Annual Financial Report

Securities Trust of Scotland plc Annual report Year to 31 March 2010 The financial information set out below does not constitute the company's statutory accounts for the years ended 31 March 2010 or 2009 but is derived from those accounts. Statutory accounts for 2009 have been delivered to the Registrar of Companies and those for 2010 will be delivered following the company's annual general meeting. The auditor's have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) of the Companies Act 2006. Copies of the Annual Report and Accounts for the year ended 31 March 2010 have been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility situated at: Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS. A copy of the full annual report can be downloaded at www.securitiestrust.com The annual general meeting of the company will be held at the offices of Martin Currie, Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES on Wednesday 20 July 2010 at 12.30pm. Full notice of the meeting can be found within the Annual Report and Accounts. The unedited full text of those parts of the annual report and accounts for the year ended 31 March 2010, which require to be published are set out on the following pages. Financial Summary Key data As at As at 31 % change 31 March March 2009 2010 Net asset value 109.37p 75.41p +45.0% per share* FTSE All-Share 2,910.19 1,984.17 +46.7% index Share price 99.00p 66.25p +49.4% Discount 9.48% 12.15% Average 7.42% 2.91% discount+ *Calculated in accordance with the requirements of the AIC. (Following a review by the AIC, the net asset value is inclusive of current year revenue.) +Average discount over twelve week period to 31 March (based on capital over net asset value). Total returns* Year ended Year ended 31 March 31 March 2010 2009 Net asset value 55.8% (35.9%) per share FTSE All-Share 52.3% (29.3%) index Share price 58.9% (39.1%) *The combined effect of any dividends paid, together with the rise or fall in the net asset value, index or share price. Income Year ended Year ended 31 March 31 March 2010 2009 Revenue return 5.16p 5.41p per share Dividend per 4.65p 5.45p share Total expense ratio Year ended Year ended 31 March 31 March 2010 2009 As percentage of 0.8% 0.7% shareholders' funds Annual total returns with dividends reinvested over 12 month periods to 31 March 2010 2009 2008 2007 2006* Securities 58.9% (39.1%) (14.5%) 17.0% 34.5% Trust share price FTSE All 52.3% (29.3%) (7.7%) 11.1% 32.2% Share index Securities 55.8% (35.9%) (15.0%) 13.5% 33.5% Trust net asset value per share *since launch on 28 June 2005 Source: Fundamental Data Chairman's Statement Performance Welcome to the latest report covering the 12 months to 31 March 2010. It is encouraging to see the capital value of equities recovering so strongly after a difficult couple of years, and particularly so to see Securities Trust of Scotland outperforming the broader market. In the period under review the total return of the net asset value per share was 55.8%, compared to the total return of 52.3% of the FTSE All-Share index. The share price returned 58.9%, reflecting a narrowing of the discount over the year. Revenues and dividends At 31 March 2010 the company's shares offered a yield of 4.7%, compared to the 3.2% available from the FTSE All-Share index. The revenue return over the year to 31 March 2010 was 5.16p per share, a fall of 4.6% compared to 5.41p in the year to 31 March 2009. Three interim dividends of 1.15p per share have already been paid and the board has declared a fourth interim dividend of 1.20p per share making a total of 4.65p per share for the year. The fourth interim dividend will be paid on 30 June 2010 to shareholders on the register on 4 June 2010. At 1.20p per share, the fourth interim dividend is 0.05p higher than we predicted paying at the half year stage. However, overall the annual dividend is 15% less than in 2009, reflecting the severity of the dividend cuts made by companies held within the portfolio. Shareholders should be aware that the underlying revenue generation of 5.16p per share over the year to 31 March 2010 was an inflated figure for two reasons. Firstly, the huge amount of new equity raised by UK companies over this period gave the opportunity to earn commission income by underwriting a portion of these rights issues. We do not think that income from this source will approach this level in the period to 31 March 2011. Secondly, a number of portfolio holdings recently brought forward dividend payments in order to lower the tax burden for some individual shareholders. This had the effect of bringing forward forecast revenue from the year to 31 March 2011 into the year to 31 March 2010. Together these two added approximately 0.4p per share to the revenue return to 31 March 2010 and will reduce forecast income by approximately 0.2p per share to 31 March 2011. The low level of revenue reserves held by the company has been improved by these two factors together with the reduction in dividends paid. At 31 March 2010 revenue reserves amounted to approximately 28% of a full year's dividend payment compared to only 14% a year ago. Borrowing On 1 July 2009 we took out a new loan facility for £18 million, replacing the previous £20 million loan. At present the company is 13% geared, lower than the maximum of 15%. Discount management We use share buy-backs to maintain the discount in single figures. If the average discount exceeds 7.5% in the twelve weeks prior to the financial year- end, a redemption opportunity is triggered. The cumulative average discount to net asset value at which shares traded over the 12 weeks prior to the year-end was 7.42% on an ex-income basis. During the year to 31 March 2010 1,193,452 shares were bought back at a cost of £1,177,000. The board After nine years of service with the company and its predecessor, Anita Frew has decided to step-down as a director of the company at the forthcoming annual general meeting. Anita has served the company with enormous commitment as a director and chairman of the marketing and communications committee. Not only did Anita bring fund management experience, she is also very well regarded by other investment companies and UK businesses both large and small and we shall greatly miss her huge contribution to the company. We wish her well in the future. Subject to shareholder approval at the forthcoming annual general meeting, the board intends to appoint Rachel Beagles as a non-executive director of the company, to take effect from 20 July 2010. Rachel is currently a non-executive director and audit committee Chair of Crown Place VCT plc and Schroder UK Mid and Small Cap Fund plc. The board believes that Rachel's experience in the investment trust sector, along with her extensive marketing and strategic research experience, will enhance the current skill set of the board. Outlook In an environment of continuing low interest rates, deposit accounts and gilt yields offer limited attractions for income-seeking investors. We believe that Securities Trust of Scotland remains a compelling proposition for long-term, income-seeking investors. Although the year was an encouraging one for capital returns, there was still pressure on UK dividends. As Ross Watson explains in his manager's review, UK companies are probably over the worst, and we expect dividend growth to resume. However this will be at levels below the expected growth in corporate profits as companies rebuild their dividend cover. Despite the well publicised problems in the UK economy, the global economic recovery is being sustained and Securities Trust of Scotland will benefit from this. Many UK companies generate significant earnings from their overseas