EAGLET INVESTMENT TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 30 JUNE 2008
The full Annual Report and Accounts can be accessed via the Company's website
at www.eagletinvestmenttrust.co.uk or by contacting the Company Secretary by
telephone 01392 412122.
Investment Policy
The investment policy of Eaglet Investment Trust plc (the "Company" or the
"Trust") is to achieve a capital return in excess of that of the Extended Hoare
Govett Smaller Companies Index (excluding Investment Companies) (the "Extended
HGSCI") by investing in a diversified portfolio selected from among quoted
companies with market capitalisations of up to �150 million at the point of
investment.
It is the aim of the Investment Manager (the "Manager") to identify and invest
in a diversified portfolio of smaller companies whose shares appear undervalued
by the market and which have some or all of the following characteristics:
- Experienced and well-motivated management;
- Products and services supplying growing markets;
- Sound operational and financial controls; and
- Cash generation to finance ongoing development allied with a progressive
dividend policy
The Manager believes that the development of a sound knowledge and
understanding of investee companies is of paramount importance, given the
sparseness and infrequency of stockbrokers' research provided on companies
within the sector and this includes, where appropriate, company visits.
The Manager has employed gearing when appropriate and during the period under
review the Company had an overdraft facility of �40 million.
In accordance with the Listing Rules, the Company has a policy to invest no
more than 15% of its gross assets in other investment companies.
A change in the Investment Policy has been proposed by the Board and will be
put before Shareholders for approval at the Extraordinary General Meeting on 20
November 2008.
Performance Statistics
Six Six Twelve Three Five
months to months to months to years to years to
30 Jun 31 Dec 30 Jun 2008 30 Jun 30 Jun
2008 2007 2008 2008
% % % % %
Basic NAV -10.0 -26.6 -34.0 +0.6 +22.4
Extended HGSCI*
(excl. Investment
Companies) -15.7 -13.2 -26.9 +9.9 +63.0
Outperformance/ +5.7 -13.4 -7.1 -9.3 -40.6
underperformance
* The Company's Benchmark
Directors
The Directors were appointed by Shareholder approval at the AGM held on 11
December 2007.
Jonathan Carr (aged 69) - Chairman
Mr Carr worked at Phillips and Drew from 1962 to 1967 and at L Messel & Co from
1968 to1986, specialising in investment trusts. He was manager of the corporate
division of Thomson T-Line from 1987 to 1989 and from 1990 to 1993 was director
in charge of the London office of Bell Lawrie White. From 1993 to 1997 he was a
director of S G Warburg Securities (now UBS), specialising in investment trust
corporate broking.
Mr Carr is Chairman of Galaxy Asset Management Limited, Royal London UK Equity
& Income Trust plc and Talisman 1st Venture Capital Trust plc. He was formerly
a non-executive director of Income & Growth Trust plc, Framlington 2nd Dual
Trust plc and BFS Income & Growth Trust plc. He was also Chairman of Premier
Absolute Growth & Income Trust and Govett Enhanced Income Trust in the last
five years.
Nicholas Jeffrey (aged 66) - Senior Independent Director
Mr Jeffrey has a successful track record in re-organisation and strategic
development of businesses both for public and private companies. He is
currently non-executive director of Coffee Republic Plc, Fountains Plc,
Robinson Healthcare Ltd, FMG Ltd and Templeton Insurance Limited, a company
within the Knox D'Arcy Group, and serves as Chairman for Equable Properties
Plc.
Previous directorships include Nightspeed Holdings Ltd, Maccess Ltd, Eurocity
Properties plc, United Industries plc, Harveys Furnishings plc, Neepsend plc,
Hallamshire Investments plc and Cantors plc.
Garth Milne (aged 65)
Mr Milne has been involved with investment funds in the City for over 30 years.
He was formerly head of the investment funds team at UBS Warburg, having
originally set up the team at Laing & Cruickshank.
Mr Milne is a director of several investment companies including Real Estate
Opportunities Limited, Utilico Emerging Markets Limited, Invesco Perpetual UK
Smaller Companies Trust Plc and SovGEM Limited. He was formerly Chairman of
Premier UK Dual Return Trust PLC and Govett Asia Income & Growth Trust PLC. He
was formerly a director of Ukraine Opportunity Trust PLC, Henderson Far East
Income Trust plc, Murray Extra Return Investment Trust and Invesco Continental
Smaller Companies Trust PLC.
Manager and Secretary
Manager
Investment management services during the year were provided by Unicorn Asset
Management Limited ("Unicorn") and Knox D'Arcy Investment Management Limited
("Knox D'Arcy").
On 5 November 2007 the Company served notice on Unicorn of its intention to
terminate with one year's notice, its appointment as investment manager of the
Company with effect from 5 November 2007. The notice may be withdrawn by the
Company, if it so decides, during the notice period.
Knox D'Arcy was appointed as interim investment manager and adviser to the
Company on 13 March 2008 with responsibility in relation to investments made
pursuant to the Company's investment policy.
Details of the fees paid in relation to investment management services provided
during the year are outlined below.
Secretary
Capita Sinclair Henderson Limited ("CSH") provides company secretarial and
administrative services for the Company and a number of other investment
trusts. CSH is a subsidiary of The Capita Group Plc.
Chairman's Report
I and my fellow Directors, Garth Milne and Nicholas Jeffrey, were appointed to
the Board of the Company at the Company's Annual General Meeting on 11 December
2007 and at that same meeting Shareholders voted against the re-appointment of
Peter Cowan, Guy Crawford, Robert Wade and Frank Dee. On 12 December 2007 Lady
Judge resigned as Chairman and as a director of the Company, and I was
appointed Chairman. These changes followed a long period of sustained and
significant underperformance.
During the period under review, the investment policy of Eaglet Investment
Trust PLC ("the Company") has been to achieve a capital return in excess of the
Extended Hoare Govett Smaller Companies Index (excluding Investment Companies)
(the "Extended HGSCI Index" or "the Index") by investing in a diversified
portfolio of quoted companies with a market capitalisation of up to �150
million at the point of investment.
During the twelve month period under review, your Company's net asset value per
share ("NAV") fell by 34.0% compared with a fall in the benchmark Index of
26.9%. This means that Eaglet's NAV has underperformed its benchmark index by
7.1% over the year. During the second six months of the year since 31 December
2007, Eaglet's NAV has outperformed its benchmark by 5.7% due to the
realisation of a number of the Company's holdings, the consequent degearing and
the holding of cash balances. The decrease in NAV over the twelve month period
under review was caused by poor stock selection combined with an inappropriate
level of gearing in a falling market prior to the new Board's appointment. No
new investments have been made since the new Board's appointment.
Your new Board has considered how best to deliver value for shareholders. In
the light of the failure of the current investment policy your Board has placed
the following proposals before shareholders:
- a change in the Company's investment policy so that the Company will invest
in UK listed shares which are identified as having patterns of directors'
dealing which suggest that following such signals will lead to superior
investment performance;
- a tender offer under which shareholders on the register on 3 March 2008 will
be able to sell up to 49% of their shares to the Company for cancellation at
a price close to net asset value; and
- the sale of a proportion of the remaining portfolio companies to Laxey
Partners for cash at a price close to net asset value and an off-market
purchase of 1,041,424 of the Company's shares held by Laxey Partners.
The proposals are outlined in a Circular sent to shareholders on 27 October
2008 and posted on the Company's website.
Subject to the proposals being approved by shareholders at the forthcoming
Extraordinary General Meeting, the Company's new investment policy will be to
achieve attractive returns for shareholders primarily through capital
appreciation by investing generally in companies listed on regulated investment
exchanges in the United Kingdom. The investment premise of The Directors'
Dealing Investment Trust Plc (as the Company is proposed to be re-named) is
that directors of listed companies are better informed than the market
generally and therefore their investments in the companies they manage are
expected to outperform the market.
The Directors' Dealing Investment Trust Plc will invest in shares of UK listed
companies which are identified as having patterns of directors' trading which
suggest that following such patterns could lead to attractive investment
returns. These patterns have been combined to form various trading strategies
which have historically outperformed the relevant FTSE index. The Board and
Knox D'Arcy Asset Management ("KAM"), the proposed investment manager of the
Company, believe that no other listed investment trust in the United Kingdom
offers investors the opportunity to gain exposure to such trading strategies.
Whilst part of the current portfolio may meet the criteria of the Company's
proposed investment policy, it is anticipated that the change in policy will
result in a realignment of the portfolio and the disposal of a number of the
existing holdings in the portfolio. During the realignment process the
Company's investments will be managed as two distinct portfolios. The first
portfolio will comprise existing portfolio holdings that do not meet the
criteria of the new investment policy (the "Residual Portfolio"). The second
will comprise existing holdings that satisfy the new investment policy and new
holdings acquired as part of the new investment policy (the "Directors' Dealing
Portfolio"). The Company intends to report the performance of these two
portfolios separately as it disposes of the Residual Portfolio. Given that the
Residual Portfolio is relatively illiquid, an activist approach may be applied
to certain holdings in the Residual Portfolio where value may be realised from
such an approach.
Jonathan Carr
Chairman
30 October 2008
Investment Manager's Report
Knox D'Arcy was appointed Investment Manager following the appointment of the
new Directors at the Annual General Meeting of the Company on 11 December 2007.
During the period under review, the investment policy of the Company has been
to achieve a capital return in excess of the Extended Hoare Govett Smaller
Companies Index (excluding Investment Companies) (the "Extended HGSCI Index" or
"the Index") by investing in a diversified portfolio of quoted companies with a
market capitalisation of up to �150 million at the point of investment.
During the twelve month period under review, the Company's net asset value per
share ("NAV") fell by 34.0% compared with a fall in the benchmark Index of
26.9%. This means that the Company's NAV has underperformed its index by 7.1%
over 1 year, it has underperformed by 9.3% over 3 years and it has
underperformed by 40.6% over 5 years. During the first half year up to 31
December 2007 the Company's NAV underperformed its benchmark by 13.4%. This was
offset by out performance of the benchmark during the second half of the year
of 5.7%.
