Annual Financial Report

SMALL COMPANIES DIVIDEND TRUST PLC ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 APRIL 2012 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 Business Review below. 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 entitlements of the Zero Dividend Preference and Preference shares were repaid. Total net assets and market capitalisation at year end As at 30 April 2012, the Company had a market capitalisation of £15,925,000 (2011: £16,331,000) and total net assets amounted to £17,180,000 (2011: £ 18,208,000). Management fee The fee payable to the Investment Manager is 1% of the gross assets of the Company. In addition, the Investment Manager is entitled to a performance fee of 10% of outperformance of the FTSE SmallCap Index, 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'). FINANCIAL HIGHLIGHTS Discount 30 April 30 April 30 April 2012 2011 % change 2012 Capital Total net assets (£'000) 17,180 18,208 (5.65) Net asset value per Ordinary 105.72p 112.05p (5.65) share† Mid-market price per Ordinary 98.00p 100.50p (2.49) 7.30% share Year ended Year ended 30 April 30 April 2012 2011 % change Revenue Return per Ordinary share 5.53p 5.38p 2.79 Dividends declared per Ordinary share 6.40p 6.20p Total Return Total assets less current liabilities 1.97% 17.31% (excluding bank borrowings) total return* Total net assets total return* 0.02% 21.21% Total expense ratio (including investment 1.89% 1.76% 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 and excluding derivative financial instruments shown as a current liability on the Balance sheet in order that the figure is comparable with 30 April 2011. Negative returns are shown in brackets. CHAIRMAN'S REPORT Results The Company's net asset value per Ordinary share at 30 April 2012 was 105.72p (2011: 112.05p), a decrease over the year of 5.65%. In the year a dividend of 6.40p per share was declared. Since the Company launched, on 12 May 1999, the net asset value per Ordinary share has risen by 10.13%. Since the year end, the net asset value per Ordinary share has fallen to 102.16p as at 23 July 2012 after payment of the fourth interim dividend of 2.35p. The Company is currently invested in 67 companies across 21 sectors. This spread creates a well diversified portfolio which we believe will lead to steady revenue growth and, in time, capital growth. Dividend growth has again been strong in the past year, however in order to pay the increased dividend of 6.40p this has been financed by a small reduction in revenue reserves. As the capital value of no dividend paying shares recovers to the appropriate level, they will be sold and the proceeds reinvested into shares with a more appropriate yield. This process requires patience and is of course the whole reason why a revenue reserve was established in the first place. Following a strong start to the Company's year, unfortunately in the latter part of 2011 share prices started to decline as the problems of the Eurozone began to resurface and equities fell out of favour. Also, following a strong recovery in the first quarter of 2012, the problems of the Southern Eurozone countries have again come to the fore. Gearing The Board, as announced on 22 March 2012, is considering alternatives to replace borrowing facilities. The current facilities are represented by a £4 million fixed loan with Lloyds TSB Bank plc and a £2 million overdraft facility with HSBC Bank plc. At the year end, £0.95 million of the overdraft facility was being used. Dividend The Board has declared a fourth interim dividend of 2.35p per Ordinary share (2011: 2.30p) which when added to the three quarterly interim dividends of 1.35p (2011: 1.30p), equates to a total dividend for the year of 6.40p per Ordinary share (2011: 6.20p), an increase of 3.23% over the previous year. The Company has revenue reserves, which after payment of the fourth dividend represent 83% of the current annual dividend or 5.34p per Ordinary share. Outlook In these uncertain times it is reassuring that the vast majority of the companies we are invested in have reported improved results in the past year. The analysts are generally forecasting steady improvement in the current year. However, clearly with UK "centric" businesses the crisis in the Eurozone affects the UK, particularly confidence. Growth expectations in the UK have been revised again and the squeeze on consumers continues. However, if inflation eases over the next twelve months, and if the Eurozone position finally becomes clearer, we may see a modest level of growth in the UK economy. Lord Lamont of Lerwick Chairman 26 July 2012 INVESTMENT MANAGER'S REPORT In the six months to 30 April 2012 the Company's total return was 9.93%. In the last year the Company's total return on net assets was 0.02%. As it became clearer in the Autumn of 2011 that the UK economy was not going to achieve the level of growth that had been expected and new concerns arose about the Eurozone all equities experienced a sharp decline with UK small companies participating fully. The catalyst to small company under performance at this time was a pick up in the number of earnings downgrades, largely