Annual Financial Report
SMALL COMPANIES DIVIDEND TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 30 APRIL 2010
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 2010, the Company had a market capitalisation of £13,894,000
(2009: £8,653,000) and total net assets amounted to £15,752,000 (2009: £
10,406,000).
Management fee
The fee payable to the Investment Manager is 1% of the combined gross assets of
the Company, plus a performance fee of 10% of the lower amount by which the net
asset value plus dividends paid in the year exceeds 10% compounded per annum
and beats the FTSE SmallCap Index by 2%.
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').
Financial highlights
Discount
30 April 30 April 30 April
2010 2009 % change 2010
Capital
Total Net Assets (£'000) 15,752 10,406 51.37
Net Asset Value per Ordinary 96.94p 64.04p 51.37
shareâ€
Mid-Market Price per Ordinary 85.50p 53.25p 60.56 11.80%
share
FTSE All-Share Index 2,863.35 2,173.06 31.77
FTSE SmallCap Index 2,960.77 2,212.27 33.83
Year ended Year ended
30 April 30 April
2010 2009 % change
Revenue
Return per Ordinary share 4.62p 8.45p (45.33)%
Dividends declared per Ordinary share 6.00p 7.30p
Total Return
Total Assets less current liabilities 40.70% (54.84)%
(excluding bank borrowings) total return*
Total Net Assets total return* 59.88% (54.77)%
FTSE All-Share Total Return Index 26.84% (26.88)%
Total Expense Ratio (including investment 1.77% 2.37%
management fee and other expenses but
excluding performance fee)
* Adding back dividends paid in the year
†Net asset values calculated in accordance with the Articles of Association
Negative returns are shown in brackets.
Chairman's Report
Results
The Company's net asset value per Ordinary share at 30 April 2010 was 96.94 p
(2009: 64.04p), an increase over the year of 51.4%. During this period the FTSE
All-Share Capital Return Index increased by 31.8%, the FTSE Small-Cap Capital
Return Index increased by 33.8%.
Since Listing, on 12 May 1999, the FTSE All-Share has fallen by 3.4% and the
net asset value per Ordinary share has increased by 1.4%. Since the year end,
the net asset value per Ordinary share has fallen to 92.31p as at 20 August
2010.
The Company's portfolio is currently invested in 61 companies across 22
sectors, this spread provides a well diversified base and will provide a stable
platform from which to grow in both capital and revenue terms.
One theme that was common across a lot of our holdings in the last year was
excellent cash generation and not surprisingly directors decided to pay down
debt as rapidly as possible. Balance sheets have been rebuilt and underlying
trading generally appears to be improving, although there are certain sectors
and stocks that will inevitably suffer the impact of government cutbacks.
Liquidity still remains an issue within the wider economy but the dividend cuts
that we have seen in the last eighteen months as a result of uncertainty over
short term company financing have now largely come to an end.
We now appear to be in the early stages of an upturn in the corporate earnings
cycle as profits are improving and analyst's consensus estimates are rising,
although directors continue to remain cautious and visibility remains limited.
This improving `bottom up' outlook is however currently at odds with the `top
down' macro environment which continues to be dominated by the adverse news
relating to European sovereign debt. Of particular interest to us is how
quickly this pick up in company profitability translates into increased
dividend payouts and there are already encouraging signs in this respect.
Bank Facility
The Company's borrowings remain unchanged with a fixed loan facility of £4
million and it remains compliant with all its required covenants. In the event
of a covenant not being complied with, the loan would become repayable on
demand.
The Board have reviewed the borrowing levels and intends to continue to monitor
and if necessary restrict the borrowing arrangements with the bank, so as to
limit the total amount of borrowings, to below 30 per cent of total assets at
the time of drawdown, currently some 20.3%. The Directors have full
responsibility for gearing decisions. The Board therefore continues to believe
that it is in shareholders' interests that it should be retained.
Dividend
The fourth interim dividend declared of 2.25p per Ordinary share was paid on 8
July 2010 to shareholders on the register on 2 July 2010. This dividend brings
the total payment for the year ended 30 April 2010 to 6.00p per Ordinary share.
