Final Results

Leo Capital Plc 12 June 2006 12th June 2006 Leo Capital plc ('Leo Capital'/'the Company') FINANCIAL INFORMATION FOR THE YEAR ENDED 31ST MARCH 2006 The financial information set out below is based on the unaudited special purpose accounts prepared under UK GAAP by the directors of London Merchant Securities PLC ('LMS') in connection with the demerger of its investment division to the Company ('the Demerger'). Further details on the basis of preparation are set out in Note 1 to the financial information in Part II. Commentary in relation to the year ended 31 March 2006 relates to the results and financial position of the LMS investment division ('the Group') during that period, before the restructuring as a result of the Demerger and the admission of Leo Capital to trading on AIM. The restructuring includes the forgiveness of certain indebtedness owed by the investment division to other LMS subsidiaries, the transfer of the investment division to the Company and the transfer of cash of £65 million from LMS to Leo Capital as part of the Demerger arrangements. Part I includes a pro-forma statement of net assets as if the Demerger had been effected as at 31 March 2006. Full details of the Demerger and the admission of Leo Capital to trading on AIM are set out in documents sent to shareholders on 12 April 2006. Highlights * The Company's shares have today been admitted to trading on AIM; * Investment portfolio valued at £226.6 million at 31 March 2006 (2005 - £203.7 million, excluding discontinued activities). * Pro forma net asset value per share at 31 March 2006 - 90p per share. The basis of the calculation of pro forma net assets is set out in Part I. For further information please contact: Leo Capital plc Brunswick Robert Rayne, CEO Simon Sporborg Tony Sweet, CFO Nina Coad Alex Tweed Tel: 020 7935 3555 Tel: 020 7404 5959 Notes to Editors Leo Capital plc is a new independent investment company whose shares are traded on AIM from today, 12 June 2006. It was formed to receive the demerged investment division of London Merchant Securities plc. The investment portfolio is valued at over £220 million and 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. Website www.leocapitalplc.com Chairman's Statement The Company has acquired the demerged investment division of LMS and begins trading on AIM today. Leo Capital is a significant investment company on AIM, with the freedom to manage its assets, pursue a business plan and develop its own shareholder base independent of LMS. There will be a transitional period as the Leo Capital management team is further strengthened and we expect to have made significant progress with this by the end of 2006. For the purposes of the Demerger, the directors of LMS prepared special purpose accounts under UK GAAP containing combined financial information for the LMS Investment Division ('the Group') which is now owned by the Company. The financial information in Part II is extracted from these special purpose accounts for the years ended 31 March 2006 and 31 March 2005. Further details on the basis of preparation of the special purpose accounts are set out in Note 1 to the financial information. Excluding the discontinued activities of Inflexion plc, the Group achieved realised profits on disposals of £9.3 million (2005 - £8.3 million). Unrealised gains on the investment portfolio were £28.4 million (2005 - £7.9 million) arising principally on the fund investments and quoted securities in the portfolio, offset by provisions of £33.4 million (2005 - £7.6 million) principally against the unquoted element of the portfolio. These provisions include £23.6 million to reflect in the valuation of those investments the changed circumstances of the investment division following the Demerger. The LMS directors' valuation of the investment portfolio at 31 March 2006 was £226.6 million, an increase of £22.9 million compared to 31 March 2005 excluding the discontinued activities of Inflexion plc. The Internal Rate of Return ('IRR') generated by the portfolio in the year ended 31 March 2006 was -0.2% (year ended 31 March 2005: 7.3%). The IRR for the year ended 31 March 2006 includes the impact of the £23.6 million provision against the valuation of unquoted securities referred to above. Assuming the Demerger had been completed as at 31 March 2006, the pro-forma net asset value per share of the Company at that date would have been £0.90. This pro-forma figure is before taking into account any adjustment for the expected tender offer to shareholders that was described in the Demerger documentation. Further details of the Company's plans for the tender offer are expected to be announced shortly. Board and Management I am delighted that John Barnsley, Richard Christou and Bernard Duroc-Danner have joined the Board as non-executive directors and that Robert Rayne will continue his involvement in the business. He will act as Chief Executive Officer until a permanent successor is found, at which point he will be invited to remain on the Board as a non-executive director. I should like to record my thanks to the directors, management and staff of LMS for their considerable efforts in executing the Demerger. Outlook Although during the last few weeks markets have shown increased volatility, the Company has significant investment opportunities and a broadly based, risk-diversified portfolio of investments in sectors where the management team has considerable experience. Your Board is confident that the current investments will contribute positively to the Company's strategy of medium to long-term growth in shareholder value. Jonathan Agnew Chairman Operating 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 March 2006 31 March 2005 -------------- ----------------------- US UK Total US UK Continuing Inflexion Total operations £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Quoted securities 37,897 18,924 56,821 27,685 1,581 29,266 14,576 43,842 Unquoted securities 13,316 84,018 97,334 14,714 113,405 