This replaces the previous release at 17.15 pm today
Chairman's Statement
Results and performance
Total assets, excluding the effect of the loan repayment of 43.5 million Euros
in July, increased by
approximately �8.4 million over the 12 months to 30 September 2003. This
represents an increase of
14.1% on the opening value of total assets after taking into account the
repayment of part of the bank
loan in July. Part of this increase represents the retranslation of cash held
in Euros at a stronger Euro
versus sterling exchange rate. The performance of invested assets was a rise of
about 18.5%, which
compares with a rise in the FTSE World Europe ex UK index of 23.1%. Despite the
fairly defensive
positioning of the Company's assets, the extent of equity market falls in March
caused the Company to
be in danger of breaching its banking covenants. It was necessary for the
Company to sell some
investments at that stage and this impacted negatively on the investment
performance for the second
half of the Company's financial year. Cash raised was maintained on deposit and
used in part to offset
the amount of the bank borrowings. Given the increase in the sterling value of
the bank loan, the
year-end result equates to an increase in net assets before breakage costs of �
2.46 million, a rise of 21%.
Shareholders will be only too aware that this has been another volatile period
for equity markets. The
first half of the Company's financial year was dominated by increasing
international tension over Iraq,
together with concerns as to whether the US economy could mount a robust
recovery. Equity markets
reached their nadir on 12 March when it seemed that a resolution to the crisis
over Iraq would be
delayed. Since that time equity markets have been on an improving trend, albeit
not without some
alarms. In retrospect equity valuations, particularly relative to government
bonds, had simply become
too cheap; the apparently successful outcome to the war in Iraq, the ending of
forced selling by life
companies and some signs of economic revival in the US provided a suitable
backdrop for this rally.
Of relevance to the Company's performance over the past twelve months was the
movement in the
Euro (which strengthened approximately 11% against sterling), and the
volatility in the level of interest
rates. The latter has had a particular impact, in that the level of breakage
costs (which for the purposes
of calculating the bank covenant are included in borrowings) results from the
difference between the
rate at which the Company has fixed its interest payments and the market rate
of interest expected to
prevail over the remaining life of the bank loan. Broadly speaking, medium term
Euro interest rates
declined over the first three quarters of the Company's financial year, thereby
increasing the breakage
costs as the differential between these rates and the fixed rate on the
Company's loan increased. Thus,
at the same time as equity markets were declining in the period up until March
2003, the break cost
liability was increasing, putting renewed pressure on the Company's bank
covenants.
As noted above, it was this situation which caused the Company to have to
realise some of its investments towards the end of March and to hold the cash
proceeds on deposit. At that time, the Board wished to retain sufficient
flexibility to be able to utilise the available gearing to enable the Company
to benefit as far as possible from any recovery in equity markets.
It became apparent in the third quarter of the Company's financial year that
the widening discrepancy
between short term interest rates, which were determining the Company's bank
interest income on cash
held as offset against the loan and the fixed rate payable on the Company's
loan were harming the
Company. It also became apparent to the Board that it was increasingly unlikely
that all the cash could
ever be reinvested in the market, because of the constraints imposed by the
bank covenants. The Board
decided that it would be in the Company's best interest to repay part of the
bank loans. Thus, in July
43.5 million Euros was repaid to the Company's lenders. The Board was concerned
to limit the cash
outflow from the Company but, at the same time, wished to protect the Company
from further
deterioration on the break cost position. As a result, instead of breaking the
fixed interest swap on that
portion of the loan which had been repaid, the Company entered into an equal
and opposite swap on
this amount. The effect of this was that the breakage cost on the amount of
loan paid off was fixed and,
together with a modest funding cost, will be paid out over the rest of the
Company's life.
In the fourth quarter of the Company's financial year we have seen something of
a reversal in bond
markets, leading to a rise in medium term rates. The Company is in the process
of negotiating with its
lenders to see whether it can take advantage of this trend, by holding part of
the cash offset in
government bonds, thereby earning a higher return than on cash.
During the Company's financial year, the Board authorised the Managers to buy
back Zero Dividend
Preference shares at a significant discount to their accrued entitlement value.
The Board is convinced
that such action is in the long-term interests of both classes of shareholders,
and the Board has
therefore authorised the Managers to continue with this strategy. As at the
date of this letter, the
Managers have repurchased 545,850 Zero Dividend Preference shares at an average
price of 36.9p per
share.
During the year and at the year end, the Company held more than 15% of its
gross assets in holdings in
other listed investment companies (including investment trusts). The Company
therefore does not have a stated investment policy of investing no more than
15% of its gross assets in such companies.
Offer from Red Apple
Ordinary shareholders will have seen the Offer document from Red Apple and the
response from the
Board. We have nothing to add to the comments made in my letter dated 30
October 2003. We await
the outcome of that bid and any changes that will emanate as a consequence.
Outlook
European and UK markets have recovered strongly from their lows of March and,
whilst they do not
appear expensive on fundamental grounds, our advisers do have concerns about
the extent to which the
US market in particular appears to be discounting a strong economic recovery.
Many of the economic
problems that had previously influenced investors remain; these include the
large budget and current
account deficits in the US, the high level of household debt in both the US and
the UK and the
potentially destabilising effect of the congruence of these imbalances. The
Managers retain a relatively
cautious stance but with equities in the UK and Europe appearing to have
reasonable value in
comparison with bonds, they will be looking to put more cash into markets
should there be a setback.
