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22 Jul 2011 15:33
Matrix Income & Growth 2 VCT plc ("the Company")
Annual Financial Report announcement for the year ended 30 April 2011
CHAIRMAN'S STATEMENT
I am pleased to present the eleventh Annual Report of the Company, for the year ended 30 April 2011.
The last year has seen a small recovery in investor confidence. However, the UKeconomy is still very weak. Proper repair of this damage will be a painfulprocess; current government policy is to reduce public spending, while at thesame time allowing the effects of quantitative easing and maintaining anartificially low interest rate structure to soften this pain.Despite this difficult background, the Company's return for the year has beengood. Many of the companies in the portfolio continue to make good progress inspite of the challenging economic conditions. The Board has been supportive ofthe Manager's selective approach to investing at a low point in the economiccycle.
Performance for the year ended 30 April 2011
The net asset value ("NAV") per share at 30 April 2011 is 96.16 pence (2010:87.47 pence), an increase over the year of 8.69 pence (2010: increase of 1.45pence). The total NAV return per share, including dividends paid to date, isnow 106.16 pence (2010: 92.47 pence), an increase over the year of 13.69 penceor 14.8% (2010: increase of 2.45 pence, or 2.7%). This compares with theinitial NAV per share, net of initial costs, of 94.5 pence at the date of thefirst issue of the `C' Share Fund (now the Ordinary Share Fund) representing apositive total return per share since the launch date of 12.3%.
This increase is primarily a result of unrealised increases in the valuation of investments.
Merger of `O' and `C' Fund share classes
The share class merger was completed on 10 September 2010 following shareholderapproval at the Extraordinary General Meeting convened the previous day. Forfurther information on the financial details of the merger please see Note 21to the Notes to the Annual Report.Shareholders should note that the performance data above relates to the oneordinary share class now in existence, which was formerly called the C shareclass. Shareholders in both the former `O' and `C' share classes may wish tosee the performance of their own investment, and this is shown in the FinancialHighlights in the Annual Report.
Revenue and Capital returns for the year ended 30 April 2011
The results for the year ended 30 April 2011 are set out below. The totalreturn (after tax) attributable to Ordinary Shareholders for the year was aprofit of £3,250,053 (2010: £722,963), comprising a net capital return of £3,128,892 and a revenue return of £121,161. This improved performance for theyear is mainly due to net increases of £2.9 million in the investmentportfolio.
Portfolio Activity
The Company has continued its cautious approach to new investment given the volatile and difficult trading environment for smaller companies. The Company completed eight investments in the year.
A number of transactions in Monsal have taken place both before and after theyear-end, which have affected the valuation of this investment. Full detailsare explained in the Manager's Review.In October, the Company invested alongside other Matrix-advised VCTs in AustRecruitment Group Limited to support the management buyout (MBO) of RDLCorporation Limited, a recruitment company specialising in the pharmaceutical,business intelligence and IT sectors.In December, the Company invested in a new fundraising by Omega DiagnosticsGroup plc, an AIM-quoted in-vitro diagnostics company, Faversham House HoldingsLimited, a family owned business to business media company, and Apricot TradingLimited to support the MBO of Automated Systems Group plc, a provider ofprinter and copier services. A follow-on investment has also been made in thislast investment, to finance an acquisition.
Finally, the Company has made three further investments in March and April 2011, as part of our operating partner programme.
In July 2011 the Company made a new investment of £1,160,549 in Motorclean Holdings Limited, a supplier of car valeting services to the retail motor sector.
ATG Media, DiGiCo, IGLU.com, Vectair and Machineworks Software Limited (demerged from VSI in the year) prepaid loan stocks plus premia during the year.
The overall performance of the portfolio remains satisfactory in the current economic circumstances. Several companies, such as DiGiCo, Iglu.com and ATG Media, are continuing to generate record profits, whilst others, which have been badly hit by the recession, have seen their profits begin to recover, notably Blaze Signs and Youngman.
The Company now holds 26 investments at the year-end, which were valued at 104.83% of cost.
Details of these investments are provided in the Investment Manager's Review below.
