Final Results

Octopus Titan VCT 2 plc Final Results 10 February 2011 Octopus Titan VCT 2 plc (the "Company"), managed by Octopus Investments Limited, today announces the final results for the year ended 31 October 2010. These results were approved by the Board of Directors on 10 February 2011. You may view the Annual Report in full at www.octopusinvestments.com shortly by navigating to VCT Meetings & Reports under the 'Services' section. About Octopus Titan VCT 2 plc Octopus Titan VCT 2 plc ('Titan 2' or 'the VCT') is a venture capital trust (VCT) which aims to provide shareholders with attractive tax-free dividends and long-term capital growth, by investing in a diverse portfolio of predominately unquoted companies.  The Company is managed by Octopus Investments Limited ('Octopus' or 'Investment Manager'). Titan 2 was incorporated on 12 October 2007. In collaboration with Octopus Titan VCT 1 plc ('Titan 1'), the VCTs raised over £30.8 million in aggregate (£29.5 million net of expenses) through an Offer for Subscription. A further £1.37 million in aggregate (£1.29 million net of expenses) has been raised by way of a top-up. Titan 2  invests primarily in unquoted UK smaller companies and aims to deliver absolute returns on its investments. Further details of the VCT's progress are discussed in the Chairman's Statement and Investment Manager's Review on pages X to X. On 31 August 2010 the VCT changed its Registered Office from 8 Angel Court, London, EC2R 7HP to 20 Old Bailey, London, EC4M 7AN. Venture Capital Trusts (VCTs) VCTs were introduced in the Finance Act 1995 to provide a means for private individuals to invest in unquoted companies in the UK.  Subsequent Finance Acts have introduced changes to VCT legislation. The tax benefits currently available to eligible new investors in VCTs include: ·                     Up to 30% up-front income tax relief; ·                     exemption from income tax on dividends paid; and ·                     exemption from capital gains tax on disposals of shares in VCTs. Titan 2 has been approved as a VCT by HM Revenue & Customs (HMRC).  In order to maintain its approval the Company must comply with certain requirements on a continuing basis.  By the end of the Company's third accounting period at least 70% of the Company's investments must comprise 'qualifying holdings' (as defined in the legislation) of which at least 30% must be in eligible ordinary shares. A 'qualifying holding' consists of up to £1 million invested in any one year in new shares or securities in an unquoted UK company (or companies listed on AIM) which is carrying on a qualifying trade and whose gross assets do not exceed a prescribed limit at the time of investment.  The definition of a 'qualifying trade' excludes certain activities such as property investment, and development, financial services and asset leasing. The Company will continue to ensure its compliance with these qualification requirements. Financial Summary   As at 31 October 2010 As at 31 October 2009 Net assets (£'000s) 15,518 15,014 Return on ordinary activities after 13 1,133 tax (£'000s) Net asset value per share 94.9p 96.1p Dividend per share - paid since launch 2.0p 1.0p Chairman's Statement I am pleased to present the annual results for the year ended 31 October 2010. Performance During the year Titan 2 has seen a modest reduction in net asset value (NAV) from 96.1p to 94.9p which, after taking dividends into account, represents a negative total return (being NAV plus cumulative dividends paid) of 0.2%. This small reduction is due in part to our small top-up issue last summer. However I am pleased to say that, as reported in our Interim Management Statement for the quarter ended 31( )January 2011, the NAV at that date has risen to 96.0p. The VCT was invested in 22 unquoted companies and one AIM-quoted company at the year end (subsequent to the year end the VCT invested into one further business). I am pleased to report that we have achieved our obligation to have 70% of our assets represented by qualifying holdings at the year end.  In the light of this, we are unlikely to invest in any more new companies until we have received cash through realisations. We are not expecting to realise any of our portfolio in the immediate future. You will see in the Directors' Remuneration Report that following achievement of the VCT qualifying rate, the fees of the Chairman and independent Non-Executive Director are set to rise with effect from 1 May 2011 to bring them in line with the other Titan VCTs and current market rates. Investment Portfolio The VCT made twelve new investments during the year totalling £3.7 million, in addition to seven follow-on investments amounting to £1.6 million. All of our investments are discussed in more detail in the Investment Manager's Review on pages X to X in which you will see that we now have a portfolio of investments in a diverse range of companies. In the case of Zoopla, we have been able to recognise another significant uplift in value following the initial investment made in 2009. Nature Delivered (trading as Graze) is another company that has seen an uplift, both cases a result of further funding rounds at increased values. We have had to make small reductions in fair value in respect of a few of our unquoted investments, the largest of which was Key Revolution which was placed in Administration during January 2010. These reductions reflect the prudent approach we continue to adopt to company valuations.  In general, we are encouraged by the performance of the portfolio and the good range of investments held by the VCT at this stage. Cash and Liquid Resources All of the bonds that the VCT held at the start of the year reached maturity and have been repaid. This has naturally reduced our income during the year. However, much of this cash has been used in making qualifying investments. Open Ended Investment Companies (OEICs) After significant uplifts in the valuation of the two Octopus OEICs during the prior year, 2010 has seen a reduction in the overall value of the Fund's holdings in the two OEICs. The Absolute UK Equity Fund decreased in value by 16% whilst the UK Micro Cap Growth Fund increased by approximately 1%. Despite this, the overall valuation of the OEICs remain almost 20% above original cost. The Board continues to monitor these funds and believes it remains a sensible strategy to maintain part of our non-qualifying portfolio in these OEICs, as set out in the original prospectus.  Further details of these OEICs may be found at www.octopusinvestments.com where monthly factsheets are available. Investment Strategy Now that the VCT has achieved its initial investment targets in qualifying companies, your Board will continue to review the investment strategy in respect of the non-qualifying portfolio and specifically how we invest our cash resources.  As  envisaged in the VCT's prospectus, between 15% and 25% of the VCT will be retained for liquidity and follow-on investments in the existing portfolio.  As our existing portfolio of unquoted companies matures, we will find that some companies may require further rounds of investment but these investments may not be qualifying for VCT purposes (for instance in situations where the company now employs more than 50 people). Your Board believes that there will be circumstances where it will be in our shareholders' interests to continue to invest, not least to avoid dilution. Since this was not set out clearly in our prospectus, we have sought to further clarify the investment strategy and added a second paragraph to the Non-Qualifying section as set out on page · of the Directors' Report. We intend that the remainder of our cash reserves will continue to be invested in Octopus managed OEICS and lower risk, readily realisable investments. Dividend and Dividend Policy It is your Board's policy to strive to maintain a regular dividend flow where possible. Whilst our primary aim is to create distributable capital gains, we anticipate declaring modest dividends in the early years. These are likely to be smaller than originally envisaged due to the substantial reduction in interest rates during the last two years. However, since the portfolio is beginning to mature and as your Board views prospects with modest confidence, we believe it appropriate to recommend an increase in our final dividend to 0.75p per share for the year ended 31 October 2010 (2009: 0.5p per share) making a total for the year of 1.25p per share (2009: 1.0p per share).  Subject to shareholder approval at the Annual General Meeting, this dividend will be paid on 8 April 2011 to those shareholders on the register on 11 March 2011. VCT Qualifying Status PricewaterhouseCoopers LLP provides both the Board and the Investment Manager with advice concerning ongoing compliance with HMRC rules and regulations concerning VCTs.  The Board has been advised that Titan 2 is in compliance with the conditions laid down by HMRC for maintaining approval as a VCT. A key requirement is for 70% of the portfolio to be invested in qualifying investments by the end of the third accounting period following that in which new share capital was subscribed. As at 31 October 2010, over 79% of the portfolio (as measured by HMRC rules) was invested in VCT qualifying investments. Annual General Meeting The Company's Annual General Meeting will take place on 30 March 2011 at 2.30 p.m.  