Given the harsh economic climate over the period the long-term aim of growing
the dividend above the rate of inflation has not been achieved.
The Company has revenue reserves, which after payment of the fourth interim
dividend represent 117% of the current annual dividend or 7.02p per Ordinary
share.
Outlook
Significantly for our fund we have just seen the first tentative signs of
increases in dividend payments within our small company universe as a number of
our holdings, notably Braemar, Nichols and Smiths News have recently announced
improved payouts. This has wider implications as we believe that one of the
most tangible signs of increasing confidence is higher levels of cash paid out
to shareholders in the form of dividends. Whilst the outlook is better than it
was a year ago, we expect stock markets to remain volatile and companies to
continue to strengthen balance sheets until there is firmer evidence of
sustained recovery.
Lord Lamont of Lerwick
Chairman
25 August 2010
Investment Manager's Report
for the year ended 30 April 2010
The recovery in smaller company share prices in the last year was driven in the
first instance by an end to the phase of de-stocking that had contributed to
the sell off in the depths of the banking crisis. By August there were the
first tentative signs of an improving macro environment and by the end of the
period there was real upward momentum in share prices as corporate earnings
estimates were starting to be upgraded. One pleasing aspect of the busy March
reporting season was the high percentage of companies beating profit
expectations, a result of improving underlying trading and overly pessimistic
forecasts.
As the co-ordinated policies by central banks of monetary easing began to bear
fruit equity risk premiums fell and equity markets continued to rise. Whilst
there was little sustained sector leadership within our investment universe,
the debate was largely centred around buying higher growth overseas earnings or
lower growth but more lowly rated domestic earnings, and this continues to be a
feature. As the recovery has gathered pace, there appears to be an increasing
focus on cash flow rather than debt driven growth in earnings per share. We
expect this to continue for the foreseeable future and it fits well with our
own investment process.
Portfolio Review
At the start of the last period there was still considerable uncertainty about
the outlook for the UK corporate sector and the fund suffered as a number of
holdings cut their dividends including Chamberlin and Victoria. We continued to
hold a number of stocks that had either cut or passed dividends as we felt that
the underlying valuations were simply too low to justify a sale. Two good
examples of this were TT Group and Trifast which both passed their dividends
but whose share prices recovered strongly in the year, the latter after a
change of top management. Whilst this enabled the fund to begin to rebuild its
capital base there was obviously a detrimental short term affect on the income
account. Now that we have seen share prices begin to recover on a more
sustained basis our focus is once again on income generation.
The fund benefited in the early part of the year from the cash bid by the
management team for Wogen. At the same time a number of deeply discounted
rights issues were announced as companies sought to reduce debt quickly and
both Holidaybreak and Marshalls raised funds through this mechanism. As the
year progressed and share prices improved a feature of a broad section of our
portfolio was the better than expected cash generation which largely brought to
an end the cycle of dividend cuts that had begun almost eighteen months
earlier. Indeed, one notable feature of the latter part of the year was the
increasing number of companies prepared to increase dividend payouts in excess
of inflation, a sign of increased confidence in the future.
We sold our holding in Brit Insurance after a change in domicile, Brulines
after a period of strong performance and Low and Bonar. We also took funds out
of Dee Valley, Arbuthnot, Nichols, and Portmeirion. We invested the monies
raised into a wide range of new holdings, including HMV, Fiberweb, Wincanton,
Beazley, United Business Media, Omega Insurance, Abbey Protection and Consort
Medical. The net result of these transactions is that we have retained our
exposure to the insurance sector and at the margin have increased our gearing
to overseas earnings.
Outlook
There currently appears to be a substantial divergence between the `top down'
and `bottom up' prospects for equities. At the company level, directors are
gradually becoming more confident about the outlook, earnings are being
upgraded and cash generation remains substantial. At the macro level, sovereign
debt concerns have recently undermined share prices and investors have once
again become more risk averse. We do not subscribe to the `double dip' theory,
but whilst this uncertainty continues markets will remain extremely volatile.
