Annual Financial Report

RNS Number : 9702H

Bluehone AIM VCT2 PLC

03 March 2010

 



To:                    Company Announcements

From:                Bluehone AiM VCT2 plc

Date:                 3 March 2010

Investment Objective

To provide shareholders with a tax efficient means of gaining long term capital growth and an attractive dividend stream primarily through investment in a diversified portfolio of AiM companies and unquoted companies which anticipate a stock market quotation

Ordinary Shares

·      Net asset value total return of 30.3 per cent for the year

·      Share price total return of 30.3 per cent for the year

·      Tax free dividend of 1.5p per share equivalent to a dividend yield of 6.2 per cent on the year end share price (equivalent to 10.3 per cent for a higher rate tax payer)

·      Cumulative tax free dividend of 20p per share since launch

The Chairman, Gordon Brough, said:

During the period under review the world experienced the most severe synchronised slump in demand and economic activity for at least fifty years. Starting in the financial sector, the recession quickly spread to most other areas of the economy, with drastic action required in the form of historically low rates of interest and unprecedented levels of quantitative easing by governments to avoid widespread economic depression. In the UK, the economy shrank by 5.1 per cent over the year and by its end the country had experienced six consecutive quarters of contraction. Whilst banks were forced to rebuild their own balance sheets their customers suffered. Smaller companies in particular found it difficult to borrow and for the first half of the year, at least, also difficult to raise finance from the equity markets.

As it became more troublesome to conduct business, companies were forced to cut costs, delay contracts and conserve cash. Inevitably the level of corporate failures increased. However, after falling for the first three months of the year, stock markets sensed that economic catastrophe had been averted and then staged a remarkable recovery in anticipation of the major economies coming out of recession. Towards the end of 2009 China and India resumed higher levels of growth and the US took its first tentative steps out of recession. The UK has lagged behind and is the last major economy to show signs of recovery although this does not seem to have held back the domestic stock markets which have also started to look ahead.

In the twelve months to the end of November the FTSE ALL Share Index increased by 25.6 per cent and the FTSE AIM Index recovered by 62.4 per cent. As in the past, the AiM index has been heavily influenced by its oil & gas and natural resource sectors which saw dramatic increases in value, fuelled by a strong rebound in commodity prices. These two sectors combined make up 34 per cent of the AiM market's value and increased by 111 per cent and 204 per cent respectively during the year. Elsewhere it was encouraging to see an improvement in investors' appetite for risk, leading to more interest being shown in smaller companies generally. The increase in the AiM Index brought with it an improvement in share trading in the market which has enabled your Manager to more actively manage the portfolio by taking profits and cutting losses, as well as supporting both existing and new holdings with investment.

Performance

The portfolio produced a total return of 30.3 per cent over the year with the Net Asset Value per share increasing to 41.6 pence at the year end and an interim distribution of 0.5 pence per share being paid in August 2009. Although there were some disappointments during the year, including a number of companies that succumbed to the financial crisis and had to be written down to zero, companies in the portfolio generally coped well with the intensive economic pressures and the majority saw an increase in their value over the year. It was heartening to see a partial recovery in the share price of the portfolio's largest holding, Infrastrata (formerly known as Portland Gas) which recommenced the financing process for its underground gas storage facility to be built deep beneath Portland harbour in Dorset. The lack of gas storage capability in the UK has been brought into sharp focus during this winter's severe weather and it must be hoped that Infrastrata is able to capitalise on its strategic position by completing the financing and commencing construction this year. Elsewhere, despite the very weak economic background, there was encouraging news from some of the larger holdings within the portfolio which helped increase individual valuations. In addition, takeover bids were received by six companies including: FDM; Supporta and Essentially. FDM was bid for by its management team, backed by a venture capitalist at a substantial premium to its share price at the time. Supporta was bid for by Mears Group and remains outstanding. Essentially was bid for by Chime Communications and has been completed. Towards the end of the period and into the New Year a number of other investee companies announced bid approaches, which may or may not come to fruition but which nevertheless highlight the potential value within the portfolio.

Portfolio Developments

Improved market conditions generally in the smaller company sector enabled a more active stance to be taken by the Manager in running the portfolio. As a result, the level of investment activity within the portfolio increased as the year progressed and the Manager followed a strategy of streamlining the portfolio, selling thirteen of the smaller underperforming investments as well as reducing exposure to three of the larger holdings; comprising Infrastrata,  FDM and Healthcare Locums. The proceeds of these disposals amounted to £2.5 million and provided the cash resources to fund further investment in the portfolio of £2 million.

