RNS Number:0021S
Prospect Japan Fund Ld
09 April 2008
THE PROSPECT JAPAN FUND LIMITED
PRELIMINARY PROFITS ANNOUNCEMENT
This is not the Company's Statutory Financial Statements. All figures are based
on the audited financial statements for the year from 1 January, 2007 to 31
December, 2007.
The preliminary announcement is prepared on the same basis as set out in the
previous year's annual accounts.
CHAIRMAN'S REPORT
Performance - The Japanese small cap market suffered a year of negative returns
during 2007, with the Topix Small Companies Index down 10.55% for the year.
During the same period, the net asset value ("NAV") per share of the Company was
down 17.13%. A more detailed review of the Company's performance appears in the
Investment Advisor's Report. The shares ended the year trading at a discount of
5.77% (2006: 5.02%) to the underlying NAV per share.
On 20 November, 2007 the Board authorised borrowing of up to US$40,000,000. As
of the end of the year, the amount drawn down was US$23,309,646.
Dividend - As with previous years and in line with expectation, the Company has
not earned sufficient income to pay a dividend to shareholders.
Directorate - Mr. Rupert Evans is subject to annual re-election due to his
position as a Director of the Manager and, being eligible, has offered himself
for re-election. All of the other Directors are independent and this provides an
appropriate balance.
Having served as Chairman of the Prospect Japan Fund since inception of the
Fund, it is my intention to step down at the end of the current term, while
continuing to serve on the Board. I would like to take this opportunity to thank
my fellow Board Members for their support during my tenure.
The Board has considered the proposal for the re-election of each of the
above-named Directors and recommends to shareholders that they vote in favour of
the proposals.
Continuation Vote - In accordance with the Articles of Association of the
Company, a Special Resolution that the Company be wound up was considered at the
2005 Annual General Meeting. Shareholders voted against the Special Resolution
in line with the recommendations of the Board. A further continuation vote will
be held at the Annual General Meeting in 2008.
Directors' remuneration - The Board reviewed the level of remuneration received
and confirms that Directors' fees be increased to �20,000 per annum for the
Chairman, �17,500 per annum for the Chairman of the Audit Committee and �15,000
per annum for Directors. This increase became effective on 1 July, 2007
following the 2007 AGM.
Annual General Meeting - The Annual General Meeting of the Company is due to
take place on 22 May, 2008 at 16.00 at the Company's registered office at
Trafalgar Court, St Peter Port, Guernsey.
David Fitzwilliam-Lay
Chairman
INVESTMENT ADVISOR'S REPORT
For the year from 1 January, 2007 to 31 December, 2007
Market Performance (%), US$ NAV
1 Year 3 Year 5 Year
31.12.07
Prospect Japan Fund (17.13%) 5.29% 102.26%
Topix Small (10.55%) 10.33% 113.17%
TSE2 (15.77%) 2.93% 146.97%
Prospect Japan Fund inception date is 20 December 1994. Topix Small is the
capitalization-weighted index designed to measure the stocks not included in the
Topix 500 Index that are listed on the First Section of the Tokyo Stock
Exchange. TSE2 is the capitalization-weighted index of all companies listed on
the Second Section of the Tokyo Stock Exchange. As of August 2003, the benchmark
of the Prospect Japan Fund changed from TSE2 to Topix Small since its
characteristics with respect to average market capitalization more closely
resemble the investment strategy pursued by the portfolio. Above performance of
the Fund is net of fees and expenses and includes reinvestment of dividends and
capital gains. Source: Prospect Asset Management, Inc. Topix Small and TSE2
Index performance includes the reinvestment of dividends. Source: Bloomberg.
Summary
The fund had a difficult year in 2007 falling 17.13% versus 10.55% in the Topix
Small Index, the fund's benchmark index. The Japanese equity market has not only
been a major laggard relative to other stock markets in 2007, there has also
been a major disparity in performance between large and small cap areas of the
market. This has been a particularly challenging environment for the Prospect
Japan Fund. In addition, the severe correction in JREITs, where the portfolio
has a significant exposure, has had a negative impact. It is important to
emphasise in both small caps and JREITs that the primary driver of price falls
has been technical rather than fundamental, and that both these areas of the
market are extremely attractive from a valuation perspective.
