GARTMORE SMALLER COMPANIES PLC
Final Results for the year to 31 August 2008
The following represents extracts from the Company's Annual Report & Accounts
for the year to 31 August 2008. The full Annual Report and Accounts can be
accessed via the Company's website at www.gartmoresmallercostrust.co.uk .
Copies will be mailed to shareholders shortly.
Annual Report Page 3
Overview of the year to 31 August 2008
* Net Asset Value per Ordinary share declined by 22.2% to 551.8p, compared with
a fall of 32.5% in the FTSE SmallCap (excluding Investment Companies) Index
* Over the 3-year period to 31 August 2008, the Net Asset Value per Ordinary
share declined by 7.6%, compared with a fall of 18.8% in the FTSE SmallCap
(excluding Investment Companies) Index
* The Over the 5-year and 10-year periods to 31 August 2008, the Net Asset
Value per Ordinary share increased by 36.8% and 51.8% respectively, compared
with increases of 2.0% and 17.1% in the FTSE SmallCap (excluding Investment
Companies) Index over the same periods
* Mid-market price per Ordinary share declined by 30.6% to 408.5p
* Net revenue after taxation increased from �418,000 to �689,000
* Because of the prospective changes in the Company's circumstances, the Board
has declared a second interim dividend of 4.00p per Ordinary share. The
aggregate dividend for the year is therefore increased by 17.6% to 5.00p per
Ordinary share. The Board does not expect to propose a final dividend for the
year
* On 10 November 2008, the Board announced a recommended merger with Standard
Life UK Smaller Companies Trust plc
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Annual Report Page 6
Chairman's Statement
Recommended Merger
On 10 November 2008, the Board announced that it had reached agreement with
Standard Life UK Smaller Companies Trust plc (SLS) to merge the assets of the
two companies through a scheme of reconstruction and winding up of the Company.
The scheme will be subject to the approval of both companies' shareholders at
general meetings which are expected to be held in late January and the scheme
will be implemented immediately thereafter. A shareholder circular setting out
details of the transaction and a notice convening a General Meeting to seek
shareholder approval is expected to be sent to shareholders before the end of
the year. The Board has obtained support from holders of 60 per cent. of the
Company's issued share capital for the proposed transaction.
Your Board has been concerned for some time about the discount at which the
Company's shares trade relative to their net asset value and was aware that
some investors might wish to realise a proportion of their investment in the
Company in the near term. Accordingly, the Board carried out a review of the
Company's operations and its future direction and decided that a transaction
with SLS would potentially increase the size of the Company, improve its
rating, reduce the total expense ratio and provide an orderly exit for those
shareholders who wish to do so.
On the basis that the general meeting to approve the transaction with Standard
Life Smaller Companies takes place and the requisite approvals are granted, the
Annual General Meeting of the Company will be postponed sine die.
Capital Performance
Against a backdrop of sharp falls in the UK equity market and a marked
deterioration in the economic outlook, shares in the smaller companies sector
performed very poorly over the year to 31 August 2008. The Company's net asset
value per Ordinary Share declined by 22.2%. Although this is less than the fall
of 32.5% in the FTSE SmallCap (excluding Investment Companies) Index and the
fall of 27.6% in the FTSE AIM All-Share Index, it is, nevertheless,
disappointing to report such a large absolute decline. Factors contributing to
the performance of equity markets generally and to the Company's performance in
particular, are discussed in detail in the Manager's Review.
The Company maintained significant exposure to stocks quoted on the Alternative
Investment Market (AIM) during the year, which, combined with a highly
analytical and disciplined investment approach, proved largely successful in
avoiding smaller companies most vulnerable to the deterioration in market
conditions. The Company's investment portfolio has outperformed the FTSE
SmallCap Index in four of the past five years.
In a climate of risk aversion and highly volatile financial markets, the
Company's share price fell sharply by 30.6% over the financial year, from
588.5p to 408.5p. The discount at which the Company's Ordinary Shares trade
relative to net asset value widened, from 17.0% at 31 August 2007, to 26.0% at
31 August 2008.
Revenue and Dividends
Net revenue for the year increased from �418,000 to �689,000, which gives a
revenue return of 4.97p per Ordinary share, compared with 3.01p for the
previous year, an increase of 65%. This increase in net revenue is attributable
to a variety of factors, including growth in income from the investment
portfolio, interest earned on the high level of cash held in the portfolio
during the second half of the year and VAT recoverable on management fees.
However, these beneficial factors were offset, in part, by a provision for
liquidation expenses and advisory costs, details of which are provided in note
5 to the accounts.
In light of the prospective change in the Company's circumstances, as explained
above, the Board has declared a second interim dividend of 4.00p per Ordinary
share which will be paid on 12 January 2009. Taken together with the interim
dividend of 1.0p per share paid in May, the total dividend for the year will
amount to 5.00p per share, compared with 4.25p for the previous year, an
increase of 17.6%. The Board does not expect to propose a final dividend for
the year to 31 August 2008.
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Annual Report Page 7
Share Buybacks
During the year, the Company repurchased and cancelled 20,000 Ordinary shares
at a cost of �96,000 under an authority approved by shareholders at the last
Annual General Meeting.
VAT on Management Fees
At the half-year, I reported that value-added tax had ceased to be charged on
management fees with effect from November 2007 and that claims had been
submitted by the Manager for repayment of VAT previously charged on management
fees. I am pleased to report that negotiations between the Manager and HM
Revenue & Customs are well advanced. The Board is therefore satisfied that
there is sufficient certainty of recovery of a large proportion of the VAT
charged in earlier years and the Company has therefore accrued �875,000 at 31
August 2008, which has been allocated between revenue and capital in the
proportions originally charged. No accrual has been made for interest which may
also be recoverable. Such interest is estimated to be in the region of �
350,000.
Outlook
Since the Company's year-end, we have witnessed a period of unprecedented
volatility in financial markets. A breakdown of trust in the banking sector,
reflected not least in abnormally high interbank lending rates, has led to a
withdrawal of liquidity from the financial system. The policy response has been
decisive and far-reaching. In October, the government announced a �50 billion
package to recapitalise the UK banking system, which set the tone for similar
measures in Europe and the US. This has been followed by dramatic monetary
easing from the Bank of England, which has reduced the Bank Rate to 2%, the
lowest level since 1951. This reflects a marked deterioration in the economic
background, with UK Gross Domestic Product contracting during the third quarter
for the first time since the early 1990s.
The investment background for UK smaller companies is likely to remain very
challenging over the next year, with businesses and consumers alike adjusting
to tighter credit conditions and the downturn in the domestic economy. With
this in mind, the Company is focusing on cash generative businesses with
sustainable earnings growth prospects. However, a period of sustained weakness
in the smaller companies market has left many stocks trading at extremely
undemanding levels, both in absolute and relative terms, which, in our view,
fail to reflect their longer term earnings growth prospects.
Liam Kane
Chairman
11 December 2008
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Annual Report Page 9
Manager's Review
Investment Background
Market conditions over the year were very challenging for all investors in UK
equities, with smaller companies particularly hard hit. The trigger for sharp
falls in international equity markets came with the collapse of the US
sub-prime mortgage market, which specialises in lending to households with low
credit ratings. This resulted in large scale write downs amongst banks and
other financial institutions with leveraged exposure to structured credit
products backed by mortgage bonds linked to the US housing market. Growing
evidence of the widespread nature of this exposure precipitated a lack of trust
and confidence between banks and other lenders, leading to a sharp rise in
interbank lending rates to abnormally high levels and a funding crisis for
several institutions. The worst effects so far have been seen in the US, with
the collapse of investment banks Bear Stearns and Lehman Brothers, government
and state rescue packages for Federal mortgage providers Fannie Mae, Freddie
Mac and major insurer AIG. However, governments and monetary authorities
worldwide have been forced to implement extraordinary measures to stave off a
meltdown in the banking system. In the UK, the government was left with little
alternative but to nationalise former building societies Northern Rock and
Bradford & Bingley, while recapitalising and facilitating the sale of stricken
bank HBOS to Lloyds TSB and effectively nationalising The Royal Bank of
Scotland by subscribing a major increase to its capital.
