Chairman's and Chief Executive's Review

Introduction

We are pleased to announce the consolidated financial results for Livermore Investments Group Limited ("Livermore" or "the Company") and its subsidiaries (together "the Group") for the year ended 31 December 2011. 

The year-end NAV was USD 0.57 per share (2010 NAV: USD 0.50 per share). Net profit for the year was USD 5.4m (2010 Net Profit: USD 8.5m). The portfolio remained well diversified across sectors and geographies with increased exposure to fixed income securities and senior secured loans as compared to 2010.

During the year, the Group performed well generating an increase of 14% on a NAV per share basis.  The positive performance is attributed largely to the income from the US credit portfolio partly offset by certain write-downs on legacy private equity investments. Interest and dividend income from the financial portfolio totalled USD 18.9m.

Wyler Park, our investment property in Bern, Switzerland performed well, generating over CHF 5.4m in net rent during the year.  All of the 39 apartments and commercial spaces are fully rented.

There were no significant developments in the private equity portfolio during the year.

Financial Review

The NAV of the Group at 31 December 2011 was USD 145.4m.  On a per share basis, NAV increased by 14%. Net profit during the year was USD 5.4m, which represents earnings per share of USD 0.02.

Administrative expenses excluding provisions for legal and other matters were USD 5.3m (2010: USD 3.2m), representing 3.7% of the average NAV.  Administrative costs include USD 0.794m one-time expense related to legal expenses in connection with the income received from the settlement of the Uniplay litigation (note 30). 

The overall change in the NAV is primarily attributed to the following:

Dividend & Buyback

Given the discount between the market price and the NAV, the Board recommends continuing the share buyback as the most efficient means to generate value for shareholders.  No dividend was declared for the year ended 31 December 2011.

During 2011, the Company purchased 27,497,119 shares to be held in treasury for a total cost of USD 7.125m.  The total number of shares held in treasury at 31 December 2011 was 49,332,883.  Following the year end the Company purchased 24,589,824 additional shares to be held in treasury for a total cost of USD 5.926m.  The total number of shares held in treasury at the date of this report is 73,922,707.

The Chairman and CEO would like to thank the investment team for their performance.

Richard B Rosenberg                                                                                        Noam Lanir

Chairman                                                                                                           Chief Executive Officer

25 May 2012

Review of Activities

Introduction and Overview

2011 was a challenging year with the European debt crisis taking a turn for the worse and the US losing its coveted AAA rating from S&P. The earthquake in Japan and tsunami in South East Asia took further steam out of the global economy.

Despite the significant challenges, Livermore generated a NAV/share increase of 14%. Management took advantage of the continued dislocation in market prices and availability of cheap leverage and increased exposure to the US senior secured loan market which continued to exhibit very robust performance.  

The year-end NAV was USD 0.57 per share (2010 NAV: USD 0.50 per share). The portfolio remained well diversified across sectors and geographies with increased exposure to US senior secured loans as compared to 2010.

In 2011, the Group generated interest and dividend income of USD 18.9m and investment property income of USD 5.7m. The Group's results (net income of USD 5.4m) relate mainly to gains and interest and dividend income from fixed income securities, currency gains from the non-USD portfolio, and income and valuation gains on its Wyler Park property in Switzerland.  At the same time the results were negatively affected by impairments related to certain legacy investments and reclassification of certain losses from reserves to income statement. Administrative expenses excluding provisions amounted to USD 5.3m. Finance costs were USD 5.3m, of which USD 3.8m relates to the loan against the Wyler Park property.

The Group does not have an external management company structure and thus does not bear the burden of external management and performance fees.  Further, the interests of Livermore's management are aligned with those of its shareholders as management members have a large ownership interest in Livermore shares.

Considering the strong liquidity position of Livermore, together with the robustness of its investment portfolio and the alignment of management's interest with those of its shareholders, management believes that the Group is well positioned to benefit from current market conditions.    

Global Investment Environment

In the first quarter of the year, economic growth continued worldwide although there were considerable regional differences. Emerging economies recorded the highest growth rates. In the euro area, particularly Germany, the recovery was supported by strong export and investment activity. In the US, by contrast, high energy prices weighed on sentiment and held back growth. In Japan, there was a significant decline in GDP as a result of the earthquake.

In the second quarter, global economic recovery lost steam due to the delayed impact of energy price increases in the first quarter and the major catastrophe in Japan which led to production interruptions.

