TIDMRUG
RENN UNIVERSAL GROWTH INVESTMENT TRUST PLC
ANNUAL REPORT AND ACCOUNTS
The Company's annual report and accounts for the year ended 31 March 2011 has
today been published on the Company's website: www.renaissanceusgrowth.co.uk.
Copies of this report will be sent to shareholders in the following week.
The Company's investment objective
Investment policy
The objective of the Company is to achieve capital growth and to outperform its
benchmark, the Russell 2000 Index.
Investments are made primarily in securities issued by companies listed, quoted
or domiciled in the US and Canada. These securities include, inter alia,
privately placed common stock, preferred stock, convertible debentures and
warrants, and may also include securities traded on an exchange. The companies
in which investments are made would generally be regarded as belonging to the
category of companies with `micro' stock capitalisations at the time of
purchase, typically those companies with market capitalisations below
$1 billion. From time to time, the Company also invests in securities in unlisted
US companies with similar characteristics. Although there are no limits set by
the Board on the proportion which may be invested in unlisted securities, it is
expected that such exposure will not exceed 25% over a prolonged period.
The Company is able to invest its assets in businesses which generate sales and
earnings outside the US so the Company may have significant economic exposure
to markets or economies outside North America.
The Board sets no specific limits on sector weights, or on the number of
securities which may be held, although no investment will be made that would
represent more than 15% of the value of the Company's total investments at the
time of purchase. The Board reviews the investments at each Board meeting to
ensure that diversification is adequate for a portfolio of this type.
The Company is permitted by its Articles of Association to borrow up to 30% of
its net assets, and may do so on an opportunistic basis determined by the
availability of investment opportunities.
A large proportion of the Company's investments will be, by their very nature,
less readily marketable than equities in general. The Company invests on a long
only basis, and does not currently intend to hedge its non UK currency exposure
back into sterling. The Company's policy is not to invest in UK listed
investment companies, including investment trusts.
Construction of the Company's portfolio
Construction of the Company's portfolio involves subjective judgement, rather
than quantitative targeting, although a number of considerations are taken into
account.
? Because liquidity in the Company's holdings is often very limited, it is
likely that a relatively large number of positions will be held. The exact
number of holdings will depend largely on the opportunities available to the
Manager.
? Several different industries will typically be represented, but the portfolio
will often deviate substantially from the sector weights in the Company's
benchmark. It should be noted that the Company expects to take significant
risks relative to that benchmark, with the goal of meeting its objective.
? The investment process tries to identify stocks which have the capacity to
appreciate very substantially in price. As a result, positions which were
relatively small on acquisition can become very large (over 15% of the
portfolio) if the investment is successful. The Company will often hold these
`winners', even if they become a large part of the investment portfolio, and
this can lead to significant concentration of risk.
? Purchases of investment positions often involves negotiation with the
business concerned and may take several months. For this reason the Board
believes it is desirable in normal circumstances for the Company to hold cash
in anticipation of such investment.
? When no investment can be found with the desired return profile, the Company
may hold cash or equivalent, and there is no limit set by the Board on the
proportion of assets so held.
? The Manager may take a seat on the board of investee companies in order to
influence the strategy of these companies. Consequently, it is possible that
this could lead to the acquisition of knowledge which might affect the ability
of the Manager to act freely in all circumstances.
Engagement with investee companies
The long term nature of the Company's investments requires the Manager to
actively engage with investee companies in order to enhance and protect
shareholder value. This typically includes the following activities:
? Regular face-to-face meetings.
? Regular formal and informal telephone communications.
? Board representation on investee companies, where appropriate.
? Provision of management assistance, where appropriate.
? Review of press releases, financial results and U.S. Securities and Exchange
Commision filings.
The Manager avoids conflicts of interest arising between itself and the
Company's investee companies by not investing alongside the Company. The
Manager's Compliance Officer also reviews any personal securities transactions
undertaken by employees of the Manager.
The Manager has a published statement on its voting policy in respect of
investee companies, which can be found on its website: www.rencapital.com.
The Board receives regular updates from the Manager on the performance of the
Company's investee companies and the ways in which the Manager engages with
these companies. The Board also receives face to face updates from some of its
major investee companies each year, as well as meeting with certain potential
investee companies.
Registered in England and Wales number 3150876
A member of the Association of Investment Companies
Company Summary
Management company RENN Capital Group, Inc
Total net assets and shareholders' GBP58,564,000 as at 31 March 2011.
funds
Market capitalisation GBP47,021,000 as at 31 March 2011.
Capital structure 18,659,008 Ordinary 25p shares.
Total voting rights 18,659,008
Wind-up date The Company's Articles require a
continuation vote to be passed by
Shareholders every three years.
Management fee The Manager receives a fee calculated at a
rate of 0.125% of the total net assets of
the Company per month, payable quarterly in
arrears. No fee is payable on cash or near
cash investments. A performance fee is also
payable as described in note 3 to the
accounts.
Secretarial fee The Company Secretary receives an annual fee
of GBP73,000 which will be subject to an RPI
adjustment in July 2012.
ISA status The Company is fully eligible for inclusion
in ISAs.
AIC The Company is a member of the Association
of Investment Companies.
Summary of results and financial highlights
Year ended Year ended
31 March 31 March % change
2011 2010
Total net assets GBP58,564,000 GBP68,198,000 (14.13)
Net asset value ("NAV") per Ordinary share 313.86 365.50 (14.13)
- pence
- US cents 503.10 554.42 (9.26)
Mid-market price per Ordinary share 252.00p 271.50p (7.18)
Discount to NAV 19.71% 25.72% 6.01
Net revenue return after taxation 126,000 GBP(630,000) 120.00
Revenue return per Ordinary share 0.68p (3.30)p 120.61
Costs of running the Company
- Manager's fee GBP874,000 GBP791,000 10.49
- Other expenses GBP556,000 GBP491,000 13.24
As a percentage of average net assets
- Manager's fee 1.45% 1.45% -
- Other expenses 0.92% 0.90% -
Exchange rate - US$/GBP 1.60295 1.51690 5.67
S&P 500 Index (Total Return) 2,239.44 1,936.48 15.64
S&P 500 Index (Total Return) - Sterling 1,394.07 1,274.75 9.36
adjusted
Russell 2000 Index (Total Return) 3,778.03 3,003.36 25.79
Russell 2000 Index (Total Return) - 2,351.86 1,977.07 18.96
Sterling adjusted
High Date Low Date
Mid-market price per Ordinary 281.50p 21/05/10 238.00p 24/11/10
share
NAV per Ordinary share - pence* 369.69p 14/05/10 288.83p 24/09/10
Discount to NAV* 27.16% 17/11/10 11.19% 02/07/10
* Including current period revenue.
CHAIRMAN'S STATEMENT
The Company suffered a set-back this year, caused mainly by a storm in US
traded Chinese equities, but the Fund remains positioned for strong growth over
the next several years.
The year to 31 March 2011 was unusual in that an important part of our
portfolio, US traded Chinese companies, encountered a storm of bad publicity
created by short sellers attacking a few US Chinese companies as being
fraudulent. Although some of the accusations were true, most were not; but the
publicity put a cloud over the entire asset class. For example, in our
portfolio, the average Chinese company reported annual earnings gains of 28%
but the shares as a group dropped 41% in value. It is important to note that
the group was already selling at low multiples of earnings. It now appears that
about 10% of the US traded Chinese companies may have had accounting or other
problems, but 90% have not. As a consequence of this dramatic derating of US
traded Chinese equities, the enviable long-term performance of the Company has
been damaged: the net asset value decreased 14.13% in sterling terms against a
rise in the Russell 2000 return of 18.96% and the S&P 500 return of 9.36%.
During the year, the pound strengthened against the dollar and contributed
meaningfully to the decline in NAV reported in sterling. Nevertheless, since
inception, your Company's net asset value has produced an annualised return of
8.93% in sterling terms, against a return of 7.56% for the Russell 2000 and
6.29% for the S&P 500. The total return for your Company was 245.87% since
inception against 187.84% for the Russell 2000 and 142.28% for the S&P 500
index.
The Board has focused on long-term returns which for this Company have been
better than both the Russell 2000 and the S&P 500. The investment manager
believes we could see a major increase in the Company's value over the next
several years for a number of reasons. These include a significant recovery in
the US traded Chinese stocks, the recognition of value from legacy stocks, good
growth in the US core holdings and attractive new investments.
As previously announced, the Company liaised with HM Revenue and Customs
following a transaction in Cover-All Technologies, which it was thought would
lead to the loss of investment trust status. We were pleased to announce, on
3 June 2011 that HM Revenue and Customs confirmed that the exercise of the
warrants had not affected the investment trust status of the Company and no
further action was required.
Unquoted Securities
25% of your Company's portfolio lies in unquoted securities, down from 30% at
the end of the previous year. During the year to 31 March 2011, we redeemed our
preferred shares in China Greenscape, Inc., as this company decided that due to
poor market valuations in the US, shares would not be offered to the public.
Your Company received $4,000,000 and dividends amounting to $1,645,570. While
we would have preferred the company to be traded in the US, we were pleased to
receive a good return over the period held.
Our largest unquoted holding is AnchorFree, Inc. This is a technology company
whose primary product is its "Hotspot Shield" which provides a free
ad-supported virtual private network (VPN). The main benefit of Hotspot Shield
is providing privacy to its users on the internet. This service has become very
important from a world-wide perspective with major growth coming from the
Middle East and China. AnchorFree experienced significant growth in 2010 and
now has over 9 million users, an increase from 5 million users in the previous
year. Unlike many internet companies, AnchorFree continues to increase its high
profit margin through controlling costs and increasing page views and revenues
per page view.
In 2009-10, the Board commissioned an independent valuation report on
AnchorFree, as reported in last year's annual report. As a result, the Board
adopted a valuation of $16.26 million for this investment and this was
reflected in your Company's net asset value. The results of AnchorFree have
been on track with respect to the forecasts made in the independent report.
The Board, along with the audit committee, decided to leave the value at $16.26
million for the year end, recognising that AnchorFree is making good progress.
Over the next year we will again be reviewing this position. The long-term
strategy is to create liquidity by selling AnchorFree or taking it public.
US Traded Chinese Storm
China as a nation has continued to lead the world in economic growth, becoming
the second largest economy overtaking Japan and Germany. Entrepreneurial
activity has contributed to this. According to The Economist, 90% of the
enterprises in China are now in private hands. Unlike the West, China has a
high savings rate and low debt similar to the United States in 1911.
Reflecting this growth, a number of companies went public in the United States
creating an excellent investment opportunity. However, over the past year, a
group of short sellers uncovered fraud in a few companies. It is difficult to
get the exact number of troubled companies, but one China research and
investment firm, Roth Capital, compiles a US universe of 190 companies. Of this
universe, 6% have had their stock deleted or suspended, and about 10% have had
late filings or accounting changes. Therefore about 90% may have had no
problems; but the US media, together with the short sellers, have created the
illusion that all Chinese companies are fraudulent.
Some companies, such as Orient Paper, have spent millions of dollars with
external accountants and attorneys refuting the charges of their accusers;
unfortunately, however, the media has not revealed this information in the
press. While there will always be some fraud, just as there is in other
markets, your Manager believes the negative publicity of US traded Chinese
companies as a group has created a buying opportunity. Many US traded Chinese
companies have been exploring ways to benefit from this confusion by listing on
alternative exchanges, going private, buying in shares, or paying cash
dividends.
SinoHub Inc., a major holding of your Company, provides an illustration of the
effect that this publicity has had on US traded Chinese companies. SinoHub is a
rapidly growing technology company based in Southern China . Sales rose from
$70 million to $200 million over the past three years and the company has given
guidance of $250 million for 2011. US analysts who follow the company are
targeting a $7 share price for this year; however the stock has declined from a
high of $5.00 to $1.75 equivalent to a little over 2 times the 2010 earnings
per share figure of $0.67. As your Company owns over 3 million shares, the
effect of the derating is significant. I want to point out SinoHub as an
example of the opportunity created. Your Manager believes that this storm is
passing and a major recovery will occur.
Managing the Portfolio
We use the analogy of tending the garden for portfolio management, i.e.,
finding new investments (planting), tending the portfolio (maintenance) and
realising investments (harvesting). During the year, new investments totalled
$2.8 million, follow on investments totalled $7.3 million and complete sales
raised approximately $9.2 million. Details of investments that were increased,
reduced or sold during the year can be found within the Manager's review.
In January, your Manager sold the assets of Integrated Security Systems for
$6 million. The surviving company retains the proceeds of the asset sale and is
actively seeking a merger partner. An attractive merger partner has been found
for legacy holding CMSF Corp. which is a fully reporting shell trading on the
OTC market.
As we highlighted in our investment objectives, our investment process seeks to
identify stocks which have the capacity to increase substantially in price. As
a result, stocks that were originally small acquisitions can become large and
this has happened in the case of Cover-All Technologies and AnchorFree. We are
aware that this leads to significant concentration of risk. These positions are
carefully monitored. As of 31 March 2011, these two stocks accounted for 34.7%
of the portfolio.
Gearing
Your Board believes a reasonable amount of gearing is useful in making new
investments or for the opportunistic purchase of the Company's shares. Although
the Company held net cash at year end, a margin facility is maintained which
allows borrowing of up to $14.0 million. This facility had a negligible amount
drawn at year end and is detailed in note 10 to the accounts. Borrowing rates
remain low at about 2.78% but could rise. We intend to maintain a conservative
policy with gearing.
Discount to Net Asset Value and Public Relations
Your Company did not take the opportunity during the period under review to
purchase its shares in the open market. Your Board of Directors will continue
to monitor the movement of the discount and take action as necessary. Your
Company has continued to support an investor relations campaign in partnership
with Lanson Communications and this has resulted in a number of press articles.
