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Matrix Income & Growth 2 VCT plc ("the Company")
Annual Financial Report announcement for the year ended 30 April 2010
CHAIRMAN'S STATEMENT
I am pleased to present the tenth Annual Report of the Company for the year ended 30 April 2010.
Overview of performance for the year ended 30 April 2010
Net asset values per share for both funds have increased over the year. OurOrdinary Shareholders have seen an increase in underlying net asset value("NAV") per share of 4.45%. The Ordinary Share NAV total return since launchincreased by 3.20% in the year, from 95.82 pence per share to 98.89 pence pershare.Our C shareholders have seen a smaller increase in underlying NAV per share of1.69%, plus a further 1.16% due to the 1 penny per share dividend paid in theyear, giving rise to a total increase in NAV per share of 2.85%. The C ShareNAV total return since launch increased by 2.72%, from 90.02 pence per share to92.47 pence per share.
Revenue and Capital returns for the year ended 30 April 2010
The results for the year ended 30 April 2010 are set out in the followingpages. The total return (after tax) attributable to the Ordinary Shareholdersfor the year was a profit of £346,071 (2009: loss of £2,545,615) and the NAVper Ordinary Share at 30 April 2010 was 72.10 pence compared with 69.03 penceas at 30 April 2009. This increase is a result of unrealised increases in thevaluation of investments. The after tax revenue loss before net capital gainswas 0.35 pence per Ordinary Share for the year ended 30 April 2010 (2009: gainof 1.29 pence).The total return (after tax) attributable to the C Shareholders for the yearwas a gain of £376,892 (2009: loss of £1,021,677) and the NAV per C Share at 30April 2010 was 87.47 pence compared with 86.02 pence as at 30 April 2009. Afinal dividend of 1 penny per share was paid on 18 September 2009 in respect ofthe year ended 30 April 2009. Net assets increased as a result of unrealisedincreases in the valuation of investments and the further and final allotmentof C Shares at the start of the year under the previous year's Offer forSubscription. The after tax revenue loss before net capital gains was 0.57pence per C Share for the year ended 30 April 2010 (2009: gain of 1.27 pence).
Portfolio Activity
The Company has continued its cautious approach to new investment given thevolatile and difficult trading environment for smaller companies. As reportedin the Half-Yearly Report, both funds made an investment in Iglu.com HolidaysLimited via Barnfield Management Investments Limited, as part of our operatingpartner programme. The Ordinary Share Fund invested £437,310 and the C ShareFund invested £562,691. Both funds made small follow-on investments in BritishInternational Holdings Limited (O fund: £133,252; C fund: £26,748).
The C Share Fund made a new investment into Backbarrow Limited in April 2010 as part of our operating partner programme.
The Company realised its investment in PastaKing Holdings Limited in December,realising net proceeds of £736,918 for the Ordinary Share Fund and £514,393 forthe C Share Fund. This realisation contributed to total proceeds over the lifeof the investment of £897,049 for the Ordinary Share Fund and £626,169 for theC Share Fund, representing a 3.27x return on the original investment cost of £274,624 and £191,720 respectively. During the year, DiGiCo Europe made twopartial repayments of its loan stock, realising £275,103 for the Ordinary Fundand £192,057 for the C Fund in May and December 2009.The Ordinary Share Fund held 15 investments at the year-end, which were valuedat 72.92% of cost. The C Share Fund held investments in 13 companies, showingvaluations which were 91.81% of cost.
Details of these investments are provided in the Investment Manager's Review below.
Income returns
Total income was negative for the year, generating a loss of £139,503 compared to a gain of £270,417 in 2009. This is the result of three factors;
Firstly, income returns for both Funds have continued to be adversely affectedby the low interest rates available on bank deposits and money-market funds.Total income from cash and money market funds was £82,397 (2009: £238,023).Secondly, loan stock interest from investee companies fell to £259,774 (2009: £391,124), as several investee companies were unable to pay their interest due.The annualised yield from loan stocks at valuation is now running at 3.09%(2009: 5.47%) and 4.53% (2009: 4.87%) to the Ordinary and C Share Fundsrespectively. Lastly, income from dividend receipts has also fallen to £25,173(2009: £214,825). Income in 2009 was boosted by two exceptional dividends fromPastaKing Holdings Limited.
Subject to a major improvement in economic conditions, it is likely that income returns will continue to remain low for the current financial year.
Dividends
The revenue account generated a net revenue loss for the year of £39,878 forthe Ordinary Share Fund (2009: gain of £147,005) and a loss of £99,625 for theC Share Fund (2009: gain of £123,412). Your Board will not be recommending incomedividends for Ordinary or C Shareholders. Following the proceeds from the sale ofPastaKing Holdings and the partial loan stock repayments by DiGiCo Europe, your Board has declared the payment of an interim capital dividend of 1 penny per C Share in respect of the year ended 30 April 2010. The dividend will be paid on 13 August 2010 to C Shareholders on the register on 23 July 2010.
Continuation vote
Under the current Articles of Association, shareholders have the opportunity toconsider the future of the Company at the forthcoming Annual General Meeting.Resolution 13 in the Annual General Meeting notice, included in the AnnualReport, proposes that the Company continue as a venture capital trust.Continuing as a venture capital trust will enable the Company to maintain itsability to distribute tax-free dividends and not pay capital gains on the saleof any of its investments. In addition, it will also mean that thoseshareholders who subscribed for new shares in 2009 will retain their taxreliefs. The Board believes that the Company is well placed to take advantageof future investment opportunities and recommends that shareholders vote infavour of this resolution.
