Kings Arms Yard Regulatory News (KAY)

1 Apr 2010 07:00

Financial highlights as at 31 December 2009

Per ordinary share (pence) 31.12.09 31.12.08 31.12.07 Net asset value 22.7 26.8 33.2Dividends Dividend paid (1) - 2.8 4.2Cumulative dividend (2) 53.7 53.7 50.9 Total return (3) SPARK VCT plc 76.4 80.5 84.1

Return including tax benefits (6) 96.4 100.5 104.1

Total return to former shareholders of: Quester VCT 2 plc, per 100p 62.3 66.5 70.2invested in shares of that company (4)

Return including tax benefits (6) 82.3 86.5 90.2

Quester VCT 3 plc, per 100p 36.1 40.1 43.7invested in shares of that company (5)

Return including tax benefits (6) 56.1 60.1 63.7

1. Dividend paid in the financial period ended on the date stated

2. Cumulative dividends paid by SPARK VCT plc

3. Net asset value plus cumulative dividend per share to ordinary shareholders

in SPARK VCT plc since the launch of the Company (then called Quester VCT

plc) in April 1996

4. Total return to original shareholders in Quester VCT 2 plc, launched in

March 1998, which were merged with SPARK VCT plc (then called Quester VCT

plc) in June 2005, the share exchange ratio for former shareholders in

Quester VCT 2 plc being 1.0249

5. Total return to original shareholders in Quester VCT 3 plc, launched in

February 2000, which were merged with SPARK VCT plc (then called Quester

VCT plc) in June 2005, the share exchange ratio for former shareholders in

Quester VCT 3 plc being 0.9816

6. Return after 20% income tax relief but excluding capital gains deferral

The directors propose a final dividend of 4.0 pence per share for the year ended 31 December 2009, to be approved at the Annual General Meeting.

Composition of the fund by value 31.12.09 Unquoted venture capital investments 57.8% Quoted venture capital investments 1.7% Listed fixed interest investments 4.0% Cash and other net current assets 36.5% Total 100.0% Chairman's statementIntroductionYour Company's new Board, which was appointed early in 2009, has now completeda year in office, during which we have thoroughly reviewed the Company'smanagement, its investment portfolio and its strategic options. We offeredshareholders some preliminary guidance on these issues in our interim report ofAugust 2009 and the full conclusions of our strategy review, which we repeatbelow, in February this year.The Company's initial focus had been investment in very early stage businesseswith a strong bias towards those with innovative, unproven technologies. Marketconditions for such companies over recent years have been extremelyunfavourable and considerable shareholder value has been lost.Nevertheless we believe that the current portfolio does contain some businessesof promise and there may be opportunities for profitable realisations in theyears ahead. Furthermore, the Venture Capital Trust (`VCT") structure itselfstill has some significant advantages, notably the ability to pay tax freedividends to shareholders, and it is a cornerstone of our new strategy, ofwhich more details are given below, that the Company's resources should beconcentrated on the regular payment of such dividends.

The movement in net assets is summarised in the table below:

Venture Bonds and Total Pence Capital Net per Investments Current £'000 Share £'000 Assets £'000

Net asset value at 31 December 2008 18,435 11,296 29,731 26.8 Net losses on disposal

(40) - (40)

-

Income net of operating expenses - (650) (650) (0.6) Net loss on valuation of investments (3,891) (42) (3,933) (3.6) Net investment 366 (366) -

-

Net assets before dividends and 14,870 10,238 25,108 22.6 share buybacks Dividend paid - - - -Share buybacks - (78) (78)

0.1 Net asset value at 31 December 2009 14,870 10,160 25,030 22.7

Performance

In the year to 31 December 2009 net assets per share have fallen from 26.8p to22.7p.The overwhelming majority of this fall has been downward valuation of theunquoted venture capital portfolio, offset by some minor improvements in a fewvaluations where externally supported investment rounds or improved performancehave increased valuations. There have been no realisations and no investment innew companies during the year.Conditions for early stage companies have remained very challenging with adearth of available credit finance, extremely cautious equity markets and avery slow trading environment. Many of the sectors to which our investeecompanies' products and services are directed remain themselves in a verycautious constrained position in which new initiatives are approved veryslowly. As a consequence trading has often remained subdued, companies' breakeven points have been delayed and cash requirements have tended to rise. OurInvestment Manager has been extremely active in compelling investee companiesto live within tighter cash constraints, to shed cost, to adopt more realisticstrategies and, where necessary, to change management. Nevertheless where wehave seen deterioration in performance and where targets have been missed wehave not hesitated to reduce the carrying values of our investments.We drew attention in the Interim Management Statement of 19 May 2009 and theHalf Yearly Report of 21 August 2009 to the position of Skinkers Limited andhave since felt it prudent to make a further reduction in valuation to reflectthe very difficult conditions that this company faces.We reduced the carrying value of Isango! Limited in the first half of the yearunder review. Although trading conditions have not improved, further thirdparty funding, in which we did not participate, has been secured, whichsupports our current carrying value. We have also previously drawn attention toSift Group Limited, where we made a reduction in carrying value in the firsthalf of the year to reflect a fall in comparable market values. Since then thecompany has secured further equity and debt from investors and management, inwhich we participated, as well as further facilities from its bankers. It hasalso been able to take advantage of the depressed market conditions to make asmall acquisition which is expected to contribute to growth and make thebusiness more attractive to potential acquirers.

We7 is another business in which the difficult investment market has contributed more to loss of current value than poor trading. Since our last report a third party investor has supported a funding round and we have, in accordance with our overall valuation policy, reduced our carrying value to reflect the price of this round.

Meanwhile the operating loss for the year has been reduced from £1,083,000 to £650,000.

VCT Qualifying StatusOn 31 December 2009, 73.7% of total investments were in qualifying holdings. Itis anticipated that this margin of compliance will be enhanced if the dividendrecommended below is approved by shareholders. The Board is very conscious ofthe necessity of ensuring that qualifying investments comfortably exceed theminimum threshold of 70% required for the Company to continue to enjoy VCT taxstatus, and will continue to monitor the position carefully.

Annual General Meeting and Continuation Vote

The Annual General Meeting of the Company ("AGM") will be held at the officesof Nabarro LLP, Lacon House, 84 Theobald's Road, London WC1X 8RW at 12:00 noonon Friday 7 May 2010. Your Board welcomes your attendance at the meeting as itgives an opportunity for shareholders to ask questions of the Board andInvestment Manager. If you are unable to attend the AGM in person we wouldencourage you to make use of your proxy votes.At the AGM this year shareholders will be asked to vote on a resolution todecide whether or not the Company should continue as a VCT (the "ContinuationVote").The Board has considered this question in the context of its overallreview of the Company's strategy. Market surveys suggest that shareholders wishVCT companies to continue and to preserve their VCT tax status. As stated inthe Half Yearly Financial Report of 21 August 2009, the Board believes thatmany investors in SPARK VCT plc with "rolled over" or "deferred" capital gainswould be significantly disadvantaged if the Company ceased to qualify as a VCT.The Board's view that the Company should be maintained as a qualifying VCT isreinforced by the stark reality that there is no credible scenario in which thefull value of the Company's portfolio, or anything approaching it, could beachieved in a rapid realisation. There is no ready market for minority sharesin unquoted early stage businesses and any attempt to market the investmentportfolio as whole would be unlikely to raise more than a fraction of itsvalue. In addition, 19 of the Company's 22 unquoted investments (representing95% of the unquoted portfolio in value) are co-investments with other fundsmanaged by our Investment Manager, who exercises management and shareholderrights on behalf of all of the funds collectively. The Company is thereforemost likely to be able to achieve high value exits if its investments are soldin conjunction with those other holdings. Further, in practice, the existenceof these shared management and shareholder rights significantly restricts theoptions for unilateral action open to the Company.

It is, therefore, the Board's view that it is in the best interests of shareholders to maintain the Company as a qualifying VCT. Accordingly, the Directors are recommending that shareholders support the Continuation Vote.

Investment Strategy

The Board is most aware that no dividend has been paid to shareholders sinceOctober 2008, that net assets have fallen significantly in recent years andthat there has been an enduring discount between the net assets per share andthe share price.The Board has, accordingly, assessed the Company's investments and concludedthat, in the current economic climate, early stage venture capital investments,such as the majority of those in the Company's existing portfolio, no longerpresent an attractive investment for SPARK VCT plc shareholders. The Boardbelieves that this is likely to remain the case for the foreseeable future.

As a result, the directors have reviewed the investment strategy for the Company and advise that:

* The Company's existing portfolio investments should be realised as soon as

they mature and suitable exits are achievable. This is likely to take

several years and some highly selective follow-on funding may be required

where it is possible to enhance realisation prospects;

* It is more efficient to use cash proceeds from realisations to fund tax

free dividends than share buybacks. Accordingly, the Board intends to adopt

an aggressive dividend policy, which returns 75% of sale proceeds realised

from current portfolio investments to shareholders by way of tax free

dividends;

• The remaining cash funds not required for follow-on investments should be

used to make new, qualifying investments, within the Company's existing

investment policy, enabling the Company to maintain its VCT tax status; such

investments would be focused towards relatively lower risk opportunities, where

investee companies are more advanced in their development - either generating

revenues and able to pay dividends or well positioned for exit in a short time

frame.

