Investec Structured Products Calculus VCT plc
Annual Report & Accounts
Period ended 28 February 2011
The full Annual Report and Accounts can be accessed via the following websites: www.calculuscapital.com and www.investecstructuredproducts.com or by contacting the Company Secretary on telephone 01392 477500.
The Company's principal objectives for investors are to:
• invest in a portfolio of Venture Capital Investments and Structured Products:
- to provide investment returns to maximise annual dividends; and
- to fund a special dividend or cash offer in year 6 sufficient to bring distributions per share to 70p;
• generate returns from a portfolio of Venture Capital Investments that will provide attractive long-term returns within a tax efficient vehicle beyond an interim return date;
• review the appropriate level of dividends annually to take account of investment returns achieved and future prospects; and
• maintain VCT status to enable qualifying investors to retain their income tax relief of up to 30 per cent. on the initial investment and receive tax-free dividends and capital growth.
Full details of the Company's investment policy can be found below.
Financial Review 13 Months to 28 February 2011 Total return Total return £308,000 Total return per ordinary share 8.3p Revenue Net loss after tax £(112,000) Revenue return per ordinary share (3.0)p Dividend Recommended final dividend 5.25p As at 28 February 2011
Assets (investments valued at bid market prices)
Net assets £4,836,000 Net asset value ("NAV") per ordinary share
Mid market quotation
Ordinary shares 99.5p Discount to bid price NAV (2.5)% As at 30 April 2011 Unaudited net asset value per ordinary share
Unaudited net asset value per C ordinary share
I am delighted to present your Company's results for the period ended 28 February 2011. The Investec Structured Products Calculus VCT plc is a tax efficient listed company which aims to address shareholder needs for:
- attractive tax free dividends;
- a clear strategy for returning capital;
- downside protection through the Structured Products portfolio and investment in lower risk VCT qualifying companies with a high percentage of investments in loan stock and preference shares; and
- low annual management fees.
The Company, which launched in March 2010, is a joint venture between Investec Structured Products (part of Investec Plc which is a member of the FTSE 100) and Calculus Capital, and brings together both Investment Managers' award winning expertise in their respective fields of structured products and venture capital. Despite launching late in the 2009/10 tax year, the Company nevertheless raised a creditable £3.87 million (before expenses) in the initial ordinary share offer before it closed in April 2010. Following shareholder approval, a further ordinary share offer was launched in September 2010, and raised £0.92 million (before expenses) before closing in December 2010. Most recently, a C share offer was launched in January 2011 and raised £1.92 million (before expenses), closing at the end of April 2011. To date, the Company has raised a net total of £6.46 million. Your Board and Investment Managers committed £1.18 million of this total, demonstrating their confidence in the Company and the product offering. The additional fundraisings undertaken have further increased the size of the Company over which the annual running costs can be spread and will provide greater opportunities for diversification. After the close of the initial offer in April 2010, the two Investment Managers began implementation of the Company's investment plans. Investec has invested approximately £2.4 million in a range of Structured Products of varying durations and counterparties to date, and Calculus Capital has made three Qualifying Investments (one of which has been made since the period end), totalling approximately £0.9 million. The net asset value per ordinary share was 102.1p as at 28 February 2011 and has subsequently risen to 102.9p as at 30 April 2011. Since 5 May 2010, when we invested in the first Structured Product, the FTSE 100 index level is up 12 per cent. (up to 28 February 2011), making the Company one of the best performing of its 2010/11 peer group. Your Board and Investment Managers are encouraged by the performance of the Company to date and believe it is well placed to make further progress in the forthcoming year.
Structured Products Portfolio
Our non-qualifying investments are managed by Investec Structured Products. As at 28 February 2011, your Company held a portfolio of six Structured Products based on the FTSE 100 Index. The products differ by duration and counterparty, in order to minimise risk and create a diversified portfolio of investments. New funds raised under the C share offer will be used to buy additional Structured Products. Up to 20 per cent. of the Structured Products portfolio of the C shares fund will be able to be invested in other indices besides the FTSE 100 Index.
Venture Capital Investments
Calculus Capital manages the portfolio of Venture Capital Investments made by the Company. It is intended that approximately 75 per cent. of the Company's funds will be invested over a three year period in a diversified portfolio of holdings in unquoted VCT qualifying companies. In order to achieve this, there will be a phased reduction in the Structured Products portfolio and a corresponding increase in the portfolio of Venture Capital Investments. In July 2010, the Company made its first VCT Qualifying Investment, investing £250,000 in Terrain Energy Limited ("Terrain"), as part of a £750,000 fundraising round. Terrain was established in October 2009 to develop a portfolio of onshore oil and gas production and development interests in areas of low political risk, with the current focus being the UK. The portfolio of licences, all of which are located in the UK, includes currently oil producing, scheduled for near term production, appraisal and exploration projects. An additional £50,000 was invested after the period end in Terrain. In November 2010, the Company invested £299,377 in Abingdon based Lime Technology Limited ("Lime"). Lime was founded in 2002 and is a leader in renewable lime and hemp based building products for the mainstream construction industry. Lime produces Tradical® Hemcrete® which is a negative carbon bio-composite product comprised of hemp and a lime based binder. Through its subsidiary, Hemp Technology, the company controls the hemp supply chain from seed to finished wall.
A more detailed analysis of the investment portfolios can be found in the respective Investment Managers' Reviews that follow this statement.
In line with our aim to provide a regular tax free dividend stream, the Directors are pleased to propose a final dividend of 5.25p per ordinary share which, subject to shareholder approval, will be paid on 29 July 2011 to ordinary shareholders on the register on 3 June 2011.
Christopher Wightman stepped down as a Director and as Chairman of the Company on 10 February 2011 in order to concentrate on his other business commitments. On behalf of the Board, I would like to thank Chris for the experience he brought and the commitment he made to the Company from its launch. I am pleased to introduce Kate Cornish-Bowden as a new non-executive Director of the Company. Kate was appointed on 10 February 2011. She brings with her a wealth of experience from her time at Morgan Stanley and the Board welcomes her to the Company.
Ian Wohlman will be retiring as a Director at the Annual General Meeting. I would like to thank Ian for all his assistance since the launch of the Company.
Developments Since the Period End
Since the period end, the Company has issued 1,931,095 C shares under the C share offer, raising £1,920,500. The Investment Managers are reviewing investment opportunities and it is expected that the first investment of the C shares fund in Structured Products will be made shortly. In addition, a further two Qualifying Investments have been made since the balance sheet date. In March an additional £50,000 was invested in Terrain and £300,000 was invested in MicroEnergy Services Limited in early April. Further details of these investments are contained in the Investment Manager's Review (Qualifying Investments). Outlook
Promising and entrepreneurial unquoted companies of the kind backed by the Investec Structured Products Calculus VCT are a key element in the country's economic recovery, as demonstrated by moves in the Chancellor's recent budget statement to increase investment in such companies. The decline in provision of other forms of funding for promising companies, such as bank finance or an active smaller companies Initial Public Offering market, also provide an attractive investment scenario. Your Board and Investment Managers believe your Company is well placed to take advantage of these opportunities, in particular at a time when valuations remain low by historic standards. Michael O'Higgins Chairman 23 May 2011
Investment Manager's Review (Qualifying Investments)
Calculus Capital Limited manages the portfolio of Venture Capital Investments made by the Company. It is intended that approximately 75 per cent. of the Company's funds will be invested over a three year period in a diversified portfolio of holdings in unquoted VCT qualifying companies.
During the period under review, the Company completed two Qualifying Investments in unquoted companies, Terrain Energy Limited ("Terrain") and Lime Technology Limited ("Lime").
Terrain Energy Limited
In July 2010, the Company invested £250,000 in Terrain, of which £50,000 was in ordinary shares and £200,000 was in the form of 7 per cent. long-term loan stock. Terrain was established in October 2009 to develop a portfolio of onshore oil and gas production and development assets, predominantly in the UK.
The portfolio of licences, all of which are located in the UK, includes currently oil producing, scheduled for near term production, appraisal and exploration projects.
