InterimFinancialReport 2010 - Better Capital · Highlights 02 B ETR C AP IL M D IN TE RMF AC L PO 2...

For the period24 November 2009 to 30 September 2010

Interim Financial Report

2010

Better Capital Limited

BETTER CAPITAL LIMITED INTERIM FINANCIAL REPORT 2010

Better Capital Limited (the “Company”) is a limited liability, closed-endedinvestment company, which was incorporated on 24 November 2009 in Guernseywith an unlimited life and registered with the Guernsey Financial ServicesCommission as a Registered Closed-ended Collective Investment Scheme.

The Company has the investment objective of generating attractive total returnsfrom investing (through BECAP Fund LP, the “Better Capital Fund”) in a portfolioof distressed businesses, such returns being expected to be largely fromcapital growth.

Investment policyThe Company’s investment objective is to generate attractive total returns throughan investment policy of investing through Better Capital Fund in a portfolio ofdistressed businesses. Such returns are expected to be largely from capital growth.

Better Capital Fund seeks to invest in a portfolio of businesses which havesignificant operating issues and may have associated financial distress, with aprimary focus on investments in businesses which have significant activities withinthe United Kingdom or Ireland.

Uninvested or surplus capital or assets may be invested on a temporary basis incash or cash equivalents, money market instruments, bonds, commercial paper orother debt obligations with banks or other counterparties having a “single A” orhigher credit rating as determined by any reputable rating agency selected by theGeneral Partner and any “government and public securities” as defined for thepurposes of the FSA Rules.

Cautionary StatementThe Chairman’s Statement and Investment Report (IR) have been prepared solely to provide additionalinformation for shareholders to assess the Company’s strategies and the potential for those strategies tosucceed. These should not be relied on by any other party or for any other purpose.The Chairman’s Statement and IR may include statements that are, or may be deemed to be, ‘‘forward-lookingstatements’’. These forward-looking statements can be identified by the use of forward-looking terminology,including the terms ‘‘believes’’, ‘‘estimates’’, ‘‘anticipates’’, ‘‘expects’’, ‘‘intends’’, ‘‘may’’, ‘‘will’’ or ‘‘should’’ or, ineach case, their negative or other variations or comparable terminology.These forward-looking statements include all matters that are not historical facts. They appear in a number ofplaces throughout this document and include statements regarding the intentions, beliefs or currentexpectations of the Directors and the General Partner of Better Capital Fund, supported by the consultant,concerning, amongst other things, the investment objectives and investment policy, financing strategies,investment performance, results of operations, financial condition, liquidity, prospects, and distribution policyof the Company and the markets in which it invests.By their nature, forward-looking statements involve risks and uncertainties because they relate to events anddepend on circumstances that may or may not occur in the future. Forward-looking statements are notguarantees of future performance. The Company’s actual investment performance, results of operations,financial condition, liquidity, distribution policy and the development of its financing strategies may differmaterially from the impression created by the forward-looking statements contained in this document.Subject to their legal and regulatory obligations, the Directors and the General Partner of Better Capital Fund,supported by the consultant, expressly disclaim any obligations to update or revise any forward-lookingstatement contained herein to reflect any change in expectations with regard thereto or any change in events,conditions or circumstances on which any statement is based.

Table of Contents

BETTER CAPITAL LIMITED INTERIM FINANCIAL REPORT 2010 01

02 Highlights

03 Chairman’s Statement

05 Investment Report of Better Capital Fund

07 Market Summary

08 Statement of Responsibility and Other Information

09 Independent Review Report

10 Condensed Statement of Financial Position

11 Condensed Statement of Comprehensive Income

12 Condensed Statement of Changes in Equity

13 Condensed Statement of Cash Flows

14 Notes to the Condensed Financial Statements

24 General Information

Highlights

02 BETTER CAPITAL LIMITED INTERIM FINANCIAL REPORT 2010

d

d

Key Financials

NAV £208.5mNAV per share 100.8 penceNAV period-to-date return1 1.68%Share price at 30 September 2010 111.25 penceMarket capitalisation £230.0m

1 Based on a weighted average issue price of ordinary sharesand net of share issue costs.

Investments

To date, investment has been made in fouracquisitions. These are:

� February 2010 – Gardner Group Limited(together with its subsidiaries, “Gardner”);£20.0 million commitment of which £18.5minvested as at 30 September 2010.

� April 2010 – The trade and assets of Reader’sDigest Association UK Limited; via a specialpurpose vehicle, Vivat Direct Limited (“Reader’sDigest”)”); £15.0 million commitment of which£13.0 million invested as at 30 September 2010.

� May 2010 – The trade and assets of RD PrecisionLimited and the shares of RD Polska Sp.Zo.o (byGardner UK Limited); funded by Gardner.

� September 2010 – The trade and assets ofcertain subsidiaries of Calyx Holdings Ltdfollowing the purchase of the group’s debt andinvoice discounting facilities (via Allcorp S.a.r.l.,based in Luxembourg) (“Calyx”); £17.0 millioncommitment of which £16.3 million wasinvested as at 30 September 2010 and a further£5.5 million committed and investedsubsequently to the reporting date.

Gardner continues to perform well against the planset at acquisition and exceeded the EBITDA and cashflow targets set for the year ended 31 August 2010.

Trading at Reader’s Digest is now emerging fromthe effects of the administration process and thebusiness recorded its first profit in July.

The RD Precision business is performing very well,recording healthy sales and trading profitably eachmonth since purchase.

The Calyx group suffered some predicted andconsiderable disruption from the insolvencyprocesses preceding the purchase of the trade andassets. However, at this early stage, trading isrecovering steadily, no major relationships were lostand the restructuring programme to reduceheadcount and the number of sites is provingsuccessful.

£210.0 MILLION total capital raised

committed

acquisitions

portfolio

deal flow

portfolio companies trading to, or above, plan

£57.5 MILLION

FOUR

ON TRACK

DIVERSIFIED

STRONG

Chairman’s Statement


The first period of trading for the Company and theBetter Capital Fund has been successful; with threeplatform investments, a move from AIM to the MainMarket and a second fundraising.

