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ADC Zeros 2010 plc (ADC2)

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Monday 28 July, 2008

ADC Zeros 2010 plc

Final Results

RNS Number : 0461A
ADC Zeros 2010 plc
28 July 2008
 

ADC ZEROS 2010 PLC


ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2008


1.    CHAIRMAN'S STATEMENT


The year to 31 May 2008 has been one of significant change for your Company. In August 2007 Shareholders voted to approve changing the parent company's investment objective and policy, implementing capital reductions, the return of capital through a combination of a capital return scheme and buyback programme and changes to the management fee arrangements. The aim of these proposals was designed to effect an orderly realisation of the Company's assets in a manner to maximise returns. I am pleased to report that some headway has been made to achieve this objective in what has proved to be challenging market conditions. Firstly, in November the Board announced a return of capital to Shareholders of £4.5 million on their ZDP holding in accordance with an approved, pre-determined entitlement scheme. In addition, under the terms of the buyback programme, 10.2% of the ZDP shares have been purchased for cancellation at a total cost of £546,000. Investment sales achieved immediately prior to and after the year-end have enhanced liquidity and increased the ability to make further returns, whether through a return of capital or further buybacks.




31 May 2008


£m

Total assets less current liabilities (Group)

17.65

Less prior ranking liabilities:


ZDP 2010 shares

(5.31)

ZDP 2012 shares

(5.31)

Cover

7.03


 


John R Milligan


Chairman


28 July 2008


2.  ZDP 2010 Share Information


  • Asset Cover at 31 May 20081.1 times repayment value at 30 April 2010

  • Redemption Yield: 6.7% at 67.54 pence per share

  • Hurdle Rate at 31 May 2008 to reach final entitlement: -15.62% compound per annum.


The ZDP 2010 shares offer a pre-determined rate of growth in capital entitlement up to the repayment date of 30 April 2010, but no right to income. At the issue date, the ZDP 2010 shares were entitled to a repayment of 100p per share. This entitlement increases on a daily basis up to and including 30 April 2010 at a rate equivalent to 6.5% per annum, compound to reach 76.19 pence per share on the repayment date. Following a return of capital of 51 pence per share dated 27 November 2007, at 31 May 2008, this figure stood at 67.54 per share.


Following each return of capital under the Capital Return Scheme described in the circular to shareholders published on 11 July 2007 by Aberdeen Development Capital PLC, the Company and ADC Zeros 2012 the capital entitlements of the ZDP 2010 shares will be adjusted by deducting from the accrued capital entitlement of the ZDP 2010 shares, at the date on which the relevant return of capital is made, the amount of such return of capital per ZDP 2010 and thereafter the capital entitlement per ZDP 2010 will continue to accrue at a rate of 6.5% per annum compounded on a daily basis, based on the adjusted capital entitlement.


The ZDP 2010 shares rank ahead of Ordinary Shareholders but behind any bank borrowings. It should be noted that repayment at the rate indicated for the ZDP 2010 shares is not guaranteed should the Group's net assets be insufficient at the repayment date of 30 April 2010.


The ZDP 2010 shares do not normally carry voting rights at general meetings of the Group. The separate approval of an extraordinary resolution of holders of the Group's ZDP 2010 shares is required for certain proposals which would be likely to affect their rights, or general interests.


3    BUSINESS REVIEW


A review of the Company's activities is given in the Chairman's Statement in Section 1 and ZDP 2010 Share Information in Section 2. The major risks associated with the Company are that Investments in smaller unlisted companies carry substantially greater risk, in terms of price and liquidity, than investments in larger companies or in companies listed on the Official List. In addition, many of the businesses in which the parent company invests may be exposed to the risk of political change, exchange controls, tax or other regulations that may affect their value and marketability. As the volume of the Company's shares traded on the market is likely to be small, the shares may trade at a significant discount to the Net Asset Value. The Key Performance Indicators for the Company including NAV performance and share price are detailed in ZDP Share Information in Section 2. Other risks include:

  • Discount volatility: The Company's share price can trade at a discount to its underlying net asset value. The Company operates a share buyback programme which is reviewed on a continuing basis.

  • Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. Breaches of regulations, such as Section 842 of the Income and Corporation Taxes Act 1988, the UKLA Listing Rules and the Companies Act, could lead to a number detrimental outcomes and reputational damage. The Audit Committee monitors compliance with regulations by reviewing internal control reports from the Manager. 