Initially, equity markets found some support in the expectation that tighter
credit conditions would have a limited and short-lived impact on economic
growth and corporate profits. However, it has become clear that both businesses
and consumers are finding it appreciably harder to obtain credit. At the same
time, both corporations and households were faced with a sharp rise in
inflationary pressures, triggered by record oil prices and increases in the
cost of fuel, commodities and other raw materials.
Although these inflationary pressures are now abating, the consequences of the
credit crunch have caused the major economies to slip into recession. Both the
US and mainland Europe have experienced an abrupt downturn, and the UK economy
ground to a halt during the second quarter, marking its weakest performance
since 1992. The housing market has tailed off significantly, and recent surveys
echo a return to the recession of the early 1990s. The Bank of England
responded by lowering the official Bank Rate from 5.75% to 5.00% during the
Company's financial year, and subsequently to 2.00%.
Against this backdrop, investors have become increasingly risk-averse and
smaller companies, which are perceived to be closely linked to the fortunes of
the domestic economy, have underperformed both the FTSE All-Share Index and the
blue chip FTSE 100 Index by a significant margin. There continues to be a wide
disparity in performance between individual stocks within the smaller company
arena, with a significant number of stocks posting heavy losses as expectations
for earnings growth have been scaled back. Companies with cash generative
businesses and sustainable earnings growth prospects have performed relatively
well in this environment.
Portfolio Performance
The year under review was a very disappointing one for the Company as share
prices fell heavily across the UK smaller companies sector. However, our
relatively cautious stance, maintaining low exposure to financials and
discretionary consumer stocks, spared the portfolio from the areas worst
affected by the marked deterioration in investor sentiment.
Our stock selection within the industrial and technology sectors contributed
positively to returns relative to the FTSE SmallCap (excluding Investment
Companies) Index. However, our holdings in the health care sector performed
poorly in the aggregate. We have maintained a significant exposure to
AIM-listed companies, which benefited performance over the year, as a number of
our favoured constituents in this segment of the small-cap arena held up
commendably well in very difficult circumstances.
Looking at the performance of the Company's major holdings, BATM Advanced
Communications, Aero Inventory, Management Consulting Group and Pace all
weathered the sell-off to remain broadly unchanged over the year.
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Annual Report Page 10
BATM Advanced Communications, the broadband equipment & networking specialist,
is a long-term holding. A sequence of encouraging sales news was followed by a
strong trading update in mid-June, when the company announced that full-year
earnings would be significantly ahead of previous forecasts. Shortly
afterwards, BATM sealed the acquisition of Vigilant Technology, a CCTV security
firm, building on its strategy of extending its technological prowess into new,
niche areas.
Aero Inventory distributes components to the civil aviation industry. In the
spring, the company announced that new contracts from Qantas and North American
firm ACTS Aero Technical Support & Services had boosted interim profits
significantly. In recent months the firm has been viewed as a potential
takeover candidate, as earnings prospects for its core services remain bright.
Aero Inventory is well-placed to benefit from increased cost pressures in the
wider aerospace industry and is currently in negotiations with a number of
major airlines for new contracts.
Although Management Consulting Group announced an interim loss as expected, due
mainly to operating losses in parts of its Parson Consulting unit, investors
were encouraged by a positive outlook statement in which the company said that
it views the second half of the year with increasing confidence. This support
services business is rebuilding its city reputation, after board changes
initiated by Gartmore. Given the high quality of this company's underlying
consultancies and the potential for improved operational performance under new
management, we believe that there remains scope for a substantial return from
this stock.
Shares in TV set-top box maker Pace Micro Technology have also held up
relatively well. The company, which supplies digital technology for BSkyB,
announced interim results in July that showed better-than-expected cash
generation. Pace's future trading prospects are encouraging as it looks to
build on the integration of Philips' consumer electronics business, acquired
earlier this year. This business is progressing well and is already profitable.
The main disappointment at the stock level was our stake in Premium Bars and
Restaurants. While the challenges facing bar operators following the
introduction of the smoking ban and a tougher consumer spending environment
generally had already been reflected in sector valuations, Premium surprised
the market with news of a slowdown in its late-night trade. The company cited
the sluggishness of the property market as the factor behind problems in
disposing of unwanted venues, but we have retained our holding, taking the view
that the market's reaction to disappointing recent news flow has been
excessive.
Prospects
Given the prevailing background of highly volatile markets and a deteriorating
economic outlook, we have maintained a cautious strategy since the year-end.
Investors are likely to remain preoccupied with the impact of tighter credit
conditions on the broader economy, particularly for business investment and
consumer demand. In this environment we have continued to focus on companies
whose underlying businesses are not overly exposed to the downturn in the
economic cycle. In particular, we remain underweight in those areas of the
market which are most vulnerable to the impact of the credit squeeze and the
weakness of domestic demand, notably financials, property and discretionary
consumer stocks.
Taking a longer-term view, we believe that stock valuations in the UK smaller
companies sector are now at attractive levels. Undemanding valuations also
provide scope for a revival in merger and acquisition activity amongst UK
small-cap stocks once market sentiment improves.
Gartmore Investment Limited
11 December 2008
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Annual Report Page 11
Financial Statistics
Capital At 31 August At 31 August Change
2008 2007 %
Net Assets (�'000) 76,454 98,386 -22.3
FTSE SmallCap 2485.0 3679.7 -32.5
(excluding Investment Companies) Index
FTSE AIM All-Share Index 802.4 1108.5 -27.6
FTSE All-Share Index 2868.7 3260.5 -12.0
Ordinary Shares
Net Assets Value 551.8p 709.1p -22.2
Mid-market Price 408.5p 588.5p -30.6
