LMS Capital plc Annual Report 2009

Plain-text annual report

LMS Capital plc Annual Report 2009 LMS Capital plc is an investment company with over 30 years’ experience in identifying, investing in and creating proﬁ table returns. Our objective is to deliver superior absolute returns for our shareholders through a risk-diversiﬁ ed portfolio of investments. Financial highlights* q Net Asset Value per share was 84p (31 December 2008: 89p) q Net Asset Value was £227.7 million (31 December 2008: £241.5 million) q The return on the investment portfolio was a loss of £4.9 million after recording unrealised currency losses of £13.5 million (2008: loss of £36.7 million after unrealised currency gains of £45.5 million) q The loss for the year was £12.7 million (2008: loss of £40.8 million) q The business had cash of £14.4 million at 31 December 2009 and no debt Operational highlights q Investment of £6.2 million for a 53.3% interest in Updata Infrastructure UK Limited in support of a management buyout q Sale of 7 Global Limited to 365iT plc q Successful migration of the Company’s shares to trading on the Main Market of the London Stock Exchange q Appointment of Glenn Payne as Chief Executive Ofﬁ cer on 1 March 2010 * Investment management business. ifc Introduction 01 Financial highlights 02 Strategy 03 Our portfolio 04 Chairman’s statement 06 Operating review 10 Financial review 14 Company Proﬁ les 20 Principal unquoted investments 22 Board of Directors and Investment team and advisers Corporate governance report 24 30 Risk factors 32 Remuneration report 40 Directors’ report 43 44 Statement of directors’ responsibilities Independent auditors’ report to the members of LMS Capital plc 46 Consolidated income statement 47 Statements of comprehensive income 48 Consolidated statement of ﬁ nancial position 49 Company statement of ﬁ nancial position 50 Statements of changes in equity 51 52 Company cash ﬂ ow statement 53 84 Notes to the ﬁ nancial information Shareholder information Consolidated cash ﬂ ow statement O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Overview LMS Capital plc 01 Strategy The Company’s strategy is to obtain superior absolute return for our shareholders through a risk-diversiﬁ ed portfolio of investments. LMS Capital plc is an investment company. Our objective is to deliver superior absolute return for our shareholders through a risk- diversiﬁ ed portfolio of investments. We understand the drivers of demand in the sectors in which we invest and this enables us to recognise the potential of both new ideas and young companies requiring growth funding. These sectors currently include applied technology, energy and water, healthcare and medical, media and consumer and real estate. We do, however, retain the freedom to invest outside our core sectors in order to take advantage of opportunities when they arise. Investments are principally in the UK and US, although the Company is not restricted from expanding into other markets. A deep knowledge of our chosen sectors acquired over 30 years allows LMS Capital to invest in and with leading management teams. The Company undertakes rigorous inquiry and carries out full due diligence into new investments to understand the investee company’s business, evaluate information on their marketplace and competition, meet their management, directors and existing shareholders and, if necessary commission reports from external experts. We also understand the cyclical nature of the sectors in which we are working and through taking long-term positions are able to adjust our economic interest to reﬂ ect the longer holding period. One of the principal characteristics of LMS Capital which differentiates us from other private equity investors is the time horizon over which we are able to invest. As an active, and supportive, long-term investor we are not constrained by the ﬁ xed investment periods of most private equity funds. It is not uncommon for us to hold investments for long periods of time where we believe that this will deliver greater shareholder value. The Board will continue to manage the Company’s portfolio in line with its overall objective. In this regard, we may make realisations from within the existing portfolio where we believe that the proceeds of realisation could generate better returns if deployed elsewhere. 02 LMS Capital plc 2009 Business review Our portfolio Portfolio split by sector (cid:74) Applied technology (cid:74) Media and consumer (cid:74) Energy and water (cid:74) Healthcare and medical (cid:74) Real estate (cid:74) Other Total Portfolio split by asset type and geography 31% 24% 18% 11% 9% 7% £65.8m (cid:74) UK Funds £52.3m (cid:74) US Funds £39.8m (cid:74) UK Quoted £23.9m (cid:74) US Quoted £18.7m (cid:74) UK Unquoted £15.1m (cid:74) US Unquoted 14% 34% 8% 16% 19% 9% £30.2m £73.2m £17.3m £34.6m £39.8m £20.5m 100% £215.6m Total 100% £215.6m Applied technology £65.8m Media and consumer £52.3m Energy and water £39.8m UK Quoted £17.3m UK Unquoted £39.8m UK Funds £30.2m Real estate £18.7m Other £15.1m Healthcare and medical £23.9m US Quoted £34.6m US Unquoted £20.5m US Funds £73.2m Vintage(1) (cid:74) 1-2 years (cid:74) 3-4 years (cid:74) 5-6 years (cid:74) 6+ years Total 11% 18% 23% 48% £23.6m £37.9m £49.7m £104.4m 100% £215.6m 11% 18% 23% (1) Vintage is based on year of first investment and includes fund interests. Valuation basis (cid:74) Directors’ valuation (cid:74) Public market quotation (cid:74) Third party valuation Total 20% 24% 56% £42.5m £51.9m £121.2m 100% £215.6m 20% 24% 48% 56% Overview LMS Capital plc 03 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Results The return on the investment portfolio for the year was a net loss of £4.9 million (2008: net loss of £36.7 million). Included in this is a small realised net loss for the year of £0.1 million (2008: realised gains of £17.3 million, most of which related to the sale of Energy Cranes) and net unrealised losses of £4.8 million, signiﬁ cantly reduced from £54.1 million last year. After overheads, the loss for the year ended 31 December 2009 was £12.7 million (year ended 31 December 2008: loss of £40.8 million). The investment portfolio at 31 December 2009 was valued at £215.6 million (31 December 2008: £202.0 million), an increase of £13.6 million or 7%. The quoted portfolio (to which there were no additions in 2009) recovered somewhat in value during the year, although our holdings in the oilﬁ eld services sector in particular have yet to beneﬁ t from a sustained increase in global demand for energy. We have continued to take a cautious view of the carrying values of our unquoted holdings until the recovery in public markets is fully reﬂ ected in private transactions. For the Group as a whole (including consolidation of the portfolio subsidiaries) the consolidated loss for the year was £14.8 million (2008: loss of £6.1 million). The Board is not recommending payment of a dividend for the year ended 31 December 2009 (year ended 31 December 2008: nil). Chairman’s statement 2009 was a year of uncertainty and instability in the ﬁ nancial markets and the effect on the private equity sector was to reduce fund raising and transaction activities to the lowest level seen for many years. The Company focused its efforts on maintaining its strong balance sheet and on managing its existing portfolio. One acquisition was made through participation in a management buyout and there were some small disposals, both of quoted and unquoted interests. The Company ended 2009 with a Net Asset Value per share of 84p, a reduction of 6% compared to the end of 2008; much of this decline was attributable to a strengthening of the Sterling/US dollar exchange rate. At the year end the Company’s balance sheet showed net cash of £14.4 million and no borrowings. During the year there was also a reduction in the Company’s outstanding commitments to funds from £71.1 million to £58.7 million and we expect this reducing trend to continue. 04 LMS Capital plc Chairman’s statement Balance sheet Share capital At the year end the Company had no direct debt. Further, as the primary method of funding development capital is equity, there is very little external debt in the unquoted portfolio. Board and management Last month the Company announced the appointment of Glenn Payne as Chief Executive with effect from 1 March 2010. His experience will provide impetus to the Company’s next phase of development. The appointment of a new chief executive is an appropriate time for me to step down from your Board which I shall do at the conclusion of the forthcoming Annual General Meeting. Your Board has appointed Robert Rayne to succeed me as Chairman. This appointment means that the Company will continue to beneﬁ t from his many contacts and long experience in the private equity sector and I wish Robbie Rayne and Glenn Payne in their new roles every success in taking the business forward. David Verey joined the Board in September 2009 and his considerable experience as an investment banker and in private equity will be of great value to the Company. Martin Pexton left the Company at the end of September 2009 and on behalf of the Board I should like to thank him for his contribution to the business since it became independent in 2006. 2009 was a year of change at LMS Capital when many of its investee companies were required to make signiﬁ cant reductions in headcount and overheads to adjust to a difﬁ cult operating environment. 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 continuing progress. 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 needs, once again, to obtain a waiver in respect of the Takeover Code obligations that 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 2009; the current number of ordinary shares in issue is 272,640,952. Outlook Although your Board does not expect a fundamental change in economic conditions in 2010 we are hopeful of a slow and steady recovery of the principal economies in which your Company invests; there are currently signs of merger and acquisition activity increasing in 2010. Your Board believes that our continued strategy of a risk diversiﬁ ed portfolio and our strong ﬁ nancial position will enable us to surmount these challenges. We shall continue to seek exit opportunities for selected investments and to ensure that capital outlays are subject to rigorous review and due diligence. Your Board is conﬁ dent that the Company is well positioned to protect its existing assets and take advantage of increased investment opportunities in the short to medium term. Jonathan Agnew Chairman 26 March 2010 Chairman’s statement LMS Capital plc 05 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Operating review The Company’s resilience following the turbulence in international markets in the closing months of 2008 is a testimony to the key fundamentals of our investment strategy – a risk and geographically diversiﬁ ed portfolio of investments. This resilience also reﬂ ects the low levels of debt in the overall portfolio. These principles have enabled us to see out these recent economic difﬁ culties while at the same time taking advantage of opportunities which the current environment presents. The last year has seen considerably reduced activity in the private equity arena and while we have maintained a satisfactory level of deal ﬂ ow, transaction levels have been very low in the face of reduced liquidity in the ﬁ nancial markets. Consequently we have added only one new investment during the year and made relatively few realisations. Our primary focus during 2009 has been on managing our existing portfolio companies to ensure that each has adapted to the current business environment of reduced demand and reduced liquidity. Faced with the expectation that this environment will continue at least through 2010, we have also used this period to review our longer term strategy for each investment. Our objective remains unchanged. We aim to deliver sustained medium- to long-term growth for our shareholders; we are not constrained by the ﬁ xed investment periods of most private equity funds and we are therefore able to hold investments for longer than many other funds where we believe that this will deliver greater shareholder value. We understand the drivers of demand in the sectors in which we invest and this enables us to recognise the potential of both new ideas and young companies requiring growth funding. Investment portfolio The portfolio in the Group’s core investment management business is risk diversiﬁ ed and comprises: (cid:129) early stage companies; (cid:129) companies requiring development or growth ﬁ nance where the normal holding period has been three to ﬁ ve years but could now be seven or eight years; and (cid:129) shorter term investments in the pre- and post-IPO market which usually provide liquidity within three to four years. 06 LMS Capital plc 2009 Business review The Company’s resilience is a testimony to the key fundamentals of our investment strategy – a risk and geographically diversiﬁ ed portfolio of investments The movement in the investment portfolio during the year was as follows: 1 January Additions in the year Realisations Valuation adjustments, net Foreign currency (losses)/gains 31 December 2009 £million 202.0 32.7 (14.3) 8.7 (13.5) 215.6 2008 £million 282.1 51.6 (77.6) (99.6) 45.5 202.0 Additions include £7.6 million (2008: £12.4 million) of new investments and £25.1 million (2008: £39.2 million) of follow on funding, including £14.8 million (2008: £15.8 million) of capital calls from funds. The ﬁ gure for realisations relates principally to sales of quoted stocks and adjustments for fund distributions (the ﬁ gure for 2008 included £65.0 million in respect of Energy Cranes International Limited). The foreign currency gains or losses are unrealised and reﬂ ect the weakening of the US dollar against the pound sterling, principally in the ﬁ rst part of the year. It is the Board’s current policy not to hedge the Company’s underlying non-sterling investments. Applied technology In July we acquired a 53.3% interest in Updata Infrastructure UK Limited (‘Updata’) investing £6.2 million in a management buyout. Updata designs, builds and manages cost-effective high-capacity broadband networks for public sector organisations in the UK and differentiates itself from its competitors through its culture of excellence in customer service. In the ﬁ rst six months since our investment Updata has performed strongly with growth in revenues and proﬁ ts which are in line with our expectations at the time of investment. In November we completed the sale of our interest in 7 Global Limited to 365 iT plc (‘365iT’), a private company which provides a comprehensive suite of IT services and solutions to UK businesses. We received shares in 365iT in return for our 7 Global shares and since the end of the year we have participated in a fund raising by 365iT which has taken our holding to 15%. 2009 Business review LMS Capital plc 07 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Wesupply Limited enjoyed strong sales growth in 2009 with revenues increasing by around 70% compared to 2008. In particular the company, in partnership with IBM, secured a contract with Sainsbury’s to be its business-to-business platform for connectivity to 4,000 of its suppliers. Despite the increase in revenues the company traded at a loss in 2009 and we have taken steps to reduce the cost base of the business in 2010. Entuity Limited had a successful year – it increased revenues year on year by 16% and achieved a positive EBITDA result for the ﬁ rst time in its history. The company has a clear strategy and we expect further progress in 2010. Coppereye Limited had a disappointing performance in 2009 after a strong 2008. Its unique technology has a long sales cycle. Kizoom’s revenues improved 20% over the prior year and this coupled with cost reductions resulted in a substantially reduced loss for the year. However this performance was below expectations and we are currently reviewing the strategic options for this business. In the USA, Penguin Computing, which provides high performance computing (‘HPC’) solutions using Linux cluster servers, continued to make good progress. In August the company launched HPC as a Service, offering on-demand access to high performance clusters over the Internet, thereby signiﬁ cantly reducing customers’ capital outlays for HPC. Energy and water This sector was particularly affected by the difﬁ cult economic conditions in 2009 as activity levels fell in the face of reduced world demand. Most of our interests in this sector are in quoted stocks, in particular Weatherford International Ltd which experienced difﬁ cult trading conditions during 2009 in line with the oilﬁ eld services sector generally. However the company’s share price recovered from a low of $9 around the end of 2008 to just under $18 at the end of 2009. We made no purchases or sales of shares in the company during the year. In August Venture Production plc was acquired by Centrica plc, a transaction that produced cash of £4.1 million for the Company. Pims Group Limited, a private UK-based company which designs, installs and services pumping systems for domestic and commercial water systems, performed well in a difﬁ cult trading environment. It has also continued to make bolt-on acquisitions to expand its presence in its chosen markets. Pims is a co-investment with Inﬂ exion 2006 Buyout Fund. Offshore Tool and Energy Corporation, which specialises in fabrication projects for the oil and gas and water industries, made good progress during the ﬁ rst half of 2009 but could not sustain this in the second half of the year. Increasing order intake is a priority for the business in the ﬁ rst quarter of 2010, following rigorous cost cutting measures during the second half of last year. Healthcare and medical This sector has proved to be more resilient than most during 2009. We made no purchases or sales in this sector during the year but our existing portfolio has made strong progress. ProStrakan Group continues to report good progress in line with its strategic objectives and expects 2010 to be its ﬁ rst full year of operating proﬁ tability. This progress has not yet been reﬂ ected in a sustained improvement in the company’s share price which, despite 08 LMS Capital plc 2009 Business review Our primary focus during 2009 has been on managing our portfolio companies movements during 2009, was little changed at the end of the year compared to the end of 2008. However, the price improved during January 2010 on the back of an encouraging trading update for 2009 and positive expectations for 2010. HealthTech Holdings (formerly Healthcare Management Systems) which is based in the USA has enjoyed a successful 2009 as the hospital market in which it operates has shown resilience in the generally difﬁ cult trading environment. Since the end of the year it has acquired a complementary business which extends its offering to Accident & Emergency departments. Media and consumer Our principal interest in this sector is via San Francisco Equity Partners, the US fund where we are the major investor. For Method Products, Inc, which sells environmentally friendly homecare products, 2009 was a year of consolidation, during which it reviewed and rationalised its various product lines. The company believes that the resulting improved product focus will drive signiﬁ cant growth in revenues and proﬁ tability in the medium term. The beginning of 2010 has seen the launch of its new laundry products with very positive media and consumer reaction to date. Yes To Inc has become one of the fastest growing brands in the worldwide natural personal-care market, and its award-winning products are currently sold by leading retailers across North America, Europe and Asia. The company is beneﬁ ting from consumers’ growing preference for natural products over synthetic. Rave Reviews Cinemas, a co-investment with one of our fund interests, had a successful year in 2009, during which it improved revenues and cash ﬂ ow. At the end of the year it completed a restructuring which substantially reduced its debt and which should result in the business paying dividends in the medium term. Other In July we sold part of our interest in Inﬂ exion 2006 Buyout Fund for approximately £1 million in cash. This transaction also reduced our outstanding commitment to this fund by £1.4 million. Also in July, Viking Moorings, an investment in the Inﬂ exion 2003 Buyout Fund, was sold, producing proceeds to the Company of £2.5 million. 