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PSource Struct Debt (PSD)

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Thursday 22 September, 2011

PSource Struct Debt

Annual Financial Report and Notice of AGM

RNS Number : 7767O
PSource Structured Debt Limited
22 September 2011
 



 

22 September 2011

 

 

 

PSource Structured Debt Limited

 

 

Financial results for the period ended 30 June 2011 and Notice of AGM

 

 

PSource Structured Debt Limited (the 'Company' or 'PSD'), the fund investing in senior secured debt and equity warrants predominantly issued by US-based small-cap companies, is pleased to announce its results for the full year to 30 June 2011.

 

Copies of the Audited accounts will be available for download from the Company's website www.psourcestructureddebt.comand will be available for inspection from the National Storage Mechanism www.hemscott.com/nsm.do.

 

 

For further information, please contact:

 

 

PSource Capital Limited +44 20 7925 3156

 

Soondra Appavoo



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSOURCE STRUCTURED DEBT LIMITED

 

 

ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2011



PSOURCE STRUCTURED DEBT LIMITED

 

Contents

 

 

 

Company Information                                                                                                               1

 

Directors                                                                                                                             2-3

 

Financial Calendar                                                                                                                  3

 

Investment Objective and Policy                                                                                               3

 

Summary Information                                                                                                            3-5

 

Chairman's Statement                                                                                                          6-7

 

Directors' Report                                                                                                                8-15

 

Responsibility Statement                                                                                                       16

 

Independent Auditor's Report                                                                                                  17

 

Consolidated Statement of Financial Position                                                                          18

 

Consolidated Statement of Comprehensive Income                                                                   19

 

Consolidated Statement of Changes in Equity                                                                          20

 

Consolidated Statement of Cash Flows                                                                                   21

 

Notes to the Financial Statements                                                                                     22-50

 

Analysis of Significant Investments (unaudited)                                                                    51-55

 

Portfolio Analysis (unaudited)                                                                                             56-57

 

Notice                                                                                                                                  58

 

Form of Proxy                                                                                                                       59

 


PSOURCE STRUCTURED DEBT LIMITED

Company Information

 

Company Number:

47075 (Registered in Guernsey)

Financial adviser and stockbroker to the Company:

Numis Securities Limited

The London Stock Exchange Building

10 Paternoster Square

London, EC4M 7LT

 

Directors:

William Scott, Independent Chairman

Soondra Appavoo

Peter Niven, Independent Director

Tim Jenkinson, Independent Director

Keith Dorrian, Independent Director

 

Auditors to the Company:

KPMG Channel Islands Limited

20 New Street

St Peter Port

Guernsey, GY1 4AN

Company Secretary and Administrator:

Praxis Fund Services Limited

Sarnia House

Le Truchot

St Peter Port

Guernsey, GY1 4NA

Solicitors to the Company:

Eversheds LLP

1 Wood Street

London,  EC2V 7WS

Registered office of the Company:

Sarnia House

Le Truchot

St Peter Port

Guernsey, GY1 4NA

Guernsey lawyers to the Company:

Mourant Ozannes

PO Box 186

1 Le Marchant Street

St Peter Port

Guernsey, GY1 4HP

 

Manager:

PSource Capital Guernsey Limited

Sarnia House

Le Truchot

St Peter Port

Guernsey, GY1 4NA

 

U.S. Counsel:

Alston & Bird LLP

90 Park Avenue

New York, NY 10016-1387

USA

Investment Manager:

Laurus Capital Management, LLC

875 Third Avenue, 3rd Floor

New York, NY 10022

USA

Bankers:

Bank of Scotland plc (part of the Lloyds Banking Group)

PO Box No 39900

155 Bishopsgate Exchange

London, EC2M 3YB

Investment Consultant and Promoter:

PSource Capital Limited

126 Jermyn Street

London, SW1Y 4UJ

Custodian:

Wells Fargo Bank                 

45 Broadway,14th Floor        

New York, NY 10006             

USA                                       

Independent Valuation Consultant:

Clayton IPS Corporation

1700 Lincoln Street

Suite 1600

Denver, Colorado 80263

USA

Equity Custodian & Broker:

Fidelity Prime Services             

200 Seaport Boulevard, Z2H  

Boston, MA 02210                    

USA                                          

(until 26 November 2010)                         

 

Clearing Broker:

Albert Fried & Company, LLC

45 Broadway, 24th Floor   

New York, NY 10006

USA

(from 26 November 2010)

 

Executing Broker:

GP Nurmenkari Inc.

6 East 39th Street

New York, NY 10016

USA

(from 1 December 2010)

 

Financial Public Relations:

Weber Shandwick Financial

Fox Court

14 Gray's Inn Road

London, WC1X 8WS

Registrar:

Capita Registrars (Guernsey) Limited

Mont Crevelt House

Bulwer Avenue

St Sampson

Guernsey, GY2 4JN

 



PSOURCE STRUCTURED DEBT LIMITED

Company Information, continued

 

Directors

The Directors are responsible for the determination of PSource Structured Debt Limited's (the "Group's or Company's") investment policy and have overall responsibility for the Group's activities. The Directors have put in place procedures to ensure that the Group meets current corporate governance requirements.

 

The Directors of the Company, all of whom are non-executive and who, apart from Mr Appavoo, are entirely independent of the Manager, the Investment Manager and the Investment Consultant, are:

 

William Scott, Chairman

William Scott was from 2003 to 2004 Senior Vice President with the Financial Risk Management Group, a leading specialist manager of funds of hedge funds. From 1989 to 2002 he worked at Rea Brothers (subsequently part of Close Brothers) as an investment manager specialising in fixed income portfolios and latterly in private banking where he was a director of Close Bank Guernsey Limited. Prior to this he was an equity sector manager with a large public sector pension fund. He holds a number of non-executive directorships of listed companies including AcenciA Debt Strategies Limited and a number of funds managed by the Financial Risk Management group where he is Chairman of the Audit, Risk Management and Control Committee. He is also a director of several other investment management and property companies. He is a chartered accountant with over 25 years' experience in the funds sector, he acts as consultant to offshore investment management organisations. He is a resident of Guernsey.

 

Soondra Appavoo

Soondra Appavoo is managing director of PSource Capital Limited and director of PSource Capital Guernsey Limited. He has 18 years experience in the investment industry, including 4 years as director and managing director of PSolve Alternative Investments, the fund of hedge fund business of Punter Southall Group. He was formerly a director at UBS Warburg investment banking and is a chartered accountant. Mr Appavoo holds an MA in Natural Sciences and MBA with Distinction, both from the University of Oxford. He is the sole representative of the Manager on the Board.

 

Peter Niven

Peter Niven, is the part time Chief Executive of Guernsey Finance, which is the island's promotional agency for the Guernsey Finance industry internationally. He has over 33 years experience in the financial services market in both the UK, offshore and internationally having worked in a number of senior positions in the Lloyds TSB Group until his retirement in 2004. In addition to his work with Guernsey Finance he is also a non executive director of several Guernsey based financial services companies listed on the main London Stock Exchange together with a captive insurance protected cell company. Mr Niven is a Fellow of the Chartered Institute of Bankers and a Chartered Director.

 

Tim Jenkinson

Tim Jenkinson is Professor of Finance and Director of the Private Equity Institute at the Oxford Saïd Business School. He is also Chairman of the economic consulting firm Oxera. He is an expert on corporate finance, in particular initial public offerings, private equity and the cost of capital, and has consulted for a wide range of companies and regulatory bodies. He has written widely on finance and economics and his work has been published in books and leading international journals. He initially studied economics as an undergraduate at Cambridge University, before going as a Thouron Fellow to the University of Pennsylvania, where he obtained a Masters in Economics. He then returned to the UK and obtained a DPhil in Economics from Oxford.

 

Keith Dorrian

Keith Dorrian has over 30 years experience in the offshore finance industry. Joining Manufacturers Hanover in 1973 he moved to First National Bank of Chicago in 1984. In 1989 he joined ANZ Bank (Guernsey) where as a director of the bank and fund management company he was closely involved in the banking and fund management services of the group. He took up the position of Manager Corporate Clients in Bank of Bermuda Guernsey in 1999 and was appointed Head of Global Fund Services and Managing Director of the bank's Guernsey fund administration company in 2001 retiring on 31 December 2003. He is currently a director of a number of funds and fund management companies and holds the Institute of Directors Diploma in Company Direction. He is a resident of Guernsey.

 



PSOURCE STRUCTURED DEBT LIMITED

Company Information, continued

 

Financial Calendar

 

Annual Report and Accounts sent to shareholders by 30 September 2011.

 

Annual General Meeting to be held   on 31 October 2011.

 

Interim Report and Accounts sent to shareholders by 28 February 2012.

 

Investment Objective and Policy

The Group's investment objective is to seek to provide a total return to shareholders of 10-15 per cent per annum over a rolling 3-year period with annual standard deviation of less than 5 per cent.

 

The Group's investment policy is to invest in a diversified portfolio of asset backed loans and debt made predominantly to, and equity warrants and similar instruments issued predominately by, publicly traded small and micro-cap companies in the US. The exact number of assets and strategies in which the Group invests may vary over time but the Directors expect that the Group will be invested at all times in a minimum of 30 underlying companies.

 

The Company has one Subsidiary, PSD SPV 2, Inc ("SPV2"), which has been established to hold certain US assets. For reasons of tax efficiency, the Group proposes to make newly originated direct investments and enter into co-investments through this Subsidiary. In prior periods the Company also used another Subsidiary, being PSource Structured Debt SPV1 Limited ("SPV1"), to make newly originated direct investments and enter into co-investments. On 29 December 2010, when this Subsidiary no longer had any holdings, SPV1 was voluntarily liquidated.

 

It is the intention of the Group to remain substantially fully invested at all times, although the Group may use its discretion to hold cash or short-term money market instruments (including gilts) from time to time for the purposes of paying margin calls on hedging, paying dividends, meeting other expenses of the Group, funding buybacks and pending full investment. Cash will be held in accounts with institutions which are rated A1 (or above) by Standard & Poor's or an equivalent rating by another reputable agency (or wholly owned subsidiary of such institutions).

 

The Group will be a passive investor and will not control, seek to control, or be actively involved in the management of, any companies or businesses in which it invests. The Group will not be a dealer in investments.

 

The Group will not enter into long term borrowing. Under its Articles of Association, the Company has the ability to borrow up to 30 per cent of net assets in order to facilitate its intention of remaining fully invested, to implement any hedging and buyback strategies and to meet ongoing expenses (please refer to note 11 of the consolidated financial statements for details on the Group's loan and overdraft facilities).

 

Summary Information

There are 59,564,681 (30 June 2010: 59,564,681) Ordinary Shares in issue and the NAV per Ordinary Share at 30 June 2011 was US$1.6562 (30 June 2010: US$1.8922). The Company listed on 3 August 2007 with an initial NAV per Ordinary Share after launch costs of 97.75p. No dividends have been declared in respect of the year ended 30 June 2011 (year ended 31 December 2010: zero pence per Ordinary Share).

 

As at 30 June 2011 the portfolio which comprised 30 companies (30 June 2010: 47), represented 107.60% of Net Asset Value (30 June 2010: 111.35%). The maximum position in any company was 76.47% of the portfolio (30 June 2010: 64.92%).

 


PSOURCE STRUCTURED DEBT LIMITED

Company Information, continued

 

Summary Information, continued

 

Monthly total return performance, NAV and dividends declared since inception is set out below:

 

5 June 2007

To

30 June 2008

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Financial

YTD

NAV (p)


97.37

98.53

100.17

102.13

103.81

103.13

105.06

107.21

107.54

109.40

110.19

-

Returns (%)


-0.38

1.19

2.49

1.95

1.64

0.55

1.87

2.05

1.49

1.73

0.72

16.37

Dividend (p)


-

-

0.8

-

-

1.25

-

-

1.25

-

-

3.30

 

1 July 2008

To

30 June 2009

Jul

Aug

Sep

Oct

Nov

Dec

Jan*

Feb

Mar

Apr

May

Jun

Financial

YTD

NAV (p)

110.48

113.17

113.20

110.78

105.49

105.88

-

-

-

-

-

-

-

NAV (¢)*

-

-

-

-

-

-

162.22

153.71

158.24

160.08

166.10

168.85

-

Returns (%)

1.41

2.43

0.03

-2.14

-4.78

0.37

4.99

-5.25

2.95

1.16

3.76

1.66

6.20

Dividend (p)

1.25

-

-

-

-

-

-

-

-

-

-

-

1.25

 

1 July 2009

To

30 June 2010

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Financial

YTD

NAV (¢)

171.16

170.94

170.09

172.59

179.84

188.30

199.31

199.10

202.62

198.52

193.41

189.22

-

Returns (%)

1.37

-0.13

-0.50

1.47

4.20

4.70

5.85

-0.11

1.77

-2.02

-2.57

-2.17

12.06

Dividend (¢)

-

-

-

-

-

-

-

-

-

-

-

-

-

 



PSOURCE STRUCTURED DEBT LIMITED

Company Information, continued

 

Summary Information, continued

 

1 July 2010

To

30 June 2011

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Financial

YTD

NAV (¢)

187.02

179.00

180.93

182.23

181.83

179.47

177.73

176.04

174.38

171.37

170.88

165.62

-

Returns (%)

-1.16

-4.29

1.08

0.72

-0.22

-1.30

-0.97

-0.95

-0.94

-1.73

-0.29

-3.08

-12.48

Dividend (¢)

-

-

-

-

-

-

-

-

-

-

-


-

 

 

1 July 2011

To

30 June 2012

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Financial

YTD

NAV (¢)

164.24

162.67











-

Returns (%)

-0.83

-0.96











-1.78

Dividend (¢)

-

-











-

 

 

* On 30 January 2009, a special resolution was passed to convert  the issued Sterling Shares into US Dollar Shares in accordance with article 3.12 of the Company's articles of association at an exchange rate of US$1.4593/£. With effect from this date the performance of the Company is measured in US Dollars.

 

§ Total net return since inception as at 30 June 2011 in reporting currency 21.21%

§ Total net return since inception as at 30 June 2011 in reporting currency (annualised) 5.03%

§ Annualised standard deviation (volatility) 8.38%

 

Total Expense Ratio:

 


Year end 30 June 2011

Year end 30 June 2010

Expense Type:

% of Average Net Assets

% of Average Net Assets

  Net operating expenses*

3.76

4.16

  Performance fees

0.00

5.03

  Total expense ratio**

3.76

9.19

 

*Net operating expenses are the costs of the Group excluding capital gains and losses, and costs associated with investment transactions..

**The Total Expense Ratio represents total operating expenses of the Group, expressed as a percentage of average net assets during the accounting period.

 


PSOURCE STRUCTURED DEBT LIMITED

Chairman's Statement

Year ended 30 June 2011

 

It is my pleasure to present the annual report for PSource Structured Debt Limited (the "Group" or "PSD") for the year ended 30 June 2011.

 

The past year has been characterised by a weak recovery on both sides of the Atlantic. Whilst stock markets in the US performed quite strongly (the S&P500 being up 28.1% in the period), since the year end renewed uncertainty about the recovery and the strength of US and European sovereign credit has resulted in some retrenchment (the S&P500 being 12.6% lower than at the year end at the time of writing).

 

This period has been one of some progress for PSD. Net Debt with Bank of Scotland/Lloyds has been reduced to US$4.5 million from US$8.5 million. In addition, PetroAlgae (the Group's largest holding) has made substantial progress. However, the Board recognises that progress has been slower than anticipated a year ago and that this has impacted shareholder value. Within this statement, I set out a discussion of NAV performance, cash flows and the non-PetroAlgae portfolio, PetroAlgae and the share price. Lastly, I set out the Board's proposals for the future of your Company.

 

NAV Performance

NAV performance has been disappointing at -12.5% over the period. The largest component of this loss has been impairments taken on the advice of our independent valuation agent (-7.1%).

 

Cash flows and bank position

The portfolio has generated net operating cash flow of US$4,380,684 (US$7,031,554 in 2010). As the debt portfolio has diminished in size (from repayments, debt for equity swaps, disposals, refinancings and write downs) the amount of regular debt repayments and interest has gone down as a proportion of cash flows (down from US$11,308,120 to US$2,387,370). The amount coming from the disposals has, however, increased substantially from US$2,510,504 to US$6,521,657. We expect this pattern to continue during this financial year.

 

On 31 August 2011, the Group refinanced its existing debt with Bank of Scotland/Lloyds. The facilities comprise a US$3.7m term note and a US$1.5m committed overdraft. Drawings on the overdraft are approximately US$1.0m. The key terms of these facilities are as follows:

 

§ Facilities available for 6 months from 1 September 2011.

§ Interest margin of 6.5%, increasing to 7.0% with effect from 1 January 2012 if the facility has not been reduced to zero. The margin is over 1 month US LIBOR (currently 0.22%).

§ Arrangement fee of US$25,000.

§ Redemption fee of US$25,000 if facility is repaid in full on or before 31 December 2011; US$75,000 if facility is repaid in full after 31 December 2011. Redemption fee is payable upon final repayment or expiration date of the facility.

§ No fixed amortisation. The term note is amortised using a cash sweep equal to 80% of monthly free cash flow.

§ No net debt/gross asset covenants.

§ Dividend payments subject to approval by Bank of Scotland.

 

Non-PetroAlgae portfolio

The cash flows have, for the time being, continued to come from the non PetroAlgae component of the portfolio. Excluding PetroAlgae, at the year end, the Group's investments were valued at US$25.0m, in 29 companies. The largest 9 of these investments comprise 91% of this.

 

There are sale processes underway on approximately US$20m of these investments. The investment manager has received offers for approximately US$10m worth of these investments. All these offers are subject to due diligence and financing.

 

However (ironically, in line with the Group's original investment thesis), many of the groups seeking to acquire our investee companies are finding it difficult to obtain financing from US banks. This has delayed several of our sales, repaying the bank and resuming dividends, as we had indicated was our intention.

 



PSOURCE STRUCTURED DEBT LIMITED

Chairman's Statement, continued

Year ended 30 June 2011

 

PetroAlgae

 

Holding and valuation

The Group has a significant holding in PetroAlgae Inc, a renewable energy company based in Florida, through its holding in PetroTech Holdings Inc. The total value of the holding is unchanged in the year at US$81.2 million. During the year (on 11 August 2010) PetroAlgae filed an S-1 registration statement with the SEC. Goldman Sachs, UBS and Citi are the lead underwriters.

 

Following this filing, the PSD Board continues to believe it appropriate to hold the valuation of PetroAlgae shares in PSD constant from the 31 January 2010 NAV at US$11.56.

