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Reviewed condensed consolidated provisional financial statements for the year ended 30 JUNE 2012
ALERT STEEL HOLDINGS LIMITED
INCORPORATED IN THE REPUBLIC OF SOUTH AFRICA
REGISTRATION NUMBER: 2003/005144/06
JSE CODE: AET
ISIN: ZAE000092847
REVIEWED CONDENSED CONSOLIDATED PROVISIONAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012
PREPARED BY
The condensed consolidated provisional financial statements for the year ended 30 June 2012 were prepared by Neil Cresswell - CA (SA), Chief Financial Officer.
CONDENSED CONSOLIDATED PROVISIONAL STATEMENT OF COMPREHENSIVE INCOME
Reviewed Restated
June 2012 June 2011
R000 Notes 12 months 12 months
Continuing operations
Revenue 825 693 735 532
Cost of sales 4 (654 763) (596 215)
Gross profit 170 930 139 317
Other income 8 748 8 750
Operating costs (195 069) (210 403)
Restructure costs 4 (4 747) (12 386)
Loss before interest, tax,
depreciation and impairments (20 138) (74 722)
Depreciation and
amortisation (12 063) (12 112)
Impairment of assets 11 (14 303) (136)
Impairment of goodwill 12 (2 050) (17 848)
Loss before interest
and taxation (48 554) (104 818)
Finance income 52 2 523
Finance costs (23 902) (28 244)
Loss before taxation (72 404) (130 539)
Taxation (140) (784)
Loss from continuing
operations (72 554) (131 323)
Loss from discontinued
operations 5 (447) (4 166)
Total comprehensive
income for the year (72 991) (135 489)
Total comprehensive
income attributable to:
Equity holders of
Alert Steel Holdings Ltd (72 991) (135 489)
Weighted average shares
in issue on which earnings
are based (000) 1 343 528 248 429
Fully diluted weighted
average shares in issue
on which earnings are
based (000) 1 351 128 256 029
Basic loss per share (cents) (5.4) (54.5)
* Continuing operations (5.4) (52.9)
* Discontinued operations - (1.6)
Fully diluted loss per
share (cents) (5.4) (52.9)
HEADLINE EARNINGS
Reconciliation of loss and
headline loss for the year
Loss attributable to
ordinary shareholders (72 991) (135 489)
Loss / (profit) on disposal
of property, plant
and equipment 1 651 (24)
Loss on termination of
discontinued operations 1 428 -
Profit on sale of business (4 056) -
Losses arising from the
impairment of goodwill 2 050 17 848
Losses arising from the
impairment of property,
plant and equipment 13 784 -
Losses arising from the
impairment of
investment property 519 -
Bargain price gain on
acquisition of business (430) -
Headline loss attributable
to ordinary shareholders (58 045) (117 665)
Headline loss per
share (cents) (4.3) (47.3)
* Continuing operations (4.3) (45.4)
* Discontinued operations - (1.9)
Fully diluted headline
loss per share (cents) (4.3) (45.9)
CONDENSED CONSOLIDATED PROVISIONAL STATEMENT OF FINANCIAL POSITION
Reviewed Restated
June 2012 June 2011
R000 Notes 12 months 12 months
ASSETS
Non-current assets 139 554 138 371
Investment property 6 447 5 855
Property, plant and
equipment 10 126 887 132 516
Goodwill 12 6 220 -
Current assets 247 788 224 316
Inventories 154 497 111 323
Loans to joint ventures - 2 403
Trade and other
receivables 75 938 105 084
Cash and cash equivalents 17 353 5 506
Assets held for sale 14 497 20 187
Total assets 401 839 382 874
EQUITY AND LIABILITIES
Total shareholders funds (2 148) (43 412)
Non-current liabilities 70 598 79 925
Other financial liabilities 9 70 188 79 925
Deferred tax 13 410 -
Current liabilities 331 672 333 073
Other financial liabilities 9 110 405 10 770
Current tax payable 30 8 142
Trade and other payables 159 960 170 124
Shareholders loans 24 224 30 365
Bank overdraft 37 053 113 672
Liabilities associated
with disposal groups
held for sale 1 718 13 288
Total equity and
liabilities 401 840 382 874
Actual number of shares
in issue (000) 4 084 951 248 429
Net asset value per
share (cents) (0.1) (17.5)
Net tangible asset value
per share (cents) (0.2) (17.5)
Net asset value per share is determined by dividing the total shareholders funds by the actual number of shares in issue at reporting date.
Net tangible asset value per share is determined by dividing the total shareholders funds less goodwill by the actual number of shares in issue at reporting date.
