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GLOBAL SPECIAL OPPORTUNITIES TRUST PLC - Annual Financial Report
GLOBAL SPECIAL OPPORTUNITIES TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2009
The full Annual Report and Accounts can be accessed via the Company's website at www.premierassetmanagment.co.uk or by contacting the Company Secretary on telephone 01392 412122.
Investment objective and policy
Investment objective
The investment objective is for the portfolio to be managed to provide the Shareholders with capital growth, for the Income Shareholders to be repaid their final adjusted capital entitlement on 31 May 2011 of 120.82p per Income Share and for the portfolio to be managed so as to provide the Capital Shareholders with a cash return on or shortly after 31 May 2011. The Directors will seek to distribute substantially all of the net revenue to Income Shareholders by way of dividend, although this is not expected to be a material amount. Investment policy Asset allocation
The investment policy of the Company is to achieve the investment objective through investment in equity and equity-related instruments which are predominantly securities domiciled, listed, quoted or traded in North America (some of these securities may however have an underlying business that is not in North America), but with the ability to invest up to 25% of the gross assets of the Company (at the time of investment) opportunistically in listed or unlisted equity or debt securities issued by issuers situated anywhere in the world. The portfolio is managed on the basis that the Company is fully invested in equity and equity-related instruments to the extent practicable for the remainder of its life (subject to the recommendation of the Investment Managers and the Investment Adviser who may wish to increase the cash holding due to market conditions). Liquidity is managed so that the costs of realising the portfolio (including market impact costs) are reduced to the extent practicable as the end of the life of the Company approaches. It is expected that liquidation of investments will take place in the last three months of the life of the Company, so that a mixture of liquid securities and cash are handed to the liquidator. Up to 40% of the gross assets of the Company (measured at the time of investment) may be invested in unquoted securities. ``Unquoted securities'' for these purposes means those investments which are not listed or quoted or traded on a recognised stock exchange or another exchange available and used by professional investors, nor convertible into securities listed, quoted or traded on such exchanges.
The Company may invest in bonds, warrants, contracts for difference, other forms of derivative investment (for the purpose of efficient portfolio management), bank debt or other debt securities, although this will not amount to more than 20% of the gross assets of the Company at the time of investment.
Risk diversification
The investment policy provides the Company with a global mandate, albeit with a particular emphasis on North America. The Company is managed with a view to maintaining an adequate spread of investment risk in terms of the concentration and in terms of size of its investments. Except in the case of cash deposits awaiting investment or pending any winding-up of the Company, the Company will not lend to any one company or group, or invest in the securities of any one company or group, more than 20% of the value of its gross assets (at the time the loan or investment is made). The Company will not invest more than 10% in aggregate of the value of its gross assets at the time of a new investment, in other investment companies or investment trusts which are listed on the Official List (except to the extent that those investment companies or investment trusts have stated policies to invest no more than 15% of their gross assets in other investment companies or investment trusts which are listed on the Official List).
Borrowings
The Company may use gearing and the Directors reserve the right to borrow up to a maximum of 25% of the gross assets (at the time of drawdown)
Chairman's statement
for the year ended 31 May 2009
Dear Shareholder,
The 12 months to 31 May 2009 mark the first year of the three year life extension that was put in place to allow for the disposal of the more illiquid holdings in the portfolio of US small company shares in such a manner as to maximise value for Shareholders. The detail of the scheme of extension and the new investment strategy were set out in full in the half-yearly report covering the six months to 30 November 2008. Shareholders wishing to refer to this document or to the circular to Shareholders regarding the extension of life proposal will find them on the Manager's website at www.premierassetmanagement.co.uk.
Market background
When the extension of life scheme was put forward, markets were already suffering from the early phase of the credit crunch and it was hoped that market conditions and liquidity in smaller companies would improve. With hindsight, we can now see that it was perhaps fortuitous that over 70% of the fund was liquidated before 31 May 2008. The following 12 months brought a deepening of the problems in the banking sector, culminating in the collapse of Lehman Brothers in September 2008 and government bailouts out of several large retail banks. This is turn triggered a global recession. Investors reacted by retreating from risk, causing an inevitable decline in price and liquidity in the smaller company sector. This was the worst possible environment against which to progress with the liquidation of the Company's portfolio; the one consolation was that the US dollar strengthened against sterling and as the currency hedge had been removed at the start of the year Shareholders were fully exposed to the appreciation in the dollar.
Performance
Over the year the NAV of the Income shares declined by 30.61% from 72.53p to 50.33p. Over the same period, the Russell 2000 index (total return) declined by 31.79% in dollars and by 16.56% when adjusted to sterling, the dollar/sterling exchange rate having moved over the period from 1.98 to the pound to 1.61. The share price of the Income shares fell by 53.19% over the year standing at a discount of 23.50%. Part of the relative under performance reflects to some extent the write down of unlisted securities. Further details can be found below.
Dividends
Revenue per Income share was 0.26p (31 May 2008: 1.40p). No dividends were paid in respect of the year ended 31 May 2009. Given the small level of income it was not considered cost effective to make a dividend payment in respect of
the year ended 31 May 2009. Bank facility At 29 May 2008 the Company negotiated a $5 million 12 month facility to give the Company the opportunity to use gearing in the event of a rising market. During the year this loan was repaid. On 29 May 2009, a facility of just $500,000 was extended for a further 12 months (to 29 May 2010) at a margin of 300 basis points over LIBOR. The loan falls well within the capital and interest cover covenants that relate to it.
Valuation policy and unlisted securities
The Directors reviewed the valuation of unlisted securities on various occasions during the year. The investment in eOriginal, Asset Capital Corporation and Integrated Security Systems were written down in July 2008 as reported at the interim stage. At the year end, following a further review of the unlisted securities, the Directors agreed to write down the eOriginal holding to zero and also wrote down holdings in Heyspace and Anchorfree by 15.9% and 24.5% respectively. Shortly before the year end, a conversion scheme was agreed for our investments in Integrated Security Systems through which our unlisted holdings in convertibles and promissory notes were converted into listed equity.
Portfolio composition
At the year end unlisted securities represented 15.5% of gross assets. Of the listed securities 34.5% were in companies with a market capitalisation of over $50million. Our largest holding, Bovie Medical Corporation, represented 17.5% of gross assets at the year end. During the course of the year, despite the difficult market conditions, some portfolio holdings were sold; details are provided in the Manager's report.
Outlook
Market sentiment and investor willingness to take on risk has improved since the market low point in March. Our Investment Adviser believes that many of the small capitalisation stocks in our portfolio are still trading at exceptionally low levels when measured by conventional valuation metrics such as price earnings ratios and that these companies have considerable scope to be re-rated as sentiment improves. Our Investment Adviser is also working on exits from our unlisted securities and some of the most illiquid listed holdings. An improving market background improves the prospect for completing such transactions. Duncan Abbot Chairman 21 August 2009 Investment Adviser's report
for the year ended 31 May 2009
As you know from last year's report, Shareholders voted in favour of the continuation of the Company for an additional three years in order to provide time to maximise the value of the remaining holdings. During the last year your Manager was successful in liquidating several positions, making modest new investments and working to get several companies closer to liquidity events which are set out below.
Top five holdings
At 31 May 2009, the following top five holdings made up 50.4% of the portfolio. A description of each of the top five holdings is below.
Company Symbol Industry Value USD % of Portfolio
Bovie Medical BVX Medical devices $3,685,000 18.4%
Corporation
Pipeline Data PPDA Data processing $1,707,000 8.5%
SinoHub SIHI Business $1,627,063 8.1%
services
Global Axcess GAXC Consumer $1,555,100 7.8%
finance
Cover-All COVR Business $1,524,639 7.6%
Technologies software
Bovie Medical Corporation
Having considered the liquidity and limited life of the Company partial and
complete disposals of several holdings were made during the fiscal year
including Advanced Nanotech, A-Power Energy Systems, American Telecom Services,
Asset Capital, Canadian Phoenix Resources, Celsia Technologies, China Direct,
GameTech International, Gaming & Entertainment, OneLink Corporation and Riptide
Worldwide. We made three new investments during the year, A-Power Energy
Systems, SinoHub, Inc. and Wonder Auto Technology, Inc. A-Power Energy Systems
Liquidity progress
At 31 May 2009 your Company had a number of unlisted companies in the portfolio, a number of which can be converted to listed securities. There are a number of unlisted securities that are not convertible to quoted stock, the four largest companies are detailed here. AnchorFree, Inc. provides an online virtual private network platform for Internet users, advertisers and publishers. AnchorFree became profitable on operations for the first time in the month of May 2009 and we believe has good prospects of being acquired by a larger company. Asian Financial is the largest non-governmental owned commercial printing equipment company in China. This profitable and well run company should be quoted before the end of 2009. China Greenscape supplies trees and plants to China's cities and developing communities. This profitable company was originally going to merge with a quoted company in Autumn 2008. That transaction did not come to pass though we are optimistic that this company will become quoted later this year. Heyspace International Limited is a social networking and entertainment company based in China. The investors are working diligently on helping this company become quoted. In each of these four cases, we expect each to trade at values greater than cost.
Conclusion
With the remaining holdings, your Adviser will endeavour to add value where it can and attempt to realise value at the appropriate time.
