Lms Capital Regulatory News (LMS)

12 Jun 2006 08:00

Leo Capital Plc12 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 specialpurpose accounts prepared under UK GAAP by the directors of London MerchantSecurities PLC ("LMS") in connection with the demerger of its investmentdivision to the Company ("the Demerger"). Further details on the basis ofpreparation 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 resultsand financial position of the LMS investment division ("the Group") during thatperiod, before the restructuring as a result of the Demerger and the admissionof Leo Capital to trading on AIM. The restructuring includes the forgiveness ofcertain indebtedness owed by the investment division to other LMS subsidiaries,the transfer of the investment division to the Company and the transfer of cashof £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 beeneffected as at 31 March 2006. Full details of the Demerger and the admission of Leo Capital to trading on AIMare 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 BrunswickRobert Rayne, CEO Simon SporborgTony Sweet, CFO Nina Coad Alex TweedTel: 020 7935 3555 Tel: 020 7404 5959 Notes to Editors Leo Capital plc is a new independent investment company whose shares are tradedon AIM from today, 12 June 2006. It was formed to receive the demergedinvestment division of London Merchant Securities plc. The investment portfoliois 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 beginstrading 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 itsown shareholder base independent of LMS. There will be a transitional period as the Leo Capital management team isfurther strengthened and we expect to have made significant progress with thisby the end of 2006. For the purposes of the Demerger, the directors of LMS prepared special purposeaccounts under UK GAAP containing combined financial information for the LMSInvestment Division ("the Group") which is now owned by the Company. Thefinancial information in Part II is extracted from these special purposeaccounts for the years ended 31 March 2006 and 31 March 2005. Further details onthe basis of preparation of the special purpose accounts are set out in Note 1to the financial information. Excluding the discontinued activities of Inflexion plc, the Group achievedrealised profits on disposals of £9.3 million (2005 - £8.3 million). Unrealisedgains on the investment portfolio were £28.4 million (2005 - £7.9 million)arising principally on the fund investments and quoted securities in theportfolio, offset by provisions of £33.4 million (2005 - £7.6 million)principally against the unquoted element of the portfolio. These provisionsinclude £23.6 million to reflect in the valuation of those investments thechanged 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 excludingthe 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 2006includes the impact of the £23.6 million provision against the valuation ofunquoted securities referred to above. Assuming the Demerger had been completed as at 31 March 2006, the pro-forma netasset value per share of the Company at that date would have been £0.90. Thispro-forma figure is before taking into account any adjustment for the expectedtender offer to shareholders that was described in the Demerger documentation.Further details of the Company's plans for the tender offer are expected to beannounced shortly. Board and Management I am delighted that John Barnsley, Richard Christou and Bernard Duroc-Dannerhave joined the Board as non-executive directors and that Robert Rayne willcontinue his involvement in the business. He will act as Chief Executive Officeruntil a permanent successor is found, at which point he will be invited toremain on the Board as a non-executive director. I should like to record my thanks to the directors, management and staff of LMSfor their considerable efforts in executing the Demerger. Outlook Although during the last few weeks markets have shown increased volatility, theCompany has significant investment opportunities and a broadly based,risk-diversified portfolio of investments in sectors where the management teamhas considerable experience. Your Board is confident that the currentinvestments will contribute positively to the Company's strategy of medium tolong-term growth in shareholder value. Jonathan AgnewChairman Operating Review The Group's portfolio is risk diversified, containing holdings in quoted andunquoted 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 Quotedsecurities 37,897 18,924 56,821 27,685 1,581 29,266 14,576 43,842Unquoted securities 13,316 84,018 97,334 14,714 113,405 128,119 4,939 133,058Funds 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 ofwhich were in the UK) and its shareholders approved the voluntary liquidation ofthe company. Performance The investments are included in the balance sheet at fair value as set out inthe Accounting Policies. At the end of the year the value of the Group'sportfolio 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 - £8.3million). New investments totalled £ 57.9 million, of which £24.9 million wasinvested in funds, £23.3 million was follow-on financing for existing companiesand £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 7,385Boston Ventures LP VI US Media & leisure 7,537 4,470Amadeus II LP UK Early stage technology 4,628 3,992Boston Ventures LP V US Media, publishing communications & leisure 4,048 3,100Foundation IV US Technology 2,867 1,839Weiss, Peck & Greer VA VI US Early stage technology 2,796 1,824Gene Weber (Bermuda) Partnership US Software 2,688 2,348Scottish Equity Partners UK Technology & energy 2,510 1,791Foundation Capital III US e-commerce 1,613 1,491 The Group invested £24.9 million in funds during the year, most of which was tomeet 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 partnershipin which the Group has a 99% interest, commenced operations. SFEP is now theprincipal vehicle through which the Group invests in unquoted companies in theUSA. 