RNS Number:5899N
Blue Chip Value & Income Fund Ld
15 July 2003
BLUE CHIP VALUE AND INCOME FUND LIMITED
PRELIMINARY ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 30 APRRIL 2003
CHAIRMAN'S STATEMENT
It is disappointing that the Group has continued to struggle since my last report. Markets have been volatile and
falling markets have dented the public's propensity to invest in equity, bringing short-term challenges to many
companies. General equity market declines have been compounded by the terrorist atrocities of 11 September 2001, war in
Afghanistan, war in Iraq and the nuclear threat from North Korea, which have added to uncertainty and volatility.
The Group's high income portfolio has comprised both fixed interest, Sterling denominated debt and convertibles and
ordinary and income shares of split capital investment trusts. Unfortunately, during the life of the Group the split
capital sector has fared significantly worse than equity markets in general with high levels of gearing leading to a
collapse in value. Negative net worth has led to the suspension of, and will ultimately lead to the liquidation of, some
split capital investment trusts and as a consequence they will not be around to participate in any future market
recovery. Due to the collapse in value of the split capital sector, highlighted by the 84.8% fall in value of the
Datastream Highly Geared Investment Trust Index since the Company commenced operations on 10 April 2000, the high income
portfolio only constituted 10.3% of the total portfolio at the year end. This is not in line with the original
investment policy of 25% of the portfolio being invested in the high income portfolio but has been forced on the Group
by the collapse in the split capital investment trust sector and a decision to sell treasury holdings in order to raise
cash to place into the offset account. The realignment of the balance between the high income portfolio and the large
capitalised United Kingdom companies portfolio is dependent on market conditions.
During the year, dividend cuts and suspensions of dividends from both the split capital market and from leading United
Kingdom companies have given the Directors cause for concern and led to a 19.6% fall in dividend income from 2002
levels. A combination of falling income and plummeting share prices has led to a substantial decrease in dividends
declared. Dividends of 2.00p per Ordinary Share were declared for the year ended 30 April 2003 compared to 5.75p for
2002. After taking into account and reviewing the income forecasts for the coming year, on 15 May 2003 the Directors
declared a fourth interim dividend for 2003 of 0.50p per Ordinary Share. In assessing the level at which dividends
should be paid, the Directors have sought to determine a level which they hope to be sustainable in current market
conditions. If dividends received from the Company's investments were cut substantially or if the prices of the
investments fell significantly, the Board would be obliged to consider the capital position of the Company, the position
of the ZDP Shareholders, and the bank covenants of the Company when determining at what level to pay any further
dividends. Although we retained #1,331,131 of revenue in the year the sustainability of the current level of dividends
is dependent upon markets stabilising, but ultimately the current level of dividends may not be sustainable.
If the market conditions of the past year persist or worsen, we may need to amend the level of management fees and
interest that is charged to the capital reserve in line with any revision in the Board's split of expected returns
between income and capital gains and losses arising from the investment portfolios. This in turn would impact upon the
sustainable level of distributable profits.
During the year the Company breached its banking covenants, including the loan-to-value covenant. On 24 January 2003 the
Company agreed with Bank of Scotland ("the Bank") that cash amounts deposited with the Bank, up to a maximum amount of
#10 million, be set-off against the existing borrowings for the purpose of determining various financial covenants. The
Bank has agreed to extend the #10 million offset arrangement until 30 November 2003 on the basis that the cash is
deposited with the Bank for a fixed term and cannot be called back, even if the Company's covenant levels improve
sufficiently during that time. Subject to world equity markets stabilising at current levels, the Directors believe that
the Company will comply with the financial covenants for the duration of the term of the offset arrangement. Collins
Stewart Fund Management Limited ("the Manager") reports daily to the Bank.
Based on the financial position of the Company as at the balance sheet date, and assuming no significant movement in
equity markets to 30 November 2003, it will be necessary for the Group to repay approximately #5 million of debt in
order to regularise the loan to value covenant position. The swap breakage costs associated with this repayment have
been calculated as #319,942. In view of the foregoing, it is the Board's intention to make an appropriate provision in
the net asset values announced monthly through the London and Channel Islands Stock Exchanges, with effect from the end
of July. If markets recover and the loan covenant ratios improve sufficiently the Board intend to retain the current
level of gearing in order to take advantage of any further market rises. A reconciliation of the 30 April 2003 net asset
value announced through the London and Channel Islands Stock Exchanges and the net asset value per these accounts is
disclosed in note 17.
The net assets of the Group were #4,152,408 at 30 April 2003 - 6.12p per Ordinary Share (2002: #29,706,047 - 43.76p per
Ordinary Share). The fall in the net asset value is due to a combination of the extreme market conditions and the high
level of gearing employed by the Group. Whilst this high level of gearing should enhance the net asset value of the
Ordinary Shares where the Group's underlying assets are rising, it has the opposite effect where the underlying assets
are falling. Since the year end markets have continued to recover, resulting in an increase in the net asset value per
Ordinary Share to 10.51p at 30 June 2003. This has had a positive impact on the banking covenants and subject to world
equity markets stabilising at current levels, we believe that the Company will comply with the financial covenants for
the duration of the term of the offset arrangement.