RENN Capital Group, Inc. 21 August 2009 Financial summary 31 May 31 May % Premium/ 2009 2008 change (discount) 31 May 2009 % Capital Assets attributable to 13,065 19,149 (31.77) shareholders ( '000) Gross assets ( '000) 13,375 20,920 (36.07) Net assets value per Zero 182.61p 182.61p n/a Dividend Preference share * Mid-market price per Zero n/a 180.25p n/a - Dividend Preference share**
Net asset value per Income share* 50.33p 72.53p (30.61)
Mid-market price per Income share 38.50p 82.25p (53.19) (23.50)
Net asset value per Capital share 0.00p 0.00p n/a
* Mid-market price per Capital 1.76p 4.63p (61.99) - share Net asset value per Unit* 50.33p 72.53p (30.61) (1 Capital share and 1 Income share) Mid-market price per Unit 38.25p 86.00p (55.52) (24.00) Year to Year to % 31 May 31 May change 2009 2008 Revenue Return per Income share 0.26p 1.40p (81.43) Net dividend paid per Income share 1.00p 4.00p
(75.00)
Total expense ratio (excluding VAT recovered 3.25% 9.74% 6.49 on Investment Managers fees and tender offer
costs)
* Net asset values calculated in accordance with Articles of Association
** De-listed on 31 July 2008.
BUSINESS REVIEW
The business of the Company
The Company is an investment company in accordance with the provisions of Section 833 of the Companies Act 2006. The Directors do not envisage any change in the Company's activity in the future. A full description of the Company's activities during the year under review is given in the Chairman's statement and the Investment Adviser's report. The principal activity of the Company is to conduct business as an investment trust. The Company has received written approval from HM Revenue & Customs as an authorised investment trust, under Section 842 of the Income and Corporation Taxes Act 1988 ("Section 842"), for the year ended 31 May 2008. It is the opinion of the Directors that the Company has subsequently directed its affairs so as to enable it to continue to qualify for such approval and the Company will continue to seek approval under Section 842 each year. The Company will retain no more than 15% of its eligible investment income. The Company's status as an investment trust allows it to obtain an exemption from paying taxes on the profits made from the sale of its investments. Investment trusts offer a number of other advantages for investors, including access to investment opportunities that might not be open to private investors and to professional stock selection skills at low cost. On incorporation, the planned wind-up date of the Company was 31 May 2008. On 30 May 2008 Shareholders voted to extend the life of the Company for a further three years. The Company's planned wind-up date is now 31 May 2011.
Management of the Company
The Company's assets are managed by Premier Fund Managers and Premier Asset Management (Guernsey) Limited. RENN Capital Group, Inc. acts as Investment Adviser to the Company. Premier Fund Managers Limited is a subsidiary of Premier Asset Management Limited, which manages a range of UK and offshore funds and provides bespoke discretionary management services for both private and corporate clients. RENN Capital Group is based in Dallas and has a thirty-six year track record in identifying growth opportunities in US smaller companies. Future of the Company On 30 May 2008 the life of the Company was extended for a further three years to 31 May 2011 based on the belief that certain investments in the portfolio would require a longer period of time to deliver potential value than the 31 May 2008 wind up date would allow; a number of the Company's investments have very poor liquidity and others only trade on a matched bargain basis. The portfolio is managed with a view to maximising the returns that will be available to Shareholders on 31 May 2011.
Donations
The Company made no political or charitable donations during the period.
Payment of suppliers
It is the Company's payment policy to obtain the best possible terms for all business and therefore there is no consistent policy as to the terms used. The Company agrees with its suppliers the terms on which business will be transacted and it is the Company's policy to abide by those terms. There were no trade creditors outstanding at the year end (31 May 2008: 60,000).
Going concern
The Directors are of the opinion that the Company has adequate resources to continue in operational existence for the foreseeable future and accordingly have adopted the going concern basis in preparing the financial statements.
Results and dividends
During the year, a fourth interim dividend in respect of the year ended 31 May 2008 of 1.00 pence was paid on 6 June 2008 to holders of Income shares. There were no proposed dividends in respect of the year ended 31 May 2009.
Borrowing facility
At 29 May 2008 the Company negotiated a $5 million 12 month facility to give the Company the opportunity to use gearing in the event of a rising market. During the year this loan was repaid. On 29 May 2009, a facility of just $500,000 was extended for a further 12 months (to 29 May 2010) at a margin of 300 basis points over LIBOR. The loan falls well within the capital and interest cover covenants that relate to it.
Transactions in the Company's own shares
During the year ended 31 May 2009, holders of any remaining Zero Dividend Preference shares after the tender offer on 30 May 2008 were given the opportunity to sell their shares to the Company for cancellation via Cenkos Securities. As a result, the Company purchased for cancellation a total of 266,850 Zero Dividend Preference shares (with a nominal value of 267), representing 0.53% of the share capital, for an aggregate amount of 490,713. The remaining 206,037 Zero Dividend Preference shares were de-listed on 31 July 2008. At the Company's AGM held on 19 November 2008, Shareholders granted the Company the authority to purchase up to 14.99% of each of its issued Income shares (being 3,778,980) and Capital shares (being 7,495,000). As at the date of this report no purchases of Income or Capital shares have been made using these authorities. These authorities will only be utilised if the Board believes that purchases of either Income shares or Capital shares will be in the best interests of the Company and its Shareholders as a whole. In considering whether to exercise the authority to make market purchases, the Board will take into account the investment opportunities available to the Company and any discount at which the shares are trading in the market relative to their net asset value. These authorities will expire on 19 February 2010 or, if earlier, at the conclusion of the Annual General Meeting of the Company in 2009. Shares purchased by the Company pursuant to the authority to make market purchases will be cancelled. The Company will seek to renew these authorities at the forthcoming Annual General Meeting.
Principal risks associated with the Company
General
The market price of the shares may not fully reflect their underlying net asset values. If stock market prices fall the potential returns available to Shareholders may decline. There can be no guarantee that the Company's investment objectives will be achieved.
Zero Dividend Preference shares
Although the Zero Dividend Preference shares rank ahead of the Income shares and the Capital shares for participation in a distribution of assets on the winding-up of the Company, they rank behind the Company's liabilities. The Zero Dividend Preference shares were de-listed on 31 July 2008. There is no secondary market in which these shares can be traded.
Income shares
The Income shares rank for repayment after the Zero Dividend Preference shares.
Capital shares
The Capital shares rank for repayment after the other two classes of shares. Due to the substantial gearing provided by the prior capital entitlements of the Income shares, the Zero Dividend Preference shares and by any debt financing, the market value of the Capital shares can be expected to be volatile and particularly sensitive to changes in the value of the Company's gross assets. Accordingly, the Capital shares should be considered to be a
high risk investment. Smaller companies
The Company invests directly in smaller companies. As smaller companies do not generally have the financial strength, diversity and resources of large companies they may find it more difficult to overcome periods of economic slow down or recession. In addition, the relatively small market capitalisation of such companies may make the market in their shares less liquid. In the event that smaller companies under perform, this may affect the performance of US smaller companies in which the Company is invested.
Unlisted securities
The Company may invest in unlisted securities, or other securities, in which there is no active market. In such cases it may be difficult to determine the value of such securities and/or to realise the investment or to do so on acceptable terms. There is no certainty that a listing or trading facility will be obtained for such securities. Holders of such securities may not have the benefit of market rules designed for the protection of holders of listed or public traded securities. This may include the absence of publicly available information on such securities or their issuers.
Derivative risk
The Company's investment policy allows it to enter into derivative transactions where the Investment Managers consider that it is prudent to do so in order to protect the value of the Company's portfolio and is in the best interests of the Company. Markets in derivatives can be highly volatile and such investments carry a high risk of loss. In the case of certain derivatives a relatively small adverse market movement may result not only in the loss of the original investment but also in unquantifiable further loss exceeding any margin deposited. Any such loss suffered by the Company may adversely affect the Company's ability to meet the capital and income returns to Shareholders.
Dividend levels
Dividends paid on the Company's Income shares rely on receipt of interest payments and dividends from the securities in which the Company invests and therefore dividend levels are likely to vary. The Board expects dividend levels, if any, to be negligible.
Currency risk
The portfolio invests in US securities and its assets are therefore subject to fluctuations in the US dollar/ sterling exchange rate and the sterling value of its assets, plus declines in US equity markets as a whole. The Board's current policy is not to engage in an active programme of hedging the dollar risk in the portfolio. However, bearing in mind that the final redemption payment will be a sterling payment made to holders of Income shares at 31 May 2011, the Board will look at taking advantage of any future dollar strength versus sterling by hedging some or all of the dollar exposure into sterling in those circumstances. Liquidity risk A significant proportion of the portfolio is held in smaller and unquoted companies. Such companies are inherently higher in risk and lower in liquidity than, for example, blue-chip equities. Unlisted companies have the additional risk of not benefiting from market rules designed to protect investors. Some of the investments are in unlisted convertible bonds or preference shares, which may at any time be converted into a listed common stock, giving an effective level of liquidity equal to the liquidity in the common stock. Other unlisted investments do not have the option of converting into a listed stock. This issue is particularly relevant regarding the 31 May 2011 wind-up date of the Company. Credit risk The portfolio may contain some fixed income securities, however, many of these are convertible into common stock (equity). The benefit of a convertible debenture is that, if a portfolio company becomes troubled, the Company is protected through its position as a creditor. If the underlying portfolio company performs well, the Company can participate in the upside by converting into common stock. However, it is possible that such investee companies might default on these debentures or wind-up prior to their repayment.
