Foresight 4 VCT PLC : "C" Share Trading Stateme...

22 August 2013

FORESIGHT 4 VCT PLC

Announcement relating to Foresight 4 "C" Share fund ("C" Share fund)

Fin Holdings Limited and The Fin Machine Company Limited (both in Administration) (the "Group")

Foresight Group LLP, as Manager of Foresight 4 VCT plc, announces that administrators have today been appointed to Fin Holdings Limited and The Fin Machine Company Limited ("Fin" or the "Company"), the largest single investment in the Foresight 4 C Share fund.  The Group has been the subject of a long and difficult attempted turnround since Foresight took over full management responsibility for this former Acuity Growth VCT PLC and Acuity VCT 3 PLC investment from their previous Manager, Acuity Capital Management, on 1st April 2011.  At that time, Foresight recognised several important issues but, given the Company's leading market position, large order book and since it was the largest investment by far across the two VCTs, the decision was made to attempt a turnround rather than put it into administration.  The two VCTS were merged in February 2012 to form the F4 "C" Share fund.

Background to the Group

With more than 200 employees, the Group designs and manufactures capital equipment used to manufacture heat exchangers for the Worldwide automotive and air conditioning markets.  The Group's global customer base includes a broad range of blue chip OEMs, automotive industry majors and Asian air conditioning companies.  The Group has manufacturing facilities in Seaham, Co. Durham and in Tianjin, China, as well as an assembly/service centre in Indiana, USA.  In any one year, Fin manufactures a relatively small number of machines, costing up to £1.5 million each, together with spares for its installed base of over 600 machines Worldwide.  As such, to fund its working capital requirements, the Company relies heavily on substantial stage payments from customers and a continuing flow of orders.  For the year to 31 December 2012, the Group incurred an unaudited EBITDA loss of £1.2m on sales of £26.2 million, after charging exceptional costs of approximately £1.5 million, at which date it had net liabilities of over £11 million reflecting accumulated past losses.

Recent Events

The proximate reason for the appointment of administrators was the serving of a winding up order by HM Revenue & Customs at short notice relating to the Company's failure to pay PAYE arrears, despite continuing efforts to negotiate a programme of phased payments with HMRC.  Considerable progress had been made by the Group's new management team in effecting the turnround, for example in reducing the Group's annual EBITDA losses from £4m for the period to 31 December 2010 to around breakeven over the nine months to 30^th June 2013, resolving various historic liabilities (notably penalties for late delivery of machines and the cost of rectifying and commissioning already delivered machines), improving production efficiency and in introducing essential financial and production control systems.  However, with growing rumours and concerns about the Group's weak financial position, major customers became increasingly reluctant over the last two or so months to place new orders with Fin despite the management's efforts to address these concerns.  Within the last month, unexpected trading difficulties also came to light in the Chinese subsidiary which resulted in significant expected payments not being made to the parent company for tooling work done in the UK and shipped to China.  Given the reliance on stage payments with new orders and an unexpected net cash outflow to China, the Company's working capital position worsened quickly.  The Board appointed corporate financiers to seek additional sources of finance and potential acquirors but the untimely actions of HMRC cut short their work.

In summary, since Foresight took over responsibility for this poorly managed investment in April 2011 and attempted a turnround, the full extent of the historic problems and liabilities gradually became apparent which, when combined with the volatility of the Company's large working capital requirement, were such that F4C could no longer justify providing further financial support to the Group.

As shown in the latest Foresight 4 VCT's Annual Report and Accounts for the year to 31 March 2013, the investment in the Group by the "C" Share fund was valued at £5,849,000, since which date a further £860,000 has been invested, together representing 37% of the "C" Share fund's net assets of £17,964,000 at that date.  With little prospect of any significant recoveries through the administration, this investment has now been provided against in full.  This will accordingly reduce the "C" Share fund's net asset value per share by approximately 36p per share from 95.8p as at 31 March 2013 to approximately 60p per share currently.  

Current "C" Share fund Portfolio

As highlighted in the Annual Report, to broaden and diversify the portfolio, Foresight has made five new investments, all of which are performing well.  The three remaining legacy investments, Connect 2 Media, Defaqto and Hallmarq, are similarly performing well.  These are summarised below and also in the Annual Report.

