Annual Financial Report

STRATEGIC EQUITY CAPITAL PLC ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2014 The full Annual Report and Accounts can be accessed via the Company's website at: www.strategicequitycapital.com or by contacting the Company Secretary by telephone on 01392 412122. Key highlights: John Hodson, Chairman of Strategic Equity Capital plc, commented that the Company has seen: A strong year for both absolute and relative performance which reflects the Investment Manager's high conviction, concentrated portfolio approach. The Company delivered a 38.6% increase in net asset value ("NAV") per share to shareholders over the twelve months ended 30 June 2014 and 13.3% outperformance of comparable FTSE Smaller Companies ex Investment Companies Index over the same period. * 8.8% outperformance of comparable FTSE Smaller Companies ex Investment Companies Index over 3 years. * Portfolio companies continue to display attractive valuations and strong operational momentum. * A market environment which is favourable for the Investment Manager's focused strategy. For further information, please contact: GVO Investment Management Limited 0203 691 6100 Investment: Stuart Widdowson Investor relations: Theresa Russell Canaccord Genuity Limited (Corporate broker) 020 7523 8000 Andrew Zychowski / Robbie Robertson / Lucy Lewis Lansons Communications on behalf of GVO Investment Management Limited David Masters 020 7294 3687 Copies of the announcement, annual reports, quarterly update presentations and other corporate information can be found on the Company website at: www.strategicequitycapital.com 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. The Company's investment policy can be found within the Strategic Report, below. INVESTMENT MANAGER'S STRATEGY The strategy of GVO Investment Management Limited ("GVOIM" or the "Investment Manager") is to invest in publicly quoted companies which will increase their value through strategic, operational or management change. GVOIM 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. FINANCIAL SUMMARY At 30 June At 30 June % 2014 2013 change Performance Total return for the year (1) 38.63% 25.40% Capital return Net asset value (statutory) per Ordinary share 173.66p 126.36p 37.43% Ordinary share price (mid-market) 156.00p 104.25p 49.64% Discount of Ordinary share price to net asset value 10.17% 17.50% Average discount of Ordinary share price to net asset value for year 11.72% 17.71% Total assets (Â£'000)(2) 104,183 79,791 30.57% Equity shareholders' funds (Â£'000)(2) 103,429 78,396 31.93% Ongoing charges (3) 1.27% 1.16% Revenue return per Ordinary share 0.76p 1.45p Dividend yield (4) 0.50% 1.44% Proposed final dividend for year 0.78p 1.50p (48.00)% Ordinary shares in issue with voting rights (2) 59,558,111 62,039,682 (4.00)% Year's Highs/Lows High Low Net asset value per Ordinary share 178.36p 127.60p Ordinary share price 158.75p 104.25p (1) Total return is the increase/decrease per share in net asset value plus dividends paid. (2) A tender offer took place in November 2013 resulting in 2,481,571 shares being bought back for cancellation, at a cost of Â£3,439,000 (including stamp duty). A further tender offer took place on 1 July 2014 resulting in 2,382,098 shares being bought back for cancellation, at a cost of Â£3,717,000 (including stamp duty). Further information on the tender offer process can be found in the Chairman's Statement below. (3) The ongoing charges figure has been calculated using the Association of Investment Companies' ("AIC's") recommended methodology and relates to the ongoing costs of running the Company. Non-recurring fees are therefore excluded from the calculation. (4) Dividend yield is calculated using the proposed dividend for the year and the closing share price. STRATEGIC REPORT The Strategic Report has been prepared in accordance with Section 414A of the Companies Act 2006 (the "Act"). Its purpose is to inform members of the Company and help them to assess how the Directors have performed their legal duties under Section 172 of the Act to promote the success of the Company. Chairman's Statement Introduction I am delighted to report that the Company made excellent progress in the year to 30 June 2014, delivering very strong growth in both share price and net assets. The Investment Manager's consistent focus on a concentrated portfolio of high quality smaller companies with strong competitive positions in growing niche markets has delivered market outperformance over the medium and long term. In the year to 30 June 2014, the portfolio has also benefitted from its bias towards investing in companies too small to be considered for inclusion in the FTSE 250 and the ability of investee companies to generate growth alongside high levels of free cash flow, with lower financial gearing than the equivalent index. Performance As at 30 June 2014, the Company had net assets of Â£103.4 million (173.7 pence per share). This represented an increase of 31.9% (37.4% per share) over the year. Including dividends, the Company delivered a NAV total return to shareholders of 38.6% per share. The Company's NAV outperformed the FTSE Smaller Companies ex Investment Trust index by 13.3%. This strong absolute and relative performance was delivered despite maintaining an average cash balance of more than 12%. The Company has delivered a NAV total return per share of 71.4% over the past three years, exceeding the 62.6% return from the FTSE Small Companies ex Investment Trust index by 8.8%. The Company's five year NAV total return per share growth of 256.8% has exceeded the return from the index by more than 110%. Notably, growth in the Company's NAV has been delivered without the use of gearing, and with relatively low volatility. Discount Management The discount to NAV at which the Company's shares trade narrowed significantly from an average in the previous financial year ending 30 June 2013 of 17.7% to an average of 11.7% and finished the year ending 30 June 2014 at 10.2%. The Board believes that the narrowing in the discount has been driven by a mix of the strong ongoing performance of the Company, its increased profile among institutional and retail investors, the broadening shareholder base and also the regular tender offer. The Investment Manager's efforts to increase the profile of the Company have led to a significant change in the shareholder base over the past year with several sizeable new long term investors, both institutions and individuals, investing in the Company. The proportion of shares held by retail investors has also increased markedly. This change in the shareholder register has also coincided with a significant improvement in daily liquidity of the shares. Tender In May 2012, the Company introduced periodic tender offers in May and November each year. Subject to unforeseen circumstances, the Directors intend to offer such tender offers in the event that the discount to NAV at which the Company's shares trade exceeds on average 10% over the relevant 6 month period to June or December as the case may be. Each tender offer is for up to 4% of the Company's issued share capital at a price equivalent to a 10% discount to NAV (including current period revenue and deducting the estimated tender costs) per share. The Company undertook its fourth semi-annual tender offer in November 2013, buying back 2,481,571 shares for cancellation at a price of 137.90 pence per share, as announced on 12 November 2013. In light of the announcements regarding the management changes within GVOIM and its proximity to the closure of the tender offer announced by the Company on 3 April 2014, the Board considered it appropriate to terminate the May 2014 tender and reintroduce it at a later date on substantially the same terms. A subsequent tender offer was announced on 5 June 2014. As a result, the Company undertook its fifth semi-annual tender offer, buying back 2,382,098 shares for cancellation at a price of 155.26 pence per share, as announced on 1 July 2014. It remains the Board's current intention to offer a bi-annual tender to shareholders. However, in the event that the discount continues to narrow prior to publication of a circular, the Board will reconsider whether it is in shareholders' best interests to proceed with tender offers. 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 0.78p per Ordinary share for the year ending 30 June 2014, payable on 14 November 2014 to shareholders on the register as at 17 October 2014. The proposed dividend this year is lower than in the previous year principally because of a reduction in the net revenue available for distribution following the higher level of annual investment management fees which have naturally resulted from the excellent growth achieved by the Investment Manager in the net assets of the Company and the narrowing of the discount, as well as more recent investments being lower yielding companies than those previously held. Marketing Activities The Investment Manager and the Company's broker's efforts to broaden the shareholder base and refresh the shareholder register have delivered significant success over the last year, with the Company gaining a number of new institutional investors. The clearly differentiated strategy, strong medium term performance, as well as the Investment Manager's efforts to raise the profile of the Company among the investment community has led to a considerable transition in the ownership of the Company over the last year. The Board and Investment Manager note the significant increase in the proportion of the shareholder register owned by retail investors. As a result, the Investment Manager will present an overview of the investment strategy, the key portfolio holdings and an outlook at the forthcoming AGM. The Company's website, www.strategicequitycapital.com, continues to feature the Investment Manager's comprehensive quarterly update presentations alongside the standard corporate information and statutory accounts. The Board I have served as Chairman since the inception of the Company and am indebted to my colleagues for their support and wise counsel throughout this time. I am stepping down as Chairman as at the date of this report, and will retire from the Board in early 2015. I am delighted that we have been able to appoint Richard Hills to take over the Chairmanship of the Company with effect from 18 September 2014 and I am proud of the performance of our Investment Manager as demonstrated by the results announced in this report. The composition of the Board is kept under review and a number of changes have taken place subsequent to the year end. Mike Phillips has resigned from the Board owing to his other commitments. The Board thanks him for his contribution and wishes him every success in the future. Jo Dixon has been appointed as a non-executive Director of the Company. She brings with her substantial investment trust board experience and we are delighted that she has joined us. Having served as a Director since 2006, John Cornish will resign at the forthcoming Annual General Meeting of the Company and will not seek re-election. On behalf of the Board, I would like to thank him for his valuable contribution to the successful running of the Company throughout this time. Jo Dixon will take over as chairman of the Audit Committee in his place. Investment Manager The various improvements made over the last five years have led to a clear improvement in the Company's performance and consistency of returns. Since the end of June 2009 the Company's NAV has substantially outperformed the FTSE Smaller