Annual Financial Report

Baronsmead VCT 2 plc Annual report and accounts for the year ended 30 September 2012 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 Report of the Directors in the Company's 2012 Annual Report and Accounts. Dividend policy The Board of Baronsmead VCT 2 aims to sustain a minimum annual dividend level at an average of 6.5p 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. Financial Headlines * + 8.9% - Net asset value ("NAV") per share increased 8.9 per cent to 103.6p in the twelve months ended 30 September 2012, before deduction of the interim dividend of 2.5p. * 7.5p - Tax free dividends totalled 7.5p for the year to 30 September 2012, including the proposed final dividend of 5.0p. * 8.3% - Tax free annual dividend yield of 8.3 per cent and gross annual yield of 11.1 per cent. * 252.0p - NAV total return to shareholders for every 100.0p invested at launch. Chairman's Statement INVESTMENT PERFORMANCE Results In the year to 30 September 2012, the net asset value ("NAV") grew by 8.45p per share (8.9 per cent) to 103.60p before payment of dividends. This growth (together with reserves accumulated from successful realisations) has enabled us to recommend a final dividend of 5p making a total of 7.5p for the year Pence per ordinary share NAV as at 1 October 2012 95.15 Valuation uplift (8.9 per cent) 8.45 103.60 Interim dividend paid on 15 June 2012 (2.50) Proposed final dividend of 5.0p, payable after shareholder approval, on 18 Jan 2013 (5.00) NAV as at 30 September 2012 assuming final dividend paid 96.10 We continue to be very satisfied with the management provided by ISIS. They have created a valuable portfolio of investments and this has enabled us to pay good dividends in a period in which investment returns more generally have been depressed. We are proud of our dividend record which has provided shareholders with an average tax free dividend of 7.9p per share for the last 10 years. With a share price of 90p per share this is equivalent to a tax free yield of 8.8 per cent (11.7 per cent for higher rate tax payers). Compared with the returns achievable on deposits and many other investments in the current market place this is outstanding. Our policy is to invest in growth companies. It is pleasing to report that, despite a weak economy, lack of bank finance and a recession in the euro zone our top ten investments (representing 51 per cent by value of the portfolio) have delivered an outstanding 18 per cent average annual growth in profits over the last three years. Indeed the overall portfolio (of 71 companies) is in good health with 8.5 per cent showing steady or better progress. The value of the unquoted and AIM portions of the portfolio, increased by 8 per cent and 19 per cent during the year. The largest gains came from the investments in Independent Living Services and IDOX, which both increased in value by some Â£1.7 million in the last year. I am also delighted to report that, in November 2011, Baronsmead VCT 2 and Baronsmead VCT 3 were jointly voted VCT of the year at the Investment Trust Awards 2011. The judging process was based on a mixture of a quantitative assessment of investment performance and a qualitative assessment of the fund manager. This year Baronsmead VCT 2, Baronsmead VCT 3 as well as Baronsmead VCT 4 have been short listed for the same award. LONGER TERM INVESTMENT PERFORMANCE The Company is a generalist investor and our investment objective and the investment and dividend policies are aimed at producing consistent returns over the long-term. The NAV total return over the last ten years has been 222.8p (before taxation benefits) for each 100p invested compared with an average of 166.3p for the VCT generalist sector as a whole (source AIC). Over the same period, cumulative tax free dividends paid to shareholders, including the proposed final dividend of 5.0p, amount to 7.9p per share (equivalent to 10.5p for a higher rate taxpayer). This is before taking account of the initial income tax relief available on subscription. Over the same period, the FTSE All-Share Index grew to 235.7p using the same metrics, but this comparison takes no account of the restricted nature of VCT investments or the benefit of tax reliefs available to investors in VCTs. FUND RAISING AND SHAREHOLDER OPPORTUNITIES Our top up offer in February 2012 generated proceeds of Â£3.9 million net of expenses. We expect to make a further prospectus offer for subscription shortly seeking to raise net proceeds of approximately Â£5 million. In deciding how much to raise the Directors have considered the level of cash that will be required by the Company for investment over the next few years as well as the need to maintain sufficient liquidity to pay dividends and costs. Since inception the Board has, as a service to shareholders, maintained a buy back policy to acquire shares through the market, generally at a 10 per cent discount to NAV. The level of such buy backs has, in recent years, been small (0.75 million shares or 1 per cent of shares in issue last year). The Directors have decided that in an effort to minimise the discount between the share price and the NAV and increase the attractiveness of the Company's shares the Company will in future endeavour to buy back shares at a 5 per cent discount to NAV. This will also enable those shareholders who sell their shares to achieve a return closer to net asset value. This new share buy back policy will be kept under continuous review based on the number of shares bought back and may be subject to revision. Shares will be bought back depending on market conditions at the time and only where the Directors believe they will be in the best interests of shareholders as a whole. ANNUAL GENERAL MEETING I look forward to meeting as many shareholders as possible at our 15th Annual General Meeting to be held on Thursday 10 January 2013 at the Plaisterers' Hall, One London Wall, EC2Y 5JU. Proceedings for the day commence at 11:00am with presentations from the Manager and an investee company followed by lunch before the AGM at 1:30pm, which is expected to finish at 2:00pm. OUTLOOK As anticipated in my half-yearly report the continued scarcity of bank debt in the UK and concerns regarding the stability of the European Union has resulted in both uncertain and slower growth for the UK economy generally. Against this backdrop it is good to report that there has been steady growth across many of the portfolio companies as witnessed by the `top ten' investees showing excellent increases in turnover and more