TIDMSVC2
Financial highlights as at 31 December 2009
Per ordinary share (pence) 31.12.09 31.12.08 31.12.07
Net asset value 31.0 36.4 46.5
Dividends
Dividend paid (1) - 1.0 1.0
Cumulative dividend (2) 6.9 6.9 5.9
Total return per share (3)
SPARK VCT 2 plc 37.9 43.3 52.4
Return including tax benefits (5) 57.9 63.3 72.4
Total return per 100p invested (4)
SPARK VCT 3 plc 48.8 56.7 70.9
Return including tax benefits (5) 68.8 76.7 90.9
1. Dividend paid in the financial year ended on the date stated
2. Cumulative dividends paid by SPARK VCT 2 plc
3. Net asset value plus cumulative dividend per share to ordinary shareholders
in SPARK VCT 2 plc since the launch of the Company (then called Quester VCT
4 plc) in November 2000.
4. Total return to former shareholders in SPARK VCT 3 plc, launched in
December 2001 (under the name Quester VCT 5 plc), which was merged with
SPARK VCT 2 plc in November 2008. The share exchange ratio for former
shareholders in SPARK VCT 3 plc was 1.4613. The total return stated is
applicable only to subscribers of shares in Quester VCT 5 plc at the time
of launch of the Company in 2001-2. It does not represent the return to
subsequent subscribers or purchasers of shares.
5. Return after 20% income tax relief but excluding capital gains deferral.
Composition of the fund by value 31.12.09
Unquoted venture capital investments 65.9%
Quoted venture capital investments 7.9%
Cash and other net current assets 26.2%
100.0%
Chairman's statement
Overview
It will come as no surprise if I start this statement by saying that 2009 was a
very difficult year for business in general. The economy was in recession and
credit was very tight. Even the more mature companies in the portfolio of SPARK
VCT 2 plc have been facing conditions in which growth has been difficult to
achieve and levels of sales and profitability have come under pressure.
Companies that are at a somewhat earlier stage of development have been
vulnerable to delays and reluctance to place orders on the part of major
corporate customers. The very early stage companies, trying to establish new
products or to develop new markets, have found the conditions particularly
difficult.
While the companies in which SPARK VCT 2 plc invests are in general financed by
equity rather than debt, the credit crunch has had the effect, in a number of
cases, of reducing the availability of trade credit and thereby increasing
working capital requirements.
Against this economic background, the funding environment for all early stage
companies has continued to be very uncertain. Companies that have needed to
raise new capital during the year have been obliged to accept significantly
lower pre-money valuations.
The environment for the achievement of exits from venture capital investments
has also been unfavourable, with the major corporates on which reliance is
normally placed for M&A activity having been reluctant to make acquisitions
during 2009, although as this report is written there are signs of this
situation beginning to improve.
As we have said before in these reports, investment in early stage technology
companies has always required a good deal of patience. We are conscious that
shareholders in SPARK VCT 2 plc have suffered a heavy decline in net asset
value per share over the period of their investment. However, the Board
believes that the present more concentrated portfolio of venture capital
investments does offer the prospect of significant capital growth from present
levels, provided that the investee companies can maintain stability and see
their way through the present difficult times.
Against this background, the operational progress shown by a number of the key
portfolio companies in 2009 is reasonably encouraging, and represents a major
step forward for a portfolio originally built around investment in companies at
very early stage. A much greater proportion of the overall portfolio by
valuation is now represented by companies with a significant level of revenue
generation (over GBP2m per annum) and trading profitably (at the EBITDA level).
It will be the Company's policy to continue to support those of the existing
investee companies that are considered to have strong growth prospects, to
enable them to develop long enough to allow an optimal realisation. At the time
of writing, it is too soon to predict the timing of any exits, but the shape of
possible exits from a number of the companies is now starting to become
clearer. Continued patience, modest amounts of additional investment where
necessary and strategic input from members of the management team in working
with the portfolio companies will be the key to making the best of these
opportunities.
For 2010, the Company's primary objective will be the same as for 2009, namely
to ensure that the portfolio remains stable, but there will now be a greater
emphasis on positioning some of the more developed companies for an exit and,
provided conditions develop favourably, making a start on turning some of the
more significant assets into cash.
Results of strategy review
An announcement was released at the end of January setting out the results of
the Board's review of the future direction of the Company: this had the aim of
determining a strategy that will ensure that investment returns generated from
the venture capital portfolio are delivered to shareholders in the most
appropriate way, as and when they arise.
In conducting the Review, the Board was mindful of the tax benefits that
shareholders have already received in respect of their original investment in
the Company or in SPARK VCT 3 plc, which merged with the Company in November
2008. The tax benefits will have included income tax relief on their original
investment and, in many cases, capital gains deferral ("CGT deferral").
Shareholders can also benefit from the ability of the Company to pay tax-free
dividends under the VCT provisions.
The Board took into account that most of the Company's existing investments
have been held in the portfolio for a long time, with successful realisations
of investments having been few in number and dividend payments to shareholders
having been very limited. This has been a consequence partly of the initial
focus of the investment policy on early-stage technology investments and partly
of the difficult economic and financial conditions in recent years which have
slowed the rate of development of investee companies and made exits more
difficult to achieve.
The key conclusions of the Review are as follows:
Dividend policy:
In future, priority will be given to the payment of dividends as and when
realisations are achieved. In particular, subject to any tax or regulatory
constraints, 50% of the proceeds from any realisations from within the existing
venture capital portfolio will be regarded as being available for distribution.
Longer-term future of the Company:
The Board considers that the Company should continue as a Venture Capital Trust
and that, within the parameters of its existing investment policy, there should
in future be a focus on investments selected with a view to yield as well as
capital stability.
Investment policy:
The Company intends to maintain the existing sector focus, capitalising on the
SPARK management team's range of contacts and its expertise in investment in
these sectors. As and when funds are available for new investment, the SPARK
management team will seek to take advantage of opportunities available at this
current stage in the investment cycle, particularly opportunities to
participate in later-stage financing rounds of venture-backed companies within
the existing sector focus. The aim will be to seek investments in companies
which are already revenue generating with a stable business base, and are able
to deliver a flow of dividends or be capable of exit within a 3-year period.
Share buyback policy:
The Company will continue to be willing to make buybacks of limited volumes of
its shares but expects that, going forward, the budget made available to fund
buybacks will be more tightly restricted than in previous years.
Results for the year ended 31 December 2009
The movement in net assets and net assets per share in the year ended
31December 2009 is summarised in the table below.
Venture capital Net Total Pence
investments current per Share
assets
GBP'000 GBP'000 GBP'000 '000
Net asset value at 31 December 2008 20,489 8,106 28,595 36.4
Income - 114 114 0.1
Operating expenses - (772) (772) (1.0)
Net gain on disposal 188 - 188 0.2
Net loss on valuation of investments (3,950) - (3,950) (5.0)
Net investment by the Company 1,016 (1,016) - -
Net assets before dividends and 17,743 6,432 24,175 30.7
share buybacks
Dividend paid - - - -
Share buybacks - (146) (146) 0.3
Net asset value at 31 December 2009 17,743 6,286 24,029 31.0
Net assets per share, before the payment of dividends and share buy-backs, fell
by 5.7p in the year (15.7%).
The effect of the business and financial environment during 2009 has been a
decline in valuation of the portfolio of GBP3,950,000 overall, including a
decline in valuation of the unquoted investments of GBP4,195,000 (-21.1%). Within
the overall figures, the valuations of the "maturing" venture capital
investments have remained broadly stable overall, but the valuations of the
"developing" venture capital investments have seen a significant decline
(-14.1%), mainly reflecting the lower pre-money valuations applicable where the
companies have needed to raise additional venture capital funding in the
current market environment.
For the "early stage" venture capital investments, the trading conditions, the
stringent approach to the provision of further funding and the lower pre-money
valuations that have applied, and in the case of the life sciences investments
a cautious approach to valuation where developmental delays have been
encountered, have led to substantial write-downs in valuation (-49.4% for this
category overall). In all cases, the valuations have been determined under the
application of the International Private Equity and Venture Capital Valuation
Guidelines. Details are given in the Business Review.
Operating expenses for 2009 at GBP772,000 overall (3.2% of year-end net assets)
have benefited from the application of the `cap' on `annual running costs' (as
defined in the Investment Management Agreement) that has applied since the date
of the merger with SPARK VCT 3 plc in November 2008, as well as from the
exemption of the management fee from VAT. Some GBP50,000 of expenses, mainly
relating to professional advisory fees, were incurred that fell outside the
definition of `annual running costs'. In 2008 the total of operating expenses
was considerably higher at GBP1,253,000 but this included the bulk of the costs
of the merger.