activities and Securities Trust of Scotland is therefore well placed to benefit from any potential uplift. Thank you for your continued support; please contact me if you have any questions regarding your company. Contact details can be found on the back of this report. I would like to invite all shareholders to attend the Annual General Meeting of the company to be held at 12.30pm on 20 July 2010 at the offices of Martin Currie, Saltire Court, 20 Castle Terrace, Edinburgh. Neil Donaldson Chairman 25 May 2010 Manager's Review In the 12 months under review global equity markets enjoyed returns that were dramatic by any standards. The UK was no exception, with a total return of 52.3% in the FTSE All-Share index. However such was the fall during the previous year that the market is still over 15% below its peak and dividend income has fallen by a similar amount. The rally began in the middle of March 2009, as investors started to believe that the worst of the financial crisis was over. In many markets - and the UK was one of them - the upswing began several months before there was confirmation that the recession had actually ended. The enormous efforts of governments and central banks around the world had a beneficial impact on monetary conditions and the availability of credit. After such a fall in both economic activity and share prices, investors were naturally focused on those stocks and sectors with the best gearing to recovery. Accordingly, the list of the period's best performers is dominated by the more cyclically exposed sectors, such as engineering, mining and banking stocks. Conversely, it was no surprise that stocks with more stable business models lagged the market, including electricity, pharmaceuticals, utilities and mobile telecommunications, all of which underperformed the broader market. Given the number of companies in the banking and mining sectors that had cut their dividends, this placed income investors at a disadvantage. BHP Billiton was the only major stock in the mining sector to pay a dividend, so we switched out of Rio Tinto and into it. The portfolio has had a significant underweight position in mining, but gained exposure to better economic conditions through holdings in industrial companies such as IMI and Melrose. These two stocks made significant contributions to the portfolio's capital performance while increasing their dividends during the period. Nevertheless, the low weighting in mining made the biggest negative contribution to the fund's relative performance. In the financial sectors, where the prices of many stocks had plummeted in the previous period, both Aviva and Intermediate Capital Group rose sharply. We purchased a holding in Barclays after the company had resumed dividend payments and it became clear to us that its profit outlook was improving. Aviva reduced its dividend payment during the year, so we switched part of the holding into Legal & General, where the new management team is more focused on cash generation and dividend growth. While we did not have a large overweight in the underperforming utilities sector, the holdings in Scottish & Southern Energy and National Grid both lagged the market. We reduced exposure to the consumer sector early in the period by selling Tui Travel, but felt confident enough to buy Persimmon at the end of 2009. We also purchased a position in Britvic, the soft drinks manufacturer; whose cashflow generation is very attractive, and this has already led to a dividend increase beyond our initial estimates. A key feature of the UK stockmarket over the year was the large amount of new capital raised by companies, through issuing bonds or equity. Eight companies in the portfolio raised money in rights issues. In each case this was not to finance investment and expansion, but rather to rebuild their balance sheets. In most cases, these were accompanied by dividend cuts. The stockmarket generally coped well with this flood of capital-raising, although the scale of the issues from HSBC, Rio Tinto and Lloyds Banking Group led to some indigestion and spurred investors to sell some of their other stocks to take part. On the plus side, the biggest rights issues did mean that the portfolio was able to earn underwriting commission. Although the year was an excellent one for capital returns, the situation for income was very different. Dividend cuts were a regular feature in the early months of the period, and the impact upon the portfolio was significant, with underlying dividend income falling by 15%. Dividend cuts were widespread, affecting companies across a range of sectors - not just the high-profile banks. The company's lack of revenue reserves meant that the previous level of dividend payment could not be sustained, and it was reduced accordingly. The key point here is that the dividend has been lowered to a level which is sustainable and from which it can grow. As the year progressed, the news gradually began to improve, and the revenue forecasts stopped deteriorating. Indeed, towards the end of the year, a number of companies announced dividends ahead of our estimates, which was very welcome. IMI, for instance, had made the maintenance of its dividend payment a key objective for 2009, but such was the firm's success in safeguarding profit margins and generating cash that the final dividend for 2009 was increased. For the current year, we do expect dividend growth to resume. As companies seek to rebuild their dividend cover, however, the rate of increase is likely to be below the expected growth in corporate profits - so there should be scope for the dividend to increase from current levels. Two key factors distorted the company's income flow in the year to 31 March 2010. First, the underwriting commission mentioned earlier boosted income generation, but we don't expect this to be a feature of the current year. Second, as the chairman has highlighted in his statement, to reduce tax liabilities for some private shareholders a number of companies decided to bring forward dividend payments which would otherwise have fallen outside the period under review. This had the effect of boosting the company's income in the year under review at the expense of the current year to 31 March 2011. Looking ahead, the improving global economy is supportive of current equity valuations, although a substantial recovery in profits has already been priced in by the market. As companies gradually grow more confident, investment plans that had been delayed will be restarted; this is already happening in the mining sector. There will be less need to raise new equity, unless it is for expansion and acquisitions, both of which will become more prevalent. The outlook for the UK economy remains particularly challenging, however. Some decision on how to reduce the public-sector deficit must be reached if the financial markets are to retain confidence. The adverse reaction of the markets to the problems in Greece shows how important this is. But even if the resulting action is delayed, or seen as insufficiently aggressive, the impact on the UK market will be limited, as so many of the companies listed in the UK earn their money overseas. Ross Watson 25 May 2010 Portfolio Summary Portfolio distribution as at 31 March By asset class 2010 2009 % % Equities 110 106 Fixed interest 3 4 Cash - 2 Less borrowings (13) (12) 100 100 By Sector 2010 2009 (excluding cash and % % fixed interest) Financials 24 17 Oil and gas 16 20 Consumer goods 12 12 Industrials 12 10 Consumer services 9 10 Healthcare 8 10 Basic materials 7 7 Utilities 6 6 Telecommunications 5 6 Technologies 1 2 100 100 Market Securities Trust of FTSE All-Share capitalisation Scotland of equity investments Weighting