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Neptune Calculus VCT (NEP)

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Thursday 10 March, 2011

Neptune Calculus VCT

Final Results

RNS Number : 7435C
Neptune-Calculus Income &Growth VCT
10 March 2011
 



Neptune-Calculus Income and Growth VCT plc

Final results for the year ended 31 December 2010

 

Financial highlights


 


Year ended

 

 


31 December

Ordinary Shares

 


2010

Return per share

 

 

(6.7)p

Net asset value per share

 

 

68.5p

Cumulative dividends paid

 

 

12.0p

Recommended final dividend  

 

 

2.0p

 

 


As at

 

 


28 February

 

 


2011*

Unaudited net asset value per share

 

 

67.8p

 

*Being the latest practicable date prior to publication.

♦ Including current year revenue.

 

 

 

CHAIRMAN'S STATEMENT

I present your Company's results for the year ended 31 December 2010.  Net assets per Ordinary Share as at 31 December 2010 were 68.5p compared with 78.1p as at 31 December 2009.  Whilst the fall over the year is disappointing, we paid dividends amounting to a total of 3 pence during the year and there was a modest recovery in net assets during the final quarter of 2010. 

 

A summary is provided below of the various factors influencing the change in net assets per Ordinary Share over the year:

Net assets per Ordinary Share as at 31 December 2009

78.1p

Payment of 2009 final and 2010 interim dividends

(3.0)p

Gain on sale of Mount Engineering plc

1.1p

Movement in Infrastrata plc

(1.2)p

Movement in other AIM investments

(2.6)p

Movement in Heritage House Media investment 

(5.9)p

Movement in Neptune funds

1.5p

Net income for the period

0.5p

Net assets per Ordinary Share as at 31 December 2010

68.5p

 

Investment performance (Qualifying Investments)

Our qualifying investments are managed by Calculus Capital Limited and are in a combination of AIM and unquoted companies.  The only new qualifying investment made during the year was in February when £126,000 was invested in Heritage House Media as part of a £600,000 fundraising.   

The overall value of the quoted portfolio, which is composed entirely of AIM companies, has declined by 22.0 per cent over the last twelve months on a like for like basis, and this compares with an increase in the FTSE AIM All-Share Index of 42.7 per cent over the same period.  However, much of the rise in AIM was driven by resource companies whose businesses are mainly or exclusively outside the UK and, in general, are not VCT qualifying.  

 

Whilst performance on an individual basis across the quoted portfolio has been disappointing, reflecting the tough trading conditions for UK companies during 2010, we successfully exited Mount Engineering in November when the company was taken over by US based Cooper Industries.  The largest decline over the year was in Infrastrata, which has to date struggled to raise the £456m project finance required for its flagship gas storage project in Portland, Dorset.  The company is now adopting a step by step approach to financing the project, and during October, eCORP International, an independent US energy company, acquired 50 per cent of the Portland project in return for providing the next £22.9 million of project funding. 

 

The fundamentals of EpiStem Holdings remain strong and the company has indicated that it expects further growth in 2011.  Trading on AIM in the company's shares is relatively light and sustained selling by some smaller shareholders led to a slight fall in the share price over the third quarter of 2010, but then recovered to reach 380 pence at the year end.

 

The unquoted portfolio has declined in value by 14.7 per cent on a like for like basis.  The greatest element of this decline was Heritage House Media which has been written down in light of ongoing performance issues.  In September a new Chief Executive was appointed to help transform the business, and this formed part of a series of measures to help improve performance following the Company's £126,000 investment in February as part of a £600,000 fundraising.  Although trading conditions have been difficult throughout the year, the company is now more focused following the recent changes in its management team and the disposal of its souvenir business in November.  The Chief Executive's intention is to build the business around the well-known Hudson's brand and place a much greater emphasis in the future on web based and digital offerings.  In January 2011, a further £300,000 was invested in Heritage House Media to support this turnaround strategy, of which £63,000 was invested by the Company.

 

Encouragingly, the rest of the unquoted portfolio as a whole has held its value over the past twelve months, and furthermore, the unquoted companies in which your Company has invested also created a net 214 jobs during 2010.  Whilst RMS Group Holdings, Terrain Energy and Waterfall Services have performed well over the year and increased in value, there has been a decrease in the value of Triage Holdings.  RMS Group Holdings successfully completed a refinancing during August and repaid half of the £400,000 mezzanine financing provided to it by the investment syndicate. 

 

A more detailed analysis of investment performance and can be found in the respective Investment Managers' Reviews that follow this statement. 

 

Investment performance (Non-Qualifying Investments)

As indicated in last year's Report and Accounts, the appointment of Neptune Investment Management as non-qualifying investment manager was terminated as at 31 December 2010. Our non-qualifying investments now only comprise holdings in the Neptune Income Fund, the Neptune Quarterly Income Fund and liquidity funds.  Both Neptune Funds are biased towards large cap stocks and our investments rose by 7.9 and 7.1 per cent respectively over the period, compared to a rise of 9.0 per cent in the FTSE 100 index.  The materials and industrials sectors performed strongly over the period, and the funds benefited from being underweight in the healthcare sector.

 

Share Buyback

The Board has been considering the most effective way of returning cash to shareholders and one way of returning cash is to carry out a share buyback.  In December, for the first time in its history, the Company purchased for cancellation 100,000 Ordinary Shares of 10p at a price of 62 pence per share.  The total nominal value of the shares repurchased was £10,000, representing 0.8 per cent of the issued share capital.  To give greater flexibility to enable cash to be returned, a resolution is being put to shareholders at the annual general meeting to increase the Company's powers to buy back shares from 10 per cent to 14.99 per cent.

 

Special Interim Dividend for 2011

Another method of returning cash to shareholders is through payment of tax-free dividends.  During the second half of the year, the Company received cash from the takeover of Mount Engineering and the redemption of half of the RMS Group Holdings' mezzanine financing.  Consequently, to manage cash balances to ensure continued compliance with the 70 per cent qualifying holdings test, the Board intends to pay a special interim dividend of 1.5 pence per Ordinary Share on 31 March 2011 to shareholders on the register on 18 March 2011.

 

Final Dividend for 2010

Additionally, in line with our policy of maximising tax-free dividends to shareholders, the Directors are also pleased to propose a final dividend for 2010 of 2 pence per Ordinary Share which, subject to shareholder approval, will be payable on 3 June 2011 to all shareholders.  The record date for the dividend is 6 May 2011.

 

Outlook

Although the UK economy grew overall in 2010, growth slowed during the second half of the year as the economy was hampered by the severe weather in December.  The outlook for 2011 is uncertain, as it remains to be seen if the economy is strong enough to withstand the forthcoming public spending cuts coupled with inflationary pressures.  However, we believe that the current portfolio is sensibly diversified and has reasonable upside potential once the economy strengthens.   

 

Philip Stephens

Chairman

10 March 2011

 

INVESTMENT MANAGER'S REVIEW (QUALIFYING INVESTMENTS)

Calculus Capital advises the Company in respect of qualifying investments made by the Company.  The investment focus of the Investment Manager has been to seek out established companies, most of which are cash positive, in preference to early stage companies.

Market commentary

The FTSE AIM All-Share index increased by 42.7 per cent during 2010, significantly outperforming the FTSE 100, which only rose by 9.0 per cent over the same period.  However, this recovery has not been mirrored by the underlying performance of the UK economy, and this apparent disconnect means that the reality for most UK focused companies is that conditions remain tough. 

Portfolio developments

At the year end, the portfolio of qualifying investments comprised 14 companies, made up of both AIM quoted and unquoted stocks.  The overall qualifying percentage (calculated on an HM Revenue & Customs basis) at the end of December 2010 was 76.0 per cent. 