Fundraising

In December 2009, the Company successfullyraised capital proceeds of £142.4 million from theinitial listing on AIM. After payment of share issuecosts and retaining £1.0 million for working capitalpurposes, £138.0 million of these proceeds wereinvested into Better Capital Fund.

In June 2010, a further fundraising of £67.6 millioncapital proceeds was completed, bringing the totalcapital raised to £210.0 million. After payment ofshare issue costs, the total invested in Better CapitalFund increased to £203.8 million. In July 2010, theenlarged share capital of the Company wasadmitted to the Official List of the UK ListingAuthority and to trading on the London StockExchange’s Main Market.

Portfolio

The Fund’s portfolio is performing broadly in linewith expectations, which is pleasing.

The rate at which Gardner is securing new customhighlights how attractive unleveraged, well-investedbusinesses are to customers. It is entrenching itselfas a strong player in the UK aerospace marketand deepening relationships with the keyindustry participants.

The management of Reader’s Digest hasundertaken a transformational restructuring of itscost base and the team is now working hard toregain momentum lost during the administrationprocess and to organically increase its readership.The company is looking at a number of ways inwhich it can supplement its product and serviceoffering and best utilise its key strengths; its brandand loyal customer base.

It remains early days for the Calyx turnaround, butits new management team is excited about thepossibilities and clear about the way in which thebusiness needs to be repositioned.

Performance

The Company’s net asset value as at 30 Septemberwas £208.5 million. Net of share issuance costsincurred from fundraising, the NAV return for theperiod under review was a healthy 1.68%, due inmost part to a strong valuation of Gardner.

The net asset value per share was 100.81 pence asat 30 September 2010.

Unique among our peer group of premium listedinvestment companies, the Company’s listing priceon AIM, and subsequently on the London StockExchange Main Market, has maintained a sizeablepremium to NAV. The Board considers that thisrepresents market confidence in the Better Capitalbrand and the key underlying individuals.

To summarise, I am encouraged by this earlypositive performance.

Deal Flow

Better Capital LLP (“Consultant” to the GeneralPartner of Better Capital Fund) is fully resourcedwith a high quality team.

According to the referrer community, the Fund’sreputation in the marketplace is strong and theproven ability to transact complex situations atspeed is a key differentiator.

The volume of new deal opportunities beinginvestigated continues to be consistently high. Thehigh number of introductions is a result ofsignificant time spent meeting members of thereferrer community and building awareness of thebrand. During the period a total of 311introductions were reviewed by the Consultant inconjunction with the General Partner of the BetterCapital Fund.

The Board continues to believe that this deal flowshould mean that the proceeds of the placings canbe substantially invested or committed within theperiod set out in the prospectus.

Marketplace

In spite of the fact that this economic downturn hasbeen the most severe in recent memory, thenumber of corporate insolvencies has remainedsignificantly below the levels seen in previousrecessions.

There is a general lack of willingness of lenders toenforce on security, in part out of a desire to avoidcrystallising losses and also due to a view thatsupporting distressed businesses provides anopportunity for lenders to mitigate their losses. Thismeans that the major banks are not bringing manybusinesses to market; preferring instead to resetcovenants, extend loan terms, take warrants andengage in other forms of restructuring. This hasresulted in lenders sustaining (but often not

Chairman’s Statement continued


investing in) underperforming or otherwiseinsolvent businesses – an unsustainable situation.

However, even with this backdrop to the flow ofrestructuring opportunities in the marketplace, theFund’s ability to source and execute (through avariety of mechanisms) a number of excitingopportunities is seen as very positive.

The near term outlook for the future is promisingfor Better Capital Limited – being an investor whichcan capitalise on corporate underperformance, ofwhich there is an abundance.

Richard CrowderChairman

26 November 2010

Investment Report of Better Capital Fund


The Better Capital Fund has invested in threebusinesses across a diverse range of industrysectors, one of which has made a strategicacquisition.

Gardner

The acquisition of Gardner was completed inFebruary 2010.

Gardner is one of the UK’s largest independentlyowned suppliers of metallic aerospace details andsub-assemblies.

The group has continued to trade ahead of the planset at the time of the acquisition in February 2010and the restructuring of the business continues inline with its plans. For the year ended August 2010the business generated revenues of just over£50.0 million, EBITDA (pre-restructuring costs) inexcess of £3.0 million and had net cash reserves inthe region of £4.0 million.

Demand from customers has remained generallystrong. There have been significant new contractwins which underpin the positive outlook for thecoming years. Performance at the gross marginlevel has exceeded expectations due to acombination of better product mix and costreduction activities. As a result, the businessoutperformed EBITDA and cash flow targetsfor the year ended 31 August 2010. Gardner hasbeen valued on a discounted earnings multiplesbasis due to the combined factors of the length ofownership and strong early financial performance.The Gardner valuation has resulted in therecognition of a £5.1 million unrealised increase invalue as at 30 September 2010 compared to cost.

Better Capital Fund has committed a total of£20.0 million to invest in the Gardner project andto date a total of £18.5 million has been invested,including RD Precision as outlined below.

Originally 100% of the share capital was acquiredby Better Capital Fund via a special purposevehicle, but this has subsequently been reduced to89% following completion of the anticipatedrestructuring process in October 2010.

Gardner Bolt-on: RD Precision

The acquisition of RD Precision was completed inMay 2010. RD Precision was a small bolt-oninvestment for Gardner, forecast to turnoverapproximately £2.0 million per annum.

The business has performed well since theacquisition and the integration into the Gardnergroup is going to plan. Sales and profitability areahead of expectation and the UK business has beenrelocated to a new leased site on the AirbusBroughton campus.

£3.6 million was transferred to Gardner andallocated to finance the acquisition of RD Precisionand to fund its working capital requirements. This£3.6 million is allocated against the £20.0 millioncommitment in the Gardner project. The valuationof RD Precision is included within Gardner.

RD Precision is wholly owned by Gardner.

Reader’s Digest

The Reader’s Digest acquisition was completed inApril 2010.

Reader’s Digest is a well recognised brand and adirect marketing business.

