Annual Report • Feb 28, 2013
Annual Report
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Annual Report and Accounts For the year ended 28 February 2013
| Who we are | 1 | Statement of comprehensive income | 32 |
|---|---|---|---|
| Performance highlights | 2 | Statement of financial position | 33 |
| Chairman's statement | 3 | Statement of changes in equity | 34 |
| Report of the directors | 6 | Statement of cash flows | 35 |
| Investment Adviser's report | 9 | Notes to the financial statements | 36 |
| Valuation policy | 16 | Company advisers | 78 |
| Investment portfolio – major holdings | 17 | Board of directors | 79 |
| Directors' remuneration report | 20 | Useful information for Shareholders | 80 |
| Corporate governance | 21 | Notice of Annual General Meeting | 83 |
| Independent Auditor's report | 26 | Form of Proxy | 87 |
| Investment portfolio | 27 |
| Statement of comprehensive income | 32 |
|---|---|
| Statement of financial position | 33 |
| Statement of changes in equity | 34 |
| Statement of cash flows | 35 |
| Notes to the financial statements | 36 |
| Company advisers | 78 |
| Board of directors | 79 |
| Useful information for Shareholders | 80 |
| Notice of Annual General Meeting | 83 |
| Form of Proxy | 87 |
"To create a portfolio of investments in businesses primarily in the United States, providing a superior overall return comprised of a current yield and significant capital appreciation."
JZ Capital Partners Limited ("JZCP") is a listed private equity company which invests primarily in US and European micro cap businesses. JZCP's Investment Adviser is Jordan/ZalaznickAdvisers, Inc. ("JZAI") which was founded by David Zalaznick and Jay Jordan in 1986. JZAI has investment professionals in New York, Chicago, London and Madrid.
JZCP's investment objective is to provide an overall total return comprised of dividend yield plus stock appreciation. The current Board policy is to pay a dividend equal to 3 per cent of net asset value, paid through semi-annual instalments.
JZAI believes that the best way to earn superior returns, on a risk adjusted basis, is to invest in a portfolio of high-quality, niche businesses at reasonable prices. These businesses are grouped together by industry sector into "verticals" which constitute respective strategic build-ups. JZAI's team of experienced industry executives assist the portfolio companies' management teams with operational expertise, focus and accountability. JZCP also provides growth capital to its portfolio companies, both for organic growth as well as for strategic acquisitions.
Most of the companies JZCP invests in are at the smaller end of the middle market, i.e. micro cap companies that have enterprise values under US\$200 million. JZCP invests in businesses that are normally not sold at auction, generally private companies where the owner is looking for a partner to help plan, fund and execute a growth plan. JZCP also invests in other asset classes such as real estate, bank loans and mezzanine debt.
JZCP is a closed-ended investment company which is admitted to trading on the Specialist Fund Market of the London Stock Exchange and listed on the Channel Islands Stock Exchange.
"We are delighted with another excellent set of results for JZCP. In particular, the record total return of 43 per cent, record dividend distribution and narrowing of the discount from 38 per cent to 18 per cent are a reflection of the underlying value of JZCP's portfolio."
The share price rose from 366p at 29 February 2012 to 500p on 28 February 2013. The total Shareholder return for the period including dividends paid was 43 per cent.
The discount has narrowed from 38 per cent on 29 February 2012 to 18 per cent on 30 April 2013.
NAV per share climbed from US\$9.47 on 29 February 2012 to US\$9.69 on 28 February 2013. The total NAV return for the period including dividends paid was 6 per cent.
"2012 has been a year of significant progress for the Company, both strategically and from a performance perspective. The Investment Adviser's unrivalled track record and expertise in US and European micro cap buyouts continues to provide Shareholders with long-term profitable growth."
I am pleased to report the results of JZ Capital Partners Limited ("JZCP" or the "Company") for the 12-month period ended 28 February 2013.
JZCP has produced another 12 months of steady growth during a year that has been characterised by the implementation of several strategic initiatives. The measures have been designed to broaden Shareholder base, build on the Company's core micro cap investment strategy and lay the foundations for long-term future profitable growth. We have been delighted by the significant support received from Shareholders for the changes.
A simplified share capital structure was introduced to accommodate a growing number of US investors and JZCP moved from the Main Market to the Specialist Fund Market ("SFM") of the London Stock Exchange. Trading volumes in the stock have remained at or near to historic levels. A new dividend policy provides a longterm solution to narrowing the discount by offering more predictable distributions at a rate of 3 per cent of NAV per year in two instalments. The proportion of NAV that can be invested outside the US has risen from 20 per cent to 30 per cent to enable the Company to apply its expertise in originating and investing in high-quality micro cap opportunities in other regions.
These initiatives were successfully implemented against the backdrop of the continuing uncertainty in the global economy. The temporary resolution of the US fiscal cliff drama helped to renew optimism in our core US market while action by the European Central Bank in the summer of 2012 improved sentiment and allayed fears about the break-up of the Euro zone. However, the global economy remains weak and growth in developed markets continues to be anaemic, despite the equity market rally which saw the FTSE 100 rise 7.2 per cent
and the Dow Jones climb by 8.3 per cent over the period. Interest rates in both the US and Europe also remain at historic lows.
Despite this renewed macroeconomic uncertainty, the directors are delighted with JZCP's excellent performance. During the period, NAV (including dividends paid) rose by 6 per cent, from US\$9.47 per share to US\$9.69 per share (US\$10.02 before dividends paid). The Company's share price rallied to an all-time high, rising 44.3 per cent during the period following the transfer to the SFM. This share price performance was in the top quartile of JZCP's peer group during the period.
The discount to NAV has significantly narrowed, reducing from 38 per cent to 18 per cent as at 30 April 2013. The Board remains convinced that the corporate actions it has already taken, combined with the Investment Adviser's ability to generate long-term NAV growth will reduce the discount to NAV even further.
The continuing robust performance of the Company is a result of its disciplined and value orientated strategy which uses a proprietary network to find high-quality micro cap companies with the potential for significant further growth. Activities continue to be focused on the US, where JZCP predominantly follows a buy-and-build strategy that focuses on thoroughly researched industry sectors with substantial growth potential known as "verticals". These micro cap investments constitute 29 per cent of NAV, and are the main driver of growth for the Company. Supervisors, regarded as the leaders in their field, support the existing management of these companies to help build better businesses, create value and deliver strong returns to investors.
The Company's only gearing is through its Zero Dividend Preference shares ("ZDPs"). The Board will, from 2014, have the Company's portfolio managed to ensure there is sufficient cash available to repay the ZDPs in the absence of any other refinancing proposal. To help with this, a modest proportion of the portfolio is also now invested in gilts.
The underlying portfolio companies have performed well and the EBITDA of all of the US micro cap businesses increased 7 per cent over the past year.
The portfolio saw 19 realisations generating US\$146 million but with new investment the portfolio comprises 51 investments across 10 industry sectors at the end of the period. US micro cap investments increased by US\$137 million during the period.
Exposure to the European micro cap sector complements the US micro cap investments. Spain continues to be the main focus of the European portfolio as distressed valuations and a lack of traditional bank lending to the SME sector has created excellent investment opportunities for the Company. The portfolio currently holds five companies which are located in the region that are performing despite the country's challenging trading environment. These investments constituted 17 per cent of NAV at period end. The Company is continuing to seek good quality and performing companies across Europe through its network of intermediaries. There is scope to pursue micro cap opportunities in other regions, such as in Latin America, but the bulk of the portfolio will remain in the US.
In May 2012, the Board proposed a new dividend policy to provide a long-term solution to narrow the discount by providing regular and more predictable distributions. The new policy provides distributions at a rate of 3 per cent of NAV per year in two instalments.
The directors declared and paid an interim dividend of 14 cents per share for the six months ended 31 August 2012. The Board has declared a second dividend for the year of 15 cents per share. Therefore the total distribution for the year will be 29 cents per share, compared to 25 cents for the year ended 29 February 2012. This implies an annualised yield as at 28 February 2013 of 4 per cent.
At the forthcoming Annual General Meeting, David Macfarlane and James Jordan will each retire by rotation and will each offer themselves for re-election.
While the Board is mindful of the uncertain economic environment, we remain positive about the ability of JZCP and the broader private equity sector to outperform public markets, as has been evidenced over the last 12 months.
Furthermore, there is scope for these returns to be enhanced further by JZCP's disciplined micro cap strategy. The Company has performed well yet again and the new dividend policy is providing stable and regular distributions to investors.
The directors are confident in the Investment Adviser's ability to continue to grow NAV given its significant experience in the US and Europe, the Company's strong balance sheet and a healthy pipeline of realisation and investment opportunities.
We have worked hard during the period to prepare the Company for a more secure, long-term future and we enter 2013 with a positive outlook, renewed confidence and well positioned to generate significant returns to our Shareholders.
I am sad to report the recent tragic death in an accident of our colleague, David Allison. He contributed substantially to our Company and we shall miss him and his wise counsel greatly.
David Macfarlane Chairman
20 May 2013
Last year, proposals which were put to Shareholders and adopted that included restructuring the Ordinary share capital of the Company so as to accommodate the weight of US ownership of the Company's equity and at the same time avoid the associated threat of delinquency under US securities law and to obtain admission to listing on the Official List of the Channel Islands Stock Exchange (the "CISX"). As part of the process pursuant to which the Company's Ordinary shares were admitted to the CISX in July 2012, the CISX required certain changes to be made to the Company's Articles of Incorporation at the first Annual General Meeting following the CISX listing. The required changes are: that the voting provisions relating to Shareholder resolutions on the appointment or removal of directors be moved from article 5 to article 14; and to ensure that the directors' discretion to restrict transfers of Ordinary shares to Restricted Persons and other Non-Qualified Holders (as defined in the Articles of Incorporation) may only be exercised where failure to do so may result in a regulatory, pecuniary, legal, taxation or material administrative disadvantage to the Company or its Shareholders as a whole and where such exercise would not disturb the market in the Ordinary shares. The changes required by the CISX satisfy their requirements regarding the equality of treatment for Shareholders without impacting upon the effectiveness of last year's restructuring arrangements as regards US securities laws. Special resolution 1 (agenda item no. 9) is therefore proposed to adopt the amended Articles of Incorporation in place of the Company's current Articles of Incorporation.
A copy of the proposed new Articles of Incorporation and a copy of the current Articles of Incorporation marked to show the proposed changes are available for inspection at the Company's registered office and at the offices of Ashurst LLP at Broadwalk House, 5 Appold Street, London EC2A 2HA during normal business hours from the date of this document until the close of the Annual General Meeting to be held on 24 June 2013 (Saturdays, Sundays and public holidays in the UK excepted) and will be available at the place of the Annual General Meeting for at least 15 minutes prior to, and during, the meeting.
The directors present their Annual Report together with the audited financial statements of JZ Capital Partners Limited (the "Company") for the year ended 28 February 2013.
JZ Capital Partners is a closed-ended investment company with limited liability which was incorporated in Guernsey on 14 April 2008 under The Companies (Guernsey) Law, 1994. The Company is subject to The Companies (Guernsey) Law, 2008. The Company's share capital consists of Ordinary shares and Zero Dividend Preference ("ZDP") shares. The Ordinary and ZDP shares were admitted to the Official List of the London Stock Exchange ("LSE") on 27 June 2008.
The Company was granted consent on 8 May 2008 by the Guernsey Financial Services Commission under The Control of Borrowing (Bailiwick of Guernsey) Ordinance, 1959 to raise up to £300,000,000 by the issue of shares.
The Company's corporate objective is to create a portfolio of investments in businesses primarily in the United States, providing a superior overall return comprised of a current yield and significant capital appreciation. The Company's present strategies include investments in micro cap buyouts, mezzanine loans (sometimes with equity participations) and high yield securities, senior secured debt and second lien loans, real estate and other debt and equity opportunities, including distressed debt and structured financings, derivatives and opportunistic purchase of publicly traded securities.
On 31 July 2012, the Company announced the cancellation of the listing of its Ordinary shares on the premium segment of the Official List and trading on the London Stock Exchange's Main Market for listed securities. Subsequently the Company's shares were admitted to trading on the SFM. The Company also announced the admission to listing on Channel Islands Stock Exchange ("CISX").
The total profit attributable to Ordinary Shareholders for the year ended 28 February 2012 was US\$35,850,000 (year ended 29 February 2012: profit of US\$45,044,000). The revenue return for the year was US\$27,113,000 (year ended 29 February 2012: US\$25,202,000), after charging administrative expenses of US\$2,785,000 (year ended 29 February 2012: US\$2,786,000) and Investment Adviser's base fee US\$10,707,000 (year ended 29 February 2012: US\$10,247,000) and an income incentive fee payable to the Investment Adviser of US\$Nil (29 February 2012: US\$4,410,000). The net asset value ("NAV") of the Company at year end was US\$630,182,000 (29 February 2012: US\$615,462,000) equal to US\$9.69 (29 February 2012: US\$9.47) per Ordinary share.
For the year ended 28 February 2013, the Company had US\$2,196,000 (year ended 29 February 2012: US\$1,633,000) of cash inflows resulting from operating activities.
A review of the Company's activities and performance is detailed in the Chairman's statement on pages 3 to 5 and the Investment Adviser's report on pages 9 to 15. The valuation of the listed and unlisted investments is detailed on pages 27 to 31.
It is the Board's policy to distribute 3 per cent of the Company's net assets in the form of dividends.
For the year ended 28 February 2012, an interim dividend of 14.0 cents per Ordinary share (total US\$9,102,605) was declared by the Board on 10 October 2012 and paid on 5 November 2012.
A second dividend of 15.0 cents per Ordinary share (total US\$9,752,792) was declared by the Board on 20 May 2013.
The directors listed below are all non-executive and have served on the Board throughout the year and were in office at the end of the year and subsequent to the date of this report. The biographical details of the directors are shown on page 79.
David Macfarlane (Chairman) Patrick Firth James Jordan Tanja Tibaldi
All directors are independent at the year end, throughout the year and to the date of this report.
David Allison served as a director until his death on 26 April 2013.
The Company's Annual General Meeting is due to be held on 24 June 2013.
Details of Zero Dividend Preference shares and Ordinary shares can be found in notes 15 and 16 on pages 52 and 53. During the year the Company did not buy back any of its own shares.
The beneficial interests of the directors in the Ordinary shares of the Company are shown below:
| Number of Ordinary shares 1 March 2012 |
Ordinary shares (sold) |
Number of Ordinary shares purchased/ 28 February 2013 |
|
|---|---|---|---|
| David Macfarlane | 43,000 | 7,000 | 50,000 |
| James Jordan | 30,000 | – | 30,000 |
| Tanja Tibaldi | 2,000 | – | 2,000 |
| 75,000 | 7,000 | 82,000 |
Patrick Firth did not hold an interest in Ordinary shares during the year. None of the directors held any interest in Zero Dividend Preference shares during the year. There have been no changes in the directors' interests between 28 February 2013 and the date of this report.
All the present directors were members of the Board at the time of approving this report and each of the directors confirms that:
A resolution to reappoint Ernst & Young LLP as Auditor to the Company will be proposed at the next Annual General Meeting.
As at 28 February 2013 and at the date of this report, the Company has been notified in accordance with applicable legislation of the following interests in the Ordinary share capital of the Company:
| As at 28 February 2013 | As at 30 April 2013 | |||
|---|---|---|---|---|
| shares | % of Ordinary Ordinary shares |
shares | % of Ordinary Ordinary shares |
|
| Edgewater Growth | ||||
| Capital Partners | 13,494,037 20.75% 13,494,037 20.75% | |||
| John W. Jordan | 7,719,240 11.87% | 7,719,240 11.87% | ||
| DavidW. Zalaznick 7,717,377 11.87% | 7,717,377 11.87% | |||
| AbramsCapital | ||||
| Management L.P. | 5,614,390 | 8.64% | 4,914,389 | 7.56% |
| Rothschild Wealth | ||||
| Management | 5,428,531 | 8.35% | 5,461,009 8.40% | |
| Leucadia Financial | ||||
| Corporation | 4,527,563 | 6.96% | 4,527,563 | 6.96% |
| Third Avenue | ||||
| Management LLC | 3,407,535 | 5.24% | 4,151,226 | 6.38% |
The percentage of Ordinary shares shown above represents the ownership of voting rights at the year end before weighting for votes on directors.
It is the responsibility of the Shareholder to notify the Company of any change to their shareholdings when it reaches 3 per cent of shares in issue and any change which moves up or down through any whole percentage figure above 3 per cent.
During the year, the Association of Investment Companies ("AIC") recommended that ongoing charges disclosure should replace the total expense ratio which has traditionally been calculated by investment companies. Ongoing charges for the year ended 28 February 2013 and 29 February 2012 have been prepared in accordance with the AIC's recommended methodology. The ongoing charges for the year ended 28 February 2013 were 2.22 per cent (29 February 2012: 2.21 per cent) excluding incentive fees and 3.69 per cent.Including incentive fees (29 February 2012: 3.86 per cent).
The Company's Corporate governance report, disclosed on pages 21 to 25, forms part of the directors' report for the year ended 28 February 2013.
directors are responsible for preparing financial statements in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS") and The Companies (Guernsey) Law, 2008 for each financial period which give a true and fair view of the state of affairs of the Company and its profit or loss for that period. International Accounting Standard 1 requires that financial statements present fairly for each financial period the Company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's "Framework for the preparation and presentation of financial statements". In virtually all circumstances a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards.
In preparing financial statements the directors are required to:
● Provide additional disclosures when compliance with the specific requirements of IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance.
The directors confirm that they have complied with these requirements in preparing the financial statements.
Each of the directors confirms to the best of each person's knowledge and belief that:
The directors are also responsible for the keeping of proper accounting records which disclose with reasonable accuracy at any time, the financial position of the Company and to enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008 and the Listing Rules of the London Stock Exchange and Channel Islands Stock Exchange. They are also responsible for the system of internal controls, safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are also responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom and Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Approved by the Board of directors and agreed on behalf of the Board on 20 May 2013.
| David Macfarlane | Patrick Firth |
|---|---|
| Chairman | Director |
"Our opportunistic approach to value investing has led us to some exciting new opportunities in the real estate sector which will complement our core micro cap strategy."
David Zalaznick and Jay Jordan
Dear Fellow Shareholders,
We are pleased to report JZCP achieved a 43 per cent total return for its Shareholders for the fiscal year ended 28 February 2013. The increase in our stock price was driven by a year-on-year growth in net asset value ("NAV"), and an increased dividend. Finally, we completed the trifecta as the discount went from 38 per cent at the beginning of the fiscal year to 18 per cent as at 30 April 2013. The discount is heading in the right direction, but is still not where we want it to be. Our NAV (before dividends paid) was up 6 per cent, as per share NAV went up to US\$10.02 from US\$9.47. JZCP's dividend will be 29 cents versus 25 cents last year. This is the first full year of our new dividend policy of paying 3 per cent of NAV in semi-annual payments; at our current stock price, the implied dividend yield is 4 per cent.
Our Company's balance sheet continues to be exceptionally strong, with a large cash and liquid assets position of US\$228.5 million and no long-term obligations other than the Zero Dividend Preference shares ("ZDPs") which mature in 2016. Since the last Annual Report we have received US\$145.9 million in proceeds from 19 realisations and deployed US\$200.7 million in 25 new investments.
JZCP's underlying portfolio companies have performed well on an operating basis during this fiscal year. On a combined basis, EBITDA of all of our US micro cap businesses increased 7 per cent over the past year.
Our US micro cap portfolio is valued at 6.9x EBITDA after an average 23 per cent marketability discount. The underlying leverage senior to JZCP's position in our micro cap portfolio, both in the US and Europe, is under 1.2x EBITDA (though we expect that to grow slightly as we put more third-party debt onto several portfolio companies). Our European micro cap portfolio, currently consisting of five Spanish businesses, are valued using a 7.1x EBITDA multiple, after a 20 per cent marketability discount, with 1.1x EBITDA of third-party leverage.
We had two significant realisations since the last Annual Report. The first is the successful conclusion to one of our US micro cap investments – Horsburgh and Scott ("H&S"). In March 2013 (post-period), we sold H&S, which makes large diameter gears. Over time, we realised US\$38.6 million on our US\$21.8 million investment, for a 1.8x multiple of capital invested, and a 13 per cent IRR. Given that we had been writing this investment up over time, there was a negligible effect on NAV.
Secondly, we sold our remaining position in TAL, our container leasing business. At the beginning of the year, we owned 1,065,738 shares for a NAV per share of 59 cents. We sold these shares for US\$42.1 million in a secondary offering creating a 6 cent increase in NAV. Given that TAL was a listed equity portfolio company, we had been writing this investment up and down as the markets dictated. Over the course of the TAL investment we have done five secondary offerings to realise our investment. We achieved a 4.5x multiple of invested capital and a 27 per cent IRR over eight years.
Investing in micro cap companies has historically been the main driver of NAV growth and will continue to be so. We continue to be active in our current five business sectors, or "verticals": Industrial Services Solution (ISS), Sensors Solutions, Healthcare Revenue Cycle Management, Water Services, and Testing Services. These verticals are each managed by an experienced business professional, who is involved in both making acquisitions, and helping the business we own grow
organically and through synergistic actions. For these activities, we invest with Edgewater Growth Capital Partners; together with them, we have a majority position in all of our verticals. We are also growing our micro cap portfolio by co-investing with other well-known US buyout firms whose operational focus in buying and managing small businesses overlap with ours.
Our opportunistic approach to value investing has led us to some exciting new opportunities in the real estate sector which will complement our core micro cap strategy. It is important to note that we are applying the same disciplined approach to these investments as we have always used; buying businesses at reasonable values in conjunction with excellent management teams. For our real estate investments, we have been backing a management team that has extensive (and successful) experience in buying and renovating smaller off-market properties in up and coming neighbourhoods in Brooklyn, NY. The Company is also establishing a new asset management business in the US that will address the growing demand from endowments and pension funds for fiduciary management services.
For the 12 months ending 28 February 2013, JZCP's net assets increased from US\$9.47 per share to US\$10.02, a 6 per cent increase, before 32.5 cents of dividends paid, or 2 per cent after the dividends. Note that we have had NAV growth in 15 of the last 16 quarters. The chart below shows the source of the annual growth for this fiscal year:
| as of 29 February 2012 | US\$9.47 |
|---|---|
| + Change in private investments | 0.05 |
| + Change in public investments | 0.18 |
| + Income from investments | 0.63 |
| + Escrows received | 0.12 |
| - ZDP dividend accrual | (0.11) |
| - Fees and expenses | (0.37) |
| +/- Other | 0.05 |
| Net asset value per Ordinary share | |
| (before dividends) | US\$10.02 |
| - Dividends paid | (0.33) |
| Net asset value per Ordinary share | |
|---|---|
| as of 28 February 2013 | US\$9.69 |
Regarding the increases in the private investments above, we have prudently lowered the valuation of the US micro cap portfolio by 4 cents, driven by a 24 cent decrease in the value of Accutest, our environmental testing business. We also show a 6 cent increase in New Vitality, our co-investment in this vitamin and supplement company, due to very positive performance, and a positive resolution to a once potential lawsuit. The remaining 14 cent increase in value is comprised of small increases spread across seven different entities. The European micro cap portfolio has a 7 cent increase, driven by continued very strong performance (23 cents) at Factor Energia, our energy and natural gas distribution business in Spain. Offsetting this performance is a write down of Xacom, our supplier of parts and technologies to Spanish and South American telecom companies (14 cents), several of which have delayed orders of certain of their products. Finally, our listed equities have performed well, adding 13 cents to our NAV.
The chart below summarises the cumulative total NAV returns and total Shareholder returns for the most recent three months, most recent 12 months, and most recent 36 months (the relevant time periods since our "recapitalisation" in June 2009).
| As at 28/02/2013 30/11/2012 29/02/2012 28/02/2010 |
Since | Since | Since | |
|---|---|---|---|---|
| Share price | ||||
| (in GBP) | £5.00 | £4.34 | £3.66 | £2.73 |
| Dividends paid | ||||
| (in US cents) | – | – | 32.5c | 70.0c |
| Total Shareholders' | ||||
| return | – | 15% | 43% | 99% |
| NAV per share | ||||
| (in USD) | US\$9.69 US\$9.41 US\$9.47 US\$7.04 | |||
| NAV total returns | – | 3% | 6% | 48% |
| NAV to market | ||||
| price discount | 22% | 26% | 38% | 41% |
We continue to diversify JZCP's portfolio into many different industry sectors as well as geographically across the United States and into Europe. Currently, we have a diversified portfolio of 51 businesses in 10 different sectors, as you will see in the charts below. In addition, our portfolio is diversified in terms of vintage years.
