TIDMAQT3
RNS Number : 4162A
Acuity VCT 3 PLC
31 January 2011
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Investment Objective
In accordance with the Prospectus dated 14 October 2005, the
Company's objective is to achieve capital gains and maximise UK
tax-free income to its shareholders from dividends and capital
distributions. It is intended that this objective is to be achieved
by investing the majority of the Company's funds in a portfolio of
Qualifying Investments as described under "Investment Strategy"
below.
Investment Strategy
The Company offers investors the opportunity to gain access to
the venture capital market.
The investment focus of the Investment Manager has been to seek
out established companies, most of whom are cash positive, in
preference to early stage opportunities.
In addition, investments are normally structured as a mixture of
equity and loan stock. The loan stock represents the majority of
the finance provided. Typically, funds managed by Acuity Capital
own a significant percentage of the equity of the investee
companies.
This investment focus, combined with a diversified sector
strategy and the typical investment structure, will, in the opinion
of the Directors, contribute materially to reducing the overall
risk of investing in smaller companies.
As at 30 September 2010, the Company has invested in 14
qualifying companies and 3 non-qualifying companies.
As at 30 September 2010, the Company has no bank
indebtedness.
The Directors do not wish the Company to be restricted by having
a fixed limit on what exposure to gearing it may have, apart from
the restriction in the Company's Articles, which limits borrowing
to an amount equal to its adjusted capital and reserves.
Co-investment
The Company invests alongside Acuity Growth VCT Plc which
enables shareholders to participate in larger unquoted
transactions, which tend to have a lower risk profile than smaller
venture capital investments.
Qualifying Investments
The Company intends to invest in companies that it believes have
a high growth potential. In the Directors' opinion, each of these
companies should generally reflect the following criteria:
-- A well defined business plan and ability to demonstrate
strong demand for its products or services;
-- Products or services that can be supplied at sustainable high
margins and be cash generative;
-- Objectives of management and shareholders to be similarly
aligned;
-- Adequate capital resources or access to further resources to
achieve the targets set out in the business plan; and
-- High calibre management teams.
The Company seeks to invest in a diversified portfolio of
unquoted and AIM quoted companies and will not specialise unduly in
any particular industry sector. Unquoted investments will typically
be in companies where the Company believes that there are
reasonable prospects of an exit through a trade sale or flotation
in the medium term.
There are no criteria set by the Directors regarding the size of
the target companies, except, with respect to each specific pool of
capital that an investee company's gross assets must comply with
current UK VCT legislation. Investments in start-up companies
where, in the opinion of the Company, levels of risk are
unacceptably high, in particular the technology sector, will
generally be avoided.
As at 30 September 2010, the Company has invested approximately
83% of its net assets by valuation in qualifying companies. The
average investment size at cost is GBP1.4 million.
Non-Qualifying Investments
Associated Funds
As at 30 September 2010, 1% of total assets by valuation of the
Company was invested in CF Acuity Real Active Management Fund and a
further 4% in Electra Private Equity Plc.
Cash Management
In addition to investments held in associated funds, as at 30
September 2010, 4% of its net funds by valuation of the Company
were invested in cash deposits to provide immediate liquidity,
pending suitable qualifying investments being identified.
Risk Management
Since the Company is flexible with regard to those areas in
which it invests, it aims to achieve a significant degree of
diversification and to spread risk by investing in unquoted, PLUS
traded and AIM quoted companies.
In addition, there is no emphasis on any particular industry
sector and even the non-qualifying investments have quite a high
level of in-built diversification. The Company is restricted to
investing no more than 15% of the value of its total assets at the
time of investment in any one individual qualifying investment or
non-qualifying investment.
Overview
I am disappointed to report that during the year ended 30
September 2010 the Net Asset Value (NAV) of the ordinary shares
decreased by 28% to 61.9 p per share. The Net Asset Value of the
Fund is GBP21.3 million. In the same period the FTSE All Share
Index increased by 9%.
Ordinary Shares
When 4.5 pence of cumulative dividends are added to the Net
Asset Value (the amount distributed since the Company's inception),
the total was 66.4p per ordinary share, a decrease of 26% over the
period.
The performance of the portfolio in the second half of the year
has been poor. In particular the Company's largest holding, The Fin
Machine Company, experienced significant working capital issues
following the establishment of a manufacturing plant in China. A
new Chairman was appointed in November 2010 and corrective actions
including senior management changes have been taken. The company
has entered 2011 with an improved order book and increased working
capital facilities and we are hopeful this will lead to a recovery
in the value of the investment. Despite this the Directors felt it
prudent to write down the Company's investment by 60% as at 30Th
September 2010 which has accounted for a significant part in the
overall decline in the Net Asset Value of the fund. Further details
of the movement in the investment portfolio are contained within
the Investment Manager's report.
The investment portfolio is focussed on unquoted investments
which now represent over 90% of the portfolio by value. The
portfolio comprises investments in 14 qualifying companies but has
become increasingly concentrated with the top five investments now
representing over 63%.
Investment Manager
On 13 December 2010, the Board announced that it was
interviewing other Investment Managers with a view to appointing a
new Investment Manager for the fund. Agreement on Heads of Terms,
which will be subject to contract, has been reached with the
Foresight Group. It is anticipated the terms of this appointment
will be substantially the same as those in our management contract
with Acuity Capital. Foresight Group is a well respected VCT
Manager in the UK with a good history of success in managing
funds.
Portfolio Activity
No new investments were made during the year other than a
further GBP3.8m was invested to support existing portfolio
companies. The largest of these investments were the Fin Machine
Company (GBP1.1m) and Loseley Dairy Ice Cream (GBP1.4m).
Soon after the year ended, the Company realised its holding in
Amber Taverns and received GBP913,000 which represents an uplift of
83% on the original cost of the investment. Amber Taverns is a
wet-led freehold pub portfolio which targets the lower end of the
marketplace. The original investment was made in 2006. Also,
following an agreed offer for Mount Engineering, we realised our
shareholding in this company for GBP846,000 a 10% uplift on
cost.
Dividends and Share Buy Backs
A Dividend of 1.0p was paid in February 2010 in relation to the
accounting period ending 30 September 2009. No dividends have been
proposed by the board for the year ended 30 September 2010.
A total of 724,299 shares were bought back in the period for a
total of GBP397,000, at an average of 53.7p per share.
Although the worst effects of the recession may be behind us the
Board continues to review the liquidity position of the fund and
will ask the new Investment Manager to undertake a rigorous review
of the portfolio.
Top Up Offer
A top up offer was offered to existing shareholders in the year.
In total GBP0.1m was raised under the offer which closed on 6
December 2010.
Risks
Risks associated with the Company are set out in detail in the
Report of the Directors' and in note 19 of the Notes to the
accounts.
Outlook
The first task of the new fund manager will be to conduct a full
scale review of all portfolio companies. A summary of the findings
of this review will be communicated to all shareholders.
Business conditions for a number of our investee companies are
likely to remain difficult during 2011 but prospects for others,
notably those engaged in export businesses appear to be
brightening.
I will write to Shareholders again once the board have executed
contracts with both Foresight Group and Acuity Capital and inform
you of the date and location of the Annual General Meeting together
with the Notice of Annual General Meeting.
Stuart Stradling
Chairman
28 January 2011
Overview
As set out in the investment strategy on page 2 of the Report,
our objective is to invest in small unquoted companies with
significant existing revenues and profits and to seek to add value
through organic growth and buy and build strategies. Access to
these types of investment is enhanced through co-investing with
Acuity Growth VCT Plc.