2009 Business review LMS Capital plc 09 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Financial review Basis of preparation of ﬁ nancial information The Company reports its results under International Financial Reporting Standards as adopted for use in the European Union (‘Adopted IFRS’), and the consolidated ﬁ nancial statements include the consolidation of portfolio companies which are also subsidiaries (‘portfolio subsidiaries’). Since the Board manages the Company as an investment business, this ﬁ nancial review focuses on the results of the investment management operations. Note 2 to the ﬁ nancial information includes the separate results and net assets of the investment management business. Where appropriate, this review includes comments on the results and ﬁ nancial position of the portfolio subsidiaries. Investment management Net Asset Value at 31 December 2009 was £227.7 million (31 December 2008: £241.5 million), a decrease of £13.8 million or 6%. The Net Asset Value per share was 84p (31 December 2008: 89p). The Group’s return on its investment portfolio for the year ended 31 December 2009 was a loss of £4.9 million (year ended 31 December 2008: loss of £36.7 million) as follows: Approximately 60% of the portfolio at 31 December 2009 is denominated in US dollars (2008: 59%) and the above table includes the impact of currency movements. In the year ended 31 December 2009 the weakening of the US dollar against pound sterling resulted in an unrealised foreign currency loss of £13.5 million. During the year ended 31 December 2008 there was a signiﬁ cant strengthening of the dollar against pound sterling and the unrealised gain for that year was £45.5 million. Realised gains on quoted securities include £2.0 million in connection with the sale of our shares in Venture Production plc to Centrica plc, with the balance arising on the sale of other, smaller holdings during the year. The realised losses on unquoted securities arose on the sale of 7 Global to 365iT. The unrealised gains on our quoted portfolio reﬂ ect the net impact of the changes in the capital markets during the year. Of the total of £9.7 million, £7.5 million is attributable to our holding in Weatherford International. The principal constituents of the net unrealised loss for the year on our unquoted securities are as follows: Realised gains/(losses) Quoted securities Unquoted securities Funds Unrealised gains/(losses) Quoted securities Unquoted securities Funds Total gain/(loss) Year ended 31 December 2009 £’000 2008 £’000 2,503 (1,867) (755) 574 14,620 2,114 (119) 17,308 9,741 (8,491) (6,007) (31,122) (27,506) 4,572 (4,757) (54,056) (4,876) (36,748) Coppereye Kizoom Offshore Tool and Energy Updata Rave Reviews Cinemas HealthTech Holdings Other investments (net) Total net unrealised loss Unrealised gain/(loss) £’000 (5,226) (3,240) (1,861) 1,800 (1,745) 3,580 (6,692) (1,799) (8,491) 10 LMS Capital plc 2009 Business review The unrealised losses above reﬂ ect the combined impact on our valuation criteria of changes in the revenue and proﬁ tability multiples of comparable businesses which are used in the underlying calculations and the operating performances of the individual businesses within the portfolio. In most cases the multiples used are either the same as or more favourable than those prevailing at the end of 2008. The unrealised gains or losses set out above for 2009 arise principally as a result of the companies’ performance. In particular, the results of Kizoom and Coppereye in 2009 were below expectations, such that a strategic review of these businesses is in progress which is likely to result in exit by us. Conversely the performances of Updata and HealthTech Holdings have resulted in a higher valuation for those businesses. The unrealised valuation loss on our fund interests reﬂ ects the fact that many of these are US funds and the net decrease in our carrying value arises from the weakening of the US dollar against the pound sterling, principally in the ﬁ rst half of the year. The net unrealised loss for the year was £6.0 million, being unrealised foreign currency losses of £7.8 million offset by net valuation adjustments of £1.8 million. In line with other funds of funds we rely on reports from general partners 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 £0.5 million (2008: £0.6 million) and comprises dividends on quoted securities and management charges made to portfolio companies. Administration expenses for the year were £8.0 million (2008: £5.6 million); the current year includes a number of non- recurring charges (including £0.4 million for the costs of the Company moving to the Ofﬁ cial List and £0.8 million as compensation for loss of ofﬁ ce to a director) whereas 2008 beneﬁ ted from a one-off VAT refund of £1.1 million. Net interest income for the year was £0.2 million (2008: £1.8 million) reﬂ ecting the lower interest rates during the year as well as the lower levels of uninvested cash. The tax charge for the year was £0.3 million (2008: £0.6 million). Investments The Group’s investments are included in the balance sheet at fair values determined in accordance with industry guidelines. Additions to the investment portfolio during the year were £32.7 million (year ended 31 December 2008: £51.6 million) of which £7.6 million (2008: £12.4 million) was for new investments and £25.1 million (2008: £39.2 million) for follow on investments including £14.8 million (2008: £15.8 million) for capital calls from funds. There were no additions to quoted securities during the year (2008: £17.5 million); the most signiﬁ cant new investment was £6.2 million for our stake in Updata. The follow on investments (excluding fund calls) included £9.5 million (2008: £12.0 million) for the UK unquoted portfolio and £0.8 million (2008: £0.9 million) for the US portfolio. 2009 Business review LMS Capital plc 11 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Proceeds of realisations were £13.9 million (2008: £97.1 million, of which £82.9 million was from the sale of Energy Cranes), including sales of quoted securities of £6.9 million (2008: £3.9 million) and distributions from funds of £5.6 million (2008: £8.1 million). At 31 December 2009 the Group had commitments of £58.7 million (31 December 2008: £71.1 million) to meet capital calls from its fund interests which the Directors estimate will be called over the next ﬁ ve 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 2009 liquid assets were £66.3 million. Consolidated results Consolidated revenues for the year were £32.5 million (2008: £19.8 million), all in the portfolio subsidiaries. The increase over the previous year reﬂ ects the inclusion of Updata for the ﬁ rst time (from acquisition in July 2009), the inclusion of Citizen Limited for a full year (2008: four months only) and the improved revenue performances by Entuity, Kizoom and Wesupply. Consolidated operating expenses were £51.1 million for the year (2008: £46.1 million), including goodwill impairment charges of £4.6 million (2008: £11.2 million). Excluding goodwill impairment, the increase in operating expenses reﬂ ects principally the inclusion of Updata and Citizen as set out above. Financial position The consolidated balance sheet at 31 December 2009 includes cash and cash equivalents of £17.0 million (31 December 2008: £42.6 million) and borrowings of £7.6 million (31 December 2008: £2.8 million) in the portfolio subsidiaries. Cash in the investment management business was £14.4 million (31 December 2008: £41.3 million). Part of the Company’s cash has been and will be committed during 2010 to meets calls from funds and to provide further funding for existing unquoted investments. The business also has a £15 million borrowing facility with The Royal Bank of Scotland, which is due to expire in April 2011. The investment management business had no borrowings during 2009. Robert Rayne Chairman designate 26 March 2010 12 LMS Capital plc 2009 Business review LMS Capital plc – Top 20 investments by valuation 31 December 2009* Investment Geography Weatherford International Ltd Oilﬁ eld services Method Products Consumer products Prostrakan Group plc Speciality pharmaceuticals Updata Infrastructure UK Limited Wide area networks Rave Reviews Cinemas Cinema operations HealthTech Holdings, Inc Hospital information systems Penguin Computing Linux server systems Wesupply Limited Supply chain connectivity software Entuity Limited Network management software Elateral Limited Marketing software Gulfmark Offshore Inc International offshore services Luxury Link Internet commerce Kizoom Limited Transport information services Yes To, Inc Consumer products Chyron Corporation Media technology Pims Group Wastewater systems and services BJ Services Oil and gas ﬁ eld services Agilisys Holdings Limited IT services and outsourcing Vio Worldwide Limited Advertising workﬂ ow services Offshore Tool and Energy Corporation Specialist engineering * Investment management business. US US UK UK US US US UK UK UK US US UK US US UK US UK UK US Type of investment Quoted Date of initial Book value £’000 investment 2001 22,647 % of net assets 10% Fund portfolio company 2004 17,265 Quoted 1999 15,226 Unquoted 2009 8,000 Unquoted 2002 7,115 Unquoted 2007 7,000 Fund portfolio company 2004 5,586 Unquoted 2000 5,500 Unquoted 2000 4,500 Unquoted 2000 4,500 Quoted 2008 4,363 Fund portfolio company 2006 4,283 Unquoted 1997 4,000 Fund portfolio company 2008 3,726 Quoted 1995 3,501 Unquoted 2008 2,905 Quoted 2007 2,870 Unquoted 2000 2,000 Unquoted 2002 2,000 Unquoted 1998 2,000 8% 7% 4% 3% 3% 3% 2% 2% 2% 2% 2% 2% 2% 2% 1% 1% 1% 1% 1% 2009 Business review LMS Capital plc 13 O O v v e e r r v v e e w w i i i i B B u u s s n n e e s s s s r r e e v v e e w w i i G G o o v v e e r r n n a a n n c c e e i i F F n n a a n n c c a a i i l l s S t t a a t t e e m m e e n n t s t s Company Proﬁ les Updata Infrastructure UK Limited www.updata.biz Updata is a specialist managed network services provider solely focused on the local authority market throughout the UK. Established in 2003, Updata was set up to provide broadband services utilising Local Loop Unbundling (LLU) as a cost effective alternative technology platform on which to compete with established service providers. Today Updata is recognised as the de facto specialist LLU Operator within its market, having won contracts in excess of £80 million since inception. Updata has expanded its service offering beyond LLU and indeed quite some way beyond simple connectivity. Current services include data centre management, ISP services, hosted services, ﬁ rewall management and migration services. The principal drive within the business today is the augmentation of its considerable networking expertise with those ancillary value added services mentioned above. Additionally, the business is actively looking to offer a broader converged solution incorporating both voice (ﬁ xed and mobile) and data to meet growing customer demands. The local authority market is addressed via a combination of direct sales and indirect sales via a small number of strategic partnerships with the likes of Siemens, Unisys, Research Machines and Logicalis. Updata now own and manage networks across Wales, Kent, Essex, Cheshire, Peterborough, Herefordshire and Dorset to name a few. Updata is a preferred supplier to The Ofﬁ ce of Government Commerce (OGC) and Adit North procurement frameworks, through which it generates considerable business and customer credibility. Typically, Updata owns and manages the entire infrastructure for which it is responsible. Contracts are entered into on a three, ﬁ ve or seven year basis, generating recurring revenues which now account for around 50% of year on year sales. There is a growing realisation by end users that signiﬁ cant economic efﬁ ciencies can be leveraged through shared services and public sector networks (PSNs). Updata’s underlying network design lends itself very well to the concept of ‘one network for multiple stakeholders’ and indeed Updata forms a major part of some of the largest PSNs in the country, namely, PSBA (Wales); KPSN (Kent) and the County-wide network now serving Essex County Council and half a dozen other users (including the Fire & Rescue service) within the county. Whilst the consequences of the expected tightening of the public sector purse may possibly contribute to a depressed market in the short to medium term, Updata believes that it is in a unique position in terms of pedigree, references and ﬁ nancial stability to offer a genuine alternative for customers looking to extract better value from its WAN related investments. This is a very risk adverse customer segment, which historically has chosen large and safe over small and innovative. Updata could be considered big enough to be safe and small enough to be innovative. The Company’s investment in Updata had a book value of £8 million as at 31 December 2009. 14 LMS Capital plc 2009 Business review O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 2009 Business review LMS Capital plc 15 HealthTech Holdings Inc HealthTech Holdings, Inc. is a healthcare information technology holding company with two major portfolio companies, Healthcare Management Systems, Inc. and MEDHOST, Inc. The company expects combined revenue in excess of $100 million in 2010. In addition, MEDHOST will develop an integrated emergency department system for the HMS solution designed for community hospitals. LMS Capital’s stake in HealthTech Holdings had a book value of £7 million as at 31 December 2009. Healthcare Management Systems www.hmstn.com MEDHOST www.medhost.com Based in Nashville, Tennessee, Healthcare Management Systems (HMS) develops, sells and supports integrated clinical and ﬁ nancial hospital information systems and services. This integrated approach provides HMS’s customers with peerless stability and effectiveness in communications and signiﬁ cantly increases productivity within their facilities and with their external agencies. HMS provides their system to over 650 community hospitals; behavioural, rehabilitation and long-term acute care facilities; and multi- entity healthcare organisations within the United States. Compared to other vendors, HMS focuses speciﬁ cally on providing solutions and services to the sub 200-bed healthcare marketplace. HMS maintains a continued commitment to growth in developing technology and quality customer service. In 2009, HMS launched its learning institute which provides the industry’s most comprehensive training and implementation process by providing a variety of easy to use, convenient and cost effective training and education opportunities to meet the needs of its customers. In February 2010, HealthTech Holdings acquired MEDHOST, a leading provider within the United States of emergency department information systems. MEDHOST’s Emergency Department Information System (EDIS) includes real time patient tracking, nurse charting, physician documentations, order entry and comprehensive reporting. This powerful EDIS was designed by clinicians, not software developers, so it eliminates everything that hinders care in the emergency department, such as drop down menus, too many screens, confusing dialogue boxes, multiple key strokes and other obstacles that impede patient care. MEDHOST’s innovative technology is easy to navigate and features a unique touch screen design and an Administrative ToolKit for customising processes. The graphical ﬂ oorplans improve staff communication through automated notiﬁ cation, risk alerts and visual cues, and it allows clinicians to quickly and easily decipher which patients are highest acuity, who has tests completed or pending, which rooms and beds are available, and manage all other patient care priorities. 16 LMS Capital plc 2009 Business review O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 2009 Business review LMS Capital plc 17 Luxury Link, LLC Luxury Link, LLC is the parent company of LuxuryLink.com and FamilyGetaway.com, the web’s pioneering sites devoted to online luxury and family travel deals. Luxury Link, LLC is a US unquoted investment made by San Francisco Equity Partners, a partnership in which LMS Capital is a founding partner. Luxury Link www.luxurylink.com Family Getaway www.familygetaway.com Founded in 1997, LuxuryLink.com is the leader in online luxury travel with a proven track record of longevity, credibility and success. Designed for travellers seeking inspiration and exceptional values at the world’s ﬁ nest hotels and resorts, holidays can be purchased via online auctions or via “buy now” special offers. LuxuryLink.com only offers the world’s very best hotels, tours and cruises and works hard to ensure that everything it offers meets high standards of quality, service and luxury. Before it lists an item, the company’s vetting team uses a three page checklist of amenities to evaluate whether a resort or travel operator meets its standards – most hotels are four or ﬁ ve star. If a holiday is bid for by auction, once the auction is won LuxuryLink.com will also make the reservation on behalf of the successful bidder, unlike other websites who make the auction winner book themselves. During the current economic situation, LuxuryLink.com has seen business boom and has been voted a “Top Travel Website” for both 2009 and 2008 by Travel & Leisure magazine and “Best Travel Website” for 2008 by CNBC. In February 2010, in response to requests for family and child friendly holidays, the team behind LuxuryLink.com launched a new website dedicated to families seeking the best places to stay at exceptional values – FamilyGetaway.com. As with LuxuryLink.com, holidays can be purchase via online auctions or via “buy now” special offers at up to 65% off retail value. FamilyGetaway.com offers a wide spectrum of family travel accommodations and experiences including global hotel collections, boutique hotels, villas, all-inclusive holidays, historic hotels, all in the three-to-ﬁ ve star range in popular family destinations such as California, Florida, Europe, Mexico, Hawaii and the Caribbean. The FamilyGetaway.com website has been designed to make it practical and easy to ﬁ nd suitable holidays for families depending on their requirements. Families can choose which holiday by type (e.g. beach, all-inclusive or cruise); by interests (e.g. active, adventure or skiing) or by speciﬁ c activities for children. 