Annual Financial Report

Unicorn AIM VCT plc ("the Company") Annual financial report announcement for the year ended 30 September 2009 Investment Objective The objective of the Company is to provide Shareholders with an attractive return from a diversified portfolio of investments, predominantly in the shares of AIM quoted companies, by maximising the stream of dividend distributions to Shareholders from the income and capital gains generated by the portfolio. It is also the objective that the Company should continue to qualify as a Venture Capital Trust, so that Shareholders benefit from the taxation advantages that this brings. To achieve this at least 70% of the Company's total assets are to be invested in qualifying investments of which 30% by value must be in ordinary shares carrying no preferential rights to dividends or return of capital and no rights to redemption. Investment Policy In order to achieve the Company's Investment Objective, the Board has agreed an Investment Policy which requires the Investment Manager to identify and invest in a diversified portfolio, predominantly of VCT qualifying companies quoted on AIM that display a majority of the following characteristics: - experienced and well-motivated management; - products and services supplying growing markets; - sound operational and financial controls; and - good cash generation to finance development allied with a progressive dividend policy. Asset allocation and risk diversification policies, including maximum exposures, are to an extent governed by prevailing VCT legislation. Specific conditions for HMRC approval of VCTs include the requirement that no single holding may represent more than 15% (by value) of the Company's investments, at the date of that investment. The Investment Manager is responsible for managing sector and stock specific risk and the Board does not impose formal limits in respect of such exposures. However, in order to maintain compliance with HMRC rules and to ensure that an appropriate spread of investment risk is achieved, the Board receives and reviews comprehensive reports from the Investment Manager and the Administrator on a regular basis. When the Investment Manager proposes to make an investment in an unquoted company, the prior approval of the Board is required. Where capital is available for investment while awaiting suitable VCT qualifying opportunities, or in excess of the 70% VCT qualification threshold, it may be invested in collective investment funds or in non-qualifying shares and securities in smaller listed UK companies. To date the Company has operated without recourse to borrowing. The Board may however consider the possibility of introducing modest levels of gearing up to a maximum of 20% of net assets, should circumstances suggest that such action is in the interests of shareholders. Chairman's Statement The year to 30 September 2009 was one of stark contrast for global equity markets. I am pleased to report that each of our Funds fared relatively well during the period, notwithstanding a small number of investment specific disappointments during this volatile year and in spite of the considerable technical constraints imposed on AIM based VCTs by HMRC. Between October 2008 and March 2009 the full extent of the economic fallout stemming from the sub-prime mortgage crisis became apparent. Governments in developed economies around the world were forced into a widespread bailout of their banking and insurance sectors in a concerted attempt to prevent a general collapse of the financial system. A massive and rolling programme of quantitative easing was also introduced in both the US and the UK designed to restart the flow of lending. Investors, understandably shell-shocked by the speed and severity of events, developed an increasing aversion to risk. As a consequence, equity values continued a downward trend, whilst the price of gold climbed back up towards $1000 per ounce. In the five months to the end of February 2009 the FTSE AllShare Index fell by 21%. The period between March 2009 and the end of September 2009 witnessed a significant reversal in sentiment. As confidence grew that the bailout and stimulus packages had successfully averted a possible financial catastrophe, so investors' appetite for risk assets slowly started to return. Equity markets began to recover, many financially distressed companies were able to refinance their debt successfully and the general economic news started to improve. During this seven month period the FTSE AllShare Index delivered a total return of 40%. The net result of this volatile performance is that the FTSE All Share Index registered a gain of 10% in the twelve months to 30 September 2009, whilst the FTSE AIM AllShare Index ended the year up by nearly 4%. As at 30 September 2009, the Net Asset Values (NAV) at bid prices for the Ordinary Share Fund, the Series 2 (S2) Share Fund and the Series 3 (S3) Share Fund were 56.3 pence, 74.6 pence and 87.2 pence per share respectively. This compares with NAVs of 61.8 pence, 75.3 pence and 77.6 pence at the previous year end. Although the Ordinary and the S2 Share Funds performed strongly in the second half, the recovery in NAVs was not quite sufficient to overcome a particularly difficult start to the financial year under review. The underperformance in the first quarter was, in large part, due to profit warnings issued by Glisten and Maxima which caused short term share price declines in each case of at least 70%. These declines had a particularly severe impact on the NAV of the Ordinary Share Fund since this Fund had large positions in both companies. Encouragingly, the outlook for both companies now appears to be improving and the share price of each has begun to recover in recent months. As reported last year, there were also a limited number of investee companies within the portfolios that were struggling to cope with high levels of debt. Unfortunately, three of these businesses, Cantono, Sanastro and Strategic Retail, were unable to secure further funding and were consequently placed into administration during the course of the year. Notwithstanding these disappointments, it is pleasing to note that many of the businesses held within the Funds continue to make solid progress both operationally and from a share price perspective. A detailed report on the performance of the portfolios within each Fund is contained in the Investment Manager's Review below. In previous years the Board has sought to maximise the stream of tax free dividend distributions to Shareholders whilst maintaining the NAV in each Fund at around 100 pence per share. Reflecting very difficult markets over the past two years, NAVs across the Funds currently remain below this level. However, given that the Ordinary and S2 Share Funds have capital reserves available for distribution, the Board has decided that, in these circumstances, it will amend this policy and declare