Annual Financial Report

CHELVERTON GROWTH TRUST PLC FINAL RESULTS FOR THE YEAR ENDED 31 AUGUST 2010 The full Annual Report and Accounts can be accessed via the Company's website at www.chelvertonam.com or by contacting the Company Secretary on telephone 01392 412122. Investment objective The Company's objective is to provide capital growth through investment in companies listed on the Official List and traded on the Alternative Investment Market with a market capitalisation at the time of investment of up to £50 million, which are believed to be at a "point of change". The Company will also invest in unquoted investments where it is believed that there is a likelihood of the shares becoming listed or traded on the Alternative Investment Market or the investee company being sold. Its investment objective is to increase net asset value per share at a higher rate than other quoted smaller company trusts and the FTSE All-Share Index. It is the Company's policy not to invest in any listed investment companies (including listed investment trusts). Company summary Benchmark FTSE All-Share Index Investment Manager Chelverton Asset Management Limited. Total net assets £3,714,000 as at 31 August 2010 Market capitalisation £2,539,000 as at 31 August 2010 Capital structure 14,864,827 Ordinary 1p shares carrying one vote each (including 145,000 shares held in Treasury), there are 14,719,827 voting rights in the Company. PEP/ISA status The Company's Ordinary shares are fully eligible for inclusion in ISAs. Performance statistics Year ended Year % change ended 31 August 2010 31 August 2009 Net assets £3,630,000 £ 25.39 2,895,000 Net asset value per share 24.66p 19.47p 26.66 FTSE All-Share Index 2,696.72 2,520.66 6.98 Share price 17.25p 14.50p 18.97 Discount to net asset value (30.05)% (25.53)% Revenue loss after taxation (£75,000) (£59,000) Revenue loss per share (0.50)p (0.40)p Capital loss per share 5.62p (13.33)p Chairman's statement I am pleased to announce that the progress that we highlighted at the half-year stage has continued in the second half of the year and resulted in a strong positive performance. The Company's net asset value per share has increased this year from 19.47p to 24.66p - an increase of 26.7%. In the same period the Company's benchmark index, the FTSE All-Share, rose by 6.9%; the FTSE 100, which makes up over 90% of the All-Share Index rose by 6.4%; and the AIM Index rose 15.8%. Since the year end the net asset value per share has increased to 26.04p as at 31 October 2010, an increase of a further 5.6%. The year was again dominated by the world recovery from the banking crisis of 2008/09 and the attempts by Western governments to steer their economies through the consequences of the economic slow-down within the constraints of excessive personal and government debt. Despite mixed signals at the macro level, the corporate sector has proved to be extremely resilient and continues to generate cash and rebuild balance sheets at rates in excess of expectation. In the UK, the election, and subsequent change of government, has dominated all aspects of business life, with the Coalition being obliged to find an appropriate balance between reducing the Public Sector, and sustaining levels of demand within the economy that will be adversely affected by tax rises and increasing unemployment. Anecdotal evidence from the companies in our portfolio suggests that there is still an ongoing lack of liquidity in the banking system. The banks appear to be in an invidious position whereby they are reluctant to lend to the indebted companies that are most in need, whilst the companies they would like to lend to are in fact generating cash and reducing their debts. Until this is resolved the economy will struggle to make a full recovery. On a case by case basis we are seeing improvements in the underlying businesses in the portfolio. However, these have largely been achieved by cost cutting and debt reduction rather than by steady sustainable growth. As turnover does eventually improve, we will benefit from the positive effects of operational gearing as the increases are put through lower cost bases. Whilst the immediate economic outlook remains uncertain, we expect the domestic economy to gradually improve over the next few years, providing a favourable environment for UK small company performance. The current intention of the Board is to make further tender offers ("Future Tender Offers") in each subsequent calendar year, of up to 10% of the Ordinary shares in issue at such times, on terms substantially similar to those applying to the Tender Offer to be issued to shareholders on 24 September 2010. It is envisaged that such Future Tender Offers will be implemented on or around the date of the Company's AGM in the relevant year, and each such Future Tender Offer will be subject or pursuant to the approval by shareholders at a general meeting. Although the above sets out the Board's current intentions, the Board will of course exercise its discretion as to whether any Future Tender Offer should be implemented and the terms thereof. In the event that a Future Tender Offer is made the terms attaching to this Tender Offer may also apply (but subject to such modifications as set out in the communication relating to the same) by incorporation. George Stevens Chairman 19 November 2010 Investment Manager's overview On basic fundamentals many small companies continue to be undervalued notwithstanding the general rise in the small companies sector. As ever, these companies are overlooked on the Alternative Investment Market ("AIM") for the latest fashion in the market. Currently, the fashionable natural resource sector represents 42% of the total value of AIM. These resource companies, where the returns might be a manifold increase in value or more likely might be a total loss, are a major distraction. Over the past two years the shareholders and directors of many solid, profitable and well run companies have become disillusioned with owning shares in these companies and also having their companies on a highly illiquid and dysfunctional market. Portfolio review The patient process that was started last year in realising shareholdings at full value has continued in the current year. An example of this is the shareholding in Hartest where an offer was received and turned down at 25p, further offers were received from a private company at 50p, 55p and 59p, all turned down by the Board. Finally, a cash offer of 90p was accepted. In the same vein, the offer by the management team for the business of Forest Support Services was supported and encouraged through a difficult funding process so that a full offer was made in