Chrysalis VCT PLC : Final Results

Chrysalis VCT plc
Final results for the year ended 31 October 2013

FINANCIAL SUMMARY

CHAIRMAN'S STATEMENT

* Dividend level retained at 5.0p for 2013
* Return for the year tops £1 million for the fourth year running
* 4.7% increase in net asset value over last year
* Total return on 80p investment now at 124.2p

Your Fund has continued its solid performance record during 2013 and I am delighted to announce that the Board is proposing a final dividend of 3.25p which takes the payment for the full year to 5p. Total dividends paid since launch now top 44p.

Although this dividend exceeds the returns made during the financial year, the Directors are confident that your portfolio is strong and we are aware of events post year-end which we believe fully justifies this level of dividend.

Portfolio
At the year end, the Fund held a portfolio of 26 investments, which value the venture capital portion of the portfolio at £16.2 million. A detailed analysis of Fund activities appears elsewhere in this report, from which shareholders will see that the bulk of investment activity during the year centred on follow-on investments and exits.

We are proud of our record of continuing support for portfolio businesses and made three follow-on investments during the period under review. In our experience the small UK companies continue to find there is a shortage of development funding from the banking sector and follow-on investments have therefore outnumbered new opportunities.

Much of the year's activity for our investment managers has focussed on exits. The two exits we achieved during the year illustrate opposite ends of the spectrum of venture capital investment. The partial sale of Newquay Helicopters follows a considerable period of close involvement with the business by ourselves and our co-investors. In the end this diligent approach paid off, producing a respectable result. In contrast our investment in KnowledgePool was briefer - but more profitable and resulted in an excellent return.  

Not every investment can be a KnowledgePool and this year has been a good example of how persistent and skilful portfolio management can produce the right outcome from a less-promising scenario. As ever, the Board is grateful to the key executives of our Investment Management company, Managing Director Chris Kay and Investment Director Robert Wilson, for their skill and efforts during the year.
Although we did not secure any new investments during the year, there were deals in the pipeline and after the year end we made a significant investment in the company behind the return of children's TV favourite, The Clangers, to the BBC schedules.

Chris Kay provides further commentary in this and other portfolio companies in his Investment Manager report.

Cash
We held cash of £6.4 million, at the year-end.  Since bank interest rates remain at long-term lows we have reviewed our cash management policy and since the year end, £2.3 million is being held in three corporate bonds, each of which has been selected for decent yield and high quality.

Our total dividend pay-out for the year, if shareholders approve our proposal at the AGM, will be £1.5 million.

Share Realisation and Reinvestment Programme
Shareholders will recall that in January 2013, the Company launched a Share Realisation and Reinvestment Programme offering Shareholders the option to sell their shares back to the Company via a tender offer and reinvest the proceeds in new shares.  This gave Shareholders the opportunity to gain income tax relief on their new investment, while remaining invested in our Fund.

With many of the Company's Shareholders having originally invested many years ago, the opportunity for further income tax relief was well received, with approximately 26% of shares participating. 8,266,579 shares were purchased for cancellation at a price of 84.5p per share and 8,018,308 new shares were allotted in respect of the tender proceeds at a price of approximately 87.1p per share.

Fundraising activities
The Company launched a top-up offer in conjunction with the SRRP. I am pleased to report that £326,000 was raised under the offer, with 374,275 shares being issued at 87.1p per share.

Management of the Fund
Shareholders will be aware that our Fund Management operating costs are low compared with the VCT industry in general, at 1.6% of net assets due essentially to the self-managed structure we created in 2005. The Board  keeps this policy under review, but we remain convinced that it not only represents exceptional value, but also gives shareholders access to a steady supply of good quality small company investments which have been the hallmark of our Fund.

Our wholly-owned Fund Management subsidiary does not seek profits for itself and has no interests other than managing your investments efficiently and cost-effectively. It may not be the norm in the VCT sector, but it works for us - and delivers the result we want. During the year, one of my fellow directors, Martin Knight, joined the Board of the subsidiary in a non-executive capacity only.

Fixed income securities
At the year end the Fund also held a portfolio of fixed income securities, which were valued at £432,000 comprised mainly of one gilt-edged security.  

Net asset value, results and dividend
Shareholders will be pleased that the Fund's net asset value ("NAV") per share at 31 October 2013 was 83.5p, an increase of 4.0p or 4.7% over the year (after adjusting for dividends paid during the year).

The return on activities after taxation for the year was £1.1 million (2012: £1.0 million), comprising a revenue return of £519,000 and a capital return of £588,000.

