31st Mar 2006 07:01
Capcon Holdings PLC31 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 internalchanges to strengthen the Group and create a stronger base for futuredevelopment. New blue chip clients continue to be gained by both divisions andmuch management effort has been spent on rationalising the business to ensurethat in future we are focused on the provision of services that create greatestadded 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 strengthenthe Group's balance sheet and provided a stable base upon which to grow thebusiness. The Directors continue to search and review potential acquisitionopportunities and remain committed to a strategy that will lead to growth fromboth organic development of the core business and acquisition of compatiblebusinesses." Enquiries Capcon Holdings plcCliff Cavender, Managing Director 0870 067 5050 Insinger de BeaufortLouis Castro 020 7190 7000 Threadneedle CommunicationsGraham Herring 020 7936 9600 Chairman's statement Operational review It has been a challenging year requiring the Board to make several internalchanges to strengthen the Group and create a stronger base for futuredevelopment. Also, during this period business activity in our Investigationsdivision has been disappointing which, together with our commitments to reduceborrowings and other liabilities, has placed a high priority on cash management. The underlying strength of the Audit & Stocktaking and Commercial Investigationsdivisions has, again, enabled us to generate cash from our operating activitiesand our financial performance on a like for like basis has improved sincereporting our results for the first six months of the year. New blue chip clients continue to be gained by both divisions and muchmanagement effort has been spent on rationalising the business to ensure that infuture we are focused on the provision of services that create greatest addedvalue. 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 LoanStock. Following this certain directors and a shareholder of the Company haveagreed to subscribe for a total of £675,000 (nominal) 10% Redeemable GuaranteedLoan 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 orbefore 31 May 2008 save that if there is a default at that time in which casesuch subscriptions will not be made. The resulting improvement in the Group'scash position will provide a sound base for ongoing operations and alleviate thepressures that have dominated the past financial year which, in turn, wereplacing limitations on our growth potential. Acknowledging our responsibilities with regard to Corporate Governance theCompany announced, on 20 March 2006, the appointment of Robin Boyle as nonexecutive director. Robin's considerable experience and particularly his 'City'involvement with small public companies will improve independence and strengthenthe Board. Our search for potential acquisitions in the risk management sector hascontinued despite this difficult trading period. However, the recent perceivedunder valuation of our company in the market has determined that a higherpriority is placed on restoring growth in our core business. The Directors areconfident that growth and improved profitability can be achieved in the mediumterm and other compatible businesses will be identified that will makeacquisition 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 andimpairment of goodwill, of £0.41 million (2004: £0.57 million profit), aftercharging £0.22 million in exceptional charges relating to compensation payableto Directors' for reductions in their future contracted remuneration. The lossbefore tax, amortisation and impairment was £0.30 million, compared with £0.43million profit achieved last year, and includes the profit on disposal of ArgenGmbH 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 was2.1p compared with 3.7p earnings per share last year. As a result of the continued underperformance of the Group, the carrying valueof the goodwill arising on the acquisition of Vincent Sherman (Creditor Claims)Limited and Capcon Argen Limited has been partially impaired with a consequentadditional charge to the profit and loss account of £1.69 million in the yearabove the normal level of amortisation. Despite the lower sales activity and profit performance, there was a net cashflow from operations of £0.19 million (2004: £0.52 million). Consequently, wewere able to reduce total bank borrowings in the year by £0.17 million to £1.09million from £1.26 million, representing 37% of net assets. The reduction wasachieved by maintaining stringent cash management procedures during a difficulttrading 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 cashconsideration of £360,000. The issue of £675,000 secured loan stock referred to above will strengthen thebalance sheet and, in particular, ensure amounts owed to the vendors of ArgenLimited, acquired in February 2003, are paid in line with scheduled cash flowavailability. The priority of strengthening the cash position of the Group determines that theDirectors continue to exercise caution with regard to the dividend policy. Nofinal dividend is being declared and, therefore, no dividend is