as a result of expectations getting ahead of themselves earlier in the year and a general shift to a `risk off' attitude amongst investors. This was reversed at the turn of the year and small and mid sized companies gained the ground that they had lost as investors moved up the risk curve and whilst the last two months have seen a general reduction in share prices around the world, it is pleasing to be able to report that in this period the gross assets have done relatively well. The resilience of the portfolio is, of course, due in part to the high yield nature of the assets. In the last six months, in the face of extreme share price volatility, the one constant has been the better than expected dividends paid by companies to their shareholders. We expect this to continue to be a feature in the short term and to continue to provide support to equity valuations. For a sustained recovery in the market we need to see directors increasing levels of capital investment which they are now more than capable of self funding as balance sheets have been rebuilt and are, to say the least, robust. The catalyst for this however remains a pick up in business confidence which ultimately has to come from a more settled macro outlook. Portfolio Review In the last year we had, for the first time in a number of years, four takeovers, Chaucer Holdings, Holidaybreak, THB and Dawson Holdings. However it is also interesting to note that these were all announced in 2011 and no further transactions in the portfolio have been announced this calendar year. Three stocks were sold in their entirety. Telecom Plus and Consort Medical were both sold after significant rises in their share prices meant that the dividend yield had consequently fallen very sharply. Fiberweb was sold once it in turn had sold off a large, very profitable, subsidiary which meant it could deleverage its balance sheet but also increased the underlying cyclicality of the business. Holdings were reduced in Trifast, Avesco and Sinclair (William) Holdings after a long period of recovery from the fallout in 2008 and significant growth in capital value in the past year. These companies are beginning to restore and increase their dividends having reduced or completely eliminated them in 2008. As part of our investment process we operate a "top-down" control so that no shareholding can represent more than 5% of the gross assets of the Company and as a result we had to reduce the shareholding in Sinclair (William) Holdings. Other reductions included Arbuthnot, Dee Valley and Hilton Foods. A proxy battle for Victoria, the last remaining listed carpet manufacturer, caused the share price to rise very rapidly to what we believed to be an unsustainable level and we took the opportunity to sell the major part of our holding. With the proceeds from the takeovers above and the reduction in other shareholdings, a surprisingly large number of 19 new shareholdings were added to the portfolio. Companies acquired include, Novae - an insurance company that we purchased at a discount to asset value, Greencore - a convenience and chilled food producer, Marstons - a pub group, St Ives - print, display and marketing, and Menzies - a company involved in newspaper distribution and airline services. It continues to be a source of comfort that we are able to diversify our portfolio by accessing relatively high levels of income from a wide range of sectors. Outlook Against a backdrop of a deteriorating macro environment we expect continued short-term volatility. One effect of this slowdown is that the universe in which the Company can invest has increased substantially and we will be taking this opportunity to slightly increase the market value of our holdings. The timing of a sustained upturn remains uncertain but the recent pick up in director purchases and corporate activity is a tentative step in the right direction in terms of underpinning valuations. For this to translate into a full blown recovery in share prices we need to see an improvement in liquidity. We believe that on the basis of medium-term cash flow prospects, current valuations are attractive and we continue to focus on the ability of our portfolio to deliver income as a key component of our investment process. It is worth reflecting that this process has delivered excellent long-term returns and that we believe this will continue to be the case going forward. As we look forward to the next year there is greater uncertainty than we are all normally used to. The tensions of the Eurozone debt crisis continue to dominate headlines. The recent fall in the price of oil will feed through over time into reduced inflation which will eventually lead to real incomes stabilising. With the reduction in international inflationary pressure there will be an opportunity for a possible further and final rate cut in the UK as mooted by Sir Mervyn King. As we have said before, excellent buying opportunities become available for the Company when short, sharp corrections take place, as solid cash generative companies are marked down with the market but tend to recover rather more quickly. When buyers start to take advantage