Final Results - Part 1
LMS Capital PLC
15 March 2007
15 March 2007
LMS Capital plc
Preliminary Results for the nine months to 31 December 2006
LMS Capital plc, ("LMS Capital" or the "Company"), the AIM-quoted investment
company with stakes in public and private UK and US companies and funds,
announces its preliminary results for the nine months to 31 December 2006.
Financial highlights
•The valuation of the investment portfolio at 31 December 2006 was £234.9
million (31 March 2006: £226.6 million)
•Realised gains on investments and income from investments were £6.4
million in the nine months ended 31 December 2006 (year ended 31 March 2006:
£9.3 million, excluding discontinued activities)
•Net unrealised losses on the investment portfolio were £11.5 million
(year ended 31 March 2006: £7.6 million)
•Net Asset Value per share at 31 December 2006 was 90p (31 March 2006:
76p)
•The initial trading price of the Company's shares on admission to AIM on
12 June 2006 was 57p; the closing share price on 13 March 2007 was 73p
Operational highlights:
•Successful demerger from London Merchant Securities in June 2006 to
launch LMS Capital as an independent investment company on AIM
•Completion of a tender offer in July 2006, returning £30.2 million to
shareholders
•Sale of nine positions in US private equity funds for US$21.1 million
(£11.1 million) at a premium to book value
•Sale of investment in Advanced Communication and Information Systems
Limited which realised a gain of £2 million and an IRR of 100%
•Refinancing of Energy Cranes, the largest unquoted investment, enabling
that company to return £5 million to LMS Capital
•Strengthening of investment management team
Jonathan Agnew, Chairman of LMS Capital, said:
"I am pleased to report LMS Capital's first preliminary results as an
independent investment company. The Company has a broadly-based,
risk-diversified portfolio of investments in sectors where the management team
has considerable experience. Since demerger, we have made significant progress
in the development of the business, including establishing the right team to
deliver our strategy."
Robert Rayne, Chief Executive Officer of LMS Capital, said:
"We have achieved robust results in a transitional year for LMS Capital. During
the second half of 2006 we concentrated on ensuring that each of our existing
direct investments had a strategy which is aligned to the Company's goal to
deliver medium to long term growth for our shareholders. We are seeing a steady
inflow of opportunities and expect to make further new investments in 2007."
LMS Capital changed its name from Leo Capital on 14 March 2007 following
shareholder approval.
For further information please contact:
LMS Capital plc Brunswick
Robert Rayne, Chief Executive Officer Simon Sporborg
Martin Pexton, Managing Director Anisha Patel
Tony Sweet, Chief Financial Officer
Tel: 020 7935 3555 Tel: 020 7404 5959
Notes to Editors
LMS Capital plc is an independent investment company whose shares are traded on
AIM. The investment portfolio comprises investments in both the US and UK, with
a spread of early stage and second round technology investments, development
capital and mature company buy-outs.
Chairman's Statement
In this first annual report from LMS Capital I am pleased to report a number of
significant achievements in the development of the business.
We completed the demerger from London Merchant Securities in June 2006 and LMS
Capital was successfully launched as an independent investment company quoted on
AIM. This independence provides the business with greater focus to pursue our
objective to deliver medium to long-term growth for our shareholders.
In June 2006 we also initiated a successful share buyback through a tender offer
to provide shareholders with an opportunity to realise their investment in the
Company. The tender offer was completed in July 2006 when we bought back 42.6
million shares in the Company at an average price of 71.03 pence per share,
thereby returning £30.2 million to shareholders.
We now have the right team in place to deliver our strategy and have implemented
the necessary reporting and control systems for the business on a stand alone
basis. We have also completed a thorough review and evaluation of the
investments within our portfolio and, in the case of the UK unquoted
investments, have ensured that their operating plans are aligned with our
strategy.
