Annual Financial Report
Kings Arms Yard VCT PLC
Annual Financial Report
As required by the UK Listing Authority's Disclosure and Transparency Rules 4.1
and 6.3, Kings Arms Yard VCT PLC today makes public its information relating to
the Annual Report and Financial Statements for the year ended 31 December 2010.
This announcement was approved for release by the Board of Directors on 19 April
2011.
This announcement has not been audited.
You will shortly be able to view the Annual Report and Financial Statements for
the year to 31 December 2010 (which have been audited) at www.albion-
ventures.co.uk by clicking on 'Our Funds' and then 'Kings Arms Yard VCT PLC'.
The Annual Report and Financial Statements for the year to 31 December 2010 will
be available as a PDF document via a link under the 'Investor Centre' in the
'Financial Reports and Circulars' section. The information contained in the
Annual Report and Financial Statements will include information as required by
the Disclosure and Transparency Rules, including Rule 4.1.
Investment policy
The Company is a Venture Capital Trust. The new investment policy, approved by
shareholders at the General Meeting held on 10 February 2011, is intended to
produce a regular and predictable dividend stream with an appreciation in
capital value as set out below.
* The Company intends to achieve its strategy by adopting an amended
investment policy for new investments which over time will rebalance the
portfolio such that approximately 50 per cent. of the portfolio comprises an
asset-based portfolio of lower risk, ungeared businesses, principally
operating in the healthcare, environmental and leisure sectors (the "Asset-
Based Portfolio"). The balance of the portfolio, other than funds retained
for liquidity purposes, will be invested in a portfolio of higher growth
businesses across a variety of sectors of the UK economy. These will range
from lower risk, income producing businesses to a limited number of higher
risk technology companies (the "Growth Portfolio").
* In neither category would portfolio companies normally have any external
borrowing with a charge ranking ahead of the VCT. Up to two thirds of
qualifying investments by cost will comprise loan stock secured with a first
charge on the portfolio company's assets.
* The Company's investment portfolio will thus be structured to provide a
balance between income and capital growth for the longer term. The Asset-
Based Portfolio is designed to provide stability and income whilst still
maintaining the potential for capital growth. The Growth Portfolio is
intended to provide highly diversified exposure through its portfolio of
investments in unquoted UK companies.
* Funds held pending investment or for liquidity purposes will be held as cash
on deposit or in floating rate notes or similar instruments with banks or
other financial institutions with a Moody's rating of 'A' or above.
Financial calendar
Annual General Meeting 16 May 2011
Ex-Dividend date for dividend (providing approved by shareholders) 25 May 2011
Record date for dividend (providing approved by shareholders) 27 May 2011
Payment date of dividend (providing approved by shareholders) 24 June 2011
Announcement of interim results for the six months ended 30 June August 2011
2011
Financial highlights
31 December 2010 31 December 2009 31 December 2008
 (pence per share) (pence per share) (pence per share)
--------------------------------------------------------------------------------
Net asset value 16.6 22.7 26.8
--------------------------------------------------------------------------------
Dividends
Dividends paid during the 5.0 - 2.8
year
Cumulative dividend paid 58.7 53.7 53.7
to 31 December 2010
--------------------------------------------------------------------------------
Total net asset value
return ((1))
To shareholders of Kings
Arms Yard VCT PLC
(formerly SPARK VCT plc) 75.3 76.4 80.5
Total net asset value
return including tax
benefits ((2)) 95.3 96.4 100.5
--------------------------------------------------------------------------------
Total net asset value
return to former
shareholders of:
Quester VCT 2 plc, per
100p invested in shares of
that company ((3)) 61.2 62.3 66.5
Total net asset value
return including tax
benefits ((2)) 81.2 82.3 86.5
--------------------------------------------------------------------------------
Quester VCT 3 plc, per
100p invested in shares of
that company ((4)) 35.1 36.1 40.1
Total net asset value
return including tax
benefits ((2)) 55.1 56.1 60.1
--------------------------------------------------------------------------------
(1) Net asset value plus cumulative dividend per share to ordinary shareholders
in the Company since the launch of the Company (then called Quester VCT plc) in
April 1996.
(2) Return after 20 per cent. income tax relief but excluding capital gains
deferral.
(3) Total return to original shareholders in Quester VCT 2 plc, launched in
March 1998, which was merged with the Company (then called Quester VCT plc) in
June 2005, the share exchange ratio for former shareholders in Quester VCT 2 plc
being 1.0249.
(4) Total return to original shareholders in Quester VCT 3 plc, launched in
February 2000, which was merged with the Company (then called Quester VCT plc)
in June 2005, the share exchange ratio for former shareholders in Quester VCT 3
plc being 0.9816.
Proposed final dividend for the year ended 31 December 2010
The Directors propose a final dividend of 0.67 pence per share for the year
ended 31 December 2010, to be approved by shareholders at the Annual General
Meeting.
Chairman's statement
Introduction
2010 was a very active year for the Company. In February 2010 the Board
announced the conclusion of a major strategic review and the intention to move
investment policy away from high risk early stage technology investments towards
lower risk opportunities where investee companies would be able to provide
positive cash flow towards the payment of dividends.
At that time the Board was constrained in the extent to which this policy could
be accelerated both by the Continuation Vote and by the investment focus of our
then Managers, SPARK Venture Management Limited.
The Continuation Vote was held at the Company's Annual General Meeting on 7 May
2010 and gained the participation of an unprecedented number of shareholders
with over 64 per cent. voting in favour.
Following this confirmation of the Company's continuation the Board was able to
embark on a process of selecting the most suitable managers to implement,
subject to shareholder approval, a radical shift in investment strategy. An
exhaustive exercise of selection was narrowed to formal proposals from four
possible managers, all with excellent credentials, of whom Albion Ventures LLP
("Albion") were eventually selected as announced to shareholders in December
2010.
At a General Meeting on 10 February 2011 the change in the Company's name to
Kings Arms Yard VCT PLC (being the address of our new Managers) was agreed and
the new investment strategy, which mirrors that successfully followed by other
VCTs managed by Albion, was approved by over 80 per cent. of shares voted.
Meanwhile our new Managers, who assumed this role formally on 1st January 2011,
have been very active both in getting to grips with the Company's existing
portfolio and in proposing new investments in accordance with this strategy.
Performance
The movement in net assets is summarised in the table below:
Bonds and
 net current pence
Investments assets Total per
£'000 £'000 £'000 share
--------------------------------------------------------------------------
Net asset value at 31 December 2009 14,870 10,160 25,030 22.7
Net gains on disposal 1,576 - 1,576 1.4
Income net of operating expenses - (581) (581) (0.5)
Net loss on valuation of investments (2,209) - (2,209) (2.0)
Net investment (1,887) 1,887 - -
--------------------------------------------------------------------------
Net assets before dividends 12,350 11,466 23,816 21.6
Dividends paid - (5,533) (5,533) (5.0)
--------------------------------------------------------------------------
Net asset value at 31 December 2010 12,350 5,933 18,283 16.6
--------------------------------------------------------------------------
In the year to 31 December 2010 net assets per share fell from 22.7 pence to
16.6 pence chiefly as a result of the payment of aggregate dividends during the
year of 5 pence per share.
Particular attention was again paid to the carrying values of the unquoted
venture capital portfolio and, although some improvements were recorded in the
value of certain investments, the overall effect was negative.
The most significant reduction in attributed value has been that of Sift
Limited, the developer of virtual communities for the professional services
sector, where there had been a very real expectation in the last quarter of
2010 of an imminent and satisfactory exit. As this has not yet been achieved we
have considered it prudent to reduce the value of this investment. We have also
considered it necessary to reduce the carrying value of Vivacta Limited, a
medical diagnostics company with a patented technology for rapid blood analysis.
Whilst Vivacta is making good progress, it remains an early stage, pre revenue
company. The third significant mark down has been in Cluster Seven Ltd which
fell behind target in the second half of the year.
Further details on individual investments are given in the Portfolio companies
information on page 13 of the Annual Report and Financial Statements.
Two successful exits were made during the year from the unquoted portfolio. The
first, Secerno Limited, the database security software business, was sold to
Oracle Corporation in June 2010, realising a gain over carrying value of
£655,000. Net cash proceeds of £917,000 have already been received and a further
£293,000 is due to be received, subject to any warranty claims, in June 2012.
