Annual Financial Report

British & American Investment Trust PLC Annual Financial Report for the year ended 31 December 2010 Registered number: 433137 Directors Registered office J Anthony V Townsend (Chairman) Wessex House Jonathan C Woolf (Managing Director) 1 Chesham Street Dominic G Dreyfus (Non-executive) London SW1X 8ND Ronald G Paterson (Non-executive) Telephone: 020 7201 3100 Registered in England No.433137 26 April 2011 This is the Annual Financial Report as required to be published under DTR 4 of the UKLA Listing Rules. Financial Highlights For the year ended 31 December 2010 2010 2009 Revenue Capital Total Revenue Capital Total return return return return Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Profit before tax - 2,146 (1,830) 316 1,624 (1,122) 502 realised Profit before tax - - 2,927 2,927 - 4,350 4,350 unrealised __________ __________ __________ __________ __________ __________ Profit before tax - 2,146 1,097 3,243 1,624 3,228 4,852 total __________ __________ __________ __________ __________ __________ Earnings per Â£1 ordinary share - 7.16p 4.39p 11.55p 5.07p 12.91p 17.98p basic __________ __________ __________ __________ __________ __________ Earnings per Â£1 ordinary share - 6.11p 3.13p 9.24p 4.62p 9.22p 13.84p diluted __________ _________ __________ __________ _________ __________ Net assets 32,198 31,037 __________ __________ Net assets per ordinary share - deducting preference 89p 84p shares at par __________ __________ - diluted 92p 89p __________ __________ 93p Diluted net asset value per ordinary share at 18 April 2011 __________ Dividends declared or proposed for the period per ordinary share - interim paid 2.7p 2.7p - final proposed 4.p 4.2p per preference 3.5p 3.5p share Chairman's Statement I report our results for the year ended 31 December 2010. Revenue The return on the revenue account before tax amounted to Â£2.1 million (2009: Â£ 1.6 million), an increase of 32 percent. Gross income amounted to Â£2.5 million (2009: Â£2.0 million), re-establishing the income levels achieved in the years prior to the global economic recession of 2008/9. Â£2.2 million of this amount (2009: Â£1.7 million) represented income from portfolio investments and Â£0.2 million (2009: Â£0.3 million) film, property and other income. The increase in portfolio income arose from a growth in dividends paid by core investee companies and a deliberate targeting of investment in higher and special dividend paying companies. The return before tax, which includes realised and unrealised capital appreciation, amounted to a gain of Â£3.2 million (2009: Â£4.9 million gain) reflecting the recovery in investment valuations over the year and marking a second year of positive return after the previous two years of substantial capital losses. The revenue return per ordinary share was 7.1p (2009: 5.1p) on an undiluted basis and 6.1p (2009: 4.6p) on a diluted basis. Net Assets Group net assets at the year end were Â£32.2 million (2009: Â£31.0 million), an increase of 3.7 percent. This compares to increases in the FTSE 100 and All Share indices of 9.0 percent and 10.9 percent, respectively, over the period. Although the year end result shows an increase in net assets compared to the decline in net assets reported at the interim stage, our portfolio nevertheless underperformed the benchmarks over the year as a whole, having outperformed at the half year point. This relative reversal was due to the combination of a very strong uplift in markets in the second half (by approximately 20 percent) and a decline in the value of our largest investment, Geron Corporation, in the last month of the year following the announcement of a large equity fundraising at the beginning of December, as explained in more detail below. As reported at the interim stage, equity and most other financial markets had shown extreme volatility in the first half, with markets in the UK and US moving by a combined (peak to trough) of approximately 15 percent and registering declines of almost 10 percent at mid-year. This volatility was primarily caused by concerns about prospects for sustained growth in the USA and globally. The second half, however, was characterised by an unusually strong and sustained period of growth, with UK equities increasing by 20 percent and establishing 3-year highs. This strength resulted from the decision by the US Federal Reserve to initiate a second round of monetary quantative easing in the US (QE2) to combat the signs of faltering return to growth seen in the first half of 2010. The share price of our largest US investment, Geron Corporation, fluctuated considerably over the year in response to the announcements of various significant events. Geron's announcement in December of a large equity fundraising at a significant discount to finance an acquisition and provide working capital resulted in a decline in the share price of over 20 percent; this contributed largely to the underperformance of the portfolio as a whole at year end. More details are given in the Managing Director's report which follows. The net asset value per ordinary share increased to 92p (2009: 89p) on a diluted basis. Deducting prior charges at par, the net asset value per ordinary share increased to 89p (2009: 84p). Dividend We are pleased to recommend an