Additionally, each Director confirms that, so far as he is aware, there is no relevant audit information of which the Company's auditors are unaware, and he has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of that information. Additionally, there are no important events since the year end which have not been disclosed. 


The Company has made no political or charitable donations during the year and in common with most investment trusts, the Company has no employees. Directors' & Officers' liability insurance cover has been maintained throughout the year at the expense of the Company.


Principal Activity

The business of the Company is that of an investment company under Section 266 of the Companies Act 1985 with capital growth as its principal objective.


Status

The Company is an investment company as defined by Section 266 of the Companies Act 1985 and is registered as a public limited company. 


The Company is a qualifying trust for the purposes of Personal Equity Plans and Individual Savings Accounts and it is the Directors' intention that the Company should continue to be a qualifying trust.


Investment Objective and Policies

It is intended that the Company's assets be maintained at a level to cover the entitlement of the ZDP 2010 shares at all time. Subject to there being sufficient assets after deductions made, any shortfall in assets will be covered under the subscription agreement referred to above. Following approval by Shareholders of both the Company and the parent company on 3 August 2007 to approve a recommendation to effect an orderly realisation of the Group's assets, a policy to realise value to Shareholders through either ad hoc returns of capital or purchases of shares for cancellation was adopted.


 4.    STATEMENT OF DIRECTORS' RESPONSIBILITIES


The directors are responsible for preparing the Annual Report and the financial statements. The directors have chosen to prepare accounts for the Company in accordance with International Financial Reporting Standards (IFRSs). Company law requires the directors to prepare such financial statements in accordance with International Financial Reporting Standards and the Companies Act 1985. International Accounting Standard 1 requires that financial statements present fairly for each financial year the company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the preparation and Presentation of Financial Statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. Directors are also required to:


  • properly select and apply accounting policies;

  • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

  • provide additional disclosures when compliance with the specific requirements in International Financial Reporting Standards is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

  • prepare the accounts on a going concern basis unless, having assessed the ability of the company to continue as a going concern, management either intends to liquidate the entity or to cease trading, or have no realistic alternative but to do so.


The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a directors' report which comply with the requirements of the Companies Act 1985.


5.  INCOME STATEMENT

For the year ended 31 May 2008




Year ended

Year ended



31 May 2008

31 May 2007


Notes

£'000

£'000

Investment income


-

-

Interest income

3

10

14

Total revenue


10

14

Loan interest


441

602

Gains on held-at-fair value investments


-

-



451

616

Expenses




Management fees


-

-

Other operating expenses


(1)

-

Profit before finance costs and tax


450

616

Finance costs




Zero dividend preference shares

4

(441)

(602)

Profit before taxation


9

14

Taxation

5

(75)

(46)

Loss for the period


(66)

(32)

Earnings per ordinary share - basic (pence)

6

(62.9)

(64.0)


All income is attributable to the equity holders of ADC Zeros 2010 PLC.


All items in the above statement are derived from continuing operations.


The accompanying notes are an integral part of the financial statements.


6.  BALANCE SHEET

As at 31 May 2008




2008

2007


Notes

£'000

£'000

Non-current assets




Held-at-fair-value investments

7

-

-





Current assets




Other receivables

8

5,307

9,874

Cash and cash equivalents


285

260



5,592

10,134

Current liabilities




Other payables

9

(249)

(225)

Net current assets


5,343

9,909

Total assets less current liabilities


5,343

9,909





Creditors: amounts falling due after one year




Zero dividend preference shares

10

(5,307)

(9,874)

Total net assets


36

35





Equity




Called-up Ordinary shares

11

117

50

Revenue reserve

12

(81)

(15)

Total shareholders' funds


36

35





Equity shareholders' funds


36

35





Net asset value per share (pence)




ZDP 2010 share

13

67.54

112.85

Ordinary share

13

30.86

70.00


The financial statements were approved by the Board of Directors on 28 July 2008 and were signed on its behalf by:



John R Milligan


Chairman


The accompanying notes are an integral part of the financial statements.





