Final Results

Acorn Income Fund Ld 06 April 2006 ACORN INCOME FUND LIMITED Results for the year ended 31 December 2005 CHAIRMAN'S STATEMENT I am pleased to present to Shareholders the Results of Acorn Income Fund Limited, (the 'Company') for the year ended 31 December 2005. During the year under review the Company increased its net asset value per share(1) by 35.26 pence, after distributing dividends totalling 9.00 pence per share, and achieved a total return per share of 44.26 pence. This represents a total annual return of 31.96% based upon the opening net asset value per share, outperforming our benchmark. Since 31 December 2005 the net asset value per share(1) has continued to rise, reaching 194.04 pence per share at the end of March 2006. The Company has continued to benefit from unrealised gains in its Smaller Companies Portfolio. The High Income Portfolio achieved modest capital growth in the year despite the adverse trend in Sterling interest rates. The market price of the Company's shares increased from 128.50 pence at the start of 2005 to 158.75 pence at the end of the year and at the close of business on 31 March 2006 was 184.50 pence. These market prices reflect discounts to net asset value per share(1) of 8.55%, 9.82% and 4.92%. Previously the net asset values per Ordinary Share published monthly through the London and Channel Islands Stock Exchanges were based on investments valued at mid market prices. However, in accordance with new accounting standards, the investments have been valued at fair value (bid price) in these results. Following recent guidance from the Association of Investment Trusts ('AITC'), from the start of 2006 net asset values announced on the London Stock Exchange and The Channel Islands Stock Exchange have been prepared using both bid and mid prices of investments. In accordance with the Articles of Association of the Company, a Special Resolution will be proposed at this year's Annual General Meeting that the Company ceases to continue as an investment company. If that resolution is passed, the Directors will be required to formulate proposals to be put to Shareholders to reorganise, unitise or reconstruct the Company or to wind up the Company. Notwithstanding that such a Special Resolution requires 75% of those shareholders voting to vote in favour for it to be carried, your Board announced, on 21 February 2006, that it is of the view that, if a simple majority of shareholders voting on the resolution vote in its favour, it will put forward proposals shortly thereafter to Shareholders which would include the opportunity for those shareholders that do not wish to continue with the Company to receive cash at close to net asset value. A circular convening the Annual General Meeting, which is expected to be held on 26 June 2006, will be sent to Shareholders in due course. Our Investment Advisers urge caution as to anticipated returns in 2006 from the High Income Portfolio but are more positive about prospective returns on the Smaller Company Portfolio. D.M. Bralsford 5 April 2006 (1) Investments valued at bid prices. (2) Investments valued at mid prices. INVESTMENT ADVISER'S REPORT - SMALLER COMPANIES PORTFOLIO The Smaller Companies Portfolio has performed extremely well during the past twelve months. In order to achieve and sustain our income requirements, we have deliberately focussed on companies with good asset backing and strong cash flow. Inevitably, for us to achieve the potential for growth in share prices we have needed to be contrarian. In the past, our decision to invest in the industrial and business services sectors of the economy may have been perceived to be at odds with the approach of many of our competitors. However, there is no doubt that the majority of our companies are delivering impressive results at the moment and that after a long period where business investment was declining or at best static, a strong improvement is underway. The portfolio consists of many of the most successful international and domestic businesses based in the United Kingdom. There are more fashionable sectors in the Stock Market than those in which the Company invests but it would appear that we are facing economic conditions where market share and global diversification are major strengths for any business seeking to outperform. As a result, we are very confident of our ability to deliver above average results in the future. During the year under review, a number of our companies have benefited from strong trading conditions and the largest contributors to performance were Rotork, Halstead (James), where special dividends have been a major bonus for shareholders, Pendragon, Renishaw, BSS Group, Robert Walters, Fenner, Laird Group, Primary Health Properties and VP Group. In most cases the improved results were achieved not just through organic growth but acquisitions as well. Wellington Holdings and PD Ports were the subjects of corporate activity and achieved good gains on our investment cost. We maintained our tough stance towards non-performers and sold Business Post and TT Electronics where results did not meet our expectations. Overall portfolio activity was fairly low, reflecting our satisfaction with progress at the majority of