Annual Financial Report

Strategic Equity Capital plc Report & Financial Statements for the year ended 30 June 2010 The Full Annual Report and Accounts can be accessed via the Company's website at: www.strategicequitycapital.com or by contacting the Company Secretary on telephone 01392 412122. Investment Objective The investment objective of the Company is to achieve absolute returns (i.e. growth in the value of investments) rather than relative returns (i.e. attempting to outperform selected indices) over a medium-term period, principally through capital growth. Investment Manager's Strategy The Investment Manager, SVG Investment Managers Limited ("SVGIM"), employs a strategy to invest in publicly quoted companies which create value through strategic, operational and management change. SVGIM follows a practice of constructive corporate engagement and aims to work with management teams in order to enhance shareholder value. A more detailed explanation can be found in the Investment Manager's Report below. Shareholder information Financial calendar Company's year-end 30 June Annual results announced October Annual General Meeting November Company's half-year 31 December Half yearly results February announced Share price The Company's Ordinary shares are listed on the London Stock Exchange. The mid-market price is quoted daily in the Financial Times under `Investment Companies'. Share dealing Shares can be traded through your usual stockbroker. Share register enquiries The register for the Ordinary shares is maintained by Computershare Investor Services plc. In the event of queries regarding your holding, please contact the Registrar on 0870 707 1285. Changes of name and/or address must be notified in writing to the Registrar. NAV The Company's net asset value is announced weekly to the London Stock Exchange. Website Further information on the Company can be accessed via the Company's website www.strategicequitycapital.com Capital structure Issued share capital 79,815,974 Ordinary shares of 10p each: Â£7,981,597 At 30 June 2010 the issued share capital of the Company was 79,815,974 Ordinary shares. All shares have equal voting rights. Treasury shares During the year to 30 June 2010 the total number of shares held in treasury was 3,045,500 (2009:3,045,500). Shares held in treasury have no voting, dividend or other rights and are excluded from net asset value and return per share calculations. As at 5 October 2010 the Company's issued share capital remained as stated above, and the total voting rights figure was 76,770,474. Financial summary Year to Six months to Year to 30 June 2010 31 December 2009 30 June 2009 Total return: Total return Â£12,907,000 Â£12,512,000 Â£(19,361,000) Return per Ordinary share* 17.03p 16.72p (27.78)p Revenue: Net return after taxation Â£234,000 Â£101,000 Â£234,000 Revenue return per Ordinary 0.31p 0.14p 0.34p share* As at Six months to As at 30 June 2010 31 December 2009 30 June 2009 Assets (investments valued at bid-market prices): Net assets Â£51,222,000 Â£50,827,000 Â£34,650,000 Net assets value per Ordinary 66.72p 66.21p 49.80p share (including current period revenue) Middle market quotation: Ordinary shares 51.25p 50.75p 36.25p Discount to net asset value 23.19% 23.35% 27.21% * Return per Ordinary share is calculated based on 75,785,546 (2009: 69,682,295), being the weighted average number of Ordinary shares in issue during the year. Chairman's report Introduction Market conditions proved well suited to the Company's investment style in the period under review. Economic uncertainty remained high, and the aftershocks of the financial crisis led to wild fluctuations in equity markets. Corporate financing availability was scarce, with banks continuing to reduce their lending to smaller companies. However, against this backdrop the Company's portfolio continued to perform well from an operating perspective, and the scarcity of financing for public companies played well to the Company's Investment Strategy. The Investment Manager has increasingly focused the portfolio on companies with strong market positions in growing niche sectors. These were able to deliver strong earnings and cash flow growth over the period as the impact of restructuring plans carried out in 2009 delivered positive results. In the first half of the financial period the company was able to participate in a number of attractively priced secondary equity fundraisings, as high quality companies sough to reduce their debt to suit the new banking environment. It was pleasing to see these making an immediate contribution to performance. In the second half of the period investment activity was more subdued, as many companies shelved fundraising in the face of an improved trading outlook and market liquidity reduced, and the Investment Manager focused on realising proceeds from more mature investments. Performance The period saw an improvement in NAV per share of 34%. This was driven by a combination of factors, including continued strong operating performance from mature portfolio holdings, the positive impact of the Company's acquisition of a partnership interest in Strategic Recovery Fund II ("SRF II") and, finally, a significant contribution from increases in the value of new investments made over the course of the period. The Company's performance was considerably better than that of comparable markets; it outperformed the FTSE SmallCap (ex-Investment Companies) Index by 17%. It is encouraging to see that, after the unsatisfactory performance of 2007-8, a refinement of the investment process has led to a recovery of much of the lost ground and brought the Company broadly in line with markets over three years. Discount Management The discount to NAV at which the Company's shares traded narrowed again to an average of 24.4% over the year. The Board remains committed to buying back shares when it believes that this is in the best interests of shareholders as a whole after taking into account all relevant factors, including alternative uses for any available cash balances, market conditions and the constraints imposed by legal and regulatory requirements, including the public hands test and concert party matters. The Board I am pleased to welcome Ian DighÃ© to the Board. Ian has extensive relevant experience in the investment trust sector, and the positive impact of his contribution has already been felt. The Board has operated effectively during the period and I believe that the current composition of the Board is appropriate. Banking Arrangements The Company currently has a Â£5 million revolving facility with RBS which expires on 14 July 2011. This facility is currently unutilised. Following the better than expected reduction in undrawn commitments to unlisted investments, the Board has authorised the Investment Manager to use this facility to increase investment flexibility over the short term. Dividend The Directors continue to expect that returns for shareholders will derive primarily from the capital appreciation of the shares rather than from dividends. The Board is proposing a final dividend of 0.30p per Ordinary share for the year ending 30 June 2010, payable on 16 November 2010 to holders on the register as at 19 October 2010. AGM The AGM of the Company will be held at 11:30am on 9 November 2010 at 61 Aldwych, London. In addition to the normal business of the meeting the Investment Manager will provide an update on the Company's investment portfolio and answer any questions from shareholders. Continuation Vote The Board previously committed to providing shareholders with an opportunity to vote on an ordinary resolution to continue the Company at this year's Annual General Meeting. In advance of this, the Board, in conjunction with its advisers, undertook a strategic review of the Company. Whilst the Board remains concerned at the level of the discount to NAV at which the Company's shares trade, taking into account the Company's improved investment performance, the proposed changes described under "New Management Fee Arrangements" and "Future Continuation Votes" below and having consulted a majority of the Company's shareholders, the Board is recommending shareholders to vote in favour of continuing the Company (resolution 6 in the notice of AGM). The Investment Manager has provided the Company with protective notice in the event of shareholders of the Company voting against the Company's continuation. New Management Fee Arrangements As part of the strategic review, the Board reviewed the basis of remuneration of the Investment Manager and concluded that the current arrangements should be revised to provide a closer alignment of the respective interests of shareholders and the Investment Manager, as well as a better incentive for the Investment Manager to continue to deliver outperformance over the longer term. Accordingly, the Board is proposing that the basic management fee should be the lower of the basic fee calculated on the current basis and 1% per annum of the Company's market capitalisation. In addition, the Board is proposing that the performance fee arrangements should be amended by replacing the current absolute return benchmark with a relative return benchmark (the FTSE SmallCap (excluding Investment Companies) Index) but maintaining a high watermark (currently 118.8p)). The proposed changes to the management fees constitute a related party transaction and are, therefore, subject to shareholder approval at a separate general meeting which will be held immediately after the AGM. Full details of the proposed new fee arrangements will be set out in a separate circular to shareholders. Future Continuation Votes The Board has decided that shareholders should be given an opportunity to vote on an ordinary resolution to continue the Company at next year's Annual General Meeting, and at every Annual General Meeting thereafter , provided that the NAV total return per share over the three years ending on the preceding 30 June has outperformed the total return on the FTSE SmallCap (excluding Investment Companies) Index and the average discount over the three months ending on the preceding 30 June is not wider than the average discount of the UK smaller companies sector over that period. If either of those tests fail, the Board will bring forward proposals which are expected to allow shareholders to realise their investment. The Investment Manager strongly supports this approach and has agreed that, if any such continuation vote is not passed or if either or both the performance tests are not met and alternative proposals are brought forward, the Company will be entitled to terminate the Investment Manager's appointment without any compensation being payable to the Investment Manager in lieu of any period of notice otherwise required under the Investment Manager Agreement. Outlook The investment outlook for the Company remains positive since the portfolio is well positioned to generate positive returns over the medium to longer term. With regards to the Company's investment strategy it is worth noting that the corporate engagement landscape has changed significantly in the last three years, with the majority of the Company's competitors disappearing from the UK market. This, along with a scarcity of corporate financing, has increased the attractiveness and thus potential influence of the Company's capital on investee companies. We believe that the Company can benefit significantly from recent developments in the corporate engagement landscape. J Hodson 5 October 2010 Directors The Directors as at the date of this report and who served during the year, all of whom are non-executive, are as follows: John Hodson (Chairman) Sir Clive Thompson (Deputy Chairman) John Cornish Michael Phillips Ian DighÃ© Investment Manager's report Investment Strategy Our strategy is to invest in publicly quoted companies which will create value through strategic, operational and management change. We follow a practice of constructive corporate engagement and aim to work with management teams in order to enhance shareholder value. We aim to build a consensus with other stakeholders, and prefer to work alongside like-minded co-investors as leaders, followers or supporters. We try to avoid confrontation with investee companies as we believe that there is strong evidence that overtly hostile activism generally generates poor returns for investors. We are long-term investors; we typically aim to hold companies for the duration of three-year investment plans that include an entry and exit strategy and a clearly identified route to value creation. The duration of these plans can be shortened by transactional activity or lengthened by adverse economic conditions. Before investing we undertake an extensive due diligence process, assessing market conditions, management and stakeholders. Our investments are underpinned by valuations, which we derive using private equity based techniques. These include a focus on cash flows, the potential value of the company to trade or financial buyers and capital structure. Our typical investee company has a market capitalisation of under Â£150 million at the time of initial investment. We believe that smaller companies provide the greatest opportunity for our investment style as they are relatively under-researched, often have more limited resources and frequently can be more attractively valued. We believe that this approach, if properly executed, will generate favourable risk-adjusted returns for shareholders over the long term. Investment Report As at 30 June 2010 the Company had net assets of Â£51.2 million (66.7p per share). This represented an increase of 34.0% over the previous year (on a per share basis). The period initially saw a strong recovery in UK stock markets led by cyclical sectors in the second half of 2009, followed by a mid sell-off in the first half of 2010 driven primarily by macroeconomic concerns. This switch from micro to macro economics did not reflect the corporate outlook. Continued earnings growth and balance sheet repair led to increased confidence in the corporate sector and a resulting resurgence in corporate M&A activity. The threat of sovereign debt defaults in peripheral Europe, and then the dawning realisation that printing money and negative real interest rates would prolong rather than solve the debt crisis, led to risk aversion, perversely expressed as a preference for sovereign debt over equities. Smaller companies outperformed the FTSE 100 Index by approximately 5% over the twelve months, in line with the long term trend. The best performing segment of the market was the FTSE 250 Index, to which the Company has little exposure, which may have been driven higher by larger institutional investors attempting to chase smaller company returns. The most important trend in the smaller companies market was