Annual Report and Accounts
Finsbury Worldwide Pharmaceutical Trust PLC
Announcement of Annual Financial Report
for the year ended 31 March 2008
Finsbury Worldwide Pharmaceutical Trust PLC announces its Annual Financial
Report for the year ended 31 March 2008.
This document is compiled from extracts from the Company's Annual Financial
Report but does not form the full Report. A full copy of the Company's Annual
Financial Report can be found on the Company's website at www.finsburywp.com
Performance Summary
%
Change
for
the
year
ended
31 *31 *31 31 31 31 31
March March March March March March March
2003 2004 2005 2006 2007 2008 2008
Shareholders' funds £143.5m £189.1m £226.4m £334.8m £273.6m £224.8m (17.8)
Net asset value per share - 365.3p 481 .3p 414.7p 583.0p 520.9p 486.6p (6.6)
basic+
Net asset value per share - 365.3p 481 .3p 414.7p 564.1 p 511 .2p 482.4p (5.6)
diluted~ (dilution for
warrants)
Share price 330.5p 466.0p 430.0p 575.0p 477.8p 457.0p (4.4)
Premium/(discount) of share - - - 1 .9% (6.5%) (5.3%) N/A
price to diluted net asset
value per share
Premium/(discount) of share (9.5%) (3.2%) 3.7% (1.4%) (8.3%) (6.1%) N/A
price to basic net asset
value per share
Benchmark Indexâ—† 5,855.7 6,154.4 6,173.2 7,787.8 7,507.7 7,049.7 (6.1)
#Total expense ratio - 3.8% 0.8% 1 .5% 1 .3% 1.3% N/A
(including performance fees)
#Total expense ratio - 1.8% 1.5% 1 .4% 1 .3% 1.3% N/A
(excluding performance fees)
â—†Datastream World Pharmaceutical and Biotechnology Index, (total return,
sterling adjusted)
*Restated for accounting policy change
~There was no dilution in years prior to 2006, dilution for conversion of all
outstanding warrants at the conversion price of 464p (see note 7)
+Total return, including portfolio income #Excludes indexation of the deferred
fee paid to M and I Investors, Inc. on 24 January 2006
The Following are included:
- Chairman's Statement
- The Board
- OrbiMed Capital LLC
- Review of Investments
- Investment Portfolio
- Report of the Directors
- Corporate Governance
- Income Statement
- Reconciliation of Movements in Shareholders' Funds
- Balance Sheet
- Cash Flow Statement
- Notes to the Financial Statements
For further information please contact Mark Pope at Frostrow Capital on 020
3008 4913
Chairman's Statement
REVIEW OF THE YEAR AND PERFORMANCE
The year under review has been a challenging one for stock markets as a whole
and in this, my last statement as Chairman, I must report that the Company's
undiluted net asset value per share declined by 6.6%. The diluted net asset
value per share fell by 5.6% over the year. The Company's benchmark index fell
by 6.1% during the same period. The Company's share price fell by slightly
less, by 4.4%, as the discount of share price to the diluted net asset value
per share finished the year at 5.3% compared to 6.5% a year ago.
THE BOARD
As mentioned at the interim stage I shall be retiring from the Board at the
Annual General Meeting. I have been a Director since the launch of the Company
in 1995 and in that period the Company's share price has grown by almost 400.0%
compared to a rise in the Company's benchmark of nearly 320.0% (both measured
on a total return basis). Your Board is delighted that Martin Smith, who joined
the Board in November 2007, is to succeed me as Chairman at the forthcoming
Annual General Meeting.
CAPITAL
The Board continued to implement its policy of active discount management
whereby consideration is given to buying back shares at prices representing a
discount greater than 6.0% to the diluted net asset value per share, if there
is demand in the market for it to do so.
In line with this policy, a total of 6,351,307 shares, 896,000 of which are
currently held in treasury, were repurchased during the year at a cost of £
30,852,000 (including expenses), representing 12.1% of the shares in issue at
the beginning of the year. Since the year end and to 16 June 2008, a further
1,387,750 shares costing £6,470,000 (including expenses), have been repurchased
to be held in treasury. The execution and timing of any share buy-back will
continue to be at the absolute discretion of the Board. The Board has agreed
that any shares held in treasury will be
Cancelled on the date of the Annual General Meeting each year. Shareholder
approval to renew the authority to repurchase the Company's shares will be
sought at the Annual General Meeting.
At the regular warrant exercise date of 31 July a total of 14,687 warrants were
exercised raising a further £68,148 as at 31 July 2007. The remaining two
opportunities to exercise the warrants are on 31 July 2008 and 31 July 2009.
DERIVATIVES
The Company continues to use derivative instruments to enhance the total return
to shareholders, within certain limits so that no more than 5.0% of the
Company's assets are exposed to the strategy. The Board is pleased to note that
gains of £2.1 million were generated during the year from the strategy by our
Investment Manager. In excess of £7 million of additional returns have now been
generated since the inception of the strategy in 2006.
REVENUE AND DIVIDENDS
The revenue return for the year was £1.7 million (2007: £1.9 million) and the
Board has recommended an interim dividend of 3.0p per share (2007: 3.0p). The
Company continues to charge 95.0% of the sum of the investment management and
management fees to capital and at 31 March 2008 the total expense ratio
(excluding performance fees) was 1.3% (31 March 2007: 1.3%).
The interim dividend will be payable on 25 July 2008 to equity shareholders on
the register of members on 20 June 2008. The shares will go ex-dividend on 18
June 2008.
THE COMPANY'S ARTICLES OF ASSOCIATION (THE "ARTICLES")
The Board believes that as a result of various legislative and regulatory
developments the Articles should be amended to bring them into line with
current best practice. This will include a provision for the future use of
communications with shareholders both in electronic form and via the website. A
Special Resolution will be proposed at the Annual General Meeting which will,
if approved, ratify the adoption of new Articles. The material differences
between the current and the proposed Articles are summarised in a separate
circular to shareholders.
VAT
The Company is currently in the process of reviewing its position concerning
VAT in light of the result of the legal case initiated by the Association of
Investment Companies and JPMorgan Claverhouse Investment Trust plc. The amounts
involved are not expected to have a material impact on the Company's net asset
value. The Company will take credit for VAT recovered if any such recovery can
be assessed with reasonable certainty and will continue to follow guidance
issued by the Association of Investment Companies in this matter.
SAVINGS PLANS
The investment plans managed by Close Investments on behalf of the Company
have, subject to FSA rules, recently been transferred to Alliance Trust Savings
Limited ("ATSL"). It is our hope that being included in the much larger,
market-wide scheme run by ATSL will lead to increased private investor interest
in the Company. Existing plan members should have received confirmation of the
transfer including their new account details.
OUTLOOK
The economic outlook remains uncertain and stock market conditions will
continue to be volatile and difficult in the short term. The Board continues to
closely monitor developments in the healthcare sector and to explore new
investment opportunities within the sector.
The stock market performance of the sector as a whole has trailed that of the
general market over the last several years. Over that time, earnings per share
of major biotechnology companies have advanced rapidly, while those of major
pharmaceutical companies have grown more slowly. At the same time, scientific
advance at discovery biotechnology companies has been notable, resulting in
several major successes in the investment portfolio. However, there is risk in
this sector, and occasional failures have detracted from returns, but we are
confident that the pace of scientific advance will contribute to multiple
opportunities for future profit. Merger and Acquisition activity should
continue, and expected enhancements at the US Food and Drug Administration
should result in a more positive stance towards new drug approvals
Your Board believes that the investment portfolio is well positioned to take
advantage of not only a brighter outlook for the sector in the medium term, but
also a recovery in stock markets generally. Your Board remains optimistic for
the fortunes of the sector and for the Company and would like to thank
shareholders for their continued support.
ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at the Barber-Surgeons'
Hall, Monkwell Square, Wood Street, London EC2Y 5BL on Wednesday, 23 July 2008
from 12 noon. I hope as many shareholders as possible will attend. This will
provide an opportunity to hear from Mr Samuel D Isaly of OrbiMed Capital LLC,
the Company's Investment Manager, on the period under review, recent
developments in the pharmaceutical sector and the prospects for the future.
Ian Ivory
Chairman
Your Board
The Board of Directors, all of whom are non-executive, supervise the management
of Finsbury Worldwide Pharmaceutical Trust PLC and look after the interests of
shareholders.
Ian Ivory+ (Chairman)
Ian Ivory, aged 64, joined the Board at launch in 1995. As well as being
Chairman of the Company, Ian also chairs the Nominations and Remuneration
Committees. A Chartered Accountant, Ian is self-employed and is a Director of
Hardy Underwriting PLC and was previously a Director of Ivory & Sime and
Stewart Ivory. Ian is not employed by and does not have any other connections
with the Investment Manager and does not have any shared directorships or
employment with any of the companies in which the Company holds an investment.
Josephine Dixon*+
Josephine (`Jo') Dixon, aged 48, joined the Board in 2004 and is Chairman of
the Audit Committee. Jo is self-employed and is also a non-executive director
of Baring Emerging Europe PLC and a member of the Greenwich Hospital Advisory
Board and Panel. Until 2003 Jo held a number of senior executive positions
including that of Finance Director for Newcastle United Plc. Jo is also a
member of Durham University Business School Advisory Board. Jo is not employed
by and does not have any other connections with the Investment Manager and does
not have any shared directorships or employment with any of the companies in
which the Company holds an investment.
Professor Duncan Geddes*+
Professor Geddes, aged 66, joined the Board at launch in 1995 and has been
designated as the Senior Independent Director. He is self-employed and is a
Consultant physician in respiratory medicine at the Royal Brompton and National
Heart Hospital. He is the author of numerous publications on respiratory
medicine. Professor Geddes is not employed by and does not have any other
connections with the Investment Manager and does not have any shared
directorships or employment with any of the companies in which the Company
holds an investment.
Paul Gaunt+
Paul Gaunt, aged 59, joined the Board at launch in 1995. Paul is self-employed
and has over 30 years' experience in the investment industry. Paul was formerly
Senior Investment Manager and an Assistant General Manager of The Equitable
Life Assurance Society and a Director of Brit Insurance Holdings PLC and Oasis
Healthcare PLC. Paul is a Director of The Biotech Growth Trust PLC whose
investment portfolio is managed by OrbiMed Capital LLC, the Investment Manager
to the Company, and RCM Technology Trust PLC. Paul is not employed by and does
not have any other connections with the Investment Manager and is not employed
by any of the companies in which the Company holds an investment.
Dr David Holbrook*+
Dr David Holbrook, aged 48, joined the Board in November 2007. He is a
qualified physician and a Director of MTI Partners Limited, a leading
technology venture capital investor. He attended London and Oxford
Universities, and has an MBA from Harvard Business School. He has held senior
positions in a number of blue-chip biopharmaceutical organisations including
GlaxoSmithKline and Roche. Dr Holbrook is not employed by and does not have any
other connections with the Investment Manager and does not have any shared
directorships or employment with any of the companies in which the Company
holds an investment.
Martin Smith+
Martin Smith, aged 65, joined the Board in November 2007. He was a founder and
is a non executive director of New Star Asset Management Group PLC. He attended
Oxford University and has an MBA from Stanford University. He was a founder of
Phoenix Securities, a private investment banking firm. Following the
acquisition of Phoenix in 1997 by Donaldson Lufkin and Jenrette (DLJ), he
chaired DLJ's European Investment Banking Group. Previously he worked at
Citicorp and Bankers Trust. Martin is not employed by and does not have any
other connections with the Investment Manager and does not have any shared
directorships or employment with any of the companies in which the Company
holds an investment.
Samuel D Isaly+
Sam Isaly, aged 63, joined the Board at launch in 1995. Sam is employed as
Managing Partner of OrbiMed Capital LLC and has been a worldwide pharmaceutical
investment specialist for more than 20 years having worked in New York and
Europe with Chase Manhattan, Société Générale, Crédit Suisse and SG Warburg.
Sam is not employed by any of the companies in which the Company holds an
investment. OrbiMed Capital LLC also acts as the Investment Manager to The
Biotech Growth Trust PLC, which is also managed by Frostrow Capital LLP. Sam,
and a number of the partners at OrbiMed Capital LLC, have a minority financial
interest of 20.0% in Frostrow Capital LLP.
Anthony Townsend*+
Anthony Townsend, aged 60, joined the Board at launch in 1995. Anthony has
spent over 35 years working in the City and was Chairman of The Association of
Investment Companies from 2001 to 2003. Anthony is Chairman of iimia Investment
Trust plc, British & American Investment Trust PLC, F&C Global Smaller
Companies PLC and Finsbury Growth & Income Trust PLC. Anthony does not have any
other connections with the Investment Manager and is not employed by any of the
companies in which the Company holds an investment.