The decrease in NAV over the twelve month period under review was caused by
poor stock selection combined with an inappropriate level of gearing in a
falling market prior to the new Board's appointment. This gearing was paid off
during the second half of the financial year. Even without taking into account
the effect of gearing, 16 of the 31 holdings in the portfolio on 30 June 2008
fell by 40% or more during the twelve months under review and in excess of two
thirds (23 holdings) fell by 20% or more.
The outperformance during the second half of the year was the result of the
realisation of a number of portfolio holdings and the holding of cash balances.
During that period, 32 investments to the value of �38m have been realised at
an aggregate premium to NAV of 1.17%. This has been achieved through the
application of activist strategies notwithstanding the receipt of offers for a
number of such holdings at discounts to net asset value of 30% or more. To date
offers for portfolio holdings at a significant discount have been rejected.
The market for the smaller/micro capitalisation companies that the Company has
invested in is at present very illiquid. Even on the assumption that the
Company could carry out 50% of the 10 day average volume traded in the market,
then 57% of the portfolio holdings would require in excess of 240 trading days
to sell. In order to achieve disposals in such circumstances at close to NAV,
the Company has pursued an activist approach to certain of the portfolio
holdings where value could be realised from such an approach. Whilst the next
twelve months are likely to be challenging for all investors, we shall continue
to seek opportunities to realise value for shareholders in this way as we
realign the portfolio. In the medium term we believe that, subject to
shareholder approval, the new investment policy offers a unique opportunity to
deliver value to shareholders.
The new investment policy, if approved by shareholders at the forthcoming
extraordinary general meeting is based on the premise that directors of listed
companies are better informed than the market generally and therefore their
investments in the companies they manage are expected to outperform the market.
The Directors' Dealing Investment Trust Plc (as the Company will be renamed if
the new investment policy is approved by shareholders) will invest in shares of
UK listed companies which are identified as having patterns of directors'
trading which suggest that following such patterns could lead to attractive
investment returns.
Investors will often consider whether directors hold shares or have interests
in the companies which they manage and whether there has been any recent buying
or selling activity when making an investment decision. Such trading activity
is often highlighted in the financial press as being a possible indicator of
future share price performance.
The investment approach is based upon independent empirical research into
directors' trading in the UK market. The original research analysed directors'
trades in shares of UK listed companies from 1994 to 2002 and identified a
number of directors' dealing strategies which outperformed the market.
Subsequent analysis of directors' trades from 2002 to 2007 confirmed the
original research and both have been used to develop the trading strategies to
be employed by the Company should the new investment policy be approved.
Approximately 182,000 directors' trades between January 1994 and December 2007
have been analysed and a number of key trading criteria have been developed
based on this analysis. These criteria have been combined to form various
simulated trading strategies which have historically outperformed the relevant
FTSE index.
As outlined in the Chairman's Statement, the new investment policy will be
implemented within the Directors' Dealing Portfolio during the realignment
process. Given the scalability of the directors' dealing strategy, we
anticipate that the Directors' Dealing Portfolio will commence with a limited
amount of capital and will grow over the next year as we dispose of the
holdings in the Residual Portfolio. We believe that the directors' dealing
investment policy will generate attractive returns for Shareholders over the
medium to long term.
Knox D'Arcy Investment Management Ltd
30 October 2008
Principal portfolio investments
as at 30 June 2008
Market % of Market
value portfolio capitalisation
�'000 �m
Concateno 4,909 12.6 129
Abcam 4,139 10.6 159
Harvey Nash Group 3,371 8.7 25
NCC Group 3,036 7.8 140
RWS Holdings 2,679 6.9 159
Nationwide Accident Repair 2,088 5.4 57
Services
Glisten 1,648 4.2 46
Advance AIM Value Realisation
1,639 4.2 13
Cohort 1,630 4.2 75
OpSec Security Group 1,409 3.6 21
Fountains 1,406 3.6 18
Property Recycling 1,164 3.0 8
Zetar 1,116 2.9 36
Driver Group 994 2.6 22
Avesco Group 993 2.6 16
Rapid Realisations 970 2.5 58
TMN Group 943 2.4 34
Clerkenwell Ventures 908 2.3 21
Cains Beer 657 1.7 11
Third Advance Value
Realisation
597 1.5 11
Total 36,296 93.3
The above holdings are in the ordinary shares of investee companies.
The 20 principal investments represent 93.3% of the investment portfolio.
Twenty largest holdings
Classification and main activities
Holding Sector
Concateno Healthcare
Equipment &
Services
Drug and alcohol testing provider and manufacturer of
clinical diagnostic products.
Abcam Pharmaceuticals
& Biotechnology
Production and distribution of research-grade antibodies via
an online catalogue featuring detailed technical data sheets
on each product.
Harvey Nash Group Support
Services
A global multi-service recruitment organisation with 3,000
staff worldwide and 28 offices covering the USA, Europe and
Asia-Pacific.
NCC Group Software &
Computer
Services
Provision of IT assurance through Escrow solutions,
consultancy and testing solutions to both the public and
private sectors.
RWS Holdings Support
Services
Provision of intellectual property support services (patent
translations and technical searches) to the medical,
pharmaceutical, chemical, aerospace, defence, automotive and
telecoms industries.
Nationwide Accident Repair Services Support
Services
Repair of motor vehicles and the provision of accident claim
management services.
Glisten Food Producers
The group is involved in the manufacture and sale of
confectionery, ingredients and snacking products to a wide
range of outlets in the UK and abroad.
Advance AIM Value Realisation Equity
Investment
Instruments
To realise value from a portfolio of AIM securities and
progressively return cash to shareholders.
Cohort Aerospace and
Defence
Provider of independent technical consultancy support and
services, primarily although not exclusively to the defence
sector. Provider of niche secure communications hardware and
software, electronic warfare software and support services
and management of secure IT facilities and services, again
primarily, although not exclusively to the defence sector.
OpSec Security Group Support
Services
The group provides governments and corporations worldwide
with industry leading anti-counterfeiting technologies
solutions and services. Its unprecedented expertise in
optical sciences, software, films, materials handling and
supply chain management allow it to tailor individual
solutions for each of its customers, effectively addressing
the growing problem of counterfeiting.
Fountains Support
Services
Environmental and forestry management service provider to
local authorities, utility companies and landowners.
Property recycling Real Estate
The company identifies and acquires previously developed
land, referred to as brownfield sites, where it can see the
opportunity to improve valuation significantly through
remediation and planning gain.
Zetar Food Producers
Manufacture of novelty and niche chocolate products, sold
under private label, Kinnerton or other chocolate
manufacturer's brands within the UK, Australia and other
export markets; Sourcing, preparation and supply of premium
quality dried fruits and nuts, fruit and other snacks,
primarily within the UK.
Driver Group Construction
and Materials
Provision of specialist commercial and dispute resolution
services to the construction industry.
Avesco Group Media
Provision of media services to the corporate presentation,
entertainment and broadcast markets.
Rapid Realisations Equity
Investment
Instruments
To exploit the investment opportunity represented by
companies in pre-IPO and other late stage situations with a
view to arbitraging differences in public and private company
valuations.
TMN Group Media
Provision of online marketing and online market research
services.
Clerkenwell Ventures General
Financial
Acquisition, development and operation of leisure businesses.
Cains Beer Travel &
Leisure
Brewing, packaging and distribution of beers and lagers and
the management of public houses.
Third Advance Value Realisations Equity
Investment
Instruments
To manage its investments to provide value and liquidity to
its investors.
Sector analysis of portfolio
as at 30 June 2008
Sector weightings Market value %
Support Services 30.1
Healthcare Equipment & Services 12.6
Pharmaceuticals & Biotechnology 10.6
Software & Computer Services 9.2
Equity Investment Instruments 8.2
Food Producers 7.1
Media 5.0
Real Estate 4.3
Aerospace & Defence 4.2
Construction & Materials 2.6
General Financial 2.5
Travel & Leisure 1.7
General Retailers 0.9
Electronic & Electrical equipment 0.9
Non Life Insurance 0.1
Total 100%
Report of the Directors
The Directors present their Report and Accounts for the year ended 30 June
2008.
Business Review
Background
In accordance with financial reporting requirements the Company is required to
provide a Business Review within the Report of the Directors. The purpose of
the Business Review is to provide a balanced view of the activities and
development of the Company together with an explanation of the principal risks
faced by the Company.
Principal Activity and Status
The principal activity of the Company is to carry on the business of an
investment trust company. A description of the Company's activities and
developments in the twelve month period to 30 June 2008 is shown in the
Chairman's statement and the Investment Manager's Report and the Portfolio
review which should be read in conjunction with this Business Review.
Following the appointment of the new Directors on 11 December 2007, your Board
has considered how best to deliver value for shareholders. In the light of the
failure of the current investment policy your Board has placed the following
proposals before shareholders:
* a change in the Company's investment policy so that the Company will invest
in UK listed shares which are identified as having patterns of directors'
dealing which suggest that following such signals will lead to superior
investment performance;
* a tender offer under which those shareholders on the register on 3 March 2008
will be able to sell up to 49% of their shares to the Company for
cancellation at a price close to net asset value; and
* the sale of a proportion of the remaining portfolio companies to Laxey
Partners for cash at a price close to net asset value and an off-market
purchase of 1,041,424 of the Company's shares held by Laxey Partners
The proposals are outlined in a Circular sent to shareholders on 27 October
2008 and posted on the Company's website.
The Company is an investment company as defined under Section 833 of the
Companies Act 2006 and has received written approval from the HM Revenue and
Customs as an authorised investment trust, under Section 842 of the Income and
Corporation Taxes Act 1988 ("ICTA"), for the year ended 30 June 2007, although
under the Corporation Tax Self Assessment regime this approval is subject to
any enquiry that may be raised. The Company has been approved as an investment
trust in all previous years since its formation. Since 12 December 2007, the
Company has disposed of investments to the value of �38 million in anticipation
of the proposed Tender Offer. The Company has deposited cash from these
disposals in an interest bearing bank account. As a result, the Company's
eligible investment income in the period commencing 1 July 2008 may not be
sufficient to meet the requirements of section 842 of the ICTA, resulting in
the Company losing its investment trust status. In the event that the Company
fails to qualify as an investment trust company, it could become subject to
Capital Gains Tax.