Following a very weak second quarter, the global economy picked up slightly in the third quarter, benefiting from the resumption of production following the earthquake disaster in Japan. The decline in commodity prices during the third quarter also had a positive effect. In the euro area, on the other hand, economic growth was weak and the European sovereign debt crisis turned for the worse. In the US, the political stalemate over the debt ceiling increase caused significant uncertainty and subsequently led to the US losing its coveted AAA rating from S&P.

Developments in the global economy were mixed in the fourth quarter. GDP growth in the US was stronger than in the previous quarter, which came as a positive surprise. Output in Japan and the euro area, on the other hand, slowed. With regard to emerging economies, robust growth in China and Russia stood in contrast to weaker results in India and Brazil, and in smaller Asian economies.

The European sovereign debt crisis and the contagion effect on the banking sector and the global economy pose significant risks to global growth. Peripheral economies in Europe faced higher interest costs and responded by undertaking austerity measures to reign in deficits and reduce debt burdens. Central bankers in the developed world continued to support the financial system and their economies with conventional and unconventional policy tools.

In equity markets, the US S&P 500 Index ended unchanged from the beginning of the year, whereas the EuroStoxx 50 Index declined 17% and the Indian NIFTY 50 Index declined 24.5% in response to the European sovereign debt crisis, slowing growth, and a decrease in risk appetite.

2011 was a volatile year for the corporate credit market in the US. While the S&P/LSTA Index saw average monthly gains of 0.39% during the first seven months as demand for leveraged loans increased, this trend was quickly reversed as concerns over the sovereign debt crisis in Europe, fears of a global double-dip recession, and the U.S. central bank's pledge to keep short-term rates low through at least mid-2013, led to capital flight out of the leveraged loan market. In late 2011, investor sentiment improved once again and the loan index ended with a 1.5% gain for the year. Notwithstanding the market price swings, U.S. credit fundamentals continued to improve. Since June 2009, publicly-filing S&P/LSTA Index issuers generated average year-over-year EBITDA growth of 16%. The size of the so-called "maturity wall" in 2013 and 2014 continued to be reduced through repayments and extensions. During 2011, issuers in the S&P/LSTA Index had reduced loan maturities due through 2014 by $131.5 billion. Trailing 12 month default rates as measured by S&P/LSTA Index hit a 54-month low of 0.17%, by principal amount.

EURO ZONE: Real GDP increased by 1.4% overall in 2011. In the earlier part of the year, economic recovery in the euro area continued, supported by global growth and strengthening domestic demand. Headline inflation rates rose significantly on the back of energy and commodity price movements causing the European Central Bank (ECB) to increase rates by 0.5% between April and July 2011. However, concerns about the evolution of public finances in several euro area economies caused severe tensions in financial markets resulting in tighter financial conditions, and deteriorating economic confidence. As a result, economic activity dampened during the second half of 2011. Contagion effect from the interplay between vulnerable public finances and the financial sector led to funding and deleveraging pressures for euro area banks. The ECB responded with several non-standard policy measures including reactivation of the Securities Markets Programme, the launch of a second covered bond purchase program and measures to provide liquidity in foreign currencies. In December the ECB adopted additional enhanced credit support measures, including the conduct of two longer-term refinancing operations with a three-year maturity, increased collateral availability and a reduction in the reserve ratio to 1% in order to mitigate the effects of strains in financial markets on the supply of credit by ensuring that banks were not liquidity-constrained. Interest rates were also lowered by 0.5% by the ECB between November and December 2011. The EuroStoxx 50 Index declined by 17% during the year.

SWITZERLAND: The increasing deterioration in the international environment weighed heavily on the Swiss economy. Average annual GDP increased by 1.9%, after a rise of 2.7% in the previous year. While the first six months of 2011 saw dynamic economic development, growth slackened in the second half of the year with a slight increase in the rate of unemployment in the last months of the year. The Swiss National Bank pursued an expansionary monetary policy throughout 2011 reducing its target interest rate range from 0.0 - 0.75% to 0.0 - 0.25% in the latter half and set a minimum exchange rate at CHF 1.20 per euro following a sharp overvaluation in the Swiss Franc. The SMI Index dropped 7.75% during the year and the 10 year Swiss Government bond yields dropped from 1.72% at the beginning of the year to 0.66% at the end of the year.