All members of the Board are non-executive
* Member of the Audit Committee
+ Member of the Nominations and Remuneration Committees
Finsbury Worldwide Pharmaceutical Trust PLC outsources the management of its
investment portfolio to OrbiMed Capital LLC, a New York based boutique company
which specialises exclusively in the management of assets in the global health
sciences industry. Personal investment, through company ownership, means that
the team is committed to producing excellent performance.
A Special Relationship
OrbiMed has managed the investment portfolio since the Company's launch in
1995, and the many awards won by the Company over the years are a testament to
the strength and talent harnessed by the OrbiMed team.
OrbiMed had over US$ 4 billion in assets under management as at 31 March 2008,
across a range of funds, including investment trusts, hedge funds and other
investment vehicles. OrbiMed's investment management activities were founded in
1989 by Samuel D Isaly.
OrbiMed Capital LLC - Investment Manager
THE TEAM
OrbiMed's investment team, headed up by Samuel D Isaly, includes over 25
experienced professionals with expertise in science, medicine, finance and law,
many of whom have advanced degrees and broad experience in science and
medicine. Collectively, the team currently serves on
the boards of over 20 biotechnology and healthcare companies.
With a coverage universe of over 750 public companies, OrbiMed's professionals
maintain an exceptional level of research intensity. The team has a
demonstrated record of investing successfully across market cycles in both
public and private companies.
Investment Strategy and Process
`Bottom-up' fundamental research provides the investment thesis for all
positions. In addition to meeting frequently with industry executives and
healthcare practitioners, OrbiMed attends many major medical conferences
worldwide. Portfolio positions are discussed and selected during daily
portfolio management meetings. OrbiMed invests with a worldwide perspective,
selecting ideas across all major geographical markets.
OrbiMed emphasises investments in companies with under-appreciated products in
the pipeline, quality management teams, and adequate financial resources.
A disciplined portfolio construction process is utilised to ensure that the
portfolio is focused on 30 to 40 `high conviction' positions.
Finally, the portfolio is subject to a rigorous risk management process to
moderate portfolio volatility.
Review of Investments
We present with pleasure our thirteenth Review of Investments for Finsbury
Worldwide Pharmaceutical Trust PLC, which was launched in April 1995.
PERFORMANCE REVIEW
The Company's undiluted net asset value per share slightly underperformed the
benchmark during the past year. The Company's share price decline of 4.4% and
the undiluted net asset value decline of 6.6% compares to a fall in the
benchmark index of 6.1%. We are never pleased to report a loss in value and we
are very focused on delivering positive returns for our investors over the
years to come. Our longer term record remains strong, with the Company's net
asset value outperforming the benchmark index by several percentage points over
the past three years, and over 13 percentage points over the past five years.
Our biggest winners all came from the biotechnology sector, including names
such as BioMarin, MedImmune, Genzyme, Onyx and Millenium. These companies were
supported by strong fundamental progress in general and, in the case of
MedImmune and Millenium, acquisition bids from large pharmaceutical companies.
Our two biggest losers came from the pharmaceutical sector: Chugai
Pharmaceutical and Schering-Plough. Schering-Plough was affected after
releasing the outcome of a very small clinical trial that showed that one of
their key cholesterol drugs showed no benefit compared to an older generic
medicine. The resulting fallout from the media frenzy was swift and
Schering-Plough fell over 25.0% in the past quarter. A much larger clinical
trial has been underway for several years, which is expected to show a
meaningful clinical benefit to this drug for patients. Thus we maintained our
position and so far in the new fiscal year the stock has recovered from US$15
to over US$19 per share.
VALUATION EROSION CONTINUES
The last seven years have witnessed a remarkable underperformance of the
healthcare sector relative to the broader markets. We are convinced the cycle
will turn soon based on many factors: unprecedented low valuations, continued
high expected earnings growth rates for biotechnology companies and
the growth of new consumer markets in Asia. With respect to valuations,
large capitalisation biotechnology companies now trade at the cheapest
valuations in history. P/E ratios have fallen to an average of approximately
20, dragged down by Amgen which now trades at less than 11x 2008 projected earnings.
In addition to opportunities in larger biotechnology companies, we also see
attractive valuations in the middle and smaller sized biotechnology companies,
in particular those companies we perceive to be "fallen angels". Approximately
one third of biotechnology companies now trade more than 50.0% below their 52
week high. This level of carnage has not been seen since 2002. The very low
valuations of that year presaged a sharp rebound in the form of a near 30.0%
positive return for the Company in 2003. We are seeking to add additional
holdings from among a selection of "fallen angel" names which are fundamentally
attractive but have been hardest hit in the market.
Within the pharmaceutical sector, valuations are also continuing to erode, and
we now can find some dividend yields above 5.0% and P/E ratios that are in the
single digits. We have been underweight in these companies relative to our
benchmark for some time, and although great challenges remain ahead (notably a
cliff of patent expirations beginning next year and legislative/political
pressure) we now believe that selected contrarian value plays are warranted.
Many of these companies are trading with high dividend yields (3.0-5.0%), P/E
ratios that are deeply discounted to the market, and bloated expense bases
which leave significant room to grow earnings through cost cutting in the
absence of top-line growth.
PLAYING POLITICS WITH OUR HEALTH
The 2008 US Presidential election season is well under way and the many
campaign proposals offer some hope of increased utilisation of healthcare goods
and services for the approximately 45 million Americans with no health
insurance. Most of the leading candidates espouse a vision of achieving
universal coverage without a "single payer" model. Individuals
would continue to receive employer-provided coverage, public healthcare access
programs would be expanded, and subsidies would be provided for individuals to
purchase private insurance. If these 45 million under-served consumers are
brought into the healthcare system the resulting increase in volume of many
healthcare products would provide a much needed growth driver for industry.
However the possibility that new legislation could lift the restriction on
Government price controls in the Medicare prescription drug benefit, in
addition to other possible industry-unfriendly actions such as patent reforms
favourable to generics companies, may provide an offset to the volume growth in
the form of lower margins.
With the anticipated flurry of healthcare reform headlines during the election
year, we expect the coming pharma-political environment could be reminiscent of
the 1994 Hillary Clinton healthcare reform proposals. Thus, we are dusting off
our play book from 1994 and will evaluate several strategies to reposition the
Company to profit from this environment, such as increasing exposure to both
non-US companies and to sectors which could benefit from expanded government
involvement in healthcare (such as generic drug markets, distributors and acute
care hospitals). We will seek to avoid the companies most vulnerable to
pharma-political issues, such as pharmaceutical companies with high-priced "me
too" products.
An example of the international exposure that we have been adding to insulate
the Company from potential political headwinds is our investment in several
Japanese generic drug companies. We believe that the coming years will see an
increase in utilisation of generic drugs in Japan from the current mid-teens
market share towards a level more consistent with other developed markets (US
generic utilisation is nearly 60.0% of the drug market by volume). This
investment thesis received an important boost recently as new legislation was
passed in Japan which creates financial incentives for pharmacies to issue at
least 30.0% of their prescriptions with generics. We expect additional
regulatory and legislative actions in Japan to continue supporting this
theme over the coming years.
FDA CHASING ITS TAIL
The US Food and Drug Administration ("FDA") has been stuck for several years
now in a cautious mode with more emphasis on safety than innovation. As a
result of this climate, combined with continued low R&D productivity from
pharmaceutical companies, only 17 new pharmaceutical products (so called "new
chemical entities", or NCEs) were approved during 2007. The last time FDA
approvals were at this low level was in 2002, and before that in 1983.
The return to majority status for the Democrats in Congress is partly to blame
for this regulatory malaise. The Democrats have presided over more scrutiny of
the FDA, as evidenced by several high profile Congressional hearings to debate
FDA's management of safety issues involving several products, including
Avandia, Epogen, Aranesp and Ketek. The Commissioner of FDA, Andrew von
Eschenbach, does not yet appear to have solid footing with respect to his
leadership role as evidenced by inconsistent performances during FDA budget and
oversight hearings. He has done little so far to address industry concerns that
the FDA remains overly concerned with drug safety to the potential detriment of
new drug approvals as evidenced by the slow pace of approvals for new chemical
entities (only 7 this year so far). In some cases, such as Zimulti from
Sanofi-Aventis, drugs have been delayed or rejected despite approval in Europe
and other markets. This higher approval hurdle is more of an issue for drugs
addressing chronic diseases vs. acute care therapies (such as oncology drugs).
As a result, this regulatory burden falls more heavily on pharmaceutical
companies than the biotechnology sector.
We are not optimistic that strong leadership will be reasserted at FDA during
an election year and thus the industry will likely continue to face product
approval headwinds in 2008. However a new President (regardless of party) would
likely appoint a new FDA Commissioner in 2009. At this point any change would
be a welcome opportunity to reinvigorate agency leadership.
MERGER & ACQUISITIONS (M&A) IN FITS & STARTS
Within the biotechnology sector, our focus on investments in acquisition
targets worked well for the Company in the early part of the year, as over
a dozen acquisitions of biotechnology companies occurred during the year.
In particular, the Company's investment in MedImmune was our second biggest
winner as AstraZeneca offered a stunning $15.6 billion for the company.
This valuation equates to over ten times revenue and is indicative of the
lengths to which the traditional pharmaceutical companies will go in order
to acquire attractive biotechnology growth opportunities.
Since December, the level of M&A activity has been subdued as Biogen Idec
(BIIB) announced that its auction process had failed to produce any
satisfactory bids for the company and it would remain as an independent entity
for the foreseeable future. BIIB's stock price fell nearly 25.0% and triggered
a broad sell off in the biotechnology indexes during the month of December.
However a final chapter may still play out: the Swiss biotechnology company
Serono went through a similar auction process in 2005 which resulted in no
acquisition bids. Once the acquisition premium had leached out of the stock,
German drug maker Merck KGaA stepped in to acquire Serono in September 2006.
Looking ahead however, in the coming year we expect biotechnology M&A will
re-accelerate and remain as a defining theme as other large companies continue
to acquire smaller discovery companies to bolster their pipelines and offset
patent expirations
A BUSY SUMMER AHEAD
One of our recent challenges has been a lack of fundamental stock-specific
catalysts, such as new clinical trial data, new product approvals and high
profile acquisitions. Fortunately this situation will change dramatically over
the coming quarters as numerous catalysts are expected to occur, all of which
present significant opportunities to generate meaningful returns. We highlight
below three specific examples of these catalysts:
* Bapineuzumab ("Bmab") data. Nothing ignites the life sciences sector like
the prospect of a new blockbuster drug. Bmab is a humanized
monoclonal antibody from Elan and Wyeth that is the most promising new
treatment in development for Alzheimer's disease. Data will be released this
summer that could demonstrate Bmab's ability to profoundly improve the current
standard of care for Alzheimer's patients. The market potential for such a
therapeutic is potentially enormous, with approximately 8 million Alzheimer's
sufferers in the US alone. If results from the on-going phase III trial are
positive, the drug could easily become the largest selling therapeutic
worldwide, surpassing current leader Lipitor at over $12 billion annually.
* ASCO conference and FLEX data. The cancer drug Erbitux is being tested in
Non-Small Cell Lung Cancer (NSCLC), with data expected this quarter at the
upcoming American Society of Clinical Oncology (ASCO) conference. NSCLC is
one of the largest oncology markets in the US, and Erbitux could
potentially generate over $1 billion in sales from this indication.
* Prasugrel decision. The FDA is currently evaluating approval of Prasugrel,
a potential competitor to Plavix, one of the world's current best-selling
drugs. In addition to impact on Eli Lilly, this decision will impact two
Japanese companies, Daiichi and Ube, which will receive royalties on
Prasugrel. The marketers of Plavix (Bristol-Myers Squibb and Sanofi
Aventis) also will be impacted significantly by this decision, as the
companies derive a large percentage of their profits from Plavix. Although
efficacy data for Prasugrel has been strong there is also evidence of
greater side effects, including excess bleeding in some patients leading to
higher mortality than Plavix.
Finally, we are pleased to announce that we have recently recruited a new
analyst, Kuhn Tsai, to lead our research efforts in healthcare services and
medical device companies. Kuhn has previous experience as a biotechnology
analyst at Goldman Sachs and Galleon Group and healthcare investment banking
experience from Lehman Brothers. His academic training includes an MD/MBA from
the University of Chicago and an AB from Harvard.
We appreciate your patience during these difficult markets as we seek to return
to the high level of returns which the Company has historically delivered to
its shareholders.