This new investment strategy reflects the policy recently announced by SPARKVCT 2 plc and it is anticipated that the majority of such new investments wouldbe made in conjunction with that company.The new policies set out above are likely, over time, to result in the totalassets within the Company reducing to a size which is no longer viable,commercially, as an independent entity. Accordingly, the Board remains alert tothe possibility of a merger with appropriate VCTs which they would anticipatebeing able to progress once the Continuation Vote has been held.

Board Changes

Greg Lockwood has indicated that, due to his other commitments, he will bestanding down from the Board at the AGM. The Board would like to thank Greg forhis valuable contribution during a short and active tenure. Having completedits review of the Company's investments and determined the future strategy, theDirectors consider the reduced Board size will meet the Company's future needs.

Dividends

On 31 December 2009, the Company had approximately £9.9m in cash and readilyrealisable assets. The Board announced on 26 February 2010 that it would berecommending a final dividend for the year to 31 December 2009 of 2p per sharefor approval by shareholders at the AGM. In proposing this level of dividendthe Board was been conscious of the need to retain sufficient cash for aregular dividend stream in the following two years, even if realisationopportunities remain very restricted. There is always a balance to be struckbetween releasing all cash as soon as it is available and ensuring maintenanceof a regular dividend stream. It is the Board's view that the Company's shareprice, and the interests of the majority of shareholders, will be bestsupported by regularity over immediacy.The Board had anticipated declaring a similar dividend of 2p per share afterthe announcement of the Interim Results. With an improving degree of certaintyas to the likely disposal timetable, the Board has decided to bring thisdividend forward and accordingly is recommending a final dividend of 4p pershare in respect of the year ended 31 December 2009.This dividend, if approvedby shareholders, will be paid on 11 June 2010 to shareholders on the registeras at 14 May 2010.

Subject to a successful Continuation Vote, it is the Board's intention to provide more regular dividends thereafter, which reflect its new policy to return 75% of realisation proceeds from existing portfolio investments to shareholders.

Once the existing portfolio has been realised and 75% of the proceeds returnedto shareholders, the Board intends to adopt a dividend policy which provides aconsistent, although lower, income stream for shareholders, reflecting theunderlying profitability of its investments.

Share Buybacks

The Board considers that funding tax free cash dividends is a better use ofCompany funds than share buybacks. Accordingly, it intends to limit any suchshare purchases to the most extreme circumstances and, in no case, will thecost of buybacks be allowed to exceed 0.5% of opening Net Asset Value in anyyear.

It is hoped that the new strategy, including the dividend policies, will encourage a more active secondary market in the Company's shares.

Costs

The Board is actively monitoring the costs of the Company's service providersto ensure these are kept as low as is practical. The contractual management feepaid to SPARK Venture Management Limited remains limited to 2% of the Company'sNet Asset Value "NAV") and all costs, including the management fee, are cappedat 3.25% of NAV. As the existing portfolio is realised and the proceedsdistributed to shareholders, the management fee will be reduced accordingly.

Once the disposal stage has been completed, there may well be opportunities for further cost savings.

Previous DividendAt the last AGM, we undertook to look at the concerns raised by certainshareholders regarding the level of dividends paid in respect of the year ended31 December 2007 and the resultant bonus paid to the fund manager. The level ofdividend was approved by shareholders at the AGM held in 2008.The Board hascarried out a thorough review and, having taken independent legal advice,concluded there is no viable basis for any further action by the Company inrespect of these matters.

Outlook

Despite the recent rally in some quoted equity markets, the overall economicoutlook remains uncertain. Whilst there have been signs of improvement incertain economic indicators, we do not expect any recovery to be a rapid oneand we do not anticipate any dramatic improvement in the conditions effectingthe majority of our investments.

Nevertheless, we believe that real value can be extracted from our portfolio over time and that the strategy that we have set out above offers the best opportunity for the Company and its shareholders.

Robin FieldChairman31 March 2010

Fund summary as at 31 December 2009

Industry Accounting Valuation Equity % of sector Cost (1) % held fund £'000 £'000 by value

Fifteen largest venture capital investments

Elateral Holdings Limited (2) TMT 1,009 1,990 23.4% 8.0% Imagesound plc TMT 2,848 1,920 11.7% 7.7% Sift Group Limited TMT 2,515 1,638 22.5% 6.5% UniServity Limited TMT 1,208 1,208 20.5% 4.8% Cluster Seven Limited TMT 1,569 1,197 9.0% 4.8% Vivacta Limited Healthcare 1,210 1,145 7.3% 4.6% Workshare Limited TMT 695 928 1.9% 3.7% Level Four Software Limited TMT 855 855 7.8% 3.4% Secerno Limited TMT 1,180 555 8.1% 2.2% Haemostatix Limited Healthcare 502 502 12.5% 2.0% Lab M Holdings Limited (2) Healthcare 690 440 26.4% 1.8% Antenova Limited TMT 1,307 343 4.7% 1.4% We7 Limited TMT 816 334 9.2% 1.3% Academia Networks Limited TMT 103 280 4.1% 1.1% Isango! Limited TMT 1,000 250 15.3% 1.0% 17,507 13,585 54.3%

Other venture capital investments

Perpetuum Limited TMT 686 228 7.0% 0.9% Community Internet Group TMT 28 211 19.8% 0.8% Limited (2) MediGene AG Frankfurt Healthcare 316 160 0.1% 0.6% Allergy Therapeutics plc AIM Healthcare 772 126 0.3% 0.5% Atego Limited (formerly TMT 120 120 12.0% 0.5% Artisan) (2) Symetrica Limited TMT 108 114 2.4% 0.5% TeraView Limited Healthcare 1,172 100 4.8% 0.4% Other investments: valuations 2,105 226 1.0% less than £100,000 (4) 5,307 1,285 5.2%

Total venture capital investments 22,814 14,870 59.5%

Total unquoted venture capital investments 21,004 14,440 57.8% Total quoted venture capital investments

1,810 430 1.7% 22,814 14,870 59.5%

Listed fixed interest investments 1,000 1,003

4.0% Total investments 23,814 15,873 63.5% Cash and other net assets 9,157 9,157 36.5% Net assets 32,971 25,030 100.0%

1. Amounts shown as accounting cost represent the acquisition cost in the case

of investments originally made by the Company and/or the valuation

attributed to the investments acquired from Quester VCT2 plc and Quester

VCT3 plc at the date of the merger in 2005, plus any subsequent acquisition

cost, as reduced in certain cases (2) by amounts written of as representing

an impairment in value

2. Cost reduced by amounts written off as representing an impairment in value

(Elateral Holdings Limited reduction of £1,117,000, Lab M Holdings Limited

of £486,000, Community Internet Group Limited of £698,000 and Atego Limited

of £2,002,000)

Details of movements in valuation of the venture capital investments over thetwelve months to 31 December 2009 are set out in note 11(c) in the notes to

thefinancial statements.Business review

The Business review has been prepared in accordance with Section 417 of the Companies Act 2006 and forms part of the Directors' report to shareholders. This Business review does not contain information about environmental matters, the Company's employees and social and community issues.

Portfolio update/ trends during 2009

The venture capital investments of SPARK VCT currently fall into three categories:

"Maturing" venture capital investments:

These are companies with stable and growing revenue streams, achieving profitable trading or very close to it, and with stable cash positions

- investments in this category represent 48.9% of the venture capital portfolio by valuation at 31 December 2009

- examples: Elateral Holdings Limited, Imagesound plc, Lab M Holdings Limited, Sift Group Limited, Workshare Limited

"Developing" venture capital investments:

These are companies with developed business models and growing revenue streams,though still facing uncertainties, and breaking through into cash-flow positivetrading- investments in this category represent 24.2% of the venture capital portfolioby valuation at 31 December 2009 - examples: Antenova Limited, Cluster SevenLimited, Level Four Software Limited, UniServity Limited

"Early stage" venture capital investments:

These are companies still establishing their business model or, in the case of businesses in the life sciences sector, still at the product development stage

- investments in this category represent 24.0% of the venture capital portfolio by valuation at 31 December 2009

- examples: Academia Networks Limited, Haemostatix Limited, Isango! Limited, Perpetuum Limited, Secerno Limited, Skinkers Limited, Vivacta Limited, We7 Limited

