Annual Financial Report

Strategic Equity Capital plc Report & Financial Statements for the year ended 30 June 2009 The Full Annual Report and Accounts can be accessed via the Company's website at: http://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. Shareholder information Financial calendar Company's year-end 30 June Annual results announced September 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 2009 the issued share capital of the Company was 72,626,000 Ordinary shares. Since the year end the Company has issued 7,189,974 new Ordinary shares. The Company has been incorporated with an indefinite life. All shares have equal voting rights. Treasury shares During the year to 30 June 2009 the Company repurchased 1,463,000 (2008: 1,582,500) Ordinary shares which are held in treasury. At 30 June 2009 the total number of shares held in treasury was 3,045,500 (2008: 1,582,500). Shares held in treasury have no voting, dividend or other rights and are excluded for net asset value and return per share calculations. As at 30 September 2009 the Company's issued share capital consisted of 79,815,974 Ordinary shares, with total voting rights of 76,770,474 and 3,045,500 Ordinary shares held in treasury. Financial summary Year to Six months to Year to 30 June 2009 31 December 2008 30 June 2008 Total return: Total return Â£(19,361,000) Â£(25,759,000) Â£(26,857,000) Return per Ordinary share* (27.78)p (36.91)p (37.14)p Revenue: Net return after taxation Â£234,000 Â£117,000 Â£(4,000) Revenue return per Ordinary 0.34p 0.17p (0.01)p share* As at Six months to Year to 30 June 2009 31 December 2008 30 June 2008 Assets (investments valued at bid-market prices): Net assets Â£34,650,000 Â£28,252,000 Â£54,851,000 Net assets value per Ordinary 49.80p 40.60p 77.21p share - (including current period revenue) Middle market quotation: Ordinary shares 36.25p 14.50p 66.25p Discount to net asset value 27.21% 64.29% 14.20% * Return per Ordinary share is calculated based on 69,682,295 shares (year to 30 June 2008: 72,314,265), being the weighted average number of Ordinary shares in circulation throughout the year. Chairman's report There has been a great deal of commentary on the causes of the extraordinary conditions prevalent in financial markets over the last twelve months. This topic has been well covered elsewhere; however it is worth briefly touching on its impact on the Company. The second half of 2008 saw a continuation of the desperate market conditions reported in the interim report and further in the first quarter of calendar 2009. Since then economic conditions have continued to worsen, but some element of risk appetite has returned to equity markets, and some investors are starting to reposition their investments for a return to growth. At the time of writing, this has led to a rally in markets in general, and in particular the smaller companies market. Over the last three years the Investment Manager has been highlighting the likelihood of a fall in profitability of the corporate sector, and so has been investing in companies that can generate shareholder value through change in spite of adverse market conditions. In general, where these strategies have been based on operational improvement they have worked well. It is worth noting that the average portfolio company has performed significantly better than the market from an earnings perspective. In some cases, operational change has led to significant absolute value creation despite the adverse market backdrop. Where acquisition-led strategies have been adopted, these have proved less successful. The tightening of debt markets has been far more severe than the Investment Manager anticipated, and those companies which have suffered as a result of the deteriorating business environment have in a few cases been left with weakened balance sheet structures, leading to savage de-ratings. The Investment Manager actively repositioned the portfolio towards attractively valued, lower risk companies over the period. As a result the top holdings are now performing strongly and the overall level of gearing of companies within the portfolio is well below the market average. The valuation characteristics of the portfolio are attractive and a number of the investments are approaching the Investment Manager's target prices and may well be realised over the short to medium term if market conditions remain supportive. Performance Much like the broader market, the Company has seen a significant recovery in the net asset value per share and a sharp reduction in the discount to net asset value at which the Company's shares trade since the beginning of 2009. Nonetheless, net assets at the end of the financial year stood 36.83% lower than their valuation at 30 June 2008, and the net asset value per share at 30 June 2009 was 49.80p. This fall in valuation has been driven by three main factors: a general fall in the valuation of smaller companies; a write down in the valuation of one of the Company's unlisted instruments albeit to a level well in excess of cost, and finally due to a large fall in the value of the Company's holding in Redstone plc. The recovery in the net asset value has continued since the year end, with the acquisition of 3i Group plc's investment in Strategic Recovery Fund II ("SRF II"), which completed on 20 August 2009, making a significant contribution. The investment in SRF II was valued at cost until 3 September 2009 and is now valued on the basis of its latest month end valuation. That change in the basis of valuation contributed 3.95p to the unaudited net asset value per share of 59.47p at 4 September 2009, an increase of 19.42% since the year end. The discount to net asset value at which the Company's shares trade increased to 64.64% during the year, but had reduced to 27.21% at the year end and stood at 25.17% at 4 September 2009. Discount Management During the year the Company bought back 1,463,000 shares at a weighted average discount of 19.23% to net asset value. Shares bought back are held in treasury. Following the shareholder consultation process of October 2008 the Board announced that, whilst it will continue to use its share buy-back authority where it can be applied for the benefit of shareholders as a whole, it believed it impractical to seek to reduce the discount to 10% or less given the market conditions at that time. The Board remains committed to buying back shares when we believe 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. The Board reviews its stance on share buy-backs on a regular basis. Banking Arrangements I can confirm that the Company has been able to refinance a Â£5 million revolving credit facility with The Royal Bank of Scotland plc. At this time there is no intention to move the Company into a geared position. 