The total return to shareholders from the launch of the Company in November
2000 to 31 December 2009, inclusive of all dividends paid, now amounts to 37.9p
per share before taking account of tax reliefs.
The total return to original shareholders in SPARK VCT 3 plc from its launch in
December 2001 (under the name Quester VCT 5 plc) to 31 December 2009, inclusive
of all dividends paid, amounts to 48.8p per 100p originally invested, before
taking account of tax reliefs.
Dividend
In the absence of any realisations during the year, the Board does not
recommend a dividend in respect of the year ended 31 December 2009.
In line with the strategy described above, should realisations be achieved
during the current year, and subject to any tax or regulatory constraints, it
will be the Board's intention to declare a dividend of 50% of the proceeds.
Board
Thomas Chambers was appointed as a Director of the Company on 13 January 2010.
It gives me much pleasure to welcome him to the Board. Thomas brings many years
of both operational experience and advisory roles in the technology and
communications sectors, giving him a deep insight into these industries, and a
wealth of experience in M&A and company flotations. In accordance with the
Articles of Association, he will stand for election at the AGM.
Developments concerning the Manager
The management buyout from SPARK Ventures plc of its investment fund management
business, including the contract for the provision of investment management
services to the Company, was completed on 9 October 2009.
Accordingly SPARK Venture Management Limited, the Manager of the Company, has
become a subsidiary of SPARK Venture Management Holdings Limited, a company
owned and run by Andrew Carruthers, Jay Patel, Tom Teichman (Executive
Chairman) and Andy Betton (Finance Director), previously the executive
directors of SPARK Ventures plc.
There is no change in the team within SPARK Venture Management Limited
responsible for the management of the Company.
Intended purchases of shares in the Company by members of the SPARK management
team and members of the Board
The Board is pleased to announce that key members of the SPARK management team,
including SPARK VCT 2 plc Director Jay Patel, who do not currently hold shares
in the Company, have indicated that they wish individually to acquire
shareholdings by purchases of the Company's shares in the open market. The
independent directors similarly intend to acquire a shareholding (in
the case of newly-appointed director Thomas Chambers) or to add to their
existing shareholdings by purchases of the Company's shares in the open market.
They intend to commence these purchases when the Company exits its close period
following publication of this Annual Report and following completion of any
share buyback transactions which the Company may choose to undertake at that
time.
Outlook
Current activity on the part of major corporates in considering strategic
acquisition opportunities among venture-backed companies suggests evidence of
an improving M&A market. Opportunities to capture strategic value in individual
cases within the portfolio will therefore be kept under close review.
The stage of development and current business prospects of the majority of the
investee companies suggest, however, that the main flow of realisation proceeds
should be expected only in 2011 and 2012.
Robert Wright
Chairman
31 March 2010
Fund summary as at 31 December 2009
Industry Accounting Valuation Equity % of fund
sector cost (1) held by value
GBP'000 GBP'000
Fifteen largest venture
capital investments
Workshare Limited TMT 2,947 3,076 10.2% 12.8%
Xtera Communications, Inc. TMT 3,191 1,779 1.3% 7.4%
UniServity Limited TMT 1,692 1,692 28.7% 7.0%
Oxford Immunotec Limited Healthcare 2,530 1,346 6.2% 5.6%
Elateral Holdings Limited (2) TMT 479 1,161 13.3% 4.8%
Xention Limited Healthcare 2,438 963 6.9% 4.0%
Level Four Software Limited TMT 795 795 7.3% 3.3%
Cluster Seven Limited TMT 845 765 5.8% 3.2%
Portrait Software plc AIM TMT 1,186 736 3.3% 3.1%
Vivacta Limited Healthcare 889 732 4.7% 3.0%
Sift Group Limited TMT 964 647 8.9% 2.7%
Celona Technologies Limited TMT 2,859 516 10.3% 2.1%
Imagesound plc TMT 489 489 0.5% 2.1%
MediGene AG FRANKFURT Healthcare 797 487 0.4% 2.0%
Antenova Limited TMT 1,718 448 6.2% 1.9%
23,819 15,632 65.0%
Other venture capital
investments
Celldex Therapeutics, Inc. Healthcare 1,542 314 0.3% 1.3%
NASDAQ
Haemostatix Limited Healthcare 312 312 7.7% 1.3%
Allergy Therapeutics plc AIM Healthcare 795 252 0.6% 1.0%
Secerno Limited TMT 476 229 3.4% 1.0%
Isango! Limited TMT 750 188 11.5% 0.8%
Perpetuum Limited TMT 479 146 4.4% 0.6%
We7 Limited TMT 334 137 3.8% 0.6%
Celoxica Holdings plc (2) TMT 208 121 3.7% 0.5%
Academia Networks Limited TMT 44 120 1.7% 0.5%
Quadnetics Group plc AIM TMT 166 106 0.5% 0.4%
TeraView Limited Healthcare 1,064 100 4.8% 0.4%
Other investments: valuations 716 86 0.4%
less than GBP100,000 (4)
6,886 2,111 8.8%
Total venture capital 30,705 17,743 73.8%
investments
Total unquoted venture capital 26,219 15,848 65.9%
investments
Total quoted venture capital 4,486 1,895 7.9%
investments
Total investments 30,705 17,743 73.8%
Cash and other net assets 6,286 6,286 26.2%
Net assets 36,991 24,029 100.0%
1. Amounts shown as accounting cost represent acquisition cost in the case of
investments originally made by the Company and/or the valuation attributed
to investments acquired from SPARK VCT 3 plc at the date of the merger in
2008, plus any subsequent acquisition cost, as reduced in certain cases (2)
by amounts written off as representing an impairment in value.
2. Cost reduced by GBP1,250,000 in the case of Celoxica Holdings plc and GBP
676,000 for Elateral Holdings Limited representing an impairment in value.
Details of movements in valuation of the venture capital investments over the
year to 31 December 2009 are set out in note 10(c) in the notes to the
financial statements.
Business review
The Business review has been prepared in accordance with Section 417 of the
Companies Act 2006 and forms part of the Directors' report to shareholders.
This Business review does not contain information about environmental matters,
the Company's employees and social and community issues.
Fund summary
The Fund summary lists the venture capital investments held by the
Company at 31 December 2009 with their accounting cost and valuation at that
date. The 15 largest venture capital investments held at 31 December 2009
collectively account for 65.0% of the net assets at the balance sheet date.
The venture capital investments of SPARK VCT 2 plc currently fall into four
categories:
* Quoted venture capital investments (11% of the venture capital portfolio by
valuation)
These are companies whose shares are quoted on a recognised market such as AIM,
the London Stock Exchange's market for smaller growing companies, NASDAQ in the
United States and the Frankfurt Stock Exchange
* "Maturing" venture capital investments (40% of the venture capital
portfolio by valuation)
These are unquoted companies with stable and growing revenue streams, achieving
profitable trading or very close to it, and with stable cash positions
* "Developing" venture capital investments (29% of the venture capital
portfolio by valuation)
These are unquoted companies with developed business models and growing revenue
streams, though still facing uncertainties, and breaking through into cash-flow
positive trading
* "Early stage" venture capital investments (20% of the venture capital
portfolio by valuation)
These are companies still establishing their business model or, in the case of
businesses in the life sciences sector, still at the product development stage.
Portfolio update/trends during 2009
Overall, the quoted venture capital investments recorded a modest increase in
valuation, with Portrait Software plc showing a good share price performance
over 2009 and subsequently (since 31 December 2009, part of the holding has
been sold at a higher level).The share prices of the life sciences companies
MediGene AG and Celldex Therapeutics, Inc. declined over the year but in both
cases the drug development pipelines are considered to offer significant scope
for capital growth over the longer term.
In respect of the unquoted companies in the categories of "maturing" and
"developing" venture capital investments, looking back on 2009 as a whole, the
SPARK management team can report generally satisfactory operational progress
despite the difficult trading conditions. In a number of cases good growth has
been achieved in spite of the trading environment (Elateral Holdings Limited
and Workshare Limited have produced encouraging performances). Other companies
have experienced some reduction in the levels of revenue and profitability (
Sift Group Limited being an example).The "developing" companies, including in
the TMT sector Antenova Limited, Cluster Seven Limited, Level Four Software
Limited and UniServity Limited, have generally made satisfactory operational
progress, growing their revenue streams and making progress towards
cash-positive trading. In the life sciences sector Oxford Immunotec Limited has
made significant progress in the development of the United States market with
encouraging sales growth, albeit from a low base.