Oil is currently produced from the Keddington field on the East Midlands licence (PEDL005) and the ongoing evaluation of this field is expected to lead to increased field production and revenues during 2011. Terrain holds a 15 per cent. interest in the PEDL005, with 75 per cent. owned by Egdon Resources plc and 10 per cent. by Alba Resources Limited, a wholly owned subsidiary of Nautical Petroleum plc. The field also produces large volumes of gas and the use of the gas for electricity generation and export to the grid is under evaluation. Drilling of an additional well commenced after the period end in early April 2011, and this well is designed to increase total field production at a time of high oil prices and also to provide additional reservoir information in an untested part of the field to enable an investment decision to be taken on the scale of the proposed gas to electricity generation project. Further development of the rest of the portfolio is also planned for later in 2011 including the restart of oil production at the Kirklington licence (PEDL203) and at the Dukes Wood licence (PEDL118), both of which are also in the East Midlands. Terrain holds a 25 per cent. interest in each of these licences. After the period end, Terrain acquired a 10 per cent. interest in an exploration licence in Northern Ireland (PL/10 Central Larne - Lough Neagh Basin) in a farm out arrangement from Infrastrata plc which retains a 30 per cent. interest. Other participants include IS E&P Limited with 40 per cent. and Nautical Petroleum plc with 20 per cent. The licence covers 663 square kilometres with permitted development rights for drilling an exploration well. The main prospect is a conventional gas play with a gross reserve potential of 2,800 billion cubic feet. After the period end, the Company invested a further £50,000 as ordinary equity at £1.28 per share as part of a total fundraising of £750,000. The fundraising was part of a funding programme intended to give Terrain visibility over its funding needs to meet development, appraisal and exploration commitments until the end of 2012. As a relatively new company, Terrain has not yet filed statutory accounts. Latest Audited Results Investment Information No statutory accounts have been filed Total cost
Income recognised in period £8,921 Valuation basis: Fair value based on cost of investment, supported by discounted cash flow and comparable company analysis Total valuation £257,142 Voting rights* 1.77%
* Other funds managed by Calculus Capital have an interest in this company and have a combined equity holding of 24.96 per cent. This follows the additional investment in Terrain in March 2011.
Lime Technology Limited
Lime, based in Abingdon, was founded in 2002, and is a leader in renewable lime and hemp based building products for the mainstream construction industry. Lime produces Tradical® Hemcrete® which is a negative carbon bio-composite product comprised of hemp and a lime based binder. Through its subsidiary, Hemp Technology, the company controls the hemp supply chain from seed to finished wall. £299,377 was invested in Lime in November 2010 (£49,377 in equity shares and £250,000 in 7 per cent. long-term loan stock). The investment in the equity shares represents 0.47 per cent. of fully diluted total shares. The total funding round in Lime was £2.6 million and, of this, Calculus Capital's EIS funds invested approximately £1.28 million. Regulatory compliance with the Code for Sustainable Homes is a key driver in bringing the company's products into the mainstream construction industry. Developers of commercial buildings are also under pressure to build more responsibly. Hemcrete® exhibits excellent thermal properties, ideal for creating comfortable buildings which meet the higher level Code for Sustainable Homes and BREEAM ("BRE Environmental Assessment Method") excellent standards. Tradical® Hemcrete® has been specified in two sustainable housing developments and in the new Adnams distribution centre, a temperature controlled warehouse for the Wine Society and Marks & Spencer's Cheshire Oaks store.
As a small company, Lime is exempt from filing full accounts.
Latest Audited Results Investment Information Period ended 4 November 2010 Total cost £299,377 Net assets £1,358,275 Income recognised in period £5,561
Valuation basis: Fair value based on
cost of investment Total valuation £299,377 Voting rights* 0.49%
* Other funds managed by Calculus Capital have an interest in this company and had a combined equity holding of 12.12 per cent.
As at the period end, £549,377 had been invested in qualifying holdings representing approximately 12.1 per cent. of the net funds raised.
Developments Since the Period End
Since the period end, as described above, the Company has invested a further £50,000 in ordinary equity in Terrain as part of a fundraising programme intended to give Terrain visibility over its funding needs to meet development, appraisal and exploration commitments until the end of 2012. Additionally, in early April, £300,000 was invested in MicroEnergy Services Limited ("MicroEnergy"). MicroEnergy is a company set up to acquire renewable, microgeneration facilities, including (but not limited to) wind, anaerobic digestion, hydro and micro CHP (Combined Heat and Power). MicroEnergy is currently in negotiations to acquire its first renewable energy assets. The investment was provided as £150,000 as ordinary equity and £150,000 in the form of long-term loan stock with a coupon of 7 per cent. The total funding round was £1,950,000 which was provided from funds managed or advised by Calculus Capital and the Company's equity interest following this fundraising was 8.7 per cent. Outlook
The Company continues to build a diversified portfolio of good quality Qualifying Investments which the Investment Manager believes will deliver sustained long-term performance. We believe that the current market remains attractive for investment in qualifying unquoted companies, as access to finance for such companies remains tight and economic conditions have lowered valuations to more realistic levels.
Calculus Capital Limited 23 May 2011
Investment Manager's Review (Structured Products)
In line with the Company's strategy set out in the original Offer document, a large percentage of the cash raised has been used to build a portfolio of Structured Products. The portfolio of Structured Products has been constructed with different issuers and differing maturity periods to minimise risk and create a diversified portfolio. The FTSE 100 Initial Index Levels for these investments range from 4,805.75 to 5,341.93. All of the Structured Product investments to date have potential returns that are by way of a fixed amount payable as long as the Final Index Level is higher than the Initial Index Level (e.g. for the Abbey National Treasury Services Structured Product the fixed amount is 85 per cent. (plus 100 per cent. of the initial notional amount) if the Final Index Level is higher than the Initial Index Level of 4,940.68). All of the products have capital at risk on a one-to-one basis if the FTSE 100 falls by more than 50 per cent. at any time during the term and fails to recover at maturity such that the Final Index Level is below the Initial Index Level. There have been no new investments made into the Structured Products portfolio since the last reporting period. As at 28 February 2011 the Structured Products portfolio was valued at £2,882,000, and the FTSE 100 closing level on this day was 5994.01.
The Investment Manager constantly reviews the portfolio of investments to assess asset allocation and the need to realise investments.
Structured Products Portfolio as at 28 February 2011
FTSE 100 Price Valuation Initial as at 28 as at 28 Return/ Index Notional Purchase February February Capital Issuer Strike Maturity Level Investment Price Cost 2011 2011 at Risk Date Date ("CAR")* The Royal 05/05/ 12/05/ 5,341.93 £275,000 £0.9600 £264,000 £1.0729 £295,048 162.5% Bank of 2010 2015 if FTSE Scotland 100** higher; CAR if FTSE 100 falls by more than 50% Investec 14/05/ 19/11/ 5,262.85 £500,000 £0.9791 £489,550 £1.1636 £581,786 185% if Bank 2010 2015 FTSE 100** higher; CAR if FTSE 100 falls by more than 50% Santander 25/05/ 18/11/ 4,940.68 £350,000 £0.9898 £346,430 £1.2654 £442,890 185% if Global 2010 2015 FTSE Banking 100** and higher; Markets CAR if (Abbey FTSE National 100 Treasury falls Services) by more than 50%
* Capital at Risk ("CAR") is explained in note 16.