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 CranesInternational UK Offshore crane operations 21,473 18,725Entuity UK Network management software 8,439 7,037Rave Review Cinemas US Movie theatre operators 8,244 4,722Citizen/Vio Worldwide UK Digital workflow management solutions 7,819 9,400WeSupply UK Supply chain execution management software 6,694 8,0247 Global UK Software hosting services 5,985 11,446AssetHouse Technology UK Content services infrastructure software 5,703 4,683CopperEye UK Database indexing technology and software 5,294 4,520Cityspace UK Urban information networks 5,000 9,832Offshore Tool & Energy UK Oilfield services 4,636 7,303 The book value of unquoted investments in the US has reduced compared to 31March 2005 as a result of the transfer of certain investments to SFEP when itcommenced operations as described above. This reduction has been substantiallyoffset by improved trading performances from Rave Review Cinemas and LifeMastersSupported SelfCare which have led to a higher valuation for these businesses. The Group's largest investment, Energy Cranes International, had a successfulyear growing revenues and profitability. In January 2006 the company expandedits rental crane fleet through the acquisition of Dynamic Cranes in the Gulf ofMexico. In the year ended 31 March 2006 we invested a further £15.9 million in theGroup's portfolio of unquoted UK companies in the applied technology sector,although we also considered it appropriate to increase our provisions againstthe value of many of these investments. The reduction in the value of UK unquoted securities also reflects thereclassification 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 12,009ProStrakan Group UK Speciality pharmaceuticals 17,392 16,212Ivanhoe Energy US Oil and gas exploration 4,520 -Covad Communications US Business communications/VoIP 2,886 1,642Atheros Communications US Manufacture of wireless chips 2,357 530Monogram Biosciences US Drug discovery 2,111 2,052Chyron Corporation US Broadcast technology 2,086 613Gourmet Holdings UK Pub/restaurant operator 1,254 1,202Grant Prideco US Oilfield services 1,208 1,847AXS-One US Enterprise software 798 1,218 The Group has continued to benefit from its experience in the oilfield servicessector and during the year our investments in Ivanhoe, Grant Prideco andWeatherford contributed strongly to both realised and unrealised gains. Our US technology portfolio also performed well, in particular AtherosCommunications, Chyron Corporation and Covad Communications. In the UK, we invested a further £2 million in ProStrakan Group, whichsuccessfully completed its IPO in June last year with a market capitalisation atthe 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 inPart II has been prepared in respect of the Group which, prior to the demergerfrom LMS on 9 June 2006, comprised the investment division of LMS. The financialinformation also includes three investments held by a subsidiary of LMS outsidethe Group which were transferred to the Group before the demerger. Following the demerger, the Company is now the ultimate holding company of theGroup. Further details of the basis of preparation are set out in Note 1 to thefinancial information. In March 2006 Inflexion plc, in which the Group has a 58% interest, disposed ofits business and its shareholders approved a members' voluntary liquidation ofthe company. The results of Inflexion are shown as discontinued activities inthe financial information. Commentary in relation to the year ended 31 March 2006 relates to the resultsand financial position of the Group during that period, before the restructuringof the Demerger and the admission of Leo to trading on AIM. The restructuringincludes the forgiveness of certain indebtedness owed by the Investment Divisionto other LMS subsidiaries, the transfer of the investment division to theCompany and the transfer of cash of £65 million from LMS to Leo Capital as partof the Demerger arrangements. Results of operations The Group's operating loss for the year before investment activity was £6.0million (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 - £1.1million) to the discontinued activities. The increased loss in both activitiesis 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 £1.7million (2005 - profits of £6.2 million). The realised profits of the continuingactivities arise principally on the Group's quoted securities and fundinvestments. The Group's share of the administration costs of the funds in whichit invests was £2.6 million (2005 - £1.1 million). Fair value adjustments for the year were £5.0 million net charge (2005 - £0.3million net favourable). In 2006 this relates solely to the continuingactivities (2005 - £5.2 million net charge for the continuing activities, £5.5million net favourable in the discontinued activities). The net charge in 2006comprises £28.4 million net unrealised gains on the valuation of the investmentportfolio (2005 - £7.9 million) offset by increased provisions against thevaluation of unquoted securities of £33.4 million (2005 - £7.6 million). The netunrealised gains principally arose on the Group's quoted securities and fundinvestments. The provisions against the valuation of unquoted securities include£23.6 million (2005 - nil) to reflect in the valuation of those investments