Trading was slow to recover out of administrationdue to the break in marketing activity, but thepromising results of recent campaigns suggest thatthe majority of its customer base has remainedloyal to the brand. The forecast turnover for thecurrent (nine month) period to 31 December is£35.0 million. The new group posted its firstprofitable month in July 2010.

Operational restructuring and investment hassignificantly improved the internal controls andsystems, increasing efficiencies and is having amaterial positive impact on underlying profitability.The working capital profile is returning to normal,following the predictably challenging period postadministration. The challenge now is to increase thebreadth of the product offering and increasereadership – much is being devoted to this. TheReader’s Digest investment has been valued using aprice of recent investment methodology due to therelatively short time period since acquisition.

Better Capital Fund has committed a total of£15.0 million to invest in the Reader’s Digestproject and to date a total of £13.0 million hasbeen invested.

Originally 100% of the share capital was acquiredbut this has subsequently been reduced to 84.5%following completion of the anticipatedrestructuring process in November 2010.

Investment Report of Better Capital Fund continued


Calyx

The Calyx acquisition was completed in September2010.

Calyx is a provider of IT services, softwareand hardware.

The most attractive parts of the group wereacquired from insolvency processes in the UKand Ireland in September 2010. Whilst thetransaction necessitated significant structuralupheaval, the business is now quickly returning topre-administration levels but with the benefit of areduced overhead base and generally improvedmanagement. The operational turnaround isunderway and the latest results are positive.

The Calyx investment has been valued using a priceof recent investment methodology due primarily tothe close proximity of the acquisition date to thereporting date.

Better Capital Fund originally committed a total of£17.0 million of which £16.3 million was investedin the Calyx project as at 30 September 2010.A planned additional investment in working capitalof £5.5 million was made in October 2010,increasing commitment to £22.5 million and totalinvested to £21.8 million.

Calyx is wholly owned by Better Capital Fundvia a special purpose vehicle.

Cash Management

As at the 30 September 2010, Better Capital Fundhad placed a total of £154.4 million of cash ondeposit with eight approved banks with maturitydates ranging from instant access to four months.The Better Capital Fund has in place a strict cashmanagement policy that limits counterparty riskswhilst simultaneously maximising return.

26 November 2010

Portfolio Summary & ReconciliationFund

Fund SPV cost Investee SPV fair value Valuation ValuationProject of investee company other investment percentage investee

Sector cost* company fair value net assets in SPV's** of NAV methodology£m £m £m £m £m

Gardner Aerospace 18.5 18.9 24.0 0.4 24.4 11.71% Earnings

Reader’s Digest Direct Marketing 13.0 13.0 13.0 – 13.0 6.24% Cost

Calyx Information Systems 16.3 15.2 15.2 0.4 15.6 7.48% Cost

47.8 47.1 52.2 0.8 53.0 25.43%

Fund cash on deposit 154.4 74.06%

Fund other net assets 0.2 0.08%

Company fair valueof investment in Fund 207.6 99.58%

Company cash on deposit 1.0 0.48%

Company other net liabilities(including current assets) (0.1) (0.06)%

Company NAV 208.5 100.00%

* Better Capital Fund holds its investments at acquisition cost in accordance with the terms of the Limited Partnership Agreement.** The Company fair values its investment in the Better Capital Fund in accordance with the accounting policies as set out in Note 2.

Market Summary


In the wake of the global economic turmoil causedby the collapse of the credit markets, the M&Aindustry has significantly contracted – and is now inweak recovery.

Fortunately for Better Capital, the lack of availabilityof leverage is actually of benefit, given the relianceupon gearing that a number of its competitorshave. In either prosperous times or those ofrecession, there remain businesses which are poorlyrun and hence require an operational turnaround.

The factor which is affecting the marketplace mostnoticeably is the attitude of the clearing banks. It isextremely common for lenders to refrain fromcrystallising losses, even though the worth of theunderlying businesses is far below the level of thedebt. The longer this situation remains, the greaterthe need for investment in those companies.

A rise in interest rates or a change of attitude in thebanking community is likely to prompt a wave ofinvestment opportunities.

Better Capital is now a strong brand in its marketwith a full set of resources to maximise the returnfrom the turnaround arena. We have considerableconfidence that the Better Capital Fund can findfurther rewarding investments over the monthsahead.

Jon MoultonDirector

BECAP GP Limited

26 November 2010

Statement of Responsibility and Other Information


Responsibility Statement

The Directors confirm that to the best of theirknowledge:

• the condensed set of financial statements hasbeen prepared in accordance with IAS 34‘Interim Financial Reporting’ as adopted by theEuropean Union; and

• the Interim Financial Report meets therequirements of an interim management report(as defined below), and includes a fair review ofthe information required by:

a) DTR 4.2.7R of the Disclosure andTransparency Rules, being an indication ofimportant events that have occurredduring the first period of the financial year;and their impact on the condensed set offinancial statements; and a description ofthe principal risks and uncertainties of theremaining six months of the year; and

b) DTR 4.2.8R of the Disclosure andTransparency Rules, being related partytransactions that have taken place in thefirst period of the current financial year andthat have materially affected the financialposition or performance of the entityduring that period; and any changes inthe related party transactions described inthe audited historical information thatcould do so.

Major Shareholders

As at 1 November 2010, insofar as is known to theCompany, the following persons were interested,directly or indirectly, in 5% or more of the OrdinaryShares in issue:

ShareholdingShareholder (Ordinary Shares) % Holding

Ruffer LLP 60,836,230 29.42Scottish WidowsInvestment Management 20,211,495 9.77

Blackrock InvestmentManagement 19,665,070 9.51

Jon Moulton 19,523,809 9.44

Aviva Investors 11,900,862 5.76

Troy Asset Management 10,593,232 5.12

Shareholdings of the DirectorsShareholding

Director (Ordinary Shares) % Holding

Richard Crowder 100,000* 0.05%

Richard Battey 30,000 0.01%

Philip Bowman 250,000 0.12%

* Represents a shareholding of 50,000 shares each by RichardCrowder and his wife.

