Annual Financial Report

SMALL COMPANIES DIVIDEND TRUST PLC FINAL RESULTS FOR THE YEAR ENDED 30 APRIL 2011 The full Annual Report and Accounts can be accessed via the Investment Manager's website at www.chelvertonam.com or by contacting the Company Secretary on telephone 01392 412122. Investment objective and policy The investment objective of the Company is to provide Ordinary shareholders with a high income and opportunity for capital growth. The Company's funds will be invested principally in companies with a market capitalisation of up to £500 million. The Company's portfolio will comprise companies listed on the Official List and companies admitted to trading on AIM. The Company will not invest in other investment trusts or in unquoted companies. No investment will be made in preference shares, loan stock or notes, convertible securities or fixed interest securities. The full details of the investment policy can be found in the Report of the Directors in the Annual Report. Company summary History The Company was launched on 12 May 1999, raising £21.38 million before expenses, by a placing of 15,000,000 Ordinary shares and, through its former subsidiary company, Small Companies PLC, 6,250,000 Zero Dividend Preference shares and 31,260 Preference shares. A further 750,000 Ordinary shares were issued as a result of a placing for cash on 3 March 2000 and on 26 October 2005 a further 500,000 shares were issued. The subsidiary, Small Companies PLC, was placed into members voluntary liquidation on 30 April 2007, following which the capital entitlement of the Zero Dividend Preference and Preference shares were repaid. Total net assets and market capitalisation at year end As at 30 April 2011, the Company had a market capitalisation of £16,331,000 (2010: £13,894,000) and total net assets amounted to £18,208,000 (2010: £15,752,000). Management fee The fee payable to the Investment Manager is 1% of the gross assets of the Company. In addition, a performance fee of 10% of out performance of the FTSE SmallCap Index is payable, subject to a number of performance requirements. Ordinary shares of 25p each - 16,250,000 in issue Holders of Ordinary shares are entitled to dividends. On a winding-up of the Company, Ordinary shareholders will be entitled to all the surplus assets of the Company available after payment of all liabilities. Each holder on a show of hands will have one vote and on a poll will have one vote for each Ordinary share held. ISA status The Company's Ordinary shares are qualifying investments for Individual Savings Accounts (`ISAs'). Registered in England No. 3749536 A member of the Association of Investment Companies Financial highlights Discount 30 April 30 April 30 April 2011 2010 % change 2011 Capital Total Net Assets (£'000) 18,208 15,752 15.59 Net Asset Value per Ordinary 112.05p 96.94p 15.59 share† Mid-Market Price per Ordinary 100.50p 85.50p 17.54 10.31% share FTSE All-Share Index 3,155.03 2,863.35 10.19 FTSE SmallCap Index 3,311.47 2,960.77 11.84 Year ended Year ended 30 April 30 April 2011 2010 % change Revenue Return per Ordinary share 5.38p 4.62p 16.45% Dividends declared per Ordinary share 6.20p 6.00p Total Return Total Assets less current liabilities 17.32% 40.70% (excluding bank borrowings) total return* Total Net Assets total return* 21.21% 59.88% FTSE All-Share Total Return Index 13.68% 26.84% Total Expense Ratio (including investment 1.76% 1.77% management fee and other expenses but excluding performance fee) † Net asset values calculated in accordance with the Articles of Association * Adding back dividends paid in the year Negative returns are shown in brackets. Chairman's Report Results The Company's net asset value per Ordinary share at 30 April 2011 was 112.05p (2010: 96.94p), an increase over the year of 15.6%. During this period the FTSE All-Share Index increased by 10.2% and the FTSE SmallCap Index increased by 11.8%. Since the Company launched, on 12 May 1999, the FTSE All-Share Index has decreased by 4.8% and the net asset value per Ordinary share has risen by 17.2%. Over the same period the share price has increased by 17.5%. Since the year end, the net asset value per Ordinary share had fallen to 111.87p as at 8 July 2011 after payment of the 2.30p fourth interim dividend. The Company is currently invested in 59 companies across 18 sectors, this spread creates a well diversified portfolio which will assist the Company in providing a stable platform from which to grow in both capital and revenue terms. Recent headlines have served to highlight the continued headwinds faced by investors as the rate of recovery in economies globally appears to have slowed. The domestic economy is especially important to the companies that we invest in and despite the current sense of gloom it is interesting to note that consensus earnings estimates for both this year and next are still extremely positive. Whilst these may ultimately prove to be too optimistic, the ability of the corporate sector to continue to beat earnings expectations against the background of declining macro growth forecasts has been one of the most positive features of the last year for our Company. At the same time an increasing number of company directors appear to be using the improved earnings to try to differentiate their business and attract investors through significant real dividend rises. This is a welcome trend that looks set to continue for the foreseeable future as interest rates remain low and income from the UK equity market remains concentrated within a relatively small number of companies. An increasing number of investors are looking at small and mid-sized companies as a way of diversifying their income portfolios. Bank Facility The Company has borrowing facilities from Lloyds TSB Bank plc represented by a £4 million fixed loan and a £2m overdraft facility with HSBC Bank plc. At the year end £0.25m of the overdraft facility was being used. The Board have reviewed the borrowing levels and intends to continue to restrict the borrowing arrangements with the bank, so as to limit the total amount of borrowings, to below 30% of total assets at the time of draw down. Dividend The Board has declared a fourth interim dividend of 2.30p per Ordinary share (2010: 2.25p) which, when added to the three quarterly interim dividends of 1.30p (2010: 1.25p), equates to a total dividend for the year of 6.20p per Ordinary share (2010: 6.00p), an increase of 3.3% over the previous year. The Company has revenue reserves, which after payment of the fourth interim dividend represent 100% of the current annual dividend or 6.21p per Ordinary share. Outlook The recent BoE Inflation Report reduced the UK GDP growth outlook for both 2011 and 2012 and we have, not surprisingly, seen downward pressure on share prices in a number of UK centric businesses such as retailers and contractors that are more likely to be affected by the reduction in consumer and government spending. Despite this the majority of stocks that we invest in continue to improve earnings and we expect this to continue through the next year. At the same time we believe that the very welcome trend of real dividend increases should continue as directors look to provide investors with tangible evidence of the financial health of their companies. Lord Lamont of Lerwick Chairman 14 July 2011 Investment