Income returns
Total income turned positive for the year, generating a profit of £121,161 compared to a loss of £139,503 in 2010. The improvement in this revenue return is mainly due to two main factors:
Firstly, loan stock interest from investee companies rose to £437,080 (2010: £259,774), as several new investments generated new income, while severalinvestee companies were able to resume payment of current interest. Theannualised yield from loan stocks at valuation is now running at 5.09% (2010:4.8%)
Secondly, income from equity dividend receipts has also risen to £128,033 (2010: £25,173). Income in 2010 was boosted by dividends from two new sources, namely DiGiCo and ATG.
It should be noted that income returns 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 £69,142 (2010: £82,397).Underlying costs did not change significantly from the previous year (excludingshare fund merger costs of £52,928).
Dividends
The revenue account generated a net revenue gain for the year, as explained above, being 0.46p per share (2010: loss of 0.57p). Your Board declared an interim dividend totalling 4p per share, of which 0.2p was income and 3.8p was capital. The Board is not recommending a final dividend for the year under review.
Share buy-backs
During the year ended 30 April 2011 the Company continued to implement itsbuy-back policy and bought back 799,951 Ordinary Shares, representing 3.0% ofthe shares in issue immediately after the merger, at a total cost of £457,264.These shares were subsequently cancelled by the Company. The shares above werebought back for an average price of 57.2 pence per share, at discounts to thenet asset value at the date of each buyback ranging from 40.6 % to 36.6%.
Shareholder communication
May I remind you that the Company continues to have its own website which is available at www.mig2vct.co.uk.
The Investment Manager held a successful and well attended shareholder workshop in December 2010 and intends to hold a similar event on 14th December 2011. More details will be sent to shareholders nearer that date.
Strategy
Your board considers the Company's strategy at least annually. The main issuesaddressed are the investment objectives and policies, the role and performanceof the investment manager and the methods of providing shareholders with asatisfactory return on their investment.We believe that all shareholders should be able to realise their investment inthe fund within a reasonable period. In the absence of a liquid market forshares in VCTs, this can be achieved only by share buy-backs or liquidation.Our dividend policy is to try to pay a consistent annual dividend whilemaintaining the net asset value of the fund.We have rejected the policy of regularly issuing new shares to fund buy-backsat unrealistically low discounts mainly because each time new shares are issuedthe vote by shareholders to continue the life of the fund is postponed foranother 5 years, thereby depriving shareholders of the opportunity to realisetheir investment through a liquidation. The next renewal vote will be inSeptember 2015. Our relatively passive buy-back policy is based on the beliefthat buy-backs should only be executed at a discount which balances theinterests of the shareholders seeking to realise their investment with those ofthe continuing shareholders.We have set the investment manager a target of a minimum average annual totalNAV return on the fund of 8% from 30 April 2010. The returns on the ordinaryshares (formerly the C shares) for the five years and the year to 30 April 2011were 6.2% and 14.8% respectively. We will review the position annually anddecide on the basis of the returns achieved and any changes in circumstanceswhether to revise our strategy.
Outlook
The last year has seen tentative signs of recovery in the UK economy, althoughconfidence remains fragile. The outlook for the UK economy remains uncertain,in the face of pressure upon the consumer from public sector cuts, higher taxesand inflation. At some point interest rates will have to rise, particularly asinflation is now increasing, and this process, whenever it takes place, willaffect recovery prospects.The effects of the relatively depressed state of the UK economy will continueto affect the investments held by your Company over the coming year. Smallercompanies can be particularly sensitive to the economic environment, and onlycompanies with robust business models will survive or expand. The Companymaintains a significant cash position to support portfolio companies wheremerited and take advantage of attractive new investment opportunities thatpresent 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 8 September 2011.
Nigel MelvilleChairman21 July 2011
SUMMARY OF THE STATEMENT OF DIRECTORS' RESPONSIBILITIES REPORT
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 MelvilleChairman21 July 2011INVESTMENT 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 (save as may be permitted under VCT rules).
The VCT regulations in respect of funds raised after 6 April 2011 will change, such that 70% of such funds must be invested in equity.
