Luxonen S.A.
Consolidated Annual Financial Statements
1 January - 31 December 2006 ______________________________
The Net Asset Value was USD 18.51 (SEK 126.79) per share as at
31 December 2006.
Luxonen S.A.
Index to the consolidated annual financial statements
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Page
Management report 3
Independent auditor’s report 13
Consolidated balance sheet 15
Consolidated income statement 16
Consolidated statement of changes in shareholders’ equity 17
Consolidated cash flow statement 17
Notes to the consolidated annual financial statements:
1. General information 18
2. Summary of significant accounting policies:
2.1 Basis of preparation 18
2.2 Consolidation 21
2.3 Segment reporting 23
2.4 Foreign currency translation 23
2.5 Financial assets at fair value through profit or loss 24 2.6 Derivative financial instruments 25
2.7 Cash and cash equivalents 25
2.8 Share capital 25
2.9 Income tax and deferred tax 25
2.10 Employee benefits 25
2.11 Revenue recognition 25
3. Financial risk management 26
3.1 Financial risk factors 26
3.2 Fair value estimation 27
3.3 Investments in Funds 27
4. Critical accounting estimates and judgments 27 4.1 Fair value of derivative financial instruments 28
4.2 Functional currency 28
5. Financial assets at fair value through profit or loss 28
6. Investments in associates 29
7. Description of the investments 30
8. Derivative financial instruments 31
8.1 Total return swaps 31
8.2 Foreign exchange contracts 33
9. Dividends income 34
10. Share capital and Legal Reserve 34
11. Related party transactions 35
12. Taxation 38
13. Earnings per share 39
14. Dividend per share 39
15. Commitment 39
Facts about Luxonen S.A. 40
Luxonen S.A.
Management Report
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• The net asset value per share in SEK increased by 24.5% during 2006.
• The net asset value per share increased from SEK 101.87 to SEK 126.79 during 2006.
• The profit for 2006 was 60.5 MUSD.
• The profit per share for 2006 was USD 5.69 during 2006.
• In the fourth quarter 2006 the net asset value per share in SEK increased by 10.4%.
• The profit for the fourth quarter 2006 was 30.0 MUSD or USD 2.83 per share.
Tables 3B show the total exposure by 31 December 2006.
The total assets are 298.9 MUSD (see table 3B) and the net asset value is 196.8 MUSD.
The equity ratio is 196.8 MUSD / 298.9 MUSD = 65.8%.
The largest holdings were: Total return swap Banks 89.6 MUSD
Nordic Absolute Return Fund 62.7 MUSD
Nordic Fund for Emerging Market Debts 51.3 MUSD Total return swap DJ Stoxx 50 index 34.0 MUSD Total return swap Carlson Fund Equity Asian Small Cap 34.0 MUSD
Table 2 shows the return and movements during 2006. The total return of all assets was 60.4 MUSD and the net return was 60.1 MUSD.
Luxonen has since beginning of 2003 hedged all its USD assets to SEK. This means that the
fluctuations in USD do not influence the net asset value in SEK. The result from hedging in 2006 was a
profit of USD 7.1 MUSD.
Luxonen S.A.
Management Report
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Table 1 Analysis of portfolio over one year.
Investments are expressed according to Market/Director’s valuation
(In MUSD)
31.12.2005 31.03.2006 30.06.2006 30.09.2006 31.12.2006
Carlson Fund Equity Asian Small Cap 0.2 0.3 0.0 0.1 0.2
Carlson Fund Equity Japan 7.8 8.3 0.0 0.0 0.0 Mass Mutual CVP 5.0 3.6 4.6 4.7 3.9 Nordic Absolute Return Fund 44.5 48.1 53.6 56.2 62.7 Nordic Fund for Emerging Market Debts 46.6 48.1 48.2 49.4 51.3 Total return swap Banks 20.9 28.4 23.1 27.6 36.8 Total return swap Carlson Fund Asian Small Cap 5.2 11.3 6.6 7.3 13.7 Total return swap DJ Stoxx 50 index 1.2 2.8 1.8 2.8 5.4
Forward exchange contracts 0.0 0.0 4.0 2.3 3.2 Other investments 0.5 0.5 0.6 0.5 0.0 Nordic Fund Management Limited 1.4 0.6 0.9 0.8 1.6 Cash 5.8 4.7 15.1 15.0 18.4
Total assets 139.1 156.7 158.5 166.7 197.2
Forward exchange contracts (2.7) (0.3) (0.4) 0.0 0.0 Other liabilities (0.3) (0.2) (0.2) (0.2) (0.4)
Net asset value 136.1 156.2 157.9 166.5 196.8
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Luxonen S.A.
Management Report
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Table 2 Net worth of Luxonen analyzed between different investments.