I look forward to welcoming you to the meeting which will be held at the new offices of Octopus Investments Limited, at 20 Old Bailey, London, EC4M 7AN. Top-up offer In July 2010 we launched a top-up offer which raised £0.685 million (£1.37 million in aggregate with Titan 1) which resulted in allotting 737,621 shares at a price of 92.9p. We would like to thank existing shareholders for their continuing support and to welcome new shareholders. Outlook The Board would like to thank our Investment Managers for their continuing success in building the Fund's portfolio as well as achieving recognition from the industry through winning in 2010: ·         'VCT Manager of the Year' at the unquoted British Private Equity awards; ·         'Early Stage Team of the Year' from the British Business Angel Association'; and ·         Accountancy Age's 'Finance Team of the Year' Award. Economic recovery in the UK is still in a very early phase and the environment within which portfolio companies are operating remains fragile. We do not expect interest rates to change significantly over the next six months, which is positive for small companies and we expect that bank finance will remain difficult to obtain. Both these issues  should not have a significant impact on our early stage portfolio companies, which rely predominately on equity capital for their finance. Your Board remains satisfied to date with the overall progress being made by the early stage companies now within the portfolio. The Investment Manager's activities in respect of our Fund will concentrate on the management of the portfolio companies. The Investment Manager has developed an in depth team of senior financial and industrial managers who assist in this process.and  we will continue to retain liquidity within the VCT in order to support the companies achieving their objectives. Octopus has recently launched Octopus Titan VCT 5 plc giving the Titan VCT family even greater presence in the marketplace which we believe will continue to be an advantage as new investment opportunities arise. The Titan VCT family of funds now represents one of the UK 's largest investors in early stage companies. John Hustler Chairman 10 February 2011 Investment Manager's Review Personal Service At Octopus, we focus on both managing your investments and keeping you informed throughout the investment process.  We are committed to providing our investors with regular and open communication. Our updates are designed to keep you informed about the progress of your investment. During this time of economic upheaval, we consider it particularly important to be in regular contact with our investors and are working hard to manage your money in the current climate. Octopus Investments Limited was established in 2000 and has a strong commitment to both smaller companies and to VCTs.  We currently manage 18 VCTs, including this VCT, and manage over £300m in the VCT sector.  Octopus has over 180 employees and has been voted as 'Best VCT Provider of the Year' by the financial adviser community for the last four years. Investment Policy Summary The investment approach of Titan 2 is not designed to deliver a return that is measured against a stock market index. Instead, the focus of Titan 2 is on generating absolute returns over the medium-term. In order to achieve this goal, the VCT focuses on providing early stage, development and expansion funding to predominantly unquoted companies with a typical deal size of £0.5 million to £1 million. Investment Strategy The investee companies are those that we believe have great potential but need some financial support to realise it. Each company that we target has the potential to create a large business by taking a relatively modest market share. We are particularly interested in businesses that address current market trends and have created a balanced investment portfolio spanning multiple industries and business sectors. Having reached the level of invested funds required by HMRC, our focus will now shift to managing the portfolio and helping the investee companies through a difficult economic period. The current portfolio of holdings built by Titan 2 now encompass investments in 22 unquoted companies and one AIM-quoted company, with a focus on the environmental, technology, media, telecoms and consumer lifestyle and wellbeing sectors. Liquidity has been maintained in the VCT to ensure that adequate resources are available to support further portfolio funding needs as they arise. The environment has remained challenging for smaller companies, which have felt the effects of the credit squeeze combined with the economic slowdown. As well as seeing reductions in banking facilities, small companies also find themselves under pressure from suppliers who want paying earlier, customers who delay payments and weaker trading conditions. The resulting pressure on cash will remain, even as the economy recovers, due to increasing working capital requirements. We are therefore monitoring carefully all the portfolio companies to ensure that they not only control costs but also take advantage of some of the opportunities that occur in these circumstances. We have sought to further support those companies that we believe have strong growth potential but need some financial support to realise it. Each company that we target is expected to have unique selling points and be capable of growing to a size that will make it attractive for acquisition by a larger company or will enable it to float on the stock market. Portfolio Review As at 31 October 2010 the NAV stood at 94.9p, compared to 96.1p at 31 October 2009, and when adding back the 1p of dividends paid during the year, this represents a reduction of 0.2%. The period showed satisfactory performance in the qualifying holdings that the VCT holds and a slightly disappointing period for the non-qualifying OEIC holdings with a reduction in value of 16% in the Absolute Return Fund, offset slightly by a rise of 1% in the Micro Cap Fund.  As the portfolio has become fully invested we have commenced the sale of some of the Absolute Return OEIC holding. Titan 2 now holds 79.1% of assets in qualifying holdings from an HMRC perspective and we continue to work with each portfolio businesses as they develop their propositions in their respective markets.  As Investment Manager it is our intention to take those businesses in which we have invested a small amount of money as a first investment and invest further as they meet or exceed the initial milestone objectives we agreed with them.  In this way we are able to invest further into those businesses that are meeting and exceeding expectations and this can be demonstrated through the further investments in Zoopla, Calastone, True Knowledge and Graze. Since the balance sheet date, Titan 2 has invested £367,000 into Diverse Energy, a company focusing on the infrastructure of energy for global telecommunications. This brought the total portfolio to 24 current trading businesses.  In addition, a further £307,000, £18,500 and £133,334 was invested into Zoopla, Skills Market and Money Workout, respectively. Outlook At the time of writing, we are looking to make a number of follow-on investments to support the current portfolio as discussed above.  It is encouraging to note the  uplift in prices on stock markets in recent months. This is filtering through to smaller listed businesses, although this has yet to have a dramatic effect on prices for unquoted businesses. This, combined with the current increase in activity in mergers and acquisitions, is an encouraging indicator for the economy and for small trading businesses. However, we have not yet seen a significant uptick in the number of small businesses being listed  on the stock market. Assuming this general trend continues, it is a positive one for the future of high growth businesses as this area of the market tends to lag the listed business market.  We do need to remain mindful of the impact the austerity measures being put in place by the UK Government will have on the UK consumer.  There is also a concern that a rise in the level of inflation will in turn cause interest rates to rise, which could have an adverse knock on effect on the economy. Overall, the environment provides a great opportunity for businesses like those in the Titan portfolio to take advantage of, as their size enables them to move quickly to adapt and respond to market conditions resulting in greater market share. While the current market is not without its challenges, which a number of our portfolio businesses are facing at the moment, it still enables us to be cautiously optimistic about the future for small high growth businesses in general and our investment strategy specifically. If you have any questions on any aspect of your investment, please call one of the team on 0800 316 2347. Alex Macpherson Octopus Investments Limited 10 February 2011 Investment Portfolio % equity % held by Investment equity all cost as at held funds 31 October Movement in fair Fair value as at by managed Qualifying 2010 value to 31 October 31 October 2010 Titan by investments Sector (£'000) 2010 (£'000) (£'000) 2 Octopus Zoopla Limited Media 764 1,399 2,163 4.2% 14.2% True Knowledge Limited Media 1,220 - 1,220 9.4% 44.9% Calastone Limited Technology 1,135 - 1,135 10.8% 34.1% Nature Delivered Limited Consumer lifestyle (Graze) & wellbeing 798 55 853 6.9% 27.1% e- Therapeutics Consumer lifestyle plc & wellbeing 450 (7) 443 0.3% 8.8% Mi-Pay Limited Telecommunications 429 - 429 5.8% 24.8% AQS Holdings Limited Environmental 421 - 421 5.6% 26.5% Executive Channel Limited Media 379 - 379 6.1% 32.2% UltraSoC Technologies Limited Technology 361 - 361 10.0% 55.6% Semafone Limited Telecommunications 360 - 360 8.8% 41.5% Phase Vision Limited Technology 400 (50) 350 12.2% 52.6% Surrey Nanosystems Limited Technology 320 - 320 5.8% 31.2% Elonics Limited Technology 305 - 305 3.1% 19.5% PrismaStar Inc. Media 300 - 300 4.5% 30.0% Bowman Power Limited Environmental 275 - 275 2.7% 17.9% GetOptics Consumer lifestyle Limited & wellbeing 361 (90) 271 7.5% 34.8% Metrasens Consumer lifestyle Limited & wellbeing 268 - 268 4.5% 25.4% Michelson Diagnostics Consumer lifestyle Limited & wellbeing 248 - 248 4.4% 28.1% Money Workout Limited Technology 312 (156) 156 6.9% 33.5% Skills Market Limited Technology 155 (50) 105 2.7% 12.3% TouchType Limited Telecommunications 53 - 53 1.5% 8.0% Phasor Solutions Limited Technology 100 (50) 50 1.8% 31.2% The Key Revolution Limited* Telecommunications 641 (641) - 12.4% 35.9% Total qualifying investments   10,055 410 10,465 Money market securities   602 - 602 OEICs   3,215 640 3,855 Cash at bank   61 - 61 Total investments   13,933 1,050 14,983 Net current assets       535 Total net assets       15,518 *went in to liquidation January 2010 Valuation Methodology Initial measurement Financial assets are measured at fair value. The initial best estimate of fair value of a financial asset that is either quoted or not quoted in an active market is the transaction price (i.e. cost). Subsequent measurement Further funding rounds are a good indicator of fair value and this is measure is used were appropriate.  