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. No holding in any one company willrepresent more than 10% of the value of the Company's investments at the timeof investment. Ongoing monitoring of each investment is carried out by theInvestment Manager generally through taking a seat on the Board of each VCTqualifying company.
Co-investment
The VCT aims to invest alongside three other Income and Growth VCTs advised bythe Investment Manager with a similar investment policy. This enables the VCTto participate in combined investments by the Investment Manager of up to £4million.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 Private Equity Partners LLP providesCompany Secretarial and Accountancy services to the VCT.
SUMMARY OF THE DIRECTORS' REPORT
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
interest rates could affect trading conditions for smaller companies and
consequently the value of the VCT's qualifying investments.
* Loss of approval as a Venture Capital Trust - the VCT must comply with
section 274 of the Income Tax Act 2007 which allows it to be exempted from
capital gains tax on investment gains. Any breach of these rules may lead
to the VCT losing its approval as a VCT, qualifying shareholders who have
not held their shares for the designated holding period having to repay the
income tax relief they obtained and future dividends paid by the VCT becoming subject to tax. The VCT would also lose its exemption from corporation tax on capital gains.
* Investment and strategic - inappropriate strategy or consistently weak VCT
qualifying investment recommendations might lead to under performance and
poor returns to shareholders. Investment in unquoted small companies by its
nature involves a higher degree of risk than investment in companies traded
on the London Stock Exchange main market. Smaller companies often have
limited product lines, markets or financial resources and may be dependent
for their management on a smaller number of key individuals. This may make
them more risk-prone and volatile 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 by undertaking a key risk management review at each quarterly Board meeting. Performance is regularly reviewed and assurances in respect of adequate internal controls and key risks are sought and received from MPEP on a six monthly basis. In the mitigation and management of these risks, the Board applies rigorously the principles detailed in the AIC Code of Corporate Governance. The Board also has a share buyback policy to try to mitigate the Market Liquidity risk. This policy is reviewed at each quarterly Board Meeting.
INVESTMENT PORTFOLIO SUMMARYAs at 30 April 2011Ordinary Share Fund Date of first Total Book Valuation Additions Disposals Valuation Change in % of investment cost at 30 at 30 at cost at at 30 valuation net April 2011 April 2010 valuation April 2011 for year assets by value £ £ £ £ £ £ Qualifying Sector investments AIM quoted investments Omega December 2010 214,998 - 214,998 - 237,394 22,396 1.0%Diagnostics Group plc In vitro Pharmaceuticals diagnostics for food intolerance, auto-immune diseases and infectious diseases Fuse 8 plc March 2004 250,000 - - - 7,000 7,000 0.1%(Award International Holdings plc) Promotional Support goods and Services services agency Vphase plc March 2001 254,586 2,851 - - 1,774 (1,077) 0.0%(formerly Flightstore Group plc)
Development of Electronic and energy saving electrical devices for equipment domestic use ----- ----- ----- ----- ----- ----- ----- 719,584 2,851 214,998 - 246,168 28,319 1.1% Unquoted investments DiGiCo Europe July 2007 495,651 1,634,704 - 74,747 1,907,395 347,438 7.7%Limited Design and Technology, manufacture of hardware and audio mixing equipment desks Blaze Signs April 2006 1,398,498 540,445 - - 1,543,170 1,002,725 6.2%Holdings Limited Manufacturing Support and services installation of signs British June 2006 1,000,000 689,477 - - 1,401,854 712,377 5.7%International Holdings Limited Helicopter Support service services operators ATG Media October 2008 767,907 858,326 95,988 1,154,838 392,500 4.6%Holdings Limited
Publisher and Media