interim dividends of 3.5 pence per share to holders of Ordinary Shares and of 2.5 pence per share to holders of S2 Shares in respect of the year ended 30 September 2009. In both cases, dividends will be paid from net realised capital profits and will be paid on 29 January 2010 to Shareholders on the register on 8 January 2010. The S3 Share Fund has yet to realise capital gains from any of its investments and has limited income available for distribution. The Board does not therefore propose paying a dividend to holders of S3 Shares at this time. During the period 682,875 Ordinary Shares and 334,511 Series 2 Shares were bought back for cancellation at an average price (net of expenses) of 32.4 pence per share and 53.2 pence per share respectively. To date, across all Funds, shareholders have received a total of £16.8m in dividends and £6.2m through share buy-backs. Given the turbulent state of markets over the past twelve months, new qualifying investment opportunities have been limited. In addition, with the Funds collectively being comfortably above the required threshold of having over 70% of gross assets invested in VCT qualifying holdings, your Manager maintained a highly selective approach, electing to focus primarily on interest bearing investments. The Ordinary and the Series 2 Share Funds participated in secondary fundraisings for three companies already held in both portfolios. In each case the investments were comprised of loan stock, with attractive yields. The Series 3 Share Fund was able to participate in one of these investments and also made one other new VCT qualifying investment. Towards the year end, one further secondary investment was made by the Ordinary and the Series 2 Share Funds. The level of cash held in the Ordinary Share Fund remained high throughout the financial year, although as markets began to recover some of this cash was deployed to good effect in a select number of non-qualifying investments. The total cash cost of purchases was £1.1m in the Ordinary Share Fund, £445,000 in the Series 2 Share Fund and £205,000 in the Series 3 Share Fund. Total proceeds from realisations and disposals amounted to £866,000 in the Ordinary Share Fund and £733,000 in the S2 Share Fund. There were no disposals or realisations in the S3 Share Fund in the year under review. At the financial year end the portfolios of the Ordinary and the S2 Share Funds respectively contained thirty-eight and thirty-six VCT qualifying companies, whilst the S3 Share Fund portfolio comprised seven qualifying investments. Finally, your Board has been in discussions with the directors of Unicorn AIM VCT II PLC regarding a possible merger of the two companies. These discussions have progressed well and it has been concluded that proposals should be put to the share holders of each company, which, if approved, will enable a merger to proceed. Both companies are managed by the same investment manager, Unicorn Asset Management Limited, and both have the same investment objectives and policies. By merging the two companies, it is expected that a number of benefits will be achieved for shareholders, in particular a significant reduction in the combined annual running costs. The intention is that the proposed merger will be completed pursuant to a section 110 scheme of reconstruction under the Insolvency Act 1986 by transferring the assets and liabilities of Unicorn AIM VCT II plc to the Company, in consideration for new shares to be issued to Unicorn AIM VCT II plc shareholders on a relative net asset value basis. A merger on this basis will be outside the provisions of The City Code on Takeovers and Mergers. A joint announcement regarding the proposed merger has been made to the London Stock Exchange today and full details of the merger proposals will be sent to shareholders shortly. Peter Dicks Chairman 4 December 2009 The Directors confirm to the best of their knowledge that: (a) the financial statements, prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP) and the 2003 Statement of Recommended Practice, 'Financial Statements of Investment Trust Companies' (SORP), revised December 2005, give a true and fair view of the assets, liabilities, financial position and the loss of the Company. (b) the management report, comprising the Chairman's Statement, Investment Manager's Review, Investment Portfolio Summary and Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces. For and on behalf of the Board: Peter Dicks Chairman 4 December 2009 Principal risks and uncertainties The Directors review the principal risks faced by the Company as part of the internal controls process (see the Corporate Governance Statement in the Annual Report for further information). The principal risks identified by the Directors are: * Investment and strategic risk - Unsuitable investment strategy or stock selection could lead to poor returns to shareholders. * Regulatory and tax risk - The Company is subject to relevant laws and regulations including Companies Act 2006, Income Tax Act 2007 and UK Listing Authority Rules. There is a risk that the Company may breach these rules and face public censure, suspension from the Official List and/or financial penalties. There is a risk that the Company may lose its VCT status under the Income Tax Act 2007 before shareholders have held their shares for the minimum period to retain their tax reliefs. Should the Company lose its VCT status, shareholders may lose any upfront income tax relief they received and be taxed on any future dividends paid and capital gain received if they dispose of their shares. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations. * Operational risk - The Company has no employees and is therefore reliant on third party service providers. Failure of the systems at third party service providers could lead to inaccurate reporting or monitoring. Inadequate controls may lead to the misappropriation or insecurity of assets. * Financial Instruments risks - The main risks arising from the Company's financial instruments are due to fluctuations in the market price and interest rates, credit risk and liquidity risk. The Board regularly reviews and agrees policies for managing these risks and full details can be found in note 20 of the Annual Report * Economic risk - Economic recession, inflation or deflation and movements in interest rates could affect trading conditions for smaller companies and consequently the value of the Company's investments. Investment Manager's Review Investment Policy It is the aim of the Investment Manager to identify and invest in a diversified portfolio of companies that display a majority of the following characteristics: - experienced and well-motivated management; - products and services supplying growing markets; - sound operational and financial controls; and - good cash generation to finance ongoing development allied with a progressive dividend policy. Performance The NAV of