Below is a summary of our portfolio, comparing the assets as of 28 February 2013 to the previous year end. As you will note, our US micro cap portfolio increased by US\$137.2 million due to the acquisition activity described below. Our mezzanine and bank debt portfolios continue to run off as companies are sold or refinanced. Finally, as discussed, we realised on the remainder of our TAL listed equity.
| (and cash) | 51 731,022 710,954 | 2.9% | ||
|---|---|---|---|---|
| Total investments | ||||
| Total listed investments (and cash) |
5 227,758 389,226 | (41.5%) | ||
| Cash | 102,740 | 202,481 | (49.3%) | |
| UK treasury gilts | 31,809 | 33,465 | (4.9%) | |
| Bank debt | 1 | 11,690 | 32,512 | (64.0%) |
| Listed corporate bonds | 2 | 26,450 | 32,129 | (17.7%) |
| Listed equity | 2 | 55,069 | 88,639 | (37.9%) |
| Total private i nvestments |
46 503,264 321,728 | 56.4% | ||
| Other portfolio | 5 | 11,080 | 1,620 | 584.4% |
| Real estate portfolio | 5 | 30,860 | – | – |
| Mezzanine investments | 4 | 11,294 | 29,632 | (61.9%) |
| European investments | 5 | 107,463 | 85,129 | 26.2% |
| US micro cap portfolio | 27 | 342,567 | 205,347 | 66.8% |
| Number of as at 28/02/2013 |
investments 28/02/2013 29/02/2012 US\$'000 |
US\$'000 | Change % |
Note that we have continued our programme of holding highly rated listed corporate bonds as a means of earning an enhanced return on our cash. The obligors of these bonds are two highly rated banks: HSBC and JP Morgan Chase and mature from 2014 to 2016. In previous periods we have purchased UK Gilts with an eye toward the 2016 maturity date of our ZDPs.
As mentioned, we have written down this portfolio by 4 cents, led by a decrease in value of Accutest, our environmental testing business. We feel this new valuation reflects a now-stabilised level of earnings. Offsetting this were (i) a 6 cent increase in New Vitality, our co-investment in a vitamin and supplement company, and (ii) smaller increases in values based upon improved performance across seven different businesses. We continue to value this portfolio prudently: the average multiple used, after a 23 per cent marketability discount, was 6.9x.
We made 11 investments totalling US\$90.8 million across several of our verticals:
● Industrial Services
We made six acquisitions into our Industrial Services vertical.
We acquired Bay Valve, which is an industrial valve distributor and provider of valve field services and equipment repair throughout the western United States. Its primary markets are petrochemical and power generation. JZCP purchased US\$18.9 million of senior and subordinated notes, and a nominal amount of common stock. JZCP's equity interest in this entity is 31 per cent.
We also purchased Gator Compressor, a small independent dealer of used and refurbished air compressor equipment and associated filter, lubricant and sundry parts. The company stocks a wide variety of inventory, and is capable of supplying aftermarket equipment and parts for a wide variety of OEM compressor brands. JZCP purchased 33 per cent of this business with US\$1.5 million of senior notes.
National Compressors was the next ISS acquisition, which provides air compressor services and solutions to manufacturing plants across several end-markets, including steel, power generation, automotive, and industrial and general manufacturing. We purchased US\$4.4 million of senior notes, and acquired 31 per cent of this business.
We also made an investment in Pennsylvania Electric Motor Services, which specialises in the repair, rebuild, maintenance and installation of electric motors in a wide variety of uses, from integrated motion control devices to more mundane electric motors installations. The company services customers in a wide variety of end markets, including mining, metals, chemicals and automotive industries. JZCP purchased US\$6.6 million of senior and subordinated notes, and acquired 34 per cent of the business' equity.
We acquired Madison Smith, which provides a range of industrial services to manufacturing plants operating in a variety of end-markets, including consumer products, food, automotive, energy, agriculture, material handling and packaging. We paid US\$4.8 million for a 34 per cent interest in this company.
Finally, we purchased RAM Industrial Services, a provider of repair and replacement options for motors, pumps, controls, variable frequency drives (used to adjust motor speed) and related equipment for a diversified customer base. We purchased US\$7.8 million in notes for 31 per cent of this business.
● Healthcare Revenue Cycle Management
We made our first investment in our new Healthcare Revenue Cycle Management vertical, MEDS, which is an outsourced provider of patient benefit eligibility, enrolment and revenue recovery services to hospitals
and health systems. MEDS helps its customers increase cash flow and accelerate cash collections by securing government-funded reimbursement for uncompensated medical expenses provided to uninsured and underinsured patients. JZCP purchased US\$7.2 million in senior notes, and US\$5.9 million of preferred and common stock, and acquired 30 per cent of the equity of this business.
Mike Shea, our CEO in this vertical, has extensive experience in helping hospitals manage their cash flows though MEDS-type vehicles. He founded, built, ran and sold a large MEDS competitor, achieving exemplary returns for his investors. His reputation in this growing segment of the healthcare industry has helped populate a very active acquisition pipeline.
● Water Services
We made three acquisitions in our Water Services vertical. The first acquisition was Klenzoid Canada, which came to us via a reference from our Nashville Chemical investment management. Klenzoid is a specialty water treatment chemicals and services business. The company treats boilers, cooling water towers and process water systems for hospitals and industrial/commercial customers. Klenzoid develops its own proprietary chemical formulations, outsources the manufacturing/ blending to chemical blenders and then sells the chemicals, along with chemical feed equipment and water softeners, to middle market customers in the Great Lakes region. We acquired a 29 per cent share of the business for US\$11.2 million by purchasing US\$6.0 million in notes, and US\$5.2 million in preferred stock.
We also purchased two businesses in the water infrastructure repair sub-sector, a large and rapidly growing area of concern for municipalities and other water suppliers. LMK Technologies is a nationwide provider of non-invasive, long-lasting repair of underground water pipes. Using patent protected proprietary technologies, LMK products allow for repair of leaking pipes with minimal or no excavation. The deterioration of infrastructure in US cities and towns implies significant growth opportunities for LMK. JZCP purchased US\$6.0 million of senior notes, and US\$4.2 million of preferred and common stock for 20 per cent of this business.
The second business in this sub-sector is Perma-Liner, whose products perform essentially the same function as LMK, but are sold through a different channel. JZCP invested US\$5.2 million in US\$4.0 million senior notes and US\$1.2 million of preferred stock for 25 per cent of this entity.
We made our second acquisition in our Testing Services vertical. Argus Group sells, rents and services industrial hygiene and safety equipment including gas monitoring and measurement equipment and personal protective equipment. The company's clients span a wide range of industries, from environmental consulting firms to industrial businesses. JZCP purchased US\$2.5 million in senior notes, and US\$2.9 million in preferred and common stock, and acquired 31 per cent of the equity in this business.
Similar to our verticals strategy, the combination of JZCP's and our partners' equity always creates a majority position in these companies.
We put almost US\$40.0 million to work across four new businesses:
● In conjunction with ACON Latin America, a successful fund that has been investing in Latin America for 15 years, we invested in BSM Engenharia S.A., a provider of supply chain logistics, infrastructure services and equipment rental to oil and gas, petrochemical, mining and energy markets in Brazil. It operates from four ports in Brazil and its blue chip customer list includes Petrobras, AcelorMittal and ThyssenKrupp. We purchased 4 per cent of this business for US\$6.1 million of stock.
JZCP is investing in the European micro cap sector through its 75 per cent ownership of the European Microcap Fund ("EMF"). Exposure to the European micro cap sector continues to complement and diversify JZCP's existing micro cap portfolio. As you may recall, EMF has offices in London and Madrid and an outstanding team with over ten years of investment experience in European micro cap deals. To date, all five investments are in Spain, where we are finding value in historically profitable businesses run by entrepreneurial managers. As at 28 February 2013, the European micro cap portfolio represented 17 per cent of total NAV.
As mentioned previously, Factor Energia, our energy and natural gas distribution business, continues to outperform expectations. The uplift in its valuation accounts for a 23 cent increase in NAV. This is offset by a 14 cent decrease in Xacom's valuation. Xacom, a supplier of products and technologies to Spanish telecoms in Spain and South America, has seen a delay in orders from its large customers, however, most recently business has picked up.
EMF made one acquisition in the past fiscal year, purchasing 30 per cent of Oro Direct, a leading precious metals trading business in Spain. EMF invested €13.5 million alongside a co-investor, LFPI, which invested €11.5 million for 25 per cent interest. Based in Valencia, Spain, Oro produces scrap gold and silver from 1,500 pawn shops and jewellers for the spot price less a commission per kilo transacted. The precious metals are then sold on to a refiner in Switzerland. This business is very scalable and opened an office in Vienna immediately after our transaction.
We have begun to assemble a portfolio of properties, retail and residential, in Brooklyn, a borough of New York City that has experienced a rapid gentrification in certain neighbourhoods. The management team we are backing is RedSky Capital, a Brooklyn-based real estate and development and management company.
Brooklyn on its own would be the fourth largest city in the United States, and demographic projections suggest that significant growth is anticipated in the next ten years. It has 2.4 million people, about the same size as Chicago in terms of population.
Brooklyn is in the early stages of a renaissance where areas that have been historically industrial, low-income and/or artist communities are beginning to see seismic population changes fuelled by an influx of young and affluent ex-Manhattan residents. They migrate to Brooklyn in search of more space and a trendier community that embraces a relaxed, artistic and young lifestyle.
The RedSky team recognised this evolution in its infancy, and began acquiring retail and multi-family developments at discounts to their intrinsic value with significant upside as these communities mature and develop. We liked what they were doing; buying properties (offmarket, non-auction) in a growth market, providing hands-on management (tremendous value added) and proven earnings performance. Similar to our strategic build-ups, there is a multiple expansion (a lower cap rate in the real estate world) when valuing properties that have been redeveloped and are generating significantly higher cash flows.
In the past year, JZ RedSky has acquired four properties, with an additional five properties under contract. The current capitalisation of the existing portfolio is US\$93.0 million, with US\$42.7 million in total equity, of which US\$34.4 million was funded by separate JZ REIT entities. The properties are in Williamsburg, Flatbush and Fulton Mall.
The first acquired property is almost a square block on Bedford Street, in the Williamsburg section of Brooklyn; JZCP's investment is US\$14.3 million. This retail/ residential building is in a premier location of an area that is in the biggest and most valuable retail redevelopment in Northern Brooklyn. The team is in the process of finding new, high-end tenants for this property, which should be fully repositioned in the next two years.
The second property, with a total investment by JZCP of US\$10.0 million, is an assemblage of three properties on the Fulton Mall area, the third largest retail centre in New York City and second only to Times Square in terms of transit density. We have purchased the first two properties and have a deposit on the third, which will close soon.
Finally, we invested US\$3.5 million in Flatbush across the street from the entrance to the newly opened US\$1.2 billion Barclays Center, a 20,000 person arena in Brooklyn, home of the NBA franchise Brooklyn Nets. The Barclays Center has been the focus of a newly revitalised
neighbourhood in the centre of Brooklyn. Our team plans to renovate the building and build an additional floor and premium signage and lease it to a sports retailer.
As mentioned, our Listed Equity portfolio has been reduced by the final sale of our remaining interest in TAL, the container leasing company. See below for details of these sales. Remaining in Listed Equities is primarily Safety Insurance, the Massachusetts-based propertycasualty insurer. It has performed well, creating an 8 cent increase in NAV over the course of the year.
The only asset of any size that remains in our Mezzanine, Bank Debt and Legacy portfolios is Healthcare Products, our power wheelchair manufacturer, marketer and seller. We have written Healthcare Products down by 8 cents to reflect the ongoing challenges the company has with its largest customer – the US Medicare system.
We also made a commitment of up to US\$15.0 million into a new asset management portfolio company, run by David Russ. David brings with him an impressive track record as Chief Investment Officer of Dartmouth College's endowment, as well as having senior investment roles at Stanford University and the Regents of the University of California. His plan is to approach smaller endowments and pension funds who have limited resources and offer them an institutional grade investment management programme; this type of asset management business is known as an "outsourced CIO/Endowment model." We are excited to be working with David and his team, and will report more on this business as it develops.
We had 19 realisations across all our business sectors, totalling US\$145.9 million. Of note are the following:
In our micro cap portfolio, we had two significant realisations. First, as mentioned above, in March 2013 (post-period), we sold Horsburgh and Scott, the large diameter gear business. Over time, we realised US\$38.6 million on our US\$21.8 million investment, for a respectable 1.8x multiple of capital invested, and a 13 per cent IRR. Given that we had been writing this investment up over time, there was a negligible effect on NAV. We also realised US\$9.2 million from the refinancing of some of the debt we put into our micro cap sensors vertical.
We realised US\$28.9 million from our Mezzanine portfolio, as four investments paid off their debt; we are left with some yield enhancement equity stubs in these successful ventures. We had US\$23.9 million of our bank debt paid off with refinancing, across five businesses.
Perhaps most importantly, we sold our remaining interest in TAL, the container leasing business. Over the course of the year, we sold 1,065,738 shares for a total of US\$42.1 million. As this investment was listed, it increased and decreased in NAV depending of the public markets. However, we did get a 6 cent increase in NAV from this successful secondary offering.
As an investment fund, our principal risks are those that are associated with its investment portfolio. Given the nature of the portfolio, the principal risks are associated with the financial and operating performance of the underlying investments, along with market risk associated with the publicly listed equities.
As most of our Shareholders are aware, we lost a valued colleague and JZCP director, David Allison, in a tragic biking accident in Guernsey last month. David was a considerate and thoughtful man and very helpful as a director. Everyone always knew David was only interested in what was best for the Shareholders, having no personal agenda or ego to satisfy. We will miss him.
Our philosophy and style of investing has remained consistent for the past 30 plus years. We believe the best way to achieve superior returns is by maintaining investment discipline and investing your (and our) money in a diversified portfolio of good quality niche businesses at reasonable prices. We are value oriented investors, i.e. we like to buy things that we hope have more intrinsic value and growth prospects than we have to pay in cash. As the market has become more competitive, we have responded by increasing the value-added/operations management component of our strategy significantly. We are pleased to have excellent managers as partners and, together, we develop growth strategies and work on operational efficiencies for the respective portfolio companies. This approach to investing offers superior risk adjusted returns for our Shareholders over the long term.
We are delighted that JZCP achieved what we like to call the "trifecta" this past year – increased stock price, increased NAV and dividend, and narrowing of the discount. We are very optimistic that our NAV and dividend will grow. We can only hope the stock market cooperates as well.
Having said that, it is clearly a good time for publicly quoted private equity stocks. The liquidity it affords Shareholders is now better appreciated than before the financial crisis. Investors who want exposure to this asset class have no other way of participating with seasoned
managers other than the traditional LP route which has a ten-year lock-up. So, we're hopeful that our "sector" will continue to be more in favour in the future and our discount will eventually become a premium.
In the meantime, we're sticking to the fundamentals that have worked well for us over JZCP's 26-year history. Our entire JZAI team, both in the US and Europe, appreciate your support and don't take it for granted.
Please feel free to contact us with any ideas that might be beneficial to JZCP.
Yours faithfully,
Jordan/ZalaznickAdvisers, Inc.
In valuing investments in accordance with International Financial Reporting Standards, the directors follow a number of general principles as detailed in the International Private Equity and Venture Capital Association ("IPEVCA") guidelines.
Investments are valued according to one of the following methods:
Investments are generally valued at amortised cost except where there is deemed to be impairment in value which indicates that a provision should be made. Mezzanine loans are classified in the statement of financial position as loans and receivables and are accounted for at amortised cost using the effective interest method less accumulated impairment allowances in accordance with IFRS.
The Company assesses at each reporting date whether a financial asset or group of financial assets classified as loans and receivables is impaired. Evidence of impairment may include indications that the debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicates that there is a measurable decease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the net present value of expected cash flows discounted at the original effective interest rate.
ii) Unquoted preferred shares, micro cap loans, unquoted equities and equity related securities Unquoted preferred shares, micro cap loans, unquoted equities and equity related securities investments are classified in the statement of financial position as investments at fair value through profit or loss. These investments are typically valued by reference to their enterprise value, which is generally calculated by applying an appropriate multiple to the last 12 months' earnings before interest, tax, depreciation and amortisation ("EBITDA"). In determining the multiple, the directors consider inter alia, where practical, the multiples used in recent transactions in comparable unquoted companies, previous valuation multiples used and, where appropriate, multiples of comparable publicly traded companies. In accordance with IPEVCA guidelines, a marketability discount is applied which
reflects the discount that in the opinion of the directors, market participants would apply in a transaction in the investment in question.
In respect of unquoted preferred shares and micro cap loans, the Company values these investments by reference to the attributable enterprise value as the exit strategy in respect to these investments would be a one tranche disposal together with the equity component. The fair value of the investment is determined by reference to the attributable enterprise value (this is calculated by a multiple of EBITDA reduced by senior debt and marketability discount) covering the aggregate of the unquoted equity, unquoted preferred shares and debt instruments invested in the underlying company. The increase of the fair value of the aggregate investment is reflected through the unquoted equity component of the investment and a decrease in the fair value is reflected across all financial instruments invested in an underlying company.
Traded loans including first and second lien term securities are valued by reference to the last indicative bid price from recognised market makers. These investments are classified in the statement of financial position as investments at fair value through profit or loss.
Listed investments are valued at the last quoted bid price. These investments are classified in the statement of financial position as investments at fair value through profit or loss.
The investments listed represent the top ten investments in terms of directors' valuation:
cap companies Euro Micro Cap Fund 2010, LP is a private equity fund built around the investment team at JZ International, the European private equity platform founded in 1999 with Jock Green-Armytage, a former Chairman of JZEP. The fund's aim is to make investments in Europe-based
Summary of JZCP's 75 per cent share of underlying investments in the EuroMicrocap Fund 2010, LP:
micro cap companies.
| Directors' | |
|---|---|
| valuation at | |
| 28/02/2013 | |
| US\$'000 | |
| Factor Energia SA | 52,032 |
| Oro Direct | 13,237 |
| Grupo Ombuds SA | 9,446 |
| Docout SL | 7,877 |
| Xacom Comunicaciones SL | 6,177 |
| Other net assets less carried interest | (1,202) |
| (87,567) | |
At 28 February 2013, JZCP had invested US\$62,428,000 in the EuroMicrocap Fund 2010, LP.
Safety Insurance Group, Inc., which is listed on NASDAQ (NASDAQ: SAFT), provides personal property and casualty insurance focused exclusively on the Massachusetts market. The Company's principal product line is private passenger automobile insurance. In addition, Safety Insurance offers commercial automobile, homeowners, dwelling fire, umbrella and business-owning policies.
| Historical | Directors' | |
|---|---|---|
| book | valuation at | |
| cost* 28/02/2013 | ||
| US\$'000 | US\$'000 | |
| Common stock | 6,816 | 54,292 |
| Year ended 31 December 2012 | ||
| Sales | US\$703.864m | |
| Year ended 31 December 2012 | ||
| Adjusted EBITDA | US\$95.83m |
BG Holdings Inc. owns The Horsburgh & Scott Co ("H&S") and Mid-American Machine & Equipment Co ("MAM"). H&S is a privately held manufacturer of highly engineered industrial gears and mechanical gear drives, with a market-leading position in the large diameter gear market. Founded in 1886, H&S offers a wide array of large gear types and engineering services for new or replacement installations, as well as custom industrial gears, repair, spare parts, heat treatment and other technical solutions. H&S also provides field service for its customers. H&S products are used in a variety of applications in steel, mining, sugar, aluminium and power generation among other industries. MAM is a provider of service, repair and equipment refurbishments primarily to the tyre and rubber industry.
| Historical book US\$'000 |
Directors' valuation at cost* 28/02/2013 US\$'000 |
|
|---|---|---|
| 12.5% senior subordinated notes | 2,624 | 3,297 |
| Preferred stock | 17,031 | 27,475 |
| Common stock with an equity | ||
| interest of 37.3% | 78 | 3,112 |
| 19,733 | 33,884 | |
| Year ended 31 December 2012 | ||
| Sales | US\$93.279m | |
| Year ended 31 December 2012 | ||
| Adjusted EBITDA | US\$15.934m |
* Original book cost incurred by JZEP/JZCP adjusted for subsequent transactions. The book cost represents the cash outflow and excludes the notional cost of PIK investments.
continued
Headquarters: Dalton, New Jersey, USA
Sector: Environmentaltesting laboratories Accutest Laboratories is a full service, independent testing laboratory successfully delivering legally defensive data for more than 50 years. Founded in 1956, they provide a full range of water, soil and air testing services to industrial, engineering/consulting and government clients throughout the United States.
| Historical book US\$'000 |
Directors' valuation at cost* 28/02/2013 US\$'000 |
|
|---|---|---|
| 12.5% senior subordinated notes | 7,425 | 8,967 |
| 10% preferred stock | 24,052 | 17,202 |
| Common stock with an equity | ||
| interest of 38.7% | 39 | – |
| 31,516 | 26,169 | |
| Year ended 31 December 2012 Sales |
US\$76.022m | |
| Year ended 31 December 2012 | ||
| Adjusted EBITDA | US\$9.563m |
Headquarters: Minneapolis, Minnesota, USA Sector: Healthcare equipment and services Dental Holdings Corporation is the parent of Dental Services Group ("DSG"). DSG is an operator of laboratories which manufacture oral appliances for dentists and dental centres. It runs both full service labs and "sale and delivery" sites in the United States, Canada and Mexico, making it one of the largest companies of its kind.
| Historical | Directors' | |
|---|---|---|
| book | valuation at | |
| cost* 28/02/2013 | ||
| US\$'000 | US\$'000 | |
| 15% senior notes | 7,500 | 10,033 |
| 12.5% senior notes | 8,404 | 12,156 |
| 8% preferred stock | 6,713 | 3,908 |
| Common stock with an equity | ||
| interest of 35.4% | 37 | – |
| 27,604 | 26,097 | |
| Year ended 31 December 2012 | ||
| Sales | US\$74.230m | |
| Year ended 31 December 2012 | ||
| Adjusted EBITDA | US\$2.744m |
Amptek, Inc. ("Amptek") designs and manufactures instrumentation used in numerous non-destructive testing and elemental analysis applications. Amptek's instruments are typically used both in the field and within laboratory settings to quickly and easily identify the composition of materials using Amptek's industry-leading x-ray detectors. Amptek is the largest manufacturer of x-ray detectors in the world that utilise the x-ray fluorescence method.
| Historical book US\$'000 |
Directors' valuation at cost* 28/02/2013 US\$'000 |
||||
|---|---|---|---|---|---|
| 7% preferred stock | 13,361 | 14,348 | |||
| Common stock | 37 | 6,900 | |||
| 13,398 | 21,248 | ||||
| Year ended 31 December 2012 | |||||
| Sales | US\$30.288m | ||||
| Year ended 31 December 2012 Adjusted EBITDA |
US\$12.224m |
Bay Valve Service & Engineering, Inc. ("BVS") is a leading provider of valve field services and equipment repair throughout the Western US. BVS specialises in valves used in petrochemical/refineries, power generation, upstream oil and gas and other industries where there is a need to isolate, control or direct flow of media. BVS provides valve service and repair as well as engineered valve solutions from eight regional locations.
| 15% senior notes 12.5% senior notes 8% preferred stock |
7,500 8,404 6,713 |
10,033 12,156 3,908 |
Historical book US\$'000 |
Directors' valuation at cost* 28/02/2013 US\$'000 |
|
|---|---|---|---|---|---|
| 10% preferred stock Common stock with an equity interest of 35.4% |
4,950 37 |
– – |
10% senior notes 11% subordinated notes |
13,740 4,950 |
14,330 5,438 |
| 27,604 | 26,097 | 18,690 | 19,768 | ||
| Year ended 31 December 2012 Sales |
US\$74.230m | Year ended 31 December 2012 Sales |
US\$41.571m | ||
| Year ended 31 December 2012 Adjusted EBITDA |
US\$2.744m | Year ended 31 December 2012 Adjusted EBITDA |
US\$5.552m |
* Original book cost incurred by JZEP/JZCP adjusted for subsequent transactions. The book cost represents the cash outflow and excludes the notional cost of PIK investments.