a reduction in liquidity, with volumes traded falling consistently, and falling by approximately 20% in the second half compared to the previous year. This increased the commercial pressure on the brokerage houses that specialise in smaller companies, and we saw some corresponding retrenchment of activity. This ultimately leads to less market efficiency, and this increased opportunities for the Company to add value through its investment strategy. Performance over the period was driven by stock specific factors, although the high exposure to technology stocks could be seen as a positive contribution from exposure to a single market sector. Within the context of our corporate engagement strategy the tactic of investing in highly cash generative, niche market leaders with a high proportion of overseas earnings and avoiding companies with exposure to UK public or consumer spending has worked well. High market volatility and low volumes combined with substantial changes to forecast earnings and ratings to produce some very large share price movements over the period. Notable gainers were 4imprint, which delivered a total return of 100% as a result of several unexpected earnings upgrades, KCOM which returned 82% after successfully delivering on the first stage of its restructuring programme and Spirent, which returned 75% after robust results and an improving outlook statement. On the negative side Redstone fell 80% as its restructuring programme fell behind target and Western & Oriental fell 42% after raising new equity at a substantial discount. From a performance perspective the largest positive contribution to performance came from the Company's investment in SRF II. It should be noted that of the 8.1% attribution only 3% was a result of transaction pricing, the remainder coming from the subsequent performance of the investment. Spirent, as mentioned above, benefited from positive news flow. The operational improvement plan at Spirent is now largely complete and the majority of the Company's position was sold over the period. Another mature investment largely exited over the period was Intec. The company fell significantly after issuing a profits warning subsequent to the bulk of our sales, but rebounded after the period end having received an early stage bid approach. StatPro continued to rally on the back of strong operational performance, and was sold down as a result. Finally RPC continued to deliver on its operational restructuring programme which is now two thirds complete. Three of the four new investments made in the period Allocate, Gooch & Housego and E2V, made positive contributions to performance. There were far fewer negative contributors to performance than positives over the period. Despite the best efforts of its management team Redstone was not able to achieve the turn-around we had hoped for. Post the period end Redstone was subject to a second refinancing in which the company did not participate. Lavendon Group was the one disappointment amongst the new investments made this year. Its share price declined as the market became concerned about the possibility of downgrades to earnings growth, which materialised post the period end. These do not impact our core investment thesis of degearing through capital expenditure reductions. Communisis fell following the unexpected departure of CEO and increased awareness of risk around key contacts. Pinewood and Filtronic did not have any particularly bad news to report. Top 5 contributors to performance Company Valuation Period attribution Â£'000 % Strategic Recovery 6,948 8.3 Fund II Spirent 2,196 6.1 Communications Intec Telecom Systems 314 5.1 StatPro Group 2,706 4.7 RPC Group 4,882 4.1 Bottom 5 contributors to performance Company Valuation Period attribution Â£'000 % Redstone 199 (2.3) Lavendon Group 3,306 (1.2) Communisis - (0.9) Pinewood Shepperton 2,593 (0.5) Filtronic 429 (0.4) Sector spilt Percentage Investment funds 16.5 Telecoms 14.1 Technology 19.2 Support services 15.7 Retail 4.4 Net cash 2.7 Media 10.1 Manufacturing 17.1 Leisure 0.2 Size split (by market Percentage capitalisation) <Â£100m 40.0 Â£100m-Â£500m 36.5 >Â£500m 4.3 Net cash 2.7 Unquoted 16.5 Strategic Equity FTSE Small Cap Capital Portfolio (excl Investment (money weighted) Companies) Index Price/Earnings ratio FY1 8.7X 11.8X Dividend yield 2.3% 3.4% Price/Book ratio 1.7X 1.2X Prices/Sales ratio 0.4X 0.2X SVGIM cash flow yield 17.3% N/A Forecast earnings growth (FY1) 62% 2.4% Forecast debt to equity 1.2X N/A Source: Factset Portfolio Analysis System Portfolio Review The portfolio remained highly focused, with a total of 21 holdings and with the top 10 holdings accounting for 76.5% of the portfolio at the end of the financial period. The portfolio remains predominantly invested in quoted equities, however the percentage of the portfolio invested in unlisted securities (including SRF II) changed from 3.2% to 16.5% at the end of the period due to their strong performance. 2.7% of the net assets was invested in cash at the period end. The level of portfolio activity was in line with our stated investment strategy of three year holding periods with Â£15.9 million of disposals (excluding distributions from unlisted investments) in the period representing around 30% of the weighted average NAV. Purchases of Â£20.2 million were made with 80% of purchases representing money into new investments, the remainder being additions to existing holdings. Portfolio activity was focused on realising mature investments that had achieved or exceeded our target prices, and "tidying-up" the portfolio by exiting small toe-hold investments that we believed would not contribute materially to performance over the longer term. We deployed the proceeds predominantly into new investment opportunities thrown up in the immediate aftermath of the financial crisis. The primary source of proceeds over the period was from reductions in our mature holdings of technology stocks including Intec Telecom Systems (c.Â£6 million) Spirent Communications (c.Â£3 million) and StatPro (c.Â£2 million). The only other material realisation over the period was that of Ora Capital (c.Â£2 million), a position that was completely exited. Smaller holdings of Communisis, Inspired Gaming, Payzone and Melrose were also fully exited as part of the portfolio rationalisation. All of these have been commented on in prior reporting periods. Aside from the acquisition of the stake in Strategic Recovery Fund II (Â£4 million), our principal target for the deployment of new capital in the period was attractive secondary fundraisings among smaller quoted companies. In late 2009, the Company made three new investments in Allocate (c.Â£2 million), E2V Technologies (c.Â£4 million) and Lavendon (c.4 million) principally through participating in new equity issuance. The background to these transactions was detailed in prior reporting periods. One new investment was made in early 2010, Gooch & Housego. Gooch is a global market leader in the design and manufacture of specialist optical components and products. Having monitored the company closely for 18 months we believe that it is materially undervalued on a cash flow basis and compared to precedent transactions such as the acquisition of Qioptic by Candover. The company is transitioning from a component/product supplier to a sub-assembler which should allow the company to increase the pace of sales growth. We believe that this company is insufficiently covered by the analyst community and are working with them to increase their profile in the investment community. Operationally the portfolio has continued to perform very well, leading to improved valuation characteristics despite the material increase in NAV over the period. The low absolute valuation of the portfolio, along with its strong expected earnings growth, makes us optimistic about the potential for further NAV uplift in the medium term. Indeed we are targeting a 15% IRR over a five year period. We believe that the majority of portfolio holdings continue to trade at significant discounts to comparable trade multiples. Top 10 holdings A summary of the top 10 investments at 30 June 2010, which represented approximately 76.5% of net assets (2009: 80%), is given below: Cost Valuation 2010 2009 Company Sector Date of Classification first investment % of % of % of invested invested net Â£'000 Â£'000 portfolio portfolio assets Strategic Unlisted * Jul 2009 3,988 6,948 13.94 - 13.56 Recovery Fund II RPC Group Manufacturing Feb 2007 4,282 4,882 9.79 11.49 9.53 KCOM Group Telecoms May 2007 3,390 4,506 9.04 4.20 8.80 E2V Technology Oct 2009 4,137 4,229 8.48 - 8.26 Technologies 4imprint Group Support Feb 2006 4,885 3,922 7.87 6.67 7.66 services Lavendon Group Support Nov 2009 3,991 3,306 6.63 - 6.45 ervices StatPro Group Technology May 2007 1,695 2,706 5.43 8.70 5.28 Pinewood Media Oct 2005 3,038 2,593 5.20 8.28 5.06 Shepperton Mecom Group Media Aug 2005 5,090 2,566 5.15 2.10 5.01 Allocate Technology Dec 2009 1,980 2,484 4.98 - 4.85 Software * In July 2009 the Company acquired 3i Group plc's 33% limited partnership interest in SRF II, an English limited partnership that seeks to deliver absolute returns to investors using private equity appraisal techniques and a philosophy of constructive corporate engagement. The consideration for the acquisition comprised the issue of 7,189,974 Ordinary shares at a price of 54.17p per share (Â£3,894,809). As part of the acquisition of the Company took on the outstanding commitments of SRF II, of which Â£2.4 million remained uncalled at the year end. Since acquisition the value of SRF II has increased by Â£3 million and as at 31 August 2010, being the latest valuation available for the investment, the net assets attributable to shareholders was Â£7.2 million. Top 10 Investee Company Review 4imprint Group is the fourth largest distributor of promotional products in the world with an international network of companies in the UK, USA, Hong Kong and Europe. SVGIM has been involved with the company since a change of management in 2003 and ultimately the appointment of Ken Minton, a member of our Industry Advisory Panel, as Executive Chairman in 2004. Having delivered considerable value for shareholders Ken announced retirement plans over the period. We worked closely with the company to identify a suitable successor, John Poulter, who oversaw the successful restructuring of Filtronic plc. John joined the board of 4imprint and took over as Chairman on 1 September 2010. The company has benefitted recently from material upgrades to forecast earnings. We expect the new Chairman to announce his strategy for the company following consultation with significant shareholders. Funds managed by SVGIM currently hold approximately 13% of the company's equity. Allocate Software is the leading workforce optimisation software applications provider for global organisations with large, multi-skilled workforces. It is the clear European market leader in the healthcare vertical market, where the compelling return on investment for clients is driving significant growth. It is also the clear lead provider of optimisation software for the global offshore and defence markets. A strong management team is focused on delivering continued profitable growth, maximising the commercial potential of the product suite. SVGIM became a major shareholder as part of a placing to fund the acquisition of its Nordic equivalent, Timecare AB, in December 2009. The company has subsequently acquired Dynamic Change, a complementary business in the UK. Funds managed by SVGIM currently hold approximately 6% of the company's equity. E2V Technologies is a global market leader in the design and manufacture of specialist electronic components and low volume/high value and high reliability semiconductors, predominately for the medical, aerospace, defence and industrial markets. An ill-timed acquisition in September 2008 funded by debt left the balance sheet of the business over-stretched as the economic downturn began. A new Finance Director, well known to SVGIM, was appointed in May 2009. The management team has acted to raise equity to pay down debt as well as restructure the UK and French cost base, a process which is now largely complete. The Company made its initial investment during December 2009 via a placing and a deeply discounted rights issue to refinance the balance sheet, and has subsequently continued to add to its holding in the market. Funds managed by SVGIM currently hold approximately 10% of the company's equity. KCOM Group is a provider of communications solutions to businesses and the public sector in the UK. It has a very strong regional consumer-based business based around Hull in East Yorkshire. Following discussions instigated by shareholders the company announced major changes to its management team in November 2008. Following further consultation with shareholders the company has implemented an innovative remuneration package that closely aligns shareholders and management. Since then, the company has undergone a strategic review and announced an important network sharing deal with BT Group. We believe that the positive impact of these changes and the company's growth potential are underestimated by the market, and that the valuation of KCOM has significant further upside. Funds managed by SVGIM currently hold approximately 6% of the company's equity. Lavendon Group is the market leader in the rental of powered aerial work platforms in both Western Europe and the Gulf States. The group entered the current downturn having over-spent on equipment, and with an overstretched balance sheet. The nature of powered access equipment is such that capital expenditures can be reduced materially for a significant amount of time without detriment to the fleet. We believe that the company will generate significant surplus cash flow over the next two years which will be used to pay down debt and thus create value for equity shareholders. We invested in the company via a fundraising in late 2009 which brought the company's debt down to high but manageable levels. Since then the company has met its debt reduction targets but had to reduce forecast earnings slightly as a result of slower than expected recovery in the Middle East. Funds managed by SVGIM currently hold approximately 10% of the company's equity Mecom Group is a European media business. The Group owns over 300 printed titles and over 200 websites in its four divisions, with substantial operations in the Netherlands, Denmark, Norway and Poland, generating readership of 23 million per week and attracting 32 million unique website users per month. The company has undergone substantial corporate restructuring in the last two years having over-extended its balance sheet through acquisitions in the run up to the recession. We have engaged