Final Results

Brainspark PLC 28 February 2001 BRAINSPARK PLC 2000 PRELIMINARY RESULTS BRAINSPARK REPOSITIONS FOR CHANGING MARKET ENVIRONMENT Brainspark today announced its Preliminary Results for the twelve months ended 31 December 2000. Brainspark invests in and incubates technology and internet-related businesses. It provides the full breadth of support resources needed to help new businesses make the early stage transition from idea conception to established company. HIGHLIGHTS * Year-end cash reserves strong, at £9.8m * Strong Board action taken to address current hostile market circumstances:- + Operating costs to be reduced from last year's average of £0.5m per month to under £0.2m; + Board re-structured in line with new business priorities * Don Caldwell of Cross Atlantic Capital Partners, joins as Chairman * Three biggest shareholders agree to extend share lock-in period * Year-end Company Net Asset Value of £24.0m (19.5p per share) Stewart Dodd, CEO commented: 'We remain convinced of the enormous potential for value creation presented by the emergence of new technology-enabled businesses. In Brainspark we have adopted a 'hands-on' approach to our investee companies. Neither our purpose nor our belief in the strength of our model has changed, and we remain fully committed to both. 'I am delighted that at this time Don Caldwell, an individual with a great deal of hands-on experience of helping early stage companies through difficult market conditions, has agreed to become Chairman. I look forward to working with him.' Enquiries: Brainspark (020 7843 6600) Stewart Dodd David Hart Mark Harford Citigate Dewe Rogerson (020 7638 9571) Martin Jackson / Charles Vivian CHAIRMAN'S STATEMENT This has been an extraordinarily eventful and challenging first year for Brainspark, but it has been disappointing in terms of year-end results. These results have been heavily influenced by the negative sentiment afflicting the technology investment market as a whole, and early-stage companies in particular. There is little evidence at present of an imminent improvement in this sentiment, so the board has agreed several changes within Brainspark to ensure it can navigate this continuing hostile period successfully. I will describe these changes shortly. Summary Financial Results Cash reserves at the end of December stood at a healthy £9.8m. Company Net Asset Value (NAV) at December 31st 2000 was £24.0m or 19.5p per share. Our NAV immediately after flotation in April 2000 was £30.7m, or 24.9p per share. This negative movement in NAV since flotation is as disappointing to the board as it will be to our shareholders. Although we achieved four upward revaluations at attractive multiples in the investment portfolio in the first part of the year, in the second part of the year we realised losses or made provisions for prospective losses on a number of portfolio businesses. Market Environment The underlying reason for this result has been the dramatic turn for the worse in capital market sentiment towards our investment arena in the latter half of the year. Simply put, the businesses in which we invested seed capital in the first half of the year have subsequently not been able to achieve follow-on funding and the related valuation gains as rapidly as we had originally planned. Operational changes In response to these market conditions the board feels Brainspark should modify its operating approach. From the outset the company has provided a relatively comprehensive range of services and infrastructure to support the development of its investee businesses. This remains our approach, but in the current market its cost must be reduced. We have therefore adopted a programme which by the middle of this year is planned to reduce our operating cash requirement to below £200,000 per month. This compares to an average monthly cost last year of £500,000. These actions will reduce the negative impact of operating expenses on our NAV, and will free up more cash for our investments. The programme reduces staff numbers within the Brainspark team by some 40% compared to their peak in the latter half of last year. It also entails recovering more of the running costs of our Clerkenwell premises through commercially-priced rent agreements with the more mature portfolio companies. These actions will be described in more detail in the Chief Executive Officer's Review. It is unfortunate that this programme entails the loss of some employees, and I thank all those leaving for their contribution over the past year and I wish them well for the future. Board changes In keeping with these market and operational changes we will also restructure the board with effect from today. This restructuring is designed to align the skills and experience on the board with Brainspark's modified operation and the specific challenges now facing the company in its next stage of development. For a number of months, I have been considering the fact that the board would benefit from having available additional experience in the complexities of helping young companies navigate through seriously difficult markets. Given the operational and financial challenges ahead we are very fortunate that Don Caldwell has offered to take on an increased role. I am delighted to report that he has agreed to become Chairman. Don has had