Lms Capital Regulatory News (LMS)

4 March 2014

LMS Capital plc

Preliminary Results for the year ended 31 December 2013

The Board of LMS Capital plc, ("LMS Capital" or "the Company"), is pleased to announce the Company's preliminary results for the year ended 31 December 2013.

· The Net Asset Value at 31 December 2013 was £165.3 million, 88p per share (31 December 2012: £192.1 million, 85p per share).

· In July £35 million was returned to shareholders by way of a tender offer; this brought to £75 million the total returned to shareholders since the commencement of the realisation strategy.

· The proceeds received from the investment portfolio during the year were £44.4 million (2012: £43.2 million).

· Gains on the investment portfolio were £16.5 million (2012: losses of £4.1 million) before charges for incentive plans.

· Overheads were £3.8 million, reduced from £5.3 million in 2012.

· The profit for the year was £9.0 million (2012: loss of £12.2 million).

· Outstanding fund commitments reduced from £10.4 million to £8.1 million over the year.

Martin Knight, Chairman of LMS Capital, said:

"In 2013 the Board made further progress in implementing the asset realisation strategy approved by shareholders in November 2011 and we were able to make a second distribution to shareholders. Against the background of improving economic conditions, the Board believes that the Company's plans for the orderly wind-down of the business should continue to deliver value to shareholders."

For further information please contact:

About LMS Capital

LMS Capital is an investment company which, following a general meeting on 30 November 2011, is undertaking a realisation strategy with the aim of achieving a balance between an efficient return of cash to shareholders and optimising the value of the Company's investments. Its investment portfolio consists of small to medium sized companies in the consumer, energy and business services sectors.

The Company's ten largestinvestments by valuation at 31 December 2013 were as follows:

*San Francisco Equity Partners manages these investments.

The above represent 69% of the investment portfolio.

www.lmscapital.com

Chairman's statement

In 2013 your Board has continued to progress the realisation strategy approved by shareholders at the general meeting on 30 November 2011.

Following a change in the accounting rules for investment entities, which was adopted by the European Union in November 2013, the Group's financial statements no longer consolidate investments which are majority owned; these are included at fair value. Your Board welcomes this change (the impact of which is set out in Note 2 to the financial statements) and believes the new basis provides greater clarity on the results and financial position of its operations.

Realisation proceeds to date

This year, realisations from the portfolio were £44.4 million including £3.3 million of realised gains. In July 2013, £35.0 million was returned to shareholders by way of a tender offer.

At 1 January 2012, the commencement of the realisation strategy, the net asset value of the Company was £245.0 million. Since that date, a total of £75.0 million has been returned to shareholders by way of tender offers; the net asset value of the Company at 31 December 2013 was £165.3 million.

The capital returned equates to around 31% of the net asset value at the end of 2011 and approximately 50% of the Company's market capitalisation at the time of the November 2011 General Meeting.

At the year end the Company had cash of £17.8 million; the Board will consider a further return of capital in the light of realisations in the coming year.The Board is not recommending payment of a dividend for the year ended 31 December 2013 (2012: £nil).

Portfolio performance

Investments in the portfolio generally performed well with net gains for the year of £16.5 million. Favourable movements in prices of our quoted investments of £7.6 million were the largest factor in this; our unquoted and fund interests contributed £4.0 million and £4.9 million respectively. Net Asset Value per share at the end of 2013 was 88p, an increase of 3.5% from 85p a year ago.

Future realisations

The Company's ability to exert control or influence over the realisation process for individual assets depends on its rights as an investor in each case. For some direct investments it has control rights; for funds and other minority investments, the Company may have a degree of influence, but no control. In all cases the Company monitors the performance of its investments both through the receipt of regular information and through its relationships with the fund manager and in the case of direct investments with the investee management, and by actively exercising its investor rights.

Where underlying financial performance is satisfactory, individual asset disposals are currently favoured over discounted transactions in the secondary markets. However, all options are kept under review.

Managing the portfolio

As the asset base of the business reduces, continued steps are being taken to contain overheads and further headcount reductions were implemented in the first half of 2013.

Given the reducing size of the Company Mark Sebba and Richard Christou decided not to stand for re-election at the 2013 Annual General Meeting. I took over as Chairman at the conclusion of that meeting. 

