Annual Report • Dec 31, 2010
Annual Report
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| Overview | |||
|---|---|---|---|
| 01 | Highlights of the year | ||
| 02 | Chairman's statement |
| Business review | |||
|---|---|---|---|
| 04 | Operating review | ||
| 11 | Financial review |
| Governance | ||||
|---|---|---|---|---|
| 14 | Board of Directors and Investment team | |||
| 16 | Corporate governance report | |||
| 22 | Principal risks and uncertainties | |||
| 24 | Remuneration report | |||
| 32 | Directors' report | |||
| 36 | Statement of directors' responsibilities | |||
| 37 | Independent auditor's report to the members of LMS Capital plc |
| Financial statements | |||||
|---|---|---|---|---|---|
| 39 | Consolidated income statement | ||||
| 40 | Consolidated statement of comprehensive income | ||||
| 41 | Consolidated statement of financial position | ||||
| 42 | Company statement of financial position | ||||
| 43 | Statements of changes in equity | ||||
| 44 | Consolidated cash flow statement | ||||
| 45 | Company cash flow statement | ||||
| 46 | Notes to the financial information | ||||
| 80 | Shareholders' information |
Net Asset Value per share was 90p (31 December 2009: 84p), an increase of 7%;
Net Asset Value was 245.0 million (31 December 2009: 227.7 million);
The investment portfolio showed a net gain of £23.9 million (year ended 31 December 2009: net loss of £4.9 million) reflecting a recovery in prices of our quoted holdings and improved valuations for our fund interests;
The consolidated profit for the year from continuing operations (including portfolio subsidiaries) was £15.2 million (year ended 31 December 2009: loss of £12.4 million);
Outstanding commitments to funds were £40.7 million at the end of the year, down from £58.7 million at the end of 2009.
LMS Capital will pursue direct investments in growing, profitable businesses where it can use the team's expertise to contribute to their growth and performance;
This focus will primarily be in the energy, consumer and business services sectors where our investment team has demonstrable expertise;
Realisations from our existing quoted, direct and fund investments are expected to provide the liquidity required to implement this strategy;
Apogee, a fast growing UK print solutions company – we acquired a 32.8% interest for £7.9 million;
Nationwide Energy Partners, an energy services company in the US – we invested \$14.1 million (£9.7 million) for a 59.5% stake;
Zoom Eyeworks was acquired by San Francisco Equity Partners – our investment was \$7.0 million (£4.7 million);
We sold a number of quoted investments where gains of £1.1 million were realised;
We exited certain legacy investments which were unable to sustain themselves as stand alone businesses – Citizen (Vio) and Corizon – and Kizoom sold its software business.
Robert A. Rayne, Chairman
I am pleased to record that 2010 was a year of considerable progress for LMS Capital. Against the backdrop of a slowly improving environment, your Board approved a revised strategic approach for the business, the benefits of which are already apparent in the year's results.
I am pleased to record that 2010 was a year of considerable progress for LMS Capital. Against the backdrop of a slowly improving environment, your Board approved a revised strategic approach for the business, the benefits of which are already apparent in the year's results. After almost two years of focusing on the existing investment portfolio to safeguard value in difficult market conditions, the Company undertook a number of new transactions in 2010.
Net Asset Value per share at the end of 2010 was 90p, an increase of 7% compared to last year, after two years of decline. Improving market conditions are a significant contributor to this (as reflected in increased values of the quoted holdings and fund interests) but this year the write downs on non-performing investments which do not fit our strategy are more than covered by higher valuations on our core investments. To underline this, for the first time the consolidated result (including portfolio subsidiaries) is positive.
The return on the investment portfolio for the year was a net gain of £23.9 million (2009: net loss of £4.9 million). Included in this is a realised net loss for the year of £1.0 million (2009: realised net loss of £0.1 million): we realised gains on sales of certain of our quoted holdings and on our fund distributions but a loss on the sale of Citizen (Vio) which is shown in the consolidated results as discontinued operations.
The investment portfolio at 31 December 2010 was valued at £253.1 million (31 December 2009: £215.6 million), an increase of £37.5 million or 17%. The quoted portfolio performed well and we expect to make disposals as our target prices are reached. We have continued to take a cautious view of the carrying values of our unquoted holdings since the recovery in public markets has not been reflected in private transactions.
The Group as a whole (including consolidation of the portfolio subsidiaries) showed a consolidated profit for the year from continuing operations of £15.2 million (2009: loss of £12.4 million).
The Board is not recommending payment of a dividend for the year ended 31 December 2010 (year ended 31 December 2009: nil).
Glenn Payne was appointed Chief Executive with effect from 1 March 2010 and he is now leading the implementation of our revised strategy. We also welcomed Mark Sebba to the Board in September 2010; his experience in business services and consumer products will be of great value to the Company.
The process of change begun in 2009 has continued and this places special demands on all our people, particularly where cost pressures result in headcount reductions at investee companies. Your Board would like to extend its appreciation to all the Company's employees, as well as to the management teams of our investee companies, for their contribution to the Group's progress in 2010.
As in previous years, at the forthcoming Annual General Meeting the Company will be seeking authority to purchase up to 14.99% of its issued share capital. The Company also seeks, once again, to obtain a waiver in respect of the Takeover Code obligations which a repurchase of shares above a certain limit would place on the Rayne family shareholders.
There were no purchases of shares by the Company during 2010; the current number of ordinary shares in issue is 272,640,952.
2010 saw an increase in merger and acquisition activity in which the Company was able to participate. At the same time our people responded positively to the revised strategy and we have begun 2011 with a higher level of deal flow than 12 months ago. We plan to complete the exits of non-performing businesses in 2011 and to focus on deploying capital to meet our stated growth objectives.
The Company's plan to realise its fund of funds and its quoted holdings will result in an increase in liquidity enabling it to invest in profitable and growing businesses. Your Board is confident that the Company is well positioned to take advantage of increased investment opportunities in the coming year and beyond.
Robert A Rayne Chairman 28 March 2011
Glenn Payne, Chief Executive Officer
Our objective is simple: we aim to acquire controlling stakes or positions of influence in profitable and growing companies run by experienced managers operating in sectors we know and where we can add value.
LMS Capital is an investment company which, although only an independent entity since 2006, has a pedigree which dates back to the 1980s. We are not therefore a new company, but there are many exciting things that we are doing which are new this year and which we expect will make us bigger, better and more attractive as an investment to you our shareholders. I was appointed as your Chief Executive Officer in March last year and I am happy to report that 2010 saw us map out the Company's strategic direction and commence its implementation.
Our objective is simple: we aim to acquire controlling stakes or positions of influence in profitable and growing companies run by experienced managers operating in sectors we know and where we can add value.
We are now pursuing a refined strategy based on our assessment of who is 'the best owner' of the Company's current three investing themes: quoted securities, third-party funds and direct investments. We believe the best owners of quoted securities are either our shareholders directly or hedge funds that can employ leverage and sophisticated computer systems which require round the clock monitoring. Similarly, the best owners of funds are entities that have access to either a regular stream of cash flows (member contributions) or committed capital (from investors) such as pension funds, or funds of funds. We are a permanent capital company and we shall exploit the strengths and advantages which this gives us.
We believe we have formulated a value proposition that is differentiable and that over time we expect to deliver superior results. We offer two important positives to our partners seeking a source of capital (usually the management of the company we acquire a stake in): permanence and strength.
We have exhibited in the past an ability to identify, acquire, manage and crystallise gains from direct investments. We have an investment team with deep experience in buyouts and from our current portfolio we expect to receive significant net inflows of cash over the next few years to support this strategy. We believe we are 'the best owner' of operating companies: we shall hold direct investments and actively engage in value creation. Recent investments in Updata, Apogee, Nationwide and Zoom (by SFEP) confirm our growing reputation as an equity partner of choice. As the acquirers and owners of these companies, we can control the destiny of our assets.
LMS currently has investment professionals in the US and UK, so our focus will be on those geographies. We have deep knowledge in three sectors: energy, consumer and business services. Our relationships, networks and investments provide a differential capability to identify and evaluate new investments in these sectors and geographies and to create value at the portfolio company level through active stewardship. We do what we are good at where we are located.
We aim to own companies and make follow-on investments in companies that have and will produce profits that contribute to an increasingly valuable and profitable LMS. Across the entire portfolio, where we are actively engaged in the stewardship of the investments and can effect change as required, we are targeting annual growth in excess of 15%.
We still need time to evolve but everything we are doing is with the objective of creating value for shareholders. Our companies operate in economies that continue to experience uncertainties and so earnings growth in 2010 has been variable but there are signs 2011 will see a marked improvement and that our companies' business models are appropriate.
2010 was a year of transition but saw a number of highlights:
Further details are set out in the Financial review section of this report.
We are pleased with our results for 2010 however there is much room for further progress. It is good that we are profitable, that we own profitable companies but we are targeting a better annual growth in value. Going forward we are actively seeking to produce superior value and capture gains from the quoted securities and funds to redeploy into direct investments.
We are pleased with our results for 2010 however there is much room for further progress. It is good that we are profitable, that we own profitable companies but we are targeting a better annual growth in value. Going forward we are actively seeking to produce superior value and capture gains from the quoted securities and funds to redeploy into direct investments. Our results are a significant improvement on 2009 (which showed a decline in NAV per share compared to the prior year) but the results continue to be burdened by losses from write-downs on legacy investments; that stops this year. Under our revised strategy we are seeking to invest in companies that should survive and thrive. As a partner of choice we will work with them to ensure they continue to grow as profitable businesses.
It is gratifying to report that a number of our consolidated portfolio companies have made big strides during 2010 and more importantly expect to be able to sustain this next year. The best performers in 2010 were:
On the minus side:
| 2007 | 2008 | 2009 | 2010 | |
|---|---|---|---|---|
| Net profit (£m) (Note 1) | 29.8 | (40.8) | (12.7) | 17.6 |
| Owned EBITDA (£m) (Note 2) | (14.2) | (9.9) | (3.0) | 7.5 |
| NAV per share (pence) | 101 | 89 | 84 | 90 |
Notes:
This is the profit of our investment management business as defined in Note 2 to our financial statements.
This is our share of the EBITDA of each of the investments in our portfolio, including investments by San Francisco Equity Partners, based on our % stake. It is not derived from the consolidated financial information.
Based on the 2011 plans of our direct investments, we expect continuing improvement in these figures during 2011.
We sold a number of our holdings during 2010 and you should expect to see more realisations during 2011 as stocks hit the exit prices we have established. We started 2010 with 20 different securities and ended with 13. Of course a few stocks dominate this category, namely Weatherford and ProStrakan, in both of which we were one of the original investors. The board of ProStrakan recently announced that it was recommending to shareholders an offer at 130p per share, a significant premium to the market (and to our December 2010 carrying value).
We shall use the proceeds of sales of our quoted holdings to reinvest in direct investments. Our book value of quoted securities at year end was £63.2 million, including sales an increase of 29% over last year's value.
| 31 December 2010 | ||||
|---|---|---|---|---|
| Company | Share Book price |
value £m | IRR for the year |
|
| Weatherford \$22.8 30.0 | 33% Energy | |||
| ProStrakan £1.03 18.1 | 19% Pharmaceuticals | |||
| GulfMark | \$30.40 4.9 | 12% Energy | ||
| Chyron | \$2.20 3.9 | 12% Media/technology |
The above holdings represent 90% of the quoted portfolio.
We have 22 general partner relationships across 35 funds. Many of these funds are in sectors we know and a number are the lead investor in co-investments we hold. However committing to funds requires us to have access to cash or cash equivalents to meet the uncertain timing of cash calls, and we have no or limited access or influence over those investments. We have ceased to make new fund commitments and because most of our funds are coming to the end of their investment period, and in many cases are into the harvest period, we expect to see cash returned to us over the next few years.
Book value of our funds at year end was £114.5 million net of commitments and realisations a gain of 4% over the past 12 months. Our outstanding commitments at year end were £40.7 million (to be met from cash and equivalents), down from £58.7 million at the end of 2009; with the reduction in size of one fund the outstanding commitment today is £36 million.
| 31 December 2010 | ||||
|---|---|---|---|---|
| General partner |
Book value £m |
IRR for the year |
||
| Brockton Capital | 14.6 | (3)% UK property | ||
| BV Investments | 9.4 | 18% US buyouts | ||
| Scottish Equity Partners | 5.7 | 14% UK technology | ||
| Spectrum Equity Investors | 4.4 | 40% US technology | ||
| CMEA Ventures | 4.0 | 24% US technology | ||
| Amadeus Capital Partners | 3.9 | (8)% UK venture capital |
||
| Weber Capital Partners | 3.1 | 65% US post-IPO technology |
||
| Brynwood Capital Partners 3.1 | 40% US consumer | |||
| Cadent Energy | 3.1 | 32% US energy |
The above holdings represent 70% of the funds portfolio (excluding San Francisco Equity Partners).
The number of our direct investments has been reduced throughout the year as we actively seek to focus on winners and exit those that have another better owner. We sold Vio, Corizon and Kizoom Software at a net loss in the year of £3.2 million and are looking to dispose of the balance of Kizoom and CopperEye. In order to succeed, these companies were in need of an owner that could fold their technology into a bigger platform. These companies were start ups when we invested and we do not intend to pursue this style of investing in the future.
We acquired stakes in three new companies during the year: Apogee (business services), Nationwide Energy Partners (energy) and Zoom Eyeworks (consumer products, via San Francisco Equity Partners). Total investment in these businesses was £22.1 million. In all cases our investment thesis foresees us investing additional monies into these companies to finance growth. It is our intention to seek similar opportunities: profitable and growing companies run by experienced managers in those sectors where we can add value.
In addition we provided follow-on monies for ITS, 365iT and Wesupply. Our direct investment portfolio at the year end was £75.4 million which was an increase of £15.1 million over 2009, after further write-downs on the legacy portfolio following strategic reviews during the year. Our direct investment portfolio is very lightly geared with third-party debt at 0.4 x EBITDA.
| 31 December 2010 | |||
|---|---|---|---|
| Book | IRR for | ||
| Company | value £m | the year | |
| Method Products | 17.6 | 0% US consumer | |
| Updata Infrastructure | 14.0 | 84% UK technology | |
| HealthTech Holdings | 12.6 | 80% US technology | |
| Nationwide Energy Partners 9.7 | 0% US energy | ||
| Apogee Corporation | 8.7 | 14% UK technology | |
| Rave Reviews | 7.3 | 3% US consumer | |
| Penguin Computing | 7.2 | 22% US technology | |
| Entuity | 5.5 | 21% UK technology | |
| Luxury Link | 5.1 | 4% US consumer | |
The above holdings represent 75% of the direct portfolio (including San Francisco Equity Partners).
Over time you will see us exit some of our older holdings and acquire new ones. We shall constantly review our investments as there may always be someone willing to acquire our position at a value greater than we put on it and for some holdings there may be a more natural owner. But because we do not have to sell we spend our time thinking about growing and adding value rather than simply exiting.
The evolution of LMS to a lead investor in private companies is ongoing. Where previously we had a variety of investment themes and sector appetites we are now focused on direct investment only in three core sectors.
Over time you will see us exit some of our older holdings and acquire new ones. We shall constantly review our investments as there may always be someone willing to acquire our position at a value greater than we put on it and for some holdings there may be a more natural owner. But because we do not have to sell we spend our time thinking about growing and adding value rather than simply exiting.
Our outlook for 2011 is positive: deal flow of profitable, growing companies is good and most of our direct investments are forecasting revenue growth this year as markets improve.
I have the pleasure of writing this report but the success of your company is attributable to a team of professionals who are committed to growing LMS into a bigger, better and successful company. I would like to thank the Board of LMS and the team working on your behalf: Pieter, Scott, Ed, Jamie, Jamie, David, Matthew, Tom, Alison, Dawn, Ela, Maia, Linda, Chris, Ray, Selina and Joe for their assistance, effort and successes in this past year. We have achieved much in 2010, and look forward to greater success in 2011.
The Company reports its results under International Financial Reporting Standards as adopted for use in the European Union ('Adopted IFRS'), and the consolidated financial statements include the consolidation of portfolio companies which are also subsidiaries ('portfolio subsidiaries'). Since the Board manages the Company as an investment business, this financial review focuses on the results of the investment management operations. Note 2 to the financial information includes the separate results and net assets of the investment management business. Where appropriate, this review includes comments on the results and financial position of the portfolio subsidiaries.
Net Asset Value at 31 December 2010 was £245.0 million (31 December 2009: £227.7 million), an increase of £17.3 million or 7%. The Net Asset Value per share was 90p (31 December 2009: 84p).
The Group's return on its investment portfolio for the year ended 31 December 2010 was a gain of £23.9 million (year ended 31 December 2009: loss of £4.9 million) as follows:
| Year ended 31 December | ||
|---|---|---|
| 2010 £'000 |
2009 £'000 |
|
| 1,128 | 2,503 | |
| (3,154) | (1,867) | |
| 1,037 | (755) | |
| (989) | (119) | |
| 14,100 | 9,741 | |
| 1,293 | (8,491) | |
| 9,510 | (6,007) | |
| 24,903 | (4,757) | |
| 23,914 | (4,876) | |
Net Asset Value at 31 December 2010 (31 December 2009: £227.7 million)
Increase in Net Asset Value of 7%
90p Net Asset Value per share (31 December 2009: 84p)
Approximately 61% of the portfolio at 31 December 2010 is denominated in US dollars (2009: 60%) and the above table includes the impact of currency movements. In the year ended 31 December 2010 the strengthening of the US dollar against pound sterling resulted in an unrealised foreign currency gain of £5.6 million. During the year ended 31 December 2009 there was a weakening of the dollar against pound sterling and the unrealised loss for that year was £13.5 million. It is the Board's current policy not to hedge the Company's underlying nonsterling investments.
Realised gains on quoted securities include £0.7 million in connection with the sale of our shares in BJ Services, with the balance arising on the sale of other, smaller holdings during the year. The realised losses on unquoted securities arose principally on the disposals of Citizen (trading as Vio) and Corizon.
The unrealised gains on our quoted portfolio reflect the net impact of the changes in the capital markets during the year. Of the total of £14.1 million, £7.4 million is attributable to our holding in Weatherford International and £2.9 million to ProStrakan Group.