an extensive career in venture capital. At present he is Chairman and CEO of Cross Atlantic Capital Partners, which is the largest shareholder in Brainspark. He is a former President and Chief Operating Officer of Safeguard Scientifics Inc., and he is also currently a Non-Executive Director of several leading companies in the US, and Chairman of Crucible Corporation, a seed fund based in Ireland. In particular he has important experience in helping companies through the very difficult early stage investment markets such as the one Brainspark has been experiencing. I will continue as a Non-Executive Director to support Don in taking up this role. I am also pleased to welcome Andrew Hawkins to the board as an additional Non-Executive Director. Andrew brings further relevant experience from a career with several leading technology investment firms in the UK, and he is currently a partner at Palamon Capital Partners. Regrettably, a further aspect of the agreed restructuring is that we will be losing Alwyn Welch our COO, and Mark Harford our CFO. Both have played a major role in Brainspark's progress over the past year and have been instrumental in the changes now in hand. However they and the rest of the Board feel that the change in the business' near-term focus means it can no longer retain their roles as currently defined. The COO and CFO roles will now be combined and will be fulfilled by Jasper Judd. Jasper, a chartered accountant, joins us from Easyart, one of Brainspark's portfolio companies. With his experience in finance and commercial management in a range of early-stage businesses, Jasper is ideally qualified to fill this broad position. Alwyn and Mark have agreed to remain with the business over the next two months as required to ensure a smooth handover. Finally, I would like to take this opportunity to welcome publicly Paul Corley to the Board. Paul joined us as a Non-Executive in November, and his extensive experience, particularly in media businesses, is already making a strong contribution. The Future I believe the value creation opportunities in early stage technology investing remain highly attractive. Moreover, the approach Brainspark has developed and the reputation it has built bode well for its competitive success in this arena. This is underlined by Brainspark's three biggest shareholders all having agreed in the past month to extend the lock-in period on their shares for a further six months following the April anniversary of the company's flotation. The team's decisive action to evolve the business in line with the rapid pace of change in our market is strong endorsement of the responsiveness, commitment, and willingness to learn that characterise this unique company. CHIEF EXECUTIVE OFFICER'S REVIEW Brainspark in 2000 This has been an exciting and challenging first full year of life for the Company. We launched in September 1999 with £6m of venture capital backing, with the purpose of finding, investing in, and accelerating the early stage development of promising new business ideas which made extensive use of new technologies. By the end of March 2000 we had achieved this with eight businesses, and we had also secured a further £6m of private funding. In April 2000 we listed as a public company and moved our entire operations into our own leased premises in Clerkenwell. The flotation on AIM raised a further £18m to fund new investments and our own operating requirements. By moving to our own 19,000 sq. ft. premises at The Lightwell in Clerkenwell we achieved our aim of being able to offer investee companies instant access to complete serviced infrastructure with high bandwidth internet connectivity. By this time, we had a core Brainspark team which, though quite small in number, covered a wide skill base in corporate finance, general management, project management, marketing, accounting, human resources and technology. We then invested in a further eight businesses between April and June 2000. By the early summer we began to experience the negative shift in market sentiment which, by the end of the year, had reached a state best described as one of unbridled pessimism. Despite this deepening market negativity, Brainspark, between May and August, successfully secured second round funding for four of its portfolio businesses. This amounted to a total of nearly £10m raised from third party investors. The average company valuation at which this money was raised was four times that at which Brainspark initially invested. After accounting for the dilutive effect of the new shares issued this gave Brainspark a three-fold increase in the value of its holding in these companies, equating to a total of £3m of valuation gains. Towards the end of the summer market sentiment deteriorated significantly. Accordingly we materially slowed our investment rate - investing in just one new business between July and December - and focused on the development of our existing portfolio companies. We also adapted our ongoing investment disciplines to ensure resources were devoted only to those businesses which we felt could still thrive in this more hostile environment. This led us to sell or close early some businesses before the year-end whilst intensifying our development efforts with others. So, our position at the end of 2000 was one of having achieved