Investments are expressed according to Market/Directors’ valuation
(In MUSD)
Holding at Holding at
31.12.2005 Return Movement 31.12.2006
(See 1 below)
Carlson Fund Equity Asian Small Cap 0.2 0.4 (0.4) 0.2 Carlson Fund Equity Japan 7.8 0.5 (8.3) 0.0
Mass Mutual CVP 5.0 1.3 (2.4) 3.9
Nordic Absolute Return Fund 44.5 18.2 0.0 62.7 Nordic Fund for Emerging Market Debts 46.6 4.7 0.0 51.3 Total return swap Banks 20.9 15.7 0.2 36.8 Total return swap Carlson Fund Asian S.C. 5.2 7.6 0.9 13.7 Total return swap DJ Stoxx 50 index 1.2 4.2 0.0 5.4
Forward exchange contracts 0.0 5.7 (2.5) 3.2
Other investments 0.5 (0.5) 0.0 0.0
Nordic Fund Management Limited 1.4 2.6 (2.4) 1.6 Cash 5.8 0.0 12.6 18.4
Total assets 139.1 60.4 (2.3) 197.2
Forward exchange contracts (2.7) 0.9 1.8 0.0
Other liabilities (0.3) (0.6) 0.5 (0.4) Net asset value (“N.A.V.”) 136.1 60.7 0.0 196.8
Number of shares 10,629,760 10,629,760
N.A.V. per share USD 12.80 (SEK 101.87) USD 18.51 (SEK 126.79)
1. Movements include cash variations relating to purchases of investments, expenses (positive), sales of investments and dividends (negative).
Luxonen S.A.
Management Report
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Table 3/A Assets by category.
Investments are expressed according to Market/Directors’ valuation (net amount for the Total return swap Banks, the Total return swap Carlson Fund Asian S.C. and the Total return swaps DJ Stoxx 50 index)
(In MUSD)
Assets by Asset/
Category nav
USD million %
Carlson Fund Equity Asian s.c. 0.2 0
Mass Mutual CVP 3.9 2
Nordic Absolute Return Fund 62.7 32
Nordic Fund for Emerging Market Debts 51.3 26
Total return swap Banks 36.8 19
Total return swap Carlson Fund Asian S.C. 13.7 7
Total return swap DJ Stoxx 50 index 5.4 3
Forward exchange contracts 3.2 1
Nordic Fund Management Limited 1.6 1
Cash 18.4 9
Total assets 197.2 100
Other liabilities (0.4) (0)
Net asset value 196.8 100
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Luxonen S.A.
Management Report
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Table 3/B Assets by category
Investments are expressed according to Market/Directors’ valuation (gross amount for the Total return swap Banks, the Total return swap Carlson Fund Asian S.C. and the Total return swaps DJ Stoxx 50 index)
(In MUSD)
Assets by Asset/
Category nav
USD million %
Carlson Fund Equity Asian s.c. 0.2 0
Mass Mutual CVP 3.9 2
Nordic Absolute Return Fund 62.7 32
Nordic Fund for Emerging Market Debts 51.3 26
Total return swap Banks 89.6 46
Total return swap Carlson Fund Asian S.C. 34.0 17
Total return swap DJ Stoxx 50 index 34.0 18
Forward exchange contracts 3.2 1
Nordic Fund Management Limited 1.6 1
Cash 18.4 9
Total assets 298.9 152
Total return swap Banks (52.8) (27)
Total return swap Carlson Fund Asian S.C. (20.3) (10)
Total return swap DJ Stoxx 50 index (28.6) (15)
Other liabilities (0.4) (0)
Net asset value 196.8 100
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Luxonen S.A.
Management Report
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Table 4 Net worth of Luxonen analyzed between different investments from 27 January 1995 to 31 December 2006.
Investments are expressed according to Market/Directors’ valuation
(In MUSD)
Holding at Holding at
27.01.95 Return Movement 31.12.2006
Carlson Fund Equity Asian Small Cap 0.0 0.6 (0.4) 0.2
Carlson Fund Equity Japan 0.0 1.7 (1.7) 0.0
Mass Mutual CVP 0.0 3.9 0.0 3.9
Nordic Absolute Return Fund 0.0 27.3 35.4 62.7
Nordic Fund for Emerging Market Debts 0.0 11.7 39.6 51.3
Total return swap Banks 0.0 39.8 (3.0) 36.8
Total return swap Carlson Fund Asian S.C. 0.0 12.8 0.9 13.7
Total return swap DJ Stoxx 50 index 0.0 5.4 0.0 5.4
Forward exchange contracts 0.0 5.7 (2.5) 3.2
Other investments 12.7 22.3 (35.0) 0.0
Nordic Fund Management Limited 0.0 4.6 (3.0) 1.6
Other Investments (see 1 below) 200.2 52.6 (252.8) 0.0
Cash and other costs 0.0 0.0 18.4 18.4
Total assets 212.9 188.4 (204.1) 197.2
Debts (192.6) 3.9 188.7 0.0
Other liabilities 0.0 (15.8) 15.4 (0.4)
Net asset value 20.3 176.5 0.0 196.8
1) Other investments include all the investments sold or liquidated before 31 December 2005.
Luxonen S.A.