Discount 26.0% 17.0%
Revenue and Dividends Year to Year to
At 31 August At 31 August
2008 2007
Net revenue after taxation (�'000) 689 418
Revenue return per Ordinary share 4.97p 3.01p
Total dividend per Ordinary share 5.00p 4.25p
Total Expense Ratio 1.30% 1.28%
Total Return to Equity Shareholders (�
'000)
Revenue return after taxation 689 418
Capital (loss)/return after taxation (21,935) 13,000
Total (loss)/return (21,246) 13,418
Total Return per Ordinary share
Revenue 4.97p 3.01p
Capital (158.20p) 93.69p
Total (loss)/return (153.23p) 96.70p
Year to 31 August 2008 Highs and Lows
Net Assets Value 714.3p 523.7p
Mid-market Price 597.5p 400.0p
Discount 26.0% 10.4%
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Annual Report Page 12
Principal Investments
at 31 August 2008
Company Sector Valuation Percentage
�'000 of
Portfolio %
BATM Advanced Technology Hardware & 3,557 (2,407) 5.4 (2.3)
Communications Equipment
Management Consulting Support Services 2,328 (1,765) 3.5 (1.7)
Group
Pace Technology Hardware & 2,014 (2,684) 3.0 (2.6)
Equipment
eServGlobal * Software & Computer 1,671 (1,570) 2.5 (1.5)
Services
Gulf Keystone Petroleum * Oil & Gas Producers 1,578 (1,610) 2.4 (1.5)
Brammer Support Services 1,573 (2,163) 2.4 (2.1)
Sportech Travel & Leisure 1,326 (-) 2.0 (-)
Aero Inventory * Aerospace & Defence 1,307 (2,664) 2.0 (2.6)
Elementis Chemicals 1,240 (1,339) 1.9 (1.3)
Ora Capital Partners * Financial Services 1,196 (708) 1.8 (0.7)
Top Ten Investments 17,790 26.9
IQE * Technology Hardware & 1,146 (1,260) 1.7 (1.2)
Equipment
Redstone * Software & Computer 1,044 (1,821) 1.6 (1.7)
Services
Gresham Computing Software & Computer 982 (1,877) 1.5 (1.8)
Services
KBC Advanced Technologies Oil Equipment & Services 888 (632) 1.3 (0.6)
*
Avocet Mining * Mining 886 (1,824) 1.3 (1.8)
Hallin Marine Subsea Oil Equipment & Services 859 (410) 1.3 (0.4)
International *
Costain Construction & Materials 841 (59) 1.3 (0.1)
Corac Group * Industrial Engineering 840 (870) 1.3 (0.8)
Lipoxen * Pharmaceuticals & 818 (-) 1.2 (-)
Biotechnology
Iomart Group * Software & Computer 808 (-) 1.2 (-)
Services
Top Twenty Investments 26,902 40.6
Tricorn Group * Industrial Engineering 765 (1,015) 1.2 (1.0)
Travelzest * Travel & Leisure 746 (-) 1.1 (-)
Inspired Gaming * Travel & Leisure 722 (-) 1.1 (-)
Kewill Systems Software & Computer 716 (-) 1.1 (-)
Services
Oakley Capital Financial Services 715 (-) 1.1 (-)
Investments *
Umeco Aerospace & Defence 714 (891) 1.1 (0.9)
Arc International Technology Hardware & 683 (-) 1.0 (-)
Equipment
PV Crystalox Solar Alternative Energy 661 (-) 1.0 (-)
Plant Health Care * Chemicals 653 (1,361) 1.0 (1.3)
Manpower Software * Software & Computer 628 (-) 0.9 (-)
Services
Top Thirty Investments 33,905 51.2
Trifast Industrial Engineering 584 (793) 0.9 (0.8)
Renew Holdings * Construction & Materials 583 (-) 0.9 (-)
Lavendon Group Support Services 561 (734) 0.8 (0.7)
Netplay TV * Media 551 (-) 0.8 (-)
Sterling Energy * Oil & Gas Producers 549 (-) 0.8 (-)
Avacta Group * Pharmaceuticals & 548 (784) 0.8 (0.8)
Biotechnology
Freedom4 Communications * Fixed Line 548 (-) 0.8 (-)
Telecommunications
Carclo Chemicals 533 (746) 0.8 (0.7)
Osmetech * Health Care Equipment & 528 (1,361) 0.8 (1.3)
Services
Healthcare Locums * Support Services 526 (348) 0.8 (0.3)
Top Forty Investments 39,416 59.4
Bodycote International Industrial Engineering 523 (-) 0.8 (-)
Walker Greenbank * Household Goods 523 (885) 0.8 (0.8)
MDM Engineering Group * Construction & Materials 523 (-) 0.8 (-)
Rurelec * Electricity 513 (578) 0.8 (0.6)
Ffastfill Group * Software & Computer 502 (469) 0.8 (0.5)
Services
Conygar Investment Real Estate 501 (881) 0.8 (0.8)
Company
Alkane Energy * Alternative Energy 500 (392) 0.8 (0.4)
SSP Holdings * Software & Computer 486 (471) 0.7 (0.5)
Services
Boomerang Plus * Media 476 (-) 0.7 (-)
Jarvis Support Services 472 (1,299) 0.7 (1.3)
Top Fifty Investments 44,435 67.1
Other equity investments 21,904 32.9
(118 stocks)
Total Investments at Fair 66,339 100.0
Value
* Quoted on the Alternative Investment Market.
Comparative valuations and percentages of portfolio as at the previous year-end
are shown in brackets.
At 31 August 2007, the top 50 investments were valued at �58,170,000, which
represented 56.1% of the portfolio.
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Annual Report Page 13
Portfolio Analysis
2008 2007
Portfolio by Equity Market % %
FTSE AIM All-Share Index 57.7 57.2
FTSE SmallCap Index 29.4 29.9
FTSE Fledgling Index 9.1 9.5
FTSE 250 Index 3.8 3.4
2008 2007
Portfolio by Market Capitalisation % %
Less than �50m 38.3 30.0
�50-�100m 23.7 22.6
�100-�250m 28.0 31.9
�250-�500m 7.7 12.8
More than �500m 2.3 2.7
2008 2007
Portfolio by Broad Industrial Sector % %
Technology 27.1 23.3
Industrials 26.9 30.2
Consumer Services 10.5 10.0
Oil & Gas 9.1 6.0
Health Care 8.7 7.6
Financials 8.0 7.2
Basic Materials 5.7 9.1
Consumer Goods 2.4 5.6
Utilities 0.8 0.6
Telecommunications 0.8 0.4
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Annual Report Page 14
Sector Classification and Weightings
at 31 August 2008
Portfolio at FTSE FTSE
31.08.08 SmallCap All-Share
(ex IC) Index at
Index at 31.08.08
31.08.08
Sector �'000 % % %
Oil & Gas
Alternative Energy 1,896 2.9 - -
Oil & Gas Producers 2,127 3.2 1.5 17.6
Oil equipment & services 2,011 3.0 - 0.6
6,034 9.1 1.5 18.2
Basic Materials
Chemicals 2,426 3.6 2.6 0.3
Forestry & Paper - - - 0.1
Industrial Metals 72 0.1 - 0.3
Mining 1,340 2.0 2.0 10.8
3,838 5.7 4.6 11.5
Industrials
Aerospace & Defence 2,381 3.6 1.9 2.1
Construction & Materials 2,309 3.5 4.5 0.3
Electronic & Electrical 344 0.4 2.2 0.3
Equipment
General Industrials 836 1.3 0.8 0.7
Industrial Engineering 4,202 6.3 3.2 0.7
Industrial Transportation 234 0.4 4.2 0.2
Support Services 7,573 11.4 11.1 2.9
17,879 26.9 27.9 7.2
Consumer Goods
Automobiles & Parts - - - 0.1
Beverages - - 0.6 2.5
Food Producers 315 0.5 3.4 2.3
Household Goods 947 1.4 2.3 1.6
Leisure Goods 296 0.5 0.4 -
Personal Goods - - - 0.2
Tobacco - - - 2.9
1,558 2.4 6.7 9.6
Health Care
Health Care Equipment & Services 1,066 1.6 1.8 0.4
Pharmaceuticals & Biotechnology 4,702 7.1 7.8 7.3
5,768 8.7 9.6 7.7
Consumer Services
Food & Drug Retailers 329 0.5 0.3 2.8
General Retailers 675 1.0 4.5 1.4
Media 2,337 3.5 4.1 2.5
Travel & Leisure 3,592 5.5 4.0 2.6
6,933 10.5 12.9 9.3
Telecommunications
Fixed Line Telecommunications 548 0.8 2.6 1.2
Mobile Telecommunications - - - 4.8
548 0.8 2.6 6.0
Utilities
Electricity 513 0.8 - 1.8
Gas, Water & Multiutilities - - - 2.6
513 0.8 - 4.4
Financials
Banks - - - 14.4
Equity Investment Instruments 196 0.3 3.7 3.2
General Financial 3,658 5.5 8.8 1.9
Life Insurance - - 1.0 3.0
Non Life insurance 446 0.7 2.6 0.8
Real Estate 992 1.5 6.6 1.6
5,292 8.0 22.7 24.9
Technology
Software & Computer Services 9,694 14.6 8.0 1.0
Technology Hardware & Equipment 8,282 12.5 3.5 0.2
17,976 27.1 11.5 1.2
TOTAL 66,339 100.0 100.0 100.0
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Annual Report Page 17
Report of the Directors
The Directors present their Report and the Accounts for the year ended 31
August 2008.