As a result of these and earlier changes, overhead costs have been brought down by approximately 50% compared to two years ago.

Conclusion and Outlook

The change in strategy has placed special demands on a smaller management team and your Board would like to extend its appreciation to all the Company's employees for their contribution in 2013.

I would also like to record the Company's appreciation to Richard Christou and Mark Sebba for their contribution to the Board.

Your Board believes that the investment portfolio will continue to release cash to shareholders in the medium term. The economic background has improved in recent months and on the basis that this trend continues, and market conditions remain favourable for asset divestments, your Board expects to progress the orderly wind-down of the business in the coming year and will focus on optimising value and cash flow for the benefit of shareholders.

Martin Knight

Chairman

4 March 2014

Strategic report

LMS Capital plc is an international investment company whose shares are traded on the London Stock Exchange. At the general meeting on 30 November 2011 shareholders approved proposals to modify the Company's objectives and its investment policy. The revised investment policy is to conduct an orderly realisation of the assets of the Company, to be effected in a manner that seeks to achieve a balance between an efficient return of cash to shareholders and maximising the value of the Company's investments.

This report is in three parts:

1. A summary of the Company's objectives and strategy, including a description of its business model;

2. A review of the Company's performance in 2013 against the background of these strategic objectives; and

3. A statement of the principal risks and uncertainties faced by the Company in its operations and strategy.

1 Objectives and strategy

The focus of the Company's directors is to optimise realisations from the investment portfolio and return the proceeds to shareholders on a timely basis. The investment portfolio comprises publicly quoted and private company investments in the UK and the US held directly and through funds. To date returns to shareholders have taken the form of tender offers and the directors expect the use of tender offers to continue as the realisation strategy progresses.

No investments will be made in new opportunities. Follow-on investments will be made in existing assets to honour commitments made at the time of the initial investment and/or to which the Company is legally obligated, or where the investment is made to protect or enhance the value of an existing asset or to facilitate its orderly realisation.

The Company's investment portfolio is managed by appropriately qualified and experienced investment professionals. Since the change in strategy at the end of 2011, the Company has sought to reduce its overall costs and this process has included headcount reductions. As the asset base decreases the Board will continue to seek to reduce the Company's operating costs.

Overall management of the business is the responsibility of the two executive directors. Mr Friedlos has responsibility for overseeing the orderly realisation of the assets of the Company and financial matters are the responsibility of Mr Sweet; both act within delegated authority limits and in accordance with clearly defined systems of control.

The Board regularly reviews reports prepared by the executive directors on the realisation prospects for each portfolio holding in the context of the Company's overall objectives, including the factors affecting the likely amount and timing of the realisations. These factors include:

· The performance of each underlying investment which is monitored regularly with commentary on trends and risks at each investee company.

· The level of confidence in the economy in which both the investee company and a potential acquirer operate. This includes prospects for the investee company in its chosen markets as well as the likely availability of finance generally for investment, including the degree of liquidity in capital markets.

· The likely value of any realisation based on comparable trading multiples for quoted companies in the same sector as well as the price of other purchase transactions.

· Recent prices within secondary markets.

The Directors' current expectation is that the realisation of the portfolio in line with these objectives is likely to be substantially completed over the next three years, in line with previously disclosed estimates. Shareholders should note that whilst these are the best estimates of the Board as at the date of this report, they are subject to a number of uncertainties including general market conditions, the future performance of investee companies, the behaviour of other shareholders in investee companies (in particular where the Company is a minority investor) and the level of activity in the mergers and acquisitions market across the geographies of the Company's assets. The Board will keep shareholders informed on progress through the Company's half-yearly and annual reports, and significant individual realisations will be announced as appropriate.

2 Review of performance in 2013

Key performance indicators

The following are the key performance indicators for 2013:

Cash realisations from the portfolio in the year came from a number of sources:

The follow-on investments during 2013 were:

· £1.5 million to provide working capital for ICU Eyewear (a portfolio investment of San Francisco Equity Partners, "SFEP");

· £0.6 million to acquire shares in Yes To (also a portfolio investment of SFEP) at below market; and

· £0.9 million to provide working capital for two of our smaller direct investments.

In July 2013 the Directors made the second return of cash to shareholders under the realisation strategy by way of a tender offer.