In October 2010, Community Internet Group Limited, an Internet Service Provider,
was sold to a private equity backed vehicle for a gain of £914,000 over its
carrying value, with £790,000 already received and a further £335,000 expected
during the course of 2011.
Limited realisations, amounting to £56,000 in total, were made from the small
AIM quoted portfolio, but the remaining valuations have continued to
deteriorate.
As a result of the various disposals, and despite the Company's significant
dividend payments, cash and liquid investments at the end of the year exceeded
£5,446,000, giving the new Managers satisfactory liquidity to make new
investments within the strategy recently agreed by shareholders, but new
investments have yet been made.
VCT qualifying status
On 31 December 2010, 80 per cent. of total investments were in qualifying
holdings. It is anticipated that this margin of compliance will be enhanced if
the dividend recommended below is approved by shareholders. The Board remains
very conscious of the necessity of ensuring that qualifying investments
comfortably exceed the minimum threshold of 70 per cent. required for the
Company to continue to enjoy VCT tax status and the Board will continue to
monitor the position carefully.
Annual General Meeting
The Annual General Meeting of the Company will be held at the City of London
Club, 19 Old Broad Street, London EC2N 1DS at 2 pm on Monday 16 May 2011. Full
details of the business to be conducted at the Annual General Meeting are given
in the Notice of the Meeting on page 46 of the Annual Report and Financial
Statements and an explanation for the approvals sought are given on page 49 of
the Annual Report and Financial Statements. Your Board welcomes your attendance
at the meeting as it gives an opportunity for shareholders to ask questions of
the Board and Investment Manager. If you are unable to attend the Annual
General Meeting in person, we would encourage you to make use of your proxy
votes.
Board composition
On 1 January 2011, as part of the change of Manager to Albion Ventures LLP,
Patrick Reeve, the Managing Partner of Albion, was appointed to the Board of
Directors, and Andrew Carruthers, Managing Director of SPARK Venture Management
Limited, resigned from the Board. The Board wishes to express its thanks to
Andrew for his contribution during his tenure.
Following the successful outcome of the Board's strategic review, the Company's
change of management and the adoption by shareholders of the new investment
policy, David Adams indicated that he wished to stand down and will be leaving
the Board on 19 April 2011. David has played a significant role in assessing
and redirecting the Company and the Board would like to thank him for his very
valuable contribution.
The Board are pleased to welcome Mr Martin Fiennes, who was appointed a Director
on 5 April 2011 and who will be proposed for election at the next Annual General
Meeting. Mr Fiennes is a corporate finance adviser specialising in fund-raising
and mergers and acquisitions for UK technology companies. Martin worked for 9
years with Top Technology Ventures where he was responsible for making
investments in early stage UK companies. Prior to entering the venture capital
sector Martin had wide experience in marketing and management roles, and as an
executive director in a start-up in the leisure sector.
Dividends
As stated in the shareholder circular issued on 19 January 2011, it is the
Board's intention to establish a sustainable and progressive dividend stream to
shareholders. The Board therefore proposes a final dividend of 0.67 pence per
share in respect of the year ended 31 December 2010, which will be subject to
shareholder approval at the forthcoming Annual General Meeting.
Dividend reinvestment scheme
Enclosed with this Report is an explanatory circular and a form allowing
shareholders to participate in a dividend reinvestment scheme whereby a
shareholder may receive dividends in the form of new Ordinary shares which are
eligible for up-front tax relief. Additional copies of the circular and form can
be found on the Company's web page at www.albion-ventures.co.uk/Our Funds/Kings
Arms Yard VCT PLC/Dividend reinvestment scheme.
Share buy-backs
In order to maintain resources for dividends and the implementation of the new
investment policy, the Board does not intend to buy back any shares in the
financial year to 31 December 2011. However, it intends to implement a similar
share buy-back policy to that practised by the other Albion managed VCTs once
the effect of the new investment policy has begun to show.
In general, the other Albion managed VCTs have a share buy-back policy of making
purchases in the market in the region of a 10 to 15 per cent. discount to net
asset value, so far as market conditions, liquidity and reserves permit. Such
buy-backs are subject to the overall constraint that such purchases are in the
Company's interest, including the maintenance of sufficient resources for
investment in existing and new investee companies and the continued payment of
dividends.
It is hoped that this approach, together with the dividend policy, will
encourage a more active secondary market in the Company's shares.
Costs
Management and administration fees will be reduced as a consequence of the
change of Manager to Albion Ventures LLP. Albion has agreed to waive its
management and administration fees for the first year to 31 December 2011 and
SPARK Venture Management Limited will be paid a management fee until 30 November
2011 based on the Company's net asset value at 31 December 2010, adjusted by
dividends paid and by any realisations made above or below the 31 December 2010
net asset value. Thereafter, Albion will be entitled to an annual management
fee of 2 per cent. of net asset value, along with an administration fee of
£50,000 per annum. This represents no change in the management fee and a
reduction in the administration fee. Furthermore, under the terms of the
Investment Management Agreement with Albion, the aggregate fees payable for
management and administration (including the management and administration fees
due to Albion, directors' remuneration, registrars' fees, stockbrokers' fees,
company secretarial fees and the fees of the Company's auditors) are subject to
an annual cap of 3 per cent. of net asset value. This is a reduction from the
previous aggregate cap of 3.25 per cent.
Outlook
The Board is very conscious that the long term performance of the Company has
been far from satisfactory and have been very active in attempting to address
this. The majority of the Company's assets are still invested in businesses
that do not pay regular dividends. Nevertheless, the Board believes that the
Company already has enough liquid assets to start its new investment policy. In
addition, there remain opportunities to add to these resources by selective
exits from the existing portfolio in line with the Board's strategy to realise
as much of the existing portfolio as soon as suitable exits are available. By
shifting the portfolio towards assets that offer an immediate yield we believe
that the Company will be able to offer investors a gradual recovery in capital
value and a sustainable long term dividend.
Robin Field
Chairman
19 April 2011
Manager's report
Portfolio review
A number of developments took place in the portfolio during the last year. Some
companies have begun to perform strongly including Level Four and UniServity.
Against that, trading at Sift has deteriorated and whilst progress at Vivacta
has been positive, it remains pre-commercial revenue.
The pie chart showing the current distribution of assets by sector as at 31
December 2010 is attached to the end of this announcement.
An overview showing the holding period and the revenue profile of each of the
top ten investments in the unquoted portfolio (as at 31 December 2010) and which
comprise nearly 90 per cent. of the unquoted portfolio, is set out below.
% of total Date of
Valuation unquoted first Revenue Basis of
 £'000 portfolio investment profile valuation
--------------------------------------------------------------------------------
Elateral Holdings 2,064 17.2% 1999 £5m-£10m Revenue multiple
Limited
UniServity Limited 1,640 14.1% 2007 £3m-£5m Revenue multiple
Imagesound plc 1,632 13.6% 2005 £5m-£10m Earnings multiple
Level Four 1,321 11.0% 2005 £1m-£3m Revenue multiple
Software Limited
Cluster Seven Ltd 965 7.2% 2005 £1m-£3m Revenue multiple
Haemostatix 870 6.7% 2006 Pre revenue Price of recent
Limited investment
Workshare Limited 618 5.1% 2006 £10m-£15m Revenue multiple
Sift Limited 611 5.1% 1999 £5m-£10m Earnings multiple
Lab M Holdings 440 3.7% 1998 £3m-£5m Earnings multiple
Limited
Vivacta Limited 415 3.4% 2006 Pre revenue Cost reviewed for
recent
performance
--------------------------------------------------------------------------------
Total 10,576 87.1%
--------------------------------------------------------------------------------
Since our appointment on 1 January 2011, we have been actively engaged in
portfolio management. To date, Albion partners have joined the boards of
Elateral, Lab M and UniServity.
Valuation changes
The changes in the valuation of the unquoted and quoted portfolios are set out
in note 11. Key changes in valuation were driven by a number of factors,
primarily performance in 2010 against plan, along with the level of third party
offers received for those investments which were marketed during the year.
