Octopus Titan VCT 2 plc
Final Results
8 February 2012
Octopus Titan VCT 2 plc, managed by Octopus Investments Limited, today announces the final results for the year ended 31 October 2011.
These results were approved by the Board of Directors on 8 February 2012.
You may, in due course, view the Annual Report in full at www.octopusinvestments.com by navigating to Services, Investor Services, Venture Capital Trusts, Octopus Titan VCT 2 plc. All other statutory information will also be found there.
Chairman's Statement
I am pleased to present the annual results for Octopus Titan VCT 2 plc (the "Company") for the year ended 31 October 2011.
Performance
During the year the Total Return of the Company, being the Net Asset Value (NAV) plus cumulative dividends paid, has declined from 96.9 pence per share to 95.0 pence per share. This decline reflects the running costs of the Company together with a small net movement in the investment portfolio.
Last year I noted how it was pleasing to report that we had achieved our obligation to have 70% of our assets represented by qualifying holdings at the year end. Following this, the Company has now been granted full approval as a VCT by HMRC.
Investment Portfolio
The Company made one new investment during the year totalling £0.3 million, and further supported existing portfolio companies by making thirteen follow-on investments amounting to £2.5 million. All of our investments are discussed in more detail in the Investment Manager's Review on pages x to x in which you will see that we continue to have a portfolio of investments which is well spread in a diverse range of companies.
Significant increases in fair value have been recognised in Calastone, Nature Delivered (trading as Graze) and TouchType, totalling £1.6 million. However, elsewhere the portfolio has suffered decreases in fair value, with Diverse Energy, Money Workout and The Skills Market being written down to nil. Overall the fair value of the qualifying investee company portfolio has decreased by £98,000 during the year.
As your Investment Manager highlights in the review, when building a portfolio of early stage investments there is an expectation that a number of these businesses will suffer a decrease in fair value, which will typically occur prior to the opportunity of seeing increases in valuations from other members of the portfolio. As we move a year past the qualification date of 31 October 2010, with an increasingly mature portfolio, we are cautiously optimistic that we have a number of strong companies that will allow the NAV to make progress in coming years.
Top-up
I am pleased to announce that the Company, together with the four other Titan VCTs managed by Octopus Investments Limited (Octopus), is offering the opportunity to invest into the Titan family of funds through a Top-up fund raising. With the capacity to raise up to £1.25 million into each VCT without the expense of issuing a full prospectus, this will provide shareholders and other investors with the opportunity to benefit from the tax reliefs available to qualifying investors, and the expected future capital gains intended from the VCTs which are allowed to be paid to shareholders as tax free dividends.
These shares will be issued at a price equal to the most recently published NAV per share adjusted for the offer costs of 5.5%, so as not to dilute the value of the existing shareholdings.
The majority of funds raised will be used to further support existing investee companies where the Investment Manager sees the opportunity for potential gains; however we may also seek to invest in new deals that are deemed appropriate for this VCT.
For further details, including a copy of the full brochure, please do not hesitate to contact Octopus Investments using the contact details provided on page 63 of this report.
Open Ended Investment Companies (OEICs)
During the year the Absolute UK Equity Fund was disposed of in its entirety. Over the lifetime of the investment, a profit of £0.8 million was realised, being 39% above the original cost, rendering the investment a success and greatly reducing the low return cash drag typically experienced in the early stages of a VCT's life.
£1.1 million of the UK Microcap Growth Fund was also disposed of at a small loss of £2,000, with the remainder of this particular OEIC showing an unrealised gain of £90,000 at the year end.
Furthermore, in August 2011, the Company invested £0.8 million into the Omnis Cautious Fund. At the year end this investment showed a small decrease in fair value of £1,000.
Overall, the OEIC portfolio generated an unrealised gain of £89,000 during the year.
The Board continues to monitor these funds and believes it remains a sensible strategy to maintain part of our non-qualifying portfolio in OEICs due to their highly liquid status and potential to achieve greater returns when compared to cash deposits that focus on capital preservation. Further details of these OEICs may be found at www.octopusinvestments.com where monthly factsheets are available.
Investment Strategy
Your Board will continue to review the investment strategy in respect of the non-qualifying portfolio which we expect to increase following the Top-up described above. As envisaged in the Company's prospectus, between 15% and 25% of the VCT will be retained as non-qualifying for liquidity and follow-on investments in the existing portfolio. As our existing portfolio of unquoted companies matures, we will find that some companies may require further rounds of investment, but these investments may not be qualifying for VCT purposes. Your Board believes that there will be circumstances where it will be in our shareholders' interests to continue to invest, not least to avoid dilution and protect value.
We intend that the remainder of our cash reserves will continue to be invested in Octopus managed OEICs and lower risk, readily realisable investments including cash deposits.
Dividend and Dividend Policy
It is your Board's policy to strive to maintain a regular dividend flow where possible. Our aim is to create capital gains from the investments in qualifying businesses which can be distributed as dividends. Prior to these realisations, we intend to continue our policy of increasing our maintainable dividends as we believe the portfolio permits. We believe that one of the most important drivers for investors in VCTs is our ability to pay tax free dividends. Whilst we are not yet able to recognise the full potential value of our portfolio, your Board views the prospects for the portfolio with modest confidence and therefore believes it appropriate to increase our final dividend for the year ended 31 October 2011 to 1 pence per share (2010: 0.75 pence per share) making distributions in relation to the year of 1.75 pence per share (2010: 1.25 pence per share).
Subject to shareholder approval at the Annual General Meeting, this dividend will be paid on 6 April 2012 to those shareholders on the register on 9 March 2012. New shares issued under the Top-up offer will not be eligible for this final dividend.
VCT Qualifying Status
PricewaterhouseCoopers LLP provides both the Board and the Investment Manager with advice concerning ongoing compliance with HMRC rules and regulations concerning VCTs. The Board has been advised that the Company is in compliance with the conditions laid down by HMRC for maintaining approval as a VCT.
A key requirement is for 70% of the portfolio to remain continually invested in qualifying investments. As at 31 October 2011, over 87% of the portfolio (as measured by HMRC rules) was invested in VCT qualifying investments.
You will have read about imminent changes to the VCT legislation. We believe that these will be positive for early stage funds and thus for our Titan family of funds.
Annual General Meeting
The Company's Annual General Meeting will take place on 28 March 2012. I look forward to welcoming you to the meeting which will be held at the offices of Octopus Investments Limited, at 20 Old Bailey, London, EC4M 7AN.
Electronic communications
Based on feedback from shareholders, and in order to reduce the cost of printing and the impact on the environment, we now offer shareholders the opportunity to forgo their printed report and account documents, in favour of receiving email or letter notification with details of how to view the documents online. If you would like to change the format in which you receive this report, please contact Octopus using the contact details provided on page 63 of this report.
Outlook
Uncertainty over the current economic climate continues both from a domestic and international point of view, which has had the effect of dissuading investors from small unquoted companies. Although early stage companies should not, in our view, seek to rely on bank finance, the continuing and well reported absence of such finance for SMEs does mean that we have an increasing deal flow. Although many of the Company's investee companies are less affected by the macro-economic situation than larger listed companies, the effects of the continuing credit squeeze and flat economy has inevitably caused our portfolio companies many challenges but at the same time provided welcome opportunities.. That said, the portfolio continues to show positive signs from a number of investee companies, and we expect this to show through in the NAV in the medium term.
Our interests remain aligned with that of the entrepreneurs' companies we have invested into, being that of boosting growth and profitability, and your Board has confidence that the Company has been successful in adhering to the mandate offered in the prospectus, being that of investing into the equity of early stage companies, with the potential of making absolute returns. To this end we believe that we have seen the value of the Octopus Investments concept of leveraging off both the investment and expertise offered by the Venture Partners and believe that this differentiates the Titan funds from other VCTs investing in early stage businesses and we trust HM Government will continue to see the value provided by the tax reliefs offered.