Initially, available funds were used to support existing investee companies and to this end follow on investments were made in Servoca, Optare, Kiotech, Colliers, Datum International and Formjet. As market conditions improved and more cash was realised from divestment, a number of investment opportunities presented themselves and the Manager made secondary market purchases of non-qualifying shares in eight existing investee companies. They also introduced three new companies to the portfolio, namely: Avia Health Informatics, Island Gas Resources and Omega Diagnostics. The Manager's Review in the Annual Report sets out a more detailed comment on these and other investments within the portfolio.

There has been a noticeable increase in the level of corporate activity at the smaller end of the market. It is encouraging therefore that there has been an improvement in the level of cash resources post the year end and the Company is in a more advantageous position to consider investment opportunities as they arise.

At the AGM in April 2009, C shareholders voted not to tender their shares for realisation and as a result these shares converted into Ordinary shares in November 2009 at the conversion ratio of 1.299 Ordinary shares for each C share. At the same time the portfolio of investments of the C share pool was combined with the Ordinary share portfolio and the number of holdings increased to 65. It is the Manager's intention to continue to streamline the portfolio in the current period.

Earnings and Dividends

Following the recovery from HM Revenue and Customs of VAT paid in the past on investment management fees and the cancellation of the Company's share premium account, which has created a distributable reserve; the Board declared an interim distribution of 0.5 pence per share which was paid to Ordinary shareholders in August 2009. Profits taken from the portfolio during the second half of the year allows the Board to recommend the payment on 30 April 2010 of a final capital distribution of a further 1 pence per share, to shareholders on the register on 9 April 2010, giving a total distribution of 1.5 pence per share for the year. Following the payment of the final distribution, the Company will have paid 20 pence per Ordinary share to shareholders since launch. For shareholders who invested at launch and have continued to hold their investment, the effective original book cost is now 20 pence per share after receipt of all tax reliefs and tax free dividends.

Change of Broker Trading in Bluehone AiM VCT2 shares and Top Up Offer

The Company was pleased to appoint Matrix Securities as its new brokers in March 2009. The Company currently has three market makers and during 2009 saw a noticeable improvement in the two-way trading of its shares, albeit that there remains a sizeable discount in the price of the shares against the net asset value per share.

Historically, investment returns have been greater when investments are made in the weaker parts of economic cycles as valuations are lower and beneficial terms can be more easily negotiated. The Manager continues to look for opportunities for the uninvested cash, whilst maintaining funds for follow-on investments, and in both regards has experienced a steady flow of investment candidates for consideration.

In light of the potential opportunities and advantageous time in market cycles for investing, the Board has decided to make available a limited number of new shares in the Company by way of a top-up offer ("Top-up Offer") to provide shareholders and investors with the opportunity to invest further in the Company and the Top-Up Offer documentation has been sent to shareholders. If this offer is fully subscribed it would raise up to maximum of approximately £2.175 million. The new Ordinary shares would benefit from income tax relief of up to 30 per cent.

New Articles of Association

We are also seeking shareholders approval for a number of amendments to our articles of association, primarily to reflect the provisions of the Companies Act 2006. 

Board Composition

The Company is now entering its ninth year of operation during which there have been a number of changes, both internal and external, which have impacted upon the responsibilities of the Board. In light of this we will be undertaking an assessment of the composition and role of the Board and its individual members in order to ensure that your Board is operating as effectively and efficiently as possible going forward.

Outlook

The UK appears to be showing some tentative signs of emerging from recession at last. The prolonged period of sterling weakness has helped exporters, enabling a rebalancing of trade, whilst exceptionally low interest rates and monetary easing have in the past provided the necessary ingredients for corporate recovery. However, the likely strength of any recovery will no doubt be tempered by the need for significant cuts in public expenditure in order to reduce an unsustainable budget deficit. Furthermore, increased taxes and higher utility bills will result in a fall in disposable income, which could dampen consumer demand and there remains a continuing threat of unemployment for many.

Smaller company shares have recovered well from their low point but remain at a discount to their larger peers, with many yet to participate fully in the market's recovery. Recent realisations have increased the cash balance of the Company, giving greater flexibility to take advantage of new investment opportunities. I am encouraged that a number of Bluehone AiM VCT2 investee companies have received interest from potential bidders which adds support to the Board's and Manager's conviction that there remains unrealised value in the portfolio. We enter the new decade looking forward with cautious optimism.