extensively with the company, investigating the progress of its turn around, assisting it with investor relations and lobbying on its behalf for greater coverage by the analyst community. Having originally invested in 2005 and fully realised the cost of that investment before the recession struck, we have revisited the investment case and added to our holding. We believe that the company is worth multiples of its current share price based on precedent transactions and should create substantial value through de-gearing. It has now re-entered the top 10 through share price appreciation. Funds managed by SVGIM currently hold approximately 4% of the company's equity Pinewood Shepperton provides facilities for major national and international film production, filmed television, studio television recording, the filming of commercials and post production sound services. It is engaged in "Project Pinewood", which will expand its operating capacity as well as releasing value from its substantial property assets. This is a longer term project, but ultimately should deliver significant returns for shareholders. It has recently been subject to a public campaign by an activist shareholder, leading to takeover speculation and an increase in its share price. We are actively engaged with the company on this and other issues. Funds managed by SVGIM currently hold approximately 7% of the company's equity. RPC Group is Europe's leading manufacturer of rigid plastic packaging. Following lobbying from SVGIM and another shareholder acting in concert the group has initiated a strategic and operational review and made substantial changes to its board. The CEO has performed well against RPC's new objectives, leading to a significant reduction in group debt and ongoing focus on improving return on invested capital. While this is a longer term investment we believe that there is still more for the taking, particularly when taking into account the improvement in the pricing of its raw materials. As the company has reduced gearing it may either make acquisitions or return capital to shareholders. Funds managed by SVGIM currently hold approximately 5% of the company's equity. StatPro is a rapidly growing provider of asset management software and asset pricing to the investment industry worldwide. SVGIM became a major shareholder after offering to replace the company's banking facilities with Kaupthing with equity financing following the bank being put into administration by the UK government. We believe that the company has resilient cash flows and strong growth characteristics given their potential to move into new areas, and that these characteristics are not yet properly valued by the market when compared to precedent transactions in the industry. Funds managed by SVGIM currently hold approximately 4% of the company's equity. Thorntons is a retailer and manufacturer of confectionary. SVGIM invested in the company following the appointment of John Von Sprekelsen as Chairman. John and his team subsequently initiated a plan based on increasing turnover by increasing branded sales to multiple retailers thus increasing manufacturing volumes and enhancing margins. Since our investment the group has experienced strong growth in its commercial division, but has not succeeded in delivering the expected improvements from its retail chain. As a result the company has announced a number of changes to its management team, including a change of CEO. While the company remains undervalued on many metrics we believe that the risk associated with this investment has increased, and have been reducing our exposure accordingly. Funds managed by SVGIM currently hold approximately 9% of the company's equity. Outlook While the economic outlook for the UK remains clouded, we remain optimistic on the outlook for the portfolio. From a valuation perspective it is the cheapest since inception. The longer earnings and cash flow growth continue, the more likely it becomes that the market will gain confidence in, and so re-value upwards, these companies and their earnings. In fact we take the same view of the UK equity markets as a whole, and believe that on a long term basis the current market environment remains a compelling investment opportunity. On a shorter term basis the recent emergence of widespread corporate merger and acquisition activity in the UK market is likely to be a precursor for renewed private equity activity. With publicly traded companies continuing to trade at sharp valuation discounts to privately held peers it is highly likely that a proportion of the billions of pounds of firepower amassed by private equity houses in recent years is directed towards public to private deals. Historically this has been a strong positive for the performance of the Company, as the assets in which we invest share characteristics which should make them attractive to private equity buyers. Finally the continued scarcity of equity and debt financing for smaller companies, in particular within the engagement arena, means that the returns and influence that the Company can demand in return for access to its capital continues to increase. SVG Investment Managers Limited 5 October 2010 All statements of opinion and/or belief contained in this Investment Manager's report and all views expressed and all projections, forecasts or statements relating to expectations regarding future events or the possible future performance of the Company represent SVG Investment Managers Limited's own assessment and interpretation of information available to it at the date of this report. As a result of various risks and uncertainties, actual events or results may differ materially from such statements, views, projections or forecasts. No representation is made or assurance given that such statements, views, projections or forecasts are correct or that the objectives of the Company will be achieved. Extracts from the Report of the Directors The statement on corporate governance forms part of the Report of the Directors. The Directors present their report and financial statements for the year ended 30 June 2010. The Company has been incorporated with an indefinite life. The Company is registered in England with number 5448627. Business Review The Business Review should be read in conjunction with the Chairman's report and the Investment Manager's report above. The purpose of the Business Review is to provide an overview of the business of the Company by: â€¢ Analysing development and performance using appropriate key performance indicators (`KPI's"). â€¢ Outlining the principal risks and uncertainties affecting the Company. â€¢ Describing how the Company manages these risks. â€¢ Explaining the future business plans of the Company. â€¢ Setting out the Company's environmental, social and ethical policies. â€¢ Providing information about persons with whom the Company has contractual or other arrangements which are essential to the business of the Company. â€¢ Outlining the main trends and factors likely to affect the future development, performance and position of the Company's business. Review of the Business of the Company The principal activity of the Company is to conduct business as an investment trust. The Company is currently an investment company in accordance with the provisions of Section 833 of the Companies Act 2006. The Directors do not envisage any change in the Company's activity in the future. The Company has received approval from HM Revenue & Customs as an investment trust under Section 842 of the Income & Corporation Taxes Act 1988 for the year ended 30 June 2009 ("Section 842"). This approval is subject to there being no subsequent enquiry under corporation tax self assessment. Under Section 842 companies can obtain `approved' status for tax purposes, meaning that such companies do not pay capital gains tax on any profits arising on disposals of their investments and in turn shareholders are only subject to capital gains tax on the disposal of their shares in the investment trust. The principal requirements for retaining `approved' status are: no single holding, at the time of investment, may exceed 15% of gross assets; 70% of total income must constitute investment income from securities; and no more than 15% of such investment income may be retained. On 1 April 2010 Section 842 was superseded by Section 1158 of the Corporation Tax Act 2010 ("Section 1158"). There was no change to the substance of the wording. It is the opinion of the Directors that the Company has directed its affairs so as to enable it to continue to qualify for approval as an investment trust for the year ended 30 June 2010 and the Company will continue to seek approval under Section 1158 each year. Investment objective The investment objective of the Company is to achieve absolute returns (i.e. growth in the value of investments) rather than relative returns (i.e. attempting to out-perform selected indices) over a medium-term period, principally through capital growth. Investment policy The Company invests primarily in equity and equity-linked securities quoted on markets operated by the London Stock Exchange where the Investment Manager believes the securities are undervalued and could benefit from strategic, operational or management initiatives. The Company also has the flexibility to invest up to 20% of the Company's gross assets at the time of investment in securities quoted on other recognised exchanges. The Company may meet all calls on its undrawn loan commitment to Strategic Recovery Fund II ("SRF II") and to Vintage 1 Limited ("Vintage"). Subject thereto, until such time as all of the undrawn loan commitment to SRF II has been called or, if earlier, SRF II's investment period has expired, save for investments pursuant to its commitments to SRF II and Vintage, the Company will not make any further investments in unquoted securities. Thereafter, the Company may invest up to 20% of its gross assets at the time of investment in unquoted securities, provided that, for the purpose of calculating this limit, any undrawn commitment to Vintage which may still be called shall be deemed to be an unquoted security. The maximum investment in any single investee company will be no more than 15% of the Company's investments at the time of investment. The Company will not invest more than 10%, in aggregate, of the value of its total assets at the time the investment is made in other listed closed-end investment funds provided that this restriction does not apply to investments in any such funds which themselves have published investment policies to invest no more than 15% of their total assets in other listed closed-end investment funds. Other than as set out above, there are no specific restrictions on concentration and diversification. The Board does expect the portfolio to be relatively concentrated, with the majority of the value of investments typically concentrated in the securities of 10 to 15 issuers across a range of industries. There is also no specific restriction on the market capitalisation of issues into which the Company will invest, although it is expected that the majority of the investments by value will be invested in companies with a market capitalisation of less than Â£300 million. The Company's Articles of Association permit the Board to take on borrowings of up to 25% of the net asset value at the time the borrowings are incurred for investment purposes. Investment Manager The Investment Manager appointed by the Company is SVG Investment Managers Limited ("SVGIM"). Established in 2002, the Public Equity Team of SVGIM were one of the first in the UK to invest in publicly traded equities using private equity techniques. The team now consists of seven investment professionals who combine a number of complementary skill sets, including corporate finance, traditional fund management, research and private equity disciplines. SVGIM currently has funds under management of over Â£350 million. Performance Over the year to 30 June 2010, net assets have increased by 47.82% to Â£51.22 million (34.0% on a per share basis). Further information on the performance of the Company's portfolio is contained in the Investment Manager's report above. The Company's investment objective is one of capital growth and it is anticipated that returns for shareholders will derive primarily from capital gains. The Board only intends to declare final dividends where necessary. The Board recommends a final dividend of 0.30p (2009: 0.30p) per Ordinary share, amounting to Â£230,000 (2009: Â£230,000). Share capital At the year end the Company's issued share capital comprised 79,815,974 Ordinary shares, with 3,045,500 shares held in treasury (2009: 72,626,000 in issue and 3,045,500 held in treasury) representing 3.82% of the shares in issue (2009: 4.19%). At general meetings of the Company, the holders of Ordinary shares are entitled to one vote for every share held. During the year the Company issued 7,189,974 new Ordinary shares in relation to the acquisition of SRF II. No shares have been purchased for treasury or cancellation during the year or since the year end. Performance Analysis using Key Performance Indicators At quarterly Board meetings the Directors consider a number of key performance indicators to assess the Company's success in achieving its objective, principally: the NAV per Ordinary share, the movement in the Company's share price, the discount of the share price in relation to the NAV and the total expense ratio. â€¢ The Company's Statement of comprehensive income is set out below. â€¢ The NAV per Ordinary share at 30 June 2010 was 66.72p (2009: 49.80p). â€¢ The mid market share price at 30 June 2010 was 51.25p (2009: 36.25p). â€¢ The discount to NAV at 30 June 2010 was 23.19% (2009: 27.21%). â€¢ The total expense ratio at 30 June 2010 was 2.09% (2009: 2.08%). Principal Risks and Uncertainties Associated with the Business General Changes in economic conditions (including, for example, interest rates, foreign exchange rates and rates of inflation), industry conditions, competition, changes in the law, political and diplomatic events and trends, tax laws and other factors can substantially affect the value, adversely or positively, of investments made by the Company and, therefore, the Company's performance and prospects, in addition to the value of the shares. Market risk The Company's investments are subject to normal market fluctuations and the risks inherent in the purchase, holding or selling of equity securities and related instruments, and there can be no guarantee that the quoted value of the Company's investments will be realisable in the event of a sale. Market price and discount volatility The market price of the shares, as well as being affected by the company's net asset value, also takes into account prevailing interest