General Partner’s Share and Carried Interest

In the period under review, the Better CapitalFund has paid fees to its General Partner of£2.1 million, under the terms of the limitedPartnership Agreement, in respect of theGeneral Partner’s Share. This has beenaccounted for in calculating the fair value of theinvestment by the Company in the Better CapitalFund. No amounts are yet liable to be paid inrespect of carried interest.

Interim management report

• Important events of the interim period

The important events of the interim period thathave occurred during the period and the keyfactors influencing the financial statements are allset out in this report, comprising the Chairman’sStatement, Fund Portfolio and Financial Statementsections.

• Principal risks and uncertainty

For the remaining six months of the financialperiod, the Company’s principal risk relates to thefinancial performance of the Better Capital Fund’sportfolio investments and the ability of the GeneralPartner to source and invest in turnaroundopportunities which can increase in value.

The Directors of the Company are listed on page 24and have been directors throughout the period.

By order of the Board

Richard BatteyDirector

26 November 2010

Independent Review Report to Better Capital Limited


Introduction

We have been engaged by the Company toreview the condensed set of financial statementsin the interim financial report for the period ended30 September 2010 which comprises the statementof financial position, statement of comprehensiveincome, statement of changes in equity, statementof cash flows and related notes. We have read theother information contained in the interim financialreport and considered whether it contains anyapparent misstatements or material inconsistencieswith the information in the condensed set offinancial statements.

Directors’ responsibilities

The interim financial report is the responsibility of,and has been approved by, the Directors. TheDirectors are responsible for preparing the interimfinancial report in accordance with the Disclosureand Transparency Rules of the United Kingdom’sFinancial Services Authority.

As disclosed in note 2, the annual financialstatements of the Company are prepared inaccordance with IFRSs as adopted by the EuropeanUnion. The condensed set of financial statementsincluded in this interim financial report have beenprepared in accordance with InternationalAccounting Standard 34, ‘Interim FinancialReporting’ as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company aconclusion on the condensed set of financialstatements in the interim financial report based onour review. This report, including the conclusion,has been prepared for, and only for, the Companyfor the purpose of the Disclosure and TransparencyRules of the Financial Services Authority and for noother purpose. We do not in producing this reportaccept or assume responsibility for any otherperson to whom this report is shown or into whosehands it may come save where expressly agreed byour prior consent in writing.

Scope of review

We conducted our review in accordance withInternational Standard on Review Engagements (UKand Ireland) 2410, ‘Review of Interim FinancialInformation Performed by the Independent Auditorof the Entity’ issued by the Auditing Practices Boardfor use in the United Kingdom. A review of interimfinancial information consists of making enquiries,primarily of persons responsible for financial andaccounting matters, and applying analytical andother review procedures. A review is substantiallyless in scope than an audit conducted inaccordance with International Standards onAuditing (UK and Ireland) and consequently doesnot enable us to obtain assurance that we wouldbecome aware of all significant matters that mightbe identified in an audit. Accordingly, we do notexpress an audit opinion.

Conclusion

Based on our review, nothing has come to ourattention that causes us to believe that thecondensed set of financial statements in the interimfinancial report for the period 24 November 2009to 30 September 2010 is not prepared, in allmaterial respects, in accordance with InternationalAccounting Standard 34 as adopted by theEuropean Union and the Disclosure andTransparency Rules of the United Kingdom’sFinancial Services Authority.

BDO LimitedChartered AccountantsPlace du Pré, Rue du Pré, St Peter Port, Guernsey

26 November 2010

Notes £

ASSETS:Non-current assetsInvestment in Limited Partnership 4 207,572,536

Total non-current assets 207,572,536

Current assetsTrade and other receivables 8,403Cash and cash equivalents 1,005,766

Total current assets 1,014,169

TOTAL ASSETS 208,586,705

Current liabilitiesTrade and other payables (129,258)

Total current liabilities (129,258)

TOTAL LIABILITIES (129,258)

NET ASSETS 208,457,447

EQUITYShare capital 6 —Share premium 6 205,005,931Retained earnings 7 3,451,516

TOTAL EQUITY 208,457,447

Number of Ordinary Shares in issue at period end 6 206,780,952

Net asset value per Ordinary Share (pence) 9 100.81

The Interim Financial statements were approved and authorised for issue by the Board of Directors on26 November 2010 and signed on their behalf by:

Mark Huntley Richard BatteyDirector Director

Condensed Statement of Financial PositionAs at 30 September 2010


The accompanying notes on pages 14 to 23 are an integral part of this Interim Financial Report.

Condensed Statement of Comprehensive IncomeFor the period 24 November 2009 to 30 September 2010



Notes £

IncomeInterest income 2,731Investment income 250,000Change in fair value on financial assets at fair value through profit or loss 4 3,772,536

Total income 4,025,267

ExpensesDirectors’ fees and expenses 8 115,305Administration fees 5 122,272Audit fees 33,092Legal and professional fees 5 58,530Migration fees 197,576Insurance premiums 13,303Registrar fees 5 11,314Other fees and expenses 22,359

Total expenses 573,751

Profit for the financial period 3,451,516

Other comprehensive income –Total comprehensive income for the period 3,451,516

Basic and diluted earnings per share (pence) 9 2.27

All activities derive from continuing operations.

All income is attributable to the holders of the Ordinary Shares of the Company.

Share Share Retained Totalcapital premium earnings Equity

Notes £ £ £ £

As at 24 November 2009 — — — —Profit for the financial period 7 — — 3,451,516 3,451,516Other comprehensive income — — — —

Total comprehensive incomefor the period — — 3,451,516 3,451,516

Transactions with ownersShares issued 6 — 210,000,000 — 210,000,000Share issue costs 6 — (4,994,069) — (4,994,069)

Total transactions with owners — 205,005,931 — 205,005,931

As at 30 September 2010 — 205,005,931 3,451,516 208,457,447

Condensed Statement of Changes in EquityFor the period 24 November 2009 to 30 September 2010



Condensed Statement of Cash FlowsFor the period 24 November 2009 to 30 September 2010



£

Cash flows from operating activitiesProfit for the financial period 3,451,516Adjustments for:Change in fair value on financial assets at fair value through profit or loss (3,772,536)Increase in trade receivables (8,403)Increase in trade payables 129,258

Net cash used in operating activities (200,165)

Cash flows from investing activitiesPurchase of investment in Limited Partnership (203,800,000)

Net cash used in investing activities (203,800,000)

Cash flow from financing activitiesProceeds from issue of shares 210,000,000Issue costs paid (4,994,069)

Net cash from financing activities 205,005,931

Net increase in cash and cash equivalents during the period 1,005,766Cash and cash equivalents at the beginning of the period —

Cash and cash equivalents at the end of the period 1,005,766

1. General information

Better Capital Limited (the “Company”) was incorporated in Guernsey on 24 November 2009 as a closed-ended investment company with an unlimited life and registration number 51194. The Company isregistered with the Guernsey Financial Services Commission as a Registered Closed-ended CollectiveInvestment Scheme. The registered office of the Company is Heritage Hall, PO Box 225, Le Marchant Street,St Peter Port, Guernsey, GY1 4HY.

