Kingswood H. Regulatory News (KWG)

30 May 2007 07:01

Equity Pre-IPO Investments Ltd30 May 2007 Equity Pre-IPO Investments Limited Annual Report Equity Pre-IPO Investments Limited (the 'Company' or 'Pre IPO') is pleased to announce its results for the year ending 31 December 2006. Directors' Report We are delighted to present this annual report to shareholders for the yearended 31 December 2006 for Equity Pre-IPO Investments Limited ("Pre-IPO" or the"Company"). We have also included some unaudited information for the periodfrom 31 December 2006 to 15 May 2007 in order to ensure that shareholders areprovided with as much up to date information as is practical. Net Asset Value We have set out in the table below the progression of our Net Asset Value ("NAV") per share since 1 January 2005. Date 31 December 2004 (audited)NAV 14.46p Date 31 March 30 June 30 September 2005 31 December 2005 2005 2005NAV (unaudited) (unaudited) (unaudited) (audited) 28.14p 28.13p 39.69p 44.19p Date 31 March 30 June 30 September 2006 31 December 2006 2006 2006NAV (unaudited) (unaudited) (unaudited) (audited) 44.68p 42.27p 42.73p 55.37p Date 31 March 2007 15 May 2007NAV (unaudited) (unaudited) 55.54p 55.56p This table shows that for the year to 31 December 2006 we achieved an increasein the NAV of the Company of approximately 25% (2005: 206%). Whilst the currentincrease in NAV is substantially less than that achieved in 2005 we are pleasedwith this performance. The Company has now increased its NAV by approximately283% from 31 December 2004 to 31 December 2006. The calendar year of 2006 can be characterised by a concentration on ourexisting portfolio of investee companies in an effort to ensure that they wereall progressing towards an exit by Pre-IPO. The stock market was volatile interms of its attitude towards new companies coming to the market and over theyear as a whole the AIM All Share index returned an absolute return of just0.8%. This poor performance of the AIM market and the generally negativeattitude of institutional investors towards many AIM flotations added asignificant element of potential risk to the growth of companies. We thereforetook the view that our investee companies should not seek to secure theirfinancial requirements solely from a flotation as this would risk the continuedfinancial well-being of a company on the highly changeable views of the market.The consequence of this is that whilst our NAV has progressed well over the yearthere have been less flotations of our investee companies than targeted at thebeginning of the year. The investment strategy of Pre-IPO is such that changes in the NAV tend to besporadic, with re-valuations of portfolio companies driven by material eventsthat happen occasionally. This is demonstrated by the large up-lifts thatoccurred in the NAV during 2005 being followed by little change during the firstthree quarters of 2006 and then by another material uplift in the final quarterof 2006. We believe that the Company's investment portfolio is well positionedto benefit from a number of further material re-valuations during the course of2007 but these will continue to be sporadic events. We expect that the progressachieved since the incorporation of the Company in terms of increase in the NAVcan be maintained during 2007. Fund Raising We have not raised any new funds during the course of 2006 and, therefore, thetotal equity funds raised by the Company since its incorporation remains at atotal of £4,609,638 (before costs). This compares to the total net assets ofthe Company as at 31 December 2006 of £7,329,586 and is an increase on totalgross equity funds invested of approximately 59%. At the time of the Company's admission to trading on AIM in February 2005 weannounced that we had signed an option agreement under the terms of which theCompany had the opportunity to raise a total of £4.0 million for the issue ofnew shares in Pre-IPO. This option was exercisable in two parts, with half thetotal due to be exercised during the period 24 October 2005 to 23 November 2005and the remaining half during the period 24 April 2006 to 23 May 2006. Weannounced in our annual report for the period to 31 December 2005 that we haddecided not to exercise the first part of the option because the share price wasso low that it would have been highly dilutive to our existing shareholders.Similarly, we did not exercise the second half of the option for the same reasonand therefore the entire option has now lapsed. We continue to operate Pre-IPO with limited levels of uninvested cash. Thismeans that we often have to either turn down or scale back the investments madeby Pre-IPO because there is little or no cash available for investment at thetime. We therefore believe that it would be in the Company's and shareholders'best interests if we are able to raise further funds. During 