Business Review
The Business Review has been prepared in accordance with The Accounting
Standards Board Reporting Statement : Operating and Financial Review, and
should be read in conjunction with the Chairman's Statement on pages 6 and 7,
the Manager's Review on pages 9 and 10 and the analyses on pages 11 to 16.
Nature and Status
The Company is an investment trust company and a member of The Association of
Investment Companies. It is registered as a public limited company and is an
investment company as defined by section 833 of the Companies Act 2006. The
Company was last approved by HM Revenue & Customs (HMRC) as an investment trust
under Section 842 of the Income and Corporation Taxes Act 1988 in respect of
the year ended 31 August 2007. This approval is subject to there being no
subsequent enquiry under corporation tax self-assessment. The Company has been
approved as an Investment Trust for all previous years. Since 31 August 2007,
the Company has directed its affairs so as to be able to continue to qualify
for approval by HMRC as an investment trust for tax purposes. The close company
provisions of the Income and Corporation Taxes Act 1988 do not apply to the
Company.
Investment Objective
The Company seeks long-term capital growth through a portfolio of investments
in smaller UK listed companies and unlisted companies quoted on the Alternative
Investment Market.
Investment Policy
Asset Allocation:
The Company invests in smaller UK listed companies and unlisted companies
quoted on the Alternative Investment Market with growth potential. The majority
of investments will be equities, although other forms of equity-related
securities, including warrants and convertibles, may also be held. Cash and
derivative instruments (such as futures and options) may be used for efficient
portfolio management and as part of investment strategy, subject to the prior
consent of the Board.
Risk Diversification:
Portfolio risk is managed by investing in a diversified spread of investments.
The Company's Articles provide that at least 60% by value of the portfolio must
be comprised of holdings which do not individually exceed in value 3% of Total
Assets and that no holdings, on acquisition, shall exceed in value 8% of Total
Assets. However, this limitation does not apply to gilts or, in limited
circumstances, investment company holdings. The Company will not invest more
than 15% of its total assets in other listed investment companies (including
investment trusts).
Gearing:
The Company has the power to borrow money (``gearing'') and does so at times
when the Manager is confident that market conditions and opportunities exist to
enhance investment returns. The Manager has discretion to borrow within limits
and conditions set by the Board from time to time.
Borrowing Facilities Under an agreement with The Bank of New York Mellon, the
Company has an uncommitted revolving credit facility of �10 million. The
Company also has an overdraft facility of �5 million, which is provided by The
Royal Bank of Scotland. During the year under review, only the revolving credit
facility was used. At 31 August 2008, no drawings were outstanding under either
of these facilities.
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Annual Report Page 18
Performance
The Board considers a number of key performance indicators to assess the
Company's success in achieving its investment objective. The principal measure
of performance is considered to be the movement of the net asset value per
Ordinary share, as the Company's primary investment objective is to deliver
long-term capital growth. The portfolio comprises investments listed on the
main market, forming part of the FTSE SmallCap Index, the FTSE Fledgling Index
or the FTSE 250 Index, and of investments quoted on the Alternative Investment
Market. In view of this broad spread of investments, the Board considers that
there is no single optimal benchmark of the Company's performance. However, for
the purpose of tracking the Manager's performance, movements in the Company's
net asset value are compared with the FTSE SmallCap (excluding Investment
Companies) Index.
Over the year to 31 August 2008, the net asset value per Ordinary share
declined by 22.2%, compared with a fall of 32.5% in the benchmark index.
Portfolio performance benefited from the Manager's favouring of the technology
sector and generally cautious stance towards financial and discretionary
consumer stocks. The Company's relatively high weighting in the oil & gas
sector also worked in the Company's favour, although this was offset to a large
degree by unsuccessful stock selection. Increased corporate activity during the
year enhanced returns, with a number of the Company's holdings being acquired
at good premiums to their market prices. A move from a geared position to a net
cash position during the second half of the financial year also proved
beneficial. A more detailed report on the factors contributing to the Company's
performance over the twelve-month period is provided in the Manager's Review on
pages 9 and 10.
Over the three-year, five-year and ten-year periods to 31 August 2008, the net
asset value per Ordinary share has moved by -7.6%, +36.8% and +51.8%
respectively, compared with movements of -18.8%, +2.0% and +17.1% in the FTSE
SmallCap (excluding Investment Companies) Index. The mid-market price of the
Company's Ordinary shares has moved by -17.7%, +22.7% and +39.4% over the same
periods.
The Board monitors the performance of the Company's Ordinary shares and the
level of discount at which the Ordinary shares trade relative to the net asset
value, by comparison with those of other investment trust companies with
comparable investment objectives. Over the year to 31 August 2008, the
mid-market price of the Company's Ordinary shares declined by 30.6%. Over the
same period, the discount ranged between a maximum of 26.0% and a minimum of
10.4%. At 31 August 2008, the Ordinary shares were trading at a discount of
26.0%, compared with 17.0% at the end of the previous year. Over the year to 31
August 2008, the weighted average discount of the AIC UK Smaller Companies
sector widened from 14.2% to 17.6%.
The Board also regularly reviews the costs of running the Company. For the year
to 31 August 2008, the Company's total expense ratio (TER), which is an
expression of the Company's management expenses as a percentage of average
shareholder's funds, was 1.30%, compared with 1.28% for the previous year.
Financial Position and Total Return
At 31 August 2008, net assets amounted to �76,454,000, compared with �
98,386,000 at 31 August 2007. All of the Company's investments are traded on
recognised exchanges and would normally be realisable within a reasonable
timeframe. The Company made a net revenue surplus in the year, after expenses
and taxation, of �689,000, compared with �418,000 for the previous year. The
Directors have declared a second interim dividend of 4.00p per Ordinary share
which will be paid on 12 January 2009 to shareholders on the register on 30
December 2008. This dividend, together with the interim dividend of 1.00p per
Ordinary share paid on 19 May 2008, makes a total for the year of 5.00p,
compared with 4.25p last year. The Directors do not expect to declare a final
dividend for the year to 31 August 2008.
----------
Annual Report Page 19 (extract)
Future Trends
The downturn in the economy is expected to persist over the next twelve months.
The environment for equity investment is therefore likely to remain difficult.
On a longer-term view, the Manager believes that the sustained weakness in the
smaller companies market over the past year has left many smaller company
stocks trading at extremely undemanding levels, both in absolute and relative
terms, that fail to reflect their longer-term earnings growth prospects.
Principal Risks and Uncertainties
The Company's performance is dependent on the performance of the companies and
securities markets in which it invests. Smaller company markets are, by their
very nature, less liquid than their larger counterparts, and tend to be more
sensitive to economic and other factors, and hence more volatile. A significant
and/or prolonged fall in these equity markets would have a serious impact on
the Company's net asset value and share price. Gearing can magnify portfolio
returns, be they positive or negative. The potential for bank gearing to have a
negative impact is minimised by the flexible and short-term nature of drawings
on the borrowing facilities that are in place. Although the Board monitors the
Manager's performance, including the level of gearing, on a regular basis, it
is dependent on the Manager to manage the portfolio to minimise the effects of
falls in the markets in which the Company invests. The Company is also subject
to the risk that the market rating of its Ordinary shares will fail to reflect
its investment performance, as a consequence of poor sentiment towards equities
in general or smaller companies in particular. The Board regularly reviews the
relative level of discount against the sector, giving consideration to ways in
which share price performance can be enhanced including marketing initiatives
and effective communication of the Company's investment performance to existing
and potential investors by the Manager and the corporate broker. Like most
other investment trust companies the Company has no employees other than the
non-executive directors. The Company therefore relies on services provided by
third parties, including, in particular, the investment manager and company
secretary, Gartmore Investment Limited. As discussed in the Corporate
Governance Statement on pages 26 to 31, the Board keeps under review the risks
facing the Company and seeks to minimise operational risks through its
arrangements with service providers and reviews of their services and internal
controls. As the Company is an investment trust it must comply with the
requirements of Section 842 of the Income and Corporation Taxes Act 1988. A
breach of those requirements might result in the Company losing its investment
trust status and, as a consequence, becoming subject to tax on capital gains.