Market price risk
Since the Company invests in financial instruments, market price risk is inherent in these investments.
Discount volatility
The Company itself, being a closed-end fund, and its shares may trade at a discount to its net asset value. The magnitude of this discount fluctuates daily and can vary significantly. Thus, for a given period of time, it is possible that the market price could decrease despite an increase in the Company's net asset value. The Company is seeking to extend its existing authority from Shareholders at the forthcoming AGM to purchase Income and Capital shares for cancellation. If granted, the Directors will consider using share buybacks to control the Company's discount levels when in the interest of all Shareholders and the Company as a whole.
Regulatory risk
If the Company did not comply with the provisions of Section 842 of the Income and Corporation Taxes Act 1988, it would lose its investment trust status. A breach of the Listing Rules may result in censure by Financial Services Authority ("FSA") and/or the Company's suspension from Listing. In order to minimise these risks, the Directors, the Investment Managers, the Investment Adviser and the Company Secretary monitor the Company's compliance with the key criteria of Section 842 on a monthly basis and an ongoing review of compliance with the FSA Listing Rules. On a quarterly basis, compliance with these provisions is discussed in detail between the Board, the Company Secretary, the Investment Managers and the Investment Adviser.
Risks associated with the engagement of third parties
There are a number of potential operational risks associated with the fact that third parties undertake the Company's administration and custody of assets. Most seriously, there is the risk that third parties could fail to ensure that statutory requirements, such as the Companies Act and the FSA Listing Rules, are complied with. Details of how these risks are managed are included below under `Internal control process'. Risk diversification The Company's investment policy provides it with a global mandate, albeit with a particular emphasis on North America. The Company is managed with a view to maintaining an adequate spread of investment risk in terms of the concentration and size of its investments as detailed in the investment policy.
Internal control process
The Directors acknowledge that they are responsible for the Company's systems of internal control and for reviewing their effectiveness. An ongoing process, in accordance with the guidance of the FRC "Internal Control: Revised Guidance for Directors on the Combined Code", has been established for identifying, evaluating and managing risks faced by the Company. This process has been in place throughout the year and up to the date the financial statements were approved. Key procedures established with a view to providing effective financial control have been in place for the full financial year and up to the date the financial statements were approved. No significant failings or weaknesses within the Company's internal controls were identified. The risk management process and systems of internal control are designed to manage rather than eliminate the risk of failure to achieve the Company's objectives. It should be recognised that such systems can only provide reasonable and not absolute assurance against material misstatement or loss. The risk assessment and review of the effectiveness of the Company's system of internal controls is undertaken by the Audit Committee in the context of the overall investment objective. The review covers the key business, operational, compliance and financial risks facing the Company. In arriving at its judgement of what risks the Company faces, the Audit Committee has considered the Company's operations in the light of the following factors:
-- the nature and extent of risks which it regards as acceptable for the Company to bear within its overall business objective;
-- the Company's ability to reduce the incidence and impact of risk on its performance; and
-- the cost to the Company and benefits related to the Company and third parties operating the relevant controls.
Against this background, in the review of risk and associated controls the Board has split the review into five sections reflecting the nature of the risks being addressed. These are: corporate strategy; published information; compliance with laws and regulations; relationship with service providers and; investment and business activities. Given the nature of the Company's activities and the fact that most functions are subcontracted, the Directors have obtained information from key third party suppliers regarding the controls operated. To enable the Board to make an appropriate risk and control assessment the information and assurances sought from third party suppliers include the following:
-- details of the control environment operated by the third party suppliers;
-- identification and evaluation of risks and control objectives by third party suppliers;
-- assessment of the communication procedures with third party suppliers; and
-- assessment of the control procedures operated by third party suppliers.
The key procedures which have been established to provide effective internal control are as follows:
-- investment management is provided by Premier Asset Management (Guernsey) Limited and Premier Fund Managers Limited, who are advised by RENN Capital Group, Inc. The Board is responsible for setting the overall investment policy and monitors the actions of the Investment Managers and Investment Adviser at regular Board meetings;
-- administration and company secretarial duties for the Company are performed by Capita Sinclair Henderson Limited;
-- custody of assets is undertaken by Frost National Bank Inc. and HSBC Bank plc;
-- the duties of investment management, administration and the custody of assets are segregated. The procedures of the individual parties are designed to complement one another;
-- the Directors of the Company, all of which are non-executive, clearly define the duties and responsibilities of their agents and advisers. The appointment of agents and advisers is conducted by the Board after consideration of the quality of the parties involved; the Board monitors their ongoing performance and contractual arrangements;
-- mandates are granted by the Board for investment transactions. The Board sets the policy for authorising expense payments; and
-- the Board reviews financial information produced by the Investment Managers, the Investment Adviser and the Company Secretary in detail on a regular basis.
Analysis of the Company's performance and position
In order to provide Shareholders with a clear understanding of the Company's performance and position, this section of the business review will consider how the Company has performed against the following key performance indicators:
1) The assessment of the value added through the portfolio by comparing performance before the impact of expenses against relevant benchmarks.
2) The performance of the Company's total assets after all expenses (including bank interest) have been charged. This measure includes the cost of gearing but will not reflect the benefit of the gearing that will arise if total assets are rising. 3) The performance of the Company at the net asset level. This shows how Shareholders' funds as a whole have performed and includes the cost of bank interest, but also the impact of the gearing provided by bank debt. If gross assets have grown by a greater amount than the cost of management and bank interest, returns to Shareholders will have been enhanced by the gearing. If total assets have declined the gearing will accelerate that decline in net assets. 4) The performance of the individual share classes, both in terms of share price total return (i.e. accounting for dividends received) and in terms of net asset value total return. The share price performance is the measure of the return that Shareholders have actually received and will reflect the impact of widening or narrowing of discounts to NAV.
Portfolio performance for the year
The portfolio was invested in US assets, cash and government securities and is managed by Premier Asset Management (Guernsey) Limited as advised by the Company's Investment Adviser, RENN Capital Group Inc., based in Dallas, Texas. During the course of the year the net asset value of the Income shares declined 30.61% from 72.53p to 50.33p against a background of declining markets. The NAV entitlement of the few remaining Zero Dividend shares was static at 182.61p and the Capital shares' NAV remained at zero throughout the year.
-- Company's performance
Over the year, the Company's gross assets fell due to the repayment of bank debt and a decline in the value of the Company's investments against a background of falling stock markets. On the 31 May 2008, following the completion of the tender, the Company's gross assets were 20.92 million of which 1.77 million was bank debt. At 31 May 2009 gross assets were 13.38 million of which 0.31 million was bank debt.
-- Share price performance
During the year the listing for the Zero Dividend Preference shares ceased and there was therefore no market price for the shares at the year end. Income share price fell 53.19% from 82.25p to 38.50p; the capital share price fell 61.99% from 4.63p to 1.76p and the Unit price fell 55.52% from 86.00p to 38.25p.
Future developments and events subsequent to the year end
The Directors are aware of the AIC/JPMorgan Claverhouse judgement which was made during 2007 regarding the charging of VAT on investment management fees. It is possible that, during the forthcoming year, the Company will be able to recover further amounts of VAT that it has paid on its investment management fees although the Directors do not believe that any such recoverable sums will be of a material amount.
Social, environmental and ethical policy
Global Special Opportunities Trust plc seeks to invest in companies that are well managed, with high standards of corporate governance. The Directors believe this creates the proper conditions to enhance value for Shareholders. In aiming to achieve a high level of corporate performance the Company adopts a positive approach to corporate governance and engagement with companies.
Statement of Directors' responsibilities
In respect of the financial statements
The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare financial statements in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). The financial statements are required by law to give a true value and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
The Directors, to the best of their knowledge, state that:
the financial statements, prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
the Report of the Directors' includes a fair review of the development and performance of the business and the position of the Company together with a description of the principle risks and uncertainties that it faces.
The Directors are responsible for keeping adequate accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the financial statements included on the Manager's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Duncan Abbot Chairman 21 August 2009 Independent Auditors' report
The Company's financial statements for the year ended 31 May 2009 have been audited by Grant Thornton UK LLP. The text of the Auditor's report can be found in the Company's annual report and accounts at: www.premierassetmanagement.co.uk.
Income statement
for the year ended 31 May 2009
Year ended 31 May 2009 Year ended 31 May 2008 Note Revenue Capital Total Revenue Capital Total GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Losses on investments at 9 - (5,066) (5,066) - (14,943) (14,943) fair value through profit or loss Income 2 454 - 454 2,486 1 2,487 Investment management fee 3 (35) (80) (115) (360) (841) (1,201) VAT recovered on 3 7 10 - - - investment management fee Other expenses 4 (311) - (311) (544) (15) (559) Exchange gains on capital - 6 6 - 58 58 items Gains on derivatives at - - - - 876 876 fair value through profit or loss Net return before finance 111 (5,133) (5,022) 1,582 (14,864) (13,282) costs and taxation Tender offer costs - - - (247) (246) (493) Tender offer costs written 2 2 4 - - - back Finance costs Interest payable and 5 (22) (52) (74) (301) (702) (1,003) similar charges Appropriations in respect - - - - (2,148) (2,148) of: Zero Dividend Preference shares Income shares 7 (65) 5,161 5,096 (693) (1,351) (2,044) Capital shares - - - - 18,975 18,975 Return on ordinary 26 (22) 4 341 (336) 5 activities before taxation Taxation on ordinary 6 (26) 22 (4) (341) 336 (5) activities - - - - - - Return per share (FRS 25 pence pence pence pence pence pence basis) Capital share 8 - - - - (37.95) (37.95) Income share 8 0.26 (20.47) (20.21) 1.40 2.72 4.12 Zero Dividend Preference 8 - - - - 15.61 15.61 Unit (1 Capital and 1 Income) 8 0.26 (20.47) (20.21) 1.40 (35.23) (33.83)
The total column of this statement is the profit and loss account of the Company. The supplementary revenue return and capital return columns have been prepared in accordance with the AIC's SORP. Revenue and capital return per share figures shown are also supplementary information.