Although the Company may not meet the requirements of Section 842 of the ICTA
for the period commencing 1 July 2008, the Directors intend to run the Company
thereafter in such a way as to ensure it meets the requirements of Section 842
of the ICTA.
The Company's shares are currently fully eligible for inclusion in ISAs and
PEPs and the Directors anticipate that this status will be maintained in the
future. Shareholders are periodically entitled to vote on the continuation of
the Company. A proposal to extend the latest date on which a continuation
resolution is to be put to the shareholders will be considered by the members
at an Extraordinary General Meeting to be held on 20 November 2008.
Principal Risks and Uncertainties Associated with the Company
The Board is committed to the principles of the Combined Code, published in
2006, as detailed in the corporate governance section of this report. The
Company is a member of the AIC and is committed to compliance with the
provisions of the AIC Code of Corporate Governance. The Board also seeks to
mitigate risk through regular monitoring and review processes that are designed
to ensure that all compliance, regulatory and contractual obligations relating
to the Company are adhered to at all times. These processes are regularly
reviewed by the Board in accordance with the Turnbull Report guidance on
internal controls to provide the ongoing means to manage risk which have been
in place during the period and to the date of this report. The principal risks
faced by the Company under its current Investment Policy are set out below.
i). Investment and Strategy
As an investment company, the returns generated by Eaglet are largely dependent
upon the stock market performance of the companies within the portfolio. The
Company could underperform its benchmark index because of poor stock selection,
poor sector allocation or through inadequate diversification across the
portfolio.
The Company is also exposed to a range of economic and market force risks
including interest rates, exchange rates and the general performance of stock
markets, which are viewed as part of the Company's normal business environment.
The Board recognises that investing in smaller companies and AIM companies can
carry greater risks than those generally associated with large capitalisation
companies as they are likely to be less well established, may not have access
to the financial resources available to their larger counterparts and are
relatively illiquid and under-researched.
The Board discusses the Company's investment performance and portfolio at each
Board meeting and reviews comprehensive information concerning each of the
Company's portfolio investments and the sector allocation.
ii). Gearing
The use of gearing magnifies both positive and negative movements in the NAV.
The Company has the ability to use gearing equating to a maximum of 30% of the
investment valuation and at 30 June 2008 the Company's had no borrowings (2007:
�10.8 million, representing 8.8% of the investment valuation).
In order to provide flexibility in setting the level of gearing employed, the
Company only uses short-term bank borrowings. The Board considers the degree of
gearing by reference to the Investment and Strategy review processes described
above, the liquidity of the Company's portfolio and consideration of the
Manager's opinions about the prospects for the portfolio companies and stock
markets in general.
Share Price and Discount
As an investment company, Eaglet is also termed a closed-end fund. The share
prices of closed-end funds often trade at a discount to their NAVs. At 30 June
2008 the discount was 21.37%. The level of this discount is likely to fluctuate
on a daily basis and can vary significantly over time. It is therefore possible
that over given periods of time the share price could go down despite an
increase in the NAV, or that the share price could appreciate at an inferior
rate to the NAV, or that the share price could fall to a greater degree than
the NAV.
The Board monitors the discount at which the shares trade and where possible
seeks to manage the discount in order to limit discount volatility and to
enhance liquidity in the Company's shares. The Company has the ability to buy
back shares for immediate cancellation and to purchase shares into Treasury
which can potentially be re-issued at a later date. During the period under
review the Company purchased 640,000 shares for cancellation (representing
2.61% of the issued capital) and 75,000 shares were purchased to be held in
Treasury (representing 0.31% of the issued capital). The total consideration
paid for shares repurchased during the period was �2.15m. At the date of this
report there remains an unused authority to purchase a further 1,731,720
shares. Full details are set out in Note 14.
Operational
The Company, in line with the majority of investment companies, does not have
any employees and consequently relies upon the provision of services by a
number of third parties. The Board is therefore dependent on the monitoring and
control procedures of these third parties which include the Company's Manager,
Custodian, Company Secretary, Banker, Solicitor, Registrar and Broker.
The Board reviews the internal control procedures of its third party service
providers and the Board's Audit Committee assesses the risks to the Company's
operations semi-annually. Further details are shown in the 'internal control
assessment process' section of this report.
Regulatory
The principal legislation and regulations that apply to Eaglet are the
Companies Acts 1985 and 2006, the Listing Rules and Disclosure and Transparency
Rules of the FSA and the ICTA. A breach of the requirements of the ICTA could
result in the Company losing its status as an investment trust company and
becoming subject to Capital Gains Tax.
The Board is not aware that the Company has breached any applicable laws or
regulations during the year under review. At each Board meeting the legislative
and regulatory status of the Company is reviewed to ensure that all
requirements continue to be adhered to by the Company and its service
providers.
Key Performance Indicators
The key measures by which the Board judge the success of the Company, are the
growth in share price and NAV. Due to the nature of the Company's strategy to
invest in a limited number of relatively small companies, the portfolio does
not mirror the benchmark index. This, therefore, may not be the best index by
which the Company's short-term performance should be measured. The Company's
NAV performance is however, reviewed by comparison to the HGSCI (excluding
Investment Companies), other relevant indices and the NAV performance of a peer
group of similar investment companies that invest in UK smaller companies. The
Board also considers the performance of the FTSE SmallCap Index (excluding
Investment Companies), the FTSE AIM All-Share Index and the FTSE All-Share
Index.
Given the stated investment policy of the Company is to achieve a NAV return in
excess of that of the benchmark index over the longer-term the Board considers
performance relative to each of the above comparators over periods of one,
three and five years and since launch.
The Company's NAV performance for the twelve month period to 30 June 2008 is
set out above while further reference to performance is made in the Investment
Manager's Report.
The Board regularly reviews the Company's discount which is monitored by the
Manager on a daily basis. The Manager will notify the Board of any material
short-term change in the discount. The level of discount is considered by
comparison to the discounts of a peer group of similar investment companies. As
detailed under Share Price and Discount above, the Board seeks to manage the
discount in order to limit discount volatility and to enhance liquidity in the
Company's shares.
The Board reviews the expenses incurred operating the Company at each Board
meeting and considers the Company's Total Expense Ratio ("TER") by comparison
to industry and peer group average TERs. Eaglet's TER at 30 June 2008 was 2.84%
(2007: 1.47%).
Results and Dividends
The results for the year and the net revenue are set out in the Income
statement and are summarised below:
2008 2007
�'000 �'000
Revenue return after taxation (330) 439
Capital return after taxation (37,358) 20,053
Total return after taxation (37,688) 20,492
Proposed annual dividend (pence per share)
nil 0.70p
Net Asset Value ("NAV")
At 30 June 2008 the NAV per share, which includes revenue reserves, was 320.48p
(2007: 485.57p).
Events Subsequent to 30 June 2008 and future developments
As a result of market movements since the year-end, the Company's Net Asset
Value has fallen by 17.5% in the period 30 June 2008 to 27 October 2008. This
compares to a fall of 36.1% in the benchmark Index and represents out
performance of the benchmark Index of 18.6%.
The fall in the Company's Net Asset Value since 30 June 2008 includes the
impairment of a holding in Cains Beer that was valued at �656,784 at 30 June
2008 and presently has nil value. Cains Beer shares have been suspended since 1
August 2008 which has resulted in impairing the holding to nil. The year-end
balance sheet has not been adjusted on grounds of materiality.
On 27 October 2008 a Circular and Notice of Extraordinary General Meeting was
sent to Shareholders outlining the proposals for a change of investment policy,
change of name, amendments to the Articles of Association, Tender Offer to
purchase up a maximum of 49 per cent. of Shares in issue, sale of a proportion
of Portfolio Companies, Off-Market Purchase of Shares, New Investment
Management Agreement, Management Warrants Deed, Investment Advisory Agreement
and cancellation of share premium account (the "Proposals").
The Directors consider that the following specific risk factors should be
considered in association with the Proposals.
The Shares
The value of, and the income derived from, the Shares can fluctuate and may go
down as well as up. There can be no guarantee that any appreciation in the
value of the Company's investments will occur and investors may not get back
the full value of their original investment. Due to the potential difference
between the market price of the Shares and the price at which Shares can be
sold, there is no guarantee that the realisable value of the Shares will
reflect their market price.
Discount
Notwithstanding the existence of share buy-back powers, there is no guarantee
that the market price of the Shares will fully reflect their underlying Net
Asset Value
Performance
Past performance is not necessarily an indication of the future performance.
Economic conditions
Changes in economic conditions (including, for example, interest rates, rates
of inflation, industry conditions, competition, political and diplomatic events
and trends, tax laws and other factors) can substantially and adversely affect
stocks and shares and, as a consequence, the Company's prospects.
Taxation
Any change in the Company's tax status, including any failure to satisfy the
conditions of, or any change in the conditions required to satisfy, section 842
of the ICTA, or in taxation legislation or in the interpretation or application
of taxation legislation, could affect the value of investments held by the
Company, the Company's ability to achieve its stated objective, the ability of
the Company to provide returns to Shareholders and/or alter the post-tax
returns of Shareholders.
Change of Investment Policy
As part of the Proposals, the Company is proposing to change its investment
policy. There can be no guarantee that the new investment policy of the Company
will be achieved.
Investment Manager and Investment Adviser
The returns on investment by the Shareholders will be dependent on the
diligence, skill and performance of Knox D'Arcy Asset Management Ltd ("KAM")
and Knox D'Arcy Investment Management Ltd as the proposed new investment
manager and investment adviser respectively. Future success will depend to a
significant extent on the continued involvement of the individuals whose
services are retained by KAM and Knox D'Arcy.
Investments
The success of any of the investments in the Company is subject to risks
related to:
i) the quality of its management and the management of the companies in which
it invests;
ii) its ability successfully to select investment opportunities;
iii) general economic conditions;
iv) its ability to liquidate its investments. Some of the companies in which
the Company will invest may be in an early stage of development or without a
significant operating history and may lack fully developed produce lines,
experienced management or a proven market for their products.
