Kings Arms Yard VCT PLC : Annual Financial Report
Kings Arms Yard VCT PLC
As required by the UK Listing Authority's Disclosure and Transparency Rules 4.1 and 6.3, Kings Arms Yard VCT PLC today makes public its information relating to the Annual Report and Financial Statements for the year ended 31 December 2012.
This announcement was approved for release by the Board of Directors on 15 April 2013.
This announcement has not been audited.
You will shortly be able to view the Annual Report and Financial Statements for the year to 31 December 2012 (which have been audited) at: www.albion-ventures.co.uk by clicking on 'Our Funds' and then 'Kings Arms Yard VCT PLC'. The Annual Report and Financial Statements for the year to 31 December 2012 will be available as a PDF document via a link under the 'Investor Centre' in the 'Financial Reports and Circulars' section. The information contained in the Annual Report and Financial Statements will include information as required by the Disclosure and Transparency Rules, including Rule 4.1.
Investment objectives
The Company is a Venture Capital Trust. The investment policy is intended to produce a regular and predictable dividend stream with an appreciation in capital value as set out below.
- The Company intends to achieve its strategy by adopting an investment policy for new investments which over time will rebalance the portfolio such that approximately 50 per cent. of the portfolio comprises an asset-backed portfolio of lower risk, ungeared businesses, principally operating in the healthcare, environmental and leisure sectors (the "Asset-Backed Portfolio"). The balance of the portfolio, other than funds retained for liquidity purposes, will be invested in a portfolio of higher growth businesses across a variety of sectors of the UK economy. These will range from lower risk, income producing businesses to a limited number of higher risk technology companies (the "Growth Portfolio").
- In neither category would portfolio companies normally have any external borrowing with a charge ranking ahead of the Company. Up to two-thirds of qualifying investments by cost will comprise loan stock secured with a first charge on the portfolio company's assets.
- The Company's investment portfolio will thus be structured to provide a balance between income and capital growth for the longer term. The Asset-Backed Portfolio is designed to provide stability and income whilst still maintaining the potential for capital growth. The Growth Portfolio is intended to provide highly diversified exposure through its portfolio of investments in unquoted UK companies.
- Funds held pending investment or for liquidity purposes will be held as cash on deposit or in floating rate notes or similar instruments with banks or other financial institutions with a Moody's rating of 'A' or above.
Financial calendar
| Record date for first dividend | 10 May 2013 |
| Annual General Meeting | 24 May 2013 |
| Payment date of first dividend | 31 May 2013 |
| Announcement of half-yearly results for the six months ending 30 June 2013 | August 2013 |
| Payment date of second dividend (subject to Board approval) | September 2013 |
Financial highlights
| 18.9p | Net asset value per share as at 31 December 2012. |
| 16.0p | Mid market share price as at 31 December 2012. |
| 2.1x | Increase in mid market share price during the year. |
| 3.1p | Total return per share to shareholders for the year ended 31 December 2012. |
| 1.0p | Total tax free dividends per share paid in the year to 31 December 2012. |
| 0.5p | First tax free dividend declared for the year to 31 December 2013. |
| 6.25% | Tax free yield on share price (dividend per annum/share price as at 31 December 2012). |
Financial summary
| 31 December 2012 (pence per share) | 31 December 2011 (pence per share) | |
| Dividends paid during the year | 1.00 | 0.67 |
| Revenue return | - | 0.10 |
| Capital return | 3.10 | 0.70 |
| Net asset value enhancement as a result of share buy backs | 0.10 | - |
| Net asset value | 18.90 | 16.70 |
| Shareholder net asset value total return | From launch to 31 December 2010 (pence) | 1 January 2011 to 31 December 2012 (pence per share) | From launch to 31 December 2012 (pence per share) |
| Subscription price per share at launch | 100.00 | - | 100.00 |
| Dividends paid | 58.66 | 1.67 | 60.33 |
| (Decrease)/increase in shareholder net asset value | (83.40) | 2.30 | (81.10) |
| Shareholder net asset value total return | 75.26 | 3.97 | 79.23 |
| Current annual dividend objective (pence per share) | 1.00 |
Chairman's statement
Introduction
The results for 2012 show a year of further growth and repositioning for the Company.
Despite the depressed conditions for the UK economy as a whole, pleasing asset growth was achieved from the legacy portfolio with two significant exits and a number of minor ones, while further progress was made in rebalancing the portfolio with the inclusion of lower risk asset backed investments offering an immediate income yield.
The troubled market conditions and the paucity of bank lending have made trading difficult for many small companies, but these conditions may have assisted the Manager in securing new investments at attractive prices.
Results
Net asset value per share rose by 13 per cent. from 16.7p on 31 December 2011 to 18.9p on 31 December 2012 after allowing for the payment of dividends totalling 1 penny per share during the year. The total net asset return (the aggregate of dividends paid to date and net asset value per share) rose from 76.0p to 79.2p per share.
The Company increased its net profit after taxation from £1,060,000 in 2011 to £6,466,000 in the year to 31 December 2012, very largely as a result of a series of successful disposals.
The two significant exits were made from the legacy portfolio of longstanding technology investments. In September 2012, the investment in Workshare Limited, the document comparison software business, was sold to a company operating in similar markets for a total consideration of £2.7 million, being a £491,000 gain on its carrying value. Shortly before the year end the entire holding in Vivacta Limited, the medical diagnostics company, was sold to a trade buyer for a total cash price of £7.0 million of which £1.0 million is held in escrow, half being payable in nine months and the remainder in eighteen months. The total gain on the previous carrying value of this investment (including the escrow) is £5.0 million. In addition, in the first half of the year, the entire holding in We7 Limited, the music destination website, was sold at a loss of £99,000 on its carrying value at 31 December 2011.
Meanwhile the remaining shareholding in the NASDAQ quoted Celldex Therapeutics Limited was successfully sold at a gain of £33,000 over its carrying value at 30 June 2012.
Over the course of the year new investments totalling £2.6 million have been made in six renewable energy businesses and a profitable pub owning company. All of these fall into our portfolio of lower risk asset-backed businesses. In addition, one new healthcare company has been added to our higher growth portfolio. This is Proveca Limited whose business model is to gain authorisation for the paediatric use of established off-patent drugs, thus obtaining 10 year exclusivity in this new market.
Further information on all new investments is contained in the Manager's Report.
Despite this very active period of new investment, the success of the disposal programme resulted in cash and liquid assets at the year-end rising to £12,173,000 (2011: £10,734,000).
VCT qualifying status
As at 31 December 2012, 84.4 per cent. of total investments were in qualifying holdings. The Board continues to monitor this position very carefully in order to ensure that qualifying investments comfortably exceed the minimum threshold of 70 per cent. required for the Company to continue to benefit from VCT tax status.
Dividend
The success achieved in generating cash through disposals while repositioning the Company's portfolio reinforces the Board's dividend policy. We are pleased to declare a first dividend of 0.5p per share to be paid on 31 May 2013 to shareholders on the register on 10 May 2013 and anticipate that a second dividend will be paid later in the year.
Discount management and share buy-backs
In 2012 the Board reintroduced a policy of buying back shares in the market, subject to the overall constraint that such purchases are in the Company's interests, including the maintenance of sufficient resources for investment in new and existing portfolio companies and the continued payment of dividends to shareholders. Given the success to date in repositioning the portfolio, it is now the Board's intention over time for such buy-backs to be in the region of a 5 per cent. discount to net asset value, so far as market conditions and liquidity permit.
During the year the Company has brought back 4,242,000 of its shares at a cost of £633,000, including stamp duty. These shares were bought at an average discount of 12 per cent. resulting in a 0.1p per share uplift in net asset value per share for continuing shareholders.
Transactions with the Manager
Details of transactions that took place with the Manager during the year can be found in note 4.
Annual General Meeting
The Annual General Meeting of the Company will be held at the City of London Club, 19 Old Broad Street, London EC2N 1DS at 11.00 am on 24 May 2013. Full details of the business to be conducted at the Annual General Meeting are given in the Notice of the Meeting which can be found in the Shareholder Circular enclosed with this Annual Report and Financial Statements.
The Board welcomes your attendance at the meeting as it gives an opportunity for shareholders to ask questions of the Board and Investment Manager. If you are unable to attend the Annual General Meeting in person, we would encourage you to make use of your proxy votes.
Performance incentive fee
Upon the change of management to Albion Ventures LLP on 1 January 2011 the Board specifically stipulated that no performance fee would be payable during the first two years of their tenure. We also said that following 1 January 2013 we would seek to agree such an incentive scheme with Albion Ventures LLP subject to shareholder approval. The Board believes that such schemes, if properly structured, can incentivise managers to better performance and assist them in attracting and retaining a sufficient calibre of staff to achieve this improvement.