On a more positive note the consensus amongst the companies that we invest in
is that the recent pick-up in trading is a result of a real improvement in
underlying demand and not just re-stocking. This is perhaps unsurprising as
stock requires capital and capital remains a relatively scarce resource. In the
downturn, as a result of the severity of the liquidity crisis, companies were
very quick to take out costs and we believe that we are now set to see the
positive benefits of operational gearing as increasing turnover is put through
these lower cost bases. Alongside the apparently conservative nature of
corporate statements this should allow a number of positive earnings surprises
as we move through the year.
Breakdown of Portfolio by Industry
Industry %
Support Services 12
Household Goods 12
Construction & Materials 10
General Financial 9
Non-Life Insurance 8
Travel & Leisure 7
General Industrials 6
Life Insurance 5
Industrial Engineering 4
Food Producers 3
Chemicals 3
Electronic & Electrical 3
Equipment
Industrial Transportation 3
Media 3
Gas, Water & 2
Multi-utilities
Mining 2
Software & Computer 2
Services
Beverages 2
General Retailers 2
Healthcare & Equipment 2
100
Source: Capita Sinclair Henderson Limited (trading as Capita Financial Group -
Specialist Fund Services)
Twenty Largest Holdings
At 30 April 2010
% of
portfolio
Macfarlane Group Packaging distribution 4.5
Portmeirion Group Markets and manufactures an 4.3
extensive range of high quality
tableware, cookware and giftware
Clarke (T) Electrical contractors with a 4.0
distinctive regional business
covering the UK
Sinclair (William) Manufactures and distributes a range 3.7
Holdings of products for the retail and
horticultural market.
S&U Consumer credit, car finance 3.7
throughout England, Wales and
Scotland
Victoria Manufacturer of carpets 3.5
Cineworld Operation of cinemas in the UK and 3.0
Ireland
Alumasc Group An engineering company focused on 2.9
the design and manufacture of
premium engineering and building
products
Chesnara Life assurance 2.9
Stadium Group Manufacture and sale of electronic 2.8
assemblies and plastic mouldings
Office2Office Provider of managed procurement and 2.8
business-critical services
Zotefoams Manufacture of high performance 2.7
foams
Arbuthnot Banking Personalised Banking and wealth 2.6
management services
Marshalls Group Supplies the domestic, public sector 2.6
and commercial markets with ranges
of hard landscaping products
Hilton Food Group International specialist 2.5
meat-packing business
Sanderson Group Develops and delivers 2.5
market-specific software and
services to the multi-channel retail
and manufacturing markets
Consort Medical Supplier of medical devices for drug 2.3
delivery and anaesthesia
ATH Resources Coal mining and reclamation 2.3
Dee Valley Group Provision of water services 2.3
Electrocomponents British - based distributor of 2.3
electrical components
Top twenty companies 60.2
total
Balance held in 38 39.8
holdings
Total portfolio 100.00
Breakdown of Portfolio by Market Capitalisation
as at 30 April 2010
Number of Companies
>£500m 4
£250 - 500m 5
£100 - 250m 9
£75 - 100m 3
£50 - 75m 7
£25 - 50m 8
£0 - 25m 22
% of Portfolio
%
>£500m 6.1
£250 - 500m 9.3
£100 - 250m 19.6
£75 - 100m 5.1
£50 - 75m 17.5
£25 - 50m 21.4
£0 - 25m 21.0
Source: Capita Sinclair Henderson Limited (trading as Capita Financial Group -
Specialist Fund Services)
David Horner and David Taylor
Chelverton Asset Management Limited
25 August 2010
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 2009. The Directors are of the opinion that the
Company has conducted its affairs for the year ended 30 April 2010 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:
â— funds will be invested principally in UK companies with a market
capitalisation of up to £500 million at the point of investment;
â— 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;
â— 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;
â— 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
â— 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.
â— The Company's Statement of Comprehensive Income is set out below.
â— A total dividend for the year to 30 April 2010 of 6.00p (2009: 7.30p) per
Ordinary share has been declared to shareholders by way of three payment of
1.25p per Ordinary share and a fourth dividend payment of 2.25p per Ordinary
share.
