Annual Report and Accounts

T2 Income Fund Limited 17 April 2007 T2 Income Fund Limited Consolidated and Company Annual Report and Audited Financial Statements For the year ended 31 December 2006 T2 Income Fund Limited (the 'Company') is pleased to announce its audited preliminary results for the one year period ending 31 December 2006. Copies of these financial statements will be sent to shareholders and will also be available, free of charge, from the offices of (Butterfield Fund Services (Guernsey) Limited, P.O. Box 211, Regency Court, Glategny Esplanade, St. Peter Port Guernsey GY1 3NQ.) Patrick Conroy T2 Income Fund Limited Phone: +1 203 983-5282 Mr. Philip Secrett Grant Thornton Corporate Finance Phone: +44 (0) 870 991 2578 CHAIRMAN'S STATEMENT As you are aware, the Company was launched in August 2005 when it raised net proceeds of £36.7 million of equity. As of 31 December 2006, the Company had invested assets of approximately £54 million. I am pleased to report that as of 31 March 2007, the Company has invested assets of approximately £83.6 million. This means that the Company is fully invested and has begun to leverage its assets to make new investments. As of 31 December 2006, the investments in the portfolio, on a weighted average basis, bear an interest rate of 10.4%, which is more than 500 basis points over LIBOR. In February 2007 the Directors of the Company increased the dividend to 2.0p per share for the fourth quarter ending 31 December 2006. This dividend was paid in February 2007. On 27 March 2007 the Directors declared a dividend of 2.5p per share in relation to the first quarter of 2007. This brings the total dividends paid and declared from the period of inception in August 2005 through 31 March 2007 to 7.0p per share. The Company's dividend history is: Month paid Dividend per share For period ended July 2006 1.0p 30 June 2006 Oct. 2006 1.5p 30 September 2006 Feb. 2007 2.0p 31 December 2006 May 2007 2.5p 31 March 2007 Total 7.0p On 25 October 2006 the Company established a credit facility of up to US$200 million with Merrill Lynch Capital Corporation. Through a newly formed special purpose entity, Merrill Lynch has made this credit facility available for the purpose of making new investments. The credit facility bears interest at LIBOR plus 50 basis points. As of 31 December 2006, the Company had drawn £22.4 million under the facility and as of 31 March 2007, the Company had drawn £56.3 million under the facility. With the establishment of this credit facility, the Company has been able to accelerate its rate of deploying capital. During the fourth quarter of 2006 the Company made approximately £22.4 million of new investments. During the first quarter of 2007 the Company deployed approximately £40.2 million of additional capital for new investments. T2 Advisers, the Company's Investment Manager, believes that the current environment for providing investment capital affords it a positive outlook going forward. The Directors are pleased with the progress that the Investment Manager has made on behalf of the Company and share the Investment Manager's enthusiasm with regard to the Company's prospects. With the Company now fully invested, generating a strong yield on its portfolio and having the capability to leverage its investments and its returns, we are looking forward to achieving greater operating scale and continuing to enhance Shareholder returns. William Harley Tozier Chairman DIRECTORS' REPORT The Directors present their report and the audited financial statements for the year ended 31 December 2006. Principal activities T2 Income Fund Limited (the 'Company') is a closed-ended investment company which was incorporated with limited liability in Guernsey on 9 June 2005 in accordance with The Companies (Guernsey) Law, 1994. The Company was admitted to the Alternative Investment Market of the London Stock Exchange (AIM) on 5 August 2005. A new Cayman Islands registered subsidiary company, T2 Income Fund CLO I Ltd, was created on 11 October 2006. Through its ownership of 100% of the preferred shares of T2 Income Fund CLO I Ltd the Directors consider the CLO to be a wholly owned subsidiary and the operating results are consolidated in these financial statements. The Company and its subsidiary (together 'the Group') will primarily invest in the debt and equity securities of small to medium sized companies to maximize its portfolio's return. The Group will seek to achieve a high level of current income by investing in debt securities, consisting primarily of senior debt across multiple industries. The Group intends to invest primarily in companies located in the United States, Europe and the United Kingdom. The Group will target companies with attractive fundamental characteristics including experienced management, a significant financial or strategic sponsor or partner, a strong competitive position and positive cash flow. Results and dividends The Group results for the year are set out on page 7. Dividends of £950,000 were paid during the year (2005: nil). On 31 January 2007 a dividend of £760,000 (2p per share), relating to the year ended 31 December 2006, was approved. This dividend was paid to shareholders on 23 February 2007, with an ex dividend date of 7 February 2007. On 27 March 2007 a dividend of £950,000 (2.5p per share), relating to the period 1 January 2007 to 31 March 2007, was announced with a payment date of 10 May 2007. Statement of directors' responsibilities The Directors are responsible for preparing the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union, for each financial period which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial period and of the profit or loss for that period in accordance with The Companies (Guernsey) Law, 1994. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements have been properly prepared in accordance with The Companies (Guernsey) Law, 1994. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In so far as the Directors are aware: * there is no relevant audit information of which the Company's auditors are unaware; and * the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. Auditors A resolution for the appointment of Grant Thornton UK LLP will be proposed at the forthcoming Annual General Meeting. Approved on behalf of the board of directors on 16 April 2007. Saul Barak Rosenthal Patrick Francis Conroy Director Director CONSOLIDATED AND COMPANY INCOME STATEMENTS Group Company Group and Company Year to Year to Period to 31 December 31 December 31 December 2006 2006 2005 Notes £ £ £ Revenue Interest income 2 2,950,030 2,676,375 648,866 Other income 2 36,814 36,814 46,978 Investment Income (Loss)/gain on financial assets and 5 liabilities at fair value through profit or loss - Realised (248,633) (248,633) - - Unrealised (1,835,169) (1,630,983) 33,384 Gain on foreign currency transactions - Realised 295,151 295,151 - - Unrealised 129,740 129,740 - Total Income 1,327,933 1,258,464 729,228 Expenses Management fees 4 298,751 298,751 300,967 Administration and secretarial fees 4 40,000 40, 000 16,329 Custodian fees 4 15,000 15,000 6,123 Legal and professional fees 25,455 25,455 9,167 Directors' remuneration 4 65,000 65,000 36,418 Directors' and officers' insurance 43,485 43,485 17,054 Audit fees 39,001 39,001 15,000 Share issue expenses 2(g) - - 68,801 Finance costs 4 104,215 - - Other expenses 200,502 199,827 57,413 Total Expenses 831,409 726,519 527,272 Profit for the year/period 496,524 531,945 201,956 Basic earnings per share 14 0.0131 0.0140 0.0053 Diluted earnings per share 14 0.0118 0.0126 0.0048 The notes at the end of this release form an integral part of these financial statements. CONSOLIDATED BALANCE SHEET 31 December 2006 31 December 2005 Notes £ £ ASSETS Non-current assets Financial assets at fair value through the 5 53,978,368 5,887,644 profit and loss account Note receivable 7 500,000 - 54,478,368 5,887,644 Current assets Trade and other receivables 7 610,946 40,440 Cash and cash equivalents 8 4,929,513 35,694,293 5,540,459 35,734,733 Total assets 60,018,827 41,622,377 EQUITY Capital and reserves attributable to the Company's equity holders Share premium 10 36,694,149 36,694,149 Other reserve 14,167 4,167 Foreign exchange reserve 35,421 - Retained earnings (251,520) 201,956 Total equity 36,492,217 36,900,272 LIABILITIES Non-current liabilities Warehouse facility 9 22,374,308 - Current liabilities Trade and other payables 9 1,152,302 4,722,105 Total liabilities 23,526,610 4,722,105 Total equity and liabilities 60,018,827 41,622,377 Net Asset Value per Share £0.96 £0.97 The notes at the end of this release form an integral part of these financial statements. COMPANY BALANCE SHEET 31 December 2006 31 December 2005 Notes £ £ ASSETS Non-current assets Financial assets at fair value through the 5 26,401,578 5,887,644 profit or loss account Investment in subsidiary 6 6,322,726 - Note receivable 7 500,000 - 33,224,304 5,887,644 Current assets Trade and other receivables 7 478,540 40,440 Cash and cash equivalents 8 3,854,472 35,694,293 4,333,012 35,734,733 Total assets 37,557,316 41,622,377 EQUITY Capital and reserves attributable to the Company's equity holders Share premium 10 36,694,149 36,694,149 Other reserve 14,167 4,167 Retained earnings (216,099) 201,956 Total equity 36,492,217 36,900,272 LIABILITIES Current liabilities Trade and other payables 9 1,065,099 4,722,105 Total liabilities 1,065,099 4,722,105 Total equity and liabilities 37,557,316 41,622,377 Net Asset Value per Share £0.96 £0.97 The notes at the end of this release form an integral part of these financial statements. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Share Share Other Foreign Retained Total Capital Premium Reserve exchange Earnings Equity Reserve Group Note £ £ £ £ £ £ Proceeds from preferred 10 - 38,000,000 - - - 38,000,000 ordinary shares issued Set-up fees in relation - (1,305,851) - - - (1,305,851) to issue of shares Profit for the period - - - - 201,956 201,956 Amortisation of fair - - 4,167 - - 4,167 value of options Balance at 31 December - 36,694,149 4,167 - 201,956 36,900,272 2005 Profit for the year - - - - 496,524 496,524 Foreign exchange on - - - 35,421 - 35,421 consolidation Total income & expense - - - 35,421 496,524 531,945 for the year Amortisation of fair - - 10,000 - - 10,000 value of options Dividends paid - - - - (950,000) (950,000) Balance at 31 December - 36,694,149 14,167 35,421 (251,520) 36,492,217 2006 Share Share Other Foreign Retained Total Capital Premium Reserve exchange Earnings Equity Reserve Company Note £ £ £ £ £ £ Proceeds from preferred 