We have valued all investments in line with International Private Equity and
Venture Capital Valuation ('IPEVCV') guidelines and have valued most investments
in the portfolio using either:
* the price of recent third party investment impaired in the event of any
underperformance against plan or
* an estimate of maintainable revenues or earnings, multiplying this by the
trading multiples of comparable quoted companies and applying a discount to
reflect the difference in marketability between a listed company and an
unquoted company.
Realisations
The successful sale of Community Internet Group Limited and Secerno Limited
realised a profit on disposal of £1,545,000. A number of companies in the
portfolio are currently being marketed and should result in successful
realisations in 2011.
New investments
No investments were made in new companies in 2010. Follow-on investments in the
year amounted to £536,000 (as set out in note 11). Since the year end, the
Company has invested further funds in Perpetuum (£160,812) and Vivacta
(£180,902).
We hope to achieve a number of exits during 2011 and to make investments in a
combination of lower risk, yielding investments as well as a small number of
smaller investments in earlier stage companies with the prospect of substantial
capital gains. We expect to make our first investment in May 2011.
Albion Ventures LLP
Manager
19 April 2011
Responsibility statement
In preparing these financial statements for the year to 31 December 2010, the
Directors of the Company, being Mr Robin Field, Mr David Adams, Mr M Fiennes and
Mr Patrick Reeve, confirm that to the best of their knowledge:
- summary financial information contained in this announcement and the full
Annual Report and Financial Statements for the year ended 31 December 2010 for
the Company has been prepared in accordance with United Kingdom Generally
Accepted Accounting Practice (UK Accounting Standards and applicable law) and
give a true and fair view of the assets, liabilities, financial position and
profit and loss of the Company for the year ended 31 December 2010 as required
by DTR 4.1.12.R;
- the Chairman's statement, Manager's report and notes include a fair review of
the information required by DTR 4.2.7R (indication of important events during
the year ended 31 December 2010 and description of principal risks and
uncertainties that the Company faces); and
- the Chairman's statement, Manager's report and notes include a fair review of
the information required by DTR 4.2.8R (disclosure of related parties
transactions and changes therein).
A detailed "Statement of Directors' responsibilities for the preparation of the
Company's financial statements" is contained within the full audited Annual
Report and Financial Statements.
By order of the Board
Robin Field
Chairman
19 April 2011
Income statement
  Year ended 31 December Year ended 31 December
2010 2009
  Revenue Capital Total Revenue Capital Total
 Note £'000 £'000 £'000 £'000 £'000 £'000
Losses on valuation of
investments at fair value
through profit and loss 11 - (2,209) (2,209) - (3,933) (3,933)
Profit/(loss) on disposal
of investments at fair
value through profit or
loss 11 - 1,576 1,576 - (40) (40)
Investment income 2 132 - 132 220 - 220
Recoverable VAT 3 49 - 49 21 - 21
Investment management fees 4 (412) - (412) (549) - (549)
Other expenses 6 (350) - (350) (342) - (342)
Loss on ordinary activities
before tax  (581) (633) (1,214) (650) (3,973) (4,623)
Tax on ordinary activities 8 - - - - - -
Loss on ordinary activities
after tax  (581) (633) (1,214) (650) (3,973) (4,623)
Basic and diluted loss per 10 (0.5) (0.6) (1.1) (0.6) (3.6) (4.2)
shares (pence )
The accompanying notes form an integral part of this announcement.
The 'Total' column of this Income statement represents the profit and loss
account of the Company. The supplementary revenue return and capital columns
have been prepared in accordance with The Association of Investment Companies'
Statement of Recommended Practice.
All revenue and capital items in the above statement derive from continuing
operations.
The Company has only one class of business and derives its income from
investments made in shares and securities and from bank deposits.
There are no recognised gains or losses other than the results for the year
disclosed above. Accordingly a statement of total recognised gains and losses is
not required.
The difference between the reported loss on ordinary activities before tax and
the historical cost profit/(loss) is due to the fair value movements on
investments. As a result, a note on historical cost profits and losses has not
been prepared.
Balance sheet
  31 December 31 December
2010 2009
 Note £'000 £'000
--------------------------------------------------------------------------------
Fixed asset investments 11 12,350 14,870
--------------------------------------------------------------------------------
Current assets
Trade and other debtors 13 686 457
Current asset investments 13 3,230 6,713
Cash at bank and in hand  2,216 3,190
--------------------------------------------------------------------------------
  6,132 10,360
Creditors: amounts falling due within one year 14 (199) (200)
--------------------------------------------------------------------------------
Net current assets  5,933 10,160
--------------------------------------------------------------------------------
Net assets  18,283 25,030
--------------------------------------------------------------------------------
Capital and reserves
Called-up share capital 15 5,519 5,519
Share premium  150 150
Capital redemption reserve  765 765
Special reserve  20,524 22,685
Investment holding losses  (9,574) (7,941)
Profit and loss account  899 3,852
--------------------------------------------------------------------------------
Total equity shareholders' funds  18,283 25,030
--------------------------------------------------------------------------------
Basic and diluted net asset value per share (pence) 16 16.6 22.7
--------------------------------------------------------------------------------
The accompanying notes form an integral part of this announcement.
The Financial Statements were approved by the Board of Directors and authorised
for issue on 19 April 2011 and were signed on its behalf by:
Robin Field
Chairman
Reconciliation of movements in shareholders' funds
 Profit
Called-up Share Capital Investment and
share premium redemption Special holding loss
capital account reserve reserve losses account Total
 £'000 £'000 £'000 £'000 £'000 £'000 £'000
--------------------------------------------------------------------------------
At 31 December
2008 5,553 150 731 23,751 (4,842) 4,388 29,731
Shares
purchased for
cancellation (34) - 34 (78) - - (78)
Realisation of
prior years'
net recognised
losses on
investments - - - - 834 (834) -
Transfer from
special
reserve to
profit and
loss account - - - (988) - 988 -
Investment
holding loss
on valuation
of investments - - - - (3,933) 3,933 -
Loss on
ordinary
activities
after taxation - - - - - (4,623) (4,623)
--------------------------------------------------------------------------------
At 31 December
2009 5,519 150 765 22,685 (7,941) 3,852 25,030
Realisation of
prior years'
net recognised
losses on
investments - - - - 576 (576) -
Transfer from
special
reserve to
profit and
loss account - - - (2,161) - 2,161 -
Investment
holding loss
on valuation
of investments - - - - (2,209) 2,209 -
Loss on
ordinary
activities
after taxation - - - - - (1,214) (1,214)
Dividends - - - - - (5,533) (5,533)
--------------------------------------------------------------------------------
At 31 December
2010 5,519 150 765 20,524 (9,574) 899 18,283
--------------------------------------------------------------------------------
The accompanying notes form an integral part of this announcement.
The special reserve is a distributable reserve, created by the cancellation of
the share premium account. This allows the Company, amongst other things, to
fund the buy-back of its Ordinary shares and to pay dividends to shareholders
earlier than would otherwise have been possible. Transfers can be made from
this reserve to the profit and loss account to offset losses on disposal of
investments and, for investments that have been fair valued to zero with no
chance of recovering the cost of these investments.
A transfer of £2,161,000 (which comprises £34,000 representing losses on
disposal of investments during the year, £127,000 representing losses of
previous years now treated as recognised or written off and £2,000,000 for
dividend purposes) has been made from the special reserve to the profit and loss
account.
Other unrealised gains and losses arising on investments held at fair value are
transferred to the investment holding losses reserve.
The total distributable reserves are £11,849,000 (2009: £18,596,000),
comprising the special reserve and the profit and loss account, less net
investment holding losses.
Cash flow statement
  Year ended Year ended
31 December 31 December
2010 2009
 Note £'000 £'000
----------------------------------------------------------------------------
Net cash flow from operating activities 18 (524) 529
Taxation
UK corporation tax recovered/(paid) Â - -
Financial investments
Purchase of fixed asset investments 11 (536) (854)
Purchase of current asset investments  - (118)
Disposal of current asset investments  2,480 -
Disposal of fixed asset investments  3,139 2,397
----------------------------------------------------------------------------
Net cash flow from investing activities  5,083 1,425
Equity dividends paid 9 (5,533) -
----------------------------------------------------------------------------
Net cash flow before financing  (974) 1,954
----------------------------------------------------------------------------
Financing
Purchase of own shares 15 - (78)
----------------------------------------------------------------------------
Net cash flow from financing  - (78)
----------------------------------------------------------------------------
Cash flow in the year 17 (974) 1,876
----------------------------------------------------------------------------
The accompanying notes form an integral part of this announcement.