Approval of Shareholders
The Proposals are subject to certain conditions (including the need for the
approval of the Shareholders), the non-fulfilment of which would mean that the
Proposals cannot be implemented. In such an event, the Company would bear the
costs in relation to the Proposals, which would reduce the Net Asset Value of
the Company.
Insufficiency of Available Distributable Profits
In light of the fact the Directors consider that the Company may not, taking
into account the maximum number of Shares that could be tendered pursuant to
the Tender Offer, have sufficient profits available for distribution to enable
it to settle the Tender Offer in full, settlement of the Tender Offer will not
take place until confirmation of the cancellation of the Company's share
premium account and subsequent preparation of interim accounts. Such
cancellation requires approval of the Court and there can not be any certainty
that such cancellation will be approved by the Court. As a consequence, were
the cancellation of share premium account not to be confirmed and the Company
not otherwise in a position whereby it had sufficient distributable reserves
available to settle the Tender Offer, the Tender Offer would lapse.
Risks associated with the Proposals
As a result of the Tender Offer and the Off-Market Purchase, the issued share
capital of the Company will be reduced and the Company will be smaller.
Consequently the fixed costs of the Company will be spread over fewer Shares
and the Company's total expense ratio will increase.
Risks associated with the Tender Price
The Tender Price will be dependent, inter alia, on the total number of Shares
tendered pursuant to the Tender Offer, and may represent a significant discount
to the NAV per Share as the costs of the Proposals will be borne, pro rata, by
those Shareholders whose Shares are to be repurchased by the Company pursuant
to the Tender Offer and the Off-Market Purchase Agreement.
Annual General Meeting
At the forthcoming Annual General Meeting, an ordinary resolution, Resolution
5, will be proposed, to give the Directors a general authority to allot
unissued Ordinary shares of the Company having a nominal value not exceeding �
2,041,994 so as to expire on the earlier of the date of the next Annual General
Meeting and 31 December 2009. A special resolution, Resolution 6, will, if
passed, authorise the Directors, in certain circumstances, to issue Ordinary
shares for cash, otherwise than by way of a rights issue to shareholders.
As special business, members are also being asked to vote on a resolution
(Resolution 7 in the Notice of AGM) to adopt new Articles of Association in
substitution for the Company's Articles of Association in force at the date of
the AGM. The Company's Articles of Association in force at the date of the AGM
will, depending upon the outcome of the EGM convened for 20 November 2008, be
either (i) the Company's Articles of Association in force at the date of this
report or (ii) if all the proposed resolutions are passed at the EGM, the new
Articles of Association approved at that EGM. The proposed new Articles of
Association will update the Company's Articles of Association in force at the
date of the AGM primarily to reflect the provisions of the Companies Act 2006
that have already come into force. An explanation of the principal changes
between the proposed and existing Articles of Association is set out below.
Section 992 Companies Act 2006
The following information is disclosed in accordance with Section 992 of the
Companies Act 2006.
- The Company's capital structure and voting rights are summarised
below.
- Details of the substantial shareholders in the Company are listed
below.
- The rules concerning the appointment and replacement of Directors
are contained in the Company's Articles of Association and are discussed below.
- Amendment of the Company's Articles of Association and the giving
of powers to issue or buy back the Company's shares require a special
resolution to be passed by shareholders. The Board's current powers to buy back
shares are stated below.
- There are: no restrictions concerning the transfer of securities in
the Company; no special rights with regard to control attached to securities;
no agreements between holders of securities regarding their transfer known to
the Company; and no agreements which the Company is party to that might affect
its control following a successful takeover bid.
Performance of the Board
At the Annual General Meeting of the Company held on 11 December 2007,
shareholders voted against the re-appointment of Peter Cowan, Guy Crawford,
Robert Wade and Frank Dee as Directors of the Company and voted to appoint
Jonathan Carr, Nicholas Jeffrey and Garth Milne as Directors of the Company.
Each of the Directors in office during the year has a letter of appointment
with the Company. Jonathan Carr's letter of appointment is dated 13 June 2008,
Nicholas Jeffrey and Garth Milne each have letters of appointment dated 11 June
2008.
The Board has implemented a procedure for reviewing its effectiveness on both
an individual and collective basis through a documented appraisal process of
performance evaluation questionnaires and formal written submissions from each
Director. The Chairman is responsible for reviewing the appraisal of each of
the Directors.
The Board's policy is that Directors should seek re-election every three years
and every year for Directors serving more than nine years.
The Senior Independent Director is Mr Jeffrey, who provides an additional
channel for the referral of any shareholder concerns. The Company has not
appointed a deputy Chairman, due to the size of the Board making such an
appointment unnecessary.
Appointment of Directors
The Board recommends the re-election of Jonathan Carr based on his contribution
to the operation of the Board and his experience of the investment trust
industry.
Directors' Beneficial Interests
The beneficial interests of the Directors and their families in the shares of
the Company are set out below:
30 June 2008 30 June 2007
Ordinary shares Ordinary shares
Jonathan Carr - -
Nicholas Jeffrey - -
Garth Milne - -
There have been no changes to the beneficial interests of the Directors and
their families from 30 June 2008 to the date of this report.
Substantial Shareholdings
At the date of this report the Company had been notified of the following
material interests in 3% or more of the voting rights of the Company:
Ordinary shares Number of % of issued share
shares capital
QVT Financial LP 6,386,612 28.9
Funds under the discretionary management of
Laxey Partners Limited
2,042,006 9.2
Perpetual Unit Trust Management Limited
1,551,335 7.0
MF Global UK Limited 1,400,394 6.3
Legal & General Group Plc 1,110,219 5.0
Carrousel Capital Limited 800,000 3.6
CG Asset Management Limited
684,000 3.1
Knox D'Arcy Investments Limited, QVT Financial LP and Laxey Partners Limited
are currently considered to be persons acting in concert for the purposes of
the Takeover Code in relation to the Company. The Directors were nominated as
directors of the Company by Knox D'Arcy Investments Limited, QVT Financial LP
and Laxey Partners at the Company's annual general meeting held in December
2007 and are thus also considered to be members of the Concert Party. The
members of the Concert Party (other than the Directors) have entered into
irrevocable commitments with each other (other than the Directors) to, among
other things, vote together in relation to certain resolutions in relation to
the Company. As at 23 October 2008, the members of the Concert Party between
them owned 8,743,618 Ordinary Shares, representing approximately 39.5 per cent.
of the issued Ordinary Share capital of the Company (excluding Ordinary Shares
held in Treasury).
The total number of shareholders on the register at 30 October 2008 was 1,087
(2007: 1,268).
Management and Secretarial Agreements
The Company entered into an agreement with Unicorn Asset Management Limited
("Unicorn") by way of a deed of novation in favour of Unicorn dated 4 July
2000. Notice was given to Unicorn on 5 November 2007 and accordingly fees will
be payable until the end of the notice period, 5 November 2008, subject to the
agreement of any termination fee.
The Unicorn management fee is calculated monthly at the rate of 0.08333% of the
funds under management and is payable in arrears. Unicorn is entitled to
receive an additional annual fee ("bonus") equating to 5% of any outperformance
in excess of a margin of 2% above the Extended HGSCI (excluding Investment
Companies) subject to a maximum amount of 0.7% of gross assets. Where the
Company under performs the Extended HGSCI (excluding Investment Companies) by a
margin of 2% or more the amount of such under performance shall be added to the
target performance in respect of the following year. No compensation is payable
to Unicorn in the event that the agreement is terminated; however, in the event
that the Company terminates the agreement, Unicorn will be entitled to fees,
excluding any performance fee, due to the date of termination. No additional
fees were paid to Unicorn during the year (2007: nil).
The Company's investments are managed by Knox D'Arcy under a Management
Agreement dated 13 March 2008. Knox D'Arcy received a fee of �10,000 per week
commencing on 11 December 2007 subject to a maximum amount of �250,000 being so
paid (representing payment in respect of a total of 25 weeks). Thereafter, no
further fee has been paid not withstanding that Knox D'Arcy continues to
provide services to the Company.
As disclosed in the Circular sent to Shareholders on 27 October 2008, a new
investment management agreement will be considered by the Shareholders for
approval at the Extraordinary General Meeting to be held on 20 November 2008.
Under an agreement, dated 21 June 1993, company secretarial services and the
general administration of the Company are undertaken by Capita Sinclair
Henderson Limited. This agreement may be terminated by one year's notice.
Continuing Appointment of the Investment Manager
The Board keeps the performance of the Investment Manager under regular review.
The most recent review was carried out on 18 September 2008. The Board
considers Knox D'Arcy's continuing appointment to be in the best interest of
the shareholders for the reasons set out in the Chairman's Statement.
Payment of Suppliers
It is the Company's policy to obtain the best possible terms for all business
and therefore there is no consistent policy as to the terms used. The Company
agrees with its suppliers the terms on which business will take place and it is
our policy to abide by those terms.
There were no trade creditors at the year end (2007: nil), representing nil
creditor days (2007: nil days).
Institutional Investors - Use of Voting Rights
The Manager, in the absence of explicit instruction from the Board, is
empowered to exercise discretion in the use of the Company's voting rights.
Corporate Governance
Compliance with the Provisions of the AIC Code of Corporate Governance
The Company joined the Association of Investment Companies ("AIC") on 20 May
2008.
The Board of Eaglet has considered the principles and recommendations of the
AIC Code of Corporate Governance ("AIC Code") by reference to the AIC Corporate
Governance Guide for Investment Companies ("AIC Guide"). The AIC Code, as
explained by the AIC Guide, addresses all the principles set out in Section 1
of the Combined Code, as well as setting out additional principles and
recommendations on issues that are of specific relevance to Eaglet.
The Board considers that reporting under the principles and recommendations of
the AIC Code, and by reference to the AIC Guide (which incorporates the
Combined Code), will provide better information to shareholders.
The Company has complied with the recommendations of the AIC Code and the
relevant provisions of Section 1 of the Combined Code, except as set out below.
The Combined Code includes provisions relating to:
* the role of the chief executive;
* executive directors' remuneration; and
* the need for an internal audit function.