2006 we made somelimited use of debt finance but because, in general, our investments are inunquoted companies and, as a result, are not regarded as suitable debt securityby banks, we do not believe that this method of raising funds is a viable andlong term method of increasing funds available for investment. We havetherefore concluded that we need to raise further equity capital for the Companyin the near future and will continue to discuss this issue with the Company'sadvisors. Investment Strategy Pre-IPO's stated investment strategy is to achieve capital growth forshareholders through the purchase, holding and sale of minority stakes in othercompanies. We intend to invest only in companies which are currently unquotedbut which we believe will achieve either a flotation on a Recognised InvestmentExchange or Exchange Regulated Market in Europe or a trade sale up to eighteenmonths from the time of Pre-IPO's investment. Potential investments areevaluated from a wide variety of industry sectors which are based upon therecommendations of an Investment Advisory Panel. Investment decisions will normally take into account the following key factors: • The size of the investments in relation to Pre-IPO's assets; • Whether or not the investment cost appears to be at a discount to theactual or potential valuation of the investee company; • Whether or not there is a proven management team in place or availablefor the investee company; • Whether the investee company's financial and other resources, futuretrading prospects, visibility of earnings, cash flow forecasts and on-goingworking capital requirements are satisfactory; • Whether or not there are satisfactory prospects for the investeecompany to achieve a flotation within a reasonable timeframe; • Whether or not there are satisfactory prospects for Pre-IPO to exitthe investment once a flotation has been achieved. In our annual report for the period to 31 December 2005 we stated that we had atotal of nine investments, of which three had achieved a flotation and sixremained unquoted. We set ourselves a target for 2006 of achieving the completeexit from at least two of our then held quoted companies and the flotation of atleast three of our then held six unquoted companies. During the course of 2006we in fact achieved an exit from all three of the quoted investments that weheld at the beginning of 2006, which raised proceeds of £2,150,921 (2005:£960,948) and the flotation of one of our unquoted investments. In addition twoof our unquoted investments have privately raised further equity funds at amaterially higher valuation than that invested by Pre-IPO. We had planned forboth these companies to be floated during 2006 but the brokers appointedconcluded that the volatility of the market meant that it was safer to raisemoney privately rather than as a part of a flotation. The aggregate sums raisedfor these two private placings was approximately £15 million and so we aredelighted that both these companies are now well financed. We will continue toassist these companies as needed and remain optimistic that they will achieve aflotation in the near future. We also participated in a small rights issue byanother of our unquoted companies which was undertaken at the same valuation atwhich we originally invested. The result of this activity is that we ended 2006 with a portfolio of one quotedinvestment and five unquoted investments. Since the year end we completed a newinvestment in January 2007 totalling approximately £480,000 and we alsocompleted the exit from our one quoted investment. Therefore as of 15 May 2007our investment portfolio was made up of six unquoted investments and no quotedinvestments. The limitation on new investments made by Pre-IPO during 2006 is something thatwe believe has not yet been to the detriment of the investment portfolio as wehave been able to focus on our existing investments and the management of ourcurrent portfolio. We believe however that it is essential that further newinvestments are made during 2007 in order that the portfolio of companiesremains vibrant and that there is a constant flow of new investments, flotationsand exits. We do not believe, however, that we can only rely upon exiting fromexisting investments in order to generate funds for new investments - the timingof an exit from an investment will rarely coincide with an investment into a newcompany, with both often having a very unpredictable time line. We do thereforebelieve that it is important for the continued success of the Company forfurther funds to be made available for investment purposes. Our focus for 2007 is the partial or complete exit from companies within ourportfolio, the raising of additional finance for investment and, assuming thatwe are able to raise further capital, the subsequent increase in the number ofportfolio