our companies. The proposed merger of Abacus and Deltron was not enough to reverse the decline in the Abacus share price during the period under review. However, we are confident that the deal will prove to be beneficial for shareholders in both companies in due course. The immediate outlook for the Company appears to be very positive and will be even more so, should sterling weaken as a result of lower domestic economic growth in the months ahead. Corporate activity is also on the increase as business confidence improves and it is quite possible that we shall see further industry consolidation and realise premiums for more of our companies in the year ahead. P Webb Unicorn Asset Management Limited 5 April 2006 INVESTMENT ADVISER'S REPORT - HIGH INCOME PORTFOLIO During the review period Sterling bond markets, especially Gilt-edged securities, fluctuated in thin volume, and a lack of market breadth was a constant theme. However, post speculation over the result of the United Kingdom General Election, fixed income markets began to rally as investors became confident that the rise in inflation above the Government's defined harmonized rate target of 2.00% would be temporary. Indeed the Bank of England went to considerable lengths to reassure market participants and even found the confidence to cut interest rates by a quarter of one percent in early August. This was largely in response to a sharp fall in retail sales and increasing pressure upon manufacturing. It later transpired from the minutes of the meeting that this was against the wishes of the Bank Governor who, for the first time, found himself in the minority when the votes were counted. Meanwhile, the Federal Reserve Board continued with its tightening policy, raising U.S. interest rates on six occasions during 2005. They also made it clear that further increases were in the pipeline, albeit at a reduced pace. The European Central Bank also raised interest rates, as did many other Central Banks, as a precaution against rising inflation, especially higher energy prices. This left the Bank of England somewhat isolated and may lead to some pressure on Sterling. Sterling bond markets were further agitated by Gordon Brown's decision to rebase his self-imposed golden rule (borrowing must be for investment purposes only) for the second time. In so doing he has risked his reputation for financial prudence. This came hard on the heels of the Treasury's admission that they had considerably overstated the prospects for United Kingdom growth. Financial markets have become increasingly concerned at the ever expanding tendency of the United Kingdom's budget deficit which shows no sign of peaking or abating. Meanwhile the Government's tax take as a percentage of GDP continues to rise sharply. One noticeable feature of the review period has been the surging demand from pension funds trying to match their assets with liabilities which has caused very long dated (30 years plus in duration) yields to fall to historically low levels. However, we view this as a temporary phenomenon and were drawn to statements from Messrs Greenspan, King and Trichet, arguably the world's premier central bankers. All three expressed both surprise and concern at the level of long-term interest rates. In fact, Monsieur Trichet went further, 'an underestimation of risk may have pushed asset prices beyond their intrinsic value, especially in fixed income markets'. Looking ahead we view bond markets as slightly vulnerable but likely to remain in a trading range with a downward price bias. J Goodey Collins Stewart Asset Management Limited 5 April 2006 The financial information set out in this announcement does not constitute the Company's statutory financial statements for the year ended 31 December 2005. The results for the year ended 31 December 2005 are audited. INCOME STATEMENT for the year ended 31 December 2005 Revenue Capital Total Revenue Capital Total (restated) (restated) 2005 2005 2005 2004 2004 2004 Notes £'000 £'000 £'000 £'000 £'000 £'000 Gains on investments 4 - 12,177 12,177 - 6,784 6,784 Income 5 3,391 - 3,391 2,945 - 2,945 Management fee 6 (176) (529) (705) (162) (487) (649) Other expenses 7 (158) (111) (269) (161) (199) (360) ---------- ---------- ---------- ---------- ---------- ---------- Net return on ordinary 3,057 11,537 14,594 2,622 6,098 8,720 activities before finance costs Interest payable and similar 9 (373) (1,120) (1,493) (394) (1,181) (1,575) charges ---------- ---------- ---------- ---------- ---------- ---------- Net return for the year 2,684 10,417 13,101 2,228 4,917 7,145 ---------- ---------- ---------- ---------- ---------- ---------- Total return per Ordinary Share 11 9.07p 35.19p 44.26p 7.53p 16.61p 24.14p Dividend per Ordinary Share 10 9.00p - 9.00p 9.00p - 9.00p (distributed) The total columns of this statement represent the Income Statement of the Company. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES for the year ended 31 December 2005 Revenue Capital Total Revenue Capital Total (restated) (restated) 2005 2005 2005 2004 2004 2004 Note £'000 £'000 £'000 £'000 £'000 £'000 Net return for the year 2,684 10,417 13,101 2,228 4,917 7,145 ---------- ---------- ---------- Prior year adjustment 3 - 601 601 ---------- ---------- ---------- Total recognised gains and 2,684 9,816 12,500 losses recognised since last annual report ---------- ---------- ---------- The revenue and capital columns represent supplementary information. All revenue and capital items in the above statements derive from continuing operations. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS For the year ended 31 December 2005 Share Share Revenue Special Capital Total capital premium reserve reserve reserve Note £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1 January 2005 as 7,400 17,079 882 10,000 6,230 41,591 previously stated Prior year adjustment 3 - - - - (601) (601) --------- --------- --------- --------- --------- --------- Balance as at 1 January 2005 as 7,400 17,079 882 10,000 5,629 40,990 restated Return for the year - - 2,684 - 10,417 13,101 Dividends paid 10 - - (2,664) - - (2,664) --------- --------- --------- --------- --------- --------- Balance as at 31 December 2005 7,400 17,079 902 10,000 16,046 51,427 --------- --------- --------- --------- --------- --------- For the year ended 31 December 2004 Share Share Revenue Special Capital Total capital premium reserve reserve reserve Note £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1 January 2004 as 7,400 17,079 1,318 10,000 1,534 37,331 previously stated Prior year adjustment 3 - - - - (822) (822) --------- --------- --------- --------- --------- --------- Balance as at 1 January 2004 as 7,400 17,079 1,318 10,000 712 36,509 restated Return for the year as restated - - 2,228 - 4,917 7,145 Dividends paid 10 - - (2,664) - - (2,664) --------- --------- --------- --------- --------- --------- Balance as at 31 December 2004 7,400 17,079 882 10,000 5,629 40,990 as restated --------- --------- --------- --------- --------- --------- BALANCE SHEET as at 31 December 2005 2005 2004 (restated) Notes £'000 £'000 Fixed assets Listed investments 12 72,075 61,616 Current assets Debtors 13 651 1,271 Cash at bank 5,238 4,242 ---------- ---------- 5,889 5,513 Creditors - amounts falling due within one year Other creditors 14 (921) (523) Bank loan 15 (25,616) - ---------- ---------- (26,537) (523) ---------- ---------- Net current (liabilities)/assets (20,648) 4,990 ---------- ---------- Total assets less current liabilities 51,427 66,606 Creditors - amounts falling due after more than one year Long-term bank loan 15 - (25,616) ---------- ---------- Net asset value 51,427 40,990 ---------- ---------- Share capital and reserves Called-up share capital 16 7,400 7,400 Share premium 17 17,079 17,079 Revenue reserve 902 882 Special reserve 17 10,000 10,000 Capital reserve 17 16,046 5,629 ---------- ---------- Total shareholders' funds attributable to equity interests 51,427 40,990 ---------- ---------- Net asset value per Ordinary Share 18 173.74p 138.48p CASH FLOW STATEMENT for the year ended 31 December 2005 2005 2004 (restated) Notes £'000 £'000 Net cash inflow from operating activities 19 2,533 1,932 Servicing of finance Interest paid (1,607) (1,431) ---------- ---------- Net cash outflow from servicing of finance (1,607) (1,431) Investing activities Purchase of investments (16,377) (17,318) Sale of investments 19,111 20,127 ---------- ---------- Net cash inflow from investing activities 2,734 2,809 Equity dividends paid (2,664) (2,664) ---------- ---------- Cash inflow before financing 996 646 Net cash flow from financing - - ---------- ---------- Increase in cash in the year 20 996 646 ---------- ---------- Opening cash balance 4,242 3,596 Increase in cash in the year 996 646 ---------- ---------- Closing cash balance 5,238 4,242 ---------- ---------- NOTES TO THE RESULTS for the year ended 31 December 2005 1. Accounting policies The accounting policies, all of which have been applied consistently throughout the year, in the preparation of the Company's results, are set out below: a) Accounting convention The results have been prepared under the historical cost convention, as modified by the revaluation of investments. b) Income Dividends receivable on equity shares are taken into account on the ex-dividend date. Income on debt and fixed interest securities is recognised on an accruals basis. Dividends received from United Kingdom registered companies are accounted for net of imputed tax credits. Bank interest is accounted for on an accruals basis. c) Expenses All expenses are accounted for on an accruals basis. Expenses are charged through the revenue reserve except as follows: (i) expenses which are incidental to the acquisition or disposal of an investment are charged through the capital reserve; (ii) 75% of the Company's management fee and financing costs are charged to the capital reserve in line with the Board's expected long-term split of returns between income and capital gains from the investment portfolio; and (iii) 100% of any performance fee is charged to the capital reserve. d) Capital reserve The following are accounted for in the capital reserve: (i) realised gains and losses on the realisation of investments; (ii) unrealised gains and losses on investments; and (iii) expenses charged to the capital reserve in accordance with the above accounting policies. e) Transaction costs Previously, transaction costs incurred on the acquisition