CONDENSED CONSOLIDATED PROVISIONAL STATEMENT OF CHANGES IN EQUITY
Reviewed Restated
June 2012 June 2011
R000 Notes 12 months 12 months
Balance at the
beginning of the period (43 412) 92 076
Shares issued under
rights offer 7 112 275 -
Loss for the period
under review as
previously reported (72 991) (120 208)
Prior period adjustment 3 - (15 280)
Addition to share-based
payment reserve 8 1 980 -
Balance at the end of
period (2 148) (43 412)
CONDENSED CONSOLIDATED PROVISIONAL STATEMENT OF CASH FLOWS
Reviewed Restated
June 2012 June 2011
R000 Notes 12 months 12 months
Cash outflow from
operating activities 14 (48 576) (13 594)
Cash (outflow) / inflow
from investing activities 14 (61 512) 22 020
Cash inflow from
financing activities 14 200 724 13 513
Increase in cash and
cash equivalents 90 636 21 939
Cash and cash equivalents
beginning of period (110 336) (132 275)
Classified as held for
sale at year end - 2 169
Cash and cash equivalents
end of period (19 700) (108 167)
CONDENSED CONSOLIDATED PROVISIONAL SEGMENTAL REPORT
Reviewed Restated
June 2012 June 2011
R000 12 months 12 months
STATEMENT OF COMPREHENSIVE INCOME
Revenue
Retail 825 693 735 532
825 693 735 532
Loss before interest, taxation,
depreciation and amortisation
Retail (20 138) (74 722)
(20 138) (74 722)
Depreciation
Retail 12 063 12 112
12 063 12 112
STATEMENT OF FINANCIAL POSITION
Reportable segment assets
Retail 387 342 342 500
Assets held for sale 14 497 20 187
401 839 362 687
Reportable segment liabilities
Retail 402 270 399 710
Liabilities associated with
disposal groups held for sale 1 718 13 288
403 988 412 998
Reconciliation of segment assets
Investment property 6 447 5 855
Property, plant and equipment 126 887 132 516
Goodwill 6 220 -
Inventories 154 497 111 323
Loans to joint ventures - 2 403
Trade and other receivables 75 938 105 084
Cash and cash equivalents 17 353 5 506
387 342 362 687
Reconciliation of segment liabilities
Other financial liabilities 180 593 90 695
Deferred tax 410 -
Shareholders loans 24 224 30 365
Current tax payable 30 8 142
Trade and other payables 159 960 170 124
Bank overdraft 37 053 113 672
402 270 412 998
NOTES TO THE CONDENSED CONSOLIDATED PROVISIONAL FINANCIAL STATEMENTS
1. Basis of preparation
These condensed consolidated provisional financial statements have been prepared in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS34 Interim Financial Reporting, the Companies Act 2008 and the AC500 standards as issued by the Accounting Practices Board.
2. Accounting policies
The accounting policies applied by the group are consistent with those applied in the comparative financial periods.
3. Prior period adjustments
The following errors arose in the prior period due to a combination of accounting errors and circumstances beyond managements control. Please refer to the overview below for a further explanation:
3.1 Onerous leases: There are three leases that were not identified as onerous in the previous financial period. The effect of this error in the June 2011 financial statements is an understatement of the lease liability of R6 953 061.
3.2 Lease straight-lining: There was an error in the determination of the liability for the straight-lining of operating leases. The effect of this error in the June 2011 financial statements is an understatement of the lease liability of R3 499 608.
3.3 Deconsolidation of subsidiary: Alert Steel is in dispute with the minority shareholder in Zimbabwe over the validity of its shareholding in this company. Consequently, due to the uncertainty over whether Alert Steel had control over this entity at June 2011, a prior year adjustment has been made to deconsolidate this subsidiary. The effect of the deconsolidation of Wire Well on the financial statements is as follows:
June 2011
R000 12 months
Non-current assets (1 114)
Current assets (6 201)
Current liabilities 10 774
Gain on deconsolidation 3 459
Provision for doubtful debt (8 287)
Net loss (4 828)
The effect of all the prior year adjustments on the financial statements is as follows:
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
Previously Decon-
Reported Lease solidation Restated
June 2011 accrual of Wire Well June 2011
R000 12 months adjustment adjustment 12 months
Revenue 769 904 - (34 371) 735 533
Gross profit 135 055 - 4 263 139 318
Other income 8 750 - - 8 750
Goodwill
impairment (17 848) - - (17 848)
Operating costs (191 328) (10 452) (9 187) (210 967)
Restructure costs (12 386) - - (12 386)
Depreciation (11 396) - (289) (11 685)
Loss before
interest and
taxation (89 153) (10 452) (5 213) (104 818)
Net finance costs (25 720) - - (25 720)
Loss before
taxation (114 873) (10 452) (5 213) (130 538)
Taxation (784) - - (784)
Loss from
continuing
operations (115 657) (10 452) (5 213) (131 322)
Loss from
discontinued
operations (4 166) - - (4 166)
Loss for the year
attributable to
ordinary
shareholders (119 823) (10 452) (5 213) (135 488)
Effect of foreign
currency
translation (385) - 385 -
Total
comprehensive
loss (120 208) (10 452) (4 828) (135 488)
Basic loss
per share (cents) (48.2) (4.3) (2.0) (54.5)
Fully diluted loss
per share (cents) (46.8) (4.2) (1.9) (52.9)
Headline loss
per share (cents) (41.0) (4.3) (2.0) (47.3)
Fully diluted
headline loss
per share (39.8) (4.2) (1.9) (45.9)
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
Previously Decon-
Reported Lease solidation Restated
June 2011 accrual of Wire Well June 2011
R000 12 months adjustment adjustment 12 months
ASSETS
Non-current
assets 139 485 - (1 114) 138 371
Current assets 238 803 - (14 488) 224 315
Assets held
for sale 20 187 - - 20 187
Total assets 398 475 - (15 602) 382 873
EQUITY AND
LIABILITIES
Total shareholders
funds (28 132) (10 452) (4 828) (43 412)
Non-current
liabilities 72 452 7 473 - 79 925
Current
liabilities 340 867 2 979 (10 774) 333 072
Liabilities held
for sale 13 288 - - 13 288
Total equity and
liabilities 398 475 - (15 602) 382 873
4. Restructure costs
Restructure costs are once off costs related to the restructure of the group as follows:
June 2012 June 2011
R000 12 months 12 months
Restructure legal costs - 763
Restructure circular costs - 2 226
Branch closure and retrenchment costs 4 747 1 688
Establishment of risk management framework - 300
Settlement of onerous lease contracts - 5 307
Costs of revamping branches - 2 102
Total operating costs 4 747 12 386
Impairment of discontinued stock lines
(included in cost of sales) - 6 983
Total once-off restructure costs 4 747 19 369
5. Discontinued operations
The group has sold Alert Steel Reinforcing (Pty) Ltd and the Alert Steel Polokwane RSC division on 23 September 2011. The assets and liabilities of the disposal groups are set out below. The decision was made by the board to discontinue these operations as part of the strategy to return exclusively to steel retail. Alert Steel Reinforcing (Pty) Ltd and the Alert Steel Polokwane RSC division were sold as going concerns. The group disposed of its 50% interest in Terracotta Concepts (Pty) Ltd. The decision was made by the board to generate some cash inflow for the group from an asset that was not being utilised.