 

The quoted portfolio, which consists entirely of AIM companies, has shown an overall fall in value of the year of 21.4 per cent on a like for like basis.  At 31 December 2010, it was valued at £1,618,862 compared with £2,061,043 as at 31 December 2009.  This fall is largely down to the disappointing performance of Infrastrata during the year, which has to date struggled to raise the £456 million project finance required for its flagship gas storage project in Portland, Dorset.   

 

During the year the Company made no new quoted investments, and the holdings in Sport Media Group and Mount Engineering were sold in March and November respectively.  The holding in Sport Media Group was sold as it was felt there was little prospect of an uplift in value, and further details regarding the successful exit of Mount Engineering are given below.  Hexagon Human Capital, which was engaged in a 'buy and build' strategy in the executive recruitment sector, entered administration in March after struggling under the weight of its borrowings and the difficult trading conditions during 2009.

 

The Company successfully exited Mount Engineering in November 2010, when the company was taken over by US based Cooper Industries following a short takeover battle with Wakefield based Redhall Group.  On 1 October 2010 Cooper made an all cash offer for Mount of 82 pence per share, which compares favourably to our original cost of investment of 70 pence per share.  Cooper's offer surpassed an earlier offer from Redhall Group of 70 pence per share, and valued Mount at approximately £19.2 million.  The offer from Cooper was declared unconditional in late October 2010, and represents a premium of approximately 46 per cent on the average closing price of Mount Engineering's shares for the six-month period immediately prior to the announcement of the Redhall offer.

 

EpiStem's share price has recovered in recent months, and the fundamentals of the company remain strong.  Trading in the company's shares on AIM is relatively light and sustained selling by some smaller shareholders depressed the share price over the summer months.  In October, the company announced that sales in all of its business divisions had made strong progress over the previous twelve months, and it reported a growth in year on year after tax profits.  In November 2010, Epistem was reappointed as a subcontractor to the U.S. National Institute of Health's Biodefence programme.

 

As mentioned above, Infrastrata has to date struggled to raise the project finance required for the Portland gas storage project, and its share price has reflected these struggles.  The share price has also been adversely affected by sustained selling from one institutional shareholder.  The Portland project is the company's proposed £456m gas storage facility in Dorset, and once operational, it will be the largest onshore gas storage facility in the UK.  On 1 October 2010, eCORP International, an independent US energy company, acquired 50 per cent of the Portland project in return for providing the next £22.9 million of funding for the project.  The European Investment Bank, which supports energy diversification and security at EU level, currently has the project under appraisal.

 

The unquoted portfolio has shown an overall fall in value of the year of 14.7 per cent on a like for like basis, primarily due to Heritage House Media, which is discussed further below.  At 31 December 2010, it was valued at £3,009,533 compared with £3,728,744 as at 31 December 2009. 

 

There have been several changes at Heritage House Media during the last year.  A new Chief Executive, who previously worked for the media firm Emap, was appointed in September, and the souvenirs side of the business, which took up a disproportionate amount of management time, was sold to a competitor in November.  Trading continues to be tough and we have reduced the fair value of the investment, although the development of Hudson's Dream Weddings has been a success.  Having already streamlined and replaced several members of the management team, the Chief Executive's intention is to build the business around the well-known Hudson's brand and place a much greater emphasis in the future on web based and digital offerings.  In addition, although several key staff are being retained in a smaller office in Norwich, the business is also relocating to a more appropriate location in Peterborough.  Following these changes, we remain optimistic about its prospects for the future. 

 

Several of the other unquoted companies are making good progress and if Heritage House Media is considered separately, the unquoted portfolio overall has held its value over the year.  The only new investment made during the year was a follow-on investment of £126,000 in Heritage House Media in February, and we disposed of Cubo Communications (formerly Cagney) in October when the company carried out a share buyback.  The section on unquoted portfolio companies on pages 10 and 11 of the Report and Accounts contains further information on the larger unquoted investments within the qualifying portfolio.

 

Terrain Energy raised a further £750,000 from other investors in July 2010, which will be used to increase production by maximising the potential of the existing portfolio and through the acquisition of further licence interests.  Of the four existing licences, Keddington is currently producing oil and the ongoing evaluation of this field is expected to lead to increased field production and revenues during 2011 with the drilling of additional wells.  The use of gas at Keddington for electricity generation and export to the grid is also under evaluation, and further development of the rest of the portfolio is also planned for the forthcoming year.  

 

During August 2010, RMS Group Holdings redeemed half of the mezzanine financing provided to it by the investment syndicate following a refinancing, and £200,000 of loan notes remain outstanding following this repayment.  Trading has been more buoyant than in 2009 with an increase in volumes, and the company is ahead of budget for the year.  Progress has also been made on the long running rates dispute between UK port operators and the Valuation Office Agency.  Although £2 million of backdated rates are to be cancelled, approximately £700,000 (for the period from September 2008 to March 2010) remains under dispute, and we have conservatively allowed for this in our valuation of the holding.  We have however increased our valuation to reflect the more buoyant market conditions and the reduction in the potential rates liability. 

 

Triage Holdings has had a mixed twelve months.  Following a disappointing 2009, the Finance Director replaced the Managing Director at the start of 2010, and this move had a positive effect on the business with new revenues of £1.3 million won during the year.  This however was tempered by the loss of a contract worth £750,000 towards the end of year when a customer decided to in-source its repairs following a bad experience with another repairer.  However, costs have been well managed over the past year and, as lead generation has improved, a modest increase in trade is forecast for 2011.

 

Waterfall Services has won additional contracts across all of its various trading divisions during the year, and following a £35 million contract win with Jewish Care in late 2009, has formed a specialist kosher division targeting the Jewish market.  The senior management team has also been strengthened during the year with two additional appointments to manage the growth of the business.  Although the severe weather around Christmas adversely affected the December results, sales in excess of £43 million are forecast for the 2010/11 financial year, and we have increased our valuation accordingly to reflect this continued strong performance.  

Developments since the year end

Since the year end, the Company has invested a further £63,000 into Heritage House Media as part of a £300,000 fundraising to support the new Chief Executive's turnaround plans referred to above. 

Outlook

Whilst the UK economic outlook for 2011 remains uncertain, the profitable exit of Mount Engineering in November 2010 demonstrates that there are companies on AIM currently undervalued by the market as a whole.  We believe that the current portfolio, featuring both quoted and unquoted companies, is well diversified and has reasonable upside potential once the economy begins to strengthen.   

 

John Glencross

Calculus Capital Limited

10 March 2011

 

INVESTMENT MANAGER'S REVIEW (NON-QUALIFYING INVESTMENTS)

The Neptune-Calculus Income and Growth VCT invests in the Neptune Income Fund and the Neptune Quarterly Income Fund. 

As a guide to the portfolio's performance, the Neptune Income Fund and Neptune Quarterly Income Fund posted returns of 13.60 per cent and 13.15 per cent respectively for the twelve months under review.*

 

Market commentary

The UK market was strong in 2010, with the shape of the recovery becoming clearer and the risk of a double dip in developed markets reducing. In the first quarter of the year, the market continued its recovery rally, which was led by traditionally cyclical stocks such as materials and industrials. In the second quarter, the market fell 12 per cent as fears grew over sovereign debt levels in Europe, mixed economic data coming out of the US and lower forecast growth for China.

 

We also saw the start of austerity measures, including the removal of the first-time homebuyer tax credit in the US and higher taxes announced, such as the VAT increase in the UK. The market applauded the severity of the UK emergency budget as it halted fears regarding sterling and UK debt. The third and final quarter of 2010 saw the market rebound as a resolution on Greek and Irish debt was reached and investors began to discount a steady recovery in the developed markets and strong growth in emerging markets. 