importantly in profits. The relatively low levels of debt in our portfolio companies should enable them to be more resilient if trading conditions remain uncertain. Government continues to talk about helping smaller companies such as those in our portfolio. However the burden of regulation and the difficulty of raising capital for growth remains a problem for investees. VCTs have an excellent record of generating growth by investing in well managed companies, but proposed restrictions on fund raising (by the FSA in particular) threaten this well proven source of capital. Small companies are the large employers of the future and they need more equity investment rather than more bank borrowing. What is needed is fiscal and regulatory encouragement for individuals and others so that equity investment in any small growing company is made desirable. The Company will continue to seek out and invest in growing businesses and further enhance our excellent portfolio. Clive Parritt Chairman 16 November 2012 Manager's Review The progress made by the Company's investees has been creditable given the ongoing economic uncertainty during the period under review. The portfolio has overall performed very well. It is pleasing to see a pickup in new investment, particularly in unquoted Private Equity. PORTFOLIO REVIEW Overview The net assets of Â£72 million were invested as follows: Number Annual % of of return Asset class NAV NAV investees % Unquoted Â£36,720,000 51 25 8 Quoted Â£22,276,000 30 46 19 Wood Street Microcap Â£4,183,000 6 33 8 Cash and near cash Â£9,254,000 13 n/a n/a During the year in total there were; - New investments of Â£9.14 million in eleven new companies and six follow ons; - Divestments of Â£2.38 million from eight full investments and a partial loan realisation. Each quarter the direction of general trading and profitability of all investee companies is recorded so that the Board can monitor the overall health and trajectory of the portfolio. At 30 September 2012, 87 per cent of the 71 companies in the quoted and unquoted portfolio were progressing steadily or better. Unquoted Private Equity The unquoted portfolio has again performed well and there has been an increase in unquoted values of 8 per cent. The unquoted portion of the portfolio is valued using a consistent process every three months which the Board oversees and approves. Almost all of the value creation in unquoted investments has come from operational improvements (revenue and margin growth), rather than financial leverage. For example, external bank debt within the top ten investments on average is only 0.7 times earnings, which is very low within the Private Equity arena. The sale of TVC Group to the Economist Group realised Â£1.32 million. Quoted (AIM traded and other listed investments) There has also been a significant uplift in the quoted portfolio of 19 per cent partially reflecting a positive re-rating of the small cap sector in the first quarter of 2012. This recovery has been helpful to the quoted portfolio following several years of headwinds from a challenging AIM market environment and weak share prices. Over the three years to 30 September 2012, the approach in quoted investments has been to concentrate on making fewer AIM investments and becoming a more engaged shareholder where possible and appropriate. This has taken time to implement as only a small minority of AIM companies qualify for VCT purposes. The average size by value of the investments in the portfolio in September 2009 was Â£246,000 but this had nearly doubled to Â£484,000 by September 2012. Realisations of Â£737,000 came from realising seven AIM-traded companies, three through trade sales (Clarity Commerce Solutions plc, Stagecoach Theatre Arts plc and Prologic plc); two through market sales (Real Good Food Company plc and Nakama Group plc) and two written off (Colliers International UK and Adventis Group). The latter five were mainly legacy companies that were valued below cost and were divested largely to reduce the tail of older and poorer performing investments. Wood Street 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 2012, Baronsmead VCT 2 had invested Â£3.5 million into Wood Street. At the year end Wood Street was invested in a portfolio of 33 companies and the Baronsmead VCT 2 investment was valued at Â£4.2 million. Wood Street generated an increase of 8 per cent over the year. During the year, a further investment of Â£1 million was made into Wood Street. The Manager receives no additional fee for managing this fund. Liquid assets (cash and near cash) Baronsmead VCT 2 had cash and near cash resources of approximately Â£9.3 million at the year-end. This asset class is conservatively managed to take minimal or no capital risk. In addition, investments within the Wood Street fund are expected to be relatively more liquid than other investments as covered in the section above. This gives the Manager the possibility of realising cash from Wood Street should this ever be required to supplement liquid assets. Unquoted Investments During the year Â£6.60 million was invested in unquoted companies. The principal unquoted investments were: * Independent Community Care Management ("ICCM") is a care business based in Kettering. It is a leading provider of homecare to individuals with complex long-term spinal and neurological conditions. This is a specialist healthcare business where the Manager has experience, most recently from the investment in Active Assistance which was successfully realised in 2010. The investment will help build infrastructure and capacity to grow the business. * Happy Days Consultancy, a children's nursery business, is based in the South West of the UK. The business has 17 sites already and the investment will help accelerate growth in new sites. This is a sector that the Manager has invested in before with a successful investment in Kidsunlimited which was realised in 2008. * Pho Holdings is a group of traditional Vietnamese restaurants based in London. The Pho sites are informal, fast casual environments, specialising in Vietnam's national dish of Pho, a tasty and nutritious noodle soup. Pho was awarded `Best Emerging Concept' at this year's Retailer of the Year Awards. The first Pho location opened on St. John Street, Clerkenwell, London, in June 2005 and the group now has a total of seven sites across London and the South East. The new investment enables the team to open new sites, but with each site retaining a unique and independent feel. * Impetus Holdings is a specialist business