Performance Review
Although the first half results indicated that the portfolio had
weathered the worst of the economic recession, four portfolio
companies have since reported difficulties in the summer which have
had a significant negative impact on the year end Net Asset Value.
As at 30 September 2010, the Net asset Value per share had fallen
to 61.9p, a reduction of 28% over the year. The main declines in
the year were The Fin Machine Company, Loseley Dairy Iced Cream,
Munro Global and Target Entertainment. Collectively they accounted
for the majority of the overall decrease in the net asset
value.
Fin Machine Company encountered working capital difficulties as
a result of its expansion into China. This had a knock on impact on
trading which has resulted in a disappointing year for the company.
The fund invested a further GBP1.1 million to help bridge the
working capital shortfall. We have instigated the appointment of a
new Chairman during November 2010. The company also replaced its
Financial Director and put in place tighter internal controls. The
company has started its new financial year with a healthy order
book and the long term growth prospects for the company remain
good. The key driver of future growth will be the continued growth
of the automotive sector in China and India and the adoption of its
cooling technology by air conditioning manufacturers.
Although Loseley Dairy Ice Cream attracted other investors in
the year, the delay in receiving the funding meant that the company
was unable to achieve the production efficiencies it had planned
for and as a result profitability was below forecast. Over the last
eighteen months the company has made good progress in increasing
its annualised turnover and winning new customers. In particular it
won a supply contract with a major national retailer, a significant
milestone, which could lead to much larger orders over the next two
years. A new CEO, Neil Burchell, the former MD of Yoghurt producer
Rachel's Organic, has been appointed. Loseley has the opportunity
to further grow its own label business and to use the benefits of
scale to market its own higher margin ice cream brands, Loseley,
Thayers and Yorkshire Dales.
Munro Global is a market research company which has demonstrated
good growth both organically and through bolt on acquisitions. One
of its trading subsidiaries which had established good long term
contracts with the public sector has recently disappointed
following the impact of the Government's austerity spending cuts.
This has necessitated a programme of redundancies and a shortfall
in forecast profitability for the current year.
Despite Target Entertainment receiving an attractive offer, a
successful negotiation between the prospective buyer and all the
shareholders proved elusive. As a result, the company's bank
decided to place the company into administration. The downturn in
the media sector had put the company under significant pressure
with its drama production business, in particular, suffering from a
lack of commissions from the TV broadcasters.
On a more positive note Amber Taverns, the pub operator, was
sold in October 2010 at an uplift of 2.9x cost. The key to the
success of the transaction was an experienced management team who
were able to acquire underperforming pubs in the North West of
England at attractive prices and to drive through better operating
performance in each unit. Mount Engineering was also sold after the
reporting date realising GBP846,000 a 10% uplift on cost.
The best performer in the period was Factory Media who have
continued to show good momentum in their online website mpora.com.
Factory Media has become one of Europe's largest and most
innovative Action Sports media owners with 19 traditional print
publications and 23 new media brands reaching over 500,000 readers
and 4 million online users every month. The business currently
focuses on two market segments, Board sports and Bike, with an
international footprint and multilingual products.
The results for the last six months have been disappointing
largely due to trading difficulties at four portfolio companies.
The investment manager has been working closely with the investee
company management teams to ensure that they have reacted quickly
to cut costs and where appropriate added management resource to
ensure that the companies are being optimally managed. Whereas the
worst of the economic downturn may well have passed the ripple
effect feeding into the smaller companies market has continued to
cause problems for many companies.
Acuity Capital Management Limited
The Investment Manager
The Board of the Company has decided to appoint another
Investment Manager to manage the Fund and subject to contract this
will take effect after the issue of this Report and Accounts of the
Company. During the year the Fund's investments were managed by
Acuity Capital Management Limited. Acuity Capital Management
Limited was established in 1981 and is authorised and regulated by
the Financial Services Authority.
Acuity Capital has considerable expertise in quoted and unquoted
investments and has a well developed deal flow, including unquoted
company proposals that originate from its own contacts and network,
pre-float finance opportunities and broker led AIM flotations.
Acuity Capital is also the Investment Manager of Acuity Growth
Plc, Acuity Environmental VCT Plc and CF Acuity Real Active
Management Fund as well as the Company.
The Investment Manager has established an Investment Committee
comprising three Acuity Capital executives and two independent
members. The independent members of the Investment Committee are
Angela Lane and Tony Everett. After 18 years working in private
equity at 3i, Angela's final role was as a partner in 3i's Growth
Capital business managing the UK Portfolio. Tony has a background
as an entrepreneur and business owner and acts as a consultant to
Fleming Family and Partners Private Equity. In addition, the
Investment Committee is chaired by Hugh Mumford a senior executive
of Electra Partners Group. The Investment Committee meets as
required to consider and review investment proposals.
The Unquoted Investment Valuation Process
The Directors follow the principles recommended in the
International Private Equity and Venture Capital (IPEV) Valuation
Guidelines issued in September 2010.
Initially the valuations of the unquoted investments will be
compiled by the fund managers. They will then be reviewed in detail
by the executive members of the Investment Committee and further
reviewed in detail by the independent members of the Investment
Committee. Finally, they will be presented to the full Audit
Committee of the Board and then be recommended to the Board of
Directors for adoption. All Boards members have open access to the
investee companies and to all papers relating to the
valuations.
Co-investment Arrangements with other Acuity VCTs
The Directors welcome the fact that the Investment Manager has
three VCT pools of funds, Acuity Growth VCT Plc Ordinary Share
pool, Acuity Growth VCT Plc 'C' Share pool, and Acuity VCT 3 Plc
(together "the Acuity VCTs"), it can use for co-investment. This
allows each fund to spread its investment risk and gain access to
larger investments than it could do on its own. Where a
co-investment opportunity arises between the Company and one or
more of the other funds, the Company will invest in an agreed and
consistent proportion, on the same terms and in the same securities
as the funds with which it co-invests. Costs associated with any
such investment will be borne by each fund pro-rata to its
investment.
In more detail, the Board has adopted a set of guidelines on its
co-investment arrangements with the Acuity VCTs and the Investment
Manager as follows:-
-- Other than as set out below, investments will be allocated
between the Company and the Acuity VCTs by reference to the size of
each fund and to each fund's available cash resources.
-- Where an opportunity arises for a second or subsequent round
of investment in a company in which one of the Acuity VCTs has
invested at an earlier stage, the fund holding the existing
investment will have a preferential right to take up any pro-rata
entitlement it may have in the new financing round. The amount it
invests on this basis will not be taken into account in determining
its co-investment share thereafter.
-- The Company will make an investment in which one or more of
the Acuity VCTs have existing investments only when the Board
considers that to be in the best interests of the Company.
-- Any potential conflict of interest in a proposed investment
by one or more of the Acuity VCTs will be referred by the
Investment Manager to the Board of the Company and the other
relevant Boards.
-- In the event of a possible conflict of interest between the
Investment Manager and the Company, the matter will be decided by
those Directors who are independent of the Investment Manager.
The Board of the Company acknowledges that the Investment
Manager may occasionally recommend an allocation of investments on
a different basis from the one described above. For example, an
exception may be made to ensure that one or more of the Company and
Acuity Growth VCT Plc maintain their status as a HMRC approved VCT,
or in the interests of balancing their portfolios. A different
basis may also be necessary to meet the requirements of potential
investee companies. In these cases the Directors may use their
judgement.