All revenue and capital items in the above statement derive from continuing operations. There are no recognised gains or losses other than those passing through the Income statement.
Statement of movements in net assets attributable to shareholders
for the year ended 31 May 2009
Year ended Year ended Note 31 May 2009 31 May 2008 GBP'000 GBP'000 Net assets attributable to Shareholders at 19,149 84,958 the start of the year
Appropriations to Shareholders Zero Dividend Preference shares - 2,148 Income shares (5,096) 2,044 Capital shares - (18,975) (5,096) (14,783) Dividends paid to Income Shareholders 7 (497)
(1,987)
Repurchase of Shares (including related (491) (49,039) costs) Net assets attributable to Shareholders at 13,065 19,149 year end Balance sheet as at 31 May 2009 31 May 2009 31 May 2008 Note GBP'000 GBP'000 Fixed assets Investments held at fair value through 9 12,403 16,899 profit or loss 12,403 16,899 Current assets Debtors 11 105 2,432 Cash held in money market fund 659 1,185 Cash at bank 327 50,139 1,091 53,756
Creditors - amounts falling due within one
year Creditors 12 119 49,735 Bank loan 13 310 1,771 429 51,506 Net current assets 662 2,250 Total assets less current liabilities 13,065
19,149
Creditors - amounts falling due after more
than one year Net assets attributable to Shareholders 14 13,065 19,149 - - Net asset value per share: pence pence - Capital shares 14 - - - Income shares 14 50.33 72.53 - Zero Dividend Preference shares 14 182.61 182.61 - Units 14 50.33 72.53
These financial statements were approved by the Board of Directors on 21 August 2009 and signed on its behalf by:
Duncan Abbot Chairman Statement of cash flows
for the year ended 31 May 2009
Year ended Year ended 31 May 2009 31 May 2008 Note GBP'000 GBP'000 Operating activities Investment income received 475 2,014 Deposit interest received 101 436 Other income received 19 -
VAT refunded in respect of Investment 10
- Manager's fees Investment management fees paid (208) (1,283) Secretarial fees paid (112) (92) Other cash payments (680) (507)
Net cash(outflow)/inflow from operating 17 (395)
568 activities Servicing of finance Interest paid (70) (989) Non-equity dividends paid (Income shares) (497)
(1,987)
Net cash outflow from servicing of finance (567)
(2,976)
Capital expenditure and financial
investment Purchase of investments (9,223) (131,984) Sales of investments 10,838 209,617 Net cash inflow from capital expenditure 1,615 77,633 and financial investment Net cash inflow before financing 653 75,225 Financing Loan repayment - (32,078) Revolving credit facility drawdown -
1,771
Revolving credit facility repayment (2,083)
- Financing costs - (108)
Buybacks of Zero Dividend Preference shares (491)
- for cancellation Tender offer costs (49,034) (38) Net cash outflow from financing (51,608)
(30,453)
Net cash (outflow)/inflow after financing (50,955) 44,772 (Decrease)/increase in cash 19 (50,955) 44,772
Notes to financial statements
for the year ended 31 May 2009
1. ACCOUNTING POLICIES
Accounting convention
The financial statements are prepared under the historical cost convention except for the measurement at fair value of fixed asset investments and are prepared in accordance with applicable law and Accounting Standards in the United Kingdom (`UK GAAP') and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Companies" (`SORP') issued by the Association of Investment Companies in January 2003 and revised in December 2005.
Dividends
Interim dividends are accounted for in the period when they are paid and final dividends are accounted for when approved by the Shareholders.
Investments
Investments have been designated by the Board as held at fair value through profit or loss and accordingly are valued at fair value. As the Company's business is investing in financial assets with a view to profiting from their total return in the form of interest, dividends or increases in fair value, quoted equities and fixed income securities are designated as fair value through profit or loss on initial recognition. The Company manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy and information about the portfolio is provided internally on this basis to the Board. Investments are recognised and derecognised on the trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at fair value. Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm's length transaction. In arriving at fair value, accounting standards require that bid prices are used where they are readily and regularly available from an exchange. The Board considers that for the majority of the Company's US quoted investments, reliable bid prices are not readily and regularly available and have therefore used the price of the most recent transaction in the investment. The Board believes this provides a more accurate valuation of the current fair value having adjusted for significant changes in economic circumstances since the time of the transaction.
Unquoted investments are valued at fair values as follows:
Unquoted equity investments and unquoted loan notes are included at fair value based on latest dealing prices, stockbroker valuations, net asset values, discounted cashflow analysis or other information, as appropriate. This valuation incorporates all factors that market participants would consider in setting a price. Unquoted convertible debenture investments are valued as follows. Where the debentures are paying cash coupons they are valued at the greater of cost and the market value of the equity received if converted. If the debentures are not paying cash coupons then they are valued at the lower of cost and the market value of the equity received if converted. Non-redeemable unquoted convertible preferred stock are valued at the market value of the equity received if converted. Redeemable preferred stock investments are valued as follows. Where the preferred stocks are paying cash coupons they are valued at the greater of cost or market value of the equity received if converted. If the preferred stocks are not paying cash coupons then they are valued at the lower of cost and the market value of the equity received if converted. Unquoted warrant investments are valued at fair value using the Black Scholes methodology, which includes a time value which is calculated and added to the intrinsic value to arrive at a total valuation for each warrant. The application of the Black Scholes methodology requires certain assumptions to be made on the volatility of the underlying shares to which the warrants subscribe.
Derivatives
The Company has the option to use derivative financial instruments. If used, these derivatives would be classified as `fair value through profit or loss' and movements in the fair value of these derivatives would be recorded through the Income statement. Shareholders' funds Due to the Company having a fixed life, the Zero Dividend Preference shares, Income shares and Capital shares are all classified under FRS 25 as financial liabilities rather than as equity in the Balance sheet. This is purely presentational and has no effect on the Company's net assets per share or returns per share as calculated. The finance costs relating to these shares are charged to the Income statement using the Effective Interest Rate method.
Income recognition
Dividends receivable on quoted equity shares are brought into account on the ex-dividend date. As prescribed in FRS 16: Current tax, UK dividends are disclosed excluding the associated tax credit. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established;
Income arising on fixed interest securities is recognised on a time apportionment basis so as to reflect the effective interest rate on that security;
The ordinary element of stocks received in lieu of dividends is recognised as income of the Company. Any enhancement above the equivalent value of the cash dividend that would have been receivable is treated as a capital gain on the associated investment. Underwriting commission is recognised as income in so far as it relates to the shares the Company is not required to take up. Where the Company is required to take up shares underwritten the commission received is treated as a deduction from the cost of shares. The balance is taken to income in the Income statement for the Company; and
Interest receivable is included on an accruals basis.
Expenditure
All expenses are accounted for on an accruals basis. All expenses are charged in full to the revenue column in the Income statement except as follows;
Transaction costs incurred on the purchase and sale of investments are charged through the capital column of the Income statement;
Expenses are allocated between capital and revenue where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. In respect of the investment management fees, debit interest and loan arrangement fees, 70% has been allocated to capital and 30% to revenue in the Income statement, as stated in the prospectus at the time of the Company's inception. The investment management performance fee when payable is charged, in total, to the capital column of the Income statement.
Taxation
The charge for taxation is based on the net revenue for the year.
Full provision for deferred taxation is made under the liability method on all timing differences that have arisen but not reversed by the Balance sheet date in accordance with FRS 19: Deferred Taxation. Deferred tax assets are recognised to the extent that is regarded as more likely than not that they will be recovered. Timing differences arise from the inclusion of items of income and expenditure in tax computations in periods different from those in which they are included in the accounts. Provision is made at the average tax rates that are expected to apply in the periods when the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the Balance sheet date. Deferred tax is measured on a non-discounted basis. The tax effect of different items of expenditure is allocated between revenue and capital on the same basis as the particular item to which it relates. Tax relief on expenses is allocated between revenue and capital using the marginal basis in accordance with the SORP.
Foreign currency transactions
The currency of the primary economic environment in which the Company operates (the functional currency) is sterling. The presentation currency is sterling.
Transactions denominated in foreign currencies are translated into sterling at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the period end are reported at the rates of exchange prevailing at the period end. A gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the capital column or in the revenue column of the Income statement depending on whether the gain or loss is of a capital or revenue nature respectively.