consultancy, supplying sales and after sales support services to the automotive industry. The business delivers a diverse range of programmes and projects for vehicle manufacturers, with much of their work taking place within dealerships and national sales companies. Impetus Holdings has achieved strong growth in recent years with revenues increasing by 50 per cent since 2010. Clients include VW, Land Rover, Audi, Toyota, BMW, Citroen, Fiat, Ford and Jaguar. Approximately 15 per cent of work is delivered outside of the UK. The investment by ISIS will support the business in its continued expansion into new markets, building on the strong presence established in the UK and further development of new services to clients. Top Ten investments The average investment value of the top ten companies held by Baronsmead VCT 2 is Â£3 million per company. As these investments are normally held by the other four Baronsmead VCTs, the total managed by ISIS in each investee is significantly larger than this, which enables ISIS to dedicate significant resource to manage each investment and its progress. The top ten investees employ some 2,600 people which is an increase of 22 per cent over the last year. They have grown their turnover and profits by some 18 per cent annually for the last three years. Each of the top ten companies is described in more detail below. Investment Management ISIS continues to invest in its skills and capacity with over 40 of its total team of 60 devoted to investment management across all its investing activities. Its focus is on generating strong investment returns from its portfolio through a mixture of intelligent investment selection and hands on portfolio management. Its ability to select good investments owes much to its in depth sector research and specialisation and to its strong origination team that help the team to generate proprietary deal flow. Its investments are supported from the outset by an experienced internal value enhancement team together with a panel of proven Operating Partners who work exclusively with ISIS to assist management teams to deliver both strategic development and operational efficiencies. They have enabled ISIS to build a strong track record of producing consistent returns from its unquoted investments. ISIS has pursued a strategy of sector specialisation over the past fourteen years and in that time its executives have developed in-depth knowledge of these sectors and valuable networks of contacts which have enabled it to capitalise on opportunities that have presented themselves in an ever changing environment. Its key sectors are: * Business Services * Financial Services * Consumer Markets * Healthcare & Education * Energy & Environmental * Technology, Media & Telecommunications ISIS' Operating Partners are all proven executives with a track record within the portfolio. Some are experienced Chairmen to lead change within investees. Others have deep functional experience including Sales, IT, Talent Management and Finance. This is an important additional resource on top of the experience of the ISIS executives to support investments made by the fund. OUTLOOK A number of commentators believe that the UK economy is unlikely to experience significant growth in the next decade. At this stage of the recovery, this is hard to dispute and it is a fair working assumption for investors. However, many of our portfolio companies and their management teams are now more experienced at handling the economic uncertainties, including managing their growth and operations in a tougher environment than in previous decades. Low bank borrowings within the portfolio give them robust financial structures. ISIS is an active investment manager who partners with our investees to help them to grow revenue and earnings whilst continuing to enhance customer service and build resilient businesses with good momentum. Our intention is to seek out the best opportunities where growth is driven by innovation and gaining market share through differentiation rather than relying on favourable economic growth. We continue to be confident that good levels of performance can be maintained through the ongoing challenging environment. ISIS EP LLP Investment Manager 16 November 2012 Summary Investment Portfolio Investment Classification at 30 September 2012 Sector* Percentage Business Services 34% Technology, Media & Telecommunications ("TMT") 31% Consumer Markets 19% Healthcare & Education 14% Financial Services 2% * at 30 September 2012 valuation. Total Assets* Percentage Unquoted - loan stock 36% AIM, listed & collective investment vehicles 36% Unquoted - ordinary and preference 15% Listed interest bearing securities 8% Net current assets principally cash 5% * at 30 September 2012 valuation Time Investments Percentage Held* Less than 1 year 16% Between 1 and 3 17% years Between 3 and 5 15% years Greater than 5 52% years * at 30 September 2012 valuation. Table of Investments and Realisations Investments in the year Book Cost Company Location Sector Activity Â£'000 Unquoted investments New Independent Community Kettering Healthcare & High acuity Care Management Limited Education care for home based care users 1,346 Impetus Holdings Limited London Business Automotive Services consultancy and outsourced service provider 1,075 Consumer Investment London Business Company seeking Partners Limited Services to acquire businesses in the business services sector 1,000 Riccal Investments London Consumer Markets Company seeking Limited to acquire businesses in the consumer markets sector 1,000 Pho Holdings Limited London Consumer Markets Restaurant group specialising in Vietnamese street food 987 Happy Days Consultancy Newquay Healthcare & Provider of Limited Education nursery based childcare in Cornwall & Plymouth across 16 settings 833 Follow on Crew Clothing Holdings London Consumer Markets Multi-channel Limited clothing retailer 360 Total unquoted investments 6,601 AIM-traded & listed investments New TLA Worldwide plc London Business Baseball sports Services management and marketing business 620 Zattikka plc London TMT* Online games development 316 Inspired Energy plc Kirkham Business Energy Services procurement consultancy services 300 Paragon Entertainment London Consumer Markets Visitor Limited attraction business 200 GB Group plc Chester TMT* ID verification and data solutions 150 Follow on Dods (Group) plc London TMT* Political information and communication 678 Electric Word plc London TMT* Business to business publisher 80 Accumuli plc Salford TMT* Managed IT