Octopus Titan VCT 2 PLC : Final Results
Octopus Titan VCT 2 plc
Final Results
22 January 2013
Octopus Titan VCT 2 plc ("Titan"), managed by Octopus Investments Limited ("Octopus"), today announces the final results for the year ended 31 October 2012.
These results were approved by the Board of Directors on 22 January 2013.
You may, in due course, view the Annual Report in full at www.octopusinvestments.com.
Octopus Titan VCT 2 plc
Annual Report & Accounts for the year ended 31 October 2012
Registered Number: 06397765
Financial Summary
| As at 31 October 2012 | As at 31 October 2011 | |
| Net assets (£'000s) | 21,361 | 14,833 |
| Return on ordinary activities after tax (£'000s) | 5,737 | (327) |
| Net asset value (NAV) per share | 121.9p | 91.5p |
| Cumulative dividends paid since launch | 6.0p | 3.5p |
| NAV plus cumulative dividends paid to 31 October 2012 | 127.9p | 95.0p |
| Special dividend proposed | 34.0p | - |
| Final dividend proposed | - | 1.0p |
Key Dates
Annual General Meeting 14 March 2013 (2.30 p.m. at 20 Old Bailey, London EC4M 7AN)
2012 special dividend payable 28 March 2013
Half Yearly Results to 30 April 2013 Announced June 2013
Chairman's Statement
I am pleased to present the annual results for Octopus Titan VCT 2 plc (the "Company") for the year ended 31 October 2012. I believe that the Titan family of VCTs are the embodiment of what successive Governments were seeking to achieve when they created and enhanced the concept of Venture Capital Trusts through the encouragement of early stage, often technology, businesses. It gives me great pleasure to see that our aims have been achieved within five years.
Performance
During the year the Total Return of the Company, being the Net Asset Value (NAV) plus cumulative dividends paid, has increased by 34.6% from 95.0 pence per share to 127.9 pence per share. This large appreciation reflects the excellent performance of the investment portfolio which has given rise to an increase in NAV of 30.4 pence per share in the year. In view of the transaction announced in December, we are delighted to have realised sufficient cash to pay the significant dividend referred to below.
I am very pleased that the business model of this Titan fund, as described in previous reports, is now being realised with the substantial uplift in NAV as stated above. The Fund, in common with most funds investing in early stage businesses, was expected to fall in NAV over the initial years of its life as it built and developed its portfolio, and I am delighted we have reached and exceeded our initial investment value within the first five years of the Fund's life. We remain quietly confident that our portfolio will continue to realise above average returns through the continuing hard work of our Investment Manager.
Dividend and Dividend Policy
It remains your Board's policy to strive to maintain a regular dividend, whilst maintaining the appropriate level of liquidity in the VCT. As a result of the successful realisations and performance of the investment portfolio during the year, the Board declared a special dividend of 34.0 pence per share (2011 final dividend: 1.00 pence per share). This takes the total dividends declared in the year to 35.5 pence per share (2011: 1.75 pence per share).
The special dividend is to be paid on 28 March 2013 to those shareholders who were on the register on 11 January 2013. The payment date has been amended from the original date of payment in order to give shareholders more time to apply to reinvest their special dividend. In view of the size of this special dividend, we are not proposing to declare a final dividend in respect of 2012.
Due to the quantum of the special dividend, the Board are anticipating to offer shareholders the ability to re-invest the cash amounts into new shares in the forthcoming linked offer for all Titan Funds. Further details of this shall be sent shortly.
The Board's strategy is to maintain an appropriate level of liquidity in the balance sheet to continue to achieve four aims:
· to support a consistent dividend flow;
· to support further investment in existing portfolio companies if required;
· to take advantage of new investment opportunities as they arise; and
· to assist liquidity in the shares through the buy back facility.
Liquidity in the VCT is primarily driven by capital realisations.
Investment Portfolio
The value of the portfolio has seen an overall increase of £7,120,000 during the year. This is largely attributable to considerable increases in fair value in Nature Delivered, Zoopla, Calastone and TouchType totalling £7,518,000.
During the year the Fund focused on supporting the existing portfolio companies during the year by making 10 follow-on investments amounting to £1,061,000.
Post year end, on 30 November 2012, I am delighted to report that the Fund's holding in Nature Delivered was realised. This yielded £5,884,000 for the Fund of which £3,764,000 was paid in cash and £2,120,000 was reinvested. This represents a significant multiple on the cost of the Fund's investment in Nature Delivered.
Furthermore, I am pleased to report that, during the year, the Company part disposed of Zoopla, realising a gain and proving the success of this investment. The Company also disposed of its total holding in Evi Technologies. Elsewhere, AQS Group and Michelson Diagnostics suffered the largest decreases in fair value within the portfolio. For a more in depth discussion of the portfolio companies please refer to pages X to X in the Investment Manager's Review.
Top-up and Buybacks
As mentioned in the interim report, the Company successfully raised £1,323,000 net of costs during the year which saw the Top-up offer fully subscribed. The majority of these funds raised are being used to support existing portfolio companies where the Investment Manager sees the opportunity for business growth.
Due to the success of the 2012 Top-up, the Board have announced a further offer for new shares alongside the other four Octopus Titan VCTs. We will write to you with further details soon.
During the period, the company repurchased 131,009 shares. Further details can be found in Note 14 of the accounts. In common with many other VCTs, and as recently announced, the Board has decided to reduce the discount to NAV at which it will repurchase shares from 10% to 5%. The Board will continue to monitor the volume of shares bought back and at present intends to maintain the existing limit of the share capital that it buys-back and cancels each year at 5%. The Board believes that in the longer term it is in the best interests of all VCTs that an active secondary market operates. Given the attractive tax free yield of many VCTs including ours, we believe that the market will eventually realise the benefits especially as the opportunity to invest in pension plans continues to be restricted. We will therefore seek to promote these advantages but in the meantime it is the Board's intention that shareholders should be able to sell their shares back to the VCT.
Your Board believes that this makes the VCT a more attractive investment for both existing and new shareholders.
Open Ended Investment Companies (OEICs) managed by Octopus Investments
Both the Microcap growth fund and Cautious fund have given rise to overall uplifts in fair value during the year of £69,000 and £9,000 respectively.
The Board continues to monitor these funds and believes it remains a sensible strategy to maintain part of our non-qualifying portfolio in OEICs which are liquid and should achieve superior returns to cash deposits. Further details of these OEICs may be found at www.octopusinvestments.com where monthly factsheets are available.
Investment Strategy
As we increase the Fund's liquidity through realisations and new share issues, we will be able to participate pro rata with the other Titan funds in new investment opportunities whilst continuing to support our existing portfolio where we believe the companies offer good opportunities for capital growth. As I have previously reported, we may also make investments in some new or existing unquoted companies which are or have become non-qualifying for VCT purposes but where your Board believes that it will be in shareholders' interests to invest, not least to avoid dilution and to protect value in existing portfolio companies.
VCT Qualifying Status
PricewaterhouseCoopers LLP provides both the Board and the Investment Manager with advice concerning ongoing compliance with HMRC rules and regulations concerning VCTs. The Board has been advised that the Company is in compliance with the conditions laid down by HMRC for maintaining approval as a VCT.
A key requirement is for 70% of the portfolio to remain continually invested in qualifying investments. As at 31 October 2012, over 89.7% of the portfolio (as measured by HMRC rules) was invested in VCT qualifying investments.
Annual General Meeting
The Company's Annual General Meeting will take place on 14 March 2013. I look forward to welcoming you to the meeting which will be held at the offices of Octopus Investments Limited, at 20 Old Bailey, London, EC4M 7AN.
Outlook
Although the current economic climate remains uncertain with continued challenges for small businesses, it is clear that there are opportunities for well funded small companies. The timing of an economic recovery remains uncertain but we will continue to work hard alongside the Investment Manager to continue to develop the current portfolio.
I referred earlier to our achievement of the original objectives for which VCTs were created. I am however surprised that the FSA is now seeking to curtail our ability to raise funds by limiting their availability to all but those the FSA define as "sophisticated investors", according to their current consultation paper on Unregulated Collective Investment Schemes (UCIS) and "close substitutes", CP12/19, which seeks to treat all VCTs as UCIS. This is a strange circumstance for two reasons: first, because we are required to suffer the significant costs of a Listing on the London Stock Exchange, which is regulated by the United Kingdom Listing Authority; and second, because all investors are able to purchase shares in the market. Additionally, the CP12/19 is at odds with the Government's strong encouragement of small company growth: VCTs have played and continue to play an important part of this policy, particularly in the absence of other forms of finance, especially from the banks.