Management Report
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Table 5 Quarterly assets and net asset value
Total assets Net asset value Net asset value per
MUSD MUSD share in SEK
27 January 1995 212.9 20.3 12.6
30 June 1995 223.1 27.6 16.8
30 September 1995 232.1 34.6 20.0
31 December 1995 228.3 32.0 17.8
31 March 1996 234.6 38.4 21.4
30 June 1996 247.7 51.2 28.3
30 September 1996 249.8 51.7 28.6
31 December 1996 247.9 52.6 30.2
31 March 1997 232.5 40.5 25.6
30 June 1997 247.7 53.6 34.6
30 September 1997 244.3 52.1 33.0
31 December 1997 176.4 39.0 25.8
31 March 1998 189.9 51.3 34.1
30 June 1998 178.1 40.1 26.7
30 September 1998 164.6 26.3 17.2
31 December 1998 152.3 43.5 29.4
31 March 1999 147.7 39.1 27.2
30 June 1999 159.9 52.4 36.0
30 September 1999 158.1 50.7 33.5
31 December 1999 164.4 67.0 46.2
31 March 2000 76.9 66.9 50.7
30 June 2000 65.8 65.8 51.2
30 September 2000 62.7 62.6 53.9
31 December 2000 57.4 57.0 50.0
31 March 2001 54.0 53.9 52.3
30 June 2001 54.0 53.9 55.2
30 September 2001 53.5 53.4 53.7
31 December 2001 54.5 54.4 53.7
31 March 2002 58.8 58.6 57.2
30 June 2002 62.9 62.8 54.3
30 September 2002 63.6 62.9 54.9
31 December 2002 62.7 62.6 51.3
31 March 2003 65.3 65.2 51.9
30 June 2003 71.1 71.0 53.4
30 September 2003 84.6 84.5 61.7
31 December 2003 97.8 97.7 66.1
31 March 2004 142.5 95.1 67.4
30 June 2004 145.2 97.7 69.1
30 September 2004 153.7 104.3 71.3 31 December 2004 123.2 123.1 77.1 31 March 2005 119.9 118.2 78.6
Luxonen S.A.
Management Report
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Table 6 Earnings trend
(Amounts in USD/000)
3 months 3 months 12 months 12 months
Sept-Dec Sept-Dec Jan-Dec Jan-Dec
2006 2005 2006 2005
Income
Dividend income 0 858 3,373 2,620
Net gain / (loss) on financial assets at fair
value through profit or loss 7,134 2,172 21,749 5,658 Net gain / (loss) on derivative financial instruments 20,624 8,111 34,218 7,210
Interest income 121 12 216 141
Share of profit / (loss) of associates 1,572 1,015 1,365 1,444
Other income 91 179 404 229
Net gain on foreign exchange 1,124 2,793 1,432 0 Total income 30,666 15,140 62,757 17,302 Expenses
Administrative expenses (599) (597) (2,285) (2,036) Net loss on foreign exchange 0 0 0 (2,253)
Total expenses (599) (597) (2,285) (4,289)
Minority interest (1) (0) (4) (0) Total expenses and minority interest (600) (597) (2,289) (4,289) Net Profit 30,066 14,543 60,468 13,013
Earnings per share 2.83 1.37 5.69 1.22
Number of shares 10,629,760 10,629,760 10,629,760 10,629,760
The amount showed as Earnings per share is calculated dividing the Profit by the number of shares.
Luxonen S.A.
Management Report
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Total return swaps Banks
In the first quarter of 2004, Luxonen took a position in four Nordic Banks through total return swaps.
Luxonen will get the return from shares in Svenska Handelsbanken, Föreningssparbanken AB, Nordea Bank AB and Den Danske Bank. The total value of the banks’ shares was 352 MSEK in equal weight.
To get this Luxonen will pay a fixed interest of 4.6% for five years. The dividends from the shares are higher then the interest payment. For 2006 the total return on the swaps was 15.7 MUSD.
Nordic Fund for Emerging Market Debts
Nordic Fund for Emerging Market Debt (the “Fund”) generated an estimated net total return to investors of 10% during 2006, making three years of stable and solid returns with low volatility. The Fund’s 2006 net profit slightly exceeded the performance of the benchmark JP Morgan Emerging Markets Bond Index Global (“EMBIG”) and the Fund also had significantly lower volatility than the EMBIG, with only two negative months (the biggest monthly decline was only 0.15%). The Fund’s 2006 Sharpe and Sortino ratios were both significantly superior to the EMBIG.
Nordic Absolute Return Fund
The Nordic Absolute Return Fund is a long/short equity fund with emphasis on Nordic shares and it had a return of 21.4% during 2006.
Total return swaps Carlson Fund Equity Asian Small Cap
In 2005, Luxonen bought 20.0 MUSD in Carlson Fund Equity Asian Small Cap through total return swaps. The Fund invests in Asia with emphasis on China and India; 58% is Hong Kong and China and 31 % is India. The Net Asset Value of the Fund was up 18.7% in SEK during 2006. The surplus of the position at the end of 2006 was 13.7 MUSD. The return for the year 2006 was 7.6 MUSD.
Total return swaps DJ Stoxx 50 Index
In 2005, Luxonen took a position in 50 largest companies in Europe through total return swaps.
Luxonen pays a fixed interest rate yearly and it will get the return from the DJ Stoxx index in 2010.
The surplus of the position at the end of 2006 was 4.1 MEUR. The return for the year 2006 was 4.2
MUSD.
Luxonen S.A.
Management Report
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Assets sold
In May 2006, the assets sold in Carlson Fund have generated a global profit of 0.4 MUSD.
Board meetings during 2006
There were three ordinary board meetings during 2006. The first meeting was held in February when the financial statements for the year ending 2005 were approved. The other two meetings were in May and September. Telephone board meetings were held between the main board meetings as necessary.