No. of Weighting No. of % stocks % stocks 2010 2009 2010 2009 2010 2009 2010 2009 FTSE 100 73.5 79.0 25 27 86.0 87.3 100 100 FTSE 250 23.6 17.6 19 15 11.8 10.8 250 250 FTSE 350 97.1 96.6 44 42 97.8 98.1 350 350 FTSE small cap 2.4 2.4 2 3 2.2 1.9 270 260 Non-index 0.5 1.0 2 3 - - - - stocks 100.0 100.0 48 48 100.0 100.0 620 610 Largest Holdings 2010 2010 2009 2009 Market % of Market % of Value total Value total £000 portfolio £000 portfolio BP 10,857 8.79 8,212 9.83 Royal Dutch 8,240 6.67 6,948 8.32 Shell British American 7,107 5.75 5,046 6.04 Tobacco Vodafone 6,172 5.00 4,527 5.42 GlaxoSmithKline 5,832 4.72 5,012 6.00 BHP Billiton 5,776 4.68 2,115 2.53 HSBC 4,654 3.77 2,232 2.67 Barclays 3,813 3.09 - - AstraZeneca 3,761 3.04 3,136 3.76 Next 3,631 2.94 2,222 2.66 Imperial Tobacco 3,312 2.68 2,582 3.09 BAE Systems 3,152 2.55 2,839 3.40 National Grid 2,896 2.34 2,417 2.89 Melrose 2,691 2.18 1,291 1.55 Scottish and 2,614 2.12 2,633 3.15 Southern Energy Halfords 2,522 2.04 967 1.16 Hiscox 2,187 1.77 1,096 1.31 Resolution 2,161 1.75 - - Intermediate 2,062 1.67 508 0.61 Capital IMI 2,040 1.65 838 1.00 Portfolio Holdings United Kingdom Market Value % of total £ portfolio BP 10,856,991 8.79 Royal Dutch Shell 8,239,683 6.67 British American 7,106,547 5.75 Tobacco Vodafone 6,171,758 5.00 GlaxoSmithKline 5,832,424 4.72 BHP Billiton 5,775,814 4.68 HSBC 4,654,150 3.77 Barclays 3,812,795 3.09 AstraZeneca 3,760,803 3.04 Next 3,631,387 2.94 Imperial Tobacco 3,311,917 2.68 BAE Systems 3,151,680 2.55 National Grid 2,896,026 2.34 Melrose 2,691,258 2.18 Scottish and 2,614,291 2.12 Southern Energy Halfords 2,521,624 2.04 Hiscox 2,187,417 1.77 Resolution 2,161,029 1.75 Intermediate 2,061,600 1.67 Capital IMI 2,039,875 1.65 Aviva 1,846,855 1.50 Unilever 1,825,034 1.48 Sage 1,775,757 1.44 Croda 1,726,048 1.40 Informa 1,717,908 1.39 RSA Insurance 1,618,790 1.31 Admiral 1,606,862 1.30 Savills 1,550,392 1.26 United Business 1,523,036 1.23 Media Elementis 1,514,685 1.23 Domino Printing 1,476,173 1.20 Smiths 1,434,836 1.16 Land Securities 1,425,814 1.15 Carillion 1,419,959 1.15 Britvic 1,413,789 1.14 WPP 1,412,096 1.14 Santander (10.375% 1,365,400 1.11 pref shares) Centrica 1,325,742 1.07 Wincanton 1,309,646 1.06 Legal and General 1,213,485 0.98 3i Infrastructure 1,082,019 0.88 Tullett Prebon 1,030,566 0.83 General Accident 1,010,000 0.82 (7.875% pref shares) Lloyds Banking 924,000 0.75 Group (9.75% pref shares) Man Group 748,503 0.61 F&C Asset 544,424 0.44 Management Corporate Services 456,270 0.37 (10% guaranteed loan note) Persimmon 441,848 0.36 SIG 419,993 0.34 Rugby Estates 388,270 0.31 Investment Trust NR Nordic and 281,602 0.23 Russia Properties Premier Foods 200,155 0.16 Total portfolio 123,509,026 100.0 Revenue and dividends Gross revenue for the year amounted to £5,950,000 (2009: £6,224,000) and the revenue return per share was 5.16p (2009: 5.41p). Interim dividends totalling 5.45p have been paid during the year. The directors recommend a fourth interim dividend of 1.20p per share payable on 30 June 2010 to holders on the register at the close of business on 4 June 2010, making a total for the year of 4.65p (2009: 5.45p). Related Party Transactions There were no related party transactions during the year, other than as disclosed in note 14. Going concern status The company's business activities, together with the factors likely to affect its future development, performance and position are set out in the chairman's statement, manager's review and the report of the directors. The company has a loan facility of £18,000,000 which expires in July 2010, of which £14,000,000 was drawn down at the year end date. The purpose of the facility is to enable the manager to enhance the return for shareholders by borrowing and investing where the return is expected to exceed the cost of borrowing. Therefore the company has adequate financial resources in the form of readily realisable listed securities and as a result the directors assess that the company is able to continue in operational existence without the facility. In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk issued in October 2009, the directors have undertaken a rigorous review of the company's ability to continue as a going concern. The company's assets consist of a diverse portfolio of listed equity shares which, in most circumstances, are realisable within a very short timescale. The directors are mindful of the principal risks and uncertainties disclosed on page 10 and have reviewed revenue forecasts and they believe that the company has adequate financial resources to continue its operational existence for the foreseeable future, and at least one year from the date of this annual report. Accordingly, the directors continue to adopt the going concern basis in preparing these accounts. Risks and Uncertainties Management of principal risks With the assistance of the manager, the board has drawn up a risk matrix, which identifies the key risks to the company. These key risks fall broadly under the following categories and the implementation of specific mitigating measures and procedures has taken place in order to reduce the probability and impact of each risk to the greatest extent possible. Risk Mitigation Loss of s842 status - In order to qualify as an investment trust, the company must comply with Section 842 of the Income and Corporation Taxes Act 1988. Section 842 qualification criteria are continually monitored by Martin Currie. Operational disruption at the manager's premises - Martin Currie has in place a full disaster recovery and business continuity plan which facilitates continued operation of the business should the manager's premises be subject to operational disruption. The plan, including a full staff call chain test, was last tested in December 2009 with successful results. The manager maintains a fully operational off-site disaster recovery centre for use by key staff during any disruption. Regulatory, accounting/internal control breach - The company must comply with the Companies Act 2006 and the UKLA Listing Rules. The board relies on the services of its company secretary and its professional advisers to ensure compliance. Details of how the board monitors the services provided by Martin Currie and the key elements designed to provide effective internal control are included within the internal control section of the Corporate Governance Report. Loss of investment team or portfolio manager - The manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team based approach, as well as special efforts to retain key personnel. Failure to manage the discount - The board regularly discusses discount policy and has set parameters for the manager and the company's broker to follow. Investment underperformance - The board manages the risk of investment underperformance by diversification of investments and through a set of investment restrictions and guidelines that are monitored and reported on by the manager. The board monitors the implementation and results of the investment process with the manager, who attends all board meetings, and reviews data that show statistical measures of the company's risk profile. Interest rate risk - From time to time the company finances its operations through bank borrowings. The amount of such borrowings will not exceed 15% of the company's total assets. Details are provided in note 16 to the financial statements. Currency risk - The board regularly monitors the impact of currency rate risk. In recent years the proportion of the company's revenue that is declared in US dollars and euros has increased and currency fluctuations have meant that revenue forecasting has become more uncertain. In order to offset these fluctuations