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PSource Struct Debt (PSD)

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Monday 28 February, 2011

PSource Struct Debt

Half Yearly Report

RNS Number : 9651B
PSource Structured Debt Limited
28 February 2011
 



 28 February 2011

 

PSource Structured Debt Limited

Financial results for the period ended

31 December 2010

 

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 half year ended 31 December 2010.

 

Highlights

 

§  Underlying portfolio and strategy continues to be strongly cash generative delivering $5.75m in cash despite challenging 
economic conditions, and driving a total return performance of 31.36% in the 41 months to 31 December 2010.

 

§  Debt reduced from $8.49m at 30 June 2010 to $5.16m at 31 December 2010. As of 31 January 2011 this has been brought down further to $4.24m.  PSD currently has visibility of opportunities for specific planned realisations totalling approximately $8.5 million (excluding PetroAlgae and Biovest).

 

§  PetroAlgae Inc. signed a number of strategic agreements, and made significant progress towards commercialisation including signing an umbrella contract with the Chinese State Renewable Energy Company, and submitted a Form S-1 document to the SEC.

 

§  Biovest, the company's second largest holding, announced that it had successfully emerged from bankruptcy. 

 

§  The company successfully disposed of the majority of its holdings in Mitek and Bioniche - two significant warrant investments.

 

Performance

 

The monthly total return performance since inception is set out below:

 


Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

YTD

2010

5.85%

-0.11%

1.77%

-2.02%

-2.57%

-2.17%

-1.16%

-4.29%

1.08%

0.72% 

-0.22% 

-1.30% 

-4.68%

2009

4.99%

-5.25%

2.95%

1.16%

3.76%

1.66%

1.37%

-0.13%

-0.50%

1.47%

4.20%

4.70%

21.86%

2008

0.55%

1.87%

2.05%

1.49%

1.73%

0.72%

1.41%

2.43%

0.03%

-2.14%

-4.78%

0.37%

5.63%

2007








-0.38%

1.19%

2.49%

1.95%

1.64%

7.06%

 

Commenting on the results, Soondra Appavoo, Managing Director of PSource Capital, said:

 

"Although global economic conditions created another challenging period, the underlying portfolio and strategy continues to prove highly cash generative allowing the company to pay down a significant position of its outstanding bank debt by way of asset disposals, without undermining shareholder value.  If this current trend continues, this should allow the Company to resume paying dividends.

 

The Company's largest holding, PetroAlgae Inc, continues to progress well, and filed its draft prospectus (Form S-1) in August with Goldman Sachs, UBS and Citi managing the process.  Since this announcement, PetroAlgae has made significant progress towards commercialisation including the signing of an umbrella contract with the Chinese State renewable energy company (CECEP).  This contract is contingent on the success of a trial facility which, if successful, will provide PetroAlgae with a significant commercial leap as CECEP is committed to build ten producing units of 5,000 hectares each."

 

The full interim accounts (including notes) will be available for download from the Company's website www.psourcestructureddebt.com from Monday 28th February.  Hard copies of the interim accounts will be posted to shareholders as soon as they are printed.  Summary accounts, including the Chairman's statement are set out below.

 

For further information, please contact:

 

PSource Capital Limited     +44 20 7925 3156

Soondra Appavoo

 

Weber Shandwick Financial   +44 20 7067 0700

Alex Brown/John Moriarty

 

 

 

 

 

 

PSOURCE STRUCTURED DEBT LIMITED

 

 

INTERIM REPORT AND UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM 1 JULY 2010 TO 31 DECEMBER 2010



 

 

Contents

 

 

 

Company Information                                                                                                             

 

Directors                                                                                                                             

 

Financial Calendar                                                                                                                 

 

Investment Objective and Policy                                                                                              

 

Summary Information                                                                                                             

 

Monthly total return performance, NAV and dividends declared since inception                         

 

Chairman's Statement                                                                                                         

 

Responsibility Statement                                                                                                        

 

Consolidated Statement of Financial Position (unaudited)                                                          

 

Consolidated Statement of Comprehensive Income (unaudited)                                                 

 

Consolidated Statement of Changes in Equity (unaudited)                                                        

 

Consolidated Statement of Cash Flows (unaudited)                                                                 

 

Notes to the Financial Statements (unaudited)                                                                   

 

Analysis of Significant Investments (unaudited)                                                                       

 

Portfolio Analysis (unaudited)                                                                                            

 

 


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, Chairman

Soondra Appavoo

Peter Niven

Tim Jenkinson

Keith Dorrian

 

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              Albert Fried & Company, LLC

200 Seaport Boulevard, Z2H    45 Broadway, 24th Floor   

Boston, MA 02210                     New York, NY 10006

USA                                           USA

(until 25 October 2010)                         (from 25 October 2010)

 

Financial Public Relations:

Weber Shandwick Financial

Fox Court

14 Gray's Inn Road

London, WC1X 8WS

Registrar:

Capita Registrars (Guernsey) Limited

Longue Hougue House

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 17 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 has worked in the financial services industry in the UK and offshore for over 30 years, most recently as Chief Executive of the Lloyds TSB Group's offshore banking operations, until his retirement from the Bank in June 2004. A Fellow of the Institute of Bankers and a Chartered Director, he has served as a director of many Lloyds TSB group companies and is currently a director of a number of Guernsey based investment funds and captive insurance companies, including London listed Dexion Trading Limited and F&C Commercial Property Trust Limited. He is also Chief Executive of Guernsey Finance LBG. Mr Niven is a resident of Guernsey.

 

Tim Jenkinson

Tim Jenkinson is Professor of Finance at the Oxford Saïd Business School. He is an expert on corporate finance, in particular initial public offerings, private equity and the cost of capital. He has written widely on finance and economics and his work has been published in books and leading international journals. He is a Research Fellow of the Centre for Economic Policy Research, a Research Associate of the European Corporate Governance Institute, is Managing Editor of the Oxford Review of Economic Policy, and is a Professorial Fellow of Keble College, Oxford.

 

Professor Jenkinson is a director of the economic consulting firm Oxford Economic Research Associates (Oxera), and has consulted for a large number of companies and regulators. He is also a non-executive director of Oxford Saïd Business School Limited.

 

Professor Jenkinson joined the Saïd Business School in 2000. He was previously in the economics department at Oxford University, which he joined in 1987. 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.

 



PSOURCE STRUCTURED DEBT LIMITED

Company Information, continued

 

Directors, continued

 

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.

 

Financial Calendar

 

Interim Report and Accounts sent to shareholders by 28 February 2011.

 

Annual Report and Accounts sent to shareholders by 28 September 2011.

 

Annual General Meeting to be held   during October 2011.

 

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 10 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 31 December 2010 was US$1.7947 (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 interim dividends have been declared in respect of the 6 months ended 31 December 2010 (6 months ended 31 December 2009: zero pence per Ordinary Share).

 

As at 31 December 2010 the portfolio which comprised 36 companies (30 June 2010: 47), represented 108.01% of Net Asset Value (30 June 2010: 111.35%). The maximum position in any company was 76.22% of the portfolio (30 June 2010: 64.92%).