The Board receives monthly reports from the Manager with regard to the
Company's compliance with Section 842 requirements. Other principal risks, and
the Company's policies for managing these risks, are summarised in note 21 to
the accounts.
----------
Annual Report Page 25 (extract)
Statement under DTR 4.1.12
The Directors of the Company, whose names are shown on pages 4 and 5 of this
Report, each confirm to the best of their knowledge that:
* the accounts, which have been prepared in accordance with applicable
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
* this Annual Report includes a fair review of the development and
performance of the business and the position of the Company, together with
a description of the principal risks and uncertainties that it faces.
Liam Kane
Chairman
11 December 2008
----------
Annual Report Page 36
Income Statement Year to 31 August 2008
to 31 August 2008 Revenue Capital Total
Notes �'000 �'000 �'000
Income and Capital Profits
Losses on investments held at fair value 2 - ( 21,594 ( 21,594
through profit or loss ) )
Income from investments 3 1,042 - 1,042
Other income 3 178 - 178
Currency losses - - -
Return before Expenses, Finance Costs and 1,220 ( 21,594 ( 20,374
Taxation ) )
Expenses
Management fees 4 257 ( 61 ) 196
Other fees and expenses 5 ( 770 ) ( 209 ) ( 979 )
Return before Finance Costs and Taxation 707 ( 21,864 ( 21,157
) )
Finance Costs
Interest payable 6 ( 13 ) ( 71 ) ( 84 )
Return on Ordinary Activities before 694 ( 21,935 ( 21,241
Taxation ) )
Taxation 7 ( 5 ) - ( 5 )
Return to Equity Shareholders after Taxation 689 ( 21,935 ( 21,246
) )
Return/(loss) per Ordinary share 9 4.97p (158.20p) (153.23p)
The total column above represents the Profit and Loss Account of the Company.
The revenue and capital items derive from continuing activities.
A Statement of Total Recognised Gains and Losses has not been presented as all
gains and losses are recognised in the Income Statement.
No operations were acquired or discontinued during the year.
The Notes on pages 41 to 50 form part of these Accounts.
----------
Annual Report Page 37
Income Statement Year to 31 August 2007
to 31 August 2007 Notes Revenue Capital Total
�'000 �'000 �'000
Income and Capital Profits
Gains on investments held at fair value 2 - 14,467 14,467
through profit or loss
Income from investments 3 862 - 862
Other income 3 16 - 16
Currency losses - ( 1 ) ( 1 )
Return before Expenses, Finance Costs and 878 14,466 15,344
Taxation
Expenses
Management fees 4 ( 141 ) ( 799 ) ( 940 )
Other fees and expenses 5 ( 287 ) ( 492 ) ( 779 )
Return before Finance Costs and Taxation 450 13,175 13,625
Finance Costs
Interest payable 6 ( 32 ) ( 175 ) ( 207 )
Return on Ordinary Activities before 418 13,000 13,418
Taxation
Taxation 7 - - -
Return to Equity Shareholders after Taxation 418 13,000 13,418
Total Return per Ordinary share 9 3.01p 93.69p 96.70p
The total column above represents the Profit and Loss Account of the Company.
The revenue and capital items derive from continuing activities.
A Statement of Total Recognised Gains and Losses has not been presented as all
gains and losses are recognised in the Income Statement.
No operations were acquired or discontinued during the year.
The Notes on pages 41 to 50 form part of these Accounts.
----------
Annual Report Page 38
Reconciliation of Capital
Movements in
Shareholders' Funds Share redemption Capital Revenue
for the year to 31 August capital reserve reserve reserve* Total
2008
Notes �'000 �'000 �'000 �'000 �'000
At 31 August 2007 3,469 506 93,456 955 98,386
Net capital return from
ordinary activities - - ( 21,935 - ( 21,935
) )
Net revenue return from
ordinary activities - - - 689 689
Equity dividends paid 8 - - - ( 590 ) ( 590 )
Repurchase and
cancellation
of Ordinary shares ( 5 ) 5 ( 96 ) - ( 96 )
At 31 August 2008 3,464 511 71,425 1,054 76,454
At 31 August 2006 3,469 506 80,456 1,265 85,696
Net capital return from
ordinary activities - - 13,000 - 13,000
Net revenue return from
ordinary activities - - - 418 418
Equity dividends paid 8 - - - ( 728 ) ( 728 )
At 31 August 2007 3,469 506 93,456 955 98,386
* The revenue reserve represents the amount of the Company's reserves
distributable by way of dividend.
The Notes on pages 41 to 50 form part of these Accounts.
----------
Annual Report Page 39
Balance Sheet At At
at 31 August 2008 31 August 31 August
2008 2007
Notes �'000 �'000
Fixed Assets
Investments held at fair value through 10 - 103,599
profit or loss
Current Assets
Investments held at fair value through 10 66,339 -
profit or loss
Debtors - amounts receivable within one year 11 1,264 500
Cash at bank 10,004 193
77,607 693
Current Liabilities
Creditors - amounts payable within one year 12 (1,153) (5,906)
Net Current Assets/(Liabilities) 76,454 (5,213)
Net Assets 76,454 98,386
Capital and Reserves
Called-up share capital 13 3,464 3,469
Capital redemption reserve 14 511 506
Capital reserve 15 71,425 93,456
Revenue reserve 16 1,054 955
Equity Shareholders' Funds 76,454 98,386
Net Asset Value per Ordinary share 17 551.8p 709.1p
The accounts were approved and authorised for issue by the Board of Directors
on 12 December 2008 and were signed on its behalf by:
Liam Kane
Chairman
The Notes on pages 41 to 50 form part of these Accounts.
----------
Annual Report Page 40
Cash Flow Statement Year to Year to
to 31 August 2008 31 August 31 August
2008 2007
Notes �'000 �'000
Operating Activities
Dividends and interest received from 973 920
investments
Interest received on deposits 171 11
Other income 7 5
Expenses paid, allocated to revenue (373) (443)
Net Cash Inflow from Operating Activities 18 778 493
Servicing of Finance
Bank overdraft interest paid (13) (31)
(13) (31)
Investment Activities
Acquisitions of investments (35,018) (81,777)
Disposals of investments 50,183 81,619
Expenses and interest paid, allocated to (733) (908)
capital
14,432 (1,066)
Equity Dividends Paid
Ordinary shares (590) (728)
(590) (728)
Financing
Loan repaid/(drawn) (4,700) 1,400
Cost of Ordinary shares repurchased (96) -
(4,796) 1,400
Net Cash Inflow 9,811 68
Reconciliation of Net Cash Inflow
to Movement in Net Cash/(Debt)
Net debt brought forward (4,507) (3,174)
Net cash inflow 9,811 68
Decrease/(increase) in borrowings 4,700 (1,400)
Currency losses - (1)
Net cash/(debt) at 31 August 19 10,004 (4,507)
The Notes on pages 41 to 50 form part of these Accounts.
----------
Annual Report Page 41
Notes to the Accounts
1. Accounting Policies
The principal accounting policies have been applied consistently throughout the
year ended 31 August 2008 and are set out below.