the company has taken out forward contracts to hedge the expected revenue from a number of portfolio constituents. In aggregate, this will protect 66% of the remaining US dollar denominated dividends for the period to 31 March 2011 at a rate of $1.59 and 65% of the remaining euro denominated dividends for the year end to 31 March 2011 at a rate of €1.15. Counterparty risk - Martin Currie monitors counterparty relationships on behalf of the board. This process includes identifying major counterparties, mapping exposure and analysing the risks through Martin Currie's risk, compliance, dealing, operations and middle office teams. The aim is to enable the board to determine an appropriate level of counterparty risk exposure, and to diversify or mitigate this, as required. This process is subject to continual monitoring and review with any recommendations made to the board. Major regulatory change - In response to the financial crisis, the European Commission produced the Alternative Investment Fund Managers Directive, currently in draft. The directive was aimed at hedge funds and private equity funds but investment trusts fall within its scope. Intensive representation has been made to ensure that the special circumstances of investment trusts are recognized. Liquidity test failure - In order to retain its place in the FTSE All-Share index, the company must satisfy the liquidity test criteria set by FTSE at each annual review. The liquidity of the company is monitored by the manager and the company's broker with a report being reviewed by the board regularly. Directors' Responsibility The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The financial statements are required by law to give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that year. In preparing these financial statements, the directors are required to: - select suitable accounting policies and then apply them consistently; - make judgements and estimates that are reasonable and prudent; - state whether applicable United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and - prepare the financial statements on the going concern basis unless it is inappropriate to assume that the company will continue in business. The directors are responsible for keeping proper accounting records that are sufficient to disclose the company's transactions and that disclose with reasonable accuracy at any time the financial position of the company and 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 financial statements are published on the www.securitiestrust.com website, which is maintained by the manager. The maintenance and integrity of the website maintained by Martin Currie is, so far as it relates to the company, the responsibility of Martin Currie. 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. In accordance with Chapter 4 of the Disclosure and Transparency Rules, and to the best of their knowledge, each director of Securities Trust of Scotland plc (`the company') confirms that the financial statements have been prepared in accordance with the applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the company. Furthermore each director certifies that the report of the directors includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal risks and uncertainties that the company faces. Edward Murray Chairman of audit committee 25 May 2010 Income Statement Year to 31 March 2010 Notes Revenue Capital Total £000 £000 £000 Gains/(losses)8 - 35,276 35,276 on investments Currency (56) (3) (59) losses Income 3 5,950 - 5,950 Investment (88) (163) (251) management fee Performance - (109) (109) fee VAT 15 27 - 27 recoverable on investment management fee Other 4 (464) - (464) expenses Net return 5,369 35,001 40,370 before finance costs and taxation Finance Costs 5 (109) (201) (310) Net return on 5,260 34,800 40,060 ordinary activities before taxation Taxation on 7 - - - ordinary activities Return 5,260 34,800 40,060 attributable to ordinary redeemable shareholders Return per 2 5.16p 34.14p 39.30p ordinary redeemable share Year to 31 March 2009 (Restated*) Notes Revenue Capital Total £000 £000 £000 Losses on 8 - (48,939) (48,939) investments Currency - (3) (3) (losses)/gains Income 3 6,224 63 6,287 Investment (83) (154) (237) management fee Performance - - - fee VAT 15 54 148 202 recoverable on Investment management fee Other 4 (453) - (453) expenses Net return 5,742 (48,885) (43,143) before finance costs and taxation Finance Costs 5 (219) (406) (625) - debt Net return on 5,523 (49,291) (43,768) ordinary activities before taxation Taxation on 7 (5) - (5) ordinary activities Return 5,518 (49,291) (43,773) attributable to ordinary redeemable shareholders Returns per 2 5.41p (48.34p) (42.93p) ordinary redeemable share The total columns of this statement are the income statement of the company. The revenue and capital items are presented in accordance with The Association of Investment Companies (AIC) SORP 2009. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year. A statement of total recognised gains and losses is not required as all gains and losses of the company have been reflected in the above statement. Balance sheet As at 31 As at 31 March 2010 March 2009 Note £000 £000 Non-current assets Investments at fair value through profit or loss Listed on 123,227 83,407 Exchanges in the UK Listed on 282 105 Exchanges abroad 8 123,509 83,512 Current Assets Loans and 9 2,845 1,031 receivables Cash at bank 301 3,198 3,146 4,229 Creditors Amounts falling 10 (16,438) (10,850) due within one year Net current (13,292) (6,621) liabilities Net assets 110,217 76,891 Capital and reserves Called up 11 1,008 1,019 ordinary share capital Capital 73 62 redemption reserve Special 109,968 111,145 distributable capital reserve Capital reserve 11 (3,361) (38,161) Revenue reserve 2,529 2,826 110,217 76,891 Net asset value 2 109.37p 75.41p per ordinary redeemable share The revenue reserve represents the amount of the company's reserves distributable by way of dividend. The aggregate amount of called up share capital is £1,007,768 *For details of restatement please refer to notes 1(l) and 19. Statement of cash flow Year to Year to 31 March 2010 31 March 2009 Note £000 £000 £000 £000 Net cash inflow 12 5,405 6,406 from operating activities Servicing of finance Finance costs (298) (629) Taxation Overseas - (5) taxation paid Capital expenditure and financial investment Payments to (17,515) (19,632) acquire investments Receipts from 11,245 26,854 disposal of investments Net cash (6,270) 7,222 (outflow)/inflow from investing activities Dividends paid (5,557) (5,694) Net cash (6,720) 7,300 (outflow)/inflow before use of liquid resources and financing Financing Repurchase of (1,177) - ordinary share capital Net movement in 5,000 (4,550) short-term borrowings Net cash 3,823 (4,550) inflow/(outflow) from financing Increase/ (2,897) 2,750 (decrease) in cash for the year Reconciliation of net cash flow to movements in net debt (Decrease)/ (2,897) 2,750 increase in cash as above Net movement in (5,000) 4,550 short-term borrowings Change in net (7,897 ) 7,297 debt resulting from cash flows Foreign - (3) exchange movements Movement in net (7,897) 7,300 debt in the year Opening net (5,802) (13,099) debt Closing net (13,699) (5,802) debt Reconciliation of movements in shareholders' funds For the Notes Called up Capital Special Capital Revenue Total year ordinary redemption distributable reserve reserve £000 ended 31 share reserve capital reserve £000 £000 March capital £000 £000 2010 £000 As at 31 1,019 62 111,145 (38,161) 2,826 76,891 March 2009 Return - - - 34,800 5,260 40,060 attributable to shareholders Ordinary (11) 11 (1,177) - - (1,177) shares bought back during the year