Subsequent adjustment to the fair value of unquoted investments can be made using sector multiples based on information as at 31 October 2010, where applicable. In some cases the multiples can be compared to equivalent companies, especially where a particular sector multiple does not appear appropriate. It is currently industry norm to discount the quoted earnings multiple to reflect the lack of liquidity in the investment, there being no ready market for our holding. Typically the discount is 30% but this can be increased where the relevant multiple appears too high. A lower discount would also be possible if an investment was close to an exit event. In accordance with the International Private Equity and Venture Capital (IPEVC) valuation guidelines investments made within 12 months are usually kept at cost unless performance indicates that fair value has changed. Quoted investments are valued at market bid price. No discounts are applied. If you would like to find out more regarding the IPEVC valuation guidelines, please visit their website at: www.privateequityvaluation.com. Review of Investments During the year, Titan 2 made twelve new investments amounting to £3.7 million and seven follow-on investments. The AIM-quoted investment and unquoted investments are in ordinary shares with full voting rights as well as loan note securities. Quoted and unquoted investments are valued in accordance with the accounting policy set out on page X, which takes account of current industry guidelines for the valuation of venture capital portfolios and is compliant with IPEVC Valuation guidelines and current financial reporting standards. Listed below are details of the VCT's 10 largest investments by value. Zoopla Limited Zoopla.co.uk is an award-winning online property information service and community website, presenting information on house pricing, free valuation estimates, for sale listings, and local community information. Zoopla has become the UK's leading website for house prices and value data, as it provides the most comprehensive source of residential property market information. It is also the UK's most active property community. Following the acquisition of PropertyFinder from News International Ltd and REA Group approximately a year ago, Zoopla launched estate agent listings on a pay-for-performance basis and expects to become the premier UK website for those interested in the property market. We encourage you to view the website atwww.zoopla.co.uk. As previously reported the company recently signed another transformational deal working with three of the UK's four largest estate agent groups and now the three estate agency CEOs sit on the Zoopla board. During the last quarter the company undertook its first advertising campaign on national TV.  This proved very successful and as a result the businesses decided to raise some further funds in order to increase the level of awareness the company has in the UK. This round of financing was completed by the current investors led by Atlas Ventures and Octopus. A second burst of television advertising is due to commence in January 2011 as the company seeks significant growth in 2011. Initial investment date:                                                 January 2009 Cost:                                        £764,206 Valuation: £2,164,015 (latest funding round) Equity held: 4.2% Equity held by all funds managed by Octopus:              14.2% Last submitted audited accounts:                                    31 December 2009 Turnover                                        £1,160,153 Loss before interest & tax: (£2,864,126) Net assets:                 £699,922 True Knowledge Limited True Knowledge has developed an Internet search engine website that answers questions. Finding information on the Internet currently involves a process of trial and error, hoping that the search engine retrieves the information you are looking for. True Knowledge has devised technology that resolves this fundamental problem by operating along a more intuitive system. It intelligently answers questions asked on any topic in plain English. It can be used just like a conventional search engine, but users can also add knowledge directly to it. There are currently nearly 250 million facts in the database, which is being continually expanded. The company continues to grow exponentially in unique users per month and revenues. In November, the number of unique users grew to 5.2 million. This growth is largely the result of acquiring more data; publishing questions and answers; and enabling Google, and other search companies, to index them. The company has automated many of the processes associated with accessing data and publishing questions and answers. This should enable the business to continue its rapid growth, with the expectation that the number of unique users will grow at least two fold in the next six months. Revenue growth over the last six months has been on average 20%, and the company is now exploring various techniques to earn more revenues from the growing number of unique users. In the meantime the company will be undertaking a further round of funding, in which Octopus will feature prominently. Initial investment date:                                                  July 2008 Cost:                                        £1,220,186 Valuation: £1,220,186 (latest funding round) Equity held: 9.4% Equity held by all funds managed by Octopus:              44.9% Last submitted accounts:                                                   31 January 2010 (abbreviated) Net assets:                 (£104,707) Calastone Limited Calastone is the UK's only independent transaction service for the mutual fund industry.  It enables buyers and sellers of mutual funds on different platforms to communicate orders electronically, by providing a universal message communication and 'translation' service - the "Calastone Transaction Network" (CTN). This is being welcomed in an industry which has not previously been able to invest in the real-time exchange of information between participants. Orders are commonly communicated by fax or telephone with a high level of manual re- keying and manual error correction. Calastone's 'translation' service means that neither the transmitter nor receiver need purchase additional technology or change their existing systems. Calastone is moving quickly to own the space and therefore seeks to sign up distributors and their counterparties, the fund providers (or their third party administrators). Progress is excellent in both dimensions as demonstrated by the fact that clients are now calling in asking to join CTN. The board believes the company is experiencing beneficial network effects where the existing distributors are encouraging fund providers to join the CTN and vice versa. Internally the focus is now on streamlining processes so that distributors and fund providers can be made operational faster driving up transaction volumes thereby growing its revenues rapidly. Over the last period growth has continued at Calastone with new client sign ups to the core offering and to the newly launched additional services such as settlement and custodian.  Calastone has also started to sign up its initial clients from the Luxembourg office which was opened earlier in 2010 and the company expects to see continued growth in Europe as we move into 2011. Initial investment date:                                                 October 2008 Cost:                                        £1,134,744 Valuation: £1,134,744 (latest funding round) Equity held: 10.8% Equity held by all funds managed by Octopus:              34.1% Last submitted accounts:                                            30 September 2009 (abbreviated) Net assets: £482,635 Nature Delivered Limited (trading as Graze) Graze is the first UK company to deliver healthy and nutritionally balanced food by post straight to the home or office. The company was founded in April 2007 and has a growing customer base that regularly place orders via its website. Graze's snack boxes cost only £3.49 and are sent by Royal Mail for  next day delivery.  