thechanged circumstances of the investment division following the Demerger. The Internal Rate of Return ("IRR") generated by the portfolio in the year ended31 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 takingaccount of the cash inflows and cash outflows associated with the investmentportfolio. These cash flows take account of any dividend income and are gross ofoverheads, fees and carried interests. The value of the opening portfolio istreated as the assumed cash out flow at the beginning of the period and thevalue 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 areset 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 millioncharge). Included in the credit for the current year is a credit of £17.4million receivable from the LMS property division as consideration for taxlosses surrendered as group relief. Investments The Group's investments are included in the balance sheet at fair valuesdetermined in accordance with industry guidelines. Further details of thevaluation principles are set out in Note 1 to the financial information. At 31 March 2006, these investments amounted to £226.6 million (2005 - £203.7million, excluding investments held by Inflexion of £24.5 million) - an increaseof £22.9 million (11.2%). New investments during the year were £71.5 million (2005 - £72.9 million) ofwhich £57.9 million (2005 - £65.2 million) related to the continuing activitiesand £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 £36.8million (2005 - £48.5 million) related to the continuing activities and £36.3million (2005 - £11.6 million) related to the discontinued activities. At 31 March 2006 the Group had commitments to meet capital calls from venturecapital 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, ofwhich £43.1 million is held in Inflexion and comprises the proceeds of thedisposal by Inflexion of its business in March 2006. This cash will bedistributed to shareholders as a consequence of the members' voluntaryliquidation 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 aspart of the demerger arrangements. During the year as part of the demergerarrangements there was a reorganization of intercompany indebtedness betweenmembers of the Group and companies within the LMS property division. As aconsequence of this reorganization, £22.5 million owing by the Group to LMS waswaived by LMS. This amount is included in the Combined Statement of TotalRecognised 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 at31 March 2006. This statement has been prepared to illustrate the effect on thenet assets of the Group at 31 March 2006 that the demerger would have had if ithad completed on that date. Further details on the basis of preparation of thisinformation are set out in Part I. This statement shows pro-forma net assets of the Group on demerger in the amountof £295.5 million. On admission to AIM, the Company had 329,001,513 shares inissue, which equates to net assets per share on a pro-forma basis at 31 March2006 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 fallingdue 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 morethan one yearAmounts 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 67,656 295,549Minority 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 £000Turnover 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 196Profit on disposal ofinvestments 6 13,518 4,997Fair value adjustments 6 333 (4,952) ------- -------Profit/(loss) on ordinary 8,934 (5,780)activities before financecostsNet finance income 4 1,218 1,849 ------- -------Profit on ordinaryactivities before taxation 10,152 (3,931) ------- -------Tax (charge)/credit onprofit on ordinary activities 5 (2,208) 15,686 ------- -------Profit on ordinary activities 7,944 11,755after taxationEquity 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 £000Fixed assets Tangible assets 105 -Investments 6 228,225 226,600 ------- ------- 228,330 226,600 ------- -------Current assetsDebtors 7 1,162 1,172Cash and short-term deposits 8 21,217 44,013 ------- ------- 22,379 45,185Creditors: amounts falling due within one year 9 (1,797) (2,470) ------- -------Net current assets 20,582 42,715 ------- -------Total assets less current liabilities 248,912 269,315Creditors: amounts falling due after more thanone yearAmounts 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 reservesCalled up share capital 83,339 83,339Profit and loss account (86,799) (51,607) ------- -------Equity shareholders' (deficit)/funds (3,460) 31,732Equity 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 note10(1)) (3,279) (4,555)Returns on investments and servicing of financeInterest received 1,267 1,246Interest paid (197) (87)Investment income received 163 195 -------- -------Net cash inflow from returns on investments andservicing of finance of finance 1,233 1,354 Taxation paid (1,956) (442) Capital expenditure and financial investmentAcquisition of tangible fixed assets (37) (514)Disposal of tangible fixed assets - 555Purchases of investments (73,986) (72,465)Realisations of investments 61,684 73,533 -------- -------Net cash (outflow)/inflow from capital expenditure andfinancial investment (12,339) 1,109 Acquisitions and disposalsPurchase of subsidiaries - -Net cash acquired with subsidiary - - -------- -------Cash outflow before management of liquid resources andfinancing (16,341) (2,534) Management of liquid resourcesIncrease in short-term deposits (see note 10 (2)) (17,866) (25,316) FinancingFunding 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 thefinancial period 3,388 3,154 12,521Unrealised gain oninvestment 1,094 -Waiver of inter-company debt - - 22,500 -------- -------- --------Currency