Annual Report and Accounts
EPIC Reconstruction PLC
02 May 2008
EPIC Reconstruction PLC
Annual Report and Audited Financial Statements
For the year ended 31 January 2008
Chairman's Statement
During the financial year ending 31 January, EPIC Reconstruction Plc ( 'the
Company') generated net revenues of £1.90 million, which translated to a net
revenue profit for the Company of £1.04m. Regrettably, there were also capital
losses of £3.30m giving a total loss for the year of £2.25m. Net asset value per
share as at the 31 January 2008 for the Company was down from 65.01p at 31
January 2007 to 55.51p. A final dividend of 3.24p has been proposed by the Board
of Directors.
The net revenue during the financial year was generated from the Company's
exposure to yielding instruments advanced to portfolio companies, most notably
Past Times. It is expected that, apart from refinancings, interest bearing
instruments will continue to provide the Company with further net revenues
during 2008. Total write-offs and provisions of £2.10m have been accounted for
during the financial year, of which £1.35m related to final provisions for
Abbseal.
Despite only holding Dolcis for just over 12 months, it was disposed of to
management during the financial year. This investment showed, similarly to Botes
and Past Times, the Company's ability to identify and secure downside protected
investments that generate mezzanine levels of return that offer attractive
upside characteristics. Unfortunately, following disposal by the Company, the
market trends proved irreversible and management were unable to halt
like-for-like sales decline. However notwithstanding these difficulties, all
funds, including interest, were returned to the Company.
The rest of the portfolio continues to perform in line with expectations. In
particular Past Times has strengthened further, with positive like-for-like
sales and additional improvements being driven through the business. The
business is on track to make a profit in the next financial year.
Exposure to Eurosales, the RBoS subsidiary in run-off, with whom the Company
financed a number of early transactions reduced from £8.32 in 2007 to £1.98 in
2008, reflecting a considerable amount of hard work by the Investment Advisor to
mitigate any further risk from what is a diminishing relationship.
The Company is seeking to exit its smaller investments and continues to identify
potential bolt-on opportunities for the remainder of the portfolio. Taking
account of the ever more challenging economic and credit climate the Company's
focus remains predominantly on value creation from within the existing portfolio
and this strategy will be the main focus for the rest of the current financial
year. However the more volatile economic conditions will inevitably create
buying opportunities for sophisticated distressed investors and the Investment
Advisor will continue to seek and review new transactions.
Geoffrey Vero
1 May 2008
Investment Advisors Report
In the financial year to 31 January 2008, the Investment Advisor has continued
to focus on creating value from within the portfolio. The Company acquired no
new assets during the period, though 119 opportunities were investigated. A
total of £3.6m was invested during the financial year relating as follow-on
investments to: Autocue, Dolcis, Kemutec, Morada and Past Times. Sadly there
were also further capital losses of £3.30m giving a total loss for the year of
£2.26m, of which over £2.1m related to provisions for Abbseal, AG Brown and the
Eurosales relationship. Although the share price performance remains
disappointing there has been some investment success since inception:
Since inception the Company has:
• Generated Net Revenues of 34.3p per share;
• Paid 16.8p per share and declared 3.24p of dividends, current dividend
is yield circa 7% ;
• Built portfolio investments running at gross 0.9x money multiple -
Past Times continues to show promise. The Company is running at
c. 0.7x money multiple after establishment and running costs;
• Deployed over £39m of capital and portfolio companies have already
returned over £27m to the Company in the form of £17m capital and
£10m gross income; and
• Created an extensive contact network of deal sources, advisory
providers and financing parterns has been created with over 450+
opportunities investigated in four years and 17 transactions completed
since inception.
During the financial year loans, loans advanced to Dolcis were fully repaid and
management acquired the Company's equity. Despite the significant change and
improvement in Dolcis' operations, sales declined due to the difficult market
conditions and the general retail environment. The Company decided to exit on
the best terms possible and before the Company's security began to erode. The
return on the investment was 9% IRR which reflects the mezzanine type yield and
the strength of security. The transaction underlines the Investment Advisor's
strategy to seek fewer but larger opportunities which provide sufficient levels
of security and downside protection whilst exposing the Company to superior
returns should the business be turned around.
The current portfolio is expected to yield a good return to shareholders as the
Investment Advisor investigates a number of bolt-on opportunities that could
grow revenue, profitability and strengthen market positions. The Investment
Advisor also continues to explore opportunities for adding value to portfolio
companies through revenue enhancing and cost saving initiatives as well as
through support in identifying the appropriate management to optimise
performance. The Investment Advisor continues to develop relationships with
various lenders to ensure portfolio companies have access to financing on
optimal terms. Re-financings continue to be sought where the turnaround in a
portfolio company's results has largely been affected, though looking forward
credit may be less available in 2008 than in 2007 for this type of operation.