128,119 4,939 133,058 Funds 62,291 10,154 72,445 41,640 4,691 46,331 4,994 51,325 -------- -------- -------- ------ -------- ------- ------ -------- Total 113,504 113,096 226,600 84,039 119,677 203,716 24,509 228,225 -------- -------- -------- ------ -------- ------- ------ -------- In March 2006 Inflexion plc disposed of its business and related assets (all of which were in the UK) and its shareholders approved the voluntary liquidation of the company. Performance The investments are included in the balance sheet at fair value as set out in the Accounting Policies. At the end of the year the value of the Group's portfolio was £226.6 million (2005 - £203.7 million, excluding Inflexion). During the year, realisations in the continuing operations of £36.8 million (2005 - £48.5 million) produced realised profits of £9.3 million (2005 - £8.3 million). New investments totalled £ 57.9 million, of which £24.9 million was invested in funds, £23.3 million was follow-on financing for existing companies and £9.7 million was invested in quoted securities. Funds The Group's ten largest fund investments by value at 31 March 2006 are: Valuation Fund Country Activity 2006 2005 £'000 £'000 San Francisco Equity Partners US Technology, media & retail 16,514 - Spectrum IV US Communications/IT 8,762 7,385 Boston Ventures LP VI US Media & leisure 7,537 4,470 Amadeus II LP UK Early stage technology 4,628 3,992 Boston Ventures LP V US Media, publishing communications & leisure 4,048 3,100 Foundation IV US Technology 2,867 1,839 Weiss, Peck & Greer VA VI US Early stage technology 2,796 1,824 Gene Weber (Bermuda) Partnership US Software 2,688 2,348 Scottish Equity Partners UK Technology & energy 2,510 1,791 Foundation Capital III US e-commerce 1,613 1,491 The Group invested £24.9 million in funds during the year, most of which was to meet existing commitments made in prior years. Distributions from funds were £22.7 million which resulted in realised gains of £3.2 million. In July 2005, San Francisco Equity Partners ('SFEP'), a US limited partnership in which the Group has a 99% interest, commenced operations. SFEP is now the principal vehicle through which the Group invests in unquoted companies in the USA. The Group has transferred certain of its US unquoted investments to SFEP: these include Method Products, Penguin Computing and Modviz. Unquoted securities The Group's ten largest unquoted investments by value at 31 March 2006 are: Valuation Name Country Activity 2006 2005 £'000 £'000 Energy Cranes International UK Offshore crane operations 21,473 18,725 Entuity UK Network management software 8,439 7,037 Rave Review Cinemas US Movie theatre operators 8,244 4,722 Citizen/Vio Worldwide UK Digital workflow management solutions 7,819 9,400 WeSupply UK Supply chain execution management software 6,694 8,024 7 Global UK Software hosting services 5,985 11,446 AssetHouse Technology UK Content services infrastructure software 5,703 4,683 CopperEye UK Database indexing technology and software 5,294 4,520 Cityspace UK Urban information networks 5,000 9,832 Offshore Tool & Energy UK Oilfield services 4,636 7,303 The book value of unquoted investments in the US has reduced compared to 31 March 2005 as a result of the transfer of certain investments to SFEP when it commenced operations as described above. This reduction has been substantially offset by improved trading performances from Rave Review Cinemas and LifeMasters Supported SelfCare which have led to a higher valuation for these businesses. The Group's largest investment, Energy Cranes International, had a successful year growing revenues and profitability. In January 2006 the company expanded its rental crane fleet through the acquisition of Dynamic Cranes in the Gulf of Mexico. In the year ended 31 March 2006 we invested a further £15.9 million in the Group's portfolio of unquoted UK companies in the applied technology sector, although we also considered it appropriate to increase our provisions against the value of many of these investments. The reduction in the value of UK unquoted securities also reflects the reclassification of ProStrakan following its IPO (see below). Quoted securities The Group's ten largest quoted investments at 31 March 2006 are: Valuation Name Country Activity 2006 2005 £'000 £'000 Weatherford International US Oilfield services 18,612 12,009 ProStrakan Group UK Speciality pharmaceuticals 17,392 16,212 Ivanhoe Energy US Oil and gas exploration 4,520 - Covad Communications US Business communications/VoIP 2,886 1,642 Atheros Communications US Manufacture of wireless chips 2,357 530 Monogram Biosciences US Drug discovery 2,111 2,052 Chyron Corporation US Broadcast technology 2,086 613 Gourmet Holdings UK Pub/restaurant operator 1,254 1,202 Grant Prideco US Oilfield services 1,208 1,847 AXS-One US Enterprise software 798 1,218 The Group has continued to benefit from its experience in the oilfield services sector and during the year our investments in Ivanhoe, Grant Prideco and Weatherford contributed strongly to both realised and unrealised gains. Our US technology portfolio also performed well, in particular Atheros Communications, Chyron Corporation and Covad Communications. In the UK, we invested a further £2 million in ProStrakan Group, which successfully completed its IPO in June last year with a market capitalisation at the time of admission to the Official List of £186 million. Financial Review Basis of preparation of financial information The financial information for the years ended 31 March 2006 and 2005 set out in Part II has been prepared in respect of the Group which, prior to the demerger from LMS on 9 June 2006, comprised the investment division of LMS. The financial information also includes three investments held by a subsidiary of LMS outside the Group which were transferred to the Group before the demerger. Following the demerger, the Company is now the ultimate holding company of the Group. 