For the reasons set out in the AIC Guide, and in the Preamble to the Combined
Code, the Board considers that these provisions are not relevant to the
position of Eaglet, being an externally managed investment company. The Company
has therefore not reported further in respect of these provisions.
The AIC Code recommends that a full portfolio listing is made available to
shareholders at least once a year, and where it is not contained in the Annual
Report, a reference should be given explaining where it can be found. The
Company discloses the top 20 holdings within its portfolio, representing 93.3%
of the portfolio as at 30 June 2008. The full portfolio is not disclosed as the
stocks outside the top 20 holdings are largely transitional holdings.
From the start of the period until 11 October 2007, when Peter Webb resigned
from the Board, the Board consisted of six Directors, all non-executive and,
except for Mr Webb, all were considered to be independent. At the AGM held on
11 December 2007 Shareholders voted against the election of Messrs Cowan, Dee,
Wade and Crawford. Messrs Carr, Jeffrey and Milne were appointed by
Shareholders at the same AGM. Lady Barbara Judge resigned from the Board on 12
December 2007.
The Board has noted the recommendations of the AIC Code with respect to the
criteria for assessing the independence of Directors and it has reached the
conclusion that each of the Directors can be deemed independent.
In accordance with the Listing Rules, the current Chairman of the Board,
Jonathan Carr is considered by his fellow Directors to be free of any conflicts
of interest and independent of the Investment Manager. He considers himself to
have sufficient time to commit to the Company's affairs. The Board further
considers that the position of a non-executive chairman of an investment trust
such as Eaglet does not de-facto impede independence and therefore preclude
membership of the Board's Committees. The status of both Mr Milne and Mr
Jeffrey have been evaluated by their fellow Directors and they are considered
to be independent. The Company has no full time employees, thus there is not a
chief executive, and all management and administrative duties are delegated and
carried out by third parties. The Directors review at each Board Meeting the
Company's investments and all other important issues, to ensure that control is
maintained over the Company's affairs.
Board procedures were formalised in February 1995 in a schedule of matters
specifically reserved for the Board's approval, which has been adopted since
then for all Meetings and is reviewed regularly. Day to day management of the
Company's portfolio is delegated to the Investment Manager under the terms of
the investment management agreement described above and other administrative
functions are carried out, principally, by the Secretary and Administrator, the
Registrar and the Custodian. The Board is ultimately responsible for the
strategic direction of the Company, the appointment of all service providers,
including the Company's bankers, determining the level of gearing, selecting
suitable accounting policies and the publication of annual and half-yearly
reports and other forms of shareholder communication. On 24 February 1995 the
Board formalised the arrangements under which Directors, in the furtherance of
their duties, may take independent professional advice. The Company has in
place Directors' and Officers' liability insurance which includes cover for the
reimbursement of legal expense costs.
The Board meets regularly and receives written and verbal reports from the
Investment Manager, principally on portfolio performance, to ensure that the
Company's investment policy is attained. Additional meetings will be held as
required. At all of its meetings the Board follows a formal agenda prepared by
the Secretary in consultation with the Chairman that encompasses all matters
relevant to the overall direction of the Company. The Secretary and Investment
Manager prepare reports as required, including management accounts, analysis of
the level of share price discount to net asset value, comparative performance,
shareholder relations, significant movements in the Company's share register
and any economic or regulatory developments that may affect the Company.
The Company's Articles of Association require one-third of the Directors to
retire by rotation each year but do not provide for Directors to retire every
three years, as recommended by the AIC Code. The policy on tenure provides for
all Directors to retire every three years and every year for Directors serving
more than nine years since their first election.
Social Environmental and Ethical Policy
The Trust's Social Environmental and Ethical policy ("SEE") is that the Manager
should take into consideration SEE matters when making an investment or
reviewing an existing investment subject to the fundamental requirement that
the Trust's financial interests should be treated as being of the greatest
importance.
Committees
The Audit Committee operates within clearly defined terms of reference, a copy
of which is available from the Secretary, and during the year comprised all
independent non-executive Directors in office at the time. Due to the size of
the Board it is deemed appropriate that all Directors serve on the Committee.
Nicholas Jeffrey is Chairman of the Committee. It provides a forum through
which the Company's external Auditors report to the Board of Directors. Each of
the Audit Committee members, including Jonathan Carr who is the Chairman of the
Board, is a non-executive Director and deemed to be independent. In reaching
this opinion the Board has noted that Mr Jeffrey is a non-executive director of
Templeton Insurance Limited, a company within the Knox D'Arcy Group, and
believe that this appointment does not impede his independence as a Director of
the Company. Mr Jeffrey has been appointed Chairman of the Audit Committee due
to his successful track record and wide range of experience of both public and
private companies.
The Audit Committee meets twice a year to oversee the production of the annual
and half-yearly accounts, compliance with accounting standards and regulatory
requirements. The terms of reference delegate specific responsibility for
making recommendations to the Board as regards the appointment, re-appointment,
and remuneration of the Auditor. The Committee has considered the independence
and objectivity of the Auditor, including a review of non audit services that
the Auditor has provided totalling �398,000 during the period, and has advised
the Board that it is satisfied in these respects that KPMG Audit Plc has
fulfilled its obligations to the Company and its shareholders. It also reviews
the effectiveness of the Company's financial reporting and internal control
policies. The Company's Auditor attends the meetings of the Audit Committee to
review the annual accounts and has direct access to Committee members between
meetings.
The Audit Committee has reviewed the "whistle blowing" procedures of the
Investment Manager and Company Secretary to ensure that the concerns of staff
at Knox D'Arcy and Capita Sinclair Henderson Limited may be raised in a
confidential matter.
The same independent non executive Directors also comprise the Management
Engagement Committee which is responsible for reviewing the terms of the
Manager's contract and those contracts of the Company's other third party
service providers. Copies of the Committee terms of reference are available
from the Secretary. Garth Milne is the Chairman of the Committee.
The Nomination Committee, comprising of the independent non-executive Directors
and chaired by Garth Milne meets for the purpose of considering appointments
to, and removals from, the Board. Copies of the Committee's terms of reference
are available from the Secretary. The Committee also considers the rationale
for the re-election of all retiring Directors in light of their performance.
The Remuneration Committee, comprising of the same Directors and Chaired by
Garth Milne meets to discuss the level of remuneration paid to the Board. Due
to the size of the Board it is deemed appropriate that all Directors serve on
the Committee. The Directors are responsible for ensuring that all statutory
disclosure provisions are made regarding Directors' remuneration including the
publication of the remuneration report. Copies of the Committees' Terms of
Reference are available from the Secretary.
Frequency and Attendance at Board and Committee Meetings
During the year the number of Board and Committee meetings held and attendance
by each Director who served during the year was as follows:
Board Audit Management Remuneration Nomination
Meetings Committee Engagement Committee Committee
Committee
Jonathan 6(6) 2(2) 1(1) 1(1) 1(1)
Carr*
Nicholas 5(6) 2(2) 1(1) 1(1) 1(1)
Jeffrey*
Garth Milne 5(6) 2(2) 1(1) 1(1) 1(1)
*
Lady Judge 5(6) 1(1) - - -
Peter Cowan 9(10) 1(1) - - -
Guy 10(10) 1(1) - - -
Crawford
Robert Wade 9(10) 1(1) - - -
Frank Dee 8(9) 0(1) - - -
Peter Webb 0(1) N/A N/A N/A N/A
Figures in brackets indicate the number of meetings in the year which each
Director was eligible to attend.
* Currently a Director of the Company.
Dialogue with Shareholders
The Directors are always available to enter into dialogue with shareholders.
All shareholders have the opportunity to attend and vote at the Annual General
Meeting during which the Board and the Investment Manager are available to
discuss issues affecting the Company.
Going Concern
The Directors, after due consideration, are of the opinion that it is
appropriate to presume that the Company will continue in business for the
foreseeable future and accordingly have continued to adopt the going concern
basis in preparing the accounts.
Internal Control Assessment Process
The Board is responsible for establishing and maintaining the Company's system
of internal control and for maintaining its effectiveness. Internal control
systems are designed to meet the particular needs of the Company and the risks
to which it is exposed and by their very nature provide reasonable but not
absolute assurance against material misstatement or loss and the systems are
designed to manage rather than eliminate the risk of failure to achieve the
Company's objective. The Directors have reviewed the effectiveness of the
system of internal controls, including financial, operational and compliance
controls and risk management.
Throughout the year under review and up until the date of this report, there
has been an ongoing documented process for formally identifying, evaluating and
managing the significant risks faced by the Company, which accords with
guidance in the document entitled "Internal Control: Guidance for Directors on
the Combined Code" and is reviewed on a regular basis by the Board. The process
involves reports from the Company Secretary and Investment Manager as described
below. In addition, the Board receives internal control statements from all of
the third parties to which it delegates functions. The key procedures, which
have been established to provide effective internal control, are as follows:
* Investment management is provided by Knox D'Arcy Investment
Management Limited. The Board is responsible for setting the overall investment
policy and monitors the activity of the Investment Manager at regular Board
meetings. The Investment Manager provides reports at these meetings, which
cover investment performance and compliance issues.
* Capita Sinclair Henderson Limited is responsible for the provision
of administration and company secretarial duties. It also reports to the Board
on risk control issues for the Company as a whole.
* Custody of assets is undertaken by HSBC.
* The duties of investment management, accounting and the custody of
assets are segregated. The procedures of the individual parties are designed to
complement one another.
* The non-executive Directors of the Company clearly define the
duties and responsibilities of their agents and advisers in the terms of their
contracts. The appointment of agents and advisers is conducted by the
Management Engagement Committee after consideration of the quality of the
parties involved; the Board monitors their ongoing performance and contractual
arrangements.
* Mandates for authorisation of investment transactions and expense
payments are set by the Board.
* The Board reviews financial information produced by the Investment
Manager and Company Secretary in detail on a regular basis.
* The Company does not have an internal audit function. All of the
Company's management functions are delegated to independent third parties whose
internal controls are reviewed by the Board. Therefore, this function is not
felt to be required. However, the need for one is reviewed periodically.
