TIDMUSPI
GLOBAL SPECIAL OPPORTUNITIES TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2010
The full Annual Report and Accounts can be accessed via the Company's website
at www.premierassetmanagment.co.uk or by contacting the Company Secretary on
telephone 01392 412122.
Investment objective and policy
Investment objective
The investment objective is for the portfolio to be managed to provide the
Shareholders with capital growth, for the Income Shareholders to be repaid
their final adjusted capital entitlement on 31 May 2011 of 120.82p per Income
Share and for the portfolio to be managed so as to provide the Capital
Shareholders with a cash return on or shortly after 31 May 2011. The Directors
will seek to distribute substantially all of the net revenue to Income
Shareholders by way of dividend, although this is not expected to be a material
amount.
Investment policy
Asset allocation
The investment policy of the Company is to achieve the investment objective
through investment in equity and equity-related instruments which are
predominantly securities domiciled, listed, quoted or traded in North America
(some of these securities may however have an underlying business that is not
in North America), but with the ability to invest up to 25% of the gross assets
of the Company (at the time of investment) opportunistically in listed or
unlisted equity or debt securities issued by issuers situated anywhere in the
world.
The portfolio is managed on the basis that the Company is fully invested in
equity and equity-related instruments to the extent practicable for the
remainder of its life (subject to the recommendation of the Investment Managers
and the Investment Adviser who may wish to increase the cash holding due to
market conditions). Liquidity is managed so that the costs of realising the
portfolio (including market impact costs) are reduced to the extent practicable
as the end of the life of the Company approaches. It is expected that
liquidation of investments will take place in the last three months of the life
of the Company, so that a mixture of liquid securities and cash are handed to
the liquidator.
Up to 40% of the gross assets of the Company (measured at the time of
investment) may be invested in unquoted securities. "Unquoted securities" for
these purposes means those investments which are not listed or quoted or traded
on a recognised stock exchange or another exchange available and used by
professional investors, nor convertible into securities listed, quoted or
traded on such exchanges.
The Company may invest in bonds, warrants, contracts for difference, other
forms of derivative investment (for the purpose of efficient portfolio
management), bank debt or other debt securities, although this will not amount
to more than 20% of the gross assets of the Company at the time of investment.
Risk diversification
The investment policy provides the Company with a global mandate, albeit with a
particular emphasis on North America. The Company is managed with a view to
maintaining an adequate spread of investment risk in terms of the concentration
and in terms of size of its investments. Except in the case of cash deposits
awaiting investment or pending any winding-up of the Company, the Company will
not lend to any one company or group, or invest in the securities of any one
company or group, more than 20% of the value of its gross assets (at the time
the loan or investment is made).
The Company will not invest more than 10% in aggregate of the value of its
gross assets at the time of a new investment, in other investment companies or
investment trusts which are listed on the Official List (except to the extent
that those investment companies or investment trusts have stated policies to
invest no more than 15% of their gross assets in other investment companies or
investment trusts which are listed on the Official List).
Borrowings
The Company may use gearing and the Directors reserve the right to borrow up to
a maximum of 25% of the gross assets (at the time of drawdown).
Company summary
Launch date 12 April 2001
Wind-up date 31 May 2011
Domiciled United Kingdom
Shareholder funds GBP12,228,000 at 31 May 2010
Market capitalisation GBP12,773,000 at 31 May 2010
Revolving credit $500,000 facility
facility
Zero Dividend Preference 206,037: Redeeming at 182.608201p on 31 May 2011.
shares De-listed 31 July 2008
Income shares 25,035,008: Aiming to redeem at 120.82p on 31 May 2011
Capital shares 50,000,000
Total voting rights 50,070,016*
Units One Income share and one Capital share may be held
together and traded as a Unit
Dividends Paid on Income shares and Units
Dividend history In respect of
year
ended 31 May Total dividends declared
2010 Nil
2009 Nil
2008 3.40p
2007 3.20p
2006 2.80p
2005 2.10p
2004 1.40p
2003 2.09p
2002 7.05p**
Investment Managers Premier Asset Management (Guernsey) Limited and
Premier Fund Managers Limited
Investment Adviser RENN Capital Group, Inc.
Management fee 0.75% per annum, plus performance fee. This is charged
70% to capital and 30% to revenue in accordance with
the accounting policies set out in note 1.
AIC Global Special Opportunities Trust PLC is a member of
the Association of Investment Companies.
* See below for details of the voting rights attached to each Company's shares.
** Included one initial dividend and four interim dividends.
Financial calendar
Year end 31 May
Year end results announced September
Annual General Meeting October
Half-year end 30 November
Half-year results January
announced
Interim management February, August
statement
Chairman's statement
for the year ended 31 May 2010
Dear Shareholder,
During the 12 months to 31 May 2010 further progress was made in selling or
reducing exposure to the more illiquid investments within the portfolio, in
line with the objective of liquidating the fund by 31 May 2011. NAV performance
was, however, disappointing.
Market background
A year ago, I reported that the market conditions in the first year following
the extension of life of the Company had been far from conducive to the
liquidation of an illiquid small cap portfolio. The year to 31 May 2010 brought
much improved conditions. Over the 12 months investor confidence returned. The
S&P 500 index, an index of the US stockmarket, rose 20.99%. The Russell 2000
total return index, an index of smaller company shares and the most relevant
benchmark for your Company, rose 33.64%. The strength of the dollar translated
that return into 48.58% for the sterling investor. The background for initial
public offerings for private companies was still relatively weak, but
nevertheless much improved from the previous year when the IPO market was
virtually closed.
Performance
Over the year, the NAV of the Income shares fell by 5.94% from 50.33p to
47.34p. This was clearly a disappointing outcome against the favourable
background of rising markets, the good performance of the Russell 2000 total
return index and the strength of the dollar against sterling. The share price
of the Income shares rose by 29.87% over the year from 38.50p to 50.00p,
benefiting from a narrowing in the discount to asset value at which they trade.
At 31 May 2010 the Income shares were trading at a premium of 5.62% to NAV.
The improved market conditions, however, did enable some reduction in more
illiquid investments to be made. Our holding in Asian Financial (Duoyuan
Printing) listed during the year and part of the holding was sold. At the year
end, 88% of the Company's net assets were held in cash and listed securities
compared to 70% a year earlier. However, the Directors are conscious that the
listed portfolio does contain some positions (notably Integrated Securities
Systems, Hemobiotech Inc. and CMSF Corporation) where daily turnover is
extremely low and an exit from these stocks may require some corporate event
rather than normal market sales.
Proceeds from the sale of less liquid investments have been reinvested in more
liquid stocks so that the portfolio can remain substantially invested but more
easily liquidated as the wind-up date approaches.
At the year end, 20% of the listed securities were in companies with a market
capitalisation of over $100m. Our largest holding was Cover-All Technologies
Common Stock, representing 11.24% of net assets at the year end.
Dividends
Earnings per Income share for the year ended 31 May 2010 were (0.64p) against
0.26p for the prior year ended 31 May 2009. No dividends were paid during the
course of the year.
Bank facility
The Company maintained a $500,000 bank facility throughout the year. The loan
is at a margin of 300 basis points over LIBOR and falls very comfortably within
the capital and interest cover covenants that relate to it.
Valuation policy and unlisted securities
During the year the Directors wrote down the value of the unlisted shares in
Heyspace, e-original, Vertical Branding and Narrowstep to zero. Subsequent to
the year end, the Board of Directors carried out a review of the Company's
portfolio in light of information received from its Investment Adviser which
resulted in the write down of Aurasound, BPO Management, Hemobiotech Inc and
Integrated Securities Systems (which was previously held at Directors valuation
rather than market price given the very low turnover in this stock) to zero.
Caminosoft was written down by 50% and Cover-All was written down by 15%. These
investments were written down to reflect their likely realisation value in the
timescale available as the Company approaches its 31 May 2011 liquidation date.
Subsequent to the portfolio review referred to above our Manager successfully
sold five of our more illiquid holdings. These were CaminoSoft Corporation
common stock and warrants, China Greenscape preference shares, Cover-All
Technologies common stock and warrants, Integrated Security Systems common
stock and warrants and PetroHunter 8.5% convertible debenture. In aggregate
these holdings were sold for $2.736m which represented an increase of $254,000
in net assets compared to the $2.482m at which these holdings were valued at 31
August 2010.
With a fixed wind-up date less than 12 months away the year end accounts have
been prepared on a break up basis rather than a going concern basis in
accordance with accounting standards. Proposed wind-up costs of GBP50,000 have
been included in the accounts.
Outlook
The focus remains very much on selling the remaining illiquid investments and
our Manager is actively pursuing exit strategies for each stock. Shareholders
should be aware that, while valuations reflect the best information available
to the Board, the timescale for the liquidation of the portfolio, the high
level of stock specific risk and the exposure to changes in the sterling dollar
exchange rate, mean that realisation proceeds may be lower.
Duncan Abbot
Chairman
17 September 2010
Investment Adviser's report
for the year ended 31 May 2010
In May 2008, 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. We are now in the final year and aim to have liquidated
the entire Company's portfolio by the end of May of 2011. During the year your
Manager was successful in liquidating several positions, making modest new
investments, and working to get several companies closer to liquidity events
which are set out below.
Top Five Holdings
At 31 May 2010, the following top five holdings in companies made up
approximately 46% of the portfolio. A description of each of these top five
holdings is below.
% of
total
assets
less
current
Company Symbol Industry Value USD % of liabilities
Portfolio
SinoHub Inc. SIHI Electronics $2,082,849 12.1% 11.7%
Cover-All COVR Business $2,046,066 11.9% 11.5%
Technologies Inc. software
Global Axcess GAXC Consumer $1,308,333 7.6% 7.4%
Corporation finance
Hollysys Automation HOLI Electronic $1,260,840 7.4% 7.1%
Technologies Ltd equipment
Duoyuan Printing DYP Industrial $1,221,669 7.1% 6.9%
machinery
SinoHub Inc. (AMEX: SIHI) engages in electronic component sales, outsourced
electronics product production and sales, and electronic component supply chain
management (SCM) services in Hong Kong and the People's Republic of China. Its
electronic component sales include procurement-fulfilment and electronic
component sales to manufacturers. The company's SCM services include
warehousing, delivery, and import/ export. The company provides its products to
contract manufacturers and design houses, as well as to OEMs and EMS companies.
SinoHub is headquartered in Shenzhen, the People's Republic of China.
Cover-All Technologies Inc., (OTCBB: COVR) through its subsidiary, Cover-All
Systems, Inc., provides software products, services, and solutions to the
property and casualty insurance industry. Its software products and services
focus on the functions required to market, underwrite, rate, issue, print,
bill, and support the life cycle of insurance policies. Cover-All Technologies
Inc. serves insurance companies, agents, brokers, and managing general agents.
Cover-All Technologies Inc. was founded in 1971 and is headquartered in
Fairfield, New Jersey.
Global Axcess Corporation, (OTCBB: GAXC) through its subsidiaries, provides
automated teller machine (ATM) services primarily in the United States. The
company owns and operates a network of ATMs located at grocery stores, regional
and national retailers, hotels, shopping malls, airports, colleges, amusement
parks, sports arenas, bars/clubs, theatres, and bowling alleys, as well as
convenience stores, and combination convenience stores and gas stations. It
offers ATM branding and processing services for approximately 53 financial
institutions that have approximately 512 branded sites under contract with it.