significant progress in the development of our own new business and of having built a sizeable portfolio of investments, yet finding ourselves in a market environment of extraordinarily low investment activity and minimal visible prospect of this improving in the short to medium term. Current Market Overview When we reported our interim results in September 2000 we said we thought market sentiment was improving. In fact, over the last two quarters of last year we experienced ever decreasing levels of investment activity amongst the venture capital community in our sector. At times in the past few months, this stance has been described by industry participants as a 'buyer's strike.' We do not expect this situation to last forever. Very attractive returns have been achieved in the past by investing at an early stage in new technology-based businesses. The events of the past two years have done much to move the UK towards the levels of interest - and success - experienced for several decades in the United States. Moreover, record levels of private equity funds have been raised for investment specifically in this sector, so considerable pent-up demand exists. However this pent-up demand has not yet prevailed over the market's current pessimism. In this environment, I think management teams serve their shareholders best through increased prudence, and Brainspark should be no exception. Brainspark evolution At the outset, Brainspark was conceived and built to play a role in the initial stage only of financing new business ideas. It would find, develop, and then exit through trade sales or flotations a number of businesses relatively swiftly. This required a more extensive infrastructure of staff and serviced premises in comparison to later-stage investors. However, the consequence of the current market negativity is that Brainspark is investing in fewer businesses, but for longer. Our initial investment sum may be bigger, and/or we may be extending further funding to businesses which are doing well commercially but which are finding it difficult to raise further funding externally. Moreover, the majority of the businesses in the portfolio now are well past their first six months of development. As a result some are beyond the point where extensive hands-on support will make the difference between success and failure. Adding these factors together, we are at a stage of market development and of our own portfolio's development where Brainspark should evolve its business model. We put this evolution in train at the beginning of 2001, and it has two main elements. The first involves significantly reducing the number of staff in the Brainspark team. Most of the businesses in the portfolio now require primarily strategic and corporate finance advice only, with some specific technical support. Accordingly, by late Spring we will have reduced the total team complement by 40% from its peak last year, to seventeen in total. I am sorry to be losing all of these individuals from whom we have received a strong contribution over the past year, and I wish them well for the future. The second element involves the management of The Lightwell premises. At the outset our policy was that investee companies would be based in The Lightwell rent-free until they secured additional third party funding; at this point, we would start charging them a subsidised rent and helping them find their own premises elsewhere. However as a consequence of the lengthening investment cycle we now feel it is advantageous to all concerned to keep some of the more mature businesses in The Lightwell for longer. This is because Brainspark can offer accommodation at competitive rents and in so doing can recoup a material proportion of the running costs of the premises. Again, this process has been in hand for some time now, and it will be developed further over the coming months. The net effect of these two initiatives, plus tight cost squeezing in general, is that by the end of the second quarter of 2001 Brainspark's monthly operating cost burn rate, net of rental income, is planned to be under £ 200,000 per month compared to approximately £500,000 per month during 2000. As well as this being a more appropriate configuration of Brainspark's operations at this stage of the market cycle and the portfolio's development, this evolved operating model clearly frees up considerably more of our current cash reserves for further investment in some of our existing investee companies as well as in new projects. Portfolio progress To date, Brainspark has invested in eighteen projects. Sixteen investments were made by mid-Summer 2000 and one - Traderserve - was made in the latter half of 2000, bringing the total to seventeen at year-end. Since the period end we have made one new investment in The Usability Company, which I shall describe below. Our portfolio comprises a broad range of businesses including exchanges, web service businesses, and application service providers. Necessarily, as the follow-on funding environment has become tougher, we have had to take a longer-term view in our initial selection criteria and also our decisions on whether we will or will not continue to support businesses which are not attracting new third party funding. This has been the case for the past several months and it will certainly