Annual Financial Report

Financial highlights as at 31 December 2008 Per ordinary share (pence) 31.12.08 31.12.07 28.02.07 Net asset value 26.8 33.2 41.6 Dividends Dividend paid 2.8 4.2 3.9 Cumulative dividend 53.7 50.9 46.7 Total return SPARK VCT plc 80.5 84.1 88.3 Return including tax benefits 100.5 104.1 108.3 Total return to former shareholders of: Quester VCT 2 plc, per 100p 66.5 70.2 74.5 invested in shares of that company Return including tax benefits 86.5 90.2 94.5 Quester VCT 3 plc, per 100p 40.1 43.7 47.8 invested in shares of that company Return including tax benefits 60.1 63.7 67.8 The directors do not propose a dividend for the year ended 31 December 2008. Composition of the fund by value 31.12.08 Unquoted venture capital investments 60.1% Quoted venture capital investments 2.0% Listed fixed interest investments 9.8% Cash and other net current assets 28.1% Total 100.0% Chairman's statement Results for the year The movement in net assets is summarised in the table below: Venture Bonds, Total Pence capital equities per investments and £'000 share £'000 net current assets £'000 Net asset value at 31 December 2007 25,634 12,042 37,676 33.2 Net gains/(losses) on disposal 728 (1,020) (292) (0.2) Income net of operating expenses - (43) (43) - Net (loss)/gain on revaluation of (2,888) 26 (2,862) (2.6) investments Net investment (5,039) 5,039 - - Net assets before dividends and 18,435 16,044 34,479 30.4 share buy-backs Dividend and incentive fee paid - (4,175) (4,175) (3.7) Share buy-backs - (573) (573) 0.1 Net asset value at 31 December 2008 18,435 11,296 29,731 26.8 The managed portfolio before the effect of dividends and buy-backs showed a reduction of £3.2 million, or 2.8p per share. The principal movements consisted of net write-downs on the venture capital portfolio of £2.9 million and the loss on disposal of the listed portfolio of FTSE equities of £1.0 million. The reduction in value of the venture capital portfolio was concentrated in the main amongst the second tier early stage and developing companies, rather than the more mature and larger companies. It was offset by realised gains of £0.7 million. While the loss on the equity portfolio was disappointing, the decision to sell proved fortunate in light of the crash which followed soon thereafter. £3.3 million was invested in the venture capital portfolio split broadly between new and follow-on investments. In very uncertain markets, the overall performance of the portfolio was satisfactory. The Manager encouraged investee companies to live within their cash resources and has been similarly prudent in only providing follow-on funding to investments which show real promise. In fact, a substantial proportion of the portfolio consists of relatively mature companies, a small number of which might have been sold if there had been exit opportunities. The environment for funding and disposals continues to show no sign of improving in the short term. The dividend approved by shareholders last year amounted to 2.8p per share (£ 3.1 million). It triggered a payment of £1.0 million (0.9p) to the Manager under the incentive scheme at that time. The Board's decision to recommend this dividend was driven by the dividend pay-out policy which was central to your Board's new policy at the time of the merger in 2005.The incentive scheme was put in place to motivate the Manager to free up funds for a payout. £23.6 million was realised. The Board concluded last year that the basic intent of the agreement was that the Manager should be rewarded if funds were released. Nevertheless, conscious that the shareholders should decide, the Board drew all of the relevant factors clearly to their attention, not only in the Annual Report but within the text of the resolution on the proxy form. Shareholders voted for the dividend payment by 81.6% and 12.8% votes against in full knowledge of the facts. Dividends of £14.3 million (12.2p per share) have been paid since 2005 compared to none in the preceding 5 years. Over the period since June 2005, the total return has dropped by only 4.5p per share or 10.4%, of which 3.7p (8.5%) occurred in 2008. While it is disappointing to see a fall, it is smaller than delivered by many other investment classes over that 3i2 year period, or the last 12 months. Unquoted early stage and technology driven companies are not necessarily driven by the same financial or economic factors which have overshadowed some other investments recently. The underlying growth in the companies is evident in the Business review and can deliver value. The Board Following the successful transition of the management of your company from Quester to SPARK, the Board has decided that it is the right time to revitalise its membership, particularly as some have been on this Board and predecessor Boards for over 10 years. Robin Field joined the Board in January 2009. He is well versed in VCTs, has experience of companies in SPARK's space and is well accustomed to the governance of listed companies. Subject to your agreement, it is proposed he become Chairman at the Annual General Meeting. Tom Sooke, Christopher Wright and I will not be putting ourselves up for re-election. You are fortunate to have three new excellent candidates including David Adams who has a deep experience of the VCT sector and Greg Lockwood who has spent many years investing in early stage technology companies, both of whom have joined the Board in March 2009 and will be up for election at the AGM. The Board is grateful to Tom Sooke and Christopher Wright for their contribution to the Board's strategy and their diligent attention to all aspects of your Company's affairs over a good number of years. Dividend and Outlook The Board is conserving cash resources to follow good investments and take opportunities for new investment to build a valuable portfolio. Profits have not been generated in this year. No dividend is proposed. In addition, the Board will carefully consider whether resources are sufficient to make share buy-backs. Success in early stage investing depends on having a spread of opportunities to develop significant businesses, a few of which can drive the returns shareholders are expecting. The mature investments need to be sold when good prices can be obtained, to produce the resources to create that spread. Meanwhile, prices for new investments are beginning to look attractive and when cash is released from the portfolio it can be put to work to achieve attractive returns. Meanwhile, solid progress can be obtained by the investee companies in their own markets, within the cash resources available to them and with the support of the Manager. Jock Birney Chairman 9 April 2009 Fund summary as at 31 December 2008 Industry Cost Valuation Equity % of fund by sector £'000 £'000 % held by value £'000 Fifteen largest venture capital investments Sift Group Limited TMT 2,395 2,249 20.2% 7.6% Imagesound plc TMT 2,848 1,920 11.8% 6.5% Elateral Holdings Limited TMT 1,009 1,783 24.3% 6.0% Vivacta Limited Healthcare 1,067 1,336 8.5% 4.5% Cluster Seven Limited TMT 1,569 1,197 9.0% 4.0% UniServity Limited TMT 1,000 1,000 16.5% 3.4% Isango! Limited TMT 1,000 1,000 2.3% 3.4% Skinkers Limited TMT 1,056 970 5.6% 3.3% Workshare Limited TMT 695 909 1.9% 3.1% Level Four Software Limited TMT 855 855 5.1% 2.9% We7 Limited TMT 816 816 10.0% 2.7% Secerno Limited TMT 978 688 8.3% 2.3% Perpetuum Limited TMT 686 585 7.0% 2.0% Community Internet Europe TMT 327 510 22.5% 1.7% Limited Haemostatix Limited Healthcare 502 502 10.6% 1.7% 16,803 16,320 55.1% Other venture capital investments Antenova Limited TMT 1,307 495 4.7% 1.7% Lab M Holdings Limited Healthcare 690 440 23.9% 1.5% (formerly IDG) Gemini Holdings Limited Healthcare 455 228 12.8% 0.8% MediGene AG FRANKFURT Healthcare 316 202 0.1% 0.7% Celldex Therapeutics, Inc. Healthcare 625 135 0.2% 0.5% NASDAQ Oxonica plc AIM Healthcare 204 127 1.5% 0.4% Artisan Software Tools Limited TMT 120 120 23.4% 0.4% TeraView Limited Healthcare 1,172 100 