The principal constituents of the net unrealised gain for the year on our unquoted securities are as follows:
| Unrealised | |
|---|---|
| gain/(loss) £'000 |
|
| Updata | 6,482 |
| HealthTech Holdings | 5,622 |
| Kizoom | (3,200) |
| Wesupply | (2,750) |
| CopperEye | (1,936) |
| ITS (US) Holdings | (2,938) |
| 1,280 | |
| Other investments (net) | 13 |
| Total unrealised gain, net | 1,293 |
The unrealised gains/losses above reflect the impact on our valuation criteria of changes in the revenue and profitability multiples of comparable businesses which are used in the underlying calculations combined with the operating performance of the individual businesses within the portfolio.
In most cases the multiples used are similar to those prevailing at the end of 2009. The unrealised gains or losses set out above for 2010 arise principally as a result of the companies' performance. The results of Updata and HealthTech Holdings have resulted in higher valuations for those businesses. Conversely, following continued disappointing results from Kizoom and CopperEye, we are actively seeking to exit these businesses and in the case of ITS a strategic review of the business is in progress.
The unrealised valuation gain on our fund interests includes £6.6 million net valuation increases and £2.9 million unrealised foreign currency gains. 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 knowledge of the investments and the sectors in which they operate.
Income from investments in the year was £0.9 million (year ended 31 December 2009: £0.5 million) and comprises dividends on quoted securities and management charges made to portfolio companies. Administration expenses for the year were £6.9 million (year ended 31 December 2009: £8.0 million, which included a number of one-off items); Net interest expense for the year was £0.2 million (year ended 31 December 2009: net income of £0.2 million) reflecting the fact that the Company drew down all of its loan facility during the year. The tax charge for the year was £0.4 million (year ended 31 December 2009: £0.3 million).
The Group's investments are included in the balance sheet at fair values determined in accordance with the International Private Equity and Venture Capital Valuation Guidelines.
Additions to the investment portfolio during the year were £38.9 million (year ended 31 December 2009: £32.7 million) of which £17.6 million (2009: £7.6 million) was for new investments, £17.1 million (2009: £14.8 million) to meet capital calls from funds and £4.2 million (2009: £10.3 million) for follow-on investments. There were no purchases of quoted securities during the year (2009: nil); the new investments were \$14.1 million (£9.7 million) for our stake in Nationwide Energy Partners and £7.9 million for our interest in Apogee Group.
Proceeds of realisations were £24.3 million (2009: £13.9 million) including sales of quoted securities of £6.2 million (2009: £6.9 million) and distributions from funds of £13.7 million (2008: £5.6 million).
At 31 December 2010 the Group had commitments of £40.7 million (31 December 2009: £58.7 million) to meet capital calls from its fund interests which the directors estimate will be called over the next five years. In terms of assessing the level of the Group's commitment in this area, the Directors do not expect fund commitments to exceed liquid assets (being cash and quoted securities); at 31 December 2010 liquid assets were £72.5 million.
Consolidated revenues for the year from continuing operations were £47.9 million (2009: £29.8 million), all in the portfolio subsidiaries. The increase over the previous year reflects the inclusion of Updata for a full year (acquired in July 2009) and of NEP (from acquisition at the end of May 2010).
Consolidated operating expenses of continuing operations were £60.2 million (2009: £46.1 million), including goodwill impairment charges of £7.7 million (2009: £4.6 million). The increase in operating expenses (excluding goodwill impairment charges) reflects principally the inclusion of Updata and NEP as set out above.
The consolidated profit from continuing operations was £15.2 million (2009: loss of £12.4 million); discontinued operations (being the impact of the sale of Citizen in September) contributed a loss of £2.6 million (2009: loss of £2.4 million).
The consolidated balance sheet at 31 December 2010 includes cash and cash equivalents of £13.2 million (31 December 2009: £17.0 million) and borrowings of £23.4 million (31 December 2009: £7.6 million). Cash in the investment management business was £9.3 million (31 December 2009: £14.4 million) and borrowings were £14.3 million under the Company's £15 million borrowing facility with The Royal Bank of Scotland.
Glenn Payne Chief Executive Officer 28 March 2011
Robert Rayne†‡ Non-Executive Chairman Age: 62
Non-executive chairman of Derwent London plc and a non-executive director of Weatherford International Ltd, Chyron Corporation and Richoux Group plc as well as a number of charitable trusts and foundations.
Robbie has expertise in a wide range of sectors, including real estate, media, consumer, technology and energy. He established the Company's investment activities in the early 1980s as investment director and later managing director and chief executive of London Merchant Securities plc.
Glenn Payne‡ Chief Executive Officer Age: 46
Development.
A number of Group companies. Experience:
Antony Sweet‡ Chief Financial Officer Age: 56
Directorships: Wesupply Ltd (non-executive), and a number of Group companies.
In addition to his finance responsibilities Tony oversees the Company's HR requirements and also participates as a member of the Investment Committee. Before joining the Company, he was chief financial officer of Systems Union Group plc. Prior to that, he was at PricewaterhouseCoopers (the last 13 years as a partner) where he gained experience of a variety of sectors and geographies, working for large multinational companies, as well as smaller entrepreneurial businesses.
Grainger plc, American Appraisal (UK) Limited and senior independent non-executive director of Northern Investors Company PLC.
John was chairman of North London Research Committee, chairman of KCS Global Holdings Ltd and nonexecutive director of Syltone plc. Prior to December 2001, he spent 22 years as a partner of PricewaterhouseCoopers, including four years as UK managing partner.
Richard Christou#† Non-Executive Director Age: 66
Directorships: Chairman, Fujitsu EMEA PLC.
Richard has held various positions within the telecommunications industry, joining ICL in 1990. In April 2002 ICL changed its name to Fujitsu and he moved into the role of executive chairman. He is now president of the global business group at Fujitsu Ltd where he has responsibility for all of Fujitsu's overseas regions including EMEA, The Americas, APAC and China.
Bernard Duroc-Danner† Non-Executive Director Age: 57
Chairman, president and chief executive officer of Weatherford International Ltd and director of a number of oilfield service sector companies.
Previously, Bernard was a non-executive director of London Merchant Securities plc and president and chief executive officer of EVI, Inc. (now Weatherford International Ltd). Prior to which he held positions at Arthur D. Little and Mobil Oil Inc.
Mark Sebba*#† Non-Executive Director Age: 62
Directorships: Net-A-Porter Limited
Mark is the chief executive officer of Net-a-Porter, the preeminent luxury global fashion internet magazine and retailer with operations in both the UK and US. He has extensive experience in business services to the retail sector and of international markets.
Prior to joining Net-A-Porter in 2003, Mark was Finance Director at Video Networks Limited and Golden Rose Communications Plc. He has also worked in investment banking and is a qualified Chartered Accountant.
David Verey*#† Non-Executive Director Age: 60
Daily Mail & General Trust plc, Sofina S.A., a member of the supervisory board of Bank Gutmann and a senior advisor to Lazard & Co.
David has over 30 years of experience in the industry. He worked for Lazard Brothers for 28 years becoming Chief Executive in 1990 and Chairman two years later. He is a past Chairman of Blackstone Group UK.
Pieter Hooft‡ Managing Director, UK investments
Pieter joined LMS Capital in November 2006 and leads the Group's UK investment activities. Pieter has over 15 years' investment experience in MBOs and development capital in the UK and across Europe. He has been involved in deals in a broad range of sectors including media, consumer, business services and industrial. As well as Apax Partners, Pieter has previously worked for JP Morgan Partners, Botts & Company and Bain and has also had operational experience as chairman of Germany's second-largest chain of fitness clubs.
Edward Snow‡ Director, UK investments
Ed leads LMS Capital's UK technology investing, having joined LMS at the start of 2007 from Amadeus Capital Partners, a venture capital firm specialising in backing start-ups. Prior to Amadeus, Ed was with Deutsche Bank's global markets division for two years. Ed also co-founded and later floated a vehicle technology start-up in the 1990s. Ed has investment and operational experience gained from a range of sectors including infrastructure software, medical technology and comms hardware.
Jamie Rhodes Investment Manager, UK investments
Jamie joined LMS Capital in 2004 and works across the Group's UK direct investment portfolio as well as being responsible for UK fund investments and quoted stocks. Jamie is a specialist in consumer products, retail, leisure, logistics and distribution and has extensive operational and entrepreneurial experience having funded, operated and sold three successive ventures in the food and beverage sector; including an award-winning restaurant in London and a chain of sandwich bars in the North of England.
Jamie Szpiro Investment Manager, UK Investments
Jamie joined LMS Capital in June 2008 from Singer & Friedlander where he was a Director in the Corporate and Structured finance team focusing on mid-market buyouts. Jamie has a broad range of financial experience spanning Corporate Finance, Property Finance and Leveraged Finance. He also has direct operational and M & A experience having been a senior Director of Wintrust plc, where he oversaw its sale and subsequent integration into Singer and Friedlander. Jamie focuses on new deal opportunities as well as managing a number of portfolio relationships.
* Audit Committee
Scott Potter Managing Partner, San Francisco Equity Partners (US)
Scott joined LMS Capital in 2003 with responsibility for the Group's US private equity portfolio and in 2005 established San Francisco Equity Partners (SFEP), with LMS Capital as the founding limited partner. San Francisco Equity Partners is a private equity fund focused on growth equity investments in the consumer products, consumer services and business services industries. Scott had broad operational experience having served as SVP, Field Operations for Inktomi Corporation and Chief Executive of Quiver, a venture backed internet software business in which LMS Capital was a significant investor.
David Mannix Vice-President, San Francisco Equity Partners
David joined SFEP in 2010 focusing on investments in the consumer products, consumer services and business services industries. David works closely with SFEP's portfolio companies and serves on the board of directors of Zoom Eyeworks.
Prior to joining SFEP, David has worked for The BearFund, Castanea Partners, RBC Capital Markets and as an independent consultant to portfolio companies of private equity funds.
David earned an MBA with Honors from the University of California at Berkeley and a BA in Economics from Stanford University.
The Board of LMS Capital plc is committed to maintaining high standards of corporate governance and business ethics.
This report is made under the Combined Code on Corporate Governance issued by the Financial Reporting Council ('the Code') in June 2008 and the period under review is the year ended 31 December 2010. A new UK Corporate Governance Code was introduced in June 2010 and will govern future corporate governance reports by the Company. Copies of both Codes are publicly available from the Financial Reporting Council's website, www.frc.org.uk.
This report explains how the Company has applied the principles set out in Section 1 of the Code and the extent to which it has complied with the detailed provisions of the Code. The Board considers that the Company has complied with, or explained why it has not complied with, all of the provisions of the Code throughout the period under review.
The Board is responsible to the Company's shareholders for the performance of the Company and for its overall strategic direction, its values and its governance. It provides the leadership necessary to enable the Company's business objectives to be met within the framework of the internal controls detailed below.
The Board is comprised of eight directors, being six non-executive directors (including the non-executive Chairman) and two executive directors.
Brief biographies of the directors appear on page 14. The Board considers that it has an appropriate balance of expertise and ability available to it.
There is a clear separation of the roles of the Chairman and the Chief Executive Officer. Broadly, the Chairman is responsible for the effective running of the Board, whilst the Chief Executive Officer is responsible for the executive management and performance of the Company's operations.
Each non-executive director is appointed for a term of three years. Subject to agreement, satisfactory performances and re-election by shareholders, their directorships may be renewed for further terms. Mark Sebba was appointed as a nonexecutive director on 28 September 2010 and will stand for election at the Annual General Meeting to be held on 12 May 2011 as required by the Company's Articles of Association. Assuming he is successfully appointed, it will be for a term of three years.
In the opinion of the Board, John Barnsley, Richard Christou, Bernard Duroc-Danner, Mark Sebba and David Verey are each considered to be independent in character and judgement and there are no relationships or circumstances which are likely to affect (or could appear to affect) the directors' judgement.
The Board is of the view that the Chairman and each of the non-executive directors committed sufficient time during 2010 to fulfilling their duties as members of the Board.
John Barnsley acts as the senior independent non-executive director. In this role he is available to shareholders if they have concerns which cannot be resolved by discussions with the Chairman, the Chief Executive Officer or the Chief Financial Officer or where such contact is inappropriate. In addition, the senior independent director is available to attend meetings with major shareholders in order to develop an understanding of their issues and concerns.
The Board believes that executive directors should be able to accept external non-executive directorships in other companies in order to widen their skills and knowledge for the benefit of the Company, whilst continuing to discharge their executive responsibilities to the Company. Any executive director who wishes to take on an external non-executive directorship must obtain prior Board approval and may not take on more than one such directorship (not including those companies in which the Company has invested and where he represents the Company). He may retain any fees paid in respect of such directorships.
The Company maintains directors' and officers' liability insurance and provides the directors and officers with a qualifying third party indemnity within the limits allowed by the Companies Act.
Neither the Company's indemnity nor insurance provides cover in the event that a director is proved to have acted fraudulently or dishonestly.
There are agreed procedures for the directors to take independent professional advice, if necessary, at the Company's expense. All directors have access to the advice and services of the Company Secretary, who is responsible to the Chairman for ensuring that board procedures are complied with and that applicable rules and regulations are followed and for advising and supporting the Chairman and the Board on corporate governance matters.
The Board delegates specific responsibilities to the Audit, Nomination and Remuneration Committees, which operate within clearly defined terms of reference approved by the Board. These committees report regularly to the Board. The Board has adopted a schedule of matters reserved to it for approval. These include the approval of financial statements, strategic plans, annual budgets, acquisitions and disposals and major capital and operating expenditure proposals.
Nine board meetings were held in 2010. At each scheduled meeting, the Board considers a report from the Chief Executive Officer on current trading and significant business issues, such as major investment or divestment proposals and strategy. A financial report is provided by the Chief Financial Officer and other reports and presentations are provided by senior management. Papers for each scheduled board meeting are usually provided four working days before the meeting.
The following were directors of the Company and attended the following number of meetings of the Board and (where they were members) its committees during the year ended 31 December 2010:
| Board | Audit | Remuneration | Nomination | |
|---|---|---|---|---|
| Meetings held | 9 | 4 | 4 | 2 |
| Jonathan Agnew1 | 5 | 1 | – | 1 |
| John Barnsley | 9 | 4 | 4 | 2 |
| Richard Christou | 7 | – | 4 | 2 |
| Bernard Duroc-Danner2 | 4 | – | – | 1 |
| Glenn Payne3 | 7 | – | – | – |
| Robert Rayne | 9 | – | – | 2 |
| Mark Sebba4 | 1 | 1 | 1 | 1 |
| Antony Sweet | 9 | – | – | – |
| David Verey | 9 | 4 | 4 | 2 |
Notes:
Mr Agnew resigned from the Board on 13 May 2010.
As a result of other business commitments, Dr Duroc-Danner was not able to attend all of the Board meetings. However, he did receive the papers for each meeting and his feedback was provided to the Chairman and other non-executive directors for them to consider and vice-versa. Thus he was able to contribute to the decisions being taken by the Board.
Mr Payne was appointed on 1 March 2010.
Mr Sebba joined the Board on 28 September 2010 and was appointed to all of the Board Committees at that time.
Each Board Committee has established clear and defined terms of reference detailing its responsibilities and powers. These are available to review on the Company's website at www.lmscapital.com.
The Audit Committee currently comprises John Barnsley (Committee Chairman), Mark Sebba (who joined the Committee on 28 September 2010) and David Verey. John Barnsley is considered by the Board to have recent and relevant financial experience, for the purpose of the Code. A representative of the Company's external auditors, the Chief Financial Officer and other directors attend meetings of the Audit Committee at the invitation of the Chairman of the Committee.
The Audit Committee met four times during 2010. Its role is to assist the Board with the discharge of its responsibilities in relation to internal and external audits and controls, including reviewing the Company and Group financial statements, considering the scope of the annual audit and the extent of the non-audit work undertaken by external auditors, advising on the appointment of external auditors and reviewing the effectiveness of the risk management and internal control systems in place within the Company.
A policy regarding the engagement of the external auditors to supply non-audit services is in place. The policy recognises the importance of maintaining the objectivity and independence of the external auditors by minimising their involvement in projects of a non-audit nature. It is, however, also acknowledged that, due to their detailed understanding of the Company's business, it may sometimes be necessary to involve the external auditors in non-audit related work, principally comprising further assurance services relating to due diligence and other duties carried out in respect of acquisitions and disposals and tax services. During 2010, KPMG provided non-audit services, namely corporate and payroll taxation advice. The fees paid to them for this work was £28,000.
Additionally, the Audit Committee keeps under review the conduct of the external audit and its cost-effectiveness. The Audit Committee makes recommendations to the Board regarding the reappointment or removal of the external auditors, their terms of engagement and the level of their remuneration. The Committee also reviews the process which is in place to ensure the independence and objectivity of the external auditors.
The Audit Committee also monitors the Company's whistleblowing policy and Mr Barnsley, as the Company's senior independent non-executive director, is the contact for staff who may have a concern that they cannot raise under their normal chain of management.
The Remuneration Committee currently comprises Richard Christou, who chairs the Committee, John Barnsley, Mark Sebba (who joined the Committee on 28 September 2010) and David Verey. The composition and role of the Remuneration Committee is described more fully in the Remuneration report.
The Nomination Committee currently comprises Robert Rayne, who chairs the Committee, John Barnsley, Richard Christou, Bernard Duroc-Danner, Mark Sebba (who joined the Committee on 28 September 2010) and David Verey. The Committee is responsible for assisting the Board in determining the composition and make-up of the Board. It is also responsible for periodically reviewing the Board's structure and identifying potential candidates to be appointed as directors, as the need may arise. The selection process is, in the Board's view, both rigorous and transparent in order to ensure that appointments are made on merit and against objective criteria set by the Committee.
The Committee will also determine succession plans for each of the directors. When considering succession planning, the Committee will look at the balance, structure and composition of the Board and take into account the future challenges and opportunities facing the Company.