Results
The Group achieved realised gains on investments and income from investments of
£6.4 million in the nine months ended 31 December 2006 (year ended 31 March 2006
- £9.3 million, excluding discontinued activities). Net unrealised losses on the
investment portfolio were £11.5 million (year ended 31 March 2006 - £7.6
million) which includes unrealised losses of £13.4 million (year ended 31 March
2006 - unrealised gain of £1.5 million) arising from the weakening of the US
dollar against £ sterling.
The loss attributable to shareholders for the nine months ended 31 December 2006
was £10.8 million (year ended 31 March 2006 - profit of £12.5 million). The
Board is not recommending payment of a dividend in respect of the nine months
ended 31 December 2006.
The valuation of the investment portfolio at 31 December 2006 was £234.9
million, an increase of £8.3 million, 3.7%, compared to 31 March 2006. The net
asset value per share of the Group at 31 December 2006 was 90p.
Board and Management
I am delighted that Robert Rayne will continue as Chief Executive Officer and
Tony Sweet as Chief Financial Officer of the Company on a permanent basis, and
that Martin Pexton has joined the board as Managing Director from 1 February
2007.
I also welcome Pieter Hooft and Ed Snow to the investment management team. They
have significant experience of the buyout and technology sectors in the UK. I
should also like to record my thanks to the directors, management and staff of
the Company for their efforts in establishing the business as an independent
company.
Outlook
The Company has a broadly-based, risk-diversified portfolio of investments in
sectors where the management team has considerable experience. Following the
recent board and management appointments we are now assured of the strength in
depth of our team to move the business forward after this transitional period.
We are also seeing a sustained inflow of new investment opportunities and are
pursuing a number of opportunities for realisation within the existing
portfolio. Your Board is confident that the Company's strategy will result in
medium to long term growth in shareholder value.
Jonathan Agnew
Chairman
14 March 2007
Business review
A new company with an established business
LMS Capital's business has a 27 year history of successful investment in a wide
range of companies, principally in the UK and the US. The Company was formed to
acquire by way of demerger the investment activities of London Merchant
Securities (now part of Derwent London plc). The acquisition completed on 9 June
2006.
As part of the demerger arrangements, LMS Capital acquired a diversified
portfolio of investments valued at over £220 million and £70 million in cash,
approximately half of which was earmarked for the tender offer in July 2006. The
tender offer, once completed, absorbed £30.2 million.
Our objective is to deliver sustained medium to long-term growth for our
shareholders. One of the principal characteristics of LMS Capital which
differentiates us from other private equity investors is the time horizon over
which we are able to invest. We are not constrained by the fixed investment
periods (typically three to five years) of most private equity funds. It is not
uncommon for us to hold investments for longer than this where we believe that
this will deliver greater shareholder value.
Our strategy
We invest in companies and industries which we believe have the potential for
superior growth over the medium to long term. These include the following
sectors where management has extensive prior investment experience: Energy,
Applied technology, Media & Leisure and Healthcare & Medical.
We understand the drivers of demand in these sectors and this enables us to
recognise the potential of both new ideas and young companies requiring growth
funding. A deep knowledge of our chosen sectors acquired over many years allows
LMS Capital to invest in and with leading management teams.
We also understand the cyclical nature of the sectors we are working in and
through taking long-term positions are able to adjust our economic interest to
reflect the longer holding period.
Having reviewed each of our investments in detail we are currently assessing
each of the sectors that we invest in. This will take account of the returns
generated and future prospects, as well as the skills and expertise of our
strengthened management team. It is likely that over the coming months we shall
refine our existing range of sectors, as well as looking for other opportunities
in new ones, in particular real estate where management has a strong track
record.
Since the technology boom in the late 90s and early 2000s we have been nurturing
this element of our portfolio which has resulted in our owning significant
stakes. In the medium term we are looking to liquidate some of these holdings
and introduce new investors into others.
We retain the freedom to invest outside our core sectors in order to take
advantage of opportunities when they arise. In addition, approximately 30% of
our portfolio is in quoted securities, which for the most part we first invested
in when they were still private companies. Where we perceive there are
opportunities for value creation we invest further funds in this part of the
portfolio with the aim of maximising returns on any surplus cash holdings.