In October, Edison Investment Research wrote a report on the Company and
arranged meetings with your Manager and private wealth managers in London,
Glasgow, Edinburgh, Leeds and Manchester. As mentioned, your Manager travels
often to the UK to visit with the financial media, prospective new investors
and existing shareholders. We continue to maintain a website that is updated
regularly and regular newsletters are released with further information for
shareholders.
Directors
Mr Russell Cleveland, president and chief executive of the Company's Manager
RENN Capital Group Inc, will not be offering himself for re-election as a
Director of the Company. This change in the Board composition brings the
Company into line with best practice and the UK Code of Corporate Governance.
The Board wishes to thank Mr Cleveland for his invaluable contribution to the
success of the Company and looks forward to continuing to work closely with him
and his team.
Conclusion
We have had a disappointing year in terms of net asset value performance: the
Russell 2000 Index had a good year while your Company's NAV fell. The Manager's
review reminds investors that over the short term, performance will often
diverge from the Russell 2000 due to the unique asset allocation and investment
style of the Company. The Manager's review provides detailed information of the
largest holdings and also highlights five securities which materially
contributed to the negative return, one of which has been sold and four that
have been retained. The Company's long-term track record has been good, beating
both the Russell 2000 and the S&P 500 indices. The Company continues to
concentrate its investments on entrepreneurially managed firms based in the
United States and China.
Ernest Fenton
Chairman
21 June 2011
MANAGER'S REVIEW
History has shown that investment results are often superior when investing
through founder-owner CEO's. We continue to concentrate our efforts on U.S. and
Chinese entrepreneurs who list their companies on U.S. exchanges, we strive to
find new opportunities, to add value to the existing portfolio companies and to
realise value at the appropriate time.
Year-end Review
Although the economies of the world appear to be recovering, the process of
de-leveraging continues with general expectations of below average growth after
many years of credit induced excess.
Performance
During the year ended 31 March 2011, your Company's net asset value decreased
by 14.13% in sterling against a rise in the Russell 2000 index of 18.96%. The
S&P 500 rose by 9.36%. Since inception in September 1996, your Company's net
asset value has produced an annual equivalent return of 8.93% in sterling
against a return of 7.56% for the Russell 2000 and 6.29% for the S&P 500. Over
the period, this equates to an aggregate in sterling of 245.87% against 187.84%
for the Russell 2000 and 142.28% for the S&P 500 index.
Annual Equivalent Total Return:
RENN Universal Growth Investment Trust PLC verses the Russell 2000 index and
S&P 500 Index:
One Year Inception
USD GBP USD GBP
RUGIT NAV (9.26%) (14.13%) 9.34% 8.93%
Russell 2000 25.79% 18.96% 7.76% 7.56%
S&P 500 15.64% 9.36% 6.49% 6.29%
At 31 March 2011, the top ten holdings represented 71% of the portfolio.
As we have stated before, returns in this fund will be lumpy because of its
unique asset allocation and investment style. Unlike many other investment
trusts, this Company's returns should not be expected to track the benchmark
(Russell 2000) over the short term. This Company holds part of its assets in
unquoted companies which do not trade and part on listed companies which are
not correlated to any index. Given our investment approach, we maintain that
there is no such thing as a perfect benchmark against which to measure returns.
Your Board, having considered a number of options, continues to believe that,
while not perfect, the Russell 2000 remains the most appropriate benchmark for
this Company.
Fiscal year 2010/2011 was nevertheless disappointing. The Russell 2000 had a
good year while your Company's NAV fell. The bulk of the decline was the result
of falls in the share prices of five holdings, the effects of which are set out
in the table below.
Contribution to Return - Negatives
Company 31/3/2010 31/3/2011 Follow-on Unrealised or
Value Value or (sale) Realised Gain
(Loss)
Bovie Medical $5,937,000 $3,410,000 $386,000 ($2,913,000)
Duoyuan Printing $4,219,000 $0 ($1,052,000) ($3,167,000)
Fushi Copperweld $6,199,000 $4,431,000 N/A ($1,768,000)
SinoHub $4,676,000 $4,669,000 $2,300,000 ($2,307,000)
Skystar $6,808,000 $3,372,000 N/A ($3,436,000)
Bio-Pharmaceutical
Total ($13,591,000)
Taking each of these in turn: in June 2010 Bovie Medical was sued over an
alleged patent infringement case which has now been settled. As discussed
later, we believe Bovie's new J-Plasma surgical device should prove to be a
prime driver of the company's growth going forward and thus do not see today as
a good time to be a seller. We have now sold the entire Duoyuan Printing
position. In late 2009, we sold one-third of our holding in the company's
initial public offering for $8.50 per share compared with a cost of $3.84. In
September 2010, Duoyuan suffered a rapid 74% decline in share value following
the dismissal of Deloitte Touche Tohmatsu as its auditor. Subsequently, we sold
the remaining position generating proceeds of a little over $1 million. This
cost the Company a total of $3.1 million in the current fiscal year, even
though the investment was profitable overall from its first purchase. Fushi
Copperweld, discussed later, decreased in market value from $11.22 on 31 March
2010 to $8.02 on 31 March 2011 in line with the general sell-off of US-traded
Chinese equities. Due to Fushi's significant global market share, its strong
operational results, current valuation and a proposal to take the company
private, your Manager has chosen not to sell Fushi at this time. For the year
ended December 2010, Fushi's revenues increased 45% to $265 million and net
income increased 46% to $32 million. Fushi has a strong balance sheet with
$123 million in cash and its common stock sells for less than book value and at
6.7 times projected 2011 earnings of $1.19 per share. SinoHub was another Chinese
holding that contributed to the net asset decline over the fiscal year. The
company's common stock closed at $1.89 on 31 March 2011 down from a close of
$3.18 on 31 March 2010. Again, we attribute this decline in value to the
general scepticism over US-traded Chinese stocks, and also to two dilutive
equity offerings completed in February of 2010 and March 2011. Nevertheless,
SinoHub has reaffirmed its 2011 full year revenue guidance of 30% growth to
$255 million as well as its target of producing and selling 3 million mobile
phones for 2011, representing annual growth of 160% in terms of handsets sold.
At fiscal year end, SinoHub's common stock was trading at just 70% of tangible
book value, 2.8 times 2010 earnings and 2.4 times 2011 projected earnings of
$0.80 per share. We feel that patience will pay off and continue to hold
SinoHub which we feel has been unfairly punished by the general sell-off.
Finally, Skystar Bio-Pharmaceutical Company closed at $11.61 on 31 March 2010
but fell to $5.75 on 31 March 2011. There were two reasons for the sell-off:
first, the company announced a dilutive equity offering which was withdrawn
following investor protest; second was the fact that the company suffered from
the general sell-off in US-traded Chinese stocks. Aside from a very low
valuation, this company has strong growth potential ahead of it and we remain
confident that, with patience, it will recover and reach new highs. The company
has new capacity coming online and accretive acquisitions on the horizon. At
fiscal year end Skystar was trading at just 58% of book value and 2.9 times
reported 2010 earnings.
Another stock which did not fall in dollar terms, but still held back returns
during the year because of the weakness of sterling, was US-based Anchorfree.
For most of the year this was the Company's largest position. As the company is
private, the valuation is determined by your Board who have elected to keep the
valuation unchanged from that set at 31st March 2010. A more detailed
description of the company's progress is given later, but the growth in profits
and sales over the last year has been in line with forecasts made when the
current valuation was determined.
On a positive note we had strong stock value performance by Access Plans, Inc.,
Cover-All Technologies Inc., PHC, Inc., and Points International Ltd. This was
not powerful enough, however, to offset the effect of the portfolio's poor
performers. Access Plans, Inc. began the fiscal year at a share price of just
$1.06 but ended at a price of $2.20. In November, the company announced that it
would pursue a broad range of strategic alternatives to enhance shareholder
value. In February, it reported strong first quarter results with earnings
rising 69% over the same period last year. We anticipate a possible sale of the
company in the near future. Cover-All Technologies closed at $2.14 on 31 March
2011, up 78% from the $1.20 close of 31 March 2010. Singular Research is
forecasting earnings per share growth of 63% in fiscal year 2012. The company's
CEO John Roblin stated in the most recent earnings report that "we have nearly
completed the process of transforming Cover-All from a smaller niche player to
a robust organization able to compete aggressively throughout the property and
casualty marketplace". PHC, Inc. has been a strong performer this year with its
stock rising 106% from $1.28 per share at 31 March 2010 to $2.64 per share on
31 March 2011, moving it into a place amongst the top ten holdings. PHC is
executing better and adding capacity in a prudent fashion. Finally, Points
international, the world's leading reward program management platform,
increased 91% in value for the fiscal year. In March, Points reported annual
revenue up 20% and fourth quarter revenue up 63% over the same period last
year. The company gave top line guidance of 25-36% growth and net income growth
in the range of 50-200% for 2011.
Core Holdings & Asset Allocation
Top ten holdings at 31 March 2011 and 31 March 2010
At 31 March 2011, the top ten holdings made up 71% of the portfolio.
31 March 2011 % of Net 31 March 2010 % of Net
Assets Assets
Cover-All Technologies, Inc. 17.4% AnchorFree, Inc. 15.7%
AnchorFree, Inc. 17.3% Zhongpin, Inc. 8.0%
Hollysys Automation 5.7% Cover-All Technologies, 7.1%
Technologies, Inc. Inc.
Zhongpin, Inc. 5.2% Skystar 6.6%
Bio-Pharmaceutical
SinoHub, Inc. 5.0% Fushi Copperweld, Inc. 6.0%
Fushi Copperweld, Inc. 4.7% Bovie Medical Corporation 5.7%
Dynamic Green Energy Limited 4.3% Hollysys Automation 5.0%
Technologies Inc.
PHC, Inc. 3.9% China Greenscape Company 4.7%
Bovie Medical Corporation 3.6% SinoHub, Inc. 4.7%
Skystar Bio-Pharmaceutical 3.6% Duoyuan Printing, Inc 4.5%
Your Company's portfolio is characterised by a large participation in the
growth of China, as well as a significant exposure to smaller entrepreneurial
US based companies. At 31 March 2011, the value of the US quoted companies
represented 36% of the portfolio, while the US quoted Chinese based companies
represented 39%. The unquoted companies represented 25% of the portfolio. As at
31 March 2011, the asset allocation of the invested portfolio was as follows:
US quoted China based companies (17 companies) 39%
US listed US based companies (11 companies) 36%
Unquoted US based companies (4 companies) 21%
Unquoted China based companies (1 company) 4%
Two of last year's top ten holdings came off the list during the fiscal year:
our preferred stock in China Greenscape Company was redeemed; and our remaining
position in Duoyuan Printing was sold. The two replacements in the top ten are
Dynamic Green Energy and PHC, Inc. which are discussed below.
Cover-All Technologies (OTCBB: COVR) licenses and maintains software for the
insurance industry. Its product platforms are robust and can be used for back
office compliance, billing, underwriting and insurance issuance. In April 2010
Cover-All completed an accretive acquisition nearly doubling its customer base
and adding a new line of intelligence services. The acquisition came with a
complementary product offering and new customers with virtually no overlap. For
the twelve months ended December 2010, revenues rose 20% but net income
declined by 23% against the same period last year, for the sole reason that the
company began to pay tax. Although the company has reported 16 straight
profitable quarters, it is only recently that the potential for significant
operating leverage began to surface. Research coverage initiated by Singular
Research is forecasting earnings per share growth of 63% in fiscal year 2011.
The company's common stock closed at $2.14 on 31 March 2011 up 78% from the
$1.20 close on 31 March 2010.
AnchorFree, Inc.(Private) is the world's leading ad-supported virtual private
network ("VPN"). Its Hotspot Shield enables users to access all online content
anonymously and securely from any location in the world. The technology also
enables the use of services such as Skype, Facebook, YouTube, Twitter and
Google which are often blocked by telecom companies around the world.
Individuals and companies from over 100 countries are using this VPN service
with over 9 million unique users per month, 30 million user sessions per month
and over 2 billion page views per month. The company continues to garner
positive press and additional users. We expect AnchorFree's revenue to continue
to accelerate, not just because of increased number of users, but also because
of increased revenues per user going forward. For the twelve months ending
December 2010, revenues were up 122% and earnings before tax rose 355% against
the same period last year. We continue to keep the progress of the company
under close scrutiny.
Hollysys Automation Technologies, Ltd (NASDAQ: HOLI) provides automation and
control technology and applications in the People's Republic of China. The
company offers Distributed Control Systems, sensors, actuators and other
devices that can be programmed. It sells its products and services to various
industries, including power generation, computer controlled manufacturing,
chemical production, petrochemicals, pharmaceuticals, and railway
transportation. For the three months ended December 2010 revenues were up
61% and net income was up 85% against the same period last year. We believe the
outlook remains favourable as the company reported a sizeable 31% increase in
backlog of $288 million against $220 million for the same period last year. The
company's common stock closed at $13.30 on 31 March 2011, up from $11.52 on
31 March 2010.
Zhongpin, Inc. (NASDAQ: HOGS) engages in the processing and distribution of
meat and food products primarily in the People's Republic of China. It offers
pork and pork products, such as chilled pork, frozen pork, pig by-products and
variety meats as well as fruits and vegetables. The company supplies its
products to fast food companies, processing factories and school cafeterias as
well as to retail outlets, including supermarkets. For the year ended December
2010, revenues were up 30% and net income rose 28% over the same period last
year. The company's common stock closed at $15.15 on 31 March 2011, up from
$12.70 on 31 March 2010. Your Manager sold approximately one-half of your
Company's position in June realising proceeds of $3.69 million, and a capital
gain of $2.01 million.