Manager's Report Investor sentiment towards the UK equity market in the past year has been dominated by discussion about the strength and sustainability of the domestic economic recovery. Although under the new government the way forward has been mapped out, there continues to be conflicting evidence regarding the effectiveness of the policies. The increase in VAT, rising inflation, especially food and oil prices, and lower than expected GDP growth have all combined to produce a heightened sense of gloom. At the same time, the problems in the Middle East and Japan and disappointing macro numbers recently from both China and the US have added a Global dimension to the slowdown. One of the most significant influences for us over the past year has been the fallout from the BP dividend cut which served to highlight the concentration of dividend payments within the UK equity market. This has led some investors to seek to diversify their income holdings and has led to the first signs of an increased awareness of the attractions of domestic small and mid sized companies. More importantly, it has led to a broad range of Company Boards at the smaller end of the market cap range positively reappraising their approach to dividend payments and the message that increasing payouts sends to the stock market. Portfolio Review We have reduced our exposure in the last period to a number of our larger illiquid holdings as their share prices have performed well. In this context we have sold part of our investment in Portmeirion Group, S&U and Sinclair (William) Holdings and re-invested in a number of slightly larger more liquid stocks including, N. Brown, a mail order retailer, Firstgroup, a rail and bus operator and Greene King, a brewer and pub owner. Moving forward we will continue to reduce the concentration amongst our top ten holdings and add to the number of investments in the Company. As Managers it is reassuring to note that we continue to have a steady stream of new investments ideas that fulfil our strict yield criteria and we have recently added four new holdings to the fund, all on annualised yields of over 5%. Huntsworth is a global public relations business, Wilmington provides information and training to professional business markets, Kcom provides communications services to the personal and business sectors and Charlemagne is a fund management business specialising in emerging markets. We have also added to a number of our existing holdings at attractive prices including Holidaybreak, Office2Office and Hansard Global. To fund these purchases we have sold Acal after a period of strong performance, HMV and reduced our weightings in both Avesco Group and Dee Valley. At the same time we raised cash from the sale of our holding in Chaucer after the Company was bid for. Another of our holdings, Dawson has just been the subject of an agreed cash offer from Smiths News, another portfolio company. Outlook A theme that has remained constant for the past twelve months and that remains valid today, is that the `bottom up' strength of the corporate sector appears at odds with the relatively poor `top down' macro environment. The companies that we invest in are still, on average, generating cash and profits at rates that are still in excess of expectations, and by and large have not started to put costs back into their businesses after the dramatic cost cutting of 2008 and 2009. This is enabling them to sustain and even improve margins in a period of low sales growth. Undoubtedly, the timing of a sustained recovery in the domestic economy continues to move further into the future with each piece of disappointing macro news. We remain geared to the fortunes of the domestic economy and are well placed to benefit when things pick up. In the meantime, the yields and cash flows of our investments should at the very least provide support to current valuations. Breakdown of Portfolio by Industry Industry % Support Services 12 Non-Life Insurance 12 Construction & Materials 11 Household Goods 10 General Financial 9 Industrial Engineering 7 Travel & Leisure 7 Life Insurance 5 General Industrials 4 Electronic & Electrical 3 Equipment Industrial Transportation 3 Healthcare & Equipment 2 Food Producers 2 Chemicals 2 Media 2 Gas, Water & 2 Multiutilities Mining 2 Software & Computer 2 Services Fixed Line 2 telecommunications General Retailers 1 100 Source: Capita Sinclair Henderson Limited (trading as Capita Financial Group - Specialist Fund Services) Twenty Largest Holdings at 30 April 2011 % of portfolio Macfarlane Group Packaging distribution 4.4 Sinclair (William) Manufactures and distributes a range 4.3 Holdings of products for the retail and horticultural market. S&U Consumer credit and car finance 3.4 throughout the UK Alumasc Group An engineering company focused on 3.3 the design and manufacture of premium engineering and building products Victoria Manufacturer of carpets 3.2 Cineworld Group Operation of cinemas in the UK, 2.9 Ireland and Spain Chesnara Life assurance 2.8 Stadium Group Manufacture and sale of electronic 2.7 assemblies and plastic mouldings Marshalls Supplies the domestic, public sector 2.7 and commercial markets with ranges of hard landscaping products Portmeirion Group Markets and manufactures an 2.7 extensive range of high quality tableware, cookware and giftware Trifast A leading international manufacturer 2.5 and distributor of industrial fastenings and components Hansard Global Supports financial advisors with tax 2.4 efficient custom configured investment products in a life assurance wrapper Sanderson Group UK provider of software solutions 2.3 and IT services Beazley Specialist underwriting business 2.3 Clarke (T) Electrical contractors with a 2.2 distinctive regional business covering the UK Braemer Shipping Provides broking and consulting 2.2 Services services to the global shipping industry across four business segments: shipbroking, logistics, technical services and environmental services Office2Office Provider of managed procurement and 2.2 business-critical services Avesco Group Providers of specialist services to 2.2 the corporate presentation, entertainment and broadcast markets Electrocomponents British-based distributor of 2.1 electrical components Personal Group Holdings A group of companies providing 2.1 accident & health insurance, employee benefits, financial advice, and personal insurance and reinsurance broking services Top twenty companies 55.0 total Balance held in 35 45.0 holdings Total portfolio 100.0 Breakdown of Portfolio by Market Capitalisation as at 30 April 2011 Number of Companies >£500m 6 £250 - 500m 5 £100 - 250m 13 £75 - 100m 4 £50 - 75m 6 £25 - 50m 8 £0 - 25m 13 % of Portfolio % >£500m 7.3 £250 - 500m 10.7 £100 - 250m 22.7 £75 - 100m 8.2 £50 - 75m 12.0 £25 - 50m 21.5 £0 - 25m 17.6 Source: Capita Sinclair Henderson Limited (trading as Capita Financial Group - Specialist Fund Services) David Horner and David Taylor Chelverton Asset Management Limited 14 July 2011 Business Review Company 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 1158 of the Corporation Tax Act 2010 for the year ended 30 April 2010. The Directors are of the opinion that the Company has conducted its affairs for the year ended 30 April 2011 so as to be able to continue to be approved as an authorised investment trust. The Company