Enlitic response unsatisfactory?

My dear Shorterskillme, thank you so much for eliciting a response from the company on the Enlitic and Notes matter. Well done. Experience, though many years gone now, has told me that when one receives a detailed response then it is prudent to take the time to fully digest detailed answers rather respond too quickly. Besides, I had to take the day off for midweek trophy day at the club. Please do not be offended with the following sentence as it is a safeguard for my response later on.

If one accepts that the response posted by the author Shorterskillme on Hot Copper on 12/5/16 is indeed emanating from Capitol Health Ltd and is a formal response, then the author has matched the answers provided with the pertinent questions to then comment on the response and finally rate the quality of the answer from the point of view of the author of this post. If the responses indicated below by the letter “A.”and in italics are not an official response from Capitol Health Limited then this would have the effect of altering my comments and may produce a different result.

Often a precise understanding of the use of a word is important. The satisfactory nature of the answer does depend on what is meant by the words utilized.

Q. Therefore although the Notes are unsecured, are the Notes financially supported by the total Enlitic investment asset, being not just the Australian distribution rights, or not?
A. The Notes are financially supported by all companies in the group.
Comment; The definition of the Group is contained within the Conditions section of the IM, as well as being graphically presented in the diagram on page 16. The answer would seem to assume that all companies are guaranteeing the Notes. Pages 3, 8 and 25 specifically exclude the Singapore companies from being a guarantor to the Notes, so how can they offer financial support to a document to which they are not a party to? Perhaps CAJ should formally join these companies as additional guarantors in the process as outlined in the Guarantee section of page 3 of the IM.
Quality of Answer; Fail

Q. Why the apparent holder of the Enlitic investment, based on what seems to be the money trail, not 100% owned by CAJ?
A. The entity holding the Enlitic investment (CAJ Investments Pte Limited) is always intended to be a subsidiary of Capitol Health Limited but we will offer our professional staff the opportunity to participate in Enlitic through this subsidiary. The intention to allow our professional staff to co-invest in Enlitic has been a clear part of the transaction from the beginning and has been included in numerous ASX announcements covering the Enlitic investment. Capitol Health Limited intends to retain control of the subsidiary through a majority holding.
Comment; The answer is correct in its reference to previous statements, however if the issue of allowing professional staff to invest was so important to be included in an ASX release then it is also assumed that it would be of importance to announce when it actually happened,
Quality of Answer; Accepted

Q.Why the one share in CAJ Investments to a CAJ employee who is not even a Director? Is the employee a radiologist?
A. -
Comment; No answer
Quality of Answer; Fail

Q. Does that one share not owned by CAJ in CAJ Investments Pte Ltd mean that any profits or benefits to CAJ from Enlitic in general from their operations throughout the world - except for any sales by CAJ through rights in Australia - can be quarantined and held in Singapore and only distributed at the discretion of the directors of CAJ Investments Pte Ltd?
A. The financial results of all subsidiaries are consolidated into the published accounts of Capitol Health Limited and the shares held outside the group does not affect that consolidation of results.
Comment; The question was on the flow of benefits, not on the consolidation of results.
Quality of Answer; Fail

Q. With NPAT being used as the marker for the P/E ratio and impact on the share price, does this mean that as a consolidated entity that any intercompany transactions between all subsidiaries within CAJ are eliminated above the NPAT line except for those with CAJ Investments – whereas the entry in the books of CAJ Investments for any transaction with CAJ or its other subsidiaries will appear below the NPAT line as “Other Comprehensive Income or Expense”?
A. All intercompany transactions between subsidiaries and with the parent entity are eliminated in the preparation of the consolidated results of the group. The CAJ Investments Pte Limited results will be in US dollars following the investment in Enlitic being in US dollars and so translation gains or losses may also arise from the Enlitic holding.
Comment; Not quite the specific answer that was looked for. However on the assumption that with the level of control and current shareholding that CAJ Investments will be consolidated within the Profit and Loss Statement rather than using Equity accounting methods within the Balance Sheet then the answer is accepted – if not then it is unacceptable.
Quality of Answer; Qualified acceptance

Q.Why no ASX announcement as to the structure for the Enlitic investment?
A. The structure has been established to ensure that Capitol Health Limited can retain control of the Enlitic investment while allowing our professional staff the opportunity to co-invest. This has been made clear in the ASX announcements concerning the Enlitic investment. CAJ Investment Pte Limited will have to be audited and to be in compliance with Australian accounting standards for inclusion in the consolidated results of the group.
Comment; The final structure, ignoring jurisdiction, complies with the general intent of ASX releases, however the path to that end result has not been made clear.
Quality of Answer; Fail