online auction platform operator Focus Pharma October 2007 660,238 696,474 - - 1,026,860 330,386 4.1%Holdings Limited Licensor and Support distributer of services generic pharmaceuticals Aust October 2010 1,000,000 - 1,000,000 - 1,000,000 - 4.0%Recruitment Group Limited
Recruitment Support consultants for services the pharmaceutical , business intelligence and IT industries Backbarrow April 2010 1,000,000 1,000,000 - - 1,000,000 - 4.0%Limited Food Food production
manufacturing, and
distribution distribution and brand management Rusland April 2011 1,000,000 - 1,000,000 - 1,000,000 - 4.0%Management Limited Brand Support management, services consumer products and retail Sawrey Limited March 2011 1,000,000 - 1,000,000 - 1,000,000 - 4.0% Marketing Support services and services media Torvar Limited April 2011 1,000,000 - 1,000,000 - 1,000,000 - 4.0% Database Support management, services mapping, data mapping and management services to legal and building industries Vanir October 2008 1,000,000 1,000,000 - - 1,000,000 - 4.0%Consultants Limited Database Support management, services mapping, data mapping and management services to legal and building industries
ASL Technology December 2010 999,865 - 999,865 -
999,865 - 4.0%Holdings Limited Printer and Support photocopier services services Iglu.com December 2009 152,326 1,000,001 - 847,675 923,815 771,489 3.8%Holidays Limited Online ski and Retail cruise travel agent Youngman Group October 2005 1,000,052 699,966 - - 699,966 - 2.8%Limited Manufacturer of Support ladders and services access towers Machineworks April 2006 25,727 723,174 - 308,627 581,802 167,255 2.3%Software Limited 3 Software for Software and CAM and machine Computer tool vendors Services Racoon December 2006 878,527 423,425 - - 469,359 45,934 1.9%International Holdings Limited Supplier of Personal goods hair extensions, hair care products and training
Faversham House December 2010 374,870 - 374,870 -
374,870 - 1.5% Publisher, Media exhibition organiser and operator of websites for the environmental, visual communications and building services sectors
Vectair January 2006 60,293 441,853 - 220,189 204,750 (16,914) 0.9%Holdings Limited Design and sale Support of washroom services products The Plastic April 2008 392,264 98,067 - - 98,067 - 0.4%Surgeon Holdings Limited Snagging and Support finishing of services domestic and commercial properties Lightworks April 2006 25,727 138,183 - - 73,372 (64,811) 0.3%Software Limited 3 Software for Software and CAD vendors Computer Services PXP Holdings December 2006 1,163,436 - - - - - 0.0%Limited (Pinewood Structures) Design, Construction manufacture and supply of timber frames for buildings Monsal Holdings December 2007 770,717 889,423 1,717 85,450 - (805,690) 0.0%Limited Supplier of Engineering engineering services to the water and waste sectors Legion Group August 2005 150,000 64,286 - 64,286 - - 0.0%plc (formerly SectorGuard plc) Provision of Support manned Services guarding, mobile patrolling, and alarm response services Campden Media January 2006 - 310,775 - 310,775 - - 0.0%Limited Publishing and Media conferencing ----- ----- ----- ----- ----- ----- ----- 16,316,098 11,208,579 5,376,452 2,007,737 17,459,983 2,882,689 70.2% ----- ----- ----- ----- ----- ----- ----- Total 17,035,682 11,211,430 5,591,450 2,007,737 17,706,151 2,911,008 71.3%1qualifying investments Non-qualifying investments Money market 6,538,497 11,752,413 6,538,497 26.3%funds 2 British 160,000 320,000 - 320,000 - 1.3%International Holdings Limited Cash 76,291 88,424 76,291 0.3% Legion Group 106 37 37 - - 0.0%plc (formerly SectorGuard plc) ----- ----- ----- ----- ----- ----- ----- Total 6,774,894 12,160,874 - 37 6,934,788 - 27.9%non-qualifying investments Debtors 441,684 61,007 441,684 1.7% Creditors (218,655) (142,362) (218,655) (0.9)% ----- ----- ----- ----- ----- ----- ----- Net assets 24,033,605 23,290,949 5,591,450 2,007,774 24,863,968 2,911,008 100.0% ===== ===== ===== ===== ===== ===== =====1 As at 30 April 2011, the Company held more than 70% of its total investmentsin qualifying holdings, and therefore complied with the VCT Investment test.For the purposes of the VCT Investment tests, the Company is permitted todisregard disposals of investments for 6 months from the date of disposal.