 


PSOURCE STRUCTURED DEBT LIMITED

Company Information, continued

 

Monthly total return performance, NAV and dividends declared since inception

 

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

 

Monthly total return performance, NAV and dividends declared since inception, 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

1.8093

1.8223

181.83

179.47

177.73






-

Returns (%)

-1.16

-4.29

1.08

0.72

-0.22

-1.30

-0.97






-6.07

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 31 December 2010 in reporting currency 31.36%

§ Total net return since inception as at 31 December 2010 in reporting currency (annualised) 8.31%

§ Annualised standard deviation (volatility) 8.54%


PSOURCE STRUCTURED DEBT LIMITED

Chairman's Statement

Period ended 31 December 2010

 

It is my pleasure to present the semi-annual report for PSource Structured Debt Limited (the "Company" or "PSD") for the half-year ended 31 December 2010.

 

The past 6-months have continued to be challenging for the Company seeing a return of -5.15% to 31 December 2010.  However, there have been steady improvements in key areas including the bank debt, cash realisations from the non-PetroAlgae portfolio, and the progress of PetroAlgae. I would like to discuss each in turn.

 

Bank Debt

The terms of the banking facilities have necessarily prioritised paying off the Company's debt and significant progress has been made in this respect. During the 6-month period the Company has reduced its net borrowings from US$8.5 million to US$5.1 million (U$S4.6 million after taking into account brokerage account cash) as at 31 December 2010.  At 31 January 2011 the bank debt has been further reduced to US$4.2 million.

 

On 30 November 2010, PSD secured a new 6-month US$8 million US Dollar denominated credit facility with its existing lender, Bank of Scotland, to replace the expiring credit facilities.  The reduction in the bank facility and strong nature of the cash flows this calendar year, US$10.4 million in cash receipts in 2010, have enabled the Company to obtain this refinancing on relatively attractive terms.

 

Cash Realisation Process

The Company is dependent upon liquidity in the US small and micro cap public markets to exercise the warrants in its portfolio and to sell the resultant shares.  I am pleased to report that opportunities continue to reveal themselves as the markets recover, and total activity in this area has resulted in significant cash receipts (US$1.9 million) by the Company in the second half of 2010. In particular this has come from the Company's disposal of the majority of its holdings in Mitek and Bioniche.

 

In addition to warrant and share sales, the firm has visibility of cash realisations from a number of identified asset sales and liquidations over the next two quarters significantly in excess of our current indebtedness, although such asset sales have been and remain subject to delays.  This is independent of both the PetroAlgae IPO process and any cash realisations from the holdings in Biovest.

 

PetroAlgae, Inc.

The Company's largest holding is its holding in PetroAlgae (US$81.5m). PetroAlgae, Inc., a leading Florida-based renewable energy company, licenses a commercial lemna based micro-crop technology system that enables the production of green diesel and a high-value protein food source in an environmentally friendly manner. PSD's holding in PetroAlgae is being held at a valuation of US$11.56 per share as of 31 January 2010. This compares to average trading on the OTC in the year at US$12.16 per share, albeit on thin trading.

 

In early 2010 a process was set in motion to list PetroAlgae on a broader exchange.  This move will create the opportunity for PSD to realise the full value of its investment in PetroAlgae although shareholders should understand that it is likely that there can only be a partial realisation at the time of the new listing with the remainder only possible after the expiry of any customary IPO lock-ups required of existing shareholders.  I am pleased to note that PetroAlgae filed its draft prospectus (Form S-1) in August.  Goldman Sachs, UBS, and Citi are managing this process.

 

Since that time PetroAlgae has announced the signing of one umbrella contract with the Chinese state renewable energy company (CECEP) to build a trial facility in Hainan Province.  CECEP has committed to build ten further full size units, each 5,000 hectares, contingent on the success of the trial facility.

 

It is the commercial progress of PetroAlgae, such as the signing of further contracts, which underpins any realisation.  We look forward to updating the market as PetroAlgae converts further advanced leads to commercial contracts.

 

Change in Custody Arrangements

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.  In addition, effective 1 December 2010, the Company migrated its trading services from Fidelity to GP Nurmenkari Inc., a New York based trading firm.  The purpose of both of the above changes in service providers was to reduce costs for the Company. The Company's main custodian remains Wells Fargo which held all of the Company's certificated assets at 31 December 2010, which includes the Company's loan, warrant and PetroAlgae investments.  

 

PSOURCE STRUCTURED DEBT LIMITED

Chairman's Statement, continued

Period ended 31 December 2010

 

Share Price

Until October 2008, the Company's shares traded at or above NAV. However, the shares have recently fallen to a low of 37p in January 2011. This share price fall was due to a number of factors; a fall in liquidity which affected the entire investment company sector, uncertainty over the Company's banking facilities, the continued suspension of our dividend, and the lack of certainty and timing of a liquidity event from PetroAlgae.

 

The Board shares investor concern and frustration with the level of the share price and has taken such steps as our banking facilities permit to address this.  Notably, we believe that progress on extinguishing the bank debt and realising as cash the position in PetroAlgae should remove two of the major factors holding back a restart of distributions and material share repurchases, also key to the share price.

 

Future prospects for PSource Structured Debt

While a full exit from PetroAlgae is likely to take some time, a successful IPO will unlock a significant initial cash payment which the Company could use for dividends or share buybacks.

 

The Annual General Meeting for PSD occurred in October 2010 and included a continuation vote.  The Board believes that the success of this vote has preserved fund value and will enable the shareholders to benefit fully from the planned PetroAlgae IPO. It is the intention of the Board to hold another continuation vote at the next AGM.

 

It is clear that the banks in the US continue to reduce lending to small companies.  The opportunity set for the strategy remains, therefore, attractive. 

 

Prior to this year's AGM the Board and Manager intend to liaise with shareholders to ascertain how best to realise value from the strategy.

 

 

William Scott (Chairman)

Date: 21 February 2011

 

PSOURCE STRUCTURED DEBT LIMITED 

Responsibility Statement

 

We confirm that to the best of our knowledge and in accordance with DTR 4.2.10R of the Disclosure and Transparency Rules:

 

a)   The financial statements have been properly prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS34 as adopted by the EU, "Interim Financial Reporting" and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group as at and for the period ended 31 December 2010.

 

b)   The interim report, which includes information detailed in the Chairman's Statement and Notes to financial statements, provides a fair review of the development and performance of the Group during the period; and includes a description of the principal risks and uncertainties faced as at and for the period ended 31 December 2010.