payable thisyear (2004: 0.75p). Audit & stocktaking Although sales of £3.31 million were 2.6% lower than last year, operating profitincreased as a result of reducing direct costs which consequently had afavourable impact on gross margins. Additionally, the trend of providing higheradded value services to clients continues which has improved margins at theexpense of sales turnover. This change in approach entails the introduction ofprocesses for our clients to highlight action they should take to reduce cashand 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 fullyreflected in the total sales. Sales reduced to £3.31 million from £3.40 millionin 2004, or 2.6%, but the change in mix reported at the half year has continuedinto the second half of the year enabling operating margins to be improved.Ongoing attention to cost control and efficiency has combined with thefavourable 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 inownership of major pubcos that have become a feature of the licensed retailindustry in recent years and this has broadened our client base. Additionally,the preference of operators of managed estates to outsource audit andstocktaking services ensures a developing market for our services that is notfully reflected in increased overall sales for the reasons referred to above. Continual development of our IT systems is essential to ensure that our servicesfully support our clients' financial and operational controls and maximiseopportunities for improving their margins. For this reason we have recentlyembarked upon a major project to update and upgrade our main support softwarewhich is crucial to the integrity of the high quality services that we provide.Additionally, we have strengthened our operational base at Watford with a helpdesk manned by additional staff who are trained to respond rapidly to ourclients' daily stocktaking and audit issues. Our exceptional experience of providing specialised services to the leisuresector over many years places this division in a strong position for continuingto win new major clients and, in particular, to take advantage of opportunitiesthat are being presented as the industry continues to consolidate. Commercial investigation services Sales for the year for all investigation activities were £3.62 million comparedwith £4.05 million last year, a 10.6% decrease. This decline in sales is mainlyattributable to two causes. Firstly, as confirmed in the Interim Report, ourinsurance investigations division, Capcon Vincent Sherman, has suffered a fallin sales following a major re-structuring of the division subsequent to thedeparture of the Managing Director. Secondly, Capcon Argen, our corporateinvestigator, did not receive instructions for as many high value projects aslast year. The visibility in this part of the Group is particularly limited dueto the unpredictable nature of the work that Capcon Argen is involved in, andthe Directors do not believe the current lower activity is an indication of apermanent fall in demand for these services. The lower level of sales in the two main areas of commercial investigationsactivity referred to above has resulted in a corresponding reduction inprofitability. In addition, as previously reported, our share in Argen GmbH, theGerman associate providing similar services to Capcon Argen, was sold and as aconsequence, the loss of shared profit is approximately £67,000 in this yearcompared with last year. Nevertheless, on a like for like basis, the second halfof the year showed an improved financial performance compared with the first sixmonths. In the Interim Report I referred to the establishment of a new specialistsurveillance division headed by the former managing director of our majorcompetitor in this field. The net cost of setting up this business which wascharged to the profit and loss account in the year was £135,700. At the end ofthe year, the surveillance business operated by Capcon Vincent Sherman andcomprising approximately half of its sales was transferred to the new division.The remaining services provided by Capcon Vincent Sherman are not profitable andaction is being taken in the current year to rectify this situation. As the market continues to respond to the greater awareness of the damage thatcan be caused to business through fraud and malpractice the Directors anticipatethat the demand in the future for the high value investigative and screeningprojects undertaken by Capcon Argen should increase. Hence, there has been anincrease in costs in the year resulting from the recruitment and training of newproject managers who will strengthen this division's capability to resourcecomplex cases in the future. However, in the short term, these additional staffcosts have had a disproportionate and adverse effect on the profit and lossaccount. 