5.4% 0.3% Other investments: valuations 1,629 268 0.7% less than £100,000 6,518 2,115 7.0% Total venture capital investments 23,321 18,435 62.1% Total unquoted venture capital investments 21,313 17,839 60.1% Total quoted venture capital investments 2,008 596 2.0% 23,321 18,435 62.1% Listed fixed interest investments 2,854 2,898 9.8% Total investments 26,175 21,333 71.9% Cash and other net assets 8,398 8,398 28.1% Net assets 34,573 29,731 100.0% Business review The Business review has been prepared in accordance with Section 234ZZB of the Companies Act 1985 and forms part of the Directors' report to shareholders. This Business review does not contain information about environmental matters, the Company's employees and social and community issues. Portfolio update and overview Recent months have seen a great deal of activity on the part of members of the SPARK management team in working with the portfolio companies, preparing them for the increasingly difficult financial and economic climate. This work has built on the new team's detailed review of the portfolio referred to last year, which included classifying the companies according to their potential to deliver capital growth, and most importantly identifying those that are key to producing a good return for the whole portfolio, which has informed all of the SPARK team's subsequent decision-making. Team members have been particularly focused on cost control and rates of cash burn, against the background of the risk of slower than expected revenue growth and the reduced availability of venture capital finance. At the same time, there has been an emphasis on working with CEOs on strategic reviews and the promotion of growth opportunities. Present conditions in the private equity and venture capital markets make the raising of additional finance for portfolio companies more difficult and have delayed opportunities for exits and depressed prices. For companies that are addressing new markets, which are growing on the back of new technologies or services, the general decline in sentiment in the financial markets does not necessarily have a direct effect on business growth. The earlier-stage companies are, however, potentially vulnerable to commercial setbacks, such as delays in the award of key customer contracts. The SPARK management team's current assessment of the prospects for individual portfolio companies is that returns are probably looking more vulnerable, and certainly more delayed than indicated 12 months ago. We now expect the bulk of the realisations of the key portfolio companies to be concentrated in 2011 at the earliest. Fund summary The Fund summary above lists the venture capital investments held by the Company at 31 December 2008 with their cost and valuation at that date. The 15 largest venture capital investments held at 31 December 2008 collectively account for 55.1% of the net assets at the balance sheet date. Highlights of a number of key developments in the portfolio are set out under "Portfolio progress" below. Portfolio progress The venture capital portfolio of the Company is well balanced between investments in companies at development stage (42% of the total) and companies at early stage (55% of the total).The top three investments in the portfolio are all in development stage companies and together account for 20.1% of net assets at 31 December 2008. All three have demonstrated satisfactory business progress over the year, growing top-line revenues by between 7% and 40% (Sift Group Limited +20%, Imagesound plc +7%, Elateral Holdings Limited +40%). Additionally, over the last 12 months, the development of the early stage companies which have been held in the portfolio for some time and are now in revenue generation has been positive with encouraging growth, albeit generally from a small base (examples of year-on-year revenue growth in the TMT sector include Antenova Limited +85%; UniServity Limited +62%; and in life sciences Celldex Therapeutics, Inc. +173%, MediGene AG +37%). In the healthcare sector, the two key companies which are still at the stage of scientific development (Vivacta Limited and Haemostatix Limited) have largely met the milestones set for them over 2008. In the same sector, however, we have been disappointed in the performance of one other unquoted company and by a couple of the quoted investments. As noted above, recent months have seen a great deal of activity on the part of members of the SPARK team in working with the portfolio companies, preparing them for the increasingly difficult financial and economic climate. Team members have been particularly focused on cost control and rates of cash burn. At the same time, there has been an emphasis on working with CEOs on strategic reviews and the promotion of growth opportunities. The extent of the activity of SPARK management team members is illustrated by the fact that, during 2008 and in the current year to date, in relation to the Fund's top 15 venture capital investments, action has been taken in 10 cases to ensure a reduction in the investee company's cost base, in nine cases additional venture capital funding has been raised and in seven cases significant management changes have been made (including a change in the CEO in five cases and the appointment of a new chairman in five cases). Highlights of specific business achievements during the year from among the largest venture capital investments are as follows: * Sift Group Limited: After a difficult trading year in 2007, Sift delivered a strong 20% top-line growth in 2008, along with a marked improvement in profitability despite challenging market conditions. Whilst these challenges remain in 2009, Sift will be looking to take advantage of dislocation in the trade publication market to further strengthen its position. * Imagesound plc: Imagesound took the decision to de-list from AIM in May 2008 as a result of the detrimental effect that the illiquidity of its stock in that market was having on the company's ability to develop the business and work towards an exit for its investors. During the year, many of the company's retail clients have suffered from the dramatic deterioration in consumer confidence and spending. Nevertheless, Imagesound was able to pick up sufficient new business in the fourth quarter of 2008 to deliver a respectable growth in top-line revenues of 7% for the year. * Elateral Holdings Limited: Elateral is a global leader in brand asset management software. In the early part of the year, the company was a victim of the sentiment change in markets when an acquisition offer was withdrawn by a private equity buyer on account of market turmoil. For 2008 as a whole, Elateral reported top-line revenue growth of 40% and announced a number of significant client wins including Autodesk, NetApp and Toyota. The company was also able to renew and extend its relationship with existing blue chip clients, including Cisco which entered into its ninth year of usage of the product. * Vivacta Limited: Vivacta is a diagnostics company developing instrumentation and cartridges for point-of-care tests. The company has achieved its technical targets for its first test. The process of scale-up and manufacturing is underway. It is beginning commercial discussions with a view to licensing its technology. * Cluster Seven Limited: Cluster Seven is the leading provider of spreadsheet management solutions; its product Enterprise Spreadsheet Manager targets the needs of financial institutions and Fortune 500 financial reporting groups, and addresses gaps in existing risk management and compliance solutions. During 2008 the business suffered from the well known uncertainty and turbulence in the financial services industry; nevertheless, the software is now installed in more than 20 tier one customers and greater emphasis on regulation and compliance is not only expanding the range of applications for the product, but also opening the possibility of selling Cluster Seven's solution as an integrated