 

In coming to this assessment of value, the board, with advice from the Independent Valuation Agent and the Investment Consultant have taken the following factors into account:

 

§ Public trading of stocks on OTC Link

§ Valuation of comparable companies

§ Model based valuations

 

The shares of PetroAlgae Inc are traded on OTC Link. The trading is irregular and volumes traded are low. The Directors note the public trading but do not solely rely upon it for valuation purposes. The Volume Weighted Average Price of the shares traded during the financial year was US$14.4 per share.

 

There are no directly comparable companies to PetroAlgae. However, the Directors note that several IPO's have occurred in the United States of companies in similar markets to PetroAlgae, and at a similar stage in development.

 

The Directors have looked at model based valuations. Any such valuation is sensitive to valuation inputs. In particular changes in assumptions of license fees, royalty rates, implementation rates and discount rates have a significant impact on valuation.

 

Developments during the year

PetroAlgae has strengthened its management team in the last 12 months. In particular, the company appointed Tony Tiarks as CEO on 16 June 2011. Dr John Scott, formerly Chairman and CEO, remains as Chairman of PetroAlgae. Also during the year the Company achieved a number of very significant commercial and technical milestones:

 

§ Signing of a Master Framework and Initial Licence agreement with the Government of Suriname

§ Successful conclusion of trials of the carbohydrate product as an Alfalfa replacement with the University of Minnesota

§ Successful conclusion of trials of the protein product as a fishmeal replacement with the University of Idaho

§ Signing of co-development agreements with CRI (a Shell Group company) and Haldor Topsoe

 

It is the Board's belief that further progress with commercial agreements is key to any monetisation of the Group's holding in PetroAlgae. We note that several companies in the renewable energy/biochemical sector have successfully IPO'd on Nasdaq during the year, including Amyris, Gevo, Kior and Solazyme. We await to see how IPO conditions develop during the later part of this year.

 

Share price

Share price performance has been very disappointing during the year. The mid price fell from 48.5p on 30 June 2010 to 31.25p at the end of the period, a -35.6% fall. Since the end of the period, the price has fallen a further 4p to 27.25p. This fall reflects in part the negative NAV performance. However, it also reflects a lack of liquidity in the stock and uncertainty surrounding the exit from and value of PetroAlgae.

 

Future of PSource Structured Debt Limited

The current position of PSD is not tenable. The Board has tried to balance the need to monetise the portfolio, with the importance of overall shareholder value. In the light of the issues discussed above, the Board does not believe that a continuation of the Group in its current form is in the interest of shareholders. The Board does, however, believe that it is in shareholders' interests to move closer to a resolution with PetroAlgae (if practicable, as we believe) prior to shaping the Group's future. Accordingly, the Board intends to present wind-up or restructuring proposals to shareholders by 31 March 2012. The Board is unanimous in strongly recommending that shareholders vote for the continuation of the Company at the Annual General Meeting to be held on 31 October 2011.

 

 

 

William Scott (Chairman)

Date: 21 September 2011



PSOURCE STRUCTURED DEBT LIMITED

Directors' Report

Year ended 30 June 2011

 

The Directors of PSource Structured Debt Limited (the "Company") are pleased to present their fourth audited annual report and consolidated financial statements for the year ended 30 June 2011.

 

The Directors submit their Report together with the Group's Consolidated Statement of Financial Position, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the accompanying related notes for the year ended 30 June 2011, which have been prepared in accordance with International Financial Reporting Standards, in accordance with any relevant enactment for the time being in force, and are in agreement with the accounting records, which have been kept in accordance with Section 238 of the Companies (Guernsey) Law, 2008.

 

The Company

The Company is a closed-ended investment company, incorporated and registered with limited liability in Guernsey on 5 June 2007 in accordance with The Control of Borrowing (Bailiwick of Guernsey) Ordinance, 1959 to 2003 as amended. The Company commenced business on 3 August 2007 when the initial 30,000,000 Ordinary Shares of the Company were admitted to the Official List of the London Stock Exchange. The Company is a Guernsey Authorised Closed-ended Investment Scheme and is subject to the Authorised Closed-ended Investment Scheme Rules 2008.

 

PSource Structured Debt SPV 1 Limited ("SPV1") was incorporated in Guernsey on 27 September 2007 and commenced trading on 30 May 2008. On 29 December 2010, when this Subsidiary no longer had any holdings, SPV1 was voluntarily liquidated.

 

PSD SPV 2, Inc ("SPV2") was incorporated in the State of Delaware on 2 April 2009. The Subsidiary commenced trading on 1 May 2009. SPV2 was established to hold certain US assets. For reasons of tax efficiency, the Group proposes to make newly originated direct investments and enter into co-investments through this Subsidiary.

 

Any references to Company relate to PSource Structured Debt Limited whereas references to the Group include PSource Structured Debt Limited, SPV1 and SPV2.

 

Results and Dividends

The results for the year are set out in the Consolidated Statement of Comprehensive Income on page 19.

 

For the year ended 30 June 2011 no dividend has been paid (year ended 30 June 2010: Nil pence per Ordinary Share). These financial statements only reflect dividends that were paid in the year.

 

Measuring Performance

Details of the performance of the Company's net asset value during the year can be found in the Summary Information on pages 3-5.

 

Directors

The Directors, all of whom are non-executive Directors, are as listed on page 1. All Directors with the exception of Mr Appavoo are independent. All the Directors, with the exception of Mr Dorrian were appointed on registration of the Company.  Mr Dorrian was appointed on 30 July 2008. Mr Scott and Mr Appavoo were re-elected on 19 October 2010.

 

Manager

Under the terms of the Management Agreement dated 31 July 2007, between the Company and PSource Capital Guernsey Limited (the "Manager"), the Manager is responsible for providing the Company with management services. 

 

The Manager is a company domiciled and incorporated in Guernsey with company registration number 46511. The Manager is a private company limited by shares which was incorporated on 2 March 2007 and operates under The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended.  The Manager is regulated by the Guernsey Financial Services Commission.

 

With the Board's approval, the Manager is acting as an advisor to PetroAlgae in its proposed IPO.

 

Investment Manager

Laurus Capital Management, LLC (the "Investment Manager") manages the assets of the Group in accordance with the Investment Management Agreement dated 31 July 2007, between the Company and the Manager.  The Investment Manager has been appointed by the Company to act as discretionary investment manager of the Group, save that the Investment Manager is required to seek the approval of the Board for any acquisitions of investments from Laurus Master Fund Ltd or any affiliate of it and to seek the approval of the Investment Consultant before making any direct investment.

 



PSOURCE STRUCTURED DEBT LIMITED

Directors' Report, continued

Year ended 30 June 2011

 

Investment Manager, continued

The Investment Manager is a New York based investment adviser registered, as of January 2006, with the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended.  The Investment Manager was founded on 1 December 2000, is incorporated in the state of Delaware, USA, under registration number 3323351 as a limited liability company, employs 19 staff and manages US$1 billion of assets (as at 30 June 2011).  The co-founders and fund managers of the Investment Manager are Eugene and David Grin.

 

As at 30 June 2011, the Investment Manager held 500,000 (30 June 2010: 500,000) Ordinary Shares in the Company.

 

The Board were notified late in 2010 that the Investment Manager would begin winding down its business. Having visited the Investment Manager and assessed their situation following a reduction in staff and assets under management, it is the belief of the Board that their actions to date have not restricted the ability of the Investment Manager to meet its obligations to the Company in managing current portfolio investments.

 

The Investment Management Agreement may be terminated by either party giving not less than twelve months' notice in writing, or earlier by either party upon certain breaches of the Investment Management Agreement or the insolvency or receivership of either party or if the Investment Manager ceases to be qualified to act as such.

 

Investment Consultant

The Manager has appointed PSource Capital Limited as Investment Consultant under the Investment Consultancy Agreement dated 31 July 2007, between the Manager and PSource Capital Limited.

 

The Investment Consultant is a wholly-owned subsidiary of the Manager and is an appointed representative of PSolve Investments Limited which is authorised and regulated in the UK by the Financial Services Authority.  The Investment Consultant was incorporated on 21 August 2006.  The role of the Investment Consultant is, among other things, to oversee the management of the Group's investments and deal with investor relations.

 

The Investment Consultant will carry out its duties in accordance with the Investment Consultancy Agreement.

 

The Investment Consultancy Agreement may be terminated by either party giving not less than twelve months' notice in writing, or earlier by either party upon certain breaches of the Investment Consultancy Agreement or the insolvency or receivership of either.

 

Administrator

Praxis Fund Services Limited has been appointed as Administrator to the Group under the Administration Agreement dated 31 July 2007. The Administrator has been appointed to provide day to day administration and secretarial services to the Group.

 

The Administration Agreement may be terminated by either party on not less than six months written notice, or earlier upon certain breaches of the Administration Agreement or the insolvency or receivership of either party or if the Administrator ceases to be qualified to act as such.

 

Loan Notes, Warrants and Options Custodian

On 8 March 2010, Wells Fargo Bank was appointed as Custodian to the Group under the Custodian Agreement dated 8 March 2010 between the Company and the Custodian. Under this agreement the Custodian agreed to provide the Group with custody services relating to loan notes, warrants and options.

 

The Custodian Agreement may be terminated by either party giving not less that ninety (90) days' prior written notice to the other party.

 

Equity Custodian & Broker

Fidelity Prime Services ("Fidelity") was appointed as Custodian and Broker to the Group under the Custodian & Broker Agreement between the Laurus Master Fund Ltd and Fidelity, as an affiliate of Laurus Master Fund Ltd. Under this agreement Fidelity has agreed to provide the Group with custody and brokerage services relating to equities.

 

Effective from 26 November 2010, the Company migrated its custody and clearing services for its short term trading assets from Fidelity Prime Services to Albert Fried & Company, LLC.

 

Effective 1 December 2010, the Company migrated its trading services from Fidelity to GP Nurmenkari Inc.

 



PSOURCE STRUCTURED DEBT LIMITED

Directors' Report, continued

Year ended 30 June 2011

 

Registrar

Capita Registrars (Guernsey) Limited has been appointed to act as Registrar of the Company under the Registrar Agreement dated 31 July 2007 between the Company and the Registrar.  The Registrar has been appointed to provide electronic registration and settlement services through CREST.  The Registrar Agreement may be terminated by either the Company or the Registrar giving not less than three months' notice in writing or otherwise in circumstances where the Company or the Registrar goes into liquidation or where either party commits and fails to remedy a material breach of the Registrar Agreement.  The Registrar Agreement will also terminate if the Registrar ceases to hold a required licence, consent, permit or registration.  The Registrar Agreement contains an indemnity in favour of the Registrar against claims by third parties except to the extent that the claim arises from the fraud, negligence or wilful default of the Registrar or a breach by the Registrar of the Registrar Agreement or the Law.

 

Independent Valuation Consultant

Clayton IPS Corporation ("Clayton") has been appointed as Independent Valuation Consultant under the Independent Valuation Consultant's Agreement dated 31 July 2007 (the "Valuation Agreement") between the Company and Clayton. Clayton has (a) provided a valuation of the Initial Portfolio of the Group and (b) agreed to provide a monthly and quarterly valuation of the assets of the Group. For these services Clayton is entitled to a fee of (a) US$50,000 for the valuation of the Initial Portfolio and (b) US$10,000 for each monthly valuation.

 

The Valuation Agreement term is for a period of one year (the "Term") and will then renew for successive one-month terms (each a "Renewal Term").

 

The Valuation Agreement may be terminated after the first 180 days of the Term of the Valuation Agreement by either party on not less than thirty days written notice, or with respect to a Renewal Term, by either party giving written notice no less than ten days prior to the end of the then-current Renewal Term. If either party materially breaches the Valuation Agreement and such breach is either incapable of cure or not cured within ten business days of receiving written notice of such breach from the non-breaching party, the non-breaching party may terminate the Valuation Agreement.

 

Corporate Governance

 

Compliance

Under The UK Listing Regime the Company is a premium listed entity. The most significant impact of this (in addition to other new provisions) on the Company as an overseas company, is that as a premium listed entity the Company must report and comply with the UK Corporate Governance Code issued by the Financial Reporting Council in June 2010 and applicable for accounting periods beginning on or after 29 June 2010 (the "Code"), or explain areas it has not complied with.

 

Prior to being required under the UK Listing Regime to comply with the Code, the Board placed a high degree of importance on maintaining high standards of corporate governance and has considered the principles and recommendations of the AIC Code by reference to the AIC Corporate Governance Guide for investment companies ("AIC Guide"). The AIC Code, as explained in the AIC Guide, addresses all the principles set out in the Code. The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the Code), will provide better information to shareholders.

 

As at 30 June 2011, the Company complied substantially with the relevant provisions of the AIC Code and the Code (save with regard to the following provisions listed below) and it is the intention of the Board that the Company will comply with those provisions throughout the year ending 30 June 2012:

 

§ The role of the chief executive: The Board considers that the post of chief executive officer is not relevant for the Company as this role has effectively been delegated by the Manager to the Investment Consultant under the terms of the Investment Consultancy Agreement.

§ The appointment of a Senior Independent Director: Given the size and composition of the Board it is not felt necessary to separate the roles of Chairman and Senior Independent Director.  The Board considers that all the independent Directors have different qualities and areas of expertise on which they may lead where issues arise and to whom concerns can be conveyed.

§ Executive directors' remuneration: As the Board has no executive directors, it is not required to comply with the principles of the Code in respect of executive directors' remuneration and does not have a remuneration committee.



PSOURCE STRUCTURED DEBT LIMITED

Directors' Report, continued

Year ended 30 June 2011

 

Corporate Governance, continued

 

Compliance, continued

 

§ Internal audit function: The Company delegates to third parties its day-to-day operations and has no employees.  The Board has therefore determined that there is no requirement for the Company to have its own internal audit function.  The Directors consider annually whether a function equivalent to an internal audit is needed and will continue to monitor its systems of internal controls in order to provide assurance that they operate as intended.

 

Chief Operating Decision Maker

The Board, as a whole, has been determined as constituting the chief operating decision maker ("CODM") of the Group.

 

The Board is charged with setting the Group's investment strategy in accordance with the Prospectus. Pursuant to the terms set out in the Investment Management Agreement the Board have delegated the day to day investment management of the Group to the Investment Manager, however the Board retains the responsibility to ensure that adequate resources of the Group are directed in accordance with their decisions. All investment recommendations made by the Investment Manager are reviewed by the Board for compliance with the policies and legal responsibilities of the Directors and the provisions of the Prospectus. Only after such reviews have been satisfactorily conducted will the Board approve the investments recommendations. The Board therefore retains full responsibility for the allocation decisions made on an ongoing basis.  Pursuant to the terms of the Investment Management Agreement the Investment Manager is obliged to comply with the investment strategy detailed in the Prospectus. This strategy sets out guidelines for proposed investments and the procedures that the Investment Manager is required to follow in dealing with the Group's assets. These guidelines and procedures are regularly reviewed and can be altered by the Board if it considers it appropriate to do so.

 

The Directors regularly monitor the corporate strategy, dividend policy and corporate governance issues and meet at least once a quarter to direct and monitor the business of the Company. This includes a review of the performance and risk profile of the Company and to monitor compliance with the Company's objectives and legislative developments. Advisers to the Company provide the Board with relevant and timely information within the Company's sphere of activity to enable the Directors to make informed decisions.

 

Board Committees

 

Audit Committee

An Audit Committee, comprising the Directors apart from Mr Appavoo (who is a director of the Manager and a director of the Investment Consultant, and therefore not considered to be independent), has been formed to ensure that the Group maintains the highest standards of integrity in financial reporting and internal control. Mr Niven acts as chairman of the Committee. The Committee, which meets at least twice a year, operates within clearly defined terms of reference and provides a forum through which the Group's auditors may report to the Board.

 

Management Engagement Committee

A Management Engagement Committee, comprising the Independent Directors, has been formed to ensure that the terms of the Management Agreement are competitive, fair and reasonable. The Committee's duties also includes reviewing and making recommendations on any proposed amendment or material breach of the Management Agreement and reviewing the performance and suitability of the Investment Manager in relation to the provision of management services to the Group. Mr Scott acts as chairman of the Committee. Please refer to the Investment Manager section of this report for further details on the current suitability of the Investment Manager in relation to the provision of management services to the Group.

 

Nominations Committee

A Nominations Committee, comprising the Directors, has been formed to consider and make recommendations to the Board on its composition and balance. Although the chairman of the Board may be the chairman of the Committee, in the event that the Committee considers the appointment of a successor to the chairman of the Board, the Committee shall elect a chairman other than the chairman of the Board. Mr Scott acts as chairman of the Committee. The Committee shall meet at such times as it considers expedient to carry out its duties and will operate within clearly defined terms of reference. In accordance with Principle 9 of the AIC Code, Soondra Appavoo volunteered to step down from the Nomination Committee on 16 June 2011 as he is considered non-independent.

 

Remuneration Committee

Because the Board consists entirely of non-executive directors it is not considered necessary to have a Remuneration Committee and the Board as a whole will fulfill the functions of a Remuneration Committee.



PSOURCE STRUCTURED DEBT LIMITED

Directors' Report, continued

Year ended 30 June 2011

 

Corporate Governance, continued

 

Board Committees, continued

 

Remuneration Committee, continued

On an annual basis the Chairman leads an evaluation of the Board and its individual Directors, with the other independent Directors evaluating the Chairman's performance. In addition, the Board as a whole evaluates its own performance and that of its committees. During the evaluation process the Board members confirmed that they are able to devote such time as is necessary to discharge their duties as Directors of the Company and indeed have sufficient capacity to cope with any reasonable expectation of increased needs should circumstances require it from time to time.

 

Independence of Directors

The Board consists of five members, all of whom are non-executive. With the exception of Soondra Appavoo all other Directors of the Company are independent of the Company's Manager, PSource Capital Guernsey Limited. All Directors are independent of the Investment Manager, Laurus Capital Management, LLC, and free of any business or other relationship that could influence their ability to exercise independent judgement. Mr Appavoo is a director of the Investment Consultant, PSource Capital Limited and of the Company's Manager. The Board also considers it an important principle that a senior member of the Investment Consultant bears personal responsibility as a Director of the Company. Mr Appavoo does not take part in discussing any contractual arrangements between the Board and the Manager or the Investment Consultant.

 

The Directors recognise the importance of succession planning for Company boards and review the composition of the Board annually. However the Board is of the view that length of service will not necessarily compromise the independence or contribution of Directors of an investment company where continuity and experience can be a benefit to the Board. Furthermore, the Board agrees with the view expressed in the AIC Code that long serving Directors should not be prevented from forming part of an independent majority or from acting as Chairman. Consequently no limit has been imposed on the overall length of service.

 

The Directors are initially appointed by the Board, retire, and seek reappointment at the next annual general meeting. Thereafter, Directors retire by rotation, and seek reappointment at the annual general meeting. As a non-independent Director Mr Appavoo stands for re-election annually.