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 ended 30 June 2009, payable on 13 November 2009 to holders on the register as at 16 October 2009, pending shareholder approval at the Annual General Meeting. Post Year-End Events At the General Meeting held on 14 August 2009, shareholders approved the acquisition of 3i's limited partnership interest in SRF II. The acquisition was completed on 20 August 2009. AGM The AGM of the Company will be held at 11.30 am on 10 November 2009 at 61 Aldwych, London WC2B 4AE. 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 has committed to providing shareholders with an opportunity to vote on an ordinary resolution to continue the Company at the annual general meeting of the Company in November 2010. Prior to making a recommendation with regard to that vote, the Board, in conjunction with its advisers, will undertake a strategic review of the Company. As part of the review process, we will consult with a range of shareholders to ascertain their views on the Company. Outlook The economic outlook remains profoundly uncertain. Stock markets remain volatile, and investors appear to take alternating views on whether the world is getting better or worse, and what "shape" of recovery we should expect, from week to week. Against such a background some things are clear. The competitive environment for activist style shareholders changed considerably over the last year. As we enter a period when smaller public companies' need for capital and other forms of shareholder support is greatest there has been a meaningful reduction in the number of engaged investors in the market place. This presents a significant opportunity for the Company to engage with high quality companies on very attractive valuations. I believe that the Investment Manager's strategy remains sound, and that the current market conditions provide a number of excellent opportunities to recover and create value for all of our shareholders. J Hodson 30 September 2009 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 Investment Manager's report Investment Strategy Our strategy is to invest in publicly quoted companies which 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 either 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 the 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. Full Year Report As at 30 June 2009 the Company had net assets of Â£34,650,000 (49.80p per share). This represented a decrease of 36.83% over the previous year, and an increase of 22.65% over the previous six months. 2008-9 was clearly a difficult year for the Company. The financial markets provided a significant headwind, with smaller companies and value style investing staying out of favour for the majority of the period. The rally in the smaller companies market in the second quarter of 2009 led to a rapid bounce in the Company's net asset value and a substantial narrowing of its discount, but not enough to recoup the losses incurred during the first three quarters of the period. In conclusion, the Company's portfolio seemed to bifurcate into winners and losers over the period, and although operationally the winners were in a large majority, in share price terms the overall de-rating of the market and the impact of the worst losers overcame this. When looking forward it is worth remembering that all of the period's successes were looking awful at some point in the period, yet this did not stop them from ultimately creating value for the Company's shareholders. Intec, the year's most successful investment, fell by 63% to its low point before rallying 280% to end the year up. By sticking to our methodology we were able to take advantage of this weakness to add significantly to our investment over this period. We believe that the portfolio today is robust and mature, and presents significant upside opportunity over the next 12 months. Performance Review The Company had some noticeable successes over the year, as plans implemented in previous years at Intec, Spirent and RPC began not only to bear fruit, but also be noticed by the market. The continuing strong performance of these holdings highlights how large the rewards can be if investment strategies can be followed through to conclusion. The Company also benefitted from the first "green shoots" of corporate activity returning to the UK market, as 3i QPE was acquired by its parent company at a healthy premium. The contribution from StatPro highlighted the potential impact of the special situations that can arise in the current environment. Top 5 contributors to performance Company Cost Realisations Valuation Period attribution Â£'000 Â£'000 Â£'000 % Intec Telecom 3,028 - 5,274 +7.23% Systems RPC Group 4,220 143 3,702 +3.04% 3i QPE 1,717 1,798 - +2.42% StatPro Group 2,575 58 2,803 +2.26% KCOM Group 1,664 60 1,354 +1.34% Bottom 5 contributors to performance Company Cost Realisations Valuation Period attribution Â£'000 Â£'000 Â£'000 % Redstone 6,949 - 1,092 -15.92% Vintage 1 514 135 1,031 -5.62% Renold 3,392 - 668 -4.44% Entertainment Rights 6,484 - - -3.35% (in administration) Mecom 3,208 178 678 -3.12% There were also some major disappointments in the period. The synchronised nature of the economic downturn and the brutal tightening of credit markets