Jz Capital Regulatory News (JZCP)

13 Jul 2005 07:00

JZ Equity Partners PLC13 July 2005 For Immediate Release 13 July 2005 JZ Equity Partners Plc ("JZEP" or the "Company") PRELIMINARY RESULTS JZEP, the independently managed US Management Buyout Investment Trust, todayannounces preliminary results for the year ended 31 March 2005. Highlights: • NAV at year end is 198.9p (164.3p) • Earnings per share for year are 11.47p (5.72p) - Exceptional items 4.2p • Final dividend of 6.0p per share, 10.5p total for year (2004:5.0p) • A year of realisations at attractive valuations • Ability of Adviser to source micro cap deals through Bolder. • New investment deals underway Chairman, Andrew Withey, said: We are pleased that we are successfully moving from profitable realizations ofour legacy portfolio to a range of new investment opportunities! For further information please contact: JZ Equity Partners 020 7491 3633Andrew Withey, Chairman Buchanan Communications 020 7466 5000Mark Edwards / Isabel Podda Chairman's Statement The year to 31 March 2005 has shown an improvement in the value of the JZ EquityPartners' (JZEP) investment portfolio. Against the background of a buoyant USeconomy we have not only been able to complete a number of profitable disposalsbut we have also demonstrated that a process of re-investment is underway. Forthe year under review we are also able to report an increased net return aftertax and higher dividends to shareholders. Very shortly before the scheduled announcement of JZEP's preliminary resultsyour directors were notified by their tax advisors of the need to undertake areview of the tax treatment of investments, from which we have exited and whereyour company held preference share or preference interests in investeecompanies. It has been concluded from this review that three previous transactions did notgenerate taxable income and, as a consequence, your company should be able toreclaim payment of associated UK corporation tax in connection with theseinvestments. In the light of this your company has recognised a tax credit of £1.1million inthe financial statements, resulting in a lower overall tax charge for 2005/6 andthus a higher level of distributable income. In future your company will haveregard to the outcome of the recent review when initiating investments anddisposals. NET ASSET VALUE Over the year, Net Asset Value (NAV) improved by 34.6p or 21.1% in comparisonwith rises of 4.8% and 4.2% respectively of the Standard and Poors and Russell2000 Indices denominated in US $. The NAV rose 15.6p from successfulrealisations, 13.2p from the LePage's litigation settlement, 2.4p fromcrystallisation of certain escrow accounts and an increase in the value of theremaining listed and unlisted portfolio of 15.4p. The largest realisations wereof Professional Paint and PBT which accounted for 12.5p of the NAV increase.JZEP also benefited to the extent of 1.3p from recognition of payments due underthe Memorandum of Understanding with the Adviser (JZAI). These agreementscovered losses from certain holdings in the J/Z CBO, for which we wereindemnified by JZAI and others. In addition, the NAV benefited from 1.1p inrelation to the tax adjustment mentioned above. To offset these gains there wasa fall in the US dollar which reduced NAV by 6.3p, an accrual of 5.4p in respectof the Zero Dividend Preference Shares and other downward adjustments amountingto 2.7p. INCOME AND DIVIDENDS Net income for the year rose by 100.5% to 11.5p per share. As previouslyreported 2.7p of this increase arose from the recognition of certain income atthe time of the ProPaint realisation and will not be repeated. Likewise, therewas also 0.4p from payments under the Memorandum of Understanding and 1.1p fromthe tax adjustment referred to above. Recurring income therefore rose by 1.6p or27.6%. The tax review has resulted in a delay to the publication of these results andwill affect the timing of the issue of our annual accounts and the date of ourAGM. Accordingly there will also be a delay in the payment of the finaldividend. Your directors have decided to recommend a final dividend of 6p inaddition to the 4.5p paid at the interim, making 10.5p for the year, or anincrease of 110% over 2003/4. STRATEGY Since inception our primary business has been to invest in the mezzanine segmentof the US unlisted company market. This encompasses, at one end, bank debt andhigh cash yield securities with no or very limited equity participation to, atthe other end, lower cash yield investments with a significant equity content.The nature and mix of our portfolio will inevitably vary to reflect the changingmarket place and the views of our advisors, JZAI, on where the best balance ofrisk and total return is to be found. In addition our Advisors seek outopportunities to provide us with higher