As at the close of business on 30 June 2003, the mid market price per Ordinary Share was 9.00p, compared to the net
asset value of 10.51p and the mid market price per ZDP Share was 73.50p, compared to a net asset value of 119.06p. The
Board is aware that a number of the holders of the Group's shares are split capital investment trusts which themselves
have suffered the aggravated effects of the general stockmarket volatility on their own asset values and have been
sellers of the Group's shares. This has led to a significant imbalance between the supply and demand for both Ordinary
and ZDP Shares. The Board has therefore concluded that it would be more advantageous to shareholders to utilise any
surplus distributable reserves in buying in the Group's Shares as opposed to distributing such reserves by way of a
dividend. The Group is currently not able to take advantage of the discount of the share prices to their net asset
values due to the constrictions of the loan covenants. However, the Board believes that it would be beneficial for the
Group to obtain the necessary authorities to buy back both Ordinary and ZDP Shares in order that it can take advantage
of any opportunity as it arises. The Board also proposes to petition the Court to write-off a proportion of share
premium against revenue and capital reserves to cover the capital losses suffered to date and to generate sufficient
distributable reserves to take advantage of any future share buy back opportunities.
The ending of hostilities in Iraq has removed some of the uncertainty affecting global equity markets. The rise in
corporate activity and generally improving corporate results provide some grounds for confidence that the recent
recovery in world equity markets may be sustainable.
D C Norman
15 July 2003
INVESTMENT ADVISER'S REPORT
The Company was launched in April 2000 and has now experienced a three year bear market which ranks as one of the worst
equity market periods in living memory.
To put this in its context, at launch on 10 April 2000 the FTSE 100 Index stood at 6,533. It fell to its low point of
3,277 on 12 March 2003 before rising to 3,926 on 30 April 2003. The total fall over the three year period has been
39.9%, in capital terms. The Datastream Highly Geared Investment Trust Index has fallen by 84.8% over the same period.
General equity market declines have been compounded by the terrorist atrocities of 11 September 2001, war in Afghanistan
and war in Iraq, which have added to uncertainty and volatility. Against this background, it is inevitable that the NAV
of the Company has fallen:
Year 1 returns (1) Year 2 returns (2) Year 3 returns (4) Cumulative Returns
Capital Total Capital Total Capital Total Capital Total
Blue Chip Value & Income
Fund Limited +17.3% +27.7% -19.6%(3) -10.2%(3) -84.3% (4) -77.7% (4) -85.2% -74.4%
FTSE 100 Index -8.7% -6.5% -13.4% -10.9% -24.0% -20.9% -39.9% -34.1%
FTSE All Share Index -7.6% -5.3% -12.4% -9.9% -24.7% -21.7% -39.1% -33.2%
(1) 10 April 2000 to 30 April 2001
(2) 1 May 2001 to 30 April 2002
(3) Pre the 4th interim dividend for 2002
(4) Pre the 4th interim dividend for 2003
The NAV of the Company in total return terms heavily outperformed markets in year 1 and managed to hang onto this
outperformance in year two despite further falls in markets. Year three saw an even greater decline in equity markets
which spread to virtually all areas of the market. When gearing is taken into account, these falls swamped the Company
and caused heavy falls in the NAV as the bear market finally caught up with the portfolio.
The QuestTM proprietary share evaluation system of Collins Stewart has continued to help avoid some of the worst
performers in the United Kingdom equity market over the last three years and there has been growing bid interest in a
number of stocks highlighted by the system (Debenhams, Boots, WH Smith and Gallaher).
During much of the last three years defensive stocks have been a relatively safe haven within the United Kingdom equity
market and good gains have been made as these stocks have reclaimed some of the underperformance of the TMT bubble
period. This marked outperformance began to breakdown in the third quarter of 2002 as the bear market spread to all
areas of the market. In some cases the declines have been quite pronounced.
There is evidence that leadership within the United Kingdom equity market has been switching to stocks which are more
geared towards economic recovery. This became very pronounced during the "Baghdad Bounce" which commenced around the
time of hostilities. Particularly strong performances have been recorded within TMT stocks, which have typically been
under-represented within the portfolio. Defensive stocks which have traditionally been the mainstay of the portfolio
have partly been left behind, although the bifurcation of the market is not as clear as that experienced in the first
two or so years of the Company's life.
We believe that the market is becoming a "stockpickers" market with less clear leadership from any one group. Within
this background we believe that the QuestTM system should provide us with a competitive advantage.
We have continued actively to try to exploit the high level of volatility in the United Kingdom equity market by trading
around the edges of the portfolio. We have continued to write a small number of covered call options to generate option
premium. Both strategies continue to add value, but have led to a high level of turnover. Our expectation is that this
volatility will continue for the foreseeable future and that the concept of "buy and hold" will not be an effective
strategy.
Investment trusts now represent a very small proportion of the total portfolio (10.3% at the year end) and began to make
a positive contribution to capital performance in April/May 2003. We have very low exposure to investment trusts which
invest into other split capital investment trusts in any meaningful way and have no intention of adding to this
exposure.
Looking forward we believe that the low point of the bear market has passed. After such a strong rise from the March low
the United Kingdom equity market may suffer some profit taking and retracement. We believe that global attempts at
reflation should win through and that equity markets should begin to discount economic recovery over the medium term.
J Davey
Collins Stewart Asset Managers
14 July 2003
This statement of results is not the Group's statutory accounts. The Auditors have reported on the statutory accounts
and have issued an unqualified opinion.