translationdifferences on foreign currencynet investments 66 53 171 -------- -------- --------Total recognised gains relatingto the financial period 4,548 3,207 35,192 -------- -------- -------- During the year as part of the demerger arrangements there was a reorganizationof intercompany indebtedness between members of the investment division andcompanies within the LMS property division. As a consequence of thisreorganization, £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 LMSgroup of companies during the period under review. For this reason, noconsolidated statutory accounts for the Investment Division have previously beenprepared. As a result of the demerger, the Company is the main holding companyof LMS Capital Limited and its subsidiary undertakings together with threeinvestments assumed to have been transferred since 1 April 2002, adjusted foradministration expenses borne by service companies and not previously rechargedto LMS Capital Limited. For the purposes of the demerger, the directors of LMS have prepared specialpurpose UK GAAP accounts containing combined financial information for theInvestment Division. These special purpose accounts are based on financialreturns for this period, prepared for consolidation purposes within the LMSGroup by the Company, and have been prepared on the basis set out in theaccounting policies set out below. This financial information does not constitute statutory accounts of theInvestment 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 whenit reported as part of the LMS group. The main difference is that fixed assetinvestments are valued at fair value rather than cost less provision fordiminution in value and the resulting fair value adjustments have been includedin the profit and loss account. The majority of the Investment Division activities were undertaken by LMSCapital Limited and its subsidiaries. These special purpose combined financialstatements have been therefore based on the financial accounts of LMS CapitalLimited and its subsidiaries. Three investment assets which formed part of theInvestment Division were not legally held by the LMS Capital Limited group butinstead were held by another LMS subsidiary. For the purpose of these financialstatements, two of these assets are assumed to have been acquired on 1 April2002 by LMS Capital Limited and the other asset is assumed to have been acquiredon the same date it was acquired by the other LMS subsidiary. Adjustments havealso been made for administration expenses relating to the Investment Divisionborne by service companies in the LMS group and not recharged to LMS CapitalLimited and its subsidiaries. Investment Division share capital is based on theshare capital of LMS Capital Limited. The principles set out below have been applied in preparing the special purposecombined financial statements and financial information. Accounting convention The financial information has been prepared under the historical costconvention, modified to include the revaluation of fixed asset investments andin accordance with applicable accounting standards and with the Companies Act.The accounting policies have been applied consistently in dealing with itemswhich are considered material in relation to the Investment Division's financialinformation. Basis of consolidation Except as explained below, the financial information incorporates results of LMSCapital Limited and its subsidiaries made up to 31 March 2005 and 2006.Subsidiary undertakings acquired during accounting periods are accounted forusing the acquisition method of accounting. Fixed asset investments that are subsidiary undertakings are carried atvaluation in accordance with the Investment Division's normal accounting policyfor such investments, and are not consolidated as required by FRS 2 'Accountingfor Subsidiary Undertakings'. These investments within the Investment Division'sportfolio are held for resale with a view to the ultimate realisation of capitalgains, although not necessarily with a view to disposal within one year ofacquisition. The Investment Division's exposure to these companies is limited toits investment at the balance sheet date. Consequently, the Directors considerthat consolidation would not give a true and fair view of the InvestmentDivision's interest in these investments. Fixed asset investments Investments are included in the balance sheet at fair value. Fair values havebeen determined in accordance with industry guidelines. These guidelines requirethe valuer to make judgments as to the most appropriate valuation method to beused and the results of the valuations. Each investment is reviewed individuallywith regards to the stage, nature and circumstances of the investment and themost appropriate valuation method selected. The valuation results are thenreviewed and any amendment to the carrying value of investments is made asconsidered appropriate. (i) Quoted investments Quoted investments for which an active market exists are valued at the closingbid price on the balance sheet date. Quoted investments which are subject to contractual restrictions on when theymay 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 usingthe most appropriate valuation technique with regard to the stage and nature ofthe 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 ofthe funds will generally provide periodic valuations on a fair value basis whichthe Investment Division will adopt provided it is satisfied that the valuationmethods used by the funds are not materially different from the InvestmentDivision's valuation methods. Tangible fixed assets These comprise computers, furniture, fixtures and fittings and are depreciatedon