TIDMUSPI
GLOBAL SPECIAL OPPORTUNITIES TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2009
The full Annual Report and Accounts can be accessed via the Company's website
at www.premierassetmanagment.co.uk or by contacting the Company Secretary on
telephone 01392 412122.
Investment objective and policy
Investment objective
The investment objective is for the portfolio to be managed to provide the
Shareholders with capital growth, for the Income Shareholders to be repaid
their final adjusted capital entitlement on 31 May 2011 of 120.82p per Income
Share and for the portfolio to be managed so as to provide the Capital
Shareholders with a cash return on or shortly after 31 May 2011. The Directors
will seek to distribute substantially all of the net revenue to Income
Shareholders by way of dividend, although this is not expected to be a material
amount.
Investment policy
Asset allocation
The investment policy of the Company is to achieve the investment objective
through investment in equity and equity-related instruments which are
predominantly securities domiciled, listed, quoted or traded in North America
(some of these securities may however have an underlying business that is not
in North America), but with the ability to invest up to 25% of the gross assets
of the Company (at the time of investment) opportunistically in listed or
unlisted equity or debt securities issued by issuers situated anywhere in the
world.
The portfolio is managed on the basis that the Company is fully invested in
equity and equity-related instruments to the extent practicable for the
remainder of its life (subject to the recommendation of the Investment Managers
and the Investment Adviser who may wish to increase the cash holding due to
market conditions). Liquidity is managed so that the costs of realising the
portfolio (including market impact costs) are reduced to the extent practicable
as the end of the life of the Company approaches. It is expected that
liquidation of investments will take place in the last three months of the life
of the Company, so that a mixture of liquid securities and cash are handed to
the liquidator.
Up to 40% of the gross assets of the Company (measured at the time of
investment) may be invested in unquoted securities. "Unquoted securities" for
these purposes means those investments which are not listed or quoted or traded
on a recognised stock exchange or another exchange available and used by
professional investors, nor convertible into securities listed, quoted or
traded on such exchanges.
The Company may invest in bonds, warrants, contracts for difference, other
forms of derivative investment (for the purpose of efficient portfolio
management), bank debt or other debt securities, although this will not amount
to more than 20% of the gross assets of the Company at the time of investment.
Risk diversification
The investment policy provides the Company with a global mandate, albeit with a
particular emphasis on North America. The Company is managed with a view to
maintaining an adequate spread of investment risk in terms of the concentration
and in terms of size of its investments. Except in the case of cash deposits
awaiting investment or pending any winding-up of the Company, the Company will
not lend to any one company or group, or invest in the securities of any one
company or group, more than 20% of the value of its gross assets (at the time
the loan or investment is made).
The Company will not invest more than 10% in aggregate of the value of its
gross assets at the time of a new investment, in other investment companies or
investment trusts which are listed on the Official List (except to the extent
that those investment companies or investment trusts have stated policies to
invest no more than 15% of their gross assets in other investment companies or
investment trusts which are listed on the Official List).
Borrowings
The Company may use gearing and the Directors reserve the right to borrow up to
a maximum of 25% of the gross assets (at the time of drawdown)
Chairman's statement
for the year ended 31 May 2009
Dear Shareholder,
The 12 months to 31 May 2009 mark the first year of the three year life
extension that was put in place to allow for the disposal of the more illiquid
holdings in the portfolio of US small company shares in such a manner as to
maximise value for Shareholders. The detail of the scheme of extension and the
new investment strategy were set out in full in the half-yearly report covering
the six months to 30 November 2008. Shareholders wishing to refer to this
document or to the circular to Shareholders regarding the extension of life
proposal will find them on the Manager's website at
www.premierassetmanagement.co.uk.
Market background
When the extension of life scheme was put forward, markets were already
suffering from the early phase of the credit crunch and it was hoped that
market conditions and liquidity in smaller companies would improve. With
hindsight, we can now see that it was perhaps fortuitous that over 70% of the
fund was liquidated before 31 May 2008. The following 12 months brought a
deepening of the problems in the banking sector, culminating in the collapse of
Lehman Brothers in September 2008 and government bailouts out of several large
retail banks. This is turn triggered a global recession. Investors reacted by
retreating from risk, causing an inevitable decline in price and liquidity in
the smaller company sector. This was the worst possible environment against
which to progress with the liquidation of the Company's portfolio; the one
consolation was that the US dollar strengthened against sterling and as the
currency hedge had been removed at the start of the year Shareholders were
fully exposed to the appreciation in the dollar.
Performance
Over the year the NAV of the Income shares declined by 30.61% from 72.53p to
50.33p. Over the same period, the Russell 2000 index (total return) declined by
31.79% in dollars and by 16.56% when adjusted to sterling, the dollar/sterling
exchange rate having moved over the period from 1.98 to the pound to 1.61. The
share price of the Income shares fell by 53.19% over the year standing at a
discount of 23.50%. Part of the relative under performance reflects to some
extent the write down of unlisted securities. Further details can be found
below.
Dividends
Revenue per Income share was 0.26p (31 May 2008: 1.40p). No dividends were paid
in respect of the year ended 31 May 2009. Given the small level of income it
was not considered cost effective to make a dividend payment in respect of the
year ended 31 May 2009.
Bank facility
At 29 May 2008 the Company negotiated a $5 million 12 month facility to give
the Company the opportunity to use gearing in the event of a rising market.
During the year this loan was repaid. On 29 May 2009, a facility of just
$500,000 was extended for a further 12 months (to 29 May 2010) at a margin of
300 basis points over LIBOR. The loan falls well within the capital and
interest cover covenants that relate to it.
Valuation policy and unlisted securities
The Directors reviewed the valuation of unlisted securities on various
occasions during the year. The investment in eOriginal, Asset Capital
Corporation and Integrated Security Systems were written down in July 2008 as
reported at the interim stage. At the year end, following a further review of
the unlisted securities, the Directors agreed to write down the eOriginal
holding to zero and also wrote down holdings in Heyspace and Anchorfree by
15.9% and 24.5% respectively. Shortly before the year end, a conversion scheme
was agreed for our investments in Integrated Security Systems through which our
unlisted holdings in convertibles and promissory notes were converted into
listed equity.
Portfolio composition
At the year end unlisted securities represented 15.5% of gross assets. Of the
listed securities 34.5% were in companies with a market capitalisation of over
$50million. Our largest holding, Bovie Medical Corporation, represented 17.5%
of gross assets at the year end. During the course of the year, despite the
difficult market conditions, some portfolio holdings were sold; details are
provided in the Manager's report.
Outlook
Market sentiment and investor willingness to take on risk has improved since
the market low point in March. Our Investment Adviser believes that many of the
small capitalisation stocks in our portfolio are still trading at exceptionally
low levels when measured by conventional valuation metrics such as price
earnings ratios and that these companies have considerable scope to be re-rated
as sentiment improves. Our Investment Adviser is also working on exits from our
unlisted securities and some of the most illiquid listed holdings. An improving
market background improves the prospect for completing such transactions.
Duncan Abbot
Chairman
21 August 2009
Investment Adviser's report
for the year ended 31 May 2009
As you know from last year's report, Shareholders voted in favour of the
continuation of the Company for an additional three years in order to provide
time to maximise the value of the remaining holdings. During the last year your
Manager was successful in liquidating several positions, making modest new
investments and working to get several companies closer to liquidity events
which are set out below.
Top five holdings
At 31 May 2009, the following top five holdings made up 50.4% of the portfolio.
A description of each of the top five holdings is below.
Company Symbol Industry Value USD % of Portfolio
Bovie Medical BVX Medical devices $3,685,000 18.4%
Corporation
Pipeline Data PPDA Data processing $1,707,000 8.5%
SinoHub SIHI Business $1,627,063 8.1%
services
Global Axcess GAXC Consumer $1,555,100 7.8%
finance
Cover-All COVR Business $1,524,639 7.6%
Technologies software
Bovie Medical Corporation (AMEX: BVX) engages in the manufacture and marketing
of medical products and the development of related technologies. The company
offers electro-surgery products, which include desiccators, generators,
electrodes, electro-surgery pencils and various ancillary disposable products
used in surgery for the cutting and coagulation of tissue; high frequency
desiccators, which are designed for dermatology and plastic surgery for
removing small skin lesions and growths. It also provides products for
outpatient surgical procedures used in various specialties, including
dermatology, gynaecology and plastic surgery. The company also offers a
specialty electrosurgical generator for the gastroenterological and niche
markets. Battery operated cauteries for precise haemostasis and battery
operated medical lighting instruments that are used in ophthalmology, as well
as for general surgery, hip replacement surgery and for the placement of end
tracheal tubes in emergency and surgical procedures. The company also offers
nerve locator stimulator, which is used for identifying motor nerves in hand
and facial reconstructive surgery. The company was founded in 1982 and is based
in Melville, New York.
Pipeline Data Inc., (OTBBB: PPDA) through its subsidiaries, provides merchant
payment processing services and related software products in the US. It
delivers credit and debit card-based payment processing solutions primarily to
small to medium-sized merchants, who operate in physical `brick and mortar'
business environments, over the Internet, or in mobile or wireless settings
through cellular-based wireless devices. The company provides various services,
including application evaluation/underwriting, merchant set-up and training,
card transaction processing, risk management/detection of fraudulent
transactions, merchant service and support, chargeback service and merchant
reporting to merchants accepting credit and debit-based payment cards. It also
offers a virtual terminal/gateway, a SecurePay product; electronic transaction
authorisation services; data capture and reporting services; shopping cart
technology; gateway and communication interfaces, as well as software
application products and services. Pipeline Data Inc. markets and sells its
products through the Internet, direct sales, partnerships with independent
sales organisations, bank alliances and through association marketing and value
added resellers, as well as cross selling its products. The company was founded
in 1997 and is based in Alpharetta, Georgia.