Finance costs
The Directors have allocated 100% of the appropriation relating to the capital entitlement of Zero Dividend Preference shares and Income shares to capital. Accordingly a redemption reserve has been set up to provide for the capital repayment entitlements attached to the Zero Dividend Preference shares and Income shares which accrue to the date of the Company's winding-up on 31 May 2011. On a winding-up of the Company the Zero Dividend Preference shares were entitled to a capital repayment of 100.00p per share as at 12 April 2001, increasing on a daily basis by approximately 8.8% p.a. compounded annually to give a final capital entitlement of 182.608201p on 31 May 2008. This amount will not increase until payment is made on 31 May 2011. The income shares were entitled to a capital repayment of 85.00p increased on the last day of each calendar month to give a capital entitlement of 100.00p on 31 May 2008 and then from 1 June 2008 to 31 May 2011 increased at a daily compound rate so as to give a final capital entitlement of 120.82p on 31 May 2011.
The Income shares are entitled to the revenue reserves of the Company. The revenue return for the year is treated as an appropriation and is analysed in note 7 between dividends paid in the year and residual returns.
The Capital shares are entitled to all surplus assets of the Company after repayment of the bank facility and after the pre-determined capital entitlements of the Zero Dividend Preference shares and the Income shares have been satisfied. 2. INCOME Year ended Year ended 31 May 2009 31 May 2009 GBP'000 GBP'000
Income from investments designated at fair value
through profit or loss UK net dividend income - 277 Overseas unfranked investment income 372 1,764 372 2,041 Other income Bank interest receivable 63 445 Other income 19 - 82 445 Total income 454 2,486 Total income comprises:
Dividends from investments designated at fair value 64
621 through profit or loss Interest from investments designated at fair value 308 1,420 through profit or loss
Deposit interest from bank deposits 63
445
Other income from investments designed at fair value 19
- through profit or loss 454 2,486 Income from investments: Listed UK - 277 Listed overseas 64 1,329 Unlisted overseas 308 435 372 2,041
3. INVESTMENT MANAGEMENT FEE
Year ended 31 May 2009 Year ended 31 May 2008 Revenue Capital Total Revenue Capital Total GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Investment management fee 35 80 115 359 839 1,198 Irrecoverable VAT thereon - - - 1 2 3 35 80 115 360 841 1,201 Under the terms of the previous Investment Management Agreements, the Investment Manager was entitled to a fee, payable monthly in arrears at the rate of 0.0417% per month, of the gross assets less current liabilities of the Income portfolio, reduced by the value of investments held in companies managed by Premier, plus 0.125% per month of the gross assets less current liabilities of the US Growth portfolio. With effect from 1 June 2008, the Investment Managers are entitled to a monthly fee of 0.0625% of the gross assets less current liabilities of the portfolio. A performance fee was not payable for the year ended 31 May 2009 (2008: nil). Further information regarding the investment management fees from 1 June 2008 is detailed in the Report of the Directors.
At 31 May 2009 there were amounts outstanding of 8,000 (2008: 101,000) VAT is no longer payable on the Investment Managers fees or performance fees.
During the year, the Company has received 10,000 in respect of past VAT on Investment Managers' fees from the previous Investment Manager, BFS Investments plc. This amount has been split 70% capital, 30% revenue in accordance with the accounting policy on charging Investment Managers' fees. 4. OTHER EXPENSES Year ended 31 May 2009 Year ended 31 May 2008 Revenue Capital Total Revenue Capital Total GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Administrative & 121 - 121 108 - 108 secretarial fee Directors' remuneration 68 - 68 68 - 68 Auditors' remuneration* 31 - 31 31 - 31 Other expenses 93 - 93 366 15 381 VAT recoverable (2) - (2) (29) - (29) Total other expenses 311 - 311 544 15 559 2009 2008 GBP'000 GBP'000
* Auditors remuneration is split as follows: Fees payable to the Company's Auditors for 31 27 the audit of the annual financial statements Fees payable to the Company's Auditors and its associates for other services - Other services pursuant to legislation:
review of half yearly report - 4 31 31
5. INTEREST PAYABLE AND SIMILAR CHARGES
Year ended 31 May 2009 Year ended 31 May 2008 Revenue Capital Total Revenue Capital Total GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 On bank loan 22 52 74 298 695 993 Amortisation of loan - - - 3 7 10 facility costs 22 52 74 301 702 1,003 6. TAXATION Year ended 31 May 2009 Year ended 31 May 2008 Revenue Capital Total Revenue Capital Total GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Analysis of charge for year: Corporation tax - - - - - - Overseas tax not 4 - 4 5 - 5 recoverable Tax relief attributable 22 (22) - 336 (336) - expenses allocated to capital 26 (22) 4 341 (336) 5
Factors affecting tax charge for the year
The tax assessed for the year differs from the standard companies rate of corporation tax in the United Kingdom (2008: standard rate 30% to 31 March 2008, 28% from 1 April 2008). The differences are explained below:
Year ended 31 May 2009 Year ended 31 May 2008 Revenue Capital Total Revenue Capital Total GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Return on ordinary 91 (5,183) (5,092) 1,034 (15,812) (14,778) activities after interest payable and tender offer costs but before appropriations Return on ordinary 19 (1,088) (1,069) 307 (4,691) (4,384) activities multiplied by the smaller companies rate of corporation tax in the United Kingdom 21% (standard rate 2008: 29.667%) Effects of the non-taxable items UK franked investment - - - (82) - (82) income Losses on investments, - 1,062 1,062 - 4,194 4,194 exchange gains on capital items and movement on fair value of derivative financial instruments Unrelieved capital expenses - 4 4 - 88 88 Expenses not deductible for 2 - 2 111 73 184 tax Accrued income taxable on 1 - 1 - - - receipt Overseas tax not 4 - 4 5 - 5 recoverable Current tax charge for the 26 (22) 4 341 (336) 5 year At 31 May 2009 the Company had unrelieved management expenses of 5,989,000 (31 May 2008: 5,966,000). It is unlikely that the Company will generate sufficient taxable income in the future to use these expenses to reduce future tax charges and therefore no deferred tax asset has been recognised.
7. APPROPRIATIONS IN RESPECT OF INCOME SHARES
Appropriations in the revenue column of the Income statement in respect of Income shares are split between dividends paid in the year and the remaining balance of the revenue account for the year.
Year ended Year ended 31 May 2009 31 May 2009 GBP'000 GBP'000 Dividends 497 1,987 Residual balance of revenue account (432)
(1,294)
Total appropriations in respect of Income 65
693 shares
Dividends are comprised as follows:
Relating to prior period
Third interim paid of nil (2007: 0.80p net) -
397
Fourth interim paid of 1.00p net (2007: 0.80p 497
397 net) 497 794 Relating to current period
First interim paid of nil (2008: 0.80p net) -
397
Second interim paid of nil (2008: 0.80p net) -
398
Third interim paid of nil (2008: 0.80p net) -
398 497 1,987
No dividend (2008: 1.00p) per share will be proposed for the year ended 31 May 2009.
Appropriations in the capital column of the Income statement are calculated as discussed in note 8 and amounted to:
Years ended Year ended 31 May 2009 31 May 2008 GBP'000 GBP'000 (5,161) 1,351 8. RETURN PER SHARE Year ended 31 May 2009 Year ended 31 May 2008 Revenue Capital Total Revenue Capital Total pence pence pence pence pence pence Return per share (FRS 25 basis) Capital share - - - - (37.95) (37.95) Income share 0.26 (20.47) (20.21) 1.40 2.72 4.12 Zero Dividend Preference - - - - 15.61 15.61 share Unit (1 Capital, 1 Income) 0.26 (20.47) (20.21) 1.40 (35.23) (33.83) Capital shares
The return per Capital share is based on appropriations for the year of nil (2008: (18,975,000) and on 50,000,000 (2008: 50,000,000) Capital shares.
Income shares
The revenue return per Income share is based on revenue appropriations of 65,000 (2008: 693,000) and on 25,210,008 (2008: 49,603,169) Income shares being the weighted average number of shares in issue during the year. The capital return per Income share is based on capital appropriations of (5,161,000) (2008: 1,351,000) and on 25,210,008 (2008: 49,603,169) Income shares being the weighted average number of shares in issue during the year. The capital return per Income share is based on an effective interest rate from 12 April 2001 of approximately 2.79%.
The redemption yield is contingent on the Company having sufficient assets at the time of redemption.
Zero Dividend Preference shares
The return per Zero Dividend Preference share is based on appropriations of nil (2008: 2,148,000) and on 206,037 (2008: 13,762,590) being the weighted average number of Zero Dividend Preference shares in issue during the year. The return per Zero Dividend Preference share is based on an effective interest rate from 12 April 2001 of approximately 8.8%.