Global Axcess also provides network processing services. As of 31 December
2009, it operated approximately 4,483 ATMs of which approximately 1,712 were
company-owned, 2,644 merchant-owned, and 127 under a service-only agreement.
The company was founded in 1984 and is headquartered in Jacksonville, Florida.
Hollysys Automation Technologies Limited, (NASDAQ: HOLI) Hollysys Automation
Technologies is a leading provider of automation and control technologies and
applications in China that enables its diversified industry and utility
customers to improve operating safety, reliability, and efficiency. Founded in
1993, Hollysys has approximately 2,100 employees with 9 sales centres and 13
service centres in 21 cities in China and serves over 1,700 customers in the
industrial, railway, subway & nuclear industries. Hollysys is also one of only
five automation control systems and products providers approved by China's
Ministry of Railways in the 200-250kph high-speed rail segment and is one of
only two automation control systems and product providers in the 300-350kph
high-speed rail segment. The company was founded in 2006 and is headquartered
in Beijing, the People's Republic of China.
Duoyuan Printing (NYSE: DYP) is a leading manufacturer of commercial offset
printing presses in China. The Company combines technical innovation and
precision engineering to offer a broad range of printing equipment and
solutions. Duoyuan Printing has manufacturing and research and development
facilities in Langfang, Hebei Province and Shaoyang, Hunan Province in addition
to a distribution and service network with over 85 distributors that operate in
over 65 cities and 28 provinces in China. The company was founded in 2001 and
is headquartered in Beijing, the company is one of the largest non-government
owned major offset printing equipment and solutions providers in China.
Disposals, adjustments & new investments
Since 31 May 2009, we made a partial sale of Bovie Medical Corporation
providing proceeds of $2,070,554 and a capital gain of $1,590,169. The Company
sold all of its securities in A-Power Energy Systems, Datapath Inc., Dyadic
International, Narrowstep Inc., Obsidian Enterprises Inc., Riptide Worldwide,
Symbollon Pharmaceuticals and Trans-Lux Corp. AnchorFree was written up from
$0.30 per share to $0.40 per share due to its rapid growth and strong
profitability. We wrote off the full value of Heyspace International as it
became increasingly clear that the probability of recovery was low. We
converted our debt holding in Integrated Security Systems Inc. to common stock
and elected to value the common stock at $nil per share, which we believe to be
the fair value given the lack of liquidity implicit in the price derived from
the market. We made a partial sale of SinoHub Inc. common shares and exercised
our in-the-money warrants netting an approximate $195,000 addition to our cost
basis. SinoHub has a cost basis now of $1,197,175 and a quoted value of
$2,082,849 and is the largest holding in the fund.
Your Company invested $1,015,296 into the common stock of SearchMedia Holdings
Ltd. SearchMedia operates one of the largest outdoor advertising networks in
China with a current portfolio of over 1,500 high-impact billboards with over
500,000 square feet of display area in 15 cities and over 140,000 print and
digital poster frames in residential and office buildings across 57 major
cities. We also invested in the common stock of American Lorain Corporation,
which manufactures over 230 food products and markets in China and 42 foreign
countries; Biostar Pharmaceuticals Inc. which develops, manufactures and
markets pharmaceutical and medical nutrient products in China; YAYI
International a leading producer and distributor of premium goat milk formula
for infants, toddlers, young children and adults; and ZST Digital Networks,
Inc. a China-based company that distributes digital and optical network
equipment and provides installation services to cable system operators.
Liquidity Progress
During the fiscal year one of the unlisted holdings, Duoyuan Printing Inc.,
completed an initial public offering raising approximately $42 million. Your
Company sold one-third of its position for $8.50 per share, compared to a cost
basis of $3.84 per share. Since the public offering the company has performed
well and has picked up research coverage from two firms. The remaining liquid
position was quoted at a value of $1,172,224 on 31 May 2010.
Subsequent to the year end we sold, in a private transaction, Pipeline Data
Inc. for $1,109,550 to The ComVest Group, a private equity group. Although it
was at a discount, we felt it was a reasonable bid for an illiquid holding. At
31 May 2010 the portfolio had three unlisted securities not convertible into
listed securities. The three remaining private companies are AnchorFree Inc.,
Business Process Outsourcing and China Greenscape.
AnchorFree provides a free virtual private network platform for internet users,
advertisers, and publishers. AnchorFree is a profitable and rapidly growing
company with users in over 100 countries.
Business Process Outsourcing is a profitable finance and accounting outsourcing
company.
China Greenscape supplies trees and plants to major property developers and
municipalities throughout central China.
Subsequent to the year end a number of the more illiquid holdings, including
China Greenscape, have been successfully sold as reported in the Chairman's
statement. Your Manager continues to seek buyers for the remaining illiquid
positions either through open market sales or by seeking to initiate other
means of realisation such as selling shares back to the investee company. As
proceeds are raised from the sale of illiquid stocks they are being reinvested
in liquid investments to maintain market exposure and these investments have
included a Russell 2000 total return index exchange traded fund.
RENN Capital Group, Inc.
17 September 2010
Portfolio of investments
as at 31 May 2010
% of
total
assets
Valuation* less
current
Stock Industrial classification GBP'000 liabilities
Unlisted convertible
debentures**
iLinc Communication 12% Technology services 241 1.97
PetroHunter Energy Oil and gas exploration 82 0.67
Corporation 8.5%
Pipeline Data 10% Business services 764 6.25
1,087 8.89
Unlisted warrants**|
Cover-All Technologies Business software 35 0.29
Duoyuan Printing Industrial machinery 79 0.64
Global Axcess Corporation Consumer finance 99 0.81
PetroHunter Energy Oil and gas exploration 26 0.21
Corporation
SinoHub Electronics 128 1.05
Symbollon Pharmaceuticals Pharmaceuticals 2 0.02
369 3.02
Unlisted convertible
preference shares**
BPO Management Services Pharmaceuticals & - -
Biotechnology
Ronco Corporation Consumer products - -
- -
Unlisted equities
Business Process Outsourcing Business services 55 0.45
55 0.45
Unlisted preference shares
AnchorFree Wireless communications 76 0.62
China Greenscape Forestry development & 516 4.22
cultivation
592 4.84
Listed equities
Access Plans Consumer services 167 1.36
American Lorain Corporation Food manufactures 490 4.01
AuraSound Technology - -
Biostar Pharmaceuticals Pharmaceuticals & 578 4.73
Biotechnology
Bovie Medical Corporation Healthcare services 679 5.55
CaminoSoft Corporation Network storage 24 0.20
Cover-All Technologies Business software 1,374 11.24
Duoyuan Printing Industrial machinery 762 6.23
Geos Communications Communications 41 0.34
Global Axcess Corporation Consumer finance 801 6.55
Hemobiotech Inc Biotechnology - -
Hollysys Automation Electronic equipment 868 7.10
Technologies
Integrated Security Systems Security products - -
Merriman Financial services 89 0.73
PetroHunter Energy Internet software 8 0.06
Corporation
Points International Internet software 181 1.48
SearchMedia Holdings Media 356 2.91
Silverleaf Resorts Travel and Leisure 206 1.68
SinoHub Electronics 1,305 10.67
Skystar Pharmaceuticals & 621 5.08
Biotechnology
Wonder Auto Technology Financial services 572 4.68
YAYI International Food manufacturers 325 2.66
ZST Digital Networks Network equipment 251 2.05
manufacturers
9,698 79.31
Total corporate investments 11,801 96.51
Net current assets*** 427 3.49
Total assets less current 12,228 100.00
liabilities
* At fair value.
** Unlisted with conversion rights into listed investments.
*** Net current assets excludes net assets attributable to Shareholders.
| Warrants with no value have not been listed above.
Financial summary
31 May 31 May % Premium*
2010 2009 change 31 May
2010
%
Capital
Assets attributable to 12,228 13,065 (6.41)
Shareholders (GBP'000)
Gross assets (GBP'000) 12,713 13,494 (5.79)
Net asset value per Zero Dividend 182.61p 182.61p n/a
Preference share *
Mid-market price per Zero n/a n/a n/a -
Dividend Preference share**
Net asset value per Income share* 47.34p 50.33p (5.94)
Mid-market price per Income share 50.00p 38.50p 29.87 5.62
Net asset value per Capital share 0.00p 0.00p -
*
Mid-market price per Capital 0.51p 1.76p (71.02) -
share
Net asset value per Unit* 47.34p 50.33p (5.94)
(1 Capital share and 1 Income
share)
Mid-market price per Unit 50.00p 38.25p 30.72 5.62
Year to Year to %
31 May 31 May change
2010 2009
Revenue
Return per Income share (0.64p) 0.26p (346.15)
Net dividend paid per Income share nil 1.00p (100.00)
Total expense ratio (excluding VAT 2.47% 3.25% (0.78)
recovered on Investment Managers fees
and tender offer costs)
* Net asset values calculated in accordance with the Articles of Association
** De-listed on 31 July 2008.
REPORT OF THE DIRECTORS
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 before its wind-up on 31 May 2011. A full description
of the Company's activities during the year under review is given in the
Chairman's statement and the Investment Adviser's report.
The principal activity of the Company is to conduct business as an investment
trust. The Company has received written approval from HM Revenue & Customs as
an authorised investment trust, under Section 842 of the Income and Corporation
Taxes Act 1988 ("Section 842"), for the year ended 31 May 2009. 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 Sections 1158 and 1159 of the Corporation
Taxes Act 2010 (formerly Section 842). The Company will retain no more than 15%
of its eligible investment income.
The Company's status as an investment trust allows it to obtain an exemption
from paying taxes on the profits made from the sale of its investments.
Investment trusts offer a number of other advantages for investors, including
access to investment opportunities that might not be open to private investors
and to professional stock selection skills at low cost.
On incorporation, the planned wind-up date of the Company was 31 May 2008. On
30 May 2008 Shareholders voted to extend the life of the Company for a further
three years. The Company's planned wind-up date is now 31 May 2011.
Management of the Company
The Company's assets are managed by Premier Fund Managers and Premier Asset
Management (Guernsey) Limited. RENN Capital Group, Inc. acts as Investment
Adviser to the Company. Premier Fund Managers Limited is a subsidiary of
Premier Asset Management Limited, which manages a range of UK and offshore
funds and provides bespoke discretionary management services for both private
and corporate clients. RENN Capital Group is based in Dallas and has a
thirty-six year track record in identifying growth opportunities in US smaller
companies.
Future of the Company
On 30 May 2008 the life of the Company was extended for a further three years
to 31 May 2011 based on the belief that certain investments in the portfolio
would require a longer period of time to deliver potential value than the 31
May 2008 wind-up date would allow; a number of the Company's investments have
very poor liquidity and others only trade on a matched bargain basis. The
portfolio is managed with a view to maximising the returns that will be
available to Shareholders on 31 May 2011. It is the Company's intention to
wind-up on 31 May 2011. Therefore it is anticipated that a General Meeting
shall be convened on 31 May 2011 at which a resolution (the "Winding-up
Resolution") will be proposed pursuant to Section 84 of the Insolvency Act
1986.
Donations
The Company made no political or charitable donations during the period.
