SPUR CORP. LIMITED INTERIM RESULTS 2015

NOTES

 

1.   Basis of preparation – The unaudited interim condensed consolidated results for the six months ended 31 December 2014 have been prepared in accordance with the JSE Limited Listings Requirements for provisional reports and the requirements of the Companies Act of South Africa (No. 71 of 2008). The Listings Requirements require provisional reports to be prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards ("IFRS") and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, and Financial Pronouncements as issued by the Financial Reporting Standards Council and to also, as a minimum, contain the information required by IAS 34 – Interim Financial Reporting. The accounting policies and methods of computation applied in the preparation of these results are in accordance with IFRS and are consistent with those applied in the preparation of the group's annual financial statements for the year ended 30 June 2014.
     
2. Broad-based black economic empowerment ("B-BBEE") deal with GPI – As detailed in the circular to shareholders of 4 September 2014, and approved by shareholders at a general meeting on 3 October 2014, the company concluded various agreements to issue 10 848 093 new ordinary shares indirectly to Grand Parade Investments Limited ("GPI"), a strategic black empowerment partner, and separately donate 500 000 of the company's shares (100 000 shares per annum over five years), currently held as treasury shares, to the Spur Foundation, a benevolent foundation that is a consolidated structured entity. Both transactions were executed on 30 October 2014. In terms of the agreements, GPI is restricted from trading the shares in question without the express permission of the company for a period of five years from the effective date of the transaction and is furthermore required to maintain its B-BBEE credentials for the same period.

The shares were issued at a price of R27.16 per share, representing a 10% discount to the volume-weighted average trading price of the company's shares on the JSE for the 90 trading days prior to 30 July 2014, resulting in the aggregate proceeds from the issue of shares amounting to R294.657 million. The market price of the shares on 30 October 2014 was R30.20 per share, equating to an effective discount of R32.957 million in aggregate. This discount has been recognised as a share-based payment expense in accordance with IFRS 2 – Share-based Payments and included in profit before income tax for the period, with a corresponding credit to equity (retained earnings).

The group partially funded the transaction through a subscription of cumulative compulsorily redeemable five-year preference shares in an unconsolidated structured entity with a combined subscription value of R72.328 million (representing 24.5% of the total funding requirement for the transaction). The preference shares accrue dividends at a rate of 90% of the prevailing prime overdraft rate of interest and are subordinated in favour of the external funding provider. GPI has funded 24.5% of the total funding requirement and an external funding provider has funded the balance of 51% of the total funding requirement. The preference shares are secured by a cession of the reversionary interest in the Spur Corporation Ltd shares held indirectly by GPI, which also serve as security for the external funding. The preference share investment is treated as a financial asset carried at amortised cost.

The transaction resulted in a net cash inflow of R222.328 million for the group. Of the total transaction costs of R1.525 million: R0.285 million relates directly to the subscription of the preference shares referred to above and is included in the carrying value of the preference shares; R0.991 million relates directly to the issue of the company's ordinary shares and has been charged directly against equity (retained earnings); and the balance of R0.301 million is included in profit before income tax.
     
3. Acquisition of non-controlling interest in Panarottis Penrith (Australia) – With effect from 1 August 2014, the group acquired the remaining 50% interest in Panpen Pty Ltd ("Panpen"), an Australian company in which the group had an existing 50% interest and which operates the Panarottis outlet in Penrith (Australia). Despite not owning a majority interest in Panpen prior to this transaction, the group effectively controlled Panpen and the entity was consequently consolidated. The purchase consideration of AU$200 000 (the equivalent of R1.992 million as at the effective date) was settled in cash on the effective date. As part of the transaction, Panpen was required to settle the outstanding shareholder's loan with the non-controlling shareholder in the amount of AU$158 342 (the equivalent of R1.576 million as at the effective date), which amount was settled in cash on the effective date. The net liabilities of Panpen at 1 August 2014 included in the consolidated financial statements of the group amount to R0.217 million, of which R0.108 million was attributable to non-controlling interest. The purchase consideration has been debited directly to retained earnings and the non-controlling interest's share in the net liabilities of the subsidiary has similarly been reallocated within equity to retained earnings.
     
4. Disposal of Panarottis in Blacktown (Australia) – With effect from 15 November 2014, the group disposed of its 92.67% interest in Panawest Pty Ltd, an Australian subsidiary operating the Panarottis outlet in Blacktown (Australia), for AU$1. The carrying value of the subsidiary's net liabilities amounted to R1.997 million as at the date of the transaction, of which R0.146 million was attributable to non-controlling interest. The net liabilities comprised property, plant and equipment of R2.000 million, inventory of R0.128 million, trade and other receivables of R0.121 million, cash of R0.206 million, tax assets of R0.141 million, trade and other payables of R0.682 million and shareholder loan liabilities of R3.911 million. The transaction resulted in a profit before income tax on disposal of the subsidiary of R1.851 million, which has been reduced by the reclassification of foreign exchange losses of R0.345 million previously recognised in other comprehensive income to profit before income tax, resulting in a net profit before income tax on disposal of R1.506 million. As part of the transaction, the former subsidiary will continue to repay the previous shareholder's loan with the group of AU$400 000 (the equivalent of R3.911 million on the date of the transaction), in equal instalments over 35 months to October 2017. The business contributed revenue for the period of R5.493 million (2013: R7.530 million; year to 30 June 2014: R14.986 million) and a loss before income tax of R0.061 million (excluding the profit on disposal) (2013: R0.548 million; year ended 30 June 2014: R3.732 million (which included an impairment loss of R2.496 million)).
     