â— The NAV per Ordinary share at 30 April 2010 was 96.94p (2009: 64.04p).
â— The total expense ratio (including investment management fees and other
expenses but excluding performance fees and exceptional items) for the year
ended 30 April 2010 was 1.77% (2009: 2.37%). The ratio as at 30 April 2009
represents the effect of costs on a significantly reduced portfolio value.
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 are 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 to enable the issue and purchase of it's own shares, when it is
in shareholders' interests as a whole.
Dividends paid
30 April 2010 30 April 2009
Payment date pence pence
First interim 7 October 2009 1.25 3.20
Second interim 7 January 2010 1.25 1.20
Third interim 1 April 2010 1.25 1.20
Fourth interim 8 July 2010 2.25 1.70
6.00 7.30
The Directors have not recommended a final dividend in respect of the year
ended 30 April 2010.
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 the amount by which the net asset value
plus dividends paid during the year exceed 10% compounded, 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.
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
25 August 2010
Independent Auditors' report
to the members of Small Companies Dividend Trust PLC
The Company's financial statements for the year ended 30 April 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 on the Investment Manager's website
www.chelvertonam.com.
Statement of comprehensive income
for the year ended 30 April 2010
2010 2009
Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Investments
Profits/(losses) 10 - 5,685 5,685 - (12,949) (12,949)
on investments
Investment income 2 1,012 - 1,012 1,698 - 1,698
Expenses
Investment 3 (45) (134) (179) (44) (132) (176)
management fee
Recovery of VAT 3 49 74 123 121 253 374
on investment
management fee
Other expenses 4 (180) - (180) (181) - (181)
Recovery of loss - 6 6 - - -
in former
subsidiary
company
(176) (54) (230) (104) 121 17
Net return before 836 5,631 6,467 1,594 (12,828) (11,234)
finance costs and
taxation
Finance costs 6 (80) (241) (321) (208) (624) (832)
Net return and 756 5,390 6,146 1,386 (13,452) (12,066)
comprehensive
income before
taxation
Taxation 7 (5) - (5) (13) - (13)
Net return and 751 5,390 6,141 1,373 (13,452) (12,079)
comprehensive
income after
taxation
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
Return per:
Ordinary share 9 4.62 33.17 37.79 8.45 (82.78) (74.33)
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 Company does not have any income or expenses that are not included in net
return for the year, and therefore the "Net return for the year" is also the
"Total comprehensive income for the year", as defined in International
Accounting Standard 1 (revised). All of the loss and total comprehensive income
for the year is attributable to the owners of the Company.
The notes form part of these financial statements.
Statement of changes in net equity
for the year ended 30 April 2010
Share Share Capital Hedge Revenue Total
capital premium reserve reserve reserve
account
Note £'000 £'000 £'000 £'000 £'000 £'000
Year ended 30 April 20
10
30 April 2009 4,063 11,917 (6,712) (503) 1,641 10,406
Net return after - - 5,390 - 751 6,141
taxation for the year
Dividends paid 8 - - - - (885) (885)
Movement in fair value - - - 90 - 90
of cash flow hedge
taken to equity
Total net return and - - 5,390 90 (134) 5,346
comprehensive income
for the year
30 April 2010 4,063 11,917 (1,322) (413) 1,507 15,752
Year ended 30 April
2009
30 April 2008 4,063 11,917 6,740 (291) 1,836 24,265
Net return after - - (13,452) - 1,373 (12,079)
taxation for the year
Dividends paid 8 - - - - (1,568) (1,568)
Transfer to profit and - - - 175 - 175
loss
Movement in fair value - - - (387) - (387)
of cash flow hedge
taken to equity
Total net return and - - (13,452) (212) (195) (13,859)
comprehensive income
for the year
30 April 2009 4,063 11,917 (6,712) (503) 1,641 10,406
The notes form part of these financial statements.