Headquarters: Nashville, Tennessee, USA and Mississauga, Ontario, Canada
Sector: Water treatment products and services TWH Water Treatment Industries, Inc. is the parent of Nashville Chemical & Equipment Company, Klenzoid Canada Company and Eldon Water, Inc. TWH Water Treatment Industries, Inc. companies provide water treatment supplies and services to various end markets in the United States and Canada.
| Historical | Directors' | |
|---|---|---|
| book | valuation at | |
| cost* 28/02/2013 | ||
| US\$'000 | US\$'000 | |
| 10% preferred stock | 8,666 | 9,334 |
| Common stock | 19 | 550 |
| 18,437 | 19,636 | |
| Year ended 31 December 2012 | ||
| Sales | US\$41.636m | |
| Year ended 31 December 2012 | ||
| Adjusted EBITDA | US\$5.470m | |
Medplast designs, engineers, and produces precision custom moulded thermoplastic, rubber and elastomer components and moulds for the healthcare and pharmaceutical and consumer/industrial markets. UPG Holdings operates as a manufacturer of precision plastic products for electronics, automotive, industrial, medical, datacentre and consumer markets.
| book US\$'000 |
valuation at cost* 28/02/2013 US\$'000 |
Historical book US\$'000 |
Directors' valuation at cost* 28/02/2013 US\$'000 |
||
|---|---|---|---|---|---|
| 10% senior notes | 9,752 | 9,752 | |||
| 10% preferred stock | 8,666 | 9,334 | 14.5% subordinated notes | 9,800 | 9,962 |
| Common stock | 19 | 550 | 7% preferred stock | 6,824 | 7,232 |
| 18,437 | 19,636 | Common stock | 720 | 720 | |
| Year ended 31 December 2012 | 17,344 | 17,914 | |||
| Sales | US\$41.636m | Year ended 31 December 2012 | |||
| Year ended 31 December 2012 | Sales | US\$223.054m | |||
| Adjusted EBITDA | US\$5.470m | Year ended 31 December 2012 | |||
| Adjusted EBITDA | US\$19.914m |
Headquarters: Sarasota, Florida, USA Sector: Healthcare services and equipment Healthcare Products Holdings, Inc.'s operating subsidiary is Hoveround Corporation, a designer, manufacturer and distributor of motorised wheelchairs and other patented mobility vehicles. Hoveround Corporation utilises a direct-to-the-customer marketing concept to sell and deliver its products.
| Historical | Directors' | ||
|---|---|---|---|
| book | valuation at | ||
| cost* 28/02/2013 | |||
| US\$'000 | US\$'000 | ||
| 12.5% second lien notes | 3,250 | 9,432 | |
| 12% subordinated notes | 8,149 | 9,587 | |
| 14% subordinated notes | 2,450 | 222 | |
| 6% preferred stock | 3,550 | – | |
| Common stock with an equity | |||
| interest of 2% | 237 | – | |
| 17,636 | 19,241 | ||
| Year ended 31 December 2012 | |||
| Sales | US\$94.013m | ||
| Year ended 31 December 2012 | |||
| Adjusted EBITDA | US\$6.032m |
* Original book cost incurred by JZEP/JZCP adjusted for subsequent transactions. The book cost represents the cash outflow and excludes the notional cost of PIK investments.
The directors' remuneration report has been prepared on behalf of the directors in accordance with the UK Corporate Governance Code ("the Code") as issued by the UK Listing Authority.
The Company's policy in regard to directors' remuneration is to ensure that the Company maintains a competitive fee structure in order to recruit, retain and motivate non-executive directors of excellent quality in the overall interests of Shareholders.
The directors do not consider it necessary for the Company to establish a separate Remuneration Committee. All of the matters recommended by the Code that would be delegated to such a committee are considered by the Board as a whole.
It is the responsibility of the Board as a whole to determine and approve the directors' fees, following a recommendation from the Chairman who will have given the matter proper consideration, having regard to the level of fees payable to non-executive directors in the industry generally, the role that individual directors fulfil in respect of Board and committee responsibilities and the time committed to the Company's affairs. The Chairman's remuneration is decided separately and is approved by the Board as a whole.
The remuneration policy set out above is the one applied for the year ended 28 February 2013 and is not expected to change in the foreseeable future.
Directors' and Officers' liability insurance cover is maintained by the Company on behalf of the directors.
Each director retires from office at the third Annual General Meeting after his appointment or (as the case may be) the general meeting at which he was last reappointed and is eligible for reappointment.
The directors were appointed as non-executive directors by letters issued in April 2008 which state that their appointment and any subsequent termination or retirement shall be subject to three months' notice from either party and otherwise to the Articles. Each director's appointment letter provides that, upon the termination of his/her appointment, that he/she must resign in writing and all records remain the property of the Company. The directors' appointments can be terminated in accordance with the Articles and without compensation. There is no notice period specified in the Articles for the removal of directors. The Articles provide that the office of director shall be terminated by, among other things: (a) written resignation; (b) unauthorised absences from Board meetings for six months or more; (c) unanimous written request of the other directors; and (d) an ordinary resolution of the Company.
| The Company's Articles states that directors' remuneration | Fees for | Fees for | |
|---|---|---|---|
| payable in any accounting year shall not exceed in the | services to | services to | |
| the Company the Company | |||
| aggregate an annual sum of US\$650,000. Each director is | for the year to for the year to | ||
| also entitled to reimbursement oftheir reasonable expenses. | 28 February | 29 February | |
| There are no commission or profit sharing arrangements | 2013 | 2012 | |
| between the Company and the directors. Similarly, none | US\$ | US\$ | |
| of the directors is entitled to pension, retirement or | David Macfarlane (Chairman) | 140,000 | 140,000 |
| similar benefits. | David Allison | 60,000 | 60,000 |
| Patrick Firth | 60,000 | 60,000 | |
| No element of the directors' remuneration is performance | James Jordan | 60,000 | 60,000 |
| related, nor does any director have any entitlement to | Tanja Tibaldi | 60,000 | 60,000 |
| pensions, share options or any long-term incentive plans from the Company. |
380,000 | 380,000 |
The amounts payable to directors as shown above were for services as non-executive directors.
No director has a service contract with the Company, nor are any such contracts proposed.
Signed on behalf of the Board of directors on 20 May 2013 by:
David Macfarlane Patrick Firth Chairman Director
The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Corporate Governance Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to JZ Capital Partners Limited.
The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the UK Corporate Governance Code), will provide better information to Shareholders.
The Company has considered the recommendations of the AIC Code and the relevant provisions of the UK Corporate Governance Code, except as set out below.
The UK Corporate Governance code includes provisions relating to:
For the reasons set out in the AIC guide, and as explained in the UK Corporate Governance Code, the Board considers these provisions are not relevant to the position of JZ Capital Partners Limited, being an externally managed investment company. The Company has therefore not reported further in respect of these provisions.
The Guernsey Financial Services Commission's (GFSC) "Finance Sector Code of Corporate Governance" (Guernsey Code) came into effect on 1 January 2012. The introduction to the Guernsey Code states that companies which report against the UK Corporate Governance Code or the AIC's Code of Corporate Governance are deemed to meet the Guernsey Code.
Corporate governance of JZCP is monitored by the Board, which at the end of the year comprised five directors, all of whom are non-executive. Biographical details of the Board members at the date of signing these financial statements are shown on page 79 and their
interests in the shares of JZCP are shown in the report of the directors on page 7. The directors' biographies highlight their wide range of business experience.
The Board considers that all of the directors are independent of the Investment Adviser. The Board considers the directors are free from any business or other relationship that could materially interfere with the exercise of their independent judgement. The Board reviews the independence of the directors at least annually.
The directors have overall responsibility for the Company's activities and the determination of its investment policy and strategy. The Company has entered into an investment advisory and management agreement with its Investment Adviser, JZAI, pursuant to which, subject to the overall supervision of the directors, the Investment Adviser acts as the investment manager to the Company and manages the investment and reinvestment of the assets of the Company in pursuit of the investment objective of the Company and in accordance with the investment policies and investment guidelines from time to time of the Company and any investment limits and restrictions notified by the directors (following consultation with the Investment Adviser). Within its strategic responsibilities the Board regularly considers corporate strategy as well as dividend policy, the policy on share buy backs and corporate governance issues.
The directors meet at least quarterly to direct and supervise the Company's affairs. This includes reviewing the investment strategy, risk profile and performance of the Company and the performance of the Company's functionaries, and to monitor compliance with the Company's objectives. The directors hold regular meetings to review the Investment Adviser's investment decisions and valuations and to decide if the levels of gearing within the investment portfolio are appropriate. The directors deem it appropriate to review the valuations on a quarterly basis. The schedule of directors and committee meetings is shown on page 23.
In the opinion of the directors, the continuing appointment of the Investment Adviser on the terms agreed continues to be in the interests of Shareholders. In reaching its conclusion the Board considers the Investment Adviser's investment strategy and performance.
The Chairman ensures that all directors are properly briefed on issues arising at Board meetings. The Company's advisers provide the Board with appropriate and timely information in order that the Board may reach proper decisions. Directors can, if necessary, obtain independent professional advice at the Company's expense.
The Board is provided with information concerning changes to the regulatory or statutory regimes as they may affect the Company, and are offered the opportunity to attend courses or seminars on such changes or other relevant matters.
The Chairman is a non-executive director, together with the rest of the Board. There is no executive director position within the Company. Day-to-day management of the Company's affairs has been delegated to the Administrator. The Board has considered whether a senior independent director should be appointed. However, as the Board comprises entirely non-executive directors, the appointment of a senior independent director for the time being, is not considered necessary. Any of the non-executive directors are available to Shareholders if they have concerns which cannot be resolved through discussion with the Chairman.
The principle set out in the UK Corporate Governance Code is that directors should submit themselves for re-election at regular intervals and at least every three years, and in any event as soon as it is practical after their initial appointment to the Board. It is a further requirement that non-executive directors are appointed for a specific period.
The Letters of Appointment of the non-executive directors suggest that it is appropriate for directors to retire and be nominated for re-election after three years of service, subject to the recommendation of the general meeting. The Nominations Committee met on 15 May 2013 and it was decided David Macfarlane and James Jordan would put themselves forward for re-election at the 2013 Annual General Meeting.
Mr Firth and Ms Tibaldi were re-elected to the Board at the 2011 Annual General Meeting.
An appraisal system has been agreed by the Board to evaluate its performance and that of the Chairman and individual directors on an annual basis. The evaluation takes the form of a questionnaire followed by a discussion of the results and any issues subsequently raised. The questionnaire is designed to highlight areas of the Board's activities, policies or processes which could be improved. The results of the evaluation process concluded the Board was functioning effectively and the Board and its committees provided a suitable mix of skills and experience.
In accordance with the AIC Code, the Board has established an Audit Committee and a Nomination Committee, in each case with formally delegated duties and responsibilities within written terms of reference. As the Board has no executive directors and is comprised solely of non-executive directors a Remuneration Committee is deemed unnecessary. The process for agreeing the non-executive directors' fees is set out in the directors' remuneration report on page 20. The identity of each of the chairmen of the committees referred to above are reviewed on an annual basis. The Board has decided that the entire Board should fulfil the role of the Audit and Nomination Committees. The terms of reference of the committees are kept under review.
In accordance with the Code, the Company has established a Nomination Committee. The main role of the committee is to propose candidates for election to the Board of directors, including the Chairman. The Nomination Committee takes into consideration the Code's rules on independence of the Board in relation to the Company, its senior management and major Shareholders. The Nomination Committee is chaired by David Macfarlane, and each of the other directors is also a member. The members of the committee are independent of the Investment Adviser. The Nomination Committee has responsibility for considering the size, structure and composition of the Board, retirements and appointments of additional and replacement directors and making appropriate recommendations to the Board.
The committee did not meet during the year ended 28 February 2013, because there were no matters to discuss in terms of nominations. The committee met on 15 May 2013.
The vacancy following the tragic death only recently of David Allison remains under discussion.
The final decision with regard to appointments always rests with the Board and all such appointments are subject to confirmation by Shareholders.
Due to the nature of the Company being a listed investment company investing in private equity with an international Shareholder base, the Company needs directors with a broad range of financial experience. For this reason, directors believe that it is more appropriate to use their own contacts as a source of suitable candidates as no one external consultancy or advertising source is likely to be in a position to identify suitable candidates.
The Audit Committee is chaired by Patrick Firth. All the other directors are members. Members of the Committee are independent of the Company's external Auditors and the Investment Adviser. The Audit Committee meets at least twice a year and meets the external Auditors at least twice a year. The Audit Committee is responsible for overseeing the Company's relationship with the external Auditors, including making recommendations to the Board on the appointment of the external Auditors and their remuneration. The Committee also considers the nature, scope and results of the Auditors' work and reviews, and develops and implements policies on the supply of any non-audit services that are to be provided by the external Auditors.
The Committee receives and reviews reports from the Investment Adviser and the Company's external Auditors relating to the Company's Annual Report and Accounts. The Committee also focuses particularly on compliance with legal requirements, accounting standards and the Listing Rules and ensuring that an effective system of internal financial and non-financial controls is maintained. The ultimate responsibility for reviewing and approving the Annual Report and Accounts remain with the Board. The committee met twice during the year ended 28 February 2013 – on 14 May 2012 and 9 October 2012.
Furthermore, the Board has reviewed the need for an internal audit function, as recommended by the Code. Due to the size of JZCP and its outsourced functions an internal audit function is not considered necessary, although this is kept under review.
The Company currently does not have a separate Management Engagement Committee. The recommended functions and responsibilities of such a committee are exercised by the full Board, each member of which is unassociated with the managers.
Board and committee meeting attendance The number of formal meetings of the Board and its committees held during the year and the attendance of individual directors at these meetings was as follows:
| Number of meetings | |||||||
|---|---|---|---|---|---|---|---|
| Board Main |
Board | Other Other Committee Committee |
Audit | ||||
| Total number | |||||||
| of meetings | 4 | 7 | 1 | 2 | |||
| David Macfarlane | 4 | 3 | 0 | 2 | |||
| David Allison | 4 | 7 | 1 | 2 | |||
| Patrick Firth | 4 | 6 | 1 | 2 | |||
| James Jordan | 4 | 5 | 0 | 2 | |||
| Tanja Tibaldi | 4 | 4 | 1 | 2 |
The main Board meetings are held to agree the Company's valuation of its investments, agree the Company's financial statements and discuss and agree other strategic issues. Other meetings are held when required to agree Board decisions on ad hoc issues.
The directors consider the Company has adequate financial resources, in view of its holding in cash and cash equivalents and liquid investments and the income streams deriving from its investments and believe that the Company is well placed to manage its business risks successfully to continue in operational existence for the foreseeable future and that it is appropriate to prepare the financial statements on the going concern basis.
The directors believe that the maintenance of good relations with both institutional and retail Shareholders is important for the long-term prospects of the Company. It therefore seeks active engagement with investors, bearing in mind the duties regarding equal treatment of Shareholders and the dissemination of inside information. The Board receives feedback on Shareholder views from its Corporate Broker and Investment Adviser, and is circulated with Broker reports on the Company.
The directors believe that the Annual General Meeting, a meeting for all Shareholders, is the key point in the year when the Board of directors accounts to all Shareholders for the performance of the Company. It therefore encourages all Shareholders to attend, and all directors are present unless unusual circumstances prevail.
The directors believe that the Company policy of reporting to Shareholders as soon as possible after the Company's year end and the holding of the Annual General Meeting at the earliest opportunity is valuable.
The Company also provides Interim Report and Accounts in accordance with IAS 34 interim management statements for the quarterly periods in line with the requirements of the Transparency Directive.
As an investment fund, the principal risks are those that are associated with its investment portfolio. Given the nature of the portfolio, the principal risks are associated with the financial and operating performance of the underlying investments, along with market risks associated with the publicly listed equities. Note 21 on pages 69 to 72 of the financial statements describes the Company's risk management processes.
Under the AIC Code the Board has overall responsibility for the Company's systems of internal controls, including its financial, operational and compliance controls, risk management, and for reviewing their effectiveness.
The key risk of the Company is the identification and evaluation of investments. As the principal objective of the Company is to invest in US and European businesses, the responsibility of identifying appropriate investments has been delegated to the Company's Investment Adviser, JZAI, who are highly regarded in the US and Europe and have many years of experience of making successful investments. JZAI are able to identify potential investments through a wide network of contacts and review these investments in conjunction with lawyers and accountants.
Other business risks identified by the Board include the risks associated with the various financial instruments issued by the investee companies such as market price, interest rate changes, foreign currency exchange rates and liquidity are explained more fully in note 21 on pages 69 to 72.
The main controls which relate to investments have been delegated to JZAI, and the Board reviews their performance.
A control report is provided to the Board incorporating a key risk table that identifies the risks to which the Company is exposed, the controls in place to mitigate them and details of any known internal control concerns. The report is reviewed by the Audit Committee. Controls relating to the risks identified, covering financial, operational, compliance and risk management, are embedded in the operations of the Investment Adviser, Administrator and Secretary and other outsourced service providers. There is a monitoring and reporting process to track risks identified by Auditors and compliance functions of these service providers.
The Company's system of internal controls is designed to manage rather than eliminate the risk of failure to achieve business objectives. However, no system can provide absolute assurance against material misstatement or loss. The Company's system is designed to assist the directors in obtaining reasonable, but not absolute, assurance that problems are being identified on a timely basis and are dealt with appropriately.
The Audit Committee is responsible for monitoring the internal control and risk management systems related to the financial reporting process on an ongoing basis.
The internal control and risk management systems are designed to mitigate rather than eliminate the risks identified in the financial reporting process. Internal controls related to the financial reporting process are established to mitigate, detect and correct material misstatements in the financial statements.
The risk assessment process related to financial reporting is conducted annually.
Significant transactions, balances and changes to accounting standards are identified. The associated risks are identified based on the evaluation of the materiality of the impact and the likelihood of the risks identified occurring.
Financial controls are also in place in order to enable the Board to meet its responsibilities regarding the integrity and accuracy of the Company's accounting records. The Board delegates this responsibility to the Administrator who provides the Board with regular updates on the Company's net asset value, income statement and cash balances.
The monitoring of the internal control and risk management systems related to financial reporting is performed by the Audit Committee.
The responsibility of identifying relationships or potential transactions with related parties has been delegated to the Company's Investment Adviser, JZAI. The Investment Adviser will report on a regular basis to the Board. The Board will determine if Shareholder support is appropriate to authorise the transaction.
The Foreign Account Tax Compliance Act ("FATCA") became effective on 1 January 2013. The legislation is aimed at determining the ownership of US assets in foreign accounts and improving US tax compliance with respect to those assets. However, the States of Guernsey has recently announced that it has decided to enter into an intergovernmental agreement ("IGA") with the US Treasury in order to facilitate the requirements under FATCA and is currently in negotiations with regards to how this is to be implemented and, as a result, the impact this will have on the Company remains unknown. The Board is in the process of ensuring the Company complies with FATCA's requirements.
We have audited the financial statements of JZ Capital Partners Limited for the year ended 28 February 2013 which comprise the investment portfolio, statement of comprehensive income, statement of financial position, statement of changes in equity, statement of cash flows, and the related notes 1 to 32. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as adopted by the European Union.
This report is made solely to the Company's members, as a body, in accordance with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an Auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report or for the opinions we have formed.
As explained more fully in the directors' responsibilities statement in the report of the directors, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report for the year ended 28 February 2013 to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
In our opinion the financial statements:
We have nothing to report in respect of the following:
Under the Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion:
Ernst & Young LLP Guernsey, Channel Islands
Notes:
| Company | JZCP book cost* US\$'000 |
Historical book cost** US\$'000 |
Directors' valuation at 28 February 2013 US\$'000 |
Carrying value including accrued interest 28 February 2013 US\$'000 |
Percentage of portfolio % |
|---|---|---|---|---|---|
| US micro cap portfolio | |||||
| Industrial Service Solutions BAY VALVE SERVICES Provider of industrial valve services and repair throughout the Western US. Bay Valve is a subsidiary of ISS #2, part of Industrial Services business |
18,989 | 18,989 | 20,149 | 20,496 | 3.3 |
| ISS COMPRESSORS INDUSTRIES, INC. Acquirer of industrial air compressor services and repair companies. ISS Compressors Industries, Inc., which owns Worthington Compressor (combination of Southern Parts & Engineering Company and Gator Compressor) and National Compressors, is a subsidiary of ISS #2, part of Industrial Services business |
12,564 | 12,514 | 11,744 | 11,943 | 1.9 |
| MADISON SMITH MACHINE & TOOL COMPANY Provider of industrial motor services and repair services to manufacturing plants operating in a variety of end markets |
4,881 | 4,881 | 4,903 | 4,987 | 0.8 |
| ISS MOTORS INDUSTRIES, INC. Acquirer of industrial motor services and repair companies. ISS Motors Industries, Inc., which owns Pennsylvania Electric Motor Services and RAM Industrial Services, Inc., is a subsidiary of Industrial Service Solutions |
14,431 | 14,431 | 14,771 | 14,902 | 2.4 |
| Healthcare Revenue Cycle Management MEDS HOLDINGS, INC. An outsourced provider of patient benefit eligibility, enrolment and revenue recovery services to hospitals and health systems. Meds Holdings is a subsidiary of Bolder Healthcare Solutions, LLC |
13,289 | 13,289 | 13,552 | 13,772 | 2.2 |
| Sensors Solutions AMPTEK, INC. Designer and manufacturer of instrumentation used in numerous non-destructive testing and elemental analysis applications. Amptek, Inc. is a subsidiary of Sensors Solutions Holdings |
13,909 | 13,909 | 20,845 | 21,019 | 3.3 |
| NIELSEN-KELLERMAN Designer and manufacturer of weather, wind and timing measurement instruments and devices. Nielsen-Kellerman is a subsidiary of Sensors Solutions Holdings |
2,613 | 2,613 | 4,169 | 4,221 | 0.7 |
| Company | JZCP book cost* US\$'000 |
Historical book cost** US\$'000 |
Directors' valuation at 28 February 2013 US\$'000 |
Carrying value including accrued interest 28 February 2013 US\$'000 |
Percentage of portfolio % |
|---|---|---|---|---|---|
| Testing Services | |||||
| ACCUTEST HOLDINGS, INC. | |||||
| Provision of environmental testing laboratories to the US market |
34,976 | 31,515 | 26,169 | 26,949 | 4.3 |
| ARGUS GROUP HOLDINGS Sells, rents and services safety and testing equipment to a variety of industries. Argus Group Holdings is a subsidiary of Testing Services Holdings |
8,382 | 8,382 | 8,589 | 8,724 | 1.4 |
| GALSON LABORATORIES | |||||
| Provider of analytical air testing services as well as | |||||
| industrial hygiene rental equipment. Galson Laboratories is a subsidiary of Testing Services Holdings |
2,671 | 2,671 | 9,735 | 9,790 | 1.6 |
| Water Services TWH INFRASTRUCTURE INDUSTRIES, INC. Environmental infrastructure company that provides technology to facilitate repair of underground pipes and other infrastructure. TWH Infrastructure Industries, Inc., which owns LMK Enterprises and Perma-Liner Industries, is a subsidiary of Triwater Holdings |
15,618 | 15,618 | 16,438 | 16,704 | 2.7 |
| TWH WATER TREATMENT INDUSTRIES, INC. Provider of water treatment supplies and services. TWH Water Treatment Industries, Inc., which owns Nashville Chemical & Equipment and Klenzoid Canada Company/EldonWater, Inc., is a subsidiary |
|||||
| of Triwater Holdings | 18,437 | 18,437 | 19,636 | 19,952 | 3.2 |
| BG HOLDINGS, INC. Manufacturer of industrial gears |
19,732 | 19,732 | 33,883 | 34,467 | 5.5 |
| CHINA DENTAL HOLDINGS, INC. Acquirer of China-based dental laboratories |
1,377 | 1,377 | 1,648 | 1,675 | 0.3 |
| DENTAL HOLDINGS CORPORATION Operator of dental laboratories |
33,368 | 27,605 | 26,096 | 26,949 | 4.3 |
| ETX HOLDINGS, INC.*** Provider of services to the auto after-sales market |
391 | 391 | 671 | 684 | 0.1 |
| HEALTHCARE PRODUCTS HOLDINGS, INC.*** | |||||
| Designer and manufacturer of motorised vehicles | 13,849 | 17,637 | 19,241 | 20,309 | 3.2 |
| JUSTRITE MANUFACTURING COMPANY A manufacturer of industrial safety products |
4,428 | 4,428 | 5,977 | 6,035 | 1.0 |
| MEDPLAST/UPG HOLDINGS Manufacturer of plastic medical components |
17,344 | 17,344 | 17,915 | 18,246 | 2.9 |
| MILESTONE AVIATION GROUP, INC. Finance provider for helicopter and private jet owners |
15,138 | 15,138 | 16,867 | 17,120 | 2.7 |
| Company | JZCP book cost* US\$'000 |
Historical book cost** US\$'000 |
Directors' valuation at 28 February 2013 US\$'000 |
Carrying value including accrued interest 28 February 2013 US\$'000 |
Percentage of portfolio % |
|---|---|---|---|---|---|
| NATIONWIDE STUDIOS, INC. Processor of digital photos for preschoolers |
16,132 | 16,132 | 6,026 | 6,201 | 1.0 |
| NEW VITALITY HOLDINGS, INC. Direct-to-consumer provider of nutritional supplements and personal care products |
3,280 | 3,280 | 7,944 | 8,000 | 1.3 |
| NTT ACQUISITION CORP.*** Technical education and training |
– | 894 | – | – | 0.0 |
| PC HELPS SUPPORT LLC Provider of outsourced IT support and training services |
9,020 | 9,020 | 9,282 | 9,422 | 1.5 |
| SALTER LABS, INC. Developer and manufacturer of respiratory medical products and equipment for the homecare, hospital, and sleep disorder markets |
19,163 | 19,163 | 12,866 | 13,147 | 2.1 |
| SUZO-HAPP GROUP Designer, manufacturer and distributor of components for the global gaming, amusement and industrial markets |
4,958 | 4,958 | 4,958 | 4,958 | 0.8 |
| TAP HOLDINGS, INC. Acquirer of food product manufacturers or distributors |
945 | 945 | 1,116 | 1,133 | 0.2 |
| TIGER INFORMATION SYSTEMS, INC.*** Provider of temporary staff and computer training |
300 | 400 | 300 | 300 | 0.0 |
| US SANITATION, LLC Acquirer of janitorial and sanitorial product distributors and related chemical manufacturers and blenders |
425 | 425 | 455 | 462 | 0.1 |
| Total US micro cap portfolio | 320,610 | 316,118 | 335,945 | 342,567 | 54.8 |
| European micro cap portfolio EUROMICROCAP FUND 2010, LP**** Acquirer of Europe-based micro cap companies |
62,428 | 62,428 | 87,567 | 87,567 | 13.9 |
| DOCOUT, S.L. Provider of digitalisation, document processing and storage services |
2,777 | 2,777 | 2,628 | 2,833 | 0.5 |
| GRUPO OMBUDS Provider of personal security and asset protection |
14,795 | 14,795 | 13,771 | 15,640 | 2.5 |
| ORO DIRECT Buyer and seller of precious metals |
1,275 | 1,275 | 1,307 | 1,423 | 0.2 |
| Total European micro cap portfolio | 81,275 | 81,275 | 105,273 | 107,463 | 17.1 |
| Company | JZCP book cost* US\$'000 |
Historical book cost** US\$'000 |
Directors' valuation at 28 February 2013 US\$'000 |
Carrying value including accrued interest 28 February 2013 US\$'000 |
Percentage of portfolio % |
|---|---|---|---|---|---|
| Mezzanine portfolio | |||||
| GED HOLDINGS, INC. | |||||
| Manufacturer of windows | – | 6,100 | 305 | 305 | 0.0 |
| HAAS TCM GROUP, INC. Speciality chemical distribution |
7,500 | 7,500 | 7,584 | 7,764 | 1.2 |
| METPAR INDUSTRIES, INC. | |||||
| Manufacturer of restroom partitions | 6,450 | 7,754 | 741 | 750 | 0.1 |
| PETCO ANIMAL SUPPLIES, INC. | |||||
| Retailer of pet food, supplies and services | 1,237 | 1,237 | 2,475 | 2,475 | 0.4 |
| Total mezzanine portfolio | 15,187 | 22,591 | 11,105 | 11,294 | 1.7 |
| Bank debt: second lien portfolio DEKKO TECHNOLOGIES, LLC Distributor of electrical sub-components |
11,418 | 11,368 | 11,590 | 11,690 | 1.9 |
| Total bank debt | 11,418 | 11,368 | 11,590 | 11,690 | 1.9 |
| Listed investments Equities SAFETY INSURANCE GROUP, INC.*** Provider of automobile insurance |
42,223 | 6,816 | 54,292 | 54,292 | 8.6 |
| UNIVERSAL TECHNICAL INSTITUTE, INC.*** | |||||
| Vocational training in the automotive and marine fields | 835 | 15 | 777 | 777 | 0.1 |
| Total listed equity investments | 43,058 | 6,831 | 55,069 | 55,069 | 8.7 |
| UK gilts UK treasury 2% – maturity 22.01.2016 |
32,431 | 32,431 | 31,745 | 31,809 | 5.1 |
| Total UK gilts | 32,431 | 32,431 | 31,745 | 31,809 | 5.1 |
| Corporate bonds HSBC Finance Corp, 01.15.2014 |
4,868 | 4,868 | 4,994 | 4,997 | 0.8 |
| JP Morgan Chase Bank NA, 05.30.2017 | 22,028 | 22,028 | 21,453 | 21,453 | 3.4 |
| Total corporate bonds | 26,896 | 26,896 | 26,447 | 26,450 | 4.2 |
| Company | JZCP book cost* US\$'000 |
Historical book cost** US\$'000 |
Directors' valuation at 28 February 2013 US\$'000 |
Carrying value including accrued interest 28 February 2013 US\$'000 |
Percentage of portfolio % |
|---|---|---|---|---|---|
| Real estate | |||||
| REDBRIDGE BEDFORD, LLC Acquirer of several buildings compromising almost a square block in Williamsburg, Brooklyn, New York |
14,258 | 14,258 | 14,258 | 14,258 | 2.2 |
| REDSKY JZ FULTON, LLC Facilitating the purchase of a mixed use development site on the Fulton Mall in Brooklyn, New York |
10,077 | 10,077 | 10,077 | 10,077 | 1.6 |
| REDSKY JZ TRIANGLE, LLC Facilitating the purchase of a freestanding building on Flatbush Avenue, across from the newly built Barclays Center, in Brooklyn, New York |
3,510 | 3,510 | 3,510 | 3,510 | 0.6 |
| REDSKY ROEBLING, LLC Facilitating the purchase of a full block front and 35 per cent of a total city block in Brooklyn, New York |
3,015 | 3,015 | 3,015 | 3,015 | 0.5 |
| Total real estate investments | 30,860 | 30,860 | 30,860 | 30,860 | 4.9 |
| Other BSM ENGENHARIA S.A. Brazilian-based provider of supply chain logistics, infrastructure services and equipment rental |
6,115 | 6,115 | 5,450 | 5,450 | 0.9 |
| CONSTITUENT CAPITAL MANAGEMENT, LLC Asset management company that primarily manages smaller endowments and pension funds |
2,167 | 2,167 | 2,167 | 2,167 | 0.3 |
| JZ INTERNATIONAL, LLC*** Fund of European LBO investments |
1,620 | 660 | 1,620 | 1,620 | 0.3 |
| JZ PALATINE CO-INVESTMENT, LLC Invests in distressed debt |
1,843 | 1,843 | 1,843 | 1,843 | 0.3 |
| Total other | 11,745 | 10,785 | 11,080 | 11,080 | 1.8 |
| Total – portfolio Zero Dividend Preference shares Cash and other net assets |
573,480 | 539,155 | 619,114 | 628,282 (89,839) 91,739 |
100 |
| Net assets attributable to Ordinary shares | 630,182 |
* Book cost to JZCP equating to transfer value as at 1 July 2008 upon the liquidation of JZEP and adjusted for subsequent transactions. The book cost excludes the transfer value and subsequent Payment In Kind (PIK) investments.