The Committee meets as required, but at least once each year. During 2010, the Committee met twice. The Committee met in January 2010 to consider and ultimately recommend to the Board the appointment of Glenn Payne as the new Chief Executive Officer. At this meeting, under the Chairmanship of John Barnsley, the Committee also decided to recommend to the Board the appointment of Robert Rayne as Chairman to succeed Jonathan Agnew after he retired from the Board. Paragraph A2.2 of the Code states that a chief executive should not go on to be chairman of the same company; however, if exceptionally a board decides that a chief executive should become chairman it needs to explain the reasons to its shareholders. The Board has deemed that this is an exceptional case for the following reasons:
(1) It allows continued access to the network and relationships developed by Robert Rayne over the last 40 years; and
(2) It provides the Company with continued access to the advisory boards of a number of funds.
Mr Rayne acted initially as an executive chairman to assist with the transition to Glenn Payne as Chief Executive Officer and on 1 October 2010, Mr Rayne became non-executive Chairman. Mr Rayne is also non-executive Chairman of Derwent London plc and a non-executive director of both Weatherford International Limited, Chyron Corporation and Richoux Group plc.
The Committee also met in September 2010 to discuss and approve the appointment of Mark Sebba as a non-executive director. As Chief Executive Officer of Net-A-Porter his experience in business services to the retail sector and his international experience will be of great benefit to the Company. Prior to the Nomination Committee in September, each member of the Committee met with Mr Sebba on a one-to-one basis to satisfy themselves that he had the balance of skills and experience necessary to benefit the Board and that he was independent for the purposes of the Code.
In addition to the principal Board committees described above, there is also an Investment Committee. This currently comprises Glenn Payne, who chairs the Committee, Antony Sweet, Pieter Hooft, Ed Snow and Robert Rayne. The Committee is responsible for reviewing and implementing investment and divestment proposals. It also makes proposals relating to the Company's investment policy for the Board to adopt and for regularly reporting to the Board on the performance and management of the Company's investments. The Committee is scheduled to meet twice a month, but in practice meets more often as circumstances require.
In accordance with the Code and the Company's Articles of Association, at least a third of the directors on the Board must retire and offer themselves for re-election. Messrs Barnsley and Christou will retire at the forthcoming Annual General Meeting and, being eligible, each offers himself for re-election at the meeting. Mr Sebba (who was appointed to the Board on 28 September 2010) will offer himself for election to the Board at the Annual General Meeting in accordance with the Company's Articles of Association. The biography for each director can be found on page 14.
Due to the changes in the Board composition in 2010, no appraisal took place as it was felt that such an appraisal would not be beneficial at that time. An appraisal will take place in 2011.
The Audit Committee, on behalf of the Board, has overall responsibility for the Company's system of internal and financial controls and risk management and for reviewing the effectiveness of this system. Such a system can only be designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can therefore only provide reasonable, and not absolute, assurance against material misstatement or loss.
The Audit Committee reviews the effectiveness of the Company's internal controls and will take any necessary actions should any significant failings or weaknesses be identified. Internal controls, included within risk management, are a standing agenda item for each Audit Committee meeting.
Operational matters and the responsibility for the day-to-day management of the businesses are delegated to the Chief Executive Officer and through him, as appropriate, to other managers acting within delegated authority limits and in accordance with clearly defined systems of control.
Financial matters and the responsibility for the day-to-day financial aspects of the business are delegated to the Chief Financial Officer and through him, as appropriate, to members of his financial team acting within delegated authority limits and in accordance with clearly defined systems of control. The Chief Financial Officer reports to the Board on financial matters at each board meeting.
Policies and procedures, which are subject to ongoing review and updated as required, are communicated across the Company and designed to ensure they are properly and consistently applied in relation to significant risks, investment decisions and management issues arising within the Company. The Board believes that this delegated management structure ensures a strong link between overall corporate strategy and its implementation within an effective control environment.
The Company has no internal audit department, relying on in-house resource and external advisers, which is currently considered adequate. In the Audit Committee's view, the information it has is sufficient to enable it to review the effectiveness of the Company's system of internal controls in accordance with the 'Internal Control Revised Guidance for Directors' on the Combined Code (Turnbull).
The Company's Articles of Association allow the directors to authorise conflicts of interest and a register has been set up to record all conflict situations declared. The conflicts declared are all very minor in nature and there have been no conflicts which have resulted in a director having to be excluded from the decision-making process. The register is maintained and updated by the Company Secretary and the Board reviews it at each Board meeting.
The Board is of the view that an ongoing process for identifying, evaluating and managing significant risks faced by the Group was in place during 2010 and up to the date of this report. Risk review is a continuing process embedded within the business. The business is also required to have processes to formally identify risks, consider financial and nonfinancial implications and, so far as possible, take action to reduce those risks. Details of the principal risks and uncertainties facing the Group can be found on pages 22 and 23.
The Company communicates regularly with its major institutional shareholders and ensures that all the directors, including the non-executive directors, have an understanding of the views and concerns of major shareholders about the Company. This is achieved by the executive directors maintaining contact from time to time with representatives of institutional shareholders to discuss matters of mutual interest relating to the Company and reporting back to the Board. Shareholders have the opportunity to meet any of the directors of the Company should they so wish.
Additionally, the Board uses the AGM as an occasion to communicate with all shareholders, including private investors, who are provided with the opportunity to question the directors. At the AGM the level of proxy votes lodged on each resolution is made available, both at the meeting and subsequently on the Company's website. Each substantially separate issue is presented as a separate resolution. Members of the Audit, Remuneration and Nomination Committees are available to answer questions from shareholders.
The interim and annual results of the Company, along with all other press releases, are posted on the Company's website, www.lmscapital.com, as soon as possible after they have been announced to the market. The website also contains an archive of all documents sent to shareholders, as well as details on the Company's investments, strategy and share price.
The directors have acknowledged, in the Statement of directors' responsibilities set out on page 36, their responsibility for preparing the financial statements of the Company and the Group. The external auditors have included, in the Independent auditor's report set out on pages 37 and 38, a statement about their reporting responsibilities.
The directors are also responsible for the publication of an unaudited half-year management statement for the Company, which provides a balanced and fair assessment of the Company and Group financial position for the first six months of each accounting period. In addition, as a company listed on the Main Market, the Company produces two interim management statements, usually in May and November, which provide an unaudited quarterly review of the Company's financial position.
Details of the Company's issued share capital, and the voting rights attached to the shares, can be found in the Directors' report on page 34.
The Company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Operating review on pages 4 to 10. The financial position of the Company, its cash flows, liquidity position and borrowing facilities are described in the Financial review on pages 11 to 13. The directors have also considered, in preparing this statement, the Financial Reporting Council's 'Going Concern and Liquidity Risk Guidance for Directors of UK Companies 2009'.
The directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
This section provides 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 ongoing 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 is 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. In reviewing and approving the Group's strategy, the Board took into account the risks which could have a material effect on the achievement of the Group's objectives, as well as the risks associated with alternative strategies. It then satisfied itself that the Group's risk management process was appropriate in the context of the agreed strategy.
The Audit Committee oversees the Group's risk management process and is provided with a report on risk management at each of its meetings. The management of specific risks is the responsibility of the executive directors and members of the Group's senior management team.
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.
The Group is subject to economic factors (such as the demand and output of the environments in which its investments operate) which may negatively impact the performance and growth rates of the Company's investments. The investment portfolio may not achieve the Company's growth targets 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.
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 background economic conditions) cannot be ascertained with certainty. Accordingly, we rely on our detailed budgeting and forecasting procedures to ensure that the cash requirements of the Group are met.
A lack of liquidity in the capital markets could mean that the Company may not be able to raise funds for its corporate purposes, including the funding of new or existing investments. The Board regularly reviews the Company's funding requirements and believes it has sufficient funds to meet its expected cash obligations for the foreseeable future. The Company has a revolving credit facility of £15 million, which was almost fully drawn down at 31 December 2010. We can also raise funds from the sale of our quoted portfolio investments if required.
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 and monitors its overall exposure to foreign currencies at a portfolio level. Any realisations or distributions from US investments are retained in US dollars to be utilised for future investments.
The Group has made investments 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 and the monitoring of this exposure is included in the Group's budgeting and forecasting procedures referred to above.
Overview
The Group's investment risk arises as a result of its investment strategy, individual investment decisions and the performance of its investments. Before the Group makes a new investment, we undertake rigorous diligence into the business concerned. We understand the company's business plan; evaluate information on its marketplace and competition; meet management, directors and existing shareholders and we commission reports from external experts as necessary. This includes consideration of potential exit routes from the proposed investment.
Our investment management process requires regular reporting of the performance and prospects of each investment. This is usually achieved by board representation or equivalent at each investment. The experience of the executive 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.
There may not be a clear exit route for the Company from any individual investment which could result in negative liquidity and have a cash flow impact on the Company. If an investment is not performing well, and is absorbing too much of the Group's resources (both financial and human), the Company will seek an exit from that investment. If necessary, the Company will seek a solvent closure of any investment where we consider this to be in the Company's best interest.
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 ability to recruit, develop and retain capable people is of fundamental importance to the Group's strategy and the loss of key staff could adversely affect investment returns. The Group operates in a competitive industry and aims to remunerate staff in line with market practice.
This Remuneration report describes the Company's overall remuneration policy and gives details of the remuneration arrangements for directors for the year ended 31 December 2010. The report has been prepared in accordance with the Companies Act 2006 ('the Act') and the Combined Code on Corporate Governance issued by the Financial Reporting Council in June 2008 ('the Combined Code').
In accordance with the Act, a resolution to approve this report will be put to shareholders at the forthcoming Annual General Meeting.
The information set out in the section headed 'Directors' remuneration in 2010' is, in accordance with the Act, subject to audit by the Company's auditors. The remainder of the information in this report is not subject to audit.
The Board has delegated to the Remuneration Committee responsibility for reviewing and recommending the remuneration strategy and policies for the Company and for setting the remuneration of the executive directors.
To achieve this, the responsibilities of the Committee are to:
Under the Combined Code and the terms of reference of the Committee, at least two independent non-executive directors must serve on the Committee. Richard Christou, John Barnsley, Mark Sebba and David Verey are considered by the Board to be independent non-executive directors. The Committee invites the Chairman and the executive directors to attend Committee meetings, when appropriate, to provide a management perspective on all aspects of employee compensation.
The Committee takes advice on technical aspects of compensation policy from independent external consultants appointed by the Committee. Clifford Chance has provided advice on long-term incentive arrangements, in addition to providing other corporate legal advice on an ad hoc basis. The Committee has also considered remuneration data provided by Deloitte, Spencer Stuart (executive recruitment specialists) and McLagan (specialists in compensation benchmarking for the private equity sector).
The Company's remuneration policy is designed to ensure that the Company is able to attract, motivate and retain the talent required to run the Company successfully. The Company aims to structure the remuneration of executive directors and senior management in such a way as to motivate them to perform in the best interests of shareholders.
The Company compensates its executive directors and senior management by balancing the following elements of compensation:
The Committee reviews remuneration policy on a regular basis and, where appropriate, it will propose or implement changes to ensure that the Company has appropriate policies to enable it to attract executives of the highest calibre.
Base salaries The fixed compensation elements of executive directors and senior management are reviewed annually by the Committee, having regard to individual performance and comparative market data. Base salaries are generally around the median of the market compared with other entities of similar size in the private equity sector. Base salary is the only element of remuneration which is pensionable.
Benefits-in-kind The benefits-in-kind available to executive directors are a car allowance, pension contribution, private healthcare, life assurance, personal accident cover, permanent health insurance and subsidised gym membership.
Bonuses Annual bonuses, which are non-pensionable, are based upon achievement of targets set by the Committee, having regard to the Company's performance and individual achievement of operational goals. The aim is to incentivise executive directors and senior management to achieve outstanding performance, and to ensure that a significant proportion of their total remuneration is provided in the form of variable compensation. The bonus target is 100% assuming a good market and the achievement of the targets set by the Committee.
Share-based incentives The Committee considers the grant of share-based incentives to executive directors and other executives. The Committee made awards under the Performance Share Plan following publication of the Company's results for 2009. The Committee reviewed the share-based incentive plans currently available and deemed them sufficient for now, however, the Committee is mindful of the need to keep remuneration systems under review in order to provide the appropriate level of challenge and incentivisation.
This Plan, approved by shareholders, was established as an inducement to recruitment for key executives of the Company. Participants may receive only one grant. No more than 3% of the shares in issue may be awarded under this Plan, and in any ten year period the number of shares issued under this Plan, the Executive Share Option Plan and the Performance Share Plan together may not exceed 5% of the shares in issue. The rules permit an award up to a normal maximum of 0.5% of the shares in issue, although in exceptional circumstances the Committee may grant an award in excess of this.
The performance condition is that the increase in the Net Asset Value per share must exceed the increase in the Retail Prices Index by an average of at least 3% per annum. In the case of an award of up to 0.5% of the shares in issue, one third may be released on the first anniversary of the award date, the second third on the second anniversary and the final third on the third anniversary. Where an award exceeds 0.5%, the release takes place over a four year period. The Committee may decide at its discretion that, when shares are due to be released, the participant may be given the cash equivalent of the market value of the shares.
In the event of a change of control awards may be released early provided that the performance condition has been satisfied or the Remuneration Committee determines that the performance condition should be treated as satisfied, but the Committee may at its discretion reduce the award to take into account the length of time between the date of award and the date of the change of control.
Awards in the form of nil-cost options have been made as follows:
| No. of shares | First release date | Final release date | Expiry date | Outstanding at 31 December 2010 |
|
|---|---|---|---|---|---|
| Award made on 30 March 2007(1) | |||||
| Robert Rayne | 2,864,292 | 30 March 2008 | 30 March 2011 | 30 March 2017 | – |
| Award made on 13 April 2010(2) | |||||
| Glenn Payne | 1,500,000 | 13 April 2011 | 13 April 2014 | 12 April 2020 | 1,500,000 |
| Antony Sweet | 100,000 | 13 April 2011 | 13 April 2013 | 12 April 2020 | 100,000 |
| Total | 1,600,000 |
(1) For those shares awarded on 30 March 2007 to Mr Rayne, the performance condition for the first release at 30 March 2008 was satisfied and the Committee exercised its discretion and paid cash instead of issuing shares to satisfy the exercise. The performance conditions for the second, third and fourth releases have not been satisfied and the options for Mr Rayne have now lapsed.
(2) For those shares awarded on 13 April 2010, the performance condition for the first release is expected to be satisfied.
Under this Plan, approved by shareholders, the Company grants share options to executive directors and other executives within the Company. The maximum value of a grant in any one calendar year is three times the individual's basic salary, provided the participant does not receive an award under the Performance Share Plan in that year. Options are normally exercisable between three and ten years following the grant, subject to the performance condition having been satisfied. The performance condition requires that, for 25% of the shares under option to vest, the Net Asset Value per share of the Company must increase by at least 3% per annum above the increase in the Retail Prices Index, starting with the Net Asset Value per share at the end of the financial year preceding the date of grant. If the increase in the Net Asset Value per share exceeds the growth in the Retail Prices Index by at least 8% per annum, the option can be exercised in respect of all the shares under option. There is a straight-line scale of vesting for increases in Net Asset Value per share between 3% and 8% per annum.
In the event of a change of control awards may be released early provided that the performance condition has been satisfied. If the change of control occurs before the end of the full period over which performance would otherwise be measured, the Remuneration Committee will determine the extent to which the performance condition has been satisfied.
The performance conditions for the award of options granted in April 2008, at a price of 74.00p, have not been satisfied and therefore the options have lapsed. The market price of an ordinary share at 31 December 2010 was 45.00p and the range during the year was 40.00p to 56.25p. There are no outstanding awards of options under this Plan.
The rules of the Plan, approved by shareholders, permit an annual award of performance shares (in the form of nil cost options) up to 150% of the participant's basic salary, if no grant is made to that person under the Executive Share Option Plan in that year.
During 2010, the performance conditions for the Plan were changed. For those awards granted in 2009, the performance conditions state that for one half of the award the performance condition is that the Total Shareholder Return (TSR) over the three year measurement period must exceed the median Total Shareholder Return of the FTSE 250 Index. At the 50th percentile TSR, 12.5% of the total shares will vest, rising on a straight-line basis to 50% vesting at the 75th percentile TSR and above. For the other half of the award, the increase in the Net Asset Value per share over the period must exceed the increase in the Retail Prices Index (RPI) by at least 3% per annum. At RPI plus 3%, 12.5% of the total shares that are subject to the award will vest, rising on a straight-line basis to 50% vesting if the increase in Net Asset Value per share exceeds RPI by 8% per annum.
For those awards granted in 2010, and onwards, the performance conditions are that for 25% of the total award to vest, the performance condition is that TSR over the three year measurement period must exceed the median Total Shareholder Return of the FTSE All-Share Index. For the remaining 75% of the award, the increase in Net Asset Value per share over the period must exceed the increase in RPI by at least 3% per annum. At RPI plus 3%,18.75% of the total shares that are subject to the award will vest, rising on a straight-line basis to the remaining 75% vesting if the increase in Net Asset Value per share exceeds RPI by 8% per annum.
In the event of a change of control awards may be released early provided that the performance condition has been satisfied or the Remuneration Committee determines that the performance condition should be treated as satisfied, but the Committee may at its discretion reduce the award to take into account the length of time between the date of award and the date of the change of control.
During 2010 awards of shares were made as follows:
| Grant date | No. of shares | First release date | Expiry date | |
|---|---|---|---|---|
| Robert Rayne | 6 April 2009 | 662,505 | 6 April 2012 | 5 April 2019 |
| 13 April 2010 | 683,451 | 13 April 2013 | 12 April 2020 | |
| Antony Sweet | 6 April 2009 | 329,172 | 6 April 2012 | 5 April 2019 |
| 13 April 2010 | 259,789 | 13 April 2013 | 12 April 2020 |
Awards will be made in 2011 to Mr Payne (100% of basic salary) and Mr Sweet (67% of basic salary). In addition, an award will be made to Mr Rayne in 2011 based on 100% of his salary as an executive director during 2010. Thereafter, no further awards under the Plan will be made to Mr Rayne.
Carried interest The Committee aims to ensure that incentive arrangements are competitive with the private equity industry. The executive directors and Mr Rayne participate in the carried interest arrangements in place for staff involved in the management and development of the investment portfolio.
For 2009 and previous pools, carried interest will be payable in respect of pre-tax net capital gains on investments, excluding third party fund investments, after a preferred return to the Company, currently at the rate of 6% per annum. The preferred return is a threshold beyond which carried interest is payable.
