Annual Report and Accounts
EPIC Reconstruction PLC
02 May 2006
COMPANY ANNOUNCEMENT
2nd May 2006
EPIC Reconstruction plc
Statement of Year End Results as at 31 January 2006
The Board of EPIC Reconstruction plc have today released their annual year end
results to 31 January 2006 which form part of this announcement.
Financial highlights outlined in the year end results are:
o 5 investments completed, committing £17.35m of capital
o 1 divestment and the sale of the Property portfolio, yielding a £1.7m
capital gain (to date)
o Total income of £2.6m, and Net Profit for the year of £1.69m
o Final dividend of 4.7p, bringing full year dividend to 5.6p
Enquiries:
Northern Trust Cormac O'Keeffe
Phone: +44 1481 745350
EPIC Investment Rob Leeming
Phone: +44 207 553 2343
EPIC Reconstruction PLC
Audited Financial Statements
For the year ended 31 January 2006
1 Company Information
2-3 Chairman's Statement
4-10 Investment Manager's Report
11-12 Directors' Report
13 Statement of Directors' Responsibilities
14-15 Report of the Independent Auditors
16 Consolidated Statement of Operations
17 Consolidated Statement of Assets and Liabilities
18 Company Statement of Assets and Liabilities
19 Consolidated Statement of Changes in Net Assets
20 Consolidated Statement of Cash Flows
21-35 Notes to the Financial Statements
36 Shareholder Information-Schedule of Major Shareholders
EPIC Reconstruction plc
Company Information
Directors DL Adamson Investment Advisor EPIC Specialist Investments Ltd
RBM Quayle 22 Billiter Street
CL Spears London
GO Vero EC3M 2RY
NV Wilson
C O'Keeffe
Secretary D J Parnell
Registrar and Northern Trust International Fund Administration (Isle Of Man Limited)
Registered (formerly Barings (Isle of Man) Limited)
Office PO Box 174
St James's Chambers
Douglas
Isle of Man, IMI 1JE
Nominated Numis Securities Auditors and KPMG Audit LLC
Advisor and, Limited Reporting Heritage Court
Broker Cheapside House Accountants 41 Athol Street
138 Cheapside Douglas
London EC2N 6LH Isle of Man IM99 1HN
Bankers Royal Bank of Scotland Crest Provider Computershare Investor Services
International (CI) Ltd
PO Box 64 Ordnance House
71 Bath Street 31 Pier Road
St Helier, Jersey St Helier, Jersey
JE4 8PJ
Chairman's statement
EPIC Reconstruction Plc ('the Company' or 'ER') has had a satisfactory second
year of consolidation, refining the investment mandate and investing in some
promising new investments. Over the period, the Company has completed five new
transactions and invested a total of £17.35m of committed and underwritten
capital. These have included the acquisition of Past Times, the high street
retailer, Kemutec, a niche engineering business and the acquisition of the
construction business, GGS Holdings post year end. Realisations to 31 March have
included the sale of our property portfolio which realised a gain of £1.7m and
the exit from our investment in Abingdon Carpets. Action has also had to be
taken with regard to two underperforming investments. ER has written off £0.4m
against the investment in Crystal Drinks, which was placed into Administration
in May 2005. In addition, since the year end, Gaskell McKay has been sold at a
loss after a period of poor trading. This is a post-balance sheet event, which
will have an adverse impact on the NAV for the year to January 2007. The sale of
some of the assets is still ongoing and the Manager currently estimates that,
when completed, the sale will result in a negative impact of up to 5p on the NAV
per share. The Board proposes a final dividend of 4.7p, making a full year
dividend of 5.6p.
The Company's investment focus continues to develop. The year to 31 January,
2006 has seen more transactions with new management teams brought in to effect a
restructuring, as well as an increasingly large number of opportunities to
invest in solvent, rather than already insolvent, situations to provide
liquidity. As the market moves increasingly towards managed restructurings, ER
is viewed as a funding solution for banks and new or incumbent management teams
alike. ER's focus is increasingly to provide liquidity for investment across a
range of distressed situations. ER's strategy continues to focus on:
'Investing to provide liquidity in distressed or insolvent businesses in the UK
through a range of debt and equity instruments with a view to generating returns
through both yield and capital gain.'
The financial results for the year show a total income of £2.6m, against total
expenses of £2.04m, yielding net investment income of £0.6m. Taking into account
the net gains on investment of £1.65m, total profit, net of tax, was £1.69m.
This represents an earnings per ordinary share of 5.6p.
The income is driven by the interest received on a range of financial
instruments utilised in each investment. The Company invests in secured debt,
confidential invoice discounting facilities, plant and machinery financing,
mezzanine financing, shareholder loans and pure equity. In addition, where
appropriate, the Company looks to isolate the property risk of the investments
through its wholly owned subsidiary, EPIC Reconstruction Property Company
Limited.
Distribution Policy and IAS
The Board has taken advice as to the distribution policy of the Company going
forward. To date, all capital gains and losses have been treated as income,
thereby resulting in considerable volatility in the dividend yield. Further to
this advice, the Board proposes to structure the distribution policy such that
all capital gain or loss is recognised against capital and all yield and
dividends from investments are taken as income. A capital event would be defined
as an exit, sale or refinancing and would impact the NAV of the Company. It is
the Board's view this will both make income more predictable and provide a truer
representation of income and capital. This is outlined further in the Notes to
the accounts.
In its Admission Document, the Company stated that it would account according to
International Accounting Standards, except in relation to portfolio companies
that fall within the definition of subsidiary or associated undertakings. The
Board consider that consolidation of these investment would render the
consolidated accounts misleading. In the year to 31 January, 2006, the Company
has made investments which fall within this definition. As such, a qualification
to the accounts for the year ended 31 January, 2006 with regard to IAS27 has
been stated.
OUTLOOK
As at 31 January, 2006, ER had net cash after future commitments of £5.1m. ER
continues to see a greater number of larger and more interesting investment
opportunities and a wider range of restructuring opportunities. Increasingly,
the ER restructuring potential is at both a corporate and business unit level,
rather than pure operational improvement.
The Company has now begun to approach maturity as the investment style has
developed and larger opportunities have emerged. Despite a more capital based
approach, dividends continue to be paid. The volatility in the dividend should
reduce as a result of the actions taken with regard to the accounting policy
coupled with significant capital upside potential in the future. I look forward
to reporting on progress in the interim results.
Investment Manager's Report
The year to 31 January, 2006, has seen the Manager complete five new
acquisitions and one divestment for the Company. The Manager updated the
shareholders on those investments completed during the first nine months in the
Interim Report. The purpose of this report is to provide a fuller flavour of
each of the portfolio companies, the rationale for investment and their current
prospects. The Manager has looked to develop a diversified portfolio across
different sectors and sizes of investment and remains confident that this
portfolio will continue to yield a strong return to Shareholders.
The Investment Model
The investment model continues to be refined, as outlined in the Chairman's
report. The past year has seen ER, as forecast in last year's report, complete
fewer, although larger, than expected deals. The Manager increasingly looks to
bring external management expertise to support incumbent management teams in
turnaround situations and the Manager's monitoring team continues to build.