 

The Directors believe that the Board has a balance of skills and experience which enable it to provide effective strategic leadership and proper governance of the Company. Information about the Directors including their relevant experience can be found on pages 2 and 3.

 

The Board has contractually delegated to external agencies, the management of the investment portfolio, the custodial services and the day to day accounting and company secretarial requirements. Each of these contracts was only entered into after proper consideration by the Board of the quality and services offered.

 

Meetings and Committees

The table below, details the attendance at Board and Committee meeting during the year:

 


 

Board

 

Audit Committee

Management Engagement Committee

 

Nominations Committee


Management

Ad hoc

William Scott

4

5

3

1

1

Keith Dorrian

4

4

3

1

1

Peter Niven

4

4

3

1

1

Soondra Appavoo

3

1

N/A

N/A

1*

Tim Jenkinson

3

1

3

1

1

 

* Soondra Appavoo stepped  down from the Nominations Committee on 16 June 2011

 

Directors' Interests

The interests of the Directors who held office during the year, and their families, are set out below:

 


30 June 2011


30 June 2010


Ordinary Shares


Ordinary Shares

William Scott (Chairman)

50,000


50,000

Peter Niven

30,000


30,000

Soondra Appavoo

20,000


20,000

Tim Jenkinson

50,000


50,000

Keith Dorrian

-


-

 

No Director, other than those listed above, and no connected person of any Director has any interest, the existence of which is known to, or could with reasonable diligence be ascertained by that Director, whether or not held through another party, in the share capital of the Company.



PSOURCE STRUCTURED DEBT LIMITED

Directors' Report, continued

Year ended 30 June 2011

 

Corporate Governance, continued

 

Internal Controls

The Directors are responsible for overseeing the effectiveness of the internal financial control systems of the Group, which are designed to ensure proper accounting records are maintained, that the financial information on which the business decisions are made and which is issued for publication is reliable, and that the assets of the Group are safeguarded. Such a system of internal financial controls can only provide reasonable and not absolute assurance against misstatement or loss.

 

The Board has reviewed the Group's internal control procedures. These internal controls are implemented by the Group's seven main service providers, Laurus Capital Management, LLC, PSource Capital Limited, Praxis Fund Services Limited, Wells Fargo Bank, GP Nurmenkari Inc., Albert Fried & Company, LLC and Bank of Scotland plc. The Audit Committee contacts each service provider on an annual basis to seek confirmation that each service provider had effective controls in place to control the risks associated with the services that they are contracted to provide to the Group. The Board is satisfied with the internal controls of the Group.

 

The Directors meet on a quarterly basis ("Management" meetings per the Meetings and Committees table) and at other unscheduled times ("Ad hoc" meetings per the Meetings and Committees table) when necessary to assess Group operations and the setting and monitoring of investment strategy and investment performance. At such meetings, the Board receives from the Manager, Investment Manager and Investment Consultant a full report on the Group's holdings and performance and consider the terms of transactions with entities managed, advised or otherwise affliated with the Investment Manager. The Board gives directions to the Investment Manager as to the investment objectives and limitations, and receives reports from the Manager in relation to the financial position of the Group and the custody of its assets.

 

Social, ethical and environmental concerns have been considered by the Board. Whilst the Board does not consider it appropriate to put social, ethical and environmental policies in place within an investment company investing in financial instruments, they do confirm that the Group does not have any investments that are illegal or immoral. Furthermore at the date of this report the Group's largest investment exposure is to biofuels, which could potentially be extremely beneficial for the environment.

 

The Board has considered non-financial areas of risk such as disaster recovery and investment management staffing levels and considers adequate arrangements to be in place.

 

Anti-bribery and Corruption

The Board acknowledge that the Company's international operations may give rise to possible claims of bribery and corruption. In consideration of the recently enacted UK Bribery Act, at the date of this report the Board had conducted an assessment of the perceived risks to the Company arising from bribery and corruption to identify aspects of business which may be improved to mitigate such risks. The Board has adopted a zero tolerance policy towards bribery and has reiterated its commitment to carry out business fairly, honestly and openly.

 

Shareholder Views

The Board regularly monitors the shareholder profile of the Company. All shareholders have the opportunity, and are encouraged, to attend the Company AGM at which members of the Board are available in person to meet shareholders and answer questions. In addition, the Company's Investment Consultant and Financial Adviser and Stockbroker maintain regular contact with major shareholders and report regularly to the Board on shareholder views.

 

Substantial Shareholdings

As at 19 August 2011, the Company was aware of the following interests in the issued share capital of the Company that exceeded 3% of the issued share capital.

 

 

Shareholder

Number of Ordinary Shares Held*

Percentage of Total Ordinary Shares Issued Held

Midas (inc Miton)

11,550,000

19.39

Wirral BC

7,449,586

12.51

SVM Asset Management

6,759,668

11.35

Ironsides Partners

6,123,173

10.28

Premier Asset Management

5,028,624

8.44

Collins Stewart, stockbrokers (ND)

3,741,954

6.28

Brooks MacDonald Asset Management

3,133,584

5.26

Henderson Global Investors

2,847,965

4.78

Berry Asset Management

2,832,382

4.76

Reliance Mutual

1,139,917

1.91

 

* Based on the Shareholder register as at 19 August 2011.



PSOURCE STRUCTURED DEBT LIMITED

Directors' Report, continued

Year ended 30 June 2011

 

Directors Statement

The Directors make the following statement:

 

·      so far as the Directors are aware, there is no relevant audit information of which the Group's auditors are unaware; and

·      that all steps have been taken by the Directors to make themselves aware of any relevant audit information and to establish that the Group's auditors are aware of that information.

 

Statement of Directors' Responsibilities

The Directors are required by the Company (Guernsey) Law, 2008, to prepare the financial statements for each financial period which give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period and are in accordance with applicable laws.  In preparing these financial statements the Directors are required to:

 

·      select suitable accounting policies and then apply them consistently;

·      make judgements that are reasonable and prudent;

·      state whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the financial statements; and

·      prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.

 

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008 and the Group's principal documents.  They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

Dividend Policy

At inception, it was the Group's intention to pay an annual dividend (paid gross quarterly) of not less than 5 pence (or its equivalent in US Dollars) in its first year growing by 0.5 pence (or its equivalent in US Dollars) per annum in its second and third years. Although this was achieved in respect of the first accounting period of the Group, a breach of the Group's banking facilities has led to the suspension of dividends during the prior and current years.

 

Status of Taxation

The Income Tax Authority of Guernsey has granted the Company exemption from Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 and the income of the Company may be distributed or accumulated without deduction of Guernsey income tax.  Exemption under the above mentioned Ordinance entails payment by the Company of an annual fee of £600.  It should be noted, however, that interest and dividend income accruing from the Company's investments may be subject to withholding tax in the country of origin. With effect from 1 January 2008 the standard rate of income tax for most companies in Guernsey is zero per cent. Tax Exempt status continues to exist and the Company has been granted this status for 2011.

 

The Company has not suffered any withholding tax in the year (30 June 2010: US$nil).

 

PSD SPV 2, Inc is a Delaware corporation and subject to US taxation. As such, PSD SPV 2, Inc will suffer taxes on realised capital gains and income generated by assets which it holds, to the extent that pre-tax earnings are not offset by expenses and realised losses. Moreover, as generated by a business wholly-owned by the Company, distributions of pre-tax earnings of PSD SPV 2, Inc to the Company (e.g. any interest payments on intercompany loans) will likely be subject to a withholding tax.

 

To the extent permissible, the Company will seek to minimise the income tax and withholding tax suffered, although for accounting purposes, no benefits have been assumed. A 35% income tax liability is accrued against any income and capital gains accrued by PSD SPV 2, Inc, and a 30% withholding tax liability is accrued against any interest accruals related to intercompany loans between PSD SPV 2, Inc and the Company. An accrued asset of US$16,308 (30 June 2010: US$8,966 accrued liability) associated with income tax rebates and withholding tax rebates related to PSD SPV 2, Inc has been made as at 30 June 2011.

 

 

PSOURCE STRUCTURED DEBT LIMITED

Directors' Report, continued

Year ended 30 June 2011

 

Going Concern

The current position of PSD is not tenable. The Board has tried to balance the need to monetise the portfolio, with the importance of overall shareholder value. In the light of the issues discussed in the Chairman's Statement, the Board does not believe that a continuation of the Group in its current form is in the interest of shareholders. The Board does, however, believe that it is in shareholders' interests to move closer to a resolution with PetroAlgae (if practicable, as we believe) prior to shaping the Group's future. The Board has also examined significant areas of possible financial risk and are satisfied that no material exposures exist that would effect the Company's ability to remain a going concern.  The Board therefore consider that the Company has adequate resources to continue in operational existence for the foreseeable future and after due consideration believe it is appropriate to adopt the going concern basis in preparing the financial statements, despite the existence of a continuation vote to be held at the next Annual General Meeting to be held on 31 October 2011.

 

The Board intends to present wind-up or restructuring proposals to shareholders by 31 March 2012.

 

The Board is unanimous in strongly recommending that shareholders vote for the continuation of the Company at the Annual General Meeting to be held on 31 October 2011.

 

Auditors

The auditors of the Company, KPMG Channel Islands Limited, have expressed their willingness to continue in office and a resolution giving authority to re-appoint them will be proposed at the forthcoming Annual General Meeting.

 

 

Director:                                                               William Scott

 

 

 

Director:                                                               Peter Niven

 

 

Date:21 September 2011

On behalf of the Board of Directors

 

 

 



PSOURCE STRUCTURED DEBT LIMITED

Responsibility Statement

 

We confirm that to the best of our knowledge and in accordance with DTR 4.1.12R of the Disclosure and Transparency Rules:

 

a)   The financial statements have been properly prepared in accordance with International Financial Reporting Standards ("IFRS") and give a true and fair view of the financial position and profit and loss of the Group as at and for the year ended 30 June 2011.

 

b)   The annual report, which includes information detailed in the Chairman's Statement, Directors' Report and Notes to financial statements, provides a fair review of the development and performance of the Group during the year; and includes a description of the principal risks and uncertainties faced as at and for the year ended 30 June 2011.

 

 

 

 

Director:                                                               William Scott

 

 

 

Director:                                                               Peter Niven

 

 

Date: 21 September 2011

On behalf of the Board of Directors

 

 



INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF PSOURCE STRUCTURED DEBT LIMITED

 

We have audited the Group financial statements (the "financial statements") of PSource Structured Debt Limited (the "Company") for the year ended 30 June 2011 which comprise Consolidated Statement of Financial Position, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as issued by the IASB.

 

This report is made solely to the Company's members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, 2008.  Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. 

 

Respective responsibilities of Directors and auditor

As explained more fully in the Statement of Directors' Responsibilities set out on page 14, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.

 

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Board of Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Directors' Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

 

Opinion on financial statements

In our opinion the financial statements:

 

·      give a true and fair view of the state of the Company's affairs as at 30 June 2011 and of its result for the year then ended;

·    are in accordance with International Financial Reporting Standards as issued by the IASB; and

·      comply with the Companies (Guernsey) Law, 2008.

 

Emphasis of Matter - Going concern

We draw attention to Note 2a(iv) to the financial statements which describes the uncertainty related to the result of the continuation vote. Our opinion is not qualified in respect of this matter.

 

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:

 

·      the Company has not kept proper accounting records; or

·      the financial statements are not in agreement with the accounting records; or

·      we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit.

 

Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the June 2008 Combined Code specified for our review.

 

 

 

Mark R Thompson

for and on behalf of KPMG Channel Islands Limited

Chartered Accountants and Recognised Auditors

Date: 21 September 2011



PSOURCE STRUCTURED DEBT LIMITED

Consolidated Statement of Financial Position

As at 30 June 2011

 


Notes

30 June 2011

 

30 June 2010

 



US$


US$






Investments

7




Fair value through profit and loss


83,809,708


92,635,523

Held for trading


1,210,737


2,834,377

Loans and receivables


21,126,349


30,031,017

Total investments


106,146,794


125,500,917






Current assets





Cash and cash equivalents

8

280,038


194,315

Unsettled investment sales


392,930


6,839

Other receivables

9

2,423,435


1,619,955



3,096,403


1,821,109






Current liabilities





Bank overdraft

8&11

790,281


1,136,519

Other payables

10

5,935,327


5,993,380

Loan

11

3,867,480


7,484,003



10,593,088


14,613,902






Net current liabilities


(7,496,685)


(12,792,793)






Total net assets


98,650,109


112,708,124






Represented by Shareholders' equity:





Share Premium

12

47,512,742


47,512,742

Distributable reserve

12

42,793,973


42,793,973

Reserves

13

8,343,394


22,401,409






Total Shareholders' equity


98,650,109


112,708,124






Net asset value per Ordinary Share

14

US$1.6562


US$1.8922

 

 

 

The financial statements on pages 18 to 50 were approved at a meeting of the Board of Directors held on

21 September 2011 and signed on its behalf by:

 

 

 

Director:                                                               William Scott

 

 

 

Director:                                                               Peter Niven

 

 

 

 

 

The accompanying notes form an integral part of these consolidated financial statements.



PSOURCE STRUCTURED DEBT LIMITED

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2011

 


Notes

30 June 2011

 


30 June 2010

 



US$


US$

Income





Loan interest income


1,737,505


3,095,381

Bank interest


2,197


1,516

Subordination fees


-


79,456

Fee income


18,125


-

Other income


1,165


-

Bad debt provision

9

(255,022)


(1,338,725)

Movement in net unrealised (losses)/gains on investments

7&14

 

(474,686)


 

34,177,858

Movement in net unrealised (losses)/gains on restructuring of loans

7&14

 

(1,783,159)


 

994,160

Net realised losses on disposal/restructuring of investments

7&14

 

(2,919,527)


 

(14,018,499)

Impairment charge on loans and receivables

7&14

(6,428,322)


(646,633)

Net foreign exchange gains/(losses)


7,926


(11,806)






Net investment income


(10,093,798)


22,332,708






Expenses





Management fee

4

2,115,297


2,241,752

Performance fee

4

-


5,581,184

Directors' fees and expenses

5

179,424


183,033

Administration fees

4

236,120


240,748

Custodian fees

4

33,163


23,972

Registrar fees

4

22,705


18,203

Auditor's remuneration


111,674


156,418

Loan arrangement fees


178,233


292,456

Legal and professional fees


588,459


904,428

Independent valuation consultancy fee


119,176


130,331

US Taxation


(14,870)


10,029

Other expenses


74,129


64,184






Operating expenses before finance costs


3,643,510


9,846,738






Net (deficit)/return from operations before finance costs


 

(13,737,308)


 

12,485,970






Finance costs





Bank interest

11

45,662


22,379

Loan interest

11

275,045


331,813






(Deficit)/return after finance costs for the year


(14,058,015)


12,131,778











Total comprehensive (deficit)/income for the year


(14,058,015)


12,131,778






Basic & diluted (deficit)/earnings per Ordinary Share

6

US$(0.2360)


US$0.2037






 

The results for the current and prior years are derived from continuing operations.

 

The accompanying notes form an integral part of these consolidated financial statements.


PSOURCE STRUCTURED DEBT LIMITED

Consolidated Statement of Changes in Equity

For the year ended 30 June 2011

 



30 June 2011

 


 

 

Share

Premium

Distributable Reserve

Reserves

Total



US$

US$

US$

US$







Balance brought forward


47,512,742

42,793,973

22,401,409

112,708,124







Total comprehensive deficit for         the year

 

 

 

-

 

-

 

(14,058,015)

 

(14,058,015)













Balance carried forward


47,512,742

42,793,973

8,343,394

98,650,109









 

 



30 June 2010

 



Share

Premium

Distributable Reserve

Reserves

Total



US$

US$

US$

US$







Balance brought forward


47,512,742

42,793,973

10,269,631

100,576,346







Total comprehensive income for       the year


 

-

 

-

 

12,131,778

 

12,131,778













Balance carried forward


47,512,742

42,793,973

22,401,409

112,708,124

 

 

 

The accompanying notes form an integral part of these consolidated financial statements. 


PSOURCE STRUCTURED DEBT LIMITED

Consolidated Statement of Cash Flows

For the year ended 30 June 2011

 


Notes

 

30 June 2011

 


30 June 2010

 



US$


US$






Cash flows from operating activities





Loan interest received


996,894


3,019,325

Fee income received


18,125


-

Other income received


1,165


-

Operating expenses paid


(3,986,986)


(6,571,943)

Amounts paid for purchase of investments


(560,647)


(215,127)

Sale proceeds received from disposal of                  investments


 

6,521,657


 

2,510,504

Amounts received on loan repayments


1,390,476


8,288,795

 

Net cash from in operating activities


 

4,380,684


 

7,031,554











Cash flows used in financing activities





Bank interest received


2,197


1,516

Bank interest paid


(45,662)


(22,379)

Loan interest paid


(296,660)


(397,137)

Loan repayments


(3,616,524)


(11,695,004)

 

Net cash used in financing activities


 

(3,956,649)


 

(12,113,004)






Net increase/(decrease) in cash and cash                 equivalents


 

424,035


 

(5,081,450)






Cash and cash equivalents, start of year


(942,204)


4,151,052






Effect of exchange rate changes during the year


7,926


(11,806)

 

Cash and cash equivalents, end of year

8

 

(510,243)


 

(942,204)

 

 

Cash and cash equivalents comprise the following amounts:





Bank deposits


280,038


194,315

Bank overdrafts


(790,281)


(1,136,519)



(510,243)


(942,204)

 

 

 

 

 

 

 

 

 

 

The accompanying notes form an integral part of these consolidated financial statements.



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements

For the year ended 30 June 2011









1.   The Company:

The Company is a closed-ended investment company, incorporated and registered with limited liability in Guernsey on 5 June 2007 in accordance with The Control of Borrowing (Bailiwick of Guernsey) Ordinance, 1959 to 2003 as amended. The Company commenced business on 3 August 2007 when the initial 30,000,000 Ordinary Shares of the Company were admitted to the Official List of the London Stock Exchange. The Company is a Guernsey Authorised Closed-ended Investment Scheme and is subject to the Authorised Closed-ended Investment Scheme Rules 2008.

 

PSource Structured Debt SPV 1 Limited ("SPV1") was incorporated in Guernsey on 27 September 2007 and commenced trading on 30 May 2008. On 29 December 2010, when this Subsidiary no longer had any holdings, SPV1 was voluntarily liquidated.

 

PSD SPV 2, Inc ("SPV2") was incorporated in the State of Delaware on 2 April 2009. The Subsidiary commenced trading on 1 May 2009. SPV2 was established to hold certain US assets. For reasons of tax efficiency, the Group proposes to make newly originated direct investments and enter into co-investments through this Subsidiary.