service for users of broad enterprise solutions. * UniServity Limited: UniServity markets a web-based collaborative learning environment for schools. It has achieved considerable success in winning contracts with Local Education Authorities in the UK and is beginning to make progress also in international markets. In November 2008 it announced a major step towards breaking into the Chinese market through a strategic partnership brokered by SPARK Venture Management Limited with the Chinese publishing and media company Time Media Co. Under the terms of the framework agreement, Time Media will launch and promote UniServity's highly successful web-based learning platform to schools throughout mainland China. * Isango! Limited: is an early stage online travel website company offering users an authoritative source of travel experiences such as holiday tours, sightseeing, attractions and activities in more than 50 countries across the world. Since the investment was completed in the first quarter of the year, Isango! has been impacted by the downturn but has continued to develop its partnership strategy and recently became the exclusive partner of Accor Hotels and TravelSupermarket.com for tours and activities. * Skinkers Limited: a software company delivering information broadcast solutions to large enterprises, has completed the development of the Live Notification Platform, an industry leading push communications platform, and started winning its first clients. The downturn in the financial services sector has impacted the sales cycle; however the company has recently won accounts with MBNA and Capital One and has a good sales pipeline. The application for MBNA is a new online secure delivery service and was recently selected as the "Best Online Initiative" by the credit card industry. * Workshare Limited: Workshare, the global leader in content protection and control solutions for secure information management, recently announced that more than 11,000 companies now use its latest software product Workshare Professional. Workshare remains the de facto standard for comparison technology with over 78% of users of its earlier DeltaView product now migrated to the improved comparison technology and the remaining 22% expected to switch. Workshare added 3,000 new customers in 2008, and can now count 99% of the top 200 US law firms as customers. * Level Four Software Limited: Level Four is the leading independent vendor of automated testing solutions for banks' networks of automated teller machines (ATMs). Based in Dunfermline, Scotland, the company serves a global client base of tier one banks and processors through offices in Dubai and Charlotte, North Carolina. The company has continued to grow over the last 12 months with notable new client wins including Barclays Bank, HBOS and National Bank of Kuwait. New investments During the year under review, the pace of new investment was constrained by the existing level of cash resources and the currently poor visibility on the generation of cash proceeds from realisations. Two new investments were completed, one in the TMT (technology, media and telecoms) sector and one in healthcare, as follows: Company Sector £'000 Unquoted companies: Gemini Holdings Limited Healthcare 455 Isango! Limited TMT 1,000 1,455 Information on Isango! Limited, the investment in which was completed in the first quarter of 2008, has been provided in the previous section. Gemini Holdings Limited is the holding company of Gemini Biomedical Limited, a specialist healthcare screening company which provides medical screening services to life insurance companies and underwriters. Gemini's service is provided through a network of pharmacies contracted to Gemini and easily accessed by applicants. Its GemTrack software enables capture of the comprehensive screening data required for timely and accurate underwriting of policies. The selection of these two new investments was in line with the indications given in last year's Business review, namely that the programme of new investment should be expected to include (a) within the TMT sector, a greater emphasis on opportunities in the digital media and software applications sectors and a reduced exposure to `hardware' investments and(b) in healthcare, a reduced exposure to drug discovery and a greater emphasis on other areas. The early progress of Gemini Holdings Limited, since the investment was completed in the third quarter of 2008, has been disappointing and slower than had been expected. The company is receiving close attention from members of the SPARK management team, with fresh milestones being set for the progress expected over the coming months. Follow-on investments The year to 31 December 2008 saw continued investment in a number of key companies in the portfolio, although at a reduced rate compared with 2007, as summarised in the table below: Company Sector £'000 Follow-on rounds in unquoted companies: Antenova Limited TMT 173 Cluster Seven Limited TMT 372 Haemostatix Limited Healthcare 255 Level Four Software Limited TMT 130 Secerno Limited TMT 532 We7 Limited TMT 142 Other companies (3) 128 1,732 Bridge finance ahead of planned realisation: Arithmatica Limited TMT 112 112 1,844 Among the companies receiving the most significant amounts of follow-on finance, Antenova Limited grew top-line revenues by 85% and demonstrated satisfactory progress in winning more profitable business, but in consequence required additional working capital to maintain adequate stock levels. The terms of the funding round completed in the fourth quarter of 2008 were inevitably less attractive than would have been expected earlier, but by participating in the round at a level more than pro-rata to its previous holding, the Company took advantage of these terms to enhance its position in the investment. Two other long-established portfolio companies in the TMT sector received additional support: an additional £372,000 was advanced as loan finance to Cluster Seven Limited, the specialist provider of spreadsheet management software, and £130,000 to Level Four Software Limited, which specialises in the provision of ATM software solutions. Secerno Limited, which specialises in the supply of software and appliances to protect against internal and external threats to databases, was successful in concluding in July 2008 a US$16 million financing led by Amadeus Capital Partners with participation by the SPARK-managed funds including £532,000 from the Company. We7 Limited, the free to user, advertisement-funded online music service founded with musician Peter Gabriel, completed a £2.5m additional financing led by Eden Ventures in December 2008 with the Company adding £142,000 to its earlier investment. In the healthcare sector, a follow-on investment of £255,000 was made in Haemostatix Limited, the early stage company focused on platelet replacement therapies: this followed good early scientific results and a decision to accelerate the rate of development of the company. Realisations In the Business review for the period ended 31 December 2007, details were given of the successful exit from Nomad Payments Limited in January 2008, in a transaction which realised £7,263,000 (with £5,888,000 received in cash and £ 1,375,000 currently being held in escrow). In the healthcare sector, the share price of MediGene AG improved over the first half of the year and the opportunity was taken to sell part of this holding. Valuation changes The valuations of the unquoted investments in the portfolio have been reviewed as at 31 December 2008 on the basis of the International Private Equity and Venture Capital Valuation Guidelines, having regard mainly to (i) prices of recent financing rounds and/or the terms of financing rounds expected within the next 12 months, (ii) earnings multiples, and (iii) industry valuation benchmarks and /or M&A valuation criteria. In a number of cases (Arithmatica Limited, Gemini Holdings Limited, Perpetuum Limited, TeraView Limited) the