Annual Financial Report
Baronsmead VCT 2 plc
Annual report and accounts for the year ended 30 September 2011
Investment Objective
Baronsmead VCT 2 is a tax efficient listed company which aims to achieve
long-term investment returns for private investors, including tax free
dividends.
Investment Policy
- To invest primarily in a diverse portfolio of UK growth businesses,
whether unquoted or traded on AIM.
- Investments are made selectively across a range of sectors in companies
that have the potential to grow and enhance their value.
Further details on investment policy and risk management are contained in the
Directors' Report.
Dividend policy
The Board of Baronsmead VCT 2 aims to sustain a minimum annual dividend level
at an average of 5.5p per ordinary share, mindful of the need to maintain net
asset value. The ability to meet these twin objectives depends significantly
on the level and timing of profitable realisations and cannot be guaranteed.
There will be variations in the amounts of dividends paid year on year.
Since launch, the average annual tax free dividend paid to Shareholders has
been 6.4p per share (equivalent to a pre-tax return of 8.5p per Ordinary Share
for a higher rate taxpayer). For Shareholders who claimed tax reliefs of 20
per cent, 30 per cent or 40 per cent, their returns would have been higher.
Secondary market in the shares of Baronsmead VCT 2 plc
The existing shares of the Company are listed on the London Stock Exchange and
can be bought and sold using a stockbroker in the same way as shares of any
other listed company.
Qualifying investors* who invest in the existing shares of the Company can
benefit from:
- Tax free dividends;
- Realised gains not subject to capital gains tax (although any realised
losses are not allowable);
- No minimum holding period; and
- No need to include VCT dividends in annual tax returns.
The UK tax treatment of VCTs is on a first in first out basis and therefore
tax advice should be obtained before shareholders dispose of their shares and
also if they deferred a capital gain in respect of new shares acquired prior
to 6 April 2004.
*UK income tax payers, aged 18 or over, who acquire no more than £200,000
worth of VCT shares in a tax year.
Financial Headlines
11.3% Net asset value ("NAV") per share increased 11.3 per cent during the
year to 102.15p before deduction of dividends.
7.0p Dividends for the year totalled 7.0p per share
231.3p NAV total return to shareholders for every 100.0p invested since
launch.
8.1% A tax free yield of 8.1 per cent has been received by qualifying
shareholders, based on the mid share price of 86.25p at the year end, and 7.0p
dividends paid for the year.
85.9p Cumulative tax free dividends total 85.9p per share for founder
shareholders since 1998, equivalent to an annual average dividend of 6.4p per
share.
Summary Since Launch
Performance Summary to 30 September 2011
1 year 5 years 10 years Since launch
Total return* % % % (2 April
1998)%
Net asset value†+11.1 +20.2 +92.0 +131.3
Share price†+18.9 +29.0 +95.7 +134.7
FTSE All-Share (4.4) +4.0 +59.2 +45.2
*Source: ISIS EP LLP and AIC
†These returns for Baronsmead VCT 2 ignore up front tax reliefs and the
impact of receiving dividends tax free.
Performance Record
Ordinary share
FTSE Combined
Total Share Net asset All-Share total
net Net asset price value total expense
assets value (mid) total return* return ratioâ€
Year ended £m p p p p %
31/03/1999 9.50 95.65 85.00 104.44 105.06 2.90
31/02/2000 31.00 119.59 125.00 134.62 115.45 3.40
31/03/2001 45.00 112.30 125.00 130.66 103.02 3.10
31/03/2002 41.20 100.54 92.50 120.15 99.76 2.70
31/03/2003 36.70 89.65 80.00 115.49 70.02 2.70
31/03/2004 41.10 100.63 90.00 141.80 91.72 2.70
31/03/2005 69.60 116.92 100.50 168.70 105.99 2.70
31/03/2006 69.60 114.62 100.50 190.51 135.69 2.90
30/09/2007 68.70 112.19 101.00 209.62 154.89 3.00
30/09/2008 54.80 91.68 84.50 184.02 121.80 2.85
30/09/2009 61.22 89.06 77.50 183.81 134.96 2.66
30/09/2010 63.67 94.79 81.25 208.25 151.81 2.58
30/09/2011 65.00 95.15 86.25 231.26 145.18 2.44
* Source: ISIS EP LLP.
†As a percentage of average total shareholders' funds (excluding performance
fee).
Dividends Paid Since Launch
Total Average
Revenue Capital annual Cumulative total annual
dividend dividend dividend dividend dividend
Year ended p p p p p
6 months to 30/09/1998 1.00 0.00 1.00 1.00 0.50
30/09/1999 3.80 0.00 3.80 4.80 3.20
30/09/2000 3.60 0.00 3.60 8.40 3.36
30/09/2001 3.50 0.00 3.50 11.90 3.40
30/09/2002 2.50 0.00 2.50 14.40 3.20
30/09/2003 1.70 10.20 11.90 26.30 4.78
30/09/2004 1.40 3.50 4.90 31.20 4.80
30/09/2005 2.50 7.70 10.20 41.40 5.52
30/09/2006 1.80 9.20 11.00 52.40 6.16
30/09/2007 2.10 6.40 8.50 60.90 6.41
30/09/2008 2.80 4.20 7.00 67.90 6.47
30/09/2009 0.70 4.80 5.50 73.40 6.38
30/09/2010 1.50 4.00 5.50 78.90 6.31
30/09/2011 2.65 4.35 7.00 85.90 6.36
Cash Returned to Shareholders
The table below shows the cash returned to shareholders dependent on their
subscription cost, including their income tax reclaimed on subscription.
Net Cumulative
Subscription Income tax Cash dividends Net annual Gross
price reclaim Invested paid†yield* yieldâ€
Year subscribed p p p p % %
1998 (April) - Ordinary 100.0 20.0 80.0 85.9 8.0 10.6
1999 (May) - Ordinary 102.0 20.4 81.6 82.4 8.2 10.9
2000 (February) - Ordinary 137.0 27.4 109.6 79.2 6.2 8.3
2000 (March) - Ordinary 130.0 26.0 104.0 79.2 6.6 8.8
2004 (October) - C 100.0 40.0 60.0 37.3 8.9 11.8
2009 (April) 91.6 27.5 64.1 18.0 11.3 15.0
C share dividend calculated using conversion ratio of 0.9657, which is the
rate the C shares were converted into ordinary shares.
* Net annual yield represents the cumulative dividends paid expressed as a
percentage of the net cash invested.
†The gross equivalent yield if the dividends had been subject to higher rate
tax (currently 32.5 per cent on dividend income). The additional rate of tax
on dividend income of 42.5 per cent which came into force from the 2010 / 11
tax year for those shareholders who earn more than £150,000 has not been
included. For those shareholders who would otherwise pay this additional rate
of tax on dividends, the future gross equivalent yield will be higher than the
figures shown.
Chairman's Statement
I am pleased to report an increase in Net Asset Value ("NAV") of 10.36p per
share (11.3 per cent) for the year to 30 September 2011. Before deducting
dividends this increased our NAV to 102.15p per share. It was achieved
primarily as a result of a series of profitable realisations from the unquoted
portfolio. Reflecting this excellent result the Board decided to pay an
increased second dividend making the total dividends for the year 7.0p a share
as compared with 5.5p paid in each of the previous two financial years.
INVESTMENT PERFORMANCE
Results
The growth of 11.3 per cent in NAV over the year compares to a 4.4 per cent.
fall in the FTSE All-Share index over the same period. The changes can be
summarised as follows:
Pence per
ordinary
share
NAV as at 1 October 2010
(after final Dividend of 3.0p deducted) 91.79
Valuation uplift (11.3 per cent) 10.36
102.15
Interim dividend paid on 17 June 2011 (2.50)
Second interim dividend paid on 29 Sept 2011 (4.50)
NAV as at 30 September 2011 95.15
During the year four of our unquoted companies were sold at an
average of 2.5 times original cost and realising net profitts of £6.6m. Two
companies in particular contributed significantly to these figures. The sale
of Reed & Mackay, which was announced with the interim results, was at a
multiple of 4.8 times cost. This was an excellent investment return from a
company that grew consistently throughout the recent recession as a result of
its dedicated focus on service and value for customers. During September, the
Company's investment in Quantix was sold realising a profit of £1.7m and
delivering a return of 3.1 times cost.
Approximately two thirds of the total return achieved in the year
to 30 September 2011 has been paid to shareholders as dividends, which at 7.0p
are 27 per cent higher than in the previous two financial years. The level of
future dividends will, of course, depend upon continued profitable
realisations, although the Board intends to maintain and hopefully improve the
Company's dividend policy of maintaining an annual average dividend of 5.5p a
share subject to maintaining NAV.
All of the VCT qualifying tests had also been met throughout the year.
LONGER TERM PERFORMANCE AND BENEFIT OF THE VCT TAX RELIEFS
The Net Asset Value Total Return at 30 September 2011, calculated
on the basis of reinvested dividends, is 231.3p for each 100p invested by
founder shareholders before taking account of any VCT tax reliefs (as above).
The comparable return would be 280.0p if the initial income tax relief
available at inception was included.
The tax free nature of a VCT is of particular benefit for
qualifying shareholders as they do not have to pay income tax on the dividends
they receive, or declare them in a tax return. This means that qualifying
shareholders in Baronsmead VCT 2, who are higher and additional rate tax
payers do not have to pay income tax equivalent to 25 per cent and 36.1 per
cent respectively on the cash dividend they receive from the Company. To
generate the same after-tax dividends, it would be necessary for the dividend
received from a non-VCT investment to be 33.3 per cent or 56.5 per cent
higher, respectively.
PORTFOLIO
The valuation of the portfolio of sixty-eight companies has grown
strongly over the twelve months to 30 September 2011. The direction of travel
showing trading and profitability of these companies is recorded quarterly so
that the Board can monitor the health of the portfolio. The continued poor
economic backdrop in the UK is beginning to have some impact on performance
with 80 per cent of investee companies progressing steadily at the year end
compared with 92 per cent at the end of the previous year. Pleasingly the
actions taken during the early crisis years of 2008/09 have resulted in most
investee companies having lower borrowings and tighter cost control.
The net assets of £65.0 million were invested as follows:
- unquoted companies 44.6 per cent
- AIM-traded and other listed companies 26.2 per cent
- Wood Street Microcap Investment Fund 4.4 per cent
- in liquid assets or government securities 24.8 per cent.
The largest unquoted investment, Nexus Vehicle Holdings and the
largest AIM investment, IDOX represented 8.6 and 3.8 per cent of net asset
value respectively.
The most significant increases in individual investment valuations
during the year were CableCom (68 per cent) and Nexus (34 per cent) both of
which have increased profits significantly since the Company invested. The two
largest AIM investments were IDOX and Staffline, both of which have continued
to grow and trade more profitably.
