Half-yearly Report

THE INCOME & GROWTH VCT PLC Half-Yearly Results for the six months ended 31 March 2010 27 May 2010 Investment Objective The objective of The Income & Growth VCT plc ("I&G VCT" or "the Company") is to provide investors with an attractive return, by maximising the stream of dividend distributions from the income and capital gains generated by a diverse and carefully selected portfolio of investments. The Company invests in companies at various stages of development. In some instances this may include investments in new and secondary issues of companies which may already be quoted on the Alternative Investment Market ("AiM") or PLUS. Financial Highlights The assets of the `O' and 'S' Share Funds were merged to form one share class of Ordinary Shares on 29 March 2010 following Shareholder approval on 26 and 29 March 2010. As a consequence, the net assets of the merged VCT are £35.7 million Over the 6 month period, the highlights were:- - Prior to the merger, dividends of 2p per `O' Share and 0.5p per `S' Share were paid on 17 March 2010. - Strong liquidity has been maintained despite continuing market volatility - Increase of 2.1% in `O' Share Fund total return to shareholders over the six month period (net asset value (NAV) basis) - Increase of 1.6% in `S' Share Fund total return to shareholders over the six month period (NAV basis) Performance Summary The net asset value of the new class of Ordinary Shares is 94.2 pence at 31 March 2010. To help shareholders in each former share class understand the performance of their investment, comparative data for each former share class is shown below:- Net asset value Cumulative NAV total return per Share (NAV) dividends paid per to shareholders (p) share (p) since launch per Share (p) `O' Share Fund As at 31 March 2010* 71.4 22.5 93.9 As at 30 September 71.5 20.5 92.0 2009 As at 30 September 83.6 16.5 100.1 2008 `S' Share Fund As at 31 March 2010* 94.2 0.5 94.7 As at 30 September 93.2 0.0 93.2 2009 As at 30 September 94.6 0.0 94.6 2008 * This data shows the return on an initial subscription price of 100p at the date of inception of each Fund Illustration of performance of original share funds Whilst the Company now has a single share class the table below shows the total NAV shareholder returns at 31 March 2010 of an initial investment of £10,000 at each Fund's inception by `O' and `S' Fund Shareholders subscribing for 10,000 shares at £1 each. Fund Original investment* Number of NAV at Dividends NAV total (10,000 shares at £1 shares held received return each) post-merger 31 March 2010 `O' Share £10,000 7,578 £7,139 £2,245 £9,384 Fund `S' Share £10,000 10,000 £9,420 £50 £9,470 Fund * Before deducting income tax benefits of £2,000 and up to £4,000 of Capital Gains Tax (CGT) deferral for an `O' Share Fund investor, and up to £4,000 of income tax benefit for an `S' Share Fund investor. The merger was effected by converting the relevant `O' Shares into `S' Shares. All the `S' Shares in issue were then redesignated as Ordinary Shares. Further details explaining the basis of the merger of the two share classes can be found in Note 9 to the Half-Yearly accounts below. As at the date of the merger, `O' Shares were trading at a discount of 32.1% to NAV while the `S' Shares were trading at a premium of 1.5% to NAV. The difference in discounts primarily reflects that the `S' Shares are still within the 5 year period that shareholders have to have held them in order to retain the relevant income tax reliefs. Upon merging into the one share class, the discount to NAV of the new Ordinary Shares became 21.4% at 31 March 2010, which represents the approximate average discount of the two Funds, taking into account their relative size. The Board will continue to pursue a share buyback policy and anticipates a significant narrowing of this discount over time. Chairman's Statement I am pleased to present the Company's Half-Yearly Report for the six months ended 31 March 2010. The last six months have been dominated by the continuing problems in the global economy. In the UK, economic problems were overshadowed by the uncertainty surrounding the outcome of the General Election in the UK. There were signs earlier in 2010 that confidence may be returning but this month has brought increased volatility and uncertainty. Share Class Merger I am pleased to report that the Company has successfully achieved a simpler single share class structure. All the Resolutions which were proposed at the Extraordinary General Meeting of the Company held on 26 March 2010 and at the separate class meetings held on 29 March 2010 were duly passed. For further information on the mechanics of the merger please see Note 9 in the Notes to the Accounts below. Following this Share Merger, there were in aggregate 38,008,712 Ordinary Shares in issue. Application was made for the existing listings of the Company's shares to be amended and that amendment became effective on 30 March 2010. Economic Background * In late April financial markets were caught in a two-way pull as worries over Greece and several other eurozone members vied with mounting evidence of US corporate strength. The deeply troubled Greek economy gave a last gasp as nervous investors finally gave up on the country and offloaded its government bonds. As a consequence, Greece's borrowing costs rose to their highest level in more than a decade amid fears its sovereign debt crisis would deteriorate further and infect several of the other southern European nations including Ireland. * In the United Kingdom, economic data from the Office for National Statistics showed that Britain's recovery almost ground to a halt in the first quarter of the year with unexpectedly slow growth of 0.2%. This means that the outlook will continue to remain decidedly unsure. Some senior economists are suggesting that the global economy is in uncharted territory and that the economic environment is likely to continue to feel far from normal for some time. There is widespread debate and uncertainty as to the best `cure' for the UK and, indeed, the global economies. Nervousness about the possibility of a `Hung' Parliament merely added to the uncertainty. In the event, the financial doubts and uncertainty arising from the Hung Parliament were overshadowed by the wider European fiscal problems. Performance Future performance data will be reported for the single share class. However, the Board also intends in future to provide data for each Shareholder Fund, by calculating both the net asset value and share price total shareholder return each class of shareholder has received from an original subscription of £ 10,000, so as to be consistent with data already reported for previous periods. This should enable shareholders to monitor the performance of their investment on a consistent basis from now on and in respect of the period since original investment. `O' Shares On the basis outlined above, the Company has maintained its NAV per `O' Share at 71.4p at 31 March 2010 (30 September 2009: 71.5p). This compares with increases of 0.6% in the capital return of the FTSE SmallCap Index and 9.8% in the capital return of the FTSE AiM All-Share Index during the same period. The