The Investment Advisor believes that the potential to create value within this
market space remains significant. The tightening of economic conditions
continues to create a wide range of investment opportunities. As such the
Advisor is actively engaged in communicating the Company's investment strategy
and capabilities to the financial community. The Investment Advisor continues to
strengthen its existing network and develop new relationships with advisors and
managers who can provide deal flow and the necessary expertise to acquire and
turn around distressed assets.
The Portfolio
Autocue (2005)
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 restructure the business fundamentally,
through the removal of a number of unnecessary excess costs, and a realignment
of the business to its core prompter (rather than software) sales. The Company
has a £0.9m overlend exposure to Autocue, yielding 15% per annum. The last
twelve months has seen the development of Qnxt, a prompter which management are
confident is significantly ahead of all competition. Qnxt hasrecently been
launched and the performance of the business is expected to improve.
Kemutec (2005)
Kemutec is a manufacturer of mixing and sifting equipment for the chemical,
pharmaceutical and food industries, with annual sales of circa £10m. The
business had repaid all of the initial loan from the Company and further
balances were advanced to assist with working capital requirements due to the
growth in the business. The Company has £0.84m in overlend and acquisition
finance yielding 15% per annum. The business continues to grow sales strongly
(+10%) but the margin has suffered due to operational inefficiencies and a shift
in the market to more sophisticated 'system' orientated projects. The Investment
Advisor has sought to rectify the management issues through the appointment of
new personnel and steps are now being taken to improve the operations to return
margin to expected levels and meet changing market demands. Both Management and
the Investment Advisor continue to seek strategic acquisitions to supplement the
organic growth.
Morada Home Limited (2005)
The Company backed Stuart Taylor to buy the Morada Home business out of
administration with a secured debt instrument of £0.75m yielding 15% per annum.
The division was based originally on contracts with the Ministry of Defence
('MoD'), which comprised around two thirds of the division's turnover, to supply
curtains and blinds for MoD living accommodation. The business also supplies
local authorities and educational establishments, including a two 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. Morada has had a stable initial period and
further uplift is now expected following the lifting of the MoD spending
moratorium in the fourth quarter of this year. The order book is now growing and
sales are forecast to improve over the coming period.
Past Times (2005)
Past Times is the Company's largest investment ans is a niche retailer of
historically inspired jewellery, gifts, books and house-wares. Past Times was
acquired in December 2005 from the administrators of Retail Variations plc, with
Will Hobhouse, formerly of Tie Rack and Whittards of Chelsea brought in as
Chairman. The Company has committed up to £8.9m at a 15% yield per annum. The
secured debt instrument is currently £7.75m. Past Times has undergone a major
restructuring process, with the number of stores reduced, the head office cost
base reduced, and the product range improved. The business is now experiencing
the benefits of these improvements. The recruitment of a new CEO, Mike Taylor,
has also boosted prospects as he has started to drive through further
improvements capitalising on the now stable core business. Like-for-like sales
have increased year-on-year, and the business is forecast to be profitable in
the current year of trading.
AGB Steel (2005)
AGB Steel is the buyout by management of parts of the failed AG Brown business.
As part of the settlement in January 2005 the Company retained a 20% stake in
AGB Steel and a property in Glasgow. The business is stable, but profits are
marginal due to a highly competitive market. Management are currently reviewing
strategic options for the company.