10 - 38,000,000 - - - 38,000,000 ordinary shares issued Set-up fees in relation - (1,305,851) - - - (1,305,851) to issue of shares Profit for the period - - - - 201,956 201,956 Amortisation of fair - - 4,167 - - 4,167 value of options Balance at 31 December - 36,694,149 4,167 - 201,956 36,900,272 2005 Profit for the year - - - - 531,945 531,945 Total income & expense - - - - 531,945 531,945 for the year Amortisation of fair - - 10,000 - - 10,000 value of options Dividends paid - - - - (950,000) (950,000) Balance at 31 December - 36,694,149 14,167 - (216,099) 36,492,217 2006 During the year the Company made two dividend payments. On 17 July 2006 the Company paid a dividend of 1p per ordinary share (£380,000) for the period to 30 June 2006. On 23 October 2006 the Company paid a dividend of 1.5p per ordinary share (£570,000) for the period to 30 September 2006. The notes at the end of this release form an integral part of these financial statements. STATEMENT OF CASHFLOWS Group Company Company 31 December 31 December 31 December 2006 2006 2005 Notes £ £ £ Cash flows from operating activities Cash generated from operations 11 (2,014,562) (2,173,545) 156,573 Net cash (outflow)/inflow from operating (2,014,562) (2,173,545) 156,573 activities Cashflows from investing activities Purchase of investments (59,465,371) (41,570,229) (1,156,429) Sale of investments 8,307,610 8,307,610 - Payment to subsidiary - (3,081,460) - Receipt from subsidiary - 6,921,988 - Principal received 983,235 705,815 - Net cash outflow from investing (50,174,526) (28,716,276) (1,156,429) activities Cashflows from financing activities Proceeds from issue of shares - - 38,000,000 Set-up fees paid - - (1,305,851) Warehouse facility 22,374,308 - - Dividends paid (950,000) (950,000) - Net cash inflow/(outflow) from financing 21,424,308 (950,000) 36,694,149 activities Net (decrease)/increase in cash and cash (30,764,780) (31,839,821) 35,694,293 equivalents Cash and cash equivalents at beginning of 35,694,293 35,694,293 - year/period Cash and cash equivalents at end of year/ 4,929,513 3,854,472 35,694,293 period The notes at the end of this release form an integral part of these financial statements. NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 1. GENERAL INFORMATION T2 Income Fund Limited (the 'Company') was incorporated and domiciled in Guernsey, Channel Islands, as a company limited by shares on 9 June 2005. The address of the registered office is Regency Court, Glategny Esplanade, St Peter Port, Guernsey, Channel Islands, GY1 3NQ. A new Cayman Islands registered subsidiary company, T2 Income Fund CLO I Ltd., was created on 11 October 2006. Through its ownership of 100% of the preferred shares of T2 Income Fund CLO I Ltd the Directors consider the CLO to be a wholly owned subsidiary and the operating results are consolidated in these financial statements. 2. ACCOUNTING POLICIES (a) Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and all applicable requirements of Guernsey Company Law. The financial statements have been prepared under the historical cost convention as modified by the revaluation of investments at fair value through the Income Statement. (b) Basis of consolidation The consolidated financial statements comprise the financial statements of T2 Income Fund Limited and its subsidiary T2 Income Fund CLO I Ltd. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. (c) Foreign currency translation (i) Functional and presentation currency The Financial Statements of the Company are presented in the currency of the primary economic environment in which the entity operates (its functional currency). The Directors have considered the primary economic currency of the Company and considered the currency in which the original finance was raised, distributions made, and ultimately what currency would be returned on a break up basis. The Directors have also considered the currency to which the underlying investments are exposed. On balance, the Directors believe Sterling best represents the functional currency of the Company and Dollars the functional currency of the subsidiary. Therefore the books and records are maintained in Sterling and Dollars respectively and for the purpose of the financial statements the results and financial position of the Group are presented in Sterling, which is the presentation currency of the Group. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Translation differences on non-monetary items are reported as part of the fair value gain or loss reported in the Income Statement. (iii) Subsidiary company The results and financial position of the subsidiary entity that has a functional currency different to the presentation currency is translated into the presentation currency as follows: 1. assets and liabilities of the balance sheet presented are translated at the closing rate at the date of the balance sheet; 2. income and expenses for the income statement are translated at average exchange rates for the period (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and 3. all resulting exchange differences are recognised as a separate component of shareholders' equity. (d) Revenue recognition Revenue is recognised as follows: Interest income - recognised on an accruals basis as this relates to bank interest income and coupon