Epe Special Opp Regulatory News (ESO)

2 May 2006 07:02

EPIC Reconstruction PLC02 May 2006 COMPANY ANNOUNCEMENT 2nd May 2006 EPIC Reconstruction plc Statement of Year End Results as at 31 January 2006 The Board of EPIC Reconstruction plc have today released their annual year endresults to 31 January 2006 which form part of this announcement. Financial highlights outlined in the year end results are: o 5 investments completed, committing £17.35m of capital o 1 divestment and the sale of the Property portfolio, yielding a £1.7m capital gain (to date) o Total income of £2.6m, and Net Profit for the year of £1.69m o Final dividend of 4.7p, bringing full year dividend to 5.6p Enquiries: Northern Trust Cormac O'Keeffe Phone: +44 1481 745350 EPIC Investment Rob Leeming Phone: +44 207 553 2343 EPIC Reconstruction PLC Audited Financial Statements For the year ended 31 January 2006 1 Company Information 2-3 Chairman's Statement 4-10 Investment Manager's Report 11-12 Directors' Report 13 Statement of Directors' Responsibilities 14-15 Report of the Independent Auditors 16 Consolidated Statement of Operations 17 Consolidated Statement of Assets and Liabilities 18 Company Statement of Assets and Liabilities 19 Consolidated Statement of Changes in Net Assets 20 Consolidated Statement of Cash Flows 21-35 Notes to the Financial Statements 36 Shareholder Information-Schedule of Major Shareholders EPIC Reconstruction plc Company Information Directors DL Adamson Investment Advisor EPIC Specialist Investments Ltd RBM Quayle 22 Billiter Street CL Spears London GO Vero EC3M 2RY NV Wilson C O'Keeffe Secretary D J Parnell Registrar and Northern Trust International Fund Administration (Isle Of Man Limited)Registered (formerly Barings (Isle of Man) Limited)Office PO Box 174 St James's Chambers Douglas Isle of Man, IMI 1JE Nominated Numis Securities Auditors and KPMG Audit LLCAdvisor and, Limited Reporting Heritage CourtBroker Cheapside House Accountants 41 Athol Street 138 Cheapside Douglas London EC2N 6LH Isle of Man IM99 1HN Bankers Royal Bank of Scotland Crest Provider Computershare Investor Services International (CI) Ltd PO Box 64 Ordnance House 71 Bath Street 31 Pier Road St Helier, Jersey St Helier, Jersey JE4 8PJ Chairman's statement EPIC Reconstruction Plc ("the Company" or "ER") has had a satisfactory secondyear of consolidation, refining the investment mandate and investing in somepromising new investments. Over the period, the Company has completed five newtransactions and invested a total of £17.35m of committed and underwrittencapital. These have included the acquisition of Past Times, the high streetretailer, Kemutec, a niche engineering business and the acquisition of theconstruction business, GGS Holdings post year end. Realisations to 31 March haveincluded the sale of our property portfolio which realised a gain of £1.7m andthe exit from our investment in Abingdon Carpets. Action has also had to betaken with regard to two underperforming investments. ER has written off £0.4magainst the investment in Crystal Drinks, which was placed into Administrationin May 2005. In addition, since the year end, Gaskell McKay has been sold at aloss after a period of poor trading. This is a post-balance sheet event, whichwill have an adverse impact on the NAV for the year to January 2007. The sale ofsome of the assets is still ongoing and the Manager currently estimates that,when completed, the sale will result in a negative impact of up to 5p on the NAVper share. The Board proposes a final dividend of 4.7p, making a full yeardividend of 5.6p. The Company's investment focus continues to develop. The year to 31 January,2006 has seen more transactions with new management teams brought in to effect arestructuring, as well as an increasingly large number of opportunities toinvest in solvent, rather than already insolvent, situations to provideliquidity. As the market moves increasingly towards managed restructurings, ERis viewed as a funding solution for banks and new or incumbent management teamsalike. ER's focus is increasingly to provide liquidity for investment across arange of distressed situations. ER's strategy continues to focus on: "Investing to provide liquidity in distressed or insolvent businesses in the UKthrough a range of debt and equity instruments with a view to generating returnsthrough both yield and capital gain." The financial results for the year show a total income of £2.6m, against totalexpenses of £2.04m, yielding net investment income of £0.6m. Taking into accountthe net gains on investment of £1.65m, total profit, net of tax, was £1.69m.This represents an earnings per ordinary share of 5.6p. The income is driven by the interest received on a range of financialinstruments utilised in each investment. The Company invests in secured debt,confidential invoice discounting facilities, plant and machinery financing,mezzanine financing, shareholder loans and pure equity. In addition, whereappropriate, the Company looks to isolate the property risk of the investmentsthrough its wholly owned subsidiary, EPIC Reconstruction Property CompanyLimited. Distribution Policy and IAS The Board has taken advice as to the distribution policy of the Company goingforward. To date, all capital gains and losses have been treated as income,thereby resulting in considerable volatility in the dividend yield. Further tothis advice, the Board proposes to structure the distribution policy such thatall capital gain or loss is recognised against capital and all yield anddividends from investments are taken as income. A capital event would be definedas an exit, sale or refinancing and would impact the NAV of the Company. It isthe Board's view this will both make income more predictable and provide a truerrepresentation of income and capital. This is outlined further in the Notes tothe accounts. In its Admission Document, the Company stated that it would account according toInternational Accounting Standards, except in relation to portfolio companiesthat fall within the definition of subsidiary or associated undertakings. TheBoard consider that consolidation of these investment would render theconsolidated accounts misleading. In the year to 31 January, 2006, the Companyhas made investments which fall within this definition. As such, a qualificationto the accounts for the year ended 31 January, 2006 with regard to IAS27 hasbeen stated. OUTLOOK As at 31 January, 2006, ER had net cash after future commitments of £5.1m. ERcontinues to see a greater number of larger and more interesting investmentopportunities and a wider range of restructuring opportunities. Increasingly,the ER restructuring potential is at both a corporate and business unit level,rather than pure operational improvement. The Company has now begun to approach maturity as the investment style hasdeveloped and larger opportunities have emerged. Despite a more capital basedapproach, dividends continue to be paid. The volatility in the dividend shouldreduce as a result of the actions taken with regard to the accounting policycoupled with significant capital upside potential in the future. I look forwardto reporting on progress in the interim results. Investment Manager's Report The year to 31 January, 2006, has seen the Manager complete five newacquisitions and one divestment for the Company. The Manager updated theshareholders on those investments completed during the first nine months in theInterim Report. The purpose of this report is to provide a fuller flavour ofeach of the portfolio companies, the rationale for investment and their currentprospects. The Manager has looked to develop a diversified portfolio acrossdifferent sectors and sizes of investment and remains confident that thisportfolio will continue to yield a strong return to Shareholders. The Investment Model The investment model continues to be refined, as outlined in the Chairman'sreport. The past year has seen ER, as forecast in last year's report, completefewer, although larger, than expected deals. The Manager increasingly looks tobring external management expertise to support incumbent management teams inturnaround situations and the Manager's monitoring team continues to build. 