SinoHub, Inc.(AMEX: SIHI) is an electronics company that engages in the
manufacture and distribution of custom, private-label mobile phones for
developing countries. The company also provides electronic component purchasing
(ECP) and supply chain management (SCM) for third party businesses. For the
twelve months ending December 2010, revenues rose 53% and operating income was
up 54%. SinoHub recently reported an $11M equity issue, in which your Company
participated, to finance its rapidly growing integrated contract manufacturing
business. The company also reaffirmed full year revenue guidance of 30% growth
to $255 million in revenues and the expected production of 3 million mobile
phones in 2011. Nevertheless, SinoHub was one of the holdings that contributed
to your Company's net asset decline over the fiscal year. The company's common
stock closed at $1.89 on 31 March 2011 down from $3.18 on 31 March 2010. We
attribute this decline in value mainly to the general scepticism over US-traded
Chinese stocks, and the dilutive equity offerings completed in February 2010
and March 2011.
Fushi Copperweld, Inc. (NASDAQ: FSIN) manufactures bimetallic wire products,
principally copper-clad aluminium (CCA) and copper-clad steel (CCS). Its CCA
and CCS conductors are used as substitutes for solid copper conductors in
applications where specific electrical or physical attributes are necessary. It
primarily serves applications in the telecommunication, electrical utility, and
transportation markets. For the year ended December 2010, revenues increased
45% to $265 million and net income increased 46% to $32 million. We estimate
Fushi has approximately a 50% world-wide market share in CCA and CCS. We expect
the utility and automotive vertical markets to provide abundant demand for
future growth. Nevertheless, the company was another holding that contributed
to your Company's net asset decline over the year. Operations were not the
cause, but rather the general sell-off in US-traded Chinese stocks. The
company's common stock closed at $11.22 on 31 March 2010 but fell to $8.02 on
31 March 2011. Fushi has retained Bank of America Merrill Lynch in conjunction
with a proposed transaction to take the company private at $11.50 per share.
Dynamic Green Energy ("DGE") (Private) is one of the largest and most
experienced photovoltaic module assemblers in China. The company's operations
also include ingot and wafer manufacturing as well as photovoltaic cell
production. Among its customers are some of the world's most technologically
advanced solar companies including SunPower Corporation (NASDAQ: SPWRA). DGE
brought in a new CEO and CFO last year and the results have been favourable
though the investment to date has not turned out as expected. For a number of
reasons, DGE missed the opportunity to participate in an initial public
offering thus limiting its ability to raise additional capital. Nevertheless,
for the year ending December 2010, revenues increased 182% and earnings before
interest, taxes, depreciation and amortization increased 53%. Your Company owns
convertible debt which matures in June 2011. We have indicated to DGE our
expectation of a timely repayment and we expect the company will be able to
fulfill its obligations.
PHC, Inc., (AMEX: PHC) a national healthcare company providing behavioural
health services in five US states, including substance abuse treatment
facilities in Utah and Virginia and inpatient and outpatient psychiatric
facilities in Michigan, Pennsylvania and Nevada. The company also offers
internet and telephone-based referral services that include employee assistance
programmes and critical incident services. Contracted services with government
agencies, national insurance companies and major transportation and gaming
companies cover more than one million individuals. For the three months ended
December 2010, the company reported revenues up 14% and net income up 75% from
the same period a year ago. PHC recently announced that it has signed an
agreement to acquire a new facility which has revenues equivalent to
approximately 30% of PHC's fiscal 2010 revenues. PHC has been a strong
performer this year, with its stock rising 106% from $1.28 per share at
31 March 2010 to $2.64 per share on 31 March 2011.
Bovie Medical Corp. (AMEX: BVX) engages in the development, manufacture, and
marketing of medical products and devices, primarily electrosurgical generators
and disposables in the United States and Canada. For the year ended December
2010, Bovie reported a 10% decline in revenues resulting in a net loss of
$1.5 million against net income of $595,000 last year. The company continues to
place great effort and resources into the regulatory approval of its new
J-Plasma surgical handpiece. The J-Plasma surgical handpiece will offer soft
tissue coagulation and/or tissue cutting with no grounding pad required as with
other electrosurgical products, thus minimising the risk to patient and
surgeon. Once approved, we believe this new product will enhance certain
surgical procedures and could ultimately contribute to a new standard of care.
The feedback from surgeons in diverse specialties has been most encouraging.
Management is convinced that the J-Plasma addressable market is large and will
be the prime engine of growth going forward. The company's common stock closed
at $6.25 on 31 March 2010 but fell to $3.10 on 31 March 2011, a decline which
we believe does not reflect the strength of the company's fundamentals.
Skystar Bio Pharmaceutical Company (NASDAQ:SKBI) engages in the research,
development, production, marketing, and sale of veterinary healthcare and
medical care products in the People's Republic of China. Its products include
veterinary medicine for poultry and livestock, vaccines and feed additives. The
company is headquartered in Xi'an, China. For the twelve months ended December
2010 revenues rose 41% to $47.5 million and net income increased 59% to
$1.97 per share. The company gave guidance expectations of top line growth in the
range of 26% to 33% for 2011. Skystar was one of the five holdings that
accounted for the net asset decline during the year. The company's common stock
closed at $11.61 on 31 March 2010 but fell to $5.75 on 31 March 2011. One
reason for the decline was due to the company announcing a dilutive equity
offering which angered investors. While investors won the argument causing the
company to withdraw its offering, the damage was done. This is a particular
issue we encounter with Chinese companies, namely, an appetite to raise capital
often when it is not needed. Nevertheless, we remain confident in the
management and future prospects of this growth company.
New investments
Company Sector Amount Instrument Price Shares
China Jo-Jo Drug Drug Stores $1,000,000 Common Stock $5.00 200,000
Stores
Kingtone Wireless Software $800,000 Common Stock $4.00 200,000
Solution
Plastec Plastics $1,030,000 Common Stock $10.30 100,000
Technologies
Total $2,830,000
During the fiscal year, your Company invested $2.8 million in three new
companies. These companies, with a brief description of the businesses, are as
follows:
In April, we made a $1.0 million investment in the common stock of China Jo-Jo
Drug Stores, Inc. (NASDAQ: CJJD) which operates 45 retail drugstores in
Hangzhou, the capital of Zhejiang Province approximately 112 miles south of
Shanghai. Each retail location provides customers with high-quality
professional services and a wide variety of merchandise including prescription
and over-the-counter drugs, nutritional supplements, traditional Chinese
medicine products, personal care products and medical devices. In contrast to
most of its competitors, the company operates larger stores which are staffed
with 10 employees versus the typical 3-5 employees. Few current competitors
provide a pharmacy, physician consultations and outpatient health care services
under one roof. With robust demographic and economic conditions within Zhejiang
Province, the company plans to expand to 200 locations over the coming years.
On 15 February 2011, the company reported its third quarter and nine month
results for the period ended 31 December 2010. For the nine months ended
31 December 2010 revenues were up 26% whilst net income rose just 1% due to
increased operating expenses against the same period last year. Earnings per
share fell from $0.68 per share to $0.46 per share reflecting the 4.5 million
shares issued in the April 2010 public stock offering.
In May we invested $800,000 into the common stock of Kingtone Wirelessinfo
Solution Holding Ltd. (NASDAQ: KONE) a leading China-based software and
solutions developer focused on wireless solutions enabling businesses and
government agencies to more efficiently manage their operations. The Company's
products, known as mobile enterprise solutions, extend a company's or
enterprise's information technology systems to include mobile participants. The
Company develops and implements mobile enterprise solutions for customers in a
broad variety of sectors and industries, to improve efficiencies by enabling
information management in wireless environments. At the core of its solutions
is a proprietary middleware that enables wireless interactivity across many
protocols, devices and platforms. On 14 May 2010, the company completed its
initial public offering by selling 4 million shares to the public at $4.00 per
share. On 20 January 2011 the company reported its full year results for the
period ending September 2010, with revenues up 29% and net income up
56% against the same period last year.
Finally, in December 2010, we invested $1,030,000 in the common stock of
Plastec Technologies, Ltd (OTCBB: PLTYF) a leading provider of precision
plastic injection molding manufacturing services. The company focuses on the
consumer home electronics marketplace including components for LCD and LED
television sets, Blu-ray disc players, DVD players, speakers and various other
consumer products. The company also manufactures plastic parts for the
telecommunications vertical as well as plastic toys requiring high precision.
The company operates 6 facilities in 5 separate locations in China employing
over 4,600 employees. For the twelve months ending October 2010, Plastec
reported revenues of $148 million and earnings of $9.3 million. For the quarter
ended January 2011, sales were up 43% and net income was $5.6 million from a
loss over the same period last year.
Follow on investments
Company Sector Amount Instrument Price Shares
Access Plans Services $529,000 Common Stock $0.98 540,520
Bovie Medical Healthcare $386,000 Common Stock $2.57 150,000
China Greenscape Forestry $750,000 Preferred Stock $68.68 10,920
CMSF Corporation Financial $91,000 Common Stock N/A N/A
Cover-All Software $1,586,000 Common Stock $1.01 1,576,871
Integrated Security $300,000 Common Stock $0.20 1,463,750
Security
PetroHunter Energy $100,000 Convertible N/A N/A
Energy Debenture
PHC, Inc. Healthcare $296,000 Common Stock $1.02 290,000
SGOCO Technology Electronics $1,000,000 Common Stock $5.00 200,000
SinoHub, Inc. Electronics $2,300,000 Common Stock $2.30 1,000,000
Total $7,338,000
Purchase of shares from Global Special Opportunities Trust Plc ("GSOT")
As we reported in the half-yearly report, we purchased a number of stocks from
GSOT, a company with a planned liquidation date of 31 May 2011. This
transaction which took place in September increased RUGIT's holdings in China
Greenscape, CMSF Corporation, Cover-All Technologies, Integrated Security
Systems and PetroHunter Energy Corporation. These stocks were purchased for an
aggregate price of $2.74 million. RENN Capital Group, also acts as Investment
Advisor to GSOT, and a committee of your Board oversaw this transaction to
ensure that any conflict of interest was avoided.
Apart from the GSOT purchases, we also made follow on investments in PHC, Inc.
and SinoHub, Inc., which have already been discussed, and SGOCO Group, Ltd.
SGOCO Group Ltd (NASDAQ: SGOC) engages in the design, manufacture, and
distribution of liquid crystal display products and related technologies. The
company provides personal computer monitors, LCD television, LCD monitor-DVD
combination products, and application-specific products. Further, it is
developing e-reader notebooks and mobile internet device product lines. The
company markets its products through computer stores, distributors, and
specialty retailers, as well as through its own SGOCO clubs to medical centres,
educational institutions, government complexes, and corporate offices. For the
nine months ended September 2010, revenues increased by 305% to $134 million
and net income rose 253% to $11.9 million.
Tending the Garden
In recent years, we have described our investment process as developing a
garden. We plant, we harvest, and we continually tend the investment garden.
Over the years, we have realised significant gains in this portfolio and hope
to continue that pattern. A new merger partner has recently been found for CMSF
Corp. and we continue to look for a similar partner for Integrated Security
Systems, both of which at this point are shell companies we intend either to
liquidate or merge into private operating companies. This year, we had sales
that were both profitable and those which were sold at a loss.
During the fiscal year, your Manager made partial sales in Hollysys Automation
Technologies, Global Sources, Ltd, SkyPeople Fruit Juice, Inc. and Zhongpin,
Inc. raising $4.8 million and recognising a capital gain of $2.3 million. We
believe it was prudent to reduce these holdings to free up funds for new
investments, yet retain partial holdings for possible future appreciation.
Your Manager did some weeding during the year by making complete sales in
companies that we believed had become too risky or would not add value to the
future of the portfolio. These sales included unquoted China Greenscape,
Duoyuan Printing, Geos Communications, Inc., Merriman Curhan Ford Group, Inc.,
Orient Paper, Inc., and Silverleaf Resorts, Inc. These sales raised
$9.2 million for a capital loss of $1.2 million.
Future Prospects
As always, we are focused on partnering with successful entrepreneurs. History
has shown that investment results are often superior when investing through
founder-owner CEOs. We continue to concentrate our efforts on U.S. and Chinese
entrepreneurs who list their companies on U.S. exchanges. Your Manager will
continue to focus on what it does best, which is bottom-up analysis on small
individual companies. Your Manager will also continue to strive to find new
opportunities, endeavor to add value to the existing portfolio companies, and
finally aim to realise value at the appropriate time when investments have
matured.
Russell Cleveland
RENN Capital Group, Inc.