interest. Other income - relates to closing fees which are recognised when they fall due. (e) Expenditure All expenses are accounted for on an accruals basis. The management fees, administration fees, finance costs and all other expenses (excluding set up expenses which were offset against share premium) are charged through the income statement. (f) Taxation The Company is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. A fixed annual fee of £600 is payable to the States of Guernsey in respect of this exemption. (g) Share issue expenses Share issue expenses of an equity transaction are accounted for as a deduction from equity (net of any income tax benefit) to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. (h) Dividends Dividend distributions to the Group's shareholders are recognised in the Group's financial statements in the period in which the dividends are paid. (i) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short term highly liquid investments and bank overdrafts. (j) Trade and other receivables Receivables are recognised initially at fair value plus transaction costs that are directly attributable to their acquisition or origination. They are subsequently measured at amortised cost. (k) Trade and other payables Payables are recognised initially at fair value and subsequently stated at amortised cost. (l) Investments (i) Financial assets and liabilities at fair value through profit or loss Purchases and sales of all investments are recognised on trade date - the date on which the Group acquires or disposes of the economic benefits of the asset. All investments are initially recognised at fair value, and transaction costs for all financial assets and financial liabilities carried at fair value through profit or loss are expensed as incurred. Investments are derecognised when the rights to receive cash flows from the investments have expired or the Group has transferred substantially all risks and rewards of ownership. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. Valuation techniques used include the use of comparable recent arm's length transactions. For broadly syndicated loans T2 receives market quotes from agent banks on a quarterly basis. This information is reviewed by T2 management and used to price the portfolio companies. For bi-lateral loans, Houlihan Lokey, an independent third party, performs portfolio company evaluations. As part of Houlihan Lokey's due diligence they review the following: - Audited and/or unaudited historical financial information including the most recent fiscal year. - Financial information for the most current period available. - Financial forecast prepared by the Portfolio Company. - Most current capitalisation table. - T2 investment Committee Memorandum prepared prior to the date of investment. - Documents relating to business operations, financial performance and corporate planning. - Public filings by the Portfolio Companies. In assessing the fair value of each investment, Houlihan Lockey reviews the following: - Recent financial performance including cash flow and profitability on an actual basis compared to plan. - Funding history of the company, the implied valuation from the most recent funding and anticipated future funding transactions. - Company's capital structure. - Recent business events disclosed by the Company. - Potential requirement for additional funding. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included in the income statement in the period in which they arise. (ii) Subsidiary Investment in subsidiary is initially recorded at cost. After initial recognition, the investment in subsidiary is measured at fair value, with movements in the unrealised gains and losses recognised in the Company Income Statement. Through its ownership of 100% of the preferred shares of T2 Income Fund CLO I Ltd the Directors consider the CLO to be a wholly owned subsidiary and the operating results are consolidated in these financial statements. (m) Critical accounting estimates and judgements in applying accounting policies The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Company also makes assumptions on the classification of financial assets. Unlisted Debt Securities The Group can invest in financial instruments which are not quoted in active markets. Fair values are determined by using valuation techniques. Where valuation techniques, such as the Market Capitalization Approach, are used to determine fair values they are carried out by an independant valuation firm specifically engaged by the Group to carry out the valuations. Changes in assumptions could affect the reported fair value of financial instruments. (n) New standards New standards and interpretations have been published that are mandatory for the Group's accounting periods beginning on or after 1 January 2007 or later periods and which the Group has not early adopted: The Group has not early adopted the new standard IFRS 7 (Financial Instruments: Disclosure), therefore no additional disclosures have been made. The Group has not early adopted the new standard IFRS 8 (Operating Segments), therefore no additional disclosures have been made. (o) Share based payments Share options are valued in accordance with IFRS2 on an estimate of the fair value of the services received. 