The Company paid an interim dividend of 1.75p per share on 31 July 2013. Subject to Shareholder approval at the forthcoming AGM, your Board is proposing to pay a final dividend of 3.25p per share on 30 April 2014 to Shareholders on the register at 26 March 2014.  

Share buybacks
The Fund maintains a policy of making ad hoc share purchases; however, during the year, all share buybacks occurred via the SRRP facility previously discussed.

If shares are offered to the Fund via its broker, Nplus1 Singer Capital Markets, a decision on whether to buy, and at what price, is taken on a case-by-case basis.

In the past share purchases by third parties in the market were negligible but, as the attractions of our dividend policy and the strength of the portfolio has become more widely known, more and more shares are being taken up by secondary investors. During the year to 31 October 2013, 2.2 million shares changed hands through the secondary market. We welcome these new shareholders.

Due to the "close period" rules, which apply to Chrysalis as a listed investment trust, there are limited occasions on which the Fund can enter the market and buy shares. The Directors feel that, in general, our resources are better applied to the dividend payments, from which all Shareholders benefit directly, than to share buy-backs. We will continue to consider ad hoc purchases when shares are offered, but we are pleased that the market is also providing liquidity for those who wish to sell.

Directors
During the year the Fund has again had the benefit of wise and committed Directors and I have greatly appreciated the support and counsel of my colleagues Julie Baddeley and Martin Knight. 

Annual General Meeting
The forthcoming AGM will be held at 10 Lower Grosvenor Place, London SW1W 0EN at 11:00am on 9 April 2014.

Conclusion
Much has been said recently about economic recovery in the UK and I felt it was a good time to take stock of our activities since 2008.

At that time I promised that our focus would be on providing support to investee companies, where required, and making sensible new investments where possible but particularly to conserve sufficient resources to take advantage of opportunities that would arise when economic conditions started to improve.

I hope shareholders would agree that these accounts show that Chrysalis VCT plc has delivered on that promise. I am proud that your Fund, through the skill and efforts of the Board and of our investment team, enters 2014 in precisely the condition we had planned.

Despite the troubled economic times, we have also achieved a 67% growth in annual dividends.

Thank you to all shareholders for your continued support.  

Peter Harkness
Chairman

INVESTMENT MANAGEMENT REPORT

It is pleasing to be able to report that for the fourth consecutive year, total overall return for Shareholders was in excess of £1 million.

As with any reasonably sized portfolio of unquoted investments overall return will largely be influenced by valuation movements which is not an exact science and can require some subjective judgements.

However during this year there have been a significant number of disposals generating over £4.5 million of cash (nearly 25% of the unquoted portfolio) which has confirmed the accuracy of the valuation policy.

The largest disposal was the sale of KnowledgePool (KP) to Capita in May 2013 which produced proceeds of £1.7 million with potentially another £100,000 to follow.  Chrysalis had only invested in KP in February 2011 when £1 million was invested, so a capital return of at least 70% was achieved in just over two years.  Interestingly in more normal times KP would almost certainly have been able to get £1 million of bank finance but in 2011 found it impossible.  Therefore we were able to negotiate an equity and debt package which has produced a highly satisfactory return.

Although the banks are now stating they are keen to support SMEs, in our experience this is still not the case.  Accordingly similar deals to KP are still around although clearly it is important to avoid a "disguised rescue".

The second largest disposal was the sale of Escape Studios Limited.  As we reported last year Escape sold one of its operating divisions during 2012 which enabled it to repay our loan in July 2013.  The repayment included a redemption premium which effectively reduced the holding cost of our equity position to zero.  The company was then sold to Pearson in October 2013.  Assuming all the retentions are released Chrysalis will have made a capital gain of £816,000 in just over four years from a £750,000 investment which also provided £45,000 of income annually.

Escape's two stage sale process is currently not untypical even for relatively small companies.  Another portfolio company, Autocue, this year sold off a non-core operating division in order to make the remaining part of the company more attractive to potential purchasers.

The message appears to be that purchasers are out there but they only want to acquire "clean" situations.  This, of course, means additional work for the management of the investee companies who are usually fully occupied with the day to day running of the business.

This is where our investment policy of providing experienced non-executive directors to the investee companies has proven advantageous by giving investee company boards experienced resources to carry out these strategic policies.