security 76 FFastFill plc London TMT* Trading platform software provider 62 Rossendale Business Dispute Driver Group plc Services resolution 61 Total AIM-traded & listed investments 2,543 Collective investment vehicle Follow on Wood Street Microcap Investment Fund 1,000 Total collective investment vehicle 1,000 Total investments in the year 10,144 * Technology, Media & Telecommunications ("TMT"). Realisations in the year 30 September Realised First 2011 profit/(loss) Overall Investment valuation this Multiple Company date Â£'000 period Â£'000 Return Unquoted realisations Full trade TVC Group Limited sale Jul 08 766 558 ^ MLS Limited Loan repayment Jul 06 320 0 1.00 Total unquoted realisations 1,086 558 AIM-traded & listed realisations Stagecoach Theatre Full trade Arts plc sale Feb 01 153 140 0.70 Full trade Prologic plc sale Jun 04 103 48 0.49 Real Good Food Full market Company (The) plc sale Dec 03 218 40 0.42 Clarity Commerce Full trade Solutions plc sale Oct 09 26 6 0.63 Full market Nakama Group plc sale Dec 96 5 (1) 0.02 Adventis Group plc Written off Jun 04 22 (22) 0.00 Colliers International UK plc Written off Jul 01 27 (27) 0.00 Total AIM-traded & listed realisations 554 184 Total realisations in the year 1,640 742â€ ^ Not disclosed. â€ Proceeds of Â£8,000 were also received in respect of Getting Personal Limited, which had been sold in the year ended 30 September 2011. Ten Largest Investments The top ten investments by current value at 30 September 2012 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: Â£9,500,000 Total equity held: 57.38% Baronsmead VCT 2 only Cost: Â£2,367,000 Valuation: Â£4,721,000 Valuation basis: Earnings Multiple % of equity held: 12.62% Year ended 30 2011 2010 September Â£ million Â£ million Sales: 38.3 33.5 EBITA: 4.3 4.0 Profit before tax: 1.4 1.3 Net Assets: 1.7 0.8 No. of Employees: 90 73 (Source: Nexus Vehicle Holdings Limited, Report and Financial Statements 2011). 2. - IDOX PLC - London All ISIS EP LLP managed funds First Investment: May 2002 Total Cost: Â£3,015,000 Total equity held: 9.52% Baronsmead VCT 2 only Cost: Â£1,038,000 Valuation: Â£4,215,000 Valuation basis: Bid Price % of equity held: 3.19% Year ended 31 2011 2010 October Â£ million Â£ million Sales: 38.6 31.3 EBITA: 9.5 7.5 Profit before tax: 5.6 4.9 Net Assets: 34.4 31.0 No. of Employees 363 332 (Source: IDOX Plc, Directors' Report and Financial Statements 31 October 2011) 3. CABLECOM NETWORKING HOLDINGS LIMITED - Clevedon All ISIS EP LLP managed funds First Investment: May 2007 Total Cost: Â£5,600,000 Total equity held: 48.00% Baronsmead VCT 2 only Cost: Â£1,381,000 Valuation: Â£4,131,000 Valuation basis: Earnings Multiple % of equity held: 10.56% Year ended 30 2011 2010 September Â£ million Â£ million Sales: 12.2 8.2 EBITA: 1.4 0.9 Loss before tax: (0.2) (0.5) Net Assets: 0.3 0.5 No. of Employees 61 52 (Source: CableCom Networking Holdings Limited, Report and Financial Statement 30 September 2011) 4. CREW CLOTHING HOLDINGS LIMITED - London All ISIS EP LLP managed funds First Investment: November 2006 Total Cost: Â£5,395,000 Total equity held: 25.51% Baronsmead VCT 2 only Cost: Â£1,344,000 Valuation: Â£3,049,000 Valuation basis: Earnings Multiple % of equity held: 6.08% Year ended 30 2011 2010 October Â£ million Â£ million Sales: 40.7 34.6 EBITA: 3.3 2.7 Profit before tax: 2.8 2.0 Net Assets: 5.7 3.8 No. of Employees: 311 284 (Source: Crew Clothing Holdings Limited, Consolidated Financial Statements 30 October 2011) 5. KAFEVEND HOLDINGS LIMITED - Crawley All ISIS EP LLP managed funds First Investment: October 2005 Total Cost: Â£5,024,000 Total equity held: 66.50% Baronsmead VCT 2 only Cost: Â£1,252,000 Valuation: Â£2,908,000 Valuation basis: Earnings Multiple % of equity held: 15.79% Year ended 30 2011 2010 September Â£ million Â£ million Sales: 18.4 15.6 EBITA: 1.9 2.0 Profit before tax: 0.6 0.8 Net Assets: 1.5 1.2 No. of Employees: 105 95 (Source: Kafevend Holdings Limited, audited Directors' Report and Financial Statements 30 September 2011) 6. INDEPENDENT LIVING SERVICES LIMITED - Aberdeen All ISIS EP LLP managed funds First Investment: September 2005 Total Cost: Â£5,829,000 Total equity held: 65.68% Baronsmead VCT 2 only Cost: Â£1,599,000 Valuation: Â£2,705,000 Valuation basis: Earnings Multiple % of equity held: 16.18% Year ended 30 2011 2010 September Â£ million Â£ million Sales: 11.5 10.1 EBITA: (0.7) (0.8) Loss before tax: (0.9) (1.1) Net Assets: 0.4 3.1 No. of Employees: 836 705 (Source: Independent Living Services Limited, Directors' Report and Financial Statements 30 September 2011) 7. FISHER OUTDOOR LEISURE HOLDINGS LIMITED - St. Albans All ISIS EP LLP managed funds First Investment: June 2006 Total Cost: Â£5,700,000 Total equity held: 44.00% Baronsmead VCT 2 only Cost: Â£1,423,000 Valuation: Â£2,329,000 Valuation basis: Earnings Multiple % of equity held: 10.45% Year ended 31 July 2011* 2010** Â£ million Â£ million Sales: 43.6 26.5 EBITA: 2.7 2.3 Profit before tax: 0.0 0.7 Net Assets: 1.2 1.4 No. of Employees: 110 96 (Source: Fisher Outdoor Leisure Holdings Limited, Directors' Report and Financial Statements 31 July 2011) ** 12 month period ending 31 January 2010. * 18 month period ending 31 July 2011. The Company changed its year end from 31 January to 31 July. 8. CSC (WORLD) LIMITED - Pudsey, Leeds All ISIS EP LLP managed funds First Investment: January 2008 Total Cost: Â£6,450,000 Total equity held: 40.03% Baronsmead VCT 2 only Cost: Â£1,606,000 Valuation: Â£2,295,000 Valuation basis: Earnings Multiple % of equity held: 8.81% Year ended 31 March 2011 2010 Â£ million Â£ million Sales: 7.9 7.3 EBITA: 2.4 2.3 Loss before tax: (0.5) (0.4) Net Liabilities: (2.0) (1.3) No. of Employees 59 58 (Source: Cobco 867 Limited, Report and Financial Statements 31 March 2012) 9. STAFFLINE GROUP PLC - Nottingham All ISIS EP LLP managed funds First Investment: July 2000 Total Cost: Â£498,000 Total equity held: 8.38% Baronsmead VCT 2 only Cost: Â£249,000 Valuation: Â£2,129,000 Valuation basis: Bid Price % of equity held: 4.19% Year ended 31 2011 2010 December Â£ million Â£ million Sales: 288.3 206.2 EBITA: 10.3 7.8 Profit before tax: 7.5 7.0 Net Assets: 34.9 30.5 No. of Employees: 498 319 (Source: Staffline Recruitment Limited, Report and Financial Statements 31 December 2011) 10. VALLDATA GROUP LIMITED - Melksham All ISIS EP LLP managed funds First Investment: January 2011 Total Cost: Â£6,475,000 Total equity held: 39.84% Baronsmead VCT 2 only Cost: Â£1,616,000 Valuation: Â£1,769,000 Valuation basis: Earnings Multiple % of equity held: 8.76% Year ended 31 March 2012 2011 Â£ million Â£ million Sales: 7.1 6.3 EBITA: 0.8 0.9 Profit before tax: 0.7 0.8 Net Assets: 0.8 0.6 No. of Employees: 137 126 (Source: Valldata Services Limited, Report and Financial Statements 31 March 2012) 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 fifteenth Report and audited financial statements of the Company for the year ended 30 September 2012. Ordinary Shares Â£'000 Profit on ordinary activities after taxation 5,964 Interim dividend of 2.5p per ordinary share paid on 15 June 2012 (1,804) Total dividends paid during the year (1,804) Subject to approval at the forthcoming Annual General Meeting the final proposed dividend in respect of the year ended 30 September 2012 of 5.0p per ordinary share will be paid on 18 January 2013 to shareholders recorded on the register on 7 December 2012. 