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AET
AET
AET - Alert Steel Holdings Limited - Reviewed Interim Financial Results for the
six months ended 31 December 2011
ALERT STEEL HOLDINGS LIMITED
INCORPORATED IN THE REPUBLIC OF SOUTH AFRICA
REGISTRATION NUMBER: 2003/005144/06
JSE CODE: AET
ISIN: ZAE000092847
REVIEWED INTERIM FINANCIAL RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2011
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
Reviewed Restated Restated
December December June
2011 2010 2011
Notes 6 months 6 months 12 months
Continuing operations R`000 R`000 R`000
Revenue 418,045 421,819 735,532
Gross profit 5 86,434 62,631 139,318
Other income 10,806 4,651 8,750
Operating costs 4 (96,500) (105,881) (210,967)
Restructure costs 5 - - (12,386)
Earnings/(Loss) before
interest, tax,
depreciation &
amortisation 740 (38,599) (75,285)
Goodwill impairment 12 (2,550) (17,848) (17,848)
Depreciation (5,061) (5,587) (11,685)
Loss before interest
and taxation (6 871) (62,034) (104,818)
Finance income 283 193 2,523
Finance costs (11,605) (14,509) (28,243)
Loss before taxation (18,193) (76,350) (130,538)
Taxation - (367) (784)
Loss from continuing
operations (18,193) (76,717) (131,322)
Loss) from discontinued
operations 6 (80) (8,379) (4,167)
Loss for the year
attributable to
ordinary shareholders (18,273) (85,096) (135,489)
Foreign currency
translation effects - 438 -
Total comprehensive
loss for the year (18,273) (84,658) (135,489)
Total comprehensive loss
attributable to:
Equity holders of
Alert Steel Holdings Ltd (18,273) (84,658) (135,489)
Weighted average number
of shares in issue, net
of treasury shares (`000) 915,425 248,428 248,428
Diluted weighted average
number of shares in
issue (`000) 923,025 256,028 256,028
Loss per share (cents) (2.0) (34.3) (54.5)
- Continuing operations (2.0) (30.9) (52.9)
- Discontinued operations 0.0 (3.4) (1.7)
Diluted loss per share (cents) (2.0) (33.2) (52.9)
- Continuing operations (2.0) (30.0) (51.3)
- Discontinued operations 0.0 (3.3) (1.6)
HEADLINE EARNINGS
Reconciliation of headline
loss for the year
Loss attributable to
ordinary shareholders (18,273) (85,096) (135,489)
Loss / (profit) on disposal
of tangible assets 325 76 (24)
Loss arising from the
impairment or write-off
of property, plant & equipment - - 137
Profit on disposal of business (4 055) - -
Loss on termination of
discontinued operations 1,060 - -
Loss arising from the
impairment of goodwill 2,550 17,848 17,848
Headline loss attributable
to ordinary shareholders (18 395) (67,172) (117,528)
Headline loss per share (cents) (2.0) (27.0) (47.3)
- Continuing operations (2.0) (23.7) (45.6)
- Discontinued operations 0.0 (3.4) (1.7)
Diluted headline loss
per share (cents) (2.0) (26.2) (45.9)
- Continuing operations (2.0) (23.0) (44.3)
- Discontinued operations 0.0 (3.3) (1.6)
CONDENSED STATEMENT OF FINANCIAL POSITION
Reviewed Restated Restated
December December June
2011 2010 2011
6 months 6 months 12 months
Notes R`000 R`000 R`000
ASSETS
Non-Current Assets 151,135 154,115 138,371
Investment property 5,855 5,991 5,855
Property, plant
& equipment 11 139,560 147,527 132,516
Goodwill 12 5,720 - -
Deferred tax - 597 -
Current assets 219,667 239,908 224,315
Inventories 137,756 128,343 111,323
Loans to joint ventures - - 2,403
Loans to directors - 6,756 -
Current tax receivable - 1,415 -
Trade & other receivables 81,665 96,930 105,083
Cash & cash equivalents 246 6,464 5,506
Assets held for sale - - 20,187
Total assets 370,802 394,023 382,873
EQUITY & LIABILITIES
Total shareholders` funds (11,104) 7,418 (43,413)
Non-current liabilities 106,311 69,142 79,924
Other financial
Liabilities 10 82,737 69,142 79,924
Shareholders` loans 7 23,164 - -
Deferred tax 13 410 - -
Current liabilities 275,595 317,463 333,073
Loans from directors - 55 -
Other financial
Liabilities 10 99,076 19,213 10,770
Current tax payable 1,184 22,591 8,142