Subsequent to the year end the Company invested £1.3m in ICCM, a
provider of high acuity care for home based care users. This has increased the
total amount of net assets invested in unquoted companies to 46.7 per cent
VCT LEGISLATION AND WIDER REGULATION
There have been two positive actions by the Government to improve
VCT legislation. The March 2011 Budget announced not only a better regime for
entrepreneurs but also an intention to liberalise the rules governing the
investments VCTs can make. From April 2012 the Government wishes to change the
qualifying company rules so that investee companies can have up to 250
employees (rather than the present limit of up to 50 employees) and gross
assets of £15 million (£7 million at present). Additionally the Government is
proposing to increase the annual investment limit for qualifying companies to
£10 million. These proposals are however subject to EU state aid approval
which is currently being negotiated.
In July 2011, HM Treasury issued a consultation document which is
aiming to refocus the VCT scheme on risk investments and seeking to remove
some of the structural VCT constraints. Our Trade Association, the AIC, worked
closely with the larger VCT Manager groups to provide a suitable response to
this consultation. The response to the Treasury's consultation and research
published by the AIC has stressed the extent to which the VCT sector has
contributed to employment, innovation and growth in the economy.
The Company's investment manager, ISIS EP LLP, participated in
these discussions and previously has provided data and case studies from the
Baronsmead portfolios to the AIC, to assist them in producing economic impact
data for the sector. This data demonstrates that the VCT sector has generated
signifi cant employment since inception and has contributed to the overall
growth of the economy. In particular SDL and Vectura in which the Company
invested in 1998 and 2001 respectively have grown into substantial companies
that are now listed on the London Stock Exchange.
ANNUAL GENERAL MEETING
I look forward to meeting as many shareholders as possible at our
14th Annual General Meeting to be held on Wednesday 11 January 2012 at the
London Stock Exchange, 10 Paternoster Square near St Paul's Cathedral.
Proceedings for the day commence at 9.45 a.m. with a shareholder workshop.
This is followed by the AGM at 10.45 a.m. as well as presentations from the
Manager and an investee company ending with a light lunch.
OUTLOOK
My cautionary remarks in the interim report anticipated continued
uncertainty and slower growth for the UK economy. The summer months have
confirmed that this caution was justified. Concerns about the level of
indebtedness of Western Economies, particularly in the EU, have led to
significant stock market volatility and lower investor confidence.
Against this backdrop Baronsmead VCT 2 has realised good profits
from the sale of a number of companies and its portfolio is lowly geared. The
manager, ISIS, has the experience to guide portfolio companies through
difficult trading environments and in this rapidly changing economic climate
there will be specific sector opportunities to which the Manager remains alert
and in which it intends to invest.
The Government needs to create a more business friendly environment
and drive private sector growth, particularly by encouraging investment by
individuals and the corporate sector. If they also succeed in liberalising the
VCT regulations, it is companies like those in our portfolio which can
generate the growth that the UK economy needs.
Clive Parritt
Chairman
18 November 2011
MANAGER'S REVIEW
Until summer 2011, trading performance across the unquoted and AIM
portfolio companies had improved compared to the previous year, including a
series of profitable exits. The deterioration in the economy and now renewed
threat of recession is having some impact on the portfolio but in general the
companies are well placed to trade through a renewed downturn.
PORTFOLIO REVIEW
The portfolio comprised sixty-eight investee companies at the year end after
making nine realisations and adding eleven new investments. Capital proceeds
from realisations totalled £13.6 million and net capital profits realised in
the period were £7.0 million. Investment in unquoted and AIM traded companies
were £5.5 million and £3.1 million respectively, including further round
financings.
The new unquoted investments were in Valldata Group, a UK leading provider of
outsourced donation processing and fulfilment services for the UK not-for
profit sector; and three acquisition companies. Each of the acquisition
companies is led by an experienced Chairman who had previously been backed by
ISIS through investment by the Baronsmead VCTs. These prior investee companies
were ScriptSwitch a healthcare IT company, Reed & Mackay a business travel
management company and Hawksmere a business training company. All three
investments delivered successful realisations for shareholders and the three
Chairmen are now seeking new opportunities in their chosen sectors.
The volume of qualifying AIM opportunities again increased from the depressed
levels of 2009. A total of £2.0 million was invested into seven AIM-traded
companies and another £1.4 million of additional capital was provided to eight
existing investments. The two largest AIM investments were in Music Festivals
plc and Escher Group Holdings plc. Music Festivals focuses on the ownership,
development, and production of music festivals including Festival
Internacional de Benicassim in Spain and the Hop Farm Music Festival in Kent.
Escher Group Holdings provides software for the global post office automation
market.
Wood Street Microcap Investment Fund ("Wood Street") was established by ISIS
in May 2009 to provide flexibility for the Baronsmead VCTs to invest in
generally larger and more liquid non VCT qualifying AIM and Small Cap
opportunities. At 30 September 2011 Baronsmead VCT 2 had invested £2.5 million
through Wood Street into a portfolio of twenty nine companies and generated a
positive return of 7.9 per cent over the year. The Manager receives no
additional fee for managing this fund.
EXITS IN THE YEAR UNDER REVIEW
The four unquoted and five AIM full exits have delivered
significant realised profits. The former were sold at an aggregate of 2.5
times cost yielding profits of £6.6m. Although profits from the AIM portfolio
realisations were at a lower multiple of 1.3 times cost, this is encouraging
in the context of quoted markets being lower by September 2011 than in
September 2010.
The two unquoted companies that achieved sale prices of 4.8 times
and 3.1 times their cost were Reed & Mackay and Quantix. Both companies had
sustained growth through the 2008/09 recession.
- Reed & Mackay provides business travel management to mostly
financial services and professional services firms and prides itself on its
exceptional customer service. Over the five and half years that the Baronsmead
VCTs were shareholders, ISIS worked with the business to strengthen the senior
management team and further develop the technological support for their travel
consultants. The work-force more than doubled from the 140 employees at the
outset.
- Quantix is an IT managed services provider, with services
including database support and cloud services to enterprises throughout the
UK. Since the Baronsmead VCTs invested in the company in 2007 it has tripled
its client base and become a recognised leader in its field particularly for
its innovative approach. Simon Goodenough, MD of Quantix said "We have really
enjoyed having ISIS as a partner for the past four and a half years. The
business has definitely benefitted from having such a supportive investor.
They gave us the confidence to invest in the sales force and internal
operations processes ahead of our original plan."
- Getting Personal and Credit Solutions were also successfully sold
during the year to 30 September 2011. Getting Personal is a leading internet
retailer of personalised gifts which had grown rapidly since its launch 5
years ago and generated sales of £11.5 million in the year to April 2011. The
business was profitably sold to Card Factory in July 2011. Baronsmead VCT 2
invested in Credit Solutions, a debt collection agency in 2005. The business
was sold to arvato, a global business outsourcing partner in November 2010.
CASE STUDIES
The four case studies highlighted in this Annual Report have shown
sustained growth over the last three years.
- CableCom Networking Holdings supplies IT and communication services to the
UK student accommodation and key worker sectors. The latter includes high
quality accommodation around the BBC's new northern base at Salford.
- Nexus Vehicle Holdings, a leading provider of vehicle rental
services to the UK corporate market, is growing both organically and by
acquisition.
- Crew Clothing Holdings, an active and casual wear clothing brand,
continues to grow its portfolio of sites, creating jobs as well as
experiencing growth from its direct mail/website retailing
- Staffline Group is a specialist provider of blue-collar labour
outsourcing for UK industry. The investment was made by the Baronsmead VCTs in
2000 and the company was floated on the AIM market in 2004. It is now a market
leader in its field with turnover increasing from £29 million at the date of
investment to £206 million in the year to 31 December 2010 with profits in
that year of £7 million.
OUTLOOK
The economic optimism of 2010 has diminished during 2011 with
widespread concern about growth prospects. Many of the portfolio companies are
now more experienced at handling the economic uncertainties. However this
environment does not help to encourage the entrepreneurial spirit so vital for
the development of the SME sector that will be key to the regeneration of the
economy. It is simply much more difficult to evaluate the future and the
associated risks.
As an active investment manager ISIS continues to work with our
investee companies to help to steer them on an appropriate course in these
difficult conditions. Few of the portfolio companies are reliant on bank
finance and so the focus will be on sustaining sales growth whilst continuing
to enhance customer service so as to build resilient businesses with continued
momentum.
ISIS EP LLP
Investment Manager's
18 November 2011
Table of Investments and Realisations
Investments in the year to 30 September 2011
Book Cost
Company Location Sector Activity (£'000)
Unquoted investments
New
Valldata Group Limited Melksham Business Payment 1,616
Services processing for
non-profit sector
Arcas Investments London Business Company seeking 1,000
Limited Services to acquire
businesses in the
business services
sector
Quest Venture Partners London Business Company seeking 1,000
Limited Services to acquire
businesses in the
business travel
sector
HealthTech Innovation London Healthcare & Company seeking 1,000
Partners Limited Education to acquire
businesses in the
healthcare IT
sector
Music Festivals Plc London Consumer Owner and 400
Loan Note Markets operator of live
music festivals
and event
Follow on
Independent Living Healthcare & Care at home
Services Limited Alloa Education services 438
Total unquoted investments 5,454
AIM-traded & listed investments
New
Escher Group Holdings Dublin IT & Media Postal automation 614
Plc software and
services
Accumuli Plc Salford IT & Media Managed IT 333
security
Tristel Plc Newmarket Healthcare & Infection Control 217
Education
Brady Plc Cambridge IT & Media Commodities 176
trading software
Ubisense Group Plc Cambridge IT & Media Technology & 130
Services offering
real time
location systems
solutions
Music Festivals Plc London Consumer Owner and 100
Markets operator of live
music festivals
and events
Hangar8 Plc Oxford Business Business Jet 44
Follow on Services Management
Green Compliance Plc Cirencester Business Small business 476
Services compliance
Specialist
IS Pharma Plc Chester Healthcare & hospital 278
Education medicines group
Electric Word plc London IT & Media Business to 238
business
publisher
Netcall Plc St Ives IT & Media Communications 157
software
Active Risk Group Plc Maidenhead IT & Media Risk management 124
software
Tangent Communications London Business Digital direct
Plc Services marketing 88
Driver Group Plc Rossendale Business Dispute 64
Services resolution
STM Group Plc Gibraltar Financial Offshore trust 22
Services and company
administration
services
Total AIM-traded & listed
investments 3,061
Collective investment vehicles
Follow on
Wood Street Microcap Investment
Fund 1,000
Total collective investment
vehicles 1,000
Total investments in the year 9,515
Realisations in the year to 30 September 2011
30
September
First 2010 Realised
profit/(loss) Overall
Investment valuation this period Multiple
Company date £'000 £'000 Return*
Unquoted realisations
Quantrix Limited Full trade sale Mar 07 1,984 920 3.1
Getting Personal
Limited Full trade sell Jun 10 988 823 ND^
Reed& Mackay
Limited Full trade sell Nov 05 4,247 761 4.8
Credit Solutions
Limited Full trade sell May 05 1,253 40 1.8
Carnell
contractors
Limited Loan repayment Mar 08 558 0 0.6
MLS Limited Loan repayment Jul 06 250 0 1.0
Total unquoted realisations 9,280 2,544
AIM-traded, listed PLUS & NYSE
Realisations
Chemistry
communications
Group Plc Full trade sell Dec 00 136 266 0.8
Mount Engineering
Plc Full trade sell Jun 07 413 39 1.2
Advanced computer Full market
software Group Plc sale Jul 08 494 31 2.1
Full market
Craneware Plc sale Sep 07 302 (4) 2.7
Full market
Alere Inc sale Aug 09 150 (40) 0.8
Total AIM-traded & listed realisations 1,495 292
Total realisations in the
year 10,775 2,836â€
* Includes interest/dividends received, loan note redemptions and partial
realisations accounted for in prior periods.
