Hygea VCT plc : Annual Financial Report
7.00am 22 March 2013
Hygea VCT plc
("Hygea" or the "Company")
Annual Report and Accounts and
Notice of Annual General Meeting
The directors are pleased to announce the audited results of the Company for the year ended 31 December 2012 and a copy of the Annual Report and Accounts is expected to be sent to Shareholders shortly. Set out below are extracts of the audited Report and Accounts.
In addition the Notice of Annual General Meeting is attached at the end of the Report and Accounts and is set out below. The AGM will be held at the offices of Panmure Gordon (UK) Limited, One New Change, London, EC4M 9AF on Wednesday 8 May 2013 at 11.30am. This will be sent out with the Report and Accounts.
A copy of both documents is available from the registered office of the Company at 39 Alma Road, St Albans AL1 3AT.
Financial Summary
| Year to 31 December 2012 | Year to 31 December 2011 | |
| Net assets (£'000s) | 9,594 | 5,733 |
| Return on ordinary activities after tax (£'000s) | 3,861 | (143) |
| Earnings per share | 47.6p | (1.8p) |
| Net asset value per share | 118.2p | 70.6p |
| Dividends paid since inception | 21.25p | 21.25p |
| Total return (NAV plus dividends paid) | 139.45p | 91.85p |
Chairman's Statement
I am pleased to present the 2012 annual report to shareholders in Hygea vct plc.
In last year's statement I set out in detail the overall background as to why your board is optimistic about the prospects for MedTech companies conforming to Hygea's investment template - the key themes were as follows:
a) Healthcare costs/emerging technologies - the NHS is going to have to achieve more with less resource. This plays to a key requirement of Hygea's investment template, which calls for investee companies to determine how their technology and chosen business model are going to result in better patient outcomes at lower total cost - such companies are well positioned to deliver attractive returns and, incidentally, a positive social impact.
b) Pensions - I expressed the view that many people will find that their pension expectations will not be met in full and that they will need to continue to work until they are older in order to maintain their standard of living. This will lead to increasing demand for healthcare solutions enabling people to remain economically active for longer.
Another year on, there is increasingly widespread recognition that the future will not be a return to the way things were before 2008 and that the themes described above are likely to impact the future. Accordingly, our optimism about very carefully selected MedTech companies has, if anything, increased.
2012 has been an encouraging year because it demonstrated the impact which the change in value of one investee can have on the fund's Net Asset Value ("NAV") - I refer to Scancell in which the value of Hygea's holding rose from £891,000 at 31st December 2011 to almost £7 million at 31st December 2012. Your Board adopts a similar process for considering what actions are required across all of Hygea's investees, with a key feature being the composition of the Board and advisory committee (if there is one) of each investee, on the grounds that it is high quality teams which build good businesses. It is encouraging to see that the supply of MedTech relevant high quality business people appears to be increasing, and mention of this is made in respect of specific investee companies in the Investment Review.
Your Board were delighted that shareholders voted in favour of the continuation of the Company and I am also pleased to report that we have received Court approval for the cancellation of the Share Premium account which will allow us to resume the payment of dividends to which I refer below.
Results and Dividends
During the year our revenue return on ordinary activities saw an increased loss of 1.9p per share compared to 1.1p last year. The revenue loss in 2011 was abnormally low due to the receipt of a significant amount of loan interest from Hallmarq on repayment of the loan principal, as well as a lower charge for administration fees due to an overpayment in previous years. I am pleased to report that the total expense ratio at 1.8% remains below most VCTs, not least due to the increase in NAV.
The capital return per share amounted to a profit of 49.5p compared to a loss in 2011 of 0.7p principally due to the rise in the bid price of Scancell shares from 6p to 47p per share as at 31 December 2012. It was also pleasing to note the receipt of a further £96,000 from the earn-out following the sale of DxS. NAV is now 118.2p per share compared to 70.6p per share at the end of 2011 giving shareholders a total return of 139.45p per share since inception, after providing £1.2 million (ie 14.8p per share) under the Board performance fee arrangements referred to in the following paragraph.
When the management of the Company was assumed by the Board in 2007, shareholders will be aware that the performance fee arrangements were redesigned so that no such fees were payable until shareholders had received 80p per share in distributions. Since the total return (NAV and dividends) has now reached a sum in excess of 80p, your Board has deemed it prudent to accrue for the performance fee, being 20% of the total return in excess of 80p per share, and this sum (£1.2 million) has been included as a creditor in the accounts. Under the agreement, no payment in respect of this performance fee is yet due.
Overall the total return for the year amounted to a profit of 47.6p per share compared to a loss in 2011 of 1.8p per share.
Your Board continues to aspire to the payment of an annual dividend of 5p per share, albeit that the achievement of this will be over a period of years because realisations do not necessarily occur so as to enable dividends to be paid each year - your Board is conscious that no dividend was paid in respect of 2011 and that no dividend has been declared in respect of 2012. In the light of the significant increase in the value of our Scancell and other holdings, we have realised £217,000 in cash since the year end. We have liquidated some of our quoted portfolio; however this has yet to allow us to realise sufficient funds for the payment of a dividend.
Portfolio Review
Follow on investments in existing investee companies
It is our policy to continue to support our existing investee companies where a good business case continues to be made for further investment. In particular, we aim to maintain our percentage holding where our liquid cash resources allow, but the rules for maintaining our VCT qualifying percentage, which are particularly difficult for small funds such as Hygea, often limit our ability in this regard.
During the year under review we have invested further funds in Axon (£50,000), ImmunoBiology (£50,000) and OR Productivity (£30,000). We have not invested in any new companies during the year.
Since the end of the year, we have realised £217,000 through the sale of a third of our holding in Epistem and 300,000 shares in Scancell. Following the realisation of these holdings, we have invested or committed further funds in Axon (£100,000), Eykona (£100,000) and OR Productivity (£100,000).
VCT Qualifying Status
PricewaterhouseCoopers LLP continues to provide the Board with advice on the on-going compliance with HMRC rules and regulations concerning VCTs. The Board has been advised that the Company continues to comply with the conditions laid down by HMRC for maintaining approval as a VCT.
Future Prospects
Your Board have been considering the future direction of the Company. As has always been envisaged for a fund investing in earlier stage businesses, realisation of significant gains is not a realistic short term objective. Nevertheless we have been pleased to achieve two excellent exits in 2009, following which we paid a total of 20p per share in dividends, and following the re-rating of the value of Scancell, have commenced realisation of part of our quoted portfolio. This has allowed us to continue to support existing investee companies. As I mentioned above, we believe that good progress is being made in a number of investee companies and we remain optimistic that we will see, over the next three years, a significant further enhancement of our NAV - this, in combination with the liquidity event strategies being pursued by a number of the investee companies, should allow us to achieve distributions which bring us in line with our target of 5p per annum described above.
It is also clear that it is difficult for a small fund to continue to support its investee companies and retain our stake without dilution and to date we believe we have been successful in balancing the needs of our investee companies with those of our shareholders. As I mentioned in my last Chairman's statement, we are exploring ways in which we might attract further funds into expanding Hygea but are not yet in a position to put a recommendation to shareholders. However we remain active in addressing this issue and will communicate our proposals as soon as we have identified a suitable course of action.
Annual General Meeting
The Company's Annual General Meeting will take place on Wednesday 8th May 2013 at 11.30 a.m. I look forward to welcoming you to the meeting which will be held at the offices of Panmure Gordon, One New Change, London EC4M 9AF. In order to assist with security arrangements, it would be helpful if shareholders would indicate on the proxy form if they intend to attend the AGM.
Outlook
We now have a balanced portfolio of six AIM quoted companies and 11 unquoted companies. Many companies in the MedTech sector continue to find the fundraising climate challenging and so we continue to use our resources to help those in our portfolio, which we believe have a strong business case and prospects for the future, by contributing to their requests for further funds. As you can see from the accounts, we are effectively fully invested for the moment, but will seek to realise funds from our AIM portfolio when we consider such requests provide a strong case for further investment.
