GLOBAL SPECIAL OPPORTUNITIES TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 31 MAY 2008
The full Annual Report and Accounts can be accessed via the Company's website
at www.premierassetmanagment.co.uk or by contacting the Company Secretary on
telephone 01392 412122.
Chairman's Statement
Dear Shareholder,
Introduction
The last few months of the year under review saw some major changes to your
Company.
As you are aware, the year ending 31 May 2008 was intended to be the final year
of the company's life when it was launched in 2001.
Some steps towards winding up the Company had been taken with the Company
degearing and paying down its bank facilities and, as is normal practice for
most split capital trusts approaching their wind-up-dates, the Board and the
Managers examined the viability of a continuation or roll over scheme for the
Company. This was particularly important given that so much of the portfolio
was invested in opportunities that frankly need more time to realise their
promise.
Consultations with the major shareholders in each class were undertaken. The
outcome of these discussions was a recognition that there was support from the
principle Income and Capital shareholders for a scheme that would provide more
time to realise the full potential value of certain holdings in the US Growth
portfolio and generally avoid a full liquidation of the assets against a market
background that was as unfavourable as at any time during the Company's seven
year life. I will discuss the difficulties in realising full value for the
Company's assets below.
The support of the major shareholders, however, was conditional on the
contribution scheme being structured so that a significant proportion of the
Income shareholders' assets would be returned as cash on the due wind-up date
(as well as the repayment of the Zero Dividend Preference shares) and on the
shareholders themselves being in a position to be better protect their
interests by having representation on the Board of the ongoing Company.
Recognising the merits of such a continuation scheme, three of the four Board
members agreed to stand aside to allow new Board members nominated by the major
shareholders to take up Board positions. Standing aside were Lord Lang of
Monkton (Chairman), Ernest Fenton and William Vanderfelt. The new appointees to
the Board were myself as Chairman, Andrew Pegge and Rory Macleod. Stephen White
agreed to remain on the Board providing continuity. The new Directors all
represented substantial shareholdings in the Company, either directly or
indirectly. Andrew Pegge is a partner in Laxey Partners which had an interest
in 5.86 million Income shares; Rory Macleod had a personal interest in 5.149
million Capital shares and 35,000 Income shares, whilst I represented iimia
MitonOptimal (now Midas Capital) which held 8.345 million Income shares.
I should like to express my thanks to the outgoing Directors and in particular,
the outgoing Chairman, Lord Lang, for their support in facilitating a smooth
restructuring of the Board.
Extension of life scheme and tender
The new directors were appointed on 29 February 2008 and the Board, working
with the Company's broker, Cenkos Securities, and lawyers, Stephenson Harwood,
brought forward a proposal for the repayment of all of the Zero Dividend
Preference shares (ZDPs) through a tender at their final redemption price, the
repayment of up to 50% of the Income shares through a tender at 100p per share
and the extension of the Company's life for a further three years.
The scheme was set out in detail in the circular sent to shareholders on 2 May
2008. Shareholders approved the scheme at the separate Class Meeting EGM held
on 30 May 2008. ZDP holders who tendered their shares were repaid the full
redemption price of 182.608201p per share and Income shareholders who tendered
were repaid 100p for a maximum of 50% of their holding. In total, 96.6% of the
ZDPs were tendered and 49.2% of the income shares were repaid. Following the
tender the Company has continued to buy back for cancellation the few remaining
ZDPs that failed to tender their shares by the required deadline and maintained
a listing for the ZDPs until 31 July 2008 to facilitate this buy back. Any
holders of ZDPs who had not tendered by 31 July will now only be able to exit
on the final winding up of the Company on 31 May 2011.
Market background
The second half of the Company's financial year, the very time when we had to
liquidated a large part of our portfolio saw a succession of financial and
economic events that brought increasing pressure on both equity and credit
markets.
The trigger was the collapse in sub prime mortgages in the US in autumn 2007.
This led to the so called "credit crunch" with financial institutions being
unwilling to lend to each other. This resulted, among other things, in the
collapse of Northern Rock in the UK and, in March 2008, to the rescue of the
investment bank Bear Sterns by its stronger rival, JP Morgan, in the US. As the
credit crisis tightened, oil and commodity prices spiralled higher driven by
massive demand in the emerging economies lead by China where GDP has been
rising at 10% per annum. This, in turn, has turned a benign inflation
environment into one in which central banks must consider increasing interest
rates to keep within inflation targets despite the parlous state of the
financial sector. Against this background, it was little surprise to see equity
markets fall. Over the course of the year, the FTSE All-Share total return
index fell 7.12% and the S&P 500 index in the US was down 8.51%. The Russell
2000 Total Return Index, the benchmark for the US Growth portfolio, was down
10.54% (10.45% in sterling).
Realisations and valuations
During the second half of the year, from November 2007 onwards, the management
of the portfolio was focused on realisation rather than investment. During
November and December cash raised was used to repay the company's �35 million
of bank debt. The last tranche of bank debt was repaid in February 2008. Within
the Income portfolio, as less liquid investment company holdings were sold they
were replaced with liquid fixed interest investments.
Against the difficult market backdrop our Managers were able to liquidate a
substantial part of the Company's portfolio enabling us to meet the various
cash needs we had.
However, shareholders need to be aware that at times your new Board has been
very concerned with how we reported our NAVs and how our reported NAVs compared
with what we were able to realise in the market for our holdings in a number of
quoted, yet illiquid investments. We carry our investments at fair value and by
convention the published bid price is used as a proxy for fair value, but as
any experienced investor knows, when dealing in sizeable stakes, it is not
always possible to achieve the published bid price. Russell Cleveland and his
team did a great job in a tough market, but they were not always able to
achieve the bid price because of the size of our holdings.
So whilst by convention we continue to value our quoted holdings generally at
their last traded price, we will be looking closely at carrying values to
better reflect the fair value of our investments. Shareholders need to be aware
that, in the event of liquidation, we may not achieve our stated NAV;
consequently we will take steps, well ahead of our winding up date, to turn the
portfolio to cash.
Currency Hedge
During the course of the year, the US Dollar weakened relative to Sterling and
the opportunity was taken to adjust the currency cylinder from a cap of $1.6610
to the Pound to a new level of $1.950 whilst leaving the collar at $2.1. This
enabled the company to bank a premium of �1.681 million which would have
evaporated if the contract had been allowed to run and the Dollar/Sterling
exchange rate had remained within the range of $1.6610 to $2.1. Over the rest
of the year the currency traded within the new narrower range breaking above
$2.1 and below $1.95 only very briefly. As the closing date for the contact
approached, rather than be exposed to an unfavourable currency movement in the
last few days, the Board decided to close out the contact for a cost of �
105,000 which enabled the Dollar cash balances held against the potential
liability of the cylinder to be sold for Sterling in preparation for the
repayment of the ZDPs and Income shares through the tender.
Earnings and Dividends
Earnings per income share for the year were 1.40p (2.89p). Dividends totalling
4.00p were paid during the year. These comprised the third and fourth interims
for 2007 (both of 0.8p) and the first, second and third interims for 2008 (also
0.8p each). The fourth interim for 2008 of 1.0p was declared on 15 May 2008 and
paid on 6 June 2008. These distribution utilised the greater part of the
Company's revenue reserves. Going forward the investment policy will focus on
capital growth and the Board does not expect that the Company will generate
sufficient income to pay dividends.
Investment policy, outlook and the current portfolio
The extension of life scheme approved by shareholders on 30 May contained some
minor changes to the investment mandate and objectives. The whole of the Income
portfolio was liquidated in the lead up to the tenders and the remaining assets
are those which were held within the US Growth portfolio. It is not expected to
renew the investments in the Income portfolio. The investment objective going
forward is one of total return principally through capital growth and the
Directors have not set any specific income or dividend target. The Board have
also recognised that the retained investments provide a significant exposure to
China. This exposure is through companies domiciled or listed in the US or
Canada and whilst this is expected to remain the case the investment policy now
allows up to 25% of assets to be invested in companies that are domiciled and
listed outside of North America. The maximum exposure to unlisted securities
(excluding unlisted bonds convertible into listed common stock) has also been
increased to 40%, in order to reflect the composition of the portfolio
following the tender offers.
The portfolio immediately following the tenders was comprised of:
* Listed common stock
* Unlisted common stock
* Listed bonds and convertibles
* Unlisted convertibles convertible into listed common stock
* Unlisted bonds.
* warrants
* cash
The portfolio has some heavy concentrations on certain stocks. The top five
holdings of the Company immediately following the tender offers are set out in
the Investment Adviser's report.
Bank facility
The board have put in place a new bank facility with Allied Irish Bank for a
maximum of $5 million. At the year end, $3.5 million had been drawn. Details of
the facility are set out in Note 13 to the accounts.
Change of name.
Recognising that nearly 50% of the portfolio was invested in companies that
derived the greater part of their revenues from China it was considered
appropriate to change the name of the company to Global Special Opportunities
Trust PLC. The name change was approved by shareholders at the EGM held on 30
May 2008.
VAT on Management Fees
The greater part of the Company's assets have been managed through a contract
with an offshore management company and VAT has never been payable on the fees.
However, the Income portfolio was managed through an onshore contract and VAT
has been paid on these fees. In common with other investment trusts the Company
has lodged claims to recover VAT on past management fees from both the current
and previous investment manger. Although HMRC have been unable to defend the
case for the recovery of past management fee VAT, the procedures for recovering
this VAT have not yet been completed and, as the exact value of the reclaim has
not yet been established no amount is, as yet, being recognised in the asset
value.
Duncan Abbot (Chairman)
29 September 2008
Investment Adviser's report
for the year ended 31 May 2008
US Growth portfolio
The Company's one year return to 31 May 2008 was (15.8)% in Sterling against
the Russell 2000 return of (10.5)% in Sterling. For the period from inception
to 31 May 2008, approximately 7.2 years, the US Growth portfolio had an annual
return of 10.6% in Sterling against the Russell 2000 annual return of 3.8% in
Sterling.
This was a difficult year for the stock market, and one of significant change,
as your Manager liquidated many of the Company's assets in preparation for the
intended wind-up of the Company on 31 May 2008. However, as you will be aware,
shareholders voted in favour of the continuation of the Company for an
additional three years in order to provide time to maximise the value of the
remaining holdings.
Top five holdings
At 31 May 2008, the following top five holdings made up approximately 36.3% of
gross assets. At 31 May 2008, the gross assets of the Company were
approximately $41.3 million. A description of each of the top five holdings is
below.
Company Symbol Industry Value US$ % of gross
assets
Integrated Security IZZI Security products $4,992,741 12.1%
Systems
Bovie Medical BVX Medical devices $4,279,000 10.4%
eOriginal Holdings N/A Business software $2,507,810 6.1%
Hemobiotech Inc. HMBT Biotechnology $1,594,879 3.9%
Cover-All Technologies COVR Business software $1,585,715 3.8%
Integrated Security Systems, Inc. engages in the design, development,
manufacture, distribution and servicing of security and traffic control
products used in the commercial, industrial and government sectors. It offers
anti-terrorist crash barriers, bollards, wedges and gates, warning and crash
gates, gate panels, soft-stop gates, high occupancy vehicle lane changers,
navigational lighting and perimeter security gates and operators. It also
manufactures card access control and corrections security hardware and software
products, and distributes products relating to the road and bridge industry.
The company was founded in 1991 and is based in Carrollton, Texas.