INDIA:  Global spillovers through trade and capital flow channels slowed India's growth more than anticipated. The impact was exacerbated by high inflation, weaker currency, and domestic factors, both cyclical and structural. Industrial growth was adversely affected by contraction in mining, deceleration in manufacturing and slowdown in construction activity. These factors created pressures on equity and currency markets. The sharp depreciation of the rupee during August-December 2011 contributed to the drying up of foreign equity inflows and in turn, further weakened the Indian Rupee as well as impacted investment financing. The NIFTY 50 Index declined by 24.5% and the Indian Rupee depreciated from 44.7 per USD at the start of the year to 53.06 per USD at the end of the year.

Sources: International Monetary Fund (IMF), Swiss National Bank (SNB), European Central Bank (ECB), Reserve Bank of India (RBI), Bloomberg

Livermore's Strategy

The financial portfolio is focused on fixed income instruments which generate periodic cash flows and include mainly exposure to senior secured and usually broadly syndicated US loans.  This part of the portfolio is geographically focused on the US with some exposure to Europe and emerging markets. In addition, the financial portfolio would include investments in select deep value public equities where management could exert influence.

The remaining portfolio is focused on Switzerland and Asia with investments primarily in real estate and select private equity opportunities.  Investments are focused on sectors that Management believes will provide superior growth over the mid to long term with relatively low downside risk. 

Strong emphasis is given to maintaining sufficient liquidity and low leverage at the overall portfolio level and to re-invest in existing and new investments along the economic cycle. 

Review of Significant Investments

* Net of related loan.

Wyler Park - Switzerland

Wyler Park is a top quality mixed-use property located in Bern, Switzerland. It has over 16,800 square meters of commercial space, 4,100 square meters of residential space, and another 7,800 square meters available for additional commercial development. The commercial part is leased entirely to SBB (AAA rated), the Swiss national transport authority wholly owned by the Swiss Confederation, and serves as the headquarters of their Passenger Traffic division. The commercial lease is Swiss inflation rate - adjusted and ends in 2019 with two 5 year extension periods thereafter. The annual rental income from the commercial area of the project is CHF 4.26m (USD 4.54m).

Following the successful development of 39 residential apartments, management rented out all of the apartments. The entire property is fully rented. The annual rental income from the residential area is about CHF 1.1m (USD 1.17m).

Livermore is the sole owner of Wyler Park through its wholly owned Swiss subsidiary, Livermore Investments AG. The loan outstanding on the project is CHF 79m (USD 84.3), which is a non-recourse loan to Livermore Investments AG backed only by this property. The loan matures in July 2014. The valuation of the property as of year-end 2011 is CHF 114.9m (USD 122.5m) and of year end 2010 was CHF 111.17m (USD 119.0m).

Management continues to evaluate the potential development of the additional commercial development rights of 7,800 square meters attached to the property.

SRS Charminar - India

Livermore invested USD 20m in 2008 in a leading Indian Real Estate company, in association with SRS Private and other investors as part of a total investment of USD 154m.

The investment in the investee company was in the form of compulsorily convertible debt and included a put option, which can be exercised if the investee company does not have an IPO within 3 years or if certain terms in the agreement are not met.  The put option is secured by land which was valued at around USD 1.3 billion at the time of investment and guarantees a minimum return of approximately 30% IRR if exercised.

As reported previously, the Manager (Infinite India Limited) for this investment served a put option exercise notice to the promoters in 2009.  Following a dispute on the grounds of the put option notice between the promoters and the fund, the parties agreed to invoke arbitration to be held in Mumbai.

On 14 August 2009, the arbitration process was completed and the arbitrator ruled in favour of the investors. The award entitles the investors to investment plus interest amounting to 30% IRR until 14 August 2009 and 18% IRR thereafter. 

Meanwhile, the investors have filed and won an interim order for injunction against the promoters and the company to prohibit sales, transfer or encumbering of the assets of the company.  Thereafter, the promoters have filed against the arbitral award and the injunction order.  As at 31 December 2011 there was no change in the status of this case.

On January 13, 2011 the Company Law Board ("CLB") passed an order and allowed Infrastructure Leasing & Financial Services Limited ("IL&FS") to become 80% shareholder and control the management of the company. After the reporting period, the Manager has reported a finalization of settlement negotiations with IL&FS and the investee company which is subject to certain court and regulatory approvals.

Due to the legal complexity and the receipt of the regulatory and court approvals required for the implementation of the proposed settlement as well as the various counterparties involved, the outcome remains uncertain.

The carrying amount of the investment is based on discounted expected cash flows and was reduced to USD 14.7m (2010: USD 17.8m).  The accrued interest up to February 2009 was reversed during the period ended 30 June 2011 (notes 13 and 25). 