Notes to the Financial Statements
1 Accounting policies
A summary of the principal accounting policies, all of which have been applied
consistently in current and prior periods, is set out below:
Basis of accounting
The Financial Statements have been prepared in accordance with the historical
cost convention, except for the measurement of fair value of investments, and in
accordance with applicable UK law and accounting standards and with the
Statement of Recommended Practice 'Financial Statements of Investment Trust
Companies and Venture Capital Trusts' ("SORP") issued by The Association of
Investment Companies ("AIC") in January 2009. As disclosed in the Statement of
corporate governance on page 25 of the Annual Report and Financial Statements,
the accounts are prepared on a going concern basis.
Fixed asset 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.
Upon initial recognition (using trade date accounting) investments are
designated by the Company as 'at fair value through profit or loss' and are
included at their initial fair value, which is 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:
- Investments listed on recognised exchanges are valued at their bid prices at
the end of the accounting period 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 in accordance with the IPEVCV 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 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.
It is not the Company's policy to exercise control or significant influence over
investee companies. Therefore, in accordance with the exemptions under FRS 9
"Associates and Joint Ventures", those undertakings in which the Company holds
more than 20 per cent., but less than 50 per cent., of the equity of an
investment company, and the investment company is not a subsidiary, are not
regarded as associated undertakings.
Current asset investments
In accordance with FRS 26, units held in funds used for cash management are
designated as fair value through profit and loss. These investments are
classified as current asset investments as they are investments held for the
short term and comparative classification in the Balance sheet and Cash flow
statement has been restated accordingly.
Gains and losses on investments
Gains and losses arising from changes in the fair value of the investments are
included in the Income statement for the year as a Capital item and are
allocated to Investment holding losses.
Investment Income
Dividends receivable on quoted equity shares are recognised into account on the
ex-dividend date. Income receivable on unquoted equity and non-equity shares
and loan notes is recognised when the Company's right to receive payment and
expect settlement is established. Fixed returns on non-equity shares and debt
securities are recognised on a time apportionment basis (including amortisation
of any premium or discount to redemption) so as to reflect the effective
interest rate, provided there is no reasonable doubt that payment will be
received in due course. Income from fixed interest securities and deposit
interest is included on an effective interest rate basis.
Expenses
All expenses, including expenses incidental to the acquisition or disposal of an
investment, are accounted for on an accruals basis and are charged wholly to the
profit and loss account. Costs associated with the issue of shares are charged
to the share premium account. Costs associated with the buy back of shares are
charged to the special reserve.
All other expenses, including management fees, are presented within the Revenue
column of the Income statement.
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 or losses arising on the revaluation or disposal of
investments as these items are not subject to tax whilst the Company maintains
its Venture Capital Trust status. The Company intends to continue to meet the
conditions required for it to hold approved Venture Capital Trust status for the
foreseeable future. Deferred tax assets in respect of surplus management
expenses are only recognised to the extent that such assets are likely to be
recoverable against future taxable profits of the Company.
Foreign exchange
The currency of the primary economic environment in which the Company operates
(the functional currency) is pounds Sterling ("Sterling"), which is also the
presentational currency of the Company. Transactions involving currencies other
than Sterling are recorded at the exchange rate ruling on the transaction date.
At each Balance sheet date, monetary items and non-monetary assets and
liabilities that are measured at fair value, which are denominated in foreign
currencies, are retranslated at the closing rates of exchange. Exchange
differences arising on settlement of monetary items and from retranslating at
the Balance sheet date of investments and other financial instruments measured
at fair value through profit or loss, and other monetary items, are included in
the Profit and loss account. Exchange differences relating to investments and
other financial instruments measured at fair value are subsequently included in
the transfer to the Investment holding losses.
Dividends
Dividends payable to equity shareholders are recognised when they are paid, or
have been approved by shareholders at an Annual General Meeting.
2Â Investment income Year ended Year ended
31 December 31 December
2010 2009
£'000 £'000
--------------------------------------------------------------------------------
Interest receivable
- Listed fixed interest securities 3 103
- Loans to venture capital investee companies 91 50
- Bank deposits 16 8
Other income (The Royal Bank of Scotland Global Treasury 22 59
Fund plc)
--------------------------------------------------------------------------------
 132 220
--------------------------------------------------------------------------------
3Â Recoverable VAT
HM Revenue and Customs ("HMRC") issued a business briefing on 24 July 2008,
which permitted the recovery of historic VAT that had been charged on management
fees, and which made these fees exempt from VAT with effect from 1 October 2008.
In 2009, the Manager paid to the Company an amount of £322,000 that it had
received from HMRC for the repayment of historic VAT. It is possible that
additional amounts of VAT will be recoverable in due course and a claim has been
submitted. However, the Directors are unable at this stage to quantify the sums
involved.
During the year ended 31 December 2010 an amount of £49,000 (2009: £21,000) was
received from OLIM Limited in respect of VAT previously charged on their
management fees and which had also become exempt from VAT following the above
decision.
4Â Investment management fees Year ended Year ended
31 December 31 December
2010 2009
£'000 £'000
-----------------------------------------------------------
Investment management fees 412 549
-----------------------------------------------------------
During the year to 31 December 2010, SPARK Venture Management Limited provided
investment management services to the Company under an amended and restated
agreement dated 20 May 2005. SPARK Venture Management Limited is a wholly owned
subsidiary of SPARK Venture Management Holdings Limited, a company of which
Andrew Carruthers is an executive director and in which he is a beneficial
shareholder. Andrew Carruthers is also an executive director of SPARK Venture
Management Limited.
SPARK Venture Management Limited was entitled to receive a management fee,
determined quarterly in arrears, at the annual rate of 2.0 per cent. 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 per cent.
of closing net asset value. There was no reduction in the management fee in
respect of the cap for the year ended 31 December 2010 (2009: £4,000).
SPARK Venture Management Limited also provided administrative and secretarial
services to the Company for which it was entitled to a fee of £68,000 for the
year (2009: £66,000).
The Company and SPARK Venture Management Limited entered into a Termination
Agreement on 8 December 2010, pursuant to which the Company has agreed to pay
SPARK Venture Management Limited the management and administration fees due
under the Investment Management Agreement for the period until 30 November
2011. Under the Termination Agreement, the management fee shall be calculated
by reference to the net asset value of the Company as at 31 December 2010,
subject to appropriate adjustments in respect of dividends or realisations made
during 2011. SPARK Venture Management Limited and the Company have agreed that
the Termination Agreement is in settlement of all claims against each other.
Albion Ventures LLP signed an Investment Management Agreement with the Company
on 8 December 2010, which came into effect on 1 January 2011. Albion Ventures
LLP will provide investment management, company secretarial and administrative
services to the Company. Albion Ventures LLP has agreed to waive its management
and administration fees for the first year to 31 December 2011. Thereafter
Albion Ventures LLP will be entitled to an annual management fee of 2 per cent.
of net asset value, along with an annual administration fee of £50,000. This
represents no change in the management fee, but a reduction in the
administration fee.
Under the terms of the Investment Management Agreement with Albion Ventures LLP,
the aggregate payable for management and administration (normal running costs)
are subject to an aggregate annual cap of 3 per cent. of the year end closing
net asset value, commencing the year ending 31 December 2012. This is a
reduction from the previous aggregate annual cap of 3.25 per cent.
The Investment Management Agreement is for an initial period expiring on 31
December 2013. Thereafter it can be terminated by either party on 12 months'
notice and is subject to earlier termination in the event of certain breaches or
on the insolvency of either party.
The Manager is entitled to arrangement fees payable by investee companies (up to
a maximum of 2 per cent. of the amount invested) and to fees charged for the
monitoring of investments (up to a maximum of £15,000 per annum). The maximums
are increased by the Retail Prices Index each year.
5 Â Performance incentive fee
As at 31 December 2010, the Company had no performance incentive fee
arrangements.
The Company has agreed with Albion Ventures LLP that no performance or incentive
fee will be payable to Albion Ventures LLP for any years prior to 31 December
2012.