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. Commentary in relation to the year ended 31 March 2006 relates to the results and financial position of the Group during that period, before the restructuring of the Demerger and the admission of Leo to trading on AIM. The restructuring includes the forgiveness of certain indebtedness owed by the Investment Division to other LMS subsidiaries, the transfer of the investment division to the Company and the transfer of cash of £65 million from LMS to Leo Capital as part of the Demerger arrangements. Results of operations The Group's operating loss for the year before investment activity was £6.0 million (2005 - loss £5.1 million). Of this £4.3 million (2005 - £4.0 million) relates to the continuing activities of the Group and £1.7 million (2005 - £1.1 million) to the discontinued activities. The increased loss in both activities is the result of higher overhead costs in 2006 compared to 2005. Realised profits on disposals of investments were £7.6 million for the year (2005 - £14.6 million). Continuing activities contributed realised profits of £9.3 million (2005 - £8.4 million) and discontinued activities losses of £1.7 million (2005 - profits of £6.2 million). The realised profits of the continuing activities arise principally on the Group's quoted securities and fund investments. The Group's share of the administration costs of the funds in which it invests was £2.6 million (2005 - £1.1 million). Fair value adjustments for the year were £5.0 million net charge (2005 - £0.3 million net favourable). In 2006 this relates solely to the continuing activities (2005 - £5.2 million net charge for the continuing activities, £5.5 million net favourable in the discontinued activities). The net charge in 2006 comprises £28.4 million net unrealised gains on the valuation of the investment portfolio (2005 - £7.9 million) offset by increased provisions against the valuation of unquoted securities of £33.4 million (2005 - £7.6 million). The net unrealised gains principally arose on the Group's quoted securities and fund investments. The provisions against the valuation of unquoted securities include £23.6 million (2005 - nil) to reflect in the valuation of those investments the changed circumstances of the investment division following the Demerger. The Internal Rate of Return ('IRR') generated by the portfolio in the year ended 31 March 2006 was -0.2% (year ended 31 March 2005: 7.3%) The longer term ('IRR') generated by the portfolio is as follows: Time period 1 year 5 year 10 year 15 year IRR -0.20% -8.00% 8.10% 11.00% The IRR is the percentage return of the investment portfolio after taking account of the cash inflows and cash outflows associated with the investment portfolio. These cash flows take account of any dividend income and are gross of overheads, fees and carried interests. The value of the opening portfolio is treated as the assumed cash out flow at the beginning of the period and the value of the closing portfolio as the assumed cash inflow at the period end. Details of the Group's accounting policy for the valuation of investments are set out in Note 1 to the financial information. Net Finance income/(expense) and taxation Net interest income for the year was £1.2 million (2005 - £1.2 million). The tax charge for the year was a credit of £15.7 million (2005 - £2.2 million charge). Included in the credit for the current year is a credit of £17.4 million receivable from the LMS property division as consideration for tax losses surrendered as group relief. Investments The Group's investments are included in the balance sheet at fair values determined in accordance with industry guidelines. Further details of the valuation principles are set out in Note 1 to the financial information. At 31 March 2006, these investments amounted to £226.6 million (2005 - £203.7 million, excluding investments held by Inflexion of £24.5 million) - an increase of £22.9 million (11.2%). New investments during the year were £71.5 million (2005 - £72.9 million) of which £57.9 million (2005 - £65.2 million) related to the continuing activities and £13.6 million (2005 - £7.7 million) related to the discontinued activities. Proceeds of disposals were £73.1 million (2005 - £60.1 million), of which £36.8 million (2005 - £48.5 million) related to the continuing activities and £36.3 million (2005 - £11.6 million) related to the discontinued activities. At 31 March 2006 the Group had commitments to meet capital calls from venture capital partnerships in the US and the UK totalling £54 million. Financial position The Group balance sheet at 31 March 2006 includes £44.0 million of cash, of which £43.1 million is held in Inflexion and comprises the proceeds of the disposal by Inflexion of its business in March 2006. This cash will be distributed to shareholders as a consequence of the members' voluntary liquidation and the first such distribution was paid in April 2006. The amount due to LMS at 31 March 2006 of £219.4 million will be eliminated as part of the demerger arrangements. During the year as part of the demerger arrangements there was a reorganization of intercompany indebtedness between members of the Group and companies within the LMS property division. As a consequence of this reorganization, £22.5 million owing by the Group to LMS was waived by LMS. This amount is included in the Combined Statement of Total Recognised Gains and Losses. The Group had no third party indebtedness at 31 March 2006. Pro-forma net asset value Part I includes the unaudited pro-forma statement of net assets of the Group at 31 March 2006. This statement has been prepared to illustrate the effect on the net assets of the Group at 31 March 2006 that the demerger would have had if it had completed on that date. Further details on the basis of preparation of this information are set out in Part I. This statement shows pro-forma net assets of the Group on demerger in the amount of £295.5 million. On admission to AIM, the Company had 329,001,513 shares in issue, which equates to net assets per share