** Original book cost incurred by JZEP/JZCP adjusted for subsequent transactions. The book cost represents cash outflows and excludes PIK investments.
*** Legacy investments. Legacy investments are excluded from the calculation of capital and income incentive fees.
**** The underlying investments in EuroMicrocap Fund 2010, LP are disclosed within the major holdings review on page 17. Mezzanine portfolio includes common stock with a carrying value of US\$2,530,000; these investments are classified as investments at fair value through profit or loss.
For the year ended 28 February 2013
| Year ended 28 February 2013 | Year ended 29 February 2012 | ||||||
|---|---|---|---|---|---|---|---|
| Notes | Revenue return US\$'000 |
Capital return US\$'000 |
Total US\$'000 |
Revenue return US\$'000 |
Capital return US\$'000 |
Total US\$'000 |
|
| Income | |||||||
| Net gain on investments at fair value | |||||||
| through profit or loss | 5 | – | 9,544 | 9,544 | – | 7,054 | 7,054 |
| Net write back of impairments on loans | |||||||
| and receivables | 6 | – | 1,025 | 1,025 | – | 142 | 142 |
| Share of associate's net income | 11 | – | 4,342 | 4,342 | – | 20,797 | 20,797 |
| Realisations from investments held | |||||||
| in escrow accounts | – | 7,528 | 7,528 | – | 2,093 | 2,093 | |
| Net foreign currency exchange gains | – | 3,915 | 3,915 | – | 1,694 | 1,694 | |
| Investment income | 7 | 41,343 | – | 41,343 | 43,558 | – | 43,558 |
| Bank and deposit interest | 393 | – | 393 | 460 | – | 460 | |
| 41,736 | 26,354 | 68,090 | 44,018 | 31,780 | 75,798 | ||
| Expenses | |||||||
| Investment Adviser's base fee | 9 | (10,707) | – | (10,707) | (10,247) | – | (10,247) |
| Investment Adviser's capital incentive fee | 9 | – | (9,030) | (9,030) | – | (5,357) | (5,357) |
| Investment Adviser's income incentive fee | 9 | – | – | (4,410) | – | (4,410) | |
| Administrative expenses | 9 | (2,785) | – | (2,785) | (2,786) | – | (2,786) |
| Share class restructuring costs | 9 | – | (1,580) | (1,580) | – | – | – |
| (13,492) | (10,610) | (24,102) | (17,443) | (5,357) | (22,800) | ||
| Operating profit Finance costs |
28,244 | 15,744 | 43,988 | 26,575 | 26,423 | 52,998 | |
| Finance costs in respect of Zero Dividend Preference shares |
8 | – | (7,007) | (7,007) | – | (6,581) | (6,581) |
| Profit before taxation | 28,244 | 8,737 | 36,981 | 26,575 | 19,842 | 46,417 | |
| Withholding taxes | 10 | (1,131) | – | (1,131) | (1,373) | – | (1,373) |
| Profitfor the year | 27,113 | 8,737 | 35,850 | 25,202 | 19,842 | 45,044 | |
| Weighted average number of Ordinary | |||||||
| shares in issue during year | 16 | 65,018,607 | 65,018,607 | ||||
| Basic and diluted profit per Ordinary | |||||||
| share using the weighted average number of Ordinary shares in issue during the year |
41.70c | 13.44c | 55.14c | 38.76c | 30.52c | 69.28c | |
All items in the above statement are derived from continuing operations.
The profit for the year is attributable to the Ordinary Shareholders of the Company.
The format of the income statement follows the recommendations of the AIC Statement of Recommended Practice.
The "Total" column of this statement represents the Company's statement of comprehensive income, prepared in accordance with IFRS.
There was no comprehensive income other than the profit for the year.
As at 28 February 2013
| 28 February | 29 February | ||
|---|---|---|---|
| Notes | 2013 US\$'000 |
2012 US\$'000 |
|
| Assets | |||
| Non-current assets | |||
| Investments at fair value through profit or loss | 11 | 531,950 | 414,549 |
| Investments classified as loans and receivables | 11 | 8,765 | 23,974 |
| Investment in associate | 11 | 87,567 | 69,950 |
| 628,282 | 508,473 | ||
| Current assets | |||
| Cash, cash equivalents and cash held on deposit | 12 | 102,740 | 202,481 |
| Other receivables | 13 | 552 | 451 |
| 103,292 | 202,932 | ||
| Total assets | 731,574 | 711,405 | |
| Liabilities | |||
| Current liabilities | |||
| Other payables | 14 | 11,553 | 8,662 |
| Non-current liabilities | |||
| Zero Dividend Preference shares | 15 | 89,839 | 87,281 |
| Total liabilities | 101,392 | 95,943 | |
| Equity | |||
| Share capital account | 18 | 149,269 | 149,269 |
| Distributable reserve | 18 | 353,528 | 353,528 |
| Capital reserve | 18 | 50,512 | 41,775 |
| Revenue reserve | 18 | 76,873 | 70,890 |
| Total equity | 630,182 | 615,462 | |
| Total liabilities and equity | 731,574 | 711,405 | |
| Number of Ordinary shares in issue at year end | 16 | 65,018,607 65,018,607 | |
| Net asset value per Ordinary share | US\$9.69 | US\$9.47 |
These audited financial statements were approved by the Board of directors and authorised for issue on 20 May 2013. They were signed on its behalf by:
| David Macfarlane | Patrick Firth |
|---|---|
| Chairman | Director |
For the year ended 28 February 2013
| Notes | Share account US\$'000 |
capital Distributable reserve US\$'000 |
Capital reserve realised US\$'000 |
Capital reserve unrealised US\$'000 |
Revenue reserve US\$'000 |
Total US\$'000 |
|
|---|---|---|---|---|---|---|---|
| Balance as at 1 March 2012 | 149,269 | 353,528 | 68,107 | (26,332) | 70,890 | 615,462 | |
| Profit/(loss) for the year | – | – | 24,727 | (15,990) | 27,113 | 35,850 | |
| Dividends paid | 29 | – | – | – | – | (21,130) | (21,130) |
| Balance at 28 February 2013 | 149,269 | 353,528 | 92,834 | (42,322) | 76,873 | 630,182 |
| Share capital account US\$'000 |
Distributable reserve US\$'000 |
Capital reserve realised US\$'000 |
Capital reserve unrealised US\$'000 |
Revenue reserve US\$'000 |
Total US\$'000 |
|
|---|---|---|---|---|---|---|
| Balance at 1 March 2011* | 149,269 | 353,528 | 14,525 | 7,408 | 56,058 | 580,788 |
| Profit/(loss) for the year | – | – | 53,582 | (33,740) | 25,202 | 45,044 |
| Dividends paid | – | – | – | – | (10,370) | (10,370) |
| Balance at 29 February 2012 | 149,269 | 353,528 | 68,107 | (26,332) | 70,890 | 615,462 |
* The opening balances at 1 March 2011 have been adjusted to reflect the reallocation of ZDP interest totalling US\$9,826,000 from realised capital to unrealised capital.
For the year ended 28 February 2013
| 1 March | 1 March | ||
|---|---|---|---|
| 2012 to | 2011 to | ||
| 28 February | 29 February | ||
| 2013 | 2012 | ||
| Notes | US\$'000 | US\$'000 | |
| Operating activities | |||
| Net cash inflow from operating activities | 25 | 2,196 | 1,633 |
| Cash outflow for purchase of investments | (174,607) | (73,729) | |
| Cash outflow for capital calls by the EuroMicrocap Fund 2010, LP | (13,275) | (49,153) | |
| Cash inflow/(outflow)from deposits with maturity greater than 3 months | 7,968 | (7,901) | |
| Cash outflow for purchase of corporate bonds | (79,316) | (64,293) | |
| Cash inflow from repayment and disposal of investments | 186,391 | 226,059 | |
| Net cash (outflow)/inflow before financing activities | (70,643) | 32,616 | |
| Financing activity | |||
| Dividends paid to Shareholders | 29 | (21,130) | (10,370) |
| Net cash outflow from financing activities | (21,130) | (10,370) | |
| (Decrease)/increase in cash and cash equivalents | (91,773) | 22,246 | |
| Reconciliation of net cash flow to movements in cash and cash equivalents | |||
| Cash and cash equivalents at 1 March | 194,513 | 172,267 | |
| (Decrease)/increase in cash and cash equivalents as above | (91,773) | 22,246 | |
| Cash and cash equivalents at year end | 102,740 | 194,513 |
JZ Capital Partners Limited (the "Company") is a Guernsey domiciled closed-ended investment company which was incorporated in Guernsey on 14 April 2008 under The Companies (Guernsey) Law, 1994. The Company is now subject to The Companies (Guernsey) Law, 2008. The Company's share capital consists of Ordinary shares and Zero Dividend Preference ("ZDP") shares. The Ordinary shares and ZDP shares were admitted to trading on the London Stock Exchange's Specialist Fund Market ("SFM") and were admitted to listing on the Channel Islands Stock Exchange ("CISX") on 31 July 2012.
The Company was granted consent on 8 May 2008 by the Guernsey Financial Services Commission under The Control of Borrowing (Bailiwick of Guernsey) Ordinance,1959 to raise up to £300,000,000 by the issue of shares.
On 31 July 2012, the Company reorganised its capital structure to enable the Company to have a single class of Ordinary shares in place of the previous capital structure that consisted of Ordinary and LVO shares. The new, simplified structure is more appropriate to the mix of investors who own the Company and removes a structural inadequacy that restricted the Company's ability to accommodate US investors.
The Company is classed as an authorised fund under the Protection of Investors (Bailiwick of Guernsey) Law 1987.
The Company's corporate objective is to create a portfolio of investments in businesses primarily in the United States, providing a superior overall return comprised of a current yield and significant capital appreciation. The Company's present strategies include investments in micro cap buyouts, mezzanine loans (sometimes with equity participations) and high yield securities, senior secured debt and second lien loans, real estate and other debt and equity opportunities, including distressed debt and structured financing, derivatives and opportunistic purchase of publicly traded securities.
The Company has no direct employees. For its services the Investment Adviser receives a management fee and is also entitled to performance-related fees (note 9). The Company has no ownership interest in the Investment Adviser. During the year under review the Company was administered by Butterfield Fulcrum Group (Guernsey) Limited (note 9) until 1 September 2012, from when the Company appointed Northern Trust International Fund Administration Services (Guernsey) Limited, as the new Company Secretary and Administrator (note 9).
The financial statements are presented in US\$'000 except where otherwise indicated.
The accounting policies adopted in the preparation of the audited annual financial statements have been consistently applied during the year, unless otherwise stated.
The financial statements have been prepared in accordance with the International Financial Reporting Standards as adopted by the European Union ("IFRS"), which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB") and International Accounting Standards ("IAS") and Standing Interpretations approved by the International Accounting Standards Committee ("IASC") that remain in effect, and have been adopted by the European Union, together with applicable legal and regulatory requirements of Guernsey Law, the SFM and the GISX.
The financial statements have been prepared under the historical cost or amortised cost basis, modified by the revaluation of financial instruments designated at fair value through profit or loss upon initial recognition. The principal accounting policies adopted are set out below. The preparation of financial statements in conformity with IFRS requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statements follow the Association of Investment Companies ("AIC") Statement of Recommended Practice ("SORP") issued on 21 January 2009.
A fundamental principle of the preparation of financial statements in accordance with IFRS is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realisation of assets and settlement of liabilities occurring in the ordinary course of business.
The directors consider the Company has adequate financial resources, in view of its holding in cash and cash equivalents and liquid investments and the income streams deriving from its investments and believe that the Company is well placed to manage its business risks successfully to continue in operational existence for the foreseeable future and that it is appropriate to prepare the financial statements on the going concern basis.
The accounting policies adopted are consistent with those of the previous financial year.
There are no standards, interpretations or amendments to existing standards that are effective for the first time for the financial year beginning 1 March 2012 that had to have a material impact on the Company.
IAS 27 Separate Financial Statements. As a consequence of the new IFRS 10 and IFRS 12, what remains of IAS 27 is limited to accounting for subsidiaries, jointly controlled entities and associates in separate financial statements. The Company does not present separate financial statements. The amendment becomes effective for annual periods beginning on or after 1 January 2013.
IAS 28 Investments in Associates and Joint Ventures. As a consequence of the new IFRS 11 and IFRS 12. IAS 28 has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The amendment becomes effective for annual periods beginning on or after 1 January 2013.
IFRS 9 Financial Instruments: Classification and Measurement. The adoption of the first phase of IFRS 9 (effective for periods beginning on after 1 January 2015) will have an effect on the classification and measurement of the Company's financial assets, but will potentially have no impact on classificationand measurements of financial liabilities.
IFRS 10 Consolidated Financial Statements. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled and, therefore, are required to be consolidated by a parent. Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) was issued on 31 October 2012 and provides an exception to the consolidation requirements of IFRS 10. The amendment requires that investment entities measure subsidiaries at fair value through profit or loss, rather than consolidate them. This standard becomes effective on 1 January 2014 but early adoption is permitted to allow investment entities to apply the provisions at the same time they first apply the rest of IFRS 10. The Company is currently assessing the impact that this standard will have on the financial position and performance.
IFRS 12 Disclosure of Involvement with Other Entities. IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity's interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The Company is currently assessing the impact that this standard will have on the financial position and performance. This standard becomes effective for annual periods beginning on or after 1 January 2013.
IFRS 13 Fair Value Measurement. IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The Company is currently assessing the impact that this standard will have on the financial position and performance. This standard becomes effective for annual periods beginning on or after 1 January 2013.
There are certain other current standards, amendments and interpretations that are not relevant to the Company's operations.
Items included in the financial statements of the Company are measured in the currency of the primary economic environment in which the Company operates (the "functional currency"). The functional currency of the Company as determined in accordance with IFRS is the US Dollar because this is the currency that best reflects the economic substance of the underlying events and circumstances of the Company. The financial statements are presented in US Dollars, as the Company has chosen the US Dollar as its presentation currency.
Monetary assets and liabilities denominated in foreign currency are translated into the functional currency at the rate of exchange ruling at the end of the reporting period date. Transactions in foreign currencies during the course of the period are translated at the rate of exchange ruling at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at reporting period end exchange rates of monetary assets and liabilities and non-monetary assets and liabilities that are denominated in foreign currencies are recognised in the statement of comprehensive income. Foreign exchange gains and losses on financial assets and financial liabilities at fair value through profit or loss are recognised together with other changes in the fair value. Net foreign exchange gains or losses on monetary financial assets and liabilities other than those classified as at fair value through profit or loss are included in the line item "net foreign currency exchange gains".
The Company classifies its investments in listed investments, investments in first and second lien debt securities, other equity opportunities and other investments within its micro cap and real estate portfolios as financial assets at fair value through profit or loss. These financial assets are designated by the Board of directors as at fair value through profit or loss at inception.
Financial assets and financial liabilities designated at fair value through profit or loss at inception are those that are managed and their performance evaluated on a fair value basis in accordance with the Company's investment strategy as documented in its prospectus and includes those investments over which the Company has significant influence except for the investment in the Associate (see (c) below). Information about these financial assets and financial liabilities are evaluated by the management of the Company on a fair value basis together with other relevant financial information.
Purchases and sales of investments are recognised on the 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.
Financial assets and liabilities at fair value through profit or loss are initially recognised at fair value. Transaction costs are expensed in the statement of comprehensive income. Subsequent to initial recognition, all financial assets and liabilities at fair value through profit or loss are measured at fair value. Gains and losses arising from changes in the fair value of the "financial assets or financial liabilities at fair value through profit or loss" category are presented in the statement of comprehensive income in the period in which they arise.
Dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income within investment income when the Company's right to receive payment is established.
Realised surpluses and deficits on the partial sale of investments are arrived at by deducting the average cost of such investments from the sales proceeds.
The fair value of financial instruments traded in active markets (such as publicly traded securities) is based on quoted market prices at the statement of financial position date. The quoted market price used for financial assets held by the Company is the bid price.
Unquoted preferred shares, micro cap loans, unquoted equities and equity related securities investments are typically valued by reference to their enterprise value, which is generally calculated by applying an appropriate multiple to the last 12 months' earnings before interest, tax, depreciation and amortisation ("EBITDA").In determining the multiple, the directors consider inter alia, where practical, the multiples used in recent transactions in comparable unquoted companies, previous valuation multiples used and, where appropriate, multiples of comparable publicly traded companies. In accordance with IPEVCA guidelines, a marketability discount is applied that reflects the discount that in the opinion of the directors, market participants would apply in a transaction in the investment in question.
Traded loans including first and second lien term securities are valued by reference to the last indicative bid price from recognised market makers. These investments are classified in the statement of financial position as investments at fair value through profit or loss.
The Company classifies unquoted senior subordinated debt within mezzanine investments as loans and receivables. Investments are generally accounted for at amortised cost using the effective interest method except where there is deemed to be impairment in value which indicates that a provision should be made.
Purchases and sales of investments are recognised on the 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.
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Company estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
The Company assesses at each reporting date whether the loans and receivables are impaired. Evidence of impairment may include indications that the counterparty is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. If there is objective evidence that an impairment loss has occurred, the amount of the loss is measured as the difference between the asset's carrying amount and the net present value of expected cash flows discounted at the original effective interest rate.
The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of comprehensive income as net impairments on loans and receivables.
Impaired debts together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Company. If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a previous write-off is later recovered, the recovery is credited to net impairments/write back of impairments on loans and receivables.
The Company's investment in its associate is accounted for using the equity method. An associate is an entity in which the Company has significant influence. An entity is regarded as a subsidiary only if the Company has control over its strategic, operating and financial policies and intends to hold the investment on a long-term basis for the purpose of securing a contribution to the Company's activities.
The directors have determined that although the Company has over 50 per cent economic partnership interest in Euromicrocap Fund 2010, LP (the "Partnership"), it does not have the power to govern the financial and operating policies of the partnership. Such powers are vested with the General Partner. However, the Company does have significant influence over the partnership.
Under the equity method, the investment in the associate is carried in the statement of financial position at cost plus post-acquisition changes in the Company's share of net assets of the associate. The statement of comprehensive income reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the equity of the associate, the Company recognises its share of any changes and discloses this, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate. The share of profit of an associate is shown on the face of the statement of comprehensive income. This is the profit attributed to holders of partnership interest in the associate.
After application of the equity method, the Company determines whether it is necessary to recognise an additional impairment loss on the Company's investment in its associate. The Company determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the "share of associate's net income" in the statement of comprehensive income. Upon loss of significant influence over the associate, the Company measures and recognises any retaining investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognised in the statement of comprehensive income.
Cash on deposit comprises bank deposits with an original maturity of three months or more.
Cash and cash equivalents comprise bank balances and cash held by the Company including short-term bank deposits with an original maturity of three months or less. Cash also includes amounts held in interest-bearing overnight accounts.
Other receivables do not carry any interest and are short term in nature and are accordingly stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Other payables are not interest bearing and are stated at their nominal value.
Financial liabilities and equity are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Financial liabilities and equity are recorded at the amount of proceeds received, net of issue costs.