SinoHub, Inc., (OTCBB: SIHI) SinoHub is dedicated to improving electronic
component supply chain management and procurement-fulfilment of electronic
components and assemblies in China, the largest electronics market in the
world. The majority of Sino-Hub's business is currently in the mobile phone
sector and the overwhelming majority of the products its customers make are
sold locally in China. Rapid technology advancements and the requirement for
speed make the mobile phone sector the ideal beneficiary of SinoHub's platform.
Because other sectors also benefit from SinoHub's platform, the company is
quickly diversifying with a significant portion of its business now coming from
the network equipment sector.
Global Axcess Corp, (OTCBB: GAXC) through its subsidiaries, provides automated
teller machine (ATM) services primarily in the US. The company owns and
operates a network of ATMs located at grocery stores, regional and national
retailers, hotels, shopping malls, airports, colleges, amusement parks, sports
arenas, bars/clubs, theatres and bowling alleys, as well as convenience stores
and combination convenience stores and gas stations. It offers ATM branding and
processing services for approximately 59 financial institutions that have
approximately 548 branded sites under contract with it. Global Axcess Corp also
provides network processing services. As of 31 December 2008, it operated
approximately 4,236 ATMs of which approximately 1,423 were company-owned, 2,699
were merchant-owned, and 114 were operated under a service-only agreement. The
company was founded in 1984 and is headquartered in Jacksonville, Florida.
Cover-All Technologies, Inc., (OTCBB: COVR) through its subsidiary, Cover-All
Systems, Inc., provides software products, services and solutions to the
property and casualty insurance industry. Its software products and services
focus on the functions required to market, underwrite, rate, issue, print, bill
and support the life cycle of insurance policies. Cover-All Technologies serves
insurance companies, agents, brokers and managing general agents. Cover-All
Technologies, Inc. was founded in 1971 and is headquartered in Fairfield, New
Jersey.
Disposals & new investments
Having considered the liquidity and limited life of the Company partial and
complete disposals of several holdings were made during the fiscal year
including Advanced Nanotech, A-Power Energy Systems, American Telecom Services,
Asset Capital, Canadian Phoenix Resources, Celsia Technologies, China Direct,
GameTech International, Gaming & Entertainment, OneLink Corporation and Riptide
Worldwide. We made three new investments during the year, A-Power Energy
Systems, SinoHub, Inc. and Wonder Auto Technology, Inc. A-Power Energy Systems
(NASDAQ: APWR) ("A-Power") designs and constructs distributed power generation
and micro grids primarily for factories in China. We sold half of the A-Power
position for a profit before the end of the fiscal year and sold the remaining
balance in June. In September we made a $1 million dollar investment in
SinoHub, Inc. an electronic sales and electronic component supply chain
management company in China. At 31 May 2009, the investment in SinoHub was up
approximately 52% in value. In October we made a new investment in Wonder Auto
Technology, Inc. (NASDAQ: WATG) which engages in the design, manufacturing and
selling of automotive electronic parts in China. At 31 May 2009, the value of
the investment in Wonder Auto had increased by approximately 94%.
Liquidity progress
At 31 May 2009 your Company had a number of unlisted companies in the
portfolio, a number of which can be converted to listed securities. There are a
number of unlisted securities that are not convertible to quoted stock, the
four largest companies are detailed here. AnchorFree, Inc. provides an online
virtual private network platform for Internet users, advertisers and
publishers. AnchorFree became profitable on operations for the first time in
the month of May 2009 and we believe has good prospects of being acquired by a
larger company. Asian Financial is the largest non-governmental owned
commercial printing equipment company in China. This profitable and well run
company should be quoted before the end of 2009. China Greenscape supplies
trees and plants to China's cities and developing communities. This profitable
company was originally going to merge with a quoted company in Autumn 2008.
That transaction did not come to pass though we are optimistic that this
company will become quoted later this year. Heyspace International Limited is a
social networking and entertainment company based in China. The investors are
working diligently on helping this company become quoted. In each of these four
cases, we expect each to trade at values greater than cost.
Conclusion
With the remaining holdings, your Adviser will endeavour to add value where it
can and attempt to realise value at the appropriate time.
RENN Capital Group, Inc.
21 August 2009
Financial summary
31 May 31 May % Premium/
2009 2008 change (discount)
31 May
2009
%
Capital
Assets attributable to 13,065 19,149 (31.77)
shareholders (GBP'000)
Gross assets (GBP'000) 13,375 20,920 (36.07)
Net assets value per Zero 182.61p 182.61p n/a
Dividend Preference share *
Mid-market price per Zero n/a 180.25p n/a -
Dividend Preference share**
Net asset value per Income share* 50.33p 72.53p (30.61)
Mid-market price per Income share 38.50p 82.25p (53.19) (23.50)
Net asset value per Capital share 0.00p 0.00p n/a
*
Mid-market price per Capital 1.76p 4.63p (61.99) -
share
Net asset value per Unit* 50.33p 72.53p (30.61)
(1 Capital share and 1 Income
share)
Mid-market price per Unit 38.25p 86.00p (55.52) (24.00)
Year to Year to %
31 May 31 May change
2009 2008
Revenue
Return per Income share 0.26p 1.40p (81.43)
Net dividend paid per Income share 1.00p 4.00p (75.00)
Total expense ratio (excluding VAT recovered 3.25% 9.74% 6.49
on Investment Managers fees and tender offer
costs)
* Net asset values calculated in accordance with Articles of Association
** De-listed on 31 July 2008.
BUSINESS REVIEW
The business of the Company
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. A full description of the Company's
activities during the year under review is given in the Chairman's statement
and the Investment Adviser's report.
The principal activity of the Company is to conduct business as an investment
trust. The Company has received written approval from HM Revenue & Customs as
an authorised investment trust, under Section 842 of the Income and Corporation
Taxes Act 1988 ("Section 842"), for the year ended 31 May 2008. 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 842 each year. The Company will
retain no more than 15% of its 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 other 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.
On incorporation, the planned wind-up date of the Company was 31 May 2008. On
30 May 2008 Shareholders voted to extend the life of the Company for a further
three years. The Company's planned wind-up date is now 31 May 2011.
Management of the Company
The Company's assets are managed by Premier Fund Managers and Premier Asset
Management (Guernsey) Limited. RENN Capital Group, Inc. acts as Investment
Adviser to the Company. Premier Fund Managers Limited is a subsidiary of
Premier Asset Management Limited, which manages a range of UK and offshore
funds and provides bespoke discretionary management services for both private
and corporate clients. RENN Capital Group is based in Dallas and has a
thirty-six year track record in identifying growth opportunities in US smaller
companies.
Future of the Company
On 30 May 2008 the life of the Company was extended for a further three years
to 31 May 2011 based on the belief that certain investments in the portfolio
would require a longer period of time to deliver potential value than the 31
May 2008 wind up date would allow; a number of the Company's investments have
very poor liquidity and others only trade on a matched bargain basis. The
portfolio is managed with a view to maximising the returns that will be
available to Shareholders on 31 May 2011.
Donations
The Company made no political or charitable donations during the period.
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 be
transacted and it is the Company's policy to abide by those terms. There were
no trade creditors outstanding at the year end (31 May 2008: GBP60,000).
Going concern
The Directors are of the opinion that the Company has adequate resources to
continue in operational existence for the foreseeable future and accordingly
have adopted the going concern basis in preparing the financial statements.
Results and dividends
During the year, a fourth interim dividend in respect of the year ended 31 May
2008 of 1.00 pence was paid on 6 June 2008 to holders of Income shares. There
were no proposed dividends in respect of the year ended 31 May 2009.
Borrowing facility
At 29 May 2008 the Company negotiated a $5 million 12 month facility to give
the Company the opportunity to use gearing in the event of a rising market.
During the year this loan was repaid. On 29 May 2009, a facility of just
$500,000 was extended for a further 12 months (to 29 May 2010) at a margin of
300 basis points over LIBOR. The loan falls well within the capital and
interest cover covenants that relate to it.
Transactions in the Company's own shares
During the year ended 31 May 2009, holders of any remaining Zero Dividend
Preference shares after the tender offer on 30 May 2008 were given the
opportunity to sell their shares to the Company for cancellation via Cenkos
Securities. As a result, the Company purchased for cancellation a total of
266,850 Zero Dividend Preference shares (with a nominal value of GBP267),
representing 0.53% of the share capital, for an aggregate amount of GBP490,713.
The remaining 206,037 Zero Dividend Preference shares were de-listed on 31 July
2008.
At the Company's AGM held on 19 November 2008, Shareholders granted the Company
the authority to purchase up to 14.99% of each of its issued Income shares
(being 3,778,980) and Capital shares (being 7,495,000). As at the date of this
report no purchases of Income or Capital shares have been made using these
authorities. These authorities will only be utilised if the Board believes that
purchases of either Income shares or Capital shares will be in the best
interests of the Company and its Shareholders as a whole. In considering
whether to exercise the authority to make market purchases, the Board will take
into account the investment opportunities available to the Company and any
discount at which the shares are trading in the market relative to their net
asset value. These authorities will expire on 19 February 2010 or, if earlier,
at the conclusion of the Annual General Meeting of the Company in 2009. Shares
purchased by the Company pursuant to the authority to make market purchases
will be cancelled. The Company will seek to renew these authorities at the
forthcoming Annual General Meeting.
Principal risks associated with the Company
General
The market price of the shares may not fully reflect their underlying net asset
values. If stock market prices fall the potential returns available to
Shareholders may decline. There can be no guarantee that the Company's
investment objectives will be achieved.