The Graze product range includes over 100 products to choose from, all free from artificial colourings, flavourings and preservatives. Customers can also place orders for personalised boxes, specifically tailored to meet their tastes, dietary and nutritional requirements. Graze promotes a varied and balanced diet through facilitating the intake of a wide variety of smaller portions of natural, high energy foods throughout the day. Its boxes contain up to four portions of dried fruit; bread; olives and vegetables, in line with the National Health Service's recognised 'five-a-day' scheme. Its product is in tune with customer needs and the demands of modern living, as people become ever more conscious of health and convenience. The company's sales continue to grow ahead of budget. Initial investment date:                                                 June 2009 Cost:                                        £797,627 Valuation:                 £852,306 (latest funding round) Equity held: 6.9% Equity held by all funds managed by Octopus:              27.1% Last submitted accounts:                                        31 December 2009 (abbreviated) Net assets:                 £1,371,320 e-Therapeutics plc e-Therapeutics is an AIM listed drug discovery and development company. It focuses on three core areas: the discovery of new drugs; discovering novel uses for existing drugs; and analysis of the interactions between different drugs. The company has developed a unique drug discovery technology that enables it to assess drug candidates for high efficacy and safety ahead of clinical trials. The use of this technology dramatically reduces the time between drug discovery and market applicability, and reduces the risks associated with clinical trials. The company is currently progressing with the preclinical and clinical development of a number of innovative drug candidates to which the new technology was applied. The treatments are now at an advanced stage of testing, validating the therapeutic attributes that e-Therapeutics' drug discovery system predicted for each candidate. The development and commercialisation of the company's drug candidates that have generated clinical data will be supported initially by licensing these to partners operating in smaller pharmaceutical markets. The company continues down its development roadmap and has been busy adding additional weight to the senior management team.  The recent addition of Development Director Steve Self to the board should ensure that the company's proprietary drug development program is of the highest standard as it moves into its next stage. Initial investment date:                                                 March 2009 Cost:                                        £450,000 Valuation: £443,250 (bid price) Equity held: 0.3% Equity held by all funds managed by Octopus:              8.8% Last submitted audited group accounts:                         31 January 2010 Turnover                                        £nil Loss before tax:                                            (£2,255,000) Net assets: £2,486,000 Mi-Pay Limited Mi-Pay was founded in 2004 with the objective to establish itself as a leading processor of payments for the fast-emerging mobile money sector. The service enables customers to 'top-up' their pre-paid mobile phone directly online, or via their mobile phone, rather than using indirect brand channels such as PayPoint or bank ATMs. Benefits of the direct service include cost reductions for mobile network operators and a more personal engagement with customers, removing the anonymity of customer relationships and allowing for substantial improvements in customer retention. Mi-Pay continues to make progress in a very dynamic and fast moving market, most recently agreeing terms with several tier one European, Middle Eastern and African mobile operators to provide its direct top up service. Mi-Pay was also delighted to appoint Allan Jakobsen as CEO in August 2010. Initial investment date: February 2010 Cost:                                        £429,153 Valuation: £429,153 (latest funding round) Equity held: 5.8% Equity held by all funds managed by Octopus:              24.8% Last submitted audited group accounts:                         31 December 2009 Turnover                                        £1,736,649 Loss before tax:                                            (£2,082,813) Net assets: (£1,065,558) AQS Holdings Limited Soil Xchange is a subsidiary of AQS, which is a waste management business focusing on soil stabilisation and remediation by means of a proprietary process and equipment. Soil Xchange's aim is to create strategic hubs across the UK, specifically with the objective of taking in hazardous soil and waste, and exchanging it for recycled, clean soil, using AQS' market leading soil remediation knowledge and equipment, the 'Eco Warrior'. Soil Xchange's first hub has now been opened in East London and negotiations are underway in respect of the second London hub, as well as further hubs in North East and North West England. The company is also in discussions to licence its technology to a business that would deploy a similar hub roll-out strategy across Australia. Initial investment date: February 2010 Cost:                                        £421,000 Valuation: £421,000 (latest funding round) Equity held: 5.6% Equity held by all funds managed by Octopus:              26.5% Last submitted audited group accounts:                         31 March 2010 Turnover                                        £5,952,822 Loss before tax:                                            (£418,617) Net assets: £3,400,647 Executive Channel Limited Executive Channel installs digital display screens in office buildings which it uses to display advertising, up-to-date news and information, via the internet. These screens are usually located in the elevator lobby to engage an exclusive audience, with high spending power in an uncluttered environment. The company continues to grow ahead of budget. Initial investment date: September 2010 Cost:                                        £378,954 Valuation: £378,954 (latest funding round) Equity held: 6.1% Equity held by all funds managed by Octopus:              32.2% Last submitted accounts:                                        n/a (none filed) UltraSoC Technologies Limited UltraSoC Technologies, is a pioneering company developing advanced debugging technology for the embedded electronic systems increasingly used in many everyday products from cars to mobile phones. UltraSoC was spun-out from the universities of Essex and Kent in 2008 after being founded by Cambridge entrepreneur Dr Karl Heeks and Professor Klaus McDonald-Maier, Research Director at the University of Essex's School of Computer Science and Electronic Engineering. The company is developing UltraDebug, an advanced debugging technology for multiple processor systems used to debug the application software that delivers the functionality and performance in many modern embedded electronic systems. Initial investment date:                                                 October 2010 Cost:                                        £361,369 Valuation: £361,369 (latest funding round) Equity held: 10.0% Equity held by all funds managed by Octopus:              55.6% Last submitted accounts:                                        31 December 2009 (abbreviated) Net assets                                        £174,013 Semafone Limited Based in London, Semafone was founded in 2009 by a consortium of call centre professionals, who were instrumental in the development of 'Semafone'; a fraud prevention software for use in call centres.  Semafone aims to secure sensitive data passed over the phone, including bank details, personal identification data and credit/debit card transactions. Without interrupting caller and agent dialogue, customers input their card details via the telephone keypad, eliminating the need to read out the card number and three digit security number to the phone operator, removing the risk of operator fraud. The company has already secured a number of blue chip clients. The company continues to grow sales, although behind budget. In part, this has been owing to technology bugs in the product as the team attempt to standardise the technology in order for it to become a basic product applicable to multiple implementations. The CEO has recruited more technical resource to assist with this challenge and will continue to build the company's team in 2011. The sales pipeline remains strong and the business may seek to capitalise on the international opportunity for the Semafone product, although no decision has been made at this point. Initial investment date:                                                 June 2010 Cost:                                 £360,113 Valuation: £360,113 (latest funding round) Equity held: 8.8% Equity held by all funds managed by Octopus:              41.5% Last submitted accounts:                                        n/a (none filed) Directors' Responsibility Statement The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations. Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company for that period. Under that law the Directors have elected to prepare financial statements in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). In preparing these financial statements, the Directors are required to: ·           select suitable accounting policies and then apply them consistently; ·           make judgments and estimates that are reasonable and prudent; ·           state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and ·           prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In so far as each of the Directors are aware: ·            there is no relevant audit information of which the Company's auditor is unaware; and ·            the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. To the best of my knowledge: ·           the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and ·           the management 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. The financial statements are published at www.octopusinvestments.com a website maintained by Octopus Investments. The maintenance and integrity of the website is, so far as it relates to the Company, the responsibility of Octopus Investments. The work carried out by the auditor does not involve considerations of the maintenance and integrity of the website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the accounts since they were originally presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the accounts differ from legislation in other jurisdictions. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. On Behalf of the Board John Hustler Chairman 10 February 2011 Income Statement +---------------------+ | Year to 31 October |     | 2010 | | |     |Revenue Capital Total| | |   Notes| £'000 £'000 £'000| | |     |      | | | Realised loss on disposal of current asset | | investments 12 | - (101) (101)| | |     |      | | | Fixed asset investment holding gains 10 | - 822 822| | | Current asset investment holding losses 12 | - (408) (408)| | |     |      | | | Other income 2 | 180 - 180| | |     |      | | | Investment management fees 3 | (70) (212) (282)| | | Other expenses 4 | (198) - (198)| | |     |      | | | Return on ordinary activities before tax   | (88) 101 13| | |     |      | | | Taxation on return on ordinary activities 6 | - - -| | |     |      | | | Return  on ordinary activities after tax   | (88) 101 13| | | Earnings per share - basic and diluted 8 | (0.5)p 0.6p 0.1p| +---------------------+ * The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies. * All revenue and capital items in the above statement derive from continuing operations. * The company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds. The Company has no recognised gains or losses other than the results for the period as set out above. The accompanying notes form an integral part of the financial statements. Income Statement +---------------------+ | Year to 31 October |     | 2009 | | |     |Revenue Capital Total| | |   Notes| £'000 £'000 £'000| | |     |      | | | Realised loss on disposal of fixed asset | | investments   | - (315) (315)| | | Realised gain on disposal of current asset | | investments   | - 45 45| | |     |      | | | Fixed asset investment holding losses   | - (206) (206)| | | Current asset investment holding gains   | - 1,676 1,676| | |     |      | | | Other income 2 | 437 - 437| | |     |      | | | Investment management fees 3 | (73) (208) (281)| | | Other expenses 4 | (223) - (223)| | |     |      | | | Return on ordinary activities before tax   | 141 992 1,133| | |     |      | | | Taxation on return on ordinary activities 6 | - - -| | |     |      | | | Return  on ordinary activities after tax   | 141 992 1,133| | | Earnings per share - basic and diluted 8 | 0.9p 6.4p 7.3p| +---------------------+ * The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies. * All revenue and capital items in the above statement derive from continuing operations. * The company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds. The Company has no recognised gains or losses other than the results for the period as set out above. The accompanying notes form an integral part of the financial statements. Reconciliation of Movements in Shareholders' Funds +------------------------+-----------------------+ | Year ended 31 October| Year ended 31 October|   | 2010| 2009| | | |   | £'000| £'000| | | | Shareholders' funds at start | | | of year | 15,014| 14,036| | | | Return on ordinary activities | | | after tax | 13| 1,133| | | | Issue of equity (net of | | | expenses) | 647| -| | | | Dividends paid | (156)| (155)| | | | Shareholders' funds at end of | | | period | 15,518| 15,014| +------------------------+-----------------------+ The accompanying notes form an integral part of the financial statements. Balance Sheet +-------------------+ | As at 31 October| As at 31 October     | 2010| 2009 | | Notes| £'000 £'000| £'000 £'000 | |     |    | | | Fixed asset investments* 10 |   10,465|   4,370 | | Current assets:   |    | | | Debtors 11 | 588  | 96 | | Money market securities and other | | deposits* 12 | 4,457  |10,069 | | Cash at bank   | 61  | 573 | |     | 5,106  |10,738 | | Creditors: amounts falling due | | within one year 13 | (53)  | (94) | | Net current assets   |   5,053|   10,644 | |     |    | | | Net assets   |   15,518|   15,014 | |     |    | | | Called up equity share capital 14 | 1,635  | 1,562 | | Share premium 15 | 574  | - | | Special distributable reserve 15 |13,040  |13,196 | | Capital reserve - (losses) on | | disposals 15 | (773)  | (407) | |                          - holding | | gains 15 | 1,050  | 583 | | Revenue reserve 15 | (8)  | 80 | | Total equity shareholders' funds   |   15,518|   15,014 | | Net asset value per share 9 |   94.9p|   96.1p +-------------------+ *Held at fair value through profit and loss The statements were approved by the Directors and authorised for issue on 10 February 2011 and are signed on their behalf by: John Hustler Chairman Company No: 6397765 The accompanying notes form an integral part of the financial statements. Cash Flow Statement +---------------+---------------+ | Year to| Year to|     |31 October 2010|31 October 2009| | | |   Notes| £'000| £'000| | | |     |  |  | | | |               Net cash (outflow)/inflow | | | from operating activities   | (833)| 6| | | |     |   |   | | | | Financial investment:   |  |  | | | | Purchase of fixed asset investments 10 | (5,273)| (3,054)| | | |     |  |  | | | | Management of funds:   |  |  | | | | Purchase of current asset investments 12 | (4,791)| (2,146)| | | | Sale of current asset investments 12 | 9,894| 5,461| | | |     |  |  | | | | Dividends paid 7 | (156)| (155)| | | |     |  |  | | | | Financing:   |  |  | | | | Issue of shares   | 647| -| | | | (Decrease)/increase in cash resources at | | | bank   | (512)| 112| +---------------+---------------+ The accompanying notes form an integral part of the financial statements. Reconciliation of Return before Taxation to Cash Flow from Operating Activities +--------------------+---------------+ | Year to| Year to|    | 31 October 2010|31 October 2009| | | |    | £'000| £'000| | | | Return on ordinary activities before tax  | 13| 1,133| | | | Loss on disposal of fixed asset  | | | investments | -| 315| | | | Loss/(gain) on disposal of current asset  | | | investments | 101| (45)| | | | (Gain)/loss on valuation of fixed asset  | | | investments | (822)| 206| | | | Loss/(gain) on valuation of current  | | | asset investments | 408| (1,676)| | | | (Increase)/decrease in debtors  | (492)| 66| | | | (Decrease)/increase in creditors  | (41)| 7| | | | (Outflow)/inflow from operating  | | | activities | (833)| 6| +--------------------+---------------+ The accompanying notes form an integral part of the financial statements. Reconciliation of Net Cash Flow to Movement in Net Funds +-----------------+-----------------+ | Year to | Year to |     | 31 October 2010 | 31 October 2009 | | | |     | £'000 | £'000 | | | | (Decrease)/increase in cash at bank   | (512) | 112 | | | | Movement in cash equivalents   | (5,612) | (1,594) | | | | Opening net cash resources   | 10,642 | 12,124 | | | | Net funds at 31 October   | 4,518 | 10,642 | +-----------------+-----------------+ Net funds at 31 October comprised: +-----------------+-----------------+   | Year to | Year to | | 31 October 2010 | 31 October 2009 | | | |   | £'000 | £'000 | | | | Cash at bank | 61 | 573 | | | | Bonds | - | 4,083 | | | | Money market funds | 602 | 1,124 | | | | OEICs | 3,855 | 4,862 | | | | Net funds at 31 October | 4,518 | 10,642 | -------------------------+-----------------+-----------------+ Notes to the Financial Statements 1.         Principal Accounting Policies Basis of accounting The financial statements have been prepared under the historical cost convention, except for the measurement at fair value of certain financial instruments, and in accordance with UK Generally Accepted Accounting Practice (UK GAAP), and the Statement of Recommended Practice (SORP) 'Financial Statements of Investment Trust Companies' (revised 2009). The principal accounting policies have remained unchanged from those set out in the Company's 2009 Annual Report and financial statements.  A summary of the principal accounting policies is set out below. The Company presents its income statement in a three column format to give shareholders additional detail of the performance of the Company, split between items of a revenue or capital nature. The preparation of the financial statements requires Management to make judgements and estimates that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Estimates and assumptions mainly relate to the fair valuation of the fixed asset investments particularly unquoted investments. Estimates are based on historical experience and other assumptions that are considered reasonable under the circumstances. The estimates and the assumptions are under continuous review with particular attention paid to the carrying value of the investments. Capital valuation policies are those that are most important to the depiction of the Company's financial position and that require the application of subjective and complex judgements, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. The critical accounting policies that are declared will not necessarily result in material changes to the financial statements in any given period but rather contain a potential for material change. The main accounting and valuation policies used by the Company are disclosed below.  Whilst not all of the significant accounting policies require subjective or complex judgements, the Company considers that the following accounting policies should be considered critical. The Company has designated all fixed asset investments as being held at fair value through profit and loss; therefore all gains and losses arising from investments held are attributable to financial assets held at fair value through profit and loss.  Accordingly, all interest income, fee income, expenses and investment gains and losses are attributable to assets designated as being at fair value through profit or loss. Current asset investments comprising money market funds and deposits are held for trading and are therefore automatically classified as fair value through profit or loss. Investments are regularly reviewed to ensure that the fair values are appropriately stated.  