Our interests remain focused on boosting growth and profitability in the underlying portfolio and striving to make further realisations. It is encouraging that despite the difficult trading conditions mentioned above; the Fund has established a strong portfolio and made a successful exit during the year. We believe that we can build on the strong foundations the Fund has made and deliver more realisations in the near future.
John Hustler
Chairman
22 January 2013
Investment Manager's Review
Personal Service
At Octopus Investments Limited ("Octopus"), we focus on both managing your investments and keeping you informed throughout the investment process. We are committed to providing our investors with regular and open communication. Our updates are designed to keep you informed about the progress of your investment. During this time of economic uncertainty, we consider it particularly important to be in regular contact with our investors and are working hard to manage your money in the current climate.
Octopus was established in 2000 and has a strong commitment to both smaller companies and to VCTs. We currently manage 13 VCTs, including this VCT, and manage over £340 million in the VCT sector. Octopus has over 200 employees and was voted 'Best VCT Provider of the Year' by the financial adviser community in 2006 to 2010.
Investment Policy Summary
The investment approach of the Company is not designed to deliver a return that is measured against a stock market index. Instead, the focus of the Company is on generating absolute returns over the medium-term. In order to achieve this, the Company focuses on providing early stage, development and expansion funding to unquoted companies with a typical initial deal size of £0.5 million to £1 million and will continue to comprise 20-25 unquoted companies, predominantly focussed within the following sectors:
- Environment
- Technology
- Media
- Telecoms
- Consumer lifestyle and well-being sectors.
Investment Strategy
The investee companies are those that we believe have great potential but need some financial support to realise it. Each company that we target has the potential to create a large business by taking a relatively modest market share. We are particularly interested in businesses that address current market trends and are able to be innovative in mature markets. We have created a balanced investment portfolio spanning multiple industries and business sectors.
Having reached the level of invested funds required by HMRC, our focus has now shifted to managing the portfolio and developing growth in the investee companies. The current portfolio of holdings built by the Company now encompass investments in 20 unquoted companies and one AIM-quoted company.
As Investment Manager, we have typically purchased a significant minority equity stake in these qualifying companies, providing financial capital to the business to build and grow its operations and then to sell to an acquirer at some point in the future. These entrepreneurial early stage businesses, which we invest in, frequently face challenges as they seek to establish themselves in their market, often developing new products and services. The amount of capital we initially deploy is intended to be only the first investment that we will make into a business, prior to seeing if the company meets or exceeds its initial objectives.
If the business is unsuccessful in meeting these first objectives, we strive to minimise the financial exposure the Company faces without committing further money to the investment, as is commonly referred to as "good money after bad". Other businesses which meet some of their objectives, but not necessarily all, will require more time to prove their concept and these businesses will typically be reduced in value prior to our making a further investment. This is in order for us to see them progress forward and prove their business model and opportunity. Finally, there are those that meet and exceed the expectations originally set. It is these businesses in which we wish to increase our investment exposure as they remain on course to create a large business.
We maintain liquidity in the Company to ensure adequate resources are available to support further portfolio funding needs as they arise. This situation should be further aided following the linked prospectus offer for new shares as described in the Chairman's Statement, and it is an important feature of our model in delivering returns to shareholders.
Portfolio Review
As at 31 October 2012 the Total return (being the NAV plus cumulative dividends) was 127.9p per share, compared to 95.0p per share at 31 October 2011. This represents a considerable increase of 34.6%. The performance of the portfolio was excellent during the year with a number of notable uplifts in fair value contributing to this large appreciation in the value of the fund.
The Company now holds over 89.6% of its assets in qualifying holdings from an HMRC perspective and we continue to work with each portfolio business as they develop capital growth in their respective markets.
As Investment Manager, it is our continued intention to take those businesses in which we have invested a small amount of money as a first investment, and invest further as they meet or exceed the initial milestone objectives we agreed with them. This approach can be demonstrated through 10 follow on investments being made totalling £1,061,000. There were no new investments during the year as the focus has been to develop the established diverse portfolio.
Investment highlights
As mentioned above, the portfolio has excelled during the year with significant uplifts in fair value in a number of companies. The top performing portfolio businesses are from a range of sectors and experienced notable growth as shown in the below table.
| Company | Sector | Cost of investment, £'000 | Current year uplift in fair value, £'000 | Effect of uplift on NAV, p |
| Nature Delivered Limited | Consumer lifestyle & wellbeing | 798 | 4,180 | 23.8 |
| Zoopla Limited | Media | 742 | 2,392 | 13.6 |
| Calastone Limited | Technology | 1,135 | 567 | 3.2 |
| TouchType Limited | Telecommunications | 385 | 379 | 2.2 |
| 3,060 | 7,518 | 42.8 |
We continue to have one quoted investment, e-therapeutics, which has performed well in the year with an increase in fair value of £180,000 giving rise to an increase in NAV of 1.0p per share.
Realisations in the year
The fund successfully disposed of 30.8% of its holding in Zoopla during the year, realising a gain of £317,000 on an investment cost of £329,000, rendering the investment a success. The Company also fully disposed of Evi Technologies recognising a small loss of £19,000.
Post year end
Since the balance sheet date, although no new investments have been made, the Company has continued to support investee companies by investing a further £244,000 into Calastone and £109,000 into Bowman Power. In addition, the Company disposed of its holding in Nature Delivered Limited, realising £5,884,000 of which £3,764,000 was paid in cash and £2,120,000 was reinvested.
Outlook
The continued uncertainty in the current economy remains a concern for small companies. There are still fierce challenges for these companies, with many being subjected to the pressure of tough trading conditions. It remains unclear when the economic downturn will revert, and until it does cash requirements will remain a concern for small companies.
Despite this, there remain opportunities for entrepreneurs and small companies as shown in this portfolio. They can execute business plans quickly to meet and enhance customer experiences in comparison to slower moving large corporate businesses. A number of businesses in this portfolio have already shown these characteristics and continue to grow aggressively, despite the volatile economic environment.
If you have any questions on any aspect of your investment, please call one of the team on 0800 316 2349.
Alex Macpherson
Octopus Investments Limited
22 January 2013
Investment Portfolio
| Fixed asset investments | Sector | Investment cost as at 31 October 2012 (£'000) | Movement in fair value to 31 October 2012 (£'000) | Fair value as at 31 October 2012 (£'000) | Movement in fair value in year to 31 October 2012 (£'000) | % voting rights held by Titan 2 | % equity held by all funds managed by Octopus |
| Nature Delivered Limited | Consumer lifestyle & wellbeing | 798 | 5,086 | 5,884 | 4,180 | 7.53 | 32.02 |
| Zoopla Limited | Media | 742 | 3,744 | 4,486 | 2,392 | 1.53 | 5.15 |
| Calastone Limited | Technology | 1,135 | 1,134 | 2,269 | 567 | 10.81 | 34.10 |
| TouchType Limited | Telecommunications | 385 | 543 | 928 | 379 | 4.20 | 20.07 |
| e-Therapeutics plc | Consumer lifestyle & wellbeing | 632 | 194 | 826 | 180 | 1.73 | 8.23 |
| Mi-Pay Limited | Telecommunications | 849 | (100) | 749 | 160 | 8.49 | 28.3 |
| Executive Channel Europe Limited | Media | 529 | 76 | 605 | - | 6.29 | 36.12 |
| GetOptics Limited | Consumer lifestyle & wellbeing | 508 | 72 | 580 | 163 | 5.75 | 21.88 |
| Semafone Limited | Telecommunications | 496 | 72 | 568 | 72 | 7.34 | 46.64 |
| Surrey NanoSystems Limited | Technology | 485 | 43 | 528 | 43 | 4.91 | 24.55 |
| Ultrasoc Technologies Limited | Technology | 492 | - | 492 | - | 10.69 | 65.21 |
| Metrasens Limited | Consumer lifestyle & wellbeing | 338 | 138 | 476 | 95 | 5.00 | 28.01 |
| Bowman Power Limited | Environmental | 311 | (41) | 270 | (70) | 2.69 | 15.55 |
| Michelson Diagnostics Limited | Consumer lifestyle & wellbeing | 441 | (220) | 221 | (221) | 5.62 | 42.87 |
| Phase Vision Limited | Technology | 474 | (329) | 145 | (164) | 10.09 | 42.96 |
| PrismaStar Inc. | Media | 424 | (300) | 124 | (150) | 4.95 | 33.02 |
| Phasor Solutions Limited | Technology | 100 | (75) | 25 | (25) | 1.23 | 23.50 |
| Diverse Energy Limited | Environmental | 413 | (413) | - | (46) | 5.47 | 29.76 |
| Elonics Limited | Technology | 305 | (305) | - | (76) | 3.11 | 19.54 |
| AQS Holdings Limited | Environmental | 654 | (654) | - | (359) | 14.2 | 50.7 |
| The Key Revolution Limited | Technology | 641 | (641) | - | - | 12.36 | 35.88 |
| Total fixed asset investments | 11,152 | 8,024 | 19,176 | 7,120 | |||
| Money market funds | 743 | - | 743 | - | |||
| Open ended investment companies | 806 | 163 | 969 | 78 | |||
| Cash at bank | 176 | - | 176 | - | |||
| Total investments | 12,877 | 8,187 | 21,064 | 7,198 | |||
| Debtors less creditors | 297 | ||||||
| Total net assets | 21,361 | ||||||
Valuation Methodology
Initial measurement
Financial assets are measured at fair value. The initial best estimate of fair value of a financial asset that is either quoted or not quoted in an active market is the transaction price (i.e. cost).
