Annual Financial Report

Mobeus Income & Growth 2 VCT plc (formerly Matrix Income & Growth 2 VCT plc ("MIG2", "the Company" or "the Fund")) Annual Financial Report announcement for the year ended 30 April 2012 CHAIRMAN'S STATEMENT I am pleased to present the twelfth Annual Report of the Company, for the year ended 30 April 2012. The persistent uncertainty in the UK and global economies has continued to impact on the Company during the year under review. Although there are some positive economic indicators coming out of the United States, the UK economy is technically in recession. Most commentators are predicting a long road to meaningful economic recovery. Against this backdrop, the quoted UK equity market as represented by the FTSE All-Share Index was volatile and ended the year down 2.0% on a total return basis. Bearing in mind that many of the portfolio companies are valued by reference to the performance of companies trading in similar sectors within the FTSE All-Share Index, it is encouraging to note that the Company's NAV total return rose by 6.2%. Despite this difficult background, many of the companies in the portfolio continue to make good progress. Performance for the year ended 30 April 2012 The net asset value ("NAV") per share at 30 April 2012 is 98.7 pence (2011: 96.2 pence), an increase over the year of 2.5 pence (2011: increase of 8.7 pence). The total NAV return per share, including dividends paid to date, is now 112.7 pence (2011: 106.2 pence), an increase over the year of 6.5 pence or 6.2% (2011: increase of 13.7 pence, or 14.8%). This compares with the initial NAV per share, net of initial costs, of 94.5 pence at the date of the first issue of the `C' Share Fund (now the Ordinary Share Fund) representing a positive total return per share since the launch date of 1 9.3%. This increase is primarily a result of unrealised increases in the valuation of investments held, the partial disposal of DiGiCo Europe Limited ("DiGiCo") and a stronger revenue return. Performance of former share classes Shareholders should note that the performance data above relates to the one ordinary share class now in existence, which was formerly called the C share class, before the merger of the `O' and `C' Fund share classes on 10 September 2010. Shareholders in both the former `O' and `C' share classes may wish to see the performance of their own investment, and this is shown in the Financial Highlights in the Annual Report. Revenue and Capital returns for the year ended 30 April 2012 The results for the year ended 30 April 2012 are set out in the following pages. The total return (after tax) attributable to Ordinary Shareholders for the year was a profit of £1,333,109 (2011: £3,250,053), comprising a net capital return of £816,532 and a revenue return of £516,577. This improved performance for the year is mainly due to net increases of £0.95 million in the investment portfolio, and a much improved revenue return over last year. Portfolio Activity The portfolio continued to be dominated by investments in management buy-out situations ("MBOs"), which has risen to 63.8% of the portfolio, followed by 31.3% in acquisition companies, 3.7% in development capital and 1.2% invested in AIM investments. The portfolio is now invested in a wide range of market sectors with the largest of those being Support Services at 64.4%. There were three new investments completed during the year under review to finance the MBOs of Equip (including the Rab and Lowe Alpine brands), Ingleby (EMaC, a provider of outsourced service plans in the automotive sector), and Fullfield (Motorclean - vehicle cleaning and valet services) totalling some £3.1 million. A further £6 million was invested into six companies formed to enable investment into established trading entities, each led by experienced operating partners. There were three acquisition companies which had not been able to find suitable investment opportunities and which repaid £3 million. On 20 July 2012 funds of £907,762 held by Sawrey Limited, one of the Company's acquisition companies, were used to invest in the acquisition of Tessella Limited, an international provider of science-powered technology and consultancy services. Further investments were made into ASL to support the acquisition of the assets of a similar company, Transcribe Copier Systems Limited and into Monsal as part of a £1.75 million facility to continue supporting the turnaround of that company. The partial disposal of DiGiCo towards the end of 2011 has contributed to net cash proceeds of £5.4 million from portfolio realisations in the year. There were two partial loan stock repayments made during the period by Fullfield and Focus Pharma totalling £284k. Details of all these transactions are contained in the Investment Manager's Review below. Portfolio Review The portfolio experienced an encouraging period given the economic environment, and the value of the portfolio has increased by 6.7%, mainly due to the uplift from the partial sale of DiGiCo to ISIS Equity Partners. The Company has received total cash proceeds of £3 million over the life of this investment, representing a 3 times cash return to date. In addition, the Company continues to hold some loan stock and a small equity investment in this company, valued in total at £1.3 million. ATG Media, DiGiCo and Iglu.com continued to trade well, with ATG's valuation seeing an improvement of £711k over the period. The sale of Iglu.com subsequent to the year-end meant the Company received total cash proceeds of £2.5 million over the life of the investment, representing a total return on cost of 2.5 times in two and a half years. Two of the investments made this year (EMaC and Fullfield) have made a strong start. There are some companies that continue to find trading difficult, but overall the portfolio's performance is respectable, bearing in mind the economic backdrop in which these businesses are operating. The Company now holds 31 investments at the year-end, which were valued at 95.6% of cost. Details of these investments are provided in the Investment Manager's Review below. Income returns Revenue returns have been much stronger this year, generating a profit of £516,577 compared to £121,161 in 2011. The improvement in this revenue return is mainly due to two factors: Firstly, loan stock interest from investee companies rose to £789,960 (2011: £437,080), as several new investments generated new income, while several investee companies were able to resume payment of current interest. The annualised yield from loan stocks at valuation is now running at 4.9% (2011: 5.1%). Secondly, income from dividend receipts has also risen to £216,406 (2011: £128,033). Income this year was boosted by dividends from two main sources, namely DiGiCo and ATG. It should be noted that income returns have continued to be adversely affected by the low interest rates available on bank deposits and money-market funds. Total income