Payment of suppliers
It is the Company's payment policy to obtain the best possible terms for all
business and therefore there is no consistent policy as to the terms used. The
Company agrees with its suppliers the terms on which business will be
transacted and it is the Company's policy to abide by those terms. There were
no trade creditors outstanding at the year end (31 May 2009: GBPnil).
Going concern
As the Company is expected to be wound up on 31 May 2011, the accounts have
been prepared on a 'break up' basis. Further explanation is provided in the
Accounting Policies note below.
Results and dividends
During the year no dividend was paid to holders of Income shares. There were no
proposed dividends in respect of the year ended 31 May 2010.
Borrowing facility
At 29 May 2009 the Company extended its facility of $500,000 for a further 12
months to give the Company the opportunity to use gearing in the event of a
rising market. On 29 May 2010, the facility of $500,000 was extended for two
months to 28 July 2010 to allow time for the extension agreement to be drawn
up. On 26 July 2010 the extension of the facility to 31 May 2011 at a margin of
300 basis points over LIBOR was approved. The loan falls well within the
capital and interest cover covenants that relate to it.
Transactions in the Company's own shares
At the Company's AGM held on 5 October 2009, Shareholders granted the Company
the authority to purchase up to 14.99% of each of its issued Income shares
(being 3,778,980) and Capital shares (being 7,495,000). During the year ended
31 May 2010, 175,000 Income shares (with a nominal value of GBP1,750) were
purchased for cancellation, representing 0.350% of the issued share capital at
the year end, for an aggregated amount of GBP77,000. No shares were held in
treasury during the year ended 31 May 2010. No further purchases of Income or
Capital shares have been made as at the date of this report using these
authorities. These authorities will only be utilised if the Board believes that
purchases of either Income shares or Capital shares will be in the best
interests of the Company and its Shareholders as a whole. In considering
whether to exercise the authority to make market purchases, the Board will take
into account the investment opportunities available to the Company and any
discount at which the shares are trading in the market relative to their net
asset value. These existing authorities will expire on 5 January 2011 or, if
earlier, at the conclusion of the Annual General Meeting of the Company in
2010. Shares purchased by the Company pursuant to the authority to make market
purchases will be cancelled. The Company will seek to renew these authorities
at the forthcoming Annual General Meeting, which will expire twelve months from
the passing of the resolutions.
Principal risks associated with the Company
General
The market price of the shares may not fully reflect their underlying net asset
values. If stock market prices fall the potential returns available to
Shareholders may decline. There can be no guarantee that the Company's
investment objectives will be achieved.
Zero Dividend Preference shares
Although the Zero Dividend Preference shares rank ahead of the Income shares
and the Capital shares for participation in a distribution of assets on the
winding-up of the Company, they rank behind the Company's liabilities. The Zero
Dividend Preference shares were de-listed on 31 July 2008. There is no
secondary market in which these shares can be traded.
Income shares
The Income shares rank for repayment after the Zero Dividend Preference shares.
Capital shares
The Capital shares rank for repayment after the other two classes of shares.
Due to the substantial gearing provided by the prior capital entitlements of
the Income shares, the Zero Dividend Preference shares and by any debt
financing, the market value of the Capital shares can be expected to be
volatile and particularly sensitive to changes in the value of the Company's
gross assets. The Capital shares' NAV remained at zero throughout the year.
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, therefore
impacting on the Company's ability to realise value before its liquidation
date. In the event that smaller companies under perform, this may affect the
performance of US smaller companies in which the Company is invested.
Unlisted securities
The Company may invest in unlisted securities, or other securities, in which
there is no active market. In such cases it may be difficult to determine the
value of such securities and/or to realise the investment or to do so on
acceptable terms. There is no certainty that a listing or trading facility will
be obtained for such securities. Holders of such securities may not have the
benefit of market rules designed for the protection of holders of listed or
public traded securities. This may include the absence of publicly available
information on such securities or their issuers.
Derivative risk
The Company's investment policy allows it to enter into derivative transactions
where the Investment Managers consider that it is prudent to do so in order to
protect the value of the Company's portfolio and is in the best interests of
the Company. Markets in derivatives can be highly volatile and such investments
carry a high risk of loss. In the case of certain derivatives a relatively
small adverse market movement may result not only in the loss of the original
investment but also in unquantifiable further loss exceeding any margin
deposited. Any such loss suffered by the Company may adversely affect the
Company's ability to meet the capital and income returns to Shareholders.
Dividend levels
Dividends paid on the Company's Income shares rely on receipt of interest
payments and dividends from the securities in which the Company invests and
therefore dividend levels are likely to vary. The Board expects dividend
levels, if any, to be negligible.
Currency risk
The portfolio invests in US securities and its assets are therefore subject to
fluctuations in the US dollar/ sterling exchange rate and the sterling value of
its assets, plus declines in US equity markets as a whole. Bearing in mind that
the final redemption payment will be a sterling payment made to holders of
Income shares at 31 May 2011, in the future 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.
Liquidity risk
A significant proportion of the portfolio is held in smaller and unquoted
companies. Such companies are inherently higher in risk and lower in liquidity
than, for example, blue-chip equities. Unlisted companies have the additional
risk of not benefiting from market rules designed to protect investors. Some of
the investments are in unlisted convertible bonds or preference shares, which
may at any time be converted into a listed common stock, giving an effective
level of liquidity equal to the liquidity in the common stock. Other unlisted
investments do not have the option of converting into a listed stock. This
issue is particularly relevant regarding the 31 May 2011 wind-up date of the
Company.
Credit risk
The portfolio may contain some fixed income securities, however, many of these
are convertible into common stock (equity). The benefit of a convertible
debenture is that, if a portfolio company becomes troubled, the Company is
protected through its position as a creditor. If the underlying portfolio
company performs well, the Company can participate in the upside by converting
into common stock. However, it is possible that such investee companies might
default on these debentures or wind-up prior to their repayment.
Market price risk
The Company is exposed to market price risk due to fluctuations in the market
prices of its investments. Market price risk arises mainly from uncertainty
about future prices of financial instruments used in the Company's business.
It represents the potential loss the Company might suffer through holding
market positions in the face of price movements. The Investment Manager
monitors the prices of financial instruments held by the Company on an ongoing
basis.
Discount volatility
The Company's shares may trade at a discount to its net asset value being a
closed-end fund. The magnitude of this discount fluctuates daily and can vary
significantly. Thus, for a given period of time, it is possible that the market
price could decrease despite an increase in the Company's net asset value. The
Company is seeking to extend its existing authority from Shareholders at the
forthcoming AGM to purchase Income and Capital shares for cancellation. If
granted, the Directors will consider using share buybacks to control the
Company's discount levels when in the interest of all Shareholders and the
Company as a whole.
Regulatory risk
If the Company did not comply with the provisions of Sections 1158 and 1159 of
the Corporation Taxes Act 2010 (formerly contained in Section 842 of the Income
and Corporation Taxes Act 1988), it would lose its investment trust status and
could be liable to pay taxes on investment gains. A breach of the Listing Rules
may result in censure by the Financial Services Authority ("FSA") and/or the
Company's suspension from Listing. In order to minimise these risks, the
Directors, the Investment Managers, the Investment Adviser and the Company
Secretary monitor the Company's compliance with the key criteria of Section
1158 and 1159 on a monthly basis and an ongoing review of compliance with the
FSA Listing Rules. On a quarterly basis, compliance with these provisions is
discussed in detail between the Board, the Company Secretary, the Investment
Managers and the Investment Adviser.
Risks associated with the engagement of third parties
There are a number of potential operational risks associated with the fact that
third parties undertake the Company's administration and custody of assets.
Most seriously, there is the risk that third parties could fail to ensure that
statutory requirements, such as the Companies Act and the FSA Listing Rules,
are complied with. There is also the risk associated with the directorships
held by the Investment Advisers employees on investee companies, which may
prohibit them from dealing in those companies' shares during prohibited periods
throughout the year, this could result in the inability to wholly liquidate the
Company's portfolio by 31 May 2011. Details of how these risks are managed are
included below under 'Internal control process'.
During the year there were no qualifying third party indemnity provisions in
force.
Risk diversification
The Company's investment policy provides it with a global mandate, albeit with
a particular emphasis to invest primarily in equities and equity related
instruments issued by companies domiciled, listed, quoted or traded in North
America. The Company is managed with a view to maintaining an adequate spread
of investment risk in terms of the concentration and size of its investments as
detailed in the investment policy.
There is the risk that the Company's portfolio may become more concentrated as
investments are realised in the months leading up to the Company's liquidation.
The Company will continue to re-invest in liquid assets that are easily
realisable before 31 May 2011.
Internal control process
The Directors acknowledge that they are responsible for the Company's systems
of internal control and for reviewing their effectiveness. An ongoing process,
in accordance with the guidance of the FRC "Internal Control: Revised Guidance
for Directors on the Combined Code", has been established for identifying,
evaluating and managing risks faced by the Company. This process has been in
place throughout the year and up to the date the financial statements were
approved. Key procedures established with a view to providing effective
financial control have been in place for the full financial year and up to the
date the financial statements were approved. No significant failings or
weaknesses within the Company's internal controls were identified.
The risk management process and systems of internal control are designed to
manage rather than eliminate the risk of failure to achieve the Company's
objectives. It should be recognised that such systems can only provide
reasonable and not absolute assurance against material misstatement or loss.
The risk assessment and review of the effectiveness of the Company's system of
internal controls is undertaken by the Audit Committee in the context of the
overall investment objective. The review covers the key business, operational,
compliance and financial risks facing the Company. In arriving at its judgement
of what risks the Company faces, the Audit Committee has considered the
Company's operations in the light of the following factors:
* the nature and extent of risks which it regards as acceptable for the Company
to bear within its overall business objective;
* the Company's ability to reduce the incidence and impact of risk on its
performance; and
* the cost to the Company and benefits related to the Company and third parties
operating the relevant controls.
Against this background, in the review of risk and associated controls the
Board has split the review into five sections reflecting the nature of the
risks being addressed. These are: corporate strategy; published information;
compliance with laws and regulations; relationship with service providers and
investment and business activities.
Given the nature of the Company's activities and the fact that most functions
are subcontracted, the Directors have obtained information from key third party
suppliers regarding the controls operated. To enable the Board to make an
appropriate risk and control assessment the information and assurances sought
from third party suppliers include the following:
* details of the control environment operated by the third party suppliers;
* identification and evaluation of risks and control objectives by third party
suppliers;
* assessment of the communication procedures with third party suppliers; and
* assessment of the control procedures operated by third party suppliers.
The key procedures which have been established to provide effective internal
control are as follows:
* investment management is provided by Premier Asset Management (Guernsey)
Limited and Premier Fund Managers Limited, who are advised by RENN Capital
Group, Inc. The Board is responsible for setting the overall investment policy
and monitors the actions of the Investment Managers and Investment Adviser at
regular Board meetings;
* administration and company secretarial duties for the Company are performed
by Capita Sinclair Henderson Limited;
* custody of assets is undertaken by Frost National Bank Inc. and HSBC Bank
plc;
* the duties of investment management, administration and the custody of assets
are segregated. The procedures of the individual parties are designed to
complement one another;
* the Directors of the Company, all of whom are non-executive, clearly define
the duties and responsibilities of their agents and advisers. The appointment
of agents and advisers is conducted by the Board after consideration of the
quality of the parties involved; the Board monitors their ongoing performance
and contractual arrangements;
* mandates are granted by the Board for investment transactions. The Board sets
the policy for authorising expense payments; and
* the Board reviews financial information produced by the Investment Managers,
the Investment Adviser and the Company Secretary in detail on a regular basis.