2005 has also seen a move in the type of opportunities investigated. ER'searlier investments focussed on the acquisition of businesses fromAdministration or Receivership. The past year has seen a range of distresseddebt opportunities, or the requirement to provide liquidity and restructuringexpertise in solvent situations with asset backing. In such situations, it isthe operational and financial restructuring ability of the Manager that addsvalue to longer term equity, rather than pursuing a range of small overlends ondebtor facilities to small distressed businesses bought from Administration. The Manager is of the view that a hands-on operational approach is critical todrive value from the underlying portfolio companies. Going forward, the Managerexpects this style of investing to develop, with more major corporate andbusiness unit restructurings undertaken, lead by exceptional managers withsignificant reorganisation expertise. Development of EPIC Private Equity Over the past financial year, EPIC Specialist Investments, the manager of ER,has itself been subject to some corporate reorganisation. A new LimitedLiability Partnership, EPIC Private Equity LLP, has been set up which is theManager of both EPIC Reconstruction Plc and the private equity part of EPIC Plc.This new structure allows more direct incentivisation and support for buildingthe team required to manage a portfolio of this nature. The Portfolio The portfolio continues to perform strongly. The five businesses acquired duringthe financial year were Morada, Kemutec, Autocue, Gaskell and Past Times, arerepresentative of the Company's diversification across industries. Due to thesecurity required as a result of the investment model, the Manager looks toinvest in asset rich businesses. The investments have become more diversified since last year, with the additionof the retailer Past Times to the portfolio. There remains a focus onmanufacturing businesses, which are frequently suitable for this fund due totheir asset-rich nature. There is a bias towards businesses that supply thelarge UK multiple retailers, in either food, drink or domestic products, wheremargins continue to be squeezed in search of price optimisation for the customerbase. Bonne Bouche, Crystal Drinks, Ex-Pac and Abingdon carpets are examples ofbusinesses influenced by that market trend. The remainder of the opportunitieshave arisen as a result of specific circumstances within that industry orbusiness, often driven by overcapacity of some nature. Portfolio Companies Abingdon Carpets Abingdon, the first investment that ER made, has now been successfully exited.ER generated a return of 73% on this investment over the course of theinvestment period. Abingdon, the £45m turnover carpet manufacturer, representsthe type of investment that allows for significant restructuring expertise.Abingdon was an example of a business purchased from the Administration processof the parent company, Carpets International, and restructured through asignificant rationalisation of turnover and operational units. C3O C3O, the business formerly called Connections Plus, is a call centre operatorbased in Skipton focussing on both inbound and outbound customers. The Companyinvested £0.5m in overlend and has provided additional financing of £0.15m forthe development of new customers. At the interim results, the Manager commentedon concerns over scale and the need to bolster and continue to restructure thebusiness. In the past half year, the business has been restructured, reducing it from twosites to one, therefore improving the relative margin and preventing excess costfor the turnover. At the same time, ER have entered heads of agreement toacquire another call centre business with a view to providing additionalturnover to the combined business and getting the business to a scale wherebyrun-rate operating profit can continue to be delivered. This restructuring hasrequired further financing which should yield a good return through theintegration of the two businesses. Bonne Bouche Bonne Bouche is a manufacturer of frozen gateaux and puddings for the foodservice and retail industries with a turnover of circa £13m.The Company invested£1.5m in overlend, in addition to a stock facility and the underwriting of theDebtor book. 2005 was a difficult period for Bonne Bouche, as a result of certain actionstaken by the management team. The Manager was presented with the budget and theongoing trading performance of Bonne Bouche, which proved unsatisfactory. Twoconsultants were employed to provide further detailed review of the business.This indicated inconsistencies and inefficiencies within the business; operatingcosts were too high, product was not always being sold profitably andoperational controls were poor. The Manager has since removed the ManagingDirector and replaced him with two other individuals who recently purchased abusiness from Administration and lead a successful turn around. More recently, an opportunity has arisen to continue to support the businessthrough acquiring more turnover from a competitor. The new management team havealso proposed and implemented a significant cost cutting exercise, taking over£1m in costs out of the business. Both of these activities require financialsupport, which ER has given, such that exposure has now increased to £2.45m.However, the likelihood of success with a new management team and revisedoperating structure is significantly improved. Trading will remain difficultuntil Christmas, but the Manager will continue to support this investmentthrough what has been a difficult restructuring. Gaskell Mackay Gaskell MacKay was formed as a result of the merging of the Gaskell contractcarpeting business and Hugh Mackay, the previously held asset of the Company.The Company has invested up to £2.5m in overlend, as well as underwriting thedebtor book, which is not fully drawn. Since acquisition, the Hugh Mackay part of the business has underperformed,whilst the core Gaskell brand has remained within budget expectation. The secondhalf of 2005 saw the business achieve profitability in the period to Christmas.However, there was poor trading in December and January. This was a result ofdifficulties encountered in the manufacturing processes, resulting in lowerstock levels than expected and customers being let down. The Manager installed anew Executive Chairman with experience in this sector to support the incumbentmanagement team in February of this year. He instigated a reorganisation of themanufacturing processes within the business so as to drive growth. He prepared aplan for the Manager, which was discussed with the Board, requiring furtherinvestment in the business. ER proposed that the additional funding requirementcould be used to support the business in the interim with a view to turning itaround, but that a sale should be sought for Gaskell, as a result of the longerterm payback on the investment. The Manager pursued a sale process and a dealhas now been substantially agreed, although certain residual assets are still inthe process of being sold. This deal, when completed, will impact adversely theNAV of ER, as the investment will be sold at a loss. This is a post-Balancesheet event, also referred to in the Notes to the accounts. Newline Display Newline Display is a small manufacturer and installer of retail fittings, withturnover of circa £2.0m. The Business was formed in 1990 to supply theshop-fitting and retail sectors with high quality slatted display panels. ERbacked the previous management team to purchase the business out ofAdministration with £0.3m of underwritten debt and equity facilities. Newline has continued to be a stable investment, yielding a strong return forthe fund. The profitability and sales of the Business have continued to exceedexpectations despite the departure of the CEO. The Manager remains confident ofthe prospects of the business with the remaining management team ever moreincentivised to succeed. Newline has now paid back its overlend. Ex-Pac Ex-Pac is a bottling and packaging business, which provides packaging for theglass bottles used by Coca-Cola and high end spirits manufacturers in the UK,with turnover of circa £3.0m. The business can offer the ability to labeldifficult and non-standard bottles and some of the work still has to becompleted by hand. Ex-Pac had one major bad debt two years prior to going into Administration in2004. This bad debt resulted in continued working capital difficulties for thecompany, which impacted the performance of the business as supplies could not beordered and growth was therefore stunted. ER supported the management team byinvesting £1m in underwritten debt and equity facilities to buy Ex-Pac out ofadministration. Ex-Pac had a promising start with initial trading proving strong, however Ex-Pacsales have recently fallen below budget. Overlend continues to be repaid, butthe Manager has extended the term of repayment by 4 months and increased theinterest rate to 15% to compensate for the increased risk. The Manager remains confident in the ability of Ex-Pac to repay the overlendover this extended timeframe, generating a strong return. Abbseal Abbseal is a glass processor, selling to both the domestic and commercialmarkets, with