Small cap stocks have had a brutal price correction over the last eighteen
months. Although there have undoubtedly been disappointments in some sectors of
the market, the key driver has been significant foreign disinvestment as a
result of fund redemptions across both traditional long only institutional and
retail funds and hedge funds. As a result Japanese corporate earnings have not
been this cheaply valued in decades and the positive gap between the earnings
yield and the bond yield is significantly above the level at the time the market
bottomed in 2003. In other words the entire 2003-2005 bull market has been
eliminated, and both risk aversion and disdain for Japanese small caps is at an
extreme. Against this backdrop if valuations are becoming stretched in areas
such as emerging markets, the case for Japan is compelling.
JREITs have also been hit hard as a result of redemption selling. The positive
carry between the cost of borrowing and rental yields remains compelling and the
managers firmly believe that the Japanese property market remains in its own,
desynchronized cycle. As a consequence we believe this sector is significantly
undervalued.
Outlook
We expect domestic interest in equities to continue to improve, partly as the
recent rally in 10 year Government Bonds means that the dividend yield on the
equity market is now virtually identical to Japanese Government Bonds.
Historically this has provided a buy signal on equities albeit that a "cheap"
equity market may remain in place for some months. We note domestic Trust banks
have recently been significant buyers of the market. The rally in Government
Bonds also serves to highlight the positive "carry" in Japanese real estate,
whilst the correction in Japanese REITS means yields of around 3.5% are evident.
This is leading to renewed domestic retail interest, which has been further
enhanced by Yen strength making overseas purchases less attractive.
Clearly the equity market is cheap for a reason, which we believe to be that
corporate governance in Japan is at unacceptably poor levels particularly with
respect to minority shareholders. Yet we see continued strong interest in
private equity and other "activist" flows towards the Japanese market. Obviously
this is because booms in other regions such as Asia and emerging markets only
serve to highlight that Japanese assets are significantly undervalued. Whilst
"headlines" regarding corporate governance are often disappointing, M&A "deals",
albeit from a low base, are growing strongly. We expect further developments on
this front over the next year. The fund is extremely well positioned to benefit
from these opportunities.
The Prospect Japan Fund is a closed-end investment company incorporated in
Guernsey, and listed on the London Stock Exchange. The Company's investment
objective is to achieve long-term capital growth from a portfolio of securities
primarily of smaller Japanese companies listed or traded on Japanese Stock
Markets. Past performance is no indication of future results
Prospect Asset Management, Inc.
April, 2008
The Preliminary Profits Announcement was approved by the Board of Directors on
07 April, 2008.
INCOME STATEMENT
for the year from 1 January, 2007 to 31
December, 2007
Revenue Capital Total Revenue Capital Total
01.01.2007 01.01.2007 01.01.2007 01.01.2006 01.01.2006 01.01.2006
to to to to to to
31.12.2007 31.12.2007 31.12.2007 31.12.2006 31.12.2006 31.12.2006
In U.S. In U.S. In U.S. In U.S. In U.S. In U.S.
Dollars Dollars Dollars Dollars Dollars Dollars
Investment income 4,211,861 - 4,211,861 4,508,557 - 4,508,557
Interest income 8,420 - 8,420 12,868 - 12,868
Losses on financial
assets at
fair value through - (36,372,395) (36,372,395) - (20,120,554) (20,120,554)
profit or loss
Foreign exchange - 8,728 8,728 - 286,525 286,525
movements
Total Income 4,220,281 (36,363,667) (32,143,386) 4,521,425 (19,834,029) (15,312,604)
Management fee (3,321,188) - (3,321,188) (3,442,395) - (3,442,395)
Other expenses (1,803,964) - (1,803,964) (1,898,594) - (1,898,594)
Loan Interest (140,637) - (140,637) - - -
Total Expenses (5,265,789) - (5,265,789) (5,340,989) - (5,340,989)
Loss for the year (1,045,508) (36,363,667) (37,409,175) (819,564) (19,834,029) (20,653,593)
before tax
Withholding tax (277,620) - (277,620) (312,211) - (312,211)
Loss for the year (1,323,128) (36,363,667) (37,686,795) (1,131,775) (19,834,029) (20,965,804)
after tax
Loss per Ordinary
Share -
Basic & Diluted (0.369) (0.202)
The above results relate to the continuing operations of the company.
The total column of this statement represents the Company's Income Statement,
prepared in accordance with IFRS. The supplementary revenue and capital columns
are both prepared under guidance published by The Association of Investment
Companies.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS AND RESERVES
for the year from 1 January, 2007 to 31 December, 2007
Capital
Capital Capital Capital Reserve/
Share Redemption Redemption Revenue Reserve/ Reserve/ Exchange
Capital Reserve Reserve Reserve Realised Unrealised Differences Total
In U.S. In U.S. In U.S. In U.S. In U.S. In U.S. In U.S. In U.S.