 

 

 

 

Director:   William Scott

 

 

 

Director:   Peter Niven

 

 

Date: 21 February 2011

On behalf of the Board of Directors



PSOURCE STRUCTURED DEBT LIMITED

Consolidated Statement of Financial Position (unaudited)

As at 31 December 2010

 


Notes

31 December 2010

 


30 June 2010

(audited)



US$

US$






Investments

6




Fair value through profit and loss


89,524,026


92,635,523

Held for trading


2,755,118


2,834,377

Loans and receivables


23,183,468


30,031,017

Total investments


115,462,612


125,500,917






Current assets





Cash and cash equivalents

7

1,958,375


194,315

Unsettled investment sales


6,237


6,839

Other receivables

8

1,901,899


1,619,955



3,866,511


1,821,109






Current liabilities





Bank overdraft

7&10

1


1,136,519

Other payables

9

5,927,999


5,993,380

Loan

10

6,500,000


7,484,003



12,428,000


14,613,902






Net current liabilities


(8,561,489)


(12,792,793)






Total net assets


106,901,123


112,708,124






Represented by Shareholders' equity:





Share Premium

11

47,512,742


47,512,742

Distributable reserve

11

42,793,973


42,793,973

Reserves

12

16,594,408


22,401,409






Total Shareholders' equity


106,901,123


112,708,124






Net asset value per Ordinary Share

13

US$1.7947


US$1.8922

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



PSOURCE STRUCTURED DEBT LIMITED

Consolidated Statement of Comprehensive Income (unaudited)

For the period ended 31 December 2010

 


Notes

1 July 2010

to

31 December 2010


1 July 2009

to

31 December 2009



US$

US$

Income





Loan interest income


827,536


1,840,628

Bank interest


152


932

Subordination fees


-


79,456

Bad debt provision


(258,449)


(638,819)

Movement in net unrealised gains on investments

6&14

1,632,003


24,812,730

Movement in net unrealised losses on restructuring of loans

6&14

 

(1,549,159)


 

(50,932)

Net realised losses on disposal/restructuring of investments

6&14

 

 (2,134,510)


 

(11,378,767)

Impairment charge on loans and receivables

6&14

(2,193,953)


2,879,156

Net foreign exchange losses


(6,787)


(12,685)






Net investment (deficit)/income


(3,683,167)


17,531,699






Expenses





Management fee

3

1,093,474


1,066,814

Performance fee

3

-


3,448,768

Directors' fees and expenses

4

93,114


93,396

Administration fees

3

117,076


127,394

Custodian fees

3

21,790


2,199

Registrar fees

3

10,691


8,238

Auditor's remuneration


55,169


85,154

Loan arrangement fees


113,595


156,970

Legal and professional fees


357,833


516,247

Independent valuation consultancy fee


59,861


70,248

US Taxation


(16,457)


134,254

Other expenses


38,936


28,709






Operating expenses before finance costs


1,945,082


5,738,391






Net (deficit)/return from operations before finance costs


 

(5,628,249)


 

11,793,308






Finance costs





Bank interest

10

26,218


4,498

Loan interest

10

152,534


203,672






(Deficit)/return after finance costs for the period


(5,807,001)


11,585,138











Total comprehensive (deficit)/income for the period

12

(5,807,001)


11,585,138






Basic & diluted earnings per Ordinary Share

  before dividends paid

5

 

US$(0.0975)


 

US$0.1945






 

The results for the current and prior periods 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 (unaudited)

For the period ended 31 December 2010

 



1 July 2010 to 31 December 2010

 


 

Notes

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 period

 

12

 

-

 

-

 

(5,807,001)

 

(5,807,001)













Balance carried forward


47,512,742

42,793,973

16,594,408

106,901,123









 

 



1 July 2009 to 31 December 2009

 


 

Notes

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 period

 

12

 

-

 

-

 

11,585,138

 

11,585,138













Balance carried forward


47,512,742

42,793,973

21,854,769

112,161,484

 

 

 

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


PSOURCE STRUCTURED DEBT LIMITED

Consolidated Statement of Cash Flows (unaudited)

For the period ended 31 December 2010

 


Notes

 

1 July 2010

 to

31 December 2010


1 July 2009

 to

31 December 2009



US$


US$






Cash flows from/(used in) operating activities





Loan interest received


667,478


1,597,524

Operating expenses paid


(2,398,836)


(2,716,760)

Amounts paid for purchase of investments


(4,089,610)


(3,165,701)

Sale proceeds received from disposal of                  investments


 

4,900,634


 

1,903,934

Amounts received on loan repayments


4,982,458


7,753,259

 

Net cash from operating activities


 

4,062,124


 

5,372,256











Cash flows (used in)/from financing activities





Bank interest received


152


932

Bank interest paid


(26,218)


(4,498)

Loan interest paid


(144,690)


(245,158)

Loan repayments


(984,003)


(9,687,546)

 

Net cash used in financing activities


 

(1,154,759)


 

(9,936,270)






Net increase/(decrease) in cash and cash                 equivalents


 

2,907,365


 

(4,564,014)






Cash and cash equivalents, start of period


(942,204)


4,151,052






Effect of exchange rate changes during the period


(6,787)


(12,685)

 

Cash and cash equivalents, end of period

7

 

1,958,374


 

(425,647)

 

 

Cash and cash equivalents comprise the following amounts:





Bank deposits


1,958,375


489,855

Bank overdrafts


(1)


(915,502)



1,958,374


(425,647)

 

 

 

 

 

 

 

 

 

 

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



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements

For the period ended 31 December 2010









1.   The Company:

The Company is a closed-ended investment company, incorporated and registered with limited liability in Guernsey on 5 June 2007. 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 on 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.

 

During the period ended 30 June 2008 a capital reorganisation took place and a Placing and Offer for Subscription dated 8 June 2008 for a second issue up to 100,000,000 shares in the Company was approved by and filed with the Financial Services Authority. The second issue was for a total of 24,154,681 Ordinary Shares of the Company and these Ordinary Shares were issued and admitted to the Official List on the London Stock Exchange on 20 June 2008.

 

On 30 July 2008 the Company issued 5,410,000 Ordinary Shares of no par value, representing 9.9 per cent 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.

 

The Company has one wholly owned subsidiary, PSD SPV 2 Inc ("SPV2"), which has been established to hold certain US assets. For reasons of tax efficiency, the Company proposes to make newly originated direct investments through this Subsidiary.

 

SPV 2 was incorporated in the State of Delaware on 2 April 2009. The Subsidiary commenced trading on 1 May 2009.

 

On 29 December 2010, PSource Structured Debt SPV 1 Limited ("SPV1"), a wholly owned Subsidiary of the Company was voluntarily liquidated. SPV1 Limited was incorporated in Guernsey on 27 September 2007.

 

PSource Structured Debt Limited and SPV2 have been consolidated to produce the consolidated results of the Group.

 

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

 

2.   Principal Accounting Policies:

 

(a)  Basis of Preparation:

 

(i) General

The interim financial statements of the Group have been prepared in accordance with IAS 34 ("IFRS") as adopted by the EU "Interim Financial Reporting", which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee ("IASC") that remain in effect.

 

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, The Companies (Guernsey) Law, 2008 and the Listing Rules of the Financial Services Authority.

 

(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 the Directors consider the presentation and functional currency of the Group to be US Dollars. As at 31 December 2010 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.

 

 

PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









2.  Principal Accounting Policies, continued:

 

(a)  Basis of Preparation, continued:

 

(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.

 

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)(i)). 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 taking into account the renewal of banking facilities during the next financial year. The Directors anticipate that the Group will generate further net cash during the twelve months following the date of signing these consolidated financial statements to repay the Company's current bank loan.

 

(v) IFRS

New standards and interpretations not yet adopted

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

 

·      IFRS 9 Financial Instruments, published on 12 November 2009 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.

 

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.



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









2.   Principal Accounting Policies, continued:

 

(b)  Basis of Consolidation:

The consolidated financial statements of the Group incorporate the financial statements of the Company and its one wholly owned subsidiary made up to 31 December 2010. There are no minority interests in the income or assets of the subsidiary. Control is achieved where the Company has the power to govern the financial and operating policies of the subsidiary so as to benefit the Company.