Companies ex Investment Trust index. I am confident that the Investment Manager's approach to investment can create value for shareholders over the long term. In September 2013, Hansa, a Swiss-based international investment and holding company, acquired SVG Investment Managers Limited ("SVGIM"), the then Investment Manager, from SVG Capital plc. Hansa also acquired SVG Capital's shareholding in the Company on the announcement of the deal in August 2013. SVGIM has since been re-named GVOIM. GVOIM has retained the successful investment culture and process within the new structure. The investment managers of the Company have retained complete investment autonomy, leading to the continuity of the investment approach. In April 2014, the Company was advised by GVOIM that Adam Steiner, chief executive officer of GVOIM and an investment manager to the Company, and Jonathan Morgan, chairman of GVOIM, had resigned from GVOIM and that Stuart Widdowson, an investment manager to the Company, had become a Director of GVOIM. It was also informed that Jeff Harris had been promoted to assistant portfolio manager. The Board continues to monitor the management arrangements of the Company closely and looks forward to continued strong performance by the Company's portfolio. Alternative Investment Fund Managers' Directive ("AIFMD") The Company's Board of Directors approved the appointment of GVOIM as the Company's Alternative Investment Fund Manager ("AIFM"), with effect from 22 July 2014. In order to facilitate this appointment, the Company terminated its existing investment management agreement and entered into a new management agreement with GVOIM. The new management agreement was made on the same commercial terms as the previous agreement with GVOIM and is also compliant with the new regulatory regime. As required by the AIFMD, the Board has also appointed Northern Trust Global Services Limited to act as the Company's Depositary on the terms and subject to the conditions of a Depositary agreement entered into between the Company, the AIFM and the Depositary, which took effect on 22 July 2014. The Northern Trust Company remains the Custodian to the Company. Gearing and Cash Management The Company has maintained it policy of operating without a banking facility. The Investment Manager and the Board periodically review the Company's gearing policy. The Board, together with the Investment Manager, has a conservative approach to gearing due to the concentrated nature of the portfolio. The Articles of Association allow gearing up to 25% of NAV; however, no gearing has been in place throughout the year and from time to time cash positions are maintained reflecting the desire to maintain cash resources for when suitable investment opportunities arise. Changes to the Annual Report You will note there have been some changes to your Company's Annual Report this year. These are the result of new narrative reporting requirements that have now come into effect. There is now a Strategic Report, which contains many of the disclosures previously contained within the Business Review section of the Directors' Report, and an updated Director's Remuneration Report. In relation to the latter, shareholders will be asked to vote on both the Director's Remuneration Policy and the Directors' Remuneration Report at the forthcoming Annual General Meeting. Annual General Meeting We hope that as many shareholders as possible will attend the Company's Annual General Meeting, which will be held at 11.30 am on Friday 14 November 2014 at the offices of Canaccord Genuity Limited, 8th Floor, 88 Wood Street, London EC2V 7QR. Outlook The Board shares the Investment Manager's belief that the prospects for the Company remain encouraging. The pause for breath taken by the markets since January 2014 has demonstrated the strength and resilience of the existing portfolio, as well as providing new opportunities for investment. The global economy appears to be supportive of a period of good earnings growth and corporate managers are focused back on the long term development of their businesses. Investor interest in smaller quoted companies has moderated more recently, despite their continued strong relative growth. A selective investment approach should serve the Company well in this environment. I believe that your Company is in good hands with a strong Board and successful Investment Manager in place. J Hodson Chairman 17 September 2014 INVESTMENT MANAGER'S REPORT Investment Strategy Our strategy is to invest in publicly quoted companies which will increase their value through strategic, operational or management change. We follow a practice of constructive corporate engagement and aim to work with management teams in order to enhance shareholder value. We like 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 and typically aim to hold companies for the duration of rolling 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 potentially beneficial changes in capital structure over the investment period. Our typical investee company, at the time of initial investment, is too small to be considered for inclusion in the FTSE250 index. 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. Market Background Once again, investors shrugged off much of the negative macro and geopolitical related news over the financial year to 30 June 2014, such as: the sixteen day shut down of the US federal government; the negotiation concerning a raise of the US debt ceiling; the beginning of tapering of quantitative easing in North America; record unemployment and deflation in several highly indebted peripheral European countries; the annexation of the Crimea by Russia; civil war in Ukraine; the seizing of parts of Northern Iraq by the Islamic State; a slow down in growth in China coupled with a continued rise of the shadow banking sector and rise in public and private levels of indebtedness. UK economic growth data again surprised positively, arguably fuelled by continued negative real interest rates. Notably, government spending has continued to rise, despite talk of austerity. Real wage growth remained low, albeit this is likely to have led to falling unemployment. Towards the end of the period, the Governor of the Bank of England indicated that interest rates would begin to rise sooner than markets expected. The realisation that UK interest rates will finally rise, has led to a strengthening of sterling against the US dollar. This has acted as a headwind for UK quoted companies with significant overseas earnings. We believe that this was a contributing factor to profit warnings rising year-on-year in the first two quarters of 2014. Rising confidence in the recovering macro economic environment saw equities perform well over the year. Over the financial year, the FTSE Smaller Companies Index ex Investment Trusts outperformed the FTSE100 index by 12.2%, rising by 25.3%. AIM companies also outperformed the FTSE100 index, but less markedly with the FTSE AIM index rising by 14.6%. Smaller Companies also outperformed the FTSE 250 Index, which rose by 17.8%. Stock markets were strong until late February 2014, continuing the trend of the previous year, with the vast majority of share price appreciation being driven by re-rating rather than earnings growth. Since early March, markets have paused for breath. Most notably, from late July/early August 2013, smaller members of the FTSE Small Cap Index and AIM began to outperform significantly mid and large cap companies. The ratings of a number of these companies were much lower than equivalent mid sized companies, despite offering similar or superior growth. Investors appear to have gained confidence in the sustainability of recovery and returned to investing in slightly less liquid stocks. The ability for private investors to hold AIM stocks in ISAs from early August 2013 may also have stimulated more private investor interest in AIM. The Company's NAV performed well after this inflection point in late July 2013. The calendar year 2014 started very well for equity markets, with the market continuing to re-rate much faster than companies were growing their earnings. However, since the end of February, there has been a modest sell-off particularly of small and mid cap companies. In our opinion, this has been driven by profit taking from domestic cyclical recovery plays and higher risk assets. The Company's NAV has performed relatively well in absolute terms and relative to its broad peer group in this environment. A significant market feature over the year was the buoyant IPO market. The first IPOs of autumn 2013 performed well and tended to be firmly covered by institutional orders. However, the change in market conditions, as well as the deteriorating quality of proposed companies through 2014, has led to a more mixed performance of recent IPOs. Liquidity has proven to be less strong than optimists had hoped. Following many years of contraction, the UK small and mid cap broking community is now much smaller than in the late 1990s. As a result, the recent IPO frenzy has left equity analysts and sales forces focused on primary issuance, as opposed to day-to-day trading of existing quoted companies. Not surprisingly, we have witnessed a number of significant pricing anomalies in the market (both extremes of under and over valuation) which we have sought to capitalise upon. M&A among small and mid-cap companies was surprisingly muted, despite some activity in the autumn of 2013. What transactions there were typically involved trade buyers and the multiples paid for the target companies appeared to price in significant short term cost and/or sales synergies. In comparison, there was significant M&A activity among larger companies over the year, including the sale of Vodafone's stake in Verizon and the bids for AstraZeneca and Shire. In all cases, the acquirers were US trade buyers, in our opinion, demonstrating that the M&A cycle for quoted companies remains in its infancy. Performance Review Performance over the period was strong and continued to be driven by stock specific factors. The Company's portfolio fared well, with the majority of its investments either meeting or exceeding consensus earnings forecasts. Only one investment did not make a positive contribution over the year. Top 5 contributors to performance Valuation Period at period end attribution Company Â£'000 (basis points) E2V Technologies 11,313 476 Allocate Software 6,659 428 Servelec Group 9,811 347 Tyman 11,228 306 CVS Group 1,610 300 A number of holdings performed exceptionally well, but the most significant contributors to performance over the whole year were E2V Technologies ("E2V"), Allocate Software, Tyman and CVS Group which delivered market beating returns of 40.2%, 79.4%, 28.8% and 78.1% respectively, materially outperforming the 25.3% rise in the FTSE Small Cap index. At its AGM in July 2013, E2V announced that its longstanding CEO was leaving the business and that a process to find a successor had started. The new CEO joined the business during Q1 2014. Despite tough end market conditions, the shares re-rated significantly over the period. The new CEO was previously an Executive Director at Spectris PLC, a well regarded FTSE 250 electronics company. Although he has been in the business for only a few months, the early indications are that he believes that the company possesses excellent IP and technology, as well as having a superb client base. He has also given an initial indication that there may be scope to improve organic growth and improve efficiency. The shares appear to be priced for negligible