companies. We have targeted the flotation of at least two companiesfrom the portfolio during 2007 and would like to increase the number ofinvestments within the portfolio to ten. We are currently holding detaileddiscussions with two unquoted companies regarding an investment by Pre-IPO. Wevery much hope that these discussions will be successful and that Pre-IPO willhave sufficient funds to follow through with an investment into these companies. This will, however, depend upon the companies having a realistic view of theircurrent valuation, confirmation of the companies' desire to float, completion ofthe due diligence exercise and Pre-IPO having raised additional capital orhaving exited from existing investments. Investee Companies The investment portfolio that we currently hold (as of 15 May 2007) is asfollows: Pinnacle Plus Limited ("Pinnacle") Pinnacle was established in 2003 and specialises in providing Airport GroundSupport Equipment Operators, Maintainers and Fleet Managers ("GSE's") with arange of decision support information services. Pinnacle's services aredesigned to help GSE's to manage their equipment assets more effectively,improve operational efficiency and reduce costs. Pinnacle provides a range ofservices which provide GSE's with key management and performance information,enabling them to better manage user access, locate equipment, monitor vehicleusage and fleet utilisation, view fuel and de-icing tank levels as well asreduce equipment damages. Customers include KLM Equipment Services, Martinairand Menzies at Schiphol in Amsterdam and Air France Services at London Heathrow.(Web site address: www.pinnacle-air.com) In our annual report for the period to 31 December 2005 we highlighted ourinvestment into Pinnacle as an example of the investments made by Pre-IPO. Wealso stated that we hoped to be able achieve a flotation for this company duringthe course of 2006. Whilst the company has continued to win new long termcontracts this process has taken longer than was expected. We thereforeconcluded that a flotation during 2006 would have been inappropriate. We remainconfident about the prospects of this company and are confident that ourinvestment in this company, which remains valued at cost, will show a materialuplift in the future. Altair Financial Services International PLC ("Altair") Altair is a provider of global prepaid solutions, headquartered in London withsubsidiary companies in USA and Antigua and banking and processing relationshipsin Europe, USA and throughout the Latin America and Caribbean regions. Altairwas incorporated in 2005 to bring together the technology, business knowledgeand investment of a group of people and companies based in Europe and the USA. Altair is a company that provides mobile money and financial solutions utilisingtraditional and non traditional banking media. The company specialises intelephone cash management and movement, prepaid technologies and money share.Altair is a global provider of prepaid, stored value card solutions and closedloop systems with enhanced functionality. Altair offers prepaid card programsto companies and individuals using MasterCard(R) and VISATM products. Toenhance these programs Altair utilises the Internet and mobile phone to providean online and mobile e-wallet and payment system. The Altair system is able tostore and manage value using mobile phones and a prepaid card can be attached tothe account to allow ATM withdrawals. The provision of a prepaid card allows theaccount to be used in a 'traditional' retail environment. (Web site address:www.altair-financial.com) Lorega Limited ("Lorega") Originally established in 1983 as a claims consultancy service for businesses,Lorega has now grown in to a leading provider of products and services focusedon making the claims process easier for private clients and commercial insurancecustomers. Today Lorega is best known as the pioneer of Loss Recovery Insurance,which is now sold by over 200 UK brokers. This unique class of insurance isdesigned to give the policyholder access to professional help without incurringthe cost of expensive fees where the value of the claim exceeds £5,000. (Website address: www.lorega.com) Combimeer N.V. ("Combimeer") Combimeer provides a range of financial products to the Dutch retail marketplace that are based upon low cost structures, transparent products andflexibility. The Combimeer products are particularly suitable for there-investment of, for example, single premium insurances, annuities andpensions; deferred single premium insurances, annuities and stamrecht (a Dutchfinancial construction for golden handshakes in the form of deferred lifeannuity insurance). (Website address: www.combimeer.nl) Radioscape plc ("Radioscape") Founded in 1996, RadioScape has become a world leader in software solutions forDigital Radio. The company's