Trade & other payables 147,351 127,635 170,124
Provisions - 746 -
Shareholders` loans - - 30,365
Bank overdraft 27,984 147,223 113,672
Liabilities associated
with disposal groups
held for sale - - 13,289
Total equity & liabilities 370,802 394,023 382,873
Actual number of
shares in issue (`000) 1,763,580 248,428 248,428
Net asset value
per share (cents) (0.6) 3.0 (17.5)
Net tangible asset
value per share (cents) (1.0) 3.0 (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 STATEMENT OF CHANGES IN EQUITY
Reviewed Restated Restated
December December June
2011 2010 2011
6 months 6 months 12 months
Notes R`000 R`000 R`000
Balance at the
beginning of the
period as
previously reported (43,413) 92,076 92,076
Shares issued under
rights offer 8 48,602 - -
Loss for the period
under review as
previously reported (18,273) (84,228) (119,823)
Prior period adjustment 3 - (868) (15,666)
Addition to foreign
translation reserve - 438 -
Addition to share based
payment reserve 9 1,980 - -
Balance at the
end of period (11,104) 7,418 (43,413)
CONDENSED STATEMENT OF CASH FLOWS
Reviewed Restated Restated
December December June
2011 2010 2011
6 months 6 months 12 months
Notes R`000 R`000 R`000
Cash (outflow)/
inflow from
operating activities 14 (9,408) 21,180 (13,207)
Cash (outflow)/
inflow from
investing activities 14 (38,927) (18,601) 21 635
Cash inflow/
(outflow) from
financing activities 14 130,932 (11,063) 13,512
Increase/(decrease)
in cash and
cash equivalents 82,597 (8,484) 21,940
Cash and cash
equivalents beginning
of period (110,335) (132,275) (132,275)
Classified as held for
sale at year end - - 2,169
Cash and cash
equivalents end of period (27,738) (140,759) (108,166)
CONDENSED SEGMENTAL REPORT
Reviewed Restated Restated
December December June
2011 2010 2011
6 months 6 months 12 months
R`000 R`000 R`000
Statement of comprehensive income
Revenue
Retail 418,045 421,819 735,532
Reinforcing manufacturing - - -
418,045 421,819 735,532
(Loss)/earnings before interest,
taxation, depreciation
and amortisation
Retail 740 (38,599) (75,285)
Reinforcing manufacturing - - -
740 (38,599) (75,285)
Depreciation
Retail 5,061 5,587 11,685
Reinforcing manufacturing - - -
5,061 5,587 11,685
Statement of financial position
Reportable segment assets
Retail 370,802 383,142 362,686
Reinforcing manufacturing - 10,881 -
Assets held for sale - - 20,187
370,802 394,023 382,873
Reportable segment liabilities
Retail 381,906 383,456 412,997
Reinforcing manufacturing - 3,149 -
Liabilities associated with
disposal groups held for sale - - 13,289
381,906 386,605 426,286
Reconciliation of segment assets
Investment property 5,855 5,991 5,855
Property, plant & equipment 139,560 147,527 137,515
Goodwill 5,720 - -
Deferred tax - 597 -
Inventories 137,756 128,343 117,309
Loans to joint ventures - - 2,403
Loans to directors - 6,756 -
Current tax receivable - 1,415 -
Trade & other receivables 81,665 96,930 114,285
Cash & cash equivalents 246 6,464 5,506
370,802 394,023 382,873
Reconciliation of segment
liabilities
Other financial liabilities 82,737 69,142 82,325
Deferred tax 410 - -
Loans from joint ventures - - -
Loans from directors - 55 -
Other financial liabilities 99,076 19,213 10,770
Current tax payable 1,184 22,591 8,383
Trade & other payables 147,351 127,635 180,771
Provisions - 746 -
Shareholders` loans 23,164 - 30,365
Bank overdraft 27,984 147,223 113,672
381,906 386,605 426,286
NOTES TO THE CONDENSED FINANCIAL RESULTS
1. Basis of preparation:
These condensed, consolidated interim financial statements have been prepared in
accordance with IAS 34 Interim Financial Reporting and the AC500 Standards as
issued by the Accounting Practices Board or its successor and do not include all
the information required for full annual financial statements. The condensed,
consolidated interim financial statements also comply with the South African
Companies Act (2008) and the Listings Requirements of the JSE Limited.