In all cases individual members of the team have worked closely with
managements of investee companies to ensure appropriate cost control and
management of cash resources while at the same time focusing strategy and
identifying opportunities for future growth.This approach appears to have been
successful so far in enabling companies to survive the recession.
The "early stage" companies which are still establishing their business models
have suffered far more in the difficult trading environment of the last couple
of years. Offering new products and services without an established customer
base, these companies have been much more vulnerable to cancellations of
contracts and extended sales cycles in this period of economic uncertainty.
Particular cases in point, in the TMT sector, are Isango! Limited, Perpetuum
Limited, Skinkers Limited and We7 Limited. The SPARK management team has worked
with the company managements on the difficult decisions that have been
necessary to secure survival.The provision of additional funding from SPARK VCT
2 plc has been kept to the minimum consistent with the continuation of the
business. In the life sciences sector Haemostatix Limited has made good
progress towards early commercialisation, while in the cases of Xention Limited
and Vivacta Limited the timescales involved in clinical trials and/or
manufacturing development and regulatory approval are now expected to be longer
than previously anticipated and are likely somewhat to delay the timescale to
commercialisation.
During 2009 only a limited amount of additional investment has been committed
to the portfolio: this has been focused on follow-on investment where the SPARK
management team's conditions regarding the trading position of the company have
been met. No new investments were made during the year.
The effect of these trends in 2009, and the limited further investment, has
been a substantial downward movement in the reported valuations of unquoted
investments (-21.1% overall).The valuations of the "maturing" venture capital
investments have remained stable overall. However the valuations of the
"developing" venture capital investments have seen a significant decline
(-14.1%), mainly reflecting the lower pre-money valuations applicable where the
companies have needed to raise additional venture capital funding in the
current market environment. For the "early stage" venture capital investments,
the trading conditions, the stringent approach to the provision of further
funding and the lower pre-money valuations that have applied, and in the case
of the life sciences investments a cautious approach to valuation where
developmental delays have been encountered, have led to substantial write-downs
in valuation (-49.4% for this category overall).
Prospects for the current portfolio
SPARK Venture Management Limited took over the management of the Company (then
called Quester VCT 4 plc) and SPARK VCT 3 plc (then called Quester VCT 5 plc)
in May 2007. At that date the combined venture capital portfolio of the two
VCTs was composed of 45 investee companies, of which 12 were quoted and 33
unquoted. Given the limited size of the two VCTs and the capital requirements
of such a large number of early stage companies, the SPARK management team
resolved to reduce the financing risk and concentrate on a smaller number of
the more promising candidates.
The number of unquoted companies in the portfolio has now been reduced from a
combined total of 33 in May 2007 to 21 at the present date (excluding
subsequent new investments).A successful trade sale was achieved in the case of
Nomad Payments Limited, returning proceeds of GBP3,020,000 for a 1.9x multiple of
cost; two other companies were sold by way of trade sale returning proceeds of
a further GBP1,078,000 and 11 companies were closed and/or the investments
written off.
In the process, the funding requirement for the portfolio was reduced from GBP
18.2m in the two years leading up to 2007 to GBP4.1m in the two years subsequent.
However, this restructuring exercise and cost control has inevitably led to a
reduction in the value of the Company's unquoted portfolio, partly as a result
of the withholding of funding from weaker investments.
Nevertheless, the SPARK management team believe that the portfolio is now
substantially more robust, in spite of the recent market downturn, than would
otherwise be the case. In 2007, 80% of the value in the 33 unquoted investments
was represented by 14 investments, which had the characteristics, in many
cases, of very small sales revenues and negative profitability in terms of
EBITDA (earnings before interest, tax, depreciation and amortisation):
* Companies with annual revenues of less than GBP2.0m: 8 of the top 14
investments (representing 59% of the valuation)
* Companies with negative EBITDA: 13 of the top 14 investments (representing
97% of the valuation).
By the end of 2009, 80% of the value in the remaining 21 unquoted investments
was represented by 10 investments, which had developed the following much
healthier profile (figures of annual revenues and EBITDA relate to annual
run-rates at December 2009):
* Companies with annual revenues of less than GBP2.0m: only 1 of the top 10
investments (6% of the valuation)
* Companies with negative EBITDA: 5 of the top 10 investments (50% of the
valuation).
We believe that this puts SPARK VCT 2 plc in a much better position to cope
with the current shortage of investment capital and to support more
satisfactory returns to shareholders.
A summary of the movement in the number of companies
in the portfolio is set out below:
Quoted Unquoted Total
Number of portfolio companies of SPARK VCT 2 plc at 8 27 35
May 2007
Companies added as a result of the merger with SPARK 4 6 10
VCT 3 plc
12 33 45
Successful realisation: Nomad Payments Limited (1) (1)
Other realisations (2) (2) (4)
Companies closed and/or investments written off (3) (11) (14)
Public quotation: Celldex Therapeutics, Inc. 1 (1) -
Reversion to unquoted status: Celoxica Holdings plc, (3) 3 -
Imagesound plc, Synarbor plc
Number of portfolio companies 31 December 2009 5 21 26
Follow-on investments
It has been an objective of the SPARK management team to reduce the portfolio's
dependency on outside capital and to ensure prudent management of liquidity
within the fund. Accordingly, the year to 31 December 2009 saw only a limited
amount of additional investment being committed to the portfolio:
Company Sector GBP'000
Celona Technologies Limited TMT 232
Oxford Immunotec Limited Healthcare 142
UniServity Limited TMT 292
Vivacta Limited Healthcare 91
Xention Limited Healthcare 244
Xtera Communications, Inc. TMT 123
Other companies(6) 211
1,335
Realisations
With the M&A market effectively having been being closed during much of the
year; it has not been possible to achieve any significant exits.
As noted in the Chairman's statement, the recent strategy review took into
account that most of the Company's existing investments have been held in the
portfolio for a long time, with successful realisations of investments being
few in number and dividend payments to shareholders having been very limited.
This has been a consequence partly of the initial focus of the investment
policy on early-stage technology investments and partly of the difficult
economic and financial conditions in recent years which have slowed the rate of
development of investee companies and made exits more difficult to achieve.
Looking ahead, while it is too soon to predict the timing of any exits, the
shape of possible exits from a number of the companies is starting to become
clearer.
In line with the new strategy described in the Chairman's statement, priority
will be given to the payment of dividends as and when realisations are
achieved.
Future investment strategy
As noted in the Chairman's statement, it will be the Company's policy to
continue to support those of the existing investee companies that are
considered to have strong growth prospects, to enable them to develop long
enough to allow an optimal realisation.
As and when funds are available for new investment, the SPARK management team
will seek to take advantage of opportunities available at this current stage in
the investment cycle, particularly opportunities to participate in later-stage
financing rounds of venture-backed companies within the existing sector
focus.The aim will be to seek investments in companies which are already
revenue generating with a stable business base, and are able to deliver a flow
of dividends or be capable of exit within a 3-year period.
Against this background, and having regard to the revised dividend policy
described in the Chairman's statement, it will be the Manager's intention to
continue to target the 85% level as the asset allocation to the venture capital
portfolio but that the balance of the net assets from time to time should be
held in liquid form (cash or holdings in global treasury funds which count as
"securities" for the purposes of the Company's VCT qualifying status), rather
than in listed equities or fixed-interest securities.
Valuation changes
Valuations of the unquoted investments have been determined under the
application of the International Private Equity and Venture Capital Valuation
Guidelines, having regard mainly to (i) prices of recent financing rounds,(ii)
earnings multiples and (iii) industry valuation benchmarks and/or M&A valuation
criteria.In a number of instances, particularly among the "early stage" venture
capital investments,the previous valuations have been written down, where
progress in product development or early commercialisation has been slower than
anticipated. The quoted venture capital investments (shares traded on AIM,
NASDAQ and the Frankfurt Stock Exchange) have been valued at their bid prices
at 31 December 2009.
Overall, a reduction in valuation of venture capital investments of GBP3,950,000
has been recorded for the year, comprising a reduction in valuation of GBP4,195,000
in respect of unquoted investments and an unrealised gain of GBP245,000
in respect of quoted venture capital Investments.
The net reduction in valuation of unquoted venture capital
investments is summarised below.