Dallas, Texas
21 June 2011
Investment portfolio
as at 31 March 2011
Book cost Market value % of net
Sector US$'000 US$'000 GBP'000 assets
Corporate investments
US unlisted
convertible
debentures
iLinc Communications Technology 500 250 156 0.27
PetroHunter Energy Oil and gas 2,100 700 437 0.74
exploration
Pipeline Data Business services 1,500 1,110 692 1.18
Total US unlisted 4,100 2,060 1,285 2.19
convertible
debentures
US unlisted loan
notes
Dynamic Green Energy Solar Energy 4,000 4,000 2,495 4.26
Total US unlisted 4,000 4,000 2,495 4.26
loan notes
US unlisted
convertible
preference shares
AnchorFree Wireless 2,500 16,261 10,144 17.32
communications
iLinc Communications Technology 200 33 21 0.04
services
Integrated Security Security services 75 1 1 -
Systems
Total US unlisted 2,775 16,295 10,166 17.36
convertible
preference shares|
US unlisted equities
Business Process Business services 20 79 50 0.09
Outsourcing
Murdoch Security & Security products 1,250 560 349 0.60
Investigations
Total unlisted 1,270 639 399 0.69
equities
US unlisted warrants
AuraSound Technology - 186 116 0.20
Duoyuan Printing Industrial - - - -
machinery
Hemobiotech Biotechnology - - - -
Integrated Security Security services - - - -
Systems
Murdoch Security & Security products - - - -
Investigations
PetroHunter Energy Oil and gas - - - -
exploration
Shengtai Financial services - - - -
Pharmaceutical
SinoHub Electronic - 12 8 0.01
components
Symbollon Pharmaceuticals - - - -
Pharmaceuticals
TNFG (Terra Nova Financial services - - - -
Financial Group)
Total US unlisted - 198 124 0.21
warrants**|
US listed warrants
Plastec Technologies Technology - 40 25 0.05
SGOCO Technology Electronic - 31 19 0.03
Equipment
Total US listed - 71 44 0.08
warrants
Canadian listed
equities
Points international Internet software 1,506 2,736 1,707 2.91
Total Canadian listed 1,506 2,736 1,707 2.91
equities
Corporate investments Sector Bock cost Market value % of net
US$'000 US$'000 GBP'000 assets
US listed equities
Access Plans USA Consumer services 3,877 2,607 1,626 2.78
AuraSound Technology 2,000 347 216 0.37
Bovie Medical Healthcare 2,421 3,410 2,127 3.63
Corporation services
CMSF (CaminoSoft) Network storage 4,610 152 95 0.16
Corporation
China Jo-Jo Drug Drug stores 1,000 522 326 0.56
Stores
ChinaCast Education Education & 998 2,414 1,506 2.57
Training services
Cogo Information 1,083 2,421 1,510 2.58
technology
Cover-All Information 5,051 16,338 10,192 17.40
Technologies technology
Fushi Copperweld Industrial 1,650 4,431 2,764 4.72
manufacturing
Global Axcess Commercial 1,821 690 430 0.73
services
Global Sources Commercial 977 913 570 0.97
services
Hemobiotech Biotechnology 1,971 185 116 0.20
Hollysys Automation Electronic 2,373 5,387 3,360 5.74
Technologies equipment
Integrated Security Security products 9,562 2,658 1,658 2.83
Systems
Kingtone Wirelessinfo Business software 800 412 257 0.44
Solution
PetroHunter Energy Oil and gas 202 45 28 0.05
exploration
PHC Healthcare 1,477 3,653 2,279 3.89
Plastec Technologies Plastic 1,030 900 562 0.96
manufacturing
SearchMedia Holdings Advertising 2,422 915 571 0.98
SGOCO Technology Electronic 2,000 1,199 748 1.28
Equipment
Shengtai Pharmaceuticals 1,345 726 453 0.77
Pharmaceutical
SinoHub Electronic 4,932 4,669 2,913 4.97
Components
SkyPeople Fruit Juice Consumer Goods & 401 590 368 0.63
Beverages
Skystar Pharmaceuticals & 2,277 3,372 2,104 3.59
Biotechnology
Bio-Phamaceutical
Wonder Auto Auto Parts 750 1,321 824 1.41
Technology
Zhongpin Food processing 1,374 4,922 3,071 5.24
Total US listed 58,404 65,199 40,674 69.45
equities
Total corporate 72,055 91,198 56,864 97.15
investments
Net current assets 2,802 1,748 2.98
Provision for (125) (78) (0.13)
liabilities
Net assets 93,875 58,564 100.00
| Unlisted convertible preference shares and warrants convert into unlisted
common stocks.
* Unlisted warrant investments are valued at fair value using the Black Scholes
methodology, which includes a time value which is calculated and added to the
intrinsic value to arrive at a total valuation for each warrant.
** The Black Scholes methodology requires certain assumptions to be made around
the volatility of the underlying shares to which the warrants subscribe.
The valuation of unlisted warrants at 31 March 2011 of GBP124,000 is made up of
the intrinsic value of GBP112,000 and a time value of GBP12,000.
Report of the Directors
The Directors present their report and accounts for the year ended 31 March
2011. The Company was incorporated on 19 January 1996 and commenced trading on
29 May 1996.
Business review
The business of the Company
The principal activity of the Company is to conduct business as an investment
trust. The Company is an investment company in accordance with the provisions
of Section 833 of the Companies Act 2006. The Directors do not envisage any
change in the Company's activity in the future.
The Company has received written approval from H.M. Revenue & Customs as an
authorised investment trust, under Section 1158/1159 of the Corporation Tax Act
2010, for the year ended 31 March 2010 (previously Section 842 ICTA 1988). It
is the opinion of the Directors that the Company has subsequently directed its
affairs so as to enable it to continue to qualify for such approval and the
Company will continue to seek approval under Section 1158/1159 each year. The
Company will distribute to its shareholders not less than 85% of eligible
investment income.
The Company's status as an investment trust allows it to obtain an exemption
from paying taxes on the profits made from the sale of its investments.
Investment trusts offer a number of advantages for investors, including access
to investment opportunities that might not be open to private investors and to
professional stock selection skills at low cost.
The Company's investment objective is to achieve capital growth and outperform
its benchmark, the Russell 2000 Index. The Company invests primarily in
securities issued by companies listed, quoted or domiciled in the US and Canada
with market capitalisations below $1 billion, although from time to time, the
Company also invests in unlisted companies with similar characteristics. It is
the Company's policy not to invest in UK listed investment companies, including
listed investment trusts. Full details of the Company's investment policy can
be found above.
The Company's Manager, RENN Capital Group, is based in Dallas and has a
thorough understanding of the US economic climate, plus a thirty-eight year
track record in identifying growth opportunities in US smaller companies.
Results and dividend
The results for the year and the proposed transfer from revenue reserves are
set out in the Income statement. The Directors do not recommend that a dividend
be paid in respect of the year ended 31 March 2011 (2010: nil). No dividend has
been paid since the Company's inception.
Analysis of performance and position
As stated previously, the Company's benchmark is the Russell 2000 and,
therefore, this is the primary key performance indicator for the Company.
However, this section of the business review will also consider the Company's
performance in terms of other indices, its annual return, its discount to net
asset value and gains and losses seen within the portfolio during the year.
For the year ended 31 March 2011, the net asset value return of the Company,
measured in US Dollars, was (9.26)%% compared to 25.79% for the Russell 2000.
The net asset value return of the Company, measured in sterling, was (14.13)%
compared to 18.96% for the Russell 2000. Since inception, the annualised return
measured in US Dollars was 9.34% against the Russell 2000 return of 7.76%.
Since inception, the sterling annualised return was 8.93% against the Russell
2000 annualised return of 7.56%.
This information is presented in tabular form above.
The Company's share price outperformed its NAV and as a result the underlying
discount to that NAV fell modestly during the year. The discount ranged from a
low of 11.19% on 2 July 2010 to a high of 27.16% on 17 November 2010, averaging
19.0% for the year. As at 31 March 2011 the Company traded at a 19.71%
discount, compared to 25.72% as at 31 March 2010.
During the year, the Company realised gains and losses in several portfolio
companies. The result was a net realised loss of approximately GBP3.3 million. As
at 31 March 2011 the Company had gearing of 0.4%.
The Investment Manager employs a `bottom-up' investment approach that focuses
on individual companies rather than sectors. Thus, the Company's performance is
tied more to an individual company's success than to sectors.
As of 31 March 2011 the Company's three largest holdings were Cover-All
Technologies, AnchorFree, and Hollysys Automation Technologies representing
approximately 17.4%, 17.3% and 5.7% of net assets respectively.
The majority of the portfolio is comprised of US companies headquartered in
China representing approximately 43% of the securities held (39% quoted and
4% unquoted). The balance are companies that are based in the US and Canada.
Further details of the Manager's investment approach and the performance for
the year are included in the Chairman's statement and the Manager's review.
Subsequent events and future developments
There have not been any significant events subsequent to the year end, nor is
the Board aware of any potential developments that are likely to have a
significant impact on the Company.
Principal risks associated with the Company
Risks associated with investing in the Company include, but are not limited to,
liquidity/marketability risk, interest rate risk, gearing risk, foreign
currency risk, country risk, market price and discount volatility risk, risk
associated with non compliance with Section 1158/1159 of the Corporation Tax
Act, credit risk, risks associated with the engagement of third parties and the
risk that shareholders will not vote in favour of the continuation of the
Company.
Liquidity/marketability risk
The Company is exposed to the US equity markets and could therefore be affected
by a decline in the US equity markets as a whole. Furthermore, a large
proportion of the stocks in which the Company invests are, by their very
nature, less readily marketable than, for example, blue-chip UK equities, and
the Company may hold significant ownership stakes. Additionally, the returns
associated with specific investment styles are cyclical and it is possible that
the Manager's investment style could fall out of favour. The Manager is
committed to investing in small and micro-cap companies and attempts to manage
liquidity risk by monitoring the trading volume of the stocks in which the
Company invests. The Board closely monitors the performance of the Company
through quarterly Board meetings and the review of monthly management accounts.
The Manager monitors the value of the Company's underlying securities on a
daily basis.
Interest rate risk
Bond prices and interest rates are inversely correlated. Thus, when interest
rates increase, the price of a bond with a fixed coupon will decline.
Alternatively, when interest rates decline, the price of a bond with a fixed
coupon will increase. The Company is invested primarily in equities, but it
does hold some fixed income securities, most of which are convertible to common
stock (equity). The benefit of a convertible debenture is that, if a portfolio
company becomes troubled, the Company is protected through its position as a
creditor. Alternatively, if the portfolio company performs well, the Company
can participate in the upside by converting to common stock. Nonetheless, the
Manager monitors interest rate risk on a regular basis.
Gearing risk
The Company has a revolving credit facility with Salomon Smith Barney ("SSB")
in order to facilitate the purchase of additional securities. The use of
gearing can cause both gains and losses in the asset value of the Company to be
magnified. Both the Board and the Manager understand and are mindful of the
risks involved in gearing the portfolio.
Under terms of the margin facility with SSB, certain assets of the Company will
be held by SSB as collateral while funds are drawn down under the facility.
Consequently there is a counterparty risk associated with this facility.
Foreign currency risk
The Company invests in US stocks and its assets are therefore subject to
fluctuations in the US Dollar: sterling exchange rate. It is not the Company's
policy to hedge the currency risk between the US dollar and sterling. Thus, the
Manager does not manage currency risk.
Country risk
The Company has significant financial exposure to the Chinese economy. Although
China is rapidly growing, it is still a volatile part of the world and
therefore the Company is exposed to risks in this economy.
Market price risk and discount volatility
Since the Company invests in financial instruments, market price risk is
inherent in these investments. The Company itself, being a closed-end fund,
generally trades at a discount to its net asset value. The magnitude of this
discount fluctuates daily and can vary significantly. Thus, for a given period
of time, it is possible that the market price could decrease despite an
increase in the Company's net asset value. The Directors review the Company's
discount levels on a twice weekly basis and can use the Company's powers to buy
back shares should it be thought appropriate to do so.
During the year, the Company did not purchase any of its shares. At the date of
this report, the Directors have the authority to purchase 2,796,985 shares of
the Company. This authority will expire at the 2011 Annual General Meeting.
The Directors also employ an investor relations firm to market the Company and
retain a Corporate Broker that can be consulted, if necessary. Furthermore, the
Company seeks to manage discount volatility through active communication with
its shareholders.
Compliance with Sections 1158/1159 of the Corporation Tax Act 2010
If the Company did not comply with the provisions of Sections 1158/1159, it
would lose its investment trust status. In order to minimise this risk, the
Directors, the Manager and the Company Secretary monitor the Company's
compliance with the key criteria of Sections 1158/1159 on a monthly basis. The
Board gives no assurance that the Company will comply with Sections 1158/1159.
On a quarterly basis, compliance with these provisions is discussed in detail
between the Board and the Manager and, furthermore, the Manager provides the
Board with a quarterly assurance that, to the best of its knowledge, the
provisions of Sections 1158/1159 relating to investments have been adhered to
during the period.
The Company became aware of an exercise of warrants in Cover-All Technologies
that was expected to affect the investment trust status of the Company.
However, following discussions with HM Revenue and Customs it was confirmed
that no action was required by the Company and its investment trust status had
not been affected. The Company has reviewed and strengthened its internal
controls and reporting procedures following the transaction.
Credit risk
The Company invests in debentures. It is possible that such investee companies
might default on these debentures or wind-up prior to their repayment. The
Board does not consider this to be a major risk to the Company, as a
diversified portfolio is maintained. Nonetheless, the Manager monitors the
credit risk of the Company's portfolio companies on an on-going basis.
Risks associated with the engagement of third parties
There are a number of potential operational risks associated with the fact that
third parties undertake the Company's administration and custody of assets.
Most seriously, there is the risk that third parties could fail to ensure that
statutory requirements, such as the Companies Act 2006 and the rules of the
London Stock Exchange, are complied with.
The Board regularly reviews the performance of the companies providing services
to the Company. As part of the review the Board considers the regular
assurances provided from those companies that the appropriate controls are in
place to mitigate risks relating to services undertaken on behalf of the
Company.
Risks associated with the annual continuation vote
The Company's Articles were amended at the 2010 AGM to require a continuation
vote every three years. A vote to this effect was passed at the 2010 AGM and
therefore the next continuation vote will be held in 2013. Although the
Directors do not think it is likely, it is possible that the shareholders might
vote against the continuation of the Company in 2013. Should the continuation
vote not be passed, the illiquid nature of some of the Company's investments
means that it is likely to take a considerable length of time to dispose of the
portfolio in its entirety.
Through the Manager, the Company's Stockbroker, the website and its investor
relations advisers, the Board ensures that regular communication regarding the
Company's performance and long-term direction is maintained with major
shareholders, whose opinions are duly considered by the Board.
Valuation risk
The Directors take responsibility for a number of holdings which are unlisted.
The valuations are the result of a range of valuation techniques described
below in Note 1 to the accounts and do involve elements of judgement which may
mean that the values recognised in the event of a sale might be significantly
different from those used in the accounts.
Further information on risk
Further information regarding certain of these risks is included in note 17 to
the accounts: Analysis of financial assets and liabilities. Information
regarding the Company's risk review procedures may also be found under
`Internal control review'.
Further details of the Manager's investment approach and the performance for
the year are included in the Chairman's statement and the Manager's review.