John Hustler
Chairman
8 February 2012
Investment Manager's Review
Personal Service
At Octopus, we focus on both managing your investments and keeping you informed throughout the investment process. We are committed to providing our investors with regular and open communication. Our updates are designed to keep you informed about the progress of your investment. During this time of economic upheaval, we consider it particularly important to be in regular contact with our investors and are working hard to manage your money in the current climate.
Octopus was established in 2000 and has a strong commitment to both smaller companies and to VCTs. We currently manage 19 VCTs, including this VCT, and manage over £340 million in the VCT sector. Octopus has over 200 employees and has been voted 'Best VCT Provider of the Year' by the financial adviser community every year since 2006.
Investment Policy Summary
The investment approach of the Company is not designed to deliver a return that is measured against a stock market index. Instead, the focus of the Company is on generating absolute returns over the medium-term. In order to achieve this, the Company focuses on providing early stage, development and expansion funding to unquoted companies with a typical deal size of £0.5 million to £1 million and will continue to comprise 20-25 unquoted companies, predominantly focussed within the environment, technology, media, telecoms and consumer lifestyle and well-being sectors.
Investment Strategy
The investee companies are those that we believe have great potential but need some financial support to realise it. Each company that we target has the potential to create a large business by taking a relatively modest market share. We are particularly interested in businesses that address current market trends and have created a balanced investment portfolio spanning multiple industries and business sectors.
Having reached the level of invested funds required by HMRC, our focus has now shifted to managing the portfolio and helping the investee companies growth. The current portfolio of holdings built by the Company now encompass investments in 23 unquoted companies and one AIM-quoted company, with a focus on the environmental, technology, media, telecoms and consumer lifestyle and wellbeing sectors.
As Investment Manager we have typically purchased a significant minority equity stake in these qualifying companies, providing financial capital to the business to build and grow its operations and then to sell to an acquirer at some point in the future. These entrepreneurial early stage businesses, which we invest in, frequently face challenges as they seek to establish themselves in their market, often developing new products and services. The amount of capital we initially deploy is intended to be only the first investment that we will make into a business, prior to seeing if the company meets or exceeds its initial objectives.
If the business is unsuccessful in meeting these first objectives, we strive to minimise the financial exposure the Company faces without committing further money to the investment, as is commonly referred to as "good money after bad". Other businesses which meet some of their objectives, but not necessarily all, will require more time to prove their concept and these businesses will typically be reduced in value prior to our making a further investment. This is in order for us to see them progress forward and prove their business model and opportunity. Finally, there are those that meet and exceed the expectations originally set. It is these businesses which we wish to increase our exposure of investment from the Company as they remain on course to create a large business.
We maintain liquidity in the Company to ensure adequate resources are available to support further portfolio funding needs as they arise. This situation should be further aided following the Top-up as described in the Chairman's Statement and it is an important feature of our model in delivering returns to shareholders.
Portfolio Review
As at 31 October 2011 the NAV plus cumulative dividends was 95.0p per share, compared to 96.9p per share at 31 October 2010. This represents a reduction of 2.0%. The period showed satisfactory performance, with a small overall reduction in value amounting to £98,000 in the qualifying holdings that the Company holds. However, this was largely offset by an appreciation in value of £89,000 within the OEIC holdings. The change in NAV plus cumulative dividends is therefore largely accounted for by the standard running costs of the Company.
The Company now holds over 87% of assets in qualifying holdings from an HMRC perspective and we continue to work with each portfolio business as they develop their proposition in their respective markets. As Investment Manager and as discussed above, it is our intention to take those businesses in which we have invested a small amount of money as a first investment, and invest further as they meet or exceed the initial milestone objectives we agreed with them. This approach can be demonstrated through the further investments in Executive Channel, Metrasens and TouchType during the year.
Since the balance sheet date, although no new investments have been made, the Company has continued to support investee companies by investing a further £179,000 into MiPay, £12,000 into GetOptics, £124,000 into PrismaStar, £75,000 into Phase Vision and £50,000 into AQS Holdings.
Outlook
The macro-economic environment has remained challenging for smaller companies, which have felt the effects of the reduced availability of finance and the economic slowdown. Small companies also find themselves under pressure from suppliers who want to be paid earlier, customers who delay payments and weaker trading conditions. The resulting pressure on cash will remain, even as the economy recovers, due to increasing working capital requirements.
Ironically, this environment also provides opportunities for entrepreneurial growth businesses to attract talented individuals to join them. These individuals help deliver the business plan and small companies are able to react quickly to customer needs and deliver an enhanced customer service by comparison to slower moving large corporate businesses. It is noticeable that a number of the businesses in the Company portfolio have these characteristics and continue to grow aggressively, despite the inclement economic environment.
The continuing turmoil in the Eurozone does have a significant impact on the confidence of not only the consumer, but also on large corporate purchasers and institutional investors. Until we start to see a return of confidence it is likely that the mergers and acquisitions market will remain quiet and there is unlikely to be an uplift in the number of IPOs on the stock market.
If you have any questions on any aspect of your investment, please call one of the team on 0800 316 2349.
Alex Macpherson
Octopus Investments Limited
8 February 2012
Investment Portfolio
| Qualifying investments | Sector | Investment cost as at 31 October 2011 (£'000) | Movement in fair value to 31 October 2011 (£'000) | Fair value as at 31 October 2011 (£'000) | % voting rights held by Titan 2 | % equity held by all funds managed by Octopus |
| Zoopla Limited | Media | 1,071 | 1,400 | 2,471 | 6.70% | 21.73% |
| Nature Delivered Limited | Consumer lifestyle & wellbeing | 798 | 907 | 1,705 | 7.44% | 31.66% |
| Calastone Limited | Technology | 1,135 | 567 | 1,702 | 10.80% | 34.10% |
| True Knowledge Limited | Media | 1,420 | (7) | 1,413 | 10.00% | 55.72% |
| e-Therapeutics plc | Consumer lifestyle & wellbeing | 632 | 15 | 647 | 1.73% | 6.35% |
| Executive Channel Limited | Media | 529 | 76 | 605 | 6.40% | 36.76% |
| TouchType Limited | Telecommunications | 385 | 164 | 549 | 4.20% | 20.07% |
| Michelson Diagnostics Limited | Consumer lifestyle & wellbeing | 442 | - | 442 | 5.57% | 42.47% |
| Mi-Pay Limited | Telecommunications | 670 | (261) | 409 | 9.64% | 32.12% |
| Surrey Nanosystems Limited | Technology | 383 | - | 383 | 5.75% | 31.24% |
| Metrasens Limited | Consumer lifestyle & wellbeing | 338 | 43 | 381 | 5.01% | 28.03% |
| UltraSoC Technologies Limited | Technology | 362 | - | 362 | 10.04% | 55.55% |
| Semafone Limited | Telecommunications | 360 | - | 360 | 8.29% | 41.45% |
| GetOptics Limited | Consumer lifestyle & wellbeing | 410 | (90) | 320 | 7.52% | 34.79% |
| Bowman Power Limited | Environmental | 275 | 28 | 303 | 2.33% | 15.56% |
| AQS Holdings Limited | Environmental | 536 | (296) | 240 | 8.52% | 38.64% |
| Phase Vision Limited | Technology | 400 | (165) | 235 | 12.18% | 52.88% |
| PrismaStar Inc. | Media | 300 | (150) | 150 | 4.80% | 31.97% |
| Elonics Limited | Technology | 305 | (229) | 76 | 3.11% | 19.54% |
| Phasor Solutions Limited | Technology | 100 | (50) | 50 | 1.74% | 32.14% |
| Diverse Energy Limited | Environmental | 367 | (367) | - | 5.54% | 30.17% |
| Money Workout Limited | Technology | 445 | (445) | - | 6.89% | 33.51% |
| Skills Market Limited | Technology | 186 | (186) | - | 2.71% | 12.28% |
| The Key Revolution Limited | Telecommunications | 641 | (641) | - | 12.36% | 35.88% |
| Total investments | 12,490 | 313 | 12,803 | |||
| Money market securities | 370 | - | 370 | |||
| Open ended investment companies | 1,518 | 88 | 1,606 | |||
| Cash at bank | 91 | - | 91 | |||
| Total investments | 14,469 | 401 | 14,870 | |||
| Debtors less creditors | (37) | |||||
| Total net assets | 14,833 | |||||
Valuation Methodology
Initial measurement
Financial assets are measured at fair value. The initial best estimate of fair value of a financial asset that is either quoted or not quoted in an active market is the transaction price (i.e. cost).