Basis of preparation
The accounts have been prepared in accordance with UK Generally Accepted
Accounting Practice and the Statement of Recommended Practice for ``Financial
Statements of Investment Trust Companies'' issued by the Association of
Investment Companies in January 2003 (revised December 2005). As it is expected
that the Company will cease to operate in the foreseeable future, the accounts
have been prepared on a break-up basis. Accordingly, a provision of �495,000
has been made for the estimated costs of winding up the Company. Investments
have been treated as current assets and continue to be stated at their fair
value, which is their bid-market value, with no additional provision for
impairment. The comparative figures were prepared on a going concern basis.
Income, Expenses and Interest Payable
Investment income includes dividends receivable from investments marked
ex-dividend on or before the Balance Sheet date. Investment income is treated
as revenue in the Income Statement, with the exception that dividends of a
capital nature are credited to the Income Statement as a capital item. Where
the Company elects to receive its dividends in the form of additional shares
rather than cash, the amount of cash dividend foregone is recognised as income.
Deposit interest and other income receivable is accounted for on an accruals
basis.
Underwriting commission is recognised as income where it relates to shares that
the Company is not required to take up. Where the Company is required to take
up a proportion of the shares underwritten, the same proportion of commission
received is deducted from the cost of the shares taken up, with the balance
taken to income.
Management fees, other administrative expenses and finance costs are accounted
for on an accrual basis.
Management fees and finance costs, net of any related tax relief, are allocated
85% to capital and 15% to revenue in the Income Statement, in line with the
Board's long-term expected split of returns in the form of capital and income
respectively. In accordance with the SORP, tax relief, if applicable, in
respect of such amounts is apportioned between capital and revenue by applying
the Company's marginal rate of tax.
Expenses which are incidental to the acquisition of an investment are expensed
through the Income Statement as a capital item. Expenses which are incidental
to the disposal of an investment are deducted from the proceeds of the sale of
the investment.
Deferred Taxation
Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the Balance Sheet date where transactions or
events that result in an obligation to pay more, or right to pay less, tax in
the future have occurred at the Balance Sheet date. This is subject to deferred
tax assets only being recognised if it is considered more likely than not that
there will be suitable profits from which the future reversal of the underlying
timing differences can be deducted. Timing differences are differences between
the Company's taxable profits and its results as stated in the financial
statements which are capable of reversal in one or more subsequent periods.
Dividends Payable
Dividends payable to shareholders are recognised in the period in which they
are paid and are shown in the Reconciliation of Movements in Shareholders'
Funds.
Investments
All investments are classified as held at fair value through profit or loss.
They are initially recognised on the trade date and measured, then and
subsequently, at fair value. Fair value is assumed to be the bid price, or last
traded price where no bid price is available. Changes in fair value are
included in the Income Statement as a capital item and surpluses are not
distributable by way of a dividend.
No provision for taxation is required in respect of any realised or unrealised
appreciation of investments which arises, as the Company expects to continue to
qualify as an investment trust for tax purposes, thereby rendering capital
profits exempt from tax.
Rates of Exchange
Transactions involving currencies other than pounds sterling are recorded at
the exchange rate ruling on the transaction date. Investments and foreign
currency balances are translated into sterling at the rate of exchange ruling
at the balance sheet date. Exchange gains and losses are taken to the Income
Statement in the period in which they arise.
----------
Annual Report Page 42
2. (Losses)/Gains on Investments held at Fair Value through Profit or Loss
2008 2007
�'000 �'000
Realised gains on disposal of investments 1,741 12,795
Unrealised gains recognised in earlier years (798) (9,259)
Net realised gains based on fair values at the
previous
balance sheet date 943 3,536
Unrealised (losses)/gains arising during the year (22,537) 10,931
(21,594) 14,467
3. Dividends and Other Income
2008 2007
�'000 �'000
Income from UK investments:
Revenue:
Franked dividends 907 844
Unfranked dividends 135 21
Interest on fixed interest securities - (3)
1,042 862
Other income:
Interest on deposits 171 11
Underwriting commission 7 5
178 16
4. Management Fees
2008 2007
�'000 �'000
Management fees 669 800
Value-added tax * 10 140
Value-added tax recoverable (875) -
(196) 940
Allocated to revenue (257) 141
Allocated to capital (see notes 1 & 15) 61 799
(196) 940
* On 5 November 2007, HM Revenue & Customs announced its acceptance of a ruling
by the European Court of Justice that the provision of fund management services
to investment trust companies is exempt from value-added tax (VAT). From that
time, the Company ceased to be charged VAT on management fees.
Recovery of �875,000 of VAT charged on management fees in the periods from 1990
to 1996 and from 2001 to 2007 is considered to be virtually certain and has,
therefore, been accrued at the year-end. This amount has been allocated between
revenue and capital on the same basis as it was originally charged.
----------
Annual Report Page 43
5. Other Fees and Expenses
2008 2007
�'000 �'000
Revenue:
Directors' fees 96 82
Auditor's remuneration - statutory audit 25 21
Liquidation expenses and advisory costs 495 -
General expenses 154 184
770 287
Capital:
Transaction costs incurred on acquisitions of 209 492
investments
979 779
On 10 November 2008, the Board announced that it had reached agreement with
Standard Life UK Smaller Companies Trust plc to merge the assets of the two
companies through a scheme of reconstruction and winding up of the Company. As
explained in note 1, as it is expected that the company will cease to operate
in the foreseeable future the accounts have been prepared on a break-up basis
and a provision of �495,000 has been made for the estimated liquidation
expenses and advisory costs. The direct costs of the scheme of reconstruction
are estimated to be approximately �1 million (excluding portfolio realignment
costs and stamp duty); however, because of a contribution to the costs of the
scheme of reconstruction through the waiver of management fees by Standard Life
Investments, together with an exit charge on realisations, it is expected that
the scheme will have a minimal financial impact on continuing shareholders.
6. Interest Payable
2008 2007
�'000 �'000
On borrowings repayable within five years:
Bank overdraft - 1
Bank revolving credit facility 84 206
84 207
Allocated to revenue 13 32
Allocated to capital (see notes 1 & 15) 71 175
84 207
----------
Annual Report Page 44
7. Taxation
(a) Analysis of charge in year: 2008 2007
�'000 �'000
Overseas tax 5 -
Total current tax for the year (see note 7b) 5 -
(b) Factors affecting current tax charge for the year:
The tax assessed for the period is lower than the standard rate of corporation
tax in the UK for an investment trust (28%) (2007: 30%).
The differences are explained below: 2008 2007
�'000 �'000
Revenue return before taxation 694 418
Corporation tax @ 30% 121 125
Corporation tax at 28%* 81 -
Effects of:
Non-taxable UK franked dividends (265) (253)
Expenses and interest payable allocated to capital (100) (440)
Disallowed expenses 212 155
Unrelieved expenses and interest - 413
Overseas tax 5 -
Utilisation of excess management expenses (49) -
Tax charge to revenue 5 -
No tax charge arises in respect of the Company's capital return for the year as
the Company expects to continue to qualify as an investment trust for tax
purposes, thereby rendering capital profits exempt from tax. A potential
deferred tax asset of �2,481,000 (2007: �2,708,000) in respect of unrelieved
management expenses and non-trading loan relationships has not been recognised
as it is improbable that this deferred tax asset will be recovered in the
foreseeable future.
* Under the Finance Act 2008, the rate of corporation tax was lowered to 28%
from 1 April 2008.