cash. The major success over the last year has been Alliance Pharma where we added to the holding earlier in the year at 12.5p. As a result of the very strong profits growth the shares have increased to 37p. Whilst last year our portfolio companies were relieved to have come through the "credit crunch" in this last year they have been reducing debt and, where possible, continuing to cut costs and grow their businesses, although trading still remains very difficult. Outlook The portfolio companies are looking much stronger than for some time and it is our objective over the next year to continue the realisation of fully valued holdings, reinvesting the proceeds in the large number of attractive companies which are currently significantly undervalued. David Horner Chelverton Asset Management Ltd 19 November 2010 Portfolio review as at 31 August 2010 The Company's portfolio as at 31 August 2010 is set out below. Investment Sector Valuation % of £'000 total AIM traded AI Claims Solutions Travel & Leisure 479 13.3 The provision of non-fault accident management services Alliance Pharma Pharmaceuticals & Biotechnology 345 9.6 Acquisition of the manufacturing, sales and distribution rights to pharmaceutical products Belgravium Technologies Technology Hardware & Equipment 113 3.2 Software systems for warehousing and distribution CEPS Support Services 175 4.9 Production and supply of components for the footwear industry; personal protection equipment; production of printed lycra fabric; and services to the direct mail industry Datong Electronics Electronic & Electrical Equipment 76 2.1 Develops, manages and supplies covert tracking and surveillance systems Hartest Holdings Industrial Engineering 299 8.3 Manufacture and sale of specialist healthcare equipment and supplies to users of electron microscopes IDOX Software & Computer Services 596 16.6 Software company specialising in the development of products for document and information management LPA Group Electronic & Electrical Equipment 73 2.0 Design, manufacture and marketing of industrial electrical accessories MTI Wireless Edge Technology Hardware & Equipment 84 2.4 Developer and manufacturer of sophisticated antennas and antenna systems Northbridge Industrial Industrial Engineering 85 2.4 Services Consolidation vehicle for specialist industrial services in the UK Pennant International Software & Computer Services 59 1.7 Group Supplier of technology solutions to the defence and industrial sectors Petards Group Support Services 27 0.8 Development, provision and maintenance of advanced security systems and related services PSG Solutions Support Services 44 1.2 Leading provider of Local Authority residential property searches; provision of packaging solutions Richoux Group Travel & Leisure 33 0.9 Owner and operator of Richoux Restaurants Sanderson Group Software & Computer Services 66 1.8 Provides software and IT services Titan Europe Industrial Engineering 68 1.9 Manufacture of big wheels for construction, mining and agricultural vehicles Tristel Health Care Equipment & Services 188 5.3 Healthcare business specialising in infection control in hospitals Universe Group Support Services 17 0.5 Provision of credit card fraud prevention system, loyalty systems and retail systems Delisted Forest Support Services Industrial Transportation 182 5.1 Supply of traffic management services (in members voluntary liquidation) Supply of traffic management services Satcom Group Mobile Telecommunications 31 0.9 Provider of mobile satellite communications equipment and airtime Unquoted Closed Loop Recycling Support Services Loanstock 252 7.0 Ordinary B shares 0 0.0 Operation of a plastic recycling plant Locker Group (in members Industrial Engineering 0 0.0 voluntary liquidation) Cash Shell Parmenion Capital Support Services 291 8.1 Partners LLP Provides fund-based discretionary fund management services to Independent Financial Advisors Portfolio valuation 3,583 100.0 The following companies in which the Company is invested are in liquidation or administration and no value is applied to those holdings as no realisations are anticipated from the insolvency process. AT Communication Group Chromogenex Conder Environmental Minorplanet Systems Smallbone Top Twenty Investments 31 August 2010 31 August 2009 Investment Valuation % of Valuation % of £'000 total £'000 total IDOX 596 16.6 530 18.2 AI Claims Solutions 479 13.3 294 10.1 Alliance Pharma 345 9.6 157 5.4 Hartest Holdings 299 8.3 71 2.4 Parmenion Capital Partners LLP 291 8.1 115 4.0 Closed Loop Recycling 525 7.0 357 12.3 Tristel 188 5.3 216 7.4 Forest Support Services 182 5.1 139 4.8 CEPS 175 4.9 106 3.6 Belgravium Technologies 113 3.2 137 4.7 Northbridge Industrial Services 85 2.4 61 2.1 MTI Wireless Edge 84 2.4 115 4.0 Datong Electronics 76 2.1 64 2.2 LPA Group 73 2.0 83 2.9 Titan Europe 68 1.9 31 1.1 Sanderson Group 66 1.8 45 1.5 Pennant International Group 59 1.7 46 1.6 PSG Solutions 44 1.2 38 1.3 Richoux Group 33 0.9 50 1.7 Satcom Group 31 0.9 47 1.6 Total 3,539 98.7 2,702 92.9 Portfolio breakdown by sector and by index Portfolio by Sector Percentage Support Services 22.5% Software and Computer 20.1% Services Travel & Leisure 14.2% Technology Hardware & 5.6% Equipment Health Care Equipment 5.3% & Services Industrial Engineering 12.6% Electronic & 4.1% Electrical Equipment Pharmaceutical & 9.6% Biotechnology Industrial 5.1% Transportation Mobile 0.9% Telecommunications Percentage of Portfolio by Index Portfolio by Index Percentage AIM 82.9% Unquoted 17.1% Delisted 6.0% Extracts from the Report of the Directors The Directors present their report, which incorporates the Business Review, and audited accounts for the year ended 31 August 2010. The registered company number for Chelverton Growth Trust PLC is 2989519. Status, objective and review The principal activity of the Company is to carry on business as an investment trust. The Company has been granted approval from HM Revenue & Customs as an authorised investment trust under Section 842 of the Income and Corporation Taxes Act 1988 for the year ended 31 August 2009. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 August 2010 so as to be able to continue to obtain approval as an authorised investment trust under Section 1158 of the Corporation Tax Act 2010, which has replaced Section 842. The Company is an investment company as defined in Section 833 of the Companies Act 2006. Investment objective The Company's objective is to provide capital growth through investment in companies listed on the Official List and traded on the Alternative Investment Market with a market capitalisation at the time of investment of up to £50 million, which are believed to be at a "point of change". The Company will also invest in unquoted investments where it is believed that there is a likelihood of the shares becoming listed or traded on the Alternative Investment Market or the investee company being sold. Its investment objective is also to increase net asset value per share at a higher rate than other quoted smaller company trusts and the FTSE All-Share Index. Investment policy The Company invests principally in securities of publicly quoted UK companies, though it may invest in unquoted securities. The concentrated UK portfolio comprises between 30 to 45 securities. The performance of the Company's investments is compared to the FTSE All-Share Index. The Company will also invest in unquoted investments where it is believed that there is a likelihood of the shares becoming listed or traded on the Alternative Investment Market or the investee company being sold. It is the Company's policy not to invest in any listed investment companies or listed investment trusts. To comply with Listing Rules the Company's investment policy is detailed above and should be read in conjunction with the subsequent sections entitled investment strategy and the performance analysis. It is intended from time to time, when deemed appropriate, that the Company will borrow for investment purposes. The Company, however, does not currently have any borrowing facilities. The investment objective and policy stated are intended to distinguish the Company from other investment vehicles which have relatively narrow investment objectives and which are constrained in their decision making and asset allocation. The investment objective and policy allow the Company to be constrained in its investment selection only by valuation and to be pragmatic in portfolio construction by only investing in securities which the Investment Manager considers to be undervalued on an absolute basis. Portfolio risk is managed by investing in a diversified spread of investments. Investment strategy Investments are selected for the portfolio only after extensive research which the Investment Manager believes to be key. The whole process through which equity must pass in order to be included in the portfolio is very rigorous. Only a security where the Investment Manager believes that the price will be significantly higher in the future will pass the selection process. The Company's Investment Manager believes the key to successful stock selection is to identify the long-term value of a company's shares and to have the patience to hold the shares until that value is appreciated by other investors. Identifying long term value involves detailed analysis of a company's earning prospects over a five year time horizon. The Company's Investment Manager is Chelverton Asset Management Limited, an independent investment manager focusing exclusively on achieving returns for investors based on UK investment analysis of the highest quality. The founders and employee owners of Chelverton include experienced investment professionals with strong investment performance records who believe rigorous fundamental research allied to patience is the basis of long term investment success. The Chairman's statement and the Investment Manager's overview give details of the Company's activities during the year under review. Performance analysis using key performance indicators At each Board meeting, the Directors consider a number of performance measures to assess the Company's success in achieving its objectives, for example: the NAV, the movement in the Company share price, the discount of the share price in relation to the NAV and the total expenses ratio. The Company's income statement is set out below. The movement of the NAV is compared to the FTSE All-Share Index, the Company's benchmark. The NAV per Ordinary share at 31 August 2010 was 24.66p (2009: 19.47p). The Company's share price at the year end was 17.25p (2009: 14.50p). Principal risks The Board considers the following as the principal risks facing the Company. Mitigation of these risks is sought and achieved in a number of ways: Market risk The Company is exposed to market risk due to fluctuations in the market prices of its investments. The Investment Manager actively monitors economic and company performance and reports regularly to the Board on a formal and informal basis. The Board formally meets with the Investment Manager quarterly when portfolio transactions and performance are reviewed. The Management Engagement Committee meets as required to review the performance of the Investment Manager. Further details regarding the Company's various Committees and their duties are given in the statement on corporate governance. The Company is substantially dependent on the services of the Investment Manager's investment team for the implementation of its investment policy. The Company may hold a proportion of the portfolio in cash or cash equivalent investments from time to time. Whilst during positive stock market movements the portfolio may forego notional gains, during negative market movements this may provide protection. Discount volatility As with many investment trust companies, discounts can significantly fluctuate. The Board recognises that it is in the long term interests of shareholders to reduce discount volatility and believes that the prime driver of discounts over the longer term is performance. The Board does not intend to adopt a precise discount target at which shares will be bought back. However Ordinary shares will not be bought back for cancellation or into Treasury at a discount to NAV of less than 7.5%. Regulatory risks Relevant legislation and regulations which apply to the Company include the Companies Act 2006, the Corporation Tax Act 2010 ("CTA") and the Listing Rules of the Financial Services Authority ("FSA"). The Company has noted the recommendations of the Combined Code on Corporate Governance and its statement of compliance. A breach of the CTA could result in the Company losing its status as an investment company and becoming subject to capital gains tax, whilst a breach of the Listing Rules might result in censure by the FSA. At each Board meeting the status of the Company is considered and discussed, so as to ensure that all regulations are being adhered to by the Company and its service providers. The Board is not aware of any breaches of laws or regulations during the period under review and up to the date of this report. Financial risk The financial situation of the Company is reviewed in detail at each Board meeting. The content of the Company's annual report and accounts is monitored and approved both by the Board and the Audit Committee. Inappropriate accounting