Your Board remain cautiously optimistic about the prospects for the MedTech sector, especially for those companies which conform to the Company's investment template, as providing better healthcare outcomes at lower cost provides a sound foundation for businesses, even in a tougher economic climate.
James Otter
Chairman
21 March 2013
Investment Review
Investment Portfolio
| Unquoted Investments | Investment at cost (£'000) | Unrealised profit/(loss) (£'000) | Carrying value at 31 December 2012 (£'000) | Movement in the year to 31 December 2012 (£'000) |
| Hallmarq Veterinary Imaging Limited | 1,116 | (257) | 859 | - |
| OR Productivity plc | 455 | - | 455 | - |
| Glide Pharmaceutical Technologies Limited | 326 | (12) | 314 | 193 |
| Exosect Limited | 250 | - | 250 | - |
| Insense Limited | 509 | (333) | 176 | (221) |
| ImmunoBiology Limited | 868 | (719) | 149 | (962) |
| Arecor Limited | 127 | 5 | 132 | 5 |
| Archimed LLP | 122 | - | 122 | - |
| Axon Limited | 200 | (92) | 108 | (174) |
| Wound Solutions Limited | 350 | (264) | 86 | - |
| Eykona Technologies Limited | 100 | (72) | 28 | (72) |
| Total unquoted investments | 4,423 | (1,744) | 2,679 | (1,231) |
| Quoted Investments | ||||
| Scancell plc | 1,061 | 5,919 | 6,980 | 6,089 |
| Omega Diagnostics plc | 356 | 17 | 373 | 134 |
| EKF Diagnostics plc | 260 | 94 | 354 | 70 |
| EpiStem Holdings plc | 66 | 209 | 275 | 98 |
| Reneuron plc | 50 | (31) | 19 | (23) |
| Tristel plc | 55 | (26) | 29 | (9) |
| Total quoted investments | 1,848 | 6,182 | 8,030 | 6,359 |
| Total investments | 6,271 | 4,438 | 10,709 | 5,128 |
Objective and Investment Policy
The Company's objective is to provide shareholders with an attractive income and capital return by investing its funds in a portfolio of unquoted and quoted UK MedTech companies which meet the relevant criteria under the VCT Rules and conform to the investment template.
The Company's investment policy is designed to deliver absolute returns on its investments rather than a performance measured against the market indices. On an ongoing basis, it is intended that at least 80% of the Company's assets will be invested in qualifying holdings, with the remainder held in cash and money market securities. The Board does not intend to vary the Company's investment policy. However, should a material change be deemed appropriate this will be done with shareholders' approval by the passing of an ordinary resolution and in accordance with the Listing Rules.
The Directors control the overall risk of the portfolio by ensuring that the Company has exposure to a diversified range of quoted and unquoted companies from the MedTech sector. The Directors will continually monitor the investment process and ensure compliance with the investment policy.
Valuation Methodology
Quoted and unquoted investments are valued in accordance with the accounting policy included in the annual Report and Accounts, which takes account of current industry guidelines for the valuation of venture capital portfolios and is compliant with International Private Equity and Venture Capital Valuations guidelines and current financial reporting standards.
If you would like to find out more regarding the International Private Equity and Venture Capital (IPEVC) Valuation Guidelines, please visit their website at: www.privateequityvaluation.com.
Ten largest holdings (by value)
Scancell plc
Background: Scancell is an AIM listed, Nottingham-based biotechnology company that is developing a pipeline of therapeutic vaccines to target various types of cancer, with the first target being melanoma. The platform technology, in effect, educates the immune system how to respond - this means that the technology can also be licensed to pharmaceutical companies to assist the development of their own therapeutic vaccines, which is an area of emerging importance for which a number of big pharmas do not have in-house technology.
Update since 2011: the Phase I trial for the melanoma treatment has continued to plan, with preliminary results announced in December 2012 which were very encouraging in terms of the clinical response and the positive immune data response. The Phase II trial is on schedule to be completed by the end of 2013. In August 2012 a new platform technology, Moditope, was announced - this could become an important component of many therapeutic vaccines in the future, both under development at Scancell and other companies. The company is planning to achieve a liquidity event in respect of its immunobody platform in the course of 2014.
| Initial investment date: | December 2003 |
| Cost: | £1,061,000 |
| Valuation: | £6,980,000 |
| Equity held: | 7.6% |
| Last audited accounts: | 30 April 2012 |
| Turnover: | £nil |
| Profit before tax: | £557,000 (including profit of £2.5 million from discontinued operations) |
| Net assets: | £7.0 million |
Hallmarq Veterinary Imaging Limited
Background: Hallmarq specialises in developing low cost magnetic resonance imaging systems for the vet market. The first application is for equine vets to enable the diagnosis of causes of lameness in horses that are not identifiable by any other method - this was the first MRI scanner in the world for standing horses - the business model relies principally on a share of scan fees (ie recurring income) rather than systems sales. The next development project is an MRI scanner for companion animals, a market which is significantly larger than the equine market.
Update since 2011: although good progress has been made on completing the development of the companion animal scanner, it is now due for launch in 2013 rather than 2012. The audited accounts to August 2012 showed sales of £3.3 million (2011: £2.7 million) and pre-tax profit of £289,000 (2011: £(12,000)).
| Initial investment date: | August 2005 |
| Cost: | £1,116,000 |
| Valuation: | £859,000 |
| Equity held: | 11.0% |
| Last audited accounts: | 31 August 2012 |
| Turnover: | £3.3 million |
| Profit before tax: | £289,000 |
| Net assets: | £4.1 million |
OR Productivity plc
Background: At the end of 2011, Freehand 2010 (a Hygea investee) was acquired by OR Productivity plc (ORP) in exchange for ORP shares. ORP has established the nucleus of a very strong team (led by the former R&D director of Smiths Medical) for commercialising productivity enhancing technologies within the Minimally Invasive Medicine sector - the team is aware of a number of companies within this sector which have good technologies but lack the skills to commercialise their technology efficiently - Freehand 2010 is ORP's first acquisition. Freehand 2010 owns the intellectual property to technology incorporated in a product for robotically controlling the laparoscope (part of the camera system) used by keyhole surgeons - the camera system is used to put an image of the inside of the patient's body onto a screen, and the surgeon uses this screen when operating to view the procedure. Keyhole surgery is growing in relation to open surgery because the smaller incisions required by the former result in reduced pain and reduced recovery time (hospital stays are very expensive). The business model is free placement of the system and sales of a consumable per operation to generate recurring income - in 2008 there were estimated to be c.3.8 million keyhole operations in Europe and the US (Medtech Insight 2010), a sector predicted to grow at 9% pa (Medtech Insight 2007). A key market development is the emergence of HD and 3D for use by keyhole surgeons to provide improved depth of vision. However, viewers of HD and 3D images generally become nauseous if the picture is not steady - the Freehand product appears to be being regarded as the leading solution worldwide for enabling HD and 3D camera systems for keyhole surgery to provide a rock steady image.
Update since 2011: ORP has overseen the development of V1.2 of the Freehand instrument incorporating modifications which make it easier to set up and make it applicable to a much higher percentage of keyhole operations. V1.2 was launched in May 2012, since when good progress has been made in developing relationships with procedure specific Key Opinion Leader surgeons - this is a key step because game changing products need to be virally marketed and surgeons tend to form procedure specific groups internationally. The company raised £1.9 million of new equity in 2012.
| Initial investment date: | March 2011 |
| Cost: | £455,000 |
| Valuation: | £455,000 |
| Equity held: | 13.2% |
| Last audited accounts: | 31 March 2012 |
| Turnover: | £240,000 |
| Loss before tax: | £1.5 million |
| Net assets: | £(181,000) |
Omega Diagnostics plc
Background: Omega listed on AIM via a reverse acquisition in 2006. It is a healthcare diagnostics business
providing IVD products for use in hospitals, blood banks, clinics and laboratories in over 100 countries - it
specialises in the areas of Food Intolerance, Allergy and Autoimmune Disease, and Infectious Disease. One of its products is Food Detective for home testing of allergies brought about by 59 commonly eaten foods. In December 2010 Allergopharma was acquired for £7.75 million - it produces manual assays for testing for allergies - part of the strategy for developing the Allergopharma business is to leverage off Omega's distribution reach, and take the assays into the much larger automated market using Omega's Genarrayt platform and the IDS-iSYS platform, which has been licensed from AIM listed Immunodiagnostic Systems Holdings.
