3rd Mar 2006 16:27
Capcon Holdings PLC03 March 2006 Capcon Holdings PLC3 March 2006Capcon Holdings plc ("Capcon" or the "Company")Circular to Shareholders Following the announcement issued on 27 February 2006, Capcon announces that ithas today posted a circular to shareholders of the Company in relation to theconstitution of £800,000 (nominal) 10% Convertible Redeemable Guaranteed SecuredLoan Stock 2006 (the "Convertible Loan Stock") and, in the alternative, to seekapproval of the sale of the business, assets and certain liabilities of theAudit and Stocktaking and the Commercial Investigations Divisions of the Group(the "Disposal"). The Directors, certain shareholders of the Company and thirdparties (the "Stockholders") have entered into subscription agreements with theCompany to subscribe for the Convertible Loan Stock (the "Subscription")conditional on shareholder approval which is being sought at an ExtraordinaryGeneral Meeting of the Company ("EGM") convened for 29 March 2006. Background Since the acquisition of Argen Limited in February 2003, cash management hasbeen one of the Directors' greatest priorities. The limited interest shown byinvestors in funding that acquisition through a placing of shares led to anincrease in bank borrowings and a deferred liability in respect of part of theconsideration. Additionally, a further potential liability to the vendors of Argen Limited hasbeen created in respect of earn out payments based on performance. Whilst theamount of this liability has not been agreed or determined, the Directors areengaged in ongoing discussions with the vendors of Argen Limited with a view toreaching a final settlement as to the amount due to the vendors. In the absenceof a legally binding agreement as to the quantum and timing of any earn outpayments due to the vendors of Argen Limited, it is likely that the auditorsopinion on the financial statements of the Company for the year ended 30September 2005, whilst not qualified in this respect, will draw the attention ofreaders to this fundamental uncertainty. Whilst, on a like for like basis the business of the Group performed better inthe six months to 30 September 2005 when compared to the first half of the year,trading since 30 September 2005, has continued on the whole to be disappointing.As a result of this continued underperformance the carrying values of thegoodwill arising on the acquisition of Vincent Sherman (Creditor Claims) Limitedand Argen Limited has been partially impaired and the carrying value wasadjusted to reflect this impairment in September 2005. The poor performance hascreated further pressure on the Company's bank facilities and there is now arequirement to raise cash in order to reduce liabilities and strengthen theCompany's financial position. Consideration has been given by the Board to raising such cash through a placingof new Ordinary Shares and through increasing the Group's borrowings. Aftermaking enquiries and taking advice from Insinger, our Nominated Adviser, we haveconcluded that a placing of shares to raise sufficient cash for our immediateneeds is not likely to be successful. Discussions have taken place with ourexisting bank and other banks with a view to increasing the level of borrowingsin the Company but, to date, no increase in borrowings has been achieved.Additionally, the Board has considered other alternative means of raising cashand has approached a number of potential trade partners to discuss jointdevelopment of the Capcon business whilst, at the same time, improving theliquidity of the Company. We have also discussed with external agents thepotential sale of certain business assets of Capcon. After exploring all of these alternatives, the Board has concluded that theSubscription is the most efficient and certain route to raising the urgentlyrequired funds in a short timescale whilst minimizing disruption to the Capconbusiness overall. In the interim Ken Dulieu and Cliff Cavender, both Directors of the Company,have agreed to vary the terms of their respective Service Agreements with effectfrom 1 November 2005 which will, with effect from 1 November 2006, result in acash saving of £217,930 per annum to the Company. This variation has resulted ina provision for compensation to the two executive Directors which will beaccounted for as a non-recurring expense in the financial statements for theyear ended 30 September 2005.Terms of the Convertible Loan Stock and Subscription Each of Ken Dulieu and Paul Jackson, Directors of the Company, have agreed tosubscribe for £300,000 (nominal) of Convertible Loan Stock with the balancebeing subscribed for by third parties. Of the total £800,000 (nominal) Convertible Loan Stock, £400,000 will besubscribed for upon approval by Shareholders at the EGM. The balance, of£400,000, is to be subscribed for as to £200,000 each by Kenneth Paul Dulieu andPaul Francis Jackson upon demand being made by the Company at any time on orbefore 31 May 2008 save that in the event of the Company being in default atthat time then such subscriptions will not be made. Each holding of the Convertible Loan Stock is, unless converted, to be redeemedin cash at par (together with all unpaid accruals of interest) on 30 June 2008.The Convertible Loan Stock will entitle the Stockholders to receive interest ata rate of 10.00 per cent. per annum, such interest accruing on a day to daybasis. Interest accruing from the date of issue of any Convertible Loan Stockwill ordinarily be payable three monthly in arrears within 14 days of the end ofeach 3 month period. The Convertible Loan Stock is transferable and will beconvertible (in whole or in part) at the Conversion Price into new OrdinaryShares, at the sole option of each Stockholder on or before 27 June 2008. NewOrdinary Shares arising on conversion must be issued by the Company (credited asfully paid) within 28 days of receipt of the relevant notice of conversion.Assuming that all of the Convertible Loan Stock is issued, on full conversion ofthe principal monies, a maximum of 16,000,000 Ordinary Shares will be issued bythe Company. Security for the payment and repayment obligations of the Company in respect ofthe Convertible Loan Stock is to be given by the Company in the form of aDebenture and by Capcon Limited and Capcon Argen Limited in the form of theGuarantee and a Debenture from each of them.Takeover Code Whitewash The Panel on Takeovers and Mergers (the "Panel") has indicated that it regardsthe Directors as acting