| Tue 16 Jul 2002, 0:00 | | Relyant Retail Limited - Company Announcement |
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Relyant Retail Limited - Company Announcement
RELYANT RETAIL LIMITED
GENERAL MEETING OF SHAREHOLDERS
TUESDAY, 16 JULY 2002
CHAIRMAN`S OPENING STATEMENT
In view of the recent press articles, radio interviews, etc., I feel that it is
imperative that I now address the issues raised in the media, to correct many of
the inaccuracies and allegations that have been made.
1. ALLEGATION THAT THE BOARD DID NOT FULLY INFORM SHAREHOLDERS OF THE WEAK
FINANCIAL POSITION OF THE GROUP
1.1 In this regard, I wish to refer to comments in last year`s Preliminary
Announcement and Annual Report, wherein it was clearly stated that the directors
were extremely concerned at the high level of gearing.
In the Preliminary Announcement dated 16 August 2001, with the gearing levels at
99%, the Board stated the following:
"Although the Group`s funding requirements have been secured, management
considers this level of gearing to be unacceptably high and has implemented a
number of strategies to reduce borrowings." These initiatives included
investigating the securitisation of our debtors` book and the disposal of
certain non-core assets.
Furthermore, in the Annual Report, released on 28 September 2001, we stated the
following:
"The Relyant board is committed to driving our gearing down significantly over
the next two years .."
We also stated:
"Progress on our reduction in gearing plans are shared regularly with our
principal financiers and we have their full support and constructive input "
1.2 It was as a direct result of the constructive input of our funding
partners, together with the Board`s concerns expressed above, that the Board
appointed Investec Merchant Bank as its advisors, in late October 2001, to
investigate various restructuring alternatives available to Relyant.
As a result of their initial review, which concluded that Relyant`s business
model was sound, but that the fundamental problem was the crippling debt burden,
the Board released the first Cautionary Announcement on 8 November 2001, warning
shareholders that the Group was involved in negotiations and that shareholders
should exercise caution when dealing in the company`s securities.
After extensive investigations into all possible alternatives, including
disposal of brands, merger with other industry participants and securitisation
of the debtors` book, the Board concluded that a rights issue was the only
viable alternative. This would, however, be unlikely to succeed unless a
significant new investor could be found, particularly one that would add value
to the Group.
1.3 Due to the lengthy investigations into the alternatives, the complexities
of the negotiations (which involved several parties, including POCO, the new
investor), the rapid deterioration in the microlending and credit markets (with
major negative announcements by such companies as Unifer, Saambou, Profurn and
the JD Group regarding market conditions and the credit environment) and the
extensive due diligence exercise undertaken by POCO, the initial Cautionary
Announcement was renewed several times, the latest being the Cautionary dated 20
March 2002, a week before the Interim Results were released. This announcement
stated:
"Further to the cautionary announcement published on 30 January 2002,
shareholders are advised that the Board of Directors of Relyant is at an
advanced stage in negotiations regarding a significant restructuring of Relyant,
which if successfully concluded, may have a material effect on the price at
which the Relyant shares trade on the JSE Securities Exchange South Africa.
It is anticipated that detailed information will be provided in conjunction with
Relyant`s interim results, which will be released prior to month end.
Accordingly, shareholders are advised to exercise caution when dealing in their
Relyant shares until a further announcement is made."
Any shareholder dealing in the company`s securities should therefore have been
aware of the need to exercise caution.
1.4 The Board also delayed the release of the Interim Results Announcement, in
the hope that the negotiations would be finalised before they were released.
Unfortunately, when the Board was forced to release the Interim Results on 28
March 2002, the negotiations had not been finalised and, consequently, the Board
was unable to release further details of the restructure.
1.5 However, in the commentary to the Interim Results for the six months to
December, released on 28 March 2002, where gearing was noted to have increased
to 105%, we clearly stated the following, under the heading "Major Restructure":
"Given the prevailing difficult environment, the Board resolved late last year
to reduce the financial risk arising from the high level of gearing, which has
been part of the financial structure of the Group since its formation. There is
no doubt that the gearing constraints under which the Group has been operating
since its inception, and the related heavy financing cost burden, have had a
direct impact on the Group`s ability to compete in an overtraded credit retail
market. This has been exacerbated by the massive restructuring exercise that the
Group undertook after merger in mid-1998, to lay the foundations for a sound
business, which has resulted in cash outflows totalling some R386 million since
July 1998.
Consequently, as noted in the cautionary announcement dated 20 March 2002, the
Board is at an advanced stage of negotiations regarding a significant
restructuring of the Group. If successfully concluded, these negotiations will
result in the Group being placed in a sound financial and competitive position
for the future."
