Lms Capital Regulatory News (LMS)

15 Mar 2007 07:02

LMS Capital PLC15 March 2007 15 March 2007 LMS Capital plc Preliminary Results for the nine months to 31 December 2006 LMS Capital plc, ("LMS Capital" or the "Company"), the AIM-quoted investmentcompany with stakes in public and private UK and US companies and funds,announces its preliminary results for the nine months to 31 December 2006. Financial highlights •The valuation of the investment portfolio at 31 December 2006 was £234.9 million (31 March 2006: £226.6 million) •Realised gains on investments and income from investments were £6.4 million in the nine months ended 31 December 2006 (year ended 31 March 2006: £9.3 million, excluding discontinued activities) •Net unrealised losses on the investment portfolio were £11.5 million (year ended 31 March 2006: £7.6 million) •Net Asset Value per share at 31 December 2006 was 90p (31 March 2006: 76p) •The initial trading price of the Company's shares on admission to AIM on 12 June 2006 was 57p; the closing share price on 13 March 2007 was 73p Operational highlights: •Successful demerger from London Merchant Securities in June 2006 to launch LMS Capital as an independent investment company on AIM •Completion of a tender offer in July 2006, returning £30.2 million to shareholders •Sale of nine positions in US private equity funds for US$21.1 million (£11.1 million) at a premium to book value •Sale of investment in Advanced Communication and Information Systems Limited which realised a gain of £2 million and an IRR of 100% •Refinancing of Energy Cranes, the largest unquoted investment, enabling that company to return £5 million to LMS Capital •Strengthening of investment management team Jonathan Agnew, Chairman of LMS Capital, said: "I am pleased to report LMS Capital's first preliminary results as anindependent investment company. The Company has a broadly-based,risk-diversified portfolio of investments in sectors where the management teamhas considerable experience. Since demerger, we have made significant progressin the development of the business, including establishing the right team todeliver our strategy." Robert Rayne, Chief Executive Officer of LMS Capital, said: "We have achieved robust results in a transitional year for LMS Capital. Duringthe second half of 2006 we concentrated on ensuring that each of our existingdirect investments had a strategy which is aligned to the Company's goal todeliver medium to long term growth for our shareholders. We are seeing a steadyinflow of opportunities and expect to make further new investments in 2007." LMS Capital changed its name from Leo Capital on 14 March 2007 followingshareholder approval. For further information please contact:LMS Capital plc BrunswickRobert Rayne, Chief Executive Officer Simon SporborgMartin Pexton, Managing Director Anisha PatelTony Sweet, Chief Financial OfficerTel: 020 7935 3555 Tel: 020 7404 5959 Notes to Editors LMS Capital plc is an independent investment company whose shares are traded onAIM. The investment portfolio comprises investments in both the US and UK, witha spread of early stage and second round technology investments, developmentcapital and mature company buy-outs. Chairman's Statement In this first annual report from LMS Capital I am pleased to report a number ofsignificant achievements in the development of the business. We completed the demerger from London Merchant Securities in June 2006 and LMSCapital was successfully launched as an independent investment company quoted onAIM. This independence provides the business with greater focus to pursue ourobjective to deliver medium to long-term growth for our shareholders. In June 2006 we also initiated a successful share buyback through a tender offerto provide shareholders with an opportunity to realise their investment in theCompany. The tender offer was completed in July 2006 when we bought back 42.6million shares in the Company at an average price of 71.03 pence per share,thereby returning £30.2 million to shareholders. We now have the right team in place to deliver our strategy and have implementedthe necessary reporting and control systems for the business on a stand alonebasis. We have also completed a thorough review and evaluation of theinvestments within our portfolio and, in the case of the UK unquotedinvestments, have ensured that their operating plans are aligned with ourstrategy. Results The Group achieved realised gains on investments and income from investments of£6.4 million in the nine months ended 31 December 2006 (year ended 31 March 2006- £9.3 million, excluding discontinued activities). Net unrealised losses on theinvestment portfolio were £11.5 million (year ended 31 March 2006 - £7.6million) which includes unrealised losses of £13.4 million (year ended 31 March2006 - unrealised gain of £1.5 million) arising from the weakening of the USdollar against £ sterling. The loss attributable to shareholders for the nine months ended 31 December 2006was £10.8 million (year ended 31 March 2006 - profit of £12.5 million). TheBoard is not recommending payment of a dividend in respect of the nine monthsended 31 December 2006. The valuation of the investment portfolio at 31 December 2006 was £234.9million, an increase of £8.3 million, 3.7%, compared to 31 March 2006. The netasset value per share of the Group at 31 December 2006 was 90p. Board and Management I am delighted that Robert Rayne will continue as Chief Executive Officer andTony Sweet as Chief Financial Officer of the Company on a permanent basis, andthat Martin Pexton