Peter Harwood
17 November 2003
Top Twenty Investments by Value
as at 30 September 2003
Number of Description Market Bid % Total assets less
Shares held current liabilities
Value �
2,100,000 Jupiter Enhanced Income - ord 1,449,000 3.28
610,000 Small Companies Dividend - ord 695,400 1.58
2,000,000 Investec High Income - ord 640,000 1.45
18,000 Royal Dutch Petroleum 475,786 1.09
21,500 Metro 467,178 1.06
302,810 Ifco Systems 456,343 1.03
25,000 Continental 431,956 0.98
45,000 Endesa 418,568 0.95
80,000 Fortum 416,640 0.94
22,000 TDC 407,044 0.92
95,000 Italcementi 398,871 0.90
16,000 Delhaize 392,528 0.89
40,000 ENI 367,855 0.83
18,000 Corio 365,640 0.83
130,000 Telecom Italia Mobil 363,579 0.82
4,000 Total Fina Elf 363,369 0.82
95,000 European Assets Trust 351,500 0.80
1,350,000 City of Oxford Geared Income - 351,000 0.80
geared ord
8,000 Vinci 346,826 0.79
65,000 Banco Santander Central Hispano 331,686 0.75
9,490,769 21.51
Statement of Operations
for the year ended 30 September 2003
30 September 30 September
2003 2002
� �
Income
Dividends 1,941,858 2,934,277
Interest on bonds 29,282 1,235,349
Bank interest 1,203,236 621,444
Other income - 877
Total income 3,174,376 4,791,947
Expenses
Investment management and administration fees (193,970) (631,668)
Audit fees (31,538) (17,642)
Directors' fees (40,848) (59,000)
Interest payable and similar charges (4,472,161) (4,409,449)
Other expenses (217,487) (72,546)
Total expenses (4,956,004) (5,190,305)
Net loss before investment result (1,781,628) (398,358)
Realised loss on sale of investments (8,167,603) (12,403,733)
Movement in unrealised loss on revaluation of 11,776,405 (10,395,184)
investments
Realised profit on foreign currency 5,592,891 102,426
Realised loss on retranslation of bank loans (4,932,327) -
Movement in unrealised loss on retranslation of (976,230) (755,942)
bank loans
Movement in unrealised gain/(loss) on forward 239,481 (260,248)
currency contracts
Gain on repurchase of zero dividend preference 481,237 -
shares
Unrealised loss on ineffective cash flow hedge (3,534,474) -
removed from equity and reported in net loss for
the year
Movement in unrealised gain on revaluation of 78,257 -
ineffective cash flow hedges
Net loss for the year (1,223,991) (24,111,039)
Basic and diluted deficit per Ordinary share (1.85) (36.39)
(pence)
All items in the above statement are derived from continuing operations.
Balance Sheet
As at 30 September 2003
30 September 30 September
2003 2002
� �
Non-current assets
Available for sale investments 19,985,276 23,914,853
Current assets
Cash and cash equivalents 24,682,782 42,629,128
Debtors 24,294 276,332
Total assets 44,692,352 66,820,313
Current liabilities
Creditors : amounts falling due within one year (561,384) (915,390)
Non-current liabilities
Bank loans (29,982,837) (54,216,677)
Zero Dividend Preference shares (10,574,560) (10,346,901)
Interest rate swap liability (6,629,713) (4,718,593)
Total liabilities (47,748,494) (70,197,561)
Net liabilities (3,056,142) (3,377,248)
Represented by:
Share capital (Ordinary shares) 66,250 66,250
Share premium (Ordinary shares) 63,683,750 63,683,750
Reserves (66,806,142) (67,127,248)
Issued capital and reserves (3,056,142) (3,377,248)
Net Asset Value per share (as per IFRS):
Ordinary Shares (pence) (4.61) (5.10)
Zero Dividend Preference Shares (pence) 128.89 118.25
Available Assets per share (as per Articles):
Ordinary Shares (pence) Nil Nil
Zero Dividend Preference Shares (pence) 91.64 79.65
This financial information has been prepared using International Financial
Reporting Standards and the Accounting Policies set out in the Statutory
Financial Statement. This preliminary announcement was approved by the Board of
Directors on 17 November 2003.Statement of Changes in Equity
For the year ended 30 September 2003
30 September 30 September
2003 2002
� �
Opening equity (3,377,248) 30,316,538
- Revaluation of opening investments to bid - (756,654)
pricing
on first time application of IAS39
- Unrealised loss on valuation of effective - (3,164,158)
cash flow hedges on first time application of
IAS39
Net loss for the year (1,223,991) (24,111,039)
Dividends paid - (4,107,500)
Movement in unrealised loss on revaluation of (1,989,377) (1,554,435)
effective cash flow hedges
Movement in unrealised loss on revaluation of 3,534,474 -
ineffective cash flow hedges removed from
equity and reported in net loss for the year
Closing equity (3,056,142) (3,377,248)
Statement of Cash Flow
for the year ended 30 September 2003
30 September 30 September
2003 2002
� �
Operating activities
Dividends received 1,959,814 3,066,885
Bond interest received 53,372 1,594,507
Bank interest received 1,203,236 621,444
Other income received - 877
Expenses paid (499,020) (798,429)
Interest paid (3,662,900) (3,546,961)
Net cash (outflow)/inflow from operating (945,498) 938,323
activities
Investing activities
Purchase of investments (16,200,874) (73,298,775)
Sale of investments 23,950,880 109,804,367
Net cash inflow from investing activities 7,750,006 36,505,592
Financing activities
Payments on repurchase of Zero Dividend (201,348) -
Preference shares
Bank loans repaid (30,142,397) -
Dividends paid - (4,107,500)
Net cash outflow from financing activities (30,343,745) ( 4,107,500)
(Decrease)/increase in cash and cash (23,539,237) 33,336,415
equivalents
Realised gain on foreign currency 5,592,891 102,426
Cash and cash equivalents at 1 October 42,629,128 9,190,287
Cash and cash equivalents at 30 September 24,682,782 42,629,128
END