continue. A number of our investee businesses continue to make good commercial progress. Fortune Cookie is one example. This is now one of the larger web development businesses in the UK which is still independent, with a current staff complement of over 60. In its last full financial year - to August 2000 - the business delivered revenues of £2.7m, and strong profit margins. Many of Fortune Cookie's clients are now established 'off-line' corporates and the company is building a strong reputation in the Media, Travel and Tourism, and Financial Services sectors particularly. Metapack is another example. This business designs, builds, and manages complex supply chain solutions and has grown to employ 75 technical and operations staff at the period end. In August, only six months after the business was started, Metapack won the contract to be the sole third party fulfilment partner for the newly formed Granada/Boots e-tailing joint venture. Two further contracts are currently in negotiation and contract revenues are projected to be several million pounds by the end of 2001. A third example, and again a very different kind of business, is Smile-on. This is the leading UK online provider of supplies, ongoing professional training, and information to dental healthcare professionals. So far nearly twenty five percent of UK dentists have registered as users of the website. Smile-on is currently at an advanced stage in establishing a close commercial relationship with a large UK corporation which should enable significant expansion of Smile-on's service reach. Some other businesses have not made the progress we had originally envisaged. We announced the closure and sale of Hobomedia and Perfectday respectively at the end of last year. We have also made provisions in the year-end accounts for the losses on disposal of our interest in certain other portfolio businesses. One of these disposals is already completed. This is Channel International, the outsourced recruitment process business, which we sold for a nominal amount in January of this year. The aggregate impact of these activities has been a £4.7m reduction in the value of the Company's portfolio. Combined with the £3.0m gain from the upward revaluations earlier in the year, this has left us with a net £1.7m reduction against cost in the portfolio carrying value for the full year. Regarding new investments, we have made two since announcing our interim results in mid-September last year. The first of these is Traderserve. This is a business which provides remote hosting facilities and data feeds for the proprietary trading models of professional and semi-professional traders. The three founders have between them several decades of experience in designing and managing such systems in large brokerage houses, and of running successful trading operations. We invested £1.25m in this business at the end of September 2000. The second new investment took place after the 2000 year end. This was a £0.3m investment in The Usability Company, finalised in February of this year. This is a service business which is already trading. It provides research and consultancy solutions to the owners and managers of websites on improving their sites' human interactivity. This is a fast-growing market already, and one which we believe will grow a great deal more in the future. Brainspark continues to attract a significant number of interesting business plans, and we think the coming year may present some attractive additional investment opportunities. Looking ahead We view capital markets as distinct from fundamental business opportunities, although both affect us strongly. We remain convinced of the enormous potential for value creation presented by the emergence of new technology-enabled businesses. The markets for financing these opportunities have experienced extravagant swings from positive to negative in just twelve months. This is not the first time markets have behaved in this way and it is unlikely to be the last. However, the penetration of internet and mobile access and usage continues to grow around the globe. It is enabling business creation, business growth, and process cost reduction at a faster rate and with lower capital expenditure than ever has been possible in the past. Brainspark was set up to facilitate, and to benefit from, the early stage growth of new companies exploiting these opportunities. In parallel with our work on 'pure' start-ups, we have seen, over the past few months, increasing interest in co-operative ventures with large corporations. We believe that such co-operation will present some of the most attractive opportunities in the period ahead. We are investing in our relationship with Royal & Sun Alliance to this end, and hope to announce our first joint project shortly. We continue to discuss similar opportunities with a number of others. Our investments so far have encompassed a broad mix of business models, including online trading, service provision and the supply of enabling tools and technologies. Of our current investee companies, Traderserve and iProx are examples of the latter. It is this area of technology and infrastructure on which we are now focusing more of our efforts. In Brainspark, we have adopted a 'hands-on' approach to our investee companies in order to reduce the risk inherent in