Zero Dividend Preference shares
Although the Zero Dividend Preference shares rank ahead of the Income shares
and the Capital shares for participation in a distribution of assets on the
winding-up of the Company, they rank behind the Company's liabilities. The Zero
Dividend Preference shares were de-listed on 31 July 2008. There is no
secondary market in which these shares can be traded.
Income shares
The Income shares rank for repayment after the Zero Dividend Preference shares.
Capital shares
The Capital shares rank for repayment after the other two classes of shares.
Due to the substantial gearing provided by the prior capital entitlements of
the Income shares, the Zero Dividend Preference shares and by any debt
financing, the market value of the Capital shares can be expected to be
volatile and particularly sensitive to changes in the value of the Company's
gross assets. Accordingly, the Capital shares should be considered to be a high
risk investment.
Smaller companies
The Company invests directly in smaller companies. As smaller companies do not
generally have the financial strength, diversity and resources of large
companies they may find it more difficult to overcome periods of economic slow
down or recession. In addition, the relatively small market capitalisation of
such companies may make the market in their shares less liquid. In the event
that smaller companies under perform, this may affect the performance of US
smaller companies in which the Company is invested.
Unlisted securities
The Company may invest in unlisted securities, or other securities, in which
there is no active market. In such cases it may be difficult to determine the
value of such securities and/or to realise the investment or to do so on
acceptable terms. There is no certainty that a listing or trading facility will
be obtained for such securities. Holders of such securities may not have the
benefit of market rules designed for the protection of holders of listed or
public traded securities. This may include the absence of publicly available
information on such securities or their issuers.
Derivative risk
The Company's investment policy allows it to enter into derivative transactions
where the Investment Managers consider that it is prudent to do so in order to
protect the value of the Company's portfolio and is in the best interests of
the Company. Markets in derivatives can be highly volatile and such investments
carry a high risk of loss. In the case of certain derivatives a relatively
small adverse market movement may result not only in the loss of the original
investment but also in unquantifiable further loss exceeding any margin
deposited. Any such loss suffered by the Company may adversely affect the
Company's ability to meet the capital and income returns to Shareholders.
Dividend levels
Dividends paid on the Company's Income shares rely on receipt of interest
payments and dividends from the securities in which the Company invests and
therefore dividend levels are likely to vary. The Board expects dividend
levels, if any, to be negligible.
Currency risk
The portfolio invests in US securities and its assets are therefore subject to
fluctuations in the US dollar/ sterling exchange rate and the sterling value of
its assets, plus declines in US equity markets as a whole. The Board's current
policy is not to engage in an active programme of hedging the dollar risk in
the portfolio. However, bearing in mind that the final redemption payment will
be a sterling payment made to holders of Income shares at 31 May 2011, the
Board will look at taking advantage of any future dollar strength versus
sterling by hedging some or all of the dollar exposure into sterling in those
circumstances.
Liquidity risk
A significant proportion of the portfolio is held in smaller and unquoted
companies. Such companies are inherently higher in risk and lower in liquidity
than, for example, blue-chip equities. Unlisted companies have the additional
risk of not benefiting from market rules designed to protect investors. Some of
the investments are in unlisted convertible bonds or preference shares, which
may at any time be converted into a listed common stock, giving an effective
level of liquidity equal to the liquidity in the common stock. Other unlisted
investments do not have the option of converting into a listed stock. This
issue is particularly relevant regarding the 31 May 2011 wind-up date of the
Company.
Credit risk
The portfolio may contain some fixed income securities, however, many of these
are convertible into 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. If the underlying portfolio
company performs well, the Company can participate in the upside by converting
into common stock. However, it is possible that such investee companies might
default on these debentures or wind-up prior to their repayment.
Market price risk
Since the Company invests in financial instruments, market price risk is
inherent in these investments.
Discount volatility
The Company itself, being a closed-end fund, and its shares may trade 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 Company is seeking to extend its existing
authority from Shareholders at the forthcoming AGM to purchase Income and
Capital shares for cancellation. If granted, the Directors will consider using
share buybacks to control the Company's discount levels when in the interest of
all Shareholders and the Company as a whole.
Regulatory risk
If the Company did not comply with the provisions of Section 842 of the Income
and Corporation Taxes Act 1988, it would lose its investment trust status. A
breach of the Listing Rules may result in censure by Financial Services
Authority ("FSA") and/or the Company's suspension from Listing. In order to
minimise these risks, the Directors, the Investment Managers, the Investment
Adviser and the Company Secretary monitor the Company's compliance with the key
criteria of Section 842 on a monthly basis and an ongoing review of compliance
with the FSA Listing Rules. On a quarterly basis, compliance with these
provisions is discussed in detail between the Board, the Company Secretary, the
Investment Managers and the Investment Adviser.
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 and the FSA Listing Rules,
are complied with. Details of how these risks are managed are included below
under `Internal control process'.
Risk diversification
The Company's investment policy provides it with a global mandate, albeit with
a particular emphasis on North America. The Company is managed with a view to
maintaining an adequate spread of investment risk in terms of the concentration
and size of its investments as detailed in the investment policy.
Internal control process
The Directors acknowledge that they are responsible for the Company's systems
of internal control and for reviewing their effectiveness. An ongoing process,
in accordance with the guidance of the FRC "Internal Control: Revised Guidance
for Directors on the Combined Code", has been established for identifying,
evaluating and managing risks faced by the Company. This process has been in
place throughout the year and up to the date the financial statements were
approved. Key procedures established with a view to providing effective
financial control have been in place for the full financial year and up to the
date the financial statements were approved. No significant failings or
weaknesses within the Company's internal controls were identified.
The risk management process and systems of internal control are designed to
manage rather than eliminate the risk of failure to achieve the Company's
objectives. It should be recognised that such systems can only provide
reasonable and not absolute assurance against material misstatement or loss.
The risk assessment and review of the effectiveness of the Company's system of
internal controls is undertaken by the Audit Committee in the context of the
overall investment objective. The review covers the key business, operational,
compliance and financial risks facing the Company. In arriving at its judgement
of what risks the Company faces, the Audit Committee has considered the
Company's operations in the light of the following factors:
* the nature and extent of risks which it regards as acceptable for the Company
to bear within its overall business objective;
* the Company's ability to reduce the incidence and impact of risk on its
performance; and
* the cost to the Company and benefits related to the Company and third parties
operating the relevant controls.
Against this background, in the review of risk and associated controls the
Board has split the review into five sections reflecting the nature of the
risks being addressed. These are: corporate strategy; published information;
compliance with laws and regulations; relationship with service providers and;
investment and business activities.
Given the nature of the Company's activities and the fact that most functions
are subcontracted, the Directors have obtained information from key third party
suppliers regarding the controls operated. To enable the Board to make an
appropriate risk and control assessment the information and assurances sought
from third party suppliers include the following:
* details of the control environment operated by the third party suppliers;
* identification and evaluation of risks and control objectives by third party
suppliers;
* assessment of the communication procedures with third party suppliers; and
* assessment of the control procedures operated by third party suppliers.
The key procedures which have been established to provide effective internal
control are as follows:
* investment management is provided by Premier Asset Management (Guernsey)
Limited and Premier Fund Managers Limited, who are advised by RENN Capital
Group, Inc. The Board is responsible for setting the overall investment policy
and monitors the actions of the Investment Managers and Investment Adviser at
regular Board meetings;
* administration and company secretarial duties for the Company are performed
by Capita Sinclair Henderson Limited;
* custody of assets is undertaken by Frost National Bank Inc. and HSBC Bank
plc;
* the duties of investment management, administration and the custody of assets
are segregated. The procedures of the individual parties are designed to
complement one another;
* the Directors of the Company, all of which are non-executive, clearly define
the duties and responsibilities of their agents and advisers. The appointment
of agents and advisers is conducted by the Board after consideration of the
quality of the parties involved; the Board monitors their ongoing performance
and contractual arrangements;
* mandates are granted by the Board for investment transactions. The Board sets
the policy for authorising expense payments; and
* the Board reviews financial information produced by the Investment Managers,
the Investment Adviser and the Company Secretary in detail on a regular basis.
Analysis of the Company's performance and position
In order to provide Shareholders with a clear understanding of the Company's
performance and position, this section of the business review will consider how
the Company has performed against the following key performance indicators:
1) The assessment of the value added through the portfolio by comparing
performance before the impact of expenses against relevant benchmarks.
2) The performance of the Company's total assets after all expenses (including
bank interest) have been charged. This measure includes the cost of gearing but
will not reflect the benefit of the gearing that will arise if total assets are
rising.
3) The performance of the Company at the net asset level. This shows how
Shareholders' funds as a whole have performed and includes the cost of bank
interest, but also the impact of the gearing provided by bank debt. If gross
assets have grown by a greater amount than the cost of management and bank
interest, returns to Shareholders will have been enhanced by the gearing. If
total assets have declined the gearing will accelerate that decline in net
assets.
4) The performance of the individual share classes, both in terms of share
price total return (i.e. accounting for dividends received) and in terms of net
asset value total return. The share price performance is the measure of the
return that Shareholders have actually received and will reflect the impact of
widening or narrowing of discounts to NAV.
Portfolio performance for the year
The portfolio was invested in US assets, cash and government securities and is
managed by Premier Asset Management (Guernsey) Limited as advised by the
Company's Investment Adviser, RENN Capital Group Inc., based in Dallas, Texas.
During the course of the year the net asset value of the Income shares declined
30.61% from 72.53p to 50.33p against a background of declining markets. The NAV
entitlement of the few remaining Zero Dividend shares was static at 182.61p and
the Capital shares' NAV remained at zero throughout the year.
* Company's performance
Over the year, the Company's gross assets fell due to the repayment of bank
debt and a decline in the value of the Company's investments against a
background of falling stock markets. On the 31 May 2008, following the
completion of the tender, the Company's gross assets were GBP20.92 million of
which GBP1.77 million was bank debt. At 31 May 2009 gross assets were GBP13.38
million of which GBP0.31 million was bank debt.