of an investment were included within the cost of that investment and transaction costs incurred on the disposal of an investment were deducted from the proceeds on sale. However, in accordance with Financial Reporting Standard 26 ' Financial Instruments: Measurement' ('FRS 26'), transaction costs are now charged through the Income Statement to the capital reserve in the period in which they are incurred. f) Investments Classification In accordance with FRS 26, all investments are now classified as 'fair value through profit or loss '. The Smaller Companies Portfolio and the High Income Portfolio are managed and their performance evaluated on a fair value basis, in accordance with a documented investment strategy. Information about each portfolio is provided internally to the Company's Board of Directors. Accordingly, upon initial recognition, the investments are designated by the Company as at 'fair value through profit or loss'. Recognition The Company recognises financial assets held as fair value through profit or loss assets on the date it commits to purchase the instruments. From this date, any gains and losses arising from the changes in fair value of the assets are recognised in the capital reserve. Measurement Fair value through profit or loss assets are initially recognised at cost, being the fair value of the consideration given, excluding transaction costs associated with the investment (see note 1e). Subsequent to initial recognition, all fair value through profit or loss assets are measured at fair value with changes in value being recognised in the Income Statement and taken to the capital reserve. For investments actively traded in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices as at the close of business on the Balance Sheet date. This differs from prior periods where investments were measured at quoted market mid prices. The impact of this is disclosed in note 3. Derecognition A fair value through profit or loss asset is derecognised when the Company loses control over the contractual rights that comprise that asset. This occurs when rights are realised, expire or are surrendered. Realised gains and losses on fair value through profit or loss assets sold are calculated as the difference between the sales proceeds (excluding transaction costs (see note 1e)) and costs. Fair value through profit or loss assets that are sold are derecognised and corresponding receivables from the buyer for the payment are recognised as of the date the Company commits to sell the assets. The Company uses the weighted average method to determine realised gains and losses on derecognition. g) Impact of revisions to United Kingdom accounting standards In compliance with Financial Reporting Standard 25 'Financial Instruments: Disclosure and Presentation' ('FRS 25') and FRS 26, the Company has designated and reclassified all investments to 'fair value through profit or loss'. Fair value through profit or loss assets are now measured at Stock Exchange quoted market bid prices whereas they were previously valued at quoted market mid prices. In addition, the transaction costs incurred on the purchase and sale of investments are now charged through the Income Statement in the period in which they are incurred instead of being included within the cost of the investment or deducted from the proceeds of a sale. The impact of this is disclosed in note 3. 2. Taxation The Company has been granted exemption from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and is charged an annual exemption fee of £600 (2004: £600). 3. Change of accounting policy As explained in note 1g, charges incurred on the purchase and sale of fair value through profit or loss investments are now charged through the Income Statement in the period in which they are incurred instead of being included within the cost of the investment or deducted from the proceeds of a sale. This had no impact on the net asset value of the Company or reserves but impacted the unrealised and realised gain or loss on investments as below. However, the effect of valuing investments at quoted market bid prices not only impacts upon the unrealised gain or loss on investments, but also on the net asset value (see note 18). The valuation of investments at bid price instead of mid price has reduced the net asset value at 31 December 2005 by £681,000 (2004: £601,000). Realised gains Movements in Other expenses on fair value unrealised gains/ through profit (losses) on fair or loss value through investments profit or loss investments £'000 £'000 £'000 Gain for the year ended 31 December 2005 under 3,821 8,325 (158) the previous accounting policy Transaction charges 126 (15) (111) Valuation of investments at bid prices - (80) - -------- -------- -------- Gain/(expense) for the year ended 31 December 3,947 8,230 (269) 2005 under the current accounting policy -------- -------- -------- Realised losses Movements in Other expenses on fair value unrealised gains/ through profit (losses) on fair or loss value through investments profit or loss investments £'000 £'000 £'000 (Loss)/gain for the year ended 31 December 2004 (as previously stated) (5,699) 12,063 (161) Transaction charges 267 (68) (199) Valuation of investments at bid prices - 219 - -------- -------- -------- (Loss)/gain/(expense) for the year ended 31 December 2004 (as restated) (5,430) 12,214 (360) -------- -------- -------- The transaction costs associated with the purchase and sale of investments have been shown separately in the note to the Cash Flow Statement. Consequently, the purchase of fair value through profit or loss investments decreased by £83,182 (2004: £137,624), the proceeds on sale of fair value through profit or loss investments increased by £26,592 (2004: £61,017) and the net cash inflow from operating activities decreased by £109,774 (2004: £198,641) 4. Gains/(losses) on investments 2005 2004 (restated) £'000 £'000 Realised gain/(loss) on sales 3,947 (5,430) Movement in unrealised appreciation/depreciation 8,230 12,214 ---------- ---------- 12,177 6,784 ---------- ---------- 5. Income 2005 2004 £'000 £'000 Dividend income 2,512 2,093 Bond interest 634 666 Bank interest 245 186 ---------- ---------- 3,391 2,945 ---------- ---------- 6. Management fee The Manager of the Company is entitled under the Management Agreement with the Company to receive a management fee from the Company at the annual rate of 1.0% of the total assets of the Company, payable quarterly in arrears. Where any investments comprised in the assets of the Company are in funds managed by or advised by the Manager or Investment Adviser or an affiliate of either of them, the value of such investments is deducted from total assets for the purposes of calculating the management fee. In addition, the Manager is entitled to receive a performance fee, payable at the end of each financial period of the Company, at the rate of 15% of any excess of the net asset value per share (with investments valued at mid prices) over the benchmark net asset value per share as at the last calculation day in the relevant financial period, multiplied by the time weighted number of shares in issue within such period. The benchmark net asset value per share is the higher of 104.8p, compounded at 10% per annum since 31 December 1999, and the highest net asset value per share as of the last calculation day in any preceding financial period. When calculating the performance fee, the net asset value per share is reduced by the amount that the dividend per share paid during that year is less than 8.5p. As at 31 December 2005 the benchmark net asset value per share was 185.66p (2004: 168.78p). No performance fee has been paid in respect of the year ended 31 December 2005 (2004: nil). The Manager has delegated the obligations for the performance of the investment management services to Unicorn Asset Management Limited ('the Smaller Companies Investment Adviser') and Collins Stewart Portfolio Management Limited ('the High Income Investment Adviser'). The agreements are between the Investment Advisers and the Manager, not the Company. All Investment Advisory fees are paid out of the management fees and performance fees received by the Manager from the Company. Both Investment Advisers are entitled to receive an annual fee at the rate of 0.5% of the total assets attributable to the investments in relation to which the Investment Adviser acts. The Smaller Companies Investment Adviser is entitled to 5/8ths of the Manager's performance fee, while the Manager may, at its discretion, pay the High Income Investment Adviser a proportion of the remaining performance fee. In addition, the Smaller Companies Investment Adviser is entitled to receive, from the Manager, a fixed annual fee of £7,500 in relation to marketing services provided to investors. The Investment Advisory Agreements may be terminated by the Manager or the Investment Advisers, giving not less than 12 months' notice in writing, or otherwise in circumstances where one of the parties has a receiver appointed over its assets or if an order is made or an effective resolution passed for the winding up of one of the parties. On termination the Investment Adviser shall be entitled to receive all fees accrued up to the date of the termination (or thereafter if the Investment Adviser necessarily incurs expenses arising out of the termination of the agreement) but shall not be entitled to compensation, except in the case of a wrongful termination by the Manager. 7. Other expenses Revenue Capital Total Revenue Capital Total (restated) (restated) 2005 2005 2005 2004 2004 2004 £'000 £'000 £'000 £'000 £'000 £'000 Custody and settlement fees 39 - 39 38 - 38 Auditors' remuneration 9 - 9 9 - 9 Directors' remuneration 40 - 40 40 - 40 (note 8) Transaction charges - 111 111 - 199 199 Other expenses 70 - 70 74 - 74 ---------- ---------- ---------- ---------- ---------- ---------- 158 111 269 161 199 360 ---------- ---------- ---------- ---------- ---------- ---------- 8. Directors' remuneration 2005 2004 £'000 £'000 David Martin Bralsford 16 16 John Michael McKean 12 12 John Boothman 12 12 Shane Le Prevost - - ---------- ---------- 40 40 ---------- ---------- No bonus or pension contributions were paid or payable on behalf of the Directors. Shane Le Prevost waived his rights to his Director's fee for the year (2004: nil). 9. Interest payable and similar charges The interest payable relates to interest due on the bank loan, details of which are disclosed in note 15. 