Faritec folds?

Embattled Faritec has thrown in the towel after months of trying to raise R60 million in rescue funding and selling off assets, and has filed for liquidation of its Enterprise Solutions division.

In an announcement to shareholders late yesterday afternoon, the company said its bids to raise rescue funding and swap shares for cash had failed.

As a result: “Faritec, in its capacity as a creditor of Faritec Enterprise Solutions, has filed for liquidation of Faritec Enterprise Solutions, Faritec's wholly-owned operating subsidiary.”

This leaves the listed entity in a murky situation. Faritec's top management did not respond to repeated requests for comment yesterday.

However, Enterprise Solutions was the company's biggest revenue-spinner, as it accounted for R678 million of Faritec's subsidiaries' revenue for the year to June. Faritec turned over R731 million during the year.

The facts that are known to ITWeb are that Faritec was trying to swap debt owed by Faritec Enterprise Solutions for shares in the listed entity. In addition, several interested parties had contacted ITWeb during the course of the day yesterday to say they had heard the company was filing for liquidation, and that Tuesday was its final day in operation.

ITWeb made several calls to CEO Fanie van Rensburg seeking clarity on the situation, but these - and several SMSes - went unanswered.

In its latest annual report, Faritec says: “The group is committed to open and prompt communication with its all its stakeholders,” which includes shareholders and media.

The company structure is complicated. Faritec Holdings, which is listed on the JSE, owns all of Faritec Pty Ltd, which owns all of Faritec Strategic IT Services, all of Faritec Enterprise Solutions and 87% of Faritec inter-company processes.

A search of the Companies and Intellectual Property Registration Offices shows Enterprise Solutions was registered as a company in 1997, and its directors are all current and recently resigned Faritec directors. The companies also share the same auditors, Charles Orbach & Co.

Three unrelated sources, who did not want to be named, claim Faritec told staff yesterday that it was folding, bringing to an end months of speculation over its financial viability. The move could leave about 300 staff members without jobs, and pay, although ITWeb has heard that some employees recently started looking for other jobs.

The company received a R20 million cash injection from competitor Shoden Data Systems and R29 million from shareholders last year. This kept it afloat for a while, but December found it trying to raise R60 million, including R5 million from CEO Fanie van Rensburg, to allow it to continue operating.

However, April saw it in a last-ditch bid to raise cash and save the company, as it started selling off assets it considered non-core.

It sold off its Microsoft large account reseller business to First Technology, for just over R2 million, and received offers for its managed services unit - which used to be its third-largest revenue spinner. The offers included one from former director Peter Winn, who bid R3 million.

Warning bells rang loudly when ITWeb revealed the company could not pay staff their full salaries for April. Instead, the company said, it would pay half at the end of the month, and half during the first week of May.

Faritec's trouble began last year when it reversed its previous profitable position and reported a loss as sales dried up and costs continued to mount.

Over the past year-and-a-bit, Faritec has seen seven top-level resignations, including CEO Simon Tomlinson, deputy CEO Hasmukh Gajjar and FD Tshidi Nyembe.

J&J founder Jayendra Naidoo also resigned as Faritec non-executive director, while chairman Chris Jardine chose not to stand for re-election when the company had its annual general meeting recently.

Mncedisi Mayekiso, who was a non-executive director, did not stand for re-election either, after his appointment as SAP's marketing director for Africa.

Last year, Shoden stepped in and funded the company to the tune of R20 million, in return for a 51% shareholding. Shareholders invested another R29 million through buying up additional shares. Van Rensburg was not available to explain what would happen to Shoden's investment, or what this development would mean for Shoden's own financial position.

However, despite the funding, the company was still in a precarious financial position and needed to raise more cash to continue operating and implement a turnaround plan.

Towards the end of last year, the company decided to raise R60 million through issuing more shares. Despite several attempts and negotiations with various parties, the fund-raising failed to materialise.

At this time, it began to turn the corner and had trimmed its losses for the six months to December, to R14.4 million. This was an improvement on the year-ago loss of R21.5 million and the year-end loss for June last year of R159.5 million.

Last October, Van Rensburg, who was appointed in August when the company was already in trouble, set himself the daunting target of returning the company to profitability - however small - by its June year-end.

Van Rensburg had also expected it to break even in December. At the time, he told ITWeb: “I'm bullish, but I can see what is happening in the organisation.”

Faritec was also expected to pay out a dividend in the next three to five years, which would be a first for the company that was founded in 1995.

When Faritec listed in November 1998, it expected to report revenue of R172.7 million, and profit after tax of R10.9 million. Its market capitalisation was R135 million. At this stage, it beat these expectations.

Faritec grew quickly, gobbling up smaller companies and growing from a R330 million company into one that broke the R1 billion mark in June 2008, just before the global recession that took out giants such as Lehman Brothers.

Last year, it fell out of favour with the analyst community when it reported a R96 million operating loss, a complete about-turn from the R46 million profit it had reported the previous year.

Faritec attributed the loss to “a large decline in sales as the economy and Faritec's target market contracted, resulting in customers cutting back on capital expenditure”. Then chairman Chris Jardine said: “The loss was then exacerbated by the high cost structures of the business, which did not decrease appropriately to match the decline in revenue.”

At the company's height on the JSE in May 2007, its shares peaked at 172c, before slowly starting to fall to trade at levels of 4c and 5c during its recent troubled past.

By the time its shares were suspended at the end of last month, its shares were at 3c, giving the once burgeoning company a market capitalisation of R56.7 million.