The third major disposal has also been far from simple.  Newquay Helicopters (formerly British International Holdings) has effectively been profitably liquidating itself over the past 18 months, selling off its various assets.  Chrysalis has already received just over £1 million which it is just £20,000 less than its original investment and all being well should receive a further £432,000 over the next 12 months.  Once again Chrysalis has also received a healthy yield throughout the seven years of the investment.

These three exits have all demonstrated the effect of structuring the investment correctly.  All three companies at various times experienced trading difficulties but the debt/equity mix means that Chrysalis enjoyed the benefit of downside protection and decent ongoing yield even when things were not going to plan but importantly meant that there was also some equity upside.

Of course if the investments had been 100% in equity the upside would have been greater but providing all equity finance to the type of companies that VCT's are eligible to invest in is a very high risk business.  Our philosophy remains that our shareholders would much prefer to enjoy a decent steady return with reduced risk as far as that is possible in a VCT.

A final example of this was the investment in Real Time Logistics Ltd. £325,000 was invested in 2006 but unfortunately the company had many years of struggle and had to be rescued several times by its majority shareholders. If the original investment had all been equity it would have been completely diluted and become virtually worthless. As it was with a structured investment we have been able to negotiate over time an exit which finally completed this year producing a small capital profit  even though the company is a long away from its original business plan.

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 October 2013:

All investments are unquoted unless otherwise stated.        
*        Quoted on AIM                       

Investment movements for the year ended 31 October 2013

Additions

Disposals

*   Adjusted for purchases in the year where applicable

DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors are responsible for preparing the Directors Report, the Strategic Report and the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the annual report includes information required by the Listing Rules of the Financial Conduct Authority.  

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

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, to disclose with reasonable accuracy at any time the financial position of the Company and to 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 addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.

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 the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.

INCOME STATEMENT
for the year ended 31 October 2013

All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the profit and loss account of the Company.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement as shown above.

Other than revaluation movements arising on investments held at fair value through profit or loss account, there were no differences between the return as stated above and historical cost.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 October 2013

BALANCE SHEET
at 31 October 2013

CASH FLOW STATEMENT
for the year ended 31 October 2013

NOTES TO THE ACCOUNTS
for the year ended 31 October 2013

1.Accounting policies

Basis of accounting
The Company has prepared its financial statements under UK Generally Accepted Accounting Practice and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" January 2009 ("SORP").

The financial statements are prepared under the historical cost convention except for certain financial instruments measured at fair value and on the basis that it is not required to prepare consolidated accounts as explained in note 9. The Company's accounts therefore present information about it as an individual undertaking rather than as a group undertaking.

The Company implements new Financial Reporting Standards issued by the Accounting Standards Board when required.

Presentation of Income Statement
In order to better reflect the activities of a venture capital trust and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. Net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Fixed asset investments
Investments are designated as "fair value through profit or loss" assets, upon acquisition, due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed, with a view to selling after a period of time, in accordance with the Company's documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter, investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS26.

Fixed income investments and investments quoted on AIM are measured using bid prices in accordance with the IPEV.

For unquoted instruments, fair value is established using the IPEV. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

* Price of recent investment;
* Multiples;
* Net assets;
* Discounted cash flows or earnings (of underlying business);
* Discounted cash flows (from the investment); and
* Industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

Where an investee company has gone into receivership, liquidation, or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised. Permanent impairments in the value of investments are deemed to be realised losses and held within the Capital Reserve - Realised.

Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment expensed.

Fixed asset investments (continued)
It is not the Company's policy to exercise controlling influence over investee companies. Therefore, the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP that does not require portfolio investments to be accounted for using the equity method of accounting.

Current asset investments
Current asset investments comprise amounts held on a fixed term deposit at a banking institution and are valued at par.

Income
Dividend income from investments is recognised when the Shareholders' rights to receive payment have been established, normally the ex-dividend date.

Interest income is accrued on a timely basis, by reference to the principal outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection.

Expenses
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:

* Expenses which are incidental to the acquisition of an investment are deducted as a capital item.
* Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.
* Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted the policy of allocating investment management fees, 75% to capital and 25% to revenue as permitted by the SORP. The allocation is in line with the Board's expectation of long term returns from the Company's investments in the form of capital gains and income respectively.
* Performance incentive fees arising from the disposal of investments are deducted as a capital item.

Taxation
The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company's effective rate of tax for the accounting period.

Due to the Company's status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments which arises.

Deferred taxation is not discounted and is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts.

Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.

Share issue costs
Issue costs in relation to shares issued are deducted from the share premium account.

2. Basic and diluted return per share

As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share. The return per share disclosed therefore represents both basic and diluted return per share.