Prior year comparatives include these same divisions as well as the Plumbing and North West divisions disposed of during the 2011 financial year.
Alert Steel Alert Steel
Reinforcing Polokwane Terracotta
R000 (Pty) Ltd RSC Concepts Total
Profit and
loss 2012
Revenue 5 037 2 796 - 7 834
Expenses (4 334) (2 405) - (6 739)
Depreciation (56) (10) - (66)
Finance charges (38) (10) - (48)
Profit before taxation 609 371 - 981
Taxation - - - -
Profit after taxation
from discontinued
operations 609 371 - 981
Loss arising on
discontinuance of
operations (397) (331) (699) (1 427)
212 40 (699) (446)
Alert Alert
Steel Steel Alert
Rein- Polo- Terra- Steel
forcing kwane cotta North
R000 (Pty) Ltd RSC Concepts West Total
Profit and
loss 2011
Revenue 11 308 21 234 22 837 56 518 111 897
Expenses (12 618) (21 073) (24 090) (57 190) (114 971)
Loss on sale
of property,
plant and
equipment - - (30) (418) (448)
Depreciation (237) (105) (46) (328) (716)
Interest
received 95 120 - 1 274 1 489
Finance charges (266) (95) (194) (862) (1 417)
(Loss) / profit
before taxation (1 718) 81 (1 523) (1 006) (4 166)
Taxation - - - - -
(Loss) / profit
after taxation
from discontinued
operations (1 718) 81 (1 523) (1 006) (4 166)
Loss arising on
discontinuance
of operations - - - - -
(1 718) 81 (1 523) (1 006) (4 166)
During June 2012, the following decisions were taken by the board:
* To dispose of investment properties and other properties that were not in use in order to free up cash flow for the company. This includes properties in Arrow Creek (Pty) Ltd, Born Free (Pty) Ltd and Xebura (Pty) Ltd.
* To close down its Benrose branch and to dispose of the property. The branch was not meeting the required performance targets and was not meeting the companys rural retail strategic objectives.
* To dispose of its Klerksdorp branch. The branch was not meeting the required performance targets and was not meeting the companys rural retail strategic objectives.
Arrow Born Klerks-
Creek Free Xebura dorp
R000 (Pty) Ltd (Pty) Ltd (Pty) Ltd branch Total
Disposal
groups 2012
Assets held
for sale
Investment
property 2 930 500 - - 3 430
Property, plant
and equipment - - 3 500 - 3 500
Inventories - - - 4 255 4 255
Trade and other
receivables - - - 3 311 3 311
2 930 500 3 500 7 566 14 496
Liabilities
associated with
assets held
for sale
Other financial
liabilities 1 718 - - - 1 718
Had the decision to discontinue the above operations or dispose of the properties been taken on 30 June 2011, the comparative numbers would have been disclosed as follows:
Arrow Born Klerks-
Creek Free Xebura dorp
R000 (Pty) Ltd (Pty) Ltd (Pty) Ltd branch Total
Disposal
groups 2011
Assets held
for sale
Investment
property 3 399 550 - - 3 949
Property, plant
and equipment - - 4 925 - 4 925
Inventories - - - - -
Trade and other
receivables - - - - -
3 399 550 4 925 - 8 874
Liabilities
associated with
assets held
for sale
Other financial
liabilities 1 898 - - - 1 898
Alert Steel Alert Steel
Reinforcing Polokwane
R000 (Pty) Ltd RSC Total
Reported disposal
groups 2011
Assets held for sale
Property, plant
and equipment 4 258 741 4 999
Inventories 2 991 3 007 5 998
Trade and other
receivables 5 602 3 588 9 190
12 851 7 336 20 187
Liabilities
associated with
assets held for sale
Trade and other
liabilities (3 553) (5 405) (8 958)
Taxation prepaid 241 - 241
Bank overdraft (2 169) - (2 169)
Loans from group
companies (1 653) (750) (2 403)
(7 134) (6 155) (13 289)
R000 June 2012 June 2011
Cash effects of discontinued operations
Cash flows from operating activities 4 389 18 388
Cash flows from investing activities 323 34 043
Cash flows from financing activities - 2 364
4 712 54 795
6. Acquisition of subsidiaries
On 30 September 2011, the group acquired the remaining 50% shares in Alert Steel Polokwane (Pty) Ltd from Murray & Roberts Steel (Pty) Ltd and 100% of the shares in Alert Steel North West (Pty) Ltd from Capital Africa Steel (Pty) Ltd. The 50% shares in Alert Steel Polokwane was purchased in order to give the group control over the Limpopo retail branches. Alert Steel North West was purchased as these businesses had been stabilised and the group intended to regain the lost footprint in the North West province.
The acquisition of the remaining 50% shares in Alert Steel Polokwane represents a change in control and hence, on consolidation, the existing 50% stake has been disposed of at fair value and the full 100% has been acquired and the assets capitalised at fair value. The fair value of the 50% was determined by utilising a discount rate of 20% when determining the net present value of the annuity stream of anticipated future cash flows. Although the Alert Steel group has not been profitable of late, Alert Steel Polokwane has been profitable historically and this is expected to continue for the foreseeable future. Therefore, it is reasonable that goodwill arose on this transaction.
The acquisition of 100% of the shares in Alert Steel North West also created goodwill as the purchase consideration exceeded the net asset value. These branches made losses over the past few months due to the impact of the restructure. However, given the losses in these branches, management felt that it was appropriate to impair this goodwill to the extent that the goodwill could not be recovered.
On 30 April 2012, the group acquired the business of Steelmecca (Pty) Ltd, a subsidiary of Capital Africa Steel (Pty) Ltd. This business was acquired to establish a presence in Rustenburg which was a target market for the company. There was a bargain price gain on the acquisition of R430 100 which is included in other income. The reason for the gain is that the business was acquired at a discount due to it being loss making.