2. Accounting policies
The accounting policies applied by the Group are consistent with those applied
in the comparative financial periods, except for the adoption of improved,
revised or new standards and interpretations. The aggregate effect of these
changes in respect of the interim ended 31 December 2011 is nil.
3. Prior period adjustments
The following errors arose in the prior period due to a combination of
accounting errors and circumstances beyond management`s 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
(December 2010: R0)
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 (December 2010: R1,612,497)
3.3. There has been a reclassification of income and expenses related to the
discontinued operations for the December 2010 results
3.4. 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:
December 2010 June 2011
6 months 12 months
R`000 R`000
Non-current assets (983) (1,114)
Current assets (6,530) (6,201)
Current liabilities 8,257 10,774
Foreign currency translation reserve - (385)
Effect of deconsolidation 744 3,074
Impairment of loan receivable - (8,287)
Net effect 744 (5,213)
The effect of all the prior year adjustments on the financial statements is as
follows:
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
Previously Lease Decon-
Reported accrual solidation Restated
June 2011 and onerous of Wire Well June 2011
12 months leases adjustment 12 months
R`000 R`000 R`000 R`000
Revenue 769,904 - (34,371) 735,532
Gross profit 135,055 - 4,263 139,318
Other income 8,750 - - 8,750
Goodwill
impairment (17,848) - - (17,848)
Operating costs (191,327) (10,453) (9,187) (210,967)
Restructure costs (12,386) - - (12,386)
Depreciation (11,396) - (289) (11,685)
Loss before
interest and
taxation (89,152) (10,453) (5,213) (104,818)
Net finance costs (25,720) - - (25,720)
Loss before
Taxation (114,872) (10,453) (5,213) (130,538)
Taxation (784) - - (784)
Loss from
continuing
operations (115,656) (10,453) (5,213) (131,322)
Profit / (loss)
from discontinued
operations (4,166) - - (4,166)
Loss for the year
attributable to
ordinary
shareholders (119,822) (10,453) (5,213) (135,488)
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
Previously Lease Decon-
Reported accrual solidation Restated
June 2011 and onerous of Wire Well June 2011
6 months leases adjustment 12 months
R`000 R`000 R`000 R`000
ASSETS
Non-Current
Assets 139,485 - (1,114) 138,371
Current assets 238,802 - (14,487) 224,315
Assets held
for sale 20,187 - - 20,187
Total assets 398,474 - (15,601) 382,873
EQUITY & LIABILITIES
Total shareholders`
Funds (28,132) (10,453) (4,828) (43,413)
Non-current
Liabilities 72,451 7,473 - 79,924
Current
liabilities 340,866 2,980 (10,773) 333,073
Liabilities
held for sale 13,289 - - 13,289
Total equity &
Liabilities 398,474 - (15,601) 382,873
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
Previously Lease accrual,
Reported onerous Decon- Restated
December leases and solidation December
2010 discontinued of Wire Well 2010
6 months operations adjustment 6 months
R`000 R`000 R`000 R`000
Revenue 520,690 (79,457) (19,414) 421,819
Gross profit 75,522 (10,590) (2,301) 62,631
Other income 4,651 - - 4,651
Goodwill
impairment (17,848) - - (17,848)
Operating costs (126,283) 17,357 3,045 (105,881)
Restructure costs - - - -
Depreciation (5,587) - - (5,587)
Loss before interest
and taxation (69,545) 6,767 744 (62,034)
Net finance costs (14,316) - - (14,316)
Loss before
Taxation (83,861) 6,767 744 (76,350)
Taxation (367) - - (367)
Loss from continuing
Operations (84,228) 6,767 744 (76,717)