The Board considers that it has carried out a review of the system of internal
controls as it has operated throughout the year.
Directors Service Contracts
Directors are not appointed for specific terms but offer themselves for
re-election at least every three years.
Auditor
KPMG Audit Plc have expressed their willingness to continue in office as
Auditor and, in accordance with Section 385 of the Companies Act 1985, a
resolution for their re-appointment will be proposed at the forthcoming Annual
General Meeting.
By order of the Board
Capita Sinclair Henderson Limited
Secretary
30 October 2008
Statement of Directors' responsibilities in respect of the annual report and
the financial statements
The Directors are responsible for preparing the annual report and the financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law 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 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 judgments and estimates that are reasonable and prudent;
* state whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the
financial statements; and
* prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping proper 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 1985. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Report of the Directors, Directors Remuneration Report and
Corporate Governance Statement that complies with that law and those
regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
The Directors state, to the best of their knowledge, 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/loss 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 principal risks and uncertainties that it faces.
By order of the Board
Jonathan Carr
Chairman
30 October 2008
Independent Auditors' report
The Company's financial statements for the year ended 30 June 2008 have been
audited by KPMG Audit Plc. The text of the Auditor's report can be found in the
Company's Annual Report and Accounts at www.eagletinvestmenttrust.co.uk.
Income Statement
for the year ended 30 June 2008
2008 2007
Revenue Capital Total Revenue Capital Total
Note �'000 �'000 �'000 �'000 �'000 �'000
(Losses)/gains on investments at 10 - (36,231) (36,231) - 21,061 21,061
fair value
Income 2 1,593 - 1,593 1,757 - 1,757
Investment management fee 3 (695) (695) (1,390) (616) (616) (1,232)
Other expenses 4 (1,005) (209) (1,214) (310) - (310)
Net return before finance costs
and taxation
(107) (37,135) (37,242) 831 20,445 21,276
Interest payable and similar
charges
6 (223) (223) (446) (392) (392) (784)
Return on Ordinary activities
before taxation for the
financial year (330) (37,358) (37,688) 439 20,053 20,492
Taxation 7 - - - - - -
Return on Ordinary activities
after taxation for the financial
year (330) (37,358) (37,688) 439 20,053
20,492
Return per Ordinary share (p) 9 (1.46) (165.18) (166.64) 1.87 85.51 87.38
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital columns are prepared under
guidance issued by the Association of Investment Companies ("AIC").
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued in the year.
The Board have not recommended a dividend payable in respect of the year ended
30 June 2008 (2007: 0.7p).
Statement of total recognised gains and losses
for the year ended 30 June 2008
2008 2007
�'000 �'000
Net return after taxation (37,688) 20,492
Total recognised (losses)/gains during the year
(37,688) 20,492
Total recognised (losses)/gains per share (p) (166.64) 87.38
Balance sheet
as at 30 June 2008
2008 2007
Note �'000 �'000
Fixed assets
Investments at fair value 10 38,967 123,681
Current assets
Debtors 12 415 225
Cash at bank 32,538 8
32,953 233
Creditors - amounts falling due 13
within one year
Bank overdraft - (10,825)
Creditors (382) (1,976)
Accruals (635) (214)
Net current assets/(liabilities) 31,936 (12,782)
Net assets 70,903 110,899
Share capital and reserves
Represented by:
Called up share capital 14 6,126 6,286
Own shares held in Treasury 14 (8,847) (8,544)
Share premium account 28,319 28,319
Capital redemption reserve 1,838 1,678
Capital reserve - realised 53,709 86,727
- unrealised (13,946) (7,759)
Revenue reserve 3,704 4,192
Shareholders' funds - equity interests 70,903 110,899
Net asset value per Ordinary Share 18 320.48p 485.57p
These financial statements were approved by the Board of Directors on 30
October 2008 and were signed on its behalf by:
Jonathan Carr
Chairman
Statement of cash flows
for the year ended 30 June 2008
2008 2007
Note �'000 �'000
Operating activities:
Investment income received 1,371 1,834
Bank interest received 31 9
Investment management fees paid (1,253) (1,218)
Secretarial fees paid (52) (55)
Other cash expenses (670) (229)
Net cash (outflow)/inflow from operating activities 16 (573) 341
Servicing of finance
Interest paid (487) (776)
Net cash outflow from servicing of finance (487) (776)
Capital expenditure and financial investment
Purchase of investments (23,149) (55,471)
Sales of investments 69,656 62,912
Net cash inflow from capital expenditure and
financial investment 46,507 7,441
Equity dividends paid (158) (168)
Net cash inflow before
financing 45,289 6,838
Financing
Reorganisation costs (166) -
Ordinary shares purchased for cancellation (1,465) (1,274)
Ordinary shares purchased for Treasury (303) (4,365)
Net cash outflow from financing (1,934) (5,639)
Increase in cash 17 43,355 1,199
Reconciliation of movements in shareholders' funds
for the year ended 30 June 2008
Own
shares Share Capital Capital Capital
Share held in premium redemption reserve reserve Revenue
capital Treasury account reserve realised unrealised reserve Total
�'000 �'000 �'000 �'000 �'000 �'000 �'000 �'000
Year ended
30 June 2008
30 June 2007 6,286 (8,544) 28,319 1,678 86,727 (7,759) 4,192 110,899
Net revenue
return after
taxation for the - - - - - - (330) (330)
year
Dividends paid - - - - - - (158) (158)
Net losses on
realisation of
investments - - - - (33,737) - - (33,737)
Transfer between
reserves-
- - - - 11,959 (11,959) - -
Fair value
movement in
investments - - - - (8,266) 5,772 - (2,494)
Costs allocated
to capital
- - - - (1,127) - - (1,127)
Cost of shares
held in Treasury
- (303) - - - - - (303)
Cost of shares
purchased for
cancellation
- - - - (1,847) - - (1,847)
Nominal value of
shares purchased
for cancellation
(160) - - 160 - - - -
30 June 2008 6,126 (8,847) 28,319 1,838 53,709 (13,946) 3,704 70,903
- With effect from 1 April 2007, changes in fair value of investments which are
readily convertible into cash, without accepting adverse terms, at the balance
sheet date are included in realised, rather than unrealised, capital reserves.
The balances on both reserves at 1 July 2007 have been amended by a reserve
transfer to reflect this change.
In accordance with TECH 01/08, gains and losses arising from changes in the
fair value of investments are considered to be realised to the extent that they
are readily convertible to cash, without accepting adverse terms, at the
Balance Sheet date. Fair value gains on unlisted investments are not
considered to be readily convertible to cash and therefore treated as
unrealised. The treatment of listed investments is dependent upon the
individual circumstances of each holding. In general, listed investments with
a market capitalisation of over �100 million are considered to be readily
convertible into cash and therefore any fair value gains and losses are shown
as realised
A block discount of 10% has been applied in respect of four investments,
indicating that the proceeds following 100% disposal of the holding may be less
than the value recognised in the balance sheet.
Own
shares Share Capital Capital Capital
Share held in premium redemption reserve reserve Revenue
capital Treasury account reserve realised unrealised reserve Total
�'000 �'000 �'000 �'000 �'000 �'000 �'000 �'000
Year ended 30
June 2007
30 June 2006 6,367 (4,179) 28,319 1,597 70,029 (9,840) 3,921 96,214
Net revenue
return after
taxation for the - - - - - - 439 439
year
Dividends paid - - - - - - (168) (168)
Net gains on - - - - 18,980 - - 18,980
realisation of
investments
Fair value - - - - - 2,081 - 2,081
movements in
investments
Costs allocated - - - - (1,008) - - (1,008)
to capital
Cost of shares
held in Treasury
- (4,365) - - - - - (4,365)
Cost of shares
purchased for
cancellation
- - - - (1,274) - - (1,274)
Nominal value of
shares purchased
for cancellation
(81) - - 81 - - - -
30 June 2007 6,286 (8,544) 28,319 1,678 86,727 (7,759) 4,192 110,899
Notes to the accounts
at 30 June 2008
1. Accounting policies
Accounting convention
The financial statements are prepared under the historical cost convention as
modified by the revaluation of fixed asset investments, and in accordance with
applicable accounting standards in the United Kingdom and with the Statement of
Recommended Practice 2003 regarding the Financial Statements of Investment
Trust Companies ("SORP"), as revised in December 2005.
Income recognition
Dividend income is included in revenue when the investments concerned are
quoted 'ex-dividend' and shown net of any associated tax credit. Deposit
interest and underwriting commission receivable are included on an accruals
basis.
Management fees and finance costs
Management fees and finance costs are split equally between the revenue account
and realised capital reserve. This is based on the expected long-term returns
of the Company. Any performance fee paid to the Manager is charged 100% to the
capital reserve since the outperformance is entirely based on capital
appreciation. All other expenses are allocated in full to the revenue account,
except for the incidental costs of purchasing and selling investments which are
allocated to capital.
Investments
All investments held by the Company are classified as 'fair value through
profit or loss'. Investments are initially recognised at cost, being the fair
value of the consideration given.
After initial recognition, investments are measured at fair value, with
unrealised gains and losses on investments and impairment of investments
recognised in the Income statement and allocated to capital. Realised gains
and losses on investments sold are calculated as the difference between sales
proceeds and cost.
For investments actively traded in organised financial markets, fair value is
generally determined by reference to Stock Exchange quoted market bid prices at
the close of business on the Balance sheet date, without adjustment for
transaction costs necessary to realise the asset. Where investments have been
suspended the shares have been valued using a valuation technique.
Any unrealised profits and losses are allocated to the unrealised capital
reserve. Any realised profits and losses arising on the disposal of
investments are allocated to the realised capital reserve.
In accordance with TECH 01/08, gains and losses arising from changes in the
fair value of investments are considered to be realised to the extent that they
are readily convertible to cash, without accepting adverse terms, at the
balance sheet date. A block discount is to be applied if any investments are
traded on an active market, to indicate that proceeds of disposal of 100% of
the holding may be less than the value recognised in the balance sheet. Fair
value gains on unlisted investments are not considered to be readily
convertible to cash and therefore treated as unrealised. The treatment of
listed investments is dependent upon the individual circumstances of each
holding.