Analysis of the Company's performance and position
In order to provide Shareholders with a clear understanding of the Company's
performance and position, this section of the business review will consider how
the Company has performed against the following key performance indicators:
1) The assessment of the value added through the portfolio by comparing
performance before the impact of expenses against relevant benchmarks.
2) The performance of the Company's total assets after all expenses (including
bank interest) have been charged. This measure includes the cost of gearing but
will not reflect the benefit of the gearing that will arise if total assets are
rising.
3) The performance of the Company at the net asset level. This shows how
Shareholders' funds as a whole have performed and includes the cost of bank
interest, but also the impact of the gearing provided by bank debt. If gross
assets have grown by a greater amount than the cost of management and bank
interest, returns to Shareholders will have been enhanced by the gearing. If
total assets have declined the gearing will accelerate that decline in net
assets.
4) The performance of the individual share classes, both in terms of share
price total return (i.e. accounting for dividends received) and in terms of net
asset value total return. The share price performance is the measure of the
return that Shareholders have actually received and will reflect the impact of
widening or narrowing of discounts to NAV.
Portfolio performance for the year
During the course of the year the net asset value of the Income shares
decreased 5.94% from 50.33p to 47.34p. The NAV entitlement of the few remaining
Zero Dividend shares was fixed at 182.61p and the Capital shares' NAV remained
at zero throughout the year.
* Company's performance
Over the year, the Company's gross assets also decreased. On 31 May 2009, the
Company's gross assets were GBP13.49 million of which GBP0.31 million was bank
debt. At 31 May 2010 gross assets were GBP12.71 million of which GBP0.34 million
was bank debt.
* Share price performance
The listing for the Zero Dividend Preference shares ceased on 31 July 2008 and
there was therefore no market price for the shares at the year end. The share
price of the Income shares increased 29.87% from 38.50p to 50.00p; the Capital
share price fell 71.02% from 1.76p to 0.51p and the Unit price increased 30.72%
from 38.25p to 50.00p.
Future developments and events subsequent to the year end
The Directors are aware of the AIC/JPMorgan Claverhouse judgement which was
made during 2007 regarding the charging of VAT on investment management fees.
It is possible that, during the forthcoming year, the Company may be able to
recover further amounts of VAT that it has paid on its investment management
fees although the Directors do not believe that any such recoverable sums will
be of a material amount.
Further details on events subsequent to the year end are detailed in the
Chairman's Statement and Investment Adviser's report.
Social, environmental and ethical policy
Global Special Opportunities Trust plc seeks to invest in companies that are
well managed, with high standards of corporate governance. The Directors
believe this creates the proper conditions to enhance value for Shareholders.
In aiming to achieve a high level of corporate performance the Company adopts a
positive approach to corporate governance and engagement with companies.
MANAGEMENT AGREEMENTS
The Company's investments are managed by Premier Asset Management (Guernsey)
Limited and Premier Fund Managers Limited, as advised by RENN Capital Group,
Inc. These arrangements are governed by two `Investment Management Agreements'
and an `Investment Advisory Agreement' each dated 5 April 2001, as amended by
the Novation Agreement dated 21 October 2005 (following the acquisition of the
business of BFS Investments PLC by Premier Asset Management plc) and by side
letters dated 2 May 2008 which took effect from 1 June 2008. As at 31 May 2008,
the management fees, payable monthly in arrears, were calculated at a monthly
rate of 0.0417% of the value of the gross assets less current liabilities of
the Income portfolio, reduced by the value of investments held in companies
managed by Premier Fund Managers Limited, plus 0.125% of the gross assets less
current liabilities of the US Growth portfolio. In addition a performance fee
(payable annually) of an amount equal to 10% of the amount by which the
Company's gross assets less current liabilities exceed, on the calculation
date, either the initial gross assets increased by a compound rate of 5.5% per
annum or the gross assets less current liabilities by reference to which the
performance fee was last paid, and prior to payment of such fee, as increased
by a compound rate of 5.5% per annum. The performance fee was subject to a cap
equal to 5% of the gross assets on the relevant calculation date.
The management of the portfolio is delegated by Premier Asset Management
(Guernsey) Limited to RENN Capital Group, Inc. under the Investment Advisory
Agreement dated 5 April 2001 as amended by a side letter dated 2 May 2008 which
took effect from 1 June 2008. RENN Capital Group, Inc. is an investment
management company based in Dallas, Texas, USA, which was founded in 1973 by
Russell Cleveland. RENN Capital Group, Inc. is a registered investment adviser
under the United States Investment Advisers Act 1940 and currently has funds
under management of approximately $375 million. Under the previous investment
advisory agreement, and until 31 May 2008, RENN Capital Group, Inc. received
60% of the management fees and performance fees payable on the portfolio.
With effect from 1 June 2008, the Investment Management and Investment Advisory
Agreements were amended. Premier Asset Management (Guernsey) Limited is now
entitled to a monthly fee of 0.0625% of the gross assets less the current
liabilities of the portfolio.
Premier Asset Management (Guernsey) Limited is also entitled to a performance
fee which shall be payable in respect of financial years ending on or after 31
May 2010 equal to 15% of the amount by which the net asset value per Income
share (assuming and deeming, for the purposes of this calculation only, that
the Income shares do not have a capped final capital entitlement) exceeds
either: (a) GBP1.00 as increased from 1 June 2008 at an annual rate of 8% per
annum (if no performance fee has been paid prior to the date of such
calculation); or (b) the net asset value per Income share (assuming and
deeming, for the purposes of this calculation only, that the Income shares do
not have a capped final capital entitlement) by reference to which the
performance fee was last paid and prior to payment of such fee (if a
performance fee has previously been paid) as increased at an annual rate of 8%
per annum. Any performance fee to be paid by the Company in any performance
period will be capped at 4.99% of net assets. Any unrewarded outperformance (as
a result of the cap) will be carried forward. Such carried forward unrewarded
outperformance will only be payable in future periods to the extent that it
does not result in a performance fee payment exceeding 4.99% of net assets in
any performance period. No performance fee was payable in respect of the year
under review.
Premier Asset Management (Guernsey) Limited is required to pay 60% of the fee
attributable to the portfolio and 70% of any performance fee to RENN Capital
Group, Inc. under the terms of the revised Investment Advisory Agreement.
The management agreements and the investment advisory agreements are terminable
on 12 months' notice, such notice not to expire prior to 31 May 2010 provided
always that they will terminate automatically upon a winding-up at the Company
on 31 May 2011. No additional compensation is payable to the Investment
Managers or the Investment Adviser on the termination of these agreements.
Under another agreement (`the administration agreement') dated 5 April 2001,
company secretarial services and the general administration of the Company are
undertaken by Capita Sinclair Henderson Limited. Their fee is subject to annual
upward adjustments in accordance with the Retail Price Index and review by the
Board. The administration agreement may be terminated by twelve months' written
notice, or at any time by written notice on liquidation of the Company with no
compensation payable.
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 or loss of the Company; and
? the Report of the Directors includes a fair review of the development and
performance of the business and the position of the Company together with a
description of the principal risks and uncertainties that it faces.
The Directors are responsible for keeping adequate accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with the
Companies Act 2006. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
financial statements included on the Manager's website. Legislation in the
United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Duncan Abbot
Chairman
17 September 2010
Independent Auditors' report
The Company's financial statements for the year ended 31 May 2010 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 2010
Year ended 31 May 2010 Year ended 31 May 2009
Note Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Losses on investments at 9 - (523) (523) - (5,066) (5,066)
fair value through profit or
loss
Income 2 216 - 216 454 - 454
Investment management fee 3 (35) (80) (115) (35) (80) (115)
VAT recovered on investment 2 5 7 3 7 10
management fees
Other expenses 4 (315) - (315) (311) - (311)
Tender offer costs written - - - 2 2 4
back
Liquidation costs (25) (25) (50) - - -
Exchange gains on capital - 31 31 - 6 6
items
Net return before finance (157) (592) (749) 113 (5,131) (5,018)
costs and taxation
Finance costs
Interest payable and similar 5 (3) (8) (11) (22) (52) (74)
charges
Appropriations in respect
of:
Income shares 7 160 600 760 (65) 5,161 5,096
Return on ordinary - - - 26 (22) 4
activities before taxation
Taxation on ordinary 6 - - - (26) 22 (4)
activities
- - - - - -
Return per share pence pence pence pence pence pence
Capital share 8 - - - - - -
Income share 8 (0.64) (2.39) (3.03) 0.26 (20.47) (20.21)
Zero Dividend Preference 8 - - - - - -
share
Unit (1 Capital, 1 Income) 8 (0.64) (2.39) (3.03) 0.26 (20.47) (20.21)
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue return and capital return columns have been
prepared in accordance with the AIC's SORP. Revenue and capital return per
share figures shown are also supplementary information.
All revenue and capital items in the above statement derive from continuing
operations. There are no recognised gains or losses other than those passing
through the Income statement.
The notes form part of these financial statements.
Statement of movements in net assets attributable to shareholders
for the year ended 31 May 2010
Year ended Year ended
Note 31 May 2010 31 May 2009
GBP'000 GBP'000
Net assets attributable to Shareholders at 13,065 19,149
the start of the year
Appropriations to Shareholders
Income shares (760) (5,096)
(760) (5,096)
Dividends paid to Income Shareholders 7 - (497)
Repurchase of shares for cancellation (77) (491)
(including related costs)
Net assets attributable to Shareholders at 12,228 13,065
the year end
Note 16 discloses the reconciliation of movement in assets attributable to
Shareholders.
The notes form part of these financial statements.
Balance sheet
as at 31 May 2010
31 May 2010 31 May 2009
Note GBP'000 GBP'000
Fixed assets
Investments held at fair value through 9 11,801 12,403
profit or loss
11,801 12,403
Current assets
Debtors 11 36 105
Cash at bank 876 986
912 1,091
Creditors - amounts falling due within one
year
Creditors 12 141 119
Bank loan 13 344 310
Net assets attributable to Shareholders 14 12,228 -
12,713 429
Net current (liabilities)/assets (11,801) 662
Total assets less current liabilities - 13,065
Creditors - amounts falling due after more
than one year
Net assets attributable to Shareholders 14 - 13,065
- 13,065
- -
Net asset values per share: pence pence
- Capital shares 14 - -
- Income shares 14 47.34 50.33
- Zero Dividend Preference shares 14 182.61 182.61
- Units 14 47.34 50.33
These financial statements were approved by the Board of Directors on 17
September 2010 and signed on its behalf by:
Duncan Abbot
Chairman
The notes form part of these financial statements.