write-down reflects disappointing business progress by the investee company, but in the main the valuation changes parallel the reductions that are being seen in the valuations of financial assets generally. Total revaluations in respect of venture capital investments amounted to a write-down of £1,929,000 of which £1,616,000 related to unquoted investments and £313,000 to quoted investments. Unquoted venture capital investments During the year ended 31 December 2008, in respect of unquoted investments, the review has resulted in a reduction in valuation of £1,616,000, net of gains totalling £1,171,000: Company £'000 Antenova Limited (442) Arithmatica Limited (236) Cluster Seven Limited (371) Community Internet Europe Limited 183 Elateral Holdings Limited 774 Lab M Holdings Limited (formerly IDG) (250) Gemini Holdings Limited (228) Perpetuum Limited (195) TeraView Limited (727) Workshare Limited 214 Others (4) (338) (1,616) Quoted venture capital investments Market movements during the year ended 31 December 2008 resulted in a net reduction in valuation of £313,000. Company £'000 Allergy Therapeutics plc AIM (239) Celldex Therapeutics, Inc. NASDAQ 65 Oxonica plc AIM (107) Others (2) (32) (313) Listed equity and bond portfolio The valuation of the listed equity portfolio fell by £685,000 over the first half of the year. In mid-July 2008 the entire portfolio of listed equities was sold (at a level somewhat below the valuation at 30 June 2008, bringing the loss in this portfolio to £1,020,000) in order to protect against the possibility of further declines in stock markets and ensure the availability of liquidity to fund necessary follow-on investments and the operations of the Company. In the event, despite crystalising a loss, this strategy has proved to have been the correct one, as the value of the portfolio would otherwise have declined by another £1.6 million as at the date of this report. Outlook The turmoil in capital markets and the increasingly constrained resources of the Company are now making it more difficult to make confident predictions for the overall outcome in terms of both valuations and timing of exits. Nevertheless, there was good growth over the last year, by and large, and many of the companies have adapted quickly to the changing market. The early stage of many of the investments means that a considerable degree of involvement by members of the SPARK management team in individual portfolio companies will continue to be required for a number of years ahead. On the assumption of successful progress of the key investments, investors should now expect that the bulk of the distributions of realisation proceeds will occur no earlier than 2011. SPARK Venture Management Limited Manager 9 April 2009 Directors' responsibility statement Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Company and of the profit or loss for that year. Under that law the Directors have elected to prepare the financial statements in accordance with UK accounting standards. In preparing those financial statements, the Directors are required to: * select suitable accounting policies and then apply them consistently; * make judgements and estimates that are reasonable and prudent; * state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and * prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The financial statements are published on the www.sparkvct.com website, which is a website maintained by the Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the auditor does not involve consideration of the maintenance and integrity of this website and accordingly, the auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction. Under applicable law and regulations, the Directors are responsible for preparing a Directors' report, Directors' remuneration report and corporate governance statement that comply with that law and those regulations. The Directors confirm to the best of their knowledge that: * the financial statements, prepared in accordance with applicable UK accounting standards, give a true and fair view of the assets, liabilities, financial position and loss of the Company; and * the Directors' report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces. On behalf of the Board Jock Birney Chairman 9 April 2009 Profit and loss account for the year to 31 December 2008 Notes Twelve Ten months to months 31.12.08 to £'000 31.12.07 £'000 Loss on investments at fair value through 11(d) (3,154) (4,314) profit or loss Income 2 784 636 Recoverable VAT 3 322 - Investment management fee: annual fee 4 (734) (776) performance incentive fee 5 (1,040) - Other expenses 6 (415) (432) Loss on ordinary activities before taxation (4,237) (4,886) Tax on loss on ordinary activities 8 - - Loss on ordinary activities after taxation (4,237) (4,886) Basic and fully diluted loss per share 10 (3.7)p (4.3)p All items in the above statement derive from continuing operations. The Company has only one class of business and derives its income from investments made in shares and securities and from bank deposits. There are no gains and losses for the period other than those passing through the profit and loss account of the Company. The accompanying notes are an integral part of this statement. Balance sheet as at 31 December 2008 Notes 31 31 December December 2008 2007 £'000 £'000 Fixed assets Investments at fair value through profit 11(a) 21,333 36,294 or loss Current assets Debtors 12 1,936 177 Cash at bank 6,965 1,417 8,901 1,594 Creditors: amounts falling due within 13 (503) (212) one year Net current assets 8,398 1,382 Net assets 29,731 37,676 Capital and reserves Called-up equity share capital 14 5,553 5,673 Share premium account 15 150 150 Capital redemption reserve 15 731 611 Special reserve 15 23,751 27,615 Revaluation reserve 15 (4,842) 945 Profit and loss account 15 4,388 2,682 Total equity shareholders' funds 29,731 37,676 Net asset value per share 16 26.8p 33.2p The financial statements were approved by the Directors on 9 April 2009 and were signed on their behalf by: Jock Birney Chairman The accompanying notes are an integral part of this statement. Cash flow statement for the year to 31 December 2008 Notes Twelve Ten months to months to 31.12.08 31.12.07 £'000 £'000 Cash (outflow)/inflow from operating 17 (2,564) 125 activities Financial investment Purchase of venture capital investments 11(b) (3,299) (3,764) Purchase of listed equities and fixed 11(b) (1,488) (7,514) interest investments Sale of venture capital investments 11(b) 7,928 1,237 Sale/redemption of listed equity and fixed 11(b) 8,269 11,926 interest investments Amounts recovered from investments 11(d) 410 159 previously written off Total net financial investment 11,820 2,044 Equity dividends paid 9 (3,135) (4,911) Financing Buy-back of ordinary shares 15 (573) (968) Issue of shares under the terms of the - 113 dividend reinvestment scheme Total financing (573) (855) Increase/(decrease) in cash for the period 5,548 (3,597) Reconciliation of net cash flow to movement in net funds Increase/(decrease) in cash for the period 5,548 (3,597) Net funds at the start of the period 1,417 5,014 Net funds at the end of the period 6,965 1,417 The accompanying notes are an integral part of this statement. Net funds comprise cash at bank and on short term deposit. Reconciliation of movements in shareholders' funds for the year to 31 December 2008 Share Share Capital Special Revaluation Profit Total capital premium redemption reserve reserve and £'000 account reserve £'000 loss £'000 £'000 £'000 £'000 account £'000 At 31 March 2007 5,805 51 465 38,820 (1,102) 4,289 48,328 Shares issued under 14 99 - - - - 113 the dividend reinvestment scheme Shares purchased for (146) - 146 (968) - - (968) cancellation Realisation of prior - - - - 1,613 (1,613) - years' net losses on investments Transfer from special - - - (10,237) - 10,237 - reserve to profit and loss account Net gain on - - - - 434 (434) - revaluation of investments Loss on ordinary - - - - - (4,886) (4,886) activities after taxation Dividends - - - - - (4,911) (4,911) At 31 December 2007 5,673 150 611 27,615 945 2,682 37,676 Shares purchased for (120) - 120 (573) - - (573) cancellation Realisation of prior - - - - (3,884) 3,884 - years' net unrealised gains on investments Transfer from special - - - (3,291) - 3,291 - reserve to profit and loss account Unrealised loss on - - - - (1,903) 1,903 - revaluation of investments Loss on ordinary - - - - - (4,237) (4,237) activities after taxation Dividends - - - - - (3,135) (3,135) At 31 December 2008 5,553 150 731 23,751 (4,842) 4,388 29,731 The accompanying notes are an integral part of these statements. Notes to the financial statements 1 Accounting policies A summary of the principal accounting policies, all of which have been applied consistently throughout the period, is set out below: Basis of accounting These financial statements have been prepared under the historical cost convention, except for the measurement at fair value of fixed asset investments, and in accordance with applicable UK accounting standards. Investments The Company's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment policy, and information about the portfolio is provided internally on that basis to the Board. Accordingly, upon initial recognition (using trade date accounting) the investments are designated by the Company as `at fair value through profit or loss'. They are included initially at fair value, which is taken to be their cost (excluding expenses incidental to the acquisition which are written off to the profit and loss account). Subsequently, the investments are valued at `fair value', which is measured as follows: * UK listed and AIM-traded investments are valued at their bid prices at the close of the period as issued by the London Stock Exchange; investments listed overseas are valued at bid prices (where a bid price is available) or otherwise at fair value based on published price quotations. * unquoted investments, where there is not an active market, are valued using an appropriate valuation technique so as to establish what the transaction price would have been at the balance sheet date. Such investments are valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines. Indicators of fair value are derived using established methodologies including earnings multiples, prices of recent investment rounds, net assets and industry valuation benchmarks. Where the Company has an investment in an early stage enterprise, the price of a recent investment round is often the most appropriate approach to determining fair value. In situations where a period of time has elapsed since the date of the most recent transaction, consideration is given to the circumstances of the investee company since that date in determining fair value. This includes consideration of whether there is any evidence of deterioration or strong definable evidence of an increase in value. In the absence of these indicators, the investment in question is valued at the amount reported at the previous reporting date. Examples of events or changes that could indicate such a diminution include: * the performance and/or prospects of the underlying business are significantly below the expectations on which the investment was based; * a significant adverse change either in the investee company's business or in the technological, market, economic, legal or regulatory environment in which the business operates; or * market conditions have deteriorated, which may be indicated by a fall in the share prices of quoted businesses operating in the same or related sectors. The Company does not exercise control or significant influence over investee companies and in accordance with the exemptions under FRS 9 "Associates and Joint Ventures", where the Company holds more than 20% but less than 50% of an investment and the investment is not a subsidiary, it is not treated as an associated company. Gains and losses on investments When the Company revalues its investments during an accounting period, any gains or losses are recognised in the profit and loss account within `gains/ (losses) on investments at fair value through profit or loss'. Any losses that are not considered by the Directors to reflect an impairment in the value of the investment, or gains on investments, are subsequently transferred from/to the revaluation reserve. When an investment is sold or the Directors consider that its value is impaired, any amount held in the revaluation reserve is transferred to the profit and loss account. Where the overall result on the sale of an investment is a loss, or there is an impairment in the value of an investment, a transfer is made from the special reserve, created on 3 November 2000 following the reduction of the share premium account, to the profit and loss account equal to the amount of such losses. Income Dividends receivable on listed equity shares are brought into account on the ex-dividend date. Income receivable on unquoted equity and non-equity shares and loan notes are brought into account when the Company's right to receive payment and expect settlement is established. Fixed returns on non-equity shares and debt securities are recognised on a time apportionment basis (including amortisation of any premium or discount to redemption) so as to reflect the effective interest rate, provided there is no reasonable doubt that payment will be received in due course. Expenses All expenses, including expenses incidental to the acquisition or disposal of an investment, are accounted for on an accruals basis and are charged wholly to the profit and loss account. Any costs associated with the issue of shares are charged to the share premium account. Any costs associated with the buy-back of shares are charged to the special reserve. Taxation Corporation tax is applied to profits chargeable to corporation tax, if any, at the applicable rate for the period. The Company has not provided for deferred tax on any capital gains/losses arising on the revaluation or disposal of investments as these items are not subject to tax whilst the Company maintains its Venture Capital Trust status. The Company intends to continue to meet the conditions required for it to hold approved Venture Capital Trust status for the foreseeable future. Deferred tax assets in respect of surplus management expenses are only recognised to the extent that those expenses are likely to be recoverable against future taxable profits of the Company. Foreign exchange The currency of the primary economic environment in which the Company operates (the functional currency) is pounds sterling ("Sterling"), which is also the presentational currency of the Company. Transactions involving currencies other than Sterling are recorded at the exchange rate ruling on the transaction date. At each balance sheet date, monetary items and non-monetary assets and liabilities that are measured at fair value, which are denominated in foreign currencies, are retranslated at the closing rates of exchange. Exchange differences arising on settlement of monetary items and from retranslating at the balance sheet date of investments and other financial instruments measured at fair value through profit or loss, and other monetary items, are included in the profit and loss account. Exchange differences relating to investments and other financial instruments measured at fair value are subsequently included in the transfer to the revaluation reserve. Dividends Dividends payable to equity shareholders are recognised in the reconciliation of movements in shareholders' funds when they are paid, or have been approved by shareholders in the case of a final dividend and become a liability of the Company. 