Montana Tech Components ("MTC") - Europe

Montana Tech Components AG is a leading components manufacturer in the fields of Aerospace & Industrial Components, Metal Tech and Micro Batteries.

The Aerospace Components business segment manufactures specialized components for Airbus and Boeing and is the market leader.  The facilities are currently located in the US and in Switzerland with a new low cost facility in Romania recently built-out.  The company has a large market share in the US with Boeing and in Europe with Airbus. The build-out of the Romanian facility was completed as planned. The certification process with Airbus was concluded in significant areas.

The Micro Batteries business is a market leader in hearing aid batteries and rechargeable batteries with a strong brand (VARTA Micro Power). VARTA has formed a significant joint venture with the Volkswagen group to develop batteries for hybrid cars.

Metal Tech business segment operates in a niche area and is a market leader in an otherwise highly fragmented industry.  This business segment produces tools for identification and marking of steel products. 

Due to an excellent market position, ongoing expansion and productivity-enhancing measures, MTC increased turnover by 12% in 2011 to EUR 395m as compared to EUR 351m in 2010. EBITDA increased 21% to EUR 54m (2010: EUR 45m) and EBIT increased 34% to EUR 37m (2010: EUR 28m). The Company's equity capital increased to EUR 225m (2010: EUR 152m).

In January 2011, MTC accomplished a capital increase in the amount of EUR 46m. In May 2011, MTC raised another EUR 15m through the issue of a convertible bond. The funds were partly utilized to repay the convertible debt due in August 2011 and to purchase shares held by non-controlling shareholders in the Romanian subsidiary.

Livermore and certain other minority shareholders in MTC have raised concerns about related party transactions between MTC and its majority shareholder as well as the unequal treatment of minority shareholders by the Board of MTC. Livermore is pursuing an activist role in order to increase transparency, ensure equal treatment of minority shareholders, and potentially gain representation on the Board of MTC. During the year, Livermore along with certain other shareholders of MTC filed and won a legal case against MTC related to an incorrect grant of discharge to the directors of MTC during MTC's annual general meeting. Livermore and certain other shareholders have filed another case against MTC and its Board of Directors concerning an incorrect allocation of shares in the recent capital increase. The matter is currently pending in court in Switzerland.

Private Equity Funds 

The other private equity investments held by the Group are incorporated in the form of Managed Funds (mostly closed end funds) mainly in the emerging economies of India and China. The investments of these funds into their portfolio companies were mostly done in 2008 and 2009. Overall, during 2011 the investment environment relating to most funds was challenging and the Group expects that material exits of portfolio companies should materialize between 2013 and 2015.  Except for distributions of USD 0.585m from Blue Ridge Capital and USD 0.102m from Da Vinci fund no material exits occurred during the reported period.

The following summarizes the book value of the private equity funds as of year-end 2011

India Blue Mountains: India Blue Mountains is a leading hotel and hospitality development fund that is developing 4 star and 5 star hotels in India. The fund has acquired land and is in the process of developing three hotels in prime areas of Mumbai, Pune and Goa. All hotels will be managed by the Accor Group (Novotel brands). Accor has also invested equity and holds a 26% stake in all of the hotels.

The Pune hotel is being built on a land area of 70,200 sq ft with a total built-up area of 338,692 sq ft. The hotel will be a Novotel brand hotel with 223 rooms and two floors have been earmarked for commercial office space. Construction of the structure is nearing completion

The Mumbai hotel is on a 82,609 sq ft land site with a built-up area of 550,217 sq ft. The hotel will be a Novotel brand hotel with 543 rooms. The hotel is close to the Mumbai airport with an unusually high frontage area of 38 meters on one of Mumbai's main arterial roads. During the year, the contract with the general contractor was terminated due to delays caused by the contractor. The existing loan facility was repaid and a bridge loan due in February 2012 was undertaken. This bridge loan has been partly paid down and the remaining extended until July 2012. The manager is currently in process of syndicating a new construction loan.

For the Goa hotel, land measuring 20 acres was purchased at Majorda beach in Goa having 200 meters of sea front with a white sandy beach from nearly 40 parcels of land. Notification of the land for settlement is a government process and it has not been concluded so far despite expectations and is currently pending with the Town Planning department.

SRS Private Fund: SRS Private is a private equity fund focused on real estate in India. The fund has invested in residential and commercial projects as well as directly in certain real estate companies. The assets are primarily located in and around major cities of India such as Mumbai and Hyderabad.