3. FINANCIAL RISK MANAGEMENT (1) Financial risk factors The Group is exposed to interest rate risk, credit risk, liquidity risk and currency risk arising from the financial instruments it holds. The risk management policies employed by the Group to manage these risks are discussed below. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimise operational and legal risks. (a) Interest rate risk Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. The Group will have exposure to interest rate risk if the Board determines that the Group should borrow to fund future investments. The exposure arises on the difference between the rate of interest the Group is required to pay on borrowed funds and the rate of interest which it receives on the debt securities in which it invests. The Group is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The Company's cash balances, warehouse facility and debt instruments are open to interest rate risk. The Group may, but is not required to, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. (b) Credit risk Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the balance sheet date. The Group invests primarily in senior debt, senior subordinated debt and junior subordinated debt. The maximum investment size, at the time of the investment, will generally be limited to 15% of the Group's Gross Assets. However, the Group may make larger investments and it may seek to syndicate or sell down a portion of any such investment, after it has been acquired. The Group has established a credit rating system. The purpose of the rating system is to monitor the credit quality of T2's investment portfolio on both an individual and portfolio basis and the future on-going monitoring required. (c) Liquidity risk Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. As the Group's investments will not generally be in publicly traded securities, they are likely to be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. The illiquidity of the Group's investments may make it difficult for them to be sold quickly if the need arises. Since the Group intends to invest in debt securities with a term of up to seven years, and hold investments in debt securities and related equity securities until maturity of the debt, the Group does not expect realisation events to occur in the near term. (d) Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The Group may make investments in currencies other than Sterling. To the extent that it does, the Group will be exposed to a potentially adverse currency risk. Changes in the rate of exchange may affect the value of the Group's investments, and the level of income that it receives from those investments. The Group has entered into currency hedging transactions to minimise this risk (see note 15). 31 December 2006 Assets USD EUR £ Total Financial assets at fair value through p&l 49,060,856 4,917,512 - 53,978,368 account Cash and cash equivalents 2,826,963 130,412 1,972,138 4,929,513 Trade and other receivables 574,186 35,675 501,085 1,110,946 Total assets 52,462,005 5,083,599 2,473,223 60,018,827 Liabilities Trade and other payables 23,270,769 - 255,841 23,526,610 31 December 2005 Assets USD EUR £ Total Financial assets at fair value through p&l 5,887,644 - - 5,887,644 account Cash and cash equivalents - - 35,694,293 35,694,293 Trade and other receivables 31,688 - 8,752 40,440 Total assets 5,919,332 - 35,703,045 41,622,377 Liabilities Trade and other payables 4,653,822 - 68,283 4,722,105 (e) Market risk The Group's exposure to market risk is comprised mainly of movements in the Group's investments. The investment portfolio is managed within parameters disclosed in the Group's offering memorandum. (2) Fair value estimation The fair values of the Group's short-term trade receivables and payables approximate to their carrying amounts at the balance sheet date. 4. FUND EXPENSES Management fee The Investment Manager, T2 Advisers, LLC, is entitled to receive an annual fee payable quarterly in advance. For the period from the Company's admission to trading on AIM until the quarter end next following six months from the date of admission, the management fee was calculated based on 2% of the initial value of the Company's gross assets upon admission. Thereafter, the management fee is calculated based on 2% of the average value of the Group's gross assets at the end of the two most recently completed quarters. Total fees charged for the year ended 31 December 2006 amounted to £298,751, including the effect of a note receivable from the Investment Manager for £500,000 of fees otherwise payable, (2005:£300,967). The total amount due and payable at the year end amounted to £57,207 (2005:£2,150). Administration and secretarial fees The Administrator and Secretary, Butterfield Fund Services (Guernsey) Limited, is entitled to an annual fee for its services as administrator and secretary, of 0.075% of the Net Asset Value of the Group, calculated on the last business day of each quarter and payable quarterly in arrears. The fee is subject to a minimum of £40,000 per annum. They are also due a fixed accounting fee of £10,000 per annum plus a fixed fee of £5,000 for their registrar services. Total Administration and secretarial fees (excluding accounting and registrar fees) charged for the year ended 31 December 