For 2010 and future pools, carried interest will be payable in respect of pre-tax net capital gains on investments, after a hurdle of 8% is reached, which is more usual practice in the private equity sector.
The percentage of eligible capital gains which may be allocated to participants in aggregate may not exceed 20%. Participants are allocated a proportion of this overall maximum at the commencement of each annual pool and may be diluted by new joiners during the life of the pool up to a maximum of 20%. The rules also include provision for reduction in the proportion allocated to each participant in the event that person ceases to be an employee.
No carried interest payments were made in the year ended 31 December 2010.
The Committee considers the FTSE All-Share Index a relevant index for Total Shareholder Return and comparison disclosure as it represents a broad equity market index of which the Company is a member.
The performance graph below shows the Company's Total Shareholder Return performance since the Company first listed on 12 June 2006 compared with that of the FTSE All-Share Index.
The Committee's general policy is that all executive directors should have rolling contracts of employment with notice periods of 12 months from the Company and six months from the director. Each contract will terminate on the director reaching age 65.
The following table provides details of the executive directors' service contracts:
| Date of appointment | Date of contract | Notice period from Company |
Notice period from Director |
|
|---|---|---|---|---|
| Glenn Payne | 1 March 2010 | 22 March 2010 | 12 months | 6 months |
| Antony Sweet | 6 April 2006 | 14 March 2007 | 12 months | 6 months |
Notes:
Each of these contracts is a rolling contract.
The executive directors' service contracts enable the Company at its option to make payment in lieu of notice upon early termination of the contract. Following a change of control, there is provision for either the Company or the executive director to terminate employment upon payment of 95% of annual salary and benefits.
The Committee's policy is for all non-executive directors to have letters of appointment with the Company. Under their letters of appointment, both non-executive directors and the Company are required to give one month's notice to terminate appointments. Non-executive directors are subject to the re-election requirements under the Company's Articles of Association. There are no provisions for non-executive directors to receive compensation upon early termination.
The following table provides details of the non-executive directors' letters of appointment:
| Date of appointment | Date of expiry of current term |
|
|---|---|---|
| John Barnsley | 7 April 2006 | 18 May 2012 |
| Richard Christou | 7 April 2006 | 18 May 2012 |
| Bernard Duroc-Danner | 7 April 2006 | 13 May 2013 |
| Robert Rayne1 | 6 April 2006 30 September 2013 | |
| Mark Sebba2 | 28 September 2010 | 12 May 2011 |
| David Verey | 7 September 2009 | 13 May 2013 |
Notes:
Mr Rayne commenced his term as non-executive Chairman on 1 October 2010.
Mr Sebba was appointed to the Board in September 2010. In accordance with the Company's Articles of Association he will offer himself for election at the forthcoming Annual General Meeting. Subject to him being successfully elected, his term of appointment will be for a period of three years.
Fees for non-executive directors are usually determined every two years by the Board as a whole (upon the recommendation of the executive directors), based on market information and in accordance with the restrictions contained in the Company's Articles of Association.
The current fees for non-executive directors, which are non-pensionable, are:
| Chairman | £100,000 |
|---|---|
| Remuneration Committee Chairman | £45,000 |
| Audit Committee Chairman | £45,000 |
| Non-executive not chairing a committee | £40,000 |
Under Mr Rayne's letter of appointment as non-executive Chairman he participates in the Company's carried interest plan in recognition of his continued contribution to the Company's marketing activities through his network of contacts developed over the last 40 years and his input and advice to the investment decision making process.
The other non-executive directors do not participate in the Company's incentive plans.
The letters of appointment for the non-executive directors provide for termination by either party by giving one month's notice, six months in the case of Mr Rayne.
The following table shows the total remuneration earned in respect of 2010.
| Salary/fees £000 |
Car allowance £000 |
Benefits in-kind1 £000 |
Pension £000 |
Bonus £000 |
2010 Total £000 |
2009 Total £000 |
|
|---|---|---|---|---|---|---|---|
| Jonathan Agnew2 | 31 | – | – | – | – | 31 | 75 |
| John Barnsley | 45 | – | – | – | – | 45 | 45 |
| Richard Christou | 45 | – | – | – | – | 45 | 45 |
| Bernard Duroc-Danner | 40 | – | – | – | – | 40 | 40 |
| Glenn Payne3 | 250 | – | 3 | 37 | 300 | 590 | – |
| Robert Rayne executive | 276 | 15 | 15 | – | 150 | 456 | 638 |
| Robert Rayne4 non-executive |
25 | – | 5 | – | – | 30 | – |
| Mark Sebba5 | 10 | – | – | – | – | 10 | – |
| Antony Sweet | 198 | 15 | 10 | 30 | 200 | 453 | 353 |
| David Verey | 40 | – | – | – | – | 40 | 13 |
| Total | 960 | 30 | 33 | 67 | 650 | 1,740 | 1,209 |
Notes:
Benefits-in-kind for executive directors are insurances and subsidised gym membership.
Until date of resignation, being 13 May 2010.
From date of appointment, being 1 March 2010.
Under Mr Rayne's letter of appointment as non-executive chairman, he is entitled to cover under the Company's various insurance policies.
From date of appointment, being 28 September 2010.
Fees payable in respect of executive directors serving as non-executive directors of companies to which they were nominated by LMS Capital are not retained by them but paid to the Company.
Fees payable to non-executive directors in 2010 from companies to which they were nominated as directors by LMS Capital were as follows:
• John Barnsley £20,000
In setting executive directors' salaries for 2011, the Committee took into account current economic and market factors as well as the salaries and benefits received by other employees of the Company. For 2011, Mr Payne's salary was increased by £30,000 and Mr Sweet's salary was increased by £17,000, including the consolidation of his car allowance which has now been removed from his service contract.
Mr Payne and Mr Sweet receive contributions into a personal pension arrangement of 15% of base salary. No other director receives a pension contribution.
The beneficial interests of those directors who held office at 31 December 2010 in the ordinary shares of the Company are set out below.
| At 31 December 2010 | At 31 December 2009 | |
|---|---|---|
| John Barnsley | 317,000 | 317,000 |
| Richard Christou | 169,965 | 169,965 |
| Bernard Duroc-Danner | 550,800 | 550,800 |
| Glenn Payne | 100,000 | 01 |
| Robert Rayne | 8,208,356 | 8,208,356 |
| Mark Sebba | 210,000 | 02 |
| Antony Sweet | 1,702 | 1,702 |
| David Verey | 309,000 | 0 |
Notes
At date of appointment, being 1 March 2010.
At date of appointment, being 28 September 2010
The following directors had non-beneficial interests in the ordinary share capital of the Company:
• Robert Rayne holds a non-beneficial interest in 21,748,571 ordinary shares held in trust.
Except as stated above:
Chairman, Remuneration Committee
28 March 2011
The directors present their report and the audited financial statements of the Group for the year ended 31 December 2010.
LMS Capital plc is an international investment company whose shares are traded on the Main Market of the London Stock Exchange. The investment portfolio comprises quoted securities, third party funds and direct investments in both the UK and the US.
A detailed review of the Group's activities and performance during the year, together with details of events since the yearend and likely future developments, can be found within the following sections of this Annual Report. All the information detailed in these sections is incorporated by reference into this report and deemed to form part of this report:
For the purpose of DTR 4.1.8R, this report, including those sections above incorporated by reference, is deemed to be the management report.
The Group has analysed and considered its social, environmental and ethical risks and found none to be material. The Company Secretary of LMS Capital is responsible for monitoring the Company's corporate and social responsibility and feedback to the Board is provided where applicable.
As part of the due diligence undertaken when making an investment, the Company looks at the potential investment's record on environmental and social matters to satisfy itself that the investment is responsibly managed in this area.
The total number of employees employed by the Group, as at 31 December 2010, was 251 (31 December 2009: 292). Employees are kept informed about significant business issues and the Group's performance by means of regular meetings, email updates and other in-house communications.
As far as is practicable, employees participate in incentive plans linked to the long-term performance of their employing company. LMS Capital employees participate in its performance share plan.
Should an LMS Capital employee become disabled while in the Company's employ, the Company will continue to employ that person in the same role if possible, or do its utmost to find a role suitable for that employee, including arranging appropriate training. The Company gives full and fair consideration to applications for employment by disabled people having regard to their particular aptitudes and abilities.
LMS Capital ensures that it reduces its environmental impact wherever possible. A carbon audit review was undertaken in 2010 for the Company by the Ethical Property Foundation and recommendations were made concerning business travel, the use of videoconferencing and improving the premises to make them more energy efficient. Since the audit was undertaken the Company has moved to and refitted new premises. As part of the refit, it installed environmentally friendly fittings (such as motion sensor lighting) and used recycled materials wherever possible. Some of the materials removed as part of the fit out were recycled by an investee company in their new premises. Any surplus office equipment resulting from the move was either given away to charities or disposed off in a responsible and environmentally friendly manner. Videoconferencing facilities are available to reduce business travel where possible.
The new premises are more modern and energy efficient than the previous one and under the lease for the new premises the Company and its landlord have agreed to:
Office waste is recycled and segregated wherever possible. During 2010, the Company produced 920 bags of waste of which nearly 49% were recycled. The Company will endeavour to increase this percentage during 2011.
The majority of the Company's employees travel to the office using public transport.
The Group did not make any charitable donations during 2010 (2009: £3,500). LMS Capital does provide office accommodation and services within its premises for The Rayne Foundation (www.raynefoundation.org.uk) without charge. The Rayne Foundation aspires to understand and engage with the needs of UK society, and to find ways and means to help address those needs. It focuses on work which has wider than just local application, or which is of national importance, within four sectors: Arts, Education, Health & Medicine, and Social Welfare & Development.
In addition, LMS Capital provides the use of its meeting rooms and facilities to two charities: The Chicken Shed Theatre Company (www.chickenshed.org.uk) and The Place2Be (www.theplace2be.org.uk), for their trustee meetings and other functions.
Individual fund raising activities by employees of the Group are supported by their respective employer and colleagues.
The Group did not make any political donations during 2010 (2009: £nil).
LMS Capital's policy and practice in the UK is to agree terms of payment with suppliers at the time of contract and to make payment in accordance with those terms, subject to satisfactory performance. The Company does not follow any code or standard on payment practice. At 31 December 2010, trade creditors of the Company had an average of approximately 31 days outstanding (31 December 2009: 31 days). There is no creditor payment policy in force for the Group as a whole.
There are no contracts or arrangements with third parties which the Board deem essential to the operation of the Company.
In January 2011, the Company moved office to 100 George Street, London W1U 8NU. The landlord of this property is Derwent London plc. Robert Rayne is also non-executive Chairman of Derwent London plc. Weatherford International Limited, who were previously subletting a floor of Carlton House, 33 Robert Adam Street, London W1U 3HR (the Company's previous office) contributed £450,000 towards the Company's office move so that it could take on the lease for the whole of Carlton House. Both Robert Rayne and Bernard Duroc-Danner are directors of Weatherford International Limited and LMS Capital plc holds shares in Weatherford International Limited. Independent legal advice was sought by all parties on these transactions.
The Board has decided not to recommend the payment of a dividend in respect of the year ended 31 December 2010 (31 December 2009: £nil).
The names and biographical details of the current directors of the Company are given on page 14. In addition, further information about the Board is set out in the Corporate governance report on pages 16 to 21. During the year, Robert Rayne moved from being Chief Executive Officer to non-executive Chairman, Glenn Payne was appointed as Chief Executive Officer on 1 March 2010 and Mark Sebba was appointed as non-executive director on 28 September 2010.
Details of the current directors' service contracts and letters of appointment, together with their interests in the Company's shares, are shown in the Remuneration report on pages 24 to 31. Qualifying third party indemnities are in force for each of the directors.
The Company's share capital is comprised of ordinary shares of 10p each and, as at 28 March 2011, there are 272,640,952 shares in issue. Each issued share carries one vote, accordingly the total voting rights in the Company are 272,640,952. No shares are currently held in treasury. Only options over shares have been granted during the year and these are subject to performance conditions before they can be exercised – further details can be found in the Remuneration report on pages 24 to 31. There are no restrictions on the transfer of shares.
As at 28 March 2011, the Company has been notified of the following persons who, directly or indirectly, are interested in 3% or more of the Company's voting rights.
| Name | Number of shares or voting rights held |
Percentage of issued share capital |
|---|---|---|
| Withers Trust Corporation Limited1 | 41,803,802 | 15.33 |
| Schroders plc2 | 37,367,973 | 13.71 |
| Trustees of Lord Rayne's Will Trust1 | 35,152,624 | 12.89 |
| Lady Jane Rayne1 | 27,494,405 | 10.08 |
| Jupiter Asset Management Limited3 | 21,814,614 | 8.00 |
| Taube Hodson & Stonex Partners LLP | 13,536,161 | 4.96 |
| Mineworkers Pension Scheme2 | 8,830,834 | 3.24 |
| Mantra Investissement SCA | 8,786,373 | 3.22 |
| British Coal Staff Superannuation Scheme2 | 8,410,952 | 3.09 |
| Robert Rayne | 8,208,356 | 3.04 |
There are common interests in certain of these shares.
Schroders plc manages the shares for the Mineworkers Pension Scheme and British Coal Staff Superannuation Scheme and therefore these shares are included within their own interest.
14,817,277 shares (5.43%) are managed on behalf of The Rayne Foundation who control the voting rights to these shares.
The Company's Annual General Meeting will be held at Durrants Hotel, George Street, London W1H 5BJ at 12 noon on 12 May 2011. The notice of meeting, which includes explanatory notes and provides full details of the resolutions being proposed at the Annual General Meeting, is available to view on the Company's website, www.lmscapital.com.
The directors who held office at the date of approval of this report each confirm that, so far as they are aware:
The auditors, KPMG Audit Plc, have indicated their willingness to continue in office and resolutions will be proposed at the forthcoming Annual General Meeting to reappoint them as auditors and to authorise the directors to fix their remuneration.
By order of the Board.
Matthew Jones Company Secretary 28 March 2011
The directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the directors are required to:
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Directors' report, Directors' remuneration report and Corporate governance statement that complies with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
For and on behalf of the Board
G Payne A C Sweet Chief Executive Officer Chief Financial Officer 28 March 2011
We have audited the financial statements of LMS Capital plc for the year ended 31 December 2010 set out on pages 39 to 79. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.
As explained more fully in the directors' responsibilities statement set out on page 36, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.
A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm.
In our opinion:
In our opinion:
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
Under the Listing Rules we are required to review:
Anthony Cecil (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 8 Salisbury Square London EC4Y 8BB
28 March 2011
| Notes | Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|---|
| Continuing operations | |||
| Revenue from sales of goods and services | 2 | 47,869 | 29,819 |
| Gains and losses on investments | 2 | 29,331 | 3,998 |
| Interest income | 3 | 37 | 166 |
| Dividend income | 4 | 35 | 133 |
| Other income from investments | 4 | 939 | 840 |
| 78,211 | 34,956 | ||
| Operating expenses | 5 | (60,241) | (46,102) |
| Profit/(loss) before finance costs | 17,970 | (11,146) | |
| Finance costs | 7 | (1,234) | (327) |
| Profit/(loss) before tax | 16,736 | (11,473) | |
| Taxation | 8 | (1,567) | (926) |
| Profit/(loss) from continuing operations | 15,169 | (12,399) | |
| Discontinued operations | |||
| Loss from discontinued operations (net of taxation) | 9 | (2,634) | (2,352) |
| Profit/(loss) for the year | 12,535 | (14,751) | |
| Attributable to: | |||
| Equity holders of the parent | 10,984 | (15,148) | |
| Non-controlling interests | 1,551 | 397 | |
| 12,535 | (14,751) | ||
| Earnings/(loss) per ordinary share – basic | 10 | 4.0p | (5.6)p |
| Earnings/(loss) per ordinary share – diluted | 10 | 3.9p | (5.6)p |
| Continuing operations | |||
| Earnings/(loss) per ordinary share – basic | 10 | 5.0p | (4.7)p |
| Earnings/(loss) per ordinary share – diluted | 10 | 4.9p | (4.7)p |
The notes on pages 46 to 79 form part of these financial statements.
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Profit/(loss) for the year Exchange differences on translation of foreign operations |
12,535 (113) |
(14,751) (200) |
| Total comprehensive profit/(loss) for the year | 12,422 | (14,951) |
| Attributable to: Owners of the parent Non-controlling interests |
10,871 1,551 |
(15,348) 397 |
| 12,422 | (14,951) |
The notes on pages 46 to 79 form part of these financial statements.
| Notes | 31 December 2010 £'000 |
31 December 2009 £'000 |
|
|---|---|---|---|
| Non-current assets | |||
| Property, plant and equipment Intangible assets Investments Other long-term assets |
11 12 13 |
9,491 28,123 220,703 43 |
7,057 29,525 188,133 80 |
| Non-current assets | 258,360 | 224,795 | |
| Current assets Inventories Operating and other receivables Cash and cash equivalents |
14 15 16 |
1,851 12,818 13,229 |
812 10,768 16,950 |
| Current assets | 27,898 | 28,530 | |
| Total assets | 286,258 | 253,325 | |
| Current liabilities Bank overdrafts Interest-bearing loans and borrowings Operating and other payables Deferred income Current tax liabilities |
16 17 18 19 |
– (18,812) (13,859) (5,014) (2,276) |
(369) (2,394) (7,921) (8,704) (1,007) |
| Current liabilities | (39,961) | (20,395) | |
| Non-current liabilities Interest-bearing loans and borrowings Deferred income Deferred tax liabilities Other long-term liabilities |
17 19 20 |
(4,597) (2,084) (614) (172) |
(4,795) (2,116) (401) – |
| Non-current liabilities | (7,467) | (7,312) | |
| Total liabilities | (47,428) | (27,707) | |
| Net assets | 238,830 | 225,618 | |
| Equity Share capital Capital redemption reserve Merger reserve Foreign exchange translation reserve Retained earnings |
21 | 27,265 5,635 84,083 899 117,827 |
27,265 5,635 84,083 1,012 106,773 |
| Equity attributable to owners of the parent Non-controlling interests |
235,709 3,121 |
224,768 850 |
|
| Total equity | 21 | 238,830 | 225,618 |
The financial statements on pages 39 to 79 were approved by the Board on 28 March 2011 and were signed on its behalf by:
G Payne
Director
The notes on pages 46 to 79 form part of these financial statements.