Samuel D. Isaly
OrbiMed Capital LLC
Investment Manager
Finsbury Worldwide Pharmaceutical Trust PLC Contribution by Investment -
excluding derivatives
Top and bottom five contributors to net asset value
performance over the year to 31 March 2008
Contribution Contribution
for the year to per share
31 March 2008 (pence)*
£'000
Top Five Contributors
BioMarin Pharmaceutical 5,242 10.65
MedImmune 4,658 9.46
Genzyme 2,423 4.92
Onyx Pharmaceuticals 2,346 4.77
Millenium Pharmaceutical 1,743 3.54
33.34
Bottom Five Contributors
Chugai Pharmaceutical (8,243) (16.74)
Schering-Plough (6,049) (12.29)
Amgen (3,987) (8.10)
Bristol-Myers Squibb (2,721) (5.53)
Momenta (2,640) (5.36)
(48.02)
* based on the weighted average number of shares in issue during the year to 31
March 2008 (49,231,108)
Champions of
Innovation
Industry leading investments in the investment portfolio
VERTEX PHARMACEUTICALS
Vertex is a leading biotechnology company focused on the discovery of
breakthrough small molecule drugs for viral diseases, inflammation, cancer and
other serious diseases. The company's strategy is to commercialize its products
both independently and in collaboration with major pharmaceutical companies.
Vertex co-discovered the HIV protease inhibitor, Lexiva, with GlaxoSmithKline.
Their lead program, telaprevir, is expected to provide patients with a quantum
leap in the treatment of Hepatitis C virus.
BIOMARIN PHARMACEUTICAL
A biotechnology company focused on developing innovative products for niche
markets. BioMarin has two drugs approved for marketing and a pipeline of
additional drugs in development. The marketed drugs help patients who suffer
from lysosomal storage diseases, which are rare diseases in which patients lack
specific enzymes required for elimination of certain biological waste products.
BioMarin's two approved products are direct replacements of these missing
enzymes. For example, BioMarin developed Aldurazyme as the first specific
therapy approved for the treatment of mucopolysaccharidosis. With two approved
products on the market and a fully-integrated infrastructure in place, BioMarin
is well positioned to realise continued success.
BIOGEN IDEC
Founded in 1978 as one of the original pioneering biotechnology companies,
Biogen Idec has grown into an industry behemoth by creating new standards of
care in therapeutic areas with high unmet medical needs. Biogen Idec is a
global leader in the discovery, development, manufacturing, and
commercialization of innovative therapies such as Tysabri for Multiple
Sclerosis and Rituxan for non-Hodgkin's lymphoma. Biogen Idec boasts a rich
pipeline of over a dozen important potential drugs in development, posing the
company for continued growth in the years ahead.
Investment Portfolio
as at 31 March 2008
Investment Portfolio Country Fair value % of
£'000 investments
Genentech USA 13,263 5.8
Genzyme USA 13,218 5.7
Novartis Switzerland 12,934 5.6
Abbott Laboratories USA 12,300 5.3
Bristol-Myers Squibb USA 11,772 5.1
Roche Switzerland 10,215 4.4
Biogen Idec USA 9,668 4.2
Merck KGaA Germany 9,217 4.0
Gen-Probe USA 8,496 3.7
Schering-Plough USA 8,294 3.6
Top 10 investments 109,377 47.4
Shionogi & Company Japan 8,215 3.6
Wyeth USA 7,342 3.2
Vertex Pharmaceuticals USA 6,214 2.7
Xoma USA 6,097 2.6
Imclone Systems USA 6,078 2.6
Onyx Pharmaceuticals USA 6,074 2.6
BioMarin Pharmaceutical USA 5,690 2.5
Amgen USA 5,675 2.5
Par Pharmaceutical USA 5,425 2.4
Pfizer USA 5,079 2.2
Top 20 investments 171,266 74.3
Mylan USA 5,015 2.2
OSI Pharmaceuticals USA 4,968 2.1
Sawai Pharmaceutical Japan 4,648 2.0
Tepnel Life Sciences > + UK 4,550 2.0
Merck & Co USA 4,356 1.9
Millenium Pharmaceutical USA 3,967 1.7
Intermune USA 3,817 1.7
Towa Pharmaceutical Japan 3,411 1.5
Nichi-Iko Pharmaceutical Japan 2,518 1.1
Genomic Health USA 2,423 1.1
Top 30 investments 210,939 91.6
Exelixis USA 2,043 0.9
Amag Pharmaceuticals USA 2,032 0.9
Amylin Pharmaceuticals USA 1,836 0.8
Nippon Chemiphar Japan 1,659 0.7
NPS Pharmaceutical USA 1,429 0.6
Hana Biosciences USA 328 0.2
Ariad Pharmaceuticals USA 321 0.1
GeneProt Series A Conv USA - -
Pref +
Total Equities and 220,587 95.8
Warrants
Elan # USA 78 -
Savient Pharmaceutical ~ USA (19) -
Imclone Systems ~ USA (21) -
Gilead Sciences ~ USA (25) -
Genentech # USA (28) -
Wyeth ~ USA (34) -
Ishares Nasdaq Biotech ~ USA (194) (0.1)
Novartis ~ Switzerland (219) (0.1)
Total Options (462) (0.2)
M & A Basket OTC Swap USA 10,244 4.4
Total investments 230,369 100.0
including options and swap
* Includes Call Options
~ Includes Put Options
* Includes warrants
* Includes unquoted Investment
Analysis of the Investment Portfolio
The Portfolio
as at 31 March 2008
Fair value % of
£'000 investments
Equities (including 218,905 95.1
options)
Warrants 1,220 0.5
M&A Basket OTC Swap 10,244 4.4
Total of all investments 230,369 100.0
Report of the Directors
Incorporating the Business Review
The Directors present their report and the audited financial statements for the
year ended 31 March 2008.
Status and Activities of the Company
During the year under review the Company has continued to conduct its affairs
so as to qualify as an investment company, as defined under s833 of the
Companies Act 2006, and an investment trust within the meaning of s842 of the
Income and Corporation Taxes Act 1988. HM Revenue & Customs approval of the
Company's status as an investment trust has been received for all years up to
and including the year ended 31 March 2007. This is however subject to review
should there be any enquiry under Corporation Tax Self Assessment. The
Directors are of the opinion that the Company has subsequently directed its
affairs so as to enable it to continue to obtain HM Revenue & Customs approval
as an investment trust.
The close company provisions of the Income and Corporation Taxes Act 1988 do
not apply to the Company.
The Company's shares are eligible for inclusion in the stocks and shares
component of an Individual Savings Account.
Continuation of the Company
It is not the Directors' intention that the Company should have a limited life.
However, in accordance with the Company's Articles of Association, shareholders
will have an opportunity to vote on the continuation of the Company no later
than the Annual General Meeting in 2009.
Investment Objective and Benchmark
The Company invests worldwide in pharmaceutical, biotechnology and related
securities with the objective of achieving a high level of capital growth. It
is the Company's policy to invest no more than 15.0% of its gross assets in
other investment companies (including listed investment trusts). No investment
of this type is currently held. Performance is measured against the Datastream
World Pharmaceutical and Biotechnology Index (total return, sterling adjusted).
Investment Policy
In order to achieve its investment objective, the Company invests in a
diversified portfolio of pharmaceutical, biotechnology and related securities
on a worldwide basis. It uses gearing and derivative transactions to mitigate
risk and also to enhance capital returns.
Investment Limitations and Guidelines
The Board seeks to manage the Company's risk by imposing various investment
limits and restrictions.
* The Company will not invest more than 15.0% of its assets in other UK
listed investment companies
* The Company will not invest more that 10.0% of the investment portfolio in
any one individual stock at the time of acquisition
* 60.0% of the investment portfolio will normally be invested in larger
companies (i.e. with a market capitalisation of at least US$5bn)
* 20.0% of the investment portfolio will normally be invested in smaller
companies (i.e. with a market capitalisation of less than US$5bn)
* Investment in unquoted securities will not exceed 10.0% of the investment
portfolio
* The Company' gearing policy is to borrow within a maximum of £70m or 20.0%
of the Company's net asset value
* Derivative transactions can be used to mitigate risk or enhance capital
returns and will be restricted to 5.0% of the investment portfolio
Compliance with the Board's investment limitations and guidelines is monitored
continuously by Frostrow Capital LLP ("Frostrow" or the "Manager") and OrbiMed
Capital LLC ("OrbiMed" or the "Investment Manager") and is reported to the
Board on a monthly basis.
Performance
In the year to 31 March 2008, the Company's undiluted net asset value per share
decreased by 6.6% compared to a fall of 6.1% in the Datastream World
Pharmaceutical and Biotechnology Index (total return, sterling adjusted). The
Company's share price fell by 4.4% in the same period.
The Review of Investments includes a review of the principal developments
during the year, together with information on investment activity within the
Company's investment portfolio.
Results and Dividends
The Directors have declared an interim dividend for the year of 3.0p per share
(2007: interim dividend of 3.0p) payable on 25 July 2008.
Key Performance Indicators (`KPI')
At each Board meeting the Board assesses the Company's performance in meeting
the investment objective against the following key performance indicators:
* Net asset value total return
* Share price total return
* Stock contribution analysis
* Share price premium/discount to net asset value per share
* Total expense ratio
* Benchmark and peer group performance
* Issue of new shares/repurchase of own shares
As indicated, the management of the investment portfolio is conducted by the
Investment Manager and the management of the Company's affairs, including
marketing, administration and company secretarial matters is conducted by the
Manager, each provider is responsible to the Board which is ultimately
responsible to the shareholders for performing against inter alia the above
KPI's within the terms of their respective agreements by utilising the
capabilities of the experienced professionals within each firm.
Principal Risks
The Company's assets consist principally of listed equities; its main area of
risk is therefore stockmarket-related. The specific key risks faced by the
Company, together with the Board's mitigation approach, are as follows:
Objective and Strategy - The Company and its investment objective become
unattractive to investors
The Board regularly reviews the investment mandate and the long-term investment
strategy in relation to market and economic conditions, and the operation of
the Company's peers, thereby monitoring whether the Company should continue in
its present form. A continuation vote is to be held at the Annual General
Meeting in 2009 and every five years thereafter. Each month the Board receives
a monthly review, which monitors the Company's investment performance (both on
an absolute basis and against the benchmark and peer group) and its compliance
with the investment guidelines. Additional reports and presentations are
regularly presented by the Company's Manager, Investment Manager and Corporate
Stockbroker.
Level of discount/premium - Share price performance lags NAV performance
The Board undertakes a regular review of the level of discount/premium and
consideration is given to ways in which share price performance may be
enhanced, including the effectiveness of marketing and share buy-backs, where
appropriate. The Board has implemented a discount control mechanism intended to
establish a maximum level of 6.0% discount of share price to the diluted net
asset value per share.
Market Price Risk
Market price risk arises mainly from uncertainty about future prices of
financial instruments held. It represents the potential loss the Company might
suffer through holding market positions in the face of price movements.
The Board meets as a team on a regular quarterly basis during the year and on
an ad hoc basis if necessary. At each meeting they consider the asset
allocation of the investment portfolio in order to minimise the risk associated
with particular countries or instruments. The Investment Manager has
responsibility for selecting investments in accordance with the Company's
investment objective and seeks to ensure that individual stocks meet an
acceptable risk-reward profile.
Liquidity Risk
The Company's assets comprise mainly realisable securities, which can be sold
to meet funding requirements if necessary.
Portfolio Performance and Financial Instruments - Investment performance may
not be meeting the investment objective or shareholder requirements
The Board regularly reviews investment performance against the benchmark and
against peer group. The Board also receives regular reports that show an
analysis of performance compared with other relevant indices. The Investment
Manager provides an explanation of stock selection decisions and an overall
rationale for the make-up of the investment portfolio. The Investment Manager
discusses current and potential investment holdings with the Board on a regular
basis in addition to new initiatives, which may enhance shareholder return.
Operational and Regulatory - Compliance with s842, Income and Corporation Taxes
Act 1988
A breach of s842 could lead to the Company being subject to capital gains tax
in the sale of its investments, whilst serious breach of other regulatory rules
may lead to suspension from the Stock Exchange or to a qualified Audit Report.
Other control failures, either by the Manager, the Investment Manager or any
other of the Company's service providers, may result in operational and/or
reputational problems, erroneous disclosures or loss of assets through fraud,
as well as breaches of regulations.
The Manager reviews the level of compliance with s842 and other financial
regulatory requirements on a daily basis. All transactions and income and
expenditure forecasts are reported to the Board. The Board regularly considers
all risks, the measures in place to control them and the possibility of any
other risks that could arise. The Board ensures that satisfactory assurances
are received from service providers. The Compliance Officer of the Manager and
the Investment Manager produce regular reports for review at the Company's
Audit Committee and are available to attend meetings in person if required.
Industry Risk
Industry risk exists in all specialist industries. Risks are inherent in
pharmaceutical companies with, for example, the potential for drug withdrawals
from the market or failures after launch and lack of expected profit growth. In
addition to portfolio risks the Company is also susceptible to currency
fluctuations due to non-sterling denominated investments being held; however
the Board's policy is not to currency hedge, thereby enabling the Investment
Manager to focus on investment and allowing the investors to make their own
currency hedging arrangements as required.