All major changes in the assets of the Company are decided by the board. All investments made by Exotica S.A. and Exotica Management Limited are also approved by the board of Luxonen S.A.
15 February 2007
Björn Carlson Märtha Josefsson Rune Larson
Erik Sjöberg Rickard Björklund Bo Lehander
Luxonen S.A.
Consolidated balance sheet as at 31 December 2006
(Expressed in USD)
Note 31.12.2006 31.12.2005
Assets
Current assets
Financial assets at fair value through profit or loss 5 226,402 8,034,153 Derivative financial instruments 8 59,082,707 27,255,623
Other assets 7,817 12,330
Cash and cash equivalents 18,448,821 5,844,796 77,765,747 41,146,902 Non-Current assets
Investments in associates 6 1,552,202 1,366.897 Financial assets at fair value through profit or loss 5 117,876,170 96,638,025
119,428,372 98,004,922
Total assets 197,194,119 139,151,824
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Shareholders’ equity and liabilities Shareholders’ equity
Share capital 10 20,807,082 20,807,082
Legal reserve 10 2,051,528 2,051,528
Share Premium 516,142 516,142
Currency translation adjustment 6 78,952 (117,820)
Retained earnings 173,322,478 112,854,678
196,776,182 136,111,610 Minority interest 19,137 14,959 Total shareholders’ equity 196,795,319 136,126,569
Current liabilities
Derivative financial instruments 8 0 2,686,559 Other liabilities 398,800 338,696 Total liabilities 398,800 3,025,255 Total equity and liabilities 197,194,119 139,151,824
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Luxonen S.A.
Consolidated income statement for the year ended 31 December 2006
(Expressed in USD)
Note 31.12.2006 31.12.2005 Income
Dividend income 9 3,373,054 2,619,867
Net gain / (loss) on financial assets at
fair value through profit or loss 5 21,748,988 5,657,610 Net gain / (loss) on derivative financial instruments 34,218,241 7,210,682
Interest income 215,637 141,297
Share of profit / (loss) of associates 6 1,365,420 1,444,105
Other income 403,559 228,985
Net gain on foreign exchange 1,432,246 0
Total income 62,757,145 17,302,546
Expenses
Administrative expenses 11 2,285,310 2,036,192 Net loss on foreign exchange 0 2,252,323 Total expenses 2,285,310 4,288,515 Profit for the year before minority interest 60,471,835 13,014,031 Attributable to minority interest (4,035) (345)
Profit for the year 60,467,800 13,013,686
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Earnings per share before and after dilution 13 5.69 1.22
Number of shares 10,629,760 10,629,760
The accompanying notes on pages 18 to 39 form an integral part of these financial statements
Luxonen S.A.
Consolidated statement of changes in shareholders’ equity
Notes Share Legal Share Retained Other Minority Total Capital Reserve Premium Earnings Reserves interest Equity
USD USD USD USD USD USD USD
Balance at 31 December 2004 20,807,082 2,051,528 516,142 99,840,992 2,075 15,304 123,233,123
Profit of the year 0 0 0 13,013,686 0 0 13,013,686
Currency translation adjustment (6) 0 0 0 0 (119,895) 0 (119,895)
Decrease in minority interest 0 0 0 0 0 (345) (345)
Balance at 31 December 2005 20,807,082 2,051,528 516,142 112,854,678 (117,820) 14,959 136,126,569
Profit of the year 0 0 0 60,467,800 0 0 60,467,800
Increase in minority interest 0 0 0 0 0 4,178 4,178
Currency translation adjustment (6) 0 0 0 0 196,772 0 196,772 Balance at 31 December 2006 20,807,082 2,051,528 516,142 173,322,478 78,952 19,137 196,795,319
Consolidated cash-flow statement for the year ended 31 December 2006
(Expressed in USD)
31.12.2006 31.12.2005
Cash flows from operating activities Purchases of financial assets at fair
value though profit or loss 0 (50,439,979)
Proceeds from financial assets at fair
value through profit or loss 8,717,830 55,720,265 Cash flows generated from financial assets
at fair value through profit or loss 4,752,671 2,821,137
Bank interest received 237,891 141,294
Administrative expenses (2,181,122) (1,754,969)
Net cash flows from derivative financial instruments (297,684) (3,569,740) Net cash inflow from operating activities 11,229,586 2,918,008
Increase in cash and cash equivalents 11,229,586 2,918,008 Cash and cash equivalents:
Beginning of the year 5,844,796 4,542,268 Effect of foreign exchange rate changes 1,374,439 (1,615,480)
End of the year 18,448,821 5,844,796
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Luxonen S.A.
Notes to the consolidated annual financial statements
1. General information
1.1 Luxonen S.A. (“the Company”) and its subsidiaries and associate together “the Group”
take participations in other Luxembourg or foreign enterprises and acquire any securities and rights through participations. As at 31 December 2006, the main investments are in USA, in Sweden and in the Euro zone.
1.2 The Company is a Luxembourg holding company incorporated on 23 May 1989 as a
“Société Anonyme” and subject to the law of 31 July 1929. The company is listed at the Stockholm’s Stock Exchange.
1.3 These consolidated annual financial statements have been approved for issue by the Board of Directors on 15 February 2007.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.
The figures of the year ending as of 31 December 2005 relating to items other income and interest income have been reclassified to ensure the comparability of the figures of the year ending as of 31 December 2006.