NAV Total Return per `O' Share rose in the six month period by 2.1%. Cumulative dividends paid to date have amounted to 22.5p per `O' Share. `S' Shares At 31 March 2010 the NAV per `S' Share was 94.2 pence (30 September 2009: 93.2p), an increase of 1.1%. The NAV Total Return per `S' Share rose in the six month period by 1.6%. Cumulative dividends paid to date have amounted to 0.5p per `S' Share. Portfolio The performance of the portfolio overall over the this six month period has offered encouragement with several companies, notably DiGiCo Europe Limited, Amaldis (2008) Limited, MC440 Limited ("Westway Cooling") and Focus Pharma Holdings Limited showing good results. Those companies in the weaker sectors in this recession have shown perhaps surprising resilience and are demonstrating signs of a return to growth. In December 2009, the Company invested £1 million into CB Imports Group Limited ("Country Baskets") an importer and distributor of artificial flowers, floral sundries and home décor products. The investment was made through the acquisition vehicle Calisamo Management Limited in which the Company had an existing investment. In the same month, a new investment of £1 million was made into Iglu.com Holidays Limited, an on-line ski and cruise travel agent. The investment was made through the acquisition vehicle Barnfield Management Investments Limited. The Company also made two follow-on investments during the period. These were a further loan stock investment of £90,909 into British International Holdings Limited in November 2009 and, in December 2010, as part of a re-financing and Rights Issue the Company invested a further £421,688 as equity and loan stock into HWA Group Limited ("Holloway White Allom"). Of considerable note and importance considering the recession we are in, the Company disposed of its entire investment in PastaKing Holdings Limited to NBGI Private Equity for net proceeds of £793,853. This realisation contributed to total proceeds of £955,042 to the Company over the life of the investment, representing a multiple of 3.27 to the Company's original investment of £ 292,405. In October 2009, Westway Cooling repaid £47,761 of its loan stock. Since the original investment in June 2009 Westway Cooling has already repaid a total of £68,532 ahead of expectations. Then in December 2009, DiGiCo Europe Limited made a repayment of its loan stock of £142,804. During the same month, DCG Group Limited also made a loan stock repayment of £54,978. Cash available for investment * Cash and liquidity fund balances as at 31 March 2010 amounted to some £14.4 million. During this economic turmoil, both the Board and the Manager have continued to work hard to ensure that our cash deposits remain as secure as possible. We have for some time been spreading our significant cash deposits with a number of the leading global cash funds rather than depositing direct to individual banks, thereby reducing our exposure to any one particular bank. However, the current low level of interest rates on cash deposits means it will continue to be difficult for the Company to pay dividends from income. Shareholders are being asked to approve a change in Investment Policy relating to the funds awaiting investment. This would allow the Company to consider a wider range of alternatives in the future should a suitable situation occur. However, the Board and Manager both strongly believe that at this time the security and protection of capital is more important than striving for a small increase in deposit rates at the cost of much higher risk. We will continue to keep this situation closely under review. Revenue Account The revenue return for the Company over the six months to 31 March 2010 was a loss of £173,592 (2009: £176,775 profit). This is the result of the continued historically low interest rates, falls in loan stock income (as several loans have been realised since last year), some exceptional dividend income last year which has not been repeated this period, and exceptional costs (of approximately £55,000) incurred in the merging of the share classes. Some smaller cost savings arising from the merger are expected to emerge during the second half of the year. In the light of present interest rate levels, dividends arising from revenue are likely to be severely limited in the short term. Dividend Investment Scheme `O' Shares 236 'O' Fund Shareholders, who between them held a total of 2,769,439 'O' Shares representing 8.0% of the Fund were issued 112,768 'O' Shares on 18 March 2010 in respect of the Dividend of 2 pence per share paid to 'O' Fund Shareholders on 17 March 2010. The issue price of 49.14 pence per share was equal to 70% of the latest published NAV per share adjusted for the dividend. `S' Shares 140 'S' Fund Shareholders, who between them held a total of 1,272,814 'S' Shares representing 10.8% of the Fund were issued 6,674 'S' Shares on 18 March 2010 in respect of the Dividend of 0.5 pence per share paid to 'S' Fund Shareholders on 17 March 2010. The issue price of 94.5 pence per share was equal to the Official List for the five business days immediately preceding the payment date. The Scheme The Dividend Investment Scheme ("the Scheme") is open to all Shareholders who have the opportunity to re-invest their dividends into new ordinary shares in the Company. Ordinary shares issued pursuant to the Scheme will, subject to an individual shareholder's particular circumstances, attract the VCT tax reliefs applicable for the tax year in which the shares are allotted (currently 30% for investments up to £200,000 in any one tax year). The issue price will be the higher of the average of the middle market price for the Company's Shares taken from the London Stock Exchange Daily Official List for the five business days immediately preceding the payment date and 70% of the latest published NAV per share as at the dividend payment date. Copies of the Scheme Rules are available on Company's website, www.incomeandgrowthvct.co.uk, and personalised application forms can be obtained from the Company's Registrars, Capita Registrars, tel: 0871 664 0300. Shareholders should return their application forms to Capita Registrars at the address given on the forms so as to arrive no later than 15 days before the payment date in respect of a particular dividend to ensure that they qualify to receive that specific dividend and future dividends as shares. Shareholders need only to complete the application form once to join the Scheme. Share buy-backs * `O' Shares * During the six months ended 31 March 2010, the Company bought back 369,937 `O' Shares (representing 1.1 per cent of the `O' Shares in issue at the beginning of the period) at a total cost of £175,456 (inclusive of expenses). A further 78,742 Ordinary Shares were bought back on 31 March 2010 following the merger at a total cost of £50,455. These shares were subsequently cancelled by the Company. * `S' Shares * No `S' Shares were bought back during the period ended 31 March 2010. Outlook These are uncertain times in both the political and economic arena, but it remains important not to lose sight of the fact that against this backdrop a more encouraging picture is presented