We have now put forward, in the enclosed circular to shareholders, a scheme which we believe will meet these objectives while protecting shareholders' interests. Our proposal is structured so that it would not come into effect unless and until the Manager had achieved a cumulative rise in net asst value and dividends per share of at least 34 per cent. over the opening net asset value per share at the time of its appointment. Even then no reward would be payable to the Manager unless total shareholder return grew thereafter by more than the Retail Price Index plus 2 per cent. per annum.
The Board believes that this is a stretching target and recommends the scheme's adoption by shareholders.
Risks and uncertainties
The outlook for the UK economy continues to be the key risk affecting your Company. The Company's investment risk is mitigated through a variety of processes, including our policy of ensuring that the Company has a first charge over portfolio companies' assets wherever possible.
A detailed analysis of the other risks and uncertainties facing the business is set out in note 23.
Outlook and prospects
Despite recent improvements in stock market performance, the position for many smaller companies of the sort that continue to form the bulk of the Company's portfolio remains difficult. Bank lending is still scarce and confidence fragile. Nevertheless, sound progress has been made in the last two years. Some very useful and remunerative exits have been achieved and the portfolio continues to be repositioned towards a lower risk profile.
We have now seen two years of continuous improvement in asset value and total shareholder return and the Board believes that the current investment policy offers the best prospect of continued improvement in capital value and a sustainable long term dividend.
Robin Field
Chairman
15 April 2013
Manager's report
Introduction
The task of repositioning the investment portfolio has continued according to plan over the course of the year. Proceeds from the sale of investments within the 'legacy' portfolio amounted to £10.2 million with the proceeds being utilised mainly into unquoted investments (£5.1 million), but also the payment of dividends (£2.1 million) and share buy-backs (£0.6 million). Cash and liquid asset resources increased over the year by £1.4 million.
Investment progress
Of the new investments made, £1.9 million went to support nine companies within the 'legacy' portfolio while £3.2 million was invested in a number of new portfolio companies, in line with the Company's revised investment policy. Of the 'legacy' investments, the largest was £576,000 into Atego to fund a US acquisition - this has so far performed well above expectations resulting in an increase in the company's overall valuation. Meanwhile, £360,000 was invested into Sift, in order to buy out a shareholder and consolidate our position; £200,000 was invested into UniServity, increasing the Company's interest in the business to 93.6 per cent. and £171,000 was invested into Oxford Immunotec. as part of a larger fund-raising on the back of strong growth.
The majority of our investments in new companies were in renewable energy (£2.6 million), which now accounts for 10 per cent. of the investment portfolio, against a longer term target of 20 per cent. Included within this was our first hydro-electric project, Dragon Hydro (£247,000), where a 'run of river' scheme in West Wales is currently under construction and, once operational, will have a 50 year life producing a projected return of around 11 per cent. per annum for the Company. We also invested a further £692,000 into Alto Prodotto Wind to fund further wind projects. Our first two turbines (both on brownfield or industrial sites) are operating at or above plan. We also invested £400,000 into an existing Albion pub investment, Bravo Inns II, which operates a number of highly profitable managed public houses in the North West and where there continue to be opportunities to purchase premises at advantageous prices, while we also invested an initial £215,000 (out of a projected £903,000) into Proveca, which is involved in the development of paediatric drugs.
Many companies within the existing portfolio are performing well including strong growth in companies such as Atego, Elateral and Oxford Immunotec. Meanwhile, a transaction by Antenova resulted in a substantial write-up during the year. We anticipate further exits over the next 12 months, with much of the proceeds being targeted for re-investment into lower risk asset-backed income producing investments.
This underlines our policy of seeking to increase the income generating capacity of the Company. Income in 2012 amounted to £511,000. This compares to a total of £790,000 for Kings Arms Yard VCT and Kings Arms Yard VCT 2 for 2011, though that number included a one-off dividend from Elateral of £573,000. Ignoring that, the Company's income more than doubled and we anticipate a further substantial increase in the current year with a view to ensuring, over time, that operating costs are fully covered by income.
An overview showing the holding period and the running revenue profile of each of the top ten investments in the unquoted portfolio (as at 31 December 2012) and which comprise nearly 74 per cent. of the unquoted portfolio is set out below.
| Valuation £'000 | % of total unquoted portfolio | Date of first investment | Running revenue profile | Basis of valuation | |
| Elateral Group Limited | 4,264 | 16.62 | 1999 | £5m-£10m | Revenue multiple |
| Oxford Immunotec Limited | 3,743 | 14.59 | 2003 | £10m-£15m | Price of recent investment |
| UniServity Limited | 2,054 | 8.00 | 2007 | £3m-£5m | Revenue multiple |
| Cluster Seven Ltd | 1,761 | 6.86 | 2005 | £3m-£5m | Revenue multiple |
| Atego Group Limited | 1,667 | 6.50 | 1998 | £10m-£15m | Earnings multiple |
| Antenova Limited | 1,288 | 5.02 | 2005 | £3m-£5m | Earnings multiple |
| Sift Limited | 1,127 | 4.39 | 2006 | £5m-£10m | Earnings multiple |
| Hilson Moran Holdings Limited | 1,066 | 4.15 | 2011 | £15m-£20m | Cost reviewed for impairment |
| Alto Prodotto Wind Limited | 1,000 | 3.90 | 2011 | Pre-revenue | Cost reviewed for impairment |
| The Street by Street Solar Programme Limited | 1,000 | 3.90 | 2011 | Pre-revenue | Cost reviewed for impairment |
| 18,970 | 73.93 | 2011 |
Albion Ventures LLP
Manager
15 April 2013
Statement of Directors' responsibilities
In preparing these Financial Statements for the year to 31 December 2012, the Directors of the Company, being Robin Field, Thomas Chambers, Martin Fiennes and Alan Lamb, confirm to the best of their knowledge:
- financial information contained in the announcement and the full Annual Report and Financial Statements for the year ended 31 December 2012 for the Company has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK Accounting Standards and applicable law) and give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company for the year ended 31 December 2012 as required by DTR 4.1.12.R;
- the Chairman's statement and Manager's report include a fair review of the information required by DTR 4.2.7R (indication of important events during the year ended 31 December 2012 and description of principal risks and uncertainties that the Company faces); and
- the Chairman's statement and Manager's report include a fair review of the information required by DTR 4.2.8R (disclosure of related parties transactions and changes therein).
A detailed Statement of Directors' responsibilities for the preparation of the Company's financial statements is contained within the full audited Annual Report and Financial Statements.
By order of the Board
Albion Ventures LLP
Company Secretary
15 April 2013
Income statement
| Year ended 31 December 2012 | Year ended 31 December 2011 | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| Note | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Gains on investments | 2 | - | 6,964 | 6,964 | - | 1,257 | 1,257 |
| Investment income | 3 | 511 | - | 511 | 522 | - | 522 |
| Investment management fees | 4 | (175) | (526) | (701) | (107) | (322) | (429) |
| Other expenses | 5 | (273) | - | (273) | (290) | - | (290) |
| Exchange rate costs | 5 | (35) | - | (35) | - | - | - |
| Profit on ordinary activities before tax | 28 | 6,438 | 6,466 | 125 | 935 | 1,060 | |
| Tax on ordinary activities | 7 | - | - | - | - | - | - |
| Profit on ordinary activities after tax | 28 | 6,438 | 6,466 | 125 | 935 | 1,060 | |
| Basic and diluted return per share (pence ) | 9 | - | 3.1 | 3.1 | 0.1 | 0.7 | 0.8 |
The accompanying notes form an integral part of these Financial Statements.
The total column of this Income statement represents the profit and loss account of the Company. The supplementary revenue return and capital columns have been prepared in accordance with The Association of Investment Companies' Statement of Recommended Practice.
All revenue and capital items in the above statement derive from the continuing operations of the Company.
The Company has only one class of business and derives its income from investments made in shares and securities and from bank deposits.
There are no recognised gains or losses other than the results for the year disclosed above. Accordingly a Statement of total recognised gains and losses is not required.
The difference between the reported profit on ordinary activities before tax and the historical cost profit/(loss) is due to the fair value movements on investments. As a result, a note on historical cost profits and losses has not been prepared.