of the value opportunities available, we believe the Company will show some real progress. Breakdown of Portfolio by Industry at 30 April 2012 Industry % Support Services 14.8 General Financial 13.6 Non Life Insurance 10.6 Travel & Leisure 7.6 Construction & Materials 7.4 Media 6.4 Industrial Engineering 6.2 Software & Computer 5.9 Services Household Goods 5.6 Life Insurance 4.3 General Industrials 3.2 Food Producers 2.9 Industrial Transportation 2.5 Chemicals 2.0 Electronic & Electrical 1.9 Equipment Gas, Water & 1.5 Multi-utilities General Retailers 1.1 Fixed Line 0.9 Telecommunications Leisure Goods 0.6 Mining 0.5 Technology & Hardware 0.5 Equipment 100.0 Source: Capita Sinclair Henderson Limited Twenty Largest Holdings at 30 April 2012 % of portfolio S&U Consumer credit, car finance 3.6 throughout the UK Sanderson Group UK provider of software solutions 3.4 and IT services Macfarlane Group Packaging distribution 3.2 Office2Office Provider of managed procurement and 2.9 business-critical services Personal Group Holdings A group of companies providing 2.6 accident & health insurance, employee benefits, financial advice, and personal insurance and reinsurance broking services Avesco Group Provider of specialist services to 2.5 the corporate presentation, entertainment and broadcast markets Portmeirion Group Markets and manufactures an 2.5 extensive range of high quality tableware, cookware and giftware Sinclair (William) Manufactures and distributes a range 2.5 Holdings of products for the retail and horticultural market Smiths News The UK leading wholesaler of 2.2 newspapers and magazines and a leading UK book wholesaler 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 Chesnara Insurance company 2.2 Arbuthnot Banking Personalised banking and wealth 2.2 management service Hansard Global Supports financial advisers with 2.2 tax-efficient custom configured investment products in a life assurance wrapper GVC Holdings Provides B2B and B2C services to the 2.1 online gaming and sports betting markets Morgan Sindall Group Leading UK construction and 2.1 regeneration group Marshalls Group Supplies the domestic, public sector 2.1 and commercial markets with ranges of hard landscaping products Vp Specialist rental business providing 2.1 products and services to a diverse range of markets including civil engineering, rail, oil & gas exploration, construction, outdoor events and industry Zotefoams Manufacturer of high performance 2.0 foams Jarvis Securities Operates a number of retail 1.9 stockbroking brands that provide nominee, certificated, SIPP and ISA accounts to individuals and organisations. It also provides outsourced financial administration services to investment firms Wilmington Group Provides information and training to 1.9 selected professional business markets Top twenty companies 48.4 total Balance held in 47 51.6 holdings Total portfolio 100.0 Breakdown of Portfolio by Market Capitalisation as at 30 April 2012 Number of Companies >£500m 9 £250 - 500m 7 £100 - 250m 14 £75 - 100m 8 £50 - 75m 8 £25 - 50m 9 £0 - 25m 12 Total 67 % of Portfolio % >£500m 10.5 £250 - 500m 8.8 £100 - 250m 19.2 £75 - 100m 16.4 £50 - 75m 14.3 £25 - 50m 15.5 £0 - 25m 15.3 Total 100.0 Source: Capita Sinclair Henderson Limited David Horner and David Taylor Chelverton Asset Management Limited 26 July 2012 DIRECTORS Lord Lamont of Lerwick (Chairman) David Harris William van Heesewijk Howard Myles 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 (`HMRC') as an authorised investment trust under Sections 1158/1159 of the Corporation Tax Act 2010 for the year ended 30 April 2011. The Directors are of the opinion that the Company has conducted its affairs for the year ended 30 April 2012 and subsequently so as to enable it 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. New regulations for obtaining and retaining investment trust status have been published by HMRC and came into force on 1 January 2012. An application for approval as an investment trust must be made within 90 days after the end of the first accounting period of the Company following implementation of the new regime. The first accounting period affected by the new regulations is the year ending 30 April 2013 and therefore the application must be made by 29 July 2013. If the application is accepted, the Company will be treated as an investment trust company for that period and for each subsequent accounting period, subject to there being no subsequent serious breaches of the regulations. 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, including the net asset value (`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 2012 of 6.40p (2011: 6.20p) per Ordinary share has been declared to shareholders by way of three payments of 1.35p per Ordinary share and a fourth interim payment of 2.35p per Ordinary share. ● The NAV per Ordinary share at 30 April 2012 was 105.72p (2011: 112.05p). ● The total expense ratio (including investment management fees and other expenses but excluding performance fees and exceptional items) for the year ended 30 April 2012 was 1.89% (2011: 1.76%). 