Statement of cash flows
for the year ended 31 May 2010
Year ended Year ended
31 May 2010 31 May 2009
Note GBP'000 GBP'000
Operating activities
Investment income received 256 475
Deposit interest received 4 101
Other income received - 19
VAT refunded in respect of Investment 7 10
Managers' fees
Investment management fees paid (115) (208)
Secretarial fees paid (115) (112)
Other cash payments (224) (680)
Net cash outflow from operating activities 17 (187) (395)
Servicing of finance
Interest paid (15) (70)
Non-equity dividends paid (Income shares) - (497)
Net cash outflow from servicing of finance (15) (567)
Capital expenditure and financial
investment
Purchase of investments (4,275) (9,223)
Sales of investments 4,379 10,838
Net cash inflow from capital expenditure 104 1,615
and financial investment
Net cash (outflow)/inflow before financing (98) 653
Financing
Revolving credit facility repayment - (2,083)
Repurchase of Income shares for (77) -
cancellation
Repurchase of Zero Dividend Preference - (491)
shares for cancellation
Buy back/repurchase of shares by tender - (49,034)
Net cash outflow from financing (77) (51,608)
Net cash outflow after financing (175) (50,955)
Decrease in cash 19 (175) (50,955)
The notes form part of these financial statements.
Notes to financial statements
for the year ended 31 May 2010
1. ACCOUNTING POLICIES
Accounting convention
The financial statements are prepared under the historical cost convention
except for the measurement at fair value of fixed asset investments and are
prepared in accordance with applicable law and Accounting Standards in the
United Kingdom (`UK GAAP') and in accordance with the Statement of Recommended
Practice "Financial Statements of Investment Companies" (`SORP') issued by the
Association of Investment Companies (`AIC') in January 2009.
Wind-up of Company
The Company is due to wind-up on 29 May 2011 and as a result, the accounts have
been prepared on a wind-up (break up) basis rather than on a going concern
basis as it is certain that the wind-up will occur and there is no option for
the Company to continue after this date. The comparatives have, however, been
prepared on a going concern basis.
The Directors have received proposals for liquidator's fees of GBP50,000 and this
amount has been included in the accounts. These are the only costs known to
date. As the Company is a split capital trust with both Income and Capital
Shareholders, the Company has considered it appropriate to apportion these
costs fairly 50% to revenue and 50% capital.
At this point in time, being one year until wind-up, there are clearly
uncertainties as to whether several valuations of the relatively illiquid
stocks can be realised. Where applicable, the assessment of fair value reflect
a cost or discount applicable to a one year realisation timetable.
Following initial attempts to realise certain holdings in the portfolio, the
Board has concluded that the markets in the shares of certain investments are
not active. Accordingly the Board has adjusted the valuation of these holdings
to reflects the likely realisation value in the timescale available as the
Company approaches its 31 May 2011 liquidation date.
All creditors, accruals and prepayments that are incurred in the course of the
day to day running of the Company have also been included at fair value, being
their face value as of the Balance sheet date.
Due to the wind-up, all liabilities have been presented as less than one year.
There are no uncertainties about the carrying amounts of the other assets and
liabilities.
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
As the Company's business is investing in financial assets with a view to
profiting from their total return in the form of interest, dividends or
increases in fair value, quoted equities and fixed income securities are
designated as fair value through profit or loss on initial recognition. The
Company manages and evaluates the performance of these investments on a fair
value basis in accordance with its investment strategy and information about
the portfolio is provided internally on this basis to the Board.
As mentioned above, several investments have been revalued in accordance with
their realisation value within the timescales available prior to the
liquidation date.
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 several of the Company's US quoted
investments, the market in the shares is not sufficiently active and 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 has used
alternative methods to value these illiquid holdings including prices of recent
transactions, indicative sales prices from disposals and other valuation
techniques.
Unquoted investments are valued at fair value as follows:
? Unquoted equity investments and unquoted loan notes are included at fair
value based on latest dealing prices, stockbroker valuations, net asset values,
discounted cashflow analysis or other information, as appropriate. This
valuation incorporates all factors that market participants would consider in
setting a price.
? Unquoted convertible debenture investments are valued as follows. Where the
debentures are paying cash coupons they are valued at the greater of par value
and the market value of the equity received if converted. If the debentures are
not paying cash coupons then they are valued at the lower of cost and the
market value of the equity received if converted.
? Non-redeemable unquoted convertible preferred stock are valued at the market
value of the equity received if converted. Redeemable preferred stock
investments are valued as follows. Where the preferred stocks are paying cash
coupons they are valued at the greater of cost or market value of the equity
received if converted. If the preferred stocks are not paying cash coupons then
they are valued at the lower of cost and the market value of the equity
received if converted.
? Unquoted warrant investments are valued at fair value using the Black Scholes
methodology, which includes a time value which is calculated and added to the
intrinsic value to arrive at a total valuation for each warrant. The
application of the Black Scholes methodology requires certain assumptions to be
made on the volatility of the underlying shares to which the warrants
subscribe.
Derivatives
The Company has the option to use derivative financial instruments. If used,
these derivatives would be classified as `fair value through profit or loss'
and movements in the fair value of these derivatives would be recorded through
the Income statement.
Shareholders' funds
Due to the Company having a fixed life, the Zero Dividend Preference shares,
Income shares and Capital shares are all classified under FRS 25 as financial
liabilities rather than as equity in the Balance sheet. This is purely
presentational and has no effect on the Company's net assets per share or
returns per share as calculated.
Income recognition
Dividends receivable on quoted equity shares are brought into account on the
ex-dividend date. As prescribed in FRS 16: Current tax, UK dividends are
disclosed excluding the associated tax credit. Dividends receivable on equity
shares where no ex-dividend date is quoted are brought into account when the
Company's right to receive payment is established.
Income arising on fixed interest securities is recognised on a time
apportionment basis so as to reflect the effective interest rate on that
security.
The ordinary element of stocks received in lieu of dividends is recognised as
income of the Company. Any enhancement above the equivalent value of the cash
dividend that would have been receivable is treated as a capital gain on the
associated investment.
? Underwriting commission is recognised as income in so far as it relates to
the shares the Company is not required to take up. Where the Company is
required to take up shares underwritten the commission received is treated as a
deduction from the cost of shares. The balance is taken to income in the Income
statement for the Company; and
? Interest receivable is included on an accruals basis.
Expenditure
All expenses are accounted for on an accruals basis. All expenses are charged
in full to the revenue column in the Income statement except as follows;
? Transaction costs incurred on the purchase and sale of investments are
charged through the capital column of the Income statement;
? Expenses are allocated between capital and revenue where a connection with
the maintenance or enhancement of the value of the investments can be
demonstrated. In respect of the investment management fees, debit interest and
loan arrangement fees, 70% has been allocated to capital and 30% to revenue in
the Income statement, as stated in the prospectus at the time of the Company's
inception. The investment management performance fee when payable is charged,
in total, to the capital column of the Income statement.
Taxation
The charge for taxation is based on the net revenue for the year.
Full provision for deferred taxation is made under the liability method on all
timing differences that have arisen but not reversed by the Balance sheet date
in accordance with FRS 19: Deferred Taxation. Deferred tax assets are
recognised to the extent that is regarded as more likely than not that they
will be recovered. Timing differences arise from the inclusion of items of
income and expenditure in tax computations in periods different from those in
which they are included in the accounts. Provision is made at the average tax
rates that are expected to apply in the periods when the timing differences are
expected to reverse, based on tax rates and laws that have been enacted or
substantially enacted by the Balance sheet date. Deferred tax is measured on a
non-discounted basis. The tax effect of different items of expenditure is
allocated between revenue and capital on the same basis as the particular item
to which it relates. Tax relief on expenses is allocated between revenue and
capital using the marginal basis in accordance with the SORP.
Foreign currency transactions
The currency of the primary economic environment in which the Company operates
(the functional currency) is sterling. The presentation currency is sterling.
Transactions denominated in foreign currencies are translated into sterling at
the rate of exchange ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the period end are reported at
the rates of exchange prevailing at the period end. A gain or loss arising from
a change in exchange rates subsequent to the date of the transaction is
included as an exchange gain or loss in the capital column or in the revenue
column of the Income statement depending on whether the gain or loss is of a
capital or revenue nature respectively.
Finance costs
The Directors have allocated 100% of the appropriation relating to the capital
entitlement of Zero Dividend Preference shares and Income shares to capital.
Accordingly a redemption reserve has been set up to provide for the capital
repayment entitlements attached to the Zero Dividend Preference shares and
Income shares which accrue to the date of the Company's winding-up on 31 May
2011. On a winding-up of the Company the Zero Dividend Preference shares were
entitled to a capital repayment of 100.00p per share as at 12 April 2001,
increasing on a daily basis by approximately 8.8% p.a. compounded annually to
give a final capital entitlement of 182.608201p on 31 May 2008. This amount
will not increase until payment is made after 31 May 2011. The Income shares
were entitled to a capital repayment of 85.00p increased on the last day of
each calendar month to give a capital entitlement of 100.00p on 31 May 2008 and
then from 1 June 2008 to 31 May 2011 increased at a daily compound rate so as
to give a final capital entitlement of 120.82p on 31 May 2011.
The Income shares are entitled to the revenue reserves of the Company. The
revenue return for the year is treated as an appropriation and is analysed in
note 7 between dividends paid in the year and residual returns.
The Capital shares are entitled to all surplus assets of the Company after
repayment of the bank facility and after the pre-determined capital
entitlements of the Zero Dividend Preference shares and the Income shares have
been satisfied.
2. INCOME
Year ended Year ended
31 May 2010 31 May 2009
GBP'000 GBP'000
Income from investments designated at fair value
through profit or loss
Overseas unfranked investment income 212 372
212 372
Other income
Bank interest receivable 4 63
Other income - 19
4 82
Total income 216 454
Total income comprises:
Dividends from investments designated at fair value - 64
through profit or loss
Interest from investments designated at fair value 212 308
through profit or loss
Deposit interest from bank deposits 4 63
Other income from investments designed at fair value - 19
through profit or loss
216 454
Income from investments:
Listed overseas 6 64
Unlisted overseas 206 308
212 372
3. INVESTMENT MANAGEMENT FEE
Year ended 31 May 2010 Year ended 31 May 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management fee 35 80 115 35 80 115
35 80 115 35 80 115
With effect from 1 June 2008, the Investment Managers are entitled to a monthly
fee of 0.0625% of the gross assets less current liabilities of the portfolio. A
performance fee was not payable for the year ended 31 May 2010 (2009: GBPnil).
Further information regarding the investment management fees from 1 June 2008
is detailed above.
At 31 May 2010 there were amounts outstanding of GBP8,000 (2009: GBP8,000). VAT is
no longer payable on the Investment Managers' fees or performance fees.
During the year, the Company has received GBP7,000 in respect of past VAT on
Investment Managers' fees from the previous Investment Manager, BFS Investments
plc. This amount has been split 70% capital, 30% revenue in accordance with the
accounting policy on charging Investment Managers' fees.