Profit / (loss)
from discontinued
operations - (8,379) - (8,379)
Loss for the year
attributable to
ordinary
shareholders (84,228) (1,612) 744 (85,096)
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
Previously
Reported Lease Decon- Restated
December accrual solidation December
2010 and onerous of Wire Well 2010
6 months leases adjustment 6 months
R`000 R`000 R`000 R`000
ASSETS
Non-Current
Assets 155,098 - (983) 154,115
Current assets 246,438 - (6,530) 239,908
Assets held for sale - - - -
Total assets 401,536 - (7,513) 394,023
EQUITY & LIABILITIES
Total shareholders`
Funds 8,286 (1,612) 744 7,418
Non-current
Liabilities 67,530 1,612 - 69,142
Current
liabilities 325,720 - (8,257) 317,463
Liabilities held
for sale - - - -
Total equity &
Liabilities 401,536 - (7,513) 394,023
4. Operating Costs
Operating Costs includes bad debts provision of R3 million (2011: 1.1 million)
and share based payments expense of R2 million
5. Restructure costs
Restructure costs in the June 2011 figures are once off costs related to the
restructure of the Group as follows:
Restructure legal costs 763
Restructure circular costs 2,226
Branch closure & retrenchment costs 1,688
Establishment of risk management framework 300
Settlement of onerous lease contracts 5,307
Costs of revamping branches 2,102
Total operating costs 12,386
Impairment of discontinued
stock lines (included in cost of sales) 6,983
Total once off restructure costs 19,369
6. Discontinued operations
Discontinued operations comprises the rebar businesses of RSC division of
Polokwane and Alert Reinforcing disposed of on 23 September 2011 as part of the
strategy to return Alert Steel to its core business of steel retailing. Prior
year comparatives include these same divisions as well as the Plumbing and North
West divisions disposed of during the 2011 financial year.
December 2011 December 2010 June 2011
6 months 6 months 12 months
R`000 R`000 R`000
Results of the
discontinued operations:
Revenue 7,834 79,458 111,898
Expenses (6,854) (87,837) (116,063)
Profit / (loss) before
Taxation 980 (8,379) (4,166)
Taxation - - -
Profit / (loss) after
taxation from
discontinued operations 980 (8,379) (4,166)
Loss from sale of
discontinued operations (1,060) - -
Taxation on loss from sale
of discontinued operations - - -
Loss for the period (80) (8,379) (4,166)
Cash flows from discontinued
operations
Net cash from
operating activities 4,389 (7,928) 18,388
Net cash from
investing activities 4,895 - 34,043
Net cash from
Financing activities - - 2,364
Effect on cash flows 9,284 (7,928) 54,795
Effect of disposal on
financial position of the Group
Property, plant &
Equipment (5,610) - (3,954)
Inventories (9,260) - (20,706)
Trade & other receivables (10,486) - (10,363)
Cash & cash equivalents (1,543) - (43)
Trade & other payables 18,724 - 1,023
Net assets & liabilities (8,175) - (34,043)
Consideration received 7,115 - 34,086
Cash & cash equivalents
disposed of (1,543) - (43)
Net cash inflow 5,572 - 34,043
7. Acquisition of subsidiaries
On 30 September 2011, the group acquired the remaining 50% of the 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 additional 50% share 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 fair value of identified
assets and liabilities. These branches made losses over the past few months due
to the impact of the restructure, but management is working on returning these
branches to profitability. However, given the losses in these branches,
management felt that it was prudent to impair this goodwill in full.