 

Any references to Company relate to PSource Structured Debt Limited whereas references to the Group include PSource Structured Debt Limited, SPV1 and SPV2.

 

2.   Principal Accounting Policies:

 

(a)  Basis of Preparation:

 

(i) General

The financial statements give a true and fair view, they have been prepared in accordance with International Financial Reporting Standards ("IFRS") and are in compliance with the Companies (Guernsey) Law, 2008 and the Listing Rules of the UK Listing Authority.

 

The financial statements of the Group have been prepared under the historical cost convention modified by the revaluation of investments and assets and liabilities at fair value through profit or loss, in accordance with IFRS.

 

(ii) Functional and Presentation Currency

The Group's investors are mainly from the UK, however, the vast majority of underlying investment portfolio is denominated in US Dollars. For this reason Directors consider the presentation and functional currency of the Group to be US Dollars. As at 30 June 2011 the performance of the Group is measured and reported to investors in US Dollar. The financial information is presented in US Dollars, which is the Group's functional and presentation currency.

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Statement of Comprehensive Income. Translation differences on the revaluation of non-functional currency financial instruments are included in net unrealised gains and losses on investments and are recognised in the Consolidated Statement of Comprehensive Income.

 

(iii) Judgements and estimates

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results could differ from such estimates.

 

The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate was revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









2.  Principal Accounting Policies, continued:

 

(a)  Basis of Preparation, continued:

 

(iii) Judgements and estimates, continued

The most critical judgements, apart from those involving estimates, that management has made in the process of applying the accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements are the functional currency of the Group (see note 2(a)(ii)) and the fair value of investments designated to be at fair value through profit or loss (see note 2(d)(iii)). The valuation methods/techniques used in valuing financial instruments involve critical judgements to be made and therefore the actual value of financial instruments could differ significantly from the value disclosed in these consolidated financial statements.

 

(iv) Going concern

These consolidated financial statements have been prepared on a going concern basis, despite the existence of a continuation vote to be held at the AGM on 31 October 2011.

 

The Company remains susceptible to the result of this continuation vote.  Should the outcome of the vote be to discontinue the Company there can be no certainty, particularly given current market conditions, that the realisation of assets of the Company would be at amounts shown in these financial statements.  The financial statements do not include any adjustments that would result from a change of basis of preparation.

 

(v) IFRS

New standards and interpretations adopted

The Group has adopted the following new and amended standards and interpretations, which are applicable to the Group's operations, for the accounting period commencing 1 July 2010:

 

§ Improvements to IFRSs 2009 - various standards (effective 1 January 2010)

§ Amendments to IFRS 1 - Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters (effective 1 July 2010)

§ Improvements to IFRSs 2010 - various standards (effective 1 July 2010)

 

Significant new standards and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are not yet effective for the current year, and have not been applied in preparing these financial statements. None of these will have a significant effect on the financial statements of the Company, with the exception of the following:

 

§ IFRS 9 Financial Instruments, published on 12 November 2009 (effective 1 January 2013) as part of phase I of the IASB's comprehensive project to replace IAS 39, deals with classification and measurement of financial assets. The requirements of this standard represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset's contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value.

 

The standard eliminates the existing IAS 39 categories of held to maturity, available for sale and loans and receivables. For an investment in an equity instrument which is not held for trading, the standard permits an irrevocable election, on initial recognition, on an individual share-by-share basis, to present all fair value changes from the investment in other comprehensive income. No amount recognised in other comprehensive income would ever be reclassified to profit or loss at a later date. However, dividends on such investments are recognised in profit or loss, rather than other comprehensive income unless they clearly represent a partial recovery of the cost of the investment. Investments in equity instruments in respect of which an entity does not elect to present fair value changes in other comprehensive income would be measured at fair value with changes in fair value recognised in profit or loss.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









2.   Principal Accounting Policies, continued:

 

(a)  Basis of Preparation, continued:

 

(v) IFRS, continued

Significant new standards and interpretations not yet adopted, continued

 

§ IFRS 9 Financial Instruments, continued, the standard requires that derivatives embedded in contracts with a host that is a financial asset within the scope of the standard are not separated; instead the hybrid financial instrument is assessed in its entirety as to whether it should be measured at amortised cost or fair value.

 

The Directors' are currently in the process of evaluating the potential effect of this standard. The standard is not expected to have a significant impact on the financial statements since the majority of the Company's financial assets are designated at fair value through profit or loss.  The amendments will become will become mandatory for the Company's 30 June 2014 financial statements.

 

Other new standards and interpretations not yet adopted

§ IAS 24 - Related Party Disclosures (Revised 2009) (effective 1 January 2011)

§ Improvements to IFRSs 2010 - various standards (effective 1 July 2010)

 

The Directors believe that other pronouncements, which are in issue but not yet operative or adopted by the Company, will not have a material impact on the financial statements of the Group.

 

(b)  Basis of Consolidation:

The consolidated financial statements of the Group incorporate the financial statements of the Company and its wholly owned subsidiary made up to 30 June 2011. There are no minority interests in the income or assets of the subsidiaries. Control is achieved where the Company has the power to govern the financial and operating policies of the subsidiaries so as to benefit the Company. The accounting policies of the Subsidiary are consistent with those adopted by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

 

(c)   Income

Bank interest, loan interest income and other income are included in these consolidated financial statements on an accruals basis, using the effective interest method.

 

Where interest income falls past due it is assessed for impairment and where impairment is identified a 0-100% provision is made, on a case by case basis after the recoverability of each interest receipt has been assessed.

 

Subordination fee income is included in these consolidated financial statements on an accruals basis and is recognised in the Consolidated Statement of Comprehensive Income.

 

(d)   Investments:

The Group's investments comprise loans, fees receivables, royalties, equities, warrants (for listed equities) and options (for listed equities).

 

(i) Classification

Equity investments have been designated as fair value through profit or loss in accordance with IAS 39 (Revised) "Financial Instruments: Recognition and Measurement".

 

Warrants and penny warrants investments meet the definition of "Derivatives" under IAS 39 and have been designated as held for trading in accordance with IAS 39 (Revised) "Financial Instruments: Recognition and Measurement". They are accounted for as fair value through profit or loss.

 

Investments in loans, royalties and fees receivable have been classified as loans and receivables in accordance with IAS 39 (Revised) "Financial Instruments: Recognition and Measurement".

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









2.   Principal Accounting Policies, continued:

 

(d)   Investments, continued:

 

(ii) Measurement

Equities, warrants and penny warrants are initially recognised at fair value. Transaction costs are expensed in the Consolidated Statement of Comprehensive Income. Subsequent to initial recognition, equity, warrants and penny warrants are measured at fair value. Realised gains and losses on disposal of investments, where the disposal proceeds are higher/lower than the book cost of the investment are presented in the Consolidated Statement of Comprehensive Income in the period in which they arise. Unrealised gains and losses arising on the fair value of investments are presented in the Consolidated Statement of Comprehensive Income in the period in which they arise. Dividend income, if any, from equity investments is recognised in the Consolidated Statement of Comprehensive Income within dividend income when the Group's right to receive payments is established.

 

Loans and royalties are initially recognised at fair value, which at the point of acquisition is equal to cost, less any directly attributable transaction cost. Subsequent to initial recognition, loans are measured at amortised cost using the effective interest rate method. Royalties are measured at the discounted value of future cash flows. Fee receivables are measured at fair value.

 

Loans are carried at amortised cost and reviewed for impairment in accordance with IAS 39 (see note 2(e)).

 

(iii) Fair Value Estimation

Quoted equity investments at fair value through profit or loss are valued at the bid price on the relevant stock exchange.

 

Unquoted investments at fair value through profit and loss are valued in accordance with the International Private Equity and Venture Capital valuation guidelines or any other valuation model and techniques which can provide a reasonable estimate of fair value of the investment involved.

 

(iv) Recognition/derecognition

All regular way purchases and sales of investments are recognised on trade date - the date on which the Company commits to purchase or sell the investment. Investments are derecognised when the rights to receive cash flows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership.

 

(e)   Impairment of financial assets:

Financial assets are assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

 

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

 

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

 

All impairment losses are recognised in the Consolidated Statement of Comprehensive Income.

 

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. The reversal is recognised in the Consolidated Statement of Comprehensive Income.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









2.   Principal Accounting Policies, continued:

 

 (f)    Expenses:

Expenses are accounted for on an accruals basis.

 

(g)   Cash and Cash Equivalents:

Cash and cash equivalents are defined as cash in hand, demand deposits and highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value.  For the purposes of the Consolidated Statement of Cash Flows cash and cash equivalents consist of cash in hand, deposits in bank and overdrafts.

 

(h) Other Receivables and Other Payables:

Other receivables are stated at amortised cost less any provision for doubtful debts. Other payables are stated at amortised cost.

 

(i)  Segment Reporting:

The Board has considered the requirements of IFRS8. The Board, as a whole, has been determined as constituting the chief operating decision maker ("CODM") of the Group.

 

The Board is charged with setting the Group's investment strategy in accordance with the Prospectus. They have delegated the day to day Investment Management of the Group to the Investment Manager, under the terms set out in the Investment Management Agreement, but the Board retains the responsibility to ensure that adequate resources of the Group are directed in accordance with their decisions. All investment recommendations made by the Investment Manager are reviewed by the Board for compliance with the policies and legal responsibilities of the Directors and the provisions of the Prospectus. Only after such reviews have been satisfactorily conducted will the Board approve the investments recommendations. The Board therefore retains full responsibility for the allocation decisions made on an ongoing basis.  Pursuant to the terms of the Investment Management Agreement the Investment Manager is obliged to comply with the investment strategy detailed in the Prospectus. This strategy sets out guidelines for proposed investments and the procedures that the Investment Manager is required to follow in dealing with the Group's assets. These guidelines and procedures are regularly reviewed and can be altered by the Board if it considers it appropriate to do so.

 

The key measure of performance used by the Board in its capacity of CODM, is to assess the Group's performance and to allocate resources based on the total return of each individual investment within the Group's portfolio, as opposed to geographic regions. As a result, the Board is of the view that the Group is engaged in a single segment of business, being investment in a diversified portfolio of asset backed loans and debt made predominantly to, and equity warrants and similar instruments issued predominately by, publicly traded small and micro-cap companies in the US and Canada. Therefore, no reconciliation is required between the measure of gains or losses used by the Board and that contained in these consolidated financial statements.

 

Information on realised gains and losses derived from sales of investments are disclosed in Note 7 to the financial statements.

 

The Group has no assets classified as non-current assets. An analysis of the significant investments held by the Company is given on page 51, in addition to the industry and geographic location analysis of the investments which are given on page 56 and 57 respectively.

 

The Company has a diversified shareholder population and no individual investor is known to own more than 19.39% (as at 19 August 2011) of the issued capital of the Company as disclosed in the Directors' Report.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2010









3.   Taxation:

The Income Tax Authority of Guernsey has granted the Company exemption from Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 and the income of the Company may be distributed or accumulated without deduction of Guernsey income tax.  Exemption under the above mentioned Ordinance entails payment by the Company of an annual fee of £600.  It should be noted, however, that interest and dividend income accruing from the Company's investments may be subject to withholding tax in the country of origin. With effect from 1 January 2008 the standard rate of income tax for most companies in Guernsey is zero per cent. Tax Exempt status continues to exist and the Company has been granted this status for 2010 and 2011. The Company has not suffered any withholding tax in the period.

 

PSD SPV 2, Inc is a Delaware corporation and subject to US taxation. As such, PSD SPV 2, Inc will suffer taxes on realised capital gains and income generated by assets which it holds, to the extent that pre-tax earnings are not offset by expenses and realised losses. Moreover, as generated by a business wholly-owned by the Company, distributions of pre-tax earnings of PSD SPV 2, Inc to the Company (e.g. any interest payments on intercompany loans) will likely be subject to a withholding tax.

 

To the extent permissible, the Company will seek to minimise the income tax and withholding tax suffered, although for accounting purposes, no benefits have been assumed. A 35% income tax liability is accrued against any income and capital gains accrued by PSD SPV 2, Inc, and a 30% withholding tax liability is accrued against any interest accruals related to intercompany loans between PSD SPV 2, Inc and the Company. An accrued asset of US$16,308 (30 June 2010: US$8,966 liability) associated with income tax rebates and withholding tax rebates related to PSD SPV 2, Inc has been made as at 30 June 2011.

 

4.   Material Agreements & Related Parties:

The Company is responsible for the continuing fees of the Manager, the Investment Manager, the Administrator, the Registrar, the Custodian and the Independent Valuation Consultant in accordance with the Management, Investment Management, Administration, Registrar, Custodian and Independent Valuation Consultant's Agreements.

 

Management Agreement

Pursuant to the provisions of the Management Agreement, the Manager is entitled to receive a management fee during the year at 2.0% per annum of the net asset value of the Company. This fee is paid monthly in arrears. As at 30 June 2011, the management fee creditor was US$162,453 (30 June 2010: US$185,603).

 

In addition the Manager is entitled to a Performance Fee in respect of any Performance Fee Period in which the Performance Trigger has been achieved.  If the Performance Trigger is achieved, the Performance Fee shall equal 20 per cent of the amount by which the Total Return NAV per Ordinary Share exceeds the NAV per Ordinary Share at the end of the previous Performance Fee Period, multiplied by the time-weighted average number of Ordinary Shares in issue during the relevant Performance Fee Period.  If there has not been any previous Performance Fee Period the Performance Fee shall equal 20 per cent of the amount if any by which the Total Return NAV per Ordinary Share exceeds the NAV per Ordinary Share (calculated net of all initial expenses payable by the Company) on the Effective Date (date of Admission of the Company), multiplied by the time-weighted average number of Ordinary Shares in issue during the relevant Performance Fee Period. As at 30 June 2011, the Performance Fee creditor was US$5,581,184 (30 June 2010: US$5,581,184). In January 2010, the Manager agreed to defer payment of the Performance Fee owed by the Group until such time as the Group has resumed dividend payments.

 

Administration Agreement

Pursuant to the provisions of the Administration Agreement, Praxis Fund Services Limited is entitled to receive an administration fee at an annualised rate of 0.16% up to £150 million, 0.12% for the following £100 million and 0.10% thereafter, subject to a monthly minimum of £4,500.  With regard to company secretarial services, the Administrator is compensated on a time cost basis.  This is estimated to be in the range of £30,000 to £35,000 per annum. As at 30 June 2011, the administration fee creditor was US$23,421 (30 June 2010: US$15,668).

 

Registrar Agreement

Pursuant to the provisions of the Registrar Agreement, Capita Registrars (Guernsey) Limited is entitled to a maintenance fee of £2.00 per shareholder (subject to an annual minimum maintenance fee of £5,000) together with various per deal fees per shareholder transactions. As at 30 June 2011, the registrar fee creditor was US$4,302 (30 June 2010: US$3,121).



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









4.   Material Agreements & Related Parties, continued:

 

Custodian Agreement

Pursuant to the provisions of the Custodial Agreement that was in place during the period, Wells Fargo Bank will be entitled to receive a custodian fee as follows:

 

Wells Fargo Bank                                                               

 

·      US$30,000 acceptance fee; plus

·      US$30,000 annual administration fee; plus

·      US$30 per asset annual custody fee; plus

·      various activity fees.

 

Effective from 26 November 2010, the Company migrated its custody and clearing services for its short term trading assets from Fidelity Prime Services to Albert Fried & Company, LLC. Albert Fried & Company, LLC is entitled to receive various activity based fees for its services to the Company. During the period Albert Fried & Company, LLC were entitled to receive US$6,004 in respect of such services.

 

Effective 1 December 2010, the Company migrated its trading services from Fidelity to GP Nurmenkari Inc.. GP Nurmenkari Inc. is entitled to receive various activity based fees for its services to the Company. During the period GP Nurmenkari Inc. were entitled to receive US$1,878 in respect of such services.

 

In addition to the above agreements, during the period the Group paid US$6,064 to Fidelity Prime Services for custodial services provided in respect of the Group's short term trading assets.

 

Independent Valuation Consultant

Pursuant to the provisions of the Independent Valuation Consultant's Agreement between the Company and Clayton IPS Corporation ("Clayton"). Clayton has agreed to provide a monthly and quarterly valuation of the assets of the Company. For these services Clayton is entitled to a fee of US$10,000 for each monthly valuation. As at 30 June 2011, the independent valuation consultancy fee creditor was US$9,507 (30 June 2010: US$20,331).

 

Master Agreement

The Master Agreement dated 31 July 2007 (and as subsequently amended on 1 September 2007 and 29 October 2007) between the Company and Laurus Master Fund Ltd which governs the terms on which Laurus Master Fund Ltd may, from time to time, offer investments for sale to the Company and the Company may, if it wishes, accept such offers of investments (including the Initial Portfolio). The Company shall not be obliged to accept such an offer, but is entitled to accept the offer in respect of one or more of the investments offered. Investments will be offered on the basis of an agreed valuation methodology set out in the Agreement.

 

The Laurus Master Fund Ltd makes a number of representations and warranties in the Master Agreement in respect of the investments that it offers to the Company.

 

Under the Master Agreement ongoing investments made by the Company may include purchases from Laurus Master Fund Ltd and other affiliates of the Investment Adviser, subject to approval by the Board of Directors or a duly authorised committee of the Board.

 

The Company entered into a similar Master Agreement with Valens Offshore SPV I Ltd (4 September 2007 and amended on 29 October 2007) and Valens US SPV 1, LLC (19 October 2007 and amended on 29 October 2007). Valens Offshore SPV I Ltd and Valens US SPV 1, LLC are managed by an affiliate of the Investment Manager, Valens Capital Management, LLC.

 

Related Party Transactions

During prior years the Company had undertaken investment transactions with Laurus Master Fund Ltd, Calliope Capital Corporation, Erato Corp, Promethean Industries, Inc and Valens Offshore SPV I Ltd, being other affiliates of the Investment Manager, under the terms of the Master Agreements.

 

There were no purchase or sales transactions with related parties for the year ended 30 June 2011 (30 June 2010: none).



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









4.   Material Agreements & Related Parties, continued:

 

Directors' and Other Related Parties' Interests

As at 30 June 2011, the interests of the Directors and their families who held office during the year are set out below:

 


30 June 2011


30 June 2010


Ordinary Shares


Ordinary Shares

William Scott (Chairman)

50,000


50,000

Peter Niven

30,000


30,000

Soondra Appavoo

20,000


20,000

Tim Jenkinson

50,000


50,000

Keith Dorrian

-


-

 

There were no changes in the interests of the Directors prior to the date of this report.

 

No Director, other than those listed above, and no connected person of any Director has any interest, the existence of which is known to, or could with reasonable diligence be ascertained by that Director, whether or not held through another party, in the share capital of the Company.

