Smaller companies spotlight

EACH week, former Fleet Street City Editor Patrick Lay keeps This Is Money readers up-to-date with a neglected, but exciting sector of the stock market - smaller companies.

Standards life

AS IF smaller quoted companies do not have enough red tape to stifle progress, those “couldn‘t-run-a-whelk-stall” eurocrats in Brussels have now passed a new regulation requiring quoted companies to use International Accounting Standards from 2005.

The switch will mean many smaller quoted companies risk breaching bank covenants, missing accounting deadlines, failing to manage expectations of stakeholders and failing to factor in potential recruitment and IT costs, says Brian Shearer, audit partner of accountants Grant Thornton.

It will mean a massive shake up for smaller quoted companies in particular. Typically their finance teams have to cope with one or two new standards each year; the Brussels ruling will introduce some 30 new standards by the end of 2005 which, if they were evenly introduced, would still be 10 times the norm.

Mr Shearer points out that, although the regulation does not come into force until 2005, the real deadline is 2003 because companies will need a starting point for comparative figures. Not only that, many IAS requirements are being brought into UK accounting standards by the end of next year.

The changes could affect earnings trends and balance sheet totals and even have an impact on borrowing arrangements. As an example, Mr Shearer points out that preference shares may be reclassified as debt giving the impression that a company is more in debt than before, upsetting investors and bank managers and having a negative effect on the share price.

His advice is to act now and get advice and systems in place. Another answer might be to return to private hands.

One to investigate

AS recent events in the US have highlighted, there are some people at the top of the business tree who are less than scrupulous. You may not believe it could happen here, but AIM-listed Capcon Holdings would prove you wrong.

The company, best known for its auditing and stocktaking operations, which ensure publicans and others in the leisure industry are not fiddling the books, has a commercial investigation side too.

This division has uncovered a wide range of fraudulent claims and financial misdeeds in the past few months. These included identifying a candidate who had applied for a senior post in a pharmaceutical company as an animal rights activist; finding that the principal of a major company seeking to raise a significant amount of money was suspected in mainland Europe of money laundering; and revealing that a high-profile chief executive whose company was seeking a merger had previous criminal convictions.

The team can also help those who are wrongly accused, not least when proving that rumours concerning the chairman of a company coming to market had been suspected of fraud were untrue.

It is the investigatory division which provides higher profit margins, so shareholders will be pleased to learn that this division continues to grow. Setting up of new contracts in the audit and stocktaking services restrained pre-tax profits in the first half, which nevertheless grew by 70% to £154,000 but chairman Ken Dulieu says “benefits should flow through in the second half.”

Catalyst converter

I HAVE been reminded that there is less than a month left for investors to sign up for the Catalyst EIS Fund, which claims to be the only Inland Revenue-approved EIS Fund accessible on the market for the public to invest in and spread their investments in early stage companies and benefit from tax reliefs.

Catalyst is looking for a minimum of £2m and has raised more than half already. The issue closes on July 12. The minimum stake is £3,000.

An Enterprise Investment Scheme trust is similar to a Venture Capital Trust. Lots of people put their savings into the fund and the credentials of companies seeking funds are passed by the fund to an independent team of investment experts – in this case Analyst Investment Management.

Analyst will make its recommendations and, where favourable, Catalyst will take a stake for around £250,000 - £500,000; the idea is that everybody benefits as the chosen company makes its debut on AIM or Ofex.

In the best case scenario there are tax-free gains to be made; in the worst case – making a loss - these can be offset against income tax rather than just capital gains.

But it‘s not all plain sailing. Although this EIS fund has lower fees and charges than a VCT and a higher investment limit (£150,000 a year instead of £100,000), and capital gains from the previous three years can be deferred into the fund (against just 12 months for a VCT), the EIS has just six months to invest 90% of the funds raised against three years and 70% for a VCT.

Despite the three-year limit for VCTs, few have managed to invest sufficiently in the past few years because of the poor state of the market. Catalyst, with a minimum of £2m, would need to find at least seven potential investments worth £250,000 before the New Year to meet Inland Revenue rules.

The market will need to show more signs of life than currently if this fund is to succeed.

Some you may have missed

AIM-LISTED investment group Billam has bought 2,727,276 shares at 2.75p each in Henderson Morley, the drug discovery group, and has an option to buy a similar number at the same price by 13 December, 2002. The purchase gives Billam a 1.722% stake in Henderson which has just appointed Professor James Hill of Louisiana State University Health Sciences Center to its scientific advisory board.

The Billam purchase was made as part of a placing of more than 8m shares which raised £240,000 for Henderson.

Brokers Durlacher have been appointed corporate adviser to FireAngel smoke alarm group, Sprue Aegis, which chairman and chief executive Graham Whitworth says ?represents a further milestone in our longer-term strategic direction.‘

The company made a gross profit of £425,000 on sales of £1,356,000 in the nine months to end March, but turned in a pre-tax loss of £344,000 for the period against losses of £545,000 for the previous 13 months.

INTERACTIVE Digital Solutions has produced its first interim results since joining Ofex with a pre-tax loss of £713,494 ?in line with forecasts.‘

Chairman Dorian Marks says: “We have developed new target markets, appointed a number of strategic business partners, developed our products and technology, raised further finance and strengthened the management team. We now feel we are ideally positioned to fully take advantage of the opportunities before us.”

DETICA, the technology company which came to market just seven weeks ago, has announced a 25% leap in operating profits at £5.84m. Pre-tax profits, after flotation expenses of £1.47m, eased to £4.44m from £4.68m.

ENGINEERING group Halma reported a £1.8m drop in pre-tax profits to £46m for the year to end March. Chief executive Stephen O‘Shea blames the dip on a decline in US demand following the 11 September attacks which “wiped out a month‘s worth of business” says. A final dividend of 3.206p makes 5.283p for the year compared with a total of 4.593p in the previous year.

Some to watch out for

BRETT Pollard, life sciences analyst at brokers Seymour Pierce, makes a strong, if largely unintelligible, case for Protherics, the vaccine and antibody research and development company.

Protherics has just filed a patent for a vaccine against Vascular Endothelial Growth Factor, which is involved in the growth of new blood vessels. It will work against tumours growing and spreading. The outcome is, “buy” the shares at 28p, he says.

CONGRATULATIONS to tipster Mark Watson Mitchell of watshot.com, who highlighted the merits of Mice Group, the supplier of marketing support services to major corporations and governments, just 24 hours before 6,730,007 shares in the company changed hands. He tipped the shares at 50p and now says they could top 73p against their current 54p.

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