In respect of the companies in the first two categories, looking back on 2009as a whole, the SPARK management team can report generally satisfactoryoperational progress despite the difficult trading conditions. In some cases,the companies have experienced some reduction in the levels of revenue andprofitability (Sift Group Limited being an example), while in other cases goodgrowth has been achieved in spite of the trading environment (Elateral HoldingsLimited and Workshare Limited have produced encouraging performances).Individual members of the team have worked closely with managements of investeecompanies to ensure appropriate cost control and management of cash resourceswhile at the same time focusing strategy and identifying opportunities forfuture growth. This approach appears to have been successful so far in enablingcompanies to survive the recession.The "early stage" companies have suffered far more in the difficult tradingenvironment of the last couple of years. Offering new products and serviceswithout an established customer base, these companies have been much morevulnerable to cancellations of contracts and extended sales cycles in thisperiod of economic uncertainty. Particular cases in point are Isango! Limited,Perpetuum Limited, Skinkers Limited and We7 Limited. The SPARK management teamhas worked with the company managements on the difficult decisions that havebeen necessary to secure survival. The provision of additional funding fromSPARK VCT has been kept to the minimum consistent with the continuation of thebusiness. Even in this early stage category, however, some businesses havedemonstrated encouraging early performance.During 2009 only a limited amount of additional investment has been committedto the portfolio: this has been focused on follow-on investment where the SPARKmanagement team's conditions regarding the trading position of the company havebeen met. No new investments were made during the year.The effect of these trends in 2009, and the limited further investment, hasbeen a substantial downward movement in the reported valuations (-21%). Inrelation to the "maturing" and "developing" venture capital investments, thedecline in valuation has been relatively modest (-6.6%), reflecting thecompanies' current trading results and currently applicable valuation criteria.For the early stage venture capital investments, on the other hand, the tradingconditions, and the stringent approach to the provision of further funding,have in many cases led to substantial write-downs in valuation (-48.6% for thiscategory overall).

Prospects for the current portfolio

SPARK Venture Management Limited took over the management of the Company (thencalled Quester VCT plc) in May 2007. At that time, the portfolio was composed of 40 investee companies, of which 11 were quoted and 29 unquoted. Given the limited size of the Company and the capital requirements of such a large number of early stage companies, the SPARK management team resolved to reduce the financing risk and concentrate on a smaller number of the more promising candidates. Since then, the number of unquoted companies in the portfolio has been reduced from 29 in 2007 to 18 at the present date, by closing or writing off 10 of them and successfully selling one of them, Nomad Payments Limited, for proceeds of £7,263,000. In theprocess, the funding requirement for the portfolio has fallen from £10m in thetwo years leading up to 2007 to £4.2m in the two years subsequent. However,this restructuring exercise and cost control has inevitably led to a reductionin the value of the Company's unquoted portfolio by £3,845,000 (-21%) asfunding was withheld from weaker investments.Nevertheless, the SPARK management team believe that the portfolio is nowsubstantially more robust, in spite of the recent market downturn, than wouldotherwise be the case. In 2007, 80% of the value in the 29 unquoted investmentswas represented by 14 cases, which had the characteristics, in many cases, ofvery small sales revenues and negative profitability in terms of EBITDA(earnings before interest, tax, depreciation and amortisation):

* Companies with annual revenues of less than £2.0m: 43% of the top 80% of

investments

* Companies with negative EBITDA: 79% of the top 80% of investments

By the end of 2009, 80% of the value in the remaining 18 unquoted investmentswas represented by 8 cases, which had developed the following much healthierprofile:

* Companies with annual revenues of less than £2.0m: now reduced to 13% of

the top 80% of investments * Companies with negative EBITDA: now reduced to 25% of the top 80% of investments

We believe that this puts SPARK VCT plc in a much better position to cope with the current shortage of investment capital and to support more satisfactory returns to shareholders.

Follow-on investments

It has been an objective of the SPARK management team to reduce the portfolio'sdependency on outside capital and to ensure prudent management of liquiditywithin the fund. Accordingly, the year to 31 December 2009 saw only a limitedamount of additional investment being committed to the portfolio:Company Sector £'000Secerno Limited TMT 202Sift Group Limited TMT 120Skinkers Limited TMT 122UniServity Limited TMT 208Vivacta Limited Healthcare 142Other companies (3) 60 854

The additional funding of Secerno Limited, which specialises in the supply ofsoftware and appliances to protect against internal and external threats todatabases, was provided to support its market development phase. SPARK VCTsubscribed its pro rata share in a rights issue of Sift Group Limited toprovide additional working capital and replace bank finance (and subsequent tothe year end has additionally subscribed £200,000 in a loan instrument with anattractive coupon). In the case of Skinkers Limited, a software companydelivering information broadcast solutions to large enterprises, the salescycle had been impacted by the downturn in the financial services sector: SPARKVCT contributed in a follow-on round at a significantly reduced valuation, aspart of arrangements which also involved the spin-off of the smaller consumer activity (Livestation) and the focusing of the company on its mainstream activities. The additional funding of UniServity Limited was provided as additional workingcapital ahead of the effect of implementation of cost reductions and theachievement of cash generative trading. Finally, in the case of Vivacta Limited, SPARK VCT has committed its share of a new round, structured as an extensionof the Series B round completed in November 2007 and expected to fund thecompany through to regulatory approval of the first of its point-of-carediagnostic tests, for TSH (thyroid function). In all cases except UniServityLimited, where the SPARK-managed funds are the sole institutional investor, thefollow-on investments were made alongside third-party syndicate partners.

Realisations

With the M&A market effectively having been being closed during much of the year, it has not been possible to achieve any significant exits. However, £300,000 was returned in cash by one of the portfolio companies, Community Internet Group Limited, following the sale of a subsidiary, at a substantially higher valuation than carrying value.

Valuation changes

Valuations of the unquoted investments have been determined under theapplication of the International Private Equity and Venture Capital ValuationGuidelines. The quoted venture capital investments (shares traded on AIM, theFrankfurt stock exchange and NASDAQ) have been valued at their bid prices at 31December 2009.Overall, a reduction in valuation of venture capital investments of £3,891,000has been recorded for the year, comprising a reduction in valuation of £3,845,000 in respect of unquoted investments and £46,000 in respect of quotedventure capital Investments.In the case of the "maturing" and "developing" venture capital investments, thevaluations have been arrived at having regard to (i) prices of recent financingrounds and/or the terms of financing rounds expected within the next 12 months,(ii) earnings multiples and (iii) industry valuation benchmarks and/or M&Avaluation criteria. The recent trading results of Elateral Holdings Limitedsupported an upward revaluation of the investment on the basis of an earningsmultiple. In the cases of Antenova Limited and Sift Group Limited, a decline inthe valuation reflects a general fall in comparable valuation measures giventhe current business and market conditions, rather than a dramaticdeterioration in the business performance.The valuations of the "early stage" venture capital investments have beenarrived at (i) by reference to the price of recent financing rounds and/or theterms of financing rounds expected within the next 12 months and/or (ii) byreduction of the previous valuation, in cases where progress in productdevelopment or early commercialisation has been slower than anticipated. Thereduction in the valuation of We7 Limited reflects the lower price of a recentinvestment round. Academia Networks Limited, on the other hand, recentlysucceeded in raising additional third-party funding at an enhanced valuation.Valuation reductions have been applied in the case of other TMT sectorcompanies to reflect slower than expected progress in revenue generation,including Isango! Limited, Perpetuum Limited and Skinkers Limited. The morecautious valuation of Vivacta Limited reflects the expectation of a longermanufacturing and commercial development timescale than previously anticipated,as referred to above.The net reduction in valuation of unquoted venture capital investments issummarised below.Company £'000

"Maturing" and "developing" venture capital investments: valuation changes principally relating to Antenova Limited, Elateral Holdings Limited and Sift Group Limited

(656)

"Early stage" venture capital investments:valuation changes principally relating to Academia Networks Limited, Isango! Limited, Perpetuum Limited,Skinkers Limited, Vivacta Limited and We7 Limited (3,189) (3,845)OutlookCurrent activity on the part of major corporates in considering strategicacquisition opportunities among venture-backed companies suggests evidence ofan improving M&A market. We are conscious of the importance of judging theoptimal timing of M&A activity in relation to small companies in specialistareas where the number of potential buyers may be limited. Opportunities tocapture strategic value in individual cases within the portfolio will thereforebe kept under close review. Nevertheless, for the purposes of overall fundplanning, we continue to expect that the main flow of realisation proceeds willbe concentrated in 2011 and 2012.SPARK Venture Management LimitedManager31 March 2010Directors' report

The Directors present their report and the audited financial statements for the twelve months to 31 December 2009.

Activities and status

The principal activity of the Company during the period was the making ofequity investments, mainly in unquoted companies. On 15 March 2010, the Companywas granted annual approval by HM Revenue & Customs as a Venture Capital Trustfor the period ended 31 December 2008 in accordance with Section 274 of theIncome Tax Act 2007. In the opinion of the Directors, the Company has conductedits affairs so as to enable it to continue to obtain such approval. The Companywas not at any time up to the date of this report a close company within themeaning of Section 414 of the Income and Corporation Taxes Act 1988.

The Company's ordinary shares of 5p each have been listed on the Daily Official List of the UK Listing Authority since 3 April 1996.

Business review

The Business review which is required by Section 417 of the Companies Act is included in the Directors' report by reference.