2006 amounted to £40,000 (2005: £16,329). The total amount due and payable at the year end amounted to £20,000 (2005:£10,082). Custodian fees The Custodian, Butterfield Bank (Guernsey) Limited is entitled to custody fees of 0.02% of the Net Asset Value of the Group subject to a minimum of £15,000 per annum. The fee is payable quarterly in arrears. Total fees charged for the year ended 31 December 2006 amounted to £15,000 (2005:£6,123). The total amount due and payable at the year end amounted to £3,780 (2005:£3,781). Directors fees The current level of fees for the Chairman of the Board of Directors of the Group is £25,000 per annum, and £20,000 each for non-executive directors. Total fees charged to the Group for the year ended 31 December 2006 amounted to £65,000 (£36,418). The total amount due and payable at the year end amounted to £16,250 (£16,250). Finance costs Total finance costs for 2006 was £ 104,215. These finance costs are for interest paid to Merrill Lynch for the Warehouse facility. The liability of the warehouse facility as of 31 December 2006 was £ 22,374,308. 5. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS Group Group and Company Company 2006 2006 2005 £ £ £ Listed debt securities 8,127,281 6,085,423 1,186,814 Unlisted debt securities 45,851,087 20,316,155 4,700,830 53,978,368 26,401,578 5,887,644 (Loss)/Gains recognised in relation to financial assets at fair value through profit or loss - realised (248,633) (248,633) - - unrealised (1,835,169) (1,630,983) 33,384 (2,083,802) (1,879,616) 33,384 Group Group and Company Company 2006 2006 2005 Opening value of financial assets 5,854,260 5,854,260 - Purchases 59,465,371 41,570,229 5,854,260 Sales (8,307,610) (8,307,610) - Realised loss on sale of investments (248,633) (248,633) - Transfer to subsidiary - (10,775,207) - Capital repayments (983,235) (705,815) - Cost of investments at year/period end 55,780,153 27,387,224 5,854,260 Unrealised (loss)/gain at year/period end (1,801,785) (985,646) 33,384 Closing value at year/period end 53,978,368 26,401,578 5,887,644 6. INVESTMENT IN SUBSIDIARY Company Company 2006 2005 £ £ Additions at cost 6,934,680 - Unrealised loss on net assets transferred to (611,954) - subsidiary Closing fair value of Investment in subsidiary 6,322,726 - The cost of the investment is represented by the net assets transferred to the subsidiary. The Company from time to time makes asset transfers between the Company, T2 Income Fund Limited, and the subsidiary, T2 Income Fund CLO I Ltd. The unrealised loss on net assets transferred to subsidiary of £611,954 primarily relates to the change in the foreign exchange rates. 7. TRADE AND OTHER RECEIVABLES Group Group and Company Company 2006 2006 2005 £ £ £ Accrued bank interest 6,138 6,138 7,541 Loan interest receivable 444,417 312,011 6,683 Prepaid expenses 28,106 28,106 26,216 Unrealised gain on forward exchange contracts 132,285 132,285 - 610,946 478,540 40,440 Non current assets Note receivable 500,000 500,000 - The £500,000 note receivable relates to a promissory note due for payment in 2009 from T2 Advisers, LLC, the Company's Investment Manager. This note, which is subject to certain conditions, was signed on 5 December 2006 and is subject to interest of 8% per annum, compounded annually. The promissory note is recognised in the financial statements as the Directors, having reviewed the conditions pertaining to the promissory note, deem that receipt of payment is virtually certain. 8. CASH AND CASH EQUIVALENTS Group Group and Company Company 2006 2006 2005 £ £ £ Call account 4,929,513 3,854,472 5,110,197 Fixed deposit - - 30,584,096 4,929,513 3,854,472 35,694,293 For the purposes of the Cash Flow Statement, the above items represent the year end cash and cash equivalents. Included within call account balances is an amount held as Collateral by RBC Capital Markets for £1,413,332 (US$2,768,717) in relation to the forward exchange contracts. 9. TRADE AND OTHER PAYABLES Group Group and Company Company 2006 2006 2005 £ £ £ Current liabilities Payable for investments - - 4,650,853 Due to RBC 896,461 896,461 - Management fees 57,207 57,207 2,150 Administrator's fees 20,000 20,000 10,082 Custodian's fees 3,780 3,780 3,781 Audit fees 28,500 28,500 15,000 Directors' fees 16,250 16,250 16,250 Finance cost 86,788 - - Other accruals 43,316 42,901 23,989 1,152,302 1,065,099 4,722,105 Non current liabilities Warehouse facility 22,374,308 - - On 21 November 2006 T2 Income Fund CLO I Ltd entered into a credit and warehouse agreement (the 'Agreement') by and among Merrill Lynch Capital Corp., T2 Income Fund CLO I Ltd (as the Issuer), T2 Advisers, LLC (as the Collateral Manager) and T2 Income Fund Limited. The facility amount is US$200,000,000. Merrill Lynch provides funding of 80% of the par value of loans assigned to T2 Income Fund CLO I Ltd. Interest due to Merrill Lynch is calculated daily on the total funded amount at 1 month LIBOR plus 50 basis points. Under the terms of the Agreement, the issuer pledged to Merrill Lynch, as security for obligations of the Issuer and the Collateral Manager to Merrill Lynch, and grants to Merrill Lynch a first priority continuing security interest in, lien on and right of sell-off against all of the Issuer's assets including the issuer's right, title and interest in the loans assigned. Such grants were made to Merrill Lynch to secure the payment of all amounts due to Merrill Lynch and compliance by the Issuer with the provision of the Agreement. 