Atlantis Japan Growth Fund Limited
Interim Report and Financial Statements for the six months ended 31st October 2007 Unaudited
www.atlantis-investment.com
ATLANTIS JAPAN GROWTH FUND LIMITED CONTENTS
PAGE
INTRODUCTION
2
INVESTMENT MANAGER’S REPORT
3
DIRECTORS’ INTERIM REPORT
6
DETAILS OF TEN LARGEST INVESTMENTS
8
UNAUDITED INCOME STATEMENT
10
UNAUDITED STATEMENT OF CHANGES IN EQUITY
12
UNAUDITED BALANCE SHEET
13
UNAUDITED CASH FLOW STATEMENT
14
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
15
ADMINISTRATION
21
NOTE: All references to “dollars” or “$” throughout this report are to the United States currency 1
ATLANTIS JAPAN GROWTH FUND LIMITED INTRODUCTION INVESTMENT OBJECTIVE AND POLICIES The Company aims to achieve long term capital growth through investment wholly or mainly in listed Japanese equities. The Investment Manager follows a stock-driven investment approach. The Company’s portfolio is invested in companies quoted on the Tokyo Stock Exchange, the regional stock markets of Fukuoka, Nagoya, Osaka and Sapporo and the Japanese over-the-counter market. The above include the Ambitious market (Sapporo), Mothers (Tokyo), Centrex (Nagoya), Hercules (Osaka) and Q Board (Fukuoka). Investment may also be made in companies listed elsewhere but controlled from Japan or with a material exposure to the Japanese economy. The Company may also invest in securities which are neither listed nor traded on the Japanese over-the-counter market provided that immediately after any such investment is made the Company does not have more than 10 per cent of its Net Asset Value so invested. The Company may borrow money with a view to enhancing the capital returns. The Company may hedge its exposure to Japanese yen. INVESTMENT MANAGER AND INVESTMENT ADVISER Atlantis Fund Management (Guernsey) Limited has been appointed as Investment Manager of the Company. Atlantis Investment Management Limited has been appointed by the Investment Manager as its Investment Adviser. Atlantis Investment Research Corporation, established in Tokyo, will, through Edwin Merner, advise the Investment Adviser on the day-to-day conduct of the Company’s investment business.
2
ATLANTIS JAPAN GROWTH FUND LIMITED INVESTMENT MANAGER’S REPORT FOR THE SIX MONTHS ENDED 31st October 2007
PERFORMANCE For the six-month period ended 31st October, 2007 the Published Company’s Net Asset Value fell 10.9%, to $20.35 per share. By comparison, the large-cap dominated Topix index declined 1.15% and the Tokyo Second Market was down 6.7%. The weak performance is explained in part by the Company’s significant exposure to medium-sized and smaller stocks. The Company also had little exposure to commodity-related stocks, which generally outperformed the market, and heavy exposure to the retail sector, which underperformed the major indices. At the end of the period under review, the Company had a total Net Asset Value of $415.9 million, with borrowings of Y7.5 billion (about $65 million) and cash of Y404 million, (about $3.5 million). Based on the above, the Company is about 15% leveraged on a net basis. The Company has no foreign exchange hedges, meaning a strong Yen has a positive impact on NAV in US dollar terms and vice versa. Since inception on 10th May, 1996 the NAV per share in US dollar terms is up 105%. This is still well ahead of the Topix, which is down 13% over the same time frame, and the Tokyo Second Market Index, which has risen 46.9%. MARKET OUTLOOK After moving higher from May through mid-July, the Japanese stock market turned lower as the subprime loan crisis surfaced in the US. After falling through most of August, the Japanese market stabilised in early September and subsequently mounted a partial recovery through to the end of October. Underneath the major indexes such as the TOPIX or Nikkei 225, we saw small and medium-sized stocks generally rising by less during the spring/ early‑summer rally but also falling by less during the mid-summer correction. Money flow statistics show overseas investors weighing on the market as net sellers during the three-month period from August to October, though turning around in the final weeks and becoming net buyers for most of October. Among domestic investors, individuals, trust funds, and financial institutions were all net sellers during the six-month period under review. In contrast, domestic corporations were consistent net buyers, buying back their own shares and also increasing cross-shareholdings in other corporations. Overseas investors were net buyers during the May-June period and net sellers during the July-October period. A look at the fundamentals shows the Japanese economy continuing to expand during the July–September quarter after contracting during the April-June quarter. External demand (i.e., exports) and private sector capital spending were still the main growth drivers, however, only modest growth was registered by private consumption spending, which accounts for more than 50% of the economy. Private sector residential investment was a major drag during the quarter, but it is important to note that the drop here reflects not so much a lack of interest but rather unforeseen delays in construction permitting following the introduction of new construction safety codes in June. The impact of government spending on the economy was basically neutral. Looking ahead, we anticipate real GDP growth in the range of 1.75-2.0% for the full fiscal year through March 2008 and, with this, growth in corporate earnings of over 10% this fiscal year followed by positive growth again next fiscal year. 3