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 listing on 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 has taken out an interest rate swap in order to minimise the cash flow interest rate risk that the Company is 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 set out in note 15). The amount of the banking facility currently drawn down is less than the amount of the hedge; the cost of the proportion of the hedge that is thus unutilised is charged to income, while the cost of the balance of the hedge that is being used is charged to equity. 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 financial 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 its own shares, when it is in shareholders' interests as a whole. Dividends paid 30 April 2012 30 April 2011 Payment date pence pence First interim 3 October 2011 1.35 1.30 Second interim 6 January 2012 1.35 1.30 Third interim 10 April 2012 1.35 1.30 Fourth interim 9 July 2012 2.35 2.30 6.40 6.20 The Directors have not recommended a final dividend in respect of the year ended 30 April 2012. The full Annual Report contains the following statements regarding responsibility for the financial statements and management report/ business review included therein. Going concern The Company's business activities, together with the factors likely to affect its future development, performance and position, are described in the Chairman's report and in the Investment Manager's report. The financial position of the Company, its cash flows, liquidity position and borrowing facilities are described in the financial statements. In addition note 23 to the financial statements sets out the Company's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk. The Company has adequate financial resources and no significant investment commitments and as a consequence, the Directors believe that the Company is well placed to manage its business risks successfully despite the economic outlook, and continue to adopt the going concern basis. STATEMENT OF DIRECTORS' 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 (`IFRSs') as adopted by the EU. Company law requires the Directors to prepare such financial statements in accordance with IFRSs and the Companies Act 2006. Under company law the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the Company for that period. In preparing the Company's financial statements, the Directors are required to: * select suitable accounting policies in accordance with IAS 8: `Accounting Policies, Changes in Accounting Estimates and Errors' and then apply them consistently; * present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; * provide additional disclosures when compliance with specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance; * state that the Company has complied with IFRSs, subject to any material departures disclosed and explained in the financial statements; and * make judgements and estimates that are reasonable and prudent. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Company's financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Report of the Directors (including Business Review), Directors' remuneration report and Statement on corporate governance that comply with that law and those regulations, and for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Services Authority. 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. The Directors confirm that, to the best of their knowledge and belief: * the financial statements, prepared in accordance with IFRSs give a true and fair view of the assets, liabilities, financial position and profit of the Company; and * the Annual Report includes a fair review of the development and performance of the Company, together with a description of the principal risks and uncertainties faced. On behalf of the Board of Directors Lord Lamont of Lerwick Chairman 26 July 2012 NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company's statutory accounts for the years ended 30 April 2012 and 2011 but is derived from those accounts. Statutory accounts for 2011 have been delivered to the Registrar of Companies, and those for 2012 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 2012 2012 2011 Revenue Capital Total Revenue Capital Total Note £'000 £'000 £'000 £'000 £'000 £'000 Investments (Losses)/gains on 10 - (699) (699) - 2,818 2,818 investments at fair value through profit or loss Investment income 2 1,167 - 1,167 1,187 - 1,187 Expenses Investment 3 (55) (166) (221) (54) (162) (216) management fee Recovery of VAT 4 45 - 45 - - - on administration and secretarial fees Other expenses 4 (180) - (180) (181) - (181) (190) (166) (356) (235) (162) (397) Net return before 977 (865) 112 952 2,656 3,608 finance costs and taxation Finance costs 6 (78) (235) (313) (77) (232) (309) Net return before 899 (1,100) (201) 875 2,424 3,299 taxation Taxation 7 - - - - - - Net return after 899 (1,100) (201) 875 2,424 3,299 taxation Other comprehensive income Movement in fair 205 156 value of cash flow hedge Total 4 3,455 comprehensive income for the year Revenue Capital Total Revenue Capital Total pence pence pence pence pence pence Net return per: Ordinary share 8 5.53 (6.77) (1.24) 5.38 14.92 20.30 