from cash and money market funds was £36,458 (2011: £69,142). Underlying costs did not change significantly from the previous year (excluding merger costs of £52,928). Dividends The revenue account generated a net revenue gain for the year, as explained above, being 2.03 pence per share (2011: gain of 0.46p). Your Board declared an unchanged interim dividend totalling 4 pence per share, of which 2 pence was income and 2 pence was capital. The Board is not recommending a final dividend for the year under review. Share buy-backs During the year ended 30 April 2012, the Company continued to implement its buy-back policy and bought back 1,010,299 Ordinary Shares, representing 3.9% of the shares in issue at the start of the year totalling £668,744. These shares were subsequently cancelled by the Company. The shares above were bought back for an average price of 66.33 pence per share, at discounts to the net asset value at the date of each buyback ranging from 34.47% to 30.58%. These discounts totalled £317,740. This figure represents an increase in net asset value per share of 1.28p, based on the closing number of shares in issue at the year-end. Change of ownership at Mobeus Equity Partners, previously Matrix Private Equity Partners Since April 2004, the Company's Investment Manager, Mobeus Equity Partners LLP ("Mobeus") has been owned jointly by its executive partners and Matrix Group Limited ("Matrix"). On 12 January 2012, the executive partners reached an agreement to acquire Matrix's interest in the business and this led to the Investment Manager becoming a fully independent owner-managed firm. The acquisition was completed on 30 June 2012. The Board undertook a thorough review of the change of ownership before completion. It satisfied itself that the new entity has sufficient resources to discharge its responsibilities. The Company's arrangements with the Investment Manager, in particular its investment strategy and services, will not change. The Directors look forward to continuing to work with the Investment Manager to provide attractive long term returns on your Company investment, whilst reserving the Company's rights under the investment management agreement. Shareholder communication May I remind you that the Company continues to have its own website which is available at www.mig2vct.co.uk. Shareholders receive a twice-yearly Mobeus VCT Newsletter from the Investment Manager, approved by the Board. The Investment Manager held a second successful investor workshop on 25 January 2012. The workshop provided a forum for about 100 Mobeus VCT Shareholders to hear presentations from the Manager about its investment activity in greater depth and from a successful entrepreneur of one of the portfolio companies. It is intended that this will be an annual event, to which all Shareholders will be invited. Shareholders should also note that resolution 12 of the AGM seeks your approval to give the Board the option to communicate with you electronically in future. I would be interested in shareholders' views on this matter. Strategy Your board considers the Company's strategy at least annually. The main issues addressed are the investment objectives and policies, the role and performance of the Investment Manager and the methods of providing shareholders with a satisfactory return on their investment. As I set out in my Statement last year, we believe that all shareholders should be able to realise their investment in the fund within a reasonable period. In the absence of a liquid market for shares in VCTs, this can be achieved only by share buy-backs or liquidation. Our dividend policy is to try to pay a consistent annual dividend while maintaining the net asset value of the fund. We have rejected the policy of regularly issuing new shares to fund buy-backs at unrealistically low discounts mainly because each time new shares are issued, the vote by shareholders to continue the life of the fund is postponed for another 5 years, thereby depriving shareholders of the opportunity to realise their investment through a liquidation. The next renewal vote will be in September 2015. Our relatively passive buy-back policy is based on the belief that buy-backs should only be executed at a discount which balances the interests of the shareholders seeking to realise their investment with those of the continuing shareholders. We have set the Investment Manager a target of a minimum average compound annual total NAV return on the fund of 8% from 30 April 2010. The returns on the ordinary shares (formerly the C shares) for the two years to 30 April 2012 have been 14.8% for the first year and 6.2% for the second - an average of 10. 5% per annum. Outlook The relatively depressed state of the UK economy will inevitably affect the investments held by your Company over the coming year. Smaller companies can be particularly sensitive to the economic environment and only companies with robust business models will prosper. The Company has an adequate cash position to support portfolio companies where merited and will use the acquisition companies to take advantage of attractive new investment opportunities that present themselves. The Investment Manager continues to investigate a number of investment opportunities at realistic purchase levels. The Board believes that the Company's strategy of investing in established businesses, and structuring investments to include loan stock, will continue to mitigate downside risk. This should contribute to enhancing the Company's performance and help to achieve the objective of attractive dividend payout levels. Conclusion I would like to express my thanks to all Shareholders for your continuing support of the Company. I hope to have the opportunity of meeting you at the Annual General Meeting on 6 September 2012. Nigel Melville Chairman 24 July 2012 SUMMARY OF THE STATEMENT OF DIRECTORS' RESPONSIBILITIES REPORT The Directors confirm to the best of their knowledge that: (a) that the financial statements, which have been prepared in accordance with UK Generally Accepted Accounting Practice and the 2009 Statement of Recommended Practice, `Financial Statements of Investment Trust Companies and Venture Capital Trusts'(SORP), give a true and fair view of the assets, liabilities, financial position and the profit or loss of the Company; and (b) that the management report, comprising the Chairman's Statement, Investment Portfolio Summary, Investment Manager's Review and Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces. The names and functions of the Directors are stated in the Annual Report. For and on behalf of the Board: Nigel Melville Chairman 24 July 2012 INVESTMENT OBJECTIVE Mobeus Income & Growth 2 VCT plc (formerly Matrix Income & Growth 2 VCT plc ("MIG2", the "Company" or the "Fund") is a Venture Capital Trust ("VCT") managed by Mobeus Equity Partners LLP, previously Matrix Private Equity Partners LLP ("Mobeus"), investing primarily in