rates, supply and demand for the shares, market conditions and general investor sentiment. As a result, the total market value of the shares in the Company may vary considerably from the net asset value per share of the Company. In addition, other factors such as a concentrated shareholder base may contribute to infrequent trading or volatile share price movements. Details of the discount management policy can be found in the Chairman's report above. During the year no Ordinary shares were purchased. At the AGM held on 11 November 2009 the Company was authorised to make market purchases of its own shares up to a limit of 11,507,894 Ordinary shares. No shares have been bought back since the year end. As at the date of this report there remained the authority to repurchase 11,507,894 Ordinary shares which is due to expire at the 2010 AGM. Reliance on the Investment Manager The Investment Manager has the right to resign as the Investment Manager under the Investment Management Agreement. The Investment Manager must give 12 months written notice to the Company. Such a resignation could have an adverse effect on the Company's performance and prospects. Nature of investee companies The investment portfolio is focused towards small and mid sized companies. These companies may involve a higher degree of risk than larger sized companies. In addition, while the investment policy of the Company is to identify and invest in companies that the Investment Manager believes are undervalued, there is a risk that the Investment Manager may be unable to deliver on the strategic, management and operational initiatives identified at the time of initial investment and, as such, companies may not prove to be capable of generating additional value for shareholders and so would not assist in achieving the Company's investment objective. Concentrated portfolio The majority of the Company's portfolio is invested in 10 to 15 companies operating in a number of industries, as was the initial intention. As a result the portfolio could carry a higher degree of risk than a more diversified portfolio. As the Company's objective is to achieve absolute returns rather than returns relative to a particular index or benchmark over a medium term period, the portfolio is managed without comparison to any stockmarket index. As a result there will be periods when the Company's performance will not correlate with such indices. Borrowing and gearing At 30 June 2010, the Company had nil drawn down under a revolving credit facility of Â£5 million with The Royal Bank of Scotland. In accordance with the current loan facility's covenant, gross borrowings shall not be more than 20% of adjusted portfolio valuation at any time. The use of gearing can magnify both gains and losses in the asset value of the Company, dependent on the value of the portfolio at the time. This is in accordance with the Company's Articles of Association which permit borrowings of up to 25% of the net asset value at the time the borrowings are incurred. Unlisted investments The Company may invest a proportion of its gross assets in companies that are not listed or admitted to trading upon any recognised stock exchange. These investments may be illiquid and difficult to realise and more volatile than investments of larger, longer-established businesses. The SRF II valuation is updated monthly and other unlisted investments are updated at least once every six months. Overseas investments The Company may invest up to 20% of its gross assets in companies listed or traded on recognised stock exchanges other than the London Stock Exchange. In any instances where the Company does not hedge its currency exposure, the movement of exchange rates between sterling and any other currencies in which the Company's investments are denominated may have a material effect, unfavourable as well as favourable, on the return otherwise experienced on the investments made by the Company. Although the Investment Manager will seek to manage any foreign exchange exposure in relation to the Company, there is no assurance that this can be performed effectively. Currency hedging may force the Investment Manager to realise underlying investments as well as affecting the overall value of the portfolio and the net asset value per share. Movements in the foreign exchange rate between sterling and the currency applicable to a particular shareholder may have an impact upon that shareholder's returns in its own currency of account. Debt investments Any debt securities that may be held by the Company will be affected by any changes to interest rates. Future trends Both the Chairman's report and the Investment Manager's report above contain `Outlook' sections setting out their view of the future. Charges against capital The Company's current accounting policy is to charge its operational costs to revenue, with the exception of any performance fee, which will be charged wholly to capital. In the event of the Company making a revenue loss or becoming liable to a performance fee, it may need to liquidate some of its investments to pay operational costs or the performance fee or both. Regulatory risks A breach of Companies Act regulations and FSA/London Stock Exchange rules may result in the Company being liable to fines or the suspension of the Company from the London Stock Exchange. The Board, with its advisers, monitors the Company's regulatory obligations both on an ongoing basis and at quarterly Board meetings. If the Company did not comply with the provisions of Section 1158, it would lose investment trust status and become subject to corporation tax on realised capital gains. In order to minimise this risk, the Directors, the Investment Manager and the Company Secretary monitor the Company's compliance with the key criteria of Section 1158 on a monthly basis. At quarterly Board Meetings, compliance with these provisions is discussed in detail between the Board, the Investment Manager and the Company Secretary. Financial risks The financial situation of the Company is reviewed in detail at each Board meeting, monitored and approved by the Board and the Audit Committee. Financial instruments As part of its normal operations, the Company holds financial assets and financial liabilities. Full details of the role of financial instruments in the Company's operations are set out in Note 18 to the financial statements. Social, Environmental, Community and Employee Issues The Company has no employees and the Board consists entirely of non-executive Directors. As an investment trust, the Company has no direct impact on the environment and as such has no policies in this area. In carrying out its activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly. Substantial shareholdings The Directors had been notified of the following voting rights in the shares of the Company at 5 October 2010 Number of Ordinary % of voting shares rights SVG Capital plc 16,000,000 20.84 Schroders & Co 10,487,129 13.66 Fortelus Special Situations Master 9,710,000 12.64 Fund Midas Capital Partners 5,750,000 7.49 SVM Asset Management 4,200,000 5.47 Sir Clive Thompson 3,030,000 3.95 1607 Capital Partners 2,977,850 3.88 Rathbone 2,912,550 3.80 Investment Management Agreement The Company's investments are managed by SVG Investment Managers Limited ("SVGIM") under an agreement dated 12 July 2005. The Investment Manager's appointment is subject to termination on 12 months notice given at any time by either party. In addition, if the resolution referred to under the sub-heading "Proposed new fee arrangements" below is passed, the Company will be entitled, in the event of any resolution to continue the Company being voted down at the 2011 AGM or any subsequent AGM, to terminate SVGIM's appointment without any compensation being payable to SVGIM in lieu of any period of notice otherwise required under the Investment Management Agreement. There are no specific provisions contained within the Investment Management Agreement relating to compensation payable in the event of termination of the agreement other than entitlement to fees, including performance fees, which would be payable within any notice period. At regular Board meetings the Directors keep under review the performance of the Investment Manager. In the opinion of the Directors the continuing appointment of SVG Investment Managers Limited as Investment Manager is in the best interests of shareholders as a whole. Investment Manager's fees The Investment Manager is entitled to receive from the Company a basic fee together, where applicable, with a performance fee. Existing basic fee A basic management fee is payable to the Investment Manager at the annual rate of 1% of the adjusted Net Asset Value ("NAV") of the Company. Following the acquisition of SRF II the calculation of the basic management fee was adjusted as the Investment Manager is appointed to act as an Investment Manager to both the Company and SRF II. In order to avoid double charging of the basic management fees payable to the Investment Manager by the Company, the NAV of the Company is reduced by the aggregate of the value of the Company's limited partnership interest in SRF II and the amount of the Company's undrawn loan commitment to SRF II. The basic management fee accrues daily and is payable quarterly in arrears. Existing performance fee In addition, the Investment Manager is entitled to a performance fee in certain circumstances. This fee is payable by reference to the increase in adjusted net asset value per share over the course of a `performance period'. Each performance period is a period of six months ending on either 30 June or 31 December in each year. The Investment Manager will become entitled to a performance fee in respect of a performance period only if two criteria are met. First, a performance hurdle test must be met. The performance hurdle is that the adjusted net asset value per share at the end of the relevant performance period exceeds a target adjusted net asset value per share for that performance period of an amount equal to the net asset value per share on the date of 19 July 2005 (the date the shares were first admitted to the Official List), increased at a rate of 7% per annum on a compounding basis. As at 30 June 2010, the targeted net asset value per share was 137.62p. The second test to be met (a "high watermark" test) is that the adjusted net asset value per share at the end of the relevant performance period is higher than the highest previously recorded adjusted net asset value per share at the end of a performance period in relation to which a performance fee was earned. As at 30 June 2010, the "high watermark" per share was 118.82p. If the performance hurdle is met, and the "high watermark" exceeded, the performance fee will be an amount equal to 15% of the increase, since the performance period in respect of which a performance fee was last earned, in the adjusted net asset value per share of the time weighted average of the total number of shares in issue. Payment of a performance fee that has been earned will be deferred to the extent that making payment would cause the performance hurdle or "high watermark" not to be met - amounts deferred will be payable when, and to the extent that, following any later performance period(s) with respect to which a performance fee is payable, it is possible to pay the deferred amounts without causing the performance hurdle or high watermark test not to be met. A performance fee is not payable in respect of the year ended 30 June 2010 (2009: nil). Proposed new fee arrangements On 5 October 2010, the Board announced that is recommending that shareholders vote in favour of the resolution to continue the Company to be proposed at the 2010 AGM. Prior to making that recommendation, the Board, in conjunction with its advisers, undertook a strategic review of the Company, including its existing management arrangements. As a result of that review, the Board, with the agreement of SVGIM, is proposing certain amendments to the fee arrangements and notice provisions set out in the Investment Management Agreement. Details of those proposed amendments were announced on 5 October 2010. The proposal to amend the Investment Management Agreement constitutes a related party transaction for the purpose of the Listing Rules and, as such, requires to be approved by an ordinary resolution of the Company. A separate circular will be sent to shareholders containing details of the proposed amendments to the Investment Management Agreement and a notice convening a General Meeting of the Company for 9 November 2010 at which a resolution will be proposed to approve those amendments. If that resolution is passed, the fee arrangements described in this report will be superseded by the new fee arrangements approved at that General Meeting. Administration Agreement Under an agreement dated 12 July 2005, company secretarial services and the general administration of the Company are undertaken by Capita Sinclair Henderson Limited ("CSH") for a fee for the year to 30 June 2010 of Â£73,000. The fee is subject to annual review based on the UK Retail Price Index. In the event that there is an increase in the issued share capital of the Company, the fee will be adjusted upwards by agreement between the Company and CSH. The agreement may be terminated by either party giving notice of not less than six months. Payment of Suppliers It is the Company's policy to obtain the best possible terms for all business and therefore there is no consistent policy as to the terms used. The Company agrees with its suppliers the terms on which business will take place and it is our policy to abide by those terms. There were no trade creditors as at 30 June 2010 (2009: nil). General Meetings At a General Meeting held on 14 August 2009, shareholders approved the acquisition of 3i Group's investment in SRF II which completed on 20 August 2009. At a requisitioned General Meeting held on 22 September 2009, resolutions to remove three Directors of the Company and appoint two new Directors failed. At a requisitioned General Meeting held on 10 November 2009, a resolution to require the Company to undertake a tender offer for all but one of the issued Ordinary shares at a price equal to 95 per cent. of the NAV per Ordinary share also failed. Annual General Meeting At the Annual General Meeting to be held on 9 November 2010, resolutions will be proposed as items of special business. i. To continue the Company (Resolution 6) The Board previously committed to providing shareholders with an opportunity to vote on an ordinary resolution to continue the Company at the 2010 AGM. The purpose of Resolution 6 is to satisfy that commitment. If Resolution 6 is passed, shareholders will be given an opportunity to vote on the continuation of the Company at next year's AGM, and