We have had a presence in North America for over 25 years during which time we
have built up a strong network of contacts. This allows us access to the most
experienced providers of venture and development capital, many of whom are our
partners in private equity funds. The relationships we have established with
these funds continue to generate significant co-investment opportunities.
At 31 December 2006 47% of our portfolio was US based (31 March 2006 - 50%),
which includes £54.6 million (31 March 2006 - £62.3 million) invested in US
private equity funds. This allows us exposure to both the US dollar and £
sterling and helps to balance cash flow.
The portfolio is structured to have a proportion in early stage companies where
we expect high return multiples, as well as in companies requiring development
finance where the normal holding period would be three to five years. We also
look for short-term investment in the pre and post IPO market and these
investments usually provide liquidity within a maximum of three to four years.
One of the key factors in our decision to invest is our assessment of the
management team. We back good people in our chosen sectors. We expect them to
run their businesses and we aim to help them do what they do better. Individuals
who create new businesses are typically first class at identifying products,
services and markets. However, they often welcome our expertise in areas such as
managing expansion. We act as enablers and catalysts, using our sector knowledge
and experience of nurturing businesses to support management.
We are privileged to have a board that has considerable experience in our core
sectors. They bring invaluable expertise to the making of investment decisions.
Members of our board (including the non-executive directors) also sit on the
boards of the companies we invest in. This enables them to share their insights
and offer support at company level.
One of our most important investments is in people, both in the companies in
which we invest and in the team that manages those investments for the Company.
Two new members have recently joined our investment team - Pieter Hooft with
responsibility for our UK investment activities and Ed Snow who now leads our
investment operations in the UK technology sector. Both have significant
previous experience, having worked at major investment houses in the UK.
The nature of our business exposes it to a number of risk factors, the impact of
which the Board seeks to mitigate through its investment strategy:
o We have a diversified portfolio covering quoted securities, unquoted
securities and funds in both the UK and the US across a range of sectors. In
this way we seek to avoid undue reliance on one any security type, market or
sector;
o Our primary focus is to invest in unquoted companies which may be small,
with limited resources and likely to undergo significant change during our
period of ownership. The experience of the executive management team is a key
factor in mitigating our risk of loss on such investments.
o We have significant holdings of quoted securities in both the UK and the
US and are therefore exposed to price movements in those markets. Our management
of these positions draws extensively on our experience of the sectors in which
we have quoted investments, which are principally our core sectors set out
above.
o Many of our investments produce little or no recurring income and the
timing of realisations of unquoted investments cannot be ascertained with
certainty. We rely on our budgeting and forecasting procedures to ensure that
the cash requirements of the Group are met.
A key driver of our business is deal flow and in following up these
opportunities, we undertake rigorous inquiries before committing to invest.
These include:
o Understanding the company's business plan;
o Evaluating information on the market place and competition;
o Meeting management, directors and existing shareholders;
o Commissioning reports from external experts as necessary on appropriate
areas of the business.
Operational review
The Group's portfolio is risk diversified, containing holdings in quoted and
unquoted companies at different stages of development in the UK and the US,
together with a number of fund investments.
The analysis of investments by type and geography is as follows:
31 December 2006 31 March 2006
-------------- --------------
US UK Total US UK Total
£'000 £'000 £'000 £'000 £'000 £'000
Quoted
securities 43,726 25,658 69,384 37,897 18,924 56,821
Unquoted
securities 11,907 87,442 99,349 13,316 84,018 97,334
Funds 54,712 11,465 66,177 61,090 11,355 72,445
------ ------ ------ ------ ------ ------
Total 110,345 124,565 234,910 112,303 114,297 226,600
------ ------ ------ ------ ------ ------
The investments are included in the balance sheet at fair value as set out in
Note 1 to the financial statements. During the nine months ended 31 December
2006, realisations from the portfolio generated cash of £33.3 million (year
ended 31 March 2006 - £36.8 million, excluding discontinued activities). Cash
invested totalled £48.1 million of which £15.9 million was invested in funds,
£14.5 million in quoted securities, £1 million in new unquoted securities and
£16.7 million was follow-on financing for existing investments.