CONSOLIDATED STATEMENT OF TOTAL RETURN
(incorporating the revenue account)
for the year ended 30 April 2003
2003 2002
Revenue Capital Total Revenue Capital Total
Note #'000 #'000 #'000 #'000 #'000 #'000
Losses on investments 10 - (23,933) (23,933) - (7,054) (7,054)
Income 2 3,612 - 3,612 4,299 - 4,299
Management fees 3 (119) (357) (476) (154) (463) (617)
Administration fees 3 (80) - (80) (73) - (73)
Other expenses 4 (242) - (242) (174) - (174)
-------- -------- -------- -------- -------- --------
Net return/(deficit) on ordinary 3,171 (24,290) (21,119) 3,898 (7,517) (3,619)
activities before exceptional items and
finance costs
Provision for swap break costs 14 - (320) (320) - - -
-------- -------- -------- -------- -------- --------
Net return/(deficit) on ordinary 3,171 (24,610) (21,439) 3,898 (7,517) (3,619)
activities before finance costs
Interest payable and similar charges (482) (1,438) (1,920) (450) (1,339) (1,789)
-------- -------- -------- -------- -------- --------
Net return/(deficit) on ordinary 2,689 (26,048) (23,359) 3,448 (8,856) (5,408)
activities for the year
Appropriations in respect of non-equity
interests
Compounding entitlement of ZDP Shares 7 - (945) (945) - (795) (795)
-------- -------- -------- -------- -------- --------
Return/(deficit) attributable to equity 2,689 (26,993) (24,304) 3,448 (9,651) (6,203)
shareholders
Dividends declared in respect of equity 8 (1,358) - (1,358) (3,558) - (3,558)
shares
-------- -------- -------- -------- -------- --------
Transfer to/(from) reserves 1,331 (26,993) (25,662) (110) (9,651) (9,761)
-------- -------- -------- -------- -------- --------
Return/(deficit) per Ordinary Share - 9 3.96p (39.76)p (35.80)p 5.44p (15.21)p (9.77)p
basic and diluted
Return per ZDP Share 7 - 9.45p 9.45p - 7.95p 7.95p
CONSOLIDATED BALANCE SHEET
as at 30 April 2003
2003 2002
Note #'000 #'000
Fixed assets
Listed investments at market value 10 34,199 69,428
Current assets
Debtors 12 1,008 2,893
Cash in loan offset account 10,095 -
Cash at bank 705 442
-------- --------
11,808 3,335
Creditors - amounts falling due within one year
Creditors 13 (1,295) (3,762)
-------- --------
Net current assets/(liabilities) 10,513 (427)
-------- --------
Total assets less current liabilities 44,712 69,001
Creditors - amounts falling due after more than one year
Long term bank loan 14 (28,500) (28,500)
ZDP Shares issued by the Subsidiary 7 (11,740) (10,795)
-------- --------
(40,240) (39,295)
Provision for swap break costs 14 (320) -
-------- --------
Net asset value 17 4,152 29,706
-------- --------
Share capital and reserves
Share capital 15 8,485 8,485
Share premium 16 29,939 29,831
Revenue reserve 16 1,485 154
Capital reserve 16 (35,757) (8,764)
-------- --------
Total equity shareholders' funds 18 4,152 29,706
-------- --------
Net asset value per Ordinary Share 17 6.12p 43.76p
Net asset value per ZDP Share (including amount to be funded by the Company) 7 117.40p 107.95p
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 30 April 2003
Note 2003 2002
#'000 #'000
Net cash inflow from operating activities 19 3,001 2,972
Returns on investments and servicing of finance
Interest paid (1,926) (1,526)
-------- --------
Net cash outflow from returns on investments and servicing of finance (1,926) (1,526)
Capital expenditure and financial investment
Purchase of investments (58,031) (117,944)
Sale of investments 69,147 59,853
-------- --------
Net cash inflow/(outflow) from capital expenditure and financial investment 11,116 (58,091)
Equity dividends paid
Ordinary dividends paid (1,928) (2,353)
-------- --------
Net cash outflow from equity dividends paid (1,928) (2,353)
-------- --------
Net cash inflow/(outflow) before financing 10,263 (58,998)
Financing
Payment to loan offset account (10,000) -
Issue of shares - 39,396
Repayment of bank loan - (8,551)
Loan drawn down - 28,500
-------- --------
Net cash (outflow)/inflow from financing (10,000) 59,345
-------- --------
Increase in cash in the year 20 263 347
-------- --------
COMPANY BALANCE SHEET
as at 30 April 2003
2003 2002
Note #'000 #'000
Fixed assets
Listed investments at market value 10 34,199 69,428
Current assets
Debtors 12 1,008 2,893
Cash in loan offset account 14 10,095 -
Cash at bank 705 442
-------- --------
11,808 3,335
Creditors - amounts falling due within one year
Creditors 13 (1,295) (3,762)
-------- --------
Net current assets/(liabilities) 10,513 (427)
-------- --------
Total assets less current liabilities 44,712 69,001
Creditors - amounts falling due after more than one year
Long term bank loan 14 (28,500) (28,500)
Loan notes issued to the Subsidiary 11 (11,740) (10,795)
-------- --------
(40,240) (39,295)
Provision for swap break costs 14 (320) -
-------- --------
Net asset value 17 4,152 29,706
-------- --------
Share capital and reserves
Share capital 15 8,485 8,485
Share premium 16 29,939 29,831
Revenue reserve 16 1,485 154
Capital reserve 16 (35,757) (8,764)
-------- --------
Total equity shareholders' funds 18 4,152 29,706
-------- --------
NOTES TO THE PRELIMINARY ANNOUNCEMENT OF RESULTS
for the year ended 30 April 2003
1. Accounting policies
A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is
set out below:
a. Accounting convention
The preliminary announcement of results has been prepared under the historical cost convention as modified by the
revaluation of investments. The preliminary announcement of results has been prepared in accordance with applicable
United Kingdom accounting standards and with the Statement of Recommended Practice ("SORP") 'Financial Statements of
Investment Trust Companies' as it is considered best practice to do so, although the Company, as an overseas company,
does not meet all criteria set out in the SORP.
b) Basis of consolidation
The consolidated statement of total return and consolidated balance sheet include the accounts of the Company and its
subsidiary undertaking for the year.
c) Investments held as fixed assets
Quoted investments are valued at the mid-market price on the relevant Stock Exchange at the balance sheet date.