Dollars Dollars Dollars Dollars Dollars Dollars Dollars Dollars
Balances at 102,824 312,685 96,730,082 (14,097,274) 142,497,446 (3,172,177) 36,295 222,409,881
1 January,
2007
Movements
during the
year
Realised - - - - 17,527,718 - - 17,527,718
gains on
investments
sold
Movement on
unrealised
loss on
revaluation - - - - - (53,900,113) - (53,900,113)
of
investments
Gains on - - - - - - 8,728 8,728
foreign
exchange
Deficit on - - - (1,323,128) - - - (1,323,128)
ordinary
activities
Repurchase (1,754) 1,754 (3,409,237) - - - - (3,409,237)
of shares
Balances at 101,070 314,439 93,320,845 (15,420,402) 160,025,164 (57,072,290) 45,023 181,313,849
31 December,
2007
for the year from 1 January, 2006 to 31 December, 2006
Capital
Capital Capital Capital Reserve/
Share Redemption Redemption Revenue Reserve/ Reserve/ Exchange
Capital Reserve Reserve Reserve Realised Unrealised Differences Total
In U.S. In U.S. In U.S. In U.S. In U.S. In U.S. In U.S. In U.S.
Dollars Dollars Dollars Dollars Dollars Dollars Dollars Dollars
Balances at 105,354 310,155 102,139,113 (12,965,499) 97,585,899 61,859,924 (250,230) 248,784,716
1 January,
2006
Movements
during the
year
Realised - - - - 44,911,547 - - 44,911,547
gains on
investments
sold
Movement on
unrealised
loss on
revaluation - - - - - (65,032,101) - (65,032,101)
of
investments
Gain on - - - - - - 286,525 286,525
foreign
exchange
Deficit on - - - (1,131,775) - - - (1,131,775)
ordinary
activities
Repurchase (2,530) 2,530 (5,409,031) - - - - (5,409,031)
of shares
Balances at 102,824 312,685 96,730,082 (14,097,274) 142,497,446 (3,172,177) 36,295 222,409,881
31
December,
2006
STATEMENT OF ASSETS AND LIABILITIES
as at 31 December, 2007
31.12.2007 31.12.2006
Notes In U.S. In U.S. Dollars
Dollars
Non-current assets
6 Financial assets designated at fair value through profit or 195,997,753 220,062,128
loss
Current assets
7 Receivables 894,083 1,578,511
Cash and cash equivalents 8,431,150 1,933,210
Total current assets 9,325,233 3,511,721
Current liabilities
Bank overdraft - 203,529
9 Short term borrowings 23,309,646 -
8 Payables 699,491 960,439
Net current (liabilities)/assets (14,683,904) 2,347,753
Total assets less current liabilities 181,313,849 222,409,881
Equity
10 Share capital 101,070 102,824
10 Redemption reserve 93,320,845 96,730,082
10 Capital redemption reserve 314,439 312,685
11 Other reserves 87,577,495 125,264,290
Total equity 181,313,849 222,409,881
Ordinary Shares in issue 101,070,520 102,824,520
2 Net Asset Value per Ordinary Share 1.79 2.16
The Preliminary Profit Announcement was approved by the Board of Directors on 07
April, 2008
CASH FLOW STATEMENT
for the year from 1 January, 2007 to 31
December, 2007
01.01.2007 to 01.01.2006 to
31.12.2007 31.12.2006
In U.S. In U.S.
Dollars Dollars
Cash flows from operating activities
Net cash outflow from operating activities (673,045) (2,075,197)
Cash flows from investing activities
Purchase of investments (235,909,508) (209,418,486)
Sale of investments 223,374,885 201,283,721
Net cash outflow from financing activities (12,534,623) (8,134,765)
Net cash outflow before financing (13,207,668) (10,209,962)
Cash flows from financing activities
Repurchase of shares (3,409,237) (5,409,031)
Short term borrowings 23,309,646 -
Net cash inflow/(outflow) from financing 19,900,409 (5,409,031)
activities
Increase/(decrease) in cash and cash 6,692,741 (15,618,993)
equivalents
Reconciliation of net cash flow to
movement in net funds
Net cash inflow/(outflow) 6,692,741 (15,618,993)
Effects of foreign exchange rate changes 8,728 286,525
Cash and cash equivalents at beginning of year 1,729,681 17,062,149
Cash and cash equivalents at end of year 8,431,150 1,729,681
Reconciliation of net cash flow to
Statement of Assets and Liabilities
Cash and cash equivalents 8,431,150 1,933,210
Bank overdraft - (203,529)
8,431,150 1,729,681
NOTES AND ACCOUNTING POLICIES
NOTE 1 Principal Accounting Policies
Basis of Accounting
The Financial Statements have been prepared for the first time in accordance
with policies consistent with International Financial Reporting Standards
("IFRS") issued by the International Accounting Standards Board (the "IASB") and
as adopted by the European Union, and interpretations issued by the
International Financial Reporting Interpretations Committee.