†Proceeds of £23,000 were also received in respect of Country Artists And a
further £6,000 in respect of MKM Group Plc, both of which had been written off
in a prior period.
^ Not disclosed
Investment Portfolio
Investment Classification at 30 September 2011
Sector* Percentage
Business Services 38
Consumer Markets 17
Financial Services 3
Healthcare & Education 10
IT & Media 32
100
* at 30 September 2011 valuation.
Total Assets* Percentage
Unquoted - Loan stock 30
Ordinary and preference Shares 15
AIM, Listed & Collective
Investment Vehicles 30
Interest bearing securities 24
Net current Assets 1
100
* at 30 September 2011 valuation
Time Investments Held* Percentage
Less than 1 year 25
Between 1 and 3 years 22
Between 3 and 5 years 32
Greater than 5 years 21
100
* at 30 September 2011 valuation.
30 September 30 September % of total % of
2010 2011 % of held by Equity
Book cost valuation valuation net Baronsmead held by
Company Sector £'000 £'000†£'000 assets VCT 2 plc all Funds*
Unquoted
Nexus Vehicle Holding Business Services 2,367 4,197 5,627 8.6 12.6 57.4
Limited
CableCom Networking
Holdings Limited IT & Media 1,381 2,200 3,686 5.7 10.6 48.0
Crew Clothing Company
Limited Consumer Markets 984 2,519 2,714 4.2 5.4 22.8
CSC (World) Limited IT & Media 1,606 1,687 2,148 3.3 8.8 40.0
Kafévend Holdings Limited Consumer Markets 1,252 1,786 2,039 3.1 15.8 66.5
Fisher Outdoor Leisure Consumer Markets 1,423 1,777 1,777 2.7 10.5 44.0
Holdings Limited
Valldata Group Limited Business Services 1,616 - 1,616 2.5 8.9 40.6
Inspired Thinking Group Business Services 796 979 1,275 2.0 5.0 22.5
Limited
MLS Ltd IT & Media 531 1,136 1,011 1.6 5.3 22.5
Arcas Investments Limited Business Services 1,000 - 1,000 1.5 9.6 48.6
Quest Venture Partners
Limited Business Services 1,000 - 1,000 1.5 9.6 48.6
HealthTech Innovation
Partners Limited Healthcare & Education 1,000 - 1,000 1.5 9.6 48.6
Independent Living Services Healthcare & Education 1,599 1,755 980 1.5 16.2 68.1
Limited
TVC Group Limited IT & Media 1,233 698 766 1.2 13.0 59.3
Empire World Trade Limited Business Services 1,297 833 715 1.1 Ŧ Ŧ
Surgi C Limited Healthcare & Education 1,102 1,102 626 1.0 9.8 44.7
Playforce Holdings Limited Business Services 1,033 1,024 512 0.8 9.7 44.0
Music Festivals Plc Loan Consumer Markets 400 - 400 0.6 N/A N/A
Note
Kidsunlimited Group Limited Business Services 113 113 113 0.2 N/A N/A
Carnell Contractors Limited Business Services 941 674 0 0.0 # #
Xention Discovery Limited Healthcare & Education 316 55 0 0.0 0.4 3.0
Total unquoted 22,990 22,535 29,005 44.6
AIM
IDOX Plc IT & Media 1,038 1,276 2,440 3.8 3.2 9.6
Staffline Group plc Business Services 249 1,534 2,013 3.1 4.2 8.4
Green Compliance plc Business Services 882 656 870 1.3 4.0 19.8
Netcall plc IT & Media 869 504 854 1.3 4.1 20.2
Jelf Golf plc Financial Services 761 548 792 1.2 1.4 6.3
Murgitroyd Group plc Business Services 319 711 777 1.2 3.1 6.2
Escher Group Holdings plc IT & Media 614 - 614 1.0 2.1 10.6
Tasty plc Consumer Markets 469 364 607 0.9 2.5 17.1
Brulines Group plc Business Services 646 621 482 0.8 1.8 9.6
Sinclair IS Pharma plc^ Healthcare & Education 524 - 446 0.7 0.5 2.5
Electric Word plc IT & Media 616 450 429 0.7 5.2 28.8
FFastFill plc IT & Media 251 288 427 0.7 0.9 6.1
Accumuli plc IT & Media 333 - 384 0.6 3.6 20.7
PROACTIS Holdings plc IT & Media 619 563 341 0.5 5.4 26.2
Plastics Capital plc Business Services 473 180 331 0.5 1.7 9.8
Kiotech International plc Healthcare & Education 275 321 327 0.5 2.1 15.5
InterQuest Group plc Business Services 310 309 281 0.4 1.8 7.0
EG Solutions plc IT & Media 375 397 273 0.4 3.1 14.2
Quadnetics Group plc Business Services 296 196 224 0.4 0.6 2.1
Real Good Food Company Consumer Markets 620 101 218 0.3 0.7 2.3
(The) plc
Sanderson Group plc IT & Media 387 170 209 0.3 1.8 6.9
Brady plc IT & Media 176 - 208 0.3 0.5 3.1
Driver Group plc Business Services 503 120 194 0.3 3.5 16.2
Tangent Communications plc Business Services 268 42 175 0.3 2.0 10.3
Dos Group plc IT & Media 666 246 162 0.3 1.7 4.4
Stagecoach Theatre Arts plc Consumer Markets 419 198 153 0.2 4.5 9.0
Tristel plc Healthcare & Education 217 - 152 0.2 1.0 5.4
Ubisense Group plc IT & Media 130 - 139 0.2 0.3 1.7
Active Risk Group plc IT & Media 159 36 136 0.2 1.1 5.6
Autoclenz Holdings plc Business Services 400 122 122 0.2 3.1 12.3
Begbies Traynor Group plc Financial Services 231 425 110 0.2 0.6 2.5
Cohort plc Business Services 179 47 105 0.2 0.3 1.4
Prologic plc IT & Media 310 103 103 0.2 4.1 15.0
Music Festivals plc Consumer Markets 100 - 91 0.2 1.0 5.2
STM Group plc Financial Services 162 49 44 0.1 0.8 4.9
Bglobal plc Business Services 176 218 42 0.1 0.4 2.5
AorTech International plc Healthcare & Education 285 25 32 0.0 0.3 0.6
Hangar8 Plc Business Services 44 - 31 0.0 0.5 2.6
Colliers International plc Financial Services 470 63 27 0.0 0.3 0.8
Clarity Commerce Solutions IT & Media 50 48 26 0.0 0.3 6.0
plc
Adventis Group plc IT & Media 361 163 22 0.0 3.1 20.7
Zoo Digital Group plc IT & Media 438 36 19 0.0 0.2 0.6
RTC Group plc Business Services 355 37 11 0.0 2.8 5.7
Highams Systems Services
Group plc Business Services 197 6 5 0.0 0.3 1.0
Total AIM 17,222 11,200 15,448 23.8
Listed
Vectura Group plc Healthcare & Education 578 615 1,031 1.6 0.4 1.3
Chime Communications plc IT & Media 369 343 323 0.5 0.2 1.3
Marwyn Management Partners Financial Services 525 - 117 0.2 0.3 1.8
plc^^
Marwyn Value Investors Financial Services 64 59 45 0.1 1.3 6.0
Limited
Total Listed 1,536 1,017 1,516 2.4
Interest bearing securities
UK T-Bill 03/10/11 9,498 - 9,498 14.6
Blackrock Cash Market OEIC 3,000 7,000 3,000 4.6
JP Morgan Europe OEIC 3,000 4,800 3,000 4.6
Total interest bearing 15,498 11,800 15,498 23.8
securities
Collective investment
vehicle
Wood Street Microcap
Investment Fund 2,525 1,654 2,863 4.4
Total Collective investment vehicle 2,525 1,654 2,863 4.4
Total investments 59,771 48,206 64,330 99.0
Net current assets 669 1.0
Net assets 64,999 100.00
^^ Marwyn Management Partners plc shares received in exchange for Prasepe plc
shares following a takeover.
†The total investment valuation at 30 September 2010 per the table above
does not agree to the audited accounts due to purchases and sales since that
date.
* All funds managed by the same investment manager, ISIS EP LLP, including
Baronsmead VCT 2.
Unquoted, AIM and Listed Portfolio Concentration Analysis at 30 September 2011
Investment ranking Book cost Valuation % of
by valuation £'000 £'000 portfolio
Top Ten 12,712 25,335 55.1
11-20 8,539 9,315 20.3
21-30 8,034 5,688 12.4
30+ 12,463 5,631 12.2
Total 41,748 45,969 100.0
Ten Largest Investments
The top ten investments by current value at 30 September 2011 illustrate the
diversity and size of investee companies within the portfolio. This financial
information is taken from publicly available information, which has been
audited by the auditors of the investee companies.