Acuity VCT 3 Plc
Board of Directors
Stuart Stradling (Chairman)
Kevin D'Silva
David Hurst-Brown
Nicholas Ross
Investment Manager and Administrator
Acuity Capital Management Limited
Paternoster House
65 St Paul's Churchyard
London EC4M 8AB
Telephone: +44 (0)20 7306 3901
Web: www.acuitycapital.co.uk
Enquiries: info@acuitycapital.co.uk
Secretary and Registered Office
Acuity Capital Management Limited
Paternoster House
65 St Paul's Churchyard
London EC4M 8AB
Telephone: +44 (0)20 7306 3901
Company Number
5544383
Registered Independent Auditors
KPMG Audit Plc
Saltire Court
20 Castle Terrace
Edinburgh EH1 2EG
Telephone: +44 (0)131 222 2000
Registrar and Transfer Office
Capita Registrars Limited
Northern House
Woodsome Park
Fenay Bridge
Huddersfield HD8 0GA
Telephone (UK): 0871 664 0300 (calls cost 10p per minute plus
network extras, lines are open 8.30am-5.30pm Monday to Friday)
Telephone (Overseas): +44 208 639 3399
Email: shareholder.services@capitaregistrars.com
Web: www.capitaregistrars.com
Any change of address of a shareholder or other relevant
amendment to shareholder details should be communicated to the
Company's Registrar, Capita Registrars.
Stuart Stradling, Chairman Appointed a Director on 14 September
2005
He is a chartered accountant with 36
years experience in the City of London.
He was Managing Director of investment
banking and Chairman of corporate banking
at Dresdner Kleinwort Wasserstein until
he retired in April 2006. He previously
held a similar position at SG Warburg
and was partner in charge of corporate
broking at Rowe and Pitman for 10 years
prior to the firm's sale to SG Warburg
in 1986. In addition, he holds a number
of non-executive positions in small
companies in several fields, including
media and technology. He is Chairman
of the Nomination Committee.
Kevin D'Silva* Appointed a Director on 14 September
2005.
He is a chemical engineer who has specialised
in the medical devices industry. He
was formerly Group Managing Director
of Ferraris Group Plc and he has managed
the growth of a number of publicly quoted
and unquoted companies. He is Chairman
of Hallmarq Veterinary Imaging Ltd,
a MRI scanning business; Chairman of
Ai2 Ltd, a antimicrobial peptide supplier;
Chairman of Crystallon Ltd and Oxford
Cryosystems Ltd, a cryogenics cooler
manufacturer and Chairman of Surface
Transforms plc, a publically listed
manufacturer of carbon ceramic brake
discs . He is also a partner in SalusInvest
LP that invests and manages a portfolio
of medical products businesses. He is
Chairman of the Remuneration Committee.
David Hurst-Brown* Appointed a Director on 14 September
2005.
Having graduated as a Production Engineer
he worked for over 25 years in the investment
banking industry. Prior to his retirement
from UBS in 2002 he had worked for 15
years as an executive in the corporate
finance division of UBS Warburg. Presently
he is a non-executive of Anite Plc,
Imagination Technologies Plc, Ffastfill
Plc, Hargreave Hale AIM VCT and Keydata
Income VCT. He is Chairman of the Audit
Committee and has been nominated the
Senior Independent Director under the
Combined Code on Corporate Governance.
Nicholas Ross Appointed a Director on 14 September
2005.
He is a founding member of Acuity Capital
LLP, prior to the Management buy-out
he had been at Electra Quoted Management
since 1993. Previously he had several
years in investment analysis and fund
management. He has been responsible
for the launch of the three Acuity Capital
VCT funds. He is a Managing Partner
of Acuity Capital LLP and a Director
of Acuity Capital and all three Acuity
VCT funds. He also sits on a number
of investee company boards.
* Member of the Audit, Remuneration
and Nomination Committees
To the Members of Acuity VCT 3 Plc
The Directors present the audited accounts of the Company for
the year ended 30 September 2010 and their Report on its
affairs.
Investment Company Status
Throughout the year under review the Company was an investment
company as defined under Section 833 of the Companies Act 2006.
VCT Status
HM Revenue and Customs has granted the Company approval under
Section 274 of the Income Tax Act 2007 (ITA 2007) as a VCT, the
approval being effective from the first day on which the Company's
ordinary shares were listed on the London Stock Exchange (being 1
December 2005). The Board continues to direct the affairs of the
Company to enable it to maintain approval as a VCT.
Business Review
Objective and Investment Strategy
A review of the Company's Objective and Investment Strategy is
detailed on page 2.
Current and Future Development
A review of the main features of the year is contained in the
Chairman's Statement and the Investment Manager's Review on pages 5
and 6 respectively.
The Board of the Company has decided to appoint another
Investment Manager to manage the Fund and subject to contract this
will take effect after the issue of this Report and Accounts of the
Company.
The Board regularly reviews the development and strategic
direction of the Company. The Board's main focus continues to be on
the Company's long-term investment return. Attention is paid to the
integrity and success of an investment process and on factors which
may have an impact on this approach. Due regard is given to the
marketing and promotion of the Company, including effective
communication with shareholders and other external parties.
Performance
A detailed review of performance during the year under review is
contained in the Investment Manager's Review on page 6.
A number of performance measures are considered by the Board and
Investment Manager in assessing the Company's success in achieving
its objectives.
The key performance indicators ('KPIs") used to measure the
progress and performance of the Company are established industry
measures and are as follows:-
-- The movement in net asset value per ordinary share
-- The movement in share price
-- The movement of net asset value and share price performance
compared to the FTSE All-Share Index
Details of the KPIs are shown in the Financial Highlights on
page 4 and through a graph comparing the Company's total return on
a share price and net asset value basis over the period since
shares were first issued with the FTSE All-Share Index total return
over the same period as set out in the Directors' Remuneration
Report on page 23.
Risk Management
Since the Company is flexible with regard to those areas in
which it invests, it aims to achieve a significant degree of
diversification and to spread risk by investing in unquoted, PLUS
traded and AIM quoted companies. In addition, there is no emphasis
on any particular industry sector and even the non-qualifying
investments have quite a high level of in-built diversification.
The Company is restricted to investing no more than 15% of the
value of its total assets at the time of investment in any one
individual qualifying investment or non-qualifying investment.
The key risks facing the Company include Market Risk, Interest
Rate Risk Credit Risk and Liquidity Risk as further detailed in
Note 19 of the Notes to the Accounts.
In addition the Company is also focused on the following
risks:
Macroeconomic risks
The performance of the Company's underlying investment portfolio
is principally influenced by a combination of economic growth,
interest rates, the availability of well-priced debt finance, the
number of active trade and private equity buyers and the level of
merger and acquisition activity. All of these factors have an
impact on the Company's ability to invest and on the Company's
ability to exit from its underlying portfolio or on the levels of
profitability achieved on exit.
Long-term strategic risk
The Company is subject to the risk that its long-term strategy
and its level of performance fails to meet the expectations of its
shareholders. The Company constantly monitors the level of discount
of its Net Asset Value to its share price and considers the most
effective methodologies to keep this at a minimum including its
share buy-back policy.
In addition the Company regularly reviews its Objectives and
Investment Strategy in light of prevailing investor sentiment to
ensure the Company remains attractive to its shareholders.
Government policy and regulation risk
The Company carries on business as a VCT under section 274 of
the Income Tax Act 2007 (ICTA 2007). Continuation of this status
is
subject to the Company directing its affairs in line with the
relevant requirements of the legislation. Anticipated and actual
changes in government policy and related tax treatment of VCTs' are
closely monitored, as are other changes which could affect results
of operations or financial position.