The investment objective of the Company is to generate total attractive returns through an investmentpolicy of investing (through Better Capital Fund) in a portfolio of distressed businesses, such returns beingexpected through capital growth.

Better Capital Fund is managed by its general partner, BECAP GP LP (the “General Partner”), which is in turnmanaged by its general partner BECAP GP Limited. Such arrangements are governed under the respectiveLimited Partnership Agreements, as amended.

The Company was initially admitted to list on the London Stock Exchange AIM market on 17 December2009, raising £142.4 million gross capital proceeds by way of a placing of shares. On 28 June 2010 theCompany raised an additional £67.6 million gross capital proceeds from a firm placing and placing andopen offer. On 8 July 2010 the Company was admitted to the Official List of the Financial Services Authorityand the enlarged share capital of the Company was migrated to the London Stock Exchange Main Market.

2. Accounting policies

Basis of preparation

The annual financial statements of the Company will be prepared in accordance with InternationalAccounting Standards, International Financial Reporting Standards and Interpretations adopted for use inthe European Union (collectively Adopted IFRS’s).

This Interim Financial Report has been prepared in accordance with International Accounting Standard34 – Interim Financial Reporting. Consequently, these financial statements do not include all of theinformation required for full financial statements. These condensed financial statements should be read inconjunction with the full audited historical information of the Company for the period from 24 November2009 to 28 February 2010 (the “historical information”)

In consideration of adopting IAS 34 for this Interim Financial Report, the Directors have concluded that thehistorical financial information provides a detailed level of disclosure, which is independently audited,available publicly and commensurate with the level of disclosure anticipated for the first annual financialstatements. Accordingly, the Directors have taken the view that the required disclosure assumptions underIAS 34 have been adequately upheld under the proviso to retain disclosure of full accounting policies.

The financial statements were prepared in accordance with the provisions of the Companies (Guernsey)Law, 2008, as amended. As this is the Company’s first reporting period, no comparative figures have beendisclosed.

The Company does not operate in an industry where significant or cyclical variations as a result of seasonalactivity are experienced during the financial year.

The principal accounting policies adopted are set out below.

Standards, amendments and interpretations to published standards not yet effective

At the date of authorisation of these financial statements, the following standards and interpretations, whichhave not been applied, were in issue but not yet effective.

Revised, amended and new standards

• IFRS 2: Share-based Payment – amendment relating to group cash-settled share-based paymenttransactions – for accounting periods beginning on or after 1 January 2010

• IFRS 3: Business Combinations – amendments resulting from May 2010 Annual Improvements to IFRS –for accounting periods beginning on or after 1 July 2010*

Notes to the Condensed Financial StatementsFor the period ended 30 September 2010


Notes to the Condensed Financial Statements continuedFor the period ended 30 September 2010


2. Accounting policies (continued)

• IFRS 5: Non Current Assets held for Sale and Discontinued Operations – amendments resulting fromApril 2009 annual improvement to IFRS – for accounting periods commencing on or after 1 January2010

• IFRS 7: Financial Instruments: Disclosures – amendments enhancing disclosures about transfers offinancial assets – for accounting periods beginning on or after 1 July 2011*

• IFRS 8: Operating Segments – amendments resulting from April 2009 annual improvement toIFRS – for accounting periods commencing on or after 1 January 2010

• IFRS 9: Financial Instruments – to replace IAS 39 Financial Instruments: Recognition andMeasurement – for accounting periods commencing on or after 1 January 2013*

• IAS 1: Presentation of Financial Statements – amendments resulting from April 2009 annualimprovement to IFRS – for accounting periods commencing on or after 1 January 2010

• IAS 1: Presentation of Financial Statements – amendments resulting from May 2010 annualimprovement to IFRS – for accounting periods commencing on or after 1 January 2011*

• IAS 7: Statement of Cash Flows amendment resulting from April 2009 annual improvements toIFRS – for accounting periods commencing on or after 1 January 2010

• IAS 17: Leases – amendment resulting from April 2009 – annual improvements to IFRS – for accountingperiods commencing on or after 1 January 2010

• IAS 24: Related Party Disclosures – amendment to simplify related party disclosures – for accountingperiods commencing on or after 1 January 2011 *

• IAS 27: Consolidated and Separate Financial Statements – amendments resulting from May 2010annual improvement to IFRS – for accounting periods commencing on or after 1 July 2010*

• IAS 32: Financial Instruments: Presentation – amendments relating to classification of rights issues – foraccounting periods commencing on or after 1 February 2010

• IAS 34: Interim Financial Reporting – amendments resulting from May 2010 annual improvement toIFRS – for accounting periods commencing on or after 1 January 2011*

• IAS 36: Intangible Assets – amendment resulting from April 2009 – annual improvements toIFRS – effective on or after 1 January 2010

• IAS 39: Financial Instruments: Recognition and Measurement amendments resulting from April 2009annual improvements to IFRS – for accounting periods commencing on or after 1 January 2010

• IFRIC 13: Customer Loyalty Programmes – amendments resulting from May 2010 annual improvementto IFRS – for accounting periods commencing on or after 1 January 2011*

• IFRIC 14: interpretation of IAS 19: Employee Benefits – for accounting periods commencing on or after1 January 2011

• IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments – for accounting periodscommencing on or after 1 July 2010*

* still to be endorsed by the EU.