4. OTHER EXPENSES
Year ended 31 May 2010 Year ended 31 May 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Administrative & 115 - 115 121 - 121
secretarial fee
Directors' remuneration 68 - 68 68 - 68
Auditors' remuneration* 33 - 33 31 - 31
Other expenses 107 - 107 93 - 93
VAT recoverable (8) - (8) (2) - (2)
Total other expenses 315 - 315 311 - 311
2010 2009
GBP'000 GBP'000
* Auditors remuneration is split as follows:
Fees payable to the Company's Auditors for the audit of 33 31
the annual financial statements
Fees payable to the Company's Auditors and its associates -
for other services
33 31
5. INTEREST PAYABLE AND SIMILAR CHARGES
Year ended 31 May 2010 Year ended 31 May 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
On bank loan 3 8 11 22 52 74
3 8 11 22 52 74
6. TAXATION
Year ended 31 May 2010 Year ended 31 May 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Analysis of charge for the
year:
Corporation tax - - - - - -
Overseas tax not - - - 4 - 4
recoverable
Tax relief attributable - - - 22 (22) -
expenses allocated to
capital
- - - 26 (22) 4
Factors affecting tax charge for the year
The tax assessed for the year differs from the smaller companies rate of
corporation tax of 21% in the United Kingdom (2009: 21%). The differences are
explained below:
Year ended 31 May 2010 Year ended 31 May 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Return on ordinary (160) (600) (760) 91 (5,183) (5,092)
activities after interest
payable but before
appropriations
Return on ordinary (34) (126) (160) 19 (1,088) (1,069)
activities multiplied by
the smaller companies rate
of corporation tax in the
United Kingdom 21% (2009:
21%)
Effects of the non-taxable
items:
Losses on investments, - 103 103 - 1,062 1,062
exchange gains on capital
items and movement on fair
value of derivative
financial instruments
Unrelieved expenses 29 18 47 - 4 4
Expenses not deductible for 5 5 10 2 - 2
tax
Accrued income taxable on - - - 1 - 1
receipt
Overseas tax not - - - 4 - 4
recoverable
Current tax charge for the - - - 26 (22) 4
year
At 31 May 2010 the Company had unrelieved expenses of GBP6,207,000 (31 May 2009:
GBP5,989,000). 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 2010 31 May 2009
GBP'000 GBP'000
Dividends - 497
Residual balance of revenue account (160) (432)
Total appropriations in respect of Income (160) 65
shares
Dividends are comprised as follows:
Relating to prior period
Fourth interim paid of nil (2008: 1.00p net) - 497
- 497
Relating to current period
No dividend (2009: nil) will be proposed for the year ended 31 May 2010.
Appropriations in the capital column of the Income statement are calculated as
discussed in note 8 and amounted to:
Year ended Year ended
31 May 2010 31 May 2009
GBP'000 GBP'000
(600) (5,161)
8. RETURN PER SHARE
Year ended 31 May 2010 Year ended 31 May 2009
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
Return per share
Capital share - - - - - -
Income share (0.64) (2.39) (3.03) 0.26 (20.47) (20.21)
Zero Dividend Preference - - - - - -
share
Unit (1 Capital, 1 Income) (0.64) (2.39) (3.03) 0.26 (20.47) (20.21)
Capital shares
The return per Capital share is based on appropriations for the year of GBPnil
(2009: GBPnil) and on 50,000,000 (2009: 50,000,000) Capital shares.
Income shares
The revenue return per Income share is based on revenue appropriations of (GBP
160,000) (2009: GBP65,000) and on 25,105,967 (2009: 25,210,008) Income shares
being the weighted average number of shares in issue during the year. The
capital return per Income share is based on capital appropriations of GBP
(600,000) (2009: (GBP5,161,000)) and on 25,105,967 (2009: 25,210,008) Income
shares being the weighted average number of shares in issue during the year.
The redemption yield is contingent on the Company having sufficient assets at
the time of redemption.
Zero Dividend Preference shares
The return per Zero Dividend Preference share is based on appropriations of GBP
nil (2009: GBPnil) and on 206,037 (2009: 206,037) Zero Dividend Preference shares
being the weighted average number of Zero Dividend Preference shares in issue
during the year.
9. INVESTMENTS
As at As at
31 May 2010 31 May 2009
GBP'000 GBP'000
Investment portfolio summary
Listed investments on a recognised 9,697 8,545
international exchange
Unlisted investments with conversion rights 1,457 1,780
into listed investments
Other unlisted investments 647 2,078
Investments at fair value 11,801 12,403
Unlisted
investments
*
with
conversion
rights into Other
Listed listed unlisted
investments investments investments Total
GBP'000 GBP'000 GBP'000 GBP'000
Analysis of investment portfolio
movements
Opening book cost 15,949 4,959 4,896 25,804
Opening investment holding losses (7,404) (3,179) (2,818) (13,401)
Opening valuation 8,545 1,780 2,078 12,403
Movements in the year:
Transfer 266 - (266) -
Purchases at cost 4,320 - - 4,320
Sales:
Proceeds (2,076) (1,187) (1,136) (4,399)
(Losses)/gains on sales (962) 20 (2,815) (3,757)
Movement in investment holding (395) 843 2,786 3,234
losses
Closing valuation 9,698 1,456 647 11,801
Analysis of investment portfolio
movements
Closing book cost 17,497 3,792 679 21,968
Closing investment holding losses (7,799) (2,336) (32) (10,167)
9,698 1,456 647 11,801
* The Company is entitled to exercise these conversion rights at any time.
2010 2009
GBP'000 GBP'000
Analysis of capital gains/(losses)
Losses on sales (3,757) (1,092)
Movement in investment holding losses 3,234 (3,974)
Losses on investments (523) (5,066)
A breakdown of the investment portfolio is shown above.
Transaction costs incidental to the acquisitions of investments totalled GBP
26,000 (2009: GBP8,000) and disposals of investments totalled GBP45,000 (2009: GBP
3,000) for the year. These amounts are included in losses on investments, as
disclosed in the Income statement.
Details of material holdings in unlisted securities are as follows:
Last Aggregate Profit/ Net income
(loss)
Fair Fair Accounts capital and after tax from
value value
Total 31 May 31 May period reserves for year investment
cost 2010 2009 end
Investment GBP'000 GBP'000 GBP'000 US$m US$'000 GBP'000
AnchorFree
preference 287 76 52 30/04/ 4,027,167 2,969,785 -
2010
Duoyuan
printing
(previously
Asian
Financial)
warrants - 79 11 31/03/ 193,215,000 25,559,930 -
2010
AuraSound
warrants - - - 31/03/ (5,806,860) (2,171,370) -
2010
Business
Process
Outsourcing
common stock 11 55 49 31/12/ 12,769,000 5,281,000 -
2009
CaminoSoft
warrants - - - 31/03/ (6,590) (201,290) -
2010
Celsia
Technologies
warrants - - - 31/12/ (5,669,510) (5,991,860) -
2008
China
Greenscape
convertible 382 516 465 31/12/ 93,960,000 20,530,000
preference 2009
Cover-All
Technologies
warrants - 34 21 31/03/ 12,372,390 4,202,402 -
2010
Global Axcess
warrants - 99 - 31/03/ 16,931,640 3,035,010 -
2010
BPO Management
Services
common stock 1,732 - 39 31/12/ (3,361,820) (12,344,650) -
2009
iLinc
Communications
convertible 352 241 310 30/09/ 3,897,000 (2,140,000) 37.8
debenture 2008
Integrated
Security
Systems
warrants - - - 31/03/ 1,479,020 6,242,040 -
2010
PetroHunter
convertible 240 83 58 31/03/ (59,634,000) (23,099,000) 26.6*
debenture 2010
warrants - 26 68 31/03/ (59,634,000) (23,099,000) -
2010
Pipeline Data
convertible 826 764 1,059 31/03/ (11,268,680) (36,498,630) 91.4
debenture 2009
Ronco
convertible 640 - 4 31/12/ 4,264,240 (53,835,640) -
preference 2006
SinoHub
warrants - 128 42 31/03/ 49,793,000 13,869,000 -
2010
Symbollon
Pharmaceuticals
warrants - 2 - 31/12/ (334,680) (692,370) -
2009
Terra Nova
Financial Group
warrants - - - 31/03/ 16,630,600 (14,450,230) -
2010
* GBP23,200 as stock GBP3,400 as cash.
Disposal Proceeds Original
cost
date GBP'000 GBP'000
Datapath 02/06/2009 35 812
e-Original** 30/06/2009 - 1,933
Narrowstep** 16/09/2009 - 4,924
Vertical Branding** 21/12/2009 - 364
Heyspace** 31/05/2010 - 380
** Written off
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
CMSF Corp. Common Stock 37.0
Integrated Security Common Stock 26.1
Systems, Inc.
Cover-All Technologies Common Stock 6.0
Inc.
Global Axcess Corp. Common Stock 6.0
Hemobiotech, Inc. Common Stock 5.3
Aurasound, Inc. Common Stock 3.6
The Company also has substantial interests in convertible debentures and other
debt instruments as follows:
Name of undertaking Class of share % of class held
BPO Management Services, Series B Preferred 10.0
Inc.
iLinc Communications, Inc. 12% Convertible Debentures 9.8
PetroHunter Energy 8.5% Convertible 7.1
Corporation Debentures
Pipeline Data, Inc. 10% Convertible Debentures 4.0
11. DEBTORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
As at As at
31 May 2010 31 May 2009
GBP\'000 GBP'000
Sales for future settlement 20 -
Prepayments and accrued income 16 105
36 105
12. CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
As at As at
31 May 2010 31 May 2009
GBP'000 GBP'000
Outstanding wind-up and related costs 50 -
Sundry creditors and accruals 91 119
141 119
13. BANK LOAN
As at As at
31 May 2010 31 May 2009
GBP'000 GBP'000
Revolving credit drawn down 344 310
344 310
As at 31 May 2010 the Company had a US$500,000 revolving credit facility with
Allied Irish Banks plc. The facility was re-negotiated on 29 May 2010,
resulting in an extension of two months to 28 July 2010 to allow time for the
extension agreement to be drawn up. On 26 July 2010 the extension of the
facility to 31 May 2011 was approved. 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 31 May 2011.
At 31 May 2010 the Company had utilised the full amount of US$500,000 (2009:
US$500,000) of this facility. Interest is payable at LIBOR plus a margin of
3.0% on any drawn down balance and 1.5% per annum on any undrawn balance.
Repayment of the loan has priority over any capital repayment on winding-up.
The principal covenant under the revolving credit facility is that gross
borrowings will not at any time exceed 40% of the adjusted net asset value.
14. NET ASSET VALUES
Total net asset values attributed to Shareholders are as follows:
31 May 2010 31 May 2009
GBP'000 GBP'000
For the purposes of calculating net
asset values:
Total net assets attributable to:
- Capital Shareholders - -
- Income Shareholders 11,852 12,689
- Zero Dividend Preference 376 376
Shareholders
12,228 13,065
- Unit holders 11,852 12,689
pence pence
Net asset value per:*
- Capital share - -
- Income share 47.34 50.33
- Zero Dividend Preference share 182.61 182.61
- Unit 47.34 50.33
They are represented by:
31 May 2010 31 May 2009
GBP'000 GBP'000
Share Capital 75 75
Special reserve 11,376 11,453
Capital redemption reserve 40 40
Capital reserve (4,197) (3,597)
Redemption reserve 4,906 4,906
Revenue reserve 28 188
Assets attributable to shareholders 12,228 13,065
* Net asset values per share calculated on the number of shares in issue of:
31 May 31 May 2009
2010
- Capital share 50,000,000 50,000,000
- Income share 25,035,008 25,210,008
- Zero Dividend Preference share 206,037 206,037
15. SHARE CAPITAL
31 May 2010 31 May 2009
GBP'000 GBP'000
Issued, allotted and fully paid
50,000,000 (2009: 50,000,000) Capital shares of 0.1p 50 50
each
25,035,008 (2009: 25,210,008) Income shares of 0.1p 25 25
each
206,037 (2009: 206,037) Zero Dividend Preference - -
shares of 0.1p each
75 75
During the year ended 31 May 2010, 175,000 Income shares were purchased for
cancellation at a price of GBP0.4385 per share resulting in 25,035,008 remaining
in issue. Subsequently to the year-end, no further shares have been purchased
for cancellation.