by the many individual company results that are beating analysts' expectations. Although it may take some time for the smoke to clear, there is a growing opinion that the US economy may have turned the corner. * Against this backdrop, the Company has retained a significant cash position. Moreover, the merger of the `O' and `S' Shares has enabled the Company to be able to use its combined cash balance to better advantage. This position continues to place the Company in an excellent position to take advantage of what are expected to be increasingly attractive purchase opportunities which should become available as the economy climbs out of recession. Therefore, while short term valuations are likely to be subject to continuing pressures, your Board still expects to see attractive investment opportunities and a recovery in performance and portfolio values over the longer term. * The current level of interest rates in the United Kingdom means that it will be difficult for the Company to pay a dividend from revenue in the forthcoming year. The market view currently is that interest rates are not expected to rise from this historic low until the fourth quarter of 2010 at the earliest. It is also too early to say whether and/or at what level it will be possible for the Company to pay further dividends from capital reserves. Once again, I would like to take this opportunity to thank Shareholders for their continued support. Colin Hook Chairman Principal risks and uncertainties, Related Party Transactions, Responsibility Statement and Cautionary Statement Principal risks and uncertainties In accordance with D.T.R 4.2.7, the Board confirms that the principal risks and uncertainties facing the Company have not materially changed since the publication of the Annual Report and Accounts for the year ended 30 September 2009. The Board acknowledges that there is regulatory risk and continues to manage the Company's affairs in such a manner as to comply with section 274 Income Tax Act 2007. The principal risks faced by the Company are: - economic risk; - investment and strategic risk; - regulatory risk (including VCT status); - financial and operating risk; - market risk; - asset liquidity risk; - market liquidity risk; - credit/counterparty risk. A more detailed explanation of these can be found in the Directors' Report on pages 26 - 27 and in Note 20 on pages 77 - 82 of the Annual Report and Accounts for the year ended 30 September 2009 copies of which are available on the VCT's website: www.incomeandgrowthvct.co.uk. Related Party Transactions Details of related party transactions in accordance with Disclosure and Transparency Rule 4.2.8 can be found in Note 12 to the Accounts below. Responsibility Statement In accordance with DTR 4.2.10 the Directors confirm that to the best of their knowledge: the condensed set of financial statements, which has been prepared in accordance with the statement, "Half-Yearly Reports", issued by the Accounting Standards Board, gives a true and fair view of the assets, liabilities, financial position and profit of the Company, as required by Disclosure and Transparency Rule (DTR) 4.2.4; and the interim management report, included within the Chairman's Statement, Investment Policy, Investment Portfolio Summary and the Investment Manager's Review includes a fair review of the information required by DTR 4.2.7 being an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements. a description of the principal risks and uncertainties facing the Company for the remaining six months is set out above, in accordance with DTR 4.2.7; and the financial statements include a description of the related party transactions in the first six months of the current financial year that have materially affected the financial position or performance of the Company during the period, and any material changes to the related party transactions since the last Annual Report, in accordance with DTR 4. Cautionary Statement This report may contain forward looking statements with regards to the financial condition and results of the Company, which are made in the light of current economic and business circumstances. Nothing in this report should be construed as a profit forecast. On behalf of the Board Colin Hook Chairman Investment Policy The Company's policy is to invest primarily in a diverse portfolio of UK unquoted companies. Investments are structured as part loan and part equity in order to receive regular income and to generate capital gains from trade sales and flotations of investee companies. Investments are made selectively across a number of sectors, primarily in management buyout transactions (MBOs) i.e. to support incumbent management teams in acquiring the business they manage but do not yet own. Investments are primarily made in companies that are established and profitable. The Company has a small legacy portfolio of investments in companies from its period prior to 30 September 2008, when it was a multi-manager VCT. This includes investments in early stage and technology companies and in companies quoted on the AiM or PLUS. Uninvested funds are held in cash and lower risk money market funds. UK companies The companies in which investments are made must have gross assets of no more than £15 million in respect of funds raised prior to 6 April 2006 and £7 million in respect of funds raised after this date at the time of investment to be classed as a VCT qualifying holding. VCT regulation The investment policy is designed to ensure that the Company continues to qualify and is approved as a VCT by HM Revenue & Customs ("HMRC"). Amongst other conditions, the Company may not invest more than 15% of its investments in a single company and must have at least 70% by value of its investments throughout the period in shares or securities comprised in VCT qualifying holdings, of which a minimum overall of 30% by value must be ordinary shares which carry no preferential rights. In addition, although the Company can invest less than 30% of an investment in a specific company in ordinary shares it must have at least 10% by value of its total investments in each VCT qualifying company in ordinary shares which carry no preferential rights. Asset mix The Company initially holds its funds in a portfolio of readily realisable interest-bearing investments and deposits. The investment portfolio of qualifying investments is built up over a three year period with the aim of investing and maintaining at least 70% of net funds raised in qualifying investments. Risk diversification and maximum exposures Risk is spread by investing in a number of different businesses across different industry sectors. To reduce the risk of high exposure to equities, each qualifying investment is structured using a significant proportion of loan stock (up to 70% of the total investment in each VCT qualifying company). Initial investments in VCT qualifying companies are generally made in amounts ranging from £200,000 to £1 million at cost. No holding in any one company will represent more than 10% of the value of the Company's investments at the time of investment. Ongoing monitoring of each investment is carried out by the Investment Manager, generally