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 stock, convertible securities, and interest bearing securities as well as cash. Unquoted investments are usually structured as a combination of ordinary shares and loan stock, while AIM investments are primarily held in ordinary shares. Pending investment in unquoted and AIM-traded securities, cash is primarily held in interest bearing accounts, money market open ended investment companies ("OEICs"), 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. 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. by value of its investments calculated in accordance with Section 278 of the Income Tax Act 2007 (as amended) ("VCT Value") in a single company or group of companies and must have at least 70 per cent. of its investments by VCT Value throughout the period in shares and securities comprised in qualifying holdings. At least 70 per cent by VCT Value of qualifying holdings must be in "eligible shares", which are ordinary shares which have no preferential rights to assets on a winding up and no rights to be redeemed, but may have certain preferential rights to dividends. For funds raised before 6 April 2011, at least 30 per cent by VCT Value of qualifying holdings must be in "eligible shares" which are ordinary shares which do not carry any rights to be redeemed or preferential rights to dividends or to assets on a winding up. At least 10 per cent of each qualifying investment must be in "eligible shares". The companies in which investments are made must have no more than Â£15 million of gross assets at the time of investment to be classed as a VCT qualifying holding. 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 uninvested 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 Â£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 and certain staff are mandated to invest in unquoteds alongside the Company on terms which align the interests of shareholders and the Manager. Further details about the Co-investment scheme can be found in the 2012 Annual Report & Accounts. 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 up to a maximum of 25 per cent of gross assets. 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 capital 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 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 Internal Controls: Guidance to Directors. 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 2012. Performance and key performance indicators ("KPIs") The Board expects the Manager to deliver a performance which meets the objective of achieving NAV total return which is in the top quartile of generalist VCTs. 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 on pages 1 to 3 of this Report and Accounts. Issue and Buy-Back of Shares As a result of a top-up offer on 20 February 2012 the Company allotted 4,077,587 ordinary shares at a price of 101.40p representing 5.0 per cent of the then issued share capital with an aggregate nominal value of Â£407,758.70 raising Â£4,135,000 of new funds in total. The terms of issue were set out in the Offer document dated 12 January 2012 and the offer price was set on 20 February 2012. The Company also bought back 744,913 ordinary shares with a nominal value of 10p each to be held in treasury, representing an aggregate cost of Â£651,7 79. No shares were sold from treasury during the period. Shares will not be sold from treasury at a discount wider than the discount prevailing at the time the shares were initially bought back by the Company. The Company holds 9,218,819 ordinary shares in treasury representing 11.40 per cent of the issued share capital as at 16 November 2012. This was the maximum number of shares held in treasury during the year. Directors Biographies of the Directors are shown in the 2012 Annual Report and Accounts. Ms McComb, having been elected at the Annual General Meeting in 2012, will not retire at the forthcoming Annual General Meeting. Mr Goldring will, in accordance with the Articles of Association, retire by rotation and submit himself for re-election at the forthcoming Annual General Meeting. As explained in more detail under Corporate Governance and 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 Parritt and Mrs 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 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 2012 30 September 2011 Ordinary Ordinary shares 10p Shares 10p Clive Parritt 87,729 85,316 Gillian Nott 48,462 48,462 Howard Goldring 10,157 - Christina McComb 20,315 - Total shares held 166,663 133,778 There have been no changes in the holdings of the Directors between 30 September 2012 and 16 November 2012. No Director has a service contract with the Company. All Directors are members of the Audit, Management Engagement and Remuneration and Nomination 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 Â£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 Â£5 million. The annual secretarial and accounting fee is subject to a maximum of Â£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. The running cost as at 30 September 2012 was 2.49 per cent. 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 Co-investment Scheme was introduced in November 2004. Members of the Manager's investment team invest their own capital into a proportion of the ordinary shares of each and every unquoted investment made by the Baronsmead VCTs. 