However, when appropriate, the quoted investments have been valued downwards to take account of the high volatility
and poor liquidity in the split capital investment trust market.
Realised surpluses or deficits on the disposal of investments, impairments in the value of investments and unrealised
surpluses or deficits on the revaluation of investments are taken to the consolidated statement of total return as
capital.
Where covered call options have been written by the Company, investments are carried in the accounts at the lower of
market value and the strike price of the options. The fair value of the covered call options is determined by
reference to the Stock Exchange quoted market mid-prices of the relevant investment as at the close of business in the
balance sheet date, less the exercise price of the option.
d) Investment income
Fixed returns on debt securities are recognised on a time apportionment basis so as to reflect the effective yield on
the debt security. Interest on overseas debt securities is shown gross of any overseas withholding tax. Interest on
United Kingdom securities is shown net of the tax credit in accordance with Financial Reporting Standard 16 "Current
Taxation". The debt securities are accounted for on a clean basis. Dividends receivable on equity shares are taken
into account on the ex-dividend date. Bank interest is accounted for on an accruals basis.
The premium on call options written by the Company is recognised immediately in the capital reserve.
e. ZDP Shares issued by the Subsidiary
The ZDP Shares issued by the Subsidiary are accounted for as a liability of the Group in accordance with the
provisions of Financial Reporting Standard 4 "Capital Instruments" ("FRS 4") as this reflects the substance of the
arrangement.
The finance costs of the ZDP Shares are accounted for on an accruals basis, and in accordance with the provisions of
FRS 4. The Directors have allocated 100% of the finance costs relating to ZDP Shares to capital. Accordingly the Group
has provided for the repayment entitlements attached to these shares, issued by the Subsidiary, which accrue on a
daily basis to 30 April 2007.
f) Expenses
All expenses are accounted for on an accruals basis. Expenses are charged through the revenue account except as
follows:
(i) expenses which are incidental to the acquisition or disposal of an investment are treated as part of the cost or
proceeds of the investment;
(ii) 75% of the Group's management fee and financing costs are charged to its capital account; and
(iii) 100% of any performance fee is charged to the capital account.
g) Capital reserve
The following are accounted for in the capital reserve:
i. realised gains and losses on the realisation of investments;
ii. unrealised gains and losses on investments;
iii. expenses charged to the capital reserve in accordance with the above accounting policies; and
iv. premiums on covered call options.
h. Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being investment
business. All investments operate in the United Kingdom, in the sense that they are listed in the London Stock
Exchange.
i. Foreign currency translations
Transactions denominated in foreign currencies are translated into Sterling at the rate of exchange ruling at the
date of the transaction. Foreign currency monetary assets and liabilities are translated into Sterling at the rate
ruling on the balance sheet date. Gains and losses arising on revaluation of foreign currency assets and
liabilities are recorded in the statement of total return.
j. Non-current liabilities
All loans and borrowings are measured at cost. The Group uses an interest rate swap to hedge its risks associated with
interest rate fluctuations. The fair value of the interest rate swap contract is determined as the difference in the
present value of the future interest cash flows (see note 14).
2. Income
2003 2002
#'000 #'000
Dividend income 3,273 4,069
Bond interest 177 55
Bank interest 162 175
-------- --------
3,612 4,299
-------- --------
3. Management fees
The Manager of the Company is entitled under the Management Agreement with the Company to receive a fee at the annual
rate of 1% of the Total Assets of the Company. Where any investments comprised in the assets of the Company are in
funds managed or advised by the Manager or Investment Adviser or an affiliate of either of them, the value of such
investments shall be deducted from the Total Assets for the purpose of calculating the management fee.
In addition, the Manager is entitled to receive a performance fee payable at the end of each financial period of the
Company at the rate of 15% of any excess growth of the net asset value over the Benchmark Net Asset Value per share.
The Benchmark Net Asset Value per share at 30 April 2003 was 64.1905p (2002: 58.355p). No performance fee was payable
for 2002 or 2003.
Under the Administration and Secretarial Agreement the Group pays Collins Stewart Fund Management Limited a fee of
#80,000 per annum, payable quarterly in arrears.
On 15 August 2002 the Group announced that, due to the exceptional market conditions, the Manager and Investment
Adviser had offered, subject to all relevant rules and regulations, to use management and administration fees to
purchase shares in the Group to help improve market liquidity. It was announced that this undertaking would remain in
place until 31 December 2002. Collins Stewart Fund Management Limited has purchased 1,187,652 Ordinary Shares and
2,179 ZDP Shares.
4. Other expenses
2003 2002
Revenue Capital Total Revenue Capital Total
#'000 #'000 #'000 #'000 #'000 #'000
Custody & settlement fees 54 - 54 65 - 65
Audit fees 16 - 16 13 - 13
Directors' remuneration (note 5) 26 - 26 32 - 32
Other expenses 146 - 146 64 - 64
-------- -------- -------- -------- -------- --------
242 - 242 174 - 174
-------- -------- -------- -------- -------- --------
5. Directors' remuneration
2003 2002
#'000 #'000
David Norman 12 12
Nicholas Wilson 10 10
Shane Le Prevost - -
Stephen Laine (resigned 11 September 2002) 4 10
-------- --------
26 32
-------- --------
Shane Le Prevost waived his rights to his Director's fee for the year.
No bonus or pension contributions were paid or payable on behalf of the Directors.
