Annual Financial Report

Baronsmead VCT 2 plc Annual report & accounts for the year ended 30 September 2013 Financial Headlines â— Net asset value ("NAV") per share increased 14.6 per cent to 110.13p in the year ended 30 September 2013, before deduction of dividends. â— 288.2p NAV total return to shareholders for every 100.00p invested at launch. â— Dividends totalled 9.5p in the twelve months to 30 September 2013, including the second interim dividend of 6.5p paid on 20 September 2013. â— Net annual dividend yield of 10.1 per cent and gross annual yield of 13.4 per cent. Extract of the Strategic Report The Strategic Report included in the Annual Report and Accounts for the year to 30 September 2013 has been prepared in accordance with the requirements of Section 414 of the Companies Act 2006 and best practice. Its purpose is to inform the members of the Company and help them to assess how the Directors have performed their duty to promote the success of the company, in accordance with Section 172 of the Companies Act 2006. 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. Investment Objective The investment objective of the Company is to achieve long-term investment returns for private investors, including tax-free dividends. Investment Policy â— To invest primarily in a diverse portfolio of UK growth businesses, whether unquoted or traded on AIM. â— Investments are made selectively across a range of sectors in companies that have the potential to grow and enhance their value. Further details on how this is achieved are set out below Chairman's Statement I am pleased to report that the Company had a very satisfactory year. Net Asset Value ("NAV") before payment of dividends increased by 14.03p a share (14.6 per cent). The total dividend for the year was 9.5p all of which has been paid out of the profits from successful investment realisations in recent years. Pence per ordinary share NAV as at 1 October 2012 96.10 (after deducting the final dividend of 5.0p for the year to 30 September 2012) Valuation uplift (14.6 per cent) 14.03 NAV as at 30 September 2013 before dividends 110.13 Less: Interim dividend paid on 14 June 2013 (3.00) Second interim dividend paid on 20 September 2013 (6.50) NAV as at 30 September 2013 after paying dividends 100.63 This year approximately two thirds of the increase in NAV has been paid to shareholders as dividends. While this is pleasing, the level of future dividends (which the Board aims to keep at a minimum of 6.5p a year) will, of course, depend upon continued profitable realisations. Shareholders have expressed a preference to receive consistent tax free income while also achieving capital growth and so the increase in NAV per share to 100.63p, after dividends, is a positive step. Our portfolio is diverse and this has helped to smooth investor returns, from year to year. The unquoted portfolio has seen several years of strong growth but, last year the return was more modest, principally because many of the current investments are relatively new and, as immature companies they are only just starting to deliver their full potential. We remain focused primarily on unquoted investments and the Manager is now working to help these newer investments achieve outstanding results in future years. In contrast, the quoted portfolio experienced significant growth of 47 per cent in the year. Undoubtedly this performance was due partly to strong markets and a welcome return of investor appetite for smaller quoted companies. However it is also a vindication of the proactive strategies that the Manager has deployed in the quoted arena since 2008. The Wood Street Microcap fund was set up in May 2009 as a way of holding a number of more liquid stakes in larger non VCT qualifying companies. Additionally the Manager has built a small number of significant shareholdings in selected AIM companies in order to become a more influential longer term partner and to contribute its private equity experience to these investees. During the market turbulence of recent years, the Manager has taken a long term view of solid, core investments based on the fundamentals of the investee rather than over reacting to weak and cyclical market sentiment. This approach and these decisions are now paying dividends and have contributed to the quoted performance. The portfolio (apart from Wood Street Microcap) has increased to 65 investments. New and follow-on investments totalled Â£5.7 million across 8 unquoted and 11 AIM companies. Sales of investments realised Â£9.2 million and delivered net gains of Â£5.7 million. The portfolio as a whole, remains in good health with 85 per cent of investees reporting steady or improving performance against their business plans. LONG TERM PERFORMANCE The Company's investment and dividend policies which are aimed at producing consistent returns over the long-term continue to be met. Following the payment of the second interim dividend, total tax-free dividends of 102.9p a share have been paid since launch. This exceeds the initial subscription price of 100p per share and, additionally the NAV at the year end is also over 100p. Accordingly founder shareholders have received back in tax-free dividends more than their initial subscription and that initial gross subscription (before taking account of upfront income tax relief) is wholly represented in the NAV of 100.63p a share at the year end. Statistics produced by the Association of Investment