In accordance with InternationalAccounting Standard 32 – "FinancialInstruments: Presentation", ZDP shares have been disclosed as a financial liability as the shares are redeemable at a fixed date and holders are entitled to a fixed return. ZDP shares are recorded at amortised cost using the effective interest rate method.
Interest income for all interest-bearing financial instruments is included on an accruals basis using the effective interest method. Dividend income is recognised when the Company's right to receive payment is established. When there is reasonable doubt that income due to be received will actually be received, such income is not accrued until it is clear that its receipt is probable. Where following an accrual of income, receipt becomes doubtful, the accrual is either fully or partly written off until the reasonable doubt is removed.
Investment Adviser's basic fees are allocated to revenue. The Company also provides for a capital gains incentive fee based on net unrealised investments gains.
Expenses which are deemed to be incurred wholly in connection with the maintenance or enhancement of the value of the investments are charged to realised capital reserve. All other expenses are accounted for on an accruals basis and are presented as revenue items.
Finance costs are interest expenses in respect of the ZDP shares and are recognised in the statement of comprehensive income using the effective interest method.
Where investments are disposed of, the consideration given may include contractual terms requiring that a percentage of the consideration is held in an escrow account pending resolution of any indemnifiable claims that may arise and as such the value of these escrow amounts is not immediately known. The Company records gains realised on investments held in escrow in the statement of comprehensive income following confirmation that any such indemnifiable claims have been resolved and none are expected in the future.
The investment manager is responsible for allocating resources available to the Company in accordance with the overall business strategies as set out in the investment guidelines of the Company. The Company has been organised into the following segments:
The investment objective of each segment is to achieve consistent medium-term returns from the investments in each segment while safeguarding capital by investing in a diversified portfolio.
Investment in corporate bonds, money market funds and treasury gilts are not considered part of any individual segment and have therefore been excluded from this segmental analysis.
During the year the investment manager restructured its reportable segments. Investments within the legacy portfolio, which consisted of investments made prior to 22 July 2002, have been reanalysed as either US micro cap or other. The comparative data shown below has been amended to reflect this change. The segment information provided is presented to the Board of the Company on the same basis.
For the year ended 28 February 2013
| Micro cap | Micro cap | Mezzanine | Bank | Listed | Real | Other | ||
|---|---|---|---|---|---|---|---|---|
| US | European | portfolio | debt investments | estate investments | Total | |||
| US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | |
| Interest revenue | 29,131 | 1,607 | 2,223 | 2,290 | – | – | – | 35,251 |
| Dividend revenue | – | – | 1,023 | – | 3,771 | – | 29 | 4,823 |
| Other revenue | – | – | – | 189 | – | – | – | 189 |
| Net gain/(loss) on | ||||||||
| investments at fair value (2,768) | (200) | 1,704 | 1,817 | 8,481 | – | (681) | 8,353 | |
| Share of associate's | ||||||||
| net income | – | 4,342 | – | – | – | – | – | 4,342 |
| Impairments on loans | ||||||||
| and receivables | – | – | 1,025 | – | – | – | – | 1,025 |
| Investment Adviser's | ||||||||
| base fee | (5,014) | (1,573) | (163) | (172) | (813) | (452) | (162) | (8,349) |
| Investment Adviser's | ||||||||
| capital incentive fee¹ | (1,329) | – | (812) | – | (6,280) | – | (609) | (9,030) |
| Total segmental | ||||||||
| operating profit | 20,020 | 4,176 | 5,000 | 4,124 | 5,159 | (452) | (1,423) | 36,604 |
For the year ended 29 February 2012
| Micro cap US US\$'000 |
Micro cap European US\$'000 |
Mezzanine portfolio US\$'000 |
Bank debt US\$'000 |
Listed investments US\$'000 |
Real estate US\$'000 |
Other investments US\$'000 |
Total US\$'000 |
|
|---|---|---|---|---|---|---|---|---|
| Interest revenue | 24,785 | 1,377 | 5,387 | 2,483 | – | – | 4,301 | 38,333 |
| Dividend revenue | – | – | – | – | 4,577 | – | – | 4,577 |
| Other revenue | – | – | – | 249 | – | – | – | 249 |
| Net gain/(loss) on | ||||||||
| investments at fair value | 2,130 | (576) | 3,080 | 4,246 | (5,529) | – | 3,098 | 6,449 |
| Share of associate's | ||||||||
| net income | – | 20,797 | – | – | – | – | – | 20,797 |
| Impairments on loans | ||||||||
| and receivables | – | – | 142 | – | – | – | – | 142 |
| Investment Adviser's | ||||||||
| base fee | (3,949) | (1,424) | (695) | (593) | (977) | – | (921) | (8,559) |
| Investment Adviser's | ||||||||
| capital incentive fee¹ | (3,267) | (486) | (63) | – | (1,541) | – | – | (5,357) |
| Investment Adviser's | ||||||||
| income incentive fee² | (3,922) | (68) | (255) | (104) | (61) | – | (4,410) | |
| Total segmental | ||||||||
| operating profit | 15,777 | 19,620 | 7,596 | 6,281 | (3,531) | – | 6,478 | 52,221 |
1 The capital incentive fee is allocated across segments where a realised or unrealised gain or loss has occurred. Segments with realised or unrealised losses are allocated a credit pro rata to the size of the loss and segments with realised or unrealised gains are allocated a charge pro rata to the size of the gain.
2 The income incentive fee is allocated across segments in the ratio of the investment income earned during the quarter in which the fee became payable.
| Micro cap US US\$'000 |
Micro cap European US\$'000 |
Mezzanine portfolio US\$'000 |
Bank debt US\$'000 |
Listed investments US\$'000 |
Real estate US\$'000 |
Other investments US\$'000 |
Total US\$'000 |
|
|---|---|---|---|---|---|---|---|---|
| Investments at fair | ||||||||
| value through profit | ||||||||
| or loss | 342,566 | 19,896 | 2,530 | 11,690 | 55,069 | 30,860 | 11,080 | 473,691 |
| Investments classified | ||||||||
| as loans and receivables | – | – | 8,765 | – | – | – | – | 8,765 |
| Investment in an associate | – | 87,567 | – | – | – | – | – | 87,567 |
| Other receivables | – | – | – | – | 486 | – | – | 486 |
| Other payables and | ||||||||
| accrued expenses | (1,664) | (105) | (823) | (11) | (7,338) | – | – | (9,941) |
| Total segmental | ||||||||
| net assets | 340,902 | 107,358 | 10,472 | 11,679 | 48,217 | 30,860 | 11,080 | 560,568 |
| Micro cap US US\$'000 |
Micro cap European US\$'000 |
Mezzanine portfolio US\$'000 |
Bank debt US\$'000 |
Listed investments US\$'000 |
Real estate US\$'000 |
Other investments US\$'000 |
Total US\$'000 |
|
|---|---|---|---|---|---|---|---|---|
| Investments at fair | ||||||||
| value through profit | ||||||||
| or loss | 205,347 | 15,179 | 5,658 | 32,512 | 88,639 | – | 1,620 | 348,955 |
| Investments classified | ||||||||
| as loans and receivables | – | – | 23,974 | – | – | – | – | 23,974 |
| Investment in an associate | – | 69,950 | – | – | – | – | – | 69,950 |
| Total segmental | ||||||||
| net assets | 205,347 | 85,129 | 29,632 | 32,512 | 88,639 | – | 1,620 | 442,879 |
Certain income and expenditure is not considered part of the performance of an individual segment. This includes net foreign exchange gains, interest on cash, finance costs, custodian and administration fees, directors' fees and other general expenses.
The following table provides a reconciliation between net reportable segment income and operating profits.
| Year ended 28/02/2013 US\$'000 |
Year ended 29/02/2012 US\$'000 |
|
|---|---|---|
| Net reportable segment profit | 36,604 | 52,221 |
| Net gains on treasury gilts and corporate bonds | 1,194 | 605 |
| Realised gains on investments held in escrow accounts | 7,528 | 2,093 |
| Net foreign exchange gains/(losses) | 3,915 | 1,694 |
| Interest on treasury notes and corporate bonds | 1,077 | 399 |
| Interest on cash | 393 | 460 |
| Other dividend income | – | – |
| Fees payable to Investment Adviser based on non-segmental assets | (2,358) | (1,688) |
| Expenses not attributable to segments | (2,785) | (2,786) |
| Share class restructuring costs | (1,580) | – |
| Operating profit | 43,988 | 52,998 |
Other receivables and prepayments are not considered to be part of individual segment assets. Certain liabilities are not considered to be part of the net assets of an individual segment. These include custodian and administration fees payable, directors' fees payable and other payables and accrued expenses.
The following table provides a reconciliation between total net segment assets and total net assets.
| 28/02/2013 US\$'000 |
29/02/2012 US\$'000 |
|
|---|---|---|
| Total net segmental assets | 560,568 | 442,879 |
| Non-segmental assets and liabilities: | ||
| Treasury gilts | 31,809 | 33,465 |
| Floating rate notes | 26,450 | 32,129 |
| Cash held on deposit and investments in money market funds | – | 7,968 |
| Cash and cash equivalents | 102,740 | 194,513 |
| Other receivables and prepayments | 66 | 451 |
| Zero Dividend Preference shares | (89,839) | (87,281) |
| Other payables and accrued expenses | (1,612) | (8,662) |
| Total non-segmental net assets | 69,614 | 172,583 |
| Total net assets | 630,182 | 615,462 |
The following are the key assumptions and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year:
Certain investments are classified as FVTPL, and valued accordingly, as disclosed in note 2 and the valuation policy on page 16. The key source of estimation uncertainty is on the valuation of unquoted equities and equity-related securities.
In reaching its valuation of the unquoted equities and equity-related securities the key judgements the Board have to make relate to the selection of the multiples and the discount factors used in the valuation models.
Certain investments are classified as loans and receivables, and valued accordingly, as disclosed in note 2 and the valuation policy on page 16. The key estimation is the impairment review and the key assumptions are as disclosed in note 2.
The policies applied in accounting for the Company's associate require significant judgement. Full details are disclosed in note 2c.
| Year ended 28/02/2013 US\$'000 |
Year ended 29/02/2012 US\$'000 |
|
|---|---|---|
| Net movement in unrealised gains/(losses) in the year | 251 | (11,284) |
| Proceeds from investments realised | 185,577 | 197,663 |
| Cost of investments realised | (158,074) | (141,696) |
| Unrealised gains in prior periods now realised | (18,210) | (37,629) |
| Total net realised gains in the year | 9,293 | 18,338 |
| Net gain on investments in the year | 9,544 | 7,054 |
| Year ended | Year ended | |
|---|---|---|
| 28/02/2013 | 29/02/2012 | |
| US\$'000 | US\$'000 | |
| Net write back of/(impairment on) loans and receivables | 211 | (174) |
| Proceeds from investments previously written off | 814 | 29,118 |
| Proceeds from loans repaid | 15,226 | – |
| Cost of investments disposed/realised | – | (28,227) |
| Cost of investments repaid | (15,226) | – |
| Unrealised gains in prior periods now realised | – | (575) |
| Net realised gain | 814 | 316 |
| Net write back of impairments/(impairments) on loans and receivables | 1,025 | 142 |
| Year ended |
|---|
| 29/02/2012 |
| US\$'000 |
| 38,202 |
| 5,356 |
| 43,558 |
Income for the year ended 28 February 2013
| Preference dividend | Loan note | |||||||
|---|---|---|---|---|---|---|---|---|
| Dividends US\$'000 |
PIK US\$'000 |
Cash US\$'000 |
PIK US\$'000 |
Cash US\$'000 |
Other interest US\$'000 |
Other income US\$'000 |
Total US\$'000 |
|
| US micro cap portfolio | – | 13,353 | – | 8,887 | 6,891 | – | 3 | 29,134 |
| European micro cap | ||||||||
| portfolio | – | – | – | – | 1,607 | – | – | 1,607 |
| Mezzanine portfolio | 1,023 | 9 | – | 195 | 2,019 | – | – | 3,246 |
| Bank debt | – | – | – | – | – | 2,290 | 189 | 2,479 |
| Listed investments | 3,771 | – | – | – | – | – | – | 3,771 |
| Treasury gilts and | ||||||||
| corporate bonds | – | – | – | – | – | 1,077 | – | 1,077 |
| Other | 29 | 29 | ||||||
| 4,794 | 13,362 | – | 9,082 | 10,517 | 3,367 | 221 | 41,343 |
Income for the year ended 29 February 2012
| Dividends US\$'000 |
Preference dividend | Loan note | ||||||
|---|---|---|---|---|---|---|---|---|
| PIK US\$'000 |
Cash US\$'000 |
PIK US\$'000 |
Cash US\$'000 |
Other interest US\$'000 |
Other income US\$'000 |
Total US\$'000 |
||
| US micro cap portfolio | – | 16,634 | – | 6,432 | 6,016 | – | – | 29,082 |
| European micro cap portfolio – | – | – | – | 1,377 | – | – | 1,377 | |
| Mezzanine portfolio | – | 31 | – | 360 | 4,996 | – | – | 5,387 |
| Bank debt | – | – | – | – | – | 2,483 | 249 | 2,732 |
| Listed investments | 4,577 | – | – | – | – | – | – | 4,577 |
| Treasury gilts | – | – | – | – | – | 399 | – | 399 |
| Other | – | 34 | – | – | – | – | – | 34 |
| 4,577 | 16,699 | – | 6,792 | 12,389 | 2,882 | 249 | 43,588 |
Interest on unlisted investments totalling US\$9,575,000 (year ended 28 February 2012: US\$7,704,000) has not been recognised in accordance with the Company's accounting and valuation policy.
| Year ended | Year ended |
|---|---|
| 28/02/2013 | 29/02/2012 |
| US\$'000 | US\$'000 |
| Zero Dividend Preference shares 7,007 |
6,581 |
| 7,007 | 6,581 |
Finance costs arising are allocated to the statement of comprehensive income using the effective interest rate method. The rights and entitlements of the ZDP shares, which are accounted for at amortised cost are described in note 15.
| 10,707 Investment Adviser's base fee Investment Adviser's capital incentive fee 9,030 Investment Adviser's income incentive fee – 19,737 Administrative expenses: Legal and professional fees 1,086 Other expenses 565 Directors' remuneration 380 Accounting, secretarial and administration fees 451 Auditors' remuneration 190 Auditors' remuneration – non-audit fees 65 Custodian fees 48 2,785 Other: Share class restructuring costs 1,580 |
Year ended 28/02/2013 US\$'000 |
Year ended 29/02/2012 US\$'000 |
|
|---|---|---|---|
| 10,247 | |||
| 5,357 | |||
| 4,410 | |||
| 20,014 | |||
| 1,308 | |||
| 504 | |||
| 380 | |||
| 400 | |||
| 99 | |||
| 65 | |||
| 30 | |||
| 2,786 | |||
| – | |||
| Total expenses | 24,102 | 22,800 |
The Chairman is entitled to a fee of US\$140,000 per annum. Each of the other directors are entitled to a fee of US\$60,000 per annum. For the year ended 28 February 2013, total directors' fees included in the statement of comprehensive income were US\$380,000 (year ended 29 February 2012: US\$380,000), of this amount US\$62,000 was outstanding at the year end (29 February 2012: US\$63,000) and included within other payables.
The Company entered into an investment advisory and management agreement with Jordan/Zalaznick Advisers, Inc. (the "Investment Adviser") in May 2008 which was then amended and restated on 20 May 2009 and again on 23 December 2010 (the "Advisory Agreement").
Pursuant to the Advisory Agreement, the Investment Adviser is entitled to a base management fee and to an incentive fee. The base management fee is an amount equal to 1.5 per cent per annum of the average total assets under management of the Company less those assets identified by the Company as being excluded from the base management fee, under the terms of the agreement. The base management fee is payable quarterly in arrears; the agreement provides that payments in advance on account of the base management fee will be made.
For the year ended 28 February 2013, total investment advisory and management expenses, based on the average total assets of the Company, were included in the statement of comprehensive income of US\$10,707,000 (year ended 29 February 2012: US\$10,247,000). Of this amount US\$715,000 (29 February 2012: US\$1,105,000) was outstanding at the year end and is included within other payables.
The incentive fee has two parts. The first part is calculated by reference to the net investment income of the Company ("Income Incentive fee") and is payable quarterly in arrears provided that the net investment income for the quarter exceeds 2 per cent of the average of the net asset value of the Company for that quarter (the "hurdle") (8 per cent annualised). The fee is an amount equal to (a) 100 per cent of that proportion of the net investment income for the quarter as exceeds the hurdle, up to an amount equal to a hurdle of 2.5 per cent, and (b) 20 per cent of the net investment income of the Company above a hurdle of 2.5 per cent in any quarter. Change in the valuation of income related (PIK) investments are also classed as an increase or decrease to investment income. Investments categorised as legacy investments and other assets identified by the Company as being excluded are excluded from the calculation of the fee. A true-up calculation is also prepared at the end of each financial year to determine if further fees are payable to the Investment Adviser or if any amounts are recoverable from future income incentive fees.
For the year ended 28 February 2013, there was no income incentive fee. For the year ended 29 February 2012, an amount of US\$4,410,000 was paid on the basis that the net investment income of the Company as determined in the Advisory Agreement exceeded the hurdle rate of 2 per cent (8 per cent per annum). This is further discussed in note 28.
The second part of the incentive fee is calculated by reference to the net realised capital gains ("capital gains incentive fee") of the Company and is equal to: 20 per cent of the realised capital gains of the Company for each financial year less all realised capital losses of the Company for the year less the aggregate of all previous capital gains incentive fees paid by the Company to the Investment Adviser. The capital gains incentive is payable in arrears within 90 days of the fiscal year end. Investments categorised as legacy investments and assets of the Euro Microcap Fund 2010, LP are excluded from the calculation of the fee.
The Company provides for a capital gains incentive fee based on cumulative net realised and unrealised investments gains. For the year ended 28 February 2013, US\$9,030,000 (29 February 2012: US\$5,357,000) was paid to the Investment Adviser in relation to the capital gains incentive fee.
The Advisory Agreement may be terminated by the Company or the Investment Adviser upon not less than two and one half years' (i.e. 913 days') prior notice (or such lesser period as may be agreed by the Company and Investment Adviser).
Northern Trust International Fund Administration Services (Guernsey) Limited was appointed as Administrator to the Company on 1 September 2012. The Administrator is entitled to a fee payable quarterly in arrears. Fees payable to the Administrator are fixed for the three years from the date of appointment and are then subsequently subject to an annual fee review. The Administrator is also due an initial set up fee.
During the period from 1 March 2012 to 31 August 2012, Butterfield Fund Services (Guernsey) Limited ("BFGL") acted as Administrator, Secretary and Registrar. BFGL was entitled to a quarterly fee payable monthly in arrears and further fees for services provided with the Company's transition to the new service provider.
HSBC Bank (USA) N.A. (the "Custodian"), was appointed on 12 May 2008 under a custodian agreement. The Custodian is entitled to receive an annual fee of US\$2,000 and a transaction fee of US\$50 per transaction. For the year ended 28 February 2013, total Custodian expenses of US\$48,000 (29 February 2012: US\$30,000) were included in the statement of comprehensive income of which US\$6,000 (29 February 2012: US\$Nil) was outstanding at the year end and is included within other payables.
All of the Auditors' remuneration relates to the annual audit and half year review report. During the year ended 28 February 2013, professional fees of US\$Nil were paid to Ernst & Young for taxation services (28 February 2012: US\$65,000).
For both 2013 and 2012, the Company applied for and was granted exempt status for Guernsey tax purposes under the terms of The Income Tax (Zero 10) (Guernsey) Law, 2007.
For the year ended 28 February 2013, the Company incurred withholding tax of US\$1,131,000 (29 February 2012: US\$1,373,000) on dividend income from listed investments.
| Carrying | |||
|---|---|---|---|
| Listed | Unlisted | value | |
| 28/02/2013 28/02/2013 28/02/2013 | |||
| Categories of financialinstruments | US\$'000 | US\$'000 | US\$'000 |
| Fair value through profit or loss (FVTPL) | 113,328 | 418,622 | 531,950 |
| Loans and receivables | – | 8,765 | 8,765 |
| Investment in an associate | – | 87,567 | 87,567 |
| 113,328 | 514,954 | 628,282 |
| Carrying | |||
|---|---|---|---|
| Listed | Unlisted | value | |
| 28/02/2013 28/02/2013 28/02/2013 | |||
| US\$'000 | US\$'000 | US\$'000 | |
| Book cost at 1 March 2012 | 132,577 | 381,086 | 513,663 |
| Purchases in year | 79,316 | 174,607 | 253,923 |
| Capital calls during year | – | 13,275 | 13,275 |
| Payment in kind ("PIK") | – | 21,466 | 21,466 |
| Proceeds from investments disposed/realised | (129,934) | (56,457) (186,391) | |
| Realised gains on disposal | 20,425 | 7,892 | 28,317 |
| Book cost at 28 February 2013 | 102,384 | 541,869 | 644,253 |
| Unrealised gains/(losses) at 28 February 2013 | 10,877 | (36,016) | (25,139) |
| Accrued interest at 28 February 2013 | 67 | 9,101 | 9,168 |
| Carrying value at 28 February 2013 | 113,328 | 514,954 | 628,282 |
| Carrying | ||
|---|---|---|
| value | ||
| 29/02/2012 | ||
| US\$'000 | US\$'000 | US\$'000 |
| 414,549 | ||
| 23,974 | ||
| – | 69,950 | 69,950 |
| 508,473 | ||
| Listed 29/02/2012 154,233 – 154,233 |
Unlisted 29/02/2012 260,316 23,974 354,240 |
| Listed 29/02/2012 US\$'000 |
Unlisted 29/02/2012 US\$'000 |
Carrying value 29/02/2012 US\$'000 |
|
|---|---|---|---|
| Book cost at 1 March 2011 | 75,017 | 394,118 | 469,135 |
| Purchases in year | 64,847 | 73,729 | 138,576 |
| Capital calls during year | – | 49,153 | 49,153 |
| Payment in kind ("PIK") | – | 25,995 | 25,995 |
| Proceeds from investments disposed/realised | (10,850) | (215,204) | (226,054) |
| Realised gains on disposal | 3,563 | 53,295 | 56,858 |
| Book cost at 29 February 2012 | 132,577 | 381,086 | 513,663 |
| Unrealised gains/(losses) at 29 February 2012 | 21,514 | (33,310) | (11,796) |
| Accrued interest at 29 February 2012 | 142 | 6,464 | 6,606 |
| Carrying value at 29 February 2012 | 154,233 | 354,240 | 508,473 |
The above book cost is the cost to JZCP equating to the transfer value as at 1 July 2008 upon the liquidation of JZEP and adjusted for subsequent transactions.
The cost of PIK investments is deemed to be interest not received in cash but settled by the issue of further securities when that interest has been recognised in the statement of comprehensive income.
At 29 February 2012, the Company had one associate carrying on business which affects the profits and assets of the Company. The Company's associate consists solely of a limited partnership interest directly held in the Partnership.
| Entity | Principal activity | % interest |
|---|---|---|
| EuroMicrocap Fund 2010, LP | Acquirer of Europe-based micro cap companies | 75% |
The Company's share of the aggregated financial information of the equity accounted associate is set out below. The balance as at 28 February 2013 includes the share of results and net assets in the associate.
| 28/02/2013 US\$'000 |
29/02/2012 US\$'000 |
|
|---|---|---|
| Share of result in associate | 4,342 | 20,797 |
| Non-current assets Current assets |
83,451 4,116 |
68,795 1,155 |
| Share of limited partner's interest in associate | 87,567 | 69,950 |
| 28/02/2013 US\$'000 |
29/02/2012 US\$'000 |
|
|---|---|---|
| Cash at bank 39,612 |
194,513 | |
| 55,497 Money Market Funds |
– | |
| Cash held on deposit with maturity of less than 3 months 7,631 |
– | |
| 102,740 | 194,513 | |
| Cash held on deposit with maturity of greater than 3 months | – | 7,968 |
| Cash, cash equivalents and cash held on deposits 102,740 |
202,481 |
Cash and cash equivalents comprise bank balances and cash held by the Company including short-term bank deposits and investments in money market funds with an original maturity of three months or less. In the prior year cash held on deposit had a maturity date of greater than three months. The carrying value of these assets approximates to their fair value.
| 28/02/2013 US\$'000 |
29/02/2012 US\$'000 |
|
|---|---|---|
| Accrued dividend income on listed investments | 486 | 405 |
| Other receivables and prepayments | 66 | 44 |
| Bank and deposit interest | – | 2 |
| 552 | 451 |
Other receivables and prepayments include US\$7,123 in respect of a structured forward currency contract entered into during the year (note 20).
| 28/02/2013 US\$'000 |
29/02/2012 US\$'000 |
|
|---|---|---|
| Investment Adviser's base and capital incentive fee 9,745 |
6,462 | |
| Provision for tax on dividends received not withheld at source 1,004 |
679 | |
| Legal fees 250 |
300 | |
| Fees due to administrator 174 |
67 | |
| 201 Other expenses |
222 | |
| Auditors' remuneration 110 |
79 | |
| Directors' remuneration | 62 | 63 |
| Custody fees | 7 | – |
| Payable on unsettled trades | – | 790 |
| 11,553 | 8,662 |
| 28/02/2013 US\$'000 |
29/02/2012 US\$'000 |
|
|---|---|---|
| ZDP shares issued 22 June 2009 | ||
| Amortised cost at 1 March | 87,281 | 82,341 |
| Finance costs allocated to statement of comprehensive income | 7,007 | 6,581 |
| Unrealised currency gain on translation during the year | (4,449) | (1,641) |
| Amortised cost at year end | 89,839 | 87,281 |
| Total number of ZDP shares in issue | 20,707,141 | 20,707,141 |
| Price per ZDP share US\$ | USD 4.3466 USD 4.2254 | |
| Price per ZDP share GBP | GBP 2.8634 | GBP 2.6513 |
ZDP shares were issued on 22 June 2009 at a price of 215.80 pence and are designed to provide a predetermined final capital entitlement of 369.84 pence on 22 June 2016 which ranks behind the Company's creditors but in priority to the capital entitlements of the Ordinary shares. The ZDP shares carry no entitlement to income and the whole of their return will therefore take the form of capital. The capital appreciation of approximately 8 per cent per annum is calculated monthly. In certain circumstances, ZDP shares carry the right to vote at general meetings of the Company as detailed in the Company's Memorandum of Articles and Incorporation.Issue costs are deducted from the cost of the liability and allocated to the statement of comprehensive income over the life of the ZDP shares.