Overview
| Notes | 31 December 2010 £'000 |
31 December 2009 £'000 |
|
|---|---|---|---|
| Non-current assets | |||
| Property, plant and equipment | 11 | 339 | 158 |
| Investments in subsidiaries | 13 | 281,801 | 281,801 |
| Non-current assets | 282,140 | 281,959 | |
| Current assets | |||
| Operating and other receivables | 15 | 198 | 743 |
| Amounts receivable from subsidiaries | 15 | 26,231 | 11,607 |
| Cash and cash equivalents | 16 | 2,679 | 4,277 |
| Current assets | 29,108 | 16,627 | |
| Total assets | 311,248 | 298,586 | |
| Current liabilities | |||
| Interest bearing loans | 17 | (14,281) | – |
| Operating and other payables | 18 | (2,292) | (1,960) |
| Amounts payable to subsidiaries | 18 | (70,018) | (68,760) |
| Current liabilities | (86,591) | (70,720) | |
| Net assets | 224,657 | 227,866 | |
| Equity | |||
| Share capital | 21 | 27,265 | 27,265 |
| Capital redemption reserve | 5,635 | 5,635 | |
| Retained earnings | 191,757 | 194,966 | |
| Equity attributable to owners of the parent | 21 | 224,657 | 227,866 |
The financial statements on pages 39 to 79 were approved by the Board on 28 March 2011 and were signed on its behalf by:
G Payne Director
The notes on pages 46 to 79 form part of these financial statements.
| Share capital £'000 |
Capital redemption reserve £'000 |
Merger reserve £'000 |
Translation reserve £'000 |
Retained earnings £'000 |
Total £'000 |
Non controlling Interests £'000 |
Total equity £'000 |
|
|---|---|---|---|---|---|---|---|---|
| Balance at 1 January 2009 | 27,265 | 5,635 | 84,083 | 1,212 | 122,741 | 240,936 | 147 | 241,083 |
| Total comprehensive | ||||||||
| income for the period Loss for the year |
– | – | – | – | (15,148) | (15,148) | 397 | (14,751) |
| Other comprehensive loss | – | – | – | (200) | – | (200) | – | (200) |
| Changes in ownership | ||||||||
| interests | ||||||||
| Acquisition of non-controlling | ||||||||
| interest with a change in control | – | – | – | – | – | – | 306 | 306 |
| Transactions with owners, recorded directly in equity |
||||||||
| Share-based payments | – | – | – | – | (820) | (820) | – | (820) |
| Balance at | ||||||||
| 31 December 2009 | 27,265 | 5,635 | 84,083 | 1,012 | 106,773 | 224,768 | 850 | 225,618 |
| Total comprehensive income | ||||||||
| for the period | ||||||||
| Profit for the year | – | – | – | – | 10,984 | 10,984 | 1,551 | 12,535 |
| Other comprehensive loss | – | – | – | (113) | (113) | – | (113) | |
| Changes in ownership | ||||||||
| interests Acquisition of non-controlling |
||||||||
| interest with a change in control | – | – | – | – | – | – | 967 | 967 |
| Disposal of non-controlling | ||||||||
| interest without a change | ||||||||
| in control | – | – | – | – | – | – | (247) | (247) |
| Transactions with owners, | ||||||||
| recorded directly in equity | ||||||||
| Share-based payments | – | – | – | – | 70 | 70 | – | 70 |
| Balance at | ||||||||
| 31 December 2010 | 27,265 | 5,635 | 84,083 | 899 | 117,827 | 235,709 | 3,121 | 238,830 |
| Balance at 31 December 2010 | 27,265 | 5,635 | 191,757 | 224,657 |
|---|---|---|---|---|
| Transactions with owners, recorded directly in equity Share-based payments |
– | – | 70 | 70 |
| Total comprehensive income for the period Loss for the year |
– | – | (3,279) | (3,279) |
| Balance at 31 December 2009 | 27,265 | 5,635 | 194,966 | 227,866 |
| Transactions with owners, recorded directly in equity Share-based payments |
– | – | (820) | (820) |
| Total comprehensive income for the period Loss for the year |
– | – | (15,056) | (15,056) |
| Balance at 1 January 2009 | 27,265 | 5,635 | 210,842 | 243,742 |
| Share capital £'000 |
Capital redemption reserve £'000 |
Retained earnings £'000 |
Total equity £'000 |
The notes on pages 46 to 79 form part of these financial statements.
| Notes | Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|---|
| Cash flows from operating activities | |||
| Profit/(loss) for the year | 12,535 | (14,751) | |
| Adjustments for: | |||
| Depreciation and amortisation | 5 | 2,450 | 1,762 |
| Impairment of intangible assets | 12 | 7,665 | 4,598 |
| (Gains)/losses on investments | 9 | (29,331) | (3,998) |
| Loss on sale of discontinued operations, net of income tax | 2,015 | – | |
| Loss on sale of property, plant and equipment | – | 56 | |
| Translation differences Share-based payments |
(280) 70 |
433 (422) |
|
| Finance costs | 1,234 | 342 | |
| Interest income | (37) | (166) | |
| Income tax expense | 1,567 | 939 | |
| (2,112) | (11,207) | ||
| Change in inventories | (1,039) | (147) | |
| Change in operating and other receivables | (1,056) | 1,396 | |
| Change in operating and other payables | 1,317 | (2,219) | |
| (2,890) | (12,177) | ||
| Interest paid | (1,234) | (342) | |
| Income tax paid | (298) | (321) | |
| Net cash used in operating activities | (4,422) | (12,840) | |
| Cash flows from investing activities | |||
| Interest received | 37 | 166 | |
| Acquisition of property, plant and equipment | 11 | (3,737) | (2,749) |
| Acquisition of intangible assets | 12 | (1,433) | – |
| Disposals of property, plant and equipment Disposal of discontinued operations, net of cash disposed of |
9 | 85 165 |
3 – |
| Other disposals | 1,560 | – | |
| Acquisition of investments | 13 | (26,991) | (18,853) |
| Acquisition of subsidiaries, net of cash acquired | 24 | (7,450) | (6,116) |
| Proceeds from sale of investments | 23,880 | 13,981 | |
| Net cash used in investing activities | (13,884) | (13,568) | |
| Cash flows from financing activities | |||
| Drawdown of interest bearing loans | 15,133 | 554 | |
| Disposal of non-controlling interest | |||
| without a change in control | (247) | – | |
| Net cash from financing activities | 14,886 | 554 | |
| Net decrease in cash and cash equivalents | (3,420) | (25,854) | |
| Cash and cash equivalents at the beginning of the period | 16,581 | 42,615 | |
| Effect of exchange rate fluctuations on cash held | 68 | (180) | |
| Cash and cash equivalents at the end of the year | 13,229 | 16,581 | |
| Cash and cash equivalents above comprise | |||
| Cash and cash equivalents | 13,229 | 16,950 | |
| Bank overdrafts | – | (369) | |
| Cash and cash equivalents at the end of the year | 16 | 13,229 | 16,581 |
The notes on pages 46 to 79 form part of these financial statements.
| Notes | Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|---|
| Cash flows from operating activities Loss for the year Adjustments for: |
(3,279) | (15,056) | |
| Depreciation Impairment of investments in subsidiaries Share-based payments Interest income |
13 | 122 – 70 (24) |
144 11,709 (422) (60) |
| Income tax credit Change in operating and other receivables Change in operating and other payables Change in amounts due to subsidiaries |
– (3,111) 545 332 (13,366) |
(2,541) (6,226) (446) 6 (1,121) |
|
| Net cash (used in)/from operating activities | (15,600) | (7,787) | |
| Cash flows from investing activities Interest received Acquisition of property, plant and equipment |
24 (303) |
60 (14) |
|
| Net cash (used in)/from investing activities | (279) | 46 | |
| Cash flows from financing activities Drawdown of interest bearing loans |
14,281 | – | |
| Net cash from financing activities | 14,281 | – | |
| Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year |
(1,598) 4,277 |
(7,741) 12,018 |
|
| Cash and cash equivalents at the end of the year | 2,679 | 4,277 | |
| Cash and cash equivalents above comprise Cash and cash equivalents Bank overdrafts |
2,679 – |
4,277 – |
|
| Cash and cash equivalents at the end of the year | 16 | 2,679 | 4,277 |
The notes on pages 46 to 79 form part of these financial statements.
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 2010 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.
The Company is an investment company but because it holds majority stakes in certain investments it is required to prepare group accounts that consolidate the results of such investments. In order to present information that is consistent with other investment companies, the results of the Group's investment business on a standalone basis are set out in Note 2.
These financial statements have been prepared in accordance with International Financial Reporting Standards as adopted for use in the European Union ('Adopted IFRS'). The Company is taking advantage of the exemption in Section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements.
The Group's business activities and financial position are set out in the Operating and Financial review on pages 4 to 13. In addition Note 23 to the financial information includes a summary of the Group's financial risk management processes, details of its financial instruments and its exposure to credit risk and liquidity risk. Taking account of the financial resources available to it the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook. After making enquiries the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the annual report and accounts.
These financial statements were authorised for issue by the directors on 28 March 2011.
The accounting policies set out below have been applied consistently for all periods. Certain comparative amounts have been reclassified to conform with the current year's presentation. In addition, the comparative consolidated income statement has been re-presented as if an operation discontinued during the current year had been discontinued from the start of the comparative year (see Note 9).
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.
The accounting policies adopted are consistent with those of the previous financial year except as follows:
The amendments to IFRS 3 include significant changes in the accounting for business combinations, including the valuation of non-controlling interests, accounting for transaction costs, initial recognition and subsequent re-measurement of contingent consideration and business combinations achieved in stages.
The Group has applied IFRS 3: Business Combinations (2008) in accounting for business combinations with effect from 1 January 2010. The change in accounting policy has been applied prospectively and had no material impact on the earnings/loss per share for the year. The Group has elected to measure any non-controlling interest at the proportionate interest in the fair value of the identifiable assets and liabilities of the acquiree.
Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.
The Group has also applied IAS 27 'Consolidated and separate financial statements' (2008) with effect from 1 January 2010 in accounting for acquisitions of and allocation of losses to non-controlling interests. The change in accounting policy has been applied prospectively and had no material impact on the earnings per share for the year.
The preparation of financial statements in conformity with Adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis; revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in the following notes:
The financial statements comprise the financial statements of the Company and its subsidiary undertakings up to 31 December 2010. The Company's subsidiary undertakings fall into two categories:
The financial statements of the subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The portfolio subsidiaries' financial statements are consolidated and restatements are made to comply with Adopted IFRS. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. Prior to the adoption of IAS 27 (2008), losses in a subsidiary were only allocated to non-controlling interests to the extent that non-controlling interests do not have a deficit balance.
On acquisition the assets and liabilities of a subsidiary are measured at fair value and any excess of the cost of acquisition over the fair values of the identifiable net assets and contingent liabilities acquired is recognised as goodwill. If the cost of acquisition is lower than the fair value of the identifiable net assets and contingent liabilities acquired, the amount is credited to the income statement in the period of acquisition.
Non-controlling interests are stated at their share of the fair value of the identifiable assets, liabilities and contingent liabilities recognised, except to the extent that applicable losses exceed non-controlling interests.
All intra Group transactions and profits or losses are eliminated on consolidation.
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Investments that are held as part of the Group's investment portfolio are carried in the balance sheet at fair value even though the Group may have significant influence over those companies. This treatment is permitted by IAS 28: Investment in Associates, which requires investments held by investment companies to be excluded from its scope where those investments are designated upon initial recognition as investments held at fair value through profit or loss and accounted for in accordance with IAS 39, with changes in fair value recognised in the income statement in the period of the change. The Group has no interest in associates through which it carries on its investment management business.
Acquisitions and disposals of non-controlling interests that do not result in a change of control are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result of such transactions. The adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. Any difference between the price paid or received and the amount by which non-controlling interests are adjusted is recognised directly in equity and attributed to the owners of the parent.
Prior to the adoption of IAS 27 (2008), goodwill was recognised on the acquisition of non-controlling interests in a subsidiary, which represented the excess of the cost of the additional investment over the carrying amount of the interest in the net assets acquired at the date of the transaction.
Investments in subsidiaries are stated at cost less impairment losses. On disposal of such investments the difference between net disposal proceeds and the corresponding carrying amount is recognised in the income statement.
Intangible assets purchased separately from a business are capitalised at their cost. Intangible assets acquired as part of an acquisition are capitalised at their fair value where this can be measured reliably.
Concessions, patents, licences and trademarks purchased by the Group are amortised to nil by equal annual instalments over their useful economic lives.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment.
The Group manages its investments with a view to profit from the receipt of dividends and changes in fair value of equity investments. Therefore all quoted investments, unquoted equity investments and managed funds investments are designated at fair value through profit and loss and carried in the balance sheet at fair value. Other investments including loan investments are classified as loans and receivables and carried in the balance sheet at amortised cost less impairment.
Fair values have been determined in accordance with the International Private Equity and Venture Capital Valuation Guidelines. These guidelines require the valuer to make judgements as to the most appropriate valuation method to be used and the results of the valuations.
Each investment is reviewed individually with regard to the stage, nature and circumstances of the investment and the most appropriate valuation method selected. The valuation results are then reviewed and any amendment to the carrying value of investments is made as considered appropriate.
Quoted investments for which an active market exists are valued at the closing bid price at the balance sheet date.
Unquoted direct investments for which there is no ready market are valued using the most appropriate valuation technique with regard to the stage and nature of the investment. Valuation methods that may be used include:
Investments in managed funds are valued at fair value. The general partners of the funds will provide periodic valuations on a fair value basis which the Group will adopt provided it is satisfied that the valuation methods used by the funds are not materially different from the Group's valuation methods.
Property, plant and equipment is stated at cost less accumulated depreciation and any impairment loss.
Cost includes expenditure that is directly attributable to the asset, including where appropriate the cost of materials, direct labour and any other costs directly attributable to bringing the asset to a working condition for its intended use.
Depreciation is charged using the straight-line method over the estimated useful lives of the assets as follows:
| • Freehold property | 50 years | |||
|---|---|---|---|---|
| -- | --------------------- | -- | -- | ---------- |
When parts of an item of property, plant and equipment have different useful lives, these components are accounted for as separate items of property, plant and equipment.
Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Assets acquired by way of finance leases are stated at an amount equal to the lower of fair value and the present value of the future minimum lease payments at inception of the lease, less accumulated depreciation and any impairment loss.
Other leases are operating leases and are not recognised on the Group's statement of financial position.
Loans and receivables are considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of loans and receivables measured at amortised cost is calculated as the difference between their carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.
Individually significant loans and receivables are tested for impairment on an individual basis. The remaining loans and receivables are assessed collectively in groups that share similar credit risk characteristics.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised.
The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset's recoverable amount is estimated.
An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the profit or loss.
For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cashgenerating unit to which the asset belongs.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Transactions in foreign currencies are recorded at the rate of exchange at the date of transaction. Monetary assets and monetary liabilities denominated in foreign currencies at the reporting date are reported at the rates of exchange prevailing at that date and exchange differences are included in the profit and loss account.
On consolidation the assets and liabilities of the Group's overseas operations including goodwill and fair value adjustments arising on consolidation are translated at the closing rates ruling at the reporting date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising on these items are classified as equity and transferred to the Group's foreign exchange translation reserve. Such exchange differences are recognised as income or expense in the period in which the related overseas operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of an overseas operation are treated as assets and liabilities of the overseas entity and translated at the closing rate.
Inventories are stated at the lower of cost and net realisable value. The cost is based on the average cost principle. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes a share of overheads based on normal working capacity.
Operating and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses.
Cash, for the purpose of the cash flow statement, comprises cash in hand and cash equivalents, less overdrafts payable on demand.
Cash equivalents are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market. Cash equivalents include short-term cash deposits with original maturity of less than three months.
The Group's financial liabilities include borrowings and operating and other payables.
Interest bearing loans are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest bearing loans and borrowings are stated at amortised cost which is the initial cost less any principal repayments.
Operating and other payables with short duration are not discounted. They are measured at cost which is the fair value of the consideration to be paid in the future for goods and services received.
A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the liability.
Revenue from sales of goods is recognised when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from sales of services is recognised by reference to the stage of completion of the transaction at the reporting date. Revenue is estimated by applying to the total expected contract revenue, the proportion of total contract costs incurred to date over total expected costs for each contract.
Revenues from software and related services are also predominantly project based with transactions typically including the sale of a software license and related implementation services which are invoiced to customers on their acceptance of the installation. Since these projects are normally short-term in nature, revenue is generally recognised in line with customer acceptance.
Maintenance contracts for hardware and software are invoiced to customers in advance and these contracts typically cover a period of one year or more. Where such maintenance services extend beyond the reporting date the related income is deferred and recognised over the remaining life of the contract, generally on a straight-line basis.
Revenues from energy provision are recognised based on metered consumption by customers; revenues from related services are recognised by reference to the stage of completion of the service provision at the reporting date.
Realised and unrealised gains and losses on investments are recognised in the profit and loss account in the period in which they arise.
Interest income is recognised as it accrues using the effective interest method.
Investment income comprises investment management fees receivable from portfolio companies and dividend income. Dividend income is recognised on the date the Group's right to receive payment is established.
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related services are provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or carried interest incentive arrangements if the Group has a present legal or constructive obligation to pay the amount as a result of past service provided by the employee and the obligation can be estimated reliably.
Payments to defined contribution pension schemes are charged as an expense as they fall due.
The Group has issued share options and awards of performance shares to certain employees. Such options and awards are treated as equity-settled share-based payments and measured at fair value at the date of grant and the fair value is recognised as an expense with a corresponding increase in equity on a straight-line basis over the vesting period.
Fair value is calculated by use of a binomial option valuation model taking into account the terms and conditions under which the equity-settled share-based payments were issued. Service and non-market performance conditions attached to transactions are not taken into account in determining fair value.
Finance costs comprise interest payable on borrowings calculated using the effective interest rate method.
Payments made under operating leases are recognised in the profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense over the term of the lease.
Minimum lease payments under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed.