7.  STATEMENT OF CHANGES IN EQUITY

For the year ended 31 May 2008



Share

Revenue



Capital


Reserve

Total

For year ended 31 May 2008

£'000

£'000

£'000

Net assets at 31 May 2007

50

(15)

35

Proceeds from parent company

67

-

67

Net loss on ordinary activities after taxation

-

(66)

(66)

Net assets at 31 May 2008

117

(81)

36



Share

Revenue



Capital

Reserve

Total

For year ended 31 May 2007

£'000

£'000

£'000

Net assets at 31 May 2006

50

17

67

Net loss on ordinary activities after taxation

-

(32)

(32)

Net assets at 31 May 2007

50

(15)

35


8.  CASH FLOW STATEMENT

For the year ended 31 May 2008




Year ended

Year ended



31 May 2008

31 May 2007 



£'000

£'000

Operating activities




Profit before tax


9

14

ZDP shares finance cost


441

602

Sales of investments held at fair value through profit and loss



-


175

Decrease/(increase) in other receivables


4,567

(583)

Increase in other payables


2

-

Net cash inflow from operating activities 


5,019

208





Corporation tax paid


(53)

-





Financing activities




Equity shares issued


67

-

Return of capital to ZDP holders by parent company


(4,462)

-

Repurchase of ZDP shares by parent company


(546)

-

Net cash inflow from financing activities


(4,941)

-





Net increase in cash and cash equivalents


25

208





Cash and cash equivalents at start of period


260

52





Cash and cash equivalents at end of period


285

260






9.  NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 May 2008


1. Principal activities

   The principal activity of the Company is that of an investment company within the meaning of Section 266 of the Companies Act 1985.


2.  Accounting policies

The financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRSs'). The Company financial statements have been prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 1985. The principal accounting policies adopted by the Company are set out below. 


The financial statements are prepared under the historical cost convention, except for the measurement at fair value of investments.

 

(a)   Basis of accounting

The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 31 May 2008.


The Company financial statements are presented in Sterling, which the currency of the primary environment in which it operates. All values are rounded to the nearest thousand pounds (£000) except when otherwise indicated.


The Company has adopted IFRS 7: 'Financial Instruments Disclosures' for the first time in these accounts. IFRS 7 introduces new disclosure requirements relating to financial instruments. This standard does not have any impact on the classification and/or valuation of the Group's financial instruments. The disclosures required by this standard are given in note 14.


(b)  Valuation of investments

Investments are held at fair value through the Income Statement.


For financial assets acquired, the cost is the fair value of the consideration. Subsequent to initial recognition, all listed investments are measured at their quoted bid prices without deduction for the estimated future selling costs.


Unlisted investments are valued by Directors at fair value having regard to the International Private Equity and Venture Capital Valuation Guidelines. They are valued at cost unless subsequent financings or other circumstances indicate a different valuation is appropriate. When a valuation is undertaken consideration is given to the most recent information available, including the latest trading figures, performance against forecast, management's view of prospects and the price of transactions in the security.


Realisable value in the short term could differ materially from the amount which these investments are included in the accounts.


(c) Movements in fair value

Changes in the fair value of all held-at-fair-value assets are taken to the Income Statement.


On disposal, realised gains and losses are also recognised in the Income Statement.


(d)  Income

Dividends receivable on equity shares are brought into account on the ex-dividend date. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established. Fixed returns on non-equity shares are recognised on a time apportioned basis so as to reflect the effective yield on shares. Other returns on non-equity shares are recognised when the right to the return is established. 


The fixed return on a debt security is recognised on a time apportioned basis so as to reflect the effective yield on the debt security. Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the amount of cash dividend is recognised as income. Any excess in the value of the shares received over the amounts of the cash is recognised in capital reserves. 


(e)  Expenses and interest payable

All expenses are accounted for on an accruals basis. Remuneration of the Company's auditors is borne by the Company's parent.


(f)  Taxation

The charge for taxation is based on the taxable profits for the period. Deferred taxation is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent it is probable that taxable profits will be available against which temporary differences can be utilised.

 

(g)  Dividends payable

  Dividends are recognised from the date on which they are declared ex-dividend.

 

(h)  Cash and cash equivalents 

   Cash comprises cash in hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash that are subject to insignificant risk of change in value.

 

(i)   Foreign currency

Transactions involving foreign currencies are converted at the rate ruling at the date of the transaction. Foreign currency monetary assets and liabilities are translated into Sterling at the rate ruling on the balance sheet date. Foreign exchange differences arising on translation are recognised in the Income Statement.