at every AGM thereafter, provided that the NAV total return per share over the three years ending on the preceding 30 June has outperformed the total return on the FTSE SmallCap (excluding Investment Companies) and the average discount over the three months ending on the preceding 30 June is not wider than the average discount of the UK smaller companies sector over that period. If the resolution is not passed, the Board will bring forward proposals to liquidate, with or without offering a roll-over investment option, or otherwise reorganise or reconstruct the Company. ii. To authorise the allotment of shares (Resolution 7) Section 551 of the Companies Act 2006 provides that the Directors may not allot new shares without shareholder approval. The purpose of Resolution 7 is to empower the Directors to allot shares with an aggregate nominal value of up to Â£2,660,532, being approximately one-third of the Company's issued Ordinary share capital. The authority would last until the earlier of the Annual General Meeting in 2011 or 9 February 2012. The Directors have no present intention of exercising the authority conferred by Resolution 7 and will only do so on the basis that the allotment and issue of shares does not dilute the net asset value per existing share iii. To disapply Section 570 of the Companies Act 2006 (Resolution 8) Under Section 570 of the Companies Act 2006, if the Directors wish to allot any equity securities, or sell any treasury shares (should they elect to hold any), for cash they must first offer them to existing shareholders in proportion to their shareholdings. The purpose of Resolution 8 is to allow the Directors to allot shares, or sell any treasury shares, for cash other than in accordance with Section 570 in connection with: a. rights issues and other pre-emptive offers; or b. otherwise up to a maximum aggregate nominal amount of Â£399,079, representing approximately 5% of the Company's issued Ordinary share capital as at 5 October 2010 (being the latest practicable date prior to publication of this document). The Directors consider the authority referred to in paragraph (a) is appropriate in order to have the flexibility to issue shares or sell shares from treasury, for example to take advantage of further investment / business opportunities as they arise. The Directors consider the authority referred to in paragraph (b) above is desirable in order to have the flexibility to issue shares or sell shares from treasury, for example to take advantage of further investment/business opportunities as they arise. These authorities will last until the earlier of the Annual General Meeting in 2011 or 9 February 2012. iv. To authorise the Directors to purchase the Company's own Ordinary shares (Resolution 9) The purpose of Resolution 9 is to authorise the Company to purchase its own shares. As stated in the prospectus issued by the Company in connection with its listing on the London Stock Exchange in July 2005, the Company may purchase shares in the market in order to address any imbalance between the supply of and demand for shares and to increase net asset value per share. The Company will make such purchases only where the Directors believed that to do so will result in an increase in the net asset value per share for remaining shareholders and is in the best interests of shareholders generally. The authority is limited to 11,507,894 Ordinary shares, representing approximately 14.99% of the Company's shares in issue as at 5 October 2010 (being the latest practicable date prior to publication of this document). The Company will only purchase Ordinary shares at prices which are below the last published net asset value per Ordinary share. The maximum price (exclusive of expenses) payable per Ordinary share under this authority is the higher of (a) 5% over the average of the middle market prices of the Ordinary shares according to the Daily Official List of the London Stock Exchange for the five business days immediately before the date on which the Company agrees to buy the shares and (b) the higher of the last independent trade and the highest current independent bid on the London Stock Exchange. The minimum price payable per Ordinary share under this authority is the nominal value of that Ordinary share. Any purchases of Ordinary shares made pursuant to this authority will be market purchases. Any such purchases will be made during the period commencing at the close of the Annual General Meeting and ending on the earlier date of the Company's Annual General Meeting in 2011 or 9 May 2012. The Company is allowed to purchase its own shares either for holding in "treasury", or for subsequent cancellation. Shares held in treasury will have no voting, dividend or other rights. The Directors consider that the purchase of shares into treasury could be beneficial to shareholders in the long term. As at 5 October 2010 (being the latest practicable date prior to the publication of this document), the Company held 3,045,500 shares in treasury, representing 3.82% of shares in issue. International Financial Reporting Standards ("IFRS") The Company has prepared its financial statements in accordance with IFRS adopted by the European Union. Corporate Governance The Statement on Corporate Governance below forms part of the Report of the Directors. Information about Securities Carrying Voting Rights The following information is disclosed in accordance with the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and DTR 7.2.6 of the FSA's Disclosure and Transparency Rules: * The Company's capital structure and voting rights are summarised above. * Details of the substantial shareholders in the Company are listed below. * The rules concerning the appointment and replacement of Directors are contained in the Company's Articles of Association * Details of the powers of the Directors including powers to issue or buy back the Company's shares are disclosed above * There are: no restrictions concerning the transfer of securities in the Company; no special rights with regard to control attached to securities; no agreements between holders of securities regarding their transfer known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid. * There are no agreements between the Company and its Directors concerning compensation for loss of office. Going Concern The Company's objective and policy, which are described above, and which are subject to regular Board monitoring processes, is designed to ensure that the Company is invested mainly in liquid, listed securities. The Company retains title to all assets held by its custodian, and has agreements relating to its borrowing facilities with which it has complied during the year. Cash is held only with banks approved and regularly reviewed by the Investment Manager. Note 18 to the accounts sets out the financial risk profile of the Company and indicates the effect on the assets and liabilities of falls (and rises) in the value of securities and market rates of interest. The Board, as stated in the Chairman's report above, has previously committed to providing shareholders with a continuation vote at this year's AGM. However, having consulted with a majority of the Company's shareholders, the Board is recommending shareholders vote in favour of the continuation of the Company. The Directors believe, in the light of the above and the controls and review processes noted above and bearing in mind the nature of the Company's business and assets, that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Auditors Ernst & Young LLP have expressed their willingness to continue in office as Auditor and a resolution proposing their re-appointment will be submitted at the forthcoming Annual General Meeting. Company number 5448627 On behalf of the Board John Hodson Chairman 5 October 2010 Statement on corporate governance The Company is committed to high standards of corporate governance. The Board is accountable to the Company's shareholders for good corporate governance. This statement describes how the principles or corporate governance will be applied to the Company. The Company is subject to The UK Code of Corporate Governance ("the Corporate Governance Code") which can be found at www.frc.org.uk The Company complies with the AIC Code of Corporate Governance ("AIC Code") which can be found at www.theaic.co.uk This statement forms part of the Report of the Directors as set out above. Compliance with the AIC Code The Board had considered the principles and recommendations of the AIC Code by reference to the AIC Corporate Governance Guide for Investment Companies ("AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in Section A of the Corporate Governance Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to investment companies such as Strategic Equity Capital plc. The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the Corporate Governance Code), will provide better information to shareholders. The Company has complied with the recommendations of the AIC Code and the relevant provisions of the Corporate Governance Code, except as set out below. The Corporate Governance Code includes provisions relating to: * The role of the chief executive * Executive director's remuneration * The need for an internal audit function For the reasons set out in the AIC Guide and in the pre-amble to the AIC Code, the Board considers these provisions are not relevant to the position of the Company, being an externally managed investment company. The Company has therefore not reported further in respect of these provisions. The Company has not complied with the following recommendations of the AIC Code: * No formal induction for the Board is deemed necessary due to the wide range of skills and experience of the Directors selected * A full portfolio listing is not provided as in the opinion of the Directors it is not in the best commercial interest of the Company * Given the size and nature of the Board it was not deemed appropriate to appoint a senior independent director The disclosures required under Disclosure and Transparency Rule 7.2.6 are reported above under `Information about Securities Carrying Voting Rights'. Board responsibilities The Board consists of five Directors, all of whom are non-executive and, with the exception of Sir Clive Thompson, are independent of the Investment Manager. Sir Clive Thompson is deemed non-independent by virtue of his position on the Industry Advisory Panel ("IAP"). The Directors review at each Board meeting the Company's investments and all other important issues to ensure that control is maintained over the Company's affairs. The procedures were formalised in July 2005 in a schedule of matters specifically reserved for the Board's approval, which has been adopted since then for all meetings. During the year end 30 June 2010 the Board held four quarterly Board Meetings. All Directors were in attendance. Members of the Board also meet with representatives of the Investment Manager on an informal and regular basis. The Board is responsible for all matters of control and direction of the Company, including its investment policy. The Directors posses a wide range of financial, business and legal expertise relevant to the direction of the Company and consider that they commit sufficient time to the Company's affairs. The Company does not have a chief executive officer, but by appointing a management company the roles of Chairman and chief executive officer are effectively separated. Board responsibilities and relationship with the Investment Manager The Board is responsible for the determination and implementation of the Company's investment policy and for monitoring compliance with the Company's objective. The Company's main functions have been subcontracted to a number of service providers, each engaged under separate legal agreements. At each Board meeting the Directors follow a formal agenda, which is circulated in advance by the Company Secretary. The Board's main roles are to create value to shareholders, to provide leadership to the Company and to achieve the Company's investment objective. Specific responsibilities of the Board include reviewing the performance of the Company's Investment Manager, in particular in relation to asset allocation, gearing policy, cash management, investment outlook and revenue forecasts. In order to meet these responsibilities the Company Secretary and Investment Manager provide financial information on a regular basis, together with briefing notes and papers in relation to changes in the Company's economic and financial environment, statutory and regulatory changes and corporate governance best practice. The Investment Manager is able, as part of the investment process, to make use of industry experts, such as utilising the IAP. The IAP was established to provide advice to SVGIM in relation to the strategy, operations and management of potential investee companies. The management of the Company's assets is delegated to SVGIM who have discretion to manage the assets of the Company in accordance with the Company's objective and policy. At each Board meeting, a representative from the Investment Manager is in attendance to present verbal and written reports covering its activity, portfolio and investment performance over the preceding period. Ongoing communication with the Board is maintained between formal meetings. The Board and the Investment Manager operate in a supportive, co-operative and open environment. Committees An Audit Committee has been established under the Chairmanship of Mr Cornish who as a former audit partner at Deloitte LLP has recent and relevant financial experience. The Audit Committee comprises all the independent Directors and operates within clearly written defined terms of reference. It provides a forum through which the Company's external Auditor reports to the Board of Directors. The primary responsibilities of the Audit Committee are: to review the effectiveness of the internal control environment of the Company; to monitor the integrity of the financial statements and accounting policies of the Company; to monitor adherence to best practice in corporate governance; to make recommendations to the Board in relation to the re-appointment of its Auditor and to approve their remuneration and terms of engagement; and to review and monitor the Auditor's independence and objectivity and the effectiveness of the audit process. The Committee undertakes a formal assessment of the Auditor's independence each year, which includes: a review of non-audit services provided to the Company and related fees; discussion with the Auditor of a written report detailing all relationships with the Company and any other parties that could affect independence or the perception of independence; and obtaining written confirmation from the Auditor that, in