RNS Number:7216A
Capcon Holdings PLC
31 March 2006
Capcon Holdings Plc
Capcon Holdings plc, the AIM listed investigations and risk management company,
announces its audited consolidated results for the year ended 30 September 2005.
Highlights
* Net cash inflow from operations despite difficult trading year
* New specialised surveillance division established and funded by
operations
* Improved margins achieved by the Audit & Stocktaking division
* New major blue chip clients acquired
* Recruited high calibre project managers for future growth in Argen
* Action taken to raise funds and strengthen balance sheet
Ken Dulieu, Chairman, commented:
"It has been a challenging year requiring the Board to make several internal
changes to strengthen the Group and create a stronger base for future
development. New blue chip clients continue to be gained by both divisions and
much management effort has been spent on rationalising the business to ensure
that in future we are focused on the provision of services that create greatest
added value.
The injection of funds through the issue of the #675,000 secured loan stock,
#375,000 issued immediately and the balance before 31 May 2008, will strengthen
the Group's balance sheet and provided a stable base upon which to grow the
business. The Directors continue to search and review potential acquisition
opportunities and remain committed to a strategy that will lead to growth from
both organic development of the core business and acquisition of compatible
businesses."
Enquiries
Capcon Holdings plc
Cliff Cavender, Managing Director 0870 067 5050
Insinger de Beaufort
Louis Castro 020 7190 7000
Threadneedle Communications
Graham Herring 020 7936 9600
Chairman's statement
Operational review
It has been a challenging year requiring the Board to make several internal
changes to strengthen the Group and create a stronger base for future
development. Also, during this period business activity in our Investigations
division has been disappointing which, together with our commitments to reduce
borrowings and other liabilities, has placed a high priority on cash management.
The underlying strength of the Audit & Stocktaking and Commercial Investigations
divisions has, again, enabled us to generate cash from our operating activities
and our financial performance on a like for like basis has improved since
reporting our results for the first six months of the year.
New blue chip clients continue to be gained by both divisions and much
management effort has been spent on rationalising the business to ensure that in
future we are focused on the provision of services that create greatest added
value.
As announced at the Extraordinary General Meeting held on 29 March 2006,
approval was not given to the issue of #800,000 of Secured Convertible Loan
Stock. Following this certain directors and a shareholder of the Company have
agreed to subscribe for a total of #675,000 (nominal) 10% Redeemable Guaranteed
Loan Stock of which #375,000 will be subscribed for immediately. The balance, of
#300,000, is to be subscribed for on demand by the Company at any time on or
before 31 May 2008 save that if there is a default at that time in which case
such subscriptions will not be made. The resulting improvement in the Group's
cash position will provide a sound base for ongoing operations and alleviate the
pressures that have dominated the past financial year which, in turn, were
placing limitations on our growth potential.
Acknowledging our responsibilities with regard to Corporate Governance the
Company announced, on 20 March 2006, the appointment of Robin Boyle as non
executive director. Robin's considerable experience and particularly his 'City'
involvement with small public companies will improve independence and strengthen
the Board.
Our search for potential acquisitions in the risk management sector has
continued despite this difficult trading period. However, the recent perceived
under valuation of our company in the market has determined that a higher
priority is placed on restoring growth in our core business. The Directors are
confident that growth and improved profitability can be achieved in the medium
term and other compatible businesses will be identified that will make
acquisition an earnings enhancing process.
Financial overview
Sales for the year to 30 September 2005 were #6.93 million (2004: #7.45 million)
representing a 7.0% decrease on last year.
The Group generated a loss for the year, before interest, amortisation and
impairment of goodwill, of #0.41 million (2004: #0.57 million profit), after
charging #0.22 million in exceptional charges relating to compensation payable
to Directors' for reductions in their future contracted remuneration. The loss
before tax, amortisation and impairment was #0.30 million, compared with #0.43
million profit achieved last year, and includes the profit on disposal of Argen
GmbH of #0.25 million
Basic loss per share of 21.6p compares with 0.9p earnings per share last year,
and excluding amortisation and impairment of goodwill, the loss per share was
2.1p compared with 3.7p earnings per share last year.