pioneering approach gives it the flexibility to addinnovation and rapidly incorporate changes to suit evolving standards. Thecompany has continued to enhance its broadcast system products, which hasenabled it to address the emerging Mobile TV market based on the DMB standard.RadioScape uses its unique Software Defined Digital Radio approach to ensurethat it can offer customers the latest features and greatest flexibility in itsproduct offerings. It has leveraged its unique, end-to-end systems knowledge tobecome a world leader in Digital Radio broadcasting, advanced multi-standardDigital Radio modules, and Mobile TV. (Web site address: www.radioscape.com) There is one further portfolio company that has asked us to keep our investmentconfidential at this stage. The cost of our existing investments (as of 15 May 2007) was £4,233,137, (as of31 December 2006, £5,419,539). This investment portfolio has been re-valued to£7,354,122 using the valuation principals for unquoted companies set out in theInternational Private Equity and Venture Capital Valuation Guidelines (publishedJune 2005, amended October 2006) by the European Private Equity and VentureCapital Association. This uplift in the valuation of our current portfolio by67% has occurred because we have re-valued three of our investments, all ofwhich have been upwards. All three re-valuations are due to recent third partyfund raisings at a value that is higher than our investment valuation. Theother three companies within the portfolio remain valued at cost. This uplift in the valuation of certain of our unquoted investee companies hasresulted in over 60% of the Company's assets being accounted for by one third ofthe investee companies. The fact that these companies remain unquoted meansthat there is currently little opportunity to realise any of these investmentsat this stage. In addition there can be no assurance that the currentvaluations of the investee companies will be those that are achieved if any exitfrom these investments occurs in the future. Share Price Our share price began 2006 at 35 pence and rose to a high of 45.5 pence in June2006. Unfortunately the price then slipped back to a new all time low of 25pence and has since then recovered slightly to close the year at 29 pence. Thisshare price performance and the low market liquidity of the shares has been acontinual disappointment to us. We are currently discussing with our nominatedadvisor and broker how to increase liquidity and to try to encourage the marketprice of the shares to be more aligned to the net asset value of the Company.Previous marketing efforts that we have undertaken have had very limited successwith institutional investors wanting to see a proven track record beforeinvesting. We are hopeful that we have now developed a sufficient track recordand that this will result in an increasing interest in Pre-IPO and an increasein market liquidity. Outlook The Directors believe that Pre-IPO has made good progress in the increase in theNAV and the development of the portfolio of investments. We believe thatfurther material rises in the NAV can be expected during the course of 2007. Inaddition the pipeline of potential new investments remains strong and thereforewe remain confident about the future. Directors and their Interests The Directors of the Company during the year were: Martin Shires BSc (Econ), ACA, TEPPaul Matthew Schreibke BSocSc, CTA, TEPJonathan David Freeman BA (Hons), MBAIan Geoffrey Clarke (alternate director for Paul Matthew Schreibke)James Grant Howitt (alternate director for Martin Shires) None of the Directors who held office at the end of the financial year had anyinterest in the share capital or share options of the Company, nor does anyperson connected with the Directors have any such interests, whether beneficialor non-beneficial. Substantial Shareholdings At 31 December 2006 and 15 May 2007, the issued share capital of the Company was13,237,235 ordinary shares of 1 pence each. We have conducted a limited investigation into the underlying holders of 3% ormore of our share capital. It is not presently a requirement of the Company'sArticles of Association that shareholders must notify the Company if they ownshares representing 3% or more of the issued share capital, (a resolution toamend the Articles of Association to include such a provision will be preparedat the next Annual General Meeting). Furthermore, there is no authority for theCompany to issue an equivalent to a 212 Notice. Therefore the combination ofthe use of nominee accounts (which the CREST settlement system encourages) andno 212 Notice equivalent means that it can be difficult to track the ownershipof the Company's shares. As far as we are aware, as at 31 December 2006, thefollowing shareholders held 3% or more of the Company's share capital: Number of Percentage