Final Results

RNS Number : 3683E

Spark Ventures PLC

26 September 2008

 



SPARK Ventures plc

Preliminary Announcement of Annual Results for the year ended 31 March 2008

26 September 2008 - SPARK Ventures plc ('SPARK'), the leading quoted early stage venture capital investor, announces preliminary results for the year ended 31 March 2008.

Highlights:

• Net assets ended the second half unchanged at 15.5p per share (2007: 17.8p), but goodwill impairment of £13.2m (2007: £nil) consumes other investment gains of £6.6m (2007: £9.4m) to produce a loss from investing activities of £6.5m for the year (2007: gain of £9.4m)

• Total funds under management increase to £215.4m, bringing new revenues of £3.4m into the group following the acquisition of the Quester fund management business during the year

• Investment operations now at breakeven excluding consolidated investments, depreciation and amortisation (2007: £5.4m loss); consolidated investment companies contribute losses of £3.1m

• Upward revaluations in the second half of investments retained in the portfolio amounts to £5.8m, with cash receipts from disposals of £2.3m 

• Cash balances (£17.2m - of which £2.9m are restricted) and net assets at year end remain resilient despite market turbulence and SPARK's share price volatility

• £9.7m invested in 13 portfolio companies during the year, including 5 new investments 

• Review of new portfolios in the funds under management reduces value of those funds by £9.6m but with no effect on the SPARK balance sheet

Enquiries:

Andrew Carruthers, Chief Executive Officer                [phone]

Annabel O'Connor, Capital MS&L                     [phone]

Overview

Positive valuation developments anticipated at the time of our interim report have materialised in the second half despite the turbulence in capital markets (Kobalt, IMI engineering, Complinet, OpenX) and further positive news emerged after the year end which is not reflected in these numbers (MyDeco and notonthehighstreet.com). The result is that after a first half reduction in net assets of 12.6%, arising principally from a write down in goodwill, the second half improvement in valuations have been sufficient to leave net assets stable after covering operating costs and a full write down in goodwill associated with consolidated investments.  

The acquisition in May 2007 of the fund management business responsible for managing the former Quester funds contributed revenues of £3.4m and EBITDA of £1.0m during the 10.5 months of ownership in the period. This is a substantial contribution to SPARK's operating costs. Our cash balances remain strong at £17.2m (of which £2.9m are restricted).

The reduction in the value of investments in the Quester funds arising from our review of those portfolios only - has had a modest impact on the income we receive under some of the management contracts, which will continue until values recover. SPARK Ventures plc does not have a participation in those investments on its own balance sheet.

SPARK balance sheet investments and cash

Investments

After a disappointing first half, a number of positive portfolio events completed in the second half of the financial year. Taken together, they produced net upwards revaluations of investments retained in the portfolio of £5.8m, and disposals of £2.3m, all of which were made at book value or above.  

In particular, we were pleased to be able to announce in February 2008 that Kobalt Music Group Ltd (Kobalt), a leading independent music publisher and one of our largest portfolio companies, had signed an agreement with Balderton Capital whereby Balderton invested new equity in Kobalt. The transaction resulted in a 60% uplift in the valuation of SPARK's investment in Kobalt, increasing from £4.4m to £7.0m. In the process, a small portion of our holding (£340k) was sold at this revised valuation in order to enable Balderton to reach its desired holding. Since then, Kobalt has gone on to perform ahead of budget, and is regularly among the top five music publishers in the UK and the USA.

Our largest investment, IMImobile, continues to grow well, achieving a good first quarter performance and exceeding budget. In April, IMI engineering, the division of IMI that was its principal business at the time that SPARK first acquired its investment in the company, was sold, realising cash of £2.1m for our holding (of which £0.6m remains in escrow). The sale of this part of IMI created an additional £2m of value over and above the value attributed to the combined IMI business at 30 September during the second half of the financial year. 

Other upward revaluations were recorded by OpenX (£870k) and Complinet (£330k) during the second half of the year, in both cases because money was raised from new investors at valuations above our carrying values. OpenX was spun out of Unanimis, a new investment by SPARK during the year, and raised new money as an independent company. In the process a portion of OpenX was sold for £247k and the remaining stake was revalued upwards by £870k.

In addition, subsequent to the year end, there have been other positive valuation movements in the portfolio. In particular, despite the serious downturn in consumer markets, we are pleased to report the successful closing of new funding rounds for two consumer orientated businesses at MyDeco and Not on the High Street. MyDeco (www.mydeco.com) raised £7.6m at a valuation of £25m, representing a 30% increase in the value of our £1.86m first round investment to £2.42m. On the back of strong revenue growth, Not on the High Street (www.notonthehighstreet.com) raised £1.3m at a valuation of £4.3m, lifting the value of our £643k holding at the year end by 147% to £1.59m.