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 Baronsmead VCTs is sold. In addition, any prior ranking financial instruments, such as loan stock, held by the Baronsmead VCTs have to be repaid in full together with the agreed priority annual return before any gain accrues to the ordinary shares. This ensures that the Baronsmead VCTs achieve a good priority return before profits accrue to the Co-investment Scheme. The Board is keen to ensure that the Manager continues to have one of the best investment teams in the VCT and private equity market place and considers the scheme to be essential in order to attract, retain and incentivise the best talent. The scheme is in line with current market practice in the private equity industry and the Board believes that it aligns the interests of the Manager with those of the Baronsmead VCTs since executives have to invest their own capital in every unquoted transaction and cannot decide selectively in which investments to participate. In addition the co-investment only delivers a return after each VCT has realised a priority return built into the structure. The executives participating in the Co-investment Scheme subscribe jointly for a proportion (currently 12%) of the ordinary shares available to the Baronsmead VCTs in each unquoted investment. The level of participation was increased from 5% in 2007 when the Manager's performance fee was reduced from 20% to its current level of 10%. Since the formation of the scheme in 2004, 52 executives have invested a total of Â£696k in 32 companies. At 30 September 2012 nine of these investments have been realised generating proceeds of Â£81m for the Baronsmead VCTs and Â£4.7m for the Co-investment Scheme. For Baronsmead VCT 2 the average money multiple on these nine realisations was 2.3 times cost. Had the co-investment shares been held instead by the Baronsmead VCTs that money multiple would have been 2.44 times cost. Over the period of eight years (based upon the current number of shares in issue) this equates to approximately 1.6p a share. 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 the 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 - Advisory Fees During the year to 30 September 2012, ISIS EP LLP received income of Â£130,300 (2011: Â£37,500) from investee companies in connection with advisory fees and incurred abort fees of Â£58,901 (2011: Â£15,246), 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 2012, there were no outstanding supplier invoices (2011: 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 16 November 2012 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 2012 the Company held cash balances & investments in UK Gilts and Money Market Funds with a combined value of Â£9,404,000. 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 16 November 2012 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 Standards and applicable law (UK Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they 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 are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the 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, 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. 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 16 November 2012 Non-Statutory Accounts The financial information set out below does not constitute the Company's statutory accounts for the years ended 30 September 2012 and 2011 but is derived from those accounts. Statutory accounts for 2011 have been delivered to the Registrar of Companies, and those for 2012 will be delivered in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts at www.baronsmeadvct2.co.uk. Income Statement For the year ended 30 September 2012 2012 2011 Revenue Capital Total Revenue Capital Total Notes Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Unrealised gains on investments 8 - 5,842 5,842 - 3,346 3,346 Realised gains on investments 8 - 750 750 - 2,865 2,865 Income 2 1,101 - 1,101 2,425 - 2,425 Investment management fee 3 (337) (1,011) (1,348) (323) (970) (1,293) Other expenses 4 (381) - (381) (368) - (368) Profit on ordinary activities before taxation 383 5,581 5,964 1,734 5,241 6,975 Taxation on ordinary activities 5 (16) 16 - (379) 379 - Profit on ordinary activities after taxation 367 5,597 5,964 1,355 5,620 6,975 Return per ordinary share: Basic 7 0.52p 7.93p 8.45p 1.98p 8.21p 10.19p 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 2012 2012 2011 Note Â£'000 Â£'000 Opening shareholders' funds 64,999 63,673 Profit for the year 5,964 6,975 Gross proceeds of share issues 11/12 4,135 2,111 Purchase of shares for treasury 12 (652) (813) Expenses of share issue and buybacks 12 (199) (78) Other costs charged to capital 12 (10) - Dividends paid 6 (1,804) (6,869) Closing shareholders' funds 72,433 64,999 The accompanying notes are an integral part of these statements. Balance Sheet As at 30 September 2012 2012 2011 Notes Â£'000 Â£'000 Fixed assets Investments 8 69,118 64,330 Current assets Debtors 9 310 586 Cash at bank 465 542 Cash on deposit 3,000 - 3,775 1,128 Creditors (amounts falling due within 10 (460) (459) one year) Net current assets 3,315 669 Net assets 72,433 64,999 Capital and reserves Called-up share capital 11 8,087 7,679 Share premium account 12 3,531 14,404 Capital redemption reserve 12 - 9,254 Capital reserve 12 47,452 28,849 Revaluation reserve 12 12,742 4,559 Revenue reserve 12 621 254 Equity shareholders' funds 13 72,433 64,999 Net asset value per share - Basic 13 101.10p 95.15p - Treasury 13 99.83p 94.16p The financial statements were approved by the Board of Directors on 16 November 2012 and were signed on its behalf by: CLIVE A PARRITT FCA (Chairman) Cash Flow Statement For the year ended 30 September 2012 2012 2011 Notes Â£'000 Â£'000 Operating activities Investment income received 1,343 2,082 Deposit interest received 6 - Other interest received - 63 Investment management fees paid (1,311) (1,286) Other cash payments (375) (371) Net cash (outflow)/inflow from 15 (337) 488 operating activities Capital expenditure and financial investment Purchases of investments (99,024) (52,054) Disposals of investments 100,857 55,846 Net cash inflow from capital expenditure and financial investment 1,833 3,792 Dividends Equity dividends paid (1,804) (6,869) Net cash outflow before financing (308) (2,589) Financing Gross proceeds of share issues 4,135 2,111 Purchase of shares for treasury (695) (770) Expenses on share issue and buybacks (199) (78) Other costs charged to capital (10) - Net cash inflow from financing 3,231 1,263 Increase/(decrease) in cash at bank and 2,923 (1,326) on deposit in the year Reconciliation of net cash flow to movement in net cash at bank and on deposit Increase/(decrease) in cash at bank on 2,923 (1,326) deposit Opening cash at bank and on deposit 542 1,868 Closing cash at bank and on deposit 14 3,465 542 The accompanying notes are an integral part of the financial statements. 