Consolidated Income Statement
For the year ended 31 January 2008
31 January 2008 31 January 2007
Revenue Capital Total Total
Notes £ £ £ £
Income:
Rental income 35,000 - 35,000 766
3 Interest income 1,762,518 - 1,762,518 2,007,270
Commission income 106,956 - 106,956 587,772
--------- --------- --------- ----------
Total income 1,904,474 - 1,904,474 2,595,808
Expenses:
4 Investment advisor's fees (217,685) - (217,685) (345,518)
4 Administration fees (30,000) - (30,000) (57,923)
5 Directors' fees (75,417) - (75,417) (86,538)
Directors and Officers' insurance (11,953) - (11,953) (22,479)
8 Professional fees (243,992) - (243,992) (327,946)
Crest service provision (5,001) - (5,001) (1,749)
Printing and advertising expenses 6,635 - 6,635 (20,524)
Board meeting and travel expenses (5,643) - (5,643) (19,207)
Auditors' remuneration (49,963) - (49,963) (40,266)
Interest and other charges (30,932) - (30,932) (48,669)
Irrecoverable VAT (92,110) - (92,110) (105,858)
Sundry expenses (46,605) - (46,605) (12,064)
Stock exchange fees (4,850) - (4,850) (8,511)
Advisor and broker fees (30,000) - (30,000) (36,633)
Rental expenses - - - (13,449)
Bad debts on rental income (24,511) - (24,511) (76,082)
--------- --------- --------- ----------
Total expenses (862,027) - (862,027) (1,223,416)
Net investment income 1,042,447 - 1,042,447 1,372,392
Gains on investments
10 Net realised gains on investments at fair - - - 201,236
value through the profit or loss
10 Unrealised (losses)/gains on investments at - (1,270,000) (1,270,000) 3,770,000
fair value through profit or loss
10 Revaluation of investment property 88,353 88,353 -
19 Impairment of loan portfolio - (341,847) (341,847) (5,802,965)
23 Commitments under guarantee - (1,754,360) (1,754,360) (7,413,794)
--------- --------- --------- ----------
(Loss)/profit for the period
before taxation 1,042,447 (3,277,854) (2,235,407) (7,873,131)
6 Taxation (7) (18,189) (18,196) (22,642)
--------- --------- --------- ----------
(Loss)/profit for the period after taxation 1,042,440 (3,296,043) (2,253,603) (7,895,773)
========= ========= ========= ==========
16 Basic and diluted (loss)/earnings
per ordinary share (pence) 3.47p (10.98p) (7.51p) (26.32p)
========= ========= ========= ==========
The total column of this statement represents the Group income statement,
prepared in accordance with IFRS. The supplementary revenue and capital return
columns are prepared in accordance with the Board of Directors' agreed
principles. All items derive from continuing activities.
Consolidated Balance Sheet
As at 31 January 2008
31 January 2008 31 January 2007
Notes £ £
10 Non-current assets
Investment property 676,000 587,647
Financial assets 12,761,460 12,808,500
------------ ----------
13,437,460 13,396,147
------------ ----------
Current assets
Accrued interest and other receivables 471,070 511,101
12 Cash and cash equivalents 2,944,914 2,831,477
12 Committed cash balances 1,983,065 8,319,035
------------ ----------
5,399,049 11,661,613
------------ ----------
Current liabilities
Accrued expenses and sundry creditors (196,631) (103,701)
6 Tax liability (18,189) -
Guarantee payable - (250,000)
23 Provision for call under guarantee (1,460,095) (4,653,909)
------------ ----------
(1,674,915) (5,007,610)
------------ ----------
Net current assets 3,724,134 6,654,003
------------ ----------
Creditors: amounts falling due in more
than one year
13 Bank loan (508,021) (545,974)
------------ ----------
Net assets 16,653,573 19,504,176
============ ==========
Represented by:
14 Share capital 300,000 300,000
15 Share premium 27,850,479 27,850,479
Capital reserve (12,541,320) (9,245,277)
Revenue reserve 1,044,414 598,974
------------ ----------
16,653,573 19,504,176
============ ==========
17 Net asset value per share (pence) 55.51p 65.01p
============ ==========
Company Statement of Assets and Liabilities
As at 31 January 2008
31 January 2008 31 January 2007
Notes £ £
10 Non-current assets
Financial assets 2,500,000 3,770,001
Investment in subsidiaries 1 275,001
------------ ----------
2,500,001 4,045,002
Current assets
11 Loan to subsidiary 14,027,020 12,668,475
Accrued interest and other receivables 30,887 170,006
12 Cash and cash equivalents 133,442 489,873
------------ ----------
14,191,349 13,328,354
------------ ----------
Current liabilities
Accrued expenses and sundry creditors (177,281) (97,474)
------------ ----------
(177,281) (97,474)
------------ ----------
Net current assets 14,014,068 13,230,880
------------ ----------
Net assets 16,514,069 17,275,882
============ ==========
Represented by:
14 Share capital 300,000 300,000
15 Share premium 27,850,479 27,850,479
Capital reserve (12,759,303) (11,552,365)
Revenue reserve 1,122,893 677,768
------------ ----------
16,514,069 17,275,882
============ ==========
Net asset value per share (pence) 55.05p 57.59p
============ ==========
.