Update since 2011: in June 2012, Omega entered into agreements providing it with worldwide exclusive access to two point-of-care tests, one for CD4 and the other for Syphilis - testing for CD4 T - cells is a vital component for the management and care of people suffering from HIV, which affects c.33 million people worldwide - the key competition is currently flow cytometry, which involves laboratories and centralised testing. The interim results to September 2012 showed sales of £5.5 million (2011: £5.5 million) and adjusted pre-tax profit of £430,000 (2011: £427,000).
| Initial investment date: | August 2007 |
| Cost: | £356,000 |
| Valuation: | £373,000 |
| Equity held: | <1% |
| Last audited accounts: | 31 March 2012 |
| Turnover: | £11.1 million |
| Profit before tax: | £479,000 |
| Net assets: | £13.3 million |
EKF Diagnostics Holdings plc
Background: EKF is an AIM listed company which David Evans (formerly chairman of, inter alia, DxS) and Julian
Baines took board control of in Q4 2009, with the objective of building a leading diagnostic business with a
particular focus on the needs of diabetic patients - Messrs Evans and Baines had been chairman and CEO
respectively of AIM listed point of care diagnostics business BBI, which listed on AIM in 2004 and was acquired by Alere (formerly Inverness Medical) for £84 million in late 2007. EKF completed its first acquisition in July 2010, which has been followed by two smaller acquisitions - one of the latter was Quotient Diagnostics, in which Hygea invested in January 2010 and exchanged its investment for EKF shares in October 2010.
Update since 2011: the January 2013 update re. the final results to December 2012 reported that they are anticipated to show sales of c.£26.1 million (2011: £21.7 million) and year end net cash of £1.9 million.
| Initial investment date: | June 2010 |
| Cost: | £260,000 |
| Valuation: | £354,000 |
| Equity held: | <1% |
| Last audited accounts: | 31 December 2011 |
| Turnover: | £21.7 million |
| Loss before tax: | £2.4 million |
| Net assets: | £37.4 million |
Glide Pharmaceutical Technologies Limited
Background: Glide Pharma has developed a needle-free drug delivery technology to deliver a drug formulation in a solid form directly through the skin of a patient. The Glide technology has been shown to have a number of benefits when compared to other delivery mechanisms - for example, it is particularly suited for vaccines, enabling them to be delivered in solid rather than liquid form, with the objective of delivering both better patient outcomes and also reduced supply chain costs.
Update since 2011: a new CEO was appointed at the beginning of 2012 - he brought 30 years experience in the drug delivery industry - in 2001 he founded drug delivery company Meridica, which he led until 2004 when it was acquired by Pfizer for $140 million. The company has won two funding awards totalling £2.55 million, one from the Technology Strategy Board and the other from The Biomedical Catalyst programme. In February 2013, a £14 million equity fundraising was completed, substantially from Invesco Perpetual.
| Initial investment date: | November 2005 |
| Cost: | £326,000 |
| Valuation: | £314,000 |
| Equity held: | 2% |
| Last audited accounts: | 31 December 2011 |
| Turnover: | £57,000 |
| Loss before tax: | £969,000 |
| Net assets: | £369,000 |
EpiStem Holdings plc
Background: EpiStem listed on AIM in April 2007. Its knowledge is based on over 30 years research at The Christie NHS Foundation Trust, Manchester on the behaviour of adult epithelial stem cells - epithelial cancers account for over 80% of adult cancers. It has the attractive business model of a profitable Contract Research Organisation division, a Personalised Medicine division and a Novel Therapeutics division. In 2009, the launch of Genedrive, a point-of-care molecular diagnostic instrument, was announced.
Update since 2011: re Genedrive's TB application, sales agreements were signed with one of India's largest diagnostic testing companies for sales in India and with Becton Dickinson for the rest of the world, with the first regulated product launch due in Q1 2013 - the Becton Dickinson agreement included an upfront payment to EpiStem of $1 million, with further milestone payments of up to $3 million, alongside escalating supply volumes over the next five years. New Genedrive tests under development include malaria, dengue, HIV, HCV and a range of sexually transmitted diseases.
| Initial investment date: | April 2007 |
| Cost: | £66,000 |
| Valuation: | £275,000 |
| Equity held: | <1% |
| Last audited accounts: | 30 June 2012 |
| Turnover: | £5.6 million |
| Loss before tax: | £726,000 |
| Net assets: | £8.9 million |
Exosect Limited
Background: Exosect was established in 2001 as a spin-out from the University of Southampton to develop a
platform technology and associated range of natural bio-control products for the protection of food from pests and disease - the objective is to develop intelligent solutions to pest management and overcome the drawbacks of conventional pesticides.
Update since 2011: focus on licensing the technology is now starting to succeed with one up-front payment and 15 companies engaged in discussions, many of which are major agrochemical companies. Early technical results from work on reducing the rates of insecticides using Exosect's technology have been very encouraging.
| Initial investment date: | January 2010 |
| Cost: | £250,000 |
| Valuation: | £250,000 |
| Equity held: | 2.7% |
| Last audited accounts: | 31 December 2011 |
| Turnover: | £320,000 |
| Loss before tax: | £2.3 million |
| Net assets: | £1.7 million |
Insense Limited
Background: Insense was a spin-out from Unilever with a platform technology which Insense has deployed in the
fields of chronic wound care (now spun-out as Archimed LLP in which Insense has a 49% interest), and protein
stabilisation (spun-out as Arecor Ltd). The company has chosen to exploit the platform in fungal nail and dermatology treatments.
Update since 2011: the principal focus has been on maintaining and strengthening the patent portfolio. The focus is principally on the fungal nail treatment, for which a suitable commercialisation partner will be sought once such a partner has been found for Archimed - the reason for waiting is that Archimed's technology is further developed than Insense's with products being used on patients, trial data and a product road map.
| Initial investment date: | July 2003 |
| Cost: | £509,000 |
| Valuation: | £176,000 |
| Equity held: | 9.2% |
| Last audited accounts: | 31 December 2011 |
| Turnover: | £67,000 |
| Loss before tax: | £290,000 |
| Net assets: | £1.2 million |
Immunobiology Limited
Background: ImmunoBiology is a biotechnology company that is focused on developing treatment areas such as
meningitis, tuberculosis, influenza and hepatitis C. The company's technology is based on the discovery that a
group of proteins known as 'heat shock proteins' have a pivotal role in controlling the normal immune response to infections - it has also licensed in Scancell's immunobody technology (see above) for use in certain treatments - both approaches seek to educate the immune system how to respond.
Update since 2011: a new Chairman with significant commercial experience within the vaccine industry was appointed as part of a £3 million fundraising. The company is now working to a plan to achieve a liquidity event by early 2015 based on achieving trial data in the course of 2014. In November 2012 an R&D grant approaching £1 million was awarded to the company by the Technology Strategy Board towards developing a vaccine against invasive meningococcal disease.
| Initial investment date: | November 2005 |
| Cost: | £868,000 |
| Valuation: | £149,000 |
| Equity held: | 3.4% |
| Last audited accounts: | 31 May 2012 |
| Turnover: | £nil |
| Loss before tax: | £1.3 million |
| Net assets: | £452,000 |
Directors' Report
The Directors present their report and the audited financial statements for the year ended 31 December 2012.
This report has been prepared by the Directors in accordance with the requirements of s415 of the Companies Act 2006. The Company's independent auditor is required by law to report on whether the information given in the Directors' Report (including the Business Review) is consistent with the financial statements. The auditor's opinion is included in their report.