 

As at 30 June 2011, the Investment Manager held 500,000 (30 June 2010: 500,000) Ordinary Shares in the Company.

 

5.   Directors' Fees:

Each of the Directors has entered into an agreement with the Company providing for them to act as a non-executive director of the Company. Their annual fees, excluding all reasonable expenses incurred in the course of their duties which were reimbursed by the Company were as follows:

 


30 June 2011


30 June 2010


Annual Fee


Annual Fee


£


£

William Scott (Chairman)

30,000


30,000

Soondra Appavoo

-


-

Peter Niven (Audit Committee chairman)

27,000


27,000

Tim Jenkinson

25,000


25,000

Keith Dorrian

25,000


25,000

 

Mr Appavoo has waived his Director's fees for the year. As at 30 June 2011 the Directors' fees creditor was US$42,139 (30 June 2010: US$1,853).

 

6.   Basic & diluted (deficit)/earnings per Ordinary Share:

Basic (deficit)/earnings per Ordinary Share is based on the net deficit for the year of US$14,058,015 (30 June 2010: US$12,131,778 return) and on a weighted average of 59,564,681 (30 June 2010: 59,564,681) Ordinary Shares in issue.

 

Diluted (deficit)/earnings per Ordinary Share is the same as basic (deficit)/earnings per Ordinary Share since there are no dilutive potential Ordinary Shares arising from financial instruments.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









7.   Investments:

 

Fair Value Through Profit or Loss Investments:

30 June 2011


30 June 2010


US$


US$

Investments listed on recognised investment exchanges

2,285,132


5,122,205

Unlisted investments

81,524,576


87,513,318


83,809,708


92,635,523





Opening fair value

92,635,523


46,012,447

Converted from loans

171,835


458,114

Converted to loans

(2,767,279)


-

Converted from fee receivables

-


896,147

Converted from warrants

-


2,926,747

Converted from penny warrants

-


3,038,184

Exercises of warrants

488,038


-

Purchases

530,357


1,383,093

Sales - proceeds

(6,555,967)


(1,722,123)

Sales - realised gains/(losses) on disposals

1,773,638


(1,641,034)

Movement in net unrealised (loss)/gain

(2,466,437)


41,283,948

Closing fair value at 30 June

83,809,708


92,635,523





Closing book cost at 30 June

16,939,089


23,298,467

Closing net unrealised gain

66,870,619


69,337,056

Closing fair value at 30 June

83,809,708


92,635,523

 

Held for Trading Investments:

30 June 2011


30 June 2010


US$


US$

Unlisted investments

1,210,737


2,834,377





Opening fair value

2,834,377


19,000,009

Converted to equity

-


(5,964,931)

Sales - proceeds

(351,781)


(443,508)

Sales - realised losses on disposals

(2,775,572)


(3,176,744)

Exercise of warrants

(488,038)



Movement in net unrealised gain/(loss)

1,991,751


(6,580,449)

Closing fair value at 30 June

1,210,737


2,834,377





Closing book cost at 30 June

27,332,055


30,947,446

Closing net unrealised loss

(26,121,318)


(28,113,069)

Closing fair value at 30 June

1,210,737


2,834,377

 

Warrants and penny warrants are valued based on the listed price of the equity for which the warrants and penny warrants relates and then adjusted using the Black Scholes method. The Directors consider it prudent to apply certain discounts (7% against the value of penny warrants and 30% against the value of standard warrants) when valuing warrants and penny warrants for the purposes of calculating the Company's issued monthly NAV and for these consolidated financial statements due to their illiquid nature and the fact that there is no active market to trade these warrants and penny warrants.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









7.   Investments, continued:

 

Loans and Receivables:

30 June 2011


30 June 2010


US$


US$

Loans

21,126,349


30,031,017





Opening carrying value

30,031,017


48,475,029

Loans converted to equity

(171,835)


(458,114)

Loans converted from equity

2,767,279


-

Fee receivables converted to equity

-


(896,147)

Purchases

19,436


577,880

Repayments/restructuring of loans - proceeds

(1,390,476)


(8,288,795)

Repayments/restructuring of loans/fee receivables - realised losses on repayments/restructuring

 

(1,917,592)


 

(9,200,721)

Movement in unrealised (losses)/gains on restructuring of loans

(1,783,159)


994,160

Movement in impairment charge

(6,428,322)


(646,633)

Movement in net unrealised loss on royalties, fee receivables and fee/proceeds receivable

 

-


 

(525,641)

Closing carrying value at 30 June

21,126,349


30,031,017





Closing book cost at 30 June

32,765,416


33,458,603

Closing unrealised gains on restructuring of loans

1,718,200


3,501,359

Impairment charge

(13,357,267)


(6,928,945)

Closing carrying value at 30 June

21,126,349


30,031,017

 

Total Investments:

30 June 2011


30 June 2010


US$


US$

Investments listed on recognised investment exchanges

2,285,132


5,122,205

Unlisted investments

82,735,313


90,347,695

Loans

21,126,349


30,031,017


106,146,794


125,500,917





Opening fair/carrying value

125,500,918


113,487,485

Purchases

549,793


1,960,973

Sales - proceeds

(6,907,748)


(2,165,631)

Sales - realised losses on disposals

(1,001,934)


(4,817,778)

Repayments/restructuring of loans - proceeds

(1,390,476)


(8,288,795)

Repayments/restructuring of loans/fee receivables - realised (losses)/gains on repayments/restructuring

 

(1,917,592)


 

(9,200,721)

Movement in unrealised (losses)/gains on restructuring of loans

(1,783,159)


994,160

Movement in impairment charge

(6,428,322)


(646,633)

Movement in net unrealised gains

(474,686)


34,177,858

Closing fair/carrying value at 30 June

106,146,794


125,500,917





Closing book cost at 30 June

77,036,560


87,704,516

Closing unrealised gains on restructuring of loans

1,718,200


3,501,359

Impairment charge

(13,357,267)


(6,928,945)

Closing net unrealised gain

40,749,301


41,223,987

Closing fair value/carrying at 30 June

106,146,794


125,500,917

 

As at 30 June 2011 the Directors identified impairment charges on loans and receivables, in accordance with IAS 39, due to an underlying investment filing for chapter 11 bankruptcy. This resulted in the investments being written down by a further US$6,428,322 during the year (30 June 2010: US$646,633). This impairment charge is reflected in the Consolidated Statement of Comprehensive Income.

 

               

PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









8.   Cash and Cash Equivalents:


30 June 2011


30 June 2010


US$


US$

Bank deposits

280,038


194,315

Bank overdrafts (see note 11)

(790,281)


(1,136,519)


(510,243)


(942,204)

 

9.   Other Receivables:


30 June 2011


30 June 2010


US$


US$

Loan interest & fee receivables*

2,384,950


1,600,591

Prepayments

22,177


19,364

US Tax receivable

16,308


-


2,423,435


1,619,955

 

The Directors consider that the carrying amount of other receivables approximates fair value.

 

10.  Other Payables:


30 June 2011


30 June 2010


US$


US$

Management fee payable

162,453


185,603

Performance fee

5,581,184


5,581,184

Administration fee

23,421


15,668

Audit fee

86,606


104,615

Loan interest payable

-


21,615

US Tax payable

-


8,966

Other payables

81,663


75,729


5,935,327


5,993,380

 

      The Directors consider that the carrying amount of other payables approximates fair value.

 

11.  Loan and Overdraft:

As at 30 June 2011, the Company had credit facilities with Bank of Scotland plc ("Bank of Scotland"), in accordance with facility agreement dated 30 November 2007 and supplemental restatement facility agreement (utilisation date 31 May 2011). The facilities comprise a US$6.5million term note and a US$1.5million committed overdraft. The key terms of these facilities are as follows:

 

§  Facility available for 3 months from 31 May 2011;

§  Interest is chargeable at a rate of the US 3 month LIBOR plus 6% per annum;

§  No fixed amortisation;

§  Cash sweep equal to 80% of monthly free cashflow;

§  No net debt/gross asset covenants;

§  Margin ratchet applicable based on repayment schedule set out in agreement; and

§  Dividend payments permitted by the Company, subject to approval by Bank of Scotland.

 

A further condition to the amendment and restatement of the facility agreement (utilisation date 31 May 2011), the Company's subsidiary, PSD SPV 2, Inc. ("SPV2"), would accede to the facility agreement as a guarantor and grant security over its assets in favour of the Bank. In turn, the Company was required to grant security over its shares in SPV2 in favour of the Bank.

 

As at 30 June 2011, the Company's outstanding loan balance was US$3,867,480 (30 June 2010: US$7,484,003) and the overdraft balance was US$790,281 (30 June 2010: US$1,136,519). The above credit facility is secured against the Company's investment portfolio.

 

The above facility was replaced on 1 September 2011 with an amended banking facility. See note 18 for full details.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









12.  Share Capital and Distributable Reserve:


30 June 2011

 &

30 June 2010

Authorised Share Capital

US$

Unlimited Ordinary and Qualifying C Shares of no par value

-


-

 


30 June 2011


30 June 2010

Allotted, issued and fully paid

US$


US$

59,564,681 (30 June 2010: 59,564,681) Ordinary Shares of no par value each

 

-


 

-






1 July 2010

to

30 June 2011


1 July 2009

to

30 June 2010


No.


No.

Carried forward

59,564,681


59,564,681





Share premium

US$


US$

Brought forward & carried forward

47,512,742


47,512,742





Distributable reserve

US$


US$

Brought forward & carried forward

42,793,973


42,793,973

 

The Ordinary Shareholders shall have the following rights:

 

(i)         Dividends

During the period Shareholders (other than the Company itself where it holds its own Shares as treasury Shares) are entitled to receive, and participate in, any dividends or other distributions out of the profit of the Company available for dividend and resolved to be distributed in respect of any accounting period or other income or right to participate therein.

 

(ii)         Winding up

On a winding up, Shareholders (other than the Company itself where it holds its own Shares as treasury Shares) shall be entitled to the surplus assets remaining after payment of all the creditors of the Company.

 

(iii)        Voting

Shareholders (other than the Company itself where it holds its own Shares as treasury Shares) shall have the right to receive notice of and to attend and vote at general meetings of the Company and each Shareholder being present in person or by proxy or by a duly authorised representative (if a corporation) at a meeting shall upon a show of hands have one vote and upon a poll each such holder present in person or by proxy or by a duly authorised representative (if a corporation) shall have one vote in respect of every Ordinary Share held by him.

 

On 27 July 2007, an ordinary resolution was passed at an extraordinary general meeting of the Shareholders approving the cancellation of the entire amount which will stand to the credit of the share premium account immediately after the Placing, conditionally upon the issue of the Shares and the payment in full thereof and with respect to any further issue of Shares. The cancellation was confirmed by the Royal Court on 25 January 2008 that the surplus thereby created formed a distributable reserve.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









12.  Share Capital and Distributable Reserve, continued:

By a resolution dated 2 November 2009, the holders of the Subscriber Shares in the Company granted the Company the authority to make market purchases of up to 14.99% of its own issued Ordinary Shares. A renewal of the authority to make purchases of Ordinary Shares is sought from Shareholders at each annual general meeting of the Company.

 

Following closing of an Offer for Subscription on 18 June 2008, the Placing and the Offer raised £26.53 million (net of placing costs) and on 20 June 2008, 24,154,681 additional Ordinary Shares in the Company were admitted to the Official List of the London Stock Exchange.

 

On 30 July 2008, the Company issued 5,410,000 Ordinary Shares of no par value, representing 9.9% of the Ordinary Shares in issue. These Ordinary Shares were issued and admitted to the Official List on the London Stock Exchange for trading on the same day.

 

Re-Designation of Sterling Shares into US Dollar Shares

On 30 January 2009, a special resolution was passed by the shareholders so that the sterling currency of all of the issued Sterling Shares of the Sterling Class be re-designated into the U.S. Dollar currency in accordance with article 3.12 of the Company's Articles of Association at an exchange rate of US$1.4593/£ calculated as at 31 December 2008.

 

Capital Management

Under its Articles of Incorporation, The Company has the ability to borrow up to 30% of net assets in order to implement any hedging and buyback strategies and to meet ongoing expenses (please refer to note 11).

 

13.  Net Asset Value per Ordinary Share:

The net asset value per Ordinary Share is based on the net assets attributable to Ordinary shareholders of US$98,650,109 (30 June 2010: US$112,708,124) and on the year end Ordinary Shares in issue of 59,564,681 (30 June 2010: 59,564,681).

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









14.  Financial Instruments:

 

(a)   Categories of financial instruments:

 


30 June 2011

30 June 2010


 

 

 

 

Fair Value

Percentage of net assets attributable to Ordinary Shareholders

 

 

 

 

Fair Value

Percentage of net assets attributable to Ordinary Shareholders

Assets

US$

%

US$

%

Financial assets at fair value through profit or loss:





  Listed equity securities

2,285,132

2.32

5,122,205

4.54

  Unlisted equity securities

81,524,576

82.64

87,513,318

77.65

  Warrants

1,021,683

1.03

1,852,177

1.64

  Penny warrants

189,054

0.19

982,200

0.87


85,020,445

86.18

95,469,900

84.70






  Cash and cash equivalents

280,038

0.28

194,315

0.17






Loans and receivables*:





  Loans

21,126,349

21.42

30,031,017

26.65






  Unsettled investment sales

392,930

0.40

6,839

0.01

  Other receivables

2,423,435

2.46

1,619,955

1.44







109,243,197

110.74

127,322,026

112.97

Liabilities





  Cash and cash equivalents (bank overdrafts)

 

(790,281)

(0.80)

 

(1,136,519)

(1.01)

  Loan

(3,867,480)

(3.92)

(7,484,003)

(6.64)

  Other payables

(5,935,327)

(6.02)

(5,993,380)

(5.32)







(10,593,088)

(10.74)

(14,613,902)

(12.97)

 

*The Directors deem that the carrying value of loans and receivables at amortised cost, written down where appropriate for known impairments, is not considered to be materially different from fair value.

 

(b)   Net gains and losses on financial instruments:

 

 

 

 

 

 

Year ended 30 June 2011

Movement in net unrealised

gains/(losses) and unrealised foreign exchange gains on translation

 

Net realised (losses)/gains on disposals/loan repayments

 

 

 

Movement in

Impairment charge

 

Movement in unrealised losses on restructuring of loans


US$

US$

US$

US$

Financial assets at fair value through profit or loss:





  Listed equity securities

(1,924,825)

-

-

-

  Unlisted equity securities

(541,612)

1,773,638

-

-

  Warrants

2,660,213

(2,654,639)

-

-

  Penny warrants

(668,462)

(120,933)

-

-


(474,686)

(1,001,934)

-

-






Loans and receivables:





  Loans

-

(1,917,592)

(6,428,322)

(1,783,159)







(474,686)

(2,919,526)

(6,428,322)

(1,783,159)



PSOURCE STRUCTURED DEBT LIMITED

Notes to the FinancialStatements, continued

For the year ended 30 June 2011









14.  Financial Instruments, continued:

 

(b)    Net gains and losses on financial instruments, continued:

 

 

 

 

 

 

Year ended 30 June 2010

Movement in net unrealised

gains/(losses) and unrealised foreign exchange gains on translation

 

Net realised (losses)/gains on disposals/loan repayments

 

 

 

Movement in

Impairment charge

 

Movement in unrealised gain on restructuring of loans


US$

US$

US$

US$

Financial assets at fair value through profit or loss:





  Listed equity securities

42,335,279

(252,998)

-

-

  Unlisted equity securities

(1,051,331)

(1,388,036)

-

-

  Warrants

(4,929,891)

(3,176,744)

-

-

  Penny warrants

(1,650,558)

-

-

-


34,703,499

(4,817,778)

-

-






Loans and receivables:





  Loans

-

(8,404,157)

(1,443,197)

994,160

  Fee receivables

-

-

-

-

  Royalties

(525,641)

-

-

-

  Receivable

-

(796,564)

796,564

-


(525,641)

(9,200,721)

(646,633)

994,160







34,177,858

(14,018,499)

(646,633)

994,160

 

(c)   Derivatives:

The following tables detail the Group's aggregate investments in derivative contracts, by maturity, outstanding as at 30 June 2011.

 

Penny Warrants

 


30 June 2011


30 June 2010

Maturity


Fair Value


US$


US$

3-5 years

7,417


16,474

5-10 years

70,097


154,229

>20 years

111,540


811,497

Total

189,054


982,200

 

A penny warrant is a derivative financial instrument with similar economic characteristics to the underlying equity instrument which gives the right, but not the obligation to buy a specific amount of a given stock, at a specified price (strike price) during a specified period (American option) or on a specific date (European option). The fair value of the penny warrants are included in options classified as financial assets at fair value through profit or loss disclosed in note (a) above. All the penny warrants the Group owns have an exercise price of US$0.01 or less (quasi equities) and are valued at a 7% discount to net intrinsic value (see note 2(d) (iii)).

 

Warrants

 


30 June 2011


30 June 2010

Maturity


Fair Value


US$


US$

< 1 year

363,540


381,449

1-3 years

514,362


841,142

3-5 years

31,590


357,505

5-10 years

20,714


152,664

10-15 years

91,477


119,417

Total

1,021,683


1,852,177

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









14.  Financial Instruments, continued:

 

(d)   Derivatives, continued:

 

Warrants, continued

A warrant is a derivative financial instrument which gives the right, but not the obligation to buy a specific amount of a given stock, at a specified price (strike price) during a specified period (American option) or on a specific date (European option). The fair value of warrants are included in warrants classified as financial assets at fair value through profit or loss disclosed in note (a) above. The warrants are valued at a 30% discount to Black Scholes value (see note 2(d) (iii)).

 

Forward foreign currency swaps

 

As at 30 June 2011 and 30 June 2010, the Group had no outstanding forward foreign currency swaps.

 

In accordance with the Group's scheme particulars the Group may invest in forward foreign exchange contracts for the purpose of efficient portfolio management.

 

15.  Financial Risk Management:

 

      Strategy in Using Financial Instruments:

The Group's investment objective is to seek to provide a total return of 10-15 per cent per annum over a rolling 3-year period with annual standard deviation of less than 5 per cent, primarily through investing in a diversified portfolio of asset backed loans made predominantly to publicly traded small and micro-cap companies and equity warrants issued predominantly by publicly traded small and micro-cap companies. 

 

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, fair value, interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. These policies include the use of certain financial derivative instruments. The risk management policies employed by the Group to manage these risks are discussed below.

 

Market Price Risk:

Market price risk results mainly from the uncertainty about future prices of financial instruments held. It represents the potential loss the Group may suffer through holding market positions in the face of price movements and changes in interest rates or foreign exchange rates, with the maximum risk resulting from financial instruments being determined by the fair value of the financial instruments. The Group's investment portfolio is monitored by the Investment Manager, Investment Consultant and the Directors in pursuance of the investment objectives.