3. Basic and diluted net asset value per Ordinary Share

As the Company has not issued any convertible securities or share options, there is no dilutive effect on net asset per share. The net asset value per share disclosed therefore represents both basic and diluted return per share.

4. Principal risks

The Company's investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company's operations are:

* Investment risks;
* Credit risk; and
* Liquidity risk.

The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.

The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year-end are provided below:

Investment risks
As a VCT, the Company is exposed to investment risks in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by Chrysalis VCT Management Limited and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The key investment risks to which the Company is exposed are:

* Investment price risk; and
* Interest rate risk.

The Company has undertaken sensitivity analysis on its financial instruments, split into the relevant component parts, taking into consideration the economic climate at the time of review in order to ascertain the appropriate risk allocation.

Investment price risk
Market price risk arises from uncertainty about the future prices and valuations of financial instruments held in accordance with the Company's investment objectives. It represents the potential loss that the Company might suffer through market price movements in respect of quoted investments and also changes in the fair value of unquoted investments that it holds.

Interest rate risk
The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers and on liquidity funds at rates based on the underlying investments. Investments in loan stock and fixed interest investments attract interest predominantly at fixed rates. A summary of the interest rate profile of the Company's investments is shown below.

Interest rate risk profile of financial assets and financial liabilities
There are three levels of interest which are attributable to the financial instruments as follows:

* "Fixed rate" assets represent investments with predetermined yield targets and comprise fixed interest and loan note investments.
* "Floating rate" assets predominantly bear interest at rates linked to Bank of England base rate and comprise cash at bank.
* "No interest rate" assets do not attract interest and comprise equity investments, loans and receivables (excluding cash at bank) and other financial liabilities.

The Company monitors the level of income received from fixed, floating and non interest rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.

Credit risk
Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan stock in investee companies, investments in liquidity funds, cash deposits and debtors.

The Manager manages credit risk in respect of loan stock with a similar approach as described under Investment risks above. In addition the credit risk is partially mitigated by registering floating charges over the assets of certain investee companies. The strength of this security in each case is dependent on the nature of the investee company's business and its identifiable assets. The level of security is a key means of managing credit risk. Similarly, the management of credit risk associated interest, dividends and other receivables is covered within the investment management procedures.

Cash is mainly held at Royal Bank of Scotland plc with a balance also maintained at Bank of Scotland plc, both of which are A-rated financial institution and ultimately part-owned by the UK Government. Consequently, the Directors consider that the risk profile associated with cash deposits is low.

There have been no changes in fair value during the year that can be directly attributable to changes in credit risk.

Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. The Company usually has a relatively low level of creditors (2013: £100,000, 2012: £99,000) and has no borrowings. The Company always holds sufficient levels of funds as cash and readily realisable investments in order to meet expenses and other cash outflows as they arise. For these reasons, the Board believes that the Company's exposure to liquidity risk is minimal.

The Company's liquidity risk is managed by Chrysalis VCT Management Limited in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.

5. Related party transactions
Chrysalis VCT Management Limited, a wholly owned subsidiary, provides investment management services to the Company for a fee of 1.65% of net assets per annum. During the period, £411,000 (2012: £414,000) was paid to Chrysalis VCT Management Limited in respect of these fees. No amounts were outstanding at the year end.

A performance incentive fee is payable quarterly to Chrysalis VCT Management Limited (with effect from 1 May 2006) based on realisations from all investments excluding quoted loan notes, redemptions of loan notes in the normal course of business and other treasury functions. The performance incentive fee is the greater of 1% of the cash proceeds of any exit or 5% of the gain to the Company after all exit costs for investments made after 30 April 2004 reduced to 2.5% of investments made prior to 30 April 2004. During the year performance incentive fees of £98,000 (2012: £1,000) were due to Chrysalis VCT Management Limited. At the year end, £46,000 was outstanding (2012: £Nil).

Peter Harkness holds a position of significant influence within MyTime Media Holdings Limited (formerly MyHobbyStore Holding Limited), an investment held by the Company, and therefore abstains from discussions surrounding the valuation or investment decisions regarding the company. Details of the investment, including cost, valuation and income received during the year are shown within the Annual Report.

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 October 2013, but has been extracted from the statutory financial statements for the year ended 31 October 2013, which were approved by the Board of Directors on 14 February 2014 and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s498(2) and (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 October 2012 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 31 October 2013 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 10 Lower Grosvenor Place, London, SW1W 0EN and will be available for download from www.downing.co.uk.