The Directors anticipate that the adoption of these standards and interpretations in future periods will nothave a material impact on the financial statements of the Company.


Foreign currencies

The functional currency of the Company is Pounds Sterling reflecting the primary economic environment inwhich the Company operates.

The presentation currency for financial reporting purposes is Pounds Sterling.

Financial instruments

Financial assets and financial liabilities are recognised in the Company statement of financial position whenthe Company becomes a party to the contractual provisions of the instrument. Financial assets and financialliabilities are only offset and the net amount reported in the statement of financial position and statement ofcomprehensive income when there is a currently enforceable legal right to offset the recognised amountsand the Company intends to settle on a net basis or realise the asset and liability simultaneously.

Financial assets

The classification of financial assets at initial recognition depends on the purpose for which the financialasset was acquired and its characteristics.

All financial assets are initially recognised at fair value. All purchases of financial assets are recorded at tradedate, being the date on which the Company became party to the contractual requirements of the financialasset.

The Company has not classified any of its financial assets as Held to Maturity or as Available for Sale.

The Company’s financial assets comprise loans and receivables and investments held at fair value throughprofit or loss.

a) Loans and receivables

These assets are non-derivative financial assets with fixed or determinable payments that are notquoted in an active market. They principally comprise trade and other receivables and cash and cashequivalents. They are initially recognised at fair value plus transaction costs that are directly attributableto the acquisition, and subsequently carried at amortised cost using the effective interest rate method,less provisions for impairment. The effect of discounting on these financial instruments is notconsidered to be material.

b) Investments at fair value through profit or loss

i. Classification

The Company classifies its investment in Better Capital Fund as a financial asset at fair valuethrough profit or loss. The financial asset is designated by the Company at fair value through profitor loss at inception.

ii. Recognition

Purchases and sales of investments are recognised on the trade date – the date on which theCompany commits to purchase or sell the investment.

iii. Measurement

“International Accounting Standard 39, Financial Instruments: Recognition and Measurement”requires investments treated as “financial assets at fair value through profit or loss” to be held atfair value. Fair value is defined as the amount for which an asset could be exchanged betweenknowledgeable willing parties in an arms length transaction.

The investment in Better Capital Fund is initially recognised at cost, being the fair value ofconsideration given.






The Directors base the fair value of the investment in Better Capital Fund on information receivedfrom the General Partner. The General Partner’s assessment of fair value of investments held byBetter Capital Fund, through Special Purpose Vehicles, is determined in accordance with theInternational Private Equity and Venture Capital (“IPEV”) Valuation Guidelines. It is the opinion ofthe General Partner, that the IPEV valuation methodology used in deriving a fair value is notmaterially different from the fair value requirements of IAS 39.

iv. Fair value estimation

A summary of the more relevant aspects of IPEV valuations is set out below:

Marketable (Listed) Securities – Where an active market exists for the security, the value is stated atthe bid price on the last trading day in the period. Marketability discounts should generally not beapplied unless there is some contractual, governmental or other legally enforceable restrictionpreventing realisation at the reporting date.

Unlisted Investments – are carried at such fair value as the General Partner considers appropriategiven the performance of each investee company and after taking account of the effect of dilution,the exercise of ratchets, options or other incentive schemes. Methodologies used in arriving at thefair value include prices of recent investment, earnings multiples, net assets, discounted cash flowsanalysis and industry valuation benchmarks.

Notwithstanding the above, the variety of valuation basis adopted and quality of managementinformation provided by the underlying Investee Company means there are inherent difficulties indetermining the value of these investments. Amounts realised on the sale of these investments willdiffer from the values reflected in this financial information and the difference may be significant.

c) Derecognition of financial assets

A financial asset (in whole or in part) is derecognised either:

• when the Company has transferred substantially all the risks and rewards of ownership; or

• when it has neither transferred nor retained substantially all the risks and rewards and when it nolonger has control over the assets or a portion of the asset; or

• when the contractual right to receive cash flow has expired.

d) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highlyliquid investments with an original maturity of three months or less that are readily convertible to aknown amount of cash and are subject to an insignificant risk of changes in value.

Financial liabilities

The classification of financial liabilities at initial recognition depends on the purpose for which the financialliability was issued and its characteristics.

All financial liabilities are initially recognised at fair value net of transactions costs incurred. All purchases offinancial liabilities are recorded on trade date, being the date on which the Company becomes party to thecontractual requirements of the financial liability. Unless otherwise indicated the carrying amounts of theCompany’s financial liabilities approximate to their fair values.

The Company’s financial liabilities consist of any financial liability measured at amortised cost.


a) Financial liabilities measured at amortised cost

These include trade payables and other short-term monetary liabilities, which are initially recognised atfair value and subsequently carried at amortised cost using the effective interest rate method.

b) Derecognition of financial liabilities

A financial liability (in whole or in part) is derecognised when the Company has extinguished itscontractual obligations, it expires or is cancelled. Any gain or loss on derecognition is taken to thestatement of comprehensive income.

Capital

Financial instruments issued by the Company are treated as equity if the holder has only a residual interestin the assets of the Company after the deduction of all liabilities. The Company’s Ordinary Shares areclassified as equity instruments.

The Company considers its capital to comprise its Ordinary Share capital, share premium and retainedearnings. There has been no change in what the Company considers to be capital since incorporation. TheCompany is not subject to any externally imposed capital requirements.

Equity instruments

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction fromproceeds.

Incremental costs include those incurred in connection with the placing and admission which include feespayable under the Placing Agreement, legal costs and any other applicable expenses.

Income

Interest income is recognised on a time apportioned basis using the effective interest method.

Investment income

Investment income is recognised on an accruals basis.

Other expenses

Other expenses are accounted for on an accruals basis.

Dividends

Dividends paid during the period will be disclosed in equity. Final dividends proposed by the Board andapproved by the Shareholders prior to the period end will be disclosed as a liability. Dividends proposedbut not approved will be disclosed in the notes.