10. Dividends in respect of equity shares 2005 2005 2004 2004 £'000 pence £'000 pence Dividends on Ordinary Shares: First interim paid 592 2.00 592 2.00 Second interim paid 592 2.00 592 2.00 Third interim paid 592 2.00 592 2.00 Special dividend paid 296 1.00 296 1.00 Fourth interim paid 592 2.00 592 2.00 ---------- ---------- ---------- ---------- 2,664 9.00 2,664 9.00 ---------- ---------- ---------- ---------- 11. Return per Ordinary Share The revenue return per Ordinary Share is based on net revenue of £2,684,205 (2004: £2,227,687) and on a weighted average number of 29,600,002 (2004: 29,600,002) Ordinary Shares in issue throughout the year. The capital gain per Ordinary Share is based on the net capital gain of £10,416,826 (2004: gain of £4,917,396) and on a weighted average number of 29,600,002 (2004: 29,600,002) Ordinary Shares in issue throughout the year. 12. Listed investments Smaller High Income Smaller High Income Companies Portfolio Companies Portfolio Portfolio Portfolio (restated) Total (restated) Total (restated) 2005 2005 2005 2004 2004 2004 £'000 £'000 £'000 £'000 £'000 £'000 Opening valuation 52,626 8,990 61,616 49,228 8,747 57,975 Purchases at cost 8,519 8,666 17,185 12,149 5,170 17,319 Sales - proceeds (12,462) (6,441) (18,903) (15,247) (5,215) (20,462) - realised 4,036 (89) 3,947 23 (5,453) (5,430) gains/(losses) Movement in 8,002 228 8,230 6,473 5,741 12,214 unrealised appreciation / depreciation ---------- ---------- ---------- ---------- ---------- ---------- Closing valuation 60,721 11,354 72,075 52,626 8,990 61,616 ---------- ---------- ---------- ---------- ---------- ---------- Closing book cost 33,938 12,321 46,259 33,845 10,185 44,030 Closing unrealised 26,783 (967) 25,816 18,781 (1,195) 17,586 appreciation/ (depreciation) ---------- ---------- ---------- ---------- ---------- ---------- Closing valuation 60,721 11,354 72,075 52,626 8,990 61,616 ---------- ---------- ---------- ---------- ---------- ---------- Previously recognised as unrealised appreciation/depreciation Smaller High Income Smaller High Income Companies Portfolio Companies Portfolio Portfolio Portfolio Total (restated) (restated) Total (restated) 2005 2005 2005 2004 2004 2004 £'000 £'000 £'000 £'000 £'000 £'000 Realised gains/ 662 4 666 (211) 240 29 (losses) attributable to current year Amounts previously 3,374 (93) 3,281 234 (5,693) (5,459) recognised as unrealised appreciation / (depreciation) on these sales ---------- ---------- ---------- ---------- ---------- ---------- Gains/(losses) 4,036 (89) 3,947 23 (5,453) (5,430) realised on investments sold ---------- ---------- ---------- ---------- ---------- ---------- 13. Debtors 2005 2004 £'000 £'000 Accrued income 563 665 Amounts due from brokers 71 588 Other debtors 17 18 ---------- ---------- 651 1,271 ---------- ---------- 14. Other creditors 2005 2004 £'000 £'000 Investments outstanding for settlement 499 - Management fee 185 167 Bank interest 199 313 Other creditors 38 43 ---------- ---------- 921 523 ---------- ---------- 15. Bank loan 2005 2004 £'000 £'000 Bank of Scotland International facility 25,616 25,616 ---------- ---------- Under loan agreements dated 28 September 1999 and 21 December 2000 between the Company and Bank of Scotland International, a term loan of £25,616,000 has been made available. The Company has extended the repayment date of the loan from 11 February 2006 to 31 October 2006 - the terms of the loan remain unchanged. In prior periods the bank loan had been accounted for as a creditor falling due after more than one year, however, as the repayment date is now 31 October 2006, the bank loan has been included in amounts falling due within one year. The interest rates payable on the loan are based on LIBOR plus a margin of 1% plus Mandatory Liquid Asset ('MLA') costs and are fixed as follows: 2005 2004 £'000 £'000 Fixed until 31/01/06 at 5.73188% (2004: 28/02/05 at 6.195%) 5,000 5,000 Fixed until 31/01/06 at 5.7375% (2004: 27/04/05 at 5.963%) 5,000 5,000 Fixed until 31/01/06 at 5.7375% (2004: 27/04/05 at 5.963%) 5,000 5,000 Fixed until 31/01/06 at 5.74503% (2004: 30/09/05 at 5.445%) 5,616 5,616 Fixed until 31/01/06 at 5.71423% (2004: 09/12/05 at 5.885%) 5,000 5,000 ---------- ---------- 25,616 25,616 ---------- ---------- The average cost of borrowings at the year end was 5.73% (2004: 5.88%). 16. Share capital 2005 2004 £'000 £'000 Authorised: 40,000,000 Ordinary Shares of 25p 10,000 10,000 ---------- ---------- Allotted, called up and fully paid: 29,600,002 Ordinary Shares of 25p 7,400 7,400 ---------- ---------- 17. Reserves The special reserve was created when the Company cancelled part of its share premium account, transferring it to a distributable reserve to allow the buy-back and cancellation of up to 14.99% of the Ordinary Shares. The capital reserve comprises an unrealised capital reserve of £25,816,830 (2004: £17,586,421) and a deficit on the realised capital reserve of £(9,770,940) (2004: £(11,957,357)). 