The financial information in these financial statements has been prepared on the
basis of standards applicable as at 31 December, 2007.
In accordance with the transitional provisions set out in IFRS 1 "First-time
Adoption of International Financial Reporting Standards" and other relevant
standards, the Company has applied IFRS in force as at 31 December, 2007 in its
financial reporting with effect from 1 January, 2006. Previously, the Company
followed UK accounting standards issued by the UK Accounting Standards Board and
the pronouncements of its Urgent Issues Task Force, along with relevant
Statements of Recommended Practice (collectively, UK GAAP). No adjustments have
been made to comparative period figures as a result of adoption of IFRS. Where
the presentational guidance set out in the Statement of Recommended Practice
(the "SORP") for Investment Trusts issued by the Association of Investment
Companies, is consistent with the requirements of IFRS, the Directors have
sought to prepare the financial statements on a basis compliant with the
recommendations of the SORP.
Presentation
Although the disclosure of certain items has changed and the cashflow statement
is now prepared in accordance with IAS7 "Cashflow Statements", there has been no
material effect on the amounts recorded in the financial statements.
Basis of Preparation
The financial statements have been prepared on a going concern basis under the
historical cost convention adjusted to take account of the revaluation of the
Company's investments at fair value.
Income
Income arising on the investments is recognised when the right to receive them
has been met and is recorded gross of withholding tax. Bank interest is
accounted for on an accruals basis.
Expenses
The Company is responsible for all normal operating expenses including stamp and
other duties and charges incurred on the acquisition and realisation of
investments and audit fees. All expenses are accounted for on an accruals basis.
Expenses are allocated to the revenue account including those which are
incidental to the purchase or disposal of an investment as required under IAS
39.
Investments
All of the Company's investments have been designated at fair value through
profit or loss at the time of acquisition. Investments are initially recognised
at fair value, being the costs incurred in their acquisition. Any transaction
costs are expensed in the income statement. After initial recognition,
investments are measured at fair value.
As it is the intention of the Directors to invest only where either a listing or
alternative form of realising can be expected within a reasonable time, the
investments are considered to be held for trading and as such are designated at
fair value through profit or loss.
Listed investments held at the balance sheet date are valued at bid prices
quoted on the principal stock exchange on which the investments are traded.
There were no unlisted investments held at 31 December, 2007. Gains and losses
arising from changes in fair value are presented in the Income Statement in the
period in which they arise.
All "regular way" purchases and sales of financial assets are recognised on the
"trade date", i.e. the date that the Company commits to purchase/sell the
financial asset. "Regular way" purchases or sales are purchases or sales of
financial assets that require delivery of assets within the time frame generally
established by regulation or convention in the market place.
Foreign Currencies
(i) Functional and presentation currency
The Company's functional and presentational currency is United States Dollar.
(ii) Foreign currency transactions
Foreign currency assets and liabilities, including investments at valuation, are
translated into U.S. Dollars at the rate of exchange ruling at the balance sheet
date. Investment transactions and income and expenditure items are translated at
the rate of exchange ruling at the date of the transactions. Gains and losses on
foreign exchange are included in the Income Statement.
Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits and
highly liquid investments readily convertible to known amounts of cash and
subject to insignificant risk of change in value. Cash and cash equivalents at
the year end constituted demand deposits.
Interest Bearing Borrowings
Interest bearing borrowings are recognised on the Company's Balance Sheet when
the Company becomes a party to the contractual provisions of the instrument and
are carried at amortised cost using the effective interest rate method.