2.1 Basis of preparation
These 31 December 2006 consolidated annual financial statements of Luxonen S.A. and its consolidated subsidiaries and associate are for the year ended 31 December 2006. They have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union.
These consolidated annual financial statements have been prepared under the historical cost
convention, as modified by the revaluation of the financial assets and liabilities (including
derivative financial instruments) at fair value through profit and loss.
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
2. Summary of significant accounting policies (continued) 2.1 Basis of preparation (continued)
The preparation of financial statements in conformity with IFRS as adopted by the European Union requires the use of certain critical accounting estimates. It also requires the Board of Directors to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.
A) Amendment to published standards effective in 2006
IAS 39 (Amendment), The Fair Value Option is mandatory for the Group accounting period beginning 1 January 2006. The Group has not applied this amendment in 2005. it allows entities to designate financial assets and financial liabilities at fair value through profit and loss when not held for trading if doing so eliminates or significantly reduces a measurement or recognition inconsistency (“an accounting mismatch”) or if a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis.
Adoption of this amendment only impacts the format and extent of disclosures presented in the financial statements.
Prior to the amendment, the Group applied the unrestricted version of the fair value option in IAS 39. The Group meets the new criteria in the amendment and therefore continues to designate certain financial assets and financial liabilities at fair value through profit or loss.
B) Standards, amendments and interpretations to publish standards those are not yet effective
Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting period beginning on or after 1
stJanuary 2007 or later periods but which the Group has not early adopted, as follows:
- IFRS 7, Financial Instruments: Disclosures and a complementary amendment to IAS 1, Presentation of Financial Statements – Capital Disclosures (effective from 1
stJanuary 2007) IFRS 7 introduces new disclosures to improve the information about financial instruments.
It requires the disclosure of qualitative and quantitative information about exposure to risks
arising from financial instruments, including specified minimum disclosures about credit
risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
2. Summary of significant accounting policies (continued) 2.1 Basis of preparation (continued)
C) Standards, amendments and interpretations effective in 2006 but not relevant
The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2006 but are not relevant to the Group operations:
- IAS 19 (Amendment), Employee Benefits;
- IAS 21 (Amendment), Net Investment in a foreign Operation;
- IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions;
- IAS 39 and IFRS 4 (Amendment), Financial Guarantee contracts;
- IFRS 6, Exploration for and Evaluation of Mineral Resources;
- IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards, and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources;
- IFRIC 4, Determining whether an Arrangement contains a Lease;
- IFRIC 5, Right to interest arising from Decommissioning, Restoration and Environmental Rehabilitation Funds; and
- IFRIC 6, Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment.
D) Interpretations to existing standards that are not yet effective and not relevant for the Company’s operations
The following interpretations are mandatory for the Company’s accounting periods beginning on or after 1 March 2006 or later period but are not relevant for the Group operations:
- IFRIC 7, Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies (effective from 1 March 2006);
- IFRIC 8, Scope of IFRS 2 (Effective from 1 May 2006);
- IFRIC 9, Reassessment of Embedded Derivatives (effective from 1 June 2006);
- IFRIC 10, Interim Financial Reporting and Impairment (effective from 1 November 2006);
- IFRIC 11, IFRS 2 – Group and Treasury Share Transactions (effective from 1 March 2007); and
- IFRIC 12, Service Concession Agreements (effective from 1 January 2008).
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
2. Summary of significant accounting policies (continued) 2.2 Consolidation
(a) Subsidiaries
Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.
Subsidiaries are fully consolidated from the date on which the control is transferred to the Group. They are de-consolidated from the date on which control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interests. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group’s share of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
Inter-company transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
As at 31 December 2006 the following companies formed part of the Group and have been included in the consolidated financial statements:
Name Country of Ownership at Holding by incorporation 31 December 2006
Luxonen S.A. Luxembourg -
Exotica S.A. Luxembourg 99.98 % Luxonen S.A.
Exotica Management Limited British Virgin Islands 100.00 % Luxonen S.A.
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
2. Summary of significant accounting policies (continued) 2.2 Consolidation (continued)
(b) Associates
Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting right.
Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost.
The Group’s investment in associates includes goodwill, if any, (net of any accumulated impairment loss) identified on acquisition.
The Group’s share of its associates’ post-acquisition profits or losses is recognized in the income statement and its share of post-acquisition movements in recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
As at 31 December 2006 the following company was associated to the Group and has been included in the consolidated financial statements following the equity method:
Name Country of Ownership at
incorporation 31 December 2006 Holding by Nordic Fund Management Company Ltd Ireland 33.60% Luxonen S.A
As at 31 December 2006 the following Mutual Funds have not been included in the consolidated financial statements using the equity method:
Name Country of Ownership at
incorporation 31 December 2006 Holding by Nordic Absolute Return Fund (see Note 3.3) Ireland 27.95% Exotica S.A Nordic Fund for Emerging Market Debts (see Note 3.3) Ireland 73.22% Exotica S.A
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
2. Summary of significant accounting policies (continued) 2.3 Segment reporting
The Management of the Group did not identify a segment as defined under IAS 14 as the Group is only involved in the investment management of financial assets. However the investments are disclosed in Note 7 by activity and by currency.