Dividends 6 - - - - (5,557) (5,557) paid Balance 1,008 73 109,968 (3,361) 2,529 110,217 at 31 March 2010 For the Notes Called up Capital Special Capital Revenue Total year ordinary redemption distributable reserve reserve £000 ended 31 share reserve capital £000 £000 March capital £000 reserve 2009 £000 £000 As at 31 1,019 62 111,145 11,130 3,002 126,358 March 2008 Return - - - (49,291) 5,518 43,773 attributable to shareholders Dividends 6 - - - - (5,694) (5,694) paid Balance 1,019 62 111,145 (38,161) 2,826 76,869 at 31 March 2009 The revenue reserve represents the amount of the company's reserves distributable by way of dividend. Notes to the Financial Statements 1. Accounting policies (a) The financial statements have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP) and the Statement of Recommended Practice for Financial Statements of Investment Trust Companies and Venture Capital Trusts (SORP), issued in January 2009. The disclosures on going concern on page 9 of the report of the directors form part of the financial statements. Dividends - In accordance with FRS 21: "Events after the balance sheet date", dividends are included in the financial statements in the period in which they are paid. Functional currency - In accordance with FRS 23: "The effects of changes in foreign currency", the company is required to nominate a functional currency, being the currency in which the company predominately operates. The board has determined that sterling is the company's functional currency, which is also the currency in which these financial statements are prepared. The company adopted the extended disclosure requirements within FRS 29 for accounting periods beginning on or after 1 January 2009. The extended disclosure requirements introduced a fair value hierarchy and this is disclosed in note 18. (b) Income from equity investments is determined on the date on which the investments are quoted ex-dividend, or where no ex-dividend date is quoted, when the company's right to receive payment is established. Income from fixed interest securities is recognised on an effective yield basis. UK dividends received are accounted for at the amount receivable and are not grossed up for any tax credit. Other income includes any taxes deducted at source. Gains and losses arising from the translation of income denominated in foreign currencies are recognised in the revenue reserve. Scrip dividends are treated as unfranked investment income; any excess in value of shares received over the amount of the cash dividend is recognised in capital reserves. Income from underwriting commission and traded options is recognised as earned. (c) Interest receivable and payable and management expenses are treated on an accruals basis. (d) The management fee and interest costs are allocated 65% to capital and 35% to revenue in accordance with the board's expected long-term split of returns in the form of capital gains and income, respectively. The performance fee is wholly allocated to capital. All other expenses are wholly allocated to revenue. (e) Gains and losses on realisation of investments and changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms, together with exchange adjustments to overseas currencies are taken to capital reserve. (f) Foreign currencies are translated at the rates of exchange ruling on the balance sheet date. Investments are recognised initially as at the trade date of a transaction. Subsequent to this, the disposal of an investment is accounted for once again as at the trade date of a transaction. (g) Revenue received and interest paid in foreign currencies are translated at the rates of exchange ruling on the transaction date. Any exchange differences relating to revenue items are taken to the revenue account. (h) The company's investments are classified as "financial assets at fair value through profit or loss" and are therefore valued at bid price. Gains and losses arising from changes in fair value are included in the capital return for the period. (i) All financial assets and liabilities are recognised in the financial statements. (j) Deferred tax is recorded in accordance with Financial Reporting Standard 19 (Deferred Tax). Deferred tax is provided on all timing differences that have originated but not reversed by the balance sheet date. A deferred tax asset is only recognised to the extent that it is regarded as recoverable. Due to the company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the company has not provided for deferred tax on any capital gains and losses arising on the revaluation or disposal of investments. (k) Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the income statement. (l) Shareholders funds - Under the amended FRS 25 "Financial instruments: Disclosure and presentation", where shares meet certain conditions, they may be treated as equity. Previously the shares in Securities Trust of Scotland have been treated as debt, however they now meet all the amended conditions required to allow them to be treated as equity and the board have decided that the early adoption of the amended FRS 25 will be implemented in the current financial year and as a result the shares will be treated as equity and the previous year's results have been restated to reflect this. For further information and restatements please refer to note 19. (m) Share buy backs are funded through the capital reserve. (n) The company uses derivative financial instruments to manage the risk associated with foreign currency fluctuations arising on dividends received in currencies other than sterling. This is achieved by the use of forward foreign currency contracts. The company does not hold or issue derivative financial instruments for speculative purposes. Derivative financial instruments are recognised initially at fair value on the contract date and subsequently remeasured to the fair value at each reporting date. The resulting gain or loss being is recognised as revenue or capital in the income statement depending on the nature and motive of each derivative transaction. Derivative financial instruments with a positive fair value are recognised as financial assets and derivative financial instruments with a negative fair value are recognised as financial liabilities. A derivative is presented as a non- current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. 2. Year to Year to 31 March 31 March 2010 2009 Returns and net asset value Revenue return Revenue return £5,260,000 £5,518,000 attributable to ordinary redeemable shareholders Average number of 101,934,772 101,970,223 shares in issue during the year Revenue return per 5.16p 5.41p ordinary redeemable share Capital return Capital return £34,800,000 (£49,291,000) attributable to ordinary redeemable shareholders Average number of 101,934,772 101,970,223 shares in issue during the year Capital return per 34.14p (48.34p) ordinary redeemable share Total return Total return per 39.30p (42.93p) ordinary redeemable share Net asset value per share Net assets £110,217,000 £76,891,000 attributable to shareholders Number of shares in 100,776,771 101,970,223 issue at year end Net asset value per 109.37p 75.41p share 3. Income Year to Year to 31 March 31 March 2010 2009 £000 £000 From listed investments Franked income 5,200 5,075 - equities Franked income 293 293 - fixed interest and convertibles Unfranked 190 660 income - equities Unfranked 76 76 income - fixed interest and convertibles 5,759 6,104 Other income Interest on 6 75 deposits Underwriting 157 45 commission Income on 9 - exchange traded option Interest on 19 - VAT recoverable on investment management fees 5,950 6,224 Total income comprises: Dividends 5,683 6,028 Underwriting 157 45 commission Interest 101 151 Income on 9 - exchange traded option 5,950 6,224 Income from investments: Listed in the 5,652 5,902 UK Listed 31 126 overseas 5,683 6,028 No capital dividends were received during the year to 31 March 2010 (31 March 2009: £63,000 from NR Nordic and Russia Properties). 