Company GBP'000
"Maturing" venture capital investments 24
"Developing" venture capital investments (852)
"Early stage" venture capital investments (3,367)
(4,195)
Movements in valuation of the quoted venture capital investments
over the year were as follows:
Company GBP'000
Portrait Software plc AIM 520
MediGene AG ANKFURT (129)
Celldex Therapeutics, Inc. NSDAQ (259)
Others (2) 113
245
Outlook
Current activity on the part of major corporates in considering strategic
acquisition opportunities among venture-backed companies suggests evidence of
an improving M&A market. We are conscious of the importance of judging the
optimal timing of M&A activity in relation to small companies in specialist
areas where the number of potential buyers may be limited. Opportunities to
capture strategic value in individual cases within the portfolio will therefore
be kept under close review. Nevertheless, for the purposes of overall fund
planning, we target the flow of realisation proceeds from certain key
investments in 2011 and 2012.
SPARK Venture Management Limited Manager
31 March 2010
Directors' report
The Directors present their report and the audited financial statements for the
year ended 31 December 2009.
Activities and status
The principal activity of the Company during the year was the making of equity
investments in unquoted companies. On 15 March 2010, the Company was granted
annual approval by HM Revenue & Customs as a Venture Capital Trust for the year
ended 31 December 2008 in accordance with Section 274 of the Income Tax Act
2007. In the opinion of the Directors, the Company has conducted its affairs
for the year ended 31 December 2009 so as to enable it to continue to obtain
such approval. The Company was not at any time up to the date of this report a
close company within the meaning of Section 414 of the Income and Corporation
Taxes Act 1988.
The Company's ordinary shares of 1p each have been listed on the Daily Official
List of the UK Listing Authority since 10 November 2000.
Business review
The Business review which is required by Section 417 of the Companies Act 2006
is included in the Directors' report by reference.
Financial results and dividends
The net loss attributable to shareholders for the year ended 31 December 2009
was GBP4,420,000 (31 December 2008: loss of GBP5,233,000).
As at 31 December 2009, the Company had accumulated investment holding losses
(net of gains) of GBP12,962,000 (31 December 2008: GBP9,937,000) and retained a
positive balance on its profit and loss account of GBP3,117,000 (31 December
2008: positive balance of GBP3,518,000). During the year, a transfer of GBP994,000
has been made from the special reserve to the profit and loss account to offset
losses arising on disposals in the year: see note 14.
Share capital
The Directors provide the following information about the Company's securities.
The Company's capital structure is shown in Note 13. The shares carry a right
to receive discretionary dividends. Interim dividends are determined by the
Directors, whereas the proposed final dividend is subject to shareholder
approval. On a winding up, after meeting the liabilities of the Company, the
surplus assets will be paid to ordinary shareholders in proportion to their
shareholdings. There are no substantial shareholdings.
On a show of hands, every shareholder who (being an individual) is present in
person or (being a corporation) is present by a duly authorised representative,
and every proxy for any shareholder (regardless of the number of shareholders
for whom he is a proxy), shall have one vote on a show of hands. On a poll
every shareholder present in person or by proxy or by representative (in case
of a corporate member) shall have one vote for each share of which he is the
holder, proxy or representative. Instruments appointing a proxy to vote at a
general meeting of the Company are to be executed in accordance with the
Company's Articles of Association and delivered to the Company or such other
place specified in the notice convening the meeting, not less than 48 hours
before the time that the meeting is to commence.
The Company's articles can be amended only by a special resolution of the
members, requiring a majority of not less than 75% of such members as vote in
person or by proxy.
Purchase and cancellation of shares
During the year 980,841, representing 1.2% of the issued share capital,
ordinary shares of 1p each were bought in by the Company for cancellation at a
total cost of GBP146,168.The impact on the net asset value was to increase it by
0.3 pence per share. The purpose of the share buybacks was to satisfy demand
from those shareholders who sought to sell their shares during the year, given
that there is a very limited secondary market for shares in Venture Capital
Trusts generally. The Company may be able to buyback limited volumes of its
shares from time to time. However, its ability to do so may be constrained by
the level of its own liquid resources, VCT specific legislation and the
regulations of the UKLA
Directors
The Directors of the Company at 31 December 2009 and their interests in the
issued ordinary shares of 1p each of the Company at that date, and as at the
date of this report, were as follows:
31 December 31 December
2009 2008
RA Wright (Chairman) 129,226 129,226
TW Chambers (appointed 13 January 2010) - -
APM Lamb 21,646 21,464
JR Patel - -
All of the Directors' share interests shown above were held beneficially and no
right to subscribe for shares in the Company was granted to, or exercised by,
any Director during the year.
JR Patel is a Director of SPARK Venture Management Limited ("SVML"), the
Manager. Save for the management agreement referred to in note 4 of the
financial statements, no contracts subsisted during or at the end of the year
in which any Director was materially interested. Disclosures required by
Financial Reporting Standard (FRS) 8 "Related Party Disclosures" are set out in
note 19 of the financial statements.
Investment manager
SVML is the Manager to the Company. The principal terms of the Company's
management agreement with SVML as applicable during the year ended 31 December
2009 are set out in note 4 of the financial statements.
The suitability of the position of the Manager is under continuous assessment
by the Directors. In the opinion of the Directors the continuing appointment of
the Manager on the terms set out in the management agreement is in the
interests of the shareholders as a whole.
Insurance
As provided for in the Company's Articles of Association, the Company has
continued to maintain directors and officers liability insurance up to an
indemnity limit of GBP5 million.
Performance measurement
It is the responsibility of the Manager to seek the best investments and to
manage the portfolio in the most beneficial way to achieve the highest returns
for shareholders. The Board reviews investment activity and the performance of
the Company on a continuous basis. Each Director receives a detailed quarterly
report from the Manager, including management accounts and progress reports on
the investee companies. The net asset value of the Company's shares is
announced quarterly via a regulatory news service.
The Board considers total return to shareholders to be the key performance
indicator. Total return is a combination of net asset value and amounts
returned to shareholders by way of a dividend. This measure does not reflect
the tax benefits available to shareholders at the time of their initial
investment. Whilst it is appropriate to consider the performance of the Company
relative to its peers, which is a review undertaken by the Board, a direct
comparison is not always appropriate or relevant given the Company's niche
investment focus and there are no particularly relevant indices with which to
compare the performance of the Company.
The Board is aware that share price performance is seen by many of the
Company's shareholders as being important in judging the return on their
investment. The market price of the Company's shares is, in principle, linked
to reported net asset value and the market's perception of the potential for
future movements in net asset value and for regular future dividend payments.
At the present an overriding factor, however, is the very limited secondary
market, a consequence of the tax reliefs available on subscription of new
shares in VCTs but not for purchases of existing shares in the market. As a
result, the market price of the shares of a VCT typically stands at a discount
to reported net asset value. Share buybacks by the VCT itself can represent a
source of demand for the shares, in the absence of significant demand from
other market participants. In the case of the Company, however, the share
buyback transactions undertaken in recent years have not been successful in
limiting the level of the share price discount which has continued to be very
significant.
The recent review of the future direction of the Company, referred to in the
Chairman's statement, has had the aim of determining a strategy that will
ensure that investment returns generated from the venture capital portfolio are
delivered to shareholders in the most appropriate way. The Board has concluded
that, in future, priority will in future be given to the payment of dividends,
as and when realisations are achieved. In particular, subject to any tax and
regulatory constraints, 50% of the proceeds from any realisations from within
the existing venture capital portfolio will be regarded as being available for
distribution. As a corollary, while the Company will continue to be willing to
make share buybacks of limited volumes of its shares, the Board expects that,
going forward, the budget made available to fund buybacks will be more tightly
restricted than in previous years.
Principal risks and how the Board seeks to mitigate them
The Company's assets consist principally of unquoted venture capital
investments (mainly in equities) and quoted venture capital investments (in
equities): its main area of risk therefore relates to investment selection and
the subsequent performance of the underlying businesses. Risks are inherent in
venture capital investment, particularly in early stage companies. The specific
key risks faced by the Company, together with the Board's approach to
mitigation of operational and regulatory risks are as set out below.
Information in respect of risks associated with financial instruments held by
the Company is provided in note 18 to the financial statements.
Objective, strategy and investment performance
The results of the Board's recent review of the objective (in terms of the
delivery of investment returns to shareholders), strategy and investment
performance of the Company are set out in the Chairman's statement.
The Board receives regular reporting allowing it to monitor the Company's
investment performance and its compliance with the investment policy. The
Manager regularly presents to the Board and detailed quarterly progress reports
on the investee companies are circulated to the Board and considered at the
quarterly Board meetings. The rationale for individual investment selection is
documented prior to the making of an investment. This documentation is also
circulated to the Board.