Corporate governance statement

The corporate governance statement which is required by DTR7.2 is included in the Directors' report by reference.

Financial results and dividends

The net loss attributable to shareholders for the period ended 31 December 2009 was £4,623,000 (31 December 2008: loss of £4,237,000).

The Directors recommend a final dividend of 4.0p per share in respect of the year ended 31 December 2009.

As at 31 December 2009, the Company had accumulated investment holding losses(net of gains) of £7,941,000 (31 December 2008: £4,842,000) and retained apositive balance on its profit and loss account of £3,852,000 (31 December2008: positive balance of £4,388,000). During the period, a transfer of £988,000 has been made from the special reserve to the profit and loss accountto offset capital losses arising in the period on disposals, being current yearlosses and unrealised losses of prior years now treated as written off: seenote 15.

Share capital

The Directors provide the following information about the Company's securities.

The Company's capital structure is shown in note 14 to the accounts. The sharescarry a right to receive discretionary dividends. Interim dividends aredetermined by the Directors, whereas the proposed final dividend is subject toshareholder approval. On a winding up, after meeting the liabilities of theCompany, the surplus assets will be paid to ordinary shareholders in proportionto their shareholdings. There are no substantial shareholders in the Company.Every shareholder who (being an individual) is present in person or (being acorporation) is present by a duly authorised representative, and every proxyfor any shareholder (regardless of the number of shareholders for whom he is aproxy), shall have one vote on a show of hands. On a poll every shareholderpresent in person or by proxy or by representative (in the case of a corporatemember) shall have one vote for each share of which he is the holder, proxy orrepresentative. Instruments appointing a proxy to vote at a general meeting ofthe Company have to be executed in accordance with the Company's articles ofassociation and delivered to the Company or such other place specified in thenotice convening the meeting, not less than 48 hours before the time that themeeting is to commence.

The Company's articles can be amended only by a special resolution of the members, requiring a majority of not less than 75% of such members as vote in person or by proxy.

Purchase and cancellation of shares

During the period 691,004 ordinary shares of 5p each, representing 0.6% of theopening issued share capital, were bought in by the Company for cancellation ata total cost of £78,289.The impact on the net asset value was to increase it by0.1 pence per share. The purpose of the share buybacks was to satisfy demand from those shareholders who sought to sell their shares during the period, given thatthere is a very limited secondary market for shares in Venture Capital Trustsgenerally. The Company may be able to buy back limited volumes of its sharesfrom time to time. However, its ability to do so may be constrained by thelevel of its own liquid resources, VCT specific legislation and the regulationsof the UKLA. In particular, the Board intends to limit share purchases to themost extreme circumstances and, in no case, will the cost of buybacks beallowed to exceed 0.5% of opening net asset value in any year.

Directors

The Directors of the Company who served during the period and their interestsin the issued ordinary shares of 5p each of the Company at 31 December 2009,and as at the date of this report, were as follows: 31 December 31 December 2009 2008*DY Adams (appointed 30 March 2009) - -AB Carruthers - -

RA Field (Chairman)(appointed 21 January 2009) 10,911 10,911 GK Lockwood (appointed 30 March 2009)

- -

* Or date of appointment if later.

All of the Directors' share interests shown above were held beneficially and noright to subscribe for shares in the Company was granted to, or exercised by,any Director during the period.AB Carruthers is a Director of SPARK Venture Management Limited, the Manager.Save for the Management Agreement no contracts subsisted during or at the endof the period in which any Director was materially interested. Disclosuresrequired by Financial Reporting Standard (FRS) 8,"Related Party Disclosures"are set out in note 20 of the financial statements.

Investment manager

SPARK Venture Management Limited ("SVML'), is the Manager to the Company. Theinvestment fund management business of SPARK Ventures plc, which includes theprovision of investment management services by SVML to the Company, was subjectto a management buyout. Following completion of the MBO on 9 October 2009, SVMLhas become a subsidiary of SPARK Venture Management Holdings Limited, a companyrun by the previous executive directors of SPARK Ventures plc. There is nochange in the team within SVML responsible for the management of the Company.

The principal terms of the Company's management agreement with SVML as applicable during the period ended 31 December 2009 are set out in note 4 of the financial statements and have not changed throughout the period to 31 December 2009.

The suitability of the position of the Manager is under continuous assessmentby the Directors. In the opinion of the Directors, the continuing appointmentof the Manager on the terms set out in the management agreement is in theinterests of the shareholders as a whole.

During the year, OLIM Limited acted as adviser to the Company in respect of investments in listed equities and fixed interest securities and had limited discretion to manage this portfolio.

Insurance

As provided for in the Company's articles of association, the Company has continued to maintain directors and officers liability insurance up to an indemnity limit of £5 million.

Performance measurement

It is the responsibility of the Manager to seek the best investments and tomanage the portfolio in the most beneficial way to achieve the highest returnsfor shareholders. The Board reviews investment activity and the performance ofthe Company on a continuous basis. Each Director receives a detailed quarterlyreport from the Manager, including management accounts and progress reports onthe investee companies. The net asset value of the Company's shares isannounced quarterly via a regulatory news service.The Board considers total return to shareholders to be the key performanceindicator. Total return is a combination of net assetvalue and amounts returned to shareholders by way of dividend. This measuredoes not reflect the tax benefits available to shareholders at the time oftheir initial investment. Whilst it is appropriate to consider the performanceof the Company relative to its peers, which is a review undertaken by theBoard, a direct comparison is not always appropriate or relevant given theCompany's niche investment focus and there are no particularly relevant indiceswith which to compare the performance of the Company.The Board is aware that share price performance is seen by many of theCompany's shareholders as being important in judging the return on theirinvestment. The market price of the Company's shares is, in principle, linkedto reported net asset value and the market's perception of the potential forfuture movements in net asset value and for regular future dividend payments.At the present time an overriding factor, however, is the very limitedsecondary market, a consequence of the tax reliefs available on subscription ofnew shares in VCTs but not for purchases of existing shares in the market. As aresult, the market price of the shares of a VCT typically stands at a discountto reported net asset value. Share buybacks by the VCT itself can represent asource of demand for the shares, in the absence of significant demand fromother market participants. In the case of the Company, however, the sharebuyback transactions undertaken in recent years have not been successful inlimiting the level of the share price discount which has continued to be verysignificant.The recent review of the future direction of the Company, referred to in theChairman's statement, has had the aim of determining a strategy that willensure that investment returns generated from the venture capital portfolio aredelivered to shareholders in the most appropriate way. The Board has concludedthat, in future, priority will in future be given to the payment of dividends,as and when realisations are achieved. In particular, subject to any tax andregulatory constraints, 75% of the proceeds from any realisations from within the existing venture capital portfolio will be regarded as being available

fordistribution.Financial instrumentsInformation on the Company's objectives and policies in relation to financialrisk and its management and exposure of market risk, liquidity and credit riskis provided in note 19 to the financial statements.

Principal risks and how the Board seeks to mitigate them

The Company's assets consist principally of unquoted venture capitalinvestments (mainly in equities) and quoted venture capital investments (inequities): its main area of risk therefore relates to investment selection andthe subsequent performance of the underlying businesses. Risks are inherent inventure capital investment, particularly in early stage companies. The specifickey risks faced by the Company, together with the Board's approach tomitigation of operational and regulatory risks are as set out below.

Objective, strategy and investment performance

The results of the Board's recent review of the objective (in terms of the delivery of investment returns to shareholders), strategy and investment performance of the Company are set out in the Chairman's statement.

The Board receives regular reporting allowing it to monitor the Company'sinvestment performance and its compliance with the investment policy. TheManager regularly presents to the Board and detailed quarterly progress reportson the investee companies are circulated to the Board and considered at thequarterly Board meetings. The rationale for individual investment selection isdocumented prior to the making of an investment. This documentation is alsocirculated to the Board.

Regulatory - compliance with the Venture Capital Trust rules

A breach of the Venture Capital Trust rules could result in HM Revenue andCustoms withdrawing the Company's VCT approval. If this approval were to bewithdrawn, the Company would lose its VCT status and all tax reliefs, includingthose available to shareholders, would be likely to be cancelled, some possiblywith retrospective effect. The Board and the Manager frequently reviewcompliance with the Venture Capital Trust rules. Information on the Company'scontinued compliance with the relevant rules and regulations is formallyreported to the Board on a regular basis.

Operational

All proposed investment decisions are notified by the Manager to the Boardprior to a decision to invest being made and all significant transactions andincome and expenditure are reported to the Board. The Board regularly considersall operational risks and the measures in place to control them. The Boardensures that satisfactory assurances are received from the Manager. The Managerproduces quarterly reports for review by the Company's Audit Committee andrepresentatives of the Manager are available to attend meetings in person ifrequired.Creditor payment policyThe Company's payment policy is to ensure settlement of supplier invoices inaccordance with their standard terms. At 31 December 2009 there were no daysbillings from the suppliers of services outstanding (31 December 2008: nil).