policies or failure to comply with current or new accounting standards may lead to a breach of regulations. Liquidity risk The Board monitors the liquidity of the portfolio at each Board meeting and regularly reviews the investments with the Investment Manager. A more detailed explanation of the investment management risks facing the Company are given in note 19 to the accounts. Financial instruments As part of its normal operations, the Company holds financial assets and financial liabilities. Full details of the role of financial instruments in the Company's operations are set out in note 19 to the accounts. Current and future developments A review of the main features of the year is contained in the Chairman's statement and the Investment Manager's overview. The marketing and promotion of the Company will continue to involve the Board, led by the Investment Manager, with a proactive communications programme either directly or through its website, with existing and potential new shareholders and other external parties. The Directors are seeking to renew the appropriate powers at the next Annual General Meeting to enable the issue and purchase of its own shares, when it is in the interests of shareholders as a whole. Social, environmental and employee issues The Company does not have any employees and the Board consists entirely of non-executive directors. As the Company is an investment trust, which invests in other companies, it has no direct impact on the community or the environment, and as such has no policies in this area. Results and dividend The results for the year and the proposed transfer from revenue reserves are set out in the income statement. The Directors do not recommend the payment of a dividend for the year. Management and administration agreements The Company's investments are managed by Chelverton Asset Management Limited ("CAM") under an agreement dated 28 June 2001. The Company pays CAM, in respect of its services as Investment Manager, a monthly fee (exclusive of VAT) payable in arrears as follows: (i) for the first £15 million of funds under management at the rate of 1 / 6 % per month of the gross value of funds under management ("the Value"); (ii) for the next £15 million of funds under management, at the rate of 1 / 8 % per month of the amount by which the Value exceeds £15 million; and (iii) for funds under management above £30 million, at the rate of 1 / 12 % per month. From 1 December 2006 the Investment Manager agreed to waive half its fee during the currency of this agreement. The appointment of CAM as Investment Manager may be terminated by either party giving to the other not less than twelve months' notice of such termination. There are no specific provisions contained within the Investment Management Agreement relating to the compensation payable in the event of termination of the agreement other than entitlement to fees, which would be payable within any notice period. Under an agreement dated 26 June 2001, company secretarial services and the general administration of the Company are undertaken by Capita Sinclair Henderson Limited for an annual fee of £45,625. This fee is subject to annual review based on the UK Retail Price Index. In the event that there is an increase in the issued share capital of the Company, the fee will be adjusted upwards by agreement between the Company and Capita Sinclair Henderson Limited. The agreement may be terminated by either party giving to the other not less than six months' notice at any time. Appointment of Chelverton Asset Management ("CAM") as the Investment Manager The Board continually reviews the performance of the Investment Manager. In the opinion of the independent Directors the continuing appointment of CAM, as Investment Manager, on the terms outlined in the Investment Management Agreement dated 28 June 2001 and amended on 1 December 2006, is in the best interests of the shareholders as a whole. The reason for this view is that the investment performance of the Company is satisfactory having regard to the exceptional circumstances of the past couple of years. Further, the Board is satisfied that CAM has the required skill and expertise to continue to manage the Company's portfolio and charges fees that are reasonable when compared with those of similar investment trusts. On behalf of the Board George Stevens Chairman 19 November 2010 Statement of Directors' responsibilities in respect of the financial Statements The Directors are responsible for preparing the Annual Report and the financial statements and have elected to prepare them in accordance with applicable United Kingdom law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing the financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and • state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy, at any time, the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors, to the best of their knowledge, state that: • the financial statements, prepared in accordance with UK Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and net return of the Company; and • the Chairman's statement, Investment Manager's overview and Report of the Directors include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces. The Directors confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware; and each Director has taken all the steps that ought to have been taken as a Director to make himself aware of any relevant audit information and to establish that the Company's Auditor is aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information related to the Company included on the website of the Investment Managers www.chelvertonam.com. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. By order of the Board George Stevens Chairman 19 November 2010 Independent Auditors' report To the members of the Chelverton Growth Trust PLC The Company's financial statements for the year ended 31 August 2010 have been audited by Hazlewoods LLP. The text of the Auditor's report can be found in the Company's Annual Report and Accounts at www.chelvertonam.com. Income statement for the year ended 31 August 2010 2010 2009 Note Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Gains/(losses) on 8 - 862 862 - (2,043) (2,043) investments at fair value Income 2 79 - 79 65 - 65 Investment management fee 3 (9) (27) (36) (8) (26) (34) Refund of VAT on 3 - - - 33 99 132 investment management fee Other expenses 4 (145) - (145) (144) - (144) Net return before finance (75) 835 760 (54) (1,970) (2,024) costs and taxation Interest payable 5 - - - (4) (12) (16) Net return on ordinary (75) 835 760 (58) (1,982) (2,040) activities before taxation Taxation on ordinary 6 - - - (1) - (1) activities Net return on ordinary (75) 835 760 (59) (1,982) (2,041) activities after taxation Revenue Capital Total Revenue Capital Total pence pence pence pence pence pence Return per Ordinary share 7 (0.50) 5.62 5.12 (0.40) (13.33) (13.73) The total column of this statement is the profit and loss account of the Company. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. A separate statement of total recognised gains and losses has not been prepared as all such gains and losses are included in the income statement. The notes below form part of these accounts. Reconciliation of movements in shareholders' funds for the year ended 31 August 2010 Called Share Capital Capital Revenue Total £ up premium reserve redemption reserve '000 share account £'000 reserve £ £'000 capital £'000 '000 £'000 Year ended 31 August 2010 1 September 2009 149 2,674 (3,574) 40 3,606 2,895 Cost of shares purchased for - - - - (25) (25) Treasury Net return after taxation for - - 835 - (75) 760 the year 31 August 2010 149 2,674 (2,739) 40 3,506 3,630 Year ended 31 August 2009 1 September 2008 149 2,674 (1,595) 40 3,665 4,933 Adjustment to provision for - - 3 - - 3 tender offer expenses Net return after taxation for - - (1,982) - (59) (2,041) the year 31 August 2009 149 2,674 (3,574) 40 3,606 2,895 The notes below form part of these accounts. Balance sheet as at 31 August 2010 Note 2010 2009 Revenue Revenue £'000 £'000 Fixed assets Investments at fair value 8 3,583 2,908 Current assets Debtors 10 6 6 Cash at bank 86 44 92 50 Creditors - amounts falling due within 11 45 63 one year Net current assets/(liabilities) 47 (13) Net assets 3,630 2,895 Share capital and reserves Called up share capital 12 149 149 Share premium account 13 2,674 2,674 Capital reserve 13 (2,739) (3,574) Capital redemption reserve 13 40 40 Revenue reserve 13 3,506 3,606 Equity shareholders' funds 3,630 2,895 Net asset value per Ordinary share 17 24.66p 19.47p The notes below form part of these accounts. These accounts were approved by the Board of Directors of Chelverton Growth Trust PLC and authorised for issue on 19 November 2010. They were signed on its behalf by George Stevens Chairman Statement of cash flows for the year ended 31 August 2010 Note 2010 2009 £'000 £'000 Operating activities Investment income received 60 79 Deposit interest received 19 - Investment management fees paid (35) (37) VAT refund on investment management fees - 132 Secretarial fees paid (49) (39) Other cash payments (115) (83) Net cash (outflow)/inflow from operating 14 (120) 52 activities Returns on investments and servicing of finance Interest paid - (28) Investing activities Purchases of investments - (71) Sales of investments 187 1,028 Net cash inflow from investing activities 187 957 Financing (25) - Cost of shares purchased for Treasury (25) - Increase in cash 16 42 981 The notes below form part of these accounts. Notes to the accounts as at 31 August 2010 1ACCOUNTING POLICIES Accounting convention The accounts are prepared in accordance with UK Generally Accepted Accounting Practice ("UK GAAP") and with the AIC Statement of Recommended Practice ("SORP") issued in January 2009, regarding the Financial Statements of Investment Trust Companies and Venture Capital Trusts. All the Company's activities are continuing. Income recognition Dividends receivable on quoted equity shares are included as revenue when the investments concerned are quoted `ex-dividend'. UK dividends are disclosed excluding the associated tax credit. Dividends receivable on equity and non-equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established. All other income is included on an accruals basis. Expenses All expenses are accounted for on an accruals basis and charged through the revenue account in the income statement except as follows: ● expenses which are incidental to the acquisition or disposal of an investment are treated as capital and separately identified and disclosed (see note 8); ● management fees and bank interest have been allocated 75% to capital reserve and 25% to revenue reserve in the income statement, being in line with the Board's expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio of the Company. Investments All investments held by the Company are classified as `fair value through profit or loss'. Investments are initially recognised at cost, being the fair value of the consideration given. After initial recognition investments are measured at fair value, with changes in the fair value of investments and impairment of investments recognised in the income statement and allocated to capital. Realised gains and losses on investments sold are calculated as the difference between sales proceeds and cost. Investments are recognised and derecognised on the trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned, and are initially measured at fair value. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices at the close of business on the balance sheet date, without adjustment for transaction costs necessary to realise the asset. Where investments are unlisted or trading in the securities of an investee company is suspended, the investment is valued at the Directors' estimate of its net realisable value being their estimate of fair value. These have either been measured at cost or, where applicable, at the most recent transaction price. Capital reserve The following are accounted for in this reserve: ● gains and losses on the realisation of investments; ● net movement arising from changes in the fair value of investments that can be readily converted to cash without accepting adverse terms; ● realised exchange differences of a capital nature; ● expenses, together with related taxation effect, charged to this account in accordance with the above policies; and ● net movement arising from the changes in the fair value of investments that cannot be readily converted to cash without accepting adverse terms, held at the year end. Taxation The charge for taxation, where relevant, is based on the revenue before taxation for the year. Tax deferred or accelerated can arise due to timing differences between the treatment of certain items for accounting and taxation purposes. Full provision is made for deferred taxation under the liability method, on all timing differences not reversed by the balance sheet date, in accordance with FRS 19: Deferred tax. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue on the same basis as the particular item to which it relates, using the Company's effective rate of tax for the accounting period. 