2 Income Twelve Ten months to months to 31.12.08 31.12.07 £'000 £'000 Dividend income - Listed companies 167 387 Interest receivable - Listed fixed interest securities 202 108 - Loans to venture capital investee companies 72 42 - Bank deposits 74 38 Other income 269 61 784 636 3 Recoverable VAT HM Revenue and Customs (HMRC) announced in March 2008, following the European Court of Justice decision in the JPMorgan Claverhouse case, that the provision of management services to venture capital trusts is exempt from VAT. Accordingly the Manager ceased to charge VAT on management fees payable by the Company with effect from 30 September 2008. On the basis of information supplied by the Manager and discussions with the Company's professional advisors, the Directors consider it virtually certain that the Company will in the foreseeable future obtain a repayment of VAT of not less than £322,000. This amount has been recognised as a separate item in the income statement. It is possible that additional amounts of VAT will be recoverable in due course but the Directors are unable at this stage to quantify the sums involved. 4 Investment management fee Twelve Ten months to months to 31.12.08 31.12.07 £'000 £'000 Investment management fee 671 653 Irrecoverable VAT 63 123 734 776 SPARK Venture Management Limited ("SVML") provides investment management services to the Company under an amended and restated agreement dated 20 May 2005. SVML is a wholly owned subsidiary of SPARK Ventures plc, a company of which AB Carruthers is an executive director and in which he is a beneficial shareholder. AB Carruthers is an executive director of SVML. SVML is entitled to receive a management fee, determined quarterly in arrears, at the annual rate of 2.0% on the value of the Company's net assets at the end of each quarter. This fee is capped to ensure that the Company's running costs do not exceed 3.25% of closing net asset value. Running costs in respect of the period were less than 3.25% of closing net asset value and accordingly there was no reduction in the management fee in respect of the cap (ten months to 31 December 2007: nil). Irrecoverable VAT was charged on the investment management fee up to 30 September 2008, as mentioned in note 3, in line with the ruling against HMRC. This amount is part of the total claimed back from HMRC representing VAT paid on management fees for the three years prior to 30 September 2008. SVML also provides administrative and secretarial services to the Company for which it was entitled to a fee of £65,000 for the period (ten months to 31 December 2007: £53,000) adjusted annually in line with changes in the Retail Price Index. The investment management agreement may be terminated by the Company or the Manager giving not less than twelve months notice. Such notice may be given at any time after the date of the agreement. There are no provisions for compensation payable in the event of termination of the agreement. 5 Performance incentive fee Following the declaration at the Annual General Meeting of a final dividend of 2.8p per share in respect of the period ended 31 December 2007, the total of cash dividends paid or declared amounted to 11.15p per share or 25% of the Fair Asset Value at the time of the merger in 2005. This triggered the performance incentive fee of £1,040,000 which was paid on 17 October 2008. 6 Other expenses Twelve Ten months to months to 31.12.08 31.12.07 £'000 £'000 Administrative and secretarial services 65 53 Directors' remuneration (note 7) 55 47 Auditor's remuneration - Fees payable to the Company's auditor for audit of the 17 16 financial statements - Fees payable to the Company's auditor and its associates 8 8 for other services relating to tax Legal and professional expenses 31 47 Insurance 28 27 Management fees payable to OLIM Limited 39 53 Transaction costs 15 8 Irrecoverable VAT 32 40 Payment on account to HMRC 31 - Other 94 133 415 432 Following a routine inspection into the PAYE records of the Company, discussions are underway with HMRC over the treatment of amounts paid in prior tax years to Directors and former Directors of SPARK VCT and the companies that merged into it. Payments have historically been made to directors' service companies rather than being treated as salary with PAYE deducted.The Company's professional advisers have advised that the likely total liability for SPARK VCT is in the region of £25,000 on the assumption that 25% of amounts paid to Directors service companies are now viewed by HMRC as having been incorrectly paid gross of any taxation or national insurance deductions and that the Company is unable to recover this possible tax liability from its Directors and former Directors. In the event that the arguments of the company's advisers are unsuccessful, the total liability could be £155,000 including £33,000 of employer's national insurance. The Company has accrued for a potential liability of £31,000 in the accounts for the year to 31 December 2008 representing a payment on account made after the balance sheet date. From 1 January 2009 all directors' fees are paid as salary with PAYE and National Insurance deducted. 7 Directors' remuneration Twelve Ten months to months to 31.12.08 31.12.07 £'000 £'000 Amounts payable to Directors or companies associated with them 55 47 55 47 8 Tax on ordinary activities Twelve Ten months to months to 31.12.08 31.12.07 £'000 £'000 Corporation tax - - - - Reconciliation of loss on ordinary activities to taxation Twelve Ten months to months to 31.12.08 31.12.07 £'000 £'000 Loss on ordinary activities before taxation (4,237) (4,886) Tax on loss on ordinary activities at standard UK corporation tax rate of 28.5% (31 December 2007: 30%) (1,208) (1,466) Effects of: Non taxable items - UK dividends and net losses 851 1,178 on investments Unutilised management expenses 357 288 - - The Company has excess trading losses of £7,453,000 (31 December 2007: £ 6,217,000) that are available for offset against future profits. A deferred tax asset of £2,087,000 (31 December 2007: £1,865,000) has not been recognised in respect of those losses as they will be recoverable only to the extent that the Company has sufficient future taxable profits. 9 Dividends Twelve Ten months to months to 31.12.08 31.12.07 £'000 £'000 Final dividend paid, period ended 31 December 2007: 2.8p per share paid 15 October 2008 3,135 - Interim dividend, period ended 31 December 2007: 1.4p per share paid 7 December 2007 - 1,612 Second interim dividend, year ended 28 February 2007: 2.8p per share paid 21 March 2007 - 3,299 3,135 4,911 10 Earnings per share The loss per share of 3.7p (ten months to 31 December 2007: loss 4.3p) is based on the loss on ordinary activities after tax of £4,237,000 (ten months to 31 December 2007: loss £4,886,000) and on the weighted average number of ordinary shares in issue during the period of 112,145,822 (ten months to 31 December 2007: 114,784,742). There is no dilution effect in respect of the period ended 31 December 2008 (31 December 2007: nil). 11 Investments a. Summary of investments 31.12.08 31.12.07 £'000 £'000 Venture capital investments 18,435 25,634 Bonds and equity investments 2,898 10,660 21,333 36,294 Bonds and equity investments comprise: Listed fixed interest investments 2,898 4,860 Listed equity investments - 5,800 2,898 10,660 b. Movements in investments Venture Bonds & Total capital equity investments investments £'000 £'000 £'000 Cost at 1 January 2008 25,098 10,252 35,350 Net gain at 1 January 2008 536 408 944 Valuation at 1 January 2008 25,634 10,660 36,294 Movements in the period: Purchases at cost 3,299 1,488 4,787 Disposals - proceeds (7,928) (8,269) (16,197) - net gains/(losses) on disposal 318 (1,020) (702) Impairment in value (959) - (959) Amortisation of fixed interest investments - 13 13 Net (loss)/gain on revaluation of investments (1,929) 26 (1,903) Valuation at 31 December 2008 18,435 2,898 21,333 Book cost at 31 December 2008 23,321 2,854 26,175 Net (loss)/gain at 31 December 2008 (4,886) 44 (4,842) Valuation at 31 December 2008 18,435 2,898 21,333 Amounts shown as cost represent the valuation attributed to the investment at the date of the merger in 2005 or subsequent acquisition cost, less any reduction made on account of