yields on our cash resources pending reinvestment. A principle focus of your Company is debt and equity investment in small tomedium sized private companies in the USA (the micro cap market). Identified andstructured by Bolder Capital, an associate of your Adviser, investments willnormally be into established companies with less than $25 million of EBITDA and$75million of sales. Recent investments identified by Bolder Capital include MidAmerica Recycling, Dantom Systems and Vista Fibers. Further investments will be made in mezzanine deals in conjunction with otherleading private equity investors. Returns will come from income and, in somecases, an equity participation and include recent investments in WizaIndustries, JTH Tax and Totes Isotone. From time to time, it may also be possible to participate alongside the ResoluteFund, a partnership managed by an affiliate of JZAI. Equity and preferred stockinvestment in TAL International Group is an example of this approach. With JZEP's available cash resources, investments have been made in the debt ofprivate companies, such as SCIL (Second Lien) investments or more senior debt. SHARE BUYBACKS As a result of the active and successful realisation policy, cash balancesamount to $106.6million and £31.4 million at the time of writing. In thiscontext, your Board is aware of the cost of £102.3m for the Zero DividendPreference Shares maturing in 2009. During the year, 2.6 million of ZeroDividend Preference Shares and 1.0 million Ordinary Shares have been bought backfor cancellation. The asset cover for the remaining Zero Dividend PreferenceShares is 2.7X. To provide maximum flexibility, a resolution to authorise the Directors topurchase up to 14.99% of the Ordinary and Zero Dividend Preference share capitalin issue will be proposed at the forthcoming Annual general Meeting. When sharesare available in reasonable volumes and at acceptable prices we may considerfurther purchases, while maintaining sufficient liquidity to cover commitmentsand to make new investments. DIRECTORS During the year, Charles Peal resigned from the Board and Tanja Tibaldi joinedthe Board bringing experience inter alia in shareholders relations, which webelieve will be valuable. It is the intention of the Board to make a further appointment when a suitablecandidate is identified. INTERNATIONAL FINANCIAL REPORTING STANDARDS International Financial Reporting Standards (IFRS) apply to listed groups from1st January, 2005 but as the Company does not prepare consolidated accounts itwill not have to comply with these changes for the year ahead. It will, however,be affected by the harmonisation of UK Generally Accepted Accounting Practice(UK GAAP) with IFRS, which will represent changes to the Company's currentaccounting policies. The Company is close to completing its assessment of the changes that willresult when the financial statements currently prepared under UK GAAP areprepared under the new UK Standards (FRS). REVIEW OF THE INVESTMENT ADVISER JZEP was founded in 1986 to enable investors to participate in transactionsoriginated and structured by Jay Jordan and David Zalaznick. Accordingly, theBoard believes that it is its role to facilitate these opportunities in a waythat is appropriate for the Company. To this end, there are regular discussions with Jordan/ Zalaznick Advisers, Inc(JZAI), the company created in 1986 by Jay Jordan and David Zalaznick, to act asadviser to JZEP. These discussions encompass the changing conditions in the USprivate equity/mezzanine markets, the kinds of transactions that will be mostefficient and the level of finance and method needed, to bring such transactionsinto being. The Board is conscious that JZEP and its investment strategy will be judged bythe results it delivers. Accordingly, performance is monitored against a rangeof benchmarks, no one indicator being solely appropriate for a fund of JZEP'stype. The Board is aware that such monitoring cannot be short term in nature andhas confirmed the continuance of JZAI's appointment on the basis that theresources, commitment and flair that are available to JZEP justifies thecontinued employment of JZAI. OUTLOOK Subject to unforeseen circumstances, including major changes in currency rates,it is hoped that the dividend for 2005/6 will be higher than the 5p paid for2003/4. Bearing in mind the special factors I have detailed shareholders shouldnot expect dividends to match those paid for 2004/5. Your directors believe that the last year has not only shown progress in therealisation of the legacy portfolio but also significant effort in putting inplace a structure for future re-investment. Recent transactions have evidencedthat this process is working and your Company's cash is being put to workeffectively and in a reasonable timescale. Andrew Withey 13 July 