 

(j)   Zero dividend preference shares

Zero dividend preference shares are treated as a liability of the Company, calculated on the effective yield basis. Full details of the Zero dividend preference shares are given in note 10.



2008

2007

3. Income

£'000

£'000

Income from investments



UK unfranked investment income 

-

7


-

7

Other income



Deposit interest

10

7


10

7

Total income comprises:



Interest

10

14


10

14

Income from investments



Unlisted

-

7


-

7




2008

2007

4. Finance costs


£'000

£'000

Zero dividend preference shares


441

602



441

602




2008

2007

5. Tax on ordinary activities


£'000

£'000

a) Analysis of charge for the year




UK Corporation tax on profits for the period


75

50

Prior year adjustment


-

(4)

Corporation tax charge


75

46



2008

2007

  b) Factors affecting tax charge for the year

£'000

£'000

Net income before tax

9

14

Tax at 29.67% thereon (2007 - 30%)

Effects of:

ZDP finance charge

Income not deductible for tax purposes

Utilisation of tax losses

Prior year adjustment

Marginal relief

3


131

-

(57)

-

(2)

4


181

(2)

(128)

(4)

(5)

Current tax charge for the period 

75

46


6.  Earnings per share

The earnings per Ordinary share is based on a loss after taxation of £66,000 (2007 - £32,000) and on 105,009 (2007 - 50,000) Ordinary shares, being the number of Ordinary shares in issue during the period.




31 May 2008


31 May 2007

7. Investments held at fair value through profit and loss

Unlisted

Total


Unlisted

Total


£'000

£'000

£'000

£'000

Opening book cost

-

-

175

175

Opening unrealised appreciation

-

-

-

-

Opening valuation

-

-

175

175

Movements in the year:





Purchases at cost

-

-

-

-

Sales - proceeds

-

-

(175)

(175)

 - realised gains/(losses) on sales

-

-

-

-

Closing valuation

-

-

-

-






Closing book cost

-

-

-

-

Closing unrealised appreciation

-

-

-

-


-

-

-

-


Gains/(losses) on held-at-fair-value investments





Realised gains/(losses) on sale of investments

-

-

-

-

Movement in unrealised appreciation

-

-

-

-


-

-

-

-



2008

2007


£'000

£'000

8. Other receivables



Amounts due from parent company

5,307

9,874


5,307

9,874



2008

2007

9. Other payables


£'000


£'000

Amounts due to group companies

176

175

Accruals

1

-

Taxation

72

50


249

225

10.  Zero dividend preference shares

The Zero dividend preference shares were issued on 30 June 2005. They were issued at 100 pence per share and redeem at the Board's discretion between 30 April 2010 and 31 October 2010 at 135.6 pence per share, an effective rate of 6.5% per annum. Following a return of capital of 51 pence per share dated 27 November 2007, the final capital entitlement decreased to 76.19 pence per share. There were 7,857,142 ZDP shares in issue at 31 May 2008 (2007 - 8,750,000).




Number of ZDP Shares

Amount due to ZDP shareholders £'000


2008

2007

2008

2007

At 1 June

8,750,000

8,750,000

9,874

9,272

Repurchase of ZDP shares

(892,858)

-

(546)

-

Return of capital to ZDP shares

-

-

(4,462)

-

ZDP shares finance cost

-

-

441

602

At 31 May 

7,857,142

8,750,000

5,307

9,874



2008

2007



Issued and


Issued and


Authorised

fully paid

Authorised

fully paid

11. Called-up share capital

£'000

£'000

£'000

£'000

Ordinary shares of 100p at 1 June

20,000

50

20,000

50

Ordinary shares issued at 100p each

-

67

-

-

Ordinary shares of 100p at 31 May 

20,000

117

20,000

50



Share

Revenue

Share

Revenue


Capital

Reserve 

Capital

Reserve 

12. Share premium and capital reserves

2008

2008

2007

2007


£'000

£'000

£'000

£'000

At 1 June

50

(15)

50

17

Issue of share capital

67

-

-

-

Retained earnings

-

(66)

-

(32)

At 31 May 

117

(81)

50

(15)


13.   Net Asset Value per share

The net asset value per Ordinary share is based on a net asset value of £36,000 (31 May 2007 - £35,000) and on 116,667 Ordinary shares (31 May 2007 - 50,000), being the number of Ordinary shares in issue at the year end. 