Subsequent measurement
Further funding rounds are a good indicator of fair value and this measure is used where appropriate. Subsequent adjustment to the fair value of unquoted investments can be made using sector multiples based on information as at 31 October 2011, where applicable. In some cases the multiples can be compared to equivalent companies, especially where a particular sector multiple does not appear appropriate. It is currently industry norm to discount the quoted earnings multiple to reflect the lack of liquidity in the investment, there being no ready market for our holding. Typically the discount is 30% but this can be increased where the relevant multiple appears too high. A lower discount would also be possible if an investment was close to an exit event.
In accordance with the International Private Equity and Venture Capital (IPEVC) valuation guidelines, investments made within 12 months are usually kept at cost unless performance indicates that fair value has changed.
Quoted investments are valued at market bid price. No discounts are applied.
If you would like to find out more regarding the IPEVC valuation guidelines, please visit their website at: www.privateequityvaluation.com.
Review of Investments
During the year one new investment was made totalling £0.3 million, together with thirteen follow-on investments amounting to £2.5 million.
Quoted and unquoted investments are valued in accordance with the accounting policy set out on page x, which takes account of current industry guidelines for the valuation of venture capital portfolios and is compliant with IPEVC Valuation guidelines and current financial reporting standards.
Listed below are details of the Company's 10 largest investments by value.
Zoopla Limited
Zoopla.co.uk is the UK's most comprehensive property website, focused on empowering consumers with the resources they need to make better-informed property decisions by combining property listings with market value data, local information and community tools. By combining free, instant value estimates for every UK home with sold prices, local market information and hundreds of thousands of properties available for sale and to rent, Zoopla.co.uk has rapidly become the destination for property consumers to search for property and do their market research, and, as a result, has become one of the most valued sources of both applicant and vendor leads for UK estate agents. Zoopla has been awarded numerous accolades including being listed in the Top 10 UK Tech Companies (Guardian) and the Top 10 Most Innovative UK Companies (Smarta 100), as well as being voted the UK's Best Property Portal (Web User, Daily Mail Awards, Website of the Year).
Initial investment date: January 2009
Cost: £1,071,000
Valuation: £2,471,000
Voting rights held by Fund: 6.70%
Equity held by all funds managed by Octopus: 21.73%
Last submitted audited accounts: 31 December 2010
Turnover £8,035,036
Loss before tax: (£497,321)
Net assets: £2,417,978
Nature Delivered Limited
Graze.com delivers tasty nutritious snacks to grazers up and down the country. All boxes are handpicked from over 100 delicious snacks and delivered in the post. Founded in 2007 and launched in 2009, graze.com was created to solve office snacking for the better. Delivered directly to customers' desks or home anywhere in the UK through Royal Mail, each graze box is packed with four snacks, from flavoured nuts, traditional rice crackers and exotic dried fruits to freshly baked bread, marinated olives and dips. Grazers choose the foods they like then graze.com hand picks the perfect box and sends it to them for just £3.49, including delivery using Royal Mail. The boxes fit perfectly through the letter box and arrive with the rest of your post, they are being delivered everywhere in the UK, from the Channel Islands to the Shetland Islands. Graze.com won New Product of the Year at the Growing Business Awards in 2009 and were voted Venture Candy's Best Food and Drink Company 2010 by Metro readers; it is also part of the Smarta 100.
Initial investment date: June 2009
Cost: £798,000
Valuation: £1,705,000
Voting rights held by Fund: 7.44%
Equity held by all funds managed by Octopus: 31.66%
Last submitted audited accounts: 28 February 2011
Turnover £8,110,771
Loss before tax: (£1,469,453)
Net assets: £1,884,388
Calastone Limited
Calastone is the UK's only independent transaction service for the mutual fund industry. It enables buyers and sellers of mutual funds on different platforms to communicate orders electronically, by providing a universal message communication and 'translation' service - the "Calastone Transaction Network" (CTN). This is being welcomed in an industry which has not previously been able to invest in the real-time exchange of information between participants. Orders are commonly communicated by fax or telephone with a high level of manual re-keying and manual error correction. Calastone's 'translation' service means that neither the transmitter nor receiver need to purchase additional technology or change their existing systems.
Initial investment date: October 2008
Cost: £1,135,000
Valuation: £1,702,000
Voting rights held by Fund: 10.8%
Equity held by all funds managed by Octopus: 34.1%
Last submitted audited accounts: 30 September 2010
Turnover £1,523,185
Loss before tax: (£1,180,742)
Net assets: £1,160,790
True Knowledge Limited
True Knowledge has developed artificial intelligence software that understands natural language text (initially just in English) and answers questions. Finding information on the Internet currently involves a process of trial and error, hoping that the search engine retrieves the information you are looking for. True Knowledge has devised patented technology that resolves this fundamental problem by operating along a more intuitive system. It intelligently answers questions asked on any topic in plain English.
The company was pursuing a strategy of advertising to the 1 million users per week of its trueknowledge.com website. Earlier in 2011 the board agreed to focus on the mobile market enabling individuals to use their smartphones to answer questions on local search and over time a wide range of subjects.
Initial investment date: July 2008
Cost: £1,420,000
Valuation: £1,413,000
Voting rights rights held by Fund: 10.0%
Equity held by all funds managed by Octopus: 55.72%
Last submitted audited accounts: 30 November 2010
Turnover £116,063
Loss before tax: (£1,486,886)
Net assets: £551,174
e-Therapeutics plc
e-Therapeutics is an AIM-quoted drug discovery and development company. It pioneered and exploits 'network pharmacology' to evaluate swiftly and accurately how medicines interact with cells in the body. This approach optimises the probability of identifying drug candidates with desirable efficacy and minimal side effects. Network pharmacology has many applications, and is particularly suited to addressing complex diseases in which current treatment options are few and ineffective. e-Therapeutics's current drug discovery programmes are focused mainly on areas of high unmet medical need, such as neurodegeneration and oncology. Four drugs resulting from e-Therapeutics's earlier discovery projects are now in clinical development.
Initial investment date: March 2009
Cost: £632,000
Valuation: £647,000 (bid price)
Voting rights held by Fund: 1.73%
Equity held by all funds managed by Octopus: 6.35%
Last submitted audited group accounts: 31 January 2011
Turnover £nil
Loss before tax: (£2,655,000)
Net assets: £3,097,000
Executive Channel Limited
Executive Channel installs digital display screens in office buildings which it uses to display advertising, up-to-date news and information, via the internet. These screens are usually located in the elevator lobby to engage an exclusive audience with high spending power in an uncluttered environment. Executive Channel is leveraging the industry move in the media market from static billboards, to interactive digital formats.
Initial investment date: September 2010
Cost: £529,000
Valuation: £605,000
Voting rights held by Fund: 6.4%
Equity held by all funds managed by Octopus: 36.76%
Last submitted group accounts: 30 June 2010
Turnover Not reported
Loss before tax: (£682,303)
Net assets: (£681,303)
TouchType Limited
TouchType is a leader in the development of text prediction technology designed to significantly boost the accuracy, fluency and speed of text entry on mobile and computing devices. TouchType's core product is the Fluency prediction engine. It is a set of software algorithms which improve upon the existing market leader's 'keystroke per character' performance by 44%. This results in users having to make less than half the number of keystrokes compared to a standard QWERTY keyboard. A patent for the engine is pending. The Fluency prediction engine powers TouchType's award winning Apps, Swiftkey and Swiftkey X, for use on Android phones and tablets, which have been downloaded more than nearly 4 million times since launch.