established, profitable, unquoted companies. The Company's objective is to provide investors with a regular income stream, arising both from the income generated by the companies selected for the portfolio and from realising any growth in capital. Mobeus Income & Growth 2 VCT has satisfied the requirements as a Venture Capital Trust under section 274 of the Income Tax Act 2007 ("ITA") and the Directors intend to conduct the business of the Company so as to continue to comply with that section. INVESTMENT POLICY The VCT's policy is to invest primarily in a diverse portfolio of UK established, profitable, unquoted companies in order to generate capital gains from trade sales and flotations. Investments are structured as part loan and part equity in order to receive regular income and to provide downside protection in the event of under-performance. Investments are made selectively across a number of sectors, including management buy-out transactions (MBOs) i.e. to support incumbent management teams in acquiring the business they manage but do not own. Investments are primarily made in companies that are established and profitable. Uninvested funds are held in cash and low risk money market funds. UK Companies The companies in which investments are made must have no more than £15 million of gross assets at the time of investment to be classed as a VCT qualifying holding. VCT regulation The investment policy is designed to ensure that the VCT continues to qualify and is approved as a VCT by HMRC. Amongst other conditions, the VCT may not invest more than 15% of its investments in a single company and must achieve at least 70% by value of its investments throughout the period in shares or securities in qualifying holdings, of which a minimum overall of 30% by value must be ordinary shares which carry no preferential rights. In addition, although the VCT 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 qualifying company in ordinary shares which carry no preferential rights (save as may be permitted under VCT rules). The VCT regulations in respect of funds raised after 6 April 2011 have changed, such that 70% of such funds must be invested in equity. Asset mix The Investment Manager aims to hold approximately 80% by value of the VCT's investments in qualifying holdings. The balance of the portfolio is held in readily realisable interest bearing investments and deposits. 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 £2 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 VCT aims to invest alongside three other VCTs advised by the Investment Manager with a similar investment policy. This enables the VCT to participate in larger combined investments by the Investment Manager. Borrowing The VCT has no borrowing and does not have any current plans for future borrowings. Management The Board has overall responsibility for the Company's affairs including the determination of its investment policy. Investment and divestment proposals are originated, negotiated and recommended by the Manager and are then subject to formal approval by the Directors. Mobeus Equity Partners LLP provides Company Secretarial and Accountancy services to the VCT. ------ Impact of changes to the VCT tax rules on the VCT's investment policy Changes to the VCT tax legislation, were introduced with effect from 6 April 2012 as part of the Finance Act 2012. The changes could impact on the Company's Investment Policy as follows: (1) The size of companies in which investment can be made has increased back to pre 6 April 2006 levels; companies can have gross assets of up to £15 million immediately before and £16 million immediately after the investment. (2) The maximum number of permitted employees for an investee company at the time of investment is proposed to be increased from fewer than 50 to fewer than 250 (this limit does not apply to VCT funds raised before 6 April 2007). (3) The £1 million limit on the amount of investment a VCT may make into a particular company within a tax year has been abolished, except where that company trades in partnership or has a joint venture. A new rule requires that an investee company should not receive more than £5 million from State Aid sources, including VCTs, within a twelve month period ending on the date of the VCT's investment. (4) It is no longer possible for the Manager to carry out certain types of MBO transactions using funds raised after 5 April 2012. The Company still intends to use other types of MBO transactions and therefore does not anticipate that this change will have a significant impact on the Company's investment policy. FINANCIAL HIGHLIGHTS Merger of former share classes The net assets of the `O' and `C' Share Funds were merged to form one share class of Ordinary Shares on 10 September 2010. At that date the net assets of the merged entity were £24.2 million, which have increased to £24.5 million at 30 April 2012. PERFORMANCE SUMMARY Ordinary Shares of 1 penny (formerly C Shares until 10 September 2010) To help Shareholders understand the recent past performance of their investment, comparative data is shown below. Total return (NAV basis) comprises NAV per share plus cumulative dividends paid per share:- Net Total return cumulative (NAV basis) Share price dividends per share to total return Net NAV per paid per shareholders Share to assets Share share since launch price2 shareholders (£m) (p) (p) (p) (p) Ordinary Share Fund (formerly C Share Fund until 10 September 2010) As at 30 April 2012 24.5 98.7 14 112.7 67 81 As at 30 April 2011 24.9 96.2 10 106.2 62 72 As at 30 April 2010 15.2 87.5 5 92.5 57.5 62.5 At close of Offer for subscription in 2005 8.7 94.5 - - - - Former Ordinary Share Fund (raised in 2000/2001) As at 30 April 2012 - 81.6 33.4 115.0 - - As at 30 April 2011 - 79.5 30.1 109.6 - - As at 30 April 2010 8.1 72.1 26.8 98.9 40.5 67.3 At close of Offer for subscription in 2001 12.4 94 - - - - 1 Source: London Stock Exchange Return before and after income tax relief The table below shows the NAV total returns at 30 April 2012 for a shareholder that invested £10,000 in each fundraising undertaken by the Company: Fundraising 2000/2001 2005/2006 2008/2009 Issue price per share (p) 100p 100p 92.4p Number of shares held 8,270 10,000 10,823 Net asset value (NAV) at 30 April 8,163 9,871 10,683 2012 (£) Dividends paid to shareholder since 3,341 1,400 1,082 subscription (£) NAV total return to shareholder since 11,504 11,271 11,765 subscription (£) Percentage change in NAV total return 4.9% 6.2% 6.4% from last year Profit before income tax relief (£) 1,504 1,271 1,7 65 Income tax relief (£) 2,000 4,000 3,000 Cost net of income tax relief (£) 8,000 6,000 7,000 ----- ----- ----- Profit after income tax relief (£)1 3,504 5,271 4,765 ===== ===== ===== 1 NAV total return minus cost net of income tax relief 2 Additional capital gains tax deferral relief of up to £4,000 available to qualifying shareholders. Dividend history Ordinary