The net asset value per ZDP shares is based on the entitlement due of £5,307,000 (31 May 2007 - £9,874,000) at the year end and on 7,857,142 ZDP shares, (31 May 2007 - 8,750,000) being the number of ZDP shares in issue at the year end.


14.   Financial instruments

The Company's financial instruments comprise:

Fixed interest securities that are held in accordance with the Company's investment objectives, which are set out on page 1 of this Report & Accounts;

Cash and liquid resources that arise directly from the Company's operations

The main risks arising from the Company's financial instruments are market price risk, interest rate risk, foreign currency risk, credit risk and liquidity risk.

The Board regularly reviews and agrees policies for managing each of these risks and these are summarised below. These policies have remained unchanged since the inception of the Company


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. 


To mitigate the risk the Board's investment strategy is to select investments for their fundamental value. Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments. The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy.


Investments are stated at fair value.


Interest rate risk

Financial assets

Bond and preference share yields, and as a consequence their prices, are determined by market perception as to the appropriate level of yields given the economic background. Key determinants include economic growth prospects, inflation, the Government's fiscal position, short-term interest rates and international market comparisons. The Investment Manager takes all these factors into account when making any investment decisions as well as considering the financial standing of the potential investee company.

Returns from bonds and preference shares are fixed at the time of purchase, as their coupon payments, as are the final redemption proceeds. Consequently, if a bond is held until its redemption date, the total return achieved is unaltered from its purchase date. However, over the life of a bond the market price at any given time will depend on the market environment at that time. Therefore, a bond sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.


The interest rate profile of the Company at 31 May 2008 is as follows:







Weighted




Financial


Average




Assets on

Weighted

Period for


Total as


Which no

Average

Which rate is



Per Balance 

Sheet £'000

Fixed 

Rate £'000

Interest

Is paid

Interest

Rate*%

Fixed

(years)**

Type

2008

2007

2008

2007

2008

2007

2008

2007

2008

2007

Unsecured loan stock

-

-

-

-

-

-

-

-

-

-


* The 'Weighted average interest rate' is based on the current yield of each asset, weighted by its market value. This excludes all equities and stocks where payments have been suspended.

** The 'Weighted average period for which rate is fixed' refers to unsecured loan stock. 


Financial liabilities







Weighted




Financial


Average




Liabilities on

Weighted

Period for


Total as


Which no

Average

Which rate is



Per Balance 

Sheet £'000

Fixed 

Rate £'000

Interest

Is paid

Interest

Rate*%

Fixed

(years)**

Type

2008

2007

2008

2007

2008

2007

2008

2007

2008

2007

ZDP shares

5,307

9,874

5,307

9,874

-

-

6.5

6.5

1.92

2.92


The Company finances its operation through its Zero dividend preference shares and bank overdrafts. The Board sets borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. At the year end, the Company's Zero dividend preference shares had a fair value of £5,029,000 (2007 - £9,056,000), details of which are contained in note 10.


Credit risk

In addition to the interest rate risk, the Company's investments in bonds and loan stock are also exposed to credit risk, which reflects the ability of a borrower to meet its obligations. Generally, the higher the quality of the issuer, the lower the interest rate at which they can borrow. Issuers of a lower quality will tend to have to pay more to borrow money to compensate the lender for the extra risk taken. The Investment Manager assesses the risk associated with these investments by prior financial analysis of the issuing companies as part of their normal scrutiny of prospective investments.


Liquidity risk

The Company's assets comprise mainly unlisted securities, which can be sold to meet funding commitments. 


Additional notes for Annual Financial Report:


This Annual Financial Report announcement is not the Company's statutory accounts. The statutory accounts for the year ended 31 May 2007 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 May 2007 and 31 May 2008 received an audit report which was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report, and did not include a statement under either section 237(2) or 237(3) of the Companies Act 1985. The statutory accounts for the financial year ended 31 May 2008 have been approved and audited but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which will be held at 12.05pm on Friday 26th September 2008 at 10 Queen's Terrace, Aberdeen AB10 1YG.


The Annual Report will be posted to shareholders in August 2008 and copies will be available from Manager or from the Company's website (www.developmentcap.co.uk).


Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise and may be affected by exchange rate movements. Investors may not get back the amount they originally invested.


For ADC Zeros 2010 PLC

Aberdeen Asset Management PLC, Secretaries


END













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