Initial investment date: August 2010
Cost: £385,000
Valuation: £549,000
Voting rights held by Fund: 4.20%
Equity held by all funds managed by Octopus: 20.07%
Last submitted group accounts: 31 December 2010
Turnover £152,181
Loss before tax: (£362,138)
Net assets: £504,479
Michelson Diagnostics Limited
Michelson Diagnostics is the medical equipment and scanner specialist, whose unique laser scanning technology can image skin and other surface tissue at a much higher resolution than ever before. Michelson Diagnostics's first product based on its patented technology, the VivoSight scanner, may revolutionise the market for the non-invasive diagnosis and treatment of non-melanoma skin cancer (NMSC). The VivoSight scanner is certified by the CE & Food and Drug Administration (FDA) regulatory clearance for clinical use in Europe and the USA. The VivoSight scanner will, for the first time, enable clinicians to 'see' under the skin surface in real time, to help them decide whether to treat a lesion, what treatment to use, and to show them how far a tumour has spread, so that surgery is required only once and conserves healthy tissue. Michelson Diagnostics has gained acceptance with several leading Key Opinion Leaders and has now placed its first machines with dermatologists in order to prove the business model.
Initial investment date: October 2010
Cost: £442,000
Valuation: £442,000
Voting rights held by Fund: 5.57%
Equity held by all funds managed by Octopus: 42.47%
Last submitted audited group accounts: 31 March 2011
Turnover £250,800
Loss before tax: £(904,642)
Net assets: £1,958,546
Mi-Pay Limited
Mi-Pay was founded in 2004 with the objective to establish itself as a leading processor of payments for the fast-emerging mobile money sector.The service enables customers to 'top-up' their pre-paid mobile phone directly online, or via their mobile phone, rather than using indirect brand channels such as PayPoint or bank ATMs. Benefits of the direct service include cost reductions for mobile network operators and a more personal engagement with customers, removing the anonymity of customer relationships and allowing for substantial improvements in customer retention.
Mi-Pay continues to make progress in a very dynamic and fast moving market, most recently agreeing terms with several tier one European, Middle Eastern and African mobile operators to provide its direct top up service.
Initial investment date: February 2010
Cost: £670,000
Valuation: £410,000
Voting rights held by Fund: 9.64%
Equity held by all funds managed by Octopus: 32.12%
Last submitted group accounts: 31 December 2010
Turnover £1,945,591
Loss before tax: £2,737,455
Net assets: £251,803
Surrey NanoSystems Limited
Surrey NanoSystems has developed a leading technology portfolio addressing the needs of the global nanoelectronics sector. Its proven technologies deliver precise, ordered nanomaterial structures for advanced manufacturing processes, meeting the scaling challenges of the semiconductor industry.
Surrey NanoSystems works with its partners to deliver practical nano-materials and technologies to the semiconductor, renewable-energy and clean technology industries. This partnering approach facilitates the migration of materials and processes developed on Surrey NanoSystems bespoke research platforms to production-ready tooling.
Initial investment date: July 2009
Cost: £383,000
Valuation: £383,000
Voting rights held by Fund: 5.75%
Equity held by all funds managed by Octopus: 31.24%
Last submitted group accounts: 30 June 2010
Turnover £614,386
Loss before tax: (£762,550)
Net assets: £1,268,907
Directors' Responsibilities Statement
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations.
Company law requires the Directors to prepare financial statements for each financial year which they must not approve unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company for that period. Under that law the Directors have elected to prepare financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws).
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and accounting 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 financial statements; and
- prepare the financial statements 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 financial statements 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.
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.
To the best of my knowledge:
- the financial statements, 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 management 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.
The financial statements are published at www.octopusinvestments.com, a website maintained by Octopus Investments. The maintenance and integrity of the website is, so far as it relates to the Company, the responsibility of Octopus Investments. The work carried out by the auditor does not involve considerations of the maintenance and integrity of the website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the accounts since they were originally presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the accounts differ from legislation in other jurisdictions.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
On Behalf of the Board
John Hustler
Chairman
8 February 2012
Income Statement | ||||||
| Year to 31 October 2011 | ||||||
| Revenue | Capital | Total | ||||
| Notes | £'000 | £'000 | £'000 | |||
| Realised gain on disposal of current asset investments | 12 | - | 156 | 156 | ||
| Fixed asset investment holding losses | 10 | - | (98) | (98) | ||
| Current asset investment holding gains | 12 | - | 89 | 89 | ||
| Other income | 2 | 65 | - | 65 | ||
| Investment management fees | 3 | (78) | (233) | (311) | ||
| Other expenses | 4 | (228) | - | (228) | ||
| Return on ordinary activities before tax | (241) | (86) | (327) | |||
| Taxation on return on ordinary activities | 6 | - | - | - | ||
| Return on ordinary activities after tax | (241) | (86) | (327) | |||
| Earnings per share - basic and diluted | 8 | (1.5)p | (0.5)p | (2.0)p | ||
- The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
- All revenue and capital items in the above statement derive from continuing operations.
- The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.
The Company has no recognised gains or losses other than the results for the period as set out above.
The accompanying notes form an integral part of the financial statements.
Income Statement | ||||||
| Year to 31 October 2010 | ||||||
| Revenue | Capital | Total | ||||
| Notes | £'000 | £'000 | £'000 | |||
| Realised loss on disposal of current asset investments | 12 | - | (101) | (101) | ||
| Fixed asset investment holding gains | 10 | - | 822 | 822 | ||
| Current asset investment holding losses | 12 | - | (408) | (408) | ||
| Other income | 2 | 180 | - | 180 | ||
| Investment management fees | 3 | (70) | (212) | (282) | ||
| Other expenses | 4 | (198) | - | (198) | ||
| Return on ordinary activities before tax | (88) | 101 | 13 | |||
| Taxation on return on ordinary activities | 6 | - | - | - | ||
| Return on ordinary activities after tax | (88) | 101 | 13 | |||
| Earnings per share - basic and diluted | 8 | (0.5)p | 0.6p | 0.1p | ||
- The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
- All revenue and capital items in the above statement derive from continuing operations.
- The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.
The Company has no recognised gains or losses other than the results for the period as set out above.
The accompanying notes form an integral part of the financial statements.
| Reconciliation of Movements in Shareholders' Funds | ||
| Year ended 31 October 2011 | Year ended 31 October 2010 | |
| £'000 | £'000 | |
| Shareholders' funds at start of year | 15,518 | 15,014 |
| Return on ordinary activities after tax | (327) | 13 |
| Purchase of own shares | (115) | - |
| Issue of equity (net of expenses) | - | 647 |
| Dividends paid | (243) | (156) |
| Shareholders' funds at end of period | 14,833 | 15,518 |
The accompanying notes form an integral part of the financial statements.
| Balance Sheet | ||||||||||||
| As at 31 October 2011 | As at 31 October 2010 | |||||||||||
| Notes | £'000 | £'000 | £'000 | £'000 | ||||||||
| Fixed asset investments* | 10 | 12,803 | | | ||||||||
| ||||||||||||
| 11 | 16 |
| |||||||||
| 12 | 1,976 |
| |||||||||
| 91 |
| ||||||||||
| 2,083 |
| |||||||||||
| 13 | (53) |
| |||||||||
| Net current assets | 2,030 | | | |||||||||
| Net assets | 14,833 | | | |||||||||
| 14 | 1,622 |
| |||||||||
| 15 | 574 |
| |||||||||
| 15 | 12,682 |
| |||||||||
| 15 | 13 | ||||||||||
| 15 | (210) |
| |||||||||
| 15 | 401 |
| |||||||||
| 15 | (249) |
| |||||||||
| Total equity shareholders' funds | 14,833 | | | |||||||||
| Net asset value per share | 9 | 91.5p | | 94.9p | ||||||||
*Held at fair value through profit or loss
The statements were approved by the Directors and authorised for issue on 8 February 2012 and are signed on their behalf by:
John Hustler
Chairman
Company No: 6397765
The accompanying notes form an integral part of the financial statements.