Bovie Medical Corporation engages in the manufacture and marketing of medical
products and the development of related technologies. The company offers
electro surgery products, which include desiccators, generators, electrodes,
electro surgery pencils and various ancillary disposable products used in
surgery for the cutting and coagulation of tissue, as well as high frequency
desiccators, which are designed for dermatology and plastic surgery for
removing small skin lesions and growths. It also provides products for
outpatient surgical procedures used in various specialties, including
dermatology, gynaecology and plastic surgery. Other products offered by this
company are as follows: Specialty electrosurgical generators for the
gastroenterological and niche markets; battery operated cauteries for precise
haemostasis in ophthalmology; battery operated medical lighting instruments
that are used in ophthalmology, general surgery, hip replacement surgery and
the placement of end tracheal tubes in emergency and surgical procedures; and
nerve locator stimulators, which are used for identifying motor nerves in hand
and facial reconstructive surgery. The company was founded in 1982 and is based
in Melville, New York.
eOriginal, Inc. provides electronic vaulting and signature software solutions
for organisations that execute secure online business transactions. Its
software solutions enable companies to create Electronic Original documents
that are legally enforceable, admissible and negotiable, as well as allow
companies to execute and manage documents over the Internet. The company offers
solutions in the mortgage, automotive and lease industries, as well as
providing expert services, including consulting and technical, project planning
and management, design and code reviews, application/component development, and
integration verification and validation services. It also provides its
signature and vaulting solutions as a hosted service. eOriginal, Inc. was
founded in 1996 and has its headquarters in Baltimore, Maryland.
Hemobiotech, Inc. is a biopharmaceutical company focused on developing and
commercialising the first viable human blood substitute targeting the broad
blood use market. The company's core product, HemoTech, is a bovine-hemoglobin
(Hb) based human blood substitute capable of inducing red blood cell production
in the human body. The company's goal is to address an increasing demand for a
safe and inexpensive human blood substitute product in the US and around the
world through its licensed technology.
Cover-All Technologies, Inc., through its subsidiary, Cover-All Systems, Inc.,
provides software products, services and solutions to the property and casualty
insurance industry. Its software products and services focus on the functions
required to market, underwrite, rate, issue, print, bill and support the life
cycle of insurance policies. Cover-All Technologies serves insurance companies,
agents, brokers and managing general agents. The company was founded in 1971
and has its headquarters in Fairfield, New Jersey.
Disposals
The US Growth portfolio raised approximately $160 million of cash through the
year ended 31 May 2008. This consisted of the sales of numerous convertible
bond and equity holdings. Some of the larger sales resulting in realised gains
were as follows:
Stock Sale proceeds Resultant gain
$'000 $'000
Quintana Maritime $9,900 $5,300
Fushi Copperweld, Inc. �8,000 $6,300
Gasco Energy, Inc. $7,800 $5,100
Zhongpin, Inc. $6,600 $3,900
Some of the larger sales that resulted in realised losses are as follows:
Stock Sale proceeds Resultant loss
$'000 $'000
FBR Capital Markets $1,400 $2,100
Source Interlink $212 �1,300
Companies, Inc.
Consolidated Energy $6 $872
Liquidity progress
Three of the private holdings within the portfolio continue to make progress
towards becoming quoted companies. Asian Financial is the largest
non-government owned commercial printing equipment company in China. This
profitable and growing company is waiting for approval from the Securities and
Exchange Commission to commence trading. We believe their registration should
become effective in the near future. On 12 May 2008, quoted company Shine Media
Acquisition Corp. signed a definitive stock purchase agreement to acquire
profitable and growing private portfolio holding China Greenscape, Inc., the
leading provider of urban greenery in China. We expect this transaction to
close in approximately five months. Finally, unquoted company Heyspace
International, a profitable and rapidly growing social network internet
property, is expected to go public through a full marketing bulge bracket
initial public offering in the first quarter of 2009. In all three cases, we
expect each to trade at values greater than cost.
Conclusion
With the remaining holdings, we will endeavour to add value wherever possible
and attempt to realise value at the appropriate time.
RENN Capital Group, Inc.
29 September 2008
Investment Manger's Report
For the year ended 31 May 2008
Income portfolio
London's stock market fell over the year, with the FTSE 100 Index of larger
companies producing a total return of minus 5.1%, while the FTSE 350 Higher
Yield Index generated a negative 11.9% return. The FD/AIC Ordinary Income
shares index produced a minus 22.4% total return.
Mindful of the potential wind-up of the Company in May 2008, the major theme of
our portfolio strategy was to increase the liquidity of the Income portfolio
during the course of the year. Funds raised from the sales of relatively
illiquid investment company shares were reinvested in more liquid bond
instruments.
The sales of investment company holdings started in earnest in October 2007
when the FTSE 100 broke through 6700, a level some 3% shy of its all time high.
In the fourth quarter of 2007, we sold some �3 million of highly leveraged
ordinary income shares. The most notable realisations came from the wind-up of
Premier Pacific early in the new financial year and the disposal of Investors
Capital A to the Company for cancellation at 96.8p per A share. The market
price at 31 May 2008 was 86.25p.
The first quarter of 2008 was the worst quarter in global equity markets in
more than five years against a background of earnings downgrades and the
prospect of the US economy moving into recession. Problems within the banking
community were headline news, while retail investors witnessed falls in the
value of both their investment portfolios and residential property.
The FTSE 350 Higher Yield Capital Only Index fell 9.8% in January alone, and
closed the first quarter down 14.4%. In difficult market conditions we were
ongoing sellers of leveraged stocks raising some �3.7 million. The decision to
sell relatively illiquid highly leveraged stocks was vindicated by later market
conditions and share price falls. The balance of the portfolio was disposed of
in the latter weeks of the Company's life including our large stake in Acorn
Income Fund.
Overall exit prices 0.8% above the bid price or carried value of investment
company shares were achieved compared with a bid-offer spread of 3.2% on the
portfolio's holdings. To achieve exit prices around a quarter above the
prevailing bid price we believe is a satisfactory outcome against a difficult
market background.
In addition, as less liquid investment company holdings were being sold during
the year, the proceeds were used to buy certificates of deposit issued by
highly rated financial institutions at market rates much greater than the UK
base rate. This was achievable due to the money market turmoil during the year.
In fact rates approaching 6% were often achieved on cash balances during the
liquidation of the Income portfolio highlighting the benefits of effective cash
management.
Premier Fund Managers Limited
26 September 2008
Business Review
The business of the Company
The Company is an investment company in accordance with the provisions of
Section 833 of the Companies Act 2006. The Directors do not envisage any change
in the Company's activity in the future. A full description of the Company's
activities during the year under review is given in the Chairman's statement
and the Investment Adviser's and Manager's reports contained in the printed
annual report.
The principal activity of the Company is to conduct business as an investment
trust. The Company has received written approval from HM Revenue & Customs as
an authorised investment trust, under Section 842 of the Income and Corporation
Taxes Act 1988, for the year ended 31 May 2007. It is the opinion of the
Directors that the Company has subsequently directed its affairs so as to
enable it to continue to qualify for such approval and the Company will
continue to seek approval under Section 842 each year. The Company will retain
no more than 15% of its eligible investment income. The Company's shares are
qualifying investments for inclusion in ISAs.
The Company's status as an investment trust allows it to obtain an exemption
from paying taxes on the profits made from the sale of its investments.
Investment trusts offer a number of other advantages for investors, including
access to investment opportunities that might not be open to private investors
and to professional stock selection skills at low cost.
On incorporation, the planned wind-up date of the Company was 31 May 2008. On
30 May 2008 shareholders voted to extend the life of the Company for a further
three years. The Company's planned wind-up date is now 31 May 2011. As part of
the scheme to extend the Company's life that was approved by shareholders on 30
May 2008, the following changes to the structure and objective of the Company
were made:
* The Company's investment policy was updated. The full text of the Company's
investment policies before and after 30 May 2008 are set out in the printed
annual report and accounts.
* Changes to the capital structure, shareholder entitlements and voting
rights of the Company.
* The assets held within the Income portfolio were realised in full, leaving
the Company with a single portfolio comprised of certain assets previously
held within the US Growth portfolio.
Management of the Company
The Company's assets are managed by Premier Fund Managers and Premier Asset
Management (Guernsey) Limited. RENN Capital Group, Inc. acts as Investment
Adviser to the Company. Premier Fund Managers Limited is a subsidiary of
Premier Asset Management Limited, which manages a range of UK and offshore
funds and provides bespoke discretionary management services for both private
and corporate clients. RENN Capital Group is based in Dallas and has a
thirty-five year track record in identifying growth opportunities in US smaller
companies. As part of the scheme to extend the life of the Company, the terms
of engagement for the Investment Manager and the Investment Adviser were
amended via side letters.
Future of the Company
The decision to extend the Company's life for a further three years to 31 May
2011 was based on the belief that certain investments in the portfolio would
require a longer period of time to deliver potential value than the 30 May 2008
wind up date would allow; a number of the Company's investments have very poor
liquidity and others only trade on a matched bargain basis. The Board was also
concerned that the prevailing market conditions at 31 May 2008 would not offer
the best backdrop against which to make realisations. The portfolio will be
managed with a view to maximising the returns that will be available to
shareholders on 31 May 2011.
Payment of suppliers
It is the Company's payment policy to obtain the best possible terms for all
business and therefore there is no consistent policy as to the terms used. The
Company agrees with its suppliers the terms on which business will be
transacted and it is the Company's policy to abide by those terms. There were
trade creditors of �60,000 outstanding at the year end.
Going concern
The Directors are of the opinion that the Company has adequate resources to
continue in operational existence for the foreseeable future and accordingly
have adopted the going concern basis in preparing the financial statements.
Results and dividends
During the year, the following dividends were paid to holders of the Income
shares:
Payment date Pence
(net per Income share)
Third interim (2007) 15 June 2007 0.80
Fourth interim (2007) 17 August 2007 0.80
First interim (2008) 19 October 2007 0.80
Second interim (2008) 16 February 2008 0.80
Third interim (2008) 16 May 2008 0.80
Total 4.00
Subsequent to the year end, but in respect of the year ended 31 May 2008, the
Company paid a fourth interim dividend of 1.00p per Income share on 6 June
2008. This dividend relates to the year ended 31 May 2008 but, in accordance
with the Company's accounting policies, it is recognised in the period in which
it is paid.
Transactions in the Company's own shares
On 2 May, the Board wrote to shareholders to invite them to tender up to 50% of
their Income shares and up to 100% of their Zero Dividend Preference shares.
Tenders were received in respect of 13,326,113 Zero Dividend Preference shares
and 24,459,992 Income shares, leaving 25,210,008 Income shares in issue and
472,887 Zero Dividend Preference shares in issue. The authorities that were
granted to the Directors in connection with the purchase of shares under the
tender offers on 30 May 2008 will expire on 31 May 2009, unless they are
renewed prior to that time.
Subsequent to the year end, holders of the remaining Zero Dividend Preference
shares were given the opportunity to sell their shares to the Company for
cancellation via Cenkos Securities. As a result, the Company made the following
additional purchases of Zero Dividend Preference shares for cancellation:
Date Number of shares Price paid per share
20 June 2008 125,691 182.608p
7 July 2008 46,383 182.608p
22 July 2008 28,472 182.608p
24 July 2008 6,125 182.608p
30 July 2008 60,179 182.608p
The remaining 206,037 Zero Dividend Preference shares were de-listed on 31 July
2008.
On 30 May 2008, in addition to the authorities set out above, shareholders
granted the Company the authority to purchase up to 14.99% each of its issued
Income shares and Capital shares following the tender offers, being 3,778,980
Income shares and 7,495,000 Capital shares. As at the date of this report no
purchases of Income or Capital shares have been made using these authorities.