Companies (www.theaic.co.uk) show that over the past ten years, the share price total return of 243.60p (before VCT tax benefits) for every 100p invested compares to 240.24p for the FTSE All-Share Index during the same period. In the past ten years, annual tax-free dividends have averaged 7.66p a share (6.64p since launch). For the higher rate taxpayer, the gross equivalent represents 10.21p a share per annum. The full record of performance since launch is set out in the Annual Report as well as on our website, www.baronsmeadvct2.co.uk. The strong performance this year has continued the cumulative progress achieved since the onset of the financial crisis in 2008. During the financial year the cumulative NAV Total Return above which the Manager is due a performance fee was exceeded and a performance fee of Â£1.4 million (the equivalent of 1.9p per share) became payable to the Manager (see Performance Incentive section of the Strategic Report for further information). A performance fee was last paid in 2007. The results for the year are stated net of all running costs as well as the performance fee earned by the Manager. SHAREHOLDER MATTERS Fundraising An offer for subscription is currently expected to be launched in early 2014 to raise gross proceeds of up to Â£10 million. The securities note which will contain the subscription form and the full terms and conditions, will be sent to existing shareholders as soon as it is published. Share price discount policy In November 2012 the Company announced that it would seek to maintain a mid share price discount of 5 per cent to NAV instead of the previous policy of a 10 per cent discount to NAV. I am pleased to report that significant progress has been made in meeting this target. The mid share price discount to NAV averaged 6.3 per cent in the twelve months to 30 September 2013. During the year the Company bought in to Treasury 1,005,000 shares at an average discount of 6.3 per cent and sold 200,000 shares out of Treasury at a discount of 4.97 per cent to NAV. The net number of shares bought back during the year represents approximately 1.1 per cent of the shares in issue (excluding shares held in treasury) at the beginning of the financial year. In view of this experience, the Company will continue to try and maintain a mid share price discount to NAV of 5 per cent. However, the share price discount policy will be kept under continuous review and may be subject to revision. Shares will be bought back depending on market conditions at the time and only where the Directors believe such a transaction to be in the best interests of all shareholders. VCT legislation A recent Treasury consultation regarding the use of "Enhanced Share Buy Backs" has no direct impact on your Company as we have never used such structures and have preferred to create an orderly market for all shareholders by striving to keep the discount rate low. However, the Company's Manager has participated in discussions regarding proposed legislation with the aim of identifying and reducing the impact of any unintended adverse consequences that might arise. In addition, the European Commission is currently undertaking a review of the state aid regulations including the risk capital guidelines under which VCTs are approved at the European level. The aim of the review is to set out a clear framework to allow member states to grant aid without the need for the European Commission to be involved. Our trade association, the Association of Investment Companies ("AIC") is engaged in the discussion and the Manager has provided data and case studies to assist the construction of a suitable response. Management Arrangements The Board has considered the impact on your Company of EU driven legislation regulating Alternative Investment Fund Managers, into which category we fall, along with most other investment funds in the UK. To minimise the regulatory cost of compliance with this directive we have decided that the Company will register directly under the rules. This will not affect the arrangements with the Manager (ISIS) who will continue to manage the investment process on a day to day basis reporting to the Board. Annual General Meeting I look forward to meeting as many shareholders as possible at our sixteenth Annual General Meeting to be held on Wednesday, 18 December 2013 at the Plaisterers' Hall, One London Wall, London, EC2Y 5JU at 10:30 a.m. This will be followed by presentations from the Manager, a light lunch and a shareholder workshop. OUTLOOK There is a growing consensus that the outlook for the UK economy is recovering and there is a greater degree of optimism than has existed for many years. The Company's portfolio has demonstrated a high degree of resilience since 2008. This is testament to the expertise and skill of the Manager who has helped steer portfolio companies through the difficult times, enabling them to increase profits and employment. The overall portfolio remains widely diversified, well resourced and adequately funded. There are also encouraging signs that the number of available investment opportunities is increasing with eight unquoted investments completed in the year together with some notable successful exits. We believe that the Company is well placed to take advantage of the recovery as it gathers momentum. We will continue to focus on delivering a consistent yield for shareholders while protecting the asset base. Clive Parritt Chairman 18 November 