The loss dealt with in the financial statements of the Company for the year
ended 31 January 2008 was £164,813 (2007: loss of £10,109,597)
Consolidated Statement of Changes in Net Assets
For the year ended 31 January 2008
Year ended 31 January 2008 Year ended
Share Share Capital Revenue 31 January
Capital Premium Reserve Reserve Total 2007
£ £ £ £ £
Net
assets 300,000 27,850,479 (9,245,277) 598,974 19,504,176 29,574,949
at start
of year
(Loss)/
profit 3,296,043) 1,042,440 (2,253,603) (7,895,773)
for the
year
after
taxation
Dividends (597,000) (597,000) (2,175,000)
paid -------- -------- -------- -------- -------- ---------
Net as
sets at 300,000 27,850,47 (12,541,320) 1,044,414 16,653,573 19,504,176
end of
year
-------- -------- -------- -------- -------- ---------
Consolidated Statement of Cash Flows
For the year ended 31 January 2008
31 January 2008 31 January 2007
Notes £ £
Operating activities
Rental income 35,000 18,614
Interest 1,742,728 1,762,652
Commission income 175,255 672,969
Expenses paid (790,921) (1,447,311)
------------ ----------
18 Net cash inflow from operating activities 1,162,062 1,006,924
Taxation paid (7) (590,049)
------------ ----------
Net cash flows from operating activities 1,162,055 416,875
------------ ----------
Investing activities
Purchase of investments and investment property - (20,000)
Sale of investments and investment property - 1,088,836
Loan advances (3,642,629) (17,771,390)
Loan repayments 2,091,168 6,892,595
Payments called under the guarantee (4,948,174) (3,202,885)
Deferred consideration paid (250,000) -
Transfer from/(to) committed cash 6,335,970 8,995,801
------------ ----------
Net cash flows from investing activities (413,665) (4,017,043)
------------ ----------
Financing activities
Dividends paid (597,000) (2,175,000)
Part payment of bank loan (37,953) (20,294)
------------ ----------
Net cash flows from financing activities (634,953) (2,195,294)
------------ ----------
Increase/(decrease) in cash and cash 113,437 (5,795,462)
equivalents
Cash and cash equivalents at start of year 2,831,477 8,626,939
------------ ----------
Cash and cash equivalents at end of year 2,944,914 2,831,477
------------ ----------
Notes to the Financial Statements
For the year ended 31 January 2008
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, detailed in note 22.
The principal activity of the Company and its subsidiaries (together 'the
Group') is to arrange financing for businesses emerging from distressed
situations.
The consolidated financial statements comprise the results of the Company and
its subsidiaries (the 'Group') (see Notes 2(b) and 22).
The Company has no employees.
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 (FVTPL).
In preparing these consolidated financial statements, the Group has adopted IFRS
7 Financial Instruments: Disclosures and IAS 1 Presentation of Financial
Statements - Capital Disclosures. The adoption of IFRS 7 and the amendment to
IAS 1 impacted the type and amount of disclosures made in these financial
statements, but had no impact on the reported profits or financial position of
the Group. In accordance with the transitional requirements of the standards,
the Group has provided full comparative information.
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 reas
onable 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.
Notes to the Financial Statements (continued)
For year ended 31 January 2008
2 Accounting policies (continued)
a (continued)
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 relate to impairment provisioning in
connection with secured loans, provisioning with regard to commitments under the
guarantee with Eurosales and valuation of unquoted equity investments.
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.
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 as
sumed in default situations. For such interests the Directors consider that they
do not meet the definition of subsidiaries under IAS 27.
For two investments (2007: four investments) 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 two investments had been consolidated, the Group net assets would have
been decreased by £4,317,000 (2007: net assets decreased by £3,634,000).
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 Consolidated Income Statement 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.
2 Accounting policies (continued)
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 previous years.
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 of 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 than 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 at fair value
through profit and loss.
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.
2 Accounting policies (continued)
(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 purchase 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.
(iii) Measurement
Financial instruments are measured initially at cost (transaction price).
Subsequent to initial recognition, all instruments classified as FVTPL are
stated at fair value. The fair value of financial instruments is based on their
quoted market prices at the balance sheet date without any deduction for
estimated future selling costs. Financial assets are priced at current bid
prices.
If a quoted market price is not available on a recognised stock exchange or from
a broker / dealer for non-exchange-traded financial instruments, the fair value
of the instrument is estimated using valuation techniques, including use of
recent arm's length market transactions, reference to the current fair value of
another instrument that is substantially the same, discounted cash flow
techniques, option pricing models or any other valuation technique that provides
a reliable estimate of prices obtained in actual market transactions. BVCA
valuation guidelines are also taken into account in determining fair value.