As a result of the continued underperformance of the Group, the carrying value
of the goodwill arising on the acquisition of Vincent Sherman (Creditor Claims)
Limited and Capcon Argen Limited has been partially impaired with a consequent
additional charge to the profit and loss account of #1.69 million in the year
above the normal level of amortisation.
Despite the lower sales activity and profit performance, there was a net cash
flow from operations of #0.19 million (2004: #0.52 million). Consequently, we
were able to reduce total bank borrowings in the year by #0.17 million to #1.09
million from #1.26 million, representing 37% of net assets. The reduction was
achieved by maintaining stringent cash management procedures during a difficult
trading period and also, as reported previously, the sale of the Group's 50%
interest in Argen GmbH which completed in January 2005 for a total cash
consideration of #360,000.
The issue of #675,000 secured loan stock referred to above will strengthen the
balance sheet and, in particular, ensure amounts owed to the vendors of Argen
Limited, acquired in February 2003, are paid in line with scheduled cash flow
availability.
The priority of strengthening the cash position of the Group determines that the
Directors continue to exercise caution with regard to the dividend policy. No
final dividend is being declared and, therefore, no dividend is payable this
year (2004: 0.75p).
Audit & stocktaking
Although sales of #3.31 million were 2.6% lower than last year, operating profit
increased as a result of reducing direct costs which consequently had a
favourable impact on gross margins. Additionally, the trend of providing higher
added value services to clients continues which has improved margins at the
expense of sales turnover. This change in approach entails the introduction of
processes for our clients to highlight action they should take to reduce cash
and stock losses and gain greater value from the resource we are providing.
This has been another successful year for gaining new clients which is not fully
reflected in the total sales. Sales reduced to #3.31 million from #3.40 million
in 2004, or 2.6%, but the change in mix reported at the half year has continued
into the second half of the year enabling operating margins to be improved.
Ongoing attention to cost control and efficiency has combined with the
favourable mix of work to produce an improved profit for the division overall.
New clients continue to be acquired as a result of the continuing changes in
ownership of major pubcos that have become a feature of the licensed retail
industry in recent years and this has broadened our client base. Additionally,
the preference of operators of managed estates to outsource audit and
stocktaking services ensures a developing market for our services that is not
fully reflected in increased overall sales for the reasons referred to above.
Continual development of our IT systems is essential to ensure that our services
fully support our clients' financial and operational controls and maximise
opportunities for improving their margins. For this reason we have recently
embarked upon a major project to update and upgrade our main support software
which is crucial to the integrity of the high quality services that we provide.
Additionally, we have strengthened our operational base at Watford with a help
desk manned by additional staff who are trained to respond rapidly to our
clients' daily stocktaking and audit issues.
Our exceptional experience of providing specialised services to the leisure
sector over many years places this division in a strong position for continuing
to win new major clients and, in particular, to take advantage of opportunities
that are being presented as the industry continues to consolidate.
Commercial investigation services
Sales for the year for all investigation activities were #3.62 million compared
with #4.05 million last year, a 10.6% decrease. This decline in sales is mainly
attributable to two causes. Firstly, as confirmed in the Interim Report, our
insurance investigations division, Capcon Vincent Sherman, has suffered a fall
in sales following a major re-structuring of the division subsequent to the
departure of the Managing Director. Secondly, Capcon Argen, our corporate
investigator, did not receive instructions for as many high value projects as
last year. The visibility in this part of the Group is particularly limited due
to the unpredictable nature of the work that Capcon Argen is involved in, and
the Directors do not believe the current lower activity is an indication of a
permanent fall in demand for these services.
The lower level of sales in the two main areas of commercial investigations
activity referred to above has resulted in a corresponding reduction in
profitability. In addition, as previously reported, our share in Argen GmbH, the
German associate providing similar services to Capcon Argen, was sold and as a
consequence, the loss of shared profit is approximately #67,000 in this year
compared with last year. Nevertheless, on a like for like basis, the second half
of the year showed an improved financial performance compared with the first six
months.
In the Interim Report I referred to the establishment of a new specialist
surveillance division headed by the former managing director of our major
competitor in this field. The net cost of setting up this business which was
charged to the profit and loss account in the year was #135,700. At the end of
the year, the surveillance business operated by Capcon Vincent Sherman and
comprising approximately half of its sales was transferred to the new division.