Currency Risk
A significant proportion of the Company's assets are, and will continue to be,
invested in securities denominated in foreign currencies, in particular US
dollars. As the shares are denominated and traded in sterling, the return to
shareholders will be affected by changes in the value of sterling relative to
those foreign currencies. The Board has made clear the Company's position with
regard to currency fluctuation, which is that it does not currently hedge
against currency exposure.
Further information on financial instruments and risk, as required by FRS 29,
can be found in note 18 to the financial statements beginning on page 40.
Share Capital
At the Annual General Meeting held on 9 July 2007, the Company was authorised
to allot up to 5,157,878 new shares into the market. Since this date, up until
16 June 2008, a total of 14,687 shares were allotted on 6 August 2007 as a
result of certain holders of the Company's warrants exercising their
subscription rights on 31 July 2007. At the Annual General Meeting held on 9
July 2007, authority was granted for the repurchase of 7,731,659 shares of 25p,
representing 14.99% of the issued share capital at that time. In the year under
review, the Company bought back a total of 6,351,307 shares, 896,000 of which
are currently held in treasury, at a cost of £30,852,000 (including expenses).
Since the year end and to 16 June 2008, a further 1,387,750 shares, costing £
6,470,000 (including expenses), have been repurchased to be held in treasury.
In aggregate to 16 June 2008 the shares bought back equate to a total of 14.7%
of the issued share capital at the beginning of the year. As indicated in the
Chairman's Statement, the Board has agreed that any treasury shares remaining
on 23 July 2008, the date of the Annual General Meeting, will be cancelled.
Prospects
The economic outlook remains uncertain and stock market conditions will
continue to be volatile and difficult in the short term. The Board continues to
closely monitor developments in the healthcare sector and to explore new
investment opportunities within the sector.
The stock market performance of the sector as a whole has trailed that of the
general market over the last several years. Over that time, earnings per share
of major biotechnology companies have advanced rapidly, while those of major
pharmaceutical companies have grown more slowly. At the same time, scientific
advance at discovery biotechnology companies has been noteable, resulting in
several major successes in the investment portfolio. However, there is risk in
this sector, and occasional failures have detracted from returns, but the Board
is confident that the pace of scientific advance will contribute to multiple
opportunities for future profit. Merger and Acquisition activity should
continue, and expected enhancements at the US Food and Drug Administration
should result in a more positive stance towards new drug approvals.
The Board believes that the investment portfolio is well positioned to take
advantage of not only a brighter outlook for the sector in the medium term, but
also a recovery in stock markets generally. The Board remains optimistic for
the fortunes of the sector and for the Company.
Management
Management, Administrative and Secretarial Services Agreement: Management,
Administrative, Secretarial and other services are provided to the Company by
the Manager. The Manager is authorised and regulated by the Financial Services
Authority.
For the period 1 April 2007 to 30 June 2007 the management fee payable was 1.0%
per annum of the Company's net asset value and was shared 0.35% to Close
Investments Limited, the previous manager, and 0.65% to the Investment Manager.
In addition Close Investments Limited received a Secretarial Fee equal to £
150,000 per annum. With effect from 1 July 2007, the new Manager, Frostrow
Capital LLP, receives a periodic fee equal to 0.30% per annum of the Company's
market capitalisation up to £150m and 0.20% per annum of the market
capitalisation in excess of £150m, plus a fixed amount equal to £50,000 per
annum.
The notice period on the Management, Administration and Company Secretarial
Agreement with Frostrow is 12 months, termination can be initiated by either
party.
The Manager, under the terms of the agreement provides inter alia the following
services:
* marketing and shareholder services;
* administrative services to such extent and from such dates as the Board may
determine;
* advice and guidance in respect of corporate governance requirements;
* maintaining the books of account and record in respect of Company dealing,
investments, transactions, dividends and other income, the income account,
balance sheet and cash books and statements;
* preparation and despatch of the audited annual and unaudited interim report
and accounts and interim management statements; and
* attending to general tax affairs where necessary.
Investment Management Agreement: Investment Management Services are provided by
the Investment Manager. The Investment Management is authorised and regulated
by the US Securities and Exchange Commission. The Investment Manager receives a
periodic fee equal to 0.65% p.a. of the Company's net asset value. The
Investment Management Agreement may be terminated by either party giving notice
of not less than 12 months. The Investment Manager under the terms of the
agreement provides inter alia the following services:
* seeking out and evaluating investment opportunities;
* recommending the manner by which monies should be invested, disinvested,
retained or realised;
* advising on how rights conferred by the investments should be exercised;
* analysing the performance of investments made; and
* advising the Company in relation to trends, market movements and other
matters which may affect the investment policy of the Company.
Performance Fee: Dependent on the level of performance achieved, the Manager
and Investment Manager are also entitled to the payment of a performance fee.
The performance fee is calculated by reference to the amount by which the
Company's investment portfolio has out-performed the Datastream World
Pharmaceutical and Biotechnology Index (total return, sterling adjusted) (the
"Benchmark").
The fee is calculated quarterly by comparing the cumulative performance of the
Company's investment portfolio with the cumulative performance of the Benchmark
since the launch of the Company in 1995. The performance fee amounts to 16.5%
of any out-performance of the net asset value over the Benchmark, the
Investment Manager receiving 15.0% and the Manager receiving 1.5% of the
outperformance.
At each quarterly calculation date any performance fee payable is based on the
lower of:
i. the cumulative out-performance of the investment portfolio over the
Benchmark as at the quarter end date; and
ii. the cumulative out-performance of the investment portfolio over the
Benchmark as at the corresponding quarter end date in the previous year.
In the year under review no performance fee was paid, and no performance fee is
accrued for as at 31 March 2008.
Continuing Appointment of the Manager and Investment Manager:
The Board has concluded that it is in shareholders' interests that the Manager
and the Investment Manager continue in their roles. The review undertaken by
the Board considered the Company's investment performance over both the short
and longer terms, together with the quality and adequacy of other services
provided. The Board also reviewed the appropriateness of the terms of the
Investment Management and Management Agreements, in particular the length of
notice period and the fee structures.
Going Concern
The Directors believe that it is appropriate to adopt the going concern basis
in preparing the financial statements as the assets of the Company consist
mainly of securities that are readily realisable and, accordingly the Company
has adequate financial resources to continue in operational existence for the
foreseeable future.
Creditors' Payment Policy
Terms of payment are negotiated with suppliers when agreeing settlement details
for transactions. While the Company does not follow a formal code, it is the
Company's continuing policy to pay amounts due to creditors as and when they
become due. As at 31 March 2008, the Company did not have any trade creditors
(2007: Nil).
Charitable and Political Donations
The Company has not in the past and does not intend in future to make any
charitable or political donations.
Environmental and Ethical Policy
The Company's primary objective is to achieve a high level of capital growth by
investment in pharmaceutical and biotechnology companies and recognises that
this should be done in an environmentally responsible way. The Company supports
the action being taken by the major pharmaceutical companies to make products
more affordable to patients in developing countries. The Directors believe that
the Company would be in breach of its fiduciary duties to shareholders if
investment decisions were based solely on ethical or environmental
considerations.
Directors
The Directors of the Company, who served throughout the year except where
stated, are all non-executive are as follows:
Ian Ivory (Chairman)
Josephine Dixon
Paul Gaunt
Professor Duncan Geddes
Dr David Holbrook (appointed 8 November 2007) Samuel D Isaly
James Noble (retired 9 July 2007)
Martin Smith (appointed 8 November 2007) Anthony Townsend
Directors' Interests
The beneficial interests of the Directors and their
families in the Company were as set out below:
Shares Warrants to subscribe
of 25p each for Shares
31 March 1 April 31 March 1 April
2008 2007* 2008 2007*
Ian Ivory 61,200 59,861 43,975 43,975
Josephine Dixon†3,400 3,400 88,180 88,180
Paul Gaunt - - - -
Professor Duncan 38,250 20,000 4,000 4,000
Geddes
Dr David Holbrook - - - -
Samuel D Isaly 235,673 235,673 407,134 407,134
Martin Smith - - - -
Anthony Townsend 12,987 12,987 1,415 1,415
*or date of appointment if later
†Since the year end, Jo Dixon transferred 3,400 shares and 62,500 warrants to
subscribe for shares to a non-connected person. As at 16 June 2008, Ms Dixon
had beneficial interest in 25,680 warrants to subscribe for shares.
As at 16 June 2008, there had been no further changes in the above details.
None of the Directors were granted or exercised rights over shares during the
year. None of the Directors has any contract (including service contracts) with
the Company, each Director is appointed by simple letter of appointment that
sets out the basic terms of appointment. Directors may resign or be removed
from office in writing. Samuel D Isaly is a partner in OrbiMed Capital LLC
which is party to the Investment Management Agreement with the Company. A
number of the partners at OrbiMed Capital LLC have a minority financial
interest totalling 20.0% in Frostrow Capital LLP, the Company's Manager.
Directors' & Officers' Liability Insurance Cover
Directors' & officers' liability insurance cover was maintained by the Board
during the year ended 31 March 2008. It is intended that this policy will
continue for the year ending 31 March 2009 and subsequent years.
Directors' Responsibilities
The Directors are responsible for preparing the annual report and the financial
statements in accordance with applicable United Kingdom law and regulation.
Company law in the United Kingdom requires the Directors to prepare financial
statements for each financial year. The financial statements are required by
law to give a true and fair view of the state of affairs of the Company and of
the net return of the Company for that period. Under this law the Directors
have elected to prepare the financial statements in accordance with United
Kingdom Generally Accepted Accounting Practice, (United Kingdom standards and
applicable law).
In preparing these financial statements, the Directors have:
* selected suitable accounting policies and applied them consistently;
* made judgements and estimates that are reasonable and prudent; and
* followed applicable United Kingdom accounting standards.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with the
Companies Act 1985. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The financial statements are published on the Company's website (website
address: www.finsburywp.com), which is a website maintained by the Manager. The
maintenance and integrity of the website maintained by the Manager is, so far
as it relates to the Company, the responsibility of the Manager. The work
carried out by the auditors does not involve consideration of the maintenance
and integrity of this website and accordingly, the auditors accept no
responsibility for any changes that have occurred to the financial statements
since they were initially presented on the website. Visitors to the website
need to be aware that legislation in the United Kingdom governing the
preparation and dissemination of the financial statements may differ from
legislation in their jurisdiction.
The Directors confirm that to the best of their knowledge the financial
statements, within the annual report, have been prepared in accordance with
applicable accounting standards, give a true and fair view of the assets,
liabilities, financial position and the loss for the year ended 31 March 2008,
and that the Chairman's Statement, Review of Investments and the Report of the
Directors include a fair review of the information by 4.1 .8R to 4.2.1 1R of
the FSAs Disclosure and Transparency Rules.
Substantial Shareholdings
As at 20 May 2008 the Company was aware of the following interests in the
shares of the Company, which exceeded 3.0% of the issued share capital of that
class:
Shareholder Registered holder Number of % of
shares issued
share
capital
Asset Value Investors Various Nominees 3,735,525 8.21
Rensburg Sheppards Ferlim Nominees/Hero 3,171,400 6.97
Investment Management Nominees
Newton Investment Various Nominees 2,866,491 6.30
Management
Legal & General Various Nominees 2,564,366 5.64
Investment Management
East Riding of Yorkshire Nortrust Nominees 2,147,250 4.72
Council
Alliance Trust Savings Alliance Trust Savings 2,106,810 4.63
Nominees
Tilney Investment Various Nominees 1,465,545 3.22
Management
Independent Auditors
Ernst & Young LLP have indicated their willingness to continue to act as
Auditors to the Company and a resolution for their re-appointment, will be
proposed at the forthcoming Annual General Meeting.
Audit Information
The Directors who held office at the date of approval of this Directors' Report
confirm that, so far as they are aware, there is no relevant audit information
of which the auditors are unaware; and that each Director has taken all steps
they ought to have taken as a Director to make themselves aware of any relevant
audit information and to establish that the auditors are aware of such
information.
Corporate Governance
A formal statement on Corporate Governance is set out in the Corporate
Governance Report.
Beneficial Owners of Shares - Information Rights
Please note that beneficial owners of shares who have been nominated by the
registered holder of those shares to receive information rights under section
146 of the Companies Act 2006 are required to direct all communications to the
registered holder of their shares rather than to the Company's registrar,
Capita Registrars, or to the Company directly.
Articles of Association
The Companies Act 2006 (the "2006 Act") received Royal Assent in November 2006.
The 2006 Act represents a major reform of UK companies' legislation and is
being brought into force on a staged basis. In order to reflect certain of the
provisions of the 2006 Act which have or will come into force, it is proposed
that a number of alterations be made to the Articles of Association. Details of
the proposed changes are set out in a separate circular to shareholders.
Shareholders should be mindful that as the 2006 Act is being implemented over a
period of time, with the final stage taking effect in October 2009.