2 Disclosed within Non-current assets as Monies held pending investment in the Balance Sheet.
3 On 31 March 2011, VSI Limited undertook a demerger, such that MIG 2 VCT nowholds separate investments in Machineworks Software Limited and LightworksSoftware Limited. As a result, the cost as at 30 April 2010, of the ordinaryand preference share investments in VSI Limited has been split equally betweenMachineworks Software Limited and Lightworks Software Limited. The valuation ofthese instruments at 30 April 2010 has been split 75:25 between MachineworksSoftware Limited and Lightworks Software Limited respectively. The former loaninvestment in VSI of £308,627 had been wholly transferred to MachineworksSoftware Limited, so this loan's cost, and value at 30 April 2010, has beenspecifically allocated to that new investment.
INVESTMENT MANAGER'S REVIEW
Overview
The first half of the year ended 30 April 2011 saw the continuation of theeconomic uncertainty that has affected new investment activity since 2008.However, the latter part of the year has shown signs of improvement in ourinvestment marketplace. We are increasingly confident that the UK economicenvironment is beginning to generate conditions for greater numbers ofattractively priced new investment opportunities. Portfolio companies are alsomore optimistic following an extended period of challenging trading conditionsin most market sectors.Our strategic response to the significant increase in deal flow is to focus oncompanies with strong and defensible market positions within their sectors,rather than targeting specific market sectors. However, we remain alert to thepotential impact of cuts in public spending that are being implemented by theCoalition Government on the UK economy.We have been appreciative of the Board's support through a period when we havethought it prudent to retain funds until economic conditions improved, ratherthan continue to invest during the downturn. Where we have chosen to invest,our strategy has also been to ensure that the companies were properlycapitalised at the time of investment so that they were well positioned tocontend with adverse market conditions. This, together with our focus on MBOsof established, profitable companies, has enabled us to build a resilientportfolio which has largely weathered the recession very well.It is important to note that during the year, no further funding has beenrequired by any of the investee companies to help them deal with tradingdownturns, with the exception of Monsal (see below within the sectiondiscussing the portfolio) where a commitment has been made. We have continuedto work actively with the management teams of investee companies, encouragingthem to take cost cutting measures and discussing their budgets, forecasts andcost structure with them to ensure that their businesses remain as resilient aspossible. The majority of investee companies have managed their cashflow welland remain cash-generative.New investmentThe second half of the year was much busier in terms of investment activity,with seven new investments completing during this period of which three areacquisition companies. The first, in October, was an investment of £1 millionin Aust Recruitment Group Limited to support the MBO of RDL RecruitmentCorporation, a European recruitment provider within the pharmaceutical,business intelligence and IT sectors based in London and Woking. The company,which employs 70 staff, was established in 1992. It sources staff for over 300major companies, matching niche professionals with "hard to fill" contractassignments and staff positions.
The next three new investments all completed in December:
£374,870 was invested to support the MBO of Faversham House Group Limited. Based in Croydon, this is an established media company providing magazines, exhibitions and online resources in the environment and sustainability, visual communications and building services sectors.
The Company invested £214,998 into the AiM listed Omega Diagnostics Group plc.Based in Alva, Scotland this company provides high quality in vitro diagnosticsproducts for use in hospitals, blood banks, clinics and laboratories in over100 countries and specialises in the areas of food intolerance, autoimmune andinfectious diseases. The share price has moved up since investment, giving anearly uplift from cost of £22,396 at 30 April 2011.The Company invested £999,865 in ASL Technology Holdings Limited to support theMBO of Automated Systems Group plc, a Cambridge based printer and copierservices business with a broad customer base of schools and SMEs, and committedto invest a further £360,265, to support the acquisition of part of the assetsof Transcribe Copier Systems Limited. This commitment was fulfilled in June2011.Finally, after the Company's year end, the Company made a new investment of £1,160,549 in Motorclean Holdings Limited, a supplier of a car valeting servicesto the retail motor sector in July.Our Operating Partner programme continues to pursue an active search forinvestment opportunities in their chosen sectors. Your Company's acquisitioncompanies, Backbarrow, Vanir Consultants, and newly invested Sawrey (March2011), Rusland Management and Torvar (both in April 2011) are each headed by anexperienced Chairman, well-known to us, who are working closely with us inseeking to identify and complete investments in sectors relevant to theirindustry knowledge and experience. These companies have not yet foundsufficiently attractive investment opportunities at the right price. However,the Operating Partner programme has already evidenced its benefit in leadingthe investments in RDL Recruitment and Automated Systems Group referred toabove. We anticipate that the Operating Partner programme will lead to furthernew investments during 2011.