Going concern

After making appropriate enquiries, the Directors have a reasonable expectation that the Company, and inturn Better Capital Fund, have adequate resources to continue in operational existence for the foreseeablefuture and do not consider there to be any threat to the going concern status of the Company. For thisreason, they continue to adopt the going concern basis in preparing the financial information.

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chiefoperating decision-maker. The chief operating decision-maker, who is responsible for allocating resourcesand assessing performance of the operating segments, has been identified as the Board of Directors, as awhole. The key measure of performance used by the Board to assess the Company’s performance and toallocate resources is the total return on the Company’s net asset value, as calculated under IFRS, andtherefore no reconciliation is required between the measure of profit or loss used by the Board and thatcontained in the financial information.






For management purposes, the Company is organised into one main operating segment, which invests inone limited partnership.

All of the Company’s income is from within Guernsey.

All of the Company’s non-current assets are located in Guernsey, via Better Capital Fund.

Due to the Company’s nature it has no customers.

Critical accounting judgment and estimation uncertainty

Use of estimates and judgements

The preparation of financial information requires management to make judgements, estimates andassumptions that affect the application of accounting policies and the reported amounts of assets, liabilities,income and expenses.

Estimates and judgements are continually evaluated and are based on historical experience and otherfactors, including expectations of future events that are believed to be reasonable under the circumstances.

The areas involving a high degree of judgement or complexity or areas where assumptions and estimatesare significant to the financial information are disclosed below. Revisions to accounting estimates arerecognised in the period in which the estimate is revised and in any future periods affected.

The resulting accounting estimates will, by definition, seldom equal the related actual results.

Investment in Better Capital Fund

The value of the Company’s investment in Better Capital Fund is based on the value of the Company’slimited partner capital and loan accounts within Better Capital Fund, which itself is based on the value ofthe underlying investee companies as determined by the General Partner. Any fluctuation in the value of theunderlying investee companies will directly impact on the value of the Company’s investment in BetterCapital Fund.

When valuing the underlying investee companies, the General Partner of Better Capital Fund reviewsinformation provided by the underlying investee companies and other business partners and applies widelyrecognised valuation methods such as time of lasting finance, multiple analysis, discounted cash flowmethod and third party valuation to estimate a fair value as at the date of the statement of financial position.The variety of valuation bases adopted and quality of management information provided by the underlyinginvestee companies and the lack of liquid markets for the investments mean that there are inherentdifficulties in determining the fair value of these investments that cannot be eliminated. Therefore theamounts realised on the sale of investments will differ from the fair values reflected in this financialinformation and the differences may be significant.

3. Taxation

The Company is exempt from taxation in Guernsey and is charged an annual exemption fee of £600.

4. Investment in Limited PartnershipLoans Capital Total

£ £ £

CostBrought forward — — —Additions during the period 203,779,620 20,380 203,800,000

Carried forward 203,779,620 20,380 203,800,000

Fair value adjustment through profit or lossBrought forward — — —Fair value movement during period 3,772,536 — 3,772,536

Carried forward 3,772,536 — 3,772,536

Fair value as at 30 September 2010 207,552,156 20,380 207,572,536

The movement in fair value is derived from the fair value uplift in Gardner and the net of income andexpenses of Better Capital Fund and its related special purpose vehicles.

The outstanding loans do not carry interest. The loans will be repaid by way of distributions from BetterCapital Fund. The Company is not entitled to demand repayment of the outstanding loans. Distributionsreceived from Better Capital Fund in the period amounted to £250,000, which have been allocated asincome based on discretionary allocation powers of the General Partner of Better Capital Fund as set out inthe Limited Partnership Agreement.

In the accounts of the Company the fair value of the loans will be increased or reduced to reflect the fairvalue of the Company’s attributable valuation of net assets within the Better Capital Fund.

The Company pursues its investment objective and policy by investing in Better Capital Fund.

Better Capital Fund seeks to invest in a portfolio of companies which have significant operating issues andmay have associated financial distress, with a primary focus on investments in companies which havesignificant activities within the United Kingdom and Ireland.

5. Corporate broker, administration and registrar fees

Corporate broker fees

On 15 April 2010 the Company entered into an engagement letter with Numis Securities Limited (“Numis”)which defined the terms of the new corporate broker engagement and constituted the termination of theexisting nominated adviser and broker agreement (“Nomad Agreement”), dated 14 December 2009,pursuant to which, Numis had agreed to act as the Company’s Nominated Adviser and Broker fromadmission to trading on AIM for the purpose of Compliance with the AIM Rules. The new Corporate Brokerarrangement became effective upon the admission to the London Stock Exchange Main Market on 8 July2010. Pursuant to the engagement letter Numis would act as corporate broker, rendering brokerageservices in relation to the migration of the Company’s listed shares from AIM to the London Stock ExchangeMain Market and the provision of ongoing support to the Company. In exchange for these services theCompany has agreed to pay a fee of £35,000 for the first 12 months of the engagement to Numis.

Under the terms of the engagement letter the Company has agreed to indemnify and hold harmless Numis,including defined indemnified parties, from and against any losses which Numis and the indemnifiedparties may suffer or incur and any claims made as defined in the engagement letter.

During the period, the Company incurred fees of £42,459 in respect of the original Nomad agreement, and£7,972 in respect of the Corporate Broker fee.





5. Corporate broker, administration and registrar fees (continued)

Administration fees

The Administrator has been appointed to provide day to day administration and secretarial services to theCompany as set out in the Administration Agreement. In consideration for its services, and in addition to aset up fee of £30,000 plus disbursements, the Administrator receives an annual fee of 0.1 per cent. of thenet asset value (subject to a minimum of £75,000 and a maximum of £175,000), for administration,company secretarial and corporate governance services. The Company shall also reimburse theAdministrator for incurred out of pocket expenses. The Administration Agreement is terminable by eitherparty giving not less than 90 days’ notice in writing and in certain other circumstances, including materialbreach of the terms of the agreement by either party.

During the period, the Company incurred administration fees of £122,272, of which £43,750 remainedoutstanding as at the period end.