Subsequent measurement
Further funding rounds are a good indicator of fair value and this measure is used where appropriate. Subsequent adjustment to the fair value of unquoted investments can be made using sector multiples based on information as at 31 October 2012, where applicable. In some cases the multiples can be compared to equivalent companies, especially where a particular sector multiple does not appear appropriate. It is currently industry norm to discount the quoted earnings multiple to reflect the lack of liquidity in the investment, there being no ready market for our holding. Typically the discount is 30% but this can be increased where the relevant multiple appears too high. A lower discount would also be possible if an investment was close to an exit event.
In accordance with the International Private Equity and Venture Capital (IPEVC) valuation guidelines, investments made within 12 months are usually kept at cost unless performance indicates that fair value has changed.
Quoted investments are valued at market bid price. No discounts are applied.
If you would like to find out more regarding the IPEVC valuation guidelines, please visit their website at: www.privateequityvaluation.com.
Review of Investments
During the year ten follow-on investments were made, amounting to £1,061,000.
Quoted and unquoted investments are valued in accordance with the accounting policy set out in accounting note 1 which takes account of current industry guidelines for the valuation of venture capital portfolios and is compliant with IPEVC Valuation guidelines and current financial reporting standards.
Listed below are details of the Company's 10 largest investments by value.
Nature Delivered Limited
Graze.com delivers tasty nutritious snacks to grazers up and down the country. All boxes are hand picked from over 100 delicious snacks and delivered in the post. Founded in 2007 and launched in 2009, graze.com was created to solve office snacking for the better. Delivered directly to customers' desks or home anywhere in the UK through Royal Mail, each graze box is packed with four snacks, from flavoured nuts, traditional rice crackers and exotic dried fruits to freshly baked bread, marinated olives and dips. Grazers choose the foods they like then graze.com hand picks the perfect box and sends it to them for just £3.49, including delivery using Royal Mail. The boxes fit perfectly through the letter box and arrive with the rest of your post, they are being delivered everywhere in the UK, from the Channel Islands to the Shetland Islands.
Initial investment date: June 2009
Cost: £798,000
Valuation: £5,884,000
Voting rights held by Fund: 7.53%
Equity held by all funds managed by Octopus: 32.02%
Last submitted audited accounts: 28 February 2012
Turnover £20,929,775
Profit before tax: £3,335,215
Net assets: £5,758,161
Zoopla Property Group Limited
Zoopla Property Group Ltd owns and operates some of the UK's leading online property brands including Zoopla.co.uk and Primelocation.com. Over 16,000 estate agent and lettings agent branches across the UK advertise on the company's websites each month, in addition to all the leading new homes developers, attracting over 28 million visitors a month and generating over 2 million enquiries per month for the member estate/letting agents and property developers. In addition to operating its own websites, Zoopla Property Group Ltd exclusively powers the property search facility on a number of the UK's biggest websites including The Times, The Telegraph, Independent, Evening Standard, The Daily Mail, Homes & Property, AOL, MSN, Globrix, Homes24 and many more. Zoopla Property Group Ltd launched in 2008 and has since acquired and integrated a number of brands. Zoopla Property Group Ltd is a privately held company whose shareholders include A&N Media (a division of the Daily Mail and General Trust) as well as the Octopus Investments managed funds, and has a highly-experienced management team, led by Founder & CEO, Alex Chesterman.
Initial investment date: January 2009
Cost: £742,000
Valuation: £4,486,000
Voting rights held by Fund: 1.53%
Equity held by all funds managed by Octopus: 5.15%
Last submitted audited accounts: 31 December 2011
Turnover £13,816,236
Loss before tax: (£890,030)
Net assets: £2,811,549
Calastone Limited
Calastone is the UK's only independent transaction service for the mutual fund industry. It enables buyers and sellers of mutual funds on different platforms to communicate orders electronically, by providing a universal message communication and 'translation' service - the "Calastone Transaction Network" (CTN). This is being welcomed in an industry which has not previously been able to invest in the real-time exchange of information between participants. Orders are commonly communicated by fax or telephone with a high level of manual re-keying and manual error correction. Calastone's 'translation' service means that neither the transmitter nor receiver need to purchase additional technology or change their existing systems.
Initial investment date: October 2008
Cost: £1,135,000
Valuation: £2,269,000
Voting rights held by Fund: 10.81%
Equity held by all funds managed by Octopus: 34.10%
Last submitted accounts: 30 September 2011
Turnover £3,324,658
Loss before tax: (£435,182)
Net assets: £1,051,426
TouchType Limited
TouchType is a leader in the development of artificial intelligence and machine learning technologies, encapsulated in its Fluency prediction engine, a patent pending set of software algorithms. Its first product, SwiftKey(TM), a text prediction technology designed to significantly boost the accuracy, fluency and speed of text entry on mobile and computing devices, resulting in users having to make less than half the number of keystrokes compared to a standard QWERTY keyboard. SwiftKey(TM) has enjoyed tremendous success as both an Android App, with over 10 million downloads to date, and as the installed text prediction technology on a increasing range of smartphones and tablets. It has won several high profile industry awards, including a prestigious Global Mobile Award for the "Most Innovative App" and the Guardian Digital Innovation Award for the "Best Startup Business.
Initial investment date: August 2010
Cost: £385,000
Valuation: £928,000
Voting rights held by Fund: 4.20%
Equity held by all funds managed by Octopus: 20.07%
Last submitted group accounts: 31 December 2011
Turnover £654,623
Loss before tax: (£1,285,798)
Net assets: £1,005,210
e-Therapeutics plc
e-Therapeutics is an AIM-quoted drug discovery and development company. It pioneered and exploits 'network pharmacology' to evaluate swiftly and accurately how medicines interact with cells in the body. This approach optimises the probability of identifying drug candidates with desirable efficacy and minimal side effects. Network pharmacology has many applications, and is particularly suited to addressing complex diseases in which current treatment options are few and ineffective. e-Therapeutics' current drug discovery programmes are focused mainly on areas of high unmet medical need, such as neurodegeneration and oncology. Four drugs resulting from e-Therapeutics' earlier discovery projects are now in clinical development.
Initial investment date: March 2009
Cost: £632,000
Valuation: £826,000 (bid price)
Voting rights held by Fund: 1.73%
Equity held by all funds managed by Octopus: 8.23%
Last submitted audited group accounts: 31 January 2012
Turnover £nil
Loss before tax: (£3,863,000)
Net assets: £14,724,000
Mi-Pay Limited
Mi-Pay was founded in 2004 with its objective to establish itself as a leading processor of payments for the fast-emerging mobile money sector. The service enables customers to 'top-up' their pre-paid mobile phone directly online, or via their mobile phone, rather than using indirect brand channels such as PayPoint or bank ATMs. Benefits of the direct service include cost reductions for mobile network operators and a more personal engagement with customers, removing the anonymity of customer relationships and allowing for substantial improvements in customer retention.