4. Other expenses Year to Year to 31 March 31 March 2010 2009 £000 £000 Savings plan administration 24 (2) and advertising Directors' fees 102 101 Employers' national insurance 9 9 contributions Secretarial fee 84 84 Printing and postage 40 36 Registrar's fees 38 40 Legal fees - 9 Bank charges 7 9 Other 109 115 Irrecoverable VAT 37 38 450 439 Auditors' remuneration: Audit services 14 13 Non-audit services (paid to - 1 previous auditors) 464 453 Details of the contract between the company and Martin Currie for provision of investment management and secretarial services are given in the report of the directors on page 9 of the full annual report. 5. Year to 31 March Year to 31 March 2010 2009 Revenue Capital Total Revenue Capital Total £000 £000 £000 £000 £000 £000 Finance costs Interest 109 201 310 219 406 625 payable on bank loans and overdrafts 6. Year to 31 March Year to 31 March 2010 2009 Revenue Capital Total Revenue Capital Total £000 £000 £000 £000 £000 £000 Dividends Year ended 31 March - - - 2,192 - 2,192 2008 - fourth interim dividend of 2.15p Year ended 31 March - - - 1,173 - 1,173 2009 - first interim dividend of 1.15p Year ended 31 March - - - 1,173 - 1,173 2009 - second interim dividend of 1.15p Year ended 31 March - - - 1,173 - 1,173 2009 - third interim dividend of 1.15p Year ended 31 March 2,039 - 2,039 - - - 2009 - fourth interim dividend of 2.00p Year ended 31 March 1,173 - 1,173 - - - 2010 - first interim dividend of 1.15p Year ended 31 March 1,173 - 1,173 - - - 2010 - second interim dividend of 1.15p Year ended 31 March 1,172 - 1,172 - - - 2010 - third interim dividend of 1.15p Refund of unclaimed - - - (17) - (17) dividends by registrar 5,557 - 5,557 5,694 - 5,694 Set out below are the total dividends payable in respect of the period, which forms the basis on which the requirements of Section 842 of the Income and Corporation Taxes Act 1988 are considered. Year to Year to 31 March 31 March 2010 2009 £000 £000 First interim dividend of 1,173 1,173 1.15p for the year ended 31 March 2010 (2009 - 1.15p) Second interim dividend of 1,173 1,173 1.15p for the year ended 31 March 2010 (2009 -1.15p) Third interim dividend of 1,172 1,173 1.15p for the year ended 31 March 2010 (2009 -1.15p) Fourth interim dividend of 1,209 2,039 1.20p for the year ended 31 March 2010 (2009 - 2.00p) Refund of unclaimed dividends - (17) by registrar 4,727 5,541 These dividends have been reclassified from debt to shareholders' funds. During the year the directors received dividends of 5.45p (2009: 5.60p) per share. 7. Taxation on ordinary As at As at activities 31 March 31 March 2010 2009 £000 £000 Withholding tax on income - 5 from overseas investments In accordance with the SORP issued in 2009, the company has adopted the marginal method for allocating tax relief between income and capital. The revenue account tax charge for the period is lower (2009: higher) than the standard rate of corporation tax in the UK for an investment trust company (28%) (2009: 28%). The differences are explained below. Taxation on ordinary As at As at activities 31 March 31 March 2010 2009 £000 £000 Net return on ordinary 40,060 (43,768) activities before taxation Corporation tax at standard 11,217 (12,255) rate of 28% (2009: 28%) Effects of: (Gains)/losses on investments (9,877) 13,703 not taxable UK dividends not taxable (1,538) (1,503) Expenses not deductible 7 - Movement in taxable accrued 2 2 income Currency losses not taxable 25 1 Excess management expenses 188 105 not utilised Non-taxable income (24) (53) Overseas tax suffered - 5 Current year tax charge - 5 The company has an unrecognised deferred tax asset of £1,251,683 (2009: £1,052,764). This has arisen from deductible expenses exceeding taxable income. 8. Investments As at As at 31 March 31 March 2010 2009 £000 £000 Fair value through profit or loss Opening valuation 83,512 137,823 Opening investment holding 34,217 7,510 losses Opening cost 117,729 145,333 Add: additions at cost 17,854 21,176 Disposal proceeds (13,133) (26,611) Less: net loss on disposal (11,209) (22,169) of investments Disposals at cost (24,342) (48,780) Closing cost 111,241 117,729 Add: investment holding 12,268 (34,217) gains/(losses) Closing valuation 123,509 83,512 The carrying value of the fixed interest securities as at 31 March 2010 was £3,756,000 (2009: £2,797,000). Details of the interest risk profile of the fixed interest securities are contained within note 16. Investments As at As at 31 March 31 March 2010 2009 £000 £000 Gains/(losses) on investment Net loss on disposal (11,209) (22,169) of investments Capital dividend - (63) received during current period Movement in 46,485 (26,707) investment holdings gains /(losses) 35,276 (48,939) Transaction costs During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains/(losses) on investments in the income statement. The total costs were as follows: As at As at 31 March 31 March 2010 2009 £000 £000 Acquisitions 92 87 Disposals 15 39 107 126 9. Loans and As at As at receivables 31 March 31 March 2010 2009 £000 £000 Dividends receivable 873 749 Interest accrued 31 32 Due from brokers 1,888 - Tax recoverable 37 21 Other debtors 16 229 2,845 1,031 10. Creditors - Amounts As at As at falling due within 31 March 31 March one year 2010 2009 £000 £000 Interest accrued 24 12 Due to brokers 2,032 1,693 Sterling bank loan 14,000 9,000 Financial 87 - liabilities carried at fair value through the income statement: Held for trading derivatives that are not designated in hedge accounting relationships: Forward foreign currency contracts Other creditors 295 145 16,438 10,850 The company has a £18,000,000 loan facility with Lloyds Banking Group which expires in July 2010. Under this agreement £14,000,000 was drawn at 31 March 2010 at a rate of 2.4132%. On 19 April 2010 the loan was rolled-over at a rate of 2.4135% with a maturity date of 19 May 2010. On 19 May 2010 the loan was rolled-over at a rate of 2.4177% with maturity date of 21 June 2010. The fair value of the sterling loan is not materially different from its carrying value. The interest rate is set at each roll-over date at LIBOR plus a margin. 11. Number Year to Number Year to of 31 March of 31 March shares 2010 shares 2009 £000 £000 Called up share capital Ordinary shares of 1p Authorised - 3,050 - 3,050 Ordinary shares in 101,970,223 1,019 101,970,223 1,019 issue at the beginning of the year Ordinary shares (1,193,452) (11) - - bought back during the year Ordinary shares in 100,776,771 1,008 101,970,223 1,019 issue at the end of the year The total cost of shares bought back during the year was £1,177,000 (2009: nil). The analysis of the capital reserve is as follows: Realised Investment Total capital holding capital reserve gains/ reserve £000 (losses) £000 £000 As at 31 March (3,944) (34,217) (38,161) 2009 Losses on (11,209) - (11,209) realisation of investments at fair value Realised currency (3) - (3) losses during the year Movement in fair - 46,385 46,485 value gains Capitalised (473) - (473) expenses As at 31 March (15,629) 12,268 (3,361) 2010 The above split in capital reserve is shown in accordance with provisions of the Statement of Recommended Practice `Financial Statements of Investment Trust Companies and Venture Capital Trusts'. 