Share Formerly Fund Ordinary (formerly Share Fund `C' share (p) per fund) (p) In respect of year ended Payment date share per share 30 April 2012 (interim) 20-Apr-12 3.31* 4.00 30 April 2011 (interim) 20-Apr-11 3.31* 4.00 30 April 2010 (interim) 13-Aug-10 - 1.00 30 April 2009 19-Sep-09 - 1.00 30 April 2008 (interim) 23-Jul-08 6 2.50 30 April 2007 19-Sep-07 6 1.50 30 April 2006 (interim) 08-Feb-06 6 - 30 April 2006 (interim) 20-Oct-05 6 - 30 April 2003 24-Sep-03 0.51 - 30 April 2002 16-Sep-02 1.35 - 30 April 2001 10-Sep-01 0.93 - ----- ----- Cumulative dividends paid 33.41 14 ===== ===== * Payments made after the share class merger on 10 September 2010 have been adjusted using the ratio of 0.827 used to convert former Ordinary Share Fund shares into the current Ordinary Shares. Share buy-backs The Company held approximately £2.2 million in readily realisable assets that are available for further investments, dividends and share buy-backs. The discount for the Company's shares at 30 April 2012 was 33.56% based on the NAV per share at 31 January 2012 of 100.84 pence, which was the latest published figure at that time. 1,010,299 shares were bought back at a total cost of £668,744, representing a discount to the net asset value prevailing at the time of each buy back totalling £317,740. This figure represents an increase in net asset value per share of 1.28p, based on the closing number of shares in issue at the year -end. INVESTMENT MANAGER'S REVIEW Overview We are continuing to see good quality, realistically priced investment opportunities and are finding that management buy-out ("MBO") teams are increasingly turning to us as a source of deliverable, long-term finance as an alternative to bank funding. We are therefore pleased with and encouraged by the current level of deal flow, enabling us to pursue a number of deals which we expect to come to fruition over the coming months. We are also discussing a number of interesting realisation opportunities with both trade and private equity investors as the lack of bank funding continues. We believe that the Company's strategy of investing in modestly-geared MBO opportunities, supporting highly motivated management teams, focusing on acquiring established, profitable, positive cashflow businesses and investing partly in income yielding loan stocks substantially increases the degree of downside protection to Shareholders' capital. We have continued to work actively with the management teams of investee companies, encouraging them to take cost cutting measures and discussing their budgets, forecasts and cost structure with them to ensure that their businesses remain as resilient as possible. The majority of investee companies have managed their cashflow well and remain cash-generative. New investment Three new investments were completed during the year under review totalling £3.1 million, one of which used the VCT's existing investment of £1 million in the acquisition vehicle Vanir. In July 2011, the first of the three new investments was completed by the Company when it provided £1,160,549 into Fullfield to enable it to support the MBO of Motorclean Group Limited, a provider of vehicle cleaning and valet services to the car dealership market. At the year end, the cost of the Company's investment in this company is £1,083,179 (after it prepaid £77,370 of its loan stock). In October, the Company made an investment of £817,185 as part of a £7.8 million transaction to support the acquisition of the international intellectual property and asset of Lowe Alpine Srl from administration in Italy, by Equip Outdoor Technologies Limited, a company specialising in owning and distributing brands focused on the outdoor sector, including the Rab brand. Finally the Company invested a further £95,723 into the acquisition vehicle Vanir to support the MBO of EMaC Limited, the UK's leading provider of outsourced service plans to franchised dealers in the automotive sector, bringing the Company's investment in this company to £1,095,723. The Operating Partner programme as a whole has continued to generate successful investments for the Company and accordingly six new acquisition vehicle investments have been made in the year, bringing the total invested to £7 million. Three of the Company's investments in acquisition vehicles were realised during the period as in our view insufficient progress was being made in negotiating suitable, attractive investment opportunities. Each of these acquisition vehicles is headed by experienced operating partners, well-known to us, who are working closely with us in seeking to identify and complete investments in specific sectors relevant to their industry knowledge and experience. Indeed, on 20 July 2012, funds of £907,762 held in Sawrey Limited were used to invest in the acquisition of Tessella Limited, an international provider of science-powered technology and consulting services. We anticipate that the Operating Partner programme will lead to further new investments in the coming financial year. Follow-on investment In June 2011, a further £360,265 in total was invested in the loan stock of ASL Technology Holdings Limited, making the total investment in ASL Technology Holdings £1,360,130, to finance its acquisition of Transcribe Copier Systems Limited, as part of its strategy to be a coordinator in this sector. The resilience of the investment portfolio is demonstrated by the fact that Monsal is the only investment in the portfolio that has required further working capital funding during the year under review. Earlier in the year, Monsal was experiencing completion delays on an existing contract and in the commissioning of new contracts. These delays led to a requirement for additional funding and, following careful consideration, your Company approved a further loan stock investment of up to £179,425 as part of a £1.75 million fundraising alongside other Mobeus VCTs and other shareholders. Three tranches of this new funding round, totalling £76,897, have been drawn down to date in separate tranches in July and August 2011; these investments are held at cost. The terms of this new investment round provided for it to rank ahead of the existing investment. With this additional funding, Monsal now has the ability to pursue a number of major contracts in the waste and water sector which will make the potential for recovery of value in the original investment a more realistic prospect. Encouragingly, since approval of this facility Monsal has materially advanced its negotiations on a number of new contracts, and its order book stands at a record level. Following the period-end, in June 2012, the Company made a further investment into PXP of £57,143. The original investment has been valued at nil, but this additional investment is expected to generate a positive return. Realisations In the prevailing economic circumstances, we are pleased to report a healthy level of realisations. During the year these