2005Chairman INVESTMENT ADVISER'S REPORT Dear Fellow Shareholders, We have completed the most active year in JZEP's almost nineteenyear history. We were fortunate to have achieved significant realizations atattractive prices. We also made many new investments which moved us toward ourgoal to build a new diversified portfolio that will yield sustainable dividendand NAV growth. As the credit markets expanded and prices for business rose, we realized elevenof JZEP's investments, some at significant profits - total proceeds were inexcess of $250 million. As you will see in the Investment Review, almost allthe old names of the legacy portfolio are exited. We have made good progress on the investment program and "back to the future"strategy we presented to our fellow shareholders one year ago. During the pasttwelve months, we invested over $170 million in eighteen companies. NEW INVESTMENTS We made investments in all four areas that comprise JZEP'sinvestment program, they are: 1) traditional mezzanine investments which providemonthly income with small capital appreciation (six new investments totaling $40million); 2) micro-cap buyouts which historically have been the main engine ofJZEP's growth (three new investments totaling $54.0 million); 3) second lienbank loans (nine new investments totaling $62 million); and 4) mezzanine andequity opportunities that come to JZEP from our private equity fund, TheResolute Fund, (one new investment of $14.5 million). SEQ CHAPTER /h /r 1JZEP co-invested with five different partners infive traditional mezzanine deals to support the acquisitions of M/CCommunications LLC (medical education) Morton Industrial Group, Inc. (metalcomponents), Totes Isotoner (cold weather and rain products), Wiza IndustriesLLC (precision machinery ) and Liberty Tax Service (tax return preparer).These investee companies are all performing well - our returns are contractual,generally without equity, so they yield a consistent low to mid-teens return. JZAI's affiliation with The Edgewater Funds, a private equity firm,yielded three investments in the micro-cap category. We have been working withEdgewater for the past year to identify, negotiate and buy smaller businesseswhere JZEP can participate up and down the capital structure from senior debt tosubordinate debt to Preferred stock with substantial equity interests. SinceJZEP owns significant equity in these deals, we anticipate the returns willexceed the low to mid-teens return of traditional mezzanine lending. In December 2004, JZEP invested $20.1 million in the acquisition of Mid AmericaRecycling, Inc. (aluminum, glass and paper recycling). The mezzanine portion ofthis investment was $6.0 million in 12.5% (10% cash/2.5% PIK) subordinate debt,$3.0 million in 8% PIK Preferred and $40,000 in common stock for a 40% effectiveequity interest. JZEP also took the opportunity to provide Mid America with$11.0 million of senior debt at 8% on a short to medium term basis. In April,JZEP made a follow-on acquisition, Vista Fibers (recycling services), whichadded an additional $10.6 million to JZEP's investment; the mezzanine portionwas $5.1 million in 12.5% (10% cash/2.5% PIK) subordinate debt, $1.0 million in8% PIK Preferred and $4.5 million in 8% senior debt. Also, in April 2005, JZEP invested $22.8 million in the micro-capbuyout of Dantom Systems, Inc. (outsourced information processing for debtcollection companies). The senior debt provided was $14.5 million at 8% and themezzanine portion was $3.6 million in 12.5% (10% cash/2.5% PIK) subordinate debt, $4.7 million in 8% PIKpreferred and $49,000 in common stock for an effective equity interest of 42.5%. We arranged for JZEP to make a $14.5 million equity investmentalongside The Resolute Fund to support our acquisition of Transamerica MaritimeContainer Inc. ("TMC"), the third largest container leasing company in theworld. TMC was purchased from AEGON N.V. for $1.2 billion; JZEP purchased $14.5million in 12% Cumulative Preferred stock and a nominal investment in commonstock for an effective equity interest of 6.13%. Our expectation is that thisinvestment will yield very attractive investment returns. Finally, JZEP purchased a total of $63 million in nine second lienloans, establishing a highly diversified portfolio by size and industry; JZEP'saverage investment is $7.0 million and no one investment is larger than $8.0million. These are floating rate loans and average about 7% above LIBOR, foran 8.5% cash yield. The underlying companies include building products, ITstaffing, outsourcing for branded consumer products, credit card processing andprecision bearing products. Two of these investments have been repaid at apremium to par while one has traded down significantly and will probably berestructured. The other six are all trading at or above par. REALIZATIONS We realized eleven of JZEP's investments in the past twelve monthswith gross proceeds in excess of $250 million. The following table reviews the realizations over the past year: Company Name Investment Realization JZEP Total Multiple of IRR Date Date Investment Proceeds Invested Capital Lincoln Industrial Dec-01 Apr-05 $16.8 $49.5 2.9x 50.1%Corporation Safety Insurance Oct-01 Mar-05 26.9 79.6 3.0x 52.4%Group, Inc. Universal Technical Jan-98 Mar-05 28.9 142.7 4.9x 37.7%Institute, Inc.