2.4 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in USD, which is the Company’s functional and presentation currency.
The functional currency of the subsidiaries and of the associates is as follow:
Name Functional
currency
Exotica S.A. USD
Exotica Management Limited USD
Nordic Fund Management Company Ltd SEK
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.
Translation differences on non-monetary items such as equities held at fair value through profit
or loss are reported in the income statement under the caption “Net gain / (loss) on financial
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
2. Summary of significant accounting policies (continued) 2.5 Financial assets at fair value through profit or loss
This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception.
A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorized as held for trading unless they are designated as hedging instruments.
Financial assets and financial liabilities are designated at fair value through profit or loss when:
- Doing so significantly reduces measurement inconsistencies that would arise if the related derivatives were treated as held for trading and the underlying financial instruments were carried at amortized cost for such as loans and advances to customers or banks and debt securities in issue;
- Certain investments, such as equity investments, that are managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis are designated at faire value through profit or loss; and
- Financial instruments, such as debt securities held, containing one or more embedded derivatives significantly modify the cash flows, are designated at faire value through profit or loss.
In 2006, the Group considered all investments as designated at fair value through profit or loss by application of the fair value option. The Group policy is for the Investment Manager and the Board of Directors to evaluate the information about these financial assets on a fair value basis together with other related financial information.
Purchases and sales of investments are recognized on trade date, the date on which the
Group commits to purchase or sell the assets. Investments are initially recognized at the fair
value and transaction costs are recognized in the income statement in “Administrative
expenses”. Investments are derecognized when the rights to receive cash flows from the
investments have expired or have been transferred and the Group has transferred
substantially all risks and rewards of ownership. Realized and unrealized gains and losses
arising from changes in the fair value are included in the income statement in the year in
which they arise as “Net gain/loss on financial asset at faire value through profit or loss”.
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
2. Summary of significant accounting policies (continued) 2.6 Derivative financial instruments
Derivative financial instruments are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
The Group does not apply hedge accounting according to IAS 39. Changes in the fair value of any derivative financial instruments that do not qualify for hedge accounting are recognized immediately in the income statement as “Net gain / (loss) on derivative financial instruments”.
2.7 Cash and cash equivalents
Cash and cash equivalent includes cash in hand, deposits held at call with banks. If any, bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
2.8 Share capital
The share capital is represented by ordinary shares; no other kinds of shares (i.e. treasury, privileged, etc.) have been issued by the Company. Ordinary shares are classified as equity.
2.9 Income tax and deferred tax
The Group is not liable to any income tax. Therefore no deferred income tax has to be recorded in Company’s book.
2.10 Employee benefits
The Company does not operate any employee benefit scheme as defined under IAS 19.
2.11 Revenue recognition
Revenues are recognized as follows:
(a) Interests income
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
2. Summary of significant accounting policies (continued) 3. Financial risk management
3.1 Financial risk factors
The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses financial instruments to hedge certain risk exposures.
Risk management is carried out directly by the Management under policies approved by the Board of Directors.
(a) Market risk
(i) Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the SEK. Foreign exchange risk arises from investments and liquidities denominated in a currency that is not the functional currency of the entity.
The Management is responsible for managing the net position in each foreign currency by using external forward currency contracts.
(ii) Price risk
The Group is exposed to equity securities price risk because of investments held by the Group and classified in the consolidated balance sheet as at fair value through profit and loss. The Group is not exposed to commodity price risk.
(b) Credit risk
The Group has no significant concentrations of credit risk. Derivative financial instruments counterparties and cash transactions are limited to high-credit-quality financial institutions.
(c) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and marketable
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
3. Financial risk management (continued) 3.2 Fair value estimation
The fair value of derivative financial instruments is based on quoted market prices if available, otherwise management uses valuation techniques described in Note 8.
The fair value of financial assets at fair value through profit or loss, traded on an active market, is based on current bid prices.
For financial assets, not traded in an active market, the Group uses the Net Asset Value received from the fund administrator of the asset, identifying this Net Asset Value as the fair value of the asset.
As at 31 December 2006, all investments of the Group are not traded in an active market.
3.3 Investments in Funds
One issue for the industry as a whole concerns the reporting of certain holdings in investment funds. According to IAS 27 and IAS 28, controlled entities on which a company has significant influence, shall normally be consolidated in the company’s annual accounts.
The Company owns 73.22% the Nordic Fund for Emerging Market Debts (see Note 2.2 b).
Because of the structure, the organization, rules and regulation applicable to Nordic Fund for Emerging Market Debts, the Company has no control, as defined by IAS 27, over this investment. Accordingly, this investment has been designated at fair value through profit or loss in accordance with IAS 39.
The Company also owns 27.95% of Nordic Absolute Return Fund (see Note 2.2 b). In accordance with the exemption provided by IAS 28.1 applicable to Venture Capital organizations, this investment as well as the investment in Nordic Fund for Emerging Market Debts, have been designated at fair value through profit or loss in accordance with IAS 39.
4. Critical accounting estimates and judgments
Management makes estimates and assumptions concerning the future. The resulting accounting
estimates will, by definition, seldom equal the related actual results. The estimates and
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
4. Critical accounting estimates and judgments (continued) 4.1 Fair value of derivative financial instruments
The Company holds financial instruments that are not quoted in active market. Fair values of such instruments are determined by using valuation techniques. Where valuation techniques are used to determine fair values, they are validated and periodically reviewed by the Management.