Merger of the share classes
When the Offer for C Shares was originally launched in 2005, it was intendedthat the Company's two share classes would merge at some future point. TheBoard has decided that a merger of the two share classes is now desirable andproposals will be forwarded to Shareholders.
Outlook
The state of the economy and any recovery still remains uncertain, although there are tentative signs that recovery is underway. The effects of the downturn will continue to impact the investments held by your Company over the coming year. The Company maintains a significant cash position to support portfolio companies where merited and take advantage of attractive new investment opportunities that present themselves.
Conclusion
I would like to express my thanks to all Shareholders for your continuing support of the Company. I hope to have the opportunity of meeting you at the Annual General Meeting on 9 September 2010.
Nigel MelvilleChairman30 June 2010
The Directors confirm to the best of their knowledge that:
(a) the financial statements, prepared in accordance with UK GenerallyAccepted Accounting Practice and the 2009 Statement of Recommended Practice,'Financial Statements of Investment Trust Companies and Venture Capital Trusts'(SORP), give a true and fair view of the assets, liabilities, financialposition and the profit or loss of the Company.(b) the management report, comprising the Chairman's Statement, InvestmentPortfolio Summary, Investment Manager's Review and Directors' Report includes afair review of the development and performance of the business and the positionof the Company, together with a description of the principal risks anduncertainties that it faces.
The names and functions of the Directors are stated in the Annual Report.
For and on behalf of the Board:
Nigel MelvilleChairman30 June 2010INVESTMENT POLICY
The VCT's policy is to invest primarily in a diverse portfolio of UK established, profitable, unquoted companies in order to generate capital gains from trade sales and flotations.
Investments are structured as part loan and part equity in order to receive regular income and to provide downside protection in the event of under-performance.
Investments are made selectively across a number of sectors, primarily in management buyout transactions (MBOs) i.e. to support incumbent management teams in acquiring the business they manage but do not own. Investments are primarily made in companies that are established and profitable.
Uninvested funds are held in cash and low risk money market funds.
UK Companies
The companies in which investments are made must have no more than £15 millionof gross assets at the time of investment to be classed as a VCT qualifyingholding. The additional £7.3 million funds raised by the Company after 6 April2006 are subject to a £7 million gross assets test for an investment to be
VCTqualifying.VCT regulationThe investment policy is designed to ensure that the VCT continues to qualifyand is approved as a VCT by HMRC. Amongst other conditions, the VCT may notinvest more than 15% of its investments in a single company and must achieve atleast 70% by value of its investments throughout the period in shares orsecurities in qualifying holdings, of which a minimum overall of 30% by valuemust be ordinary shares which carry no preferential rights. In addition,although the VCT can invest less than 30% of an investment in a specificcompany in ordinary shares it must have at least 10% by value of its totalinvestments in each qualifying company in ordinary shares which carry nopreferential rights.
Asset mix
The Investment Manager aims to hold approximately 80% by value of the VCT's investments in qualifying holdings. The balance of the portfolio is held in readily realisable interest bearing investments and deposits.
Risk diversification and maximum exposures
Risk is spread by investing in a number of different businesses acrossdifferent industry sectors. To reduce the risk of high exposure to equities,each qualifying investment is structured using a significant proportion of loanstock (up to 70% of the total investment in each VCT qualifying company).Initial investments in VCT qualifying companies are generally made in amountsranging from £200,000 to £1 million at cost. Ongoing monitoring of eachinvestment is carried out by the Manager generally through taking a seat on theBoard of each VCT qualifying company.
Co-investment
The VCT aims to invest alongside three other Income and Growth VCTs advised by the Manager with a similar investment policy. This enables the VCT to participate in combined investments by the Investment Manager of up to £5 million.
Borrowing
The VCT has no borrowing and does not have any current plans for future borrowings.
Management
The Board has overall responsibility for the Company's affairs including thedetermination of its investment policy. Investment and divestment proposals areoriginated, negotiated and recommended by the Manager and are then subject toformal approval by the Directors. Matrix Securities provides CompanySecretarial and Accountancy services to the VCT.
PRINCIPAL RISKS, MANAGEMENT AND REGULATORY ENVIRONMENT
The Board believes that the principal risks faced by the VCT are:
Economic risk - events such as an economic recession and movement in interestrates could affect trading conditions for smaller companies and consequentlythe value of the VCT's qualifying investments.Loss of approval as a Venture Capital Trust - the VCT must comply with section274 of the Income Tax Act 2007 which allows it to be exempted from capitalgains tax on investment gains. Any breach of these rules may lead to the VCTlosing its approval as a VCT, qualifying shareholders who have not held theirshares for the designated holding period having to repay the income tax reliefthey obtained and future dividends paid by the VCT becoming subject to tax. TheVCT would also lose its exemption from corporation tax on capital gains.Investment and strategic - inappropriate strategy or consistently weak VCTqualifying investment recommendations might lead to under performance and poorreturns to shareholders. Investment in unquoted small companies by its natureinvolves a higher degree of risk than investment in companies traded on theLondon Stock Exchange main market. Smaller companies often have limited productlines, markets or financial resources and may be dependent for their managementon a smaller number of key individuals. This may make them more risk-prone andvolatile investments.
Regulatory - the VCT is required to comply with the Companies Act 2006, the rules of the UK Listing Authority and United Kingdom Accounting Standards. Breach of any of these might lead to suspension of the VCT's Stock Exchange listing, financial penalties or a qualified audit report.