18 LMS Capital plc 2009 Business review O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Entuity Limited www.entuity.com Method Products, Inc www.methodproducts.com Founded in 1997, Entuity® is a leading provider of innovative management solutions that deliver network insight, predictability and control, enabling enterprises, system integrators and managed service providers to monitor and manage network services and assets, meet service level commitments, implement best practices in service delivery. Entuity competes in a mature and competitive market but is making steady progress thanks to continued product improvements. With its Insight Center Perspectives, the company has successfully positioned itself as the ‘next generation’ of network management, bringing business-focused service and value to the forefront. One of those Perspectives is for ‘Green IT’ initiatives, and the company is winning awards and praise for its uniqueness and innovation in the network management industry. For example, the Green IT Perspective currently allows the University of Minnesota to monitor the nightly shut-down of more than 50,000 devices. This will allow the university to save more than $2 million in total annual utility costs. In early 2010, Entuity ﬁ nished a project with the University, installing a centrally managed network support service that supports the wireless mobility needs of its students and staff, with 9,500 wireless access points, serving some 80,000 people spread over a campus of 1,204 acres: the largest current- generation wireless conﬁ guration in the world. Since introducing a strategic plan to stimulate sales from partnerships and reseller agreements, Entuity’s indirect channel partners have quadrupled in number over the last four years. Indirect revenues doubled from 2008 to 2009 alone and the company experienced a 20% growth in 2009, despite the global economic downturn. The Company’s interest in Entuity had a book value of £4.5 million as at 31 December 2009. Method Products is the maker of eco-friendly household and personal care products and within eight years it has become the world’s largest and fastest growing green homecare company. Having started in the United States, the company’s products are now available in the United Kingdom, Ireland and Australia. There are no toxic ingredients used in Method’s products. All ingredients in Method’s products are environmentally safe and friendly, with each ingredient being independently assessed by EPA, a world- renowned scientiﬁc research institute. In late January 2010, Method launched a new revolutionary laundry detergent in the US, made with smartclean technology – a powerful, patent-pending, plant-based formula that gets clothes really clean with a formula that’s super green. It cuts down on the need for large bottles of laundry detergent and packs it into a smaller, ultra- concentrated, lightweight bottle. Instead of using a measuring cap, which is prone to dripping, Method’s product uses a no-mess, precision-dosing pump. The result of this is a product that is smaller and lighter in size than its rivals, which means that it is cheaper to ship as it takes up less packaging space. It also uses less water. This results in a super green product. The launch of the detergent has proven a great success and has received much coverage in the press and on television in the US. Current retailers of Method Products in the UK are John Lewis and Waitrose, Selfridges, Tesco, Sainsbury’s, Boots, Co-Op, Homebase and B&Q. Method is a US unquoted investment made by San Francisco Equity Partners, a partnership in which LMS Capital is a founding partner. 2009 Business review LMS Capital plc 19 Principal unquoted investments Company 365 iT plc Company Kizoom Company Elateral Limited Description 365 iT delivers expert and affordable computer and network services including Managed IT Services, Uniﬁ ed Communications, Business Continuity, Virtualisation, and IT Security. Description Provision of urban digital networks, supplying and servicing intelligent transport systems, iPlus Points and wireless broadband city networks. Description Supply chain software to streamline and automate marketing processes, from creative design and marketing to printing and fulﬁ lment, via an online collaborative workﬂ ow tool. MD Peter MacLean CEO Andrew Fraser CEO Paul Goater Website www.365itechnology.com Website www.kizoom.com Website www.elateral.com Company Agilisys Holdings Limited Company CopperEye Limited Company Description An IT services and outsourcing provider which designs, builds and operates an integrated end-to-end suite of IT and business process services, for public and private sector clients. Description Specialised search solutions for business transaction data that facilitates quick retrieval of speciﬁ c records from months or years of history and billions of business transactions. Description Emerging Markets Advisory Corporation Limited An alternative asset management business focused primarily on the transition markets of South Eastern Europe. CEO Kay Andrews CEO Carmen Carey CEO Matthew Gilpin Website www.agilisys.co.uk Website www.coppereye.com Website www.emac-global.com Company Pims Group Limited Company Corizon Limited Company Wesupply Limited Description A supplier of waste water pumping systems and services across the UK. Description Software solutions which allow enterprise users, such as contact centre agents, to access multiple applications from a single user interface. Description Supply chain management software, offering a fully conﬁ gurable on-demand and collaborative web-based solution. CEO Charlie White CEO Eric Guilloteau CEO Bob Godfrey Website www.pimsgroup.co.uk Website www.corizon.com Website www.wesupply.com 20 LMS Capital plc 2009 Business review Company Entuity Limited Description Network management software that facilitates the deployment and management of IP services, reduction of network downtime, and compliance with service level commitments. Company Updata Infrastructure UK Limited Description Updata creates, implements and then manages secure, cost-effective high-capacity broadband networks for public sector organisations and mobile operators. Company Telespree Communications Description Self-service platform for automated activation, ongoing account management and location-based advertising for mobile devices. CEO Michael Jannery CEO Richard Bennett CEO Bill DeKay Website www.entuity.com Website www.updata.biz Website www.telespree.com Company Healthcare Management Systems, Inc* Description Integrated clinical and ﬁ nancial hospital information systems and services, focusing on rural, community, behavioural, rehabilitation and multi-entity healthcare organisations. Where Advisors Prosper SM Company Envestnet Asset Management Company Vio Worldwide Limited Description A provider of wealth management solutions, via web-based tools, to the ﬁ nancial advisory sector. Description Supply chain software solutions for the advertising, publishing and graphic arts industries. CEO Thomas M Stephenson CEO Judson Bergman MD Chris Friend Website www.hmstn.com Website www.envestnet.com Website www.vio.com *Part of HealthTech Holdings, Inc. O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e Company ITS Engineered Systems Inc* Company Rave Reviews Cinemas LLC Company Eye-Fi, Inc. Description Oil and gas production/recovery systems, encompassing custom engineering, fabrication, installation, training and service. Description Operator of multiplex cinemas in the United States. Description Developer of wireless memory cards which integrate with Wi-Fi networks to automatically send photos from a digital camera to online, in-home and retail destinations. President Mike Decarlo CEO Tom Stephenson CEO Jef Holove Website www.itses.com Website www.ravemotionpictures.com Website www.eye.ﬁ *Part of Offshore Tool & Energy 2009 Business review LMS Capital plc 21 i F n a n c a i l S t a t e m e n t s Board of Directors 1) Jonathan Agnew 11 Chairman Age: 68 2) Robert Rayne 11 Chairman designate Age: 61 3) Glenn Payne 1 Chief Executive Ofﬁ cer Age: 45 4) Antony Sweet 1 Chief Financial Ofﬁ cer Age: 55 Directorships: Chairman of Ashmore Global Opportunities Ltd, Beazley plc and The Cayenne Trust plc, and senior independent director of Rightmove plc. Experience: Jonathan was a managing director of Morgan Stanley and subsequently group chief executive of Kleinwort Benson and has been chairman of Nationwide Building Society, Limit plc, Gerrard Group plc and Henderson Geared Income & Growth Trust plc. Directorships: Chairman of Derwent London plc and a non-executive director of Weatherford International Ltd and Chyron Corporation, as well as a number of unlisted companies. Experience: Robbie established LMS Capital’s investment activities in the early 1980s as investment director and later managing director and chief executive of London Merchant Securities plc. He has expertise in a wide range of sectors, including real estate, media, consumer, technology and energy. Previous directorships include First Leisure Corporation and Crown Sports plc. Directorships: A number of Group companies. Experience: Glenn joined LMS Capital as CEO on 1 March 2010. Previously, he was a director of First Reserve Corporation, a leading investment ﬁ rm specialising in the energy industry. He has also worked at Suez Energy, a major global electricity and gas provider, as director of strategy and at McKinsey & Co. as an Engagement Manager serving electric power and natural gas clients. Before joining McKinsey, he was at the Atlantic Richﬁ eld Company (ARCO, now BP), where he served as a Director of Business Development. Directorships: Wesupply Ltd (non-executive), and a number of Group companies. Experience: In addition to his ﬁ nance responsibilities Tony participates actively in investment activities, particularly supporting portfolio companies in formulating strategic plans and funding requirements. Before joining the Company, he was chief ﬁ nancial ofﬁ cer 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. 5) John Barnsley 111 Senior Independent Non-Executive Director Age: 61 Directorships: Non-executive director of Grainger plc, American Appraisal (UK) Limited and European Cardiovascular Genetics Foundation, chairman of Westover Medical Ltd and senior independent non- executive director of Northern Investors Company plc. Experience: John was chairman of North London Research Committee, chairman of KCS Global Holdings Ltd and non-executive director of Syltone plc. Prior to December 2001, he spent 22 years as a partner of PricewaterhouseCoopers, including four years as UK managing partner. 6) Richard Christou 11 Non-Executive Director Age: 65 Directorships: Chairman, Fujitsu Services Holdings PLC, and director of a number of Fujitsu subsidiary companies, and English Touring Opera Limited. Experience: Richard began his career in 1967 and 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. 7) Bernard Duroc-Danner 1 Non-Executive Director Age: 56 Directorships: Chairman, president and chief executive ofﬁ cer of Weatherford International Ltd and director of a number of oilﬁ eld service sector companies. Experience: Bernard was a non-executive director of London Merchant Securities plc and president and chief executive ofﬁ cer of EVI, Inc. (now Weatherford International Ltd). Previously, he held positions at Arthur D. Little and Mobil Oil Inc. 8) David Verey 111 Non-Executive Director Age: 59 Directorships: Daily Mail & General Trust plc, Soﬁ na S.A., a member of the supervisory board of Bank Gutmann and a member of the international advisory board of The Blackstone Group. Experience: With over 30 years of experience, David has extensive industry knowledge and was previously Chairman of Blackstone Group UK where he remains as a member of their International Advisory Board. Previously he worked for Lazard Brothers for 28 years becoming Chief Executive in 1990 and Chairman two years later. 22 LMS Capital plc 2009 Business review Investment team and advisers 1) Pieter Hooft 1 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 ﬁ tness clubs. 2) Edward Snow 1 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 ﬁ rm 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 ﬂ oated 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. 3) Jamie Rhodes Investment Manager, UK investments 4) Jamie Szpiro 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 joined LMS Capital in June 2008 from Singer & Friedlander where he was a Director in the Corporate and Structured ﬁ nance team focusing on mid-market buyouts. Jamie has a broad range of ﬁ nancial 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. 1Audit Committee 1Remuneration Committee 1Nomination Committee 1Investment Committee 5) Scott Potter Managing Partner, San Francisco Equity Partners (US) 6) Gene Weber Managing Partner, Weber Capital Management, LLC (US) 7) Brian Bank Managing Partner, Pinecrest Capital Partners 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 signiﬁ cant investor. Gene is the managing partner of Weber Capital Management, a ﬁ rm that operates a number of funds in which LMS Capital invests. He founded Weber Capital Management in 1994 and is a long term investor in public and private growth companies in the information technology, communications and healthcare sectors in the US. From 1983 to 1994, Gene was a partner with the investment management ﬁ rm Weiss, Peck & Greer in their San Francisco venture capital ofﬁ ce having joined them from McKinsey & Company. Gene has over 26 years experience in investment management and has managed four funds holding positions in over 130 companies. Brian has been working with LMS Capital for over ten years and is responsible for selecting and managing the Group’s investments in US venture capital and private equity partnerships as well as overseeing LMS Capital’s US based co-investment portfolio. Recent co-investments include Healthcare Management Systems (HMS) and Eye-Fi. Brian was previously with Ernst & Young’s management consulting group, with Miller and Schroeder Inc as a municipal bond underwriter and with the Center for Strategic and International Studies as an international political-military analyst. 2009 Business review LMS Capital plc 23 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Corporate governance report The Board of LMS Capital plc is committed to maintaining high standards of corporate governance and business ethics. As a company, LMS Capital is required to comply with the Combined Code on Corporate Governance issued by the Financial Reporting Council (‘the Code’). A copy of the Code is 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 period under review is the year ended 31 December 2009. The Board considers that the Company has complied with all of the provisions of the Code throughout the period under review. On 4 February 2010, the Company announced that it was appointing a new Chief Executive Ofﬁ cer on 1 March 2010, that Jonathan Agnew would be retiring from the Board after the Annual General Meeting on 13 May 2010 and that Robert Rayne, the previous Chief Executive Ofﬁ cer, would be succeeding him as Chairman. 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 will allow continued access to the network and relationships developed by Robert Rayne over the last 40 years; (2) Robert Rayne has an ongoing involvement with the investee companies’ managements and is the Company representative on some of their boards; and (3) It will provide the Company with continued access to the advisory boards of a number of funds. As Chairman, Mr Rayne will continue to act in an executive capacity for a period of time to ensure that there is a smooth transition to the incoming new Chief Executive Ofﬁ cer. Board of Directors The Board’s role 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. Composition Throughout the period under review, the Board was comprised of seven directors. For most of the period, it was four non-executive directors (including the non-executive Chairman) and three executive directors. However, in September 2009, one executive director left the Company and one non-executive director joined the Company. Accordingly, the composition as at 31 December 2009 was ﬁ ve non-executive directors and two executive directors. On 1 March 2010, a new executive director was appointed to the Board. In addition, Mr Agnew, the current non-executive Chairman, has advised that he will leave the Company after the Annual General Meeting on 13 May 2010. Brief biographies of the directors appear on page 22. The Board considers that it has an appropriate balance of expertise and ability available to it. The Chairman and Chief Executive Ofﬁ cer There is a clear separation of the roles of the Chairman and the Chief Executive Ofﬁ cer. Broadly, the Chairman is responsible for the effective running of the Board, whilst the Chief Executive Ofﬁ cer is responsible for the executive management and performance of the Company’s operations. Non-executive directors The original non-executive directors were all re-appointed in April 2009 for a further term of three years or until the Annual General Meeting at which they next have to retire by rotation, whichever is the earlier. Subject to agreement, satisfactory performances and re-election by shareholders, their directorships may be renewed for further terms. David Verey was appointed a non-executive director in September 2009 and will stand for election at the Annual General Meeting to be held on 13 May 2010 as required by the Company’s Articles of Association. Assuming he is successfully appointed, it will be for a term of three years. 24 LMS Capital plc Corporate governance report In the opinion of the Board, John Barnsley, Richard Christou, Bernard Duroc-Danner 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 sufﬁ cient time during 2009 to fulﬁ lling their duties as members of the Board. Senior independent director 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 Ofﬁ cer or the Chief Financial Ofﬁ cer 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. External non-executive directorships 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 beneﬁ t 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. Insurance The Company maintains directors’ and ofﬁ cers’ liability insurance and provides the directors and ofﬁ cers 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. Board procedures 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. Powers and delegation The Board delegates speciﬁ c responsibilities to the Audit, Nomination and Remuneration Committees, which operate within clearly deﬁ ned 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 ﬁ nancial statements, strategic plans, annual budgets, acquisitions and disposals and major capital and operating expenditure proposals. Board meetings Six scheduled board meetings were held in 2009. At each scheduled meeting, the Board considers a report from the Chief Executive Ofﬁ cer on current trading and signiﬁ cant business issues, such as major investment or divestment proposals and strategy. A ﬁ nancial report is provided by the Chief Financial Ofﬁ cer 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. In addition to the scheduled meetings, one further meeting was held to discuss the Company’s future strategy. Corporate governance report LMS Capital plc 25 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Attendance at board meetings 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 2009: Board Audit Committee Remuneration Committee Nomination Committee Meetings held Meetings attended Jonathan Agnew Robert Rayne Martin Pexton1 Antony Sweet John Barnsley Richard Christou2 Bernard Duroc-Danner David Verey3 Notes: 7 7 7 4 7 7 4 6 2 4 4 - - - 4 1 - 1 6 6 - - - 6 6 - 2 3 3 3 - - 3 3 3 1 1. Mr Pexton left the Company on 30 September 2009. 2. Mr Christou resigned from the Audit Committee in September 2009. 3. Mr Verey joined the Board on 7 September 2009 and was appointed to all of the Board Committees at that time. Board committees Each Board Committee has established clear and deﬁ ned terms of reference detailing its responsibilities and powers. These are available to review on the Company’s website at www.lmscapital.com. Audit Committee During 2009, the Audit Committee members were John Barnsley (Committee Chairman), Jonathan Agnew, Richard Christou (who resigned from the Committee in September 2009) and David Verey (who joined the Committee in September 2009). John Barnsley is considered by the Board to have recent and relevant ﬁ nancial experience, for the purpose of the Code. A representative of the Company’s external auditors, the Chief Financial Ofﬁ cer 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 2009. 