Quoted investments are valued in accordance with the bid- price on the relevant date, unquoted investments are valued in accordance with current IPEVC valuation guidelines, although this does rely on subjective estimates such as appropriate sector earnings multiples, forecast results of investee companies, asset values of subsidiary companies and liquidity or marketability of the investments held. Although the Company believes that the assumptions concerning the business environment and estimate of future cash flows are appropriate, changes in estimates and assumptions could require changes in the stated values. This could lead to additional changes in fair value in the future. Investments Purchases and sales of investments are recognised in the financial statements at the date of the transaction (trade date). These investments will be managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy and information about them has to be provided internally on that basis to the Board. Accordingly, as permitted by FRS 26, the investments will be designated as fair value through profit and loss (FVTPL) on the basis that they qualify as a group of assets managed, and whose performance is evaluated, on a fair value basis in accordance with a documented investment strategy.  The Company's investments are measured at subsequent reporting dates at fair value. In the case of investments quoted on a recognised stock exchange, fair value is established by reference to the closing bid price on the relevant date or the last traded price, depending upon convention of the exchange on which the investment is quoted.  This is consistent with the IPEVC valuation guidelines. In the case of unquoted investments, fair value is established by using measures of value such as the price of recent transactions, earnings multiple and net assets. This is consistent with IPEVC valuation guidelines. Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the income statement and allocated to the capital reserve - holding gains/(losses). In the preparation of the valuations of assets the Directors are required to make judgements and estimates that are reasonable and incorporate their knowledge of the performance of the investee companies. Current asset investments Current asset investments comprise money market funds, bonds and OEICs and are designated as FVTPL.  Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - gains/(losses) on disposal. The current asset investments are all invested with the Company's cash manager and are readily convertible into cash at the choice of the Company.  The current asset investments are held for trading, are actively managed and the performance is evaluated on a fair value basis in accordance with a documented investment strategy.  Information about them has to be provided internally on that basis to the Board. Income Investment income includes interest earned on bank balances and money market securities and includes income tax withheld at source. Dividend income is shown net of any related tax credit. Dividends receivable 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 debt and money market securities are recognised on a time apportionment basis so as to reflect the effective yield, provided there is no reasonable doubt that payment will be received in due course. Expenses All expenses are accounted for on an accruals basis.  Expenses are charged wholly to revenue with the exception of the investment management fee, which has been charged 25% to the revenue account and 75% to the capital reserve to reflect, in the Directors' opinion, the expected long-term split of returns in the form of income and capital gains respectively from the investment portfolio. The transaction costs incurred when purchasing or selling assets are written off to the Income Statement in the period that they occur. Revenue and capital The revenue column of the income statement includes all income and revenue expenses of the Company.  The capital column includes gains and losses on disposal and holding gains and losses on investments.  Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the income statement. Taxation Corporation tax payable is applied to profits chargeable to corporation tax, if any, at the current rate. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue return on the "marginal" basis as recommended in the SORP. Deferred tax is recognised on an undiscounted basis in respect of all timing differences that have originated but not reversed at the balance sheet date. Where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less tax, with the exception that deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Cash and liquid resources Cash, for the purposes of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand.  Liquid resources are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market. Liquid resources comprise term deposits of less than one year (other than cash), government securities, investment grade bonds and investments in money market managed funds, as well as OEICs. Loans and receivables The Company's loans and receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. Financing strategy and capital structure FRS 29 'Financial Instruments: Disclosures' comprises disclosures' relating to financial instruments. We define capital as shareholders' funds and our financial strategy in the medium term is to manage a level of cash that balances the risks of the business with optimising the return on equity.  The Company currently has no borrowings nor does it anticipate that it will drawdown any borrowing facilities in the future to fund the acquisition of investments. The Company does not have any externally imposed capital requirements. Financial instruments During the course of the year, the Company held non-current asset investments, shares in OEICs (open ended investment companies), money market funds and cash deposits. The Company holds financial assets that comprise investments in unlisted companies and qualifying loans. The carrying value for all financial assets and liabilities is fair value. Dividends Dividends payable are recognised as distributions in the financial statements when the Company's liability to make payment has been established.  This liability is established for  interim dividends when they are paid, and for final dividends when they are approved by the shareholders. 2.         Income   Year to Year to 31 October 2010 31 October 2009   £'000 £'000 Money market funds & OEICs 31 311 Bond interest receivable 42 118 Loan note interest receivable 107 8   180 437 3.         Investment Management Fees Year to 31 October Year to 31 October   2010 2009   Revenue Capital Total Revenue Capital Total   £'000 £'000 £'000 £'000 £'000 £'000 Investment management fee 70 212 282 73 208 281 For the purposes of the revenue and capital columns in the income statement, the management fee has been allocated 25% to revenue and 75% to capital, in line with the Board's expected long-term return in the form of income and capital gains respectively from the Company's investment portfolio. Octopus provides investment management and accounting and administration services to the Company under a management agreement. This agreement runs for a period of five years with effect from 2 November 2007 and may be terminated at any time thereafter by not less than 12 months' notice given by either party. No compensation is payable in the event of terminating the agreement by either party, if the required notice period is given.  The fee payable, should insufficient notice be given, will be equal to the fee that would have been paid should continuous service be provided, or the required notice period was given. The basis upon which the management fee is calculated is disclosed within note 19 to the financial statements. 4.         Other Expenses   Year to Year to 31 October 2010 31 October 2009   £'000 £'000 Directors' remuneration 33 33 Fees payable to the Company's auditor for the 9 audit of the financial statements 9  Fees payable to the Company's auditor for other 2 services - tax compliance 2 Legal and professional expenses 3 1 Accounting and administration services 46 46 Trail commission 25 78 Other expenses 80 54   198 223 Total annual running costs are capped at 3.2% of net assets (excluding irrecoverable VAT).  For the year to 31 October 2010 the running costs, as defined in the prospectus, were 2.9% of net assets (2009: 2.7%). 5.         Directors' Remuneration   Year to Year to 31 October 2010 31 October 2009   £'000 £'000 Directors' emoluments John Hustler (Chairman) 15 15 Mark Faulker 10 10 Matt Cooper 8 8   33 33 None of the Directors received any other remuneration from the Company during the year. The Company has no employees other than non-executive Directors.  The average number of non-executive Directors in the year was three (2009: three). 6.         Tax on Ordinary Activities The corporation tax charge for the period was £nil (2009: £nil) Factors affecting the tax charge for the current year: The current tax charge for the period differs from the standard rate of corporation tax in the UK of 28% (2009: 28%). The differences are explained below. Current tax reconciliation: Year to Year to 31 October 2010 31 October 2009   £'000 £'000 Return on ordinary activities before tax 13 1,133 Current tax at 28% (2009: 28%)  4 318 Income not taxable for tax purposes (54) (366) Unrelieved tax losses 50 48 Total current tax charge - - Excess management charges of £564,000 (2009: £241,000) have been carried forward at 31 October 2010 and are available for offset against future taxable income subject to agreement with HMRC.  The Company has not recognised the deferred tax asset of £158,000 (2009: £67,000) in respect of these excess management charges. Approved VCTs are exempt from tax on capital gains within the Company.  Since the Directors intend that the Company will continue to conduct its affairs so as to maintain its approval as a VCT, no current deferred tax has been provided in respect of any capital gains or losses arising on the revaluation or disposal of investments. 7.         Dividends Year to Year to   31 October 2010 31 October 2009   £'000 £'000 Recognised as distributions in the financial statements for the period Previous year's final dividend 78 78 Current period's interim dividend 78 77   156 155 Paid and proposed in respect of the period Interim dividend paid - 0.5p per share (2009: 0.5p per share) 78 78 Proposed final dividend - 0.75p per share (2009: 0.5p per share) 123 78   201 156 The final dividend of 0.75p per share for the year ended 31 October 2010, subject to shareholder approval at the Annual General Meeting, will be paid on 8 April 2011 to those shareholders on the register on 11 March 2011. 