TIDMOPV
Octopus Protected VCT 2 plc
Final Results
19 May 2010
Octopus Protected VCT 2 plc, managed by Octopus Investments Limited, today
announces the final results for the year ended 31 January 2010.
These results were approved by the Board of Directors on 18 May 2010.
You may, in due course, view the Annual Report in full at
www.octopusinvestments.com <http://www.octopusinvestments.com/> by navigating to
Services, Investor Services, Venture Capital Trusts, Octopus Protected VCT 2
plc. All other statutory information will also be found there.
About Octopus Protected VCT 2 plc
Octopus Protected VCT 2 plc ("Protected 2," "Company" or "Fund") is a venture
capital trust ("VCT") and is managed by Octopus Investments Limited ("Octopus").
The Fund was launched in June 2008 and raised over GBP11.5 million ( GBP11.0 million
net of expenses) through an offer for subscription by the time it closed on 30
June 2009. The objective of the Fund is to invest primarily in unquoted UK
smaller companies and aims to deliver absolute returns on its investments.
Further details of the Fund's progress are discussed in the Chairman's Statement
and Investment Manager's Review on pages [<li>] to [<li>].
Venture Capital Trusts (VCTs)
VCTs were introduced in the Finance Act 1995 to provide a means for private
individuals to invest in unlisted companies in the UK. Subsequent Finance Acts
have introduced changes to VCT legislation. The tax benefits currently available
to eligible new investors in VCTs include:
· up-front income tax relief of 30%
· exemption from income tax on dividends paid
· exemption from capital gains tax on disposals of shares in
VCTs
The Company has been provisionally approved as a VCT by HM Revenue & Customs.
In order to maintain its approval the Company must comply with certain
requirements on a continuing basis. By the end of the Company's third
accounting period at least 70% of the Company's investments must comprise
'qualifying holdings' of which at least 30% must be in eligible Ordinary
shares. A 'qualifying holding' consists of up to GBP1 million invested in any one
year in new shares or securities in an unquoted company (including companies
listed on AIM) which is carrying on a qualifying trade and whose gross assets do
not exceed GBP7 million at the time of investment, and whose total number of
employees is less than 50, also at the time of investment. The Company will
continue to ensure its compliance with these qualification requirements.
Financial Summary
+-----------------------+
| | Period Ended 31 January
Ordinary shares |Year to 31 January 2010| 2009
| |
| |
| |
Net assets ( GBP'000s) | 10,591| 2,087
| |
Net total return after tax| |
( GBP'000s) | (334)| (84)
| |
Net asset value per share| |
(NAV) | 90.9p| 90.8p
=---------------------------+-----------------------+---------------------------
Chairman's Statement
Introduction
I am pleased to present the second Annual Report of Octopus Protected VCT 2 plc
for the year ended 31 January 2010.
Performance
At 31 January 2010 the net asset value (NAV) of the fund was 90.9p, which
compares to 90.8p at 31 January 2009. The performance of the Fund has been
relatively stable because a large proportion of its assets are held in cash and
cash equivalent securities, and because there have been no changes in the
valuations of the companies in its portfolio. The investments held are valued
in accordance with the International Private Equity and Venture Capital
Valuation Guidelines and Financial Reporting Standards and are therefore subject
to regular valuation reviews.
Investment Portfolio
The year under review, particularly during the first 6 months, has proved
challenging for many businesses due to the slow recovery of the economic
environment. However it is encouraging to report that none of your Company's
investments suffered any reductions in their fair value. That said it is too
early to recognise any uplift in values, however we are optimistic about the
potential of the portfolio companies.
During the year the Fund has made its first investments into eight companies
totalling GBP6,417,000. These investments include Dualcom Holdings Limited, the
UK's leading supplier of dual path signalling devices, which link burglar alarms
to the police or a private security firm, Diagnos Limited, who develop and sell
sophisticated automotive diagnostic software and hardware, and Clifford Thames,
a provider of data and support services for the auto industry. There has also
been five investments into companies that have been established to seek suitable
qualifying investments across a range of sectors.
All of these investments are discussed in more detail in the Investment
Manager's Review on pages ? to ?
Investment Strategy
The Fund is being invested on the basis of taking less risk than a typical VCT.
Typically the Fund will receive its return from interest paid on secured loan
notes as well as an exposure to the value of the shares of a company. The
investment strategy is to derive sufficient return from the secured loan notes
to achieve the Fund's investment aims and to use the equity exposure to boost
returns. As portfolio companies are unquoted the Fund will receive a return
from an equity holding when a company is sold.
The Manager of the Fund aims to reduce risk by investing in well managed and
profitable businesses with strong recurring cash-flows. Furthermore with the
majority of the investment being made in the form of a secured loan, in the
event of the business failing, the Fund will rank ahead of unsecured creditors
and equity investors.
VCT Qualifying Status
PricewaterhouseCoopers LLP provides the Board and Investment Manager with advice
concerning ongoing compliance with Her Majesty's Revenue & Customs ('HMRC')
rules and regulations concerning VCTs. The Board has been advised that Octopus
Protected VCT 2 plc is in compliance with the conditions laid down by HMRC for
maintaining approval as a VCT. This is discussed further on page ?.
A key requirement now is to achieve the 70% qualifying investment level prior to
31 January 2012. As at 31 January 2010, over 59% of the portfolio, as measured
by HMRC rules, was invested in VCT qualifying investments. In view of the
current investment activity, the Board continues to be confident that the 70%
target will be met by the required date.
Change of Company Name
At the forthcoming Annual General Meeting it is proposed to change the name of
the Company to Octopus Apollo VCT 4 plc. The proposed change of name is to bring
the VCT in line with other VCTs managed by Octopus that follow the same
investment strategy. There will be no change to the way in which this VCT is
managed or the type of investments that it makes.