have generated net cash proceeds of £2,424,329 (excluding acquisition company loan repayments of £2,997,000). Several companies in the portfolio continue to be strongly cash generative, and two partially repaid their loan stock during the year to 30 April 2012, returning a total of £283,695 to the Company. The payments received were: £206,325 from Focus Pharma Holdings and £77,370 from Fullfield, both in January 2012. In December 2011 the Company made a partial realisation of its investment in DiGiCo Europe Limited ("DiGiCo") through a sale to ISIS Equity Partners. This realisation increased the total cash proceeds received by the Company over the life of the investment by £2,139,808 to £3,024,832, representing a 3.0 times cash return on the Company's original investment of £1.0 million. In addition, the VCT retains a 2.4% equity stake, and new loan stock in DiGiCo, together valued at £1,334,291 at the date of completion of the transaction and the year-end. The total return to date thus equates to approximately £4.4 million; a 4.4 times return on the Company's original investment. DiGiCo is a leading manufacturer and distributor of sound mixing consoles used at major corporate and sporting events worldwide. Its sustained strong profit growth since investment has been largely driven by product development and a series of successful launches. DiGiCo is a good example of how a properly financed business with strong management and a market-leading product can develop a niche opportunity and grow significant value. The Portfolio The Mobeus invested portfolio at 30 April 2012 comprised thirty-one investments (2011: twenty-six) with a cost of £23.3 million (2011: £17.2 million) and valued at £22.3 million (2011: £18.0 million), representing 95. 6% of cost (2011: 104.7%). The portfolio's performance as a whole continues to be robust. DiGiCo, Iglu.com Holidays and ATG Media have once again produced the strongest performances and this is reflected in their valuations. We are pleased that the sale of Iglu.com just after the year-end contributed further proceeds of £1,455,265, making a total of £2,530,414 received by the Company over the time the investment was held , achieving a return of 2.5 times cost in only two and a half years. Many other portfolio companies have also continued to increase sales and profits despite the challenges of the economic environment. Of the new investments made during the year, Fullfield (Motorclean Group) and Ingleby (EMaC) have both made promising starts. EMaC is currently trading ahead of investment plan. Fullfield is performing in line with expectations. EOTH (Rab and Lowe Alpine), however, has experienced a lower level of growth than expected since investment, reflecting the recent problems affecting the retail leisure goods sector. DiGiCo and ATG Media have continued to grow revenue and profitability which has contributed to their higher valuations. Following the partial realisation of DiGiCo, the bulk of the value of the investment is in the form of loan stock. Focus Pharma continues to trade well, although it ended its last full financial year behind a stretching budget. It expects to progress further with several further product launches planned for 2012. Other companies are still endeavouring to recover fully from the effects of the recession. Activity in the construction and house building sectors remains well below historical levels. This continues to affect the performance of Plastic Surgeon. Nonetheless, it has made considerable inroads into new markets which have driven growth in profitability and are expected to continue to develop. Elsewhere the position is more mixed. Although Youngman has now fully repaid its bank debt, demand in the wider construction sector remains volatile and difficult to predict. Blaze Signs continues to consolidate its recovery and is starting to benefit from some contract gains whilst profitability remains well below peak levels. Westway suffered from lower revenues last year but is now growing profits again and has strong customer relationships. ASL has now integrated Transcribe, which is trading well, but the group's overall performance is lagging its investment plan. RDL had a disappointing first year with a net reduction in contract staff placements in its core pharmaceuticals and IT markets but has taken measures to improve performance. Faversham is streamlining its operations although progress is slower than anticipated. Of the Company's investments more directly exposed to the consumer, CB Imports has continued to advance its position in a difficult floristry supplies market and has started its trading year strongly. Racoon continues to generate solid profitability. British International has experienced a disappointing period after record profitability in 2010 achieved on the back of high activity in oil and gas support work. The oil support work in the Falklands ended in May last year and has not been replaced by other contracts. In addition the long term decline in passenger numbers on the Penzance to Isles of Scilly passenger route has continued. Your Company's investment is, however, well underpinned by British International's assets. Our strategy remains to invest in strong, profitable companies and we consider that the prospect of further recovery and progress over the medium term is good. We believe that the portfolio, taken as a whole, is resilient and of high quality. Outlook The outlook for the UK economy is uncertain but we have been encouraged by developments in the last year in our market sector. The coming year may prove more testing as the public sector cuts continue and the economy struggles to achieve any growth. We consider that good quality companies, prudently financed and capable of maintaining competitive advantage, still have the potential to succeed in this environment. The difficult economic outlook and the volatility in the quoted markets will inevitably continue to have an impact on the unrealised valuations of the companies in the portfolio. However, we believe that the portfolio has the capability to deliver growth in value which will be released in the long term. Our strategy of investing primarily in MBOs and structuring investments to include loan stock will continue to mitigate downside risk. Uninvested cash retained by the Company has fallen in the year, but should be adequate to support portfolio companies should the need arise. Cash in the acquisition companies will be used to invest in attractive new opportunities. Alongside this, the Investment Manager is conscious of the need to ensure that investee companies take appropriate actions to respond to the challenging environment ahead. Details of the Company's ten largest investments by value (excluding the seven acquisition companies), representing 43.6% by cost and 54.7% by value of the portfolio, are set in the Annual Report. INVESTMENT PORTFOLIO SUMMARY As at 30 April 2012 % of net Date of first Total