increased final dividend of 4.5p per ordinary share, which together with the interim dividend makes a total payment for the year of 7.2p (2008: 6.9p) per ordinary share. This represents an increase of 4.3 percent over the previous year's total dividend and a yield of 9.9 percent based on the share price of 73p at the end of the year. The final dividend will be payable on 23 June 2011 to shareholders on the register at 27 May 2011. A dividend of 1.75p will be paid to preference shareholders resulting in a total payment for the year of 3.5p per share. Investment Trust regulation HM Treasury's review of the tax and company law rules affecting investment trusts set out in its consultation document in July 2010 has, thanks very largely to painstaking work by our trade association, the Association of Investment Companies (AIC), resulted in sensible and beneficial amendments which will be advantageous to the whole industry. The proposed revisions that appeared particularly to discriminate against smaller trusts such as ourselves have been dropped. The AIC has also done important work on the Alternative Investment Fund Managers Directive passed into law by the European Parliament last summer. Although there is much detail still to emerge before this Directive takes effect in 2013, it is clear that much of the over-bureaucratic regulation first proposed has been abandoned in favour of more pragmatic measures. Outlook While the high levels of growth in financial markets seen in the second half of 2010 abated in the first quarter of 2011, equity markets nevertheless remained firm at these higher levels. Towards the end of the quarter, however, sentiment began to change as concerns about levels of inflation in developed economies, the high cost of commodities and over-heating in developing countries took hold, resulting in expectations that the end of monetary easing and historically low interest rates would be hastened. This combined with the devastating effects of the Japanese earthquake and tsunami in March resulted in a sharp sell-off of equities and higher risk assets during the month and short-term turbulence in currency markets. These events and changes in sentiment have now set the scene for markets to consider the inevitable return over time to more conventional levels of official liquidity, interest rates and corporate growth prospects over the medium term. As a result, and barring any further unforeseen events or natural disasters, we would expect markets to display a less volatile and more subdued level of activity over the coming period. Against this background, we maintain our long-term and income generating strategies that are primarily based on equity investment in the UK and USA. As at 18 April 2011, group net assets had increased to Â£32.4 million, an increase of 0.6 percent since the beginning of the calendar year. This is equivalent to 90 pence per share (prior charges deducted at par) and 93 pence per share on a diluted basis. Over the same period the FTSE 100 decreased 0.5 percent and the All Share Index decreased 0.5 percent. Anthony Townsend 26 April 2011 Managing Director's report The anticipated re-appraisal of growth prospects for economies and markets after a period of dramatic recovery in 2009 duly arrived in the first quarter of 2010 and a period of high volatilty and uncertainty in financial markets ensued for the rest of the first half. Weak corporate growth, employment, housing and commodities indicators combined with disruption in the currency markets caused by difficulties in the Euro zone all served to destabilise the equity markets with risk appetite waxing and waning with the publication of each economic indicator. As a result, equities markets in the UK and US closed substantially down at the half year by 9 and 6 percent respectively, despite the generally favourable environment for equity investment in terms of interest rates, yields and earnings ratios. Against this background, fears grew particularly in the USA that the recovery from one of the largest global recessions in 60 years would not run its course, particularly given the still unmet need in developed economies to reduce budget deficits and deleverage the financial and household sectors through spending reductions and higher taxes. As a result, the US Federal Reserve began to make it plain that the then current high levels of monetary easing would not be reduced as expected and that on the contrary a second round of easing was contemplated. This duly occurred formally in November, but its anticipation was sufficient to boost markets significantly and re-establish risk appetite throughout the second half of 2010. As noted above, UK and US equity markets grew by 20 and 18 percent in the second half of 2010, giving rise to full year increases of 10 and 11 percent, respectively. As noted above, our portfolio outperformed the benchmarks at the half year both in asset value and total return but underperformed at the year end. This was principally due to a large 20 percent fall in the share price of our largest investment Geron Corporation in the final month of the year. This fall followed the announcement and completion of a large and generally unexpected equity fundraising at a 20 percent discount to market price to finance an acquisition