Duration
The Articles of Association provide that the Directors shall convene a 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 after 31 May 2011.
The holders of the Income shares shall be paid prior to the wind-up date an
amount equal to the amount standing to credit of the Company's revenue reserves
and, after repayment of prior ranking creditors and the prior capital
entitlements of the Zero Dividend Preference Shareholders have been met in
full, an amount equal to 85.00p per Income share as increased on the last day
of each calendar month from 30 April 2001 to and including 31 May 2008 so as to
give a capital entitlement of 100.00p on 31 May 2008 and then from 1 June 2008
to 31 May 2011 increased at a daily compound rate so as to give a final capital
entitlement of 120.82p on 31 May 2011.
The holders of the Capital shares are entitled to the surplus assets of the
Company available for distribution after repayment of the bank loan and payment
of the entitlements of the Zero Dividend Preference shares and the Income
shares.
16. MOVEMENT IN ASSETS ATTRIBUTABLE TO SHAREHOLDERS
Capital
redemption Special Capital Redemption Revenue
reserve reserve reserve reserve reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Opening balance 40 11,453 (3,597) 4,906 188
Net losses on realisation of - - (3,757) - -
investments
Exchange gains on capital - - 31 - -
items
Movement in Investment - - 3,234 - -
holding losses
Costs charged to capital - - (113) - -
VAT recovered on Investment - - 5 - -
Management fees
Repurchase of shares for - (77) - - -
cancellation
Retained net revenue for the - - - - (160)
year
At 31 May 2010 40 11,376 (4,197) 4,906 28
17. RECONCILIATION OF NET RETURN BEFORE FINANCE COST AND TAXATION TO NET CASH
INFLOW FROM OPERATING ACTIVITIES
31 May 2010 31 May 2009
GBP'000 GBP'000
Net return before finance costs and taxation (749) (5,018)
Add back: losses on investments 523 5,066
Less: Exchange gains on capital items (31) (6)
Increase/(decrease) in creditors 26 (583)
Decrease in debtors 89 223
Reinvested dividends (45) (73)
Tax deducted from investment income - (4)
Net cash outflow from operating activities (187) (395)
18. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
31 May 2010 31 May 2009
GBP'000 GBP'000
Decrease in cash at bank in year (175) (50,955)
Revolving credit repayment - 2,083
Realised foreign exchange gain/(loss) 31 (5)
Movement in net funds (144) (48,877)
Net cash at start of year 676 49,553
Net cash at 31 May 532 676
For the purposes of this note net funds is defined as cash at bank and the
revolving credit loan only.
19. ANALYSIS OF CHANGES IN NET CASH
At Cash Exchange At
1 June 2009 flows differences 31 May 2010
GBP'000 GBP'000 GBP'000 GBP'000
Cash at bank 986 (175) 65 876
Revolving credit loan due within (310) - (34) (344)
one year
676 (175) 31 532
20. RELATED PARTY TRANSACTIONS
The Investment Managers, Premier Asset Management (Guernsey) Limited and
Premier Fund Managers Limited, are regarded as related parties to the Company.
The amounts paid to the Managers for investment management fees are disclosed
in note 3. The investment management fee is based on the Company's gross assets
less current liabilities which are reduced by the value of investments held in
companies where Premier is the investment manager. At 31 May 2010 the market
value of these holdings was GBPnil (2009: GBPnil).
Mr Cleveland of RENN Capital Group, Inc., the Investment Adviser is a director
of Access Plans, Cover-All Technologies, Integrated Securities Systems, BPO
Management and CaminoSoft, being companies held within the portfolio. Of these
companies, Mr Cleveland received fees of US$49,000 per annum in respect of
Cover-All Technologies. Other officers of RENN Capital Group Inc. also sit on
the boards of certain companies held as investments within the portfolio. The
total directors' remuneration received by RENN Capital Group Inc. for
representation of the Company and its other clients and affiliates, and
attendance at meetings of the boards of companies in which the Company had a
interest during the year ended 31 May 2010 was US$nil (2009: US$11,476).
21. CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
At 31 May 2010 there were no outstanding commitments or contingent liabilities
(2009:nil).
22. CONTINGENT ASSETS
Following the AIC/JPMorgan Claverhouse judgement which was made during 2007
regarding the charging VAT on investment management fees, the Company has
recently received a sum of GBP7,000 from the previous Investment Manager. It is
possible that the Company will be able to recover further amounts of VAT that
it has paid on its investment management fees during the forthcoming year,
although the Directors do not believe that any such recoverable sums will be of
a material amount.
Sums received to date amount to GBP17,000.
23. ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES
Objectives, policies and strategies
Following approval by Shareholders on 30 May 2008 the investment policy was
revised to invest primarily in equities and equity related instruments issued
by companies domiciled, listed quoted or traded in North America. The Company
may invest in bonds, warrants, contracts for difference, other forms of
derivative investment, bank debt or debt securities.
The Company borrows money by way of a US$500,000 revolving credit facility at a
fixed interest rate of LIBOR plus margin of 3.0% on any drawn down balance and
1.5% per annum on any undrawn balance.
The Company's financial instruments comprise securities, warrants, other
investments and bank deposits which are held to achieve its investment
objective as well as debtors and creditors that arise from its operations, for
example sales and purchases of securities awaiting settlement and debtors of
accrued income.
The nature and extent of the financial instruments outstanding at the Balance
sheet date and the risk management policies employed by the Company are
discussed below.
The principal risks the Company faces through the holding of financial
instruments are:
? market risk, comprising currency risk, interest rate risk and other price
risk; and
? liquidity/marketability risk.
As required by FRS 29: Financial Instruments: Disclosure, an analysis of
financial assets and liabilities, which identifies the risk to the Company of
holding such items, is given below.
Market risk
The Company's strategy on the management of investment risk is driven by the
Company's investment objective. The Investment Managers and Investment Adviser
monitor the financial risks affecting the Company on a continual basis in
accordance with the policies and procedures in place. The Board manages the
market price risks inherent in the investment portfolio by ensuring full and
timely access to relevant information from the Investment Managers and
Investment Adviser. The Board meets quarterly and at each meeting reviews the
investment performance, the investment portfolio and the rationale for the
current investment positioning to ensure consistency with the Company's
objectives and investment policies.
Financial assets
All investments and derivatives are stated in sterling and disclosed at fair
value through profit or loss.
The Company invests directly in smaller companies. As smaller companies do not
generally have the financial strength, diversity and resources of large
companies they may find it more difficult to overcome periods of economic slow
down or recession. In addition, the relatively small market capitalisation of
such companies may make the market in their shares less liquid. In the event
that smaller companies under perform, this may affect the performance of
smaller companies in which the Company is invested.
The Company invests in a wide range of industrial sectors therefore the Board
does not consider there is a significant risk to market fluctuations in any one
industry.
The Company may invest in unlisted securities, or other securities, in which
there is no active market. In such cases it may be difficult to determine the
value of such securities and/or to realise the investment or to do so on
acceptable terms. There may be no certainty that a listing or trading facility
will be obtained for such securities. Holders of such securities may not have
the benefit of market rules designed for the protection of holders of listed or
public traded securities. This may include the absence of publicly available
information on such securities or their issuers.
As discussed in the accounting policies of the Company in note 1, unquoted
warrants are valued at fair value using the Black Scholes methodology, which
includes a time value which is calculated and added to the intrinsic value to
arrive to the total valuation for each warrant. The intrinsic value is
calculated by reference to the quoted price of the investment into which the
warrant will convert and the conversion price for each warrant.
The Black Scholes pricing formula requires five inputs: (i) stock price, (ii)
exercise price, (iii) time to expiration, (iv) volatility and (v) interest
rate. The stock price, exercise price and time to maturity are straight
forward. The interest rate is a risk free rate (represented by the yield on US
Treasury security) for a term that corresponds to the time to expiration of the
subject warrant. The 90-day volatility of each holding is used but where no
data exists for any holding a default of 37.5% is used.
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 2010 amounted to GBP876,000
(2009: GBP986,000) and GBP36,000 (2009: GBP105,000) 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. Bearing
in mind that the final redemption payment will be sterling payment of 120.82p
to be made to Income Shareholders on 31 May 2011, the Board will look at taking
advantage of any future dollar strength versus sterling by hedging some or all
of the dollar exposure into sterling in those circumstances.
The Investment Managers monitor the exposure to foreign currencies on a daily
basis and report to the Directors on a regular basis. The Investment Managers
measure the risk to the Company of the foreign currency exposure by considering
the effect on the Company's net asset value and income of a movement in the
rates of exchange to which the Company's assets, liabilities, income and
expenses are exposed.
The Company settles its US investment transactions from its bank accounts in US
dollars. In the year ended 31 May 2010, exchange gains of GBP31,000 (2009: GBP
6,000) relating to currency, have been taken to the capital reserve.
The primary currency risk is between sterling and dollars.
The Investment Managers risk assessment policy is reflected in its investment
strategy. In order to protect against inflation and grow capital the fund
invests in small companies that it believes will grow into larger companies,
with the intention of increasing the value of the investment.
The foreign currency profile of the Company's financial assets and liabilities
at 31 May was as follows:
Other
Investment current Financial Financial Sensitivity
portfolio Cash assets assets liabilities gap
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 31 May
2010
US dollars 11,801 855 25 12,681 (344) 12,337
As at 31 May
2009
US dollars 12,403 947 93 13,443 (310) 13,133
The Company has a total exposure as a percentage of funds attributable to
Shareholders to US dollars of 101% (2009: 101%).
Sensitivity analysis
At 31 May 2010, had sterling strengthened by 10% in relation to the US dollar,
with all other variables held constant, the net assets attributable to
Shareholders and the return for the year would have decreased by GBP1,122,000
(2009: GBP1,194,000). A 10% weakening of sterling against the US dollar would
have resulted in an increase in net assets of GBP1,371,000 (2009: GBP1,459,000).
Interest rate risk
The Company's portfolio is partially invested in interest bearing securities of
various types (as set out below). At the time of investing, interest rates are
fixed and as long as the security concerned remains unimpaired, cash flows will
not be affected by movements in long-term interest rates. The Company also
holds cash, in the short term, which it invests in money market accounts and,
on occasions, government backed Treasury Bills. The interest rate received on
these holdings is based on short term interest rates.
The Company's interest rate risk is managed on a daily basis by the Investment
Manager in accordance with polices and procedures in place. The overall
interest rate risks are monitored on a regular basis by the Directors.
Any surplus cash held at Frost National Bank is invested overnight in an
institutional high quality commercial liquidity account with a very low
maturity structure. This is to obtain a higher rate of interest, as interest
rates on the surplus cash (if not invested) would be minimal.
The Directors consider interest rate risk as part of their overall assessment
of risk in the portfolio.