a turnover of circa £18.0m. The Manager used the Administrationprocess to restructure the cost base of the Company by reducing the number ofmanufacturing plants. The Company has a £2.3m overlend exposure to Abbseal, with£2.9m funds in use at Eurosales and £0.6m Plant and Machinery loan. The UK Glass market has been in turmoil during 2005, as a result of overcapacitywithin the industry. Consolidation continues apace within the market. As aresult of the restructuring of the business, turnover has reduced to a coreprofitable business, expected to generate stable operating profit in the comingyear. The management team have evolved, with a new sales and finance team withinthe business. The Manager remains confident for the opportunities for thisbusiness going forward. Morada ER backed Stuart Taylor to buy Morada Furnishings Ltd out of Administration on15 September 2005. This division was based originally on contracts with theMinistry of Defence ("MoD"), which comprises around two thirds of the division'sturnover, to supply curtains and blinds for living accommodation occupied bylower ranks in the military. In May 2005 the business was awarded a 3 yearcontract (with a 2 year extension) to provide furnishings to senior ranks, shipfurnishings and upholstery covers, in addition to the current curtain contracts.The business also supplies Local Authorities and educational establishments,including a 2 year contract with Lancashire Purchasing Agency. In the retail sector, it supplies custom-made and ready-made furnishings to anumber of independent and national customers, including Paul Simon and Dunelm. The first few months of the investment have proved promising, albeit thebusiness has experienced some difficulties in getting orders out in time due torestrictive credit limits with key suppliers. However, orders are ahead ofbudget and the Manager remains confident in the management team's ability todevelop this business going forward. Past Times Past Times was acquired on 31 December, 2005. ER backed Will Hobhouse, formerlyof Tie Rack and Whittard, to purchase the business from the Administrators ofRetail Variations plc. Past Times is a retailer of historically themed items. The first month was one of significant change, as ER and the management teamlooked to implement the basis of the restructuring plan. Of the 96 stores, it isestimated that 72 will be retained. The mail order business has been analysed indetail and proved to be unprofitable. In addition, the central head office function has been dramatically reduced,with further job losses. A refocussing of the buying and merchandisingdepartments is underway and the key strategic change is to move the product backto its original higher quality proposition, focussed on historically themedproducts, without compromising quality for price. The Manager aims to reduce the peak funding requirement of Past Times throughsourcing third party stock finance for the business. The majority of exceptionalcosts have now been incurred and the business is trading in its new format. Newproduct will take some further months to come into store due to lead times andthe Manager is hopeful of seeing a pick up in trading performance as the retailproposition changes in the latter half of the summer period. EPIC Reconstruction Property Company The property portfolio was built up during the year through the acquisition ofthe properties associated with Gaskell, Kemutec and Abbseal. These propertieswere not assimilated into the underlying business to ring-fence the risk. Theportfolio of properties has been sold yielding a gain of £1.7m to date. Kemutec Kemutec is a manufacturer of mixing and sifting equipment for the chemical,pharmaceutical and food industries, with sales of circa £10m. The Companyinvested £0.9m in overlend, as well as underwriting the debtor book (which hasminimal utilisation, due to the contract nature of the business) and purchasingof the properties through EPIC Reconstruction Property Company. The businesscontinues to perform strongly, exceeding budget for the first financial year. ER has supported the management team in their growth strategy through providingfurther finance to complete a bolt-on acquisition of a business called PPS. Themanagement had identified PPS as a good strategic fit for Kemutec and the ownerwas looking for a retirement sale. ER supported the business through providingthe funds to acquire the business, a further £0.28m and the acquisitionexpertise. Kemutec purchased PPS in an assets only transaction with no liabilitytaken on. This acquisition will continue to support the business through its growth phaseto drive additional value to ER's equity stake. Autocue The Company has a £0.5m overlend exposure to Autocue. Autocue is a manufacturerof prompting equipment for the media industry, as well as the developer andprovider of a range of software for a similar customer base. The business wentinto Administration early in 2005 due to significant historic leverage raised toexpand the software side of the business, a strategy which subsequently proveddisastrous. The Company teamed up with another private equity provider to buy the businessout of Administration, employing a new management team who have looked tofundamentally restructure the business, through the removal of a number ofunnecessary excess costs and a realignment of the business to its core hardwaresales. There is also a renewed focus on driving sales through new productdevelopment and sales incentives. The business has shown steady performance and a new product range has beenimplemented. The management have identified weaknesses in the offering of thebusiness, which are being plugged and released into the market in the comingmonths. It is expected this will be a catalyst to drive change in the toplineperformance of the business. Crystal Drinks The Company invested in Crystal Drinks in December 2003. Crystal Drinks is amanufacturer of both own brand and branded soft drinks for large retailers andfoodservice sellers. The Company invested £0.75m as overlend and underwrote thedebtor book facilities. £0.40m of overlend has been returned. In addition, a 'Bshare' of £0.15m has been paid. As reported in the Interim results, theturnaround of the business was not successful and it was placed intoAdministration in April. PwC were appointed Administrators on the 23 May 2005. The Investment Advisor wasof the view that continuing to fund the business would have resulted in longerterm difficulties for the Company and there were certain supply liabilitiesduring the summer season that made ongoing trading untenable. Therefore, theCompany has provided £0.4m which represents the expected loss on the investment,not yet crystallised. The investment has yielded, to date, a return (including interest) of £0.26m onthe initial investment of £0.75m, as well as the repayment of £0.4m ofcapital.The Administration has now been concluded and the loss will becrystallised when it is called under the Eurosales Guarantee. No further loss isexpected from this investment, although there will be some time before theAdministration is fully wound down. Adam G Brown The Administration of A.G.Brown continues to wind down. The Manager expects theprovision of £0.86m made to date, which incorporates a further provision of£0.42m in the year ended 31 January 2006, to be sufficient. AGB Steel The residual 20% stake in AGB Steel is proving to create value. AGB Steel hashad a strong trading period after the Administration of AGB Steel and ERcontinues to receive rent on the Property and Plant and Machinery and valueremains within the residual stake. Report of the Directors Principal activity The Company was incorporated with limited liability in the Isle of Man as an AIMlisted public company limited by shares under the Laws with registered number108834C on 25 July 2003. The principal activity of the Company and its subsidiaries (together "theGroup") is to arrange financing for businesses emerging from distressedsituations. Whilst the Group may itself make some loans available, the majorityof financing transactions are undertaken by the Group introducing a third partyfinance company, which advances the loans to the businesses. The Group participates by providing credit support to the lender inreturn for which it is paid commission and receives equity stakes. Incorporation The Company was incorporated on the 25 July 2003. The Company's registeredoffice is: St James's Chambers, Athol Street, Douglas, Isle of Man, IM99 1PP, BritishIsles. The Company has four wholly owned subsidiaries - EPIC Structured FinanceLimited, a company incorporated on 21 August 2003 in the Isle of Man, EPICReconstruction Property Limited, a company incorporated