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 ﬁ nancial 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. 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. 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. 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. 26 LMS Capital plc Corporate governance report Remuneration Committee The Remuneration Committee currently comprises Richard Christou, who chairs the Committee, John Barnsley and David Verey (who joined the Committee in September 2009). The composition and role of the Remuneration Committee is described more fully in the Remuneration report. Nomination Committee The Nomination Committee currently comprises Jonathan Agnew, who chairs the Committee, Robert Rayne, John Barnsley, Richard Christou, Bernard Duroc-Danner and David Verey (who joined the Committee in September 2009). 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 2009, the Committee met three times. The Committee met once to discuss and approve the appointment of David Verey as non-executive director, prior to which the individual members of the Committee had met with Mr Verey on a one-to- one basis. The Committee also met twice during the year to discuss the recruitment of a new Chief Executive Ofﬁ cer. The Committee authorised a sub-committee comprising of John Barnsley, who chaired the sub-committee, Robert Rayne and David Verey to oversee the recruitment and to meet the proposed candidates. The Committee appointed Spencer Stuart to assist the recruitment process and a list of candidates was compiled. This was reduced to a short list of about ten candidates whom the individual members of the sub-committee met. A ﬁ nal list of four candidates was drawn up and these candidates met further with the members of the sub-committee and other members of the Board on an individual basis. The candidates also met the senior management of the Company. A Nomination Committee meeting was then held in January 2010 to recommend to the Board the appointment of Glenn Payne as the new Chief Executive Ofﬁ cer. 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. Investment Committee In addition to the principal Board committees described above, there is also an Investment Committee. This currently comprises Robert Rayne, who chaired the Committee during 2009, Antony Sweet, Pieter Hooft and Ed Snow (who was appointed to the Committee on 6 July 2009). Martin Pexton left the Committee in September 2009. Following his appointment as Chief Executive Ofﬁ cer, Glenn Payne will chair the Investment Committee. 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 may meet more often as circumstances require. Board reappointments 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 Rayne, Sweet and Duroc-Danner will retire at the forthcoming Annual General Meeting and, being eligible, each offers himself for re-election at the meeting. Mr Verey (who was appointed to the Board on 7 September 2009) and Mr Payne (who was appointed to the Board on 1 March 2010) will each 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 22. Board appraisal Due to the changes in the Board composition in 2009 and early 2010, no appraisal took place as it was felt that such an appraisal would not be beneﬁ cial at that time. It is envisaged that an appraisal will take place in late 2010, or in early 2011. Corporate governance report LMS Capital plc 27 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Shareholder communications 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. Internal control Process The Audit Committee, on behalf of the Board, has overall responsibility for the Company’s system of internal and ﬁ nancial 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 in depth the effectiveness of the Company’s internal controls on an annual basis and will take any necessary actions should any signiﬁ cant failings or weaknesses be identiﬁ ed. 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 Ofﬁ cer and through him, as appropriate, to other managers acting within delegated authority limits and in accordance with clearly deﬁ ned systems of control. Financial matters and the responsibility for the day-to-day ﬁ nancial aspects of the business are delegated to the Chief Financial Ofﬁ cer and through him, as appropriate, to members of his ﬁ nancial team acting within delegated authority limits and in accordance with clearly deﬁ ned systems of control. The Chief Financial Ofﬁ cer reports to the Board on ﬁ nancial 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 signiﬁ cant 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 sufﬁ cient 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). 28 LMS Capital plc Corporate governance report Directors’ conﬂ icts of interests The directors’ statutory duty to avoid conﬂ icts of interest with the Company came into force during 2008. The Company’s Articles of Association allow the directors to authorise conﬂ icts of interest and a register has been set up to record all conﬂ ict situations declared. The conﬂ icts declared are all very minor in nature and there have been no conﬂ icts 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. Risk review The Board is of the view that an ongoing process for identifying, evaluating and managing signiﬁ cant risks faced by the Group was in place during 2009 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 ﬁ nancial and non-ﬁ nancial implications and, so far as possible, take action to reduce those risks. Details of risks potentially facing the Group can be found on page 30. Financial reporting The directors have acknowledged, in the Statement of directors’ responsibilities set out on page 43, their responsibility for preparing the ﬁ nancial statements of the Company and the Group. The external auditors have included, in the independent auditors’ report set out on pages 44 to 45, 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 understandable assessment of the Company and Group ﬁ nancial position for the ﬁ rst 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 ﬁ nancial position. Shares and voting rights 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 41. Going concern 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 6 to 9. The ﬁ nancial position of the Company, its cash ﬂ ows, liquidity position and borrowing facilities are described in the ﬁ nancial review on pages 10 to 11. 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 ﬁ nancial statements. O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i Jonathan Agnew Chairman 26 March 2010 l S t a t e m e n t s Corporate governance report LMS Capital plc 29 Risk factors The Group has an ongoing process for identifying, evaluating and managing the risks which the business is exposed to and this is monitored by the Audit Committee at each meeting. The key risks, and how the Group mitigates their effects, are as follows: Economic and ﬁ nancial risk 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 corporate performance and growth rates. The investment portfolio may not achieve the Company’s growth targets which may result in the Company’s Net Asset Value declining. We manage this by monitoring the trading and cash ﬂ ows 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 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 sufﬁ cient funds to meet its expected cash obligations for the foreseeable future. The Company’s existing working capital facility is undrawn and 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 our quoted investments, as well as movements in interest rates and exchange rates. A signiﬁ cant 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 fund 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. Investment risk The Group’s investment risk arises as a result of its investment strategy, individual investment decisions and the performance of its investments. The Group’s portfolio is risk-diversiﬁ ed, comprising holdings in quoted and unquoted companies at different stages of development in the UK and the US, together with a number of fund investments. Before the Group makes a new investment, we undertake rigorous inquiries into the business concerned. We understand the company’s business plan; evaluate information on its market place 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. 30 LMS Capital plc Risk factors 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 of the Company. 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 ﬂ ow impact on the Company. If an investment is not performing well, and is absorbing too much of the Group’s resources (both ﬁ nancial 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. Operational risk The Group has a number of internal processes and systems to ensure that it complies with all legal and regulatory obligations, as well as internal controls designed to ensure the integrity of its ﬁ nancial 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 ﬁ nancial reporting systems are subject to an annual audit. 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. O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Risk factors LMS Capital plc 31 Remuneration report Introduction 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 2009. The report has been prepared in accordance with the Companies Act 2006 (‘the Act’) and 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 2009” 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 Remuneration Committee 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: (cid:129) Review and recommend annually employee compensation strategies; (cid:129) Review and recommend remuneration policy for the Company’s annual compensation review; (cid:129) Set the remuneration for executive directors and monitor the level and structure of remuneration for senior management; and (cid:129) Approve targets for any performance-related pay schemes applicable to executive directors. The Committee is made up of non-executive directors, the members during 2009 being: (cid:129) Richard Christou (Committee Chairman) (cid:129) John Barnsley (cid:129) David Verey (appointed on 7 September 2009) 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 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. The Committee has also considered remuneration data published by Deloitte. Remuneration policy 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. 32 LMS Capital plc Remuneration report The Company compensates its executive directors and senior management by balancing the following elements of compensation: (cid:129) base salary, payable in cash; (cid:129) beneﬁ ts-in-kind; (cid:129) bonus; (cid:129) long-term incentives; and (cid:129) carried interest. The mix of these components is managed to create a total compensation package which should be: (cid:129) directly linked to the Company’s overall performance and proﬁ tability; (cid:129) based upon individual and business contribution; (cid:129) retentive in the long term; and (cid:129) market competitive. 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 ﬁ xed 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 set between the median and upper quartile of the market compared with other quoted companies of similar size. Base salary is the only element of remuneration which is pensionable. Beneﬁ ts-in-kind The beneﬁ ts-in-kind available to executive directors are a car allowance, pension contribution (with the exception of Robert Rayne), 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 performance of the Company and the external market. Consideration is given 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 the majority of their total remuneration is provided in the form of variable compensation. The maximum bonus payments are 150% of base salary for Robert Rayne and 100% of salary for Antony Sweet. Long-term incentives The Committee considers the grant of long-term incentives to executive directors and other executives. The Committee made awards under the Performance Share Plan following publication of the Company’s results for 2008. The Committee reviewed the long-term incentive plans currently available and deemed them sufﬁ cient 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. In setting executive directors’ salaries for 2010, the Committee took into account current economic and market factors as well as the salaries and beneﬁ ts received by other employees of the Company. For 2010, Mr Rayne’s salary was reduced by £30,000 and Mr Sweet’s salary remained at its 2009 level. Remuneration report LMS Capital plc 33 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Deferred Share Bonus Plan 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 ﬁ rst anniversary of the award date, the second third on the second anniversary and the ﬁ nal 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 satisﬁ ed or the Remuneration Committee determines that the performance condition should be treated as satisﬁ ed, 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 were made on 30 March 2007 as follows: Robert Rayne Martin Pexton Changes in the year were as follows: Outstanding at 1 January 2009 Awards during the year Exercised during the year Lapsed during the year Outstanding at 31 December 2009 No. of shares First release date Final release date Expiry date 2,864,292 30 March 2008 30 March 2011 30 March 2017 – 1,432,146 30 March 2008 30 March 2010 Mr Rayne Mr Pexton 2,148,219 – (716,073) (716,073) 716,073 954,764 – (477,382) (477,382) – The performance condition for the ﬁ rst release at 30 March 2008 was satisﬁ ed and both Mr Rayne and Mr Pexton exercised their options. The Committee exercised its discretion and paid cash instead of issuing shares to satisfy the exercises. Details of these payments can be found later in this report under Directors’ remuneration in 2009. The performance conditions for the second and third releases have not been satisﬁ ed. The outstanding award granted to Mr Pexton lapsed when he left the Company on 30 September 2009. Executive Share Option Plan 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 satisﬁ ed. 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 ﬁ nancial 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. 34 LMS Capital plc Remuneration report In the event of a change of control awards may be released early provided that the performance condition has been satisﬁ ed. 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 satisﬁ ed. Awards of options to executive directors have been made as follows: Martin Pexton Robert Rayne Antony Sweet Grant date No. of shares Exercise price First exercise date Expiry date 2 April 2007 1 April 2008 2 April 2007 1 April 2008 2 April 2007 1 April 2008 319,727 329,729 523,809 537,837 251,700 518,918 73.5p 74.0p 73.5p 74.0p 73.5p 74.0p – 2 April 2010 – 1 April 2011 2 April 2010 1 April 2017 1 April 2011 31 March 2018 2 April 2010 1 April 2017 1 April 2011 31 March 2018 Outstanding at 1 January 2009 Awards during the year Exercised during the year Lapsed during the year Outstanding at 31 December 2009 Mr Rayne Mr Sweet Mr Pexton 1,061,646 – – (523,809) 770,618 – – (251,700) 649,456 – – (649,456) 537,837 518,918 – The performance conditions for the award of options granted in April 2007 have not been satisﬁ ed and therefore the options have lapsed. The market price of an ordinary share at 31 December 2009 was 52.00p and the range during the year was 36.00p to 52.00p. Performance Share Plan The rules of the Plan, approved by shareholders, permit an annual award of performance shares 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. For one half of the award, the performance condition is that 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 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%, 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. In the event of a change of control awards may be released early provided that the performance condition has been satisﬁ ed or the Remuneration Committee determines that the performance condition should be treated as satisﬁ ed, 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 of shares in the form of nil-cost shares were made on 6 April 2009 to executive directors as follows: Martin Pexton1 Robert Rayne Antony Sweet No. of shares First release date Expiry date 417,811 662,505 329,172 6 April 2012 6 April 2012 6 April 2012 – 5 April 2019 5 April 2019 1. The award of shares to Mr Pexton lapsed when he left the Company on 30 September 2009. Remuneration report LMS Capital plc 35 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Carried interest The Committee aims to ensure that incentive arrangements are competitive with the private equity industry. The executive directors participate in the carried interest arrangements in place for staff involved in the management and development of the investment portfolio. 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 and consequently more demanding than the hurdle rate commonly found in private equity funds. The percentage of capital gains, after the preferred return, which may be allocated to participants in aggregate may not exceed 20%. No carried interest payments were made in the year ended 31 December 2009. Performance graph The Committee considers the FTSE 250 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 ﬁ rst listed on 12 June 2006 compared with that of the FTSE 250 Index. Total Shareholder Return graph since 12 June 2006 160 140 120 100 80 60 40 20 0 June 06 December 06 June 07 December 07 June 08 December 08 June 09 December 09 LMS Capital FTSE 250 – Price index Source: Datastream 36 LMS Capital plc Remuneration report Service contracts 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: Martin Pexton3 Robert Rayne Antony Sweet Notes: Date of appointment Date of contract 1 February 2007 14 March 2007 6 April 2006 14 March 2007 6 April 2006 14 March 2007 Notice period from Company 12 months 12 months 12 months Notice period from director 6 months 6 months 6 months 1. Each of these contracts is a rolling contract. 2. 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 beneﬁ ts. 3. Mr Pexton received compensation for loss of ofﬁ ce on the early termination of his contract, details of which can be found in the Directors’ Remuneration section of this report. Non-executive directors 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: Jonathan Agnew1 John Barnsley Richard Christou Bernard Duroc-Danner David Verey Notes Date of appointment Date of appointment letter 7 April 2006 7 April 2006 7 April 2006 7 April 2006 6 April 2009 6 April 2009 6 April 2009 6 April 2009 7 September 2009 4 September 2009 Date of expiry of current term May 2011 18 May 2012 18 May 2012 13 May 2010 13 May 2010 1. Mr Agnew has announced his intention to resign from the Board at the forthcoming 2010 Annual General Meeting to be held on 13 May 2010. 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 Remuneration Committee Chairman Audit Committee Chairman Non-executive not chairing Committee £75,000 £45,000 £45,000 £40,000 Non-executive directors do not participate in the Company’s incentive plans or pension schemes. Remuneration report LMS Capital plc 37 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Directors’ remuneration in 2009 The following table shows the total remuneration earned in respect of 2009. Salary/ fees £’000 75 45 45 40 188 398 198 13 1,002 Car allowance £’000 Beneﬁ ts -in-kind1 £’000 Pension £’000 – – – – 11 20 15 – 46 – – – – 7 20 10 – 37 – – – – 38 – 30 – 68 Bonus £’000 – – – – – 200 100 – 300 2009 Total £’000 75 45 45 40 244 638 353 13 1,453 2008 Total £’000 75 45 45 40 392 517 284 – 1,398 Jonathan Agnew John Barnsley Richard Christou Bernard Duroc-Danner Martin Pexton2 Robert Rayne3 Antony Sweet David Verey4 Total Notes: 1. Beneﬁ ts in kind for executive directors are insurances and subsidised gym membership. 