future growth and imply no material improvement in margins. Allocate Software started the period well, with its final results in July 2013 being significantly ahead of expectations, both at the profit and cashflow level. This strong trading continued over the year, with positive interim results and a good year end trading update in June 2014. It has been a deliberate strategy of the company's management to improve this earnings visibility, swapping some short term profits for longer term resilience. Whilst the shares have re-rated somewhat over the past year to reflect this improved earnings quality, the rating is still undemanding. Servelec Group has performed exceptionally well since its IPO - both in terms of share price and financial and operational performance. It has won a significantly higher proportion of the software licence renewals in its healthcare division than anticipated by both the management team and the analysts at its IPO. In the automation division, a large contract from a major oil & gas customer has been delayed, but strength from smaller projects has offset this. We continue to see significant medium to long term upside in the investment due to its organic and inorganic growth prospects, and given that its market capitalisation is much lower than its break up value. Tyman completed its $200m acquisition of US peer Truth at the beginning of the period. Trading has been in line since that date, with strong profit growth driven by the improving residential construction industry in North America and the UK. We estimate that 70-75% of profits are derived from North America. As a result there is likely to be some currency headwinds on reported profits growth. The company hosted an analysts' visit to the North American operations in late spring 2014, at which significant schemes to improve organic growth and margins were unveiled. CVS continued to deliver in line performance, driven by continued and accelerating like-for-like growth, supplemented by increased acquisition activity over the period. The company's rating has increased materially over the four-year period of ownership and we see the shares approaching fair value. Outside of the top five contributors, other holdings enjoyed strong rises in their share prices. Following our due diligence visit to the company's headquarters in Belfast and subsequent primary research, the position in Andor Technologies was increased significantly during August 2013. This proved well timed, as the company received a bid from Oxford Instruments in the autumn at an 83% premium to their price at the end of June 2013. RPC rose by 58% following the announcements of further cost saving initiatives as well as the acquisitions of M&H Plastics and ACE. It is a mature holding for the Company, although we believe good upside still exists. Goals Soccer Centre's shares rose by 67% over the year. The company has returned to delivering positive like for like sales at its existing units, and the financial performance of the only site in Los Angeles, North America, has improved materially. The company undertook a small placing to accelerate its return to site expansion, and has indicated that it sees significant potential in further sites in Los Angeles. We believe that significant growth and margin improvement remains. Northbridge Industrial Services' shares also performed strongly over the year, rising by 49%. The company has continued to enjoy good levels of organic growth, supplemented by selective and well priced acquisitive growth. It was pleasing to see EMIS shares perform well from the point of investment at the end of March 2014, with the shares delivering a strong positive return in an environment where the share price of the average quoted smaller company fell. Bottom 5 contributors to performance Valuation Period at period end attribution Company Â£'000 (basis points) Dignity 2,004 (6) Advanced Medical Solutions 75 4 Cash 11,696 7 Hill & Smith holdings - 12 Strategic Recovery Fund II - 15 With the exception of Dignity, the bottom contributors to performance were the smallest holdings in the portfolio or cash and all delivered positive returns. Dignity was added to the portfolio in April 2014. It delivered a marginally negative return from this date to the end of the period, although has outperformed on a relative basis. Although the death rate is likely to be low this year, we believe that the entry rating is undemanding for the quality of the business and the cashflows and it will generate an attractive risk adjusted return over the long term. With an increasing proportion of sales coming from its crematoria business unit, where M&A multiples are typically up to 20x EBITDA, we believe that the shares look attractive on a sum-of-the-parts basis. Strategic Recovery Fund II ("SRFII") was fully realised by the end of July 2013, with the remaining investments, predominately E2V Technologies, being transferred in-specie to the Company. The average cash balance in the Company's portfolio was 12% over the period, reflecting both the Board and the Investment Manager's conservative approach to gearing and desire to retain the ability to participate in block transactions at short notice without being a forced seller of other holdings. Dealing activity The level of portfolio activity picked up compared with previous periods, with disposals of Â£31.1m (excluding distributions from unlisted investments) representing around 30% of the weighted average NAV. In addition Â£1.5m of net distributions were received from unlisted investments. Â£24.2m of purchases were made representing 23% of the NAV. As detailed in the half-yearly report, KCOM was exited in full over the period raising Â£6.5m. This has been a successful investment for the Company, with the investment of Â£4.2m delivering 2.6x cost and 32% IRR over our holding period. Profits were taken from other mature holdings, which typically have delivered in line with our original expectations. Sales of Lavendon netted Â£5.5m. The shares have re-rated significantly to reflect the improving prospects and this has been used to reduce the position. Sales netted Â£4.9m. In addition, mature holdings including RPC, Journey Group and Tyman were reduced at various points in the period following strong share price performances. New investments over the period were typically in companies offering reasonably priced defensive growth. At this point in the cycle, we were surprised that a number of companies with these characteristics were trading at discounts to the market, as a result of the flight to domestic cyclical recovery stocks. Â£6.5m was deployed into a major new investment, Servelec Group plc ("Servelec"), in a block, on its Â£122m IPO in late November 2013. The background to this investment was detailed in the half yearly report. The due diligence we had undertaken on Servelec's healthcare division brought another healthcare software company, EMIS, to our attention. There is very limited overlap between the companies (we estimate that c.10% of EMIS' turnover competes with Servelec). Our due diligence suggested that both companies were best placed to benefit from the upcoming software tenders by Community and Mental Health Trusts in the UK. In addition, we believed that the strength of the major sales and profit generator of EMIS, its 53% share of electronic GP record software, was significantly undervalued by the market. Â£6.1m was deployed investing in EMIS in the last three weeks of March. The company's profile among the investment community belies its size and quality. Steps have already been taken to try and address this. We deployed further funds into enlarging existing holdings and establishing small weightings in two new investments. A significant additional investment of Â£3.3m was made in Wilmington as we believed it offered an attractively rated blend of growth and cashflow. The shares were volatile in Q1 and Q2 2014, being initially squeezed up on very low volumes to a level we perceived to be above fair value, before falling back to a level far below what we consider to be fair value. The latter event was more interesting, with the company's shares being ejected from the FTSE Small Cap Index, due to low median daily liquidity. This has provided an excellent opportunity to deploy capital in the shares at a price heavily depressed by technical trading activity. A new high calibre CEO has recently been announced and we believe there is substantial medium to long term upside. Modest follow on investments, via participating in placings, were made in Goals Soccer and Northbridge Industrial Services. With fund managers and brokers focused on IPOs, share prices in some small and medium weight long term holdings were volatile. Where liquidity allowed, we used this as an opportunity to top slice and buy back in selectively at lower levels in holdings including Allocate, Gooch & Housego and Servelec. Portfolio Review The portfolio remained highly focused, with a total of 18 direct holdings and the top 10 holdings accounting for 75% of the NAV 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 changed from 3.7% to 1.8% at the end of the period due to the final distribution from SRFII and further distributions from Vintage. 10.6% of the NAV was invested in cash at the period end, although this was immediately prior to the settlement of the tender offer for 4% of the company's shares. Portfolio as at 30 June 2014 - Top 10 Largest Investments % of % of invested invested portfolio portfolio Date at 30 at 30 % of of first Cost Valuation June June net Company Sector classification investment Â£'000 Â£'000 2014 2013 assets E2V Technologies Electronic & Electricals Oct 2009 2,935 11,313 12.2 10.2 10.9 Tyman Manufacturing Apr 2007 3,742 11,228 12.1 11.9 10.9 Servelec Group Software & Computer Services Dec 2013 6,833 9,811 10.6 9.7 9.5 4imprint Support Services Feb 2006 3,105 7,951 8.6 0.0 7.7 Wilmington Group Media Oct 2010 6,987 7,829 8.5 3.2 7.6 Emis Group Software & Computer Services Mar 2014 6,137 7,320 7.9 3.6 7.1 Allocate Software Software & Computer Services Dec 2009 3,480 6,659 7.2 6.0 6.4 Goals Soccer Consumer Services Mar 2012 4,002 6,553 7.1 4.6 6.3 Gooch & Housego Electronic & Electricals Dec 2011 3,619 5,362 5.8 0.2 5.2 RPC Group Manufacturing Feb 2007 1,235 3,585 3.9 4.8 3.5 Portfolio as at 30 June 2014 Sector spilt % Software & computer services 23.0 Electronic & electricals 19.1 Manufacturing 14.3 Support services 13.7 Net cash 10.7 Consumer services 9.8 Media 7.6 Unquoted investments 1.8 Size split (by market capitalisation) % Greater than Â£500m 5.4 Â£300m - Â£500m 30.7 Â£100m - Â£300m 40.8 Less than Â£100m 10.6 Net cash 10.7 Unquoted investments 1.8 The underlying operational performance of the portfolio remains strong. In most cases, companies are operating in growth markets, generating high operating margins and cash flow return on investment, but are not margin maximising. We remain keen to avoid situations where companies are generating peak sales, peak margins and whose shares are trading at peak multiples. In many top holdings, particularly those in software, niche electronics, manufacturing and media sectors, we believe there to be scope to improve margins through operational initiatives. Further upside is likely to exist from operational gearing as these companies grow their revenues. In many top holdings, particularly those in software, niche electronics, manufacturing and media sectors, we believe there to be scope to improve margins through operational initiatives. Further upside is likely to exist from operational gearing as these companies