on 11October 2004 inEngland and Wales, EPIC Reconstruction Property Company II Limited, a companyincorporated on 30 December 2004, in England and Wales and EPIC ReconstructionProperty Company (Isle of Man) Limited, a company incorporated on 29 September2005 in the Isle of Man. Results of the financial year ended Results for the year and their appropriation are set out in the ConsolidatedStatement of Operations on page 16 and in the Consolidated Statement of Changesin Net Assets on 19. Dividends Details of the dividends paid and proposed during the year ended are analysed onpage 28 in Note 7. Significant holdings The number of shares held and the percentage of the issued shares which thatnumber represents at the date of the signing of these financial statements areanalysed on page 36. The Directors are not aware of any other individual holding of greater than 3%. Directors The Directors of the Company holding office during the financial year and todate were: Mr. D.L. Adamson (Chairman) Mr. R.B.M Quayle Mr. N.V Wilson Mr. C.L. Spears Mr. G.O. Vero Mr. C.O'Keeffe (Appointed 20 March 2006) Secretary The secretary of the Company holding office for the financial year and to datewere: Appointed Resigned Mr. P.P. Scales 25 July 2003 22 December 2005 Mr. D.J.Parnell 22 December 2005 Staff At 31 January 2006 the Group employed no staff. Auditors The auditors, KPMG Audit LLC, being eligible, have expressed their willingnessto continue in office in accordance with Section 12(2) of the Isle of ManCompanies Act 1982. By order of the Board: _________________________________________ Statement of Directors' responsibilities in respect of the Directors' report andthe financial statements The Directors are responsible for preparing the Directors' Report and thefinancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for eachfinancial year, which meet the requirements of Isle of Man company law. Inaddition, the Directors have elected to prepare the Group and Parent Companyfinancial statements in accordance with International Financial ReportingStandards. The Group and Parent Company financial statements are required by law to give atrue and fair view of the state of affairs of the Group and the Parent Companyand of the profit or loss for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable International Financial Reporting Standards havebeen followed, subject to any material departures disclosed and explained in thefinancial statements; and • prepare the financial statements on the going concern basis unless it isinappropriate to presume that the Group and Parent Company will continue inbusiness. The Directors are responsible for keeping proper accounting records thatdisclose with reasonable accuracy at any time the financial position of theParent Company and to enable them to ensure that the financial statements complywith the Isle of Man Companies Acts 1931 to 2004. They have generalresponsibility for taking such steps as are reasonably open to them to safeguardthe assets of the Group and to prevent and detect fraud and otherirregularities. Under applicable law the Directors are also responsible for preparing aDirectors' Report that complies with that law. Report of the Independent Auditors, KPMG Audit LLC, to the members of EPICReconstruction plc We have audited the group and parent company financial statements ("thefinancial statements") of EPIC Reconstruction plc for the year ended 31 January2006 which comprise the Consolidated Statement of Operations, the Consolidatedand Parent Company Statement of Assets and Liabilities the ConsolidatedStatement of Changes in Net Assets, the Consolidated Statement of Cash Flows andthe related Notes. These financial statements have been prepared under theaccounting policies set out therein. This report is made solely to the Company's members, as a body, in accordancewith section 15 of the Companies Act 1982. Our audit work has been undertaken sothat we might state to the Company's members those matters we are required tostate to them in an auditor's report and for no other purpose. To the fullestextent permitted by law, we do not accept or assume responsibility to anyoneother 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 described in the Statement of Directors' Responsibilities on page 13 theCompany's directors are responsible for the preparation of the financialstatements in accordance with applicable Isle of Man company law andInternational Financial Reporting Standards. Our responsibility is to audit the financial statements in accordance withrelevant legal and regulatory requirements and International Standards onAuditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a trueand fair view and are properly prepared in accordance with Isle of Man CompaniesActs 1931 to 2004. We also report to you if, in our opinion, the Company has notkept proper accounting records, if we have not received all the information andexplanations we require for our audit, or if information specified by lawregarding directors' transactions with the Company is not disclosed. We read the Directors' Report and any other information accompanying thefinancial statements and consider the implications for our report if we becomeaware of any apparent misstatements or inconsistencies within it. Basis of opinion We conducted our audit in accordance with International Standards on Auditing(UK and Ireland) issued by the UK Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements. It also includes an assessment of thesignificant estimates and judgments made by the Directors in the preparation ofthe financial statements and of whether the accounting policies are appropriateto the Group's and Company's circumstances, consistently applied and adequatelydisclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statementsare free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the financial statements. Qualified opinion resulting from disagreement about accounting treatment As stated in Note 2(b) to the financial statements, the Company has not includedin the consolidated financial statements the results of portfolio companiesbecause the Directors are of the opinion that their inclusion would render theCompany's consolidated financial statements misleading. However, the results ofcertain portfolio companies are required to be included in the consolidatedfinancial statements by International Accounting Standard 27 "ConsolidatedFinancial Statements and Accounting for Investments in Subsidiaries" and suchnon-inclusion constitutes a departure from the above mentioned accountingstandard. The effect of such non-inclusion of the results of certain portfoliocompanies on the consolidated financial statements is discussed and disclosed bythe Directors in Note 2(b). In our opinion the financial statements: - give a true and fair view, in accordance with International FinancialReporting Standards, of the state of the Company's affairs as at 31 January2006; and - have been properly prepared in accordance with the Isle of Man Companies Acts1931 to 2004. In our opinion the financial statements: - except for the effect of the non-inclusion of the results of certain portfoliocompanies in the consolidated financial statements as referred to above, give atrue and fair view, in accordance with International Financial ReportingStandards, of the state of the Group's affairs as at 31 January 2006 and of theGroup's profit for the year then ended. KPMG Audit LLC Chartered Accountants Douglas Isle of Man 28 April 2006 EPIC Reconstruction plc Consolidated Statement of Operations For the year ended 31 January 2006 2006 2005 (Note 24)Note £ £ Income: Rental income 702,889 - Interest receivable 1,164,577 1,554,962 Dividends received - 1,225,000 Commission income 773,577 403,028 ---------- ---------- Total income 2,641,043 3,182,990 Expenses: 3 Investment advisor's fees (467,016) (556,495) 3 Administration fees (53,649) (69,742) 4 Directors' fees (119,959) (123,600) 5 Directors' and Officers' insurance (4,693) (85,973) 8 Professional fees (318,136) (66,592) Crest Service provision (4,875) (3,797) Printing and advertising expenses (55,462) (9,904) Travel expenses (13,767) (7,923) Auditors' remuneration (34,154) (12,169) 12 Bank interest and other charges (57,337) (720) Sundry expenses (10,710) (14,442) Stock Exchange fees (2,353) (8,445) Advisor and broker fees (32,818) (48,674) 22 Charge for commitments under guarantee (824,363) (435,000) Rental expenses (41,997) - ---------- ---------- Total expenses (2,041,289) (1,443,476) Net investment income 599,754 1,739,514 Gains on investments Net realised gains 1,653,953 260,656 ---------- ---------- Profit for the year before taxation 2,253,707 2,000,170 6 Taxation (567,407) - ---------- ---------- Profit for the year after taxation 1,686,300 2,000,170 ========== ========== 15 Basic and diluted earnings per ordinary share 5.621p 6.667p (pence) ---------- ---------- EPIC Reconstruction plc Consolidated Statement of Assets and Liabilities As at 31 January 2006 2006 2005Notes £ £ 9 Non-current assets Investment property 1,425,247 1,100,000 Financial assets 3,742,670 - ----------- ---------- 5,167,917 1,100,000 Current assets Accrued interest and other receivables 448,396 850,687 11 Cash and cash equivalents 8,626,939 12,887,931 11 Committed cash balances 17,314,836 15,406,414 ----------- ---------- 26,390,171 29,145,032 ----------- ---------- Current liabilities Accrued expenses and sundry accruals (406,464) (160,383) 6 Tax liability (567,407) - 22 Provision for call under guarantee (443,000) (435,000) ----------- ---------- (1,416,871) (595,383) ----------- ---------- Net current assets 24,973,300 28,549,649 Creditors: Amounts falling due in more than one year 12 Bank loan (566,268) - ----------- ---------- ----------- ---------- Net assets 29,574,949 29,649,649 =========== ========== Represented by: 13 Share capital 300,000 300,000 14 Share premium 27,850,479 27,850,479 Revenue reserve 1,424,470 1,499,170 ----------- ---------- 29,574,949 29,649,649 =========== ========== 16 Net asset value per share (pence) 98.583p 98.832p ----------- ---------- The financial statements were approved by the Board of Directors on 28 April2006 and signed on its behalf by: Donald Adamson Cormac O'Keeffe EPIC Reconstruction plc Company Statement of Assets and Liabilities As at 31 January 2006 2006 2005 Notes £ £ 9 Non-current assets Financial assets 30,000 - Investment in subsidiaries 1,252,704 1,100,104 ---------- ----------- 1,282,704 1,100,104 Current assets Accrued interest and other receivables 97,164 4,404 10 Loan to subsidiary 22,343,521 20,630,391 11 Cash and cash equivalents 6,032,523 8,075,237 ---------- ----------- 28,473,208 28,710,032 Current liabilities Accrued expenses and sundry accruals (195,433) (160,487) ---------- ----------- (195,433) (160,487) Net current assets 28,277,775 28,549,545 ---------- ----------- Net assets 29,560,479 29,649,649 ========== =========== Represented by: 13 Share capital 300,000 300,000 14 Share premium 27,850,479 27,850,479 Revenue reserve 1,410,000 1,499,170 ---------- ----------- 29,560,479 29,646,649 ========== =========== The profit dealt with in the accounts of the Company for the year ended 31 January2006 was £1,671,830 (31 January 2005: (Note 24) £2,000,170).The financial statements were approved by the Board of Directors on 28 April 2006and signed on its behalf by: Donald Adamson Cormac O'Keeffe EPIC Reconstruction plc Consolidated Statement of Changes in Net Assets For the year ended 31 January 2006 Share Share premium Revenue Total 2005 Capital Reserve (Note 24) £ £ £ £ £ Net assetsat 300,000 27,850,479 1,499,170 29,649,649 -start ofyear Share issuenet ofexpenses - - - - 28,150,479 Profit fortheyear after - - 1,686,300 1,686,300 2,000,170taxation Dividends - - (1,761,000) (1,761,000) (501,000)paid(Note 7) ---------- ----------- ------------ ---------- ------------Net assetsat 300,000 27,850,479 1,424,470 29,574,949 29,649,649end of year ========== =========== ============ ========== ============ EPIC Reconstruction plc Consolidated Statement of Cash Flows For the year ended 31 January 2006 2006 2005 (Note 24) £ £ Operating activities Rental income 698,878 - Bank interest 1,734,343 831,527 Dividends received - 1,225,000 Commission income 908,261 280,177 Expenses paid (2,053,756) (852,494) ---------- ---------- 175 Net cash inflow from operating activities 1,287,727 1,484,210 ---------- ---------- Investing activities Purchase of investments (8,606,301) (1,100,000) Sale of investments 6,160,736 260,656 Transfer to committed cash (1,908,422) (15,406,414) ---------- ---------- Net cash (outflow) from investing activities (4,353,987) (16,245,758) ---------- ---------- Financing activities Proceeds on issue of equity shares - 28,150,479 Dividends paid (1,761,000) (501,000) Proceeds from borrowings 566,268 - ---------- ---------- Net cash (outflow)/inflow from financing (1,194,732) 27,649,479 activities ---------- ---------- (Decrease)/Increase in cash (4,260,992) 12,887,931 Cash and cash equivalents at start of year 12,887,931 - ---------- ---------- Cash and cash equivalents at end of year 8,626,939 12,887,931 ========== ========== EPIC Reconstruction plc Notes to the Financial Statements For the year ended 31 January 2006 1 Operations The Company was incorporated with limited liability in the Isle of Man with theregistered number 108834C on 25 July 2003. The Company's ordinary shares arelisted on the Alternative Investment Market ("AIM"). The Company raised £30m bya placing of ordinary shares at 100 pence per share. The Company has four wholly owned subsidiaries - EPIC Structured FinanceLimited, a company incorporated on 21 August 2003 in the Isle of Man; EPICReconstruction Property Limited, a company incorporated on 11 October 2004 inEngland and Wales; EPIC Reconstruction Property Company II Limited, a companyincorporated on 30 December 2004 in England and Wales and EPIC ReconstructionProperty Company (Isle of Man) Limited, a company incorporated on the Isle ofMan on 29 September 2005. The principal activity of the Company and its subsidiaries (together "theGroup") is to arrange financing for businesses emerging from distressedsituations. Whilst the Group may itself make some loans, the majority offinancing transactions are undertaken by the Group introducing a third partyfinance company, which advances the loans to the investee businesses. The Groupparticipates by providing credit support to the lender in return for which it ispaid commission. The Group also invests through an 'overlend' on the invoice discounting facilityof each investment. Each overlend is then repaid over a period of up to threeyears. The repayment schedule outlined at the time of the deal is used as aguide and controlling mechanism for the management teams of each investment. TheManager looks to set realistic repayment schedules, but does not view aportfolio company not repaying on time and in full as 'underperforming' thoughin all cases the Manager reserves the right to exercise step in rights. Inaddition to the repayment of the overlend, the Group will often arrangeadditional preference share structures and take significant equity stakes so asto create shareholder value. It is the performance on the combination of allsecurities including third party debt, typically held with the third partyfinance company that determines the Group's view of each investment. The consolidated financial statements comprise the results of the Company andits subsidiaries (the "Group") (see Notes 2(b) and 21). The Company has no employees. EPIC Reconstruction plc Notes to the Financial Statements (continued) For year ended 31 January 2006 2 Accounting policies a The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRSs) and interpretations adopted by theInternational Accounting Standards Board (IASB) except for the non-consolidationof certain companies as detailed in Note 2(b) and applicable legal andregulatory requirements of Isle of Man law and reflect the following policies,which have been adopted and applied consistently. The financial statements are presented in Sterling. They are prepared on a fairvalue basis for financial assets and liabilities at fair value through profit orloss and derivative financial instruments. Other financial assets and financialliabilities are stated at amortised cost. The preparation of financial statements in conformity with IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and the reported amounts of assets and liabilities,income and expense. The estimates and associated assumptions are based onhistorical experience and various other factors that are believed to bereasonable under the circumstances, the results of which form the basis ofmaking the judgements about carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period, or in the periodof the revision and future periods if the revision affects both current andfuture periods. Judgements made by management in the application of IFRS that have a significanteffect on the financial statements and estimates with a significant risk ofmaterial adjustment in the next year are discussed in Note 22. b Subsidiaries Subsidiaries are those enterprises controlled by the Company. Control existswhen the Company has the power, directly or indirectly, to govern the financialand operating policies of an enterprise so as to obtain benefits from itsactivities. The financial statements of subsidiaries