Unlimited number of Ordinary shares of no par value.
| 28/02/2013 Number |
29/02/2012 Number |
|
|---|---|---|
| of shares | of shares | |
| Balance at 1 March | 37,319,238 | 42,913,133 |
| Converted from Limited Voting Ordinary shares | 27,699,369 | 1,300,000 |
| Converted to Limited Voting Ordinary shares | – | (6,893,895) |
| Total Ordinary shares in issue | 65,018,607 | 37,319,238 |
| 28/02/2013 Number of shares |
29/02/2012 Number of shares |
|---|---|
| Balance at 1 March 27,699,369 |
22,105,474 |
| Converted to Ordinary shares | (27,699,369) (1,300,000) |
| Converted from Ordinary shares – |
6,893,895 |
| Total limited voting Ordinary shares in issue – |
27,699,369 |
| Total shares in issue 65,018,607 |
65,018,607 |
On 3 July 2012, a Shareholder resolution was passed which approved the conversion of all of the Limited Voting Ordinary ("LVO") shares into Ordinary shares on the basis that one LVO share would convert into one Ordinary share. A further resolution was passed approving the proposed transfer of the listing of the Ordinary shares to the London Stock Exchange's Specialist Fund Market ("SFM"). The move to this structure removes a structural inadequacy that had restricted the Company's ability to accommodate US investors and is more appropriate to the Company's mix of investors.
On 31 July 2012, the Company announced the cancellation of the listing of its Ordinary shares on the premium segment of the Official List and trading on the London Stock Exchange's Main Market for listed securities. Subsequently, the Company's shares were admitted to trading on the London Stock Exchange's Specialist Fund Market ("SFM"). The Company also announced the admission to listing on the Channel Islands Stock Exchange ("CISX").
LVO shares were issued so that certain of the Company's existing Shareholders and certain US new investors could participate in the Ordinary share issue without causing the Company to be treated as a US domestic company for the purposes of US securities laws and/or a CFC for US tax purposes. LVO shares were identical to, and ranked pari passu in all respects with, the New Ordinary shares except that the LVO shares only carried a limited entitlement to vote in respect of the appointment or removal of directors and did not carry any entitlement to vote in respect of certain other matters. The LVO shares were not listed and were not admitted to trade on or through the facilities of the London Stock Exchange.
The Ordinary shares carry a right to receive the profits of the Company available for distribution by dividend and resolved to be distributed by way of dividend to be made at such time as determined by the directors.
In addition to receiving the income distributed, the Ordinary shares are entitled to the net assets of the Company on a winding up, after all liabilities have been settled and the entitlement of the ZDP shares have been met. In addition, holders of Ordinary shares will be entitled on a winding up to receive any accumulated but unpaid revenue reserves of the Company, subject to all creditors having been paid out in full but in priority to the entitlements of the ZDP shares. Any distribution of revenue reserves on a winding up is currently expected to be made by way of a final special dividend prior to the Company's eventual liquidation.
Holders of Ordinary shares have the right to receive notice of, to attend and to vote at, all general meetings of the Company.
The Company's capital is represented by the Ordinary shares and ZDP shares.
As a result of the ability to issue, repurchase and resell shares, the capital of the Company can vary. The Company is not subject to externally imposed capital requirements and has no restrictions on the issue, repurchase or resale of its shares.
The Company's objectives for managing capital are:
The Company continues to keep under review opportunities to buy back Ordinary or ZDP shares.
The Company monitors capital by analysing the NAV per share over time and tracking the discount to the Company's share price. It also monitors the performance of the existing investments to identify opportunities for exiting at a reasonable return to the Shareholders.
The Royal Court of Guernsey granted that on the admission of the Company's shares to the Official List and to trading on the London Stock Exchange's Main Market, the amount credited to the share premium account of the Company immediately following the admission of such shares be cancelled and any surplus thereby created accrue to the Company's distributable reserves to be used for all purposes permitted by Companies Law, including the purchase of shares and the payment of dividends.
Subsequent amounts raised by the issue of new shares, net of issue costs, are credited to the share capital account.
Subject to satisfaction of the solvency test, all of the Company's capital and reserves are distributable in accordance with The Companies (Guernsey) Law, 2008.
| 28/02/2012 | 29/02/2012 | |
|---|---|---|
| US\$'000 | US\$'000 | |
| Distributable reserve | 353,528 | 353,528 |
| Share capital account | 149,269 | 149,269 |
| Capital reserve | 50,512 | 41,775 |
| Revenue reserve | 76,873 | 70,890 |
| 630,182 | 615,462 | |
| Distributable reserve | ||
| 28/02/2012 | 29/02/2012 | |
| US\$'000 | US\$'000 | |
| At 1 March 2012 | 353,528 | 353,528 |
| At 28 February 2013 | 353,528 | 353,528 |
| Share capital account | ||
| 28/02/2012 | 29/02/2012 | |
| US\$'000 | US\$'000 | |
| At 1 March 2012 | 149,269 | 149,269 |
| At 28 February 2013 | 149,269 | 149,269 |
All surpluses arising from the realisation or revaluation of investments and all other capital profits and accretions of capital are credited to the capital reserve. Any loss arising from the realisation or revaluation of investments or any expense, loss or liability classified as capital in nature may be debited to the capital reserve.
| Capital reserve | ||||
|---|---|---|---|---|
| Realised | Unrealised | Total | ||
| 28/02/2013 28/02/2013 28/02/2013 | ||||
| US\$'000 | US\$'000 | US\$'000 | ||
| At 1 March 2012 | 68,107 | (26,332) | 41,775 | |
| Net gains/(losses) on investments | 28,390 | (13,479) | 14,911 | |
| Net gains/(losses) on foreign currency exchange | (580) | 4,495 | 3,915 | |
| Realised gains on investments held in escrow accounts | 7,528 | – | 7,528 | |
| Expenses charged to capital | (10,610) | – | (10,610) | |
| Finance costs in respect of Zero Dividend Preference shares | – | (7,007) | (7,007) | |
| At 28 February 2013 | 92,835 | (42,323) | 50,512 |
| Capital reserve | ||||
|---|---|---|---|---|
| Realised | Unrealised | Total | ||
| 29/02/2012 | 29/02/2012 | 29/02/2012 | ||
| US\$'000 | US\$'000 | US\$'000 | ||
| At 1 March 2011 | 14,525 | 7,408 | 21,933 | |
| Net gains on investments | 56,858 | (28,865) | 27,993 | |
| Net gains/(losses) on foreign currency exchange | (12) | 1,706 | 1,694 | |
| Realised gains on investments held in escrow accounts | 2,093 | – | 2,093 | |
| Expenses charged to capital | (5,357) | – | (5,357) | |
| Finance costs in respect of Zero Dividend Preference shares | – | (6,581) | (6,581) | |
| At 29 February 2012 | 68,107 | (26,332) | 41,775 |
| 28/02/2013 | 29/02/2012 | |
|---|---|---|
| US\$'000 | US\$'000 | |
| At 1 March 2012 | 70,890 | 56,058 |
| Profit for the year attributable to revenue | 27,113 | 25,202 |
| Dividend paid | (21,130) | (10,370) |
| At 28 February 2013 | 76,873 | 70,890 |
| Carrying | Carrying | |
|---|---|---|
| value | value | |
| 28/02/2013 | 29/02/2012 | |
| Categories of financial instruments | US\$'000 | US\$'000 |
| Financial assets | ||
| Fair value through profit or loss (FVTPL) | 531,950 | 414,549 |
| Loans and receivables | 8,765 | 23,974 |
| Investment in associate | 87,567 | 69,950 |
| Other receivables | 552 | 451 |
| Cash held on deposit (maturity date >3 months) | – | 7,968 |
| Cash and cash equivalents | 102,740 | 194,513 |
| Total assets | 731,574 | 711,405 |
| Financial liabilities | ||
| Zero Dividend Preference ("ZDP") shares | (89,839) | (87,281) |
| Trade payables | (11,553) | (8,662) |
| Total liabilities | (101,392) | (95,943) |
Loans and receivables presented above represent mezzanine loans.
Financial liabilities measured at amortised cost presented above represent ZDP shares and trade payables as detailed in the statement of financial position.
The Company's objective in managing risk is the creation and protection of Shareholder value. Risk is inherent in the Company's activities, but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. The process of risk management is critical to the Company's continuing profitability. The Company is exposed to market risk (which includes currency risk, interest rate risk and price risk), credit risk and liquidity risk arising from the financial instruments it holds.
The Company's Investment Adviser is responsible for identifying and controlling risks. The directors supervise the Investment Adviser and are ultimately responsible for the overall risk management approach within the Company.
The Company's prospectus sets out its overall business strategies, its tolerance for risk and its general risk management philosophy. The Company may use derivatives and other instruments for trading purposes and in connection with its risk management activities.
Market risk is defined as "the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in variables such as equity price, interest rate and foreign currency rate".
The Company's investments are subject to normal market fluctuations and there can be no assurance that no depreciation in the value of those investments will occur. There can be no guarantee that any realisation of an investment will be on a basis which necessarily reflects the Company's valuation of that investment for the purposes of calculating the net asset value of the shares.
Changes in industry conditions, competition, political and diplomatic events, tax, environmental and other laws and other factors, whether affecting the United States alone or other countries and regions more widely, can substantially and either adversely or favourably affect the value of the securities in which the Company invests and, therefore, the Company's performance and prospects.
The Company's market price risk is managed through diversification of the investment portfolio across various sectors. The Investment Adviser considers each investment purchase to ensure that an acquisition will enable the Company to continue to have an appropriate spread of market risk and that an appropriate risk/reward profile is maintained.
Equity price risk is the risk of unfavourable changes in the fair values of equity investments as the result of changes in the value of individual shares. The equity price risk exposure arises from the Company's investments in equity securities. The Company has two equity investments valued at US\$55,069,000 (29 February 2012: three investments valued at US\$88,639,000) which are listed on the NASDAQ and NYSE.
The Company does not generally invest in liquid equity investments and the current portfolio of the listed equity investments result from the successful flotation of unlisted investments.
Management's best estimate of the effect on the net assets attributable to Shareholders and on the profit for the year due to a reasonably possible change in equity indices, with all other variables held constant, is indicated in the table below. In practice, the actual trading results may differ from the sensitivity analysis below and the difference could be material. An equivalent decrease in each of the indices shown below would have resulted in an equivalent, but opposite, impact.
Sensitivity analysis for change in value of listed equity resulting from increase/decrease in relevant indices:
| Carrying | Effect on the | ||
|---|---|---|---|
| value | net assets | ||
| of listed attributable to | |||
| equities Shareholders | |||
| Change in 28/02/2013 | 28/02/2013 | ||
| Markets | indices | US\$'000 | US\$'000 |
| NYSE | 10% | 777 | 78 |
| NASDAQ | 10% | 54,292 | 5,429 |
| 55,069 | 5,507 |
| Carrying | Effect on the | ||
|---|---|---|---|
| value | net assets | ||
| of listed | attributable to | ||
| equities | Shareholders | ||
| Change in | 29/02/2012 | 29/02/2012 | |
| Markets | indices | US\$'000 | US\$'000 |
| NYSE | 10% | 39,276 | 3,928 |
| NASDAQ | 10% | 49,363 | 4,936 |
| 88,639 | 8,864 |
The table below analyses the Company's concentration of equity price risk by industrial distribution:
| Percentage of equity securities | |||
|---|---|---|---|
| Industry | 28/02/2013 | 29/02/2012 | |
| Property and casualty insurance | 98.6% | 55.7% | |
| Education and training services | 1.4% | 1.0% | |
| Rental and leasing services | – | 43.3% | |
| 100.0% | 100.0% |
The Company has certain financial instruments (common stock private investments) that are recorded at fair value using valuation techniques such as earnings multiple model derived either from acquisition/purchase information or observable market data from comparable companies. In some cases an adjustment is made to the acquisition/ purchase multiple to reflect the underlying growth of the investment. These are adjusted to reflect counterparty credit risk and limitations in the model.
For the financial instruments whose fair value is estimated using valuation techniques with no market observable inputs, the net unrealised amount recorded in the statement of comprehensive income in the year due to changes in the inputs amounts to losses of US\$2,558,000 (29 February 2012: losses of US\$6,224,000).
The following table analyses the Company's concentration of common stock private investments by industrial distribution and the effect on the net assets attributable to Shareholders and on the increase/(decrease) in profit for the year due to a reasonably possible change in the value of unobservable inputs. In practice, the actual trading results may differ from the sensitivity analysis below and the difference could be material.
| Percentage | ||||||
|---|---|---|---|---|---|---|
| of total | Effect on the | |||||
| common | net assets | |||||
| stock of | attributable to | |||||
| Carrying value | private | Un | Shareholders | |||
| 28/02/2013 | investments | Valuation | observable | Ranges | 28/02/2013 | |
| Industry | US\$'000 | 28/02/2013 | approach | inputs | % | US\$'000 |
| Testing laboratory | 6,343 | 9% | Public | EBITDA | 10/-10 1,940/(1,940) | |
| multiples | multiple | |||||
| Industrial investment firms | 5,055 | 7% Purchase | EBITDA | 10/-10 | 0/0 | |
| multiples | multiple | |||||
| Pet supplies | 2,475 | 3% | Public | EBITDA | 10/-10 | 505/(505) |
| multiples | multiple | |||||
| Specialised equipment manufacturers | 6,458 | 9% | Public | EBITDA | 10/-10 | 975/(975) |
| multiples | multiple | |||||
| Personal care products | 4,200 | 6% | Public | EBITDA | 10/-10 | 1,195/(1,195) |
| multiples | multiple | |||||
| Strategic workforce solutions | 1,202 | 2% | Public | EBITDA | 10/-10 | 0/0 |
| multiples | multiple | |||||
| Other | 4,006 | 5% | Public | EBITDA | 10/-10 | 0/0 |
| and | multiple | |||||
| purchase | ||||||
| multiples | ||||||
| Sensors and instrumentation | 6,900 | 9% | Public | EBITDA | 10/-10 4,225/(4,225) | |
| and | multiple | |||||
| multiples | ||||||
| Water treatment/infrastructure | 1,000 | 1% | Public | EBITDA | 10/-10 1,590/(1,000) | |
| and | multiple | |||||
| purchase | ||||||
| multiples | ||||||
| Real estate | 30,861 | 42% Purchase | EBITDA | 10/-10 | 0/0 | |
| multiples | multiple | |||||
| Logistics | 5,450 | 7% Purchase | EBITDA | 10/-10 | 0/0 | |
| multiples | multiple | |||||
| 73,950 | 100% | 10,340/(9,840) |
| Percentage | ||||||
|---|---|---|---|---|---|---|
| of total | Effect on the | |||||
| common | net assets | |||||
| Carrying value | stock of private |
attributable to Shareholders |
||||
| 29/02/2012 | investments | Valuation | Unobservable | Ranges | 29/02/2012 | |
| Industry | US\$'000 | 29/02/2012 | approach | inputs | % | US\$'000 |
| Testing laboratory | 5,043 | 38% | Public | EBITDA | 10/-10 | 715/(715) |
| multiples | multiple | |||||
| Roofing supplies | 3,780 | 28% | Public | EBITDA | 10/-10 | 690/(690) |
| multiples | multiple | |||||
| Industrial investment firms | 1,809 | 13% | Purchase | EBITDA | 10/-10 | 0/0 |
| multiples | multiple | |||||
| Pet supplies | 1,636 | 12% | Public | EBITDA | 10/-10 | 0/0 |
| multiples | multiple | |||||
| Specialised equipment manufacturers | 443 | 3% | Purchase | EBITDA | 10/-10 | 0/0 |
| multiples | multiple | |||||
| Personal care products | 328 | 2% | Purchase | EBITDA | 10/-10 | 0/0 |
| multiples | multiple | |||||
| Strategic workforce solutions | 300 | 2% | Public | EBITDA | 10/-10 | 0/0 |
| and | multiple | |||||
| purchase | ||||||
| multiples | ||||||
| Other | 229 | 2% | Purchase | EBITDA | 10/-10 | 220/0 |
| multiples | multiple | |||||
| Sensors and instrumentation | 37 | – | Public | EBITDA | 10/-10 | 0/0 |
| multiples | multiple | |||||
| Water treatment/infrastructure | – | – | Public | EBITDA | 10/-10 | 0/0 |
| multiples | multiple | |||||
| 13,605 | 100% | 1,625/(1,405) |
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. It has not been the Company's policy to use derivative instruments to mitigate interest rate risk, as the Investment Adviser believes that the effectiveness of such instruments does not justify the costs involved.
The table below summarises the Company's exposure to interest rate risks:
| Non-interest | ||||
|---|---|---|---|---|
| Fixed rate Floating rate | Total | |||
| 28/02/2013 28/02/2013 28/02/2013 28/02/2013 | ||||
| US\$'000 | US\$'000 | US\$'000 | US\$'000 | |
| Investments at fair value through profit or loss | 438,741 | 38,140 | 55,069 | 531,950 |
| Loans and receivables | 8,765 | – | – | 8,765 |
| Investment in an associate | – | – | 87,567 | 87,567 |
| Other receivables and prepayments | – | – | 552 | 552 |
| Cash and cash equivalents | – | 102,740 | – | 102,740 |
| Zero Dividend Preference shares | (89,839) | – | – | (89,839) |
| Other payables | – | – | (11,553) | (11,553) |
| Total net assets | 357,667 | 140,880 | 131,635 | 630,182 |
| Non-interest | ||||
|---|---|---|---|---|
| Fixed rate Floating rate |
Total | |||
| 29/02/2012 | 29/02/2012 | bearing 29/02/2012 |
29/02/2012 | |
| US\$'000 | US\$'000 | US\$'000 | US\$'000 | |
| Investments at fair value through profit or loss | 247,664 | 64,641 | 102,244 | 414,549 |
| Loans and receivables | 23,974 | – | – | 23,974 |
| Investment in an associate | – | – | 69,950 | 69,950 |
| Other receivables and prepayments | – | – | 451 | 451 |
| Cash held on deposit (maturity date >3 months) | 7,968 | – | – | 7,968 |
| Cash and cash equivalents | – | 194,513 | – | 194,513 |
| Zero Dividend Preference shares | (87,281) | – | – | (87,281) |
| Other payables | – | – | (8,662) | (8,662) |
| Total net assets | 192,325 | 259,154 | 163,983 | 615,462 |
The income receivable by the Company is not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. However, whilst the income received from fixed rate securities is unaffected by changes in interest rates, the investments are subject to risk in the movement of fair value. The Investment Adviser considers the risk in the movement of fair value as a result of changes in the market interest rate for fixed rate securities to be insignificant, hence no sensitivity analysis is provided.
Of the money held on deposit, US\$47,243,000 (29 February 2012: US\$194,513,000) earns interest at variable rates and the income may rise and fall depending on changes to interest rates.
The sensitivity of the bank debt's market value is not influenced by a change in prevailing interest rates, because they are floating rate instruments. The market value of bank debt is influenced by factors such as the performance of the issuer and bank liquidity.
The data below demonstrates the sensitivity of the Company's profit/(loss)for the year to a reasonably possible change in interest rates, with all other variables held constant.
The sensitivity of the profit on interest received on cash and cash equivalents is the effect of the assumed changes in the daily interest rates throughout the year to 28 February 2013 and year ended 29 February 2012, on accounts where cash is held.
The sensitivity of the profit for the year on investment income received on bank debt is the effect of the assumed changes in the three-month Libor on which the interest paid was derived.
| Sensitivity of interest income increase/(decrease) Sensitivity of investment receivable on cash income increase/(decrease) and cash equivalents receivable on bank debt |
||||
|---|---|---|---|---|
| Change in basis points increase/(decrease) | 28/02/2013 US\$'000 |
US\$'000 | 29/02/2012 28/02/2013 US\$'000 |
29/02/2012 US\$'000 |
| +25/-25 +100/-100 |
167/(167) 666/(200) |
383/(382) | 45/(45) 1,527/(458) 182/(182) 402/(402) |
101/(101) |
The following table analyses the Company's interest rate exposure in terms of the assets and liabilities maturity dates.
| 28/02/2013 | US\$'000 | 0-3 months 4-12 months US\$'000 |
1-2 years US\$'000 |
2-5 years US\$'000 |
5 years US\$'000 |
More than No maturity Non-interest date US\$'000 |
bearing US\$'000 |
Total US\$'000 |
|---|---|---|---|---|---|---|---|---|
| Cash and | ||||||||
| cash equivalents | 102,740 | – | – | – | – | – | – | 102,740 |
| Financial asset at fair value | ||||||||
| through profit or loss | – | 16,686 | 37,581 | 131,564 | 21,886 | 11,267 | 312,966 | 531,950 |
| Loans and receivables | – | – | – | 8,515 | – | 250 | – | 8,765 |
| Investment in an associate | – | – | – | – | – | – | 87,567 | 87,567 |
| Zero Dividend | ||||||||
| Preference shares | – | – | – | (89,839) | – | – | – | (89,839) |
| Other receivables/payables | – | – | – | – | – | – | (11,001) | (11,001) |
| 102,740 | 16,686 | 37,581 | 50,240 | 21,886 | 11,517 | 389,532 | 630,182 |
| 29/02/2012 | 0-3 months US\$'000 |
4-12 months US\$'000 |
1-2 years US\$'000 |
2-5 years US\$'000 |
More than 5 years US\$'000 |
No maturity date US\$'000 |
Non-interest bearing US\$'000 |
Total US\$'000 |
|---|---|---|---|---|---|---|---|---|
| Cash and | ||||||||
| cash equivalents | 194,513 | – | – | – | – | – | – | 194,513 |
| Cash held on deposit | ||||||||
| (maturity date >3 months) | – | 7,968 | – | – | – | – | – | 7,968 |
| Financial asset at fair value | ||||||||
| through profit or loss | – | 22,043 | 30,529 | 138,492 | 5,110 | 116,059 | 102,316 | 414,549 |
| Loans and receivables | – | 16,213 | – | 7,761 | – | – | – | 23,974 |
| Investment in an associate | – | – | – | – | – | – | 69,950 | 69,950 |
| Zero Dividend | ||||||||
| Preference shares | – | – | – | (87,281) | – | – | – | (87,281) |
| Other receivables/payables | – | – | – | – | – | – | (8,211) | (8,211) |
| 194,513 | 46,224 | 30,529 | 58,972 | 5,110 | 116,059 | 164,055 | 615,462 |
The Investment Adviser monitors the Company's overall interest sensitivity on a regular basis by reference to prevailing interest rates and the level of the Company's cash balances. The Company has not used derivatives to mitigate the impact of changes in interest rates.
The Company takes on exposure to credit risk, which is the risk that a counterparty to a financial instrument will cause a financial loss to the Company by failing to discharge an obligation. These credit exposures exist within investment classified as FVTPL, debt investments, loans and receivables and cash and cash equivalents.
They may arise, for example, from a decline in the financial condition of a counterparty, from entering into derivative contracts under which counterparties have obligations to make payments to the Company. As the Company's credit exposure increases, it could have an adverse effect on the Company's business and profitability if material unexpected credit losses were to occur.
In the event of any default on the Company's loan investments by a counterparty, the Company will bear a risk of loss of principal and accrued interest of the investment, which could have a material adverse effect on the Company's income and potential to pay dividends to Shareholders and to redeem the ZDP shares.
In accordance with the Company's policy, the Investment Adviser monitors the Company's exposure to credit risk on a regular basis, by reviewing the financial statements, budgets and forecasts of underlying investee companies.