Financial and operating risk- inadequate controls might lead to misappropriation of assets. Inappropriate accounting policies might lead to misreporting or breaches of regulations. Failure of the Manager's and Administrator's accounting systems or disruption to its business might lead to an inability to provide accurate reporting and monitoring.
Market risk - movements in the valuations of the VCT's investments will, inter alia, be connected to movements in UK Stock Market indices.
Asset liquidity risk - The VCT's investments may be difficult to realise.
Market liquidity risk - Shareholders may find it difficult to sell their shares at a price which is close to the net asset value.
Credit/counterparty risk - A counterparty may fail to discharge an obligation or commitment that it has entered into with the Company.
The Board seeks to mitigate the internal risks by setting policy and byundertaking a key risk management review at each quarterly Board meeting.Performance is regularly reviewed and assurances in respect of adequateinternal controls and key risks are sought and received from the Manager andAdministrator on a six monthly basis. In the mitigation and management of theserisks, the Board applies rigorously the principles detailed in the AIC Code ofCorporate Governance. The Board also has a share buyback policy to try tomitigate the Market Liquidity risk. This policy is reviewed at each quarterlyBoard Meeting.INVESTMENT PORTFOLIO SUMMARYAs at 30 April 2010
Ordinary Share Fund
Date of Total Book Valuation Additions Disposals Valuation Change in % of first cost at 30 at 30 at cost at at 30 valuation net investment April 2010 April valuation April for year assets Sector 2009 2010 by £ £ £ £ £ £ £ Qualifying investments AIM quoted investments Legion Group plc (formerly SectorGuard plc) August 2005 150,000 75,000 - - 64,286 (10,714) 0.8%Provision of manned guarding, Supportmobile patrolling, and Servicesalarm response services Vphaseplc (formerly Flightstore Group plc) March 2001 254,586 7,604 - - 2,851 (4,753) 0.0%Development of energy saving Electronicdevices for domestic and electrical use equipment ----- ----- ----- ----- ----- ----- ----- 404,586 82,604 - - 67,137 (15,467) 0.8%
Unquoted investments
DiGiCoEurope Limited July 2007 332,849 827,897 - (256,037) 962,655 390,795 11.9%Design and manufacture of Technology,audio mixing desks hardware and equipment Youngman Group Limited October 2005 1,000,052 689,583 - - 699,966 10,383 8.6%Manufacturer of ladders Support and access towers services VSI Limited April 2006 231,020 651,150 - - 644,727 (6,423) 7.9%Software for CAD and CAM vendors Software and
Computer Services British International Holdings Limited June 2006 832,827 1,000,432 - - 574,215 (426,217) 7.2%Helicopter service operators Support services ATG Media Holdings Limited October 2008 508,736 508,736 - - 505,456 (3,280) 6.2%Publisher and online auction Mediaplatform operatorVectair Holdings Limited January 2006 243,784 325,108 - - 441,853 116,745 5.4%Design and sale of washroom Supportproducts servicesIglu.com Holidays Limited December 2009 437,310 - 437,310 - 437,310 - 5.4%Online ski and cruise travel RetailagentCampden Media Limited January 2006 975,000 214,044 - - 310,775 96,731 3.8%
Publishing and conferencing Media
Blaze Signs Holdings Limited April 2006 791,608 297,000 - - 305,914 8,914 3.8%Manufacturing and installation Supportof signs services Racoon International Holdings Limited December 2006 517,350 - - - 249,349 249,349 3.1%Supplier of hair extensions, Personalhair care products and training goodsThe Plastic Surgeon Holdings Limited April 2008 230,986 57,747 - - 57,747 - 0.7%Snagging and finishing of Supportdomestic and commercial servicesproperties PXP Holdings Limited (Pinewood Structures) December 2006 685,131 32,851 - - - (32,851) 0.0%Design, manufacture and supply Constructionof timber frames for buildingsPastaKing Holdings Limited June 2006 - 783,243 - (783,243) - - 0.0%Manufacture and supply of Foodfresh pasta meals producers
Award International Holdings plc March 2004 250,000 - -
- - - 0.0%Promotional goods and services N/Aagency ----- ----- ----- ----- ----- ----- ----- , 7,036,653 5,387,791 437,310 (1,039,280) 5,189,967 404,146 64.0% ----- ----- ----- ----- ----- ----- -----Total qualifying investments 7,441,239 5,470,395
437,310 (1,039,280) 5,257,104 388,679 64.8%
Non-qualifying investments Money market funds 2 2,293,042 2,061,939 2,293,042 28.2%Cash 43,814 38,510 43,814 0.5%British International Holdings Limited 133,252 - 133,252 266,504 133,252 3.3%Legion Group plc (formerly SectorGuard plc) 106 44 37 (7) 0.0% ----- ----- ----- ----- ----- ----- -----Total non-qualifying investments 2,470,214 2,100,493 133,252 - 2,603,397 133,245 32.0%Debtors 342,925 277,484 342,925 4.3%Creditors (85,128) (76,145) (85,128) (1.1)% ----- ----- ----- ----- ----- ----- -----Net assets 10,169,250 7,772,227 570,562 (1,039,280) 8,118,298 521,924 100.0% ===== ===== ===== ===== ===== ===== =====C Share Fund Date of Total Book Valuation Additions Disposals Valuation Change in % of first cost at 30 at 30 at cost at at 30 valuation net investment April 2010 April valuation April for year assets Sector 2009 2010 by £ £ £ £ £ £ £ Qualifying investments Unquoted investments VanirConsultants Limited October 2008 1,000,000 1,000,000 - - 1,000,000 - 6.6%Company seeking to invest in Supportdata management, data mapping servicesand management servicesBackbarrow Limited April 2010 1,000,000 - 1,000,000 1,000,000 - 6.6%Company seeking to invest in Foodfood manufacturing, productiondistribution and brand management Monsal Holdings Limited December 2007 854,450 640,838 - - 889,423 248,585 5.9%Engineering services to the Supportwater and waste sectors servicesFocus Pharma Holdings Limited October 2007 660,238 599,780 - - 696,474 96,694 4.6%Licensing and distribution of Pharmaceuticalsgeneric pharmaceuticals and Biotechnology DiGiCo Europe Limited July 2007 232,368 577,972 - (178,746) 672,049 272,823 4.4%Design and manufacture of Technology,audio mixing desks hardware and equipment Iglu.com Holidays Limited(formerly Barnfield July 2008 562,691 1,000,000 - (437,309) 562,691 - 3.7%Management Investments Retail Limited)