are included in theconsolidated financial statements from the date that control commences until thedate that control ceases. EPIC Reconstruction plc Notes to the Financial Statements (continued) For year ended 31 January 2006 b Subsidiaries (continued) As part of the Group's arrangement of finance for businesses emerging fromdistressed situations the Group may receive preference and ordinary shares. Suchshares permit the Group to participate in any increase in the value of portfoliocompanies. Such shares are received for nil consideration and the equityinterest of the Group is capped by way of management options to purchase theGroup's interest at a set amount. In addition, Board representation is onlyassumed in default situations. For such interests the Directors consider thatthey do not meet the definition of subsidiaries under IAS 27. For three investments made in the year in portfolio companies, the equityinterest of the Company is not capped. It is considered that such companies meetthe definition of subsidiaries and would therefore fall to be consolidated underIAS 27. However, the directors consider that consolidation would render theconsolidated accounts misleading, as such interests were acquired for nilconsideration, as part of loan finance arranged for such companies and suchinterests were acquired with a view to income and capital gain. If these three investments had been consolidated, the group profit would havebeen reduced by £1,990,000 and net assets would have been reduced by the sameamount. c Segmental reporting The Directors are of the opinion that the Group is engaged in a single segmentof business and geographic area being arranging financing for businessesemerging from distressed situations in the United Kingdom. d Income Interest income is recognised in the Statement of Operations as it accrues.Dividend income is accounted for when the right to receive such income isestablished. The return on shares held in money market funds is treated asinterest receivable. e Expenses All expenses are accounted for on an accruals basis. f Taxation Income tax on the profit or loss for the period presented comprises current anddeferred tax. Income tax is recognised in profit or loss except to the extentthat it relates to items recognised directly in equity, in which case it isrecognised in equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantially enacted at the balance sheet date andany adjustment to tax payable in respect of the pervious years. EPIC Reconstruction plc Notes to the Financial Statements (continued) For year ended 31 January 2006 f Taxation (continued) Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amount of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. Theamount of deferred tax provided is based on the expected manner if realisationor settlement of the carrying amount of assets and liabilities, using tax ratesenacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised. g Cash and cash equivalents Cash comprises current deposits with banks. Cash equivalents are short-termhighly liquid investments that are readily convertible to known amounts of cash,are subject to an insignificant risk of changes in value and are held for thepurposes of meeting short-term cash commitments rather that for investments orother purposes. Money market funds are treated as cash and cash equivalents. h Investments (i) Classification Equity and preference share investments have been designated into theavailable-for-sale category. Such investments are unlisted and their fair valuecannot be reliably measured. Therefore they are stated at cost less anyprovision for impairment. Financial assets that are designated as loans and receivables comprise loans andaccrued interest and other receivables. Financial liabilities that are not at fair value through profit or loss compriseaccrued expenses and sundry creditors. (ii) Recognition The Group recognises financial assets and financial liabilities on the date itbecomes a party to the contractual provisions of the instrument. A regular way of purchasing of financial assets is recognised by using tradedate accounting. From this date any gains and losses arising from changes infair value of the financial assets or financial liabilities are recorded. Financial liabilities are not recognised unless one of the parties hasperformed. EPIC Reconstruction plc Notes to the Financial Statements (continued) For year ended 31 January 2006 (iii) Measurement Financial instruments are measured initially at fair value (transaction price). Subsequent to initial recognition, all instruments classified as available forsale are stated at cost (transaction price), less any provision for impairment. Financial assets classified as loans and receivables are carried at amortisedcost using the effective interest rate method, less impairment losses, if any.Gains and losses on re-measurement of available for sale investments arerecognised in equity Financial liabilities, other than those at fair value through profit or loss,are measured at amortised cost using the effective interest rate. (iv) Impairment Financial assets that are stated at cost or amortised cost are reviewed at eachbalance sheet date to determine whether there is objective evidence ofimpairment. If any such indication exists, an impairment loss is recognised inthe Statement of Operations as the difference between the asset's carryingamount and the present value of estimated future cash flows discounted at thefinancial asset's original effective interest rate. If in a subsequent period the amount of an impairment loss recognised on afinancial asset carried at amortised cost decreases and the decrease can belinked objectively to an event occurring after the write-down, the write-down isreversed through the Statement of Operations. (v) Derecognition The Company derecognises a financial asset when the contractual rights to thecash flows from the financial asset expire or it transfers the financial assetand the transfer qualifies for derecognition in accordance with IAS 39. The Company uses the weighted average method to determine realised gains andlosses on derecognition. A financial liability is derecognised when the obligation specified in thecontract is discharged, cancelled or expired. i Financial guarantees Commitments under financial guarantees are provided for when an event hasoccurred that will result in the commitment being called (see Note 22). EPIC Reconstruction plc Notes to the Financial Statements (continued) For year ended 31 January 2006 j Investment property Investment property is stated at fair value determined annually by theDirectors. Any gain or loss arising from a change in fair value is recognised inthe Statement of Operations. Rental income from investment property is accountedfor on an accruals basis. Property interests held under operating leases forinvestment purposes are classified and accounted for as investment property. 3 Investment advisory, administration and performance fees Investment advisory fees On 10 September 2003 the Company entered into an Investment Advisory Agreementwith EPIC Specialist Investments Limited ('ESI' or 'the Manager') for theprovision of investment advisory services. Investment advisory fees are paidquarterly in arrears at a rate of 1% per annum of the Group's Gross Asset Value(including the Group's attributable proportion of financing contracts for whichit is participating in the credit risk). The management agreement can be terminated by either party giving not less than12 months notice at any time after the second anniversary of the commencement ofthe Investment Advisory Agreement. The Manager is entitled to charge and retain structuring fees of a maximum of 2%of the value of the total facilities provided on any transaction or a minimum of£35,000 per transaction, whichever is the higher. In the year ending 31 January2006, such fees amounted to £365,000 or 2.19% of total available facilities,drawn and undrawn, provided during the period. (2005: (Note 24):£633,000 or1.7%). The fees are paid by the investee companies. The Manager also receives a fee for arranging the sale of investments. Threeproperties were sold in the year by EPIC Reconstruction Property Company Limitedgenerating a capital gain of £1.7m. A fee of £50,000 plus VAT was charged by theManager to EPIC Reconstruction Property Company Limited, which is included inprofessional fees in the Statement of Operations. Administration fees On 10 September 2003 the Company entered into an Administration agreement withNorthern Trust International Fund Administration Services (Isle of Man) Limited(formerly Barings (Isle of Man) Limited) for the provision of administration,registration and secretarial services. The fee is payable at a rate of 0.15% perannum of the Group's Net Asset Value, subject to a minimum fee of £30,000 perannum. The agreement is terminable by either of the parties giving not less than 6months notice. EPIC Reconstruction plc Notes to the Financial Statements (continued) For the year ended 31 January 2006 Performance fees The Investment Advisory Agreement above also provides for the provision of aperformance fee. The fee is payable if the Total Return (taken as Net AssetValue plus dividends distributed) is equal to at least 8% per annum from thedate of admission of the Company's shares to AIM, based on the funds raisedthrough the Placing of shares and compounded annually. No performance fee hasaccrued for the year ended 31 January 2006. 