Alert Alert Net effect Alert
Steel Steel of 50% Steel
Polokwane Polokwane Alert Steel North West
50% 100% Polokwane 100%
disposed acquired acquisition acquired
Identifiable
assets acquired
and liabilities
assumed:
Property, plant
and equipment (1,799) 5,061 3,262 4,850
Inventories (19,089) 38,178 19,089 12,987
Trade and other
Receivables (21,937) 43,873 21,937 14,146
Cash and cash
Equivalents 17 (34) (17) (3,290)
Loans and
Borrowings 6,294 (11,459) (5,165) 938
Deferred tax assets /
Liabilities - (410) (410) -
Trade and other
Payables 25,410 (51,220) (25,809) (10,537)
(11,104) 23,989 12,887 19,094
Fair value of
business disposed /
purchase
consideration 15,159 (29,711) (14,552) (21,644)
Profit on disposal 4,055 4,055
Goodwill on
Acquisition 5,722 5,722 2,550
The considerations transferred
comprise the following:
Cash 14,552
Convertible shareholder`s 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)
Less cash equivalents acquired (17) (3,290)
Cash effect (14,569) (24,934)
Total cash effect (39 503)
8. 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. The effect on
equity was as follows:
Shares issued 50,000
Rights issue expenses (1,398)
Total cash inflow 48,602
9. 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 EBTIDA 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 Instruments
entitled Grant date in thousands) Vesting 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 R 0 R 0 R 0 R 0
Risk free rate 7.4% 7.4% 7.4% 7.4%
Expected volatility is estimated taking into account historic average share
price volatility
10. Loans and borrowings
Opening long term liabilities 01 July 2011 79,924
Opening short term liabilities 01 July 2011 10,770
90,694
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 1,087
Interest capitalised on Aquarella Bond 2,034
Lease accruals acquired through business combination 2,716
Adjustment to lease straight line calculation (146)
Repayments:
Mortgage bonds (607)
Finance lease liabilities (3,965)
181,813
Closing long term liabilities 31 December 2011 82,737
Closing short term liabilities 31 December 2011 99,076
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%.
With regard to the above mentioned loans, there was a covenant agreement which
meant that the Group needed to keep within predefined ratio`s of securitised
assets to debt. At 31 December 2011, the Group is technically in breach of these
covenants which means that the Group does not have the unconditional right to
defer its settlement beyond 12 months and Nedbank can call this debt at any
stage. These loans have therefore been classified as current liabilities.
The lease accruals acquired through business combination arose in the entity
acquired due to certain onerous leases and lease straight lining calculations.
11. Property, plant and equipment
Reconciliation of non-current asset movements for the 6 months:
Opening balance 01 July 2011 (as previously reported) 132,516
Assets held for sale 01 July 2011 5,000
Additions 7,950
Disposals (3,279)
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
Disposal of discontinued Operations (5,610)
Depreciation (5,128)
Closing balance 31 December 2011 139,560
12. Goodwill
Goodwill is carried at cost less any accumulated impairment. Goodwill was
valued, using the net present value of cash flows based on current actual
contribution, discounted at a rate of 20%.
The Group tests goodwill annually for impairment or more frequently if there are
indications that goodwill might be impaired.
The recoverable amounts of a cash-generating unit are determined based on the
value in use. These calculations use cash flow projections base on financial
budgets for the following year as approved by management. Cash flows for future
years and beyond are extrapolated using an estimated growth rate of 5%. A
discount rate of 20% was used which is conservative and is higher than the pre-
tax weighted average cost of capital.
Key assumptions used in the fair value calculations include budgeted retail
revenue streams. Such results are based on historical results adjusted for
anticipated future growth. These assumptions are a reflection of management`s
past experience in the market in which these units operate.
Management believes that any reasonable possible change in any of its key
assumptions would not cause the aggregate carrying amounts to exceed aggregate
recoverable amounts.