1. NEXUS VEHICLE HOLDINGS LIMITED - Leeds
All ISIS EP LLP managed funds
First Investment: February 2008
Total Cost: £9,500,000
Total equity held: 57.38%
Baronsmead VCT 2 only
Cost: £2,367,000
Valuation: £5,627,000
Valuation basis: Earnings Multiple
% of equity held: 12.62%
Year ended 30 2010 2009
September
£ million £ million
Sales 33.0 19.2
EBITA 4.0 2.0
Profit/(Loss) before 1.3 (0.3)
tax
Net Assets/ 0.8 (0.2)
(Liabilities)
No. of Employees 73 32
(Source: Nexus Vehicle Holdings Limited, Financial Statements 2010).#
2. CABLECOM NETWORKING HOLDINGS LIMITED - Clevedon
All ISIS EP LLP managed funds
First Investment: May 2007
Total Cost: £5,600,000
Total equity held: 48.00%
Baronsmead VCT 2 only
Cost: £1,381,000
Valuation: £3,686,000
Valuation basis: Earnings Multiple
% of equity held: 10.56%
Year ended 30 2010 2009
September
£ million £ million
Sales 8.2 8.1
EBITA 0.9 0.9
Loss before tax (0.5) (0.4)
Net Assets 0.5 0.9
No. of Employees 52 40
(Source: Cablecom Networking Holdings Limited, Audited Annual Report and
Accounts 2010)
3. CREW CLOTHING HOLDINGSLIMITED - London
All ISIS EP LLP managed funds
First Investment: November 2006
Total Cost: £3,955,000
Total equity held: 22.79%
Baronsmead VCT 2 only
Cost: £984,000
Valuation: £2,714,000
Valuation basis: Earnings Multiple
% of equity held: 5.41%
Year ended 31 2010 2009
October
£ million £ million
Sales 34.6 29.3
EBITA 2.7 0.8
Profit before tax 2.0 0.2
Net Assets 3.8 2.3
No. of Employees 284 273
(Source: Crew Clothing Holdings Limited, Consolidated Financial Statements
2010)
4. IDOX PLC - London
All ISIS EP LLP managed funds
First Investment: June 2006
Total Cost: £3,015,000
Total equity held: 9.60%
Baronsmead VCT 2 only
Cost: £1,038,000
Valuation: £2,440,000
Valuation basis: Bid Price
% of equity held: 3.21%
Year ended 31 2010 2009
October
£ million £ million
Sales 31.3 32.2
EBITA 7.5 6.6
Profti before tax 4.9 4.5
Net Assets 31.0 28.2
No. of Employees 332 304
(Source: IDOX plc Annual Report and Accounts 2010).
5. CSC (WORLD) LIMITED - Pudsey, Leeds
All ISIS EP LLP managed funds
First Investment: January 2008
Total Cost: £6,450,000
Total equity held: 40.03%
Baronsmead VCT 2 only
Cost: £1,606,000
Valuation: £2,148,000
Valuation basis: Earnings Multiple
% of equity held: 8.81%
Year ended 31 March 2011 2010
£ million £ million
Sales 7.3 6.4
EBITA 2.3 1.9
Loss before tax (0.4) (0.8)
Net (Liabilities)/ (1.3) (0.6)
Assets
No. of Employees 58 55
(Source: Cobco 867 Limited, Directors Report and Consolidated Financial
Statements 2010)
6. KAFÉVEND HOLDINGS LIMITED - Crawley
All ISIS EP LLP managed funds
First Investment: October 2005
Total Cost: £5,024,000
Total equity held: 66.50%
Baronsmead VCT 2 only
Cost: £1,252,000
Valuation: £2,039,000
Valuation basis: Earnings Multiple
% of equity held: 15.79%
Year ended 30 2010 2009
September
£ million £ million
Sales 15.6 14.7
EBITA 2.0 1.9
Profit before tax 0.8 0.5
Net Assets 1.2 0.8
No. of Employees 95 98
(Source: Kafevend Holdings Limited, audited Annual Report and Accounts 2010)
7. STAFFLINE RECRUITMENT GROUP PLC - Nottingham
All ISIS EP LLP managed funds
First Investment: July 2000
Total Cost: £498,000
Total equity held: 8.42%
Baronsmead VCT 2 only
Cost: £249,000
Valuation: £2,013,000
Valuation basis: Bid Price
% of equity held: 4.23%
Year ended 31 2010 2009
December
£ million £ million
Sales 206.2 115.0
EBITA 7.8 3.7
Profit before tax 7.0 3.5
Net Assets 30.5 26.1
No. of Employees 319 243
(Source: Staffline Group Plc Financial Statements 2010)
8. FISHER OUTDOOR LEISURE HOLDINGS LIMITED - St. Albans
All ISIS EP LLP managed funds
First Investment: June 2006
Total Cost: £5,700,000
Total equity held: 44.0%
Baronsmead VCT 2 only
Cost: £1,423,000
Valuation: £1,777,000
Valuation basis: Earnings Multiple
% of equity held: 10.45%
Year ended 31 2010 2009
January
£ million £ million
Sales 26.5 22.2
EBITA 2.3 1.8
Profit before tax 0.7 0.1
Net Assets 1.4 1.0
No. of Employees 96 83
(Source: Fisher Outdoor Leisure Holdings Limited, Directors Report and
Financial Statements 2010)
9. VALLDATA GROUP LIMITED - Wiltshire
All ISIS EP LLP managed funds
First Investment: January 2011
Total Cost: £6,475,000
Total equity held: 40.57%
Baronsmead VCT 2 only
Cost: £1,616,000
Valuation: £1,616,000
Valuation basis: Cost
% of equity held: 8.92%
Year ended 31 March 2011 2010**
£ million £ million
Sales 6.3 5.4
EBITA 0.9 0.8
Profit before tax 0.8 0.7
Net (Liabilities)/ 0.6 0.4
Assets
No. of Employees 292 234
**restated
(Source: Valldata Services Limited, Directors Report and Financial Statements
2011)
10. INSPIRED THNKING GROUP LIMITED - Birmingham
All ISIS EP LLP managed funds
First Investment: May 2010
Total Cost: £3,200,000
Total equity held: 22.50%
Baronsmead VCT 2 only
Cost: £769,000
Valuation: £1,275,000
Valuation basis: Earnings Multiple
% of equity held: 4.95%
Year ended 31 August 2010
£ million
Sales 12.9
EBITA 0.5
Profit before tax 0.4
Net Assets 0.9
No. of Employees 96
(Source: Inspired Thinking Group Holdings, Directors Report and Consolidated
Financial Statements for the year end 31 August 2010)
Extract from Report of the Directors
The chairman's statement and the Corporate Governance Statement from part of
the report of the Directors
Results and Dividends
The Directors present the fourteenth Report and audited financial statements
of the Company for the year ended 30 September 2011.
Ordinary Shares £'000
Profit on ordinary activities after taxation 6,975
Final dividend for 2010 of 3.0p per ordinary
share paid on 14 January 2011 (2,077)
Interim dividend of 2.5p per ordinary share
paid on 17 June 2011 (1,715)
Second interim dividend of 4.5p per ordinary
share paid on 29 September 2011 (3,077)
Total dividends paid during the year (6,869)
Principal Activity and Status
The Company is registered in England as a Public Limited Company (Registration
number 03504214). The Directors have managed, and intend to continue to
manage, the Company's affairs in such a manner as to comply with Section 274
of the Income Tax Act 2007 which grants approval as a VCT.
Business Review
The Business Review has been prepared in accordance with the requirements of
Section 417 of the Companies Act 2006 and best practice. The purpose of this
review is to provide shareholders with a summary setting out the business
objectives of the Company, the Board's strategy to achieve those objectives,
the risks faced, the regulatory environment and the key performance indicators
("KPIs") used to measure performance.
Strategy for achieving objectives
Baronsmead VCT 2 plc is a tax efficient Company listed on the London Stock
Exchange's main market for listed securities.
Investment Objective
The investment objective of the Company is to achieve long-term investment
returns for private investors, including tax-free dividends.
Investment Policy
The Company's investment policy is to invest primarily in a diverse portfolio
of UK growth businesses, whether unquoted or traded on AIM.
Investments are made selectively across a range of sectors in companies that
have the potential to grow and enhance their value.
Investment securities
The Company invests in a range of securities including, but not limited to,
ordinary and preference shares, loan stocks, convertible securities, and
fixed-interest securities as well as cash. Unquoted investments are usually
structured as a combination of ordinary shares and loan stocks, while AIM
investments are primarily held in ordinary shares. Pending investment in
unquoted and AIM-traded securities, cash is primarily held in an interest
bearing money market open ended investment company ("OEIC"), UK gilts and
Treasury Bills.
UK companies
Investments are primarily made in companies which are substantially based in
the UK, although many of these investees will trade overseas. The companies in
which investments are made must have no more than £15 million of gross assets
at the time of investment (or £7 million if the funds being invested were
raised after 5 April 2006) to be classed as a VCT qualifying holding.
VCT regulation
The investment policy is designed to ensure that the Company continues to
qualify and is approved as a VCT by HM Revenue and Customs. Amongst other
conditions, the Company may not invest more than 15 per cent of its
investments in a single company and must have at least 70 per cent by value of
its investments throughout the period in shares or securities comprised in
qualifying holdings, of which 30 per cent by value must be ordinary shares
which carry no preferential rights. In addition, it must have at least 10 per
cent by value of its total investments in any qualifying company in ordinary
shares which carry no preferential rights.
Asset mix
The Company aims to be at least 90 per cent invested in growth businesses
subject always to the quality of investment opportunities and the timing of
realisations. Any un-invested funds are held in cash and interest bearing
securities. It is intended that at least 75 per cent of any funds raised by
the Company will be invested in VCT qualifying investments.
Risk diversification and maximum exposures
Risk is spread by investing in a number of different businesses within
different qualifying industry sectors using a mixture of securities. Generally
no more than £2.5 million at cost is invested in the same company. The value
of an individual investment is expected to increase over time as a result of
trading progress and a continuous assessment is made of its suitability for
sale.
Investment style
Investments are selected in the expectation that the application of private
equity disciplines including an active management style for unquoted companies
will enhance value and enable profits to be realised from planned exits.
Co-investment
The Company aims to invest in larger more mature unquoted and AIM companies
and to achieve this it invests alongside the other Baronsmead VCTs. Currently,
ISIS EP LLP (`the Manager') and its executive members are mandated to invest
in unquoteds alongside the Company on terms which align the interests of
shareholders and the Manager.
Borrowing powers
The Company's Articles permit borrowing to give a degree of investment
flexibility. The Company's policy is to use borrowing for short term liquidity
purposes only.
Management
The Board has delegated the management of the investment portfolio to the
Manager. The Manager also provides or procures the provision of company
secretarial, administrative, accounting and custodian services to the Company.
The Manager has adopted a `top-down, sector-driven' approach to identifying
and evaluating potential investment opportunities, by assessing a forward view
of firstly the business environment, then the sector and finally the specific
potential investment opportunity. Based on its research, the Manager has
selected a number of sectors that it believes will offer attractive growth
prospects and investment opportunities. Diversification is also achieved by
spreading investments across different asset classes and making investments
for a variety of different periods.
The Manager's Review above provides a review of the investment portfolio and
of market conditions during the year.