18. Net asset value per Ordinary Share 2005 2004 (restated) pence pence Balance at 1 January as previously stated 140.51 126.12 Prior year adjustment (2.03) (2.78) ---------- ---------- Opening net asset value per Ordinary Share 138.48 123.34 Total return per Ordinary Share 44.26 24.14 Dividend per Ordinary Share (9.00) (9.00) ---------- ---------- Closing net asset value per Ordinary Share 173.74 138.48 ---------- ---------- The net asset value per Ordinary Share is based on the net assets attributable to equity Shareholders of £51,427,357 (2004: £40,990,327) and on 29,600,002 (2004: 29,600,002) Ordinary Shares in issue at the end of the year. These results have been prepared in accordance with the provisions of FRS 26. The effect of this is to bring into the Balance Sheet the concept of 'fair value', with the Company's investment portfolio being valued at bid market prices. However, in accordance with the SORP for ITCs (prior to its December 2005 revision), the net asset value reported each month to the London Stock Exchange and The Channel Islands Stock Exchange reflected these investments valued at Stock Exchange quoted market mid prices. The monetary effects of FRS 26 have resulted in a reduction in the net asset value per Ordinary Share of 2.30p (2004: 2.03p). From the start of 2006, and in accordance with the recommendations of the Association of Investment Trust Companies ('AITC'), the net asset values reported each month to the London Stock Exchange and The Channel Islands Stock Exchange will reflect the Company's investments valued at Stock Exchange quoted market bid prices and mid prices. Reconciliation of net asset value to published net asset value: 2005 2005 2004 2004 Total Per Share Total Per Share £'000 pence £'000 pence Published net asset value(1) 52,108 176.04 41,591 140.51 Valuation of investments at bid prices (681) (2.30) (601) (2.03) -------- -------- -------- -------- Net asset value per FRS 26 51,427 173.74 40,990 138.48p -------- -------- -------- -------- 19. Reconciliation of net revenue return before finance costs and taxation to net cash inflow from operating activities 2005 2004 (restated) £'000 £'000 Net revenue return before finance costs and taxation 3,057 2,622 Management fee charged to the capital reserve (529) (487) Transaction costs charged to the capital reserve (111) (199) Decrease/(increase) in accrued income 102 (17) Decrease in other debtors 1 2 Increase in other creditors and accruals 13 11 ---------- ---------- Net cash inflow from operating activities 2,533 1,932 ---------- ---------- 20. Reconciliation of net cash flow to net debt 1 January Cash flows Other 31 December 2005 2005 £'000 £'000 £'000 £'000 Cash at bank and in hand 4,242 996 - 5,238 Debt due in less than one year - - (25,616) (25,616) Debt due after more than one year (25,616) - 25,616 - ---------- ---------- ---------- ---------- Total (21,374) 996 - (20,378) ---------- ---------- ---------- ---------- 21. Capital commitments All contracted capital commitments have been provided for. 22. Related parties Details of the relationships between the Company, Collins Stewart Fund Management Limited, Collins Stewart Portfolio Management Limited and Collins Stewart (CI) Limited are disclosed in note 6. The Company receives stockbroking services from Collins Stewart Limited in respect of its London Stock Exchange listing, for which a fee of £6,250 per annum is paid, and from Collins Stewart (CI) Limited in respect of The Channel Islands Stock Exchange listing, for which a fee of £6,250 per annum is paid. The Company paid Collins Stewart (CI) Limited £39,102 (2004: £37,731) in respect of the Custodian services provided. Collins Stewart (CI) Limited, Collins Stewart Fund Management Limited and Collins Stewart Limited are all members of the Collins Stewart Tullett plc Group. The Directors are not aware of any ultimate controlling party. 23. Risk profile of financial assets and liabilities Financial Summary The principal investment objectives of the Company are to provide Shareholders with a high income and also the opportunity for income and capital growth by investing primarily in smaller capitalised United Kingdom companies admitted to the Official List of the United Kingdom Listing Authority and traded on the London Stock Exchange or traded on AIM. The Company's portfolio is invested in equities and high income and fixed interest and other income-bearing securities in order to achieve its investment objectives. It is the aim of the Company to provide both income and capital growth predominantly through investment of approximately 75% of the portfolio in smaller capitalised United Kingdom companies. The Company also aims to further enhance income for Shareholders by investing approximately 25% of its assets in a Sterling denominated investment grade fixed interest bond portfolio. Due to the recent performance of the Smaller Companies Portfolio and the testing conditions faced by the Sterling bond market the split has been relaxed to be closer to 80% invested in smaller capitalised United Kingdom companies, whilst the remainder is invested in Sterling denominated investment grade fixed interest bonds and cash. It is no longer the policy of the Company to invest in ordinary shares and income shares of split capital investment trusts nor lower grade fixed interest Sterling denominated debt and convertibles. At 31 December 2005 78.54%, (2004: 80.04%) of the portfolio (including cash) related to the smaller companies portfolio. In addition, the