 

(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".

 

(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, royalties and fee receivables 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.

 

(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.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









2.   Principal Accounting Policies, continued:

 

(d)    Investments, continued:

 

(iii) Fair Value Estimation, continued

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.

 

Royalty investments are valued using a discounted cash flows approach, based on the Company's contractually determined portion of projected revenue streams from specific products and/or businesses.  When valuing the royalty investments, the Directors consider it prudent to apply a discount that reflects the full risks associated with each specific investment, including but not limited to the certainty of the projected cash flows and the liquidity of the investment.

 

Fee receivables are valued at fair value with fair value being the value of the fee receivables less impairments to reflect the collectability of the fee receivable (see note 2(e)).

 

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

 

(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 period ended 31 December 2010









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) 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. 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$17,895 (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 31 December 2010.

 

(i)  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.

 

3.   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 31 December 2010, the management fee creditor was US$181,919 (30 June 2010: US$185,603).



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









3.   Material Agreements & Related Parties, continued:

 

Management Agreement, continued

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 31 December 2010, the Performance Fee creditor was US$5,581,184 (30 June 2010: US$5,581,184).

 

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 £20,000 to £25,000 per annum. As at 31 December 2010, the administration fee creditor was US$19,077 (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 31 December 2010, the registrar fee creditor was US$4,230 (30 June 2010: US$3,121).

 

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$500 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$nil 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 31 December 2010, the independent valuation consultancy fee creditor was US$10,192 (30 June 2010: US$20,331).



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









3.   Material Agreements & Related Parties, continued:

 

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 periods the Company has 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 transactions from related parties for the period 1 July 2010 to 31 December 2010 (period 1 July 2009 to 31 December 2009: none).

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









3.   Material Agreements & Related Parties, continued:

 

Directors' and Other Related Parties' Interests

As at 31 December 2010 the interests of the Directors and their families who held office during the year are set out below:

 


31 December 2010


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 31 December 2010, the Investment Manager held 500,000 (30 June 2010: 500,000) Ordinary Shares in the Company.

 

4.   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:

 


31 December 2010


30 June 2010


Annual Fee


Annual Fee


£


£

William Scott (Chairman)

30,000


30,000

Soondra Appavoo

-


-

Peter Niven

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 period. As at 31 December 2010 the Directors' fees creditor was US$2,368 (30 June 2010: US$1,863).

 

As chairman of the Audit Committee Mr Niven's fee includes a further £2,000 per annum.

 

5.   Basic & diluted earnings per Ordinary Share:

Basic earnings per Ordinary Share is based on the net deficit for the period of US$5,807,001 (period ended 31 December 2009: US$11,585,138 net return) and on a weighted average of 59,564,681 (period ended 31 December 2009: 59,564,681) Ordinary Shares in issue.

 

Diluted earnings per Ordinary Share is based on the net deficit for the period of US$5,807,001 (period ended 31 December 2009: US$11,585,138 net return) and on a weighted average of 59,564,681 (period ended 31 December 2009: 59,564,681) Ordinary Shares in issue adjusted for the effects of all dilutive potential Ordinary Shares.

 

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









6.   Investments:

 

Fair Value Through Profit or Loss Investments:

1 July 2010

to

31 December 2010


1 July 2009

to

30 June

2010


1 July 2009

to

31 December 2009


US$


US$


US$







Investments listed on recognised investment exchanges

 

4,402,416


 

5,122,205


 

1,060,346

Unlisted investments

85,121,610


87,513,318


79,583,619


89,524,026


92,635,523


80,643,965







Opening fair value

92,635,523


46,012,447


46,012,447

Converted from loans

-


458,114


89,724

Converted from fee receivables

-


896,147


-

Converted from warrants

294,427


2,926,747


-

Converted from penny warrants

-


3,038,184


-

Purchases

294,351


1,383,093


2,737,354

Sales - proceeds

(4,552,002)


(1,722,123)


(1,414,086)

Sales - realised gains/(losses) on disposals

1,032,184


(1,641,034)


(1,538,393)

Movement in net unrealised (loss)/gain

(180,457)


41,283,948


34,756,919

Closing fair value

89,524,026


92,635,523


80,643,965







Closing book cost

20,367,427


23,298,467


17,833,938

Closing net unrealised gain

69,156,599


69,337,056


62,810,027

Closing fair value

89,524,026


92,635,523


80,643,965

 

 

Held for Trading Investments:

1 July 2010

to

31 December 2010


1 July 2009

to

30 June

2010


1 July 2009

to

31 December 2009


US$


US$


US$







Unlisted investments

2,755,118


2,834,377


8,761,405







Opening fair value

2,834,377


19,000,009


19,000,009

Purchases



-


-

Converted to equity

(294,427)


(5,964,931)


-

Sales - proceeds

(348,030)


(443,508)


(143,508)

Sales - realised losses on disposals

(1,249,262)


(3,176,744)


(676,548)

Movement in net unrealised gain/(loss)

1,812,460


(6,580,449)


(9,418,548)

Closing fair value

2,755,118


2,834,377


8,761,405







Closing book cost

29,055,727


30,947,446


39,712,573

Closing net unrealised loss

(26,300,609)


(28,113,069)


(30,951,168)

Closing fair value

2,755,118


2,834,377


8,761,405

 

 

 

 

 

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









6.   Investments, continued:

 

Loans and Receivables:

1 July 2010

to

31 December 2010


1 July 2009

to

30 June

2010


1 July 2009

to

31 December 2009


US$


US$


US$

Loans

23,183,468


30,031,017


34,189,904

Receivable *

-


-


896,147


23,183,468


30,031,017


35,086,051







Opening carrying value

30,031,017


48,475,029


48,475,029

Loans converted to equity

-


(458,114)


(89,724)

Fee receivables converted to equity

-


(896,147)


-

Purchases

3,795,453


577,880


1,315,248

Sales - proceeds

-


-


-

Sales - realised losses on disposals

-


-


(796,564)

Repayments/restructuring of loans -                 proceeds

 

(4,982,458)


 

(8,288,795)


 

(7,753,259)

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

 

 

(1,917,432)


 

 

(9,200,721)


 

 

(8,367,262)

Movement in unrealised gains on                     restructuring of loans

 

(1,549,159)


 

994,159


 

(50,932)

Movement in impairment charge

(2,193,953)


(646,633)


2,879,156

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

 

-


 

(525,641)


 

(525,641)

Closing carrying value

23,183,468


30,031,017


35,086,051







Closing book cost

30,354,166


33,458,603


36,032,939

Closing unrealised gains on restructuring of     loans

 

1,952,200


 

3,501,359


 

2,456,268

Impairment charge

(9,122,898)


(6,928,945)


(3,403,156)

Closing carrying value

23,183,468


30,031,017


35,086,051

 

* Receivable - As part of a restructured loan, the Group was entitled to US$896,147. During the prior year this receivable was converted into an equity holding.