Balance Sheet
as at 30 April 2010
2010 2009
Note £'000 £'000
Non-current assets
Fair value through profit or 10 19,479 14,369
loss investments
Current assets
Trade and other receivables 12 540 440
Cash and cash equivalents 358 318
898 758
Total assets 20,377 15,127
Current liabilities
Trade and other payables 13 (109) (92)
(109) (92)
Total assets less current 20,268 15,035
liabilities
Non-current liabilities
Bank loan 14 (4,000) (4,000)
Derivative financial instruments 15 (516) (629)
(4,516) (4,629)
Total liabilities (4,625) (4,721)
Net assets 15,752 10,406
Represented by:
Share capital 16 4,063 4,063
Share premium account 17 11,917 11,917
Capital reserve 17 (1,322) (6,712)
Hedge reserve 17 (413) (503)
Revenue reserve 17 1,507 1,641
Issued capital and reserves 15,752 10,406
The notes form part of these financial statements.
These financial statements were approved by the Board and authorised for issue
on 25 August 2010.
Lord Lamont of Lerwick, Chairman
Statement of cash flows
for the year ended 30 April 2010
2010 2009
Note £'000 £'000
Operating activities
Investment income received 1,030 1,983
Bank deposit interest received 16 17
Investment management fee paid (166) (225)
Administration and secretarial (47) (57)
fees paid
Refund of VAT on Investment 312 185
Management fees
Other cash payments (125) (129)
Cash generated from operations 1,020 1,774
Loan interest paid (342) (731)
Net cash inflow from operating 19 678 1,043
activities
Investing activities
Purchases of investments (4,303) (1,017)
Sales of investments 4,550 7,781
Net cash inflow from investing 247 6,764
activities
Financing activities
Repayment of bank loan - (6,000)
Dividends paid (885) (1,568)
Net cash outflow from financing (885) (7,568)
activities
Increase in cash and cash 20 40 239
equivalents for year
Cash and cash equivalents at 21 318 79
start of year
Cash and cash equivalents at end 21 358 318
of year
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 2010
1 ACCOUNTING POLICIES
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.
IAS 1. The Company has adopted IAS 1 (revised)
The amendment to IAS 1 has required the following changes to the terminology
and presentation of the primary statements within the Annual Report:
`Income Statements' and `Cash flow statements', are now referred to as
`Statement of Comprehensive Income' and `Statement of cash flows' respectively.
Additionally, IAS 1, as revised has brought about changes to the Income
Statement where there is now a requirement to present `other comprehensive
income' items (such as revaluation gains and losses), as well as the usual
income statement items, on the face of the primary financial statements. IAS 1
allows this information to be presented in one `Statement of Comprehensive
Income'.
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:
• IFRS 1 (amendment), `First-time Adoption of International Financial Reporting
Standards' and `Additional exemptions for first-time adopters' (effective 1
January 2010).
• IFRS 2 (amendments), `Group cash-settled share-based payment transactions'
(effective 1 January 2010).
• IFRS 3 (revised), `Business combinations' (effective 1 July 2009).
• IFRS 5 (amendment), `Non-current Assets Held for Sale and Discontinued
Operations' (effective 1 January 2010).
• IFRS 9 `Financial Instruments' (effective 1 January 2013).
• IAS 17 (amendment), Leases (effective 1 January 2011).
• IAS 28 (amendment), `Investments in Associates' (effective for periods
beginning on or after 1 July 2009). Consequential amendments arising from
revisions to IFRS 3 (effective 1 July 2009).
• IAS 32 (amendment), `Financial Instruments: Presentation' - Amendments
relating to classification of rights issues (effective 1 February 2010).
• IFRIC 17: Distribution of non-cash assets to owners (effective 1 July 2009).
• IFRIC 18: Transfer of assets from customers (effective 1 July 2009).
• IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments
(effective 1 July 2009).