Substantial shareholdings

As at 31 December 2009 and at the date of this report, the Company was not aware of any beneficial interest exceeding 3% of any class of the issued share capital.

Audit informationThe Directors holding office at the date of approval of this Directors' reportconfirm that, so far as they are aware, there is no relevant audit informationof which the Company's auditor is unaware; and each Director has taken allsteps that he ought to have taken as a Director to make himself aware of anyrelevant audit information and to establish that the Company's auditor is awareof this information.

Annual General Meeting ("AGM")

The AGM will be held at the offices of Nabarro LLP, Lacon House, 84 Theobald's Road, London WC1X 8RW at 12:00 noon on Friday 7 May 2010.

Going concern

As discussed in the Chairman's statement, the shareholders will be asked tovote on a resolution at this year's AGM to decide whether or not the Companyshould continue as a VCT. The Directors are of the opinion that theshareholders will vote in favour of continuing as a VCT because it is the onlyrealistic opportunity for the Company to realise the full value of theinvestments held. In addition, many investors in SPARK VCT with "rolled over"or "deferred" capital gains would also be significantly disadvantaged if theCompany ceased to qualify as a VCT. It is the Board's view that it is in thebest interests of shareholders to maintain the Company as a qualifying VCT. TheDirectors are recommending that shareholders support the Continuation Vote.Directors with share holdings at the time of the AGM will be voting in favourof the Continuation Vote. It is on this basis that the Directors consider thatthe Company is a going concern.The Directors confirm that they are satisfied that the Company has adequateresources to continue in business for the foreseeable future. For this reasonthey believe that the Company continues to be a going concern and that it isappropriate to continue to apply the going concern basis in preparing thefinancial statements.

Auditor

A resolution to re-appoint Grant Thornton UK LLP as the Company's auditor will be proposed at the forthcoming Annual General Meeting.

By order of the Board NT TranSecretary31 March 2010

Directors' responsibility statement

Company law requires the Directors to prepare financial statements for eachfinancial year that give a true and fair view of the state of affairs of theCompany and of the profit or loss for that year. Under that law, the Directorshave elected to prepare the financial statements in accordance with UKaccounting standards.

In preparing those financial statements, the Directors are required to:

* select suitable accounting policies and then apply them consistently; * make judgements and estimates that are reasonable and prudent; * state whether applicable UK accounting standards have been followed,

subject to any material departures disclosed and explained in the 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 whichdisclose with reasonable accuracy at any time the financial position of theCompany and to enable them to ensure that the financial statements comply withthe Companies Act 2006.They have general responsibility for taking such stepsas are reasonably open to them to safeguard the assets of the Company and toprevent and detect fraud and other irregularities.The financial statements are published on the website (www.sparkvct.com), whichis a website maintained by the Manager. The maintenance and integrity of thewebsite maintained by the Manager is, so far as it relates to the Company, theresponsibility of the Manager. The work carried out by the auditor does notinvolve consideration of the maintenance and integrity of this website and,accordingly, the auditor accepts no responsibility for any changes that haveoccurred to the financial statements since they were initially presented on thewebsite. Visitors to the website need to be aware that legislation in theUnited Kingdom governing the preparation and dissemination of the financialstatements may differ from legislation in their jurisdiction.

Under applicable law and regulations, the Directors are responsible for preparing a Directors' report, Directors' remuneration report and Corporate governance statement that comply with that law and those regulations.

The Directors confirm to the best of their knowledge that:

* the financial statements, prepared in accordance with applicable UK

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 the Company

faces. On behalf of the BoardRobin FieldChairman31 March 2010

Income statement for the year to 31 December 2009

Notes Year Year Year Year Year Year ended ended ended ended ended ended 31.12.09 31.12.09 31.12.09 31.12.08 31.12.08 31.12.08 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Loss on valuation 11(d) - (3,933) (3,933) - (2,862) (2,862)of investments at fair value through profit or loss Loss on disposal of 11(d) - (40) (40) - (292) (292)investments at fairvalue through profitor loss Income 2 241 - 241 784 - 784Recoverable VAT 3 - - - 322 - 322Investment management fee: annual fee 4 (549) - (549) (734) - (734)performance 5 - - - - (1,040) (1,040)incentive fee Other expenses 6 (342) - (342) (415) - (415)Loss on ordinary (650) (3,973) (4,623) (43) (4,194) (4,237)activities before taxation Tax on loss on 8 - - - - - -ordinary activities Loss on ordinary (650) (3,973) (4,623) (43) (4,194) (4,237)activities after taxation Basic and fully 10 (0.6)p (3.6)p (4.2)p - (3.7)p (3.7)pdiluted loss per share

The `Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return have been prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations.

The Company has only one class of business and derives its income from investments made in shares and securities and from bank deposits.

There are no gains and losses for the period other than those passing through the income statement of the Company. The accompanying notes are an integral part of this statement.

Balance sheet as at 31 December 2009

Notes 31 31 December December 2009 2008 £'000 £'000 Fixed assets Investments at fair value through profit 11(a) 15,873 21,333 or loss Current assets Debtors 12 457 1,936Cash at bank 8,900 6,965 9,357 8,901

Creditors: amounts falling due within 13 (200)

(503)one year Net current assets 9,157 8,398 Net assets 25,030 29,731 Capital and reserves

Called-up equity share capital 14 5,519

5,553Share premium account 15 150 150Capital redemption reserve 15 765 731Special reserve 15 22,685 23,751Investment holding losses 15 (7,941) (4,842)Profit and loss account 15 3,852 4,388 Total equity shareholders' funds 25,030 29,731 Net asset value per share 16 22.7p 26.8p

The financial statements were approved by the Directors on 31 March 2010 and were signed on their behalf by:

Robin Field Chairman

The accompanying notes are an integral part of this statement.

Cash flow statement for the year to 31 December 2009

Notes Year Year ended ended 31.12.09 31.12.08 £'000 £'000

Cash inflow/(outflow) from operating activities 17 529 (2,564) Financial investment

Purchase of venture capital investments 11(b) (854) (3,299) Purchase of listed equities and fixed -

(1,488)

interest investments Sale of venture capital investments 11(b) 396

7,928

Sale/redemption of listed equity and fixed 11(b) 1,850

8,269

interest investments Amounts recovered from investments 11(d) 92

410

previously written off Total net financial investment 1,484 11,820 Equity dividends paid 9 - (3,135) Financing Buyback of ordinary shares 14 (78) (573)Total financing (78) (573) Increase in cash for the period 1,935

5,548

Reconciliation of net cash flow to movement in net funds Increase in cash for the period 1,935

5,548

Net funds at the start of the period 6,965

1,417

Net funds at the end of the period 8,900

6,965

The accompanying notes are an integral part of this statement. Net funds comprise cash at bank and on short term deposit. Reconciliation of movements in shareholders' funds for the year to 31 December2009 Called-up Share Capital Special Investment Profit Total equity share premium redemption reserve holding and capital account reserve losses loss account £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 31 December 2007 5,673 150 611 27,615 945 2,682 37,676Shares purchased for (120) - 120 (573) - - (573)cancellation Realisation of prior - - - - (3,884) 3,884 -years' net unrealised gains on investments Transfer from special - - - (3,291) - 3,291 -reserve to profit and loss account Investment holding loss - - - - (1,903) 1,903 -on valuation of investments Loss on ordinary - - - - - (4,237) (4,237)

activities after taxation

Dividends - - - - - (3,135) (3,135)At 31 December 2008 5,553 150 731 23,751 (4,842) 4,388 29,731Shares purchased for (34) - 34 (78) - - (78)cancellation Realisation of prior - - - - 834 (834) -years' net unrealised losses on investments Transfer from special - - - (988) - 988 -reserve to profit and loss account Investment holding loss - - - - (3,933) 3,933 -on valuation of investments Loss on ordinary - - - - - (4,623) (4,623)

activities after taxation

Dividends - - - - - - -At 31 December 2009 5,519 150 765 22,685 (7,941) 3,852 25,030

The accompanying notes are an integral part of these statements.

Notes to the financial statements

1 Accounting policies

A summary of the principal accounting policies, all of which have been applied consistently throughout the period, is set out below:

Basis of accounting

The Financial statements have been prepared under the historical costconvention, except for the measurement of fair value of investments, and inaccordance with applicable UK accounting standards and the Statement ofRecommended Practise `Financial Statements of Investment Trust Companies andVenture Capital Trusts' issued by the Association of Investment Companies inJanuary 2009. The accounts are prepared on a going concern basis.

Investments

The Company's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment policy, and information about the portfolio is provided internally on that basis to the Board.

Accordingly, upon initial recognition (using trade date accounting) theinvestments are designated by the Company as `at fair value through profit orloss'. They are included initially at fair value, which is taken to be theircost (excluding expenses incidental to the acquisition which are written off tothe profit and loss account).

Subsequently, the investments are valued at `fair value', which is measured as follows:

* Listed and other quoted investments are valued at their bid prices at the

close of the period as issued by the London Stock Exchange; investments

listed or quoted overseas are valued at bid prices (where a bid price is

available) or otherwise at fair value based on published price quotations.