Net
effect
Alert Alert of 50% Alert
Steel Steel Alert Steel Steel-
Polo- Polo- Steel North mecca
kwane kwane Polo- West busi-
50% 100% kwane 100% ness
dis- acq- acqui- acq- acq-
R000 posed uired sition uired uired
Identifiable
assets acquired
and liabilities
assumed:
Property, plant
and equipment (1 799) 5 061 3 262 4 850 1 800
Inventories (19 089) 38 178 19 089 12 987 3 188
Trade and other
receivables (21 936) 43 873 21 937 14 146 4 120
Cash and cash
equivalents 17 (34) (17) (3 290) (928)
Loans and
borrowings 6 294 (11 459) (5 165) 938 -
Deferred tax
assets /
liabilities - (409) (409) - -
Trade and other
payables 25 410 (51 219) (25 809) (10 537) (3 484)
(11 103) 23 991 12 888 19 094 4 696
Fair value of
business
disposed /
(purchase
consideration) 15 159 (29 711) (14 552) (21 644) (4 266)
Profit on
disposal 4 056 - 4 056 - 430
Goodwill on
acquisition - 5 720 5 720 2 550 -
The considerations
transferred
comprise the
following:
Cash - - 14 552 - 4 266
Convertible
shareholders
loan - - - 21 644 -
The loan is convertible into
ordinary shares at the directors
discretion after 24 months, but no
later than 36 months. The number
of shares shall be determined by
dividing the loan balance by the net
asset value per share of the Alert
group. The loan bears interest at
prime + 2%. The cash effect of
these transactions is as follows:
Consideration (14 552) (21 644) (4 266)
Less cash equivalents acquired (17) (3 290) (928)
Cash effect (14 569) (24 934) (5 194)
Total Cash effect - - (44 697)
The revenue and profit and loss
of these businesses acquired since
inception to 30 June 2012 are
as follows:
Revenue 226 106 71 838 3 425
Profit / (loss) 9 785 (5 671) 37
7. Rights offer
On 10 October 2011, a rights offer was successfully concluded with the shareholders. 1 515 515 151 shares were issued at 3.3 cents per share. All shares were fully paid resulting in a cash inflow of R50 million.
On 28 June 2012, a further rights offer was concluded with shareholders. A further 2 321 370 482 shares were issued at 2.8 cents per share. All shares were fully paid resulting in a cash inflow of R65 million.
Shares issued 115 000
Rights issue expenses (2 725)
Total cash inflow 112 275
8. Share-based payments
On 1 July 2011, the group established a share option programme that entitles key management personnel to purchase shares in the group after 30 June 2014, provided the group achieves certain EBITDA targets and that the personnel are still employed by the group at that stage.
The terms and conditions relating to these grants of the options are as follows; all options are to be settled by the physical delivery of shares:
No of
Employees Grant instruments Vesting
entitled date (000) conditions
Capital
Africa Steel
(Pty) Ltd 01/07/2011 118 181 Group achieves EBITDA
of between R55 million
and R165 million
over 3 years
JC Family
Trust 01/07/2011 118 181 Group achieves EBITDA
of between R55 million
and R165 million
over 3 years
WF / JC
Family
Trust 01/07/2011 39 394 3 years of service,
group achieves EBITDA
of between R55 million
and R165 million
over 3 years
Executive
management 01/07/2011 118 181 3 years of service,
group achieves EBITDA
of between R55 million
and R165 million
over 3 years
393 937
The fair value of the services received in return for share options granted is based on the fair value of share options granted, measured using the Black-Sholes model. The following inputs were used in the measurement of the fair values at grant date of the share based payment plans:
Capital WF / JC
Africa JC Family Family Executive
Steel Trust Trust management
Fair value
at grant date 0.7c 0.7c 0.7c 0.7c
Share price at
grant date 3.3c 3.3c 3.3c 3.3c
Exercise price 3.3c 3.3c 3.3c 3.3c
Expected
volatility 91.5% 91.5% 91.5% 91.5%
Option life 3 years 3 years 3 years 3 years
Expected
dividends R0 R0 R0 R0
Risk free rate 7.4% 7.4% 7.4% 7.4%
Expected volatility is estimated taking into account historic average share price volatility.
9. Loans and borrowings
R000 June 2012 June 2011
Opening non-current liabilities 79 925 79 858
Opening current liabilities 10 770 16 585
90 695 96 442
New issues:
Long-term loan 1 advanced by Nedbank 70 000 -
Long-term loan 2 advanced by Nedbank 20 000 -
Interest capitalised on loan 1 3 639 -
Interest capitalised on Aquarella Bond 1 598 247
Lease accruals acquired through
business combination 2 716 -
Adjustment to lease straight-line /
onerous leases provision (580) 10 447
Classified as held for sale (1 718) -
Repayments
Mortgage bonds (2 118) (2 728)
Finance lease liabilities (3 639) (13 713)
180 593 90 695
Closing non-current liabilities 70 188 79 925
Closing current liabilities 110 405 10 770
Long-term loan 1 was advanced by Nedbank on 10 October 2011 and is repayable in one instalment at the end of five years. The loan bears interest at prime less 2% and interest is capitalised on the loan for the first 12 months, repayable on the maturity date.
Long-term loan 2 was advanced by Nedbank on 10 October 2011 and is repayable in 24 equal instalments commencing on 1 October 2012. The loan bears interest at prime less 2%.
The group was in breach of its covenants with Nedbank as at 30 June 2012. These loans have therefore been classified as current. Subsequent to the financial year end, the directors have renegotiated these covenants with Nedbank and the group is once again in compliance with the new covenants.
The lease accruals acquired through business combination arose in the entity acquired due to certain onerous leases and lease straight-lining calculations.