Information about securities carrying voting rights
The following information is disclosed in accordance with The Large and
Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and
DTR 7.2.6 of the FSA Disclosure and Transparency Rules:
* At the date of this report, the Company's capital structure was comprised of
18,659,008 Ordinary shares of 25p each, with each of these shares being
entitled to one vote. There are no restrictions on the transfer of the
Company's shares or voting rights.
* Details of the substantial shareholders in the Company are set out in the
full published Annual Report.
* The rules governing the appointment and replacement of Directors are
contained in the Company's Articles of Association.
* Amendment of the Company's Articles of Association and the giving of powers
to issue or buy back the Company's shares require an appropriate resolution
to be passed by shareholders.
* There are: no restrictions concerning the transfer of securities in the
Company; no special rights with regard to control attached to securities; no
agreements between holders of securities regarding their transfer known to
the Company; and no agreements which the Company is party to that might
affect its control following a takeover bid.
* There are no agreements between the Company and its Directors concerning
compensation for loss of office.
Management agreement
The Company's investments are managed by RENN Capital Group, Inc. under an
agreement dated 17 May 1996, as amended. The management fee is calculated at
the rate of 0.125% per calendar month of the net asset value of the Company and
is payable quarterly in arrears. No management fee is payable on any cash or
near cash investments held by the Company. RENN Capital Group is also entitled
to an annual performance fee equivalent to 20% of the amount by which the net
asset value of the Company at the year end, together with gross dividends paid
or distributions made, exceeds the net asset value of the Company at the
preceding financial year and as increased or decreased in line with the
movement in the Russell 2000 Index over the same period. No performance fee
will be payable in respect of any year where the net asset value is less than
either the placing price or the net asset value at the end of the preceding
financial year. This year no performance fee was payable.
Further details of the Manager's fees are given in note 3 to the accounts.
Appointment of RENN Capital Group, Inc. as Manager
Through the Management Engagement Committee, the independent Directors keep
under review the performance of the Manager. In the opinion of the Directors,
the continuing appointment of RENN Capital Group, Inc. as Manager, on the terms
outlined in the Management Agreement dated 17 May 1996, as amended, is in the
best interests of shareholders as a whole. The Company's net asset value
performance since inception when compared to its benchmark, the Russell 2000
Index, has been satisfactory.
The agreement may be terminated by either party giving to the other not less
than twelve months' notice in writing at any time. No additional compensation
is payable to the Manager in the event of termination.
Secretarial agreement
Under an agreement dated 8 May 1996, company secretarial services and the
general administration of the Company have been undertaken by Capita Sinclair
Henderson Limited for a fee for the year to 31 March 2011 of GBP73,000, subject
to an annual review based on the UK Retail Price Index in 2012. The Secretarial
fees paid in respect of the year ended 31 March 2010 were GBP65,000. The
agreement may be terminated by either party giving to the other not less than
twelve months' notice at any time.
Contractual arrangements essential to the business of the Company
Other than the Management Agreement , the Secretarial Agreement described above
and the custodian arrangements with Frost Bank which are essential to the
Company, there are no other contractual arrangements that are considered
essential to the business of the Company.
Payment of suppliers
It is the Company's payment policy to obtain the best possible terms for all
business and therefore there is no consistent policy as to the terms used. The
Company agrees with its suppliers the terms on which business will take place
and it is our policy to abide by those terms. All supplier invoices received by
31 March 2011 had been paid (2010: none outstanding).
Corporate social responsibility
The Company does not have any employees and the Board is comprised solely of
non-executive Directors. As an investment company, the Company does not have
any direct impact on the environment. In carrying out its activities and in
relationships with suppliers and stakeholders, the Company aims to conduct
itself responsibly, ethically and fairly. The Company does not have anything
further to report on environmental, employee, social or community matters.
Engagement with investee companies
As an externally managed investment company, the Board delegates the majority
of its responsibilities in relation to engagement with investee companies to
the Company's Investment Manager. However, the Board retains oversight of this
process by receiving regular updates from the Manager on its engagement
activities and by having reviewed the Manager's engagement and voting policies.
Directors
The Directors in office during the year are shown in the full published Annual
Report.
Statement of Directors' Responsibilities in respect of the Annual Report and
the Financial Statements
The Directors are responsible for preparing the Annual Report and the financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the financial
statements in accordance with UK Accounting Standards and applicable law (UK
Generally Accepted Accounting Practice).
Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the company and of the profit or loss of the Company and of the
profit or loss of the Company 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 UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the financial statements;
and
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and to prevent
and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Directors' Report, Directors' Remuneration Report and Corporate
Governance Statement that complies with law and those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Directors' responsibility statement under the Disclosure and Transparency Rules
The Directors confirm that, to the best of their knowledge and belief:
* the financial statements, prepared in accordance with UK Generally Accepted
Accounting Practice, give a true and fair view of the assets, liabilities,
financial position and profit of the Company; and
* the annual financial report includes a fair review of the development and
performance of the Company, together with a description of the principal risks
and uncertainties faced.
Ernest Fenton
Chairman
21 June 2011
Non-Statutory Accounts
The financial information set out below does not constitute the Company's
statutory accounts for the period ended 31 March 2011 but is derived from those
accounts. Statutory accounts for 2011 will be delivered to the Registrar of
Companies in due course. The Auditor has reported on those accounts; their
report was (i) unqualified, (ii) did not include a reference to any matters to
which the Auditor drew attention by way of emphasis without qualifying their
report and (iii) did not contain a statement under Section 498 (2) or (3) of the
Companies Act 2006. The text of the Auditor's report can be found in the
Company's full Annual Report and Accounts at www.renaissanceusgrowth.co.uk.
INCOME STATEMENT
for the year ended 31 March 2011
2011 2010
Notes Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
(Losses)/gains on 7 - (9,592) (9,592) - 22,256 22,256
investments at fair
value through profit
or loss
Exchange (losses)/ 7 - (168) (168) - 189 189
gains on capital
items
Income 2 1,573 - 1,573 697 - 697
Investment 3 (874) - (874) (791) - (791)
management fee
Other expenses 4 (556) - (556) (491) - (491)
Return before 143 (9,760) (9,617) (585) 22,445 21,860
finance costs and
taxation
Interest payable (16) - (16) (20) - (20)
Return after finance 127 (9,760) (9,633) (605) 22,445 21,840
costs and before
taxation
Taxation on ordinary 5 (1) - (1) (25) - (25)
activities
Return on ordinary 126 (9,760) (9,634) (630) 22,445 21,815
activities after
taxation for the
financial year
pence pence pence pence pence pence
Return per Ordinary 6 0.68 (52.31) (51.63) (3.30) 117.63 114.33
share
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue return and capital return columns have been
prepared in accordance with the AIC's SORP. Revenue and capital return per
share figures shown are also supplementary information.
All revenue and capital items in the above statement derive from continuing
activities.
There are no recognised gains and losses other than those reflected in the
Income statement for the year, accordingly no statement of recognised gains and
losses has been prepared.
The notes below form part of these accounts.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 March 2011
Share Share Capital Special Capital Revenue Total
capital premium redemption reserve* reserve reserve
account reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 4,665 5,995 666 5,208 55,765 (4,101) 68,198
1 April 2010
Decrease in - - - - (6,307) - (6,307)
investment
holding
gains
Net losses - - - - (3,285) - (3,285)
on sales of
investments|
Exchange - - - - (168) - (168)
losses on
currency
and capital
items|
Retained - - - - - 126 126
revenue
return for
the year
As at 4,665 5,995 666 5,208 46,005 (3,975) 58,564
31 March 2011
Share Share Capital Special Capital Revenue Total
capital premium redemption reserve* reserve reserve
account reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 4,777 5,995 554 6,296 33,320 (3,471) 47,471
1 April 2009
Increase in - - - - 28,034 - 28,034
investment
holding
gains
Net losses - - - - (5,778) - (5,778)
on sales of
investments|
Exchange - - - - 189 - 189
gains on
currency
and capital
items|
Cost of (112) - 112 (1,088) - - (1,088)
Share
repurchase
Retained - - - - - (630) (630)
revenue
return for
the year
As at 4,665 5,995 666 5,208 55,765 (4,101) 68,198
31 March 2010
* The special reserve was created in September 1998, following a transfer from
the share premium account, to enable the Company to purchase its own shares.
| See note 7 for further details.
The notes below form part of these accounts.
BALANCE SHEET
as at 31 March 2011
2011 2010
Notes GBP'000 GBP'000
Fixed Assets
- Investments at fair value through profit 7 56,894 67,491
or loss
Current Assets
- Debtors 8 776 630
- Cash at bank 1,563 3,510
2,339 4,140
Creditors - amounts falling due within one
year
- Creditors and accruals 9 (350) (336)
- Revolving credit facility 10 (241) (3,097)
(591) (3,433)
Net current assets 1,748 707
Total assets less current liabilities 58,642 68,198
Provision for liabilities and charges
Provision for bad debt 11 (78) -
Total net assets 58,564 68,198
Share capital and reserves
Called up share capital 12 4,665 4,665
Share premium account 5,995 5,995
Capital redemption reserve 666 666
Special reserve 5,208 5,208
Capital reserve 46,005 55,765
Revenue reserve (3,975) (4,101)
Equity shareholders' funds 58,564 68,198
Net asset value per Ordinary share 15 313.86p 365.50p
These accounts were approved by the Board of Directors on 21 June 2011.
Ernest Fenton
Chairman
RENN Universal Growth Investment Trust PLC
Company number: 3150876
The notes below form part of these accounts.
STATEMENT OF CASH FLOWS
for the year ended 31 March 2011
2011 2010
Notes GBP'000 GBP'000
Operating activities
Investment income received 1,209 307
Deposit interest received 2 2
Investment management fees paid (877) (742)
Secretarial fees paid (73) (64)
Other cash payments (378) (430)
Net cash outflow from operating 13 (117) (927)
activities
Servicing of finance
Loan interest paid (16) (20)
Taxation
Irrecoverable overseas tax (1) (18)
Total taxation paid (1) (18)
Capital expenditure and financial
investment
Purchases of investments (7,119) (7,729)
Sales of investments 8,228 11,183
Net cash inflow from capital expenditure 1,109 3,454
and financial investment
Financing
Repurchase of Ordinary shares for - (1,088)
cancellation
Loan margin drawdown 1,965 3,097
Loan margin repayment (4,821) (1,331)
Net cash (outflow)/inflow from financing (2,856) 678
(Decrease)/increase in cash 14 (1,881) 3,167
The notes below form part of these accounts.
Notes to the accounts
for the year ended 31 March 2011
1 ACCOUNTING POLICIES
Basis of preparation
The accounts are prepared under the historical cost convention, as modified by
the revaluation of fixed asset investments, and in accordance with applicable
accounting standards in the United Kingdom and with the Statement of
Recommended Practice ("SORP") regarding the Financial Statements of Investment
Trust Companies and Venture Capital Trusts, issued by the Association of
Investment Companies ("AIC") in January 2009. All the Company's activities are
continuing. The accounts are prepared on the going concern basis which assumes
that the Ordinary Resolution for the continuation of the Company will be passed
at the forthcoming Annual General Meeting.
Investments
Financial assets are designated by the Company as at fair value through profit
or loss. Purchases and sales of financial assets are recognised on the trade
date, which is when the Company commits to purchase, or sell the assets.
After initial recognition, the Company measures financial assets designated as
at fair value through profit or loss, at fair values without any deduction for
transaction costs it may incur on their disposal. The fair value of quoted
financial assets is their last traded price at the balance sheet date.
Unlisted investments are valued by the Directors as follows:
? Where possible, unlisted equity investments are included at fair value based
on the last arms length transaction that has taken place in the security held
by the Company. This price is reviewed by the Directors at year end to ensure
that there has not been a significant alteration in the market or stock
specific conditions since the transaction date that would make the use of the
transaction price insufficiently recent. Where there have been such alterations
the investment is valued using an alternative valuation technique as more fully
described below.
? Unlisted convertible debentures investments and unlisted convertible
preferred stock of companies with a quoted common stock are valued by reference
to the fair value of the underlying equity of the investments only if
conversion terms are satisfied. When the conditions are satisfied the closing
last traded price of the common stock is used to value the position. Otherwise
the valuation is based on an alternative valuation technique as described
below.
? For ordinary unlisted debentures an estimate of the fair value is derived
based on a discounted cashflow analysis. In performing the analysis the
Directors estimate the cashflows they expect to arise from holding the
investment. The Directors also estimate an appropriate discount factor to apply
to the investment. The Directors then estimate the fair value on the investment
based on the expected cashflows and the discount factor they have identified.
? Alternative valuation techniques include peer based multiples and discount
cash flow analysis. In performing a peer multiple based valuation the Directors
identify quoted companies with similar characteristics to the security being
valued. The peer group is selected by matching the geographical coverage of the
company, its financial profile and nature of the sector in which it operates
with publicly listed companies that exhibit similar characteristics. The last
twelve months financial information is used to derive valuation multiples
(Revenue, EBIT, EBITDA and P/E) for each of the peer companies. A median
multiple is calculated for each type of multiple. This is applied to the data
point of the investee company (revenue, EBIT, EBITDA and EPS) to generate a
value range. The Directors then select the value they consider the most
appropriate within the range of possible valuations identified by the
alternative valuation technique.
Discounted cash flow (DCF) analysis is a method of valuing an investment using
the concepts of the time value of money. All future cash flows are estimated
and discounted to give their present values. The sum of all future cash flows,
both incoming and outgoing, is the net present value (NPV), which is taken as
the value or price of the cash flows in question.
Using DCF analysis to compute the NPV, takes the cash flows together with an
appropriate discount rate as input to give a price as output.
? Unlisted warrant investments are valued at fair value using the Black Scholes
methodology which includes a time value which is calculated and added to the
intrinsic value to arrive at a total valuation for each warrant. The Black
Scholes pricing formula requires 5 inputs: (i) stock price (ii) exercise price,
(iii) time to expiration, (iv) volatility and (v) interest rates. The stock
price, exercise price and time to maturity are straightforward inputs. The
interest rate is a risk free rate represented by the yield on a US Treasury
security for a term that corresponds to the time to expiration of the subject
warrant.