grow their revenues. Portfolio Characteristics Consensus Median FTSE Small Cap FTSE Small Cap ex portfolio Strategic ex Investment Investment Trusts ex characteristics Equity Capital Trusts financials and resources Price/Earnings ratio (FY1) 15.2x 16.7x 14.8x Dividend yield 2.3% 2.5% 2.4% Price/Book ratio 2.6x 1.1x n/a Price/Sales ratio 2.0x 0.7x n/a Price/Cash flow ratio 14.6x n/a n/a GVOIM Cash flow yield 10.3% n/a n/a Forecast earnings growth (FY1) 10.0% 49.8% 10.2% Forecast net debt to EBITDA 0.0x 1.7x 1.3x Source: Factset Portfolio Analysis System, Investec, Peel Hunt. The poor, but recovering profitability of the resources and financials sectors in the FTSE Small Cap Index has a material impact on overall index valuation and growth characteristics. Given this, we believe that comparison against the FTSE Small Cap Index excluding these sectors is worthy of inclusion. Once again, as in previous reports, the financial and valuation characteristics of the Company's portfolio compared with the average FTSE Small Cap company (ex resources and financials), shows similar earnings growth, at a marginally higher price earnings ratio, with a similar dividend yield and a much stronger balance sheet. The two key implications of this data set remain the same: First, on a balance sheet adjusted basis (i.e. with similar levels of net debt, achieved through a return of capital and share consolidation), the Company's portfolio would trade at a significantly lower price earnings ratio with improved earnings growth. Secondly, in our opinion, properly utilised, the strong balance sheets of the portfolio companies allow their boards many more options to enhance shareholder value than the average small cap company. These options include increasing the dividend pay out ratio, making earnings enhancing acquisitions and returning capital to shareholders. Unlisted investments Over the period, the Company received a total of Â£0.9m from SRFII and Â£0.5m from Vintage 1. The SRFII investment period ended in June 2011 and the fund made its final distribution in July 2013. The outstanding commitment relating to Vintage 1 is Â£1.2m and its manager has communicated that it does not expect to make any further net draw downs. Outlook Our focus remains on the Company's concentrated portfolio of holdings, and the small subset of other smaller UK quoted companies which fulfil our rigorous qualitative investment criteria. However, we keep an eye on the broader market, to help us anticipate trading patterns of portfolio companies as well as the prospects for long term ratings and M&A. Short term market moves cannot be predicted with confidence or accuracy. However, we continue to believe that the outlook for equities remains positive for the medium to long term in absolute terms, and especially relative to other asset classes. Equities have re-rated over the past five years to a point where they are no longer cheap, nor expensive, and currently sit on a small discount to a blend of their average 10 and 20 year price to earnings ratios. With every month that goes by, the macro economic recovery in the US and UK appears to be more sustainable, evidenced by the talk of interest rates rising. Company balance sheets are much stronger than in 2007/8 and the prospect of permanent capital value destruction from equities continues to appear lower than for some time. Yet, the same risks remain. Parts of the Eurozone are suffering from deflation, combined with extremely high levels of youth unemployment. Several sovereign wealth crises are possible at any time. The Chinese shadow banking sector, and overall public and private indebtedness continues to grow. Quantitative Easing's inflationary impact on overall asset prices risk igniting political tension between asset owners and non-asset owners. Geopolitical risks in general are rising again, and an unforeseen shock could have a short sharp impact on markets. That said, we believe that asset classes other than equities currently are vulnerable to significant de-ratings. We have commented before that re-ratings have been a major driver of UK equity returns over the past two years, only some of which was warranted, and that we expected 2014 to be a stockpickers' market. The wide divergence in performance of mid and small sized quoted companies during 2014 has therefore not been a surprise. We believe that this selective performance is likely to continue, exacerbated by the low levels of secondary broking activity and sporadic market liquidity particularly among smaller companies. For several months our new investment pipeline has been skewed towards higher quality structural growth situations which we believe have been temporarily overlooked by the market, or are misunderstood. We continue to avoid discretionary consumer cyclical companies, financial services and resource companies. We continue to assume prudently that the pace of re-rating will moderate, cease or potentially modestly reverse. We believe that delivered earnings growth, M&A and cash generation/degearing, and avoiding overpaying for investments, will provide sustainable returns to equity holders. Our focus on investing in companies which have the potential to generate multiple drivers of return, not just re-rating, should enable the Company's NAV to progress even in a market where re-rating is absent. We also believe that the buoyant IPO market may limit the scope for re-rating of existing quoted companies. The broader open ended UK Smaller Companies sector experienced the first outflows for some time in May 2014. If this trend continues, it may lead to further de-rating of the average smaller company. The prospects for the other three key drivers of shareholder value look good. The estimated forward earnings growth from the portfolio remains good at 10% p.a., in line with the average FTSE Small Cap company excluding mining resources and financials. However, the average portfolio company has no gearing to generate this earnings growth, whereas the average company in the FTSE Small Cap index has 1.3x net debt/EBITDA. Adding together the earnings growth of the portfolio, the dividend yield of 2.3%, degearing of c.3% of the portfolio companies' market capitalisations, suggests mid teens returns are achievable even in the event of no further re-rating or corporate activity. The low level of M&A among smaller quoted companies continues to surprise negatively. Trade buyers have almost record low levels of indebtedness. Private equity firms have significant levels of "dry powder", and have happier clients enjoying record returns of capital following recapitalisations, IPOs and disposals to other private equity firms. Although timing and the identity of the company is impossible to predict, we believe that there is a strong chance that the Company's portfolio will benefit from increased M&A activity. With no net gearing, the portfolio in aggregate is grossly over capitalised and this is unlikely to escape the attention of suitors. We intend to continue to use any undervaluation of high quality companies to improve the quality of the average portfolio company, whilst aiming to maintain the growth prospects and valuation of the portfolio. We continue to favour companies with strong balance sheets which are likely to prove more resilient investments in times of uncertainty. We would like the Company to continue to run with a strong net cash balance to allow us to act nimbly as and when we come across compelling investment opportunities. With a more active pipeline than for some time, the portfolio could see several new investments over the rest of 2014. New investments remain likely to be made via market purchases and participating in secondary fundraisings. In conclusion, we believe that equity markets will continue to make progress, although at a much slower pace than 2012 and 2013, and that the dispersion of returns between stocks will grow. The trend of increased discrimination between strong and weak companies should accelerate. M&A activity should continue to build. A shock sell off at some period may occur, but we would expect this to be temporary. The Company's portfolio is in good health. Constituent companies have strong balance sheets, strong franchises, good growth opportunities and we believe are highly coveted, yet the ratings do not appear to reflect these characteristics. The pipeline of interesting new investments is good. We remain positive on the prospects for medium and long term NAV progress. Stuart Widdowson/Jeff Harris GVO Investment Management Limited 17 September 2014 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. We have been involved with the company since a change of management in 2003. The company has benefitted recently from material upgrades to forecast earnings. Following the disposal of Brand Addition, virtually all of the profits of the group are generated by the fast growing US business. The company has a significant net cash balance. Funds managed by GVOIM currently hold approximately 8% of the company's equity. Allocate Software is the leading workforce optimisation software applications provider for global organisations with large, multiskilled 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. The Company became the major shareholder as part of a placing to fund the acquisition of Allocate's Nordic equivalent, Timecare AB, in December 2009. The company has subsequently made four further acquisitions of complementary businesses. The quality and visibility of earnings has improved significantly with the company enjoying a 100% renewal rate in its core rostering product. Funds managed by GVOIM currently hold approximately 9% 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, 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 GVOIM, was appointed in May 2009. The management team acted, raising new 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. During 2013, a new chairman and CEO were appointed. The new CEO will update investors in December 2014 on his strategy for the business. Funds managed by GVOIM currently hold approximately 5% of the company's equity. EMIS Group is a specialist healthcare software and services provider. It is the UK market leader in the provision of electronic patient records for GPs, with a 53% market share. It also supplies electronic patient records to other healthcare organisations including Community Pharmacies, Community and Mental Health Trusts and Accident & Emergency departments. It has grown organically every year for 24 years and just under 80% of its revenues are recurring. It is very cash generative and has used this cash to augment its product portfolio through selective acquisitions. The shares had been under pressure due to some scepticism regarding the acquisition of Ascribe in autumn 2013, as well as uncertainty surrounding the renewal of the GP Systems of Choice framework contract which was announced at the end of March 2014. Funds managed by GVOIM currently hold approximately 3% of the company's equity. Goals Soccer is a developer and operator of 5-a-side soccer centres in the UK, trading from 42 centres. In early 2012, the company announced that it would significantly reduce the speed of rolling out new sites for 12-18 months. Given that the roll out of sites requires significant capital, the impact of this change was to increase the free cash generation of the business and drive a large degearing of its balance sheet. The entry valuation was a significant discount to precedent M&A - specifically the acquisition of its only major competitor, Powerleague, by Patron Capital in 