Portfolio developments

The strong performance of the materials sector was driven by a quick recovery in demand. One of the themes of 2010 was the continued high level of growth in the emerging markets, particularly China, and the resulting demand. The sector was also helped by the weaker US dollar, which fell as quantitative easing caused bond yields to drop. Our materials weighting significantly contributed to the performance of both funds. In particular, our materials sector analysts highlighted strong fundamentals in copper at the start of the year and our subsequent purchase of Antofagasta delivered excellent performance. 

 

The funds were overweight in the industrials sector where our holdings were the best performing stocks in both portfolios in 2010. We also had good individual stock performance in the utilities sector, particularly from International Power which returned 47 per cent.** The company was taken over by GDF Suez, but was structured so that a new company was formed with International Power's assets combined with a similar number of assets from GDF Suez's international business. We have maintained our holdings in the company as the new, larger entity has even greater potential for growth. 

 

We benefited from an underweight in healthcare due to concerns over reduced healthcare budgets globally and the weak dollar. We also remained underweight in the financials sector due to ongoing concerns regarding new banking regulation and the level of return on equity.  With regard to banks, our primary focus was on HSBC and Standard Chartered which look best placed to weather the changes in the banking industry.

 

In the energy sector, BP's disaster was a significant shock to the UK market, with its share price falling 48 per cent in the second quarter and its dividend being subsequently suspended. We sold our holding in BP during the second quarter. Dividend growth in the UK market returned in the second quarter of 2010, following 18 months of dividend cuts. However, the net effect of BP's suspension was a 5 per cent decline in dividends compared to 2009.

Outlook

Looking to 2011, the UK equity income sector looks particularly attractive, with good yields and high forecasted dividend growth. Our outlook is for a steady global recovery helped by strong growth in emerging markets, hence our overweight in international growth companies.  We believe that dividends will form an important component of total return in 2011 and hence we will continue to ensure that every stock in the funds contributes to income. 

 

Robin Geffen

Neptune Investment Management Limited

 

*Source: Lipper, A Accumulation share class performance, IMA UK Equity Income sector, no initial charges, net income reinvested to 31.12.10. The performance of other share classes may differ. Past performance is not a guide for future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the original amount invested. References to specific securities are for illustrative purposes only and should not be regarded as recommendations to buy or sell these securities.

 

**Source: Bloomberg, as at 31.12.10

 

This review has been prepared for Neptune-Calculus Income and Growth VCT only and should not be relied upon by parties seeking to make their own investments.  This review may contain analysts' personal recommendations and as such this review is deemed to be impartial research.  We do not undertake to advise anyone other than Neptune-Calculus Income and Growth VCT as to any change of our views.  Neptune Investment Management Limited is authorised and regulated by the Financial Services Authority.

 

INVESTMENT PORTFOLIO

The ten largest holdings by value are included below:

 

As at 31 December 2010

Percentage

 

Cost

Valuation

of portfolio

 

£

£

%

AIM investments (quoted equity)

EpiStem Holdings plc*

251,261

778,328

9.8

Other AIM investments*

2,397,216

840,534

10.5

Unquoted equity investments




RMS Group Holdings Limited

92,339

413,540

5.2

Triage Holdings Limited*

50,589

35,962

0.5

Waterfall Services Limited

50,129

486,811

6.1

Terrain Energy Limited

410,000

459,200

5.8

Heritage House Media Limited

147,369

-

-

Unquoted preference shares




Triage Holdings Limited preference shares ‡

357,720

425,000

5.3

Waterfall Services Limited preference shares

116,667

116,667

1.5

Unquoted bonds




Heritage House Media Limited loan stockƗ

1,148,599

419,740

5.3

RMS Group Holdings Limited loan stock

200,000

200,000

2.5

Waterfall Services Limited loan stock

333,333

333,333

4.2

Triage Holdings Limited loan stock

74,280

74,280

0.9

Croma Group plc loan stock

45,000

45,000

0.6

Non-qualifying equity investments and loan stockƗ*

(318,309)

(76,182)

(1.0)

Total qualifying investments

5,356,193

4,552,213

57.2

Quoted funds

Neptune Quarterly Income Fund Income Units

1,249,318

1,269,873

15.9

The Neptune Income Fund Income A Class

1,260,819

1,303,303

16.3

Unquoted funds




Fidelity Sterling Fund distributing shares class A

445,205

445,205

5.6

SWIP Global Liquidity Fund

317,000

317,000

4.0

GS Sterling Liquid Reserves

376

376

-

Non-qualifying equity investments and loan stockƗ*

318,309

76,182

1.0

Total non-qualifying investments

3,591,027

3,411,939

42.8

Total investments

8,947,220

7,964,152

100.0

 

Ɨ The valuation of Heritage House Media Limited loan stock includes rolled up interest which is non-qualifying.  This cost £309,118 and is valued at £nil.

 

The valuation of Triage Holdings Limited preference shares includes a redemption premium which is non-qualifying.  This cost £nil and is valued at £67,280.

 

* The valuations of certain investments include small purchases made which are non-qualifying investments.  These cost £9,191 and are valued at £8,902.

 

UNQUOTED PORTFOLIO COMPANIES

In aggregate, the following unquoted investments are included in the ten largest holdings by value within the investment portfolio at the balance sheet date.  Further details of these companies (based on the latest published accounts) are provided below:

Heritage House Media Limited

Publishing and Media Services

Heritage House Media is based in East Anglia, and provides publishing and media services to the heritage, UK visitor attraction and disability markets.  It is the largest supplier of guidebooks and promotional material to UK stately homes and is the publisher of Hudson's Historic Houses & Gardens and Hudson's Dream Weddings.   

As a small company, Heritage House Media is exempt from filing full accounts.

Latest audited results:

£'000

£'000

Investment information:

£'000

Year ended 30 September

2009

2008

Total cost

1,296

Net liabilities

(1,429)

(64)

Income recognised in year

80

Valuation basis: Sales Multiple

Equity valuation

-



Loan stock valuation

420


Voting rights

14.4 per cent

 

RMS Group Holdings Limited


Operator of Port Facilities

RMS Group Holdings is a Humberside based port operator, and provides customers with shipping, stevedoring and storage warehousing.  The group also has a national logistics division.

Latest audited results (group):

£'000

£'000

Investment information:

£'000

Year ended 31 December

2009

2008

Total cost

500

Turnover

24,000

31,398

Income recognised in year

40

Pre-tax profit/(loss)

710

(2)

Equity valuation

414

Net Assets

5,426

5,159

Loan stock valuation

200

Valuation basis: Earnings Multiple

Voting rights

4.7 per cent


 

Waterfall Services Limited


Catering and Support Services

Waterfall Services provides catering and support services to the aged care, welfare and education markets.  In 2008, the company acquired Taylor Shaw, an independent caterer with a strong foothold in the education market, and in 2009 established a specialist kosher division to cater for the Jewish aged care market.  The group now employs over 2,200 people.

Latest audited results (group):

£'000

£'000

Investment information:

£'000

Year ended 31 March

2010

2009

Total cost

500

Turnover

36,333

28,415

Income recognised in year

38

Pre-tax profit

853

441

Equity valuation

487

Net Assets

1,594

1,099

Preference shares valuation

117



Loan stock valuation

333

Valuation basis: Earnings Multiple

Voting rights

9.2 per cent

 

Triage Holdings Limited


IT Repairs

Triage Holdings provides IT repair and refurbishment services and auto identification solutions to customers.  The group has headquarters in Stevenage, but operates repair centres in several other locations across the UK.  In May 2010 Triage achieved the prestigious Gold Supplier Standard status in Fujitsu's UK Supplier Management programme. 