Realisations
We are pleased to report that a number of companies in the portfolio continueto be strongly cash generative. As a result of this the Company has received atotal of £1,795,536 in loan stock repayments plus premia during the year frominvestee companies still held in the portfolio at the end of the year. Amongstthese, DiGiCo Europe continues to make regular repayments, the latest amountbeing £69,566 received in June 2010 plus a premium of £5,181. Monsal repaid £85,450 in July 2010; IGLU.com Holidays repaid £997,674 including £149,999premium; Vectair repaid £220,189 including £36,698 premium and ATG Media repaid£95,988 in October 2010. In addition, a product of the recently demerged VSI,Machineworks Software Limited repaid all their remaining loan stock realising £321,488 including £64,298 premium.In January, the Company realised its entire investment in Campden Media for acash consideration of £836,294, including loan element of £777,563 representing85.8% of total investment cost of £975,000. This compares to a valuation at 30April 2010 of £310,775. The total cash return from the investment (includinginterest paid) amounted to £1,016,150, or 104% of cost.
The Portfolio
The MPEP invested portfolio at 30 April 2011 comprised twenty-six investments(2010: nineteen) with a cost of £17.2 million (2010: £14.1 million) and valuedat £18.0 million (2010: £11.5 million), representing 104.7% of cost (2010:81.7%). Realisations during the year generated cash proceeds of £2.63m.The new investment made in 2010 in Iglu.com is now valued above cost followingout-performance of its business plans at the time of investment. In March 2011,VSI completed a 50:50 demerger into Lightworks Software Limited andMachineworks Software Limited (with Machineworks assuming all of VSI's loanstock). This has enabled repayment of the loan stock in April 2011. Bothremaining investments are valued above cost. Focus Pharma continues to tradewell, although it ended its financial year slightly behind a stretching budget.It expects to progress further with several new product launches due during2011. DiGiCo, BIH or ATG all experienced increase trading and profitabilitywhich has contributed to their higher unrealised valuations.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 fully repaid its acquisition bank debt since investment and iswell positioned to benefit from any upturn in its markets. Plastic Surgeon hasdiversified into commercial property and insurance markets. PXP has moved awayfrom its dependence on private and public sector house builds towardscommercial buildings, but its financial performance continues to be very weak.In July 2010, a small follow-on investment was made in Monsal, and Monsalprepaid part of its loan stock, both at the same time as a third partyinvestment by Four Winds Capital. The valuation of Monsal, which at thehalf-year had been equal to its cost of £770,717, has been reduced to nil atthe year-end. This is because completion delays have occurred in an existingcontract and in obtaining new contracts. The full provision arises due to afurther loan stock investment of £192,244 in Monsal having so far beencommitted in May 2011 by the Company, alongside other Matrix VCTs and othershareholders, to provide £2 million to fund the cash shortfall. The terms ofthis new investment provide that it will rank ahead of previous rounds ofinvestment by Monsal's shareholders, as a result of which the valuation of theinvestment already made up to 30 April has been reduced to nil for the timebeing. With this additional funding, Monsal now has the ability to pursue anumber of major contracts in the waste and water sectors. Assuming successfulcontract wins, the potential for recovery of the value of the originalinvestment becomes a more realistic prospect. The first amount of thiscommitment of £192,244, being £51,265, was drawn down in July 2011.
Blaze Signs has recovered strongly over the year and enjoyed particularly strong autumn months. Racoon has continued to recover profitability during 2010 and this year.
Disappointingly, Legion Group requested a suspension of trading of its sharesin July 2010 pending clarification of the company's financial position. Legionhad a healthy order book but continued to suffer working capital constraints.On 6 August 2010, the board appointed administrators and the business wassubsequently sold to OCS Group.