These authorities will only be utilised if the Board believes that purchases of
either Income shares or Capital shares will be in the best interests of the
Company and shareholders as a whole. In considering whether to exercise the
authority to make market purchases, the Board will take into account both the
longer term investment opportunities available to the Company and any discount
at which the shares are trading in the market relative to their net asset
value. These authorities will expire on 30 May 2009 or, if earlier, at the
conclusion of the Annual General Meeting of the Company in 2009. Shares
purchased by the Company pursuant to the authority to make market purchases
will be cancelled.
Principal risks associated with the Company
General
The market price of the shares may not fully reflect their underlying net asset
values. If stock market prices fall the potential returns available to
shareholders may decline. There can be no guarantee that the Company's
investment objectives will be achieved.
Zero Dividend Preference shares
Although the Zero Dividend Preference shares rank ahead of the Income shares
and the Capital shares for participation in a distribution of assets on the
winding-up of the Company, they rank behind the Company's liabilities.
Income shares
The Income shares rank for repayment after the Zero Dividend Preference shares.
Capital shares
The Capital shares rank for repayment after the other two classes of shares.
Due to the substantial gearing provided by the prior capital entitlements of
the Income shares, the Zero Dividend Preference shares and by any debt
financing, the market value of the Capital shares can be expected to be
volatile and particularly sensitive to changes in the value of the Company's
gross assets. Accordingly, the Capital shares should be considered to be a high
risk investment.
Smaller companies
The Company invests directly in smaller companies. As smaller companies do not
generally have the financial strength, diversity and resources of large
companies they may find it more difficult to overcome periods of economic slow
down or recession. In addition, the relatively small market capitalisation of
such companies may make the market in their shares less liquid. In the event
that smaller companies take a downturn, this may affect the performance of US
smaller companies in which the Company is invested.
Unlisted securities
The Company may invest in unlisted securities, or other securities, in which
there is no active market. In such cases it may be difficult to determine the
value of such securities and/or to realise the investment or to do so on
acceptable terms. There may be no certainty that a listing or trading facility
will be obtained for such securities. Holders of such securities may not have
the benefit of market rules designed for the protection of holders of listed or
public traded securities. This may include the absence of publicly available
information on such securities or their issuers.
Derivative risk
The Company's investment policy allows it to enter into derivative transactions
where the Investment Managers consider that it is prudent to do so in order to
protect the value of the Company's portfolio and is in the best interests of
the Company. Markets in derivatives can be highly volatile and such investments
carry a high risk of loss. In the case of certain derivatives a relatively
small adverse market movement may result not only in the loss of the original
investment but also in unquantifiable further loss exceeding any margin
deposited. Any such loss suffered by the Company may adversely affect the
Company's ability to meet the capital and income returns to shareholders.
Dividend levels
Dividends paid on the Company's Income shares rely on receipt of interest
payments and dividends from the securities in which the Company invests and
therefore dividend levels are likely to vary. The Board expects dividend
levels, if any, to be negligible or low.
Currency risk
The portfolio invests in US securities and its assets are therefore subject to
fluctuations in the US Dollar/ Sterling exchange rate and the Sterling value of
its assets, plus declines in US equity markets as a whole. The Board's current
policy is not to engage in an active programme of hedging the Dollar risk in
the portfolio. However, bearing in mind that the final redemption payment will
be a Sterling payment made to Income shareholders at 31 May 2011, the Board
will look at taking advantage of any future Dollar strength versus Sterling by
hedging some or all of the Dollar exposure into Sterling in those
circumstances.
Liquidity risk
A significant proportion of the portfolio is held in smaller and unquoted
companies. Such companies are inherently higher in risk and lower in liquidity
than, for example, blue-chip equities. Unlisted companies have the additional
risk of not benefiting from market rules designed to protect investors. Some of
the investments are in unlisted convertible bonds or preference shares, which
may at any time be converted into a listed common stock, giving an effective
level of liquidity equal to the liquidity in the common stock. Other unlisted
investments do not have the option of converting into a listed stock. This
issue is particularly relevant regarding the new wind-up date of the Company.
Credit risk
The portfolio may contain some fixed income securities. However, many of these
are convertible into common stock (equity). The benefit of a convertible
debenture is that, if a portfolio company becomes troubled, the Company is
protected through its position as a creditor. If the underlying portfolio
company performs well, the Company can participate in the upside by converting
into common stock. However, it is possible that such investee companies might
default on these debentures or wind-up prior to their repayment.
Market price risk
Since the Company invests in financial instruments, market price risk is
inherent in these investments.
Discount volatility
The Company itself, being a closed-end fund, may trade at a discount to its net
asset value. The magnitude of this discount fluctuates daily and can vary
significantly. Thus, for a given period of time, it is possible that the market
price could decrease despite an increase in the Company's net asset value. The
Company is seeking to extend its existing authority to purchase Income and
Capital shares for cancellation from shareholders at the forthcoming AGM. If
granted, the Directors will consider using share buybacks to control the
Company's discount levels.
Compliance with Section 842 of the Income and Corporation Taxes Act
If the Company did not comply with the provisions of Section 842, it would lose
its investment trust status. In order to minimise this risk, the Directors, the
Investment Managers, the Investment Adviser and the Company Secretary monitor
the Company's compliance with the key criteria of Section 842 on a monthly
basis. On a quarterly basis, compliance with these provisions is discussed in
detail between the Board, the Investment Managers and the Investment Adviser.
Risks associated with the engagement of third parties
There are a number of potential operational risks associated with the fact that
third parties undertake the Company's administration and custody of assets.
Most seriously, there is the risk that third parties could fail to ensure that
statutory requirements, such as the Companies Act and the FSA's Listing Rules,
are complied with. Details of how these risks are managed are included below
under `Internal control process'.
Internal control process
The Directors acknowledge that they are responsible for the Company's systems
of internal control and for reviewing their effectiveness. An ongoing process,
in accordance with the guidance of the FRC "Internal Control: Revised Guidance
for Directors on the Combined Code", has been established for identifying,
evaluating and managing risks faced by the Company. This process has been in
place throughout the year and up to the date the financial statements were
approved. Key procedures established with a view to providing effective
financial control have been in place for the full financial year and up to the
date the financial statements were approved. No significant failings or
weaknesses within the Company's internal controls were identified.
The risk management process and systems of internal control are designed to
manage rather than eliminate the risk of failure to achieve the Company's
objectives. It should be recognised that such systems can only provide
reasonable and not absolute assurance against material misstatement or loss.
The risk assessment and review of the effectiveness of the Company's system of
internal controls is undertaken by the Audit Committee in the context of the
overall investment objective. The review covers the key business, operational,
compliance and financial risks facing the Company. In arriving at its judgement
of what risks the Company faces, the Audit Committee has considered the
Company's operations in the light of the following factors:
* The nature and extent of risks which it regards as acceptable for the
Company to bear within its overall business objective;
* The Company's ability to reduce the incidence and impact of risk on its
performance; and
* The cost to the Company and benefits related to the Company and third
parties operating the relevant controls.
Against this background, in the review of risk and associated controls the
Board has split the review into five sections reflecting the nature of the
risks being addressed. These are: corporate strategy; published information;
compliance with laws and regulations; relationship with service providers and;
investment and business activities.
Given the nature of the Company's activities and the fact that most functions
are subcontracted, the Directors have obtained information from key third party
suppliers regarding the controls operated. To enable the Board to make an
appropriate risk and control assessment the information and assurances sought
from third party suppliers include the following:
* Details of the control environment operated by the third party suppliers;
* Identification and evaluation of risks and control objectives by third
party suppliers;
* Assessment of the communication procedures with third party suppliers; and
* Assessment of the control procedures operated by third party suppliers.
The key procedures which have been established to provide effective internal
control are as follows:
* Investment management is provided by Premier Asset Management (Guernsey)
Limited and Premier Fund Managers Limited, who are advised by RENN Capital
Group, Inc. The Board is responsible for setting the overall investment
policy and monitors the actions of the Investment Managers and Investment
Adviser at regular Board meetings;
* Administration and company secretarial duties for the Company are performed
by Capita Sinclair Henderson Limited;
* Custody of assets is undertaken by Frost National Bank Inc. and HSBC Bank
plc;
* The duties of investment management, administration and the custody of
assets are segregated. The procedures of the individual parties are
designed to complement one another;
* The non-executive Directors of the Company clearly define the duties and
responsibilities of their agents and advisers. The appointment of agents
and advisers is conducted by the Board after consideration of the quality
of the parties involved; the Board monitors their ongoing performance and
contractual arrangements;
* Mandates for authorisation of investment transactions and expense payments
are set by the Board; and
* The Board reviews financial information produced by the Investment
Managers, the Investment Advisers and the Administrator in detail on a
regular basis.
Analysis of the Company's performance and position
In order to provide shareholders with a clear understanding of the Company's
performance and position, this section of the business review will consider how
the Company has performed against the following key performance indicators:
1. The assessment of the value added through the portfolio by comparing
performance before the impact of expenses against relevant benchmarks.
2. The performance of the Company's total assets after all expenses (including
bank interest) have been charged. This measure includes the cost of gearing
but will not reflect the benefit of the gearing that will arise if total
assets are rising.
3. The performance of the Company at the net asset level. This shows how
shareholders' funds as a whole have performed and includes the cost of bank
interest, but also the impact of the gearing provided by bank debt. If
gross assets have grown by a greater amount than the cost of management and
bank interest, returns to shareholders will have been enhanced by the
gearing. If total assets have declined the gearing will accelerate that
decline in net assets.
4. The performance of the individual share classes, both in terms of share
price total return (ie accounting for dividends received) and in terms of
net asset value total return. The share price performance is the measure of
the return that shareholders have actually received and will reflect the
impact of widening or narrowing of discounts to NAV.
Sub-portfolio performance for the year
* US Growth portfolio
The US Growth portfolio was invested principally in US assets and is managed by
Premier Asset Management (Guernsey) Limited as advised by the Company's
Investment Adviser, RENN Capital Group Inc., based in Dallas, Texas. The
management of the portfolio during the second half of the year was driven by
the need to prepare for a possible wind-up of the Company on 31 May 2008. Sales
were made to repay the bank debt during December and January and further cash
raising was required during height of the credit crunch in the first quarter of
2008. The cost of liquidating the portfolio was certainly a factor in
restricting returns to shareholders over the year.
* Income portfolio
During the year, the Income portfolio was invested in bonds, reverse
convertible bonds and investment company shares. Over the course of the year,
less liquid assets were sold and reinvested in bonds and cash instruments
allowing the portfolio to be fully liquidated by the year end. As at 31 May
2008, there were no assets held within the Income portfolio.
* Company's performance
Over the year, the Company's assets depreciated, not only as a result of market
forces, but as bank debt was repaid and the Company's portfolios were
liquidated in preparation for either a wind-up at 31 May 2008 or for an
extension of life with a tender for the Zero Dividend Preference shares or
Income shares on this date. On 31 May 2007, the Company's gross assets were �
119.9 million, falling to �20.9 million on 31 May 2008 (post tenders).
* Share price performance
During the year, the Zero Dividend Preference share price rose 6.3%. The
predetermined accrual rate on the ZDPs meant that the NAV rose by 8.8%. The
Income share price fell 11.3% whilst the NAV of these shares fell 13.8%
reflecting the predetermined accrual rate on the Income shares and the change
in revenue reserve. The Capital shares' NAV fell from 22.68p to zero over the
course of the year and the share price fell from 15.50p to 4.63p.