A major focus has been to ensure that each of our unquoted investments has a
clear strategic and operating plan which aligns them to our overall objective of
achieving growth in value for the Company's shareholders.
Unquoted securities
The following is a summary of the Group's ten largest unquoted investments by
value at 31 December 2006:
Book value
31 December 31 March
Name Country Activity 2006 2006
£'000 £'000
Energy Cranes UK Offshore crane operations 34,000 21,474
Cityspace UK Urban information networks 12,500 5,000
Rave Review Cinemas US Movie theatre operators 7,854 8,244
Citizen/Vio Worldwide UK Digital workflow management
solutions 7,000 7,819
AssetHouse Technology UK Content services
infrastructure software 6,000 5,703
Entuity UK Network management software 5,300 8,439
WeSupply UK Supply chain execution
management software 4,000 6,694
7 Global UK Software hosting services 3,000 5,985
First Index UK B2B marketplace for custom
manufactured products 3,000 2,566
Corizon UK Software solutions to access
multiple applications 2,700 1,923
The book value has been determined in accordance with industry guidelines and is
based on the directors' review of each company's performance, progress and stage
of development.
Energy Cranes is our largest unquoted investment. It comprises three businesses
specialising in offshore cranes which we brought together over the period 2003
to 2005. By mid 2006 the business had made excellent progress and we agreed with
management that the company should obtain more favourable third party financing
arrangements. This refinancing was completed in September 2006 and Energy Cranes
repaid a total of £5 million to the Company, including £1.4 million of
preference dividends.
A major focus has been to ensure that each of our unquoted investments has a
clear strategic and operating plan which aligns them to our overall objective of
achieving growth in value for the Company's shareholders. The operating plans of
individual companies can encompass any of a number of approaches to achieve this
overall objective - cost reduction, greater focus, an acquisition, finding a new
external investor.
Examples drawn from our UK technology portfolio of how we have recently applied
this policy include:
7 Global The company's management has prepared an operational plan which will
mean cost reductions to achieve break-even by the middle of 2007.
This should provide a base for growth, supported by positive recent
feedback from customers and potential customers.
Citizen Following a strategic review of options for this business, the
(trading company made a significant acquisition in the US in December 2006.
Vio) This acquisition brings with it a significant customer base which
provides cross-selling opportunities for the complementary Vio
products.
AssetHouse This company's software is now an established product in its market
place and the company needs further funding to expand its sales and
marketing and continue its development programme. It is currently
seeking an investor to inject the necessary funds in return for a
significant equity stake.
In November 2006 we sold our interest in Advanced Communications and Information
Systems Limited ("ACIS") for £3.0 million. The Company made a £1 million
co-investment in ACIS in April 2005 (alongside the Inflexion 2003 Buyout Fund)
and the sale proceeds represented an internal rate of return on our investment
of 100%. Co-investment with funds where the Company is a limited partner
continues to be an important element of our investment strategy.
Funds
The Group's ten largest fund investments by value at 31 December 2006 are:
Book value
31 December 31 March
Fund Country Activity 2006 2006
£'000 £'000
San Francisco Equity Partners US Technology, media
& retail 21,729 16,514
Spectrum IV US Communications/IT 8,208 8,762
Boston Ventures LP VI US Media & leisure 5,466 7,537
Amadeus II LP UK Early stage technology 4,994 4,628
Boston Ventures LP V US Media, publishing
communications & leisure 3,511 4,048
Scottish Equity Partners II UK Technology & energy 3,189 2,510
Gene Weber (Bermuda)
Partnership US Software 2,357 2,688
Inflexion II UK Mid-market buyouts 2,248 1,714
Bank of America New
Century Fund US Buyout funds 1,471 1,489
Brynwood Partners V US Mid-market buyouts 1,334 1,012
Following a review of our interests in US private equity funds, we decided to
take advantage of the buoyant secondary market for such interests during the
year. Accordingly in October 2006 we agreed to sell nine of our interests for
US$21.1 million (£11.1 million). The sale proceeds resulted in a premium over
the book value of the interests of £0.9 million.