| Cash Flow Statement | |||
| Year to 31 October 2011 | Year to 31 October 2010 | ||
| Notes | £'000 | £'000 | |
| Net cash inflow/(outflow) from operating activities | 98 | (833) | |
| Financial investment: | |||
| Purchase of fixed asset investments | 10 | (2,818) | (5,273) |
| Sale of fixed asset investments | 10 | 382 | - |
| Management of liquid resources: | |||
| Purchase of current asset investments | 12 | (2,192) | (4,791) |
| Sale of current asset investments | 12 | 4,918 | 9,894 |
| Taxation | - | - | |
| Dividends paid | 7 | (243) | (156) |
| Financing: | |||
| Issue of shares | - | 647 | |
| Purchase of own shares | 14 | (115) | - |
| Increase/(decrease) in cash resources at bank | 30 | (512) | |
The accompanying notes form an integral part of the financial statements.
| Reconciliation of Return before Taxation to Cash Flow from Operating Activities | |||
| Year to 31 October 2011 | Year to 31 October 2010 | ||
| £'000 | £'000 | ||
| Return on ordinary activities before tax | (327) | 13 | |
| (Gain)/loss on disposal of current asset investments | (156) | 101 | |
| Loss/(gain) on valuation of fixed asset investments | 98 | (822) | |
| (Gain)/loss on valuation of current asset investments | (89) | 408 | |
| Decrease/(increase) in debtors | 572 | (492) | |
| (Decrease)/increase in creditors | - | (41) | |
| Inflow/(outflow) from operating activities | 98 | (833) | |
| Reconciliation of Net Cash Flow to Movement in Net Funds | |||
| Year to 31 October 2011 | Year to 31 October 2010 | ||
| £'000 | £'000 | ||
| Increase/(decrease) in cash at bank | 30 | (512) | |
| Movement in cash equivalents | (2,481) | (5,612) | |
| Opening net cash resources | 4,518 | 10,642 | |
| Net funds at 31 October | 2,067 | 4,518 | |
Net funds at 31 October comprised:
| Year to 31 October 2011 | Year to 31 October 2010 | |
| £'000 | £'000 | |
| Cash at bank | 91 | 61 |
| Money market funds | 370 | 602 |
| OEICs | 1,606 | 3,855 |
| Net funds at 31 October | 2,067 | 4,518 |
The accompanying notes form an integral part of the financial statements.
Notes to the Financial Statements
1. Principal Accounting Policies
Basis of accounting
The financial statements have been prepared under the historical cost convention, except for the measurement at fair value of certain financial instruments, and in accordance with UK Generally Accepted Accounting Practice (UK GAAP), and the Statement of Recommended Practice (SORP) 'Financial Statements of Investment Trust Companies' (revised 2009).
The Company's business activities and the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and Investment Manager's Review on pages x to x. Further details on the management of financial risk may be found in note 16 to the Financial Statements.
The Board receives regular reports from the Investment Manager and the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The assets of the company consist of cash, Money Market Funds and OEIC Investments, which are readily realisable (14% of net assets) and accordingly, the company has adequate financial resources to continue in operational existence for the foreseeable future. Thus, as no material uncertainties leading to significant doubt about going concern have been identified, it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
The principal accounting policies have remained unchanged from those set out in the Company's 2010 Annual Report and financial statements. A summary of the principal accounting policies is set out below.
The Company presents its income statement in a three column format to give shareholders additional detail of the performance of the Company, split between items of a revenue or capital nature.
The preparation of the financial statements requires Management to make judgements and estimates that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Estimates and assumptions mainly relate to the fair valuation of the fixed asset investments, particularly that which are unquoted investments. Estimates are based on historical experience and other assumptions that are considered reasonable under the circumstances. The estimates and the assumptions are under continuous review with particular attention paid to the carrying value of the investments.
Capital valuation policies are those that are most important to the depiction of the Company's financial position and that require the application of subjective and complex judgements, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. The critical accounting policies that are declared will not necessarily result in material changes to the financial statements in any given period but rather contain a potential for material change. The main accounting and valuation policies used by the Company are disclosed below. Whilst not all of the significant accounting policies require subjective or complex judgements, the Company considers that the following accounting policies should be considered critical.
The Company has designated all fixed asset investments as being held at fair value through profit or loss; therefore all gains and losses arising from investments held are attributable to financial assets held at fair value through profit or loss. Accordingly, all interest income, fee income, expenses and investment gains and losses are attributable to assets designated as being at fair value through profit or loss.
Current asset investments comprising money market funds are held at fair value through the profit or loss. Cash and short term deposits are held at amortised cost.
Investments are regularly reviewed to ensure that the fair values are appropriately stated. Quoted investments are valued in accordance with the bid-price on the relevant date, unquoted investments are valued in accordance with current IPEVC valuation guidelines, although this does rely on subjective estimates such as appropriate sector earnings multiples, forecast results of investee companies, asset values of subsidiary companies and liquidity or marketability of the investments held.
Although the Company believes that the assumptions concerning the business environment and estimates of future cash flows are appropriate, changes in estimates and assumptions could require changes in the stated values. This could lead to additional changes in fair value in the future.
Investments
Purchases and sales of investments are recognised in the financial statements at the date of the transaction (trade date).
These investments will be managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy and information about them has to be provided internally on that basis to the Board. Accordingly, as permitted by FRS 26, the investments will be designated as fair value through profit or loss (FVTPL) on the basis that they qualify as a group of assets managed, and whose performance is evaluated, on a fair value basis in accordance with the documented investment strategy. The Company's investments are measured at subsequent reporting dates at fair value with the holding gains and losses recorded in the income statement each year. In accordance with the investment strategy, the investments are held with a view to long-term capital growth and it is therefore possible that individual holdings may increase in value to a point where they represent a significantly higher proportion of total assets than the original cost.
In the case of investments quoted on a recognised stock exchange, fair value is established by reference to the closing bid price on the relevant date or the last traded price, depending upon convention of the exchange on which the investment is quoted. This is consistent with the IPEVC valuation guidelines.
In the case of unquoted investments, fair value is established by using measures of value such as the price of recent transactions, earnings multiple and net assets. This is consistent with IPEVC valuation guidelines.
Gains or losses arising from the revaluation of investments at the year end are recognised as part of the capital return within the income statement and allocated to the capital reserve - investment holding gains/(losses).
In the preparation of the valuations of assets the Directors are required to make judgements and estimates that are reasonable and incorporate their knowledge of the performance of the investee companies.
Current asset investments
Current asset investments comprise money market funds and OEICs and are designated as FVTPL. Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - investment gains/(losses) on disposal.
The current asset investments are all invested with the Company's cash manager and are readily convertible into cash at the option of the Company. The current asset investments are held for trading, are actively managed and the performance is evaluated in accordance with a documented investment strategy. Information about them has to be provided internally on that basis to the Board.
Other income
Investment income includes interest earned on bank balances and money market funds and includes income tax withheld at source. Dividend income is shown net of any related tax credit.
Dividends receivable are brought into account when the Company's right to receive payment is established and there is no reasonable doubt that payment will be received. Fixed returns on debt and money market funds are recognised so as to reflect the effective interest rate; provided there is no reasonable doubt that payment will be received in due course.
Expenses
All expenses are accounted for on an accruals basis. Expenses are charged wholly to revenue with the exception of the investment management fee, which has been charged 25% to the revenue account and 75% to the capital reserve to reflect, in the Directors' opinion, the expected long-term split of returns in the form of income and capital gains respectively from the investment portfolio.
The transaction costs incurred when purchasing or selling assets are written off to the Income Statement in the year that they occur.
Revenue and capital
The revenue column of the income statement includes all income and revenue expenses of the Company. The capital column includes gains and losses on disposal and gains and losses arising from the revaluation of investments at the period end. Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the income statement.
Taxation
Corporation tax payable is applied to profits chargeable to corporation tax, if any, at the current rate. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue return on the 'marginal' basis as recommended in the SORP.
Deferred tax is recognised on an undiscounted basis in respect of all timing differences that have originated but not reversed at the balance sheet date or where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less tax. This is with the exception that deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing can be deducted.