5. Long-term share-linked retention scheme – In December 2014, the second tranche (2013: first tranche) of share appreciation rights granted in terms of the group's long-term share-linked retention scheme was settled in cash. This resulted in a gross cash outflow of R24.045 million (2013: R23.357 million) to the scheme participants. Simultaneously, the economic hedging instrument utilised by the group matured, which resulted in a gross cash inflow of R19.725 million (2013: R19.920 million). During the period, the share-based payment expense in respect of the scheme included in profit before income tax amounted to R4.366 million (2013: R16.547 million; year ended 30 June 2014: R28.117 million), while the loss on the related economic hedging instrument recognised in profit before income tax amounted to R7.469 million (2013: R11.729 million gain; year ended 30 June 2014 R17.922 million gain). Further details of the share appreciation rights and related hedges are detailed in notes 23 and 17 respectively on pages 132 and 128 respectively of the annual integrated report for the year ended 30 June 2014.
     
6. Prior year acquisition of The Hussar Grill – During the prior year and with effect from 1 January 2014, a wholly-owned subsidiary of the group acquired the franchise business of The Hussar Grill as well as three restaurants trading as The Hussar Grill in Rondebosch, Green Point and Camps Bay (all in the Western Cape). The acquisition gives the group exposure to an upmarket specialist steakhouse chain. The aggregate purchase consideration of R35.380 million was settled in cash on the effective date. Transaction costs in the amount of R1.620 million, relating to financial and legal due diligence, legal and consulting services, are included in profit before income tax for the prior year to 30 June 2014.
     
7. Prior year investment in associate, Braviz Fine Foods – During the prior year, and with effect from 18 March 2014, a wholly-owned subsidiary of the group acquired a 30% interest in Braviz Fine Foods (Pty) Ltd. The entity is a start-up operation establishing a rib processing plant in Johannesburg, which commenced formal production in January 2015. As the group is able to exercise significant influence over the entity, but not control, it equity accounts the investment. The initial purchase consideration amounted to R0.4 million (comprising ordinary shares of R300 and initial transaction costs of R0.4 million). The group simultaneously advanced a loan in the amount of R36.250 million to the entity. The loan bears interest at the prevailing prime overdraft rate of interest and has no formal repayment terms (although any repayment of shareholder loans is to be made on a pro rata basis between the respective shareholders) and is consequently considered part of the net investment in the equity-accounted investee. The group's share of equity-accounted losses after income tax for the period amounts to R0.354 million (2013: Rnil; year ended 30 June 2014: R0.379 million) and arose primarily from finance costs incurred by the entity on shareholder funding for the respective periods and administrative costs in the current period prior to commencement of production in January 2015.
     
8. Prior year disposal of Panarottis Tuggerah (Australia) – During the prior year and with effect from 1 January 2014, a wholly-owned subsidiary of the group, which was the 80% partner of the Panarottis Tuggerah partnership, agreed with the remaining 20% partner to dissolve the partnership in question. The partnership previously operated the Panarottis restaurant in Tuggerah (Australia). The transaction resulted in a profit before income tax on disposal of the partnership interest in the amount of R2.154 million recognised in the year to 30 June 2014. The partnership contributed revenue of R6.050 million and earned a profit before income tax of R0.061 million for the period to 31 December 2013 (the date of the disposal).
     
9. Prior year closure of Captain DoRegos distribution centre in Bloemfontein – During the prior year, in November 2013, the group closed its Captain DoRegos warehouse and distribution centre in Bloemfontein. The distribution operations were absorbed into the group's existing outsourced logistics network. One-off costs associated with the closure of the warehouse amounted to R1.224 million for the period to 31 December 2013 and R1.326 million for the year to 30 June 2014 and were included in profit before income tax for the respective periods.
     
10. Prior year international group restructure – During the prior year, between 31 March 2014 and 30 June 2014, the group restructured certain of its international subsidiaries in order to ensure the continued validity of franchise agreements concluded between the group and its international franchisees. The restructure resulted in certain foreign subsidiaries commencing deregistration procedures or becoming dormant, which resulted in foreign exchange gains on translation of these foreign operations previously recognised in equity (FCTR) through other comprehensive income being recycled through other comprehensive income back to profit before income tax in the prior year to 30 June 2014 in the amount of R3.386 million. Legal, consulting and other advisory costs relating to the restructure amounted to R2.169 million during the prior year to 30 June 2014 and were included in profit before income tax for that year.
     