Future developments and events subsequent to the year end
The Directors are aware of the AIC/JPMorgan Claverhouse judgement which was
made during 2007 regarding the charging of VAT on investment management fees.
It is possible that the Company will be able to recover during the forthcoming
year an amount of VAT that it has paid on its investment management fees
although the Directors do not believe that any such recoverable sums will be of
a material amount.
All significant events that have occurred since the year end are detailed in
the above business review.
Financial Summary
31 May 31 May % Premium/
2008 2007 change (discount)
31 May
2008
10%
Capital
Assets attributable to 19,149 84,958 (77.46)
shareholders (�'000)
Assets attributable to 68,680 84,958 (19.16)
shareholders (�'000)*
Gross assets (�'000) 20,920 119,948 (82.56)
Gross assets (�'000)*** 70,451 119,948 (41.27)
Net assets value per Zero 182.61p 167.80p 8.83
Dividend Preference share ***
Mid-market price per Zero 180.25p 169.50p 6.34 (1.29)
Dividend Preference share
Net asset value per Income share* 87.54p 101.60p (13.84)
**
Mid-market price per Income share 82.25p 92.75p (11.32) (6.04)
Net asset value per Capital share 0.00p 22.68p (100.00)
***
Mid-market price per Capital 4.63p 15.50p (70.13) -
share
Net asset value per Unit*** 87.54p 124.28p (29.56)
(1 Capital share and 1 Income
share)
Mid-market price per Unit 86.00p 106.75p (19.44) (1.76)
Year to Year to %
31 May 31 May change
2008 2007
Revenue
Return per Income share 1.40p 2.89p (51.56)
Net dividend paid per Income share 4.00p 3.10p 29.03
* Assets attributable to shareholders excluding the cost of buying back 49.24%
of the Income shares at �1.00 per share and costs relating to the tender offer
of �493,000.
** Total assets less current liabilities (excluding bank loan, the cost of
buying back 49.24% of the Income shares at �1.00 per share and costs relating
to the tender offer of �493,000).
*** Net asset values calculated in accordance with Articles of Association and
excluding all costs relating to the tender offers.
Statement of Directors' Responsibilities
In respect of the financial statements
The Directors are responsible for preparing the annual report and the financial
statements in accordance with applicable law and regulations. Company law
requires the directors to prepare financial statements for each financial year.
Under that law the Directors have elected to prepare financial statements in
accordance with United Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice). The financial statements are required by law to
give a true value and fair view of the state of affairs of the Company and of
the profit or loss of the Company for that period. In preparing these financial
statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable and prudent;
* state whether applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the financial statements;
and
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The Directors, to the best of their knowledge, state that:
* the financial statements, prepared in accordance with UK Accounting
Standards, give a true and fair view of the assets, liabilities, financial
position and profit of the Company; and
* the Directors' report includes a fair review of the development and
performance of the business and the position of the Company together with a
description of the principle risks and uncertainties that it faces.
The Directors are responsible for keeping 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 responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
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.
Independent Auditor's Report
The Company's financial statements for the year ended 31 May 2008 have been
audited by Grant Thornton UK LLP. The text of the Auditor's report can be found
in the Company's annual report and accounts at www.premierassetmanagement.co.uk
.
Income Statement
for the year ended 31 May 2008
Year ended 31 May 2008 Year ended 31 May 2007
Note Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
(Losses)/gains on 9 - (14,943) (14,943) - 3,703 3,703
investments at fair value
through profit or loss
Income 2 2,486 1 2,487 3,477 100 3,577
Investment management fee 3 (360) (841) (1,201) (474) (1,106) (1,580)
Other expenses 4 (544) (15) (559) (555) - (555)
Exchange gains/(losses) on - 58 58 - (1,037) (1,037)
capital items
Gains on derivatives at 14 - 876 876 - 1,668 1,668
fair value through profit
or loss
Net return before finance 1,582 (14,864) (13,282) 2,448 3,328 5,776
costs and taxation
Finance costs
Interest payable and 5 (301) (702) (1,003) (590) (1,376) (1,966)
similar charges
Tender offer costs (247) (246) (493) - - -
Appropriations in respect - (2,148) (2,148) - (1,965) (1,965)
of:
Zero Dividend Preference
shares
Income shares 7 (693) (1,351) (2,044) (1,435) (1,313) (2,748)
Capital shares - 18,975 18,975 - 928 928
Return on ordinary 341 (336) 5 423 (398) 25
activities before taxation
Taxation on ordinary 6 (341) 336 (5) (423) 398 (25)
activities
- - - - - -
Return per share (FRS 25 pence pence pence pence pence pence
basis)
Capital share 8 - (37.95) (37.95) - (1.86) (1.86)
Income share 8 1.40 2.72 4.12 2.89 2.64 5.53
Zero Dividend Preference 8 - 15.61 15.61 - 14.24 14.24
Unit (1 Capital and 1 Income) 8 1.40 (35.23) (33.83) 2.89 0.78 3.67
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue return and capital return columns have been
prepared in accordance with the AIC's SORP. Revenue and capital return per
share figures shown below are also supplementary information.
All revenue and capital items in the above statement derive from continuing
operations. There are no recognised gains or losses other than those passing
through the Income statement.
Statement of Movements In Net Assets Attributable To Shareholders
for the year ended 31 May 2008
Year ended Year ended
Note 31 May 2008 31 May 2007
�'000 �'000
Net assets attributable to shareholders at 84,958 82,713
the start of the year
Appropriations to shareholders
Zero Dividend Preference shares 2,148 1,965
Income shares 2,044 2,748
Capital shares (18,975) (928)
(14,783) 3,785
Dividends paid to Income shareholders 7 (1,987) (1,540)
Repurchase of shares (including related (49,039) -
costs)
Net assets attributable to shareholders at 19,149 84,958
year end
Balance Sheet
as at 31 May 2008
31 May 2008 31 May 2007
Note �'000 �'000
Fixed assets
Investments held at fair value through 9 16,899 110,712
profit or loss
Derivatives at fair value through profit or 14 - 1,941
loss
16,899 112,653
Current assets
Debtors 11 2,432 1,325
Cash at bank 51,324 6,479
53,756 7,804
Creditors - amounts falling due within one
year
Creditors 12 49,735 509
Bank loan 13 1,771 34,990
Net assets attributable to shareholders 15 - 84,958
51,506 120,457
Net current (liabilities)/assets 2,250 (112,653)
Total assets less current liabilities 19,149 -
Creditors - amounts falling due after more
than one year
Net assets attributable to shareholders 15 19,149 -
- -
Net asset value per share: pence pence
- Capital shares 15 - 23.37
- Income shares 15 72.53 101.13
- Zero Dividend Preference shares 15 182.61 167.00
- Units 15 72.53 124.50
These financial statements were approved by the Board of Directors on 29
September 2008 and signed on its behalf by:
Duncan Abbot
Chairman
Statement of cash flows
for the year ended 31 May 2008
Year ended Year ended
31 May 2008 31 May 2007
Note �'000 �'000
Operating activities
Investment income received 2,014 2,268
Deposit interest received 436 766
Investment management fees paid (1,283) (1,532)
Secretarial fees paid (92) (89)
Other cash payments (507) (394)
Net cash inflow from operating activities 18 568 1,019
Servicing of finance
Interest paid (989) (1,958)
Non-equity dividends paid (Income shares) (1,987) (1,540)
Net cash outflow from servicing of finance (2,976) (3,498)
Capital expenditure and financial
investment
Purchase of investments (131,984) (96,447)
Sales of investments 209,617 93,406
Net cash inflow/(outflow) from capital 77,633 (3,041)
expenditure and financial investment
Net cash inflow/(outflow) before financing 75,225 (5,520)
Financing
Loan repayment (32,078) -
Revolving credit facility drawdown 1,771 -
Financing costs (108) -
Tender offer costs (38) -
Net cash outflow from financing (30,453) -
Net cash inflow/(outflow) after financing 44,772 (5,520)
Increase/(decrease) in cash 20 44,772 (5,520)
Notes to financial statements
for the year ended 31 May 2008
1. ACCOUNTING POLICIES
Accounting convention
The financial statements are prepared under the historical cost convention
except for the measurement at fair value of fixed asset investments and are
prepared in accordance with applicable law and Accounting Standards in the
United Kingdom (`UK GAAP') and in accordance with the Statement of Recommended
Practice "Financial Statements of Investment Trust Companies" (`SORP') issued
by the Association of Investment Companies in January 2003 and revised in 2005.
Dividends
Interim dividends are accounted for in the period when they are paid and final
dividends are accounted for when approved by the shareholders.
Investments
Investments have been designated by the Board as held at fair value through
profit or loss and accordingly are valued at fair value. As the entity's
business is investing in financial assets with a view to profiting from their
total return in the form of interest, dividends or increases in fair value,
quoted equities and fixed income securities are designated as fair value
through profit or loss on initial recognition. The entity manages and evaluates
the performance of these investments on a fair value basis in accordance with
its investment strategy and information about the portfolio is provided
internally on this basis to the Board.
Investments are recognised and derecognised on the trade date where a purchase
or sale is under a contract whose terms require delivery within the time frame
established by the market concerned, and are initially measured at fair value.
Fair value is defined as the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable willing parties in an arm's length
transaction. In arriving at fair value, accounting standards require that bid
prices are used where they are readily and regularly available from an
exchange. The Board considers that for the majority of the Company's US quoted
investments, reliable bid prices are not readily and regularly available and
have therefore used the price of the most recent transaction in the investment.
The Board believes this provides a more accurate valuation of the current fair
value having adjusted for significant changes in economic circumstances since
the time of the transaction.
Unquoted investments are valued by the Directors as follows:
* Unquoted equity investments are included at fair value based on latest
dealing prices, stockbroker valuations, net asset values or other information,
as appropriate. This valuation incorporates all factors that market
participants would consider in setting a price.
* Unquoted convertible debenture investments are valued by reference to the
fair value of the underlying equity of the investment. Cost is used where no
market price for the underlying equity is available or where the market price
is less than cost.
* Unquoted loan notes are valued at fair value
* Unquoted convertible preferred stock is valued at the closing last traded
price of the common stock. If the preferred stock is redeemable, the preferred
stock is valued at the greater of cost or market price.
* Unquoted warrant investments are valued at fair value using the Black Scholes
methodology, which includes a time value which is calculated and added to the
intrinsic value to arrive at a total valuation for each warrant. The
application of the Black Scholes methodology requires certain assumptions to be
made on the volatility of the underlying shares to which the warrants
subscribe.
Derivatives
The Company uses derivative financial instruments. These derivatives are
classified as `fair value through profit or loss' and movements in the fair
value of these derivatives are recorded through the Income statement.
Shareholders' funds
Due to the Company having a fixed life, the Zero Dividend Preference shares,
Income shares and Capital shares are all classified under FRS 25 as financial
liabilities rather than as equity in the Balance sheet. This is purely
presentational and has no effect on the Company's net assets per share or
returns per share as calculated. The finance costs relating to these shares are
charged to the Income statement using the Effective Interest Rate method.
Income recognition
Dividends receivable on quoted equity shares are brought into account on the
ex-dividend date. As prescribed in FRS 16: Current tax, UK dividends are
disclosed excluding the associated tax credit. Dividends receivable on equity
shares where no ex-dividend date is quoted are brought into account when the
Company's right to receive payment is established;
Income arising on fixed interest securities (including reserves convertible
bonds) is recognised on a time apportionment basis so as to reflect the
effective interest rate on that security;
The ordinary element of stocks received in lieu of dividends is recognised as
income of the Company. Any enhancement above the equivalent value of the cash
dividend that would have been receivable is treated as a capital gain on the
associated investment.