Outlook
Your Board remains confident that the Fund will be able to meet its investment
objectives and produce good returns for shareholders. The imperative is to find
lower risk investments and take advantage of current market conditions whenever
possible. Since 31 January 2010, the Fund has made two such investments into
Businessco Services 3 Limited and Carebase (Col) Limited. Further details of
these investments can be found in the Investment Managers report.
Protected 2 aims to invest alongside Octopus Protected VCT plc and two other
VCTs under the management of Octopus that have the same investment policy. This
is allowing Protected 2 to invest in larger, safer companies and to invest on
more favorable terms. I believe this structure will enable Protected 2 to be
well placed to benefit from the emerging economic environment.
Murray Steele
Chairman
18 May 2010
Investment Manager's Review
Personal Service
At Octopus, we focus on both managing your investments and keeping you informed
throughout the investment process. We are committed to providing our investors
with regular and open communication. Our updates are designed to keep you
informed about the progress of your investment. During this time of economic
upheaval, we consider it particularly important to be in regular contact with
our investors and are working hard to manage your money in the current climate.
Octopus Investments Limited was established in 2000 and has a strong commitment
to both smaller companies and to VCTs. We currently manage 17 VCTs, including
this Company, and manage almost GBP300 million in the VCT sector. Octopus has over
140 employees and has been voted as 'Best VCT Provider of the Year' by the
financial adviser community for the last four years.
Investment Policy
The investment approach of Protected 2 is to seek lower risk investments. The
majority of companies in which Protected 2 invests operate in sectors where
there is a high degree of predictability. Ideally, we seek companies that have
contractual revenues from financially sound customers and will provide an exit
to shareholders within three to five years.
Portfolio Review
As at 31 January 2010 the NAV stood at 90.9p, compared to 90.8p at 31 January
2009. Recent improvements in the economy have created a better environment for
the companies in the portfolio. There is a sense that the low point of the
recession is over and that we may be on the road to recovery. We are confident
about the stability in the market for the smaller private companies included in
your portfolio.
Since the date of these accounts we have completed a non-qualifying investment
into Carebase (Col) Limited of GBP270,000, a company involved in the construction
of a care home and a qualifying investment into Businessco Services 3 Limited, a
company established to seek qualifying investments.
Outlook
While the Company is invested in established businesses that are relatively
unaffected by economic shifts, changes in the economy can of course alter the
trading environment for Company. It is fair to say that the worst of the
economic upheavals appear to be over, leading to an improved environment which
can aid progress of the Fund.
We will continue to consider low risk investments in sound companies and to
support existing holdings that merit capital for sensible expansion plans,
including well priced acquisitions. Taking a longer term view, which a VCT
affords, we expect to be able to develop and generate successful exits that will
bring rewards for shareholders.
If you have any questions on any aspect of your investment, please call one of
the team on 0800 316 2396.
Stuart Nicol
Director
Octopus Investments
18 May 2010
Investment Portfolio
Fair
Investment value at
at cost at Movement 31 % equity % equity
31 January in January held by managed
Qualifying 2010 valuation 2010 Protected by
investments Sector ( GBP'000) ( GBP'000) ( GBP'000) 2 Octopus
=-------------------------------------------------------------------------------
Clifford
Thames Automotive 1,336 - 1,336 2.00% 8.00%
Greenco
Services Environmental 1,000 - 1,000 16.30% 57.40%
Pubco
Services Restaurants &
Limited bars 1,000 - 1,000 15.10% 56.90%
Vulcan
Services II Oil & gas
Limited services 1,000 - 1,000 12.25% 49.00%
Salus
Services 1
Limited Care homes 881 - 881 20.00% 100.00%
Businessco
Services 2 Business
Limited services 600 - 600 14.50% 49.00%
Diagnos
Limited Automotive 350 - 350 0.00%* 0.00%*
Dualcom
Holdings Security
Limited devices 250 - 250 0.00%* 0.00%*
=-------------------------------------------------------------------------------
Total Qualifying investments 6,417 - 6,417
Money market
funds 4,091 - 4,091
=-------------------------------------------------------------------------------
Total
investments 10,508 - 10,508
Cash at bank 85
Debtors less
creditors (2)
=-------------------------------------------------------------------------------
Total net
assets 10,591
*Debt based investment
Valuation Methodology
The investments held by Protected 2 are all unquoted and as such there is no
trading platform from which prices can be easily obtained. As a result, the
methodology used in fair valuing the investments is the transaction price of the
recent investment round. Subsequent adjustment to the fair value has then been
made according to any significant under or over performance of the business.
If you would like to find out more regarding The International Private Equity
and Venture Capital ('IPEVC') Valuation Guidelines, please visit their website
at: www.privateequityvaluation.com <http://www.privateequityvaluation.com/>.
Review of Investments
During the year, the Fund made eight new investments totalling GBP6,417,000.
Investments are valued in accordance with the accounting policy set out on page
?, which takes account of current industry guidelines for the valuation of
venture capital portfolios and is compliant with International Private Equity
and Venture Capital Valuations guidelines and current financial reporting
standards.
Investment Portfolio
Clifford Thames Group Limited ('CT')
Clifford Thames is a market leading provider of consultancy and business
outsourcing services for the automotive industry, and is a key partner of most
of the world's leading car manufacturers. With offices in eight countries,
having recently opened up in China and Poland, Clifford Thames has a well
established and impressive client list including Ford, GM Europe, Jaguar Land
Rover, Mazda and Fiat. Our investment into CT was made via BusinessCo Services
Limited. This was a company that we had previously created to invest in this
type of business. Further information can be found at the company's website
www.clifford-thames.com <http://www.clifford-thames.com/>.