impairment in value. c. Venture capital investments Valuation Additions Disposals Write-offs Other Valuation at revaluations at 01.01.08 31.12.08 £'000 £'000 £'000 £'000 £'000 £'000 Fifteen largest venture capital investments Sift Group Limited 2,249 - - - - 2,249 Imagesound plc 1,859 - - - 61 1,920 Elateral Holdings Limited 1,009 - - - 774 1,783 Vivacta Limited 1,336 - - - - 1,336 Cluster Seven Limited 1,196 372 - - (371) 1,197 UniServity Limited 1,000 - - - - 1,000 Isango! Limited - 1,000 - - - 1,000 Skinkers Limited 1,001 56 - - (87) 970 Workshare Limited 695 - - - 214 909 Level Four Software Limited 725 130 - - - 855 We7 Limited 674 142 - - - 816 Secerno Limited 447 532 - - (291) 688 Perpetuum Limited 780 - - - (195) 585 Community Internet Europe Limited 317 10 - - 183 510 Haemostatix Limited 247 255 - - - 502 13,535 2,497 - - 288 16,320 Other unquoted venture capital 3,239 740 - (556) (1,904) 1,519 investments Other quoted venture capital investments 1,487 - (175) (403) (313) 596 18,261 3,237 (175) (959) (1,929) 18,435 Investments exited during the year Nomad Payments Limited 7,263 - (7,263) - - - Casella Group Limited 110 - (110) - - - Pelikon Limited - 62 (62) - - - 25,634 3,299 (7,610) (959) (1,929) 18,435 d. Loss on investments The overall loss on investments at fair value through profit or loss disclosed in the profit and loss account is analysed as follows: Twelve Ten months to months to 31.12.08 31.12.07 £'000 £'000 Net (loss)/gain on disposals (702) 169 Recoveries made in respect of investments 410 159 previously written off Write-off of investments (959) (5,076) Net (loss)/gain on revaluation of investments (1,903) 434 (3,154) (4,314) Net (loss)/gain on disposals' represents the difference between proceeds received and the carrying values of those investments sold during the period. The amounts reported under `write-off of investments' represent the proportion of the carrying value that have, in the opinion of the Directors, suffered an impairment in value. 11(e) Significant holdings Details of shareholdings in those companies where the company's holding at 31 December 2008 represents more than 20 per cent of the allotted equity share capital of any class; more than 20 per cent of the allotted share capital; or more than 20 per cent of the assets of the company itself, are given below. All of the companies are incorporated in Great Britain. Company Class of share Number Proportion of held class held Artisan Software Tools Limited Ordinary shares (3p) 218,155 2.6% A Ordinary shares (3p) 8,923,649 31.8% B Ordinary shares (3p) 194,186 2.3% Community Internet Europe Limited Ordinary shares (£1) 227,470 13.6% `B' Ordinary shares (25p) 606,945 25.8% Elateral Holdings Limited Ordinary shares(0.001p) 14,423,285 21.8% Preference shares(0.001p) 81,699,667 28.5% Lab M Holdings Limited(formerly IDG) A Ordinary shares (10p) 2,280,000 100.0% B Ordinary shares (10p) 600 60.0% Cumulative redeemable preference shares (£1) 600,000 60.0% Preferred ordinary shares(10p) 389,940 52.3% Sift Group Limited Ordinary shares (1p) 5,566,184 17.6% A Ordinary shares 2,977,480 25.9% B Ordinary shares 2,977,480 25.9% 12 Debtors 31.12.08 31.12.07 £'000 £'000 Other debtors 1,811 92 Prepayments and accrued income 125 85 1,936 177 13 Creditors (amounts falling due within one year) 31.12.08 31.12.07 £'000 £'000 Accruals 345 212 Other creditors 158 - 503 212 14 Called-up equity share capital 31.12.08 31.12.07 £'000 £'000 Authorised: 200,000,000 (31.12.07: 200,000,000) ordinary 10,000 10,000 shares of 5p Allotted, issued and fully paid: 111,061,138 (31.12.07:113,453,270) ordinary shares 5,553 5,673 of 5p The Company bought back for cancellation 2,392,132 ordinary shares, representing 2.1% of the opening issued share capital, at a cost of £572,111. 15 Reserves Share Capital Special Revaluation Profit premium redemption reserve reserve and account reserve loss account £'000 £'000 £'000 £'000 £'000 At 1 January 2008 150 611 27,615 945 2,682 Shares purchased for - 120 (573) - - cancellation Realisation of prior years' net - - - (3,884) 3,884 gains on investments Transfer from special reserve to - - (3,291) - 3,291 profit and loss account Loss on revaluation of - - - (1,903) 1,903 investments Loss on ordinary activities - - - - (4,237) after taxation Dividends - - - - (3,135) At 31 December 2008 150 731 23,751 (4,842) 4,388 The capital redemption reserve was created in March 2005 to reflect the repurchase and cancellation of shares. The special reserve is a distributable reserve and it allows the Company, amongst other things, to fund the buy-back of its ordinary shares as and when it is considered by the Board to be in the best interests of shareholders and also to facilitate the payment of dividends to shareholders earlier than would otherwise have been possible as transfers can be made from this reserve to the profit and loss account to offset losses on disposal of investments and impairments in value of investments. Accordingly, a transfer of £3,291,000 (including £2,000,000 representing impairments in value of investments during the period and £1,291,000 representing losses of previous years now treated as impairments in value) has been made from the special reserve to the profit and loss account. Other gains and losses arising on the inclusion of investments at fair value, are transferred to the revaluation reserve. 16 Net asset value per share The net asset value per share as at 31 December 2008 of 26.8p (31 December 2007: 33.2p) is based on net assets of £29,731,000 (31 December 2007: £ 37,676,000) divided by the 111,061,138 ordinary shares in issue at that date (31 December 2007: 113,453,270).There is no dilution effect as at 31 December 2008 (year ended 31 December 2007: nil). 17 Reconciliation of operating loss to net cash (outflow)/inflow from operating activities Twelve Ten months to months to 31.12.08 31.12.07 £'000 £'000 Loss on ordinary activities before tax (4,237) (4,886) Loss on investments at fair value through profit or loss 3,154 4,314 (Increase)/decrease in debtors (1,759) 812 Increase/(decrease) in creditors 291 (122) Amortisation of fixed interest investments (13) 7 Cash (outflow)/inflow from operating (2,564) 125 activities 18 Commitments and guarantees As at 31 December 2008 there were no legal commitments (31 December 2007: £ 70,000) in respect of further funding to be provided to existing investee companies.There were no guarantees outstanding (31 December 2007: £nil). 19 Financial instruments As a Venture Capital Trust the Company invests in unquoted and AIM-traded UK companies. In addition to its venture capital portfolio, which is invested mainly in technology-related companies in the TMT and healthcare sectors, the Company maintains liquidity balances in the form of cash, listed fixed interest securities and listed equities held for follow-on financing and new venture capital investment and debtors and creditors that arise directly from its operations. At 31 December 2008, 62.1% (£18.4 million) of the Company's net assets were invested in venture capital investments and 37.9% (£11.3 million) in liquidity balances. In pursuing its investment policy, the Company is exposed to risks that could result in a reduction in the value of net assets and consequently funds available for distribution by way of dividend or for re-investment. These risks and the management of them, which is the responsibility of the Manager and monitored by the Directors, are unchanged from the previous accounting period and are set out below. Market risk The fair value or the future cash flows of financial instruments held by the Company may fluctuate because of changes in market prices. Market risk comprises currency risk, interest rate risk and other price risk: * Currency risk The Company has no significant financial instruments denominated in foreign currencies. * Interest rate risk As the Company has no borrowings it only has limited interest rate risk. The impact is on income and operating cash flows and