Regulatory - compliance with the Venture Capital Trust rules
A breach of the Venture Capital Trust rules could result in HM Revenue and
Customs withdrawing the Company's VCT approval. If this approval were to be
withdrawn, the Company would lose its VCT status and all tax reliefs, including
those available to shareholders, would be likely to be cancelled, some possibly
with retrospective effect. The Board and the Manager frequently review
compliance with the Venture Capital Trust rules. Information on the Company's
continued compliance with the relevant rules and regulations is formally
reported to the Board on a regular basis.
Operational
All proposed investment decisions are notified by the Manager to the Board
prior to a decision to invest being made and all significant transactions and
income and expenditure are reported to the Board. The Board regularly considers
all operational risks and the measures in place to control them. The Board
ensures that satisfactory assurances are received from the Manager. The Manager
produces quarterly reports for review by the Company's Audit Committee and
representatives of the Manager are available to attend meetings in person if
required.
Creditor payment policy
The Company's payment policy is to ensure settlement of supplier invoices in
accordance with their standard terms. At 31 December 2009 there were no days
billings from the suppliers of services outstanding (31 December 2008: nil).
Substantial shareholdings
As at 31 December 2009 and at the date of this report, the Company was not
aware of any beneficial interest exceeding 3% of any class of the issued share
capital.
Audit information
The Directors holding office at the date of approval of this Directors' report
confirm that, so far as they are aware, there is no relevant audit information
of which the Company's auditor is unaware; and each Director has taken all
steps that he ought to have taken as a Director to make himself aware of any
relevant audit information and to establish that the Company's auditor is aware
of this information.
Annual General Meeting ("AGM")
The AGM will be held at the offices of Nabarro LLP, Lacon House, 84 Theobald's
Road, London WC1X 8RW at 12:00 noon on Friday 14 May 2010.
Going concern
The Directors confirm that they are satisfied that the Company has adequate
resources to continue in business for the foreseeable future. For this reason
they believe that the Company continues to be a going concern and that it is
appropriate to continue to apply the going concern basis in preparing the
financial statements.
Auditor
A resolution to re-appoint Grant Thornton UK LLP as the Company's auditor will
be proposed at the forthcoming AGM.
By order of the Board
NT Tran
Secretary
31 March 2010
Directors' responsibility statement
Company law requires the Directors to prepare financial statements for each
financial year that give a true and fair view of the state of affairs of the
Company and of the profit or loss for that year. Under that law, the Directors
have elected to prepare the financial statements in accordance with UK
accounting standards.
In preparing those financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable and prudent;
* state whether applicable UK accounting standards have been followed,
subject to any material departures disclosed and explained in the financial
statements; and
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the financial statements comply with
the Companies Act 2006.They have general responsibility for taking such steps
as are reasonably open to them to safeguard the assets of the Company and to
prevent and detect fraud and other irregularities.
The financial statements are published on the website (www.sparkvct.com), which
is a website maintained by the Manager. The maintenance and integrity of the
website maintained by the Manager is, so far as it relates to the Company, the
responsibility of the Manager. The work carried out by the auditor does not
involve consideration of the maintenance and integrity of this website and
accordingly, the auditor accepts no responsibility for any changes that have
occurred to the financial statements since they were initially presented on the
website. Visitors to the website need to be aware that legislation in the
United Kingdom governing the preparation and dissemination of the financial
statements may differ from legislation in their jurisdiction.
Under applicable law and regulations, the Directors are responsible for
preparing a Directors' report, Directors' remuneration report and corporate
governance statement that comply with that law and those regulations.
The Directors confirm to the best of their knowledge that:
* the financial statements, prepared in accordance with applicable UK
accounting standards, give a true and fair view of the assets, liabilities,
financial position and loss of the Company; and
* the Directors' report includes a fair review of the development and
performance of the business and the position of the Company, together with
a description of the principal risks and uncertainties that the Company
faces.
On behalf of the Board
Robert Wright
Chairman
31 March 2010
Income statement for the year to 31 December 2009
Notes Year Year Year Year Year Year
ended ended ended ended ended ended
31.12.09 31.12.09 31.12.09 31.12.08 31.12.08 31.12.08
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Loss on valuation of 10(d) - (3,950) (3,950) - (4,084) (4,084)
investments at fair
value through profit or
loss
Gain/(loss) on disposal 10(d) - 188 188 - (526) (526)
of investments at fair
value through profit or
loss
Income 2 114 - 114 235 - 235
Recoverable VAT 3 - - - 400 - 400
Investment management 4 (512) - (512) (592) - (592)
fee
Other expenses 5 (260) - (260) (661) - (661)
Loss on operating (658) (3,762) (4,420) (618) (4,610) (5,228)
activities
Interest payable on - - - (5) - (5)
loan notes
Loss on ordinary (658) (3,762) (4,420) (623) (4,610) (5,233)
activities before
taxation
Tax on loss on ordinary 7 - - - - - -
activities
Loss on ordinary (658) (3,762) (4,420) (623) (4,610) (5,233)
activities after
taxation
Basic and fully diluted 9 (0.9)p (4.8)p (5.7)p (1.1)p (8.3)p (9.4)p
loss per share
The `Total' column of this statement is the profit and loss account of the
Company; the supplementary revenue return and capital return columns have been
prepared under the guidance published by the Association of Investment
Companies.
All revenue and capital items in the above statement derive from continuing
operations.
The Company has only one class of business and derives its income from
investments made in shares and securities and from bank deposits.
There are no gains and losses for the year other than those passing through the
income statement of the Company.
The accompanying notes are an integral part of this statement.
Balance sheet as at 31 December 2009
Notes 31 December 31 December
2009 2008
GBP'000 GBP'000
Fixed assets 10(a) 17,743 20,489
Investments at fair value through profit
or loss
Current assets
Debtors 11 282 1,364
Cash at bank 6,136 7,139
6,418 8,503
Creditors: amounts falling due within one 12 (132) (397)
year
Net current assets 6,286 8,106
Net assets 24,029 28,595
Capital and reserves
Called-up share capital 13 775 785
Share premium account 14 339 339
Capital redemption reserve 14 89 79
Special reserve 14 20,056 21,196
Investment holding losses 14 (12,962) (9,937)
Merger reserve 14 12,615 12,615
Profit and loss account 14 3,117 3,518
Total equity shareholders' funds 24,029 28,595
Net asset value per share 15 31.0p 36.4p
The financial statements were approved by the Directors
on 31 March 2010 and were signed on their behalf by:
Robert Wright
Chairman
The accompanying notes are an integral part of this statement.
Cash flow statement for the year to 31 December 2009
Notes Year Year
ended ended
31.12.09 31.12.08
GBP'000 GBP'000
Cash inflow/(outflow) from operating 16 159 (1,954)
activities
Financial investment
Purchase of venture capital investments 10(b) (1,335) (1,584)
Purchase of listed equities - (158)
Sale of venture capital investments 10(b) 84 4,381
Sale/redemption of listed equity - 2,933
Amounts recovered from investments previously 10(d) 235 97
written off
Total net financial investment (1,016) 5,669
Equity dividends paid 8 - (467)
Financing
Funds received as part of merger - 3,792
Buyback of ordinary shares 13 (146) (395)
Redemption of loan notes - (100)
Net interest on loan notes - (5)
Total financing (146) 3,292
(Decrease)/increase in cash for the year (1,003) 6,540
Reconciliation of net cash flow to movement in
net funds
(Decrease)/increase in cash for the year (1,003) 6,540
Net funds at the start of the year 7,139 599
Net funds at the end of the year 6,136 7,139
The accompanying notes are an integral part of
this statement.
Net funds comprise cash at bank and on short
term deposit.
Reconciliation of movements in shareholders' funds for the year to 31 December
2009
Called-up Share Capital Special Investment Merger Profit Total
share premium redemption reserve holding reserve and loss
capital account reserve losses
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 31 December 2007 467 339 67 23,157 (4,701) - 2,416 21,745
Shares issued in 330 - - - - 12,615 - 12,945
connection with the
merger
Shares purchased for (12) - 12 (395) - - - (395)
cancellation
Realisation of prior - - - - (1,306) - 1,306 -
years' net gains on
investments
Transfer from - - - (1,566) - - 1,566 -
special reserve to
profit and loss
account
Investment holding - - - - (3,930) - 3,930 -
loss on valuation of
investments
Loss on ordinary - - - - - - (5,233) (5,233)
activities before
taxation
Dividends - - - - - - (467) (467)
At 31 December 2008 785 339 79 21,196 (9,937) 12,615 3,518 28,595
Shares purchased for (10) - 10 (146) - - - (146)
cancellation
Realisation of prior - - - - 925 - (925) -
years' net losses on
investments
Transfer from - - - (994) - - 994 -
special reserve to
profit and loss
account
Investment holding - - - - (3,950) - 3,950 -
loss on valuation of
investments
Loss on ordinary - - - - - - (4,420) (4,420)
activities after
taxation
Dividends - - - - - - - -
At 31 December 2009 775 339 89 20,056 (12,962) 12,615 3,117 24,029
The accompanying notes are an integral part of these statements.