Furthermore, under the "Prospects" paragraph, we stated:
"If the negotiations referred to in the recent cautionary announcement are
successfully concluded, there will be a material impact on the Group`s cash
flows, balance sheet and future earnings."
Since we were trading under a cautionary, no more could have been said at that
stage, but shareholders were clearly aware that the Board was concerned about
the Group`s financial position and was taking action.
2. INTEGRITY OF THE INTERIM RESULTS
Regarding the integrity of the Interim Results, the following needs to be
understood:
a. Although pressure to reduce debt had been intensified by the Group`s funding
partners, we continued to enjoy their support due to their own involvement in
the negotiations to restructure the business. Due to this ongoing support and
the fact that these negotiations were at an extremely advanced stage immediately
prior to the release of the Interim Results, the Board concluded that it was
appropriate to prepare the Interim Results on a going concern basis.
b. The principal accounting policies of the Group were consistently applied in
preparing the Interim Results, except for one minor change that was disclosed in
the Interim Results:
c. The basis of providing against the debtors book, where a certain percentage
of arrear account balances was set aside as a doubtful debt provision, was
applied consistently with the past. As noted in the Interim Results, the quality
of the debtors` book, measured by arrears and the number of "A" grade payers,
had once again improved. The Board was confident that, on this basis, the
provisions at 31 December 2001 were adequate and no change in the basis of
providing was envisaged or deemed necessary. These provisions were comparable
with other industry participants, and, in certain instances, more conservative.
d. The tangible net asset value of 985c, disclosed in the Interim Results, was
determined on this basis.
3. WHY THERE WAS NO PROFIT WARNING INCLUDED IN THE INTERIM RESULTS
Based on the information that the Board had at its disposal at the date of the
release of the Interim Results, the Group`s year to date trading results were in
line with the prior year. Subsequent to the release of the results, the market
deteriorated markedly and only by the end of April was the Board in a position
to establish that there was likely to be a significant trading loss for the
second six months. Therefore, on 3 May 2002, a Trading Update was released,
informing shareholders of the situation.
4. THE QUANTUM OF THE RIGHTS ISSUE AND THE RESTRUCTURE PROVISION OF
APPROXIMATELY R510 MILLION
4.1 In dealing with the quantum of the Rights issue, the parties involved in
the negotiations agreed that, in the light of the prevailing difficult market
conditions and the related risks, the gearing level immediately post-
restructuring should be below 40% to place the business on a sound financial
footing. The Board agreed that this was essential.
4.2 In dealing with the Restructure Provision, may I refer you to page 15 of
the Circular, wherein it describes the nature of the provision. Since the
creation of this provision was a non-negotiable, integral and indivisible part
of the capital restructure agreement, the Board agreed to implement the
provision.
The following must be stressed:
i. The provision, which will be finalised in terms of the current year audit,
will be made in accordance with GAAP;
ii. Apart from certain closure costs, it must be emphasised that the cash
flows of the Group will be unaffected by this provision and, hence, the
valuation of the company on a discounted cash flow basis is largely unaffected;
iii. Any impairment of goodwill and trademarks will be determined after a
detailed evaluation of the full year`s actual and the future projected trading
results of the brands to which these amounts were attributed;
iv. It includes a change in accounting policy, requested by the new investors
as an integral part of an indivisible transaction, in respect of the basis of
providing for doubtful debts, from a basis whereby a certain percentage of
arrear balances was set aside, to a full provision for gross arrears;
v. Due to the change in accounting policy announced in the Interim Results,
the loan to the staff share incentive trust (in respect of options issued to
staff) has already been offset against share capital and premium. This does not
affect the rights of participants in the staff share incentive trust at this
stage. It should be noted that no participants are likely, nor obliged, to
exercise their options which were issued to them at a price of R4,28 in 1999;
vi. The restructuring envisaged by the recapitalisation of the Group will
enable Relyant to accelerate the repositioning and rationalisation of the
business, including the closure of certain non-performing stores.
5. SECURITISATION
Questions have also been asked as to why the Board concluded that the
securitisation of the debtors` book should not be implemented. The reasons are
as follows:
(i) While the debtors` book itself received an indicative rating, which
confirmed that the Group would have been able to raise significant funding
through securitisation, it would have been necessary for the rating agency to
also rate the company. This is because any successful securitisation requires
that the company to be appointed the servicing agent must receive an acceptable
rating. Without this rating, a full back-up servicer would need to be appointed
immediately, which would significantly raise the costs of the structure. In the
light of Relyant`s unacceptably high gearing, the Board was advised that Relyant
may not have obtained an acceptable rating as a company. This situation was
further exacerbated by the deterioration in the credit market.