Investment date: January 2009
Cost: GBP1.3 million
Valuation: GBP1.3 million
Equity held: 2.0%
Last audited accounts: N/A
Greenco Services Limited
Greenco Services Limited has been set up to investigate and seek the acquisition
of companies engaged in the provision of environmental products or services.
Investment date: April 2009
Cost: GBP1.0 million
Valuation: GBP1.0 million
Equity held: 16.3%
Last audited accounts: N/A
Pubco Services Limited
Pubco Services Limited has been set up to acquire and operate freehold pubs.
Investment date: April 2009
Cost: GBP1.0 million
Valuation: GBP1.0 million
Equity held: 15.1%
Last audited accounts: N/A
Vulcan Services II Limited
Vulcan Services II Limited has been established to seek the acquisition of
businesses engaged in any of the activities of design, manufacture, development,
marketing or sale of equipment and components for use in the oil and gas sector.
Investment date: November 2008
Cost: GBP1.0 million
Valuation: GBP1.0 million
Equity held: 12.25%
Last audited accounts: N/A
Salus Services 1 Limited
Salus Services I Limited has been set up to investigate and seek the acquisition
of companies engaged in the provision of products or services into the health
care sector.
Investment date: January 2010
Cost: GBP0.9 million
Valuation: GBP0.9 million
Equity held: 20.0%
Last audited accounts: N/A
Businessco Services 2 Limited
Businessco Services 2 Limited has been set up to investigate and seek the
acquisition of companies engaged in the provision of business support services.
Investment date: November 2008
Cost: GBP0.6 million
Valuation: GBP0.6 million
Equity held: 14.5%
Last audited accounts: N/A
Diagnos Limited
Diagnos Limited develops and sells sophisticated automotive diagnostic software
and hardware that enables independent mechanics, dealerships and garages to
service and repair vehicles. Mechanics require a diagnostic tool to communicate
with the in-car computer in order to measure, monitor and, where necessary, fix
the electronic process or system. Further information can be found at the
company's website www.autologic-diagnos.co.uk
<http://www.autologic-diagnos.co.uk/>.
Investment date: February 2009
Cost: GBP0.4 million
Valuation: GBP0.4 million
Equity held: 0.0%
Last audited accounts: N/A
Revenues: GBP0.4 million
Loss before interest & tax: GBP(0.02) million
Net assets: GBP2.7 million
Dualcom Holdings Limited
Dualcom Holdings Limited is the UK's leading supplier of dual path signalling
devices, which link burglar alarms to the police or a private security firm. The
devices communicate using a telephone line or broadband connection and a
wireless link from Vodafone, which has been a partner since 2000. Dualcom has
developed a number of new products for the sector, which have enabled the
business to steadily grow its market share of new connections and its
profitability since the initial investment. Further information can be found at
the company's website www.csldual.com <http://www.csldual.com/>.
Investment date: February 2009
Cost: GBP0.3 million
Valuation: GBP0.3 million
Equity held: 0.0%
Last audited accounts: 31 March 2009
Revenues GBP7.2 million
Profit before interest & tax: GBP0.8 million
Net assets: GBP0.7 million
Directors' Responsibility Statement
The Directors are responsible for preparing the Annual Report and the accounts
in accordance with applicable laws and regulations. Company law requires the
Directors to prepare financial statements for each financial year which give a
true and fair view of the assets, liabilities, financial position and profit or
loss of the Company. Under that law the Directors have elected to prepare
financial statements in accordance with United Kingdom Accounting Standards
(United Kingdom Generally Accepted Accounting Practice).
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and estimates that are reasonable and prudent;
- state whether applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the financial statements;
and
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with the
Companies Act 2006. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
In so far as each of the Directors is aware:
- there is no relevant audit information of which the Company's auditor is
unaware
- the Directors have taken all steps that they ought to have taken to make
themselves aware of any relevant audit information and to establish that the
auditor is aware of that information.
To the best of my knowledge:
- the financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
- the management report includes a fair review of the development and
performance of the business and the position of the Company, together with a
description of the principal risks and uncertainties that it faces.
The Directors are responsible for the maintenance and integrity of the corporate
and financial information included on the Company's website. Legislation in the
United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
On behalf of the Board
Murray Steele
Chairman
18 May 2010
Income Statement
+----------------------------+
| Year ended 31 January 2010 |
| |
| Revenue Capital Total |
| |
Notes | GBP'000 GBP'000 GBP'000 |
| |
| |
| |
Investment income 2 | 64 - 64 |
| |
| |
| |
Investment management fees 3 | (45) (136) (181) |
| |
| |
| |
Other expenses 4 | (217) - (217) |
| |
| |
| |
Loss on ordinary activities before tax | (198) (136) (334) |
| |
| |
| |
Taxation on loss on ordinary activities 6 | - - - |
| |
| |
| |
Loss on ordinary activities after tax | (198) (136) (334) |
| |
Earnings per share - basic and diluted 7 | (2.0)p (1.4)p (3.4)p |
+----------------------------+
* The 'Total' column of this statement is the profit and loss account of the
Company; the supplementary revenue return and capital return columns have
been prepared under guidance published by the Association of Investment
Companies
* all revenue and capital items in the above statement derive from continuing
operations
* the accompanying notes are an integral part of the financial statements
* the Company has only one class of business and derives its income from
investments made in shares and securities and from bank and money market
funds
The Company has no recognised gains or losses other than the results for the
year as set out above.