10. Property, plant and equipment
R000 June 2012 June 2011
Reconciliation of non-current
asset movements:
Opening balance 132 516 152 933
Additions 27 951 3 435
Disposals (7 791) (1 673)
Disposal of 50% of Alert Steel
Polokwane (Pty) Ltd (1 799) -
Acquisition of 100% of Alert Steel
Polokwane (Pty) Ltd 5 061 -
Acquisition of 100% of Alert Steel
North West (Pty) Ltd 4 850 -
Acquisition of the business of
Steelmecca (Pty) Ltd 1 800 -
Disposal of discontinued operations (4 906) (3 953)
Deconsolidation of Wire Well Fencing - (1 114)
Classified as held for sale (4 947) (5 000)
Impairments of property, plant
and equipment (13 784) -
Depreciation (12 063) (12 112)
Closing balance 126 887 132 516
11. Impairment of assets
The group performed an impairment test at 30 June 2012. The depressed market conditions in the construction and mining sectors, and losses sustained by the Group provided evidence that this testing was necessary. The group considered both value in use of cash-generating units and the fair value less cost to sell of individual assets when performing the impairment test as required by IAS 36 Impairment of Assets.
Corporate assets shared by cash generating units were allocated to cash generating units on a ratio of revenue generated by each cash generating unit in relation to the total revenue. The impairment testing revealed that value in use exceeded fair value less cost to sell.
The values assigned to the key assumptions represent managements assessment of future trends. The significant assumptions used for the valuation in use calculations are as follows:
2012
Budget period (approved by management) 3 years
Terminal growth rate for extrapolation
beyond budget period 4%
Pre-tax discount rate 25.8%
Which used the following inputs:
* Post-tax discount rate 20.8%
* Cost of equity 25.5%
* After-tax cost of debt 6.5%
In calculating the cost of equity, a 5% additive small stock premium (based on the size of the business), as well as an alpha (a company-specific risk premium) of 3% based mainly on forecasting risk, was included. The capital structure used, was a debt equity ratio of 33%, based on the capital structure of market participants as required by International Financial Reporting Standards (IFRS).
The terminal growth rate is based on a combination of the long-term debt inflation outlook, the expected long-term gross domestic product growth rate and other company specific factors.
2012
Average working capital operating cycle (days)
over the three-year period 23
EBITDA compound annual growth rate over the 3 year
forecast period 101.2%
The following table shows the amount that the following four key assumptions are required to change individually in order for the estimated recoverable amount to equal to the carrying amount.
Any adverse movement in one or more of the key assumptions would lead to a further impairment.
2012
Pre-tax discount rate (%) -1.1%
Terminal growth rate (%) 1.5%
Average working capital operating cycle (days) -5
EBITDA compound annual growth rate (%) 3.7%
The EBITDA growth is achieved by the effect of the cost reductions already implemented, as well as the roll out of Alert Express stores on a high margin, low cost model which contribute significantly to the EBITDA. Revenue growth year on year is moderate throughout the 3 year forecast.
In determining the average working capital cycle, the cash sales to credit sales ratio was taken into consideration. Over the past year, the group has become more cash sales orientated and consequently, the working capital cycle has reduced dramatically. No further reductions have been forecast. This cycle would normally be 35 days, but it is low over the three years due to the anticipated reduction in inventory levels in year 1.
The result of the impairment test is that a R12 million impairment loss is required which has been recorded as an impairment of land and buildings. Following the impairment, the recoverable amount equals the carrying amount. Impairment losses were not allocated to other asset classes as these other classes comprise working capital balances and had already been recorded at their recoverable amounts.
Where impairment losses were recorded, the impairment was limited to the fair value less cost to sell of an individual asset. In the case of the Alert Steel Hub property, the fair value less cost to sell was assessed as R43 million by an independent valuator. This, however, did not limit the impairment loss adjustment of R12 million.
The impairment loss was recorded in the retail segment. The impairment loss was recorded in the impairment of assets line item in the statement of comprehensive income.
Formal impairment testing was not performed in this manner in the prior period as it is not practical to determine the impairment which would otherwise have been recorded in the prior period. All impairment losses have been recognised in the 2012 financial year.
Prior period restatement is not possible as the turnaround management were new to the role. As a result, the appropriate discount rate was not sought in the prior period, budgets and forecasts were still being prepared and plans for the recapitalisation of the group and cost cutting were still underway. These budgets and forecast still had to be proven and management still had to take a number of corrective actions.
12. Goodwill
There were three groups of cash generating units which have goodwill allocated to them, namely, retail stores in Gauteng; Limpopo and North West. This goodwill arose historically on acquisition of various businesses in these provincial geographical regions.
Accumulated Carrying
R000 Cost impairment value
2012
Total 61 471 (55 251) 6 220
Retail stores - Gauteng 36 295 (36 295) -
Retail stores - Limpopo 15 695 (9 975) 5 720
Retail stores - North West 9 481 (8 981) 500
2011
Total 53 202 (53 202) -
Retail stores Gauteng 36 295 (36 295) -
Retail stores - Limpopo 9 975 (9 975) -
Retail stores - North West 6 932 (6 932) -
Opening Closing
carrying Impairment carrying
R000 value Additions loss value
Reconciliation of
goodwill 2012
Total - 8 270 (2 050) 6 220
Retail stores
Gauteng - - - -
Retail stores
Limpopo - 5 720 - 5 720
Retail stores
North West - 2 550 (2 050) 500
Reconciliation of
goodwill 2011
Total 17 848 - (17 848) -
Retail stores
Gauteng 7 873 - (7 873) -
Retail stores
Limpopo 9 975 - (9 975) -
Retail stores
North West - - - -
The group performed its annual impairment test on the groups of cash generating units containing goodwill at 30 June 2012. The group considered both the value in use of cash-generating units and the fair value less cost to sell of individual assets when performing the impairment test as required by IAS 36 Impairment of Assets. The recoverable amount of the two groups of cash generating units was based on its value in use. The values assigned to the key assumptions represent managements assessment of future trends. Value in use was determined by discounting the future cash flows generated from the continuing use of the individual entities and was based on the following key assumptions:
2012
Limpopo North West
Budget period
(approved by management) 5 years 5 years
Terminal growth rate
for extrapolation
beyond budget period 4% 4%
Pre-tax discount rate 25.8% 25.8%
Which used the following inputs:
* Post-tax discount rate 20.8% 20.8%
* Cost of equity 25.5% 25.5%
* After-tax cost of debt 6.5% 6.5%
In calculating the cost of equity, a 5% additive small stock premium
(based on the size of the business), as well as an alpha (a company-specific risk premium) of 3% based mainly on forecasting risk, was included. The capital structure used, was a debt equity ratio of 33%, based on the capital structure of market participants as required by International Financial Reporting Standards (IFRS).