8. Dividends on Ordinary Shares
2008 2007
�'000 �'000
Amounts recognised as distributions to Ordinary shareholders in the year:
Rate per Number of Payment date
share shares
2006 final 4.25p 13,875,000 4 December - 589
2006
2007 interim 1.00p 13,875,000 8 May 2007 - 139
2007 final 3.25p 13,875,000 3 December 451 -
2007
2008 interim 1.00p 13,855,000 19 May 2008 139 -
590 728
The total dividend payable in respect of the financial year, which is the basis
on which the requirements of Section 842 of the Income and Corporation Taxes
Act 1988 are considered, is set out below:
Rate per Number of Payment date
share shares
2007 interim 1.00p 13,875,000 8 May 2007 - 139
2007 final 3.25p 13,875,000 3 December - 451
2007
2008 interim 1.00p 13,855,000 19 May 2008 139 -
2008 second 4.00p 13,855,000 12 January 554 -
interim 2009
693 590
Revenue available for distribution by way of 689 418
dividend
----------
Annual Report Page 45
9. Total Return per Ordinary Share
2008 2007
�'000 �'000
Revenue return after taxation 689 418
Capital (loss)/return after taxation (21,935) 13,000
Total (loss)/return after taxation (21,246) 13,418
Weighted average number of shares 13,856,273 13,875,000
Revenue return per Ordinary share 4.97p 3.01p
Capital (loss)/return per Ordinary share (158.20p) 93.69p
Total (loss)/return per Ordinary share (153.23p) 96.70p
10. Investments held at Fair Value through Profit or Loss
2008 2007
�'000 �'000
Opening book cost 101,204 88,472
Acquisitions at cost (excluding transaction costs) 34,357 81,617
Proceeds of disposals (net of transaction costs) (50,023) (81,680)
Net profit realised on disposals 1,741 12,795
Book cost at 31 August 87,279 101,204
Unrealised (depreciation)/appreciation of investments (20,940) 2,395
Valuation of investments at 31 August 66,339 103,599
In light of the proposals outlined in the Chairman's Statement on page 6 the
accounts have been prepared on a break-up basis. Consequently, all investments
held at 31 August 2008 have been treated as current assets.
The investments are all equities which are either listed in the United Kingdom
or traded on the Alternative Investment Market in the UK and are included in
the Balance Sheet at fair value.
Analysis of investments by place of listing:
London Stock Exchange 28,038 44,361
Alternative Investment Market 38,301 59,238
Valuation of investments at 31 August 66,339 103,599
The Company's investments are registered in the name of nominees of, and held
to the order of, The Bank of New York Mellon, as custodians to the Company.
There were no contingent liabilities in respect of the investments held at the
year-end.
2008 2007
�'000 �'000
The following transaction costs were incurred during
the year:
On acquisitions 209 492
On disposals 117 200
326 692
----------
Annual Report Page 46
10. Investments held at Fair Value through Profit or Loss (continued)
Significant Interests:
At 31 August 2008 the Company held interests amounting to 3% or more of any
class of capital in the following investee companies:
% of class
Tricorn 9.5
CSS Stellar 5.2
Netcall 4.5
Red24 4.2
Netservices 3.9
Evolutec Group 3.7
Travelzest 3.6
Lipoxen 3.5
Walker Greenbank 3.4
ServicePower Technologies 3.1
Kellan Group 3.1
Boomerang Plus 3.1
Alkane Energy 3.0
11. Debtors
2008 2007
�'000 �'000
Amounts receivable within one year:
Investments sold 260 420
Recoverable VAT 875 -
Prepaid expenses 3 18
Accrued income 126 62
1,264 500
12. Creditors
2008 2007
�'000 �'000
Amounts payable within one year:
Bank loan - 4,700
Investments purchased 421 873
Accrued expenses 732 333
1,153 5,906
Accrued expenses include management fees payable of �152,000 (2007: �249,000
including VAT).
The Company has a Revolving Credit Facility of �10,000,000 (2007: �10,000,000)
with The Bank of New York Mellon. Interest is charged at prevailing interbank
market rates, plus a margin of 0.5% per annum. Borrowings are repayable on
demand.
The Company has an overdraft facility of �5,000,000 (2007: �5,000,000) with The
Royal Bank of Scotland plc. Interest on any overdraft is charged at 1% above
the Bank's fluctuating base rate.
13. Share Capital
Authorised
2008 2007
�'000 �'000
20,500,000 (2007: 20,500,000) Ordinary shares of 25p 5,125 5,125
each
Allotted, Called-up
and Fully- paid
2008 2007
�'000 �'000
13,855,000 (2007: 13,875,000) Ordinary shares of 25p 3,464 3,469
each
During the year to 31 August 2008, the Company repurchased 20,000 (2007: nil)
Ordinary shares at a cost of �96,000 (2007: nil). This represented
approximately 0.14% of the Company's issued share capital as at 31 August 2007
and reduced the number of Ordinary shares from 13,875,000 to 13,855,000.
----------
Annual Report Page 47
14. Capital Redemption Reserve
2008 2007
�'000 �'000
Balance brought forward 506 506
Nominal value of Ordinary shares repurchased 5 -
Balance at 31 August 511 506
15. Capital Reserve
2008 2007
�'000 �'000
Balance brought forward 93,456 80,456
(Losses)/gains on investments held at fair value (21,594) 14,467
through profit or loss
Currency losses - (1)
Management fee, allocated to capital (see note 4) (61) (799)
Interest charge, allocated to capital (71) (175)
Transaction costs incurred on acquisition of (209) (492)
investments
Cost of shares repurchased (96) -
Balance at 31 August 71,425 93,456
The Institute of Chartered Accountants in England and Wales has issued guidance
(TECH 01/08) stating that profits arising out of a change in the fair value of
assets, recognised in accordance with Accounting Standards, may be treated as
realised, provided the relevant assets can be readily converted into cash.
Given the relative illiquidity of the investments in which the Company invests,
none of the investments are considered to be sufficiently liquid to be regarded
as readily convertible into cash. Accordingly, the split of Capital Reserve
between realised and unrealised is as follows:
2008 2007
�'000 �'000
Realised 92,365 91,061
Unrealised (20,940) 2,395
Balance at 31 August 71,425 93,456
Under the terms of the Company's Articles of Association, sums comprising the
Capital Reserve, both realised and unrealised, are available for distribution
only by way of redemption or purchase of the Company's own shares.
16. Revenue Reserve
2008 2007
�'000 �'000
Balance brought forward 955 1,265
Net revenue return for the year 689 418
Dividends paid on Ordinary shares (590) (728)
Balance at 31 August 1,054 955
17.Net Asset Value per Ordinary Share
The Net Asset Value per Ordinary share is calculated on net assets of �
76,454,000 (2007: �98,386,000) and 13,855,000 (2007: 13,875,000) Ordinary
shares in issue at the year-end.
18. Cash Flow from Operating Activities
2008 2007
�'000 �'000
Total (loss)/return before finance costs and taxation (21,157) 13,625
Less: capital return before finance costs and 21,864 (13,175)
taxation
Revenue return before finance costs and taxation 707 450
(Increase)/decrease in accrued income (64) 58
Recoverable VAT, allocated to revenue (359) -
Decrease in prepaid expenses 15 2
Increase in accrued expenses 399 50
Accrual adjustment for expenses, allocated to capital 85 (67)
Irrecoverable tax deducted from income (5) -
Net cash inflow from operating activities 778 493
----------
Annual Report Page 48
19. Analysis of Changes in Net Cash/(Debt)
At 31 August At 31
August
2007 Cash Flow 2008
�'000 �'000 �'000
Cash at bank 193 9,811 10,004
Bank loan (4,700) 4,700 -
(4,507) 14,511 10,004
20. Transactions with the Manager
Management fees were paid to Gartmore Investment Limited at the rate disclosed
in the Report of the Directors on page 19. Fees payable for the year amounted
to �669,000 (2007: �800,000), plus value-added tax where applicable. Fees
outstanding at the Balance Sheet date were �152,000 (2007: �212,000 plus
value-added tax).
21. Financial Instruments: Risk Management
As required by Financial Reporting Standard 29 ``Financial Instruments:
Disclosures'', the following note provides information with regard to the
Company's exposure to risks and how those risks are managed.