on a pro-forma basis at 31 March 2006 of £0.90 per share. Part I Unaudited pro-forma statement of net assets of the Company Inflexion Investment proceeds Pro-forma Division Inflexion Inflexion to LMS & Cash on 31-Mar-06 removal proceeds interco & costs demerger (note 1) (note 2) (note 2) (note 3) (note 4) (note 5) £'000 £'000 £'000 £'000 £'000 £'000 Fixed assets Tangible assets - - - - - - Investments 226,600 - - - - 226,600 ------- ------ ------ ------- ------ ------- 226,600 - - - - 226,600 ------- ------ ------ ------- ------ ------- Current assets Debtors 1,172 (76) - - - 1,096 Cash and short term deposits 44,013 (43,143) 24,500 (22,800) 67,656 70,226 ------- ------ ------ ------- ------ ------- 45,185 (43,219) 24,500 (22,800) 67,656 71,322 ------- ------ ------ ------- ------ ------- Creditors: amounts falling due within one year (2,470) 1,461 - - - (1,009) ------- ------ ------ ------- ------ ------- Net current assets 42,715 (41,758) 24,500 (22,800) 67,656 70,313 ------- ------ ------ ------- ------ ------- Total assets less current liabilities 269,315 (41,758) 24,500 (22,800) 67,656 296,913 Creditors: amounts falling due after more than one year Amounts owed to LMS group (219,361) - - 219,361 - - Other creditors - - - - - - Provisions for liabilities and charges (1,364) - - - - (1,364) ------- ------ ------ ------- ------ ------- Net assets 48,590 (41,758) 24,500 196,561 67,656 295,549 ------- ------ ------ ------- ------ ------- Equity shareholders' funds 31,732 (24,900) 24,500 196,561 67,656 295,549 Minority interest 16,858 (16,858) - - - - ------- ------ ------ ------- ------ ------- Total equity 48,590 (41,758) 24,500 196,561 67,656 295,549 ------- ------ ------ ------- ------ ------- Notes 1 The net assets relating to the Investment Division have been extracted without material adjustment from the historical financial information in Part II. 2 These adjustments reflect the removal of the assets and liabilities attributable to Inflexion as a result of the disposal of its business and assets followed by voluntary liquidation, for which it is expected that net proceeds of £24.5 million will be received. 3 These adjustments reflect the following: (a) The elimination of intercompany balances between the Company and LMS as at 31 March 2006, which was documented as loan stock and transferred to Leo Capital Holdings Limited as part of the Demerger. (b) The return of £22.8 million of the net proceeds from the liquidation of Inflexion to LMS as part of the Demerger agreement. 4 These adjustments reflect the net effect of the receipt of £65 million in cash from LMS (via Leo Capital Holdings Limited) as part of the Demerger, less payment of £2.4 million of transaction costs (inclusive of VAT) associated with the Demerger and the working capital adjustment of £5.1 million. 5 This column reflects the illustrative net assets of the Company at the point of Demerger. No account has been taken of the trading of the Investment Division since 31 March 2006. Part II HISTORICAL FINANCIAL INFORMATION ON THE LMS INVESTMENT DIVISION for the two years ended 31 March 2006 Combined Profit and Loss Account Year ended 31 Year ended 31 March March 2005 2006 Notes £000 £000 Turnover Continuing activities 71 132 Discontinued activities 1,735 1,702 Total turnover 1,806 1,834 ------- ------- Operating loss Continuing activities (3,994) (4,270) Discontinued activities (1,085) (1,751) ------- ------- Total operating loss 2 (5,079) (6,021) ------- ------- Investment income 162 196 Profit on disposal of investments 6 13,518 4,997 Fair value adjustments 6 333 (4,952) ------- ------- Profit/(loss) on ordinary 8,934 (5,780) activities before finance costs Net finance income 4 1,218 1,849 ------- ------- Profit on ordinary activities before taxation 10,152 (3,931) ------- ------- Tax (charge)/credit on profit on ordinary activities 5 (2,208) 15,686 ------- ------- Profit on ordinary activities 7,944 11,755 after taxation Equity minority interests (4,790) 766 ------- ------- Profit for the period 3,154 12,521 ------- ------- HISTORICAL FINANCIAL INFORMATION ON THE LMS INVESTMENT DIVISION for the two years ended 31 March 2006 Combined Balance Sheet 31 31 March March 2005 2006 Notes £000 £000 Fixed assets Tangible assets 105 - Investments 6 228,225 226,600 ------- ------- 228,330 226,600 ------- ------- Current assets Debtors 7 1,162 1,172 Cash and short-term deposits 8 21,217 44,013 ------- ------- 22,379 45,185 Creditors: amounts falling due within one year 9 (1,797) (2,470) ------- ------- Net current assets 20,582 42,715 ------- ------- Total assets less current liabilities 248,912 269,315 Creditors: amounts falling due after more than one year Amounts owed to LMS group (233,963) (219,361) Other creditors (577) - Provisions for liabilities and charges (435) (1,364) ------- -------- Net assets 13,937 48,590 ------- -------- Capital and reserves Called up share capital 83,339 83,339 Profit and loss account (86,799) (51,607) ------- ------- Equity shareholders' (deficit)/funds (3,460) 31,732 Equity minority interests 17,397 16,858 ------- ------- Capital employed 13,937 48,590 ------- ------- HISTORICAL FINANCIAL INFORMATION ON THE LMS INVESTMENT DIVISION for the two years ended 31 March 2006 Combined Cash Flow Statement Year ended Year ended 31 March 31 March 2005 2006 £000 £000 -------- ------- Net cash outflow from operating activities (see note 10(1)) (3,279) (4,555) Returns on investments and servicing of finance Interest received 1,267 1,246 Interest paid (197) (87) Investment income received 163 195 -------- ------- Net cash inflow from returns on investments and servicing of finance of finance 1,233 1,354 Taxation paid (1,956) (442) Capital expenditure and financial investment Acquisition of tangible fixed assets (37) (514) Disposal of tangible fixed assets - 555 Purchases of investments (73,986) (72,465) Realisations of investments 61,684 73,533 -------- ------- Net cash (outflow)/inflow from capital expenditure and financial investment (12,339) 