Mi-Pay continues to make progress in a very dynamic and fast moving market, most recently agreeing terms with several tier one European, Middle Eastern and African mobile operators to provide its direct top up service.
Initial investment date: February 2010
Cost: £849,000
Valuation: £749,000
Voting rights held by Fund: 8.49%
Equity held by all funds managed by Octopus: 28.3%
Last submitted group accounts: 31 December 2011
Turnover £2,401,949
Loss before tax: (£2,781,342)
Net assets: £1,069,602
Executive Channel Europe Limited
Executive Channel installs digital display screens in office buildings which it uses to display advertising, up-to-date news and information, via the internet. These screens are usually located in the elevator lobby to engage an exclusive audience with high spending power in an uncluttered environment. Executive Channel is leveraging the industry move in the media market from static billboards, to interactive digital formats.
Initial investment date: September 2010
Cost: £529,000
Valuation: £605,000
Voting rights held by Fund: 6.29%
Equity held by all funds managed by Octopus: 36.12%
Last submitted group accounts: 30 June 2011
Turnover 293,292
Loss before tax: (£900,612)
Net assets: £1,746,998
GetOptics
GetOptics Ltd is an online retailer of contact lenses and related products with sales in seven European countries through GetLenses branded websites. It was formed through the acquisition of Getlenses and Postoptics and is the largest online retailer of contact lenses in the UK with run rate turnover of circa £9.5 million and 25-30% market share of the online market. The company uses its scale to generate cost savings and operating efficiencies, including securing best prices and terms with contact lens manufacturers. It is looking to grow the online market in the UK, building on its market leading position, as well as developing its local language sites in Europe.
Initial investment date: September 2009
Cost: £508,000
Valuation: £580,000
Voting rights held by Fund: 5.75%
Equity held by all funds managed by Octopus: 21.88%
Last submitted group accounts: 31 August 2011
Turnover £6,079,586
Loss before tax: (£780,274)
Net assets: £3,576,696
Semafone
Based in London, Semafone was founded in 2009 by a consortium of call centre professionals, who were instrumental in the development of its fraud prevention software for use in call centres. It aims to secure sensitive data passed over the phone, including bank details, personal identification data and credit/debit card transactions. Without interrupting caller and agent dialogue, customers input their card details via the telephone keypad, eliminating the need to read out the card number and three digit security number to the phone operator therefore removing the risk of operator fraud. Semafone has secured valued customers such as BSkyB, the John Lewis Partnership, Argos, Specsavers and the Manchester Airports Group.
Initial investment date: June 2010
Cost: £496,000
Valuation: £568,000
Voting rights held by Fund: 7.34%
Equity held by all funds managed by Octopus: 46.64%
Last submitted group accounts: 31 December 2011
Turnover £2,025,528
Loss before tax: (£1,114,892)
Net liabilities: (£312,180)
Surrey NanoSystems Limited
Surrey NanoSystems has developed a leading technology portfolio addressing the needs of the global nanoelectronics sector. Its proven technologies deliver precise, ordered nanomaterial structures for advanced manufacturing processes, meeting the scaling challenges of the semiconductor industry.
Surrey NanoSystems works with its partners to deliver practical nano-materials and technologies to the semiconductor, renewable-energy and clean technology industries. This partnering approach facilitates the migration of materials and processes developed on Surrey NanoSystems bespoke research platforms to production-ready tooling.
Initial investment date: July 2009
Cost: £485,000
Valuation: £528,000
Voting rights held by Fund: 4.91%
Equity held by all funds managed by Octopus: 24.55%
Last submitted group accounts: 30 June 2011
Turnover not disclosed
Loss before tax: not disclosed
Net assets: £941,229
Directors' Responsibilities Statement
The Directors are responsible for preparing the Directors' Report, the Remuneration report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the company for that period. In preparing these financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and accounting estimates that are reasonable and prudent;
· state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
In so far as each of the Directors is aware:
· there is no relevant audit information of which the Company's auditor is unaware; and
· the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
To the best of my knowledge:
· the financial statements, prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Standard and applicable laws), give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
· the Investment managers and Directors' reports include fair reviews of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
On behalf of the Board
John Hustler
Chairman
22 January 2013
Income Statement | ||||||
| Year to 31 October 2012 | ||||||
| Revenue | Capital | Total | ||||
| Notes | £'000 | £'000 | £'000 | |||
| Gain on disposal of fixed asset investments | 10 | - | 259 | 259 | ||
| Loss on disposal of current asset investments | - | (15) | (15) | |||
| Fixed asset investment holding gains | 10 | - | 7,120 | 7,120 | ||
| Current asset investment holding gains | - | 78 | 78 | |||
| Other income | 2 | 66 | - | 66 | ||
| Investment management fees | 3 | (74) | (223) | (297) | ||
| Performance fee incentive | 19 | - | (1,222) | (1,222) | ||
| Other expenses | 4 | (252) | - | (252) | ||
| Return on ordinary activities before tax | (260) | 5,997 | 5,737 | |||
| Taxation on return on ordinary activities | 6 | - | - | - | ||
| Return on ordinary activities after tax | (260) | 5,997 | 5,737 | |||
| Earnings per share - basic and diluted | 8 | (1.5)p | 35.3p | 33.8p | ||
- The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
- All revenue and capital items in the above statement derive from continuing operations.
- The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.
The Company has no recognised gains or losses other than the results for the period as set out above.
The accompanying notes form an integral part of the financial statements.
Income Statement | ||||||
| Year to 31 October 2011 | ||||||
| Revenue | Capital | Total | ||||
| Notes | £'000 | £'000 | £'000 | |||
| Realised gain on disposal of current asset investments | - | 156 | 156 | |||
| Fixed asset investment holding losses | - | (98) | (98) | |||
| Current asset investment holding gains | - | 89 | 89 | |||
| Other income | 2 | 65 | - | 65 | ||
| Investment management fees | 3 | (78) | (233) | (311) | ||
| Other expenses | 4 | (228) | - | (228) | ||
| Return on ordinary activities before tax | (241) | (86) | (327) | |||
| Taxation on return on ordinary activities | 6 | - | - | - | ||
| Return on ordinary activities after tax | (241) | (86) | (327) | |||
| Earnings per share - basic and diluted | 8 | (1.5)p | (0.5)p | (2.0)p | ||
- The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
- All revenue and capital items in the above statement derive from continuing operations.
- The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.
The Company had no recognised gains or losses other than the results for the period as set out above.
The accompanying notes form an integral part of the financial statements.
Reconciliation of Movements in Shareholders' Funds | ||
| Year ended 31 October 2012 | Year ended 31 October 2011 | |
| £'000 | £'000 | |
| Shareholders' funds at start of year | 14,833 | 15,518 |
| Return on ordinary activities after tax | 5,737 | (327) |
| Issue of equity (net of expenses) | 1,323 | (115) |
| Purchase of own shares | (107) | - |
| Dividends paid | (425) | (243) |
| Shareholders' funds at end of year | 21,361 | 14,833 |
The accompanying notes form an integral part of the financial statements.
Balance Sheet | |||||
| As at 31 October 2012 | As at 31 October 2011 | ||||
| Notes | £'000 | £'000 | £'000 | £'000 | |
| Fixed asset investments* | 10 | 19,176 | 12,803 | ||
| Current assets: | |||||
| Debtors | 11 | 1,562 | 16 | ||
| Money market funds and other deposits* | 12 | 1,712 | 1,976 | ||
| Cash at bank | 176 | 91 | |||
| 3,450 | 2,083 | ||||
| Creditors: amounts falling due within one year | 13 | (1,265) | |||
| Net current assets | 2,185 | 2,030 | |||
| Net assets | 21,361 | 14,833 | |||
| Called up equity share capital | 14 | 1,751 | 1,622 | ||
| Share premium | 15 | 1,754 | 574 | ||
| Special distributable reserve | 15 | 12,150 | 12,682 | ||
| Capital redemption reserve | 15 | 27 | 13 | ||
| Capital reserve - losses on disposals | 15 | (1,998) | (210) | ||
| - holding gains | 15 | 8,186 | 401 | ||
| Revenue reserve | 15 | (509) | (249) | ||
| Total equity shareholders' funds | 21,361 | 14,833 | |||
| Net asset value per share | 9 | 121.9p | 91.5p | ||
*Held at fair value through profit or loss
The statements were approved by the Directors and authorised for issue on 22 January 2013 and are signed on their behalf by:
John Hustler
Chairman
Company No: 6397765
The accompanying notes form an integral part of the financial statements.