 

All investments present a risk of loss of capital. The profitability of a significant portion of the Group's investment program depends to a great extent upon correctly assessing the future course of movements in interest rates, currencies and other investments. There can be no assurance that the Investment Manager will be able to predict accurately these price movements. The Investment Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Group's portfolio and investment strategy is reviewed continuously by the Investment Manager, Investment Consultant and on a quarterly basis by the Board and the Manager.

 

By their nature, the Group's equity investments at fair value through profit and loss, and, warrants and penny warrants investments held for trading are directly exposed to market price risk. The Group's investments in loans and receivables are not directly subject to market price risk in the same way as equities and derivatives. By their nature there is no upside in the value of loans and receivables. However market conditions may dictate that loan investments need to be impaired. The Group's exposure to this risk is dealt with under credit risk.

 

The following details the Group's sensitivity to a 5% increase and decrease in market prices of equities, with 5% being the sensitivity rate used when reporting price risk internally to key management personnel and representing management's assessment of the possible changes in market prices.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









15.  Financial Risk Management, continued:

 

Market Price Risk, continued:

At 30 June 2011, the Group's market risk is affected by four main components: changes in actual market prices, credit risk, interest rate and foreign currency movements. Credit risk, interest rate and foreign currency movements are covered below. A 5% increase in the value of equity investments, with all other variables held constant, would bring about 4.25% or US$4,190,485 (30 June 2010: 4.11% or US$4,631,776) increase in net assets attributable to equity shareholders. If the value of equity investments had been 5% lower, with all other variables held constant, net assets attributable to equity shareholders would have fallen by 4.25% or US$4,190,485 (30 June 2010: 4.11% or US$4,631,776). Warrants and penny warrants by their nature may be more sensitive to changes in the value of the underlying equity instrument dependent upon a number of factors including time to expire and whether or not they are in the money or not. A 5% increase in the value of underlying equity prices for derivatives held, with all other variables held constant, would bring about a 0.14% or US$133,712 (30 June 2010: 0.17% or US$192,761) increase in net assets attributable to equity shareholders. A 5% decrease in the value of underlying equity prices for derivatives held, with all other variables held constant, would bring about a 0.13% or US$125,154 (30 June 2010: 0.16% or US$185,945) decrease in net assets attributable to equity shareholders.

 

Credit Risk:

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group, resulting in financial loss to the Group.

 

To the extent the Group invests in derivative instruments, certain types of options or other customised financial instruments or non-UK securities, the Group takes the risk of non-performance by the other party to the contract. This risk may include credit risk of the counterparty and the risk of settlement default. This risk may differ materially from those entailed in UK exchange-traded transactions which generally are supported by guarantees of clearing organisations, daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Transactions entered directly between two counterparties generally do not benefit from such protections and expose the parties to the risk of counterparty default. In addition, there are risks involved in dealing with the custodians or brokers who settle trades particularly with respect to non-UK investments.

 

At the reporting date financial assets exposed to credit risk include loan instruments, receivables and derivatives. It is the opinion of the Board of Directors that the maximum exposure to credit risk that the Group faces is equal to the carrying value of these financial instruments held by the Group.

 

The loan and receivable instruments are private loans and receivables with the underlying counterparties and as such do not have associated agency credit ratings. To mitigate the credit risk on these loan and receivable instruments the Directors consider impairment on an ongoing basis also taking into consideration the results of any reviews performed by Clayton. Clayton is employed to review a sample the of loan and receivable instruments on a monthly basis and report to the Board of Directors/Investment Manager any issues with regards to the valuation of the loan and receivable instruments in accordance with the Independent Valuation Consultant's Agreement. Any impairment on the loan and receivable instruments is written off to the Consolidated Statement of Comprehensive Income. As at 30 June 2011, impairment charges totaling US$13,357,267 (30 June 2010: US$6,928,945) had been written off to the Consolidated Statement of Comprehensive Income since the Group commenced trading (see note 2(e)).

 

The credit risk on cash transactions and transactions involving derivative financial instruments is mitigated by transacting with counterparties that are regulated entities subject to prudential supervision, or with high credit-ratings assigned by international credit-rating agencies.

 

In accordance with the investment restrictions as described in its Placing Document, the Group may not invest more than 10% of its total assets in any one underlying company (calculated at the time of any relevant investment being made).

 

As at 30 June 2011, the following amounts on debt instruments were past due:

 


30 June 2011



US$


US$

Principal default

4,912,865


2,150,820

Interest default

61,811


140,187

 

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









15.  Financial Risk Management, continued:

 

Credit Risk:

The Group has entered into certain agreements with affiliates of the Investment Manager in which the Group and the affiliates have investments in the same loan instruments. The Group has agreed to alter the allocation of cash principal and interest repayments in the event of a restructuring or liquidation of the entity in which the Group and affiliate(s) are invested. The agreements provide for the Group to receive upfront consideration from the affiliate(s) in exchange for reallocating the cash liquidation proceeds received by the Investment Manager in respect of the loan securities first to the affiliate(s) and secondly to the Group. This reallocation applies only to regular principal and interest, and not to any contingent amounts including default interest and fees.

 

The Group has mitigated the credit risk of these certain agreements by only entering into agreements related to loan instruments in which the collateral and/or operating strength of the invested companies was sufficiently in excess of the loan amounts outstanding such that doing so did not materially alter the credit risk of the loan instruments held by the Group. This determination of whether the loan instruments were sufficiently collateralised was made by Clayton IPS Corporation at the time of the agreements, and Clayton IPS Corporation continues to evaluate the loan instruments in the context of these agreements.

 

As at 30 June 2011, of the total loans held by the Group of US$21,126,349 (30 June 2010: US$30,031,017), US$9,270,719 (30 June 2010: US$10,902,976) were subordinated.

 

Liquidity Risk:

Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments.

 

The Group invests in loan notes and warrants that are not liquid and there may not be any secondary market for these instruments. Even though the warrants are generally convertible into securities listed on the national securities exchanges, quoted on NASDAQ or traded in the over-the counter markets or other markets (eg pink sheets), the instruments themselves are not liquid. In addition, the Group's assets (including the loan notes) may, at any given time, include securities and other financial instruments or obligations which are very thinly traded or for which no market exists or which are restricted as to their transferability under applicable securities laws. The sale of any such investments may be possible only at substantial discounts. Further, such investments may be extremely difficult to value with any degree of certainty.

 

The Group may also invest in private placements and other similar issues of securities (including investments in privately held companies).  This may involve a high degree of business and financial risk that can result in substantial losses. In addition, there is no existing market for the purchase and sale of such investments and the Group may not be able to readily sell such investments. Such investments may be subject to greater economic, business and market risks than the marketable securities of more well-established companies.

 

While the Investment Manager will attempt to spread the Group's assets among a number of investments in accordance with the investment policies adopted by the Group, at times the Group may hold a relatively small number of investments each representing a relatively large portion of the Group's net assets.  Losses incurred in such investments could have a materially adverse effect on the Group's overall financial condition. Whilst the Group's portfolio is diversified in terms of the companies in which it invests, the investment portfolio of the Group may be subject to more rapid change in value than would be the case if the Group were required to maintain a wide diversification among types of securities, countries and industry groups.

 

In particular the Group is exposed to its large holdings in Petrotech Holdings/PetroAlgae which constitutes 76.47% (30 June 2010: 64.92%) of the investment portfolio as at 30 June 2011.

 

At any given time, the Group may have significant investment in smaller and medium sized companies of a less seasoned nature whose securities are traded in the over-the-counter market.  These "secondary" securities often involve significantly greater risks than the securities of larger, better known companies. Such securities may not be liquid and there may be only a limited market for such securities.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









15.  Financial Risk Management, continued:

 

Liquidity Risk, continued:

The Group's liquidity risk exposure is moderated by the careful selection of securities and other financial instruments by the investment Manager. The Group's portfolio and investment strategy is reviewed continuously by the Investment Manager and on a quarterly basis by the Board. In addition the Directors will seek to review capital requirements on an annual basis.

 

The Group's principal financial commitment is its indebtedness to Bank of Scotland plc which facilities are due to expire on 29 February 2012, if it has not previously been reduced to zero. In the event that a replacement facility is not agreed with effect from that date, there is a risk that the Bank could enforce its security over the Group's portfolio which could result in losses for shareholders. Given the significant reduction in the size of the banking facility required by the Company during the financial year, the Board currently anticipate that the facilities will be renewed.


PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









15.  Financial Risk Management, continued:

 

Liquidity Risk, continued:

 

The following table details the maturity profile of the Group's financial instruments:

 

Maturity Analysis

 

At 30 June 2011

less than 1 year

1-3 years

3-5 years

5-10 years

> 10 years

No fixed maturity

Total

Assets

US$

US$

US$

US$

US$

US$

US$

Financial assets at fair value through profit or loss:








  Listed equity securities

-

-

-

-

-

2,285,132

2,285,132

  Unlisted equity securities

-

-

-

-

-

81,524,576

81,524,576

  Warrants

363,540

514,362

31,590

20,714

91,477

-

1,021,683

  Penny warrants

-

-

7,417

70,097

111,540

-

189,054


363,540

514,362

39,007

90,811

203,017

83,809,708

85,020,445









  Cash and cash equivalents

280,038

-

-

-

-

-

280,038









Loans and receivables:








Loans

11,100,719

5,114,482

312,750

-

-

4,598,398

21,126,349









Unsettled investment sales

392,930

-

-

-

-

-

392,930

Other receivables

2,423,435

-

-

-

-

-

2,423,435










14,560,662

5,628,844

351,757

90,811

203,017

88,408,106

109,243,197

Liabilities








  Cash and cash equivalents (Bank overdraft)

(790,281)

-

-

-

-

-

(790,281)









Loans and receivables:








  Loans

(3,867,480)

-

-

-

-

-

(3,867,480)









Other payables

(5,935,327)

-

-

-

-

-

(5,935,327)


(10,593,088)

-

-

-

-

-

(10,593,088)



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









15.  Financial Risk Management, continued:

 

Liquidity Risk, continued:

 

The following table details the maturity profile of the Group's financial instruments:

 

Maturity Analysis

 

At 30 June 2010

less than 1 year

1-3 years

3-5 years

5-10 years

> 10 years

No fixed maturity

Total

Assets

US$

US$

US$

US$

US$

US$

US$

Financial assets at fair value through profit or loss:








  Listed equity securities

-

-

-

-

-

5,122,205

5,122,205

  Unlisted equity securities

-

-

-

-

-

87,513,318

87,513,318

  Warrants

381,449

841,142

357,505

152,664

119,417

-

1,852,177

  Penny warrants

-

-

16,474

154,229

811,497

-

982,200


381,449

841,142

373,979

306,893

930,914

92,635,523

95,469,900









  Cash and cash equivalents

194,315

-

-

-

-

-

194,315









Loans and receivables:








Loans

12,140,217

6,677,336

329,096

-

-

10,884,368

30,031,017









Unsettled investment sales

6,839

-

-

-

-

-

6,839

Other receivables

1,619,955

-

-

-

-

-

1,619,955










14,342,775

7,518,478

703,075

306,893

930,914

103,519,891

127,322,026

Liabilities








  Cash and cash equivalents (Bank overdraft)

(1,136,519)

-

-

-

-

-

(1,136,519)









Loans and receivables:








  Loans

(7,484,003)

-

-

-

-

-

(7,484,003)









Other payables

(5,993,380)

-

-

-

-

-

(5,993,380)


(14,613,902)

-

-

-

-

-

(14,613,902)

 

 


PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









15.  Financial Risk Management, continued:

 

Interest Rate Risk:

The Group is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial instruments and future cash flows.

 

The Group is exposed to interest rate risk as it invests in loan instruments bearing interest at both fixed and floating interest rates. Other financial assets and liabilities exposed to interest rate risk include borrowings which are invested at long term interest rates and cash and cash equivalents which are invested at short term rates. The Investment Manager manages the Group's exposure to interest rate risk daily in accordance with the Group's investment objectives and policies, as disclosed on page 3. The Group's overall exposure to interest rate risk is monitored regularly by the Board of Directors.

 

The table below summarises the Group's exposure to interest rate risk:

 


30 June 2011

30 June 2010

 

 

Weighted average effective interest rate

 

 

Total

Weighted average effective interest rate

 

 

Total

Assets

%

US$

%

US$

Fixed rate equity (preference share holdings)

 

9.00

 

7,198,510

 

9.48

 

11,086,618

Fixed interest rate unlisted loan instruments

 

6.14

 

8,135,236

 

0.80

 

12,574,303

Floating interest rate unlisted loan instruments

 

5.30

 

12,991,113

 

6.38

 

17,456,714

Floating interest rate cash and cash equivalents

 

0.23

 

280,038

 

0.32

 

194,315

Non-interest bearing

-

80,638,300

-

86,010,076

Total assets


109,243,197


127,322,026






Liabilities





Floating interest rate cash and cash equivalents

 

5.41

 

790,281

 

3.50

 

1,136,519

Floating interest rate loan

6.19

3,867,480

3.85

7,484,003

Non-interest bearing

-

5,935,327

-

5,993,380

Total liabilities


10,593,0889


14,613,902






The analysis below has been determined based on the Group's exposure to interest rates for interest bearing assets and liabilities (included in the interest rate exposure table above) at the reporting date.

 

The Group's interest bearing assets are comprised of fixed rate equity preference share instruments, fixed and floating rate loan instruments and floating rate cash and cash equivalents. The floating rate assets are generally indexed on US Prime. As of 30 June 2011, 59% (30 June 2010: 70%) of the floating rate loans have an interest rate floor, with an average floor of 7.48% (30 June 2010: 8.00%). In contrast, the interest rate of these loans in absence of the floor provisions would have been 2.28% (30 June 2010: 2.67%) lower. Therefore, the majority of the interest income generated by the Group is not sensitive to normal changes in interest rates. An immediate 200 basis point drop in US Prime would cause the yield on the interest bearing assets to fall by 0.1 basis points or US$644 (30 June 2010: 0.1 basis points or US$622). Conversely, an immediate 200 basis point increase in US Prime would cause the yield on the interest bearing assets to increase by 0.6 basis points or US$5,601 (30 June 2010: 0.3 basis points or US$3,886).

 

The Group's interest bearing liabilities are comprised of floating rate cash and cash equivalents and floating rate loans. The floating rate loans are comprised of loans that are indexed on US LIBOR with a margin of 600 basis points, and reset either monthly or quarterly. The change in yield on these liabilities therefore changes directly with changes in US LIBOR. The 3 month US LIBOR as at 30 June 2011 was 0.19% (30 June 2010: 0.35%) an immediate drop to zero in the US LIBOR on the interest bearing liabilities would cause net assets attributable to equity holders to increase by US$8,643 or 0.01% (30 June 2010: US LIBOR drop to zero US$30,248 or 0.03%) on an annualised basis due to the reduction in interest payable on floating rate interest bearing liabilities.



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









15.  Financial Risk Management, continued:

 

Interest Rate Risk, continued:

Conversely, an immediate 200 basis point increase in US LIBOR would cause net assets attributable to equity holders to decrease by US$93,155 or 0.09% (30 June 2010: US$172,410 or 0.15%) on an annualised basis due to the increase in interest payable on floating rate interest bearing liabilities.

 

As a result of low interest rates generally causing the floating rate loan asset yields to be based upon their floor rates, marginal increases of interest rates up to approximately 3 percent would marginally increase income on interest bearing assets less income on interest bearing liabilities, with a cumulative increase of approximately US$14,505 (30 June 2010: US$11,571 decrease) on an annualised basis if rates increased by 3 percent. Additional interest rate increases beyond 3 percent would result in positive marginal income. Management considers the Group's initial negative exposure to small increases in interest rates to be immaterial, and overall considers the exposure to interest rates to be positive.

 

Foreign Currency Risk:

Foreign currency risk is the risk that the fair value of future cash flows of a foreign currency financial instrument will fluctuate because of changes in foreign exchange rates.

 

As at 30 June 2011, the Group's assets are invested predominately in securities and other investments that are denominated in the same currency as the reporting currency.  Accordingly the Group is at low risk to fluctuations in foreign exchange rate. However, should this change the Group has the ability to manage any significant exposure to foreign currencies through forward foreign exchange contracts to hedge its exposure back to US Dollar. As at 30 June 2011 there was no open currency hedging (30 June 2010: none).

 

PSD was originally a Sterling denominated fund investing principally in US Dollar assets, with the foreign exchange risk hedged out using a rolling swap programme. During the second half of 2008 Sterling fell in value by 27% against the US Dollar. The result of this foreign exchange movement increased the Sterling value of the Group's US Dollar assets but also created a significant cash settlement liability on the foreign exchange contracts which exceeded the natural cash inflow from the Group's portfolio. PSD stopped hedging on 12 December 2008 and the reporting currency was changed from Sterling to US Dollars, as agreed by shareholders at an EGM at the end of January 2009.

 

Following on from these changes, the significant majority of the Group's assets and liabilities, and shareholder equity are dominated in US Dollars, significantly reducing the foreign currency risk of the Group.

 

Currency Exposure:

As at 30 June 2011, the majority of the net assets of the Group are denominated in US Dollars. The carrying amounts of these assets and liabilities are as follows:

 


Assets

Liabilities

Net


30 June 2011

30 June 2011

30 June 2011


US$

US$

US$

British Pound

23,032

(208,928)

(185,896)

Canadian Dollar

41,624

(1)

41,623

Euro

9

-

9

US Dollars

109,178,532

(10,384,159)

98,794,373


109,243,197

(10,593,088)

98,650,109



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









15.  Financial Risk Management, continued:

 

Foreign Currency Risk, continued 

 


Assets

Liabilities

Net


30 June 2010

30 June 2010

30 June 2010


US$

US$

US$

British Pound

38,253

(187,525)

(149,272)

Canadian Dollar

196,729

(1)

196,728

Euro

8

-

8

US Dollars

127,087,036

(14,426,376)

112,660,660


127,322,026

(14,613,902)

112,708,124

 

The Group has no significant currency risk. The Group has the ability to implement a policy of currency hedging.

 

As at 30 June 2011, the Group's sensitivity to foreign currency risk is low due to the majority of the net assets of the Company are denominated in US Dollars.

 

Concentration Risk

While the Investment Manager will attempt to spread the Group's assets among a number of investments in accordance with the investment policies adopted by the Group, at times the Groupmay hold a relatively small number of investments each representing a relatively large portion of the Group's net assets.  Losses incurred in such investments could have a materially adverse effect on the Group's overall financial condition. Whilst the Group's portfolio is diversified in terms of the companies in which it invests, the investment portfolio of the Groupmay be subject to more rapid change in value than would be the case if the Group were required to maintain a wide diversification among types of securities, countries and industry groups. Please refer to the Analysis of Significant Investments and Portfolio Analysis that follows the Notes to the Financial Statements.