is an investment company as defined in section 833 of the Companies Act 2006. The investment objective of the Company is to provide Ordinary shareholders with a high income and opportunity for capital growth. Investment policies and restrictions The Company's investment policy, as approved by shareholders, is that: ● funds will be invested principally in UK companies with a market capitalisation of up to £500 million at the point of investment; ● a maximum of 20% of the Company's portfolio may be invested in companies without reference to their market capitalisation at the discretion of the Investment Manager; ● the Company will invest in the ordinary shares of companies either listed on the Official List and traded on the London Stock Exchange's Main Market or on the London Stock Exchange's Alternative Investment Market; ● no investment will be made in preference shares, loan stock or notes, convertible securities or fixed interest securities or any similar securities convertible into shares; and ● the Company will not invest in the securities of other investment trusts or in unquoted companies. The Chairman's report and Investment Manager's report give details of the Company's activities during the financial year under review. Performance analysis using key performance indicators At each quarterly Board meeting the Directors consider a number of key performance indicators (`KPI's') to assess the Company's success in achieving its objectives, for example the net asset value (`NAV'), the movement in the Company's share price, the discount of the share price in relation to the NAV, the dividend per share and the total expense ratio. ● The Company's Statement of Comprehensive Income is set out below. ● A total dividend for the year to 30 April 2011 of 6.20p (2010: 6.00p) per Ordinary share has been declared to shareholders by way of three payment of 1.30p per Ordinary share and a fourth dividend payment of 2.30p per Ordinary share. ● The NAV per Ordinary share at 30 April 2011 was 112.05p (2010: 96.94p). ● The total expense ratio (including investment management fees and other expenses but excluding performance fees and exceptional items) for the year ended 30 April 2011 was 1.76% (2010: 1.77%). 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 as set out below: Market risk The Company is exposed to UK market risk due to fluctuations in the market prices of its investments. The Investment Manager actively monitors economic performance of investee companies and reports regularly to the Board on a formal and informal basis. The Board formally meets with the Investment Manager on a quarterly basis when the portfolio transactions and performance are discussed and reviewed. 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 fluctuate significantly. The Board recognises that, as a closed ended company, 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, with its advisers, monitors the Company's discount levels and shares may be bought back should it be thought appropriate to do so by the Board. Regulatory risks A breach of Companies Act regulations and FSA rules may result in the Company being liable to fines or the suspension of the Company from the London Stock Exchange. The Board, with its advisers, monitors the Company's regulatory obligations both on an ongoing basis and at quarterly Board meetings. Financial risk The financial situation of the Company is reviewed in detail at each Board meeting and monitored by the Audit Committee. New developments in accounting standards and industry related issues are actively reported to and monitored by the Board and its advisers, ensuring that appropriate accounting policies are adhered to. Hedge accounting The Company took out an interest rate swap in order to minimise the cash flow interest rate risk that the Company was exposed to. The hedge has been accounted for as a cash flow hedge given that it is the use of a swap to change floating rate debt to fixed rate debt. As such the portion of the gain or loss on the hedge that is determined to be effective has been recognised directly in equity and the ineffective portion has been recognised in the Statement of Comprehensive Income. Banking A breach of the loan covenants may lead to funding being reduced or withdrawn. The Board monitors compliance with the loan covenants at each Board meeting and regularly reviews the loan and overdraft facilities, and the requirement for them, with the Investment Manager. A more detailed explanation of the risks facing the Company is given in note 23 to the financial statements. Social, environmental and employee issues The Company does not have any employees and the Board consists of entirely 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. Current and future developments A review of the main features of the year is contained in the Chairman's report and the Investment Manager's report. 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 ("AGM") to enable the issue and purchase of it's own shares, when it is in shareholders' interests as a whole. Dividends paid 30 April 2011 30 April 2010 Payment date pence pence First interim 4 October 2010 1.30 1.25 Second interim 7 January 2011 1.30 1.25 Third interim 4 April 2011 1.30 1.25 Fourth interim 8 July 2011 2.30 2.25 6.20 6.00 The Directors have not recommended a final dividend in respect of the year ended 30 April 2011. Management agreements The Company's investments are managed by Chelverton under an agreement (`the Investment Management Agreement') dated 1 December 2005. The management fees are as follows: a) a periodic fee payable quarterly in arrears at an annual rate of 1% of the value of the gross assets under management of the Company; and b) a performance fee equal to 10% of any excess of the net asset value per share over the benchmark multiplied by the number of shares in issue, subject to certain conditions and capped at 1% of shareholders' funds. The Investment Management Agreement may be terminated by twelve months written notice. Under another agreement (`the Administration Agreement') dated 7 May 1999, company secretarial services and the general administration of the Company are undertaken by Capita Sinclair Henderson Limited. Their fee is subject to annual upward adjustments in accordance with the Retail Price Index. The Administration Agreement may be terminated by six months written notice. It is the Directors' opinion that the continuing appointment of the Investment Manager and the Secretary on the terms agreed is in the best interests of the Company and its shareholders. The Directors are satisfied that Chelverton has the required skill and expertise to continue to manage the Company's portfolio. There are no additional arrangements in place for compensation beyond the notice period. The full Annual Report contains the following statements regarding responsibility for the financial statements and management report/ business review included therein (references in the following statements are to page 27 in the Annual Report). Statement of Director's responsibilities in respect of the Annual Report and the financial statements The Directors are responsible for preparing the Annual Report and the financial statements. The Directors have elected to prepare financial statements in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs). Company