The above investments have been designed to meet the 43.75p per ordinary share interim return by 14 December 2015. A total of £1,099,980 (24.20 per cent. of net monies raised) was invested in the above Structured Products. Assuming no issuer defaults and if the FTSE 100 Final Index Level is higher than the Initial Index Level, then these investments will return £2,019,375, equivalent to 42.62p per ordinary share. FTSE 100 Price Valuation Initial as at 28 as at 28 Return/ Index Notional Purchase February February Capital Issuer Strike Maturity Level Investment Price Cost 2011 2011 at Risk Date Date ("CAR") Nomura 28/05/ 20/02/ 5,188.43 £350,000 £0.9800 £343,000 £1.1572 £405,020 137% if Bank 2010 2013 FTSE International 100** higher; CAR if FTSE 100 falls by more than 50% Morgan 10/06/ 17/12/ 5,132.50 £500,000 £1.0000 £500,000 £1.1544 £577,200 134% if Stanley 2010 2012 FTSE 100** higher; CAR if FTSE 100 falls by more than 50% HSBC Bank 01/07/ 06/07/ 4,805.75 £500,000 £1.0000 £500,000 £1.1591 £579,550 125.1% 2010 2012 if FTSE 100** higher; CAR if FTSE 100 falls by more than 50% The above investments mature prior to year 3 and target an average return of 13.15 per cent. per annum. These investments may be sold prior to maturity if it is deemed that a greater return can be made by Calculus Capital in Qualifying Investments. ** The Final Index Level is calculated using 'averaging', meaning that we take the average of the closing levels of the FTSE 100 on each Business Day over the 2 - 6 months of the Structured Product plan term (the length of the averaging period may differ for each plan). The use of averaging to calculate the return can reduce adverse effects of a falling market or sudden market falls shortly before maturity. Equally, it can reduce the benefits of an increasing market or sudden market rises shortly before maturity. Investec Structured Products 23 May 2011 Investment Portfolio as at 28 February 2011 Net assets % of net assets Structured Products 60% Unquoted - loan stock 9% Unquoted - ordinary and preference 2% shares Unquoted - liquidity funds 21% Net current assets 8% 100% Sector % of portfolio Structured Products 64% Unquoted - Qualifying Investments 12% Unquoted - other non-Qualifying 24% Investments 100% Book Cost Valuation % of Net % of Company Nature of £'000 £'000 Assets Portfolio Business Structured Products Investec Bank Banking 490 582 12% 13% The Royal Bank of Banking 264 295 6% 6% Scotland Santander Global Banking 346 443 9% 10% Banking and Markets (Abbey National Treasury Services) Nomura Bank Banking 343 405 9% 9% International Morgan Stanley Banking 500 577 12% 13% HSBC Bank Banking 500 580 12% 13% Total Structured 2,443 2,882 60% 64% Products Qualifying Investments Terrain Energy Onshore oil 250 257 5% 6% Limited and gas production Lime Technology Construction 299 299 6% 6% Limited Total Qualifying 549 556 11% 12% Investments Other non-Qualifying Investments Fidelity Liquidity Liquidity fund 350 350 7% 8% Fund Goldman Sachs Liquidity fund 350 350 7% 8% Liquidity Fund Scottish Widows Liquidity fund 350 350 7% 8% Liquidity Fund Total Other 1,050 1,050 21% 24% non-Qualifying Investments Total Investments 4,042 4,488 92% 100% Net Current Assets less Creditors due after one year 348 8% Net Assets 4,836 100% Board of Directors
Michael O'Higgins (Chairman)*
Kate Cornish-Bowden* John Glencross Steve Meeks
Mark Rayward (Audit Committee Chairman)*
* independent of the Investment Managers
Calculus Capital Calculus Capital Limited is the Venture Capital Investments portfolio manager (VCT Qualifying Investments).
Investec Structured Products Investec Structured Products (a trading name of Investec Bank plc) is the Structured Products portfolio manager (non VCT Qualifying Investments).
Business Review Activities and status
The Company is registered as a public limited company and incorporated in England and Wales with registration number 07142153. Its shares have a premium listing and are traded on the London Stock Exchange.
The Company carries on business as a venture capital trust and its affairs are conducted in a manner to satisfy the conditions to enable it to obtain approval as a venture capital trust under sections 258-332 of the Income Tax Act 2007 ("ITA 2007"). Details of the Company's investment policy are set out below. During the period, the Company was an investment company under section 833 of the Companies Act 2006. On 18 May 2011 investment company status was revoked. This was done in order to allow the Company to pay dividends to shareholders using the special reserve, which had been created on the cancellation of the share premium account on 20 October 2010.
This Business Review should be read in conjunction with the Chairman's Statement, the Investment Managers' Reviews and the portfolio analysis.
The Board reviews performance by reference to a number of key performance indicators ("KPIs") and considers that the most relevant KPIs are those that communicate the financial performance and strength of the Company as a whole:
- total return per share - net asset value per share
- share price and discount/premium to net asset value
Further KPIs are those which show the Company's position in relation to the VCT tests which it is required to meet in order to meet and maintain its VCT status. These tests are set out in the full Annual Report and Accounts. The Company has received provisional approval as a VCT from HM Revenue & Customs. All the relevant VCT qualifying tests were met throughout the period.
The total return (after tax) for the period ended 28 February 2011 attributable to the ordinary shareholders was £308,000.
The fair value of the Company's investments at 28 February 2011 was £4.5 million.
The financial performance of the Company is set out below:
Period Ended 28 February 2011 Total return per ordinary share 8.3p NAV per ordinary share 102.1p Ordinary share price 99.5p Ordinary share price discount to NAV 2.5%
The Directors are recommending a final dividend of 5.25p per ordinary share. Subject to approval by shareholders at the Annual General Meeting, this dividend will be paid on 29 July 2011 to ordinary shareholders on the register on 3 June 2011. Share capital The issued share capital on incorporation was 20 ordinary shares of 1p each. A total of 4,738,443 ordinary shares, with an aggregate nominal value of £47,384 and a total consideration of £4,787,269, were issued during the year, as follows:
• 3,867,897 ordinary shares were issued at 100p per share under the Offer for Subscription dated 3 March 2010.
• a further ordinary share offer was launched on 20 September 2010 and the following shares were issued:
- 115,830 ordinary shares at 103.6p per share on 5 October 2010
- 226,446 ordinary shares at 105.3p per share 2 November 2010
- 89,292 ordinary shares at 105.8p per share on 16 November 2010
- 18,250 ordinary shares at 105.2p per share on 30 November 2010
- 420,728 ordinary shares at 106.3p per share on 13 December 2010
5,000,000 redeemable non-voting shares of 1p each were issued to Investec Structured Products, an investment manager of the Company, on 10 February 2010to enable the Company to register as a public limited company. These shares were redeemed in full on 29 June 2010.
At the year end, the issued share capital comprised 4,738,463 ordinary shares. No shares are held in treasury.
An offer for subscription for C ordinary shares of 1p each ("C shares") was launched in January 2011 and the following shares have been issued since the period end:
- 1,644,826 C shares at 100p per share on 1 April 2011
- 187,679 C shares at 100p per share on 5 April 2011
- 98,590 C shares at 100p per share on 4 May 2011
The ordinary shares and C shares have equal voting rights, and at general meetings of the Company, holders are entitled to one vote on a show of hands and on a poll to one vote for every share held.
At the date of this report, the issued share capital comprises 4,738,463 ordinary shares (representing 71.05 per cent. of total voting rights) and 1,931,095 C shares (representing 28.95 per cent. of total voting rights).
There are no restrictions concerning the transfer of securities in the Company; no special rights with regard to control attached to securities; no agreements between holders of securities regarding their transfer known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid. The authority to issue or buy back the Company's shares and amendment of the Company's Articles of Association require a relevant resolution to be passed by shareholders. At the General Meeting held on 6 September 2010, the Directors were granted authority to allot ordinary and C shares up to an aggregate nominal amount of £165,000 and £275,000 respectively. They were also authorised to issue for cash (without rights of pre-emption applying) and buyback both ordinary and C shares. The Board's proposals for the renewal of the authorities to issue and buyback shares are set out in the full Annual Report and Accounts. Investment policy Asset allocation
It was intended that approximately 75 per cent. of the monies raised by the Company would be invested within 60 days in a portfolio of Structured Products. The balance would be used to meet initial costs and invested in cash or near cash assets (as directed by the Board) and would be available to invest in Venture Capital Investments, as well as to fund ongoing expenses. In order to qualify as a VCT, at least 70 per cent. of the Company's assets must be invested in Venture Capital Investments within approximately three years. Thus, in respect of monies raised from time to time, there will be a phased reduction in the Structured Products portfolio and corresponding build up in the portfolio of Venture Capital Investments to achieve and maintain this 70 per cent. threshold along the following lines:
Average Exposure per Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6+
Structured Products and cash/ 85% 75% 35% 25% 25% 0% near cash Venture Capital Investments 15% 25% 65% 75% 75% 100% Note: the investment allocation set out above is only an estimate and the actual allocation will depend on market conditions, the level of opportunities and the comparative rates of returns available from Venture Capital Investments and Structured Products. The combination of Venture Capital Investments and the Structured Products will be designed to produce ongoing capital gains and income that will be sufficient to maximise both annual dividends for the first five years from funds being raised and an interim return by an interim return date by way of a special dividend or cash tender offer for shares. After the interim return date, unless Investec Structured Products are requested to make further investments in Structured Products, the relevant fund will be left with a portfolio of Venture Capital Investments managed by Calculus Capital with a view to maximising longer term returns. Such returns will then be dependent, both in terms of amount and timing, on the performance of the Venture Capital Investments but with the intention to source exits as soon as possible. The portfolio of Structured Products will be constructed with different issuers and differing maturity periods to minimise risk and create a diversified portfolio. The maximum exposure to any one issuer will be limited to 15 per cent. of the assets of the Company at the time of investment. Structured Products can and may be sold before their maturity date if required for the purposes of making Venture Capital Investments and Investec Structured Products have agreed to make a market in the Structured Products, should this be required by the Company. The intention for the portfolio of Venture Capital Investments is to build a diverse portfolio of primarily established unquoted companies across different industries. In order to generate income and where it is felt it would enhance shareholder return, investments may be structured to include loan stock and/or redeemable preference shares as well as ordinary equity. It is intended that the amount invested in any one sector and any one company will be no more than approximately 20 per cent. and 10 per cent. respectively of the Venture Capital Investments portfolio (in both cases at the date of investment). The Board and its Investment Managers review the portfolio of investments on a regular basis to assess asset allocation and the need to realise investments to meet the Company's objectives or maintain VCT status. Where investment opportunities arise in one asset class which conflicts with assets held or opportunities in another asset class, the Board will make the investment/ divestment decision. Under its Articles of Association, the Company has the ability to borrow a maximum amount equal to 25 per cent. of the aggregate amount paid on all shares issued by the Company (together with any share premium thereon). The Board will consider borrowing if it is in the shareholders' interests to do so. In particular, because the Board intends to minimise cash balances, the Company may borrow on a short-term to medium-term basis (in particular, against Structured Products) for cashflow purposes and to facilitate the payment of dividends and expenses in the early years. The Company will not vary the investment objective or the investment policy, to any material extent, without the approval of shareholders. The Company intends to be a generalist VCT investing in a wide range of sectors.