Realisation of losses
During the year ended 30 June 2008, the Company realised �27.3m of previously
unrealised losses that arose due to suspension or becoming delisted and
therefore have no current market value. It is not anticipated that any funds
will be recovered on these investments.
These investments are detailed in note 10.
Taxation
The charge for taxation is based on the net revenue for the year. Deferred
taxation is provided in accordance with Financial Reporting Standard No.19:
Deferred Tax ("FRS 19") on all timing differences that have originated but not
reversed by the Balance sheet date. Deferred taxation assets are only
recognised to the extent that they are regarded as recoverable, and are
measured on a non-discounted basis.
Dividends payable to shareholders
Dividends paid by the Company are accounted for in the period in which the
dividend has been approved in general meeting.
Capital Reserves
i) Capital Reserve - Realised:
Gains and losses on realisation of investments and changes in fair value of
instruments which are readily convertible to cash, without accepting terms, are
dealt with in this reserve. This reserve is also used for the purchases of the
Company's own shares for cancellation, 50% of the management fees, including
any related VAT, and 50% of finance costs in accordance with Company's
objectives.
(ii) Capital Reserve - Unrealised:
Changes in fair value of investments which are not readily convertible to cash,
without accepting adverse terms, are dealt with in this reserve.
2. Income
2008 2007
�'000 �'000
Income from UK listed investments
UK dividend income 1,323 1,745
Other income
Bank interest receivable 270 12
Total income 1,593 1,757
Total income comprises:
Dividends 1,323 1,745
Interest 270 12
1,593 1,757
3. Investment management fee
2008 2007
Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
Investment management fee 673 673 1,346 524 524 1,048
VAT thereon (note 21) 22 22 44 92 92 184
695 695 1,390 616 616 1,232
Of these, the amounts payable to both Investment Managers, throughout the year
was as follows:
2008 2007
�'000 �'000
Unicorn 1,140 1,232
Knox D'Arcy 250 -
1,390 1,232
The investment management fees have been calculated in accordance with the
management agreements.
At 30 June 2008 �244,129 (2007: �108,588) was due to Unicorn Asset Management
Limited "Unicorn".
No performance fees were payable to the Investment Managers (2007: �nil).
4. Other expenses 2008 2007
�'000 �'000
Secretarial services 57 55
Auditor's remuneration for audit 20 25
Directors' remuneration (note 5) 82 74
Directors' expenses 10 4
Brokers' fees 36 29
Directors' insurance 15 14
Registrars' fees 19 19
Fees in respect of Savings Scheme 15 15
Printing 16 21
Professional fees 684 -
Other 51 54
1,005 310
Included in "Other" for the previous year to 30 June 2007 is a donation of �
3,000 equally divided between the three charities nominated by Mr Underhill's
family: Diabetes UK, St Michael's Church and Headway.
Professional fees of �684,495 were paid in respect of non-recurring corporate
advice incurred by the Company's previous Board in relation to the request by
certain shareholders to appoint three Directors at the Annual General Meeting
of the Company on 11 December 2007. Of this amount, �398,000 was paid to KPMG
for corporate finance advice.
2008 2007
�'000 �'000
Auditors remuneration
Audit of financial statements 20 25
Corporate finance fees* 398 -
418 25
* Services relating to corporate finance transactions entered into or proposed
to be entered into by or on behalf of the Company or any of its associates.
5. Directors' remuneration
2008 2007
�'000 �'000
Total fees 82 74
� �
Remuneration to Directors:
J Carr (Chairman) (appointed 11 December 2007) 16,613 -
G Milne (appointed 11 December 2007) 11,909 -
N Jeffrey (appointed 11 December 2007) 15,792 -
Lady Judge (Chairman) (resigned 12 December 2007) 12,500 25,000
Peter Cowan (resigned 11 December 2007) 7,139 14,000
Guy Crawford (resigned 11 December 2007) 7,139 14,000
Peter Underhill* - 6,650
Robert Wade (resigned 11 December 2007) 7,139 14,000
Frank Dee (retired 12 December 2007) 3,584 -
Peter Webb waived his fees of �4,515 until the point of his resignation on 11
October 2007 (year ended 30 June 2007: �14,000).
* Fees paid until Peter Underhill's death in January 2007.
6. Interest payable and similar charges
2008 2007
Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
On bank overdraft 223 223 446 392 392 784
7. Taxation
The Company is subject to corporation tax at 29.50% (2007: 30%). However, UK
dividends are not liable to corporation tax. Consequently, the tax deductible
expenses substantially exceed the taxable income of the Company and, as a
result, there is no taxation charge.
2008 2007
� �
'000 '000
Net revenue return on ordinary activities before tax (330) 439
Net revenue return on ordinary activities multiplied by the
standard rate of corporation tax in the UK of 29.50% (2007: 30%)
(98) 132
UK dividends not chargeable to corporation tax (390) (524)
Expenses not deductible for tax purposes 72 9
Expenses charged to capital reserve (332) (302)
Excess expenses of period 748 685
Total current tax - -
At 30 June 2008, the Company had surplus management expenses and non-trade
losses of �26.1 million (2007: �23.6 million), which have not been recognised
as a deferred taxation asset of �7.32 million and �7.08 million respectively.
This is because the Company is not expected to generate taxable income in
future periods in excess of the deductible expenses of those future periods,
and accordingly, it is unlikely that the Company will be able to reduce future
taxation liabilities through the use of existing surplus expenses.
8. Dividend paid
2008 2007
�'000 �'000
Payment of final dividend of 0.70p (2007: 0.70p) per share 158 168
158 168
No final dividend has been proposed in respect of the year ended 30 June 2008.
9. Return per Ordinary share
2008 2007
*Net return Ordinary Per share *Net return Ordinary Per share
�'000 shares pence �'000 shares pence
Revenue
Return per
share
(330) 22,615,798 (1.46) 439 23,450,818 1.87
* *
Capital
Return per (37,358) 22,615,798 (165.18) 20,053 23,450,818 85.51
share * *
Total
Return per (37,688) 22,615,798 (166.64) 20,492 23,450,818 87.38
share * *
* Net return on ordinary activities attributable to Ordinary shareholders.
* Weighted average number of Ordinary shares in issue during the year
(excluding treasury shares).
10. Investments
2008 2007
�'000 �'000
UK listed investments 38,967 123,681
All listed investments are of equity shares in quoted companies.
During the year the Company incurred transaction costs of �107,546 and �160,334
(2007: �81,094 and �97,758) on purchases and sales of investments
respectively. The amounts are included within gains on investments at fair
value, as disclosed in the Income statement.
2008 2007
Analysis of investment portfolio movements �'000 �'000
Opening book cost 131,439 118,230
Opening fair value adjustment (7,758) (9,839)
Opening valuation 123,681 108,391
Movements in the year:
Purchases at cost 21,173 53,747
Sales - Proceeds (69,656) (59,518)
- realised losses on sales (33,737) 18,980
Changes in fair value (2,494) 2,081
Closing valuation 38,967 123,681
Closing book cost 42,219 131,439
Closing fair value adjustment (10,252) (7,758)
38,967 123,681
With effect from 1 April 2007, changes in fair value of listed investments
which are readily convertible into cash, without accepting adverse terms, at
the balance sheet date are considered to be realised, rather than unrealised,
dependant upon the market capitalisation of the investment. As at 30 June 2008
total valuation losses of �10,252,000 have been allocated as �13,946,000
unrealised losses and �3,694,000 realised gains.
30 June 2008 30 June 2007
Realised Unrealised Total Realised Unrealised Total
�'000 �'000 �'000 �'000 �'000 �'000
Net gains on
investments at fair
value through profit
or loss
(Losses)/gains on (33,737) - (33,737) 18,980 - 18,890
sales
Changes in fair 11,959 (11,959) - - - -
value - 2007
Changes in fair (8,266) 5,772 (2,494) - 2,081 2,081
value
(30,044) (6,187) (36,231) 18,980 2,081 21,061
Realisation of losses
During the year ended 30 June 2008, the Company realised �27.3m of previously
unrealised losses that arose due to suspension or becoming delisted and
therefore have no current market value. It is not anticipated that any funds
will be recovered on these investments.
The investments are detailed below:
Investment Holding Bookcost
Angel Realisations 6 Ltd, NPV 700,000 -
Sfi Holdings A Shares 700,000 1,030,177
Stenoak Associate Services, Ord 10p 940,000 1,231,795
Eurodis Electron, Ord 1p 121,891,010 15,975,318
PressAC, Ord 5p 18,700,501 9,083,678
27,320,968
11. Significant holdings
The Company has no interests exceeding 20% in the nominal value of the allotted
shares of investee companies.
The Company has 25 holdings over 3% including the following which are
considered to be material:
Market
Class of capitalisation
Name of undertaking Share �m % held
Harvey Nash Group Ordinary 25 13.687
Concateno Ordinary 129 3.806
Nationwide Accident Repair Services Ordinary 57 3.634
Materiality has been defined as 5 % or more of the Company's gross assets.
12. Debtors - amounts falling due within one year 2008 2007
�,000 �,000
Dividends receivable 158 206
Prepayments and accrued income 257 19
415 225
13. Creditors - amounts falling due within one year 2008 2007
�,000 �,000
Bank overdraft - 10,825
Amounts due to brokers re: trade purchases - 1,976
Amounts due to brokers re: purchases for cancellation 382 -
Accruals 635 214
1,017 13,015
The bank overdraft was secured by a charge, by way of formal mortgage, over the
investment portfolio.