their professional judgment, they are independent. Two Audit Committee Meetings were held with all committee members present. The Audit Committee has direct access to the Company's Auditor, Ernst & Young LLP, and representatives of Ernst & Young LLP attend the year end and Audit Committee meeting. The Board recommends to shareholders that the Auditor, Ernst & Young LLP, be re-appointed at the Annual General Meeting as set out in Resolution 5 of the Notice of Meeting. A Management Engagement Committee has been established under the Chairmanship of Mr Hodson comprising of all the independent Directors and operates within clearly defined terms of reference. The Committee is responsible for reviewing the performance of the Investment Manager. The Committee also reviews the Company's other service providers. This Committee met once during the year with all members present. Review of the Board appointments is a subject for the whole Board, led by the independent Directors, to monitor and consider. The Board meets as and when required for this purpose and to ensure planned and progressive refreshing of the Board. The Board does not believe it is necessary to have separate nomination committee due to the size and nature of the Company. The Board has previously engaged an external search consultant when considering a new appointment to the Board of Directors. The Board collectively reviews its effectiveness in a formal appraisal process, following the year end by way of a questionnaire. The Chairman, Mr Hodson, is deemed by his fellow independent Board members to be independent and to have no conflicting relationships. He considers himself to have sufficient time to commit to the Company's affairs. The Board as a whole acts as a Remuneration Committee with Mr Hodson as Chairman. Further details are given in the Director's Remuneration report below. Terms of reference for each Committee are available for inspection at the Company's registered office. In addition, the Board has formalised the arrangements under which Directors, in the furtherance of their duties, may take independent professional advice at the expense of the Company. The Company has arranged Directors' and Officers' Liability Insurance which provides cover for legal expenses under certain circumstances. Directors' service contracts It is the Board's policy that none of the Directors has a service contract. The terms of appointment provide that a Director shall retire and be subject to election at the first Annual General Meeting after his/her appointment, and at least every three years thereafter unless a Director has been in office more than nine years, in which case he/she will stand for re-election every year. The terms also provide that a Director may resign or be removed without notice and that compensation will not be due on leaving office. Internal control review The Directors acknowledge that they are responsible for the Company's systems of internal control and for reviewing their effectiveness. An ongoing process, in accordance with the guidance supplied Financial Reporting Council's Internal Control: Guidance for Directors on the Corporate Governance Code has been established for identifying, evaluating and managing risks faced by the Company. This process is regularly reviewed by the Board. The risk management process and systems of internal control are designed to manage rather than eliminate the risk of failure to achieve the Company's objectives. It should be recognised that such systems can only provide reasonable, not absolute, assurance against material misstatement or loss. Internal control assessment and process Risk assessment and the review of internal controls are undertaken by the Board in the context of the Company's overall investment objective. The review, which has been in place for the year ended 30 June 2010 and up to the date of this report, covers the key business, operational, compliance and financial risks facing the Company. In arriving at its judgment of what risks the Company faces, the Board considers the Company's objectives in light of the following factors: * the nature and extent of risks which it regards as acceptable for the Company to bear within its overall business objective; * the threat of such risks becoming reality; * the Company's ability to reduce the incidence and impact risk on its performance; and * the cost to the Company and benefits related to the Company and third parties of operating the relevant controls. Against this backdrop the Board has split the review into four sections reflecting the nature of the risks being addressed. The sections are as follows: * corporate strategy; * published information and compliance with laws and regulations; * relationship with service providers; and * investment and business activities. Given the nature of the Company's activities and the fact that most functions are subcontracted, the Directors obtain information from key third party suppliers regarding the controls operated by them. To enable the Board to make an appropriate risk and control assessment, the information and assurances sought from third parties include the following: * details of the control environment; * identification and evaluation of the risks and control objectives; * assessment of the communication procedures; and * assessment of the control procedures. The key procedures which have been established to provide effective internal controls are as follows: * investment management is provided by SVGIM. The Board is responsible for the implementation of the overall investment policy and monitors the action of the Investment Manager at regular meetings; * the provision of administration, accounting and company secretarial duties are the responsibility of Capita Sinclair Henderson Limited ("CSH"). The Audit Committee reviews the internal controls report of CSH on an annual basis; * custody of assets is undertaken by HSBC Bank plc; * the duties of the investment management, accounting and custody assets are segregated. The procedures of the individual parties are designed to complement one another; * The non-executive Directors of the Company clearly define the duties and responsibilities of their agents and advisers in terms of their contracts. The appointment of agents and advisers is conducted by the Board after consideration of the quality of the parties involved; the Board monitors their ongoing performance and contractual agreements; * mandates for authorisation of investment transactions and expense payments are set by the Board; and * the Board reviews detailed financial information produced by the Investment Manager and the Secretary on a regular basis. The Company does not have an internal audit function. All of the Company's management functions are delegated to independent third parties whose controls are reviewed by the Board. It is therefore felt that there is no need for the Company to have an internal audit function. However, this need is reviewed annually. Company Secretary The Board has direct access to the advice and services of the Company Secretary, Capita Sinclair Henderson Limited, which is responsible for ensuring that Board and Committee procedures are followed and that applicable regulations are complied with. The Secretary is also responsible to the Board for ensuring timely delivery of the information and reports and that statutory obligations of the Company are met. Dialogue with shareholders Communication with shareholders is given high priority by both the Board and the Manager. Shareholders can communicate with the Board by writing to the Company Secretary at the address disclosed above. Major shareholders of the Company are offered the opportunity to meet with the Investment Manager and the Directors in order to ensure that their views are understood. All shareholders are encouraged to attend and vote at the Annual General Meeting, during which the Board and the Investment Manager are available to discuss issues affecting the Company and shareholders have the opportunity to address questions to the Investment Manager, the Board and the Chairmen of the Board's standing committees. Statement of Directors' responsibilities in respect of the accounts The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards ("IFRS") adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position and the financial performance and cash flows of the Company for that period. In preparing these financial statements, the Directors are required to: â€¢ select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors, and then apply them consistently; â€¢ present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; â€¢ provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance; â€¢ state that the Company has complied with International Financial Reporting Standards, subject to any material departures disclosed and explained in the financial statements; and â€¢ make judgements and estimates that are reasonable and prudent. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy, at any time, the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors, to the best of their knowledge, state that: â€¢ the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and loss/ profit of the Company; and â€¢ the Chairman's report, Investment Manager's report and Report of the Directors include 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. The Directors confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware; and each Director has taken all the steps that ought to have been taken as a Director to make himself aware of any relevant audit information and to establish that the Company's Auditor is aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. On behalf of the Board John Hodson Chairman 5 October 2010 Notes 1. The maintenance and integrity of Strategic Equity Capital plc's web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Independent Auditors' report to the members of Strategic Equity Capital plc The Company's financial statements for the year ended 30 June 2010 have been audited by Ernst & Young LLP. The text of the Auditor's report can be found in the Company's Annual Report and Accounts at www.strategicequitycapital.com Statement of comprehensive income for the year ended 30 June 2010 Year ended Year ended 30 June 2010 30 June 2009 Revenue Capital Revenue Capital return return Total return return Total Note Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Investments Gains/ (losses) on - 12,674 12,674 - (19,592) (19,592) investments at fair value through profit or loss Exchange losses - (1) (1) - (3) (3) 8 - 12,673 12,673 (19,595) (19,595) Income Dividends 2 1,087 - 1,087 936 - 936 Interest 2 16 - 16 50 - 50 Underwriting commission 2 24 - 24 - - - 1,127 - 1,127 986 - 986 Expenses Investment Manager's 3 (396) - (396) (359) - (359) fee Other expenses 4 (447) - (447) (361) - (361) Total expenses (843) - (843) (720) - (720) Net return/(loss) 284 12,673 12,957 266 (19,595) (19,329) before finance costs and taxation Finance costs Interest payable (50) - (50) (32) - (32) Total finance costs (50) - (50) (32) - (32) Net return/(loss) 234 12,673 12,907 234 (19,595) (19,361) before taxation Taxation 5 - - - - - - Net return/(loss) and 7 234 12,673 12,907 234 (19,595) (19,361) total comprehensive income for the year pence pence pence pence pence pence Return/ (loss) per Ordinary share Basic 7 0.31 16.72 17.03 0.34 (28.12) (27.78) The total column of this statement represents the Company's profit and loss account. The supplementary revenue and capital return columns are both prepared under guidance published by the Association of Investment Companies ("AIC"). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. Statement of changes in equity for the year ended 30 June 2010 Share Share premium Special Capital Revenue capital account reserve reserve reserve Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 For the year ended 30 June 2010 1 July 2009 7,262 2,070 60,398 (35,687) 607 34,650 Comprehensive income for - - - 12,673 234 12,907 the year Dividends paid - - - - (230) (230) New shares issued in the 719 3,176 - - - 3,895 year 30 June 2010 7,9819 5,246 60,398 (23,104) 611 51,222 For the year ended 30 June 2009 1 July 2008 7,262 2,070 61,238 (16,092) 373 54,851 Comprehensive income for - - - (19,595) 234 (19,361) the year Shares purchased to be - - (840) - - (840) held in treasury 30 June 2009 7,262 2,070 60,398 (35,687) 607 34,650 Balance sheet as at 30 June 2010 30 June 30 June 2010 2009 Note Â£'000 Â£'000 Non-current assets Fair value through profit or loss - Investments 8 49,859 32,230 Current assets Other receivables 10 177 105 Cash and cash equivalents 15 1,367 2,457 1,544 2,562 Total assets 51,403 34,792 Current liabilities Other payables 11 181 142 181 142 Total assets less current 51,222 34,650 liabilities Net assets 51,222 34,650 Capital and reserves: Share capital 12 7,981 7,262 Share premium account 14 5,246 2,070 Special reserve 14 60.398 60,398 Capital reserve 14 (23,014) (35,687) Revenue reserve 14 611 607 Total shareholders' equity 51,222 34,650 pence pence Net asset value per share Basic 16 66.72 49.80 The financial statements were approved by the Board of Directors and authorised for issue on 5 October 2010. They were signed on its behalf by J Hodson Chairman 5 October 2010 Statement of cash flows for the year ended 30 June 2010 Year Year ended 30 ended 30 June 2010 June 2009 Note Â£'000 Â£'000 Operating activities Net return/ (loss) before finance costs 12,957 (19,329) and taxation Adjustment for (gains)/ losses on (12,673) 19,592 investments Interest paid (50) (32) Operating cash flows before movements in 234 231 working capital (Increase)/ decrease in receivables (72) 647 Increase/(decrease) in payables 39 (77) Purchases of portfolio investments (25,168) (6,900) Sales of portfolio investments 20,212 6,463 Net cash flow from operating activities (4,755) 364 Financing activities 6 Equity dividends paid (230) - Shares issued in the year 3,895 - Repurchase of treasury shares - - Net cash flow from financing activities (4,755) 364 Decrease in cash and cash equivalents for (1,090) (476) the year Cash and cash equivalents at start of the 2,457 2,933 year Cash and cash equivalents at 30 June 2010 15 1,367 2,457 Notes to the financial statements for the year ended 30 June 2010 1.1 Corporate information Strategic Equity Capital plc is a public limited company incorporated and domiciled in the United Kingdom, registered in England and Wales under the Companies Act 2006 whose shares are publicly traded. The Company is registered as a public limited company and is an investment company as defined by Section 833 of the Companies Act 2006. The Company carries on business as an investment trust within the meaning of Section 1158 of the Corporation Tax Act 2010. The financial statements of Strategic Equity Capital plc for the year ended 30 June 2010 were authorised for issue in accordance with a resolution of the Directors on 5 October 2010. 