The Board controls the overall risk of the Company. Calculus Capital will ensure the Company has exposure to a diversified range of Venture Capital Investments from different sectors. Investec Structured Products will ensure the Company has exposure to a diversified range of Structured Products. The Board believes that investment in these two asset classes provides further diversification.
Calculus Capital has a co-investment policy between its various funds whereby investment allocations are generally offered to each party in proportion to their respective funds available for investment, subject to: (i) a priority being given to any of the funds in order to maintain their tax status; (ii) the time horizon of the investment opportunity being compatible with the exit strategy of each fund; and (iii) the risk/reward profile of the investment opportunity being compatible with the target return for each fund. The terms of the investments may differ between the parties. In the event of any conflicts between the parties, the issues will be resolved at the discretion of the independent Directors, designated members and committees. It is not intended that the Company will co-invest with Directors or members of the Calculus Capital management team (including family members). In respect of the Venture Capital Investments, funds attributable to separate share classes will co-invest (i.e. pro rata allocation per fund, unless one of the funds has a pre-existing investment where the incumbent fund will have priority, or as otherwise approved by the Board). Any potential conflict of interest arising will be resolved on a basis which the Board believes to be equitable and in the best interests of all shareholders. A co-investment policy is not considered necessary for the Structured Products.
Policy on Qualifying Investments
Calculus Capital follows a disciplined investment approach which focuses on investing in more mature unquoted companies where the risk of capital loss is reduced and prospects for exit enhanced, typically by the cash generative characteristics and/or strong asset bases of the investee companies. Calculus Capital, therefore, intends to:
• Invest in a diversified portfolio from a range of different sectors.
• Focus on companies which are cash generative and/or with a strong asset base.
• Structure investments to include loans and preference shares where it is felt this would enhance shareholder return.
• Invest in companies which operate in sectors with a high degree of predictability and a defensible market position.
• Invest in companies which can benefit both from the capital provided by Calculus Capital but also from the many years of operating and financial experience of the Calculus Capital team.
It is intended that the Venture Capital Investments portfolio will be spread across a number of investments and the amount invested in any one sector and any one company will be no more than approximately 20 per cent. and 10 per cent. respectively (in both cases at the date of investment).
The Company's investment policy is designed to ensure that it will meet, and continue to meet, the requirements for approved VCT status from HM Revenue & Customs. Amongst other conditions, the Company may not invest more than 15 per cent. (by value at the time of investment) of its investments in a single company and must have at least 70 per cent. by value of its investments throughout the period in shares or securities in qualifying holdings, of which 30 per cent. by value must be ordinary shares which carry no preferential rights ("eligible shares"). For funds raised from 6 April 2011, the requirement for 30 per cent. to be invested in eligible shares was increased to 70 per cent.
Principal risks and uncertainties facing the Company
The Company is exposed to a variety of risks. The principal financial risks and the Company's policies for managing these risks and the policy and practice with regard to financial instruments are summarised in note 16 to the Accounts.
The Board has also identified the following additional risks and uncertainties:
Loss of approval as a venture capital trust and other regulatory breaches
The Company has received provisional approval as a VCT under ITA 2007. Failure to meet and maintain the qualifying requirements for VCT status could result in the loss of tax reliefs previously obtained, resulting in adverse tax consequences for investors, including a requirement to repay the income tax relief obtained, and could also cause the Company to lose its exemption from corporation tax on chargeable gains. The Board receives regular updates from the Managers and financial information is produced on a monthly basis. The Board has appointed an independent adviser to monitor and advise on the Company's compliance with the VCT rules. The Company is subject to compliance with the Companies Act 2006, the rules of the UK Listing Authority and ITA 2007. A breach of any of these could lead to suspension of the listing of the Company's shares on the London Stock Exchange and/or financial penalties, with the resulting reputational implications.
Venture Capital Investments
There are restrictions regarding the type of companies in which the Company may invest and there is no guarantee that suitable investment opportunities will be identified. Investment in unquoted companies, AIM-traded and PLUS Markets-traded companies involves a higher degree of risk than investment in companies traded on the main market of the London Stock Exchange. These companies may not be freely marketable and realisations of such investments can be difficult and can take a considerable amount of time. There may also be constraints imposed upon the Company with respect to realisations in order to maintain its VCT status which may restrict the Company's ability to obtain the maximum value from its investments.
Calculus Capital has been appointed to manage the Qualifying Investments portfolio, and has extensive experience of investing in this type of investment. Regular reports are provided to the Board.
Risks attaching to investment in Structured Products
Structured Products are subject to market fluctuations and the Company may lose some or all of its investment. In the event of a long-term decline in the FTSE 100 Index (or, in the case of the C shares fund when investment commences, in such other index as this fund may be invested), there will be no gains from the Structured Products. In the event of a fall in the relevant Index of more than 50 per cent. at any time during the Structured Product term, and where the Final Index Level is below the Initial Index Level, there will be losses on the Structured Products.
There may not be a liquid market in the Structured Products and there may never be two competitive market makers, making it difficult for the Company to realise its investment. Risk is increased further where there is a single market maker who is also the issuer of the Structured Product. Investec Structured Products has agreed to make a market in the Structured Products, should this be required by the Company.
Factors which may influence the market value of Structured Products include interest rates, changes in the method of calculating the relevant underlying index from to time and market expectations regarding the future performance of the relevant underlying index, its composition and such Structured Products.
Investec Structured Products has been appointed to manage the Structured Products portfolio for its expertise in these types of financial products. Restrictions have been agreed with Investec Structured Products relating to approved counterparties and maximum exposure to any one counterparty.
Due to the holding period required to maintain up-front tax reliefs, there is a limited secondary market for VCT shares and investors may therefore find it difficult to realise their investments. As a result, the market price of the shares may not fully reflect, and will tend to be at a discount to, the underlying net asset value. The level of discount may also be exacerbated by the availability of income tax relief on the issue of new VCT shares. The Board recognises this difficulty, and has taken powers to buy back shares, which could be used to enable investors to realise investments.
Changes to legislation/taxation
Changes in legislation or tax rates concerning VCTs in general, and Venture Capital Investments and qualifying trades in particular, may limit the number of new Venture Capital Investment opportunities, and thereby adversely affect the ability of the Company to achieve or maintain VCT status, and/or reduce the level of returns which would otherwise have been achievable.
Engagement of third party advisers
The Company has no employees and relies on services provided by third parties. The Board has appointed Calculus Capital as Investment Manager of the Qualifying Investments portfolio and Investec Structured Products as Investment Manager of the Structured Products portfolio. Capita Sinclair Henderson Limited provides administration, accounting and company secretarial services, and Rensburg Sheppards act as custodian.
C shares versus ordinary shares
The assets relating to the C shares will be managed and accounted for separately from the assets attributable to the ordinary shares. However, a number of company regulations and VCT requirements are assessed at company level and, therefore, the performance of one fund may impact adversely on the other. The Board will monitor both the performance of each separate fund as well as requirements at a company level to reduce the risk of this occurring.
The Directors believe that the Company is well placed to make progress during 2011.