The following amounts were added to goodwill during the period under review:
Acquisition of Alert Steel North West (Pty) Ltd 2,550
Acquisition of remaining 50% of Alert Steel
Polokwane (Pty) Ltd 5,720
Total goodwill acquired 8,270
Less: Impairment of goodwill relating to Alert Steel
North West (Pty) Ltd (2,550)
Closing balance 5,720
13. Deferred tax
Reconciliation of deferred tax liability
Balance at the beginning of year -
Originating temporary difference arising on acquisition of
tangible fixed assets in Dual Intake (Pty) Ltd
(subsidiary of Alert Steel Polokwane (Pty) Ltd (410)
Closing deferred tax liability (410)
14. Notes to cash flow statement
Reviewed Restated Restated
December December June
2011 2010 2011
6 months 6 months 12 months
Notes R`000 R`000 R`000
Cash effects of operating
Activities Profit / (loss)
before taxation (18,273) (84,729) (134,703)
Adjustment for:
Depreciation & amortisation 5,128 5,587 12,112
Impairment of goodwill 2,550 17,848 17,848
Impairment of property,
plant & equipment - - 136
(Profit) / loss on sale
of assets 325 76 (24)
Profit on sale of
joint venture (2,995) - -
(Profit) / loss on
deconsolidation of
subsidiary - (744) 5,213
Interest received (283) (193) (4,012)
Finance costs 11,605 14,509 29,660
Lease accrual adjustment (736) 1,612 10,453
Movement in foreign
exchange reserve - (438) -
Share based payment expense 1,980 - -
Working capital changes:
Inventories 2,370 65,010 55,003
Trade & Other receivables 50,687 68,878 32,200
Trade Payables (38,010) (51,718) 831
Other payables (5,717) 681 (65)
Cash generated from
operations 8,631 36,379 24,652
Interest received 283 193 4,012
Finance costs (11,605) (14,509) (29,660)
Taxation paid (6,717) (883) (12,211)
Cash utilised in operating
Activities (9,408) 21,180 (13,207)
Cash effects of investing
activities:
Purchase of property, plant
& equipment (7,951) (1,361) (3,820)
Sale of property, plant
& equipment 2,952 108 1,697
Loans to joint ventures
repaid 3 (15,911) (15,911)
Cash effect of
deconsolidation
of Subsidiary - (2,766) (973)
Consideration paid
on acquisition
of businesses 8 (39,503) - -
Movements in loans
to directors - 1,329 5,427
Proceeds on disposal
of businesses 6 5,572 - 35,215
Cash utilised in
investing activities (38,927) (18,601) 21,635
Cash effects of
financing activities
changes to other financial
Liabilities (1,457) (9,699) (15,433)
Long term loans advanced
by Nedbank 10 91,087 - -
Loans received
from shareholders 23,164 - 30,364
Repayment of director`s
loan - (1,364) (1,419)
Repayment of shareholder`s
loans (30,464) - -
Proceeds on the issue
of share capital 9 48,602 - -
Cash flows from financing
Activities 130 932 (11,063) 13,512
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 the director: Novator (Pty) Ltd
Directors: WF Schalekamp
J du Toit
N Cresswell
OV Jevon
MW McCulloch
R van Rooyen
(resigned 7 December 2011)
M Patel
E Hewitt
W van der Merwe
G Mahuma
The following related party transactions were identified during the period:
December 2011 December 2010 June 2011
6 months 6 months 12 months
R`000 R`000 R`000
Rent paid to / (Received from)
related parties
Schallies Beleggings (Pty) Ltd 1,489 1,479 2,957
Paul Kruger Straat Beleggings
390 (Pty) Ltd 199 199 399
Zeranza 26 (Pty) Ltd 834 687 1,374
Icon suppliers (Pty) Ltd (23) - (25)
Purchases from / (sales to)
related parties
Capital Africa Steel (Pty) Ltd 8,250 - -
Reinforcing & Mesh Solutions,
a division of Capital Africa
Steel (Pty) Ltd 7,584 4,437 -
Capital Star Steel (Pty) Ltd 327 - -
Novator (Pty) Ltd 1,085 709 1,419
Steel Mecca (Pty) Ltd (3,885) - -
Gondwana Marketing (Pty) Ltd (82) (967) (1,298)
Buffelskom Boerdery (Pty) Ltd (1,006) (400) (528)
Business combinations transactions
Proceeds on disposal of Alert Steel
North West operations to
Capital Africa Steel - - (27,000)
Proceeds on disposal of Alert Plumbing
division to Taboo Trading (Pty) Ltd - - (8,241)
Consideration paid on acquisition of
Alert Steel North West (Pty) Ltd 21,644 - -
Amounts included in trade receivable/
(trade payable) regarding related parties
Reinforcing & Mesh Solutions, a
division of Capital Africa Steel
(Pty) Ltd (3,064) (15,714) -
Schallies Beleggings (Pty) Ltd (1) 35 1
Capital Africa Steel (Pty) Ltd (8,250) - -
Capital Star Steel (Pty) Ltd (327) - -
Novator (Pty) Ltd (156) - (7)
Icon suppliers (Pty) Ltd 29 - 6
Paul Kruger Straat Beleggings 390
(Pty) Ltd - - -
Gondwana Marketing (Pty) Ltd 17 4,103 -
Buffelskom Boerdery (Pty) Ltd 37 2,588 -
Steel Mecca (Pty) Ltd 942 - -
OVERVIEW
The six month period under review was a challenging one in which Alert Steel
completed the process of implementing its branch restructuring strategy, which
is designed to return the Group to long-term growth and sustainable
profitability by refocusing on its core business of retailing steel and steel-
related products and services.