* Share price performance
During the year the listing for the Zero Dividend Preference shares ceased and
there was therefore no market price for the shares at the year end. Income
share price fell 53.19% from 82.25p to 38.50p; the capital share price fell
61.99% from 4.63p to 1.76p and the Unit price fell 55.52% from 86.00p to
38.25p.
Future developments and events subsequent to the year end
The Directors are aware of the AIC/JPMorgan Claverhouse judgement which was
made during 2007 regarding the charging of VAT on investment management fees.
It is possible that, during the forthcoming year, the Company will be able to
recover further amounts of VAT that it has paid on its investment management
fees although the Directors do not believe that any such recoverable sums will
be of a material amount.
Social, environmental and ethical policy
Global Special Opportunities Trust plc seeks to invest in companies that are
well managed, with high standards of corporate governance. The Directors
believe this creates the proper conditions to enhance value for Shareholders.
In aiming to achieve a high level of corporate performance the Company adopts a
positive approach to corporate governance and engagement with companies.
Statement of Directors' responsibilities
In respect of 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 the Directors have elected to prepare financial statements in
accordance with United Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice). The financial statements are required by law to
give a true value and fair view of the state of affairs 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, to the best of their knowledge, state that:
? the financial statements, prepared in accordance with UK Accounting
Standards, give a true and fair view of the assets, liabilities, financial
position and profit of the Company; and
? the Report of the Directors' includes a fair review of the development and
performance of the business and the position of the Company together with a
description of the principle risks and uncertainties that it faces.
The Directors are responsible for keeping adequate accounting records that
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 are responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
financial statements included on the Manager's website. Legislation in the
United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Duncan Abbot
Chairman
21 August 2009
Independent Auditors' report
The Company's financial statements for the year ended 31 May 2009 have been
audited by Grant Thornton UK LLP. The text of the Auditor's report can be found
in the Company's annual report and accounts at:
www.premierassetmanagement.co.uk.
Income statement
for the year ended 31 May 2009
Year ended 31 May 2009 Year ended 31 May 2008
Note Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Losses on investments at 9 - (5,066) (5,066) - (14,943) (14,943)
fair value through profit
or loss
Income 2 454 - 454 2,486 1 2,487
Investment management fee 3 (35) (80) (115) (360) (841) (1,201)
VAT recovered on 3 7 10 - - -
investment management fee
Other expenses 4 (311) - (311) (544) (15) (559)
Exchange gains on capital - 6 6 - 58 58
items
Gains on derivatives at - - - - 876 876
fair value through profit
or loss
Net return before finance 111 (5,133) (5,022) 1,582 (14,864) (13,282)
costs and taxation
Tender offer costs - - - (247) (246) (493)
Tender offer costs written 2 2 4 - - -
back
Finance costs
Interest payable and 5 (22) (52) (74) (301) (702) (1,003)
similar charges
Appropriations in respect - - - - (2,148) (2,148)
of:
Zero Dividend Preference
shares
Income shares 7 (65) 5,161 5,096 (693) (1,351) (2,044)
Capital shares - - - - 18,975 18,975
Return on ordinary 26 (22) 4 341 (336) 5
activities before taxation
Taxation on ordinary 6 (26) 22 (4) (341) 336 (5)
activities
- - - - - -
Return per share (FRS 25 pence pence pence pence pence pence
basis)
Capital share 8 - - - - (37.95) (37.95)
Income share 8 0.26 (20.47) (20.21) 1.40 2.72 4.12
Zero Dividend Preference 8 - - - - 15.61 15.61
Unit (1 Capital and 1 Income) 8 0.26 (20.47) (20.21) 1.40 (35.23) (33.83)
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
operations. There are no recognised gains or losses other than those passing
through the Income statement.
Statement of movements in net assets attributable to shareholders
for the year ended 31 May 2009
Year ended Year ended
Note 31 May 2009 31 May 2008
GBP'000 GBP'000
Net assets attributable to Shareholders at 19,149 84,958
the start of the year
Appropriations to Shareholders
Zero Dividend Preference shares - 2,148
Income shares (5,096) 2,044
Capital shares - (18,975)
(5,096) (14,783)
Dividends paid to Income Shareholders 7 (497) (1,987)
Repurchase of Shares (including related (491) (49,039)
costs)
Net assets attributable to Shareholders at 13,065 19,149
year end
Balance sheet
as at 31 May 2009
31 May 2009 31 May 2008
Note GBP'000 GBP'000
Fixed assets
Investments held at fair value through 9 12,403 16,899
profit or loss
12,403 16,899
Current assets
Debtors 11 105 2,432
Cash held in money market fund 659 1,185
Cash at bank 327 50,139
1,091 53,756
Creditors - amounts falling due within one
year
Creditors 12 119 49,735
Bank loan 13 310 1,771
429 51,506
Net current assets 662 2,250
Total assets less current liabilities 13,065 19,149
Creditors - amounts falling due after more
than one year
Net assets attributable to Shareholders 14 13,065 19,149
- -
Net asset value per share: pence pence
- Capital shares 14 - -
- Income shares 14 50.33 72.53
- Zero Dividend Preference shares 14 182.61 182.61
- Units 14 50.33 72.53
These financial statements were approved by the Board of Directors on 21 August
2009 and signed on its behalf by:
Duncan Abbot
Chairman
Statement of cash flows
for the year ended 31 May 2009
Year ended Year ended
31 May 2009 31 May 2008
Note GBP'000 GBP'000
Operating activities
Investment income received 475 2,014
Deposit interest received 101 436
Other income received 19 -
VAT refunded in respect of Investment 10 -
Manager's fees
Investment management fees paid (208) (1,283)
Secretarial fees paid (112) (92)
Other cash payments (680) (507)
Net cash(outflow)/inflow from operating 17 (395) 568
activities
Servicing of finance
Interest paid (70) (989)
Non-equity dividends paid (Income shares) (497) (1,987)
Net cash outflow from servicing of finance (567) (2,976)
Capital expenditure and financial
investment
Purchase of investments (9,223) (131,984)
Sales of investments 10,838 209,617
Net cash inflow from capital expenditure 1,615 77,633
and financial investment
Net cash inflow before financing 653 75,225
Financing
Loan repayment - (32,078)
Revolving credit facility drawdown - 1,771
Revolving credit facility repayment (2,083) -
Financing costs - (108)
Buybacks of Zero Dividend Preference shares (491) -
for cancellation
Tender offer costs (49,034) (38)
Net cash outflow from financing (51,608) (30,453)
Net cash (outflow)/inflow after financing (50,955) 44,772
(Decrease)/increase in cash 19 (50,955) 44,772
Notes to financial statements
for the year ended 31 May 2009
1. ACCOUNTING POLICIES
Accounting convention
The financial statements are prepared under the historical cost convention
except for the measurement at fair value of fixed asset investments and are
prepared in accordance with applicable law and Accounting Standards in the
United Kingdom (`UK GAAP') and in accordance with the Statement of Recommended
Practice "Financial Statements of Investment Companies" (`SORP') issued by the
Association of Investment Companies in January 2003 and revised in December
2005.
Dividends
Interim dividends are accounted for in the period when they are paid and final
dividends are accounted for when approved by the Shareholders.
Investments
Investments have been designated by the Board as held at fair value through
profit or loss and accordingly are valued at fair value. As the Company's
business is investing in financial assets with a view to profiting from their
total return in the form of interest, dividends or increases in fair value,
quoted equities and fixed income securities are designated as fair value
through profit or loss on initial recognition. The Company manages and
evaluates the performance of these investments on a fair value basis in
accordance with its investment strategy and information about the portfolio is
provided internally on this basis to the Board.
Investments are recognised and derecognised on the trade date where a purchase
or sale is under a contract whose terms require delivery within the time frame
established by the market concerned, and are initially measured at fair value.
Fair value is defined as the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable willing parties in an arm's length
transaction. In arriving at fair value, accounting standards require that bid
prices are used where they are readily and regularly available from an
exchange. The Board considers that for the majority of the Company's US quoted
investments, reliable bid prices are not readily and regularly available and
have therefore used the price of the most recent transaction in the investment.
The Board believes this provides a more accurate valuation of the current fair
value having adjusted for significant changes in economic circumstances since
the time of the transaction.
Unquoted investments are valued at fair values as follows:
? Unquoted equity investments and unquoted loan notes are included at fair
value based on latest dealing prices, stockbroker valuations, net asset values,
discounted cashflow analysis or other information, as appropriate. This
valuation incorporates all factors that market participants would consider in
setting a price.
? Unquoted convertible debenture investments are valued as follows. Where the
debentures are paying cash coupons they are valued at the greater of cost and
the market value of the equity received if converted. If the debentures are not
paying cash coupons then they are valued at the lower of cost and the market
value of the equity received if converted.
? Non-redeemable unquoted convertible preferred stock are valued at the market
value of the equity received if converted. Redeemable preferred stock
investments are valued as follows. Where the preferred stocks are paying cash
coupons they are valued at the greater of cost or market value of the equity
received if converted. If the preferred stocks are not paying cash coupons then
they are valued at the lower of cost and the market value of the equity
received if converted.
? Unquoted 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
application of the Black Scholes methodology requires certain assumptions to be
made on the volatility of the underlying shares to which the warrants
subscribe.
Derivatives
The Company has the option to use derivative financial instruments. If used,
these derivatives would be classified as `fair value through profit or loss'
and movements in the fair value of these derivatives would be recorded through
the Income statement.
