Amati VCT plc

Half-yearly Report

for the six months ended 31 August 2011

Contents

OVERVIEW

Highlights

·     NAV plus cumulative dividends since inception of 26.3p amounts to 99.5p per share at 31 August 2011. 

·     NAV total return for the period of -14.5% vs FTSE AIM All-Share total return of -16.7%.

·     Intention to pay 2.0p per share interim dividend following restructuring of capital reserves (2010: 2.0p).

Corporate Objective

The objective of Amati VCT plc (the "Company") is to provide an attractive return to shareholders.   The Company generates tax-free capital gains and income by building and maintaining a well-balanced portfolio of qualifying investments for the purposes of the tax legislation under which the Company operates.  The qualifying investments are predominantly in AIM-traded companies or companies to be traded on AIM.  The Company is managed as a Venture Capital Trust in order that shareholders may benefit from the tax reliefs available.

Key data

for the six months to 31 August 2011

Table of investor returns to 31 August 2011 from a sample of share issues

# assumes full recovery of tax relief (y/e 5 April 2006 - 40%; subsequent years - 30%)

*shares issued to Noble Income & Growth VCT plc shareholders as a result of the asset acquisition

Table of investor returns to 31 August 2011 from shares issued under the Dividend Reinvestment Scheme

#assumes full recovery of tax relief (y/e 5 April 2006 - 40%; subsequent years - 30%)

CHAIRMAN'S STATEMENT

Over the months of August and September stock markets have fallen significantly and this has had an impact on the performance of the portfolio, which has given back some of the ground made over the previous year.  Investors are faced with a difficult conundrum, with the intractable problems of the Eurozone and the wider issues of excess government debt on the one hand and a corporate sector which generally looks to be in good shape on the other.

As at 31 August 2011, the Company's net asset value per share was 73.2p, after paying out the 3.0p dividend on 12 August 2011.  The resulting net asset value total return per share for the half year was a fall of 14.5%, reflecting the troubled markets.  Over the same period, the FTSE AIM All-Share total return index fell by 16.7%.

The Company was able to make six new qualifying investments during the period, which will serve it well if the market downturn creates a dearth of such opportunities over the coming months. 

In line with the stated policy of targeting 5% of year end net asset value, the Board intends to declare an interim dividend of 2p per share.  However, the Company's distributable reserves have been gradually reduced by share buybacks and dividends over many years, and could fall further given the current market volatility.  To avoid any possibility of paying a dividend without the requisite distributable reserves, in advance of declaring this dividend the Board wishes to proceed with a cancellation of the Company's share premium account and the capital redemption reserve, such that these reserves, which stood at £23.4m at the end of August 2011, become part of the special reserve, which is distributable.  This requires that a circular with a special resolution to this effect be sent to shareholders for approval, after which authority for the reserve restructuring is requested from a Scottish court.  Following the completion of this process, which may take several months, the Board intends to declare this interim dividend.

The Company's offer for subscription has so far raised a total of £5.4m.  The offer remains open until 10 January 2012 with existing shareholders receiving preferential terms.  The Board would like to welcome all new shareholders and to thank shareholders who have reinvested using the enhanced share buy back scheme and the dividend reinvestment scheme.  Shareholders who wish to reinvest dividends can also elect to participate in the dividend reinvestment scheme by completing the form at the back of the offer prospectus.  This is available at www.amatiglobal.com/avct_literature.php or by calling Amati Global Investors on 0131 243 0411.

Over the summer, HM Treasury published an important consultation document for "tax advantaged venture capital schemes", which set out some significant new proposals to ensure more effective targeting of funds raised by VCTs and under the EIS rules.  The Board does not think that these proposals will in any way inhibit the current investing activities of the Company and sees them as a positive development for the industry.  The Association of Investment Companies, of which the Company is a member, submitted a detailed response to the consultation, which has been widely endorsed by the VCT industry.  It is hoped that following this consultation HM Treasury will be able to secure EU approval for the rule changes proposed during the 2011 budget, which would increase the "gross assets test" for qualifying investments from the current £7m to £15m, which is where it was when the Company launched in 2005.  The Board sees this change as particularly beneficial for all AIM VCTs.  For the Company, which has raised money in each year since it began in 2005, the simplification to the rules that this change would bring would be very welcome.

In accordance with corporate governance good practice Brian Scouler has been appointed to the Board of the Company.  He is a chartered accountant with 25 years experience of private equity and investment portfolio management.  His appointment, which was announced on 25 October 2011, will be put to shareholders at next year's annual general meeting.

If you have any queries please do not hesitate to contact the Company Secretary on 0131 243 7215.  There is also a dedicated email enquiry service through vct-enquiries@amatiglobal.com and the Company's fund manager, Amati Global Investors, maintains an informative website for the Company - www.amatiglobal.com - on which monthly investment updates, performance information and all relevant documentation can be found.