of issued ordinary shares ordinary share capital Jon Olafsson 3,753,500 28.36%Equity Special Situations Limited 2,968,052 22.42%Cobra Capital Limited 997,500 7.54%W T Lamb Investments Limited 662,400 5.00%Newton Nominees Limited 639,022 4.83% Share Option Plan A discretionary Share Option Plan ("Plan") was adopted by the Board prior to theadmission of the Company to AIM on 18 February 2005. A summary of the draftterms of the Plan were provided in the admission to trading on AIM document.The Board formally adopted the terms of the Plan as were set out in the AIMAdmission document on 16 May 2007 however no options have yet been awarded underthe Plan. Relationship with Shareholders The Directors seek to build a mutual understanding of objectives between theCompany and its shareholders. The Company reports formally to shareholders inits interim and annual reports setting out details of its activities. Inaddition, the Company keeps shareholders informed of events and progress duringthe year through the issue of press releases. The Directors meet withinstitutional shareholders following interim and final results, as required.The Company also maintains company information on its website -www.equitypreipo.com. Shareholders have the opportunity to meet the Board atthe Annual General Meeting ("AGM"). The Board is also happy to respond to anywritten queries made by shareholders during the course of the year. Where possible the Annual Report is sent to shareholders at least 20 workingdays before the AGM. Directors are required to attend AGMs of the Companyunless unable to do so for personal reasons or due to pressing commercialcommitments. Shareholders are given the opportunity to vote on each separateissue. The Company counts all proxy votes and will indicate the level ofproxies lodged on each resolution, after it has been dealt with by a show ofhands. Dividends No dividends have been paid or are proposed. Auditors A resolution to reappoint BDO Novus Limited as auditors will be proposed at thenext Annual General Meeting. Directors' Service Contracts The Company entered into an open ended services agreement with Fortis FundServices (Guernsey) which include the provision of the services of M Shires andP M Schreibke as executive directors on a time-cost basis, with a 3 monthsnotice period. A service agreement exists between the Company and JonathanFreeman with a 3 month notice period. The Company has also entered into a research and consultancy agreement withCombined Management Services Limited ("CMS") as disclosed in Note 14 of theaccounts. J D Freeman is a director of CMS and owns 50% of the shares of CMS.The above fees do not include reimbursed expenditure. Directors' Remuneration The emoluments of the individual Directors for the year were as follows: Director Salary or FeesM Shires nilP M Schreibke nilJ D Freeman £20,000 The fees for the non-executive Director are determined in accordance withArticle 99 of the Articles of Association of the Company. Non-executiveDirectors are not eligible for bonuses, pension benefits, share options, longterm incentive schemes or other benefits. No pension scheme contributions or other retirement benefit contributions werepaid. There are no share option contracts or long term incentive schemes held by theDirectors. No Director has any interest in any contract to which the Company is a partyexcept for the contracts between the Company and Fortis Fund Services (Guernsey)Limited and the Company and Combined Management Services Limited, as disclosedelsewhere. 30 May 2007 STATEMENT OF TOTAL RETURNFOR THE YEAR ENDING 31 DECEMBER 2006 For the year ended 31 December 2006 For the year ended 31 December 2005GAINS ON Note Revenue £ Capital Total Revenue £ Capital TotalINVESTMENTS £ £ £ £Net realised gains - 115,845 115,845 - 321,296 321,296Net unrealised - 1,759,775 1,759,775 - 1,590,650 1,590,650gains - 1,875,620 1,875,620 - 1,911,946 1,911,946 INCOME 2Investment Income - - - 3,238 - 3,238Loan interest 432 - 432 - - -receivedBank interest 1,477 - 1,477 25,050 - 25,052 1,909 - 1,909 28,288 - 28,288 EXPENDITURE 2Directors' fees 20,000 - 20,000 16,666 - 16,666Administration fees 49,498 - 49,498 44,650 - 44,650Professional fees 42,832 14,609 57,441 - 72,932 72,932AIM admission - - - 238,081 - 238,081expensesConsultancy fees 14 - 171,961 171,961 - 117,651 117,651Audit fee 9,300 - 9,300 3,000 - 3,000Bank charges and 2,074 - 2,074 2,550 - 2,550interestInterest - other 2,124 - 2,124 - - -Commissions paid 3,288 - 3,288 - - -Sundry expenses - - - 1,430 - 1,430Regulatory and 18,046 - 18,046 13,767 - 13,767registration fees 147,162 186,570 333,732 320,144 190,583 510,727 NET RETURN ONORDINARY ACTIVITIESFOR THE FINANCIALYEAR (145,253) 1,689,050 1,543,797 (291,856) 1,721,363 1,429,507Return per share: 6 (1.10) 12.76 11.66 (2.85) 16.81 13.96basic and diluted(pence) All