(ii) In addition, and more importantly, the Group`s funding partners refused to
give up their security over the debtors` book unless they were fully repaid.
Although the securitisation could have raised significant funding, it was
insufficient to fully repay the funding partners.
6. THE EXECUTIVE SHARE PURCHASE SCHEME ("THE CCD SCHEME")
Regarding the Executive Share Purchase Scheme, or the CCD Scheme, the following
should be noted:
(i) One of the objectives of the capital restructuring is to ensure that the
capital structure of the Group is simplified, with the recapitalised company
having only ordinary share capital. To this end, an integral part of the capital
restructure is to ensure that the compulsorily convertible debentures were
eliminated. However, the conversion rights and obligations had been split from
the debentures and sold to the CCD Scheme participants, which gave the
opportunity of repaying the debentures without affecting the rights and
obligations of the participants.
(ii) The CCD Scheme was initially approved by shareholders in a meeting held
on 1 September 1998 and was amended in shareholders meetings on 17 December 1998
and 17 June 1999. In line with normal practice, each of the relevant Circulars
to shareholders endeavoured to provide shareholders with the Salient Features of
the Scheme, and the circulars all stated clearly:
"While every attempt has been made to ensure that this summary is accurate as
far as it goes, reading this summary is not a substitute for reading the scheme
documents under which the above scheme is operated. This summary does not
override the scheme documents and in the event of conflict or omission the
scheme documents will prevail."
(iii) These scheme documents were available for inspection at each of these
meetings. Allegations of inadequate disclosure in the Circulars are therefore
incorrect. Shareholders were also entitled at any time, since the inception of
the CCD Scheme, to inspect these documents.
(iv) It has also been alleged that disclosure in the Annual Reports of Relyant
was inadequate with regard to the Scheme. Again, the Board is satisfied that
every attempt was made to ensure that the Salient Features of the Scheme were
properly disclosed in every Annual Report since inception of the Scheme.
(v) It has also been suggested that the directors are now "getting off the
hook" to the tune of some R40 million, as part of this Capital Restructuring.
This is incorrect.
It states on page 14 of the Circular that:
"The acceleration of the Promissory Notes has not and does not extinguish,
reduce or otherwise vary the rights or obligations of any participant in the
Compulsorily Convertible Debenture Scheme in relation to Relyant and/or the
Trust. However, the participants in the Compulsorily Convertible Debenture
Scheme have agreed to give up their rights in return for the release from their
obligations and the possibility of a replacement scheme to be implemented by the
reconstituted Board.
The implementation of the amendment, variation or cancellation of the
Compulsorily Convertible Debenture Scheme (whichever is applicable) shall be
undertaken by Relyant after consultation with and approval by POCO and the Lead
Bank.
A revised executive share incentive scheme will be negotiated by the Board as
reconstituted, subject to the necessary regulatory approvals if any, taking into
consideration the existing rights and obligations and also the need to provide
fair and appropriate incentivisation for the retention and performance of key
management."
Consequently, until a new scheme has been approved by the reconstituted Board
and the shareholders, if necessary, the participants in the Scheme remain
obligated and have not been "let off the hook".
The rights that the participants have agreed to give up are more fully detailed
on page 59 of the Circular, under paragraph 10.
(vi) It must be further emphasised that the Board has always comprised a
majority of non-executive directors. Only the two executive directors were
participants in the CCD Scheme. Furthermore, the other participants in the CCD
Scheme are part of senior management and are not members of the Board.
Appropriate corporate governance procedures have therefore been followed.
(vii) Regarding the acceleration of settlement of the Promissory Notes, this
was done to effect an immediate interest saving, which only arose as a result of
the agreement by the parties to apply the rates agreed to by the funding
partners in terms of the new facility agreement.
7. LOAN TO THE STAFF SHARE INCENTIVE SCHEME
In certain media, it has been alleged that the loan to the staff share incentive
trust (which is the staff option scheme and has nothing to do with the CCD
Scheme) amounted to R174 million. This is factually incorrect. The total loan to
the staff share incentive trust amounts to R34,4 million and has been dealt with
as stated in the Interim Results, in terms of GAAP.
8. AMOUNTS OWING TO STEINHOFF
It has also been alleged in certain media that Relyant owes Steinhoff an amount
of R400 million and that this position influenced the transaction. This is
incorrect. That amount is significantly in excess of Relyant`s total annual
purchases from that group and the amount owing at any time is a fraction of that
amount. Furthermore, our payments are up to date and in line with our normal
terms.
Date: 16/07/2002 01:00:00 PM Produced by the JSE SENS Department