 

In particular the Group is exposed to its large holdings in Petrotech Holdings/PetroAlgae which constitutes 76.47% (30 June 2010: 64.92%) of the investment portfolio as at 30 June 2011.

 

Classification of Fair Value Measurements

The Company has adopted the amendment to IFRS 7, effective 1 January 2009. This requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

 

·    Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);

·    Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and

·    Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









15.  Financial Risk Management, continued:

 

Classification of Fair Value Measurements, continued

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, the measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.

 

The determination of what constitutes "observable" requires significant judgement by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

 

The following table analyses within the fair value hierarchy the Company's financial assets (by class) measured at fair value at 30 June 2011:

 


Fair Value as at 30 June 2011

 


Level 1

Level 2

Level 3

Total


US$

US$

US$

US$

Financial assets at fair value through profit or loss:





  Equity securities

2,253,964

31,168

81,524,576

83,809,708

  Warrants

-

1,021,683

-

1,021,683

  Penny warrants

-

118,957

70,097

189,054


2,253,964

1,171,808

81,594,673

85,020,445

 


Fair Value as at 30 June 2010

 


Level 1

Level 2

Level 3

Total


US$

US$

US$

US$

Financial assets at fair value through profit or loss:





  Equity securities

-

5,114,520

87,521,003

92,635,523

  Warrants

-

1,852,177

-

1,852,177

  Penny warrants

-

815,222

166,978

982,200


-

7,781,919

87,687,981

95,469,900

 

Investments whose values are based on quoted market prices in active markets, and therefore classified within level 1, include active listed equities. No adjustments are made to the quoted price for these instruments. The level 1 amount above relates to a single investment that had previously been categorised as a level 2 investment in the prior year. During the prior year, whilst this investment was listed it was in the process of bankruptcy and therefore there was not active market for the trading of its shares. During the current period, the investment restructured, came out of bankruptcy and now has active trading of its shares. As a result this investment has been transferred from a level 2 to a level 1 investment.

 

Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As level 2 investments may include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information.

 

Investments classified within level 3 have significant unobservable inputs, as they trade infrequently. Level 3 instruments include unquoted equity instruments which the Company values in accordance with the International Private Equity and Venture Capital valuation guidelines or any other valuation model and techniques which can provide a reasonable estimate of fair value of the investment involved. The Company considers liquidity, credit and other market risk factors.


PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011







15.  Financial Risk Management, continued:

 

Classification of Fair Value Measurements, continued

The tables below provides a reconciliation from brought forward to carried forward balances of financial instruments categorised under level 3 during the year:

 


30 June 2011

Assets at Fair Value based on

Level 3:

Equity securities

Penny warrants

Total


US$

US$

US$

Fair value brought forward

87,521,003

166,978

87,687,981

Purchases

171,835

-

171,838

Sales

(2,461,630)

-

(2,461,630)

Equity converted to loans

(3,157,331)

-

(3,157,334)

Movement in net unrealised gains/(losses) on fair value through profit or loss investments

 

 

(549,301)

 

 

(96,881)

 

 

(646,182)

 

Fair value carried forward

 

81,524,576

 

70,097

 

81,594,673

 


30 June 2010

Assets at Fair Value based on

Level 3:

Equity securities

Penny warrants

Total


US$

US$

US$

Fair value brought forward

45,442,655

227,738

45,670,393

Purchases

24

-

24

Sales

(210,168)

-

(210,168)

Loans converted to equity

1,354,261

-

1,354,261

Net realised loss on fair value through profit or loss investments

 

(1,388,036)

 

-

 

(1,388,036)

Movement in net unrealised gains/(losses) on fair value through profit or loss investments

 

 

42,322,267

 

 

(60,760)

 

 

42,261,507

 

Fair value carried forward

 

87,521,003

 

166,978

 

87,687,981

 

16.  Dividends:

At inception, it was the Group's intention to pay an annual dividend (paid gross quarterly) of not less than 5 pence per Ordinary Share (or its equivalent in US Dollars) in its first year growing by 0.5 pence per Ordinary Share (or its equivalent in US Dollars) per annum in its second and third years. Although this was achieved in respect of the first accounting period of the Group, a breach of the Group's banking facilities led to the suspension of dividends during the current period and prior year.

 

It is the Board's intention to resume dividends at a sustainable level as soon as practicable.

 

All dividends in prior periods were paid from the Group's reserves.

 

17.  Significant Investment Holding:

 

PetroAlgae/PetroTech Holdings Inc.

The Group has a significant holding in PetroAlgae Inc ("PetroAlgae"), a renewable energy company based in Florida, through its holding in PetroTech Holdings Inc ("PetroTech"). The holding structure and some of the commercial progress of PetroAlgae is discussed in the following sections.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









17.  Significant Investment Holding, continued:

 

Holding structure

The Group has a significant holding in PetroTech, a Delaware corporation. PetroTech is a privately held holding company whose principal asset at 30 June 2011 was 100,000,000 shares (30 June 2010: 100,000,000 shares) of the common stock of PetroAlgae. PetroTech is owned jointly by the Group, Laurus Master Fund and Valens (which are funds managed by the Investment Manager). Through it's holding in PetroTech, the Group has an effective holding of 7,021,217 common shares in PetroAlgae.

 

PetroAlgae is registered with the SEC and quoted on OTC Link (PALG.US), following a reverse merger into a quoted shell in December 2008. OTC Link is an electronic quotation system that displays quotes from broker dealers for many over-the-counter securities.

 

In February 2010, PetroAlgae announced its intention to migrate to a higher exchange. On 11 August 2010, PetroAlgae filed an S-1 registration statement for a proposed IPO with Goldman Sachs, UBS and Citi as the lead underwriters. The registration continues to be current.

 

Valuation

The Group owns 8.24% (30 June 2010: 8.24%) of the common stock and US$7.2 million (30 June 2010: US$7.2 million) in preferred stock in PetroTech. The preferred stock is held at par plus accrued interest. The common stock is valued based on an assessment of the realisable value of PetroAlgae.

 

Following statements made by PetroAlgae last year related to its stated intention to move to a broader stock exchange and its Form S-1 Registration Statement filing with the SEC, the PSD Board continues to believe it appropriate to hold the valuation of PetroAlgae shares in PSD constant from the 31 January 2010 NAV at US$11.56.

 

In coming to this assessment of value, the Board, with advice from the Independent Valuation Agent and the Investment Consultant, has taken the following factors into account:

 

§ Public trading of stocks on OTC Link

§ Valuation of comparable companies

§ Model based valuations

 

The shares of PetroAlgae are traded on OTC Link. The trading is irregular and volumes traded are low. The Board notes the public trading but do not solely rely upon it for valuation purposes. The Volume Weighted Average Price of the shares traded during the financial year was US$14.4 per share.

 

There are no directly comparable companies to PetroAlgae. However, the Board notes that several IPO's have occurred in the United States of companies in similar markets to PetroAlgae, and at a similar stage in development.

 

The Directors have looked at model based valuations. Any such valuation model is sensitive to valuation inputs. In particular changes in assumptions of licence fees, royalty rates, implementation rates and discount rates have a significant impact on valuation.

 

The models used have been based on private 5 year projections provided to the Group. These cashflow projections have been reduced by an assumed investor "haircut" and an appropriate range of discount rates applied in coming to an assessment of value.

 

There are no directly comparable companies to PetroAlgae. However, several in the wider biomass/biofuels/biochemical sector have successfully completed IPOs during the financial year at valuations between US$390 million and US$1.5 billion. These include Gevo Inc, Amyris Inc, Solazyme Inc and KiOR Inc.

 

The models used are particularly sensitive to:

§ speed of contract roll out

§ discount rate used

§ level of investor "haircut" applied to projections

 

More conservative assumptions on any of these would negatively impact the implied valuation.



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









17.  Significant Investment Holding, continued:

 

Risks

PetroAlgae is a development stage company with a limited operating history. PetroAlgae faces many risks in implementing its business plans. These risks include, but are not limited to, the following:

 

§ PetroAlgae is materially a pre-revenue company and in the absence of outside funding faces.

§ PetroAlgae may be unable to acquire and retain licensees. In addition, during the next year or so, PetroAlgae will be dependent upon a limited number of customers.

§ PetroAlgae has entered into several contracts and MOUs with prospective customer licensees, MOUs are not binding agreements and they might not result in any enforceable contracts or generate any revenue.

§ Initial contracts will be conditioned on the demonstration facilities deployed by licensees meeting certain levels of productivity, and the failure to meet those levels may lead to the termination of these contracts.

§ The market may not accept the end-products produced by PetroAlgae's technology.

§ The revenue and returns licensees will realize from PetroAlgae's technology are highly dependent on the market price of the biocrude and protein end-products produced using our technology, and those prices will be considerably lower if PetroAlgae fails to receive certain regulatory or industry approvals or if those markets are unavailable for other reasons.

§ The end-products produced by Petroalgae's technology are subject to industry and regulatory testing.

§ PetroAlgae's long-term success depends on future royalties paid by customer licensees, and PetroAlgae faces the risks inherent in a royalty-based business model.

§ If a competitor were to achieve a technological breakthrough, PetroAlgae's operations and business could be negatively impacted.

§ PetroAlgae has filed patent applications. However, these may not be granted which may negatively affect revenues.

§ PetroAlgae may not be able to manage its growth. In particular, the company may not be able to recruit sufficient, qualified staff.

§ PetroAlgae does business in developing economies with less developed legal frameworks. This may affect the enforceability of contracts and intellectual property.

§ PSD is dependent on the proposed IPO or other transaction to realize the value of its shares. There is no guarantee that such a transaction will occur. In particular, any such transaction is highly dependent upon the state of the equity markets.

 

Prospects

The Directors of PSD continue to monitor PetroAlgae with a view to its commercial progress and the liquidity in the stock. In particular, the Directors will look to any significant capital markets transactions that PetroAlgae may undertake in the future as an important indicator of value. Longer term, the Group continues to examine, together with its Investment Manager and Investment Consultant, the best options for realising its significant holding in PetroAlgae.

 

The Manager of the Company is acting as an advisor to PetroAlgae in its proposed IPO.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the year ended 30 June 2011









18.  Post Year End Events:

 

Renewal of banking facility

On 31 August 2011, the Company signed and amended US Dollar bank facilities with Bank of Scotland plc ("Bank of Scotland"), in accordance with the facility agreement dated 30 November 2007 and supplemental restatement facility agreement (utilisation date 1 September 2011). The facilities comprise a US$3.7million term note and a US$1.5million committed overdraft. The key terms of this facility are as follows:

 

§  Facility available for 6 months from 1 September 2011;

§  Interest is chargeable at a rate of the 1 month US LIBOR +6.5% (increasing to +7% with effect from 1 January 2012 if the facility has not been reduced to zero);

§  Arrangement fee of US$25,000;

§  Redmption fee of US$25,000 if the facility is repaid in full on or before 31 December 2011; US$75,000 if the facility is repaid in full after 31 December 2011. Redemption fee is payable upon final repayment or expiration date of the facility:

§  No fixed amortization. The term note is amortised using cash sweep equal to 80% of monthly free cashflow;

§  No net debt/gross asset covenants; and

§  Dividend payments permitted by the Company, subject to approval by Bank of Scotland.

 

There are no other significant post year end events that require disclosure in these consolidated financial statements.



PSOURCE STRUCTURED DEBT LIMITED

Analysis of Significant Investments (unaudited)

As at 30 June 2011









The ten largest holdings of the Group, by underlying investment company as at 30 June 2011 are set out below:





 

 

Name of investment

 

Book

Cost

 

Fair

Value

Percentage

of

NAV

 

US$

US$

%

Petrotech Holdings Corp

8,369,165

81,165,267

82.28

Biovest International

8,781,715

5,779,382

5.86

Sentinel Technologies, Inc

5,322,845

5,392,942

5.47

Creative Vistas, Inc

9,561,646

3,689,438

3.74

Mascon Global Limited

3,069,867

3,069,867

3.11

North Texas Steel

1,068,613

1,843,047

1.87

Accentia Biopharmaceuticals

826,062

1,061,439

1.08

True North Energy Corporation

987,276

904,091

0.92

NCEY, LLC

2,767,279

547,761

0.55

Incentra Solutions

837,529

527,654

0.52





20 other underlying investment companies

35,444,563

2,165,906

2.20






77,036,560

106,146,794

107.60

 

In compliance with current UK Listing Authority requirements, the Company intends to disclose only its ten largest investments.

 

PetroAlgae/PetroTech Holdings Inc.

We set out below a review of the technological and commercial progress of PetroAlgae during the year.

 

Technology and Commercial progress

PetroAlgae was founded in 2006 based on technology developed at the University of Arizona over the previous decade. PetroAlgae is an early stage company which has developed and is licensing new technologies to enable the global production of renewable energy. The Company is based in Melbourne Florida and has a 20 acre pilot facility.

 

PetroAlgae is a licensor of a unique technology for improving the growth and harvest rate of naturally occurring aquatic microorganisms in a consistent and commercial manner. PetroAlgae calls these specially cultivated organisms "micro-crops" and these include macro-algae, micro-algae, diatoms, micro-angiosperms, cyanobacters and, especially, lemna. These micro-crops offer an opportunity to create a new, local, large scale source of protein for animal feed and human food as well as a renewable feedstock to replace petroleum at a large scale. Importantly, this proposition creates strong economic returns for the licensee and a significant number of "green jobs" in emerging economies.

 

PetroAlgae's technology at commercial scale is designed to produce:

 

§  High-quality protein

-    used in animal feed for aquaculture, poultry, swine and other industries

-    High value protein used to supplement human diets

§  Carbohydrate and lipid which can be used for

-    Reliable and consistent feedstock for renewable fuels that leverage the existing oil industry infrastructure

-    Enriched animal feed used as alfalfa replacement

§  Feedstock for organic fertilizer and bio-stimulants

 

Market studies, some of which are discussed below, show that these products currently have high demand and value in the marketplace. With population growth and unrest in oil producing countries, demand for Petroalgae's products (feed, fuel and food) is unlikely to decrease. The key to meeting these demands sustainably is to produce commercial scale quantities with consistent quality and sound economics.

 

PetroAlgae's proposition to customers is based on licensees building large farm units in suitable locations (typically in warm climates with sufficient rainfall). PetroAlgae anticipates these units being from 500 hectares to 5,000 hectares in size.

PSOURCE STRUCTURED DEBT LIMITED

Analysis of Significant Investments (unaudited)

As at 30 June 2011

 

PetroAlgae/PetroTech Holdings Inc., continued

 

Memorandums of Understanding and Commercial Agreements

PetroAlgae has disclosed a number of early stage contracts and memoranda of understanding. These are set out below. There are significant risks associated with these agreements, set out in the risk section below. The Directors believe that the development of these agreements into final binding contracts and the construction of complete facilities are crucial to the proposed IPO of PetroAlgae.

 

Suriname/Statsolie: In June 2011, PetroAlgae finalized a Master Framework and Initial License Agreement with the Ministry of Natural Resources for the Republic of Suriname (Ministry), Staatsolie Maatschappij Suriname N.V. (Staatsolie), and N.V. Verenigde Cultuur Maatschappijen (N.V. VCM) for the phased construction and operation of a commercial-scale, PetroAlgae farm for the production of renewable fuel and protein. Planning and funding for the initial phase is underway utilizing PetroAlgae's micro-crop system and licensed technology. Under the agreement, Staatsolie will serve as the lead coordinator for the Ministry, while N.V. VCM and Staatsolie will be responsible for construction and operation of the project. PetroAlgae will contribute the use and limited license to certain of its PA intellectual property and technology as well as supporting services and quality assurance.

 

AIQ: In April 2010, PetroAlgae announced that it signed an MOU with Asesorias e Inversiones Quilicura (AIQ), a major shareholder in Subus Chile S.A., that is expected to enable the development in Chile of a micro-crop technology system for the large-scale production of green gasoline, diesel and jet fuel. Under the agreement, AIQ has acquired an option to purchase from PetroAlgae a standard license to build a full micro-crop technology system for commercially producing biofuels and high-value protein.

 

China (CECIC/CECEP): In March 2009, PetroAlgae entered into a Master Licensing Agreement with GTB Power Enterprise Ltd. to construct and operate at least ten separate 5,000 hectares license units for the production of micro-crop biomass in China. In December 2009, PetroAlgae entered into a strategic MOU with the China Energy Conservation Investment Corporation (CECIC) whereby the parties contemplate that CECIC would acquire the Master License Agreement for China from GTB Power Enterprise Ltd.  Its intent, in supporting the anticipated transfer to CECIC is to accelerate PetroAlgae's penetration of China's renewable energy market.   CECIC, a State owned corporation with over 11,000 employees, was established in 1988 to invest in energy saving technologies and infrastructures.  Thus far, CECIC has undertaken more than 3,000 major projects in the areas of energy-efficiency, environmental protection (treatment of waste gas, solid waste and waste gas), and renewable energy production (wind, solar, and biomass). 

 

In October 2010, PetroAlgae announced the agreement of a contract with CECEP (the new translation of CECIC) of China to build a pilot facility through the finalisation of a pilot facility agreement and a master framework agreement.  Under the terms of the pilot facility agreement, CECEP will pay for the construction of a pilot facility.  Following the successful running of the pilot facility and other conditions being met, CECEP is committed to construct a minimum of 10 units over a ten year period.

 

Indonesia: In December 2009, PetroAlgae signed an MOU to lead to the license of the Company's proprietary micro-crop technology to the largest conglomerate in Indonesia. This prospect's various businesses cover a range of activities including palm oil, property development, leisure and agriculture. The MOU contemplates that this group would initially build a partial license unit to demonstrate the commercial viability of producing renewable fuels in Indonesia through the use of PetroAlgae's technology. Upon achieving success, the remaining portion of the full license unit 5,000 hectares or 12,355 acres) would be built for the large scale production of biofuels.

 

Indian Oil: In November 2009, PetroAlgae entered into an agreement to license its proprietary micro-crop technology to Indian Oil Corporation Limited (IOCL) for its future large-scale production of renewable fuels. Under the terms of the MoU and the license agreement to be completed, IOCL will build a pilot facility to demonstrate the commercial viability of producing renewable fuels from micro-crops. Upon achieving success, the pilot facility is expected to lead to the completion of a licensed unit for large-scale production of renewable fuels by IOCL.

 



PSOURCE STRUCTURED DEBT LIMITED

Analysis of Significant Investments (unaudited)

As at 30 June 2011

 

PetroAlgae/PetroTech Holdings Inc., continued

 

Test results and co-development agreements

The Company has announced a number of studies which validate its technology and co-development agreements with technology partners. Some of these are discussed below. Significant risks remain around the commercialization of PetroAlgae's technology, however.