2 INCOME 2010 2009 £'000 £'000 Income from investments Dividends from UK companies 60 59 Dividends from overseas companies - 6 60 65 Other income Interest on Investment Management fee VAT refund 19 - Total income 79 65 Total income comprises: Dividends 60 65 Interest 19 - 79 65 3 INVESTMENT MANAGEMENT FEE 2010 2009 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Investment management fee 9 27 36 8 26 34 9 27 36 8 26 34 The investment management fee is calculated at the rate of 1/6% per month of the gross value of funds under management and is payable monthly in arrears. At 31 August 2010 there was £3,000 outstanding (2009: £2,000). From 1 December 2006 the Investment Manager agreed to waive half its fee. In 2004 the Association of Investment Companies (`AIC') and JPMorgan Claverhouse (`Claverhouse') brought a case against HM Revenue & Customs to challenge the VAT charged on management fees paid by investment trusts. The case was referred to the European Court of Justice and in a ruling in June 2007 it upheld the AIC/Claverhouse claim. Following this ruling the Company has not been charged VAT on its investment management fees from 1 November 2007. In the year to 31 August 2009, the Company received a refund of VAT previously paid of £132,000. In the year to 31 August 2010, the Company received interest on this refund of VAT of £19,000. This has been allocated 100% to revenue. 4 OTHER EXPENSES 2010 2009 Revenue Revenue £'000 £'000 Administrative and secretarial services 46 42 Directors' remuneration 49 49 Auditors' remuneration: 12 10 audit services Other expenses 38 43 145 144 5 INTEREST PAYABLE 2010 2009 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 On bank overdraft - - - 4 12 16 6 TAXATION 2010 2009 Analysis of charge in period Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Current tax: - - - 1 - 1 Irrecoverable withholding tax - - - 1 - 1 Factors affecting current tax charge for the period The tax assessed for the period is lower than the standard rate of corporation tax in the UK (28%). The differences are explained below: 2010 2009 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 (Loss)/profit on ordinary (75) 835 760 (58) (1,982) (2,040) activities before taxation Theoretical tax at UK (21) 234 213 (16) (555) (571) corporation tax rate of 28% (2009: 28%) UK dividend income not taxable (17) - (17) (16) - (16) Expenses not allowable for tax - - - 1 - 1 Non-taxable investment (gains)/ - (241) (241) - 572 572 losses Excess expenses for the period 38 7 45 31 - 31 Utilisation of brought forward - - - - (17) (17) expenses Withholding tax suffered on - - - 1 - 1 foreign income dividend Current tax charge for the - - - 1 - 1 period At 31 August 2010 the Company had surplus management expenses of £3,135,000 (2009: £2,972,000) which have not been recognised as a deferred tax asset. This is because the Company is not expected to generate taxable income in a future period in excess of the deductible expenses of that future period and, accordingly, it is unlikely that the Company will be able to reduce future tax liabilities through the use of existing surplus expenses. 7 RETURN PER ORDINARY SHARE 2010 2009 Revenue Capital Total Revenue Capital Total pence pence pence pence pence pence Basic (0.50) 5.62 5.12 (0.40) (13.33) (13.73) Revenue return per Ordinary share is based on the net revenue loss on ordinary activities after taxation attributable of £75,000 (2009: £59,000) and on 14,843,882 (2009: 14,864,827) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year. Capital return per Ordinary share is based on the net capital loss of £835,000 (2009: net capital loss of £1,982,000) and on 14,843,882 (2009: 14,864,827) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year. Total return per Ordinary share is based on the total gain of £760,000 (2009: total loss £2,041,000) and on 14,843,882 (2009: 14,864,827) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year. 8 INVESTMENTS 2010 2009 £'000 £'000 Delisted 213 3 AIM 2,827 2,412 Unquoted 543 493 3,583 2,908 AIM Delisted Unquoted Total * £'000 £'000 £'000 £'000 Opening book cost 5,679 1,512 451 7,660 Opening fair value adjustment (3,285) (1,509) 42 (4,752) Movements in the year: 2,412 3 493 2,908 Purchases at cost - - - - Sales: Proceeds (166) - (21) (187) (Losses)/gains on sales (48) (195) 21 (222) Investments delisted (849) 849 - - Changes in fair value of investments (net of previous revaluation surpluses and deficits realised) 1,478 (444) 50 1,084 Closing valuation 2,827 213 543 3,583 Closing book cost 4,634 2,166 451 7,251 Closing fair value adjustment (1,807) (1,953) 92 (3,668) Closing valuation 2,827 213 543 3,583 2010 2009 £'000 £'000 Realised losses on sales (222) (916) Changes in fair value 1,084 (1,127) Net gains/(losses) on investments at fair value 862 (2,043) All quoted investments are made up of equity shares * Unquoted investments are valued at the Directors' estimate of their net realisable value, being their estimate of fair value. Analysis of movements in unquoted investments Cost at Valuation Realised Changes Cost at Valuation at in 31 at 31 in year August 31 August August 31 August Fair 2009 2009 value 2010 2010 Investment £'000 £'000 £'000 £'000 £'000 £'000 Closed Loop Recycling* 252 252 - - 252 252 - Loanstock - Ordinary B shares 84 - - (105) 84 105 Locker Group - - (21) - - 21 Parmenion Capital 115 291 - 176 115 115 Partners LLP** 451 543 (21) 71 451 493 Analysis of disposals of unquoted investments The Company did not dispose of any unquoted investments in the year, but realised £21,000 in respect of its investment in Locker Group being a distribution on liquidation. Transaction costs During the year, the Company incurred transaction costs of £nil (2009: £nil) and £149 (2009: £4,388) on purchases and sales of investments, respectively. These amounts are included in `Losses on investments at fair value' as disclosed in the income statement. Details of material holdings in unquoted investments Cost at Valuation Cost Valuation Last Net Turnover Pre tax at accounts 31 at at (liabilities) £'000 (loss)/ August 31 period / 31 August August 31 August end profit 2010 assets 2010 2009 2009 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Investment Closed Loop 252 252 252 252 30/06/ Recycling* 2008 - Loanstock - Ordinary B 84 - 84 105 30/06/ (4,926) 1,533 (7,315) shares 2008 Parmenion 115 291 115 115 31/03/ 648 907 45 Capital 2009 Partners LLP ** * Closed Loop Recycling is the first food grade plastic recycler in the UK. The company produces food grade PET and HDPE from plastic bottle waste. ** Parmenion Capital Partners LLP offers fund based discretionary investment management services to the Independent Financial Adviser community. 