ATLANTIS JAPAN GROWTH FUND LIMITED INVESTMENT MANAGER’S REPORT (continued) FOR THE SIX MONTHS ENDED 31st October 2007
At this time, we see both positive and negative factors impacting the Japanese stock market. The new Prime Minister, Yasuo Fukuda, who took office in late September, has shown interest in continuing the economic reforms begun under Junichiro Koizumi. Also on the plus side, domestic interest rates are still low and the monetary environment appears likely to remain accommodative even though interest rates may rise slowly over the year ahead. Growth in wages and personal income has been weak, and this, along with inclement weather has generally inhibited growth in consumption spending by households. Assuming the economy continues to expand, we would expect consumer spending to slowly pick up steam going forward. Property prices in larger cities are rising, and this too should help to bolster investor confidence. We think the greatest risks to the Japanese economy and stock market are external, with major risks including the possibility of a further sharp rise in commodity prices, severe slowdown in the US including further subprime loan problems, and slowing world economic growth, particularly in China or Southeast Asia. The Japanese economy itself is not overheated, nor are Japanese corporations highly geared. Indeed, Japanese companies are in exceedingly good shape financially and earnings appear likely to continue rising in most cases, as mentioned above. The Japanese stock market is also very reasonably priced, in our view. The Tokyo First Market as of 20th November is trading at about 17x estimated earnings for this fiscal year and 1.6x book value, while the Tokyo Second Market is trading at about 15x estimated earnings and slightly under 1x book value. The expected dividend yields for both the First and Second markets are also slightly higher than the yield on the benchmark 10-year Japanese government bond. At current levels, we believe the Tokyo market offers good value for long‑term investors, although in the near term it will probably remain subject to the impact of external factors as well as the possibility of renewed selling pressure from overseas investors and domestic individual investors, the two big players in the Tokyo market. OUR STRATEGY AND THE PORTFOLIO Our investment strategy remains focused on value and growth. This means we invest in companies that we believe have above-average earnings growth potential over the longer term and whose stocks are also reasonably priced or, preferably, undervalued. The manager does not seek to play short-term market themes or fads, but rather aims to buy and hold companies that offer attractive investment potential over the medium to longer term, which can mean years in some cases. If a stock in the portfolio does extremely well in the short term and becomes overvalued, we may take profits by selling part or all of our position. Conversely, if a company in the portfolio fails to meet our earnings expectations or we lose confidence in management, we may exit our position even if it means taking a loss. At this time, we are finding many attractive stocks that meet our criteria. Specifically, in terms of growth, we want to see top-line and bottom-line growth combined with rising profit margins, positive free cash flow, and an improving balance sheet. In terms of valuations, we want to see low PERs on future earnings and, if possible, low price to book ratios as well. We insist on good management and also like to see the dividends rising over time. 4
ATLANTIS JAPAN GROWTH FUND LIMITED INVESTMENT MANAGER’S REPORT (continued) FOR THE SIX MONTHS ENDED 31st October 2007
In our daily search for investment candidates, we look at a wide variety of companies, ranging from big to small across nearly every industry. However, we are still finding most of the best growth and value combinations among the medium-sized and smaller companies, as is reflected in the composition of the portfolio. While we are buying many small and medium-sized companies, we are careful not to own too much of any one company since things can and do go wrong from time to time. If we like the fundamentals of a given sector, we will buy several companies with similar businesses to spread the risk. For instance, at this time we find local drug store chains attractive; however, rather than buying just one, we have several different holdings in this