Balance sheet
| 31 December 2012 | 31 December 2011 | ||
| Note | £'000 | £'000 | |
| Fixed asset investments | 11 | 25,794 | 23,957 |
| Current assets | |||
| Trade and other debtors | 13 | 1,505 | 557 |
| Current asset investments | 13 | 5,476 | 1,976 |
| Cash at bank and in hand | 17 | 6,697 | 8,758 |
| 13,678 | 11,291 | ||
| Creditors: amounts falling due within one year | 14 | (642) | (262) |
| Net current assets | 13,036 | 11,029 | |
| Net assets | 38,830 | 34,986 | |
| Capital and reserves | |||
| Called-up share capital | 15 | 2,097 | 2,095 |
| Share premium | 27 | - | |
| Investment holding reserve | (2,569) | (4,984) | |
| Other distributable reserve | 39,275 | 37,875 | |
| Total equity shareholders' funds | 38,830 | 34,986 | |
| Basic and diluted net asset value per share (pence) | 16 | 18.9 | 16.7 |
The accompanying notes form an integral part of these Financial Statements.
The special reserve, treasury reserve and the profit and loss account have been combined to form a single reserve named other distributable reserve for both the current and prior year. The Directors consider the presentation of a single reserve to enhance the clarity of financial reporting. Details regarding treasury shares can be found in note 15.
The Financial Statements were approved by the Board of Directors and authorised for issue on 15 April 2013 and were signed on its behalf by:
Robin Field
Chairman
Company number: 03139019
Reconciliation of movements in shareholders' funds
| Called-up share capital | Share premium account | Capital redemption reserve | Investment holding reserve | Other distributable reserve | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| At 31 December 2011 | 2,095 | - | - | (4,984) | 37,875 | 34,986 |
| Recognised gains on investments | - | - | - | - | 5,585 | 5,585 |
| Realisation of prior years' net recognised losses on investments | - | - | - | 1,035 | (1,035) | - |
| Investment holding profit on valuation of investments | - | - | - | 1,379 | - | 1,379 |
| Investment management fee allocated to capital | - | - | - | - | (526) | (526) |
| Purchase of own treasury shares | - | - | - | - | (633) | (633) |
| Shares issued under the dividend reinvestment scheme | 2 | 27 | - | - | - | 29 |
| Revenue gain on ordinary activities after taxation | - | - | - | - | 28 | 28 |
| Net dividends paid | - | - | - | - | (2,017) | (2,017) |
| At 31 December 2012 | 2,097 | 27 | - | (2,569) | 39,275 | 38,830 |
| At 31 December 2010 | 5,519 | 150 | 765 | (9,574) | 21,423 | 18,283 |
| Recognised gains on investments | - | - | - | - | 270 | 270 |
| Realisation of prior years' net recognised losses on investments | - | - | - | 3,603 | (3,603) | - |
| Investment holding profit on valuation of investments | - | - | - | 987 | - | 987 |
| Investment management fee allocated to capital | - | - | - | - | (322) | (322) |
| Shares issued under the dividend reinvestment scheme | 2 | 5 | - | - | - | 7 |
| Shares issued to acquire net assets of Kings Arms Yard VCT 2 PLC including costs | 4,953 | 11,425 | - | - | - | 16,378 |
| Share issue costs | - | (124) | - | - | - | (124) |
| Reduction in share capital and reserves | (8,379) | (11,456) | (765) | - | 20,600 | - |
| Revenue gain on ordinary activities after taxation | - | - | - | - | 125 | 125 |
| Net dividends paid | - | - | - | - | (619) | (619) |
| At 31 December 2011 | 2,095 | - | - | (4,984) | 37,875 | 34,986 |
The accompanying notes form an integral part of these Financial Statements.
Unrealised gains and losses arising on investments held at fair value are transferred to the investment holding losses reserve.
The total distributable reserves are £39,706,000 (2011: £32,891,000), comprising other distributable reserve net of investment holding losses.
The special reserve, treasury share reserve and the profit and loss account have been combined in the balance sheet to form a single reserve named other distributable reserve for both the current and prior year. The Directors consider the presentation of a single reserve to enhance the clarity of financial reporting. More details regarding treasury shares can be found in note 15.
Cash flow statement
| Year ended 31 December 2012 | Year ended 31 December 2011 | ||
| Note | £'000 | £'000 | |
| Net cash flow from operating activities | 18 | (390) | (205) |
| Capital expenditure and financial investments | |||
| Purchase of fixed asset investments | (6,296) | (3,131) | |
| Disposal of fixed asset investments | 10,360 | 4,235 | |
| Cash received from investments previously sold or written off | 404 | 324 | |
| Net cash flow from investing activities | 4,468 | 1,428 | |
| Management of liquid resources | |||
| Purchase of current asset investments | (5,474) | (985) | |
| Disposal of current asset investments | 1,976 | 3,230 | |
| Net cash flow from liquid resources | (3,498) | 2,245 | |
| Equity dividends paid (net of costs of issuing shares under the dividend reinvestment scheme and unclaimed dividends)* | (2,012) | (706) | |
| Net cash flow before financing | (1,392) | 2,762 | |
| Financing | |||
| Cash acquired from Kings Arms Yard VCT 2 PLC on Merger | - | 3,953 | |
| Cost of Merger (paid on behalf of the Company and Kings Arms Yard VCT 2 PLC) | (37) | (173) | |
| Purchase of own shares | (632) | - | |
| Net cash flow from financing | (669) | 3,780 | |
| Cash flow in the year | 17 | (2,061) | 6,542 |
The accompanying notes form an integral part of these Financial Statements.
Details of material non-cash transactions can be found in notes 10 and 11.
* The equity dividends shown in the cash flow are different to the dividends posted to reserves due to the release of dividend creditors recoverable by the Company and the non-cash effect of the dividend reinvestment scheme.
Notes to the Financial Statements
1. Accounting policies
A summary of the principal accounting policies which have been applied consistently in the current and in prior periods, is set out below. However, to enhance clarify of the financial reporting, during the year the special reserve, treasury share reserve and profit and loss account have been presented as a single reserve named other distributable reserve. This has also been applied to prior periods.
Basis of accounting
The Financial Statements have been prepared in accordance with the historical cost convention, modified to include the revaluation of investments, in accordance with applicable UK law and accounting standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ("SORP") issued by The Association of Investment Companies ("AIC") in January 2009. The accounts are prepared on a going concern basis.
Consolidation
As permitted by FRS 2 "Accounting for Subsidiary Undertakings", holdings in excess of 50 per cent. of the equity of an investment company may be excluded from consolidation where the holding is held exclusively for subsequent resale.
The results of UniServity Limited, where the Company holds in excess of 50 per cent. of that company's equity are, therefore, excluded from consolidation as the interest in UniServity Limited is held exclusively for subsequent resale and has not previously been consolidated.
Fixed asset investments
The Company's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment policy, and information about the portfolio is provided internally on that basis to the Board.
Upon initial recognition (using trade date accounting) investments are designated by the Company as 'at fair value through profit or loss' and are included at their initial fair value, which is cost (excluding expenses incidental to the acquisition which are written off to the income statement).
Subsequently, the investments are valued at 'fair value', which is measured as follows:
- Investments listed on recognised exchanges are valued at their bid prices at the end of the accounting period or otherwise at fair value based on published price quotations;
- Unquoted investments, where there is not an active market, are valued using an appropriate valuation technique in accordance with the September 2009 IPEVCV Guidelines. Indicators of fair value are derived using established methodologies including earnings multiples, the level of third party offers received, prices of recent investment rounds, net assets and industry valuation benchmarks. Where the Company has an investment in an early stage enterprise, the price of a recent investment round is often the most appropriate approach to determining fair value. In situations where a period of time has elapsed since the date of the most recent transaction, consideration is given to the circumstances of the portfolio company since that date in determining fair value. This includes consideration of whether there is any evidence of deterioration or strong definable evidence of an increase in value. In the absence of these indicators, the investment in question is valued at the amount reported at the previous reporting date. Examples of events or changes that could indicate a diminution include:
- the performance and/or prospects of the underlying business are significantly below the expectations on which the investment was based;
- a significant adverse change either in the portfolio company's business or in the technological, market, economic, legal or regulatory environment in which the business operates; or
- market conditions have deteriorated, which may be indicated by a fall in the share prices of quoted businesses operating in the same or related sectors.
It is not the Company's policy to exercise control or significant influence over portfolio companies. Therefore, in accordance with the exemptions under FRS 9 "Associates and Joint Ventures", those undertakings in which the Company holds more than 20 per cent., but less than 50 per cent., of the equity of an investment company, and the investment company is not a subsidiary, are not regarded as associated undertakings.
Current asset investments
In accordance with FRS 26, units held in funds used for cash management are designated as fair value through profit and loss. These investments are classified as current asset investments as they are investments held for the short term.