Acuity Capital is an authorised person under the Financial
Services and Markets Act 2000 and regulated by the FSA. Changes to
the regulatory framework under which Acuity Capital operates are
closely monitored and reported upon as necessary by Acuity Capital
to the Company.
Investment risks
The Company operates in a very competitive market. Changes in
the number of market participants, the availability of funds within
the market, the pricing of assets, or in the ability of its
Investment Manager to access deals on a proprietary basis, could
have a significant effect on the Company's competitive position and
on the sustainability of returns.
In order to source and execute good quality investments the
Company is primarily dependent on Acuity Capital having the ability
to attract and retain people with the requisite investment
experience and whose compensation is in line with the Company's
objectives.
Once invested, the performance of the Company's portfolio is
dependent upon a range of factors. These include but are not
limited to: (i) the quality of the initial investment decision
described above; (ii) the ability of the portfolio company to
execute its business strategy successfully; and (iii) actual
outcomes against the key assumptions underlying the portfolio
company's financial projections. Any one of these factors could
have an impact on the valuation of a portfolio company and upon the
Company's ability to make a profitable exit from the investment
within the desired timeframe.
A rigorous process is put in place by Acuity Capital for
managing the relationship with each investee company for the period
prior to anticipated realisation. This includes regular asset
reviews and, in many cases, board representation by one of Acuity
Capital's executives.
The Company reviews both the performance of Acuity Capital and
its incentive arrangements on a regular basis to ensure that both
are appropriate to the objectives of the Company. As part of this
process the Board has concluded that the best interests of
Shareholders are served by appointing a new Investment Manager.
Operational risks
The Company's investment management, custody of assets and all
administrative systems are provided or arranged for the Company by
Acuity Capital. Therefore the Company is exposed to a range of
operational risks at Acuity Capital which can arise from inadequate
or failed processes, people and systems or from external factors
affecting these.
The Company's system of internal control mainly comprises the
monitoring of the services provided by Acuity Capital, including
the operating controls established by them to ensure they meet the
Company's business objectives, as discussed further in the
Corporate Governance Statement on page 19.
Share Capital
The current authorised share capital of the Company is
GBP600,000 divided into 60,000,000 ordinary shares of 1p each. The
ordinary shares have voting rights attached, holders are entitled
to receive notice of and attend shareholder meetings and to receive
dividends once declared and approved. The other rights and
obligations attaching to the ordinary shares are set out in the
Company's Articles of Association.
Authority to make Market Purchases of Shares
At the Annual General Meeting of the Company held on 3 March
2010 authority was given to make market purchases of up to
5,208,544 of the Company's issued ordinary share capital.
The Company does not hold any shares in treasury.
Accordingly, at 30 September 2010 authority remained to purchase
a further 4,484,245 ordinary shares.
At 30 September 2010, a total of 34,337,164 ordinary shares of
1p each of the Company were in issue.
A Special Resolution will be proposed at the Annual General
Meeting to renew, for one year, the Board's authority to buy up to
3,433,716 of the Company's ordinary shares, or such lesser number
of shares as is equal to 10% of the total number of ordinary shares
in issue as at the date of the passing of the resolution, subject
to the constraints set out in the Special Resolution. Should any
shares be purchased under this authority, it is the intention of
the Board that such shares be cancelled.
The Directors do not intend to use this authority to purchase
shares unless this would result in an increase in the net asset
value per share and would be in the best interests of shareholders
generally. The Directors recommend shareholders to vote in favour
of this Special Resolution.
Results and Dividend
Revenue (losses)/returns attributable to shareholders amounted
to GBP(347,000) (2009: GBP139,000). Capital losses attributable to
shareholders amounted to GBP(7,696,000) (2009: GBP(3,780,000)). The
Directors do not recommend the payment of a final dividend in
respect of the year ended 30 September 2010.
Directors
The current Directors of the Company are listed on page 13. Mr
SR Stradling, Mr D Hurst-Brown, Mr KA D'Silva and Mr NRW Ross all
served as Directors throughout the year ended 30 September 2010. No
other person was a Director of the Company during any part of the
year under review. Mr N Ross and Mr K D'Silva will retire at the
Annual General Meeting in 2011 and, being eligible, Mr K D'Silva
will offer himself for re-election. Mr N Ross will not offer
himself for re-election. Short biographical details of all the
Directors are provided on page 14. Following performance appraisals
of all of the Directors, details of which are to be found in the
Corporate Governance Statement on page 19, the Board considers that
the performance of each Director retiring at the Annual General
Meeting and offering himself for re-election continues to be
effective and that each Director continues to show commitment to
his role. Accordingly, the Board recommends that those Directors
retiring at the Annual General Meeting in 2011 and offering
themselves for re-election be re-elected
Directors' Interests
The beneficial interests of the Directors in the ordinary shares
of the Company are shown below. Save as disclosed, no Director had
any notifiable interest in the securities of the Company.
No Director bought or sold any ordinary shares of the Company
during the year under review. There have been no changes in the
interests of any of the Directors in the ordinary shares of the
Company between 1 October 2010 and 28 January 2011. No options over
ordinary shares in the capital of the Company have been granted to
the Directors.
30 September 2010 1 October
Ordinary Shares 2009
of 1p each Ordinary Shares
of 1p each
------------------------- -----------------
SR Stradling 51,500 51,500
KA D'Silva 10,300 10,300
D Hurst-Brown 25,750 25,750
NRW Ross** 51,600 51,600
--------------- -------- -----------------
** NRW Ross also has an interest in GBP25,575 (2009: GBP25,575)
of the 3.75% Loan Notes issued by the Company.
Directors' Remuneration Report
An Ordinary Resolution to approve the Directors' Remuneration
Report will be put to the Annual General Meeting in 2011.
Contracts with Directors
No Director has a service contract with the Company. As a result
of being a Partner of Acuity Capital LLP, Mr NRW Ross is deemed to
have an interest in the Management Contract between the Company and
Acuity Capital.
Directors' and Officers' Liability Insurance
Directors' and Officers' Liability Insurance is maintained on
behalf of the Directors in respect of their positions as Directors
of the Company.
Substantial Shareholders
At 28 January 2011 the Directors had not been notified of any
interests of 3% or more in the Company's issued share capital.
Independent Auditors
A resolution to re-appoint KPMG Audit Plc as Auditors to the
Company will be proposed at the Annual General Meeting in 2011. A
separate resolution will be proposed at the Annual General Meeting
in 2011 authorising the Directors to fix the remuneration of the
Auditors.
The Directors confirm that so far as each Director is aware,
there is no relevant audit information of which the Company's
auditors are unaware and that each Director has taken all the steps
that he ought to have taken as a Director in order to make himself
aware of any relevant audit information and to establish that the
Company's auditors are aware of that information.
Creditor Payment Policy
The Company agrees the terms of payment with its suppliers when
agreeing the terms of each agreement. Suppliers are aware of the
terms of payment and the Company abides by the terms of payment.
The Company's average creditor payment period at 30 September 2010
was one day.
Investment Manager
In February 2008 Acuity Capital LLP, a limited liability
partnership established by the current investment management team,
acquired the Company's Investment Manager, Electra Quoted
Management Limited. On acquisition Electra Quoted Management
changed its name to Acuity Capital Management Limited ("Acuity
Capital").
Acuity Capital was the Investment Manager of the Company during
the year under review. The Board regularly reviews the performance
of the Investment Manager and as a result of its poor performance
in the year the Board conducted a beauty parade of alternative
Investment Managers and intends to appoint Foresight Group.