Simon Miller

Chairman

28 October 2011

FUND MANAGER'S REVIEW

Market Review

For much of the period under review there was little overall direction in the markets, until a crisis of confidence precipitated by Eurozone sovereign debt worries and an increasingly pessimistic outlook for global growth caused markets to fall dramatically in August.  The period encompassed some momentous events, all of which contributed to dampening market sentiment. The most significant were the swathe of uprisings across the Middle East, which began in February; the tragic earthquake in Japan during March; the ongoing crisis in the Eurozone over the solvency of Greece; and finally, the pantomime in Washington concerning the raising of the debt ceiling, which was raised at the eleventh hour, but not before bringing Congress into disrepute in the process and too late to stop the historic downgrading of America's triple A status.

These events have cast a range of economic shadows. The Japanese earthquake resulted in supply chain problems that contributed to a slowdown in industrial output.  The uprisings in the Middle East caused oil prices to spike upwards sharply as supplies from some countries were disrupted, causing some industries to slow and tending to result in slower economic growth than forecast in the first half of this year. Both the series of crises surrounding Greece's inability to service its financing requirements and the lack of political consensus in the US to start tackling its budget deficit caused investors to question the very structure of the financial landscape as it is currently mapped out and, in particular, the concept of the 'risk-free' rate, upon which all other investments are predicated.  This situation is making investors extremely cautious, as witnessed by the demand for US Treasuries and gold, which reached record nominal highs during the period.  Meanwhile, China has been making strenuous efforts to reduce inflation with a long series of steps aimed at restricting credit, bearing the hopes of the developed world that it can do so without a hard landing for the economy.

By May it became evident that forecasts for economic growth were unlikely to be met in much of Europe and in the US and many companies reported a slowdown of business activity during May and June. At the same time, commodity prices rolled over, in some cases sharply from their speculative highs.  In July, Eurozone policymakers finally agreed on an outline deal for a second bail-out of Greece and, although markets responded positively at first, it soon became apparent that Greece's debt burden would remain unsustainably high.  Lending costs for Spain and Italy also rose, despite an aggressive programme of bond purchases by the European Central Bank, on fears that a Greek default would precipitate a wider crisis.  The subsequent severe market falls in August and September reflect investors' lack of confidence that a solution can be found to shore up the Eurozone and weaker than expected economic data from the US as well as concerns over slowing growth in China. 

Performance

The NAV total return fell by 14.5%, as compared to a fall of 16.7% for the FTSE AIM All-Share total return index. The biggest positive contributors to performance were Sprue Aegis, a PLUS-quoted fire safety product provider, which reminded the market of its profitable and resilient business model; RPC Group, makers of rigid plastic packaging that announced results ahead of expectations, with an impressive contribution from its Superfos acquisition; and IDOX, the public sector software and services provider, which reported increased profits and a strong sales pipeline.  The biggest detractors from performance were XP Power, makers of control components for the electronics industry, which fell on sentiment despite solid trading updates and improving gross margins; Asian Citrus Holdings, which also lost ground, despite continuing to produce exceptionally strong results; Bglobal, which lost ground after uncertainties emerged over the speed of the roll-out and specifications of energy smart meters; and Fulcrum Utility Services, which fell back, although we believe good progress continues to be made in turning around the business.  We also suffered losses on Hardide and China Food Company, two convertible bond holdings, due to falls in the underlying share prices.

Portfolio Activity

The broad equity market rally of late 2010 has given way to uncertainty and volatility during the period under review, and in response we have continued our strategy of positioning the portfolio so as to increase liquidity and to lower the risk profile of the fund.  When appraising existing holdings and prospective investments we are looking for companies with strong balance sheets and business models that we believe are capable of delivering earnings growth against a poor economic background.  Also, despite the severe uncertainties facing the global economy at the moment, we still wish to have exposure to the emerging economies of China and India, where we believe the long-term dynamics can remain favourable.

Qualifying Portfolio

We were pleased that a number of attractive investment opportunities emerged during the period, to enable us to increase the percentage of assets held in qualifying investments. There were six new qualifying investments during the period, two in secondary offerings (where companies already quoted raise further funds), and four in Initial Public Offerings ("IPOs") on AIM. The two secondary offerings were Futura Medical, a developer of innovative sexual healthcare products that is nearing revenues following the completion of licensing deals with blue-chip partners; and Manroy, an equipment supplier to the UK and US military.  The four IPOs in which we participated were Microsaic Systems, makers of miniaturised mass spectrometers; Ubisense Group, which delivers systems that enable companies to track assets in real time and in three dimensions; Music Festivals; the first quoted business in the UK for the ownership, development and production of music festivals, and MyCelx Technologies Corporation, a US-based provider of clean water treatments to the oil and gas industry.  We exited Avanti Communications Group, a provider of satellite communications services. 