Gains and losses on investments
Gains and losses arising from changes in the fair value of the investments are included in the Income statement for the year as a capital item and are allocated to Investment holding losses.
Investment income
Dividends receivable on quoted equity shares are recognised on the ex-dividend date. Income receivable on unquoted equity and non-equity shares and loan notes is recognised when the Company's right to receive payment and expect settlement is established. Fixed returns on non-equity shares and debt securities are recognised on a time apportionment basis (including amortisation of any premium or discount to redemption) so as to reflect the effective interest rate, provided there is no reasonable doubt that payment will be received in due course. Income from fixed interest securities and deposit interest is included on an effective interest basis.
Investment management fees and other expenses
All expenses, including expenses incidental to the acquisition or disposal of an investment, are accounted for on an accruals basis and are charged wholly to the income statement except for 75 per cent. of management fees which are allocated to capital to the extent that these relate to an enhancement in the value of the investments. This is in line with the Board's expectation that over the long term 75 per cent. of the Company's investment returns will be in the form of capital gains
Costs associated with the issue of shares are charged to the share premium account. Costs associated with the buy back of shares are charged to other distributable reserve, which now includes the special reserve to which these costs were previously charged.
Taxation
Taxation is applied on a current basis in accordance with FRS 16 "Current tax". Taxation associated with capital expenses is applied in accordance with the SORP. In accordance with FRS 19 "Deferred tax", deferred taxation is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the Financial Statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.
The Directors have considered the requirements of FRS 19 and do not believe that any provision should be made for deferred tax.
Foreign exchange
The currency of the primary economic environment in which the Company operates (the functional currency) is pounds Sterling ("Sterling"), which is also the presentational currency of the Company. Transactions involving currencies other than Sterling are recorded at the exchange rate ruling on the transaction date. At each Balance sheet date, monetary items and non-monetary assets and liabilities that are measured at fair value, which are denominated in foreign currencies, are retranslated at the closing rates of exchange. Exchange differences arising on settlement of monetary items and from retranslating at the Balance sheet date of investments and other financial instruments measured at fair value through profit or loss, and other monetary items, are included in the Income statement. Exchange differences relating to investments and other financial instruments measured at fair value are subsequently included in the Investment holding losses.
Reserves
Share premium account
This reserve accounts for the difference between the price paid for shares and the nominal value of the shares, less issue costs and transfers to other distributable reserve.
Investment holding reserve
Increases and decreases in the valuation of investments held at the year end against cost are included in this reserve.
Other distributable reserve
The special reserve, treasury share reserve and profit and loss account have been combined as a single reserve named other distributable reserve.
Dividends
In accordance with FRS 21 "Events after the balance sheet date", dividends declared by the Company and payable to equity shareholders are accounted for in the period in which the dividend has been paid or approved by shareholders at an annual general meeting.
| 2. Gains on investments | Year ended 31 December 2012 £'000 | Year ended 31 December 2011 £'000 |
| Unrealised gains on fixed asset investments held at fair value through profit or loss account | 1,375 | 993 |
| Unrealised gain/(loss) on deferred consideration held at fair value through profit or loss account | 4 | (6) |
| Unrealised gains subtotal | 1,379 | 987 |
| Realised gains on fixed asset investments held at fair value through profit or loss account | 5,572 | 253 |
| Realised gains in respect of escrow receipts from previously sold investments and distributions from investments in liquidation | 13 | 17 |
| Realised gains subtotal | 5,585 | 270 |
| 6,964 | 1,257 |
| 3. Investment income | Year ended 31 December 2012 £'000 | Year ended 31 December 2011 £'000 |
| Income recognised on investments held at fair value through profit or loss account | ||
| Dividends | - | 359 |
| Listed fixed interest securities | 72 | 13 |
| Interest from loans to portfolio companies | 354 | 67 |
| Other income | - | 10 |
| 426 | 449 | |
| Income recognised on investments measured at amortised cost | ||
| Bank deposit interest | 85 | 73 |
| 511 | 522 |
Interest income earned on impaired investments at 31 December 2012 was £nil (2011: £nil).
| 4. Investment management fees | Year ended 31 December 2012 £'000 | Year ended 31 December 2011 £'000 |
| Investment management fees charged to revenue | 175 | 107 |
| Investment management fees charged to capital | 526 | 322 |
| 701 | 429 |
Further details of the Management agreement under which the investment management fee is paid are given in the Directors' report on page 20 of the Annual Report and Financial Statements.
The Manager, Albion Ventures LLP, is party to a Management agreement from the Company (details disclosed on page 20 of the Annual Report and Financial Statements). During the year, services with a value of £701,000 (2011: £429,000 from SPARK Venture Management Limited) and £50,000 (2011: £77,000 from SPARK Venture Management Limited) were purchased by the Company from Albion Ventures LLP in respect of management and administration fees respectively. At the financial year end, the amount due to Albion Ventures LLP in respect of these services disclosed as accruals was £185,000 (2011: £nil to SPARK Venture Management Limited).
Albion Ventures LLP is, from time to time, eligible to receive transaction fees and Directors' fees from portfolio companies. During the year ended 31 December 2012, fees of £255,000 attributable to the investments of the Company were received pursuant to these arrangements (2011: £82,000).
Albion Ventures LLP holds 1,084 shares as a result of the fractional entitlements arising from the Merger of Kings Arms Yard VCT 2 PLC on 30 September 2011. These shares will be sold for the benefit of the Company at a future date.
Albion Ventures LLP also holds 6,403 shares purchased to clear a dissenting shareholder in respect of the Merger of Kings Arms Yard VCT 2 PLC on 30 September 2011.
| 5. Other expenses | Year ended 31 December 2012 £'000 | Year ended 31 December 2011 £'000 |
| Administrative and secretarial services | 50 | 77 |
| Directors' fees (note 6) | 75 | 46 |
| Auditor's remuneration | ||
| Fees for statutory audit of the Financial Statements (excluding VAT) | 23 | 23 |
| Fees for taxation advice (excluding VAT) | 3 | 2 |
| Fees for taxation compliance (excluding VAT) for taxation compliance | 2 | 2 |
| Legal and professional expenses | 1 | 27 |
| Insurance | 10 | 10 |
| Irrecoverable VAT | 17 | 26 |
| Other expenses | 92 | 77 |
| 273 | 290 | |
| Exchange rate costs | 35 | - |
| 308 | 290 |
As described in the Managers' report, the Company acquired control of UniServity Limited on 19 December 2012 and for the reasons given in note 1, this investment is not consolidated. Grant Thornton UK LLP is the Auditor of both the Company and UniServity Limited. UniServity Limited prepares it's financial statements for the year to 31 July. For the year ended 31 July 2012 fees in relation to audit and taxation compliance services were £16,750 and £4,200 respectively.
| 6. Directors' fees | Year ended 31 December 2012 £'000 | Year ended 31 December 2011 £'000 |
| Amount payable to Directors | 70 | 49 |
| National insurance | 5 | 2 |
| Tax and national insurance recovered from past directors | - | (5) |
| 75 | 46 |
Further information regarding Directors' remuneration can be found in the Directors' remuneration report on pages 28 and 29 in the Annual Report and Financial Statements.
| 7. Tax on ordinary activities | Year ended 31 December 2012 £'000 | Year ended 31 December 2011 £'000 |
| UK Corporation tax payable | - | - |
| Reconciliation of profit on ordinary activities to taxation charge | Year ended 31 December 2012 £'000 | Year ended 31 December 2011 £'000 |
| Profit on ordinary activities before taxation | 6,466 | 1,060 |
| Tax charge on profit at the standard UK corporation tax rate of 24.5% (2011: 26.5%) | (1,584) | (281) |
| Effects of: | ||
| Non-taxable gains | 1,706 | 333 |
| Non-taxable income | - | 95 |
| Unutilised management expenses | (122) | (147) |
| - | - |
The UK government changed the rate of corporation tax from 26 per cent. to 24 per cent. with effect from 1 April 2012. The effective rate of tax for the year ended 31 December 2012 is 24.5 per cent. (91 days at 26 per cent. and 275 days at 24 per cent.). The tax charge for the year shown in the income statement is lower than the standard rate of corporation tax for the reasons shown above.