Cash Flow Statement | |||
| Year to 31 October 2012 | Year to 31 October 2011 | ||
| Notes | £'000 | £'000 | |
| Net cash (outflow)/inflow from operating activities | (638) | 98 | |
| Financial investment: | |||
| Purchase of fixed asset investments | 10 | (1,061) | (2,818) |
| Sale of fixed asset investments | 10 | 666 | 382 |
| Management of liquid resources: | |||
| Purchase of current asset investments | (1,754) | (2,192) | |
| Sale of current asset investments | 2,081 | 4,918 | |
| Taxation | - | - | |
| Dividends paid | 7 | (425) | (243) |
| Financing: | |||
| Issue of shares | 1,323 | - | |
| Purchase of own shares | 14 | (107) | (115) |
| Increase in cash resources at bank | 85 | 30 | |
The accompanying notes form an integral part of the financial statements.
| Reconciliation of Return before Taxation to Cash Flow from Operating Activities | |||
| Year to 31 October 2012 | Year to 31 October 2011 | ||
| £'000 | £'000 | ||
| Return on ordinary activities before tax | 5,737 | (327) | |
| (Gain)/loss on disposal of fixed asset investments | (259) | - | |
| (Gain)/loss on disposal of current asset investments | 15 | (156) | |
| Loss/(gain) on valuation of fixed asset investments | (7,120) | 98 | |
| (Gain)/loss on valuation of current asset investments | (78) | (89) | |
| (Increase)/decrease in debtors | (145) | 572 | |
| Increase in creditors | 1,212 | - | |
| (Outflow)/inflow from operating activities | (638) | 98 | |
| Reconciliation of Net Cash Flow to Movement in Net Funds | |||
| Year to 31 October 2012 | Year to 31 October 2011 | ||
| £'000 | £'000 | ||
| Increase in cash at bank | 85 | 30 | |
| Movement in cash equivalents | (264) | (2,481) | |
| Opening net cash resources | 2,067 | 4,518 | |
| Net funds at 31 October | 1,888 | 2,067 | |
Net funds at 31 October comprised:
| Year to 31 October 2012 | Year to 31 October 2011 | |
| £'000 | £'000 | |
| Cash at bank | 176 | 91 |
| Money market funds | 743 | 370 |
| OEICs | 969 | 1,606 |
| Net funds at 31 October | 1,888 | 2,067 |
The accompanying notes form an integral part of the financial statements.
Notes to the Financial Statements
1. Principal Accounting Policies
Basis of accounting
The financial statements have been prepared under the historical cost convention, except for the measurement at fair value of certain financial instruments, and in accordance with UK Generally Accepted Accounting Practice (UK GAAP), and the Statement of Recommended Practice (SORP) 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (revised 2009).
The Company's business activities and the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and Investment Manager's Review on pages X to X. Further details on the management of financial risk may be found in note 16 to the Financial Statements.
The Board receives regular reports from the Investment Manager and the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The assets of the company consist of cash, Money Market Funds and OEIC Investments, which are readily realisable (8.8% of net assets) and accordingly, the company has adequate financial resources to continue in operational existence for the foreseeable future. Thus, as no material uncertainties leading to significant doubt about going concern have been identified, it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
The principal accounting policies have remained unchanged from those set out in the Company's 2011 Annual Report and financial statements. A summary of the principal accounting policies is set out below.
The Company presents its income statement in a three column format to give shareholders additional detail of the performance of the Company, split between items of a revenue or capital nature.
The preparation of the financial statements requires Management to make judgements and estimates that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Estimates and assumptions mainly relate to the fair valuation of the fixed asset investments, particularly those that are unquoted investments. Estimates are based on historical experience and other assumptions that are considered reasonable under the circumstances. The estimates and the assumptions are under continuous review with particular attention paid to the carrying value of the investments.
Capital valuation policies are those that are most important to the depiction of the Company's financial position and that require the application of subjective and complex judgements, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. The critical accounting policies that are declared will not necessarily result in material changes to the financial statements in any given period but rather contain a potential for material change. The main accounting and valuation policies used by the Company are disclosed below. Whilst not all of the significant accounting policies require subjective or complex judgements, the Company considers that the following accounting policies should be considered critical.
The Company has designated all fixed asset investments as being held at fair value through profit or loss; therefore all gains and losses arising from investments held are attributable to financial assets held at fair value through profit or loss. Accordingly, all interest income, fee income, expenses and investment gains and losses are attributable to assets designated as being at fair value through profit or loss.
Current asset investments comprising money market funds are held at fair value through the profit or loss. Cash and short term deposits are held at amortised cost.
Investments are regularly reviewed to ensure that the fair values are appropriately stated. Quoted investments are valued in accordance with the bid-price on the relevant date, unquoted investments are valued in accordance with current IPEVC valuation guidelines, although this does rely on subjective estimates such as appropriate sector earnings multiples, forecast results of investee companies, asset values of subsidiary companies and liquidity or marketability of the investments held.
Although the Company believes that the assumptions concerning the business environment and estimates of future cash flows are appropriate, changes in estimates and assumptions could require changes in the stated values. This could lead to additional changes in fair value in the future.
Fixed Asset Investments
Purchases and sales of investments are recognised in the financial statements at the date of the transaction (trade date) at cost.
These investments will be managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy and information about them is provided internally on that basis to the Board. Accordingly, as permitted by FRS 26, the investments are designated as fair value through profit or loss (FVTPL) on the basis that they qualify as a group of assets managed, and whose performance is evaluated, on a fair value basis in accordance with a documented investment strategy. The Company's investments are measured at subsequent reporting dates at fair value with the holding gains and losses recorded in the income statement each year. In accordance with the investment strategy, the investments are held with a view to long-term capital growth and it is therefore possible that individual holdings may increase in value to a point where they represent a significantly higher proportion of total assets than the original cost.
In the case of investments quoted on a recognised stock exchange, fair value is established by reference to the closing bid price on the relevant date or the last traded price, depending upon the convention of the exchange on which the investment is quoted. This is consistent with the IPEVC valuation guidelines.
In the case of unquoted investments, fair value is established by using measures of value such as the price of recent transactions, earnings multiple and net assets. This is consistent with IPEVC valuation guidelines.
Gains or losses arising from the revaluation of investments at the year end are recognised as part of the capital return within the income statement and allocated to the capital reserve - investment holding gains/(losses).
In the preparation of the valuations of assets the Directors are required to make judgements and estimates that are reasonable and incorporate their knowledge of the performance of the investee companies.
Current asset investments
Current asset investments comprise money market funds and OEICs and are designated as classified as held for trading carried at FVTPL. Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - investment gains/(losses) on disposal.
The current asset investments are all invested with the Company's cash manager and are readily convertible into cash at the option of the Company. The current asset investments, are actively managed and the performance is evaluated in accordance with a documented investment strategy. Information about them has to be provided internally on that basis to the Board.
Other income
Investment income includes interest earned on bank balances and money market funds and includes income tax withheld at source. Dividend income is shown net of any related tax credit.
Dividends receivable are brought into account when the Company's right to receive payment is established and there is no reasonable doubt that payment will be received. Fixed returns on debt and money market funds are recognised 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 are accounted for on an accruals basis. Expenses are charged wholly to revenue with the exception of the investment management fee, which is charged 25% to the revenue account and 75% to the capital reserve to reflect, in the Directors' opinion, the expected long-term split of returns in the form of income and capital gains respectively from the investment portfolio, and the performance fee which has been charged 100% to capital, as the fees relate to the gains made on fixed asset investments.
The transaction costs incurred when purchasing or selling assets are written off to the Income Statement in the year that they occur. The performance, however, has been attributed fully to capital since it has arisen through capital growth of companies.
Revenue and capital
The revenue column of the income statement includes all income and revenue expenses of the Company. The capital column includes gains and losses on disposal and gains and losses arising from the revaluation of investments at the period end. Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the income statement.
Taxation
Corporation tax payable is applied to profits chargeable to corporation tax, if any, at the current rate. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue return on the 'marginal' basis as recommended in the SORP.