On 15 August 2002 the Group announced that, due to the exceptional market conditions, the Directors had offered,
subject to all relevant rules and regulations, to use their Directors' remuneration to purchase shares in the Group to
help improve market liquidity. It was announced that this undertaking would remain in place until 31 December 2002. Mr
Norman purchased 8,896 ZDP Shares and Mr Wilson purchased 7,400 ZDP Shares.
6. Taxation
The Company and its Guernsey based subsidiary, Blue Chip ZDP Limited, are exempt from Guernsey Income Tax under The
Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and are charged an annual exemption fee of #600.
7. Zero Dividend Preference Shares issued by the Subsidiary
2003 2002
#'000 #'000
Amount due to ZDP Shares brought forward 10,795 -
Amount issued - 10,000
Compounding entitlement of ZDP Shares 945 795
-------- --------
Amount due to ZDP Shares carried forward 11,740 10,795
-------- --------
Return per ZDP Share 9.45p 7.95p
Net asset value per ZDP Shares 117.40p 107.95p
On 1 June 2001, 10 million ZDP Shares were issued by Blue Chip ZDP Limited, a wholly-owned subsidiary undertaking,
raising #10 million by way of a placing on both The Channel Islands Stock Exchange and the London Stock Exchange. Blue
Chip ZDP Limited is authorised to issue 20 million ZDP Shares of 10p each.
ZDP Shareholders are not entitled to receive or participate in any dividends or other distributions out of the profits
of Blue Chip ZDP Limited available for dividend and resolved to be distributed in respect of any accounting period or
any other income or right to participate therein.
On a return of assets on liquidation, after payment of all debts and satisfaction of all creditors of Blue Chip ZDP
Limited, there shall be paid to ZDP Shareholders, from the surplus assets of Blue Chip ZDP Limited, an amount equal to
100p as increased daily at such compound rate as will give an entitlement to 164.24p on the ZDP Redemption Date, 30
April 2007.
ZDP Shareholders do not have the right to receive notice of any general meeting of Blue Chip ZDP Limited or to attend
or vote at any such meeting except in respect of any resolution altering, modifying or abrogating any of the rights
and privileges attached to ZDP Shares or to wind up Blue Chip ZDP Limited.
The basic return per ZDP Share is based on an annualised redemption yield of 8.75%.
8. Dividends
2003 2002
#'000 #'000
Dividends on Ordinary Shares:
1st interim of 0.50p (2002: 1.00p) 339 676
2nd interim of 0.50p (2002: 1.25p) 339 846
3rd interim of 0.50p (2002: 1.50p) 340 1,018
4th interim of 0.50p (2002: 1.50p) 340 1,018
-------- --------
1,358 3,558
-------- --------
Ordinary Shareholders were given the opportunity of receiving shares, as an alternative to cash. The number of shares
offered was based on their market value when each dividend was declared.
2003 2002
Shares issued Shares issued
Shares / purchased in Cost if Shares / purchased Cost if
accepting market purchased in accepting in market purchased in
offer market offer market
#'000 #'000
First interim - 0.50p per share 11,692,496 215,331 37 8,264,324 136,569 issued
(2002: 1.50p per share)
Second interim - 0.50p per share 12,436,742 360,485 36 7,001,214 181,161 issued
(2002: 1.50p per share)
Third interim - 0.50p per share 6,778,800 322,800 12 12,583,486 429,446 172
(2002: 1.50p per share)
Fourth interim - 0.50p per share 6,117,068 334,265 28 10,016,173 347,421 112
(2002: 1.50p per share)
9. Return per Ordinary Share
2003 2002
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
Return/(deficit) per 12.5p Ordinary Share - 3.96 (39.76) (35.80) 5.44 (15.21) (9.77)
basic and diluted
The revenue return per Ordinary Share is based on net revenue return attributable to equity shareholders of #2,688,782
(2002: #3,448,794) and on a weighted average number of 67,882,526 (2002: 63,451,017) Ordinary Shares in issue
throughout the year. The capital return per Ordinary Share is based on the net capital deficit of #(26,992,757) (2002:
#(9,651,617)) and on a weighted average number of 67,882,526 (2002: 63,451,017) Ordinary Shares in issue throughout
the year.
As the average price of Ordinary Shares for the year was less than the exercise price of the Warrants there was no
dilution of the return per Ordinary Share.
10. Listed investments
2003 2002
Group and Company #'000 #'000
Opening valuation 69,428 18,267
Purchases at cost 56,311 120,092
Sales - proceeds (67,607) (61,877)
- realised losses (14,227) (1,883)
Increase in unrealised depreciation (9,706) (5,171)
-------- --------
Closing valuation 34,199 69,428
-------- --------
Closing book cost 48,149 73,672
Closing unrealised depreciation (13,950) (4,244)
-------- --------
Closing valuation 34,199 69,428
-------- --------
Realised losses on sales (14,227) (1,883)
Increase in unrealised depreciation (9,706) (5,171)
-------- --------
Losses on investments for the year (23,933) (7,054)
-------- --------
The 2002 figures include a write-down of #415,825 which takes account of the high volatility and poor liquidity in the
Split Capital Investment Trust market. Due to the decreased volatility in the market and the sale or liquidation
during the year of investments which were written-down in 2002, the Board concluded that it was not necessary to
write-down investments from their 30 April 2003 market values.
11. Investment in subsidiary
The sole activity of the wholly-owned Subsidiary, Blue Chip ZDP Limited, is the issuing of ZDP Shares. It was
incorporated in and is registered in Guernsey and has issued 2 ordinary #1 shares, both of which are held by the
Company.