has joined the board as Managing Director from 1 February2007. I also welcome Pieter Hooft and Ed Snow to the investment management team. Theyhave significant experience of the buyout and technology sectors in the UK. Ishould also like to record my thanks to the directors, management and staff ofthe Company for their efforts in establishing the business as an independentcompany. Outlook The Company has a broadly-based, risk-diversified portfolio of investments insectors where the management team has considerable experience. Following therecent board and management appointments we are now assured of the strength indepth of our team to move the business forward after this transitional period. We are also seeing a sustained inflow of new investment opportunities and arepursuing a number of opportunities for realisation within the existingportfolio. Your Board is confident that the Company's strategy will result inmedium to long term growth in shareholder value. Jonathan Agnew Chairman 14 March 2007 Business review A new company with an established business LMS Capital's business has a 27 year history of successful investment in a widerange of companies, principally in the UK and the US. The Company was formed toacquire by way of demerger the investment activities of London MerchantSecurities (now part of Derwent London plc). The acquisition completed on 9 June2006. As part of the demerger arrangements, LMS Capital acquired a diversifiedportfolio of investments valued at over £220 million and £70 million in cash,approximately half of which was earmarked for the tender offer in July 2006. Thetender offer, once completed, absorbed £30.2 million. Our objective is to deliver sustained medium to long-term growth for ourshareholders. One of the principal characteristics of LMS Capital whichdifferentiates us from other private equity investors is the time horizon overwhich we are able to invest. We are not constrained by the fixed investmentperiods (typically three to five years) of most private equity funds. It is notuncommon for us to hold investments for longer than this where we believe thatthis will deliver greater shareholder value. Our strategy We invest in companies and industries which we believe have the potential forsuperior growth over the medium to long term. These include the followingsectors where management has extensive prior investment experience: Energy,Applied technology, Media & Leisure and Healthcare & Medical. We understand the drivers of demand in these sectors and this enables us torecognise the potential of both new ideas and young companies requiring growthfunding. A deep knowledge of our chosen sectors acquired over many years allowsLMS Capital to invest in and with leading management teams. We also understand the cyclical nature of the sectors we are working in andthrough taking long-term positions are able to adjust our economic interest toreflect the longer holding period. Having reviewed each of our investments in detail we are currently assessingeach of the sectors that we invest in. This will take account of the returnsgenerated and future prospects, as well as the skills and expertise of ourstrengthened management team. It is likely that over the coming months we shallrefine our existing range of sectors, as well as looking for other opportunitiesin new ones, in particular real estate where management has a strong trackrecord. Since the technology boom in the late 90s and early 2000s we have been nurturingthis element of our portfolio which has resulted in our owning significantstakes. In the medium term we are looking to liquidate some of these holdingsand introduce new investors into others. We retain the freedom to invest outside our core sectors in order to takeadvantage of opportunities when they arise. In addition, approximately 30% ofour portfolio is in quoted securities, which for the most part we first investedin when they were still private companies. Where we perceive there areopportunities for value creation we invest further funds in this part of theportfolio with the aim of maximising returns on any surplus cash holdings. We have had a presence in North America for over 25 years during which time wehave built up a strong network of contacts. This allows us access to the mostexperienced providers of venture and development capital, many of whom are ourpartners in private equity funds. The relationships we have established withthese funds continue to generate significant co-investment opportunities. At 31 December 2006 47% of our portfolio was US based (31 March 2006 - 50%),which includes £54.6 million (31 March 2006 - £62.3 million) invested in USprivate equity funds. This allows us exposure to both the US dollar and £sterling and helps to balance cash flow. The portfolio is structured to have a proportion in early stage companies wherewe expect high return multiples, as well as in companies requiring developmentfinance where the normal holding period would be three to five years. We alsolook for short-term investment in the pre and post IPO market and theseinvestments usually provide liquidity within a maximum of three to four years. One of the key factors in our decision to invest is our assessment of themanagement team. We back good people in our chosen sectors. We expect them torun their businesses and we aim to help them do what they do better. Individualswho create new businesses are typically first class at identifying products,services and markets. However, they often welcome our expertise in areas such asmanaging expansion. We