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 2012 Share Share p Capital Hedge Revenue Total capital remium reserve reserve reserve account Note £'000 £'000 £'000 £'000 £'000 £'000 Year ended 30 April 2012 30 April 2011 4,063 11,917 1,102 (257) 1,383 18,208 Total - - (1,100) 205 899 4 comprehensive return for the year Transactions with owners: Dividends paid 9 - - - - (1,032) (1,032) 30 April 2012 4,063 11,917 2 (52) 1,250 17,180 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 return 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 BALANCE SHEET as at 30 April 2012 2012 2011 Note £'000 £'000 Non-current assets Fair value through profit or 10 22,120 22,689 loss investments Current assets Trade and other receivables 12 205 275 Cash and cash equivalents - 1 205 276 Total assets 22,325 22,965 Current liabilities Bank overdraft (950) (248) Trade and other payables 13 (130) (188) Derivative financial instruments 15 (65) - (1,145) (436) Total assets less current 21,180 22,529 liabilities Non-current liabilities Bank loan 14 (4,000) (4,000) Derivative financial instruments 15 - (321) (4,000) (4,321) Total liabilities (5,145) (4,757) Net assets 17,180 18,208 Represented by: Share capital 16 4,063 4,063 Share premium account 17 11,917 11,917 Capital reserve 17 2 1,102 Hedge reserve 17 (52) (257) Revenue reserve 17 1,250 1,383 Equity shareholders' funds 17,180 18,208 The notes form part of these financial statements. These financial statements were approved by the Board and authorised for issue on 26 July 2012. Lord Lamont of Lerwick, Chairman 26 July 2012 STATEMENT OF CASH FLOWS for the year ended 30 April 2012 2012 2011 Note £'000 £'000 Operating activities Investment income received 1,162 1,195 Interest income received 6 - Investment management fee paid (222) (210) Administration and secretarial (58) (60) fees paid Refund of VAT paid on 45 - administration and secretarial fees Other cash payments (119) (125) Cash generated from operations 814 800 Loan interest paid (352) (346) Net cash inflow from operating 19 462 454 activities Investing activities Purchases of investments (5,703) (4,295) Sales of investments 5,570 4,235 Net cash outflow from investing (133) (60) activities Financing activities Dividends paid (1,032) (999) Net cash outflow from financing (1,032) (999) activities Decrease in cash and cash 20 (703) (605) equivalents for year Cash and cash equivalents at 21 (247) 358 start of year Cash and cash equivalents at end 21 (950) (247) of year Cash and cash equivalents at 30 April comprise: Cash at bank - 1 Bank overdraft (950) (248) (950) (247) 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 2012 1 ACCOUNTING POLICIES Small Companies Dividend Trust PLC is a Company domiciled in the UK. 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 EU) 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. The accounting policies adopted are consistent with those of the previous financial year. Amendments to the following relevant accounting standards were effective for this financial year but have no impact on the financial statements: ● IAS 24 Related Party Disclosures - revised definition of related parties ● IAS 32 Financial Instruments: Presentation - amendments relating to classification of rights issues ● Minor amendments to various standards and interpretations resulting from the May 2012 Annual Improvements to IFRSs The following accounting standards and their amendments were in issue at the year end but will not be in effect until after this financial year. They are not expected to significantly impact the financial statements: ● IFRS 1 First-time adoption of International Financial Reporting Standards - replacing fixed dates for certain exemptions with the date of transition to IFRS and additional exemption for entities ceasing to suffer from severe hyperinflation (effective for annual periods beginning on or after 1 July 2011) ● IFRS 7 Financial Instruments: Disclosures - amendments enhancing disclosures about transfers of financial assets (effective for annual periods beginning on or after 1 July 2011) ● IAS 1 Presentation of Financial Statements - amendments to revise the way other comprehensive income is presented (effective for annual periods beginning on or after 1 July 2012) ● IFRS 13 Fair Value Measurement (effective for annual periods beginning on or after 1 January 2013) ● IFRS 7 Financial Instruments: Disclosures - amendments enhancing disclosures about offsetting of financial assets and financial liabilities (effective for annual periods beginning on or after 1 January 2013 and interim periods within those periods) ● IAS 32 Financial Instruments: Presentation - amendments to application guidance on the offsetting of financial assets and financial liabilities (effective for annual periods beginning on or after 1 January 2014) ● IFRS 9 Financial Instruments - Classification and Measurement (effective for annual periods beginning on or after 1 January 2015) ● IFRS 9 Financial Instruments - Accounting for financial liabilities and de-recognition (effective for annual periods beginning on or after 1 January 2015) ● IFRS 7 Financial Instruments: Disclosures - amendments requiring disclosures about the initial application of IFRS 9 (effective for annual periods beginning on or after 1 January 2015 or otherwise when IFRS 9 is first applied) 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 by the Association of Investment Companies 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 only invests in companies listed in the UK. 