Annual General Meeting
The formal Notice of Annual General Meeting is set out in a separate circular
to shareholders dated 18 June 2008. Resolutions relating to the following items
of special business will be proposed at the forthcoming Annual General Meeting:
a. Adoption of new articles of association
Resolution 10 seeks shareholder approval that new articles of association be
adopted in substitution for, and to the exclusion of, the existing articles of
association.
b. Authority to allot shares
Resolution 11 gives the Directors authority to allot new shares, otherwise than
by a pro rata issue to existing shareholders, up to an aggregate nominal amount
of £1,120,060 such amount being equivalent to 10.0% of the present issued share
capital and representing 4,480,241 shares of 25p each. Such issues would only
be made at prices greater than the fully diluted net asset value per share
(`NAV') thereby increasing the assets underlying each share and spread
administrative expenses, other than those charged as a percentage of assets,
over a greater number of shares.
c. Disapplication of pre-emption rights
Resolution 12 seeks shareholder approval for the disapplication of pre-emption
rights in respect of a) the allotment of shares or the sale by the Company of
shares held by it in treasury (`treasury shares'), pursuant to a rights issue
or a sale equivalent to a rights issue, and b) the allotment (other than as
part of a rights issue) of shares or the sale of treasury shares for cash up to
an aggregate nominal value of £1,120,060. No such allotment will be made at
less than the prevailing NAV per share (as determined in the absolute
discretion of the Directors). However, shares held in treasury may be resold by
the Company at a discount to such diluted NAV provided that such shares are
resold by the Company at a lower discount to the fully diluted NAV than the
discount at which they were repurchased by the Company, subject to a maximum
discount of 5.0% in absolute terms.
d. Authority to repurchase shares
Resolution 13 seeks shareholder approval for the Company to have the power to
repurchase its own shares. The Board believes that the ability of the Company
to purchase its own shares in the market will potentially benefit all
shareholders of the Company. The repurchase of shares at a discount to the
underlying NAV would enhance the NAV of the remaining shares.
At the Annual General Meeting the Company will seek shareholder approval to
repurchase up to 6,715,881 shares, representing approximately 14.99% of the
Company's issued share capital (the maximum permitted under the Listing Rules)
at a price that is not less than 25p a share (the nominal value of each share)
and not more than the higher of (a) 105% of the average of the middle market
quotations for the five business days preceding the day of purchase; and (b)
the higher of the price of the last independent trade in shares and the highest
then current independent bid for shares on the London Stock Exchange. The
decision as to whether to repurchase any shares will be at the absolute
discretion of the Board. Shares repurchased under this authority may either be
held by the Company in treasury for resale up to a maximum of 10.0% of the
issued shares or cancelled.
The authorities being sought under resolutions 11, 12 and 13 will last until
the conclusion of the next Annual General Meeting or, if less, a period of 15
months.
The Directors consider that the resolutions relating to the above items of
special business are in the best interests of shareholders as a whole.
Accordingly, the Directors unanimously recommend to the shareholders that they
vote in favour of the above resolutions to be proposed at the forthcoming
Annual General Meeting.
By order of the Board
Frostrow Capital LLP
Company Secretary
16 June 2008
Corporate Governance
Compliance
The Board has considered the principles and recommendations of the AIC Code of
Corporate Governance ("AIC Code") by reference to the AIC Corporate Governace
Guide for Investment Companies ("AIC Guide"). The AIC Code, as explained by the
AIC Guide, addresses all the principles set out in Section 1 of the Combined
Code, as well as setting out additional principles and recommendations on
issues that are of specific relevance to Finsbury Worldwide Pharmaceutical
Trust PLC.
The Board considers that reporting against the principles and recommendations
of the AIC Code, and by reference to the AIC Guide (which incorporates the
Combined Code), will provide better information to shareholders.
The Company has complied with the recommendations of the AIC Code and the
relevant provisions of Section 1 of the Combined Code throughout the year ended
31 March 2008 and up to the date of this report, except with regard to the
composition of certain of its committees and as set out below.
The Combined Code includes provision relating to:
* The role of the chief executive (section A.2);
* Executive directors' remuneration (section B.1); and
* The need for an internal audit function (section C.3).
For the reasons set out in the AIC Guide, and in the preamble to the AIC Code,
the Board considers these provisions are not relevant to the position of
Finsbury Worldwide Pharmaceutical Trust PLC, being an externally managed
investment company. The Company has therefore not reported further in respect
of these provisions.
Board Independence, Composition and Tenure
The Board, chaired by Ian Ivory, currently consists of eight non-executive
Directors. The Directors' biographical details demonstrate a breadth of
investment, commercial and professional experience. Professor Duncan Geddes has
been designated as the Senior Independent Director. The Directors review their
independence annually. Paul Gaunt is a Director of The Biotech Growth Trust PLC
for which OrbiMed also acts as Investment Manager; he has also served on the
Board for over nine years. He is therefore not considered to be an Independent
Director. Sam Isaly is Managing Partner of OrbiMed and has also served on the
Board for over nine years. Mr Isaly is therefore not considered to be an
Independent Director. Professor Geddes and Messrs Ivory and Townsend have all
also served on the Board for over nine years. However, the Board considers them
to be independent in character and judgement and, in accordance with the AIC
Code, does not believe that the criterion of length of service should
necessarily preclude them from being considered independent; they also have no
other links to the Investment Manager and have a wide range of other interests.
Anthony Townsend was previously considered not to be independent by the Board
due to directorship of The Biotech Growth Trust PLC, another investment company
to whom OrbiMed Capital provide investment management services. Following his
retirement from the Board of The Biotech Growth Trust PLC he is now considered
to be independent by the Board.
The Directors retire by rotation at every third Annual General Meeting and any
Directors appointed to the Board since the previous Annual General Meeting also
retire and stand for election. Any Director who has served on the Board for
more than nine years is subject to annual re-election. In light of the above
Messrs Gaunt, Isaly, Ivory, Townsend and Professor Geddes will be retiring from
the Board at the forthcoming Annual General Meeting. All of these, with the
exception of Mr Ivory, will be offering themselves for re-election. Dr David
Holbrook and Martin Smith, who both joined the Board on 8 November 2007, shall
both stand for their first election by shareholders at the Annual General
Meeting.
The Board has considered the position of Messrs Gaunt, Isaly, Smith, Townsend
and Professor Geddes and Dr Holbrook, as part of the evaluation process, and
believes that it would be in the Company's best interests to propose them for
election and re-election at the forthcoming Annual General Meeting.
None of the Directors has a service contract with the Company. New Directors
are appointed with the expectation that they will serve for a period of three
years. Any Director may resign in writing to the Board at any time. The terms
of their appointment are detailed in a letter sent to them when they join the
Board. These letters are available for inspection at the offices of the
Company's Manager and will be available at the Annual General Meeting. When a
new Director is appointed to the Board, he/she is provided with all relevant
information regarding the Company and his/her duties and responsibilities as a
Director. In addition, a new Director will also spend time with representatives
of the Manager and Investment Manager in order to learn more about their
processes and procedures. The Board also receives regular briefings from,
amongst others, the Auditors and the Company Secretary regarding any proposed
developments or changes in laws or regulations that could affect the Company
and/or the Directors.
The Board's Responsibilities
The Board is responsible for efficient and effective leadership of the Company
and has reviewed the schedule of matters reserved for its decision. The Board
meets at least on a quarterly basis and at other times as necessary. The Board
is responsible all aspects of the Company's affairs, including the setting of
parameters for and the monitoring of investment strategy, the review of
investment performance (including peer group performance) and investment
policy. It also has responsibility for all corporate strategy issues, dividend
policy, share buy-back policy, gearing, share price and discount/premium
monitoring and corporate governance matters. To enable them to discharge their
responsibilities, prior to each meeting the Directors are provided, in a timely
manner, with a comprehensive set of papers giving detailed information on the
Company's transactions, financial position and performance. Representatives of
the Manager and Investment Manager attend each Board meeting, enabling the
Directors to seek clarification on specific issues or to probe further on
matters of concern; a full written report is also received from the Manager and
Investment Manager at each quarterly meeting. In light of these reports, the
Board gives direction to the Investment Manager with regard to the Company's
investment objectives and guidelines. Within these established guidelines, the
Investment Manager takes decisions as to the purchase and sale of individual
investments.
There is an agreed procedure for Directors, in the furtherance of their duties,
to take independent professional advice if necessary at the Company's expense.
The Directors have access to the advice and services of the company secretary,
through its appointed representative, who is responsible to the Board for
ensuring that Board procedures are followed.
Performance Evaluation
The Board has carried out an evaluation process for the year ended 31 March
2008, independently managed by Professor Geddes, the Senior Independent
Director. This took the form of a questionnaire followed by discussions to
identify how the effectiveness of its activities, including its committees,
policies and processes might be improved. The results of the evaluation process
were presented to and discussed by the Board and, as a result, it was agreed
that the current Directors contributed effectively and that all had the skills
and experience which are relevant to the leadership and direction of the
Company.
Committees of the Board
During the year the Board delegated certain responsibilities and functions to
committees. Copies of the full terms of reference, which clearly define the
responsibilities of each Committee, can be obtained from the Company Secretary,
will be available for inspection at the Annual General Meeting, and can be
found at the Company's website at www.finsburywp.com. Up until 5 March 2008 the
committees were comprised of the independent Directors although the
non-independent Directors were invited to attend meetings when appropriate by
the Chairman. Following a review by the Board, it was agreed on 5 March 2008
that, due to its size, the membership of the Remuneration and Nominations
Committees should comprise the whole Board under the chairmanship of Ian Ivory
(provided that a majority of the Directors present are independent). It was
further agreed that the membership of the Audit Committee comprise the
following independent Directors: Jo Dixon (Chairman), Dr David Holbrook,
Professor Duncan Geddes and Anthony Townsend. Directors who are not members of
the Audit Committee may attend at the invitation of the Chairman. Details of
the membership of the Committees as at 31 March 2008 are shown with the
Directors' Biographies on pages 4 and 5.
The table below details the number of Board and Committee meetings attended by
each Director. During the year there were 5 Board meetings and a separate
meeting devoted to strategy, 2 Audit Committee meetings, 3 meetings of the
Nominations Committee and 1 meeting of the Remuneration Committee.
Meeting Attendance
The number of meetings held during the year of the Board and its Committees,
and each Directors attendance level is shown below:
Type and number of Board Strategy Audit Nominations Remuneration
meetings held in Committee Committee Committee
2007/8 (5) (1) (2) (3) (1)
Ian Ivory 5 1 2 3 1
Josephine Dixon 5 1 2 3 1
Paul Gaunt 5 1 N/A 1 1
Professor Duncan 5 1 2 3 1
Geddes
Dr David Holbrook* 1 1 - 1 1
Samuel D Isaly 5 1 N/A 1 1
James Noble** 2 - - - -
Martin Smith* 1 1 - 1 1
Anthony Townsend 4 1 N/A 1 1
*Appointed to the Board on 8 November 2007
**Retired from the Board on 9 July 2007
All of the Directors (with the exception of Dr David Holbrook and Martin Smith)
attended the Annual General Meeting held on 9 July 2007.
Nominations Committee
The Nominations Committee is responsible for the Board appraisal process and
for making recommendations to the Board on the appointment of new Directors.
Where appropriate, each Director is invited to submit nominations and external
advisers may be used to identify potential candidates.
Remuneration Committee
The level of Directors' fees is reviewed on a regular basis relative to other
comparable investment companies and in the light of Directors'
responsibilities. Neither the Chairman nor individual Directors participate in
discussions involving personal remuneration. Details of the fees paid to the
Directors in the year under review.
Audit Committee
The Audit Committee meets at least twice a year and is responsible for the
review of the interim and annual financial statements, the nature and scope of
the external audit and the findings therefrom and the terms of appointment of
the auditors, including their remuneration and the provision of any non-audit
services by them.
The Audit Committee meets representatives of the Manager and Investment Manager
and their Compliance Officers who report as to the proper conduct of business
in accordance with the regulatory environment in which the Company, Manager and
Investment Manager operate. The Company's external auditors also attend
meetings of this Committee at its request and report on their work procedures
and their findings in relation to the Company's statutory audit. They also
have the opportunity to meet with the Committee without representatives of the
Manager or the Investment Manager being present. The Audit Committee reviews the
need for non-audit services and authorises such on a case by case basis, having
consideration to the cost effectiveness of the services and the independence
and objectivity of the auditors. Non audit fees of £3,550 were paid to Ernst &
Young LLP for their review of the Company's options strategy. The Board
concluded, on the recommendation of the Audit Committee, that the auditors
continued to be independent and that their reappointment be proposed at the
Annual General Meeting.
