Allan Hawkins' Cynotech Holdings reports unaudited annual equity deficit as it battles to recoup loans bought from Western Bay Finance and National Finance 2000
Cynotech Holdings, which bought loans from failed car lenders Western Bay Finance and National Finance 2000, has reported an unaudited preliminary annual equity deficit. However chairman and 77.68% shareholder Allan Hawkins says the business remains a going concern under accounting rules.
Cynotech's financial statements for the year to March 31 show an equity deficit of NZ$743,097 compared with total equity of NZ$1.6 million a year earlier. Total assets fell about NZ$3.3 million to NZ$12.4 million with total liabilities down about NZ$800,000 to NZ$13.2 million. Assets include NZ$565,000 of cash and cash equivalents. For the March year, Cynotech's unaudited loss reported narrowed to NZ$2.4 million from NZ$3.95 million the previous year.
Cynotech, which paid NZ$1.5 million for loan receivables with a face value of NZ$30 million from Western Bay Finance in April 2008, also bought the loan book of National Finance 2000 in 2006. It has been divesting assets as it focuses on "core" finance company and debt collection activities, and operates Budget Loans Limited and Evolution Finance Limited.
After heading up high flying Equiticorp in the 1980s, Hawkins was jailed in 1992 for four years after being found guilty of fraud involving the so-called H-fee scheme which funnelled more than NZ$300 million through transactions designed to obscure their source.
Hawkins says Cynotech's directors "carefully" reviewed the carrying value of the group's assets to ensure they are at a realistic realisable value, especially given current economic conditions and continuing fallout from the "meltdown" in the finance company sector over the last few years.
"The assessment of carrying value of finance and debt collection assets takes account of the ongoing earning capacity of those assets and a discounted cash flow exercise is undertaken to bring future loan instalments due, back to a present value," Hawkins says.
"Annually a rigorous assessment is undertaken by directors of all groups of loans which were purchased from the receiverships of National Finance and Western Bay Finance."
"The estimates, assumptions or judgements used in the application of the accounting standards can change the reported results of these operations quite markedly and we continue to struggle to give a clear picture of the value of these assets and the earning capacity available from them," Hawkins says. "These assets now form the largest proportion of the Group's asset base."
NZ$22 mln of loans outstanding, just NZ$6 mln recorded in financial statements
In simple terms, Hawkins says Cynotech has outstanding loan balances due of NZ$22 million of which just NZ$6 million is recorded in its financial statements. The value in the Group's accounts represents
28% of the actual face value due, he says.
"Of course a significant part of the excess which is not represented in the financial statements of the Cynotech Holdings Group may never be collectable even though our collection procedures are robust and we are continually refining and extending our methods."
Meanwhile, Hawkins says whilst "on the face of it" Cynotech's balance sheet shows a deficit in shareholders funds, a small change in management's interpretation of the accounting policies could see Cynotech report a different position.
"For example if the discount rate used in discounted cash flow calculations had been set at plus or minus 5% of the rate used then the profit before tax and the shareholders funds would have been NZ$523,799 higher or NZ$587,341 lower. If the assumed term to maturity had changed by minus or plus 1 year, profit before tax and shareholders funds at year end would have been NZ$768,961 higher or NZ$608,612 lower," Hawkins says.
Under accounting rules management has to assess whether Cynotech has the ability to continue as a going concern.
"Management and the Directors have concluded that the Group meets the going concern criteria."
Cynotech has sold ice cream cone maker Snowdon Limited and its assets, and "ceased" its temporary grandstand business through Seating Systems, with more than 60% of its inventory of temporary grandstand seating assets sold.
"The major benefit from the rationalisation that has occurred is that all operations are essentially based in Auckland and the span of general management control activities has been narrowed," Hawkins says. "In the year, staff numbers have been reduced from 72 total staff employed at March 2011 to the current employment level of 18 staff."
Hawkins says Cynotech is now set up as management wants it to be.
"Management are under no illusions as to the task ahead to generate satisfactory profits and cash flows from finance related activities. An objective is to reduce corporate costs to a level commensurate with the reduced size of the Group," says Hawkins.
"This involves cutting the leasing costs of the head office and the potential delisting of Cynotech Holdings Ltd. It is proposed that the shareholders will be asked to consider delisting at the Annual General Meeting."