in concert because of their involvement in 1999 infounding Capcon Limited, the vehicle for the management buy out of the audit andstocktaking division of Capitol Group plc, together with certain otherbusinesses carried on by the corporate and commercial division of Capitol Groupplc. For the purposes of the City Code on Takeovers and Mergers (the "City Code") persons acting in concert comprise persons who, pursuant to an agreement orunderstanding (whether formal or informal), actively co-operate, through theacquisition by any of them of shares in a company to obtain or consolidatecontrol of that company. As at 2 March 2006 (the latest practical date prior tothe publication of this document), the Concert Party held, in aggregate,approximately 30.6 per cent. of the issued share capital of the Company.Immediately following the issue of the whole amount of the Convertible LoanStock such persons would have the right to convert the Convertible Loan Stockinto 12,000,000 new Ordinary Shares following which they would hold in aggregatea maximum of approximately 68.2 per cent. of the enlarged issued share capitalof the Company assuming no other issues of Ordinary Shares to any other party inthe interim. The Company is consequently seeking a waiver of Rule 9 of the City Code, whichwould otherwise require the concert party to offer to acquire those ordinaryshares in the Company that they do not own following conversion of theConvertible Loan Stock. A proposal seeking Shareholder approval for such awaiver is, therefore, being sought at the EGM convened for 29 March 2006. The Alternative Should the issue of the Convertible Loan Stock not be approved by Shareholdersat the EGM then, in the absence of alternative financing arrangements being madeavailable immediately, it is unlikely that the Group would be able to meet itsfinancial obligations and may therefore be unable to trade. In the light of this and after having considered all other options the Board hasconcluded that a sale of the Stocktaking and Audit and Commercial InvestigationsDivisions of the Company (the "Divisions") to Lakesong Trading Limited ("Lakesong"), a company in which two of the Directors are interested would thenoffer the best alternative to raising the urgently required funds in thetimescale required. The Stocktaking and Audit Division focuses on developing its businessprincipally within the licensed trade, including the managed house divisions ofbrewers, public house chains, restaurant chains, hotel operators and ferrycompanies. The Commercial Investigations Division focuses its businessprincipally on the provision of services to clients in the leisure sector,including several large pub, hotel and leisure groups that are also clients ofthe Stocktaking and Audit Division. Although the Divisions were the corebusinesses of the Group at the time of the admission of the Company's OrdinaryShares to AIM in May 2001, the development of the commercial investigationservices divisions, both organically and through acquisition since 2001, intocorporate investigation work (including due diligence, corporate fraudinvestigations, intelligence gathering and parallel trading investigations)through Capcon Argen Limited and insurance fraud investigation work throughCapcon Vincent Sherman Limited, has been such that turnover derived by the Groupfrom the Divisions has reduced from 100 per cent. of Group sales at the time ofadmission to AIM to its current level of approximately 50 per cent. of Groupsales. The profit attributable to the Divisions for the year ended 30 September2004 was £59,000. The Board believes the opportunities for growth of theremaining commercial investigation service divisions of the Group may benefitfrom the increased focus that they will inevitably receive after the proposedsale. If the sale of the Divisions does proceed as proposed, the Board believes thatthe existing opportunities for cross-fertilisation between the various parts ofthe business can still be captured through the cross-referral arrangements.Given the need to generate cash for the Group as a matter of some urgency atthis time and as alternative to the Subscription, the Divisions appear to theBoard to be the only effective candidates for sale. Ken Dulieu and Cliff Cavender have formed Lakesong with a view to purchasing thebusiness and assets of the Divisions and to assume certain liabilities of theGroup in the event that the Subscription is not approved by the Shareholders atthe EGM. Lakesong will pay a cash consideration of £700,000 to Capcon Limited oncompletion, which sum is apportioned as to £300,000 for the goodwill, £100,000for the fixed assets and £300,000 for the work in progress. By generating cash through such a sale and reducing central overhead costs fromtheir current level of £800,000 to a level of £440,000, it is believed that theCompany will have the resources to enable it to service the cash requirementsidentified above and to continue to successfully develop its risk managementbusiness. The Board would intend following such sale to develop the remainingbusiness in Capcon and firmly believes that the investigation and riskmanagement services will increase in demand in response to the growing awarenessand reaction throughout the developed world to threats of damage to businessfrom major fraud. The Directors believe that in these circumstances thestrengthened remaining business will be an attractive base for furtherdevelopment and various alternative strategies are currently being considered. As Lakesong is a company in which each of Ken Dulieu and Cliff Cavender,directors of the Company, are interested, the transaction will be a relatedparty transaction for the purposes of Rule 13 of the AIM Rules and a substantialproperty transaction for the purposes of section 320 of the Companies Act 1985(as amended). Consequently, the Disposal is conditional upon the approval ofShareholders. In addition, approval of Shareholders is required as the Disposalamounts to a fundamental change of the business of the Company for the purposesof Rule 15 of the AIM Rules. Circular A Circular has been posted to shareholders setting out full details of theproposals and calling the EGM at which the necessary Resolutions approving theseproposals will be presented. Capcon Holdings plcPaul JacksonTel: 020 7417 0417 Insinger de BeaufortLouis CastroTel: 020 7190 7000 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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