Evolution Venture: Evolution is an Israel focused Venture Capital fund. It invests in early stage technology companies. Its investments include a carrier-class Mobile Broadband Wireless (MBW) Wi-Fi solutions company, a language enhancement products company, a software company operating in the digital radio market, a software test tool developer, and a virtualization technology company.

Elephant Capital: India-focused private equity fund, which is AIM quoted (formerly called Promethean India plc).  (Ticker: ECAP).  Its portfolio investments to date include a leading tiles manufacturer in India, an established automotive components manufacturer, a hospitality company with luxury hotels in top Indian cities, a media business with an exclusive content library, a clinical research organization, a m-commerce player, and an online venture to distribute cricket related content.  During the period, an investment of GBP 3m was made into a leading independent provider of aviation maintenance, repair and overhaul service in India.

As of August 2011, the NAV of the fund was 51 pence. Additional information about the fund is available at www.elephantcapital.com

Da Vinci: The fund is primarily focused on Russia and CIS countries. The fund has made five investments. 70% of the fund is invested in RTS, the leading Russian stock exchange, and a leading Eastern European software company.  In 2011, RTS merged with MiCex stock exchange to form the largest financial exchange in Russia and distributed a dividend from the partial exit. The leading Eastern European software company filed for an initial public offering during the year and was listed on a US stock exchange in February 2012. The fund expects to exit the investment in the Eastern European software company over the next year.

Blue Ridge: Blue Ridge is a China focused private equity fund. The fund has made investments in six portfolio companies. Portfolio companies include a distressed real estate turnaround company, a plastic and chemicals manufacturer, a higher education company, an innovative bio-pesticide company, a software company specializing in Oil & Gas applications and a refinery. In 2011, the fund has realized partial exits from the plastic and chemicals manufacturer and the distressed real estate turnaround company at valuations higher than cost.

Panda Capital: Panda Capital is a China-based private equity fund focused on early-stage industrial operations in China and Taiwan, which represent strong growth opportunities. The fund has invested in a bamboo based flooring manufacturer, a lens moulding company, an electronic components manufacturer, an FDA approved wound healing cream producer, and an outdoor media company.

The fund's main investment is in a bamboo flooring company in China, which provides an innovative low cost alternative to hardwood flooring in shipping containers.  The manager is in the process of building up operational capacity for product manufacturing. This investment could generate attractive returns once the shipping industry recovers from the current downturn.

Financial portfolio and trading activity               

The Group manages a financial portfolio valued at USD 75m (net of leverage) as at 31 December 2011, which is invested mainly in fixed income securities. The recovery of the US and emerging economies witnessed through 2010 continued in 2011 and has led to improvements in the credit quality and overall strength of Livermore's credit portfolio.

Fixed Income:

During 2011 the Group almost doubled its exposure to the US syndicated loan market mainly through investment into US Collateralized Loan Obligations (CLO) mostly of 2006 and 2007 issues. These are managed portfolios invested into diversified pools of senior secured floating rate loans and financed with long term financing pre-fixed at the respective pre-crisis levels. On absolute and relative value basis the loan market continued to offer remarkable value as an undervalued, diversified inflation linked asset class with a senior secured claim on the borrower and with overall low volatility and low correlation to equity markets. New issue loans offered high spreads (including Libor floors) of 400-600 bps over the average cost of the respective CLO Fund's liabilities. New issue credit quality was also attractive, especially compared to the pre-crisis vintages. That allows CLO managers to reinvest their prepayment proceeds in higher spread, better quality new issue loans.

The fundamentals of the US corporate credit market continued to show improvement during 2011. Trailing 12 month default rate for the S&P/LTSA index was 0.54% for the year and corporate earnings and balance sheets continued to improve during the period. Since June 2009 the publicly filing of S&P/LTSA index issuers have generated year on year EBITDA growth of 16%. Despite improving fundamentals, the European debt crisis, fears of a double dip recession and the market volatility that followed after the first quarter caused market value swings in the prices of loans. Following a rise in first quarter and a decline in second and third quarters, the S&P/LTSA index of issuers managed to gain 1.5% for the year. These price swings generated good entry points for CLO managers within the reinvestment period, which resulted in additional cushion build up for those positions, as reflected in the improving over collateralization tests.