meant that indebtedness became a major issue. This had a particularly adverse impact on those portfolio companies that had been previously pursuing acquisition strategies, such as Redstone, Renold, Mecom and Entertainment Rights. In the case of Mecom, we had already fully recovered the cost of our investment by selling at higher prices. In the case of Entertainment Rights, the weaker economic environment derailed our efforts to stabilise the group following the issues disclosed last year, and the company went into administration. Vintage 1 remains a successful investment for the Company, but has a volatile valuation due to the nature of its capital structure. Over the period it was negatively impacted by the general write down of private equity asset valuations for the year ended 31 December 2008 becoming fully reflected in its valuation. Portfolio Review The portfolio remained highly focused, with a total of 22 holdings and with the top 10 holdings accounting for 80.34% of the portfolio at the end of the financial period. The portfolio remains predominantly invested in quoted equities, with 3.20% of the portfolio invested in unlisted investments and 6.98% of the portfolio invested in cash at the year end. In terms of portfolio activity, the virtual removal of the private equity and trade buyer from the market, as well as a collapse in multiples, slowed down the process of realisations. New investment over the period was mostly limited to selling smaller or riskier holdings in order to invest the proceeds into our strongest ideas. The exceptions to this were the cash inflows that came from the acquisition of 3i QPE and sales of Spirent as the company neared our target price. This cash was predominantly invested in shares in KCOM Group, RPC Group and on-market buy-backs of shares in the Company in the earlier part of the period. We believe that the portfolio remains attractively valued offering a significantly better growth outlook than the market despite a lower valuation. Sector spilt Percentage Telecoms 30.6 Manufacturing 13.6 Support services 11.9 Technology 10.6 Media 9.7 Net cash 7.0 Retail 6.3 Financial general 4.8 Investment companies 4.2 Leisure 1.3 Size split (by market Percentage capitalisation) <Â£100m 51.6 Â£100m-Â£300m 31.8 Â£300m-Â£500m 9.6 Net cash 7.0 Strategic Equity Capital FTSE Small Cap Portfolio (money (excl Investment weighted) Trust) Index Price/Earnings ratio 12.6 14.4 Price/Book ratio 1.2 1.2 Historic 3 Year Earnings Growth (%) 12.3 17.0 Forecast 3-5 Year Earnings Growth 13.4 7.3 (%) Return on equity (%) 5.3 2.6 Source: Factset Portfolio Analysis System The portfolio is now largely comprised of companies that are market leaders in their industry niches, with high levels of market share and some pricing power. They are growing and have strong underlying cash flows to support already robust balance sheets. As at the period end the top 10 holdings were as follows: Intec Telecom Systems is a global market leader in interconnect and mediation software, and retail billing software for the telecommunications industry. Following a change of Chairman and CEO over the course of 2007, Intec has been pursuing an operational improvement programme based around cost reduction, margin improvement and focus on cash flow generation. While the market was initially slow to recognise the importance of these changes, more recently Intec has seen a dramatic increase in its share price. This investment is now relatively mature. RPC Group is Europe's leading manufacturer of rigid plastic packaging. Following lobbying from us 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. This is a longer term investment as we believe that there is still more to go for, particularly when taking into account the improvement in the pricing of its raw materials. Spirent Group is a global market leader in test solutions for telecommunication companies and their suppliers. In December 2006 we voted alongside other shareholders at an EGM to reconstitute the company's board, and ultimately appoint Ed Bramson as Chairman. Under his leadership the company has instituted a strategic review and materially increased the profitability of the business. This has led to a material increase in the company's share price. This investment is also relatively mature. StatPro Group is a rapidly growing provider of asset management software and asset pricing to the investment industry worldwide. We 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 its 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. 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. Thornton's is a retailer and manufacturer of confectionary. We made our investment 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, key performance indicators are ahead of plan despite various hurdles, such as the insolvency of Woolworth's and Birthdays', both of whom were customers. The company's share price was hit following concerns over Christmas trading but has subsequently rebounded as trading has improved and it remains highly cash generative. 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. We have 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. Over the long term the company has benefitted from a subsequent restructuring of the group. More recently it has been negatively impacted by the cyclical nature of its markets, however it continues to benefit from market share gains in the United States and there is potential upside from further restructuring. The principal activity of ORA Capital is the formation or acquisition of significant minority or majority shareholdings in new businesses in the technology, financial services and resources sectors. ORA was established in November 2005 and raised Â£31.8 million from investors between inception and May 2006. The Company initially provided ORA with pre-IPO capital, and further increased its stake at flotation. ORA has a robust net cash balance sheet, which it is in a position to use for value enhancing acquisitions. The 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 