area. This has been a rewarding strategy. With regard to sector allocation, we would note that we do not make our stock selection based on any specific sector weighting targets or guidelines. However, because we look at many companies in many different industries, we nevertheless have exposure to a wide range of sectors. At the end of the six-month period under review, the portfolio is relatively overweight in consumer-related stocks, service companies, auto parts makers, electronic component manufacturers, machine tool makers, and real estate-related companies (including REITs). In contrast, the portfolio has almost no exposure to utilities, fisheries/agriculture, shipping, iron/steel, airlines, glass/ceramics, and non-ferrous metals. We hold some cyclical growth stocks but have very limited exposure to commodity-related stocks, which for the most part are extremely cyclical and have very poor earnings visibility. Since we are positive on the outlook for the Japanese economy we have increased the Company’s borrowings by Y1.5 billion, to Y7.5 billion (about $65 million). This means the Company is about 15% geared on a net basis. As indicated above, we are bottom-up investors, with our main focus on individual stock selection. However, we also closely monitor “big picture” trends based on our belief that macro-level fundamentals significantly influence stock market trends over the longer term. Thus, in addition to our intensive research of individual companies, we also keep a close watch on the economy, corporate earnings, inflation, interest rates, fiscal and monetary policy, foreign exchange rates, and trade and current account balances. The Fund manager is not trying to beat the major indices every quarter or even every year. Indeed, because our investment strategy is focused on value as well as growth, we must often buy stocks when they are not popular in order to obtain the valuation levels we seek. Ultimately, though, we believe our approach will continue to deliver superior performance for long-term oriented investors. Atlantis Fund Management (Guernsey) Limited 21st November 2007
5
ATLANTIS JAPAN GROWTH FUND LIMITED DIRECTORS’ INTERIM REPORT for the six months ended 31st October 2007
The Directors are pleased to present their Interim Report and the Financial Statements of the Company for the six month period ended 31st October 2007. CAPITAL VALUES At 31st October 2007 the value of net assets available to shareholders was $413,215,179 (30th April 2007 - $464,980,738) and the Net Asset Value per share was $20.22 (30th April - $22.75). COMPANY’S OBJECTIVES, POLICIES AND STRATEGIES IN RESPECT OF FINANCIAL ASSETS As an investment trust, the Company invests in securities for the long term. The financial investments held as assets by the Company comprise of equity shares. As such, the holding of securities, investing activities and financing associated with the implementation of the investment policy involves certain inherent risks. Events may occur that could result in either a reduction in the Company’s net assets or a reduction of revenue profits available for distribution. Set out below are the principal risks inherent in the Company’s activities along with the actions taken to manage them. The Board reviews and agrees policies for managing these risks and these policies have remained substantially unchanged since 30th April 2007. Market risk Market risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The market risk is monitored by the Board on a quarterly basis and on a daily basis by the Investment Manager. Currency risk The Company’s results for the period and net assets could be significantly affected by currency movements as most of the Company’s assets are denominated in yen. In order to reduce this risk the Company may hedge its exposure to the Japanese currency. The Company did not have any hedging arrangements at the end of the period. Interest rate risk The Company finances its operations mainly through its share capital and retained profits, including realised and unrealised capital profits. Additional bank borrowings may be used with a view to enhancing capital returns. However, the Company’s Articles of Association provide that borrowing levels should not exceed 20% of Net Asset Value at the time any borrowing is effected. The level of borrowing as at 31st October 2007 was 15.8%, while at 30th April 2007 it was 11.7%. Liquidity risk, and cashflow risk The majority of the Company’s assets comprise readily realisable securities, which can be sold to meet funding commitments as necessary. 6
ATLANTIS JAPAN GROWTH FUND LIMITED DIRECTORS’ INTERIM REPORT (continued) for the six months ended 31st October 2007