The remaining services provided by Capcon Vincent Sherman are not profitable and
action is being taken in the current year to rectify this situation.
As the market continues to respond to the greater awareness of the damage that
can be caused to business through fraud and malpractice the Directors anticipate
that the demand in the future for the high value investigative and screening
projects undertaken by Capcon Argen should increase. Hence, there has been an
increase in costs in the year resulting from the recruitment and training of new
project managers who will strengthen this division's capability to resource
complex cases in the future. However, in the short term, these additional staff
costs have had a disproportionate and adverse effect on the profit and loss
account.
Central overheads
Acknowledging the recent frustration of the Group's short term growth ambitions,
the Board have reviewed the Group's central overhead base and, in particular,
the Directors' level of remuneration. At the end of the year it was decided
that, with effect from 1 November 2005, Ken Dulieu and Cliff Cavender would
reduce their salaries to #15,000 p.a. and #10,000 p.a. respectively.
The compensation due to them as a result of this compromise to their service
agreements together with other associated costs amounted to approximately
#218,000 and was charged in the profit and loss account for the year ended 30
September 2005, although it is payable in twelve equal monthly instalments from
1 November 2005.
Current trading and prospects
Since 30 September 2005, business activity in the two main divisions has been
disappointing.
Trading in the Audit & Stocktaking division in the first half of the year has
been slower than expected but new business is being won which should flow
through to improved profitability later in the year. Action has been taken to
eliminate the losses being incurred by Capcon Vincent Sherman by closing the
operation and allowing certain ex-employees to operate under a licence with
Capcon and paying a commission to the Company. The effect of this will be to
improve the profitability of the Investigations division overall in the second
half of the year.
The unpredictable nature of project based investigation work determines that
forecasting short term future performance remains difficult. Nevertheless, the
Directors anticipate that the demand for these services should increase in the
longer term and we remain optimistic that the core business will grow in
response to increasing global sensitivities to the significance of key issues of
corporate risk management.
The injection of funds through the issue of the #675,000 secured loan stock
referred to above will strengthen the Group's balance sheet and provided a
stable base upon which to grow the business. The Directors continue to search
and review potential acquisition opportunities and remain committed to a
strategy that will lead to growth from both organic development of the core
business and acquisition of compatible businesses.
K P Dulieu
Chairman
31 March 2006
Consolidated profit and loss account for the year ended 30 September 2005
Total Total
2005 2004
Turnover 6,930,647 7,453,445
Cost of sales (4,031,136) (4,100,957)
_______ _______
Gross profit 2,899,511 3,352,488
Administrative expenses (5,326,940) (3,159,048)
_______ _______
Group operating (loss)/profit (2,427,429) 193,440
Share of operating profit in associates 33,332 100,178
Total operating (loss)/profit before amortisation and impairment of
goodwill (414,009) 568,047
Amortisation of goodwill and impairment (1,980,088) (274,429)
Total operating (loss)/profit (2,394,097) 293,618
Profit on sale of associate 248,012 -
_______ _______
(Loss)/profit on ordinary activities
before interest and other income (2,146,085) 293,618
Interest receivable 301 58
Interest payable and similar charges (131,936) (137,875)
_______ _______
(Loss)/profit on ordinary activities
before taxation (2,277,720) 155,801
Taxation on (loss)/profit from ordinary activities 81,164 (69,945)
_______ _______
(Loss)/profit on ordinary activities
after taxation (2,196,556) 85,856
Dividends - (89,465)
_______ _______
Retained loss for the financial year (2,196,556) (3,609)
Retained profit brought forward 46,883 50,492
_______ _______
Retained (loss)/profit carried forward (2,149,673) 46,883