6Â Other expenses Year ended Year ended
31 December 31 December
2010 2009
£'000 £'000
----------------------------------------------------------------------------
Administrative and secretarial services 68 66
Directors' remuneration (note 7) 49 70
Auditor's remuneration
- Fees payable for audit of the financial statements 18 17
- Fees payable for other services relating to tax 9 8
Legal and professional expenses 89 47
Insurance 19 28
Management fees payable to OLIM Limited 1 11
Irrecoverable VAT 35 30
Other expenses 62 65
----------------------------------------------------------------------------
 350 342
----------------------------------------------------------------------------
7Â Directors' fees Year ended Year ended
31 December 31 December
2010 2009
£'000 £'000
---------------------------------------------------------
Amount payable to Directors 45 67
National insurance 4 3
---------------------------------------------------------
 49 70
---------------------------------------------------------
Further information regarding Directors' remuneration can be found in the
Directors' remuneration report on page 27 of the Annual Report and Financial
Statements.
8Â Tax on ordinary activities Year ended Year ended
31 December 31 December
2010 2009
£'000 £'000
--------------------------------------------------------------------------------
UK Corporation tax payable - -
--------------------------------------------------------------------------------
Reconciliation of loss on ordinary activities to Year ended Year ended
taxation charge 31 December 31 December
2010 2009
£'000 £'000
--------------------------------------------------------------------------------
Loss on ordinary activities before taxation (1,214) (4,623)
--------------------------------------------------------------------------------
Tax on loss on ordinary activities at standard UK 340 1,294
corporation tax rate of 28% (2009: 28%)
Effects of:
Non taxable items - UK dividends and net losses on (177) (1,112)
investments
Unutilised management expenses (163) (182)
--------------------------------------------------------------------------------
 - -
--------------------------------------------------------------------------------
The Company has excess trading losses of £8,642,000 (2009: £8,061,000) that are
available for offset against future profits. A deferred tax asset of £2,420,000
(2009: £2,257,000) 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.
9Â Dividends Year ended Year ended
31 December 31 December
2010 2009
£'000 £'000
--------------------------------------------------------------------------------
Final dividend of 4 pence per share paid on 11 June
2010 in respect of the year ended 31 December 2009 4,430 -
Interim dividend of 1 penny per share paid on 24
September 2010 in respect of the year ended 31 December
2010 1,103 -
--------------------------------------------------------------------------------
 5,533 -
--------------------------------------------------------------------------------
The Directors propose a final dividend of 0.67 pence per share for the year
ended 31 December 2010, to be approved at the Annual General Meeting, which will
amount to approximately £739,000.
10Â Earnings per share
The revenue loss per share of 0.5 pence (2009: loss 0.6 pence) is based on the
revenue loss on ordinary activities after tax of £581,000 (2009: loss £650,000)
and on the number of ordinary shares in issue during the year of 110,370,135
(2009: 110,631,989).
The capital loss per share of 0.6 pence (2009: loss 3.6 pence) is based on the
capital loss on ordinary activities after tax of £633,000 (2009: loss
£3,973,000) and on the number of ordinary shares in issue during the year of
110,370,135 (2009: 110,631,989).
The total loss per share of 1.1 pence (2009: loss 4.2 pence) is based on the
loss on ordinary activities after tax of £1,214,000 (2009: loss £4,623,000) and
on the number of ordinary shares in issue during the year of 110,370,135 (2009:
110,631,989).
There is no dilution effect in respect of the year ended 31 December 2010 (2009:
nil).
11Â Fixed asset investments
Summary of fixed asset investments   31 December 31 December
2010 2009
£'000 £'000
--------------------------------------------------------------------
Unquoted equity 9,784 12,366
Unquoted loan stock 2,354 2,074
Quoted equity 212 430
--------------------------------------------------------------------
 12,350 14,870
--------------------------------------------------------------------
Movements in fixed asset investments £'000
--------------------------------------------------------------------
Cost at 1 January 2010 22,811
Investment holding losses at 1 January 2010 (7,941)
--------------------------------------------------------------------
Valuation at 1 January 2010 14,870
Purchases at cost 536
Disposal proceeds (2,423)
Realised gains 1,576
Unrealised losses (2,209)
--------------------------------------------------------------------
Valuation at 31 December 2010 12,350
--------------------------------------------------------------------
Cost at 31 December 2010 21,924
Investment holding losses at 31 December 2010 (9,574)
--------------------------------------------------------------------
Valuation at 31 December 2010 12,350
--------------------------------------------------------------------
Amounts shown as cost represent the acquisition cost in the case of investments
made by the Company and/or the valuation attributed to the investments acquired
from Quester VCT 2 plc and Quester VCT 3 plc at the date of the merger in 2005,
plus any subsequent acquisition cost.
Losses on fixed asset investments
The overall loss on investments at fair value through profit or loss disclosed
in the Income statement is analysed as follows:
 31 December 31 December
2010 2009
£'000 £'000
--------------------------------------------------------------------------------
Loss on valuation of investments at
fair value through profit and loss
Net loss on valuation of (2,209) (3,933)
investments
---------------------------------------------
Loss on disposal of investments at
fair value through profit and loss:
Net gains/(losses) on disposals 1,544 (132)
Recoveries made in respect of 32 92
investments previously written off
--------------------------------------------------------------------------------
 1,576 (40)
--------------------------------------------------------------------------------
 (633) (3,973)
--------------------------------------------------------------------------------
"Net gains/(losses) on disposals" represents the difference between proceeds
received and the carrying values of these investments sold during the year.
Movements in unrealised losses £'000
--------------------------------------------------------------------------------
Opening accumulated unrealised losses (7,941)
Transfer of previously unrealised losses to 576
realised reserve on disposal of investments
Movement in unrealised (losses) (2,209)
--------------------------------------------------------------------------------
Accumulated unrealised losses at 31 December 2010 (9,574)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Fixed asset historic cost basis £'000
--------------------------------------------------------------------------------
Opening book cost 22,811
Purchases at cost 536
Sales at cost (1,423)
--------------------------------------------------------------------------------
Book cost at 31 December 2010 21,924
--------------------------------------------------------------------------------
Fixed asset investment valuation methodologies
Unquoted investments are valued in accordance with the 31 December 31 December
IPEVCV guidelines 2010 2009
as follows: £'000 £'000
--------------------------------------------------------------------------------
Revenue multiple 7,152 5,965
Earnings multiple 2,963 1,920
Price of recent investment 1,679 4,814
Cost reviewed for recent performance 325 1,741
Bid price 212 430
Expected distribution 19 -
--------------------------------------------------------------------------------
 12,350 14,870
--------------------------------------------------------------------------------
The valuation will be the most appropriate valuation methodology for an
investment within its market, with regard to the financial health of the
investment and the September 2009 IPEVCV Guidelines. The Directors believe that
the methods used are the most appropriate methods of valuation as at 31 December
2010.