Internal Controls
The Combined Code requires the Directors, at least annually, to review the
effectiveness of the Company's system of internal control and to report to
shareholders that they have done so. This encompasses a review of all controls,
which the Board has identified as including business, financial, operational,
compliance and risk management. This accords with the guidance contained in the
Turnbull Report published in 1999 and revised in 2005.
The Directors are responsible for the Company's system of internal control
which is designed to safeguard the Company's assets, maintain proper accounting
records and ensure that financial information used within the business, or
published, is reliable. Such a system, however, is designed to manage rather
then eliminate the risks of failure to achieve the Company's business
objectives and can only provide reasonable and not absolute assurance against
material misstatement or loss.
Unlike the boards of most other listed companies, the boards of investment
trust companies obtain the majority of their evidence as to whether internal
controls are operating effectively from third party suppliers to whom
investment management, custody, administration, accounting and secretarial
matters have been delegated. This means that an understanding of the internal
controls for an investment trust company requires Directors to consider
information from a number of independent sources, rather than from a
consolidated single source covering a typical listed company's system of
internal control.
The Company does not have an internal audit function. The Audit Committee
considers annually whether there is any need for an internal audit function. As
most of the Company's functions are delegated to third parties, it has been
agreed that it is inappropriate for the Company to have its own internal audit
function.
The Directors, through the procedures outlined below, have kept the
effectiveness of the Company's internal controls under review throughout the
period covered by these financial statements and up to the date of their
approval.
The Manager and the Investment Manager have established an internal control
framework to provide reasonable assurance on the effectiveness of the internal
controls operated on behalf of their clients. Their compliance monitoring
programmes assess the effectiveness of and provide the Board with regular
reports on all aspects of internal control (including financial, operational
and compliance control, risk management and relationships with external service
providers). Business risks have been analysed and recorded in a Risk Register,
which is reviewed at each meeting of the Audit Committee and at other times as
necessary.
Relations with Shareholders
The Board reviews the shareholder register at each Board meeting. The Company
has regular contact with its institutional shareholders particularly through
the Manager. The Board supports the principle that the Annual General Meeting
be used to communicate with private investors. The full Board attends the
Annual General Meeting under the Chairmanship of the Chairman of the Board.
Details of proxy votes received in respect of each resolution are made
available to shareholders at the meeting and are also published on the
Company's website at www.finsburywp.com. Representatives from the Investment
Manager attend the Annual General Meeting and give a presentation on investment
matters to those present. The Company has adopted a nominee share code which is
set out below.
The Board receives marketing and public relations reports from the Manager to
whom the marketing function has been delegated. The Board reviews and considers
the marketing plans of the Manager on a regular basis.
The annual and interim financial reports, the interim management statements and
a monthly fact sheet are available to all shareholders. The Board considers the
format of the annual and interim financial reports so as to ensure they are
useful to all shareholders and others taking an interest in the Company. In
accordance with best practice, the annual report, including the Notice of the
Annual General Meeting, is sent to shareholders at least 20 working days before
the Meeting. Separate resolutions are proposed for substantive issues.
Exercise of Voting Powers
The Board has delegated authority to the Investment Manager to vote the shares
held by the Company through its nominee, The Bank of New York (Nominees)
Limited, which accords with current best practice whilst maintaining a primary
focus on financial returns. The Investment Manager may refer to the Board on
any matters of a contentious nature.
Accountability and Audit
The Directors' statement of responsibilities in respect of the financial
statements is set out on pages 18 and 19. The report of the auditors is set out
on pages 27 and 28. The Board has delegated contractually to external agencies,
including the manager and the Investment Manager, the management of the
investment portfolio, custodial services (which includes the safeguarding of
the Company's assets), the day to day marketing, accounting administration,
company secretarial requirements and registration services. Each of these
contracts was entered into after full and proper consideration by the Board of
the quality and cost of the services offered, including the control systems in
operation in so far as they relate to the affairs of the Company. The Board
receives and considers regular reports from the Manager and ad hoc reports and
information are supplied to the Board as required.
Nominee Share Code
Where shares are held in a nominee company name, the Company undertakes:
* to provide the nominee company with multiple copies of shareholder
communications, so long as an indication of quantities has been provided in
advance;
* to allow investors holding shares through a nominee company to attend
general meetings, provided the correct authority from the nominee company
is available; and
* that investors in the Alliance Trust Savings Scheme or ISA are
automatically sent shareholder communications, including details of general
meetings, together with a form of direction to facilitate voting and to
seek authority to attend.
Nominee companies are encouraged to provide the necessary authority to
underlying shareholders to attend the Company's general meetings
Shareholder Analysis
as at 31 March
2008 2008 2008 2008 2007 2007 2007 2007
number of number of number of number of % of
shares % of warrants# % of shares % of warrants# issued
issued issued issued warrants
share warrants share #
capital # capital
Nominee Companies 40,431,441 87.5 8,601,006 79.9 45,714,140 87.0 7,194,000 66.8
*
Other
Institutions,
Investment
Funds and 2,071,821 4.5 368,488 3.4 3,600,501 6.9 2,791,007 25.9
Companies
Private 1,449,588 3.1 641,249 6.0 1,970,400 3.7 640,470 5.9
Individuals
Banks and Bank 2,237,311 4.9 1,147,937 10.7 1,241,740 2.4 147,890 1.4
Nominees
Total shares/ 46,190,161 100.0 10,758,680 100.00 52,526,781 100.0 10,773,367+ 100.0
warrants in issue * *
*includes
Alliance Trust
Savings Scheme, 2,109,096 4.6 137,154 1.3 2,349,477 4.5 240,204 2.2
and ISA clients.
These holdings were transferred to Alliance Trust Savings Limited with effect
from 18 March 2008.
# Warrants to subscribe for shares, created on 17 December 2004
+ 14,687 Warrants were exercised on 31 July 2007
Income Statement
for the year ended 31 March 2008
Notes 2008 2008 2008 2007 2007 2007
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Losses on investments 9 - (16,666) (16,666) - (37,708) (37,708)
held at fair value
through profit or
loss
Exchange gains on - 1,332 1,332 - 3,903 3,903
currency balances
Income from 2 3,404 - 3,404 3,891 - 3,891
investments held at
fair value through
profit or loss
Investment 3 (122) (2,323) (2,445) (147) (2,787) (2,934)
management,
management and
performance fees
Other expenses 4 (708) - (708) (973) - (973)
Net return/(loss) 2,574 (17,657) (15,083) 2,771 (36,592) (33,821)
before
finance charges and
taxation
Finance charges 5 (51) (976) (1,027) (100) (1,893) (1,993)
Net return/(loss) on 2,523 (18,633) (16,110) 2,671 (38,485) (35,814)
ordinary activities
before taxation
Taxation on net 6 (782) 372 (410) (819) 389 (430)
return/(loss) on
ordinary activities
Net return/(loss) on 1,741 (18,261) (16,520) 1,852 (38,096) (36,244)
ordinary activities
after taxation
Return/(loss) per 7 3.5p (37.1 p) (33.6p) 3.3p (66.9p) (63.6p)
share - basic
Return/(loss) per 7 3.5p (37.1 p) (33.6p) 3.2p (66.9p) (63.7p)
share - diluted
The total column of this statement is the profit and loss account of the
Company. The revenue and capital return columns are supplementary to this and
are prepared under guidance published by the Association of Investment
Companies.
All revenue and capital items in the above statement derive from continuing
operations.The Company has no recognised gains and losses other than those
disclosed in the Income Statement and Reconciliation of Movements in
Shareholders' Funds. Accordingly no separate Statement of Total Recognised
Gains and Losses has been presented. No operations were acquired or
discontinued in the year
Reconciliation of Movements in Shareholders' Funds
For the year ended 31 March 2008
Called-up Share Warrant Capital Capital Revenue Total
share premium reserve reserve redemption reserve £'000
capital account £'000 £'000 reserve £'000
£'000 £'000 £'000
At 31 March 2007 14,401 117,565 7,436 130,724 375 3,130 273,631
Net (loss)/return - - - (18,261) - 1,741 (16,520)
on ordinary
activities after
taxation
Dividend paid in - - - - - (1,544) (1,544)
respect of year
ended 31 March 2007
Proceeds from 4 64 - - - - 68
exercise of
warrants
Transfer from - 10 (10) - - - -
warrant reserve
following exercise
of warrants
Shares purchased (2,633) - - (30,852) 2,633 - (30,852)
including expenses
At 31 March 2008 11,772 117,639 7,426 81,611 3,008 3,327 224,783
For the year ended
31 March 2007
Called-up Share Capital
share premium Warrant Capital redemption Revenue
capital account reserve reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 March 2006 14,356 116,613 7,458 193,699 375 2,257 334,758
Net (loss)/return - - - (38,096) - 1,852 (36,244)
from ordinary
activities after
taxation
Dividend paid in - - - - - (979) ( 979)
respect of year
ended 31 March 2006
Proceeds from 8 143 - - - - 151
exercise of
warrants
Transfer from - 22 (22) - - - -
warrant reserve
following exercise
of warrants
Shares purchased - - - (24,879) - - (24,879)
including expenses
(and held in
treasury)
Issue of own shares 37 787 - - - - 824
At 31 March 2007 14,401 117,565 7,436 130,724 375 3,130 273,631
Balance Sheet
as at 31 March 2008
Notes 2008 2007
£'000 £'000
Fixed assets
Investments held at fair value 9 220,587 289,919
through profit or loss
Derivative - OTC swap 12 10,244 -
230,831 289,919
Current assets
Debtors 10 4,399 1,319
Cash at bank 7,050 376
11,449 1,695
Current liabilities
Creditors: amounts falling due 11 (17,035) (17,131)
within one year
Derivative - financial instruments 9 & 12 (462) (852)
(17,497) (17,983)
Net current liabilities (6,048) (16,288)
Total net assets 224,783 273,631
Capital and reserves
Called-up share capital 13 11,772 14,401
Share premium account 117,639 117,565
Warrant reserve 7,426 7,436
Capital reserve 81,611 130,724
Capital redemption reserve 3,008 375
Revenue reserve 3,327 3,130
Total equity shareholders' funds 224,783 273,631
Net asset value per share - basic 14 486.6p 520.9p
Net asset value per share - 14 482.4p 511 .2p
diluted
Cash Flow Statement
for the year ended 31 March 2008
Notes 2008 2007
£'000 £'000
Net cash outflow from operating 15 (332) (645)
activities
Servicing of finance
Interest paid (1,023) (2,007)
Taxation
Taxation recovered 124 140
Financial investments
Purchases of investments and (219,443) (102,329)
derivatives
Sales of investments and 269,680 152,855
derivatives
Net cash inflow from financial 50,237 50,526
investment
Equity dividends paid (1,544) (979)
Net cash inflow before financing 47,462 47,035
Financing
Issue of shares 68 975
Purchase of shares (30,618) (24,179)
Decrease in short term loans (10,308) (29,907)
Net cash outflow from financing (40,858) (53,111)
Increase/(decrease) in cash for 16 6,604 (6,076)
the year
The accompanying notes are an integral part of this statement.
Notes to the Financial Statements
1. Accounting Policies
The principal accounting policies, all of which have been applied consistently
throughout the year in the preparation of these financial statements, are set
out below:
(a) Basis of Preparation
The financial statements have been prepared in accordance with applicable
accounting standards and with the Statement of Recommended Practice `Financial
Statements of Investment Trust Companies' dated December 2005 (the `SORP').
The Company has adopted FRS 29: "Financial Instruments: Disclosures" for the
first time in these financial statements. The disclosures required by this
standard are given in note 18.
(b) Valuation of Investments
Listed investments have been designated by the Board as held at fair value
through profit or loss and accordingly are valued at fair value, deemed to be
bid market prices.
Unquoted investments are valued by the Directors using primary valuation
techniques such as earnings multiples, option pricing models, recent
transactions and net assets.
Changes in the fair value of investments held at fair value through profit or
loss and gains and losses on disposal are recognised in the Income Statement as
`Gains or losses on investments held at fair value through profit or loss'.
Also included within this caption are transaction costs in relation to the
purchase or sale of investments, including the difference between the purchase
price of an investment and its bid price at the date of purchase. All purchases
and sales are accounted for on a trade date basis.
(c) Investment Income
Dividends receivable on equity shares are recognised on the ex-dividend date.
Where no ex-dividend date is quoted, dividends are recognised when the
Company's right to receive payment is established.
Deposit interest is accounted for on an accruals basis.
(d) Expenses
All expenses are accounted for on an accruals basis. Expenses are charged
through the income statement (revenue) except as follows:
i. expenses which are incidental to the acquisition or disposal of an
investment, categorised as fixed assets held at fair value through profit
or loss are charged to capital;
ii. expenses are charged to the capital column of the income statement where a
connection with the maintenance or enhancement of the
value of the investments can be demonstrated. In this respect the
investment management and management fees have been charged to the income
statement in line with the Board's expected long-term split of returns, in
the form of capital gains and income, from the Company's investment
portfolio. As a result 5.0% of the investment management and management
fees are charged to the revenue column of the income statement and 95.0%
are charged to the capital column of the income statement.