Book Valuation Disposals Valuation Change in assets investment / cost at 30 at 30 April Additions at at 30 valuation by Sector April 2012 2011 at cost valuation April 2012 for year value £ £ £ £ £ £ QUALIFTYING INVESTMENTS AIM quoted investments Omega December 2010 214,998 237,394 - - 259,789 22,395 1.1% Diagnostics Group plc In vitro Pharmaceuticals diagnostics for food intolerance, auto-immune diseases and infectious diseases Vphase plc March 2001 254,586 1,774 - - 1,014 (760) 0.0% (formerly Flightstore Group plc) Development of Electronic and energy saving electrical devices for equipment domestic use Fuse 8 plc March 2004 250,000 7,000 - - - (7,000) 0.0% (Award International Holdings plc) Promotional Support goods and Services services agency ----- ----- ----- ----- ----- ----- ----- 719,584 246,168 - - 260,803 14,635 1.1% Unquoted investments ATG Media October 2008 768,011 1,154,838 104 1,866,354 711,412 7.6% Holdings Limited Publisher and Media online auction platform operator Iglu.com December 2009 152,326 923,815 - - 1,455,265 531,450 5.9% Holidays Limited Online ski and Retail cruise travel agent Blaze Signs April 2006 1,398,498 1,543,170 - - 1,422,619 (120,551) 5.8% Holdings Limited Manufacturing Support and services installation of signs Ingleby (1879) October 2008 1,095,723 1,000,000 95,723 - 1,095,723 - 4.5% Limited trading as EMaC Limited (formerly Vanir Consultants Limited) Service plans Support for the motor services trade Fullfield July 2011 1,000,000 - 1,000,000 - 1,062,194 62,194 4.3% Limited trading as Motorclean Limited Vehicle Support cleaning and services valet services British June 2006 1,000,000 1,401,854 - - 1,005,644 (396,210) 4.1% International Holdings Limited Helicopter Support service services operators Ackling January 2012 1,000,000 - 1,000,000 - 1,000,000 - 4.1% Management Limited Food Food production manufacturing, & distribution distribution and brand management Almsworthy March 2012 1,000,000 - 1,000,000 - 1,000,000 - 4.1% Trading Limited Specialist Support construction, services building support services, building products and related services Peddars January 2012 1,000,000 - 1,000,000 - 1,000,000 - 4.1% Management Limited Database Support management, services mapping, data mapping and management services to legal and building industries Culbone Trading April 2012 1,000,000 - 1,000,000 - 1,000,000 - 4.1% Limited Outsourced Support services services Fosse January 2012 1,000,000 - 1,000,000 - 1,000,000 - 4.1% Management Limited Brand Support management, services consumer products and retail Madacombe April 2012 1,000,000 - 1,000,000 - 1,000,000 - 4.1% Trading Limited Engineering Support services services Sawrey Limited March 2011 1,000,000 1,000,000 - - 1,000,000 - 4.1% Marketing Support services and services media RDL Recruitment October 2010 1,000,000 1,000,000 - - 921,169 (78,831) 3.8% Limited (formerly Aust Recruitment Group Limited) Recruitment Support consultants for services the pharmaceutical, business intelligence and IT industries EOTH Limited October 2011 817,185 - 817,185 - 817,185 - 3.3% trading as Equip Outdoor Technologies Limited Branded outdoor General equipment and retailers clothing ASL Technology December 2010 1,360,130 999,865 360,265 - 801,951 (558,179) 3.3% Holdings Limited Printer and Support photocopier services services Youngman Group October 2005 1,000,052 699,966 - - 699,966 - 2.9% Limited Manufacturer of Support ladders and services access towers Focus Pharma October 2007 517,827 1,026,860 - 206,325 578,529 (242,006) 2.4% Holdings Limited Licensor and Support distributer of services generic pharmaceuticals Machineworks April 2006 25,727 581,802 - - 550,340 (31,462) 2.2% Software Limited Software for Software and CAM and machine Computer tool vendors Services Racoon December 2006 878,527 469,359 - - 254,441 (214,918) 1.0% International Holdings Limited Supplier of Personal goods hair extensions, hair care products and training Faversham House December 2010 374,870 374,870 - - 216,647 (158,223) 0.9% Publisher, Media exhibition organiser and operator of websites for the environmental, visual communications and building services sectors The Plastic April 2008 392,264 98,067 - - 203,433 105,366 0.8% Surgeon Holdings Limited Snagging and Support finishing of services domestic and commercial properties Vectair January 2006 60,293 204,750 - - 154,045 (50,705) 0.6% Holdings Limited Design and sale Support of washroom services products Lightworks April 2006 25,727 73,372 - - 116,629 43,257 0.5% Software Limited Software for Software and CAD vendors Computer Services Monsal Holdings December 2007 847,614 - 76,897 - 76,897 - 0.2% Limited Supplier of Engineering engineering services to the water and waste sectors DiGiCo Europe July 2007 - 1,907,395 - 1,907,395 - 1,331,900 0.0% Limited) Design and Technology, manufacture of hardware and audio mixing equipment desks PXP Holdings December 2006 1,163,436 - - - - - 0.0% Limited (Pinewood Structures) Design, Construction manufacture and supply of timber frames for buildings Legion Group August 2005 150,000 - - - - - 0.0% plc (formerly SectorGuard plc) Provision of Support manned Services guarding, mobile patrolling, and alarm response services Backbarrow April 2010 - 1,000,000 - 1,000,000 - - 0.0% Limited Food Support manufacturing, services distribution and brand management Rusland April 2011 - 1,000,000 - 1,000,000 - - 0.0% Management Limited Brand Support management, services consumer products and retail Torvar Limited April 2011 - 1,000,000 - 1,000,000 - - 0.0% Database Support management, services mapping, data mapping and management services to legal and building industries ----- ----- ----- ----- ----- ----- ----- 21,028,210 17,459,983 8,350,174 5,113,720 20,299,031 934,494 82.8% ----- ----- ----- ----- ----- ----- ----- Total 21,747,794 17,706,151 8,350,174 5,113,720 20,559,834 949,129 83.9%1 qualifying investments ----- ----- ----- ----- ----- ----- ----- NON QUALIFYING INVESTMENTS Money market 2,099,906 6,538,497 2,099,906 8.6% funds 2 Newincco 1124 December 2011 1,334,291 - 1,334,291 - 1,334,291 - 5.4% Limited (trading as DiGiCo Europe Limited) Design and Technology, manufacture of hardware and audio mixing equipment desks British 160,000 320,000 - 320,000 - 1.3% International Holdings Limited Fullfield 83,179 - 160,549 77,370 83,179 - 0.3% Limited trading as Motorclean Limited Cash 79,786 76,291 79,786 0.3% Legion Group 106 - - - - - 0.0% plc (formerly SectorGuard plc) ----- ----- ----- ----- ----- ----- ----- Total 3,757,268 6,934,788 1,494,840 77,370 3,917,162 - 15.9% non-qualifying investments ----- ----- ----- ----- ----- ----- ----- Debtors 213,610 441,684 213,610 0.9% Creditors (163,967) (218,655) (163,967) (0.7)% ----- ----- ----- ----- ----- ----- ----- Net assets 25,554,705 24,863,968 9,845,014 5,191,090 24,526,639 949,129 100.0% ===== ===== ===== ===== ===== ===== ===== 1 As at 30 April 2012, the Company held more than 70% of its total