9SIGNIFICANT INTERESTS At 31 August 2010 the Company had a holding of 3% or more of the issued class of share that is material in the context of the accounts in the following investments: Security Number of Percentage Issued share of capital shares held issued share capital Forest Support Services, Ord 5p 2,140,000 11.440 18,706,961 CEPS, Ord 5p 625,856 7.527 8,314,310 Belgravium Technologies, Ord 5p 5,000,000 4.954 100,936,547 Hartest Holdings, Ord 10p 340,000 3.951 8,605,288 AI Claims Solutions, Ord 10p 2,175,000 3.541 61,416,189 10 DEBTORS - amounts falling due within one year 2010 2009 £'000 £'000 Prepayments and other debtors 6 6 6 6 11 CREDITORS - amounts falling due within one year 2010 2009 £'000 £'000 Other creditors 45 63 45 63 12 CALLED UP SHARE CAPITAL 2010 2009 £'000 £'000 Allotted, called up and fully paid: 149 149 14,864,827 (2009: 14,864,827) Ordinary shares of 1p each There were 145,000 (2009: nil) shares held in Treasury at the date of this report. The shares were purchased during the year for £25,000 and that amount has been deducted from distributable reserves. Duration of Company At the Annual General Meeting of the Company in 2011 the Directors shall ensure that a resolution is proposed to the effect that the duration of the Company shall continue for a further three years (a "Continuance Resolution"). In the event that a Continuance Resolution is passed, the Directors shall ensure that a further Continuance Resolution is proposed at a general meeting of the Company to be held no later than three years after the date on which the previous Continuance Resolution was passed. In the event that any Continuance Resolution fails to be passed at any general meeting of the Company, the Directors shall conduct the Company's affairs so as to arrange an orderly wind up of the Company's affairs and shall ensure that a resolution to effect a voluntary wind up of the Company shall be proposed at a general meeting of the Company by no later than the third anniversary of the date on which the relevant Continuance Resolution failed to be passed. At a general meeting called pursuant to the Articles those holders of Ordinary shares who (being individuals) are present in person or by proxy or (being corporations) are present by proxy or by a representative duly authorised (not being himself a member entitled to vote) and entitled to vote and who vote in favour of the resolution proposed to wind up the Company voluntarily shall on a poll collectively have such total number of votes as is one more than the number of votes which are required to be cast on such poll for the said resolution to be carried, and upon such resolution being passed then the Company shall be wound up accordingly. 13 RESERVES Year ended 31 August 2010 Share Capital Capital Revenue premium reserve redemption reserve £'000 £'000 reserve £'000 £'000 At 1 September 2009 2,674 (3,574) 40 3,606 Net losses on realisation - (222) - - of investments Changes in fair value of - 1,084 - - investments Costs of shares purchased - - - (25) for Treasury Costs charged to capital - (27) - - Retained net loss for the - - - (75) year At 31 August 2010 2,674 (2,739) 40 3,506 Yearended 31 August 2009 Share Capital Capital Revenue premium reserve redemption reserve £'000 £'000 reserve £'000 £'000 At 1 September 2008 2,674 (1,595) 40 3,665 Net losses on realisation - (916) - - of investments VAT refund on investment - 99 - - management fees Changes in fair value of - (1,127) - - investments Adjustment to provision for - 3 - - tender offer expenses Costs charged to capital - (38) - - Retained net loss for the - - - (59) year At 31 August 2009 2,674 (3,574) 40 3,606 14 RECONCILIATION OF NET return BEFORE FINANCECOSTS AND TAXATION TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES 2010 2009 £'000 £'000 Net return before finance costs and taxation 760 (2,024) Net capital return before finance costs (835) 1,970 Expenses charged to capital (27) (26) VAT refund on investment management fees - 99 allocated to capital (Decrease) /increase in creditors and (18) 19 accruals Decrease in prepayments and accrued income - 14 (120) 52 15 RECONCILIATION OF NET CASH FLOW TO NET CASH 2010 2009 £'000 £'000 Net cash/(debt) at 1 September 2009 44 (937) Net cash inflow 42 981 Net cash at 31 August 2010 86 44 16 ANALYSIS OF CHANGES IN NET DEBT At Cash At 31 Flows 31 August August £'000 2009 2010 £'000 £'000 Cash at bank 44 42 86 44 42 86 17NET ASSET VALUE PER ORDINARY SHARE The basic net asset value per Ordinary share is based on net assets of £ 3,630,000 (2009: £2,895,000) and on 14,719,827 (2009: 14,864,827) Ordinary shares, being the number of shares in issue at the year end, less treasury shares. 18CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES At 31 August 2010 there were no capital commitments or contingent liabilities (2009: £nil). 19ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES The Company's financial instruments comprise securities and other investments, cash balances and debtors and creditors that arise from its operations, for example, in respect of sales and purchases awaiting settlement and debtors for accrued income. The Company primarily invests in companies traded on AIM with a market capitalisation at the time of investment of up to £50 million. The Company finances its operations through its issued capital and existing reserves. In following its investment objective, the Company is exposed to a variety of risks that could result in a reduction in the Company's net assets. These risks are market risk (comprising exchange rate risk, interest rate risk and other price risk), credit risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below: (i)Market risk - market price risk Market price risk arises mainly from uncertainty about future prices of financial investments used in the Company's business. It represents the potential loss the Company might suffer through holding market positions by way of price movements other than movements in exchange rates and interest rates. The Company's investment portfolio is exposed to market price fluctuations which are monitored by the Investment Manager who gives timely reports of relevant information to the Directors. Investment performance is also reviewed at each Board meeting. The Directors are conscious of the fact that the nature of AIM investments is such that prices can be volatile. Investors should be aware that the Company is exposed to a higher rate of risk than exists within a fund which holds traditional blue chip securities. Adherence to the investment objectives and the internal control limits on investments set by the Company mitigates the risk of excessive exposure to any one particular type of security or issuer. The Company's exposure to other changes in market prices at 31 August on its investments