Online ski and cruise retailer
ATG Media Holdings Limited October 2008 355,159 355,159 - - 352,870 (2,289) 2.3%Publisher and online auction Mediaplatform operator Blaze Signs Holdings Limited April 2006 606,890 223,000 - - 234,531 11,531 1.5%Manufacturing and installation Supportof signs services VSI Limited April 2006 77,623 218,788 - - 216,630 (2,158) 1.4%Software for CAD and CAM Software andvendors Computer Services Racoon International Holdings Limited December 2006 361,177 - - - 174,076 174,076 1.1%Supplier of hair extensions, Personal goodshair care products and training British International Holdings Limited June 2006 167,173 200,868 - - 115,262 (85,606) 0.8%
Supplier of helicopter services Support services
The Plastic Surgeon Holdings Limited April 2008 161,278 40,320 - - 40,320 - 0.3%
Snagging and finishing of Support services domestic and commercial properties
PXP Holdings Limited (Pinewood Structures) December 2006 478,305 22,942 - - - (22,942) 0.0%Design, manufacture and supply Constructionof timber frames for buildings PastaKingHoldings Limited June 2006 - 546,798 - (546,798) - - 0.0%Manufacture and supply of fresh Food producerspasta meals ----- -----
----- ----- ----- ----- -----
6,517,352 5,426,465
1,000,000 (1,162,853) 5,954,326 690,714 39.2%
----- ----- ----- ----- ----- ----- -----Total qualifying investments 6,517,352 5,426,465
1,000,000 (1,162,853) 5,954,326 690,714 39.2%
Non-qualifying investments Money market funds 2 9,459,371 9,136,823 9,459,371 62.3% Cash 44,610 22,836 44,610 0.3% British International Holdings Limited 26,748 - 26,748 - 53,496 26,748 0.4% ----- ----- ----- ----- ----- ----- -----
Total non-qualifying investments 9,530,729 9,159,659
26,748 - 9,557,477 26,748 63.0% Debtors 26,768 170,762 26,768 0.2%Creditors (365,920) (209,969) (365,920) (2.4%) ----- ----- ----- ----- ----- ----- -----Net assets 15,708,929 14,546,917
1,026,748 (1,162,853) 15,172,651 717,462 100.0%
===== =====
===== ===== ===== ===== =====
1 At 30 April 2010, the Company (comprising of both share classes) held morethan 70% of its total investments in qualifying holdings, and thereforecomplied with the VCT Investment test. For the purposes of the VCT Investmenttests, the Company is permitted to disregard disposals of investments for 6months from the date of disposal.
2 Disclosed within Non-current assets as Monies held pending investment in the Balance Sheet.
INVESTMENT MANAGER'S REVIEW
Overview of Investment Activity
The difficult economic environment in the UK and worldwide has made this a challenging year for the Company. We have continued to remain cautious and selective when considering new deals. A large proportion of new deals that we have reviewed have been unattractive and we have frequently viewed vendors' price expectations as likely to be unsustainable in the medium term.
Our new investment activity continues to focus on management buyouts but our approach has been to capitalise companies conservatively at the time of investment so that they are well positioned to contend with difficult times.
No new investments were completed during the first half of the year. The rateof new deal activity has shown some signs of increase in the second half of theyear. This can, in part, be attributed to vendors becoming more realistic intheir price expectations to stimulate interest from buyers, but it is as yetunclear whether this will be sustained through the rest of 2010. During thisperiod your Company completed two new investments and a follow-on investment,in addition to a successful disposal.In December 2009, the Company invested in Iglu.com Holidays Limited via theacquisition company Barnfield Management Investments Limited, as part of ouroperating partner programme. The C Share Fund's original investment of £1million was partially refunded and the Ordinary Share Fund invested £437,310alongside £562,691 from the C Share Fund as part of the acquisition byMatrix-advised VCTs of Iglu.com Limited, a specialist provider of cruise andski holidays. Based in Wimbledon, Iglu.com is a profitable and cash generativebusiness with a strong management team that has a successful track record ofbuilding a profitable niche business. Since the investment was completed,Iglu.com has made a strong start and is trading ahead of plan. We have,however, continued to value the investment at cost for the time being.Our Operating Partner programme continues to to pursue an active search forinvestment opportunities and the C Share Fund completed a £1 million investmentin Backbarrow Limited in April 2010. Backbarrow is searching for acquisitionopportunities in the food manufacturing, distribution and brand managementsectors and is currently pursuing a number of potential investments.In November 2009, both share funds participated in a follow-on investment inBritish International Holdings Limited to provide additional working capital.The company has enjoyed a strong start to 2010 and is expected to exceed itsbudget for the year.As evidence that high quality businesses remain in demand, your Companysuccessfully realised its investment in PastaKing Holdings, the NewtonAbbot-based supplier of fresh pasta meals, in November 2009 for proceeds of £736,918 for the Ordinary Share Fund and £514,393 for the C Share Fund. Thisrealisation contributed to total proceeds over the life of the investment of £897,049 for the Ordinary Share Fund and £626,169 for the C Share Fund,representing a 3.27x return on the original investment cost of £274,624 and £191,720 respectively. The realised loss shown in the Income Statement in theaccounts reflects the fall in the valuation of PastaKing from its valuationlast year before its disposal, which as reported earlier was a successfulinvestment overall.