The terminal growth rate is based on a combination of the long-term inflation outlook, the expected long-term gross domestic product growth rate and other company specific factors.
2012
Limpopo North West
Revenue growth 6.0% 6.0%
Gross margin 19.0% 19.0%
The revenue growth of 6% is based on past experience. Projected gross margins of 19% are slightly lower than the margins currently being achieved as tougher conditions are anticipated. Operating expenses are not expected to increase significantly but have been increased in line with revenue growth. For the Limpopo group of cash generating units, the recoverable amount was R6 741 000 which exceeded the carrying amount of R5 720 436. Therefore no impairment loss was recognised on this group of cash generating unitss. The impairment losses were recognised in the retail segment in both 2012 and 2011 financial years. The impairment losses were recognised in the impairment of goodwill line item in the statement of comprehensive income in both 2012 and 2011 financial years.
13. Deferred tax
R000 June 2012 June 2011
Reconciliation of deferred
tax liability
Balance at the beginning of year - 689
Originating temporary differences
on property, plant and equipment (1 563) (150)
Originating temporary difference
arising on acquisition of property,
plant and equipment in
business combination 410 -
Decrease in tax losses available
for set off against future taxable income (52) (952)
Originating temporary differences on
provisions and accruals 3 135 5 242
Temporary differences on provisions
and accruals not recognised (1 520) (4 829)
Closing deferred tax liability 410 -
14. Notes to cash flow statement
Reviewed Restated
June 2012 June 2011
R000 12 months 12 months
Cash effects of operating activities
Loss before taxation (72 851) (134 705)
Adjustment for:
Depreciation and amortisation 12 063 12 112
Loss / (profit) on sale of property,
plant and equipment 1 651 (24)
Profit on disposal of subsidiaries (4 056) -
Bargain price gain on acquisition
of business (430) -
Loss on disposal of business 1 428 -
Interest received (52) (2 523)
Interest paid 23 902 28 244
Impairment of goodwill 2 050 17 848
Impairment of property, plant
and equipment 13 784 136
Impairment of investment property 519 -
Loss on deconsolidation of subsidiary - 4 828
Movements in provisions - (65)
Lease accrual adjustment 2 137 10 453
Share based payment expense 1 980 -
Working capital changes:
Inventories (7 980) 55 003
Trade and other receivables 60 080 32 200
Trade and other payables (50 940) 831
Cash generated from operations (16 715) 24 338
Interest received 52 2 523
Interest paid (23 902) (28 244)
Taxation paid (8 011) (12 211)
Cash utilised in operating activities (48 576) (13 594)
Cash effects of investing activities:
Consideration paid on purchase
of property, plant and equipment (27 951) (3 435)
Proceeds on sale of property, plant
and equipment 6 140 1 697
Loans repaid / (advanced) to
joint ventures 2 (15 911)
Cash effects on deconsolidation
of subsidiary - (973)
Repayments received on loans to directors - 5 427
Consideration paid on acquisition
of business (44 697) -
Proceeds on sale of business 4 994 35 215
Cash utilised in investing activities (61 512) 22 020
Cash effects of financing activities
Repayment of other financial liabilities (1 428) (846)
Repayments of bonds on properties (2 914) (1 143)
Advances of bonds on properties 1 598 247
Repayments of instalment sale agreements (3 639) (13 691)
Loans received from bank 93 639 -
Loans received from shareholders 1 192 30 365
Repayment of directors loan - (1 419)
Proceeds on rights issues 112 276 -
Cash flows from financing activities 200 724 13 513
15. Related parties
Relationships:
Entities controlled
by directors: Schallies Belegings (Pty) Ltd
Paul Kruger Straat
Beleggings 390 (Pty) Ltd
Zeranza 26 (Pty) Ltd
Icon suppliers (Pty) Ltd
Capital Africa Steel (Pty) Ltd
Reinforcing & Mesh Solutions,
a division of Capital Africa Steel (Pty) Ltd
Capital Star Steel (Pty) Ltd
Steel Mecca (Pty) Ltd
Gondwana Marketing (Pty) Ltd
Buffelskom Boerdery (Pty) Ltd
JC Family Trust
Mahuma Investment Holdings (Pty) Ltd
Shareholders with
significant influence Capital Africa Steel (Pty) Ltd
Close family of directors Novator (Pty) Ltd
Directors WF Schalekamp
J du Toit
N Cresswell
OV Jevon (resigned 18 May 2012)
MW McCulloch
R van Rooyen (resigned 7 December 2011)
M Patel
E Hewitt
W van der Merwe
G Mahuma
June 2012 June 2011
R000 12 months 12 months
The following related
party transactions were
identified during the period:
Rent paid to / (received from)
related parties
These transactions were done at arms
length and are settled on
30 day payment terms
Schallies Beleggings (Pty) Ltd 3 360 2 957
Paul Kruger Straat Beleggings 390
(Pty) Ltd 420 399
Zeranza 26 (Pty) Ltd 1 709 1 374
Icon suppliers (Pty) Ltd 23 25
Purchases from / (sales to)
related parties
These transactions were done at arms
length and are settled on
30 day payment terms
Capital Africa Steel (Pty) Ltd 8 250 -
Reinforcing & Mesh Solutions,
a division of Capital Africa Steel
(Pty) Ltd 8 216 -
Capital Star Steel (Pty) Ltd 327 -
Novator (Pty) Ltd 1 463 1 419
Steel Mecca (Pty) Ltd (3 936) -
Gondwana Marketing (Pty) Ltd (82) (1 298)
Buffelskom Boerdery (Pty) Ltd (1 006) (528)
Business combinations transactions
* Proceeds on disposal of
Alert Steel North West operations
to Capital Africa Steel - (27 000)
This transaction was settled
R12 million in cash and R15 million
was set-off against an outstanding
trade debtor
* Proceeds on disposal of Alert Plumbing
division to Taboo Trading (Pty) Ltd - (8 241)
These proceeds were settled in cash
* Consideration paid on acquisition of
Alert Steel North West (Pty) Ltd 21 644 -
The loan bears interest at prime + 2%
and is convertible into ordinary shares
within 24 to 36 months at the discretion
of the directors.