* Unquoted investments, where there is not an active market, 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 Valuation Guidelines. Indicators of fair value are derived using

established methodologies including earnings multiples, prices of recent

investment rounds, net assets and industry valuation benchmarks. Where the

Company has an investment in an early stage enterprise, the price of a

recent investment round is often the most appropriate approach to

determining fair value. In situations where a period of time has elapsed

since the date of the most recent transaction, consideration is given to

the circumstances of the investee company since that date in determining

fair value. This includes consideration of whether there is any evidence of

deterioration or strong definable evidence of an increase in value. In the

absence of these indicators, the investment in question is valued at the

amount reported at the previous reporting date. Examples of events or changes that could indicate a diminution include: * the performance and/or prospects of the underlying business are significantly below the expectations on which the investment was based;

* a significant adverse change either in the investee company's business or

in the technological, market, economic, legal or regulatory environment in

which the business operates; or

* market conditions have deteriorated, which may be indicated by a fall in

the share prices of quoted businesses operating in the same or related

sectors.

The Company does not exercise control or significant influence over investeecompanies and, in accordance with the exemptions under FRS 9 "Associates andJoint Ventures", where the Company holds more than 20% but less than 50% of aninvestment and the investment is not a subsidiary, it is not treated as anassociated company.

Gains and losses on investments

Gains and losses arising from changes in the fair value of the investments are included in the Income statement for the period as a Capital item and are allocated to the Investment holding losses.

Income

Dividends receivable on quoted equity shares are brought into account on theex-dividend date. Income receivable on unquoted equity and non-equity sharesand loan notes are brought into account when the Company's right to receivepayment and expect settlement is established. Fixed returns on non-equityshares and debt securities are recognised on a time apportionment basis(including amortisation of any premium or discount to redemption) so as toreflect the effective interest rate, provided there is no reasonable doubt thatpayment will be received in due course. Income from fixed interest securitiesand deposit interest is included on an effective interest rate basis.

Expenses

All expenses, including expenses incidental to the acquisition or disposal ofan investment, are accounted for on an accruals basis and are charged wholly tothe profit and loss account. Any costs associated with the issue of shares arecharged to the share premium account. Any costs associated with the buyback ofshares are charged to the special reserve.

All other expenses including management fees are presented within the Revenue column of the Income statement.

Taxation

Corporation tax is applied to profits chargeable to corporation tax, if any, atthe applicable rate for the period. The Company has not provided for deferredtax on any capital gains/losses arising on the revaluation or disposal ofinvestments as these items are not subject to tax whilst the Company maintainsits Venture Capital Trust status. The Company intends to continue to meet theconditions required for it to hold approved Venture Capital Trust status forthe foreseeable future. Deferred tax assets in respect of surplus managementexpenses are only recognised to the extent that such assets are likely to berecoverable against future taxable profits of the Company.

Foreign exchange

The currency of the primary economic environment in which the Company operates(the functional currency) is pounds sterling ("Sterling"), which is also thepresentational currency of the Company. Transactions involving currencies otherthan Sterling are recorded at the exchange rate ruling on the transaction date.At each balance sheet date, monetary items and non-monetary assets andliabilities that are measured at fair value, which are denominated in foreigncurrencies, are retranslated at the closing rates of exchange. Exchangedifferences arising on settlement of monetary items and from retranslating atthe balance sheet date of investments and other financial instruments measuredat fair value through profit or loss, and other monetary items, are included inthe Profit and loss account. Exchange differences relating to investments andother financial instruments measured at fair value are subsequently included inthe transfer to the Investment holding losses.

Dividends

Dividends payable to equity shareholders are recognised in the reconciliationof movements in shareholders' funds when they are paid, or have been approvedby shareholders in the case of a final dividend and become a liability of theCompany.2 Income Year Year ended ended 31.12.09 31.12.08 £'000 £'000 Dividend income - 167 - Listed companies Interest receivable

- Listed fixed interest securities 103

202

- Loans to venture capital investee companies 50

72 - Bank deposits 8 74 - VAT reclaim 21 -

Other income (global treasury fund) 59

269 241 7843 Recoverable VATHM Revenue and Customs (HMRC) announced in March 2008, following the EuropeanCourt of Justice decision in the JPMorgan Claverhouse case, that the provisionof management services to venture capital trusts is exempt from VAT.Accordingly, the Manager ceased to charge VAT on management fees payable by theCompany with effect from 30 September 2008.In the income statement to 31 December 2008, the Company recognised VATrecoverable of £322,000. During the year to 31 December 2009, the Manager receiveda repayment of £322,000 from HMRC, which was passed on to the Company. It is possiblethat additional amounts of VAT will be recoverable in due course but the Directors are unable at this stage to quantify the sums involved.4 Investment management fee Year ended Year ended 31.12.09 31.12.08 £'000 £'000Investment management fee 549 671Irrecoverable VAT - 63 549 734

SPARK Venture Management Limited ("SVML") provides investment management services to the Company under an amended and restated agreement dated 20 May 2005.

SVML is a wholly owned subsidiary of Spark Ventures Management Holdings Limited, a company of which AB Carruthers is an executive director and in which he is a beneficial shareholder. AB Carruthers is an executive director of SVML.

SVML is entitled to receive a management fee, determined quarterly in arrears,at the annual rate of 2.0% on the value of the Company's net assets at the endof each quarter. This fee is capped to ensure that the Company's running costsdo not exceed 3.25% of closing net asset value. There was no reduction in themanagement fee in respect of the cap (31 December 2008: nil).

Irrecoverable VAT was charged on the investment management fee up to 30 September 2008. In line with the ruling against HMRC, (see note 3), no further VAT was charged after this point.

SVML also provides administrative and secretarial services to the Company for which it was entitled to a fee of £66,000 for the year (31 December 2008: £65,000) adjusted annually in line with changes in the Retail Price Index.

The Investment Management Agreement may be terminated by the Company or the Manager giving not less than twelve months notice. Such notice may be given at any time after the date of the agreement. There are no provisions for compensation payable in the event of termination of the agreement.

5 Performance incentive fee

Following the declaration at the Annual General Meeting of a final dividend of2.8p per share in respect of the period ended 31 December 2007, the total of cash dividends paid or declared amounted to 11.15p per share or 25% of the Fair Asset Value at the time of the merger in 2005.This triggered the performance incentive fee of £1,040,000 which was paid on 17 October 2008.At an Extraordinary General Meeting of the Company on 1 July 2008, theshareholders approved the new management performance incentive arrangements.However, the new management performance incentive arrangements have yet to beimplemented by the entry by the Company into the loan note instrument and theissue of loan notes (being the mechanism for implementation of the performanceincentive scheme). If the performance incentive scheme were implemented,rewards under the performance incentive scheme would be paid each year, basedon year-on-year total returns (net asset values plus cumulative dividends paid)achieved in excess of a hurdle return of 5 per cent. of the opening net assetvalue each year, starting from the net asset value at 31 December 2007, andwould be calculated as 20 per cent. of that excess. In circumstances in whichgrowth in the year-on-year total return results in an entitlement arising underthe management performance incentive arrangements, the Board would also expectto pay a dividend.6 Other expenses Year Year ended ended 31.12.09 31.12.08 £'000 £'000

Administrative and secretarial services 66

65

Directors' remuneration (note 7) 69

55

Auditor's remuneration - Fees payable to the Company's auditor for audit of the 17

17

financial statements

- Fees payable to the Company's auditor and its associates 8

8

for other services relating to tax Legal and professional expenses 47

31

Insurance 28

28

Management fees payable to OLIM Limited 11

39Transaction costs - 15Irrecoverable VAT 30 32

Payment on account to HMRC (see below) -

31Other 66 94 342 415Following a routine inspection into the PAYE records of the Company,discussions are underway with HMRC over the treatment of amounts paid in priortax years to former Directors of SPARK VCT and the companies that merged intoit. Payments were historically made to Directors' service companies rather thanbeing treated as salary with PAYE deducted. The Company's professional advisershave advised that the likely total liability for SPARK VCT is in the region of£25,000 on the assumption that 25% of amounts paid to Directors' servicecompanies are viewed by HMRC as having been incorrectly paid gross of anytaxation or national insurance deductions and that the Company is unable torecover this possible tax liability from its former Directors. In the eventthat the arguments of the Company's advisers are unsuccessful, the totalliability could be £155,000, including £33,000 of employer's nationalinsurance. The Company has made a payment on account of £31,000 which wasaccrued in the accounts for the year to 31 December 2008.From 1 January 2009 all directors' fees are paid as salary with PAYE andNational Insurance deducted.7 Directors' remuneration Year ended Year ended 31.12.09 31.12.08 £'000 £'000Amounts payable to Directors or companies 69 55 associated with them 69 558 Tax on ordinary activities Year ended Year ended 31.12.09 31.12.08 £'000 £'000Corporation tax - - - -

Reconciliation of loss on ordinary activities to taxation

Year ended Year ended 31.12.09 31.12.08 £'000 £'000Loss on ordinary activities before taxation (4,623) (4,237)Tax on loss on ordinary activities atstandard UK corporation tax rate of 28% (31 December 2008: 28.5%) (1,294) (1,208)Effects of:Non taxable items - UK dividends and netlosses on investments 1,112 851Unutilised management expenses 182 357 - -The Company has excess trading losses of £8,059,000 (31 December 2008: £7,409,000) that are available for offset against future profits. A deferred taxasset of £2,257,000 (31 December 2008: £2,075,000) has not been recognised inrespect of those losses as they will be recoverable only to the extent that theCompany has sufficient future taxable profits.9 Dividends Year ended Year ended 31.12.09 31.12.08 £'000 £'000Final dividend paid, period ended 31 December 2007: 2.8p per share paid 15October 2008 - 3,135 - 3,135

The total reserves available for distribution by way of a dividend is £18,596,000 (31 December 2008: £23,297,000), being made up of the Special reserve, and Profit and loss account less Investment holding losses.