2. The amounts for Mr Pexton are up to the date of his leaving the Company, being 30 September 2009. In addition to the above, Mr Pexton received £216,015 (being 45.25p per share over 477,382 shares) when exercising the ﬁ rst tranche of his award under the Deferred Share Bonus Plan. The payment was subject to deduction of income tax and national insurance. Mr Pexton was paid £600,000 (comprising compensation for salary, bonus and beneﬁ ts for the 12 month notice period to which he was entitled under the terms of his service contract and statutory compensation) as a termination payment and he remains interested in the carried interest plan. In addition, Mr Pexton was paid £150,000 by reference to his pro rata bonus for the period January to September 2009. 3. In addition to the above, Mr Rayne received £361,617 (being 50.50p per share over 716,073 shares) when exercising the ﬁ rst tranche of his award under the Deferred Share Bonus Plan. The payment was subject to deduction of income tax and national insurance. 4. From date of appointment, being 7 September 2009. 5. 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. Robert Rayne is Chairman of Derwent London plc and receives a fee at the rate of £150,000 per annum, which he retains. 6. Fees payable to non-executive directors in 2009 from companies to which they were nominated as directors by LMS Capital were as follows: (cid:129) John Barnsley £24,000 (cid:129) Richard Christou £3,000 7. Mr Payne was appointed as Chief Executive Ofﬁ cer on 1 March 2010. His basic salary is £300,000. In addition, he will receive a guaranteed bonus of £300,000 for the ﬁ rst 12 months of working for the Company. Thereafter, he will be entitled to discretionary bonuses and share option awards. Directors’ pension entitlements Mr Sweet receives a contribution into a personal pension arrangement of 15% of base salary. Mr Rayne does not receive a pension contribution. While a director, Mr Pexton received a contribution of 20% of base salary. 38 LMS Capital plc Remuneration report Directors’ share interests The beneﬁ cial interests of those directors who held ofﬁ ce at 31 December 2009 in the ordinary shares of the Company are set out below. Jonathan Agnew John Barnsley Richard Christou Bernard Duroc-Danner Robert Rayne Antony Sweet David Verey Notes At 31 December 2009 At 31 December 2008 291,058 317,000 169,965 550,800 8,208,356 1,702 0 291,058 317,000 169,965 550,800 7,853,626 1,702 01 1. At date of appointment, being 7 September 2009. The following directors had non-beneﬁ cial interests in the ordinary share capital of the Company: (cid:129) Robert Rayne holds a non-beneﬁ cial interest in 21,748,571 ordinary shares held in trust. Except as stated above: (cid:129) no changes in the above directors’ interests have taken place between 31 December 2009 and the date of this report; and (cid:129) the Company is not aware of any other interests of any director (or any member of his immediate family) in the ordinary share capital of the Company. Richard Christou Chairman, Remuneration Committee 26 March 2010 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Remuneration report LMS Capital plc 39 Directors’ report The directors present their report and the audited ﬁ nancial statements of the Group for the year ended 31 December 2009. Principal activities LMS Capital plc is an international investment company whose shares are traded on the Main Market of the London Stock Exchange (the Company was previously quoted on AIM but moved to the Main Market on 30 June 2009). The investment portfolio comprises investments in both the UK and the US, with a spread of early stage and second round technology investments, development capital and mature company buyouts. Business review A detailed review of the Group’s activities and performance during the year, together with details of events since the year-end 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: (cid:129) Operating review on pages 6 to 9; (cid:129) Financial review on pages 10 to 13; (cid:129) Corporate governance report on pages 24 to 29; (cid:129) Principal risks and uncertainties facing the business on pages 30 to 31; (cid:129) Directors’ declaration in relation to relevant audit information on page 42; and (cid:129) Directors’ responsibilities in relation to the ﬁ nancial statements on page 43. Employees LMS Capital plc had 15 employees at 31 December 2009 (31 December 2008: 18). Employees are kept informed about signiﬁ cant business issues and the Group’s performance by means of regular meetings, email updates and other in-house communications. Employees are supported in their ongoing professional development and attend training courses which are paid for by the Company. For personal development, the employee is provided with time off. All employees participate in the performance share plan and executive share option scheme offered by the Company. Should an 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 ﬁ nd 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. The total number of employees employed by the Group, as at 31 December 2009, was 292 (31 December 2008: 294). Charitable donations During 2009, LMS Capital plc made one charitable donation of £3,500 (2008: £5,125). The donation was made to Business in the Community, the charity which brings businesses together to help with their local communities, tackle carbon emissions and improve working conditions. Political donations The Company did not make any political donations during 2009 (2008: £nil). Creditor payment policy The Company’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 2009, trade creditors of the Company had an average of approximately 31 days outstanding (31 December 2008: 31 days). 40 LMS Capital plc Directors’ report Contractual arrangements There are no contracts or arrangements with third parties which the Board deem essential to the operation of the Company. Dividends The Board has decided not to recommend the payment of a dividend in respect of the year ended 31 December 2009 (31 December 2008: £nil). Directors The names and biographical details of the current directors of the Company are given on pages 24 to 25. In addition, further information about the Board is set out in the Corporate governance report on pages 24 to 29. During the year, Martin Pexton resigned as an executive director of the Company on 11 September and left the Company on 30 September 2009. David Verey was appointed as a non-executive director on 7 September 2009. Since the end of the year under review, Glenn Payne has been appointed as an executive director of the Company on 1 March 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 32 to 39. Qualifying third party indemnities are in force for each of the directors. Shares and voting rights The Company’s share capital is comprised of ordinary shares of 10p each and, as at 26 March 2010, 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 32 and 39. There are no restrictions on the transfer of shares. Substantial shareholdings As at 26 March 2010, the Company has been notiﬁ ed of the following persons who, directly or indirectly, are interested in 3% or more of the Company’s voting rights. Name Withers Trust Corporation Limited1 Trustees of Lord Rayne’s Will Trust1 Schroders plc2 Lady Jane Rayne1 Jupiter Asset Management Limited3 Taube Hodson Stonex Partners Limited Mineworkers Pension Scheme2 Mantra Investissement SCA British Coal Staff Superannuation Scheme2 Robert Rayne 1. There are common interests in certain of these shares Number of shares or voting rights held Percentage of issued share capital 48,382,302 43,062,624 37,157,775 27,494,405 21,814,614 13,815,461 8,830,834 8,786,373 8,410,952 8,208,356 17.75 15.80 13.63 10.09 8.00 5.07 3.24 3.22 3.09 3.01 2. 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. 3. 14,817,277 shares (5.43%) are managed on behalf of The Rayne Foundation who control the voting rights to these shares. Directors’ report LMS Capital plc 41 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Annual General Meeting The Company’s Annual General Meeting will be held at Durrants Hotel, George Street, London W1H 5BJ at 11.00 am on 13 May 2010. The notice of meeting, which includes explanatory notes, provides full details of the resolutions being proposed at the Annual General Meeting and is available to view on the Company’s website, www.lmscapital.com. Auditors and disclosure of information to auditors The directors who held ofﬁ ce at the date of approval of this report each conﬁ rm that, so far as they are aware: (cid:129) there is no relevant audit information (as deﬁ ned by the Companies Act 2006) of which the Company’s auditors are unaware, and (cid:129) they have each taken all the steps that ought to have been taken as a director of the Company to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. The auditors, KPMG Audit Plc, have indicated their willingness to continue in ofﬁ ce and resolutions will be proposed at the forthcoming Annual General Meeting to reappoint them as auditors and to authorise the directors to ﬁ x their remuneration. By order of the Board. Matthew Jones Company Secretary 26 March 2010 42 LMS Capital plc Directors’ report Statement of directors’ responsibilities The directors are responsible for preparing the Annual Report and the Group and parent company ﬁ nancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and parent company ﬁ nancial statements for each ﬁ nancial year. Under that law they are required to prepare the Group ﬁ nancial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company ﬁ nancial statements on the same basis. Under company law the directors must not approve the ﬁ nancial statements unless they are satisﬁ ed that they give a true and fair view of the state of affairs of the Group and parent company and of their proﬁ t or loss for that period. In preparing each of the Group and parent company ﬁ nancial statements, the directors are required to: (cid:129) select suitable accounting policies and then apply them consistently; (cid:129) make judgements and estimates that are reasonable and prudent; (cid:129) state whether they have been prepared in accordance with IFRSs as adopted by the EU; and (cid:129) prepare the ﬁ nancial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business. The directors are responsible for keeping adequate accounting records that are sufﬁ cient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the ﬁ nancial position of the parent company and enable them to ensure that its ﬁ nancial 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, Remuneration report and Corporate governance report that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and ﬁ nancial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of ﬁ nancial statements may differ from legislation in other jurisdictions. We conﬁ rm to the best of our knowledge that: (cid:129) the ﬁ nancial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, ﬁ nancial position and proﬁ t or loss of the Company and the undertakings included in the consolidation taken as a whole; and (cid:129) the Directors’ report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. For and on behalf of the Board O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i R A Rayne Chairman designate 26 March 2010 A C Sweet Chief Financial Ofﬁ cer l S t a t e m e n t s Statement of directors’ responsibilities LMS Capital plc 43 Independent auditors’ report to the members of LMS Capital plc We have audited the ﬁ nancial statements of LMS Capital plc for the year ended 31 December 2009 set out on pages 46 to 83. The ﬁ nancial 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 ﬁ nancial 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. Respective responsibilities of directors and auditors As explained more fully in the Statement of directors’ responsibilities set out on page 43, the directors are responsible for the preparation of the ﬁ nancial statements and for being satisﬁ ed that they give a true and fair view. Our responsibility is to audit the ﬁ nancial 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. Scope of the audit of the ﬁ nancial statements A description of the scope of an audit of ﬁ nancial statements is provided on the APB’s web-site at www.frc.org.uk/apb/scope/UKP. Opinion on ﬁ nancial statements In our opinion: (cid:129) the ﬁ nancial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2009 and of the Group’s loss for the year then ended; (cid:129) the Group ﬁ nancial statements have been properly prepared in accordance with IFRSs as adopted by the EU; (cid:129) the parent company ﬁ nancial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and (cid:129) the ﬁ nancial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group ﬁ nancial statements, Article 4 of the IAS Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: (cid:129) the part of the Remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and (cid:129) the information given in the Directors’ report for the ﬁ nancial year for which the ﬁ nancial statements are prepared is consistent with the ﬁ nancial statements; and (cid:129) information given in the Corporate governance report set out on pages 24 to 29 in this Annual Report with respect to internal control and risk management systems in relation to ﬁ nancial reporting processes and about share capital structures is consistent with the ﬁ nancial statements. 44 LMS Capital plc Independent auditors’ report Matters on which we are required to report by exception 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: (cid:129) adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or (cid:129) the parent company ﬁ nancial statements and the part of the Remuneration report to be audited are not in agreement with the accounting records and returns; or (cid:129) certain disclosures of directors’ remuneration speciﬁ ed by law are not made; or (cid:129) we have not received all the information and explanations we require for our audit; or (cid:129) a Corporate governance report has not been prepared by the Company. Under the Listing Rules we are required to review: (cid:129) the directors’ statement, set out on page 29, in relation to going concern; and (cid:129) the part of the Corporate governance report on pages 24 to 29 in this Annual Report relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code speciﬁ ed for our review. Anthony Cecil Senior Statutory Auditor For and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 8 Salisbury Square London EC4Y 8BB 26 March 2010 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Independent auditors’ report LMS Capital plc 45 Consolidated income statement Continuing operations Revenue from sales of goods and services Gains and losses on investments Interest income Investment and other income Operating expenses Loss before ﬁ nance costs Finance costs Loss before tax Taxation Loss from continuing operations Discontinued operations Proﬁ t from discontinued operations (net of taxation) Loss for the year Attributable to: Equity holders of the parent Minority interests Basic and diluted loss per ordinary share Continuing operations Basic and diluted loss per ordinary share Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 Notes 2 3 4 5 7 8 9 32,526 3,998 166 973 37,663 (51,133) (13,470) (342) (13,812) (939) (14,751) – (14,751) (15,148) 397 (14,751) 19,790 (32,137) 1,802 582 (9,963) (46,114) (56,077) (221) (56,298) (579) (56,877) 50,755 (6,122) (5,929) (193) (6,122) 10 10 (5.6)p (2.1)p (5.6)p (20.1)p The notes on pages 53 to 83 form part of these ﬁ nancial statements. 46 LMS Capital plc Consolidated income statement Statements of comprehensive income Group Loss for the year Exchange differences on translation of foreign operations Total comprehensive loss for the year Attributable to: Equity holders of the parent Minority interests Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 (14,751) (200) (14,951) (15,348) 397 (14,951) (6,122) 1,083 (5,039) (4,846) (193) (5,039) Company The company has no recognised income or expense other than its loss for the year of £15,056,000 (year ended 31 December 2008: loss of £3,027,000) which includes an impairment loss on investments in subsidiaries of £11,709,000 (year ended 31 December 2008: nil). O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s The notes on pages 53 to 83 form part of these ﬁ nancial statements. Statements of comprehensive income LMS Capital plc 47 Consolidated statement of ﬁ nancial position Non-current assets Property, plant and equipment Intangible assets Investments Other long-term assets Non-current assets Current assets Inventories Operating and other receivables Cash and cash equivalents Current assets Total assets Current liabilities Bank overdrafts Interest-bearing loans and borrowings Operating and other payables Deferred income Current tax liabilities Current liabilities Non-current liabilities Interest-bearing loans and borrowings Deferred income Deferred tax liabilities Non-current liabilities Total liabilities Net assets Equity Share capital Capital redemption reserve Merger reserve Foreign exchange translation reserve Retained earnings Equity attributable to owners of the parent Minority interests Total equity 31 December 2009 £’000 31 December 2008 £’000 Notes 11 12 13 14 15 16 16 17 18 19 17 19 20 21 21 7,057 29,525 188,133 80 224,795 812 10,768 16,950 28,530 3,216 26,798 179,546 15 209,575 319 8,309 42,615 51,243 253,325 260,818 (369) (2,394) (7,921) (8,704) (1,007) (20,395) (4,795) (2,116) (401) (7,312) – (1,656) (10,335) (3,426) (410) (15,827) (1,170) (2,697) (41) (3,908) (27,707) (19,735) 225,618 241,083 27,265 5,635 84,083 1,012 106,773 224,768 850 225,618 27,265 5,635 84,083 1,212 122,741 240,936 147 241,083 The ﬁ nancial statements on pages 46 to 83 were approved by the Board on 26 March 2010 and were signed on its behalf by: RA Rayne Chairman designate The notes on pages 53 to 83 form part of these ﬁ nancial statements. 48 LMS Capital plc Consolidated statement of ﬁ nancial position Company statement of ﬁ nancial position Non-current assets Property, plant and equipment Investments in subsidiaries Non-current assets Current assets Operating and other receivables Amounts receivable from subsidiaries Cash and cash equivalents Current assets Total assets Current liabilities Operating and other payables Amounts payable to subsidiaries Current liabilities Net assets Equity Share capital Capital redemption reserve Retained earnings Equity attributable to owners of the parent 31 December 2009 £’000 31 December 2008 £’000 Notes 11 13 15 15 16 18 18 21 21 158 281,801 281,959 743 11,607 4,277 16,627 288 293,510 293,798 297 5,548 12,018 17,863 298,586 311,661 (1,960) (68,760) (70,720) (1,556) (66,363) (67,919) 227,866 243,742 27,265 5,635 194,966 227,866 27,265 5,635 210,842 243,742 The ﬁ nancial statements on pages 46 to 83 were approved by the Board on 26 March 2010 and were signed on its behalf by: O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e RA Rayne Chairman designate i F n a n c a i l S t a t e m e n t s The notes on pages 53 to 83 form part of these ﬁ nancial statements. Company statement of ﬁ nancial position LMS Capital plc 49 Statements of changes in equity Group Balance at 1 January 2008 Total recognised income and expense Distribution to minority interests Disposal of portfolio subsidiaries Repurchase of shares Share-based payments Balance at 31 December 2008 Total recognised income and expense Acquisition of portfolio subsidiary Share-based payments Capital Share redemption reserve capital £’000 £’000 Foreign exchange translation reserve £’000 Merger reserve £’000 Retained earnings £’000 Total £’000 Minority interests £’000 Total equity £’000 28,643 4,257 84,083 (867) 133,047 249,163 5,283 254,446 – – – – – (1,378) – – 1,378 – – – – – – 1,083 (5,929) (4,846) (193) (5,039) – 996 – – – – (575) (575) 3,372 (8,638) 889 4,368 (8,638) 889 (4,368) – – – (8,638) 889 27,265 5,635 84,083 1,212 122,741 240,936 147 241,083 – – – – – – – – – (200) (15,148) (15,348) 397 (14,951) – – – (820) – (820) 306 – 306 (820) Balance at 31 December 2009 27,265 5,635 84,083 1,012 106,773 224,768 850 225,618 Capital Share redemption reserve capital £’000 £’000 Retained earnings £’000 Total equity £’000 28,643 – (1,378) – 27,265 – – 4,257 221,618 254,518 (3,027) (3,027) (8,638) (8,638) 889 889 – 1,378 – 5,635 210,842 243,742 (15,056) (15,056) (820) (820) – – 27,265 5,635 194,966 227,866 Company Balance at 1 January 2008 Total recognised income and expense Repurchase of shares Share-based payments Balance at 31 December 2008 Total recognised income and expense Share-based payments Balance at 31 December 2009 The notes on pages 53 to 83 form part of these ﬁ nancial statements. 