* Consideration paid on acquisition of the
business of Steelmecca (Pty) Ltd 4 266 -
Consideration was settled in cash.
Amounts included in trade receivable /
(trade payable) regarding related parties
These amounts carry 30 day terms and no
interest is applicable on outstanding
amounts.
Reinforcing & Mesh Solutions, a division
of Capital Africa Steel (Pty) Ltd (608) -
Schallies Beleggings (Pty) Ltd - 1
Capital Africa Steel (Pty) Ltd (1) -
Novator (Pty) Ltd (58) (7)
Icon suppliers (Pty) Ltd - 6
Gondwana Marketing (Pty) Ltd 1 -
Buffelskom Boerdery (Pty) Ltd 2 -
Steel Mecca (Pty) Ltd 24 -
16. Directors emoluments
Termin- Direc-
Short-term ation tors
employee benefits benefit and
Perfor- Retrench- attend-
Basic mance ment ance
R000 salary bonus package fees Total
2012
Executive
J du Toit 1 800 - - - 1 800
N Cresswell 1 200 - - - 1 200
WF Schalekamp 1 350 - 1 226 - 2 576
4 350 - 1 226 - 5 576
Non-executive
MW McCulloch - - - 50 50
W van der Merwe - - - 91 91
MM Patel - - - 105 105
GS Mahuma - - - 98 98
R van Rooyen - - - 118 118
OV Jevon - - - 143 143
- - - 605 605
Direc-
Short-term tors
employee benefits and
Perfor- attend-
Basic mance Travel ance
R000 salary bonus allowance fees Total
2011
Executive
J du Toit 450 - - - 450
N Cresswell 100 - - - 100
WW Mentz 638 - 108 - 746
WF Schalekamp 1 122 - - - 1 122
2 310 - 108 - 2 418
Non-executive
R van Rooyen - - - 125 125
OV Jevon - - - 140 140
- - - 265 265
OVERVIEW
The remedial measures implemented over the last year have had a positive impact on Alert Steels performance but progress with the turnaround continued to be hampered by a number of external factors including a deteriorating operating environment, industrial action and supply shortages.
In addition to the two national strike actions during the course of the year as well as stock shortages from September to December 2011, slow trading during December and January negatively impacted Alert Steels cash flows, which affected its ability to pay suppliers within terms. As a result, stock supply was intermittent until the rights offer underwriters advanced their funds to the company. Market conditions have also been poor for the last 3 months of the new financial year. All these factors have had a severe impact on the groups revenue and profitability.
Finance costs were also higher than anticipated, primarily due to a charge of R1.5 million to raise a cash-back guarantee to Arcellor Mittal and shareholder loans bearing high interest ahead of the rights offers of October 2011 and June 2012.
Prior period adjustments:
Onerous leases: During the period leading up to and during the financial year end, the new management team was in the middle of significant restructuring of the business, including closing down of some operations. It was only identified and reported during the review of the half year results, that the effect of the closing of some operations had created onerous circumstances for three leases prior to 30 June 2011. The restructure of branch operations is complete and it is not likely that this kind of error would occur again.
Lease straight lining: There was an error in the determination of the liability for the straight lining of operating leases. The calculation has subsequently been amended and it is not likely that this error will occur again.
Deconsolidation of subsidiary: Alert Steel is in dispute with the minority shareholder in Zimbabwe over the validity of its shareholding in this company. As a result of the dispute Steels management has not been able to obtain reliable financial information from the business and the auditors have also been unable to audit 2012 results. Some information has come to light after the 30 June 2011 annual report was approved which has created some uncertainty over whether Alert Steel had effective control over this entity at 30 June 2011. The directors felt it appropriate in light of this uncertainty to deconsolidate this entity in the prior year. This is a unique set of circumstances for the group and it is unlikely that such circumstances will reoccur.
FINANCIAL RESULTS
When comparing the results for the year ended June 2012 to the restated results for the year ended June 2011, the following items can be noted:
Revenue increased by 12% to R825 million (2011: R735 million). The gross profit increased by 23% to R171 million (2011: R139 million).
Operating expenses decreased by 7% to R195 million (2011: R210 million).
On 30 September 2011, Alert Steel disposed of Alert Reinforcing (Pty) Ltd and the division of RSC Polokwane as going concerns, to Murray & Roberts Steel (Pty) Ltd. The profit from these discontinued operations was R980 000. The loss on disposal of these business was R1 million.
On 30 September 2011, Alert Steel acquired the remaining 50% of the shares in Alert Steel Polokwane (Pty) Ltd from Murray & Roberts Steel (Pty) Ltd.
On 30 September 2011, Alert Steel acquired 100% of the shares in Alert Steel North West (Pty) Ltd. The business was acquired at fair value.
On 30 April 2012, Alert Steel acquired the business of Steelmecca at fair value.
Depreciation, amortisation and impairments accounted for 5.4% of revenue (June 2011: 4.1%).
The loss after tax decreased by 46% to R73 million (June 2011: R135.4 million).
Headline loss decreased by 50% to R58.4 million (Jun 2011: R117.7 million). Headline loss per share decreased by 91% to 4.4 cents per share (June 2011: 47.3 cents).