The Company has excess trading losses of £9,687,000 (2011: £9,189,000) that are available for offset against future profits. A deferred tax asset of £2,325,000 (2011: £2,388,000) has not been recognised in respect of those losses as they will be recoverable only to the extent that the Company has sufficient future taxable profits.
| 8. Dividends | Year ended 31 December 2012 £'000 | Year ended 31 December 2011 £'000 |
| Final dividend of 0.67 pence per share paid on 24 June 2011 | - | 739 |
| Unclaimed dividends returned to Company during the year | - | (120) |
| First dividend of 0.5 pence per share paid on 25 May 2012 | 1,047 | - |
| Second dividend of 0.5 pence per share paid on 28 September 2012 | 1,048 | - |
| Unclaimed dividends returned to Company during the year | (78) | - |
| 2,017 | 619 |
The Directors have declared a first dividend of 0.5 pence per share for the year ending 31 December 2013, which will amount to approximately £1,027,000. This dividend will be paid on 31 May 2013 to shareholders on the register on 10 May 2013.
| 9. Basic and diluted return per share | ||||||||
| Year ended 31 December 2012 | Year ended 31 December 2011 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| Return attributable to equity shares (£'000) | 28 | 6,438 | 6,466 | 125 | 935 | 1,060 | ||
| Weighted average shares in issue (excluding treasury shares) | 208,673,002 | 135,360,943 | 135,360,943 | |||||
| Return attributable per equity share (pence) | - | 3.1 | 3.1 | 0.1 | 0.7 | 0.8 | ||
The weighted average number of Ordinary shares is calculated excluding the treasury shares of 4,242,000 (2011: nil).
There are no convertible instruments, derivatives or contingent share agreements in issue so basic and diluted return per share are the same.
10. Acquisition of the assets and liabilities of Kings Arms Yard VCT 2 PLC
On 30 September 2011, Kings Arms Yard VCT 2 PLC was placed into members' voluntary liquidation pursuant to a scheme of reconstruction under section 110 of the Insolvency Act 1986. The liquidators held the final creditors meeting on 27 December 2012 and the company was dissolved on 8 April 2013.
| 11. Fixed asset investments Summary of fixed asset investments | 31 December 2012 £'000 | 31 December 2011 £'000 |
| Investments held at fair value through profit or loss account Unquoted equity | 17,411 | 19,412 |
| Unquoted loan stock | 8,243 | 4,242 |
| Quoted equity | 140 | 303 |
| 25,794 | 23,957 |
| 31 December 2012 £'000 | 31 December 2011 £'000 | |
| Opening valuation | 23,957 | 12,350 |
| Purchases at cost | 5,148 | 3,375 |
| Investments acquired from Kings Arms Yard VCT 2 PLC | - | 11,422 |
| Disposal proceeds | (10,298) | (4,460) |
| Realised gains | 5,572 | 270 |
| Movement in loan stock accrued income | 40 | 7 |
| Unrealised gains | 1,375 | 993 |
| Closing valuation | 25,794 | 23,957 |
| Movement in loan stock accrued income | ||
| Opening accumulated movement in loan stock accrued income | 7 | - |
| Movement in loan stock accrued income | 40 | 7 |
| Closing accumulated movement in loan stock accrued income | 47 | 7 |
| Movement in unrealised losses | ||
| Opening accumulated unrealised losses | (4,978) | (9,574) |
| Transfer of previously unrealised losses to realised reserve on disposal of investments | 1,035 | 3,603 |
| Movement in unrealised gains | 1,375 | 993 |
| Closing accumulated unrealised losses | (2,568) | (4,978) |
| Historical cost basis | ||
| Opening book cost | 28,928 | 21,924 |
| Purchases at cost | 5,148 | 3,375 |
| Investments acquired from Kings Arms Yard VCT 2 PLC | - | 11,422 |
| Sales at cost | (5,761) | (7,793) |
| Closing book cost | 28,315 | 28,928 |
Amounts shown as cost represent the acquisition cost in the case of investments made by the Company and/or the valuation attributed to the investments acquired from other VCTs at the dates of merger, plus any subsequent acquisition cost.
Purchases and disposals in the cash flow statement may not equal purchases and disposals in the table above due to settlement debtors and creditors.
All fixed asset investments are held at fair value through profit or loss. Loan stocks valued at £5,296,000 yield a fixed rate of interest. Loan stocks valued at £2,947,000 are non-interest bearing.
The Company does not hold any assets as the result of the enforcement of security during the year and believes that the carrying values for both impaired and past due assets are covered by the value of security held for these loan stock investments.
| Unquoted investment valuation methodologies Unquoted investments are valued in accordance with the IPEVCV guidelines as follows: | ||
| 31 December 2012 £'000 | 31 December 2011 £'000 | |
| Revenue multiple | 8,245 | 8,336 |
| Price of recent investment | 6,101 | 7,109 |
| Cost reviewed for impairment | 5,457 | 2,932 |
| Earnings multiple | 4,826 | 5,267 |
| Discount to price of recent investment | 557 | - |
| Net assets supported by third party valuation | 399 | - |
| Discounted cash flow | 69 | - |
| Net Assets | - | 10 |
| 25,654 | 23,654 | |
Full valuations are prepared by independent RICS qualified surveyors in full compliance with the RICS Red Book.
Fair value investments had the following movements between valuation methodologies between 31 December 2011 and 31 December 2012.
| Change in valuation methodology (2011 to 2012) | Value as at 31 December 2012 £'000 | Explanatory Note | |
| Earnings multiple to revenue multiple | 2,122 | Short term reduction in profitability | |
| Price of recent investment to earnings multiple | 1,667 | Trading update since last round of investment | |
| Price of recent investment to revenue multiple | 13 | Trading update since last round of investment | |
| Price of recent investment to discount to price of recent investment | 557 | Trading update since last round of investment | |
| Revenue multiple to earnings multiple | 1,288 | Profitability established | |
| Cost reviewed for impairment to price of recent investment | 475 | Investment round has recently taken place | |
| Cost reviewed for impairment to discounted cashflow | 69 | Anticipated sale proceeds | |
The valuation will be the most appropriate valuation methodology for an investment within its market, with regard to the financial health of the investment and the September 2009 IPEVCV Guidelines. The Directors believe that the methods used are the most appropriate methods of valuation as at 31 December 2012.
Fair value hierarchy
FRS 29 'Financial Instruments: Disclosures' requires the Company to disclose the inputs to the valuation methods applied to its investments at fair value through profit or loss in a fair value hierarchy according to the following definitions:
| Fair value hierarchy | Definition |
| Level 1 | Unadjusted quoted (bid) prices applied where an active market exists |
| Level 2 | Inputs to valuation are from observable sources and are directly or indirectly derived from prices |
| Level 3 | Inputs to valuations not based on observable market data |
Fixed asset investments at fair value through profit or loss as at 31 December 2012 are categorised in accordance with FRS 29 as follows:
| 31 December 2012 | ||||
| Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total £'000 | |
| Unquoted equity | - | - | 17,411 | 17,411 |
| Unquoted loan stock | - | - | 8,243 | 8,243 |
| Quoted equity | 140 | - | - | 140 |
| 140 | - | 25,654 | 25,794 | |
Fixed asset investments at fair value through profit or loss as at 31 December 2011 are categorised in accordance with FRS 29 as follows:
| 31 December 2011 | ||||
| Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total £'000 | |
| Unquoted equity | - | - | 19,412 | 19,412 |
| Unquoted loan stock | - | - | 4,242 | 4,242 |
| Quoted equity | 303 | - | - | 303 |
| 303 | - | 23,654 | 23,957 | |
| Level 3 reconciliation | 31 December 2012 £'000 | 31 December 2011 £'000 |
| Opening valuation | 23,654 | 12,138 |
| Purchases at cost | 5,148 | 3,375 |
| Investments acquired from Kings Arms Yard VCT 2 PLC | - | 11,200 |
| Disposal proceeds | (9,917) | (4,294) |
| Realised net gains on disposal | 4,790 | 833 |
| Movement in loan stock accrued income | 40 | 7 |
| Investment holding gains | 1,939 | 395 |
| Closing valuation | 25,654 | 23,654 |
FRS29 requires the Directors to consider the impact of changing one or more of the inputs used as part of the valuation process to reasonable possible alternative assumptions. The valuation methodology applied to 51 per cent. of the unquoted portfolio (Level 3) is neither price of recent investment nor cost. The Directors believe that changes to reasonable possible alternative assumptions for the valuation of this part of the portfolio could result in an increase of £1.1m or a decrease of £1.7m in the valuation of the unquoted investments.
12. Significant holdings
The principal activity of the Company is to select and hold a portfolio of investments in quoted and unquoted securities. Although the Company, through the Manager, will, in some cases, be represented on the board of the portfolio company, it will not ordinarily take a controlling interest or become involved in the management. The size and structure of companies with unquoted securities may result in certain holdings in the portfolio representing a participating interest without there being any partnership, joint venture or management consortium agreement.