a straight-line basis to estimated residual values over their estimateduseful lives of between 3 and 5 years. Goodwill Goodwill, including negative goodwill, arising on acquisition is calculatedbased upon a comparison of the fair value of the assets acquired and the fairvalue of the consideration given and other costs of acquisition. Foreign currencies Transactions in foreign currencies are recorded at the rate of exchange at thedate of transaction. Assets and liabilities denominated in foreign currencies atthe balance sheet date are reported at the rates of exchange prevailing at thatdate, and exchange differences are included in the profit and loss account. Investments denominated in foreign currencies are translated at the closingrates ruling at the balance sheet date as part of the fair value adjustment andare treated through reserves. The results and balance sheets of overseas operations are translated at theclosing rates ruling at the balance sheet date. Exchange differences arising ontranslation 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 anddeposits repayable on demand, less overdrafts payable on demand. Liquid resources are current asset investments which are disposable withoutcurtailing or disrupting the business and are either readily convertible intoknown amounts of cash at or close to their carrying values or traded in anactive 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 therecognition of gains and losses in the accounts and their recognition in a taxcomputation. In accordance with FRS 19 'Deferred Tax', deferred tax is provided in respect ofall timing differences that have originated, but not reversed, at the balancesheet date that may give rise to an obligation to pay more or less tax in thefuture. 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 itsincome from investments made in shares, securities and managed investmentsthrough two segments, those managed by the Investment Division's managementdirectly and those managed by Inflexion. On 16 March 2006 Inflexion disposed ofits business and related assets and on 29 March 2006 its shareholders approvedthe voluntary liquidation of the company. Consequently the information set outin the tables below for the Inflexion segment relates to discontinuedactivities. The directors of LMS consider that the investment portfolio represents onegeographical 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 1,834Administrativecosts (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) ------- ------- ------- ------- ------- -------Investmentincome 18 144 162 3 193 196Profit ondisposal ofinvestments 8,346 6,233 14,579 9,340 (1,702) 7,638Fair valueadjustments (5,176) 5,509 333 (4,952) - (4,952)Partnershipnet losses (1,061) - (1,061) (2,641) - (2,641)--------- ------- ------- ------- ------- ------- -------(Loss)/profiton ordinaryactivitiesbefore financecosts andtaxation (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 goodwillTangible assets - 105 105 - - -Investments 203,716 24,509 228,225 226,600 - 226,600 ------- ------- ------- ------- ------- -------Fixed assets 203,716 24,614 228,330 226,600 - 226,600Debtors 409 753 1,162 1,096 76 1,172Cash andshort-termdeposits 1,347 19,870 21,217 870 43,143 44,013Creditors:amounts fallingdue withinone year (92) (1,705) (1,797) (1,009) (1,461) (2,470)--------- ------- ------- ------- ------- ------- -------Total assetsless current 205,380 43,532 248,912 227,557 41,758 269,315liabilities ------- ------- ------- ------- ------- ------- Creditors:amounts fallingdue aftermore than one (233,963) (577) (234,540) (219,361) - (219,361)yearProvisions forliabilities 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 1,237Exchange (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 periodUK corporation taxCharge on profit/(loss) for the period 503 137Group relief receivable (17,431)Adjustments relating to prior periods 115 (98)US taxation on disposal of venture capitalinvestments - 521Other 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 corporationtax 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 2,299Overseas losses / (profits) not available forcurrent deduction (339) 60Adjustments to tax charge in respect of priorperiods 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 March2004 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 72,950Proceeds fromdisposal (22,973) (17,753) (7,817) (11,578) (60,121)Gain/(loss) ondisposal 3,574 4,254 (543) 6,233 13,518Revaluations 658 1,917 (7,751) 5,509 333--------- -------- -------- -------- -------- --------At 31 March2005 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 71,466Proceeds fromdisposal (20,035) (14,124) (2,629) (36,348) (73,136)Gain/(loss) ondisposal 513 5,912 273 (1,701) 4,997Revaluations 12,170 12,756 (29,878) - (4,952)--------- -------- -------- -------- -------- --------At 31 March2006 72,445 56,821 97,334 - 226,600--------- -------- -------- -------- -------- -------- The fund investment, listed investment and unlisted investment categories shownabove comprise the portfolio of investments managed directly by the InvestmentDivision. The Inflexion investments are owned and managed by Inflexion. TheInflexion investments comprise: -As at 31 March 31 March 2005 2006 £000 £000 ------- ------Listed investments 14,576 -Unlisted investments held via Inflexion plc'sinterest 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 thetable below. Name Activity Geography Stake Original cost Valuation £'000 £'000----------- --------- --------- ----- ------------- ----------- Energy Cranes Offshore craneInternational operations UK 82% 21,473 21,473 WeatherfordInternational OilfieldLtd Services US