start-ups, and we have sought to build an environment where the companies would benefit from growing together. Our current restructuring is being undertaken in the interests of maximizing long-term shareholder value through prudent cash flow management. We intend it to affect the volume and not the quality of our current activities. Neither our purpose nor our belief in the strength of our model has changed, and we remain fully committed to both. Finally, I would like to thank Barbara, Alwyn, and Mark for their very valuable contribution over the year. I am delighted that at this time Don Caldwell, an individual with a great deal of hands-on experience relevant to the particular challenges ahead, has agreed to become Chairman. I look forward to working with him in Brainspark's next stage of development. FINANCIAL REVIEW Summary Company Net Asset Value has decreased by £6.7m since its peak post-flotation in April 2000, within which the investment portfolio has decreased in value by £1.7m. Monthly operating cash requirements averaged £0.5m over the year, and will now be reduced to under £0.2m per month by mid-2001; cash reserves remain healthy at £9.8m at year-end. Operating Loss The consolidated operating loss for the year was £14.2m. This comprises recurring Group operating expenses of £5.6m, exceptional operating expenses of £4.1m relating to the Employee Benefit Trust and employer's National Insurance, and £4.5m for the Group's share of the net operating losses and goodwill amortisation in the partner companies. The actual cash outflow from operating activities was £6.3m (see below). Exceptional items Consolidated profit on deemed disposals (the increase in value of Brainspark's share in the net assets of three partner companies following further third party funding) totalled £1.4m for the year. Consolidated losses, arising from losses on disposal and provisions for loss on disposal of interests, totalled £2.4m. Interest earned This was £0.7m for the year, and arose from the investment of surplus cash balances, averaging £13.4m over the year, at an average interest rate of 5.5%. Earnings The basic loss per ordinary share was 14.9p, being the retained loss for the year of £14.6m divided by an average of 97.6m ordinary shares in issue during the year. Movement in Net Asset Value Company Net Asset Value (NAV) at 31st December 2000 was £24.0m, or 19.5p per share. This compares to £7.1m as at 31st December 1999, and £30.7m (or 24.9p per share) immediately after the company's flotation on April 7th 2000. The decrease in NAV of £6.7m between April 7th 2000 and the year end is accounted for by operating costs for the period, and the net decrease in the Company balance sheet value of the investment portfolio, of £1.7m. This figure is accounted for by £3m total gains, less £4.7m total losses. Being analysed at the Company not the Consolidated level these figures differ from the figures explained under 'Exceptional items' above, because they exclude Brainspark's share of the movement in net assets arising from operating losses and the amortisation of goodwill in the relevant portfolio companies. Funding and Cashflows At the start of the year Brainspark's consolidated cash balances were £3.6m. During the year a further £26.8m was raised primarily from the mezzanine funding round in March and the flotation in April. Cash outflows during the year were £6.3m on operating activities (including £0.3m in EC1 Media which is a subsidiary), £1.4m on fixed assets, £5.3m loaned to the Employee Benefit Trust which invested the proceeds in Company shares, and a further £8.2m of investments in partner companies (including EC1 Media), bringing the total invested to date in portfolio companies to £11.7m. This includes the £1.6m of Company shares exchanged for Brainspark's stake in Petspark. Cash reserves at the end of December 2000 were £9.8m. Tax Brainspark PLC and its subsidiaries have no trading profits for the year and therefore no tax charge. The trading losses incurred are available for relief against future taxable profits but this potential deferred tax asset has not been recognised in the financial statements for the year 2000 in accordance with the Group's deferred tax accounting policy. The share of associated undertakings tax charge for the year relates to Brainspark's interest in Fortune Cookie. Treasury policy Surplus cash funds are deposited with third party banks with a high credit rating. The security of these deposits and the interest rates earned are monitored on a regular basis against the products and services of competing financial institutions. The Group's financial instruments comprise cash, trade debtors, and trade creditors only. Consolidated profit and loss account for the Year ended 31 December 2000 Notes Year ended Period from 3 June 1999 31 December to 31 December 2000 1999 £000 £000 ------------ ------------ Turnover - - Net operating expenses - recurring 2 (5,644) (373) Net operating expenses - exceptional 2 (4,054) - --------- --------- Total net operating expenses / group (9,698) (373) operating loss - continuing Share of operating profit (loss) of (4,548) (246) associated undertakings including amortisation of goodwill --------- --------- Total operating loss: group and share of (14,246) (619) associated undertakings Exceptional items: Profit on