4.2 Functional currency
The Board of Directors considers the USD the currency that most faithfully represents the economic effect of the underlying transactions, events and conditions. The USD is the currency in which the Company measures its performance and reports its results.
5. Financial assets at fair value through profit or loss Movements in the period (expressed in USD)
Net Unrealized
Fair value Movements gain / (loss) Fair value 1st January 2006 in the year of the year 31 December 2006
(see Note 1 below) Financial Assets at fair value
through profit or loss Current assets
Carlson Fund Equity Asian Small Cap (*) 197,921 (12,172) 40,653 226,402 Carlson Fund Equity Global Emerging (*) 29,246 (29,246) 0 0 Carlson Fund Equity Japan (*) 7,806,986 (7,806,986) 0 0 8,034,153 (7,848,404) 40,653 226,402 Non current assets
First Britannia Mezzanine NV 522,505 0 (521,505) 1,000 Mass Mutual CVP 5,002,868 0 (1,135,218) 3,867,650 Nordic Absolute Return Fund (*) 44,483,895 0 18,250,746 62,734,641 Nordic Fund for Emerging Market Debts (*) 46,628,757 0 4,644,122 51,272,879 96,638,025 0 21,238,145 117,876,170
Total financial assets at fair value
through profit or loss 104,672,178 (7,848,404) 21,278,798 118,102,572
1) The net amount of USD 21,278,798 representing the unrealized gain/(loss) has been recorded with
the amount of USD 470,190 representing the realized gain/(loss) as “Net gain / (loss) on financial
assets at fair value through profit or loss” in the income statement.
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
6. Investments in associates
The movements in relation with Nordic Fund Management Company Limited are as follows:
USD
At 1
stJanuary 2005 211,744
Dividend received on the 31
stDecember 2004 result (169,057) Advance dividend on the 31
stDecember 2005 result (483,057)
Share of profit (gross of advance dividend) 1,927,162
Share of profit 1,444,105
Foreign exchange difference (119,895)
At 31
stDecember 2005 1,366,897
At 1
stJanuary 2006 1,366,897
Dividend received on the 31
stDecember 2005 result (1,376,887) Advance dividend on the 31
stDecember 2006 result (977,025)
Share of profit (gross of advance dividend) 2,342,445
Share of profit 1,365,420
Foreign exchange difference 196,772
At 31
stDecember 2006 1,552,202
The summarized financial information of the Nordic Fund Management (Ireland) Limited, that is the only associate of the Company and that is unlisted, are as follows:
Country of incorporation: Ireland
31 December 2006 31 December 2005
Assets SEK 31,644,343 33,233,892
Liabilities SEK 0 0
Income SEK 82,115,578 68,831,505
Expenses SEK (29,854,078) (25,915,051)
Profit / (loss) for the year SEK 52,261,500 42,916,454
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
7. Description of the investments (a) Balance sheet by currency
The balance sheet of the Group by currency is as follows:
31.12.2006 31.12.2005 In USD % In USD % Assets
SEK 119,508,745 60.61 70,123,262 50.39
USD 63,102,245 32.00 54,858,138 39.42
JPY 0 0.00 7,806,986 5.61
EUR 14,582,127 7.39 5,840,933 4.20
GBP 1,000 0.00 522,505 0.38
DKK 2 0.00 0 0.00 197,194,119 100.00 139,151,824 100.00 Liabilities
SEK 164,117 41.15 2,799,161 92.53
USD 0 0.00 220,549 7.29
EUR 234,683 58.85 5,545 0.18 398,800 100.00 3,025,255 100.00
(b) Balance sheet by activity
The balance sheet of the Group by activity is as follows:
31.12.2006 31.12.2005 In USD % In USD % Assets
Associated companies 1,552,202 0.79 1,366,897 0.98 Mutual Funds 118,101,572 59.89 104,149,673 74.84
Other investments 1,000 0.00 522,505 0.38
Derivatives financial instruments 59,082,707 29.96 27,255,623 19.59
Other assets 7,817 0.00 12,330 0.01
Cash at bank 18,448,821 9.36 5,844,796 4.20 197,194,119 100.00 139,151,824 100.00 Liabilities
Derivatives financial instruments 0 0 2,686,559 88.80 Other liabilities 398,800 100.00 338,696 11.20 398,800 100.00 3,025,255 100.00
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
8 Derivative financial instruments
The caption includes three types of derivative financial instruments.
8.1 Total return swaps 8.1.1 Total return swaps Banks
In 2004, the Luxonen Group has entered into eight equity-interest swap agreement with Nordea Bank.
In each swap agreement, the Group agreed to pay fixed interest rate, calculated on each 23 February from 2005 to 2009 and to receive the equity performance on shares in banks, calculated in 2009.
However, in anticipation of the above equity performance payment, Nordea Bank agreed to pay dividends received from the invested companies to the Group five business currency days after the payment by the invested company.
All the agreements existing as at 31
stDecember 2006 are subject to early termination by both parties.
8.1.2 Total return swaps Carlson Fund Equity Asian Small Cap
In January 2005, the Luxonen Group has entered into two equity-interest swap agreement with Nordea Bank.