Corporate social responsibility
The Company has no employees and the Board is comprised entirely of non-executive Directors. Day to day management of the Company's business is delegated to the Investment Managers and the Company itself has no environmental, social or community policies. In carrying out its activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly.
The full Annual Report and Accounts contain the following statements regarding responsibility for the Accounts.
Directors' Responsibilities Statement
Statement of Directors' Responsibilities in respect of the Annual Report and the Accounts
The Directors are responsible for preparing the Annual Report and the Accounts in accordance with applicable law and regulations.
Company law requires the Directors to prepare Accounts for each financial year. Under that law they have elected to prepare the Accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws). Under company law the Directors must not approve the Accounts unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company for that period.
In preparing these Accounts, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Accounts; and
• prepare the Accounts on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Accounts comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report (including Business Review), Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations, and for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Services Authority.
In so far as each of the Directors is aware:
• there is no relevant audit information of which the Company's Auditor is unaware; and
• the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the Auditor is aware of that information. The Accounts are published on the www.calculuscapital.com website, which is a website maintained by one of the Company's Investment Managers, Calculus Capital Limited. The maintenance and integrity of the website maintained by Calculus Capital Limited is, so far as it relates to the Company, the responsibility of Calculus Capital Limited. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and accordingly, the Auditor accepts no responsibility for any changes that have occurred to the Accounts since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom covering the preparation and dissemination of the Accounts may differ from legislation in their jurisdiction.
We confirm that to the best of our knowledge:
• the Accounts, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
• the Annual Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces. On behalf of the Board Michael O'Higgins Chairman 23 May 2011 Non-Statutory Accounts The financial information set out below does not constitute the Company's statutory accounts for the period ended 28 February 2011 but is derived from those accounts. Statutory accounts for 2011 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (ii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor's report can be found in the Company's full Annual Report and Accounts at www.calculuscapital.com.
for the period from 1 February 2010 to 28 February 2011
Period Ended 28 February 2011 Revenue Capital Total Return Return Note £'000 £'000 £'000 Investment holding gains 8 - 446 446 Income 2 20 - 20 Investment management fee 3 (9) (26) (35) Other operating expenses 4 (123) - (123) (Loss)/profit on ordinary (112) 420 308 activities before taxation
Taxation on ordinary activities 5 - -
- (Loss)/profit on ordinary (112) 420 308 activities after taxation
Return per ordinary share - basic 7 (3.0)p 11.3p 8.3p
The total column of this statement represents the Company's Income Statement.
The supplementary revenue return and capital return columns are both prepared in accordance with the Association of Investment Companies ("AIC") Statement of Recommended Practice ("SORP").
No operations were acquired or discontinued during the period.
All items in the above statement derive from continuing operations.
There were no recognised gains or losses other than those passing through the Income Statement.
The notes form an integral part of these Accounts.
Reconciliation of Movements in Shareholders' Funds for the period from 1 February 2010 to 28 February 2011
Share Capital Capital Share Premium Special Reserve Reserve Revenue Capital Account Reserve Realised Unrealised Reserve Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 For the period to 28 February 2011 1 February 2010 - - - - - - - (Loss)/profit for the - - - (26) 446 (112) 308 period Issue of redeemable 50 - - - - - 50 non-voting shares Redemption of redeemable (50) - - - - - (50) non-voting shares Increase in share 47 4,740 - - - - 4,787 capital in issue Expenses of share issues - (259) - - - - (259) Share premium cancelled - (3,729) 3,729 - - - - during period 28 February 2011 47 752 3,729 (26) 446 (112) 4,836
The notes form an integral part of these Accounts.
Balance Sheet as at 28 February 2011 28 February 2011 Note £'000 Fixed assets Investments designated at fair value through profit or 8 4,488 loss Current assets Debtors 9 214 Cash at bank and on deposit 326 540
Creditors: amounts falling due within one year
Creditors 10 (176) (176) Net current assets 364 Non-current liabilities IFA trail commission (16) Total net assets 4,836 Capital and reserve Called-up share capital 11 47 Share premium account 12 752 Special reserve 12 3,729
Capital reserve - realised 12
Capital reserve - unrealised 12
446 Revenue reserve 12 (112) Equity shareholders' funds 4,836 Net asset value per ordinary share 13
These Accounts were approved by the Board of Directors and were authorised for issue on 23 May 2011 and were signed on its behalf:
Michael O'Higgins Chairman
Registered No. 07142153 England & Wales
The notes form an integral part of these Accounts.
Cash Flow Statement
for the period from 1 February 2010 to 28 February 2011
Period Ended 28 February 2011 Note £'000 Operating activities Investment income received 7 Deposit interest received 6 Investment management fees (24) Other cash payments (169) Cash expended from operations 14
Cash flow from investing activities
Purchase of investments (4,042) Net cash outflow from investing activities
Net cash outflow before financing
Cash flow from financing activities Redeemable non-voting shares issued
Redemption of redeemable non-voting shares
(50) Shares issued 4,787 Expenses of share issues (239) Net cash inflow from financing activities
Increase in cash at bank and on deposit
The notes form an integral part of these Accounts.
Notes to the Accounts 1. Accounting Policies Basis of accounting These Accounts cover the 13 month period from incorporation on 1 February 2010 to 28 February 2011, and have been prepared under the historical cost convention, except for the valuation of financial assets at fair value through profit or loss, in accordance with UK Generally Accepted Accounting Practice ("UK GAAP").
In determining the analysis of total income and expenses as between capital return and revenue return, the Directors have followed the guidance contained in the AIC SORP, as revised in 2009, and on the assumption that the Company maintains VCT status.
The Company's Accounts are presented in Sterling.
Investments at fair value through profit or loss
The Company aims to invest in a portfolio of Structured Products and Venture Capital Investments that will provide sufficient total returns to allow the Company to pay annual dividends and provide long-term capital returns for investors. As a result, all investments held by the Company are designated, upon initial recognition, as held at fair value through profit or loss, in accordance with Financial Reporting Standard 26 'Financial Instruments: Recognition and Measurement'. The Company manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy, and information about the portfolio is provided internally on this basis to the Board. Fair value is the amount for which an asset can be exchanged between knowledgeable, willing parties in an arm's length transaction. Investments held at fair value through profit or loss are initially recognised at cost, being the consideration given and excluding transaction or other dealing costs associated with the investment, which are expensed and included in the capital column of the Income Statement. Subsequently, investments are measured at fair value, with gains and losses on investments recognised in the Income Statement and allocated to capital. All purchases and sales of investments are accounted for on the trade date basis. For investments actively traded in organised financial markets, fair value is generally determined by reference to quoted market bid, or last, prices depending on the convention of the exchange on which the investment is quoted, at the close of business on the Balance Sheet date.
Structured Products are valued by reference to the FTSE 100 Index with mid prices for the Structured Products provided by the product issuers. An adjustment is made to these prices to take into account any bid/offer spreads prevalent in the market at each valuation date. These spreads are either determined by the issuer or recommended by the Structured Products Manager, Investec Structured Products (a trading name of Investec Bank plc).
Returns are linked to the FTSE 100 Index by way of a fixed return that is payable as long as the Final Index Level is no lower than the Initial Index Level (Final Index Level and Initial Index Level being the closing (or average closing) level of the FTSE 100 Index at the end of the relevant Index Calculation Period (being the relevant period over which the Initial and Final Index Levels are determined in accordance with the terms of the Structured Product) for a Structured Product). All of the investments in Structured Products in respect of the ordinary shares fund will either be capital protected or capital at risk on a one-to-one basis where the FTSE 100 Index falls by more than 50 per cent. and the Final Index Level is below the Initial Index Level. If the FTSE 100 Index does fall by more than 50 per cent. at any time during the investment period and fails to recover at maturity, the capital will be at risk on a maximum one-to-one basis (i.e. if the FTSE 100 Index falls by more than 50 per cent. during the investment period and on maturity is down 25 per cent., capital within that Structured Product will be reduced by 25 per cent.).
The majority of the Structured Products are designed to produce capital appreciation.
Unquoted investments are valued using an appropriate valuation technique so as to establish what the transaction price would have been at the Balance Sheet date. Such investments are valued in accordance with the International Private Equity and Venture Capital Association ("IPEVCA") guidelines. Primary indicators of fair value are derived from earnings multiples, recent arm's length market transactions, net assets or, where appropriate, at cost for recent investments or the valuation as at the previous reporting date.
Dividends receivable on equity shares are recognised as revenue on the date on which the shares or units are marked as ex-dividend. Where no ex-dividend date is available, the revenue is recognised when the Company's right to receive it has been established.