1,109 Acquisitions and disposals Purchase of subsidiaries - - Net cash acquired with subsidiary - - -------- ------- Cash outflow before management of liquid resources and financing (16,341) (2,534) Management of liquid resources Increase in short-term deposits (see note 10 (2)) (17,866) (25,316) Financing Funding from LMS Group 21,273 25,330 -------- ------- Decrease in cash in the period (12,934) (2,520) -------- ------- HISTORICAL FINANCIAL INFORMATION ON THE LMS INVESTMENT DIVISION for the two years ended 31 March 2006 Combined Statement of Total Recognised Gains and Losses Year ended 31 Year ended 31 Year ended March March 31 March 2004 2005 2006 £000 £000 £000 -------- -------- -------- Profit for the financial period 3,388 3,154 12,521 Unrealised gain on investment 1,094 - Waiver of inter-company debt - - 22,500 -------- -------- -------- Currency translation differences on foreign currency net investments 66 53 171 -------- -------- -------- Total recognised gains relating to the financial period 4,548 3,207 35,192 -------- -------- -------- During the year as part of the demerger arrangements there was a reorganization of intercompany indebtedness between members of the investment division and companies within the LMS property division. As a consequence of this reorganization, £22.5 million owing by the Group to LMS was waived by LMS. HISTORICAL FINANCIAL INFORMATION ON THE LMS INVESTMENT DIVISION for the two years ended 31 March 2006 Notes to the Financial Information 1.Accounting Policies Basis of preparation The Investment Division did not constitute a statutory sub-group within the LMS group of companies during the period under review. For this reason, no consolidated statutory accounts for the Investment Division have previously been prepared. As a result of the demerger, the Company is the main holding company of LMS Capital Limited and its subsidiary undertakings together with three investments assumed to have been transferred since 1 April 2002, adjusted for administration expenses borne by service companies and not previously recharged to LMS Capital Limited. For the purposes of the demerger, the directors of LMS have prepared special purpose UK GAAP accounts containing combined financial information for the Investment Division. These special purpose accounts are based on financial returns for this period, prepared for consolidation purposes within the LMS Group by the Company, and have been prepared on the basis set out in the accounting policies set out below. This financial information does not constitute statutory accounts of the Investment Division within the meaning of section 240 of the Companies Act. The special purpose combined financial statements were prepared under UK GAAP. The accounting policies used differ to those adopted by LMS Capital Limited when it reported as part of the LMS group. The main difference is that fixed asset investments are valued at fair value rather than cost less provision for diminution in value and the resulting fair value adjustments have been included in the profit and loss account. The majority of the Investment Division activities were undertaken by LMS Capital Limited and its subsidiaries. These special purpose combined financial statements have been therefore based on the financial accounts of LMS Capital Limited and its subsidiaries. Three investment assets which formed part of the Investment Division were not legally held by the LMS Capital Limited group but instead were held by another LMS subsidiary. For the purpose of these financial statements, two of these assets are assumed to have been acquired on 1 April 2002 by LMS Capital Limited and the other asset is assumed to have been acquired on the same date it was acquired by the other LMS subsidiary. Adjustments have also been made for administration expenses relating to the Investment Division borne by service companies in the LMS group and not recharged to LMS Capital Limited and its subsidiaries. Investment Division share capital is based on the share capital of LMS Capital Limited. The principles set out below have been applied in preparing the special purpose combined financial statements and financial information. Accounting convention The financial information has been prepared under the historical cost convention, modified to include the revaluation of fixed asset investments and in accordance with applicable accounting standards and with the Companies Act. The accounting policies have been applied consistently in dealing with items which are considered material in relation to the Investment Division's financial information. Basis of consolidation Except as explained below, the financial information incorporates results of LMS Capital Limited and its subsidiaries made up to 31 March 2005 and 2006. Subsidiary undertakings acquired during accounting periods are accounted for using the acquisition method of accounting. Fixed asset investments that are subsidiary undertakings are carried at valuation in accordance with the Investment Division's normal accounting policy for such investments, and are not consolidated as required by FRS 2 'Accounting for Subsidiary Undertakings'. These investments within the Investment Division's portfolio are held for resale with a view to the ultimate realisation of capital gains, although not necessarily with a view to disposal within one year of acquisition. The Investment Division's exposure to these companies is limited to its investment at the balance sheet date. Consequently, the Directors consider that consolidation would not give a true and fair view of the Investment Division's interest in these investments. Fixed asset investments Investments are included in the balance sheet at fair value. Fair values have been determined in accordance with industry guidelines. These guidelines require the valuer to make judgments as to the most appropriate valuation method to be used and the results of the valuations. Each investment is reviewed individually with regards to