As reported in our interim results, the first half of the year saw a decline in net assets from 17.8p to 15.5p, arising principally from the write down in goodwill associated with the consolidated investment in Aspex Semiconductors. In the second half, a sale process initiated for Aspex produced an indicative offer from a major European technology company. Whilst negotiations are still ongoing, the uncertainty about the outcome has led to the view that we should not retain any goodwill for this investment on the balance sheet.  

Cash

The year to March 2008 saw the completion of a number of new investments from the SPARK balance sheet following the successful sale of Mergermarket to The Financial Times in 2006, which brought proceeds of £27.8m into the group. During the year, £9.7m was invested in 13 portfolio companies, of which five were new investments and the remainder were follow-on investments into the existing portfolio. In addition, £4m was used to finance the acquisition of the fund management company for the Quester funds. As at March 2008, cash balances were £17.2m (of which £2.9m is restricted). This is consistent with the level of cash reserves we like to hold when the fund is fully invested - even before we had the benefit of income from the management of third party funds which substantially covers the annual cost base.

Fund management

The acquisition of the fund manager of the former Quester funds in May 2007 has brought revenues of £3.4m into the group for the period. Excluding amortisation and depreciation, the net contribution towards operating costs of the group in the 10.5 month period since acquisition has been £1.0m. In the year ahead, having taken the restructuring costs in the current year, we would expect these revenues to remain broadly steady and contribution to increase. 

The major initiative in the fund management business this year has been to combine the teams, re-allocate responsibilities for the Quester investments and carry out a thorough review of those assets. The reallocation of between 70% and 90% of the investments has precipitated a different perspective on valuations, which has been compounded by a number of events within those portfolios, resulting in a substantial reduction in their valuations. None of the assets subject to this review are held on the SPARK balance sheet or reside within the net asset value of SPARK shares. However, valuation changes within the Venture Capital Trust ('VCT') funds have an impact on the fees chargeable for managing them, as they are calculated on the basis of 2% - 2.5% of the net asset value of those funds.  

During the year, joint investments have been made in Academia, Skinkers and Isango!, as the strategy set out a year ago to co-invest the SPARK resources and those of the VCTs is implemented. The benefit of co-investment is that it allows the funds under the management of the group, which are subject to a similar investment strategy, to be spread over a wider base of investments more consistently over time. The effect of this should be a reduction in the volatility of returns associated with over-reliance on a limited number of assets invested within a concentrated part of the investment cycle. Nevertheless, it will take a period of sustained co-investment before these benefits become apparent.

In July 2008 the Quester VCTs changed their names to SPARK VCT plc, SPARK VCT2 plc and SPARK VCT3 plc, and in September 2008 the proposed merger was announced between SPARK VCT2 plc and SPARK VCT3 plc. This will complete the restructuring of these funds and the full integration of third party fund management into the core SPARK business.

Conclusion

The period covered by these results has been a turbulent time for capital markets, economic growth and international stability. In the face of this uncertainty the performance of the underlying SPARK Ventures business, which exhibits all the characteristically volatile features of venture capital investing, has nevertheless demonstrated that the asset class can be resilient. The characteristics of venture capital investment combine binary outcomes for early stage businesses such as that for Aspex on the one hand, with strong growth from emerging technologies and markets in the face of a slowing economy as demonstrated by Kobalt, IMI mobile and Notonthehighstreet.com, on the other.

Despite these somewhat counter-cyclical features of our business, we clearly have to continue managing down our risks as far as is practicable. This applies particularly in the complex European venture capital market, where access to early stage co-investment capital is rapidly drying up and small companies still struggle to launch across fragmented territories. The measures we have been taking over the last 18 months include the move to a strategy that mixes fund management income with capital growth, the spreading of investment risk over a wider portfolio, the opening up of relationships in Asia to provide access to those markets for portfolio companies, and maintaining sufficient cash reserves to limit capital market risk. The interest expressed by a strategic investor announced earlier in the year remains and, if an investment is closed, will make a significant contribution to this strategy.

Andrew Carruthers, Chief Executive Officer

26 September 2008

Group income statement

Year ended 31 March 2008

	Year ended 31 March 2008		Year ended 31 March 2007
	£'000		£'000
	Unaudited		Audited
Gains on investments at fair value through profit and loss
- Realised gains and losses	172		2,047
- Realised carried interest valuation	-		4,800
- Impairment of goodwill	(13,178)		-
- Unrealised gains and losses	6,477		2,537
	(6,529)		9,384
Revenue
Bank interest receivable	1,403		1,331
Management fee income	3,423		-
Portfolio dividends and interest	40		292
Sales of goods and related services	1,163		881
Other income	1,998		1,426
	8,027		3,930
Administrative expenses
Salaries and other staff costs	(5,645)		(3,990)
Carried interest expense	-		(4,800)
Depreciation of property, plant and equipment	(192)		(196)
Amortisation of other intangible assets	(664)		-
Other costs	(5,379)		(5,257)
	(11,880)		(14,243)
Loss before taxation	(10,382)		(929)
Taxation	922		714
Loss for the financial year	(9,460)		(215)
Attributable to:
- Equity shareholders	(9,460)		(215)
Basis and diluted loss per ordinary share	(2.32p)		(0.05p)