The table below analyses the Company's maximum exposure to credit risk. The maximum exposure is shown gross at the reporting date.
| Total | Total | |
|---|---|---|
| 28/02/2013 | 29/02/2012 | |
| US\$'000 | US\$'000 | |
| Bank debt | 11,690 | 32,512 |
| Legacy portfolio debt | – | 25,312 |
| Mezzanine debt | 11,294 | 29,632 |
| US micro cap debt | 342,567 | 181,655 |
| European micro cap debt | 107,463 | 85,129 |
| Cash and cash equivalents | 102,740 | 202,481 |
| Accrued dividend income | 486 | 405 |
| 576,240 | 557,126 |
A proportion of micro cap and mezzanine debt held does not entitle the Company to interest payment in cash. This interest is capitalised (PIK) and as a result has substantial credit risk as there is no return to the Company until the loan plus all the interest is repaid in full. Of the US\$2,214,000 (29 February 2012: US\$5,356,000) interest that was recognised in the statement of comprehensive income on investments classified as loans and receivables during the year US\$195,000 (29 February 2012: US\$360,000) was receivable in the form of PIK investments. There is no collateral held in respect of mezzanine debt forming the loans and receivables.
An impairment review is performed by the Investment Adviser on an investment by investment basis every quarter.
The movement in the allowance for impairment in respect of loans and receivables during the year was as follows:
| 28/02/2013 US\$'000 |
29/02/2012 US\$'000 |
|
|---|---|---|
| Balance at beginning of year | 9,293 | 9,119 |
| Transfers out of loans and receivables | (1,956) | – |
| Impairment | (211) | 174 |
| Balance at year end | 7,126 | 9,293 |
The table below analyses the Company's loans and receivables that are either past due or impaired.
| Total of impairment 28/02/2013 US\$'000 |
Past due 28/02/2013 US\$'000 |
Total 28/02/2013 US\$'000 |
Total of impairment 29/02/2012 US\$'000 |
Past due 29/02/2012 US\$'000 |
Total 29/02/2012 US\$'000 |
|
|---|---|---|---|---|---|---|
| Mezzanine portfolio | 7,126 | – | 7,126 | 9,293 | – | 9,293 |
| Total | 7,126 | – | 7,126 | 9,293 | – | 9,293 |
Mezzanine investments typically have no or a limited trading market and therefore such investments will be illiquid, and as such the Company's ability to sell them in the short term may be limited.
The Investment Adviser closely monitors the creditworthiness of mezzanine debt counterparties and other loans and receivables and, upon unfavourable change, may seek to terminate the agreement or to obtain collateral. The creditworthiness is monitored by the reviewing of quarterly covenant agreements and by the Investment Adviser having Board representation on a significant number of these investees. The Company has also diversified its portfolio across different industry sectors.
The Company had previously invested in bank debt with investment grade credit ratings as rated by Standard & Poor's detailed below. As at 28 February 2013, the Company's only investment in bank debt was Dekko Technologies LLC, a private company whose debt was neither listed or rated:
| Percentage of debt instruments |
||||
|---|---|---|---|---|
| Credit rating – bank debt first and second lien | 28/02/2013 | 29/02/2012 | ||
| B | – | 13% | ||
| B- | – | 6% | ||
| CCC+ | – | 41% | ||
| No rating | 100% | 40% | ||
| 100% | 100% |
The following table analyses the concentration of credit risk in the Company's debt portfolio by industrial distribution.
| Industry | 28/02/2013 US\$'000 |
29/02/2012 US\$'000 |
|---|---|---|
| Healthcare services and equipment | 25% | 26% |
| House, leisure and personal goods | 3% | 2% |
| Construction and materials | – | 1% |
| Support services | 9% | 18% |
| Industrial engineering | 6% | 11% |
| Industrial services | 22% | 3% |
| Water treatment/infrastructure | 9% | 2% |
| Electronic and electrical equipment | 5% | 7% |
| Financial general | 21% | 25% |
| Sensors and instrumentation | – | 5% |
| 100% | 100% |
The table below analyses the Company's cash and cash equivalents and cash deposits by rating agency category.
| Credit ratings | 29/02/2012 US\$'000 |
|||
|---|---|---|---|---|
| Standard & Poor's outlook |
Issuer default rating |
28/02/2013 US\$'000 |
||
| Cash deposits | ||||
| HSBC Bank USA NA | Negative | AA– | 7,654 | 7,968 |
| Deutsche Bank | Negative | A+ | 47,843 | – |
| 55,497 | 7,968 | |||
| Cash and cash equivalents | ||||
| HSBC Bank USA NA | Negative | AA– | 29,661 | 142,819 |
| Deutsche Bank | Negative | A+ | 17,524 | 51,434 |
| Northern Trust (Guernsey) Limited | Stable | AA– | 58 | – |
| Butterfield Bank (Guernsey) Limited | Negative | A– | – | 260 |
| 47,243 | 194,513 |
Bankruptcy or insolvency of the banks may cause the Company's rights with respect to these assets to be delayed or limited. The Investment Adviser monitors risk by reviewing the credit rating of the bank. If credit quality deteriorates, the Investment Adviser may move the holdings to another bank.
Liquidity risk is defined as the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk arises because of the possibility that the Company could be required to pay its liabilities earlier than expected.
Many of the Company's investments are private equity, mezzanine loans and other unlisted investments. By their nature, these investments will generally be of a long-term and illiquid nature and there may be no readily available market for sale of these investments.
There are no restrictions on the saleability of the listed investments (29 February 2012: US\$20,206,000) (being 42 per cent of TAL International Group, Inc.).
The Company has outstanding investment commitments at the year end of US\$40,032,000 (2012: US\$50,430,000) see note 25. The Company manages liquidity levels to ensure these obligations can be met.
The tables below analyse the Company's financial liabilities into relevant maturity groups based on the remaining period at the reporting date to the contractual maturity date. The amounts in the tables are not discounted to the net present value of the future cash outflows as it is not considered significant.
| At 28 February 2013 | Less than 1 month US\$'000 |
2-12 months US\$'000 |
1-5 years US\$'000 |
>5 years US\$'000 |
No stated maturity US\$'000 |
|---|---|---|---|---|---|
| Other payables | 11,553 | – | – | – | – |
| Zero Dividend Preference shares | – | – | 116,252 | – | – |
| 11,553 | – | 116,252 | – | – | |
| At 29 February 2012 | Less than 1 month US\$'000 |
2-12 months US\$'000 |
1-5 years US\$'000 |
>5 years US\$'000 |
No stated maturity US\$'000 |
| Other payables | 8,662 | – | – | – | – |
| Zero Dividend Preference shares | – | – | 139,100 | – | – |
| 8,662 | – | 139,100 | – | – |
The Company has a capital requirement to pay ZDP Shareholders a predetermined final capital entitlement of 369.84 pence on 22 June 2016. As at 28 February 2013, the liability to the ZDP Shareholders amounted to US\$89,839,000 (29 February 2012: US\$87,281,000).
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.
Zero Dividend Preference shares are denominated in Sterling. The Company has an obligation to redeem the ZDP Shareholders on 22 June 2016. The total liability on the redemption date, 22 June 2016, will be GBP76,583,969. The Company currently has no hedge to manage this risk to Sterling.
The following table sets out the Company's exposure to foreign currency risk.
| At 28 February 2013 | US Dollar US\$'000 |
Euro US\$'000 |
GB Sterling US\$'000 |
Total US\$'000 |
|---|---|---|---|---|
| Assets | ||||
| Financial asset at fair value through profit or loss | 482,435 | 17,706 | 31,809 | 531,950 |
| Loans and receivables | 8,765 | – | – | 8,765 |
| Investment in associate | – | 87,567 | – | 87,567 |
| Other receivables | 486 | – | 66 | 552 |
| Cash and cash equivalents | 92,202 | 1,435 | 9,103 | 102,740 |
| Total assets | 583,888 | 106,708 | 40,978 | 731,574 |
| Liabilities | ||||
| Zero Dividend Preference shares | – | – | 89,839 | 89,839 |
| Other payables | 11,411 | – | 142 | 11,553 |
| Total liabilities | 11,411 | – | 89,981 | 101,392 |
| Net currency exposure | 572,477 | 106,708 | (49,003) 630,182 |
The Company has entered into a Structured Forward Currency Contract. If the US\$/€ exchange rate reaches the trigger rate of 1.4, the Company will buy €13,000,000 at a cost of US\$16,900,000.
| US Dollar | Euro | GB Sterling | Total | |
|---|---|---|---|---|
| At 29 February 2012 | US\$'000 | US\$'000 | US\$'000 | US\$'000 |
| Assets | ||||
| Financial asset at fair value through profit or loss | 365,905 | 15,179 | 33,465 | 414,549 |
| Loans and receivables | 23,974 | – | – | 23,974 |
| Investment in associate | – | 69,950 | – | 69,950 |
| Other receivables | 405 | – | 46 | 451 |
| Cash and cash equivalents | 194,513 | – | 7,968 | 202,481 |
| Total assets | 584,797 | 85,129 | 41,479 | 711,405 |
| Liabilities | ||||
| Zero Dividend Preference shares | – | – | 87,281 | 87,281 |
| Other payables | 8,498 | – | 164 | 8,662 |
| Total liabilities | 8,498 | – | 87,445 | 95,943 |
| Net currency exposure | 576,299 | 85,129 | (45,966) | 615,462 |
The Company classifies fair value measurements of its financial instruments at fair value through profit or loss using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The financial assets valued at fair value through profit or loss are analysed in a fair value hierarchy based on the following levels:
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, that 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.
| Financial assets at 28 February 2013 | Level 1 US\$'000 |
Level 2 US\$'000 |
Level 3 US\$'000 |
Total US\$'000 |
|---|---|---|---|---|
| Financial assets designated at fair value | ||||
| through profit or loss at inception: | ||||
| Listed securities | 113,328 | – | – | 113,328 |
| Bank debt | – | – | 11,690 | 11,690 |
| Mezzanine portfolio | – | – | 2,529 | 2,529 |
| US micro cap portfolio | – | – | 342,567 | 342,567 |
| European micro cap portfolio | – | – | 19,896 | 19,896 |
| Real estate portfolio | – | – | 30,860 | 30,860 |
| Other | – | – | 11,080 | 11,080 |
| 113,328 | – | 418,622 | 531,950 |
The following table shows financial instruments recognised at fair value, analysed between those whose fair value is based on:
| Financial assets at 29 February 2012 | Level 1 US\$'000 |
Level 2 US\$'000 |
Level 3 US\$'000 |
Total US\$'000 |
|---|---|---|---|---|
| Financial assets designated at fair value | ||||
| through profit or loss at inception: | ||||
| Listed securities | 154,233 | – | – | 154,233 |
| Legacy portfolio | – | – | 25,312 | 25,312 |
| Bank debt | – | 19,541 | 12,971 | 32,512 |
| Mezzanine portfolio | – | – | 5,658 | 5,658 |
| US micro cap portfolio | – | – | 181,655 | 181,655 |
| European micro cap portfolio | – | – | 15,179 | 15,179 |
| 154,233 | 19,541 | 240,775 | 414,549 |
When fair values of listed equity and debt securities at the reporting date are based on quoted market prices or binding dealer price quotations (bid prices for long positions), without any deduction for transaction costs, the instruments are included within level 1 of the hierarchy.
The fair values of bank debt which is provided by a broker is classified as level 2. The fair value of bank debt which is derived from unobservable data is classified as level 3.
The fair values of investments in the micro cap, legacy and mezzanine portfolios for which there are no active market, are calculated using a valuation model which is accepted in the industry. The model calculates the fair value by applying an appropriate multiple (based on comparable quoted companies, recent acquisition prices and quotes) to the Company's last 12 months EBITDA and deducting a market liquidity discount. The multiples used and marketability discount are classified as unobservable inputs therefore investments are classified as level 3.
There were no transfers between the levels of hierarchy of financial assets recognised at fair value within the year ended 28 February 2013 and 29 February 2012.
The following table shows a reconciliation of all movements in the fair value of financial instruments categorised within level 3 between the beginning and the end of the reporting period.
| US | Euro | ||||||
|---|---|---|---|---|---|---|---|
| Bank | Mezzanine | micro cap | micro cap | Real | |||
| debt | portfolio | portfolio | portfolio | estate | Other | Total | |
| At 28 February 2013 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 |
| At 1 March 2012 | 12,971 | 5,658 | 204,583 | 15,179 | – | 2,384 | 240,775 |
| Purchases | – | – | 128,392 | – | 30,861 | 9,361 | 168,614 |
| PIK adjusted for fair value | 535 | – | 20,684 | 5,993 | – | 27,212 | |
| Cost of investments repaid or sold | (1,808) | (4,309) | (10,341) | (2,125) | – | – | (18,583) |
| Net gains and losses recognised in | |||||||
| statement of comprehensive income | 1,704 | (2,738) | (200) | – | (665) | (1,899) | |
| Investment gains on warrants | |||||||
| held at nil value | – | (518) | – | – | – | – | (518) |
| Movement in accrued interest | |||||||
| recognised in statement of | |||||||
| comprehensive income | (8) | (6) | 1,986 | 1,049 | – | – | 3,021 |
| At 28 February 2013 | 11,690 | 2,529 | 342,566 | 19,896 | 30,861 | 11,080 | 418,622 |
| At 29 February 2012 | Bank debt US\$'000 |
Mezzanine portfolio US\$'000 |
US micro cap portfolio US\$'000 |
Euro micro cap portfolio US\$'000 |
Real estate US\$'000 |
Other US\$'000 |
Total US\$'000 |
|---|---|---|---|---|---|---|---|
| At 1 March 2011 | 9,082 | 2,547 | 271,495 | 32,899 | – | 1,726 | 317,749 |
| Purchases | – | – | 54,659 | 12,202 | – | 764 | 67,625 |
| PIK adjusted for fair value | 404 | 30 | 24,208 | – | – | 38 | 24,680 |
| Cost of investments repaid or sold | – | – | (149,782) | (30,102) | – | (137) | (180,021) |
| Net gains and losses recognised in statement of comprehensive income Movement in accrued interest recognised in statement of |
3,474 | 3,080 | 5,265 | (609) | – | – | 11,210 |
| comprehensive income | 11 | 1 | (1,262) | 789 | – | (7) | (468) |
| At 29 February 2012 | 12,971 | 5,658 | 204,583 | 15,179 | – | 2,384 | 240,775 |
The following table details the revenues and net gains included within the statement of comprehensive income for investments classified at level 3 which held during the year.
| At 28 February 2013 | Bank debt US\$'000 |
Mezzanine portfolio US\$'000 |
US micro cap portfolio US\$'000 |
Euro micro cap portfolio US\$'000 |
Real estate US\$'000 |
Other US\$'000 |
Total US\$'000 |
|---|---|---|---|---|---|---|---|
| Interest and other revenue | 2,479 | 3,246 | 29,134 | 1,607 | – | – | 36,466 |
| Net loss on investments at fair value through profit or loss |
– | 1,704 | (2,738) | (200) | – | (665) | (1,899 ) |
| 2,479 | 4,950 | 26,396 | 1,407 | – | (665) | 34,567 | |
| At 29 February 2012 | Bank debt US\$'000 |
Mezzanine portfolio US\$'000 |
US micro cap portfolio US\$'000 |
Euro micro cap portfolio US\$'000 |
Real estate US\$'000 |
Other US\$'000 |
Total US\$'000 |
| Interest and other revenue | 1,650 | 31 | 29,052 | 1,377 | – | 34 | 32,144 |
| Net gain on investments at fair value | |||||||
| through profit or loss | 3,474 | 3,080 | 5,137 | (517) | – | – | 11,210 |
| 5,124 | 3,111 | 34,225 | 860 | – | 34 | 43,354 |
For the investments measured at level 3 at the reporting date, the Company adjusted the default rate and discount rate assumptions within a range of reasonably possible alternatives. The extent of the adjustment varied according to the characteristics of each security.
The potential effect of using reasonably possible alternative assumptions for valuing financial instruments classified as level 3 at the reporting date would reduce the fair value by up to US\$9,840,000 (29 February 2012: US\$1,405,000) or increase the fair value by US\$10,430,000 (29 February 2012: US\$1,625,000).
The fair value of financial assets and financial liabilities measured at amortised cost are determined as follows:
The fair value of the Zero Dividend Preference shares is deemed to be their quoted market price. As at 28 February 2013 the ask price was £4.34 (29 February 2012: £3.09 per share) the total fair value of the ZDP shares was US\$90,005,000 (29 February 2012: US\$101,973,000) which is US\$166,000 higher (29 February 2012: US\$14,476,000 higher) than the liability recorded in the statement of financial position.
The carrying amounts of loans and receivables are recorded at amortised cost using the effective interest method in the financial statements. The fair value of loans and receivables at 28 February 2013 was US\$7,834,000 (29 February 2012: US\$23,974,000).
The carrying amounts of trade receivables and trade payables are deemed to be their fair value due to their short-term nature.
Basic and diluted earnings per share are calculated by dividing the earnings for the period by the weighted average number of Ordinary shares outstanding during the period.
For the years ended 28 February 2013 and 29 February 2012 the weighted average number of Ordinary shares (including Limited Voting Ordinary shares) outstanding during the year was 65,018,607.
The net asset value per Ordinary share of US\$9.69 (29 February 2012: US\$9.47) is based on the net assets at the year end of US\$630,182,000 (29 February 2012: US\$615,462,000) and on 65,018,607 (29 February 2012: 65,018,607) Ordinary shares, being the number of Ordinary shares in issue at the year end.
| Year ended | Year ended | |
|---|---|---|
| 28/02/2013 | 29/02/2012 | |
| US\$'000 | US\$'000 | |
| Profit for the year | 35,850 | 45,044 |
| Increase/(decrease) in other receivables | (94) | 13 |
| (Decrease)/increase in other payables | 2,891 | 4,514 |
| Net movement in unrealised gains on investments | (533) | 11,284 |
| Net write back of/(impairments on) loans and receivables | (211) | 174 |
| Share of associate's income | (4,342) | (20,797) |
| Adjustment for foreign currency exchange gains on ZDP shares | (4,449) | (1,706) |
| Realised gain on investments | (9,896) | (18,654) |
| Increase in accrued interest on investments and adjustment for interest received as PIK | (24,027) | (24,124) |
| Interest receivable from treasury gilts reinvested | – | (696) |
| Finance costs in respect of Zero Dividend Preference shares | 7,007 | 6,581 |
| Net cash inflow from operating activities | 2,196 | 1,633 |
| Year ended 28/02/2013 US\$'000 |
Year ended 29/02/2012 US\$'000 |
|
|---|---|---|
| Interest on investments | 11,125 | 14,459 |
| Dividends from listed investments | 3,690 | 3,882 |
| Bank interest | 393 | 486 |
| Other income | 189 | 124 |
| 15,397 | 18,951 |
Purchases and sales of investments are considered to be operating activities of the Company, given its purpose, rather than investing activities. The cash flows arising from these activities are shown in the cash flow statement.
At 28 February 2013, JZCP had the following financial commitments outstanding in relation to fund investments:
| Year ended 28/02/2013 US\$'000 |
Year ended 29/02/2012 US\$'000 |
|
|---|---|---|
| EuroMicrocap Fund 2010, LP (related party) | 20,072 | 33,347 |
| Constituent Capital Management, LLC | 12,833 | 15,000 |
| Acon AEP Co-Invest (Suzo), LP | 5,042 | – |
| Grua, LP | 2,085 | – |
| Milestone Aviation Group, Inc. | – | 2,083 |
| 40,032 | 50,430 |
In 2007, JZEP invested US\$250,000 in ETX Holdings, Inc. which was a spin-off from Jordan Auto Aftermarket Holdings, Inc., a former co-investment with The Jordan Company. The investment was subsequently transferred to JZCP as part of the in specie transfer dated 1 July 2008. A further US\$142,000 has subsequently been invested in ETX Holdings, Inc. At 28 February 2013, the investment was valued at US\$671,000 (29 February 2012: US\$602,000).
At 28 February 2013, JZCP has invested US\$62,248,000 (29 February 2012: US\$49,153,000 in the EuroMicrocap Fund 2010, LP ("The Europe Fund"). At 28 February 2013, the investment was valued at US\$87,567,000 (29 February 2012: US\$69,950,000). The Europe Fund is managed by JZ International LLC ("JZI"), an affiliate of JZAI, JZCP's investment manager. JZAI and JZI were each founded by David Zalaznick and Jay Jordan.
The Company has invested with The Resolute Fund, which is managed by The Jordan Company, a company in which David Zalaznick and Jay Jordan are Managing Principals. Investments held by the Company and The Resolute Fund included: Kinetek, Inc.; TAL International Group, Inc.; TTS, LLC. The investments were sold/repaid during the year ended 28 February 2013. Aggregate proceeds of disposals totalled US\$76,576,000, the value of these investments at 29 February 2012 were US\$71,154,000).
The Company has invested with Fund A, a Limited Partnership in a number of US micro cap buyouts. Fund A is managed by JZAI. At 28 February 2013, the total amount of these co-investments was US\$Nil (29 February 2012: US\$53,905,000) of the total amount of the co-investment US\$96,099,904 (29 February 2012: US\$44,203,000) was invested by the Company and US\$21,600,371 (29 February 2012: US\$9,702,000) was invested by Fund A. During September 2012, the Company sold to Fund A 18 per cent of its investment in New Vitality Holdings, Inc. (being an investment in which it had been intended that Fund A would be a co-investor) for a consideration of US\$881,859 being cost plus interest at a rate of 5.25 per cent.
Jordan/Zalaznick Advisers, Inc. ("JZAI"), a US-based company, provides advisory services to the Board of directors of the Company in exchange for management fees, paid quarterly. Fees paid by the Company to the Investment Adviser are detailed in note 9.
The directors' remuneration is disclosed in note 9.
The issued shares of the Company are owned by a number of parties and, therefore, in the opinion of the directors, there is no ultimate controlling party of the Company, as defined by IAS 24 – Related Party Disclosures.
Investments have been disposed by the Company, of which the consideration given included contractual terms requiring that a percentage was held in an escrow account pending resolution of any indemnifiable claims that may arise. At 28 February 2013, the Company has assessed that the fair value of these escrow accounts are nil as it is not reasonably probable that they will be realised by the Company.
As at 28 February 2013, the Company had the following contingent assets held in escrow accounts which had not been recognised as assets of the Company:
| Amount in escrow | |||
|---|---|---|---|
| Company | 28/02/2013 US\$'000 |
29/02/2012 US\$'000 |
|
| GHW (G&H Wire) | 2,609 | 3,031 | |
| Advanced Chemistry & Technology, Inc. | 1,613 | 1,772 | |
| Wound Care Solutions, LLC | 1,573 | 5,398 | |
| N&B Industries, Inc. | 776 | 776 | |
| Apparel Ventures, Inc. | 428 | 835 | |
| Dantom Systems, Inc. | 15 | 2,415 | |
| Recycled Holdings Corporation | 1,300 | 1,300 | |
| Gear for Sports | – | 186 | |
| 8,314 | 15,713 |
During the year US\$7,528,000 (29 February 2012: US\$2,093,000) was realised relating to the escrow accounts of the Company.
The Company has a contingent asset of US\$4,409,700 (29 February 2012: US\$4,409,700) relating to an income incentive fee which was paid to the Investment Adviser during the year ended 28 February 2012. Under the terms of the Advisory Agreement the amount paid in the year is repayable to the Company as the required annual hurdle was not met. The amount is repayable on termination of the Advisory Agreement or offset against any future income incentive fees payable. As neither a date for the termination of the Advisory Agreement or the event of any future income incentive fees becoming payable can be predicted the amount is treated as a contingent asset.
In accordance with the Company's dividend policy, it is the directors' intention for the year ending 28 February 2013 and thereafter to distribute approximately 3 per cent of the Company's net assets in the form of dividends paid in US Dollars (Shareholders can elect to receive dividends in Sterling). Prior to the new policy, the directors have distributed substantially all of the Company's net cash income (after expenses) in the form of dividends.
A final dividend for the year ended 29 February 2012 of 18.5 cents per Ordinary share (total US\$12,028,443) was paid on 3 July 2012.
For the year ended 28 February 2013 an interim dividend of 14.0 cents per Ordinary share (total US\$9,102,605) was paid on 5 November 2012.
A second dividend for the year ended 28 February 2013 of 15.00 cents per Ordinary share (total US\$9,752,791) will be paid on 14 June 2013.
The following table presents performance information derived from the financial statements.
| 28/02/2013 | |
|---|---|
| US\$ | |
| Net asset value per share at the beginning of the year | 9.47 |
| Performance during the year (per share): | |
| Net investment income | 0.45 |
| Incentive fee | (0.14) |
| Net realised and unrealised gains | 0.34 |
| Finance costs | (0.43) |
| Total return | 0.22 |
| Net asset value per share at the end of the year | 9.69 |
| Total return | 2.29% |
| Net investment income to average net assets excluding incentive fee | 7.43% |
| Operating expenses to average net assets | (2.64%) |
| Incentive fees to average net assets | (1.47%) |
| Operating expenses to average net assets including incentive fee | (4.11%) |
| Finance costs | (4.58%) |
The Company's financial statements are prepared in accordance with IFRS, which in certain respects differ from the accounting principles generally accepted in the United States ("US GAAP"). It is the opinion of the directors that these differences are not material and therefore no reconciliation between IFRS and US GAAP has been presented.