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 2010 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:
â— expenses which are incidental to the acquisition of an investment are
included within the costs of the investment;
â— expenses which are incidental to the disposal of an investment are deducted
from the disposal proceeds of the investment; and
â— 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% (2009: 75%) of the
Investment Manager's fee, 75% (2009: 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
2010 2009
£'000 £'000
Income from listed investments
UK net dividend income 925 1,595
Unfranked foreign dividend income 68 87
993 1,682
Other income
Bank interest receivable - 16
Interest on VAT refund 16 -
Exchange gains 3 -
Total income 1,012 1,698
Total income comprises
Dividends 993 1,682
Interest 16 16
Other 3 -
1,012 1,698
3 Investment management fee
2010 2009
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment 45 134 179 44 132 176
management fee
Recovery of VAT on (49) (74) (123) (121) (253) (374)
prior year
investment
management fees
(4) 60 56 (77) (121) (198)
At 30 April 2010 there were amounts outstanding of £51,000 (2009: £38,000).
A performance fee was not payable for the year ended 30 April 2010 nor for the
year ended 30 April 2009.
In 2004 the Association of Investment Companies (`AIC') and JPMorgan
Claverhouse (`Claverhouse') brought a case against HM Revenue & Customs to
challenge the VAT charge 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. The immediate effect is that invoices from
the Investment Manager will no longer include VAT.
During the year ended 30 April 2010 the Company received £189,000 in backdated
VAT from the Investment Managers in respect of this claim, split 25% to
revenue, 75% to capital. This amount was outstanding at 30 April 2009 and
included in the accounts for that year.
The Company also recovered a further amount of £123,000 in respect of this
claim from the previous Investment Manager, split 40% to revenue, 60% to
capital.
4 Other expenses
2010 2009
£'000 £'000
Administrative and secretarial fee* 52 48
Directors' remuneration 55 55
Auditors' remuneration:
audit services* 16 18
non audit services* - -
Insurance 11 13
Other expenses* 46 47
180 181
*The above amounts include irrecoverable VAT where applicable.
5 Directors' Remuneration
2010 2009
£ £
Total fees 55,000 55,000
Remuneration to Directors
Lord Lamont (Chairman) 20,000 20,000
D Harris 15,000 15,000
B N Lenygon 20,000 20,000
W van Heesewijk* - -
* Mr van Heesewijk has waived his entitlement to fees
6 Finance costs
2010 2009
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Bank interest payable 86 258 344 120 358 478
on bank overdraft and
bank loan
Cost of cancellation - - - 57 171 228
of portion of interest
rate swap no longer
effective
Movement in fair value (6) (17) (23) 31 95 126
of ineffective element
of interest rate swap
80 241 321 208 624 832
7 Taxation
2010 2009
£'000 £'000
Based on the revenue return for the year
Current tax - withholding tax on foreign 5 13
dividend income
The current tax charge for the year is lower than the standard rate of
corporation tax in the UK of 28% (2009: 28%). The differences are explained
below:
2010 2009
£'000 £'000
Revenue on ordinary activities before 6,146 (12,066)
taxation
Theoretical tax at UK corporation rate of 1,721 (3,378)
28% (2009: 28%)
Effects of:
Capital items not taxable (1,592) 3,626
UK and foreign dividends which are not (269) (447)
taxable in the UK
Excess expenses in the year 140 199
Withholding tax suffered on foreign 5 13
dividend income
Actual current tax charged to the revenue 5 13
account
The Company has unrelieved excess expenses of £16,125,000 (2009: £15,630,000).
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 Dividends
2010 2009
£'000 £'000
Declared and paid per Ordinary share
Fourth interim dividend for the year ended 276 658
30 April 2009 of 1.7p (2008: 4.05p)
First interim dividend paid of 1.25p (2009: 203 520
3.20p)
Second interim dividend paid of 1.25p 203 195
(2009: 1.20p)
Third interim dividend paid of 1.25p (2009: 203 195
1.20p)
885 1,568
Proposed per Ordinary share
Proposed fourth interim dividend for the 366 276
year ended 30 April 2010 of 2.25p (2009:
1.70p)
9 Return per share
Ordinary shares
Revenue return per Ordinary share is based on the net revenue on ordinary
activities after taxation of £751,000 (2009: £1,373,000) and on 16,250,000
(2009: 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 £5,390,000
(2009: capital losses £13,452,000) and on 16,250,000 (2009: 16,250,000)
Ordinary shares, being the weighted average number of Ordinary shares in issue
during the year.