We continue to monitor our portfolio of fund interests and will take advantage
of further opportunities in the secondary market if we consider it appropriate.
San Francisco Equity Partners ("SFEP") is a US limited partnership in which the
Group has a 99% interest. It is the principal vehicle through which the Group
invests in unquoted companies in the US. During the nine months ended 31
December 2006 SFEP acquired an 18% interest in Luxury Link, an online provider
of luxury travel packages, for US$ 4.5 million (£2.4 million) and invested a
further US$6.3 million (£3.4 million) in its existing portfolio companies.
Quoted securities
The Group's ten largest quoted investments are:
Book value
31 December 31 March
Name Country Activity 2006 2006
£'000 £'000
Weatherford International US Oilfield services 19,630 18,612
ProStrakan Group UK Speciality pharmaceuticals 19,427 17,392
Grant Prideco US Oil and gas exploration 8,233 1,208
Chyron Corporation US Media technology 4,846 2,086
Bridgewell UK Investment banking 3,632 -
Ivanhoe Energy US Oil and gas exploration 1,964 4,520
Atheros Communications US Manufacture of wireless chips 1,700 2,357
Covad Communications US Business communications 1,624 2,886
Monogram Biosciences US Drug discovery 1,401 2,111
Gourmet Holdings UK Pub/restaurant operator 1,355 1,254
Quoted investments continue to form an important part of our investment
strategy, and most of our holdings have resulted from private companies in which
we originally invested (either directly or through private equity funds)
obtaining a public listing for their shares. During 2006 we have:
•Invested cash (approximately £12.5 million) in quoted stocks in the
oilfield services sector, principally Weatherford International and Grant
Prideco which we believed were undervalued, and
•Realised a number of our smaller holdings by value to enable us to focus
on a smaller number of stocks, principally in the oilfield services and
technology sectors.
Financial Review
Basis of preparation of financial information
The financial information of the Group for the nine months ended 31 December
2006 and the year ended 31 March 2006 has been prepared on a merger accounting
basis as if it had been in existence in its current form throughout both these
periods. The company was formed on 17 March 2006 and commenced operations on 9
June 2006; accordingly it has no statutory comparative figures. The results for
the Group for the year ended 31 March 2006, together with the financial position
at that date, have been presented in the financial statements on a pro forma
basis for comparative purposes. Further details of the basis of preparation are
set out in Note 1 to the financial information.
In March 2006 Inflexion plc, in which the Group has a 58% interest, disposed of
its business and its shareholders approved a members' voluntary liquidation of
the company. The results of Inflexion are shown as discontinued activities in
the financial information for the year ended 31 March 2006.
Results of operations
The Group's return on its investment portfolio during the nine months ended 31
December 2006 was a loss of £5.0 million (year ended 31 March 2006 - profit of
£1.7 million, excluding discontinued activities).
Profit on realisation of investments was £5.1 million (year ended 31 March 2006
- £9.3 million, excluding realised losses of the discontinued activities of £1.7
million). This includes £2.0 million on the sale of ACIS and £0.9 million on the
sale of nine of our US fund interests, as well as realised gains on
distributions from our interest in funds and gains on sales of listed
investments. The higher profit on realisations in the year ended 31 March 2006
includes gains on the sale of two quoted securities which were not repeated in
the nine months ended 31 December 2006.