the stage, nature and circumstances of the investment and the most appropriate valuation method selected. The valuation results are then reviewed and any amendment to the carrying value of investments is made as considered appropriate. (i) Quoted investments Quoted investments for which an active market exists are valued at the closing bid price on the balance sheet date. Quoted investments which are subject to contractual restrictions on when they may be sold, are valued at the closing bid price on the balance sheet date, discounted in accordance with industry guidelines as appropriate. (ii) Unquoted direct investments Unquoted direct investments for which there is no ready market are valued using the most appropriate valuation technique with regard to the stage and nature of the investment. Valuation methods that may be used include: •Recent investments are valued at cost subject to an impairment review. •Investments in which there has been a recent funding round involving significant financing from external investors are valued at the price of the recent funding, discounted if an external investor is motivated by strategic considerations. •Investments in an established business which is generating sustainable profits and positive cash flows are valued using earnings multiples. •Investments in a business the value of which is derived mainly from its underlying net assets rather than its earnings are valued on the basis of net asset valuation. •Investments in an established business which is generating sustainable profits and positive cash flows but for which other valuation methods are not appropriate are valued by calculating the discounted cash flow of future cash flows or earnings. •Investments in a business which is not generating sustainable profits or positive cash flows and for which there has not been any recent independent funding are valued by calculating the discounted cash flow of the investment to the investors. This valuation basis will primarily be used to determine whether there is any impairment to the carrying value of the asset and, due to the subjective nature of the calculation and the dependence on the outcome of unknown future events, will only give rise to a valuation increase in exceptional circumstances and where there is also additional evidence of an increase in value, such as additional funding or profit generation. (iii) Funds Investments in managed funds are valued at fair value. The General Partners of the funds will generally provide periodic valuations on a fair value basis which the Investment Division will adopt provided it is satisfied that the valuation methods used by the funds are not materially different from the Investment Division's valuation methods. Tangible fixed assets These comprise computers, furniture, fixtures and fittings and are depreciated on a straight-line basis to estimated residual values over their estimated useful lives of between 3 and 5 years. Goodwill Goodwill, including negative goodwill, arising on acquisition is calculated based upon a comparison of the fair value of the assets acquired and the fair value of the consideration given and other costs of acquisition. Foreign currencies Transactions in foreign currencies are recorded at the rate of exchange at the date of transaction. Assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date, and exchange differences are included in the profit and loss account. Investments denominated in foreign currencies are translated at the closing rates ruling at the balance sheet date as part of the fair value adjustment and are treated through reserves. The results and balance sheets of overseas operations are translated at the closing rates ruling at the balance sheet date. Exchange differences arising on translation of the opening net assets are dealt with through reserves. Cash and liquid resources Cash, for the purpose of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand. Liquid resources are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market. Liquid resources include short-term cash deposits. Taxation Corporation tax payable is provided on taxable profits at the current rate. Deferred tax assets and liabilities arise from timing differences between the recognition of gains and losses in the accounts and their recognition in a tax computation. In accordance with FRS 19 'Deferred Tax', deferred tax is provided in respect of all timing differences that have originated, but not reversed, at the balance sheet date that may give rise to an obligation to pay more or less tax in the future. Deferred tax is measured on a non-discounted basis. Turnover Turnover represents management fees paid to the Investment Division. 2 Segmental analysis of profit and discontinued activities During the two years ended 31 March 2006, the Investment Division derived its income from investments made in shares, securities and managed investments through two segments, those managed by the Investment Division's management directly and those managed by Inflexion. On 16 March 2006 Inflexion disposed of its business and related assets and on 29 March 2006 its shareholders approved the voluntary liquidation of the company. Consequently the information set out in the tables below for the Inflexion segment relates to discontinued activities. The directors of LMS consider that the investment portfolio represents one geographical segment. LMS LMS Managed Inflexion Total Managed Inflexion Total Year ended Year ended Year ended Year ended Year ended Year ended 31-Mar-05 31-Mar-05 31-Mar-05 31-Mar-06 31-Mar-06 31-Mar-06 £000 £000 £000 £000 £000 £000 --------- -------- ------- ------- ------- ------- ------- Turnover - Investment management income 71 1,735 1,806 132 1,702 1,834 Administrative costs (4,065) (2,820) (6,885) (4,402) (3,453) (7,855) ------- ------- ------- ------- ------- ------- Operating loss (3,994) (1,085) (5,079) (4,270) (1,751) (6,021) ------- ------- ------- ------- ------- ------- Investment income 18 144 162 3 193 196 