 

               

PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









6.   Investments, continued:

 

Total Investments:

1 July 2010

to

31 December 2010


1 July 2009

to

30 June

2010


1 July 2009

to

31 December 2009


US$


US$


US$

Investments listed on recognised investment exchanges

 

4,402,416


 

5,122,205


 

1,060,346

Unlisted investments

87,876,728


90,347,695


88,345,024

Loans

23,183,468


30,031,017


34,189,904

Receivable

-


-


896,147


115,462,612


125,500,917


124,491,421







Opening fair/carrying value

125,500,917


113,487,485


113,487,485

Purchases

4,089,804


1,960,973


4,052,602

Sales - proceeds

(4,900,032)


(2,165,631)


(1,557,594)

Sales - realised losses on disposals

(217,078)


(4,817,778)


(2,214,941)

Sales - realised impairment on disposals

-


-


(796,564)

Repayments/restructuring of loans -                 proceeds

 

(4,982,458)


 

(8,288,795)


 

(7,753,259)

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

 

 

(1,917,432)


 

 

(9,200,721)


 

 

(8,367,262)

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

 

(1,549,159)


 

994,159


 

(50,932)

Movement in impairment charge

(2,193,953)


(646,633)


2,879,156

Movement in net unrealised gains

1,632,003


34,177,858


24,812,730

Closing fair/carrying value

115,462,612


125,500,917


124,491,421







Closing book cost

79,777,320


87,704,516


93,579,450

Closing unrealised gains on restructuring of    loans

 

1,952,200


 

3,501,359


 

2,456,268

Impairment charge

(9,122,898)


(6,928,945)


(3,403,156)

Closing net unrealised gain

42,855,990


41,223,987


31,858,859

Closing fair/carrying value

115,462,612


125,500,917


124,491,421

 

As at 31 December 2010 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$2,193,953 during the period (period ended 31 December 2009: US$2,879,156 write back). This impairment charge is reflected in the Consolidated Statement of Comprehensive Income. Due to several restructurings during the period ended 31 December 2009, a number of previously unrealised impairment charges were realised. This resulted in a transfer between unrealised and realised impairments during that period, with a net credit to the movement in unrealised impairment charge of U$2,879,156. Both realised and unrealised impairment charges are reflected in the Consolidated Statement of Comprehensive Income for the period ended 31 December 2009.

 

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









7.   Cash and Cash Equivalents:


31 December 2010


30 June 2010


US$


US$

Bank deposits

1,958,375


194,315

Bank overdrafts (see note 10)

(1)


(1,136,519)


1,958,374


(942,204)

 

8.   Other Receivables:


31 December 2010


30 June 2010


US$


US$

Loan interest & fee receivables*

1,851,876


1,600,591

Prepayments

32,128


19,364

US Tax receivable

17,895


-


1,901,899


1,619,955

 

*These are shown less a bad debt provision - the bad debt provision is a 0%-100% provision against fee receivables of US$3,427 (30 June 2010: US$nil) (included in "loan interest & receivables").

 

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

 

9.   Other Payables:


31 December 2010


30 June 2010


US$


US$

Management fee payable

181,919


185,603

Performance fee

5,581,184


5,581,184

Administration fee

19,077


15,668

Audit fee

46,097


104,615

Loan interest payable

29,459


21,615

US Tax payable

-


8,966

Other payables

70,263


75,729


5,927,999


5,993,380

 

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

 

10.  Loan and Overdraft:

 

As at 31 December 2010 the Company had credit facilities with Bank of Scotland plc ("Bank of Scotland"), in accordance with a facility agreement dated 30 November 2007 and a supplemental restatement facility agreement (utilisation date 1 December 2010). 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 6 months from 1 December 2010;

§  Interest is chargeable at a rate of the US 3 month LIBOR plus 5.0% per annum;

§  Arrangement fee of US$75,000;

§  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 by the Company may be permitted subject to approval by Bank of Scotland.

 

A further condition to the amendment and restatement of the facility agreement (utilisation date 1 December 2010), 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 31 December 2010 the Company's outstanding loan balance was US$6,500,000 (30 June 2010: US$7,484,003) and the overdraft balance was US$1 (30 June 2010: US$1,136,519). The above credit facility is secured against the Company's investment portfolio.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









11.  Share Capital:


31 December 2010

 &

30 June 2010

Authorised Share Capital

US$

Unlimited Ordinary and Qualifying C Shares of no par value

-


-

 


31 December 2010


30 June 2009

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

31 December 2010


1 July 2009

to

30 June 2010


No.


No.

Brought forward & 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.



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









11.  Share Capital, continued:

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.

 

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 Association, 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 10).

 

12.  Reserves:


1 July 2010

to

31 December 2010


1 July 2009

to

31 December 2009


US$


US$

Brought forward

22,401,409


10,269,631

Total comprehensive (deficit)/income for the period

(5,807,001)


11,585,138

 

Carried forward

 

16,594,408


 

21,854,769

 

Reserves represent retained net realised and unrealised gains and losses of the Group. The reserve is used to facilitate payments of future dividends.

 

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$106,901,123 (30 June 2010: US$112,708,124) and on the period/year end 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 period ended 31 December 2010









14.  Financial Instruments:

 

(a)   Significant accounting policies:

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of its financial assets and financial liabilities are disclosed in note 2 to these consolidated financial statements.

 

(b)   Categories of financial instruments:

Financial instruments comprise loans, fees receivables, royalties, equity, warrants, penny warrants and cash and cash equivalents. Investments in loans have been classified as loans and receivables. The warrants and options are derivative instruments and have been classified as held for trading and are accounted for as fair value through profit or loss. All other financial instruments have been classified as fair value through profit or loss.

 


31 December 2010

30 June 2010


 

 

 

 

Fair Value

Percentage of net assets attributable to Ordinary Share holders

 

 

 

 

Fair Value

Percentage of net assets attributable to Ordinary Share holders

Assets

US$

%

US$

%

Financial assets at fair value through profit or loss:





  Listed equity securities

4,402,416

4.12

5,122,205

4.54

  Unlisted equity securities

85,121,610

79.62

87,513,318

77.65

  Warrants

2,180,722

2.04

1,852,177

1.64

  Penny warrants

574,396

0.54

982,200

0.87


92,279,144

86.32

95,469,900

84.70






  Cash and cash equivalents

1,958,375

1.83

194,315

0.17






Loans and receivables*:





  Loans

23,183,468

21.69

30,031,017

26.65






  Unsettled investment sales

6,237

0.01

6,839

0.01

  Other receivables

1,901,899

1.78

1,619,955

1.44







119,329,123

111.63

127,322,026

112.97

Liabilities





  Cash and cash equivalents (bank overdrafts)

 

(1)

-

 

(1,136,519)

(1.01)






Loans and receivables:





  Loan

(6,500,000)

(6.08)

(7,484,003)

(6.64)






  Other payables

(5,927,999)

(5.55)

(5,993,380)

(5.32)







(12,428,000)

(11.63)

(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.