NAV per share increased over the year by 3 pence - the profit for the year was £9.0 million (2012: loss of £12.2 million).

The principal factor in the results is the return on the investment portfolio which was as follows:

Charges for incentive plans include £2.5 million (2012: £nil) in respect of the executive directors' incentive plan and £1.5 million (2012: £3.1 million) for carried interest.

Approximately 59% of the portfolio at 31 December 2013 is denominated in US dollars (31 December 2012: 56%) and the above table includes the impact of currency movements. In the year ended 31 December 2013, the weakening of the US dollar against pound sterling (year on year) resulted in an unrealised foreign currency loss of £2.2 million (2012: unrealised loss of £5.6 million). As is common practice in private equity investment, it is the Board's current policy not to hedge the Company's underlying non-sterling investments.

Quoted investments

The gain on the quoted portfolio reflects the net impact of the changes in the capital markets during the year. Of the total gain of £7.6 million (2012: loss of £6.3 million), £0.2 million (2012: £nil) was realised on sales; of the unrealised element of £7.4 million (2012: loss of £6.3million), £5.0 million (2012: loss of £5.3 million) is attributable to our holding in Weatherford International.

At the end of 2013 our quoted holdings were valued at £24.0 million (2012: £17.1 million), of which our interest in Weatherford International, at £19.1 million, continues to be the principal element. The Weatherford International share price performed well in 2013 - our carrying value at the end of December 2013 was 36% higher than at 31 December 2012.

Direct investments

The net gain on our direct investments includes £0.8 million realised on sales (principally Apogee less other small net items) and unrealised net valuation increases on our remaining holdings of £3.2 million as follows:

Changes in valuations reflect a combination of two factors:

· changes in the revenue and profitability multiples and transaction prices of comparable businesses, which are used in the underlying calculations; and

· the operating performance of the individual businesses within the portfolio.

The multiples we used this year are similar to those prevailing at the end of 2012 (except as set out above for HealthTech) and therefore the unrealised gains or losses set out in the table above arise principally as a result of the companies' performance.

Fund interests

The maturity of our funds portfolio is reflected in the related cash flows during 2013. Distributions from funds were £15.5 million (2012: £32.2 million, including £18.1 million from SFEP following its sale of Method) and calls paid were £3.3 million (2012: £5.3 million).

We are the majority investor in SFEP (as opposed to our other fund interests where we have only a minority stake) and at the end of 2013 the carrying value of our interest was £17.5 million (2012: £20.2 million) and the principal investments in its portfolio are Yes To (£8.5 million (2012: £8.3 million) - consumer sector), Penguin Computing (£4.3 million (2012: £4.2 million) - technology sector) and Luxury Link (£4.0 million (2012: £4.2 million) - consumer sector).

Our other fund holdings at the end of 2013 (excluding SFEP) had a book value of £51.6 million (2012: £56.3 million), and include the following principal interests:

The above holdings represent 73% of the funds portfolio (excluding SFEP).

For the valuation of our fund interests we utilise reports from the general partners of our funds as at the end of the third quarter in establishing our year end carrying value, with adjustments made for calls, distributions and foreign currency movements since that date. We also carry out our own review of individual funds and their portfolios to satisfy ourselves that the underlying valuation bases are consistent with our basis of valuation and knowledge of the investments and the sectors in which they operate.

Other income statement items

As well as the investment portfolio return, the profit/loss for the year of £9.0 million (2012: loss of £12.2 million) includes the items discussed below.

Income from investments in the year was £0.8 million (2012: £1.2 million) and comprises interest and dividends from portfolio companies, dividends on quoted securities and directors' fees from portfolio companies.

Overhead costs in 2013 were £3.8 million (2012: £5.3 million), the reduction by 28% compared to last year reflecting cost cutting measures instituted by the Board as the Company's operations reduce in scale.

Interest income for the year was £0.1 million (2012: £0.1 million) and there was a tax charge for the year of £0.5 million (2012: £1.0 million), being principally withholding tax on distributions from US funds.

Financial resources and commitments

Cash holdings were £17.8 million (31 December 2012: £20.1 million) with no debt. At 31 December 2013 the Group had commitments of £8.1 million (31 December 2012: £10.4 million) to meet outstanding capital calls from its fund interests.