 

University of Minnesota Study on alphalpha replacement: In July 2011, PetroAlgae announced the completion of a major third party study showing that PetroAlgae micro-crop meal performs as well as alfalfa in dairy cattle diets.  PetroAlgae's micro-crop technology employs indigenous, aquatic micro-organisms suitable to local climates and is designed to enable its technology licensees to produce a cost-effective alternative to fossil fuels, a high-value protein co-product, and a new micro-crop meal for animal feed (which was the subject of the study), while absorbing carbon dioxide from greenhouse gas emissions.

 

The global market for dairy feed from alfalfa alone is estimated at 400 million metric tons by the United Nations Food and Agricultural Organization.  PetroAlgae micro-crop meal is expected to be highly competitive with alfalfa and other ingredients based on its positive impact on meat and milk, continuous production, and supply chain advantages, opening a new market for the company and its licensing partners.  


The study encompassed a continuous 6-week feeding trial of a statistically significant sample of 36 dairy cows in the barns at the University of Minnesota.  It measured PetroAlgae micro-crop meal against 17.5% protein alfalfa diets for nutrient intake, milk yield and composition, showing that PetroAlgae micro-crop meal represents a new source of commercial-scale dairy feed. 

 

CRI: In July 2011, PetroAlgae entered into an agreement with CRI Catalyst Company LP (CRI, a subsidiary of Royal Dutch/Shell) to use Integrated Hydropyrolysis and Hydroconversion technology (IH2) for the conversion of PetroAlgae's micro-crop residues into renewable fuels. Successful combination of the two technologies results in an integrated system that produces cellulosic gasoline, diesel, and jet hydrocarbon fuels and/or premium blend stocks that are virtually indistinguishable from petroleum based fuels.

 

CRI is a leading provider of catalyst and environmental systems technology to the global petrochemical producing community. CRI has obtained exclusive global sublicensing rights for IH2 technology from Gas Technology Institute (GTI) where the technology was developed. PetroAlgae's micro-crop technology employs indigenous, aquatic micro-organisms suitable to local climates and is designed to enable its licensees to produce a high-value protein product and residual biomass which may be converted to cellulosic hydrocarbon fuels and/or blend stocks via the IH2 technology at commercial scale. This agreement is a direct result of successful tests converting PetroAlgae's micro-crop residue into cellulosic hydrocarbon fuels and/or blend stocks using the IH2 technology provided by CRI. The two firms have agreed to continue to optimize the combined capability of their respective biomass production and conversion processes. Commercial collaboration has already begun and is expected to result in a joint marketing agreement between the two firms in which PetroAlgae and its licensees will hold exclusive rights to IH2 technology for conversion of lemna biomass.

 

Haldor Topsoe: In March 2011, PetroAlgae entered into an agreement with Haldor Topsoe A/S and its U.S. subsidiary, Haldor Topsoe, Inc. to provide technology and catalysts to upgrade oils produced from PetroAlgae's biomass through refinery coking processes and pyrolysis into drop-in renewable fuels, including diesel and jet fuels.

 

Haldor Topsoe is a leading global catalyst and technology company focused on the refining industry, petrochemical industry and the power industries. PetroAlgae's micro-crop technology employs indigenous, aquatic micro-organisms suitable to local climates and is designed to enable its licensees to produce an alternative to fossil fuels as well as a high-value protein co-product, while absorbing carbon dioxide from the atmosphere. Under the agreement, the two companies will work together to apply Haldor Topsoe catalysts, equipment, and licensed technology to upgrade oils derived from PetroAlgae's biocrude.

 



PSOURCE STRUCTURED DEBT LIMITED

Analysis of Significant Investments (unaudited)

As at 30 June 2011

 

PetroAlgae/PetroTech Holdings Inc., continued

 

Test results and co-development agreements, continued

 

University of Idaho test on use of protein: In November 2010, PetroAlgae announced that a third party study done by the Aquaculture Research Institute at the University of Idaho has found that PetroAlgae protein concentrate (PPC) produced as a co-product along with the renewable fuel feedstock by the company's micro-crop technology system can replace menhaden fishmeal protein at levels up to 100% in feeds for tilapia.

 

The study also found that PPC would be suitable as a fishmeal replacement for other farmed fish species. According to the study, tilapia is one of the largest-volume farmed fish species, and tilapia production is expected to grow from 2.8 million tons to more than 9 million tons by 2020, requiring 13 million tons of feed (up from 8 million tons in 2010).

 

Partnership with Foster Wheeler: In December 2009, PetroAlgae announced that it signed an MOU with Foster Wheeler AG's (Nasdaq: FWLT) Global Engineering and Construction Group for engineering services to be performed in conjunction with PetroAlgae's micro-crop technology, which allows for the production of dry biomass at an unprecedented scale. PetroAlgae intends to work with Foster Wheeler to develop commercial solutions that will allow existing oil refineries to convert micro-crop biomass into fuels that are functionally compatible with petroleum-based fuels in the current market. For refineries, the solutions are expected to provide strong economics from the large-scale processing of PetroAlgae's micro-crop biomass into green fuels. The two firms will create end-to-end market solutions for the large-scale production of green gasoline, diesel, jet fuel and specialty chemicals.

 

On 28 September 2010, Foster Wheeler AG announced that it had completed its initial testing of PetroAlgae's biomass, with encouraging results. The biomass, produced at PetroAlgae's micro-crop farm in the U.S., was being tested as a delayed coker feedstock supplement to provide renewable biofuels to the market.  Testing was conducted at a state-of-the-art commercial coker testing facility operated by the College of Engineering and Natural Sciences at the University of Tulsa (Oklahoma).

 

The combination of PetroAlgae's proprietary patent-pending biomass production system, and Foster Wheeler's SYDECSM delayed coking technology, is being designed with the intent to allow the delayed coker to incorporate biomass into the coker feedstock, with minimal configuration changes to an existing unit.

 

Testing was conducted to demonstrate that the biomass is an effective add-in complement to vacuum residue coker feedstock, and does not significantly affect overall coker operations. The initial test results demonstrate that biomass, mixed with vacuum residue, yields additional valuable hydrocarbons as a result of biomass carbohydrate and lipid decomposition. Further testing and engineering development is underway to optimize process parameters and feedstock blend ratios.

 

Eco-Frontier: In July 2010, PetroAlgae announced that it had signed a Non-Binding Commercial Offtake Agreement with Eco-Frontier, a leading cleantech management firm and Asian renewable energy developer based in Seoul, Korea. Eco-Frontier expressed its willingness to establish a market for biocrude products produced by the PetroAlgae system for use in co-firing energy applications in Korea and in other markets. Depending on the satisfaction of a number of different conditions, Eco-Frontier would be prepared to commit to purchase from PetroAlgae's licensees up to 850,000 metric tons of biocrude over a three year period beginning in 2012.

 

Sky Airline: In October 2010, PetroAlgae announced that it had signed a non-binding offtake agreement with Sky Airline, a leading Chilean airline providing passenger, mail and cargo transport services.  Subject to certain conditions, Sky Airlines and PetroAlgae have agreed to collaborate to enable Sky Airline to purchase fuel feedstock produced by licensees of PetroAlgae's technology for conversion into renewable jet fuel.

 



PSOURCE STRUCTURED DEBT LIMITED

Analysis of Significant Investments (unaudited)

As at 30 June 2011

 

PetroAlgae/PetroTech Holdings Inc., continued

 

Management

PetroAlgae has strengthened its management team in the last 12 months. In particular, the company has appointed (or promoted) the following experienced key team members:

 

§  CEO - Tony Tiarks appointed 16 June 2011

§  CFO - Jim Dietz promoted 28 July 2011

§  COO - Peter Sherlock appointed 28 July 2011

 

Dr John Scott, formerly Chairman and CEO, remains as Chairman of PetroAlgae.

 

Prior to joining PetroAlgae, Mr. Tiarks was President & CEO of Liberty Aerospace, Inc., which he established in the United States in 2000 with the purpose of developing, certifying and delivering a new-generation, advanced, entry level aircraft called the XL2. Prior to starting Liberty Aerospace, Mr. Tiarks was the Managing Director in London of Donaldson, Lufkin & Jenrette, a US investment bank; Chairman of Tide Brokers Limited, a wholesale money broker; and Managing Director of Tide (U.K.) Limited, an international foreign exchange fund management group. Mr. Tiarks has a B.S. in Systems and Management from City University, London, United Kingdom.

 



PSOURCE STRUCTURED DEBT LIMITED

Portfolio Analysis (unaudited)

As at 30 June 2011









 

An analysis of the portfolio by industry at 30 June 2011 is set out below: 

 



 

Loans

&

 

Investments Held for

Fair Value Through Profit & Loss

 

 

No. of

Industry

Total

Receivables

Trading

Investments

companies


US$

US$

US$

US$

No.

Biotech

7,544,780

4,586,857

703,959

2,253,964

8

Business Services

73,969

-

67,526

6,443

2

Computers

646,861

527,625

98,755

20,481

3

Consulting

3,069,867

3,069,867

-

-

1

Energy

1,541,614

1,178,381

90,574

272,659

3

Industrial

1,851,035

1,830,000

21,035

-

2

IT

82,346

-

82,346

-

1

Renewable Energy

81,165,267

-

-

81,165,267

1

Other

280

-

264

16

-

Security

3,689,438

3,660,969

25,100

3,369

1

Software

4,805

-

4,805

-

1

Technology

6,182,449

5,985,745

109,195

87,509

5

Transport

294,083

286,905

7,178

-

2


106,146,794

21,126,349

1,210,737

83,809,708

30

 

 



PSOURCE STRUCTURED DEBT LIMITED

Portfolio Analysis, continued (unaudited)

As at 30 June 2011









 

An analysis of the portfolio by geography at 30 June 2011 is set out below: 

 

 

 

US State


 

Loans

&

 

Investments Held for

Fair Value Through Profit & Loss

 

 

No. of

or Country

Total

Receivables

Trading

Investments

companies


US$

US$

US$

US$

No.

Arizona

318,426

312,750

4,783

893

2

California

575,312

350,150

225,162

-

3

Canada

3,731,063

3,660,969

66,725

3,369

2

Colorado

535,350

527,625

6,814

911

2

Florida

88,012,531

4,586,857

-

83,425,674

4

Illinois

8,470,855

8,392,712

78,143

-

3

Israel

82,346

-

82,346

-

1

Massachusetts

14,160

-

14,160

-

2

Minnesota

86,616

-

-

86,616

1

North Carolina

322,823

-

322,823

-

2

New England

174,831

-

174,831

-

1

New Hampshire

39,097

-

39,097

-

1

New Jersey

111,507

-

91,941

19,566

1

Other

312

-

292

20

-

Texas

3,384,660

3,008,381

103,620

272,659

4

Washington

286,905

286,905

-

-

1


106,146,794

21,126,349

1,210,737

83,809,708

30

 



NOTICE

 

PSOURCE STRUCTURED DEBT LIMITED (the "Company")

(An investment company incorporated in Guernsey with registration number 47075)

 

Notice of Annual General Meeting

 

NOTICE IS HEREBY GIVEN that an Annual General Meeting (the "Annual General Meeting") of PSource Structured Debt Limited will be held at Sarnia House, Le Truchot, St Peter Port, Guernsey, on 31 October 2011 at 11.00am for the purpose of considering and, if thought fit, passing the following resolutions:

 

Resolutions

Ordinary Business

1.     That the Financial Statements of the Company for the year ended 30 June 2011 with the Report of the Directors and Auditors thereon be received and adopted.

2.     That the re-appointment of KPMG Channel Islands Limited, 20 New Street, St. Peter Port, Guernsey as Auditors of the Company to hold office until the conclusion of the next annual general meeting be and is hereby approved.

3.     That the Directors be authorised to fix the remuneration of the Auditors for their next period of office.

4.     That Mr Soondra Appavoo be re-elected as a Director.

5.     That Mr Peter Niven be re-elected as a Director.

6.     That Mr Keith Dorrian be re-elected as a Director.

 

Special Business

7.     That as the Company has not paid a dividend in respect of the financial year to 30 June 2011, it is hereby resolved that the Company continue as an investment company until restructuring or winding-up proposals are presented to Shareholders at an Extraordinary General Meeting to be called on or before 31 March 2012.

8.     That the Company be and is hereby authorised in accordance with section 5 of the Companies (Guernsey) Law, 2008 to make market purchases of ordinary shares in the Company provided that:

(a)         the maximum number of Ordinary Shares authorised to be purchased is up to 14.99% of the issued Ordinary Shares;

(b)         the minimum price payable by the Company for each Ordinary Share is 1p (or its equivalent in US Dollars);

(c)         and the maximum price for each Ordinary Share shall be the higher of (a) 105 percent of the average of the middle market quotation for an Ordinary Share as derived from the Daily Official List of the London Stock Exchange for the five business days immediately preceding the day on which that share is purchased; and (b) the higher of the price of the last independent trade in the shares and the highest then current independent bid for the shares on the London Stock Exchange;

(d)         such authority shall expire on the earlier of 15 months from the date of this resolution or the conclusion of the next annual general meeting of the Company unless such authority is renewed, varied or revoked prior to such time;

(e)         the Company may make a contract to purchase Ordinary Shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiration of such authority and may make a purchase of ordinary Shares pursuant to any such contract; and

(f)         any Ordinary Shares bought back may be held in treasury in accordance with Guernsey law or be subsequently cancelled by the Company and the timing of any purchases in accordance with the above authority will be decided by the board of directors of the Company.  The terms of this authority to make market purchases of Ordinary Shares shall supersede any previous resolution authorising the purchase of Ordinary Shares in the Company.

 

By order of the Board


Registered Office:

Praxis Fund Services Limited

Secretary

Sarnia House, Le Truchot, St Peter Port, Guernsey

GY1 4NA

 

Notes:

1.         If you wish to appoint as your proxy someone other than the Chairman of the meeting, cross out the words "the Chairman of the meeting" and write on the dotted line the full name and address of your proxy.  The changes should be initialed.

 

2.         In the absence of instructions, the person appointed proxy may vote or abstain from voting as he or she thinks fit on the specified resolutions and, unless instructed otherwise, the person appointed proxy may also vote or abstain from voting as he or she thinks fit on any other business (including amendments to resolutions) which may properly come before the meeting.

 

3.         This form must be signed and dated by the shareholder or his/her attorney duly authorised in writing.  If the shareholder is a company, it may execute under its common seal or by the signature of a duly authorised officer or attorney.  In the case of joint holdings, any one holder may sign this form.  The vote of the senior joint holder who tenders a vote, whether in person or by proxy, will be accepted to the exclusion of the votes of the other joint holder and for this purpose seniority will be determined by the order in which the names stand in the register of members in respect of the joint holding.

 

4.         To appoint more than one proxy you may photocopy this form. Please indicate the proxy holder's name and the number of shares in relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number of shares held by you). Please also indicate if the proxy instruction is one of multiple instructions being given. All forms must be signed and should be returned together in the same envelope.

 

5.         To be valid, this form must be completed and lodged with the Company's Registrar, Capita Registrars, PXS, 34 Beckenham Road, Beckenham, Kent, BR3 4TU, or at the Registered Office, together with the power of attorney or other authority (if any) under which it is signed or a copy of such authority certified notarially, not less than 48 hours before the time fixed for holding the meeting. 



 

FORM OF PROXY

 

PSOURCE STRUCTURED DEBT LIMITED (the "Company")

 

Form of Proxy for use by holder of Ordinary Shares at the Annual General Meeting of the Company to be held at Sarnia House, Le Truchot, St Peter Port, Guernsey, convened for 31 October 2011 at 11.00am

 

I/We_________________________________________________________________________________________

 

of__________________________________________________________________________________________

 

hereby appoint the Chairman of the meeting (See Note 1 below), or

 

_____________________________________________________________________________________________

 

_____________________________________________________________________________________________

 

(name and address of proxy in block capitals)

 

as my/our proxy to attend, and on a poll, vote for me/us and on my/our behalf at the Annual General Meeting of the Company to be held on 31 October 2011 at 11.00am

 

I/We wish my/our proxy to vote as indicated below in respect of the resolutions to be proposed at the meeting.  Please indicate which way you wish your proxy to vote by ticking the appropriate box alongside each resolution.  (See Note 2 below).

RESOLUTIONS

 



FOR

AGAINST

WITHHELD

1.

Ordinary Resolution - Approval of the Financial Statements




2.

Ordinary Resolution - Re-appointment of the Auditors




3.

Ordinary Resolution - Directors to fix remuneration of Auditors




4.

Ordinary Resolution - Re-election of Mr Soondra Appavoo as a Director




5.

Ordinary Resolution - Re-election of Mr Peter Niven as a Director




6.

Ordinary Resolution - Re-election of Mr Keith Dorrian as a Director




7.

Ordinary Resolution - Approve the continuation of the Company




8.

Ordinary Resolution - To authorise the Company to purchase its own shares




 

 

Signature ……………………………………………(see Note 3 below)     Date …………………2011

 

Notes:

1.         If you wish to appoint as your proxy someone other than the Chairman of the meeting, cross out the words "the Chairman of the meeting" and write on the dotted line the full name and address of your proxy.  The changes should be initialed.

 

2.         In the absence of instructions, the person appointed proxy may vote or abstain from voting as he or she thinks fit on the specified resolutions and, unless instructed otherwise, the person appointed proxy may also vote or abstain from voting as he or she thinks fit on any other business (including amendments to resolutions) which may properly come before the meeting.

 

3.         This form must be signed and dated by the shareholder or his/her attorney duly authorised in writing.  If the shareholder is a company, it may execute under its common seal or by the signature of a duly authorised officer or attorney.  In the case of joint holdings, any one holder may sign this form.  The vote of the senior joint holder who tenders a vote, whether in person or by proxy, will be accepted to the exclusion of the votes of the other joint holder and for this purpose seniority will be determined by the order in which the names stand in the register of members in respect of the joint holding.

 

4.          To appoint more than one proxy you may photocopy this form. Please indicate the proxy holder's name and the number of shares in relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number of shares held by you). Please also indicate if the proxy instruction is one of multiple instructions being given. All forms must be signed and should be returned together in the same envelope.

 

5.          To be valid, this form must be completed and lodged with the Company's Registrar, Capita Registrars, PXS, 34 Beckenham Road, Beckenham, Kent, BR3 4TU, or at the Registered Office, together with the power of attorney or other authority (if any) under which it is signed or a copy of such authority certified notarially, not less than 48 hours before the time fixed for holding the meeting.

 

6.          The 'vote withheld' option is provided to enable you to abstain on any particular Resolution. However, it should be noted that a 'vote withheld' is not a vote in law and will not be counted in the calculation of the proportion of the votes 'for' and 'against' a resolution.

 

 


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