During 2011, the Group increased its exposure to performing CLOs at lower than current market prices and at modelled IRRs of over 20%.  The CLO portfolio has performed extremely well on account of low default rates and improving credit fundamentals of their underlying loans which is evident by lower weighted average rating factor (WARF) levels in our deals. At the end of 2011 all of our US investments were passing their coverage tests (thereby making dividend distributions), which outperformed the general market average.  During 2011, the portfolio generated dividend income of USD 22.2m and a total of USD 38.8m since inception.

The excess spread of these CLOs, namely the difference between the interest income generated by a CLO's assets and the cost of financing through its liabilities as well as certain fees (which are locked-in at closing), increased substantially from original levels. Volatility in loan prices provided a good entry point for CLO's within their reinvestment period to build additional par and increase coverage ratios.  This combination of improving coverage ratios and increasing excess spread availability also continued in 2011 and led to increased payments to CLO income notes.  Furthermore, the cushions built up within the portfolios are expected to insulate the portfolio from moderate potential future credit losses, implying that performance should remain strong even in the absence of a significant improvement in macroeconomic conditions, so long as another dramatic fundamental downturn or financial market crisis is avoided. Overall the performance of this asset class during the 2008 financial crisis and thereafter has been remarkable.  Investors may be hard stretched to find an asset class that exhibited comparable performance over this time period.

During 2011 management concentrated on purchases of income notes in the secondary market as the IRRs and cash on cash returns offered better economics than primary market offerings.  At the same time, management followed closely the development of the US CLO primary market.  Total new issuance of US cash flow CLOs in 2011 was 12.3b, up from 3.6b in 2010.  However, management was of the opinion that liability spreads did not come in enough to generate sufficiently sustainable long term arbitrage and attractive equity returns.  However, as both US interest rates and corporate defaults are expected to remain low in the medium term and loan spreads are forecast to remain wide by historical standard we believe that the environment should remain attractive for investments in CLO income notes.  As liability spreads tightened during Q1 2012 and secondary market prices increased offering lower returns, the investment team is evaluating investing in primary issue CLOs with the aim of acquiring a controlling or significant equity stake. 

While management maintains a positive view, mid-long term performance may be negatively impacted by a pull back into a substantial double dip recession in US and/or Europe involving a spike in defaults.  Despite positive developments in the overall health of the US economy in 2011 we acknowledge the potential headwinds posed by continued weakness in the US housing market, high unemployment and the continued EU sovereign debt crisis as well the headwinds the economy may face in 2013 relating to the possible austerity measures following the US debt ceiling discussions.

Public Equities:

Babylon Ltd ("Babylon"): Babylon is an International Internet company based in Israel and listed on the Tel-Aviv Stock Exchange (TASE: BBYL).  It is a leading translation and language tools provider and its language translation software product is a recognized name in the industry. The company generates revenues through Search and Advertising, Online Sales, Corporate Sales, and Telesales.  As of 31 Dec 2011, Livermore's investment in Babylon was valued at USD 6.6m. During the year, market value gains and dividend income from Babylon totalled USD 2.5m.

Babylon has achieved strong growth in its Search and Advertising business since 2009. In 2011, total revenues increased 95% to USD 61.9m as compared to the previous year and profit before tax increased by 56% year-on-year to USD 9.2m. In the last quarter of 2011, Babylon's revenues and profit before tax increased 140% and 247% to USD 21.9m and USD 5.2m respectively as compared to the third quarter. In the first quarter of 2012, Babylon's revenues increased 229% to USD 30m and net profit rose 233% to USD 4m as compared to the corresponding quarter in the previous year.

Noam Lanir, the majority shareholder of the Group, is also a major shareholder in Babylon (note 34).

The following is a table summarizing the financial portfolio as of year-end 2011 

Events after the reporting date

 In January 2012, Livermore agreed to settle its guarantee to a financing bank in relation to its investment in DTH Boom.  The settlement amount is fully provided for in the 2011 financial statements. Please refer to note 35 for further details.

After the reporting period, the Manager of SRS Charminar has reported a finalization of settlement negotiations with IL&FS and the investee company which is subject to certain court and regulatory approvals.  Please refer to note 5 for further details.

After the reporting date and prior to publishing this report, Livermore had acquired an additional 1.039m shares of Babylon Ltd.

Following the year end the Company purchased 24,589,824 additional own shares to be held in treasury for a total cost of USD 5.926m.

Litigation

At the time of this Report, there is one matter in litigation against the Group. Further information is provided in note 36 to the consolidated financial statements.