Value as at
31 December
Change in valuation 2010
methodology (2009 to 2010) £'000 Explanatory Note
--------------------------------------------------------------------------------
Price of recent investment to revenue 3,367 More relevant industry
multiple benchmarks available
Price of recent investment to earnings 281 More relevant industry
multiple benchmarks available
Cost reviewed for recent performance to 395 New investment made within
recent price of investment the past year
Cost reviewed for recent performance to 440 More relevant industry
earnings multiple benchmarks available
Revenue multiple to earnings multiple 611 Company making profits
Cost reviewed for recent performance to 138 Company making profits
revenue multiple
Fair value hierarchy
The amended FRS 29 'Financial Instruments: Disclosures' requires the Company to
disclose the inputs to the valuation methods applied to its investments at fair
value through profit or loss in a fair value hierarchy according to the
following definitions:
Fair value hierarchy Definition
--------------------------------------------------------------------------------
Level 1 Unadjusted quoted (bid) prices applied where an active
market exists
Level 2 Inputs to valuation are from observable sources and are
directly or indirectly derived from prices
Level 3 Inputs to valuations not based on observable market data
--------------------------------------------------------------------------------
Fixed asset investments at fair value through profit or loss as at 31 December
2010 are categorised in accordance with FRS 29 as follows:
 31 December 2010 Level 1 Level 2 Level 3
£'000 £'000 £'000 £'000
----------------------------------------------------------------------
Unquoted equity 9,784 - Â 9,784
Unquoted loan stock 2,354 - Â 2,354
Quoted equity 212 212 - -
----------------------------------------------------------------------
 12,350 212 - 12,138
----------------------------------------------------------------------
Fixed asset investments at fair value through profit or loss as at 31 December
2009 are categorised in accordance with FRS 29 as follows:
 31 December 2009 Level 1 Level 2 Level 3
£'000 £'000 £'000 £'000
----------------------------------------------------------------------
Unquoted equity 12,366 - - 12,366
Unquoted loan stock 2,074 - - 2,074
Quoted equity 430 430 - -
----------------------------------------------------------------------
 14,870 430 - 14,440
----------------------------------------------------------------------
Level 3 reconciliation
 31 December 31 December
2010 2009
£'000 £'000
----------------------------------------------------------------------
Valuation as at 31 December 2009 14,440 17,965
Purchases at cost 536 848
Disposal proceeds (2,335) (396)
Realised net gains/(losses) on disposal 1,569 (132)
Investment holding losses (2,072) (3,845)
----------------------------------------------------------------------
Valuation as at 31 December 2010 12,138 14,440
----------------------------------------------------------------------
FRS29 requires the Directors to consider the impact of changing one or more of
the inputs used as part of the valuation process. The valuation methodology
applied to 80 per cent. of the unquoted portfolio (level 3) is neither price of
recent investment nor cost. The Directors believe that changes to reasonable
possible alternative assumptions for the valuation of this part of the portfolio
could result in an increase of £0.7m or a decrease of £0.5m in the valuation of
the unquoted investments.
12Â Significant holdings
The principal activity of the Company is to select and hold a portfolio of
investments in quoted and unquoted securities. Although the Company, through
the Manager, will, in some cases, be represented on the board of the investee
company, it will not take a controlling interest or become involved in the
management. The size and structure of companies with unquoted securities may
result in certain holdings in the portfolio representing a participating
interest without there being any partnership, joint venture or management
consortium agreement.
The Company has interests of greater than 20 per cent. of the nominal value of
any class of the allotted shares in the investee companies as at 31 December
2010 as described below. All of the companies are incorporated in Great
Britain.
Number of Proportion of
Company Class of share shares held class held
--------------------------------------------------------------------------------
Elateral Holdings Limited Ordinary shares 14,423,285 21.8%
 Preference shares 81,699,667 28.5%
Lab M Holdings Limited A Ordinary shares 2,280,000 100.0%
 B Ordinary shares 600 60.0%
Cumulative redeemable
 preference shares 600,000 60.0%
 Preferred ordinary shares 389,940 52.3%
Sift Limited Ordinary shares 12,434,074 22.0%
 A Ordinary shares 2,441,184 21.7%
 B Ordinary shares 2,977,480 25.9%
UniServity Limited Ordinary shares 10,255 6.5%
 A Ordinary shares 35,896 41.7%
 B Ordinary shares 18,540 41.7%
--------------------------------------------------------------------------------
As permitted by FRS 9, the investments listed above are held as part of an
investment portfolio, and their value to the Company is as part of a portfolio
of investments. Therefore, these investments are not considered to be
associated undertakings.
13Â Current assets
Current assets include:
Trade and other debtors 31 December 31 December
2010 Â 2009
 £'000 £'000
------------------------------------------------------------
Other debtors 628 349
Prepayments and accrued income 58 108
------------------------------------------------------------
 686 457
------------------------------------------------------------
The Directors consider that the carrying amount of debtors is not materially
different to their fair value.
Current asset investments 31 December 31 December
2010 2009
£'000 £'000
----------------------------------------------------------------------------
The Royal Bank of Scotland Global Treasury Funds plc 3,230 5,710
KFW Corporate bond 5.5% 25/01/2010 - 1,003
----------------------------------------------------------------------------
 3,230 6,713
----------------------------------------------------------------------------
Current asset investments represent money held for investment. The units can be
converted into cash within five working days.
14Â Creditors: amounts falling due within one year
 31 December 31 December
2010 2009
£'000 £'000
---------------------------------------------
Trade creditors 5 7
Accruals 76 85
Other creditors 118 108
---------------------------------------------
 199 200
---------------------------------------------
The Directors consider that the carrying amount of creditors is not materially
different to their fair value.
15Â Called up share capital
 31 December 31 December
2010 2009
£'000 £'000
--------------------------------------------------------------------------------
Authorised:
200,000,000 (2009: 200,000,000) ordinary shares of 5 10,000 10,000
pence
--------------------------------------------------------------------------------
Allotted, issued and fully paid:
110,370,135 (2009: 110,370,135) ordinary shares of 5 5,519 5,519
pence
--------------------------------------------------------------------------------
No shares were bought back for cancellation by the Company during the year ended
31 December 2010 (2009:Â 691,004 shares, representing 0.6 per cent. of the
opening issued share capital, at a cost of £78,289).
16Â Net asset value per share
The net asset value per share as at 31 December 2010 of 16.6 pence (2009: 22.7
pence) is based on net assets of £18,283,000 (2009: £25,030,000) divided by the
110,370,135 ordinary shares in issue at that date (2009: 110,370,135).
17Â Analysis of changes in cash during the year
 31 December 31 December
2010 2009
£'000 £'000
---------------------------------------------------
Opening cash balances 3,190 1,314
Net cash flow (974) 1,876
---------------------------------------------------
Closing cash balances 2,216 3,190
---------------------------------------------------
18Â Reconciliation of operating loss to net cash flow 31 December 31 December
from operating activities   2010 2009
£'000 £'000
--------------------------------------------------------------------------------
Loss on ordinary activities before tax (1,214) (4,623)
Loss on investments at fair value through profit or loss 633 3,973
Decrease in debtors 58 1,479
Decrease in creditors (1) (303)
Amortisation of fixed interest investments - 3
--------------------------------------------------------------------------------
Cash flow from operating activities (524) 529
--------------------------------------------------------------------------------
19. Capital and financial instruments risk management
The Company's capital comprises Ordinary shares as described in note 15. The
Company is permitted to buy-back its own shares for cancellation and this is
described in more detail on page 49 of the Annual Report and Financial
Statements.
The Company's financial instruments comprise equity and loan stock investments
in unquoted and quoted companies, cash balances and liquid cash instruments, and
short term debtors and creditors which arise from its operations. The main
purpose of these financial instruments is to generate cashflow, revenue and
capital appreciation for the Company's operations. The Company has no gearing
or other financial liabilities apart from short term creditors. The Company does
not use any derivatives for the management of its balance sheet.
The principal risks arising from the Company's operations are:
* investment (or market) risk (which comprises investment price and cash flow
interest rate risk);
* credit risk; and
* liquidity risk.
The Board regularly reviews and agrees policies for managing each of these
risks. There have been no changes in the nature of the risks that the Company
has faced during the past year, and apart from where noted below, there have
been no changes in the objectives, policies or processes for managing risks
during the past year. The key risks are summarised below.
Investment risk
As a venture capital trust, it is the Company's specific nature to evaluate and
control the investment risk of its portfolio in unquoted and quoted investments,
details of which are shown on pages 12 to 14 of the Annual Report and Financial
Statements. Investment risk is the exposure of the Company to the revaluation
and devaluation of investments. The main driver of investment risk is the
operational and financial performance of the investee company and the dynamics
of market quoted comparators. The Manager receives management accounts from
investee companies, and members of the investment management team often sit on
the boards of unquoted investee companies; this enables the close
identification, monitoring and management of investment risk.
The Manager and the Board formally review investment risk (which includes market
price risk), both at the time of initial investment and at quarterly Board
meetings.
The Board monitors the prices at which sales of investments are made to ensure
that profits to the Company are maximised, and that valuations of investments
retained within the portfolio appear sufficiently prudent and realistic compared
to prices being achieved in the market for sales of unquoted investments.
The maximum investment risk as at the balance sheet date is the value of the
fixed and current asset investment portfolio which is £15,580,000 (2009:
£21,583,000). Investments form 85 per cent. of the net asset value as at 31
December 2010 (2009: 86 per cent.).