through taking a seat on the board of each VCT qualifying company. Co-investment The Company aims to invest in larger, more mature unquoted companies through investing alongside the four other VCTs advised by the Investment Manager with a similar investment policy. This enables the Company to participate in combined investments advised on by the Investment Manager of up to £5 million. Investment Portfolio Summary as at 31 March 2010 Total cost at Valuation at Additional Valuation at 31 March 2010 30 September investments 31 March 2010 2009 in the (unaudited) (audited) period (unaudited) £ £ £ £ Camwood Limited 1,028,181 1,013,233 - 1,961,818 Provider of software repackaging services Image Source Group Limited 305,000 2,259,232 - 1,959,369 Royalty free picture library Amaldis (2008) Limited 80,313 1,586,734 - 1,866,587 (Original Additions) Manufacturer and distributor of beauty products DiGiCo Europe Limited 371,291 1,131,870 - 1,086,451 Designer and manufacturer of audio mixing desks ATG Media Holdings Limited 1,000,000 1,000,000 - 1,040,948 Publisher and online auction platform operator IGLU.com Holidays Limited 1,000,000 - 1,000,000 1,000,000 Online ski and cruise travel agent Apricot Trading Limited 1,000,000 1,000,000 - 1,000,000 Company seeking to acquire businesses in the marketing services and media sector Aust Construction Investors 1,000,000 1,000,000 - 1,000,000 Limited Company seeking to acquire businesses in the construction sector CB Imports Group Limited 1,000,000 1,000,000 - 1,000,000 (Country Baskets) (formerly Calisamo Management Limited) Importer and distributor of artificial flowers, floral sundries and home decór products MC440 Limited (Westway 490,654 559,186 - 982,923 Cooling) Installation, service and maintenance of air conditioning systems IDOX plc 872,625 796,250 - 939,167 Provider of document storage systems VSI Limited 245,596 794,146 - 885,759 Provider of software for CAD and CAM vendors Youngman Group Limited 1,000,052 700,992 - 700,992 Manufacturer of ladders and access towers Tikit Group plc 500,000 595,651 - 643,477 Provider of consultancy services and software solutions for law firms Focus Pharma Holdings 516,900 525,858 - 621,179 Limited Licensor and distributor of generic pharmaceuticals British International 590,909 359,765 90,909 562,998 Holdings Limited Helicopter service operator Monsal Holdings Limited 471,605 353,704 - 477,618 Supplier of engineering services to water and waste sectors Blaze Signs Holdings 1,338,500 132,589 - 443,855 Limited Manufacturer and installer of signs HWA Limited (Holloway White 456,241 1,457,407 421,688 425,284 Allom) Specialist contractor in the high-value residential and heritage property refurbishment market Brookerpaks Limited 55,000 324,447 - 404,547 Importer and distributor of garlic and vacuum-packed vegetables Vectair Holdings Limited 215,914 375,136 - 377,436 Designer and distributor of washroom products Aquasium Technology Limited 700,000 564,739 - 344,533 Design, manufacture and marketing of bespoke electron beam welding and vacuum furnace equipment Racoon International 550,852 79,496 - 236,378 Holdings Limited Supplier of hair extensions, hair care products and training Biomer Technology Limited 137,170 226,585 - 226,585 Developer of biomaterials for medical devices Letraset Limited 650,000 - - 219,150 Manufacturer and distributor of graphic art products BG Consulting Group Limited 1,153,976 115,027 - 207,492 /Duncary 4 Limited Technical training business ANT plc 462,816 275,770 - 177,281 Provider of embedded browser/email software for consumer electronics and internet appliances Nexxtdrive Limited 812,014 203,004 - 162,500 Developer and exploiter of patented transmission technologies Sarantel Group plc 1,881,253 153,175 - 136,156 Developer and manufacturer of antennae for mobile phones and other wireless devices Campden Media Limited 334,880 44,438 - 116,447 Magazine publisher and conference organiser The Plastic Surgeon 406,082 101,521 - 101,521 Holdings Limited Supplier of snagging and finishing services to property sector DCG Group Limited 257,096 262,861 - 85,221 Design, supply and integration of data storage solutions Legion Group plc 150,000 53,571 - 75,000 Design, supply and installation of quality kitchens to house developers Corero plc 600,000 34,381 - 35,363 Provider of e-business technologies Alaric Systems Limited 595,802 30,647 - 30,647 Software development, implementation and support in the credit/debit card authorisation and payments market Oxonica plc 2,524,527 - - - International nanomaterials group PXP Holdings Limited 920,176 - - - (Pinewood Structures) Designer, manufacturer and supplier of timber frames for buildings Aigis Blast Protection 272,120 - - - Limited Specialist blast containment materials company PastaKing Holdings Limited - 778,913 - - Manufacturer and supplier of fresh pasta meals Other investments in the 350,000 - - - portfolio * --------------- --------------- ------------- --------------- Total 26,297,545 19,890,328 1,512,597 21,534,682 --------------- --------------- ------------- --------------- * `Other investments in the portfolio' comprises Inca Interiors Limited (in administration) Investment Manager's Review Following the recent economic instability both in the UK and worldwide we were encouraged in the first half of the period to see some indications that the rate of new deal activity was starting to increase, leading to the completion of two new investments in the period. There continue to be many high quality companies that are sufficiently attractively priced to catch our attention. However, the continuing precarious economic conditions and the doubts surrounding the outcome of the general election meant that activity levels in the period under review remained low. We remain cautious and selective in our consideration of new investments and think this caution has been a significant factor in maintaining value in the portfolio through a very volatile period. There are signs that the economy may have stabilised in the short term but also considerable doubts as to whether this is sustainable over the longer term. We are therefore committed to continue a highly selective approach to the new investment market, only seeking investments in businesses which can demonstrate defensible market strength in a fragile economic environment. As evidence that high quality investments remain in demand, the Company successfully sold its investment in PastaKing, the Newton Abbot based foodservice company to a buy-in management team for initial proceeds of £ 793,853 in November. This realisation and a small final payment of £5,379 in January contributed to total returns of £955,042 to the Fund throughout the life of the investment, representing a 3.27 fold return on the Company's original investment of £292,405. Two new investments were made in December. The first of these was an investment of £1 million, using the acquisition vehicle Calisamo Management (now re-named CB Imports Group), to support the management buy-out of Country Baskets a leading importer and distributor of artificial flowers, floral sundries, glassware, giftware, basket ware and Christmas decorations. The investment comprises