Deferred tax is recognised on an undiscounted basis in respect of all timing differences that have originated but not reversed at the balance sheet date or where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less tax. This is with the exception that deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing can be deducted.
Cash and liquid resources
Cash, for the purposes of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand. Liquid resources are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market. Liquid resources comprise term deposits of less than one year (other than cash), government securities, investment grade bonds and investments in money market funds, as well as OEICs.
Loans and receivables
The Company's loans and receivables are initially recognised at fair value which is normally transaction cost and subsequently measured at amortised cost using the effective interest method.
Financing strategy and capital structure
FRS 29 'Financial Instruments: Disclosures' comprises disclosures relating to financial instruments.
We define capital as shareholders' funds and our financial strategy in the medium term is to manage a level of cash that balances the risks of the business with optimising the return on equity. The Company currently has no borrowings nor does it anticipate that it will drawdown any borrowing facilities in the future to fund the acquisition of investments.
The Company does not have any externally imposed capital requirements.
The value of the managed capital is indicated in note 14. The Board considers the distributable reserves and the total return for the year when recommending a dividend. In addition, the Board is authorised to make market purchases up to a maximum of 5% of the issued Ordinary share capital of the Company in accordance with Special Resolution 8 in order to maintain sufficient liquidity in the Company.
Capital management is monitored and controlled using the internal control procedures set out on page X of this report. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.
Financial instruments
The Company's principal financial assets are its investments and the policies in relation to those assets are set out above. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited direct to equity.
Dividends
Dividends payable are recognised as distributions in the financial statements when the Company's liability to make payment has been established. This liability is established for interim dividends when they are declared by the Board, and for final dividends when they are approved by the shareholders.
2. Other income
| Year to 31 October 2012 | Year to 31 October 2011 | |
| £'000 | £'000 | |
| Money market funds & OEICs | 6 | 9 |
| Loan note interest receivable | 60 | 56 |
| 66 | 65 |
3. Investment Management Fees
| Year to 31 October 2012 | Year to 31 October 2011 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Investment management fee | 74 | 223 | 297 | 78 | 233 | 311 |
For the purposes of the revenue and capital columns in the income statement, the management fee has been allocated 25% to revenue and 75% to capital, in line with the Board's expected long-term return in the form of income and capital gains respectively from the Company's investment portfolio.
Octopus provides investment management and accounting and administration services to the Company under a management agreement. This agreement runs for a period of five years with effect from 2 November 2007 and may be terminated at any time thereafter by not less than 12 months' notice given by either party. No compensation is payable in the event of terminating the agreement by either party, if the required notice period is given. The fee payable, should insufficient notice be given, will be equal to the fee that would have been paid should continuous service be provided, or the required notice period was given. The basis upon which the management fee is calculated is disclosed within note 19 to the financial statements.
4. Other Expenses
| Year to 31 October 2012 | Year to 31 October 2011 | |
| £'000 | £'000 | |
| Directors' remuneration | 43 | 38 |
| Fees payable to the Company's auditor for the audit of the financial statements | 12 | 9 |
| Fees payable to the Company's auditor for other services - tax compliance | 2 | 2 |
| Legal and professional expenses | 1 | 3 |
| Accounting and administration services | 44 | 47 |
| Trail commission | 62 | 53 |
| Printing fees | 13 | 24 |
| Other expenses | 75 | 52 |
| 252 | 228 |
Total annual running costs are capped at 3.2% of net assets (excluding irrecoverable VAT). For the year to 31 October 2012 the running costs, as defined in the prospectus, were 2.9% of net assets (2011: 3.2%). This is calculated excluding VAT, trail commission and non-recurring expenses.
5. Directors' Remuneration
| Year to 31 October 2012 | Year to 31 October 2011 | |
| £'000 | £'000 | |
| Directors' emoluments | ||
| John Hustler (Chairman) | 20 | 18 |
| Mark Faulker | 15 | 12 |
| Matt Cooper | 8 | 8 |
| 43 | 38 |
None of the Directors received any other remuneration from the Company during the year. The Company has no employees other than non-executive Directors. The average number of non-executive Directors in the year was three (2011: three).
6. Tax on Ordinary Activities
The corporation tax charge for the period was £nil (2011: £nil)
Factors affecting the tax charge for the current year:
The current tax charge for the period differs from the standard rate of corporation tax in the UK of 24.83% (2011: 26.83%).
The differences are explained below.
| Current tax reconciliation: | Year to 31 October 2012 | Year to 31 October 2011 |
| £'000 | £'000 | |
| Return on ordinary activities before tax | 5,737 | (327) |
| Capital gains not taxable | (7,442) | (147) |
| (1,705) | (474) | |
| Current tax at 24.83% (2011: 26.83%) | (423) | (127) |
| Income not taxable for tax purposes | - | (2) |
| Unrelieved tax losses | 423 | 129 |
| Total current tax charge | - | - |
Excess management charges of £1,536,000 (2011: £1,045,000) have been carried forward at 31 October 2012 and are available for offset against future taxable income subject to agreement with HMRC. The Company has not recognised the deferred tax asset of £359,000 (2011: £292,000) in respect of these excess management charges.
Approved VCTs are exempt from tax on capital gains within the Company. Since the Directors intend that the Company will continue to conduct its affairs so as to maintain its approval as a VCT, no current deferred tax has been provided in respect of any capital gains or losses arising on the revaluation or disposal of investments.
7. Dividends
| Year to 31 October 2012 | Year to 31 October 2011 | |
| £'000 | £'000 | |
| Recognised as distributions in the financial statements for the period | ||
| Previous year's final dividend | 162 | 122 |
| Current period's interim dividend | 263 | 121 |
| 425 | 243 | |
| Paid and proposed in respect of the period | ||
| Interim dividend paid - 1.5p per share (2011: 0.75p per share) | 263 | 122 |
| Proposed Special dividend - 34.0p per share (2011: nil) | 5,956 | - |
| Proposed final dividend - nil (2011: 1.0p per share) | - | 162 |
| 6,219 | 284 |
The special dividend of 34.0p will be paid on 28 March 2013 to shareholders on the register on 11 January 2013.
8. Earnings per Share
The total earnings per share is based on the total gain of £5,737,000 (2011: loss of 327,000) and 16,972,597 (2011: 16,267,138) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year.
The revenue earnings per share is based on revenue loss of £260,000 (2011: 241,000) and 16,972,597 (2011: 16,267,138) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year.
The capital earnings per share is based on a capital gain of £5,997,000 (2011: loss of 86,000) and 16,972,597 (2011: 16,267,138) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year.
There are no potentially dilutive capital instruments in issue and, therefore no diluted return per share figures are relevant. The basic and diluted earnings per share are therefore identical.
9. Net Asset Value per Share
The calculation of NAV per share as at 31 October 2012 is based on is based on net assets of £21,361,000 (2011: 14,833,000) and 17,518,045 (2011: 16,220,459) Ordinary shares in issue at that date.
10. Fixed Asset Investments
Where financial instruments are measured in the balance sheet at fair value; FRS 29 requires disclosure of the fair value measurements by level based on the following fair vale investment hierarchy:
Level 1: quoted prices in active markets for identical assets and liabilities. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held is the current bid price. These instruments are included in level 1 and comprise AIM-quoted investments classified as held at fair value through profit or loss.
Level 2: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable data where it is available and
rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument
are observable, the instrument is included in level 2. The Company held no such investments in the current or
prior year.
Level 3: the fair value of financial instruments that are not traded in an active market (for example investments in
unquoted companies) is determined by using valuation techniques such as earnings multiples. If one or more of
the significant inputs is not based on observable market data, the instrument is included in level 3.
There have been no transfers between these classifications in the year (2011: nil). The change in fair value
for the current and previous year is recognised through the income statement.