The turn-around has been hampered by poor trading conditions with labour strikes
in July, followed by stock shortages from September to December, primarily
created by the Arcellor Mittal Newcastle plant`s force majeure. These factors
meant that there was only one month (August) where there were normal trading
conditions. This has had a severe impact on the group`s revenue. However, the
group was able to take advantage of the price increases created by the stock
shortage and has made better margins than forecast. This resulted in the group
managing to make the targeted EBITDA for December 2011 for trading operations.
Finance costs were higher than anticipated, predominantly driven by the fact
that the group had to pay R1.5m in order to raise a bank cash-backed guarantee
to Arcellor Mittal, as well as shareholder loans of R30m bearing interest at
high interest rates for the first three months of the year ahead of the rights
offer of R50m on 11 October.
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
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 Steel`s management has not been able to obtain
reliable financial information from the business and the auditors have also been
unable to do a review of December 2011 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 prudent 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 any other such circumstances
will reoccur.
During the period under review, the group has also appointed new auditors and a
new designated advisor.
FINANCIAL RESULTS
When comparing the 6 months ended December 2011 to the 6 months ended December
2010, the following items can be noted:
Revenue reduced by 1% to R418 million (Dec 2010: R422 million). The gross profit
increased by 38% to R86 million (Dec 2010: R63 million). Operating expenses
decreased by 9% to R97 million (Dec 2010: R106 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 R980k. 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.
Depreciation, amortisation and impairments accounted for 1.2% of revenue (Dec
2010: 1.3%). This resulted in a loss after tax of R18 million (Dec 2010: R75
million)
Total headline loss decreased by 73% to R18.4 million (Dec 2010: R67.2 million).
Headline loss per share decreased by 93% to 2.0 cents per share (Dec 2010: 27
cents).
PROSPECTS
The directors anticipated that the group may require a further rights offer in
order to generate growth of the business. The restricted cash flow post the slow
trading period of December and January has expedited the Group`s need for a
further rights offer. Therefore, the directors have proposed a rights offer of
R120 million, of which, underwriting agreements from the major shareholders and
a black empowerment investor have been signed amounting to R102.5 million
subject to the fulfilment of certain suspensive conditions. The rights offer
will be utilised to settle the R23 million shareholder`s loan from Capital
Africa Steel, to acquire the business of Steel Mecca for R7 million from Capital
Africa Steel at fair value and to settle R55 million of Nedbank debt. The rights
offer will be concluded before 30 June 2012.
Arcellor Mittal is back on full production after the force majeure in July 2011.
With the additional cash injection, the Group will be able to settle its
creditors within terms and will be able to obtain stock in the normal course of
business. Due to the above two factors, it is anticipated that the full range of
stock products will be back in the branches from April 2012.
By the end of June 2012, there will be 31 containers deployed and running at
optimal revenue and margin levels. This will set the Group up to achieve the
target results for the 2013 financial period.
During the 6 months ended December 2011, the restructure of branches was
completed as part of the first restructure phase. Post December 2011, the Group
has embarked on a second phase of cost restructuring at head office level only.
The objective of the second phase is to reduce the fixed cost burden on the
Group. The cost of the retrenchments is expected to be around R5 million which
will be incurred in April and May 2012. However, the restructure is expected to
result in a monthly saving in salaries of R1.2 million and other operational
cost savings of R500 000 per month going forward. This new cost base will then
be at a sustainable level into the future subject to the group achieving the
revenue targets. With the introduction of the additional R40 million in cash
from the rights offer, it is anticipated that the additional discounts from
suppliers will be approximately R750 000 per month and an interest saving of
around R700 000 per month is anticipated. The benefits of these savings will
only really be felt from the 1st of June 2012 onwards.