INVESTMENT MANAGER In the opinion of the Directors, in order to achieve the investment objectives and policies of the Company, and having taken into consideration the performance of the Company, the continuing appointment of the Investment Manager is in the interests of the shareholders as a whole. A more detailed commentary of important events that have occurred during the period and their impact on these Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the financial year is contained in the Investment Manager’s Report. CHANGE OF CUSTODIAN, ADMINISTRATOR, SECRETARY AND PRINCIPAL REGISTRAR HSBC Securities Services (Guernsey) Limited ceased as secretary, administrator and principal registrar and HSBC Custody Services (Guernsey) Limited ceased as custodian of the Company with effect from 31st October 2007. Northern Trust International Fund Administration Services (Guernsey) Limited has been appointed as secretary, administrator and principal registrar, and Northern Trust (Guernsey) Limited as custodian with effect from 1st November 2007. DIRECTORS’ RESPONSIBILITY STATEMENT We confirm that to the best of our knowledge: • the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’; • as required by DTR 4.2.7R of the FSA’s Disclosure and Transparency Rules, the interim management report includes a fair review of important events that have occurred during the first six months of the financial year and their impact on the condensed set of of financial statements, and a description of the principal risks and uncertainties for the remaining six months of financial year; and • the interim management report includes a fair review of the information concerning related party transactions required by DTR 4.2.8R. Approved by the Board
Andrew Martin Smith Director
Christopher Jones Director
12th December 2007 7
ATLANTIS JAPAN GROWTH FUND LIMITED DETAILS OF TEN LARGEST INVESTMENTS AS AT 31st October 2007
Toyota Tsusho Corp (493,500 shares, cost $5,059,624) Toyota Tsusho is a trading company in the Toyota group, strong in automobile-related products including steel, machinery and chemical products. The company exports Toyota cars chiefly to Southeast Asia, China, the Middle East and Latin America. The company took over Tomen which is helping to increase the chemical and energy related businesses. (Fair value of $13,707,738 representing 3.37% of the Net Asset Value) Yusen Air & Sea Service Co Ltd (479,600 shares, cost $10,547,702) Yusen Air & Sea Service provides both domestic and international air freight forwarding, international sea scheduled transportation, van truckload, logistics, warehousing, and clearing brokerage services in North America, Europe and Pacific Rim. (Fair value of $9,658,192 representing 2.37% of the Net Asset Value) Nissha Printing Co Ltd (255,000 shares, cost $6,965,087) Nissha Printing provides multi coloured printing services for books and periodicals. The company has developed a high-precision film presser system and is advancing into specialised printing fields, such as IC cards and has sales office in the US. (Fair value of $7,282,236 representing 1.79% of the Net Asset Value) Unicharm Petcare Corp (147,200 shares, cost $2,371,767) Unicharm Petcare is a subsidiary of Unicharm Corp. The company produces and sells pet foods and toiletry goods for cats and dogs and has developed a range of tailored products for varying age, size and health. (Fair value of $7,219,131 representing 1.77% of the Net Asset Value) Maxvalu Tokai Co Ltd (476,000 shares, cost $8,668,239) Maxvalu runs a chain of food supermarkets in Shizuoka Pref and neighbouring areas. The company is hoping to open around 6 stores a year, mainly large-scale ‘Maxvalu’ stores. (Fair value of $7,102,504 representing 1.75% of the Net Asset Value) Sumitomo Rubber Industries (550,000 shares, cost $6,028,290) Sumitomo Rubber manufactures automobiles and motorcycle tires, industrial rubber products and sports equipment, including golf balls, tennis rackets, rubber gloves and artificial turf, which the company markets under the Dunlop brand. (Fair value of $6,645,545 representing 1.63% of the Net Asset Value) Nippon Hotel Fund Investment Corporation (REIT) (1,529 shares, cost $6,444,303) Nippon Hotel Fund Investment is a real estate investment trust, which invests in business hotels which are then leased out to operators on long term contracts. (Fair value of $6,503,277 representing 1.60% of the Net Asset Value)
8
ATLANTIS JAPAN GROWTH FUND LIMITED DETAILS OF TEN LARGEST INVESTMENTS (continued) AS AT 31st October 2007
Fukuoka REIT Corp (852 shares, cost $6,472,806) Fukuoka REIT Corp is a real estate investment trust that invests in office buildings, shopping centres and apartment houses in and around Fukuoka and other places in Kyushu, the second largest of Japan’s four islands by population. (Fair value of $6,471,073 representing 1.59% of the Net Asset Value) Sumida Corp (383,400 shares, cost $5,914,660) Sumida Corp. manufactures coils chiefly used in end-products such as AV equipment, PCs, mobile phones and automobiles. Most production takes place in China and SE Asia. (Fair value of $6,469,594 representing 1.59% of the Net Asset Value) Art Corp (211,200 shares, cost $4,002,544) Art Corp provides moving services, mostly for individuals, and also operates overseas. The Company also sells imported car vehicles, home electric appliances, interior accessories, and also has some exposure to the housing industry. (Fair value of $5,774,749 representing 1.42% of the Net Asset Value)