Gordon Brough

Chairman

Enquiries:

Robert Mitchell

Bluehone Investors LLP

Investment Managers                             Tel:  [phone]

Scott Macrae

F&C Asset Management plc

Secretaries                                            Tel:  [phone]

Audited Income Statement

for the year ended 30 November 2009

 

 

	Ordinary Shares
	2009	2009	2009
	Revenue	Capital	Total
	£'000	£'000	£'000
Loss on realisation of investments	-	(347)	(347)
Change in fair value of investments	-	6,176	6,176
Income	253	-	253
Investment management fee	(87)	(262)	(349)
Expenses of capital restructure	-	(30)	(30)
Other expenses	(359)	-	(359)
(Loss) / profit on ordinary activities before taxation	(193)	5,537	5,344
Tax on ordinary activities	-	-	-
(Loss) / profit on ordinary activities after taxation	(193)	5,537	5,344
Return per ordinary share	(0.35p)	9.99p	9.64p

Reconciliation of Movement in Shareholders' Funds

for the year ended 30 November 2009

	2009	2009	2009
	Ordinary	C Shares	Total
	£'000	£'000	£'000
Opening shareholders' funds	17,894	1,665	19,559
Profit / (loss) for the period	5,413	(69)	5,344
Conversion of C shares	1,596	(1,596)	-
Increase in share capital	9	-	9
Share issue expenses	(3)	-	(3)
Dividends paid	(277)	-	(277)
Closing shareholders' funds	24,632	-	24,632

Audited Income Statement

for the year ended 30 November 2008

 

	Ordinary Shares
	2008	2008	2008
	Revenue	Capital	Total
	£'000	£'000	£'000
Profit on realisation of investments	-	451	451
Changes in fair value of investments	-	(19,871)	(19,871)
Income	256	116	372
Investment management fee	(130)	(392)	(522)
VAT on management fees refund	265	795	1,060
Other expenses	(245)	-	(245)
Profit / (loss) on ordinary activities before taxation	146	(18,901)	(18,755)
Tax on ordinary activities	-	-	-
Profit / (loss) on ordinary activities after taxation	146	(18,901)	(18,755)
Return per ordinary share	0.33p	(42.69p)	(42.36p)

Reconciliation of Movement in Ordinary Shareholders' Funds

for the year ended 30 November 2008

			2008
			£'000
Opening shareholders' funds			27,863
Loss for the year			(18,755)
Increase in share capital			10,267
Expenses of share issue			(162)
Purchase of shares			(77)
Dividends paid			(1,242)
Closing shareholders' funds			17,894

Audited Income Statement

for the year ended 30 November 2008

 

	C Shares
	2008	2008	2008
	Revenue	Capital	Total
	£'000	£'000	£'000
Profit on realisation of investments	-	36	36
Changes in fair value of investments	-	(1,171)	(1,171)
Income	33	1	34
Investment management fee	(12)	(38)	(50)
VAT on management fees refund	5	14	19
Other expenses	(27)	-	(27)
Loss on ordinary activities before taxation	(1)	(1,158)	(1,159)
Tax on ordinary activities	-	-	-
Loss on ordinary activities after taxation	(1)	(1,158)	(1,159)
Return per C share	(0.03p)	(39.22p)	(39.25p)

Reconciliation of Movement in C Shareholders' Funds
for the year ended 30 November 2008

			2008
			£'000
Opening shareholders' funds			2,824
Loss for the year			(1,159)
Closing shareholders' funds			1,665

 

 

Audited Income Statement

for the year ended 30 November 2008

 

	Total
	2008	2008	2008
	Revenue	Capital	Total
	£'000	£'000	£'000
Profit on realisation of investments	-	487	487
Changes in fair value of investments	-	(21,042)	(21,042)
Income	289	117	406
Investment management fee	(142)	(430)	(572)
VAT on management fees refund	270	809	1,079
Other expenses	(272)	-	(272)
Profit / (loss) on ordinary activities before taxation	145	(20,059)	(19,914)
Tax on ordinary activities	-	-	-
Profit / (loss) on ordinary activities after taxation	145	(20,059)	(19,914)

Reconciliation of Movement in Total Shareholders' Funds

for the year ended 30 November 2008

			2008
			£'000
Opening shareholders' funds			30,687
Loss for the year			(19,914)
Increase in share capital			10,267
Expenses of share issue			(162)
Purchase of shares			(77)
Dividends paid			(1,242)
Closing shareholders' funds			19,559