12. Year to Year to 31 March 31 March 2010 2009 £000 £000 Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities Net return before finance 40,370 (43,143) costs Decrease in accrued income and 90 671 other debtors Increase/(decrease) in 237 (50) creditors Currency movements - 3 Net (gains)/losses on (35,276) 48,939 investments Taxation withheld from income (16) (14) on investments Net cash inflow from operating 5,405 6,406 activities 13. As at Cashflow As at 31 March £000 31 March 2009 2010 £000 £000 Analysis of net debt Cash at bank 3,198 (2,897) 301 Bank borrowings - (9,000) (5,000) (14,000) sterling loan Net debt (5,802) (7,897) (13,699) 14. Directors' As at As at shareholdings 31 March 2010 31 March 2009 No. of shares No. of shares held held Neil Donaldson 30,750 26,057 Edward Murray 6,611 6,228 Charles Berry 14,012 13,200 Anita Frew 12,000 12,000 Andrew Irvine 80,000 80,000 Directors who held office at the end of the year and their shareholdings in the company are shown above. Charles Berry's holding of 14,012 shares includes a beneficial and family interest of 7,006 shares. Andrew Irvine's holding of 80,000 shares includes a beneficial and family interest of 50,000 shares. Since 31 March 2010 to the date of this report, Neil Donaldson's shares have increased by 839 shares. Anita Frew has declared a conflict of interest through her position as non- executive director of City of London Investment Trust, a peer group competitor of Securities Trust of Scotland. This conflict has been properly considered and authorised by the board. 15. VAT recoverable On 5 November 2007, the European Court of Justice ruled that management fees should be exempt from VAT. The manager has submitted a claim to the HMRC for VAT charged on investment management fees for the period 15 April 2005 to 30 June 2007. A refund of £229,000 (£202,000 of which was recognised in 2009) and interest of £19,000 (included in income - see note 3) was received from HMRC and repaid to the company. This repayment has been allocated to capital and revenue in line with the accounting policy of the company for the period in which the VAT was charged. Interest has been allocated entirely to revenue. 16. Derivatives and other financial instruments The company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The company also has the ability to enter into derivative transactions in the form of forward foreign currency contracts, futures and options, for the purpose of managing currency and market risks arising from the company's activities. The main risks the company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk. The board regularly reviews and agrees policies for managing each of these risks. The manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short- term debtors and creditors. (i) Market price risk The fair value or future cash flows of a financial instrument held by the company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk. Interest rate risk Interest rate movements may affect: - the fair value of the investments in fixed interest rate securities; - the level of income receivable on cash deposits; - the level of interest payable on borrowings; The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions. The board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. The company has a variable rate facility with Lloyds Banking Group which provides flexibility to finance opportunities in the short term. Current guidelines state that the total borrowings will not exceed 15 per cent of the total assets of the company. Details of borrowings at 31 March 2010 are shown in note 10. Interest risk profile The interest rate risk profile of the portfolio of financial assets and liabilities at the respective balance sheet date were as follows: Weighted Weighted Fixed Floating Non- average average rate rate interest period interest £000 £000 bearing for which rate £000 rate is % fixed Years At 31 March 2010 Assets Sterling - - 8.19 3,300 301 119,753 undated Sterling - dated 1 16.67 456 - - 3,756 301 119,753 Liabilities Bank loan - 0.1 2.41 14,000 - - sterling At 31 March 2009 Assets Sterling - - 5.69 2,265 3,198 80,715 undated Sterling - dated 2 14.29 532 - - 2,797 3,198 80,715 Liabilities Bank loan - 0.1 1.87 9,000 - - sterling The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on the bank loan is based on the interest rate payable on each tranche drawn down, which is set at each tranche draw down, weighted by its value. The maturity date of the company's loan is shown in note 10. The floating rate assets consist of cash deposits on call earning interest at prevailing market rates. The non-interest bearing assets represent the equity element of the portfolio. Interest rate sensitivity The sensitivity analysis below has been determined based on the exposure to interest rates at the balance sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates. The following table illustrates the sensitivity of the return after taxation to an increase or decrease of 100 basis points in interest rates. This is mainly attributable to the company's exposure to the interest rate on its bank loan. 2010 2010 2009 2009 Increase Decrease Increase Decrease in rate in rate in rate in rate Effect on (46) 46 1 (1) revenue return Effect on (91) 91 (59) 59 capital return Effect on total (137) 137 (58) 58 return and on net assets In the opinion of the directors, the above sensitivity analysis is not representative of the year as a whole, since exposure changes as investments are made, borrowings are drawn down and repaid throughout the year. Currency risk A number of companies within the investment portfolio declare dividends payable in currencies other than sterling. The revenue account is therefore subject to currency fluctuations arising on such dividends. To reduce the risk of currency fluctuations, the company entered into a number of forward foreign exchange currency contracts. At the year-end, the following contracts were held: 2010 Amount Unrealised Currency loss '000 £000 US dollars 2,095 86 Euros 60 1 Effect on total return and on - 87 net assets Other price risk Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments. It is the board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets and the stock selection process, as detailed on page 5 of the full annual report, both act to reduce market risk. The manager actively monitors market prices throughout the year and reports to the board, which meets regularly in order to review investment strategy. The investments held by the company are mainly listed on the London Stock Exchange with one holding listed on Euronext Amsterdam. Analysis of the company's investments is given on pages 5 to 6 of the full annual report this shows that the majority of the investments' value is in the UK. Accordingly there is a concentration of exposure to that country. However it should be noted that an investment's country of domicile or listing does not necessarily equate to its exposure to the economic conditions of that country. Other price risk sensitivity The following table illustrates the sensitivity of the return after taxation and the net asset value to an increase or decrease of 15% in the fair value of the company's equities. The calculations are based on the portfolio valuations, as at the respective balance sheet dates, and are not representative of the year as a whole. 