In June 2001 the Company issued subordinated loan notes to the Subsidiary. The subordinated loan notes were issued at
an aggregate principal amount of #10,000,000, representing all of the proceeds received by the Subsidiary from the
issue of the ZDP Shares.
The subordinated loan notes are not transferable and are repayable at par on 30 April 2007. The Company has given an
undertaking to the Subsidiary under which the Company has undertaken to contribute such funds as would ensure that the
Subsidiary will have in aggregate sufficient assets on the ZDP Repayment Date to satisfy the final capital entitlement
of the ZDP Shares. This contribution has been provided for at a rate of return of 8.75% per annum on the loan notes,
compounded daily.
12. Debtors
2003 2002
Group and Company #'000 #'000
Prepayments and accrued income 424 769
Investment sales outstanding for settlement 584 2,124
-------- --------
1,008 2,893
-------- --------
13. Creditors - amounts falling due within one year
2003 2002
Group and Company #'000 #'000
Investment purchases outstanding for settlement 503 2,222
Management fee 94 154
Administration fee 20 20
Bank interest 289 295
Dividends 339 1,018
Other creditors 50 53
-------- --------
1,295 3,762
-------- --------
14. Long term bank loan
2003 2002
Group and Company #'000 #'000
Bank of Scotland facility 28,500 28,500
-------- --------
In May 2001 the Company entered into a new loan agreement with Bank of Scotland Corporate Banking ("the Bank") for up
to a maximum of #28.5 million. The loan is for a term of approximately 6 years, although it may be repayable earlier
if an event of default occurs. The loan is also repayable prior to the maturity date at the option of the Company. In
addition, the Company has entered into an interest rate swap agreement to fix its interest payments on the loan until
27 April 2007. After taking account of this swap, the interest rate payable on the loan is fixed at 5.74% plus a
margin of 0.975% and MLA costs of 0.02%.
Covenants under the loan agreement
The Company has entered into covenants with the Bank that inter alia provide that:
* the value of the Permitted Investments must exceed 1.7 times the amount of the facility drawn down and
outstanding;
* the realisation value of all Specified Investments (companies with a market capitalisation above #500 million,
United Kingdom Government Securities and cash) is required to be a minimum of 120% of the term loan outstanding;
and
* gross income must exceed at least twice all interest payable under the loan agreements.
Breach of covenants and use of loan offset account
The Company breached the loan-to-value covenant along with a number of other financial covenants during the year. On
24 January 2003 the Company agreed with the Bank that cash amounts deposited with the Bank, up to a maximum amount of
#10 million, be set-off against the existing borrowings for the purpose of determining various financial covenants. On
15 May 2003 the Bank agreed to extend the #10 million offset arrangement until 30 November 2003 on the basis that the
cash is deposited with the Bank for a fixed term and cannot be called back, even if the Company's covenants levels
improve sufficiently. Subject to world equity markets stabilising at current levels, the Directors believe that the
Company will comply with the financial covenants for the duration of the term of the offset arrangement.
Fair value of swap
The fair value of the interest rate swap as at 30 April 2003 was #(1,823,671). The fair value is the estimated amount
that the Company would receive or pay to terminate the swap agreement at 30 April 2003.
Provision for swap break costs
Based on the financial position of the Company as at the balance sheet date, and assuming no significant movement in
equity markets to 30 November 2003, it will be necessary for the Group to repay approximately #5 million of debt in
order to regularise the loan to value covenant position. The swap breakage costs associated with this repayment have
been calculated as #319,942 and have been provided for in these accounts as required by Financial Reporting Standard
12 "Provisions, Liabilities, and Assets". In view of the foregoing, it is the Board's intention to make an appropriate
provision in the net asset values announced monthly through the London and Channel Islands Stock Exchanges, with
effect from the end of July. If markets recover and the loan covenant ratios improve sufficiently the Board intend to
retain the current level of gearing in order to take advantage of any further market rises. A reconciliation of the 30
April 2003 net asset value announced through the London and Channel Islands Stock Exchanges and the net asset value
per these accounts is disclosed in note 17.
15. Share capital
2003 2002
#'000 #'000
Authorised:
100,000,000 (2002: 80,000,000) Ordinary Shares of 12.5p 12,500 10,000
-------- --------
Allotted, called up and fully paid:
67,882,526 Ordinary Shares of 12.5p 8,485 8,485
-------- --------
On 1 June 2001, each 25p Ordinary Share was sub-divided into two 12.5p Ordinary Shares and the authorised share
capital was increased to 80 million 12.5p Ordinary Shares. Following the capital reorganisation, the Company issued 50
million new 12.5p Ordinary Shares (with Warrants attached on a one for five basis) raising #30.6 million by way of a
placing on both The Channel Islands Stock Exchange and the London Stock Exchange. A bonus issue of Warrants was also
made to existing Ordinary Shareholders on the basis of one Warrant for every five existing Ordinary Shares. Each
Warrant confers the right to subscribe for one Ordinary Share at 75p in each of the years 2002 to 2011. At 30 April
2003 there were 13,512,959 Warrants in issue (2002: 13,512,959).
On 1 June 2001, 10 million ZDP Shares were issued by Blue Chip ZDP Limited, a wholly owned subsidiary undertaking,
raising #10 million by way of a placing on both The Channel Islands Stock Exchange and the London Stock Exchange. Blue
Chip ZDP Limited is authorised to issue 20,000,000 ZDP shares of 10p each.