2009. A recently appointed chairman is working with the executive team to optimise operational performance and return the business to growth in the UK and North America. Funds managed by GVOIM currently hold approximately 5% of the company's equity. Gooch & Housego is a global market leader in the design and manufacture of specialist optical components and subsystems. Funds managed by GVOIM previously invested in the company during 2010 and the Manager knows the business and management team well. The company's shares de-rated significantly at the end of 2011 and early 2012, driven by concerns over slowing activity in their industrial division. GVOIM took advantage of this weakness in the share price to rebuild a stake at a significantly lower level than its exit price in late 2010. The new product development pipeline and ramping up of volumes on existing contracts has the potential to deliver significant growth over the medium term. Its fiber-optics products have strong long term growth prospects as they substitute conventional electronics in aerospace and defence applications. Funds managed by GVOIM currently hold approximately 3% of the company's equity. RPC Group is Europe's leading manufacturer of rigid plastic packaging. Following lobbying from GVOIM and another shareholder acting in concert, the group initiated a strategic and operational review and made substantial changes to its board in 2008. The management team 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. As the restructuring ended, RPC acquired its smaller Scandinavian competitor, Superfos, funded by a mixture of debt and new equity. This deal created significant shareholder value. RPC has announced further cost saving initiatives over the last year, which will continue to improve group returns. It also announced the acquisition of UK-based M&H Plastics in December 2013 and ACE Corporation in May 2014. Funds managed by GVOIM currently hold approximately 1% of the company's equity. Servelec is a UK technology company with three key divisions. The healthcare software division is a market leader in the design and operation of electronic patient records for NHS mental and community trusts. The controls division specifies, designs, assembles, installs and maintains safety and remote control systems for the oil & gas and process industries. The technologies division provides software, hardware and systems for industrial telemetry and SCADA applications. It was listed in November 2013, having previously been owned by a Singaporean listed group. The company has a strong balance sheet. The unwind of the significant debtor from the National Programme for IT over 18 months from the end of 2014, means that cashflow will exceed profits by a considerable amount until mid 2016. Profits appear to be at a cyclical low. Funds managed by GVOIM currently hold approximately 5% of the company's equity, acquired at IPO. Tyman is a leading international supplier of building products to the door and window industry, and was the world's leading manufacturer of marine breakaway couplings. The company has significant operations in nine separate countries across Europe, the Americas, Asia and Australasia. The building products division enjoys clear market leadership in a number of niches, with a highly diversified customer base, serving both the new build and RMI (repair and maintenance) markets. The building products division was adversely impacted by the significant fall in residential construction activity experienced since 2007, which, combined with a geared balance sheet, led to a material fall in the share price through 2008. We began building our stake in the company in late 2009 following the appointment of a new chairman, who has subsequently reconstituted the executive management and non-executive board. Since then, strong cash flows and a disposal of the non-core marine couplings business have reduced the debt burden substantially. We believe that there is substantial upside from a medium term recovery in the end markets of the building products division in North America. The recent acquisition of North American peer Truth has the potential to bring significant cost and sales synergies to augment this end market recovery. Funds managed by GVOIM currently hold approximately 4% of the company's equity. Wilmington provides business information and training services to professional business customers in the financial services, legal and medical sectors. More than 76% of revenues in the main publishing and information division are delivered digitally, typically on a subscription basis, and with high levels of client retention. The company is highly cash generative. Growth has been held back over the past few years due to a significant fall, and no recovery, in its legal training market, and the decline in some legacy print publications. This has masked strong growth in the rest of the business. The declining segments have now either been exited or stabilised. The company's earnings are set to grow organically at double digit rates, as well as generating significant free cash flow, neither of which we feel are fully reflected in the current rating. With a stronger balance sheet, there is potential upside from targeted M&A. The management team has a good track record of creating value from M&A. A new CEO was announced in June 2014. Funds managed by GVOIM currently hold just less than 5% of the company's equity. GVO Investment Management Limited 17 September 2014 The unconstrained, long term philosophy and concentrated portfolios resulting from GVOIM's investment style can lead to periods of significant short term variances of performance relative to comparative indices. GVOIM believes that evaluating performance over rolling periods of no less than three years, as well as assessing risk taken to generate these returns, is most appropriate given the investment style and horizon. Properly executed, GVOIM believes that this investment style can generate attractive long term risk adjusted returns. 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 GVOIM'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. OTHER STATUTORY INFORMATION Business and status 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 been incorporated with an indefinite life but is subject to an annual continuation vote. The Company is registered in England with number 5448627. The Company has received written approval from HM Revenue and Customs as an authorised investment trust under Section 1158 of the Corporation Tax 2010 ("CTA"). The Company's status as an investment trust means that the Company does not pay capital gains tax on any profits arising from the disposal of its investments. 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 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 commitments 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 too small to be considered for inclusion in the FTSE 250 Index. 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. Performance and dividend Over the year to 30 June 2014, net assets have increased by Â£25.0 million representing an increase of 31.9% (37.4% 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 intends to declare final dividends only where necessary to comply with investment trust rules. The Board recommends a final dividend of 0.78p (2013: 1.50p) per Ordinary share, amounting to Â£446,000 (2013: Â£931,000) based on the Ordinary share capital at the date of this report. Performance analysis using KPIs The key performance indicators used to measure the progress of the Company during the year under review are as follows: Net asset value ("NAV") per Ordinary share The NAV per Ordinary share, including revenue reserves, as at 30 June 2014 was 173.7p (30 June 2013: 126.4p). Movement in the Company's share price In the year to 30 June 2014, the Company's share price increased by 49.6% from 104.3p to 156.0p. The share price total return, taking account of the 1.5p dividend paid in the year, was 51.1%. Discount of the share price in relation to the NAV Over the year, the discount of the ordinary share price in relation to the NAV ranged from 8.3% to 19.6%. As at 30 June 2014, the Company's shares traded at a discount of 10.2% (30 June 2013: 17.5%). Ongoing charges The ongoing charges ratio was 1.27% in the year to 30 June 2014 (30 June 2013: 1.16%). Events subsequent to the year end As detailed in the Chairman's Statement above, Jo Dixon was appointed to the Board on 14 July 2014 and Michael Phillips resigned from the Board on the same date. As detailed in the Chairman's Statement above and announced on 1 July 2014, the Company bought back 2,382,098 shares for cancellation in its fifth semi-annual tender offer. No share are currently held in treasury. As a result, the Company's issued share capital comprises 57,176,013 Ordinary shares as at the date of this report. Investment Manager The Investment Manager appointed by the Company is GVOIM. Established in 2002, the public equity team of GVOIM, formerly of SVGIM prior to its acquisition by Hansa in September 2013, was one of the first in the UK to invest in publicly traded equities using private equity techniques. The team now consists of four investment professionals who combine a number of complementary skill sets, including corporate finance, traditional fund management, research and private equity disciplines. In addition, GVOIM makes use of a panel of industrial advisors and other external due diligence providers. GVOIM currently has funds under management of more than Â£300m. As detailed in the Chairman's statement above, the Investment Manager was acquired by Hansa in September 2013. Investment Management Agreement The Company's investments are managed by GVOIM under an agreement dated 22 July 2014. The Investment Manager's appointment is subject to termination 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. However, in the event that a continuation resolution proposed at any Annual General Meeting is not passed, the Investment Management Agreement expressly permits the Company to give notice terminating 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 Management Agreement. 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 GVOIM 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 The basic management fee accrues weekly and is payable quarterly in arrears. The basic fee is the lower of (i) 1.0% of the adjusted NAV of the Company and (ii) 1.0% per annum of the Company's market capitalisation. Performance fee arrangements The Company's performance is measured over rolling three-year periods ending on 30 June each year, by comparing the NAV total return per share over a performance period against the total return performance of the FTSE SmallCap (ex Investment Companies) Index. A performance fee is payable if the NAV total return per share (calculated before any accrual for any performance fee to be paid in respect of the relevant performance period) at the end of the relevant performance period exceeds both: (i) the NAV per share at the beginning of the relevant performance period as adjusted by the aggregate amount of (a) the total return on the FTSE SmallCap (ex Investment Companies) Index (expressed as a percentage) and (b) 2.0% per annum over the relevant performance period ("Benchmark NAV"); and (ii) the high watermark (which is the highest NAV per share by reference to which a performance fee was paid previously). The Investment Manager will be entitled to 15% of the excess over the higher of the Benchmark NAV per share and the high watermark. Payment of a performance fee that has been earned will be deferred to the extent that the amount payable exceeds 1.75% per annum of the Company's NAV at the end of the relevant performance period (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 that cap to be exceeded or the relevant NAV total return per share to fall below the relevant Benchmark NAV per share and the relevant high watermark). A performance fee of Â£310,000 is payable in respect of the year ending 30 June 2014. 