The application of the Black Scholes methodology requires certain assumptions
to be made around the volatility of the underlying shares to which the warrants
subscribe. The Directors have agreed that the Company use the 100 day
volatility measure of the Russell 2000 Index to give the best reflection of
fair value.
The intrinsic value is calculated by reference to the quoted price of the
investment into which the warrant will convert and the conversion price for
each warrant.
Investment transactions are recognised on the date that they are traded.
Realised gains and losses arising from the sale of investments, and gains and
losses arising from changes in the fair value of financial assets held at fair
value through profit or loss, are included in the Income statement in the
period in which they arise. Gains and losses arising from changes in the fair
value of financial assets classified as at fair value through profit or loss
include interest income.
Gains and losses arising from changes in the fair value of financial assets are
considered to be realised to the extent that they are readily convertible to
cash, without accepting adverse terms, at the balance sheet date. Fair value
gains on unlisted investments are not considered to be readily convertible to
cash and therefore treated as unrealised. The treatment of listed investments
is dependent upon the individual circumstances of each holding.
There is a degree of uncertainty in determining the fair values ascribed in the
unlisted investments held by the Company and the Directors have used their
judgement in determining the most appropriate methodology and valuation for
each unlisted investment. These estimates may differ significantly to the
values that might have been used if an active market existed.
Where investments in a company have been valued at nil, the loss has been
charged to the realised capital reserve. Other than as stated above, any
unrealised profits and losses are taken directly to the capital reserve -
unrealised. Any realised profits and losses arising on the disposal of
investments are taken directly to the capital reserve.
Income recognition
Dividends receivable on quoted shares are included in the accounts when the
investments concerned are quoted `ex-dividend'. Dividends receivable on such
shares where no ex-dividend date is quoted are brought into account when the
Company's right to receive payment is established. The fixed return on a debt
security is recognised on a time apportionment basis so as to reflect the
effective yield on the debt security. Interest receivable is included on an
accruals basis.
The ordinary element of stocks received in lieu of dividends is recognised as
income of the Company. Any enhancement above the equivalent value of the cash
dividend that would have been receivable is treated as a capital gain on the
associated investment.
Management expenses and finance costs
Management expenses and finance costs are allocated in full to the revenue
account. The investment management performance fee, which is based on capital
performance, is charged to capital.
Foreign currency
Transactions denominated in foreign currencies are converted to sterling at the
actual exchange rate as at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the year end are reported at
the rate of exchange at the balance sheet date. Any gain or loss arising from a
change in exchange rate subsequent to the date of the transaction is included
as an exchange gain or loss in the capital reserve or the revenue account
depending on whether the gain or loss is of a capital or revenue nature.
Taxation
No taxation liability arises on gains from sales of fixed asset investments
made by the Company by reason of its investment trust status. However, the net
revenue (excluding UK dividend income and overseas dividend income from 1 July
2009) accruing to the Company is liable to corporation tax at the prevailing
rates.
The payment of taxation is deferred or accelerated because of timing
differences between the treatment of certain items for accounting and taxation
purposes. Full provision for deferred taxation is made under the liability
method, without discounting, on all timing differences that have arisen but not
reversed by the balance sheet date, unless such provision is not permitted by
FRS 19: Deferred Tax.
Capital reserve
The following are accounted for in this reserve:
? gains and losses on the realisation of investments*;
? changes in fair value of investments held which are readily convertible to
cash, without accepting adverse terms*;
? realised exchange differences of a capital nature*;
? other capital charges and credits charged or credited to this account in
accordance with the above policies*;
? changes in fair value investments held which are not readily convertible to
cash, without accepting adverse terms;
? unrealised exchange differences of a capital nature.
* Items classified as distributable to shareholders for the purpose of
purchasing the Company's own shares for cancellation.
Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business, being investment business. The Company invests primarily
in companies listed, quoted or domiciled in the US and Canada. Geographical
analysis of the portfolio is shown above.
2 INCOME
2011 2010
GBP'000 GBP'000
Income from US investments
Convertible debenture stocks - unlisted 497 412
Convertible debenture stocks - unlisted - 148
(reinvested)
Convertible preference shares - unlisted 1,074 17
Common Stock - listed - 118
1,571 695
Other income
Bank interest receivable 2 2
Total income 1,573 697
Total income comprises:
Dividends from financial assets designated at 5 135
fair value through profit or loss
Interest from financial assets designated at 1,566 560
fair value through profit or loss
Deposit interest from financial assets not at 2 2
fair value through profit or loss
1,573 697
3 INVESTMENT MANAGEMENT FEE
2011 2010
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management 874 - 874 791 - 791
fee
Investment management services are provided by RENN Capital Group Inc., whose
fees are calculated at 0.125% per calendar month of the total net assets of the
Company as adjusted for any uninvested cash or `near cash' investments. As at
31 March 2011, the Company held no investments in USA Treasury Bills
(2010: GBPnil), and cash at bank of GBP1,563,000 (2010: GBP3,510,000).
The Manager is also entitled to a performance fee in accordance with the
provisions of the management agreement, the calculation of which is described
in the Report of the Directors. No performance fee is due in respect of the
year ended 31 March 2011 (2010: GBPnil).
4 OTHER EXPENSES
2011 2010
GBP'000 GBP'000
Secretarial services 73 65
Auditor's remuneration 42 41
Directors' remuneration 117 93
Other expenses 324 292
556 491
Total fees paid to the auditors for the year, all of
which were charged to revenue, comprised:
Audit services - statutory audit - current year 37 36
Tax services - compliance services 5 5
42 41
The Directors do not consider that the provision of non-audit work to the
Company affects the independence of the Auditor.
5 TAXATION ON ORDINARY ACTIVITIES
2011 2010
Revenue Capital Total Revenue Capital Total
(a) Analysis of charge GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
in year:
Based on net return for
the year
Overseas tax suffered 1 - 1 25 - 25
(b) Factors affecting the current tax charge:
The tax assessed on the net return for the year is different to the standard
rate of corporation tax of 28% (2010: 28%). The differences are reconciled
below:
2011 2010
GBP'000 GBP'000
Return on ordinary activities before tax (9,633) 21,840
Theoretical tax at UK corporation tax rate of 28% (2010: 28%) (2,697) 6,115
Effects of:
Losses/(gains) on investments and exchange losses/(gains) on 2,733 (6,285)
capital items
Expenses not deductible for tax purposes 13 21
Irrecoverable overseas tax 1 25
Excess management expenses for tax purposes (49) 151
US Scrip dividends not taxable - (1)
Dividends not taxable post 1 July 2009 - (1)
Total current tax charge 1 25
The Company is subject to corporation tax at 28% (2010: 28%). However, the
available tax deductible expenses (including substantial brought forward
amounts) exceed the taxable income of the Company and, as a result, there is no
UK tax charge (2010: GBPnil), other than withholding tax suffered on foreign
dividends receipts.
On 23 March 2011 the Chancellor announced the reduction in the main rate of UK
corporation tax to 26% with effect from 1 April 2011. This change became
substantively enacted on 29 March 2011 and therefore the effect of the rate
reduction would be to create a reduction in any deferred taxation asset. As the
Company does not recognise a deferred taxation asset, there is no effect on the
figures above.
The Chancellor also proposed changes to further reduce the main rate of
corporation tax by 1% per annum to 23% by 1 April 2014, but these changes have
not yet been substantively enacted and are therefore not included in the
figures above. The overall effect of the further reductions from 26% to 23%, if
these applied to the deferred taxation balance at 31 March 2011, would be nil
as no deferred taxation asset is recognised.
At 31 March 2011, the Company had excess management expenses for tax purposes
of GBP10,484,000 (2010: GBP10,657,000) which have not been recognised as a deferred
tax asset. This is because the Company is not expected to generate taxable
income in future periods in excess of the deductible expenses of those future
periods and, accordingly, it is unlikely that the Company will be able to
reduce future tax liabilities through the use of existing surplus expenses.
6 RETURN PER ORDINARY SHARE
2011 2010
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence Pence
Basic 0.68 (52.31) (51.63) (3.30) 117.63 114.33
Revenue return per Ordinary share is based on the net return on ordinary
activities after taxation of GBP126,000 (2010: (GBP630,000)) and on 18,659,008
(2010: 19,080,652) Ordinary shares, being the average number of Ordinary shares
in issue during the year.
Capital return per Ordinary share is based on a net capital return for the year
of GBP(9,760,000) (2010: GBP22,445,000), and on 18,659,008 (2010: 19,080,652)
Ordinary shares, being the average number of Ordinary shares in issue during
the year.
7 INVESTMENTS
2011 2010
a) Investment portfolio summary GBP'000 GBP'000
Listed investments
- Equities 42,381 47,008
- Warrants 44 58
Unlisted investments
- Equities 399 938
- Convertible debenture stocks 1,285 1,720
- Loan notes 2,495 2,637
- Convertible preference shares 10,166 14,599
- Warrants 124 531
56,894 67,491
Listed equity makes up 75% (2010: 70%) of the total portfolio and 72%
(2010: 69%) of net assets.
For the purposes of the Investment policy section concerning the exposure to
unlisted securities not being expected to exceed 25% the Manager excludes
Convertible debenture stocks and Warrants as these investments are readily
convertible into listed equity.
The Manager has procedures in place to ensure this exposure does not exceed
25% for any prolonged period, although the Manager's ability to bring the
percentage down will depend on a number of circumstances many of which are
beyond its control.
2011
Listed Unlisted Total
GBP'000 GBP'000 GBP'000
b) Analysis of investment portfolio
movements
Opening book cost 33,480 12,033 45,513
Opening investment holding gains 13,586 8,392 21,978
Opening valuation 47,066 20,425 67,491
Movements in the year:
Purchases at cost 6,566 553 7,119
Sales
- Proceeds (5,531) (2,593) (8,124)
- Realised gains/(losses) on sales 384 (3,669) (3,285)
Decrease in investment holding gains (6,060) (247) (6,307)
Closing valuation 42,425 14,469 56,894
Closing book cost 34,899 6,324 41,223
Closing investment holding gains 7,526 8,145 15,671
42,425 14,469 56,894
During the year, the Company incurred transaction costs of GBP23,000 on purchases
of investments and GBP53,000 on sales of investments. These are included within
losses on investments in the Income statement.
2011 2010
Total Total
c) Analysis of capital gains and losses GBP'000 GBP'000
Net (losses)/gains on investments designated at fair
value through profit or loss on initial recognition
Realised losses on sales (3,285) (5,778)
(Decrease)/increase in investment holding gains (6,307) 28,034
(9,592) 22,256
Exchange (losses)/gains on capital items (168) 189
d) Fair value gains and losses
With effect from 1 April 2008, changes in fair value of investments which are
readily convertible to cash, without accepting adverse terms, at the balance
sheet date are considered to be realised. Fair value gains on unlisted
investments are not treated as readily convertible to cash, whereas the
treatment of fair value gains on listed investments depends on the individual
circumstances of each investment.
During the year there were no material disposals of unlisted investments.
e) Unlisted securities
Details of material investments in unlisted securities are as follows:
Carrying Carrying Net Last Profit/
Value at Value at income accounts Aggregate (loss)
Total 31 March 31 March from for year capital and after tax
cost 2011 2010 Investment end reserves for year
Investment GBP'000 GBP'000 GBP'000 GBP'000 US$'000 US$'000
AnchorFree - 1,287 10,144 10,720 - 28/02/2011 n/a| n/a|
Convertible
preference
AuraSound - - 116 110 - 31/12/2010 5,654,910 (286,100)
Warrants
Business Process
Outsourcing
- Common stock 11 50 52 - 31/12/2010 19,991,000 6,269,000
Duoyuan Printing - - - 253 - 31/12/2010 11,120,730 1,013,780
Warrants
Dynamic Green 2,031 2,495 2,637 169 31/12/2010 6,942,846 (5,648,038)
Energy
iLinc
Communications
Convertible 354 156 231 38 31/03/2010 102,000 (1,856,000)
debenture
Convertible 124 21 25 5 31/03/2010 102,000 (1,856,000)
preference
Integrated
Security Systems
Convertible 45 1 1 - 31/12/2010 1,817,100 60,340
preference
Warrants - - - - 31/12/2010 1,817,100 60,340
Murdoch Security &
Investigations
Common stock 621 349 886 - 30/09/2010 (459,323) (1,516,156)
Warrants - - 20 - 01/10/2010 (459,322) (1,516,156)
PetroHunter Energy
Convertible 1,026 437 540 48* 31/12/2010 (63,554,490) (6,237,740)
debenture
Warrants - - - - 31/12/2010 (63,554,490) (6,237,740)
Pipeline Data
Convertible 825 692 949 142 31/03/2009 (11,268,680)(36,498,630)
debenture
Shengtai
Pharmaceuticals
Warrants - - 2 - 31/12/2010 55,210,940 5,702,470
Sinohub
Warrants - 8 118 - 31/12/2010 67,810,000 19,112,000
Symbollon
Pharmaceuticals
Warrants - - - - 30/09/2010 (434,380) (638,350)
(TNFG) Terra Nova
Financial Group
Warrants - - - - 30/09/2010 20,142,370 (10,124,930)
* against which a 50% provision has been taken.
| Private Company - Information not available to the public domain.
f) Significant interests
The following are investments in which the Company has an interest exceeding
20% of the nominal value of that class in the investee company.
Investment Country of Class of capital % of
registration class
held
CMSF (CaminoSoft) US Common stock 76.2%
Corporation
Integrated Security Systems US Common stock 47.4%
Inc.