Latest audited results (group):

£'000

£'000

Investment information:

£'000

Year ended 31 December

2009

2008

Total cost

483

Turnover

9,656

12,394

Income recognised in year

39

Pre-tax (loss)/profit

(209)

565

Equity valuation

36

Net Assets

536

863

Preference shares valuation

425



Loan stock valuation

74

Valuation basis: Earnings Multiple

Voting rights

8.2 per cent




 

Terrain Energy Limited

Oil and Gas Production

Terrain Energy was established by Calculus Capital Limited in 2009 to develop a portfolio of onshore oil and gas producing assets in the UK.  In October 2009, Terrain Energy signed an agreement to acquire its first interests, which comprise a balanced portfolio of exploration, development and production interests from Egdon Resources plc for an initial consideration of £450,000 with a further £237,500 based on achieving agreed milestones. 

In a further fundraising in July 2010, Terrain Energy raised an additional £750,000 from other investors.  The intention is for the funds to be used for further development of the existing portfolio and for the acquisition of additional licence interests.

The existing interests are all located in the East Midlands and comprise a 15 per cent share in Petroleum Exploration Development Licence 005 (Keddington and North Somercotes) and 25 per cent interests in PEDL203 (Kirklington), PEDL118 (Eakring-Dukes Wood) and PEDL206 (Kelham Hills and Caunton).  Oil is produced currently from the Keddington field and the ongoing evaluation of this field is expected to lead to increased field production and revenues during 2011 with the drilling of additional wells.  Keddington also produces large volumes of gas and the use of gas for electricity generation and export to the grid is under evaluation.  Further development of the rest of the existing portfolio is also planned for 2011.

As a relatively new company, Terrain Energy has not yet filed statutory accounts.

Latest audited results:


Investment information:

£'000

No statutory accounts have been filed

Total cost

410


Income recognised in year

-


Equity valuation

459

Valuation basis:   Discounted Cashflow

Voting rights

19.4 per cent



Other funds managed by Calculus Capital Limited have invested in this company and have combined voting rights of 12.5 per cent.

 

Management of risk

The Company is exposed to a variety of risks and the principal risks identified by the Board are noted below.

The Company is required at all times to observe the conditions within the Income Tax Act 2007 for the maintenance of approved VCT status.  This involves compliance with a number of tests which, if not met, could result in the loss of a number of tax reliefs which are currently available to both the Company and its shareholders under its VCT status.  The tests are under continual review by Calculus Capital Limited, the administrator and (qualifying) investment manager of the Company.  The Board keeps these matters under continual review through the provision of monthly management information and quarterly Board meetings.  The Board has also retained the services of a VCT consultant to undertake an independent monitoring role.

The majority of the Company's investments will ultimately be in small and medium size companies as these meet the VCT qualifying holdings rules.  These companies may not be publicly traded or freely marketable and realisations of such investments can be difficult and can take a considerable amount of time.  They also, by their nature, tend to carry higher risk than a larger or longer established business.  This risk is in part mitigated by diversifying the investments and maintaining around 25 per cent of the Company's portfolio in liquid assets to enable any short term cash requirements to be met.

In addition, the Company is subject to other price risk constituting uncertainty about the future prices of financial instruments held by the Company.  The Company has also invested in loan stocks and as a result is subject to credit risk.  The majority of the loan stocks are fixed rate so the Board does not consider interest rate risk to be material.  The Company has no exposure to foreign currency risk, nor does it have any interest bearing liabilities.  Further comment is provided on the financial risks of the Company in note 19 to the accounts.

The Board regularly reviews the risks the business faces and their potential impact on the Company.  The Board monitors the Company's performance through the use of regular financial information and administrator and management reports.

 

Dividend

An interim dividend of 1.0 pence per Ordinary Share was paid during the year.  As the proposed final dividend of 2.0 pence per Ordinary Share has to be approved at the Annual General Meeting, it will be paid, subject to approval, to shareholders on 3 June 2011.  The record date for the dividend will be 6 May 2011.  In addition, on 31 March 2011, a special interim dividend of 1.5 pence per Ordinary Share will be paid to shareholders on the register at 18 March 2011.  

 

DIRECTORS' RESPONSIBILITIES STATEMENT

The Directors are responsible for preparing the Directors' Report and the accounts in accordance with applicable law and regulations.

Company law requires the Directors to prepare accounts for each financial year. Under that law the Directors have to prepare the accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws). The Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company for that period. In preparing these accounts, the directors are required to:

•     select suitable accounting policies and then apply them consistently;

•     make judgments and 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 accounts;

•     prepare the accounts on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the accounts comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The accounts are published on the www.calculuscapital.com website, which is a website maintained by the Company's Investment Manager, Calculus Capital Limited.  The maintenance and integrity of the website maintained by Calculus Capital Limited is, so far as it relates to the Company, the responsibility of Calculus Capital Limited.  The work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and accordingly, the auditors accept no responsibility for any changes that have occurred to the accounts since they were initially presented on the website.  Visitors to the website need to be aware that legislation in the United Kingdom covering the preparation and dissemination of the accounts may differ from legislation in their own jurisdiction.

We confirm that to the best of our knowledge:

•     the accounts, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and loss of the Company; and

•     the Directors' Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces.

 

On behalf of the Board

 

Philip Stephens

Chairman

10 March 2011

 

INCOME STATEMENT

for the year ended 31 December 2010

 

 

 

Year ended

 

Year ended

 

 

31 December 2010

31 December 2009

 

 

Revenue

Capital

Total

Revenue

Capital

Total

 

Note

£'000

£'000

£'000

£'000

£'000

£'000

 (Losses)/gains on investments at fair value

8

-

(897)

(897)

-

191

191

Investment income

2

357

-

357

417

-

417

Investment management fee

3

(34)

(102)

(136)

(48)

(145)

(193)

VAT recovered

3

-

-

-

4

11

15

Other expenses

4

(158)

-

(158)

(157)

-

(157)

Return/(deficit) on ordinary activities before finance charges and taxation


165

(999)

(834)

216

57

273

Finance charges


-

-

-

(50)

(235)

(285)

Taxation on ordinary activities

5

-

-

-

(15)

12

(3)

Return/(deficit) attributable to Ordinary shareholders


165

(999)

(834)

151

(166)

(15)

Return per Ordinary Share

7

1.33p

(8.06)p

(6.73)p

1.56p

(1.71)p

(0.15)p

The total column is the profit and loss account of the Company.  The revenue and capital columns are provided as supplementary information in accordance with the AIC SORP.

All items in the above statement derive from continuing operations.  No operations were acquired or discontinued in the year.

There is no statement of recognised gains and losses as there were no other gains and losses.

 The relevant accompanying notes are an integral part of this statement.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

 

for the year ended 31 December 2010








Capital





Share

Share

Special

redemption

Capital

Revenue



capital

premium

reserve

reserve

reserve

reserve

Total


£'000

£'000

£'000

£'000

£'000

£'000

£'000









For the year 1 January 2010

to 31 December 2010




1 January 2010

1,240

631

10,271

-

(2,654)

202

9,690

Cancellation of own shares

(10)

-

(62)

10

-

-

(62)

Net (deficit)/return after taxation for the year

-

-

-

-

(999)

165

(834)

Dividends paid

-

-

(170)

-

-

(202)

(372)

31 December 2010

1,230

631

10,039

10

(3,653)

165

8,422









For the year 1 January 2009

to 31 December 2009




1 January 2009

410

281

3,187

-

(759)

77

3,196

C Share conversion

830

350

7,097

-

(1,729)

209

6,757

Net (deficit)/return after taxation for the year

-

-

-

-

(166)

151

(15)

Dividends paid

-

-

(13)

-

-

(235)

(248)

31 December 2009

1,240

631

10,271

-

(2,654)

202

9,690

The relevant accompanying notes are an integral part of this statement.