Interest receivable from fixed income securities is recognised using the effective interest rate method. Interest receivable on bank deposits is included in the Accounts on an accruals basis.
The gains and losses arising on investments in Structured Products are allocated between revenue and capital according to the nature of each Structured Product. This is dependent on the extent to which the return on the Structured Product is capital or revenue based.
Other revenue is credited to the revenue column of the Income Statement when the Company's right to receive the revenue has been established.
All expenses are accounted for on an accruals basis. Expenses are charged to the Income Statement as follows:
• expenses, except as stated below, are charged to the revenue column of the Income Statement;
• expenses incurred in the acquisition or disposal of an investment are taken to the capital column of the Income Statement;
• expenses are charged to the capital column of the Income Statement where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. In this respect management fees have been allocated 75 per cent. to the capital column and 25 per cent. to the revenue column of the Income Statement, being in line with the Board's expected long-term split of returns, in the form of capital gains and revenue respectively, from the investment portfolio of the Company; and • expenses associated with the issue of shares are deducted from the share premium account. Annual IFA trail commission to 14 December 2015 has been provided for in the Accounts as, due to the nature of the fund, it is probable that this will be payable. The commission is apportioned between current and non-current liabilities. Expenses incurred by the Company in excess of the agreed cap, currently 3 per cent. of the gross amount raised from the offer for subscription of ordinary shares for the 2009/2010 and 2010/2011 tax years (excluding irrecoverable VAT, annual trail commission and performance incentive fees), can be clawed back from Investec Structured Products until 14 December 2015 (the interim return date for the ordinary shares). Any claw back is treated as a credit against the expenses of the Company.
Investment management and performance fees
Calculus Capital, as Investment Manager of the VCT qualifying portfolio, will receive an annual investment management fee of an amount equivalent to 1.0 per cent. of the net assets of the Company.
Investec Structured Products, as Investment Manager of the Structured Products portfolio, will not receive any annual management fees from the Company. Investec Structured Products is entitled to an arrangement fee from the providers of Structured Products as detailed in note 17.
The Investment Managers will each receive a performance incentive fee payable in cash of an amount equal to 10 per cent. of dividends and distributions paid (including the relevant distribution being offered) to holders of ordinary shares over and above 105 pence per ordinary share (this being a 50 per cent. return on an initial net investment of 70 pence per ordinary share taking into account upfront income tax relief)provided holders of ordinary shares have received or been offered an interim return of at least 70 pence per share for payment on or before 14 December 2015. Such performance incentive fees will be paid within 10 business days of the date of payment of the relevant dividend or distribution. Capital reserve
The capital return component of the return for the period is taken to the non-distributable capital reserves within the Reconciliation of Movements in Shareholders' Funds.
Taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the Balance Sheet date where transactions or events that result in an obligation to pay more tax in the future have occurred at the Balance Sheet date. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversals of the underlying timing differences can be deducted. Timing differences are differences between the Company's taxable profits and its results as stated in the Accounts. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the Balance Sheet date. Deferred tax is measured on a non-discounted basis.
No taxation liability arises on gains from sales of fixed asset investments by the Company by virtue of its Venture Capital Trust status. However, the net revenue (excluding UK dividend income) accruing to the Company is liable to corporation tax at the prevailing rates.
Dividends to shareholders are accounted for in the period in which they are paid or approved in general meetings. Dividends payable to equity shareholders are recognised in the Reconciliation of Movements in Shareholders' Funds when they are paid, or have been approved by shareholders in the case of a final dividend and become a liability of the Company. 2. Income Period Ended 28 February 2011 £'000 UK unfranked loan stock interest 14 Bank interest 6 20 Total income comprises: Interest 20 20 3. Management Fee Period Ended 28 February 2011 Revenue Capital Total £'000 £'000 £'000 Investment management fee 9 26 35
No performance fee was paid during the period.
4. Other Expenses Period Ended 28 February 2011 £'000 Directors' fees 73 Secretarial and accounting fees 60 Auditor's remuneration - audit services 17 - interim review 13 - reporting accountant on launch 10 - reporting accountant on issue of ordinary shares 7 - tax 5 Other 123 Clawback of expenses in excess of 3% cap (185) 123
Further details of Directors' fees can be found in the Directors' Remuneration Report in the full Annual Report and Accounts.
5. Taxation Period Ended 28 February 2011 Revenue Capital Total £'000 £'000 £'000
(Loss)/profit on ordinary activities before tax (112) 420 308
Theoretical tax at UK Corporation Tax rate of 28% (31) 118 87
Timing differences: Loss not recognised, carried 31 - 31 forward Effects of non-taxable gains/(losses) - (118)
Tax on (loss)/profit for the year - -
- 6. Dividends Period Ended 28 February 2011 £'000 Proposed final dividend: 5.25 p per 249 ordinary share
The above dividend is proposed by the Company and is subject to approval by shareholders at the forthcoming Annual General Meeting. This proposed dividend has not been included as a liability in these Accounts.
7. Return per Ordinary Share Period Ended 28 February 2011 Revenue Capital Total pence pence pence Return per ordinary share (3.0) 11.3 8.3 Revenue return per ordinary share is based on the net revenue loss on ordinary activities after taxation of £112,000, and on 3,721,530 ordinary shares, being the weighted average number of ordinary shares in issue during the period.
Capital return per ordinary share is based on the net capital gain for the period of £420,000, and on 3,721,530 ordinary shares, being the weighted average number of ordinary shares in issue during the period.
Total return per ordinary share is based on the net gain for the period of £308,000, and on 3,721,530 ordinary shares, being the weighted average number of ordinary shares in issue during the period.
8. Investments Period Ended 28 February 2011 Structured Products Unquoted Other Investments Investments Investments Total £'000 £'000 £'000 £'000 Movements in period: Purchases at cost 2,443 549 1,050 4,042
Increase in unrealised appreciation 439 7 -
446 Closing valuation 2,882 556 1,050 4,488 Closing bookcost 2,443 549 1,050 4,042
Closing unrealised appreciation 439 7 -
446 2,882 556 1,050 4,488 Note 16 provides a detailed analysis of investments held at fair value through profit and loss in accordance with Financial Reporting Standard 29 'Financial Instruments: Disclosures'.
During the period the Company incurred no transaction costs on purchases in respect of ordinary shareholder activities.
9. Debtors Period Ended 28 February 2011 £'000 Prepayments and accrued income 29 Clawback of expenses in excess of 3% cap 185 214 10. Creditors Period Ended 28 February 2011 £'000 IFA trail commission 4 Management fees 10 Audit fees 17 Directors' fees 13 Administration fees 10 Other creditors 122 176 11. Share Capital 28 February 2011 Number £'000 Ordinary shares of 1p each As at 1 February 2010 20 - Issue of ordinary shares 4,738,443 47 4,738,463 47 Redeemable non-voting shares of 1p each As at 1 February 2010 - - Issue of redeemable shares 5,000,000 50 Redemption of redeemable shares (5,000,000) (50) - - The Company was incorporated on 1 February 2010 with 20 subscriber shares.
Under the Articles of Association, a resolution for the continuation of the Company as a Venture Capital Trust will be proposed at the Annual General Meeting falling after the tenth anniversary of the last allotment (from time to time) of shares in the Company and thereafter at five-yearly intervals.
12. Reserves Share Capital Capital Premium Special Reserve Reserve Revenue Account Reserve Realised Unrealised Reserve £'000 £'000 £'000 £'000 £'000 Premium on issue of 4,740 - - - - ordinary shares Cancellation of share (3,729) 3,729 - - - premium Expenses of share issues (259) - - - - Unrealised net increase - - - 446 - in value of investments Management fee - - (26) - - capitalisation net of associated tax Revenue return on - - - - (112) ordinary activities after tax Closing balance 752 3,729 (26) 446 (112)
During the period, the Company was an investment company under section 833 of the Companies Act 2006. On 18 May 2011 investment company status was revoked. This was done in order to pay dividends to shareholders using the Special Reserve. The Special Reserve was created by the cancellation of Share Premium on 20 October 2010. The Special Reserve is a distributable reserve created to be used by the Company inter alia to write off losses, fund market purchases of its own ordinary shares, make distributions and/or for other corporate purposes. 13. Net Asset Value per Share Period Ended 28 February 2011 £'000 Total net assets £4,836,000 Number of shares in issue 4,738,463 Net asset value per ordinary share 102.1p The basic net asset value per ordinary share is based on net assets (including current period revenue) of £4,836,000 and on 4,738,463 ordinary shares, being the number of ordinary shares in issue at the end of the period. 14. Reconciliation of Net Profit before Tax to Cash Expended from Operating Activities Period Ended 28 February 2011 £'000 Profit on ordinary activities before taxation 308 Gains on investments (446) Increase in debtors (214) Increase in creditors 172 Cash expended from operating activities (180) The increase in creditors shown above does not agree with the movement shown in the Balance Sheet principally because of the effect of the short-term liability for trail commission of £4,000 included in creditors at the year end, which is not part of operating activities.