Management Fees and Arrangements
Acuity Capital was appointed as Investment Manager under an
agreement dated 14 October 2005. The agreement is for an initial
period of five years and thereafter until terminated by not less
than one year's notice. Fees are paid quarterly in arrears, as a
percentage of net assets (less a rebate of fees suffered on
investments on funds managed by Acuity Capital Management), at
the following annual rates:
Period ended 30 June 2006 1.5%
Year ended 30 June 2007 2.0%
Year ended 30 June 2008 and thereafter 2.5%
Incentive Schemes
Certain persons engaged in the business of the Investment
Manager will be entitled to receive a performance fee based upon
returns to shareholders. The incentives are designed to encourage
significant dividend payments to shareholders and a Net Asset Value
performance that would equate to a historic top quartile industry
ranking, before any performance fee payment is made. Therefore, if,
by the end of a financial year, aggregate distributions of 30p per
share have been declared and if the Performance Value, which is
equal to the Net Asset Value plus distributions, at that date
exceeds 130p per share, then the beneficiaries will be entitled to
a performance fee equal to 20% of the excess of such Performance
Value over 100p per share. If, on a subsequent financial year end,
the performance of the Company falls short of the performance of
the Company on the previous financial year end, the beneficiaries
will not be entitled to any incentive. If, on a subsequent
financial year end, the performance of the Company exceeds the
previous performance of the Company, the beneficiaries will be
entitled to 20% of such excess. To give effect to this performance
fee, Loan Notes have been issued by the Company to certain persons
engaged in the business of the Investment Manager. No Loan Notes
have been issued directly to the Investment Manager. Further
details of the terms of the Loan Notes are set out in Note 13 of
the Financial Statements. At 30 September 2010 there was no amount
due under the Incentive Schemes.
Going Concern
After making enquiries and bearing in mind the nature of the
Company's business and assets, the Directors consider that the
Company had adequate resources to continue in operational existence
for the foreseeable future. In arriving at this conclusion the
Directors have considered the liquidity of the Company and its
ability to meet obligations as they fall due for a period of at
least twelve months from the date that these financial statements
were approved. As at 30 September 2010 the Company held cash
balances and listed investments in Electra Private Equity plc
amounting to GBP1,589,000. Cash flow projections have been reviewed
and show that the Company has sufficient funds to meet both its
contracted expenditure and its discretionary cash outflows in the
form of the share buyback programme and dividend policy. The
Company has no external loan finance in place and therefore is not
exposed to any gearing or covenants.
Annual General Meeting
The Annual General Meeting of the Company will be held on 2
March 2011. In addition to the ordinary business, the following
special business will be considered:-
Authority to Allot Shares: Resolution 7
At the Annual General Meeting an Ordinary Resolution will be
proposed seeking to renew the authority conferred upon the
Directors at the Annual General Meeting held on 2 March 2011 to
allot additional shares, up to an aggregate nominal amount of
GBP115,199.17 representing one third of the nominal value of the
issued share capital of the Company at the date of this Directors'
Report. The Directors have no present intention of exercising this
authority. The authority conferred on the Directors will expire at
the conclusion of the Company's Annual General Meeting in 2012. The
Directors recommend shareholders to vote in favour of this Ordinary
Resolution.
Authority to Disapply Pre-emption Rights: Resolution 8
A Special Resolution will be proposed at the Annual General
Meeting seeking to renew the authority conferred upon the Directors
at the Annual General Meeting held on 2 March 2010 to issue equity
securities of the Company for cash without the application of the
pre-emption rights provided by the Companies Act 2006. The
authority contained in this Resolution is sought in connection with
a rights issue or similar issue, or otherwise in connection with an
allotment of up to 5% of the nominal value of the issued ordinary
share capital of the Company shown in the accounts for the year
ended 30 September 2010. The Directors' authority will expire at
the conclusion of the Company's Annual General Meeting in 2012. The
Directors recommend shareholders to vote in favour of this Special
Resolution.
Authority to Make Market Purchases of Shares: Resolution 9
As set out in the Chairman's Statement, in the interest of all
the Company's shareholders the Board has decided to suspend the
Company's buy back programme temporarily because of the exceptional
economic circumstances. Nevertheless the Board wishes to have in
place the authority to purchase the Company's own shares so that
the buy back programme can be re-instated as and when conditions
permit. Accordingly, a Special Resolution will be proposed to
renew, for one year, the Board's authority to buy up to 3,433,716
of the Company's ordinary shares, or such lesser number of shares
as is equal to 10% of the total number of ordinary shares in issue
immediately prior to the passing of the resolution, subject to the
constraints set out in the Special Resolution. Should any shares be
purchased under this authority, it is the intention of the Board
that such shares be cancelled and not held as treasury shares.
The Directors do not intend to use this authority to purchase
shares unless this would result in an increase in the net asset
value per share and would be in the best interests of shareholders
generally. The Directors recommend shareholders to vote in favour
of this Special Resolution.
Corporate Governance
The Directors confirm that during the year under review the
Company has complied with Section 1 of the Combined Code on
Corporate Governance ("the Code") issued by the Financial Reporting
Council in 2008.
Directors' Attendance at Scheduled Meetings of the Board and
Committees of the Board
In addition, a number of Directors attended further Board
meetings at short notice to address specific issues.
The Board of Directors
The Board, which meets regularly, comprised four Directors at 30
September 2010, all of whom were non-executive.
Acuity Growth VCT Plc is also managed by Acuity Capital and Mr
NRW Ross is one of its Directors. The Board has particularly
considered the independence of each Director in light of the Code's
provisions on that subject.
The Board believes that each of the Company's Directors, apart
from Mr NRW Ross continues to be wholly independent under the Code.
Independence is a state of mind and the character and judgement
which accompany this are distinct from and, in the Board's opinion,
are not compromised by having cross directorships with other
Directors.
The Board has agreed a schedule of matters reserved for its
specific approval, which includes a regular review of the Company's
Management Agreement with Acuity Capital, together with the
monitoring of the performance thereunder. As such the board have
conducted a beauty parade with the intention of changing the
Investment Manager. The Management Agreement sets out the matters
over which Acuity Capital has authority in accordance with the
policies and directions of the Board. The Board Meetings consider
as appropriate such matters as overall strategy, investment
performance, share price performance, share price discount and
communication with shareholders. The Board considers that it meets
sufficiently regularly to discharge its duties effectively. The
numbers of scheduled meetings of the Board and the Audit Committee
are shown in the table above.
The Board receives information that it considers to be
sufficient and appropriate to enable it to discharge its duties.
Each Director receives board papers several days in advance of each
scheduled Board meeting and is able to consider in detail the
Company's performance and any issues to be discussed at the
relevant meeting.
The Directors believe that the Board has the balance, skills and
experience which enable it to provide effective strategic
leadership and proper governance of the Company. Information about
the Directors, including their relevant experience can be found on
page 14.
Performance Appraisal
The Board carried out a formal appraisal process of its own and
of its Committees' operation and performance during the year under
review. This was implemented by means of questionnaires circulated
to the Directors, the results of which were then reviewed by the
Board. Issues covered included board composition, meeting
arrangements and communication. The process was considered by the
Board to be constructive in identifying areas for improving the
functioning and performance of the Board and of its Committees. The
Board concluded that its performance and that of its Committees was
satisfactory.
The Chairman carried out a formal appraisal of each of the
Directors during the year under review and the Board, under the
leadership of the Senior Independent Director, similarly appraised
the Chairman. Relevant matters considered included the attendance
and participation at Board and Committee meetings, commitment to
Board activities and the effectiveness of the contribution made by
the relevant Director. As a result of this process the Chairman has
confirmed that the performance of each of the Directors being
proposed for re-election continues to be effective and that each of
them continues to show commitment to his role. The Senior
Independent Director has also confirmed the continuing
effectiveness and commitment of the Chairman.