2005 has also seen a move in the type of opportunities investigated. ER's
earlier investments focussed on the acquisition of businesses from
Administration or Receivership. The past year has seen a range of distressed
debt opportunities, or the requirement to provide liquidity and restructuring
expertise in solvent situations with asset backing. In such situations, it is
the operational and financial restructuring ability of the Manager that adds
value to longer term equity, rather than pursuing a range of small overlends on
debtor facilities to small distressed businesses bought from Administration.
The Manager is of the view that a hands-on operational approach is critical to
drive value from the underlying portfolio companies. Going forward, the Manager
expects this style of investing to develop, with more major corporate and
business unit restructurings undertaken, lead by exceptional managers with
significant reorganisation expertise.
Development of EPIC Private Equity
Over the past financial year, EPIC Specialist Investments, the manager of ER,
has itself been subject to some corporate reorganisation. A new Limited
Liability Partnership, EPIC Private Equity LLP, has been set up which is the
Manager of both EPIC Reconstruction Plc and the private equity part of EPIC Plc.
This new structure allows more direct incentivisation and support for building
the team required to manage a portfolio of this nature.
The Portfolio
The portfolio continues to perform strongly. The five businesses acquired during
the financial year were Morada, Kemutec, Autocue, Gaskell and Past Times, are
representative of the Company's diversification across industries. Due to the
security required as a result of the investment model, the Manager looks to
invest in asset rich businesses.
The investments have become more diversified since last year, with the addition
of the retailer Past Times to the portfolio. There remains a focus on
manufacturing businesses, which are frequently suitable for this fund due to
their asset-rich nature. There is a bias towards businesses that supply the
large UK multiple retailers, in either food, drink or domestic products, where
margins continue to be squeezed in search of price optimisation for the customer
base. Bonne Bouche, Crystal Drinks, Ex-Pac and Abingdon carpets are examples of
businesses influenced by that market trend. The remainder of the opportunities
have arisen as a result of specific circumstances within that industry or
business, often driven by overcapacity of some nature.
Portfolio Companies
Abingdon Carpets
Abingdon, the first investment that ER made, has now been successfully exited.
ER generated a return of 73% on this investment over the course of the
investment period. Abingdon, the £45m turnover carpet manufacturer, represents
the type of investment that allows for significant restructuring expertise.
Abingdon was an example of a business purchased from the Administration process
of the parent company, Carpets International, and restructured through a
significant rationalisation of turnover and operational units.
C3O
C3O, the business formerly called Connections Plus, is a call centre operator
based in Skipton focussing on both inbound and outbound customers. The Company
invested £0.5m in overlend and has provided additional financing of £0.15m for
the development of new customers. At the interim results, the Manager commented
on concerns over scale and the need to bolster and continue to restructure the
business.
In the past half year, the business has been restructured, reducing it from two
sites to one, therefore improving the relative margin and preventing excess cost
for the turnover. At the same time, ER have entered heads of agreement to
acquire another call centre business with a view to providing additional
turnover to the combined business and getting the business to a scale whereby
run-rate operating profit can continue to be delivered. This restructuring has
required further financing which should yield a good return through the
integration of the two businesses.
Bonne Bouche
Bonne Bouche is a manufacturer of frozen gateaux and puddings for the food
service and retail industries with a turnover of circa £13m.The Company invested
£1.5m in overlend, in addition to a stock facility and the underwriting of the
Debtor book.
2005 was a difficult period for Bonne Bouche, as a result of certain actions
taken by the management team. The Manager was presented with the budget and the
ongoing trading performance of Bonne Bouche, which proved unsatisfactory. Two
consultants were employed to provide further detailed review of the business.
This indicated inconsistencies and inefficiencies within the business; operating
costs were too high, product was not always being sold profitably and
operational controls were poor. The Manager has since removed the Managing
Director and replaced him with two other individuals who recently purchased a
business from Administration and lead a successful turn around.
More recently, an opportunity has arisen to continue to support the business
through acquiring more turnover from a competitor. The new management team have
also proposed and implemented a significant cost cutting exercise, taking over
£1m in costs out of the business. Both of these activities require financial
support, which ER has given, such that exposure has now increased to £2.45m.
However, the likelihood of success with a new management team and revised
operating structure is significantly improved. Trading will remain difficult
until Christmas, but the Manager will continue to support this investment
through what has been a difficult restructuring.
Gaskell Mackay
Gaskell MacKay was formed as a result of the merging of the Gaskell contract
carpeting business and Hugh Mackay, the previously held asset of the Company.
The Company has invested up to £2.5m in overlend, as well as underwriting the
debtor book, which is not fully drawn.
Since acquisition, the Hugh Mackay part of the business has underperformed,
whilst the core Gaskell brand has remained within budget expectation. The second
half of 2005 saw the business achieve profitability in the period to Christmas.
However, there was poor trading in December and January. This was a result of
difficulties encountered in the manufacturing processes, resulting in lower
stock levels than expected and customers being let down. The Manager installed a
new Executive Chairman with experience in this sector to support the incumbent
management team in February of this year. He instigated a reorganisation of the
manufacturing processes within the business so as to drive growth. He prepared a
plan for the Manager, which was discussed with the Board, requiring further
investment in the business. ER proposed that the additional funding requirement
could be used to support the business in the interim with a view to turning it
around, but that a sale should be sought for Gaskell, as a result of the longer
term payback on the investment. The Manager pursued a sale process and a deal
has now been substantially agreed, although certain residual assets are still in
the process of being sold. This deal, when completed, will impact adversely the
NAV of ER, as the investment will be sold at a loss. This is a post-Balance
sheet event, also referred to in the Notes to the accounts.
Newline Display
Newline Display is a small manufacturer and installer of retail fittings, with
turnover of circa £2.0m. The Business was formed in 1990 to supply the
shop-fitting and retail sectors with high quality slatted display panels. ER
backed the previous management team to purchase the business out of
Administration with £0.3m of underwritten debt and equity facilities.
Newline has continued to be a stable investment, yielding a strong return for
the fund. The profitability and sales of the Business have continued to exceed
expectations despite the departure of the CEO. The Manager remains confident of
the prospects of the business with the remaining management team ever more
incentivised to succeed. Newline has now paid back its overlend.
Ex-Pac
Ex-Pac is a bottling and packaging business, which provides packaging for the
glass bottles used by Coca-Cola and high end spirits manufacturers in the UK,
with turnover of circa £3.0m. The business can offer the ability to label
difficult and non-standard bottles and some of the work still has to be
completed by hand.
Ex-Pac had one major bad debt two years prior to going into Administration in
2004. This bad debt resulted in continued working capital difficulties for the
company, which impacted the performance of the business as supplies could not be
ordered and growth was therefore stunted. ER supported the management team by
investing £1m in underwritten debt and equity facilities to buy Ex-Pac out of
administration.
Ex-Pac had a promising start with initial trading proving strong, however Ex-Pac
sales have recently fallen below budget. Overlend continues to be repaid, but
the Manager has extended the term of repayment by 4 months and increased the
interest rate to 15% to compensate for the increased risk.
The Manager remains confident in the ability of Ex-Pac to repay the overlend
over this extended timeframe, generating a strong return.