Income tax expense comprises current and deferred tax. Income tax expense is recognised in the profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they probably will not reverse in the foreseeable future.
Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised.
A discontinued operation is a component of the Group's business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative consolidated income statement is restated as if the operation has been discontinued from the start of the comparative period.
The information below has been prepared using the definition of an operating segment in IFRS 8: Operating Segments. The Group determines and presents information on operating segments based on the information that is provided internally to the directors to enable them to assess performance and allocate resources.
As an investment company, the Group's primary focus is on the performance of its investment management business. Financial information for this segment is prepared on the basis that all investments are accounted for at fair value.
The information set out below therefore presents summarised financial information for the investment management business on a stand alone basis, together with the adjustments arising from the summarised results and financial position of the portfolio subsidiaries.
The consolidation adjustments included below reflect the adjustments necessary to restate the portfolio subsidiaries from the basis included in the investment management business (investments carried at fair value) to full consolidation in the Group's financial statements. These adjustments include the elimination of intra-group transactions and adjustments in relation to goodwill.
| Reconciliation | |||||
|---|---|---|---|---|---|
| Year ended 31 December 2010 | Investment management £'000 |
Portfolio subsidiaries £'000 |
Discontinued operations £'000 |
Consolidation adjustments £'000 |
Group total £'000 |
| Revenues from sales of goods and services Gains and losses on investments |
– 23,914 |
47,869 – |
– – |
– 5,417 |
47,869 29,331 |
| Interest income | 24 | 13 | – | – | 37 |
| Dividend income Other income from investments |
35 920 |
– (227) |
– – |
– 246 |
35 939 |
| Impairment of intangible assets | – | – | – | 7,665 | 7,665 |
| Finance costs | (338) | (3,202) | – | 2,306 | (1,234) |
| Continuing operations | 17,562 | (2,745) | – | 352 | 15,169 |
| Discontinued operations | – | – | (2,634) | – | (2,634) |
| Profit/(loss) for the year | 17,562 | (2,745) | (2,634) | 352 | 12,535 |
| Reconciliation | |||||
|---|---|---|---|---|---|
| Year ended 31 December 2009 | Investment management £'000 |
Portfolio subsidiaries £'000 |
Discontinued operations £'000 |
Consolidation adjustments £'000 |
Group total £'000 |
| Revenues from sales of goods and services Gains and losses on investments |
– (4,876) |
29,819 – |
– – |
– 8,874 |
29,819 3,998 |
| Interest income | 159 | 7 | – | – | 166 |
| Dividend income Other income from investments |
133 361 |
– 479 |
– – |
– – |
133 840 |
| Impairment of intangible assets | – | – | – | (4,598) | (4,598) |
| Finance costs | – | (6,326) | – | 5,999 | (327) |
| Continuing operations Discontinued operations |
(12,660) – |
7,284 – |
– (2,352) |
(7,023) – |
(12,399) (2,352) |
| (Loss)/profit for the year | (12,660) | 7,284 | (2,352) | (7,023) | (14,751) |
| Reconciliation | ||||
|---|---|---|---|---|
| 31 December 2010 | Investment management £'000 |
Portfolio subsidiaries £'000 |
Consolidation adjustments £'000 |
Group total £'000 |
| Property, plant and equipment Intangible assets Investments Other non-current assets |
339 – 253,140 – |
9,152 11,502 – 43 |
– 16,621 (32,437) – |
9,491 28,123 220,703 43 |
| Non-current assets | 253,479 | 20,697 | (15,816) | 258,360 |
| Cash and cash equivalents | 9,326 | 3,903 | – | 13,229 |
| Other current assets | 590 | 14,661 | (582) | 14,669 |
| Total assets | 263,395 | 39,261 | (16,398) | 286,258 |
| Total liabilities | (18,429) | (60,802) | 31,803 | (47,428) |
| Net assets/(liabilities) | 244,966 | (21,541) | 15,405 | 238,830 |
The net asset value of the investment management business at 31 December 2010 is wholly attributable to the equity holders of the parent.
| Reconciliation | ||||
|---|---|---|---|---|
| 31 December 2009 | Investment Management £'000 |
Portfolio subsidiaries £'000 |
Consolidation adjustments £'000 |
Group total £'000 |
| Property, plant and equipment Intangible assets Investments Other non-current assets |
158 – 215,632 – |
6,899 11,817 1 80 |
– 17,708 (27,500) – |
7,057 29,525 188,133 80 |
| Non-current assets | 215,790 | 18,797 | (9,792) | 224,795 |
| Cash and cash equivalents | 14,416 | 2,534 | – | 16,950 |
| Other current assets | 462 | 11,182 | (64) | 11,580 |
| Total assets | 230,668 | 32,513 | (9,856) | 253,325 |
| Total liabilities | (2,802) | (79,519) | 54,614 | (27,707) |
| Net assets/(liabilities) | 227,866 | (47,006) | 44,758 | 225,618 |
The net asset value of the investment management business at 31 December 2009 includes £227,719,000 attributable to the equity holders of the parent and £147,000 attributable to non-controlling interests.
The carrying amount and gain and losses of the investments of the investment management business can be further analysed as follows:
| Year ended 31 December 2010 | Year ended 31 December 2009 | |||||
|---|---|---|---|---|---|---|
| Asset type | UK £'000 |
US £'000 |
Total £'000 |
UK £'000 |
US £'000 |
Total £'000 |
| Funds Quoted Unquoted |
35,164 21,091 41,361 |
79,371 42,122 34,031 |
114,535 63,213 75,392 |
30,259 17,274 39,849 |
73,194 34,601 20,455 |
103,453 51,875 60,304 |
| 97,616 | 155,524 | 253,140 | 87,382 | 128,250 | 215,632 | |
| Year ended 31 December 2010 | Year ended 31 December 2009 | |||||
| Asset type | Realised gains/(losses) £'000 |
Unrealised gains/(losses) £'000 |
Total £'000 |
Realised gains/(losses) £'000 |
Unrealised gains/(losses) £'000 |
Total £'000 |
| Funds Quoted Unquoted |
1,037 1,128 (3,154) |
9,510 14,100 1,293 |
10,547 15,228 (1,861) |
(755) 2,503 (1,867) |
(6,007) 9,741 (8,491) |
(6,762) 12,244 (10,358) |
| (989) | 24,903 | 23,914 | (119) | (4,757) | (4,876) |
The Group's revenues from external customers comprise:
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Continuing operations | ||
| IT services and software | 36,850 | 22,178 |
| Specialist manufacturing | 4,039 | 7,641 |
| Energy and related services | 6,980 | – |
| 47,869 | 29,819 |
| Revenues | Non-current assets | |||
|---|---|---|---|---|
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
31 December 2010 £'000 |
31 December 2009 £'000 |
|
| Continuing operations | ||||
| United Kingdom | 31,527 | 16,224 | 93,924 | 88,298 |
| United States of America | 12,068 | 7,611 | 164,436 | 136,497 |
| Other countries | 4,274 | 5,984 | – | – |
| 47,869 | 29,819 | 258,360 | 224,795 |
Geographical information on revenue is based on the location of customers and on assets is based on the location of the assets.
Revenues from one customer of the Group's Portfolio subsidiaries segment represents approximately 12% of the Group's total revenues. In 2009, no single customer contributed more than 10% of the Group's total revenues.
Interest income comprises interest receivable on bank deposits.
Investment and other income comprise the following:
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Dividends from quoted securities | 35 | 133 |
| Investment management fees | 297 | 360 |
| Income from investments | 79 | 314 |
| Other | 563 | 166 |
| 974 | 973 |
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Cost of sales Administrative expenses |
21,884 38,357 |
12,826 33,276 |
| 60,241 | 46,102 |
Operating expenses include the following:
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Depreciation Goodwill impairment loss Intangible asset amortisation Auditors' remuneration: |
2,212 7,665 238 |
1,435 3,456 – |
| Fees to group auditors: – parent company – subsidiary companies Non-audit related services: |
70 140 |
67 133 |
| – taxation advisory services – other Fees to non-group auditors |
28 – 185 |
19 80 196 |
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Wages and salaries Compulsory social security contributions Contributions to defined contribution plans Share-based payment transactions |
15,717 2,424 448 70 |
15,740 1,457 544 (178) |
| 18,659 | 17,563 |
The Group operates carried interest incentive arrangements in line with normal practice in the private equity industry based on the performance of its investment management business. No amounts were payable under these arrangements for the year ended 31 December 2010 (year ended 31 December 2009: nil). If the Group's investment portfolio were realised at its carrying amount at 31 December 2010, carried interest of £nil would become payable (31 December 2009: £nil).
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Interest on bank loans and overdrafts Interest on other loans Finance lease charges |
413 817 4 |
94 219 14 |
| 1,234 | 327 |
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Current tax expense | ||
| Current period | 1,569 | 458 |
| Adjustment for prior periods | (2) | 224 |
| 1,567 | 682 | |
| Deferred tax expense | ||
| Origination and reversal of temporary differences | – | 244 |
| – | 244 | |
| Total tax expense | 1,567 | 926 |
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Profit/(loss) before tax | 16,736 | (11,473) |
| Income tax using the Company's domestic tax rate – 28% (2009: 28.5%) Recognition of previously unrecognised tax losses Fair value adjustments not currently taxed Non-deductible expenses Non-taxable income Deferred tax not recognised Prior year adjustment |
4,686 – (7,520) 2,306 (338) 2,435 (2) |
(3,270) (123) (1,901) 3,717 (234) 2.513 224 |
| Total tax expense | 1,567 | 926 |
In September 2010 the Group sold its entire interest in Citizen Limited.
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Revenues | 1,708 | 2,706 |
| Expenses | (2,324) | (5,046) |
| Results from operating activities | (616) | (2,340) |
| Taxation | (3) | (12) |
| Results from operating activities, net of tax | (619) | (2,352) |
| Loss on sale of discontinued operations, net | (2,015) | – |
| Tax on loss on sale of discontinued operations | – | – |
| Loss for the year | (2,634) | (2,352) |
| Basic and diluted loss per ordinary share | (1.0)p | (0.9)p |
| Year ended 31 December 2010 £'000 |
Year ended 31 December 2009 £'000 |
|
|---|---|---|
| Net cash used in operating activities Net cash used in investing activities Net cash from financing activities |
(82) (17) – |
(413) (201) – |
| Net cash used in discontinued operations | (99) | (614) |
| 31 December 2010 £'000 |
|
|---|---|
| Property, plant and equipment | (157) |
| Intangible assets | (2,561) |
| Trade and other receivables | (338) |
| Cash and cash equivalents | (54) |
| Bank overdrafts | 475 |
| Trade and other payables | 770 |
| Deferred Income | 140 |
| Net assets | (1,725) |
| Consideration received, satisfied in cash | 219 |
| Cash disposed of | (54) |
| Net cash inflow | 165 |
The calculation of basic earnings per ordinary share is based on the profit of £10,984,000 (year ended 31 December 2009: loss of £15,148,000), being the profit for the year attributable to the owners of the Company, divided by the weighted average number of ordinary shares in issue during the year of 272,640,952 (year ended 31 December 2009: 272,640,952).
The calculation of earnings per ordinary share for continuing operations is based on the profit of £13,618,000 (year ended 31 December 2009: loss of £12,796,000), being the profit for the year from continuing operations attributable to the owners of the Company, divided by the weighted average number of ordinary shares in issue during the year of 272,640,952 (year ended 31 December 2009: 272,640,952).
The calculation of diluted earnings per ordinary share is based on the profit of £10,984,000, being the profit for the year attributable to the owners of the Company, divided by the weighted average number of ordinary shares in issue during the year of 278,266,853 after taking account of the potential dilutive effect of share options issued under the Company's share option plans.
The calculation of diluted earnings per ordinary share for continuing operations is based on the profit of £13,618,000, being the profit for the year from continuing operations attributable to the owners of the Company, divided by the weighted average number of ordinary shares in issue during the year of 278,266,853 after taking account of the potential dilutive effect of share options issued under the Company's share option plans.
There was no dilution effect in the preceding year.
| Land and buildings £'000 |
Plant and equipment £'000 |
Fixtures and fittings £'000 |
Total £'000 |
|
|---|---|---|---|---|
| Cost Balance at 1 January 2009 |
1,785 | 4,307 | 417 | 6,509 |
| Additions | 2 | 2,309 | 438 | 2,749 |
| Acquisitions through business combinations | – | 2,888 | 82 | 2,970 |
| Disposals Effect of movement in exchange rates |
– (173) |
(118) (128) |
(7) (4) |
(125) (305) |
| Balance at 31 December 2009 | 1,614 | 9,258 | 926 | 11,798 |
| Balance at 1 January 2010 Additions Acquisitions through business combinations Disposals |
1,614 24 – – |
9,258 3,187 1,387 (328) |
926 526 – (364) |
11,798 3,737 1,387 (692) |
| Disposals of discontinued operations | – | (594) | (9) | (603) |
| Other disposals | – | – | (318) | (318) |
| Effect of movement in exchange rates | 180 | (125) | (21) | 34 |
| Balance at 31 December 2010 | 1,818 | 12,785 | 740 | 15,343 |
| Depreciation and impairment losses Balance at 1 January 2009 Depreciation charge for the year Disposals Effect of movement in exchange rates |
922 91 – (92) |
2,193 1,340 (61) (40) |
178 218 (5) (3) |
3,293 1,649 (66) (135) |
| Balance at 31 December 2009 | 921 | 3,432 | 388 | 4,741 |
| Balance at 1 January 2010 Depreciation charge for the year Disposals Disposals of discontinued operations Other disposals Effect of movement in exchange rates |
921 98 – – – 244 |
3,432 2,003 (274) (441) – (179) |
388 294 (333) (5) (278) (18) |
4,741 2,395 (607) (446) (278) 47 |
| Balance at 31 December 2010 | 1,263 | 4,541 | 48 | 5,852 |
| Carrying amounts | ||||
| At 31 December 2009 | 693 | 5,826 | 538 | 7,057 |
| At 31 December 2010 | 555 | 8,244 | 692 | 9,491 |
At 31 December 2010 land and buildings with a carrying amount of £555,000 (31 December 2009: £693,000) are subject to a registered debenture to secure bank loans.
At 31 December 2010 the carrying amount of plant and equipment includes £285,475 held under finance leases (31 December 2009: £278,000).
| Plant and equipment £'000 |
Fixtures and fittings £'000 |
Total £'000 |
|
|---|---|---|---|
| Cost | |||
| Balance at 1 January 2009 | 162 | 295 | 457 |
| Additions | 14 | – | 14 |
| Balance at 31 December 2009 | 176 | 295 | 471 |
| Balance at 1 January 2010 | 176 | 295 | 471 |
| Additions | 126 | 177 | 303 |
| Balance at 31 December 2010 | 302 | 472 | 774 |
| Depreciation and impairment losses | |||
| Balance at 1 January 2009 | 93 | 76 | 169 |
| Depreciation charge for the year | 54 | 90 | 144 |
| Balance at 31 December 2009 | 147 | 166 | 313 |
| Balance at 1 January 2010 | 147 | 166 | 313 |
| Depreciation charge for the year | 129 | (7) | 122 |
| Balance at 31 December 2010 | 276 | 159 | 435 |
| Carrying amounts | |||
| At 31 December 2009 | 29 | 129 | 158 |
| At 31 December 2010 | 26 | 313 | 339 |
| Intangible asset £'000 |
Software licence £'000 |
Goodwill £'000 |
Total £'000 |
|
|---|---|---|---|---|
| Cost Balance at 1 January 2009 Acquisitions through business combinations Adjustment to goodwill at acquisition |
– – – |
2,088 – – |
40,656 8,733 (1,295) |
42,744 8,733 (1,295) |
| Balance at 31 December 2009 | – | 2,088 | 48,094 | 50,182 |
| Balance at 1 January 2010 Acquisitions through business combinations Acquisitions of intangible assets Disposal of discontinued operations Other disposals Effect of movement in exchange rates |
– 1,916 1,433 – – (126) |
2,088 – – (2,088) – – |
48,094 7,077 – (1,860) (1,165) – |
50,182 8,993 1,433 (3,948) (1,165) (126) |
| Balance at 31 December 2010 | 3,223 | – | 52,146 | 55,369 |
| Impairment losses Balance at 1 January 2009 Impairment loss Amortisation |
– – – |
57 – 113 |
15,889 4,598 – |
15,946 4,598 113 |
| Balance at 31 December 2009 | – | 170 | 20,487 | 20,657 |
| Balance at 1 January 2010 Impairment loss Disposal of discontinued operations Amortisation Effect of movement in exchange rates |
– – – (238) 2 |
(170) (75) 245 – – |
(20,487) (7,665) 1,142 – – |
(20,657) (7,740) 1,387 (238) 2 |
| Balance at 31 December 2010 | (236) | – | (27,010) | (27,246) |
| Carrying amounts | ||||
| At 31 December 2009 | – | 1,918 | 27,607 | 29,525 |
| At 31 December 2010 | 2,987 | – | 25,136 | 28,123 |
The adjustment to goodwill at acquisition in 2009 relates to the acquisition of Citizen Limited in September 2008, based on information received prior to September 2009.
For the purpose of impairment testing, goodwill is allocated to each portfolio subsidiary which represents the lowest level within the Group at which the goodwill is monitored for internal management purposes. The recoverable amount of each unit has been determined on the basis of its fair value less costs to sell which is equivalent to its value in use.
An analysis of goodwill is set out below:
| Goodwill impairment recognised in the year ended 31 December 2010 £'000 |
Goodwill impairment recognised in the year ended 31 December 2009 £'000 |
Carrying amount 2010 £'000 |
Carrying amount 2009 £'000 |
|
|---|---|---|---|---|
| ITS (US) Holdings Inc | 1,508 | 64 | – | 1,508 |
| Entuity Limited | – | – | 4,981 | 4,981 |
| Wesupply Limited | 776 | – | 4,344 | 5,120 |
| CopperEye Limited | 1,426 | 1,585 | – | 1,426 |
| Nationwide Energy Partners LLC | – | – | 7,077 | – |
| Kizoom Limited | 3,955 | 1,806 | – | 5,121 |
| Citizen Limited | – | 1,143 | – | 718 |
| Updata Infrastructure UK Ltd | – | – | 8,734 | 8,733 |
| 7,665 | 4,598 | 25,136 | 27,607 |
The impairment loss in each year reflects the impact of decreases in the fair value of the relevant portfolio subsidiary; fair value is measured in accordance with the Group's valuation policy for investments which is set out in Note 1. Factors impacting fair values are principally individual company performance and changes in valuation multiples for comparable businesses.