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"). The fee charged in the year was Â£80,000 (2013: Â£77,000). 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. Principal risks and uncertainties associated with the Company 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. Reliance on the Investment Manager The Investment Manager has the right to resign 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 stock market index. As a result there will be periods when the Company's performance will not correlate with such indices. Borrowing and gearing The Company's revolving credit facility of Â£5 million with The Royal Bank of Scotland plc expired on 14 July 2012 (at which point there were no drawdowns) and was not replaced. In the event that the Board chose to replace the expired facility and introduce gearing, the use of such gearing could magnify both the gains and losses in the assets of the Company, dependent upon the value of the portfolio at the time. The Company's Articles of Association permit borrowings of up to 25% of the net asset value at the time the borrowings are incurred. Debt investments Any debt securities that may be held by the Company will be affected by any changes to interest rates. 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. Prior to its dissolution in July 2013, the SRF II valuation was 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. Charges against capital The Company's current accounting policy is to charge its operational costs to revenue, with the exception of any performance fee, as well as any costs incurred in relation to the tender offer process, 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 FCA/London Stock Exchange rules may result in the Company being liable to fines or the suspension of the Company from listing on 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 Sections 1158/1159 of the Corporation Tax Act ("CTA"), 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 Sections 1158/1159 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. The Board also regularly reviews the share register to ensure the Company is not a close company (as defined in the CTA), however, the Board acknowledges that it has no control over shareholders purchasing shares nor their concentration on the share register. Being a close company would breach the CTA investment trust rules. 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. The risks are expanded further in Note 17 below. 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 17 below. Main trends and future development A review of the main features of the financial year and the outlook for the coming year is to be found in the Chairman's Statement and the Investment Manager's Report above. Gender diversity The Board of Directors comprises five male Directors and one female Director. Employees, human rights, environmental, social and community issues The Company has no employees and the Board is comprised entirely of non-executive Directors. Day-to-day management of the Company's business is delegated to the Investment Manager (details of the Investment Management Agreement are set out above) and the Company itself has no environmental, human rights or community policies. In carrying out its activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly. On behalf of the Board J Hodson Chairman 17 September 2014 Extracts from the Report of the Directors Directors The Directors in office during the year and at the date of this report were: John Hodson (Chairman) John Cornish Ian DighÃ© Josephine Dixon (appointed on 14 July 2014) Richard Hills (appointed on 5 March 2014) Sir Clive Thompson Michael Phillips retired on 14 July 2014. Share capital At the year-end the Company's issued share capital comprised 59,558,111 Ordinary shares each with a nominal value of 10p, representing the Company's issued share capital. All shares have equal voting rights. No shares were held in treasury during the year and at the year end (2013: 62,039,682 shares in issue and no shares held in treasury). At General Meetings of the Company, the holders of Ordinary shares are entitled to one vote for every share held. At the AGM held on 5 November 2013 the Company was authorised to make market purchases of its own shares up to a limit of 9,299,748 Ordinary shares. The Company undertook its fourth semi-annual tender offer in November 2013, buying back 2,481,571 shares for cancellation at a price of 137.90 pence per share, as announced on 12 November 2013. As detailed in the Chairman's Statement and announced on 1 July 2014, the Company bought back 2,382,098 shares for cancellation in its fifth semi-annual tender offer. As a result, the Company's issued share capital comprises 57,176,013 Ordinary shares as at the date of this report. Going concern The Company's Articles of Association require a continuation vote to be proposed at each Annual General Meeting of the Company. In the event that any such resolution is not passed, then the Directors will be required to bring forward proposals to liquidate, open-end or otherwise reconstruct the Company. The Directors have considered the application of the Statement of Recommended Practice for Financial Statements of Investment Trust Companies and Venture Capital Trusts, which states that, even if an investment company is approaching a wind-up and shareholders have yet to vote on the issue and provided that the Board has not concluded that there is no realistic alternative to winding up the company, it will usually be more appropriate for the financial statements to be prepared on a going (rather than non-going) concern basis. In assessing the Company's ability to continue as a going concern the Directors have also considered the Company's investment objective, detailed above, risk management policies, detailed above, capital management (see Note 17 to the financial statements), the nature of its portfolio and expenditure projections and believe that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. In addition, the Board has had regard to the Company's investment performance (see above), the narrowing of the discount at which the Company's shares trade relative to their NAV (see above), ongoing investor interest in the continuation of the Company (including feedback from meetings and conversations with shareholders by the Company's advisers) and the proposals regarding management fees and discount management described in the Chairman's Statement (which are intended to further enhance the Company's appeal to investors). Based on their assessment and considerations, the Directors have concluded that they should continue to prepare the financial statements of the Company on a going concern basis and the financial statements have been prepared accordingly. Resolution 12 at this year's Annual General Meeting represents the annual continuation vote by shareholders on the Company's future. The Board believes this resolution to be in the best interests of the Company and its members as a whole, and strongly recommends that shareholders should vote in favour of Resolution 12 as it intends to do in respect of its own beneficial shareholdings. The annual report contains the following statements: STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS 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 ("EU"). Under Company law the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position, 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, Change 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 IFRS, subject to any material departures disclosed and explained in the financial statements; â€¢ make judgements and estimates that are reasonable and prudent; and â€¢ prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. 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 IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company; â€¢ the Strategic 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; and â€¢ the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy. 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 J Hodson Chairman 17 September 2014 NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company's statutory accounts for the year ended 30 June 2014 and 30 June 2013 but is derived from those accounts. Statutory accounts for 2014 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (ii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor's report can be found in the Company's full Annual Report and Accounts at www.strategicequitycapital.com. STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2014 Year ended 30 June 2014 Year ended 30 June 2013 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 on investments held at fair value through profit or loss 8 - 29,361 29,361 - 16,722 16,722 - 29,361 29,361 - 16,722 16,722 Income Dividends 2 1,712 - 1,712 1,798 - 1,798 Interest 2 39 - 39 28 - 28 Underwriting commission 2 - - - 2 - 2 Total income 1,751 - 1,751 1,828 - 1,828 Expenses Investment Manager's fee 3 (859) - (859) (539) - (539) Investment Manager's performance fee 3 - (310) (310) - (1,132) (1,132) Other expenses 4 (432) (108) (540) (345) (122) (467) Total expenses (1,291) (418) (1,709) (884) (1,254) (2,138) Net return before taxation 460 28,943 29,403 944 15,468 16,412 Taxation 5 - - - - - - Net return and total comprehensive income for the year 460 28,943 29,403 944 15,468 16,412 pence pence pence pence pence pence Return per Ordinary share Basic 7 0.76 47.85 48.61 1.45 23.72 25.17 The total column of this statement represents the Statement of comprehensive income. The supplementary revenue and capital return columns are both prepared under guidance published by the AIC. All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The notes form part of these financial statements. STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2014 Share Capital Note Share premium Special Capital redemption Revenue capital account reserve reserve reserve reserve Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 For the year ended 30 June 2014 1 July 2013 6,203 5,246 46,089 17,638 1,778 1,442 78,396 Net return and total comprehensive income for the year - - - 28,943 - 460 29,403 Dividends paid 6 - - - - - (931) (931) Shares bought back for cancellation (248) - (3,439) - 248 - (3,439) 30 June 2014 5,955 5,246 42,650 46,581 2,026 971 103,429 For the year ended 30 June 2013 1 July 2012 6,731 5,246 51,734 2,170 1,250 1,508 68,639 Net return and total comprehensive income for the year - - - 15,468 - 944 16,412 Dividends paid 6 - - - - - (1,010) (1,010) Shares bought back for cancellation (528) - (5,645) - 528 - (5,645) 30 June 2013 6,203 5,246 46,089 17,638 1,778 1,442 78,396 The notes form part of these financial statements. BALANCE SHEET AS AT 30 JUNE 2014 30 30 June June 2014 2013 Note Â£'000 Â£'000 Non-current assets Investments held at fair value through profit or loss 8 92,423 71,414 Current assets Trade and other receivables 10 64 265 Cash and cash equivalents 14 11,696 8,112 11,760 8,377 Total assets 104,183 79,791 Current liabilities Trade and other payables 11 754 1,395 Total assets less current liabilities 103,429 78,396 Net assets 103,429 78,396 Capital and reserves: Share capital 12 5,955 6,203 Share premium account 13 5,246 5,246 Special reserve 13 42,650 46,089 Capital reserve 13 46,581 17,638 Capital redemption reserve 13 2,026 1,778 Revenue reserve 13 971 1,442 Total shareholders' equity 103,429 78,396 pence pence Net asset value per share Basic 15 173.66 126.36 The financial statements were approved by the Board of Directors on 17 September 2014. They were signed on its behalf by J Hodson Chairman 17 September 2014 Company Number: 05448627 The notes form part of these financial statements. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2014 Year ended Year ended 30 June 2014 30 June 2013 Note Â£'000 Â£'000 Operating activities Net return before finance costs and taxation 29,403 16,412 Adjustment for gains on investments and foreign exchange (29,361) (16,722) Share buy back expenses 108 122 Operating cash flows before movements in working capital 150 (188) Decrease/(increase) in receivables 201 (43) (Decrease)/increase in payables (746) 1,200 Purchases of portfolio investments (24,123) (22,778) Sales of portfolio investments 32,580 34,494 Net cash flow from operating activities 8,062 12,685 Financing activities Dividends paid 6 (931) (1,010) Shares bought back in the year 13 (3,439) (5,645) Share buy back expenses (108) (122) Net cash flow from financing activities (4,478) (6,777) Increase in cash and cash equivalents for the year 3,584 5,908 Cash and cash equivalents at start of the year 8,112 2,204 Cash and cash equivalents at 30 June 14 11,696 8,112 The notes form part of these financial statements. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 1.1 Corporate information Strategic Equity Capital plc is a public limited company incorporated and domiciled in the United Kingdom and registered in England and Wales under the Companies Act 2006 whose shares are publicly traded. The Company 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 Sections 1158/1159 of the Corporation Tax Act 2010. The financial statements of Strategic Equity Capital plc for the year ended 30 June 2014 were authorised for issue in accordance with a resolution of the Directors on 17 September 2014. 1.2 Basis of preparation and statement of compliance The financial statements of the Company have been prepared in accordance with 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 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. The financial statements of the Company have been prepared on a going concern basis. 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 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, unlisted 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, less any transaction costs payable. 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. 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 Company 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, using the effective interest rate method, from the date of purchase. Expenses All expenses are accounted for on an accruals basis. The Company's investment management and administration fees, finance costs (calculated using the effective interest rate method) 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. Costs incurred in relation to the tender offer process have been recognised on annual basis and allocated to the capital column of the Statement of comprehensive income. Cash and cash equivalents Cash in hand and at bank 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 are included as a component of cash and cash equivalents for the purpose of the Statement of cash flows and Balance sheet. 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 the revenue and capital columns of the Statement of comprehensive income on the same basis as the particular item to which it relates, using the Company's effective rate of tax. 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 Dividends to shareholders are recognised as a deduction from equity 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. Share capital transactions Incremental costs directly attributable to the issuance of shares are recognised as a deduction from equity. When share capital recognised as equity is repurchased, the amount of the consideration paid is recognised as a deduction from equity. Repurchased shares are either classified as treasury shares and are presented as a deduction from shareholders' equity, or are cancelled. 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 and other monetary assets and liabilities are converted to Sterling at the rates of exchange ruling at the Balance sheet date. Exchange gains and losses relating to investments and other monetary assets and liabilities 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 facts, circumstances, and, to some extent, future events and actions, the Company's actual results may ultimately differ from those estimates, possibly significantly. 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 IPEVC Valuation Guidelines. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. 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 2014 and have not been applied in preparing these financial statements. International Accounting Standards (IAS/IFRS) Effective date* IFRS 7 Financial Instruments: Disclosures 1 January 2016 IFRS 9 Financial Instruments: Classification & Measurement 1 January 2016 IFRS 10 Consolidated Financial Statements 1 January 2014 IFRS 11 Joint Ventures 1 January 2014 IFRS 12 Disclosure of Interests in Other Entities 1 January 2014 * Years beginning on or after The Company applies for the first time, IFRS 13 Fair Value Measurement. IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The application of IFRS 13 has not materially impacted the fair value measurements carried out by the Company. The Directors do not anticipate that the initial adoption of the above standards will have a material impact in the period of initial application. 2 Income 30 June 2014 30 June 2013 Â£'000 Â£'000 Income from investments: UK dividend income 1,617 1,741 Overseas dividend income 95 57 Liquidity fund income 39 28 1,751 1,826 Other income: Underwriting commission - 2 - 2 1,751 1,828 Total income comprises: Dividends 1,712 1,798 Interest 39 28 Underwriting commission - 2 1,751 1,828 Income from investments: Listed UK 1,617 1,741 Listed overseas 134 85 1,751 1,826 3 Investment Manager's fee 30 June 2014 30 June 2013 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Management fee 859 - 859 539 - 539 Performance fee - 310 310 - 1,132 1,132 859 310 1,169 539 1,132 1,671 A basic management fee is payable to the Investment Manager at the lower of (i) the annual rate of 1.0% of the adjusted NAV of the Company or (ii) 1.0% per annum of the market capitalisation of the Company. 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 value of the Company's Limited Partnership interest in SRF II. The basic management fee accrues weekly and is payable quarterly in arrears. The Investment Manager is also entitled to a performance fee, details of which are given in the Strategic Report above. 4 Other expenses 30 June 2014 30 June 2013 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Secretarial services 80 - 80 77 - 77 Auditors' remuneration for: Audit servicesâ€ * 27 - 27 26 - 26 Directors' remuneration 115 - 115 105 - 105 Other expenses 210 108+ 318 137 122+ 259 432 108 540 345 122 467 â€ No non-audit fees were incurred during the year. * Incorporates Â£4,300 VAT. + Expenses incurred in relation to the tender offer process. 5 Taxation 30 June 2014 30 June 2013 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 22.5% (2013: 23.75%) - - - - - - The Company is subject to corporation tax at 22.5%. As at 30 June 2014 the total current taxation charge in the Company's revenue account is lower than the standard rate of corporation tax in the UK (21%). The differences are explained below: 30 June 2014 30 June 2013 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Net return on ordinary activities before taxation 460 28,943 29,403 944 15,468 16,412 Theoretical tax at UK corporation tax rate of 22.5% (2012: 23.75%) 104 6,512 6,616 224 3,674 3,898 Effects of: - UK dividends that are not taxable (364) - (364) (413) - (413) - Overseas dividends that are not taxable (21) - (21) (14) - (14) - Unrelieved expenses 281 69 350 203 268 471 - Non-taxable investment gains - (6,606) (6,606) - (3,971) (3,971) - Disallowable expenses - 25 25 - 29 29 - - - - - - Factors that may affect future tax charges The Company has Â£10,259,000 excess management expenses (2013: Â£8,697,000) 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, a deferred tax asset of Â£2,154,000 (2013: Â£1,826,000) 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 Sections 1158/1159 Corporation Tax Act 2010 no more than 15% of total income 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 2014 30 June 2013 Â£'000 Â£'000 Net return after taxation per Company accounts 460 944 Final dividend proposed of 0.78p (2013: 1.50p) per share (446) (931) Revenue retained for Section 1158 purposes 14 13 The following dividends were declared and paid by the Company: 30 June 2014 30 June 2013 Â£'000 Â£'000 Final dividend 1.50p per share (2013: 1.50p) 931 1,010 7 Return per Ordinary share 30 June 2014 30 June 2013 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 29,403 60,482,751 48.61 16,412 65,215,418 25.17 Revenue Return per share 460 60,482,751 0.76 944 65,215,418 1.45 Capital Return per share 28,943 60,482,751 47.85 15,468 65,215,418 23.72 8 Investments 30 June 2014 Â£'000 Investment portfolio summary Listed investments at fair value through profit or loss 90,522 Unlisted investments at fair value through profit or loss 1,901 92,423 30 June 2014 Listed Unlisted Total Â£'000 Â£'000 Â£'000 Analysis of investment portfolio movements Opening book cost 47,011 277 47,288 Opening investment holding gains 21,516 2,610 24,126 Opening valuation 68,527 2,887 71,414 Movements in the year: Purchases at cost 24,228 - 24,228 Sales - proceeds (31,119) (1,466) (32,585) - realised gains on sales 14,433 1,402 15,835 Increase/(decrease) in unrealised appreciation 14,453 (922) 13,531 Closing valuation 90,522 1,901 92,423 Closing book cost 54,553 213 54,766 Closing investment holding gains 35,969 1,688 37,657 90,522 1,901 92,423 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£107,000 (2013: Â£88,000) and disposals of investments totalled Â£53,000 (2013: Â£30,000) for the year. 30 June 2014 30 June 2013 Total Total Â£'000 Â£'000 Analysis of capital gains Gains on sale of investments 15,820 4,115 Foreign exchange gains on sale of investments 15 8 Foreign exchange losses on settlement (5) - Movement in investment holding gains 13,531 12,599 29,361 16,722 The Company is required to classify fair value measurements using a fair value hierarchy that reflects the subjectivity of the inputs used in measuring the fair value of each asset. The fair value hierarchy has the following levels: â— Quoted bid prices (unadjusted) in active markets for identical assets or liabilities ("level 1"). â— Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) ("level 2"). â— 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 2014. Financial instruments at fair value through profit and loss Level 1 Level 2 Level 3 Total Â£'000 Â£'000 Â£'000 Â£'000 30 June 2014 Equity investments and limited partnership interests 90,522 - 1,901 92,423 Liquidity funds - 7,707 - 7,707 Total 90,522 7,707 1,901 100,130 30 June 2013 Equity investments and limited partnership interests 68,527 931 1,956 71,414 Liquidity funds - 7,750 - 7,750 Total 68,527 8,681 1,956 79,164 Investments whose values are based on quoted market prices in active markets are classified within level 1 and 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. 