Principal Activity and Status
The principal activity of the Company is to provide shareholders with an attractive income and capital return by investing its funds in a portfolio of unquoted and quoted UK MedTech companies which meet the relevant criteria under the VCT Rules.
On 21 January 2010, the Company revoked investment company status.
The Company has been granted full approval as a Venture Capital Trust by HMRC. In order to maintain approved status, the Company must comply on a continuing basis with the provisions of s274 of the Income Tax Act 2007; in particular, the Company is required at all times to hold at least 70% of its investments (as defined in the legislation) in VCT qualifying holdings, of which at least 30% must comprise eligible ordinary shares.
For this purpose, a "VCT qualifying holding" consists of up to £5 million invested in any one year in new shares or securities of a UK AIM quoted company or an unquoted company which is carrying on a qualifying trade, and whose gross assets and number of employees at the time of investment do not exceed a prescribed limit. The definition of "qualifying trade" excludes certain activities such as property investment and development, financial services and asset leasing.
The accounts have been prepared in accordance with the requirements of the Companies Act 2006. The Directors are required by the articles of association to propose an ordinary resolution at the Company's annual general meeting in 2015 that the Company should continue as a Venture Capital Trust for a further three year period, and at three yearly intervals thereafter. If any such resolution is not passed, the Directors shall within four months convene a general meeting to consider the proposals for the reorganisation or winding-up of the Company.
Review of Business Activities
The Directors are required by s417 of the Companies Act 2006 to include a Business Review to shareholders. The Business Review is set out below and also includes the Chairman's Statement and the Investment Review.
The purpose of this review is to provide shareholders with a snapshot summary setting out the business objectives of the Company, the Board's strategy to achieve those objectives, the risks faced, the regulatory environment and the key performance indicators used to measure performance.
Since the year end there have been no significant post balance sheet events.
Performance and Key Performance Indicators
The Board has a number of performance measures to assess the Company's success in meeting its objectives. Performance, measured by the change in NAV and total return per share, is also measured against the FTSE All-Share index. This is shown in the graph in the Directors' Remuneration Report. This index has been adopted as a benchmark.
| Results and dividend | Year ended | Year ended |
| 31 December 2012 | 31 December 2011 | |
| £'000 | £'000 | |
| Net return attributable to shareholders | 3,861 | (143) |
| Appropriations: | ||
| Final dividend proposed - 0p per share (2011 - 0p) | - | - |
Objective and Investment Policy
The Company's objective is to provide shareholders with an attractive income and capital return by investing its funds in a portfolio of unquoted and quoted UK MedTech companies which meet the relevant criteria under the VCT Rules.
The Company's investment strategy is designed to deliver absolute returns on its investments rather than a performance measured against the market indices. On an ongoing basis, it is intended that at least 80% of the Company's assets will be invested in qualifying holdings, with the remainder held in cash and money market securities. The Board does not intend to vary the Company's investment policy. However, should a material change be deemed appropriate this will be done with shareholders' approval by the passing of an ordinary resolution and in accordance with the Listing Rules.
The Directors control the overall risk of the portfolio by ensuring that the Company has exposure to a diversified range of quoted and unquoted companies from the MedTech sector. The Directors will continually monitor the investment process and ensure compliance with the investment policy.
VCT regulation
Compliance with required rules and regulations is considered with all investment decisions made. The company is further monitored on a continual basis to ensure compliance. The main criteria to which the company must adhere include:
At least 70% of investments must be made in qualifying shares or securities
At least 30% of the 70% of qualifying investments must be invested into Ordinary shares with no preferential rights
No single investment made can exceed 15% of the total company value at the time the investment is made
A minimum of 10% of each qualifying investment must be in Ordinary shares with no preferential rights
Principal Risks, Risk Management and Regulatory Environment
The Board carries out a regular review of the risk environment in which the Company operates. The main areas of risk identified by the Board are as follows:
VCT qualifying status risk: the Company is required at all times to observe the conditions laid down in the Income Tax Act 2007 for the maintenance of approved VCT status. The loss of such approval could lead to the Company losing its exemption from corporation tax on capital gains, to investors being liable to pay income tax on dividends received from the Company and, in certain circumstances, to investors being required to repay the initial income tax relief on their investment.
The Board keeps the Company's VCT qualifying status under regular review. The Board has also retained PricewaterhouseCoopers LLP to undertake an independent VCT status monitoring role.
Investment risk: the majority of the Company's investments are in quoted and unquoted companies which are VCT qualifying holdings, which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies. The Directors aim to limit the risk attached to the portfolio as a whole by careful selection and timely realisation of investments, by carrying out due diligence procedures and by maintaining a spread of holdings in terms of financing stage. The Board reviews the investment portfolio on a regular basis.
Financial risk: by its nature, as a Venture Capital Trust, the Company is exposed to market price risk, credit risk, liquidity risk, fair value and cash flow interest rate risks. All of the Company's income and expenditure is denominated in sterling and hence the Company has no foreign currency risk. The Company is financed principally through equity and has occasionally used a working capital facility. The Company does not use derivative financial instruments.
Regulatory risk: the Company is required to comply with the Companies Acts, the rules of the UK Listing Authority and United Kingdom Accounting Standards. Breach of any of these might lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.
Reputational: inadequate or failed controls might result in breaches of regulation or loss of shareholder trust.
Internal control risk: the Board reviews annually the system of internal controls, financial and non-financial, operated by the Company. These include controls designed to ensure that the Company's assets are safeguarded and that proper accounting records are maintained.
The Board seeks to mitigate the internal risks by setting policy, regular review of performance, enforcement of contractual obligations and monitoring progress and compliance. In the mitigation and management of these risks, the Board applies rigorously the principles detailed in the 'Turnbull' guidance. Details of the Company's internal controls are contained in the Corporate Governance section.
Due to the nature of the Company, environmental, social and employee issues do not apply and therefore no disclosures in respect of these have been included in the Directors report.
Further details of the Company's risk management policies are provided in note 14 to the financial statements.
Directors
The Directors of the Company during the period and their interests (in respect of which transactions are notifiable under Disclosure and Transparency Rule 3.1.2R) in the issued ordinary shares of 50p are shown in the table below:
| 31 December 2012 | 31 December 2011 | |
| James Otter (Chairman) | 24,050 | 24,050 |
| John Hustler | 190,000 | 190,000 |
| Charles Breese | 105,000 | 105,000 |
All of the Directors' shares were held beneficially. There have been no changes in the Directors' share interests between 31 December 2012 and the date of this report.
Under the Company's Articles of Association, one-third of the Directors are required to retire by rotation each year. The Board is satisfied that, following individual performance evaluations, Mr Charles Breese continues to be effective and to demonstrate commitment to the role.
Brief biographical notes on the Directors are given in the annual Report and Accounts.
Directors' and Officers' Liability Insurance
The Company has maintained directors' and officers' liability insurance cover on behalf of the Directors and Company Secretary. The Company's Articles of Association provide, subject to provisions of UK legislation, an indemnity for directors in respect of costs which they may incur relating to the defence of any proceedings brought against them arising out of their positions as directors, in which they are acquitted or judgement is given in their favour by the Court.
Whistleblowing
The Board has considered and implemented arrangements in accordance with the Combined Code's recommendations, to encourage staff of the Administration Manager or Secretary of the Company to raise concerns, in confidence, within their organisation about possible improprieties in matters of financial reporting or other matters. It is therefore satisfied that adequate arrangements are in place to allow an independent investigation, and follow on action where necessary, to take place within the organisation.
Management
Since 30 July 2007 the Board has assumed responsibility for the management of the Company and its portfolio. The Board continues to review and evaluate the management of the Company in the light of present circumstances whereby the resources of the Company are fully invested in portfolio companies. It does not believe that it would be cost effective to seek to appoint a third party manager at the present time. The terms of the Board's remuneration are set out at the sections entitled, "Directors' Emoluments" and "Performance Fee", both of which appear in the Directors' Remuneration Report.