Where discounted cash flow techniques are used, estimated future cash flows are
based on management's best estimates and the discount rate used is a market rate
at the balance sheet date applicable for an instrument with similar terms and
conditions. Where other pricing models are used, inputs are based on market data
at the balance sheet date. Fair values for unquoted equity investments are
estimated, if possible, using applicable price / earnings ratios for similar
listed companies adjusted to reflect the specific circumstances of the issuer.
Financial assets classified as loans and receivables are carried at amortised
cost using the effective interest rate method, less impairment losses, if any.
Financial liabilities, other than those at fair value through profit or loss,
are measured at amortised cost using the effective interest rate.
h Investments (continued)
(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 Consolidated Income Statement 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 Consolidated Income Statement.
(v) Derecognition
The Company derecognises a financial asset when the contractual rights to the c
ash 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 23).
j Investment property
Investment property is property held to earn rental income or for capital
appreciation or both. Investment property is stated at fair value with any
change therein recognised in profit or loss. 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.
k Future changes in accounting policies
IASB and IFRIC have issued the following standards and interpretations with an
effective date after the date of these financial statements:
Effective date
(accounting periods
International Accounting Standards (IAS/IFRS) commencing after)
--------------
IFRS 8 Operating segments 1 January 2009
IAS 23 Amendment - Borrowing costs 1 January 2009
------------------------------------- --------------
International Financial Reporting
Interpretations Committee (IFRIC)
-------------------------------------
IFRIC11 IFRS 2 - Group and Treasury Share Transactions 1 March 2007
IFRIC12 Service Concession Arrangements 1 January 2008
IFRIC13 Customer loyalty programmes 1 July 2008
IFRIC14 IAS 19 - the limit on a defined benefit asset, minimum 1 January 2008
funding requirements and their interaction
------------------------------------- --------------
IFRS 8 introduces the 'management approach' to segment reporting, with
information based on internal reports. Management are currently assessing the
impact of this on the disclosures to be presented regarding segmental reporting.
The Directors do not expect the adoption of the other standards and
interpretations to have a material impact on the Group's financial statements in
the period of initial application.
3 Interest income
31 January 2008 31 January 2007
£ £
Cash balances 285,560 758,917
Secured loans 1,476,958 1,248,353
Total 1,762,518 2,007,270
4 Investment advisory, administration and performance fees
Investment advisory fees
On 10 September 2003 the Company entered into an Investment Advisory Agreement
with EPIC Private Equity Limited (Formerly EPIC Specialist Investments Limited)
('EPE' 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 and exit 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 2008, no such fees were charged.
Administration fees
On 10 September 2003 the Company entered into an Administration agreement with
Northern Trust International Fund Administration Services (Isle of Man) Limited
for the provision of administration, registration and secretarial services. The
fee was 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. This agreement was terminated on
30 November 2007 and IOMA Fund and Investment Management Limited were appointed
as administrators 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.
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 2008 (2007:£Nil).
5 Directors' fees
Directors' fees payable for the year (including VAT where applicable) were as
follows:
2008 2007
£ £
GO Vero (Chairman) 20,417 15,625
DL Adamson - 17,598
RBM Quayle 20,000 20,000
CL Spears 15,000 15,000
NV Wilson 20,000 20,000
Under-accrual for prior year - (1,085)
75,417 86,538
6 Taxation
Both the Company and EPIC Structured Finance Limited are Isle of Man tax
resident. The Companies are liable to a zero percent rate of of income tax.
UK Corporation tax at 30% on the profit on ordinary activities of the UK
property company subsidiary has been provided for.
2008 2007
£ £
Actual UK Corporation Tax charge in the accounts 18,189 22,642
Deferred tax on property revaluation 7
18,196 22,642
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. The
Directors, having taken legal advice to ensure compliance with the applicable
regulations, agreed to amend the Company's dividend distribution policy with
effect from 1 February 2006. Dividends are now declared from available revenue
reserves rather than from the total return of the Company.
During the year the following dividends were paid.
Rate Total £
2007 Final Paid 31 December 2007 1.99p 597,000
After the balance sheet date, the Directors have proposed a final dividend of
3.24p per ordinary share for the year ended 31 January 2008. The proposed final
dividend has not been provided for in the financial statements.
8 Professional fees
Professional fees represent the employment of third party advisers on a number
of aborted transactions together with accountancy fees for subsidiary companies.