the Ordinary Share Fund on a bid price basis as at 30 September 2009 was 56.3 pence per share, representing a decrease of 4% over the previous year after adding back dividends paid. Since shares were first allotted in November 2001, the initial NAV of the Ordinary Share Fund after adding back dividends paid has increased by 4% on a total return basis. The NAV of the S2 Share Fund on a bid price basis was 74.6 pence per share, which represents a total return for the year of 1.7% after adding back dividends paid. The total return on initial NAV is -1.2%. The NAV of the S3 Share Fund on a bid price basis was 87.2 pence per share, representing an increase of 13.6% over the previous year after adding back dividends paid. Since shares were first allotted in April 2007, the initial NAV of the S3 Share Fund after adding back dividends paid has decreased by 6.7% on a total return basis. Investment strategy The policy of investing in companies which have a demonstrable record of profitability and positive cash generation remains unchanged. The Ordinary Share Fund and the S2 Share Fund portfolios are well diversified both by sector and by number of investments held. The S3 Share Fund portfolio now holds seven VCT qualifying investments. At Company level, the Funds are comfortably above the threshold required to retain VCT qualifying status (whereby a minimum of 70% of combined assets must be invested in VCT qualifying holdings). Your Investment Manager will continue to adopt a highly selective approach to new investment opportunities for all three Funds. Alternative Investment Market (AIM) review In the twelve months to 30 September 2009, investors in the Alternative Investment Market experienced a rollercoaster ride. The FTSE AIM AllShare Index continued to decline sharply in the early months of the year under review. Between the start of October 2008 and the end of February 2009, the Index fell by a further 40%, following on from a 44% decline recorded in the previous twelve month period. However, from early March 2009 through to the end of September 2009, the Index enjoyed a remarkable turnaround, rising by almost 73% and recording a gain of 4% for the year as a whole. The recovery was led by the Mining and Oil & Gas sectors, which together accounted for almost 38% of the Index by value as at 30 September 2009. As referred to in previous years, Mining & Resource companies rarely qualify for investment by Venture Capital Trusts under existing HMRC legislation, nor do they typically meet your Manager's investment criteria. As a result, it is very difficult for Unicorn AIM VCT Funds to have any direct exposure to this area of the market. Despite the recent, robust recovery, liquidity at the junior end of the market remains an issue. The number of shares traded on a daily basis during 2009 is down by almost 13% when compared with the equivalent period in 2008. In addition, with very few companies achieving an initial listing and some businesses delisting or failing altogether, there are now 16% fewer stocks listed on AIM than there were a year ago. Following the turbulent events of the past two years, it is to be hoped that AIM can now enjoy a period of stability as it seeks to re-establish itself as the most successful small company growth market in the world. Qualifying investments After a particularly challenging twelve months for UK smaller quoted companies, it is encouraging to report that the vast majority of the companies held across all three funds have not only survived, but are now well positioned to emerge from the current recession as leaner, more efficiently managed businesses. Unfortunately, there were three investee companies, details of which are set out below, which for different reasons were unable to secure the funding required to continue. These businesses were placed into administration during the course of the year and in each case the carrying value of the investment has been written down to zero. Cantono raised £10m in early 2008 to fund the initial development phase of a new data centre. By the time second stage funding was required, the wider financial crisis was reaching its height and despite significant efforts the company was unable to secure sufficient further investment to enable it to continue. Cantono was held in the Ordinary and the S2 Share Funds. Sanastrowas an unquoted publishing business focused on the financial sector. The collapse in advertising revenues following the onset of recession and the unwillingness of shareholders to fund further losses meant that the business was unable to continue trading as a going concern. Liquidators were appointed in July 2009. Sanastro was held in the Ordinary and S2 Share Funds. Strategic Retail was an operator of a chain of DIY stores in the UK which became a victim of the collapse in consumer spending and which was placed into administration in December 2008. Subsequently, liquidators were appointed in August 2009. Strategic Retail was held in the Ordinary and the S2 Share Funds. The overall performance of the Ordinary and the S2 Share Funds has also been held back by a number of profit warnings issued by investee companies during the year. In the main these setbacks have been due to the wider economic malaise rather than because the companies themselves were poorly managed or financially over-geared. However, there were three companies which delivered particularly disappointing performance. Glisten is a snack and confectionery group, which in the past twelve months has had to contend with rising raw material and energy costs. At the same time consumer spending has come under increasing pressure. Food retailers have responded to the economic downturn by introducing aggressive promotional activity and the impact on margins at suppliers such as Glisten has therefore been considerable. Although the company remains profitable and cash generative, margins came under additional pressure after a division within the group was discovered to have suffered from accounting irregularities. The release of the company's financial results for the year to 30 June 2009 has been delayed until an investigation into the apparent failings within this division has been completed. Despite these problems, the business remains inherently cash generative, net debt is reducing and management have confirmed that they expect to generate sales and profit growth in the year ahead and that their bankers remain supportive of the group. Glisten is held in the Ordinary Share Fund. Maxima Holdings is an IT managed services and systems integration business, which grew rapidly after floating on AIM in November 2004. In the past five years turnover has grown from approximately £10m to over £56m per annum, whilst adjusted profits before tax peaked at almost £9m in the financial year to 31 May 2008. However, investor confidence was steadily eroded after the company delivered a sequence of disappointing financial