SFI's debts are more than £150m and the value of its pubs is plummeting. We report.
The investigation is now in its second year but many of the questions surrounding SFI's financial implosion last October remain unanswered.
What is clear is that the group's debt mountain, which now stands at £151.2m - far higher than anyone had anticipated - means the banks will be in control for the foreseeable future.
Lenders have lost patience with other managed house businesses such as Old Monk Company and Po Na Na, but the scale of SFI's borrowings means the banks cannot afford to call time.
A letter to shareholders last week unveiled a catalogue of errors and mistakes.
Forecasts made at the time of the Parisa acquisition predicted that cash-flow would be £10m more than it was.
Money invested in the business in the year to May 2002 exceeded forecasts by £12m, and capital expenditure in the eight weeks from June 2002, was £4m over budget.
Investigations have also so far uncovered a string of accounting misdemeanours such as inflated stock values, inaccurate allocations of property and insurance costs, errors in calculating rent and rates liabilities, and minor earnings manipulation.
The company, which even forgot to account for staff wages and bonuses, owes a further £6.7m in unpaid interest and bank fees.
SFI said that neither current or projected trading could support such a high level of debt and executive chairman Stuart Lawson is now working with banks on a refinancing of the business.
While the debts continue to spiral upwards, the value of the SFI pub estate is shrinking. The company is already revising the worth of its pub operations but diminishing performance means the value is set to fall further.
The result may see SFI's bars worth just half its debt. "It's one of the unfortunate spirals," said Mr Lawson. "A weaker performance leads to re-evaluations."
Mr Lawson was parachuted in to SFI three months ago. A rescue specialist, he replaced SFI's previous boss Andrew Latham, who stepped down to managing director in June and has now been made redundant.
Last week SFI also informed shareholders that like-for-like sales in SFI outlets were down eight per cent for the year to May, and down 10 per cent for the second-half. "The position is not at odds with other companies operating similar estates," said Mr Lawson. "Without any cash invested in the business, we are not that far behind."
SFI has sold For Your Eyes Only and some lodges. It had also marketed its Bar Med chain and some Latin bars but no longer plans to dispose of these after offers failed to match group valuations.
The value of SFI's pubs is yet to be determined and re-evaluations may mean that profit figures reported in the last three years need to be adjusted.
SFI faces FSA investigation
The Financial Service Authority (FSA), the watchdog that monitors public companies, is investigating SFI Group.
The FSA is probing statements made by the group between the time it published its seemingly strong results in July 2002 and when its shares were suspended in November.
Presenting results last year, the company made some typically bullish statements with the then chairman Tony Hill declaring: "In another successful year, the company's key performance indicators are all positive. I am particularly pleased that the strong growth in sales is reflected in similar earnings per share growth of 24 per cent."
Just months after "all performance indicators were positive" the company ran out of cash, its shares were suspended and Tony Hill resigned. Debts have now climbed to a staggering £151.2m.
The FSA has narrowed its investigation to four statements made between July and November last year.
Analysts at WestLB Panmure issued a note saying it believed the company was effectively insolvent. The company refuted this but did grudgingly admit it had placed some "short-term pressure on creditors".
The FSA is said to be assessing whether this was an appropriate response, given what later came to light.
It is also said to be looking at chief executive Andrew Latham's assertion at the time that if he were allowed to buy shares, he would. After it emerged that SFI had cash problems and the share price had dropped to 84p, Mr Latham was also quoted as saying: "I believe that when we make announcements at the AGM, there is likely to be an improvement in the share price. There are quality analysts who have said our share price should be between 250p and 350p."
Encouraging people to buy shares is forbidden as is buying, or saying you would like to buy shares, at market-sensitive times during the financial year.
Pictured: Former SFI chief executive Andrew Latham.
Related articles:
SFI Group debts top £150m (8 October 2003)
Redundancy for SFI's Latham (2 October 2003)
SFI sell-offs to help recovery programme (22 September 2003)
SFI abandons the stock market (15 April 2003)
SFI scraps plans to sell Bar Med (10 April 2003)
Shares in SFI suspended (12 November 2002)
SFI sees positive results with Andrew Latham at the helm (30 July 2002)