15. Financial Commitments
At 28 February 2011 the Company did not have any financial commitments which had not been accrued for.
16. Financial Instruments The Company's objective is to create two portfolios to produce ongoing capital gains and income that will provide investment returns sufficient to maximise annual dividends and to fund a special dividend or cash offer in year 6 sufficient to bring distributions per share to 70p. Initially, a minimum of 66.5 per cent. of the monies raised by the Company has been invested in a portfolio of Structured Products. The balance has been invested in cash or near cash assets (as directed by the Board) and it will then be available to invest in Venture Capital Investments, as well as to fund expenses. In order to qualify as a VCT, at least 70 per cent. of the Company's investments must be invested in Venture Capital Investments within approximately three years of the relevant funds being raised. Thus, there will be a phased reduction in the Structured Products portfolio and corresponding build up in the portfolio of Venture Capital Investments to achieve and maintain this 70 per cent. threshold along the following lines: Average Exposure per Year 1 Year 2 Year 3 Year 4 Year 5 Year 6+ Year Structured Products and 85% 75% 35% 25% 25% 0% cash/near cash assets Venture Capital 15% 25% 65% 75% 75% 100% Investments
As at 28 February 2011, the Company's investment portfolio comprised 64 per cent. Structured Products and 12 per cent. Qualifying Investments, by market value.
The Company's financial instruments comprise securities and cash and liquid resources that arise directly from the Company's operations.
The principal risks the Company faces in its portfolio management activities are:
• Market price risk • Credit risk • Liquidity risk
The Company does not have exposure to foreign currency risk.
With many years experience of managing the risks involved in investing in Structured Products and Venture Capital Investments respectively, both the Investec Structured Products team and the Calculus Capital team, together with the Board, have designed the Company's structure and its investment strategy to reduce risk as much as possible. The policies for managing these risks are summarised below and have been applied throughout the period under review.
a) Market price risk
The return and valuation of the Company's investments in Structured Products is linked to the FTSE 100 Index by way of a fixed return that is payable as long as the Final Index Level is no lower than the Initial Index Level. All of the investments in Structured Products in respect of the ordinary shares fund will either be capital protected or capital at risk on a one-to-one basis where the FTSE 100 Index falls by more than 50 per cent. and the Final Index Level is below the Initial Index Level. If the FTSE 100 Index does fall by more than 50 per cent. at any time during the investment period and fails to recover at maturity, the capital will be at risk on a maximum one-to-one basis (Capital at Risk ("CAR")) (eg if the FTSE 100 Index falls by more than 50 per cent. during the investment period and on maturity is down 25 per cent., capital within that Structured Product will be reduced by 25 per cent.). The table below provides details of the Initial Index Level at the date of investment and the maturity date for each of the Structured Products. As at 28 February 2011, the FTSE 100 Index closed at 5,994.0. As at 19 May 2011 being the last practical date prior to the publication of these Accounts, the Index had increased 0.6 per cent. to close at 5,956.0. Initial Strike Index Maturity Issuer Date Level Date Return/CAR The Royal Bank of Scotland 05/05/ 5,341.93 12/05/ 162.5% if FTSE 100 2010 2015 higher; CAR if FTSE 100 falls by more than 50% Investec Bank 14/05/ 5,262.85 19/11/ 185% if FTSE 100 2010 2015 higher; CAR if FTSE 100 falls by more than 50% Santander Global Banking 25/05/ 4,940.68 18/11/ 185% if FTSE 100 and Markets (Abbey National 2010 2015 higher; CAR if FTSE Treasury Services) 100 falls by more than 50% Nomura Bank International 28/05/ 5,188.43 20/02/ 137% if FTSE 100 2010 2013 higher; CAR if FTSE 100 falls by more than 50% Morgan Stanley 10/06/ 5,132.50 17/12/ 134% if FTSE 100 2010 2012 higher; CAR if FTSE 100 falls by more than 50% HSBC Bank 01/07/ 4,805.75 06/07/ 125.1% if FTSE 100 2010 2012 higher; CAR if FTSE 100 falls by more than 50% The Final Index Level is calculated using 'averaging', meaning that the average is taken of the closing levels of the FTSE 100 on each Business Day over the last two to six months of the Structured Product plan term (the length of the averaging period differs for each plan). The Investment Manager of the Structured Products portfolio and the Board review this risk on a regular basis and the use of averaging to calculate the return can reduce adverse effects of a falling market or sudden market falls shortly before maturity. Equally, it can reduce the benefits of an increasing market or sudden market rises shortly before maturity. As at 28 February 2011, the value of the Company's investments in Structured Products was valued at £2,882,000. A 10 per cent. increase in the level of the FTSE 100 Index, at 28 February 2011 given that all other variables remained constant, would have increased net assets by £158,000. A 10 per cent. decrease would have reduced net assets by £211,000. A 10 per cent. increase would increase the investment management fee due to Calculus Capital by £1,185; a 10 per cent. decrease would reduce the fee by £1,582. In recent years, the performance of the FTSE 100 Index has been volatile and the Directors consider that an increase or decrease in the aggregate value of investments by 10 per cent. or more is reasonably possible.
Market risk embodies the potential for losses and includes interest rate risk and price risk.
The management of market price risk is part of the investment management process. The portfolio is managed in accordance with policies in place as described in more detail in the Chairman's Statement and Investment Manager's Review (Qualifying Investments).
The Company's strategy on the management of investment risk is driven by the Company's investment objective as outlined above. Investments in unquoted companies, AIM-traded and PLUS Markets-traded companies, by their nature, involve a higher degree of risk than investments in the main market. Some of that risk can be mitigated by diversifying the portfolio across business sectors and asset classes. Interest is earned on cash balances and money market funds and is linked to the banks' variable deposit rates. The Board does not consider interest rate risk to be material. Interest rates do not materially impact upon the value of the Qualifying Investments as the investee companies have no external debt and the loan stock instruments contain fixed interest rates. The main risk arising on the loan stock instruments is credit risk. The Company does not have any interest bearing liabilities. As required by Financial Reporting Standard 29 'Financial Instruments: Disclosures' (the "Standard") an analysis of financial assets and liabilities, which identifies the risk of the Company's holding of such items is provided. The Company's financial assets comprise equity, loan stock, cash and debtors. The interest rate profile of the Company's financial assets is given in the
table below: As at 28 February 2011 Fair Value Cash Flow Interest Interest Rate Risk Rate Risk £'000 £'000 Loan stock 450 - Money market funds - 1,050 Cash - 326 450 1,376
The variable rate is based on the banks' deposit rate, and applies to cash balances held and the money market funds. The benchmark rate which determines the interest payments received on interest bearing cash balances is the Bank of England base rate which was 0.5 per cent. as at 28 February 2011.
Any movement in interest rates is deemed to have an insignifi cant effect on the Structured Products.
b) Credit risk Structured Products The failure of a counterparty to discharge its obligations under a transaction could result in the Company suffering a loss. In its role as the Investment Manager of the Structured Products portfolio and to diversify counterparty risk, Investec Structured Products will only invest in Structured Products issued by approved issuers. In addition, the maximum exposure to any one counterparty will be limited to 15 per cent. of the assets of the Company at the time of investment.
As at 28 February 2011, the Company's credit risk exposure, by credit rating of the Structured Product issuer, was as follows:
28 February 2011 Credit Risk Rating % of (Moody's unless otherwise indicated) £'000 Portfolio A2 577 12.9% Aa2 580 13.0% Aa3 738 16.5% A - (Standard & Poor's) 405 9.0% Baa3 582 13.0% 2,882 64.4% Qualifying Investments 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 Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amount of financial assets best represents the maximum credit risk exposure at the balance sheet date. Where an investment is made in loan stock issued by an unquoted company, it is made as part of an overall equity and debt package. The recoverability of the debt is assessed as part of the overall investment process and is then monitored on an ongoing basis by the Investment Manager who reports to the Board on any recoverability issues. Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the high credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk. All the assets of the Company which are traded on AIM or PLUS Markets are held by Rensburg Sheppards, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited. The Board and the Investment Manager monitor the Company's risk by reviewing the custodian's internal control reports.
c) Liquidity risk
The Company's liquidity risk is managed on an ongoing basis by the Investment Managers. The Company's overall liquidity risks are monitored on a quarterly basis by the Board.