 

BALANCE SHEET

as at 31 December 2010

 

 

31 December

31 December

 

 

2010

2009

 

Note

£'000

£'000

Fixed Assets

Investments at fair value through profit or loss

8

7,964

9,602

Current Assets

Debtors

10

73

33

Cash at bank

 

509

170

 

 

582

203

Creditors: Amounts falling due within one year

Creditors

11

(124)

(115)

Net Current Assets

 

458

88

Net Assets

 

8,422

9,690

 

Represented by:

CALLED UP SHARE CAPITAL AND RESERVES

Share capital

12

1,230

1,240

Share premium

13

631

631

Special reserve

13

10,039

10,271

Capital redemption reserve

13

10

-

Capital reserve - other

13

(2,670)

(337)

Capital reserve - investment holding loss

13

(983)

(2,317)

Revenue reserve

13

165

202

Total Ordinary shareholders' funds


8,422

9,690

Net asset value per Ordinary Share

14

68.47p

78.14p

The relevant accompanying notes are an integral part of this statement.

CASH FLOW STATEMENT

for the year ended 31 December 2010




 


Year ended

Year ended

 


31 December

31 December

 


2010

2009

 

Note

£'000

£'000

Operating activities




Investment income received

 

238

265

Deposit income received

 

-

1

Other income received

 

-

1

Investment management fees paid

 

(189)

(201)

Administration fees paid

 

(28)

(40)

Other cash payments

 

(133)

(139)

Net cash outflow from operating activities

15

(112)

(113)

Investing activities

 



Purchase of investments

 

(129)

(531)

Sale of investments

 

952

500

Net cash inflow/(outflow) from investing activities

 

823

(31)

Equity dividends paid

 

(372)

(248)

Financing

 



Net proceeds from C Share issue

 

-

6

Net proceeds from Ordinary Share issue

 

-

7

Net cash inflow from financing


-

13

Increase/(decrease) in cash

16

339

(379)

The relevant accompanying notes are an integral part of this statement.

NOTES TO THE ACCOUNTS

1          Accounting Policies

Basis of accounting

The accounts have been prepared under the historical cost convention, except for the valuation of investments at fair value, and in accordance with applicable UK accounting standards.  The Directors have prepared the accounts on a basis compliant with the recommendations of theStatement of Recommended Practice January 2003, revised January 2009 ("the SORP") for Investment Trust Companies and Venture Capital Trusts produced by the Association of Investment Companies ("AIC"). 

 

Investments

As the Company's business is investing in investments with a view to profiting from their total return in the form of increases in fair value, investments are designated as fair value through profit or loss on initial recognition in accordance with FRS 26.  Fair value is the amount for which an asset can be exchanged between knowledgeable, willing parties in an arm's length transaction.  The Company manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy, and information about the investments is provided on this basis to the Board of Directors.

Investments held at fair value through profit or loss are initially recognised at fair value, being the consideration given and excluding transaction or other dealing costs associated with the investment, which are expensed and included in the capital column of the Income Statement.

After initial recognition, investments, which are classified as fair value through profit or loss, are measured at fair value.  Gains or losses on investments classified as fair value through profit or loss are recognised in the capital column of the Income Statement, and allocated to the capital reserve - other, and capital reserve - investment holding loss as appropriate.

Aggregate transaction and dealing costs included in disposals and additions are disclosed in note 8 to the accounts, as recommended by the SORP.  All purchases and sales of investments are accounted for on the trade date basis.

 

For quoted investments, fair value is established by reference to bid, or last, market prices depending on the convention of the exchange on which the investment is quoted.

Unquoted investments are valued using an appropriate valuation technique so as to establish what the transaction price would have been at the balance sheet date.  Such investments are valued in accordance with the International Private Equity and Venture Capital Association (''IPEVCA'') guidelines.  Primary indicators of fair value are derived from earnings multiples, recent arm's length market transactions, from net assets, or where appropriate, at cost for recent investments or the valuation as at the previous reporting date.

Those venture capital investments that may be termed associated undertakings are not equity accounted for and are carried at fair value as determined by the Directors in accordance with the Company's accounting policy, as required by FRS 9 "Associates and Joint Ventures", where venture capital entities hold investments as part of an investment portfolio.

Income

Dividends receivable on equity shares and on unquoted funds are recognised as income on the date on which the shares or units are marked as ex-dividend.  Where no ex-dividend date is available, the income is recognised when the Company's right to receive it has been established.

Interest receivable from fixed income securities is recognised using the effective interest rate method.

Interest receivable on bank deposits is included in the accounts on an accruals basis.

Other income is credited to the revenue column of the Income Statement when the Company's right to receive the income is established.

Expenses

All expenses are accounted for on an accruals basis.  Expenses are charged through revenue in the Income Statement except as follows:

•       expenses which are incidental to the acquisition or disposal of an investment are taken to the capital column of the Income Statement;

•       expenses are charged to the capital column in the Income Statement where a connection with the maintenance or enhancement of the value of the investments can be demonstrated.  In this respect management fees have been allocated 75 per cent to the capital column and 25 per cent to the revenue column in the Income Statement, being in line with the Board's expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio of the Company;

•       expenses associated with the issue of shares are deducted from the Share premium account.

Capital reserve

Capital reserve - other

The following are accounted for in this reserve:

•       gains and losses on disposal of investments; and

•       expenses, together with the related tax effect, charged to the capital column of the Income Statement in accordance with the above policies.

Capital reserve - investment holding loss

The following are accounted for in this reserve:

       movements in the fair value of investments held at the year end.

Taxation

Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future have occurred at the balance sheet date.  This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversals of the underlying timing differences can be deducted.  Timing differences are differences between the Company's taxable profits and its results as stated in the accounts.

Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date.  Deferred tax is measured on a non-discounted basis.

No taxation liability arises on gains from sales of fixed asset investments by the Company by virtue of its venture capital trust status.  However, the net revenue (excluding UK dividend income) accruing to the Company is liable to corporation tax at the prevailing rates.

Dividends

Dividends to shareholders are accounted for in the period in which they are paid or approved in general meetings.  Dividends payable to equity shareholders are recognised in the Reconciliation of Movements in Shareholders' Funds when they are paid, or have been approved by shareholders in the case of a final dividend and become a liability of the Company.

Share Buybacks

Where shares are repurchased for cancellation, the consideration paid, including any directly attributable incremental costs, is deducted from distributable reserves.  As required by the Companies Act 2006, the equivalent of the nominal value of shares cancelled is transferred to a capital redemption reserve.

 

2          Income

 

Year ended

Year ended

 

31 December 2010

31 December 2009

 

£'000

£'000

Income from quoted investments

UK dividend income

149

96

Unfranked investment income

2

21

Dividends reinvested

2

9

 

153

126

Income from unquoted investments

UK dividend income

55

43

Unfranked investment income

69

112

Interest reinvested

80

135

 

204

290

Other income

Interest on VAT recovered

-

1


-

1


 

 

Total income

357

417

Total income comprises

Dividends

208

211

Interest

149

206

 

357

417

 

3          Investment management fee


Year ended

31 December 2010

Year ended

31 December 2009



Revenue

Capital

Total

Revenue

Capital

Total


£'000

£'000

£'000

£'000

£'000

£'000

Investment management fee

45

135

180

48

145

193

Claw back of excess expenses

(11)

(33)

(44)

-

-

-

VAT recovered

-

-

-

(4)

(11)

(15)


34

102

136

44

134

178

For the year ended 31 December 2010, the Investment Managers waived £44,407 (2009: £nil) of their fees. At 31 December 2010, there was £20,265 outstanding payable to the Investment Managers (31 December 2009: £72,386).  Details of the terms and conditions of the investment management agreement are set out under "Management" in the Directors' Report.