The Company has interests of greater than 20 per cent. of the nominal value of any class (some of which are non-voting) of the allotted shares in the portfolio companies as at 31 December 2012 as described below. All of the companies are incorporated in Great Britain.
| Company | Class of share | Number of shares held | Proportion of class held |
| Academia Networks Limited | Preferred shares | 774,400 | 23.2% |
| Cluster Seven Ltd | Ordinary shares | 5,999,437 | 28.6% |
| Elateral Group Limited | Ordinary shares | 17,380,462 | 37.7% |
| Lab M Holdings Limited | A Ordinary shares (voting rights diluted) | 2,280,000 | 60.0% |
| B Ordinary shares (no voting rights) | 600 | 60.0% | |
| Preferred ordinary shares (no voting rights) | 389,940 | 52.3% | |
| Oxford Immunotec Limited | A Preferred shares | 294,840 | 32.6% |
| Proveca Limited | D Ordinary shares | 9,297 | 35.8% |
| Sift Limited | Ordinary shares | 20,952,097 | 26.5% |
| UniServity Limited | Ordinary shares | 2,024,405 | 93.2% |
| A Ordinary shares | 87,152 | 100.0% | |
| B Ordinary shares | 45,500 | 100.0% |
As permitted by FRS 9, the investments listed above, which are measured at fair value, are held as part of an investment portfolio and their value to the Company is as part of a portfolio of investments. Therefore, these investments are not considered to be associated undertakings.
As permitted by FRS 2, UniServity Limited, whose holding is in excess of 50 per cent. of that company's equity, is excluded from consolidation as the interest in UniServity Limited is held exclusively for subsequent resale and has not previously been consolidated with the Company.
There is a deficit of £92,191 in respect of the aggregate share capital and reserves of UniServity Limited as at 31 July 2012 and a profit after tax of £338,118 for the year then ended. Details of transactions and balances with UniServity Limited are given in note 22. The investment in UniServity Limited has been included at a fair value that is £1,656,000 less than its original cost. No dividends were received during, or are receivable for the year ended 31 December 2012 from UniServity Limited.
| 13. Trade and other receivables/debtors and current asset investments | ||
| 31 December 2012 £'000 | 31 December 2011 £'000 | |
| Trade and other receivables/debtors greater than one year | 503 | - |
| Trade and other receivables/debtors less than one year | 938 | 513 |
| Prepayments and accrued income | 64 | 44 |
| 1,505 | 557 | |
The Directors consider that the carrying amount of debtors is not materially different to their fair value.
| Current asset investments | 31 December 2012 £'000 | 31 December 2011 £'000 |
| RBS Group European Commercial Paper 16/06/11 to 14/06/12 | - | 1,976 |
| RBS Euro Medium Term Note 6.375% 26/06/12 to 29/04/14 | 1,976 | - |
| Close Brothers Limited Fixed Terms Deposit to 12/03/14 | 3,500 | |
| 5,476 | 1,976 |
Current asset investments represent money held for investment. The fair value hierarchy applied to this current asset investment is Level 1 (see note 11 for definitions).
| 14. Creditors: amounts falling due within one year | 31 December 2012 £'000 | 31 December 2011 £'000 |
| Trade creditors | 18 | 27 |
| Accruals | 279 | 108 |
| Other creditors | 345 | 127 |
| 642 | 262 |
The Directors consider that the carrying amount of creditors is not materially different to their fair value.
| 15. Called up share capital | 31 December 2012 £'000 | 31 December 2011 £'000 |
| Allotted, issued and fully paid: | ||
| 209,667,635 Ordinary shares of 1 penny (2011: 209,467,597 Ordinary shares of 1 penny) | 2,097 | 2,095 |
Voting rights
205,425,635 Ordinary shares of 1 penny (net of 4,242,000 treasury shares) (2011: 209,467,597).
The Company operates a share buy back programme, as detailed in the Chairman's Statement. During the year the Company purchased 4,242,000 Ordinary shares with a nominal value of £42,420 at a cost of £633,000, including stamp duty (2011: nil) to be held in treasury. The Company holds a total of 4,242,000 Ordinary shares in treasury, representing 2.0 per cent. of the issued Ordinary share capital as at 31 December 2012. The shares purchased for treasury were funded from other distributable reserves.
Under the terms of the Dividend Reinvestment Scheme, the following Ordinary shares of nominal value 1 penny per share were allotted during the year:
| Date of allotment | Number of shares allotted | Aggregate nominal value of shares (£'000) | Issue price (pence per share) | Consideration received net of costs (£'000) | Opening market price per share on allotment date (pence per share) |
| 25 May 2012 | 98,879 | 1 | 16.20 | 14 | 11.00 |
| 28 September 2012 | 101,159 | 1 | 16.60 | 15 | 15.00 |
| 200,038 | 2 | 29 |
16. Basic and diluted net asset value per share
The basic and diluted net asset value per share as at 31 December 2012 of 18.9 pence (2011: 16.7 pence) are based on net assets of £38,830,000 (2011: £34,986,000) divided by the 205,425,635 shares in issue at that date (2011: 209,467,597).
| 17. Analysis of changes in cash during the year | 31 December 2012 £'000 | 31 December 2011 £'000 |
| Opening cash balances | 8,758 | 2,216 |
| Net cash flow | (2,061) | 6,542 |
| Closing cash balances | 6,697 | 8,758 |
| 18. Reconciliation of revenue profit before tax to net cash flow from operating activities | ||
| 31 December 2012 £'000 | 31 December 2011 £'000 | |
| Revenue profit on ordinary activities before tax | 28 | 125 |
| Exchange rate losses | (35) | - |
| Investment management fees allocated to capital | (526) | (322) |
| Movement in accrued loan stock interest | (40) | 7 |
| (Increase)/decrease in debtors | (17) | 113 |
| Increase/(decrease) in creditors | 240 | (128) |
| Net cash flow from operating activities | (350) | (205) |
19. Capital and financial instruments risk management
The Company's capital comprises Ordinary shares as described in note 15. The Company is permitted to buy back its own shares for cancellation or treasury purposes and this policy is described in more detail on page 21 in the Annual Report and Financial Statements.
The Company's financial instruments comprise equity and loan stock investments in unquoted and quoted companies, cash balances and liquid cash instruments and short term debtors and creditors which arise from its operations. The main purpose of these financial instruments is to generate cash flow, revenue and capital appreciation for the Company's operations. The Company has no gearing or other financial liabilities apart from short term creditors. The Company does not use any derivatives for the management of its balance sheet.
The principal financial instrument risks arising from the Company's operations are:
- investment (or market) risk (which comprises investment price, foreign currency on investments and cash flow interest rate risk);
- credit risk; and
- liquidity risk.
The Board regularly reviews and agrees policies for managing each of these risks. There have been no changes in the nature of the risks that the Company has faced during the past year, and there have been no changes in the objectives, policies or processes for managing risks during the past year. The key risks are summarised below.
Investment risk
As a venture capital trust, it is the Company's specific nature to evaluate and control the investment risk in its portfolio in unquoted and quoted investments, details of which are shown on pages 12 to 14 in the Annual Report and Financial Statements. Investment risk is the exposure of the Company to the revaluation and devaluation of investments. The main driver of investment risk is the operational and financial performance of the portfolio company and the dynamics of market quoted comparators. The Manager receives management accounts from portfolio companies, and members of the investment management team often sit on the boards of unquoted portfolio companies; this enables the close identification, monitoring and management of investment risk.
The Manager and the Board formally review investment risk (which includes market price risk), both at the time of initial investment and at quarterly Board meetings.
The Board monitors the prices at which sales of investments are made to ensure that profits to the Company are maximised, and that valuations of investments retained within the portfolio appear sufficiently prudent and realistic compared to prices being achieved in the market for sales of unquoted investments.
The maximum investment risk as at the balance sheet date is the value of the fixed asset investment portfolio which is £25,795,000 (2011: £23,957,000). Fixed asset investments form 66 per cent. of the net asset value as at 31 December 2012 (2011: 68 per cent.).
More details regarding the classification of fixed asset investments are shown in note 11.