loan stock of £825,000 and a 6% equity stake. Founded in 1990 and operating from a national distribution centre in Leeds, the company has a turnover of circa £20 million. The company is planning to roll out further outlets across the UK as part of a new growth phase to be funded by this investment. The second new investment was into Iglu.com Holidays, the UK's largest online specialist ski holiday operator and fastest growing cruise holiday travel agent. The investment, totalling £1 million, comprised loan stock of £848,000 and an equity stake of 8.1%. Based in Wimbledon, Iglu.com is a profitable and cash generative business with a strong management team that has a successful track record of building a profitable niche business. The investment was made through the acquisition vehicle Barnfield Management Investments. Although both of these investments have got off to a strong start and are ahead of investment plan, on balance we have retained these for the time being at cost. Further investments were completed in November and January into British International Holdings of £90,909 by way of loan stock and HWA Group (trading as Holloway White Allom) of £421,688. The VCT made a further investment in HWA to provide additional working capital to bridge the company's lower than expected revenues in 2010, arising from delays by clients in commissioning projects. Despite its current under-performance which has resulted in a a large reduction in its valuation HWA has been a very successful investment for the VCT, returning £5 million in cash to date and we remain confident of its future prospects. All but two investments in the MPEP invested portfolio have either maintained or increased in value compared to the year-end. We have been working actively with the management teams of investee companies encouraging them to take cost cutting measures and looking with them at planning, forecasting and costing systems, where appropriate, to ensure that they are as resilient as possible. A number of companies, notwithstanding the challenging economic conditions, have increased profits, many to record levels. Foremost among these are Amaldis, DiGiCo, Westway and Focus. Racoon also has shown a significant improvement in profitability in the period and a number of investments exposed to the construction and housebuilding sectors are showing early indications of improving trading conditions. We envisage that the overall additional funding required to support the portfolio will be minimal for the remainder of the financial year. Most of our investee companies have managed their cash flow well and remain profitable. Some of the companies in the portfolio in particular continue to be strongly cash generative, and amongst these Westway prepaid £68,532 of loan stock in October. DiGiCo Europe has continued to roll out new products and this has led to sustained profit growth since investment. The company repaid a further £142,804 of loan stock in December plus the premium due. Within the legacy Foresight portfolio there has been a strong earnings performance from Camwood, resulting in a material increase in valuation. This has been due to increased market acceptance of an applications software tool developed by the company over recent years. The VCT's significant cash reserves place it in an excellent position both to capitalise on attractive new investment opportunities as they arise and to support its existing portfolio should the need arise. Unaudited Income Statement for the six months ended 31 March 2010 Six months ended 31 March 2010 Six months ended 31 March 2009 (unaudited) (unaudited) Notes Revenue Capital Total Revenue Capital Total £ £ £ £ £ £ Unrealised gains/ 7 - 1,187,618 1,187,618 - (1,052,863) (1,052,863) (losses) on investments Net gains on 7 - 37,442 37,442 - 20,000 20,000 realisation of investments Income 277,682 - 277,682 585,951 67,950 653,901 Investment 2 (96,270) (288,811) (385,081) (99,769) (299,305) (399,074) management expense Other expenses (355,004) - (355,004) (259,272) - (259,272) -------------- -------------- -------------- ------------ -------------- -------------- (Loss)/profit on (173,592) 936,249 762,657 226,910 (1,264,218) (1,037,308) ordinary activities before taxation Tax on profit/ 3 - - - (50,135) 50,135 - (loss) on ordinary activities -------------- -------------- -------------- ------------ -------------- -------------- (Loss)/profit on (173,592) 936,249 762,657 176,775 (1,214,083) 1,037,108 ordinary activities after taxation -------------- -------------- -------------- ------------ -------------- -------------- Basic and diluted 6 (0.04)p (0.38)p earnings per Ordinary Share (formerly 'S' Share) Basic and diluted 6 2.22*p (2.81)p earnings per 'O' Share: Year ended 30 September 2009 (audited) Notes Revenue Capital Total £ £ £ Unrealised gains/ - (3,547,286) (3,547,286) (losses) on investments Net gains on - 597,637 597,637 realisation of investments Income 931,359 67,950 999,309 Investment 2 (192,882) (578,645) (771,527) management expense Other expenses (511,764) - (511,764) -------------- -------------- -------------- (Loss)/profit on 226,713 (3,460,344) (3,233,631) ordinary activities before taxation Tax on profit/ 3 (33,030) 33,030 - (loss) on ordinary activities -------------- -------------- -------------- (Loss)/profit on 193,683 (3,427,314) (3,233,631) ordinary activities after taxation -------------- -------------- -------------- Basic and diluted 6 (1.41)p earnings per Ordinary Share (formerly 'S' Share) Basic and diluted 6 (8.73)p earnings per 'O' Share: *This relates to the period up to 29 March 2010 Unaudited Balance Sheet as at 31 March 2010 31 March 2010 31 March 2009 30 September 2009 (unaudited) (unaudited) (audited) Notes £ £ £ Non-current assets Investments 7 21,534,682 23,005,554 19,890,328 Current assets Debtors and prepayments 168,229 504,760 185,876 Investments at fair value 8 14,385,083 14,747,534 15,962,070 Cash at bank 20,385 41,302 55,638 ----------------- ------------------ ----------------- 14,573,697 15,293,596 16,203,584 Creditors: amounts falling due (378,229) (107,530) (210,815) within one year ----------------- ------------------ ----------------- Net current assets 14,195,468 15,186,066 15,992,769 ----------------- ------------------ ----------------- Net assets 35,730,150 38,191,620 35,883,097 ----------------- ------------------ ----------------- Capital and reserves 10 Called up share capital 379,300 468,618 466,309 Share premium account 369,141 11,361,834 308,614 Capital redemption 161,220 70,708 73,017 reserve Revaluation reserve (4,208,921) (2,073,406) (5,279,832) Special reserve 27,059,018 17,743,304 27,952,006 Profit and loss account 11,970,392 10,620,562 12,362,983 ----------------- ------------------ ----------------- Equity shareholders' 35,730,150 38,191,620 35,883,097 funds ----------------- ------------------ ----------------- Basic and diluted net asset value: per Ordinary Share 11 94.20p 94.21p 93.18p (previously 'S' Share) per 'O' Share 11 - 77.22p 71.45p The financial information for the six months ended 31 March 2010 and the six months ended 31 March 2009 has not been audited. Unaudited Reconciliation of Movements in Shareholders' Funds for