Principal risks, risk management and regulatory environment
The Board believes that the principal risks faced by the Company are:
- Economic risk - events such as an economic recession and movement in
interest rates could affect smaller companies' valuations
- Loss of approval as a Venture Capital Trust - the Company must comply with
Section 274 of the Income Tax Act 2007 which allows it to be exempted from
capital gains tax on investment gains. Any breach of these rules may lead to
the Company losing its approval as a VCT, qualifying shareholders who have not
held their shares for the designated holding period having to repay the income
tax relief they obtained and future dividends paid by the Company becoming
subject to tax. The Company would also lose its exemption from corporation tax
on capital gains.
- Investment and strategic - an inappropriate strategy, poor asset allocation
or consistent weak stock selection might lead to under performance and poor
returns to shareholders. Therefore the Company's investment strategy is
periodically reviewed by the Board which considers at each meeting the
performance of the investment portfolio.
- Regulatory - the Company is required to comply with the Companies Act 2006,
the rules of the UK Listing Authority and United Kingdom Accounting Standards.
Breach of any of these might lead to suspension of the Company's Stock
Exchange listing, financial penalties or a qualified audit report. General
changes in legislation, regulations or government policy could significantly
influence the decisions of investors or impact upon the markets in which the
Company invests
- Reputational - inadequate or failed controls might result in breaches of
regulations or loss of shareholder trust.
- Operational - failure of the Manager's and administrator's accounting
systems or disruption to its business might lead to an inability to provide
accurate reporting and monitoring.
- Financial - the Board has identified the Company's principal financial risks
which are set out in the notes to the Financial Statements below. Inadequate
controls might lead to misappropriation of assets. Inappropriate accounting
policies might lead to misreporting or breaches of regulations.
- Market Risk - investment in AIM traded, PLUS traded and unquoted companies
by nature involve a higher degree of risk than investment in companies traded
on the main market. In particular, smaller companies often have limited
product lines, markets or financial resources and may be dependent for their
management on a smaller number of key individuals. In addition, the market for
stock in smaller companies is often less liquid than that for stock in larger
companies, bringing with it potential difficulties in acquiring, valuing and
disposing of such stock.
Liquidity Risk - the Company's investments may be difficult to realise. The
fact that a share is traded on AIM does not guarantee its liquidity. The
spread between the buying and selling price of such shares may be wide and
thus the price used for valuation may not be achievable.
- Competitive Risk - retention of key personnel of the Manager is vital to the
success of the Company. Appropriate incentives are in place to ensure
retention of such personnel.
The Board seeks to mitigate the internal risks by setting policy, regular
review of performance, enforcement of contractual obligations and monitoring
progress and compliance. In the mitigation and management of these risks, the
Board applies rigorously the principles detailed in the FRC's "Revised
Guidance for Directors on the Combined Code".
Details of the Company's internal controls are contained in the Corporate
Governance section of the Company's Annual Report for the year ended 30
September 2011.
Performance and key performance indicators ("KPIs")
The Board expects the Manager to deliver a performance which meets the
objective of achieving long term investment returns, including tax-free
dividends.
Performance, measured by dividends paid to shareholders and the change in NAV
per share, is also measured against the FTSE All-Share Total Return Index.
This index, as the widest measure of UK quoted equities, has been adopted as
an informal benchmark. Investment performance, cash returned to shareholders
and share price are also measured against the Company's peer group of seven
other generalist venture capital trusts. A review of the Company's performance
during the financial period, the position of the Company at the year end and
the outlook for the coming year is contained within the Chairman's statement
above.
The Board assesses the performance of the Manager in meeting the Company's
objective against the primary KPIs highlighted above.
Issue and Buy-Back of Shares
During the period the Company issued 2,068,746 ordinary shares, 9,756 of which
were cancelled following their forfeiture on 16 May 2011. During the period
the Company bought back 920,000 ordinary shares with a nominal value of 10p to
be held in Treasury, representing at an aggregate cost of £813,262.50. These
shares will not be sold at a discount wider than the discount prevailing at
the time the shares were initially bought back by the Company. The Company
holds 8,473,906 ordinary shares in Treasury representing 11.04 per cent of the
issued share capital as at 18 November 2011. The maximum number of shares held
in Treasury during the year was 8,473,906 shares representing 11.04 per cent
of the issued share capital at the year end.
Directors
On 3 February 2011 Ms C McComb was appointed as a Director and having been
appointed during the year will submit herself for election as a Director at
the forthcoming Annual General Meeting being the first General Meeting since
her appointment. Mr Goldring will, in accordance with the Articles of
Association, will retire by rotation and submit himself for re-election at the
forthcoming Annuall General Meeting.
As explained in more detail under Corporate Governance below in accordance
with the provisions of the AIC Code of Corporate Governance, the Board has
agreed that Directors who have held office for more than nine years will
retire annually. Accordingly, as Mr C Parritt and Mrs G Nott have held office
for a period of more than nine years, they will retire at the forthcoming
Annual General Meeting of the Company and, being eligible, offer themselves
for re-election. Mrs G Nott who is a director of Baronsmead VCT 3 plc and
Baronsmead VCT 5 plc is also required to seek annual re-election under the
terms of the UKLA's Listing Rules.
The Board confirms that, following formal performance evaluations, the
performance of each of the Directors continues to be effective and
demonstrates commitment to the role; the Board believes that it is therefore
in the best interests of shareholders that these Directors be re-elected. The
interests of the Directors in the shares of the Company, at the beginning and
at the end of the year, or date of appointment, if later, were as follows:
30 September 2011 30 September 2010
Ordinary Ordinary
shares 10p Shares 10p
Clive Parritt 85,316 73,941
Gillian Nott 48,462 23,341
Howard Goldring - -
Christina McComb* - -
Total shares held 133,778 97,282
*Appointed on 3
February 2011
There have been no changes in the holdings of the Directors between 30
September 2011 and 18 November 2011.
No Director has a service contract with the Company.
All Directors are members of the Audit, Management Engagement and
Remuneration, Nomination and Valuation Committees.
The Directors who held office at the date of approval of this Directors'
Report confirm that, so far as they are each aware, there is no relevant audit
information of which the Company's auditors are unaware; and each Director has
taken all the steps that they ought to have taken as a Director to make
themselves aware of any relevant audit information and to establish that the
Company's auditors are aware of that information.
Directors' Professional Development
When a new director is appointed he or she is provided with an induction
programme that is held by the Manager. Directors are also provided on a
regular basis with key information on the Company's policies, regulatory and
statutory requirements and internal controls. Changes affecting directors'
responsibilities are advised to the Board as they arise. Directors also
regularly participate in industry seminars.
Management
ISIS EP LLP manages the investments for the Company. The liquid
assets within the portfolio (being cash, gilts and other assets, which are not
categorised as venture capital investments for the purpose of the FSA's rules)
have been managed by FPPE LLP. This is a limited partnership, which is
authorised and regulated by the FSA and which has the same controlling members
as the Manager. The Manager has continued to act as the Manager of the Company
and as the Investment Manager of the Company's illiquid assets (being all
AIM-traded and other venture capital investments).
The Manager also provides or procures the provision of secretarial,
administrative and custodian services to the Company. The management agreement
may be terminated at any date by either party giving twelve months' notice of
termination. Under the management agreement, the Manager receives a fee of 2.0
per cent per annum of the net assets of the Company. If the management
agreement is terminated, the Manager is only entitled to the management fees
paid to it and any interest due on unpaid fees.
In addition, the Manager receives an annual secretarial and
accounting fee of £36,380 (linked to the movement in the UK Retail Price Index
("RPI")), subject to annual review, plus a variable fee of 0.125 per cent of
the net assets of the Company which exceed £5 million. The annual secretarial
and accounting fee is subject to a maximum of £105,634 per annum (linked to
the movement in RPI) subject to annual review.
Annual running costs are capped at 3.5 per cent of the net assets
of the Company (excluding any performance fee payable to the Manager and
irrecoverable VAT), any excess being refunded by the Manager by way of an
adjustment to its management fee.
It is the Board's opinion that the continuing appointment of ISIS
EP LLP on the terms agreed is in the best interests of shareholders as a
whole. The Board believes that the knowledge and experience accumulated by the
Manager in the period since the launch of the first Baronsmead VCT in 1995 is
reflected in processes which are designed to find, manage and realise good
quality growth businesses.
Directors' Indemnity
Directors and officers' liability insurance cover is in place in respect of
the directors. The Company's Articles of Association provide, subject to the
provisions of UK legislation, an indemnity for directors in respect of costs
which they may incur relating to the defence of any proceedings brought
against them arising out of their positions as directors, in which they are
acquitted or judgement is given in their favour by the Court.
Save for such indemnity provisions in the Company's Articles of Association
and in the Directors' letters of appointment, there are no qualifying third
party indemnity provisions.
Co-investment Scheme
The Scheme is intended to help attract, retain and incentivise
certain executive members of the Manager and reflects schemes which are used
elsewhere in the private equity industry in the UK. It requires all the
members of the Scheme to invest their own capital into a proportion of the
ordinary shares of each and every unquoted investment made by the Baronsmead
VCTs (except those life sciences transactions where the Manager is not the
lead investor).
The shares held by the members of the Co-investment Scheme in any
portfolio company can only be sold at the same time as the investment held by
the generalist Baronsmead VCTs. In addition, any prior ranking financial
instruments, e.g. loan stock, held by the Baronsmead VCTs have to be repaid in
full prior to any gain accruing to the ordinary shares.
As at 30 September 201 1 forty-five executives of the Manager had
invested a total of approximately £14 3,000 in the ordinary shares of
twenty-six unquoted investments through the Co-investment Scheme alongside
Baronsmead VCT 2 plc. The amount invested by Baronsmead VCT 2 in those twenty-
six companies' totals approximately £29.1 million. As at September 201 1 eight
of the investments in the scheme has been sold realising total proceeds of £
18.9 million for Baronsmead VCT 2 and £ 1.0 million for the members of the
Co-investment Scheme.
The Board reviews the operation of the Co-investment Scheme at each
quarterly valuation meeting. The Co-investment Scheme was also independently
reviewed during the period by Singer Capital Markets who confirmed that the
investments were compliant with Co-investment Scheme rules.
Performance Incentive
A performance fee will not be payable to the Manager until the total return on
shareholders' funds exceeds an annual threshold of base rate plus 2 per cent
calculated on a compound basis. To the extent that the total return exceeds
the threshold of base rate plus 2 per cent on shareholders' funds compounded
over the relevant period then a performance fee will be paid to the Manager of
10 per cent. The amount of any performance fee which is paid in an accounting
period shall be capped at 5 per cent of shareholders' funds for that period.