Any performance fee accrued or paid is charged in full to the capital column of
the income statement.
(e) Finance costs
Finance costs are accounted for on an accruals basis. Finance costs are charged
to the income statement in line with the Board's expected long-term split of
returns, in the form of capital gains and income, from the Company's investment
portfolio. As a result 5.0% of the finance costs are charged to revenue and
95.0% are charged to capital. Finance charges, if applicable, including
interest payable and premiums on settlement or redemption, are accounted for on
an accruals basis in the income statement using the effective interest rate
method and are added to the carrying amount of the instrument to the extent
that they are not settled in the period in which they arise.
(f) Taxation
The tax effect of different items of expenditure is allocated between
capital and revenue using the marginal basis.
Deferred taxation is provided on all timing differences that have originated
but not reversed by the balance sheet date other than those differences
regarded as permanent. This is subject to deferred tax assets only being
recognised if it is considered more likely than not that there will be suitable
profits from which the reversal of timing differences can be deducted. Any
liability to deferred tax is provided for at the average rate of tax expected
to apply. Deferred tax assets and liabilities are not discounted to reflect the
time value of money.
(g) Foreign Currency
The results and financial position of the Company are expressed in sterling,
which is the functional and presentational currency of the Company. Sterling is
the functional currency because it is the currency of the primary economic
environment in which the Company operates.
Transactions recorded in overseas currencies during the year are translated
into sterling at the appropriate daily exchange rates. Assets and liabilities
denominated in overseas currencies at the balance sheet date are translated
into sterling at the exchange rates ruling at the date.
Any gains or losses on the translation of foreign currency balances, whether
realised or unrealised, are taken to the capital or the revenue column of the
Income Statement, depending on whether the gain or loss is of a capital or
revenue nature.
(h) Financial Instruments
The Company uses derivative financial instruments (namely put and call options
and an OTC equity swap also referred to as the M & A Basket). The merits and
rationale behind such strategies are to enhance the capital return of the
investment portfolio, facilitate management of the investment portfolio
volatility and improve the risk-return profile of the Company relative to its
benchmark.
All derivative instruments are valued at fair value in the balance sheet in
accordance with FRS 26: `Financial instruments: measurement'.
Each investment in options is reviewed on a case-by-case basis and are all
deemed to be capital in nature. As such, all gains and losses on the above
strategies have been debited or credited to the capital column of the income
statement.
All gains and losses on the OTC equity swap, during the swap term are accounted
for as unrealised gains and losses on investments. Where there has been a
re-positioning of the swap, gains and losses are accounted for on a realised
basis. All such gains and losses have been debited or credited to the capital
column of the income statement.
(i) Reserves
Capital reserves
The following are charged to the capital column of the income statement and
transferred to this reserve:
* gains and losses on the realisation of investments;
* realised exchange differences of a capital nature;
* expenses, together with the related taxation effect, in accordance with the
above policies;
* increases and decreases in the valuation of investments held at the year
end; and
* unrealised exchange differences of a capital nature.
2. Income from Investments Held at Fair Value Through Profit or Loss
2008 2007
£'000 £'000
Income from investments
UK listed dividend 3 -
Overseas dividends 3,029 3,123
Fixed interest income 144 498
3,176 3,621
Other income
Interest receivable 228 270
Total income from investments held at fair value 3,404 3,891
through profit or loss
Total income comprises:
Dividends 3,032 3,123
Interest 372 768
3,404 3,891
3. Investment Management, Management and Performance Fees
2008 2008 2008 2007 2000 2007
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment Management and 122 2,323 2,445 145 2,756 2,901
management periodic fee
Irrecoverable VAT thereon - - - 2 31 33
122 2,323 2,445 147 2,787 2,934
At the year end no performance fees were accrued or payable (2007: nil), in
accordance with the performance fee arrangements described on page 17. Details
of Investment Management and Management fee arrangements are set out in the
Report of the Directors on pages 16 and 17.
4. Other Expenses
2008 2007
Revenue Revenue
£'000 £'000
Secretarial services fee 37 150
Directors' remuneration 153 145
Auditors' remuneration for the audit of the Company's financial 22 21
statements
Auditors' remuneration for other services 4 13
Marketing 14 195
PEP, ISA and savings scheme expenses 83 56
Registrar 33 56
Custody 42 54
Other 320 283
708 973
Where applicable the above expenses exclude VAT.
5. Finance Charges
2008 2008 2008 2007 2007 2007
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Finance charges 51 976 1,027 100 1,893 1,993
6. Taxation on Ordinary Activities
(a) Analysis of charge in year:
2008 2008 2008 2007 2007 2007
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
UK corporation tax at - - -
30%
Tax relief to capital 372 (372) - 389 (389) -
Overseas taxation 410 - 410 430 - 430
782 (372) 410 819 (389) 430
(b) Factors affecting current tax charge for the year
The tax charged for the year is higher than the standard rate
of corporation tax in the UK for a large company 30% (2007:
30%).
The difference is explained below. 2008 2007
£'000 £'000
Revenue account profit on ordinary activities before tax 2,523 2,671
Corporation tax at 30% 757 801
Overseas withholding tax not recoverable 410 430
Non taxable UK dividend 1 -
Expenses charged to capital available to be utilised (618) (1,404)
Excess expenses unused 205 975
Timing differences on overseas dividends 2 -
Disallowed expenses 25 17
782 819
(c) The Company has not recognised a deferred tax asset of £11,094,000 (2007: £
10,482,000) arising as a result of unutilised expenses. These expenses will
only be utilised if the Company generates sufficient taxable profits in the
future or if there is a change in the legislation and capital gains become
taxable for investment trust companies. It is considered too uncertain that
either of these will occur and, therefore, no deferred tax asset has been
recognised. There is no capital gains tax payable by the Company because
investment trust companies are exempt from this tax.
7. (Loss)/Return per Share
2008 2007
£'000 £'000
The (loss)/return per share is based in the
following figures:
Revenue return 1,741 1,852
Capital loss (18,261) (38,096)
Total loss (16,250) (36,244)
Weighted average number of shares in issue 49,231,108 56,962,481
for the year - basic
Revenue return per share 3.5p 3.3p
Capital loss per share (37.1 p) (66.9p)
Total loss per share - basic (33.6p) (63.6p)
Weighted average number of shares in issue 49,675,682 57,619,379
for the year - diluted
Revenue return per share 3.5p* 3.2p
Capital loss per share (37.1 p)* (66.9p)*
Total loss per share - diluted (33.6p)* (63.7p)
*dilution not applicable
8. Interim Dividend
Under UK GAAP, final dividends are not recognised until they are approved by
shareholders and interim dividends are not recognised until they are paid. They
are also debited directly from reserves. Amounts recognised as distributable to
ordinary shareholders for the year ended 31 March 2008 were as follows:
2008 2007
£'000 £'000
Interim dividend in respect of the year 1,544 -
ended 31 March 2007
Interim dividend in respect of the year - 979
ended 31 March 2006
1,544 979
In respect of the year ended 31 March 2008, an interim dividend of 3.0p per
share (2007: 3.0p per share) has been declared. The aggregate cost of this
dividend based on the number of shares in issue at 16 June 2008 is estimated to
be £1,344,000. In accordance with FRS 21 this dividend will be reflected in the
interim accounts as at 30 September 2008. Total dividends in respect of the
financial year, which is the basis on which the requirements of s842 of the
Income and Corporation Taxes Act 1988 are considered, are set out below:
2008 2007
£'000 £'000
Revenue available for distribution by way of 1,741 1,852
dividend for the year
Dividends for the year ended 31 March (1,344)* (1,547)â€
397 305
*based on shares in issue as at 16 June 2008 (44,802,411)
†£1,544,000 was paid to shareholders on 18 July 2007. The difference is due to
additional shares being bought back for cancellation in the period from the
signing of the 2007 Annual Report on 11 June 2007 and the ex dividend date of
13 June 2007.
9. Investments
Listed Unlisted Options Derivatives Total
investments investments £'000 OTC swap £'000
£'000 £'000
Cost at 1 April 256,188 - (850) - 255,338
2007
Unrealised 32,946 785 (2) - 33,729
appreciation/
(depreciation) at
1 April 2007
Valuation at 1 289,134 785 (852) - 289,067
April 2007
Movements in the
year:
Purchases at cost 192,544 - 5,600 32,652 230,796
Sales - proceeds (244,483) (17) (7,313) (21,015) (272,828)
- realised gains/ 14,822 17 2,323 (178) 16,984
(losses) on sales
Net movement in (32,650) 435 (220) (1,215) (33,650)
unrealised
appreciation
Valuation at 31 219,367 1,220 (462) 10,244 230,369
March 2008
Cost at 31 March 219,071 - (240) 11,459 230,290
2008
Unrealised 296 1,220 (222) (1,215) 79
appreciation/
(depreciation) at
31 March 2008
Valuation at 31 219,367 1,220 (462) 10,244 230,369
March 2008
Gains/(losses) on investment 2008 2007
£'000 £'000
Realised gains based on historical cost 16,984 15,456
Less: amounts recognised as unrealised in (24,281) (40,267)
previous years
Realised losses based on carrying value at (7,297) (24,811)
previous balance sheet date
Net movement in unrealised depreciation in the (9,369) (12,897)
year
Losses on investments (16,666) (37,708)
Purchase transaction costs for the year to 31 March 2008 were £349,000 (year
ended 31 March 2007: £291,000). These comprise mainly stamp duty and
commission.
Sales transaction costs for the year to 31 March 2008 were 2008 2007
£395,000 (year ended 31 March 2007: £419,000). £'000 £'000
10. Debtors
Amounts due from brokers 3,899 751
Withholding taxation recoverable 273 246
VAT recoverable 36 125
Prepayments and accrued income 191 197
4,399 1,319
11. Creditors
2008 2007
Amounts falling due within one year £'000 £'000
Amounts due to brokers - 8
Amounts due to brokers - OTC equity swap 11,361 -
Amounts due to brokers - purchase of own shares 919 694
Stamp duty due on purchase of own shares 15 6
Bank loans and overdrafts 4,075 15,650
Other creditors and accruals 665 773
17,035 17,131
12. Derivative Financial Instruments
2008 2007
£'000 £'000
Fair value of call and put options (462) (852)
Fair value of OTC equity swap 10,244 -
9,782 (852)
13. Share Capital
2008 2007
£'000 £'000
Authorised:
178,000,000 shares of 25p 44,500 44,500
Allotted, called-up and fully paid:
47,086,161(2007: 57,604,881) shares of 25p 11,772 14,401
At 31 March 2008, the Company held 896,000 shares in treasury (2007:
5,078,100).
During the year ended 31 March 2008, a total of 6,351,307 shares (2007:
5,078,100) were purchased at a total cost of £30,852,000 (2007: £24,879,000).
Of these, 896,000 were held in treasury at 31 March 2008 (2007: 5,078,100).
The Company also allotted on 6 August 2007 a total of 14,687 shares for total
consideration of £68,000 as a result of certain holders of the Company's
warrants exercising their subscription rights. At the year end there were
10,758,680 warrants in issue (2007: 10,773,367). Holders of warrants have the
right to subscribe for the number of shares of the Company equal to the number
of warrants held at a price of 464.00p per share on 31 July 2008 and 31 July
2009.
14. Net Asset Value per Share
2008 2007
Net asset value per share - basic 486.6p 520.9p
Net asset value per share - diluted 482.4p 511 .2p
The net asset value per share is based on the assets attributable to equity
shareholders of £224,783,000 (2007: £273,631,000) and on the number of shares
in issue at the year end of 46,190,161 (excluding shares held in treasury)
(2007: 52,526,781). The diluted net asset value per share assumes all
outstanding warrants are exercised at 464p resulting in assets attributable to
equity shareholders of £274,703,000 (2007: 323,619,000) and on the resultant
number of shares of 56,948,841 (2007: 63,300,148). As at 31 March 2008, the
Company held 896,000 shares in treasury.