Audited Balance Sheet as at 30 November
	Ordinary shares	Ordinary shares	C shares		Total
	2009	2008	2008		2008
	£'000	£'000	£'000		£'000
Fixed assets
Investments	23,913	17,011	1,647		18,658
Current assets
Debtors	87	811	16		827
Cash at bank and on deposit	958	207	14		221
	1,045	1,018	30		1,048
Creditors (amounts falling due within one year)	(326)	(135)	(12)		(147)
Net assets less current liabilities	719	883	18		901
Total assets less current liabilities	24,632	17,894	1,665		19,559
Financed by:
Equity shareholders' funds	24,632	17,894	1,665		19,559
Net asset value per share:	41.59p	32.32p	56.47p
Number of shares in issue at the balance sheet date	59,226,066	55,370,992	2,950,085

Summarised Audited Statement of Cash Flow

for the year ended 30 November

	Ordinary shares	Ordinary shares	C shares	Total
	2009	2008	2008	2008
	£'000	£'000	£'000	£'000
Net cash inflow /(outflow) from operating activities	236	(135)	(43)	(178)
Taxation received	-	-	-	-
Capital expenditure and financial investment	772	1,376	22	1,398
Equity dividends paid	(277)	(1,224)	-	(1,224)
Net cash inflow/(outflow) before financing	731	17	(21)	(4)
Financing	6	(140)	-	(140)
Increase / (decrease) in cash	737	(123)	(21)	(144)
Reconciliation of net cash flow to movement in net cash
Increase / (decrease) in cash	737	(123)	(21)	(144)
Opening cash	221	330	35	365
Net cash at 30 November	958	207	14	221

Reconciliation of net profit / (loss) before taxation to net cash inflow/(outflow) from operating activities

	2009	2008	2008	2008
	Ordinary shares	Ordinary shares	C shares	Total
	£'000	£'000	£'000	£'000
Profit / (loss) on ordinary activities before taxation	5,344	(18,755)	(1,159)	(19,914)
Loss / (profit) on realisation of investments	347	(451)	(36)	(487)
Changes in fair value of investments	(6,176)	19,871	1,171	21,042
Decrease / (increase) in debtors	742	(768)	(10)	(778)
Decrease in creditors	(21)	(32)	(9)	(41)
Net cash inflow / (outflow) from operating activities	236	(135)	(43)	(178)

Principal risks, risk management and regulatory environment

·                    Loss of approval as a Venture Capital Trust - the Company must comply with Section 274 of the Income Taxes Act 2008 which allows it to be exempted from capital gains tax on investment gains.  Any breach of these rules may lead to the Company losing its approval as a VCT, with 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 Company becoming subject to tax.  The Company would also lose its exemption from tax on capital gains.

·                    Investment and strategic - inappropriate strategy, poor asset allocation or consistent weak stock selection might lead to under performance and poor returns to shareholders.

·                    Regulatory - the Company is required to comply with the Companies Acts, the rules of the UK Listing Authority and United Kingdom Accounting Standards.  Breach of any of these regulatory rules might lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.

·                    Reputational - inadequate or failed controls might result in breaches of regulations or loss of shareholder trust.

·                    Operational - failure of the administrator's accounting systems or disruption to its business might lead to an inability to provide accurate reporting and monitoring.

·                    Financial - inadequate controls might lead to misappropriation of assets, inappropriate accounting policies might lead to misreporting or breaches of regulations.

·                    Market Risk - Investment in AiM-traded, PLUS-traded and unquoted companies, by its nature, involves a higher degree of risk than investment in companies traded on the main market.  In particular, 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.  In addition, the market for stock in smaller companies is often less liquid than that for stock in larger companies, bringing with it potential difficulties in acquiring, valuing and disposing of such stock.

·                    Liquidity Risk - The Company's investments may be difficult to realise.  The fact that a share is traded on AiM does not guarantee its liquidity.

The Board seeks to mitigate and manage these risks by setting policy, regular review of performance, enforcement of contractual obligations and monitoring progressing and compliance.  In the mitigation and management of these risks, the Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

Statement of Directors Responsibility in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the Annual Report for the year ended 30 November 2009, of which this statement of results is an extract:

·      The financial statements have been prepared in accordance with applicable  UK Accounting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Annual Report includes a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      The Annual Report includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

G Brough

Director

2 March 2010

Notes

1. Financial instruments

The Company's financial instruments comprise equity and fixed interest investments, cash balances and liquid resources.  The Company holds financial assets to invest in accordance with its investment policy, in UK companies raising new share capital predominately on AiM.