Income Statement
+----------------------------+
| Period to 31 January 2009 |
| |
| Revenue Capital Total |
| |
Notes | GBP'000 GBP'000 GBP'000 |
| |
| |
| |
Investment income 2 | - - - |
| |
| |
| |
Investment management fees 3 | (2) (7) (9) |
| |
| |
| |
Other expenses 4 | (75) - (75) |
| |
| |
| |
Loss on ordinary activities before tax | (77) (7) (84) |
| |
| |
| |
Taxation on loss on ordinary activities 6 | - - - |
| |
| |
| |
Loss on ordinary activities after tax | (77) (7) (84) |
| |
Earnings per share - basic and diluted 7 | (4.8)p (0.4)p (5.2)p |
+----------------------------+
* The 'Total' column of this statement is the profit and loss account of the
Company; the supplementary revenue return and capital return columns have
been prepared under guidance published by the Association of Investment
Companies
* all revenue and capital items in the above statement derive from continuing
operations
* the accompanying notes are an integral part of the financial statements
* the Company has only one class of business and derives its income from
investments made in shares and securities and from bank and money market
funds
The Company has no recognised gains or losses other than the results for the
year as set out above.
Reconciliation of Movements in Shareholders' Funds
+-----------------+
| Year ended | Year ended
| 31 January 2010 | 31 January 2009
| |
Shareholders' funds at start of year | 2,087 | -
| |
Loss on ordinary activities after tax | (334) | (84)
| |
Issue of equity (net of expenses) | 8,838 | 2,171
| |
Shareholders' funds at end of year | 10,591 | 2,087
Balance Sheet
+--------------------+
| As at 31 January | As at 31 January
| 2010| 2009
| |
Notes| GBP'000 GBP'000| GBP'000 GBP'000
| |
| |
| |
Fixed asset investments* 9 | 6,417| -
| |
Current assets: | |
| |
Debtors 10 | 86 | 1
| |
Investments* 9 |4,091 |2,000
| |
Cash at bank | 85 | 240
| |
|4,262 |2,241
| |
Creditors: amounts falling due | |
within one year 11 | (88) |(154)
| |
Net current assets | 4,174| 2,087
| |
Net assets | 10,591| 2,087
| |
| |
| |
Called up equity share capital 12 |1,165 | 230
| |
Special distributable reserve 13 |9,844 | -
| |
Share Premium 13 | - |1,941
| |
Capital reserve - realised 13 |(143) | (7)
| |
Revenue reserve 13 |(275) | (77)
| |
Total shareholders' funds | 10,591| 2,087
| |
Net asset value per share 8 | 90.9p| 90.8p
+--------------------+
* Held at fair value through profit and loss
The accompanying notes are an integral part of the financial statements.
The statements were approved by the Directors and authorised for issue on 18 May
2010 and are signed on their behalf by:
Murray Steele
Chairman
Company No: 05840377
Cash Flow Statement
+------------------------+
|Year to 31 January | Year to 31
| 2010| January 2009
| |
Notes| GBP'000| GBP'000
| |
| |
| |
Net cash (Outflow)/inflow from | |
operating activities | (485)| 69
| |
| |
| |
Capital expenditure and | |
financial investment: | |
| |
Purchase of fixed asset | |
investments 9 | (6,417)| (2,000)
| |
| |
| |
Management of liquid | |
resources: | |
| |
Purchase of current asset | |
investments | (6,063)| -
| |
Disposal of current asset | |
investments | 3,972| -
| |
| (8,993)| (1,931)
| |
Financing: | |
| |
Issue of own shares 12 | 9,307| 2,249
| |
Share issue expenses | (469)| (78)
=-----------------------------------+------------------------+------------------
Increase/(decrease) in cash | |
resources at bank | (155)| 240
Reconciliation of Loss before Taxation to Cash Flow from Operating Activities
+----------------------+
| Year to 31 January| Year to 31 January
| 2010| 2009
| |
| GBP'000| GBP'000
| |
Loss on ordinary activities before| |
tax | (334)| (84)
| |
Increase in debtors | (85)| (1)
| |
(Decrease)/increase in creditors | (66)| 154
| |
(Outflow)/inflow from operating | |
activities | (485)| 69
+----------------------+
Reconciliation of Net Cash Flow to Movement in Net Funds
+---------------------+
| Year to 31 January| Year to 31 January
| 2010| 2009
| |
| GBP'000| GBP'000
| |
(Decrease)/increase in cash | |
resources | (155)| 240
| |
Movement in cash equivalent | |
securities | 2,091| 2,000
| |
Opening net cash funds | 2,240| -
| |
Net funds at 31 January | 4,176| 2,240
+---------------------+
Net Funds at 31 January comprised:
+-------------------------+
| Year to 31 January 2010 | Year to 31 January 2009
| |
| GBP'000 | GBP'000
| |
Cash at bank | 85 | 240
| |
Money market funds | 4,091 | 2,000
| |
Net Funds at 31 January | 4,176 | 2,240
=------------------------+-------------------------+
Notes to the Financial Statements
1. Basis of accounting
The financial statements have been prepared under the historical cost
convention, except for the measurement at fair value of certain financial
instruments, and in accordance with UK Generally Accepted Accounting Practice
(UK GAAP), and the Statement of Recommended Practice (SORP) "Financial
Statements of Investment Trust Companies" (revised 2009).
The principal accounting policies have remained unchanged from those set out in
the Company's 2008 annual report and financial statements. A summary of the
principal accounting policies is set out below.
The preparation of financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Although these estimates are based on
management's best knowledge of the amount, event or actions, actual results
ultimately may differ from those estimates.
The estimates and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities relate to:
- the valuation of unlisted financial investments held at fair value through
profit and loss, which are valued on the basis noted below (Fixed asset
investments), the key areas of judgement being the adjustments required to
normalise sustainable earnings and the appropriate comparable multiple to apply;
- the recognition or otherwise of accrued income on loan notes and similar
instruments granted to investee companies, which are assessed in conjunction
with the overall valuation of unlisted financial investments as noted below;
- the appropriateness of the allocation of management expenses between revenue
and capital, which is based on the split of the long-term anticipated return
between revenue and capital of net income;
- finance costs have been allocated on the same basis as the above, whereas
movements in the carrying value of borrowings and related instruments have been
taken to the unrealised capital reserve as they have been raised to fund future
financial investments.