Standards, interpretations and amendments to published statements not yet
effective
At the date of authorisation of these financial statements, the following
standards and interpretations, which have not been applied in these financial
statements, were in issue but not yet effective:
- IFRS 2 - Share Based Payments - Amendment relating to vesting conditions and
cancellations
(Effective date - 1 January 2009)
- IFRS 3 - Business Combinations - Comprehensive revision on applying the
acquisition method
(Effective date - 1 January 2009)
- IAS 1 - Presentation of Financial Statements - Comprehensive revision
including requiring a statement of
comprehensive income (Effective date - 1 January 2009)
- IAS 23 (Revised) - Borrowing costs - Comprehensive revision to prohibit
immediate expensing
(Effective date - 1 January 2009)
- IAS 27 - IAS 28 and IAS 31 - Consequential amendments arising from amendments
to IFRS 3 (Effective date -
1 January 2009)
- IAS 32 - Financial instruments presentation - Amendments relating to puttable
instruments and obligations arising
on liquidation (Effective date - 1 January 2009)
- IFRIC 11- IFRS 2 - Group and Treasury Share Transactions (Effective date - 1
March 2007)
- IFRIC 12 - Service Concession Arrangements (Effective date - 1 January 2008)
- IFRIC 13 - Customer Loyalty Programmes (Effective date - 1 July 2008)
- IFRIC 14 - IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their
Interaction (Effective date - 1 January 2008)
The Directors anticipate that the adoption of these Standards in future periods
will have no material financial impact on the financial statements of the
Company.
NOTE 2 (Deficit)/Return per Ordinary Share - Basic & Diluted and Net Asset Value
per Ordinary Share - Basic & Diluted
The deficit per Ordinary Share - Basic and Diluted has been calculated based on
the weighted average number of Ordinary Shares of 102,119,176 and a net deficit
of US$37,686,795 (2006: on 103,723,178 Ordinary Shares and a net deficit of
US$20,965,804).
There were no dilutive elements to shares issued or repurchased during the year.
The Net Asset Value per Ordinary Share - Basic and Diluted has been calculated
based on the number of shares in existence at the balance sheet date 101,070,520
(2006: 102,824,520) and shareholders' funds attributable to equity interests of
US$181,313,849 (2006: US$222,409,881).
31.12.2007 31.12.2006
In U.S. In U.S.
Dollars Dollars
Net Asset Value per Ordinary Share - 1.79 2.16
Basic and Diluted
NOTE 3 Taxation
The Company has been granted Exempt Status under the terms of The Income Tax
(Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its
liability is an annual fee of �600. With effect from 1 January, 2008 Guernsey
taxation legislation was changed, with the standard rate of income tax for
Guernsey resident companies now 0%. There is no impact on the Company with
regard to this change as it will continue to apply for Exempt Status.
The amount disclosed as taxation in the Income Statement relates solely to
withholing tax suffered at the source of income in the investing country, Japan.
Note 4 Management Fee
The management fee is payable to the Manager, Prospect Asset Management (Channel
Islands) Limited, monthly in arrears at a rate of 1.5% per annum of the Net
Asset Value, which is calculated as of the last business day of each month.
Total management fees for the year amounted to US$3,321,188 (2006: US$3,442,395)
of which US$231,287 (2006: US$283,790) is due and payable at the year end. The
Management Agreement dated 1 December, 1994 shall remain in force until
determined by the Fund, or upon the Manager giving the Fund not less than three
months' notice in writing, subject to additional provisions included in the
agreement regarding a breach by either party.
Note 5 Other Expenses
31.12.2007 31.12.2006
In U.S. In U.S.
Dollars Dollars
Brokers' commission 571,257 615,281
Administration and secretarial fees* 553,683 573,711
Custodian's fees and charges** 293,358 357,305
General expenses 217,865 227,571
Directors' remuneration 121,207 81,608
Auditors' fees 46,594 43,118
1,803,964 1,898,594
*The administration and secretarial fees are payable to Northern Trust
International Fund Administration Services (Guernsey) Limited, monthly in
arrears and is 0.25% of the Net Asset Value of the Fund, which is calculated as
of the last business day of each month. Total administration and secretarial
fees for the year amounted to US$553,683 (2006: US$573,711) of which US$38,548
(2006: US$92,200) is due and payable at the year end.
**The Fund's custodian changed with effect from 3 September, 2007, from HSBC
Custody Services (Guernsey) Limited to Northern Trust (Guernsey) Limited. The
custodian's fees and charges payable to HSBC Custody Services (Guernsey) Limited
were 0.10% of the Net Asset Value of the Fund, which is calculated as of the
last business day of each month. Custodian's fees and charges payable to
Northern Trust (Guernsey) Limited, monthly in arrears, is 0.08% of the Net Asset
Value of the Fund, which is calculated as of the last business day of each
month. Total custodian's fees and charges for the year amounted to US$293,358
(2006: US$357,305) of which US$13,317 (2006: US$18,027) is due and payable at
the year end.