4 Directors' fees Directors' fees payable for the year (including VAT where applicable) were asfollows. The charge for the year in the Statement of Operations of £119,959includes an adjustment in respect of prior year £ DL Adamson 20,000 NV Wilson 23,500 RBM Quayle 23,500 CL Spears 15,000 GO Vero 17,625* Adjustment for prior year 20,334 119,959 (* Mr Vero's fee includes VAT at 17.5%) 5 Directors' and Officers insurance The Directors and Officers' insurance charge in the Statement of Operations of£4,693 (2005 (Note 24): £85,973) includes an adjustment in respect of prioryear. 6 Taxation Both the Company and EPIC Structured Finance Limited are Isle of Man taxresident. No Isle of Man Tax charge arises as dividends paid and proposed are deductiblefrom taxable income and all taxable income has been paid or proposed to be paidas a dividend. UK Corporation tax at 30% on the profit on ordinary activities of the UKproperty company subsidiaries has been provided for. The profit principallyarises from the sale during the period of investment properties. £ Profit before tax of UK property company subsidiaries 1,839,145 UK Corporation Tax charge at 30 % 551,744 Actual UK Corporation Tax charge in the accounts 567,407 The difference between the actual UK corporation tax charge and the expectedcharge based on the UK profits for the year is due to disallowed expenses. EPIC Reconstruction plc Notes to the Financial Statements (continued) For the year ended 31 January 2006 7 Dividends paid and proposed Under the terms of the Company's prospectus, it is the policy of the Company todistribute substantially all of its distributable profits each year. During theyear the following dividends were paid. Rate Total £ 2005 Final Paid 1 July 2005 4.99p 1,497,000 2006 Interim Paid 30 December 2005 0.88p 264,000 After the balance sheet date, the Directors have proposed a final dividend of4.7p per ordinary share. The proposed final dividend has not been provided forin the financial statements. 8 Professional fees The level of professional fees represents the employment of third party adviserson a number of aborted transactions. As the complexity and size of transactionsinvestigated has increased, the professional fee levels have increasedaccordingly. 9 Non-current assets 2006 2005 Group Company Group Company £ £ £ £ Investment property 1,425,247 - 1,100,000 -Financial assets 3,742,670 30,000 - -Investment in subsidiaries 275,104 275,104Mortgage loan to subsidiary - 977,600 - 825,000 ----------- ----------- ----------- ----------- 5,167,917 1,282,704 1,100,000 1,100,104 ----------- ----------- ----------- ----------- Investment property is stated at Directors' valuation which is equivalent tocost. The mortgage loan to the subsidiary is interest bearing at 8.0% and is repayable31 December 2010. Financial assets comprise secured loans of £3,712,670 (31January 2005: £nil) and unquoted equity investments of £30,000 (31 January 2005:£nil). Secured loans and unquoted equity investments are stated at cost. Theloans are secured by way of floating charge. Realised net capital gains in the year comprise of £1,710,637 (2005:(Note 24):£nil) in respect of gain on sale of investment property and £56,684 loss oninvestments (2005 (Note 24):gain of £260,656). EPIC Reconstruction plc Notes to the Financial Statements (continued) For the year ended 31 January 2006 10 Loan to subsidiary - EPIC Structured Finance Limited 2006 2005 Company Company £ £ --------------------- -----------------Loan to subsidiary 22,343,521 20,630,091 --------------------- ----------------- The loan to the subsidiary is unsecured interest free and not subject to anyfixed repayment term. 11 Cash at bank 2006 2005 Group Company Group Company £ £ £ £ Current and call accounts 2,360,085 1,242,544 21,740 13,870Money market fund 5,081,690 4,789,979 8,272,605 8,061,367Term deposit 18,500,000 - 20,000,000 - ----------- ----------- ----------- -------- 25,941,775 6,032,523 28,294,345 8,075,237 ----------- ----------- ----------- -------- Committed cash 17,314,836 - 15,406,414 -Cash and cash equivalents 8,626,939 6,032,523 12,887,931 8,075,237 ----------- ----------- ----------- -------- 25,941,775 6,032,523 28,294,345 8,075,237 ----------- ----------- ----------- -------- £17.3 million (31 January 2005: £15.4 million) of the term deposit is charged infavour of the third party finance company to support the Group's commitmentunder a credit risk participation agreement (see Note 22). The current and call accounts and money market fund have been classified as cashand cash equivalents in the Statement of Cash Flows together with the unchargedpart of the term deposit. 12 Bank loan 2006 2005 Group Group £ -------------------- -----------------Mortgage loan 566,268 - -------------------- ----------------- The mortgage bank loan bears interest at 9.10% and is secured on investmentproperty valued in the financial statements at £587,647. The term currentlyoutstanding on the loan is 23 years and 3 months. EPIC Reconstruction plc Notes to the Financial Statements (continued) For the year ended 31 January 2006 13 Share capital At 31 January 2006 /2005 Number £ Authorised Ordinary shares of 1p each 50,000,000 500,000 Called up, allotted and fully paid Ordinary shares of 1p each 30,000,000 300,000 14 Share premium The share premium arose on the issue of the ordinary shares and represents thedifference between the price at which the shares were issued (100p) and the parvalue (1p). Issue expenses amounting to £1,849,521 were written off against theshare premium account. 15 Basic and diluted earnings per share (pence) Basic earnings per share are calculated by dividing the profit for the yearattributable to ordinary shareholders of £1,686,300 (2005 (Note 24): £2,000,170)by the weighted average number of shares outstanding during the period of30,000,000 (31 January 2005: 30,000,000). Diluted earnings per share are calculated by dividing the profit for the periodattributable to ordinary shareholders of £1,686,300 (2005 (Note 24): £2,000,170)by the weighted average number of shares outstanding during the year of30,000,000 (31 January 2005: £30,000,000). 16 Net asset value per share (pence) The net asset value per share is based on the net assets as at the period-end of£29,574,949 (2005 (Note 24): £29,649,649) divided by 30,000,000 shares in issueat the end of the year. EPIC Reconstruction plc Notes to the Financial Statements (continued) For the year ended 31 January 2006 17 Note to the consolidated statement of cash flows Reconciliation of net investment income to net cash inflows from operatingactivities: 2006 2005 (Note 24) £ £ Net investment income 599,754 1,739,514 Adjustment for non-cash items Movement in debtors and prepayments 433,936 (850,687) Movement in accrued expenses and provision for callunder guarantee 254,037 595,383 Net cash flows from operating activities 1,287,727 1,484,210 18 Financial instruments The Group's financial instruments comprise: - Investments in unlisted companies, comprising equity and loans that are heldin accordance with the Group's investment objectives. - Cash and cash equivalents, including the investment of surplus liquidity in amoney market fund. Financial risk management objectives and policies The main risks arising from the Group's financial instruments are liquidityrisk, credit risk, market price risk and interest rate risk. None of these risksare hedged. The Board regularly reviews and agrees policies for managing each ofthese risks and these are summarised below. Liquidity risk Under the credit risk participation agreement (see Note 22), the Group iscommitted to funding a proportion of any credit losses on loans arranged by theGroup and advanced by a third party finance company. The Group has no othersignificant liabilities or commitments. Therefore, the key liquidity risk facingthe Group is that the Group does not have sufficient liquid resources to meetany demands made under the credit risk