Abbseal
Abbseal is a glass processor, selling to both the domestic and commercial
markets, with a turnover of circa £18.0m. The Manager used the Administration
process to restructure the cost base of the Company by reducing the number of
manufacturing plants. The Company has a £2.3m overlend exposure to Abbseal, with
£2.9m funds in use at Eurosales and £0.6m Plant and Machinery loan.
The UK Glass market has been in turmoil during 2005, as a result of overcapacity
within the industry. Consolidation continues apace within the market. As a
result of the restructuring of the business, turnover has reduced to a core
profitable business, expected to generate stable operating profit in the coming
year. The management team have evolved, with a new sales and finance team within
the business. The Manager remains confident for the opportunities for this
business going forward.
Morada
ER backed Stuart Taylor to buy Morada Furnishings Ltd out of Administration on
15 September 2005. This division was based originally on contracts with the
Ministry of Defence ('MoD'), which comprises around two thirds of the division's
turnover, to supply curtains and blinds for living accommodation occupied by
lower ranks in the military. In May 2005 the business was awarded a 3 year
contract (with a 2 year extension) to provide furnishings to senior ranks, ship
furnishings and upholstery covers, in addition to the current curtain contracts.
The business also supplies Local Authorities and educational establishments,
including a 2 year contract with Lancashire Purchasing Agency.
In the retail sector, it supplies custom-made and ready-made furnishings to a
number of independent and national customers, including Paul Simon and Dunelm.
The first few months of the investment have proved promising, albeit the
business has experienced some difficulties in getting orders out in time due to
restrictive credit limits with key suppliers. However, orders are ahead of
budget and the Manager remains confident in the management team's ability to
develop this business going forward.
Past Times
Past Times was acquired on 31 December, 2005. ER backed Will Hobhouse, formerly
of Tie Rack and Whittard, to purchase the business from the Administrators of
Retail Variations plc. Past Times is a retailer of historically themed items.
The first month was one of significant change, as ER and the management team
looked to implement the basis of the restructuring plan. Of the 96 stores, it is
estimated that 72 will be retained. The mail order business has been analysed in
detail and proved to be unprofitable.
In addition, the central head office function has been dramatically reduced,
with further job losses. A refocussing of the buying and merchandising
departments is underway and the key strategic change is to move the product back
to its original higher quality proposition, focussed on historically themed
products, without compromising quality for price.
The Manager aims to reduce the peak funding requirement of Past Times through
sourcing third party stock finance for the business. The majority of exceptional
costs have now been incurred and the business is trading in its new format. New
product will take some further months to come into store due to lead times and
the Manager is hopeful of seeing a pick up in trading performance as the retail
proposition changes in the latter half of the summer period.
EPIC Reconstruction Property Company
The property portfolio was built up during the year through the acquisition of
the properties associated with Gaskell, Kemutec and Abbseal. These properties
were not assimilated into the underlying business to ring-fence the risk. The
portfolio of properties has been sold yielding a gain of £1.7m to date.
Kemutec
Kemutec is a manufacturer of mixing and sifting equipment for the chemical,
pharmaceutical and food industries, with sales of circa £10m. The Company
invested £0.9m in overlend, as well as underwriting the debtor book (which has
minimal utilisation, due to the contract nature of the business) and purchasing
of the properties through EPIC Reconstruction Property Company. The business
continues to perform strongly, exceeding budget for the first financial year.
ER has supported the management team in their growth strategy through providing
further finance to complete a bolt-on acquisition of a business called PPS. The
management had identified PPS as a good strategic fit for Kemutec and the owner
was looking for a retirement sale. ER supported the business through providing
the funds to acquire the business, a further £0.28m and the acquisition
expertise. Kemutec purchased PPS in an assets only transaction with no liability
taken on.
This acquisition will continue to support the business through its growth phase
to drive additional value to ER's equity stake.
Autocue
The Company has a £0.5m overlend exposure to Autocue. Autocue is a manufacturer
of prompting equipment for the media industry, as well as the developer and
provider of a range of software for a similar customer base. The business went
into Administration early in 2005 due to significant historic leverage raised to
expand the software side of the business, a strategy which subsequently proved
disastrous.
The Company teamed up with another private equity provider to buy the business
out of Administration, employing a new management team who have looked to
fundamentally restructure the business, through the removal of a number of
unnecessary excess costs and a realignment of the business to its core hardware
sales. There is also a renewed focus on driving sales through new product
development and sales incentives.
The business has shown steady performance and a new product range has been
implemented. The management have identified weaknesses in the offering of the
business, which are being plugged and released into the market in the coming
months. It is expected this will be a catalyst to drive change in the topline
performance of the business.
Crystal Drinks
The Company invested in Crystal Drinks in December 2003. Crystal Drinks is a
manufacturer of both own brand and branded soft drinks for large retailers and
foodservice sellers. The Company invested £0.75m as overlend and underwrote the
debtor book facilities. £0.40m of overlend has been returned. In addition, a 'B
share' of £0.15m has been paid. As reported in the Interim results, the
turnaround of the business was not successful and it was placed into
Administration in April.
PwC were appointed Administrators on the 23 May 2005. The Investment Advisor was
of the view that continuing to fund the business would have resulted in longer
term difficulties for the Company and there were certain supply liabilities
during the summer season that made ongoing trading untenable. Therefore, the
Company has provided £0.4m which represents the expected loss on the investment,
not yet crystallised.
The investment has yielded, to date, a return (including interest) of £0.26m on
the initial investment of £0.75m, as well as the repayment of £0.4m of
capital.The Administration has now been concluded and the loss will be
crystallised when it is called under the Eurosales Guarantee. No further loss is
expected from this investment, although there will be some time before the
Administration is fully wound down.
Adam G Brown
The Administration of A.G.Brown continues to wind down. The Manager expects the
provision of £0.86m made to date, which incorporates a further provision of
£0.42m in the year ended 31 January 2006, to be sufficient.
AGB Steel
The residual 20% stake in AGB Steel is proving to create value. AGB Steel has
had a strong trading period after the Administration of AGB Steel and ER
continues to receive rent on the Property and Plant and Machinery and value
remains within the residual stake.
Report of the Directors
Principal activity
The Company was incorporated with limited liability in the Isle of Man as an AIM
listed public company limited by shares under the Laws with registered number
108834C on 25 July 2003.
The principal activity of the Company and its subsidiaries (together 'the
Group') is to arrange financing for businesses emerging from distressed
situations. Whilst the Group may itself make some loans available, the majority
of financing transactions are undertaken by the Group introducing a third party
finance company, which advances the loans to the
businesses. The Group participates by providing credit support to the lender in
return for which it is paid commission and receives equity stakes.
Incorporation
The Company was incorporated on the 25 July 2003. The Company's registered
office is:
St James's Chambers, Athol Street, Douglas, Isle of Man, IM99 1PP, British
Isles.
The Company has four wholly owned subsidiaries - EPIC Structured Finance
Limited, a company incorporated on 21 August 2003 in the Isle of Man, EPIC
Reconstruction Property Limited, a company incorporated on 11October 2004 in
England and Wales, EPIC Reconstruction Property Company II Limited, a company
incorporated on 30 December 2004, in England and Wales and EPIC Reconstruction
Property Company (Isle of Man) Limited, a company incorporated on 29 September
2005 in the Isle of Man.
