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Fully-listed companies moving to Aim now outnumber real new issues joining the market. Some of these are exciting turnaround situations using Aim to engender a new corporate dawn. But many have problems so terminal that Aim is merely a dark place to rest before the administrators arrive. Christopher Spink reports

Something strange has happened to the Alternative Investment market over the past couple of years. Set up eight years ago primarily to help ambitious private companies raise public money to grow, the market now attracts more entrants from the Full List rather than this conventional source.

A total of 141 companies have transferred from the Stock Exchange's main market since Aim's inception in 1995. Up until the end of 2000, just 44 companies had made the move. But the pace has picked up since then. 36 moved in 2001, 42 joined from the Full List last year and by June this year, 19 companies had left the Full List for Aim, outnumbering the 17 companies entirely new to the market in 2003.

Why do they do it?

Many of these companies have moved across from the Full List to make the most of Aim's lighter regulations. These allow such refugees to restructure, divest themselves of unwanted businesses and refinance more easily and, just as importantly, without incurring large costs.

This ease of restructuring and refinancing explains why a high proportion of those that transfer tend to be traditional manufacturers, engineers or textile businesses. Perfect examples of this ilk include glassmaker Darby, windscreen wiper producer Widney and clothes, shoe and clothing accessory maker Dinkie Heel.

These businesses – and others – have been affected by competition from cheaper imports. The relative strength of the pound, until earlier this year, has also made trading hard. These problems have combined to cut operating margins.

Because of their large workforces many have pension fund deficits as well. Insurance broker Bradstock is an example of a former main board company hit particularly severely by such financial problems.

Other companies seeking a home on Aim operate in traditional areas that have seen better days. For example agricultural producers, such as Bertam, Rowe Evans and Lendu, come under this umbrella. All started life as plantation owners principally operating in the Commonwealth.

One interesting group of struggling ventures to dash sideways has been the listed football clubs. Most have proved to be poor investments, whatever market they have traded on. The worst is arguably Leicester City, the Midlands struggler that lurched sideways onto Aim before limbering into administration. Others, such as Sheffield United, have moved down after failing to gain promotion to the Premiership – a move which hardly smacks of ambition.

Fresh funds up for grabs

Some troubled tech businesses with similar cashflow problems to the engineers mentioned above have started a new life on Aim in order to try and attract a fresh cash injection from opportunistic Venture Capital Trusts (VCTs).

These specialised investment vehicles, which can only invest in unquoted or Aim-listed companies, had more than £400 million of cash between them at the start of the year.

Unsurprisingly, some high-tech companies have been more successful – and remain more appealing – than others.

For instance, in the middle of June two software companies supplying the financial services sector, made the move.

Sirius Financial Services distinquished itself in the eyes of potential investors when it moved by virture of its debt-free status and the fact that it was already in profit. It joined Aim to 'make acquisitions' more easily and it looks a good bet to continue its growth trajectory.

Easyscreen, however, has eaten up £18 million of shareholders' funds (thus far) and its move looks like a last desperate attempt to stem costs and raise fresh money.

Worth the risk?

The stocks that join Aim from the Full List obviously provide a rich source of ideas but backing many of these businesses can be risky, as a number of them have financial difficulties that could prove terminal.

However, the trick is to find ones that have refinanced adequately, have sufficient business plans in place, and whose move to Aim was primarily motivated to accelerate a sensible growth plan. These kind of companies should prove profitable for investors happy with the high risks involved. After all, the darkest financial hour often occurs just before the golden dawn.

Advanced Medical Solutions

Advanced Medical Solutions, which is developing a range of sophisticated woundcare products, moved to Aim from the Full List in April 2002.

The move was accompanied by a £3.4 million placing, net of costs, at 8.5p with a range of VCTs. This repaid debts incurred by the £2.9 million acquisition of Medlogic, which makes superglues for use in surgery.

Since joining Aim the shares have hardly moved but the business is making great strides towards profitability. In the year to the end of December overall sales rose 14 per cent to £8.4 million.

The higher margin professional products business increased turnover 42 per cent to £7.8 million though, with the non-Medlogic core products increasing revenues by 26 per cent to £6.9 million.

Consumer sales have dropped to just £600,000. The group, which has developed technology that treats plasters and other wound dressings with substances such as seaweed and silver compounds so that the wound heals better, has suffered from the perception that its products are merely plasters.

This is why chief executive Don Evans, a former Johnson & Johnson manager, wants to make the products higher value and higher margin propositions, principally for use by the medical profession. One example is Liquishield, which can prevent bedsores developing.

His aim is to make the company profitable by the end of the current year. A tiny profit may be made but in 2004 house broker Baird reckons sales will have virtually doubled from their 2002 level, producing a £1 million pre-tax profit and 0.7p of earnings per share. This puts the group on a p/e of 14.4, which is modest if the growth plans come off.

One distraction is the presence of the Advance Value Realisation investment trust on the shareholder list. This concern wants to sell its holding at a higher price and is prepared to persuade the board to think about accepting takeover bids to achieve this. However, this looks unlikely to happen at present.

Sector: Healthcare

Market capitalisation: £12.8m

Share price: 9p

52-week high/low: 9.5p/6.75p

AFA Systems

Another company that has managed to attract fresh funds from VCTs is financial software developer AFA Systems.

The group struggled last year, as its main client market – major investment banks – continued to endure troubled trading. Revenues for 2002 fell 26 per cent to £6 million and losses before tax came in at £10.6 million. This includes an exceptional goodwill charge of £8.3 million.

Alongside the Artemis Aim VCT, another investor in the £2 million placing at 17p was rival software group London Bridge. As part of the deal the latter company will distribute AFA's products, enabling the smaller company to increase sales.

Nevertheless, although some contracts have been won recently, revenues are not expected to pick up significantly until later this year. But the group has managed to cut out £1 million of annualised costs and this, combined with the expected increase in sales, should enable the group to make a profit next year.

Indeed, at the current low price, Artemis fund manager John Dodd believes the group is trading on a prospective p/e ratio of roughly one. Brave investors may want to follow his lead and back the business at this bargain price, which value the business at just one times historic sales.

Sector: Software

Market capitalisation: £6.6m

Share price: 19.25p

52-week high/low: 52.5p/11.75p

Tepnel Life Sciences

Two years ago this maker of sophisticated DNA-related systems raised £7.5 million at 20p when moving to Aim from the main list. This enabled the group to double turnover to £3.3 million in the year to the end of June 2002.

Further progress was reported in the last six months of 2002, with sales rising 27 per cent to £1.8 million, and chief executive Ben Matzilevich expects the group to break even for the whole of the current year after half-time losses dropped 29 per cent to £1.4 million.

Investors have started to take notice in the past few weeks, sending the shares up from 7p to 15.75p since the interims were released at the end of March. At this level the shares are still below the price at which they joined Aim and they could reasonably be expected to continue rising.

Tepnel's proposition is proving increasingly attractive because rather than developing its own drugs, its services help other companies in their hunt for the next generation of gene-related therapies.

The group sells the kits and then provides related scientific services to companies using them. These two businesses are expected to break into profit this year.

As well as providing and servicing novel DNA-purification systems, the group is also developing tests for food allergies, such as peanuts, which is also attracting interest. However, this division is at an earlier stage of development and may prove a drag on profits in the short term.

Sector: Pharmaceuticals

Market capitalisation: £15.3m

Share price: 15.75p

52-week high/low: 18.6p/5p