9
ATLANTIS JAPAN UNAUDITED
FOR THE SIX MONTHS
01-May-07 to 31-Oct-07
Notes Income 2(f) Losses on investments held at fair value 2(i) Exchange (loss)/gain 2(d) Investment income
Revenue $’000
Capital $’000
Total $’000
– (63) 3,281
(47,767) (2,181) –
(47,767) (2,244) 3,281
(49,948)
(46,730)
3,218
2(e) 4 4 4 4 4
Expenses Investment management fee Custodian fees Administration fees Registrar and transfer agent fees Directors’ fees and expenses Interest expense and bank charges Transaction costs Insurance fees Audit fee Printing and advertising fees Legal and professional fees Listing fees Miscellaneous expenses
3,333 111 133 14 106 492 – 31 17 25 28 25 18
– – – – – – 473 – – – – – –
3,333 111 133 14 106 492 473 31 17 25 28 25 18
4,333
473
4,806
Loss before tax
2(j)
Taxation
Loss for the period
3
Deficit per ordinary share
(1,115) (230) (1,345)
(50,421) – (50,421)
(51,536) (230) (51,766) $(2.533)
All revenue and capital items in the above The revenue and capital columns The ‘Total’ column of this statement represents the Company’s Income Statement, The supplementary income and capital return columns are both prepared under
The notes on pages 15 to 20 form 10
GROWTH FUND LIMITED INCOME STATEMENT
ENDED 31st October 2007
01-May-06 to 31-Oct-06 Revenue $’000
Capital $’000
Total $’000
– (35) 2,716
(118,388) 1,219 –
(118,388) 1,184 2,716
2,681
(117,169)
(114,488)
3,960 139 143 10 113 394 – 37 11 21 18 23 3
– – – – – – 475 – – – – – –
3,960 139 143 10 113 394 475 37 11 21 18 23 3
4,872
475
5,347
(2,191) (190) (2,381)
(117,644) – (117,644)
(119,835) (190) (120,025) $(5.874)
statement derive from continuing operations. represent supplementary information. prepared in accordance with International Financial Reporting Standards. guidance published by the Association of Investment Companies. part of these financial statements 11
ATLANTIS JAPAN GROWTH FUND LIMITED UNAUDITED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 31st October 2007
For the six month period ended 31st October 2007 Ordinary Share Share Revenue Capital Premium Reserve $’000 $’000 $’000
Capital Reserve $’000
Total $’000
Balance at 1st May 2007 Loss for the period Transfer from capital reserve
204 – –
192,650 – –
(20,788) (51,766) 50,421
292,915 – (50,421)
464,981 (51,766) –
Balance at 31st October 2007
204
192,650
(22,133)
242,494
413,215
For the six month period ended 31st October 2006 Ordinary Share Share Revenue Capital Premium Reserve $’000 $’000 $’000
Capital Reserve $’000
Total $’000
Balance at 1st May 2006 Loss for the period Transfer from capital reserve
204 – –
192,650 – –
(18,178) (120,025) 117,644
431,959 – (117,644)
606,635 (120,025) –
Balance at 31st October 2006
204
192,650
(20,559)
314,315
486,610
The notes on pages 15 to 20 form part of these financial statements 12
ATLANTIS JAPAN GROWTH FUND LIMITED UNAUDITED BALANCE SHEET AS AT 31st October 2007
Notes Non Current Assets 2(f) Financial assets at fair value through profit or loss
(Unaudited) 31-Oct-07 $’000
(Audited) 30-Apr-07 $’000
473,427
515,814
2(d)
Current Assets Due from brokers Dividends and interest receivable Other receivables Cash and cash equivalents
239 2,266 35 5,996
798 3,340 29 2,813
8,536
6,980
2(h)
Current Liabilities Due to brokers Payables and accrued expenses Loans payable
(2,723) (924) (13,020)
(2,634) (820) –
(16,667)
(3,454)
Net Current (Liabilities)/Assets
(8,131)
3,526
2(h)
Non Current Liabilities Loans payable
(52,081)
(54,359)
Net Assets
413,215
464,981
Equity Ordinary share capital Share premium Revenue reserve Capital reserve
204 192,650 (22,133) 242,494
204 192,650 (20,788) 292,915
5
Net Assets Attributable to Equity Shareholders
413,215
464,981
Net Asset Value per Ordinary Share*
$20.22
$22.75
*Based on the Net Asset Value at the period end divided by the number of shares in issue: 20,435,627 (30th April 2007 - 20,435,627) The financial statements on pages 10 to 20 were approved and signed at a Board Meeting at Atlantis Japan Growth Fund Limited on 12th December 2007 by:
Andrew Martin Smith Director
Christopher Jones Director
The notes on pages 15 to 20 form part of these financial statements 13
ATLANTIS JAPAN GROWTH FUND LIMITED UNAUDITED CASH FLOW STATEMENT FOR THE SIX MONTHS ENDED 31st October 2007
2007 $’000
2006 $’000
Cash outflow from operating activities
(152)
(1,247)
Investing Activities Purchase of investments Sale of investments
(106,673) 101,941
(103,174) 104,112
Net cash (outflow)/inflow from investing activities
(4,732)
938
Net cash outflow before financing
(4,884)
(309)
Cash flows from financing activities Interest paid Net loans drawn-down
(431) 8,395
(349) –
Net cash inflow/(outflow) from financing activities
7,964
(349)
Net increase/(decrease) in cash and cash equivalents
3,080
(658)
Exchange movements
103
(207)
Movement in cash and cash equivalents in the period
3,183
(865)