The trading environment remains uncertain and has meant that some investee companies continue to be valued below cost. A number of investments have, however, increased in value during the year in response to increases in the valuations of comparable quoted companies or increased earnings during the year. We are confident that the valuations many portfolio companies will begin to reflect their underlying value against a background of more stable macro-economic conditions.
Ordinary Share Fund Portfolio Highlights
The Ordinary Share Fund comprised investments in 15 companies at a cost of £7.58 million and a current valuation of £5.52 million; on a like-for-like basisthe portfolio value shows a 11.14% increase compared with the valuationsprevailing at 30 April 2009. The FTSE All-Share and FTSE Small Cap indicesincreased by 31.80% and 33.80% respectively over the same period.Several companies in the portfolio continue to trade ahead of budget. Foremostamongst these is DiGiCo Europe, which made two partial loan stock repaymentsplus premium during the year of £137,552 each in May and December 2009. DiGiCoEurope continues to trade strongly and has made a good start to 2010. ATG Mediahas benefited from increased interest in its online auction technology, whilstits trade magazine has seen an increase in advertising revenues. Despite seeinga fall in licence income, VSI has benefited from the relative weakness ofsterling and is developing a number of strategic relationships. VSI paid aparticipating preference dividend of £14,399 to the Ordinary Share Fund inApril 2010.The construction and house building sectors remain weak and Youngman, PXP andPlastic Surgeon continue to trade well below pre-economic downturn levels. Eachbusiness has reduced its costs and managed its cash resources effectively.Youngman has almost fully repaid its acquisition debt since investment and iswell positioned to benefit from an upturn in its markets. PXP has moved awayfrom its dependence on private sector house builds towards public sector fundedhousing associations. Plastic Surgeon has diversified into commercial propertyand insurance markets.Blaze Signs has continued to suffer from delays in customers placing orders. Ithas, however, secured new contracts which should begin to contribute during itscurrent financial year. Racoon has shown a significant improvement inprofitability in its financial year to 31 March 2010.Vectair continues to expand its export markets and now making significantinroads into the US market. Campden Media has made a strong start to 2010,following a better than expected year to December 2009. Legion Group continuesto win new contracts following a period of growth by acquisition over thepreceding two years. VPhase has successfully completed its product developmentcycle and is undertaking a number of trials with energy and social housingproviders.
C Share Fund Portfolio Highlights
The "C" share fund now holds investments in 13 companies at a cost of £6.54million and a current valuation of £6.07 million; on a like for like basis thisrepresents an increase of 14.70% compared with the valuation prevailing at 30April 2009, and compares with the 31.80% and 33.80% increases in the FTSEAll-Share and FTSE Small Cap indices respectively over the same period.As last year, most of the C Share Fund's investments are common to the OrdinaryShare Fund; four investments are held solely by the C Share Fund. Backbarrowand Vanir Consultants continue to review a number of acquisition opportunities.Focus Pharma continues to trade well, comfortably exceeding its budget for theyear to 31 December 2009 and continuing this trend in 2010. Monsal continues toprogress a number of waste contracts, exploiting its acknowledged expertise inanaerobic digestion technology.
Outlook
The rise in valuations for the year is encouraging although the reduction inprofitability of some portfolio companies has made some decreases inevitable.It is important to recognise that all of the falls in the year have been inunrealised valuations as opposed to realised investment losses. We believe theprospect of significant future recovery over the medium term is good as wecontinue to believe that the portfolio, taken as a whole, is resilient and ofhigh quality.
Both Share Funds are well placed to support certain portfolio should the need arise and to capitalise on attractive new investment opportunities.