and provide working capital. During the year, Geron was able to update the market on two positive developments, namely the lifting of a temporary halt by the Federal Drug Agency in July 2010 on its ground-breaking Phase 1 trial of embryonic stem cell therapy for spinal cord injury and in October the announcement of the first patient being treated, a world first. As a result, Geron's share price had strengthened steadily in the second half of 2010, until the announcement of the fund raising. However, the further announcement in early 2011 of a major change in senior management, including the departure of the long serving Chief Executive was also unexpected and resulted in further weakening of the share price to levels below that of the fund raising in December. Since then, however, the price has recovered somewhat but remains well below pre-fund raising levels. Nevertheless, the modest recovery has allowed our portfolio to outperform slightly in the first quarter of 2011, as noted above, and we remain firmly committed to our large investment in Geron for its significant growth potential in the medium term as it brings to fruition the development of its revolutionary oncology and embryonic stem cell technologies. Outlook When last reporting in August 2010, it was noted that the outlook was very uncertain, poised between continuing recovery or return to recession, depending on governments' policy and monetary response to weakening indicators. In the event, the global stimulus was continued and even increased which had the effect of perpetuating the recovery. As already noted, however, this has led to concerns about growing inflationary pressures in many of the developed economies and price bubbles in commodities and large developing economies such as China. While downside economic risks still exist such as the large structural imbalances in government finances and bank balance sheets, the continuing reluctance of banks to lend, high oil prices and external shocks such as the recent natural disaster in Japan, the expectation now is that monetary and/or fiscal tightening will now proceed this year in most of the developed economies, bringing forward a period of lower growth expectation, increasing interest rates, lower corporate profitability and dull financial market performance. The beginnings of this trend have already been seen in the first increase in interest rates by the European Central Bank since the recession and signs in the UK that consumers have already started to limit significantly their retail consumption in non-essential areas. We therefore anticipate a period of lower growth in major economies and financial markets. We will continue to invest for the long term alongside our core investments in UK investment trusts, seeking to identify situations giving higher levels of capital return and income. Jonathan Woolf 26 April 2011 Group income statement For the year ended 31 December 2010 2010 2009 Revenue Capital Total Revenue Capital Total return return return return Â£ 000 Â£ 000 Â£ 000 Â£ 000 Â£ 000 Â£ 000 Investment income (note 2) 2,489 - 2,489 1,967 - 1,967 Holding gains on 2,927 2,927 4,350 4,350 investments at fair value - - through profit or loss Losses on disposal of investments at fair value - (1,641) (1,641) - (937) (937) through profit or loss Expenses (343) (189) (532) (343) (185) (528) ________ ________ ________ ________ ________ ________ Profit before tax 2,146 1,097 3,243 1,624 3,228 4,852 Tax (7) - (7) (5) - (5) ________ ________ ________ ________ ________ ________ Profit for the period 2,139 1,097 3,236 1,619 3,228 4,847 ________ ________ ________ ________ ________ ________ Earnings per share Basic - ordinary shares 7.16p 4.39p 11.55p 5.07p 12.91p 17.98p ________ ________ ________ ________ ________ ________ Diluted - ordinary shares 6.11p 3.13p 9.24p 4.62p 9.22p 13.84p ________ ________ ________ ________ ________ ________ The group does not have any income or expense that is not included in the profit for the period. Accordingly, the `Profit/(loss) for the period' is also the `Total Comprehensive Income for the period' as defined in IAS 1(revised) and no separate Statement of Comprehensive Income has been presented. The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations. All profit and total comprehensive income is attributable to the equity holders of the parent company. There are no minority interests. Group statement of changes in equity For the year ended 31 December 2010 Share Capital Retained Total capital reserve earnings Â£ 000 Â£ 000 Â£ 000 Â£ 000 Balance at 31 December 2008 35,000 (8,035) 1,225 28,190 Changes in equity for 2009 Profit for the period - 3,228 1,619 4,847 Ordinary dividend paid (note - - (1,650) (1,650) 4) Preference dividend paid - - (350) (350) (note 4) ________ ________ ________ ________ Balance at 31 December 2009 35,000 (4,807) 844 31,037 Changes in equity for 2010 Profit for the period - 1,097 2,139 3,236 Ordinary dividend paid (note - - (1,725) (1,725) 4) Preference dividend paid - - (350) (350) (note 4) ________ ________ ________ ________ Balance at 31 December 2010 35,000 (3,710) 908 32,198 ________ ________ ________ ________ Registered number: 433137 Group Balance Sheet For the year ended 31 December 2010 Group 2010 2009 Â£ 000 Â£ 000 Non-current assets