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LAB - Labat - Correction of disclosure on review opinion and cautionary
LABAT AFRICA LIMITED
Incorporated in the Republic of South Africa
(Registration number 1986/001616/06)
Share code: LAB & ISIN: ZAE000018354
("Labat")
CORRECTION OF DISCLOSURE ON REVIEW OPINION AND CAUTIONARY ANNOUNCEMENT
Contrary to the information contained in the Reviewed Results for the year ended
28 February 2007, the review report issued by the auditors, RAiN, contained a
disclaimer of opinion detailing several issues which need clarification. These
issues all relate to a Labat subsidiary; South African Micro-Electronic Systems
(Pty) Ltd ("SAMES"). In brief, the issues are detailed in paragraphs 1 - 5 of
this announcement set out after the Review Report to the Members of Labat Africa
Limited;
"REVIEW REPORT TO THE MEMBERS OF LABAT AFRICA LIMITED
We have reviewed the accompanying group balance sheet of Labat Africa Limited at
28 February 2007, and the related statements of income and cash flows for the
year then ended. We have initialed these financial statements for
identification purposes. These financial statements are the responsibilities of
the Company`s directors. Our responsibility is to issue a report on these
financial statements based on our review.
We conducted our review in accordance with the International Standard on Review
Engagements 2400. This standard requires that we plan and perform the review to
obtain moderate assurance as to whether the financial statements are free of
material misstatement. A review is limited primarily to inquiries of company
personnel and analytical procedures applied to financial data and thus provides
less assurance than an audit. We have not performed an audit and, accordingly,
we do not express an audit opinion.
Based on our review, because of the pervasive effect on the financial statements
of the matters discussed in the proceeding paragraphs, we express no assurance
on these financial statements.
Disallowance of Assessed Losses and Deferred Tax Asset
The South African Revenue Services (SARS) has disallowed an assessed loss of
R190m relating to a subsidiary, resulting in a tax liability of R36,1m. The
directors do not believe that this is a valid tax liability and have objected to
the assessment. No adjustment for the liability resulting from the disallowance
of the assessed loss has been made by the directors in these financial
statements. The directors continue to carry a deferred tax asset of R21,2m
related to this assessed loss.
Revaluation of Property, Plant and Equipment
We do not concur with the directors` decision to credit group income with a
revaluation surplus of R42,7m. IAS 16 - Property Plant and Equipment states
that a revaluation amount can only be put through the income statement if, and
only to the extent that, there was a previous impairment loss, in terms of the
standard, the revaluation surplus should have been taken directly to a reserve.
Had this been done, it would have resulted in an after tax loss in the group of
R12,7m.
Impairment of Goodwill
The directors are of the view that goodwill of R17,8m arising on the
consolidation of a subsidiary, South African Micro-Electronic Systems (Pty) Ltd,
is not impaired even though this subsidiary has incurred and continues to incur
losses.
Going Concern
A subsidiary in the group, South African Micro-Electronic Systems (Pty) Ltd, has
incurred substantial losses resulting in negative cash flows and the inability
to pay its creditors on due dates. The going concern status of this subsidiary
is subject to the successful implementation of a turnaround strategy, securing
new business and the ability to generate sufficient cash flows in the ordinary
course of business in order to meet its operating and other commitments. These
matters indicate the existence of a material uncertainty which may cast
significant doubt about the subsidiary`s and group`s ability to continue as a
going concern.
Reportable Irregularity
In accordance with our responsibilities in terms of Sections 44(2) and 44(3) of
the Auditing Profession Act, we report that a reportable irregularity arose out
of South African Micro-electronic Systems (Pty) Ltd, a subsidiary company,
trading whilst factually insolvent and being unable to make provident fund
contributions as required by the Pension Fund Act, and pay as you earn
contributions as required by the Income Tax Act, due to severe cash flow
constraints.