Note 6 Financial assets designated at fair value through profit or loss
31.12.2007 31.12.2006
In U.S. In U.S.
Dollars Dollars
Opening book cost 223,234,305 160,396,796
Purchases at cost 235,632,928 209,144,749
Proceeds on sale (223,324,908) (191,218,787)
Realised gains on sale 17,527,718 44,911,547
Closing book cost 253,070,043 223,234,305
Closing unrealised (57,072,290) (3,172,177)
depreciation
Fair value as at 31 195,997,753 220,062,128
December, 2007
Note 7 Receivables
31.12.2007 31.12.2006
In U.S. In U.S.
Dollars Dollars
Amounts due from brokers 130,200 180,177
Dividends receivable 630,308 1,398,334
Other receivables 133,575 -
894,083 1,578,511
Note 8 Payables
31.12.2007 31.12.2006
In U.S. In U.S.
Dollars Dollars
Amounts due to brokers 79,129 355,709
Other creditors 620,362 604,730
699,491 960,439
Note 9 Short Term Borrowings
On 20 November, 2007 the Company entered into a drawdown loan agreement of up to
US$40,000,000 with Royal Bank of Scotland (RBS). As at 31 December, 2007 the
loan amount drawn down was US$23,309,646.
In connection with the facility agreement, the Company entered into a Guernsey
law security interest agreement in favour of RBS over its custody accounts held
with Northern Trust (Guernsey) Limited.
The loan may be applied for investment leverage purposes only and shall be
repaid on the latest of (i) the day falling 364 days from the date of the
drawing down of the loan, and (ii) any extension date agreed by the the Company
and RBS.
Note Share Capital, Share Premium, Redemption Reserve & Capital Redemption
10 Reserve
Authorised Share Capital 31.12.2007
Number of shares In U.S.
Dollars
150,000,000 Ordinary Shares of US$0.001 150,000
each
60,000,000 "C" Ordinary Shares of 600,000
US$0.01 each
Issued and fully paid Shares
Capital
Ordinary Shares Share Redemption Redemption
Capital Reserve Reserve
Number of shares In U.S. In U.S. In U.S.
Dollars Dollars Dollars
102,824,520 Balance at 1 102,824 96,730,082 312,685
January, 2007
Shares acquired
and cancelled
(1,754,000) during the year (1,754) (3,409,237) 1,754
101,070,520 Balance at 31 101,070 93,320,845 314,439
December, 2007
Ordinary Shares are not puttable instruments. As such they are not required to
be classified as debt under IAS 32.
IFRIC Interpretation 2: 'Members' Shares in Co-operative Entities and Similar
Instruments' paragraph 7 states "Members' share is equity if the entity has an
unconditional right to refuse redemption of the members' share". As defined in
the Articles of Association, redemption of Ordinary Shares is at the sole
discretion of the Directors, therefore the Ordinary Shares have been classified
as equity.
Ordinary Shares carry the right to vote at general meetings of the Company and
to receive dividends and, in a winding-up rank may participate in surplus assets
remaining after settlement of any outstanding liabilities of the Company.
The Company may purchase, subject to various terms as set out in the Articles, a
maximum of 7,706,950 Ordinary Shares, equivalent to 7.6% of the Issued share
capital of the Company as at 31 December, 2007. During the year, shares were
purchased and cancelled as follows:-
Price per Percentage of
Share
Date Shares In U.S. share capital
Dollars
2 February, 2007 175,000 2.080 0.17%
15 June, 2007 500,000 2.164 0.49%
3 August, 2007 50,000 2.064 0.05%
13 August, 2007 400,000 1.980 0.40%
26 October, 2007 310,000 1.680 0.31%
5 November, 2007 220,000 1.700 0.22%
21 November, 2007 25,000 1.693 0.02%
26 November, 2007 54,000 1.743 0.05%
27 November, 2007 20,000 1.740 0.02%
1,754,000 1.73%
Note Other Reserves
11
Capital Capital Capital
Reserve/
Accumulated Reserve/ Reserve/ Exchange
Losses Realised Unrealised Differences Total
In U.S. In U.S. In U.S. In U.S. In U.S.
Dollars Dollars Dollars Dollars Dollars
Balances at 1 January, 2007 (14,097,274) 142,497,446 (3,172,177) 36,295 125,264,290
Movements during the year
Realised gains on - 17,527,718 - - 17,527,718
investments sold
Movement on unrealised loss
on
revaluation of investments - - (53,900,113) - (53,900,113)
Gain on foreign exchange - - - 8,728 8,728
Deficit on ordinary (1,323,128) - - - (1,323,128)
activities
Balances at 31 December, (15,420,402) 160,025,164 (57,072,290) 45,023 87,577,495
2007
Note Reconciliation of Deficit on Ordinary Activities to Net Cash Outflow from Operating
12 Activities
31.12.2007 31.12.2006
In U.S. In U.S.