Investments - fair value through profit or 30,881 29,385 loss Current assets Receivables 623 109 Derivatives - fair value through profit or 2,385 1,335 loss Cash and cash equivalents 509 985 __________ __________ 3,517 2,429 __________ __________ Total assets 34,398 31,814 __________ __________ Current liabilities Trade and other payables 580 62 Other current liabilities 180 122 Derivatives - fair value through profit or 1,440 593 loss __________ __________ (2,200) (777) __________ __________ Total assets less current liabilities 32,198 31,037 __________ __________ Net assets 32,198 31,037 __________ __________ Equity attributable to equity holders Ordinary share capital 25,000 25,000 Convertible preference share capital 10,000 10,000 Capital reserve (3,710) (4,807) Retained revenue earnings 908 844 __________ __________ Total equity 32,198 31,037 __________ __________ Approved: 26 April 2011 Group cash flow statement For the year ended 31 December 2010 Year ended Year ended 2010 2009 Â£ 000 Â£ 000 CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax 3,243 4,852 Adjustments for: Gain on investments (1,286) (3,413) Scrip dividends (167) (6) Film income tax deducted at source (7) (5) Proceeds on disposal of investments 16,500 17,756 at fair value through profit and loss Purchases of investments at fair (15,701) (16,995) value through profit and loss __________ __________ Operating cash flows before movements 2,582 2,189 in working capital Increase in receivables (2,770) (869) Increase in payables 1,786 771 __________ __________ Net cash from operating activities 1,598 2,091 before income taxes Income taxes recovered 1 30 __________ __________ NET CASH FLOWS FROM OPERATING 1,599 2,121 ACTIVITIES __________ __________ CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid on ordinary shares (1,725) (1,650) Dividends paid on preference shares (350) (350) __________ __________ NET CASH USED IN FINANCING ACTIVITIES (2,075) (2,000) __________ __________ NET (DECREASE)/INCREASE IN CASH AND (476) 121 CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 985 864 __________ __________ CASH AND CASH EQUIVALENTS AT END OF YEAR 509 985 __________ __________ Purchases and sales of investments are considered to be operating activities of the company, given its purpose, rather than investing activities. 1 Basis of preparation and going concern The financial information set out above contains the financial information of the company and its subsidiaries (together referred to as the "Group") for the year ended 31 December 2010. The financial statements have been prepared on the historical cost basis except for the measurements at fair value of investments and derivative financial instruments and the inclusion of a subsidiary at cost. The same accounting policies as those published in the statutory accounts for 31 December 2009 have been applied. The information for the year ended 31 December 2010 is an extract from the statutory accounts to that date. Statutory accounts for 2009, which were prepared under IFRS as adopted by the EU, have been delivered to the registrar of companies and those for 2010, prepared under IFRS as adopted by the EU, will be delivered in due course. The auditors have reported on the 31 December 2010 year end accounts and their reports were unqualified and did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and did not contain statements under section 498(2) or (3) of the Companies Act 2006. The directors, having made enquiries, consider that the Group has adequate financial resources to enable it to continue in operational existence for the foreseeable future. Accordingly, the directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Group's accounts. 2 Income 2010 2009 Â£ 000 Â£ 000 Income from investments UK dividends 1,968 1,532 Overseas dividends 10 47 Scrip and in specie dividends 167 6 Interest on fixed income 102 114 securities Rental income (PID) 7 31 Property unit trust income 23 23 Film revenues 188 208 __________ __________ 2,465 1,961 __________ __________ Other income Deposit interest 1 4 Other 23 2 __________ __________ 24 6 __________ __________ Total income 2,489 1,967 __________ __________ Total income comprises: Dividends 2,145 1,585 Interest 103 118 Film revenues 188 208 Property income 30 54 Gain on foreign exchange 23 2 __________ __________ 2,489 1,967 __________ __________ Income from investments Listed investments 2,238 1,706 Unlisted investments 227 255 __________ __________ 2,465 1,961 __________ __________ Of the Â£ 2,145,000 (2009 - Â£1,585,000) dividends received in the group accounts, Â£1,525,000 (2009 - Â£ 962,000) related to special and other dividends received from investee companies that were bought after the dividend announcement. There was a corresponding capital loss of Â£1,769,000 (2009 - Â£ 1,016,000), on these investments. 