Results of the financial year ended
Results for the year and their appropriation are set out in the Consolidated
Statement of Operations on page 16 and in the Consolidated Statement of Changes
in Net Assets on 19.
Dividends
Details of the dividends paid and proposed during the year ended are analysed on
page 28 in Note 7.
Significant holdings
The number of shares held and the percentage of the issued shares which that
number represents at the date of the signing of these financial statements are
analysed on page 36.
The Directors are not aware of any other individual holding of greater than 3%.
Directors
The Directors of the Company holding office during the financial year and to
date were:
Mr. D.L. Adamson (Chairman)
Mr. R.B.M Quayle
Mr. N.V Wilson
Mr. C.L. Spears
Mr. G.O. Vero
Mr. C.O'Keeffe (Appointed 20 March 2006)
Secretary
The secretary of the Company holding office for the financial year and to date
were:
Appointed Resigned
Mr. P.P. Scales 25 July 2003 22 December 2005
Mr. D.J.Parnell 22 December 2005
Staff
At 31 January 2006 the Group employed no staff.
Auditors
The auditors, KPMG Audit LLC, being eligible, have expressed their willingness
to continue in office in accordance with Section 12(2) of the Isle of Man
Companies Act 1982.
By order of the Board: _________________________________________
Statement of Directors' responsibilities in respect of the Directors' report and
the financial statements
The Directors are responsible for preparing the Directors' Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year, which meet the requirements of Isle of Man company law. In
addition, the Directors have elected to prepare the Group and Parent Company
financial statements in accordance with International Financial Reporting
Standards.
The Group and Parent Company financial statements are required by law to give a
true and fair view of the state of affairs of the Group and the Parent Company
and of the profit or loss for that period.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable International Financial Reporting Standards have
been followed, subject to any material departures disclosed and explained in the
financial statements; and
• prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Group and Parent Company will continue in
business.
The Directors are responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Parent Company and to enable them to ensure that the financial statements comply
with the Isle of Man Companies Acts 1931 to 2004. They have general
responsibility for taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and other
irregularities.
Under applicable law the Directors are also responsible for preparing a
Directors' Report that complies with that law.
Report of the Independent Auditors, KPMG Audit LLC, to the members of EPIC
Reconstruction plc
We have audited the group and parent company financial statements ('the
financial statements') of EPIC Reconstruction plc for the year ended 31 January
2006 which comprise the Consolidated Statement of Operations, the Consolidated
and Parent Company Statement of Assets and Liabilities the Consolidated
Statement of Changes in Net Assets, the Consolidated Statement of Cash Flows and
the related Notes. These financial statements have been prepared under the
accounting policies set out therein.
This report is made solely to the Company's members, as a body, in accordance
with section 15 of the Companies Act 1982. Our audit work has been undertaken so
that we might state to the Company's members those matters we are required to
state to them in an auditor's report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company's members as a body, for our audit work,
for this report, or for the opinions we have formed.
Respective responsibilities of Directors and Auditors
As described in the Statement of Directors' Responsibilities on page 13 the
Company's directors are responsible for the preparation of the financial
statements in accordance with applicable Isle of Man company law and
International Financial Reporting Standards.
Our responsibility is to audit the financial statements in accordance with
relevant legal and regulatory requirements and International Standards on
Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true
and fair view and are properly prepared in accordance with Isle of Man Companies
Acts 1931 to 2004. We also report to you if, in our opinion, the Company has not
kept proper accounting records, if we have not received all the information and
explanations we require for our audit, or if information specified by law
regarding directors' transactions with the Company is not disclosed.
We read the Directors' Report and any other information accompanying the
financial statements and consider the implications for our report if we become
aware of any apparent misstatements or inconsistencies within it.
Basis of opinion
We conducted our audit in accordance with International Standards on Auditing
(UK and Ireland) issued by the UK Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgments made by the Directors in the preparation of
the financial statements and of whether the accounting policies are appropriate
to the Group's and Company's circumstances, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Qualified opinion resulting from disagreement about accounting treatment
As stated in Note 2(b) to the financial statements, the Company has not included
in the consolidated financial statements the results of portfolio companies
because the Directors are of the opinion that their inclusion would render the
Company's consolidated financial statements misleading. However, the results of
certain portfolio companies are required to be included in the consolidated
financial statements by International Accounting Standard 27 'Consolidated
Financial Statements and Accounting for Investments in Subsidiaries' and such
non-inclusion constitutes a departure from the above mentioned accounting
standard. The effect of such non-inclusion of the results of certain portfolio
companies on the consolidated financial statements is discussed and disclosed by
the Directors in Note 2(b).
In our opinion the financial statements:
- give a true and fair view, in accordance with International Financial
Reporting Standards, of the state of the Company's affairs as at 31 January
2006; and
- have been properly prepared in accordance with the Isle of Man Companies Acts
1931 to 2004.
In our opinion the financial statements:
- except for the effect of the non-inclusion of the results of certain portfolio
companies in the consolidated financial statements as referred to above, give a
true and fair view, in accordance with International Financial Reporting
Standards, of the state of the Group's affairs as at 31 January 2006 and of the
Group's profit for the year then ended.