15. Reconciliation of Operating Return to Net Cash Outflow from Operating
Activities
2008 2007
£'000 £'000
Loss before finance costs and taxation (15,083) (33,821)
Capital loss before finance costs and 17,657 36,592
taxation
Revenue return before finance costs and 2,574 2,771
taxation
Expenses charged to capital (2,323) (2,787)
Decrease in accrued income 6 24
Decrease/(increase) in other debtors 91 (84)
(Decrease)/increase in creditors and (112) -
accruals
Net taxation suffered on investment income (568) (569)
Net cash outflow from operating activities (332) (645)
16. Reconciliation of Net Cash Flow Movement to Movement in Net Debt/Funds
2008 2007
£'000 £'000
Decrease/(increase) in net debt resulting from 6,604 (6,076)
cashflows
Exchange movements 1,337 3,903
Decrease in short term loans 10,308 29,907
Movement in net debt in the year 18,249 27,734
Net debt at start of year (15,274) (43,008)
Net funds/(debt) at end of year 2,975 (15,274)
Represented by:
At 1 April Cash Exchange At 31
2007 flows movements March
2008
£'000 £'000 £'000 £'000
Cash at bank 376 6,604 70 7,050
Bank overdraft (801) 801 - -
Bank loans (14,849) 9,507 1,267 (4,075)
Net (debt)/funds (15,274) 16,912 1,337 2,975
17. Related Parties
Details of the relationship between the Company, Frostrow Capital LLP and
OrbiMed Capital LLC are disclosed in the Report of the Directors. Sam Isaly is
a Director of the Company, as well as a Partner of the Company's Investment
Manager, OrbiMed Capital LLC. During the year ended 31 March 2008, OrbiMed
Capital LLC received £1,692,000 in respect of which £365,900 was outstanding at
the year end.
18. Risk Management Policies and Procedures
As an investment trust, the Company invests in equities and other investments
for the long term so as to secure its investment objective as stated on page
14. In pursuing its investment objectives, the Company is exposed to a variety
of risks that could result in either a reduction in the Company's net assets or
a reduction in the profits available.
The Company's financial instruments comprise securities and other investments,
derivative instruments, cash balances, loans, debtors and creditors that arise
directly from its operations.
The main risks to which the Company is exposed from its financial instruments
are: (i) market risk (including currency risk, interest rate risk and other
price risk (i.e. changes in market prices other than those arising from
interest rate or currency risks)); (ii) liquidity risk; and (iii) credit risk.
These risks and the Directors' approach to the management of them are set out
in the Report of Directors. The Investment Manager, in close co-operation with
the Board of Directors, co-ordinates the Company's risk management.
The objectives, policies and processes for managing the risks, and the methods
used to manage the risks, which are set out below, have not changed from the
previous accounting period.
1. Market price risk:
The Company's investment portfolio is exposed to market price fluctuations
which are monitored by the Investment Manager in pursuance of the investment
objective.
Management of risk:
Derivative instruments are used to mitigate market price risk, the following
option strategies or a combination of such have been used during
the financial year:
* Buy calls: provides leveraged long exposure, facilitates exposure while
minimising capital risk.
* Buy puts: provides leveraged protection, facilitates exposure while
minimising capital at risk.
* Sell calls: against an existing position, provides partial protection from
a decline in stock price; facilitates commitment to an exit strategy and
exit price that is consistent with fundamental analysis.
* Sell puts: provides an effective entry price at which to add to a existing
position, or provides an effective entry price at which to initiate an new
position.
The Investment Manager uses the following methodology in evaluating and
examining the investment portfolio for investment opportunities:
* Valuation
* Timing catalysts
* Desired entry price or exit price
* Implied verses historical implied volatility
In order to meet the Company's objective of achieving a high level of capital
growth the Company has entered into an OTC equity swap. OTC equity swaps are
over-the-counter derivatives contracts between two counterparties, governed by
an ISDA (International Swap Dealer Association) master agreement.
(a) Currency risk
A significant proportion of the Company's investment portfolio is denominated
in currencies other than sterling (the Company's functional currency, and in
which it reports its results). As a result, movements in exchange rates can
significantly affect the sterling value of those items.
Management of risk:
The Investment Manager and Manager monitor the Company's exposure to foreign
currencies on a daily basis and report to the Board on a regular basis. The
Investment Manager does not hedge against foreign currency movements, but takes
account of the risk when making investment decisions.
Foreign currency borrowing facilities are available and are currently being
utilised, to limit the Company's exposure to anticipated future changes in
exchange rates, which might otherwise adversely affect the value of the
investment portfolio of investments.
Income denominated in foreign currencies is converted into sterling on receipt.
The Company does not use financial instruments to mitigate the currency
exposure in the period between the time that the income is included in the
financial statements and its receipt.
Foreign currency exposure
An analysis of the foreign currency exposure of the Company's equity
investments at 31 March 2008 is given below.
USD YEN CHF
£'000 £'000 £'000
Investments at fair value through profit or loss
31 March 2008 163,220 20,451 23,149
31 March 2007 219,265 36,196 30,817
The above amounts are not representative of the exposure to the risk during the
year as levels of monetary foreign currency exposure change significantly
throughout the year. During the year, the maximum and minimum net monetary
assets/liabilities for each currency were as follows:
USD YEN CHF
31 March 2008 £'000 £'000 £'000
Maximum 221,688 48,509 31,866
Minimum 144,833 20,451 22,930
USD YEN CHF
31 March 2007 £'000 £'000 £'000
Maximum 262,226 41,995 45,809
Minimum 200,490 28,022 24,064
Foreign currency sensitivity
The following table details the sensitivity of the Company's profit or loss
after taxation for the year and of shareholders' funds to a 5.0% increase and
decrease in sterling against US dollars (2007: 10.0% increase and decrease), a
15.0% increase and decrease in sterling against Japanese yen (2007: 15.0%
increase and decrease), and a 20.0% increase and decrease in sterling against
Swiss francs (2007: 5.0% increase and decrease).
These percentages have been determined based on market volatility in exchange
rates over the previous 12 months. The sensitivity analysis is based on the
Company's foreign currency financial instruments held at each balance sheet
date.
If sterling had weakened against the currencies below this would have the
following effect:
2008 2007
USD YEN CHF USD YEN CHF
£'000 £'000 £'000 £'000 £'000 £'000
Impact on revenue return 62 120 143 227 102 33
Impact on capital return 9,042 3,160 5,686 24,034 6,327 1,607
Total return after tax 9,104 3,280 5,829 24,261 6,429 1,640
/effect
on shareholders funds
If sterling had strengthened against the currencies below this would have the
following effect:
2008 2007
USD YEN CHF USD YEN CHF
£'000 £'000 £'000 £'000 £'000 £'000
Impact on revenue return (56) (89) (95) (179) (81) (29)
Impact on capital return (8,255) (2,646) (3,790) (19,662) (4,676) (1,453)
Total return after tax (8,311) (2,735) (3,885) (19,841) (4,757) (1,482)
/effect
on shareholders funds
In the opinion of the Directors, the above sensitivity analyses are not
representative of the year as a whole, since the levels of exposure change
frequently.
(b) Interest rate risk
Interest rate movement may affect:
-the interest payable on the Company's variable rate borrowings
-the level of income receivable from fixed interest securities and cash at bank
and on deposit -the fair value of investments of fixed interest securities
Management of the risk
The possible effects on fair value and cash flows that could arise as a result
of changes in interest rates are taken into account when making investment
decisions and borrowing under the multi-currency loan facility.
In the year to 31 March 2008, the Company held no fixed interest securities.
The Company, generally, does not hold significant cash balances (except when
required for collateral against the Company's derivative positions), with short
term borrowing being used when required.
Interest rate exposure
The Company has a £45m committed facility of which £4.1 m was drawn down at 31
March 2008. The exposure of financial assets and liabilities to floating
interest rates, giving cash flow interest rate risk when rates are re-set, is
shown below.
Within 2008 Total Within 2007 Total
one More one year More
year than than
one one
year year
£'000 £'000 £'000 £'000 £'000 £'000
Exposure to floating
interest rates:
Cash at bank 7,050 - 7,050 376 - 376
Creditors: amounts falling
due within one year
- borrowings on the loan (4,075) - (4,075) (15,650) - (15,650)
facility and bank overdraft
Total exposure to interest 2,975 - 2,975 (15,274) - (15,274)
rates
Average interest receivable and finance costs are at the following rates:
* Interest receivable on cash balances is at 4.5%
* Interest payable on borrowings under the loan facility provided by Allied Irish
Banks p.l.c. was at a rate of 5.4%
The exposure during the year fluctuated as borrowings were drawn down and
repaid as follows:
2008 2007
Within one Within one
year year
£'000 £'000
Maximum interest rate exposure to floating rates 36,608 48,605
Minimum interest rate exposure to floating rates 2,237 12,363
(c) Other price risk
Other price risk may affect the value of the quoted investments. If market
prices at the balance sheet date had been 10.0% higher or lower while all other
variables remained constant, the revenue return would have increased/decreased
by £5,000 (2007: £10,000), and on the capital return would have increased/
decreased by £22,893,000 (2007: £28,628,000). The calculations are based on the
investment portfolio valuations as at the respective balance sheet dates and
assume that the investment portfolio moves in line with the index.
2. Liquidity risk
This is the risk that the Company will encounter difficulty in meeting
obligations associated with financial liabilities.
Management of the risk
Liquidity risk is not significant as the majority of the Company's assets are
investments in quoted equities and other quoted securities that are readily
realisable. The Company has a £45m multicurrency committed facility with Allied
Irish Banks p.l.c.
The Board gives guidance to the Investment Manager as to the maximum amount of
the Company's resources that should be invested in any one company.
Liquidity exposure
Contractual maturities of the financial liabilities as at 31 March 2008, based
on the earliest date on which payment can be required are as follows:
2008
31 March 2008 3 months Not more More Total
or less than one than £'000
£'000 year one year
£'000 £'000
Current liabilities:
Borrowings under the multi-currency loan 4,075 - - 4,075
facility and bank overdraft
Amounts due to brokers and accruals 1,599 11,361 - 12,960
5,674 11,361 - 17,035
2007
31 March 2007 3 months Not more More Total
or less than one than £'000
£'000 year one year
£'000 £'000
Current liabilities:
Borrowings under the multi-currency loan 15,650 - - 15,650
facility and bank overdraft
Amounts due to brokers and accruals 1,481 - - 1,481
Amounts due to brokers and accruals 17,131 - - 17,131
3. Credit risk
The failure of the counterparty to a transaction to discharge its obligations
under that transaction could result in the Company suffering a loss.
Management of the risk
The risk is not significant, and is managed as follows:
* by only dealing with brokers which have been approved by OrbiMed Capital
LLC and banks with high credit ratings and
* by setting limits to the maximum exposure to any one counterparty at any
time.
2008 2007
Balance Maximum Balance Maximum
Sheet exposure Sheet exposure
£'000 £'000 £'000 £'000
Current assets:
Other receivables (amounts due from 4,399 14,356 1,319 6,924
brokers, dividends and interest receivable)
Cash at bank and on deposit 7,050 18,572 376 22,674
Fair value of financial assets and financial liabilities
The fair value of the financial assets and financial liabilities, are either
carried in the Balance Sheet at their fair value (investments and derivatives)
or the balance sheet amount is a reasonable approximation of fair value (due
from brokers, dividends and interest receivable, due to brokers, accrual, cash
at bank, bank overdraft and amounts due under the multi-currency loan
facility).
Capital management policies and procedures
The Company's capital management objectives are:
* to ensure that it will be able to continue as a going concern; and
* to maximise the income and capital return to its equity shareholders
through an appropriate balance of equity capital and debt. The policy is
that debt as shown below should be the lower of £70m and no more than 20%
of the Company's net assets.
The Company's capital at 31 March comprises:
2008 2007
£'000 £'000
Debt:
- Bank overdrafts - 801
Bank loan 4,075 14,849
4,075 15,650
Equity:
- Equity share capital 11,772 14,401
- Retained earnings and other reserves 213,011 259,230
Total capital 224,783 273,631
Debt as a percentage of total capital 1.8% 5.7%
The Board with the assistance of the Investment Manager monitors and reviews
the broad structure of the Company's capital on an ongoing basis. This review
includes:
* the planned level of gearing, which takes into account the Investment
Manager's view on the market;
* the need to buy back equity shares, either for cancellation or to hold in
treasury, in light of any share price discount to net asset value per share
in accordance with the Company's share buyback policy.
* need for new issues of equity shares, including issues from treasury; and
* the extent to which revenue in excess of that which is required to be
distributed should be retained.
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding accounting period. The Company is subject to
several externally imposed capital requirements:
* the bank borrowings under the loan facility are not to exceed 20.0% of
ordinary share capital plus reserves;
* as a public company, the Company has a minimum share capital of £50,000;
and in order to be able to pay dividends out of profits available for
distribution, the Company has to be able to meet one of the two
capital restriction tests imposed on investment companies by company law.
These requirements are unchanged since last year, and the Company has complied
with them.
19. Contingent Assets
On 5 November 2007, the European Court of Justice ruled that management fees
should be exempt from VAT. HMRC has announced its intention not to appeal
against this case to the UK VAT tribuneral. The Board is currently in the
process of quantifying any potential repayment that might be due. However, the
amount the Company may receive, the period to which it will refer, and the time
scale for receipt are all uncertain and hence the Company has made no provision
in these financial statements for any such payment.
Frostrow Capital LLP
Company Secretary