Investment price risk
Investment price risk is the risk that the fair value of future investment cash flows will fluctuate due to factors specific to an investment instrument or to a market in similar instruments. As a venture capital trust the Company invests in unquoted companies in accordance with the investment policy set out on pages 15 and 16 in the Annual Report and Financial Statements. The management of risk within the venture capital portfolio is addressed through careful investment selection, by diversification across different industry segments, by maintaining a wide spread of holdings in terms of financing stage and by limitation of the size of individual holdings. Furthermore, new unquoted investments are often made with up to two-thirds of the investments comprising debt securities, which, owing to the structure of their yield and the fact that they are usually secured, have a lower level of price volatility than equity. The Directors monitor the Manager's compliance with the investment policy, review and agree policies for managing this risk and monitor the overall level of risk on the investment portfolio on a regular basis.
Valuations are based on the most appropriate valuation methodology for an investment within its market, with regard to the financial health of the investment and the IPEVCV guidelines. Details of the sectors in which the Company is currently invested are shown in the pie chart in the Manager's report on page 9 in the Annual Report and Financial Statements.
As required under FRS 29 "Financial Instruments: Disclosures", the Board is required to illustrate by way of a sensitivity analysis the degree of exposure to market risk. The Board considers that the value of the fixed asset investment portfolio is sensitive to a 10 per cent. change based on the current economic climate. The impact of a 10 per cent. change has been selected as this is considered reasonable given the current level of volatility observed both on a historical basis and future expectations.
The sensitivity of a 10 per cent. increase or decrease in the valuation of the fixed asset investment portfolio (keeping all other variables constant) would increase or decrease the net asset value and return for the year by £2,579,000 (2011: £2,395,000).
Foreign currency risk
Foreign currency risk is the risk of exposure to movements in exchange rates relative to sterling.
The majority of the Company's assets are denominated in Sterling, however, the Company is exposed to US dollars through its investment in a US dollar denominated security. No hedging of the currency exposure is currently undertaken. The Manager monitors the Company's exposure and reports to the Board on a regular basis.
Investment and revenue received in currencies other than sterling is converted into sterling on or shortly after the date of investment or receipt of revenue as are any proceeds from the disposal of a foreign currency investment.
At the year ended 31 December 2012, the Company held an investment and accrued income denominated in US dollars of £582,000 (2011: £178,000).
During the year to 31 December 2012, sterling depreciated by 4.3 per cent. (2011: appreciated by 0.1 per cent.) against the US dollar. It is difficult to forecast future changes in exchanges rates, but the Company, based on the movement of US dollars over the last three years, reasonably expects that the US dollar rate could change by 7.5 per cent. If sterling depreciated by 7.5 per cent. this would affect the US dollar denominated security favourably by £44,000 and a sterling appreciation of 7.5 per cent. would affect the security adversely by £38,000.
Cash flow interest rate risk
It is the Company's policy to accept a degree of interest rate risk on its financial assets through the effect of interest rate changes. On the basis of the Company's analysis, it is estimated that a rise of one percentage point in all interest rates would have increased total return before tax for the year by approximately £222,000 (2011: £63,000). Furthermore, it is considered that a fall of interest rates below current levels during the year would have been unlikely.
The weighted average interest rate applied to the Company's fixed rate fixed asset investments during the year was approximately 2.7 per cent. (2011: 0.7 per cent.). The weighted average period to expected maturity for the fixed rate fixed assets is approximately 9.2 years (2011: 9.5 years).
The Company's financial assets and liabilities as at 31 December 2012, denominated in pounds sterling, consist of the following:
| 31 December 2012 | 31 December 2011 | |||||||
| Fixed rate £'000 | Floating rate £'000 | Non-interest bearing £'000 | Total £'000 | Fixed rate £'000 | Floating rate £'000 | Non-interest bearing £'000 | Total £'000 | |
| Unquoted equity | - | - | 17,411 | 17,411 | - | - | 19,412 | 19,412 |
| Quoted equity | - | - | 140 | 140 | - | - | 303 | 303 |
| Unquoted loan stock | 5,123 | 173 | 2,947 | 8,243 | 2,245 | 200 | 1,797 | 4,242 |
| Debtors * | - | - | 1,489 | 1,489 | - | - | 544 | 544 |
| Current liabilities | - | - | (642) | (642) | - | - | (262) | (262) |
| Cash and current asset investments | 12,173 | - | - | 12,173 | 8,423 | 2,311 | - | 10,734 |
| Total net assets | 17,296 | 173 | 21,345 | 38,814 | 10,668 | 2,511 | 21,794 | 34,973 |
* The debtors do not reconcile to the balance sheet as prepayments are not included in the above table.
Credit risk
Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Company is exposed to credit risk through its debtors, investment in unquoted loan stock, quoted corporate bonds and through the holding of cash on deposit with banks.
The Manager evaluates credit risk on loan stock instruments prior to investment and as part of its ongoing monitoring of investments. In doing this, it takes into account the extent and quality of any security held. In the past loan stock may or may not have a fixed or floating charge, which may or may not have been subordinated, over the assets of the portfolio company. However, for new investments, typically loan stock instruments will have a first fixed charge or a fixed and floating charge over the assets of the portfolio company in order to mitigate the gross credit risk.
The Manager receives management accounts from portfolio companies, and members of the investment management team often sit on the boards of unquoted portfolio companies; this enables the close identification, monitoring and management of investment specific credit risk.
The Manager and the Board formally review credit risk (including debtors) and other risks, both at the time of initial investment and at quarterly Board meetings.
The Company's total gross credit risk at 31 December 2012 was limited to £8,243,000 (2011: £4,242,000) of unquoted loan stock instruments, £1,976,000 of Royal Bank of Scotland Euro Medium Term Note (2011: £1,976,000 of Royal Bank of Scotland Group ECP), Close Brothers Limited £3,500,000 (2011: nil) and £6,697,000 (2011: £8,758,000) cash on deposit with banks.
As at the balance sheet date, cash and liquid investments held by the Company are held with the Royal Bank of Scotland Group, NatWest Bank plc, Scottish Widows Bank plc (part of Lloyds Banking Group plc), Barclays Bank plc, Close Brothers Limited and UBS Wealth Management AG. Credit risk on cash transactions is mitigated by transacting with counterparties that are regulated entities subject to regulatory supervision, with high credit ratings assigned by international credit-rating agencies.
The credit profile of unquoted loan stock is described under liquidity risk below.
The cost, impairment and carrying value of impaired loan stocks held at fair value at 31 December 2012 and 31 December 2011 are as follows:
| 31 December 2012 | 31 December 2011 | |||||
| Cost £'000 | Impairment £'000 | Carrying value £'000 | Cost £'000 | Impairment £'000 | Carrying value £'000 | |
| Impaired loan stock | - | - | - | 764 | 303 | 461 |
Liquidity risk
Liquid assets are held as cash on current account, deposit or short term money market accounts or similar instruments. Under the terms of its Articles, the Company has the ability to borrow an amount equal to its adjusted capital and reserves of the latest published audited balance sheet.
The Company has no committed borrowing facilities as at 31 December 2012 (2011: £nil) and had cash of £6,697,000 (2011: £8,758,000) and current asset investments of £5,476,000 (2011: £1,976,000). Against this the Company has an investment commitment as at 31 December 2012 of £188,000 (2011: £148,000).
There are no externally imposed capital requirements other than the minimum statutory share capital requirements for public limited companies.
The main cash outflows are for new investments, the buy back of shares and dividend payments, which are within the control of the Company. The Manager formally reviews the cash requirements of the Company on a monthly basis, and the Board on a quarterly basis as part of its review of management accounts and forecasts. The Company's financial liabilities at 31 December 2012 are short term in nature and total £642,000 (2011: £262,000).
The carrying value of loan stock investments analysed by expected maturity dates is as follows:
| 31 December 2012 | 31 December 2011 | |||||||
| Redemption date | Fully performing loan stock £'000 | Past due loan stock £'000 | Impaired loan stock £'000 | Total £'000 | Fully performing loan stock £'000 | Past due loan stock £'000 | Impaired loan stock £'000 | Total £'000 |
| Less than one year | 301 | - | - | 301 | 129 | - | - | 129 |
| 1-2 years | 1,761 | - | - | 1,761 | - | - | - | - |
| 2-3 years | - | - | - | - | 1,207 | - | 461 | 1,668 |
| 3-5 years | 2,045 | 568 | - | 2,613 | 1,102 | - | - | 1,102 |
| 5 + years | 3,108 | 460 | - | 3,568 | 1,343 | - | - | 1,343 |
| Total | 7,215 | 1,028 | - | 8,243 | 3,781 | - | 461 | 4,242 |
Loan stock can be past due as a result of interest or capital not being paid in accordance with contractual terms.
Loan stock categorised as past due includes:
- loan stock with a carrying value of £268,000 yielding 2.2 per cent. which has interest overdue for 3 months;
- loan stock with a carrying value of £760,000 in renewable energy companies which are building up interest yield over periods of up to a year as installation of units are completed. Typically these loan stocks yield in excess of 9 per cent. once installed.