10. SHARE CAPITAL The Company has the power to issue an unlimited number of ordinary shares of no par value. On incorporation two Ordinary Shares were issued at 100p each to the subscribers to the Memorandum of Association of the Company. On Admission to the AIM on 5 August 2005 the Company repurchased these Ordinary Shares. On Admission to the AIM on 5 August 2005 the Company allotted 38,000,000 fully paid Ordinary Shares. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds, net of tax. The Investment manager, T2 Advisers LLC, has been granted options to purchase 4,222,222 Ordinary Shares at the Placing Price, as reduced by dividends paid per share, subject to the Company achieving certain performance criteria as follows: The Investment manager options will vest and become exercisable in respect of 50 per cent immediately on conclusion of the first three month period during which the Company pays dividends on the Shares in an aggregate amount during that three month period equal to or exceeding 8 per cent of the Initial Offer Price on an annualised basis (the hurdle rate). The remaining 50 per cent will vest and become exercisable immediately on conclusion of the twelve month period following the date specified above. On 23 February 2007 the hurdle rate was met. Accordingly on 31 March 2007 the options on 2,111,111 of these Ordinary shares became vested. The remaining options for 2,111,111 Ordinary shares are scheduled to vest on 31 March 2008. In accordance with IFRS2, the value of the options was based upon an estimate of the fair value of the services received. The Company believes that the fair value can be determined by a comparison to a performance-based incentive fee program, which arrangements are common practice in the industry, because the option program was similarly intended to compensate the Investment manager for achieving superior returns. The fair value estimate was based, in good faith, upon the present value of a hypothetical performance-based incentive fee, assuming a fee of 20% of the excess return above an 8% hurdle rate over a ten-year period; the fair value of the options was determined to be £100,000. For the year ending 31 December 2006 the Company charged £10,000 (2005: £4,167) to expenses representing the amortisation of the fair value of the options. The calculation of fair value is sensitive to a number of assumptions, including the average interest rate on investments, the pace of investment activity, the amount and cost of leverage, if any, and expenses. It should be noted that the actual value of the options may ultimately be substantially greater or less than the fair value calculated. If actual financial performance is significantly better than the assumptions used in the calculation of fair value, the options could be worth several million pounds; to the extent that the performance criteria is not achieved, the options would expire worthless. Share Capital Shares in £ issue Ordinary shares Shares in issue as at 31 December 2006 and 31 December 38,000,000 - 2005 38,000,000 - Share Premium 31 December 31 December 2005 2006 £ £ Balance at start year/period 36,694,149 - Issued during year/period - 38,000,000 Set-up fees - (1,305,851) Balance at end year/period 36,694,149 36,694,149 11. CASH GENERATED FROM OPERATIONS Group Group and Company Company 2006 2006 2005 £ £ £ Profit for the year/period 496,524 531,945 201,956 Adjustments for: Realised/Unrealised loss/(gain) arising on 2,083,802 1,879,616 (33,384) adjustment to fair value of investments Amortisation of fair value of options 10,000 10,000 4,167 Foreign exchange on consolidation 35,421 - - Changes in working capital: Trade and other receivables (1,070,506) (938,100) (87,418) Trade and other payables (3,569,803) (3,657,006) 71,252 Cash (outflow)/inflow from operations (2,014,562) (2,173,545) 156,573 12. CONSOLIDATED SUBSIDIARY UNDERTAKING Through its 100% ownership of preferred shares in T2 Income Fund CLO I Ltd, the Directors consider the following entity as a wholly owned subsidiary of the Company and its results and financial position are included within the consolidated results of the Company. Date of Country of Nature of Percentage incorporation incorporation holding holding T2 Income Fund CLO I Ltd 11 October 2006 Cayman Islands Direct 100% 13. RELATED PARTY TRANSACTIONS Saul Rosenthal is a member of BDC Partners which owns T2 Advisers LLC. Saul Rosenthal and Patrick Conroy are officers of T2 Advisers LLC. Patrick Firth is a director of the Administrator Butterfield Fund Services (Guernsey) Limited. The following transactions were carried out with Group Group and related parties: Company Company 2006 2006 2005 Amounts incurred during the year to related £ £ £ parties Fees due to P Conroy as Chief Financial Officer 50,000 50,000 50,000 to the Company Fees due from the Investment Manager T2 Advisers, 798,751 798,751 300,967 LLC Fees due to the Investment Manager T2 Advisers, (500,000) (500,000) - LLC Fees due to BDC Partners, LLC 28,912 28,912 - Amounts due to related parties Fees due to P Conroy as Chief Financial Officer 4,167 4,167 4,167 to the Company