More details regarding the classification of investments are shown in notes 11
and 13 of the Annual Report and Financial Statements.
Investment price risk
Investment price risk is the risk that the fair value of future investment cash
flows will fluctuate due to factors specific to an investment instrument or to a
market in similar instruments. As a venture capital trust the Company invests
in unquoted and quoted companies in accordance with the investment policy set
out on page 16 of the Annual Report and Financial Statements. The management of
risk within the venture capital portfolio is addressed through careful
investment selection, by diversification across different industry segments, 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.
Valuations are based on the most appropriate valuation methodology for an
investment within its market, with regard to the financial health of the
investment and the IPEVCV guidelines. Details of the sectors in which the
Company is currently invested are shown in the pie chart on page 8 of the
Manager's report of the Annual Report and Financial Statements.
As required under FRS 29 "Financial Instruments: Disclosures", the Board is
required to illustrate by way of a sensitivity analysis the degree of exposure
to market risk. The Board considers that the value of the fixed asset
investment portfolio is sensitive to a 10 per cent. change based on the current
economic climate. The impact of a 10 per cent. change has been selected as this
is considered reasonable given the current level of volatility observed both on
a historical basis and future expectations.
The sensitivity of a 10 per cent. increase or decrease in the valuation of the
fixed asset investment portfolio (keeping all other variables constant) would
increase or decrease the net asset value and return for the year by £1,235,000
(2009: £1,487,000).
Foreign currency risk
The Company is unlikely to be significantly affected by currency fluctuations.
Revenue received in currencies other than sterling is converted into sterling on
or shortly after the date of receipt as are any proceeds from the disposal of
foreign currency investments.
At the year ended 31 December 2010, the Company held investments denominated in
currencies other than sterling of £140,000 (2009: £239,000).
Cash flow interest rate risk
It is the Company's policy to accept a degree of interest rate risk on its
financial assets through the effect of interest rate changes. On the basis of
the Company's analysis, it is estimated that a rise of one percentage point in
all interest rates would have increased total return before tax for the year by
approximately £82,000 (2009: £108,000). Furthermore, it is considered that a
fall of interest rates below current levels during the year would have been
unlikely.
The weighted average interest rate applied to the Company's fixed rate assets
during the year was approximately 3.3 per cent. (2009: 2.7 per cent.). The
weighted average period to maturity for the fixed rate assets is approximately
2.2 years (2009: 2.8 years).
The Company's financial assets and liabilities as at 31 December 2010,
denominated in pounds sterling, consist of the following:
 31 December 2010 31 December 2009
Non- Non-
Fixed Floating interest Fixed Floating interest
rate rate bearing Total rate rate bearing Total
 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
--------------------------------------------------------------------------------
Unquoted equity - - 9,784 9,784 - - 12,366 12,366
Quoted equity - - 212 212 - - 430 430
Unquoted loan
stock 1,246 143 965 2,354 1,000 - 1,074 2,074
Debtors - - 686 686 - - 457 457
Current
liabilities - - (199) (199) - - (200) (200)
Cash and liquid
investments - 5,446 - 5,446 1,003 8,900 - 9,903
--------------------------------------------------------------------------------
Total net assets 1,246 5,589 11,448 18,283 2,003 8,900 14,127 25,030
--------------------------------------------------------------------------------
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 Company is exposed to credit risk through its debtors, investment
in unquoted loan stock, cash held on deposit, cash funds held with banks and
through quoted corporate bonds.
The Manager evaluates credit risk on loan stock instruments prior to investment
and as part of its ongoing monitoring of investments. In doing this, it takes
into account the extent and quality of any security held. In the past loan
stock may or may not have a fixed or floating charge, which may or may not have
been subordinated, over the assets of the investee company. However, for the
future typically Albion Ventures LLP loan stock instruments have a first fixed
charge or a fixed and floating charge over the assets of the investee company in
order to mitigate the gross credit risk.
The Manager receives management accounts from investee companies, and members of
the investment management team often sit on the boards of unquoted investee
companies; this enables the close identification, monitoring and management of
investment specific credit risk.
The Manager and the Board formally review credit risk (including debtors) and
other risks, both at the time of initial investment and at quarterly Board
meetings.
The Company's total gross credit risk at 31 December 2010 was limited to
£2,354,000 (2009: £2,074,000) of unquoted loan stock instruments, £3,230,000
units held in The Royal Bank of Scotland Global Treasury Funds plc (2009:
£5,710,000) and £2,216,000 (2009: £3,190,000) cash deposits on deposit with
banks. The quoted corporate bond matured during the year.
As at the balance sheet date, cash and liquid investments held by the Company
are held with The Royal Bank of Scotland plc and The Royal Bank of Scotland
Global Treasury Funds plc. Credit risk on cash transactions is mitigated by
transacting with counterparties that are regulated entities subject to
regulatory supervision, with Moody's credit ratings of at least 'A' or
equivalent as assigned by international credit-rating agencies.
Liquidity risk
Liquid assets are held as cash on current account, cash on deposit or as units
in short term money market funds. Under the terms of its Articles, the Company
has the ability to borrow an amount equal to its adjusted capital and reserves
of the latest published audited balance sheet.
The Company has no committed borrowing facilities as at 31 December 2010 (2009:
£nil).
There are no externally imposed capital requirements other than the minimum
statutory share capital requirements for public limited companies.
The main cash outflows are for new investments, share buy-backs and dividend
payments, which are within the control of the Company. The Manager formally
reviews the cash requirements of the Company on a monthly basis, and the Board
on a quarterly basis as part of its review of management accounts and
forecasts. The Company's financial liabilities at 31 December 2010 are short
term in nature and total £199,000 (2009: £200,000).
The carrying value of loan stock investments analysed by expected maturity dates
is as follows:
 31 December 2010 31 December 2009
------------------------------------------------------------------------
Fully Past due Fully
performing loan performing Past due
loan stock stock Total loan stock loan stock Total
Redemption date £'000 £'000 £'000 £'000 £'000 £'000
------------------------------------------------------------------------
Less than one year - - - - - -
1-2 years 1,796 - 1,796 188 - 188
2-3 years 169 - 169 886 - 886
3-5 years 246 143 389 1,000 - 1,000
------------------------------------------------------------------------
Total 2,211 143 2,354 2,074 - 2,074
------------------------------------------------------------------------
Loan stock categorised as past due has capital and interest which is past due by
more than 3 months.
In view of the factors identified above, the Board considers that the Company is
subject to low liquidity risk.
Fair values of financial assets and financial liabilities
All the Company's financial assets and liabilities as at 31 December 2010 are
stated at fair value as determined by the Directors. There are no financial
liabilities other than creditors. The Company's financial liabilities are all
non-interest bearing. It is the Directors' opinion that the book value of the
financial liabilities is not materially different to the fair value and all are
payable within one year.
20Â Commitments and guarantees
As at 31 December 2010, there were no legal commitments (2009: £nil) in respect
of further funding to be provided to existing investee companies.
There were no contingent liabilities or guarantees given by the Company as at
31 December 2010 (2009: £nil).
21Â Co-investment
The Company has venture capital investments in companies in which other funds
managed by SPARK Venture Management Limited have also invested.