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the FinancialStatements, continued

For the period ended 31 December 2010









14.  Financial Instruments, continued:

 

(c)  Net gains and losses on financial instruments:

 

Movement in net unrealised

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

 

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

 

 

 

Movement in

Impairment charge

 

Movement in unrealised loss on restructuring of loans


US$

US$

US$

US$

Financial assets at fair value through profit or loss:





  Listed equity securities

(237,685)

1,032,184

-

-

  Unlisted equity securities

57,228

-

-

-

  Warrants

2,220,264

(1,249,262)

-

-

  Penny warrants

(407,804)

-

-

-


1,632,003

(217,078)

-

-






Loans and receivables:





  Loans

-

(1,917,432)

(2,193,953)

(1,549,159)







1,632,003

(2,134,510)

(2,193,953)

(1,549,159)

 

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

  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

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the FinancialStatements, continued

For the period ended 31 December 2010









14.  Financial Instruments, continued:

 

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

 

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 loss on restructuring of loans


US$

US$

US$

US$

Financial assets at fair value through profit or loss:





  Listed equity securities

561,507

(150,357)

-

-

  Unlisted equity securities

34,195,412

(1,388,036)

-

-

  Warrants

(7,199,943)

(676,548)

-

-

  Penny warrants

(2,218,605)

-

-

-


25,338,371

(2,214,941)

-

-






Loans and receivables:





  Loans

-

(8,367,262)

2,082,592

(50,932)

  Fee receivables

-

(796,564)

796,564

-

  Royalties

(525,641)

-

-

-


(525,641)

(9,163,826)

2,879,156

(50,932)







24,812,730

(11,378,767)

2,879,156

(50,932)

 

 

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









14.  Financial Instruments, continued:

 

(d)   Derivatives:

The following tables detail the Group's aggregate investments in derivative contracts, by maturity, outstanding as at 31 December 2010.

 

Penny Warrants

 


31 December 2010


30 June 2010

Maturity

Fair Value


Fair Value


US$


US$

1-3 years 

5,438


11,598

3-5 years

1,625


4,876

5-10 years

98,141


154,229

>20 years

469,192


811,497





Total

574,396


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 (b) 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

 


31 December 2010


30 June 2010

Maturity

Fair Value


Fair Value


US$


US$

< 1 year

991,475


381,449

1-3 years

362,125


841,142

3-5 years

613,313


357,505

5-10 years

90,026


152,664

10-15 years

123,783


119,417





Total

2,180,722


1,852,177

 

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 (b) above. The warrants are valued at a 30% discount to Black Scholes value (see note 2(d) (iii)).

 

Forward foreign currency swaps

 

As at 31 December 2010 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.



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









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.

 

At 31 December 2010, 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 4.19% or US$4,476,206 (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 a 4.19% or US$4,476,206 (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 expiry and whether or not they are in the money. A 5% increase in the value of underlying equity prices for derivatives held, with all other variables held constant, would bring about a 0.19% or US$203,037 (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 0.19% or US$198,559 (30 June 2010: 0.16% or US$185,945) decrease in net assets attributable to equity shareholders.



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









15.  Financial Risk Management, continued:

 

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 disclosed in note 14 to these financial statements. 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 31 December 2010, impairment charges totaling US$9,122,898 (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 31 December 2010, the following amounts on debt instruments were past due:

 


31 December 2010


30 June 2010


US$


US$

Principal default

3,215,977


2,150,820

Interest default

14,511


140,187

 

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 31 December 2010, of the total loans held by the Group of US$23,183,468 (30 June 2010: US$30,031,017), US$10,859,960 (30 June 2010: US$10,902,976) were subordinated.



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









15.  Financial Risk Management, continued:

 

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 70.57% (30 June 2010: 64.92%) of the investment portfolio as at 31 December 2010.

 

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.

 

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 ("the Bank") which facilities are due to expire on 31 May 2011.  In the event that the Group's indebtedness to the Bank has not been extinguished and 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 current period and prior year, the Board currently anticipates that the facilities will not need to be renewed.


PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









15.  Financial Risk Management, continued:

 

Liquidity Risk, continued:

 

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

 

Maturity Analysis

 

At 31 December 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

-

-

-

-

-

4,402,416

4,402,416

  Unlisted equity securities

-

-

-

-

-

85,121,610

85,121,610

  Warrants

991,475

362,125

613,313

90,026

123,783

-

2,180,722

  Penny warrants

-

5,438

1,625

98,141

469,192

-

574,396

  Cash and cash equivalents

1,958,375

-

-

-

-

-

1,958,375


2,949,850

367,563

614,938

188,167

592,975

89,524,026

94,237,519

Loans and receivables:








Loans

8,078,359

5,424,357

331,290

-

-

9,349,462

23,183,468









Unsettled investment sales

6,237

-

-

-

-

-

6,237

Other receivables

1,901,899

-

-

-

-

-

1,901,899










12,936,345

5,791,920

946,228

188,167

592,975

98,873,488

119,329,123

Liabilities








Financial assets at fair value through profit or loss:








  Cash and cash equivalents (Bank overdraft)

(1)

-

-

-

-

-

(1)









Loans and receivables:








  Loans

(6,500,000)

-

-

-

-

-

(6,500,000)









Other payables

(5,927,999)

-

-

-

-

-

(5,927,999)


(12,428,000)

-

-

-

-

-

(12,428,000)



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









15.  Financial Risk Management, continued:

 

Liquidity Risk, continued:

 

Maturity Analysis, continued

 

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

-

11,598

4,876

154,229

811,497

-

982,200

  Cash and cash equivalents

194,315

-

-

-

-

-

194,315


575,764

852,740

362,381

306,893

930,914

92,635,523

95,664,215

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

7,530,076

691,477

306,893

930,914

103,519,891

127,322,026

Liabilities








Financial assets at fair value through profit or loss:








  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 period ended 31 December 2010









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:

 


31 December 2010

30 June 2010

 

 

Weighted average effective interest rate

 

 

Total

Weighted average effective interest rate

 

 

Total

Assets

%

US$

%

US$

Fixed rate equity (preference share holdings)

 

9.84

 

8,688,999

 

9.48

 

11,086,618

Fixed interest rate unlisted loan instruments

 

4.80

 

8,745,590

 

0.80

 

12,574,303

Floating interest rate unlisted loan instruments

 

5.27

 

14,437,878

 

6.38

 

17,456,714

Floating interest rate cash and cash equivalents

 

0.02

 

1,958,375

 

0.32

 

194,315

Non-interest bearing

-

85,498,281

-

86,010,076

Total assets


119,329,123


127,322,026






Liabilities





Floating interest rate cash and cash equivalents

 

5.26

 

1

 

3.50

 

1,136,519

Floating interest rate loan

5.26

6,500,000

3.85

7,484,003

Non-interest bearing

-

5,927,999

-

5,993,380

Total liabilities


12,428,000


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 31 December 2010, 63% (30 June 2010: 70%) of the floating rate loans have an interest rate floor, with an average floor of 7.46% (30 June 2010: 8.00%). In contrast, the interest rate of these loans in absence of the floor provisions would have been 2.25% (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 zero basis points or US$392 (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 3.7 basis points or US$39,168 (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 500 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 31 December 2010 was 0.26% (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$17,104 or 0.02% (30 June 2010: 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 period ended 31 December 2010









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$130,000 or 0.12% (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 only marginally increase net income on interest bearing assets less expenses on interest bearing liabilities, with a cumulative increase of approximately US$49,238 (30 June 2010: US$11,571 decrease) on an annualised basis if rates increased by 3 percent.