Cash and liquid resources
Cash, for the purposes of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand. Liquid resources are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market. Liquid resources comprise term deposits of less than one year (other than cash), government securities, investment grade bonds and investments in money market funds, as well as OEICs.
Loans and receivables
The Company's loans and receivables are initially recognised at fair value which is normally transaction cost and subsequently measured at amortised cost using the effective interest method.
Financing strategy and capital structure
FRS 29 'Financial Instruments: Disclosures' comprises disclosures relating to financial instruments.
We define capital as shareholders' funds and our financial strategy in the medium term is to manage a level of cash that balances the risks of the business with optimising the return on equity. The Company currently has no borrowings nor does it anticipate that it will drawdown any borrowing facilities in the future to fund the acquisition of investments.
The Company does not have any externally imposed capital requirements.
The value of the managed capital is indicated in note 14. The Board considers the distributable reserves and the total return for the year when recommending a dividend. In addition, the Board is authorised to make market purchases up to a maximum of 5% of the issued Ordinary share capital of the Company in accordance with Special Resolution 8 in order to maintain sufficient liquidity in the Company.
Capital management is monitored and controlled using the internal control procedures set out on page · of this report. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.
Financial instruments
The Company's principal financial assets are its investments and the policies in relation to those assets are set out above. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited direct to equity.
Dividends
Dividends payable are recognised as distributions in the financial statements when the Company's liability to make payment has been established. This liability is established for interim dividends when they are declared by the Board, and for final dividends when they are approved by the shareholders.
2. Other income
| Year to 31 October 2011 | Year to 31 October 2010 | |
| £'000 | £'000 | |
| Money market funds & OEICs | 9 | 31 |
| Bond interest receivable | - | 42 |
| Loan note interest receivable | 56 | 107 |
| 65 | 180 |
3. Investment Management Fees
| Year to 31 October 2011 | Year to 31 October 2010 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Investment management fee | 78 | 233 | 311 | 70 | 212 | 282 |
For the purposes of the revenue and capital columns in the income statement, the management fee has been allocated 25% to revenue and 75% to capital, in line with the Board's expected long-term return in the form of income and capital gains respectively from the Company's investment portfolio.
Octopus provides investment management and accounting and administration services to the Company under a management agreement. This agreement runs for a period of five years with effect from 2 November 2007 and may be terminated at any time thereafter by not less than 12 months' notice given by either party. No compensation is payable in the event of terminating the agreement by either party, if the required notice period is given. The fee payable, should insufficient notice be given, will be equal to the fee that would have been paid should continuous service be provided, or the required notice period was given. The basis upon which the management fee is calculated is disclosed within note 19 to the financial statements.
4. Other Expenses
| Year to 31 October 2011 | Year to 31 October 2010 | |
| £'000 | £'000 | |
| Directors' remuneration | 38 | 33 |
| Fees payable to the Company's auditor for the audit of the financial statements | 9 | 9 |
| Fees payable to the Company's auditor for other services - tax compliance | 2 | 2 |
| Legal and professional expenses | 3 | 3 |
| Accounting and administration services | 47 | 46 |
| Trail commission | 53 | 25 |
| Printing fees | 24 | 23 |
| Other expenses | 52 | 57 |
| 228 | 198 |
Total annual running costs are capped at 3.2% of net assets (excluding irrecoverable VAT). For the year to 31 October 2011 the running costs, as defined in the prospectus, were 3.2% of net assets (2010: 2.9%). This is calculated excluding VAT, trail commission and non-recurring expenses.
5. Directors' Remuneration
| Year to 31 October 2011 | Year to 31 October 2010 | |
| £'000 | £'000 | |
| Directors' emoluments | ||
| John Hustler (Chairman) | 18 | 15 |
| Mark Faulker | 12 | 10 |
| Matt Cooper | 8 | 8 |
| 38 | 33 |
None of the Directors received any other remuneration from the Company during the year. The Company has no employees other than non-executive Directors. The average number of non-executive Directors in the year was three (2010: three).
6. Tax on Ordinary Activities
The corporation tax charge for the period was £nil (2010: £nil)
Factors affecting the tax charge for the current year:
The current tax charge for the period differs from the standard rate of corporation tax in the UK of 26.83% (2010: 28%).
The differences are explained below.
| Current tax reconciliation: | Year to 31 October 2011 | Year to 31 October 2010 |
| £'000 | £'000 | |
| Return on ordinary activities before tax | (327) | 13 |
| Current tax at 26.83% (2010: 28%) | (88) | 4 |
| Income not taxable for tax purposes | (41) | (54) |
| Unrelieved tax losses | 129 | 50 |
| Total current tax charge | - | - |
Excess management charges of £1,045,000 (2010: £564,000) have been carried forward at 31 October 2011 and are available for offset against future taxable income subject to agreement with HMRC. The Company has not recognised the deferred tax asset of £292,000 (2010: £158,000) in respect of these excess management charges.
Approved VCTs are exempt from tax on capital gains within the Company. Since the Directors intend that the Company will continue to conduct its affairs so as to maintain its approval as a VCT, no current deferred tax has been provided in respect of any capital gains or losses arising on the revaluation or disposal of investments.
7. Dividends
| Year to 31 October 2011 | Year to 31 October 2010 | |
| £'000 | £'000 | |
| Recognised as distributions in the financial statements for the period | ||
| Previous year's final dividend | 122 | 78 |
| Current period's interim dividend | 121 | 78 |
| 243 | 156 | |
| Paid and proposed in respect of the period | ||
| Interim dividend paid - 0.75p per share (2010: 0.5p per share) | 122 | 78 |
| Proposed final dividend - 1.0p per share (2010: 0.75p per share) | 162 | 123 |
| 284 | 201 |
The final dividend of 1.0p per share for the year ended 31 October 2011, subject to shareholder approval at the Annual General Meeting, will be paid on 6 April 2012 to those shareholders on the register on 9 March 2012.
8. Earnings per Share
The total, revenue and capital earnings per share is based on 16,267,138 (31 October 2010: 15,790,677) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year.
There are no potentially dilutive capital instruments in issue and, therefore no diluted return per share figures are relevant. The basic and diluted earnings per share are therefore identical.
9. Net Asset Value per Share
The calculation of NAV per share as at 31 October 2011 is based on 16,220,459 (31 October 2010: 16,354,502) Ordinary shares in issue at that date.
10. Fixed Asset Investments
Effective from 1 November 2009, the Company adopted the amendment to FRS 29 regarding financial instruments that are measured in the balance sheet at fair value; this requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
Level 1: quoted prices in active markets for identical assets and liabilities. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held is the current bid price. These instruments are included in level 1 and comprise AIM-listed investments classified as
held at fair value through profit or loss.
Level 2: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable data where it is available and
rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument
are observable, the instrument is included in level 2. The Company held no such investment in the current or
prior year.
Level 3: the fair value of financial instruments that are not traded in an active market (for example investments in
unquoted companies) is determined by using valuation techniques such as earnings multiples. If one or more of
the significant inputs is not based on observable market data, the instrument is included in level 3.
There have been no transfers between these classifications in the year (2010: one). The change in fair value
for the current and previous year is recognised through the income statement.
All items held at fair value through profit or loss were designated as such upon initial recognition. Movements in
investments at fair value through profit or loss during the year to 31 October 2011 are summarised below and in
note 12.
| Level 1: | Level 3: | Total | |
| AIM-quoted | Unquoted investments | investments | |
| 31-Oct-11 | |||
| £'000 | £'000 | £'000 | |
| Valuation and net book amount: | |||
| As at 1 November 2010 | 450 | 9,605 | 10,055 |
| Cumulative revaluation as at 1 November 2010 | (7) | 417 | 410 |
| Valuation at 1 November 2010 | 443 | 10,022 | 10,465 |
| Movement in the year: | |||
| Purchases at cost | 564 | 2,254 | 2,818 |
| Disposal proceeds | (382) | - | (382) |
| Profit/(loss) on realisation of investments - current year | - | - | - |
| Revaluation in year | 22 | (120) | (98) |
| Valuation at 31 October 2011 | 647 | 12,156 | 12,803 |
| Book cost at 31 October 2011 | 632 | 11,859 | 12,491 |
| Revaluation to 31 October 2011 | 15 | 297 | 12,491 |
| Valuation at 31 October 2011 | 647 | 12,156 | 12,803 |
The investment portfolio is managed with capital growth as the primary focus. The loan and equity investments are considered to be one instrument for valuation purposes due to the legal binding within the investment agreement and therefore they are combined in the table shown above.