and other changes have been underestimated by the market, and that the valuation of KCOM has significant further upside. Journey Group offers products and services to the travel industry. A significant part of its business is based on a new model of delivering catering supplies to airlines. SVGIM has been an investor in the group since 2005 and has been closely involved with a restructuring of the business under a new management team led by Stephen Yapp. The group has benefitted from significant operational and financial improvements since the start of the turn-around strategy, and if successfully completed the company's recently announced joint venture with Autogrill could transform the outlook for the company. Top 10 holdings A summary of the top 10 investments at 30 June 2009, which represent approximately 80% of net assets, is given below: % of % of Date of invested invested % of Sector first Cost Valuation portfolio portfolio net Company classification investment Â£'000 Â£'000 2009 2008 assets Intec Telecoms Sep 2006 3,028 5,274 16.36 6.88 15.22 Telecom Systems RPC Group Manufacturing Feb 2007 4,220 3,702 11.49 5.02 10.69 Spirent Telecoms Aug 2006 2,597 2,918 9.06 7.80 8.42 Group StatPro Technology May 2007 2,575 2,803 8.70 3.17 8.09 Group Pinewood Media Oct 2005 3,038 2,668 8.28 8.84 7.70 Shepperton Thornton's Retail Sep 2006 4,149 2,189 6.79 6.14 6.32 4imprint Support Feb 2006 4,885 2,150 6.67 5.48 6.20 Group services ORA Capital Financial Mar 2006 1,300 1,671 5.19 4.24 4.82 general KCOM Group Telecoms May 2007 1,664 1,354 4.20 1.07 3.91 Journey Support Aug 2005 8,419 1,163 3.61 2.47 3.36 Group services New investments No significant new investments were made during the period. Outlook The timing of a full economic recovery and a normalisation of the debt and banking markets remains highly uncertain. In addition, the ongoing tug of war between short-term government stimulus and long-term structural imbalances in the market are likely to lead to continued market volatility. Against this backdrop we believe it is prudent to move our focus from operational to financial restructuring opportunities. The latter may be easier to accomplish in difficult trading conditions and may also have a more immediate impact. Over the next 12 months we see secondary fundraisings as a compelling area for new investment. The current scarcity of debt and low valuations of equity means that providing companies with access to fresh capital can generate supernormal returns. It also means that we can be more robust than ever when agreeing investment strategy with investee companies. We have become very actively engaged with the UK smaller company corporate finance community and are tracking a large number of potential investee companies which are planning fundraisings in the second half of 2009. We have identified four categories of fundraising currently underway. Some strongly performing companies are raising equity as a "comfort blanket". These fundraisings are unnecessary and are likely to dilute shareholder returns over the long term. A larger number of poorly performing companies have had or are contemplating emergency fundraisings to repay excessive debt. These transactions may be throwing good money after bad if they do not resolve the underlying problems affecting the companies, and thus need to be assessed very carefully. The two types of fundraising which we find most attractive are either lowly geared companies hoping to raise equity to make opportunistic acquisitions at attractive prices or companies with strong market positions and good operations that have inappropriate balance sheets for the current environment. We believe that these may offer the correct combination of attractive entry prices and relatively rapid uplifts in valuation. There are now a number of mature and successful investments in the portfolio. As trade-led M&A and private equity players return to the market we expect to see acceleration in realisations over the next 12 months, particularly if the stock market rally which is currently underway continues. SVG Investment Managers Limited 30 September 2009 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 Directors present their report and financial statements for the year to 30 June 2009. The Company has been incorporated with an indefinite life. Business Review The Business Review should be read in conjunction with the Chairman's report and the Investment Manager's report. 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 (`KPIs'). 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 authorised investment trust under Section 842 of the Income & Corporation Taxes Act 1988 for the year ended 30 June 2008 ("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. It is the opinion of the Directors that the Company has directed its affairs so as to enable it to continue to qualify for such approval for the year ended 30 June 2009 and the Company will continue to seek approval under Section 842 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£183 million. Performance Over the year to 30 June 2009, net assets have decreased by 36.83% to Â£34.65 million. Further information on the performance of the Company's portfolio is contained in the Investment Manager's report. 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 (2008: nil) per Ordinary share, amounting to Â£230,000 (2008: Â£nil), be paid on 13 November 2009 to shareholders on the share register at the close of business on 16 October 2009 subject to shareholder approval at the Annual General Meeting. Share Capital At the year end the Company's issued share capital comprised 72,626,000 Ordinary shares, with 3,045,500 shares held in treasury (2008: 72,626,000 in issue and 1,582,500 held in treasury) representing 4.19% of the shares in issue (2008: 2.19%). At general meetings of the Company, the holders of Ordinary shares are entitled to one vote for every share held. During the year 1,463,000 Ordinary shares were purchased for treasury at an aggregate cost of Â£840,000 at prices ranging from 50.31p to 61.00p per Ordinary share at discounts to NAV of between 12.5% and 27.5%, representing 2.01% of the shares in issue. No shares have been purchased for treasury or cancellation since the year end. No shares were issued during the year, however, on 20 August 2009 the Company issued 7,189,974 Ordinary shares to 3i Group as part of the acquisition of SRF II from 3i (see Note 20). 