revenue and capital items in the above statement derive from continuingoperations. No operations were acquired or discontinued during the year. A reconciliation of movements in shareholders' funds is set out in note 13 tothe financial statements. The notes form an integral part of these financial statements. BALANCE SHEET31 DECEMBER 2006 Note 31 December 2006 31 December 2005FIXED ASSETSQuoted investments 4 918,000 2,054,118Unquoted investments 5 6,352,739 3,722,050 7,270,739 5,776,168 CURRENT ASSETSCash at bank and broker 77,504 101,668 CREDITORS - AMOUNTS FALLINGDUE WITHIN ONE YEARSundry creditors 8 (18,657) (28,178) NET CURRENT ASSETS 58,847 73,490TOTAL ASSETS LESS CURRENT £7,329,586 £5,849,658LIABILITIESCAPITAL AND RESERVESCALLED UP SHARE CAPITAL 10 132,372 132,372SHARE PREMIUM ACCOUNT 11 4,254,872 4,254,872CAPITAL RESERVEREALISED 12 546,843 130,713UNREALISED 12 2,851,201 1,642,150REVENUE RESERVE 12 (455,702) (310,449) SHAREHOLDERS FUNDS 13 £7,329,586 £5,849,658 Net asset value per share 7 55.37p 44.19p The notes form an integral part of these financial statements. CASH FLOW STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2006 Note For the year ended 31 For the year ended 31 December 2006 December 2005Net cash outflow from operating activities 9 (341,344) (459,511)Investing activities:Purchase of quoted investments - (451,999)Purchase of unquoted investments (1,833,741) (2,796,893)Proceeds from disposals of quoted investments 2,150,921 960,948 Net cash inflow/ (outflow) from investing 317,180 (2,287,944)activities Financing:Issue of own shares - 2,859,860Commission on new share issues - (22,394) Net cash inflow from financing - 2,837,466 (Decrease) / increase in cash for the year £ (24,164) £ 90,011 RECONCILLIATION OF NET CASHFLOW TO MOVEMENT INNET FUNDS(Decrease) / increase in cash for the year (24,164) 90,011 Opening net funds 101,668 11,657 Closing net funds £77,504 £101,668 The notes form an integral part of these financial statements. NOTES TO THE FINANCIAL STATEMENTS31 DECEMBER 2006 1. SIGNIFICANT NEW FINANCIAL REPORTING STANDARDS FRS 26 requires that listed investments are valued at bid price, whereaspreviously, listed investments were valued at middle market price. The Companyhas applied the transitional provisions of FRS 26 and has not restated thecomparative figures for this change in accounting policy. Had the entityrestated the comparative figures the investments held at 31 December 2005 wouldhave been valued on a bid basis which would have resulted in the reported totalassets at that date being reduced by £63,869. In accordance with the transitional provisions of FRS 26 the adjustments betweenthe value of investments at the prior balance sheet date and the opening balancesheet at the start of this financial period has been treated as an adjustmentagainst the Company's opening reserves - see note 13. 2. ACCOUNTING POLICIES a) CONVENTION The financial statements have been prepared under the historical costconvention, modified to include the revaluation of investments and in accordancewith applicable accounting standards and with the Statement of RecommendedPractice "Financial Statements of Investment Trust Companies" issued by TheAssociation of Investment Trust Companies in December 2005. The principalaccounting policies which the Directors have adopted within that convention areset out below. b) INCOME Dividends receivable from quoted equity investments are recognised on theex-dividend date. Dividends receivable from equity investments where noex-dividend date is quoted are recognised when the Company's right to receivepayment is established. Interest receivable on cash deposits is accounted foron an accruals basis. c) FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies other than sterlinghave been translated into sterling at the rates of exchange ruling at thebalance sheet date. Transactions during the period have been translated at therates of exchange ruling at the date of the transaction. d) VALUATION OF INVESTMENTS Quoted investments are valued at bid price. Unquoted investments are valued by the Board according to the valuationprinciples of the European Private Equity and Venture Capital Association as setout in the International Private Equity and Venture Capital Valuation Guidelines(published June 2005, amended October 2006) and accordingly are stated at thevalue of their latest third party funding. Where no third party funding hastaken place, they are valued at cost, less a provision for impairment whennecessary. Realised gains or losses on the disposal of investments are taken to the capitalreserve - realised. Unrealised gains or losses on revaluation of investmentsare taken to the capital reserve - unrealised. e) EXPENDITURE All expenses are accounted for on an accruals basis. Expenses are chargedthrough the Statement of Total Return except where the expense is incidental tothe acquisition or disposal of an investment in which case the expense is addedto the cost of the investment or deducted from the sale proceeds. Expenses that are directly attributable to the management of investments areallocated directly to capital in the Statement of Total Return. With theDirectors' long term target for returns on investments being entirely capitalgain there is no requirement to apportion these expenses between revenue andcapital. 