* Underwriting commission is recognised as income in so far as it relates to
the shares the Company is not required to take up. Where the Company is
required to take up shares underwritten the commission received is treated as a
deduction from the cost of shares. The balance is taken to income in the Income
statement for the Company; and
* Interest receivable is included on an accruals basis.
Expenditure
All expenses are accounted for on an accruals basis. All expenses are charged
in full to the revenue column in the Income statement except as follows;
* Transaction costs incurred on the purchase and sale of investments are
charged through the capital column of the Income statement;
* Issue costs associated with the bank loan are being amortised over the life
of the facility in accordance with FRS 26; and
* Expenses are allocated between capital and revenue where a connection with
the maintenance or enhancement of the value of the investments can be
demonstrated. In respect of the investment management fees, debit interest and
loan arrangement fees, 70% has been allocated to capital and 30% to revenue in
the Income statement, as stated in the prospectus at the time of the Company's
inception. The investment management performance fee when payable is charged,
in total, to the capital column of the Income statement.
Taxation
The charge for taxation is based on the net revenue for the year.
Full provision for deferred taxation is made under the liability method on all
timing differences that have arisen but not reversed by the Balance sheet date
in accordance with FRS 19: Deferred Taxation. Deferred tax assets are
recognised to the extent that is regarded as more likely than not that they
will be recovered. Timing differences arise from the inclusion of items of
income and expenditure in tax computations in periods different from those in
which they are included in the accounts. Provision is made at the average tax
rates that are expected to apply in the periods when the timing differences are
expected to reverse, based on tax rates and laws that have been enacted or
substantially enacted by the Balance sheet date. Deferred tax is measured on a
non-discounted basis. The tax effect of different items of expenditure is
allocated between revenue and capital on the same basis as the particular item
to which it relates. Tax relief on expenses is allocated between revenue and
capital using the marginal basis in accordance with the SORP.
Foreign currency transactions
The currency of the primary economic environment in which the Company operates
(the functional currency) is Pounds Sterling. The presentation currency is
Pounds Sterling.
Transactions denominated in foreign currencies are translated into Sterling at
the rate of exchange ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the period end are reported at
the rates of exchange prevailing at the period end. A gain or loss arising from
a change in exchange rates subsequent to the date of the transaction is
included as an exchange gain or loss in the capital column or in the revenue
column of the Income statement depending on whether the gain or loss is of a
capital or revenue nature respectively.
Finance costs
The Directors have allocated 100% of the appropriation relating to the capital
entitlement of Zero Dividend Preference shares and Income shares to capital.
Accordingly a redemption reserve has been set up to provide for the capital
repayment entitlements attached to the Zero Dividend Preference shares and
Income shares which accrue to the date of the Company's winding-up on 31 May
2011. On a winding-up of the Company the Zero Dividend Preference shares were
entitled to a capital repayment of 100.00p per share as at 12 April 2001,
increasing on a daily basis by approximately 8.8% p.a. compounded annually to
give a final capital entitlement of 182.608201p on 31 May 2008. This amount
shall not increase until payment is made on 31 May 2011. The income shares are
entitled to a capital repayment of 85.00p increased on the last day of each
calendar month to give a capital entitlement of 100.00p on 31 May 2008 and then
from 1 June 2008 to 31 May 2011 increased at a daily compound rate so as to
give a final capital entitlement of 120.82p on 31 May 2011.
The Income shares are entitled to the revenue reserves of the Company. The
revenue return for the year is treated as an appropriation and is analysed in
note 7 between dividends paid in the year and residual returns.
The Capital shares are entitled to all surplus assets of the Company after
repayment of the bank facility and after the pre-determined capital
entitlements of the Zero Dividend Preference shares and the Income shares have
been satisfied.
2. INCOME
Year ended Year ended
31 May 2008 31 May 2007
�'000 �'000
Income from investments designated at fair value
through profit or loss
UK net dividend income 277 559
Overseas unfranked investment income 1,764 2,177
2,041 2,736
Other income
Bank interest receivable 445 741
445 741
Total income 2,486 3,477
Total income comprises:
Dividends from investments designated at fair value 621 1,320
through profit or loss
Interest from investments designated at fair value 1,420 1,416
through profit or loss
Deposit interest from financial assets not at fair 445 741
value through profit or loss
2,486 3,477
Income from investments:
Listed UK 277 559
Listed overseas 1,329 1,261
Unlisted overseas 435 916
2,041 2,736
3. INVESTMENT MANAGEMENT FEE
Year ended 31 May 2008 Year ended 31 May 2007
Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
Investment management fee 359 839 1,198 471 1,098 1,569
Irrecoverable VAT thereon 1 2 3 3 8 11
360 841 1,201 474 1,106 1,580
Under the terms of the previous Investment Management Agreements, the
Investment Manager was entitled to a fee, payable monthly in arrears at the
rate of 0.0147% (plus VAT0 per month, of the gross assets less current
liabilities of the Income portfolio, reduced by the value of investments held
in companies managed by Premier, plus 0.125% per month of the gross assets less
current liabilities of the US Growth portfolio. A performance fee was not
payable for the year ended 31 May 2008 (2007: �nil). Further information
regarding the investment management fees from 1 June 2008 is detailed in the
report of the Directors.
At 31 May 2008 there were amounts outstanding of �101,000 (2007: �181,000) VAT
is no longer payable on the Investment Managers fees or performance fees.
4 OTHER EXPENSES
Year ended 31 May 2008 Year ended 31 May 2007
Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
Administrative & 108 - 108 106 - 106
Secretarial fee
Directors' remuneration 68 - 68 68 - 68
Auditors' remuneration for 31 - 31 22 - 22
audit services
Other expenses 366 15 381 387 - 387
VAT recoverable (29) - (29) (28) - (28)
Total other expenses 544 15 559 555 - 555
5 INTEREST PAYABLE AND SIMILAR CHARGES
Year ended 31 May 2008 Year ended 31 May 2007
Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
On bank loan 298 695 993 587 1,369 1,956
Amortisation of loan 3 7 10 3 7 10
facility costs
301 702 1,003 590 1,376 1,966
6 TAXATION
Year ended 31 May 2008 Year ended 31 May 2007
Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
Analysis of charge for
year:
Corporation tax - - - - - -
Overseas tax not 5 - 5 25 - 25
recoverable
Tax relief attributable to 336 (336) - 398 (398) -
capitalised expenses
341 (336) 5 423 (398) 25
Factors affecting tax charge for the year
The tax assessed for the year differs from the standard rate of corporation tax
in the United Kingdom (30% to 31 March 2008, 28% from 1 April 2008). The
differences are explained below:
Year ended 31 May 2008 Year ended 31 May 2007
Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
Return on ordinary 1,034 (15,812) (14,778) 1,858 1,952 3,810
activities after interest
payable and tender offer
costs but before
appropriations
Return on ordinary 307 (4,691) (4,384) 557 586 1,143
activities multiplied by
the standard rate of
corporation tax in the
United Kingdom (30%/28%)
Effects of the non-taxable
items
UK franked investment (82) - (82) (167) - (167)
income
(Losses)/gains on - 4,194 4,194 - (1,301) (1,301)
investments, exchange
gains on capital items and
movement on fair value of
derivative financial
instruments
Unrelieved capital - 88 88 - 317 317
expenses
Expenses not deductible 111 73 184 8 - 8
for tax
Marginal relief
Overseas tax not 5 - 5 25 - 25
recoverable
Current tax charge for the 341 (336) 5 423 (398) 25
year
At 31 May 2008 the Company had unrelieved management expenses of �5,966,000 (31
May 2007: �5,671,000). It is unlikely that the Company will generate sufficient
taxable income in the future to use these expenses to reduce future tax charges
and therefore no deferred tax asset has been recognised.
7. APPROPRIATIONS IN RESPECT OF INCOME SHARES
Appropriations in the revenue column of the Income statement in respect of
Income shares are split between dividends paid in the year and the remaining
balance of the revenue account for the year.
Year ended Year ended
31 May 2008 31 May 2007
�'000 �'000
Dividends 1,987 1,540
Residual balance of revenue account (1,294) (105)
Total appropriations in respect of Income 693 1,435
shares
Dividends are comprised as follows:
Relating to prior period
Third interim paid of 0.80p net (2006: 0.70p) 397 348
Fourth interim paid of 0.80p net (2006: 397 397
0.80p)
794 745
Relating to current period
First interim paid of 0.80p net (2007: 0.80p) 397 397
Second interim paid of 0.80p net (2007: 398 398
0.80p)
Third interim paid of 0.80p net (2007: nil) 398 -
1,987 1,540
In addition a fourth interim dividend of 1.00p (2007: 0.80p) per share was paid
on 6 June 2008. This dividend relates to the year ended 31 May 2008 but in
accordance with the Company's accounting policies and FRS 21 they are
recognised in the period in which they are paid.
Appropriations in the capital column of the Income statement are calculated as
discussed in note 8 and amounted to:
8. RETURN PER SHARE
Year ended 31 May 2008 Year ended 31 May 2007
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
Return per share (FRS 25
basis)
Capital share - (37.95) (37.95) - (1.86) (1.86)
Income share 1.40 2.72 4.12 2.89 2.64 5.53
Zero Dividend Preference - 15.61 15.61 - 14.24 14.24
share
Unit (1 Capital, 1 Income) 1.40 (35.23) (33.83) 2.89 0.78 3.67
Capital shares
The return per Capital share is based on appropriations for the year of �
(18,975,000) (2007: �(928,000)) and on 50,000,000 (2007: 50,000,000) Capital
shares.
Income shares
The revenue return per Income share is based on revenue appropriations of �
693,000 (2007: �1,435,000) and on 49,603,169 (2007: 49,670,000) Income shares
being the weighted average number of shares in issue during the year. The
capital return per Income share is based on capital appropriations of �
1,351,000 (2007: �1,313,000) and on 49,603,169 (2007: 49,670,000) Income shares
being the weighted average number of shares in issue during the year. The
capital return per Income share is based on an effective interest rate from 12
April 2001 of approximately 2.79%.
The redemption yield is contingent on the Company having sufficient assets at
the time of redemption.
Zero Dividend Preference shares
The return per Zero Dividend Preference share is based on appropriations of �
2,148,000 (2007: �1,965,000) and on 13,762,590 (2007: 13,799,000) being the
weighted average number of Zero Dividend Preference shares in issue during the
year. The return per Zero Dividend Preference share is based on an effective
interest rate from 12 April 2001 of approximately 8.8%.
The return per share based on the allocation of available assets in the event
of a return of capital in accordance with the Articles of Association was:
Year ended 31 May 2008 Year ended 31 May 2007
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
Return per share
(Articles)
Capital shares - (22.68) (22.68) - (1.23) (1.23)
Income shares 1.40 (12.45) (11.05) 2.89 2.20 5.09
Zero Dividend Preference - 14.81 14.81 - 13.57 13.57
shares-
Unit (1 Capital, 1 Income) 1.40 (35.13) (33.73) 2.89 0.97 3.86
The return per share calculated in accordance with the Articles of Association
differs from that calculated in accordance with FRS 25 due to the amortisation
of share issue costs and assets available for distribution in the event of a
return of capital.
During the year ended 31 May 2008 the value of share issue costs amortised in
calculating the return per Zero Dividend Preference share under FRS 25 was �
110,000 (2007: �92,000).
During the year ended 31 May 2008 the value of share issue costs amortised in
calculating the return per Income share under FRS 25 was �232,000 (2007: �
220,000). The shortfall in assets available for a return of capital amounted to
�7,293,000 (2007: �nil).