Dollars Dollars
Revenue deficit on ordinary (1,323,128) (1,131,775)
activities for the year
Decrease/(increase) in dividends 634,451 (1,001,048)
receivable and other receivables
Increase in other creditors 15,632 57,626
Net cash outflow from (673,045) (2,075,197)
operating activities
Note Analysis of financial assets and liabilities by
13 measurement basis
Designated Loans,
at fair receivables
value and payables Total
� � �
2007
Financial Assets
Investments designated at fair value 195,997,753 - 195,997,753
through profit or loss
Cash and cash equivalents - 8,431,150 8,431,150
Receivables - 894,083 894,083
195,997,753 9,325,233 205,322,986
Financial Liabilities
Payables - 699,491 699,491
Loans payable - 23,309,646 23,309,646
- 24,009,137 24,009,137
Designated Loans, Total
at fair receivables
value and payables
� � �
2006
Financial Assets
Investments designated at fair value 220,062,128 - 220,062,128
through profit or loss
Cash and cash equivalents - 1,933,210 1,933,210
Receivables - 1,578,511 1,578,511
220,062,128 3,511,721 223,573,849
Financial Liabilities
Payables - 960,439 960,439
Cash and cash equivalents - 203,529 203,529
- 1,163,968 1,163,968
Note 14 Related Party Transactions
Parties are considered to be related if one party has the ability to control the
other party or exercise significant influence over the other party in making
financial or operational decisions.
The Directors are responsible for the determination of the investment policy of
the Group and have overall responsibility for the Group's activities.
Mr Rupert Evans is a Director of the Manager.
Directors' fees are disclosed in Note 5. The basic fee payable to Directors is
�15,000, the Chairman of the Audit Committee �17,500 and the Chairman of the
Board �20,000.
Note 15 Financial Instruments
In accordance with its investment objectives and policies, the Company holds
financial instruments which at any one time may comprise the following:
* securities held in accordance with the investment objectives and policies
* cash and short-term debtors and creditors arising directly from operations
* borrowing used to finance investment activity
* derivative transactions including investment in warrants and forward currency
contracts
* options or futures for hedging purposes
The financial instruments held by the Company principally comprise equities
listed on the stock market in Japan. The specific risks arising from the
Company's exposure to these instruments, and the Manager/Investment Adviser's
policies for managing these risks, which have been applied throughout the year,
are summarised below.
Capital Management
The fair value of the Company's financial assets and liabilities approximate
their carrying amounts at the balance sheet date.
The Company's objectives when managing capital are to safeguard the Company's
ability to continue as a going concern in order to provide returns for
shareholders and benefits for other stakeholders and to maintain an optimal
capital structure to reduce the cost of capital.
The Company may not borrow or otherwise use leverage exceeding 25% of its net
assets for investment purposes, to meet redemption request or to settle
facilities for specific investments such as bridge financing.
In connection with the loan facility agreement with RBS, the Company entered
into a Guernsey law security interest agreement in favour of RBS over its
custody accounts held with Northern Trust (Guernsey) Limited.
The Company may purchase a maximum of 7,706,950 Ordinary Shares, equivalent to
7.6% of the Issued share capital of the Company as at 31 December, 2007,
provided that;
* The total number of shares repurchased from the AGM date does not exceed
13,424,453;
* The minimum price to be paid (exclusive of expenses) be US$0.001; and
* If the shares are trading on the London Stock Exchange at a discount to the
lower of the undiluted or diluted Net Asset Value;
Market Price Risk
The Company's investment portfolio - particularly its equity investments - is
exposed to market price fluctuations which are monitored by the Manager/
Investment Adviser in pursuance of the investment objectives and policies.
Adherence to investment guidelines and to investment and borrowing powers set
out in the scheme particulars mitigates the risk of excessive exposure to any
particular type of security or issuer.
Exceptional risks associated with investment in Japanese smaller companies may
include:
a) greater price volatility, substantially less liquidity and significantly
smaller market capitalisation, and
b) more substantial government intervention in the economy, including
restrictions on investing in companies or in industries deemed sensitive to
relevant national interests.