Level 3 valuations include assumptions based on non-observable market data, such as discounts applied either to reflect fair value of financial assets held at the price of recent investment, or, in the case of unquoted investments, to adjust earnings multiples. Further details in respect of the methods and assumptions applied in determining the fair value of the investments are disclosed in the Investment Manager's Review and within the principal accounting policies in note 1.
At 31 October 2011 and 31 October 2010, there were no commitments in respect of investments not yet completed.
11. Debtors
| 31 October 2011 | 31 October 2010 | |
| £'000 | £'000 | |
| Prepayments | 12 | 13 |
| Accrued income | - | 575 |
| Other debtors | 4 | - |
| 16 | 588 |
12. Current Asset Investments
Current asset investments at 31 October 2011 comprised money market funds and OEICs.
| £'000 | £'000 | |
| Valuation and net book amount: | ||
| Book cost as 1 November 2010 | ||
| - Money Market Funds | 602 | |
| - OEICs | 3,215 | |
| 3,817 | ||
| Revaluation as at 1 November 2010 | ||
| - Money Market Funds | - | |
| - OEICs | 640 | |
| 640 | ||
| Valuation as at 1 November 2010 | 4,457 | |
| | ||
| - OEICs | 800 | |
| - Money Market Funds | 1,392 | |
| 2,192 | ||
| Disposal proceeds | ||
| - Money Market Funds | (1,623) | |
| - OEICs | (3,295) | |
| (4,918) | ||
| Profit in year on realisation of investments: | ||
| - OEICs | 156 | |
| 156 | ||
| Revaluation in the year | ||
| - OEICs | 89 | |
| 89 | ||
| Valuation as at 31 October 2011 | 1,976 | |
| Book cost as 31 October 2011 | ||
| - Money Market Funds | 370 | |
| - OEICs | 1,518 | |
| 1,888 | ||
| Revaluation as at 31 October 2011 | ||
| - OEICs | 88 | |
| 88 | ||
| Valuation as at 31 October 2011 | 1,976 |
All current asset investments held at the year end sit within level 1 hierarchy for the purposes of FRS 29.
Level 1 money market funds: Level 1 valuations are based on quoted prices (unadjusted) in active markets for identical assets or liabilities. The valuation of money market funds and OEIC's at 31 October 2011 was £1,976,000 (2010: £4,457,000).
13. Creditors: Amounts Falling Due Within One Year
| 31 October 2011 | 31 October 2010 | |||
| £'000 | £'000 | |||
| Accruals | 53 | 53 |
14. Share Capital
| 31 October 2011 | 31 October 2010 | ||
| £'000 | £'000 | ||
| Authorised: | |||
| 50,000,000 Ordinary shares of 10p | 5,000 | 5,000 | |
| Allotted and fully paid up: | |||
| 16,220,459 (2010: 16,354,502) Ordinary shares of 10p | 1,622 | 1,635 |
The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective as set on page x. The Company is not subject to any externally imposed capital requirements.
We define capital as shareholders' funds and our financial strategy in the medium term is to manage a level of cash that balances the risks of the business with optimising the return on equity. The Company currently has no borrowings nor does it anticipate that it will drawdown any borrowing facilities in the future to fund the acquisition of investments.
The Board considers the distributable reserves and the total return for the year when recommending a dividend. In addition, the Board is authorised to make market purchases up to a maximum of 5% of the issued Ordinary share capital of the Company in accordance with Special Resolution 8 in order to maintain sufficient liquidity in the Company.
Capital management is monitored and controlled using the internal control procedures set out on page · of this report. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.
There were no shares issued during the year (2010: 737,621 Ordinary shares at a weighted average price of 92.9p per share).
The Company repurchased the following Ordinary shares for cancellation (2010: nil shares):
| · 21 February 2011: | 118,285 at a price of 86p per share |
| · 21 June 2011: | 15,758 at a price of 83p per share |
15. Reserves
| Share Premium | Special distributable reserve | Capital reserve gains/(losses) on disposal | Capital reserve holding gains/(losses) | Capital redemption reserve | Revenue reserve | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| As at 1 November 2010 | 574 | 13,040 | (773) | 1,050 | - | (8) |
| Return on ordinary activities after tax | - | - | - | - | - | (241) |
| Management fees allocated as capital expenditure | - | - | (233) | - | - | - |
| Purchase of own shares | - | (115) | - | - | 13 | - |
| Current period gains on disposal | - | - | 156 | - | - | - |
| Prior period holding gain on disposal | - | - | 640 | (640) | - | - |
| Current period gains/losses on revaluation | - | - | - | (9) | - | - |
| Dividends paid | - | (243) | - | - | - | - |
| Balance as at 31 October 2011 | 574 | 12,682* | (210)* | 401 | 13 | (249)* |
* Reserve considered when calculating potential distribution by way of a dividend.
When the Company revalues its investments during the year, any gains or losses arising are credited/charged to the income statement. Unrealised gains/losses are then transferred to the 'capital reserve - holding gains/(losses)'. When an investment is sold, any balance held on the 'capital reserve - holding gains/(losses)' is transferred to the 'capital reserve - gains/(losses) on disposal' as a movement in reserves.
Reserves available for potential distribution by way of a dividend are:
| £'000 | |
| As at 1 November 2010 | 12,259 |
| Movement in year | (36) |
| As at 31 October 2011 | 12,223 |
The purpose of the special distributable reserve was to create a reserve which will be capable of being used by the Company to pay dividends and for the purpose of making repurchases of its own shares in the market with a view to narrowing the discount to net asset value at which the Company's Ordinary shares trade. In the event that the revenue reserve and capital reserve gains/(losses) on disposals do not have sufficient funds to pay dividends, these will be paid from the special distributable reserve.
16. Financial Instruments and Risk Management
The Company's financial instruments comprise equity and fixed interest investments, cash balances and liquid resources including debtors and creditors. The Company holds financial assets in accordance with its investment policy of investing mainly in a portfolio of VCT qualifying unquoted securities whilst holding a proportion of its assets in cash or near-cash investments in order to provide a reserve of liquidity.
Classification of financial instruments
the Company held the following categories of financial instruments, all of which are included in the balance sheet at fair value, at 31 October 2011.
| 31 October 2011 | 31 October 2010 | |
| £000 | £000 | |
| Assets at fair value through profit or loss | ||
| Fixed Asset Investments | 12,803 | 10,465 |
| Current asset investments | 1,976 | 4,457 |
| Total | 14,779 | 14,922 |
| Loans and receivables | ||
| Cash at bank | 91 | 61 |
| Accrued income | - | 575 |
| Total | 91 | 636 |
| Liabilities at amortised cost | ||
| Accruals and other creditors | 49 | 53 |
| Total | 49 | 53 |
Fixed asset investments (see note 10) are carried at fair value. Unquoted investments are carried at fair value as determined by the Directors in accordance with current venture capital industry guidelines. The fair value of all other financial assets and liabilities is represented by their carrying value in the balance sheet. The Directors believe that the fair value of the assets held at the period-end is equal to their book value.
In carrying on its investment activities, the Company is exposed to various types of risk associated with the financial instruments and markets in which it invests. The most significant types of financial risk facing the Company are price risk, interest rate risk, credit risk and liquidity risk. The Company's approach to managing these risks is set out below together with a description of the nature and amount of the financial instruments held at the balance sheet date.