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 objectives, principally: the NAV, 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 Income statement is set out below. â€¢ The NAV per Ordinary share at 30 June 2009 was 49.80p (2008: 77.21p). â€¢ The mid market share price at 30 June 2009 was 36.25p (2008: 66.25p). â€¢ The discount to NAV at 30 June 2009 was 27.21% (2008: 14.20%). â€¢ The total expense ratio at 30 June 2009 was 2.08% (2008: 0.80%). 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 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 portfolio 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. At the AGM held on 11 November 2008 the Company was authorised to make market purchases of its own shares up to a limit of 10,430,116 Ordinary shares. During the year 1,463,000 Ordinary shares were purchased. All these shares were placed into treasury. Further details of these purchases are disclosed in Notes 13 and 14. As at the date of this report there remained the authority to repurchase 8,967,116 Ordinary shares which is due to expire at the 2009 AGM. No shares have been bought back since the year end. 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 2009, the Company had nil drawn down under a revolving credit facility of Â£10 million with The Royal Bank of Scotland, this was subsequently reduced to a Â£5 million facility on 14 July 2009, details of which can be found in Note 18 of the financial statements. Gross borrowing 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. Unlisted investments The Company may invest up to 20% 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 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 842, 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 842 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. 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 by the Company on 12 months notice given at any time by either party. 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. Basic fee A basic management fee is payable to the Investment Manager at the annual rate of 1% of the net asset value of the Company (adjusted for the period from the date of admission, 19 July 2005 ("Admission") to 30 June 2009, so that the lower rate of 0.5% is payable in respect of cash amounts raised in the Placing until those amounts are applied in acquiring an interest in investee companies). The basic management fee accrues daily and is payable quarterly in arrears. 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'. The first performance period began on Admission and ended on 30 June 2007; each subsequent performance period is a period of six months. 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 Admission, increased at a rate of 7% per annum on a compounding basis. 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 (or if no performance fee has been earned since Admission, is higher than the net asset value per share on the date of Admission). 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 (or since Admission, if no performance fee has yet been 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 2009 (2008: nil). 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. Company law requires the Directors to prepare financial statements for each financial year which present fairly the financial position of the Company 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 and then apply them consistently; â€¢ make judgments and estimates that are reasonable and prudent; â€¢ present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; â€¢ state whether applicable International Financial Reporting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and 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. The Directors are responsible for keeping proper accounting records that 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 and Article 4 of the IAS Regulations. 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 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 30 September 2009 Independent Auditors' report to the members of Strategic Equity Capital plc The Company's financial statements for the year ended 30 June 2009 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. Income statement for the year ended 30 June 2009 Year ended 30 June 2009 Year ended 30 June 2008 Revenue Capital Revenue Capital return return Total return return Total Note Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Investments Losses on investments - (19,592) (19,592) - (27,237) (27,237) at fair value through profit or loss Exchange losses - (3) (3) - - - Net investment result 8 - (19,595) (19,595) - (27,237) (27,237) Income Dividends 2 936 - 936 792 - 792 Interest 2 50 - 50 187 - 187 Underwriting commission 2 - - - 5 - 5 Total operating income 986 - 986 984 - 984 Expenses Investment Manager's 3 (359) - (359) (453) - (453) fee Investment Manager's 3 - - - - 387 387 performance fee Other expenses 4 (361) - (361) (372) (3) (375) Total expenses (720) - (720) (825) 384 (441) Net return/(loss) 266 (19,595) (19,329) 159 (26,853) (26,694) before finance costs and taxation Finance costs Interest payable (32) - (32) (163) - (163) Total finance costs (32) - (32) (163) - (163) Net return/(loss) 234 (19,595) (19,361) (4) (26,853) (26,857) before taxation Taxation 5 - - - - - - Net return/(loss) after 7 234 (19,595) (19,361) (4) (26,853) (26,857) taxation for the year pence pence pence pence pence pence Return per Ordinary share Basic 7 0.34 (28.12) (27.78) (0.01) (37.13) (37.14) The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital return columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. Statement of changes in equity for the year ended 30 June 2009 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 2009 1 July 2008 7,262 2,070 61,238 (16,092) 373 54,851 (Loss)/return for - - - (19,595) 234 (19,361) the year Shares purchased to - - (840) - - (840) be held in treasury 30 June 2009 7,262 2,070 60,398 (35,687) 607 34,650 For the year ended 30 June 2008 1 July 2007 7,262 2,070 62,282 10,761 377 82,752 Loss for the year - - - (26,853) (4) (26,857) Shares purchased to - - (1,044) - - (1,044) be held in treasury 30 June 2008 7,262 2,070 61,238 (16,092) 373 54,851 Balance sheet as at 30 June 2009 30 June 30 June 2009 2008 Note Â£'000 Â£'000 Non-current assets Fair value through profit or loss - Investments 8 32,230 52,588 Current assets Other receivables 10 105 809 Cash and cash equivalents 15 2,457 2,933 2,562 3,742 Total assets 34,792 56,330 Current liabilities Other payables 11 142 1,479 142 1,479 Total assets less current 34,650 54,851 liabilities Net assets 34,650 54,851 Capital and reserves: Share capital 12 7,262 7,262 Share premium account 14 2,070 2,070 Special reserve 14 60,398 61,238 Capital reserve 14 (35,687) (16,092) Revenue reserve 14 607 373 Total shareholders' equity 34,650 54,851 pence pence Net asset value per share Basic 16 49.80 77.21 The financial statements were approved by the Board of Directors and authorised for issue on 30 September 2009. They were signed on its behalf by J Hodson Chairman 30 September 2009 Statement of cash flows for the year ended 30 June 2009 Year ended Year ended 30 June 2009 30 June 2008 Note Â£'000 Â£'000 Operating activities Net loss before finance costs and (19,329) (26,694) taxation Adjustment for losses on 19,592 27,239 investments Interest paid (32) (165) Operating cash flows before 231 380 movements in working capital Decrease/(increase) in receivables 647 (721) Decrease in payables (77) (2,696) Income tax recovered - 24 Purchases of portfolio investments (6,900) (17,256) Sales of portfolio investments 6,463 24,327 Net cash inflow from operating 364 4,058 activities Financing activities Repayment of revolving credit - (1,000) facility Purchase of treasury shares (840) (1,043) Net cash outflow from financing (840) (2,043) activities (Decrease)/increase in cash and (476) 2,015 cash equivalents for the year Cash and cash equivalents at start 2,933 918 of the year Cash and cash equivalents at 15 2,457 2,933 30 June 2009 Notes to the financial statements for the year ended 30 June 2009 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 1985 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 financial statements of Strategic Equity Capital plc for the year ended 30 June 2009 were authorised for issue in accordance with a resolution of the Directors on 30 September 2009. 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. Convention The financial statements are presented in Sterling, being the currency of the primary 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 Income statement 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 Income statement and allocated to capital. Gains and losses on investments sold are calculated as the difference between sales proceeds and cost. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices 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. 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 received 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 Income statement 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 Income statement. These expenses are allocated 100% to the revenue column of the Income statement. The Investment Manager's performance fee is allocated 100% to the capital column of the Income statement. 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 cost. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Bank overdrafts that are repayable on demand which form an integral part of the Company's cash management are included as a component of cash and cash equivalents for the purpose of the Statement of cash flows. Bank loans and borrowings All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost, any difference between cost and redemption value being recognised in the Income statement 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 Income statement 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. 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 pounds Sterling (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 Income statement. 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 2009 and have not been applied in preparing these financial statements. International Accounting Standards (IAS/IFRS) Effective date IAS 1 Presentation of financial statements (revised) 1 January 2009 IAS 23 Amendment - Borrowing costs 1 January 2009 IAS 27 Consolidated and separate financial statements 1 July 2009 (revised) IAS 32 Amendment - Puttable financial instruments and 1 January 2009 obligations existing on liquidation IAS 39 Amendment - Eligible hedged items 1 July 2009 IFRS 2 Amendment - Share based payments: vesting 1 January 2009 conditions and cancellations IFRS 3 Business combinations (revised) 1 July 2009 IFRS 8 Operating segments 1 January 2009 International Financial Reporting Interpretations Committee (IFRIC) IFRIC 16 Hedges of a net investment in foreign operation 1 October 2009 IFRIC 17 Distribution of non-cash assets to owners 1 July 2009 The Directors do not anticipate that the initial adoption of the above standards, amendments and interpretations will have a material impact on the Company's financial statements in the period of initial application. 