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 valued at fair value 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 2012 2011 Â£'000 Â£'000 Income from investmentsâ€ UK franked 323 331 UK unfranked 710 1,502 UK unfranked - reinvested 29 - Redemption premium 33 528 1,095 2,361 Other incomeâ€ â€ Deposit Interest 6 1 Other income - 63 Total income 1,101 2,425 Total income comprises: Dividends 323 333 Interest 778 2,092 1,101 2,425 Income from investments: AIM-traded & listed securities 344 347 Unquoted securities 751 2,014 1,095 2,361 â€ All investments have been designated at fair value through profit or loss on initial recognition, therefore all investment income arises on investments at fair value through profit or loss. â€ â€ Other income on financial assets not designated fair value through profit or loss. 3. Investment management fee 2012 2011 Â£'000 Â£'000 Investment management fee 1,348 1,293 Performance fee - - 1,348 1,293 For the purposes of the revenue and capital columns in the income statement, the management fee 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 which is paid in respect of a calculation period shall 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 Â£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 Â£5 million. The annual secretarial and accounting fee is subject to a maximum of Â£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 in note 10. 4. Other expenses 2012 2011 Â£'000 Â£'000 Directors' fees 78 69 Secretarial and accounting fees 125 121 Remuneration of the auditors and their associates: - audit 22 21 - other services supplied pursuant to legislation (interim 5 5 review) - other services supplied relating to taxation 11 5 Other 140 147 381 368 The Chairman received Â£26,000 per annum (2011: Â£24,750). Each of the other Directors received Â£17,325 per annum (2011: Â£16,500). Charges for other services provided by the auditors in the year ended 30 September 2012 were in relation to the interim reviews and tax compliance work (including iXBRL). 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 2012 2011 Â£'000 Â£'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: 2012 2011 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Profit on ordinary activities before taxation 383 5,581 5,964 1,734 5,241 6,975 Corporation tax at 26 per cent (2011: 27 per cent) 100 1,451 1,551 468 1,415 1,883 Effect of: Non-taxable dividend income (84) - (84) (89) - (89) Non-taxable gains - (1,714)(1,714) - (1,676)(1,676) Losses carried forward/(utilised) - 247 247 - (118) (118) Tax charge/(credit) for the year (note 5a) 16 (16) - 379 (379) - At 30 September 2012 the Company had surplus management expenses of Â£1,785,618 (2011: Â£ 834,592) 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 2012 2011 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Amounts recognised as distributions to equity holders in the year: For the year ended 30 September 2012 - interim dividend of 2.5p per ordinary share paid on 15 June 2012 - 1,804 1,804 - - - For the year ended 30 September 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 end 30 September 2010 - Final dividend of 3.0p per ordinary share paid on 14 January 2011 - - - 692 1,385 2,077 - 1,804 1,804 2,506 4,363 6,869 7. Returns per share The 8.45p return per ordinary share (2011: 10.19p) is based on the net profit on ordinary activities after taxation of Â£5,964,000 (2011: Â£6,975,000) and on 70,544,594 ordinary shares (2011: 68,443,702), being the weighted average number of shares in circulation 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 as 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 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. 2012 2011 Â£'000 Â£'000 Level 1 Listed interest bearing securities 5,939 15,498 Investments traded on AIM 20,750 15,448 Investments listed on LSE 1,526 1,516 28,215 32,462 Level 2 Collective investment vehicle (Wood Street Microcap 4,183 2,863 Investment Fund) Level 3 Unquoted investments 36,720 29,005 69,118 64,330 2012 2011 Â£'000 Â£'000 Equity shares 37,154 29,441 Loan notes 25,947 19,391 Preference shares 78 - Fixed income securities 5,939 15,498 69,118 64,330 Level 1 Level 2 Level 3 Listed interest Listed Collective bearing Traded on investment securities on AIM LSE vehicle Unquoted Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening book cost 15,498 17,222 1,536 2,525 22,990 59,771 Opening unrealised (depreciation)/appreciation - (1,774) (20) 338 6,015 4,559 Opening valuation 15,498 15,448 1,516 2,863 29,005 64,330 Movements in the year: Purchases at cost 88,909 2,543 - 1,000 6,601 99,053 Sales - proceeds (98,468) (737) - - (1,652) (100,857) - realised gains on sales - 184 - - 566 750 Unrealised losses realised during the year - (1,874) - - (467) (2,341) Increase in unrealised appreciation - 5,186 10 320 2,667 8,183 Closing valuation 5,939 20,750 1,526 4,183 36,720 69,118 Closing book cost 5,939 17,338 1,536 3,525 28,038 56,376 Closing unrealised appreciation/(depreciation) - 3,412 (10) 658 8,682 12,742 5,939 20,750 1,526 4,183 36,720 69,118 During the year the Company incurred brokerage costs on purchases of Â£1,100 (2011: Â£3,100) and brokerage costs of sales of Â£nil (2011: Â£2,500) 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 Â£2.14 million or 5.84 per cent lower. Using the upside alternative the value would be increased by Â£2.57 million or 7.00 per cent. 9. Debtors 2012 2011 Â£'000 Â£'000 Prepayments and accrued income 310 586 310 586 10. Creditors (amounts falling due within one year) 2012 2011 Â£'000 Â£'000 Management, performance, secretarial and accounting fees due to the Manager 397 357 Amounts due to brokers (for buybacks) - 43 Other creditors 63 59 460 459 11. Called-up share capital Allotted, called-up and fully paid: Â£'000 Ordinary shares 76,789,184 ordinary shares of 10p each listed at 30 September 2011 7,679 4,077,587 ordinary shares of 10p each issued during the year 408 80,866,771 ordinary shares of 10p each listed at 30 September 2012 8,087 8,473,906 ordinary shares of 10p each held in treasury at 30 September (847) 2011 744,913 ordinary shares of 10p each repurchased during the year and (75) held in treasury 9,218,819 ordinary shares of 10p each held in treasury at 30 September (922) 2012 71,647,952 ordinary shares of 10p each in circulation at 30 September 7,165 2012 As at 16 November 2012 the Company's issued share capital was 80,866,771 ordinary shares, of which 9,218,819 shares were held in treasury. The number of shares in