is as follows: 2010 2009 £'000 £'000 Fair value through profit or loss investments 3,583 2,908 A 20% decrease in the market value of investments at 31 August 2010 would have decreased net assets attributable to shareholders by £717,000 (2009: £582,000). An increase of the same percentage would have an equal but opposite effect on net assets available to shareholders. (ii)Market risk - exchange rate risk All of the Company's assets are in sterling and accordingly the only currency exposure the Company has is through the trading activities of its investee companies. (iii)Market risk - interest rate risk Changes in interest rates may cause fluctuations in the income and expenses of the Company. The majority of the Company's financial assets are non-interest bearing. As a result, the Company's financial assets are not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The exposure at 31 August of financial assets and financial liabilities to interest rate risk is as follows: 2010 2009 £'000 £'000 Cash at bank 86 44 86 44 The effect of an interest rate increase of 1% would increase net revenue before taxation on an annualised basis by £860. If there was a decrease in interest rates of 0.5% net revenue before taxation would decrease by £430. These calculations are based on balances as at 31 August 2010 and may not be representative of the year as a whole. (iv) Credit risk Credit risk is the risk of financial loss to the Company if the contractual party to a financial instrument fails to meet its contractual obligations. The carrying amounts of financial assets best represent the maximum credit risk exposure at the Balance Sheet date. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held with the custodian to be delayed. (v)Liquidity risk The majority of the Company's assets are AIM listed securities, which under normal conditions can be sold to meet funding commitments if necessary. These may however be difficult to realise in adverse market conditions. (vi)Maturity Analysis of Financial Liabilities The Company's financial liabilities comprise of creditors as disclosed in note 11. All items are due within one year. (vii)Managing Capital The Company's capital management objectives are to increase net asset value per share at a higher rate rather other quoted smaller company trusts and the FTSE All-Share Index. Primarily the Company finances its operations through its issued capital and existing reserves. (viii)Fair values of financial assets and financial liabilities All of the financial assets and liabilities of the Company are held at fair value. (ix)Financial instruments by category The financial instruments of the Company fall into the following categories. 31 August 2010 At Loans and Assets Total amortised at fair receivables value £'000 cost £'000 through £'000 profit or loss £'000 Assets as per the Balance sheet Investments - 252 3,331 3,583 Debtors - 6 - 6 Total - 258 3,331 3,589 Liabilities as per the Balance sheet Creditors 45 - - 45 45 - - 45 31 August 2009 At Loans and Assets Total amortised at fair receivables value £'000 cost £'000 through £'000 profit or loss £'000 Assets as per the Balance sheet Investments - 252 2,656 2,908 Debtors - 6 - 6 Total - 258 2,656 2,914 Liabilities as per the Balance sheet Creditors 63 - - 63 63 - - 63 Fair value hierarchy In accordance with Financial Reporting Standard No.29: `Financial Instruments: Disclosures', the Company must disclose the fair value hierarchy of financial instruments. The fair value hierarchy consists of the following three levels: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date. Quoted prices provided by external pricing services, brokers and vendors are included in level 1, if they reflect actual and regularly occurring market transactions on an arms length basis. Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Level 2 inputs include the following: • quoted prices for similar (i.e. not identical) assets in active markets. • quoted prices for identical or similar assets or liabilities in markets that are not active. Characteristics of an inactive market include a significant decline in the volume and level of trading activity, the available prices vary significantly over time or among market participants or the prices are not current. • inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals). • inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market-corroborated inputs). Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs) The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes `observable' requires significant judgement by the Company. The Company considers observable data to be investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices (or last traded in respect of SETS) at the close of business on the balance sheet date, without adjustment for transaction costs necessary to realise the asset. Investments whose values are based on quoted market prices in active markets, and therefore classified within level 1, include active listed equities. The Company does not adjust the quoted price for these instruments. Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. Investments classified within level 3 have significant unobservable inputs. Level 3 instruments include unquoted holdings. As observable prices are not available for these securities, the Company has used valuation techniques to derive the fair value. The Company has no level 2 investments, and level 3 investments consist only of unquoted holdings. Level 1 Level 2 Level 3 Total £'000 £'000 £'000 £'000 Equity investments 2,827 - 504 3,331 Total 2,827 - 504 3,331 The following table presents the movement in the level 3 investment for the period ended 31 August 2010: Equity investments £'000 Opening balance 241 Sales proceeds: (21) Total gains included in gains on investments in the 71 income statement Transfers into level 3* 213 Closing balance 504 * Satcom Group and Forest Support Services were delisted in the year to 31 August 2010. 20RELATED PARTY TRANSACTIONS Under the terms of the agreement dated 28 June 2001, the Company has appointed Chelverton Asset Management Limited to be the Investment Manager. The fee arrangements for these services and fees payable are set out in the Report of the Directors and in note 3 to the accounts. Mr Horner, a Director of the Company, is also a director of Chelverton Asset Management Limited and CEPS PLC, in which the Company has an investment. Mr Allen, a Director of the Company is a director and employee of Forest Support Services PLC, in which the Company has an investment (see note 9). Forest Support Services PLC is now in members voluntary liquidation.

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