Cash and cash equivalents at beginning of period
2,813
2,550
Cash and cash equivalents at end of period
5,996
1,685
Reconciliation of loss for period to net cash outflow from operating activities Net loss before taxation Loss on investments held at fair value Exchange loss/(gain) Interest expense Decrease in debtors and accrued income Increase/(decrease) in creditors Taxation
(51,536) 47,767 2,244 492 1,068 43 (230)
(119,835) 118,388 (1,184) 394 1,219 (39) (190)
(152)
(1,247)
The notes on pages 15 to 20 form part of these financial statements 14
ATLANTIS JAPAN GROWTH FUND LIMITED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS for the six months ended 31st October 2007
1. GENERAL Atlantis Japan Growth Fund Limited (the “Company”) was incorporated in Guernsey on 13th March 1996. The Company commenced activities on 10th May 1996. 2. ACCOUNTING POLICIES a) Statement of Compliance The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”), which comprise standards and interpretations approved by the IASB, and International Accounting Standards, and Standing Interpretations Committee interpretations approved by the IASC that remain in effect. The following new standards and amendments have been issued but are not effective for these financial statements and have not been early adopted: In August 2005, the IASB issued IFRS 7 “Financial Instruments Disclosure” which becomes effective for annual accounting periods commencing on or after 1 January 2007. The standard requires disclosures about the significance of financial instruments for an entity’s financial position and performance. In November 2006, the IASB issued IFRS 8 “Operating Segments” which becomes effective for annual accounting periods beginning on or after 1 January 2009. This standard requires disclosures on the financial performance of the operating segments of the entity. The IASB has issued an amendment to IAS1 Presentation of Financial Statements: Capital Disclosures, which becomes effective for annual accounting periods commencing on or after 1 January 2007. This standard requires increased disclosure in relation to financial instruments. b) Basis of Preparation The interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, ‘Interim Financial Reporting’. The accounting policies adopted and detailed below will be applied to the forthcoming annual financial statements which will be prepared in accordance with International Financial Reporting Standards. The Financial Statements are presented in US Dollars which is also the functional currency of the Company. The Financial Statements have been prepared on a historical cost basis except for the measurement of financial assets and financial liabilities at fair value through profit or loss. The preparation of Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.” 15
ATLANTIS JAPAN GROWTH FUND LIMITED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (continued) for the six months ended 31st October 2007
2. ACCOUNTING POLICIES (continued) b) Basis of Preparation (continued) Where presentational recommendations set out in the Statement of Recommended Practice (“SORP”) “Financial Statements of Investment Companies”, issued by the Association of Investment Companies in December 2005 do not conflict with the requirements of IFRS, the Directors have prepared the financial statements on a basis consistent with the recommendations in the SORP. All financial assets and financial liabilities are recognised (or de-recognised) on the date of the transaction by the use of ‘trade date accounting’. c) Presentation of Income Statement In order to better reflect the activities of an investment trust company supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. d) Income Recognition Dividends arising on the Company’s investments are accounted for on an ex-dividend basis. Investment income is accounted for gross of withholding tax. Interest on short-term paper is accrued on a day-to-day basis. e) Expenses All expenses are recognised on an accruals basis and have been charged against revenue, with the exception of transaction costs, which have been charged against capital. f) Financial assets at fair value through profit or loss (“Investments”) The Company’s business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Company’s Board of Directors and other key management personnel. Accordingly, upon initial recognition the investments are designated by the Company as ‘at fair value through profit or loss’. They are included initially at fair value, which is taken to be their cost (excluding expenses incidental to the acquisition which are written off in the Income Statement, and allocated to the capital column of the Income Statement at the time of acquisition). Subsequently, the investments listed overseas are valued at ‘fair value’, which is bid price (where a bid price is available) or otherwise at fair value based on published price quotations. Gains and losses on non-current asset investments are included in the Income Statement as capital.