Non-Qualifying Portfolio

We raised cash by selling our holdings in several companies, including NCC Group, Sterling Resources and Promethean World, and by taking profits in several holdings including Entertainment One and XP Power. The most significant new addition to the non-qualifying portfolio was Waterlogic, a manufacturer and distributor of water purifying and dispensing systems, whose flagship product, the Firewall UV system, is already gaining market share and represents a significant opportunity in the years to come. We also made an arbitrage trade in China Shoto during an offer period to take advantage of an attractive discount to the takeover price.   We added to our holdings in Elementis, Asian Citrus Holdings, Anglo Pacific Group, London Capital Group Holdings and New Britain Palm Oil.

Outlook

The recent market turmoil reflects the build-up of significant macro-economic and political risks, which are difficult to analyse and predict.  At the root of these risks lies excess debt.  The credit crunch of 2008 was caused by excess debt in the private sector, with much of the focus being on over-leveraged banks.  This has now morphed into a problem of excess debt in the public sector, where its trajectory is much less predictable, because nations, even more so than large banks, can't become bankrupt. Something else has to happen but it is not clear what.  Although the 2008 crisis itself was responsible for pushing up government debt levels in Western markets to unprecedented levels, as governments bailed out the banking sector whilst experiencing a significant fall in tax revenue, the real difficulty is that there is a forty year underlying trend in place of rising government debt and rising budget deficits in most developed economies.  This very long-term trend has been called the "Debt Supercycle", and there appears to be no reverse gear.  Instead, successive generations have devised ways of postponing the problem of reducing deficits.  Hence we have arrived at a situation where over-leveraged government finances have little capacity to deal with a recession and less still to deal with deflation.  As a consequence, both Europe and the US appear locked into close to zero interest rates for the foreseeable future, in order to ward off the spectre of deflation, with few levers left to pull in order to stimulate the economy, other than quantitative easing (the technical term for printing money). 

This leaves an acute dilemma for investors. The stock market will continue to be prone to sudden panic attacks, as we have seen during August and since the period end, and these are likely to get worse if the global economy slips into recession. However, following the falls during September, share prices are already factoring in a good deal of negative news, and there is evidence of capitulation selling creeping in, albeit with less intensity than that seen in early 2009. Many of the companies we analyse and hold have been trading exceptionally well, have strong balance sheets and are likely to be resilient in a downturn, with the ability to gain market share in order to prosper once markets recover. It would take a severe and protracted meltdown for such equity investments to fare worse than cash or government bonds over the medium-term, so our inclination is to stick with them, other than for short-term tactical positioning, whilst raising enough cash for dividends and future investments in qualifying holdings.

Dr Paul Jourdan

CEO and Founder
Amati Global Investors

28 October 2011

INVESTMENT PORTFOLIO

as at 31 August 2011

^* Qualifying holdings.

^† Part qualifying holdings.

^# Unquoted holdings.

^@ These investments are also held by other funds managed by Amati.

**These figures represent percentage of loan stock held.

All holdings are in ordinary shares unless otherwise stated.

Notes to the above table:

1.     No holding represents more than 6% by value of the Company's portfolio.

2.     As at the period end, the percentage of the Company's portfolio held in qualifying holdings for the purposes of Section 274 of the Income and Corporation Taxes Act 2007 is 75.83%.

TEN LARGEST HOLDINGS

as at 31 August 2011

SECTOR ALLOCATION

as at 31 August 2011

PRINCIPAL RISKS AND UNCERTAINTIES

The Company's assets consist of equity and fixed interest investments, cash and liquid resources.  Its principal risks include market risk, credit risk and liquidity risk.  Other risks faced by the Company include compliance and internal control, economic, investment and strategic, regulatory, reputational, operational and financial risks as well as the potential for loss of approval as a VCT.  These risks, and the way in which they are managed, are described in more detail under the heading Principal Risks and Uncertainties within the Directors' Report and Business Review in the Company's Annual Report and Accounts for the year ended 28 February 2011.  The Company's principal risks and uncertainties have not changed materially since the date of that report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

·     the condensed set of financial statements has been prepared in accordance with the Statement "Half-yearly financial reports" issued by the UK Accounting Standards Board;

·     the Chairman's Statement and Fund Manager's Review (constituting the interim management report) includes a true and fair review of the information required by DTR4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements;

·     the Statement of Principal Risks and Uncertainties on page 14 is a fair review of the information required by DTR4.2.7R, being a description of the principal risks and uncertainties for the remaining six months of the year; and

·     the financial statements include a fair review of the information required by DTR4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

For and on behalf of the Board

Simon Miller

Chairman

28 October 2011