Company holds cash and liquid resources as well as having debtors and creditors that arise directly from its operations. The main risks arising from the Company's financial instruments are market price risk, interest rate risk and liquidity risk. As all the assets and liabilities of the Company are denominated in Sterling, there is no currency risk. Market price risk The Company's exposure to market price risk consists mainly of movements in the value of the Company's investments. The Company's investment portfolio complies with the investment parameters as disclosed in its prospectus. The Board manages the market price risks inherent in the investment portfolios by ensuring full and timely access to relevant information from the Investment Advisers. The Board meets regularly and at each meeting reviews investment performance. The magnitude of any change in the net asset value of the portfolio arising from market price movements is increased by the Company's policy of employing gearing. A 10% increase / decrease in the market prices of investments would have resulted in a 14.01% (2004: 15.03%) increase / decrease in the net asset value per Ordinary Share as at the balance sheet date. Interest rate risk The Company finances its operations through a mixture of shareholders' capital, bank borrowings and retained profits. Bank of Scotland International has made available a term loan of up to £25,616,000. The interest payable under the facility is fixed at regular intervals based on the aggregate rate of LIBOR plus certain additional regulatory costs charged by the bank and a margin of 1.0% per annum (see note 15). Liquidity risk The Company entered into a loan agreement with Bank of Scotland International, under which Bank of Scotland made available a loan of £25,616,000 (see note 15). The Company has extended the repayment date of the loan from 11 February 2006 to 31 October 2006. The terms of the Company's bank borrowings entitle the lender to require early repayment should the Company breach any of the covenants placed upon it by Bank of Scotland. The Company's liquidity is monitored regularly to ensure that the covenants are not breached. Certain of the Company's investments are or may be illiquid, and the marketability of investments that are normally liquid may be affected by unsettled market conditions. Interest rate risk - profile The Company's financial fixed assets comprise a fixed interest portfolio of £7,393,575 (2004: £8,245,888) with a weighted average coupon rate of 8.31% (2004: 9.03%), fixed for a weighted average period of 6.03 years (2004: 4.21 years). An investment with a market value of £778,400 (2004: £801,430) with a fixed income of 9.875% is undated. The balance of the investment portfolio consists of non-interest bearing investments of £64,681,712 (2004: £53,370,572). The Company's other exposure to interest rate risk arises through its loan, details of which are given in note 15. Financial assets Non-interest Fixed rate Floating Total Non-interest Fixed rate Floating Total bearing rate bearing rate (restated) (restated) (restated) (restated) 2005 2005 2005 2005 2004 2004 2004 2004 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Equity shares 61,681 - - 61,681 53,370 - - 53,370 Debt - 7,394 3,000 10,394 - 8,246 - 8,246 investments Cash at bank - - 5,238 5,238 - - 4,242 4,242 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 61,681 7,394 8,238 77,313 53,370 8,246 4,242 65,858 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- The above analysis excludes short-term debtors as all the material amounts are non-interest bearing. Fixed rate financial assets Weighted Weighted Weighted Weighted average average rate average period average period rate 2005 2005 2004 2004 % Years % Years Debt investments 8.31 6.03 9.03 4.21 ---------- ---------- ---------- ---------- Financial liabilities Fixed rate Fixed rate financial financial liabilities liabilities 2005 2004 £'000 £'000 Bank loan 25,616 25,616 ---------- ---------- The above analysis excludes short-term creditors as all the material amounts are non-interest bearing. The Company has extended the repayment date of the bank loan from 11 February 2006 to 31 October 2006. Credit risk The risk that counterparties might default on their obligations is monitored on an ongoing basis. As stated in the Prospectus, it is the Company's policy not to invest more than 20% of the gross assets of the Company in the securities of any one company or group at the time the investment is made. The Group's principal financial assets are equity shares, cash at bank and other receivables. The Company has no significant concentration of credit risk, with exposure spread over a large number of counterparties. At 31 December 2005 the Company's largest exposure to a single investment was £5,792,000, 11.26% of total assets (2004: £5,096,000, 12.43%). If you have any queries please contact: Andrew Duquemin Collins Stewart Fund Management Limited 2nd Floor, No. 1 Le Truchot St Peter Port Guernsey GY1 4AE Tel: 01481 731 987 Fax: 01481 720 018 e-mail: fundman@ci.collins-stewart.com This information is provided by RNS The company news service from the London Stock Exchange

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