The Directors manage investment risk principally through setting an investment
policy (see page 2) that is approved by shareholders, by delegating management
of the Company's investments to an investment manager under an agreement which
incorporates appropriate duties and restrictions, and by monitoring performance
in relation thereto. The Board's relationship with the investment manager is
set out on page 28 of this Report. Internal control procedures and the Board's
approach to risk is summarised on pages 29 to 31.
In pursuit of its investment objective set out on page 2, the Company is faced
with a variety of risks which could result in either a reduction in the
Company's net assets or a reduction in the revenue available for distribution
by way of dividend. The principal risks associated with the Company's financial
instruments are market risk, credit risk and liquidity risk.
Market risk
Market risk comprises three types of risk: market price risk, interest rate
risk and currency risk.
Market price risk
The Company is an investment company and its performance is dependent on the
performance of the companies and securities in which it invests. Consequently,
market price risk is the most significant risk to which the Company is exposed.
The Company's investment objective and policy require it to invest
predominantly in smaller UK listed companies and unlisted companies quoted on
the Alternative Investment Market.
At 31 August 2008, the fair value of the Company's assets exposed to market
price risk was �66,339,000 (2007: �103,599,000). The fair value of the
investments in the portfolio is normally their bid-market price. The market
price of the investee companies' shares is subject to their performance, supply
and demand for the shares and investor sentiment regarding the companies, or
their industry sector.
The reduction in the value of assets exposed to market risk was attributable
mainly to the combination of falls in the market prices of investments held and
to the move from a geared position to a net cash position in the light of the
deteriorating economic environment.
Although the net movement in the benchmark index over the 10-year period to 31
August 2008 was an increase of 17.1%, the annual movement over that period
averaged 20.1%. This illustrates the volatility of the small-cap sector and
indicates that it could move similarly in the forthcoming financial year.
Accordingly, to illustrate the Company's sensitivity to market prices, a 20.1%
change to the market value of the equity portfolio at 31 August 2008 would
generate a corresponding increase or decrease of 17.5% in the net asset value
per Ordinary share and, because of the effect on the management fee, would have
a converse effect on revenue return of around 0.8p per Ordinary share. The
effect on capital return would be materially the same as the effect on net
assets.
----------
Annual Report Page 49
21. Financial Instruments: Risk Management (continued)
Interest rate risk
The Company finances part of its activities through the use of a revolving
credit facility of �10,000,000 (2007: �10,000,000) provided by The Bank of New
York Mellon. Interest on drawings under the facility is charged at prevailing
interbank market rates, plus a margin of 0.5% per annum. During the year, the
maximum drawn under the facility was �6,550,000 (2007: �7,300,000) and the
weighted average interest rate was 6.41% (2007: 6.19%). No hedging of the
interest rate is undertaken. At 31 August 2008, there were no drawings
outstanding (2007: �4,700,000).
The Company also has a short-term overdraft facility of �5,000,000 (2007: �
5,000,000) provided by The Royal Bank of Scotland. The interest rate is 1%
above the Bank's fluctuating base rate and no hedging is undertaken. The
Manager minimises the risk of exposure to excessive interest costs by regularly
monitoring the Company's cash position. The Company earns interest on its cash
and short-term deposits. Where funds are placed on deposit, they are rarely
fixed for periods of more than one week. At 31 August 2008, financial assets
and liabilities exposed to floating interest rates were as follows:
2008 2007
�'000 �'000
Financial Assets:
Cash at bank and on deposit 10,004 193
Financial Liabilities
Bank loan - (4,700)
The Company has no direct exposure to fixed interest rates.
The year-end amounts are not representative of the exposure to interest rates
either during the year just ended or in the year ahead, since the level of
borrowings and/or cash held will be affected by the strategy being followed in
response to the Board's and the Manager's perception of market prospects and
the investment opportunities available at any particular time. However, to
illustrate the potential sensitivity to changes in interest rates, if the
borrowing facilities of �15,000,000 were fully drawn, a change of 0.5% in the
rate of interest charged would, over the course of a year, amount to �75,000,
less than 0.1% of year-end net assets. Interest rate changes may have an impact
on the earnings of companies whose shares are held within the portfolio and may
therefore have a secondary impact on either the value of the portfolio or the
revenue return.
Currency risk
At 31 August 2008, all the Company's investments were priced in sterling.
Although there may be occasions when the Company will hold investments
denominated in currencies other than sterling, the Company's exposure to
movements in exchange rates relative to sterling is unlikely to have a material
impact on either the value of the portfolio or on the revenue return.
Credit risk
Credit risk is the Company's exposure to financial loss from failure of a
counterparty to deliver securities or cash for acquisitions or disposals of
investments or to repay deposits. The Company manages credit risk by using
brokers from a database of approved financial institutions which have undergone
rigorous due diligence tests by the Manager's Risk Management Team and by
dealing through Gartmore Investment Limited with banks of high standing
regulated by the Financial Services Authority.
At 31 August 2008, the maximum exposure to credit risk was �10,264,000 (2007: �
613,000), comprising:
2008 2007
�'000 �'000
Cash at bank and on deposit 10,004 193
Investments sold 260 420
All of the above financial assets are current, their fair values are considered
to be the same as the values shown and the likelihood of default is considered
to be low.
----------
Annual Report Page 50
21. Financial Instruments: Risk Management (continued)
Liquidity risk
Liquidity risk is the possibility of the Company failing to realise sufficient
assets to meet its financial obligations. The Company minimises this risk by
investing primarily in marketable securities which can be expected to generate
cash inflows and by ensuring that it has adequate cash and credit facilities in
place to meet its obligations. The Company's liquidity is held in sterling, and
during the year this was almost entirely on interest-bearing current accounts
or short-term deposits in the money market. Deposits are rarely fixed for terms
in excess of one week. If amounts are sizeable, they are placed with a range of
deposit takers so that, at any given time, deposits do not exceed �5,000,000
with any single counterparty. On behalf of the Board, the Audit Committee
monitors the banks used by the Manager and reviews the limits on the amount
that can be placed on deposit with any single counterparty.
At 31 August 2008, the fair value of financial liabilities was �1,153,000
(2007: �5,906,000), comprising:
2008 2007
�'000 �'000
Due within one month:
Investments purchased 421 873
Bank loan - 4,700
Accrued expenses 732 333
Gearing
Market risks can be amplified by gearing. As discussed above, in addition to
using shareholders' funds to finance investments the Company can also invest
funds by drawing on its loan and overdraft facilities. Such gearing would
exaggerate the effect on net asset value of a change in the value of the
portfolio. If the Company's borrowing facilities were fully drawn the bank
gearing would amount to 19.6% of net assets and in those circumstances a
movement of 10% in the value of the investment portfolio would be expected to
move the net asset value by approximately 12.0%. As noted on page 48 in the
interest rate risk section, the level of borrowings and/or cash held during the
year will be affected by the strategy being followed in response to the Board's
and Manager's perception of market prospects and the investment opportunities
available at any particular time.
At the year-end there was no bank gearing (2007: 4.8%).
22. Capital Management Policies and Procedures
The Company's capital is represented by its net assets, which are managed to
achieve the Company's investment objective set out on page 2.
The Board monitors and reviews the broad structure of the Company's capital on
an ongoing basis. This review includes:
(i)the planned level of gearing through the Company's loan and overdraft
facilities;
(ii)the need to buy back or issue equity shares; and
(iii)the determination of dividend payments.
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding accounting period.
The Company is subject to externally imposed capital requirements through the
Companies Act, with respect to its status as a public company.
In addition, with respect to the obligation and ability to pay dividends, the
Company must comply with the provisions of Section 842 Income and Corporation
Taxes Act 1988 and of the Companies Act 2006.
These provisions are unchanged since the previous year and the Company has
complied with them.
Gartmore Investment Limited
Company Secretary
END
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