Notes to the financial statements
1 Accounting policies
A summary of the principal accounting policies, all of which have been applied
consistently throughout the year, is set out below:
Basis of accounting
The financial statements have been prepared under the historical cost
convention, except for the measurement at fair value of investments, and in
accordance with applicable UK Accounting Standards and the Statements of
Recommended Practice "Financial Statements of Investment Trust Companies and
Venture Capital Trusts" issued by the Association of Investment Companies in
January 2009.
Investments
The Company's business is investing in financial assets with a view to
profiting from their total return in the form of income and capital growth.
This portfolio of financial assets is managed and its performance evaluated on
a fair value basis, in accordance with a documented investment strategy, and
information about the portfolio is provided internally on that basis to the
Board.
Accordingly, upon initial recognition (using trade date accounting) the
investments are designated by the Company as `at fair value through profit or
loss'. They are included initially at fair value, which is taken to be their
cost (excluding expenses incidental to the acquisition which are written off to
the profit and loss account).
Subsequently, the investments are valued at `fair value', which is measured as
follows:
* Listed and other quoted investments are valued at their bid prices at the
close of the year as issued by the London Stock Exchange; investments
listed or quoted overseas are valued at bid prices (where a bid price is
available) or otherwise at fair value based on published price quotations.
* Unquoted investments, where there is not an active market, are valued using
an appropriate valuation technique so as to establish what the transaction
price would have been at the balance sheet date. Such investments are
valued in accordance with the International Private Equity and Venture
Capital Valuation Guidelines. Indicators of fair value are derived using
established methodologies including earnings multiples, prices of recent
investment rounds, net assets and industry valuation benchmarks. Where the
Company has an investment in an early stage enterprise, the price of a
recent investment round is often the most appropriate approach to
determining fair value. In situations where a period of time has elapsed
since the date of the most recent transaction, consideration is given to
the circumstances of the investee company since that date in determining
fair value. This includes consideration of whether there is any evidence of
deterioration or strong definable evidence of an increase in value. In the
absence of these indicators, the investment in question is valued at the
amount reported at the previous reporting date. Examples of events or
changes that could indicate an impairment include:
* the performance and/or prospects of the underlying business are
significantly below the expectations on which the investment was based;
* a significant adverse change either in the investee company's business or
in the technological, market, economic, legal or regulatory environment in
which the business operates; or
* market conditions have deteriorated, which may be indicated by a fall in
the share prices of quoted businesses operating in the same or related
sectors.
In accordance with the exemptions under FRS 9 "Associates and Joint Ventures",
where the Company holds more than 20% but less than 50% of an investment and
the investment is not a subsidiary, it is not treated as an associated company.
Gains and losses on investments
Gains and losses arising from changes in the fair value of the investments are
included in the income statement for the year as a capital item and are
allocated to the investment holding losses.
Income
Dividends receivable on quoted equity shares are brought into account on the
ex-dividend date. Income receivable on unquoted equity and non-equity shares
and loan notes are brought into account when the Company's right to receive
payment and expect settlement is established. Fixed returns on non-equity
shares and debt securities are recognised on a time apportionment basis
(including amortisation of any premium or discount to redemption) so as to
reflect the effective interest rate, provided there is no reasonable doubt
that payment will be received in due course. Income from deposit interest
is included on an effective interest rate basis.
Expenses
All expenses, including expenses incidental to the acquisition or disposal of
an investment, are accounted for on an accruals basis and are charged wholly to
the profit and loss account. Any costs associated with the issue of shares are
charged to the share premium account. Any costs associated with the buyback of
shares are charged to the special reserve. All other expenses including
management fees are presented within the revenue column on the income
statement.
Taxation
Corporation tax is applied to profits chargeable to corporation tax, if any, at
the applicable rate for the year. The Company has not provided for deferred tax
on any capital gains/losses arising on the revaluation or disposal of
investments as these items are not subject to tax whilst the Company maintains
its Venture Capital Trust status. The Company intends to continue to meet the
conditions required for it to hold approved Venture Capital Trust status for
the foreseeable future. Deferred tax assets in respect of surplus management
expenses are only recognised to the extent that such assets are likely to be
recoverable against future taxable profits of the Company.
Foreign exchange
The currency of the primary economic environment in which the Company operates
(the functional currency) is pounds sterling ("Sterling"), which is also the
presentational currency of the Company. Transactions involving currencies other
than Sterling are recorded at the exchange rate ruling on the transaction date.
At each balance sheet date, monetary items and non-monetary assets and
liabilities that are measured at fair value, which are denominated in foreign
currencies, are retranslated at the closing rates of exchange. Exchange
differences arising on settlement of monetary items and from retranslating at
the balance sheet date of investments and other financial instruments measured
at fair value through profit or loss, and other monetary items, are included in
the profit and loss account. Exchange differences relating to investments and
other financial instruments measured at fair value are subsequently included in
the transfer to the investment holding losses reserve.
Dividends
Dividends payable to equity shareholders are recognised in the reconciliation
of movements in shareholders' funds when they are paid, or have been approved
by shareholders in the case of a final dividend and become a liability of the
Company.
2 Income Year ended Year ended
31.12.09 31.12.08
GBP'000 GBP'000
Dividend income
- Listed companies - UK 1 28
- Listed companies - foreign - 31
Interest receivable
- Loans to venture capital investee companies 24 1
- Bank deposits 1 34
- VAT 28 -
Other income (global treasury fund) 60 141
114 235
3 Recoverable VAT
In the income statement to 31 December 2008, the Company recognised VAT
recoverable of GBP400,000. During the year to 31 December 2009, the Manager
received a repayment of GBP400,000 from HMRC, which was passed on to the Company.
It is possible that additional amounts of VAT will be recoverable in due course
but the Directors are unable at this stage to quantify the sums involved.
4 Investment management fee
Year ended Year ended
31.12.09 31.12.08
GBP'000 GBP'000
Investment management fee 512 505
Irrecoverable VAT - 87
512 592
SVML provides investment management services to the Company under an agreement
dated 30 October 2000.
SVML is a wholly owned subsidiary of SPARK Venture Management Holdings Limited,
a company of which JR Patel is an executive director and a beneficial
shareholder. JR Patel is an executive director of SVML.
The management fee, which is calculated monthly and is payable quarterly in
advance, is levied at a rate of 2.5% on the Company's net assets. The
management fee will be reduced to the extent that the annual running costs
(excluding irrecoverable VAT) of the Company does not exceed 3.0% of year end
net assets. The investment management agreement continues to be terminable by
the Company or the Manager on a notice period the longer of (i) twelve months
and (ii) the period from the date on which notice is given to 9 November 2010.
If such notice is given on or after 9 November 2010, the notice period will be
twelve months. There are no provisions for compensation payable in the event of
termination.
Irrecoverable VAT was charged on the investment management fee up to 30
September 2008. In line with the ruling against HMRC (see note 3) no further
VAT was charged after this point.
SVML also provides administrative and secretarial services to the Company for
which it was entitled to a fee of GBP61,000 for the year (31 December 2008:
GBP61,000) adjusted annually in line with changes in the Retail Price Index.