Outlook
Whilst we cannot be sure of the extent of UK economic recovery, we have beenencouraged by changes in the year and we look forward to a productive newinvestment period. Although the coming months are likely to prove more testingas the public sector cuts begin to take effect, we consider that good qualitycompanies of the calibre in which we seek to invest, capable of maintainingcompetitive advantage, have the potential to succeed in this environment. Weare seeing the confidence of both vendors and sellers return. Having retainedsignificant uninvested cash, which will be bolstered by the currentfundraising, we consider the Company is very well placed to cover both anyportfolio needs and funding for attractive new investment opportunities thatmay arise.INCOME STATEMENTS
For the year ended 30 April 2011
Year ended 30 April 2011 Notes Revenue Capital Total £ £ £ Unrealised gains on - 2,911,008 2,911,008investments Realised gains/(losses) - 624,055 624,055on investments Income 2 637,008 - 637,008 Recoverable VAT 3 - - - Investment management (139,450) (418,352) (557,802)fees Other expenses (311,288) - (311,288) Share merger costs (52,928) - (52,928) ----- ----- ----- Profit/(loss) on 133,342 3,116,711 3,250,053ordinary activities before taxation Taxation on profit/ (12,181) 12,181 -(loss) on ordinary activities ----- ----- ----- Profit/(loss) on 121,161 3,128,892 3,250,053ordinary activities after taxation ===== ===== ===== Basic and diluted earnings per share Ordinary shares 5 0.46p 12.03p 12.49p(formerly C Shares) O' fund ordinary Shares 5 - - -
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 SHEETSAs at 30 April 2011 Notes 30 April 2011 30 April 2010 £ £ Fixed assets Investments at fair value 18,026,151 11,531,467 Current assets Debtors and prepayments 441,684 61,007 Current investments 6,538,497 11,752,413 Cash at bank 76,291 88,424 ----- ----- 7,056,472 11,901,844 Creditors: amounts falling due (218,655) (142,362)within one year ----- ----- Net current assets 6,837,817 11,759,482 ----- ----- Net assets 24,863,968 23,290,949 ===== ===== Capital and reserves Called up share capital 258,578 286,057 Capital redemption reserve 48,069 20,590 Revaluation reserve 1,230,469 ( 2,337,230) Special distributable reserve 16,258,990 17,411,237 Profit and loss account 7,067,862 7,910,295 ----- ----- Equity shareholders' funds 24,863,968 23,290,949 ===== =====
Net asset value per share -
basic and diluted Ordinary Shares (formerly C 6 96.16p 87.47pShares) O' fund ordinary Shares 6 - 72.10p
The notes below form part of these financial statements.
CASH FLOW STATEMENT
For the year ended 30 April 2011
Year ended 30 Year ended 30 April 2011 April 2010 Notes £ £ Interest income received 415,334 262,213 Dividend income 199,037 104,824
VAT recovered and interest thereon - 136,235 Other Income 2,753 - Investment management fees paid (557,802) (457,011) Share merger costs paid by the (49,988) -Company Cash payments for other expenses (320,136) (364,709) ----- ----- Net cash outflow from operating (310,802) (318,448)
activities Investing activities Purchase of investments (5,951,715) (1,597,310) Disposals of investments 2,631,829 2,155,781 ----- -----
Net cash (outflow)/inflow from (3,319,886) 558,471
investing activities Dividends Equity dividends paid (1,219,770) (174,841) ----- -----
Cash (outflow)/inflow before (4,850,458) 65,182financing and liquid resource
management Financing Purchase of own shares (375,591) (78,141)
Share capital raised (net of - 593,688expenses) ----- ----- Net cash (outflow)/inflow from (375,591) 515,547financing Management of liquid resources Decrease/(increase) in monies held 5,213,916 (553,651)in current investments ----- ----- Increase/(decrease) in cash for (12,133) 27,078the year ===== =====
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
For the year ended 30 April 2011
Year ended 30 Year ended 30 April 2011 April 2010 Notes £ £ Opening shareholders' funds 23,290,949 22,319,144 Net share capital issued in the year - 501,824(net of expenses) Share capital bought back (457,264) (78,141) Profit for the year 3,250,053 722,963 Dividends paid in year (1,219,770) (174,841) ----- ----- Closing shareholders' funds 24,863,968 23,290,949 ===== =====NOTES TO THE ACCOUNTS