These financial statements were approved for issuance by the Board on 20 May 2013. Subsequent events have been evaluated until this date.
In March 2012, the Company sold its holding in BG Holdings, Inc., realising proceeds of US\$33.7 million.
A second dividend for the year ended 28 February 2013 of 15.00 cents per Ordinary share (total US\$9,752,791) will be paid on 14 June 2013.
The Investment Adviser to JZ Capital Partners Limited ("JZCP") is Jordan/Zalaznick Advisers, Inc. ("JZAI"), a company beneficially owned by John (Jay) W Jordan II and David W Zalaznick. The company was formed for the purpose of advising the Board of JZCP on investments in leveraged securities, primarily related to private equity transactions. JZAI has offices in New York and Chicago.
767 Fifth Avenue New York NY 10153
PO Box 255 Trafalgar Court Les Banques St Peter Port Guernsey GY1 3QL
JZ Capital Partners Limited is registered in Guernsey number 48761
Peter Port Guernsey GY1 3QL
Prior to 1 September 2012 the Company's Administrator was Butterfield Fulcrum Group (Guernsey) Limited
The previous registered address of the Company was: 2nd Floor Regency Court Glategny Esplanade St Peter Port Guernsey GY1 3NQ
Aspect House Spencer Road Lancing West Sussex BN99 6ZX
(Also provides custodian services to JZ Capital Partners Limited under the terms of a Custody Agreement.)
Northern Trust (Guernsey) Limited PO Box 71 Trafalgar Court Les Banques St Peter Port Guernsey GY1 3DA
Ernst & Young LLP PO Box 9 Royal Chambers St Julian's Avenue St Peter Port Guernsey GY1 4AF
Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA
Monge Law Firm, PLLC 333 West Trade Street Charlotte NC 28202
214 North Tryon Street Suite 3800 Charlotte NC 28202
35 West Wacker Drive Chicago IL 60601-9703
Mourant Ozannes PO Box 186 1 Le Marchant Street St Peter Port Guernsey GY1 4HP
JP Morgan Cazenove Limited 20 Moorgate London EC2R 6DA
Mr Macfarlane was appointed to the Board of JZCP in April 2008 as Chairman and a non-executive director. Until 2002, he was a Senior Corporate Partner at Ashurst. He was a non-executive director of the Platinum Investment Trust Plc from 2002 until January 2007.
Mr Jordan was appointed to the Board of JZCP in April 2008. He is also a director of Alpha Trust Andromeda Investment Trust S.A. He is a private investor, who until 30 June 2005 was Managing director of Arnhold and S. Bleichroeder Advisers, LLC, a New York-based firm
of asset managers, and is a non executive director of Leucadia National Corporation and the First Eagle Funds.
Mr Firth was appointed to the Board of JZCP in April 2008. He is also a director of a number of offshore funds and management companies, including BH Credit Catalysts Limited and ICG-Longbow Senior Secured UK Property Debt Investments Limited. He is Chairman of
member of the Institute of Chartered Accountants in England and Wales and The Chartered Institute for Securities and Investment. He is a resident of Guernsey.
Ms Tibaldi was appointed to the Board of JZCP in April 2008. She was on the Board of JZ Equity Partners Plc from January 2005 until the company's liquidation on 1 July 2008. She was Managing director at Fairway Investment Greenwich Loan Income Fund Limited. He is a Partners, a Swiss asset management company, where
she was responsible for the Group's marketing and co-managed two fund of funds. Previously she was an executive at the Swiss Stock Exchange and currently serves on the Board of several private companies.
Mr Allison served as a Director until his death on 26 April 2013.
1 Chairman of the Nominations Committee of which all directors are members.
2 Chairman of the Audit Committee of which all directors are members.
JZCP Ordinary and Zero Dividend Preference shares are listed on the Official List of the Financial Services Authority of the UK and are admitted to trading on the London Stock Exchange Specialist Fund Market for listed securities. The ticker symbols are "JZCP" and "JZCN" respectively.
The prices of the Ordinary and Zero Dividend Preference shares are shown in the FinancialTimes under "Investment Companies – Ordinary Income shares" and "Investment Companies – Zero Dividend Preference shares" as "JZ Capital" respectively.
The Company has complied with the requirements of the SEC Custody Rules within these financial statements. These requirements include the investment portfolio falling within the remit of the annual audit, disclosure of the Company's financial highlights, as disclosed in note 30, and a reconciliation of the accounts prepared under IFRS to US GAAP, as discussed in note 31.
| Annual General Meeting | 24 June 2013 |
|---|---|
| Interim report for the six months | |
| to 31 August 2013 | 31 October 2013 |
In accordance with the Transparency Directive, JZCP will be issuing an Interim Management Statement for the quarters ending 31 May 2013 and 30 November 2013. These Statements will be sent to the market via RNS within six weeks from the end of the appropriate quarter, and will be posted on JZCP's website at the same time or soon thereafter.
Cash dividends will be sent by cheque to the first-named Shareholder on the register of members at their registered address, together with a tax voucher. At Shareholders' request, where they have elected to receive dividend proceeds in GBP Sterling, the dividend may instead be paid direct into the Shareholder's bank account through the Bankers' Automated Clearing System. Payments will be paid in US Dollars unless the Shareholder elects to receive the dividend in Sterling. Existing elections can be changed by contacting the Company's Transfer and Paying Agent, Equiniti Limited on +44 (0)121 415 7047.
Investors wishing to buy or sell shares in the Company may do so through a stockbroker. Most banks also offer this service.
The ISIN code/SEDOL (Stock Exchange Daily Official List) numbers of the Company's Ordinary shares are GG00B403HK58/B403HK5 and the numbers of the Zero Dividend Preference shares are GG00B40B7X85/B40B7X8
The Company's UK Transfer and Paying Agent, Equiniti Limited, maintains the share registers. In the event of queries regarding your holding, please contact the Registrar on 0871 384 2265, calls to this number cost 8 pence per minute from a BT landline, other providers' costs may vary. Lines are open 08.00 to 17.30, Monday to Friday, If calling from overseas +44 (0)121 415 7047 or access their website at www.equiniti.com. Changes of name or address must be notified in writing to the Transfer and Paying Agent.
Where notification has been provided in advance, the Company will arrange for copies of Shareholder communications to be provided to the operators of nominee accounts. Nominee investors may attend general meetings and speak at meetings when invited to do so by the Chairman.
following documents will be available at the registered office of the Company during usual business hours on any weekday until the date of the Annual General Meeting and at the place of the meeting for a period of 15 minutes prior to and during the meeting:
In recent years, many companies have become aware that their Shareholders have been targeted by unauthorised overseas-based brokers selling what turn out to be non-existent or high risk shares, or expressing a wish to buy their shares. If you are offered, for example, unsolicited investment advice, discounted JZCP shares or a premium price for the JZCP shares you own, you should take these steps before handing over any money:
More detailed information on this can be found on the Money Advice Service website www.moneyadviceservice.org.uk
The Company's Articles contain provisions allowing the directors to decline to register a person as a holder of any class of Ordinary shares or other securities of the Company or to require the transfer of those securities (including by way of a disposal effected by the Company itself) if they believe that the person:
(a) is a "US person" (as defined in Regulation S under the US Securities Act of 1933, as amended) and not a "qualified purchaser" (as defined in the US Investment Company Act of 1940, as amended);
(b) is a "Benefit Plan Investor" (as described under "Prohibition on Benefit Plan Investors and Restrictions on Non-ERISA Plan" below); or
(c) is, or is related to, a citizen or resident of the United States, a US partnership, a US corporation or a certain type of estate or trust and that ownership of any class of Ordinary shares or any other equity securities of the Company by the person would materially increase the risk that the Company could be or become a "controlled foreign corporation" (as described under "US Tax Matters" below).
In addition, the directors may require any holder of any class of Ordinary shares or other securities of the Company to show to their satisfaction whether or not the holder is a person described in paragraphs (a), (b) or (c) above.
The Company (a) is not subject to the reporting requirements of the US Securities Exchange Act of 1934, as amended (the "Exchange Act") and does not intend to become subject to such reporting requirements; and (b) is not registered as an investment company under the US Investment Company Act of 1940, as amended (the "1940 Act") and investors in the Company are not subject to the protections provided by the 1940 Act.
Investment in the Company by "benefit plan investors" is prohibited so that the assets of the Company will not be deemed to constitute "plan assets" of a "benefit plan investor". The term "benefit plan investor" shall have the meaning contained in Section 3(42) of the US Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and includes (a) an "employee benefit plan" as defined in Section 3(3) of ERISA that is subject to Part 4 of Title I of ERISA; (b) a "plan" described in Section 4975(e)(1) of the US Internal Revenue Code of 1986, as amended (the "Code"), that is subject to Section
4975 of the Code; and (c) an entity whose underlying assets include "plan assets" by reason of an employee benefit plan's or a plan's investment in such entity. For purposes of the foregoing, a "benefit plan investor" does not include a governmental plan (as defined in Section 3(32) of ERISA), a non-US plan (as defined in Section 4(b)(4) of ERISA) or a church plan (as defined in Section 3(33) of ERISA) that has not elected to be subject to ERISA.
Each purchaser and subsequent transferee of any class of Ordinary shares (or any other class of equity interest in the Company) will be required to represent, warrant and covenant, or will be deemed to have represented, warranted and covenanted, that it is not, and is not acting on behalf of or with the assets of a benefit plan investor to acquire such Ordinary shares (or any other class of equity interest in the Company).
Under the Articles, the directors have the power to require the sale or transfer of the Company's securities in order to avoid the assets of the Company being treated as "plan assets" for the purposes of ERISA.
The fiduciary provisions of pension codes applicable to governmental plans, non-US plans or other employee benefit plans or retirement arrangements that are not subject to ERISA (collectively "non-ERISA plans") may impose limitations on investment in the Company. Fiduciaries of non-ERISA plans, in consultation with their advisers, should consider, to the extent applicable, the impact of such fiduciary rules and regulations on an investment in the Company. Among other considerations, the fiduciary of a non-ERISA plan should take into account the composition of the non-ERISA plan's portfolio with respect to diversification;the cash flow needs of the non-ERISA plan and the effects thereon of the illiquidity of the investment; the economic terms of the non-ERISA plan's investment in the Company; the non-ERISA plan's funding objectives; the tax effects of the investment and the tax and other risks associated with the investment; the fact that the investors in the Company are expected to consist of a diverse group of investors (including taxable, tax-exempt, domestic and foreign entities) and the fact that the management of the Company will not take the particular objectives of any investors or class of investors into account.
Non-ERISA plan fiduciaries should also take into account the fact that, while the Company's Board of directors and its Investment Adviser will have certain general fiduciary duties to the Company, the Board and the Investment Adviser will not have any direct fiduciary relationship with or duty to any investor, either with respect to its investment in shares or with respect to the management and investment of the assets of the Company. Similarly, it is intended that the assets of the Company will not be considered plan assets of
continued
any non-ERISA plan or be subject to any fiduciary or investment restrictions that may exist under pension codes specifically applicable to such non-ERISA plans.
Each non-ERISA plan will be required to acknowledge and agree in connection with its investment in any securities to the foregoing status of the Company, the Board and the Investment Adviser that there is no rule, regulation or requirement applicable to such investor that is inconsistent with the foregoing description of the Company, the Board and the Investment Adviser.
Each purchaser or transferee that is a non-ERISA plan will be deemed to have represented, warranted and covenanted as follows:
or transferee that is inconsistent with the foregoing description of the Company, the Board and the Investment Adviser.
This discussion does not constitute tax advice and is not intended to be a substitute for tax advice and planning. Prospective holders oftheCompany's securities must consult their own tax advisers concerning the US federal, state and local income tax and estate tax consequences in their particular situations of the acquisition, ownership and disposition of any of the Company's securities, as well as any consequences under the laws of any other taxing jurisdiction.
The Company's directors are entitled to decline to register a person as, or to require such person to cease to be, a holder of any class of Ordinary shares or other equity securities of the Company if they believe that: such person is, or is related to, a citizen or resident of the United States, a US partnership, a US corporation or a certain type of estate or trust and that ownership of any class of Ordinary shares or any other equity securities of the Company by such person would materially increase the risk that the Company could be or become a "controlled foreign corporation" (a "CFC").
In general, a foreign corporation is treated as a CFC only if its "US Shareholders" collectively own more than 50 per cent of the total combined voting power or total value of the corporation's stock. A "US Shareholder" means any US person who owns, directly or indirectly through foreign entities, or is considered to own (by application of certain constructive ownership rules), 10 per cent or more of the total combined voting power of all classes of stock of a foreign corporation, such as the Company.
There is a risk that the Company will decline to register a person as, or to require such person to cease to be, a holder of the Company's shares if the Company could be or become a CFC. The Company's treatment as a CFC could have adverse tax consequences for US taxpayers.
The Company is expected to be treated as a "passive foreign investment company" ("PFIC"). The Company's treatment as a PFIC is likely to have adverse tax consequences for US taxpayers.
The taxation of a US taxpayer's investment in the Company's securities is highly complex. Prospective holders of the Company's securities must consult their own tax advisers concerning the US federal, state and local income tax and estate tax consequences in their particular situations of the acquisition, ownership and disposition of any of the Company's securities, as well as any consequences under the laws of any other taxing jurisdiction.
| Resolution on Form of Proxy |
Agenda |
|---|---|
| 1. To elect a Chairman of the meeting. | |
| Ordinary resolution 1 | 2. To consider and approve the Annual Report and Accounts of the Company for the year ended 28 February 2013. |
| Ordinary resolution 2 | 3. To re-elect Ernst & Young LLP as Auditor of the Company until the conclusion of the next Annual General Meeting. |
| Ordinary resolution 3 | 4. To authorise the Board of directors to determine the Auditor's remuneration. |
| Ordinary resolution 4 | 5. To approve the directors' remuneration report for the year ended 28 February 2013. |
| Ordinary resolution 5 | 6. To re-elect David Macfarlane as a director of the Company in accordance with Article 21(3) of the Articles of Incorporation of the Company. |
| Ordinary resolution 6 | 7. To re-elect James Jordan as a director of the Company in accordance with Article 21(3) of the Articles of Incorporation of the Company. |
| Ordinary resolution 7 | 8. To approve that the Company be authorised in accordance with the Companies (Guernsey) Law 2008 as amended, to make market acquisitions (as defined in that Law) of its own shares provided that: (a) the maximum number of shares in each class authorised to be purchased is 14.99 per cent of each class of the shares of the Company in issue at any time; (b) the minimum price payable by the Company for each share is 1 pence and the maximum price payable by the Company for each share will not be more than the higher of (i) 105 per cent of the average of the middle market quotations for a share as derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which that share is purchased and (ii) that stipulated by Article 5(1) of the Buy-back and Stabilisation Regulation (EC No 2213/2003); and (c) unless previously varied, revoked or renewed, the authority hereby conferred shall expire at the conclusion of the general meeting of the Company to be held in 2014 under section 199 of the Law, save that the Company may, prior to such expiry, enter into a contract to purchase shares under such authority and may make a purchase of shares pursuant to any such contract. |
| Special resolution 1 (see note 1) |
9. To approve the adoption of the Articles of Incorporation produced to the meeting and initialled by the Chairman of the meeting for the purpose of identification as the Articles of Incorporation of the Company in substitution for, and to the exclusion of, the existing Articles of Incorporation. |
| 10. Close of meeting. |
By Order of the Board
For and on behalf of Northern Trust International Fund Administration Services (Guernsey) Limited Secretary
A member of a company is entitled to appoint another person as his proxy to exercise all or any of his rights to attend and to speak and vote at a meeting of the company. A member may appoint more than one proxy in relation to a meeting, provided that each proxy is appointed to exercise the rights attached to a different share or shares held by him. The requisite form is attached hereto and must be delivered to PO Box 255, Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL at least 48 hours before the time of the Meeting.
Last year proposals were put to Shareholders and adopted that included restructuring the Ordinary share capital of the Company so as to accommodate the weight of US ownership of the Company's equity and at the same time avoid the associated threat of delinquency under US securities law and to obtain admission to listing on the Official List of the Channel Islands Stock Exchange (the "CISX"). As part of the process pursuant to which the Company's Ordinary shares were admitted to the "CISX" in July 2012, the CISX required certain changes to be made to the Company's Articles of Incorporation at the first Annual General Meeting following the CISX listing. The required changes are: that the voting provisions relating to Shareholder resolutions on the appointment or removal of directors be moved from article 5 to article 14; and to ensure that the directors' discretion to restrict transfers of Ordinary shares to Restricted Persons and other Non-Qualified Holders (as defined in the Articles of Incorporation) may only be exercised where failure to do so may result in a regulatory, pecuniary, legal, taxation or material administrative disadvantage to the Company or its Shareholders as a whole and where such exercise would not disturb the market in the Ordinary shares. The changes required by the CISX satisfy their requirements regarding the equality of treatment for Shareholders without impacting upon the effectiveness of last year's restructuring arrangements as regards US securities laws. Special resolution 1 (agenda item no. 9) is therefore proposed to adopt the amended Articles of Incorporation in place of the Company's current Articles of Incorporation.
A copy of the proposed new Articles of Incorporation and a copy of the current Articles of Incorporation marked to show the proposed changes are available for inspection at the Company's registered office and at the offices of Ashurst LLP at Broadwalk House, 5 Appold Street, London EC2A 2HA during normal business hours from the date of this document until the close of the Annual General Meeting to be held on 24 June 2013 (Saturdays, Sundays and public holidays in the UK excepted) and will be available at the place of the Annual General Meeting for at least 15 minutes prior to, and during, the meeting.
It is recommended that a member seek their own financial advice from their stockbroker, bank manager, solicitor, accountant or other professional adviser duly authorised under the Financial Services and Markets Act 2000 (as amended) when considering what action they should take.
If a member has sold or otherwise transferred their shares in the Company it is requested that they forward this document and any accompanying documents to the buyer or transferee or the stockbroker, bank or other agent through whom the sale or transfer was effected for transmission to such buyer or transferee.
A member of a company is entitled to appoint another person as his proxy to exercise all or any of his rights to attend and to speak and vote at a meeting of the company. A member may appoint more than one proxy in relation to a meeting, provided that each proxy is appointed to exercise the rights attached to a different share or shares held by him.
If it is desired to appoint some other person or persons as proxy or proxies the name(s) of the proxy or proxies desired must be inserted in the space provided and the alteration should be initialled. Appointment of a proxy does not preclude you from attending the meeting and voting in person. If you have appointed a proxy and attend the meeting in person, your proxy appointment will automatically be terminated.
Please indicate with an "X" in the appropriate box how you wish your vote to be cast in respect of the resolution. If you do not insert an "X" in the appropriate box your proxy will vote or abstain at his discretion.
The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing or if the appointor is a corporation under its common seal or under the hand of an officer or attorney duly authorised.
All joint holders should be named but the signature of any one is sufficient. In all cases, names must be entered as they appear on the Company's register.
Where there are joint registered holders of any share such persons shall not have the right of voting individually in respect of such share but shall elect one of their number to represent them and to vote whether in person or by proxy in their name. In default of such election the person whose name stands first on the register shall alone be entitled to vote.
Any corporation which is a member may by resolution of its directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the company or of any class of members or to approve any resolution submitted in writing and the person so authorised shall be entitled to exercise on behalf of the corporation he represents the same powers (other than to appoint a proxy) as that corporation could exercise if it were an individual member.
The instrument appointing a proxy and the power of attorney or other authority (if any) under which it is signed or a notarially certified copy of that power or authority shall be deposited at the Company's Transfer Agent office (Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA, United Kingdom) not less than 48 hours before the time for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote and in default unless the Board directs otherwise the instrument of proxy shall not be treated as valid.
The form of proxy may be sent by post or transmitted to the Company's Transfer Agent. "By post" means by registered post, recorded delivery service or ordinary letter post and "transmitted" means transmitted by electronic communication or facsimile transmission. Should the original form of proxy not be received by post the electronic version shall still be treated as valid (provided it is returned before the proxy cut off as detailed above).
Only members registered in the register of members of the company at 6pm on 20 June 2013 shall be entitled to attend or vote at the aforesaid meeting in respect of the number of shares registered in their name at the time, or in the event that the meeting is adjourned in accordance with the provisions contained in the company's Articles of Incorporation, in the register of members at close of business two days before the time of any adjourned meeting. Changes to entries on the register of members after such time or, in the event that the meeting is adjourned, to entries in the register of members after close of business before the time of the adjourned meeting, shall be disregarded in determining the rights of any person to attend or vote at the meeting.
In accordance with the company's Articles of Incorporation, all Ordinary shares will vote together as a class on all matters at the Annual General Meeting. The holders of Zero Dividend Preference shares are not entitled to attend or vote at the Annual General Meeting.
To change your proxy instructions, simply submit a new proxy appointment using the method set out above. If you submit more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will take precedence. Please note that the cut-off time for receipt of proxy appointments also applies in relation to amended instructions; any amended proxy appointment received after the relevant cut-off time will be disregarded.
To appoint more than one proxy you may photocopy the Form of Proxy. Please indicate the proxy holder's name and the number of shares in relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number of shares held by you). Please also indicate if the proxy instruction is one of multiple instructions being given. All forms must be signed and should be returned together in the same envelope.
CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual, which can be viewed at www.euroclear.com/CREST. CREST personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.
In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a "CREST Proxy Instruction") must be properly authenticated in accordance with Euroclear's specifications and must contain the information required for such instructions, as described in the CREST Manual (available at www.euroclear.com/CREST). The message, regardless of whether it constitutes the appointment of a proxy or amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer's agent (ID RA19) by the latest time for receipt of proxy appointments specified above. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Applications Host) from which the issuer's agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means.
CREST members and, where applicable, their CREST sponsors or voting service providers should note that Euroclear does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST person member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings.
The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in regulation 35(5)(a) of the Regulations.
I/We,
Please insert Shareholder name using block capitals. Please note if the shareholder name is not inserted the Form of Proxy cannot be used.
of being a member of
JZ Capital Partners Limited hereby appoint (full name)
of (address)
or failing him, the Chairman of the meeting or the Company Secretary as my/our proxy to attend and vote on my/our behalf and if necessary demand a poll at the Fifth Annual General Meeting of the Company to be held at Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL, Channel Islands on 24 June 2013 at 14:00 BST and at any adjournment thereof.
| Ordinary resolutions | For | Against | Abstain | |
|---|---|---|---|---|
| 1 | To consider and approve the Annual Report and Accounts of the Company for the year ended 28 February 2013. |
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| 2 | To re-elect Ernst & Young LLP as Auditor to the Company until the conclusion of the next Annual General Meeting. |
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| 3 | To authorise the Board directors to determine the Auditor's remuneration. |
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| 4 | To approve the directors' remuneration report for the year ended 28 February 2013. |
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| 5 | To re-elect David Macfarlane as a director of the Company in accordance with Article 21(3) of the Articles of Incorporation of the Company. |
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| 6 | To re-elect James Jordan as a director of the Company in accordance with Article 21(3) of the Articles of Incorporation of the Company. |
| Ordinary resolutions | For | Against | Abstain | |
|---|---|---|---|---|
| 7 | To approve that the Company be authorised in accordance with the Companies (Guernsey) Law 2008 as amended, to make market acquisitions (as defined in that Law) of its own shares provided that: a) The maximum number of shares in each class authorised |
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| to be purchased is 14.99 per cent of each class of the shares of the Company in issue at any time; |
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| b) the minimum price payable by the Company for each share is 1 pence and the maximum price payable by the Company for each share will not be more than the higher of (i) 105 per cent of the average of the middle market quotations for a share as derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which that share is purchased and (ii) that stipulated by Article 5(1) of the Buy-back and Stabilisation Regulation (EC No 2213/2003); and |
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| c) unless previously varied, revoked or renewed, the authority hereby conferred shall expire at the conclusion of the general meeting of the Company to be held in 2014 under section 199 of the Law, save that the Company may, prior to such expiry, enter into a contract to purchase shares under such authority and may make a purchase of shares pursuant to any such contract. |
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| Special resolution | ||||
| 1 | To approve the adoption of the Articles of Incorporation produced to the meeting and initialled by the Chairman of the meeting for the purpose of identification as the Articles of Incorporation of the Company in substitution for, and to the exclusion of, the existing Articles of Incorporation. |
Signature(s)
Dated
In order to be valid at the above meeting this Form of Proxy must be completed and returned to arrive no later than 14:00 BST on Thursday 20 June 2013. You may return the Form of Proxy by fax to +44 (0)1903 698402 or email to [email protected] (with the original to follow by post to Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA, United Kingdom in due course).
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