Final Results
October 28 2002 - 12:17PM
UK Regulatory
RNS Number:0439D
Downing Healthcare Protectd.VCT PLC
28 October 2002
DOWNING HEALTHCARE PROTECTED VCT PLC
PRELIMINARY ANNOUNCEMENT OF RESULTS
FOR THE YEAR ENDED 30 JUNE 2002
NAV/
Total
Return to
date 2002 2001
pence pence pence
Net asset value per share 79.5 79.5 79.5
Total dividends per ordinary share
(including tax credits where reclaimable) 20.1 3.2 3.1
99.6
Revenue return per ordinary share 3.2 3.4
Net assets #7.7 million #7.7 million
The statement to shareholders by the Chairman, Chris Kay, includes the following
comments:
Introduction
I have pleasure in presenting the Annual Report for the year ended 30 June 2002.
The Company's sixth Annual General Meeting will take place on 10 December 2002
and, in accordance with the Company's original prospectus, a resolution will be
put to shareholders as to whether the Company should continue as a Venture
Capital Trust.
The Board has undertaken a review of the current portfolio of the Company and
the others factors, which are relevant to the decision on the Company's future.
After lengthy consideration the Board has come to a firm conclusion that it is
in the best interests of Shareholders for the Company to continue as a Venture
Capital Trust. The key areas which were considered are set out in my report
below.
Background
Since the launch of the Company in March 1997 the nursing home sector in the UK
has faced difficult conditions. Downward pressure on fees from local
authorities, increasing staffing costs and the general tightening of standards
and regulations have combined to make it very difficult for private nursing
homes to make a satisfactory financial return.
These factors have lead to a number of high profile failures of nursing home
operators and caused other operators to withdraw from the market leading to the
closure of many homes. The Government's attempt to introduce the National
Required Standards and the subsequent postponement of their implementation is
another indication of the difficult environment that has been created for
operators.
Performance and Net Asset Value
Since launch, the Company has invested in ten companies and at the year-end had
a portfolio comprising of nine nursing home businesses. To comply with the VCT
regulations the investments are structured such that the Company is a 50% equity
shareholder along with a third party. Various managers have been appointed to
deal with the operational issues at each home.
The performance of the businesses has been varied, with some homes performing to
plan but several requiring intensive management in order to try to achieve their
potential.
The Board has obtained third party valuations of each of the nursing homes in
the portfolio at 30 June 2002 and used these as the basis for valuing the
Company's investments. At the year end, valuations of two investments were
increased in value while four were reduced, with an overall net effect of nil.
At 30 June 2002 the Net Asset Value per share ("NAV") stood at 79.5p, which
represents no change over the previous year.
Results and Dividend
Gross revenues for the year were #574,000 (2001- #559,000) and net revenue after
taxation #314,000 (2001 - #336,000). Your Board is proposing to pay a final
dividend of 1.7p per share, which subject to shareholder approval will be paid
on 12 December 2002 to shareholders on the register at 15 November 2002. The
total dividend for the year will therefore be 3.2p per share (2001 - 3.1p). This
brings the total dividend paid to shareholders since commencement (including tax
credits where reclaimable) to 20.1p.
The total return to shareholders (NAV plus cumulative dividends since launch) is
99.6p per share at 30 June 2002 compared to the original investment of #1 per
share or 80p net of income tax relief.
Future Strategy
Following years of decline in the nursing home sector, there are now some early
indications that, as supply and demand of nursing home beds becomes more
equalised, the market may stabilise and perhaps recover.
Additionally, the Board feels that a number of homes within the existing
portfolio, which have underperformed to date, are now starting to show improved
performance. It will, however, be some time before this performance is
reflected in the valuation of the homes.
For the above reasons the Board feels that, having had to invest during a period
of decline within the sector in order to meet the VCT qualification
requirements, this is not an appropriate time for the Company to be seeking to
dispose of all of its investments. If the Company were to undertake a full
disposal programme it is likely that the full potential value of its investments
would not be achieved. The Board has, therefore, produced an outline plan for
future strategy with the objective of continuing to pay a good level of tax free
dividends to shareholders combined with the potential for some capital growth.
The key features of the new strategy are as follows:
* invest in a series of new build nursing homes with an experienced
equity partner;
* new investments to be managed by the equity partner;
* seek to extract value from the existing portfolio, giving consideration
to good disposal opportunities as they arise; and
* increase the level of involvement of the investee company chairman to
ensure the Company, the equity partner and the operational manager's interests
are closely aligned.
The Board feels that good opportunities now exist within the nursing home
sector, particularly in respect of new builds, where the homes will be designed
with future care standards in mind. Preliminary discussions have been held with
a team, which includes one of the Company's directors, Mahesh Patel, with a view
to entering into a series of joint ventures to build new nursing homes. Mahesh
Patel has a proven track record in the sector and has support from a very
experienced team.