Employees

The number of employees (including directors) was as follows:

The directors do not consider that information on environmental matters and social, community and human rights issues is necessary for an understanding of the development, performance or position of the Company's business; this information is therefore included in the Directors' Report.

3 Principal risks and uncertainties

Set out below is a summary of the principal risks and uncertainties that could have a material adverse effect on the Group's strategy, performance and financial condition. The Group has an on-going process for identifying, evaluating and managing risk with the aim of mitigating the impact of the risks and uncertainties to which the business is exposed. This process provides reasonable, rather than absolute, assurance in managing risk and cannot eliminate it.

The Group's risk profile derives from a combination of two elements - the Group's own strategy, including the actions taken within that strategic framework, and the effects of changes in the external economic environment in which it operates, including the impact on the companies in its investment portfolio. The Board is satisfied that the Group's risk management process is appropriate in the context of the objectives and strategy set out above.

The Audit Committee oversees the Group's risk management process and is provided with a report on risk management at each of its meetings. Further information on this is provided in the Audit Committee Report. The management of specific risks is the responsibility of the executive directors.

The principal risks and uncertainties summarised below are not set out in order of probability of occurrence or materiality; the Group may also be adversely affected by other risks and uncertainties besides those described here.

Economic and financial risk

The Group is subject to economic factors (such as the market demands of the sectors in which its investments operate) which may negatively impact the performance and growth rates of the Company's investments, which may result in the Company's Net Asset Value and net income declining. We seek to mitigate the potential impact of this by monitoring the trading performance and cash flows of our portfolio companies on a regular basis which allows us to act quickly should there be a need to do so, although the extent of any action we can take is dependent on the degree of influence we exercise over individual investments.

A lack of liquidity in the capital markets could mean that the Company may not be able to realise its investments in line with planned timings and values. This could impact the timing and amount of capital returned to shareholders under the Company's asset realisation strategy. Difficulties could arise in agreeing the Company's plans to realise investments with investee companies' management and investing partners leading to realisations being lower and/or later than planned.

Many of our investments produce little or no recurring income and the timing of realisations of unquoted investments (which itself may be a function of underlying economic conditions) cannot be ascertained with certainty. We rely on our detailed budgeting and forecasting procedures to ensure that the cash requirements of the Group are met. The Board regularly reviews the Company's working capital requirements and believes it has sufficient liquid resources to meet its expected cash obligations for the foreseeable future.

The Group is subject to the impact of changes in market prices for its quoted investments, as well as to movements in interest rates and exchange rates. A significant proportion of our investment portfolio is denominated in a currency other than pounds sterling, principally US dollars. Changes in the value of the US dollar affect the valuation of the Company's US investments, and therefore impact the valuation of the portfolio as a whole. The Group regards its exposure to exchange rate changes on the underlying investment as part of its overall investment return; it is the Board's current policy not to hedge the Company's underlying non-sterling investments.

The Group has made investments in funds and by virtue of these investments may be obliged to make further capital contributions. Whilst the maximum amount of the future commitment is known, the timing of such capital calls cannot be predicted with certainty. The monitoring of this exposure is included in the Group's budgeting and forecasting procedures referred to above.

Investment risk

The Group's investment risk arises as a result of individual investment decisions and the performance of its investments. Our investment management process requires regular monitoring of the performance and prospects of each investment; this is usually achieved by board representation or equivalent at each investment. The experience of the management team is a key factor in mitigating our risk of loss on individual investments. The progress of each investment is reported regularly to the Board including an update on expected realisation timing and value.

Operational risk

The Group has a number of internal processes and systems to ensure that it complies with all legal and regulatory obligations, as well as internal controls designed to ensure the integrity of its financial information and reporting. The Audit Committee, on behalf of the Board, regularly reviews these systems, which include reports on the Company's risk management procedures. The Company has instituted procedures to ensure that Directors' outside interests do not give rise to conflicts with its operations and strategy.

By order of the Board

N Friedlos

Director

4 March 2014

Consolidated income statement

Consolidated statement of comprehensive income

Consolidated statement of financial position

Consolidated statement of changes in equity

Consolidated cash flow statement

Notes

1. Principal accounting policies

Reporting entity

LMS Capital plc ("the Company") is domiciled in the United Kingdom. These financial statements are presented in pounds sterling because that is the currency of the principal economic environment of the Company's operations. The consolidated financial statements of the Company for the year ended 31 December 2013 comprise the Company and its subsidiaries (together "the Group").