Share Issues and Open Offers
During the year, the Company did not issue any shares (2011 - nil shares).
Share Capital, Rights Attaching to the Shares and Restrictions on Voting and Transfer
The Company's issued ordinary share capital as at 31 December 2012 is 8,115,376 ordinary shares of 50p each.
Subject to any suspension or abrogation of rights pursuant to relevant law or the Company's Articles of Association, the shares confer on their holders the following principal rights:
(a) the right to receive out of profits available for distribution such dividends as may be agreed to be paid (in the case of a final dividend in an amount not exceeding the amount recommended by the Board as approved by shareholders in a general meeting or in the case of an interim dividend in an amount determined by the Board). All dividends unclaimed for a period of 12 years after having become due for payment are forfeited automatically and cease to remain owing by the Company;
(b) the right, on a return of assets on a liquidation, reduction of capital or otherwise, to share in the surplus assets of the Company remaining after payment of its liabilities pari passu with the other holders of Ordinary shares; and
(c) the right to receive notice of and to attend and speak and vote in person or by proxy at any general meeting of the Company.
On a show of hands every member present or represented and voting has one vote and on a poll every member present or represented and voting has one vote for every share of which that member is the holder; the appointment of a proxy must be received not less than 48 hours before the time of the holding of the relevant meeting or adjourned meeting or, in the case of a poll taken otherwise than at or on the same day as the relevant meeting or adjourned meeting, be received after the poll has been demanded and not less than 24 hours before the time appointed for the taking of the poll.
These rights can be suspended. If a member, or any other person appearing to be interested in shares held by that member, has failed to comply within the time limits specified in the Company's Articles of Association with a notice pursuant to s793 of the Companies Act 2006 (notice by the Company requiring information about interests in its shares), the Company can, until the default ceases, suspend the right to attend and speak and vote at a general meeting and if the shares represent at least 0.25% of their class the Company can also withhold any dividend or other money payable in respect of the shares (without any obligation to pay interest) and refuse to accept certain transfers of the relevant shares.
Shareholders, either alone or with other shareholders, have other rights as set out in the Company's Articles of Association and in company law.
A member may choose whether his shares are evidenced by share certificates (certificated shares) or held in electronic (uncertificated) form in CREST (the UK electronic settlement system). Any member may transfer all or any of his shares, subject in the case of certificated shares, to the rules set out in the Company's Articles of Association, or in the case of uncertificated shares, to the regulations governing the operation of CREST (which allow the Directors to refuse to register a transfer as therein set out); the transferor remains the holder of the shares until the name of the transferee is entered in the register of members.
The Directors may refuse to register a transfer of certificated shares in favour of more than four persons jointly or where there is no adequate evidence of ownership or the transfer is not duly stamped (if so required). The Directors may also refuse to register a share transfer if it is in respect of a certificated share which is not fully paid up or on which the Company has a lien provided that, where the share transfer is in respect of any share admitted to the Official List maintained by the UK Listing Authority, any such discretion may not be exercised so as to prevent dealings taking place on an open and proper basis, or if in the opinion of the Directors (and with the concurrence of the UK Listing Authority) exceptional circumstances so warrant, provided that the exercise of such power will not disturb the market in those shares.
Whilst there are no squeeze-out and sell out rules relating to the shares in the Company's Articles of Association, shareholders are subject to the compulsory acquisition provisions in s974 to s991 of the Companies Act 2006.
Appointment and Replacement of Directors
A person may be appointed as a Director of the Company by the shareholders in general meeting by Ordinary Resolution (requiring a simple majority of the persons voting on the relevant resolution) or by the Directors; no person, other than a Director retiring by rotation or otherwise, shall be appointed or reappointed a Director at any general meeting unless he is recommended by the Directors or, not less than seven nor more than 42 clear days before the date appointed for the meeting, notice is given to the Company of the intention to propose that person for appointment or re-appointment in the form and manner set out in the Company's Articles of Association.
Each Director who is appointed by the Directors (and who has not been elected as a Director of the Company by the members at a general meeting held in the interval since his appointment as a Director of the Company) is to be subject to election as a Director of the Company by the members at the first Annual General Meeting of the Company following his appointment. At each Annual General Meeting of the Company one third of the Directors for the time being, or if their number is not three or an integral multiple of three the number nearest to but not exceeding one-third, are to be subject to re-election.
The Companies Act allows shareholders in a general meeting by Ordinary Resolution (requiring a simple majority of the persons voting on the relevant Resolution) to remove any Director before the expiration of his or her period of office, but without prejudice to any claim for damages which the Director may have for breach of any contract of service between him or her and the Company.
A person also ceases to be a Director if he or she resigns in writing, ceases to be a Director by virtue of any provision of the Companies Act, becomes prohibited by law from being a Director, becomes bankrupt or is the subject of a relevant insolvency procedure, or becomes of unsound mind, or if the Board so decides following at least six months' absence without leave or if he or she becomes subject to relevant procedures under the mental health laws, as set out in the Company's Articles of Association.
Powers of the Directors
Subject to the provisions of the Companies Act, the Memorandum and Articles of Association of the Company and any directions given by shareholders by Special Resolution, the Articles of Association specify that the business of the Company is to be managed by the directors, who may exercise all the powers of the Company, whether relating to the management of the business or not. In particular the directors may exercise on behalf of the Company its powers to purchase its own shares to the extent permitted by shareholders.
International Financial Reporting Standards
As the Company is not part of a group it is not mandatory for it to comply with International Financial Reporting Standards. The Company does not anticipate that it will voluntarily adopt International Financial Reporting Standards.
Creditor Payment Policy
The Company's payment policy for the forthcoming financial year is to agree terms of payment before business is transacted and to settle accounts in accordance with those terms. The Company does not follow any code or standard with regard to creditor payment practice. Trade creditors at 31 December 2012 were £2,495 (2011: £8,714).
Environmental Policy
The Company always makes full effort to conduct its business in a manner that is responsible to the environment. This responsibility is always maintained in investment decisions where possible.
Going Concern
The Company's business activities and the factors likely to affect its future performance and position are set out in the Chairman's Statement and Investment Review. Further details on the management of financial risk may be found in note 14 to the Financial Statements.
The Board receives regular reports from the Administration Manager and the Directors believe that, 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 assets of the Company consist mainly of cash resources and securities, some of which are readily realisable. As such, the Company has adequate financial resources to continue in operational existence for the foreseeable future.
Substantial Shareholdings
As at the date of this report, no disclosures of major shareholdings had been made to the Company under Disclosure and Transparency Rule 5 (Vote Holder and Issuer Notification Rules).
Annual General Meeting
Notice convening the 2013 Annual General Meeting of the Company and a form of proxy in relation to the meeting can each be found at the end of this document.
Independent Auditor
James Cowper LLP are engaged as the Company's auditors and they offer themselves for reappointment as auditor. A resolution to re-appoint James Cowper LLP will be proposed at the forthcoming Annual General Meeting.
Directors' Authority to Allot Shares, to Disapply Pre-emption Rights
Resolution 6 renews the Directors' authority to allot Ordinary shares. This would enable the Directors until May 2013, to allot up to 811,537 ordinary shares (representing approximately 10% of the Company's issued share capital as at 31 December 2012).
Resolution 7 renews and extends the Directors' authority to allot equity securities for cash without pre-emption rights applying in certain circumstances. This Resolution would authorise the Directors, until the date falling 15 months after the date of the passing of the Resolution or, if earlier, the conclusion of the next Annual General Meeting of the Company, to issue Ordinary shares for cash without pre-emption rights applying by way of an offer to existing shareholders, or re-issuing shares out of Treasury, up to a maximum of 811,537 Ordinary shares (representing approximately 10% of the Company's issued share capital as at 31 December 2012). This power will be exercised only if, in the opinion of the Directors, it would be in the best interests of shareholders, as a whole.
.