9 Financial assets and liabilities
2008 2007
------------------- ----------------
Group Company Group Company
£ £ £ £
Assets
Financial assets at fair value
through profit or loss- designated
on initial recognition:
Equity investments 2,500,000 2,510,002 3,770,000 4,045002
Loans and receivables and
cash balances 15,660,509 12,051,495 20,700,113 13,328,354
--------- --------- --------- ---------
Total financial assets 18,160,509 14,561,497 24,470,113 17,373,356
--------- --------- --------- ---------
Liabilities
Financial liabilities
measured at amortised cost (2,182,936) (50,583) (5,553,584) (97,474)
--------- --------- --------- ---------
Total financial (2,182,936) (50,583) (5,553,584) (97,474)
liabilities
--------- --------- --------- ---------
Loans and receivables and cash balances presented above represents cash balances
and accrued interest and other receivables as detailed in the balance sheet.
Financial liabilities measured at amortised cost presented above represents
accrued expenses and sundry creditors, guarantee payable, provision for calls
under guarantee and bank loan, as detailed in the balance sheet.
10 Non-current assets
2008 2007
----------------- -----------------
Group Company Group Company
£ £ £ £
--------- --------- --------- ---------
Investment property 676,000 587,647 -
Financial assets:
Secured loans 10,261,460 9,038,500 -
Unquoted equity 2,500,000 2,500,001 3,770,000 3,770,001
investments
Investment in subsidiaries 10,001 - 275,001
---------- ---------- --------- ---------
13,437,460 2,510,002 13,396,147 4,045,002
---------- ---------- --------- ---------
An external independent valuation company having appropriate recognised
professional qualifications and recent experience in the location and category
of the property being valued, values the investment property based on market
values.
The secured loans are secured by way of floating charge. The terms of secured
loans are disclosed in note 19.
Unquoted equity investments comprises unrealised fair value gains of £2,500,0000
(2007: £3,770,000) on two (2007: two) portfolio companies. Fair value is
determined by the Directors, based on valuation techniques. The movement in
unrealised gains/(losses) is reflected in the income statement being a loss of
£1,270,000 (2007: gains of £3,770,000) in the year.
There were no realised capital gains in the year (2007: £207,479) in respect of
investment property sales. There were no realised gains/(losses) on other
investment of the Group (2007: net loss £6,243).
11 Loan to subsidiary - EPIC Structured Finance Limited
2008 2007
Company Company
£ £
Loan to subsidiary 14,027,020 12,668,475
The loan to the subsidiary is unsecured interest free and not subject to any
fixed repayment term.
12 Cash at bank
2008 2007
----------------- -----------------
Group Company Group Company
£ £ £ £
--------- --------- --------- ---------
Current and call accounts 2,944,914 101,841 274,471 3,875
Money market fund - - 2,557,006 485,998
Term deposit 1,983,065 - 8,319,035 -
---------- ---------- --------- ---------
4,927,979 101,841 11,150,512 489,873
---------- ---------- --------- ---------
£1,983,065 million (31 January 2007: £8,319,035 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 23).
The current and call accounts and money market fund have been classified as cash
and cash equivalents in the Consolidated Statement of Cash Flows together with
the uncharged part of the term deposit.
13 Bank loan
2008 2007
Group Group
£ £
Mortgage loan 508,021 545,974
The mortgage bank loan bears interest at 9.10% and is secured on investment
property valued in the financial statements at £676,000 (2007 : £587,647) . The
loan expiry date is May 2029.
14 Share capital
At 31 January 2008 /2007 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
The Company treats share capital, share premium and reserves as capital. The
Company does not have any externally imposed capital requirements. As at 31
January 2008 the Company had capital of £16,653,573 (2007: £19,504,176).
The Company's capital is deployed to meet the Company's investment objective as
set out in note 1. The Company has no debt as at 31 January 2008, although a
subsidiary has a mortgage loan of £508,021 in relation to investment property
(note 13).
15 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.
16 Basic and diluted loss per share (pence)
Basic and diluted loss per share are calculated by dividing the loss for the
year attributable to ordinary shareholders loss of £2,253,603 (2007: loss of
£7,895,773) by the weighted average number of shares outstanding during the
period of 30,000,000 (2007: 30,000,000).
17 Net asset value per share (pence)
The net asset value per share is based on the net assets as at the year-end of
£16,653,573 (2007: £19,504,176) divided by 30,000,000 shares (2007: 30,000,000
shares) in issue at the end of the year.