results. As a result, the market value of the business fell from £75m two years ago to just over £10m at its nadir in early 2009. A new executive management team, with a track record of successful company turnarounds, has now been brought in and the share price has responded positively. Maxima remains a profitable and cash generative business which is now better placed to benefit from any improvement in trading conditions. However, despite early signs of rehabilitation, the new management team still face significant challenges before market confidence in the company is fully restored. Maxima is held in both the Ordinary and the S2 Share Funds. Supportais a provider of domiciliary care and back office support services. The share price has struggled over the past three years after the company made a series of untimely acquisitions. Following a strategic review loss-making businesses were disposed of and the central overhead reduced. Supporta is now a more focused company with a significantly lower cost base. The benefits of this strategy should be felt in the current financial year and although the share price remains depressed, there are now sound prospects of recovery. Supporta is held in the Ordinary Share Fund. Despite these setbacks, the policy of seeking to invest in profitable, cash generative businesses with sound operational and financial controls has been beneficial in protecting the funds from the worst effects of the credit crunch. Indeed, a number of companies within the portfolios have to date shown little sign of being impacted by recession and have delivered significant share price gains as a result. The performance of the qualifying portfolio of the S3 Share Fund has been particularly encouraging since the investment phase for this Fund coincided with the general downturn in equity markets. Of the seven qualifying investments held in the S3 only one failed to deliver a positive return over the past twelve months. The aggregate contribution to performance across the seven stocks was in excess of £400,000 which equates to an average,unrealised capital return of almost 23%. The following is a summary of some of the strongest contributors to performance across the Funds in the past year. Abcam has grown to become one of the world's leading manufacturers and distributors of therapeutic antibodies to the worldwide life science research market. The company continues to grow strongly and recently reported earnings for the financial year to 30 June 2009 more than double the previous year on sales growth of greater than 50%. Abcam's products are high value and high margin. The product range continues to be rapidly expanded and to date there has been no sign of a slowdown in demand despite the global recession. The business is inherently cash generative and as a consequence the net cash position has grown by £10m in the past 12 months to over £25m. The company has also reported that trading in the new financial year has begun well. The shares, which are held in the Ordinary and the S2 Share Funds, rose by 85% in the period under review. Kiotechmanufactures and supplies high performance natural feed additives to the global agriculture and aquaculture markets. Following the acquisition of an established, profitable and cash generative business in November 2006, Kiotech has continued to deliver steady growth. In the six months to 30 June 2009, the company grew sales by 29% whilst pre-tax profits were up by almost 60%. However, the business is still relatively small in scale and the executive management team has been actively seeking further acquisitions. In August 2009, the company announced a further fundraising to help finance the acquisition of a competitor in the feed additive market. The Ordinary and the S2 Share Funds were able to participate in this fundraising which was successfully completed at 3 pence per share, since when the shares have appreciated by a further 42%. Melorio, a leading provider of vocational training, enjoyed strong growth as Government funding for national training programmes expands. Melorio's share price gained 67% during the period and is held in the S2 and S3 Share Funds. Shieldtech came to AIM in July 2007 with the intention of pursuing a buy and build strategy focused on acquiring businesses which supply products and services to the Homeland Security market. The outlook for small, acquisitive businesses like Shieldtech deteriorated significantly as the recession took hold. The Group was therefore unable to secure additional funds to help finance further acquisitions. At the same time, the core business; Aegis, which specialises in the manufacture and supply of body armour systems to police forces, experienced delays to a number of significant expected orders. As a result of these delays and because the Group had built a central overhead designed to accommodate a much larger entity, Shieldtech delivered significant losses in the year to 30 June 2008. It became apparent that in order to survive, the business would require refinancing. As a result, the decision was taken to suspend the shares from trading and, after a protracted period of negotiation, a refinancing package was agreed. The shares were relisted on AIM in May 2009 and have begun to recover lost ground, whilst underlying trading has also improved dramatically. Shieldtech is held in the Ordinary and the S2 Share Funds. Tristel is a specialist manufacturer of infection control products primarily for the NHS. The company raised money in July 2009 in order to help finance an acquisition. The fundraising was qualifying for VCT purposes under new HM Revenue & Customs rules and the shares were therefore acquired for the S3 Share Fund. Tristel's share price performed strongly in the period following this transaction and the investment closed the year registering a gain of 29%. New qualifying investments In view of the difficult market conditions and given that the portfolios are already well diversified, new investment activity has been strictly limited over the past twelve months. Other than the equity investments inKiotech and Tristel referred to above, your Manager has adopted a defensive approach. Across the three Funds a total of £1.36m of new capital was committed to VCT qualifying situations, the vast majority of which was in the form of secondary investments in companies already held. The primary focus has been to identify investment opportunities where immediate market risk could be controlled. Most of the new investments made during the year therefore took the form of loan stock offering attractive yields and, in some cases, with the opportunity to convert the loan into equity at a predetermined price at any point in the next five years. This form of investment is particularly suitable when equity values are depressed since it offers meaningful interest income, greater downside protection and all of the upside potential offered by ordinary