Market risk
The Company's strategy for managing investment risk is determined with regard to the Company's investment objective, as outlined on page x. The management of market risk is part of the investment management process and is a central feature of venture capital investment. The Company's portfolio is managed in accordance with the policies and procedures described in the Corporate Governance statement on pages x to x, having regard to the possible effects of adverse price movements, with the objective of maximising overall returns to shareholders. Investments in unquoted companies, by their nature, usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by diversifying the portfolio across business sectors and asset classes. The overall disposition of the Company's assets is regularly monitored by the Board.
Details of the Company's investment portfolio at the balance sheet date are set out on page x to x.
82.2% (2010: 67.4%) by value of the Company's net assets comprises investments in unquoted companies held at fair value. The valuation methods used by the Company include the application of a price/earnings ratio derived from listed companies with similar characteristics, and consequently the value of the unquoted element of the portfolio can be indirectly affected by price movements on the London Stock Exchange. A 10% overall increase in the valuation of the unquoted investments at 31 October 2011 would have increased net assets and the total return for the year by £1,219,600 (2010: £1,046,500) an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount.
13.3% (2010: 28.7%) by value of the Company's net assets comprises of OEICs and Money Market Securities held at fair value. A 10% overall increase in the valuation of the OEICs and Money Market Securities at 31 October 2011 would have increased net assets and the total return for the year by £197,600 (2010: £445,700) an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount.
Interest rate risk
Some of the Company's financial assets are interest-bearing, of which some are at fixed rates and some variable. As a result, the Company is exposed to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates.
Fixed rate
The table below summarises weighted average effective interest rates for the fixed interest-bearing financial instruments:
| As at 31 October 2011 | As at 31 October 2010 | |||||
| Total fixed rate portfolio by value £'000 | Weighted average interest rate % | Weighted average time for which rate is fixed in years | Total fixed rate portfolio by value £'000 | Weighted average interest rate % | Weighted average time for which rate is fixed in years | |
| Fixed-rate investments in unquoted companies | 953 | 12% | 2.5 | 382 | 12% | 3.5 |
| 953 | 382 | |||||
Due to the relatively short period to maturity of the fixed rate investments held within the portfolio, it is considered that an increase or decrease of 1% in interest rates as at the reporting date would not have had a significant effect on the Company's net assets or total return for the year.
Floating rate
The Company's floating rate investments comprise cash held on interest-bearing deposit accounts, libor rate on one loan note and, where appropriate, within interest bearing money market securities. The benchmark rate which determines the rate of interest receivable on such investments is the bank base rate, which was 0.5% at 31 October 2011. The amounts held in floating rate investments at the balance sheet date were as follows:
| 31 October 2011 £000 | 31 October 2010 £000 | ||
| Floating-rate investments in unquoted companies | - | 315 | |
| Cash on deposit & money market funds | 462 | 663 | |
| 462 | 978 |
A 1% increase in the base rate would increase income receivable from these investments and the total return for the year by £5,000 (2010: £10,000).
Credit risk
There were no significant concentrations of credit risk to counterparties at 31 October 2011. By cost, no individual investment exceeded 9.6% (2010: 11.4 %) of the Company's net assets at 31 October 2011.
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Investment Manager and the Board carry out a regular review of counterparty risk. The carrying values of financial assets represent the maximum credit risk exposure at the balance sheet date.
At 31 October 2011 the Company's financial assets exposed to credit risk comprised the following:
| 31 October 2011 £000 | 31 October 2010 £000 | ||
| Cash on deposit & money market funds | 462 | 663 | |
| Fixed rate investments in unquoted companies | 953 | 382 | |
| Accrued dividends and interest receivable | - | 75 | |
| 1,415 | 1,130 |
Credit risk relating to listed money market securities is mitigated by investing in a portfolio of investment instruments of high credit quality, comprising securities issued by the UK Government and major UK companies and institutions. Credit risk relating to loans to and preference shares in unquoted companies is considered to be part of market risk.
Those assets of the Company which are traded on recognised stock exchanges are held on the Company's behalf by third party custodians (BlackRock in the case of listed money market securities and Capita Financial in the case of quoted equity securities). Bankruptcy or insolvency of a custodian could cause the Company's rights with respect to securities held by the custodian to be delayed or limited.
Credit risk arising on the sale of investments is considered to be small due to the short settlement and the contracted agreements in place with the settlement lawyers.
The Company's interest-bearing deposit and current accounts are maintained with HSBC Bank plc.
Liquidity risk
The Company's financial assets include investments in unquoted equity securities which are not traded on a recognised stock exchange and which generally may be illiquid. They also include investments in AIM-quoted companies, which, by their nature, involve a higher degree of risk than investments on the main market. As a result, the Company may not be able to realise some of its investments in these instruments quickly at an amount close to their fair value in order to meet its liquidity requirements, or to respond to specific events such as deterioration in the creditworthiness of any particular issuer.
The Company's listed money market securities are considered to be readily realisable as they are of high credit quality as outlined above.
The Company's liquidity risk is managed on a continuing basis by the Investment Manager in accordance with policies and procedures laid down by the Board. The Company's overall liquidity risks are monitored on a quarterly basis by the Board.
The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and accrued expenses. At 31 October 2011 these investments were valued at £1,985,000 (2010: £4,500,000).
17. Post Balance Sheet Events
The following events occurred between the balance sheet date and the signing of these financial statements:
- On 22 November 2011 a further £12,000 was invested into GetOptics Limited
- On 22 November 2011 a further £179,000 was invested into Mi-PayLimited
- On 25 November 2011 a further £124,000 was invested into PrismaStar Limited
- On 21 December 2011 a further £50,000 was invested into AQS Holdings Limited
- On 21 December 2011 a further £74,000 was invested into Phase Vision
18. Contingencies, Guarantees and Financial Commitments
Provided that an intermediary continues to act for a shareholder and the shareholder continues to be the beneficial owner of the shares, intermediaries will be paid an annual trail commission of 0.5% of the initial net asset value. Trail commission of £53,000 was paid in cash during the year (2010: £25,000) and there was £nil outstanding at the year end.
There were no other contingencies, guarantees or financial commitments as at 31 October 2011.
19. Related Party Transactions
Octopus Titan VCT 2 plc has employed Octopus Investments Limited throughout the year as the Investment Manager.
Matt Cooper, a non-executive Director of Octopus Titan VCT 2 plc, is also Chairman of Octopus Investments. Octopus Titan VCT 2 plc has paid Octopus £311,000 (2010: £282,000) in the year as a management fee and there is £nil outstanding at the balance sheet date. The management fee is payable quarterly in advance and is based on 2.0% of the net asset value calculated at annual intervals as at 31 October.
Octopus Investments Limited also provides accounting, administrative and company secretarial services to the Company, payable quarterly in advance for a fee of 0.3% of the net asset value calculated at annual intervals as at 31 October. During the year £47,000 (2010: £46,000) was paid to Octopus Investments Limited and there is £nil outstanding at the balance sheet date, for the accounting and administrative services.
In addition, Octopus is entitled to performance related incentive fees. The incentive fees are designed to ensure that there are significant tax-free dividend payments made to Shareholders as well as strong performance in terms of capital and income growth, before any performance related incentive fee payment is made. Therefore, only if by the end of a financial year (commencing no earlier than close of the 2011 financial year), declared distributions per Share have reached 40p in aggregate and if the Performance Value at that date exceeds 130p per Share, a performance incentive fee equal to 20% of the excess of such Performance Value over 100p per Share will be payable to Octopus.
If, on a subsequent financial year end, the Performance Value of Octopus Titan VCT 2 plc falls short of the Performance Value on the previous financial year end, no incentive fee will arise. If, on a subsequent financial year end, the performance exceeds the previous best Performance Value of Octopus Titan VCT 2 plc, the Investment Manager will be entitled to 20% of such excess in aggregate.
No performance fee has been recognised for the year ended 31 October 2011 on the basis that the directors consider that the liability becomes due at the point that the performance criteria are met; this has not been achieved and therefore no liability has been recognised.
The Directors received the following dividends from the Company:
| 31 October 2011 | 31 October 2010 | |
| John Hustler (Chairman) | £112 | £74 |
| Mark Faulkner | £225 | £150 |
| Matt Cooper | £505 | £336 |