Fees due to the Investment Manager T2 Advisers, 57,207 57,207 2,150 LLC Amounts due from related parties Fees due from the Investment Manager T2 Advisers, 500,000 500,000 - LLC The Investment manager has been granted options giving it the right to acquire 4,222,222 Ordinary Shares at the Placing Price (£1.00), subject to the Company achieving certain performance criteria. As at 31 December 2006 the criteria had not been met. As of 23 February 2007 the criteria has been met, refer note 10. Directors shareholdings in Company Saul Rosenthal has a beneficial interest in 1,055,556 (2005: 1,055,556) ordinary shares in the Company as at 31 December 2006 related to the share option plan (ref note 10). This is equal to a beneficial interest of 2.5% based on the Share Capital as at that date when diluted by the number of Ordinary Shares subject to the option. 14. EARNINGS PER SHARE Earnings per share has been calculated by dividing the profit attributable to ordinary share holders £496,524 Group, £531,945 Company (2005:£201,956 Group and Company) by the weighted average number of ordinary shares outstanding during the year 38,000,000 (2005:38,000,000). Fully diluted profit per share has been calculated by dividing the profit attributable to ordinary share holders of £496,524 Group, £531,945 Company (2005: £201,956 Group and Company), by the weighted average number of ordinary shares outstanding during the year adjusted for the effects of all dilutive potential ordinary shares 42,222,222 (2005: 42,222,222). 15. COMMITMENTS At the balance sheet date the following commitments in respect of forward foreign exchange contracts existed: Contract amount - £ Buy Sell (loss)/profit 7,562,250 EUR £ (17,080) 186,918 EUR £ 1,645 186,918 EUR £ 1,645 186,918 EUR £ 1,645 186,918 EUR £ 1,645 25,175,975 USD £ 163,213 709,543 USD £ (5,107) 709,543 USD £ (5,107) 709,543 USD £ (5,107) 709,543 USD £ (5,107) 16. POST BALANCE SHEET EVENTS On 31 January 2007 a dividend of £760,000 (2p per share), relating to the year ended 31 December 2006, was approved. This dividend was paid to shareholders on 23 February 2007, with an ex dividend date of 7 February 2007. On 27 March 2007 a dividend of £950,000 (2.5p per share), relating to the period 1 January 2007 to 31 March 2007, was announced with a payment date of 10 May 2007. Since the year end the Group has made a number of new investment purchases, these are detailed below: 05/01/07 - US$7,000,000 - CBA Group 05/01/07 - US$2,000,000 - INFONXX 22/01/07 - US$2,500,000 - Graceway 26/01/07 - US$5,990,000 - Nestaway 09/02/07 - US$1,800,000 - Sirsi Corp 09/02/07 - US$2,017,333 - National Processing Company 23/02/07 - US$5,940,000 - Investools Inc 07/03/07 - US$3,003,438 - Investools Inc 08/03/07 - US$500,000 - Krispy Kreme 08/03/07 - US$8,000,000 - Express Energy Services 13/03/07 - US$3,000,000 - Peacock Engineering Co LLC 14/03/07 - US$6,100,000 - Nuvox 15/03/07 - US$11,984,950 - CavTel Holdings 23/03/07 - US$5,079,792 - Paetec Holding Corp 23/03/07 - US$5,000,000 - Data Transmission Network DTN 26/03/07 - US$9,055,667 - Proquest 29/03/07 - US$1,005,000 - Express Energy Services 30/03/07 - US$5,025,083 - Ford Portfolio Statement As at 31 December 2006 Portfolio Statement of the Group % of net As at 31 December 2006 Fair assets Value £ Audatex North America Inc 2,236,113 6.13% Cavalier Telephone Inc 2,551,002 6.99% Cavalier Telephone 2 Inc 3,573,252 9.79% Corel Primary Corp 6,085,423 16.68% INFONXX Inc 1,533,308 4.20% Infor Global Solutions Inc 3,077,159 8.43% Merrill Communications LLC 4,582,695 12.56% Metrologic instruments Inc 1,540,965 4.22% Nova 2,694,847 7.38% NPC Inc 3,065,339 8.40% One communications Corp 2,185,745 5.99% Peer 1 Enterprises Inc 3,497,613 9.58% Prodigy Health Group Inc 4,088,821 11.20% Stratus Technologies Inc 3,430,322 9.40% Travelport 3,081,930 8.45% Versatel Holdings GmbH 2,681,399 7.35% Workflow Management Inc 2,030,577 5.56% X-rite Inc 2,041,858 5.61% Total financial assets at fair value through profit or 53,978,368 147.92% loss Cash balances 4,929,513 13.51% Other net liabilities (22,415,664) -61.43% Net Assets 36,492,217 100.00% Statement of significant investment purchases and sales of the Group For the year ended 31 December 2006 Purchases(at cost) 2006 £ Corel Primary Corp 6,338,651 Merrill Communications LLC 4,594,181 Stratus Technologies Inc 3,872,335 Cavalier Telephone 2 Inc 3,575,255 Infor Enterprise Inc 3,198,374 Travelport 3,190,301 Workflow Management Inc 3,068,697 Prodigy Health Group Inc 3,062,787 Infor Global Solutions Inc 2,733,862 Cavalier Telephone Inc 2,700,853 Nova 2,683,700 Versatel Holdings GmbH 2,681,579 One Communications Corp 2,281,698 Audatex North America Inc 2,257,098 X-Rite Inc 2,184,244 NPC Inc 2,045,857 Infor Global Solutions Inc 2,027,335 Metrologic instruments Inc 1,531,394 INFONXX Inc 1,531,394 Infor Global Solutions Inc 1,060,337 NPC Inc 1,020,929 Prodigy Health Group Inc 1,020,929 FCI International 803,581 59,465,371 Sales (proceeds) 2006 £ Infor Enterprise Inc 3,081,460 Infor Global Solutions Inc 2,730,446 Corel Primary Corp 1,092,243 FCI International 778,197 Workflow Management Inc 618,573 Cavalier 6,691 8,307,610 This information is provided by RNS The company news service from the London Stock Exchange

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