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 IPEVC Valuation Guidelines. There were no transfers between levels for the year ended 30 June 2014 (2013: none). The following table presents movements in level 3 instruments for the year ended 30 June 2014 by class of financial instrument. Total equity investments Â£'000 Opening balance 1,956 Disposals during the year (63) Total gain for the year included in the Statement of 8 comprehensive income Closing balance 1,901 9 Significant interests The Company had holdings of 3% or more in the following companies: Name of Class of 30 June 2014 investment Share Percentage held Journey Group Ordinary 8.8 Allocate Software Ordinary 8.3 Servelec Group Ordinary 5.4 Goals Soccer Centre Ordinary 5.1 Wilmington Group Ordinary 4.7 4imprint Group Ordinary 4.4 Gooch & Housego Ordinary 3.5 E2V Technologies Ordinary 3.1 10 Trade and other receivables 30 June 2014 30 June 2013 Â£'000 Â£'000 UK dividends receivable 22 235 Overseas dividends receivable 25 16 Accrued income 3 3 Other receivables and prepayments 14 11 64 265 11 Trade and other payables 30 June 2014 30 June 2013 Â£'000 Â£'000 Amounts due to brokers for settlement of trades 105 - Investment Manager's performance fee 310 1,132 Other payables and accruals 339 263 754 1,395 12 Share capital Number Â£'000 Allotted, called up and fully paid Ordinary shares of 10p each: At 1 July 2013 62,039,682 6,203 Share buy backs (2,481,571) (248) At 30 June 2014 59,558,111 5,955 13 Reserves Capital Capital reserve reserve Share arising on arising on Capital premium Special investments investments redemption Revenue account reserve sold held reserve reserve For the year ended 30 June 2014 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening balance 5,246 46,089 (6,488) 24,126 1,778 1,442 Net gain on realisation of investments - - 15,835 - - - Foreign exchange losses on settlement - - (5) - - - Increase in unrealised appreciation - - - 13,531 - - Share buy back expenses - - (108) - - - Shares bought back for cancellation - (3,439) - - 248 - Investment Manager's performance fee - - (310) - - - Retained net revenue for the year - - - - - 460 Dividends paid - - - - (931) As at 30 June 2014 5,246 42,650 8,924 37,657 2,026 971 Capital Capital reserve reserve Share arising on arising on Capital premium Special investments investments redemption Revenue account reserve sold held reserve reserve For the year ended 30 June 2013 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening balance 5,246 51,734 (9,357) 11,527 1,250 1,508 Net gain on realisation of investments - - 4,115 - - - Foreign exchange gains - - 8 - - - Increase in unrealised appreciation - - - 12,599 - - Share buy back expenses - - (122) - - - Shares bought back for cancellation - (5,645) - - 528 - Investment Manager's performance fee - - (1,132) - - - Retained net revenue for the year - - - - - 944 Dividends paid - - - - - (1,010) As at 30 June 2013 5,246 46,089 (6,488) 24,126 1,778 1,442 14 Reconciliation of net cash flow to net funds 30 June 2014 30 June 2013 Â£'000 Â£'000 Opening net funds 8,112 2,204 Increase in cash and cash equivalents in year 3,584 5,908 Closing net funds 11,696 8,112 At Net At 30 June 2013 cash flow 30 June 2014 Â£'000 Â£'000 Â£'000 Cash at bank 362 3,627 3,989 Liquidity funds 7,750 (43) 7,707 8,112 3,584 11,696 15 Net asset value per Ordinary share The net asset value per Ordinary share is based on net assets of Â£103,429,000 (2013: Â£78,396,000) and on 59,558,111 (2013: 62,039,682) Ordinary shares, being the number of shares in issue at the year end. 16 Capital commitments and contingent liabilities The Company has a commitment to invest â‚¬1,560,000 (2013: â‚¬1,560,000) in Vintage 1. 17 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. All the assets of the Company which are traded on listed exchanges are held by The Northern Trust Company, the Company's Custodian. Bankruptcy or insolvency of the Custodian may cause the Company's rights with respect to securities held by the Custodian to be delayed or limited. The Board reviews the Custodian's annual controls report and the Investment Manager's management of the relationship with the Custodian. The Company invests in markets that operate DVP (Delivery versus Payment) settlement. The process of DVP mitigates the risk of losing the principal of a trade during the settlement process. The Manager continuously monitors dealing activity to ensure best execution, a process that involves measuring various indicators including the quality of trade settlement and incidence of failed trades. Counterparty lists are maintained and adjusted accordingly. 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 operational requirements are invested in Institutional Liquidity Funds. These are highly liquid assets that are redeemable on less than 24 hours notice. The Company only invests in funds that have an AAA rating and the fund's performance is monitored by the Investment Manager. As at 30 June 2014 the Company had Â£7.7 million (2013: Â£7.8 million) invested in such funds. The maximum exposure to credit risk is Â£11,760,000 (2013: Â£8,377,000). There are no assets past due or impaired (2013: none). The Company finances its operations through its issued capital and existing reserves. 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. 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 2014 valuation (2013: 20%), with all other variables held constant, there would have been a reduction of Â£18,485,000 (2013: Â£14,283,000) in the return after taxation and equity. An increase of 20% in the investment portfolio valuation would have had an equal and opposite effect on the return after taxation and equity. The calculations are based on the fair value of investments at 30 June 2014 and these may not be representative of the year as a whole. (ii) Cash flow interest rate risk exposure 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, which is subject to fluctuations in interest rates (along with other factors). If interest rates had reduced by 0.5% from those obtained at 30 June 2014 (2013: 0.5%), it would have the effect, with all other variables held constant, of reducing the net return after taxation and equity by Â£39,000 (2013: Â£24,000). If there had been an increase in interest rates of 0.5% there would have been an equal and opposite effect in the net return after taxation and equity. The calculations are based on average cash at bank and liquidity funds for the year ending 30 June 2014 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 (2013: same). 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 2014 was: Cash flow No interest interest rate risk rate risk financial financial Total assets assets Â£'000 Â£'000 Â£'000 Sterling Ordinary shares 90,522 90,522 - Liquidity funds 7,707 - 7,707 Cash 3,989 - 3,989 Receivables* 50 50 - 102,268 90,572 11,696 Euros Unlisted investments 1,901 1,901 - 1,901 1,901 - Total 104,169 92,473 11,696 * 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 2013 was: Cash flow No interest interest rate risk rate risk financial financial Total assets assets Â£'000 Â£'000 Â£'000 Sterling Ordinary shares 68,527 68,527 - Unlisted investments 931 931 - Liquidity funds 7,750 - 7,750 Cash 362 - 362 Receivables* 254 254 - 77,824 69,712 8,112 Euros Unlisted investments 1,956 1,956 - 1,956 1,956 - Total 79,780 71,668 8,112 * 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 2014 was: No interest rate risk financial Total liabilities Â£'000 Â£'000 Sterling Creditors 754 754 All amounts were due in three months or less for a consideration equal to the carrying value of the creditors shown above. The interest rate risk profile of the Company's financial liabilities at 30 June 2013 was: No interest rate risk financial Total liabilities Â£'000 Â£'000 Sterling Creditors 1,395 1,395 All amounts were due in three months or less for a consideration equal to the carrying value of the creditors shown above. (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 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, and this is the only non-sterling asset. The Company is, therefore, subject to foreign currency risk. During the year the Sterling/Euro exchange rate fluctuated 9.8% between a low of 1.14175 on 31 July 2013 and a high of 1.2537 on 13 June 2014, before closing at 1.24885 on 30 June 2014 (2013: 1.1668). If the Sterling/Euro exchange rate had decreased by 15% from that obtained at 30 June 2014 (2013: 15%), it would have the effect, with all other variables held constant, of increasing net profit and equity shareholders' funds by Â£336,000 (2013: Â£345,000). An increase of 15% (2013: 15%) would have decreased net profit and equity shareholders' funds by Â£248,000 (2013: Â£255,000). The calculations are based on the value of the investment in Vintage as at 30 June 2014 and this may not be representative of the year as a whole. The balance exposed to foreign currency risk is Â£1,901,000 (2013: Â£1,956,000). 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 (2013: same). Managing Capital Capital structure The Company is funded through shareholders' equity and cash reserves. 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. Although no longer a requirement for obtaining and retaining investment trust status, it remains the Company's investment policy that 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's capital requirement is reviewed regularly by the Board. 18 Related party transactions and transactions with the Investment Manager 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 GVOIM in relation to the strategy, operations and management of potential investee companies. The amounts payable to the Investment Manager are disclosed in Note 3 above. The amount due to the Investment Manager for management fees at 30 June 2014 was Â£232,000 (30 June 2013: Â£157,000). The amount due to the Investment Manager for performance fees at 30 June 2014 was Â£310,000 (30 June 2013: Â£1,132,000). GVOIM has entered into Commission Sharing Agreements with a number of executing brokers. Under this arrangement the amount of commission received by GVOIM in relation to trading activities carried out on behalf of the Company for the year to 30 June 2014 was Â£4,805 (2013: Â£6,600). The amount outstanding to GVOIM at the year end was Â£4,805 (2013: Â£5,600). Fees paid to Directors are disclosed in the Directors' Remuneration Report in the full Annual Report. Full details of Directors' interests are set out in the Report of the Directors in the full Annual Report. Notice of Annual General Meeting The Annual General Meeting of Strategic Equity Capital plc will be held at the offices of Canaccord Genuity Limited, 8th Floor, 88 Wood Street, London EC2V 7QR at 11.30 am on Friday, 14 November 2014. The notice of this meeting can be found in the Annual Report and Accounts at: www.strategicequitycapital.com National Storage Mechanism A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/NSM ENDS Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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Thursday, 21st November 2024

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HLMA JD. ITH

JD Sports tanks after management tighten profit guidance towards the lower end of expectations, Halma finds support from strong earnings and capital return commitment cheers shareholders in Ithica Energy.

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