Group balance sheet

Year ended 31 March 2008

	Year ended 31 March 2008		Year ended 31 March 2007
	£'000		£'000
	Unaudited		Audited
Non-current assets
Property, plant and equipment	596		647
Investments at fair value through profit and loss	40,580		25,453
Deferred consideration	-		1,498
Intangible assets	4,586		13,178
Restricted cash	2,869		2,869
	48,631		43,645
Current Assets
Deferred consideration	1,639		2,147
Inventory - finished goods	47		89
Trade and other receivables	2,040		1,358
Taxation	288		422
Cash and cash equivalents	14,281		31,846
	18,295		35,862
Current liabilities
Trade and other payables	(3,072)		(2,137)
Deferred consideration	(500)		-
Carried interest payable	-		(4,800)
Provisions	-		(133)
	(3,572)		(7,070)
Net current assets	14,723		28,792
Non - current liabilities
Deferred consideration	(500)		-
	(500)		-
Net assets	62,854		72,437
Equity
Issued capital	11,250		11,818
Share premium	39,693		39,693
Revenue reserve	11,518		21,101
Capital Redemption Reserve	568		-
Own shares	(175)		(175)
Total equity	62,854		72,437
Total Equity
Ordinary shares in issue	450,000		472,736
Shares held in Treasury	(39,245)		(58,391)
Shares held by Employee Benefit Trust	(6,273)		(7,023)
Shares in issue for net asset value per share calculation	404,482		407,322
NAV per share	15.54		17.78

Reconciliation of movements in equity

	Year ended 31 March 2008		Year ended 31 March 2007
	£'000		£'000
	Unaudited		Audited
Opening total equity	72,437		75,680
Total recognised income and expenses	(9,233)		213
Share buy-backs	(350)		(3,456)
Closing total equity	62,854		72,437

Group cash flow statement

Year ended 31 March 2008

	Year ended 31 March 2008		Year ended 31 March 2007
	£'000		£'000
	Unaudited		Audited
Cash flows from operating activities
Cash flow from operations	(7,099)		(6,469)
Tax received	402		570
Net cash outflow from operating activities	(6,697)		(5,899)
Cash flows from investing activities
Purchase of property, plant and equipment	(141)		(61)
Acquisition of subsidiary	(2,994)		-
Purchase of financial investments	(9,660)		(4,143)
Sale of financial investments	2,277		30,395
Net cash (outflow)/inflow from investing activities	(10,518)		26,191
Cash flows from financing activities
Purchase of own shares	(350)		(3,456)
Net cash outflow from financing activities	(350)		(3,456)
Change in cash and cash equivalents	(17,565)		16,836
Opening cash and cash equivalents	31,846		15,010
Closing cash and cash equivalents	14,281		31,846

Reconciliation of operating loss to net cash outflow from operating activities

	Year ended 31 March 2008		Year ended 31 March 2007
	£'000		£'000
	Unaudited		Audited
Interest received	1,403		1,479
Dividends received	40		144
Other revenue	6,584		2,307
Total revenue	8,027		3,930
Administrative expenses	(11,880)		(14,243)
Operating loss	(3,853)		(10,313)
Increase/decrease in trade and other receivables	1,692		(276)
Increase/decrease in trade and other trade payables	(6,064)		3,522
Increase/decrease in inventory	43		(26)
Depreciation of property, plant and equipment	192		196
Amortisation of other intangible assets	664		-
Non-cash expenditure	-		33
Share based payment	227		395
Net cash outflow from operations	(7,099)		(6,469)

Financial information

This preliminary statement was approved by the Board on 25 September 2008. The financial information set out above does not constitute the company's statutory accounts for the year ended 31 March 2008 but is derived from and has been prepared on the same basis as those financial statements.

Statutory accounts for 31 March 2007, which were prepared under International Financial Reporting Standards (IFRS), have been delivered to the registrar of companies and those for 31 March 2008, prepared under IFRS, will be delivered in due course.

The auditors have reported on the 31 March 2007 and 31 March 2008 year end accounts and their reports were unqualified and did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and did not contain statements under section 237(2) or (3) of the Companies Act 1985.

The audited statutory accounts for the financial period ended 31 March 2008 will be available by the close of business on 29 September 2008 at www.sparkventures.com

Copies of the full financial statements for the period ended 31 March 2008 are expected to be posted to shareholders on 29 September 2008 and will be available to the public at the registered office of the Company at 33 Glasshouse Street, London, W1B 5DG.

 

END

 

 

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