investments in qualifying holdings, and therefore complied with the VCT Investment test. 2 Disclosed within Non-current assets as Monies held pending investment in the Balance Sheet INCOME STATEMENT For the year ended 30 April 2012 Year ended 30 April 2012 Year ended 30 April 2011 Notes Revenue Capital Total Revenue Capital Total £ £ £ £ £ £ ----- ----- ----- ----- ----- ----- Unrealised gains on investments 5 - 949,129 949,129 - 2,911,008 2,911,008 Realised gains on investments 5 - 230,239 230,239 - 624,055 624,055 Income 1,042,824 - 1,042,824 637,008 - 637,008 Investment management fees (152,221) (456,662) (608,883) (139,450) (418,352) (557,802) Other expenses (280,200) - (280,200) (311,288) - (311,288) Share merger costs - - - (52,928) - (52,928) ----- ----- ----- ----- ----- ----- Profit on ordinary activities before taxation 610,403 722,706 1,333,109 133,342 3,116,711 3,250,053 Taxation on profit on ordinary activities (93,826) 93,826 - (12,181) 12,181 - ----- ----- ----- ----- ----- ----- Profit on ordinary activities after taxation 516,577 816,532 1,333,109 121,161 3,128,892 3,250,053 ===== ===== ===== ===== ===== ===== Basic and diluted earnings per share: Ordinary shares 5 2.03p 3.20p 5.23p 0.46p 12.03p 12.49p All the items in the above statement derive from continuingoperations. There were no other gains or losses in the year. The total column of this statement is the profit and loss account of the Company. Other than revaluation movements arising on investments held at fair value through the profit and loss, there were no differences between the profit/(loss) as stated above and historical cost. BALANCE SHEET As at 30 April 2012 Notes 30 April 2012 30 April 2011 £ £ Fixed assets Investments at fair value 22,297,304 18,026,151 Current assets Debtors and prepayments 213,610 441,684 Current Investments 2,099,906 6,538,497 Cash at bank 79,786 76,291 ----- ----- 2,393,302 7,056,472 Creditors: amounts falling due within one year (163,967) (218,655) ----- ----- Net current assets 2,229,335 6,837,817 ----- ----- Net assets 24,526,639 24,863,968 ===== ===== Capital and reserves Called up share capital 248,475 258,578 Capital redemption reserve 58,172 48,069 Share premium account - - Revaluation reserve 1,478,804 1,230,469 Special distributable reserve 14,449,546 16,258,990 Profit and loss account 6 8,291,642 7,067,862 ----- ----- Equity shareholders' funds 24,526,639 24,863,968 ===== ===== Net asset value per share - basic and diluted Ordinary Shares 16 98.71p 96.16p RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS For the year ended 30 April 2012 Year ended Year ended Notes 30 April 2012 30 April 2011 £ £ Opening shareholders' funds 24,863,968 23,290,949 Share capital bought back (668,744) (457,264) Profit for the year 1,333,109 3,250,053 Dividends paid in year 4 (1,001,694) (1,219,770) ----- ----- Closing shareholders' funds 24,526,639 24,863,968 ===== ===== CASH FLOW STATEMENT For the year ended 30 April 2012 Year ended Year ended 30 April 2012 30 April 2011 Notes £ £ Interest income received 671,990 415,334 Dividend income 241,452 199,037 Other income - 2,753 Investment management fees paid (608,883) (557,802) Share merger costs paid by the Company - (49,988) Cash payments for other expenses (280,803) (320,136) ----- ----- Net cash inflow/(outflow) from operating activities 23,756 (310,802) Investing activities Purchase of investments (8,152,849) (5,951,715) Disposals of investments 5,421,329 2,631,829 ----- ----- Net cash outflow from investing activities (2,731,520) (3,319,886) Dividends Equity dividends paid 4 (1,001,694) (1,219,770) ----- ----- Cash outflow before financing and liquid resource (3,709,458) (4,850,458) management Financing Purchase of own shares (725,638) (375,591) ----- ----- Net cash outflow from financing (725,638) (375,591) Management of liquid resources Decrease in monies held in current investments 18 4,438,591 5,213,916 ----- ----- Increase/(decrease) in cash for the year 18 3,495 (12,133) ===== ===== NOTES TO THE ACCOUNTS For the year ended 30 April 2012 1) Basis of accounting The accounts have been prepared under UK Generally Accepted Accounting Practice (UK GAAP) and the Statement of Recommended Practice, `Financial Statements of Investment Trust Companies and Venture Capital Trusts' ("the SORP") issued by the Association of Investment Companies in January 2009. 2) Income 2012 2011 £ £ Income from bank deposits 764 94 ----- ----- Income from investments - from equities 216,406 128,033 - from overseas based OEICs 22,552 44,900 - from UK based OEICs 13,142 24,148 - from loan stock 789,960 437,080 ----- ----- 1,042,060 634,161 ===== ===== Other income - 2,753 ----- ----- Total income 1,042,824 637,008 ===== ===== Total income comprises Dividends 252,100 197,081 Interest 790,724 437,174 Other - 2,753 ----- ----- 1,042,824 637,008 ===== ===== Income from investments comprises Listed overseas securities 22,552 44,900 Unlisted UK securities 229,548 152,181 Loan stock interest 789,960 437,080 ----- ----- 1,042,060 634,161 ===== ===== Total loan stock interest due but not recognised in the year was £232,301 (2011: £353,940). 3) Investment management fees Revenue Capital Total Revenue Capital Total 2012 2012 2012 2011 2011 2011 £ £ £ £ £ £ Mobeus Equity Partners LLP (formerly Matrix Private Equity Partners LLP) 152,221 456,662 608,883 139,450 418,352 557,802 Under the terms of a revised investment management agreement dated 10 September 2010, Mobeus Equity Partners LLP ("Mobeus") (formerly called Matrix Private Equity Partners LLP ("MPEP") up to 30 June 2012) provides investment advisory, administrative and company secretarial services to the Company, for a fee of 2% per annum calculated on a quarterly basis by reference to the net assets at the end of the preceding quarter, plus a fee of £104,432 per annum, the latter being subject to changes in the retail prices index each year. This agreement replaced the previous agreements with MPEP dated 10 May 2000 and 20 September 2005, both novated to MPEP on 20 October 2006, and the accounting services agreement and the secretarial services agreement with Matrix-Securities Limited both dated 20 September 2005, all of which were terminated on 10 September 2010. In accordance with the policy statement published under "Management and Administration" in the Company's prospectus dated 10 May 2000, the Directors have charged 75% of the investment management expenses to the capital account. This is in line with the Board's expectation of the long-term split of returns from the investment portfolio of the Company. For the year ended 30 April 2012, the expense cap hasn't been breached (2011: £nil). It has been agreed that the existing performance fee arrangements should continue following the Share Merger, and operated as detailed below: Ordinary share fund - an entitlement to subscribe for New Ordinary Shares representing 16.67% (as reduced by 1.5% per annum as referred to in the Annual