 

4          Other expenses

 

Year ended

Year ended

 

31 December 2010

31 December 2009

 

£'000

£'000

Fees payable to the Company's auditor for the audit of the Company's individual accounts

17

17

Fees payable to the Company's auditor for other services:

Other services relating to taxation

3

4

Other services

3

5

Directors' remuneration and social security contributions

41

41

Other expenses

94

90

 

158

157

 

5          Taxation on ordinary activities

 

 

Year ended

31 December 2010

Year ended

31 December 2009

 

 

 

Revenue

Capital

Total

Revenue

Capital

Total

 

 

£'000

£'000

£'000

£'000

£'000

£'000

UK Corporation Tax

-

-

-

12

(12)

-

Irrecoverable income tax on unfranked investment income

-

-

-

3

-

3

Total current tax charge/(credit)

-

-

-

15

(12)

3

Return/(deficit) on ordinary activities before taxation:

165

(999)

(834)

216

57

273

Return/(deficit) on ordinary activities multiplied by Corporation Tax at 28% (2009: 28%)

46

(280)

(234)

60

16

76

Effect of:







UK dividends not chargeable to tax

(56)


(56)

(51)

-

(51)

Non-taxable losses/(gains)


251

251

-

(53)

(53)

Disallowable expenses for tax purposes

-

-

-

3

-

3

Excess expenses for the period

10

29

39

-

25

25

Irrecoverable income tax on unfranked investment income

-

-

-

3

-

3

Total current tax charge/(credit)

-

-

-

15

(12)

3

 

At 31 December 2010, the Company had £816,732 (31 December 2009: £675,438) of excess management expenses to carry forward against future taxable profits.

6          Dividends

 

Year ended

31 December 2010

Year ended

31 December 2009



£'000

£'000

Declared and paid:

2009 Final dividend: 2.0p (2008: 1.0p) per Ordinary Share

248

124

2010 Interim dividend: 1.0p (2008: 1.0p) per Ordinary Share

124

124


372

248

Proposed:

 

 

2010 Final dividend: 2.0p (2008: 2.0p) per Ordinary Share

246

248

The Company paid an interim dividend on 18 October 2010 of 1p per Ordinary Share (2009: 1p).   The Directors are proposing a final dividend of 2p per Ordinary Share in respect of the year ended 31 December 2010 (2009: 2p).  Subject to shareholder approval, the dividend will be paid on 3 June 2011 to shareholders on the register on 6 May 2011.

7          Return per share

 

 

Year ended

31 December 2010

 

Year ended

31 December 2009

 

 

 

 

Revenue

Capital

Total

Revenue

  Capital

Total

 

   pence

pence

pence

pence

          pence

pence

Ordinary Share

1.33

(8.06)

(6.73)

1.56

(1.71)

(0.15)

Revenue return per Ordinary Share is based on the net revenue on ordinary activities attributable to the Ordinary Shares of £165,000 (31 December 2009: £151,000) and on 12,396,607 (31 December 2009: 9,694,903) Ordinary Shares, being the weighted average number of Ordinary Shares in issue during the year.

Capital return per Ordinary Share is based on the net capital deficit for the year of £999,000 (31 December 2009: £166,000) and on 12,396,607 (31 December 2009: 9,694,903) Ordinary Shares, being the weighted average number of Ordinary Shares in issue during the year.

Total return per Ordinary Share is based on the total deficit on ordinary activities attributable to the Ordinary Shares of £834,000 (31 December 2009: £15,000) and on 12,396,607 (31 December 2009: 9,694,903) Ordinary Shares, being the weighted average number of Ordinary Shares in issue during the year.

 

8          Investments at fair value through profit or loss

 

31 December 2010

31 December 2009

 

£'000

£'000

AIM investments

1,619

2,344

Quoted funds

2,393

Unquoted and money market investments

3,772

4,865

 

7,964

9,602

 

 

£'000

£'000

Opening book cost

11,919

11,744

Opening investment holding losses

(2,508)

Opening valuation

9,602

9,236

Movements in the year:

Purchases at cost

675

Sales - proceeds

(952)

(500)

    - realised losses on sales

(2,231)

-

Movement in investment holding losses

191

Closing valuation

7,964

9,602

Closing book cost

8,947

11,919

Closing investment holding losses

(2,317)

Closing valuation

7,964

9,602

 

 

£'000

Loss on disposal of investments

(2,231)

-

Movement in investment holding losses

1,334

191

Total gains/(losses) on investments

191

Note 19 to the accounts provides a detailed analysis of investments held at fair value through profit and loss in accordance with Financial Reporting Standard 29 'Financial Instruments: Disclosures'.  

              

During the year, the Company incurred transaction costs of £15 (31 December 2009: £1) on purchases of investments and £121 (31 December 2009:£nil) on sales of investments.  These amounts are included in "Gains/(losses) on investments at fair value" as disclosed in the Income Statement.

 

9          Significant interests

The Company had the following interests of 3 per cent or more in the share capital of its portfolio companies:


Class of shares

   Number held

Proportion

of class  held

Terrain Energy Limited

Ordinary £1

410,000

19.4%

Heritage House Media Limited

Ordinary 1p

147,369

14.4%

Triage Holdings Limited

Ordinary 10p

56,191

8.2%

RMS Group Holdings Limited

Ordinary £1

92,308

4.7%

Waterfall Services Limited

Ordinary £1

27,283

9.2%

 

10        Debtors

 

31 December 2010

31 December 2009

 

£'000

£'000

Accrued income

15

21

Other debtors and prepayments

58

12


73

33

11        Creditors - amounts falling due within one year

 

31 December 2010

31 December 2009

 

£'000

£'000

Accruals and other creditors

62

115

Amount owing on repurchase of own shares

62

-


124

115

 

12         Called up share capital

 

Ordinary Shares





Issued and fully paid:

31 December 2010

31 December 2009

Ordinary Shares of 10p each

Number

£'000

Number

£'000

As at 1 January

12,400,991

1,240

4,100,806

410

C Share conversion

-

-

8,300,185

830

Purchase of own shares

(100,000)

(10)

-

-

As at 31 December

12,300,991

1,230

12,400,991

1,240






 

During the year, the Company purchased for cancellation 100,000 Ordinary Shares of 10p at a price of 62 pence per share.  The consideration of £62,000 was paid in January 2011, and is included in creditors at the year end.  The total nominal value of the shares repurchased was £10,000 representing 0.8 per cent of the issued share capital.

13  Reserves


Share

premium

account

Special

reserve

Capital redemption reserve

Capital

reserve

- other

Capital

reserve

- investment holding

loss

Revenue

reserve




£'000

£'000

£'000

£'000

£'000

£'000

At 1 January 2010

631

10,271

-

(337)

(2,317)

202

Cancellation of own shares

-

(62)

10

-

-

-

Realised losses on sales

-

-

-

(2,231)

-

-

Movement in investment holding losses

-

-

-

-

1,334

-

Investment management fee charged to capital

-

-

-

(102)

-

-

Dividends 

-

(170)

-

-

-

(202)

Retained net revenue for the year

-

-

-

-

-

165

At 31 December 2010

631

10,039

10

(2,670)

(983)

165

 

The Special reserve has been created to (i) create a distributable reserve which can be used by the Company to fund purchases of its own shares; (ii) to enable the Company to offset the effects of any future unrealised losses on future dividends payable in respect of shares; and (iii) since the Company revoked its status as an investment company, for any other purpose..  The Company is therefore able to make distributions out of the aggregate of its Revenue reserve, Special reserve and Capital reserves, excluding any gains arising on the valuation of unquoted investments.

 

14        Net asset value per share


31 December 2010

31 December 2009


pence

pence

Ordinary Shares of 10p each

68.47

78.14

 

The basic net asset value per Ordinary Share is based on net assets (including current period revenue) of £8,422,000 (31 December 2009: £9,690,000) and on 12,300,991 (31 December 2009: 12,400,991) Ordinary Shares, being the number of Ordinary Shares in issue at the end of the year.