9 INVESTMENTS
As at As at
31 May 2008 31 May 2007
�'000 �'000
Investment portfolio summary
Listed investments on a recognised 8,098 97,050
international exchange
Unlisted investments with conversion rights 4,377 9,197
into listed investments
Other unlisted investments 4,424 4,465
Investments at fair value 16,899 110,712
Listed Unlisted Other Total
investments investments unlisted
*
investments
with
conversion
rights into
listed
investments
�'000 �'000 �'000 �'000
Analysis of investment portfolio
movements
Opening book cost 79,581 8,403 5,941 93,925
Opening unrealised appreciation 16,718 794 (725) 16,787
Opening valuation 96,299 9,197 5,216 110,712
Movements in the year:
Purchases at cost 127,218 1,495 2,323 131,036
Sales:
Proceeds (205,125) (2,837) (1,944) (209,906)
Realised gains/(losses) on sales 10,670 617 (16) 11,271
Movement in unrealised (20,964) (4,095) (1,155) (26,214)
appreciation
Closing valuation 8,098 4,377 4,424 16,899
Analysis of investment portfolio
movements
Closing book cost 12,344 7,678 6,304 26,326
Closing unrealised depreciation (4,246) (3,301) (1,880) (9,427)
8,098 4,377 4,424 16,899
2008 2007
�'000 �'000
Analysis of capital gains
Realised gains on sales 11,271 11,935
Decrease in unrealised appreciation (26,214) (8,232)
(Losses)/gains on investments (14,943) 3,703
Transaction costs incidental to the acquisitions of investments totalled �
19,000 (2007: �36,000) and disposals of investments totalled �393,000 (2007: �
107,000) for the year. These amounts are included in gains on investments, as
disclosed in the Income statement.
* The Company is entitled to exercise these conversion rights at any time.
Total Fair Fair Last Aggregate Profit/ Net income
cost value value (loss)
accounts capital from
31 May 31 May and after
2008 2007 period tax investment
end reserves for year
Investment �'000 �'000 �'000 US$m US$'000 �'000
Anchorfree
convertible 287 56 450 15/06/ 0.8 (2.4) -
preference 2008
Asian
Financial
common stock 400 379 758 31/03/ 85.8 23.5 -
2008
warrants - 12 31/03/ 85.8 23.5 -
2008
Asset Capital
common stock 561 328 516 31/03/ 85.8 (4.0) -
2006
Aurasound
warrants - 15 - 31/03/ 19.8 (8.7) -
2008
BPO Management
Services
convertible 1,255 337 - 31/03/ 15.5 (6.8) -
preference 2008
warrants - 79 - 31/03/ 15.5 (6.8) -
2008
CaminoSoft
promissory 136 126 126 31/03/ (3.5) (0.6) 9
note 2008
promissory 51 51 51 31/03/ (3.5) (0.6) 4
note 2008
convertible 1,088 109 281 31/03/ (3.5) (0.6) 53
debenture 2008
Celsia
Technologies
convertible 228 6 31 31/03/ (1.9) (16.5) -
preference 2008
China
Greenscape
preference 382 380 - 31/12/ 24.1 17.3 -
2007
Cover-All
Technologies
warrants - 18 23 31/03/ 3.2 1.7 -
2008
eOriginal
Holdings*
preferred 410 177 230 31/12/ (4.2) (4.7) -
series B 2007
preferred 456 169 256 31/12/ (4.2) (4.7) -
series C 2007
new preferred 444 344 412 31/12/ (4.2) (4.7) -
series C 2007
preferred 622 580 330 31/12/ (4.2) (4.7) -
series D 2007
warrants - 15 65 31/12/ (4.2) (4.7) -
2007
Global Axcess
Promissory 555 506 505 31/03/ 12.3 0.4 45
note 2008
Heyspace
preference 380 379 - 31/12/ 18.9 7.0 -
2007
iLinc
Communications
convertible 352 253 253 32/03/ 4.0 (2.2) 30
debenture 2008
convertible 186 68 222 31/03/ 4.0 (2.2) 12
preference 2008
Integrated
Security
Systems
promissory 858 747 746 31/03/ (11.4) (3.6) 59
note 2008
Total Carrying Carrying Last Aggregate Profit/ Net income
cost value value (loss)
accounts capital from
31 May 31 May and after
2008 2007 period tax investment
end reserves
for year
Investment �'000 �'000 �'000 US$m US$'000 �'000
convertible 820 759 758 31/03/ (11.4) (3.6) 76
debenture 2008
convertible 558 532 531 31/03/ (11.4) (3.6) 31
debenture 2008
convertible 318 253 253 31/03/ (11.4) (3.6) 18
debenture 2008
Inyx
warrants - - 100 30/09/ (38.9) (37.1) -
2006
Narrowstep
warrants - 61 - 31/05/ 4.4 (13.9) -
2008
Obsidian
Enterprise
convertible 100 71 109 31/10/ (22.6) (10.7) 3
debenture 2005
OneLink
Corporation
convertible 273 - 4 30/06/ (4.2) (10.8) 25
promissory note 2006
Petrohunter
convertible 240 320 - 31/03/ 105.1 (44.2) -
debenture 2008
warrants - 263 - 31/03/ 105.1 (44.2) -
2008
Pipeline Data
convertible 826 759 758 31/03/ 15.3 (2.0) 60
debenture 2008
warrants - 14 100 31/03/ 15.3 (2.0) -
2008
Ronco
convertible 640 7 13 31/12/ 4.3 (53.8) -
preference 2006
Simtek
convertible 459 354 1,112 31/03/ 16.9 (4.7) 26
debenture 2008
warrants - 12 36 31/03/ 16.9 (4.7) -
2008
Symbollon
Pharmaceuticals
warrants - 6 42 31/03/ 0.5 (3.1) -
2008
Terra Nova
Financial Group
warrants - 6 126 31/03/ 32.7 2.8 -
2008
Vertical
Branding
warrants - 10 - 31/03/ 2.9 (5.5) -
2008
* eOriginal holdings is a technology company with patented technology for
creating and sorting legal documents in computer form. The Company has
introduced its software in the automobile finance vertical market and is
pursuing additional vertical markets such as mortgage lending. Proportion of
capital owned is 6.4%. Earnings per share to 31 December 2007 were $(0.93).
Dividends $0.00.
10 SIGNIFICANT INTERESTS
The Company has a holding of 3% or more of the voting rights in the following
investments:
Name of undertaking Class of share % of class held
Riptide Worldwide Common stock 24.1%
CaminoSoft Common stock 21.0%
Integrated Security Common stock 13.2%
Systems
Cover-All Technologies Common stock 7.2%
Global Axcess Common stock 6.8%
Hemobiotech Common stock 5.8%
Narrowstep Common stock 5.8%
Access Plans USA. Common stock 4.6%
OneLink Corporation Common stock 4.6%
Aurasound Common stock 3.6%
Bovie Medical Corporation Common stock 3.5%
The Company also have substantial interests in convertible debentures and other
debt instruments as follows:
Name of undertaking Class of share % of class held
CamioSoft 6% Convertible debenture 100.0%
Integrated Security 7% Convertible debenture 100.0%
Systems
Obsidian Enterprises 8% Convertible debenture 50.0%
Integrated Security 10% Convertible debenture 36.4%
Systems
CamioSoft 7% Promissory notes 33.3%
Simtek Corporation 7.5% Convertible debenture 33.3%
Integrated Security 8% Promissory notes 30.2%
Systems
BPO Management Services Series D-2 Preferred 17.9%
iLink Communications. 12% Convertible debentures 9.8%
BPO Management Services Series D Preferred 8.9%
PetroHunter Energy 8.5% Convertible debenture 7.1%
Corporation
Onelink Corporation 10% Promissory notes 5.7%
Pipeline Data 8% Convertible debenture 4.1%
The Company's holdings in Integrated Security Systems and CaminoSoft represents
29% and 19% respectively of the enterprise value of these companies.
11 DEBTORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
As at As at
31 May 2008 31 May 2007
�'000 �'000
Sales for future settlement 2,101 919
Prepayments and accrued income 325 339
Dividends receivable 6 67
2,432 1,325
12 CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
As at As at
31 May 2008 31 May 2007
�'000 �'000
Purchases for future settlement - 150
Outstanding tender offer settlement and related 49,493 -
costs
Sundry creditors and accruals 242 359
49,735 509
13 BANK LOAN
As at As at
31 May 2008 31 May 2007
�'000 �'000
Sterling loan at fixed rate - 6,998
Sterling loan swapped into US Dollars at a floating - 27,992
rate
Revolving credit drawn down 1,771 -
1,771 34,990
The Company has a US$5,000,000 revolving credit facility with Allied Irish
Banks Plc. Under the terms of the facility the Company can make utilisation
requests for a minimum of US$1,000,000, or if less, the available commitment.
The Company may not make a utilisation request if as a result of the proposed
utilisations would be outstanding. Utilisation periods may be one, two or three
months, or any shorter period agreed between the Company and Allied Irish Banks
Plc, but shall not extend beyond the termination date of 29 May 2009.
At 31 May 2008 the Company had utilised US$3,500,000 of this facility. Interest
is payable at LIBOR plus a margin of 1.20% on any drawn down balance and 0.60%
per annum on any undrawn down balance. Repayment of the loan has priority over
any capital repayment on winding up.
With effect from 29 May 2008, the covenant, under the revolving credit facility
is that gross borrowings will not at any time exceed 40% of the adjusted net
asset value.
Previously the Company had a Sterling bank loan of �35 million held with Lloyds
TSB Bank plc which was repaid in full during the year ending 31 May 2008. The
loan was drawn down in Sterling while at the same time entering into a currency
and interest rate swap in respect of �28 million of the borrowings. This
transaction was executed at the prevailing exchange rate of US$1.856 to �1. At
the same time it sold forward against its US Dollar assets for settlement on 30
May 2008, fixing its US Dollar debt liability at $51.968 million, which is
allocated to repay �28 million of the borrowings. Thus the Company had a loan
of �7 million Sterling at a fixed rate and �28 million Sterling swapped into US
Dollars at a floating rate. Interest was payable at a fixed rate of 5.39%
excluding margin on the 7 million Sterling loan and at a floating rate of US
three month LIBOR excluding margin on the �28 million Sterling loan swapped
into US Dollars.
Issue costs associated with this bank loan were amortised over the life of the
facility in accordance with FRS 26: Financial Instruments: Measurement.
Previously, the Company entered into a cap and collar `cylinder' protection for
$100 million of US assets protecting the Company should the US Dollar fall
below US$2.1 to �1, but giving up all the upside above US$1.6610 to �1. On 21
May 2008 the Company closed this option.
14 DERIVATIVE FINANCIAL INSTRUMENTS
The Company had a number of derivative financial instruments to reduce its
exposure to interest rate movements on its Sterling borrowings and also to
mitigate the risk of fluctuations in the US Dollar exchange rate.
The fair value of derivative financial instruments at 31 May 2008 are as
follows:
Fair value Fair value
31 May 2008 31 May 2007
�'000 �'000
Interest rate swap - 41
- 41
Currency rate swaps
Currency swap - 1,728
Cap and collar cylinder - 172
- 1,900
Changes in the fair value of derivates amounting to (�1,941,000) (2007: �
1,668,000) have been (debited)/credited to the Income statement.
In addition the Company received premiums totalling �2,922,000 on closing the
interest rate swap and adjusting the currency cylinder and paid a premium of �
105,000 for closing out the currency cylinder.