Fixed asset investments held are valued at bid market prices or Directors' valuation which equate to their fair values.  The fair value of all other financial assets and liabilities is represented by their carrying value in the Balance Sheet.  Short term debtors and creditors are excluded from disclosure as allowed by FRS 13.

The main risks that the Company faces arising from its financial instruments are:

(i)         market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

(ii)         Interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii)        credit risk, being the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company; and

(iv)        liquidity risk, being the risk that the Company may not be able to liquidate its investments quickly enough to meet its ongoing financial commitments.

Market price risk

The Company's strategy for managing investment risk is determined with regard to the Company's investment objective.  The management of market risk is part of the investment management process and is a central feature of venture capital investment.  The Company's portfolio is managed in accordance with the policies and procedures described in the corporate governance statement having regard to the possible effects of adverse price movements, with the objective of maximising overall returns to shareholders.  Investments in unquoted companies, by their nature usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by diversifying the portfolio across business sectors and asset classes.  The overall disposition of the Company's assets is monitored by the Board on a quarterly basis.

Interest rate risk

When the Company retains cash balances the majority of the cash is held in deposit accounts. The benchmark rate which determines the interest payments received on cash balances is the bank base rate for the relevant currency for each deposit.

Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company.  The carrying amount of financial assets best represents the maximum credit risk exposure at the balance sheet date.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement.  Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the diversity of counterparties used.

All the assets of the Company are held by JPMorgan Chase Bank, the Company's custodian.  Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited.  The Board monitors the Company's risk by reviewing the custodian's internal control reports.  The Managers have in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis.

The credit risk on liquid funds is controlled because the counterparties are banks with high credit ratings, rated AA or higher, assigned by international credit rating agencies.  Bankruptcy or insolvency of such financial institutions may cause the Company's ability to access cash placed on deposit to be delayed, limited or lost.

Liquidity risk

The Company's liquidity risk is managed on an ongoing basis by the Managers.

The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and expenses.

2.         The audited results which cover the year to 30 November 2009 have been prepared under UK Generally Accepted Accounting Practice (UK GAAP) and on the assumption that the Company maintains VCT status.

The Company is no longer an investment Company as defined by Section 833 of the Companies Act 2006, as Investment Company status was revoked in order to permit the distribution of capital profits.

Where presentational guidance set out in the Statement of Recommended Practice (SORP), for Investment Trusts issued by the Association of Investment Companies (AIC) in January 2003, revised January 2009, is consistent with the requirements of UK GAAP, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

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 Net Revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Section 274 of the Taxes Act 2007.

3.         There were 59,226,066 Ordinary shares in issue at 30 November 2009 (30 November 2008: 55,370,992 Ordinary shares and 2,950,085 C shares).  During the year to 30 November 2009 3,832,066 Ordinary shares were issued on conversion of C shares and 23,008 Ordinary shares were issued following the Dividend Reinvestment Scheme.

4.         Returns for the year to 30 November 2009 are based on 55,408,414 Ordinary shares (30 November 2008: 44,274,717 Ordinary shares and 2,950,085 C shares) being the weighted average of shares in issue during the year.

5.         Bluehone Investors LLP manages the investments for the Company.  From 23 July 2008 the management fee was reduced from 2.0 per cent to 1.5 per cent of the net assets of the Company (including the assets attributable to C shares) per annum until 30 November 2009 and Bluehone LLP also waived all rights to a performance fee.  During the year to 30 November 2009 investment management fees of £349,000 (2008: £572,000) were incurred of which £33,000 (2008: £20,000) was payable at the year end.

6.         On 23 November 2009, the 2,950,000 C shares in issue were converted to Ordinary shares at a ratio of 1.298969.  Included in the Income Statement are the following items relating to the C share pool:

	£'000
Loss on realisation of investments	(40)
Changes in fair value of investments	25
Income	45
Investment management fee	(29)
Other expenses	(57)
Expenses of conversion	(13)
Loss on ordinary activities before tax	(69)
Tax on ordinary activities	-
Loss on ordinary activities after tax	(69)

7.         This announcement is not the Company's statutory accounts.  The statutory accounts for the year to 30 November 2008 have been lodged with the Registrar of Companies and have received an audit report which was unqualified and did not contain any emphasis of matter.  The annual report for the year to 30 November 2009 will be sent to shareholders during March 2010 and will then be available for inspection at F&C Asset Management plc, Exchange House, Primrose Street, London, EC2A 2NY, the registered office of the Company and on the Company's website: www.bluehoneaimvct2.co.uk.

8.         The Annual General Meeting will be held on 1 April 2010 at 10am.

 

END

 

 

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