 

15        Reconciliation of net (deficit)/return before finance charges and taxation to net cash           

           outflow from operating activities


Year ended
31 December 2010

Year ended
31 December

2009


£'000

£'000

Net (deficit)/return before finance charges and taxation

(834)

273

Net capital deficit/(return)

999

(57)

(Increase)/decrease in debtors

(40)

23

Decrease in creditors

(53)

(71)

Investment management fee charged to capital

(102)

(145)

VAT recovered credited to capital

-

11

Income reinvested

(82)

(144)

Taxation

-

(3)

Net cash outflow from operating activities

(112)

(113)

 

The decrease in creditors shown above does not agree with the movement shown on the Balance Sheet principally because of the effect of the share buyback creditor of £62,000 included in creditors at the year end, which is not an operating activity.

 

16         Reconciliation of net cash flow to movement in net funds

 

Year ended
31 December 2010

Year ended
31 December 2009

 

£'000

£'000

Increase/(decrease) in cash in year

339

(379)

Net funds at beginning of year

170

549

Net funds at end of year

509

170

 

17        Analysis of changes in net funds


At
1 January 2010

Cash flows

At
31 December 2010


£'000

£'000

£'000

Cash at bank

170

339

509

 

18        Financial commitments

At 31 December 2010 and 2009 the Company did not have any financial commitments which had not been accrued.

 

19        Analysis of financial assets and liabilities

The objective of the Company is to generate long term capital growth and tax free dividends for investors.  The investment policy is to invest approximately 75 per cent of the Company's funds in a diversified portfolio of holdings in qualifying investments, whether unquoted or traded on AIM.  Investments are made selectively across a diverse range of sectors in companies which have the potential to generate growth and enhance their value.   The investments in a particular company may be made in loan stocks or preference shares as well as equity shares where it is felt this would enhance shareholder return.  The Company does not invest in start-up or seed capital situations.  In accordance with the Company's risk averse approach, the Investment Manager will only invest when it believes it has identified the right investment opportunity.  The balance of approximately 25 per cent of the Company's funds can be invested in a combination of Neptune income funds, a portfolio of similar income generating UK listed shares and money market instruments.

 

The ten largest holdings by value and the amounts invested in quoted equity, unquoted equity, unquoted bonds, unquoted preference shares, quoted funds and unquoted funds are set out in the Investment Portfolio, on page 9 of the Report and Accounts. 

 

The Company's financial instruments comprise securities, cash balances and debtors and creditors that arise from its operations.

 

The Company has no exposure to foreign currency risk.

 

The principal risks the Company faces in its portfolio management activities are:

-   Other price risk

-   Interest rate risk

-   Liquidity risk

-   Credit risk

 

The Investment Manager's policies for managing these risks are summarised below and have been applied throughout the year.  The Board keeps the risks under continual review through the provision of monthly management information and quarterly board meetings.

 

(i)   Other price risk

Other price risk arises from uncertainty about the future prices of financial instruments held in accordance with the Company's investment objectives.  It represents the potential loss that the Company might suffer through holding market positions in the face of market movements.  This risk is monitored by the Investment Manager on a regular basis and by the Board at meetings with the Investment Manager.

 

The Board reviews each investment purchase in the qualifying portfolio to ensure that any acquisition allows the Company to maintain an appropriate spread of other price risk and that it falls within the VCT qualifying criteria at the time of purchase.  It considers the associated business risks of each investment.  These include, but are not restricted to, the industry sector, management expertise and financial stability of each company

 

The Company does not use derivative instruments to hedge against other price risk.  The maximum potential exposure to other price risk is the value of the investment portfolio as at 31 December 2010 of £7,964,000 (31 December 2009: £9,602,000).   

The Board believes that the Company's assets are mainly exposed to other price risk, as the Company holds most of its assets in the form of investments in VCT qualifying small UK companies whose equity shares are either quoted or valued by reference to the share prices of quoted comparable companies and are thus subject to market movements.  The Board considers that investments in loan stock and/or preference share may also be sensitive to changes in quoted share prices as the value of these financial instruments can be determined with reference to the enterprise value of the investee company which may be based on the value of quoted comparable companies.. 



The table below shows the impact upon profit and net assets if there were to be a 10 per cent (31 December 2009: 10 per cent) movement in overall share prices, and assumes:

 

-    that each of the sub categories of instruments (shares and loan stocks) held by the Company produces an overall movement of 10 per cent, and

-    that the actual portfolio of investments held by the Company is perfectly correlated to this overall movement in share prices.  Shareholders should however note that this level of correlation is highly unlikely in reality.

 

If overall share prices fell/rose by 10 per cent (2009: 10 per cent), with all other variables held constant:

 


31 December 2010

31 December 2009

Return and

net assets

Return and

net assets


£'000

£'000

(Decrease)/increase in return

(796)/796

(960)/960

(Decrease)/increase in net asset value per Ordinary Share

        (6.47)p/6.47p

(7.74)p/7.74p

 

An (decrease)/increase of £796,415 (31 December 2009: £960,242) in the net assets of the Company would have (decreased)/increased investment management fees payable to the Investment Managers for the financial year under review by £27,874 (31 December 2009: £28,989 decrease and £19,204 increase), subject to the 3.5 per cent annual expenses cap. 

 

In addition, an (decrease)/increase of £796,415 (31 December 2009: £960,242) in the net assets of the Company would (decrease)/increase investment management fees payable to the Investment Manager for the forthcoming financial year by £14,335 (31 December 2009: £22,086), subject to the 3.5 per cent annual expenses cap. 

The impact of a change of 10 per cent has been selected, as in current market conditions, an increase/(decrease) in the aggregate values of investments by 10 per cent is reasonably possible based on historic changes that have been observed.

(ii)  Interest rate risk

Interest is earned on cash balances and money market funds and is linked to the banks' variable deposit rates.  The board does not consider interest rate risk to be material.  Interest rate risk arising on loan stock instruments is not considered significant, as the main risks on these investments are credit risk and other price risk.  The Company does not have any interest bearing liabilities. 

As required by Financial Reporting Standard 29 'Financial Instruments: Disclosures' (the Standard) an analysis of financial assets and liabilities, which identifies the risk of the Company's holding of such items is provided.  The Company's financial assets comprise equity and preference shares, loan stock, cash and debtors.  The interest rate profile of the Company's financial assets is given in the table below:

 

As at 31 December 2010

 

As at 31 December 2009

 

 Fair value interest rate risk

 Cash flow interest rate risk

 

 Fair value interest rate risk

 Cash flow interest rate risk

 

 £'000

 £'000

 

 £'000

 £'000

Loan stock

1,072

-


1,795

-

Money market funds

-

763


-

1,137

Cash

-

509


-

170

 

1,072

1,272


1,795

1,307

 

The variable rate is based on the banks' deposit rate, and applies to cash balances held and the money market funds.  The benchmark rate which determines the interest payments received on interest bearing cash balances is the Bank of England base rate which was 0.5 per cent as at 31 December 2010 (31 December 2009: 0.5 per cent).

(iii)  Liquidity risk

The investments the Company holds include AIM quoted securities where the liquidity is generally below that of securities listed/quoted on the main market and unquoted investments where there is no ready market for the securities.  The ability of the Company to realise positions may therefore be restricted when there are no willing purchasers.

The Board, which monitors the Company's overall liquidity risk, seeks to ensure that an appropriate proportion of the Company's investment portfolio is invested in cash and readily realisable securities, which are sufficient to meet any funding commitments that may arise. 

At 31 December 2010, the Company held £3,845,000 (31 December 2009: £3,700,000) in cash and readily realisable securities (including the investments in the Neptune Income and Neptune Quarterly Income Funds) to pay accounts payable and accrued expenses.