14. Called up share capital 2008 2007
�,000 �,000
Authorised:
48,000,000 (2007: 48,000,000) Ordinary shares of 25p each 12,000 12,000
Allotted called up and fully paid:
24,503,926 (2007: 25,143,926) Ordinary shares of 25p each 6,126 6,286
During the year the following Ordinary shares were purchases for cancellation:
Total cost
of purchase % of
Number of including issued shares
Date shares expenses at that date
12/09/2007 150,000 �586,075 0.60
25/09/2007 25,000 �94,408 0.10
05/06/2008 115,000 �273,304 0.46
17/06/2008 75,000 �188,060 0.30
23/06/2008 75,000 �193,345 0.30
24/06/2008 50,000 �128,897 0.20
30/06/2008 150,000 �382,916 0.61
640,000 �1,847,005
During the year the following Ordinary shares were purchased for Treasury:
Total cost
of purchase % of
Number of including issued shares
Date shares expenses at that date
Year ended 30/06/07 2,305,000 �8,544,122
26/07/07 50,000 �202,914 0.20
26/07/07 25,000 �100,200 0.10
2,380,000 �8,847,236
The aggregate nominal value of the shares held in Treasury is �595,000.
Since 30 June 2008 the Company has not purchased any further shares for
cancellation or any shares for Treasury. One vote is attached to each Ordinary
share in issue. Own shares held in treasury do not carry voting rights.
15. Commitments and contingent liabilities
At 30 June 2008 there were no commitments (2007: �1,430,000 in respect of a
placing commitment).
16. Reconciliation of net revenue before finance costs and 2008 2007
taxation
�,000 �,000
to net cash (outflow)/inflow from operating activities
Net return before finance costs and taxation (37,242) 21,276
Add back/(less): losses/(gains) on investments 36,231 (21,061)
Add back: capital expenses 209 -
Increase in creditors and accruals 419 33
(Increase)/ decrease in prepayments and accrued income (238) 4
Decrease in dividends receivable 48 89
(573) 341
17. Reconciliation of net cash flow to net cash/(debt) 2008 2007
�,000 �,000
Beginning of year (10,817) (12,016)
Net cash inflow 43,355 1,199
End of year 32,538 (10,817)
The balance of net cash/(debt) is shown in the accounts as
follows
2008 2007
�,000 �,000
Cash at bank 32,538 8
Overdraft - (10,825)
32,538 (10,817)
18. Net asset value per Ordinary share
The basic net asset value per Ordinary share is based on net assets of �
70,903,000 (2007: �110,899,000) and on 22,123,926 (2007: 22,838,926) Ordinary
shares being the number of shares in issue at the year end, excluding shares
held in Treasury (see note 14).
19. Related party transactions
Under the Listing Rules the Manager is regarded as a related party of the
Company. The amounts paid and due to the Manager are disclosed in note 3.
However, the existence of an independent Board of Directors demonstrates that
the Company is free to pursue its own financial and operating policies, and
therefore, in terms of FRS8: "Related Party Transactions", the Manager is not
considered a related party. The relationship between the Company, its Directors
and the Investment Manager is disclosed in the Report of Directors.
20. Analysis of financial instruments
Background
The Company's financial instruments comprise securities, cash balances and
debtors and creditors that arise from operations, for example, in respect of
sales and purchases awaiting settlement and debtors for accrued income.
The risk management policies and procedures outlined in this note have not
changed substantially from the previous accounting period.
The principal risks the Company faces in its portfolio management activities
are:
market price risks i.e. movements in the value of investment holdings caused by
factors other than interest rate or currency movement;
interest rate risks;
liquidity risk;
credit risk; and
gearing.
The Manager's policies for managing these risks are summarised below and have
been applied throughout the year:
Policy
Market Price Risk
Market price risk arises mainly from uncertainty about future prices of
financial instruments. The value of shares and the income from them may fall as
well as rise and shareholders may not get back the full amount invested. The
Investment Manager continues to monitor the prices of financial instruments
held by the Company on a real time basis. Adherence to the Company's investment
policy mitigates the risk of excessive exposure to one issuer or investment
sector by divesting the portfolio across many sectors.
The Board manages the market price risk inherent in the investment portfolio by
ensuring full and timely access to relevant information from the Investment
Manager. The Board meets regularly and, at each meeting, reviews the investment
performance, the investment portfolio and the rationale for the current
investments to ensure consistency with the Company's objective and investment
policy. The portfolio does not seek to reproduce the benchmark Index,
investments are selected based upon the merit of individual companies and
therefore the portfolio may diverge from the short term fluctuations of the
benchmark.
Investments in smaller companies and AIM traded Companies by their nature,
involve a higher degree of risk than investments in the mass market.
Fixed asset investments are valued at their bid price, which equates to their
fair value. A list of the Company's twenty largest equity investments is given
above. In addition, an analysis of the portfolio by market capitalisation of
holdings is also given above.
The maximum exposure to market price risk is the fair value of investments of �
38.9 million (2007: �123,681 million).
If the investment portfolio valuation fell by 1% from the amount detailed in
the financial statements as at 30 June 2008, it would have the effect (assuming
all other variable held constant) of reducing the net capital return before
taxation by �390,000 (2007: �1,237,000). An increase of 1% in the investment
portfolio valuation would have an equal and opposite effect on the net capital
before taxation.
(ii) Interest Rate Risk
Changes in the interest rates nay cause fluctuations in the income of the
Company. The Company receives interest on the cash deposits at a rate of 1%
below the bank base rate. The interest received during the year amounted to �
270,000 (2007: �12,000). The interest rate risk profile of the Company is
detailed later on in this note.
If interest rates had reduced by 1% from those paid as at 30 June 2008 it would
have the effect (assuming all other variables held constant) of increasing both
net revenue and net capital returns before taxation on an annualised basis by �
35,000 (2007: �65,000). If interest rates had increased by 1% there would have
been an equal and opposite effect on the net revenue before taxation. The
calculations are based on a weighted average of interest paid during the year
and are a weighted average of interest rates to interest paid during the year
and are therefore only approximate.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities. The Investment
Manager does not invest in unlisted securities. However, the investments held
by the Company consist of UK quoted small companies which are inherently less
liquid than quoted large companies.
Liquidity risk is mitigated by the fact that the Company has �32,538,000 (2007:
�8,000) cash held at bank which can satisfy its creditors and that at a closed
end fund assets do not need to be liquidated to meet redemptions. The Board has
deemed that the Company's listed investments with a market capitalisation of
over �100 million is �24.2 million.
Short term flexibility is achieved through the use of overdraft facilities.
(iv) Credit Risk
Credit risk is the risk of financial loss to the Company if the contractual
party to a financial instrument fails to meet its contractual obligations.
The carrying amounts of financial assets best represent the maximum credit risk
exposure at the balance sheet date.
The Company's listed investments are held on its behalf by HSBC, the Company's
custodian, acting as agent. Bankruptcy or insolvency of the custodian may cause
the Company's rights with respect to securities held by the custodian to be
delayed. The Board monitors the Company's risk by reviewing the custodian's
internal controls reports.
Investment transactions are carried out with a large number of brokers whose
creditworthiness is reviewed by the Investment Manager. Transactions are
ordinarily undertaken on a delivery versus payment basis whereby the Company's
custodian bank ensures that the counterpart to any transaction entered into by
the Company has delivered in its obligations before any transfer of cash or
securities away from the Company is completed.
Cash is only held at the banks that have been identified by the Board as
reputable and of high credit quality.
The maximum exposure to credit risk as 30 June 2008 was:
30 June 2008 30 June 2007
�,000 3,000
Investments at fair value 38,967 123,681
Cash at bank 32,538 8
Debtors and repayments 415 225
71,920 123,914
None of the Company's assets are past due or impaired.
(v) Gearing
Gearing can have amplified effects on the net asset value of the Company. It
can be positive for a company's performance, although can have negative effects
on the performance in falling markets. It is the Company's policy to determine
the adequate level of gearing appropriate to its own risk profile and the
appropriate level of gearing is regularly monitored by the Board.
The Company had no borrowings as at 30 June 2008 (2007: �10,825,000)
representing nil% (2007: 9.8%) of the net asset value.
Fair values of financial assets and financial liabilities
All of the financial assets and liabilities of the Company are held at fair
value.
Financial assets
The Company holds fixes asset investments which are UK listed and are traded on
the London Stock Exchange. All of the Company's assets are in sterling and
accordingly the Company has no currency exposure.
The investments are classified as fair value through profit or loss, and
measured at fair value. For investments actively traded in organised financial
assets, fair value is determined by reference to Stock Exchange quoted market
bid prices.
The Company's financial assets are substantially equity shares and debtors
which neither pay interest not have a fixed maturity date.
Financial liabilities
The only financial liabilities of the Company are Creditors which are due
within one year, as disclosed in note 13.
Use of derivatives
It is not the Company's policy to enter into derivative contracts.
As required by Financial Reporting Standard No.29: "Derivatives and other
financial instruments", an analysis of financial assets and liabilities, which
identifies the risk to the Company of holding such items, is given below:
The interest rate profile of the Company's financial liabilities as at 30 June
2008 is shown below:
Weighted
average Period
until
Total interest maturity
rate
�,000 % Years
Amounts drawn under sterling bank overdraft - - -
facility
Financial liabilities upon which no interest is 1,017 - -
paid
1,017
The interest rate profile of the Company's financial liabilities as at 30 June
2007 is shown below:
Weighted
average Period
until
Total interest maturity
rate
�,000 % Years
Amounts drawn under sterling bank overdraft 10,825 6.5 -
facility
Financial liabilities upon which no interest is 2,190 - -
paid
13,015
The maturity profile of the Company's financial liabilities is as follows:
As at As at
30 June 2008 30 June
2007
�,000 �,000
In one year or less 1,017 13,015
In more than one but not more than two years - -
In more than two but not more than five years - -
21. Contingent asset
In 2004, the Association of Investment Companies ("AIC and JP Morgan
Claverhouse Investment Trust plc launched a case against HM Revenue & Customs
("HMRC") in which they claimed that management fees charged to UK investment
trusts should be exempt from VAT. On 28 June 2007, the European Court of
Justice found in favour of AIC/ Claverhouse in respect of the specific
questions referred to it by the UK VAT Tribunal. HMRC accepted this judgement
in November 2007.
Your Company is taking appropriate steps to reclaim the relevant VAT that has
been paid on management fees between 2001 and 2007. The timings and quantum of
this repayment, together with the status of the pre-2001 payments, are still to
be determined.
On the basis of this, no contingent asset has been disclosed.
END
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