equity. The Ordinary and the S2 Share Funds made follow-on VCT qualifying investments of this type in Access Intelligence, Amber Taverns and Snacktime, whilst the S3 Share Fund was also able to participate in the Snacktime fundraising. Realisations It was a quiet year for realisations across the Funds. Fountains, a specialist in vegetation management, was acquired by Connaught in a transaction funded by the issue of new Connaught shares. Fountains was held in the Ordinary and the S2 Share Funds. Both Funds are retaining their stakes in Connaught following the transaction since they remain qualifying for VCT purposes for a period of up to two years. Connaught is one of the UK's leading providers of services to the social housing sector and the management team has a long standing and successful track record of delivering value for shareholders. Clerkenwell Ventures, which was a cash shell held in the Ordinary and S2 Share Funds, returned the majority of its cash to investors during the year having failed to identify any suitable acquisitions. Following extremely strong share price performance, a partial disposal of Abcam was made in the Ordinary and S2 Share Funds in order to maintain the holding at an appropriate weighting within the portfolios. Both Funds also effected a sale of their holdings in Optare, a bus manufacturer, via an exchange of stock. The Ordinary Share Fund disposed of a proportion of its holdings in Printing.com and Pilat Media Group. There were no disposals in the S3 Share Fund during the year under review. Non-qualifying portfolios As referred to by the Chairman in the Half-Yearly Report covering the period to 31 March 2009, the Investment Manager has focused on preserving capital wherever possible and on selectively taking advantage of investment opportunities that meet its defined criteria. The Ordinary Share Fund made five new non-qualifying investments during the year. The initial investments were modest in size, representing a total capital commitment of £412,000. Each investment subsequently registered strong share price gains, with the total value rising to £686,000 by the financial year end, which equates to an average unrealised return of almost 67%. In the established Funds, the contribution to performance from the investment in sub-funds of the Unicorn Investment Funds OEIC has become a much smaller component of total returns than in previous years. This is a natural process, in line with the stated strategy, whereby 50% of the capital raised for each Fund is initially invested in the Unicorn OEIC to provide market exposure. As the Funds mature, the exposure to the OEIC Funds is reduced in order to release capital for investment in new VCT qualifying opportunities. In the Ordinary Share Fund this process is largely complete, with the remaining holding in the Unicorn Free Spirit Fund representing approximately 3% of total assets. The S2 Share Fund retains holdings in the Unicorn Mastertrust Fund and the Unicorn UK Smaller Companies Fund which accounted for nearly 22% of its net asset value at the year end. The S3 Fund continues to hold investments across the full range of Unicorn OEIC Funds. The Investment Manager's fees are based on the net asset value of the Company, excluding the value of the investments in these OEIC Funds. Having suffered in the previous year, the performance of the Unicorn OEIC Funds rebounded in the period under review. Total returns ranged from 9% for the Unicorn Outstanding British Companies Fund to over 30% for the Unicorn UK Income Fund. Prospects Whilst the stock market rally of the past six months has been welcome, the gains have primarily been driven by two specific factors. Firstly, there has been a significant recovery in commodity prices worldwide, which in turn has driven a strong rebound in the value of Mining & Resource stocks. Secondly, there has been substantial refinancing activity. Many of the UK's more financially distressed quoted companies have successfully strengthened their balance sheets in recent times through the issue of new equity at deeply discounted prices. In both cases this has led to handsome returns in the short term for those investors willing and able to invest in these higher risk assets. However, your Investment Manager is now anticipating a rotation of capital away from these areas and into more conservatively managed, sustainably profitable businesses with strong balance sheets and healthy cashflows. On relative valuation grounds, quoted companies of this type have become increasingly attractive in recent months. In addition, with sterling remaining weak it is likely that corporate activity will increase as foreign buyers look to acquire well-run, UK based businesses cheaply. A general shift in investor focus of this type should be positive for the future performance of the Funds since it would more accurately reflect the Manager's stated Investment Policy. Although the remit and purpose of the Funds is to invest capital in companies that are at a relatively early stage in their development, your Investment Manager has always attempted to mitigate risk by adopting a selective approach. The aim is to invest in companies which are run by experienced management, which supply growing markets, which demonstrate sound financial and operational controls and which are capable of generating sustainable and growing levels of cash. Over the longer term, we believe this strategy should deliver attractive returns for Shareholders. Chris Hutchinson Unicorn Asset Management Ltd 4 December 2009 Non-statutory analysis between the Ordinary Share Fund, S2 Share Fund and S3 Share Fund 1. Income statements for the year ended 30 September 2009 Ordinary Share Fund S2 Share Fund Notes Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Net unrealised (losses)/gains on investments - (883) (883) - 166 166 Net gains on realisation of investments - 143 143 - 113 113 Income 2 379 - 379 147 - 147 Investment management fees 1e) (76) (228) (304) (39) (117) (156) Other expenses (290) - (290) (148) - (148) ------ ------ ------ ------ ------ ------ Profit/(loss) on ordinary activities before taxation 13 (968) (955) (40) 162 122 Tax on profit/(loss) on ordinary activities 4 - - - - - - ------ ------ ------ ------ ------ ------ Profit/(loss) attributable to equity shareholders 13 (968) (955) (40) 162 122 ===== ===== ===== ===== ===== ===== Basic and diluted earnings per share 6 0.04 p (3.15)p (3.11)p (0.27)p 1.10 p 0.83 p Average number of shares in issue 30,725,568 14,744,906 S3 Share Fund Total of all Funds (per Statutory Profit and Loss Account) Notes Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Net unrealised (losses)/gains on investments - 551 551 - (166) (166) Net gains on realisation of investments - - - - 256 256 Income 2 54 - 54 580 - 580 Investment management fees 1e) (11) (32) (43) (126) (377) (503) Other expenses (38) - (38) (476) - (476) ------ ------ ------ ------ ------ ------ Profit/(loss) on ordinary activities before taxation 5 519 524 (22) (287) (309) Tax on profit/(loss) on ordinary activities 4 - - - - - - ------ ------ ------ ------ ------ ------ Profit/(loss) attributable to equity shareholders 5 519 524 (22) (287) (309) ===== ===== ===== ===== ===== ===== Basic and diluted earnings per share 6 0.10 p 10.47 p 10.57 p Average number of shares in issue 4,958,036 2. Balance sheets As at 30 September 2009 Ordinary Share Fund S2 Share Fund Notes £'000 £'000 £'000 £'000 Fixed assets Investments at fair value 14,329 10,509 Current assets Debtors and prepayments 256 38 Current investments 2,603 426 Cash at bank 185 157 ------ ------ ------ ------ 3,044 621 Creditors: amounts falling due within one year (326) (361) ------ ------ ------ ------ Net current assets 2,718 260 ------ ------ Net assets 17,047 10,769 ===== ===== Capital and reserves Called up share capital 303 145 Capital redemption reserve 57 15 Share premium account 640 200 Revaluation reserve (1,748) (1,004) Special distributable reserve 14,056 10,150 Profit and Loss account 3,739 1,263 ------ ------ Equity shareholders' funds 17,047 10,769 ===== ===== Number of shares in issue: 30,297,471 14,430,227 Net asset value per 1p share - basic and diluted: 7 56.26p 74.63p S3 Share Fund Adjustments Total of all (see note Funds below) (per Statutory Balance Sheet) Notes £'000 £'000 £'000 £'000 £'000 Fixed assets Investments at fair value 3,467 28,305 Current assets Debtors and prepayments 23 (179) 138 Current investments 883 3,912 Cash at bank 24 366 ------ ------ ------ ------ ------ 930 (179) 4,416 Creditors: amounts falling due within one year (75) 179 (583) ------ ------ ------ ------ Net current assets 855 3,833 ------ ------ ------ Net assets 4,322 - 32,138 ===== ===== ===== Capital and reserves Called up share capital 50 498 Capital redemption reserve - 72 Share premium account - 840 Revaluation reserve (309) (3,061) Special distributable reserve 4,535 28,741 Profit and Loss account 46 5,048 ------ ------ Equity shareholders' funds 4,322 32,138 ===== ===== Number of shares in issue: 4,958,036 Net asset value per 1p share - basic and diluted: 7 87.18p Note: The adjustment above nets off the inter-fund debtor and creditor balances, so that the "Total of all funds" Balance Sheet agrees to the Statutory Balance Sheet below. 3. Reconciliation of movements in Shareholders' Funds. Ordinary Share S2 Share S3 Share Total of all Fund Fund Fund Funds (per Statutory Balance Sheet) Notes £'000 £'000 £'000 £'000 As at 1 October 2008 19,154 11,121 3,848 34,123 Net share capital bought back in the year (223) (179) - (402) (Loss)/profit for the year (955) 122 524 (309) Dividends paid 5 (929) (295) (50) (1,274) ------ ------ ------ ------ Closing shareholders' funds at 30 September 2009 17,047 10,769 4,322 32,138 ===== ===== ===== ===== Income Statement For the year ended 30 September 2009 30 September 2009 30 September 2008 Notes Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Net unrealised losses on investments - (166) (166) - (14,209) (14,209) Net gains/(losses) on realisation of investments - 256 256 - (182) (182) Income 2 580 - 580 729 - 729 VAT recoverable - - - 168 503 671 Investment management fees 1e) (126) (377) (503) (172) (514) (686) Other expenses (476) - (476) (504) - (504) ------ ------ ------ ------ ------ ------ (Loss)/profit on ordinary activities before taxation (22) (287) (309) 221 (14,402) (14,181) Tax on (loss)/profit on ordinary activities 4 - - - 18 (18) - ------ ------ ------ ------ ------ ------ (Loss)/profit on ordinary activities after taxation for the financial year (22) (287) (309) 239 (14,420) (14,181) ===== ===== ===== ===== ===== ===== Basic and diluted earnings per share: Ordinary Shares 6 (3.11)p (27.67)p S2 Shares 6 0.83p (33.65)p S3 Shares 6 10.57p (14.66)p The total column of this statement is the profit and loss account of the Company. All revenue and capital items in the above statement derive from continuing operations. There were no other recognised gains or losses in the year. Other than revaluation movements arising on investments held at fair value through Profit and Loss Account, there were no differences between the (Loss)/ profit as stated above. The notes below form part of these financial statements. Balance sheet as at 30 September 2009 30 September 30 September 2009 2008 Notes £'000 £'000 £'000 £'000 Fixed assets Investments at fair value 28,305 28,042 Current assets Debtors and prepayments 138 2,068 Current investments 8 3,912 4,152 Cash at bank 366 48 ------ ------ ------ ------ 4,416 6,268 Creditors: amounts falling due within one year (583) (187) ------ ------ ------ ------ Net current assets 3,833 6,081 ------ ------ Net assets 32,138 34,123 ===== ===== Capital and reserves Called up share capital 498 508 Capital redemption reserve 72 62 Share premium account 840 840 Revaluation reserve (3,061) (4,603) Special distributable reserve 28,741 31,396 Profit and loss account 5,048 5,920 ------ ------ Equity shareholders' funds 32,138 34,123 ===== ===== Net asset value per share of 1 pence each: Ordinary Shares - basic and diluted 7 56.26p 61.83p S2 Shares - basic and diluted 7 74.63p 75.32p S3 Shares - basic and diluted 7 87.18p 77.62p The notes below form part of these financial statements. Reconciliation of movement in Shareholders' funds for the year ended 30 September 2009 30 September 2009 30 September 2008 Notes £'000 £'000 As at 1 October 2008 34,123 48,670 Net share capital bought back in the year (402) (469) Net share capital subscribed in the year - 842 Loss for the year (309) (14,181) Dividends paid 5 (1,274) (739) ----- ----- Closing Shareholders' funds at 30 September 2009 32,138 34,123 ===== ===== Cash flow statement For the year ended 30 September 2009 30 September 30 September 2009 2008 Notes £'000 £'000 £'000 £'000 Operating activities Investment income received 517 713 VAT recovered and related interest 889 - Other income received 13 - Investment management fees paid (504) (807) Other cash payments (438) (600) ------ ------ ------ ------ Net cash inflow/(outflow) from operating activities 477 (694) Investing activities Purchase of investments (1,502) (3,710) Sale of investments 2,711 5,967 ------ ------ ------ ------ 1,209 2,257 Equity dividends Payment of dividends 5 (1,274) (739) ------ ------ Net cash inflow before liquid resource management and financing 412 824 Management of liquid resources Decrease/(increase) in current investments 8 240 (1,213) Financing Issue of shares (net of expenses) - 842 Purchase of own shares (334) (513) ------ ------ ------ ------ (334) 329 ------ ------ Net increase/(decrease) in cash 318 (60) ===== ===== Notes to the accounts for the year ended 30 September 2009 1. Accounting policies A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below: a) Basis of accounting The accounts have been prepared under UK Generally Accepted Accounting Practice (UK GAAP) and the 2003 Statement of Recommended Practice, 'Financial Statements of Investment Trust Companies', revised December 2005 ("SORP"). b) Presentation of the Income Statement In order to better reflect the activities of a VCT and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The revenue column of the Income Statement is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in section 274 Income Tax Act 2007. c) Investments Investments are accounted for on a trade date basis. All investments held by the Company are classified as "fair value through profit and loss" as the Company's business is to invest in financial assets with a view to profiting from their total return in the form of capital growth and income. For investments actively traded in organised financial markets, recognition and fair value is determined by reference to Stock Exchange market trading rules and quoted bid prices at the close of business on the balance sheet date. Unquoted investments are valued by the Directors at 'fair value through profit and loss'. Accordingly, in the absence of a market price, the Directors have valued unquoted investments in accordance with International Private Equity Venture Capital Valuation (IPEVCV) guidelines as updated in September 2009, which have not materially changed the results reported last year. All investments are held at the price of a recent investment for an appropriate period where there is considered to have been no change in fair value. Where such a basis is no longer considered appropriate, the following factors will be considered: Where a value is indicated by a material arms-length transaction by an independent third party in the shares of a company, this value will be used. In the absence of i), and depending upon both the subsequent trading performance and investment structure of an investee company, the valuation basis will usually move to either:- an earnings multiple basis. The shares may be valued by applying a suitable price-earnings ratio to that company's historic, current or forecast post-tax earnings before interest and amortisation (the ratio used being based on a comparable sector but the resulting value being adjusted to reflect points of difference identified by the Investment Manager compared to the sector including, inter alia, a lack of marketability). or:- where a company's underperformance against plan indicates a diminution in the value of the investment, provision against cost is made, as appropriate. Where the value of an investment has fallen permanently below cost, the loss is treated as a permanent impairment and as a realised loss, even though the investment is still held. The Board assesses the portfolio for such investments, and after agreement with the Investment Manager, will agree the values that represent the extent to which an investment loss has become realised. This is based upon an assessment of objective evidence of that investment's future prospects, to determine whether there is potential for the investment to recover in value. Where an earnings multiple or cost less impairment basis is not appropriate and overriding factors apply, discounted cash flow or net asset valuation bases may be applied. d) Income Dividends receivable on quoted equity shares are brought into account on the ex-dividend date. Dividends receivable on unquoted equity shares are brought into account when the Company's right to receive payment is established and there is no reasonable doubt that payment will be received. Fixed returns on non-equity shares are recognised on a time apportioned basis so as to reflect the effective interest rate, provided there is no reasonable doubt that payment will be received in due course. Fixed returns on debt securities are recognised on a time-apportioned basis so as to reflect the effective yield. e) Expenses All expenses are accounted for on an accruals basis. Expenses are charged wholly to revenue, with the exception of expenses incidental to the acquisition or disposal of an investment, which are charged to capital, and with the further exception that 75% of the fees payable to the Investment Manager are charged against capital. This is in line with the allocation followed by most other VCTs. IFA trail commission is expensed in the period in which it is incurred. Expenses that related to the Ordinary Share Fund, the S2 Share Fund and S3 Share Fund have been allocated to those funds respectively. Of other expenses which did not relate specifically to any fund, 56% have been attributed to the Ordinary Share Fund, 33% to the S2 Share Fund and 11% to the S3 Share Fund. These percentages represented the share of net assets of each Share Fund as at 30 September 2008. f) Taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Company's taxable profits and its results stated in the financial statements. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantially enacted at the balance sheet date. Deferred tax is measured on a non-discounted basis. Any tax relief obtained in respect of management fees allocated to capital is reflected in the capital column of the profit and loss account and a corresponding amount is charged to the revenue column of the profit and loss account. The tax relief is the amount by which corporation tax payable is reduced as a result of these capital expenses. Deferred tax assets are recognised where it is more likely than not that there will be sufficient profits to recover against. g) Liquid resources Liquid resources are the current investments disclosed in note 8, regarded as available for investment, rather than to meet the Company's running expenses, as at the year-end. 2. Income Total income comprises 2009 2008 £'000 £'000 Dividends from equities 332 426 Dividends from money market funds and Unicorn OEICs 118 290 Interest from bank deposits and loan stock 32 13 Interest from VAT recoverable 98 - ------ ------ 580 729 ===== ===== 3. VAT recoverable Revenue Capital Total Revenue Capital Total 2009 2009 2009 2008 2008 2008 £'000 £'000 £'000 £'000 £'000 £'000 VAT recoverable - - - 168 503 671 As at 30 September 2008, the Directors considered it reasonably certain that the Company would obtain a repayment of VAT of not less than £791,000. £120,000 of this sum was set off against Investment Manager's fees in 2008, below. This estimate was based upon information supplied by the Company's Investment Manager, and discussions with the Company's professional advisors as a result of the European Court of Justice ruling and subsequent HMRC briefing that management fees be exempt for VAT purpose. During the year a total of £889,000 of VAT recoverable and related interest was actually received. 4. Taxation There is no tax charge for the period, as the Company has incurred taxable losses in the period. 