NON-STATUTORY ANALYSIS BETWEEN THE ORDINARY SHARE AND C SHARE FUNDS
Income StatementsFor the year ended 30 April 2010 Ordinary Share Fund Notes Revenue Capital Total £ £ £ Unrealised gains on investments -
521,924 521,924
Realised losses on investments - (27,258) (27,258) Income 2 149,401 - 149,401 Recoverable VAT 2,174 6,523 8,697 Investment management fees (38,413) (115,240) (153,653) Other expenses (153,040) - (153,040) ----- ----- -----
(Loss)/profit on ordinary activities before taxation (39,878) 385,949 346,071
Tax on (loss)/profit on ordinary activities -
- - ----- ----- ----- (Loss)/profit for the year (39,878) 385,949 346,071 ===== ===== ===== Basic and diluted earnings per share 5 (0.35)p
3.43 p 3.08 p
Weighted average number of shares in issue
11,259,333 C Share Fund Notes Revenue Capital Total £ £ £ Unrealised gains on investments -
717,462 717,462
Realised losses on investments - (19,094) (19,094) Income 2 234,110 - 234,110 Recoverable VAT 1,225 3,674 4,899 Investment management fees (75,175) (225,525) (300,700) Other expenses (259,785) - (259,785) ----- ----- -----
(Loss)/profit on ordinary activities before taxation (99,625) 476,517 376,892
Tax on (loss)/profit on ordinary activities -
- - ----- ----- ----- (Loss)/profit for the year (99,625) 476,517 376,892 ===== ===== ===== Basic and diluted earnings per share 5 (0.57)p 2.74 p 2.17 p
Weighted average number of shares in issue
17,411,523 Total Notes Revenue Capital Total £ £ £ Unrealised gains on investments -
1,239,386 1,239,386
Realised losses on investments - (46,352) (46,352) Income 2 383,511 - 383,511 Recoverable VAT 3 3,399 10,197 13,596 Investment management fees (113,588) (340,765) (454,353) Other expenses (412,825) - (412,825) ----- ----- -----
(Loss)/profit on ordinary activities before taxation (139,503) 862,466 722,963
Tax on (loss)/profit on ordinary activities -
- - ----- ----- ----- (Loss)/profit for the year (139,503) 862,466 722,963 ===== ===== ===== Balance SheetsAs at 30 April 2010 Ordinary Share Fund C Share Fund Notes £ £ £ £ Fixed assets Investments at fair value 5,523,645 6,007,822 Current assets Debtors and prepayments 342,925 26,768 Current investments 2,293,042 9,459,371 Cash at bank 43,814 44,610 ----- ----- ----- ----- 2,679,781 9,530,749
Creditors: amounts falling due within one year (85,128)
(365,920) ----- ----- ----- -----
Net current assets/(liabilities) 2,594,653
9,164,829 ----- ----- Net assets 8,118,298 15,172,651 ===== ===== Capital Called up share capital 112,593 173,464 Capital redemption reserve 19,213 1,377 Share premium account - - Revaluation reserve (1,800,952) (536,278) Special distributable reserve 2,300,179 15,111,058 Profit and loss account 7,487,265 423,030 ----- ----- Equity shareholders' funds 8,118,298 15,172,651 ===== ===== Number of shares in issue: 11,259,333 17,346,339
Net asset value per share - basic and diluted 6 72.10p
87.47p Adjustments Total (see note Notes below) £ £ £ Fixed assets Investments at fair value 11,531,467 Current assets Debtors and prepayments (308,686) 61,007 Current investments 11,752,413 Cash at bank 88,424 ----- ----- (308,686) 11,901,844 Creditors: amounts falling due within one year 308,686 (142,362) ----- -----
Net current assets/(liabilities)
11,759,482 ----- Net assets 23,290,949 =====Capital Called up share capital 286,057 Capital redemption reserve 20,590 Share premium account - Revaluation reserve (2,337,230) Special distributable reserve 17,411,237 Profit and loss account 7,910,295 ----- Equity shareholders' funds 23,290,949 ====
Note: The adjustment above nets off the inter-fund debtor and creditor balances, so that the "Total of both funds" balance sheet agrees to the Statutory Balance Sheet below.
Reconciliation of Movement in Shareholders' Funds
Ordinary Share C Share Fund Fund Total £ £ £Opening shareholders' funds 7,772,227 14,546,917 22,319,144
Net Share capital issued/(bought back) in the year (net of expenses)
- 423,683 423,683 Profit for the year 346,071 376,892 722,963 Dividends paid in year
- (174,841) (174,841) ------ ------ ------ Closing shareholders' funds 8,118,298 15,172,651 23,290,949 ==== ==== ==== INCOME STATEMENTFor the year ended 30 April 2010 Year ended 30 April 2010 Notes Revenue Capital Total £ £ £ Unrealised gains/(losses) on investments -
1,239,386 1,239,386
Realised losses on investments - (46,352) (46,352) Income 2 383,511 - 383,511 Recoverable VAT 3 3,399 10,197 13,596 Investment management fees (113,588) (340,765) (454,353) Other expenses (412,825) - (412,825) ----- ----- -----
(Loss)/profit on ordinary activities before taxation (139,503) 862,466 722,963
Taxation on (loss)/profit on ordinary activities -
- - ----- ----- ----- (Loss)/profit on ordinary activities after taxation (139,503) 862,466 722,963 ==== ==== ====
Basic and diluted earnings per share: 5
Ordinary Shares (0.35)p 3.43p 3.08p C Shares (0.57)p 2.74p 2.17p Year ended 30 April 2009 Notes Revenue Capital Total £ £ £ Unrealised gains/(losses) on investments -
(3,778,380) (3,778,380)
Realised losses on investments -
(29) (29) Income 735,597 108,375 843,972 Recoverable VAT 22,618 67,854 90,472 Investment management fees (93,039) (279,115) (372,154) Other expenses (351,173) - (351,173) ----- ----- ----- (Loss)/profit on ordinary activities before taxation 314,003 (3,881,295) (3,567,292) Taxation on (loss)/profit on ordinary activities (43,586) 43,586 - ----- ----- ----- (Loss)/profit on ordinary activities after taxation 270,417 (3,837,709) (3,567,292) ==== ==== ====
Basic and diluted earnings per share: 5
Ordinary Shares 1.29p (23.63)p (22.34)p C Shares 1.27p (11.83)p (10.56)p
All the items in the above statement derive from continuing operations.
There were no other gains or losses in the year.