KPMG Audit LLC
Chartered Accountants
Douglas
Isle of Man
28 April 2006
EPIC Reconstruction plc
Consolidated Statement of Operations
For the year ended 31 January 2006
2006 2005
(Note 24)
Note £ £
Income:
Rental income 702,889 -
Interest receivable 1,164,577 1,554,962
Dividends received - 1,225,000
Commission income 773,577 403,028
---------- ----------
Total income 2,641,043 3,182,990
Expenses:
3 Investment advisor's fees (467,016) (556,495)
3 Administration fees (53,649) (69,742)
4 Directors' fees (119,959) (123,600)
5 Directors' and Officers' insurance (4,693) (85,973)
8 Professional fees (318,136) (66,592)
Crest Service provision (4,875) (3,797)
Printing and advertising expenses (55,462) (9,904)
Travel expenses (13,767) (7,923)
Auditors' remuneration (34,154) (12,169)
12 Bank interest and other charges (57,337) (720)
Sundry expenses (10,710) (14,442)
Stock Exchange fees (2,353) (8,445)
Advisor and broker fees (32,818) (48,674)
22 Charge for commitments under guarantee (824,363) (435,000)
Rental expenses (41,997) -
---------- ----------
Total expenses (2,041,289) (1,443,476)
Net investment income 599,754 1,739,514
Gains on investments
Net realised gains 1,653,953 260,656
---------- ----------
Profit for the year before taxation 2,253,707 2,000,170
6 Taxation (567,407) -
---------- ----------
Profit for the year after taxation 1,686,300 2,000,170
========== ==========
15 Basic and diluted earnings per ordinary share 5.621p 6.667p
(pence) ---------- ----------
EPIC Reconstruction plc
Consolidated Statement of Assets and Liabilities
As at 31 January 2006
2006 2005
Notes £ £
9 Non-current assets
Investment property 1,425,247 1,100,000
Financial assets 3,742,670 -
----------- ----------
5,167,917 1,100,000
Current assets
Accrued interest and other receivables 448,396 850,687
11 Cash and cash equivalents 8,626,939 12,887,931
11 Committed cash balances 17,314,836 15,406,414
----------- ----------
26,390,171 29,145,032
----------- ----------
Current liabilities
Accrued expenses and sundry accruals (406,464) (160,383)
6 Tax liability (567,407) -
22 Provision for call under guarantee (443,000) (435,000)
----------- ----------
(1,416,871) (595,383)
----------- ----------
Net current assets 24,973,300 28,549,649
Creditors: Amounts falling due in more than
one year
12 Bank loan (566,268) -
----------- ----------
----------- ----------
Net assets 29,574,949 29,649,649
=========== ==========
Represented by:
13 Share capital 300,000 300,000
14 Share premium 27,850,479 27,850,479
Revenue reserve 1,424,470 1,499,170
----------- ----------
29,574,949 29,649,649
=========== ==========
16 Net asset value per share (pence) 98.583p 98.832p
----------- ----------
The financial statements were approved by the Board of Directors on 28 April
2006 and signed on its behalf by:
Donald Adamson Cormac O'Keeffe
EPIC Reconstruction plc
Company Statement of Assets and Liabilities
As at 31 January 2006
2006 2005
Notes £ £
9 Non-current assets
Financial assets 30,000 -
Investment in subsidiaries 1,252,704 1,100,104
---------- -----------
1,282,704 1,100,104
Current assets
Accrued interest and other receivables 97,164 4,404
10 Loan to subsidiary 22,343,521 20,630,391
11 Cash and cash equivalents 6,032,523 8,075,237
---------- -----------
28,473,208 28,710,032
Current liabilities
Accrued expenses and sundry accruals (195,433) (160,487)
---------- -----------
(195,433) (160,487)
Net current assets 28,277,775 28,549,545
---------- -----------
Net assets 29,560,479 29,649,649
========== ===========
Represented by:
13 Share capital 300,000 300,000
14 Share premium 27,850,479 27,850,479
Revenue reserve 1,410,000 1,499,170
---------- -----------
29,560,479 29,646,649
========== ===========
The profit dealt with in the accounts of the Company for the year ended 31 January
2006 was £1,671,830 (31 January 2005: (Note 24) £2,000,170).
The financial statements were approved by the Board of Directors on 28 April 2006
and signed on its behalf by:
Donald Adamson Cormac O'Keeffe
EPIC Reconstruction plc
Consolidated Statement of Changes in Net Assets
For the year ended 31 January 2006
Share Share premium Revenue Total 2005
Capital Reserve
(Note 24)
£ £ £ £ £
Net assets
at 300,000 27,850,479 1,499,170 29,649,649 -
start of
year
Share issue
net of
expenses - - - - 28,150,479
Profit for
the
year after - - 1,686,300 1,686,300 2,000,170
taxation
Dividends - - (1,761,000) (1,761,000) (501,000)
paid
(Note 7)
---------- ----------- ------------ ---------- ------------
Net assets
at 300,000 27,850,479 1,424,470 29,574,949 29,649,649
end of year ========== =========== ============ ========== ============
EPIC Reconstruction plc
Consolidated Statement of Cash Flows
For the year ended 31 January 2006
2006 2005
(Note 24)
£ £
Operating activities
Rental income 698,878 -
Bank interest 1,734,343 831,527
Dividends received - 1,225,000
Commission income 908,261 280,177
Expenses paid (2,053,756) (852,494)
---------- ----------
175 Net cash inflow from operating activities 1,287,727 1,484,210
---------- ----------
Investing activities
Purchase of investments (8,606,301) (1,100,000)
Sale of investments 6,160,736 260,656
Transfer to committed cash (1,908,422) (15,406,414)
---------- ----------
Net cash (outflow) from investing activities (4,353,987) (16,245,758)
---------- ----------
Financing activities
Proceeds on issue of equity shares - 28,150,479
Dividends paid (1,761,000) (501,000)
Proceeds from borrowings 566,268 -
---------- ----------
Net cash (outflow)/inflow from financing (1,194,732) 27,649,479
activities ---------- ----------
(Decrease)/Increase in cash (4,260,992) 12,887,931
Cash and cash equivalents at start of year 12,887,931 -
---------- ----------
Cash and cash equivalents at end of year 8,626,939 12,887,931
========== ==========
EPIC Reconstruction plc
Notes to the Financial Statements
For the year ended 31 January 2006
1 Operations
The Company was incorporated with limited liability in the Isle of Man with the
registered number 108834C on 25 July 2003. The Company's ordinary shares are
listed on the Alternative Investment Market ('AIM'). The Company raised £30m by
a placing of ordinary shares at 100 pence per share.
The Company has four wholly owned subsidiaries - EPIC Structured Finance
Limited, a company incorporated on 21 August 2003 in the Isle of Man; EPIC
Reconstruction Property Limited, a company incorporated on 11 October 2004 in
England and Wales; EPIC Reconstruction Property Company II Limited, a company
incorporated on 30 December 2004 in England and Wales and EPIC Reconstruction
Property Company (Isle of Man) Limited, a company incorporated on the Isle of
Man on 29 September 2005.
The principal activity of the Company and its subsidiaries (together 'the
Group') is to arrange financing for businesses emerging from distressed
situations. Whilst the Group may itself make some loans, the majority of
financing transactions are undertaken by the Group introducing a third party
finance company, which advances the loans to the investee businesses. The Group
participates by providing credit support to the lender in return for which it is
paid commission.
The Group also invests through an 'overlend' on the invoice discounting facility
of each investment. Each overlend is then repaid over a period of up to three
years. The repayment schedule outlined at the time of the deal is used as a
guide and controlling mechanism for the management teams of each investment. The
Manager looks to set realistic repayment schedules, but does not view a
portfolio company not repaying on time and in full as 'underperforming' though
in all cases the Manager reserves the right to exercise step in rights. In
addition to the repayment of the overlend, the Group will often arrange
additional preference share structures and take significant equity stakes so as
to create shareholder value. It is the performance on the combination of all
securities including third party debt, typically held with the third party
finance company that determines the Group's view of each investment.
The consolidated financial statements comprise the results of the Company and
its subsidiaries (the 'Group') (see Notes 2(b) and 21).
The Company has no employees.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For year ended 31 January 2006
2 Accounting policies
a The financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRSs) and interpretations adopted by the
International Accounting Standards Board (IASB) except for the non-consolidation
of certain companies as detailed in Note 2(b) and applicable legal and
regulatory requirements of Isle of Man law and reflect the following policies,
which have been adopted and applied consistently.
The financial statements are presented in Sterling. They are prepared on a fair
value basis for financial assets and liabilities at fair value through profit or
loss and derivative financial instruments. Other financial assets and financial
liabilities are stated at amortised cost.
The preparation of financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and the reported amounts of assets and liabilities,
income and expense. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of
making the judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods.