Shareholders' funds
Due to the Company having a fixed life, the Zero Dividend Preference shares,
Income shares and Capital shares are all classified under FRS 25 as financial
liabilities rather than as equity in the Balance sheet. This is purely
presentational and has no effect on the Company's net assets per share or
returns per share as calculated. The finance costs relating to these shares are
charged to the Income statement using the Effective Interest Rate method.
Income recognition
Dividends receivable on quoted equity shares are brought into account on the
ex-dividend date. As prescribed in FRS 16: Current tax, UK dividends are
disclosed excluding the associated tax credit. Dividends receivable on equity
shares where no ex-dividend date is quoted are brought into account when the
Company's right to receive payment is established;
Income arising on fixed interest securities is recognised on a time
apportionment basis so as to reflect the effective interest rate on that
security;
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.
? Underwriting commission is recognised as income in so far as it relates to
the shares the Company is not required to take up. Where the Company is
required to take up shares underwritten the commission received is treated as a
deduction from the cost of shares. The balance is taken to income in the Income
statement for the Company; and
? Interest receivable is included on an accruals basis.
Expenditure
All expenses are accounted for on an accruals basis. All expenses are charged
in full to the revenue column in the Income statement except as follows;
? Transaction costs incurred on the purchase and sale of investments are
charged through the capital column of the Income statement;
? Expenses are allocated between capital and revenue where a connection with
the maintenance or enhancement of the value of the investments can be
demonstrated. In respect of the investment management fees, debit interest and
loan arrangement fees, 70% has been allocated to capital and 30% to revenue in
the Income statement, as stated in the prospectus at the time of the Company's
inception. The investment management performance fee when payable is charged,
in total, to the capital column of the Income statement.
Taxation
The charge for taxation is based on the net revenue for the year.
Full provision for deferred taxation is made under the liability method on all
timing differences that have arisen but not reversed by the Balance sheet date
in accordance with FRS 19: Deferred Taxation. Deferred tax assets are
recognised to the extent that is regarded as more likely than not that they
will be recovered. Timing differences arise from the inclusion of items of
income and expenditure in tax computations in periods different from those in
which they are included in the accounts. Provision is made at the average tax
rates that are expected to apply in the periods when the timing differences are
expected to reverse, based on tax rates and laws that have been enacted or
substantially enacted by the Balance sheet date. Deferred tax is measured on a
non-discounted basis. The tax effect of different items of expenditure is
allocated between revenue and capital on the same basis as the particular item
to which it relates. Tax relief on expenses is allocated between revenue and
capital using the marginal basis in accordance with the SORP.
Foreign currency transactions
The currency of the primary economic environment in which the Company operates
(the functional currency) is sterling. The presentation currency is sterling.
Transactions denominated in foreign currencies are translated into sterling at
the rate of exchange ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the period end are reported at
the rates of exchange prevailing at the period end. A gain or loss arising from
a change in exchange rates subsequent to the date of the transaction is
included as an exchange gain or loss in the capital column or in the revenue
column of the Income statement depending on whether the gain or loss is of a
capital or revenue nature respectively.
Finance costs
The Directors have allocated 100% of the appropriation relating to the capital
entitlement of Zero Dividend Preference shares and Income shares to capital.
Accordingly a redemption reserve has been set up to provide for the capital
repayment entitlements attached to the Zero Dividend Preference shares and
Income shares which accrue to the date of the Company's winding-up on 31 May
2011. On a winding-up of the Company the Zero Dividend Preference shares were
entitled to a capital repayment of 100.00p per share as at 12 April 2001,
increasing on a daily basis by approximately 8.8% p.a. compounded annually to
give a final capital entitlement of 182.608201p on 31 May 2008. This amount
will not increase until payment is made on 31 May 2011. The income shares were
entitled to a capital repayment of 85.00p increased on the last day of each
calendar month to give a capital entitlement of 100.00p on 31 May 2008 and then
from 1 June 2008 to 31 May 2011 increased at a daily compound rate so as to
give a final capital entitlement of 120.82p on 31 May 2011.
The Income shares are entitled to the revenue reserves of the Company. The
revenue return for the year is treated as an appropriation and is analysed in
note 7 between dividends paid in the year and residual returns.
The Capital shares are entitled to all surplus assets of the Company after
repayment of the bank facility and after the pre-determined capital
entitlements of the Zero Dividend Preference shares and the Income shares have
been satisfied.
2. INCOME
Year ended Year ended
31 May 2009 31 May 2009
GBP'000 GBP'000
Income from investments designated at fair value
through profit or loss
UK net dividend income - 277
Overseas unfranked investment income 372 1,764
372 2,041
Other income
Bank interest receivable 63 445
Other income 19 -
82 445
Total income 454 2,486
Total income comprises:
Dividends from investments designated at fair value 64 621
through profit or loss
Interest from investments designated at fair value 308 1,420
through profit or loss
Deposit interest from bank deposits 63 445
Other income from investments designed at fair value 19 -
through profit or loss
454 2,486
Income from investments:
Listed UK - 277
Listed overseas 64 1,329
Unlisted overseas 308 435
372 2,041
3. INVESTMENT MANAGEMENT FEE
Year ended 31 May 2009 Year ended 31 May 2008
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management fee 35 80 115 359 839 1,198
Irrecoverable VAT thereon - - - 1 2 3
35 80 115 360 841 1,201
Under the terms of the previous Investment Management Agreements, the
Investment Manager was entitled to a fee, payable monthly in arrears at the
rate of 0.0417% per month, of the gross assets less current liabilities of the
Income portfolio, reduced by the value of investments held in companies managed
by Premier, plus 0.125% per month of the gross assets less current liabilities
of the US Growth portfolio. With effect from 1 June 2008, the Investment
Managers are entitled to a monthly fee of 0.0625% of the gross assets less
current liabilities of the portfolio. A performance fee was not payable for the
year ended 31 May 2009 (2008: GBPnil). Further information regarding the
investment management fees from 1 June 2008 is detailed in the Report of the
Directors.
At 31 May 2009 there were amounts outstanding of GBP8,000 (2008: GBP101,000) VAT is
no longer payable on the Investment Managers fees or performance fees.
During the year, the Company has received GBP10,000 in respect of past VAT on
Investment Managers' fees from the previous Investment Manager, BFS Investments
plc. This amount has been split 70% capital, 30% revenue in accordance with the
accounting policy on charging Investment Managers' fees.
4. OTHER EXPENSES
Year ended 31 May 2009 Year ended 31 May 2008
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Administrative & 121 - 121 108 - 108
secretarial fee
Directors' remuneration 68 - 68 68 - 68
Auditors' remuneration* 31 - 31 31 - 31
Other expenses 93 - 93 366 15 381
VAT recoverable (2) - (2) (29) - (29)
Total other expenses 311 - 311 544 15 559
2009 2008
GBP'000 GBP'000
* Auditors remuneration is split as follows:
Fees payable to the Company's Auditors for 31 27
the audit of the annual financial statements
Fees payable to the Company's Auditors and
its associates for other services
- Other services pursuant to legislation:
review of half yearly report - 4
31 31
5. INTEREST PAYABLE AND SIMILAR CHARGES
Year ended 31 May 2009 Year ended 31 May 2008
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
On bank loan 22 52 74 298 695 993
Amortisation of loan - - - 3 7 10 facility costs
22 52 74 301 702 1,003
6. TAXATION
Year ended 31 May 2009 Year ended 31 May 2008
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Analysis of charge for
year:
Corporation tax - - - - - -
Overseas tax not 4 - 4 5 - 5
recoverable
Tax relief attributable 22 (22) - 336 (336) -
expenses allocated to
capital
26 (22) 4 341 (336) 5
Factors affecting tax charge for the year
The tax assessed for the year differs from the standard companies rate of
corporation tax in the United Kingdom (2008: standard rate 30% to 31 March
2008, 28% from 1 April 2008). The differences are explained below:
Year ended 31 May 2009 Year ended 31 May 2008
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Return on ordinary 91 (5,183) (5,092) 1,034 (15,812) (14,778)
activities after interest
payable and tender offer
costs but before
appropriations
Return on ordinary 19 (1,088) (1,069) 307 (4,691) (4,384)
activities multiplied by
the smaller companies rate
of corporation tax in the
United Kingdom 21%
(standard rate 2008:
29.667%)
Effects of the non-taxable
items
UK franked investment - - - (82) - (82)
income
Losses on investments, - 1,062 1,062 - 4,194 4,194
exchange gains on capital
items and movement on fair
value of derivative
financial instruments
Unrelieved capital expenses - 4 4 - 88 88
Expenses not deductible for 2 - 2 111 73 184
tax
Accrued income taxable on 1 - 1 - - -
receipt
Overseas tax not 4 - 4 5 - 5
recoverable
Current tax charge for the 26 (22) 4 341 (336) 5
year
At 31 May 2009 the Company had unrelieved management expenses of GBP5,989,000 (31
May 2008: GBP5,966,000). It is unlikely that the Company will generate sufficient
taxable income in the future to use these expenses to reduce future tax charges
and therefore no deferred tax asset has been recognised.
7. APPROPRIATIONS IN RESPECT OF INCOME SHARES
Appropriations in the revenue column of the Income statement in respect of
Income shares are split between dividends paid in the year and the remaining
balance of the revenue account for the year.
Year ended Year ended
31 May 2009 31 May 2009
GBP'000 GBP'000
Dividends 497 1,987
Residual balance of revenue account (432) (1,294)
Total appropriations in respect of Income 65 693
shares
Dividends are comprised as follows:
Relating to prior period
Third interim paid of nil (2007: 0.80p net) - 397
Fourth interim paid of 1.00p net (2007: 0.80p 497 397
net)
497 794
Relating to current period
First interim paid of nil (2008: 0.80p net) - 397
Second interim paid of nil (2008: 0.80p net) - 398
Third interim paid of nil (2008: 0.80p net) - 398
497 1,987
No dividend (2008: 1.00p) per share will be proposed for the year ended 31 May
2009.