16
ATLANTIS JAPAN GROWTH FUND LIMITED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (continued) for the six months ended 31st October 2007
2. ACCOUNTING POLICIES (continued) g) Cash and Cash Equivalents Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents, as defined above, net of outstanding bank overdrafts. h) Loans Payable All loans are initially recognised at cost, being the fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account discount or premium on settlement. Any costs of arranging any interest-bearing loans are capitalised and amortised over the life of the loan. i) Foreign Currencies The Company’s investments are predominately denominated in Japanese yen. The Company’s obligation to shareholders is denominated in US dollars and when appropriate, the Company may hedge the exchange rate risk from yen to US dollars. Therefore, the functional currency is US dollars, which is also the presentational currency of the Company. Transactions involving currencies other than US dollars, are recorded at the exchange rate ruling on the transaction date. At each balance sheet date, monetary items and non-monetary assets and liabilities that are fair valued, which are denominated in foreign currencies, are retranslated at the closing rates of exchange. Exchange differences arising from retranslating at the balance sheet date: – investments and other financial instruments measured at fair value through profit or loss; and – other monetary items; and arising on settlement of monetary items, are included in the Income Statement and allocated as capital if they are of a capital nature, or as revenue if they are of a revenue nature. j) Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the period. Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that were applicable at the balance sheet date. In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented against capital returns in the supplementary information in the Income Statement is the “marginal basis”. Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue return column of the Income Statement, then no tax relief is transferred to the capital return column. 17
ATLANTIS JAPAN GROWTH FUND LIMITED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (continued) for the six months ended 31st October 2007
2. ACCOUNTING POLICIES (continued) j) Taxation (continued) Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised in full for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Investment trusts which have approval as such under section 842 of the Income and Corporation Taxes Act 1988 are not liable for taxation on capital gains. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. 3. DEFICIT PER ORDINARY SHARE The deficit per ordinary share figure is based on the net deficit for the period of $51,765,588 (2006 - $120,025,318) and on 20,435,627 ordinary shares for each period, being the weighted average number of ordinary shares in issue during the period. The deficit per ordinary share figure detailed above can be further analysed between revenue and capital, as below. 2007 2006 $’000 $’000 Net revenue loss Net capital loss
(1,345) (50,421)
(2,381) (117,644)
Net total loss
(51,766)
(120,025)
Weighted average number of ordinary shares in issue during the period
20,435,627
20,435,627
Revenue deficit per ordinary share Capital deficit per ordinary share
$ (0.066) (2.467)
$ (0.117) (5.757)
Total deficit per ordinary share
(2.533)
(5.874)
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ATLANTIS JAPAN GROWTH FUND LIMITED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (continued) for the six months ended 31st October 2007
4. RELATED PARTY TRANSACTIONS Certain Directors had a beneficial interest in the Company by way of their investment in the ordinary shares of the Company. The details of these interests as at 31st October 2007 are as follows:
Ordinary Shares
T. Guinness A. Martin Smith C. Jones
10,000 2,500 1,000
There were no relevant contracts in force during or at the end of the period in which any Director had an interest. There are no service contracts in issue in respect of the Company’s Directors. No Directors had a non-beneficial interest in the Company during the period under review. Investment Management Fee The Company pays to the Investment Manager a fee accrued weekly and paid monthly in arrears at the annual rate of 1.5 per cent of the weekly Net Asset Value of the Company. For the period ended 31st October 2007, total investment management fees were $3,332,610 (2006 - $3,959,629) of which $563,237 (2006 - $633,533) is due and payable as at that date. Under the terms of the Investment Management Agreement dated 18th March 1996, the Investment Manager, Atlantis Fund Managers (Guernsey) Limited, will continue in office until a resignation is tendered or the contract is terminated. In both circumstances, a resignation or termination must be given with a notice period which must not be less than twelve months, and be in accordance with the Investment Management Agreement. Fees payable to the Investment Adviser are met