AnchorFree US Series B Convertible 42.0%
Preferred
Cover-All Technologies Inc. US Common stock 30.4%
PetroHunter Energy US 8.5% Convertible Debenture 30.2%
Corporation
The Company holds more than 20% of the common stock of Integrated Security
Systems, Cover-All Technologies and CaminoSoft Corporation. The investments in
these companies are not held on a long term basis and although they are greater
than 20%, their value to the Company is their marketable value, as a part of
the overall investment portfolio. Accordingly they have not been accounted for
as associate companies.
In addition to the above, the Company has a holding of 3% or more that is
material in the context of the accounts in the following investments:
Investment Country of Class of capital % of
registration class
held
Murdoch Security & US Common stock 16.6%
Investigations, Inc.
Dynamic Green Energy US Convertible Loan - 7% 11.4%
iLinc Communications, Inc. US Debenture - 12% 9.8%
Business Process Outsourcing, US Series D Preferred 8.9%
Inc
SinoHub, Inc. US Common stock 8.6%
iLinc Communications, Inc. US Convertible Preferred - 8.5%
8%
Skystar Bio-Pharmaceutical US Common stock 8.2%
AnchorFree US Series A Convertible 8.0%
Preferred - 7%
Hemobiotech Inc. US Common stock 7.8%
PHC, Inc. US Common stock 7.1%
Global Axcess Corporation US Common stock 6.9%
Bovie Medical Corporation US Common stock 6.2%
Access Plans USA, Inc. US Common stock 6.0%
Integrated Security Systems US Convertible Preferred - 4.2%
Inc. 9%
Pipeline Data, Inc. US Convertible Debenture - 4.0%
14%
Shengtai Pharmaceutical Inc. US Common stock 3.3%
A full listing of the investment portfolio is provided above.
8 DEBTORS - amounts falling due within one year
2011 2010
GBP'000 GBP'000
Due from sales of investments - 206
Accrued income 742 379
Prepayments and other debtors 34 45
776 630
The carrying amount for prepayments, accrued income and dividends receivable
disclosed above reasonably approximates to its fair value at the year end and
is expected to be realised within a year from balance sheet date.
9 CREDITORS - amounts falling due within one year
2011 2010
GBP'000 GBP'000
Accruals 350 333
Accrued margin interest - 3
350 336
At 31 March 2011, GBP6,100 was due for payment to the Company Secretary
(2010: GBP5,800).
At 31 March 2011, GBP220,300 was due for payment to the Manager (2010: GBP224,000)
in respect of investment management fees and nil (2010: nil) in respect of the
performance fee.
The carrying amount for accruals and deferred income disclosed above reasonably
approximates to its fair value at the year end and is expected to be realised
within a year from the balance sheet date.
10 REVOLVING CREDIT FACILITY
2011 2010
GBP'000 GBP'000
Falling due within one year 241 3,097
241 3,097
The Company has a Revolving Credit Facility with Salomon Smith Barney.
As at 31 March 2011, $0.4 million (2010: $4.7 million) was drawn down which has
an interest rate of 2.784%* (2010:2.665%). The Company was able to borrow a
further $5.2 million (31 March 2010: $3.5 million).
* Including margin and mandatory costs.
11 PROVISION FOR LIABILITIES AND CHARGES
2011 2010
GBP'000 GBP'000
Provision for bad debt 78 -
78 -
A provision has been made for 50% of the Company's debtor of PetroHunter 8.5%
convertible debenture interest, on the grounds of uncertainty that full payment
will be received.
12 CALLED UP SHARE CAPITAL
2011 2010
GBP'000 GBP'000
Allotted, called up and fully paid:
18,659,008 (2010: 18,659,008) Ordinary shares of 25p 4,665 4,665
each
There were no repurchases of Ordinary Shares for cancellation during the year.
The Company does not have any externally imposed capital requirements.
The capital of the Company is managed in accordance with its investment policy
in pursuit of its investment objective.
13 RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH
OUTFLOW FROM OPERATING ACTIVITIES
2011 2010
GBP'000 GBP'000
Net return before finance costs and taxation (9,617) 21,860
Net capital return 9,760 (22,445)
Stock dividends/interest received - (150)
Increase in provision for bad debt 78 -
Increase in creditors and accruals 14 56
Increase in prepayments and accrued income (352) (248)
Net cash outflow from operating activities (117) (927)
14 RECONCILIATION OF NET CASH FLOW TO NET FUNDS
2011 2010
GBP'000 GBP'000
(Decrease)/increase in cash in the year (1,881) 3,167
Effect of exchange rate movements (66) 179
Movement in net funds (1,947) 3,346
Net funds at beginning of year 3,510 164
Net funds at end of year 1,563 3,510
Net funds are comprised as follows:
2011 2010
GBP'000 GBP'000
Cash at bank 1,563 3,510
Net funds at 31 March 1,563 3,510
15 NET ASSET VALUE PER ORDINARY SHARE
The basic net asset value per Ordinary share is based on net assets of
GBP58,564,000 (2010: GBP68,198,000) and on 18,659,008 (2010: 18,659,008) Ordinary
shares, being the number of shares in issue at the year end.
There are no dilutive elements or potentially dilutive elements in existence at
the year end (2010: none).
16 COMMITMENTS AND CONTINGENT LIABILITIES
At 31 March 2011 there were no outstanding commitments or contingent
liabilities (2010: None).
17 ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES
As detailed at the beginning of this announcement, the primary investment
objective of the Company is to achieve capital growth and outperform its
benchmark, the Russell 2000 Index. This is principally achieved by investing
primarily in privately placed common stock, preferred stock and convertible
debentures of US quoted companies, and from time to time in unlisted US
companies.
The Company's principal financial instruments comprise securities, warrants,
other investments, bank deposits and bank borrowings which are held to achieve
its investment objective and to manage the Company's funding and liquidity
requirements. The Company has other financial assets and liabilities such as
debtors and creditors that arise from its operations, for example sales and
purchases of securities awaiting settlement and debtors of accrued income.
The nature and extent of the financial instruments outstanding at the balance
sheet date and the risk management policies employed by the Company are
discussed below.
The principal risks the Company faces through the holding of financial
instruments are:
* market risk, comprising currency risk, interest rate risk, valuation risk and
other price risk;
* liquidity/marketability risk; and
* gearing.
The Company does not enter into derivative contracts.
The Manager monitors the financial risks affecting the Company on a daily
basis. The Directors receive financial information on a monthly basis which is
used to identify and monitor risk.
As required by FRS 29: Financial Instruments: Disclosure, an analysis of
financial assets and liabilities, which identifies the risk to the Company of
holding such items, is given below.
Market risk
The Company's strategy on the management of investment risk is driven by the
Company's investment objective. The Manager monitors the financial risks
affecting the Company on a daily basis in accordance with the policies and
procedures in place. The Board manages the market price risks inherent in the
investment portfolio by ensuring full and timely access to relevant information
from the Investment Manager. The Board meets regularly and at each meeting
reviews the investment performance, the investment portfolio and the rationale
for the current investment positioning to ensure consistency with the Company's
objectives and investment policies. The portfolio does not seek to reproduce
the Russell 2000 Index. Investments are selected based upon the merits of
individual companies and therefore the portfolio may well diverge from the
short term fluctuations of the benchmark.
Financial assets
All financial assets are stated in sterling and disclosed at fair value through
profit or loss.
Analysis of the Company's investment portfolio is given above.
Further details of warrants held are given below:
Intrinsic Time Total Expiry Date
Value Value Value
GBP'000 GBP'000 GBP'000
AuraSound 112 4 116 07/06/2014
Duoyuan Printing - - - 30/06/2013
Hemobiotech - - - 09/072013
Integrated Security Systems - - - 01/06/2014
Murdoch Security & Investigations - - - 03/07/2012
Murdoch Security & Investigations - - - 27/11/2012
Murdoch Security & Investigations - - - 25/02/2013
PetroHunter Energy Corporation - - - 31/12/2014
Shengtai Pharmaceuticals - - - 15/05/2012
SinoHub - 8 8 08/09/2013
Symbollon Pharmaceuticals - - - 23/09/2011
Symbollon Pharmaceuticals - - - 27/09/2012
(TNFG) Terra Nova Financial Group - - - 16/05/2011
Value at 31 March 2011 112 12 124
As discussed in the accounting policies of the Company in note 1, unquoted
warrants are valued at fair value using the Black Scholes methodology, which
includes a time value which is calculated and added to the intrinsic value to
arrive at the total valuation for each warrant.
The method of valuing the fixed asset investments is discussed in the
accounting policies of the Company in note 1. Cash and trade debtors arising
from the operations of the Company as at 31 March 2011 amounted to GBP1,563,000
(2010: GBP3,510,000) and GBP776,000 (2010: GBP630,000) respectively.
Foreign currency risk
Due to the Company's holdings being wholly overseas, the Company is also
exposed to the risk of movement in the sterling/dollar exchange rate. The
Company does not, nor does it intend to, hedge the portfolio against any
movement in the exchange rate.
The Manager monitors the exposure to foreign currencies on a daily basis and
reports to the Directors on a regular basis. The Manager measures the risk to
the Company of the foreign currency exposure by considering the effect on the
Company's net asset value and income of a movement in the rates of exchange to
which the Company's assets, liabilities, income and expenses are exposed.
The Company settles its investment transactions from its bank accounts in US
Dollars. In the year ended 31 March 2011, exchange losses of GBP168,000
(2010: gains GBP189,000) relating to currency, have been taken to the capital reserve.
The primary currency risk is between sterling and US dollars. The fund also
invests in US listed companies with operations in China and therefore has
exposure to the Renminbi. This exposure to the Renminbi is an indirect exposure
through holding US listed investments.
The Directors consider currency risk, but have stated in their investment
objective that it is not their intention to hedge currency risk between the US
dollar and sterling.
The Manager's risk assessment policy is reflected in its investment strategy.
In order to protect against inflation and grow capital the fund invests in
small companies that it believes will grow into larger companies, with the
intention of increasing the value of the investment.
The currency profile of the Company's financial assets at 31 March was as
follows:
As at 31 March 2011 Investment Cash Other Financial Financial
portfolio current assets liabilities
assets
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Sterling - 69 34 103 92
USA $ 55,187 1,494 742 57,423 577
Canada $ 1,707 - - 1,707 -
56,894 1,563 776 59,233 669
As at 31 March 2010 Investment Cash Other Financial Financial
portfolio current assets liabilities
assets
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Sterling - 28 45 73 81
USA $ 66,546 3,482 585 70,613 3,352
Canada $ 945 - - 945 -
67,491 3,510 630 71,631 3,433
The Company has a total exposure as a percentage of net assets to US Dollars of
97% (2010: 99%) and Canadian Dollars of 3% (2010: 1%).
Sensitivity analysis
At 31 March 2011, had sterling strengthened by 10% in relation to the US
Dollar, with all other variables held constant, the net assets attributable to
shareholders and the return for the year would have decreased by GBP5,168,000
(2010: GBP6,115,000). A 10% weakening of sterling against the US$ would have
resulted in an equal but opposite effect.
Interest rate risk
The Company's portfolio is partially invested in interest bearing securities of
various types (as set out below). At the time of investing, interest rates are
fixed and as long as the security concerned remains unimpaired, cash flows will
not be affected by movements in long-term interest rates. The Company also
holds cash, in the short term, which it invests in money market accounts and
government backed treasury bills. The interest rate received on these holdings
is based on short term interest rates.
The Company's interest rate risk is managed on a daily basis by the Investment
Manager in accordance with policies and procedures in place. The overall
interest rate risks are monitored on a regular basis by the Directors.
The cash held at Frost National Bank is invested in an institutional high
quality commercial paper fund with a very low maturity structure which subjects
the vehicle to reinvestment risk but immunises the fund from intermediate and
long term interest rate risk.
The Directors consider interest rate risk as part of their overall assessment
of risk in the portfolio.
The revolving credit facility with Salomon Smith Barney is a floating (or
variable) rate facility (see note 10). The amounts of such borrowings are
determined by the Manager and reviewed regularly by the Board.
Due to the short-term nature of the credit facility, changes in interest rates
would not have an effect on the fair value of the loan.
The interest rate profile of the Company's fixed interest financial assets at
31 March was as follows:
Value Value Weighted Weighted
average average
interest period for
rate which rates
are fixed
US$'000 GBP'000 % (years)
As at 31 March 2011
US unlisted convertible debentures 2,060 1,285 1.1 0.1
US unlisted loan notes 4,000 2,495 1.3 -
US unlisted convertible preference 16,295 10,166 - -
shares
As at 31 March 2010 2,609 1,720 1.0 0.1
US unlisted loan notes 4,000 2,637 1.0 0.2
US unlisted convertible preference 22,145 14,599 - -
shares
The maturity profile of assets held in the portfolio at 31 March was as
follows:
2011 2010
GBP'000 GBP'000
Within one year 3,343 949
Within one to two years - 2,868
Within two to three years - 540
Within three to four years 437 -
Within four to five years - -
More than five years - -
3,780 4,357
Investments with no maturity dates 53,114 63,134
56,894 67,491
The remaining current assets of the Company of GBP2,339,000 (2010: GBP4,140,000)
have no maturity date.
The Company finances its operations through equity, retained profits and bank
borrowings (see note 10). The change in the fair value of financial liabilities
during the year was not related to the credit risk profile.
The interest rate risk profile of the Company's financial liabilities as at
31 March 2011 is as follows:
Period
until
Amount Total maturity
drawn GBP'000 (years)
Amounts drawn down under fixed revolving $0.4m 241 -
facility
Financial liabilities upon which no interest is 350 -
paid
The interest rate risk profile of the Company's financial liabilities as at
31 March 2010 was as follows:
Period
until
Amount Total maturity
drawn GBP'000 (years)
Amounts drawn down under fixed revolving $4.7m 3,097 -
facility
Financial liabilities upon which no interest is 366 -
paid
The maturity profile of the company's financial liabilities is as follows:
As at 31 March As at 31 March
2011 2010
GBP'000 GBP'000
In one year or less 591 3,433
In more than one year but no more than two - -
years
In more than two years but no more than five - -
years
591 3,433
The Company had $5.2 million undrawn under the fixed Revolving Credit facility
at 31 March 2011 (2010: $3.5 million).