5 Other expenses Year Year
ended ended
31.12.09 31.12.08
GBP'000 GBP'000
Administrative and secretarial services 61 61
Directors' remuneration (note 6) 45 48
Auditor's remuneration
- Fees payable to the Company's auditor for audit of the 17 17
financial statements
- Fees payable to the Company's auditor and its associates - 35
for other services relating to the merger
- Fees payable to the Company's auditor and its associates 7 16
for other services relating to tax
Legal and professional expenses, including merger costs 45 333
Payment on account to HMRC 11 -
Insurance 6 7
UKLA, LSE and registrar's fees 26 29
Transaction costs 4 15
Irrecoverable VAT 5 55
Other 33 45
260 661
6 Directors' remuneration
Year Year
ended ended
31.12.09 31.12.08
GBP'000 GBP'000
Amounts payable to Directors or companies controlled by them 45 48
7 Tax on ordinary activities
Year Year
ended ended
31.12.09 31.12.08
GBP'000 GBP'000
Corporation tax - -
Reconciliation of loss on ordinary activities to taxation
Year Year
ended ended
31.12.09 31.12.08
GBP'000 GBP'000
Loss on ordinary activities before taxation (4,420) (5,233)
Tax on loss on ordinary activities at standard UK
corporation tax rate of 28% (31 December 2008: 28.5%) (1,238) (1,491)
Effects of:
Non taxable items - UK dividends and net losses on investments 1,106 1,306
Unutilised management expenses 132 185
- -
The Company has excess trading losses of GBP5,491,000 (2008: GBP5,020,000) that are
available for offset against future profits. A deferred tax asset of GBP1,538,000
(2008: GBP1,406,000) has not been recognised in respect of those losses as they
will be recoverable only to the extent that the Company has sufficient future
taxable profits.
8 Dividends
Year Year
ended ended
31.12.09 31.12.08
GBP'000 GBP'000
Final dividend: 1p per share paid on 24 June 2008 - 467
The total reserves available for distribution by way of a dividend is
GBP10,211,000 (31 December 2008: GBP14,777,000), being made up of the special
reserve and profit and loss account less investment holding losses.
The Directors do not recommend a dividend for the year ended 31 December 2009.
9 Earnings per share
The revenue loss per share of 0.9p (31 December 2008: loss 1.1p) is based on
the revenue loss on ordinary activities after tax of GBP658,000 (31 December
2008: loss GBP623,000) and on the weighted average number of ordinary shares in
issue during the year of 77,968,095 (31 December 2008: 55,670,213).
The capital loss per share of 4.8p (31 December 2008: loss 8.3p) is based on
the capital loss on ordinary activities after tax of GBP3,762,000 (31 December
2008: loss GBP4,610,000) and on the weighted average number of ordinary shares in
issue during the year of 77,968,095 (31 December 2008: 55,670,213).
The total loss per share of 5.7p (31 December 2008: loss 9.4p) is based on the
total loss on ordinary activities after tax of GBP4,420,000 (31 December 2008:
loss GBP5,233,000) and on the weighted average number of ordinary shares in issue
during the year of 77,968,095 (31 December 2008: 55,670,213).
10 Investments
10(a) Summary of investments
31.12.09 31.12.08
GBP'000 GBP'000
Venture capital investments 17,743 20,489
10(b) Movements in investments
Venture
capital
investments
GBP'000
Cost at 1 January 2009 30,426
Investment holding losses at 1 January 2009 (9,937)
Valuation at 1 January 2009 20,489
Movements in the year:
Purchases at cost 1,335
Disposals
- proceeds (84)
- net losses on disposal (47)
Net loss on valuation of investments (3,950)
Valuation at 31 December 2009 17,743
Book cost at 31 December 2009 30,705
Investment holding losses at 31 December 2009 (12,962)
Valuation at 31 December 2009 17,743
Amounts shown as cost represent acquisition cost, less any reduction made on
account of impairment in value.
10(c) Venture capital investments
Investment
Valuation at holding Valuation at
01.01.09 Additions Disposals gains/(losses) 31.12.09
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Fifteen largest venture capital investments
Workshare Limited 3,066 - - 10 3,076
Xtera Communications, Inc. 1,656 123 - - 1,779
UniServity Limited 1,400 292 - - 1,692
Oxford Immunotec Limited 1,802 142 - (598) 1,346
Elateral Holdings Limited 1,048 - - 113 1,161
Xention Limited 1,815 244 - (1,096) 963
Level Four Software Limited 795 - - - 795
Cluster Seven Limited 765 - - - 765
Portrait Software plc AIM 216 - - 520 736
Vivacta Limited 856 91 - (215) 732
Sift Group Limited 698 47 - (98) 647
Celona Technologies Limited 983 232 - (699) 516
Imagesound plc 489 - - - 489
MediGene AG FRANKFURT 616 - - (129) 487
Antenova Limited 659 - - (211) 448
16,864 1,171 - (2,403) 15,632
Other unquoted venture capital investments 2,682 158 - (1,401) 1,439
Other quoted venture capital investments 812 6 - (146) 672
20,358 1,335 - (3,950) 17,743
Investments exited during the year 131 - (131) - -
20,489 1,335 (131) (3,950) 17,743
Transaction costs relating to the purchase of venture capital
investments are not capitalised.
FRS 29 analysis GBP'000
Level 1: quoted venture capital investments(1) 1,895
Level 3: unquoted venture capital investments 15,848
17,743
(1) All level 1 investments are in an active market.
Level 3 reconciliation GBP'000
Valuation at 1 January 2009 18,837
Purchases at cost 1,329
Disposals
- proceeds (70)
- realised net losses on disposal(3) (53)
Investment holding losses(4) (4,195)
Valuation at 31 December 2009 15,848
(3) Realised net losses on disposal are included within "Loss
on disposal at fair value through profit or loss" in the
Income Statement.
(4) Investment holding losses are included within "Loss on
valuation of investments at fair value through profit or
loss" in the Income Statement.
10(d) Loss on investments
The overall loss on investments at fair value through profit or loss disclosed in
the profit and loss account is analysed as follows
Year ended Year
31.12.09 ended
GBP'000 31.12.08
GBP'000
Loss on valuation of investments at fair value through
profit or loss
Net loss on valuation of investments (3,950) (3,930)
Write-off of investments - (154)
(3,950) (4,084)
Gain/(loss) on disposal of investments at fair value
through profit or loss
Net loss on disposal of investments (47) (623)
Additional proceeds received in respect of investments 235 97
previously disposed of and recoveries made in respect
of investments previously written off
188 (526)
(3,762) (4,610)
`Net loss on disposal' represents the difference between proceeds received and
the carrying values of those investments sold during the year.
10(e) Significant holdings
Details of shareholdings in those companies where the Company's holding at 31
December 2009 represents more than 20% of the allotted equity share capital of
any class; more than 20% of the allotted share capital; or more than 20% of the
assets of the company itself, are given below. All of the companies are
incorporated in Great Britain.
Company Class of share Number held Proportion
of class
held
UniServity Limited Ordinary shares 14,350 9.1%
B Ordinary shares 25,960 58.3%
A Ordinary shares 50,256 58.3%
11 Debtors
31.12.09 31.12.08
GBP'000 GBP'000
Other debtors 178 1,220
Prepayments and accrued income 104 144
282 1,364
12 Creditors (amounts falling due
within one year)
31.12.09 31.12.08
GBP'000 GBP'000
Accruals 89 355
Other creditors 43 42
132 397
13 Called-up share capital
31.12.09 31.12.08
GBP'000 GBP'000
Authorised:
100,000,000 (31.12.08: 100,000,000) ordinary shares of 1p 1,000 1,000
Allotted, issued and fully paid:
77,554,035 (31.12.08: 78,534,876) ordinary shares of 1p 775 785
The Company bought back for cancellation 980,841 ordinary shares, representing
1.2% of the opening issued share capital, at a cost of GBP146,168.
14 Reserves
Share Capital Special Investment Merger Profit
premium redemption reserve holding reserve and loss
account reserve losses account
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2009 339 79 21,196 (9,937) 12,615 3,518
Shares purchased for cancellation - 10 (146) - - -
Realisation of prior years' net - - - 925 - (925)
losses on investments
Transfer from special reserve to - - (994) - - 994
profit and loss account
Investment holding loss on - - - (3,950) - 3,950
valuation of investments
Loss on ordinary activities after - - - - - (4,420)
taxation
Dividends - - - - - -
At 31 December 2009 339 89 20,056 (12,962) 12,615 3,117
The capital redemption reserve was created to reflect the repurchase and
cancellation of shares.
The special reserve is a distributable reserve that was created in November
2000 following the reduction of the share premium account. This reserve allows
the Company, amongst other things, to fund the buyback of its ordinary shares
as and when it is considered by the Board to be in the best interests of
shareholders and also to facilitate the payment of dividends to shareholders
earlier than would otherwise have been possible as transfers can be made from
this reserve to the profit and loss account to offset losses on disposal of
investments and, for investments that have been fair valued to zero with no
chance of recovery, the cost of those investments.
Accordingly, a transfer of GBP994,000 (including GBP47,000 representing losses on
disposal of investments during the year and GBP925,000 representing losses of
previous years now treated as realised or written off) has been made from the
special reserve to the profit and loss account.