5. Dividends 2009 2009 2009 2009 2008 2008 2008 2008 Ordinary S2 S3 Ordinary S2 S3 Fund Fund Fund Total Fund Fund Fund Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Amounts recognised as distributions to equity holders in the year: Ordinary Fund Final capital dividend for the year ended 30 September 2008 of 3p per Ordinary share paid on 30 January 2009 929 - - 929 - - - - S2 Fund Final dividend for the year ended 30 September 2007 of 5p per S2 share paid on 31 January 2008 - - - - - 739 - 739 Final capital dividend for the year ended 30 September 2008 of 2p per S2 share paid on 30 January 2009 - 295 - 295 - - - - S3 Fund Final revenue dividend for the year ended 30 September 2008 of 1p per S3 share paid on 30 January 2009 - - 50 50 - - - - ------ ------ ------ ------ ------ ------ ------ ------ 929 295 50 1,274 - 739 - 739 ===== ===== ===== ===== ===== ===== ===== ===== Any proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. Set out below are the total income dividends payable in respect of the financial year, which is the basis on which the requirements of Section 274 of the Income Tax Act 2007 are considered. 2009 2008 £ £'000 '000 Ordinary Fund: Revenue available for distribution by way of dividends for the year 13 180 Proposed final dividend for the year ended 30 September 2009 (2008: nil) - - S2 Fund: Revenue available for distribution by way of dividends for the year (40) 12 Proposed final dividend for the year ended 30 September 2009 (2008: nil) - - S3 Fund: Revenue available for distribution by way of dividends for the year 5 47 Proposed final dividend for the year ended 30 September 2009 (2008: 1p per share) - 50 Interim dividends of 3.5p per Ordinary Share and 2.5p per S2 Share will be paid on 29 January 2010 to shareholders on the register on 8 January 2010. 6. Basic and diluted earnings and return per share 2009 2009 2009 2009 2008 2008 2008 2008 Ordinary Ordinary Fund S2 Fund S3 Fund Total Fund S2 Fund S3 Fund Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Total earnings after taxation: (955) 122 524 (309) (8,496) (4,958) (727) (14,181) Basic and diluted earnings per share (note a) (3.11)p 0.83p 10.57p (27.67)p (33.65)p (14.66)p Net revenue /(loss) from ordinary activities after taxation 13 (40) 5 180 12 47 Basic and diluted revenue earnings per share (note b) 0.04p (0.27)p 0.10p 0.59p 0.08p 0.95p Net realised capital gains/ (losses) 143 113 - 4 (186) - Net unrealised capital (losses)/ gains (883) 166 551 (8,751) (4,714) (744) Capital element of Vat recoverable - - - 411 89 3 Capital expenses (228) (117) (32) (340) (159) (33) Total capital return (968) 162 519 (8,676) (4,970) (774) Basic and diluted capital earnings per share (note c) (3.15)p 1.10p 10.47p (28.26)p (33.73)p (15.61)p Weighted average number of shares in issue in the year 30,725,568 14,744,906 4,958,036 30,699,263 14,731,850 4,958,036 Notes Basic and diluted earnings per share is total earnings after taxation divided by the weighted average number of shares in issue. Revenue earnings per share is net revenue after taxation divided by the weighted average number of shares in issue. Capital earnings per share is total capital return divided by the weighted average number of shares in issue. There are no instruments in place that will increase the number of shares in issue in future. Accordingly, the above figures currently represent both basic and diluted returns. 7. Net asset values 2009 2009 2009 2008 2008 2008 Ordinary Ordinary Fund S2 Fund S3 Fund Fund S2 Fund S3 Fund £'000 £'000 £'000 £'000 £'000 £'000 Net Assets 17,047 10,769 4,322 19,154 11,121 3,848 Number of shares in issue 30,297,469 14,430,227 4,958,036 30,980,344 14,764,738 4,958,036 Net asset value per share - basic and diluted 56.26p 74.63p 87.18p 61.83p 75.32p 77.62p 8. Current investments These comprise investments in two Dublin based OEIC money market funds, managed by Royal Bank of Scotland and Blackrock Investment Management UK Limited and one UK based OEIC, managed by Prime Rate Capital Management. £3,911,000 (30 September 2008: £4,151,000) of this sum is subject to same day access while £ 1,000 (30 September 2008: £1,000) is subject to two day access. These sums are regarded as monies held pending investment. 9. Related party transactions Under the terms of the agreement dated 1 October 2001, the Company has appointed Unicorn Asset Management Limited to be the Investment Manager. The fee arrangements for these services and the fees payable are set out in note 4 of the Annual Report for the year ended 30 September 2009. Unicorn Asset Management also received a fee of £nil for acting as promoter to the company (2008: £48,000 Ordinary and S2 funds). David Royds is a director and shareholder of Matrix Group Limited, which owns Matrix-Securities Limited and has significant interests in Prime Rate Capital Management LLP ("PRCM") and Matrix Corporate Capital LLP ("MCC"). David Royds is also a director of Matrix-Securities Limited ("MSL"), which acted as Promoter to the Company for a fee of £nil (30 September 2008: £nil) and provides administration services to the Company for a fee of £195,000 (30 September 2008: £193,000) as disclosed in note 5 of the Annual Report for the year ended 30 September 2009. £49,000 (30 September 2008: £nil) was due to MSL at the end of the year. The Company has invested £1,000,000 in a liquidity fund managed by PRCM, and earned income of £16,000 from this fund in the year to 30 September 2009. MCC were appointed as the Company's brokers on 10 December 2008. £8,000 in fees has been charged for the year. Seven share buybacks were undertaken by MCC on the Company's instruction totalling £402,000. £97,000 was owed to MCC at the year-end. 10. Post balance sheet events The Board has decided to put proposals to Shareholders to merge the Company with Unicorn AIM VCT II plc. The intention is that the proposed merger will be completed pursuant to a section 110 scheme of reconstruction under the Insolvency Act 1986 by transferring the assets and liabilities of Unicorn AIM VCT II plc to the Company, in consideration for new shares to be issued to Unicorn AIM VCT II plc shareholders on a relative net asset value basis. 11. Non-statutory accounts These are not full accounts in terms of section 434 of the Companies Act 2006. The Annual Report for the year to 30 September 2009 will be sent to shareholders shortly and will then be available for inspection at One Vine Street, London W1J 0AH, the registered office of the Company. Copies of the Annual Report will be available from 21 December 2009 on the Company Secretary's website and the Investment Manager's website, details of which can be found at www.unicornaimvct.com. Statutory accounts will be delivered to the Registrar of Companies after the Annual General Meeting. The audited accounts for the year ended 30 September 2009 contain an unqualified audit report. 12. Annual general meeting The Annual General Meeting of the Company will be held at 3.00 pm on 25 February 2010 at One Vine Street, London W1J 0AH.

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