In June 2013, the "C" Share fund invested £900,000 together with £600,000 from the Foresight 4 VCT "O" Share fund and other Foresight VCTs in a £3.5 million shareholder recapitalisation of Dundee based Aerospace Tooling Corporation Limited, a specialist engineering company founded in 2007 providing repair, refurbishment and remanufacturing services to large international companies for components in high-specification aerospace and turbine engines.  With a heavy focus on quality assurance, the company enjoys high quality relationships with companies serving the aerospace, military, marine and industrial markets.

In April 2012, the "C" Share fund invested £312,503 in Biofortuna, a molecular diagnostics business based in the Wirral with expertise in enzyme stabilisation, effectively hi-tech freeze drying.  Its first range of products, SSPGo, is a series of genetic compatibility tests for organ transplant recipients, although the application of the technology is extremely broad.    The company is expanding into adjacent premises, improving manufacturing and generating successful clinical data for its SSPGo product range for submission to the FDA, whose approval is required to sell in the USA, its largest potential market. The SSPGo product range continues to see repeat orders from Abbott. The freeze-dried kit manufacturing service shows promise, with contract discussions with a number of parties.

In July 2012, "C" Share fund invested £1.0 million in Northampton based Blackstar Amplification Holdings alongside £2.5 million from Foresight VCT to finance a management buy-out of and provide growth capital to Blackstar Amplification Limited, which designs and manufactures innovative guitar amplifiers.    The company achieved strong sales and profit growth in the year to 30 April 2013, driven by new product launches and increased penetration in key markets, most notably the US.

Manchester based Connect2Media develops and publishes digital media entertainment on a range of devices including mobile phones, portable games consoles, Blackberrys, PCs and interactive TVs.  
The company is developing a Cloud based game development and publishing technology platform to provide small and medium sized game developers with software tools to support their development, distribution and discovery requirements.  These tools will be provided as a highly scalable Platform as a Service (PaaS), with developers paying monthly subscriptions, thereby generating recurring revenues.  

For the year to 31 March 2013, Defaqto returned to substantial profitability, achieving an EBITDA of over £750,000 on sales of £7.2 million, which contrasts with the previous year to 31 March 2012, when a small EBITDA loss was incurred on sales of £8.5 million, after heavy investment in new product development.  

In May 2012, the "C" Share fund invested £492,500 in Flowrite Refrigeration Holdings alongside other Foresight VCTs to finance the £3.2 million management buyout of Flowrite Services Limited, a long established Maidstone based company which provides refrigeration and air conditioning maintenance and related services nationally, principally to leisure and commercial businesses.  The management team has recently won a number of significant new customers and contracts.  The company is enjoying strong growth and is currently generating profit at twice the level budgetted.

Guildford based Hallmarq Veterinary Imaging is the only manufacturer of MRI systems for the standing equine market, with over 60 MRI scanners in use at equine practices throughout the World.  For the year ended 31 August 2012, the company achieved an EBITDA of £1.18 million on sales of £3.31 million, well ahead of budget and trading in the previous year.  In the current year to 31 August 2013, sales growth continues to be strong but continuing investment in the PetVet scanner (an MRI scanner for the companion animal market i.e. cats and dogs) is expected to hold back EBITDA growth.  
In April 2013, the "C" Share fund invested £400,000 alongside other Foresight VCTs in a £1.8 million round to finance a management buy-out of Procam Television Limited, one of the UK's leading broadcast hire companies, supplying equipment and crews for UK location TV production to broadcasters, production companies and corporates for over 20 years.  Over the last four years revenues have doubled, following the introduction of new camera formats.  The former CEO of Carlton Television, Clive Jones, has been appointed as Chairman.

Outlook

Foresight is now seeing an increasing number of high quality private equity investment opportunities for the "C" Share fund and expects to close a further investment within the next few weeks.  However, as a small fund with finite cash resources, the "C" Share fund will soon have insufficient funds to pursue further investments and consideration is being given to raising new funds.

For further information please contact:

Gary Fraser, Foresight Group: 01732 471 800

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Source: Foresight 4 VCT PLC via Thomson Reuters ONE

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