At the Annual General Meeting held on 17 September 2002, the Ordinary Shareholders resolved to increase the authorised
share capital of the Company to 12,500,000 Ordinary Shares of 12.5p each in order to provide sufficient authorised
share capital to allow for any possible conversion of Warrants. However, due to the share price being lower than the
Warrant exercise price, no elections were made in 2002 to exercise the Warrants.
16. Reserves
Share
premium Revenue Capital
account reserve reserve
Total
Group and Company #'000 #'000 #'000 #'000
At 1 May 2002 29,831 154 (8,764) 21,221
Return/(deficit) attributable to equity shareholders - 2,689 (26,993) (24,304)
Dividends declared in respect of Ordinary Shares - (1,358) - (1,358)
Gain on purchase of Ordinary Shares in market for satisfaction of scrip 108 - - 108
dividend entitlement
-------- -------- -------- --------
At 30 April 2003 29,939 1,485 (35,757) (4,333)
-------- -------- -------- --------
17. Net asset value per Ordinary Share
2003 2002
Group and Company pence pence
Net asset value per Ordinary Share - basic 6.12 43.76
-------- --------
The net asset value per Ordinary Share is based on the net assets attributable to equity shareholders of #4,152,408
(2002: #29,706,047) and on 67,882,526 (2002: 67,882,526) shares in issue at the end of the year.
As the price of Ordinary Shares during the year and to date was less than the exercise price of the Warrants there was
no dilution of the net assets per Ordinary Share.
Reconciliation of net asset value to published net asset value:
#'000 per share
Published net asset value 4,811 7.09p
4th interim dividend declared on 15 May 2003 (339) (0.50)p
Provision for swap break costs (note 14) (320) (0.47)p
-------- --------
4,152 6.12p
-------- --------
18. Reconciliation of movements in consolidated shareholders' funds
2003 2002
#'000 #'000
Deficit for the financial year (24,304) (6,203)
Ordinary dividends (1,358) (3,558)
Satisfaction of scrip dividend entitlement 108 130
Issue of share capital (net of issue costs) - 29,453
-------- --------
Movement in shareholders' funds (25,554) 19,822
Shareholders' funds brought forward 29,706 9,884
-------- --------
Shareholders' funds carried forward 4,152 29,706
-------- --------
19. Reconciliation of operating activities to net cash operating inflow
2003 2002
#'000 #'000
Net revenue return before finance costs 3,171 3,898
Management fees charged to the capital account (357) (463)
Decrease/(increase) in accrued income 345 (537)
(Decrease)/increase in other creditors and accruals (63) 74
Interest received on cash held in the loan offset account (95) -
-------- --------
Net cash inflow from operating activities 3,001 2,972
-------- --------
20. Reconciliation of net cash flow to movement in net debt
2003 2002
#'000 #'000
Increase in cash in the year 263 347
Net cash inflow from bank financing - (19,949)
Increase in cash held in the loan offset accounts 10,095 -
-------- --------
Decrease/(increase) in net debt in the year 10,358 (19,602)
Net debt brought forward (28,058) (8,456)
-------- --------
Net debt carried forward (17,700) (28,058)
-------- --------
21. Analysis of net debt
At 1 May 2002 At 30 April
Cashflows 2003
#'000 #'000 #'000
Cash at bank and in hand 442 263 705
Cash in loan offset account - 10,095 10,095
Bank loans due after more than one year (28,500) - (28,500)
-------- -------- --------
Total (28,058) 10,358 (17,700)
-------- -------- --------
22. Related parties
The Company has taken advantage of the disclosure exemption allowed by Financial Reporting Standard 8 "Related Party
Disclosures" in respect of related party transactions with the Subsidiary.
Details of the relationship between the Group, Collins Stewart Fund Management Limited and Collins Stewart (CI)
Limited are disclosed in note 3.
S.R. Le Prevost is managing director of Collins Stewart (CI) Limited and a director of Collins Stewart Fund Management
Limited.
The Directors are not aware of any ultimate controlling party.
23. Capital commitments
All contracted capital commitments have been provided for.
24. Analysis of financial assets and liabilities
Financial summary
The Group has taken advantage of the exemption under Financial Reporting Standard 13 "Derivatives and Other Financial
Instruments", that short-term debtors and creditors can be excluded from disclosure on the grounds that they do not
have a significant impact on the risk profile of the Group.
The Group's financial instruments, other than derivatives, comprise investments, borrowings, long-term loans, cash and
liquid resources that arise directly from its operations. The main purpose of these financial instruments is to
provide income and capital growth and to raise finance for the Group's operations.
The Group also enters into derivative transactions (principally covered call options and interest rate swaps). The
purpose of these transactions is to manage market price risks arising from the Group's operations, generate additional
return and to act as another vehicle for investment purposes (covered call options) and to manage interest rate risks
arising from the Group's source of finance.
The main risks arising from the Group's financial instruments are market price, interest rate and liquidity risk. As
all the assets and liabilities of the Group are denominated in Sterling, there is no currency risk. The Board reviews
and agrees policies for managing its exposure to each of these risks. These policies are summarised below and have
remained unchanged for the year under review.
Market price risk
The Group is exposed to movements in the value of the Group's investments, which can vary with the credit ratings of
the underlying issuers. The Group's investment portfolio complies with the investment parameters as disclosed in its
prospectus.
A 10% decrease in the market prices of investments would result in an 82.36% decrease (2002: 22.60% decrease) in the
net asset value per Ordinary Share. A 10% increase in the market prices of the investments would result in a 78.71%
increase (2002: 21.37% increase) in the net asset value per Ordinary Share. The net asset value is less sensitive to
increases in market prices because of the covered call options written. A fall in the market prices of the investments
greater than 12.14% would result in the net asset value per Ordinary Share being reduced to nil and the net asset
value of the ZDP Shares being eroded.