2 Income 30 June 2009 30 June 2008 Â£'000 Â£'000 Income from investments: UK dividend income 936 792 Convertible bond income (9) 122 Liquidity fund income 32 48 959 962 Other income: Bank interest receivable 3 17 Underwriting commission - 5 Other interest income 24 - 27 22 986 984 Total income comprises: Dividends 936 792 Interest 50 187 Underwriting commission - 5 986 984 Income from investments: Listed UK 927 914 Listed overseas 32 48 Unlisted overseas - - 959 962 3 Investment Manager's fee 30 June 2009 30 June 2008 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Management fee 359 - 359 709 - 709 Refund of VAT on management/performance - - - (256) (387) (643) fee 359 - 359 453 (387) 66 A basic management fee is payable to the Investment Manager at the annual rate of 1% of the net asset value of the Company. 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 above. No performance fee has been payable in either year. 4 Other expenses 30 June 2009 30 June 2008 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Secretarial services 68 - 68 76 - 76 Auditors' remuneration for: Audit services 21 - 21 21 - 21 Directors' remuneration 78 - 78 82 - 82 Other expenses 194 - 194 193 3 196 361 - 361 372 3 375 5 Taxation 30 June 2009 30 June 2008 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% - - - - - - (2008: 29.5%) - - - - - - The Company is subject to corporation tax at 28% (2008: 29.5%). As at 30 June 2009 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 2009 30 June 2008 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Return/(loss) on 234 (19,595) (19,361) (4) (26,853) (26,857) ordinary activities before taxation Theoretical tax at UK corporation tax rate of 28% (2008: 29.5%) 66 (5,487) (5,421) (1) (7,922) (7,923) Effects of: - UK dividends that are (262) - (262) (234) - (234) not taxable - Losses on investment - 5,487 5,487 - 8,035 8,035 - Movement in unrelieved 181 - 181 233 (113) 120 expenses - Expenses not 15 - 15 2 - 2 deductible for tax purposes - - - - - - Factors that may affect future tax charges The Company has Â£4,323,000 management expenses and loan relationship deficits (2008: Â£3,697,000) 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, no deferred tax asset in respect of these amounts has 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 The proposed distribution for the year ended 30 June 2009 is 0.30p per share, on 76,770,474 shares, amounting to Â£230,311. Under the requirements of Section 842 of the Income and Corporation Taxes Act 1988 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 2009 30 June 2008 Â£'000 Â£'000 Net return after taxation per Company accounts 234 (4) Final dividend proposed of 0.30p (2008: nil) (230) - per share Revenue retained for s842 purposes 4 (4) 7 Return per Ordinary share 30 June 2009 30 June 2008 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 (19,361) 69,682,295 (27.78) (26,857) 72,314,265 (37.14) Revenue Return per share 234 69,682,295 0.34 (4) 72,314,265 (0.01) Capital Return per share (19,595) 69,682,295 (28.12) (26,853) 72,314,265 (37.13) 8 Investments 30 June 2009 Â£'000 Investment portfolio summary Listed investments at fair value through 31,199 profit or loss Unlisted investments at fair value through 1,031 profit or loss 32,230 30 June 2009 Listed Unlisted Total Â£'000 Â£'000 Â£'000 Analysis of investment portfolio movements Opening book cost 69,248 2,296 71,544 Opening investment holding (losses)/gains (20,800) 1,844 (18,956) Opening valuation 48,448 4,140 52,588 Movements in the year: Purchases at cost 5,640 - 5,640 Sales - proceeds (6,271) (135) (6,406) Sales - (losses)/gains on sales (4,270) 109 (4,161) Movement from unlisted to listed 1,756 (1,756) - Investment holding losses (14,104) (1,327) (15,431) Closing valuation 31,199 1,031 32,230 Closing book cost 66,103 514 66,617 Closing investment holding (losses)/gains (34,904) 517 (34,387) 31,199 1,031 32,230 A list of the top ten portfolio holdings by their aggregate market values is given in the Investment Manager's report. Transaction costs incidental to the acquisitions of investments totalled Â£ 13,000 (2008: Â£94,000) and disposals of investments totalled Â£7,000 (2008: Â£ 26,000) for the year. 30 June 2009 Total Â£'000 Analysis of capital gains Losses on sale of investments (4,161) Foreign exchange losses (3) Movement in investment holding losses (15,431) (19,595) 9 Significant interests The Company had holdings of 3% or more that is material in the context of the accounts in the following companies' securities: Name of Class of 30 June 2009 investment Share Percentage held Journey Group (formerly Watermark) Ordinary 11.03 Redstone Ordinary 9.15 4imprint Group Ordinary 7.57 StatPro Ordinary 6.60 Renold Ordinary 4.28 Thornton's Ordinary 4.16 Avingtrans Ordinary 3.93 Entertainment Rights (in administration) Ordinary 3.92 Pinewood Shepperton Ordinary 3.64 Western & Oriental Ordinary 3.51 Filtronic Ordinary 3.07 10 Other receivables 30 June 2009 30 June 2008 Â£'000 Â£'000 Amounts due from brokers - 57 Dividends receivable 91 80 Accrued income 2 12 VAT recoverable on Investment Manager's - 643 fee Prepayments 12 17 105 809 11 Other payables 30 June 2009 30 June 2008 Â£'000 Â£'000 Amounts due to brokers - 1,260 Other creditors and accruals 142 219 142 1,479 12 Called up share capital 30 June 2009 30 June 2008 Â£'000 Â£'000 Authorised: 120,000,000 Ordinary shares of 10p each 12,000 12,000 Allotted, called up and fully paid: 72,626,000 (2008: 72,626,000) Ordinary 7,262 7,262 shares of 10p each 13 Own shares held in treasury 30 June 2009 30 June 2008 Â£'000 Â£'000 3,045,500 (2008: 1,582,500) Ordinary 1,884 1,044 shares of 10p each The cost of the shares 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 61,238 2,864 (18,956) 373 Net losses on realisation of - - (4,161) - - investments Exchange difference - - (3) - - Investment holding losses - - - (15,431) - Shares purchased to be held - (840) - - - in treasury Retained net revenue for the - - - - 234 period As at 30 June 2009 2,070 60,398 (1,300) (34,387) 607 15 Reconciliation of net cash flow to net debt 30 June 2009 30 June 2008 Â£'000 Â£'000 Opening net funds/(debt) 2,933 (82) (Decrease)/increase in cash and cash (476) 2,015 equivalents in year Repayment of bank loan - 1,000 Closing net funds 2,457 2,933 At Net At 30 June 2008 cashflow 30 June 2009 Â£'000 Â£'000 Â£'000 Cash at bank 733 (626) 107 Liquidity funds 2,200 150 2,350 2,933 (476) 2,457 16 Net asset value per Ordinary share The net asset value per Ordinary share is based on net assets of Â£34,650,000 (2008: Â£54,851,000) and on 69,580,500 (2008: 71,043,500) 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 (2008: 1,582,500). 