(Current) Bear Creek Jun-04 Feb-05 6.0 6.6 1.1x 14.9%Corporation Builders Firstsource, Jun-04 Feb-05 7.5 8.1 1.1x 15.8%Inc Permatex, Inc. Aug-99 Dec-04 28.7 33.4 1.1x 3.1% AEC Holdings, Inc. Apr-95 Oct-04 28.4 56.7 2.0x 11.9% Gate Gourmet Jan-03 Oct-04 9.9 12.1 1.2x 13.0% Professional Paint, Aug-00 Sep-04 35.1 77.8 2.2x 23.6%Inc. LePage's Industries, Jun-93 Jun-04 14.0 30.0 2.1x 9.8%Inc. Flavor and Fragrance Jun-99 May-04 16.5 29.7 1.8x 25.7%Group Holdings, Inc. Duro-Med Industries, Jun-95 May-04 16.3 37.9 2.3x 14.0%Inc. Mabis Healthcare Aug-99 May-04 9.7 18.9 1.9x 17.7%Holdings, Inc. These returns qualify JZEP to be at the top of the class for U.S. private equityfirms' comparable vintage funds. JZEP is more than a "mezzanine" fund becauseof the large equity stakes it receives from our proprietary deal flow. THE FUTURE Our goal is to build a more diversified portfolio with sustaineddividend and NAV growth. We made great strides toward that goal in the pastyear and will continue to build our staff to increase the number of high qualityinvestment opportunities offered to JZEP. While seeking diversity throughsenior/second lien loans and "traditional" mezzanine, we expect the micro-capbuyouts to be the growth engine for NAV appreciation. We advised on threemicro-cap buyouts with JZEP investing $54 million in the past six months andhave several new transactions in various stages of development. We have built JZEP's business so that it can thrive throughdifferent market cycles. This past year was a very difficult time for investorsof mezzanine finance due to a robust high-yield market and very aggressive bank(senior) financing. Our firm has the infrastructure and professionals togenerate proprietary transactions regardless of market cycles. Once the creditmarkets soften and the prices come down, there will be even more investmentopportunities available to JZEP at our targeted returns. We expect that thespecial nature of JZEP will allow it to outperform its peer group by a widemargin. Next year, JZEP will celebrate its twentieth anniversary. We have come a longway since floating JZEP with £29 million in 1986. Some of you have been with usfrom the beginning or certainly for many years. JZEP has also attracted a largenumber of new investors in recent years. It has been a rewarding time but ouraspiration is for an even brighter future. Our message to our fellowshareholders is that JZEP is uniquely qualified to grow in a very challengingmezzanine/private equity market where there is too much money chasing too fewdeals at high prices. Our activity is focused on the lower tier of the middlemarket where we can originate and create proprietary transactions. That hasbeen our history and will continue to be how we produce superior returns forshareholders in JZEP. As always, we thank you for your long-term support and confidence inour activities. Yours truly, John W. Jordan IIDavid W. Zalaznick JZ EQUITY PARTNERS PLCUnaudited Statement of TotalReturn for the year ended 31 March 2005 2005 2004 Notes Revenue* Capital Total Revenue* Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Gains on investments 0 47,977 47,977 0 46,446 46,446Income from investments 1 17,774 0 17,774 15,169 0 15,169Other income 2,432 0 2,432 647 0 647Investment Adviser's fees 2 -2,470 -1,330 -3,800 -2,204 -1,187 -3,391Currency losses -300 -6,492 -6,792 -3,420 -29,186 -32,606Administrative expenses -1,498 0 -1,498 -1,276 0 -1,276Legal fees 0 0 0 0 -48 -48 Net return before finance costsand taxation 15,938 40,155 56,093 8,916 16,025 24,941Interest payable and similar 2 0 0 0 -27 -14 -41charges Net return on ordinary activities before 15,938 40,155 56,093 8,889 16,011 24,900taxationTaxation 3 -3,964 399 -3,565 -2,891 360 -2,531 Net return on ordinary activities after 11,974 40,554 52,528 5,998 16,371 22,369taxationAppropriations in respect of ZeroDividend Preference shares 4 0 -5,582 -5,582 0 -5,338 -5,338 Return attributable to ordinaryshareholders 11,974 34,972 46,946 5,998 11,033 17,031 Dividends on equity shares paid and -10,908 0 -10,908 -5,244 0 -5,244proposed Transfer to reserves 1,066 34,972 36,038 754 11,033 11,787 Return per ordinary share 5 11.47 33.51p 44.98 5.72p 10.52p 16.24p \* The revenue column of this Statement is the profit and loss account of the Company The notes form an integral part of