The Company's fixed revolving credit facility is measured at cost and
denominated in US Dollars. All other financial liabilities are in sterling and
disclosed at fair value. It is considered that, because of the short-term
nature of the facility, cost approximates to fair value.
Sensitivity analysis
A change in interest rates would have some impact on the fair value of warrants
and debt instruments but the quantum of the impact is not easily measured.
Other price risk
Other price risk is the risk that the value of the instrument will fluctuate as
a result of changes in market prices (other than those arising from currency
risk or interest rate risk) and represents the potential loss the Company may
suffer in the light of adverse market price movements. Since the Company
invests in financial instruments, this risk is inherent. The Company will
always face uncertainty as to the future price of the financial instruments in
which it is invested. The price of certain unquoted stocks is also affected by
their relative illiquidity (see below).
The Board of Directors manage this risk by ensuring full and timely access to
relevant information from the Investment Manager. The Directors monitor
compliance with the Company's objectives and are directly responsible for
investment strategy and asset allocation.
The investment strategy of the fund is a "bottom-up" approach, meaning the fund
invests on the merits of each company rather than a "top down" approach which
endeavours to have certain percentages of assets in given sectors.
See the Manager's review for discussion of investments made during the year.
The method of valuing the investments is discussed in the accounting policies
in note 1.
Sensitivity analysis
A 10% increase in the market value of investments at 31 March 2011 would have
increased net assets attributable to shareholders by GBP5,689,000
(2010: GBP6,749,000). An equal change in the opposite direction would have decreased the
net assets attributable to shareholders by an equal but opposite amount.
Liquidity risk
The investments made by the Company are in smaller US companies. Although at
the year end 75% of the portfolio (2010: 70%) is held in listed equity
securities (see note 7), it should be recognised that the Company is exposed to
liquidity risk as many of the portfolio holdings are relatively illiquid. The
Manager could be unable to sell due to lack of trading volume. Any forced sales
are likely to generate significantly lower proceeds than the valuations in the
portfolio shown above.
Most investments, micro capitalisation and private placements in public
equities investing involve liquidity risk. Most often the lack of liquidity is
a function of the individual holding not meeting its business objectives. If a
given company becomes successful, liquidity typically increases, when
individual holdings fail, valuation and liquidity can decline to zero.
Credit risk
The carrying amounts of financial assets including cash balances best represent
the maximum credit risk exposure of the Company as at the balance sheet date.
The Company is exposed to credit risk by way of its debenture loan notes and
preference shares in the portfolio and any interest outstanding thereon, but
the Directors do not consider there to be a major risk of material default on
these items. They do recognise however that from time to time, default might
occur.
The Company's investments are held on its behalf by the Company's custodian
Frost National Bank, acting as agent. Bankruptcy or insolvency of the custodian
may cause the Company's rights with respect to securities held by the custodian
to be delayed. The Board monitors the Company's risk by reviewing the
custodian's internal controls report.
The banks at which cash are held are kept under constant review.
Investment transactions are carried out with a large number of brokers whose
creditworthiness is reviewed by the Investment Manager. Transactions are
ordinarily undertaken on a delivery versus payment basis whereby the Company's
custodian bank ensures that the counterparty to any transaction entered into by
the Company has delivered on its obligations before any transfer of cash or
securities away from the Company is completed.
Short-term flexibility is achieved via the use of bank borrowings from the
Company's rolling margin facility with Salomon Smith Barney. Liquidity risk is
mitigated by the fact that funds can be drawn from this facility should the
need arise.
The Company has the benefit of being a closed-end fund where assets do not need
to be liquidated in order to meet redemptions.
The following table shows a breakdown of all financial assets susceptible to
credit risk:
2011 2010
US unlisted convertible debentures: GBP'000 GBP'000
iLinc Communications 156 231
PetroHunter Energy Corporation 437 540
Pipeline Data 692 949
Total US unlisted convertible debentures 1,285 1,720
US unlisted loan notes:
Dynamic Green Energy 2,495 2,637
Total US unlisted loan notes 2,495 2,637
US unlisted convertible preference shares:
AnchorFree 10,144 10,720
China Greenscape Company - 3,203
China New Cities Development - 547
Healthaxis - 100
iLinc Communications 21 25
Integrated Security Systems 1 1
Ronco Corporation - 3
Total US unlisted convertible preference shares 10,166 14,599
Debtors 776 630
Cash 1,563 3,510
16,285 23,096
Financial liabilities
The Company finances its operations primarily through equity and retained
profits, although trade creditors and accruals arise from its operations. At
31 March 2011, all financial liabilities are due within one year and are stated at
fair value.
The Company also has a margin facility which attracts interest at a variable
rate. The maximum draw down available is 40% of the value of the securities
nominated as collateral. At 31 March 2011, eight securities were nominated and
a draw down of $5.6 million was available (31 March 2010: $8.2 million) of
which $0.4 million was utilised (31 March 2010: $4.7 million). The facility is
a rolling facility and therefore does not have a renewal date.
The securities nominated as collateral are:
Global Sources
Hollysys Automation Technologies
Bovie Medical Corporation
COGO Group
SGOCO Technology (common stock and warrants)
SkyPeople Fruit Juice
Skystar Bio-Pharmaceutical
The carrying amount of these assets nominated as collateral is $13.9 million.
As the facility is drawn in US Dollars, the Company is subject to currency
exchange gains and losses.
The maturity profile of the company's financial liabilities are all due within
one year or less.
Fair value hierarchy disclosures
The Company has adopted the amendment to FRS 29, effective 1 January 2009. This
requires the Company to classify fair value measurements using a fair value
hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy consists of the following three levels:
* Level 1 - Quoted prices (unadjusted) in active markets for identical assets
or liabilities.
An active market is a market in which transactions for the asset or liability
occur with sufficient frequency and volume on an ongoing basis such that quoted
prices reflect prices at which an orderly transaction would take place between
market participants at the measurement date. Quoted prices provided by external
pricing services, brokers and vendors are included in Level 1, if they reflect
actual and regularly occurring market transactions on an arms length basis.
* Level 2 - Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices).
Level 2 inputs include the following:
* quoted prices for similar (ie not identical) assets in active markets.
* quoted prices for identical or similar assets or liabilities in markets that
are not active. Characteristics of an inactive market include a significant
decline in the volume and level of trading activity, the available prices vary
significantly over time or among market participants or the prices are not
current.
* inputs other than quoted prices that are observable for the asset (for
example, interest rates and yield curves observable at commonly quoted
intervals).
* inputs that are derived principally from, or corroborated by, observable
market data by correlation or other means (market-corroborated inputs).
* Level 3 - Inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
The level in the fair value hierarchy within which the fair value measurement
is categorised in its entirety is determined on the basis of the lowest level
input that is significant to the fair value measurement in its entirety. For
this purpose, the significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses observable inputs
that require significant adjustment based on unobservable inputs, that
measurement is a level 3 measurement. Assessing the significance of a
particular input to the fair value measurement in its entirety requires
judgement, considering factors specific to the asset or liability.
The determination of what constitutes `observable' requires significant
judgement by the Company. The Company considers observable data to be the price
of investments actively traded in organised financial markets, fair value is
generally determined by reference to Stock Exchange quoted market bid prices at
the close of business on the Balance sheet date, without adjustment for
transaction costs necessary to realise the asset.
The table below sets out fair value measurements of financial assets in
accordance with the FRS 29 fair value hierarchy system:
Financial assets at fair value Total Level 1 Level 2 Level 3
through
profit or loss at 31 March 2011 GBP'000 GBP'000 GBP'000 GBP'000
Equity investments 42,780 39,102 49 3,629
Convertible debenture shares 1,285 - - 1,285
Loan notes 2,495 - - 2,495
Convertible preference shares 10,166 - 21 10,145
Warrants 168 19 124 25
Total 56,894 39,121 194 17,579
Financial assets at fair value Total Level 1 Level 2 Level 3
through
profit or loss at 31 March 2010 GBP'000 GBP'000 GBP'000 GBP'000
Equity investments 47,946 46,557 938 451
Convertible debenture shares 1,720 - - 1,720
Loan notes 2,637 - - 2,637
Convertible preference shares 14,599 - 675 13,924
Warrants 589 58 531 -
Total 67,491 46,615 2,144 18,732
Financial liabilities at fair Total Level 1 Level 2 Level 3
value through
profit or loss at 31 March 2011 GBP'000 GBP'000 GBP'000 GBP'000
Revolving credit facility 241 241 - -
Total 241 241 - -
Financial liabilities at fair Total Level 1 Level 2 Level 3
value through
profit or loss at 31 March 2010 GBP'000 GBP'000 GBP'000 GBP'000
Revolving credit facility 3,097 3,097 - -
Total 3,097 3,097 - -
There are no other financial assets or liabilities other than those disclosed
above. Trade receivables consist purely of accrued income and prepayments and
trade payables consist purely of accruals and are not restated at fair value.
Cash is also not restated at fair value.
Investments whose values are based on quoted market prices in active markets,
and therefore classified within level 1, include active listed equities. The
Company does not adjust the quoted price for these instruments.
Financial instruments that trade in markets that are not considered to be
active but are valued based on quoted market prices, dealer quotations or
alternative pricing sources supported by observable inputs are classified
within level 2. As level 2 investments include positions that are not traded in
active markets and/or are subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/or non-transferability, which are generally
based on available market information.
Investments classified within level 3 have significant unobservable inputs.
Level 3 instruments include private equity and corporate debt securities. As
observable prices are not available for these securities, the Company has used
valuation techniques to derive the fair value. In respect of unquoted
instruments, or where the market for a financial instrument is not active, fair
value is established by using recognised valuation methodologies, in accordance
with International Private Equity and Venture Capital ("IPEVC") Valuation
Guidelines. New investments are initially carried at cost, for a limited
period, being the price of the most recent investment in the investee. This is
in accordance with IPEVC Guidelines as the cost of recent investments will
generally provide a good indication of fair value. Fair value is the amount for
which an asset could be exchanged between knowledgeable, willing parties in an
arm's length transaction.
There were transfers from level 2 to 3 amounting to GBP886,000 and transfers from
level 1 to 3 amounting to GBP852,000 for the year ended 31 March 2011. There were
no transfers between levels for the year ended 31 March 2010.
The following table presents the movement in level 3 instruments for the period
ended 31 March 2011 and 31 March 2010:
At 31 March 2011
Convertible Convertible
Equity debenture Loan preference
Total investments shares notes shares Warrants
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Opening balance 18,732 451 1,720 2,637 13,924 -
Purchases 2,116 1,563 65 - 488 -
Sales - proceeds (2,593) - - - (2,593) -
Transfers 1,738 1,738 - - - -
Total (losses)/ (2,414) (123) (500) (142) (1,674) 25
gains for the
year included in
the income
statement
Closing balance 17,579 3,629 1,285 2,495 10,145 25
At 31 March 2010 Convertible Convertible
Equity debenture Loan preference
Total investments shares notes shares Warrants
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Opening balance 10,513 610 2,677 3,468 3,758 -
Purchases 34 34 - - - -
Sales - proceeds - - - - - -
Transfers - 2,059 (884) (1,130) (45) -
Total gains/ 8,185 (2,252) (73) 299 10,211 -
(losses) for the
year included in
the income
statement
Closing balance 18,732 451 1,720 2,637 13,924 -
The Directors are required under FRS 29 to provide further information on
holdings categorised as Level 3 in the Table above to illustrate a range of
values for these positions which might be obtainable in certain circumstances.
The holdings categorised by the Directors as Level 3 are as follows:
AnchorFree
AuroSound
CMSF (CaminoSoft) Corporation
Dynamic Green Energy
iLinc
Integrated Security Systems
Murdoch Security & Investigations
PetroHunter Energy
Pipeline Data
Plastec Technologies
SGOCO Technology
The Directors show the holdings at what they believe to be fair value, of
GBP17.6 million. There is clearly considerable uncertainty as to whether this valuation
could be realised in all market circumstances. Values realised on sale could be
lower or higher than fair value. The most significant inputs used to derive the
various valuations are the operational forecasts and the discount rate applied
to future cash flows. Using reasonably possible alternative assumptions,
including the valuation reports conducted on AnchorFree and commented on
elsewhere in this annual report, gives an aggregate range of values for these
positions from 60% to over 200% of the figure reported for all holdings in
Level 3.
18 RELATED PARTY TRANSACTIONS
The Manager, RENN Capital Group, Inc. is regarded as a related party of the
Company. The amounts paid to the Manager are disclosed in note 3. The
relationships between the Company, its Directors and the Manager are disclosed
in the Report of the Directors.
Mr Cleveland is a director of CaminoSoft Corporation, Cover-All Technologies,
Inc., Integrated Security Systems, Inc. and BPO Management Services, Inc.
Details of the Company's holdings in these investments are disclosed in the
Manager's review and in the Investment portfolio. At the year end accrued
interest of GBPnil (2010: GBPnil) was due from these holdings. Of these
directorships, Mr Cleveland receives fees from Cover-All Technologies,
amounting to US$43,000.
Together with the Company's holdings in CaminoSoft Corporation and Integrated
Security Systems, Inc, the holdings held by RENN Capital Group, Inc in total
are in excess of 50%.
ANNUAL GENERAL MEETING
The Company's AGM will be held at the offices of the Association of Investment
Companies, 9th Floor, 24 Chiswell Street, London EC1Y 4YY at 12 noon on
Thursday 28 July 2011.
The notice of this meeting can be found in the Annual Report and Accounts at
www.renaissanceusgrowth.co.uk
National Storage Mechanism
A copy of the Annual Report and Accounts 2011 will be submitted shortly to the
National Storage Mechanism ("NSM") and will be available for inspection at the
NSM, which is situated at: www.hemscott.com/nsm.do.
ENDS
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.
END
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