The total column of this statement is the profit and loss account of the Company.
Other than revaluation movements arising on investments held at fair value through the profit and loss, there were no differences between the (loss)/ profit as stated above and historical cost.
The notes below form part of these financial statements.
BALANCE SHEETAs at 30 April 2010 Notes 30 April 2010 30 April 2009 £ £Fixed assets Investments at fair value 11,531,467 10,896,904 Current assets Debtors and prepayments 61,007 273,662 Current Investments 11,752,413 11,198,762 Cash at bank 88,424 61,346 ----- ----- 11,901,844 11,533,770
Creditors: amounts falling due within one
year (142,362) (111,530) Net current assets 11,759,482 11,422,240 ----- ----- Net assets 23,290,949 22,319,144 ===== ===== Capital and reserves Called up share capital 286,057 281,697 Capital redemption reserve 20,590 19,213 Share premium account - 6,712,239 Revaluation reserve (2,337,230) (2,712,919) Special distributable reserve 17,411,237 10,611,920 Profit and loss account 7,910,295 7,406,994 ----- ----- Equity shareholders' funds 23,290,949 22,319,144 ===== =====
Net asset value per share - basic and diluted 6
Ordinary Shares 72.10p 69.03p C Shares 87.47p 86.02p
The notes below form part of these financial statements.
CASH FLOW STATEMENTFor the year ended 30 April 2010 Year ended 30 April 2010 Year ended 30 April 2009 Notes £ £ Interest income received 262,213 449,574 Dividend income 104,824 485,537
VAT recovered and interest thereon 136,235 - Investment management fees paid (457,011) (373,826) Cash payments for other expenses (364,709) (377,434) ----- ----- Net cash (outflow)/inflow from operating activities (318,448) 183,851 Investing activities Purchase of investments (1,597,310) (3,758,017) Disposals of investments 2,155,781 757,966 ----- -----
Net cash inflow/(outflow) from investing activities 558,471 (3,000,051) Dividends Equity dividends paid (174,841) (918,110) ----- -----
Cash inflow/(outflow) before financing and liquid resource management 65,182 (3,734,310) Financing Purchase of own shares (78,141) (151,530)
Share capital raised (net of expenses)
593,688 6,698,020 ----- -----
Net cash outflow from financing 515,547 6,546,490 Management of liquid resources Increase in monies held in current investments (553,651) (2,840,588) ----- -----
Increase/(decrease) in cash for the year
27,078 (28,408) ===== ===== RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDSFor the year ended 30 April 2010 Year ended 30 April 2010 Year ended 30 April 2009 Notes £ £ Opening shareholders' funds 22,319,144 20,142,891 Net share capital issued in the year (net of expenses) 16 501,824 6,789,883 Share capital bought back 16 (78,141) (128,228) Profit/(loss) for the year
722,963 (3,567,292) Dividends paid in year 8 (174,841) (918,110) ----- ----- Closing shareholders' funds 23,290,949 22,319,144 ===== =====NOTES TO THE ACCOUNTSFor the year ended 30 April 2010
1. Basis of accounting
The accounts have been prepared under UK Generally Accepted Accounting Practice(UK GAAP) and the Statement of Recommended Practice, 'Financial Statements ofInvestment Trust Companies and Venture Capital Trusts' ("the SORP") issued bythe Association of Investment Companies in January 2009. 2. Income 2010 2009 £ £ Income from bank deposits 516 1,731 Income from investments - from equities 25,173 214,825 - from overseas
based OEICs 57,036 191,677
- from UK
based OEICs 24,845 44,615
- from
loan stock 259,774 391,124
- from VAT recoverable 16,167 - ----- ----- 382,995 842,241 ----- ----- Total income 383,511 843,972 Total income comprises Dividends 107,054 451,117 Interest 276,457 392,855 ----- ----- 383,511 843,972 Income from investments comprises Listed overseas
securities 57,036 191,677
Unlisted UK
securities 50,018 259,440
Loan stock interest 259,774 391,124 ----- ----- 366,828 842,241
Loan stock interest above is stated after deducting an amount of £6,188
(2009: £38,611), being a provision made against loan stock interest regarded as collectable in previous years.
Total loan stock interest due but not recognised in the year was £467,081 (2009: £303,168). 3. Recoverable VAT Revenue Capital Total Revenue Capital Total 2010 2010 2010 2009 2009 2009 £ £ £ £ £ £ Recoverable VAT 3,399 10,197 13,596 22,618 67,854 90,472 As at 30 April 2009, the Directors considered it reasonably certain that theCompany would obtain a repayment of VAT of not less than £112,000. Last year'saccounts recognised this amount as income of £90,472 above, and £21,528deducted from last year's investment manager's fees. This estimate was basedupon information supplied by the Company's Investment Manager, and discussionswith the Company's professional advisors as a result of the European Court ofJustice ruling and subsequent HMRC briefing that management fees be exempt forVAT purposes. During the year, a total of £125,596 of VAT recoverable has beenreceived. The excess of £13,596 over the £112,000 recognised in 2009's accountshas been further credited to the Income Statement, allocated 25% to revenue and75% to capital return and is in the same proportion as that in which theirrecoverable VAT was originally charged.The £120,068 of income recognised in both the 2009 and current year accounts,together with related interest of £16,167 shown in note 2, equals the sum of £136,235 shown in the cash flow statement as part of cash flow from operatingactivities. 4. Dividends
The Company has declared an interim dividend of 1 penny per C Share and will be paid on 13 August 2010 to C Shareholders on the Register on 23 July 2010.