The return per share based on the allocation of available assets in the event of a return of capital in accordance with the Articles of Association was:
Year ended 31 May 2009 Year ended 31 May 2008 Revenue Capital Total Revenue Capital Total pence pence pence pence pence pence Return per share (Articles basis) Capital shares - - - - (22.68) (22.68) Income shares 0.26 (20.47) (20.21) 1.40 (12.45) (11.05) Zero Dividend Preference - - - - 14.81 14.81 shares- Unit (1 Capital, 1 Income) 0.26 (20.47) (20.21) 1.40 (35.13) (33.73) For the year ended 31 May 2008, the return per share calculated in accordance with the Articles of Association differs from that calculated in accordance with FRS 25 due to the amortisation of share issue costs and assets available for distribution in the event of a return of capital. During the year ended 31 May 2009 the value of share issue costs amortised in calculating the return per Zero Dividend Preference share under FRS 25 was nil (2008: 110,000). The share issue costs were fully amortised by 31 May 2008. During the year ended 31 May 2009 the value of share issue costs amortised in calculating the return per Income share under FRS 25 was nil (2008: 232,000). 9. INVESTMENTS As at As at 31 May 2009 31 May 2008 GBP'000 GBP'000 Investment portfolio summary Listed investments on a recognised 8,545 8,098 international exchange Unlisted investments with conversion rights 1,780 4,377 into listed investments Other unlisted investments 2,078 4,424 Investments at fair value 12,403 16,899 Unlisted investments * with conversion rights into Other Listed listed unlisted investments investments investments Total GBP'000 GBP'000 GBP'000 GBP'000
Analysis of investment portfolio
movements Opening book cost 12,344 7,678 6,304 26,326 Opening unrealised depreciation (4,246) (3,301) (1,880) (9,427) Opening valuation 8,098 4,377 4,424 16,899 Movements in the year: Transfer 283 (283) - - Purchases at cost 7,781 1,504 11 9,296 Sales: Proceeds (3,471) (4,249) (1,006) (8,726) Realised (losses)/gains on sales (988) 309 (413) (1,092) Movement in unrealised (3,158) 122 (938) (3,974) depreciation Closing valuation 8,545 1,780 2,078 12,403
Analysis of investment portfolio
movements Closing book cost 15,949 4,959 4,896 25,804 Closing unrealised depreciation (7,404) (3,179) (2,818) (13,401) 8,545 1,780 2,078 12,403
* The Company is entitled to exercise these conversion rights at any time.
2009 2008 GBP'000 GBP'000
Analysis of capital (losses)/gains Realised (losses)/gains on sales (1,092)
11,271
Decrease in unrealised appreciation (3,974) (26,214) Losses on investments (5,066) (14,943) Transaction costs incidental to the acquisitions of investments totalled 8,000 (2008: 19,000) and disposals of investments totalled 3,000 (2008: 393,000) for the year. These amounts are included in losses on investments, as disclosed in the Income statement.
Details of material holdings in unlisted securities are as follows:
Last Aggregate Profit/ Net income (loss) Fair Fair Accounts capital after from value value and tax Total 31 May 31 May period reserves for year investment cost 2009 2008 end Investment GBP'000 GBP'000 GBP'000 US$m US$'000 GBP'000 Anchorfree preference 287 52 56 31/12/ 1.9 (2.1) - 2008 Asian Financial common stock 400 465 379 31/03/ 120.2 32.1 - 2009 warrants* - 11 12 31/02/ 120.2 32.1 - 2009 Aurasound warrants - - 15 31/03/ (3.6) (23.5) - 2009 Business Process Outsourcing common stock 11 49 - 31/12/ 7.7 1.1 - 2008 CaminoSoft senior secured 136 - 126 31/12/ (0.3) - 11.2 note 2008 loan note 51 - 51 31/12/ (0.3) - 5.1 2008 convertible 1,088 2 109 31/12/ (0.3) - 68.2 debenture* 2008 warrants - - - 31/12/ (0.3) - - 2008 Celsia Technologies warrants - - - 31/12/ (5.7) (6.0) - 2008 China Greenscape preference 382 465 380 31/12/ 37.2 26.3 - 2008 Cover-All Technologies warrants* - 21 18 31/03/ 7.6 4.4 - 2009 Datapath common stock 812 35 - 31/03/ 1,631.0 671.0 - 2009 Dyadic International warrants* - 17 - 31/12/ 28.2 (10.9) - 2006 eOriginal Holdings** preferred 410 - 177 28/02/ (6.6) (2.3) - series B 2009 preferred 900 - 513 28/02/ (6.6) (2.3) - series C 2009 preferred 622 - 580 28/02/ (6.6) (2.3) - series D 2009 warrants - - 15 28/02/ (6.6) (2.3) - 2009 Global Axcess Loan note 555 620 506 31/03/ 13.7 11.6 - 2009 warrants - - - 31/03/ 13.7 11.6 - 2009 Healthaxis Convertible 1,732 39 - 31/03/ 6.7 (17.9) - preference* 2009 Heyspace preference 380 391 379 31/12/ 23.4 6.2 - 2008 iLinc Communications convertible 352 310 253 30/09/ 3.9 (2.1) 37.8 debenture* 2008 Integrated Security Systems warrants - - - 31/03/ (12.8) (2.3) - 2009 Narrowstep warrants* - - 61 30/11/ 0.2 (8.9) - 2008 Obsidian Enterprise convertible 29 25 71 31/10/ (10.7) (22.6) 4.0 debenture* 2008 Petrohunter convertible 240 58 320 31/03/ (53.2) (163.0) 28.0 debenture* 2009 warrants* - 68 263 31/03/ (53.2) (163.0) - 2009 Pipeline Data convertible 826 1,059 759 31/03/ (11.3) (36.5) 94.2 debenture* 2009 Ronco convertible 640 4 7 30/06/ 3.9 (47.1) - preference* 2006 Sinohub `A' warrants* - 55 - 31/03/ 25.6 9.4 - 2009 `B' warrants* - 42 - 31/03/ 25.6 9.4 - 2009 Symbollon Pharmaceuticals warrants - - 6 31/03/ 0.1 (1.2) - 2009 Terra Nova Financial Group warrants - - 6 31/03/ 31.2 (0.1) - 2009 Vertical Branding warrants - 69 10 31/12/ (0.2) (5.0) - 2008
* Unlisted investments with conversion rights into listed investments.
10. SIGNIFICANT INTERESTS
The Company has a holding of 3% or more of the voting rights in the following investments: Name of undertaking Class of share % of class held Integrated Security Common stock 30.3% Systems Riptide Worldwide Common stock 24.1% CaminoSoft Common stock 21.0% Cover-All Technologies Common stock 7.2% Global Axcess Common stock 6.8% Hemobiotech Common stock 5.8% Narrowstep Common stock 5.8% Alliance Healthcard Common stock 4.6% Aurasound Common stock 3.6%
Bovie Medical Corporation Common stock
3.5%
The Company also have substantial interests in convertible debentures and other debt instruments as follows:
Name of undertaking Class of share % of class held CaminoSoft 6% Convertible debenture 100.0% CaminoSoft 8% Loan notes 100.0% Obsidian Enterprises 8% Convertible debenture 50.0% CaminoSoft 7% Loan notes 33.3% iLink Communications 12% Convertible debentures 9.8% PetroHunter Energy 8.5% Convertible debenture 7.1% Corporation Pipeline Data 10% Convertible debenture 4.1%
The Company's holdings in Integrated Security Systems and CaminoSoft represents 29% and 19% respectively of the enterprise value of these companies.
11. DEBTORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
As at As at 31 May 2009 31 May 2008 GBP'000 GBP'000 Sales for future settlement - 2,101
Prepayments and accrued income 105
325 Dividends receivable - 6 105 2,432
12. CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
As at As at 31 May 2009 31 May 2008 GBP'000 GBP'000 Outstanding tender offer settlement and related - 49,493 costs
Sundry creditors and accruals 119
242 119 49,735 13. BANK LOAN As at As at 31 May 2009 31 May 2008 GBP'000 GBP'000 Revolving credit drawn down 310 1,771 310 1,771
As at 31 May 2009 the Company had a US$500,000 revolving credit facility with Allied Irish Banks plc. The facility was re-negotiated on 29 May 2009, following termination of the previous US$500,000 facility on this date. Utilisation periods may be one, two or three months, or any shorter period agreed between the Company and Allied Irish Banks plc, but shall not extend beyond the termination date of 29 May 2010.
At 31 May 2009 the Company had utilised the full amount of US$500,000 (2008: US$3,500,000) of this facility. Interest is payable at LIBOR plus a margin of 3.0% on any drawn down balance and 1.5% per annum on any undrawn balance. Repayment of the loan has priority over any capital repayment on winding up. With effect from 29 May 2008, the covenant, under the revolving credit facility is that gross borrowings will not at any time exceed 40% of the adjusted net asset value. 14. NET ASSET VALUES
Total net asset values attributed to Shareholders are as follows:
31 May 2009 31 May 2009 31 May 2008 31 May 2008 FRS 25 Articles FRS 25 Articles basis basis basis basis GBP'000 GBP'000 GBP'000 GBP'000
For the purposes of calculating
net asset values:
Total net assets attributable to:
- Capital Shareholders - - - - - Income Shareholders 12,689 12,689 18,285 18,285 - Zero Dividend Preference 376 376 864 864 Shareholders 13,065 13,065 19,149 19,149 - Unit holders 12,689 12,689 18,285 18,285 pence pence pence pence Net asset value per:* - Capital share - - - - - Income share 50.33 50.33 72.53 72.53 - Zero Dividend Preference share 182.61 182.61 182.61 182.61 - Unit 50.33 50.33 72.53 72.53 They are represented by: 31 May 2009 31 May 2008 GBP'000 GBP'000 Share Capital 75 76 Special reserve 11,453 11,944 Capital redemption reserve 40 39 Capital reserve - realised 9,804 11,002 - unrealised (13,401) (9,438) Redemption reserve 4,906 4,906 Revenue reserve 188 620 Assets attributable to shareholders 13,065
19,149
* Net asset values per share calculated on the number of shares in issue of: 31 May 31 May 2008 2009 - Capital share 50,000,000 50,000,000 - Income share 25,210,008 25,210,008 - Zero Dividend Preference share 206,037
472,887
At 31 May 2009 the net assets attributable to Shareholders calculated in accordance with FRS 25 and in accordance with the Articles of Association were the same as all issue costs had been fully amortised by this date.