2010 2009 Increase Decrease Increase Decrease in fair in fair in fair in fair value value value £000 value £000 £000 £000 Effect on (20) 20 (13) 13 revenue return Effect on 18,490 (18,490) 12,502 (12,502) capital return Effect on 18,470 (18,470) 12,489 (12,489) total return and on net assets The effect of the performance fee is not included in this sensitivity analysis. (ii) Liquidity risk This is the risk that the company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not considered to be significant as the company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan facilities (note 10). The contractual maturities of the financial liabilities at the year-end, based on the earliest date on which payment can be required are as follows: 2010 2009 Three More Total Three More Total months than £000 months than £000 or three or three less months less months £000 £000 £000 £000 Creditors: amounts falling due within one year Interest accrued 24 - 24 12 - 12 Due to brokers 2,032 - 2,032 1,693 - 1,693 Sterling bank 14,000 - 14,000 9,000 - 9,000 loan Financial 25 62 87 - - - liabilities carried at fair value through the income statement: Forward foreign currency contracts Other creditors 295 - 295 145 - 145 16,376 62 16,438 10,850 - 10,850 (iii) Credit risk This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the company suffering a loss. The risk is not considered significant by the board, and is managed as follows: - investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the manager, and limits are set on the amount that may be due from any one broker; and - cash is held only with reputable banks with high quality external credit enhancements. None of the company's financial assets is secured by collateral or other credit enhancements. The maximum credit risk exposure as at 31 March 2010 was £3,146,000(2009: £4,229,000). This was due to debtors and cash as per notes 9 and 13. Fair values of financial assets and financial liabilities All financial assets and liabilities of the company are included in the balance sheet at fair value or the balance sheet amount is a reasonable approximation of fair value. 17. Capital management policies and procedures The company's capital management objectives are: - to ensure that the company will be able to continue as a going concern; and - to maximise the income and capital return to its equity shareholders through an appropriate balance of equity capital and debt. The capital of the company consists of equity, comprising issued capital, reserves and retained earnings. The board monitors and reviews the broad structure of the company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained. 18. Fair value hierarchy The company adopted the amendments to FRS 29 `Financial Instruments: Disclosures' effective from 1 January 2009. These amendments require an entity to classify financial assets using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels: - Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities: - Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices); and - Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The financial assets and liabilities measured at fair value in the balance sheet are grouped into the fair value hierarchy at 31 March 2010 as follows: Note Level 1 Level 2 Level 3 Total £000 £000 £000 £000 Fair assets at fair value through profit or loss Quoted equities (a) 123,053 - - 123,053 Quoted bonds (b) 456 - - 456 Total 123,509 - - 123,509 Financial liabilities at fair value through profit or loss Forward foreign (c) - (87) - (87) exchange contracts Total 123,509 (87) - 123,422 a) Quoted equities The fair value of the company's investments in quoted equities has been determined by reference to their quoted bid prices at the reporting date. Quoted equities included in fair value level 1 are actively traded on recognised stock exchanges. b) Quoted bonds The fair value of the company's investment in corporate quoted bonds has been determined by reference to its quoted bid price at the reporting date. c) Forward foreign exchange contracts The fair value of the company's forward foreign exchange contracts has been determined using observable market inputs. There have been no movements between levels in the fair value hierarchy during the year. 19 Explanation of prior year adjustments In previous years, under the terms of `FRS 25 - `Financial Instruments: Disclosure and Presentation', the company's shares were classified as financial liabilities and, accordingly, there was no presentation of `Capital and reserves' within the balance sheet and all movements in the value of shareholders' funds were recorded through the income statement as finance costs. Following the adoption of the amendment to FRS 25, the company's shares are now classified as equity and are presented in this year's accounts together with the relevant reserves within `Capital and reserves'. Movements in the value of shareholders' funds are no longer reflected through the income statement as finance costs. The impact of this change in accounting policy on the current and prior year results and returns is nil, as summarised below. As per note 1(l) these financial statements have incorporated the amended requirements of FRS 25 " Financial Instruments' Disclosure and Presentation". Shareholders may redeem their shares at net asset value (less costs) if the average discount exceeds 7.5% in the twelve weeks prior to the financial year end. As Effect of As previously change in restated reported policy 31 March 31 March £000 2009 2009 £000 £000 Reconciliation of income statement for the year ended 31 March 2009 Losses on investments (48,939) - (48,939) Currency losses (3) - (3) Income 6,287 - 6,287 Investment management (237) - (237) fee VAT recoverable on 202 - 202 investment management fees Other expenses (453) - (453) Net return before (43,143) - (43,143) finance costs and taxation Finance costs: debt (625) - (625) Finance costs: (5,694) 5,694 - shareholders' funds Net return on ordinary (49,462) 5,694 (43,768) activities before taxation Taxation on ordinary (5) - (5) activities Return attributable to (49,467) 5,694 (43,773) ordinary redeemable shareholders Non-current assets Investments at fair 83,512 - 83,512 value through profit or loss Current assets Loans and receivables 1,031 - 1,031 Cash at bank 3,198 - 3,198 Creditors Amounts falling due (10,850) - (10,850) within one year Shareholders' funds 76,891 - 76,891 (prior to Shareholders' redemption liability)/net assets Creditors Distributable capital (74,065) 74,065 - and reserves attributable to shareholders on redemption 2,826 (2,826) - Distributable capital and reserves Revenue reserve 2,826 (2,826) Capital and reserves Called-up ordinary share - 1,019 1,019 capital Capital redemption - 62 62 reserve Special distributable - 111,145 111,145 capital reserve Capital reserve - (38,161) (38,161) Revenue reserve - 2,826 2,826 - 76,891 76,891 Dividends paid during the year ended 31 March 2009 of £5,694,000 have been reclassified in the statement of cash flow from "servicing of finance" to "dividends paid". The movement in the revenue reserve in the reconciliation of the movement in shareholders' funds has been updated to reflect the change in the treatment of dividends. The revenue and capital returns per share as detailed in note 2, remain unaltered for the previous year as the "Finance costs: shareholders' funds" were adjusted for in the calculation of the returns. Such costs were reported and recognised as dividends as detailed in note 6. "Finance costs: shareholders' funds" were allocated to the revenue reserve and therefore there is no effect on the balance sheet. The net assets attributable to shareholders as detailed in note 2, remain unaltered for the previous year. 20. Post balance sheet events On 25 May 2010 the board declared a fourth interim dividend of 1.20p per share. There are no other post balance sheet events. Website At www.securitiestrust.com we maintain a website specifically for shareholders in the trust and their advisers. It includes price and performance statistics, monthly update, webcasts, online versions of the trust's annual and interim reports and information on how to invest.

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