8.         Earnings per Share The total, revenue and capital earnings per share is based on 15,790,677 (31 October 2009: 15,616,881) ordinary shares, being the weighted average number of ordinary shares in issue during the year. There are no potentially dilutive capital instruments in issue and, therefore no diluted returns per share figures are relevant. The basic and diluted earnings per share are therefore identical. 9.        Net Asset Value per Share The calculation of NAV per share as at 31 October 2010 is based on 16,354,502 (31 October 2009: 15,616,881) ordinary shares in issue at that date. 10.      Fixed Asset Investments Effective from 1 November 2009, the Company adopted the amendment to FRS 29 regarding financial instruments that are measured in the balance sheet at fair value; this requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: Level 1: quoted prices in active markets for identical assets and liabilities. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held is the current bid price. These instruments are included in level 1 and comprise AIM-listed investments classified as held at fair value through profit or loss. Level 2: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable data where it is available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. The Company held no such investment in the current or prior year. Level 3: the fair value of financial instruments that are not traded in an active market (for example investments in unquoted companies) is determined by using valuation techniques such as earnings multiples. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. There has been one transfer between these classifications in the year (2009: none). The change in fair value for the current and previous year is recognised through the income statement. All items held at fair value through profit or loss were designated as such upon initial recognition. Movements in investments at fair value through profit or loss during the year to 31 October 2010 are summarised below and in note 12. Level 1: Level 1: AIM-quoted Level 3: Level 3: AIM-quoted loan Unquoted Unquoted Total   investments investments  investments  investments investments Equity Loan Equity Loan   investments investments investments investments 31 October 31 October 31 October 31 October 31 October   2010 2010 2010 2010 2010   £'000 £'000 £'000 £'000 £'000 Valuation and net book amount: Book cost as at 1 November 2009 - - 3,566 1,215 4,781 Cumulative revaluation - - (411) - (411) Valuation at 1 November 2009 - - 3,155 1,215 4,370 Movement in the year: Purchases at cost -   5,273 - 5,273 Transfer between levels 68 382 (68) (382) - Loan converted to equity - - 365 (365) - Revaluation in year (7)   807 22 822 Valuation at 31 October 2010 61 382 9,532 490 10,465 Book cost at 31 October 2010: 68 382 9,137 468 10,055 Revaluation to 31 October 2010: (7) - 395 22 410 Valuation at 31 October 2010 61 382 9,532 490 10,465 Level 3 valuations include assumptions based on non-observable market data, such as discounts applied either to reflect fair value of financial assets held at the price of recent investment, or, in the case of unquoted investments, to adjust earnings multiples. Further details in respect of the methods of assumptions applied in determining the fair value of the investments are disclosed in the Investment Manager's review and within the principal accounting policies in note 1. The sensitivity of these valuations to a reasonable possible change in such assumptions is given in note X. Further details of the fixed asset investments held by the Company are shown within the Investment Manager's Review on pages X to X. At 31 October 2010 and 31 October 2009, there were no commitments in respect of investments not yet completed. 11.        Debtors   31 October 2010 31 October 2009   £'000 £'000 Prepayments 13 9 Accrued income 575 88   588 97 12.        Current Asset Investments Current asset investments at 31 October 2010 comprised bonds, money market funds and OEICs.   £'000 £'000 Valuation and net book amount: Book cost as 1 November 2009 - Bonds 3,930 - Money Market Funds 1,120 - OEICs 3,542     8,592 Revaluation as at 1 November 2009 - Bonds 153 - Money Market Funds 4 - OEICs 1,320     1,477 Valuation as at 1 November 2009   10,069 Purchase at cost: - Money Market Funds 4,791     4,791 Disposal proceeds - Bonds (4,083) - Money Market Funds (5,311) - OEICs (500)     (9,894) Loss in year on realisation of investments: - OEICs (101)     (101) Revaluation in the year - OEICs (408)     (408)     4,457 Book cost as 31 October 2010 - Money Market Funds 602 - OEICs 3,215     3,817 Revaluation as at 31 October 2010 - OEICs 640     640 Valuation as at 31 October 2010   4,457 All current asset investments held at the year end sit within level 1 hierarchy for the purposes of FRS 29. Level 1 money market funds: Level 1 valuations are based on quoted prices (unadjusted) in active markets for identical assets or liabilities. The valuation of money market funds at 31 October 2010 was £4,457,000 (2009: £10,069,000). 13.        Creditors: Amounts Falling Due Within One Year       31 October 2010 31 October 2009       £'000 £'000 Accruals     53 94 14.        Share Capital     31 October 2010 31 October 2009     £'000 £'000 Authorised:  50,000,000 ordinary shares of 10p   5,000 5,000 Allotted and fully paid up: 16,354,502 ordinary shares of 10p   1,635 1,562 The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective as set on page X. The Company is not subject to any externally imposed capital requirements. The Company issued 737,621 ordinary shares at a weighted average price of 92.9p per share during the period. The total nominal value of the shares issued was £73,762 representing 4.5% of the issued share capital. 15.        Reserves Capital Capital Special reserve reserve Share distributable gains/(losses) holding Revenue   Premium reserve on disposal gains/(losses) reserve Total   £'000 £'000 £'000 £'000 £'000 £'000 As at 1 November 2009 - 13,196 (407) 583 80 13,452 Return on ordinary activities after tax - - - - (88) (88) Management fees allocated as capital expenditure - - (212) - - (212) Issue of equity* 574 - - - - 574 Current period losses on disposal - - (101) - - (101) Prior period holding loss on disposal - - (53) 53 - - Current period gains/losses on revaluation - - - 414 - 414 Dividends paid - (156) - - - (156) Balance as at 31 October 2010 574 13,040 (773) 1,050 (8) 13,883 *net of Offer costs When the Company revalues its investments during the year, any gains or losses arising are credited/charged to the income statement.  Unrealised gains/losses are then transferred to the Capital reserve - holding gains/(losses).  When an investment is sold, any balance held on the 'capital reserve - holding gains/(losses)' is transferred to the 'capital reserve - gains/(losses) on disposal' as a movement in reserves. The purpose of the special distributable reserve was to create a reserve which will be capable of being used by the Company to pay dividends and for the purpose of making repurchases of its own shares in the market with a view to narrowing the discount to net asset value at which the Company's ordinary shares trade. In the event that the revenue reserve and capital reserve gains/(losses) on disposals do not have sufficient funds to pay dividends, these will be paid from the special distributable reserve. 16.        Financial Instruments and Risk Management The Company's financial instruments comprise equity and fixed interest investments, cash balances and liquid resources including debtors and creditors. The Company holds financial assets in accordance with its investment policy of investing mainly in a portfolio of VCT qualifying unquoted securities whilst holding a proportion of its assets in cash or near-cash investments in order to provide a reserve of liquidity. Classification of financial instruments Titan 2 held the following categories of financial instruments, all of which are included in the balance sheet at fair value, at 31 October 2010.   31 October 2010 31 October 2009   £000 £000 Assets at fair value through profit or loss Investments 10,465 4,370 Current asset investments 4,457 10,069 Total 14,922 14,439 Loans and receivables Cash at bank 61 573 Accrued income 575 88 Total 636 661 Liabilities at amortised cost Accruals and other creditors 53 94 Total 53 94 Fixed asset investments (see note 10) are valued at fair value. Unquoted investments are carried at fair value as determined by the Directors in accordance with current venture capital industry guidelines. The fair value of all other financial assets and liabilities is represented by their carrying value in the balance sheet.  The Directors believe that the fair value of the assets held at the period-end is equal to their book value. In carrying on its investment activities, the Company is exposed to various types of risk associated with the financial instruments and markets in which it invests. The most significant types of financial risk facing the Company are price risk, interest rate risk, credit risk and liquidity risk. The Company's approach to managing these risks is set out below together with a description of the nature and amount of the financial instruments held at the balance sheet date. Market risk The Company's strategy for managing investment risk is determined with regard to the Company's investment objective, as outlined on page X. 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 on pages X to X, 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 regularly monitored by the Board. Details of the Company's investment portfolio at the balance sheet date are set out on page X to X.  