Appropriations in the capital column of the Income statement are calculated as
discussed in note 8 and amounted to:
Years ended Year ended
31 May 2009 31 May 2008
GBP'000 GBP'000
(5,161) 1,351
8. RETURN PER SHARE
Year ended 31 May 2009 Year ended 31 May 2008
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
Return per share (FRS 25
basis)
Capital share - - - - (37.95) (37.95)
Income share 0.26 (20.47) (20.21) 1.40 2.72 4.12
Zero Dividend Preference - - - - 15.61 15.61
share
Unit (1 Capital, 1 Income) 0.26 (20.47) (20.21) 1.40 (35.23) (33.83)
Capital shares
The return per Capital share is based on appropriations for the year of GBPnil
(2008: GBP(18,975,000) and on 50,000,000 (2008: 50,000,000) Capital shares.
Income shares
The revenue return per Income share is based on revenue appropriations of GBP
65,000 (2008: GBP693,000) and on 25,210,008 (2008: 49,603,169) Income shares
being the weighted average number of shares in issue during the year. The
capital return per Income share is based on capital appropriations of GBP
(5,161,000) (2008: GBP1,351,000) and on 25,210,008 (2008: 49,603,169) Income
shares being the weighted average number of shares in issue during the year.
The capital return per Income share is based on an effective interest rate from
12 April 2001 of approximately 2.79%.
The redemption yield is contingent on the Company having sufficient assets at
the time of redemption.
Zero Dividend Preference shares
The return per Zero Dividend Preference share is based on appropriations of GBP
nil (2008: GBP2,148,000) and on 206,037 (2008: 13,762,590) being the weighted
average number of Zero Dividend Preference shares in issue during the year. The
return per Zero Dividend Preference share is based on an effective interest
rate from 12 April 2001 of approximately 8.8%.
The return per share based on the allocation of available assets in the event
of a return of capital in accordance with the Articles of Association was:
Year ended 31 May 2009 Year ended 31 May 2008
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
Return per share (Articles
basis)
Capital shares - - - - (22.68) (22.68)
Income shares 0.26 (20.47) (20.21) 1.40 (12.45) (11.05)
Zero Dividend Preference - - - - 14.81 14.81
shares-
Unit (1 Capital, 1 Income) 0.26 (20.47) (20.21) 1.40 (35.13) (33.73)
For the year ended 31 May 2008, the return per share calculated in accordance
with the Articles of Association differs from that calculated in accordance
with FRS 25 due to the amortisation of share issue costs and assets available
for distribution in the event of a return of capital.
During the year ended 31 May 2009 the value of share issue costs amortised in
calculating the return per Zero Dividend Preference share under FRS 25 was GBPnil
(2008: GBP110,000). The share issue costs were fully amortised by 31 May 2008.
During the year ended 31 May 2009 the value of share issue costs amortised in
calculating the return per Income share under FRS 25 was GBPnil (2008: GBP232,000).
9. INVESTMENTS
As at As at
31 May 2009 31 May 2008
GBP'000 GBP'000
Investment portfolio summary
Listed investments on a recognised 8,545 8,098
international exchange
Unlisted investments with conversion rights 1,780 4,377
into listed investments
Other unlisted investments 2,078 4,424
Investments at fair value 12,403 16,899
Unlisted
investments
*
with
conversion
rights into Other
Listed listed unlisted
investments investments investments Total
GBP'000 GBP'000 GBP'000 GBP'000
Analysis of investment portfolio
movements
Opening book cost 12,344 7,678 6,304 26,326
Opening unrealised depreciation (4,246) (3,301) (1,880) (9,427)
Opening valuation 8,098 4,377 4,424 16,899
Movements in the year:
Transfer 283 (283) - -
Purchases at cost 7,781 1,504 11 9,296
Sales:
Proceeds (3,471) (4,249) (1,006) (8,726)
Realised (losses)/gains on sales (988) 309 (413) (1,092)
Movement in unrealised (3,158) 122 (938) (3,974)
depreciation
Closing valuation 8,545 1,780 2,078 12,403
Analysis of investment portfolio
movements
Closing book cost 15,949 4,959 4,896 25,804
Closing unrealised depreciation (7,404) (3,179) (2,818) (13,401)
8,545 1,780 2,078 12,403
* The Company is entitled to exercise these conversion rights at any time.
2009 2008
GBP'000 GBP'000
Analysis of capital (losses)/gains
Realised (losses)/gains on sales (1,092) 11,271
Decrease in unrealised appreciation (3,974) (26,214)
Losses on investments (5,066) (14,943)
Transaction costs incidental to the acquisitions of investments totalled GBP8,000
(2008: GBP19,000) and disposals of investments totalled GBP3,000 (2008: GBP393,000)
for the year. These amounts are included in losses on investments, as disclosed
in the Income statement.
Details of material holdings in unlisted securities are as follows:
Last Aggregate Profit/ Net income
(loss)
Fair Fair Accounts capital after from
value value and tax
Total 31 May 31 May period reserves for year investment
cost 2009 2008 end
Investment GBP'000 GBP'000 GBP'000 US$m US$'000 GBP'000
Anchorfree
preference 287 52 56 31/12/ 1.9 (2.1) -
2008
Asian Financial
common stock 400 465 379 31/03/ 120.2 32.1 -
2009
warrants* - 11 12 31/02/ 120.2 32.1 -
2009
Aurasound
warrants - - 15 31/03/ (3.6) (23.5) -
2009
Business
Process
Outsourcing
common stock 11 49 - 31/12/ 7.7 1.1 -
2008
CaminoSoft
senior secured 136 - 126 31/12/ (0.3) - 11.2
note 2008
loan note 51 - 51 31/12/ (0.3) - 5.1
2008
convertible 1,088 2 109 31/12/ (0.3) - 68.2
debenture* 2008
warrants - - - 31/12/ (0.3) - -
2008
Celsia
Technologies
warrants - - - 31/12/ (5.7) (6.0) -
2008
China
Greenscape
preference 382 465 380 31/12/ 37.2 26.3 -
2008
Cover-All
Technologies
warrants* - 21 18 31/03/ 7.6 4.4 -
2009
Datapath
common stock 812 35 - 31/03/ 1,631.0 671.0 -
2009
Dyadic
International
warrants* - 17 - 31/12/ 28.2 (10.9) -
2006
eOriginal
Holdings|
preferred 410 - 177 28/02/ (6.6) (2.3) -
series B 2009
preferred 900 - 513 28/02/ (6.6) (2.3) -
series C 2009
preferred 622 - 580 28/02/ (6.6) (2.3) -
series D 2009
warrants - - 15 28/02/ (6.6) (2.3) -
2009
Global Axcess
Loan note 555 620 506 31/03/ 13.7 11.6 -
2009
warrants - - - 31/03/ 13.7 11.6 -
2009
Healthaxis
Convertible 1,732 39 - 31/03/ 6.7 (17.9) -
preference* 2009
Heyspace
preference 380 391 379 31/12/ 23.4 6.2 -
2008
iLinc
Communications
convertible 352 310 253 30/09/ 3.9 (2.1) 37.8
debenture* 2008
Integrated
Security
Systems
warrants - - - 31/03/ (12.8) (2.3) -
2009
Narrowstep
warrants* - - 61 30/11/ 0.2 (8.9) -
2008
Obsidian
Enterprise
convertible 29 25 71 31/10/ (10.7) (22.6) 4.0
debenture* 2008
Petrohunter
convertible 240 58 320 31/03/ (53.2) (163.0) 28.0
debenture* 2009
warrants* - 68 263 31/03/ (53.2) (163.0) -
2009
Pipeline Data
convertible 826 1,059 759 31/03/ (11.3) (36.5) 94.2
debenture* 2009
Ronco
convertible 640 4 7 30/06/ 3.9 (47.1) -
preference* 2006
Sinohub
`A' warrants* - 55 - 31/03/ 25.6 9.4 -
2009
`B' warrants* - 42 - 31/03/ 25.6 9.4 -
2009
Symbollon
Pharmaceuticals
warrants - - 6 31/03/ 0.1 (1.2) -
2009
Terra Nova
Financial Group
warrants - - 6 31/03/ 31.2 (0.1) -
2009
Vertical
Branding
warrants - 69 10 31/12/ (0.2) (5.0) -
2008
* Unlisted investments with conversion rights into listed investments.
10. SIGNIFICANT INTERESTS
The Company has a holding of 3% or more of the voting rights in the following
investments:
Name of undertaking Class of share % of class held
Integrated Security Common stock 30.3%
Systems
Riptide Worldwide Common stock 24.1%
CaminoSoft Common stock 21.0%
Cover-All Technologies Common stock 7.2%
Global Axcess Common stock 6.8%
Hemobiotech Common stock 5.8%
Narrowstep Common stock 5.8%
Alliance Healthcard Common stock 4.6%
Aurasound Common stock 3.6%
Bovie Medical Corporation Common stock 3.5%
The Company also have substantial interests in convertible debentures and other
debt instruments as follows:
Name of undertaking Class of share % of class held
CaminoSoft 6% Convertible debenture 100.0%
CaminoSoft 8% Loan notes 100.0%
Obsidian Enterprises 8% Convertible debenture 50.0%
CaminoSoft 7% Loan notes 33.3%
iLink Communications 12% Convertible debentures 9.8%
PetroHunter Energy 8.5% Convertible debenture 7.1%
Corporation
Pipeline Data 10% Convertible debenture 4.1%
The Company's holdings in Integrated Security Systems and CaminoSoft represents
29% and 19% respectively of the enterprise value of these companies.
11. DEBTORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
As at As at
31 May 2009 31 May 2008
GBP'000 GBP'000
Sales for future settlement - 2,101
Prepayments and accrued income 105 325
Dividends receivable - 6
105 2,432
12. CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
As at As at
31 May 2009 31 May 2008
GBP'000 GBP'000
Outstanding tender offer settlement and related - 49,493
costs
Sundry creditors and accruals 119 242
119 49,735
13. BANK LOAN
As at As at
31 May 2009 31 May 2008
GBP'000 GBP'000
Revolving credit drawn down 310 1,771
310 1,771
As at 31 May 2009 the Company had a US$500,000 revolving credit facility with
Allied Irish Banks plc. The facility was re-negotiated on 29 May 2009,
following termination of the previous US$500,000 facility on this date.
Utilisation periods may be one, two or three months, or any shorter period
agreed between the Company and Allied Irish Banks plc, but shall not extend
beyond the termination date of 29 May 2010.
At 31 May 2009 the Company had utilised the full amount of US$500,000 (2008:
US$3,500,000) of this facility. Interest is payable at LIBOR plus a margin of
3.0% on any drawn down balance and 1.5% per annum on any undrawn balance.
Repayment of the loan has priority over any capital repayment on winding up.
With effect from 29 May 2008, the covenant, under the revolving credit facility
is that gross borrowings will not at any time exceed 40% of the adjusted net
asset value.
14. NET ASSET VALUES
Total net asset values attributed to Shareholders are as follows:
31 May 2009 31 May 2009 31 May 2008 31 May
2008
FRS 25 Articles FRS 25 Articles
basis basis basis basis
GBP'000 GBP'000 GBP'000 GBP'000
For the purposes of calculating
net asset values:
Total net assets attributable to:
- Capital Shareholders - - - -
- Income Shareholders 12,689 12,689 18,285 18,285
- Zero Dividend Preference 376 376 864 864
Shareholders
13,065 13,065 19,149 19,149
- Unit holders 12,689 12,689 18,285 18,285
pence pence pence pence
Net asset value per:*
- Capital share - - - -
- Income share 50.33 50.33 72.53 72.53
- Zero Dividend Preference share 182.61 182.61 182.61 182.61
- Unit 50.33 50.33 72.53 72.53
They are represented by:
31 May 2009 31 May 2008
GBP'000 GBP'000
Share Capital 75 76
Special reserve 11,453 11,944
Capital redemption reserve 40 39
Capital reserve - realised 9,804 11,002
- unrealised (13,401) (9,438)
Redemption reserve 4,906 4,906
Revenue reserve 188 620
Assets attributable to shareholders 13,065 19,149
* Net asset values per share calculated on the number of shares in issue of:
31 May 31 May
2008
2009
- Capital share 50,000,000 50,000,000
- Income share 25,210,008 25,210,008
- Zero Dividend Preference share 206,037 472,887
At 31 May 2009 the net assets attributable to Shareholders calculated in
accordance with FRS 25 and in accordance with the Articles of Association were
the same as all issue costs had been fully amortised by this date.
15. SHARE CAPITAL
31 May 2009 31 May 2008
GBP'000 GBP'000
Authorised
200,000,000 Capital shares of 0.1p each 200 200
150,000,000 Income shares of 0.1p each 150 150
50,000,000 Zero Dividend Preference shares of 0.1p 50 50
each
400 400
Issued, allotted and fully paid
50,000,000 (2008: 50,000,000) Capital shares of 0.1p 50 50
each
25,210,008 (2008: 25,210,008) Income shares of 0.1p 25 25
each
206,037 (2008: 472,887) Zero Dividend Preference - 1
shares of 0.1p each
75 76
During the year ended 31 May 2009 266,850 Zero Dividend Preference shares were
purchased for cancellation at a price of 182.608201p per share resulting in
206,037 remaining in issue. Subsequently to the year-end, no further shares
have been purchased for cancellation. These shares were subsequently de-listed
on 31 July 2008.
Duration
The Articles of Association provide that the Directors shall convene an
Extraordinary General Meeting of the Company to be held on 31 May 2011, or if
that day is not a business day, on the immediate preceding business day, at
which a special resolution shall be proposed, pursuant to Section 84 of the
Insolvency Act 1986 requiring the Company to be wound-up voluntarily unless the
Board shall have previously been released from its obligation to do so by a
special resolution of the Company.
As to dividends each year
The Income shares carry the right to receive all the revenue profits of the
Company (including accumulated revenue reserves) available for distribution and
determined to be distributed by way of interim and/or final dividend and at
such times as the Directors may determine.
The Zero Dividend Preference shares and the Capital shares carry no right to
receive dividends out of revenue or any other profits of the Company.
As to capital on winding-up
On winding-up, and after repayment of prior ranking creditors, there shall be
paid to the holders of Zero Dividend Preference shares an amount equal to 100p
per Zero Dividend Preference shares as increased each day from 12 April 2001 to
31 May 2008 (inclusive) at a daily compound rate so as to give a final
entitlement of 182.608201p on 31 May 2008. This amount shall not increase until
payment is made on 31 May 2011.
The holders of the Income shares shall be paid prior to the wind-up date an
amount equal to the amount standing to credit of the Company's revenue reserves
and, after repayment of prior ranking creditors and the prior capital
entitlements of the Zero Dividend Preference Shareholders have been met in
full, an amount equal to 85.00p per Income share as increased on the last day
of each calendar month from 30 April 2001 to and including 31 May 2008 so as to
give a capital entitlement of 100.00p on 31 May 2008 and then from 1 June 2008
to 31 May 2011 increased at a daily compound rate so as to give a final capital
entitlement of 120.82p on 31 May 2011.
The holders of the Capital shares are entitled to the surplus assets of the
Company available for distribution after repayment of the bank loan and payment
of the entitlements of the Zero Dividend Preference shares and the Income
shares.
16. MOVEMENT IN ASSETS ATTRIBUTABLE TO SHAREHOLDERS
Capital Capital Capital
redemption Special reserve reserve Redemption Revenue
reserve reserve realised unrealised reserve reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Opening balance 39 11,944 11,002 (9,438) 4,906 620
Net losses on - - (1,092) - - -
realisation of
investments
Currency exchange - - (5) 11 - -
(losses)/gains
Movement in unrealised - - - (3,974) - -
appreciation
Costs written back to - - 2 - - -
capital
Costs charged to - - (132) - - -
capital
VAT refunded on - - 7 - - -
Investment Managers
fees
Tax relief on costs - - 22 - - -
charged to capital
Cancellation of shares 1 (491) - - - -
Retained net revenue - - - - - (432)
for the year
At 31 May 2009 40 11,453 9,804 (13,401) 4,906 188
In accordance with TECH 01/08 issued by the Institute of Chartered Accountants
in England and Wales, the movement in fair value of investments that can be
readily converted to cash is to be treated as realised in the capital reserve.
As at 31 May 2009 the value of such investments is GBPnil (2008:GBPnil).
17. RECONCILIATION OF NET RETURN BEFORE FINANCE COST AND TAXATION TO NET CASH
INFLOW FROM OPERATING ACTIVITIES
31 May 2009 31 May 2008
GBP'000 GBP'000
Net return before finance costs and taxation (5,022) (13,282)
Add back: Losses on investments 5,066 14,943
Less: Exchange gains on capital items (6) (58)
Less: Gains on derivatives - (876)
Decrease in creditors (583) (117)
Decrease in debtors 223 75
Capital dividend - (1)
Reinvested dividends (73) (110)
Tender offer costs written back 4 -
Tax deducted from investment income (4) (6)
Net cash (outflow)/inflow from operating activities (395) 568
18. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET CASH
31 May 2009 31 May 2008
GBP'000 GBP'000
(Decrease)/increase in cash in year (50,154) 39,882
(Decrease)/increase in cash held in money market fund (801) 4,890
in year
Loan repayment - 32,078
Revolving credit drawdown - (1,771)
Revolving credit repayment 2,083 -
Amortisation of costs incurred on bank loan - (9)
Realised foreign exchange (loss)/gain (5) 2,994
Movement in net cash (48,877) 78,064
Net cash/(debt) at start of year 49,553 (28,511)
Net cash at 31 May 2009 676 49,553
For the purposes of this note net cash is defined as cash at bank, cash held in
money market fund and the revolving credit loan only.
19. ANALYSIS OF CHANGES IN NET CASH
At Cash Exchange At
1 June 2008 flows differences 31 May 2009
GBP'000 GBP'000 GBP'000 GBP'000
Cash at bank 50,139 (50,154) 342 327
Cash held in money market fund 1,185 (801) 275 659
Revolving credit loan due within (1,771) 2,083 (622) (310)
one year
49,553 (48,872) (5) 676
20. RELATED PARTY TRANSACTIONS
The Investment Managers, Premier Asset Management (Guernsey) Limited and
Premier Fund Managers Limited, are regarded as related parties to the Company.
The amounts paid to the Managers for investment management fees are disclosed
in note 3. The investment management fee is based on the Company's gross assets
less current liabilities which are reduced by the value of investments held in
companies where Premier is the investment manager. At 31 May 2009 the market
value of these holdings was GBPnil (2008: GBPnil).
Mr Cleveland of RENN Capital Group, Inc., the Investment Adviser is a director
of Access Plans, Cover-All-Technologies, Integrated Securities Systems, BPO
Management and CaminoSoft, being companies held within the portfolio. Other
officers of RENN Capital Group Inc. also sit on the boards of certain companies
held as investments within the portfolio. The total directors' remuneration
received by RENN Capital Group Inc. for representation of the Company and its
other clients and affiliates, and attendance at meetings of the boards of
companies in which the Company had a interest during the year ended 31 May 2009
was US$11,476 (2008: US$7,826).
21. CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
At 31 May 2009 there were no outstanding commitments or contingent liabilities.