STATEMENT OF GOING CONCERN
The group incurred a loss for the year ended 30 June 2012 of R73 million (2011: R135.5 million) and at that date, the groups total liabilities exceeded its total assets by R2 million (2011: R43.4 million). Notwithstanding the loss for the year and the negative net asset value, there have been considerable improvements to the companys financial performance and cash flows during the year, and its financial position at year end.
Market conditions were depressed for the last 3 months of the financial year. This trend has continued into the first few months of the new financial year and has been aggravated by strikes at the company and within the mining and transportation sectors. The directors view is that market conditions will remain depressed for the duration of the 2013 financial year. These conditions are hampering the directors turn-around plan and the group has not yet been profitable, despite the improvements in financial position, performance and cash flows described above. Consequently, the directors have given the going concern risk additional focus. The directors have taken the following steps in evaluating the groups ability to continue as a going concern:
* The directors have formulated a revised business plan and performed a reforecast of the groups anticipated results to June 2013, given the current market conditions. In this plan, the directors have assumed that there will be no pick-up in trading conditions and they have planned further cost cuts in addition to the cuts that have been made during the 2012 financial year. These cost cuts will be implemented by the end of October 2012. In addition, the directors plan to replace the lost revenue from the non-profitable branches that were closed or disposed of during the 2012 financial year, with revenue from additional express stores to be opened before June 2013. This is in line with the directors rural retail strategy and these new stores will operate on the same model that the current express stores operate in that they will be high margin, low cost, cash only operations which will contribute toward covering the groups overheads. The objective is to build the groups base to be at least break even, if not profitable by the end of the 2013 financial year, even under the current depressed market conditions.
* The directors have also evaluated the groups cash flow requirements for the next 12 months. At present, even under the current market conditions, the earnings before tax, depreciation and amortisation is covering the interest burden. This means that the group is not losing cash, even though it is not profitable. The directors view is that the group has enough cash resources to meet its obligations as they fall due. The additional express stores to be rolled out will be funded by planned reductions in inventory levels in the group. Although the inventory levels will be reduced, turnover levels will be maintained.
In addition, the group has raised a further R30 million capital in the form of a specific issue of shares for cash to shareholders to be concluded on 31 October 2012. The net asset value of the group, had the specific issue of shares taken place on 30 June 2012, would have been R28 million. Whilst the group is technically solvent post the specific issue of shares, cash flow remains restricted. Trade payables are being paid throughout the month and no compromises have been made with any vendors. The directors have prepared their budgets and cash flows based on reasonable and supportable assumptions. The assumptions that the directors have used include:
* The successful implementation of various initiatives to reduce costs to return the group to profitable operations.
* The successful roll-out of planned express stores to increase revenue and margins to return the group to profitable operations.
* The successful reduction in inventory levels to increase available cash resources.
Given the directors evaluation that the group has enough cash resources to meet its obligations as they fall due, the financial statements have been prepared on the basis of accounting policies applicable to a going concern. This basis presumes that funds will be available to finance future operations and that the realisation of assets and settlement of liabilities and commitments will occur in the ordinary course of business.
CHANGES TO THE BOARD OF DIRECTORS
The following changes to the Board of directors transpired during the financial year, mainly as a result of the restructuring of the group.
* Mr R van Rooyen resigned as chairman and non-executive director on 7 December 2011. Mr MW McCulloch was appointed to replace Mr van Rooyen as Chairman on 7 December 2011.
* Mr E Hewitt was appointed as non-executive director on 25 January 2012.
* Mr W Schalekamp resigned as deputy chairman and executive director on 1 March 2012 but remains on the board as a non-executive director. There will be no additional executive director appointed to replace
Mr Schalekamp and his responsibilities have been divided amongst the members of the exco.
* Mr OV Jevon resigned as non-executive on 18 May 2012.
REVIEW REPORT
The condensed consolidated provisional financial results for the year ended 30 June 2012 have been reviewed by the companys auditor, KPMG Inc. In their review report dated 30 October 2012, which is available for inspection at the companys registered office, KPMG Inc. stated that their review was conducted in accordance with the International Standard on Review Engagements 2410, Review of Interim Information Performed by the Independent Auditor of the Entity, and have expressed an unmodified conclusion on the reviewed condensed consolidated provisional financial results for the year ended 30 June 2012.
The auditors review report includes the following emphasis of matter:
Without qualifying our conclusion, we draw attention to the going concern paragraph in the directors commentary which indicates that the group incurred a loss for the year ended 30 June 2012 of R73 million and, at that date, the groups liabilities exceeded its assets by R2 million. The paragraph indicates that directors have prepared the financial statements on the basis of accounting policies applicable to a going concern on the basis that the group has enough cash resources to meet its obligations as they fall due. The note also sets out the directors assumptions at arriving at this conclusion.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Compliance with legislation
For the period under review, there were no matters of non-compliance with legislation of which the directors were aware.
ANNUAL FINANCIAL STATEMENTS
The previous signed audited annual financial statements of the group for the period ended 30 June 2011 are available for inspection at the registered address found below and on the company website: www.alertsteel.co.za.
For and on behalf of the board
M McCulloch J du Toit
Chairman Chief executive
30 October 2012
Pretoria
NON-EXECUTIVE DIRECTORS: MW McCulloch (Chairman), WF Schalekamp, MM Patel, BS Mahuma, W van der Merwe, E Hewitt
EXECUTIVE DIRECTORS: J du Toit, N Cresswell
REGISTERED ADDRESS: Cnr Engelbrecht and Lanham Streets, East Lynne, 0186
POSTAL ADDRESS: PO Box 29607, Sunnyside, 0132
COMPANY SECRETARY: M Pretorius
TELEPHONE: (012) 800 0000
FACSIMILE: (012) 800 4661
TRANSFER SECRETARIES: Computershare Investor Services (Pty) Ltd
DESIGNATED ADVISER: Exchange Sponsors (2008) (Pty) Ltd
AUDITORS: KPMG Inc
Date: 30/10/2012 01:43:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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