Judgements made by management in the application of IFRS that have a significant
effect on the financial statements and estimates with a significant risk of
material adjustment in the next year are discussed in Note 22.
b Subsidiaries
Subsidiaries are those enterprises controlled by the Company. Control exists
when the Company has the power, directly or indirectly, to govern the financial
and operating policies of an enterprise so as to obtain benefits from its
activities. The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control commences until the
date that control ceases.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For year ended 31 January 2006
b Subsidiaries (continued)
As part of the Group's arrangement of finance for businesses emerging from
distressed situations the Group may receive preference and ordinary shares. Such
shares permit the Group to participate in any increase in the value of portfolio
companies. Such shares are received for nil consideration and the equity
interest of the Group is capped by way of management options to purchase the
Group's interest at a set amount. In addition, Board representation is only
assumed in default situations. For such interests the Directors consider that
they do not meet the definition of subsidiaries under IAS 27.
For three investments made in the year in portfolio companies, the equity
interest of the Company is not capped. It is considered that such companies meet
the definition of subsidiaries and would therefore fall to be consolidated under
IAS 27. However, the directors consider that consolidation would render the
consolidated accounts misleading, as such interests were acquired for nil
consideration, as part of loan finance arranged for such companies and such
interests were acquired with a view to income and capital gain.
If these three investments had been consolidated, the group profit would have
been reduced by £1,990,000 and net assets would have been reduced by the same
amount.
c Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment
of business and geographic area being arranging financing for businesses
emerging from distressed situations in the United Kingdom.
d Income
Interest income is recognised in the Statement of Operations as it accrues.
Dividend income is accounted for when the right to receive such income is
established. The return on shares held in money market funds is treated as
interest receivable.
e Expenses
All expenses are accounted for on an accruals basis.
f Taxation
Income tax on the profit or loss for the period presented comprises current and
deferred tax. Income tax is recognised in profit or loss except to the extent
that it relates to items recognised directly in equity, in which case it is
recognised in equity.
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantially enacted at the balance sheet date and
any adjustment to tax payable in respect of the pervious years.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For year ended 31 January 2006
f Taxation (continued)
Deferred tax is provided using the balance sheet liability method, providing for
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes. The
amount of deferred tax provided is based on the expected manner if realisation
or settlement of the carrying amount of assets and liabilities, using tax rates
enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset can be
utilised. Deferred tax assets are reduced to the extent that it is no longer
probable that the related tax benefit will be realised.
g Cash and cash equivalents
Cash comprises current deposits with banks. Cash equivalents are short-term
highly liquid investments that are readily convertible to known amounts of cash,
are subject to an insignificant risk of changes in value and are held for the
purposes of meeting short-term cash commitments rather that for investments or
other purposes. Money market funds are treated as cash and cash equivalents.
h Investments
(i) Classification
Equity and preference share investments have been designated into the
available-for-sale category. Such investments are unlisted and their fair value
cannot be reliably measured. Therefore they are stated at cost less any
provision for impairment.
Financial assets that are designated as loans and receivables comprise loans and
accrued interest and other receivables.
Financial liabilities that are not at fair value through profit or loss comprise
accrued expenses and sundry creditors.
(ii) Recognition
The Group recognises financial assets and financial liabilities on the date it
becomes a party to the contractual provisions of the instrument.
A regular way of purchasing of financial assets is recognised by using trade
date accounting. From this date any gains and losses arising from changes in
fair value of the financial assets or financial liabilities are recorded.
Financial liabilities are not recognised unless one of the parties has
performed.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For year ended 31 January 2006
(iii) Measurement
Financial instruments are measured initially at fair value (transaction price).
Subsequent to initial recognition, all instruments classified as available for
sale are stated at cost (transaction price), less any provision for impairment.
Financial assets classified as loans and receivables are carried at amortised
cost using the effective interest rate method, less impairment losses, if any.
Gains and losses on re-measurement of available for sale investments are
recognised in equity
Financial liabilities, other than those at fair value through profit or loss,
are measured at amortised cost using the effective interest rate.
(iv) Impairment
Financial assets that are stated at cost or amortised cost are reviewed at each
balance sheet date to determine whether there is objective evidence of
impairment. If any such indication exists, an impairment loss is recognised in
the Statement of Operations as the difference between the asset's carrying
amount and the present value of estimated future cash flows discounted at the
financial asset's original effective interest rate.
If in a subsequent period the amount of an impairment loss recognised on a
financial asset carried at amortised cost decreases and the decrease can be
linked objectively to an event occurring after the write-down, the write-down is
reversed through the Statement of Operations.
(v) Derecognition
The Company derecognises a financial asset when the contractual rights to the
cash flows from the financial asset expire or it transfers the financial asset
and the transfer qualifies for derecognition in accordance with IAS 39.
The Company uses the weighted average method to determine realised gains and
losses on derecognition.
A financial liability is derecognised when the obligation specified in the
contract is discharged, cancelled or expired.
i Financial guarantees
Commitments under financial guarantees are provided for when an event has
occurred that will result in the commitment being called (see Note 22).
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For year ended 31 January 2006
j Investment property
Investment property is stated at fair value determined annually by the
Directors. Any gain or loss arising from a change in fair value is recognised in
the Statement of Operations. Rental income from investment property is accounted
for on an accruals basis. Property interests held under operating leases for
investment purposes are classified and accounted for as investment property.
3 Investment advisory, administration and performance fees
Investment advisory fees
On 10 September 2003 the Company entered into an Investment Advisory Agreement
with EPIC Specialist Investments Limited ('ESI' or 'the Manager') for the
provision of investment advisory services. Investment advisory fees are paid
quarterly in arrears at a rate of 1% per annum of the Group's Gross Asset Value
(including the Group's attributable proportion of financing contracts for which
it is participating in the credit risk).
The management agreement can be terminated by either party giving not less than
12 months notice at any time after the second anniversary of the commencement of
the Investment Advisory Agreement.
The Manager is entitled to charge and retain structuring fees of a maximum of 2%
of the value of the total facilities provided on any transaction or a minimum of
£35,000 per transaction, whichever is the higher. In the year ending 31 January
2006, such fees amounted to £365,000 or 2.19% of total available facilities,
drawn and undrawn, provided during the period. (2005: (Note 24):£633,000 or
1.7%). The fees are paid by the investee companies.
The Manager also receives a fee for arranging the sale of investments. Three
properties were sold in the year by EPIC Reconstruction Property Company Limited
generating a capital gain of £1.7m. A fee of £50,000 plus VAT was charged by the
Manager to EPIC Reconstruction Property Company Limited, which is included in
professional fees in the Statement of Operations.
Administration fees
On 10 September 2003 the Company entered into an Administration agreement with
Northern Trust International Fund Administration Services (Isle of Man) Limited
(formerly Barings (Isle of Man) Limited) for the provision of administration,
registration and secretarial services. The fee is payable at a rate of 0.15% per
annum of the Group's Net Asset Value, subject to a minimum fee of £30,000 per
annum.
The agreement is terminable by either of the parties giving not less than 6
months notice.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For the year ended 31 January 2006
Performance fees
The Investment Advisory Agreement above also provides for the provision of a
performance fee. The fee is payable if the Total Return (taken as Net Asset
Value plus dividends distributed) is equal to at least 8% per annum from the
date of admission of the Company's shares to AIM, based on the funds raised
through the Placing of shares and compounded annually. No performance fee has
accrued for the year ended 31 January 2006.