Re-election of Directors
In accordance with the Code's provisions and the Company's
Articles, Mr K D'Silva and Mr N Ross will retire at the Annual
General Meeting to be held in 2011 and Mr D'Silva will offer
himself for re-election. Mr N Ross will not offer himself for
re-election.
Independent Professional Advice
Individual Directors may seek independent professional advice in
furtherance of their duties at the Company's expense within certain
parameters. All Directors have access to the advice and services of
the Company Secretary. Any appointment or removal of the Company
Secretary would be a matter for consideration by the entire
Board.
The Audit Committee
The Board has an Audit Committee established in compliance with
the Code. It comprises all the Directors other than the Chairman of
the Board and Mr NRW Ross, with Mr David Hurst-Brown as Chairman of
the Committee. The Board has taken note of the suggestion that at
least one member of the Committee should have recent and relevant
experience and is satisfied that the Committee is properly
constituted in this respect. Its authority and duties are clearly
defined in its written terms of reference which are available on
Acuity Capital's website.
The Committee's Responsibilities include:
-- monitoring and reviewing the integrity of the financial
statements, the internal financial controls and the independence,
objectivity and effectiveness of the external auditors;
-- making recommendations to the Board in relation to the
appointment of the external auditors and approving the remuneration
and terms of their engagement;
-- developing and implementing the Company's policy on the
provision of non-audit services by the external auditors;
-- reviewing the arrangements in place within Acuity Capital
whereby their staff may, in confidence, raise concerns about
possible improprieties in matters of financial reporting or other
matters insofar as they may affect the Company;
-- considering annually whether there is a need for the Company
to have its own internal audit function.
The Committee has reviewed the provision of non-audit services
provided by the external auditors and believes them to be cost
effective and not an impediment to the external auditors'
objectivity and independence. It has been agreed that all non-audit
work to be carried out by the external auditors, must be approved
by the Audit Committee and that any special projects must be
approved in advance.
Internal Audit
Following the review carried out by the Audit Committee as to
whether there is a need for the Company to have its own internal
audit function, the Board has considered and continues to believe
that the internal control systems in place within Acuity Capital
provide sufficient assurance that a sound system of internal
control, which safeguards shareholders' investment and the
Company's assets is maintained. An internal audit function,
specific to the Company, is therefore considered unnecessary.
The Remuneration Committee
During the year under review the Remuneration Committee
comprised all the Directors of the Company other than the Chairman
of the Board and Mr NRW Ross, with Mr KA D'Silva as Chairman of the
Committee. The Committee met once during the year. It was agreed
for there to be no change in salaries. The Committee has written
terms of reference which are available on Acuity Capital's website.
Full details of its role are set out in the Directors' Remuneration
Report.
The Nomination Committee
The Nomination Committee meets on an ad hoc basis to consider
suitable candidates for appointment as Director. It comprises all
the Directors apart from Mr NRW Ross, with Mr S Stradling as
Chairman of the Committee. It was not necessary to hold any meeting
of the Committee during the course of this year. The Committee has
written terms of reference which are available on Acuity Capital's
website. The Committee is responsible for identifying and
nominating, for the approval of the Board, candidates to fill board
vacancies to maintain a balanced Board. Letters of appointment,
which specify the terms of appointment, are issued to new
Directors.
The current Directors of the Company were appointed with regard
to their independence, suitability for the position and their
experience in related business areas.
Induction and Training
New Directors are provided with an induction programme which is
tailored to the particular circumstances of the appointee and which
includes being briefed fully about the Company by the Chairman and
senior executives of Acuity Capital. Following appointment,
Directors continue to receive other relevant training and advice as
necessary to enable them to discharge their duties.
The Company's Relationship with its Shareholders
At the Annual General Meeting all shareholders are welcome to
attend and have the opportunity to put questions to the Board.
The notice of the Annual General Meeting and related papers are
sent to shareholders at least 21 working days before the Meeting. A
separate resolution is proposed on each substantially separate
issue including the annual report and accounts.
All proxy votes are counted and, except where a poll is called,
the level of proxies lodged for each resolution is announced at the
Meeting and is published on Acuity Capital's website.
The Chairman and the Senior Independent Director can always be
contacted either through the Company Secretary or care of the
Company's registered office at Paternoster House, 65 St Paul's
Churchyard, London EC4M 8AB.
Internal Control
The Code requires the Directors to review the effectiveness of
the Company's system of internal control and report to shareholders
that they have done so. The Code extended the earlier reporting
requirements and now includes financial, operational and compliance
controls and risk management.
The Board confirms that it has an ongoing process for
identifying, evaluating and managing the significant risks faced by
the Company. This process has been in place throughout the year and
has continued since the year end and up to the date of this report.
It is reviewed at regular intervals by the Board and accords with
the Financial Reporting Council's 'Internal Control: Revised
Guidance for Directors on the Combined Code'.
The Board is responsible for the Company's system of internal
control and it has reviewed its effectiveness for the year ended 30
September 2010. The system of internal control is designed to
manage, rather than eliminate, the risk of failure to achieve
business objectives and can only provide reasonable and not
absolute assurance against material misstatement or loss.
Since investment management, custody of assets and all
administrative services are provided or arranged for the Company by
Acuity Capital, the Company's system of internal control mainly
comprises the monitoring of services provided by Acuity Capital,
including the operating controls established by them, to ensure
they meet the Company's business objectives. The key elements
designed to provide effective internal control for the Company are
as follows:
-- Financial Reporting - Regular and comprehensive review by the
Board of key investment and financial data including management
accounts, revenue projections, analyses of transactions and
performance comparisons.
-- Investment Strategy - Agreement by the Board of the Company's
investment strategy and monitoring of all large investments.
-- Management Agreements - The Board regularly monitors the
performance of Acuity Capital to ensure that the Company's assets
and affairs are managed in accordance with the guidelines
determined by the Board.
-- Investment Performance - The investment transactions and
performance of the Company's assets and affairs are managed in
accordance with the guidelines determined by the Board.
-- Management Systems - Acuity Capital's system of internal
control includes clear lines of responsibility, delegated
authority, control procedures and systems. Acuity Capital's
compliance department monitors compliance with the Financial
Services Authority rules.
The Board keeps under review the effectiveness of the Company's
system of internal control by monitoring the operation of key
controls of Acuity Capital as follows:
-- The Board reviews the terms of the Management Agreement and
receives regular reports from Acuity Capital executives.
-- The Board reviews the certificates provided by Acuity Capital
on a six monthly basis, verifying compliance with documented
controls.
Voting Policy
The Company's investee companies are principally a mixture of
quoted and unquoted companies in which the Company is a significant
shareholder and the Company is usually a party to all issues
requiring shareholder approval. The Company has given discretionary
voting power to Acuity Capital to vote on its behalf.
Acuity Capital's voting policy as agent for the Company has
adopted and applies the Statement of Principles drawn up by the
Institutional Shareholders Committee when it considers these in its
reasonable judgement to best serve the financial interests of the
Company's shareholders. Acuity Capital's voting policy has been
reviewed and endorsed by the Board.
Acuity Capital Management Limited
Secretary
Registered Office:
Paternoster House
65 St Paul's Churchyard
London EC4M 8AB
28 January 2011
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law they have
elected to prepare the Financial Statements in accordance with UK
Accounting Standards and applicable law (UK Generally Accepted
Accounting Practice).
The Financial Statements are required by law to give a true and
fair view of the state of affairs of the Company and of the profit
or loss of the Company for that period.