RAiN
REGISTERED AUDITORS
5 June 2007
Johannesburg"
Disallowance of assessed losses and Deferred tax asset
The South African Revenue Services ("SARS") has disallowed an assessed loss of
R190 million which could result in a tax liability of R36 million. The company
has appealed this assessment and after taking exhaustive external tax advice
from various tax consultants the directors are of the opinion that the tax
losses are valid and will not give rise to a tax liability and will therefore
have no effect on the deferred tax asset. This is not a new matter. This has
been ongoing since 2002 and has subsequently been disclosed in Labat`s Annual
Reports since 2003. Nothing in the past year has occurred which has changed our
position on the status of the matter. Ongoing discussions have been held with
SARS with a view to resolving this matter and the Directors are confident that
it will be resolved shortly.
Revaluation of Property, Plant and Equipment
There is a difference of opinion regarding the treatment of the surplus on the
revaluation of the Plant and Equipment. There is no debate concerning the
validity of the surplus but only about its treatment. The directors are of the
opinion, again after taking external advice from Bethanie and Associates, that
the surplus should be taken to the Income Statement instead of directly to the
Balance Sheet as the assets were previously written off through the Income
Statement. This is in line with IFRS and IAS 16.
Going concern
The auditors have raised concerns about the future viability of SAMES and its
going concern status and its possible impact on the holding company. In our
reviewed results announcement of 13 June 2007 we said;
"Difficult trading conditions in the industry have prevailed during the current
year. The implementation of a major contract, on which much of the business`
revenue growth was dependent, was delayed by a further 9 months and is only now
being gradually implemented. This has seriously affected our revenue and has
contributed to an EBITDA loss of R6,9 million for SAMES. However, this is a
substantial improvement on the previous year where the EBITDA loss was R14,8
million.
The business is being completely restructured to respond to significant changes
in the industry. There will be an increase in emphasis on design rather than
production. Like many other South African industries, SAMES is being affected
by low cost Chinese manufacturing and will have to change its core business
model to survive in the long term. Associated businesses around the core
technology are being acquired and developed and these will eventually replace
the existing business. SAMES faces many challenges and will need to continue
with bold initiatives in order to grow."
Despite the many challenges the directors are confident that the business has
been turned around and is a going concern.
At 28 February 2007 SAMES had cash resources of R32,6 million, total assets of
R157,9 million and total liabilities of R148 million (which includes a
subordination of a loan of R57,2 million owed to Labat itself), to implement its
turnaround strategy which is proceeding successfully. The company is currently
trading profitably and the directors are of the view that a going concern issue
does not exist.
Impairment of Goodwill
As a result of paragraph 3 above, the directors are therefore of the view that
the Goodwill arising on the consolidation of this subsidiary should not be
impaired.
Reportable Irregularity
Reportable irregularities raised in the auditors report relate solely to SAMES.
The directors are of the view that no reportable irregularity in terms of
section 45 of the Auditing Professions Act occurred. We have however responded
fully to these perceived reportable irregularities to the auditors as well as
the Independent Regulatory Board for Auditors ("IRBA") on 28 June 2007.
Shareholders are advised that the issues raised are confined to SAMES and would
have no impact on the Group or other subsidiaries and would have no bearing, to
the extent that the directors are correct in their opinions, on the headline
earnings per share, earnings per share or net asset value as published on 31 May
2007. Full details will be disclosed in the company`s forthcoming annual
report.
Cautionary announcement
Shareholders are advised that in respect of the disagreement by the directors
with the auditors` review report as disclosed above, and until such matter has
been resolved, shareholders are advised to exercise caution when dealing in
Labat shares on JSE Limited until a further announcement is made.
Resignation of the auditors
Shareholders are advised that the auditors have agreed to resign following the
resolution of the issues set out above.
20 July 2007
Sponsor to Labat
Merchant Sponsors (Pty) Ltd
Date: 20/07/2007 16:48:15 Supplied by www.sharenet.co.za
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