Profit on disposal of investments 8,346 6,233 14,579 9,340 (1,702) 7,638 Fair value adjustments (5,176) 5,509 333 (4,952) - (4,952) Partnership net losses (1,061) - (1,061) (2,641) - (2,641) --------- ------- ------- ------- ------- ------- ------- (Loss)/profit on ordinary activities before finance costs and taxation (1,867) 10,801 8,934 (2,520) (3,260) (5,780) ------- ------- ------- ------- ------- ------- 3 Segmental analysis of net assets LMS LMS Managed Inflexion Total Managed Inflexion Total 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 2005 2005 2005 2006 2006 2006 £000s £000s £000s £000s £000s £000s --------- ------- ------- ------- ------- ------- ------- Intangible - - - - - - assets - negative goodwill Tangible assets - 105 105 - - - Investments 203,716 24,509 228,225 226,600 - 226,600 ------- ------- ------- ------- ------- ------- Fixed assets 203,716 24,614 228,330 226,600 - 226,600 Debtors 409 753 1,162 1,096 76 1,172 Cash and short-term deposits 1,347 19,870 21,217 870 43,143 44,013 Creditors: amounts falling due within one year (92) (1,705) (1,797) (1,009) (1,461) (2,470) --------- ------- ------- ------- ------- ------- ------- Total assets less current 205,380 43,532 248,912 227,557 41,758 269,315 liabilities ------- ------- ------- ------- ------- ------- Creditors: amounts falling due after more than one (233,963) (577) (234,540) (219,361) - (219,361) year Provisions for liabilities and (435) - (435) (1,364) - (1,364) charges ------- ------- ------- ------- ------- ------- Net (liabilities) /assets (29,018) 42,955 13,937 6,832 41,758 48,590 ------- ------- ------- ------- ------- ------- 4 Net finance income/(expense) Year ended Year ended 31 March 31 March 2005 2006 £000 £000 ------- ------- Interest payable ------- ------- Bank loans and bank overdrafts (55) (66) ------- ------- Interest receivable 1,286 1,237 Exchange (losses)/gains on dollar deposits (13) 678 ------- ------- 1,218 1,849 ------- ------- 5 Tax on (loss)/profit on ordinary activities Year ended Year ended 31 March 31 March 2005 2006 £000 £000 ------- ------- Analysis of (credit)/charge for period UK corporation tax Charge on profit/(loss) for the period 503 137 Group relief receivable (17,431) Adjustments relating to prior periods 115 (98) US taxation on disposal of venture capital investments - 521 Other US taxation 1,521 256 --------------------- ------- ------- Total current tax 2,139 (16,615) --------------------- ------- ------- Total deferred tax charge/(credit) 69 929 --------------------- ------- ------- Total tax charge/(credit) for the period 2,208 (15,686) --------------------- ------- ------- Factors affecting the tax charge for the year Year ended Year ended 31 March 31 March 2005 2006 £000 £000 ------- ------- Profit/(loss) on ordinary activities before taxation 10,152 (3,931) Multiplied by the standard UK rate of corporation tax at 30% 3,046 (1,179) Capital profits sheltered by losses (2,429) (32) Group relief receivable - (17,431) Fair value adjustments not currently taxed 100 2,299 Overseas losses / (profits) not available for current deduction (339) 60 Adjustments to tax charge in respect of prior periods 115 (98) Unrealised capital gains recognised - (929) Other items 1,646 695 ------- ------- Current tax charge / (credit) for the period 2,139 (16,615) ------- ------- 6 Investments Fund Listed Unlisted Inflexion Investments Investments Investments Investments Total £000 £000 £000 £000 £000 At 31 March 2004 41,623 30,339 112,973 16,610 201,545 --------- -------- -------- -------- -------- -------- Reclassification (289) 2,011 (1,722) - - Additions at cost 23,738 8,501 32,976 7,735 72,950 Proceeds from disposal (22,973) (17,753) (7,817) (11,578) (60,121) Gain/(loss) on disposal 3,574 4,254 (543) 6,233 13,518 Revaluations 658 1,917 (7,751) 5,509 333 --------- -------- -------- -------- -------- -------- At 31 March 2005 46,331 29,269 128,116 24,509 228,225 --------- -------- -------- -------- -------- -------- Reclassification 8,557 13,296 (21,853) Additions at cost 24,909 9,712 23,305 13,540 71,466 Proceeds from disposal (20,035) (14,124) (2,629) (36,348) (73,136) Gain/(loss) on disposal 513 5,912 273 (1,701) 4,997 Revaluations 12,170 12,756 (29,878) - (4,952) --------- -------- -------- -------- -------- -------- At 31 March 2006 72,445 56,821 97,334 - 226,600 --------- -------- -------- -------- -------- -------- The fund investment, listed investment and unlisted investment categories shown above comprise the portfolio of investments managed directly by the Investment Division. The Inflexion investments are owned and managed by Inflexion. The Inflexion investments comprise: - As at 31 March 31 March 2005 2006 £000 £000 ------- ------ Listed investments 14,576 - Unlisted investments held via Inflexion plc's interest in its managed funds 4,939 - Unlisted co-investment 4,994 - ------- ------ 24,509 - ------- ------ The top 10 investments by valuation as at 31 March 2006 are provided in the table below. Name Activity Geography Stake Original cost Valuation £'000 £'000 ----------- --------- --------- ----- ------------- ----------- Energy Cranes Offshore crane International operations UK 82% 21,473 21,473 Weatherford International Oilfield Ltd Services US <1% 7,558 18,612 ProStrakan Pharmaceuticals Group plc UK 9% 21,260 17,392 San Francisco Technology, Equity Partners media and US 99% 13,007 16,514 retail Spectrum IV Communications/ US 1% 7,098 8,762 IT Entuity Limited Information UK 66% 8,439 8,439 Technology Rave Review Cinemas Media and US 13% 6,406 8,244 leisure Vio Worldwide Software UK 84% 10,600 7,819 Boston Venture LP VI Media and US 3% 6,626 7,537 leisure WeSupply Limited Supply Chain UK 78% 11,124 6,694 management The Investment Division's unquoted investments are structured using a number of different financial instruments, including loan notes, preference shares, ordinary equity and warrants, 'Stake' represents the Investment Division's percentage share in the equity upside of the relevant investee