3 Earnings per ordinary share The calculation of the basic and diluted earnings per share is based on the following data: 2010 2009 Revenue Capital Total Revenue Capital Total return return return return Â£ 000 Â£ 000 Â£ 000 Â£ 000 Â£ 000 Â£ 000 Earnings: Basic 1,789 1,097 2,886 1,269 3,228 4,497 Preference dividend 350 - 350 350 - 350 __________ __________ __________ __________ __________ __________ Diluted 2,139 1,097 3,236 1,619 3,228 4,847 __________ __________ __________ __________ __________ __________ Basic revenue, capital and total return per ordinary share is based on the net revenue, capital and total return for the period and after deduction of dividends in respect of preference shares and on 25 million (2009: 25 million) ordinary shares in issue. The diluted revenue, capital and total return is based on the net revenue, capital and total return for the period and on 35 million (2009: 35 million) ordinary and preference shares in issue. 4 Dividends 2010 2009 Â£ 000 Â£ 000 Amounts recognised as distributions to equity holders in the period: Dividends on ordinary shares: Final dividend for the year ended 31 December 2009 of 4.2p (2008:3.9p) per share 1,050 975 Interim dividend for the year ended 31 December 2010 of 2.7p 675 675 (2009:2.7p) per share __________ __________ 1,725 1,650 __________ __________ Proposed final dividend for the year ended 31 December 2010 of 4.5p (2009:4.2p) per share 1,125 1,050 __________ __________ Dividends on 3.5% cumulative convertible preference shares: Preference dividend for the 6 months ended 31 December 2009 of 1.75p (2008:1.75p) per share 175 175 Preference dividend for the 6 months ended 30 June 2010 of 1.75p (2009:1.75p) per share 175 175 __________ __________ 350 350 __________ __________ Proposed preference dividend for the 6 months ended 31 December 2010 of 1.75p (2009:1.75p) per share 175 175 __________ __________ The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements in accordance with IFRS. We have set out below the total dividend payable in respect of the financial year, which is the basis on which the retention requirements of Sections 1158 and 1159 of the Corporation Tax Act 2010 are considered. Dividends proposed for the period 2010 2009 Â£ 000 Â£ 000 Dividends on ordinary shares: Interim dividend for the year ended 31 December 2010 of 2.7p (2009:2.7p) per share 675 675 Proposed final dividend for the year ended 31 December 2010 of 4.5p (2009:4.2p) per share 1,125 1,050 __________ __________ 1,800 1,725 __________ __________ Dividends on 3.5% cumulative convertible preference shares: Preference dividend for the year ended 31 December 2010 of 1.75p (2009:1.75p) per share 175 175 Proposed preference dividend for the year ended 31 December 2010 of 1.75p (2009:1.75p) per share 175 175 __________ __________ 350 350 __________ __________ 5 Net asset values Net asset Net assets value per attributable share 2010 2009 2010 2009 Â£ Â£ Â£ 000 Â£ 000 Ordinary shares Undiluted 0.89 0.84 22,198 21,037 Diluted 0.92 0.89 32,198 31,037 The undiluted and diluted net asset values per Â£ 1 ordinary share are based on net assets at the year end and 25 million (undiluted) ordinary and 35 million (diluted) ordinary and preference shares in issue. Principal risks and uncertainties The principal risks facing the company relate to its investment activities and include market risk (other price risk, interest rate risk and currency risk), liquidity risk and credit risk. The other principal risks to the company are loss of investment trust status and operational risk. These will be explained in more detail in the notes to the 2010 Annual Report and Accounts, but remain unchanged from those published in the 2009 Annual Report and Accounts. Related party transactions The company rents its offices from Romulus Films Limited, and is also charged for its office overheads. The salaries and pensions of the company's employees, except for the three non-executive directors, are paid by Remus Films Limited and Romulus Films Limited and are recharged to the company. There have been no other related party transactions during the period, which have materially affected the financial position or performance of the group. During the period transactions between the company and its subsidiaries have been eliminated on consolidation. Capital Structure The company's capital comprises Â£35,000,000 (2009 - Â£35,000,000) being 25,000,000 ordinary shares of Â£1 (2009 - 25,000,000) and 10,000,000 non-voting convertible preference shares of Â£1 each (2009 - 10,000,000). The rights attaching to the shares will be explained in more detail in the notes to the 2010 Annual Report and Accounts, but remain unchanged from those published in the 2009 Annual Report and Accounts. Directors' responsibility statement The directors are responsible for preparing the financial statements in accordance with applicable law and regulations. The directors confirm that to the best of their knowledge the financial statements prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and the profit of the company and the undertakings included in the consolidation taken as a whole and that the Chairman's Statement, Managing Director's Report and the Directors' report include a fair review of the information required by rules 4.1.8R to 4.2.11R of the FSA's Disclosure and Transparency Rules, together with a description of the principal risks and uncertainties that the company faces. Annual General Meeting This year's Annual General Meeting has been convened for Thursday 16 June 2011 at 12.15pm at Wessex House, 1 Chesham Street, London SW1X 8ND. Copies of this Annual Financial Report are available on www.baitgroup.co.uk.

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