18 Note to the consolidated statement of cash flows
Reconciliation of net investment income to net cash inflows from operating
activities:
2008 2007
£ £
Net investment income 1,042,447 1,372,392
Adjustment for loan settlement expenses (13,346) -
Movement in debtors and prepayments 40,031 (62,705)
Movement in accrued expenses 92,930 (302,763)
Net cash flows from operating activities 1,162,062 1,006,924
19 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 and interest rate risk. None of these risks are hedged. These
risks are managed by the Directors in conjunction with the Investment Adviser.
The Investment Adviser is responsible for day to day management.
Liquidity risk
Under the credit risk participation agreement (see Note 23), 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. 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 23).
Residual contractual maturities of financial liabilities
31 January 2008
Less than 1-3 3 months 1-5 Over 5 No stated
1 month months to 1 year years years maturity
Financial £ £ £ £ £ £
liabilities
Accrued expenses 214,820 - - - - -
and other
creditors
Guarantee payable - - - - - -
Provision for 1,460,095 - - - -
call
Bank loan - - - - 508,021 -
-------- ---------- ------- ------- -------- --------
214,820 1,460,095 - - 508,021 -
-------- ---------- ------- ------- -------- --------
19 Financial instruments (continued)
Liquidity risk (continued)
31 January 2007 Less than 1-3 3 months 1-5 No
1 month months to 1 year years Over 5 stated
years maturity
Financial £ £ £ £ £ £
liabilities
- - - - -
Accrued expenses
and other 103,701 - - - - -
creditors
Guarantee payable - 250,000 - - - -
Provision for - 4,653,909 - - - -
call
Bank loan - - - 545,974 -
-------- ---------- ------- ------- -------- --------
Total 103,701 4,903,909 - - 545,974 -
-------- ---------- ------- ------- -------- --------
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 23), the Group is
exposed to significant credit risk by way of its commitment to fund any credit
losses on loans arranged by the Group. The total exposure of the Group as at 31
January 2008 under the credit risk participation agreement was £134,479
(2007:£2,745,550) net of provided loans. Under the credit risk participation
agreement there were three investments in default at 31 January 2008 (2007: 5)
in respect to some or all of their loans, for which provision has been made
(see Note 23).
In addition the Group has advanced loans to a number of unquoted private
companies which exposes the Group to significant credit risk (see Note 10). The
impairment of loan portfolio charge in the Income Statement comprises £341,847
(2007: £5,802,965) in respect of impairment provisions against two secured loans
during the year and nil (2007: £250,000) payable in respect of a guarantee on
behalf of a portfolio company.
At the reporting date, the Group's financial assets exposed to credit risk
amounted to the following:
2008 2007
£ £
Secured loans 10,261,460 9,038,500
Cash balances 4,927,979 11,150,512
Accrued interest and other receivables 471,070 511,101
Total 15,660,509 20,700,113
Exposure under the credit risk participation
Agreement (note 23) 1,983,065 8,319,035
The secured loans are advanced to unquoted private companies, which have no
credit risk rating. They are entered into as part of the investment strategy of
the Group and credit risk is managed by taking security where available
(typically a floating charge) and the Investment Adviser taking an active role
in the management of the borrowing companies. As part of the Group's investment
strategy, loans and investments are made in companies that are in a recovery
phase and therefore carry a relatively high risk of default - which is reflected
in the interest rates charged and equity rights taken.
As at the 31 January 2008 there are secured loans to four companies. Therefore,
the Group is exposed to concentration risk relating to these loans.
Cash balances are placed with Royal Bank of Scotland International in Jersey.
Market price risk
Market price risk is the risk that the value of a financial instrument will
fluctuate as a result of changes in market prices (other than those arising from
interest rate risk or currency risk). The Group is exposed to market price risk
via its equity investments, which are stated at fair value - with gains and
losses recognised in the income statement.
As at the reporting date, the Group's equity investments in the balance sheet
comprised two holdings - representing the unrealised fair value gains on those
portfolio companies (2007: two holdings). The Group also has equity interests in
other portfolio companies, linked to lending facilities, which have not been
revalued.
Market price risk sensitivity
The Group's interest in unquoted equity investments accounts for 15% (2007: 19%)
of net assets. A 5% increase in the value of these investments as at 31 January
2008 would have increased net assets by £125,000 (2007: £188,500); an equal
change in the opposite direction would have decreased net assets by an equal but
opposite amount.
Interest rate risk
The Group is exposed to significant interest rate risk, through the secured loan
portfolio and cash balances.