50 LMS Capital plc Statements of changes in equity Consolidated cash ﬂ ow statement Cash ﬂ ows from operating activities Loss for the year Adjustments for: Depreciation and amortisation Goodwill impairment (Gains)/losses on investments Gain on discontinued operations, net of income tax Loss on sale of property, plant and equipment Translation differences Share-based payments Finance costs Interest income Income tax expense Change in inventories Change in operating and other receivables Change in operating and other payables Interest paid Income tax paid Net cash used in operating activities Cash ﬂ ows from investing activities Interest received Acquisition of property, plant and equipment Proceeds from disposals of property, plant and equipment Disposal of discontinued operations, net of cash disposed of Acquisition of investments Acquisition of subsidiaries, net of cash acquired Proceeds from sale of investments Net cash (used in)/from investing activities Cash ﬂ ows from ﬁ nancing activities Repurchase of own shares Drawdown of interest bearing loans Distribution to minority interests Net cash from/(used in) ﬁ nancing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of exchange rate ﬂ uctuations on cash held Cash and cash equivalents at the end of the year Cash and cash equivalents above comprise Cash and cash equivalents Bank overdrafts Cash and cash equivalents at the end of the year 16 Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 Notes (14,751) (6,122) 12 1,762 4,598 (3,998) – 56 433 (422) 342 (166) 939 (11,207) (147) 1,396 (2,219) (12,177) (342) (321) (12,840) 166 (2,749) 3 – (18,853) (6,116) 13,981 (13,568) – 554 – 554 (25,854) 42,615 (180) 16,581 16,950 (369) 16,581 1,199 11,224 32,137 (49,436) – (1,958) 889 221 (1,802) 579 (13,069) (9,878) 13,342 (3,397) (13,002) (221) (183) (13,406) 1,802 (1,685) 12 80,543 (40,019) (5,645) 11,503 46,511 (8,638) 1,855 (575) (7,358) 25,747 14,263 2,605 42,615 42,615 – 42,615 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s The notes on pages 53 to 83 form part of these ﬁ nancial statements. Consolidated cash ﬂ ow statement LMS Capital plc 51 Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 Notes (15,056) (3,027) 13 144 11,709 (422) (60) (2,541) (6,226) (446) 6 (1,121) (7,787) 60 (14) 46 – – (7,741) 12,018 4,277 4,277 – 4,277 134 – 889 (336) (1,906) (4,246) 186 (658) 19,333 14,615 336 (111) 225 (8,638) (8,638) 6,202 5,816 12,018 12,018 – 12,018 Company cash ﬂ ow statement Cash ﬂ ows from operating activities Loss for the year Adjustments for: Depreciation Impairment of investments in subsidiaries Share-based payments Interest income Income tax credit Change in operating and other receivables Change in operating and other payables Change in amounts due to subsidiaries Net cash (used in)/from operating activities Cash ﬂ ows from investing activities Interest received Acquisition of property, plant and equipment Net cash from investing activities Cash ﬂ ows from ﬁ nancing activities Repurchase of own shares Net cash used in ﬁ nancing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents above comprise Cash and cash equivalents Bank overdrafts Cash and cash equivalents at the end of the year 16 The notes on pages 53 to 83 form part of these ﬁ nancial statements. 52 LMS Capital plc Company cash ﬂ ow statement Notes to the ﬁ nancial information 1. Principal accounting policies Reporting entity LMS Capital plc (‘the Company’) is domiciled in the United Kingdom. These ﬁ nancial statements are presented in pounds sterling because that is the currency of the principal economic environment of the Company’s operations. The consolidated ﬁ nancial statements of the Company for the year ended 31 December 2009 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 ﬁ nancial 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. Basis of preparation These ﬁ nancial statements have been prepared in accordance with International Financial Reporting Standards as adopted for use in the European Union (‘Adopted IFRS’). The Group’s business activities and ﬁ nancial position are set out in the Operating and Financial review on pages 6 to 13. In addition Note 23 to the ﬁ nancial information includes a summary of the Group’s ﬁ nancial risk management processes, details of its ﬁ nancial instruments and its exposure to credit risk and liquidity risk. Taking account of the ﬁ nancial 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 ﬁ nancial statements were authorised for issue by the directors on 26 March 2010. The accounting policies set out below have been applied consistently for all periods. The ﬁ nancial statements have been prepared on the historical cost basis except for investments held at fair value through proﬁ t or loss which are measured at fair value. Changes in accounting policy and disclosure The accounting policies adopted are consistent with those of the previous ﬁ nancial year except as follows: IAS 1: Presentation of Financial Statements The revised standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners. The revised standard also introduces the statement of comprehensive income which presents all items of recognised income and expense, either in one single statement or in two linked statements. The Group has elected to present two statements. IFRS 2: Share-based Payment (revised) Amendments to IFRS 2: (cid:129) Clariﬁ ed the deﬁ nition of vesting conditions and prescribed the treatment for an award that is cancelled; and (cid:129) Clariﬁ ed the scope and accounting for Group cash-settled share-based payment transactions. The Group adopted these amendments with effect from 1 January 2009; they did not have an impact on the ﬁ nancial position or performance of the Group. Notes to the ﬁ nancial information LMS Capital plc 53 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 1. Principal accounting policies (continued) IFRS 7: Financial Instruments Disclosures – Improving Disclosures about Financial Instruments The amendments to IFRS 7 require fair value measurements to be disclosed by the source of inputs using a three-level hierarchy: (cid:129) Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (cid:129) Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); (cid:129) Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). In addition, the amendment revises the speciﬁ c minimum liquidity risk disclosures including the contractual maturity of non-derivative and derivative ﬁ nancial liabilities, and a description of how this risk is managed. IFRS 3: Business combinations (revised) The amendments to IFRS 3 include signiﬁ cant changes in the accounting for business combinations, including the valuation of non-controlling interests, accounting for transaction costs, initial recognition and subsequent remeasurement of contingent consideration and business combinations achieved in stages. The revised standard does not apply to the Group for 2009 and will be implemented with effect from 1 January 2010. There are no other standards available for early adoption which would have an impact on the ﬁ nancial position or performance of the Group. Use of estimates and judgements The preparation of ﬁ nancial 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 signiﬁ cant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most signiﬁ cant effect on the amounts recognised in the ﬁ nancial statements is included in the following notes: (cid:129) Note 1 – valuation of investments held at fair value through proﬁ t or loss; (cid:129) Note 12 – measurement of the recoverable amounts of cash-generating units containing goodwill. 54 LMS Capital plc Notes to the ﬁ nancial information 1. Principal accounting policies (continued) Basis of consolidation The ﬁ nancial statements comprise the ﬁ nancial statements of the Company and its subsidiary undertakings up to 31 December 2009. The Company’s subsidiary undertakings fall into two categories: (cid:129) Investment companies through which the Group conducts its investment activities; and (cid:129) Certain portfolio companies which form part of the Group’s investment activities but which, by virtue of the size of the Group’s shareholding or other control rights, fall within the deﬁ nition of subsidiaries under Adopted IFRS (‘portfolio subsidiaries’). The portfolio subsidiaries are included within the consolidated ﬁ nancial information although they continue to be managed by the Group as investments held for capital appreciation. Note 30 includes details of the companies concerned. Subsidiaries The ﬁ nancial statements of the subsidiaries are included in the consolidated ﬁ nancial statements from the date that control commences until the date that control ceases. The portfolio subsidiaries’ UK GAAP ﬁ nancial statements are consolidated and restatements are made to comply with Adopted IFRS. 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 identiﬁ able net assets and contingent liabilities acquired is recognised as goodwill. If the cost of acquisition is lower than the fair value of the identiﬁ able net assets and contingent liabilities acquired, the amount is credited to the income statement in the period of acquisition. The interest of minority shareholders is stated at their share of the fair value of the identiﬁ able assets, liabilities and contingent liabilities recognised, except to the extent that losses applicable to the minority exceed minority interest. All intra Group transactions and proﬁ ts or losses are eliminated on consolidation. Associates Associates are those entities in which the Group has signiﬁ cant inﬂ uence, but not control, over the ﬁ nancial 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 signiﬁ cant inﬂ uence 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 proﬁ t 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 business. Investments in subsidiaries 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 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 of 20 years. Goodwill Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash- generating units and is tested annually for impairment. Notes to the ﬁ nancial information LMS Capital plc 55 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 1. Principal accounting policies (continued) Investments The Group manages its investments with a view to proﬁ t 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 proﬁ t and loss and carried in the balance sheet at fair value. Other investments including loan investments are classiﬁ ed 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 judgments 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 Quoted investments for which an active market exists are valued at the closing bid price at the balance sheet date. Unquoted direct investments 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: (cid:129) Investments in which there has been a recent funding round involving signiﬁ cant ﬁ nancing from external investors are valued at the price of the recent funding, discounted if an external investor is motivated by strategic considerations; (cid:129) Investments in an established business are valued using revenue or earnings multiples depending on the stage of development of the business and the extent to which it is generating sustainable proﬁ ts or positive cash ﬂ ows; (cid:129) Investments in a business the value of which is derived mainly from its underlying net assets rather than its earnings are valued on the basis of net asset valuation; (cid:129) Investments in an established business which is generating sustainable proﬁ ts or positive cash ﬂ ows but for which other valuation methods are not appropriate are valued by calculating the discounted cash ﬂ ow of future cash ﬂ ows or earnings; (cid:129) Investments in early stage businesses not generating sustainable proﬁ ts or positive cash ﬂ ows and for which there has not been any recent independent funding are valued by calculating the discounted cash ﬂ ow of the investment to the investors. Funds 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 satisﬁ ed that the valuation methods used by the funds are not materially different from the Group’s valuation methods. Property, plant and equipment 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. 56 LMS Capital plc Notes to the ﬁ nancial information 1. Principal accounting policies (continued) Depreciation is charged using the straight-line method over the estimated useful lives of the assets as follows: (cid:129) Freehold property 50 years (cid:129) Leasehold improvements the term of the lease (cid:129) Plant and equipment 3–10 years (cid:129) Fixtures and ﬁ ttings 3–5 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. Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classiﬁ ed as ﬁ nance leases. Assets acquired by way of ﬁ nance 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 balance sheet. Impairment of assets Loans and receivables 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 ﬂ ows 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 ﬂ ows discounted at the original effective interest rate. Individually signiﬁ cant 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. Non-ﬁ nancial assets The carrying amounts of the Group’s non-ﬁ nancial 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 proﬁ t or loss. For an asset that does not generate largely independent cash ﬂ ows, the recoverable amount is determined for the cash-generating 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 ﬂ ows are discounted to their present value using a pre-tax discount rate that reﬂ ects current market assessments of the time value of money and the risks speciﬁ c 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. Notes to the ﬁ nancial information LMS Capital plc 57 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 1. Principal accounting policies (continued) Foreign currencies 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 balance sheet date are reported at the rates of exchange prevailing at that date and exchange differences are included in the proﬁ t 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 balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising on these items are classiﬁ ed 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 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 Operating and other receivables are carried at fair value. Bad debts are written-off when identiﬁ ed. Cash and cash equivalents Cash, for the purpose of the cash ﬂ ow 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. Financial liabilities The Group’s ﬁ nancial 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. Provisions 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 outﬂ ow of economic beneﬁ ts will be required to settle the obligation. Provisions are determined by discounting the expected future cash ﬂ ows at a pre-tax rate that reﬂ ects current market assessments of the time value of money and the risk speciﬁ c to the liability. 58 LMS Capital plc Notes to the ﬁ nancial information 1. Principal accounting policies (continued) Income Revenue from sales of goods and services Revenue from sales of goods is recognised when the signiﬁ cant 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 licence 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 balance sheet date the related income is deferred and recognised over the remaining life of the contract, generally on a straight-line basis. Revenues from specialist manufacturing are recognised on delivery of the product to the customer. Gains and losses on investments Realised and unrealised gains and losses on investments are recognised in the proﬁ t and loss account in the period in which they arise. Interest income Interest income is recognised as it accrues using the effective interest method. Investment income 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. Expenditure Employee beneﬁ ts Short-term employee beneﬁ t 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 deﬁ ned contribution pension schemes are charged as an expense as they fall due. Share-based payments 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 Finance costs comprise interest payable on borrowings calculated using the effective interest rate method. Notes to the ﬁ nancial information LMS Capital plc 59 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 1. Principal accounting policies (continued) Lease payments Payments made under operating leases are recognised in proﬁ t 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 ﬁ nance leases are apportioned between the ﬁ nance expense and the reduction of the outstanding liability. The ﬁ nance 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 conﬁ rmed. Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in proﬁ t 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 ﬁ nancial 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 proﬁ t, 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 proﬁ ts 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 beneﬁ t 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. 2. Operating segments The information below has been prepared using the deﬁ nition 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 ﬁ nancial information for the investment management business on a stand alone basis, together with the adjustments arising from the summarised results and ﬁ nancial position of the portfolio subsidiaries. Adjustments for Energy Cranes International Limited (‘Energy Cranes’) are shown separately in the prior year because of the size of this business relative to the others. The consolidation adjustments included below reﬂ ect 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 ﬁ nancial statements. 