22. CONTINGENT ASSETS
The Directors are aware of the AIC/JPMorgan Claverhouse judgement which was
made during 2007 regarding the charging VAT on investment management fees and
has recently received a sum of GBP10,000 from the previous Investment Manager. It
is possible that the Company will be able to recover an amount of VAT that it
has paid on its investment management fees during the forthcoming year,
although the Directors do not believe that any such recoverable sums will be of
a material amount.
23. ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES
Objectives, policies and strategies
Following approval by Shareholders on 30 May 2008 the investment policy was
revised to invest primarily in equities and equity related instruments issued
by companies domiciled, listed quoted or traded in North America. The Company
may invest in bonds, warrants, contracts for difference, other forms of
derivative investment, bank debt or debt securities.
The Company borrows money by way of a US$500,000 revolving credit facility at a
fixed interest rate of LIBOR plus margin of 3.0% on any drawn down balance and
1.5% per annum on any undrawn balance.
The Company's financial instruments comprise securities, warrants, other
investments and bank deposits which are held to achieve its investment
objective as well 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 and other price
risk; and
? liquidity/marketability 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 Investment Managers and Investment Adviser
monitor the financial risks affecting the Company on a continual 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 Managers and
Investment Adviser. The Board meets quarterly 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.
Financial assets
All investments and derivatives are stated in sterling and disclosed at fair
value through profit or loss.
The Company invests directly in smaller companies. As smaller companies do not
generally have the financial strength, diversity and resources of large
companies they may find it more difficult to overcome periods of economic slow
down or recession. In addition, the relatively small market capitalisation of
such companies may make the market in their shares less liquid. In the event
that smaller companies under perform, this may affect the performance of
smaller companies in which the Company is invested.
The Company invests in a wide range of industrial sectors therefore the Board
does not consider there is a significant risk to market fluctuations in any one
industry.
The Company may invest in unlisted securities, or other securities, in which
there is no active market. In such cases it may be difficult to determine the
value of such securities and/or to realise the investment or to do so on
acceptable terms. There may be no certainty that a listing or trading facility
will be obtained for such securities. Holders of such securities may not have
the benefit of market rules designed for the protection of holders of listed or
public traded securities. This may include the absence of publicly available
information on such securities or their issuers.
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 to the total valuation for each warrant. 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.
The Black Scholes pricing formula requires five inputs: (i) stock price, (ii)
exercise price, (iii) time to expiration, (iv) volatility and (v) interest
rate. The stock price, exercise price and time to maturity are straight
forward. The interest rate is a risk free rate (represented by the yield on US
Treasury security) for a team that corresponds to the time to expiration of the
subject 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 May 2009 amounted to GBP986,000
(2008: GBP51,324,000) and GBP105,000 (2008: GBP2,432,000) 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 dollar/sterling exchange rate. The
Board's current policy is not to engage in an active programme of hedging the
dollar risk in the portfolio. However, bearing in mind that the final
redemption payment will be sterling payment of 120.82p to be made to Income
Shareholders on 31 May 2011, the Board will look at taking advantage of any
future dollar strength versus sterling by hedging some or all of the dollar
exposure into sterling in those circumstances.
The Investment Managers monitor the exposure to foreign currencies on a daily
basis and report to the Directors on a regular basis. The Investment Managers
measure 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 US investment transactions from its bank accounts in US
dollars. In the year ended 31 May 2009, exchange gains of GBP6,000 (2008: gains GBP
58,000) relating to currency, have been taken to the capital reserve.
The primary currency risk is between sterling and dollars.
The Investment Managers 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 foreign currency profile of the Company's financial assets and liabilities
at 31 May was as follows:
Other
Investment Current Financial Financial Sensitivity
portfolio Cash assets assets liabilities gap
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 31 May
2009
US dollars 12,403 947 93 13,443 310 13,133
As at 31 May
2008
US dollars 16,899 2,578 2,378 21,855 1,809 20,046
The Company has a total exposure as a percentage of funds attributable to
Shareholders to US dollars of 101% (2008: 105%).
Sensitivity analysis
At 31 May 2009, 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 GBP1,194,000
(2008: GBP1,822,000). A 10% weakening of sterling against the US dollar would
have resulted in an increase in net assets of GBP1,459,000 (2008: GBP2,227,000).
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,
on occasions, 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 polices 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.
The Directors consider interest rate risk as part of their overall assessment
of risk in the portfolio.
The interest rate risk profile of the Company's fixed interest financial assets
at 31 May was as follows:
Weighted
Weighted average
average period for
interest which rates
Value Value rate are fixed
US$'000 GBP'000 % (months)
As at 31 May 2009
US convertible debentures 2,603 1,614 6.4 12.5
US loan notes 1,000 620 9.0 17.0
US preference shares 1,535 952 1.2 -
As at 31 May 2008
US convertible debentures 7,087 3,586 6.5 6.1
US loan notes 2,825 1,430 8.3 14.2
US preference shares 4,945 2,503 1.6 -
The maturity profile of the Company's financial assets at 31 May was as
follows:
2009 2008
GBP'000 GBP'000
Within one year 142 4,222
Within one to two years 1,079 325
Within two to three years 1,144 2,273
Within three to four years 196 23
Within four to five years 53 1,098
More than five years - 12
2,614 7,953
Assets with no maturity dates 10,873 62,693
13,487 70,646
The interest rate risk and maturity profile of the financial liabilities of the
Company as at 31 May was as follows:
Amount Period
until
drawn Total maturity
$'000 GBP'000 (years)
As at 31 May 2009
Amounts drawn under the fixed revolving credit 500 310 1.0
facility
Financial liabilities upon which no interest is 112
paid with no maturity date*
Financial liabilities upon which no interest is 13,065 2.0
paid
13,487
As at 31 May 2008
Amounts drawn under the fixed revolving credit 3,500 1,771 1.0
facility
Financial liabilities upon which no interest is 49,726
paid with no maturity date*
Financial liabilities upon which no interest is 19,149 3.0
paid
70,646
* Creditors less prepayments
Sensitivity analysis
A change in interest rates would have some impact on the fair value of warrants
and debit instruments but the size of the impact is not easily quantifiable.
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, the risk is inherent. The Company will always
face uncertainty as to 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 and Investment Adviser. The
Directors monitor compliance with the Company's objectives and are directly
responsible for investment strategy and asset allocation.
See the Investment Adviser's report 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 May 2009 would have
increased net assets attributable to Shareholders by GBP1,240,000 (2008: GBP
1,690,000). An equal change in the opposite direction would have decreased the
net assets attributable to Shareholders by an equal but opposite amount.
Liquidity risk
A significant proportion is held in smaller and unquoted companies. Such
companies are inherently higher in risk and lower in liquidity than, for
example, blue-chip equities. Unlisted companies have the additional risk of not
benefiting from market rules designed to protect investors. Some of the
investments are in unlisted convertible bonds or preference shares, which may
at any time be converted into a listed common stock, giving an effective level
of liquidity equal to the liquidity in the common stock. Other unlisted
investments do not have the option of converting into a listed stock.
Credit risk
The carrying amounts of financial assets including cash balances best represent
the maximum credit risk exposure 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. The
benefit of a convertible debenture is that if a portfolio company becomes
troubled, the Company is protected through its position as a creditor. The
Directors do not consider there to be a major risk of material default on these
items but do not recognise that from time to time, default might occur.
As at 31 May 2009 the fair value of financial assets which are subject to
credit risk was GBP3,186,000 (2008: GBP7,519,000). In addition there was interest
outstanding of GBP93,000 (2008: GBP273,000).
The carrying value of financial assets subject to credit risk is split as
follows:
2009 2008
GBP'000 GBP'000
Unlisted preference 909 759
Unlisted convertible preference 43 1,744
Unlisted convertible debentures 1,454 3,410
Listed convertible debentures 160 176
Unlisted loan notes 620 1,430
3,186 7,519
The Company's investments are held on its behalf by Frost National Bank, acting
as agent. Bankruptcy or insolvency of Frost National Bank 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 regularly reviewing the
custodian's internal controls report.
Investment transactions are carried out with a large number of brokers whose
creditworthiness is reviewed by the Investment Managers. 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 it obligations before any transfer of cash or
securities away from the Company is completed.
Cash is only held at banks that have been identified by the Board as reputable
and of high credit quality.
Short-term flexibility is achieved via the use of bank borrowing from a
facility with Allied Irish Banks plc. This facility, together with funding
requirements, is regularly reviewed by the Board.
Financial liabilities
The Company finances its operations through a revolving credit facility, share
capital and retained profits, although trade creditors and accruals arise from
its operations.
At 31 May 2009, the maturity profile of the Company's financial liabilities was
as follows:
2009 2008
GBP'000 GBP'000
Within one year 422 51,497
2-3 years 13,065 19,149
13,487 70,646
The Company has a $500,000 margin facility which attracts interest at a
variable rate. As at 31 May 2009, the full $500,000 was drawn down. The renewal
date of this facility is 29 May 2010.
As the facility is drawn in US dollars, the Company is subject to currency
exchange gains and losses.
Capital management
The Company does not have any externally imposed capital requirements other
than those relating to the revolving credit facility. Details of the covenant
attached to this facility together with the Company's principle risks and their
management are disclosed above and in note 13.
The Board consider the capital of the Company to be the assets attributable to
Shareholders. The Capital of the Company is managed in accordance with its
investment objective and policy.
Annual General Meeting
The Company's Annual General Meeting will be held on 5 October 2009, at the
offices of the AIC, 24 Chiswell Street, London EC1Y 4YY at 11am.
The notice of this meeting can be found in the annual report and accounts at
www.premierassetmanagement.co.uk.
Duncan Abbot
Chairman
21 August 2009
END
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