Registrar fees

The Company is party to an Offshore Registrar Agreement with Capita Registrars (Guernsey) Limited (the”Registrar”) dated 14 December 2009, pursuant to which the Registrar will provide registration services tothe Company which will entail, among other things, the Registrar having responsibility for the transfer ofshares, maintenance of the share register and acting as transfer and paying agent. For the provision of suchservices, the Registrar is entitled to receive a basic fee based on the number of shareholder accountssubject to an annual minimum charge of £6,500. In addition to this basic fee, the Registrar is entitled toadditional fees for specific actions.

During the period, the Company incurred fees of £11,314 in respect of this agreement, of which £3,156remained outstanding as at the period end.

6. Share capital£

Authorised:Unlimited Ordinary Shares of no par value —

Issued and fully paid:No. £

Unlimited Ordinary Shares of no par valueOpening shares — —Issued 24 November 2009 1 —Issued 17 December 2009 142,399,999 —Issued 24 June 2010 64,380,952 —

Shares as at 30 September 2010 206,780,952 —

£

Share premiumOpening share premium —Issued 24 November 2009 1Issued 17 December 2009 142,399,999Issued 28 June 2010 67,600,000Share issue costs (4,994,069)

Share premium as at 30 September 2010 205,005,931

On incorporation one Ordinary Share of no par value was issued for a consideration of £1. Following theCompany’s listing on the London Stock Exchange AIM market on 17 December 2009, a total of 142,399,999additional Ordinary Shares were issued with no par value at 100 pence per share. The Company incurredimmediate listing expenses comprising of commissions, professional adviser fees and disbursements of£3,442,928. These costs have been taken to the share premium account.

6. Share capital (continued)

On 28 June 2010 the Company issued a total of 64,380,952 new additional ordinary shares with no parvalue at 105 pence per share, raising an additional £67,600,000 gross capital proceeds, under firm placingand placing and open offer. The Company incurred additional fundraising expenses comprisingpredominately of commissions, regulatory fees, professional adviser fees and disbursements totalling£1,551,141. These costs have been taken to the share premium account.

The Company has one class of Ordinary Shares which carry no right to fixed income.

Members of Better Capital LLP, the appointed Consultant to BECAP GP Limited, which acts as generalpartner to BECAP GP LP, which in turn acts as General Partner to Better Capital Fund, hold investments inthe Company in accordance with the terms of the Prospectus. At the period end, those members held thefollowing proportions of Ordinary Shares:

Number of Percentage ofShares Share Capital

Jon Moulton 19,523,809 9.4 per cent.Mark Aldridge 150,000 0.1 per cent.Nick Sanders* 200,000 0.1 per cent.

*Shareholding is held through a discretionary trust in favour of Nick Sanders’ children

7. Retained earnings

Retained earnings£

As at 24 November 2009 —Profit for the financial period 3,451,516

As at 30 September 2010 3,451,516

Any surplus/deficit arising from the net profit/loss for that period is taken to the revenue reserve which maybe utilised for payment of dividends.

8. Related party transactions

Parties are considered to be related if one party has the ability to control the other party or exercisesignificant influence over the party in making financial or operational decisions. The Directors areresponsible for overall control, management and supervision of the Company’s affairs and are responsiblefor the overall implementation of the investment objective and policy of the Company.

The Company has four non-executive Directors, all independent of the Administrator other than Mr MarkHuntley, who is also the managing director of Heritage International Fund Managers Limited. Mr Huntley isalso a director of BECAP GP Limited, the general partner of the General Partner.

Directors’ fees for the period to 30 September 2010 amounted to £115,305, of which £33,750 wasoutstanding at the period end. Annual remuneration terms for each Director are summarised as follows: theChairman receives £40,000, the chairman of the audit committee receives £35,000 and other non-executivedirectors receive £30,000 each.





9. Earnings per share and net asset value per share

Earnings per share£

Profit for the period 3,451,516Weighted average number of shares in issue 152,187,527

EPS (pence) 2.27

The earnings per share is based on the profit for the period and on the weighted average number of sharesin issue for the period.

The Company does not have any instruments which could potentially dilute basic earnings per share in thefuture.

Net asset value per share

The net asset value per share for the Company is arrived at by dividing the total net assets of the Companyat the period end by the number of ordinary shares in issue at the period end.

10. Contingent liabilities

As at the date of the Interim Financial Report there were no contingent liabilities to report.

11. Events after the period end

There are no material post period events.

General Information


Board of DirectorsRichard Crowder (Chairman)Richard BatteyMark HuntleyPhilip Bowman

*All of the above are non-executive, including theChairman, and were appointed on 24 November2009

Registered officeHeritage HallPO Box 225Le Marchant StreetSt Peter PortGuernseyGY1 4HY

Guernsey administrator and company secretaryto the CompanyHeritage International Fund Managers LimitedHeritage HallPO Box 225Le Marchant StreetSt Peter PortGuernseyGY1 4HY

Websitewww.bettercapital.gg

Reporting accountants and tax adviserBDO LLP55 Baker StreetLondonW1U 7EU

RegistrarCapita Registrars (Guernsey) LimitedLongue Hougue HouseSt SampsonGuernseyGY2 4JN

Principal bankersThe Royal Bank of Scotland International LimitedRoyal Bank Place1 Glategny EsplanadeSt Peter PortGuernseyGY1 4BQ

English solicitors to the CompanyDLA Piper UK LLP3 Noble StreetLondonEC2V 7EE

Corporate broker and financial adviserNumis Securities Limited10 Paternoster SquareLondonEC4M 7LT

Independent auditorsBDO LimitedPO Box 180Place du PréRue du PréSt Peter PortGuernseyGY1 3LL

Guernsey advocates to the CompanyCarey OlsenPO Box 98Carey HouseLes BanquesSt Peter PortGuernseyGY1 4BZ

Public Relations AdviserPowerscourt2-5 St John's SquareLondonEC1M 4DE

Registered officeHeritage HallPO Box 225

Le Marchant StreetSt Peter Port

Guernsey GY1 4HY

Company Number: 51194

InterimFinancialReport 2010 - Better Capital · Highlights 02 B ETR C AP IL M D IN TE RMF AC L PO 2...

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Transcript of InterimFinancialReport 2010 - Better Capital · Highlights 02 B ETR C AP IL M D IN TE RMF AC L PO 2...