All items held at fair value through profit or loss were designated as such upon initial recognition. Movements in
investments at fair value through profit or loss during the year to 31 October 2012 are summarised below.
| Level 1: | Level 3: | Total | |
| AIM-quoted | Unquoted investments | investments | |
| £'000 | £'000 | £'000 | |
| Valuation and net book amount: | |||
| As at 1 November 2011 | 632 | 11,859 | 12,491 |
| Cumulative revaluation as at 1 November 2011 | 15 | 297 | 312 |
| Valuation at 1 November 2011 | 647 | 12,156 | 12,803 |
| Movement in the year: | |||
| Purchases at cost | - | 1,061 | 1,061 |
| Disposal proceeds | - | (2,067) | (2,067) |
| Profit/(loss) on realisation of investments - current year | - | 259 | 259 |
| Revaluation in year | 179 | 6,941 | 7,120 |
| Valuation at 31 October 2012 | 826 | 18,350 | 19,176 |
| Book cost at 31 October 2012 | 632 | 10,520 | 11,152 |
| Revaluation to 31 October 2012 | 194 | 7,830 | 8,024 |
| Valuation at 31 October 2012 | 826 | 18,350 | 19,176 |
The investment portfolio is managed with capital growth as the primary focus. The loan and equity investments are considered to be one instrument for valuation purposes due to the legal binding within the investment agreement and therefore they are combined in the table shown above. The costs incurred in the disposals amount to £18,000.
Level 3 valuations include assumptions based on non-observable market data, such as discounts applied either to reflect fair value of financial assets held at the price of recent investment, or, in the case of unquoted investments, to adjust earnings multiples. Further details in respect of the methods and assumptions applied in determining the fair value of the investments are disclosed in the Investment Manager's Review and within the principal accounting policies in note 1.
At 31 October 2012 and 31 October 2011, there were no commitments in respect of investments not yet completed.
11. Debtors
| 31 October 2012 | 31 October 2011 | |
| £'000 | £'000 | |
| Prepayments | 102 | 12 |
| Disposal proceeds | 1,460 | - |
| Other debtors | - | 4 |
| 1,562 | 16 |
Disposal proceeds of £221,000 are due in more than one year.
12. Current Asset Investments
Current asset investments at 31 October 2012 comprised money market funds and OEIC's.
| 31 October 2012 | 31 October 2011 | |
| £'000 | £'000 | |
| Money Market funds | 743 | 370 |
| OEIC's | 969 | 1,606 |
| 1,712 | 1,976 |
All current asset investments held at the year end sit within level 1 hierarchy for the purposes of FRS 29.
Level 1 money market funds and OEICs: Level 1 valuations are based on quoted prices (unadjusted) in active markets for identical assets or liabilities. The valuation of money market funds and OEIC's at 31 October 2012 was £1,712,000 (2011: £1,976,000).
13. Creditors: Amounts Falling Due Within One Year
| 31 October 2012 | 31 October 2011 | |||
| £'000 | £'000 | |||
| Accruals | 1,265 | 53 |
Included within accruals is an amount of £1,222,000 relating to a performance fee payable to the investment manager on achieving a NAV of 130p and declaring dividends of 40p per share. For more details please refer to Note 19.
14. Share Capital
| 31 October 2012 | 31 October 2011 | ||
| £'000 | £'000 | ||
| Authorised: | |||
| 50,000,000 Ordinary shares of 10p | 5,000 | 5,000 | |
| Allotted and fully paid up: | |||
| 17,518,045 (2011: 16,220,459) Ordinary shares of 10p | 1,751 | 1,622 |
The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective as set on page X. The Company is not subject to any externally imposed capital requirements.
We define capital as shareholders' funds and our financial strategy in the medium term is to manage a level of cash that balances the risks of the business with optimising the return on equity. The Company currently has no borrowings nor does it anticipate that it will drawdown any borrowing facilities in the future to fund the acquisition of investments.
The Board considers the distributable reserves and the total return for the year when recommending a dividend. In addition, the Board is authorised to make market purchases up to a maximum of 5% of the issued Ordinary share capital of the Company in accordance with Special Resolution 8 in order to maintain sufficient liquidity in the Company.
Capital management is monitored and controlled using the internal control procedures set out on page X of this report. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.
During the year 1,428,595 shares were issued at a price of 97.8p (2011: No shares were issued during the year).
The Company repurchased the following Ordinary shares for cancellation (2011: 134,043 shares):
| · 2 March 2012: | 49,908 at a price of 82.2p per share |
| · 30 March 2012: | 13,000 at a price of 82.2p per share |
| · 30 April 2012 | 25,175 at a price of 83.2p per share |
| · 6 July 2012 | 42,926 at a price of 82.2p per share |
15. Reserves
| Share Premium | Special distributable reserve | Capital reserve gains/(losses) on disposal | Capital reserve holding gains/(losses) | Capital redemption reserve | Revenue reserve | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| As at 1 November 2011 | 574 | 12,682* | (210)* | 401 | 13 | (249)* |
| Return on ordinary activities after tax | - | - | - | - | - | (260) |
| Management fees allocated as capital expenditure | - | - | (1,445) | - | - | - |
| Issue of shares | 1,180 | - | - | - | - | - |
| Purchase of own shares | - | (107) | - | - | 14 | - |
| Current year gain on disposal - Fixed asset investment | - | - | 259 | - | - | - |
| Current year loss on disposal - current asset investment | - | - | (15) | - | - | - |
| Prior period holding gain on disposal | - | - | 3 | (3) | - | - |
| Prior period holding loss on disposal | - | - | (590) | 590 | - | - |
| Current period gains/losses on revaluation | - | - | - | 7,198 | - | - |
| Dividends paid | - | (425) | - | - | - | - |
| Balance as at 31 October 2012 | 1,754 | 12,150* | (1,998)* | 8,186 | 27 | (509)* |
* Reserve considered when calculating potential distribution by way of a dividend.
When the Company revalues its investments during the year, any gains or losses arising are credited/charged to the income statement. Holding gains/losses are then transferred to the 'capital reserve - holding gains/(losses)'. When an investment is sold, any balance held on the 'capital reserve - holding gains/(losses)' is transferred to the 'capital reserve - gains/(losses) on disposal' as a movement in reserves.
Reserves available for potential distribution by way of a dividend are:
| £'000 | |
| As at 1 November 2011 | 12,223 |
| Movement in year | (2,580) |
| As at 31 October 2012 | 9,643 |
This is the minimum value of reserves available for potential distribution, which will be impacted by the future realisibility, into cash, of gains and losses included in the Capital Holding reserve.
The purpose of the special distributable reserve was to create a reserve which will be capable of being used by the Company to pay dividends and for the purpose of making repurchases of its own shares in the market with a view to narrowing the discount to net asset value at which the Company's Ordinary shares trade. In the event that the revenue reserve and capital reserve gains/(losses) on disposals do not have sufficient funds to pay dividends, these will be paid from the special distributable reserve.
16. Financial Instruments and Risk Management
The Company's financial instruments comprise equity and fixed interest investments, cash balances and liquid resources including debtors and creditors. The Company holds financial assets in accordance with its investment policy of investing mainly in a portfolio of VCT qualifying unquoted securities whilst holding a proportion of its assets in cash or near-cash investments in order to provide a reserve of liquidity.
Classification of financial instruments
The Company held the following categories of financial instruments, all of which are included in the balance sheet at fair value, at 31 October 2012.
| 31 October 2012 | 31 October 2011 | |
| £'000 | £'000 | |
| Assets at fair value through profit or loss | ||
| Fixed Asset Investments | 19,176 | 12,803 |
| Current asset investments | 1,712 | 1,976 |
| Total | 20,888 | 14,779 |
| Loans and receivables | ||
| Cash at bank | 176 | 91 |
| Disposal proceeds | 1,460 | - |
| Total | 1,636 | 91 |
| Liabilities at amortised cost | ||
| Accruals | 1,265 | 49 |
| Total | 1,265 | 49 |
Fixed asset investments (see note 10) are carried at fair value. Unquoted investments are carried at fair value as determined by the Directors in accordance with current venture capital industry guidelines. The fair value of all other financial assets and liabilities is represented by their carrying value in the balance sheet. The Directors believe that the fair value of the assets held at the period-end is equal to their book value.
In carrying on its investment activities, the Company is exposed to various types of risk associated with the financial instruments and markets in which it invests. The most significant types of financial risk facing the Company are price risk, interest rate risk, credit risk and liquidity risk. The Company's approach to managing these risks is set out below together with a description of the nature and amount of the financial instruments held at the balance sheet date.
Market risk
The Company's strategy for managing investment risk is determined with regard to the Company's investment objective, as outlined on page X. The management of market risk is part of the investment management process and is a central feature of venture capital investment. The Company's portfolio is managed in accordance with the policies and procedures described in the Corporate Governance statement on pages X to X, having regard to the possible effects of adverse price movements, with the objective of maximising overall returns to shareholders. Investments in unquoted companies, by their nature, usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by diversifying the portfolio across business sectors and asset classes. The overall disposition of the Company's assets is regularly monitored by the Board.