An analysis of investments between debt and equity instruments is given in note 10. 67.4% (2009: 29.2%) by value of the Company's net assets comprises investments in unquoted companies held at fair value.  The valuation methods used by the Company include the application of a price/earnings ratio derived from listed companies with similar characteristics, and consequently the value of the unquoted element of the portfolio can be indirectly affected by price movements on the London Stock Exchange. A 10% overall increase in the valuation of the unquoted investments at 31 October 2010 would have increased net assets and the total return for the year by £1,046,500 (2009: £437,000) an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount. 28.7% (2009: 67.3%) by value of the Company's net assets comprises of OEICs and Money Market Securities held at fair value.  A 10% overall increase in the valuation of the OEICs and Money Market Securities at 31 October 2010 would have increased net assets and the total return for the year by £445,700 (2009: £1,007,000) an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount. Interest rate risk Some of the Company's financial assets are interest-bearing, of which some are at fixed rates and some variable.  As a result, the Company is exposed to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates. Fixed rate The table below summarises weighted average effective interest rates for the fixed interest-bearing financial instruments:   As at 31 October 2010 As at 31 October 2009 Weighted Weighted average Total fixed average Total fixed time for rate Weighted time for rate Weighted which portfolio average which rate portfolio average rate is by value interest is fixed by value interest fixed in   £'000 rate % in years £'000 rate % years Listed fixed- interest investments - N/A N/A 2,483 4.90% 0.6 Fixed-rate investments in unquoted companies 382 12% 3.5 987 10.60% 3.5   382     3,470 Due to the relatively short period to maturity of the fixed rate investments held within the portfolio, it is considered that an increase or decrease of 1% in interest rates as at the reporting date would not have had a significant effect on the Company's net assets or total return for the period. Floating rate The Company's floating rate investments comprise cash held on interest-bearing deposit accounts, libor rate on one loan note and, where appropriate, within interest bearing money market securities.  The benchmark rate which determines the rate of interest receivable on such investments is the bank base rate, which was 0.5% at 31 October 2010.  The amounts held in floating rate investments at the balance sheet date were as follows: 31 October 2010   31 October 2009   £000 £000 Floating rate notes -   1,599 Floating-rate investments in unquoted companies 315 315 Cash on deposit & money market funds 663   2,229   978   4,143 A 1% increase in the base rate would increase income receivable from these investments and the total return for the period by £10,000 (2009: £41,000). Credit risk There were no significant concentrations of credit risk to counterparties at 31 October 2010.  By cost, no individual investment exceeded 11.4% (2009: 10.9%) of the Company's net assets at 31 October 2010. 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 Investment Manager and the Board carry out a regular review of counterparty risk. The carrying values of financial assets represent the maximum credit risk exposure at the balance sheet date. At 31 October 2010 the Company's financial assets exposed to credit risk comprised the following: 31 October 2010   31 October 2009   £000 £000 Investments in fixed interest instruments -   2,483 Investments in floating rate instruments -   1,599 Cash on deposit & money market funds 663   2,229 Fixed rate investments in unquoted companies 382   987 Accrued dividends and interest receivable 75   89   1,130   7,387 Credit risk relating to listed money market securities is mitigated by investing in a portfolio of investment instruments of high credit quality, comprising securities issued by the UK Government and major UK companies and institutions. Credit risk relating to loans to and preference shares in unquoted companies is considered to be part of market risk. Those assets of the Company which are traded on recognised stock exchanges are held on the Company's behalf by third party custodians (Goldman Sachs International in the case of listed money market securities and Capita Financial in the case of quoted equity securities).  Bankruptcy or insolvency of a custodian could cause the Company's rights with respect to securities held by the custodian to be delayed or limited. Credit risk arising on the sale of investments is considered to be small due to the short settlement and the contracted agreements in place with the settlement lawyers. The Company's interest-bearing deposit and current accounts are maintained with HSBC Bank plc. Liquidity risk The Company's financial assets include investments in unquoted equity securities which are not traded on a recognised stock exchange and which generally may be illiquid. They also include investments in AIM-quoted companies, which, by their nature, involve a higher degree of risk than investments on the main market.  As a result, the Company may not be able to realise some of its investments in these instruments quickly at an amount close to their fair value in order to meet its liquidity requirements, or to respond to specific events such as deterioration in the creditworthiness of any particular issuer. The Company's listed money market securities are considered to be readily realisable as they are of high credit quality as outlined above. The Company's liquidity risk is managed on a continuing basis by the Investment Manager in accordance with policies and procedures laid down by the Board. The Company's overall liquidity risks are monitored on a quarterly basis by the Board. The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and accrued expenses.  At 31 October 2010 these investments were valued at £4,500,000 (2009: £10,600,000). 17.        Post Balance Sheet Events The following events occurred between the balance sheet date and the signing of these financial statements:    · On 5 November 2010 a further £12,500 was invested into Skills Market Limited    · On 30 November 2010 a further £6,000 was invested into Skills Market Limited    · On 7 December 2010 a new investment of £367,000 was made into Diverse Energy Limited    · On 9 December 2010 a further £307,000 was invested into Zoopla Limited    · On 27 January 2011 a further £116,667 was invested into Money Workout Limited    · On 4 February 2011 a further £16,667 was invested into Money Workout Limited 18.        Contingencies, Guarantees and Financial Commitments Provided that an intermediary continues to act for a shareholder and the shareholder continues to be the beneficial owner of the shares, intermediaries will be paid an annual trail commission of 0.5% of the initial net asset value. Trail commission of £25,000 was paid during the year (2009: £78,000) and there was £nil outstanding at the year end. There were no other contingencies, guarantees or financial commitments as at 31 October 2010. 19.        Related Party Transactions Octopus Titan VCT 2 plc has employed Octopus Investments Limited throughout the period as the Investment Manager. Matt Cooper, a non executive Director of Octopus Titan VCT 2 plc, is also Chairman of Octopus Investments.  Octopus Titan VCT 2 plc has paid Octopus £282,000 (2009: £281,000) in the year as a management fee and there is £nil outstanding at the balance sheet date. The management fee is payable quarterly in advance and is based on 2.0% of the net asset value calculated at annual intervals as at 31 October. Octopus Investments Limited also provides accounting, administrative and company secretarial services to the Company, payable quarterly in advance for a fee of 0.3% of the net asset value calculated at annual intervals as at 31 October. During the year £46,000 (2009: £46,000) was paid to Octopus Investments Limited and there is £nil outstanding at the balance sheet date, for the accounting and administrative services. In addition, Octopus is entitled to performance related incentive fees. The incentive fees are designed to ensure that there are significant tax-free dividend payments made to Shareholders as well as strong performance in terms of capital and income growth, before any performance related incentive fee payment is made. Therefore, only if by the end of a financial year (commencing no earlier than close of the 2011 financial year), declared distributions per Share have reached 40p in aggregate and if the Performance Value at that date exceeds 130p per Share, a performance incentive fee equal to 20% of the excess of such Performance Value over 100p per Share will be payable to Octopus. If, on a subsequent financial year end, the Performance Value of Octopus Titan VCT 2 plc falls short of the Performance Value on the previous financial year end, no incentive fee will arise. If, on a subsequent financial year end, the performance exceeds the previous best Performance Value of Octopus Titan VCT 2 plc, the Investment Manager will be entitled to 20% of such excess in aggregate. No performance fee has been recognised for the year ended 31 October 2010 on the basis that the directors do not believe that the necessary criteria will be met in the foreseeable future, and therefore the amount of any possible obligation is not material. This announcement is distributed by Thomson Reuters on behalf of Thomson Reuters clients. The owner of this announcement warrants that: (i) the releases contained herein are protected by copyright and other applicable laws; and (ii) they are solely responsible for the content, accuracy and originality of the information contained therein. Source: Octopus Titan VCT 2 PLC via Thomson Reuters ONE [HUG#1487918]

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