60 LMS Capital plc Notes to the ﬁ nancial information 2. Operating segments (continued) Segment proﬁ t or loss Year ended 31 December 2009 Revenues from sales of goods and services Gains and losses on investments Interest income Investment and other income Goodwill impairment loss Finance costs (Loss)/proﬁ t for the year Year ended 31 December 2008 Revenues from sales of goods and services Gains and losses on investments Interest income Investment and other income Goodwill impairment loss Finance costs Continuing operations Discontinued operations (Loss)/proﬁ t for the year Segment net assets 31 December 2009 Property, plant and equipment Intangible assets Investments Other non-current assets Non-current assets Cash and cash equivalents Other current assets Total assets Total liabilities Net assets/(liabilities) Reconciliation Investment management £’000 Portfolio subsidiaries £’000 Consolidation adjustments £’000 – (4,876) 159 494 – – (12,660) 32,526 – 7 479 – (6,341) 2,177 Group total £’000 32,526 3,998 166 973 (4,598) (342) – 8,874 – – (4,598) 5,999 (4,268) (14,751) Investment Portfolio management subsidiaries £’000 £’000 Reconciliation Discontinued operations Energy Cranes £’000 Consolidation Other adjustments Group total £’000 £’000 £’000 – (36,748) 1,754 582 – – 19,790 – 48 – – (4,267) – – – – – – – – – – – – – 4,611 – – 19,790 (32,137) 1,802 582 (11,224) (11,224) 4,046 (221) (40,796) – (13,514) – – 57,556 – (6,801) (2,567) – (56,877) 50,755 (40,796) (13,514) 57,556 (6,801) (2,567) (6,122) Reconciliation Investment management £’000 Portfolio subsidiaries £’000 Consolidation adjustments £’000 158 – 215,632 – 215,790 14,416 462 230,668 (2,802) 227,866 6,899 11,817 1 80 18,797 2,534 11,182 32,513 (79,519) (47,006) Group total £’000 7,057 29,525 188,133 80 224,795 16,950 11,580 – 17,708 (27,500) – (9,792) – (64) (9,856) 253,325 54,614 44,758 (27,707) 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 minority interests. Notes to the ﬁ nancial information LMS Capital plc 61 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 2. Operating segments (continued) 31 December 2008 Property, plant and equipment Intangible assets Investments Other non-current assets Non-current assets Cash and cash equivalents Other current assets Total assets Total liabilities Net assets/(liabilities) Reconciliation Investment management £’000 Portfolio subsidiaries £’000 Consolidation adjustments £’000 288 – 202,049 – 202,337 41,293 309 243,939 (2,283) 241,656 2,928 3,196 1 15 6,140 1,322 8,319 15,781 (70,604) (54,823) – 23,602 (22,504) – 1,098 – – 1,098 53,152 54,250 Group total £’000 3,216 26,798 179,546 15 209,575 42,615 8,628 260,818 (19,735) 241,083 The net asset value of the investment management business at 31 December 2008 includes £241,509,000 attributable to the equity holders of the parent and £147,000 attributable to minority interests. The carrying amount and gains and losses of the investments of the investment management business can be further analysed as follows: Asset type Funds Quoted Unquoted Funds Quoted Unquoted Revenues 31 December 2009 31 December 2008 UK £’000 30,259 17,274 39,849 87,382 US £’000 73,194 34,601 20,455 128,250 Total £’000 103,453 51,875 60,304 215,632 UK £’000 29,911 19,409 33,686 83,006 US £’000 72,390 27,097 19,556 119,043 Total £’000 102,301 46,506 53,242 202,049 Year ended 31 December 2009 Year ended 31 December 2008 Realised gains/(losses) £’000 Unrealised gains/(losses) £’000 (755) 2,503 (1,867) (119) (6,007) 9,741 (8,491) (4,757) Total £’000 (6,762) 12,244 (10,358) (4,876) Realised gains/(losses) £’000 Unrealised gains/(losses) £’000 2,114 574 14,620 17,308 4,572 (31,122) (27,506) (54,056) Total £’000 6,686 (30,548) (12,886) (36,748) The Group’s revenues from external customers comprise: Continuing operations IT services and software Specialist manufacturing Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 24,885 7,641 32,526 12,431 7,359 19,790 62 LMS Capital plc Notes to the ﬁ nancial information 2. Operating segments (continued) Geographical information Continuing operations United Kingdom United States of America Other countries Year ended 31 December 2009 £’000 Revenues Year ended 31 December 2008 £’000 Non-current assets 31 December 2009 £’000 31 December 2008 £’000 17,640 8,925 5,961 32,526 7,066 6,521 6,203 19,790 88,298 136,497 – 224,795 99,378 110,197 – 209,575 Geographical information on revenue is based on the location of customers and on assets is based on the location of the assets. Major customers Revenues from the ten largest customers represent approximately 39% of the Group’s total revenues (year ended 31 December 2008: 33%). 3. Interest income Interest income comprises interest receivable on bank deposits. 4. Investment and other income Investment and other income comprise the following: Dividends from quoted securities Investment management fees Income from investments Other Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 133 360 314 166 973 159 137 286 – 582 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial information LMS Capital plc 63 5. Operating expenses Cost of sales Administrative expenses Operating expenses include the following: Depreciation Goodwill impairment loss Refund of value added tax Auditors’ remuneration: Fees to group auditors: – parent company – subsidiary companies Non-audit related services: – taxation advisory services – other Fees to non-group auditors 6. Personnel expenses Wages and salaries Compulsory social security contributions Contributions to deﬁ ned contribution plans Share-based payment transactions Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 13,270 37,863 51,133 8,451 37,663 46,114 Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 1,649 4,598 – 1,142 11,224 (1,078) 67 133 19 80 196 65 141 19 – 84 Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 17,854 1,457 544 (178) 19,677 16,172 1,634 552 889 19,247 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 2009 (year ended 31 December 2008: nil). If the Group’s investment portfolio were realised at its carrying amount at 31 December 2009, carried interest of £nil would become payable (year ended 31 December 2008: £0.1 million). 7. Finance costs Interest on bank loans and overdrafts Interest on other loans Finance lease charges Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 110 219 13 342 76 145 – 221 64 LMS Capital plc Notes to the ﬁ nancial information 8. Taxation Current tax expense Current period Adjustment for prior periods Total current tax Deferred tax expense Origination and reversal of temporary differences Total tax expense Reconciliation of effective tax rate Loss before tax 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 Total tax expense 9. Discontinued operations Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 471 224 695 579 – 579 Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 244 244 939 – – 579 Year ended 31 December 2009 £’000 Year ended 31 December 2008 £’000 (13,812) (3,867) (123) (1,901) 3,717 (234) 3,123 224 939 (56,298) (16,045) (619) 14,120 4,946 (4,533) 2,710 – 579 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e There were no disposals constituting discontinued operations in the year ended 31 December 2009. In March 2008 the Group sold its entire interest in Energy Cranes International Limited and in June 2008 the Group sold its entire interest in AssetHouse Technology Limited. Results of discontinued operations Revenues Expenses Results from operating activities Taxation Results from operating activities, net of tax Gain on sale of discontinued operations, net Tax on gain on sale of discontinued operations Proﬁ t for the year Basic earnings/(loss) per ordinary share Diluted earnings/(loss) per ordinary share Year ended 31 December 2008 £’000 33,142 (31,240) 1,902 (583) 1,319 49,436 – 50,755 18.0p 17.7p Notes to the ﬁ nancial information LMS Capital plc 65 i F n a n c a i l S t a t e m e n t s 9. Discontinued operations (continued) Cash ﬂ ows from/(used in) discontinued operations Net cash used in operating activities Net cash used in investing activities Net cash from ﬁ nancing activities Net cash used in discontinued operations Effect of disposal on the ﬁ nancial position of the Group Property, plant and equipment Intangible assets Investments Other non-current assets Inventories Trade and other receivables Cash and cash equivalents Bank overdrafts Interest bearing loans and borrowings Trade and other payables Provisions Net assets Consideration received, satisﬁ ed in cash Cash disposed of Net cash inﬂ ow 10. Basic and diluted loss per ordinary share Year ended 31 December 2008 £’000 (8,977) (849) 7,375 (2,451) Year ended 31 December 2008 £’000 12,216 39,587 527 – 15,326 25,763 3,043 – (43,447) (10,813) (8,052) 34,150 83,586 (3,043) 80,543 The calculation of basic loss per ordinary share is based on the loss of £15,148,000 (year ended 31 December 2008: loss of £5,929,000), being the loss for the year attributable to the parent, divided by the weighted average number of ordinary shares in issue during the year 272,640,952 (year ended 31 December 2008: 281,758,491). The calculation of loss per ordinary share for continuing operations is based on the loss of £15,148,000 (year ended 31 December 2008: loss of £56,684,000), being the loss for the year attributable to the parent, divided by the weighted average number of ordinary shares in issue during the year of 272,640,952 (year ended 31 December 2008: 281,758,491). There was no dilution effect on the loss for the year or the loss from continuing operations in either year. 66 LMS Capital plc Notes to the ﬁ nancial information 11. Property, plant and equipment Group Cost Balance at 1 January 2008 Additions Acquisitions through business combinations Disposals Disposals of subsidiaries Effect of movement in exchange rates Balance at 31 December 2008 Balance at 1 January 2009 Additions Acquisitions through business combinations Disposals Effect of movement in exchange rates Balance at 31 December 2009 Depreciation and impairment losses Balance at 1 January 2008 Depreciation charge for the year Disposals Disposals of subsidiaries Effect of movement in exchange rates Balance at 31 December 2008 Balance at 1 January 2009 Depreciation charge for the year Disposals Effect of movement in exchange rates Balance at 31 December 2009 Carrying amounts At 31 December 2008 At 31 December 2009 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e Land and buildings £’000 Plant and equipment £’000 Fixtures and ﬁ ttings £’000 3,547 87 – – (2,288) 439 1,785 1,785 2 – – (173) 1,614 830 71 – (210) 231 922 922 91 – (92) 921 863 693 16,841 1,538 180 (75) (14,538) 361 4,307 4,307 2,309 2,888 (118) (128) 9,258 6,028 947 (63) (4,855) 136 2,193 2,193 1,340 (61) (40) 3,432 2,114 5,826 866 60 31 – (549) 9 417 417 438 82 (7) (4) 926 141 124 – (94) 7 178 178 218 (5) (3) 388 239 538 Total £’000 21,254 1,685 211 (75) (17,375) 809 6,509 6,509 2,749 2,970 (125) (305) 11,798 6,999 1,142 (63) (5,159) 374 3,293 3,293 1,649 (66) (135) 4,741 3,216 7,057 At 31 December 2009 land and buildings with a carrying amount of £693,000 (31 December 2008: £863,000) are subject to a registered debenture to secure bank loans. At 31 December 2009 the carrying amount of plant and equipment includes £278,000 held under ﬁ nance leases (31 December 2008: £nil). i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial information LMS Capital plc 67 11. Property, plant and equipment (continued) Company Cost Balance at 1 January 2008 Additions Balance at 31 December 2008 Balance at 1 January 2009 Additions Balance at 31 December 2009 Depreciation and impairment losses Balance at 1 January 2008 Depreciation charge for the year Balance at 31 December 2008 Balance at 1 January 2009 Depreciation charge for the year Balance at 31 December 2009 Carrying amounts At 31 December 2008 At 31 December 2009 Plant and equipment £’000 Fixtures and ﬁ ttings £’000 51 111 162 162 14 176 11 82 93 93 54 147 69 29 295 – 295 295 – 295 24 52 76 76 90 166 219 129 Total £’000 346 111 457 457 14 471 35 134 169 169 144 313 288 158 68 LMS Capital plc Notes to the ﬁ nancial information 12. Intangible assets Group Cost Balance at 1 January 2008 Acquisitions through business combinations Disposals of businesses Effect of movement in exchange rates Balance at 31 December 2008 Balance at 1 January 2009 Acquisitions through business combinations Adjustment to goodwill at acquisition Balance at 31 December 2009 Impairment losses Balance at 1 January 2008 Impairment loss Amortisation Balance at 31 December 2008 Balance at 1 January 2009 Impairment loss Amortisation Balance at 31 December 2009 Carrying amounts At 31 December 2008 At 31 December 2009 Software licence £’000 – 2,088 – – 2,088 2,088 – – 2,088 – – 57 57 57 – 113 170 2,031 1,918 Goodwill £’000 75,922 4,320 (39,586) – 40,656 40,656 8,733 (1,295) 48,094 4,665 11,224 – 15,889 15,889 4,598 – 20,487 24,767 27,607 Total intangible assets £’000 75,922 6,408 (39,586) – 42,744 42,744 8,733 (1,295) 50,182 4,665 11,224 57 15,946 15,946 4,598 113 20,657 26,798 29,525 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e The adjustment to goodwill at acquisition 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 2009 £’000 Goodwill impairment recognised in the year ended 31 December 2008 £’000 Offshore Tool and Energy Corporation Entuity Limited Wesupply Limited CopperEye Limited Kizoom Limited Citizen Limited Updata Infrastructure UK Ltd 64 – – 1,585 1,806 1,143 – 4,598 610 2,846 – – 7,768 – – 11,224 27,607 24,767 i F n a n c a i l S t a t e m e n t s Carrying amount 2009 £’000 1,508 4,981 5,120 1,426 5,121 718 8,733 Carrying amount 2008 £’000 1,572 4,981 5,120 3,011 6,927 3,156 – Notes to the ﬁ nancial information LMS Capital plc 69 12. Intangible assets (continued) The impairment loss in each year reﬂ ects 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. 13. Investments Group The movements in investments were as follows: Carrying value Balance at 1 January 2008 Purchases Disposals Distributions from partnerships Fair value adjustments Transfers to portfolio subsidiaries Balance at 31 December 2008 Balance at 1 January 2009 Purchases Disposals Distributions from partnerships Fair value adjustments Balance at 31 December 2009 Unquoted securities Quoted securities £’000 Equity £’000 Loans £’000 Funds £’000 Total £’000 63,824 17,525 (3,721) – (31,122) – 46,506 46,506 1 (6,136) – 11,505 51,876 20,225 1,336 – – 2,142 – 23,703 23,703 1,561 – – 1,014 26,278 13,089 5,383 (352) – (4,084) (7,000) 86,374 15,775 – (6,313) 6,465 – 183,512 40,019 (4,073) (6,313) (26,599) (7,000) 7,036 102,301 179,546 7,036 2,500 (500) – (2,511) 102,301 14,791 (968) (5,366) (7,304) 179,546 18,853 (7,604) (5,366) 2,704 6,525 103,454 188,133 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 deﬁ ned 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). Level 1 Level 2 Level 3 2009 £’000 51,876 – 136,257 188,133 2008 £’000 46,506 – 133,040 179,546 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: Opening balance Total (gain)/loss in proﬁ t or loss Purchases Transfers to portfolio subsidiaries Realisations 70 LMS Capital plc Notes to the ﬁ nancial information 2009 £’000 133,040 (8,801) 18,852 – (6,834) 2008 £’000 119,688 4,523 22,494 (7,000) (6,665) 136,257 133,040 13. Investments (continued) Company The movement in investments in subsidiaries was as follows: Opening balance Impairment loss 2009 £’000 293,510 (11,709) 281,801 2008 £’000 293,510 – 293,510 Details of subsidiaries are set out in Note 30. The impairment loss for the year reﬂ ects 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. 14. Inventories Work in progress Finished goods 2009 £’000 191 621 812 Group 2008 £’000 71 248 319 Changes in ﬁ nished goods and work in progress recognised as cost of sales amounted to a credit of £493,000 (year ended 31 December 2008: £54,000). 15. Operating and other receivables Trade receivables Other receivables and prepayments Amounts receivable from subsidiaries 16. Cash and cash equivalents Bank balances Short-term deposits Cash and cash equivalents Bank overdrafts 2009 £’000 8,518 2,250 – 10,768 2009 £’000 2,793 14,157 16,950 (369) 16,581 Group 2008 £’000 6,497 1,812 – 8,309 Group 2008 £’000 1,438 41,177 42,615 – 42,615 2009 £’000 – 743 11,607 12,350 2009 £’000 410 3,867 4,277 – 4,277 Company 2008 £’000 – 297 5,548 5,845 Company 2008 £’000 147 11,871 12,018 – 12,018 Notes to the ﬁ nancial information LMS Capital plc 71 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 17. Interest bearing loans and borrowings Non-current liabilities Secured bank loans Other unsecured loans Finance lease liabilities Current liabilities Secured bank loans Other unsecured loans Finance lease liabilities Terms and conditions of outstanding loans are as follows: Secured bank loan Secured bank loan Secured bank loan Secured bank loan Other secured loans Unsecured loan Unsecured loan Unsecured loan Finance lease liabilities Finance lease liabilities Currency £ £ USD USD USD £ USD USD £ USD Nominal interest rate LIBOR plus 2.50% 7.5% 7.51% 8.25% Various 21% 4.95% 12% 25% 6.45% Finance lease liabilities are payable as follows: Future minimum lease payments £’000 80 327 – 407 Interest £’000 17 57 – 74 2009 Present value of minimum lease payments £’000 63 270 – 333 Less than one year Between one and ﬁ ve years More than ﬁ ve years Maturity 2010 2014 2020 2010 2010 2014 2010 2010 2014 2014 Future minimum lease payments £’000 – – – – 2009 £’000 3,255 1,270 270 4,795 765 1,566 63 2,394 2009 £’000 Carrying amount 91 2,540 764 612 13 1,270 100 1,466 278 55 7,189 Interest £’000 – – – – Group 2008 £’000 1,170 – – 1,170 254 1,402 – 1,656 Group 2008 £’000 Carrying amount – – 897 – 527 – _ 1,402 – – 2,826 2008 Present value of minimum lease payments £’000 – – – – 72 LMS Capital plc Notes to the ﬁ nancial information 18. Operating and other payables Trade payables Non-trade payables and accrued expenses Amounts payable to subsidiaries 19. Deferred income 2009 £’000 2,739 5,182 – 7,921 Group 2008 £’000 2,271 8,064 – 10,335 2009 £’000 85 1,875 68,760 70,720 Company 2008 £’000 62 1,494 66,363 67,919 Deferred income comprises amounts invoiced to customers in respect of goods or services which had not been delivered at the balance sheet date. It arises principally on maintenance contracts for hardware and software which typically cover a period of one year or more. 20. Deferred tax liabilities Recognised deferred tax liabilities Deferred tax liabilities were attributable to the following: Property, plant and equipment Financial assets at fair value through proﬁ t or loss Unrecognised deferred tax liabilities The Group has no unrecognised deferred tax liabilities. Deferred tax assets 2009 £’000 339 62 401 Group 2008 £’000 – 41 41 The Group’s investment management business has capital losses for tax purposes of £10.9 million at 31 December 2009 (31 December 2008: £4.7 million) available to offset future proﬁ ts chargeable to tax. In addition, if the Group were to dispose of its investment portfolio at book value at 31 December 2009 it would realise further net capital losses for tax purposes of £55.7 million (31 December 2008: £65.5 million). Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable proﬁ t will be available against which the Group can utilise the beneﬁ ts therefrom. The Group’s portfolio subsidiaries have tax losses of £118.9 million at 31 December 2009 (31 December 2008: £118.4 million) available to offset future proﬁ ts chargeable to tax. O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e 21. Capital and reserves Share capital Balance at beginning of the year Repurchase of shares Balance at end of the year i F n a n c a i Ordinary shares 2009 Number 2009 £’000 2008 Number 272,640,952 – 27,265 286,429,228 (13,788,276) – 272,640,952 27,265 272,640,952 2008 £’000 28,643 (1,378) 27,265 l S t a t e m e n t s 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. Notes to the ﬁ nancial information LMS Capital plc 73 21. Capital and reserves (continued) Capital redemption reserve The capital redemption reserve comprises the nominal value of those shares purchased by the Company out of its own proﬁ ts and cancelled. Treasury shares The Company has no shares held in treasury. Merger reserve The Company commenced operations on 9 June 2006 when it received the demerged investment division of London Merchant Securities. Consolidated ﬁ nancial statements were prepared for the nine months ended 31 December 2006 to reﬂ ect the two step demerger process: this comprised an initial common control transaction followed by a subsequent demerger of the Group. The consolidated ﬁ nancial 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. Foreign exchange translation reserve The foreign exchange translation reserve comprises all foreign currency movements arising from the translation of the ﬁ nancial statements of foreign operations. 