Report of the Directors

The Board's objectives

The Board's primary objectives are to supervise and control the management activities, business development, and the establishment of a strong franchise in the Group's business lines. Measures aimed at increasing shareholders' value over the medium to long-term, such as an increase in NAV are used to monitor performance.

The Board of Directors

Richard Barry Rosenberg (age 56), Non-Executive Director, Chairman of the Board

Richard joined the Group in December 2004. He became Non-Executive Chairman on 31 October 2006.  He qualified as a chartered accountant in 1980 and in 1988 co-founded the accountancy practice SRLV.  He has considerable experience in giving professional advice to clients in the leisure and entertainment sector. Richard is a director of a large number of companies operating in a variety of business segments.

Menachem Marder (age 59), Non-Executive Director (resigned at 3 April 2012)

Menachem joined the Group in September 2009.  He brings with him a profound background of accounting and business experience.  Menachem is a Certified Public Accountant, and was the founder and senior manager of the accounting firm Shlomo Ziv and Partners (BDO).  In addition to his work with Livermore, Menachem, through his company, Mimtar Business Consulting LTD, provides business, economic, managerial and financial consultancy to a wide range of firms with a specialization in company turn arounds and mergers and acquisitions.  Menachem earned an MBA with a major in Finance from Tel Aviv University, and holds a BA in Economics and Accounting from Tel Aviv University. Menachem is a director of a large number of companies operating in a variety of business segments.

Noam Lanir (age 45), Founder and Chief Executive Officer

Noam founded the Group in July 1998, to develop a specialist online marketing operation. Noam has led the growth and development of the Group's operations over the last fourteen years which culminated in its IPO in June 2005 on AIM. He is also a major benefactor of a number of charitable organisations.   Prior to 1998, Noam was involved in a variety of businesses mainly within the online marketing sector.  He is also the major shareholder of Babylon Ltd, an International Internet Company listed on the Tel Aviv Stock Exchange.

Ron Baron (age 44), Executive Director and Chief Investment Officer

Ron was appointed as Executive Director and Chief Investment Officer on 10 August 2007. Ron has wide investment and M&A experience. From 2001 to 2006 Ron served as a member of the management at Bank Leumi, Switzerland and was responsible for portfolio management activity. Prior to this he spent five years as a commercial lawyer at Kantor, Elhanani, Tal & Co. Law Offices in Tel Aviv, Israel, advising banks and large corporations on corporate transactions, including buy-outs and privatisations. Ron has over 10 years of experience as an investment manager with particular focus on the US credit market.  He holds an MBA from INSEAD Fontainebleau and a LLB (LAW) and BA in Economics from Tel Aviv University.

The Directors shall retire from office at the third Annual General Meeting after that at which they were last elected, and if they so wish, offer themselves up for re-election to the Board. Subject to the BVI Companies Act and the Articles, the Directors to retire by rotation at the Annual General Meeting in every year shall be in addition to any Director who wishes to retire and not to offer himself for reappointment, any Director required to retire under the Company's Articles.  The interests of the Directors and their related companies in the shares and options over shares in the Company are as shown under the Remuneration Report section. Details of the Directors' remuneration and service contracts also appear under the Remuneration Report section. 

On 3 April 2012, Mr Menachem Marder, a non-executive director resigned from his position as a non-executive director of the Company. No replacement has been appointed as a non-executive director at the date of this report.

The Directors submit their annual report and audited consolidated financial statements of the Group for the year ended 31 December 2011.

Directors' responsibilities in relation to the consolidated financial statements

The Directors are responsible for preparing the Annual Report and the consolidated financial statements in accordance with applicable law and International Financial Reporting Standards as adopted by the European Union.

The Directors are required to prepare consolidated financial statements for each financial year which give a true and fair view of the financial position of the Group, and its financial performance and cash flows for that period.  In preparing these consolidated financial statements, the Directors are required to:

·      Select suitable accounting policies and then apply them consistently;

·      Make judgments and estimates that are reasonable and prudent;

·      State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;

·      Prepare the consolidated financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Group's transactions, and at any time enable the financial position of the Group to be determined with reasonable accuracy and enable them to ensure that the consolidated financial statements comply with the applicable law and International Financial Reporting Standards as adopted by the European Union.  They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group's website.  Legislation in the British Virgin Islands governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Disclosure of information to the Auditor

In so far as the Directors are aware:

·      there is no relevant audit information of which the Company's auditor is unaware; and

·      the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

Substantial Shareholdings

As at 26 April 2012 the Directors are aware of the following interests in 3 per cent or more of the Company's issued ordinary share capital:

* after consideration of treasury shares (note 15).