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 2012 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 the 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 Company 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% (2011: 75%) of the Investment Manager's fee, 75% (2011: 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 UK 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 2012 2011 £'000 £'000 Income from listed investments UK net dividend income 1,045 974 Unfranked foreign dividend income 116 214 1,161 1,188 Other income Interest on VAT refund (see note 4) 6 - Exchange losses - (1) Total income 1,167 1,187 Total income comprises: Dividends 1,161 1,188 Interest 6 - Other - (1) 1,167 1,187 3 Investment management fee 2012 2011 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Investment 55 166 221 54 162 216 management fee At 30 April 2012 there were amounts outstanding of £56,000 (2011: £57,000). A performance fee was not payable for the year ended 30 April 2012 nor for the year ended 30 April 2011. 4 Other expenses 2012 2011 £'000 £'000 Administration and secretarial fees 58 55 Directors' remuneration (note 5) 58 50 Auditors' remuneration: audit services* 16 16 non-audit services* - - Insurance 6 11 Other expenses* 42 49 Recovery of VAT on administration and (45) - secretarial fees 135 181 * The above amounts include irrecoverable VAT where applicable. JPMorgan Claverhouse (`Claverhouse') brought a case against HMRC to challenge the VAT charged on fund management services paid by investment companies. In June 2007, the case was upheld by the European Court of Justice concluding that fund management services paid by investment companies be exempt from VAT. In 2010, protective claims were submitted to HMRC by the Company to request a repayment of VAT charged to investment companies on their administration and secretarial fees and as a result, in March 2012, the Company received a repayment of VAT totalling £45,000 together with subsequent interest of £6,000 which has been included within the revenue column of the Statement of comprehensive income and within `Other income' in note 2. 5 Directors' Remuneration 2012 2011 £ £ Total fees 57,500 50,000 Remuneration to Directors Lord Lamont (Chairman) 20,000 20,000 D Harris 20,000 17,000 H Myles (appointed 15 March 2011) 17,500 2,000 B N Lenygon (deceased 25 November 2010) - 11,000 W van Heesewijk* - - * Mr van Heesewijk has waived his entitlement to fees. 6 Finance costs 2012 2011 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Interest payable on 91 273 364 87 261 348 bank overdraft and bank loan Movement in fair value (13) (38) (51) (10) (29) (39) of ineffective element of interest rate swap 78 235 313 77 232 309 7 Taxation 2012 2011 £'000 £'000 Based on the revenue return for the year Current tax - withholding tax on foreign - - dividend income The current tax charge for the year is lower than the standard rate of corporation tax in the UK of 26% to 31 March 2012 and 24% from 1 April 2012 (2011: 27.82%). The differences are explained below: 2012 2011 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Revenue on ordinary 899 (1,100) (201) 875 2,424 3,299 activities before taxation Theoretical 232 (284) (52) 244 674 918 corporation tax at 25.83% (2011: 27.82%) Effects of: Capital items not - 181 181 - (784) (784) taxable UK and foreign (300) - (300) (330) - (330) dividends which are not taxable in the UK Excess expenses in 68 103 171 86 110 196 the year Actual current tax - - - - - - charged to the revenue account The Company has unrelieved excess expenses of £17,353,000 (2011: £16,690,000). 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 £899,000 (2011: £875,000) and on 16,250,000 (2011: 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 the capital loss of £1,100,000 (2011: capital profit £2,424,000) and on 16,250,000 (2011: 16,250,000) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year. 9 Dividends 2012 2010 £'000 £'000 Declared and paid per Ordinary share Fourth interim dividend for the year ended 374 366 30 April 2011 of 2.30p (2010: 2.25p) First interim dividend of 1.35p (2011: 219 211 1.30p) Second interim dividend of 1.35p (2011: 219 211 1.30p) Third interim dividend of 1.35p (2011: 220 211 1.30p) 1,032 999 Declared and paid per Ordinary share* Fourth interim dividend for the year ended 382 374 30 April 2012 of 2.35p (2011: 2.30p) * Dividend paid subsequent to the year end. 10 Investments 2012 Listed AIM Total £'000 £'000 £'000 Year ended 30 April 2012 Opening book cost 15,829 9,504 25,333 Opening investment holding losses (719) (1,925) (2,644) Opening valuation 15,110 7,579 22,689 Movements in the year: Purchases at cost 4,300 1,335 5,635 Disposals: Proceeds (4,154) (1,351) (5,505) Net realised (losses)/gains on (102) 421 319 disposals Movement in investment holding (1,291) 273 (1,018) losses Closing valuation 13,863 8,257 22,120 Closing book cost 15,873 9,909 25,782 Closing investment holding losses (2,010) (1,652) (3,662) 13,863 8,257 22,120 Realised (losses)/gains on (102) 421 319 disposals Movement in fair value of (1,291) 273 (1,018) investments at fair value through profit or loss (Losses)/gains on investments (1,393) 694 (699) 2011 Listed AIM Unlisted Total £'000 £'000 £'000 £`000 Year ended 30 April 2011 Opening book cost 17,343 10,107 2,369 29,819 Opening investment holding losses (4,189) (3,782) (2,369) (10,340) 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 at fair value through profit or loss Gains on investments 1,524 1,258 36 2,818 Transaction costs During the year the Company incurred transaction costs of £53,000 (2011: £ 39,000) and £20,000 (2011: £17,000) on purchases and sales of investments respectively. These amounts are included in losses 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: Name of undertaking 30 April 2012 Class of share % held Sanderson Group Ordinary 4.59 RTC Group Ordinary 3.48 Macfarlane Group Ordinary 3.04 12 Trade and other receivables 2012 2011 £'000 £'000 Sales of investments for future - 65 settlement Dividends receivable 201 202 Prepayments and accrued income 4 8 205 275 13 Trade and other payables 2012 2011 £'000 £'000 Purchases of investments for future 1 69 settlement Trade and other payables 129 119 130 188 14 Bank loan 2012 2011 £'000 £'000 Bank loan 4,000 4,000 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 30 April 2012, was estimated as follows: 2012 2011 £'000 £'000 £5,000,000 fixed at 6.2475% for floating 65 321 interest rate swap expiring 10 July 2012 16 Share capital 2012 2011 £'000 £'000 Issued, allotted and fully paid 16,250,000 (2011: 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. Voting rights Voting rights in the Company consist of one vote for each Ordinary share. Duration The Directors shall convene a 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 GM'), 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 a general meeting of the Company to be convened not more than four months after the date of the First GM (or such adjournment). The Restructuring Resolution shall be proposed as a Special Resolution. The Directors shall convene a general meeting not more than four months after the date of the First GM (or such adjournment) if the Restructuring Resolution is not proposed, or four months after the date the Restructuring Resolution is not passed, at which an Ordinary Resolution pursuant to Section 84 of the Insolvency Act 1986 to voluntarily wind-up the Company shall be put to shareholders 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 2011 11,917 1,102 (257) 1,383 Net profits on - 319 - - realisation of investments Movement in fair value - (1,018) - - of investments at fair value through profit or loss Costs charged to capital - (401) - - Net return after - - - (133) dividends for the year retained Movement in fair value - - 205 - of cash flow hedge At 30 April 2012 11,917 2 (52) 1,250 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 - - of investments at fair value through profit or loss Costs charged to capital - (394) - - Net return after - - - (124) dividends for the year retained Movement in fair value - - 156 - of cash flow hedge As 30 April 2011 11,917 1,102 (257) 1,383 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 assets value per attributable value per attributable share to share to 2012 shareholders 2011 shareholders pence 2012 pence 2011 £'000 £'000 Ordinary shares 105.72 17,180 112.05 18,208 The net asset value per share is calculated on 16,250,000 (2011: 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 2012 2011 £'000 £'000 Net return before taxation (201) 3,299 Taxation - - Net return after taxation (201) 3,299 Net capital return 1,100 (2,424) Movement in fair value of ineffective element of (51) (39) interest rate swap Decrease in receivables 5 2 Increase in payables 10 10 Interest and expenses charged to the capital reserve (401) (394) Net cash inflow from operating activities 462 454 20 Reconciliation of net cash flow to movement in net debt 2012 2011 £'000 £'000 Decrease in cash in year (703) (605) Change in net debt (703) (605) Net debt at 1 May 2011 (4,247) (3,642) Net debt at 30 April 2012 (4,950) (4,247) 21 Analysis of changes in net debt At 1 May 2011 Cash flows At 30 April 20 £'000 £'000 12 £'000 Cash at bank 1 (1) - Bank overdraft (248) (702) (950) (247) (703) (950) Debt due after more than one year (4,000) - (4,000) (4,247) (703) (4,950) 22 Related party transactions Under the terms of agreement dated 1 December 2005, the Company appointed Chelverton to be Investment Manager. The fee arrangements for these services and fees payable are set out in the Report of the Directors in the full Annual Report and in note 3 to the financial statements. 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. All of the Company's 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 2012 (2011: £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 2012 and £950,000 was drawn down under the facility (2011: £248,000). This facility is used for short-term liquidity. Details can be found below. 