In preparing these Financial Statements, the Directors are
required to:
-- select suitable accounting policies and then apply them
consistently;
-- make judgements and estimates that are reasonable and
prudent;
-- state whether applicable 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 proper accounting
records that disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
its 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.
Under applicable law and regulations, the Directors are also
responsible for preparing a Directors' Report, Directors'
Remuneration Report and Corporate Governance Statement that
complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Management Company's website, relating to Acuity VCT 3 PLC.
Legislation in the UK governing the preparation and dissemination
of financial statements may differ from legislation in other
jurisdictions.
The accounts of the Company are published on
www.acuitycapital.co.uk which is a website maintained by the
Company's Investment Manager, Acuity Capital.
In accordance with the FSA's Disclosure and Transparency Rules,
the Directors confirm to the best of their knowledge that:-
(a) the accounts, prepared in accordance with applicable
accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company;
and
(b) the Report of the Directors includes a fair review of the
development and performance of the business and position of the
Company together with a description of the principal risks and
uncertainties that it faces.
By order of the Board of Directors
Stuart Stradling, Chairman
Registered Office:
Paternoster House
65 St Paul's Churchyard
London EC4M 8AB
28 January 2011
The Directors submit this report in accordance with the
requirements of Schedule 8 of the Large and Medium Sized Companies
and Groups (Accounts and Reports) Regulations 2008. An Ordinary
Resolution for the approval of this report will be put to members
at the forthcoming Annual General Meeting. The law requires the
Company's Auditors to audit certain of the disclosures provided.
Where disclosures have been audited they are indicated as such.
Remuneration Committee
During the year under review the Remuneration Committee
comprised all the Directors of the Company other than the Chairman
of the Board and Mr NRW Ross. Mr KA D'Silva was Chairman of the
Remuneration Committee throughout the year.
The Committee met once during the year. The current annual fee
rates are GBP20,000 for the Chairman and Mr David Hurst-Brown and
GBP15,000 for the other Directors, apart from Mr NRW Ross who
receives no remuneration from the Company. The Company has not been
provided with advice or services by any person in respect of
Directors' remuneration during the year.
Policy on Directors' Remuneration
In accordance with the Articles of Association of the Company,
the aggregate remuneration of the Directors may not exceed
GBP100,000 per annum or such higher amount as may from time to time
be determined by an Ordinary Resolution of the Company. Subject to
this overall limit, the Remuneration Committee's policy is that
remuneration of non-executive Directors should be sufficient to
attract and retain the Directors needed to oversee the Company and
reflect the specific circumstances of the Company, the duties and
responsibilities of the Directors and the value and amount of time
committed to the Company's affairs. It is intended that this policy
will continue for the year ended 30 September 2011 and subsequent
years. Non-executive Directors are not eligible to receive bonuses,
pension benefits, share options and other benefits.
Directors' Service Contracts
None of the Directors has a service contract with the Company.
No arrangements have been entered into between the Company and the
Directors to entitle any of the Directors to compensation for loss
of office.
Directors' Remuneration for the Year (audited)
The Directors who served during the year received the following
emoluments in the form of fees:
For the
year ended
For the year ended 30 September
30 September 2010 2009
GBP'000 GBP'000
----------------------- --------------
SR Stradling
(Chairman
& joint
highest
paid Director)
D Hurst-Brown
(Joint
highest 20 20
paid Director) 20 20
KA D'Silva 15 15
NRW Ross - -
----------------- ---- --------------
Total 55 55
----------------- ---- --------------
As a current executive of Acuity Capital, NRW Ross has an
interest in the Management Contract between the Company and Acuity
Capital and also holds loan notes. NRW Ross has waived his right to
receive a salary in the Company.
By order of the Board of Directors
Mr KA D'Silva
Chairman of the Remuneration Committee
Registered Office: Paternoster House, 65 St Paul's
Churchyard,
London, EC4M 8AB
28 January 2011
Independent Auditors' Report to the Members of Acuity VCT 3
Plc
We have audited the financial statements of Acuity VCT 3 Plc for
the period ended 30 September 2010 which comprise the Income
Statement, the Reconciliation of Movements in Shareholders' Funds,
the Balance Sheet, the Cash Flow Statement and the related notes.
The financial reporting framework that has been applied in their
preparation is applicable law and UK Accounting Standards (UK
Generally Accepted Accounting Practice).
This report is made solely to the company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditors' report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members, as a body,
for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of directors and auditors
As explained more fully in the Directors' Responsibilities
Statement set out on page 22, the directors are responsible for the
preparation of the financial statements and for being satisfied
that they give a true and fair view. Our responsibility is to audit
the financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board's
(APB's) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements
is provided on the APB's web-site at
www.frc.org.uk/apb/scope/UKP.
Opinion on financial statements
In our opinion the financial statements:
-- give a true and fair view of the state of the company's
affairs as at 30 September 2010 and of its loss for the year then
ended;
-- have been properly prepared in accordance with UK Generally
Accepted Accounting Practice; and
-- have been prepared in accordance with the requirements of the
Companies Act 2006.
Opinion on other matters prescribed by the Companies Act
2006
In our opinion:
-- the part of the Directors' Remuneration Report to be audited
has been properly prepared in accordance with the Companies Act
2006; and
-- the information given in the Directors' Report for the
financial year for which the financial statements are prepared is
consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- adequate accounting records have not been kept, or returns
adequate for our audit have not been received from branches not
visited by us; or
-- the financial statements and the part of the Directors'
Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
-- certain disclosures of directors' remuneration specified by
law are not made; or
-- we have not received all the information and explanations we
require for our audit.
Under the Listing Rules we are required to review:
-- the directors' statement, set out on page 18, in relation to
going concern; and
-- the part of the Corporate Governance Statement relating to
the company's compliance with the nine provisions of the June 2008
Combined Code specified for our review.
Simon Pashby (Senior Statutory Auditor)
for and on behalf of
KPMG Audit Plc,
Statutory Auditor
Chartered Accountants
Edinburgh
28 January 2011
The total column of this statement represents the Company's
Income Statement prepared in accordance with UK GAAP. The revenue
return and capital return columns are supplementary to this and are
prepared under guidance published by the Association of Investment
Companies. All revenue and capital items in the above statement
derive from continuing operations. No operations were acquired or
discontinued in the year. A Statement of Total Recognised Gains and
Losses is not required as all gains and losses of the Company have
been reflected in the above statement.
The information on pages 29 to 42 from part of these financial
statements.
The information on pages 29 to 42 forms part of these Financial
Statements.
The Financial Statements on pages 25 to 42 were approved and
authorised for issue by the Board of Directors on 28 January 2011
and were signed on their behalf by:
S Stradling
Chairman
Basis of Accounting
The accounts are prepared on a going concern basis and on the
historical cost basis of accounting, modified to include the
revaluation of fixed asset investments, in accordance with the
Companies Act 2006, United Kingdom Generally Accepted Accounting
Practice (UK GAAP) and the Statement of Recommended Practice for
Investment Trust Companies and Venture Capital Trusts issued by the
Association of Investment Companies in December 2005 and revised in
January 2009 (the "SORP").
In order to reflect the activities of an investment company,
supplementary information which analyses the financial statements
between items of a revenue and capital nature has been presented
alongside the financial statements. In analysing total income
between capital and revenue returns, the Directors have followed
the guidance contained in the SORP.
The management fee is allocated between revenue and capital in
accordance with the Board's expected long term split of returns,
and other expenses are charged to capital only to the extent that a
clear connection with the maintenance or enhancement of the value
of investments can be demonstrated.