deemed disposal of interests in 3 1,379 - associated undertakings (Loss) on disposal and provisions for loss 3 (2,433) - on disposal of interests in associated undertakings --------- --------- Loss on ordinary activities before interest (15,300) (619) Net interest receivable 736 58 ---------- ---------- Loss on ordinary activities before taxation (14,564) (561) Tax on loss on ordinary activities (27) (10) ---------- ---------- Loss on ordinary activities after taxation (14,591) (571) Equity minority interests 37 - --------- --------- Retained loss for the financial period (14,554) (571) ======= ======= Loss per 1p ordinary share - basic and diluted (14.9p) (1.4p) -------------- ----------- Consolidated statement of Total Recognised Gains and Losses for the Year ended 31 December 2000 Loss for the financial period (14,554) (571) Revaluation of fixed asset investments 719 - --------- --------- Total recognised gains and losses for the period (13,835) (571) ------------- ------------- Balance sheets At 31 December 2000 Notes Group Group Company 2000 1999 2000 £000 £000 £000 ----------- ----------- ---------Fixed assets Tangible assets 1,135 7 - Investments in subsidiary undertakings 5 - - 462 Investments in associated undertakings 6 4,987 3,166 - Other investments 7 1,568 - - Investment in own shares 8 2,445 - 2,445 ------------ ----------- -------- 10,135 3,173 2,907 ------------ ----------- --------Current assets Debtors 1,609 441 11,798 Cash at bank and in hand 9,766 3,647 9,360 -------- ---------- ---------- 11,375 4,088 21,158 Creditors: amounts falling due within (586) (115) (37) one year -------- -------- -------- Net current assets 10,789 3,973 21,121 ------------ ------------ -------Total assets less current liabilities 20,924 7,146 24,028 ------------ ------------ ------- Provisions for liabilities and charges (385) - - Net assets 20,539 7,146 24,028 ======= ======= ====== Capital and reserves Called up share capital 1,233 1 1,233 Share premium account 10 26,442 7,688 26,442 Revaluation reserve 10 719 - - Other reserves 10 6,813 - - Profit and loss account 10 (14,702) (543) (3,647) ------------ ----------- --------Total equity shareholders' funds 20,505 7,146 24,028 Equity minority interests 34 - - --------- -------- -------- Capital employed 20,539 7,146 24,028 ====== ===== ======= Reconciliation of Movements in Shareholders' Funds for the Year ended 31 December 2000 Group Group Company 2000 1999 2000 £000 £000 £000 ---------- ---------- ----------- Loss for the period (14,554) (571) (3,647) New share capital issued for cash 26,799 7,689 27,675 Revaluation of fixed asset investments 719 - - Charge for issue of shares at below market 395 28 - value ----------- ----------- ----------Net addition to shareholders' funds 13,359 7,146 24,028 Opening shareholders' funds 7,146 - - ----------- ----------- ----------Closing shareholders' funds 20,505 7,146 24,028 ===== ===== ===== Consolidated Cash Flow Statement for the Year ended 31 December 2000 Notes Year ended Period from 3 June 1999 31 December to 31 December 2000 1999 £000 £000 ------------- ------------ Net cash outflow from operating activities 9 (6,260) (624) --------- -------- Returns on investments and servicing of finance Interest received (net) 723 17 --------- --------- Net cash inflow from returns on investments and servicing of finance 723 17 ---------- ---------- Capital expenditure and financial investment Purchase of tangible fixed assets (1,392) (14) Purchase of other investments 7 (849) - Purchase of own shares 8 (5,322) - ---------- ----------- Net cash outflow from capital expenditure and financial investment (7,563) (14) --------------- -------------Acquisitions and disposals Purchase of subsidiary undertaking (550) - Cash acquired with subsidiary undertaking 550 - Purchase of investments in associated 6 (6,800) (1,889) undertakings Loans to associated undertakings 6 (780) - ---------- --------- Net cash outflow from acquisitions and (7,580) (1,889) disposals --------------- ----------- Net cash outflow before financing (20,680) (2,510) -------------- ------------Financing Issue of ordinary share capital 26,799 6,157 ---------- ---------- Net cash inflow from financing 26,799 6,157 -------------- ------------- Increase in net cash for the period 6,119 3,647 ====== ====== Reconciliation of net cash flow to movement in net cash Net cash at beginning of period 3,647 - Increase in net cash in the period 6,119 3,647 ---------- ---------- Net cash at end of period 9,766 3,647 ===== ===== Notes to the Preliminary Announcement for the Year ended 31 December 2000 1. Principal accounting policies The financial statements have been prepared under the historical cost convention modified to include certain investments at valuation, and in accordance with applicable accounting standards. A summary of the more important Group accounting policies are set out below. The preliminary results for the year ended 31 December 2000 are unaudited and the financial information set out in the announcement does not constitute the Company's statutory accounts for the years ended 31 December 2000 or 31 December 1999. Statutory accounts for 1999 have been delivered to the Registrar of Companies and those for 2000 will be delivered following the Company's Annual General Meeting. The auditors have reported on the 