_______ _______
(Loss)/earnings per share
Basic (21.6p) 0.9p
Fully diluted (21.6p) 0.8p
(Loss)/earnings per share before amortisation
of goodwill
Basic (2.1p) 3.7p
Fully diluted (2.1p) 3.4p
_______ _______
Consolidated balance sheet at 30 September 2005
2005 2005 2004 2004
# # # #
Fixed assets
Intangible assets 3,169,215 5,020,194
Tangible assets 268,970 266,075
Investment in associate - 119,936
_______ _______
3,438,185 5,406,205
Current assets
Debtors 1,696,088 1,891,497
Cash at bank and in hand 13,908 37,207
_______ _______
1,709,996 1,928,704
Creditors:
Amounts falling due within one year (3,071,498) (2,999,392)
_______ _______
Net current liabilities (1,361,502) (1,070,688)
_______ _______
Total assets less current liabilities 2,076,683 4,335,517
Creditors
Amounts falling due after more than one (83,056) (100,000)
year
Provision for liabilities and charges (21,472) (21,472)
_______ _______
1,972,155 4,214,045
_______ _______
Capital and reserves
Called up share capital 101,568 101,568
Share premium account 2,774,094 2,774,094
Merger reserve 950,000 950,000
Profit and loss account (2,149,673) 46,883
Shares to be issued 296,166 341,500
_______ _______
Equity shareholders' funds 1,972,155 4,214,045
_______ _______
Consolidated cash flow statement for the year ended 30 September 2005
2005 2005 2004 2004
# # # #
Net cash inflow from operating 193,243 523,277
activities
Dividend received from associate 118,223 -
Returns on investments and
servicing of finance
Interest received 301 58
Interest paid (124,787) (137,875)
_______ _______
Net cash outflow from returns on
investment and servicing of finance (124,486) (137,817)
Taxation
Tax paid (23,711) (37,228)
Capital expenditure and financial
investment
Purchase of tangible fixed assets (86,022) (84,097)
Sale of tangible fixed assets 8,860 33,530
_______ _______
Net cash outflow from capital
expenditure
and financial investment (77,162) (50,567)
Acquisitions and disposals
Purchase of subsidiary undertakings (193,599) (428,658)
Disposal of investment in associate 328,470 -
_______ _______
Net cash inflow/(outflow) from
acquisitions
and disposals 134,871 (428,658)
Equity dividends paid - (224,465)
_______ _______
Cash inflow/(outflow) before 220,978 (355,458)
financing
Financing
Issue of ordinary share capital - 466,115
Issue of loans 170,000 -
Repayment of loan (205,625) (216,630)
Movement in invoice discounting 3,062 (77,084)
facilities
Capital element of finance lease (14,894) (63,117)
payments
Other loans - 71,484
Other loan repayments - (62,779)
_______ _______
Cash (outflow)/inflow from (47,457) 117,989
financing
_______ _______
Increase/(decrease) in cash in the 173,521 (237,469)
year
_______ _______
Notes to the preliminary announcement for the year ended 30 September 2005
1 Going concern
Issue of Redeemable Loan Stock
At a meeting of the directors held on 29 March 2006, K P Dulieu, P F Jackson and
R G Boyle together with a shareholder of the Company agreed to subscribe for a
total #675,000 (nominal) 10% Redeemable Guaranteed Secured Loan Stock 2006 (the
"Loan Stock"). Of this amount, #375,000 was subscribed for immediately and the
balance of #300,000 is to be subscribed for as to #150,000 each by K P Dulieu
and P F Jackson upon demand being made by the Company at any time on or before
31 May 2008 save that if there exists an event of default at that time then such
subscriptions will not be made. For this purpose an event of default includes
inter alia a change of control of the Company such that a third party acquires
an interest of 30 per cent. or more in the Company. The Loan Stock was put in
place to ensure, on the continuing assumption that the directors will be able to
focus their attention on the running of the business, the financial viability of
the Group going forward.
Timing of deferred consideration payments
The Group acquired Argen Limited ("Argen") in February 2003. In addition to
initial consideration of #1.35million, the purchase agreement provided for a
maximum contingent consideration of #1.92million - #1.57million by way of cash
and #0.35million by way of shares. This contingent consideration was payable
dependent upon the profit of Argen for the years ended 31 December 2003 and 31
December 2004 ("the earn-out period") exceeding specified targets. The extent to
which these targets were exceeded is disputed.