the six months ended 31 March 2010 Six months ended Six months ended Year ended 31 March 2010 31 March 2009 30 September 2010 (unaudited) (unaudited) (audited) Notes £ £ £ Opening shareholders' 35,883,097 40,791,712 40,791,712 funds Net share capital 10 (164,190) (144,725) (256,925) (bought back)/ subscribed for in the period Profit/(Loss) for the 762,657 (1,037,308) (3,233,631) period Dividends paid in 5 (751,414) (1,418,059) (1,418,059) period ----------------- ------------------ ----------------- Closing shareholders' 35,730,150 38,191,620 35,883,097 funds ----------------- ------------------ ----------------- Analysis for the period to 31 March 2010 per share class Six months ended Six months ended Six months ended Six months ended 31 March 2010 31 March 2010 31 March 2010 31 March 2010 Total per `O' Share per `S' Share New Ordinary Shares Notes £ £ £ £ Opening 35,883,097 24,881,881 11,001,216 - shareholders' funds Net share capital (164,190) (164,190) - - (bought back)/ subscribed for in the period Profit/(Loss) for 762,657 767,073 (4,416) - the period Dividends paid in 5 (751,414) (692,438) (58,976) - period Conversion into `S' - (24,792,326) 24,792,326 - Shares ----------------- ------------------ ----------------- ----------------- 35,730,150 - 35,730,150 - ----------------- ------------------ ----------------- ----------------- Redesignation of `S' - - (35,730,150) 35,730,150 Shares as Ordinary shares ----------------- ------------------ ----------------- ----------------- Closing 10 35,730,150 - - 35,730,150 shareholders' funds ----------------- ------------------ ----------------- ----------------- Unaudited Cash Flow Statement for the six months ended 31 March 2010 Six months ended Six months ended Year ended 31 March 2010 31 March 2009 30 September 2010 (unaudited) (unaudited) (audited) £ £ £ Operating activities Investment income received 185,905 730,106 1,081,127 Investment management fees (381,259) (825,088) (1,200,016) paid Recoverable VAT and interest 143,757 130,470 408,305 received thereon Other income 4,053 12,377 - Other cash payments (262,947) (338,927) (477,847) ----------------- ------------------ ----------------- Net cash outflow from (310,491) (291,062) (188,431) operating activities Investing activities Acquisitions of investments (1,512,597) (176,422) (735,608) Disposals of investments 1,093,303 417,400 2,215,027 ----------------- ------------------ ----------------- Net cash (outflow)/inflow from (419,294) 240,978 1,479,419 investing activities Dividends Equity dividends paid (751,414) (1,418,059) (1,418,059) ----------------- ------------------ ----------------- Cash outflow before financing (1,481,199) (1,468,143) (127,071) and liquid resource management Management of liquid resources Increase in current 1,576,987 1,588,480 373,944 investments Financing Issue of Ordinary shares 61,722 96,826 96,826 Purchase of own shares (192,763) (241,551) (353,751) ----------------- ------------------ ----------------- (131,041) (144,725) (256,925) ----------------- ------------------ ----------------- Decrease in cash for the (35,253) (24,388) (10,052) period ----------------- ------------------ ----------------- Reconciliation of profit/(loss) on ordinary activities before taxation to net cash outflow from operating activities for the six months ended 31 March 2010 Six months ended Six months ended Year ended 30 31 March 2010 31 March 2009 September 2010 (unaudited) (unaudited) (audited) £ £ £ Profit/(loss) on ordinary 762,657 (1,037,308) (3,233,631) activities before taxation Net unrealised (gains)/losses (1,187,618) 1,052,863 3,547,286 on investments Net gains on realisations of (37,442) (20,000) (597,637) investments Decrease in debtors 17,647 165,615 412,760 Increase/(decrease) in 134,265 (452,232) (317,209) creditors ----------------- ------------------ ----------------- Net cash outflow from (310,491) (291,062) (188,431) operating activities ----------------- ------------------ ----------------- Notes to the Unaudited Financial Statements 1. Principal accounting policies The following accounting policies have been applied consistently throughout the period. Full details of principal accounting policies will be disclosed in the Annual Report. a) Basis of accounting The unaudited results cover the six months to 31 March 2010 and have been prepared under UK Generally Accepted Accounting Practice (UK GAAP), consistent with the accounting policies set out in the statutory accounts for the year ended 30 September 2009 and the 2009 Statement of Recommended Practice, `Financial Statements of Investment Trust Companies and Venture Capital Trusts' ("the SORP"). The Half-yearly Report has not been audited, nor has it been reviewed by the auditors pursuant to the Auditing Practices Board (APB)'s guidance on Review of Interim Financial Information. The results for the six months to 31 March 2010 reflect the activities of the Company. On 29 March 2010, the 'O' Share Fund and the 'S' Share Fund were consolidated. New 'S' Shares were issued to 'O' Fund Shareholders in proportion to its net assets relative to the 'S' Share Fund. The new 'S' Shares were then redesignated as new Ordinary Shares. Further details are contained in note 9 below. b) Presentation of the Income Statement In order to better reflect the activities of a VCT and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The revenue column of profit attributable to equity shareholders is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Section 274 Income Tax Act 2007. c) Investments For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange market quoted bid prices at the close of business on the balance sheet date. Purchases and sales of quoted investments are recognised on the trade date where a contract of sale exists whose terms require delivery within a time frame determined by the relevant market. Purchases and sales of unlisted investments are recognised when the contract for acquisition or sale becomes unconditional. Unquoted investments are stated at fair value by the Directors in accordance with the following rules, which are consistent with the IPEVCV guidelines: All investments are held at the price of a recent investment for an appropriate period where there is considered to have been no change in fair value. Where such a basis is no longer considered appropriate, the following factors will be considered: (i) Where a value is indicated by a material arms-length transaction by an independent third party in the shares of a company, this value will be used. (ii) In the absence of i), and depending upon both the subsequent trading performance and investment structure of an investee company, the valuation basis will usually move to either:- a. an earnings multiple basis. The shares may be valued by applying a suitable price-earnings ratio to that company's historic, current or forecast post-tax earnings before interest and amortisation (the ratio used being based on a comparable sector but the resulting value being adjusted to reflect points of difference identified by the Investment Manager compared to the sector including, inter alia, a lack of marketability). or:- b. where a company's underperformance against plan indicates a diminution in the value of the investment, provision against cost is made, as appropriate. Where the value of an investment has fallen permanently below cost, the loss is treated as a permanent impairment and as a realised loss, even though the investment is still held. The Board assesses the portfolio for such investments and, after agreement with the Investment Manager, will agree the values that represent the extent to which an investment has become realised. This is based upon an assessment of objective evidence of that investment's future prospects, to determine whether there is potential for the investment to recover in value. (iii) Premiums on loan stock investments are accrued at fair value when the Company receives the right to the premium and when considered recoverable. (vi) Where an earnings multiple or cost less impairment basis is not appropriate and overriding factors apply, discounted cash flow or net asset valuation bases may be applied. 