10 Investments
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 net unrealised (11,725) (6,347) (101) (18,173)
depreciation
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 -
Decrease/(increase) in unrealised 7,536 2,565 (2,268) 7,833
depreciation
Closing valuation 13,154 6,325 - 19,479
Closing book cost 17,343 10,107 2,369 29,819
Closing net unrealised (4,189) (3,782) (2,369) (10,340)
depreciation
13,154 6,325 - 19,479
Realised losses on disposals (1,115) (1,033) - (2,148)
Decrease/(increase) in net 7,536 2,565 (2,268) 7,833
unrealised depreciation
Profits/(losses) on investments 6,421 1,532 (2,268) 5,685
2009
Listed AIM Unlisted Total
£'000 £'000 £'000 £'000
Year ended 30 April 2009
Opening book cost 27,424 12,306 101 39,831
Opening unrealised depreciation (3,553) (2,126) (75) (5,754)
Opening valuation 23,871 10,180 26 34,077
Movements in the year:
Purchases at cost 1,017 - - 1,017
Disposals:
Proceeds (6,802) (974) - (7,776)
Net realised losses on disposals (333) (197) - (530)
Increase in net unrealised (8,172) (4,221) (26) (12,419)
depreciation
Closing valuation 9,581 4,788 - 14,369
Closing book cost 21,306 11,135 101 32,542
Closing net unrealised (11,725) (6,347) (101) (18,173)
depreciation
9,581 4,788 - 14,369
Realised losses on disposals (333) (197) - (530)
Increase in net unrealised (8,172) (4,221) (26) (12,419)
depreciation
Losses on investments (8,505) (4,418) (26) (12,949)
Transaction costs
During the year the Company incurred transaction costs of £35,000 (2009:
£7,000) and £21,000 (2009: £31,000) on purchases and sales of investments
respectively. These amounts are included in gains 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 2010
Name of undertaking Class of share % held
RTC Group Ordinary 5.209
Sanderson Group Ordinary 4.610
Victoria Ordinary 4.321
Sinclair (William) Holdings Ordinary 4.078
Avesco Group Ordinary 3.197
Stadium Group Ordinary 3.082
Macfarlane Group Ordinary 3.043
12 Trade and other receivables
2010 2009
£'000 £'000
Sales of investments for future 328 -
settlement
VAT refund on management fees - 189
Dividends receivable 210 249
Prepayment and accrued income 2 2
540 440
13 Trade and other payables
2010 2009
£'000 £'000
Trade and other payables 109 92
14 Bank loan
2010 2009
£'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 2010, was estimated as follows:
2010 2009
£'000 £'000
£5,000,000 fixed at 6.2475% for floating 516 629
interest rate swap expiring 10 July 2012
516 629
16 Share capital
2010 2009
£'000 £'000
Authorised
33,000,000 (2009: 33,000,000) Ordinary shares 8,250 8,250
of 25p each
8,250 8,250
Issued, allotted and fully paid
16,250,000 (2009: 16,250,000) Ordinary shares 4,063 4,063
of 25p each
4,063 4,063
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 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 cash flow hedge
At 30 April 2010 11,917 (1,322) (413) 1,507
At 1 May 2008 11,917 6,740 (291) 1,836
Net losses on - (530) - -
realisation of
investments
Movement in fair value - (12,419) - -
Costs charged to capital - (503) - -
Net deficit after - - - (195)
dividends for the year
retained
Transfer to profit and - - 175 -
loss*
Movement in fair value - - (387) -
of cashflow hedge
As 30 April 2009 11,917 (6,712) (503) 1,641
* The transfer to profit and loss reflects the proportion of the hedge at 1 May
2008 which became ineffective during the year.