In view of the factors identified above, the Board considers that the Company is subject to low liquidity risk.
Fair values of financial assets and financial liabilities
All the Company's financial assets and liabilities as at 31 December 2012 are stated at fair value as determined by the Directors. There are no financial liabilities other than creditors. The Company's financial liabilities are all non-interest bearing. It is the Directors' opinion that the book value of the financial liabilities is not materially different to the fair value and all are payable within one year.
20. Commitments, contingencies and guarantees
As at 31 December 2012, there was a commitment of £188,000 (2011: £148,000) in respect of further funding to be provided to an existing portfolio company.
The Company gave an indemnity to the liquidator of Kings Arms Yard VCT 2 PLC.
There were no contingent liabilities or guarantees given by the Company as at 31 December 2012 (2011: £nil).
21. Post balance sheet events
Since 31 December 2012, the Company has had the following material post balance sheet events:
- the sale of Isango! Limited for £69,000 realising a gain of £69,000 on the carrying value at 31 December 2012;
- a repayment of £45,000 loan stock from Hilson Moran ; and
- further investments of:
- £365,000 in MyMeds&Me Limited;
- £120,000 in Bravo Inns II Limited;
- £100,000 in Celoxica Holdings plc;
- £86,000 in Dragon Hydro Limited; and
- £48,000 in Oxford Immunotec Limited.
22. Related party disclosures
There are no related party transactions in the year or balances with the Company and UniServity Limited other than the Company's payment of £200,000 to UniServity for the issue of new shares.
During the year, Albion Ventures LLP, the Company's Manager and Company Secretary, received £24,000 from UniServity Limited in respect of monitoring and arrangement fees.
23. Principal risks and uncertainties
In additional to the current economic risks outlined in the Chairman's statement, the Board considers that the Company faces the following major risks and uncertainties:
1. Economic risk
Changes in economic conditions, including, for example, interest rates, rates of inflation, industry conditions, competition, political and diplomatic events and other factors could substantially and adversely affect the Company's prospects in a number of ways.
To reduce this risk, in addition to investing in equity in portfolio companies, the Company often invests in secured loan stock and has a policy of not permitting any external bank borrowings within portfolio companies. Additionally, the Manager has been rebalancing the sector exposure of the portfolio with a view to limiting reliance on consumer led sectors.
2. Investment risk
This is the risk of investment in poor quality assets which reduces the capital and income returns to shareholders, and negatively impacts on the Company's reputation. By nature, smaller unquoted businesses, such as those that qualify for venture capital trust purposes, are more fragile than larger, long established businesses.
The success of investments in certain sectors is also subject to regulatory risk, such as those affecting companies involved in UK renewable energy.
To reduce this risk, the Board places reliance upon the skills and expertise of the Manager and its strong track record for investing in this segment of the market. In addition, the Manager operates a formal and structured investment process, which includes an Investment Committee, comprising investment professionals from the Manager and at least one external investment professional. The Manager also invites, and takes into account, comments from the non-executive Directors of the Company on investments discussed at the Investment Committee meetings. Investments are actively and regularly monitored by the Manager (investment managers normally sit on portfolio company boards) and the Board receives detailed reports on each investment as part of the Manager's report at quarterly Board meetings. For new investments it is the policy of the Company for portfolio companies to not normally have external borrowings.
The Board and the Manager closely monitor regulatory changes within the sectors invested in.
3. Valuation risk
The Company's investment valuation methodology is reliant on the accuracy and completeness of information that is issued by portfolio companies. In particular, the Directors may not be aware of or take into account certain events or circumstances which occur after the information issued by such companies is reported.
As described in note 1 of the Financial Statements, the unquoted equity investments, loan stock and debt issued at a discount held by the Company are valued at fair value through profit or loss in accordance with the International Private Equity and Venture Capital Valuation Guidelines. The guidelines set out recommendations, intended to represent current best practice on the valuation of venture capital investments. These investments are valued on the basis of forward looking estimates and judgements about the business itself, its market and the environment in which it operates, together with the state of the mergers and acquisitions market, stock market conditions and other factors. In making these judgements the valuation takes into account all known material facts up to the date of approval of the Financial Statements by the Board. The sensitivity of these assumptions is commented on further in notes 11 and 19.
4. Venture Capital Trust approval risk
The Company's current approval as a venture capital trust allows investors to take advantage of tax reliefs on initial investment and ongoing tax free capital gains and dividend income. Failure to meet the qualifying requirements could result in investors losing the tax relief on initial investment and loss of tax relief on any tax-free income or capital gains received. In addition, failure to meet the qualifying requirements could result in a loss of listing of the shares.
To reduce this risk, the Board has appointed the Manager, who has a team with significant experience in venture capital trust management, used to operating within the requirements of the venture capital trust legislation. In addition, to provide further formal reassurance, the Board has appointed PricewaterhouseCoopers LLP as its taxation advisers. PricewaterhouseCoopers will report quarterly to the Board to independently confirm compliance with the venture capital trust legislation, to highlight areas of risk and to inform on changes in legislation.
5. Compliance risk
The Company is listed on the London Stock Exchange and is required to comply with the rules of the UK Listing Authority, as well as with the Companies Act, Accounting Standards and other legislation. Failure to comply with these regulations could result in a delisting of the Company's shares, or other penalties under the Companies Act or from financial reporting oversight bodies.
Board members and the Manager have experience of operating at senior levels within quoted businesses. In addition, the Board and the Manager receive regular updates on new regulation from the Company's Auditor, lawyers and other professional bodies.
6. Internal control risk
Failures in key controls, within the Board or within the Manager's business, could put assets of the Company at risk or result in reduced or inaccurate information being passed to the Board or to shareholders.
The Audit Committee meets with the Manager's Internal Auditor, Littlejohn LLP, when required, and receives a report regarding the last formal internal audit performed on the Manager, providing opportunity for the Audit Committee to ask specific and detailed questions. The Manager has a comprehensive business continuity plan in place in the event that operational continuity is threatened. Further details regarding the Board's management and review of the Company's internal controls through the implementation of the Turnbull guidance are detailed on page 25 in the Annual Report and Financial Statements.
Measures are in place to mitigate information risk in order to ensure the integrity, availability and confidentiality of information used within the business.
7. Reliance upon third parties risk
The Company is reliant upon the services of Albion Ventures LLP for the provision of investment management and administrative functions. There are provisions within the Management agreement for the change of Manager under certain circumstances (for more detail, see the Management agreement paragraph on page 20 in the Annual Report and Financial Statements). In addition, the Manager has demonstrated to the Board that there is no undue reliance placed upon any one individual within Albion Ventures LLP.
8. Financial risks
By its nature, as a venture capital trust, the Company is exposed to investment risk (which comprises investment price risk and cash flow interest rate risk), credit risk and liquidity risk. The Company's policies for managing these risks and its financial instruments are outlined in full in note 19.
Most of the Company's income and expenditure is denominated in sterling. However, as at 31 December 2012, the Company held an investment and accrued income denominated in US dollars of £582,000 (2011: £178,000). It is therefore likely that the Company would be affected by currency fluctuations, however, this is not expected to be material.
The Company is financed through equity and does not have any borrowings. The Company does not use derivative financial instruments for speculative purposes.
24. Other information
The information set out in this announcement does not constitute the Company's statutory accounts within the terms of section 434 of the Companies Act 2006 for the years ended 31 December 2012 and 31 December 2011, and is derived from the statutory accounts for those financial years, which have been, or in the case of the accounts for the year ended 31 December 2012, which will be, delivered to the Registrar of Companies. The Auditor reported on those accounts; the reports were unqualified and did not contain a statement under s498 (2) or (3) of the Companies Act 2006.
The Company's Annual General Meeting will be held at The City of London Club, 19 Old Broad Street, London, EC2N 1DS on 24 May 2013 at 11.00am.
25. Publication
The full audited Annual Report and Financial Statements are being sent to shareholders and copies will be made available to the public at the registered office of the Company, Companies House, the National Storage Mechanism and also electronically at www.albion-ventures.co.uk under the 'Our Funds' section, by clicking on 'Kings Arms Yard VCT PLC', where the Report can be accessed as a PDF document via a link under the 'Investor Centre' in the 'Financial Reports and Circulars' section.
The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and other applicable laws; and
(ii) they are solely responsible for the content, accuracy and originality of the
information contained therein.
Source: Kings Arms Yard VCT PLC via Thomson Reuters ONE
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