1.2 Basis of preparation/statement of compliance The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board (as adopted by the EU), interpretations issued by the International Financial Reporting Interpretations Committee, and applicable requirements of United Kingdom company law, and reflect the following policies which have been adopted and applied consistently. Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the Association of Investment Companies ("AIC") (as revised in 2009) is consistent with the requirements of IFRS the Directors have sought to prepare financial statements on a basis compliant with the recommendations of the SORP and the impact of the change for adoption of IAS 1 and revised IFRS 7. Convention The financial statements are presented in Sterling, being the currency of the Primary Economic Environment in which the Company operates, rounded to the nearest thousand. Segmental reporting The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. 1.3 Accounting policies Investments All investments in the scope of IAS 39 held by the Company are classified as "fair value through profit or loss". As the Company's business is investing in financial assets with a view to profiting from their total return in the form of interest, dividends or increase in fair value, listed equities and fixed income securities are designated as fair value through profit or loss on initial recognition. The Company manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy. Investments are initially recognised at cost, being the fair value of the consideration, excluding transaction costs associated with the investment which are charged to the Statement of comprehensive income and allocated to capital. After initial recognition, investments are measured at fair value, with movements in fair value of investments and impairment of investments recognised in the Statement of comprehensive income and allocated to capital. Gains and losses on investments sold are calculated as the difference between sales proceeds and cost. Capital distributions from SRF II are accounted for on a reducing cost basis; cash received is first applied to reducing the historical cost of an investment; a realised gain will be recognised only when the cost has been reduced to nil. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices at the close of business on the Balance sheet date, without adjustment for transaction costs necessary to realise the asset. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital ("IPEVC") Valuation Guidelines. New investments are initially carried at cost, for a limited period, being the price of the most recent investment in the investee company. This is in accordance with IPEVC Guidelines as the cost of recent investments will generally provide a good indication of fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. Trade date accounting All "regular way" purchases and sales of financial assets are recognised on the "trade date" i.e. the day that the entity commits to purchase or sell the asset. Regular way purchases, or sales, are purchases or sales of financial assets that require delivery of the asset within a time frame generally established by regulation or convention in the market place. Income Dividends receivable on quoted equity shares are taken into account on the ex-dividend date. Where no ex-dividend date is quoted, they are brought into account when the Company's right to receive payment is established. Other investment income and interest receivable are included in the financial statements on an accruals basis. Dividends receivable from UK registered companies are accounted for net of imputed tax credits. Income on fixed income securities is recognised on a time apportionment basis from the date of purchase so as to reflect the effective yield on the securities. Expenses All expenses are accounted for on an accruals basis. Transaction costs and other expenses incurred on the acquisition of an investment classified as fair value through profit or loss are not included within the cost of that investment but are charged immediately through the Statement of comprehensive income and allocated to capital. The Company's investment management and administration fees, finance costs (including interest on the bank facility) and all other expenses are charged through the Statement of comprehensive income. These expenses are allocated 100% to the revenue column of the Statement of comprehensive income. The Investment Manager's performance fee is allocated 100% to the capital column of the Statement of comprehensive income. In the opinion of the Directors the fee is awarded entirely for the capital performance of the portfolio. Cash and cash equivalents Cash in hand and in banks and short-term deposits which are held to maturity are carried at fair value. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Bank overdrafts that are repayable on demand which form an integral part of the Company's cash management are included as a component of cash and cash equivalents for the purpose of the Statement of cash flows. Bank loans and borrowings All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost, any difference between cost and redemption value being recognised in the Statement of comprehensive income over the period of the borrowings on an effective interest rate basis. Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the Statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the Balance sheet date, and any adjustment to tax payable in respect of previous years. The tax effect of different items of expenditure is allocated between revenue and capital on the same basis as the particular item to which it relates, using the Company's effective rate of tax, as applied to those items allocated to revenue, for the accounting year. Deferred income tax is provided on all temporary differences at the Balance sheet date between the tax basis of assets and liabilities and their carrying amount for financial reporting purposes. Deferred income tax liabilities are measured on an undiscounted basis at the tax rates that are expected to apply to the year when the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the Balance sheet date. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Dividends payable to shareholders Interim dividends to shareholders are recognised as a liability in the period in which they are paid. Final dividends to shareholders are recognised as a liability in the year in which they have been declared and approved by the shareholders. The final dividend is proposed by the Board and is not declared until approved by the shareholders at the Annual General Meeting following the year end. Dividends are charged to the Statement of changes in equity. Foreign currency transactions The currency of the Primary Economic Environment in which the Company operates is Sterling which is also the presentational currency. Transactions denominated in foreign currencies are translated into Sterling at the rates of exchange ruling at the date of the transaction. Investments are converted to Sterling at the rates of exchange ruling at the Balance sheet date. Exchange gains and losses relating to investments are taken to the capital column of the Statement of comprehensive income. Use of estimates The preparation of financial statements requires the Company to make estimates and assumptions that affect items reported in the balance sheet and Statement of comprehensive income at the date of the financial statements. Although the estimates are based on best knowledge of current fats and circumstances, to some extent, future events and actions, the Company's actual results may ultimately differ from those estimates, possibly significantly. 1.4 New standards and interpretations not applied IASB and IFRIC have issued the following standards and interpretations which are not effective for the year ended 30 June 2010 and have not been applied in preparing these financial statements. International Accounting Standards (IAS/IFRS) Effective date IFRS 1 Amendments to IFRS 1 - Additional Exemptions for the 1 January 2010 First-time Adopters IFRS 2 Amendments to IFRS 2 - Group Cash-settled Share-based 1 January 2010 Payment Transactions IFRS 9 Financial Instruments: Classification & Measurement 1 January 2013 IAS 24 Related Party Disclosures (revised) 1 January 2011 IAS 32 Amendment to IAS 32: Classification of Rights Issues 1 February Improvements to IFRS (issued April 2009) 2010 Various dates International Financial Reporting Interpretations Committee (IFRIC) IFRIC 14 Amendment: Prepayments of a Minimum Funding 1 January 2011 Requirement IFRIC 19 Extinguishing Financial Liabilities with Equity 1 July 2010 Instruments The Directors do not anticipate that the initial adoption of the above standards, amendments and interpretations will have a material impact on the Group's financial statements in the period of initial application. 2 Income 30 June 2010 30 June 2009 Â£'000 Â£'000 Income from investments: UK dividend income 1,087 936 Convertible bond income - (9) Liquidity fund income 16 32 1,103 959 Other income: Bank interest receivable - 3 Underwriting commission 24 - Other interest income - 24 24 27 1,127 986 Total income comprises: Dividends 1,087 936 Interest 16 50 Underwriting commission 24 - 1,127 986 Income from investments: Listed UK 1,087 927 Listed overseas 16 32 1,103 959 3 Investment Manager's fee 30 June 2010 30 June 2009 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Management fee 396 - 396 359 - 359 A basic management fee is payable to the Investment Manager at the annual rate of 1% of the Net Asset Value of the Company. Following the acquisition of SRF II the calculation of the basic management fee was adjusted as the Investment Manager is appointed to act as Investment Manager to both the Company and SRF II. In order to avoid double charging of basic management fees payable to the Investment Manager by the Company, the NAV of the Company is reduced by the aggregate of the value of the Company's limited partnership interest in SRF II and the amount to the Company's undrawn loan commitment to SRF II. The basic management fee accrues daily and is payable quarterly in arrears. The Investment Manager is also entitled to a performance fee, details of which are given in the Report of the Directors above. No performance fee has been payable in either year. 4 Other expenses 30 June 2010 30 June 2009 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Secretarial services 73 - 73 68 - 68 Auditors' remuneration for: Audit servicesâ€ 24 - 24 21 - 21 Directors' remuneration* 89 - 89 78 - 78 Other expenses 261 - 261 194 - 194 447 - 447 361 - 361 * There is an amount of Â£12,500 excluded from this figure relating to fees paid to M Phillips for advice provided on the acquisition of SRF II. These fees have been capitalised as part of the costs of acquisition of SRF II. â€ There is an amount of Â£9,200 excluded from this figure relating to fees paid to Ernst & Young relating to the acquisition of SRF II. These fees have been capitalised as part of the costs of acquisition of SRF II. 5 Taxation 30 June 2010 30 June 2009 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Corporation tax at 28% - - - - - - (2009: 28%) The Company is subject to corporation tax at 28% (2009: 28%). As at 30 June 2010 the total current taxation charge in the Company's revenue account is lower than the standard rate of corporation tax in the UK (28%). The differences are explained below: 30 June 2010 30 June 2009 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Net return/(loss) on 234 12,673 12,907 234 (19,595) (19,361) ordinary activities before taxation Theoretical tax at UK 66 3,548 3,614 66 (5,487) (5,421) corporation tax rate of 28% (2009: 28%) Effects of: - UK dividends that are not (303) - (303) (262) - (262) taxable - Losses on investment - (3,611) (3,611) - 5,487 5,487 - Movement in unrelieved 191 - 191 181 - 181 expenses - Expenses not deductible 46 63 109 15 - 15 for tax purposes - - - Factors that may affect future tax charges The Company has Â£4,989,000 management expenses (2009: Â£4,323,000) that are available to offset future taxable revenue. It is considered too uncertain that there will be sufficient future taxable profits against which these expenses can be offset and therefore, in accordance with IAS 12, deferred tax asset of Â£ 1,397,000 (2009: Â£1,210,000) in respect of these amounts has not been recognised. Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company. 6 Dividends Under the requirements of Section 1158 Corporation Tax Act 2010 no more than 15% of investment income generated from qualifying shares and securities may be retained by the Company. These requirements are considered on the basis of dividends declared in respect of the financial year as shown below. 30 June 30 June 2010 2009 Â£'000 Â£'000 Net return after taxation per Company accounts 234 234 Final dividend proposed of 0.30p (2009: 0.30p) (230) (230) per share Revenue retained for Section 1158 purposes 4 4 7 Return per Ordinary share 30 30 June 2010 June 2009 Weighted Weighted average average Net number of Per Net number of Per return Ordinary share return Ordinary share Â£'000 shares pence Â£'000 shares pence Total Return per share 12,907 75,785,546 17.03 (19,361) 69,682,295 (27.78) Revenue Return per share 234 75,785,546 0.31 234 69,682,295 0.34 Capital Return per share 12,673 75,785,546 16.72 (19,595) 69,682,295 (28.12) 8 Investments 30 June 2010 Â£'000 Investment portfolio summary Listed investments at fair value through profit or loss 41,387 Unlisted investments at fair value through profit or loss 8,472 49,859 30 June 2010 Listed Unlisted Total Â£'000 Â£'000 Â£'000 Analysis of investment portfolio movements Opening book cost 66,103 514 66,617 Opening investment holding (losses)/gains (34,904) 517 (34,387) Opening valuation 31,199 1,031 32,230 Movements in the year: Purchases at cost 18,358 6,810 25,168 Sales - proceeds (17,323) (2,890) (20,213) - (losses)/gains on sales (9,032) 36 (8,996) Increase in unrealised appreciation 18,185 3,485 21,670 Closing valuation 41,387 8,472 49,859 Closing book cost 58,106 4,470 62,576 Closing investment holding (losses)/gains (16,719) 4,002 (12,717) 41,387 8,472 49,859 A list of the top 10 portfolio holdings by their aggregate market values is given in the Investment Manager's report above. Transaction costs incidental to the acquisitions of investments totalled Â£ 308,000, including Â£223,000 of costs associated with the acquisition of SRF II (2009: Â£13,000) and disposals of investments totalled Â£31,000 (2009: Â£7,000) for the year. 30 June 2010 Total Â£'000 Analysis of capital gains Losses on sale of investments (8,996) Foreign exchange losses (1) Movement in investment holding losses 21,670 12,673 The Company adopted the amendment to IFRS 7, effective for periods commencing on or after 1 January 2009, which requires the Company to classify fair value measurements using a fair value hierarchy that reflect the subjectivity of the inputs used in measuring fair value of each asset. The fair value hierarchy has the following levels: * Quoted bid prices (unadjusted) in active markets for identical assets or liabilities ("level 1"). * Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as process) or indirectly (that is, derived from prices) ("level 2"). * Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) ("level 3"). The level in the fair value hierarchy within which the fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value of the investment. The following table analyses within the fair value hierarchy the Company's financial assets and liabilities (by class) measured at fair value at 30 June 2010. Financial instruments at fair value Level 1 Level 2 Level 3 Total through profit and loss Â£'000 Â£'000 Â£'000 Â£'000 Equity investments and limited 41,387 6,948 1,524 49,859 partnership interests Liquidity funds - 1,200 - - Total 41,387 8,148 1,524 49,859 Investments whose values are based on quoted market process in active markets, and therefore classified within level 1, include active listed equities. The Company does not adjust the quoted price for these instruments. Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/ or subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/ or non-transferability, which are generally based on available market information. Investments classified within level 3 have significant unobservable inputs. Level 3 instruments include private equity, as observable prices are not available for these securities, the Company has used valuation techniques to derive the fair value. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital ("IPEVC") Valuation Guidelines. There were no transfers between levels for the year ended 30 June 2010. The following table presents movements in level 3 instruments for the year ended 30 June 2010 by class of financial instrument. Equity investments Total Â£'000 Â£'000 Opening balance 1,031 1,031 Disposals during the year (31) (31) Total gains for the year included in the Statement of 524 524 comprehensive income Closing balance 1,524 1,524 9 Significant interests The Company had holdings of 3% or more in the following companies' securities: Name of Class of 30 June 2010 investment Share Percentage held Journey Group Ordinary 11.03 Redstone Ordinary 9.15 4imprint Group Ordinary 7.50 Allocate Software Ordinary 5.88 StatPro Group Ordinary 4.35 Thornton's Ordinary 4.06 Avingtrans Ordinary 3.92 E2V Technologies Ordinary 3.90 Pinewood Shepperton Ordinary 3.63 Lavendon Group Ordinary 3.47 Gooch & Housego Ordinary 3.35 Unlisted securities: Strategic Recovery Fund II Partnership 33.33 interest 10 Other receivables 30 June 30 June 2010 2009 Â£'000 Â£'000 - Dividends receivable 167 91 Accrued income - 2 Other receivables and prepayments 10 12 177 105 11 Other payables 30 June 30 June 2010 2009 Â£'000 Â£'000 Other creditors and accruals 181 142 12 Called up share capital Number Â£'000 Allotted, called up and fully paid Ordinary shares of 10p each: At 1 July 2009 72,626,000 7,262 New shares issued 7,189,974 719 79,815,974 7,981 Following the receipt of Shareholder approval, the Company acquired 3i Group plc's limited partnership interest in Strategic Recovery Fund II. The consideration for the acquisition comprised the issue of 7,189,974 Ordinary shares at a price of 54.17p per share (Â£3,894,809). 13 Own shares held in treasury 30 June 30 June 2010 2009 Â£'000 Â£'000 3,045,500 (2009: 3,045,500) Ordinary shares of 10p each 305 305 The cost of the shares Â£1,884,000 (2009: Â£1,884,000) held in treasury has been taken to the special reserve. 14 Reserves Capital Capital reserve reserve arising on arising on Share Special investments investments Revenue premium reserve sold held reserve Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening balance 2,070 60,398 (1,300) (34,387) 607 Net losses on realisation of - - (8,996) - - investments Exchange difference - - (1) - - Increase in unrealised - - - 21,670 - appreciation New shares issued in the year 3,176 - - - 234 Retained net revenue for the - - - - (230) period As at 30 June 2010 5,246 60,398 (10,297) (12,717) 611 15 Reconciliation of net cash flow to net debt 30 30 June 2010 June 2009 Â£'000 Â£'000 Opening net funds 2,457 2,933 Decrease in cash and cash equivalents in year (1,090) (476) Closing net funds 1,367 2,457 At 30 Net At 30 June 2009 cashflow June 2010 Â£'000 Â£'000 Â£'000 Cash at bank 107 60 167 Liquidity funds 2,350 (1,150) 1,200 2,457 (1,090) 1,367 16 Net asset value per Ordinary share The net asset value per Ordinary share is based on net assets of Â£51,222,000 (2009: Â£34,650,000) and on 76,770,474 (2009: 69,580,500) Ordinary shares, being the number of shares in issue at the year end, less the number of shares being held in treasury of 3,045,500 (2009: 3,045,500). 17 Capital commitments and contingent liabilities The Company has a commitment to invest â‚¬2,160,000 in Vintage I and an outstanding commitment to SRFII of Â£2,367,000. 18 Analysis of financial assets and liabilities The Company's financial instruments comprise securities, cash balances (including amounts held in liquidity funds) and debtors and creditors that arise from its operations, for example, in respect of sales and purchases awaiting settlement and debtors for accrued income. The Company has little exposure to credit and cash flow risk. Credit risk is due to uncertainty in a counterparty's ability to meet its obligations. The Company has no exposure to debt purchases and ensures that cash at bank is held only with reputable banks with high quality external credit ratings. Due to timings of investment and distributions, at any one time the Company may hold significant amounts of surplus cash. Any funds in excess of those required to meet daily operation requirements are invested in Institutional Liquidity Funds. These are highly liquid assets than are redeemable on less than 24 hours notice. The Company only invests in funds that have a AAA rating and the funds performance is monitored by the Investment Manager. As at 30 June 2010 the Company had Â£1.2 million (2009: Â£2.35 million) invested in such funds. The Company finances its operations through its issued capital, existing reserves and a Â£5 million revolving credit facility which remains undrawn at 30 June 2010. The principal risks the Company faces in its investment portfolio management activities are: * market price risk, i.e. the movements in value of investment holdings caused by factors other than interest rate movement; * interest rate risk; * liquidity risk; and * foreign currency risk. The Investment Manager's policies for managing these risks are summarised below and have been applied throughout the year: Policy (i) Market price risk The Company's investment portfolio is exposed to market price fluctuations which are monitored by the Investment Manager. Adherence to the investment objectives and the limits on investment set by the Company mitigates the risk of exposure to any one particular type of security or issuer. If the investment portfolio valuation fell by 20% from the 30 June 2010 valuation (2009: 20%), with all other variables held constant, there would have been a reduction of Â£9,972, 000 (2009: Â£6, 446,000) in the return before taxation and equity. (ii) Cash flow interest rate risk exposure The Investment Manager is permitted to borrow up to 20% of the Company's adjusted portfolio valuation, and uses a Â£5,000,000 revolving credit facility for this purpose, at variable rates to be determined prior to any drawdown. The Company's bank accounts earn interest at a variable rate which is subject to fluctuations in interest rates. The Company holds cash in liquidity funds. Income from these funds is dependent on the performance of the funds. If interest rates had reduced by 1% from those obtained at 30 June 2010, it would have the effect, with all other variables held constant, of reducing the net return before taxation and equity by Â£16,000 (2009: Â£25,000). If there had been an increase in interest rates of 1% there would have been an equal and opposite effect in the net return before taxation and equity. The calculations are based on cash at bank and liquidity funds as at 30 June 2010 and these may not be representative of the year as a whole. Non-interest rate risk exposure The remainder of the Company's portfolio and current assets are not subject directly to interest rate risk. Details of the risk profile of the Company are shown in the following tables. The interest rate risk profile of the Company's financial assets at 30 June 2010 was: No inte Cash flow rest rate interest risk rate risk Total financial financial assets assets Â£'000 Â£'000 Â£'000 Sterling Ordinary shares 41,387 41,387 - Liquidity funds 1,200 - 1,200 Cash 167 - 167 Receivables* 167 167 - 42,921 41,554 1,367 Euros Unlisted investments 8,472 8,472 - 8,472 8,472 - Total 51,393 50,026 1,367 * Receivables exclude prepayments which under IAS 32 are not classed as financial assets. The interest rate risk profile of the Company's financial assets at 30 June 2009 was: No interest Cash flow rate risk interest financial rate risk Total assets financial assets Â£'000 Â£'000 Â£'000 Cash flow Sterling Ordinary shares 31,199 31,199 - Liquidity funds 2,350 - 2,350 Cash 107 - 107 Receivables* 93 93 - 33,749 31,292 2,457 Euros Other investments 1,031 1,031 - 1,031 1,031 - Total 34,780 32,323 2,457 * Receivables exclude prepayments which under IAS 32 are not classed as financial assets. The interest rate risk profile of the Company's financial liabilities at 30 June 2010 was: No interest rate risk financial Total liabilities Â£'000 Â£'000 Sterling Creditors 181 181 All amounts are due in three months or less The interest rate risk profile of the Company's financial liabilities at 30 June 2009 was: No interest rate risk financial Total liabilities Â£'000 Â£'000 Sterling Creditors 142 142 All amounts are due in three months or less. (iii) Liquidity risk The Investment Manager may invest on behalf of the Company in securities which are not readily tradable, which can lead to volatile share price movements. It may be difficult for the Company to sell such investments. Although the Company's AIM quoted investments and unquoted investments are less liquid than securities listed on the London Stock Exchange, the Board seeks to ensure that an appropriate proportion of the Company's investment portfolio is in invested in cash and readily realisable investments, which are sufficient to meet any funding requirements that may arise. (iv) Foreign currency risk The Company invests in a private equity fund denominated in Euros. In addition, the Company's loan may be drawn down in US Dollars or Euros as well as Sterling. The Company is, therefore, subject to foreign currency risk. During the year the Sterling/Euro exchange fluctuated 16% from a low of 1.066 on 12 October 2009 to a high of 1.2364 on 29 June 2010, before closing at 1.2214 on 30 June 2010 (2009: 1.1741). If the Sterling/Euro exchange rate had reduced by 15% from that obtained at 30 June 2010 (2009: 10%), it would have the effect, with all other variables held constant, of increasing the equity shareholders' funds by Â£269,000 (2009: Â£ 115,000). The calculations are based on the value of the investment in Vintage I as at 30 June 2010 and this may not be representative of the year as a whole. The bank facility, which since 14 July 2009 (before this date the facility was for Â£10 million) is a Â£5 million revolving credit facility with The Royal Bank of Scotland plc, incurs interest at the rate of 1.0% over LIBOR or EURIBOR. The facility may be drawn down in Sterling, US Dollars or Euros. The facility was undrawn at 30 June 2010. The undrawn balance incurs interest at the rate of 0.2%. The facility is available until 13 July 2011 in accordance with the current loan facility's covenant, gross borrowings shall not be more than 20% of the adjusted portfolio valuation at any time. Fair values of financial assets and financial liabilities The carrying value of the financial assets and liabilities of the Company is equivalent to their fair value. Managing Capital Capital structure The Company is funded through shareholders' equity, cash reserves and an existing Â£5 million loan facility with The Royal Bank of Scotland plc, which was not utilised as at 30 June 2010. The Company's Articles of Association permit the Board to borrow up to 25% of the Company's net asset value at the time of borrowing. Capital is managed so as to maximise the return to shareholders while maintaining an appropriate capital base to allow the Company to operate effectively in the marketplace and to sustain future development of the business. The Company pays such dividends as are required to maintain its investment trust status, and may also from time to time return capital to shareholders through the purchase of its own shares at a discount to net asset value. Capital constraints The Company operates so as to qualify as a UK investment trust for UK tax purposes. Inter alia, this requires that no investment may exceed 15% by value of the Company's portfolio at the point of investment. The Company's capital requirement is reviewed regularly by the Board. 19 Related party transactions The Investment Manager: SVG Investment Managers Limited is regarded as a related party of the Company. The Investment Manager may draw upon advice from the IAP of which Sir Clive Thompson, a Director of the Company, is a member. The IAP was established to provide advice to SVGIM in relation to the strategy, operations and management of potential investee companies. The amounts paid to the Investment Manager are disclosed in note 3 above. The amount due to the Investment Manager at 30 June 2010 was 109,000 (30 June 2009: Â£83,000). In June 2009 SVGIM entered into a Commission Sharing Arrangement with four executing brokers. Under this arrangement the amount of commission received by SVGIM in relation to trading activities was carried out on behalf of the Company for the period to 30 June 2010 was Â£6,000 (30 June 2009: nil). Notice of Annual General Meeting The Annual General Meeting of Strategic Equity Capital plc will be held at the offices of SVG Investment Managers Limited at 61 Aldwych, London WC2B 4AE at 11.30 am on Tuesday, 9 November 2010. The notice of this meeting can be found in the Annual Report and Accounts at: www.strategicequitycapital.com

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