2. Investment Management Expense Six months Six months ended Year ended ended 31 March 2010 31 March 2009 30 September 2009 Ordinary `O' Share `S' Share `O' `S' Share shares Share Total Fund Fund Fund Fund £ £ £ £ £ Investment 385,081 291,016 108,058 555,088 216,439 management fee The Directors have charged 75% of the fees payable under the investment adviser's agreement, and 100% of the amounts payable under the Incentive Agreement, to the capital reserve. The Directors believe it is appropriate to charge the incentive fee wholly against the capital return, as any fee payable depends on capital performance, as explained below. After the merger, the Investment Manager's Incentive Agreement for the former 'O' Share Fund has been continued while the former 'S' Share Fund's Incentive Agreement has been terminated. Under the terms of the pre-merger 'O' Share Fund Incentive Agreement, each of the ongoing Investment Manager, Matrix Private Equity Partners LLP ("MPEP") and a former Investment Manager, Foresight Group LLP ("Foresight") are entitled to a performance fee equal to 20% of the excess of the value of any realisation of an investment made after 30 June 2007, over the value of that investment in an Investment Manager's portfolio at that date ("the Embedded Value"), which value is itself uplifted at the rate of 6% per annum. No fee is payable in any year if the value of that Investment Manager's portfolio at that year-end plus the cumulative value of any realisations made up to that year-end is less than the value of that Investment Manager's portfolio at 30 June 2007, "the High Watermark test". However, two amendments were made to this agreement for MPEP the ongoing Investment Manager. Firstly, the High Watermark was increased by £811,430, being the 'S Share Fund's shortfall in total net assets from net asset value of £1 per 'S' Share, at 31 December 2009. Secondly, only 70% of any new investment made by MPEP after the merger will be added to the calculation of the Embedded Value and value of the Investment Manager's portfolio, for the purposes of assessing any excess. No fee is payable for the period ended 31 March 2010. 3. Taxation There is no tax charge for the period, as the Company has incurred taxable losses. 4. Recoverable VAT As at 30 September 2008, the directors considered it reasonably certain that the Company would obtain a repayment of VAT of not less than £462,702. This was based upon information supplied by the Company's current and former Investment Managers, and discussions with the Company's professional advisors as a result of the European Court of Justice ruling and subsequent HMRC briefing that management fees be exempt for VAT purposes. All of this amount has now been recovered (£124,779 was received in the period to 31 March 2010 with no amounts charged to the Income Statement in the period). The Board believe it is possible that additional amounts of VAT will be recoverable in due course but are unable at this stage to quantify the sums involved. Once this matter has been resolved, it is possible that further, relatively small amounts of VAT will be agreed as due to the Company, and recognised in these accounts. 5. Dividends on equity shares paid and payable Six months ended Six months ended Year ended 31 March 2010 31 March 2009 30 September 2009 £ £ £ `O' Share Fund `O' Shares - final paid 696,488 1,418,059 1,418,059 of 2p (31 March 2009 : 2p; 30 September 2009 : 4p) pence per share Under/(over) provision (4,050) - - re prior year OrdinaryShares (formerly 59,032 - - `S' Share Fund) Under/(over) provision (56) - - re prior year ------------------ ----------------- ----------------- 751,414 1,418,059 1,418,059 ------------------ ----------------- ----------------- 6. Basic and diluted earnings and return per share Six months ended 31 March 2010 Six months ended 31 March 2009 `O' Share `S' Share `O' Share `S' Share Fund * Fund * Total Fund Fund Total £ £ £ £ £ £ i) Total earnings 767,073 (4,416) 762,657 (992,616) (44,692) (1,037,308) after taxation: Basic earnings per 2.22 p (0.04)p (2.81)p (0.38)p share ii) Net revenue (84,695) (88,897) 132,488 44,287 from ordinary activities after taxation Revenue return per (0.24)p (0.75)p 0.38 p 0.38 p share Net unrealised 1,021,916 165,702 (1,028,110) (24,753) capital gains/ (losses) Net realised 36,403 1,039 20,000 - capital gains Income from - - 67,950 - capital dividends Recoverable VAT - - - - Capital expenses (206,551) (82,260) (184,944) (64,226) (net of taxation) -------------- -------------- -------------- -------------- -------------- -------------- iii) Total capital 851,768 84,481 (1,125,104) (88,979) return Capital return per 2.45 p 0.71 p (3.19)p (0.76)p share iv) Weighted 34,578,490 11,807,017 35,317,847 11,806,467 average number of shares in issue in the period Year ended 30 September 2009 `O' Share `S' Share Fund Fund Total £ £ £ i) Total earnings (3,067,355) (166,276) (3,233,631) after taxation: Basic earnings per (8.73)p (1.41)p share ii) Net revenue 182,551 11,132 from ordinary activities after taxation Revenue return per 0.52 p 0.09 p share Net unrealised (3,522,533) (24,753) capital gains/ (losses) Net realised 597,637 - capital gains Income from 67,950 - capital dividends Recoverable VAT - - Capital expenses (392,960) (152,655) (net of taxation) ---------------- ---------------- iii) Total capital (3,249,906) (177,408) return Capital return per (9.25)p (1.50)p share iv) Weighted 35,148,192 11,806,467 average number of shares in issue in the period Other than the performance related incentive, there are no instruments in place that will increase the number of shares in issue in future. Accordingly, the above figures currently represent both basic and diluted returns. *Due to the merger taking place on 29 March 2010, it has been deemed more informative to show figures on a per share basis. 