15 NET ASSET VALUES
Total net asset values attributed to shareholders are as follows:
31 May 31 May 2008 31 May 2007 31 May
2008 2007
FRS 25 Articles FRS 25 Articles
basis basis basis basis
�'000 �'000 �'000 �'000
For the purposes of calculating
net asset values:
Total net assets attributable to:
- Capital shareholders - - 11,682 11,340
- Income shareholders 18,285 18,285 50,232 50,463
- Zero Dividend Preference 864 864 23,044 23,155
shareholders
19,149 19,149 84,958 84,958
- Unit holders 18,285 18,285 61,914 61,803
pence pence pence pence
Net asset value per:*
- Capital share - - 23.37 22.68
- Income share 72.53 72.53 101.13 101.60
- Zero Dividend Preference share 182.61 182.61 167.00 167.80
- Unit 72.53 72.53 124.50 124.28
They are represented by:
31 May 2008 31 May 2007
�'000 �'000
Share Capital 76 113
Special reserve 11,944 60,983
Capital redemption reserve 39 2
Capital reserve - realised 11,002 (13,563)
- unrealised (9,438) 18,731
Redemption reserve 4,906 16,778
Revenue reserve 620 1,914
Assets attributable to shareholders 19,149 84,958
* Net asset values per share calculated on the number of shares in issue of:
31 May 31 May
2007
2008
- Capital share 50,000,000 50,000,000
- Income share 25,210,008 49,670,000
- Zero Dividend Preference share 472,887 13,799,000
At 31 May 2008 the net assets attributable to shareholders calculated in
accordance with FRS 25 and in accordance with the Articles of Association were
the same as all issue costs had been fully amortised by this date, and there
was a shortfall in assets of �7,545,000.
16 Share Capital
31 May 31 May
2008 2007
�'000 �'000
Authorised
200,000,000 Capital shares of 0.1p each 200 200
150,000,000 Income shares of 0.1p each 150 150
50,000,000 Zero Dividend Preference shares 50 50
of 0.1p each
400 400
Issued, allotted and fully paid
50,000,000 Capital shares of 0.1p each 50 50
25,210,008 (2007: 49,670,000) Income 25 49
shares of 0.1p each
472,887 (2007: 13,799,000) Zero Dividend 1 14
Preference shares of 0.1p each
76 113
As a result of the Tender Offer on 30 May 2008, 13,326,113 Zero Dividend
Preference shares and 24,459,992 Income shares were purchased for cancellation.
Subsequent to the year end a further 266,850 Zero Dividend Preference shares
have been purchased for cancellation at a price of 182.608201p.
Duration
The Articles of Association provide that the Directors shall convene an
Extraordinary General Meeting of the Company to be held on 31 May 2011, or if
that day is not a business day, on the immediate preceding business day, at
which a special resolution shall be proposed, pursuant to Section 84 of the
Insolvency Act 1986 requiring the Company to be wound-up voluntarily unless the
Board shall have previously been released from its obligation to do so by a
special resolution of the Company.
As to dividends each year
The Income shares carry the right to receive all the revenue profits of the
Company (including accumulated revenue reserves) available for distribution and
determined to be distributed by way of interim and/or final dividend and at
such times as the Directors may determine.
The Zero Dividend Preference shares and the Capital shares carry no right to
receive dividends out of revenue or any other profits of the Company.
As to capital on winding-up
On winding-up, and after repayment of prior ranking creditors, there shall be
paid to the holders of Zero Dividend Preference shares an amount equal to 100p
per Zero Dividend Preference shares as increased each day from 12 April 2001 to
31 May 2008 (inclusive) at a daily compound rate so as to give a final
entitlement of 182.608201p on 31 May 2008. This amount shall not increase until
payment is made on 31 May 2011.
The holders of the Income shares shall be paid prior to the wind-up date an
amount equal to the amount standing to credit of the Company's revenue reserves
and, after repayment of prior ranking creditors and the prior capital
entitlements of the Zero Dividend Preference shares have been met in full, an
amount equal to 85.00p per Income share as increased on the last day of each
calendar month from 30 April 2001 to and including 31 May 2008 so as to give a
capital entitlement of 100.00p on 31 May 2008 and then from 1 June 2008 to 31
May 2011 increased at a daily compound rate so as to give a final capital
entitlement of 120.82p on 31 May 2011.
The holders of the Capital shares are entitled to the surplus assets of the
Company available for distribution after repayment of the bank loan and payment
of the entitlements of the Zero Dividend Preference shares and the Income
shares.
17 Movement in assets attributable to shareholders
Capital Special Capital Capital Redemption Revenue
redemption reserve reserve reserve reserve reserve
reserve realised unrealised
�'000 �'000 �'000 �'000 �'000 �'000
Opening balance 2 60,983 (13,563) 18,731 16,778 1,914
Net gains on - - (7,032) - - -
realisation of
investments
Transfer on disposal - - 20,244 (20,244) - -
Exchange difference - - 72 (14) - -
Movement in unrealised - - - (7,911) - -
appreciation
Gains on derivative - - 876 - - -
financial investments
Costs charged to - - (1,804) - - -
capital
Capital dividend - - 1 - - -
Tax relief on costs - - 336 - - -
charged to capital
Capital appropriation
on respect of:
Zero Dividend - - (2,148) - 2,148 -
Preference shares
Income shares - - (1,351) - 1,351 -
Cancellation of shares 37 (49,039) - - - -
Transfer of entitlement - - 11,005 - (11,005) -
of Zero Dividend
Preference shares
cancelled
Transfer of entitlement - - 4,366 - (4,366) -
of Income shares
cancelled
Retained net revenue - - - - - (1,294)
for the year
At 31 May 2008 39 11,944 11,002 (9,438) 4,906 620
In accordance with TECH 01/08 issued by the Institute of Chartered Accountants
in England and Wales, the movement in fair value of investments that can be
readily converted to cash is to be treated as realised in the capital reserve.
As at 31 May 2008 the value of such investments is �nil (2007:�nil).
18 RECONCILIATION OF NET RETURN BEFORE FINANCE COST AND TAXATION TO NET CASH
INFLOW FROM OPERATING ACTIVITIES
31 May 2008 31 May 2007
�'000 �'000
Net return before finance costs and taxation (13,282) 5,776
Losses/(gains) on investments 14,943 (3,703)
Exchange (gains)/losses on capital items (58) 1,037
Gains on derivatives (876) (1,668)
(Decrease)/Increase in creditors (117) 112
Decrease in debtors 75 44
Capital dividend (1) (100)
Reinvested dividends (110) (454)
Tax deducted from investment income (6) (25)
Net cash inflow from operating activities 568 1,019
19 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET CASH/DEBT
31 May 2008 31 May 2007
�'000 �'000
Increase/(decrease) in cash in year 44,772 (5,520)
Loan repayment 32,078 -
Revolving credit drawdown (1,771) -
Amortisation of costs incurred on bank loan (9) (10)
Realised foreign exchange gain/(loss) 2,994 (1,040)
Movement in net cash/debt 78,064 (6,570)
Net debt at start of year (28,511) (21,941)
Net cash at 31 May 2008 49,553 (28,511)
For the purposes of this note net debt is defined as cash at bank and the bank
loan only.
20 ANALYSIS OF CHANGES IN NET CASH/DEBT
At 1 June Cash flows Non-cash At 31 May
2007 movements 2008
�'000 �'000 �'000 �'000
Cash at bank 6,479 44,772 73 51,324
Bank loan due within one year (34,990) 30,307 2,912 (1,771)
(28,511) 75,079 2,985 49,553
21 RELATED PARTY TRANSACTIONS
The Investment Managers, Premier Asset Management (Guernsey) Limited and
Premier Fund Managers Limited, are regarded as related parties to the Company.
The amounts paid to the Managers for investment management fees are disclosed
in note 3. The investment manager fee is based on the Company's gross assets
less current liabilities which are reduced by the value of investments held in
companies where Premier is the investment manager. At 31 May 2008 the market
value of these holdings was �nil (2007: �2,823,000).
In addition, a marketing fee of �35,568 (plus VAT) is payable to Premier for
the year ended 31 May 2008 (2007: �24,978 (plus VAT)).
Mr Cleveland of RENN Capital Group, Inc., the Investment Adviser is a director
of Access Plans, Cover-All-Technologies, Integrated Securities Systems, BPO
Management and CaminoSoft, being companies held within the portfolio. Other
officers of RENN Capital Group Inc. also sit on the boards of certain companies
held as investments within the portfolio. The total directors' remuneration
received by RENN Capital Group Inc. for representation of the Company and its
other clients and affiliates, and attendance at meetings of the boards of
companies in which the Company had a interest during the year ended 31 May 2008
was US$7,826 (2007: US$17,769).
During the year the Company sold assets amounting to $6,541,939 (�3,310,363) to
Renaissance US Growth Investment Trust PLC. An Investment Company for which
RENN Capital Group inc. is the investment manager.
Mr Vanderfelt is a director of RP&C International, which was a party to the
sponsoring and placing of the Company and which received remuneration from the
Company of �96,610 for the year ended 31 May 2008. The agreement with RP&C
International was terminated on 31 May 2008. The above remuneration includes �
10,000 in lieu of notice to terminate the contract.
22 CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
At 31 May 208 there were no outstanding commitments or contingent liabilities.
23 CONTINGENT ASSETS
The Directors are aware of the AIC/JPMorgan Claverhouse judgement which was
made during 2007 regarding the charging VAT on investment management fees. It
is possible that the Company will be able to recover an amount of VAT that it
paid on its investment management fees during the forthcoming year, although
the Directors do not believe that any such recoverable sums will be of a
material amount.
24 ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES
Objectives, policies and strategies
During the year the Company sought to provide its shareholders with capital
growth and high income. Following approval by shareholders on 30 May 2008 the
investment policy was revised to invest primarily in equities and equity
related instruments issued by companies domiciled, listed quoted or traded in
North America. The Company may invest in bonds, warrants, contracts for
difference, other forms of derivative investment, bank debt or debt securities.
The Company borrows money by way of a US$5 million revolving credit facility at
a fixed interest rate of LIBOR plus margin of 1.20% on any drawn down balance
and 0.60% per annum on any undrawn down balance.
The Company's financial instruments comprise securities, warrants, other
investments and bank deposits which are held to achieve its investment
objective as well as debtors and creditors that arise from its operations, for
example sales and purchases of securities awaiting settlement and debtors of
accrued income.
The nature and extent of the financial instruments outstanding at the balance
sheet date and the risk management policies employed by the Company are
discussed below.
The principal risks the Company faces through the holding of financial
instruments are:
* market risk, comprising currency risk, interest rate risk and other price
risk; and
* liquidity/marketability risk.
As required by FRS 29: Financial Instruments: Disclosure, an analysis of
financial assets and liabilities, which identifies the risk to the Company of
holding such items, is given below.
Market risk
The Company's strategy on the management of investment risk is driven by the
Company's investment objective. The Investment Managers and Investment Adviser
monitor the financial risks affecting the Company on a continual basis in
accordance with the policies and procedures in place. The Board manages the
market price risks inherent in the investment portfolio by ensuring full and
timely access to relevant information from the Investment Managers and
Investment Adviser. The Board meets quarterly and at each meeting reviews the
investment performance, the investment portfolio and the rationale for the
current investment positioning to ensure consistency with the Company's
objectives and investment policies.
Financial assets
All investments and derivatives are stated in sterling and disclosed at fair
value through profit or loss.
The Company invests directly in smaller companies. As smaller companies do not
generally have the financial strength, diversity and resources of large
companies they may find it more difficult to overcome periods of economic slow
down or recession. In addition, the relatively small market capitalisation of
such companies may make the market in their shares less liquid. In the event
that smaller companies take a downturn, this may affect the performance of
smaller companies in which the Company is invested.