For the year ended 30 April 2011
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 3. 2011 2010 £ £ Income from bank deposits 94 516 Income from investments - from equities 128,033 25,173 - from overseas based OEICs 44,900 57,036 - from UK based OEICs 24,148 24,845 - from loan stock 437,080 259,774 - from VAT recoverable - 16,167 ----- ----- 634,161 382,995 ----- ----- Other income 2,753 - ----- ----- Total income 637,008 383,511 ----- ----- Total income comprises Dividends 197,081 107,054 Interest 437,174 276,457 Other 2,753 - ----- ----- 637,008 383,511 Income from investments comprises Listed overseas securities 44,900 57,036 Unlisted UK securities 152,181 50,018 Loan stock interest 437,080 259,774 ----- ----- 366,828 842,241
Loan stock interest above is stated after deducting an amount of £nil (2010: £ 6,188), 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 £353,940 (2010: £467,081). 3. Recoverable VAT Revenue Capital Total Revenue Capital Total 2011 2011 2011 2010 2010 2010 £ £ £ £ £ £ Recoverable VAT - - - 3,399 10,197 13,596 4. Dividends The Directors are not recommending a final income dividend for OrdinaryShareholders. The Company, however, declared an interim capital dividend of 3.8pence per Ordinary Share and an interim income dividend of 0.2 pence perOrdinary Share for the year ended 30 April 2011 to Shareholders on the registeron 1 April 2011.
5. Basic and diluted earnings and return per share
2011 2010 2010 2010 Ordinary Share Ordinary Share C Total s (formerly Fund Share Fund C shares) £ £ £ Total earnings after 3,250,053 346,071 376,892 722,963taxation: ----- ----- ----- ----- Basic and diluted 12.49p 3.08p 2.17p earnings per share (note a) Net revenue from 121,161 ( 39,878) ( 99,625) ordinary activities after taxation ----- ----- ----- ----- Basic and diluted 0.46p ( 0.35)p ( 0.57)p revenue earnings per share (note b) Net realised capital 624,055 (27,258) (19,094) gains/(losses) Net unrealised capital 2,911,008 521,924 717,462 gains VAT recoverable - 6,523 3,674 Capital expenses (net (406,171) (115,240) (225,525) of taxation) ----- ----- ----- ----- Total capital return 3,128,892 385,949 476,517 ----- ----- ----- ----- Basic and diluted 12.03p 3.43p 2.74p capital earnings per share (note c) Weighted average 26,015,053 11,259,333 17,411,523 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 by the Ordinary Share Fund, as referred to in Note 4 of the published Annual Report, is low. Accordingly, the potential impact of the issue of these warrants upon diluted earnings 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 (formerly C shares) is based on net assetsat the end of the year, and on 25,857,764 (2010: 28,605,672) Ordinary Shares,being the number of Ordinary 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 £42,319 (2010: £121,501)including VAT during the year up until the contract was terminated on 10September 2010, in addition to fees earned as promoter £nil (2010: £28,219).MPE Partners Limited has a 50% interest in Matrix Private Equity Partners LLP,the Company's Investment Manager. Matrix Private Equity Partners LLP is theCompany's Investment Manager in respect of venture capital investments andearned fees of £557,802 (2010: £454,353) in respect of investment managementand, from 10 September 2010 onwards, Administration and Company Secretarialservices. The Company has £2,716,416 (2010: £2,841,964) invested in a liquidityfund managed by Prime Rate Capital Management LLP, and earned income of £24,148(2010: £24,845) from this fund in the year. MCC are the Company's brokers andfees of £11,833 (2010: £11,526) were charged for the period. Seven (2010:Three) share buybacks were undertaken by MCC on the Company's instructiontotalling £457,264 (2010: £78,141). £81,088 (2010: £nil) was due to MCC
at theyear-end. 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 2011 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 Thursday, 8 September 2011 at the Offices of Matrix Group Limited, One Vine Street, London W1J 0AH.
Contact details for further enquiries:
Robert Brittain of Matrix Private Equity Partners LLP (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.
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