Final Results

Octopus Protected VCT plc

Annual Report & Accounts for the year ended 31 January 2008

 

About Octopus Protected VCT plc

Octopus Protected VCT plc ("Company" or "Fund") is a venture capital trust ("VCT") and is managed by Octopus Investments Limited ("Octopus").

 

The Fund was launched in July 2006 and raised over £27.1 million (£25.9 million net of expenses) through an offer for subscription by the time it closed on 5 April 2007.  The objective of the Fund is to invest in a diversified portfolio of UK smaller companies in order to generate income and capital growth over the long-term.

 

Financial Highlights

 

 

Chairman's Statement

 

I am pleased to present the second annual report for Octopus Protected VCT plc for the year to 31 January 2008.

 

Net Asset Value ("NAV")

The NAV per share at 31 January 2008 was 95.5p, up from the initial NAV of 94.5p, and from the prior year NAV of 93.7p.  The increase in NAV is due to income from proceeds invested with the cash managers exceeding the expenses and running costs of the Fund.  As such, the Board has proposed a dividend of 1.5p per share to be paid to shareholders on 25 June 2008 who are on the register on 30 May 2008.

 

Investment Portfolio

During the year the Fund made four new investments, totalling £3.1 million, into British Country Inns 3 plc, Funeral Services Partnership Limited, Bruce Dunlop & Associates Limited and Tristar Worldwide Limited. In accordance with International Private Equity guidelines, these will be held at cost for the first year of investment as this is considered to be the best approximation to fair value as there have been no significant changes in circumstances since the time of investment.  No disposals took place during the year.  In addition Octopus has taken an active yet cautious approach to managing the cash raised prior to its investment in qualifying companies. The remaining funds raised have been invested by Goldman Sachs International in a range of money market securities.

 

Investment Strategy

The Fund is being invested on the basis of taking lower risk than a typical VCT and a higher risk than a typical bank. In the finance sector this is often called intermediate capital or mezzanine finance. The investment strategy is to derive sufficient return from the secured loan notes to achieve the fund aims and use any equity portion to boost returns.

 

The manner of the reduced risk will vary across the investments. In the four main investments to date risk has been reduced by investing in well managed, successful, profitable, strong recurring cashflow businesses with the majority of the investment being in the form of a secured loan which, in the unlikely event of the business failing, ranks ahead of the investment of other equity investors.  Typically the fund will receive its return from interest paid on its secured loan notes, as well as the return on the equity it holds when the company is sold.

 

Share Price

The Fund has a share buy-back facility, proposing to buy-back shares at no more than a 10% discount to the prevailing NAV at the discretion of the Company. This should assist the marketability of the shares and help prevent the shares from trading at a wide discount to NAV. The Fund's mid market share price currently stands at 90p.  During the year the Fund bought back 50,582 shares at a price of 94.5p per share.

 

Shareholders should note that if they sell their shares within five years of the original purchase they forfeit any income tax relief obtained. If you need to sell your shares, please contact Octopus on 020 7710 2800.

 

VCT Qualifying Status

PricewaterhouseCoopers LLP provides the Board and Investment Manager with advice on the ongoing compliance with HM Revenue & Customs rules and regulations concerning VCTs.  The Board has been advised that Octopus Protected VCT plc is in compliance with the conditions laid down by HM Revenue & Customs for maintaining approval as a VCT at this stage in the Fund's life.

 

A key requirement is for 70% of the portfolio to be invested in qualifying investments by the end of the third accounting period following that in which new share capital was subscribed.  As at 31 January 2008, over 10.3% of the portfolio (according to HM Revenue & Customs rules and regulations) was invested in VCT qualifying investments, in line with our expectations at this early stage of the Fund's life.  In light of the current deal flow, the Board is confident of achieving the required investment level.

 

Outlook

Whilst national and international economies have suffered considerable recent setbacks we remain confident that our policy of investing predominantly in secured loan stock in profitable UK businesses with strong recurring cashflows is sound. We expect to see increased demand from such companies for our funds as our presence in the market continues to grow and the best firms look for finance that is not tainted with the irrational decisions that the large banks are apt to make in times of economic uncertainty.

 

Tony Morgan

Chairman

29 April 2008

 

Investment Manager's Review

 

Personal Service

 

Review of Investments

As mentioned in the Chairman's Statement, four new investments, totalling £3.1 million, were made during the year, the details of which are set-out below.  Whilst Octopus seeks suitable qualifying investments, the remaining proceeds raised have been managed by our cash managers, Goldman Sachs International, and invested in a range of low risk money market securities.  Over what has been a difficult period across world debt and equity markets, resulting from the 'credit crunch' in the US, the proceeds managed by Goldman Sachs have yielded over 5.1%.