arises from changes in market interest rates. The assets that are exposed to interest rate risk are tabled below. Interest received on cash balances is at a margin over LIBOR or its foreign currency equivalent (2007: same). With interest income of £348,000 to 31 December 2008, any further upward or downward movement in interest rates is unlikely to be material. * Other price risk Venture capital investments carry a significant risk of failure. The management of risk within the venture capital portfolio is addressed through careful investment selection, by diversification across different industry segments within the TMT and healthcare sectors, by maintaining a wide spread of holdings in terms of financing stage and by limitation of the size of individual holdings. The Directors monitor the Manager's compliance with the investment policy, review and agree policies for managing this risk and monitor the overall level of risk on the investment portfolio on a regular basis. A movement of 1.9% (the annual average percent reduction in total return over the last five accounting periods) in the fair value of the total venture capital portfolio would result in a movement of £0.4 million in profit before tax, which would affect the net asset value by 0.32p per share (2007: movement of 1.6% would affect net asset value by 0.36p per share). Liquidity risk The Company's assets comprise quoted and unquoted equity and non-equity shares, fixed income securities, short term money market investments and cash. Although the Company's AIM traded and unquoted investments are less liquid than securities listed on the London Stock Exchange, the Company has 37.9% of the investment portfolio invested in cash, short-term debtors and creditors and readily realisable securities, which are sufficient to meet any funding commitments that may arise. As at the period end, the Company had no borrowings. The liquidity balances include £2.9m of fixed interest securities that are subject to market price changes. The Directors monitor the performance of the portfolio on a regular basis and review and agree policies with the manager for managing this risk. A movement of 1.9% in the fair value of the listed equity and fixed interest securities portfolio would result in a movement of £0.1 million in profit before tax, which would affect the net asset value by 0.05p per share (2007: movement of 1.6% would affect net asset value by 0.15p per share). Credit risk Credit risk is the risk that a party to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company, resulting in a financial loss. The Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. At the reporting date, the Company's financial assets exposed to credit risk amounted to the following: 31.12.08 31.12.07 £'000 £'000 Investments in fixed interest instruments 2,898 4,860 Cash and cash equivalents 6.965 1,417 9,863 6,277 The risk is managed as follows: - where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to determine the risk to the Company of default; - investment transactions are carried out by the fixed interest investment adviser, whose reports are received and reviewed on a monthly basis by the Manager; - cash at bank is held only with banks with high quality external credit ratings. The Company also has an exposure to credit risk in respect of the loan stock investments it has made into investee companies, most of which have no security attached to them, and where they do, such security ranks beneath any bank debt that an investee company may owe. These loan stock investments are made as part of the qualifying investments within the investment portfolio, and the risk management processes applied to the loan stock investments have already been set out under other price risk above. Fair values of financial assets and financial liabilities Financial assets and liabilities are carried in the balance sheet at either their fair value (investments), or the balance sheet amount is a reasonable approximation of the fair value (amounts due from brokers, dividends receivable, accrued income, due to brokers, accruals, and cash at bank). Capital disclosures The Company's objective is to deliver, as far as is consistent with venture capital investment, steady growth in the net asset value of the fund and in total return (net asset value plus cumulative dividends paid). Future dividends depend on the rate of reinvestment of the liquid resources and the overall performance of the portfolio. It is the Company's policy that dividends will be dependent to a significant degree on the level of the Company's net income and realised capital gains. The capital subscribed to the Company by original investors has been managed in accordance with the Company's objectives. The available capital at 31 December 2008 is £29.7 million (31 December 2007: £37.7 million) as shown in the Balance Sheet, which includes the Company's share capital and reserves. The Board periodically reviews the need for share buy-backs. The purpose of share buy-backs is to satisfy demand from those shareholders who seek to sell their shares, given that there is a very limited secondary market for shares in Venture Capital Trusts generally. The Company may be able to buy back limited volumes of its shares from time to time. However its ability to do so may be constrained by the level of its own liquid resources, VCT specific legislation and the regulations of the UKLA. The Company's current policy in this respect is unchanged from the previous accounting period. The Company has no borrowings and there are no externally imposed capital requirements other than the minimum statutory share capital requirements for public limited companies. 20 Related party disclosures Spark Investors Limited, (a fellow subsidiary of the Manager) for which AB Carruthers acted as a Director, is from time to time eligible to receive transaction fees and/or Directors' fees from investee companies. During the period ended 31 December 2008, fees of £31,000 attributable to the investments of the Company were received pursuant to these arrangements (ten months to 31 December 2007: £39,000). During the year there were no transactions by Directors or in which SPARK VCT plc has invested (ten months to 31.12.07: one director made market purchases of shares: Imagesound plc (£5,000), MediGene AG (£10,000) and Vernalis plc (£ 6,000)). 21 Co-investment The Company has made venture capital investments in companies in which other funds managed by SVML have also invested. For the purpose of this note, the following abbreviations apply: SPARK Ventures plc - SPK SPARK VCT 2 plc - SVCT 2 Quester Venture Partnership - QVP Isis College Fund Limited Partnerships and Second Isis College Fund Limited Partnership - ICF Lachesis Seed Fund Limited Partnership - Lachesis Company Co-investors Academia Networks Limited ICF, SPK and SVCT 2 Allergy Therapeutics plc SVCT 2 Antenova Limited QVP and SVCT 2 Arithmatica Limited QVP and SVCT 2 Celldex Therapeutics,Inc. QVP and SVCT 2 Cluster Seven Limited QVP and SVCT 2 Elateral Holdings Limited SVCT 2 Gemini holdings Limited SVCT 2 Haemostatix Limited Lachesis, QVP and SVCT 2 Imagesound plc SVCT 2 Isango! Limited SPK and SVCT 2 Lectus Therapeutics Limited QVP and SVCT 2 Level Four Software Limited QVP and SVCT 2 MediGene AG ICF, QVP and SVCT 2 Nanotecture Group Limited QVP Oxonica plc ICF and SVCT 2 Perpetuum Limited QVP and SVCT 2 Secerno Limited ICF and SVCT 2 Sift Group Limited SVCT 2 Skinkers Limited SPK and SVCT 2 Symetrica Limited SVCT 2 TeraView Limited SVCT 2 UniServity Limited SVCT 2 Vivacta Limited QVP and SVCT 2 We7 Limited SVCT 2 Workshare Limited QVP and SVCT 2 22 Post balance sheet events Subsequent to the year end the Company has not made any new investments in excess of 20% of the equity capital of an investee company or any follow-on investments that would raise the Company's existing stake above 20% of the equity capital of an investee company.

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