law requires the Directors to prepare such financial statements in accordance with IFRSs and the Companies Act 2006. International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company's financial position, financial performance and cash flows. This requires the faithful representation of the effect of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's `Framework for the Preparation and Presentation of Financial Statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. Directors are also required to: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information, and • provide additional disclosures when compliance and the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a Report of the Directors and Directors' remuneration report which comply with the requirements of the Companies Act 2006. The Directors are responsible for the integrity of the information relating to the Company on the Investment Manager's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions. On behalf of the Board of Directors Lord Lamont of Lerwick Chairman 14 July 2011 NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company's statutory accounts for the years ended 30 April 2011 and 2010 but is derived from those accounts. Statutory accounts for 2010 have been delivered to the registrar of companies, and those for 2011 will be delivered in due course. The auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (ii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor's report can be found in the Company's full Annual Report and Accounts on the Investment Manager's website www.chelvertonam.com. Statement of comprehensive income for the year ended 30 April 2011 2011 2010 Revenue Capital Total Revenue Capital Total Note £'000 £'000 £'000 £'000 £'000 £'000 Investments Profits on 10 - 2,818 2,818 - 5,685 5,685 investments Investment income 2 1,187 - 1,187 1,012 - 1,012 Expenses Investment 3 (54) (162) (216) (45) (134) (179) management fee Recovery of VAT 3 - - - 49 74 123 on investment management fee Other expenses 4 (181) - (181) (180) - (180) Recovery of loss - - - - 6 6 in former subsidiary company (235) (162) (397) (176) (54) (230) Net return before 952 2,656 3,608 836 5,631 6,467 finance costs and taxation Finance costs 6 (77) (232) (309) (80) (241) (321) Net return before 875 2,424 3,299 756 5,390 6,146 taxation Taxation 7 - - - (5) - (5) Net return after 875 2,424 3,299 751 5,390 6,141 taxation Other comprehensive income Movement in fair 156 90 value of cash flow hedge Total 3,455 6,231 comprehensive income for the year Revenue Capital Total Revenue Capital Total pence pence Pence pence pence pence Net return per: Ordinary share 8 5.38 14.92 20.30 4.62 33.17 37.79 The total column of this statement is the Statement of Comprehensive Income of the Company, prepared in accordance with International Financial Reporting Standards (`IFRS'), as adopted by the EU. All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The notes form part of these financial statements. Statement of changes in net equity for the year ended 30 April 2011 Share Share p Capital Hedge Revenue Total capital remium reserve reserve reserve account Note £'000 £'000 £'000 £'000 £'000 £'000 Year ended 30 April 2011 30 April 2010 4,063 11,917 (1,322) (413) 1,507 15,752 Total - - 2,424 156 875 3,455 comprehensive income for the year Transactions with owners: Dividends paid 9 - - - - (999) (999) 30 April 2011 4,063 11,917 1,102 (257) 1,383 18,208 Year ended 30 April 2010 30 April 2009 4,063 11,917 (6,712) (503) 1,641 10,406 Total - - 5,390 90 751 6,231 comprehensive income for the year Transactions with owners: Dividends paid 9 - - - - (885) (885) 30 April 2010 4,063 11,917 (1,322) (413) 1,507 15,752 The notes form part of these financial statements. Balance Sheet as at 30 April 2011 2011 2010 Note £'000 £'000 Non-current assets Fair value through profit or 10 22,689 19,479 loss investments Current assets Trade and other receivables 12 275 540 Cash and cash equivalents 1 358 276 898 Total assets 22,965 20,377 Current liabilities Bank overdraft (248) - Trade and other payables 13 (188) (109) (436) (109) Total assets less current 22,529 20,268 liabilities Non-current liabilities Bank loan 14 (4,000) (4,000) Derivative financial instruments 15 (321) (516) (4,321) (4,516) Total liabilities (4,757) (4,625) Net assets 18,208 15,752 Represented by: Share capital 16 4,063 4,063 Share premium account 17 11,917 11,917 Capital reserve 17 1,102 (1,322) Hedge reserve 17 (257) (413) Revenue reserve 17 1,383 1,507 Issued capital and reserves 18,208 15,752 The notes form part of these financial statements. These financial statements were approved by the Board and authorised for issue on 14 July 2011. Lord Lamont of Lerwick, Chairman Statement of cash flows for the year ended 30 April 2011 2011 2010 Note £'000 £'000 Operating activities Investment income received 1,195 1,030 Bank deposit interest received - 16 Investment management fee paid (210) (166) Administration and secretarial (60) (47) fees paid Refund of VAT on Investment - 312 Management fees Other cash payments (125) (125) Cash generated from operations 800 1,020 Loan interest paid (346) (342) Net cash inflow from operating 19 454 678 activities Investing activities Purchases of investments (4,295) (4,303) Sales of investments 4,235 4,550 Net cash (outflow)/inflow from (60) 247 investing activities Financing activities Dividends paid (999) (885) Net cash outflow from financing (999) (885) activities (Decrease)/increase in cash and 20 (605) 40 cash equivalents for year Cash and cash equivalents at 21 358 318 start of year Cash and cash equivalents at end 21 (247) 358 of year Cash and cash equivalents at 30 April comprise: Cash at bank 1 358 Bank overdraft (248) - (247) 358 These financial statements have been prepared under IFRS. The notes form part of these financial statements. Notes to the financial statements as at 30 April 2011 1 Accounting Polices Small Companies Dividend Trust PLC is a Company domiciled in the United Kingdom. Basis of preparation The financial statements of the Company have been prepared in conformity with International Financial Reporting Standards (`IFRS') issued by the International Accounting Standards Board (as adopted by the European Union) and Interpretations issued by the International Financial Reporting Interpretations Committee, and applicable requirements of United Kingdom company law, and reflect the following policies which have been adopted and applied consistently. At the date of authorisation of these financial statements the following Standards and Interpretations which are relevant to the annual financial statements and have not been applied in these financial statements were in issue but not yet effective until accounting periods commencing on or after the below dates: • IFRS 3 (revised), `Business combinations' (effective 1 July 2010). • IFRS 9 `Financial Instruments' (effective 1 January 2013). • IFRS 13 `Fair Value Measurements' (effective 1 January 2013). • IAS 24 (revised 2009), `Related Party Disclosures' (effective 1 January 2011). • IAS 28 (amendment), `Investments in Associates' (effective for periods beginning on or after 1 January 2011). • IFRIC 14 (amendment), Prepayments of a Minimum Funding. The Directors anticipate that the adoption of these Standards and Interpretations will have no material impact on the Company when the relevant standards come into effect. Convention The financial statements are presented in Sterling rounded to the nearest thousand. The financial statements have been prepared on a going concern basis under the historical cost convention, except for the measurement at fair value of investments classified as fair value through profit or loss and interest rate swaps taken out as cash flow hedges. Where presentational guidance set out in the Statement of Recommended Practice regarding the Financial Statements of Investment Trust Companies and Venture Capital Trusts (`SORP'), issued in January 2009, is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a consistent basis compliant with the recommendations of the SORP. Segmental reporting The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. The Company invests in companies listed in the United Kingdom. 