Fixed asset investments
The Company has designated all fixed asset investments as being held at fair
value through profit and loss; therefore all gains and losses arising from such
investments held are attributable to financial assets held at fair value through
profit and loss. Accordingly, all interest income, fee income, expenses and
investments gains and losses are attributable to assets designated as being at
fair value through profit and loss.
Purchases and sales of investments are recognised in the financial statements at
the date of the transaction (trade date).
These investments will be managed and their performance evaluated on a fair
value basis in accordance with the documented investment strategy and
information about them has to be provided internally on that basis to the
Board. Accordingly as permitted by FRS 26, the investments will be designated
as fair value through profit and loss ('FVTPL') on the basis that they qualify
as a group of assets managed, and whose performance is evaluated on a fair value
basis in accordance with a documented investment strategy. The Company's
investments are measured at subsequent reporting dates at fair value.
In the case of investments quoted on a recognised stock exchange, fair value is
established by reference to the closing bid price on the relevant date or the
last traded price, depending upon convention of the exchange on which the
investment is quoted. This is consistent with the International Private Equity
and Venture Capital ('IPEVC') guidelines.
In the case of unquoted investments, fair value is established by using measures
of value such as the price of recent transactions, earnings multiple and net
assets. This is consistent with IPEVC valuation guidelines and is in compliance
with FRS 26 Financial Instruments: Recognition and measurement.
Gains and losses arising from changes in fair value of investments are
recognised as part of the capital return within the income statement and
allocated to the capital reserve - holding gains/(losses).
In the preparation of the valuations of assets the Directors are required to
make judgements and estimates that are reasonable and incorporate their
knowledge of the performance of the investee companies. Investments are
regularly reviewed to ensure that the fair values are appropriately stated.
Quoted investments are valued in accordance with the bid-price on the relevant
date, unquoted investments are valued in accordance with current International
Private Equity and Venture Capital ('IPEVC') valuation guidelines, although this
does rely on subjective estimates such as appropriate sector earnings multiples,
forecast results of investee companies, asset values of subsidiary companies and
liquidity or marketability of the investments held.
Although the Company believes that the assumptions concerning the business
environment and estimate of future cash flows are appropriate, changes in
estimates and assumptions could require changes in the stated values. This could
lead to additional changes in fair value in the future.
Current asset investments
Current asset investments comprise money market funds, bonds and OEICs and are
classified as FVTPL. Gains and losses arising from changes in fair value of
investments are recognised as part of the capital return within the Income
Statement and allocated to the capital reserve - gains/(losses) on disposal.
The current asset investments are all invested with the Company's cash manager
and are readily convertible into cash at the choice of the Company. The current
asset investments are held for trading; information about them has to be
provided internally on that basis to the Board.
Income
Investment income includes interest earned on bank balances and money market
funds and includes income tax withheld at source. Dividend income is shown net
of any related tax credit.
Dividends receivable are brought into the accounts on the ex-dividend date.
Fixed returns on debt and money market funds are recognised on a time
apportionment basis so as to reflect the effective interest rate.
A provision will be made against this income where there is uncertainty as to
its future recoverability. The requirement or otherwise for a provision is
considered in conjunction with the valuation of the related financial
investment.
Expenses
All expenses are accounted for on an accruals basis. Expenses are charged
wholly to revenue with the exception of the investment management fee, which is
charged 25% to the revenue account and 75% to the capital reserve to reflect, in
the Directors' opinion, the expected long-term split of returns in the form of
income and capital gains respectively from the investment portfolio.
Revenue and capital
The revenue column of the Income Statement includes all income and revenue
expenses of the Company. The capital column includes gains and losses on
disposal and holding gains and losses on investments. Gains and losses arising
from changes in fair value of investments are recognised as part of the capital
return within the income statement.
Taxation
Corporation tax payable is applied to profits chargeable to corporation tax, if
any, at the current rate. The tax effect of different items of income/gain and
expenditure/loss is allocated between capital and revenue return on the
'marginal' basis as recommended in the SORP.
Deferred tax is recognised on an undiscounted basis in respect of all timing
differences that have originated but not reversed at the balance sheet date.
Where transactions or events have occurred at that date that will result in an
obligation to pay more, or a right to pay less tax. This is with the exception
that deferred tax assets are recognised only to the extent that the Directors
consider that it is more likely than not that there will be suitable taxable
profits from which the future reversal of the underlying timing can be deducted.
Cash and liquid resources
Cash, for the purposes of the cash flow statement, comprises cash in hand and
deposits repayable on demand, less overdrafts payable on demand. Liquid
resources are current asset investments which are disposable without curtailing
or disrupting the business and are either readily convertible into known amounts
of cash at or close to their carrying values or traded in an active market.
Liquid resources comprise term deposits of less than one year (other than cash),
government securities, investment grade bonds and investments in money market
funds.
Financing strategy and capital structure
FRS 29 'Financial Instruments: Disclosures' comprises disclosures' relating to
financial instruments.
We define capital as shareholders' funds and our financial strategy in the
medium term is to manage a level of cash that balances the risks of the business
with optimising the return on equity. The Company currently has no borrowings
nor does it anticipate that it will drawdown any borrowing facilities in the
future to fund the acquisition of investments.