1999 accounts and their report was unqualified and did not contain statements under either Section 237 (2) or (3) of the Companies Act 1985. Goodwill On the acquisition of a business, fair values are ascribed to the net assets acquired and where the cost of acquisition exceeds the fair values attributable to such net assets, the difference is treated as goodwill and capitalised as an asset within the balance sheet and amortised over its useful economic life which is assumed to be three years. Goodwill, being the excess of the fair value of consideration paid for associated undertakings over the fair value of their net assets at the date of acquisition, is capitalised and included together with the Group's share of the net assets in the investments in associated undertakings. Associated undertakings Investments in associated undertakings are carried in the subsidiary's balance sheet at cost or valuation. Cost is based on the fair value of the consideration paid for the investment, including acquisition costs. Where a different value is demonstrated by a significant third party event the investment is carried at a corresponding revalued amount and in the case of a permanent impairment in the carrying value of the asset a write-down provision is made in the profit and loss account. In the consolidated balance sheet the investments in associated undertakings are carried at share of net assets plus unamortised goodwill. Investments Investments in subsidiary undertakings are carried at underlying net asset value. Investments in unlisted companies are carried at cost or valuation. Investments in own shares are carried at cost less provision for any decrease in their market value. 2. Net operating expenses 2000 1999 £000 £000 ----------- ----------- Recurring Administrative expenses 5,644 373 ====== ======= Exceptional administrative expenses National Insurance on warrants 1,177 - Provision against investment in own shares 2,877 - ======== ======== (see note 8) 4,054 - --------- --------- Total administrative expenses 9,698 373 ======== ======== 3. Exceptional items 2000 1999 £000 £000 ---------- ----------- Profit on deemed disposal of interests in associated undertakings 1,379 - ======= ======= Loss on disposal and provisions for loss on disposal of interests in associated undertakings (2,433) - ======= ======== In accordance with FRS 9 the profit on deemed disposal represents the net increase in the value of the Group's share of the net assets of three associated undertakings, Leisurehub, Petspark and Easyart when they raised new capital from third parties. None of the exceptional items resulted in any cash flows during the year and the consideration on the sale of the shares in Perfectday has been deferred until 2001 and is included in debtors. There are no tax liabilities arising from any of the above exceptional items. 4. Employee information 2000 1999 No No ---------- ------------ The average number of employees during the period were as follows: Incubation management and operations 24 4 ======== ======== 4. Employee information (continued) Staff costs during the period including directors 2000 1999 comprise: £000 £000 ----------- ----------- Wages and salaries 1,497 119 Social security costs 162 14 Exceptional National Insurance on warrants (see Note 2) 1,177 - Other pension costs 78 10 ----------- ---------- 2,914 143 ====== ====== 5. Investments in subsidiary undertakings COMPANY £000 ----------- Cost at 1 January 2000 - Additions 1,426 Adjustments to carrying value (964) --------- Valuation at 31 December 2000 462 ===== During the year the Company acquired the entire issued share capital of Brainspark Associates Limited at a cost of £876,000 and an 87% interest in EC1 Media Limited for £550,000. The difference between the share of net assets acquired in EC1 Media of £ 479,000 and the cash consideration paid of £550,000 represents £71,000 of goodwill which has been written off to profit and loss account during the year. The Company's investments in Brainspark Associated Ltd and EC1 Media are held at net asset value and accordingly the movements in the reserves of the Company's subsidiaries are reflected in the adjustments to the carrying value of the Company's investments in subsidiaries. 6. Investments in associated undertakings Investments Loans to Total in associated associated GROUP undertakings undertakings £000 £000 £000 ----------- ------------ ----------- Cost At 1 January 2000 3,422 86 3,508 Additions / loans granted 6,800 780 7,580 Loans capitalised *1 86 (86) - Disposals (4,193) (200) (4,393) ----------- ---------- ---------- At 31 December 2000 6,115 580 6,695 ====== ====== ====== Share of net assets At 1 January 2000 402 - 402 Additions 1,912 - 1,912 Disposals 44 - 44 Share of profit(loss) for the year (2,653) - (2,653) Profit on deemed disposals 1,379 - 1,379 ---------- ---------- ---------- At 31 December 2000 1,084 - 1,084 ====== ====== ====== Goodwill At 1 January 2000 2,764 - 2,764 Arising on acquisition 4,975 - 4,975 Disposals (2,548) - (2,548) Amortisation of goodwill (1,868) - (1,868) ----------- ----------- ---------- At 31 December 2000 3,323 - 3,323 ======= ======= ====== Net book amount -------- -------- ------- At 31 December 2000 4,407 580 4,987 ------------ ----------- ----------- At 31 December 1999 3,166 - 3,166 ======= ======= ======= *1 A loan of £86,000 originally made to Petspark was capitalised within a new subscription for equity shares during the year. Goodwill on acquisition of investments in associated undertakings is amortised over three years. 