A summary of the principal accounting policies, all of which
have been applied consistently throughout the current year,
follows:
Investments
Purchases and sales of quoted investments are recognised on the
trade date where a contract exists whose terms require delivery
within a timeframe determined by the relevant market. Purchases and
sales of unlisted investments are recognised when the contract for
acquisition or sale becomes unconditional. Investments are
designated at fair value through profit and loss on initial
recognition (described in the Accounts as investments held at fair
value) and are subsequently measured at reporting dates at fair
value. The fair value of direct unquoted investments is calculated
in accordance with the Principles of Valuation of Investments
below. Changes in the fair value of investments are recognised in
the income statement through the capital account.
Quoted Investments
Quoted investments are stated at the bid market prices on the
balance sheet date without discount.
Principles of Valuation of Investments
General
In valuing investments, the Directors follow the principles
recommended in the International Private Equity and Venture Capital
Valuation Guidelines issued in September 2009. Investments are
valued at fair value at the reporting date.
Fair value represents the amount for which an asset could be
exchanged between knowledgeable, willing parties in an arm's length
transaction. In estimating fair value, the Directors use a
methodology which is appropriate in light of the nature, facts and
circumstances of the investment. Methodologies are applied
consistently from one period to another except where a change
results in a better estimate of fair value. Because of the inherent
uncertainties in estimating the value of private equity
investments, the Directors exercise appropriate prudence in
applying the various methodologies.
As part of the valuation process, the proposed valuations are
reviewed by the independent members of the Investment Committee
before being examined by the auditors and then approved by the
Directors.
Unquoted Investments
The principal methodologies applied in valuing unquoted
investments, including PLUS investments (a UK market focussed on
small and medium companies which the Directors do not regard as an
active market with sufficient liquidity), include, but not
exclusively, the following:
-- Earnings multiple
-- Price of recent investment
-- Net assets
In applying the Earnings Multiple methodology, the Directors
apply a market based multiple that is appropriate and reasonable to
the maintainable earnings of the company. In the majority of cases
the Enterprise Value of the underlying business is derived by the
use of an Earnings before Interest, Tax and Depreciation multiple
applied to current year's earnings where these can be forecast with
a reasonable degree of certainty and are deemed to represent the
best estimate of maintainable earnings. Where this is not the case,
historic earnings will generally be used in their place.
Where a recent investment has been made, either by the Company
or by a third party in one of Company's investments, this price
will be used as the estimate of fair value from the date on which
the investment was made. One of the principal methodologies, as
above, may be used at any time if this is deemed to provide a
better assessment of the fair value of the investment. Unquoted
investments may be subject to an impairment adjustment to valuation
where necessary.
The fair value of an investment in a company will be arrived at
through the following process:
-- The Enterprise Value of the underlying business will be
calculated using one of the above methodologies;
-- The Enterprise Value of the underlying business will then be
adjusted for surplus assets or excess liabilities to arrive at an
Enterprise Value for the company; and
-- The valuation of the Company's investment will be calculated
from the Enterprise Value for the company after deduction of prior
ranking debt and other financial instruments and an appropriate
discount.
In terms of the discount, this will normally be in the range of
10-30% (in steps of 5%) applied to the comparable multiple of the
company.
The amount of the discount is a question of judgement and will
reflect several factors including the ability of the Company to
influence the timing and nature of any realisation. Where the
Company has the ability to influence an exit, or is part of a
syndicate of like-minded investors who initiate the exit, a smaller
discount will be applied. This may vary according to market and
investee company circumstances. Where the likelihood of an exit is
high, the discount is likely to be lower. Where there is no ability
to initiate an exit and exit is not under discussion the discount
is likely to be higher. In cases where no exit is contemplated by
controlling shareholders, the investment may be valued by
discounting the cash flow from the investment itself.
Although the Company holds more than 20% of the equity of
certain companies, it is considered that the investments are held
as part of the investment portfolio. Accordingly, and as permitted
by FRS 9 'Associates and joint ventures', their value to the
Company lies in their marketable value as part of that portfolio.
It is not considered that any of the holdings represent investments
in associated undertakings.
Under FRS 2 'Accounting for subsidiary undertakings' control is
presumed to exist when the parent owns, directly or indirectly more
than half of the voting power by a number of means. The Company
does not hold more than 50% of the equity of any of the companies
within the portfolio. In addition, it does not control any of the
companies held as part of the investment portfolio. It is not
considered that any of the holdings represent investments in
subsidiary undertakings.
Income
Dividends receivable from equity investments are brought into
account on the ex-dividend date or, where no ex-dividend date is
quoted, are brought into account when the Company's right to
receive payment is established. Fixed returns on non-equity
investments and on debt securities are recognised on an effective
interest rate basis. Where there is reasonable doubt that a return,
which falls within the accounting period, will actually be received
by the Company, the recognition of the return is deferred until the
reasonable doubt has been removed.
Interest receivable on cash deposits is accounted for on an
accruals basis.
Expenses
All expenses are accounted for on an accruals basis. Expenses
are charged through the revenue account except for expenses in
connection with the disposal of fixed asset investments, which are
deducted from the disposal proceeds of the investment and
investment management and incentive fees which are dealt with
below.
Investment Management and Incentive Fees
The investment management fees for the Investment Manager's
services are charged 25% to the revenue account and 75% to the
capital account. This is in line with the Board's long-term
expected split of returns from the investment portfolio of the
Company. Incentive fees are fully charged to the capital account.
The incentive fee on realisations in the period is charged to the
realised capital reserve and the incentive fee provision in respect
of unrealised value growth in the portfolio is charged to the
unrealised capital reserve.
Revenue and Capital Reserves
The revenue return in the Income Statement is taken to the
revenue reserve.
Gains and losses on the realisation of investments are taken to
the realised capital reserve. Gains and losses arising from changes
in fair value are considered to be realised only to the extent that
they are readily convertible to cash in full at the balance sheet
date. Otherwise Gains and Losses are treated as unrealised.
Taxation
The tax effects of different items in the Income Statement are
allocated between capital and revenue on the same basis as the
particular item to which they relate using the Company's effective
rate of tax for the accounting period.
Due to the Company's status as a venture capital trust and the
continued intention to meet the conditions required to comply with
Section 274 of the Income Tax Act 2007 (ITA 2007), no provision for
taxation is required in respect of any realised or unrealised
appreciation of the Company's investments.
Deferred tax is provided on all timing differences that have
originated but not reversed by the balance sheet date. Deferred tax
assets are only recognised to the extent that they are
recoverable.
Dividends Payable
Dividend distributions to shareholders are recognised as a
liability in the period in which they are paid in respect of
interim dividends or when approved by members in respect of final
dividends.
Foreign Currency
The Company does not hold any assets or liabilities denominated
in foreign currencies at the year end.
Trail Commission
The fair value of trail commission payable on new share issues
is estimated on the date the new shares are issued based on the net
asset value of the trust at that time, an estimate of annualised
growth in NAV over the life of the contract and an appropriate
discount rate. Subsequent to initial recognition, changes in the
value of the creditor arising through the unwinding of the discount
rate are recognised in the revenue column of the Income Statement
and movements in the value of the creditor resulting from changes
in assumptions are recognised in the capital column of the Income
Statement.
9. Investments (cont.)
During the year ended 30 September 2007, the Company received
court approval to cancel its Share Premium. The resulting special
reserve can be used for the payment of dividends and the repurchase
of Ordinary Shares.
19. Financial Instruments (Cont..)
This information is provided by RNS
The company news service from the London Stock Exchange
END
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