Liquidity risk
The Company has entered into a loan agreement with Bank of Scotland, under which the Bank has made available a loan
facility of #28.5 million (see note 14). The terms of the Group's bank borrowings entitle the lender to require early
repayment should the Group breach any of the covenants placed upon it by Bank of Scotland Corporate Banking.
The Company breached the loan-to-value covenant along with a number of other financial covenants during the year. On
24 January 2003 the Company agreed with the Bank that cash amounts deposited with the Bank, up to a maximum amount of
#10 million, be set-off against the existing borrowings for the purpose of determining various financial covenants. On
15 May 2003 the Bank agreed to extend the #10 million offset arrangement until 30 November 2003 on the basis that the
cash is deposited with the Bank for a fixed term and cannot be called back, even if the Company's covenants levels
improve sufficiently. Subject to world equity markets stabilising at current levels, the Directors believe that the
Company will comply with the financial covenants for the duration of the term of the offset arrangement.
Based on the financial position of the Company as at the balance sheet date, and assuming no significant movement in
equity markets to 30 November 2003, it will be necessary for the Group to repay approximately #5 million of debt in
order to regularise the loan to value covenant position. The swap breakage costs associated with this repayment have
been calculated as #319,942. In view of the foregoing, it is the Board's intention to make an appropriate provision in
the net asset values announced monthly through the London and Channel Islands Stock Exchanges, with effect from the
end of July. If markets recover and the loan covenant ratios improve sufficiently the Board intend to retain the
current level of gearing in order to take advantage of any further market rises. A reconciliation of the 30 April 2003
net asset value announced through the London and Channel Islands Stock Exchanges and the net asset value per these
accounts is disclosed in note 17.
The Group's liquidity is monitored regularly to ensure that the covenants are not breached. Managing the liquidity
risk is made simpler as the majority of the investments are highly liquid.
Interest rate risk
The Company finances its operations through a mixture of bank borrowings and retained profits. Bank of Scotland has
made available a term loan of up to #28.5 million. In addition, the Company has entered into an interest rate swap
agreement to fix its interest payments on the loan until 27 April 2007. After taking account of this swap, the
interest rate payable on the loan is fixed at 5.74% plus a margin of 0.975% and MLA costs of 0.02% (see note 14).
Interest rate risk profile
At 30 April 2003 the Company did not hold any fixed interest investments. At 30 April 2002 the Company held two fixed
interest investments totalling #982,700 which bore a weighted average interest rate of 11.0%, fixed for a weighted
average period of 12.2 years. The balance of the investment portfolio consists of non-interest bearing investments.
The Company's other exposure to interest rate risk has been mitigated by the interest rate swap agreement which
effectively fixes the interest payments on the Company's #28.5 million loan with the Bank at 5.74% plus a margin of
0.975% and MLA costs of 0.02% (see note 14).
Non-interest Non-interest
bearing Fixed rate Floating rate bearing Fixed rate Floating
rate
2003 2003 2003 2002 2002 2002
Financial assets #'000 #'000 #'000 #'000 #'000 #'000
Equity shares 34,199 - - 68,720 - -
Debt investments - - - - 708 -
Cash at bank in loan offset - - 10,095 - - -
account
Cash at bank - - 705 - - 442
-------- -------- -------- -------- -------- --------
34,199 - 10,800 68,720 708 442
-------- -------- -------- -------- -------- --------
The above analysis excludes short-term debtors and creditors as all the material amounts are non-interest bearing.
Financial assets
Listed investments held by the Group comprise large capitalisation United Kingdom companies and high income funds
traded on the London Stock Exchange. The Group also holds cash and liquid resources as well as having debtors and
creditors that arise directly from its operations.
Except for cash at bank, cash held in the loan offset account and a small number of fixed interest securities (none at
30 April 2003 (2002: #707,700)), the assets are not interest bearing and, in the opinion of the Directors, their fair
value is not materially different from their carrying value.
In addition, the Group writes covered call options. The purpose of these transactions is to manage market price risks
arising from the Group's operations and generate additional return. At the year end there were ten (2002: three)
covered call options outstanding:
Market price at
30 June 2003 /
Quantity 2002
Premium Exercise date Exercise
price
#'000 pence pence
2003:
Scottish 11 116,000 June 2003 390 expired
Power
Scottish 18 250,000 June 2003 420 expired
Power
Shell 17 180,000 June 2003 420 expired
Transport &
Trading
Abbey 19 50,000 July 2003 420 470.5
National
Centrica 14 250,000 July 2003 180 175.8
Gallaher 1 4,000 August 2003 650 595.0
Group
Scottish 25 125,000 September 2003 390 364.0
Power
Shell 14 100,000 September 2003 460 400.0
Transport &
Trading
Abbey 31 125,000 October 2003 500 470.5
National
Vodafone 30 500,000 October 2003 140 118.5
Group
2002:
Abbey 30 100,000 July 2002 1,150 772.0
National
British 73 270,000 July 2002 700 705.0
American
Tobacco
Cadbury 31 180,000 July 2002 500 491.5
Schweppes
Including the options above, the Group wrote 38 (2002: 24) options during the year. 4 options (2002: 7) were exercised
during the year. The premiums from these options totalled #640,943 (2002: #1,185,912).
If you have any queries please contact:
Andrew Duquemin
Collins Stewart Fund Management Limited
2nd Floor
TSB House
Le Truchot
St Peter Port
Guernsey
GY1 4AE
tel: 01481 731 987
fax: 01481 720 018
This information is provided by RNS
The company news service from the London Stock Exchange
END
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