The movements in investments were as follows:
| Unquoted securities | |||||
|---|---|---|---|---|---|
| Quoted securities £'000 |
Equity £'000 |
Loans £'000 |
Funds £'000 |
Total £'000 |
|
| Carrying value | |||||
| Balance at 1 January 2009 | 46,506 | 23,703 | 7,036 | 102,301 | 179,546 |
| Purchases | 1 | 1,561 | 2,500 | 14,791 | 18,853 |
| Disposals | (6,136) | – | (500) | (968) | (7,604) |
| Distributions from partnerships | – | – | – | (5,366) | (5,366) |
| Fair value adjustments | 11,505 | 1,014 | (2,511) | (7,304) | 2,704 |
| Balance at 31 December 2009 | 51,876 | 26,278 | 6,525 | 103,454 | 188,133 |
| Balance at 1 January 2010 Purchases Disposals Distributions from partnerships Fair value adjustments Reclassifications |
51,876 1,104 (6,241) – 14,935 1,538 |
26,278 8,023 (484) – 6,252 (1,538) |
6,525 744 (138) – (2,707) – |
103,454 17,120 (2,622) (12,566) 9,150 – |
188,133 26,991 (9,485) (12,566) 27,630 – |
| Balance at 31 December 2010 | 63,212 | 38,531 | 4,424 | 114,536 | 220,703 |
The table below analyses investments carried at fair value at the end of the year, by the level in the fair value hierarchy into which the fair value measurement is categorised. The different levels have been defined as follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets.
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: inputs for the asset that are not based on observable market data (unobservable inputs).
| 2010 £'000 |
2009 £'000 |
|
|---|---|---|
| Level 1 | 63,213 | 51,876 |
| Level 2 | – | – |
| Level 3 | 153,066 | 129,732 |
| 216,279 | 181,608 |
The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy:
| 2010 £'000 |
2009 £'000 |
|
|---|---|---|
| Opening balance | 129,731 | 126,004 |
| Total gain/(loss) in profit or loss | 15,402 | (6,290) |
| Purchases | 25,143 | 16,353 |
| Transfers to portfolio subsidiaries | – | – |
| Realisations | (15,672) | (6,335) |
| Reclassifications | (1,538) | – |
| 153,066 | 129,732 |
The movement in investments in subsidiaries was as follows:
| 2010 £'000 |
2009 £'000 |
|
|---|---|---|
| Opening balance Impairment loss |
281,801 – |
293,510 (11,709) |
| 281,801 | 281,801 |
Details of subsidiaries are set out in Note 30.
The impairment loss for the year reflects the impact of changes in the values of the net assets of subsidiaries on the carrying value of the Company's investment. The values of the underlying net assets in subsidiary companies are calculated in accordance with the Group's accounting policies set out in Note 1.
| Group | ||
|---|---|---|
| 2010 £'000 |
2009 £'000 |
|
| Work in progress Finished goods |
1,671 180 |
191 621 |
| 1,851 | 812 |
Changes in finished goods and work in progress recognised as cost of sales amounted to a credit of £1,039,000. (Year ended 31 December 2009: credit of £493,000.)
| Group | Company | |||
|---|---|---|---|---|
| 2010 £'000 |
2009 £'000 |
2010 £'000 |
2009 £'000 |
|
| Trade receivables | 7,937 | 8,518 | – | – |
| Other receivables and prepayments | 4,881 | 2,250 | 198 | 743 |
| Amounts receivable from subsidiaries | – | – | 26,231 | 11,607 |
| 12,818 | 10,768 | 26,429 | 12,350 |
| Group | Company | ||||
|---|---|---|---|---|---|
| 2010 | 2009 | 2010 | 2009 | ||
| £'000 | £'000 | £'000 | £'000 | ||
| Bank balances | 7,246 | 2,793 | 341 | 410 | |
| Short-term deposits | 5,983 | 14,157 | 2,338 | 3,867 | |
| Cash and cash equivalents | 13,229 | 16,950 | 2,679 | 4,277 | |
| Bank overdrafts | – | (369) | – | – | |
| 13,229 | 16,581 | 2,679 | 4,277 |
| Group | ||
|---|---|---|
| 2010 £'000 |
2009 £'000 |
|
| Non-current liabilities | ||
| Secured bank loans | 2,866 | 3,255 |
| Other unsecured loans | 1,513 | 1,270 |
| Finance lease liabilities | 218 | 270 |
| 4,597 | 4,795 | |
| Current liabilities | ||
| Secured bank loans | 2,080 | 765 |
| Other unsecured loans | 16,664 | 1,566 |
| Finance lease liabilities | 68 | 63 |
| 18,812 | 2,394 |
Terms and conditions of outstanding loans are as follows:
| Group | |||||
|---|---|---|---|---|---|
| 2010 £'000 |
2009 £'000 |
||||
| Currency | Nominal interest rate |
Maturity | Carrying amount |
Carrying amount |
|
| Secured bank loan | £ | LIBOR plus 2.50% | 2010 | – | 91 |
| Secured bank loan | £ | 7.5% | 2014 | 3,117 | 2,540 |
| Secured bank loan | USD | 4.36% | 2020 | 742 | 764 |
| Secured bank loan | USD | 6.00% | 2011 | 644 | 612 |
| Secured bank loan | £ | LIBOR plus 3.00% | 2011 | 5,000 | – |
| Secured bank loan | USD | LIBOR plus 3.00% | 2011 | 9,281 | – |
| Secured bank loan | USD | LIBOR plus 2.625% | 2011 | 441 | – |
| Secured bank loan | USD | LIBOR plus 2.375% | 2012 | 140 | – |
| Secured bank loan | USD | 7.18% | 2011 | 11 | – |
| Secured bank loan | USD | 6.06% | 2013 | 33 | – |
| Other secured loans | USD | Various | 2010 | – | 13 |
| Unsecured loan | £ | 21% | 2014 | 1,805 | 1,270 |
| Unsecured loan | USD | 4.65% | 2011 | 93 | 100 |
| Unsecured loan | USD | 12.00% | 2011 | 1,816 | 1,466 |
| Finance lease liabilities | £ | 25% | 2014 | 240 | 278 |
| Finance lease liabilities | USD | 6.45% | 2014 | 46 | 55 |
| 23,409 | 7,189 |
Finance lease liabilities are payable as follows:
| 2010 | 2009 | |||||
|---|---|---|---|---|---|---|
| Future minimum lease payments £'000 |
Interest £'000 |
Present value of minimum lease payments £'000 |
Future minimum lease payments £'000 |
Interest £'000 |
Present value of minimum lease payments £'000 |
|
| Less than one year Between one and five years More than five years |
86 260 – |
18 42 – |
68 218 – |
80 327 – |
17 57 – |
63 270 – |
| 346 | 60 | 286 | 407 | 74 | 333 |
| Group | Company | |||
|---|---|---|---|---|
| 2010 £'000 |
2009 £'000 |
2010 £'000 |
2009 £'000 |
|
| Trade payables | 6,040 | 2,739 | 42 | 85 |
| Non-trade payables and accrued expenses | 7,819 | 5,182 | 16,531 | 1,875 |
| Amounts payable to subsidiaries | – | – | 70,018 | 68,760 |
| 13,859 | 7,921 | 86,591 | 70,720 |
Deferred income comprises amounts invoiced to customers in respect of goods or services which had not been delivered at the reporting date. It arises principally on maintenance contracts for hardware and software which typically cover a period of one year or more.
Deferred tax liabilities were attributable to the following:
| Group | ||
|---|---|---|
| 2010 £'000 |
2009 £'000 |
|
| Property, plant and equipment | 549 | 339 |
| Financial assets at fair value through profit or loss | 65 | 62 |
| 614 | 401 |
The Group has no unrecognised deferred tax liabilities.
The Group's investment management business has capital losses for tax purposes of £11.2 million at 31 December 2010 (31 December 2009: £10.9 million) available to offset future profits chargeable to tax. In addition, if the Group were to dispose of its investment portfolio at book value at 31 December 2010 it would realise further net capital losses for tax purposes of £47.4 million (31 December 2009: £55.7 million). Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the Group can utilise the benefits.
The Group's portfolio subsidiaries have tax losses of £96.7 million at 31 December 2010 (31 December 2009: £118.9 million) available to offset future profits chargeable to tax.
| Ordinary shares | ||||
|---|---|---|---|---|
| 2010 Number |
2010 £'000 |
2009 Number |
2009 £'000 |
|
| Balance at beginning and end of the year | 272,640,952 | 27,265 | 272,640,952 | 27,265 |
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.
The capital redemption reserve comprises the nominal value of those shares purchased by the Company out of its own profits and cancelled.
The Company has no shares held in treasury.
The Company commenced operations on 9 June 2006 when it received the demerged investment division of London Merchant Securities. Consolidated financial statements were prepared for the nine months ended 31 December 2006 to reflect the two step demerger process: this comprised an initial common control transaction followed by a subsequent demerger of the Group. 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.
The foreign exchange translation reserve comprises all foreign currency arising from the translation of the financial statements of foreign operations.
The Company has a share option plan that entitles certain employees to purchase shares in the Company at the market price of the shares at the date of grant of the option, subject to Company performance criteria. Under the terms of the scheme, options may be exercised between three and ten years after the date of grant.
Options granted under the plan are subject to the following vesting criteria. If the Net Asset Value per share of the Company increases by at least 3% per annum above the increase in the Retail Prices Index based on the Net Asset Value per share at the financial year end preceding the date of grant 25% of the shares under option will vest three years after the date of grant. If the increase in the Net Asset Value per share exceeds the growth in the Retail Prices Index by at least 8% per annum 100% of the options will be exercisable three years after the date of grant. There is a straight-line scale for increases in Net Asset Value per share between 3% and 8% per annum.
Movements during the year were as follows:
| 2010 Number |
2009 Number |
|
|---|---|---|
| Outstanding at 1 January | 1,859,995 | 4,045,807 |
| Granted during the year | – | – |
| Exercised during the year | – | – |
| Lapsed during the year | (1,859,995) | (2,185,812) |
| Outstanding at 31 December | – | 1,859,995 |
Options over 1,859,995 ordinary shares lapsed during the year as a result of performance criteria not being met (2009: 1,445,952). In 2009 options over 739,860 ordinary shares lapsed as a result of employees leaving the Company.
The Company has a deferred share bonus plan for key executives. Shares awarded under this scheme are released over three or four years (depending on the size of the award) and the first release may take place no earlier than the first anniversary of the award subject to the increase in the Net Asset Value per share of the Company exceeding the increase in the Retail Prices Index by an average of at least 3% per annum.
Movements during the year were as follows:
| 2010 Number |
2009 Number |
|
|---|---|---|
| Outstanding at 1 January | 716,073 | 3,102,983 |
| Awards during the year | 1,870,000 | – |
| Exercised during the year | – | (1,193,455) |
| Lapsed during the year | (716,073) | (1,193,455) |
| Outstanding at 31 December | 1,870,000 | 716,073 |
In 2009, 1,193,455 shares were released having become eligible for release on 31 March 2008; the Company elected to settle the release for a cash payment of £642,000. The weighted average exercise price of the shares released was nil.
Of the 1,193,455 shares which lapsed in 2009, 477,382 lapsed when the beneficiary left the Company and 716,073 lapsed because the performance criteria were not met.
The award of 716,073 shares outstanding as at 1 January 2010 (eligible for release on 30 March 2011) has lapsed since performance criteria were not met.
Assuming the performance criteria set out above are met, the awards granted during the year and outstanding at 31 December 2010 are eligible for release as follows:
| Date | Number of shares |
|---|---|
| 13 April 2011 | 498,333 |
| 13 April 2012 | 498,333 |
| 13 April 2013 | 498,334 |
| 13 April 2014 | 375,000 |
The weighted average exercise price of awards outstanding at 31 December 2010 was nil (31 December 2009: nil).
The Company has a performance share plan that entitles certain employees to receive an award of performance shares in the Company. Performance shares granted under the plan are subject to the performance criteria set out below.
In respect of awards granted in 2010: for 25% of the total award to vest, Total Shareholder Return (TSR) over the three year measurement period must exceed the median TSR of the FTSE All-Share Index. For the remaining 75% of the award, the increase in Net Asset Value per share over the period must exceed the increase in the Retail Prices Index by at least 3% per annum. At RPI plus 3%, 18.75% of the total shares that are subject to the award will vest, rising on a straightline basis to the remaining 75% vesting if the increase in Net Asset Value per share exceeds RPI by 8% per annum.
In respect of awards granted in 2009: for 50% of the total award to vest, Total Shareholder Return (TSR) over the three year measurement period must exceed the median TSR of the FTSE 250 Index. At the 50th percentile TSR, 12.5% of the total award will vest, rising on a straight-line basis to 50% of the total award vesting at the 75th percentile and above. For the other 50% of the award to vest, the increase in Net Asset Value per share over the measurement period must exceed the increase in the Retail Prices Index by at least 3% per annum. At RPI plus 3%, 12.5% of the total award will vest, rising on a straight-line basis to 50% of the total award vesting if the increase in Net Asset Value per share exceeds RPI by 8% per annum.
| 2010 Number |
2009 Number |
|
|---|---|---|
| Outstanding at 1 January Granted during the year Exercised during the year |
2,005,201 1,750,700 – |
– 2,455,888 – |
| Lapsed during the year | – | (450,687) |
| Outstanding at 31 December | 3,755,901 | 2,005,201 |
The weighted average exercise price of awards outstanding at 31 December 2010 was nil (31 December 2009: nil).
The fair value of services received in return for grants and awards under the Company's share-based incentive plans is based on their fair value measured using a binomial valuation model.
Awards under the performance share plan and the deferred share bonus plan granted during 2010 were valued using the following inputs:
| Performance share plan |
Deferred share bonus plan |
|
|---|---|---|
| Fair value at grant date | £0.50 | £0.50 |
| Share price | £0.51 | £0.51 |
| Exercise price | – | – |
| Expected volatility | 30% | 30% |
| Option life | 10 years | 10 years |
| Expected dividends | – | – |
| Risk-free interest rate | 3.0% | 3.0% |
The (credit)/expense recognised in the income statement for share-based payments is as follows:
| 2010 £'000 |
2009 £'000 |
|
|---|---|---|
| Executive share option plan | (260) | (186) |
| Deferred share bonus plan – Equity settled |
(170) | (844) |
| – Cash settled | – | 642 |
| Performance share plan | 500 | 210 |
| 70 | (178) |
At 31 December 2010, non-trade payables and accrued expenses include £51,000 (2009: £398,000) in respect of amounts payable under the Company's long-term incentive plans.
The following tables analyse the Group and Company's financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are not included in the tables below.
| 31 December 2010 |
31 December 2009 |
|||||
|---|---|---|---|---|---|---|
| Assets | Fair value through profit or loss £'000 |
Loans and receivables £'000 |
Total £'000 |
Fair value through profit or loss £'000 |
Loans and receivables £'000 |
Total £'000 |
| Investments Operating and other receivables Cash and cash equivalents |
216,279 – – |
4,424 12,818 13,229 |
220,703 12,818 13,229 |
181,607 – – |
6,526 10,768 16,950 |
188,133 10,768 16,950 |
| Total | 216,279 | 30,471 | 246,750 | 181,607 | 34,244 | 215,851 |
| 2010 | 2009 | |||||
| Liabilities | Fair value through profit or loss £'000 |
Loans and receivables £'000 |
Total £'000 |
Fair value through profit or loss £'000 |
Loans and receivables £'000 |
Total £'000 |
| Bank overdrafts Interest bearing loans and borrowings Operating and other payables |
– – – |
– 23,409 13,859 |
– 23,409 13,859 |
– – – |
369 7,189 7,921 |
369 7,189 7,921 |
| Total | – | 37,268 | 37,268 | – | 15,479 | 15,479 |
| 31 December 2010 |
31 December 2009 |
|||||
|---|---|---|---|---|---|---|
| Assets | Fair value through profit or loss £'000 |
Loans and receivables £'000 |
Total £'000 |
Fair value through profit or loss £'000 |
Loans and receivables £'000 |
Total £'000 |
| Operating and other receivables Amounts receivable from subsidiaries Cash and cash equivalents |
– – – |
198 26,231 2,679 |
198 26,231 2,679 |
– – – |
743 11,607 4,277 |
743 11,607 4,277 |
| Total | – | 29,108 | 29,108 | – | 16,627 | 16,627 |
| 2010 | ||||||
|---|---|---|---|---|---|---|
| Liabilities | Fair value through profit or loss £'000 |
Loans and receivables £'000 |
Total £'000 |
Fair value through profit or loss £'000 |
Loans and receivables £'000 |
Total £'000 |
| Interest bearing loans and borrowings | – | 14,281 | 14,281 | – | – | – |
| Operating and other payables | – | 2,292 | 2,292 | – | 1,960 | 1,960 |
| Amounts payable to subsidiaries | – | 70,018 | 70,018 | – | 68,760 | 68,760 |
| Total | – | 86,591 | 86,591 | – | 70,720 | 70,720 |
The Group has exposure to the following risks from its use of financial instruments:
This note presents information about the Group's exposure to each of the above risks, its policies for measuring and managing risk, and its management of capital.
Credit risk is the risk of the financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group's receivables from customers and its cash and cash equivalents.
| 2010 £'000 |
2009 £'000 |
|
|---|---|---|
| Operating and other receivables Cash and cash equivalents |
12,818 13,229 |
10,768 16,950 |
| 26,047 | 27,718 |
The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. Each new customer is analysed individually for creditworthiness before payment and delivery terms are offered. The conduct of customer accounts is reviewed regularly.
The Group establishes an allowance for impairment that represents an estimate of incurred losses in respect of operating and other receivables. This allowance includes a specific loss component that relates to individually significant exposures and a collective loss component for groups of similar assets. This is determined based on historical payment data statistics and is intended to cover losses that have been incurred but not yet identified.