STATEMENT OF GOING CONCERN
The Group incurred a loss for the period ended 31 December 2011 of R18.3 million
(2010: R84.7 million) and, at that date, the Group`s total liabilities exceeded
its total assets by R11.1 million (2010: total assets exceeded total liabilities
by R7.4 million). The cash flow has been quite restricted, even after the rights
offer in October 2011, and due to the expected slow trading months of December
2011 and January 2012, the Group has not been able to adhere strictly to its
normal trade creditors payment terms post the period end. This means that
settlement discounts have been lost and the supply of inventory has
intermittently been interrupted until the arrear payments have been made.
The directors have therefore proposed a rights offer of R120 million to be
concluded before 30 June 2012. Signed underwriting agreements for R102.5 million
have been obtained from the major shareholders and also from a new black
empowerment investor. It is anticipated that the net cash inflow from the rights
offer after settling the debt and purchase consideration, described under
"Prospects", will be R40 million. This will allow the Group to have a stable
cash flow and to settle its trade creditors within normal trading terms once
again, thereby ensuring a consistent supply of inventory and that settlement
discounts will be obtained. The Group has completed the cost restructuring as
described under "Prospects" and with the reduction in costs, additional
settlement discounts received and the interest cost saving from the reduction in
debt, it is anticipated that the Group will also return to profitability and
have a positive cash flow. The covenants for the R70 million and R20 million
loans described under note 10 will be amended after the rights offer to ensure
the Group`s compliance with the covenants. This will mean that the original
payment terms will apply and the loans can once again be classified as non-
current.
Accordingly, the ability of the Group to continue as a going concern is
dependent on a number of factors namely the:
* successful conclusion of the rights offer by June 2012
* successful implementation of the various initiatives to reduce costs and
increase revenue and margins to return the group to profitability.
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, contingent obligations and commitments will occur in the
ordinary course of business. However, in the event that the rights issue is not
successfully concluded and the Group is unable to return to profitable
operations, there exists a material uncertainty that may cast significant doubt
on the ability of the company and its subsidiaries to continue as going
concerns.
CHANGES TO THE BOARD OF DIRECTORS
The following changes to the Board of directors transpired since the annual
report was issued, 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 01 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.
REVIEWED REPORT
The condensed financial results have been reviewed by Alert Steel`s independent
auditors KPMG Inc. The Auditor`s Review Report concluded that, based on their
review, nothing has come to their attention that caused them to believe that the
financial results are not prepared in all material respects in accordance with
International Financial Reporting Standards and in the manner required by the
Companies Act of South Africa.
KPMG`s report contains an unmodified conclusion, but had 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 period ended 31 December 2011 of R18.3 million and, at that date,
the Group`s total liabilities exceeded its total assets by R11.1 million. These
conditions, along with other matters set out in the going concern paragraph,
indicate the existence of a material uncertainty that may cast significant doubt
on the ability of the company and its subsidiaries to continue as going
concerns."
A copy of the auditor`s report is available for inspection at the company`s
registered office.
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.
PREPARED BY
The preparation of the interim financial results for the 6 months ended 31
December 2011 was supervised by Neil Cresswell, CA (SA), Chief Financial
Officer.
DATE OF PUBLICATION OF THIS REPORT 30 March 2012
ANNUAL FINANCIAL STATEMENTS
The previous signed financial statements of the Group are for the period ended
30 June 2011 and are available for inspection at the registered address found
below.
CORPORATE INFORMATION
Non executive directors: W Schalekamp, OV Jevon, M McCulloch,
M Patel, G Mahuma, W van der Merwe,
E Hewitt
Executive directors: J du Toit, N Cresswell
Registration number: 2003/005144/06
Registered address 12 Gompou Street,
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 QuestCo (Pty) Ltd
Auditors KPMG Inc.
Date: 30/03/2012 17:49:30 Produced by the JSE SENS Department.
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