by the Investment Manager. Custodian Fees The Company pays to the Custodian a fee accrued weekly at a rate of 0.05 per cent of the total weekly Net Asset Value (subject to an annual minimum of US$20,000) of the assets held by the Custodian or Sub-Custodian, together with transactions charges. For the period ended 31st October 2007, total custodian fees were $111,330 (2006 - $139,220) of which $18,775 (2006 - $21,118) is due and payable as at that date. Administration and Registrar Fees The Company pays to the Administrator a fee accrued weekly and paid monthly in arrears at the annual rate of 0.20 per cent of the weekly Net Asset Value up to $50 million, 0.10 per cent between $50 million and $100 million, 0.05 per cent between $100 million and $200 million and 0.025 per cent above $200 million, subject to an annual minimum of $125,000. In addition, an annual minimum retainer of $1,000 is payable in respect of maintaining the principal register of shareholders. For the period ended 31st October 2007, total administration and registrar fees were $146,599 (2006 - $153,417) of which $33,456 (2006 - $26,952) is due and payable as at that date. 19
ATLANTIS JAPAN GROWTH FUND LIMITED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (continued) for the six months ended 31st October 2007
4. RELATED PARTY TRANSACTIONS (continued) Directors’ Fees and Expenses Each of the Directors is entitled to receive a fee from the Company, being £20,000 per annum for the Chairman and £15,000 per annum for each of the other Directors. In addition, the Company reimburses all reasonably incurred out-of-pocket expenses of the Directors. For the period ended 31st October 2007, total directors’ fees and expenses were $106,252 (2006 - $113,125) of which $97,491 (2006 - $89,550) is due and payable as at that date. There were no other major related parties transactions during the period. 5. RECONCILIATION OF NET ASSET VALUE TO PUBLISHED NET ASSET VALUE
(Unaudited) 31-Oct-07 $’000
Per Share $
Published Net Asset Value Unrealised loss on revaluation of securities at bid prices
415,881 (2,666)
20.35 (0.13)
413,215
20.22
(Audited) 30-Apr-07 $’000
Per Share $
Published Net Asset Value Unrealised loss on revaluation of securities at bid prices
466,835 (1,854)
22.84 (0.09)
464,981
22.75
In accordance with IFRS the Company’s investments have been valued at bid price. However, in accordance with the Company’s prospectus for the purposes of determining the monthly net asset value per share the investments are valued at mid prices. 6. POST BALANCE SHEET EVENTS HSBC Securities Services (Guernsey) Limited ceased as secretary, administrator and principal registrar and HSBC Custody Services (Guernsey) Limited ceased as custodian of the Company with effect from 31st October 2007. Northern Trust International Fund Administration Services (Guernsey) Limited has been appointed as secretary, administrator and principal registrar, and Northern Trust (Guernsey) Limited as custodian with effect from 1st November 2007. 20
ATLANTIS JAPAN GROWTH FUND LIMITED ADMINISTRATION
DIRECTORS Timothy Guinness (Chairman) Yoshinobu Itai (Retired 4th October 2007) Christopher Jones Eric Boyle Andrew Martin Smith Takeshi Murakami (Appointed 29th November 2007) REGISTERED OFFICE Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 3QL, Channel Islands INVESTMENT MANAGER Atlantis Fund Management (Guernsey) Limited Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 3QL, Channel Islands GLOBAL CUSTODIAN up to 31st October 2007 HSBC Custody Services (Guernsey) Limited P.O. Box 208, Arnold House, St. Julian’s Avenue, St. Peter Port, Guernsey GY1 3NF, Channel Islands from 1st November 2007 Northern Trust (Guernsey) Limited Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 3QL, Channel Islands INVESTMENT ADVISER Atlantis Investment Management Limited (regulated by FSA) 4th Floor, 30-34 Moorgate, London EC2R 6DN (Telephone no. 020-7638-9192) ADMINISTRATOR, SECRETARY AND PRINCIPAL REGISTRAR up to 31st October 2007 HSBC Securities Services (Guernsey) Limited P.O. Box 208, Arnold House, St. Julian’s Avenue, St. Peter Port, Guernsey GY1 3NF, Channel Islands from 1st November 2007 Northern Trust International Fund Administration Services (Guernsey) Limited Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 3QL, Channel Islands
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ATLANTIS JAPAN GROWTH FUND LIMITED ADMINISTRATION (continued)
JERSEY REGISTRAR Computershare Investor Services PO Box 83, Ordnance House, 31 Pier Road, St. Helier, Jersey JE4 8PW, Channel Islands LUXEMBOURG REGISTRAR Euroclear Bank 1, Boulevard Albert 2 1210 Brussels CORPORATE ADVISERS ING Bank N.V. 60 London Wall, London EC2M 5TQ STOCK BROKERS J.P. Morgan Securities Limited 10 Aldermanbury, London EC2V 7RF AUDITORS RSM Robson Rhodes (Guernsey) Limited PO Box 313, Anson Court, Le Route des Camps, St. Martins, Guernsey GY1 3TF LEGAL ADVISERS Ogier Ogier House, St. Julian’s Avenue, St. Peter Port GY1 1WA Dechert LLP 2 Serjeants’ Inn, London EC4Y 1LT
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