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
shareholders shareholders
2010 2010 2009 2009
pence £'000 pence £'000
Ordinary shares 96.94 15,752 64.04 10,406
The net asset value per share is calculated on 16,250,000 (2009: 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
2010 2009
£'000 £'000
Net return before taxation 6,146 (12,066)
Taxation (5) (13)
Net return after taxation 6,141 (12,079)
Net capital return (5,390) 13,452
Movement in fair value of ineffective element of (23) 126
interest rate swap
Decrease in receivables 228 128
Increase/(decrease) in payables 17 (81)
Interest and expenses charged to the capital reserve (295) (503)
Net cash inflow from operating activities 678 1,043
20 Reconciliation of net cash flow to movement in net debt
2010 2009
£'000 £'000
Increase in cash in year 40 239
Repayment of loan - 6,000
Change in net debt 40 6,239
Net debt at 1 May 2009 (3,682) (9,921)
Net debt at 30 April 2010 (3,642) (3,682)
21 Analysis of changes in net debt
At 1 May 2009 Cash flows At 30 April 2010
£'000 £'000 £'000
Cash at bank 318 40 358
318 40 358
Debt due after more than one year (4,000) - (4,000)
(3,682) 40 (3,642)
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. Mr van Heesewijk, as an employee of the Investment Manager, has
an interest. Mr Lenygon is also a director of another investment trust company
managed by Chelverton.
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 2010 (2009: £4 million).
These facilities are used for investment purposes and to aid settlement and
finance placings until other investments have been reduced.
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;
2010 2009
£'000 £'000
Fair value through profit of loss 19,479 14,369
investments
Sensitivity analysis
A 10% increase in the market value of investments at 30 April 2010 would have
increased net assets attributable to shareholders by £1,948,000 (2009:
£1,437,000). 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 2010, 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 Total
one year
£'000 £'000 £'000
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
30 April 2009
Cash and cash equivalents 318 - 318
Bank loan - (4,000) (4,000)
Total exposure to interest 318 (4,000) (3,682)
rates
A loan facility of £4 million was in place at 30 April 2010, repayable on 1 May
2014. Bank borrowings under this facility amounted to £4 million at 30 April
2010 (2009: £4 million), and incur interest at a rate of 1% above LIBOR.
Sensitivity analysis
The Directors believe that at 30 April 2010 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 2010 was £20,377,000 (2009:
£15,127,000). The calculation is based on the Company's credit risk exposure as
at 30 April 2010 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 2010, the level of borrowing was 20.5% (2009: 27.8%) of the value
of the investment portfolio; a reduction in the market value of investments in
the region of 30% 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 2010 At Loans and Assets at Derivatives Total
amortised receivables fair value used for
cost through hedging
profit or
loss
£'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
30 April 2009
At Loans and Assets at Derivatives Total
amortised receivables fair value used for
cost through hedging
profit or
loss
£'000 £'000 £'000 £'000 £'000
Assets as per Balance
sheet
Investments - - 14,369 - 14,369
Trade and other - 440 - - 440
receivables
Cash and cash equivalents - 318 - - 318
Total - 758 14,369 - 15,127
Liabilities as per
Balance sheet
Trade and other payables 92 - - - 92
Bank loan 4,000 - - - 4,000
Derivative financial - - - 629 629
instruments
Total 4,092 - - 629 4,721
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 2010, 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 £516,000 (2009: £629,000).
The following table presents the movement in the level 3 instrument for the
period ended 30 April 2010:
Effective
Ineffective element (80%)
element (20%) to equity
to income (hedge reserve) Total
£'000 £'000 £'000
30 April 2009 126 503 629
Movement in year (23) (90) (113)
30 April 2010 103 413 516
ANNUAL REPORT AND AGM
The foregoing represents extracts from the full text of the Annual Report and
Accounts for the year ended 30 April 2010. The full Report will shortly be
available for download from the following website:
www.chelvertonam.com
Copies will be posted to shareholders shortly.
A copy of the Annual Report and Accounts will be submitted shortly to the UK
Listing Authority and will be available for inspection at the UK Listing
Authority's Document Viewing Facility, which is situated at:
Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Tel no: 020 7066 8224
This years AGM will be held on Friday 24 September 2010 at 12 noon at the
offices of Chelverton Asset Management Limited, 9 Dartmouth Street, London SW1H
9BP.
Capita Sinclair Henderson Limited
25 August 2010
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