 

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 31 December 2010 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 31 December 2010 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 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.

 

On 1 December 2010, PSD secured new US Dollar denominated credit facilities with its existing lender, Bank of Scotland plc, to replace its previous US$7.5million reducing facility and a US$1.5million committed overdraft. Bank of Scotland plc agreed to a US$6.5million facility and a US$1.5million committed overdraft. The cost of the debt is 500bps over 3 month US LIBOR (currently 0.263131%) with monthly repayments equal to 80% of monthly free cash flow.

 

Currency Exposure:

As at 31 December 2010 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


31 December 2010

31 December 2010

31 December 2010


US$

US$

US$

British Pound

105,514

(130,198)

(24,684)

Canadian Dollar

278,785

(1)

278,784

Euro

8

-

8

US Dollars

118,944,816

(12,297,801)

106,647,015






119,329,123

(12,428,000)

106,901,123



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









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.

 

The sensitivity analysis below has been determined based on the sensitivity of the Group's outstanding foreign currency denominated financial assets and liabilities to a 10% increase / decrease in the US Dollar to Sterling, Euro and Canadian Dollar, translated at the year end date.

 

10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management's assessment of the possible change in foreign exchange rates.

 

As at 31 December 2010 if US Dollar had weakened by 10% against Sterling, Euro and Canadian Dollar, with all other variables held constant, the increase in net assets attributable to Ordinary Shareholders would have been US$25,411 or 0.02% (30 June 2010: US$4,746 or 0.00%) higher. Conversely, if US Dollar had strengthened by 10% against the Sterling, Euro and Canadian Dollar with all other variables held constant, the increase in net assets attributable to equity shareholders would have been US$25,411 or 0.02% (30 June 2010: US$4,476 or 0.00%) lower.

 

As at 31 December 2010,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 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. Please refer to the Analysis of Significant Investments and Portfolio Analysis that follows the Notes to Financial Statements and the Liquidity Risk section of note 15.

 

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









15.  Financial Risk Management, continued:

 

Classification of Fair Value Measurements:

The Company 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).

 

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 31 December 2010:

 


Fair Value as at 31 December 2010

 


Level 1

Level 2

Level 3

Total


US$

US$

US$

US$

Financial assets at fair value through profit or loss:





  Equity securities

-

4,402,416

85,121,610

89,524,026

  Warrants

-

2,180,722

-

2,180,722

  Penny warrants

-

407,418

166,978

574,396


-

6,990,556

85,288,588

92,279,144






 


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. None of the Company's investments are categorised as level 1 financial assets.

 


PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010







15.  Financial Risk Management, continued:

 

Classification of Fair Value Measurements, continued:

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.

 

The table below provides a reconciliation from brought forward to carried forward balances of financial instruments categorised under level 3:

 


1 July 2010 to 31 December 2010

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

Sales

(2,456,621)

-

(2,456,621)

Movement in net unrealised gains on fair value through profit or loss investments

 

 

57,228

 

 

-

 

 

57,228

 

Fair value carried forward

 

85,121,610

 

166,978

 

85,288,588

 


1 July 2009 to 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.

 


PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









17.  Significant Investment Holding:

 

PetroAlgae/PetroTech Holdings Inc.

The Group has a significant holding in PetroTech Holdings Inc, a Delaware corporation. PetroTech Holdings Inc is a privately held holding company whose principal asset at 31 December 2010 was 100,000,000 shares (30 June 2010: 100,000,000 shares) of the common stock of PetroAlgae, Inc ("PetroAlgae"). PetroAlgae is a renewable energy company based in Florida which is registered with the SEC and quoted on the OTC Bulletin Board (PALG.OB), following a reverse merger into a quoted shell in December 2008. The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities.

 

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's approach is to select the most suitable microorganism for each specific location (indigenous to the region), and then apply PetroAlgae's distinct proprietary processes to significantly increase output to 2 or 3 times that found naturally. Suitable microorganisms include macro-algae, micro-algae, diatoms, micro-angiosperms, cyanobacters and other small fuel and food-producing organisms of extremely rapid exponential growth.

 

PetroAlgae is licensing a modular bioreactor system which can be built and operated cost-effectively on a very large commercial scale. The primary product derived from this system is feedstock for the production of fuel in existing oil refineries. However, a complimentary co-product produced in production of these feedstocks is high-quality proteins, which can be used for animal feed or human consumption.

 

PetroAlgae is commercialising a licensing methodology which includes significant upfront payments without incurring costs related to capital expenditures. PetroAlgae intends for revenue to be realized through licensing fees and royalties.

 

PetroAlgae has achieved a number of significant milestones.  At the end of 2009 PetroAlgae entered into a Master License Agreement with Green Science Energy LLC for the use of its proprietary technology to produce biofuels in Egypt. This agreement generated US$4 million, the first commercial cash flow for PetroAlgae.

 

PetroAlgae is in commercial discussions with over 300 active prospects spanning 40 countries around the globe, with numerous qualified business discussions having arisen from over 100 corporate visits to its pilot plant. While sales cycles for large licensing deals are long, the Company has recently signed a number of non-binding Memorandums of Understanding (MOU's) from among the many qualified business discussions. PetroAlgae and these potential licensees agree to negotiate a final license contract.   Nonetheless, key contract terms that are generally set forth in the stated MOU's may change pending final negotiations; moreover the negotiations may not always result in a final contract.  The following are certain groups that have reached the MOU stage:

 

Memorandums of Understanding

 

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.

 

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









17.  Significant Investment Holding, continued:

 

Technology and Commercial progress, continued

 

Memorandums of Understanding, continued

 

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.

 

Partnership with Foster Wheeler: In December 2009 PetroAlgae announced today 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 Sep 28, 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.

 

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.

 

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.

 

 

PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









17.  Significant Investment Holding, continued:

 

Technology and Commercial progress, continued

 

Memorandums of Understanding, continued

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' technology for conversion into renewable jet fuel.

 

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 Holdings Inc. 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 Inc.

 

PetroTech Holdings Inc received PetroAlgae shares in a private placement that occurred in December 2008, and it is therefore subject to restrictions on the sale of the securities. There is limited liquidity in the market for shares of PetroAlgae. The shares have traded between US$3.25 per share and US$40 per share since trading commenced in December 2008. Since 1 September 2009, the shares have traded mainly in a range of US$10-25 per share.

 

PSD initially valued the PetroAlgae ("PALG") shares in PetroTech Holdings Corp at last trade and then at 1 month volume weighted average trading price ("1mo VWAP"), although the carrying value was therefore subject to high volatility that resulted from thin trading and illiquidity, and it was therefore deemed imprudent from a valuation standpoint. Multiple observable reference points are available to assist with determining a fair carrying value for the PALG shares, most notably the OTC trading data (bid, last trade, 1mo and 6mo VWAP) and the on-going private placement trades.

 

From 31 October 2009 to 31 January 2010, following discussions with Clayton, the Group had based its valuation of PetroTech Holdings Inc common stock on a weighted average of i) the private placement-implied PetroAlgae share price of US$6.59 resulting from private subscriptions in excess of US$20 million, and ii) the 1mo VWAP of PetroAlgae shares in the OTC market.  The weighting ascribed to each component had been determined by the following schedule.