11. Prior year losses of Mohawk Spur in Wandsworth (England) – As a consequence of sustained trading losses incurred by the Mohawk Spur in Wandsworth (England), the group impaired the franchise rights intangible asset of R1.866 million attributable to the cash-generating unit at 30 June 2014, and the full carrying value of the intangible asset was charged to profit before income tax in the year to 30 June 2014. Furthermore, in considering the ability of the restaurant in question to continue trading, the group accelerated the amortisation of the lease previously acquired by the group relating to the restaurant, resulting in a further charge of R1.612 million to profit before income tax in the year to 30 June 2014. The group intends ceasing to trade this outlet at the end of February 2015.
     
12. Prior year impairment of Panarottis Blacktown (Australia) – As a consequence of sustained historic trading losses, the carrying value of property, plant and equipment of the Panarottis outlet in Blacktown (Australia), amounting to R2.496 million at 30 June 2014, was impaired and written off to profit before income tax for the year to 30 June 2014.
     
13. Subsequent event
    Acquisition of RocoMamas – On 16 January 2015, the group signed a non-binding heads of agreement to acquire a 51% interest in the franchise company for the RocoMamas brand. The brand offers handmade "smash-style" burgers, ribs and wings, with all orders prepared fresh, on site through its five franchised restaurants in Gauteng. Restaurants provide full-service, sit-down and take-away options within a nostalgic American rock ambience. The intended acquisition will give the group exposure to an exciting small-format restaurant concept that appeals to clientele from a broad spectrum. The group intends utilising its existing infrastructure to support the existing shareholder to accelerate the expansion of the brand nationally. It is anticipated that the effective date of the transaction will be in March 2015. The accounting treatment for the transaction has yet to be determined. It is anticipated that the purchase consideration will be paid over a three-year period, based effectively on a five-times earnings multiplier of the company's third year of profit before income tax.
     
14. Contingent liabilities
   
  • International tax – As reported in note 46.1 on page 159 of the annual integrated report for the year ended 30 June 2014, the South African Revenue Service ("SARS") had previously issued assessments to wholly-owned subsidiary, Spur Group (Pty) Ltd, for additional income from controlled foreign companies of the group for the 2009, 2010 and 2011 years of assessment. Following the objection process during the prior year, reduced assessments were issued amounting in aggregate to R1.993 million (comprising R1.561 million in tax and R0.432 million in interest), which were settled in cash in the prior year. The board of the company in question appealed SARS' decision to partially disallow the objection and alternate dispute resolution proceedings were initiated in November 2014 with SARS. The company awaits the final determination of the alternate dispute resolution process from SARS. The board continues to be of the view that it is able to defend its position. Consequently, a liability has not been raised in respect of the assessments issued, or the possible liability arising from the same disputed issue for the 2012 to 2014 years of assessment.
  • Tax on 2004 share incentive scheme – On 9 December 2014, following an audit of wholly-owned subsidiary, Spur Group (Pty) Ltd, SARS issued additional assessments to that company in respect of the 2010, 2011 and 2012 years of assessment totalling R6.589 million (comprising R5.098 million in tax and R1.491 million in interest). The additional assessments were issued following the disallowance of a deduction claimed in respect of the 2004 share incentive scheme. The assessments were settled in cash on 30 January 2015. The board of the company in question intends to object to the additional assessments and is confident that it will be able to prove that SARS has erred in disallowing the deduction. Furthermore, on 10 December 2014, SARS advised that it intends issuing additional assessments relating to the same matter for the 2005 to 2009 years of assessment amounting to R8.725 million in tax (with interest not yet calculated). The board will similarly object to these assessments. No liability has been raised in respect of the assessments issued and those anticipated to be issued, on the basis that the board is confident that it can defend the matter.
  • There have been no further changes to the status of other contingent liabilities referred to in note 46 on page 159 of the annual integrated report for the year ended 30 June 2014.
     
15. Fair value of financial instruments
   
  • The hedge forward purchase derivative financial assets/(liabilities) utilised by the group to economically hedge the impact of the share appreciation rights granted in terms of its long-term share-linked retention scheme are fair valued at each reporting date (refer note 5). The fair values of the contracts are determined by an independent external professional financial instruments specialist using a Black-Scholes (risk neutral pricing) option pricing model in a manner that is consistent with prior reporting periods. The financial instruments in question are designated as level 2 financial instruments in terms of the fair value hierarchy specified in IFRS 13 – Fair Value Measurement, as the inputs into the valuation model are derived from observable inputs for the assets/liabilities in question, but are not quoted prices in active markets for identical assets/liabilities.
  • The investment in preference shares, relating to the B-BBEE transaction detailed in note 2, of R72.328 million is treated as a financial asset carried at amortised cost but was initially recognised at its fair value at the subscription date plus the value of transaction costs of R0.285 million. In determining the fair value of the investment at initial recognition, the directors considered the dividend/interest rates implicit in similar funding arrangements granted on similar terms and conditions between unrelated market participants. The directors determined that the dividend/interest rate applicable to the investment is commensurate with similar external funding instruments between unrelated market participants, and the nominal value of the investment therefore approximated its fair value at initial recognition. The financial asset is designated as a level 2 financial instrument in terms of the fair value hierarchy as the inputs into the valuation model are derived from observable inputs for the asset in question, but are not quoted prices in active markets for identical assets.