17 Capital commitments and contingent liabilities The Company has a commitment to invest â‚¬2,160,000 in Vintage I. 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. 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 2009 the Company had Â£2.35 million (2008: Â£2.20 million) invested in such funds. The Company finances its operations through its issued capital, existing reserves and a Â£5,000,000 revolving credit facility. The principal risks the Company faces in its investment portfolio management activities are: â— market price risk, i.e. the movements in value of investment holdings caused by factors other than interest rate movement; â— interest rate risk; â— liquidity risk; and â— 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. All markets were exposed to significant turmoil during the year with smaller companies, value style investing and private equity based valuation techniques all staying out of favour for the majority of the period, though there was a rally in the smaller companies market in the second quarter of 2009. This trend can be seen with the FTSE Small Cap index which fell 43% from a high of 2,868.30 at the start of the year to 1,621.27 before recovering to end the year down 22% at 2,238.04. Adherence to the investment objectives and the limits on investment set by the Company mitigates the risk of excessive exposure to any one particular type of security or issuer. If the investment portfolio valuation fell by 20% from the 30 June 2009 valuation, with all other variables held constant, there would have been a reduction of Â£6,446,000 (2008 restated: Â£10,518,000) in the return before taxation and equity. An increase of 20% in the investment portfolio valuation would have had an equal and opposite effect on 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 2009, it would have the effect, with all other variables held constant, of reducing the net return before taxation and equity by Â£25,000 (2008: Â£29,000). 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 2009 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 2009 was: Cash flow Fixed No interest interest interest rate risk rate risk rate risk financial financial financial Total assets assets assets Â£'000 Â£'000 Â£'000 Â£'000 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 assets at 30 June 2008 was: Cash flow Fixed No interest interest interest rate risk rate risk rate risk financial financial financial Total assets assets assets Â£'000 Â£'000 Â£'000 Â£'000 Cash flow Fixed Sterling Ordinary shares 49,133 49,133 - - Convertible bonds 813 - - 813 Loan notes 257 - - 257 Liquidity funds 2,200 - 2,200 - Cash 733 - 733 - Receivables* 792 792 - - 53,928 49,925 2,933 1,070 Euros Other investments 2,385 2,385 - - 2,385 2,385 - - Total 56,313 52,310 2,933 1,070 * 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 2009 was: Cash flow No interest interest rate risk rate risk financial financial Total liabilities liabilities Â£'000 Â£'000 Â£'000 Sterling Creditors 142 142 - Total 142 142 - All amounts are due in one year or less. The interest rate risk profile of the Company's financial liabilities at 30 June 2008 was: Cash flow No interest interest rate risk rate risk financial financial Total liabilities liabilities Â£'000 Â£'000 Â£'000 Sterling Creditors 1,479 1,479 - Total 1,479 1,479 - All amounts are due in one year 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. (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 rate fell 21% from a high of 1.2906 recorded on 7 October 2008 to a low of 1.0201 at 30 December 2008 before recovering to 1.1741 at the year end. If the Sterling/Euro exchange rate had reduced by 10% from that obtained at 30 June 2009, it would have the effect, with all other variables held constant, of increasing the equity shareholders' funds by Â£115,000 (2008 restated: Â£ 256,000). The calculations are based on the value of the investment in Vintage I as at 30 June 2009 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£10,000,000) is a Â£5,000,000 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 2009. The undrawn balance incurs interest at the rate of 0.2%. The facility is available until 13 July 2010 and is subject to the following 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 All of the financial assets and liabilities of the Company are held at fair value. Managing Capital Capital structure The Company is funded through shareholders' equity, cash reserves and an existing Â£5,000,000 loan facility with the Royal Bank of Scotland plc, which was not utilised as at 30 June 2009. 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. The amount due to the Investment Manager at 30 June 2009 was Â£83,000 (30 June 2008: Â£148,000). 20 Post Balance Sheet events On 20 August 2009, following the receipt of Shareholder approval, the Company completed the acquisition of 3i Group plc's limited partnership interest in Strategic Recovery Fund II (SRFII). 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). Following the acquisition the Company's allotted, called up and fully paid share capital was 79,815,974, of which 3,045,500 were held in treasury by the Company. At 31 July 2009 the net asset value of SRFII, attributable to the Company was Â£ 6,075,426, representing a premium of 35.9% on the consideration price. Had the acquisition taken place prior to the year end it would have had the effect, with all other variables held constant, of increasing the year end net asset value by 4.1p per share. 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, 10 November 2009. The notice of this meeting can be found in the Annual Report and Accounts at: www.strategicequitycapital.com.

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