ISIS Equity Partners - Arrangement Fees
During the year to 30 September 2011, ISIS EP LLP received net income of
£37,500 (2010: £92,750) from investee companies in connection with arrangement
fees and incurred abort fees of £15,246 (2010: £12,896), with respect to
investments attributable to Baronsmead VCT 2.
VCT Status Adviser
The Company has retained PricewaterhouseCoopers LLP ("PwC") as their VCT Tax
Status Advisers to advise it on compliance with VCT requirements. PwC review
new investment opportunities, as appropriate, and review regularly the
investment portfolio of the Company. PwC work closely with the Manager but
report directly to the Board.
Creditor Payment Policy
The Company's payment policy is to settle investment transactions in
accordance with market practice and to ensure settlement of supplier invoices
in accordance with stated terms. At 30 September 2011, there were no
outstanding supplier invoices (2010: none).
Environment
The Company seeks to conduct its affairs responsibly and environmental factors
are, where appropriate, taken into consideration with regard to investment
decisions.
Substantial Interests in Share Capital
At 18 November 2011 the Company was not aware of any beneficial interests
exceeding 3 per cent of the ordinary share capital in circulation.
Going Concern
After making enquires, and bearing in mind the nature of the Company's
business and assets, the Directors consider that the Company has adequate
resources to continue in operational existence for the foreseeable future. In
arriving at this conclusion the Directors have considered the liquidity of the
Company and its ability to meet obligations as they fall due for a period of
at least twelve months from the date that these financial statements were
approved. As at 30 September 2011 the Company held cash balances & investments
in UK Gilts and Money Market Funds with a combined value of £16,040,000. Cash
flow projections have been reviewed and show that the Company has sufficient
funds to meet both its contracted expenditure and its discretionary cash
outflows in the form of the share buyback programme and dividend policy. The
Company has no external loan finance in place and therefore is not exposed to
any gearing covenants.
By Order of the Board,
ISIS EP LLP
Secretary
100 Wood Street
London EC2V 7AN
18 November 2011
Statement of Directors' Responsibilities
Statement of Directors' Responsibilities in respect of the Annual Report and
the Financial Statements
The Directors are responsible for preparing the Annual Report and the
Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the financial
statements in accordance with UK Accounting Standards ("UK GAAP").
The financial statements are required by law to give a true and fair view of
the state of affairs of the Company and of the profit or loss of the Company
for that period.
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and estimates that are reasonable and prudent;
- state whether applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the financial
statements; and
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that its financial statements comply with
the Companies Act 2006. They have general responsibility for taking such steps
as are reasonably open to them to safeguard the assets of the Company and to
prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Directors' Report (including Business Review), Directors'
Remuneration Report and Corporate Governance Statement that comply with that
law and those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website,
www.baronsmeadvct2.co.uk. Visitors to the website should be aware that
legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial
report
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
- the Annual Report of the Directors includes a fair review of the development
and performance of the business and the position of the issuer together with a
description of the principal risks and uncertainties that they face.
On behalf of the Board,
Clive A Parritt
Chairman
18 November 2011
Income Statement
For the year ended 30 September 2011
- - 2011 2010
Revenue Capital Total Revenue Capital Total
- Notes £'000 £'000 £'000 £'000 £'000 £'000
Unrealised gains on
investments 8 - 3,346 3,346 - 4,924 4,924
Realised gains on 8 - 2,865 2,865 - 1,875 1,875
investments
Income 2 2,425 - 2,425 2,218 - 2,218
Investment (323) (970) (1,293) (304) (910) (1,214)
management fee 3
- -
Other expenses 4 (368) (368) (360) (360)
Profit on ordinary
activities before
taxation 1,734 5,241 6,975 1,554 5,889 7,443
Taxation on ordinary
activities 5 (379) 379 - (354) 354 -
Profit on ordinary 1,355 5,620 6,975 1,200 6,243 7,443
activities after
taxation
Return per ordinary 7 1.98p 8.21p 10.19p 1.77p 9.19p 10.96p
share: Basic
The `Total' column of this statement is the profit and loss account of the
Company.
All revenue and capital items in this statement derive from continuing
operations.
No operations were acquired or discontinued in the year.
There are no recognised gains or losses other than those disclosed in the
Income Statement, therefore a separate statement of total recognised gains or
losses has not been prepared
Reconciliation of Movements in Shareholders' Funds
For the year ended 30 September 2011
2011 2010
Note £'000 £'000
Opening shareholders' funds 63,673 61,215
Profit for the year 6,975 7,443
Gross proceeds of share issues 11/12 2,111 -
Purchase of shares for treasury 12 (813) (1,225)
Expenses of share issue and buybacks 12 (78) (6)
Dividends paid 6 (6,869) (3,754)
Closing shareholders' funds 64,999 63,673
-
The accompanying notes are an integral part of these statements.
Balance Sheet
As at 30 September 2011
2011 2010
- Notes £'000 £'000
Fixed assets
Investments 8 64,330 61,739
Current assets
Debtors 9 586 479
Cash at bank and on deposit 542 1,868
1,127 2,347
Creditors (amounts falling due within one year) 10 (459) (413)
Net current assets 669 1,934
Net assets 64,999 63,673
Capital and reserves
Called-up share capital 11 7,679 7,473
Share premium account 12 14,404 12,573
Capital redemption reserve 12 9,254 9,254
Capital reserve 12 28,849 27,590
Revaluation reserve 12 4,559 5,378
Revenue reserve 12 254 1,405
Equity shareholders' funds 13 64,999 63,673
Net asset value per share
- Basic 13 95.15p 94.79p
- Treasury 13 94.16p 93.42p
- - - -
The financial statements were approved by the Board of Directors on 18
November 2011 and were signed on its behalf by:
CLIVE A PARRITT FCA (Chairman)
The accompanying notes are an integral part of this balance.
Cash Flow Statement
For the year ended 30 September 2011
2011 2010
- Notes £'000 £'000
Operating activities
Investment income received 2,082 1,991
Deposit interest received - 4
Other interest received 63 -
Investment management fees (1,286) (1,202)
Other cash payments (371) (373)
Net cash inflow from operating activities 15 488 420
Capital expenditure and financial investment
Purchases of investments (52,054) (58,627)
Disposals of investments 55,844 63,391
Net cash inflow/(outflow) from capital expenditure
and financial investment 3,792 4,764
Dividends
Equity dividends paid (6,869) (3,754)
Net cash inflow/(outflow) before financing (2,589) 1,430
Financing
Gross proceeds of share issues 2,111 -
Purchase of shares for treasury (770) (1,225)
Expenses on share issue and buybacks (78) (21)
Net cash (outflow)/inflow from financing 1,263 (1,246)
(Decrease)/increase in cash in the year (1,326) 184
Reconciliation of net cash flow to movement in net
cash
(Decrease)/increase in cash (1,326) 184
Opening cash position 1,868 1,684
Closing cash position 14 542 1,868
- - - -
The accompanying notes are an integral part of this statement.
Notes to the Accounts
1. Accounting polices
(a) Basis of accounting
These financial statements have been prepared under UK Generally Accepted
Accounting Practice ("UK GAAP") and in accordance with the Statement of
Recommended Practice ("SORP") for investment trust companies and venture
capital trusts issued by the Association of Investment Companies ("AIC") in
January 2009 and on the assumption that the Company maintains VCT status.
The Company is no longer an investment company as defined by Section 833 of
the Companies Act 2006, as investment company status was revoked on 10 March
2003 in order to permit the distribution of capital profits.
The principal accounting policies adopted are set out below.
Presentation of the Income Statement
In order to better reflect the activities of a VCT and in accordance with the
SORP, supplementary information which analyses the income statement between
items of a revenue and capital nature has been presented alongside the income
statement. Net revenue is the measure the Directors believe appropriate in
assessing the Company's compliance with certain requirements set out in
Section 274 of the Income Tax Act 2007.
(b) Valuation of investments
Purchases or sales of investments are recognised at the date of transaction.
Investments are valued at fair value. For AIM traded & listed securities this
is either bid price or the last traded price, depending on the convention of
the exchange on which the investment is quoted.
In respect of unquoted investments, these are fair valued by the Directors
using methodology which is consistent with the International Private Equity
and Venture Capital Valuation ("IPEV") guidelines. This means investments are
valued using an earnings multiple, which has a discount or premium applied
which adjusts for points of difference to appropriate stock market or
comparable transaction multiples. Alternative methods of valuation will
include application of an arm's length third party valuation, a provision on
cost or a net asset value basis.
Gains and losses arising from changes in the fair value of the investments are
included in the Income Statement for the period as a capital item. Transaction
costs on acquisition are included within the initial recognition and the
profit or loss on disposal is calculated net of transaction costs on disposal.
(c) Income
Interest income on loan stock and dividends on preference shares are accrued
on a daily basis. Provision is made against this income where recovery is
doubtful. Where the terms of unquoted loan stocks only require interest or a
redemption premium to be paid on redemption, the interest and redemption
premium is recognised as income once redemption is reasonably certain. Until
such date interest is accrued daily and included within the valuation of the
investment.
Income from fixed interest securities and deposit interest is included on an
effective interest rate basis.
Dividends on quoted shares are recognised as income on the date that the
related investments are marked ex dividend and where no dividend date is
quoted, when the Company's right to receive payment is established.
(d) Expenses
All expenses are recorded on an accruals basis.
(e) Revenue/capital
The revenue column of the Income Statement includes all income and expenses.
The capital column accounts for the realised and unrealised profit and loss on
investments and the proportion of management fee charged to capital.
(f) Issue costs
Issue costs are deducted from the share premium account.
(g) Deferred taxation
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more, or the right to pay less, tax
in future have occurred at the balance sheet date. This is subject to deferred
tax assets only being recognised if it is considered more likely than not that
there will be suitable profits from which the future reversal of the
underlying timing differences can be deducted. Timing differences are
differences arising between the Company's taxable profits and its results as
stated in the financial statements which are capable of reversal in one or
more subsequent periods.
(h) Capital reserves
(i) Capital Reserve
Gains and losses on realisation of investments of a capital nature are dealt
with in this reserve. Purchase of the Company's own shares to be either held
in treasury or cancelled are also funded from this reserve. 75 per cent of
management fees are allocated to the capital reserve in accordance with the
Board's expected split between long term income and capital returns.
(ii) Revaluation Reserve
Changes in fair value of investments are dealt with in this reserve.
2. Income
2011 2010
- £'000 £'000
Income from investmentsâ€
UK franked 331 290
UK unfranked 1,502 1,413
UK unfranked - reinvested - 201
Redemption premium 528 310
2,361 2,214
Other income*
Deposit Interest 1 4
Other interest 63 -
Total income 2,425 2,218
Total income comprises:
Dividends 333 291
Interest 2,092 1,927
2,425 2,218
Income from investments:
AIM-traded & listed securities 347 319
Unquoted securities 2,014 1,895
2,361 2,214
- - -
†All investments have been designated fair value through profit or loss on
initial recognition, therefore all investment income arises on investments at
fair value through profit or loss.