Financial instruments
The Company's principal financial assets are its investments and the policies in
relation to those assets are set out above. Financial liabilities and equity
instruments are classified according to the substance of the contractual
arrangements entered into. An equity instrument is any contract that evidences a
residual interest in the assets of the entity after deducting all of its
financial liabilities. Where the contractual terms of share capital do not have
any terms meeting the definition of a financial liability then this is classed
as an equity instrument. Dividends and distributions relating to equity
instruments are debited directly to equity.
Capital management is monitored and controlled using the internal control
procedures set out on page 25 of this report. The capital being managed
includes equity and fixed-interest investments, cash balances and liquid
resources including debtors and creditors.
The company does not have any externally imposed capital requirements.
Dividends
Dividends payable are recognised as distributions in the financial statements
when the Company's liability to make payment has been established. This
liability is established for interim dividends when they are declared by the
Board, and for final dividends when they are approved by the shareholders.
2. Income
31 January 2010 31 January 2009
GBP'000 GBP'000
Money market funds - dividend income 30 -
Loan note interest receivable 34 -
64 -
3. Investment management fees
31 January 2010 31 January 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management fee 45 136 181 2 7 9
45 136 181 2 7 9
As mentioned above in Accounting Policies, for the purposes of the revenue and
capital columns in the income statement, the management fee has been allocated
25 per cent to revenue and 75 per cent to capital, in line with the Board's
expected long term return in the form of income and capital gains respectively
from the Company's investment portfolio.
Octopus Investments provides investment management and accounting and
administration services to the Company under a management agreement which runs
for a period of five accounting periods with effect from 21 July 2008 and may be
terminated at any time thereafter by not less than 12 months' notice given by
either party. No compensation is payable in the event of terminating the
agreement by either party, if the required notice period is given. The fee
payable, should insufficient notice be given, will be equal to the fee that
would have been paid should continuous service be provided, or the required
notice period was given. The basis upon which the management fee is calculated
is disclosed within note 18 to the financial statements.
The Chancellor of the Exchequer announced in his budget statement on 12 March
2008 that the Finance Act 2008 would contain draft legislation exempting VCTs
from VAT on management fees with effect from 1 October 2008. This legislation
has now been passed and as such all VCTs have been made exempt from VAT on
management fees from this date.
4. Other expenses
31 January 2010 31 January 2009
GBP'000 GBP'000
Directors' remuneration 50 30
Fees payable to the Company's auditor for the
audit of the financial statements 6 6
Fees payable to the Company's auditor for other
services - tax compliance 5 1
Accounting and administration services 31 2
Legal and professional expenses 8 -
Other expenses 117 36
217 75
The total expense ratio for the Company for the year to 31 January 2010 was 2.5
per cent (2009: 2.1 per cent). Total running costs are capped at 3.2 per cent.
5. Directors' remuneration
31 January 2010 31 January 2009
GBP'000 GBP'000
Directors' emoluments
Murray Steele (Chairman) 20 11
Chris Powles 15 9
Chris Hulatt (paid to Octopus Investments 15 10
limited)
50 30
None of the Directors received any other remuneration or benefit from the
Company during the year. The Company has no employees other than non-executive
Directors. The average number of non-executive Directors in the year was three
(2009: three).
6. Tax on ordinary activities
The corporation tax charge for the year was GBPnil (2009: GBP182,000).
The current tax charge for the year differs from the standard rate of
corporation tax in the UK of 28% (2009: 28%). The differences are explained
below.
Current tax reconciliation: 31 January 2010 31 January 2009
GBP'000 GBP'000
Loss on ordinary activities before tax (334) (84)
Non taxable gains/(losses) - -
Net loss on ordinary activities (334) (84)
Current tax at 28% (2009: 28%) (94) (24)
Unutilised tax losses 99 24
Income not liable to tax (5) -
Total current tax charge - -
Approved venture capital trusts are exempt from tax on capital gains within the
Company. Since the Directors intend that the Company will continue to conduct
its affairs so as to maintain its approval as a venture capital trust, no
current deferred tax has been provided in respect of any capital gains or losses
arising on the revaluation or disposal of investments.
7. Earnings/(loss) per share
The revenue earnings per share is based on 9,913,612 (31 January
2009: 1,609,161) shares, being the weighted average number of shares in issue
during the year, and a loss for the year totalling GBP(198,000) (31 January 2009:
GBP(77,000)).
The capital earnings per share is based on 9,913,612 (31 January
2009: 1,609,161) shares, being the weighted average number of shares in issue
during the year, and a loss for the year totalling GBP(136,000) (31 January 2009:
GBP(7,000)).
The total earnings per share is based on 9,913,612 (31 January 2009: 1,609,161)
shares, being the weighted average number of shares in issue during the year,
and a loss for the year totalling GBP(334,000) (31 January 2009: GBP(84,000)).
There are no potentially dilutive capital instruments in issue and, therefore no
diluted returns per share figures are relevant. The basic and diluted earnings
per share are therefore identical.
8. Net asset value per share
The calculation of net asset value per share as at 31 January 2010 is based on
net assets of GBP10,591,000 (31 January 2009: GBP2,087,000) and 11,650,327 (31
January 2010: 2,297,666) Ordinary shares in issue at that date.
9. Fixed asset investments
Financial Reporting Standard 29 Financial Instruments: Disclosures regarding
financial instruments that are measured in the balance sheet at fair value
requires disclosure of fair value measurements by level in the following fair
value measurement hierarchy:
Level 1: quoted prices in active markets for identical assets and liabilities.
The fair value of financial instruments traded in active markets is based on
quoted market prices at the balance sheet date. A market is regarded as active
if quoted prices are readily and regularly available, and those prices represent
actual and regularly occurring market transactions on an arm's length basis. The
quoted market price used for financial assets held is the current bid price.
These instruments are included in level 1 and comprise money market funds
classified as held for trading.