The interest rate risk profile of the Company's fixed interest financial assets
at 31 May was as follows:
Weighted
Weighted average
average period for
interest which rates
Value Value rate are fixed
US$'000 GBP'000 % (months)
As at 31 May 2010
US convertible debentures 1,581 1,087 6.68 5.1
US preference shares 860 592 - -
2,441 1,679
As at 31 May 2009
US convertible debentures 2,603 1,614 6.4 12.5
US loan notes 1,000 620 9.0 17.0
US preference shares 1,535 952 1.2 -
5,138 3,186
The maturity profile of the Company's financial assets at 31 May was as
follows:
2010 2009
GBP'000 GBP'000
Within one year 836 142
Within one to two years 243 1,079
Within two to three years 169 1,144
Within three to four years 305 196
Within four to five years - 53
More than five years - -
1,553 2,614
Assets with no maturity dates 11,153 10,873
12,706 13,487
The interest rate risk and maturity profile of the financial liabilities of the
Company as at 31 May was as follows:
Amount Period
until
drawn Total maturity
$'000 GBP'000 (years)
As at 31 May 2010
Amounts drawn under the floating rate revolving 500 344 0.1
credit facility
Financial liabilities upon which no interest is 134
paid with no maturity date*
Amounts attributable to Shareholders upon which 12,228 1.0
no interest is paid
12,706
As at 31 May 2009
Amounts drawn under the floating rate revolving 500 310 1.0
credit facility
Financial liabilities upon which no interest is 112
paid with no maturity date*
Amounts attributable to Shareholders upon which 13,065 2.0
no interest is paid
13,487
* Creditors less prepayments
Sensitivity analysis
A change in interest rates would have some impact on the fair value of warrants
and debit instruments but the size of the impact is not easily quantifiable.
The impact of a 10% increase in the floating rate element of the loan is
insignificant in value.
The revolving credit facility pays interest at LIBOR plus a 3% margin. The
amount of interest payable is therefore subject to LIBOR rate fluctuation.
Other price risk
Other price risk is the risk that the value of the instrument will fluctuate as
a result of changes in market prices (other than those arising from currency
risk or interest rate risk) and represents the potential loss the Company may
suffer in the light of adverse market price movements. Since the Company
invests in financial instruments, the risk is inherent. The Company will always
face uncertainty as to future price of the financial instruments in which it is
invested. The price of certain unquoted stocks is also affected by their
relative illiquidity (see below).
The Board of Directors manage this risk by ensuring full and timely access to
relevant information from the Investment Manager and Investment Adviser. The
Directors monitor compliance with the Company's objectives and are directly
responsible for investment strategy and asset allocation.
See the Investment Adviser's report for discussion of investments made during
the year. The method of valuing the investments is discussed in the accounting
policies in note 1.
Sensitivity analysis
A 10% increase in the market value of investments at 31 May 2010 would have
increased net assets attributable to Shareholders by GBP1,180,000 (2009: GBP
1,240,000). An equal change in the opposite direction would have decreased the
net assets attributable to Shareholders by an equal but opposite amount.
Liquidity risk
A significant proportion is held in smaller and unquoted companies. Such
companies are inherently higher in risk and lower in liquidity than, for
example, blue-chip equities. Unlisted companies have the additional risk of not
benefiting from market rules designed to protect investors. Some of the
investments are in unlisted convertible bonds or preference shares, which may
at any time be converted into a listed common stock, giving an effective level
of liquidity equal to the liquidity in the common stock. Other unlisted
investments do not have the option of converting into a listed stock.
Credit risk
The carrying amounts of financial assets including cash balances best represent
the maximum credit risk exposure as at the Balance sheet date.
The Company is exposed to credit risk by way of its debenture loan notes and
preference shares in the portfolio and any interest outstanding thereon. The
benefit of a convertible debenture is that if a portfolio company becomes
troubled, the Company is protected through its position as a creditor. The
Directors do not consider there to be a major risk of material default on any
convertible debentures held but do not recognise that from time to time,
default might occur.
As at 31 May 2010 the fair value of financial assets which are subject to
credit risk was GBP1,825,000 (2009: GBP3,186,000). In addition there was interest
outstanding of GBP3,000 (2009: GBP93,000).
At 31 May 2010 the carrying value of financial assets subject to credit risk
was split as follows:
2010 2009
GBP'000 GBP'000
Unlisted preference 592 909
Unlisted convertible preference - 43
Unlisted convertible debentures 1,087 1,454
Listed convertible debentures - 160
Unlisted loan notes - 620
1,679 3,186
The Company's investments are held on its behalf by Frost National Bank, acting
as agent. Bankruptcy or insolvency of Frost National Bank may cause the
Company's rights with respect to securities held by the custodian to be
delayed. The Board monitors the Company's risk by regularly reviewing the
custodian's internal controls report.
Investment transactions are carried out with a large number of brokers whose
creditworthiness is reviewed by the Investment Managers. Transactions are
ordinarily undertaken on a delivery versus payment basis whereby the Company's
custodian bank ensures that the counterparty to any transaction entered into by
the Company has delivered on it obligations before any transfer of cash or
securities away from the Company is completed.
Cash is only held at banks that have been identified by the Board as reputable
and of high credit quality.
Short-term flexibility is achieved via the use of bank borrowing from a
facility with Allied Irish Banks plc. This facility, together with funding
requirements, is regularly reviewed by the Board.
Financial liabilities
The Company finances its operations through a revolving credit facility, share
capital and retained profits, although trade creditors and accruals arise from
its operations.
At 31 May 2010, the maturity profile of the Company's financial liabilities was
as follows:
2010 2009
GBP'000 GBP'000
Within one year 12,706 422
2-3 years - 13,065
12,706 13,487
The Company has a $500,000 margin facility which attracts interest at a
variable rate. As at 31 May 2010, the full $500,000 was drawn down. The renewal
date of this facility is 31 May 2011.
As the facility is drawn in US dollars, the Company is subject to currency
exchange gains and losses.
Fair value hierarchy disclosures
The Company has adopted the amendment to FRS 29, effective 1 January 2009. This
requires the Company to classify fair value measurements using a fair value
hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy consists of the following three levels:
* Level 1 - Quoted prices (unadjusted) in active markets for identical assets
or liabilities.
An active market is a market in which transactions for the asset or liability
occur with sufficient frequency and volume on an ongoing basis such that quoted
prices reflect prices at which an orderly transaction would take place between
market participants at the measurement date. Quoted prices provided by external
pricing services, brokers and vendors are included in Level 1, if they reflect
actual and regularly occurring market transactions on an arms length basis.
* Level 2 - Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices).
Level 2 inputs include the following:
* quoted prices for similar (ie not identical) assets in active markets.
* quoted prices for identical or similar assets or liabilities in markets that
are not active. Characteristics of an inactive market include a significant
decline in the volume and level of trading activity, the available prices vary
significantly over time or among market participants or the prices are not
current.
* inputs other than quoted prices that are observable for the asset (for
example, interest rates and yield curves observable at commonly quoted
intervals).
* inputs that are derived principally from, or corroborated by, observable
market data by correlation or other means (market-corroborated inputs).
* Level 3 - Inputs for the asset or liability that are not based on observable
market data (unobservable inputs)
The level in the fair value hierarchy within which the fair value measurement
is categorised in its entirety is determined on the basis of the lowest level
input that is significant to the fair value measurement in its entirety. For
this purpose, the significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses observable inputs
that require significant adjustment based on unobservable inputs, that
measurement is a level 3 measurement. Assessing the significance of a
particular input to the fair value measurement in its entirety requires
judgement, considering factors specific to the asset or liability.
The determination of what constitutes `observable' requires significant
judgement by the Company. The Company considers observable data to investments
actively traded in organised financial markets, fair value is generally
determined by reference to Stock Exchange quoted market bid prices at the close
of business on the Balance sheet date, without adjustment for transaction costs
necessary to realise the asset.
The table below sets out fair value measurements of financial assets in
accordance with the fair value hierarchy system:
Total Level 1 Level 2 Level 3
GBP'000 GBP'000 GBP'000 GBP'000
Financial assets at fair value through profit
or loss at 31 May 2010
Equity investments 9,753 7,332 - 2,421
Convertible Debenture stocks 1,087 - 846 241
Preference stocks 592 - - 592
Warrants 369 - 235 134
Other financial assets and cash - - - -
Total 11,801 7,332 1,081 3,388
There are no other financial assets or liabilities other than those disclosed
above.
Investments whose values are based on quoted market prices in active markets,
and therefore classified within level 1, include active listed equities. The
Company does not adjust the quoted price for these instruments.
Financial instruments that trade in markets that are not considered to be
active but are valued based on quoted market prices, dealer quotations or
alternative pricing sources supported by observable inputs are classified
within level 2. As level 2 investments include positions that are not traded in
active markets and/or are subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/or non-transferability, which are generally
based on available market information.
Investments classified within level 3 have significant unobservable inputs.
Level 3 instruments include private equity and corporate debt securities. As
observable prices are not available for these securities, the Company has used
valuation techniques to derive the fair value. In respect of unquoted
instruments, or where the market for a financial instrument is not active, fair
value is established by using recognised valuation methodologies, in accordance
with International Private Equity and Venture Capital ("IPEVC") Valuation
Guidelines. New investments are initially carried at cost, for a limited
period, being the price of the most recent investment in the investee. This is
in accordance with IPEVC Guidelines as the cost of recent investments will
generally provide a good indication of fair value. Fair value is the amount for
which an asset could be exchanged between knowledgeable, willing parties in an
arm's length transaction.
There were no transfers between levels for the year ended 31 May 2010.
The following table presents the movement in level 3 instruments for the period
ended 31 May 2010:
Equity Convertible Loan Preference
Total investments debentures notes shares Warrants
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Company
Opening balance 1,878 966 - - 912 -
Purchases 1,384 1,384 - - - -
Transfer to level 3 6,467 6,115 352 - - -
Sales - proceeds (217) - - (217) - -
Total (losses)/ (6,124) (6,044) (111) 217 (320) 134
gains for the year
included in the
Income statement
Closing balance 3,388 2,421 241 - 592 134
The Directors are required under FRS 29 to provide further information on
holdings categorised as Level 3 in the Table above to illustrate a range of
values for these positions which might be obtainable in certain circumstances.
The holdings categorised by the Directors as Level 3 are as follows:
AnchorFree AuraSound
Business Process Outsourcing Cover-All Technologies
CaminoSoft Corporation Global Axcess Corporation
China Greenscape Hemobiotech Inc
Integrated Security Systems, iLinc Communications
Inc
Ronco Corporation
The Directors show the holdings at what they believe to be fair value, of GBP3.4
million. There is clearly considerable uncertainty as to whether these
valuations could be realised due to varying market conditions. Values realised
on sale could be lower or higher than fair value. The most significant inputs
used to derive the various valuations are the operational forecasts and the
discount rate applied to future cash flows. Using reasonably possible
alternative assumptions commented on elsewhere in this annual report, this
would give a wide range of values for these positions for all the holdings
classified as Level 3.
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 principal risks and their
management are disclosed above and in note 13.
The Board consider the capital of the Company to be the assets attributable to
Shareholders. The capital of the Company is managed in accordance with its
investment objective and policy as detailed above.
Annual General Meeting
The Company's Annual General Meeting will be held on 26 October 2010, at the
offices of Cenkos Securities, 6.7.8 Tokenhouse Yard, London EC2R 7AS at 2.00pm.
The notice of this meeting can be found in the Annual Report and Accounts at
www.premierassetmanagement.co.uk.
Duncan Abbot
Chairman
17 September 2010
END
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