The directors propose a final dividend of 4.0 pence per share for the year ended 31 December 2009, to be approved at the AGM.

10 Earnings per share

The revenue loss per share of 0.6p (31 December 2008: loss 0p) is based on therevenue loss on ordinary activities after tax of £650,000 (31 December 2008:loss £43,000) and on the weighted average number of ordinary shares in issueduring the period of 110,631,989 (31 December 2008: 112,145,822).The capital loss per share of 3.6p (31 December 2008: loss 3.7p) is based onthe capital loss on ordinary activities after tax of £3,973,000 (31 December2008: loss £4,194,000) and on the weighted average number of ordinary shares inissue during the period of 110,631,989 (31 December 2008: 112,145,822).The total loss per share of 4.2p (31 December 2008: loss 3.7p) is based on theloss on ordinary activities after tax of £4,623,000 (31 December 2008: loss £4,237,000) and on the weighted average number of ordinary shares in issueduring the period of 110,631,989 (31 December 2008: 112,145,822).There is no dilution effect in respect of the period ended 31 December 2009 (31December 2008: nil).11 Investments 31.12.09 31.12.08 11(a) Summary of investments £'000 £'000 Venture capital investments 14,870 18,435 Listed fixed interest investments 1,003 2,898 15,873 21,333

11(b) Movements in investments

Listed Venture fixed capital interest investments investments Total £'000 £'000 £'000 Cost at 1 January 2009 23,321 2,854 26,175Investment holding (losses)/gains at 1 (4,886) 44 (4,842)January 2009 Valuation at 1 January 2009 18,435 2,898 21,333 Movements in the period: Purchases at cost 854 - 854Disposals (396) (1,850) (2,246)- proceeds

- realised net losses on disposal (132) -

(132)

Amortisation of fixed interest investments - (3)

(3)

Net loss on valuation of investments (3,891) (42) (3,933)Valuation at 31 December 2009 14,870 1,003 15,873 Book cost at 31 December 2009 22,814 1,000 23,814Investment holding (losses)/gains at 31 (7,944) 3 (7,941)December 2009 Valuation at 31 December 2009 14,870 1,003 15,873Amounts shown at cost represent the fair value of the investment at the date ofthe merger in 2005, or subsequent acquisition cost, less any reduction made onaccount of impairment in value.

11(c) Venture capital investments

Investment Valuation holding gains/ Valuation at 01.01.09 Additions Disposals (losses) at 31.12.09 £'000 £'000 £'000 £'000 £'000

Fifteen largest venture capital investments

Elateral Holdings Limited 1,783 - - 207 1,990Imagesound plc (1) 1,920 - - - 1,920Sift Group Limited 2,248 120 - (730) 1,638UniServity Limited 1,000 208 - - 1,208Cluster Seven Limited 1,197 - - - 1,197Vivacta Limited 1,337 142 - (334) 1,145Workshare Limited 909 - - 19 928Level Four Software Limited 855 - - - 855Secerno Limited 688 202 - (335) 555Haemostatix Limited 502 - - - 502Lab M Holdings Limited 440 - - - 440Antenova Limited 495 - - (152) 343We7 Limited 816 - - (482) 334Academia Networks Limited 51 53 - 176 280Isango! Limited 1,000 - - (750) 250 15,241 725 - (2,381) 13,585

Other unquoted venture capital investments 2,724 123 (528) (1,464) 855

Other quoted venture capital investments 470 6

- (46) 430 18,435 854 (528) (3,891) 14,870

Transaction costs relating to purchase or sale of venture capital investments are not capitalised

(1) Includes £1 million unquoted 5% fixed interest rate unsecured subordinated convertible loans until 2012 FRS 29 analysis £'000Level 1:

Quoted venture capital investment(2)

430

Listed fixed interest investments(2)

1,003

Level 3: Unquoted venture capital investments 14,440 15,873

(2) All level 1 investments are in an active market.

Level 3 reconciliation £'000Valuation at 1 January 2009 17,965Purchases at cost 848Disposals - proceeds (396)

- realised net losses on disposal(3)

(132)Investment holding losses(4) (3,845)Valuation at 31 December 2009 14,440

(3) Realised net losses on disposal are included within "Loss on disposal at

fair value through profit or loss" in the Income statement.

(4)Investment holding losses are included within "Loss on valuation of

investments at fair value through profit or loss" in the Income statement.

11(d) Loss on investments The overall loss on investments at fair value through profit or loss disclosedin the profit and loss account is analysed as follows: Year Year ended ended 31.12.09 31.12.08 £'000 £'000

Loss on valuation of investments at fair value

through profit or loss Net loss on valuation of investments (3,933) (1,903)Write-off of investments - (959) (3,933) (2,862)

Loss on disposal of investments at fair value

through profit or loss Net loss on disposals (132) (702)

Recoveries made in respect of investments 92

410previously written off (40) (292) (3,973) (3,154)

"Net loss on disposals" represents the difference between proceeds received and the carrying values of those investments sold during the period.

11(e) Significant holdings

Details of shareholdings in those companies where the Company's holding at 31December 2009 represents more than 20 per cent. of the allotted equity sharecapital of any class; more than 20 per cent. of the allotted share capital; ormore than 20 per cent. of the assets of the company itself, are given below.All of the companies are incorporated in Great Britain.Company Class of share Number Proportion of class held held Elateral Holdings Ordinary shares (0.001p) 14,423,285 21.8% Limited Preference shares (0.001p) 81,699,667 28.5% Lab M Holdings Limited A. Ordinary shares (10p) 2,280,000 100.0% B. Ordinary shares (10p) 600 60.0% Cumulative redeemable preference 600,000 60.0% shares (£1) Preferred ordinary shares (10p) 389,940 52.3% Sift Group Limited Ordinary shares (1p) 5,566,184 17.6% A Ordinary shares 2,977,480 25.9% B Ordinary shares 2,977,480 25.9% UniServity Limited Ordinary shares 10,255 6.5% A Ordinary shares 35,896 41.7% B Ordinary share 18,540 41.7% 12 Debtors 31.12.09 31.12.08 £'000 £'000 Other debtors 349 1,811Prepayments and 108 125accrued income 457 1,93613 Creditors (amounts falling due within one 31.12.09 31.12.08year) £'000 £'000 Accruals 85 345Other creditors 115 158 200 503

14 Called-up equity share capital

31.12.09 31.12.08 £'000 £'000 Authorised: 200,000,000 (31.12.08: 200,000,000) ordinary 10,000 10,000shares of 5p

Allotted, issued and fully paid: 110,370,134 (31.12.08: 111,061,138) ordinary 5,519

5,553

shares of 5p

The Company bought back for cancellation 691,004 ordinary shares, representing 0.6% of the opening issued share capital, at a cost of £78,289.

15 Reserves Share Capital Special Investment Profit premium redemption reserve holding and account reserve losses loss account £'000 £'000 £'000 £'000 £'000 At 1 January 2009 150 731 23,751 (4,842) 4,388

Shares purchased for cancellation - 34 (78) -

-

Realisation of prior years' net - - - 834 (834) losses on investments

Transfer from special reserve to - - (988) - 988 profit and loss account

Investment holding loss on - - - (3,933)

3,933

valuation of investments Loss on ordinary activities after - - - - (4,623)taxation Dividends - - - - -At 31 December 2009 150 765 22,685 (7,941) 3,852

The capital redemption reserve was created in March 2005 to reflect the repurchase and cancellation of shares.

The special reserve is a distributable reserve, created on 3 November 2000following the reduction of the share premium account, which allows the Company,amongst other things, to fund the buyback of its ordinary shares as and when itis considered by the Board to be in the best interests of shareholders and alsoto facilitate the payment of dividends to shareholders earlier than wouldotherwise have been possible, as transfers can be made from this reserve to theprofit and loss account to offset losses on disposal of investments and forinvestments that have been fair valued to zero with no chance of recovery, thecost of these investments.Accordingly, a transfer of £988,000 (including £132,000 representing losses ondisposal of investments during the period and £856,000 representing losses ofprevious years now treated as realised or written off) has been made from thespecial reserve to the profit and loss account.