15 Net asset value per share
The net asset value per share as at 31 December 2009 of 31.0p (31 December
2008: 36.4p) is based on net assets of GBP24,029,000 (31 December 2008: GBP
28,595,000) divided by the 77,554,035 ordinary shares in issue at that date (31
December 2008: 78,534,876).
16 Reconciliation of operating loss to net cash inflow/ Year Year
(outflow) from operating activities ended ended
31.12.09 31.12.08
GBP'000 GBP'000
Loss on operating activities (4,420) (5,228)
Loss on investments at fair value through profit or loss 3,762 4,610
Decrease/(increase) in debtors 1,082 (1,224)
Decrease in creditors (265) (112)
Cash inflow/(outflow) from operating activities 159 (1,954)
17 Commitments and guarantees
As at 31 December 2009, there were legal commitments totalling GBP451,000 (31
December 2008: GBP80,000) in respect of further funding to be provided to
existing investee companies. There were no guarantees outstanding (31 December
2008: GBPnil).
18 Financial instruments
As a Venture Capital Trust the Company invests in unquoted and AIM-traded UK
companies. In addition to its venture capital portfolio, which is invested mainly in
technology-related companies in the TMT and healthcare sectors, the Company
maintains liquidity balances in the form of cash and cash equivalents held for
follow-on financing and new venture capital investment and debtors and
creditors that arise directly from its operations. At 31 December 2009, 73.8%
(GBP17.7 million) of the Company's net assets were invested in venture capital
investments and 26.2% (GBP6.3 million) in liquidity balances.
In pursuing its investment policy, the Company is exposed to risks that could
result in a reduction in the value of net assets and consequently funds
available for distribution by way of dividend or for re-investment.
These risks and the management of them, which is the responsibility of the
Manager and monitored by the Directors, are unchanged from the previous
accounting period and are set out below.
Market risk
The fair value or the future cash flows of financial instruments held by the
Company may fluctuate because of changes in market prices. Market risk
comprises currency risk, interest rate risk and other price risk:
* Currency risk
The Company has no significant financial instruments denominated in foreign
currencies.
* Interest rate risk
As the Company has no borrowings it only has limited interest rate risk. The
impact is on income and operating cash flows and arises from changes in market
interest rates.
The assets that are exposed to interest rate risk are tabled below. Interest
received on cash balances is at a margin over LIBOR or its foreign currency
equivalent (2008: same). Interest on loans to venture capital investee
companies is at a fixed rate. With interest income of GBP25,000 to 31 December
2009 (31 December 2008: GBP35,000), any further downward or upward movement in
interest rates is unlikely to be material.
* Other price risk
Venture capital investments carry a significant risk of failure. The management
of risk within the venture capital portfolio is addressed through careful
investment selection, by diversification across different industry segments
within the TMT and healthcare sectors, by maintaining a wide spread of holdings
in terms of financing stage and by limitation of the size of individual
holdings. There is a concentration of risk due to the focused investment
policy. This risk is mitigated by the specialised expertise of the Manager. The
Directors monitor the Manager's compliance with the investment policy, review
and agree policies for managing this risk and monitor the overall level of risk
on the investment portfolio on a regular basis.
A movement of 8.3% (31 December 2008: 7.5%) (the annual average percent
reduction in total return over the last five accounting periods of the Company)
in the fair value of the total venture capital portfolio would result in a
movement of GBP1,473,000 (31 December 2008: GBP1,613,000) in profit before tax,
which would affect the net asset value by 1.9p (31 December 2008: 2.1p) per
share.
Credit risk
Credit risk is the risk that a party to a financial instrument will fail to
discharge an obligation or commitment that it has entered into with the
Company, resulting in a financial loss.
The Investment Manager has in place a monitoring procedure in respect of
counterparty risk which is reviewed on an ongoing basis.
At the reporting date, the Company's financial assets exposed
to credit risk amounted to the following:
31.12.09 31.12.08
GBP'000 GBP'000
Cash and cash equivalents 6,136 7,139
The risk is managed as follows:
- cash at bank is held only with banks with high quality external credit
ratings.
The Company also has an exposure to credit risk in respect of the loan stock
investments it has made into investee companies, most of which have no security
attached to them, and, where they do, such security ranks beneath any bank debt
that an investee company may owe.
These loan stock investments are made as part of the qualifying investments
within the investment portfolio, and the risk management processes applied to
the loan stock investments have already been set out under other price risk
above.
Capital disclosures
The Company's objective is to deliver, as far as is consistent with venture
capital investment, steady growth in total return to shareholders (net asset
value plus cumulative dividends paid). As a result of the recent strategy
review, this objective has been varied from the previous accounting year: in
future, within the components of total return, priority will be given to the
payment of dividends as and when realisations are achieved. In particular,
subject to any tax or regulatory constraints, 50% of the proceeds from any
realisations from within the existing venture capital portfolio will be
regarded as available for distribution. It is likely, therefore, that the net
asset value of the fund will decline as dividends are paid, although to the
extent that investments are realised at amounts in excess of the valuations at
31 December 2009, and subject to the ongoing operating costs of the fund, total
return will increase.
The capital subscribed to the Company by original investors has been managed in
accordance with the Company's objectives. The available capital at 31 December
2009 is GBP24.0 million (31 December 2008: GBP28.6 million) as shown in the balance
sheet, which includes the Company's share capital and reserves.
Following the Board's recent strategy review, the dividend policy of the
Company will now be as set out above. Owing to the nature of a VCT, dividends
payable may vary considerably from time to time depending, both on the level of
income received from investments and, more significantly, on whether
realisations of investments have been achieved. Accordingly the level of
dividends will fluctuate and in some periods it is possible that no dividend
will be paid.
As regards share buybacks, following the strategy review the Board has
determined that the Company will continue to be willing to make buybacks of
limited volumes of its shares but expects that, going forward, the budget made
available to fund buybacks will be more tightly restricted than in previous
years.
The Company has no borrowings and there are no externally imposed capital
requirements other than the minimum statutory share capital requirements for
public limited companies.
19 Related party disclosures
SPARK Investors Limited (a fellow subsidiary of the Manager), of which JR Patel
is a Director, may from time to time be eligible to receive transaction fees
and/or directors' fees from investee companies. During the year ended 31
December 2009, fees of GBP23,000 attributable to the investments of the Company
were received pursuant to these arrangements (31 December 2008: GBP26,000).
There were no transactions, during the year, by Directors in investments in
which the Company has invested (31 December 2008: nil).
20 Co-investment
The Company has made venture capital investments in companies in which other
funds managed by SVML have also invested:
For the purposes of this note, the following abbreviations apply:
SPARK Ventures plc - SPK
SPARK VCT plc - SVCT
Quester Venture Partnership - QVP
Isis College Fund Limited Partnerships and Second Isis College Fund Limited
Partnership - ICF
Lachesis Seed Fund Limited Partnership - Lachesis
Company Co-investors
Academia Networks Limited SVCT, ICF and SPK
Allergy Therapeutics plc SVCT
Antenova Limited SVCT and QVP
Arithmatica Limited SVCT and QVP
Celldex Therapeutics, Inc. SVCT and QVP
Celona Technologies Limited QVP
Celoxica Holdings plc QVP and ICF
Cluster Seven Limited SVCT and QVP
Elateral Holdings Limited SVCT
Haemostatix Limited SVCT, QVP and Lachesis
Imagesound plc SVCT
Isango! Limited SVCT and SPK
Level Four Software Limited SVCT and QVP
MediGene AG SVCT, QVP and ICF
Oxford Immunotec Limited QVP and ICF
Oxonica plc SVCT and ICF
Perpetuum Limited SVCT and QVP
Secerno Limited SVCT and ICF
Sift Group Limited SVCT
Skinkers Limited SVCT and SPK
Symetrica Limited SVCT
TeraView Limited SVCT
UniServity Limited SVCT
Vivacta Limited SVCT and QVP
Workshare Limited SVCT and QVP
Xention Limited QVP
Xtera Communications, Inc. QVP
21 Post balance sheet events
Subsequent to the year end, the Company has not made any new investments in
excess of 20% of the equity capital of an investee company or any follow-on
investments that would raise the Company's existing stake above 20% of the
equity capital of an investee company.
After the year end GBP28,000 was obtained from HMRC being interest on the VAT
reclaim made in 2008. This amount has been accrued at year end.
In March 2010 the Company sold 800,000 shares in Portrait Software plc at 24.0p
per share.
END
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