 

Date

Private Placement Implied Price Weight

VWAP Weight

31-Oct-09

91.7%

8.3%

30-Nov-09

83.3%

16.7%

31-Dec-09

75.0%

25.0%

31-Jan-10

66.7%

33.3%

 

 

 



PSOURCE STRUCTURED DEBT LIMITED

Notes to the Financial Statements, continued

For the period ended 31 December 2010









17.  Significant Investment Holding, continued:

 

Valuation, continued

The 1 mo VWAP for PetroAlgae in the period since July 2009 is set out below, along with the effective discounted value which PSource Structured Debt has used for PetroAlgae shares in its monthly valuation.

 

Month Ended

1mo VWAP

PSD Price

PSD Carrying Value*

31 Jul 2009

US$10.40

US$5.95

US$43,299,674

31 Aug 2009

US$17.59

US$6.81

US$48,841,697

30 Sept 2009

US$17.76

US$6.81

   US$48,759,841

31 Oct 2009

US$19.72

US$7.68

   US$54,820,959

30 Nov 2009

US$21.06

US$9.00

   US$63,965,616

31 Dec 2009

US$20.42

US$10.05

   US$71,184,195

31 Jan 2010

US$21.50

US$11.56

US$81,687,627

28 Feb 2010

US$20.96

US$11.56

US$81,687,627

31 Mar 2010

US$22.38

US$11.56

US$81,687,627

30 Apr 2010

US$25.04

US$11.56

US$81,687,627

31 May 2010

US$23.00

US$11.56

US$81,687,627

30 Jun 2010

US$11.36

US$11.56

US$81,479,986

31 Jul 2010

US$22.26

US$11.56

US$81,479,986

31 Aug 2010

US$10.42

US$11.56

US$81,479,986

30 Sept 2010

US$12.72

US$11.56

US$81,479,986

31 Oct 2010

US$11.08

US$11.56

US$81,479,986

30 Nov 2010

US$11.57

US$11.56

US$81,479,986

31 Dec 2010

US$12.16

US$11.56

US$81,479,986

31 Jan 2011

US$10.77

US$11.56

US$81,479,986

 

*Note: PSD Carrying Value does not include accrued dividends which accrue at 9% per annum on the PetroTech Preferred Stock.  As of 31 December 2010, accrued dividends totaled US$1,607,599 (30 June 2010: US$1,276,468).

 

Following statements made by PetroAlgae related to its stated intention to move to a broader stock exchange, the PSD Board believes it appropriate to hold the valuation of PetroAlgae shares in PSD constant from the 31 January 2010 NAV at US$11.56, until further material valuation information is made available on this process.

 

Technology and Commercial Progress

On Nov 5, 2010 the Aquaculture Research Institute at the University of Idaho announced that it had 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.

 

Prospects

The Directors 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 Inc.

 

PSource Capital Guernsey Limited, the Manager of the Company, is acting as an advisor to PetroAlgae Inc in its proposed IPO.

 

18.  Post Period End Events:

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



PSOURCE STRUCTURED DEBT LIMITED

Analysis of Significant Investments (unaudited)

As at 31 December 2010









 

The ten largest holdings of the Group, by underlying investment company as at 31 December 2010 are set out below:

 





 

 

Name of investment

 

Book

Cost

 

Fair

Value

Percentage

of

NAV

 

US$

US$

%





Petrotech Holdings Corp

7,198,509

81,479,986

76.22

Biovest International

8,781,715

7,711,351

7.21

Sentinel Technologies Inc

5,322,845

5,392,942

5.04

Creative Vistas

9,663,717

3,803,980

3.56

Mascon Global Consulting Inc

3,186,755

3,186,755

2.98

North Texas Steel

1,068,613

2,075,523

1.94

JTM Acquisition Corp

2,972,441

1,836,348

1.72

TNE Oleary Assets LLC

845,031

1,635,961

1.53

GPSI Holdings LLC

1,496,058

1,496,058

1.40

New Cetury Energy Corp

3,162,344

1,490,489

1.39





26 other underlying investment companies

36,079,292

5,353,219

5.02






79,777,320

115,462,612

108.01





 

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



PSOURCE STRUCTURED DEBT LIMITED

Portfolio Analysis (unaudited)

As at 31 December 2010









 

An analysis of the portfolio by industry at 31 December 2010 is set out below: 

 



Loans

&

Investments Held for

Fair Value Through Profit & Loss

 

No. of


Total

Receivables

Trading

Investments

companies

Industry

US$

US$

US$

US$

No.

Biotech

9,767,482

4,586,857

 994,691

  4,185,934

8

Business Services

141,058

-

138,708

2,350

3

Computers

      962,999

    837,500

    125,041

             458

2

Consulting

   3,186,755

   3,186,755

                  -

                  -

1

Energy

   3,267,256

      655,538

       107,444

   2,504,274

3

Environmental

      244,405

      244,367

                38

                  -

1

Financial Services

          7,724

                  -  

           7,724

                  -

1

Industrial

   2,081,574

   2,064,000

         17,574

                  -

2

IT

      939,499

                  -  

       758,704

    180,795

3

Renewable              Energy

           81,479,987

                        -

                           1

 

 81,479,986

   

1

Retail

       14,417

                  -  

         14,417

                  -

1

Security

   3,803,980

   3,700,768

         98,159

          5,053

1

Software

        10,196

                  -  

         10,196

                  -

1

Technology

   7,395,670

    6,071,335

       159,192

   1,165,143

4

Telecom

      312,697

                  -  

       312,664

               33

2

Transport

   1,846,913

   1,836,348

         10,565

                  -

2


115,462,612

23,183,468

 2,755,118

 89,524,026

36

 



PSOURCE STRUCTURED DEBT LIMITED

Portfolio Analysis, continued (unaudited)

As at 31 December 2010









 

An analysis of the portfolio by geography at 31 December 2010 is set out below: 

 

 

 


Loans

&

Investments Held for

Fair Value Through Profit & Loss

 

No. of

US State

Total

Receivables

Trading

Investments

companies

or Country

US$

US$

US$

US$

No.

Arizona

1,506,624

331,290

10,191

1,165,143

2

California

1,358,334

417,200

 941,128

6

4

Canada

4,082,765

3,700,768

376,943

5,054

2

Colorado

   837,954

837,500

-

454

1

Delaware

 215,784

-

215,784

-

1

Florida

90,435,916

4,586,857

1

85,849,058

5

Illinois

5,399,053

5,322,845

76,208

-

2

Indiana

862

-

862

-

1

India

3,186,755

3,186,755

-

-

1

Ireland

   96,880

-

96,880

-

1

Israel

39,223

-

39,223

-

1

Massachusetts

16,124

-

16,124

-

2

North Carolina

598,946

-

598,946

 -

2

New England

    27,387

-

27,387

-

1

New Hampshire

 89,080

-

89,080

-

1

New Jersey

125,041

-

125,041

-

1

New York

258,817

244,367

14,417

33

2

Ohio

7,518

-

7,518

-

1

Other

608

-

604

4

-

Texas

5,342,397

2,719,538

118,585

2,504,274

4

Washington

1,836,544

1,836,348

196

-

1


115,462,612

23,183,468

2,755,118

89,524,026

36

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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