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 unrealised gains and losses on investments and impairment of investments recognised in the Statement of Comprehensive Income and allocated to capital. Realised gains and losses on investments sold are calculated as the difference between sales proceeds and cost. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices and SETS at last trade price at the close of business on the Balance Sheet date, without adjustment for transaction costs necessary to realise the asset. Derivative financial instruments and hedge accounting It is the Company's policy not to trade in derivative financial instruments. However, the Company has utilised interest rate swaps as cash flow hedges to mitigate its exposure to interest rate changes on its bank loan which is subject to a variable rate of interest. As at 30 April 2011 the Company had one interest rate swap in place, details can be found in note 15. All derivatives are recognised at their fair value. The method of recognising movements in fair value of derivatives depends on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Derivatives are only designated as hedges provided certain strict criteria are met. At the inception of a hedge its terms must be clearly documented and there must be an expectation that the derivative will be highly effective in offsetting changes in the cash flow of the hedged risk. The effectiveness of the hedging relationship is tested throughout its life and if at any point it is concluded that it is no longer highly effective the hedge relationship is terminated. The effective portion of changes in the fair value derivatives that are designated as cash flow hedges (being the interest rate swaps) is recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Trade date accounting All "regular way" purchases and sales of financial assets are recognised on the "trade date" i.e., the day that the entity commits to purchase or sell the asset. Regular way purchases, or sales, are purchases or sales of financial assets that require delivery of the asset within a time frame generally established by regulation or convention in the market place. Income Dividends receivable on quoted equity shares are taken into account on the ex-dividend date. Where no ex-dividend date is quoted, they are brought into account when the Company's right to receive payment is established. Other investment income and interest receivable are included in the financial statements on an accruals basis. Dividends received from UK registered companies are accounted for net of imputed tax credits. Expenses All expenses are accounted for on an accruals basis. All expenses are charged through the revenue account in the Statement of Comprehensive Income except as follows: ● expenses which are incidental to the acquisition of an investment are included within the costs of the investment; ● expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment; and ● expenses are charged to capital reserve where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. The Company's investment management fees, bank interest and all other expenses are allocated to revenue with the exception of 75% (2010: 75%) of the Investment Manager's fee, 75% (2010: 75%) of bank and loan interest and 100% of the provision for the Investment Manager's performance fee, all of which are allocated to capital. In respect of the investment management fee, bank and loan interest allocation to revenue and capital this is in line with the Board's expected long term split of returns in the form of income and capital gains respectively, from the investment portfolio of the Company. Cash and cash equivalents Cash in hand and in banks and short-term deposits which are held to maturity are carried at cost. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Bank overdrafts that are repayable on demand which form an integral part of the Company's cash management are included as a component of cash and cash equivalents for the purpose of the Statement of Cash Flows. Bank loans and borrowings All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost. Any difference between cost and redemption value is recognised in the Statement of Comprehensive Income over the period of the borrowings on an effective interest basis. Taxation There is no charge to United Kingdom income tax as the Company's allowable expenses exceed its taxable income. Deferred tax assets in respect of unrelieved excess expenses are not recognised as it is unlikely that the Company will generate sufficient taxable income in the future to utilise these expenses. Deferred tax is not provided on capital gains and losses because the Company meets the conditions for approval as an Investment Trust Company. Dividends payable to shareholders Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are charged to the Statement of Changes in Net Equity. Dividends declared and approved by the Company after the Balance Sheet date have not been recognised as a liability of the Company at the Balance Sheet date. 2 Income 2011 2010 £'000 £'000 Income from listed investments UK net dividend income 974 925 Unfranked foreign dividend income 214 68 1,188 993 Other income Interest on VAT refund - 16 Exchange (losses)/gains (1) 3 Total income 1,187 1,012 Total income comprises: Dividends 1,188 993 Interest - 16 Other (1) 3 1,187 1,012 3 Investment management fee 2011 2010 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Investment 54 162 216 45 134 179 management fee Recovery of VAT on - - - (49) (74) (123) prior year investment management fees 54 162 216 (4) 60 56 At 30 April 2011 there were amounts outstanding of £57,000 (2010: £51,000). A performance fee was not payable for the year ended 30 April 2011 nor for the year ended 30 April 2010. Following the AIC/Claverhouse judgement in 2007 regarding the charging of VAT on investment management fees, the Company has received £497,000 which was recognised in the financial statements for the years ended 30 April 2009 and 30 April 2010. 4 Other expenses 2011 2010 £'000 £'000 Administrative and secretarial fee 55 52 Directors' remuneration 50 55 Auditors' remuneration: audit services* 16 16 non audit services* - - Insurance 11 11 Other expenses* 49 46 181 180 *The above amounts include irrecoverable VAT where applicable. 