For the purpose of this note, the following abbreviations apply:
KAY2 Kings Arms Yard VCT 2 PLC (formerly SPARK VCT 2 plc)
SPK SPARK Ventures plc
QVP Quester Venture Partnership
ICF Isis College Fund Limited Partnership and Second Isis College Fund
Limited Partnership
Lachesis Lachesis Seed Fund Limited Partnership
+------------------------+-----------------------------+
| Co-investors | Company |
+------------------------+-----------------------------+
| KAY2, SPK and ICF | Academia Networks Limited |
+------------------------+-----------------------------+
| KAY2 | Allergy Therapeutics plc |
+------------------------+-----------------------------+
| KAY2 and QVP | Antenova Limited |
+------------------------+-----------------------------+
| KAY2 and QVP | Celldex Therapeutics, Inc |
+------------------------+-----------------------------+
| KAY2 and QVP | Cluster Seven Ltd |
+------------------------+-----------------------------+
| KAY2 | Elateral Holdings Limited |
+------------------------+-----------------------------+
| KAY2, QVP and Lachesis | Haemostatix Limited |
+------------------------+-----------------------------+
| KAY2 | Imagesound plc |
+------------------------+-----------------------------+
| KAY2 and SPK | Isango! Limited |
+------------------------+-----------------------------+
| KAY2 and QVP | Level Four Software Limited |
+------------------------+-----------------------------+
| KAY2, QVP and ICF | MediGene AG |
+------------------------+-----------------------------+
| KAY2 and ICF | Oxonica Limited |
+------------------------+-----------------------------+
| KAY2 and QVP | Perpetuum Limited |
+------------------------+-----------------------------+
| KAY2 | Sift Limited |
+------------------------+-----------------------------+
| KAY2 and SPK | Skinkers Limited |
+------------------------+-----------------------------+
| KAY2 | Symetrica Limited |
+------------------------+-----------------------------+
| KAY2 | TeraView Limited |
+------------------------+-----------------------------+
| KAY2 | UniServity Limited |
+------------------------+-----------------------------+
| KAY2 and QVP | Vivacta Limited |
+------------------------+-----------------------------+
| KAY2 | We7 Limited |
+------------------------+-----------------------------+
| KAY2 and QVP | Workshare Limited |
+------------------------+-----------------------------+
With effect from 1 January 2011, the Company will be investing in companies in
which other funds managed by Albion Ventures LLP have also invested. At the
date these accounts were signed, no such investments have yet been made.
22Â Post balance sheet events
Since the year end, the Company has had the following post balance sheet events
all being additional investments in:
- Perpetuum Limited of £161,000 in February 2011; and
- Vivacta Limited of £181,000 in March 2011.
23Â Related party disclosures
During the year to 31 December 2010, the previous Manager, SPARK Venture
Management Limited, was considered to be a related party. Andrew Carruthers, who
was a Director of the Company, is also a director of the previous manager who
was party to an Investment Management Agreement as disclosed in note 4 of this
Report. During the year, services of a total value of £412,000 (2009: £549,000)
were purchased by the Company from SPARK Venture Management Limited. As at 31
December 2010, an amount of £6,000 is reflected in prepayments, due from SPARK
Venture Management Limited.
As at 31 December 2010, an amount of £6,000 is reflected in prepayments, due
from SPARK Venture Management Limited.
SPARK Investors Limited (a fellow subsidiary of SPARK Venture Management
Limited) was, from time to time, eligible to receive transaction fees and
Directors' fees from investee companies. During the year ended 31 December
2010, fees of £40,000 attributable to the investments of the Company were
received pursuant to these arrangements (2009: £26,000).
With effect from 1 January 2011, the Manager, Albion Ventures LLP, is considered
to be a related party by virtue of the fact that Patrick Reeve, a Director of
the Company, is also Managing Partner of the Manager. The Manager is party to
an Investment Management agreement from the Company as disclosed in note 4 of
this Report. Albion Ventures LLP is, from time to time, eligible to receive
transaction fees and Directors' fees from investee companies.
Principal risks and uncertainties
The Board considers that the Company faces the following major risks and
uncertainties:
1. Investment risk
This is the risk of investment in poor quality assets which reduces the capital
and income returns to shareholders, and negatively impacts on the Company's
reputation. By nature, smaller unquoted businesses, such as those that qualify
for venture capital trust purposes, are more fragile than larger, long
established businesses.
To reduce this risk, the Board places reliance upon the skills and expertise of
the Manager and its strong track record for investing in this segment of the
market. In addition, the Manager operates a formal and structured investment
process, which includes an investment committee, comprising investment
professionals from the Manager and at least one external investment
professional. The Manager also invites comments from non-executive Directors of
the Company on investments discussed at the investment committee meetings.
Investments are actively and regularly monitored by the Manager (investment
managers normally sit on investee company boards) and the Board receives
detailed reports on each investment as part of the Manager's report at quarterly
Board meetings.
2. Venture Capital Trust approval risk
The Company's current approval as a venture capital trust allows investors to
take advantage of tax reliefs on initial investment and ongoing tax free capital
gains and dividend income. Failure to meet the qualifying requirements could
result in investors losing the tax relief on initial investment and loss of tax
relief on any tax-free income or capital gains received. In addition, failure
to meet the qualifying requirements could result in a loss of listing of the
shares.
To reduce this risk, the Board has appointed the Manager, who has a team with
significant experience in venture capital trust management, used to operating
within the requirements of the venture capital trust legislation. In addition,
to provide further formal reassurance, the Board has appointed Grant Thornton UK
LLP as its taxation advisers. Grant Thornton UK LLP report annually to the
Board to independently confirm compliance with the venture capital trust
legislation, to highlight areas of risk and to inform on changes in legislation.
3. Compliance risk
The Company is listed on the London Stock Exchange and is required to comply
with the rules of the UK Listing Authority, as well as with the Companies Act,
Accounting Standards and other legislation. Failure to comply with these
regulations could result in a delisting of the Company's shares, or other
penalties under the Companies Act or from financial reporting oversight bodies.
Board members and the Manager have experience of operating at senior levels
within quoted businesses. In addition, the Board and the Manager receive
regular updates on new regulation from the Company's Auditors, lawyers and other
professional bodies.
4. Internal control risk
Failures in key controls, within the Board or within the Manager's business,
could put assets of the Company at risk or result in reduced or inaccurate
information being passed to the Board or to shareholders.
The Audit Committee will meet with Albion Ventures LLP's internal auditors,
Littlejohn LLP, at least once a year, receiving a report regarding the last
formal internal audit performed on the Manager and providing the opportunity for
the Audit Committee to ask specific and detailed questions. The Manager has a
comprehensive business continuity plan in place in the event that operational
continuity is threatened. Further details regarding the Board's management and
review of the Company's internal controls through the implementation of the
Turnbull guidance are detailed on page 24 of the Annual Report and Financial
Statements.
Measures are in place to mitigate information risk in order to ensure the
integrity, availability and confidentiality of information used within the
business.
5. Reliance upon third parties risk
The Company is reliant upon the services of Albion Ventures LLP for the
provision of investment management and administrative functions. There are
provisions within the Investment Management Agreement for the change of Manager
under certain circumstances (for more information, see the Investment Management
Agreement details in note 4). In addition, the Manager has demonstrated to the
Board that there is no undue reliance placed upon any one individual within
Albion Ventures LLP.
6. Financial risks
By its nature, as a venture capital trust, the Company is exposed to investment
risk (which comprises investment price risk and cash flow interest rate risk),
credit risk and liquidity risk. The Company's policies for managing these risks
and its financial instruments are outlined in full in note 19 to the Financial
Statements.
All of the Company's income and expenditure is denominated in sterling and there
are two foreign currency quoted portfolio investments whose total value at 31
December 2010 is £140,000. The Company is financed through equity and does not
have any borrowings. The Company does not use derivative financial instruments
for speculative purposes.
25Â Other information
The information set out in this announcement does not constitute the Company's
statutory accounts within the terms of section 434 of the Companies Act 2006 for
the periods ended 31 December 2010 and 31 December 2009, and is derived from the
statutory accounts for those financial years, which have been, or in the case of
the accounts for the year ended 31 December 2010, which will be, delivered to
the Registrar of Companies. The Auditors reported on those accounts; their
reports were unqualified and did not contain a statement under s498 (2) or (3)
of the Companies Act 2006.
The Company's Annual General Meeting will be held at The City of London Club,
19 Old Broad Street, London, EC2N 1DS on 16 May 2011 at 2 pm.
26. Publication
The full audited Annual Report and Financial Statements are being sent to
shareholders and copies will be made available to the public at the registered
office of the Company, Companies House, the National Storage Mechanism and also
electronically at www.albion-ventures.co.uk under the 'Our Funds' section, by
clicking on 'Kings Arms Yard VCT PLC', where the Report can be accessed as a PDF
document via a link under the 'Investor Centre' in the 'Financial Reports and
Circulars' section.
Pie Chart:
http://hugin.info/145558/R/1508083/442995.pdf
This announcement is distributed by Thomson Reuters on behalf of
Thomson Reuters clients. The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and
other applicable laws; and
(ii) they are solely responsible for the content, accuracy and
originality of the information contained therein.
Source: Kings Arms Yard VCT PLC via Thomson Reuters ONE
[HUG#1508083]
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