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 reporting of relevant information from the Investment Manager. Investment performance is reviewed at each Board meeting. The Company's exposure to changes in market prices at 30 April on its investments is as follows: 2012 2011 £'000 £'000 Fair value through profit or loss 22,120 22,689 investments Sensitivity analysis A 10% increase in the market value of investments at 30 April 2012 would have increased net assets attributable to shareholders by £2,212,000 (2011: £ 2,269,000). 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 denominated 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 and on its overdraft facility. 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 2012, there is a £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 2012 Cash and cash equivalents and (950) - (950) bank overdraft Bank loan - (4,000) (4,000) Total exposure to interest (950) (4,000) (4,950) rates 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 A loan facility of £4 million was in place at 30 April 2012, repayable on 1 May 2014. Bank borrowings under this facility amounted to £4 million at 30 April 2012 (2011: £4 million), and incur interest at a rate of 1% above LIBOR. On 3 February 2011 the Company entered into 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 million; and (ii) 10% of custody assets from time to time. The purpose of the facility is for short-term liquidity and it 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. Sensitivity analysis The Directors believe that at 30 April 2012 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 2012 was £22,325,000 (2011: £22,965,000). The calculation is based on the Company's credit risk exposure as at 30 April 2012 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 2012, the level of borrowing was 22.4% (2011: 18.7%) of the value of the investment portfolio; a reduction in the market value of investments in the region of 26% would require disposal of investments to ensure ongoing compliance with the lending covenants. The covenants are 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 2012 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 - - 22,120 - 22,120 Trade and other - 205 - - 205 receivables Total - 205 22,120 - 22,325 Liabilities as per Balance sheet Trade and other payables 130 - - - 130 Bank loan 4,000 - - - 4,000 Bank overdraft 950 - - - 950 Derivative financial - - - 65 65 instruments Total 5,080 - - 65 5,145 30 April 2011 Assets at fair value through Derivatives At Loans and profit or used for Total amortised receivables loss hedging £'000 cost £'000 £'000 £'000 £'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 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 (i.e. not identical) assets in active markets. • quoted prices for identical or similar assets or liabilities in markets that are not active. Characteristics of an inactive market include a significant decline in the volume and level of trading activity, the available prices vary significantly over time or among market participants or the prices are not current. • inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals). • inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market-corroborated inputs). Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs). The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. 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 investments. 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 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 2012, 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 million floating rate swap fixed at 6.2475% and expiring on 10 July 2012 is £65,000 (2011: £321,000). The following table presents the movement in the Level 3 instrument for the year ended 30 April 2012: Ineffective Effective Total element (20%) element (80%) £'000 to income to equity £'000 (hedge reserve) £'000 30 April 2011 64 257 321 Movement in year (51) (205) (256) 30 April 2012 13 52 65 24 POST BALANCE SHEET EVENT Since 30 April 2012 there has been a period of stock market volatility resulting in a reduction in the value of the investment portfolio. As at the close of trading on 23 July 2012 the value of the investment portfolio stood at approximately £21.48 million. The effect of this movement on the net asset value is disclosed in the Chairman's report. ANNUAL REPORT AND AGM The foregoing represents extracts from the full text of the Annual Report and Accounts for the year ended 30 April 2012. The full Report will shortly be available for download from the following website: www.chelvertonam.com Copies will be posted to shareholders shortly. The AGM will be held on Friday, 7 September 2012 at 11.00 am at the offices of Chelverton Asset Management Limited, 9 Dartmouth Street, London SW1H 9BP. 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. Capita Sinclair Henderson Limited 26 July 2012 Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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