In each swap agreement, the Group agreed to pay fixed interest rate, calculated on each 11 January from 2006 to 2010, and to receive the equity performance on units of Carlson Fund Equity Asian Small Companies, calculated in 2010.
All the agreements existing as at 31
stDecember 2006 are subject to early termination by both
parties.
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
8 Derivative financial instruments (continued) 8.1 Total return swaps (continued)
8.1.3 Total return swaps DJ Stoxx 50 Index
In October 2005 and in November 2005, the Luxonen Group has entered into one index-interest swap agreement with Nordea Bank.
In the swap agreements, the Group agreed to pay fixed interest rate, calculated on each October from 2006 to 2010, and to receive the index performance on the DJ Stoxx 50 Index, calculated in 2010.
All the agreements existing as at 31
stDecember 2006 are subject to early termination by both parties.
8.1.4 Valuation
The valuation of the derivatives is as follows:
Financial swaps Fair value Fair value 31 December 2006 31 December 2005
USD USD
Total return swaps Banks
Receivables SEK 613,787,888 89,613,032 SEK 537,346,299 67,517,562 Payables SEK (361,615,204) (52,795,820) SEK (371,022,976) (46,619,037)
Net 36,817,212 20,898,525
Total return swaps Carlson Fund Asian S.C.
Receivables EUR 12,890,750 17,014,501 EUR 10,449,561 12,326,303 Receivables USD 17,014,502 USD 12,381,685 Payables EUR (7,663,186) (10,114,639) EUR (7,857,343) (9,268,522) Payables USD (10,234,964) USD (10,235,712)
Net 13,679,400 5,203,754
Total return swaps DJ Stoxx 50 index
Receivables EUR 14,143,008 18,667,357 EUR 12,811,341 15,112,259 Receivables EUR 11,644,641 15,369,761 EUR 10,548,214 12,442,673 Payables EUR (12,036,911) (15,887,519) EUR (12,380,219) (14,603,706) Payables EUR (9,695,859) (12,797,564) EUR (10,001,596) (11,797,882)
Net 5,352,035 1,153,344
Foreign exchange contracts
Receivables SEK 22,151,096 3,234,060 SEK 0 0 Derivative financial instruments (assets) 59,082,707 27,255,623
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
8 Derivative financial instruments (continued) 8.1 Total return swaps (continued)
8.1.5 Amount received and paid
The following amount have been received and paid in relation to the derivatives transactions:
Financial swaps 31 December 2006 31 December 2005
USD USD
Total return swaps Banks
Dividend received SEK 18,771,281 2,524,803 SEK 16,920,284 2,397,040 Dividend received EUR 651,946 813,100 0 Interest paid SEK (18,944,040) (2,448,555) SEK (16,055,187) (2,297,400)
Interest paid EUR (275,256) (351,623) 0 Net 537,725 99,640
Total return swaps Carlson Fund Asian S.C.
Interest paid SEK (6,700,777) (850,709) 0 Net (850,709) 0
Total return swaps DJ Stoxx 50 index
Dividend received SEK 675,962 87,902 0 Dividend received EUR 447,403 569,871 0 Interest paid EUR (1,405,094) (1,789,642) 0
Net (1,131,869) 0
Foreign exchange contracts
Received SEK 7,368,000 1,147,169 0 Paid 0 SEK (29,553,000) (3,669,380) Net 1,147,169 (3,669,380) Net received/(paid) on Derivatives (297,684) (3,569,740)
8.2 Foreign exchange contracts
The Management is ruling to cover its exposure in foreign currency of the Group against SEK.
To cover this risk on foreign exchange the Group entered into a forward exchange agreement with a primary bank following the opportunity of the market and the necessity of the Group.
Following this forward exchange policy the Group sells USD against SEK, on forward.
Exchange differences arising on forward exchange contracts open at year-end are recorded as
“Net gain / (loss) on derivative financial instruments”.
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
9. Dividend income
The dividends received by the Group are as follows:
31.12.2006 USD 31.12.2005 USD
Dividends from associated company
Nordic Fund Management Limited SEK 7,447,860 977,025 SEK 4,899,300 483,057 Dividends from mutual funds
First Britannia 0 GBP 570,653 989,512
Mass Mutual USD 2,396,029 USD 1,026,870
Dividends from equity instruments other than mutual funds
Scania B 0 SEK 195,000 27,301
Tele2 B 0 SEK 675,000 93,071
Hennes & Mauritz B 0 SEK 400 56 3,373,054 2,619,867 The above amount was recorded as “Dividends income” in the income statement.
31.12.2006 USD 31.12.2005 USD
Dividends from shares according to swap transactions (see Note 8.1)
Den Danske Bank SEK 6,246,361 801,464 SEK 4,798,075 692,423
Nordea Bank 0 SEK 4,349,709 615,148
Swedbank (Föreningssparbanken) SEK 4,627,500 634,286 SEK 4,010,500 565,002 Svenska Handelsbanken SEK 7,897,420 1,089,052 SEK 3,762,000 524,467
Nordea Bank EUR 593,250 738,122 0
Den Danske Bank EUR 58,696 74,978 0
3,337,902 2,397,040
The above amount was recorded in the income statement as return from the total return swaps Banks in “Net gain / (loss) on derivative financial instruments”.