5. Basic and diluted earnings and return per share
2010 2010 2010 Ordinary C Share Share Fund Fund £ £ £ Total 346,071 376,892 722,963
earnings after taxation: ----- ----- Basic and 3.08p 2.17p diluted earnings per share (note a) Net revenue ( 39,878) ( 99,625) from ordinary activities after taxation ----- ----- Basic and ( 0.35)p ( 0.57)p diluted revenue earnings per share (note b) Net (27,258) (19,094) realised capital losses Net 521,924 717,462 unrealised capital gains/ (losses) Dividends - - treated as capital VAT 6,523 3,674 recoverable Capital (115,240) (225,525) expenses (net of taxation) ----- ----- Total 385,949 476,517 capital return ----- ----- Basic and 3.43p 2.74p diluted capital earnings per share (note c) Weighted 11,259,333 17,411,523 average number of shares in issue in the year 2009 2009 2009 Ordinary C Share Share Fund Fund £ £ £ Total (2,545,615) (1,021,677) (3,567,292)earnings after taxation: ----- ----- Basic and (22.34)p (10.56)p diluted earnings per share (note a) Net revenue 147,005 123,412 from ordinary activities after taxation ----- ----- Basic and 1.29p 1.27p diluted revenue earnings per share (note b) Net (29) - realised capital losses Net (2,671,234) (1,107,146) unrealised capital gains/ (losses) Dividends 63,825 44,550 treated as capital VAT 37,650 30,204 recoverable Capital (122,832) (112,697) expenses (net of taxation) ----- ----- Total (2,692,620) (1,145,089) capital return ----- ----- Basic and (23.63)p (11.83)p diluted capital earnings per share (note c) Weighted 11,394,390 9,677,798 average number of shares in issue in the year Notes:
a) Basic earnings per share is total earnings after taxation divided by the weighted average number of shares in issue.
b) Revenue earnings per share is the revenue return after taxation divided by the weighted average number of shares in issue.
c) Capital earnings per share is the total capital loss after taxation divided by the weighted average number of shares in issue.
d) There are no instruments that will increase the number of shares in issue in future. Accordingly, the above figures currently represent both basic and diluted returns.
The Board consider that the likelihood of the issue of performance warrants bythe Ordinary Share Fund, as referred to in Note 4 in the Annual Report, is low.Accordingly, the potential impact of the issue of these warrants upon dilutedearnings per share has been ignored for this purpose.
6. Basic and diluted net asset value per share
Ordinary Share Fund
Net asset value per Ordinary Share is based on net assets at the end of the year, and on 11,259,333 (2009: 11,259,333) Ordinary Shares, being the number of Ordinary Shares in issue on that date.
The Board consider that the likelihood of the issue of performance warrants bythe Ordinary Share Fund, as referred to in Note 4 in the Annual Report, is low.Accordingly, the potential impact of the issue of these warrants upon dilutednet asset value per O Fund Share has been ignored for this purpose.
C Share Fund
Net asset value per C Share is based on net assets at the end of the year, and on 17,346,339 (2009: 16,910,386) C Shares, being the number of C Shares in issue on that date.
7. Related party transactions
Kenneth Vere Nicoll is a shareholder of Matrix Group Limited, which owns Matrix-Securities Limited, MPE Partners Limited and has a 51% interest in Prime Rate Capital Management LLP and Matrix Corporate Capital LLP ("MCC").
Matrix-Securities Limited provided accountancy and company secretarial servicesto the Company for which it received payment of £121,501 (2009: £95,123)including VAT during the year, in addition to fees earned as promoter £28,219(2009: £383,634). MPE Partners Limited has a 50% interest in Matrix PrivateEquity Partners LLP, the Company's Investment Manager. Matrix Private EquityPartners LLP is the Company's Investment Manager in respect of venture capitalinvestments and earned fees of £454,353 (2009: £372,154). £nil (2009: £6,500)was due from Matrix Private Equity Partners LLP at the year-end. The Companyhas invested £2,841,964 in a liquidity fund managed by Prime Rate CapitalManagement LLP, and earned income of £24,845 (2009: £44,615) from this fund inthe year. MCC are the Company's brokers and fees of £11,526 (2009: £1,394) werecharged for the period. Three (2009: Two) share buybacks were undertaken by MCCon the Company's instruction totalling £78,141 (2009: £42,538).
8. Financial information
These are not full accounts in terms of section 435 of the Companies Act 2006.The Annual Report for the year to 30 April 2010 will be sent to shareholdersshortly and will then be available for inspection at One Vine Street, LondonW1J 0AH, the registered office of the Company. Copies of the Annual Report willbe available in August at www.mig2vct.co.uk. Statutory accounts will bedelivered to the Registrar of Companies after the Annual General Meeting. Theauditors have reported on these accounts and their report was unqualified anddid not contain a statement under section 498(2) of the Companies Act 2006.
9. Annual General Meeting
The Annual General Meeting of the Company will be held at 12 noon on 9 September 2010 at One Vine Street, London W1J 0AH.
Contact details for further enquiries: Ross Lacey of Matrix-Securities Limited (the Company Secretary) on 020 3206 7000 or by e-mail on mig2@matrixgroup.co.uk.
Mark Wignall or Mike Walker at Matrix Private Equity Partners LLP (the Investment Manager), on 020 3206 7000 or by e-mail on info@matrixpep.co.uk.
MATRIX INCOME & GROWTH 2 VCT PLC