the unaudited financialstatements All revenue and capital items derive from continuing operations. No operations were acquired or discontinuedin the year. Final dividendThe Directors have declared a final dividend of 6.0p per share (2004:2.5p) on 103,878,826 Ordinary shares inrespect of the year ending 31 March 2005, which will be marked ex-dividend on 20 July 2005 and paid on 26September 2005 to shareholders on the Register on 22 July 2005. JZ EQUITY PARTNERS PLCUnaudited Balance Sheetat 31 March 2005 Notes 2005 2004 £'000 £'000Fixed AssetsUnlisted investments 6 151,408 121,153Listed investments 6 38,861 62,476 190,269 183,629 Current AssetsDebtors 27,505 16,226Cash at bank 75,079 52,480 102,584 68,706Creditors: Amounts falling due within one yearCreditors 10,588 -4,617Net current assets 91,996 64,089Total assets less current 282,265 247,718liabilitiesProvision for liabilities and chargesDeferred taxation -1,817 -3,389 Net Assets 280,448 244,329 Attributable to:Equity - Ordinary Shares 206,664 172,263Non-equity - Zero Dividend Preference Shares 73,784 72,066 Shareholders' funds 7 280,448 244,329 Net asset value per Ordinary Share 8 198.9p 164.3p Net asset value per ZeroDividend Preference Share 155.7p 144.1p The notes form an integral part of the unaudited financial statements JZ EQUITY PARTNERS PLCUnaudited Cash flowfor the year ended 31 March 2005 2005 2004 £'000 £'000Operating activitiesInvestment income 24,759 11,328Bank deposit interest 2,356 647Expenses -5,477 -4,633 21,638 7,342Servicing of FinanceInterest and other finance costs paid 0 -70 TaxationCorporation tax paid -3,490 -2,122 Investment ActivitiesAcquisition of investments -101,671 -13,816Disposal of investments 122,714 45,732Net cash inflow from financial investment 21,043 31,916 Equity share dividends paidOrdinary shares -7,297 -5,244 FinancingRepurchase and cancellation of Zero Dividend Pref Shares -4,046 0Repurchase and cancellation of Ordinary Shares -1,455 0 -5,501 0 Net cash inflow 26,393 31,822 The notes form an integral part of the unaudited financial statements JZ EQUITY PARTNERS PLC Notes to the Unaudited Financial Statements 1 Income from investments Investment income and other income receivable are included on an accruals basis. Where there is reasonable doubt that income which fails to be recognised in an accounting period will actually be received, such income is not accrued until it is clear that its receipt is no longer in doubt. Where subsequent to the accrual of income, receipt becomes doubtful, a provision is made until the reasonable doubt is removed. 2 Investment adviser's fees, interest payable and similar charges Investment Adviser's fees, interest payable and other finance costs were allocated as to 65% to revenue account and 35% to realised capital reserve. 3 Taxation Tax rate to 31 March 2005: 30% (2004: 30%) 4 Zero Dividend Preference Shares 2005 2004 £'000 £'000 Attributable net assets at 1 April 72,066 66,728 Appropriations in respect of Zero Dividend Preference Shares 5,582 5,338 Less attributable net assets of shares redeemed during year -3,864 0 Attributable net assets at 31st March 73,784 72,066 5 Return to Ordinary shareholders Revenue return per Ordinary share is calculated on net revenue after taxation of £11,974,000 (2004: £5,998,000) and 104,377,456 Ordinary shares being the weighted average number of Ordinary shares, which were in issue between 1 April 2004 and 31 March 2005 (2004: 104,878,826 ). Capital return per Ordinary share is calculated on net capital gains of £34,972,000 (2004: £11,033,000) and 104,377,456 Ordinary shares being the weighted average number of Ordinary shares, which were in issue between 1 April 2004 and 31 March 2005 (2004: 104,878,826 ). 6 Fixed asset investments Unlisted investments are included at Directors' valuation at 31 March 2005. Listed equity investments are valued at the last quoted price at the balance sheet date 7 Shareholders' funds 2005 2004 £'000 £'000 At 1 April 244,329 227,204 Total return for the year 46,946 17,031 Dividends paid and proposed -10,908 -5,244 Repurchase of Ordinary shares -1,455 0 Repurchase of Zero Dividend Preference shares -4,046 0 Appropriation to Zero Dividend Preference shares 5,582 5,338 At 31 March 280,448 244,329 JZ EQUITY PARTNERS PLCNotes to the Unaudited Financial Statements 8 Net asset value per share The net asset value per Ordinary share at 31 March 2005 is calculated on attributable net assets of £206,664,000 (2004: £172,263,000) and 103,878,826 ( 2004: 104,878,826) Ordinary shares in issue at 31 March 2005 9 Foreign exchange rate At 31st March 2005, income and expenditure accrued and assets and liabilities denominated in US dollars was translated into sterling using an exchange rate of US$1.8880 (2004 - US$1.8437). 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