Level 2: the fair value of financial instruments that are not traded in an
active market is determined by using valuation techniques. These valuation
techniques maximise the use of observable date where it is available and rely as
little as possible on entity specific estimates. If all significant inputs
required to fair value an instrument are observable, the instrument is included
in level 2. The Company holds no such investment in the current or prior year.
Level 3: the fair value of financial instruments that are not traded in an
active market (for example investments in unquoted companies) is determined by
using valuation techniques such as earnings multiples. If one or more of the
significant inputs is not based on observable market data, the instrument is
included in level 3.
There have been no transfers between these classifications in the period (2009:
none). The change in fair value for the current and previous year is recognised
through the profit and loss account.
All items held at fair value through profit or loss were designated as such upon
initial recognition. Movements in investments at fair value through profit or
loss during the year to 31 January 2010 are summarised below.
Fixed asset investments:
Level 3: Unquoted investments
GBP'000
Fair value and book cost at 1 February 2009 -
Fair value at 1 February 2009 -
Movement in the year
Purchases at cost 6,417
Change in holding gains/(losses) in year -
Closing fair value at 31 January 2010 6,417
Closing cost at 31 January 2010: 6,417
Closing holding gains/(losses) at 31 January 2010: -
Fair value at 31 January 6,417
Level 3 valuations include assumptions based on non-observable market data, such
as discounts applied either to reflect impairment of financial assets held at
the price of recent investment, or to adjust earnings multiples. The sensitivity
of these valuations to a reasonable possible change in such assumptions is given
in note 15.
Further details of the fixed asset investments held by the Company are shown
within the Investment Manager's Review on pages ? to ?.
Current asset investments
Level 1 money market funds: Level 1 valuations are based on quoted prices
(unadjusted) in active markets for identical assets or liabilities. The fair
value of money market funds at 31 January 2010 was GBP4,091,000 (2009:
GBP2,000,000).
At 31 January 2010 there were no commitments in respect of investments approved
by the Manager but not yet
completed.
10. Debtors
31 January 2010 31 January 2009
GBP'000 GBP'000
Prepayments and accrued income 86 1
86 1
11. Creditors: amounts falling due within one year
31 January 2010 31 January 2009
GBP'000 GBP'000
Accruals 80 59
Other creditors 8 95
88 154
=----------------------------------------------------
12. Share capital
31 January 2010 31 January 2009
GBP'000 GBP'000
Authorised:
50,000,000 Ordinary shares of 10p 5,000 5,000
Allotted and fully paid up:
11,650,327 (2009: 2,297,666) Ordinary shares of 1,165 230
10p
The capital of the Company is managed in accordance with its investment policy
with a view to the achievement of its investment objective as set on page ?.
The Company is not subject to any externally imposed capital requirements.
The Company issued 9,352,661 (2009: 2,297,666) Ordinary shares during the year
at a price of 100p per share.
13. Reserves
Capital
reserve
Special gains &
Share distributable losses on Revenue
premium reserve disposal reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 1 February 1,941
2009 - (7) (77) 1,857
Issue of equity 7,903 - - - 7,903
Cancellation of (9,844)
share premium 9,844 - - -
Management fees -
allocated to
capital - (136) - (136)
Revenue return on -
ordinary
activities after
tax - - (198) (198)
Balance as at 31 -
January 2010 9,844* (143)* (275)* 9,426
*Available for potential distribution by way of a dividend
All fixed asset investments are designated as fair value through profit or loss
at the time of acquisition, and all capital gains or losses on investments so
designated. Given the nature of the Company's venture capital investments, the
changes in fair value of such investments recognised in these financial
statements are not considered to be readily convertible to cash in full at the
balance sheet date and accordingly these gains are treated as holding gains or
losses.
When the Company revalues the investments still held during the period, any
gains or losses arising are credited/charged to the Capital reserve - holding
gains/(losses).
When an investment is sold any balance held on the Capital reserve - holding
gains/(losses) is transferred to the
Capital reserve - gains/(losses) on disposal as a movement in reserves.
At 31 January 2010 there were no commitments in respect of investments approved
by the Manager but not yet completed.
Reserves available for potential distribution by way of a dividend are:
GBP'000
As at 1 February 2009 nil
Movement in year 9,426
As at 31 January 2010 9,426
14. Financial instruments and risk management
The Company's financial instruments comprise equity and fixed interest
investments, unquoted loans, cash balances and liquid resources including
debtors and creditors. The Company holds financial assets in accordance with its
investment policy of investing mainly in a portfolio of VCT-qualifying unquoted
securities whilst holding a proportion of its assets in cash or near-cash
investments in order to provide a reserve of liquidity.
Fixed asset investments (see note 10) are valued at fair value. Unquoted
investments are carried at fair value as determined by the directors in
accordance with current venture capital industry guidelines. The fair value of
all other financial assets and liabilities is represented by their carrying
value in the balance sheet. The Directors believe that the fair value of the
assets are held at the period end is equal to their book value.
In carrying on its investment activities, the Company is exposed to various
types of risk associated with the financial instruments and markets in which it
invests. The most significant types of financial risk facing the Company are
price risk, interest rate risk, credit risk and liquidity risk. The Company's
approach to managing these risks is set out below together with a description of
the nature and amount of the financial instruments held at the balance sheet
date.
Fair value methods and assumptions
Where investments are in quoted stocks, fair value is set as market price,
discounted if appropriate. Unquoted investments are valued in line with IPEVC
valuation guidelines.
Market risk
The Company's strategy for managing investment risk is determined with regard to
the Company's investment objective, as outlined on page ?. The management of
market risk is part of the investment management process and is a central
feature of venture capital investment. The Company's portfolio is managed with
regard to the possible effects of adverse price movements and, with the
objective of maximising overall returns to shareholders. Investments in unquoted
companies, by their nature, usually involve a higher degree of risk than
investments in companies quoted on a recognised stock exchange, though the risk
can be mitigated to a certain extent by diversifying the portfolio across
business sectors and asset classes. The overall disposition of the Company's
assets is regularly monitored by the Board.