* Other income on financial assets not designated fair value through profit
or loss.
3. Investment management fee
2011 2010
- £'000 £'000
Investment management fee 1,293 1,214
Performance fee - -
1,293 1,214
- - -
For the purposes of the revenue and capital columns in the Income Statement,
the management fee (including VAT) has been allocated 25 per cent to revenue
and 75 per cent to capital, in line with the Board's expected long term return
in the form of income and capital gains respectively from the Company's
investment portfolio.
The management agreement may be terminated by either party giving twelve
months notice of termination. The Manager, ISIS EP LLP, receives a fee of 2
per cent per annum of the net assets of the Company, calculated and payable on
a quarterly basis.
The Manager is entitled to a performance fee if at the end of any calculation
period, the total return on shareholders' funds, exceeds the threshold of UK
base rate plus 2 per cent on shareholders' funds (calculated on a compound
basis). The Manager is entitled to 10 per cent of the excess. The amount of
any performance fee payable in a year will be capped at 5 per cent of
shareholders' funds at the end of the period.
In addition, the Manager receives an annual secretarial and accounting fee of
£36,380 (linked to the movement in the UK Retail Price Index ("RPI")), subject
to annual review, plus a variable fee of 0.125 per cent of the net assets of
the Company which exceed £5 million. The annual secretarial and accounting fee
is subject to a maximum of £105,634 per annum (linked to the movement in RPI)
subject to annual review. It is chargeable 100 per cent to revenue.
Amounts payable to the Manager at the year end are disclosed above.
4. Other expenses
2011 2010
- £'000 £'000
Directors' fees 69 71
Secretarial and accounting fees 121 110
Remuneration of the auditors and their associates:
- audit 21 20
- other services supplied pursuant to legislation (interim 5 5
review)
- other services supplied relating to taxation 5 5
Other 147 149
368 360
The Chairman received £24,750 per annum (2010: £23,500). Each of the other
Directors received £16,500 per annum (2010: £15,500).
The Audit Committee reviews the nature and extent of non-audit services to
ensure that independence is maintained. The Directors consider that the
auditors were best placed to provide such services.
All figures include irrecoverable VAT, where applicable. The Company is not
registered for VAT.
5. Tax on ordinary activities
5a. Analysis of charge for the year
2011 2010
£'000 £'000
UK corporation tax - -
The income statement shows the tax change allocated between revenue and
capital.
5b. Factors affecting tax charge for the year
The tax charge for the year is lower than the standard rate of corporation tax
in the UK for a company. The differences are explained below:
2011 2010
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Profit on ordinary
activities before tax 1,734 5,241 6,975 1,554 5,889 7,443
Corporation tax at [27%] 468 1,415 1,883 435 1,649 2,084
(2010: 28%)
Effect of:
Non-taxable dividend income (89) - (89) (81) - (81)
Non-taxable gains - (1,676) (1,676) - (1,904) (1,904)
Brought forward losses - (118) (118) - (99) (99)
utilised
Tax charge/(credit) for the
year (note 6a) 379 (379) - 354 (354) -
At 30 September 2011 the Company had surplus management expenses of £834,592
(30 September 2010: £1,268,823) which have not been recognised as a deferred
tax asset. This is because the Company is not expected to generate taxable
income in a future period in excess of the deductible expenses of that future
period and, accordingly, the Company is unlikely to be able to reduce future
tax liabilities through the use of existing surplus expenses. Due to the
Company's status as a VCT, and the intention to continue meeting the
conditions required to obtain approval in the foreseeable future, the Company
has not provided deferred tax on any capital gains and losses arising on the
revaluation or disposal of investments.
6. Dividends
2011 2010
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Amounts recognised as
distributions to equity
holders in the year:
For the year ended
30September 2011
- First interim dividend of
2.5p per ordinary share paid
on 17 June 2011 515 1,200 1,715 - - -
- Second interim dividend of
4.5p per ordinary share paid
on 29 September 2011 1,299 1,778 3,077 - - -
For the year ended 30
September 2010
- First interim dividend of
2.5p per ordinary share paid
on 7 June 2010 - - - 338 1,354 1,692
- Final dividend of 3.0p per
ordinary share paid on 14
January 2011 692 1,385 2,077 - - -
For the year end 30
September 2009
- Final dividend of 3.0p per
ordinary share paid in 30
December 2009 - - - 138 1,924 2,062
2,506 4,363 6,869 476 3,278 3,754
7. Returns per share
The 10.19p return per ordinary share (2010: 10.96p) is based on the net profit
on ordinary activities after taxation of £6,975,000 (2010: £7,443,000) and on
68,443,702 ordinary shares (2010: 67,917,384), being the weighted average
number of shares in issue during the year.
8. Investments
All investments are designated fair value through profit or loss at initial
recognition, therefore all gains and losses arise on investments designated at
fair value through profit or loss.
Financial Reporting Standard 29 `Financial Instruments: Disclosures' (the
Standard) requires an analysis of investments valued at fair value based on
the reliability and significance of the information used to measure their fair
value. The level is determined by the lowest (that is the least reliable or
independently observable) level of input that is significant to the fair value
measurement for the individual investment in its entirety as follows:
- Level 1 - investment prices quoted prices in an active market.
- Level 2 - investments whose fair value is based directly on observable
current market prices or indirectly being derived from market prices.
- Level 3 - investments whose fair value is determined using a valuation
technique based on assumptions that are not supported by observable current
market prices or based on observable market data.
2011 2010
- £'000 £'000
Level 1
Interest bearing securities 15,498 14,994
Investments traded on AIM 15,448 12,781
Investment listed on LSE 1,516 1,017
Investments traded on NYSE - 150
Investment traded on PLUS - 136
32,462 29,078
Level 2
Collective investment vehicle (Wood Street Microcap 2,863 1,654
Investment Fund)
Level 3
Unquoted investments 29,005 31,007
64,330 61,739
- - -
2011 2010
£'000 £'000
Equity shares 29,441 25,696
Loan notes 19,391 20,994
Preference shares - 55
Fixed income securities 15,498 14,994
64,330 61,739
Level 1 Level 2 Level 3
Interest Collective
bearing Traded Listed Traded Traded investment
securities on AIM on LSE on NYSE on PLUS vehicle Unquoted Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening book cost 14,994 15,405 1,011 157 500 1,525 22,769 56,361
Opening unrealised - (2,624) 6 (7) (364) 129 8,238 5,378
(depreciation)/appreciation
Opening valuation 14,994 12,781 1,017 150 136 1,654 31,007 61,739
Movements in the year:
Reclassification in the - (525) 525 - - - - -
year
Purchases at cost 42,539 3,061 - - - 1,000 5,454 52,054
Sales - proceeds (42,035) (1,303) - (110) (402) - (11,824) (55,674)
- realised gains/ (losses) - 95 - (40) 266 - 2,544 2,865
on sales
Unrealised gains/ (losses)
realised during the year - 489 - (7) (364) - 4,047 4,165
Increase/(decrease) in - 850 (26) 7 364 209 (2,223) (819)
unrealised appreciation
Closing valuation 15,498 15,448 1,516 - - 2,863 29,005 64,330
Closing book cost 15,498 17,222 1,536 - - 2,525 22,990 59,771
Closing unrealised - (1,774) (20) - - 338 6,015 4,559
(depreciation)/appreciation
15,498 15,448 1,516 - - 2,863 29,005 64,330
During the year the Company incurred brokerage costs on purchases of £3,100
(2010: £4,000) and brokerage costs on sales on £2,500 (2010: £3,500) in
respect of Ordinary Shareholder interests.
The gains and losses included in the above table have all been recognised in
the Income Statement above
The Standard requires disclosure, by class of financial instruments, if the
effect of changing one or more inputs to reasonably possible alternative
assumptions would result in a significant change to the fair value
measurement. The information used in determination of the fair value of Level
3 investments is chosen with reference to the specific underlying
circumstances and position of the investee company. The portfolio has been
reviewed and both downside and upside reasonable possible alternatives have
been identified and applied to the valuation of each of the unquoted
investments. The inputs flexed in determining the reasonably possible
alternative assumptions include the earnings stream and marketability
discount. Applying the downside alternatives the value of the unquoted
investments would be £3.0 million or 10.3 per cent lower. Using the upside
alternative the value would be increased by £1.9 million or 6.6 per cent.
9. Debtors
2011 2010
- £'000 £'000
Prepayments and accrued income 586 307
Amounts due from escrow - 172
586 479
10. Creditors (amounts falling due within one year)
2011 2010
£'000 £'000
Management, performance, secretarial and accounting fees 357 348
due to Manager
Amounts due to brokers (for buybacks) 43 -
Other creditors 59 65
459 413
11. Called-up share capital
Allotted, called-up and fully paid:
£'000
Ordinary shares
74,730,194 ordinary shares of 10p each listed at 30 September 2010 7,473
2,068,746 ordinary shares of 10p each issued during the year 207
9,756 ordinary shares of 10p each cancelled during the year (1)
76,789,184 ordinary shares of 10p each listed at 30 September 2011 7,679
7,553,906 ordinary shares of 10p each held in treasury at 30 September 2010 (755)
920,000 ordinary shares of 10p each repurchased during the year and
held in treasury (92)
8,473,906 ordinary shares of 10p each held in treasury at 30 September 2011 (847)
68,315,278 ordinary shares of 10p each in circulation at 30 September 2011 6,832
As at 18 November 2011 the Company's issued share capital was 76,789,184
ordinary shares, of which 8,743,906 shares were held in treasury. The number
of shares in circulation was 68,315,278 ordinary shares carrying one vote
each.
Treasury shares
The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003
came into force on 1 December 2003 and allowed the Company to hold shares
acquired by way of market purchase as treasury shares, rather than having to
cancel them. Shareholders have previously approved a resolution permitting the
Company to issue shares from treasury at a discount to the prevailing NAV if
the Board considers it in the best interests of the Company to do so. However,
treasury shares will not be sold at a discount wider than the discount
prevailing at the time the shares were initially bought back by the Company.
It is the Board's intention only to use the mechanism of re-issuing treasury
shares when demand for the Company's shares is greater than the supply
available in the market place. Such issues would be captured under the terms
of the Prospectus Directive and subject to the annual cap of Euro 5 million on
funds raised before requiring a full prospectus, although they would not be
considered by HM Revenue & Customs to be new shares entitling the purchaser to
initial income tax relief.
The Company does not have any externally imposed capital requirements.
Where shares are bought back but not cancelled the share capital remains
unchanged. The NAV is calculated by using the number of shares in issue less
those bought back and held in treasury.