The structure of the proposed new investments will be such that the Company will
typically invest smaller sums than previously, with investee companies utilising
some bank finance. When complete, the homes will be managed by Mahesh Patel's
team, who will have invested alongside the Company. The Board is confident
that this structure avoids some of the difficulties which have been experienced
with previous investments, where the aspirations of the equity partner and
manager have not necessarily been aligned with those of the Company.
A further change has been the appointment of David Lowe to the boards of the
investee companies. David Lowe has been appointed to all investee boards to act
as independent non-executive chairman and ensure that best practice is
implemented across the whole portfolio. He is a chartered accountant with
extensive venture capital experience having worked with fund managers such as
Kleinwort Benson Development Capital and Elderstreet. The investee companies
have given David Lowe a mandate to take a more active monitoring role than
previously to focus on optimising performance and ultimately improving
valuations of the homes. It is expected that David Lowe will also undertake this
role in new investments made by the Company.
Board Composition
In view of the proposal that the Company makes new investments with Mahesh
Patel's team, Mahesh Patel has agreed to resign from the Board of your Company
at the forthcoming Annual General Meeting in order to avoid any possible
conflicts of interest in the future.
In addition, Mike Newman celebrated his 65th birthday during the year and is now
winding down his business interests. As a result, Mike Newman has decided that
he will also resign at the forthcoming Annual General Meeting.
I would like to thank both Mike Newman and Mahesh Patel for the valuable
contributions they have made since the launch of the Company in acting as the
Industry Specialist Directors. The Board looks forward to continuing to work
with Mahesh in the capacity described above.
In view of the above changes, a new director with detailed industry experience
has been sought. I am pleased to announce that Martin Bradford has agreed to
join the Board with effect from the date of the Annual General Meting. Martin
was a co-founder of Westminster Health Care Holdings PLC and was an executive
director of the company from 1985 until it was sold in early 1999.
Fee Structure
Downing Corporate Finance ("DCF") undertakes the administration of your Company
and has historically only received fees under the incentive arrangements. This
has resulted in a considerable under-recovery of costs by DCF since the Company
was launched. In order that DCF is able to recover its costs in future in
carrying out its administration role, it is proposed that it receives an annual
fee of #30,000 plus VAT per annum. As Nicholas Lewis and Tony McGing are also
Directors of DCF, it is treated as a related party and, thus, shareholder
approval for this change will be sought at the Annual General Meeting.
Expenses incurred in operating Downing Healthcare for the year to 30 June 2002
were 1.4% of the Net Asset Value (2001-1.4%). This is substantially below that
for any other Venture Capital Trust, where typically these expenses are in
excess of 3% per annum. It is expected that annual running expenses in the
future will remain below 2.0% of NAV.
Share repurchase
Your Board is conscious that the Company's share price is affected by the
illiquidity of its shares in the market, which is typical of many VCTs. The
Company, therefore, has a policy of purchasing its own shares. A special
resolution to continue with this policy, which was approved at last year's AGM,
is proposed for the forthcoming AGM.
Shareholders, who invested at the commencement of the Company, are now able to
dispose of their holding without losing the income tax relief they received at
the time of investment. Those Shareholders who deferred a gain by investing in
this VCT will crystallise the gain when they sell their shares. Any
Shareholders considering selling their holdings are recommended to take advice
from their financial adviser prior to making any investment decision.
Publication of share price
The Company's share price continues to be quoted in the Financial Times on a
daily basis in the "Investment Companies" sector.
Annual General Meeting
The sixth AGM of the Company will be held at 69 Eccleston Square, London SW1V
1PJ at 11.00 a.m. on 10 December 2002.
Conclusion
Whilst the performance to date has not been as envisaged at launch, the Company
has been able to pay a steady, tax-free dividend stream to shareholders and its
performance is in the second quartile of all VCTs based on total return. The
Board has identified strong arguments against winding up the Company and
realising the portfolio. The proposed future strategy is focussed on
maintaining a strong dividend stream and enhancing opportunities for capital
growth. The Board therefore recommends that, at the AGM, shareholders vote in
favour of the resolution that the Company continues as a Venture Capital Trust.
Should shareholders vote against the resolution to continue as such the Board
will put proposals for the reorganisation, reconstruction or voluntary winding
up of the Company to shareholders within four months of the AGM. It should be
noted that the Inland Revenue has still not finalised regulations to allow VCTs
to wind up or merge.
Assuming the resolution is passed the Board will implement the proposed strategy
described in this statement. The time period from initial identification of a
suitable site to the opening of a newly built nursing home is up to two years.