company, assuming full dilution for options and warrants (assuming such options and warrants are vested and are in the money) after all fixed and preferred interests have been satisfied (including such interests owing to the Investment Division). Such percentage shareholdings therefore do not reflect the Company's total economic interest in the underlying companies, the share of actual proceeds receivable at realisation nor the net proceeds after costs and carried interests. For quoted investments, 'stake' means the number of shares held expressed as a percentage of the total issued share capital of the investee company as at 31 March 2006. For fund investments, 'stake' means the Investment Division's total commitment to the fund expressed as a percentage of the fund's commitments. Unquoted Investments Additional information is provided below for the unquoted investments that are included in the top 10 investments table by valuation above. All amounts are in £'000. The financial information is based on the most recent audited accounts, or management accounts where not available. Energy Cranes International Limited Based in Aberdeen and Houston, ECI provides crane operation and management services to the offshore energy industry and also manufactures cranes under the American Aero and Titan brands. As at 31 March 2006 Year ended 31 December 2005 Amounts invested 21,473 Sales 77,346 Valuation 21,473 Retained profit 283 Stake 82% Net assets 15,642 Entuity Limited Entuity develops and markets 'Eye of the Storm', an enterprise network management software suite. The product provides real-time visibility of fault, performance and resource allocation across an entire corporate network. As at 31 March 2006 Year ended 31 December 2005 Amounts invested 8,439 Sales 2,130 Valuation 8,439 Retained (loss) (1,556) Stake 66% Net (liabilities) (1,837) Rave Review Cinemas Rave Motion Pictures constructs and operates megaplex cinemas in the South East and South West of the United States of America. As at 31 March 2006 Year ended 29 December 2005 Amounts invested 6,406 Sales 68,310 Valuation 8,244 Retained (loss) (4,810) Stake 13% Net assets 25,542 WeSupply Limited WeSupply Limited provides supply chain execution software which is delivered to its customers as a hosted 'Software-as-a-Service' solution. As at 31 March 2006 Year ended 31 May 2004 Amounts invested 11,124 Sales 819 Valuation 6,694 Retained (loss) (3,520) Stake 78% Net (liabilities) (2,352) Vio Worldwide Vio provides network, network management and digital asset transportation software and services to the printing, publishing, advertising and graphics industries. As at 31 March 2006 Year ended 30 June 2005 Amounts invested 10,600 Sales 3,044 Valuation 7,819 Retained (loss) (3,395) Stake 84% Net (liabilities) (12,906) 7 Debtors 31 March 31 March 2005 2006 £000 £000 ------- ------- Overseas taxation 71 77 Other debtors 1,063 1,074 Other prepayments and accrued income 28 21 ------- ------- 1,162 1,172 ------- ------- 8 Cash and short-term deposits 31 March 31 March 2005 2006 £000 £000 ------- ------- Short-term deposits 18,663 43,979 Bank and cash balances 2,554 34 ------- ------- 21,217 44,013 ------- ------- The Investment Division's cash and short-term deposits include £43.1 million as at 31 March 2006 (31 March 2005 - £19.9 million) held by Inflexion. 9 Creditors: amounts falling due within one year 31 March 31 March 2005 2006 £000 £000 ------- ------- Other creditors 1,705 2,414 Accruals 92 56 ------- ------- 1,797 2,470 ------- ------- 10 Notes to combined cash flow statement Year ended Year ended 31 March 31 March 2005 2006 £000 £000 ------- ------- (1) Reconciliation of operating loss to net cash inflow from operating activities Operating loss (5,079) (6,021) Depreciation 31 64 Other non-cash movements (177) 952 (Increase)/decrease in debtors 1,302 715 Increase/(decrease) in creditors 644 (265) ------- ------- Net cash outflow from operating activities (3,279) (4,555) ------- ------- Other 31 March non-cash 31 March 2004 Cash flow Changes 2005 £000 £000 £000 £000 ------- ------- ------- ------- (2) Analysis of movement in net debt Bank and cash balances * 15,488 (12,934) - 2,554 Debt due after more than one year (212,690) - (21,273) (233,963) Short-term deposits* 797 17,866 - 18,663 ------------------------- ------- ------- ------- ------- Net debt (196,405) 4,932 (21,273) (212,746) ------------------------- ------- ------- ------- ------- * Totalled on balance sheet as cash and short-term deposits. Other 31 March non-cash 31 March 2005 Cash flow Changes 2006 £000 £000 £000 £000 ------- ------- ------- ------- (2) Analysis of movement in net debt Bank and cash balances * 2,554 (2,520) - 34 Debt due after more than one year (233,963) (25,330) 39,932 (219,361) Short-term deposits* 18,663 25,316 - 43,979 ------------------------- ------- ------- ------- ------- Net debt (212,746) (2,534) 39,932 (175,348) ------------------------- ------- ------- ------- ------- *Totalled on balance sheet as cash and short-term deposits. Year ended Year ended 31 March 31 March 2005 2006 £000 £000 ------- ------- (3) Reconciliation of net cash flow to movement in net debt Decrease in cash in the year (12,934) (2,520) Cash inflow/(outflow) from decrease in liquid resources 17,866 (14) ------- ------- Change in net debt resulting from cash flows 4,932 (2,534) Other non-cash changes (21,273) 39,932 ------- ------- Movement in net debt in the year (16,341) 37,398 Net debt b/fwd (196,405) (212,746) ------- ------- Net debt c/fwd (212,746) (175,348) 11 Capital commitments 31 March 31 March 2005 2006 £000 £000 ------- ------- Commitments by LMS Capital Limited 31,427 54,034 Commitments by Inflexion plc 15,129 - ------- ------- Total 46,556 54,034 ------- ------- Since 31 March 2006, the Investment Division has committed to invest a further £16.1 million in funds. This information is provided by RNS The company news service from the London Stock Exchange

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