6. Investments in associated undertakings (continued) Interests in associated undertakings The Group's interests in associated undertakings at 31 December 2000 were as follows: Name Number % Class of Country of Business activity of owned shares shares incorporation held --------- --------- ------------ ----------- --------------- Channel 200 20.0 £1 A England Recruitment services International Ordinary Easyart Limited * 26,236 18.8 1p A England Artwork supplies Ordinary Fortune Cookie 50,000 25.0 .01p A England Web development (UK) Ltd * Ordinary Gasworld Ltd 950,000 33.0 .01p A England Industrial gas Ordinary exchange Globe-Rail * 30,000 30.0 10p A England Rail industry portal Ordinary Iprox 4,000 27.5 .01p A England Mobile phone location Ordinary software Kerb * 30,167 25.0 £1 A England Web development Ordinary Leisurehub.com 50,000 13.1 0.5p A England Leisure industry Ltd Ordinary exchange Petspark * ) 666,700 14.8 A Ordinary England Household pet exchange ) 82,424 A Preference Propex 1,000,000 25.0 .01p A England Commercial property Ordinary exchange Que Pasa 200 40.0 £1 A England Media solutions Ordinary agency Smile-on 36,000 40.0 0.1p A England B2B dentist website Ordinary Traderserve 1,250,000 34.6 £1 A England Proprietary trading Ordinary services * All associated undertakings have 31 December year ends with the exception of Easyart, Fortune Cookie, Globe-Rail and Kerb which have 30 September, 31 August, 31 March and 29 February year ends respectively The Group's share of the turnover and its share of the assets of associated undertakings were as follows: 2000 1999 £000 £000 ------------ ---------- Turnover 1,239 83 ======= ====== Fixed assets 177 55 ======= ====== Current assets 1,602 559 ======= ====== Liabilities due within one year 690 212 ======= ====== Liabilities due after one year 5 - ======= ====== 7. Other investments £000 --------- GROUP Cost or Valuation: At 1 January 2000 - Additions 849 Revaluation 719 ---------- At 31 December 2000 1,568 ====== Other investments comprise a 7.4% investment in the ordinary share capital of Metapack Limited which was revalued in April 2000 by £719,000 on receipt of third party second round financing. 8. Investment in own shares £000 COMPANY AND GROUP Cost: At 1 January 2000 - Additions 5,322 Provision against investment (2,877) --------- At 31 December 2000 2,445 ======= At the time of the flotation a loan of £5.3 million was made to an Employee Benefit Trust, which invested the proceeds wholly in Company shares. The trust was established to cover actual and potential national insurance liabilities arising on the exercise of warrants held by employees and partner company managers at the time of the flotation. This arrangement is treated as an investment in own shares. A full discussion is presented in the flotation prospectus. The provision arises from the reduction in the company's share price from 125p at flotation to a bid price of 58.0p at 31 December 2000. The investment in own shares represents 4,236,329 ordinary shares with a nominal value of £42,363 and a bid market value of £2,445,000 net of brokers commission at the 31 December 2000. Subsequent to the year end the bid price has fallen to 28p as at 22nd February and hence the market value of these shares has fallen by £1,271,000. This would have the effect of increasing the required provision against the investment to £4,148,000. However, most of the warrants and options under which National Insurance would become payable were issued at a strike price of 57.1p, and are therefore unlikely to be exercised at a market price lower than this. As a result no post balance sheet adjustment to the provision against the investment in own shares is considered necessary. 9. Reconciliation of operating loss to net cash outflow from operating activities 2000 1999 £000 £000 ---------- ---------- Operating loss (14,246) (619) Depreciation and amortisation 257 7 Goodwill written off on acquisition of subsidiary 71 - undertaking Provision against investment in own shares 2,877 - Loss on disposal of fixed assets 7 - Share of net operating losses of associated undertakings 4,548 246 (Increase) in debtors (1,025) (401) Increase in creditors 471 115 Charge for issue of shares at below market value 395 28 Increase in provisions 385 - --------- -------- Net cash outflow (6,260) (624) ======= ======= 10. Reserves GROUP Share Revaluation Other Profit and premium reserve reserves loss account £000 £000 £000 £000 ---------- ---------- ------------ ----------At 1 January 2000 7,688 - - (543) Effect of Group reorganisation (7,688) - 6,813 - Issues of shares 26,442 - - - Revaluation of investments (note 7) - 719 - - Issue of shares at below market - - - 395 value Retained loss for the year - - - (14,554) ----------- --------- --------- ----------- 26,442 719 6,813 (14,702) ====== ===== ===== ====== COMPANY At 1 January 2000 - - - - Issues of shares 26,442 - - - Retained loss for the year - - - (3,647) ----------- ---------- ---------- ---------- 26,442 - - (3,647) ====== ====== ====== ======

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