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 interest at fixed rates of 15% and are repayable as
follows:
Principal Interest Rate Maturity
£
Past Times Ltd 7,750,000 15% 22 December 2008
Morada Home Ltd 863,000 15% 19 September 2008
Autocue Group Ltd 875,000 15% 31 December 2015
Kemutec 773,464 15% 31 December 2016
The table below summarises the Group's exposure to interest rate risks. It
includes the Groups' financial assets and liabilities at the earlier of
contractual re-pricing or maturity date, measured by the carrying values of as
sets and liabilities:
31 January 2008 Less than 1-3 3 months 1-5 Over 5 Non- Total
Assets 1 month months to 1 year years years interest
bearing
£ £ £ £ £ £ £
Designated at fair
value through
profit or loss
Equities - - - - - 2,500,000 2,500,000
Loans and
receivables
Secured loans 7,750,000 - 863,000 773,460 875,000 - 10,261,460
Accrued
interest and
other debtors - - - - - 471,070 471,070
Cash 2,944,914 - - - - - 2,944,914
Committed cash 1,983,065 - - - - - 1,983,065
Total
financial
assets 12,677,979 - 863,000 773,460 875,000 2,971,070 18,160,509
Liabilities
Financial
liabilities meas
ured at amortised
cost
Accrued
expenses and
other
creditors - - - - - (214,820)(214,820)
Provision for
call - - - - -(1,460,095)(1,460,095)
Bank loan - - - - (508,021) - (508,021)
Total
financial
liabilities - - - - (508,021)(1674,915)(2182,936)
Total interest
rate
sensitivity
gap 12,677,979 - 863,000 773,460 366,979
31 January 2007 Less than 1-3 3 months 1-5 years Over 5 Non-interest Total
Assets 1 month months to 1 year years bearing
£ £ £ £ £ £ £
Designated at fair
value through
profit or loss
Equities - - - - - 3,770,000 3,770,000
Loans and
receivables
Secured loans - - 7,613,500 750,000 675,000 - 9,038,500
Accrued
interest and
other debtors - - - - - 511,101 511,101
Cash 2,831,477 - - - - - 2,831,477
Committed cash 8,319,035 - - - - - 8,319,035
Total
financial
assets 11,150,512 - 7,613,500 750,000 675,000 4,281,101 24,470,113
Liabilities
Financial
liabilities meas
ured at amortised
cost
Accrued
expenses and
other
creditors - - - - - (103,701) (103,701)
Guarantee
payable - - - - - (250,000) (250,000)
Provision for
call - - - - - (4,653,909) (4,653,909)
Bank loan - - - - (545,974) - (545,974)
Total
financial
liabilities - - - - (545,974) (5,007,610) (5,553,584)
Total interest
rate
sensitivity
gap 11,150,512 - 7,613,500 750,000 129,026
Interest rate sensitivity
The Group is exposed to market interest rate risk via its bank balances. A
sensitivity analysis has not been provided as it is not considered significant
to Group performance.
Currency risk
The Group has no exposure to currency risk as it has no non-sterling assets or
liabilities.
Fair Values
All financial instruments are considered to be stated at fair value except for
secured loans and the bank loan, which carry a fixed interest rate and are
stated at amortised cost. It is not practicable to determine fair value for
these loans.
20 Directors' interests
None of the Directors had any interests in the shares of the Company as at
31 January 2008 (2007: £Nil).
21 Related parties
Investment advisory fees amounting to £217,685 were payable to the Manager
calculated in accordance with the Investment Advisory Agreement, of which
£16,745 (2007: £19,672) was outstanding as at 31 January 2008. The Investment
Advisor is also entitled to structuring fees and fees on the sale of investments
(see Note 4).
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, Brokers and Placing Agent to the Company. Advisory and broker fees of
£30,000 (2007: £36,663) were payable to Numis Securities Limited, of which
£3,750 (2007: £15,000) was paid in advance as at 31 January 2008.
Lehman Brothers, a significant shareholder, have rights to 20%, subject to
costs, of the performance fee due to the Manager.
22 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. During the year
this company was liquated.
On 30 December 2004 the Company incorporated EPIC Reconstruction Property
Company II Limited in England and Wales , with paid up share capital of £1.
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.
23 Financial commitments and guarantees
Under a credit risk participation agreement signed with Eurosales, a division of
RBS, 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
Eurosales. 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 2008 provisions of £1,460,095 have been established against the loans
(2007: £4,653,909). Total calls under the agreement in the year, charged to the
Income Statement amounted to £1,754,360 (2007: £7,413,794).
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
Eurosales, to support the Group's commitment under the agreement. As at 31
January 2008, £1,983,065 (31 January 2007: £8,319,035) of the term deposit was
charged in favour of Eurosales.
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