The earn-out period has now expired. Under the terms of the agreement, the
contingent consideration was due to be paid by April 2005 and #500,000 has been
paid to date. The Directors are actively engaged in ongoing discussions with
the vendors of Argen with a view to reaching a final settlement as to the amount
due and a number of letters have been exchanged in this regard. The latest
indicates a willingness on the part of the vendors to accept a legally binding
deferred payment schedule comprising the issue of 2,200,000 Ordinary Shares and
the payment in cash of the sum of #524,485 plus accrued interest over a three
year period. The Company has proposed a four year schedule to resolve the
dispute but agreement to this has yet to be received. The financial statements
at 30 September 2005 include an appropriate provision for contingent
consideration. However, the amount of any liability due remains a matter of
dispute and has not been agreed or determined.
In the absence of a legally binding deferred payment schedule, any contingent
consideration that might be due could be payable on demand. The directors will
not agree to any settlement without first endeavouring to ensure that the
Company has the funds available to meet its obligations as they fall due. The
cash flow forecasts prepared by the directors assume a deferred payment schedule
in line with that proposed above but make no allowance for immediate repayment.
Additionally, in view of the uncertainty surrounding any amounts that might be
payable and, in turn, the timing of such payments, the directors have not
entered into any negotiations to secure the additional financing that would be
required to fund immediate repayment.
As a consequence of the matters set out above, the Group may be unable to meet
its financial obligations as they fall due and may thus be unable to continue as
a going concern as a result of either or both of the following circumstances:
* with regard to the issue of Loan Stock, an event of default occurring
such that the subscriptions for the balance of #300,000 are not made, or the
continuing assumption noted above not being met.
* with regard to the timing of deferred consideration payments, the
amount of deferred consideration due being determined to be at the level
currently provided in the financial statements, with a demand for the immediate
payment of this sum being enforced.
The financial statements do not include any adjustments that would result from
the going concern basis of preparation being inappropriate.
2 Earnings per share
Earnings per ordinary share have been calculated using the weighted average
number of shares in issue during the relevant financial periods. The weighted
average number of equity shares in issue is 10,156,776 (2004 - 9,743,191) and
the earnings, being loss after tax, are #2,196,556 (2004 - profit #85,856).
The directors have also presented adjusted earnings per share, as they believe
this gives a better indicator of underlying business performance.
2005 2004
# #
Reconciliation of earnings
(Loss)/earnings used for calculation of basic and
diluted EPS (2,196,556) 85,856
Amortisation of goodwill 1,980,088 274,429
__________ _________
(Loss)/earnings used for calculation of adjusted
basic and diluted EPS (216,468) 360,285
__________ _________
Reconciliation of denominator
Shares used for calculation of basic and adjusted
basic EPS 10,156,776 9,743,191
Exercise of options - -
Shares to be issued - 864,556
__________ _________
Shares used in calculation of diluted and adjusted
diluted EPS 10,156,776 10,607,747
__________ _________
3 Reconciliation of operating profit to net cash inflow from operating
activities
2005 2004
# #
Operating (loss)/profit (2,427,429) 193,440
Amortisation and impairment of goodwill 1,980,088 274,429
Depreciation 119,038 96,370
Loss/(profit) on disposal of fixed assets 1,161 (2,178)
Decrease in debtors 195,409 87,391
Increase/ (decrease) in creditors 324,976 (126,175)
__________ _________
Net cash inflow from operating activities 193,243 523,277
__________ _________
4 Reconciliation of net cash inflow to movement in net debt
2005 2004
# #
Increase/(decrease) in cash in the year 173,521 (237,469)
Cash flow from change in debt and lease finance 47,457 348,126
__________ _________
Change in net debt resulting from cash flows 220,978 110,657
New finance leases (45,932) -
Other non-cash movements (7,149) -
__________ _________
Movement in net debt in the year 167,897 110,657
Net debt at start of year (1,332,912) (1,443,569)
__________ _________
Net debt at end of year (1,165,015) (1,332,912)
__________ _________
5 The financial information set out in the announcement does not
constitute the company's statutory accounts for the years ended 30 September
2005 or 2004, but is derived from those accounts. Statutory accounts for 2004
have been delivered to the Registrar of Companies and those for 2005 will be
delivered following the Company's annual general meeting. The auditors have
reported on those accounts; their reports' were unqualified and did not contain
statements under s237(2) or (3) Companies Act 1985.
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The company news service from the London Stock Exchange
END
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