act as enablers and catalysts, using our sector knowledgeand experience of nurturing businesses to support management. We are privileged to have a board that has considerable experience in our coresectors. They bring invaluable expertise to the making of investment decisions.Members of our board (including the non-executive directors) also sit on theboards of the companies we invest in. This enables them to share their insightsand offer support at company level. One of our most important investments is in people, both in the companies inwhich we invest and in the team that manages those investments for the Company.Two new members have recently joined our investment team - Pieter Hooft withresponsibility for our UK investment activities and Ed Snow who now leads ourinvestment operations in the UK technology sector. Both have significantprevious experience, having worked at major investment houses in the UK. The nature of our business exposes it to a number of risk factors, the impact ofwhich the Board seeks to mitigate through its investment strategy: o We have a diversified portfolio covering quoted securities, unquotedsecurities and funds in both the UK and the US across a range of sectors. Inthis way we seek to avoid undue reliance on one any security type, market orsector; o Our primary focus is to invest in unquoted companies which may be small,with limited resources and likely to undergo significant change during ourperiod of ownership. The experience of the executive management team is a keyfactor in mitigating our risk of loss on such investments. o We have significant holdings of quoted securities in both the UK and theUS and are therefore exposed to price movements in those markets. Our managementof these positions draws extensively on our experience of the sectors in whichwe have quoted investments, which are principally our core sectors set outabove. o Many of our investments produce little or no recurring income and thetiming of realisations of unquoted investments cannot be ascertained withcertainty. We rely on our budgeting and forecasting procedures to ensure thatthe cash requirements of the Group are met. A key driver of our business is deal flow and in following up theseopportunities, we undertake rigorous inquiries before committing to invest.These include: o Understanding the company's business plan; o Evaluating information on the market place and competition; o Meeting management, directors and existing shareholders; o Commissioning reports from external experts as necessary on appropriate areas of the business. Operational 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 December 2006 31 March 2006 -------------- -------------- US UK Total US UK Total £'000 £'000 £'000 £'000 £'000 £'000 Quotedsecurities 43,726 25,658 69,384 37,897 18,924 56,821Unquotedsecurities 11,907 87,442 99,349 13,316 84,018 97,334Funds 54,712 11,465 66,177 61,090 11,355 72,445 ------ ------ ------ ------ ------ ------Total 110,345 124,565 234,910 112,303 114,297 226,600 ------ ------ ------ ------ ------ ------ The investments are included in the balance sheet at fair value as set out inNote 1 to the financial statements. During the nine months ended 31 December2006, realisations from the portfolio generated cash of £33.3 million (yearended 31 March 2006 - £36.8 million, excluding discontinued activities). Cashinvested totalled £48.1 million of which £15.9 million was invested in funds,£14.5 million in quoted securities, £1 million in new unquoted securities and£16.7 million was follow-on financing for existing investments. A major focus has been to ensure that each of our unquoted investments has aclear strategic and operating plan which aligns them to our overall objective ofachieving growth in value for the Company's shareholders. Unquoted securities The following is a summary of the Group's ten largest unquoted investments byvalue at 31 December 2006: Book value 31 December 31 MarchName Country Activity 2006 2006 £'000 £'000 Energy Cranes UK Offshore crane operations 34,000 21,474Cityspace UK Urban information networks 12,500 5,000Rave Review Cinemas US Movie theatre operators 7,854 8,244Citizen/Vio Worldwide UK Digital workflow management solutions 7,000 7,819AssetHouse Technology UK Content services infrastructure software 6,000 5,703Entuity UK Network management software 5,300 8,439WeSupply UK Supply chain execution management software 4,000 6,6947 Global UK Software hosting services 3,000 5,985First Index UK B2B marketplace for custom manufactured products 3,000 2,566Corizon UK Software solutions to access multiple applications 2,700 1,923 The book value has been determined in accordance with industry guidelines and isbased on the directors' review of each company's performance, progress and stageof development. Energy Cranes is our largest unquoted investment. It comprises three businessesspecialising in offshore cranes which we brought together over the period 2003to 2005. By mid 2006 the business had made excellent progress and we agreed withmanagement that the company should obtain more favourable third party financingarrangements. This refinancing was completed in September 2006 and Energy Cranesrepaid a total of £5 million to the Company, including £1.4 million ofpreference dividends. A major focus has been to ensure that each of our unquoted investments has aclear strategic and operating plan which aligns them to our overall objective ofachieving growth in value for the Company's shareholders. The operating plans ofindividual companies can encompass any of a