Save as disclosed in this report and in the remuneration report, the Company is not aware of any person who is interested directly or indirectly in 3 per cent or more of the issued share capital of the Company or could, directly or indirectly, jointly or severally, exercise control over the Company.

Details of transactions with Directors are disclosed in note 34 to the consolidated financial statements.

Corporate Governance Statement

Introduction

The Company recognises the importance of the principles of good Corporate Governance and the Board is pleased to accept its commitment to such high standards throughout the year.  As an AIM quoted company, Livermore is not required to follow the provisions of the UK Corporate Governance Code - June 2010 ("the Code").  However, the Company is keen to adopt and promote the provisions of that Code.  Up to 31 December 2011 the Board has adopted several provisions of the Code, some of which have not yet been fully implemented. 

The Board Constitution and Procedures

The Company is controlled through the Board of Directors, which currently comprises one Non-Executive Director and two Executive Directors.  The Chief Executive's responsibility is to focus on co-ordinating the company's business and implementing group strategy. 

A formal schedule of matters is reserved for consideration by the Board, which meets approximately four times each year.  The Board is responsible for implementation of the investing strategy as described in the circular to shareholders dated 6 February 2007 and adopted pursuant to shareholder approval at the Company's EGM on 28 February 2007.  It reviews the strategic direction of the Group, its codes of conduct, its annual budgets, its progress towards achievement of these budgets and any capital expenditure programmes.  In addition, the Directors have access to advice and services of the Company Secretary and all Directors are able to take independent professional advice if relevant to their duties.  The Directors receive training and advice on their responsibilities as necessary.  All Directors, in accordance with the Code, submit themselves to re-election at least once every three years.

Board Committees

The Board delegates clearly defined powers to its Audit and Remuneration Committees. The minutes of each Committee are circulated by the Board. 

Remuneration Committee

The Remuneration Committee comprises of the Non-Executive Chairman of the Board and a Non-Executive Director.  Following the resignation of one of the Non-Executive Directors, this committee has one member until a new Non-Executive Director is appointed.  The Remuneration Committee considers the terms of employment and overall remuneration of the Executive Directors and key members of Executive management regarding share options, salaries, incentive payments and performance related pay.  The remuneration of Non-Executive Directors is determined by the Board.

Audit Committee

The Audit Committee comprises of the Non-Executive Chairman of the Board and a Non-Executive Director and is chaired by the Chairman of the Board.  The duties of the Committee include monitoring the auditor's performance and reviewing accounting policies and financial reporting procedures. 

Following the resignation of one of the Non-Executive directors, this committee has one member until a new Non-Executive Director is appointed.

Communication with Investors

The Directors are available to meet with shareholders throughout the year.  In particular the Executive Directors prepare a general presentation for analysts and institutional shareholders following the interim and preliminary results announcements of the Company.  The chairman, Richard Rosenberg, is available for meetings with shareholders throughout the year.  The Board endeavours to answer all queries raised by shareholders promptly.

Shareholders are encouraged to participate in the Annual General Meeting at which the Chairman will present the key highlights of the Group's performance.  The Board will be available at the Annual General Meeting to answer questions from shareholders.

Internal Control

The Board is responsible for ensuring that the Group has in place a system of internal controls and for reviewing its effectiveness.  In this context, control is defined in the policies and processes established to ensure that business objectives are achieved cost effectively, assets and shareholder value safeguarded and that laws and regulations are complied with.  Controls can provide reasonable but not absolute assurance that risks are identified and adequately managed to achieve business objectives and to minimise material errors, frauds and losses or breaches of laws and regulations.

The Group operates a sound system of internal control, which is designed to ensure that the risk of mis-statement or loss is kept to a minimum.

Given the Group's size and the nature of its business, the Board does not consider that it is necessary to have an internal audit function.  An internal audit function will be established as and when the Group is of an appropriate size.

The Board undertakes a review of its internal controls on an ongoing basis.

Independence of Auditor

The Board undertakes a formal assessment of the auditor's independence each year, which includes:

·      a review of non-audit related services provided to the Company and related fees;

·      discussion with the auditor of a written report detailing all relationships with the Company and any other parties which could affect independence or the perception of independence;

·      a review of the auditor's own procedures for ensuring independence of the audit firm and partners and staff involved in the audit, including the rotation of the audit partner;

·      obtaining written confirmation from the auditors that they are independent;

·      a review of fees paid to the auditor in respect of audit and non-audit services.