3. TAXATION The Company has been granted exempt status under the Income Tax (Exempt Bodies)(Guernsey) Ordinance 1989, and is therefore subject to the payment of an annualfee which is currently £600. 4. QUOTED INVESTMENTS 31 December 2006 31 December 2005At cost £920,246 £ 1,503,395At market value £918,000 £2,054,118 5. UNQUOTED INVESTMENTS 31 December 2006 31 December 2005At cost £3,499,293 £2,630,623At Directors Valuation £6,352,739 £3,722,050 6. EARNINGS PER SHARE The calculation of basic earnings per share is based on the net return onordinary activities for the financial year and on 13,237,235 (2005: 10,238,759)shares being the weighted average number of shares in issue during the year. The calculation of diluted earnings per share is based on the net return onordinary activities for the financial year and on 13,237,235 (2005: 10,238,759)shares being the weighted average number of shares in issue during the yearadjusted for any dilutive effect of the share options (see note 16). 7. NET ASSET VALUE The calculation of net asset value is based on the net assets of £7,329,586(2005: £5,849,658) and on the ordinary shares in issue of 13,237,235 (2005:13,237,235) at the balance sheet date. 8. SUNDRY 31 December 2006 31 December 2006Audit fees 4,650 3,000Consultancy/directors fees - 14,717Professional fees 7,500 1,520Administration fees 6,507 8,941 £18,657 £28,178 9. CASH FLOW NOTES (i) Reconciliation of revenue return to operating cashflow For the year ended 31 For the year ended 31 December 2006 December 2005 Net revenue return on ordinary activities for the (145,253) (291,856)financial yearExpenses charged to capital (186,570) (190,583)(Decrease)/increase in creditors (9,521) 22,928Net cash outflow from operating activities £(341,344) £ (459,511) (ii) Material non-cash transactions During the year ended 31 December 2005 the Company received stock in an unquotedcompany amounting to £890,778 in satisfaction of an issue of ordinary shares.The proceeds from issues of ordinary shares during 2005 were received net ofcommission amounting to £200,000. 10. CALLED UP SHARE CAPITAL 31 December 2006 31 December 2005Authorised50,000,000 ordinary shares of £0.01 each £500,000 £500,000 Allotted and fully paid13,237,235 ordinary shares of £0.01 £132,372 £132,372 11. SHARE PREMIUM ACCOUNT As at 1 January 2006 and at 31 December 2006 £ 4,254,872 12 RESERVES Capital Reserve - Capital Revenue Total Realised Reserve - Reserve UnrealisedBalance at 1 January 2006 130,713 1,642,150 (310,449) 1,462,414Impact of implementation of FRS 26 - (63,869) - (63,869)(note 1)Net return for the financial year (70,725) 1,759,775 (145,253) 1,543,797Transfer from unrealised reserves torealised reserves on disposal ofinvestments 486,855 (486,855) - -Balance at 31 December 2006 £ 546,843 2,851,201 (455,702) 2,942,342 13. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS For the year end 31 For the year end 31 December 2006 December 2005Net return for the financial year 1,543,797 1,429,507Impact of implementation of FRS 26 (note 1) (63,869) - 1,479,928 1,429,507 New share capital subscribed - 3,728,244Net addition to shareholders' funds 1,479,928 5,157,751Opening shareholders' funds 5,849,658 691,907Closing shareholders' funds £7,329,586 £5,849,658 14. RELATED PARTY TRANSACTIONS On 9 February 2005 and as disclosed in the AIM Admission document dated 18February 2005, Combined Management Services Limited ("CMS") entered into aservices agreement with the Company under the terms of which CMS agreed toprovide research, consultancy, office management and administration services tothe Investment Advisory Panel. A total of £101,601 (2005: £81,183) has been paid to CMS for the year to 31December 2006, which amount is included in Consultancy fees in the Statement ofTotal Return. Jonathan Freeman owns 50% of CMS. 15. FINANCIAL INSTRUMENTS (i) Management of risk The Company's financial instruments comprise: - Equity shares that are held in accordance with the Company's investmentobjective as set out in the Director's Statement - Cash and short term debtors and creditors that arise directly from theCompany's operations. The main risks arising from the Company's financial instruments are due tofluctuations in market prices, foreign exchange rates and interest rates. TheBoard regularly reviews and agrees policies for managing each of