number of approaches to achieve thisoverall objective - cost reduction, greater focus, an acquisition, finding a newexternal investor. Examples drawn from our UK technology portfolio of how we have recently appliedthis policy include: 7 Global The company's management has prepared an operational plan which will mean cost reductions to achieve break-even by the middle of 2007. This should provide a base for growth, supported by positive recent feedback from customers and potential customers.Citizen Following a strategic review of options for this business, the(trading company made a significant acquisition in the US in December 2006.Vio) This acquisition brings with it a significant customer base which provides cross-selling opportunities for the complementary Vio products.AssetHouse This company's software is now an established product in its market place and the company needs further funding to expand its sales and marketing and continue its development programme. It is currently seeking an investor to inject the necessary funds in return for a significant equity stake. In November 2006 we sold our interest in Advanced Communications and InformationSystems Limited ("ACIS") for £3.0 million. The Company made a £1 millionco-investment in ACIS in April 2005 (alongside the Inflexion 2003 Buyout Fund)and the sale proceeds represented an internal rate of return on our investmentof 100%. Co-investment with funds where the Company is a limited partnercontinues to be an important element of our investment strategy. Funds The Group's ten largest fund investments by value at 31 December 2006 are: Book value 31 December 31 MarchFund Country Activity 2006 2006 £'000 £'000 San Francisco Equity Partners US Technology, media & retail 21,729 16,514Spectrum IV US Communications/IT 8,208 8,762Boston Ventures LP VI US Media & leisure 5,466 7,537Amadeus II LP UK Early stage technology 4,994 4,628Boston Ventures LP V US Media, publishing communications & leisure 3,511 4,048Scottish Equity Partners II UK Technology & energy 3,189 2,510Gene Weber (Bermuda)Partnership US Software 2,357 2,688Inflexion II UK Mid-market buyouts 2,248 1,714Bank of America NewCentury Fund US Buyout funds 1,471 1,489Brynwood Partners V US Mid-market buyouts 1,334 1,012 Following a review of our interests in US private equity funds, we decided totake advantage of the buoyant secondary market for such interests during theyear. Accordingly in October 2006 we agreed to sell nine of our interests forUS$21.1 million (£11.1 million). The sale proceeds resulted in a premium overthe book value of the interests of £0.9 million. We continue to monitor our portfolio of fund interests and will take advantageof further opportunities in the secondary market if we consider it appropriate. San Francisco Equity Partners ("SFEP") is a US limited partnership in which theGroup has a 99% interest. It is the principal vehicle through which the Groupinvests in unquoted companies in the US. During the nine months ended 31December 2006 SFEP acquired an 18% interest in Luxury Link, an online providerof luxury travel packages, for US$ 4.5 million (£2.4 million) and invested afurther US$6.3 million (£3.4 million) in its existing portfolio companies. Quoted securities The Group's ten largest quoted investments are: Book value 31 December 31 MarchName Country Activity 2006 2006 £'000 £'000 Weatherford International US Oilfield services 19,630 18,612ProStrakan Group UK Speciality pharmaceuticals 19,427 17,392Grant Prideco US Oil and gas exploration 8,233 1,208Chyron Corporation US Media technology 4,846 2,086Bridgewell UK Investment banking 3,632 -Ivanhoe Energy US Oil and gas exploration 1,964 4,520Atheros Communications US Manufacture of wireless chips 1,700 2,357Covad Communications US Business communications 1,624 2,886Monogram Biosciences US Drug discovery 1,401 2,111Gourmet Holdings UK Pub/restaurant operator 1,355 1,254 Quoted investments continue to form an important part of our investmentstrategy, and most of our holdings have resulted from private companies in whichwe originally invested (either directly or through private equity funds)obtaining a public listing for their shares. During 2006 we have: •Invested cash (approximately £12.5 million) in quoted stocks in the oilfield services sector, principally Weatherford International and Grant Prideco which we believed were undervalued, and •Realised a number of our smaller holdings by value to enable us to focus on a smaller number of stocks, principally in the oilfield services and technology sectors. Financial Review Basis of preparation of financial information The financial information of the Group for the nine months ended 31 December2006 and the year ended 31 March 2006 has been prepared on a merger accountingbasis as if it had been in existence in its current form throughout both theseperiods. The company was formed on 17 March 2006 and commenced operations on 9June 2006; accordingly it has no statutory comparative figures. The results forthe Group for the year ended 31 March 2006, together with the financial positionat that date, have been presented in the financial statements on a pro formabasis for comparative purposes. Further details of the basis of preparation areset out in Note 1 to the financial 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 for the year ended 31 March 2006. Results of operations The Group's return on its investment portfolio during the nine months ended 31December 2006 was a loss of £5.0 million (year ended 31 March 2006 - profit of£1.7 million, excluding