12. Reserves
Capital
Share redemption Capital Revaluation Revenue
premium reserve reserve reserve reserve
£'000 £'000 £'000 £'000 £'000
At 1 October 2010 12,573 9,254 27,590 5,378 1,405
Gross proceeds of shares 1,905 - - - -
issues
Purchase of shares for
treasury (74) - (4) - -
Expenses of share issue and
buy backs - - (813) - -
Reallocation of prior year
unrealised gains - - 4,165 (4,165) -
Realised on disposal of
investments* - - 2,865 - -
Net increase in value of
investments* - - - 3,346 -
Management fee capitalised* - - (970) - -
Revenue return on ordinary
activities after taxation* - - - - 1,355
Dividends paid in the year - - (4,363) - (2,506)
Taxation relief from
capital expenses* - - 379 - -
At 30 September 2011 14,404 9,254 28,849 4,559 254
At 30 September 2011, reserves distributable by way of dividend amounted to
£27,309,000 (2010: £26,006,000) comprising the capital reserve, revenue
reserve and the net unrealised loss on those level one investments whose
prices are quoted in an active market and deemed readily realisable in cash.
* The total of these items is £6,975,000, which agrees to the total profit on
ordinary activities after taxation above.
13. Net asset value per share
The net asset value per share and the net asset values attributable to the
ordinary shares at the year end are calculated in accordance with their
entitlements in the Articles of Association and were:
Net asset value per Net asset value
Number of shares share attributable attributable
2011 2010 2011 2010 2011 2010
number number pence pence £'000 £'000
Ordinary shares (basic) 68,315,278 67,176,288 95.15 94.79 64,999 63,673
Ordinary shares 76,789,184 74,730,194 94.16 93.42 72,308 69,811
(treasury)
Basic net asset value per share is based on net assets at the year end, and on
68,315,278 (2010: 67,176,288) ordinary shares, being the respective number of
shares in circulation at the year end.
The treasury net asset value per share as at 30 September 2011 included
ordinary shares held in treasury valued at the mid share price of 86.25p at 30
September 2011(2010: 81.25p).
14. Analysis of changes in cash
2011 2010
£'000 £'000
Beginning of year 1,868 1,684
Net cash outflow)/inflow (1,326) 184
As at 30 September 2011 542 1,868
15. Reconciliation of profit on ordinary activities before taxation to net
cash inflow from operating activities
2011 2010
£'000 £'000
Profit on ordinary activities before taxation 6,975 7,443
Gains on investments (6,211) (6,799)
Increase in debtors (279) (24)
Increase in creditors 3 1
Income reinvested - (201)
Net cash inflow from operating activities 488 420
16. Contingencies, guarantees and financial commitments
There were no contingencies, guarantees or financial commitments of the
Company as at 30 September 2011 (2010: nil).
17. Significant interests
There are no interests of 20 per cent or more of any class of share capital in
any underlying holdings in investee companies.
Further information on the significant interests is disclosed above.
18. Financial instruments and associated risks
The Company's financial instruments comprise equity and fixed interest
investments, cash balances and liquid resources. The Company holds financial
assets in accordance with its investment policy to invest in a diverse
portfolio of established and profitable UK unquoted companies and companies
raising new share capital on AIM.
Fixed asset investments held (see note 8) are valued at fair value. For quoted
securities this is either bid price or the last traded price, depending on the
convention of the exchange on which the investment is quoted. In respect of
unquoted investments, these are fair valued by the Directors (using rules
consistent with IPEV guidelines). The fair value of all other financial assets
and liabilities is represented by their carrying value in the Balance sheet.
The Company's investing activities expose it to various types of risk that are
associated with financial instruments and markets in which it invests. The
most important types of financial risk to which the Company is exposed are
market risk, credit risk and liquidity risk. The nature and extent of the
financial instruments held at the balance sheet date and the risk management
policies employed by the Company are discussed in notes 19 to 22.
19. Market risk
Market risk embodies the potential for both loss and gains and includes
interest rate risk and price risk.
The Company's strategy on the management of investment risk is driven by the
Company's investment objective as outlined in note 18. The management of
market risk is part of the investment management process and is typical of
private equity investment. The portfolio is managed in accordance with
policies and procedures in place as described in more detail in the Report of
the Directors, with an awareness of the effects of adverse price movements
through detailed and continuing analysis, with an objective of maximising
overall returns to shareholders. Investments in unquoted stocks and AIM traded
companies, by their nature, involve a higher degree of risk than investments
in the main market. Some of that risk can be mitigated by diversifying the
portfolio across business sectors and asset classes. The Company's overall
market positions are monitored by the Board on a quarterly basis.
Details of the Company investment portfolio at the balance sheet date are
disclosed in the schedule of investments set out above. An analysis of
investments between debt and equity instruments is disclosed in note 8.
26 per cent (2010: 23 per cent) of the Company's investments are listed on the
London Stock Exchange or traded on AIM. A 5 per cent increase in stock prices
as at 30 September 2011 would have increased the net assets attributable to
the Company's shareholders and the total profit for the year by £848,000
(2010: £704,000); an equal change in the opposite direction would have
decreased the net assets attributable to the Company's shareholders and the
total profit for the year by an equal amount.
45 per cent (2010: 49 per cent) of the Company's investments are in unquoted
companies held at fair value. Valuation methodology includes the application
of earnings multiples derived from either listed companies with similar
characteristics or recent comparable transactions. Therefore the value of the
unquoted element of the portfolio may also be indirectly affected by price
movements on the listed exchanges. A 5 per cent increase in the valuations of
unquoted investments at 30 September 2011 would have increased the net assets
attributable to the Company's shareholders and the total profit for the year
by £1,450,000 (2010: £1,550,000); an equal change in the opposite direction
would have decreased the net assets attributable to the Company's shareholders
and the total profit for the year by an equal amount.
20. Interest rate risk
At 30 September 2011 £9,498,000 (2010: £3,194,000) fixed rate securities were
held by the Company. As a result, the Company is subject to exposure to fair
value interest rate risk due to fluctuations in the prevailing levels of
market interest rates.
At 30 September 2011 £19,391,000 (2010: £20,994,000) fixed rate loan notes
were held by the Company. The weighted average effective interest rate for the
loan note securities is 9.59 per cent as at 30 September 2011 (2010: 10.87 per
cent). Due to the complexity of the instruments and uncertainty surrounding
timing of redemption the weighted average time for which the rate is fixed has
not been calculated.
The table below summarises weighted average effective interest rates for the
fixed interest-bearing financial instruments:
Fixed Rate
2011 2010
Weighted Weighted
Total Weighted average Total Weighted average
fixed average time for fixed average time for
rate interest which rate rate interest which rate
portfolio rate is fixed portfolio rate is fixed
£'000 % days £'000 % days
Fixed rate
Fixed interest 9,498 0.43 3 3,194 0.51 57
instruments
Floating rate
When the Company retains cash balances, the majority of cash is ordinarily
held on interest bearing deposit accounts and, where appropriate, within an
interest bearing money market open ended investment company ("OEIC"). The
benchmark rate which determines the interest payments received on interest
bearing cash balances is the bank base rate which was 0.5 per cent as at 30
September 2011 (2010: 0.5 per cent).
2011 2010
£'000 £'000
Floating rate
Floating rate instruments ("OEIC") 6,000 11,800
Cash at bank and on deposit 542 1,868
6,542 13,668
21. Credit risk
Credit risk is the risk that a counterparty to a financial instrument will
fail to discharge an obligation or commitment that it has entered into with
the Company. The Investment Manager has in place a monitoring procedure in
respect of counterparty risk which is reviewed on an ongoing basis. The
carrying amounts of financial assets best represent the maximum credit risk
exposure at the balance sheet date.
At the reporting date, the Company's financial assets exposed to credit risk
amounted to the following:
2011 2010
£'000 £'000
Investments in floating rate instruments 6,000 11,800
Investments in fixed rate instruments 9,498 3,194
Cash at bank and on deposit 542 1,868
Interest, dividends and other receivables 586 479
16,626 17,341
Credit risk arising on fixed interest instruments is mitigated by investing in
UK Government Stock.
Credit risk arising on floating rate instruments is mitigated by investing in
money market open ended investment companies managed by BlackRock and JP
Morgan Chase ("JPM"). Credit risk on unquoted loan stock held within unlisted
investments is considered to be part of market risk as disclosed in note 19.
Credit risk arising on transactions with brokers relates to transactions
awaiting settlement. Risk relating to unsettled transactions is considered to
be small due to the short settlement period involved and the high credit
quality of the brokers used. The Board monitors the quality of service
provided by the brokers used to further mitigate this risk.
All assets of the Company which are traded on a recognised exchange are held
by JPM, the Company's custodian. The Board monitors the Company's risk by
reviewing the custodian's internal controls reports as described in the
Corporate Governance section in the Annual report.
Substantially all of the cash held by the Company is held by JPM. The Board
monitors the Company's risk by reviewing regularly JPM's internal controls
reports as previously described. Should the credit quality or the financial
position of JPM deteriorate significantly the Investment Manager will seek to
move the cash holdings to another bank.
There were no significant concentrations of credit risk to counterparties at
30 September 2011 or 30 September 2010. No individual investment exceeded 14.6
per cent of the net assets attributable to the Company's shareholders at 30
September 2011 (2010: 11.0 per cent).
22. Liquidity risk
The Company's financial instruments include investments in unquoted companies
which are not traded in an organised public market as well as AIM traded
equity investments both of which generally may be illiquid. As a result, the
Company may not be able to liquidate quickly some of its investments in these
instruments at an amount close to their fair value in order to meet its
liquidity requirements, or to respond to specific events such as deterioration
in the creditworthiness of any particular issuer.
The Company's liquidity risk is managed on an ongoing basis by the Investment
Manager in accordance with policies and procedures in place as described in
the Report of the Directors above. The Company's overall liquidity risks are
monitored on a quarterly basis by the Board.
The Company maintains sufficient investments in cash and readily realisable
securities to pay accounts payable and accrued expenses. At 30 September 2011
these investments were valued at £16,040,000 (2010: £16,862,000).
23. Related parties
Related party transactions include Management, Secretarial, Accounting and
Performance fees payable to the Manager, ISIS EP LLP, as disclosed in notes 3,
4 and 10, and fees paid to the Directors as disclosed in note 4. In addition,
the Manager operates a Co-investment Scheme, detailed in the Report of the
Directors detailed above, whereby employees of the Manager are entitled to
participate in certain unquoted investments alongside the Company.
Annual General Meeting
The Company's Annual General Meeting will be held on 11 January 2012 at
10.45am at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS.
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incorporated into, or forms part of, this announcement.
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