4 Directors' fees
Directors' fees payable for the year (including VAT where applicable) were as
follows. The charge for the year in the Statement of Operations of £119,959
includes an adjustment in respect of prior year
£
DL Adamson 20,000
NV Wilson 23,500
RBM Quayle 23,500
CL Spears 15,000
GO Vero 17,625*
Adjustment for prior year 20,334
119,959
(* Mr Vero's fee includes VAT at 17.5%)
5 Directors' and Officers insurance
The Directors and Officers' insurance charge in the Statement of Operations of
£4,693 (2005 (Note 24): £85,973) includes an adjustment in respect of prior
year.
6 Taxation
Both the Company and EPIC Structured Finance Limited are Isle of Man tax
resident.
No Isle of Man Tax charge arises as dividends paid and proposed are deductible
from taxable income and all taxable income has been paid or proposed to be paid
as a dividend.
UK Corporation tax at 30% on the profit on ordinary activities of the UK
property company subsidiaries has been provided for. The profit principally
arises from the sale during the period of investment properties.
£
Profit before tax of UK property company subsidiaries 1,839,145
UK Corporation Tax charge at 30 % 551,744
Actual UK Corporation Tax charge in the accounts 567,407
The difference between the actual UK corporation tax charge and the expected
charge based on the UK profits for the year is due to disallowed expenses.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For the year ended 31 January 2006
7 Dividends paid and proposed
Under the terms of the Company's prospectus, it is the policy of the Company to
distribute substantially all of its distributable profits each year. During the
year the following dividends were paid.
Rate Total £
2005 Final Paid 1 July 2005 4.99p 1,497,000
2006 Interim Paid 30 December 2005 0.88p 264,000
After the balance sheet date, the Directors have proposed a final dividend of
4.7p per ordinary share. The proposed final dividend has not been provided for
in the financial statements.
8 Professional fees
The level of professional fees represents the employment of third party advisers
on a number of aborted transactions. As the complexity and size of transactions
investigated has increased, the professional fee levels have increased
accordingly.
9 Non-current assets
2006 2005
Group Company Group Company
£ £ £ £
Investment property 1,425,247 - 1,100,000 -
Financial assets 3,742,670 30,000 - -
Investment in subsidiaries 275,104 275,104
Mortgage loan to subsidiary - 977,600 - 825,000
----------- ----------- ----------- -----------
5,167,917 1,282,704 1,100,000 1,100,104
----------- ----------- ----------- -----------
Investment property is stated at Directors' valuation which is equivalent to
cost.
The mortgage loan to the subsidiary is interest bearing at 8.0% and is repayable
31 December 2010. Financial assets comprise secured loans of £3,712,670 (31
January 2005: £nil) and unquoted equity investments of £30,000 (31 January 2005:
£nil). Secured loans and unquoted equity investments are stated at cost. The
loans are secured by way of floating charge.
Realised net capital gains in the year comprise of £1,710,637 (2005:(Note 24):
£nil) in respect of gain on sale of investment property and £56,684 loss on
investments (2005 (Note 24):gain of £260,656).
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For the year ended 31 January 2006
10 Loan to subsidiary - EPIC Structured Finance Limited
2006 2005
Company Company
£ £
--------------------- -----------------
Loan to subsidiary 22,343,521 20,630,091
--------------------- -----------------
The loan to the subsidiary is unsecured interest free and not subject to any
fixed repayment term.
11 Cash at bank
2006 2005
Group Company Group Company
£ £ £ £
Current and call accounts 2,360,085 1,242,544 21,740 13,870
Money market fund 5,081,690 4,789,979 8,272,605 8,061,367
Term deposit 18,500,000 - 20,000,000 -
----------- ----------- ----------- --------
25,941,775 6,032,523 28,294,345 8,075,237
----------- ----------- ----------- --------
Committed cash 17,314,836 - 15,406,414 -
Cash and cash equivalents 8,626,939 6,032,523 12,887,931 8,075,237
----------- ----------- ----------- --------
25,941,775 6,032,523 28,294,345 8,075,237
----------- ----------- ----------- --------
£17.3 million (31 January 2005: £15.4 million) of the term deposit is charged in
favour of the third party finance company to support the Group's commitment
under a credit risk participation agreement (see Note 22).
The current and call accounts and money market fund have been classified as cash
and cash equivalents in the Statement of Cash Flows together with the uncharged
part of the term deposit.
12 Bank loan
2006 2005
Group Group
£
-------------------- -----------------
Mortgage loan 566,268 -
-------------------- -----------------
The mortgage bank loan bears interest at 9.10% and is secured on investment
property valued in the financial statements at £587,647. The term currently
outstanding on the loan is 23 years and 3 months.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For the year ended 31 January 2006
13 Share capital
At 31 January 2006 /2005 Number £
Authorised
Ordinary shares of 1p each 50,000,000 500,000
Called up, allotted and fully paid
Ordinary shares of 1p each 30,000,000 300,000
14 Share premium
The share premium arose on the issue of the ordinary shares and represents the
difference between the price at which the shares were issued (100p) and the par
value (1p). Issue expenses amounting to £1,849,521 were written off against the
share premium account.
15 Basic and diluted earnings per share (pence)
Basic earnings per share are calculated by dividing the profit for the year
attributable to ordinary shareholders of £1,686,300 (2005 (Note 24): £2,000,170)
by the weighted average number of shares outstanding during the period of
30,000,000 (31 January 2005: 30,000,000).
Diluted earnings per share are calculated by dividing the profit for the period
attributable to ordinary shareholders of £1,686,300 (2005 (Note 24): £2,000,170)
by the weighted average number of shares outstanding during the year of
30,000,000 (31 January 2005: £30,000,000).
16 Net asset value per share (pence)
The net asset value per share is based on the net assets as at the period-end of
£29,574,949 (2005 (Note 24): £29,649,649) divided by 30,000,000 shares in issue
at the end of the year.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For the year ended 31 January 2006
17 Note to the consolidated statement of cash flows
Reconciliation of net investment income to net cash inflows from operating
activities:
2006 2005
(Note 24)
£ £
Net investment income 599,754 1,739,514
Adjustment for non-cash items
Movement in debtors and prepayments 433,936 (850,687)
Movement in accrued expenses and provision for call
under guarantee 254,037 595,383
Net cash flows from operating
activities 1,287,727 1,484,210
18 Financial instruments
The Group's financial instruments comprise:
- Investments in unlisted companies, comprising equity and loans that are held
in accordance with the Group's investment objectives.
- Cash and cash equivalents, including the investment of surplus liquidity in a
money market fund.
Financial risk management objectives and policies
The main risks arising from the Group's financial instruments are liquidity
risk, credit risk, market price risk and interest rate risk. None of these risks
are hedged. The Board regularly reviews and agrees policies for managing each of
these risks and these are summarised below.
Liquidity risk
Under the credit risk participation agreement (see Note 22), the Group is
committed to funding a proportion of any credit losses on loans arranged by the
Group and advanced by a third party finance company. The Group has no other
significant liabilities or commitments. Therefore, the key liquidity risk facing
the Group is that the Group does not have sufficient liquid resources to meet
any demands made under the credit risk participation agreement. This risk is
managed by keeping most assets in a readily realisable form. The Group's liquid
assets comprise cash and cash equivalents, which are readily realisable and a
term deposit account, which is partly held as security under the credit risk
participation agreement (see Note 22).