 

Investment Portfolio

During the year, the Fund made four new investments.  Details of these are set-out below.

 

British Country Inns was launched as an EIS, qualifying company in April 2006 in order to buy traditional, food-led freehold and long leasehold pubs in the South of England.  Rather than initiate a second round of fundraising, which would have entailed a very early valuation of the estate at the time and a tight cap on the size of the issue, management opted to raise additional funds through a separate company, British Country Inns 2. This company  maintained a geographical focus in the South and South West of England. A third company, British Country Inns 3 in which Octopus Protected is an investor, was formed to invest in pubs in the West Midlands.

 

Investment date:                                    April 2007

Cost:                                                    £100,000 (ordinary shares)

Valuation:                                              £100,000

Valuation basis:                        Cost

Equity held:                                           1.3% (1.3% held by all funds managed by Octopus)

Last audited accounts:               N/A

 

Funeral Services Partnership is an independent funeral services group made up of funeral parlours and their associated services. It currently owns 14 funeral parlours and a stonemasons and is continuing to grow via acquisition.

 

Investment date:                        October 2007

Cost:                                                    £1,000,000 (ordinary shares and loan notes)

Valuation:                                  £1,000,000

Valuation basis:                        Cost

Equity held:                                           2.5% 'B shares' (6.8% 'B shares' held by all funds managed by Octopus)

Last audited accounts:               N/A

 

BDA provides promotion and design services to broadcasters and advertisers worldwide and also creates brand films and internal communications for leading UK corporations, including Hallmark, Barclays, Discovery and Sony. The company operates from offices in London, Munich, Dubai, Singapore and Sydney.

 

Investment date:                        December 2007

Cost:                                                    £1,000,000 (ordinary shares and loan notes)

Valuation:                                  £1,000,000

Valuation basis:                        Cost

Equity held:                                           1.7% 'A shares' (33.3% 'A shares' held by all funds managed by Octopus)

Last audited accounts:               June 2006

Profit before interest & tax:         £0.7 million

Net assets:                              £1.8 million

 

Tristar is one of the world's leading chauffeur companies, carrying over 400,000 passengers for 400 clients in 2007 alone. The business operates in 44 countries with its own vehicles in the UK and a rapidly expanding service in the US. It has a blue chip customer base which includes Virgin, Emirates, BP, Goldman Sachs and Merrill Lynch.

 

Investment date:                        January 2008

Cost:                                                    £1,000,000 (ordinary shares and loan notes)

Valuation:                                  £1,000,000

Valuation basis:                        Cost

Equity held:                                           2.5% 'A shares' (35.0% 'A shares' held by all funds managed by Octopus)

Last audited accounts:               May 2007

Profit before interest & tax:         £1.7 million

Net assets:                              £3.4 million

 

Recent Transactions

Since the end of the year under review, we have completed one new qualifying investment:

 

Octopus Protected invested £606,000 in the management buy-out of Hydrobolt Limited in April 2008.  Hydrobolt is a specialist manufacturer of high integrity fasteners for the oil & gas and energy sectors.  Further details of this investment will be detailed in the interim report of Octopus Protected later in the year.

 

Simon Rogerson

Chief Executive

 

 

The Company has no recognised gains or losses other than the results for the year as set out above.

 

 

 

The Company has no recognised gains or losses other than the results for the period as set out above.

 

 

 

 

 

 

Reconciliation of Net Cash Flow to Movement in Net Funds                                                                                  

 

Net cash at 31 January 2008 comprised:

 

Reconciliation of Operating Profit before Taxation to Cash Flow from Operating Activities

 

Note:    Fixed asset investments

  

Further details of the fixed asset investments held by the Company are shown within the Investment Manager's Review.

 

The above summary of results for the year ended 31 January 2008 does not constitute statutory financial statements within the meaning of section 240 of the Companies Act 1985 and has not been delivered to the Registrar of Companies.

 

Statutory financial statements will be filed with the Registrar of Companies in due course; the auditor's report on those financial statements under S235 of the Companies Act 1985 is unqualified and does not contain a statement under S237 (2) or (3) of the Companies Act 1985.

 

A copy of the full annual report and financial statements for the year ended 31 January 2008 is expected to be posted to shareholders shortly and will be available to the public at the registered office of the company at 8 Angel Court, London, EC2R 7HP.