these risks andthey are summarised below. These policies have remained constant throughout theperiod under review. Market price risk Market price risk arises mainly from uncertainty about the future prices offinancial instruments used in the Company's operations. It represents thepotential loss the Company might suffer through holding market positions in theface of price movements and movements in exchange rates. The Company's assetscomprise mainly investments in smaller, unquoted businesses which, by theirnature, tend to be more fragile than larger, longer established businesses. Inaddition these investments may include fast-growing companies undergoingsignificant change which are, therefore, usually exposed to greater risks thanlower growth businesses. The Company's unquoted investments may thereforechange in nature quickly with such changes not being reflected in the Company'svaluation of investment. It is the Board's policy to hold an appropriate spread of investments in theportfolio in order to reduce risk arising from factors specific to a particularcountry or sector. The allocation of assets to international markets and stockselection are other factors which act to reduce market price risk. TheInvestment Advisory Panel monitor market prices throughout the year and reportto the Board, which meets regularly to consider investment strategy. Foreign currency risk The Company's total return and net assets can be significantly affected byfluctuations in foreign currency exchange rates because a portion of theCompany's assets and revenue are denominated in currencies other than sterling.The Board carefully monitors the Company's exposure to exchange risk and if itfeels it necessary will utilise appropriate hedging strategies. Liquidity risk Liquidity risk is the risk that the Company will encounter in realising assetsor otherwise raising funds to meet its financial commitments. The Company'sassets comprise mainly investments in smaller, unquoted businesses which, bytheir nature are difficult to realise. There is therefore a risk that theCompany may not be able to exit from an investment to meet a financial liabilityor to fund further investment, when such an opportunity arises. Accordingly theCompany is generally unable to use its non-cash assets to fund the Company'son-going activities until an exit can be achieved. The Directors carefullymonitor the on-going working capital requirements of the Company and seek toensure that there are sufficient cash resources to meet the liabilities of theCompany as they arise. Credit risk The Company places funds with authorised deposit takers from time to time and istherefore potentially at risk from the failure of any such institution of whichit is a creditor. The Company expects to place any deposits on a short termbasis and where possible with more than one institution to reduce its creditrisk. (ii) Interest rate risk of financial assets The majority of the Company's financial assets are equity shares and otherinvestments which neither pay interest nor have a stated maturity date. (iii) Currency exposure A portion of the financial assets of the Company are denominated in currenciesother than sterling with the effect that the net assets and total return can besignificantly affected by currency movements. Currency Investments Cash at bank Total31 December 2006 Euro £276,470 - £276,470 USD - £371 £371 31 December 2005 Euro £173,300 - £173,300 USD - £3,238 £3,238 (iv) Fair values of financial assets All of the financial assets of the Company are held at fair value, as shown innotes 4 and 5. 16. SHARE OPTIONS The Company had an option agreement with Danemead Limited ("Danemead") underwhich Danemead had to procure the subscription of a total of £4.0 million forthe issue of new shares in Pre-IPO, with half the total due to be procuredduring the period 24 October 2005 to 23 November 2005 and the remaining halfduring the period 24 April 2006 to 23 May 2006. The Company announced in theannual report for the year to 31 December 2005 that it did not exercise thefirst part of the option. With the Company's share price remaining at lowlevels it was concluded that it was in the best interests of our existingshareholders not to exercise the second part of the option. Accordingly theDanemead option has now lapsed. Copies of the Annual Report for the year ended 31 December 2006 are being sent to shareholders. Further copies will be available from the Company Secretary's office:Cosign Limited, Martello Court, Admiral Park, St Peter Port, Guernsey, GY1 3HB. For further information, please contact: Martin Shires, Director Tel: +44 (0) 1481 751 000 Paul Schreibke, Director Tel: +44 (0) 1481 751 000 Jonathan Freeman, non-executive Director Tel: +44 (0) 1600 750 432 This information is provided by RNS The company news service from the London Stock Exchange