5 Directors' Remuneration 2011 2010 £ £ Total fees 50,000 55,000 Remuneration to Directors Lord Lamont (Chairman) 20,000 20,000 D Harris 17,000 15,000 Howard Myles (appointed 15 March 2011) 2,000 - B N Lenygon (deceased 25 November 2010) 11,000 20,000 W van Heesewijk* - - * Mr van Heesewijk has waived his entitlement to fees 6 Finance costs 2011 2010 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Bank interest payable 87 261 348 86 258 344 on bank overdraft and bank loan Movement in fair value (10) (29) (39) (6) (17) (23) of ineffective element of interest rate swap 77 232 309 80 241 321 7 Taxation 2011 2010 £'000 £'000 Based on the revenue return for the year Current tax - withholding tax on foreign - 5 dividend income The current tax charge for the year is lower than the standard rate of corporation tax in the UK of 28% to 31 March 2011 and 26% from 1 April 2011 (2010: 28%). The differences are explained below: 2011 2010 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Revenue on ordinary 875 2,424 3,299 756 5,390 6,146 activities before taxation Theoretical 244 674 918 212 1,509 1,721 corporation tax at 27.82% (2010: 28%) Effects of: Capital items not - (784) (784) - (1,592) (1,592) taxable UK and foreign (330) - (330) (269) - (269) dividends which are not taxable in the UK Excess expenses in 86 110 196 57 83 140 the year Withholding tax - - - 5 - 5 suffered on foreign dividend income Actual current tax - - - 5 - 5 charged to the revenue account The Company has unrelieved excess expenses of £16,831,000 (2010: £16,125,000). It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these expenses and therefore no deferred tax asset has been recognised. 8 Return per share Ordinary shares Revenue return per Ordinary share is based on the net revenue on ordinary activities after taxation of £875,000 (2010: £751,000) and on 16,250,000 (2010: 16,250,000) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year. Capital return per Ordinary share is based on capital profit of £2,424,000 (2010: 5,390,000) and on 16,250,000 (2010: 16,250,000) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year. 9 Dividends 2011 2010 £'000 £'000 Declared and paid per Ordinary share Fourth interim dividend for the year ended 366 276 30 April 2010 of 2.25p (2009: 1.7p) First interim dividend paid of 1.30p 211 203 (2010: 1.25p) Second interim dividend paid of 1.30p 211 203 (2010: 1.25p) Third interim dividend paid of 1.30p 211 203 (2010: 1.25p) 999 885 Declared per Ordinary share Declared fourth interim dividend for the 374 366 year ended 30 April 2011 of 2.30p (2010: 2.25p) 10 Investments 2011 Listed AIM Unlisted Total £'000 £'000 £'000 £'000 Year ended 30 April 2011 17,343 10,107 2,369 29,819 Opening book cost (4,189) (3,782) (2,369) (10,340) Opening investment holding losses Opening valuation 13,154 6,325 - 19,479 Movements in the year: Purchases at cost 2,801 1,563 - 4,364 Disposals: Proceeds (2,603) (1,333) (36) (3,972) Net realised losses on disposals (1,946) (599) (2,333) (4,878) Transfers from AIM to Listed 234 (234) - - Movement in investment holding 3,470 1,857 2,369 7,696 losses Closing valuation 15,110 7,579 - 22,689 Closing book cost 15,829 9,504 - 25,333 Closing investment holding losses (719) (1,925) - (2,644) 15,110 7,579 - 22,689 Realised losses on disposals (1,946) (599) (2,333) (4,878) Movement in fair value of 3,470 1,857 2,369 7,696 investments Profits on investments 1,524 1,258 36 2,818 2010 Listed AIM Unlisted Total £'000 £'000 £'000 £'000 Year ended 30 April 2010 Opening book cost 21,306 11,135 101 32,542 Opening investment holding losses (11,725) (6,347) (101) (18,173) Opening valuation 9,581 4,788 - 14,369 Movements in the year: Purchases at cost 3,513 790 - 4,303 Disposals: Proceeds (3,294) (1,584) - (4,878) Net realised losses on disposals (1,115) (1,033) - (2,148) Transfers from Listed to AIM (932) 932 - - Delisted in year (2,135) (133) 2,268 - Movement in investment holding 7,536 2,565 (2,268) 7,833 losses Closing valuation 13,154 6,325 - 19,479 Closing book cost 17,343 10,107 2,369 29,819 Closing investment holding losses (4,189) (3,782) (2,369) (10,340) 13,154 6,325 - 19,479 Realised losses on disposals (1,115) (1,033) - (2,148) Movement in fair value of 7,536 2,565 (2,268) 7,833 investments Profits /(losses) on investments 6,421 1,532 (2,268) 5,685 Transaction costs During the year the Company incurred transaction costs of £29,000 (2010: £35,000) and £17,000 (2010: £21,000) on purchases and sales of investments respectively. These amounts are included in profits on investments, as disclosed in the Statement of Comprehensive Income. 11 Significant Interests The Company has a holding of 3% or more in the following investments: 30 April 2011 Class of share % held Name of undertaking RTC Group Ordinary 5.21 Sanderson Group Ordinary 4.61 Victoria Ordinary 3.96 Sinclair (William) Holdings Ordinary 3.67 Stadium Group Ordinary 3.08 Macfarlane Group Ordinary 3.04 12 Trade and other receivables 2011 2010 £'000 £'000 Sales of investments for future 65 328 settlement Dividends receivable 202 210 Prepayment and accrued income 8 2 275 540 13 Trade and other payables 2011 2010 £'000 £'000 Purchases of investments for future 69 - settlement Trade and other payables 119 109 188 109 14 Bank loan 2011 2010 £'000 £'000 Bank loan 4,000 4,000 The bank loan is secured by a first legal charge over the Company's investment portfolio. The loan is repayable on 1 May 2014. 15 DERIVATIVE FINANCIAL INSTRUMENTS An interest rate swap is an agreement between two parties to exchange fixed and floating interest payments based upon interest rates defined in the contract without the exchange of the underlying principal amounts. In each case noted below the Company has swapped its obligation to pay variable rates of interest for a fixed rate. Following the reduction of the loan drawn, there was a mismatch with the two swap transactions. The remaining £4 million loan is only 80% of the remaining £5 million swap. Therefore 20% of the cost of the swap is charged to income with the remaining 80% to equity. The fair value at the end of the financial year of the interest rate swap designated as a cash flow hedge, calculated based on the value of entering into an equivalent swap at the 30 April 2011, was estimated as follows: 2011 2010 £'000 £'000 £5,000,000 fixed at 6.2475% for floating 321 516 interest rate swap expiring 10 July 2012 16 Share capital 2011 2010 £'000 £'000 Issued, allotted and fully paid 16,250,000 (2010: 16,250,000) Ordinary shares 4,063 4,063 of 25p each The rights attaching to the Ordinary shares are: As to dividends each year Ordinary shares are entitled to all the revenue profits of the Company available for distribution, including all undistributed income. As to capital on winding-up On a winding-up, the holders of Ordinary shares will receive all the assets available for distribution to shareholders after payment of all debts and satisfaction of all liabilities of the Company pro-rata according to the amounts paid or credited as paid up on the Ordinary shares held by them respectively. Duration The Directors shall convene an extraordinary general meeting of the Company to be held on 30 April 2014, or if that is not a business day, on the immediately preceding business day (`the First EGM'), at which an Ordinary resolution will be proposed to the effect that the Company continues in existence (`the Continuation Resolution'). In