22. Share-based payments Company Executive share option plan 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 ﬁ nancial 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: Outstanding at 1 January Granted during the year Exercised during the year Lapsed during the year Outstanding at 31 December 2009 Number 2008 Number 4,045,807 – – (2,185,812) 1,962,067 2,493,641 – (409,901) 1,859,995 4,045,807 Options over 739,860 (2008: 409,901) ordinary shares lapsed as a result of employees leaving the Company and options over 1,445,952 lapsed as a result of performance criteria not being met. The weighted average exercise price of options outstanding at 31 December 2009 was 74p (31 December 2008: 74p). 74 LMS Capital plc Notes to the ﬁ nancial information 22. Share-based payments (continued) Deferred share bonus plan 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 ﬁ rst release may take place no earlier than the ﬁ rst 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: Outstanding at 1 January Awards during the year Exercised during the year Lapsed during the year Outstanding at 31 December 2009 Number 2008 Number 3,102,983 – (1,193,455) (1,193,455) 4,296,438 – – (1,193,455) 716,073 3,102,983 Under this plan, 1,193,455 shares became eligible for release on 31 March 2008 and were released during 2009; the Company elected to settle the release for a cash payment of £642,000. The weighted average exercise price of the awards outstanding was nil (31 December 2008: nil). No shares became eligible for release during 2009 since performance criteria were not met and as a result 1,193,455 shares lapsed as of 31 December 2008. Of the 1,193,455 shares eligible for release based on 2009 performance, 477,382 lapsed when the beneﬁ ciary left the Company during 2009 and 716,073 lapsed since performance criteria were not met. At 31 December 2009, 716,073 shares remain eligible for release on 30 March 2011. The weighted average exercise price at 31 December 2009 was nil (31 December 2008: nil). Performance share plan 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 following performance criteria. In respect of one half of the award, over the three year measurement period, Total Shareholder Return (‘TSR’) 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. In respect of the other half of the award, 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. On 6 April 2009 the Company granted awards under this plan for the ﬁ rst time in respect of 2,455,888 ordinary shares to eligible employees; during the year awards covering 450,687 ordinary shares lapsed as a result of employees leaving the Company. The weighted average exercise price of the awards outstanding was nil (31 December 2008: nil). O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial information LMS Capital plc 75 22. Share-based payments (continued) Recognition and measurement 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. Performance share awards granted during 2009 were valued using the following inputs: Performance share plan Fair value at grant date Share price Exercise price Expected volatility Option life Expected dividends Risk-free interest rate The (credit)/expense recognised in the income statement for share-based payments is as follows: Executive share option plan Deferred share-based plan – Equity-settled – Cash settled Performance share plan 2009 £’000 (186) (844) 642 210 (178) £0.42 £0.43 – 20% 10 years – 3.0% 2008 £’000 318 571 – – 889 At 31 December 2009, non-trade payables and accrued expenses include £398,000 (2008: £19,000) in respect of amounts payable under the Company’s long-term incentive plans. 23. Financial risk management The Group has exposure to the following risks from its use of ﬁ nancial instruments: (cid:129) Credit risk (cid:129) Liquidity risk (cid:129) Market risk. 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 Credit risk is the risk of the ﬁ nancial loss to the Group if a customer or counterparty to a ﬁ nancial instrument fails to meet its contractual obligations and arises principally from the Group’s receivables from customers and its cash and cash equivalents. Operating and other receivables Cash and cash equivalents 2009 £’000 10,768 16,950 27,718 2008 £’000 8,309 42,615 50,924 76 LMS Capital plc Notes to the ﬁ nancial information 23. Financial risk management (continued) Operating and other receivables The Group’s exposure to credit risk is inﬂ uenced 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 speciﬁ c loss component that relates to individually signiﬁ cant 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 identiﬁ ed. The maximum exposure to credit risk for operating and other receivables by geographic region was: UK United States Other regions The aging of trade receivables was: Not past due Past due 0–30 days Past due 31–120 days More than 120 days 2009 £’000 7,954 1,853 961 10,768 Gross £’000 4,052 1,356 851 801 7,060 2008 £’000 3,883 2,842 1,584 8,309 2008 Impairment £’000 – – 170 393 563 Gross £’000 4,270 2,969 462 1,008 8,709 2009 Impairment £’000 – – – 191 191 Cash and cash equivalents 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 Liquidity risk is the risk that the Group will not be able to meet its ﬁ nancial obligations as they fall due. Its ﬁ nancing 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. Interest would be 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 Company did not use this facility during 2009. O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial information LMS Capital plc 77 23. Financial risk management (continued) The following are the contractual maturities of ﬁ nancial liabilities: 31 December 2009 Bank overdrafts Interest bearing loans and borrowings Finance lease liabilities Operating and other payables 31 December 2008 Bank overdrafts Interest bearing loans and borrowings Finance lease liabilities Operating and other payables Market risk Carrying Contractual amount Cash ﬂ ows £’000 £’000 6 months or less £’000 369 369 6,856 10,011 407 7,921 333 7,921 369 376 38 7,921 6–12 months £’000 – 2,659 42 – 15,479 18,708 8,704 2,701 Carrying Contractual amount Cash ﬂ ows £’000 £’000 6 months or less £’000 – 2,826 – – 140 – 10,335 10,335 10,335 – 3,852 – 6–12 months £’000 – 2,032 – – 13,161 14,187 10,475 2,032 1–2 years £’000 – 515 83 – 598 1–2 years £’000 – 109 – – 109 2–5 More than 5 years £’000 years £’000 – 5,410 244 – 5,654 – 1,051 – – 1,051 2–5 More than 5 years £’000 years £’000 – 270 – – 270 – 1,301 – – 1,301 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 ﬁ nancial instruments. The Group aims to manage this risk within acceptable parameters while optimising the return. Currency risk 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 signiﬁ cant currency within the investment portfolio is the US dollar; approximately 60% 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 ﬁ nancial 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 2009 31 December 2008 Investments Operating and other receivables Cash and cash equivalents Bank overdrafts Interest bearing loans and borrowings Finance lease liabilities Operating and other payables GBP £’000 USD £’000 59,881 128,252 7,568 15,342 (369) (3,901) (278) (6,504) 3,092 1,528 – (2,955) (55) (1,380) Gross balance sheet exposure 71,739 128,482 Forward exchange contracts – – Net exposure 71,739 128,482 Other £’000 – 108 80 – – – (37) 151 – 151 GBP £’000 USD £’000 60,502 119,044 4,626 40,621 – – – (7,118) 3,476 1,822 – (2,826) – (3,209) 98,631 118,307 – – 98,631 118,307 Other £’000 – 207 172 – – – (8) 371 – 371 78 LMS Capital plc Notes to the ﬁ nancial information 23. Financial risk management (continued) At 31 December 2009 the rate of exchange was USD1.62 = £1.00 (31 December 2008: USD1.46 = £1.00). The average rate for the year ended 31 December 2009 was USD1.57 = £1.00 (year ended 31 December 2008: USD1.84 = £1.00). A 10% strengthening of the US dollar against the pound sterling would have increased equity by £10.9 million at 31 December 2009 (31 December 2008: increase of £12.2 million) and decreased the loss from continuing operations for the year ended 31 December 2009 by £13.9 million (year ended 31 December 2008: decreased by £13.5 million). This assumes that all other variables, in particular interest rates, remain constant. Interest rate risk At the reporting date the interest rate proﬁ le of the Group’s interest bearing ﬁ nancial instruments was: Fixed rate instruments Financial assets Financial liabilities Variable rate instruments Financial assets Financial liabilities 2009 £’000 – 7,558 7,558 16,950 – 16,950 2008 £’000 – 2,826 2,826 42,615 – 42,615 An increase of 100 basis points in interest rates at the reporting date would have increased equity by £246,000 (31 December 2008: increase of £238,000) and decreased the loss from continuing activities by £246,000 (year ended 31 December 2008: decrease of £238,000). Fair values The carrying amounts of ﬁ nancial assets (excluding investments) and liabilities, shown in the balance sheet, approximate their fair values. The fair values of ﬁ nancial liabilities are based on the present value of future principal and interest cash ﬂ ows, discounted at the market rate of interest at the reporting date. Other market price risk 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 signiﬁ cant income. The Group’s management of risk in its investment portfolio focuses on diversiﬁ cation in terms of geography, sector, 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 loss for the year ended 31 December 2009 would have increased by £18.8 million (year ended 31 December 2008: the loss would have increased by £17.9 million). An increase in the valuation of investments by 10% at the balance sheet date would have an equal and opposite effect on the proﬁ t or loss for the year. Notes to the ﬁ nancial information LMS Capital plc 79 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 23. Financial risk management (continued) Capital management The Group’s total capital at 31 December 2009 was £225.6 million (31 December 2008: £241.1 million) comprising equity share capital and reserves. The Group had borrowings at 31 December of £7.6 million (2008: £2.8 million). The Board monitors and reviews the broad structure of the Group’s capital on an ongoing basis. This review includes: (cid:129) The planned level of gearing, which takes into accounts planned investment activity; (cid:129) The possible buy-back of equity shares for holding in treasury or cancellation, which takes account of the discount of the share price to net asset value per share; (cid:129) The annual dividend policy. The Group’s objectives, policies and processes for managing capital are unchanged from the preceding accounting year. 24. Acquisitions of subsidiaries The following acquisition was made during the year ended 31 December 2009: Updata Infrastructure (UK) Limited 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: Property, plant and equipment Inventories Operating and other receivables Cash and cash equivalents Loans and borrowings Operating and other payables Net identiﬁ able liabilities Intangible assets (goodwill) Net assets acquired Minority interest Consideration paid Pre-acquisition carrying amounts £’000 2,970 346 3,855 83 (3,809) (5,673) (2,228) 8,733 6,505 (306) 6,199 No adjustments were made to pre-acquisition carrying amounts. The consideration was paid in cash on completion. The goodwill is attributable to the expected proﬁ tability of the acquired business. Updata designs, builds and manages carrier-class networks. In the six months to 31 December 2009 the company contributed a proﬁ t of £1,400,000 to the consolidated results of the Group. If the acquisition had occurred on 1 January 2009, management estimates that consolidated revenue would have been £38,874,000 and the consolidated loss for the period would have been £12,885,000. 80 LMS Capital plc Notes to the ﬁ nancial information 24. Acquisitions of subsidiaries (continued) The following acquisitions were made during the year ended 31 December 2008: Citizen Limited In September 2008 the above company underwent a capital reconstruction which took the Group’s voting interest from less than 50% to 84% and the company has been included in the consolidated ﬁ nancial statements of the Group with effect from this restructuring. The acquisition had the following effect on the Group’s assets and liabilities on the acquisition date: Property, plant and equipment Intangible assets Inventories Operating and other receivables Cash and cash equivalents Loans and borrowings Operating and other payables Net identiﬁ able liabilities Group share of net identiﬁ able liabilities Goodwill Group equity carrying value on acquisition date Pre-acquisition carrying amounts £’000 186 2,088 29 480 (83) (4,050) (1,805) (3,155) (3,155) 3,155 – No adjustments were made to pre-acquisition carrying amounts. Citizen (through its wholly-owned subsidiary Vio Worldwide Limited) provides supply chain software solutions for the advertising, publishing and graphic arts industries. In the four months to 31 December 2008 the company contributed a loss of £679,000 to the consolidated results of the Group. Kizoom Limited In May 2008 Cityspace acquired 100% of the issued share capital of Kizoom Limited. The acquisition had the following effect on the Group’s assets and liabilities on the acquisition date: Property, plant and equipment Operating and other receivables Cash and cash equivalents Operating and other payables Net identiﬁ able assets Goodwill on acquisition Consideration paid Pre-acquisition carrying amounts £’000 25 635 459 (313) 806 1,165 1,971 No adjustments were made to pre-acquisition carrying amounts. The consideration was paid in cash on completion. Kizoom provides solutions to deliver real-time transport information to the internet and mobile devices. In the eight months to 31 December 2008 the company contributed a loss of £261,117 to the consolidated results of the Group. Notes to the ﬁ nancial information LMS Capital plc 81 O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 25. Operating leases Leases as lessee Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and ﬁ ve years More than ﬁ ve years 26. Capital commitments Outstanding commitments to funds Group £’000 640 1,147 – 1,787 2009 Company £’000 400 600 – 1,000 Group £’000 716 1,160 – 1,876 2009 £’000 58,709 58,709 2008 Company £’000 400 1,000 – 1,400 2008 £’000 71,104 71,104 The outstanding commitments to funds comprise unpaid calls in respect of funds where a member of the Group is a limited partner. 27. Contingent liabilities The Company has guaranteed the indebtedness of certain of the Group’s investments; the amount outstanding under these arrangements at 31 December 2009 was £1.8 million (31 December 2008: £2.3 million). 28. Related party transactions 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 ofﬁ ce and registered ofﬁ ce. 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 ofﬁ ce and related costs of Mr Robert Rayne. Mr Rayne is Chairman of Derwent London plc. Amounts outstanding under this arrangement at 31 December 2009 were £14,000 (31 December 2008: £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 ofﬁ ce 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 2009 were £47,000 (31 December 2008: £12,000). Compensation arrangements for key management are set out in the Remuneration report on pages 32 to 39. 29. Subsequent events There were no events subsequent to the balance sheet date that would materially affect the interpretation of these ﬁ nancial statements. 82 LMS Capital plc Notes to the ﬁ nancial information 30. Subsidiaries 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 Oilﬁ eld Services Limited LMS Capital (Bermuda) Limited LMS Capital (ECI) Limited LMS Capital (General Partner) Limited LMS Capital (GW) Limited LMS Capital Group Limited LMS Capital Holdings Limited Lioness Property Investments Limited Lion Property Investments Limited Lion Investments Limited Lion Cub Investments Limited Lion Cub Property Investments Limited Tiger Investments Limited LMS Tiger Investments Limited LMS Tiger Investments (II) Limited Westpool Investment Trust plc Bermuda Bermuda England and Wales Bermuda Bermuda England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Dormant Investment holding Investment holding Investment holding Investment holding 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 deﬁ nition of subsidiaries under IFRS. These portfolio subsidiaries are included within the consolidated ﬁ nancial information although they continue to be managed by the Group as investments held for capital appreciation. Name Citizen Limited Country of incorporation Holding % Activity England and Wales CopperEye Limited England and Wales Entuity Limited Kizoom Limited England and Wales England and Wales Offshore Tool and Energy Corporation United States of America 100 Updata Infrastructure Holdings Limited England and Wales England and Wales Wesupply Limited 53.3 98 84 76 68 94 Software solutions for the advertising, publishing and graphic arts industries Specialised search solutions for business transaction data Network management software Urban digital networks and intelligent transport systems Specialist engineering design and fabrication Carrier-class networks Supply chain management software O v e r v e w i i B u s n e s s r e v e w i G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial information LMS Capital plc 83 Shareholder information Registered ofﬁ ce Company website Carlton House 33 Robert Adam Street London W1U 3HR Tel: +44 (0)20 7935 3555 Email: webenquiries@lmscapital.com Website: www.lmscapital.com Company registered in England Number 5746555 Company Secretary Matthew Jones FCIS Registrars Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersﬁ eld West Yorkshire HD8 0LA Tel: (UK) 0871 664 0300 (Outside UK) +44 (0)20 8639 3399 Email: ssd@capitaregistrars.com Shareholder enquiries All administrative enquiries relating to shareholders, such as notiﬁ cation of change of address or the loss of a share certiﬁ cate, should be made to the Company’s registrars, Capita Registrars, whose address is given above. Electronic shareholder communications The Company has opted to send shareholders communications via the Company website rather than via the post. This is more environmentally friendly and cost efﬁ cient. If you would like to receive paper copies of these communications, please write to the Company’s registrars, Capita Registrars, whose address is given above. Share dealing service 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/ 84 LMS Capital plc Shareholder information 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 notiﬁ ed by email when press releases are announced. For further information, please visit www.lmscapital.com Brokers J.P. Morgan plc 20 Moorgate London EC2R 6DA Winterﬂ ood Securities Limited The Atrium Building Cannon Bridge 25 Dowgate Hill London EC4R 2GA Auditors KPMG Audit Plc 8 Salisbury Square London EC4Y 8BB Bankers Barclays Bank plc 1 Churchill Place London E14 5HP The Royal Bank of Scotland plc 36 St. Andrew Square Edinburgh EH2 2YB Solicitors Clifford Chance LLP 10 Upper Bank Street London E14 5JJ Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA Financial calendar 2010 Annual General Meeting 13 May Interim Management Statements May and November Half-year results August* Year-end 31 December * This date is provisional and may change. Designed and produced by Radley Yeldar www.ry.com Carlton House, 33 Robert Adam Street, London W1U 3HR Telephone +44 (0)20 7935 3555 www.lmscapital.com

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