discontinued activities). Profit on realisation of investments was £5.1 million (year ended 31 March 2006- £9.3 million, excluding realised losses of the discontinued activities of £1.7million). This includes £2.0 million on the sale of ACIS and £0.9 million on thesale of nine of our US fund interests, as well as realised gains ondistributions from our interest in funds and gains on sales of listedinvestments. The higher profit on realisations in the year ended 31 March 2006includes gains on the sale of two quoted securities which were not repeated inthe nine months ended 31 December 2006. Unrealised losses on investments, being the net impact of fair value adjustmentsto the Group's investment portfolio, were £11.5 million (year ended 31 March2006 - £7.6 million; there were no unrealised gains or losses in thediscontinued activities). The most significant factor in the nine months ended31 December 2006 was the impact of the weakening of the US dollar against £sterling on our US investments; this resulted in an unrealised loss of £13.4million (year ended 31 March 2006 - unrealised gain of £1.5 million). Thepositive fair value adjustment of £1.9 million, excluding the currency impact,includes a £2.4 million unrealised gain as a result of no longer recognising amarketability discount on one of our quoted investments and £2.5 million inrespect of increases in value of our fund investments, offset by net adjustmentsof £3.0 million reducing the value of our quoted and unquoted securities. We have carried out a detailed review of the value of each of our unquotedsecurities as at 31 December 2006. The most significant change is the increasein the fair value of Energy Cranes by £16.2 million (after the impact on ourcarrying value of the refinancing during the year) to £34 million, whichreflects the continuing excellent performance of that business. We have reducedthe fair value of our other unquoted investments by £18.9 million, including£16.8 million in respect of our UK technology investments. The net charge for fair value adjustments in the year ended 31 March 2006comprised £28.4 million net unrealised gains, principally on the Group's quotedsecurities and fund investments (including the favourable foreign currencyimpact referred to above) offset by increased provisions against the valuationof unquoted securities of £33.4 million. Income from investments in the nine months ended 31 December 2006 was £1.4million (year ended 31 March 2006 - £nil, excluding £0.2 million in thediscontinued activities) and comprises preference dividends paid by EnergyCranes. Administration expenses for the nine months ended 31 December 2006 were £4.9million (year ended 31 March 2006 - £7.9 million, of which £3.5 million relatedto the discontinued activities. The proportionately higher costs in the ninemonths ended 31 December 2006 reflect the Company's change of status to astand-alone AIM-quoted company in that period. Exceptional costs of £3.1 million were incurred in respect of the demerger (£2.4million) and the tender offer (£0.7 million). There were no exceptional costs inthe year ended 31 March 2006. Net interest income for the nine months ended 31 December 2006 year was £1.3million (year ended 31 March 2006 - £1.8 million). The tax charge for the nine months ended 31 December 2006 was a credit of £0.7million (year ended 31 March 2006 - credit of £15.7 million). Included in thecredit for the year ended 31 March 2006 is a credit of £17.4 million receivablefrom London Merchant Securities as consideration for tax losses surrendered asgroup relief before the demerger. Investments The Group's investments are included in the balance sheet at fair valuesdetermined in accordance with industry guidelines. Details of the Group'saccounting policy for the valuation of investments are set out in Note 1 to thefinancial information. At 31 December 2006 these investments amounted to £ 234.9 million (31 March 2006- £226.6 million) - an increase of £8.3 million (3.7%). New investments during the year were £48.1 million (year ended 31 March 2006 -£71.5 million, of which £13.6 million related to the discontinued activities).Proceeds of realisations were £33.3 million (year ended 31 March 2006 - £73.1million of which £36.3 million related to the discontinued activities). At 31 December 2006 the Group had commitments to meet capital calls from privateequity funds in the US and the UK totalling £45.6 million. Financial position The Group balance sheet at 31 December 2006 includes cash of £24.1 million (31March 2006 - £44.0 million), of which £1.6 million (31 March 2006 - £43.1million) is held in Inflexion and will be distributed to shareholders oncompletion of the members' voluntary liquidation. The first such distributionwas paid in April 2006. The Group had no third party indebtedness at 31 December 2006. Outlook During the second half of 2006 we have concentrated on ensuring that each of ourexisting direct investments has a strategy which is aligned to the Company'sgoal to deliver medium to long term growth for our shareholders. We expect tomake further progress on this in 2007. We have made no significant new direct investments in the nine months ended 31December 2006. However we continue to see a steady flow of opportunities and weexpect to make further new investments in 2007. The new members of ourinvestment team are already making a significant contribution in this area. Robert RayneChief Executive Officer14 March 2007 This information is provided by RNS The company news service from the London Stock Exchange