the event that such resolution is not passed the Directors shall, subject to the Statutes, put forward further proposals to shareholders regarding the future of the Company (which may include the voluntary liquidation, unitisation or other reorganisation of the Company) (`Restructuring Resolution') at an extraordinary general meeting of the Company to be convened not more than four months after the date of the First EGM (or such adjournment). The Restructuring Resolution shall be proposed as a Special Resolution. If the Restructuring Resolution is either not proposed or not passed then the Directors shall convene an extraordinary general meeting not more than four months after the date of the First EGM (or such adjournment) if the Restructuring Resolution is not proposed or four months after the date the Restructuring Resolution is not passed, an Ordinary Resolution pursuant to section 84 of the Insolvency Act 1986 to voluntarily wind-up the Company shall be put to shareholders at this extraordinary general meeting and the votes taken on such resolution shall be on a poll. 17 Reserves Share Capital Hedge Revenue premium reserve reserve reserve account £'000 £'000 £'000 £'000 At 1 May 2010 11,917 (1,322) (413) 1,507 Net losses on - (4,878) - - realisation of investments Movement in fair value - 7,696 - - Costs charged to capital - (394) - - Net deficit after - - - (124) dividends for the year retained Movement in fair value - - 156 - of cash flow hedge At 30 April 2011 11,917 1,102 (257) 1,383 At 1 May 2009 11,917 (6,712) (503) 1,641 Net losses on - (2,148) - - realisation of investments Movement in fair value - 7,833 - - Costs charged to capital - (295) - - Net deficit after - - - (134) dividends for the year retained Movement in fair value - - 90 - of cashflow hedge As 30 April 2010 11,917 (1,322) (413) 1,507 18 Net asset value per share The net asset value per share and the net assets attributable to the Ordinary shareholders at the year end are calculated in accordance with the Articles of Association and are as follows: Net asset Net assets Net asset Net asset value per attributed value per attributed share to share to 2011 shareholders 2010 shareholders pence 2011 pence 2010 £'000 £'000 Ordinary shares 112.05 18,208 96.94 15,752 The net asset value per share is calculated on 16,250,000 (2010: 16,250,000) Ordinary shares, being the number of Ordinary shares in issue at the year end. 19 Reconciliation of net return before and after taxation to net cash flow from operating activities 2011 2010 £'000 £'000 Net return before taxation 3,299 6,146 Taxation - (5) Net return after taxation 3,299 6,141 Net capital return (2,424) (5,390) Movement in fair value of ineffective element of (39) (23) interest rate swap Decrease in receivables 2 228 Increase in payables 10 17 Interest and expenses charged to the capital reserve (394) (295) Net cash inflow from operating activities 454 678 20 Reconciliation of net cash flow to movement in net debt 2011 2010 £'000 £'000 (Decrease)/increase in cash in year (605) 40 Change in net debt (605) 40 Net debt at 1 May 2010 (3,642) (3,682) Net debt at 30 April 2011 (4,247) (3,642) 21 Analysis of changes in net debt At 1 May 2010 Cash flows At 30 April 2011 £'000 £'000 £'000 Cash at bank 358 (357) 1 Bank overdraft - (248) (248) 358 (605) (247) Debt due after more than one year (4,000) - (4,000) (3,642) (605) (4,247) 22 Related party transactions Under the terms of agreement dated 1 December 2005, the Company has appointed Chelverton to be 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. 23 Analysis of financial assets and liabilities Objectives, policies and strategies The Company primarily invests in companies with a market capitalisation of up to £500 million. The majority of investments comprise ordinary shares in companies listed on the Official List and companies admitted to AIM. A bank loan of £4 million was in place as at 30 April 2011 (2010: £4 million). These facilities are used for investment purposes and to aid settlement and finance placings until other investments have been reduced. An overdraft facility was in place as at 30 April 2011 (2010: nil). This facility is used for short term liquidity. The Company finances its operations through bank borrowings and equity. Cash, liquid resources and short-term debtors and creditors arise from the Company's day-to-day operations. It is, and has been throughout the year under review, the Company's policy that no trading in financial instruments shall be undertaken. Details of the Company's interest rate swaps can be found in note 15. The purpose of this swap is to fix the interest level over a certain period and reduce cash flow volatility on the bank loan. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company's net assets or a reduction of the profits available for distribution. These risks are market risk (comprising currency 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. As required by IFRS 7: Financial Instruments: Disclosures, an analysis of financial assets and liabilities, which identifies the risk to the Company of holding such items, is given below. Market risk Market risk arises mainly from uncertainty about future prices of financial instruments used in the Company's business. It represents the potential loss the Company might suffer through holding market positions by way of price movements and movements in exchange rates and interest rates. The Investment Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Investment Manager on a regular basis and the Board at quarterly meetings with the Investment Manager. Market price risk Market price risks (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments. The Board manages the risks inherent in the investment portfolios by ensuring full and timely report of relevant information from the Investment Manager. Investment performance is reviewed at each Board meeting. The Company's exposure to other changes in market prices at 30 April on its investments is as follows; 2011 2010 £'000 £'000 Fair value through profit of loss 22,689 19,479 investments Sensitivity analysis A 10% increase in the market value of investments at 30 April 2011 would have increased net assets attributable to shareholders by £2,269,000 (2010: £ 1,948,000). An equal change in the opposite direction would have decreased the net assets available to shareholders by an equal but opposite amount. Foreign currency risk All 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. Interest rate risk Interest rate movements may affect the level of income receivable on cash deposits and the interest payable on the Company's variable rate borrowings. 