The Company invests in a wide range of industrial sectors therefore the Board
does not consider there is a significant risk to market fluctuations in any one
industry.
The Company may invest in unlisted securities, or other securities, in which
there is no active market. In such cases it may be difficult to determine the
value of such securities and/or to realise the investment or to do so on
acceptable terms. There may be no certainty that a listing or trading facility
will be obtained for such securities. Holders of such securities may not have
the benefit of market rules designed for the protection of holders of listed or
public traded securities. This may include the absence of publicly available
information on such securities or their issuers.
As discussed in the accounting policies of the Company in note 1, unquoted
warrants are valued at fair value using the Black Scholes methodology, which
includes a time value which is calculated and added to the intrinsic value to
arrive to the total valuation for each warrant. The intrinsic value is
calculated by reference to the quoted price of the investment into which the
warrant will convert and the conversion price for each warrant.
The Black Scholes pricing formula requires five inputs: (i) stock price, (ii)
exercise price, (iii) time to expiration, (iv) volatility and (v) interest
rate. The stock price, exercise price and time to maturity are straight
forward. The interest rate is a risk free rate (represented by the yield on US
Treasury security) for a team that corresponds to the time to expiration of the
subject warrant.
The method of valuing the fixed asset investments is discussed in the
accounting policies of the Company in note 1. Cash and trade debtors arising
from the operations of the Company as at 31 May 2008 amounted to �51,324,000
(2007: �6,479,000) and �2,432,000 (2007: �1,325,000) respectively.
Foreign currency risk
Due to the Company's holdings being wholly overseas, the Company is also
exposed to the risk of movement in the Dollar/Sterling exchange rate. The
Board's current policy is not to engage in an active programme of hedging the
Dollar risk in the portfolio. However, bearing in mind that the final
redemption payment will be Sterling payment of 120.82p to be made to Income
shareholders on 31 May 2011, the Board will look at taking advantage of any
future Dollar strength versus Sterling by hedging some or all of the Dollar
exposure into sterling in those circumstances.
The investment Manager monitors the exposure to foreign currencies on a daily
basis and reports to the Directors on a regular basis. The Investment Manager
measures the risk to the Company of the foreign currency exposure by
considering the effect on the Company's net asset value and income of a
movement in the rates of exchange to which the Company's assets, liabilities,
income and expenses are exposed.
The Company settles its US investment transactions from its bank accounts in US
Dollars. In the year ended 31 May 2008, exchange gains of �58,000 (2007: losses
�1,037,000) relating to currency, have been taken to the capital reserve.
The primary currency risk is between Sterling and Dollars.
The Investment Manager's risk assessment policy is reflected in its investment
strategy. In order to protect against inflation and capital the fund invests in
small companies that it believes will grow into larger companies, with the
intention of increasing the value of the investment.
The foreign currency profile of the Company's fixed interest financial assets
at 31 May was as follows:
US Growth Cash Other Financial Financial
portfolio Current assets liabilities
assets
�'000 �'000 �'000 �'000 �'000
As at 31 May 2008
US Dollars 16,899 2,578 2,378 21,855 1,809
As at 31 May 2007
US Dollars 92,204 5,458 2,925 100,587 133
Canada Dollars 1,887 - - 1,887 -
94,091 5,458 2,925 102,474 133
The Company has a total exposure as a percentage of funds attributable to
shareholders to US Dollars of 114% (2007: 114%) and Canadian Dollars of nil
(2007: 2%).
Sensitivity analysis
At 31 May 2008, had Sterling strengthened by 10% in relation to the US Dollars,
with all other variables held constant, the net assets attributable to
shareholders and the return for the year would have decreased by �1,690,000
(2007: �9,220,000). A 10% weakening of Sterling against the US Dollars would
have resulted in an equal but opposite.
Interest rate risk
The Company's portfolio is partially invested in interest bearing securities of
various types (as set out below). At the time of investing, interest rates are
fixed and as long as the security concerned remains unimpaired, cash flows will
not be affected by movements in long-term interest rates. The Company also
holds cash, in the short term, which it invests in money market accounts and
government backed Treasury Bills. The interest rate received on these holdings
is based on short term interest rates.
The Company's interest rate risk is managed on a daily basis by the Investment
Manager in accordance with polices and procedures in place. The overall
interest rate risks are monitored on a regular basis by the Directors.
The cash held at Frost International Bank is invested in an institutional high
quality commercial paper fund with a very low maturity structure which subjects
the vehicle to reinvestment risk but immunises the fund from intermediate and
long term interest rate risk.
The Directors consider interest rate risk as part of their overall assessment
of risk in the portfolio.
The interest rate portfolio of the Company's fixed interest financial assets at
31 May was as follows:
Value Value Weighted Weighted
average average
interest period for
rate which rates
are fixed
US$'000 �'000 % (years)
As at 31 May 2008
US convertible debentures 7,087 3,586 6.5 6.1
US loan notes 2,825 1,430 8.3 14.2
US convertible preference 4,945 2,503 1.6 -
shares
As at 31 May 2007
US convertible debentures 8,264 4,213 6.0 3.2
US loan notes 2,252 1,148 8.9 0.9
US convertible preference 5,669 2,891 2.4 -
shares
US Treasury Bills 17,930 9,142 5.1 0.1
The maturity profile of the Company's financial assets at 31 May was as
follows:
2008 2007
�'000 �'000
Within one year 4,222 26,213
Within one to two years 325 3,239
Within two to three years 2,273 4,523
Within three to four years 23 2,476
Within four to five years 1,098 1,299
More than five years 12 -
7,953 37,750
Assets with no maturity dates 62,693 82,698
70,646 120,448
Sensitivity analysis
A change in interest rates would have some impact on the fair value of warrants
and debit instruments but the quantum of the impact is not easily quantifiable.
Other price risk
Other price risk is the risk that the value of the instrument will fluctuate as
a result of changes in market prices (other than those arising from currency
risk or interest rate risk) and represents the potential loss the Company may
suffer in the light of adverse market price movements. Since the Company
invests in financial instruments, the risk is inherent. The Company will always
face uncertainty as to future price of the financial instruments in which it is
invested. The price of certain unquoted stocks is also affected by their
relative illiquidity (see below).
The Board of Directors manage this risk by ensuring full and timely access to
relevant information from the Investment Manager and Investment Adviser. The
Directors monitor compliance with the Company's objectives and is directly
responsible for investment strategy and asset allocation.
See the Investment Adviser's report for discussion of investments made during
the year. The method of valuing the investments is discussed in the accounting
in the accounting policies.
Sensitivity analysis
A 10% increase in the market value of investments at 31 May 2008 would have
increased net assets attributable to shareholders by �1,689,000 (2007: �
11,071,000). An equal change in the opposite direction would have decreased the
net assets attributable to shareholders by an equal but opposite amount.
Liquidity risk
A significant proportion is held in smaller and unquoted companies. Such
companies are inherently higher in risk and lower in liquidity than, for
example, blue-chip equities. Unlisted companies have the additional risk of not
benefiting from market rules designed to protect investors. Some of the
investments are in unlisted convertible bonds or preference shares, which may
at any time be converted into a listed common stock, giving an effective level
of liquidity equal to the liquidity in the common stock. Other unlisted
investments do not have the option of converting into a listed stock. This
issue is particularly relevant regarding the new wind-up date of the Company.
Credit risk
The Company is exposed to credit risk by way of its debenture loan notes and
preference shares in the portfolio and any interest outstanding thereon. The
benefit of a convertible debenture is that if a portfolio company becomes
troubled, the Company is protected through its position as a creditor. The
Directors do not consider there to be a major risk of material default on these
items but do not recognise that from time to time, default might occur.
As at 31 May 2008 the fair value of financial assets which are subject to
credit risk was �7,519,000 (2007: �13,481,000). In addition there was interest
outstanding of �273,000 (2007: �228,000).
The Company's investments are held on its behalf by Frost National Bank, acting
as agent. Bankruptcy or insolvency of Frost National Bank may cause the
Company's rights with respect to securities held by the custodian to be
delayed. The Board monitors the Company's risk by reviewing the custodian's
internal controls report.
Investment transactions are carried out with a large number of brokers whose
creditworthiness is reviewed by the Investment Managers. Transactions are
ordinary undertaken on a delivery versus payment basis whereby the Company's
custodian bank ensures that the counterparty to any transaction entered into by
the Company has delivered on it obligations before any transfer of cash or
securities away from the Company is completed.
Cash is only held at banks that have been identified by the Board as reputable
and of high credit quality.
Financial liabilities
The Company finances its operations through a revolving credit facility, share
capital and retained profits, although trade creditors and accruals arise from
its operations. At 31 May 2008, the maturity profile of the Company's financial
liabilities was as follows:
2008 2007
�'000 �'000
Within one year 51,506 120,457
2-3 years 19,149 -
70,655 120,457
Capital Management
The Company does not have any externally imposed capital requirements other
than those relating to the revolving credit facility. Details of the covenant
attached to this facility together with the Company's principle risks and their
management are disclosed above.
The Board consider the capital of the Company to be the assets attributable to
shareholders. The Capital of the Company is managed in accordance with its
investment objective and policy.
25 POST BALANCE SHEET EVENTS
Since the year end the Company's holding in e-Original has been devalued from
USD2,537,000 at 31 May 2008 to USD705,000.
On 30 May 2008, the board of directors of e-Original, Inc. granted its
unanimous written consent regarding the company's ability to raise money on
various terms. According to the consent, if the company were able to raise
money at USD13.62 per share or higher prior to 31 July 2008, the conversion
price of the convertible loan notes would be adjusted from USD13.62 to USD10.21
(75% of USD13.62). If e-Original was unable to raise money at any price prior
to 31 July 2008, the conversion price of the convertible loan notes and the
Series E Convertible Preferred Stock would be lowered to USD3.83.
On 9 July 2008, the Company's holding was revalued at USD10.21 per share and on
8 August 2008, when it became known that eOriginal was unable to raise
additional funds, revalued at USD3.83 per share.
In addition, with effect from 12 September 2008, as disclosed in the
announcement dated 16 September 2008, the Directors have taken a decision to
amend the Company's accounting policies regarding the valuation of unquoted
convertible debentures and unquoted redeemable and non-redeemable convertible
preference shares, as set out below:
Unquoted convertible debenture investments will be valued as follows. Where the
debentures are paying cash coupons they are valued at the greater of cost and
the market value of the equity received if converted. If the debentures are not
paying cash coupons then they are valued at the lower of cost and the market
value of the equity received if converted.
Non-redeemable unquoted convertible preferred stock will be valued at the
market value of the equity received if converted. Redeemable preferred stock
investments will be valued as follows. Where the preferred stocks are paying
cash coupons they are valued at the greater of cost or market value of the
equity received if converted. If the preferred stocks are not paying cash
coupons then they are valued at the lower of cost and the market value of the
equity received if converted.
The Company has also made a provision of 40% with regard to the Company's
investment in the debt of Integrated Security Systems.
The overall effect of this was to reduce the valuation of Integrated Security
systems by �1,773,000 as at 12 September 2008.
Annual General Meeting
The Company's Annual General Meeting will be held on Wednesday, 19 November
2008, at the offices of the AIC, 24 Chiswell Street, London EC1Y 4YY at 11am.
The notice of this meeting can be found in the annual report and accounts at
www.premierassetmanagement.co.uk.
Duncan Abbot
Chairman
29 September 2008
END
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