The maximum exposure to credit risk for operating and other receivables by geographic region was:
| 2010 £'000 |
2009 £'000 |
|
|---|---|---|
| UK | 8,418 | 7,954 |
| United States | 3,090 | 1,853 |
| Other regions | 1,310 | 961 |
| 12,818 | 10,768 |
The ageing of trade receivables was:
| 2010 | 2009 | |||
|---|---|---|---|---|
| Gross £'000 |
Impairment £'000 |
Gross £'000 |
Impairment £'000 |
|
| Not past due | 2,767 | – | 4,270 | – |
| Past due 0–30 days | 1,322 | – | 2,969 | – |
| Past due 31–120 days | 2,975 | – | 462 | – |
| More than 120 days | 1,221 | 348 | 1,008 | 191 |
| 8,285 | 348 | 8,709 | 191 |
The Group limits its credit risk exposure by only depositing funds with highly rated institutions. Given these ratings the Group does not expect any counterparty to fail to meet its obligations and therefore no allowance for impairment is made for bank deposits.
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Its financing requirements are met through a combination of liquidity from the sale of investments, the use of cash resources and bank borrowing facilities. The Company has a £15,000,000 facility with The Royal Bank of Scotland which is fully drawn. Interest is payable at the percentage rate per annum, which is the aggregate of the margin (3.0% per annum), London Interbank Offered Rate (LIBOR) and the mandatory cost.
The following are the contractual maturities of financial liabilities:
| 31 December 2010 | Carrying | Contractual | 6 months | 6–12 | 1–2 | 2–5 | More than |
|---|---|---|---|---|---|---|---|
| amount | cash flows | or less | months | years | years | 5 years | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Bank overdrafts | – | – | – | – | – | – | – |
| Interest bearing loans and borrowings | 23,123 | 23,408 | 16,303 | 1,264 | 106 | 5,238 | 497 |
| Finance lease liabilities | 286 | 290 | 35 | 35 | 150 | 70 | – |
| Operating and other payables | 13,859 | 13,897 | 13,886 | 9 | 1 | 1 | – |
| 37,268 | 37,595 | 30,224 | 1,308 | 257 | 5,309 | 497 | |
| 31 December 2009 | Carrying | Contractual | 6 months | 6–12 | 1–2 | 2–5 | More than |
| amount | cash flows | or less | months | years | years | 5 years | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Bank overdrafts | 369 | 369 | 369 | – | – | – | – |
| Interest bearing loans and borrowings | 6,856 | 10,011 | 376 | 2,659 | 515 | 5,410 | 1,051 |
| Finance lease liabilities | 333 | 407 | 38 | 42 | 83 | 244 | – |
| Operating and other payables | 7,921 | 7,921 | 7,921 | – | – | – | – |
| 15,479 | 18,708 | 8,704 | 2,701 | 598 | 5,654 | 1,051 |
Market risk is the risk that changes in market prices such as foreign exchange rates, interest rates and equity prices will affect the Group's income or the value of its holdings of financial instruments. The Group aims to manage this risk within acceptable parameters while optimising the return.
The Group is exposed to currency risk on those of its investments which are denominated in a currency other than the Group's functional currency which is pounds sterling. The only other significant currency within the investment portfolio is the US dollar; approximately 66% of the investment portfolio within the Group's investment management business is denominated in US dollars.
The Group does not hedge the currency exposure related to its investments. The Group regards its exposure to exchange rate changes on the underlying investment as part of its overall investment return, and does not seek to mitigate that risk through the use of financial derivatives.
The Group is exposed to currency risk on sales and purchases which are denominated in a currency other than the Group's functional currency. The currency in which these transactions are denominated is principally US dollars.
The Group's exposure to foreign currency risk was as follows:
| 31 December 2010 | 31 December 2009 | |||||
|---|---|---|---|---|---|---|
| GBP £'000 |
USD £'000 |
Other £'000 |
GBP £'000 |
USD £'000 |
Other £'000 |
|
| Investments Operating and other receivables Cash and cash equivalents Bank overdrafts Interest bearing loans and borrowings Finance lease liabilities Operating and other payables |
67,805 8,051 5,827 – (10,013) (240) (7,218) |
146,663 4,689 7,325 – (13,110) (45) (6,642) |
6,235 78 77 – – – – |
59,881 7,568 15,342 (369) (3,901) (278) (6,504) |
128,252 3,092 1,528 – (2,955) (55) (1,380) |
– 108 80 – – – (37) |
| Gross exposure | 64,212 | 138,880 | 6,390 | 71,739 | 128,482 | 151 |
| Forward exchange contracts | – | – | – | – | – | – |
| Net exposure | 64,212 | 138,880 | 6,390 | 71,739 | 128,482 | 151 |
At 31 December 2010 the rate of exchange was USD1.55 = £1.00 (31 December 2009: USD1.62 = £1.00). The average rate for the year ended 31 December 2010 was USD1.54 = £1.00 (year ended 31 December 2009: USD1.57 = £1.00).
A 10% strengthening of the US dollar against the pound sterling would have increased equity by £13.5 million at 31 December 2010 (31 December 2009: increase of £10.9 million) and increased the profit from continuing operations for the year ended 31 December 2010 by £14.9 million (year ended 31 December 2009: decreased the loss by £13.9 million). This assumes that all other variables, in particular interest rates, remain constant.
At the reporting date the interest rate profile of the Group's interest bearing financial instruments was:
| 2010 £'000 |
2009 £'000 |
|---|---|
| Fixed rate instruments | |
| Financial assets – |
– |
| Financial liabilities 23,409 |
7,558 |
| 23,409 | 7,558 |
| Variable rate instruments | |
| Financial assets 13,229 |
16,950 |
| Financial liabilities – |
– |
| 13,229 | 16,950 |
An increase of 100 basis points in interest rates at the reporting date would have decreased equity by £4,000 (31 December 2009: increase of £246,000) and decreased the profit from continuing activities by £4,000 (year ended 31 December 2008: decreased the loss by £246,000).
The carrying amounts of financial assets (excluding investments) and liabilities, shown in the statement of financial position, approximate their fair values.
The fair values of financial liabilities are based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.
Equity price risk arises from equity securities held as part of the Group's portfolio of investments. The Group's investments comprise quoted investments (quoted on the main stock exchanges in London, US, Canada and AIM) and equity and debt instruments in unquoted businesses. A proportion of its unquoted investments are held through funds managed by external managers.
As is common practice in the venture and development capital industry, the investments in unquoted companies are structured using a variety of instruments including ordinary shares, preference shares and other shares carrying special rights, options and warrants and debt instruments with and without conversion rights. The investments are held for resale with a view to the realisation of capital gains. Generally, the investments do not pay significant income.
The Group's management of risk in its investment portfolio focuses on diversification in terms of geography and sector, as well as type and stage of investment.
If the investment valuation declined by 10% from the amount at the balance sheet date, with all other variables held constant, the profit for the year ended 31 December 2010 would have decreased by £22.1 million (year ended 31 December 2009: increased the loss by £18.8 million). An increase in the valuation of investments by 10% at the balance sheet date would have an equal and opposite effect on the profit/loss for the year.
The Group's total capital at 31 December 2010 was £239 million (31 December 2009: £225.6 million) comprising equity share capital and reserves. The Group had borrowings at 31 December 2010 of £23.4 million (31 December 2009: £7.6 million).
The Board monitors and reviews the broad structure of the Group's capital on an ongoing basis. This review includes:
The Group's objectives, policies and processes for managing capital are unchanged from the preceding accounting year.
The following acquisition was made during the year ended 31 December 2010:
In May 2010 the Group acquired a 55.4% interest in Nationwide Energy Partners LLC 'NEP'); the acquisition had the following effect on the Group's assets and liabilities on the acquisition date:
| Pre-acquisition carrying amounts £'000 |
|
|---|---|
| Property, plant and equipment | 1,761 |
| Intangible assets | 1,571 |
| Operating and other receivables | 2,682 |
| Loans and borrowings | (1,086) |
| Operating and other payables | (2,569) |
| Long-term liabilities | (192) |
| Net identifiable assets and liabilities | 2,167 |
| Intangible assets (goodwill) | 7,077 |
| Net assets acquired | 9,244 |
| Non-controlling interest | (967) |
| Consideration paid | 8,277 |
The operating and other receivables comprise gross contractual amounts due of £2,922,551, of which £240,859 was expected to be uncollectable at acquisition date. The non-controlling interest is calculated based on the proportionate interest of the non-controlling interest in the fair value of identifiable net assets acquired.
Of the total consideration, £7,450,000 was paid on completion and the remainder is payable in May 2011.
The goodwill is attributable to the expected profitability of the acquired business. None of the goodwill is expected to be deductible for tax purposes.
NEP is an energy service provider in Columbus, Ohio and provides owners of multi unit residential properties with outsourced meter reading, billing and collection services for water and electricity accounts.
In July 2010 the Group made an additional investment in NEP of £1.2 million and increased its interest in the company to 59.5%.
In the seven months to 31 December 2010 the company contributed a profit of £21,661 to the consolidated results of the Group. If the acquisition had occurred on 1 January 2010, management estimates that consolidated revenue would have been £52,515,254 and the consolidated profit for the period would have been £12,218,062.
The following acquisition was made during the year ended 31 December 2009:
In July 2009 the Group acquired 53.3% of the issued share capital of Updata Infrastructure Holdings Limited ('Updata Holdings'), which immediately prior to this investment by the Group had acquired 100% of the issued share capital of Updata Infrastructure UK Limited. The consideration paid by the Group was equivalent to its share of the consolidated net assets of Updata Holdings.
The acquisition had the following effect on the Group's assets and liabilities on the acquisition date:
| Fair value of net assets acquired £'000 |
|
|---|---|
| Property, plant and equipment | 2,970 |
| Inventories | 346 |
| Operating and other receivables | 3,855 |
| Cash and cash equivalents | 83 |
| Loans and borrowings | (3,809) |
| Operating and other payables | (5,673) |
| Net identifiable assets and liabilities | (2,228) |
| Intangible assets (goodwill) | 8,733 |
| Net assets acquired | 6,505 |
| Non-controlling interest | (306) |
| Consideration paid | 6,199 |
The consideration was paid in cash on completion.
The goodwill is attributable to the expected profitability of the acquired business.
Updata designs, builds and manages carrier-class networks. In the six months to 31 December 2009 the company contributed a profit of £1,400,000 to the consolidated results of the Group.
In July 2010 the Group sold some shares in Updata and there was a partial repayment of loans which reduced the Groups interest to 47.8%. However, the Group still regards Updata as a subsidiary since it controls the composition of the company's board of directors.
Non-cancellable operating lease rentals are payable as follows:
| 2010 | 2009 | |||
|---|---|---|---|---|
| Group | Company | Group | Company | |
| £'000 | £'000 | £'000 | £'000 | |
| Less than one year | 572 | 280 | 640 | 400 |
| Between one and five years | 1,473 | 1,155 | 1,147 | 600 |
| More than five years | 650 | 650 | – | – |
| 2,695 | 2,085 | 1,787 | 1,000 |
| 2010 £'000 |
2009 £'000 |
|
|---|---|---|
| Outstanding commitments to funds | 40,711 | 58,709 |
| 40,711 | 58,709 |
The outstanding commitments to funds comprise unpaid calls in respect of funds where a member of the Group is a limited partner.
The Company has guaranteed the indebtedness of certain of the Group's investments; the amount outstanding under these arrangements at 31 December 2010 was £1.2 million (31 December 2009: £1.8 million).
With effect from 1 May 2007 the Company entered into a lease agreement with Derwent London plc in respect of the premises comprising its head office and registered office. Under the terms of the lease the Company pays an annual rent of £400,000 to Derwent London plc plus certain service charges.
Under an arrangement with Derwent London plc the Company is entitled to charge that company £50,000 per annum as a recharge of office and related costs of Mr Robert Rayne. Mr Rayne is Chairman of Derwent London plc. Amounts outstanding under this arrangement at 31 December 2010 were £nil (31 December 2009: £14,000).
With effect from 29 September 2007 the Company entered into a sub-lease agreement with Weatherford UK under which the latter is a sub-tenant of part of the Company's head office premises at an annual rental of £200,000 plus service charges. Mr Rayne and Dr Duroc-Danner are directors of Weatherford International, the ultimate parent undertaking of Weatherford UK. Amounts outstanding under these arrangements at 31 December 2010 were £6,500 (31 December 2008: £47,000).
The Company surrendered its lease with Derwent London plc in January 2011 in respect of the premises comprising its head office and former registered office (33 Robert Adam Street). The Company entered a new lease agreement with Derwent London plc for new premises (100 George Street, its current registered office). Under the terms of the lease the Company pays an annual rent of £288,752 to Derwent London plc plus certain service charges. Rent is payable from 16 January 2011 at a reduced rate of £144,495 for the first 12 months and thereafter at £288,752 per annum.
Compensation arrangements for key management are set out in the Remuneration report on pages 24 to 31.
There were no events subsequent to the balance sheet date that would materially affect the interpretation of these financial statements.
The subsidiaries comprising the Group's investment management business (as set out in Note 2) are as follows:
| Name | Country of incorporation | Holding % | Activity |
|---|---|---|---|
| International Oilfield Services Limited | Bermuda | 100 | Investment holding |
| LMS Capital (Bermuda) Limited | Bermuda | 100 | Investment holding |
| LMS Capital (ECI) Limited | England and Wales | 100 | Investment holding |
| LMS Capital (General Partner) Limited | Bermuda | 100 | Investment holding |
| LMS Capital (GW) Limited | Bermuda | 100 | Investment holding |
| LMS Capital Group Limited | England and Wales | 100 | Investment holding |
| LMS Capital Holdings Limited | England and Wales | 100 | Investment holding |
| LMS NEP Holdings Inc | United States | 100 | Investment holding |
| Lioness Property Investments Limited | England and Wales | 100 | Investment holding |
| Lion Property Investments Limited | England and Wales | 100 | Investment holding |
| Lion Investments Limited | England and Wales | 100 | Investment holding |
| Lion Cub Investments Limited | England and Wales | 100 | Dormant |
| Lion Cub Property Investments Limited | England and Wales | 100 | Investment holding |
| Tiger Investments Limited | England and Wales | 100 | Investment holding |
| LMS Tiger Investments Limited | England and Wales | 100 | Investment holding |
| LMS Tiger Investments (II) Limited | England and Wales | 100 | Investment holding |
| Westpool Investment Trust plc | England and Wales | 100 | Investment holding |
In addition to the above, the Group's carried interest arrangements are operated through three limited partnerships (LMS Capital 2007 LP, LMS Capital 2008 LP and LMS Capital 2009 LP) which are registered in Bermuda.
The following companies form part of the Group's investment activities but, by virtue of the size of the Group's shareholding or other control rights, fall within the definition of subsidiaries under IFRS. These portfolio subsidiaries are included within the consolidated financial information although they continue to be managed by the Group as investments held for capital appreciation.
| Name | Country of incorporation | Holding % | Activity |
|---|---|---|---|
| CopperEye Limited | England and Wales | 76 | Specialised search solutions for business transaction data |
| Entuity limited | England and Wales | 68 | Network management software |
| Kizoom Limited | England and Wales | 94 | Urban digital networks and intelligent transport systems |
| Nationwide Energy Partners LLC | United States of America | 59.5 | Energy services provider |
| ITS (US) Holdings Inc | United States of America | 100 | Specialist engineering design and fabrication |
| Updata Infrastructure (UK) Limited | England and Wales | 47.8 | Carrier-class networks |
| Wesupply Limited | England and Wales | 85 | Supply chain management software |
During the year to 31 December 2010 Offshore Tool and Energy Corporation was dissolved and ITS (US) Holdings Inc was formed. The assets of Offshore Tool and Energy Corporation were transferred to ITS (US) Holdings Inc as part of a restructuring process.
100 George Street London W1U 8NU Tel: +44 (0)20 7935 3555 Email: [email protected] Website: www.lmscapital.com
Number 5746555
Matthew Jones FCIS
Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Tel: (UK) 0871 664 0300 (Outside UK) +44 (0)20 8639 3399 Email: [email protected]
All administrative enquiries relating to shareholders, such as notification of change of address or the loss of a share certificate, should be made to the Capita Registrars, whose address is given above.
The Company has opted to send shareholder communications via the Company website rather than via the post. This is more environmentally friendly and cost efficient. If you would like to receive paper copies of these communications, please write to Capita Registrars, whose address is given above.
A telephone dealing service has been arranged with Stocktrade, which provides a simple way of buying or selling LMS Capital plc ordinary shares. Full details can be obtained by telephoning 08456 010995, quoting the reference: 'Low Co 0236'. For further information, please visit: www.stocktrade.co.uk/LMS/
The Company's website provides further information on the Company's investments, its strategy and its share price, as well as an archive of all press releases, presentations and shareholder documents. You can sign up to be notified by email when press releases are announced. For further information, please visit www.lmscapital.com
J.P. Morgan plc 20 Moorgate London EC2R 6DA
Winterflood Securities Limited The Atrium Building Cannon Bridge 25 Dowgate Hill London EC4R 2GA
KPMG Audit Plc 8 Salisbury Square London EC4Y 8BB
Barclays Bank plc 1 Churchill Place London E14 5HP
The Royal Bank of Scotland plc 36 St. Andrew Square Edinburgh EH2 2YB
Clifford Chance LLP 10 Upper Bank Street London E14 5JJ
Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA
Annual General Meeting: 12 May
Interim Management Statements: May and November
Half-year results: July*
Year-end 31 December
* This date is provisional and may change.
This document includes statements that are, or may be deemed to be 'forward-looking statements'. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. The Company cautions investors that forward-looking statements are not guarantees of future performance and that its actual results of operations, financial condition and liquidity may differ materially from those made in or suggested by the forward-looking statements contained in this document. These forward-looking statements reflect the Directors' judgement at the date of this document and are not intended to give any assurances as to future results. Subject to the requirements of the Financial Services Authority's Prospectus Rules, Disclosure Rules and Transparency Rules and Listing Rules, the Company undertakes no obligation to update these forward-looking statements, and it will not publicly release any revisions it may make to these forward-looking statements that may result from events or circumstances arising after the date of this document.
100 George Street, London W1U 8NU Telephone +44 (0)20 7935 3555
www.lmscapital.com
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