By Order of the Board
Craig Hunter
Company Secretary
21 March 2013
| Income Statement | ||||||
| Year to 31 December 2012 | ||||||
| Revenue | Capital | Total | ||||
| Notes | £'000 | £'000 | £'000 | |||
| Gain on disposal of fixed asset investments | - | 96 | 96 | |||
| Gain on valuation of fixed asset investments | 9 | - | 5,128 | 5,128 | ||
| Performance fee | - | (1,207) | (1,207) | |||
| Income | 2 | 13 | - | 13 | ||
| Other expenses | 3 | (169) | - | (169) | ||
| Return on ordinary activities before tax | (156) | 4,017 | 3,861 | |||
| Taxation on return on ordinary activities | 5 | - | - | - | ||
| Return on ordinary activities after tax | (156) | 4,017 | 3,861 | |||
| Earnings per share - basic and diluted | 7 | (1.9p) | 49.5p | 47.6p | ||
The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in the above statement derive from continuing operations.
The accompanying notes are an integral part of the financial statements.
The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.
The Company has no recognised gains or losses other than the results for the year as set out above.
Income Statement
| Year to 31 December 2011 | ||||
| Revenue | Capital | Total | ||
| Notes | £'000 | £'000 | £'000 | |
| Gain on disposal of fixed asset investments | - | 347 | 347 | |
| Loss on valuation of fixedasset investments | - | (404) | (404) | |
| Income | 2 | 64 | - | 64 |
| Other expenses | 3 | (150) | - | (150) |
| Return on ordinary activities before tax | (86) | (57) | (143) | |
| Taxation on return on ordinary activities | 5 | - | - | - |
| Return on ordinary activities after tax | (86) | (57) | (143) | |
| Earnings per share - basic and diluted | 7 | (1.1p) | (0.7p) | (1.8p) |
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 accompanying notes are an integral part of the financial statements.
The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.
The Company has no recognised gains or losses other than the results for the year as set out above.
| Reconciliation of Movements in Shareholders' Funds | ||
| Year ended 31 December 2012 | Year ended 31 December 2011 | |
| £'000 | £'000 | |
| Shareholders' funds at start of year | 5,733 | 6,282 |
| Return on ordinary activities after tax | 3,861 | (143) |
| Issue of equity (net of expenses) | - | - |
| Dividends paid | - | (406) |
| Shareholders' funds at end of year | 9,594 | 5,733 |
| Balance Sheet | |||||
| As at 31 December 2012 | As at 31 December 2011 | ||||
| Notes | £'000 | £'000 | £'000 | £'000 | |
| Fixed asset investments* | 9 | 10,709 | 5,451 | ||
| Current assets: | |||||
| Debtors | 10 | 8 | 9 | ||
| Cash at bank | 112 | 303 | |||
| 120 | 312 | ||||
| Creditors: amounts falling due within one year | 11 | (1,235) | (30) | ||
| Net current assets | (1,115) | 282 | |||
| Net assets | 9,594 | 5,733 | |||
| Called up equity share capital | 12 | 4,058 | 4,058 | ||
| Share premium | 13 | - | 1,737 | ||
| Special distributable reserve | 13 | 3,397 | 1,660 | ||
| Capital redemption reserve | 13 | 38 | 38 | ||
| Capital reserve - gains and losses on disposals | 13 | (1,163) | (52) | ||
| - holding gains and losses | 13 | 4,438 | (690) | ||
| Revenue reserve | 13 | (1,174) | (1,018) | ||
| Total equity shareholders' funds | 9,594 | 5,733 | |||
| Net asset value per share | 8 | 118.2p | 70.6p | ||
*At fair value through Income Statement
The accompanying notes are an integral part of the financial statements.
The statements were approved by the Directors and authorised for issue on 21 March 2013 and are signed on their behalf by:
James Otter
Chairman
Company No: 04221489
| Cash Flow Statement | ||||
| Year to 31 December 2012 | Year to 31 December 2011 | |||
| Notes | £'000 | £'000 | ||
| Net cash (Outflow)/inflow from operating activities | (157) | 228 | ||
| Financial investment: | ||||
| Purchase of fixed asset investments | 9 | (130) | (630) | |
| Disposal of fixed asset investments | 96 | 347 | ||
| Financing: | ||||
| Issue of shares | - | - | ||
| Dividends paid | - | (406) | ||
| Decrease in cash resources at bank | (191) | (461) | ||
| Reconciliation of Net Cash Flow to Movement in Net Funds | |||
| Year to 31 December 2012 | Year to 31 December 2011 | ||
| £'000 | £'000 | ||
| (Decrease)/increase in cash resources at bank | (191) | (461) | |
| Opening net funds | 303 | 764 | |
| Net funds at 31 December* | 112 | 303 | |
* Net funds at 31 December 2011 and 31 December 2012 comprised solely of cash at bank
| Reconciliation of Operating profit/(loss) before Taxation to Cash Flow from Operating Activities | |||
| Year to 31 December 2012 | Year to 31 December 2011 | ||
| £'000 | £'000 | ||
| Return on ordinary activities before tax | 3,861 | (143) | |
| (Gain)/loss on disposal of fixed asset investments | (96) | (347) | |
| (Gain)/loss on valuation of fixed asset investments | (5,128) | 404 | |
| Decrease/(increase) in debtors | 1 | 314 | |
| Increase/(decrease) in creditors | 1,205 | - | |
| Inflow/(outflow) from operating activities | (157) | 228 | |
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" (revised 2009).
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 has designated all fixed asset investments as being held at fair value through profit and loss; therefore all gains and losses arising from investments held are attributable to financial assets held at fair value through Income Statement. Accordingly, all interest income, fee income, expenses and impairment losses are attributable to assets designated as being at fair value through Income Statement.
The preparation of the financial statements requires the Board 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 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 requires 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.
Although the Company believes that the assumptions concerning the business environment and estimate of future cash flows are appropriate, changes in estimates and assumptions could require changes in the stated values. This could lead to additional changes in fair value in the future.
Investments
Purchases and sales of investments are recognised in the financial statements at the date of the transaction (trade date).
These investments will be managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy and information about them has to be provided internally on that basis to the Board. Accordingly, as permitted by FRS 26, the investments will be designated as fair value through Income Statement on the basis that they qualify as a group of assets managed, and whose performance is evaluated, on a fair value basis in accordance with a documented investment strategy. The Company's investments are measured at subsequent reporting dates at fair value.
In the case of investments quoted on a recognised stock exchange, fair value is established by reference to the closing bid price on the relevant date or the last traded price, depending upon convention of the exchange on which the investment is quoted. This is consistent with the International Private Equity and Venture Capital (IPEVC) guidelines.
In the case of unquoted investments, fair value is established by using measures of value such as the price of recent transactions, earnings multiple and net assets. This is consistent with IPEVC valuation guidelines.
Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - holding gains/(losses).
In the preparation of the valuations of assets the Directors are required to make judgements and estimates that are reasonable and incorporate their knowledge of the performance of the investee companies.
Current asset investments
No current asset investments were held at 31 December 2012 or 31 December 2011. Should current assets be held, gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - gains/(losses) on disposal.
Income
Investment income includes interest earned on bank balances and from unquoted loan note securities. Fixed returns on debt are recognised on a time apportionment basis so as to reflect the effective yield, 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 (including performance fee), which has been charged 100% to the capital reserve.
Revenue and capital
The revenue column of the Income Statement includes all income and revenue expenses of the Company. The capital column includes gains and losses on disposal and holding gains and losses on investments. Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the appropriate capital reserve on the basis of whether they are readily convertible to cash in full at the balance sheet date.
Taxation
Corporation tax payable is applied to profits chargeable to corporation tax, if any, at the current rate. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue return on the "marginal" basis as recommended in the SORP.
Deferred tax is recognised on an undiscounted basis in respect of all timing differences that have originated but not reversed at the balance sheet date. Where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less tax, 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 managed funds, as well as OEICs. At the year end, no liquid resources were held by the Company.