Market price sensitivity analysis
The sensitivity of the Company to market price risk can be approximated by
applying the percentage of funds invested measuring the impact that a movement
in the Topix Small Index would have. At 31 December 2007 this approximation
would produce a positive/negative movement in the net assets of the Company of
US$862,390 (2006: US$1,210,342) for a 1% positive/negative movement in the
Index.
Foreign Currency Risk
The Company principally invests in securities denominated in currencies other
than United States Dollar, the funcional currency of the Company. Therefore, the
balance sheet may be affected by movements in the exchange rates of such
currencies against the US Dollar. The Manager/Investment Advisor has the power
to manage exposure to currency movements by using forward currency contracts. No
such instruments were held at the date of these Financial Statements.
It is not the present intention of the Directors to hedge the currency exposure
of the Company, but the Directors reserve the right to do so in the future if
they consider this to be desirable.
The treatment of currency transactions other than in US Dollars is set out in
Note 1 to the Financial Statements under "Foreign Currencies".
The Company's net currency exposure is as
follows:
31.12.2007 31.12.2006
Investments Investments
In US In US
Dollars Dollars
Investments
Japanese Yen (Y21,969,388,133, 2006: 195,997,753 220,062,128
Y26,164,286,709)
Other (Liabilities)/Assets
US Dollars (23,844,998) (704,371)
Sterling (�50,073,2006:�3,068) 99,973 (6,005)
Japanese Yen (Y1,015,661,053, 2006: 9,061,121 3,058,129
Y363,596,247)
(14,683,904) 2,347,753
Interest Rate Risk
The Company may invest in fixed and floating rate securities. The income of the
Company may be affected by changes to interest rates relevant to particular
securities or as a result of the Manager/Investment Adviser being unable to
secure similar returns on the expiry of contracts or sale of securities. The
value of fixed interest securities may be affected by interest rate movements in
the future. Interest receivable on bank deposits or payable on bank overdraft
positions will be affected by fluctuations in interest rates, however the value
of the underlying cash positions will not be affected.
Increases in interest rates may increase the costs of the Company's borrowings.
The rate of interest on each RBS drawdown loan for each interest period is the
percentage rate per annum which is the aggregate of the applicable; (i) margin,
(ii) LIBOR and (iii) mandatory cost. Interest on the loan is payable monthly in
arrears. For the year ended 31 December, 2007 the interest accrued on the loan
was US$140,637.
As at 31 December, 2007, the Company only has significant exposure to interest
rate risk regarding the loan facility and cash and cash equivalents.
Interest rate sensitivity analysis
At the reporting date, if all other variables were assumed to hold constant, a
1% increase/decrease in interest rates would increase/decrease interest paid on
the Company's borrowings by US$21,367 and increase/decrease interest received on
cash and cash equivalents by US$100,845.
Fair Value
All assets and liabilities are carried at fair value with the exception of short
term borrowings which are carried at amortised cost using the effective interest
rate method.
Short term Debtors and Creditors
Trade and other receivables do not carry interest and are short term in nature.
They are stated at nominal value as reduced by appropriate allowances for
irrecoverable amounts in the case of receivables.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter in realising assets
or otherwise raising funds to meet financial commitments.
On 20 November, 2007 the Company entered into a drawdown loan agreement of up to
US$40,000,000 with Royal Bank of Scotland (RBS). As at 31 December, 2007 the
loan amount drawn down was US$23,309,646. In connection with the facility
agreement, the Company entered into a Guernsey law security interest agreement
in favour of RBS over its custody accounts held with Northern Trust (Guernsey)
Limited. The loan may only be applied for investment leverage purposes only and
must be repaid on the latest of (i) the day falling 364 days from the date of
the draw down of the loan, and (ii) any extension date agreed between the
Company and RBS.
The Company invests primarily in listed securities. In a review of trading in
the period after the balance sheet date, it was found that the securitites were
realisable in the following proportions;
31.12.2007 31.12.2006
On demand 13% 33%
1-6 months 60% 67%
6-12 months 27% 0%
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Company.
In accordance with the investment restrictions as described in its placing
Memorandum, the Company may not invest more than 10% of the Company's gross
assets in securities of any one company or issuer. However, this restriction
shall not apply to securities issued or guaranteed by a government or government
agency of the Japanese or US Governments. In adhering to these investment
restrictions, the Company mitigates the risk of any significant concentration of
credit risk arising on broker and dividend receivables.
Note 16 Segmental Reporting
The Directors are of the opinion that the Company operates in single business
and geographical segments, being investment business in Japan.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UUURACUPRGCB
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