circulation was 71,647,952 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 â‚¬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 Share Capital premium redemption Capital Revaluation Revenue account reserve reserve reserve reserve Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 At 1 October 2011 14,404 9,254 28,849 4,559 254 Cancellation of share premium and capital redemption reserve (14,404) (9,254) 23,658 - - Costs relating to the cancellation of share premium and capital redemption reserve - - (10) - - Gross proceeds of shares issues 3,727 - - - - Purchase of shares for treasury - - (652) - - Expenses of share issue and buy backs (196) - (3) - - Reallocation of prior year unrealised gains - - (2,341) 2,341 - Realised on disposal of investments* - - 750 - - Net increase in value of investments* - - - 5,842 - Management fee capitalised* - - (1,011) - - Taxation relief from capital expenses* - - 16 - - Revenue return on ordinary activities after taxation* - - - 367 Dividends paid in the year - - (1,804) - - At 30 September 2012 3,531 - 47,452 12,742 621 At 30 September 2012, reserves distributable by way of dividend amounted to Â£48,073,000 (2011: Â£27,309,000) comprising the capital reserve and revenue reserve less the net unrealised loss on those investments whose prices are quoted in an active market and deemed readily realisable. * The total of these items is Â£5,964,000, which agrees to the total profit on ordinary activities after taxation above. On 2 November 2011, the share premium account and capital redemption reserve were cancelled by an Order of Court following the passing of a Special Resolution. The credit arising has been applied in crediting a special reserve, within the capital reserve, which shall be able to be applied in any manner in which the Company's profits available for distribution (as determined in accordance with section 649 of the Companies Act 2006) are able to be applied. 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 as follows: Number of shares Net asset value per Net asset value share attributable attributable 2012 2011 2012 2011 2012 2011 number number pence pence Â£'000 Â£'000 Ordinary shares (basic) 71,647,952 68,315,278 101.10 95.15 72,433 64,999 Ordinary shares 80,866,771 76,789,184 99.83 94.16 80,730 72,308 (treasury) Basic net asset value per share is based on net assets at the year end, and on 71,647,952 (2011: 68,315,278) 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 2012 included ordinary shares held in treasury valued at the mid share price of 90.00p at 30 September 2012 (2011: 86.25p). 14. Analysis of changes in cash 2012 2011 Â£'000 Â£'000 Beginning of year 542 1,868 Net cash inflow/(outflow) 2,923 (1,326) As at 30 September 2012 3,465 542 15. Reconciliation of profit on ordinary activities before taxation to net cash (outflow)/inflow from operating activities 2012 2011 Â£'000 Â£'000 Profit on ordinary activities before taxation 5,964 6,975 Gains on investments (6,592) (6,211) Decrease/(increase) in debtors 276 (279) Increase in creditors 44 3 Income reinvested (29) - Net cash (outflow)/inflow from operating activities (337) 488 16. Contingencies, guarantees and financial commitments There were no contingencies, guarantees or financial commitments of the Company as at 30 September 2012 (2011: 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. 38 per cent (2011: 26 per cent) of the Company's investments are listed on the London Stock Exchange, traded on AIM or invested through Wood Street Microcap Fund. A 5 per cent increase in stock prices as at 30 September 2012 would have increased the net assets attributable to the Company's shareholders and the total profit for the year by Â£1,323,000 (2011: Â£848,000); 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. 53 per cent (2011: 45 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 2012 would have increased the net assets attributable to the Company's shareholders and the total profit for the year by Â£1,836,000 (2011: Â£1,450,000); 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 2012 Â£4,699,000 (2011: Â£9,498,000) 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. However the effect of these interest rate changes is not materially significant. At 30 September 2012 Â£25,947,000 (2011: Â£19,391,000) fixed rate loan notes were held by the Company. The weighted average coupon rate for the loan note securities is 9.41 per cent as at 30 September 2012 (2011: 9.59 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 other fixed interest-bearing financial instruments: Fixed Rate 2012 2011 Total Weighted Weighted Total Weighted Weighted fixed average average fixed average average rate interest time for rate interest time for portfolio rate which rate portfolio rate which rate Â£'000 % is fixed Â£'000 % is fixed days days Fixed rate Fixed interest 4,699 0.18 10 9,498 0.43 3 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 2012 (2011: 0.5 per cent). 2012 2011 Â£'000 Â£'000 Floating rate Floating rate instruments ("OEIC") 1,240 6,000 Cash at bank 465 542 Cash on deposit 3,000 - 4,705 6,542 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: 2012 2011 Â£'000 Â£'000 Investments in fixed rate instruments 4,699 9,498 Investments in floating rate instruments 1,240 6,000 Cash at bank 465 542 Cash on deposit 3,000 - Interest, dividends and other receivables 310 586 9,714 16,626 Credit risk arising on unquoted loan notes are considered in conjunction with the associated equity investment in the portfolio company. 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 2012 Annual Report and Accounts. The cash held by the Company is held by JPM and Lloyds TSB. The Board monitors the Company's risk by reviewing regularly the internal control reports of these banks. Should the credit quality or the financial position of either bank 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 2012 or 30 September 2011. No individual investment exceeded 6.5 per cent of the net assets attributable to the Company's shareholders at 30 September 2012 (2011: 14.6 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 2012 these investments were valued at Â£9,404,000 (2011:Â£16,040,000). 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 all unquoted investments alongside the Company. Annual General Meeting The Company's Annual General Meeting will be held on Thursday, 10 January 2013 at 1:30pm at the Plaisters' Hall, One London Wall, EC2Y 5JU. END Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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