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 decidedthat, with effect from 1 November 2005, Ken Dulieu and Cliff Cavender wouldreduce 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 serviceagreements together with other associated costs amounted to approximately£218,000 and was charged in the profit and loss account for the year ended 30September 2005, although it is payable in twelve equal monthly instalments from1 November 2005. Current trading and prospects Since 30 September 2005, business activity in the two main divisions has beendisappointing. Trading in the Audit & Stocktaking division in the first half of the year hasbeen slower than expected but new business is being won which should flowthrough to improved profitability later in the year. Action has been taken toeliminate the losses being incurred by Capcon Vincent Sherman by closing theoperation and allowing certain ex-employees to operate under a licence withCapcon and paying a commission to the Company. The effect of this will be toimprove the profitability of the Investigations division overall in the secondhalf of the year. The unpredictable nature of project based investigation work determines thatforecasting short term future performance remains difficult. Nevertheless, theDirectors anticipate that the demand for these services should increase in thelonger term and we remain optimistic that the core business will grow inresponse to increasing global sensitivities to the significance of key issues ofcorporate risk management. The injection of funds through the issue of the £675,000 secured loan stockreferred to above will strengthen the Group's balance sheet and provided astable base upon which to grow the business. The Directors continue to searchand review potential acquisition opportunities and remain committed to astrategy that will lead to growth from both organic development of the corebusiness and acquisition of compatible businesses. K P DulieuChairman 31 March 2006 Consolidated profit and loss account for the year ended 30 September 2005 Total Total 2005 2004 Turnover 6,930,647 7,453,445Cost 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 ofgoodwill (414,009) 568,047Amortisation of goodwill and impairment (1,980,088) (274,429) Total operating (loss)/profit (2,394,097) 293,618Profit on sale of associate 248,012 - _______ _______(Loss)/profit on ordinary activitiesbefore interest and other income (2,146,085) 293,618 Interest receivable 301 58Interest payable and similar charges (131,936) (137,875) _______ _______(Loss)/profit on ordinary activitiesbefore taxation (2,277,720) 155,801Taxation on (loss)/profit from ordinary activities 81,164 (69,945) _______ _______(Loss)/profit on ordinary activitiesafter taxation (2,196,556) 85,856Dividends - (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 shareBasic (21.6p) 0.9pFully diluted (21.6p) 0.8p (Loss)/earnings per share before amortisationof goodwillBasic (2.1p) 3.7pFully diluted (2.1p) 3.4p _______ _______ Consolidated balance sheet at 30 September 2005 2005 2005 2004 2004 £ £ £ £ Fixed assetsIntangible assets 3,169,215 5,020,194Tangible assets 268,970 266,075Investment in associate - 119,936 _______ _______ 3,438,185 5,406,205 Current assetsDebtors 1,696,088 1,891,497Cash at bank and in hand 13,908 37,207 _______ _______ 1,709,996 1,928,704Creditors: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 CreditorsAmounts 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 reservesCalled up share capital 101,568 101,568Share premium account 2,774,094 2,774,094Merger reserve 950,000 950,000Profit and loss account (2,149,673) 46,883Shares 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 193,243 523,277activities Dividend received from associate 118,223 - Returns on investments andservicing of financeInterest received 301 58Interest paid (124,787) (137,875) _______ _______ Net cash outflow from returns oninvestment and servicing of finance (124,486) (137,817)TaxationTax paid (23,711) (37,228) Capital expenditure and financialinvestmentPurchase of tangible fixed assets (86,022) (84,097)Sale of tangible fixed assets 8,860 33,530 _______ _______ Net cash outflow from capitalexpenditureand financial investment (77,162) (50,567) Acquisitions and disposalsPurchase of subsidiary undertakings (193,599) (428,658)Disposal of investment in associate 328,470 - _______ _______ Net cash inflow/(outflow) fromacquisitionsand disposals 134,871 (428,658) Equity dividends paid - (224,465) _______ _______ Cash inflow/(outflow) before 220,978 (355,458)financing FinancingIssue of ordinary share capital - 466,115Issue of loans 170,000 -Repayment of loan (205,625) (216,630)Movement in invoice discounting 3,062 (77,084)facilitiesCapital element of finance lease (14,894) (63,117)paymentsOther loans - 71,484Other loan repayments - (62,779) _______ _______ Cash (outflow)/inflow from (47,457) 117,989financing _______ _______ 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 andR G Boyle together with a shareholder of the Company agreed to subscribe for atotal £675,000 (nominal) 10% Redeemable Guaranteed Secured Loan Stock 2006 (the"Loan Stock"). Of this amount, £375,000 was subscribed for immediately and thebalance of £300,000 is to be subscribed for as to £150,000 each by K P Dulieuand P F Jackson upon demand being made by the Company at any time on or before31 May 2008 save that if there exists an event of default at that time then suchsubscriptions will not be made. For this purpose an event of default includesinter alia