 (iv) Credit risk

The failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. The Company manages this risk by ensuring that where an investment is made in an unquoted loan, it is made as part of the overall equity and debt package.  The recoverability of the debt is assessed as part of the overall investment process and is then monitored on an ongoing basis by the Investment Manager who reports to the Board on any recoverability issues.  It also ensures that cash at bank is held only with reputable banks with high quality external credit ratings.  None of the Company's financial assets are secured by collateral or other credit enhancements.  The total exposure to loan stocks is set out above in the interest rate risk section.

All assets of the Company which are traded on a recognised exchange are held by HSBC, the Company's custodian.  The Board regularly monitors the Company's risk by reviewing assessments of the custodian submitted by the Investment Manager.

Fair value hierarchy

Investments held at fair value through profit and loss are valued in accordance with International Private Equity and Venture Capital Association ("IPEVCA") guidelines as follows:

Valuation Methodology

Year ended
31 December 2010

Year ended
31 December 2009

 

£'000

£'000

Quoted market bid price

4,955

5,874

Expected recoverable amount

45

987

Earnings multiple

2,085

2,331

Recent investment price

459

410

Sales multiple

420

-


7,964

9,602

The valuation method used will be the most appropriate valuation methodology for an investment within its market, with regard to the financial health of the investment and the IPEVCA guidelines.  Following a review of the performance of Heritage House Media, the basis of valuation changed between 31 December 2009 and 31 December 2010 from Expected recoverable amount to a Sales multiple. 

As required by Financial Reporting Standard 29 'Financial Instruments: Disclosures' (the Standard) an analysis of financial assets and liabilities, which identifies the risk of the Company's holding of such items is provided. The Standard requires an analysis of investments carried at fair value based on the reliability and significance of the information used to measure their fair value. 

In order to provide further information on the valuation techniques used to measure assets carried at fair value, the measurement bases are categorised into a "fair value hierarchy" as follows:

-           Quoted market prices in active markets - "Level 1"

Inputs to Level 1 fair values are quoted prices in active markets for identical assets.  An active market is one in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis.  The Company's investments in AIM quoted equities, money market funds and the quoted Neptune funds are classified within this category.

-           Valued using models with significant observable market inputs - "Level 2"

Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly.  The Company has no investments classified within this category. 

 -          Valued using models with significant unobservable market inputs - "Level 3"

Inputs to Level 3 fair values are unobservable inputs for the asset.  Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models).  As such, unobservable inputs reflect the assumptions the Company considers that market participants would use in pricing the asset.  The Company's unquoted equities, preference shares and loan stock are classified within this category.  As explained in note 1, unquoted investments are valued in accordance with the IPEVCA guidelines.

Financial assets at fair value through profit or loss

At 31 December 2010

 

Level 1

Level 2

Level 3

Total

 

 £'000

 £'000

 £'000

 £'000

Equity investments

1,619

-

1,396

3,015

Fixed interest investments

-

-

1,072

1,072

Preference share investments

-

-

541

541

Money market funds

763

-

-

763

Quoted funds

2,573

-

-

2,573

 

4,955

-

3,009

7,964

The table below shows movements in the assets measured at fair value based on Level 3 valuation techniques for which any significant input is not based on observable market data.  During the year there were no transfers between levels 1, 2 or 3.

Level 3 financial assets at fair value through profit or loss

At 31 December 2010

 

Equity investments

Preference

share

investments

Fixed interest investments

Total

 

£'000

£'000

 £'000

 £'000

Opening balance at 1 January 2010

1,459

474

1,795

3,728

Purchases

3

-

126

129

Sales

(4)

-

(200)

(204)

Redemption premium/interest reinvested

-

67

80

147

Total net losses recognised in the Income

Statement

(62)

-

(729)

(791)

Closing balance at 31 December 2010

1,396

541

1,072

3,009

 

The Standard requires disclosure, by class of financial instruments, if the effect of changing one or more inputs to reasonably possible alternative assumptions would result in a significant change to the fair value measurement.  The information used in determination of the fair value of Level 3 investments is chosen with reference to the specific underlying circumstances and position of the investee company.  The portfolio has been reviewed and both downside and upside reasonable possible alternative assumptions have been identified and applied to the valuation of each of the unquoted investments.  Applying the downside alternatives the value of the unquoted investment portfolio would be £583,000 (31 December 2009: £272,000) or 19.4 (31 December 2009: 7.3) per cent lower.  Using the upside alternatives the value of the unquoted investment portfolio would be increased by £676,000 (31 December 2009: £240,000) or 22.5 (31 December 2009: 6.5) per cent.  

Financial liabilities

The Company finances its operations through its issued share capital and existing reserves.  The only financial liabilities of the Company are creditors all of which are sterling denominated and are due within one year.   The creditors are disclosed in note 11.  No interest is paid on these liabilities. 

All assets and liabilities are carried at fair value.

 

Capital management policies and procedures

The Company's capital management objectives are to ensure that it will be able to continue as a going concern and to maximise the income and capital return to its Ordinary shareholders.

The Board, with the assistance of the Investment Manager monitors and reviews the broad structure of the Company's capital on an ongoing basis.  This review includes the planned level of gearing, which takes account of the Manager's views on the market; the need for new issues of equity shares; and the extent to which revenue in excess of that which is required to be distributed should be retained.  The capital of the Company is made up of called up share capital and reserves as detailed on the balance sheet on page 29 of the Report and Accounts.

20        Related party transactions

The Company's qualifying investments are managed by Calculus Capital Limited.  Neptune Investment Management Limited served as the Company's non-qualifying investment manager throughout the financial year, although this   appointment was terminated as at 31 December 2010.  John Glencross, a Director of the Company, has an interest in Calculus Capital Limited and is a Director of Terrain Energy Limited.  The amounts paid to the Managers are disclosed in note 3.  Calculus Capital Limited also acts as administrator to the Company and received a fee of £27,150 (31 December 2009: £28,974).

Calculus Capital Limited receives an annual fee from Terrain Energy Limited for the provision of John Glencross as a Director, as well as an annual monitoring fee.  Other funds under the management or advice of Calculus Capital Limited have also invested in Terrain Energy Limited.  In the year ended 31 December 2010, the amount paid to Calculus Capital Limited which was attributable to the investment made by the Neptune-Calculus Income and Growth  VCT plc was £8,500  (including VAT).

In the year ended 31 December 2010, Calculus Capital Limited received an arrangement fee of £3,790 (31 December 2009: £3,900) as a result of the Company's investment in Heritage House Media. In February 2011, Calculus Capital Limited received a further arrangement fee of £1,895 as a result of the Company's follow-on investment in Heritage House Media.

The Company may co-invest with other funds managed and advised by Calculus Capital Limited.  The allocation between different funds takes into account such factors as the funds available for investment and the time horizon of these funds, the size of a potential investment, and the existing sector exposure of the various funds.

The Company has invested in The Neptune Income Fund Income A Class and in the Neptune Quarterly Income Fund Income Units.   Details of these investments are set out below.  Neptune Investment Management charges an annual fee of 1.6 per cent on these investments. 


31 December 2010

31 December 2009




£

£

Neptune Income Fund Income Class A 


Investment at cost



1,260,819

1,260,819

Valuation at 31 December



1,303,303

1,208,000

Neptune Quarterly Income Fund Income Units


Investment at cost



1,249,318

1,249,318

Valuation at 31 December



1,269,873

1,185,367

21        Nature of information

These are not full accounts in terms of Section 434 of the Companies Act 2006.  Full audited accounts for the year ended 31 December 2009 have been lodged with the Registrar of Companies.  The Report and Accounts for the year ended 31 December 2010 will be sent to shareholders shortly and will be available for inspection at 104 Park Street, London, W1K 6NF, the Company's registered office, and will be published on www.calculuscapital.com, a website maintained by the Company's Investment Manager, Calculus Capital Limited.  The audited accounts for the year ended 31 December 2010 contain an unqualified audit report.

 

 


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