Loans and receivables
The Company's loans and receivables are initially recognised at cost and subsequently measured at fair value, being amortised cost using the effective interest rate 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.
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.
Capital management is monitored and controlled using the internal control procedures. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.
The Company does not have any externally imposed capital requirements.
Dividends
Dividends payable are recognised as distributions in the financial statements when the Company's liability to make payment has been established. This liability is established for interim dividends when they are declared by the Board, and for final dividends when they are approved by the shareholders.
2. Income
| Year to 31 December 2012 | Year to 31 December 2011 | |
| £'000 | £'000 | |
| Dividends received | 1 | 1 |
| Bank interest receivable | 2 | - |
| Loan note interest receivable | 10 | 63 |
| 13 | 64 |
3. Other Expenses
| Year to 31 December 2012 | Year to 31 December 2011 | |
| £'000 | £'000 | |
| Directors' remuneration | 55 | 55 |
| Fees payable to the Company's auditor for the audit of the financial statements | 8 | 7 |
| Fees payable to the Company's auditor for other services - tax compliance | 1 | 2 |
| Legal and professional expenses | 64 | 52 |
| Accounting and administration services | 26 | 13 |
| Other expenses | 15 | 21 |
| 169 | 150 |
For the year ended 31 December 2012 the running costs were 1.7% (2011: 2.6%) of net assets.
4. Directors' Remuneration
| Year to 31 December 2012 | Year to 31 December 2011 | |
| £'000 | £'000 | |
| Directors' emoluments | ||
| James Otter (Chairman) | 20.0 | 20.0 |
| John Hustler | 17.5 | 17.5 |
| Charles Breese | 17.5 | 17.5 |
| 55 | 55 |
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).
5. Tax on Ordinary Activities
The corporation tax charge for the period was £nil (2011: £nil)
The current rate of tax is the small companies' rate of corporation tax at 20.0% (2011: 20.25%)
| Current tax reconciliation: | Year to 31 December 2012 | Year to 31 December 2011 |
| £'000 | £'000 | |
| Return on ordinary activities before tax | (156) | (86) |
| Current tax at 20.0% (2011: 20.25%) | (31) | (17) |
| Unrecognised tax losses | 31 | 17 |
| Total current tax charge | - | - |
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.
6. Dividends
| Year to 31 December 2012 | Year to 31 December 2011 | |
| £'000 | £'000 | |
| Recognised as distributions in the financial statements for the period | ||
| Previous year's interim dividend | - | - |
| Previous year's final dividend | - | 406 |
| - | 406 | |
| Paid and proposed in respect of the year | ||
| Proposed final dividend - 0p per share (2011: 0p per share) | - | - |
| - | - |
7. Earnings per Share
The total earnings per share is based on 8,115,376 (31 December 2011: 8,115,376) shares, being the weighted average number of shares in issue during the year, and a return for the year totalling £3,861,000 (31 December 2011: (£143,000)).
The revenue and capital earnings per share are based on 8,115,376 (31 December 2011: 8,115,376) shares, being the weighted average number of shares in issue during the year, and a revenue return for the year totalling £(156,000) (31 December 2011: £(86,000)) and a capital return for the year totalling £4,017,000 (31 December 2011: (£57,000)).
There are no potentially dilutive capital instruments in issue and, therefore no diluted returns per share figures are relevant. The basic and diluted earnings per share are therefore identical.
8. Net Asset Value per Share
The calculation of NAV per share as at 31 December 2012 is based on 8,115,376 (31 December 2011: 8,115,376) ordinary shares in issue at that date.
9. Fixed Asset Investments
| Level 1: AIM-quoted investments | Level 3: Unquoted investments | Level 3: Unquoted investments | ||
| Equity investments | Equity investments | Loan investments | Total investments | |
| £'000 | £'000 | £'000 | £'000 | |
| Valuation and net book amount: | ||||
| Book cost as at 1 January 2012 | 1,848 | 4,138 | 155 | 6,141 |
| Cumulative revaluation | (178) | (512) | - | (690) |
| Valuation at 1 January 2012 | 1,670 | 3,626 | 155 | 5,451 |
| Movement in the year: | ||||
| Purchases at cost | - | 130 | - | 130 |
| Disposal proceeds | - | (96) | - | (96) |
| Gain on disposal | - | 96 | - | 96 |
| Revaluation in year | 6,359 | (1,231) | 5,128 | |
| Valuation at 31 December 2012 | 8,029 | 2,525 | 155 | 10,709 |
| Book cost at 31 December 2012: | 1,848 | 4,268 | 155 | 6,271 |
| Revaluation to 31 December 2012: | 6,181 | (1,743) | - | 4,438 |
| Valuation at 31 December 2012 | 8,029 | 2,525 | 155 | 10,709 |
Further details of the fixed asset investments held by the Company are shown within the Investment Review.
All investments are designated as fair value through profit or loss at the time of acquisition, and all capital gains or losses on investments so designated. Given the nature of the Company's venture capital investments, the changes in fair value of such investments recognised in these financial statements are not considered to be readily convertible to cash in full at the balance sheet date and accordingly these gains are treated as holding gains or losses.
As at 31 December 2012 and 31 December 2011, there were no further commitments in respect of investments approved by the Board but not yet completed.
10. Debtors
| 31 December 2012 | 31 December 2011 | |
| £'000 | £'000 | |
| Prepayments and accrued income | 8 | 9 |
| 8 | 9 |
11. Creditors: Amounts Falling Due Within One Year
| 31 December 2012 | 31 December 2011 | ||
| £'000 | £'000 | ||
| Accruals | 1,233 | 21 | |
| Other creditors | 2 | 9 | |
| 1,235 | 30 |
12. Share Capital
| 31 December 2012 | 31 December 2011 | |
| £'000 | £'000 | |
| Authorised: | ||
| 50,000,000 Ordinary shares of 50p | 25,000 | 25,000 |
| Allotted and fully paid up: | ||
| 8,115,376 Ordinary shares of 50p (2011: 8,115,376) | 4,058 | 4,058 |
The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective. The Company is not subject to any externally imposed capital requirements.
During the year, the Company did not issue any shares.
13. Reserves
| Share Premium | Special distributable reserve | Capital redemption reserve | Capital reserve gains/(losses) | Capital reserve holding gains/(losses) | Revenue reserve | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| As at 1 January 2012 | 1,737 | 1,660 | 38 | (52) | (690) | (1,018) |
| Return on ordinary activities after tax | (156) | |||||
| Cancellation of Share Premium | (1,737) | 1,737 | ||||
| Performance fee allocated as capital expenditure | (1,207) | |||||
| Current period gains/losses on disposal | 96 | |||||
| Current period gains/losses on fair value of investments | 5,128 | |||||
| Prior years' unrealised losses now realised | ||||||
| Dividends paid | ||||||
| Balance as at 31 December 2012 | - | 3,397 | 38 | (1,163) | 4,438 | (1,174) |
When the Company revalues its investments during the period, any gains or losses arising are credited/charged to the income statement. Changes in fair value of investments held 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) reserve is transferred to the capital reserve - gains/(losses) on disposal as a movement in reserves.
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 at which the Company's shares trade to net asset value, providing shareholder authority has been granted.
During 2010, the Company revoked investment company status in order to allow payment of dividends from distributable reserves. Distributable reserves are represented by the special distributable reserve, the capital reserve gains/(losses) on disposal and the revenue reserve which total £1,060,000 as at 31 December 2012.
14. Financial Instruments and Risk Management
The Company's financial instruments comprise equity and loan note 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 quoted and unquoted securities whilst holding a proportion of its assets in cash or near - cash investments in order to provide a reserve of liquidity.
Fixed asset investments (see note 9) are valued at fair value. Unquoted investments are carried at fair value as determined by the Directors in accordance with current venture capital industry guidelines. The fair value of all other financial assets and liabilities is represented by their carrying value in the balance sheet. The Directors believe that the fair value of the assets held at the year 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. The management of market risk is part of the investment management process and is a central feature of venture capital investment. The Company's portfolio is managed with regard to the possible effects of adverse price movements and with the objective of maximising overall returns to shareholders. Investments in unquoted companies, by their nature, usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by diversifying the portfolio across business sectors and asset classes. The overall disposition of the Company's assets is regularly monitored by the Board.