7. Summary of movement on investments during the period Traded on AiM Unlisted or Preference Qualifying loans Total traded on PLUS Shares MARKETS £ £ £ £ £ Valuation at 1,908,798 9,000,829 25,403 8,955,298 19,890,328 30 September 2009 Purchases at cost - 245,184 2,326 1,568,177 1,815,687 Sales - proceeds - (873,539) (824) (532,118) (1,406,481) - realised gains - 27,446 - 20,084 47,530 Unrealised gains 97,645 198,227 8,333 883,413 1,187,618 ---------------- ---------------- ---------------- ---------------- ---------------- Valuation at 2,006,443 8,598,147 35,238 10,894,854 21,534,682 31 March 2010 Book cost at 4,466,693 8,972,139 169,190 12,689,523 26,297,545 31 March 2010 Unrealised losses (2,460,250) (290,182) (132,062) (1,326,427) (4,208,921) at 31 March 2010 Permanent - (83,811) (1,890) (468,241) (533,942) impairment of valuation of investments ---------------- ---------------- ---------------- ---------------- ---------------- 2,006,443 8,598,146 35,238 10,894,855 21,534,682 Gains on investments Realised losses - 98,101 - 66,136 164,237 based on historical cost Less amounts - 70,655 - 46,052 116,707 recognised as unrealised losses in previous years ---------------- ---------------- ---------------- ---------------- ---------------- Realised gains - 27,446 - 20,084 47,530 based on carrying value at 30 September 2009 Net movement in 97,645 198,227 - 883,413 1,187,618 unrealised depreciation in the period ---------------- ---------------- ---------------- ---------------- ---------------- Gains on 97,645 225,673 8,333 903,497 1,235,148 investments for the period ended 31 March 2010 Transaction costs of £10,088 were incurred in the period and are treated as realised gains on investments in the Income Statement. Deducting these from realised gains above gives £37,442 of gains as shown in the Income Statement. 8. Current asset investments Monies held pending 31 March 2010 31 March 2009 30 September investment 2009 Company Company Total Total Total £ £ £ Royal Bank of Scotland 2,642,764 3,084,750 4,251,045 Sterling Liquidity Fund Royal Bank of Scotland 93,725 92,983 93,515 Sterling Liquidity Fund plus Blackrock Investment 2,460,113 3,131,570 3,149,166 Management (UK) Institutional Sterling Fund Fidelity Institutional Cash 4,173,115 4,151,931 4,164,843 Fund Prime Rate Capital 1,002,346 - - Management LLP (UK based) Scottish Widows Investment 4,013,020 4,286,300 4,303,501 Partnership Sterling Liquidity Fund ---------------- ---------------- ---------------- Monies held pending 14,385,083 14,747,534 15,962,070 investment ---------------- ---------------- ---------------- These comprise investments in five Dublin based OEIC money market funds and one UK based as shown in the table above. £14,291,358 (31 March 2009: £14,654,551; 30 September 2009: £15,868,555) of this sum is subject to same day access, while £93,725 (31 March 2009: £92,983; 30 September 2009: £93,515) is subject to two day access. 9. Consolidation of 'O' and 'S' Share classes On 29 March 2010, the ordinary shares of 1p each in the capital of the Company (" 'O' Shares") were consolidated with the S ordinary shares of 1p each in the capital of the Company (" 'S' Shares"). A proportion of the 'O' Shares were redesignated as 'S' Shares, calculated by reference to the relative net asset values of each Share class as at 31 December 2009, adjusted for subsequent dividends paid to each class before the merger. The resultant 38,008,712 `S' Shares in issue, being 11,813,141 already in issue plus 26,195,571 created by the conversion, were then re-designated as Ordinary Shares in the capital of the Company. The residual balance of 8,371,657 'O' Fund shares not redesignated as 'S' shares were instead redesignated as deferred shares and bought back by the Company for an aggregate amount of 1p, cancelled as issued and redesignated as Ordinary Shares. The net asset values (NAV) of each Fund used for the purposes of conversion at the calculation date of 29 March 2010, and the resultant conversion ratios into Ordinary Shares were: NAV per share Conversion ratio applied to each 'O' Share to obtain new number of 'S' Shares 'O' Share Fund 70.20p 0.75784526 'S' Share Fund 92.63p 1.00000000 Share certificates reflecting the new shareholdings totalling 38,008,712 Ordinary Shares in the capital of the Company were sent to Shareholders on 5 April 2010. 10. Capital and reserves for the six months ended 31 March 2010 Called-up Share Capital Revaluation Special Profit &loss Total share premium redemption reserve reserve capital account reserve account £ £ £ £ £ £ £ At 1 October 466,309 308,614 73,017 (5,279,832) 27,952,006 12,362,983 35,883,097 2009 Shares bought (4,487) - 4,487 - (225,911) - (225,911) back Shares issued - - - - - - - Dividends 1,194 60,527 - - - - 61,721 re-invested into new shares Dividends paid - - - - - (751,414) (751,414) Loss - - - - (667,077) 667,077 - transferred between reserves Other expenses - - - - - (288,811) (288,811) net of taxation Net unrealised - - - 1,187,618 - - 1,187,618 gains on investments Deferred shares (83,716) - 83,716 - - - - bought back Gains on - - - - - 37,442 37,442 disposal of investments (net of transaction costs) Realisation of - - - (116,707) - 116,707 - previously unrealised appreciation Capital element - - - - - - - of VAT recoverable Loss for the - - - - - (173,592) (173,592) period --------- ---------- ------------- ------------- -------------- ------------- ------------- At 31 March 379,300 369,141 161,220 (4,208,921) 27,059,018 11,970,392 35,730,150 2010 --------- ---------- ------------- ------------- -------------- ------------- ------------- 11. Net asset value per share 31 March 2010 31 March 2009 30 September 2009 Ordinary Shares `O' Share `S' Share `O' Share `S' Share Total Fund Fund Fund Fund Net assets £ £ £ £ £ 35,730,150 27,068,820 11,122,800 24,881,881 11,001,216 Number of shares 37,929,970 35,055,303 11,806,467 34,824,397 11,806,467 in issue Net asset value 94.20p 77.22p 94.21p 71.45p 93.18p per share Diluted net asset 94.20p 77.22p 94.21p 71.45p 93.18p value per share Diluted NAV per share assumes that the Investment Manager's incentive fee is satisfied by the issue of additional shares. No incentive fee is expected to be triggered for the Company for the foreseeable future. 12. Related party transactions Christopher Moore is a shareholder in Oxonica plc ("Oxonica" in which the Company has invested £2,524,527 to the end of the year (total carrying value: £ nil). He owns 0.21% of the equity of Oxonica. Additionally, it has been agreed that Christopher Moore will cede 128,972 options into ordinary shares of Oxonica out of his options pool. These options are subject to performance conditions and lock in restrictions. The exercise price of the options is 45p. Oxonica ordinary shares are no longer listed on the AiM and the Company's own holding has been valued at nil. 13. The financial information for the six months ended 31 March 2010 and the six months ended 31 March 2009 has not been audited. The financial information contained in this half-yearly report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006.The financial statements for the year ended 30 September 2009 have been filed with the Registrar of Companies. The auditors have reported on these financial statements and that report was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006. 14. Copies of this statement are being sent to all shareholders. Further copies are available free of charge from the Company's registered office, One Vine Street, London, W1J OAH.

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