The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and accrued expenses as they fall due.
If Structured Products are redeemed before the end of the term, the Company may get back less than the amount originally invested. The value of the Structured Products will be determined by the price at which the investments can actually be sold on the relevant dealing date. The Board does not consider this risk to be significant as the planned investment periods in Structured Products will range from six months to five and a half years and there is a planned transition from Structured Products to Qualifying Investments as detailed earlier in this note. There may not be a liquid market in the Structured Products and there may never be two competitive market makers, making it difficult for the Company to realise its investment. Risk is increased further where there is a single market maker who is also the issuer. The Board has sought to mitigate this risk by only investing in approved issuers of Structured Products, and by limiting exposure to any one issuer.
The Board seeks to ensure that an appropriate proportion of the Company's investment portfolio is invested in cash and readily realisable assets, which are sufficient to meet any funding commitments that may arise.
Under its Articles of Association, the Company has the ability to borrow a maximum amount equal to 25 per cent. of the aggregate amount paid on all shares issued by the Company (together with any share premium thereon). As at 28 February 2011 the Company had no borrowings.
The Company's financial instruments include investments in unlisted equity investments which are not traded in an organised public market and which may be illiquid. As a result, the Company may not be able to realise quickly some of its investments at an amount close to their fair value in order to meet its liquidity requirements, or to respond to specific events such as deterioration in the creditworthiness of any particular issuer.
d) Capital management
The capital structure of the Company consists of cash held and shareholders' equity. Capital is managed to ensure the Company has adequate resources to continue as a going concern, and to maximise the income and capital return to its shareholders, while maintaining a capital base to allow the Company to operate effectively in the market place and sustain future development of the business. To this end the Company may use gearing to achieve its objectives. The Company's assets and borrowing levels are reviewed regularly by the Board.
e) Fair value hierarchy
Investments held at fair value through profit and loss are valued in accordance with IPEVCA guidelines.
The valuation method used will be the most appropriate valuation methodology for an investment within its market, with regard to the financial health of the investment and the IPEVCA guidelines. As required by the Standard an analysis of financial assets and liabilities, which identifies the risk of the Company's holding of such items, is provided. The Standard requires an analysis of investments carried at fair value based on the reliability and significance of the information used to measure their fair value. In order to provide further information on the valuation techniques used to measure assets carried at fair value, we have categorised the measurement basis into a "fair value hierarchy" as follows:
- Quoted market prices in active markets - "Level 1"
Inputs to Level 1 fair values are quoted prices in active markets for identical assets. An active market is one in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The Company's investments in money market funds are recognised within this category.
- Valued using models with significant observable market parameters - "Level 2"
Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. The Company's investments in Structured Products are classified within this category.
- Valued using models with significant unobservable market parameters - "Level 3"
Inputs to Level 3 fair values are unobservable inputs for the asset. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect the assumptions the Company considers that market participants would use in pricing the asset. The Company's unquoted equities and loan stock are classified within this category. As explained in note 1, unquoted investments are valued in accordance with the IPEVCA guidelines. The table below shows movements in the assets measured at fair value based on Level 3 valuation techniques for which any significant input is not based on observable market data. During the period there were no transfers between levels 1, 2 or 3. Financial Assets at Fair Value through Profit or Loss At 28 February 2011 Level 1 Level 2 Level 3 Total £'000 £'000 £'000 £'000 Structured Products - 2,882 - 2,882 Unquoted equity - - 106 106 Money market funds 1,050 - - 1,050 Loan stock - - 450 450 1,050 2,882 556 4,488
The Standard requires disclosure, by class of financial instruments, if the effect of changing one or more inputs to reasonably possible alternative assumptions would result in a significant change to the fair value measurement. The information used in determination of the fair value of Level 3 investments is chosen with reference to the specific underlying circumstances and position of the investee company. The portfolio has been reviewed and both downside and upside reasonable possible alternative assumptions have been identified and applied to the valuation of the unquoted investments. For Terrain, the assumed oil price used within the valuation model has been increased/decreased by 10 per cent. Applying the downside alternatives, the value of the unquoted investment portfolio would be £8,928 or 1.6 per cent. lower. Using the upside alternatives, the value of the unquoted investment portfolio would be increased by £8,482 or 1.5 per cent.
17. Related Party Transactions
Investec Structured Products is a related party in respect of its appointment as an Investment Manager to the Company and is entitled to a performance incentive fee. Investec Structured Products will receive an arrangement fee of 0.75 per cent. of the amount invested in each Structured Product. This arrangement fee shall be paid to Investec Structured Products by the issuer of the relevant Structured Product. No arrangement fee will be paid to Investec Structured Products in respect of any decision to invest in Investec-issued Structured Products. Investec Structured Products has agreed not to earn an annual management fee from the Company. As at 28 February 2011, £81,000 was payable to Investec Structured Products in relation to the initial fee of 5 per cent. of the gross funds raised pursuant to the original ordinary share offer. In addition, £185,000 was owed by Investec Structured Products as claw back of costs in excess of the agreed expenses cap of 3 per cent. Calculus Capital is regarded as a related party in respect of its appointment as an Investment Manager to the Company. For the period ended 28 February 2011, fees of £35,000 were payable to Calculus Capital, of which £10,000 were outstanding as at 28 February 2011. Calculus Capital is also entitled to a performance incentive fee.
John Glencross, a Director of the Company, has an interest in Calculus Capital and is a director of Terrain Energy Limited and Lime Technology Limited, companies in which the Company has invested.
In the period ended 28 February 2011, Calculus Capital received an arrangement fee of £7,500 as a result of the Company's investment in Terrain Energy Limited. Calculus Capital also receives an annual fee from Terrain Energy Limited for the provision of John Glencross as a director, as well as an annual monitoring fee which also covers the provision of certain administrative support services. In the period ended 28 February 2011, the amount paid to Calculus Capital which was attributable to the investment made by the Company was £2,713 (excluding VAT). In the period ended 28 February 2011, Calculus Capital received an arrangement fee of £8,233 as a result of the Company's investment in Lime Technology Limited. Calculus Capital also receives an annual fee from Lime Technology Limited for the provision of John Glencross as a director, as well as an annual monitoring fee. In the period ended 28 February 2011, the amount paid to Calculus Capital which was attributable to the investment made by the Company was £1,626 (excluding VAT).
No incentive fee accrued to either Investment Manager during the period.
The following Directors are considered to be related parties due to their connection with one of the Investment Managers: Ian Wohlman is a director of Investec Bank plc (of which Investec Structured Products is a trading division), and John Glencross is a director of Calculus Capital. Both Directors have agreed not to receive any remuneration from the Company. Steven Meeks received consulting fees from Investec Bank plc during the period.
Ian Wohlman applied for £30,000 of C shares under the offer for subscription launched in January 2011. 30,000 C shares were allotted to Mr Wohlman on 1 April 2011 at a price of 100p per C share.
Kate Cornish-Bowden subscribed for £10,000 of C shares under the offer for subscription. 10,000 C shares were allotted to Ms Cornish-Bowden on 4 May 2011at a price of 100p per C share.
18. Post Balance Sheet Events
In January 2011 an offer for subscription for C shares was launched. Since the period end the following shares have been issued:
- 1,644,826 C shares at 100p per share on 1 April 2011.
- 187,679 C shares at 100p per share on 5 April 2011.
- 98,590 C shares at 100p per share on 4 May 2011.
The offer for subscription closed on 30 April 2011.
Please refer to 'Developments Since the Period End' in the Chairman's Statement for details of investments made post year end.
Annual General Meeting and Separate Class Meetings
The Company's Annual General Meeting will be held at the offices of Investec Structured Products, 2 Gresham Street, London EC2V 7QP at 11.00 am on Thursday, 30 June 2011. It will be followed by separate class meetings of the holders of ordinary shares and C shares.
For further information, please contact:
Investment Manager to the Structured Products Portfolio
Investec Structured Products Gary Dale Telephone: 020 7597 4065
Investment Manager to the Venture Capital Portfolio
Calculus Capital Limited Susan McDonald Telephone: 020 7493 4940 National Storage Mechanism A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.hemscott.com/nsm.do.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.