Report) of (i) the New Ordinary Shares which are derived from the original Ordinary Shares and (ii) the New Ordinary Shares the subject of the performance warrants; - subject to a hurdle of cumulative dividends amounting to 80p x A (where A is the C Shares merger NAV per share divided by the Ordinary Shares merger NAV per share) per New Ordinary Share - dividends paid prior to the Share merger will be restated taking into account the Share Merger for the purposes of assessing the amount of distributions paid. If the hurdle has not been reached by 22 December 2012, the performance warrants will lapse as the agreement envisages. The above provides for the entitlement and hurdle to be appropriately applied to the relevant proportion of the New Ordinary Shares represented by the original Ordinary Shares fund and at a hurdle rate taking into account the revised number of shares attributable to such fund. At the date of the Share Merger, the hurdle became 96.73p per share (40.39p of which having been paid by 30 April 2012) and the conditional warrants entitlement would be to 1,509,718 shares. C share fund - the performance incentive fee payable will be calculated as an amount equivalent to 20% of the excess of annual dividends paid to the holders of New Ordinary Shares but then reduced to the proportion which the C Shares aggregate merger net asset value represents of the entire merger net asset value of the Company; and - the dividend shortfall per former C Share at 30 April 2012 is 19.36 p (£3,129,734 in aggregate, being 65.1 % of the total shortfall at the year-end (where 65.1% was the share of C shares to the total number of shares in issue at the date of the Share Merger) and taking into account the target rate of dividends and the dividends paid to shareholders. The 6p annual dividend hurdle (as adjusted for RPI) and the £1 NAV maintenance provisions will continue to apply in respect of shares in issue and funds raised at the date of the Share Merger. 4) Dividends The Directors are not recommending a final income dividend for Ordinary Shareholders. The Company, however, declared an interim dividend of 4 pence per Ordinary Share made up of capital dividend of 2 pence and an interim income dividend of 2 pence per Share for the year ended 30 April 2012. The dividend was paid on 20 April 2012 to Shareholders on the register on 30 March 2012. 5) Basic and diluted earnings and return per share 2012 2011 Ordinary Ordinary Shares Shares £ £ Total earnings after taxation: 1,333,109 3,250,053 Basic and diluted earnings per share (note a) 5.23p 12.49p ----- ----- Net revenue from ordinary activities after taxation 516,577 121,161 Basic and diluted revenue earnings per share (note b) 2.03p 0.46p ----- ----- Net realised capital gains 230,239 624,055 Net unrealised capital gains 949,129 2,911,008 Capital expenses (net of taxation) (362,836) (406,171) ----- ----- Total capital return 816,532 3,128,892 Basic and diluted capital earnings per share (note c) 3.20p 12.03p ----- ----- Weighted average number of shares in issue in the year 25,484,692 26,015,053 Notes: a) Basic earnings per share is total earnings after taxation divided by the weighted average number of shares in issue. b) Revenue earnings per share is the revenue return after taxation divided by the weighted average number of shares in issue. c) Capital earnings per share is the total capital return after taxation divided by the weighted average number of shares in issue. d) There are no instruments that will increase the number of shares in issue in future. Accordingly, the above figures currently represent both basic and diluted returns. The Board consider that the likelihood of the issue of performance warrants by the Ordinary Share Fund, as referred to in Note 3 of the published Annual Report, is low. Accordingly, the potential impact of the issue of these warrants upon diluted earnings per share has been ignored for this purpose. 6) Basic and diluted net asset value per share Net asset value per Ordinary Share is based on net assets at the end of the year, and on 24,847,465 (2011: 25,857,764) Ordinary Shares, being the number of Ordinary Shares in issue on that date. 7) Related party transactions On 12 January 2012, MPEP's executive partners, being the holders of a 50% interest in MPEP, agreed to purchase the 50% interest held by MPE Partners Limited. The transaction completed on 30 June 2012. Mobeus Equity Partners LLP (formerly Matrix Private Equity Partners LLP up to 30 June 2012) is the Company's Investment Manager in respect of venture capital investments and earned fees of £608,883 (2011: £557,802) in respect of investment management and, from 10 September 2010 onwards, Administration and Company Secretarial services. Kenneth Vere Nicoll is a shareholder of Matrix Group Limited, which owns Matrix-Securities Limited, MPE Partners Limited and Matrix CC Limited, the latter being a member of Matrix Corporate Capital LLP ("MCC"). MCC are the Company's brokers and fees of £12,000 (2011: £11,833) were charged for the period. Eight (2011: seven) share buybacks were undertaken by MCC on the Company's instruction totalling £668,744 (2011: £457,264). £24,394 (2011: £81,088) was due to MCC at the year-end. 8) Post balance sheet events On 31 May 2012, the entire holding in IGLU.com Holidays Limited was realised for net proceeds of £1,455,265. This has been reflected in the valuation of the portfolio at 30 April 2012. On 15 June 2012, a further £57,143 was invested in PXP Holdings Limited. On 20 July 2012, funds of £907,762 held by Sawrey Limited, one of the Company's acquisition companies, were used to invest in the acquisition of Tessella Limited, an international provider of science-powered technology and consultancy services. 9) Financial information These are not full accounts in terms of section 435 of the Companies Act 2006. The Annual Report for the year to 30 April 2012 will be sent to shareholders shortly and will then be available for inspection at 30 Haymarket, London SW1Y 4EX, the registered office of the Company. Copies of the Annual Report will be available in August at www.mig2vct.co.uk. Statutory accounts will be delivered to the Registrar of Companies after the Annual General Meeting. The auditors have reported on these accounts and their report was unqualified and did not contain a statement under section 498(2) of the Companies Act 2006. 10) Annual General Meeting The Annual General Meeting of the Company will be held at 12 noon on Thursday, 6 September 2012 at the Offices of Mobeus Equity Partners LLP, 30 Haymarket, London SW1Y 4EX. Contact details for further enquiries: Robert Brittain of Mobeus Equity Partners LLP (the Company Secretary) on 020 7024 7600 or by e-mail on mig2@mobeusequity.co.uk. Mark Wignall or Mike Walker at Mobeus Equity Partners LLP (the Investment Manager), on 020 7024 7600 or by e-mail on info@mobeusequity.co.uk.

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