Q.What’s the extra half mil $USD sitting in Singapore for? Expenses that do not need to be audited or disclosed to the Aust market? What sort of expenses?
A. All expenses of the group whether in subsidiaries (such as CAJ Investments Pte Limited) or the parent entity are audited and disclosed in accordance with Australian accounting and listing rules in the published financial reports of the group. The direct costs of the investment such as legal and transaction costs are obviously in addition to the actual subscription for shares in Enlitic and this is the reason for the additional funds allocated. These additional funds and costs will be subject to the same auditing and compliance requirements as for all of the subsidiaries of Capitol Health Limited
Comment; For what is a simple investment within a company that has its only purpose to hold shares in another company and what is assumed to be the relatively minor costs of setting up a shelf company to hold that investment regardless of jurisdiction the high level of additional costs seems extraordinary at approximately $700,000 AUD.
Quality of Answer; Fail

Q.Was the above structure disclosed to the Auditors at the half year audit?
A. The auditors of the group were aware of the proposed investment and manner of investment in Enlitic when they conducted the half year audit.
Comment; I take it from the answer that the auditors are fully aware of the final structure as put into place, not what may have been proposed during the audit process at the time if that differed.
Quality of Answer; Accepted

Q. IM dated 28/4/16 still includes a Kim Hogg as CAJ company secretary, yet ASX release dated 31/3/16 has him resigning. Poor draughtsmanship?
A. Kim Hogg has resigned as a company secretary of Capitol Health Limited.
Comment; The question was on the timing and dating of the documents referred to, not the end result.
Quality of Answer; Fail

Q. Maybe CAJ should state the actual rather than the ultimate or parent company that Enlitic recognises as the holder of its shares that were paid for by CAJ?
A. The actual legal holder of the Enlitic shares is CAJ Investments Pte Limited which is a subsidiary of the ultimate holding company Capitol Health Limited.
Comment; Accepted
Quality of Answer; Accepted

Q. If CAJ is the actual registered holder of the shares then why the convoluted structure outside of Australian jurisdiction?
A. The incorporation of a subsidiary in Singapore is simply a precursor to the group’s plans to establish the Asia Pacific Joint Venture with Enlitic and hence the holding of the investment in Enlitic by CAJ Investments Pte Limited.
Comment; I fail to see the connection between an operating company setup in Singapore for the purposes of a JV within the Asian region which is understandable and a separate company also in that jurisdiction simply to hold shares. The rationale for CAJ Investments being in Singapore has not been established, other than the possibility that a subsidiary not 100% owned may put the assets out of reach of Australian jurisdiction.
Quality of Answer; Fail

Q. Has the current and apparent corporate structure now introduced foreign currency risk for CAJ investors?
A. The Enlitic investment is in a US company and is therefore denominated in US dollars. Obviously any operations of the Asia Pacific Joint Venture with Enlitic is also likely to be in a foreign currency.
Comment; Accepted
Quality of Answer; Accepted

Q. As CAJ is a substantial shareholder in Australian terms in Enlitic, what sort of financial reporting can we expect from CAJ on the performance of its Enlitic investment?
A. Capitol Health Limited will ensure that the holding in Enlitic is accounted for entirely in accordance with the Australian accounting standards. We remain committed to informing the market more generally on the performance of Enlitic as this investment and associated activities (including Asia Pacific JV) is a core part of the group’s future strategy.
Comment; Accepted if CAJ has committed to detailed reporting on the performance of Enlitic in its own right as a corporate entity, unacceptable if CAJ fails to provide regular market updates
Quality of Answer; Qualified Acceptance

Q. Were the Noteholders aware of the asset and corporate structure before signing up?
A. The corporate structure of Capitol Health Limited was detailed in the IM which was made available to the Noteholders prior to the investment.
Comment; The position of the Singapore companies not guaranteeing the Notes and the associated lack of clarity as to where the Enlitic investment was being held is consistent with the IM so the prompter for my initial interest in the company and the Notes offered remains.
Quality of Answer; Fail

Q. Would the above points fall under incomplete corporate disclosure by the company - meaning a market not fully informed?
A. The company complies with the continuous disclosure requirements of the ASX and the details above are simply the internal holdings for the Enlitic investment.
Comment; Disclosure is a subjective matter. The answer implies the company believes that it has met disclosure requirement, whereas one could possibly draw a different conclusion.
Quality of Answer; Subjective.

Overall Comment; The number of Fails to Accepted is 8 to 6, with one undecided. However the key issue of the financial support through guarantees as distinct from the answer, the jurisdiction selected for and entity holding the Enlitic investment as compared to the need for an operational company in that region tips the overview of answers into the unacceptable basket.

Overall Quality of Answers in the opinion of the author; on balance – Unsatisfactory.