15. SHARE CAPITAL 31 May 2009 31 May 2008 GBP'000 GBP'000 Authorised
200,000,000 Capital shares of 0.1p each 200
200
150,000,000 Income shares of 0.1p each 150
150
50,000,000 Zero Dividend Preference shares of 0.1p 50
50 each 400 400
Issued, allotted and fully paid 50,000,000 (2008: 50,000,000) Capital shares of 0.1p 50
50 each
25,210,008 (2008: 25,210,008) Income shares of 0.1p 25
25 each
206,037 (2008: 472,887) Zero Dividend Preference -
1 shares of 0.1p each 75 76 During the year ended 31 May 2009 266,850 Zero Dividend Preference shares were purchased for cancellation at a price of 182.608201p per share resulting in 206,037 remaining in issue. Subsequently to the year-end, no further shares have been purchased for cancellation. These shares were subsequently de-listed on 31 July 2008. Duration The Articles of Association provide that the Directors shall convene an Extraordinary General Meeting of the Company to be held on 31 May 2011, or if that day is not a business day, on the immediate preceding business day, at which a special resolution shall be proposed, pursuant to Section 84 of the Insolvency Act 1986 requiring the Company to be wound-up voluntarily unless the Board shall have previously been released from its obligation to do so by a special resolution of the Company.
As to dividends each year
The Income shares carry the right to receive all the revenue profits of the Company (including accumulated revenue reserves) available for distribution and determined to be distributed by way of interim and/or final dividend and at such times as the Directors may determine.
The Zero Dividend Preference shares and the Capital shares carry no right to receive dividends out of revenue or any other profits of the Company.
As to capital on winding-up
On winding-up, and after repayment of prior ranking creditors, there shall be paid to the holders of Zero Dividend Preference shares an amount equal to 100p per Zero Dividend Preference shares as increased each day from 12 April 2001 to 31 May 2008 (inclusive) at a daily compound rate so as to give a final entitlement of 182.608201p on 31 May 2008. This amount shall not increase until payment is made on 31 May 2011. The holders of the Income shares shall be paid prior to the wind-up date an amount equal to the amount standing to credit of the Company's revenue reserves and, after repayment of prior ranking creditors and the prior capital entitlements of the Zero Dividend Preference Shareholders have been met in full, an amount equal to 85.00p per Income share as increased on the last day of each calendar month from 30 April 2001 to and including 31 May 2008 so as to give a capital entitlement of 100.00p on 31 May 2008 and then from 1 June 2008 to 31 May 2011 increased at a daily compound rate so as to give a final capital entitlement of 120.82p on 31 May 2011.
The holders of the Capital shares are entitled to the surplus assets of the Company available for distribution after repayment of the bank loan and payment of the entitlements of the Zero Dividend Preference shares and the Income shares.
16. MOVEMENT IN ASSETS ATTRIBUTABLE TO SHAREHOLDERS
Capital Capital Capital redemption Special reserve reserve Redemption Revenue reserve reserve realised unrealised reserve reserve GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Opening balance 39 11,944 11,002 (9,438) 4,906 620 Net losses on - - (1,092) - - - realisation of investments Currency exchange - - (5) 11 - - (losses)/gains Movement in unrealised - - - (3,974) - - appreciation Costs written back to - - 2 - - - capital Costs charged to - - (132) - - - capital VAT refunded on - - 7 - - - Investment Managers fees Tax relief on costs - - 22 - - - charged to capital Cancellation of shares 1 (491) - - - - Retained net revenue - - - - - (432) for the year At 31 May 2009 40 11,453 9,804 (13,401) 4,906 188 In accordance with TECH 01/08 issued by the Institute of Chartered Accountants in England and Wales, the movement in fair value of investments that can be readily converted to cash is to be treated as realised in the capital reserve. As at 31 May 2009 the value of such investments is nil (2008: nil).
17. RECONCILIATION OF NET RETURN BEFORE FINANCE COST AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
31 May 2009 31 May 2008 GBP'000 GBP'000 Net return before finance costs and taxation (5,022)
(13,282)
Add back: Losses on investments 5,066
14,943
Less: Exchange gains on capital items (6)
(58) Less: Gains on derivatives - (876) Decrease in creditors (583) (117) Decrease in debtors 223 75 Capital dividend - (1) Reinvested dividends (73) (110)
Tender offer costs written back 4
-
Tax deducted from investment income (4)
(6)
Net cash (outflow)/inflow from operating activities (395)
568
18. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET CASH
31 May 2009 31 May 2008 GBP'000 GBP'000 (Decrease)/increase in cash in year (50,154)
39,882
(Decrease)/increase in cash held in money market fund (801) 4,890 in year Loan repayment - 32,078 Revolving credit drawdown - (1,771) Revolving credit repayment 2,083 -
Amortisation of costs incurred on bank loan -
(9)
Realised foreign exchange (loss)/gain (5) 2,994 Movement in net cash (48,877) 78,064 Net cash/(debt) at start of year 49,553 (28,511) Net cash at 31 May 2009 676 49,553
For the purposes of this note net cash is defined as cash at bank, cash held in money market fund and the revolving credit loan only.
19. ANALYSIS OF CHANGES IN NET CASH
At Cash Exchange At 1 June 2008 flows differences 31 May 2009 GBP'000 GBP'000 GBP'000 GBP'000 Cash at bank 50,139 (50,154) 342 327
Cash held in money market fund 1,185 (801) 275 659
Revolving credit loan due within (1,771) 2,083 (622) (310) one year 49,553 (48,872) (5) 676
20. RELATED PARTY TRANSACTIONS
The Investment Managers, Premier Asset Management (Guernsey) Limited and Premier Fund Managers Limited, are regarded as related parties to the Company. The amounts paid to the Managers for investment management fees are disclosed in note 3. The investment management fee is based on the Company's gross assets less current liabilities which are reduced by the value of investments held in companies where Premier is the investment manager. At 31 May 2009 the market value of these holdings was nil (2008: nil). Mr Cleveland of RENN Capital Group, Inc., the Investment Adviser is a director of Access Plans, Cover-All-Technologies, Integrated Securities Systems, BPO Management and CaminoSoft, being companies held within the portfolio. Other officers of RENN Capital Group Inc. also sit on the boards of certain companies held as investments within the portfolio. The total directors' remuneration received by RENN Capital Group Inc. for representation of the Company and its other clients and affiliates, and attendance at meetings of the boards of companies in which the Company had a interest during the year ended 31 May 2009 was US$11,476 (2008: US$7,826).
21. CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
At 31 May 2009 there were no outstanding commitments or contingent liabilities.
22. CONTINGENT ASSETS
The Directors are aware of the AIC/JPMorgan Claverhouse judgement which was made during 2007 regarding the charging VAT on investment management fees and has recently received a sum of 10,000 from the previous Investment Manager. It is possible that the Company will be able to recover an amount of VAT that it has paid on its investment management fees during the forthcoming year, although the Directors do not believe that any such recoverable sums will be of a material amount.
23. ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES
Objectives, policies and strategies
Following approval by Shareholders on 30 May 2008 the investment policy was revised to invest primarily in equities and equity related instruments issued by companies domiciled, listed quoted or traded in North America. The Company may invest in bonds, warrants, contracts for difference, other forms of derivative investment, bank debt or debt securities. The Company borrows money by way of a US$500,000 revolving credit facility at a fixed interest rate of LIBOR plus margin of 3.0% on any drawn down balance and 1.5% per annum on any undrawn balance. The Company's financial instruments comprise securities, warrants, other investments and bank deposits which are held to achieve its investment objective as well as debtors and creditors that arise from its operations, for example sales and purchases of securities awaiting settlement and debtors of accrued income.
The nature and extent of the financial instruments outstanding at the Balance sheet date and the risk management policies employed by the Company are discussed below.
The principal risks the Company faces through the holding of financial instruments are:
market risk, comprising currency risk, interest rate risk and other price risk; and
liquidity/marketability risk.
As required by FRS 29: Financial Instruments: Disclosure, an analysis of financial assets and liabilities, which identifies the risk to the Company of holding such items, is given below.
Market risk
The Company's strategy on the management of investment risk is driven by the Company's investment objective. The Investment Managers and Investment Adviser monitor the financial risks affecting the Company on a continual basis in accordance with the policies and procedures in place. The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Managers and Investment Adviser. The Board meets quarterly and at each meeting reviews the investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies.
Financial assets
All investments and derivatives are stated in sterling and disclosed at fair value through profit or loss.
The Company invests directly in smaller companies. As smaller companies do not generally have the financial strength, diversity and resources of large companies they may find it more difficult to overcome periods of economic slow down or recession. In addition, the relatively small market capitalisation of such companies may make the market in their shares less liquid. In the event that smaller companies under perform, this may affect the performance of smaller companies in which the Company is invested. The Company invests in a wide range of industrial sectors therefore the Board does not consider there is a significant risk to market fluctuations in any one industry. The Company may invest in unlisted securities, or other securities, in which there is no active market. In such cases it may be difficult to determine the value of such securities and/or to realise the investment or to do so on acceptable terms. There may be no certainty that a listing or trading facility will be obtained for such securities. Holders of such securities may not have the benefit of market rules designed for the protection of holders of listed or public traded securities. This may include the absence of publicly available information on such securities or their issuers. As discussed in the accounting policies of the Company in note 1, unquoted warrants are valued at fair value using the Black Scholes methodology, which includes a time value which is calculated and added to the intrinsic value to arrive to the total valuation for each warrant. The intrinsic value is calculated by reference to the quoted price of the investment into which the warrant will convert and the conversion price for each warrant. The Black Scholes pricing formula requires five inputs: (i) stock price, (ii) exercise price, (iii) time to expiration, (iv) volatility and (v) interest rate. The stock price, exercise price and time to maturity are straight forward. The interest rate is a risk free rate (represented by the yield on US Treasury security) for a team that corresponds to the time to expiration of the subject warrant.