27.9% (2011: 66.0%) by value of the Company's net assets comprises investments in unquoted companies held at fair value. The valuation methods used by the Company include the application of a price/earnings ratio derived from listed companies with similar characteristics, and consequently the value of the unquoted element of the portfolio can be indirectly affected by price movements on the London Stock Exchange. A 10% overall increase in the valuation of the unquoted investments at 31 December 2012 would have increased net assets and the total return for the year by £268,000 (2011: £378,000) an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount.
83.7% (2011: 29.1%) by value of the Company's net assets comprises equity securities listed on the London Stock Exchange or quoted on AIM. A 10% increase in the bid price of these securities as at 31 December 2012 would have increased net assets and the total return for the year by £803,000 (2011: £167,000); a corresponding fall would have reduced net assets and the total return for the year by the same amount.
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.
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 securities. The benchmark rate which determines the rate of interest receivable on such investments is the bank base rate, which was 0.5% at 31 December 2012 (2011: 0.5%). The amounts held in floating rate investments at the balance sheet date were as follows:
| 31 December 2012 £000 | 31 December 2011 £000 | ||
| Cash at bank | 112 | 303 | |
| 112 | 303 |
A 1% increase in the base rate would increase income receivable from these investments and the total return for the period by £1,120 (2011: £3,030); a corresponding fall would have reduced net assets and the total return for the year by the same amount.
Credit risk
There were no significant concentrations of credit risk to counterparties at 31 December 2012 or 31 December 2011.
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 Board carries 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 December 2012 the Company's financial assets exposed to credit risk comprised the following:
| 31 December 2012 £000 | 31 December 2011 £000 | ||
| Cash at bank | 112 | 303 | |
| Unquoted investments - loans | 155 | 155 | |
| 267 | 458 |
The Company's interest-bearing deposit and current accounts are maintained with The Royal Bank of Scotland plc.
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 liquidity risk is managed on a continuing basis by the Board 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 cash facilities to pay accounts payable and accrued expenses. At 31 December 2012, the Company's cash balance was £112,000 (2011: £303,000).
15. Post Balance Sheet Events
There have been no material transactions since the balance sheet date and the date of the publication of this report.
16. Contingencies, Guarantees and Financial Commitments
As stated in the Chairman's Statement, the Company may be entitled to further deferred consideration of up to £200,000 based on performance from DxS over the next few years of which £nil has been accrued in the accounts as no amounts have yet been agreed. As at 31 December 2012 deferred consideration of £1,337,000 has been received.
There were no further contingencies, guarantees or financial commitments as at 31 December 2012 (2011: £nil).
17. Related Party Transactions
The Board acts as the investment manager of the Company. No remuneration has been paid to the Board during the year in its capacity as investment manager. The Directors are entitled to participate in a performance bonus calculated as 20% of sums returned to shareholders by way of dividends and capital distributions of whatever nature, which in aggregate exceeds the sum of 80p per share (including dividends paid to date, i.e. 21.25p, but excluding any sums returned to shareholders from HMRC in the year of subscription). At the 31 December 2012, there was £1,207,000 accrued (2011: £nil) in performance fees. The Board is also entitled to be repaid all reasonable travelling, subsistence and other expenses incurred by them respectively whilst conducting their duties as Directors.
James Otter is a Director of Axon Limited.
Notice of Annual General Meeting
Notice is hereby given that the Annual General Meeting of Hygea vct plc ("the Company") will be held at the offices of Pannmure Gordon (UK) Limited, One New Change, London EC4M 9AF on Wednesday 8 May 2013 at 11.30 a.m. for the following purposes:
ORDINARY BUSINESS
To consider and if thought fit, pass the following as Ordinary Resolutions
That the Directors' Annual Report and Accounts and the auditors' report thereon for the year ended 31 December 2012 be received and adopted.
That the Directors' Remuneration Report for the year ended 31 December 2012 be received and adopted.
That Charles Breese be re-elected as a Director of the Company.
That James Cowper LLP be re-appointed as auditors of the Company until the conclusion of the next Annual General Meeting of the Company at which accounts are laid before the Members.
That the Directors be authorised to determine the auditor's remuneration.
SPECIAL BUSINESS
AUTHORITY TO ALLOT RELEVANT SECURITIES
That the Directors be and are generally and unconditionally authorised in accordance with s551 of the Companies Act 2006 to exercise all the powers of the Company to allot shares in the Company up to a maximum nominal amount of £405,767 (representing approximately 10% of the Ordinary share capital in issue at today's date) such authority to expire at the later of the conclusion of the Company's Annual General Meeting next following the passing of this Resolution and the expiry of 15 months from the passing of the relevant Resolution (unless previously revoked, varied or extended by the Company in a general meeting but so that such authority allows the Company to make offers or agreements before the expiry thereof, which would or might require relevant securities to be allotted after the expiry of such authority).
To consider and, if thought fit, pass the following as Special Resolutions:
EMPOWERMENT TO MAKE ALLOTMENTS OF EQUITY SECURITIES
THAT the Directors pursuant to s571 of the Companies Act 2006 be empowered to allot or make offers or agreements to allot equity securities (as defined in s560(1) of the said Act) for cash pursuant to the authority referred to in Resolution 7 as if s561 (1) of the Act did not apply to any such allotments and so that:
reference to allotment in this Resolution shall be construed in accordance with s560(2) of the Act; and
the power conferred by this Resolution shall enable the Company to make any offer or agreement before the expiry of the said power which would or might require equity securities to be allotted after the expiry of the said power and the Directors may allot equity securities in pursuance of such offer or agreement notwithstanding the expiry of such power.
And this power, unless previously varied, revoked or renewed, shall come to an end at the conclusion of the Annual General Meeting of the Company next following the passing of this Resolution or, if earlier, on the expiry of 15 months from the passing of this Resolution.
| By order of the Board | Registered office 39 Alma Road St Albans AL1 3AT |
| Craig Hunter Company Secretary |
NOTES:
A member entitled to attend and vote at the Annual General Meeting may appoint one or more proxies to attend and vote on his or her behalf. A proxy need not be a member.
A form of proxy is enclosed which, to be effective, must be completed and delivered to the registrars of the Company, Capita Registrars, Proxies Department, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU so as to be received by no later than 48 hours before the time the Annual General Meeting is scheduled to begin. The completion and return of the form of proxy will not affect the right of a member to attend and vote at the Annual General Meeting.
(c) Copies of the Directors' Letters of Appointment, the Register of Directors' Interests in the Ordinary shares of the Company kept in accordance with the Listing Rules Articles of Association will be available for inspection at the registered office of the Company during usual business hours on any weekday from the date of this notice until the Annual General Meeting, and at the place of that meeting for at least 15 minutes prior to the commencement of the meeting until its conclusion.
Accounts
The financial information set out in this announcement does not constitute statutory accounts as defined in the Companies Act 2006 ("the Act"). The balance sheet as at 31 December 2012, income statement and cash flow statement for the period then ended have been extracted from the Company's 2012 statutory financial statements upon which the auditor's opinion is unqualified and does not include any statement under the section 495 of the Act.
The Annual Report & Accounts for the year ended 31 December 2012 will be filed with the Registrar of Companies.
Copies of the documents listed below will be submitted to the National Storage Mechanism and are available for inspection at: http://www.hemscott.com/nsm.do
Documents:
· Report and Accounts for the year ended 31 December 2012
· Notice of Annual General Meeting
· Annual General meeting Proxy Card
Enquiries:
Charles Breese, Hygea VCT plc on 01280 703482 or larpentnewton@btinternet.com
Roland Cornish, Beaumont Cornish Limited on 020 7628 3396
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: Hygea VCT plc via Thomson Reuters ONE
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