Unrealised losses on investments, being the net impact of fair value adjustments
to the Group's investment portfolio, were £11.5 million (year ended 31 March
2006 - £7.6 million; there were no unrealised gains or losses in the
discontinued activities). The most significant factor in the nine months ended
31 December 2006 was the impact of the weakening of the US dollar against £
sterling on our US investments; this resulted in an unrealised loss of £13.4
million (year ended 31 March 2006 - unrealised gain of £1.5 million). The
positive fair value adjustment of £1.9 million, excluding the currency impact,
includes a £2.4 million unrealised gain as a result of no longer recognising a
marketability discount on one of our quoted investments and £2.5 million in
respect of increases in value of our fund investments, offset by net adjustments
of £3.0 million reducing the value of our quoted and unquoted securities.
We have carried out a detailed review of the value of each of our unquoted
securities as at 31 December 2006. The most significant change is the increase
in the fair value of Energy Cranes by £16.2 million (after the impact on our
carrying value of the refinancing during the year) to £34 million, which
reflects the continuing excellent performance of that business. We have reduced
the fair value of our other unquoted investments by £18.9 million, including
£16.8 million in respect of our UK technology investments.
The net charge for fair value adjustments in the year ended 31 March 2006
comprised £28.4 million net unrealised gains, principally on the Group's quoted
securities and fund investments (including the favourable foreign currency
impact referred to above) offset by increased provisions against the valuation
of unquoted securities of £33.4 million.
Income from investments in the nine months ended 31 December 2006 was £1.4
million (year ended 31 March 2006 - £nil, excluding £0.2 million in the
discontinued activities) and comprises preference dividends paid by Energy
Cranes.
Administration expenses for the nine months ended 31 December 2006 were £4.9
million (year ended 31 March 2006 - £7.9 million, of which £3.5 million related
to the discontinued activities. The proportionately higher costs in the nine
months ended 31 December 2006 reflect the Company's change of status to a
stand-alone AIM-quoted company in that period.
Exceptional costs of £3.1 million were incurred in respect of the demerger (£2.4
million) and the tender offer (£0.7 million). There were no exceptional costs in
the year ended 31 March 2006.
Net interest income for the nine months ended 31 December 2006 year was £1.3
million (year ended 31 March 2006 - £1.8 million).
The tax charge for the nine months ended 31 December 2006 was a credit of £0.7
million (year ended 31 March 2006 - credit of £15.7 million). Included in the
credit for the year ended 31 March 2006 is a credit of £17.4 million receivable
from London Merchant Securities as consideration for tax losses surrendered as
group relief before the demerger.
Investments
The Group's investments are included in the balance sheet at fair values
determined in accordance with industry guidelines. Details of the Group's
accounting policy for the valuation of investments are set out in Note 1 to the
financial information.
At 31 December 2006 these investments amounted to £ 234.9 million (31 March 2006
- £226.6 million) - an increase of £8.3 million (3.7%).
New investments during the year were £48.1 million (year ended 31 March 2006 -
£71.5 million, of which £13.6 million related to the discontinued activities).
Proceeds of realisations were £33.3 million (year ended 31 March 2006 - £73.1
million of which £36.3 million related to the discontinued activities).
At 31 December 2006 the Group had commitments to meet capital calls from private
equity funds in the US and the UK totalling £45.6 million.
Financial position
The Group balance sheet at 31 December 2006 includes cash of £24.1 million (31
March 2006 - £44.0 million), of which £1.6 million (31 March 2006 - £43.1
million) is held in Inflexion and will be distributed to shareholders on
completion of the members' voluntary liquidation. The first such distribution
was paid in April 2006.
The Group had no third party indebtedness at 31 December 2006.
Outlook
During the second half of 2006 we have concentrated on ensuring that each of our
existing direct investments has a strategy which is aligned to the Company's
goal to deliver medium to long term growth for our shareholders. We expect to
make further progress on this in 2007.
We have made no significant new direct investments in the nine months ended 31
December 2006. However we continue to see a steady flow of opportunities and we
expect to make further new investments in 2007. The new members of our
investment team are already making a significant contribution in this area.
Robert Rayne
Chief Executive Officer
14 March 2007
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