a change of control of the Company such that a third party acquiresan interest of 30 per cent. or more in the Company. The Loan Stock was put inplace to ensure, on the continuing assumption that the directors will be able tofocus their attention on the running of the business, the financial viability ofthe Group going forward. Timing of deferred consideration payments The Group acquired Argen Limited ("Argen") in February 2003. In addition toinitial consideration of £1.35million, the purchase agreement provided for amaximum contingent consideration of £1.92million - £1.57million by way of cashand £0.35million by way of shares. This contingent consideration was payabledependent upon the profit of Argen for the years ended 31 December 2003 and 31December 2004 ("the earn-out period") exceeding specified targets. The extent towhich these targets were exceeded is disputed. The earn-out period has now expired. Under the terms of the agreement, thecontingent consideration was due to be paid by April 2005 and £500,000 has beenpaid to date. The Directors are actively engaged in ongoing discussions withthe vendors of Argen with a view to reaching a final settlement as to the amountdue and a number of letters have been exchanged in this regard. The latestindicates a willingness on the part of the vendors to accept a legally bindingdeferred payment schedule comprising the issue of 2,200,000 Ordinary Shares andthe payment in cash of the sum of £524,485 plus accrued interest over a threeyear period. The Company has proposed a four year schedule to resolve thedispute but agreement to this has yet to be received. The financial statementsat 30 September 2005 include an appropriate provision for contingentconsideration. However, the amount of any liability due remains a matter ofdispute and has not been agreed or determined. In the absence of a legally binding deferred payment schedule, any contingentconsideration that might be due could be payable on demand. The directors willnot agree to any settlement without first endeavouring to ensure that theCompany has the funds available to meet its obligations as they fall due. Thecash flow forecasts prepared by the directors assume a deferred payment schedulein line with that proposed above but make no allowance for immediate repayment.Additionally, in view of the uncertainty surrounding any amounts that might bepayable and, in turn, the timing of such payments, the directors have notentered into any negotiations to secure the additional financing that would berequired to fund immediate repayment. As a consequence of the matters set out above, the Group may be unable to meetits financial obligations as they fall due and may thus be unable to continue asa 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 occurringsuch that the subscriptions for the balance of £300,000 are not made, or thecontinuing assumption noted above not being met. • with regard to the timing of deferred consideration payments, theamount of deferred consideration due being determined to be at the levelcurrently provided in the financial statements, with a demand for the immediatepayment of this sum being enforced. The financial statements do not include any adjustments that would result fromthe going concern basis of preparation being inappropriate. 2 Earnings per share Earnings per ordinary share have been calculated using the weighted averagenumber of shares in issue during the relevant financial periods. The weightedaverage number of equity shares in issue is 10,156,776 (2004 - 9,743,191) andthe earnings, being loss after tax, are £2,196,556 (2004 - profit £85,856). The directors have also presented adjusted earnings per share, as they believethis 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) 85,856Amortisation of goodwill 1,980,088 274,429 __________ _________ (Loss)/earnings used for calculation of adjusted basic and diluted EPS (216,468) 360,285 __________ _________ Reconciliation of denominatorShares used for calculation of basic and adjusted basic EPS 10,156,776 9,743,191Exercise 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 operatingactivities 2005 2004 £ £Operating (loss)/profit (2,427,429) 193,440Amortisation and impairment of goodwill 1,980,088 274,429Depreciation 119,038 96,370Loss/(profit) on disposal of fixed assets 1,161 (2,178)Decrease in debtors 195,409 87,391Increase/ (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 220,978 110,657New finance leases (45,932) -Other non-cash movements (7,149) - __________ _________ Movement in net debt in the year 167,897 110,657Net 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 notconstitute the company's statutory accounts for the years ended 30 September2005 or 2004, but is derived from those accounts. Statutory accounts for 2004have been delivered to the Registrar of Companies and those for 2005 will bedelivered following the Company's annual general meeting. The auditors havereported on those accounts; their reports' were unqualified and did not containstatements under s237(2) or (3) Companies Act 1985. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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