Details of the Company's investment portfolio at the balance sheet date are set
out on pages ? and ?. An analysis of investments between debt and equity
instruments is given in note ?.
61.3% (2009: nil) by value of the Company's net assets comprises investments in
unquoted companies held at fair value. The valuation methods used by the
Company include the application of a price/earnings ratio derived from listed
companies with similar characteristics, and consequently the value of the
unquoted element of the portfolio can be indirectly affected by price movements
on the London Stock Exchange. A 10% overall increase in the valuation of the
unquoted investments at 31 January 2010 would have increased net assets and the
total return for the period by GBP641,700 (2009: GBPnil) an equivalent change in the
opposite direction would have reduced net assets and the total return for the
period by the same amount.
38.6% (2009: 95.8%) by value of the Company's net assets comprises of money
market funds held at fair value. A 1% overall increase in the valuation of the
money market funds at 31 January 2010 would have increased net assets and the
total return for the year by GBP40,910 (2009: GBP20,000) an equivalent change in the
opposite direction would have reduced net assets and the total return for the
year by the same amount.
Interest rate risk
At the year end, some of the Company's financial assets are interest-bearing,
some of which are at variable rates. As a result, the Company is exposed to
fair value interest rate risk due to fluctuations in the prevailing levels of
market interest rates.
Floating rate
The Company's floating rate investments comprise cash held on interest-bearing
deposit accounts and, where appropriate, within interest bearing money market
funds. The benchmark rate which determines the rate of interest receivable on
such investments is the bank base rate, which was 0.5% at 31 January 2010 (2009:
1.5%). The amounts held in floating rate investments at the balance sheet date
were as follows:
31 January 2010 31 January 2009
GBP000
Cash on deposit & money market funds 4,176 2,240
A 1% increase in the base rate would increase income receivable from these
investments and the total return by GBP41,700 (2009: GBP22,400), on an annualised
basis.
Credit risk
Credit risk is the risk that the counterparty to a financial instrument will
fail to discharge an obligation or commitment that it has entered into with the
Company. The Investment Manager and the Board carry out a regular review of
counterparty risk. The carrying values of financial assets represent the maximum
credit risk exposure at the balance sheet date.
At 31 January 2010 the Company's financial assets exposed to credit risk
comprised the following:
31 January 2010 31 January 2009
GBP000 GBP000
Investments in floating rate instruments 4,091 2,000
Cash on deposit 85 240
Investments in fixed rate instruments 2,306 -
Accrued dividends and interest receivable 3 -
6,485 2,240
Credit risk relating to listed money market funds is mitigated by investing in a
portfolio of investment instruments of high credit quality, comprising
securities issued by the UK Government and major UK companies and institutions.
Credit risk relating to loans to and preference shares in unquoted companies is
considered to be part of market risk.
Bankruptcy or insolvency of a custodian could cause the Company's rights with
respect to securities held by a custodian to be delayed or limited.
Credit risk arising on the sale of investments is considered to be small due to
the short settlement and the contracted agreements in place with the settlement
lawyers.
The Company's interest-bearing deposit and current accounts are maintained with
HSBC PLC and BlackRock.
Liquidity risk
The Company's holdings in money market funds are considered to be readily
realisable as they are of high credit quality as outlined above.
The Company's liquidity risk is managed on a continuing basis by the Investment
Manager in accordance with policies and procedures laid down by the Board. The
Company's overall liquidity risks are monitored on a quarterly basis by the
Board.
The Company maintains sufficient investments in cash and readily realisable
securities to pay accounts payable and accrued expenses. At 31 January 2010
these investments were valued at GBP4,176,000 (2009: GBP2,240,084).
15. Post balance sheet events
The following events occurred between the balance sheet date and the signing of
these financial statements:
· 11 March 2010: GBP27,000 was invested into Carebase (Col) Limited
· 22 March 2010: GBP1,000,000 was invested into Businessco
Services 3 Limited, a company that seeks to invest in qualifying investments.
16. Contingencies, guarantees and financial commitments
There were no contingencies, guarantees or financial commitments as at 31
January 2010 (2009: GBPnil).
17. Related party transactions
Chris Hulatt, a non-executive director of Octopus Protected VCT 2 plc, is a
director of Octopus Investments Limited. Octopus Protected VCT 2 plc has
employed Octopus Investments throughout the period as Investment Manager.
Octopus Protected VCT 2 plc has paid Octopus GBP181,000 (2009: GBP9,000) in the
period as a management fee and there is GBPnil outstanding at the balance sheet
date.
The management fee is payable quarterly in advance and is based on 2.0% of the
net asset value calculated at annual intervals as at 31 January. Octopus
Investments Limited provides accounting and administrative services to the
Company, payable quarterly in advance for a fee of 0.3% of the net asset value
calculated at annual intervals as at 31 January.
In addition, Octopus Investments also provides secretarial services for an
additional fee of GBP10,000 per annum. During the year GBP13,625 (2009: GBP2,000) was
paid to Octopus Investments Limited and there is GBPnil outstanding at the balance
sheet date.
No performance related incentive fee will be payable over the first five years.
Thereafter, Octopus Investments will be entitled to an annual performance
related incentive fee. This performance fee is equal to 20% of the amount by
which the NAV from the start of the sixth accounting and subsequent accounting
period exceeds simple interest of the HSBC Bank plc base rate for the same
period. The NAV at the start of the sixth accounting period must be at least
100p. Any distributions paid out by the Fund will be added back when calculating
this performance fee.
[HUG#1417160]
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