participation agreement. This risk ismanaged by keeping most assets in a readily realisable form. The Group's liquidassets comprise cash and cash equivalents, which are readily realisable and aterm deposit account, which is partly held as security under the credit riskparticipation agreement (see Note 22). EPIC Reconstruction plc Notes to the Financial Statements (continued) For the year ended 31 January 2006 18 Financial instruments (continued) Credit risk Credit risk is the risk that an issuer or counterparty will be unable orunwilling to meet a commitment that it has entered into with the Group. Underthe credit risk participation agreement (see Note 22), the Group is exposed tosignificant credit risk by way of its commitment to fund any credit losses onloans arranged by the Group. This risk is mitigated by the performance of duediligence before loans are advanced, following Board established creditguidelines and monitoring of the ongoing performance of the businesses to whichloans have been advanced. The total exposure of the Group as at 31 January 2006under this agreement was £14.77 million (2005:£17.02 million) net of providedloans. There were 2 investee companies in default at 31 January 2006 in respect to someor all of their loans, for which provision has been made (see Note 22). The Group is also exposed to credit risk on the secured loans - see Note 9 andinterest rate risk below. Market price risk Market price risk arises mainly from uncertainty about future movements andvalue of the Group's investments. As there are no quoted investments within theinvestment portfolio the exposure to market price risk is reduced. However, thevaluation of unquoted investments may take market price movements for similarinstruments into account. Interest rate risk The Group's exposure to market risk for changes in interest rates relatesprimarily to the Group's cash at bank and secured loans. The return on the bankbalances is linked to short-term deposit rates and is therefore linked closelyto bank base rate changes. The secured loans bear fixed rates of interest at 15% and are repayable asfollows: Principal Interest Rate Maturity £Past Times Ltd 2,450,000 15% 22 December 2006 Morada Home Ltd 645,000 15% 19 September 2008 C30 Ltd 117,670 15% 21 September 2006 Autocue Group Ltd 500,000 15% 31 December 2015 The terms of the mortgage bank loan are disclosed in Note 12. EPIC Reconstruction plc Notes to the Financial Statements (continued) For the year ended 31 January 2006 Fair Values All financial instruments are considered to be stated at fair value except theGroup's interest in unlisted shares and the Group's interest in fixed ratesecured loans for which fair value cannot be reliably measured. 19 Director interests None of the Directors had any interests in the shares of the Company as at 31January 2006. 20 Related parties During the year Mr Philip Scales was a director of Northern Trust InternationalFund Administration (Isle of Man) Limited, the Administrator and Registrar.Administration fees amounting to £53,649 (2005 (Note 24): £69,742) were payableto Northern Trust International Fund Administration Services (Isle of Man)Limited, calculated in accordance with the Administration Agreement of which£46,896 was outstanding as at 31 January 2006 (31 January 2005: £8,431). CormacO'Keeffe is an employee of the Northern Trust Group. Investment advisory fees amounting to £467,016 (2005 (Note 24): £556,495) werepayable to the Manager calculated in accordance with the Investment AdvisoryAgreement, of which £72,277 (31 January 2005: £119,021) was outstanding as at 31January 2006. The Investment Advisor is also entitled to structuring fees andfees on the sale of investments (see Note 3). Mr Donald Adamson, a director, is a non-executive director of the EquityPartnership Investment Company plc, which owns 29.9% of the EPIC InvestmentPartners Limited, the holding company of EPIC Special Investments Limited, theInvestment Manager. Mr Geoffrey Vero is a non executive director of Numis Corporation plc and aformer non executive Director of Numis Securities Limited, the NominatedAdvisors and to the Company. Advisory and broker fees of £32,818 (2005 (Note24): £48,674) were payable to Numis Securities Limited, of which £6,633 was paidin advance as at 31 January 2006 (31 January 2005: £4,201 in advance). Lehman Brothers, a significant shareholder have rights to 20%, subject to costs,of the performance fee and management fees due to the Manager. EPIC Reconstruction plc Notes to the Financial Statements (continued) For the year ended 31 January 2006 21 Subsidiary Companies On 21 August 2003 the Company incorporated EPIC Structured Finance Limited inthe Isle of Man, with paid up share capital of £2. On 11 October 2004 the Company incorporated EPIC Reconstruction Property Limitedin England and Wales, with paid up share capital of £275,100. On 30 December 2004 the Company incorporated EPIC Reconstruction PropertyCompany II Limited in the Isle of Man, with paid up share capital of £2. On 29 September 2005 the Company incorporated EPIC Reconstruction PropertyCompany (Isle of Man) Limited in the Isle of Man, with paid up share capital of£2. 22 Financial commitments and guarantees Under a credit risk participation agreement signed with a third party financecompany, the Group is committed to fund a minimum of 70% and a maximum of 100%(depending on the nature of loan and amount of security) of the credit lossesfor loans arranged by the Group and funded by the third party finance company.Provision is made for any loans which are considered impaired and hence thecommitment to fund the related credit losses will be called. As at 31 January2006 provisions of £443,000 have been established against two loans, (2005: oneloan for £435,000). The company settled an additional call under the agreementin respect of one loan during the current financial year for £381,363 resultingin a charge for the year of £824,363. Under the terms of the credit risk participation agreement, the Group mustretain a minimum amount in a security account, which is charged in favour of thethird party finance company, to support the Group's commitment under theagreement. As at 31 January 2006, £17,314,836 (31 January 2005: £15,406,414) ofthe term deposit was charged in favour of the third party finance company. EPIC Reconstruction plc Notes to the Financial Statements (continued) For the year ended 31 January 2006 23 Post balance sheet events On 14 March 2006 the Company reached agreement on an investment of up to £5.0million in cash in GGS Holdings Limited, a construction, maintenance andproperty development group. The Company has agreed to support a new managementteam and work with the previous owner to implement an operational and financialrestructuring of the group. At a meeting of the Board of Directors held on 11 April 2006, it was agreed bythe Directors to adopt a consistent distribution policy in respect of bothcapital and income distributions. It was resolved that all capital gains andlosses would be attributable to capital distributions and all income andexpenses relating to the operation of the Company would be attributable toincome distributions, with the exception of any expenses directly associatedwith capital transactions which would be taken to capital. The policy will beimplemented for all transactions and distributions from 1 February 2006. At a meeting of the Board of Directors held on 20 April 2006, it was agreed tosell the assets of the investment in Gaskell McKay Ltd. Since the year end,Gaskell McKay has had a deterioration in performance and a sale was pursued.This sale has now been completed and is at a loss. Some of the assets are stillin the sale process, however, it is envisaged that the sale will result in anegative impact of up to 5p on the net asset value per share The sale of the Par property, the final property in the Property Company, wascompleted on 13 April 2006. The sale was for £969,000, representing a gain of£169,000 over the original investment. 24 Comparative figures The comparative figures are for the period from 25 July 2003 (date ofincorporation) to 31 January 2005.EPIC Reconstruction plc 25 Schedule of shareholders holding over 3% of issued shares Income Shares Holdings % of class Lehman Brothers Nominees Limited 11,000,000 36.67 Brit Insurance Holdings Limited 5,000,000 16.67 Nortrust Nominees Limited 3,000,000 10.00 Numis Nominees Limited 1,742,489 5.81 BNY (OCS) Nominees Limited 1,394,030 4.65 State Street Nominees Limited 1,258,961 4.20 Roy Nominees Limited 1,190,476 3.97 Harewood Nominees Limited 1,044,314 3.48 25,630,270 85.45 This information is provided by RNS The company news service from the London Stock Exchange