The method of valuing the fixed asset investments is discussed in the accounting policies of the Company in note 1. Cash and trade debtors arising from the operations of the Company as at 31 May 2009 amounted to 986,000 (2008: 51,324,000) and 105,000 (2008: 2,432,000) respectively.
Foreign currency risk
Due to the Company's holdings being wholly overseas, the Company is also exposed to the risk of movement in the dollar/sterling exchange rate. The Board's current policy is not to engage in an active programme of hedging the dollar risk in the portfolio. However, bearing in mind that the final redemption payment will be sterling payment of 120.82p to be made to Income Shareholders on 31 May 2011, the Board will look at taking advantage of any future dollar strength versus sterling by hedging some or all of the dollar exposure into sterling in those circumstances.
The Investment Managers monitor the exposure to foreign currencies on a daily basis and report to the Directors on a regular basis. The Investment Managers measure the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. The Company settles its US investment transactions from its bank accounts in US dollars. In the year ended 31 May 2009, exchange gains of 6,000 (2008: gains 58,000) relating to currency, have been taken to the capital reserve.
The primary currency risk is between sterling and dollars.
The Investment Managers risk assessment policy is reflected in its investment strategy. In order to protect against inflation and grow capital the fund invests in small companies that it believes will grow into larger companies, with the intention of increasing the value of the investment. The foreign currency profile of the Company's financial assets and liabilities at 31 May was as follows: Other Investment Current Financial Financial Sensitivity portfolio Cash assets assets liabilities gap GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 As at 31 May 2009 US dollars 12,403 947 93 13,443 310 13,133 As at 31 May 2008 US dollars 16,899 2,578 2,378 21,855 1,809 20,046
The Company has a total exposure as a percentage of funds attributable to Shareholders to US dollars of 101% (2008: 105%).
Sensitivity analysis
At 31 May 2009, had sterling strengthened by 10% in relation to the US dollar, with all other variables held constant, the net assets attributable to Shareholders and the return for the year would have decreased by 1,194,000 (2008: 1,822,000). A 10% weakening of sterling against the US dollar would have resulted in an increase in net assets of 1,459,000 (2008: 2,227,000).
Interest rate risk
The Company's portfolio is partially invested in interest bearing securities of various types (as set out below). At the time of investing, interest rates are fixed and as long as the security concerned remains unimpaired, cash flows will not be affected by movements in long-term interest rates. The Company also holds cash, in the short term, which it invests in money market accounts and, on occasions, government backed Treasury Bills. The interest rate received on these holdings is based on short term interest rates.
The Company's interest rate risk is managed on a daily basis by the Investment Manager in accordance with polices and procedures in place. The overall interest rate risks are monitored on a regular basis by the Directors.
The cash held at Frost National Bank is invested in an institutional high quality commercial paper fund with a very low maturity structure.
The Directors consider interest rate risk as part of their overall assessment of risk in the portfolio.
The interest rate risk profile of the Company's fixed interest financial assets at 31 May was as follows: Weighted Weighted average average period for interest which rates Value Value rate are fixed US$'000 GBP'000 % (months) As at 31 May 2009 US convertible debentures 2,603 1,614 6.4 12.5 US loan notes 1,000 620 9.0 17.0 US preference shares 1,535 952 1.2 - As at 31 May 2008 US convertible debentures 7,087 3,586 6.5 6.1 US loan notes 2,825 1,430 8.3 14.2 US preference shares 4,945 2,503 1.6 - The maturity profile of the Company's financial assets at 31 May was as follows: 2009 2008 GBP'000 GBP'000 Within one year 142 4,222 Within one to two years 1,079 325 Within two to three years 1,144 2,273 Within three to four years 196 23 Within four to five years 53 1,098 More than five years - 12 2,614 7,953 Assets with no maturity dates 10,873 62,693 13,487 70,646
The interest rate risk and maturity profile of the financial liabilities of the Company as at 31 May was as follows:
Amount Period until drawn Total maturity $'000 GBP'000 (years) As at 31 May 2009 Amounts drawn under the fixed revolving credit 500 310 1.0 facility
Financial liabilities upon which no interest is 112
paid with no maturity date*
Financial liabilities upon which no interest is 13,065
2.0 paid 13,487 As at 31 May 2008 Amounts drawn under the fixed revolving credit 3,500 1,771 1.0 facility
Financial liabilities upon which no interest is 49,726
paid with no maturity date*
Financial liabilities upon which no interest is 19,149
3.0 paid 70,646 * Creditors less prepayments Sensitivity analysis
A change in interest rates would have some impact on the fair value of warrants and debit instruments but the size of the impact is not easily quantifiable.
Other price risk
Other price risk is the risk that the value of the instrument will fluctuate as a result of changes in market prices (other than those arising from currency risk or interest rate risk) and represents the potential loss the Company may suffer in the light of adverse market price movements. Since the Company invests in financial instruments, the risk is inherent. The Company will always face uncertainty as to future price of the financial instruments in which it is invested. The price of certain unquoted stocks is also affected by their relative illiquidity (see below). The Board of Directors manage this risk by ensuring full and timely access to relevant information from the Investment Manager and Investment Adviser. The Directors monitor compliance with the Company's objectives and are directly responsible for investment strategy and asset allocation. See the Investment Adviser's report for discussion of investments made during the year. The method of valuing the investments is discussed in the accounting policies in note 1. Sensitivity analysis
A 10% increase in the market value of investments at 31 May 2009 would have increased net assets attributable to Shareholders by 1,240,000 (2008: 1,690,000). An equal change in the opposite direction would have decreased the net assets attributable to Shareholders by an equal but opposite amount.
Liquidity risk
A significant proportion is held in smaller and unquoted companies. Such companies are inherently higher in risk and lower in liquidity than, for example, blue-chip equities. Unlisted companies have the additional risk of not benefiting from market rules designed to protect investors. Some of the investments are in unlisted convertible bonds or preference shares, which may at any time be converted into a listed common stock, giving an effective level of liquidity equal to the liquidity in the common stock. Other unlisted investments do not have the option of converting into a listed stock.
Credit risk
The carrying amounts of financial assets including cash balances best represent the maximum credit risk exposure as at the Balance sheet date.
The Company is exposed to credit risk by way of its debenture loan notes and preference shares in the portfolio and any interest outstanding thereon. The benefit of a convertible debenture is that if a portfolio company becomes troubled, the Company is protected through its position as a creditor. The Directors do not consider there to be a major risk of material default on these items but do not recognise that from time to time, default might occur.
As at 31 May 2009 the fair value of financial assets which are subject to credit risk was 3,186,000 (2008: 7,519,000). In addition there was interest outstanding of 93,000 (2008: 273,000).
The carrying value of financial assets subject to credit risk is split as follows: 2009 2008 GBP'000 GBP'000 Unlisted preference 909 759 Unlisted convertible preference 43
1,744
Unlisted convertible debentures 1,454
3,410
Listed convertible debentures 160
176 Unlisted loan notes 620 1,430 3,186 7,519
The Company's investments are held on its behalf by Frost National Bank, acting as agent. Bankruptcy or insolvency of Frost National Bank may cause the Company's rights with respect to securities held by the custodian to be delayed. The Board monitors the Company's risk by regularly reviewing the custodian's internal controls report.
Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Managers. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on it obligations before any transfer of cash or securities away from the Company is completed.
Cash is only held at banks that have been identified by the Board as reputable and of high credit quality.
Short-term flexibility is achieved via the use of bank borrowing from a facility with Allied Irish Banks plc. This facility, together with funding requirements, is regularly reviewed by the Board.
Financial liabilities
The Company finances its operations through a revolving credit facility, share capital and retained profits, although trade creditors and accruals arise from its operations. At 31 May 2009, the maturity profile of the Company's financial liabilities was as follows: 2009 2008 GBP'000 GBP'000 Within one year 422 51,497 2-3 years 13,065 19,149 13,487 70,646
The Company has a $500,000 margin facility which attracts interest at a variable rate. As at 31 May 2009, the full $500,000 was drawn down. The renewal date of this facility is 29 May 2010.
As the facility is drawn in US dollars, the Company is subject to currency exchange gains and losses.
Capital management
The Company does not have any externally imposed capital requirements other than those relating to the revolving credit facility. Details of the covenant attached to this facility together with the Company's principle risks and their management are disclosed above and in note 13.
The Board consider the capital of the Company to be the assets attributable to Shareholders. The Capital of the Company is managed in accordance with its investment objective and policy.
Annual General Meeting
The Company's Annual General Meeting will be held on 5 October 2009, at the offices of the AIC, 24 Chiswell Street, London EC1Y 4YY at 11am.
The notice of this meeting can be found in the annual report and accounts at www.premierassetmanagement.co.uk.
Duncan Abbot Chairman 21 August 2009
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