Details of the Company's investment portfolio at the balance sheet date are set out on page X to X.
85.9% (2011: 82.2%) by value of the Company's net assets comprises investments in unquoted companies held at fair value. The valuation methods used by the Company include the application of a price/earnings ratio derived from listed companies with similar characteristics, and consequently the value of the unquoted element of the portfolio can be indirectly affected by price movements on the London Stock Exchange. A 5% overall increase in the valuation of the unquoted investments at 31 October 2012 would have increased net assets and the total return for the year by £918,000 (2011: £610,000) an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount.
8% (2011: 13.3%) by value of the Company's net assets comprises of OEICs and Money Market Funds held at fair value. A 5% overall increase in the valuation of the OEICs and Money Market Funds at 31 October 2012 would have increased net assets and the total return for the year by £86,000 (2011: £99,000) an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount.
The Investment Manager considers that the majority of the investment valuations are based on earnings multiples which are ascertained with reference to the individual sector multiple or similarly listed entities. It is considered that due to the diversity of the sectors, the 5% sensitivity discussed above provides the most meaningful potential impact of average multiple changes across the portfolio.
Interest rate risk
Some of the Company's financial assets are interest-bearing, of which some are at fixed rates and some variable. As a result, the Company is exposed to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates.
Fixed rate
The table below summarises weighted average effective interest rates for the fixed interest-bearing financial instruments:
| As at 31 October 2012 | As at 31 October 2011 | |||||
| Total fixed rate portfolio by value £'000 | Weighted average interest rate % | Weighted average time for which rate is fixed in years | Total fixed rate portfolio by value £'000 | Weighted average interest rate % | Weighted average time for which rate is fixed in years | |
| Fixed-rate investments in unquoted companies | 560 | 10% | 1.8 | 953 | 12% | 2.5 |
Due to the relatively short period to maturity of the fixed rate investments held within the portfolio, it is considered that an increase or decrease of 1% in the base rate as at the reporting date would not have had a significant effect on the Company's net assets or total return for the year.
Floating rate
The Company's floating rate investments comprise cash held on interest-bearing deposit accounts, libor rate on one loan note and, where appropriate, within interest bearing money market funds. The benchmark rate which determines the rate of interest receivable on such investments is the bank base rate, which was 0.5% at 31 October 2012. The amounts held in floating rate investments at the balance sheet date were as follows:
| 31 October 2012 £'000 | 31 October 2011 £'000 | ||
| Floating-rate investments in unquoted companies | - | - | |
| Cash on deposit & money market funds | 919 | 461 | |
| 919 | 461 |
A 1% increase in the base rate would increase income receivable from these investments and the total return for the year by £9,000 (2011: £5,000).
Credit risk
There were no significant concentrations of credit risk to counterparties at 31 October 2012. By cost, no individual investment exceeded 6.0% (2011: 9.6%) of the Company's net assets at 31 October 2012.
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Investment Manager and the Board carry out a regular review of counterparty risk. The carrying values of financial assets represent the maximum credit risk exposure at the balance sheet date.
At 31 October 2012 the Company's financial assets exposed to credit risk comprised the following:
| 31 October 2012 £'000 | 31 October 2011 £'000 | ||
| Cash on deposit & money market funds | 919 | 461 | |
| Fixed rate investments in unquoted companies | 560 | 953 | |
| 1,479 | 1,414 |
Credit risk relating to listed money market funds is mitigated by investing in a portfolio of investment instruments of high credit quality, comprising securities issued by the UK Government and major UK companies and institutions. Credit risk relating to loans to and preference shares in unquoted companies is considered to be part of market risk.
The investments in money market funds and OEICS are uncertified.
Credit risk arising on the sale of investments is considered to be small due to the short settlement and the contracted agreements in place with the settlement lawyers.
The Company's interest-bearing deposit and current accounts are maintained with HSBC Bank plc. The Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. Should the credit quality or the financial position of HSBC deteriorate significantly, the Investment Manager will move the cash holdings to another bank.
Liquidity risk
The Company's financial assets include investments in unquoted equity securities which are not traded on a recognised stock exchange and which generally may be illiquid. They also include investments in AIM-quoted companies, which, by their nature, involve a higher degree of risk than investments on the main market. As a result, the Company may not be able to realise some of its investments in these instruments quickly at an amount close to their fair value in order to meet its liquidity requirements, or to respond to specific events such as deterioration in the creditworthiness of any particular issuer.
The Company's listed money market funds are considered to be readily realisable as they are of high credit quality as outlined above.
The Company's liquidity risk is managed on a continuing basis by the Investment Manager in accordance with policies and procedures laid down by the Board. The Company's overall liquidity risks are monitored on a quarterly basis by the Board.
The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and accrued expenses. At 31 October 2012 these investments were valued at £1,888,000 (2011: £4,500,000).
17. Post Balance Sheet Events
The following events occurred between the balance sheet date and the signing of these financial statements:
- On 12 November 2012 a further £244,000 was invested into Calastone Limited
- On 15 November 2012 a further £109,000 was invested into Bowman Power Limited
- On 30 November 2012 Titan disposed of its holding in Nature Delivered Limited for £5,884,000 of which £3,764,000 was paid in cash and £2,120,000 was reinvested
18. Contingencies, Guarantees and Financial Commitments
Provided that an intermediary continues to act for a shareholder and the shareholder continues to be the beneficial owner of the shares, intermediaries will be paid an annual trail commission of 0.5% of the initial net asset value. Trail commission of £62,000 was paid in cash during the year (2011: £53,000) and there was £15,000 (2011: £14,000) outstanding at the year end.
There were no other contingencies, guarantees or financial commitments as at 31 October 2012.
19. Transactions with manager
Octopus Titan VCT 2 plc has employed Octopus Investments Limited throughout the year as the Investment Manager.
Octopus Titan VCT 2 plc has paid Octopus £376,000 (2011: £311,000) in the year as a management fee and there is £79,000 (2011: £nil) is shown as a prepayment at the balance sheet date. The management fee is payable quarterly in advance and is based on 2.0% of the net asset value calculated at annual intervals as at 31 October.
Octopus Investments Limited also provides accounting, administrative and company secretarial services to the Company, payable quarterly in advance for a fee of 0.3% of the net asset value calculated at annual intervals as at 31 October. During the year £56,000 (2011: £47,000) was paid to Octopus Investments Limited and there is £12,000 (2011: £nil) shown as a prepayment at the balance sheet date, for the accounting and administrative services. In addition, Octopus also provides secretarial services for a fee of £7,500 per annum. During the year there was £2,000 (2011: £nil) in prepayments at the balance sheet date.
In addition, Octopus is entitled to performance related incentive fees. The incentive fees are designed to ensure that there are significant tax-free dividend payments made to Shareholders as well as strong performance in terms of capital and income growth, before any performance related incentive fee payment is made. Included within accrued expenses is an amount of £1,222,000 relating to a performance fee payable to the investment manager on achieving a NAV of 130p and declaring dividends of 40p per share. At the period end dividends declared amounted to 6p per share with the remaining 34p being declared as an interim dividend by the Board on 10 December 2012. The Board has decided to recognise the accrual for the performance fee to reflect the cost of the fee in the period in which the fees were earned. The Board considers that whilst part of the dividend was declared after the period end that the fund was committed to paying the fee due to its results for the period, and accruing the fee provides the most accurate reflection of the assets and liabilities of the fund at the period end.
If, on a subsequent financial year end, the Performance Value of Octopus Titan VCT 2 plc falls short of the Performance Value on the previous financial year end, no incentive fee will arise. If, on a subsequent financial year end, the performance exceeds the previous best Performance Value of Octopus Titan VCT 2 plc, the Investment Manager will be entitled to 20% of such excess in aggregate.
20. Related Party Transactions
Matt Cooper, a non-executive Director of Octopus Titan VCT 2 plc, is also Chairman of Octopus Investments. The Directors received the following dividends from the Company:
| 31 October 2012 | 31 October 2011 | |
| John Hustler (Chairman) | £252 | £112 |
| Mark Faulkner | £375 | £225 |
| Matt Cooper | £874 | £505 |
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: Octopus Titan VCT 2 PLC via Thomson Reuters ONE
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