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For the year ended 31 January 2006
18 Financial instruments (continued)
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Group. Under
the credit risk participation agreement (see Note 22), the Group is exposed to
significant credit risk by way of its commitment to fund any credit losses on
loans arranged by the Group. This risk is mitigated by the performance of due
diligence before loans are advanced, following Board established credit
guidelines and monitoring of the ongoing performance of the businesses to which
loans have been advanced. The total exposure of the Group as at 31 January 2006
under this agreement was £14.77 million (2005:£17.02 million) net of provided
loans.
There were 2 investee companies in default at 31 January 2006 in respect to some
or all of their loans, for which provision has been made (see Note 22).
The Group is also exposed to credit risk on the secured loans - see Note 9 and
interest rate risk below.
Market price risk
Market price risk arises mainly from uncertainty about future movements and
value of the Group's investments. As there are no quoted investments within the
investment portfolio the exposure to market price risk is reduced. However, the
valuation of unquoted investments may take market price movements for similar
instruments into account.
Interest rate risk
The Group's exposure to market risk for changes in interest rates relates
primarily to the Group's cash at bank and secured loans. The return on the bank
balances is linked to short-term deposit rates and is therefore linked closely
to bank base rate changes.
The secured loans bear fixed rates of interest at 15% and are repayable as
follows:
Principal Interest Rate Maturity
£
Past Times Ltd 2,450,000 15% 22 December 2006
Morada Home Ltd 645,000 15% 19 September 2008
C30 Ltd 117,670 15% 21 September 2006
Autocue Group Ltd 500,000 15% 31 December 2015
The terms of the mortgage bank loan are disclosed in Note 12.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For the year ended 31 January 2006
Fair Values
All financial instruments are considered to be stated at fair value except the
Group's interest in unlisted shares and the Group's interest in fixed rate
secured loans for which fair value cannot be reliably measured.
19 Director interests
None of the Directors had any interests in the shares of the Company as at 31
January 2006.
20 Related parties
During the year Mr Philip Scales was a director of Northern Trust International
Fund Administration (Isle of Man) Limited, the Administrator and Registrar.
Administration fees amounting to £53,649 (2005 (Note 24): £69,742) were payable
to Northern Trust International Fund Administration Services (Isle of Man)
Limited, calculated in accordance with the Administration Agreement of which
£46,896 was outstanding as at 31 January 2006 (31 January 2005: £8,431). Cormac
O'Keeffe is an employee of the Northern Trust Group.
Investment advisory fees amounting to £467,016 (2005 (Note 24): £556,495) were
payable to the Manager calculated in accordance with the Investment Advisory
Agreement, of which £72,277 (31 January 2005: £119,021) was outstanding as at 31
January 2006. The Investment Advisor is also entitled to structuring fees and
fees on the sale of investments (see Note 3).
Mr Donald Adamson, a director, is a non-executive director of the Equity
Partnership Investment Company plc, which owns 29.9% of the EPIC Investment
Partners Limited, the holding company of EPIC Special Investments Limited, the
Investment Manager.
Mr Geoffrey Vero is a non executive director of Numis Corporation plc and a
former non executive Director of Numis Securities Limited, the Nominated
Advisors and to the Company. Advisory and broker fees of £32,818 (2005 (Note
24): £48,674) were payable to Numis Securities Limited, of which £6,633 was paid
in advance as at 31 January 2006 (31 January 2005: £4,201 in advance).
Lehman Brothers, a significant shareholder have rights to 20%, subject to costs,
of the performance fee and management fees due to the Manager.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For the year ended 31 January 2006
21 Subsidiary Companies
On 21 August 2003 the Company incorporated EPIC Structured Finance Limited in
the Isle of Man, with paid up share capital of £2.
On 11 October 2004 the Company incorporated EPIC Reconstruction Property Limited
in England and Wales, with paid up share capital of £275,100.
On 30 December 2004 the Company incorporated EPIC Reconstruction Property
Company II Limited in the Isle of Man, with paid up share capital of £2.
On 29 September 2005 the Company incorporated EPIC Reconstruction Property
Company (Isle of Man) Limited in the Isle of Man, with paid up share capital of
£2.
22 Financial commitments and guarantees
Under a credit risk participation agreement signed with a third party finance
company, the Group is committed to fund a minimum of 70% and a maximum of 100%
(depending on the nature of loan and amount of security) of the credit losses
for loans arranged by the Group and funded by the third party finance company.
Provision is made for any loans which are considered impaired and hence the
commitment to fund the related credit losses will be called. As at 31 January
2006 provisions of £443,000 have been established against two loans, (2005: one
loan for £435,000). The company settled an additional call under the agreement
in respect of one loan during the current financial year for £381,363 resulting
in a charge for the year of £824,363.
Under the terms of the credit risk participation agreement, the Group must
retain a minimum amount in a security account, which is charged in favour of the
third party finance company, to support the Group's commitment under the
agreement. As at 31 January 2006, £17,314,836 (31 January 2005: £15,406,414) of
the term deposit was charged in favour of the third party finance company.
EPIC Reconstruction plc
Notes to the Financial Statements (continued)
For the year ended 31 January 2006
23 Post balance sheet events
On 14 March 2006 the Company reached agreement on an investment of up to £5.0
million in cash in GGS Holdings Limited, a construction, maintenance and
property development group. The Company has agreed to support a new management
team and work with the previous owner to implement an operational and financial
restructuring of the group.
At a meeting of the Board of Directors held on 11 April 2006, it was agreed by
the Directors to adopt a consistent distribution policy in respect of both
capital and income distributions. It was resolved that all capital gains and
losses would be attributable to capital distributions and all income and
expenses relating to the operation of the Company would be attributable to
income distributions, with the exception of any expenses directly associated
with capital transactions which would be taken to capital. The policy will be
implemented for all transactions and distributions from 1 February 2006.
At a meeting of the Board of Directors held on 20 April 2006, it was agreed to
sell the assets of the investment in Gaskell McKay Ltd. Since the year end,
Gaskell McKay has had a deterioration in performance and a sale was pursued.
This sale has now been completed and is at a loss. Some of the assets are still
in the sale process, however, it is envisaged that the sale will result in a
negative impact of up to 5p on the net asset value per share
The sale of the Par property, the final property in the Property Company, was
completed on 13 April 2006. The sale was for £969,000, representing a gain of
£169,000 over the original investment.
24 Comparative figures
The comparative figures are for the period from 25 July 2003 (date of
incorporation) to 31 January 2005.
EPIC Reconstruction plc
25 Schedule of shareholders holding over 3% of issued shares
Income Shares
Holdings % of class
Lehman Brothers Nominees Limited 11,000,000 36.67
Brit Insurance Holdings Limited 5,000,000 16.67
Nortrust Nominees Limited 3,000,000 10.00
Numis Nominees Limited 1,742,489 5.81
BNY (OCS) Nominees Limited 1,394,030 4.65
State Street Nominees Limited 1,258,961 4.20
Roy Nominees Limited 1,190,476 3.97
Harewood Nominees Limited 1,044,314 3.48
25,630,270 85.45
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