Therefore, it is likely that the full benefits of the new strategy will take
some time to become evident. The Board is, however, confident that it can
ultimately deliver rewards to shareholders. I welcome your attendance at the
AGM where the Board and I will be happy to discuss the proposals.
Chris Kay
Chairman
STATEMENT OF TOTAL RETURN (incorporating the revenue account)
for the year ended 30 June 2002
Year Year
ended ended
30 June 30 June
2002 2001
Revenue Capital Total Revenue Capital Total
#'000 #'000 #'000 #'000 #'000 #'000
Gains/(losses) on investments
- realised - 1 1 - - -
- unrealised - - - - (1,085) (1,085)
Income 574 - 574 559 - 559
Management incentive fees (9) (8) (17) (4) (3) (7)
Other expenses (100) - (100) (102) - (102)
Return on ordinary activities before tax 465 (7) 458 453 (1,088) (635)
Tax on ordinary activities (151) 3 (148) (117) 1 (116)
Return attributable to equity 314 (4) 310 336 (1,087) (751)
shareholders
Dividends in respect of equity (312) - (312) (302) - (302)
shareholders
Transfer to/(from) reserves 2 (4) (2) 34 (1,087) (1,053)
Return per ordinary share 3.2p (0.0p) 3.2p 3.4p (11.1p) (7.7p)
The revenue column of this statement is the profit and loss account of the
Company.
All revenue and capital items in the above statement derive from continuing
operations.
BALANCE SHEET
as at 30 June 2002
2002 2001
#'000 #'000 #'000 #'000
Fixed Assets
Venture capital investments 6,600 7,170
Current assets
Debtors 308 283
Cash at bank and in hand 1,148 588
1,456 871
Creditors: amounts falling due within one year (311) (294)
Net current assets 1,145 577
Net assets 7,745 7,747
Capital and reserves
Called up share capital 4,871 4,871
Special reserve 4,393 4,393
Capital redemption reserve 35 35
Capital reserve (1,604) (1,600)
Revenue reserve 50 48
Total equity shareholders' funds 7,745 7,747
Net asset value per ordinary share 79.5p 79.5p
CASHFLOW STATEMENT
for the year ended 30 June 2002
Year ended Year
30 June ended
2002 30 June
2001
#'000 #'000
Net cash inflow from operating activities 434 316
Taxation
Corporation tax paid (121) (126)
Tax credits received - 122
ACT recovered - 33
(121) 29
Capital expenditure
Purchase of venture capital investments (250) (43)
Sale of fixed income securities - 195
Sale of venture capital investments 821 -
Net cash inflow from capital expenditure 571 152
Equity dividends paid (302) (293)
Net cash inflow before financing 582 204
Financing
Repurchase of ordinary shares (22) (14)
Increase in cash and cash equivalents 560
190
Reconciliation of net cash flow to movement in net funds
Increase in cash during the year 560 190
Net funds at 1 July 2001 588 398
Net funds at 30 June 2002 1,148 588
Reconciliation of net revenue return before taxation to net cash inflow
from operating activities
Net revenue before taxation 465 453
Management fees charged to capital (8) (3)
Decrease/(increase) in accrued income 20 (94)
(Increase) in other debtors (45) (21)
Increase/(decrease) in other creditors 2 (19)
434 588
Notes:
1. The financial information has been prepared on the basis of the
accounting policies set out in the Company's financial statements for the year
ended 30 June 2001.
2. Revenue per ordinary share is based on the net revenue after taxation of
#314,000 (2001: #336,000) but before deduction of dividends of #312,000 (2001:
#302,000), in respect of 9,741,961 ordinary shares (2001: 9,774,780), being the
weighted average number of ordinary shares in issue during the year. Capital
return per ordinary share is based on the net capital loss for the financial
year of #4,000 (2001: #1,087,000) in respect 9,741,961 ordinary shares (2001:
9,774,780), being the weighted average number of ordinary shares in issue during
the year.
3. The financial information set out in the announcement does not
constitute the Company's statutory accounts for the year ended 30 June 2002 and
has not been reported on by the Company's auditors. The statutory accounts for
the period ended 30 June 2002 will be finalised on the basis of the financial
information presented by the directors in this preliminary announcement and will
be delivered to the Registrar of Companies following the Company's Annual
General Meeting.
4. The financial information for the year ended 30 June 2001 is derived
from the statutory accounts for that year which have been delivered to the
Register of Companies. The auditors reported on those accounts; this report was
unqualified and did not contain a statement under section 237(2) or (3) of the
Companies Act 1985.
5. A copy of the full annual report and financial statements for the year
ended 30 June 2002 will be printed and posted to shareholders. Copies will also
be available to the public at the registered office of the company at 69
Eccleston Square, London SW1V 1PJ.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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