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 and borrowing under the loan facility. The Company is exposed to interest rate risk on its variable rate loan. The Company has mitigated its exposure to cash flow variations arising from changes in interest rates by taking out an interest rate swap as described in note 15. As at 30 April 2011, there is one £5 million swap expiring on 10 July 2012. The Company settles the difference between fixed and variable rate on a quarterly basis. Changes in interest rates will however affect the fair value of these derivative instruments. The fair value is determined by obtaining a quotation from the Company's bank of the cost or benefit of closing the contract. The exposure at 30 April of financial assets and financial liabilities to interest rate risk is as follows: Within one year More than one Total year £'000 £'000 £'000 30 April 2011 Cash and cash equivalents and (247) - (247) bank overdraft Bank loan - (4,000) (4,000) Total exposure to interest (247) (4,000) (4,247) rates 30 April 2010 Cash and cash equivalents 358 - 358 Bank loan - (4,000) (4,000) Total exposure to interest 358 (4,000) (3,642) rates A loan facility of £4 million was in place at 30 April 2011, repayable on 1 May 2014. Bank borrowings under this facility amounted to £4 million at 30 April 2011 (2010: £4 million), and incur interest at a rate of 1% above LIBOR. On 3 February 2011 the Company entered in to an uncommitted multi-currency overdraft facility agreement with HSBC Bank plc. The bank makes available an aggregate amount equal to the lesser of: (i) £2,000,000; and (ii) 10% of custody assets from time to time. The purpose of the facility is for short term liquidity and has no fixed term but is subject to review from time to time, at least on an annual basis. Interest is payable monthly in arrears on the amount of the facility outstanding at the rate of 1.75% above the applicable base rate. In addition a fee of £10,000 per annum is payable on each anniversary date. Sensitivity analysis The Directors believe that at 30 April 2011 the interest rate swap completely mitigates any cash flow risk through increases in interest rates, though the fair value of the interest rate swap instruments will vary with changes in interest rates. 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. The Company's listed investments are held on its behalf by HSBC Global Services acting as the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Board monitors the Company's risk by reviewing the custodian's internal controls reports. Investment transactions are carried out with a number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinary undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered in its obligations before any transfer of cash or securities away from the Company is completed. Cash is only held at banks that have been identified by the Board as reputable and of high credit quality. The maximum exposure to credit risk as at 30 April 2011 was £22,965,000 (2010: £20,377,000). The calculation is based on the Company's credit risk exposure as at 30 April 2011 and this may not be representative of the year as a whole. None of the Company's assets are past due or impaired. Liquidity risk The majority of the Company's assets are listed securities in small companies, which can under normal conditions be sold to meet funding commitments if necessary. They may however be difficult to realise in adverse market conditions. Under the terms of the bank facilities the Company must comply with the following financial covenants that: (a) the borrowing (including both loan and overdraft) does not at any time exceed 30% of the value of the investment portfolio after deducting (i) the amount by which the value of any single investment exceeds 5% of the value of the investment portfolio; and (ii) the amount by which the aggregate value of all investments in a single industry sector exceeds 20% of the value of the investment portfolio; and (b) the borrowing does not at any time exceed 80% of the value of the investment portfolio after deducting the value of any investment with a market capitalisation that (i) exceeds £500,000,000, by 10% of the value of such investment; (ii) equals or exceeds £75,000,000 but does not exceed £ 500,000,000, by 40% of the value of such investment; or, (iii) is less than £ 75,000,000, by 70% of the value of such investment; and (c) profit before interest and taxation is not at any time less than 200% of the aggregate amount of interest paid and payable. At 30 April 2011, the level of borrowing was 18.7% (2010: 20.5%) of the value of the investment portfolio; a reduction in the market value of investments in the region of 38% would require disposal of investments to ensure ongoing compliance with the lending covenant. The covenant is reviewed frequently and monitored in conjunction with the Bank on a monthly basis. Financial instruments by category The financial instruments of the Company fall into the following categories 30 April 2011 At Loans and Assets at Derivatives Total amortised receivables fair value used for £'000 cost £'000 through hedging £'000 profit or £'000 loss £'000 Assets as per Balance sheet Investments - - 22,689 - 22,689 Trade and other - 275 - - 275 receivables Cash and cash equivalents - 1 - - 1 Total - 276 22,689 - 22,965 Liabilities as per Balance sheet Trade and other payables 188 - - - 188 Bank loan 4,000 - - - 4,000 Bank overdraft 248 - - - 248 Derivative financial - - - 321 321 instruments Total 4,436 - - 321 4,757 30 April 2010 Assets at fair value At through Derivatives amortised Loans and profit or used for cost receivables loss hedging Total £'000 £'000 £'000 £'000 £'000 Assets as per Balance sheet Investments - - 19,479 - 19,479 Trade and other - 540 - - 540 receivables Cash and cash equivalents - 358 - - 358 Total - 898 19,479 - 20,377 Liabilities as per Balance sheet Trade and other payables 109 - - - 109 Bank loan 4,000 - - - 4,000 Derivative financial - - - 516 516 instruments Total 4,109 - - 516 4,625 IFRS 7 Hierarchy The Company has adopted the amendment to IFRS 7, effective 1 January 2009. This requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. 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 (ie 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 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 private equity and corporate debt securities. 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 or Level 3 investments, however the interest rate swap derivative is designated a Level 3. This is due to the fair value obtained being reliant upon inputs obtained from brokers that are indicative and cannot easily be corroborated with observable market data. At 30 April 2011, the fair value of the interest rate swap derivative designated as a cash flow hedge has been calculated based on the value of entering into an equivalent swap as at that date. This was estimated as follows: The fair value of the £5,000,000 floating rate swap fixed at 6.2475% expiring 10 July 2012 is £321,000 (2010: £516,000). The following table presents the movement in the Level 3 instrument for the year ended 30 April 2011: Ineffective Effective Total element (20%) element (80%) £'000 to income to equity £'000 (hedge reserve) £'000 30 April 2010 103 413 516 Movement in year (39) (156) (195) 30 April 2011 64 257 321 ANNUAL REPORT AND AGM The foregoing represents extracts from the full text of the Annual Report and Accounts for the year ended 30 April 2011. The full Report will shortly be available for download from the following website: www.chelvertonam.com Copies will be posted to shareholders shortly. NATIONAL STORAGE MECHANISM A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.hemscott.com/nsm.do. This years AGM will be held on Friday 23 September 2011 at 2.00pm at the offices of Chelverton Asset Management Limited, 9 Dartmouth Street, London SW1H 9BP. Capita Sinclair Henderson Limited 14 July 2011

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