The Company was formed on 17 March 2006 and commenced operations on 9 June 2006 when it received the demerged investment division of London Merchant Securities. The consolidated financial statements are prepared as if the Group had always been in existence. The difference between the nominal value of the Company's shares issued and the amount of the net assets acquired at the date of demerger has been credited to merger reserve.

Basis of preparation

This financial information has been prepared in accordance with International Financial Reporting Standards as adopted for use in the European Union ("Adopted IFRS") although the financial information in this announcement is not sufficient to comply with Adopted IFRS.

On 30 November 2011 shareholders approved a change in the investment policy of the Company with the objective of conducting an orderly realisation of the assets of the Company in a manner that seeks to achieve a balance between an efficient return of cash to shareholders and maximising the value of the Company's investments. As the Directors intend to liquidate the Company following the realisation and settlement of the remaining net assets, which may be over a number of years, these consolidated financial statements have not been prepared on a going concern basis.

The accounting policies adopted are consistent with those of the previous financial year except as follows:

On 31 October 2012, the International Accounting Standards Board issued Investment Entities (amendments to IFRS 10, IFRS 12 and IAS 27). These amendments provide an exception to existing IFRS 10 consolidation requirements, and require investment entities to measure certain subsidiaries at fair value through the profit or loss account rather than consolidating. The standard and its amendments were adopted by the European Union on 20 November 2013.

The Company's business purpose is solely to invest funds for returns from capital appreciation and for investment income and it measures and evaluates the performance of all of its investments on a fair value basis. Accordingly it meets the criteria for investment entity status set out in IFRS 10 (as amended) and (as permitted) the Company has early adopted the amendments with a date of initial application of 1 January 2013. In accordance with the transitional provisions of the amendments the Company has applied the new accounting policy retrospectively and restated the comparative information. The impact of this change in accounting policy is set out in Note 2 to the financial information.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2013 or 2012 but is derived from those accounts. Statutory accounts for 2012 have been delivered to the registrar of companies, and those for 2013 will be delivered in due course. The auditor has reported on those accounts; their report on the accounts for 2013 was (i) unqualified and (ii) drew attention by way of emphasis without qualifying their report to the accounts not being prepared on a going concern basis and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. Their report on the accounts for 2012 was (i) unqualified, (ii) drew attention by way of emphasis without qualifying their report to the accounts not being prepared on a going concern basis and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The financial statements have been prepared on the historical cost basis except for investments held at fair value through profit or loss which are measured at fair value.

2. Change in accounting policy

LMS has early adopted the International Accounting Standards Board's Investment Entities amendments to IFRS 10, IFRS 12 and IAS 27, with a date of initial application of 1 January 2013.

The amendments were issued on 31 October 2012 and provide an exception to existing IFRS 10 consolidation requirements, and require investment entities to measure certain subsidiaries at fair value through the profit or loss account rather than consolidating. The standard and its amendments were adopted by the EU on 20 November 2013.

The impact of this change in accounting policy on the Group's income statement for year ended 31 December 2012 is set out below:

The impact of this change in accounting policy on the Group's financial position at 31 December 2012 is set out below:

The companies excluded from consolidation are as follows:

* Control of this company is exercised via shareholder agreements.

The total fair value of the above subsidiaries was £33,376,000 as at 1 January 2012, the effective date of the change in accounting policy. At that date the exclusion of these subsidiaries from consolidation gave rise to a net gain of £8,081,000, reduced to £4,605,000 after minority interest adjustments.

3. Gains/(losses) on investments

Gains and losses on investments were as follows:

Charges for incentive plans include £2,478,000 (2012: £nil) in respect of the executive directors' incentive plan (which is linked to cash returns to shareholders from the realisation strategy) and £1,552,000 (2012: £3,126,000) for carried interest.

4. Earnings/(loss) per ordinary share

The calculation of the basic and diluted earnings per share, in accordance with IAS 33, is based on the following data:

5. Capital commitments

The outstanding commitments to funds comprise unpaid calls in respect of funds where a member

of the Group is a limited partner.