Other gains and losses arising on the inclusion of investments at fair value, are transferred to the investment holding losses.

16 Net asset value per share

The net asset value per share as at 31 December 2009 of 22.7p (31 December 2008: 26.8p) is based on net assets of £25,030,000 (31 December 2008: £29,731,000) divided by the 110,370,134 ordinary shares in issue at that date (31 December 2008: 111,061,138).

17 Reconciliation of operating loss to net cash inflow/(outflow) from operatingactivities Year Year ended ended 31.12.09 31.12.08 £'000 £'000 Loss on ordinary activities before tax (4,623)

(4,237)

Loss on investments at fair value through 3,973

3,154

profit or loss Decrease/(increase) in debtors 1,479

(1,759)

(Decrease)/increase in creditors (303)

291

Amortisation of fixed interest investments 3

(13)

Cash inflow/(outflow) from operating 529

(2,564)

activities

18 Commitments and guarantees

As at 31 December 2009, there were no legal commitments (31 December 2008: £nil) in respect of further funding to be provided to existing investee companies. There were no guarantees outstanding (31 December 2008: £nil).

19 Financial instruments

As a Venture Capital Trust the Company invests in unquoted and AIM-traded UKcompanies.In addition to its venture capital portfolio, which is invested mainly in technology-related companies in the TMT and healthcare sectors, the Companymaintains liquidity balances in the form of cash and listed fixed interestsecurities held for follow-on financing and new venture capital investment anddebtors and creditors that arise directly from its operations. At 31 December2009, 59.5% (£14.9 million) of the Company's net assets were invested inventure capital investments and 40.5% (£10.2 million) in liquidity balances.

In pursuing its investment policy, the Company is exposed to risks that could result in a reduction in the value of net assets and consequently funds available for distribution by way of dividend or for re-investment.

These risks and the management of them, which is the responsibility of the Manager and monitored by the Directors, are unchanged from the previous accounting period and are set out below.

Market risk

The fair value or the future cash flows of financial instruments held by the Company may fluctuate because of changes in market prices. Market risk comprises currency risk, interest rate risk and other price risk:

* Currency risk The Company has no significant financial instruments denominated in foreign currencies. * Interest rate risk As the Company has no borrowings it only has limited interest rate risk. Theimpact is on income and operating cash flows and arises from changes in marketinterest rates.The assets that are exposed to interest rate risk are tabled below. Interestreceived on cash balances is at a margin over LIBOR or its currency equivalent(2008: same). Interest on listed fixed interest securities and on loans toventure capital investee companies is at a fixed rate. With interest income of£161,000 to 31 December 2009, any further upward or downward movement ininterest rates is unlikely to be material.

* Other price risk

Venture capital investments carry a significant risk of failure. The managementof risk within the venture capital portfolio is addressed through carefulinvestment selection, by diversification across different industry segmentswithin the TMT and healthcare sectors, by maintaining a wide spread of holdingsin terms of financing stage and by limitation of the size of individualholdings. The Directors monitor the Manager's compliance with the investmentpolicy, review and agree policies for managing this risk and monitor theoverall level of risk on the investment portfolio on a regular basis.A movement of 2.5% (the annual average percent reduction in total return overthe last five accounting periods) in the fair value of the total venturecapital portfolio would result in a movement of £0.4 million in profit beforetax, which would affect the net asset value by 0.34p per share (2008: movementof 1.9% would affect net asset value by 0.32p per share).

Liquidity risk

The Company's assets comprise quoted and unquoted equity and non-equity shares,fixed income securities, short term money market investments and cash. Althoughthe Company's AIM traded and unquoted investments are less liquid thansecurities listed on the London Stock Exchange, the Company has 40.5% of theinvestment portfolio invested in cash, short-term debtors and creditors andreadily realisable securities, which are sufficient to meet any fundingcommitments that may arise. As at the period end, the Company had noborrowings.

Credit risk

Credit risk is the risk that a party to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company, resulting in a financial loss.

The Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis.

At the reporting date, the Company's financial assets exposed to credit risk amounted to the following:

31.12.09 31.12.08 £'000 £'000 Investment in fixed interest instruments 1,003 2,898Cash and cash equivalents 8,900 6,965 9,903 9,863

This risk is managed as follows: - where the Manager makes an investment in a bond, corporate or otherwise, thecredit rating of the issuer is taken into account so as to determine the riskto the Company of default.

- investment transactions are carried out by the fixed interest adviser, whose reports are received and reviewed on a monthly basis by the Manager.

- cash at bank is held only with banks with high quality external credit ratings.

The Company also has an exposure to credit risk in respect of the loan stockinvestments it has made into investee companies, most of which have no securityattached to them and, where they do, such security ranks beneath any bank debtthat an investee company may owe.

These loan stock investments are made as part of the qualifying investments within the investment portfolio and the risk management process applied to the loan stock investments have already been set out under other price risk above.

Fair values of financial assets and financial liabilities

Financial assets and liabilities are carried in the balance sheet at either their fair value (investments), or the balance sheet amount is a reasonable approximation of the fair value (amounts due from brokers, dividends receivable, accrued income, due to brokers, accruals, and cash at bank).

Capital disclosures

The Company's objective is to deliver, as far as is consistent with venturecapital investment, steady growth in total return to shareholders (net assetvalue plus cumulative dividends paid).As a result of the recent strategyreview, this objective has been varied from the previous accounting year: infuture, within the components of total return, priority will be given to thepayment of dividends as and when realisations are achieved. In particular,subject to any tax or regulatory constraints, 75% of the proceeds from anyrealisations from within the existing venture capital portfolio will beregarded as available for distribution. It is likely, therefore, that the netasset value of the fund will decline as dividends are paid, although to theextent that investments are realised at amounts in excess of the valuations at31 December 2009, and subject to the ongoing operating costs of the fund, totalreturn will increase.The capital subscribed to the Company by original investors has been managed inaccordance with the Company's objectives. The available capital at 31 December2009 is £25.0 million (31 December 2008: £29.7 million) as shown in the Balancesheet, which includes the Company's share capital and reserves.Following the Board's recent strategy review, the dividend policy of theCompany will now be as set out above. Owing to the nature of a VCT, dividendspayable may vary considerably from time to time depending, both on the level ofincome received from investments and, more significantly, on whether realisations of investments have been achieved. Accordingly the level of dividends willfluctuate and in some periods it is possible that no dividend will be paid.

As regards share buybacks, following the strategy review the Board has determined that the Company will continue to be willing to make buybacks of limited volumes of its shares but expects that, going forward, the budget made available to fund buybacks will be more tightly restricted than in previous years.

The Company has no borrowings and there are no externally imposed capital requirements other than the minimum statutory share capital requirements for public limited companies.

20 Related party disclosuresSPARK Investors Limited, (a fellow subsidiary of the Manager) for which ABCarruthers acted as a Director, is from time to time eligible to receivetransaction fees and/or Directors' fees from investee companies. During theperiod ended 31 December 2009, fees of £26,000 attributable to the investmentsof the Company were received pursuant to these arrangements (31 December 2008:£31,000).

There were no transactions, during the year, by Directors in investments in which SPARK VCT plc has invested (31 December 2008: nil).

21 Co-investment

The Company has made venture capital investments in companies in which other funds managed by SVML have also invested:

For the purpose of this note, the following abbreviations apply:

SPARK Ventures plc - SPKSPARK VCT 2 plc - SVCT 2Quester Venture Partnership - QVPIsis College Fund Limited Partnerships and Second Isis College Fund LimitedPartnership - ICF Lachesis Seed Fund Limited Partnership - LachesisCompany Co-investorsAcademia Networks Limited ICF, SPK and SVCT 2Allergy Therapeutics plc SVCT 2Antenova Limited QVP and SVCT 2Celldex Therapeutics, Inc. QVP and SVCT 2Cluster Seven Limited QVP and SVCT 2Elateral Holdings Limited SVCT 2Haemostatix Limited Lachesis, QVP and SVCT 2Imagesound plc SVCT 2Isango! Limited SPK and SVCT 2Level Four Software Limited QVP and SVCT 2MediGene AG ICF, QVP and SVCT 2Oxonica plc ICF and SVCT 2Perpetuum Limited QVP and SVCT 2Secerno Limited ICF and SVCT 2Sift Group Limited SVCT 2Skinkers Limited SPK and SVCT 2Symetrica Limited SVCT 2TeraView Limited SVCT 2UniServity Limited SVCT 2Vivacta Limited QVP and SVCT 2We7 Limited SVCT 2Workshare Limited QVP and SVCT 2

22 Post balance sheet events

Subsequent to the year end, the Company has not made any new investments in excess of 20% of the equity capital of an investee company or any follow-on investments that would raise the Company's existing stake above 20% of the equity capital of an investee company.

After the year end, £21,000 was obtained from HMRC being interest on the VAT reclaim made in 2008.This amount has been accrued at the year end.

vendor