2013 Manager's Review The year has been characterised by a stronger period of new investment, particularly in unquoted investments. Five new unquoted investee companies have been added to the portfolio and a further one has been added since the date of these Accounts. In addition, strong upward performance had been delivered by the quoted portfolio which is a welcome reward for patience through an uncertain market over the recent past. The unquoted portfolio has remained robust and delivered two successful realisations of longstanding investments. Portfolio Review Overview The net assets of Â£75.8 million were invested as follows: Asset class NAV % of Number of Annual return Â£m NAV investees % Unquoted Â£36.5 48 26 5 Quoted Â£27.2 36 47 43 Wood Street Microcap Â£6.1 8 34 47 Cash and near cash Â£6.0 8 - - During the year there were: â— New investments of Â£4.2 million in 9 new companies and Â£1.4 million in 10 follow ons; â— Divestments of Â£9.2 million from 4 full exits and 5 partial realisations. Each quarter the director 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 2013, 78 per cent of the 73 companies in the portfolio (excluding Wood Street Microcap) were progressing steadily or better. Unquoted Private Equity Portfolio After a strong year of growth last year of 8 per cent, the unquoted portfolio showed more modest growth this year of 5 per cent including income. 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 comes from operational improvements (revenue and margin growth), rather than financial leverage A very pleasing result during the period was the successful realisation of two longstanding investments. Independent Living Services Ltd, the care business based in Scotland, has been in the portfolio since 2005 and was sold to Mears Group plc generating a profit multiple of 2.5x cost. MLS Ltd, the school library software business, was an investment from 2006 that realised 2.8x cost on its sale to Capita plc. These represent strong realised returns. Since the period end, there has been a further significant realisation. CableCom has been in the portfolio since 2007 and manages internet services to high density accommodation such as student accommodation. The business has been sold via a secondary management buy-out and the realisation has delivered 4.8x the original cost of investment which is an excellent result. In addition, a Â£5 million investment (Â£1.25 million for Baronsmead VCT 2) has been negotiated in the new transaction on the same terms as the lead private equity buyer as ISIS believes there is an opportunity for further growth. Quoted Portfolio (AIM traded and other listed investments) There has been a significant uplift in the quoted portfolio of 43 per cent reflecting a positive re-rating of the small cap sector in the year. This recovery has been welcome following recent years of headwinds from a challenging AIM market environment and weak share prices. The performance of the quoted portfolio also reflected the changes introduced by the ISIS Quoted Investment team since 2009. The Quoted team is now more likely to build progressive stakes. An investment in a new smaller company might start at an initial low level. As the team become more comfortable with performance and where it is possible within the constraints of VCT qualifying investing, the holding will be increased. Several more significant holdings of over 20 per cent have now been built where the team has a closer, more influential relationship and can utilise some of the good practice from Private Equity experience. In addition, during the weaker AIM market, the team endeavoured to focus on the fundamentals of the investees and demonstrated patient support when market sentiment depressed share prices of sound companies. The ISIS team believes the benefits of this work are now being reflected in improved Quoted performance. Realisations during the year from the quoted portfolio totalled Â£4.9 million at an average multiple of 3.9x cost which is an excellent result. Notably within this is the full realisation due to a takeover of FFastFill plc (2.8x cost) and the partial sales in the market of IDOX plc (at 5.5x cost) and Staffline Group plc (at 6.0x). Whilst it is expected that work in the Quoted arena will deliver future positive growth, the high annual growth achieved in this period should be considered as exceptional. 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 larger and more liquid non VCT qualifying AIM and Small Cap opportunities. It represents another innovation introduced by the ISIS Quoted team to seek performance improvement. At 30 September 2013, Baronsmead VCT 2 had invested Â£3.5 million through Wood Street into a portfolio of 34 companies, now valued at Â£6.1 million. Wood Street generated a positive return of 47 per cent over the year. Liquid assts (cash and near cash) Baronsmead VCT 2 had cash and near cash resources of approximately Â£6.0 million at the year-end. This asset class is conservatively managed to take minimal or no capital risk, a strategy outlined in prospectuses that have been issued in the past. In addition, investments within the Wood Street fund are expected to be relatively more liquid than other investments as explained 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£4.0 million was invested in 8 unquoted companies including 5 new additions to the unquoted portfolio, one of which utilised an existing acquisition vehicle. The new unquoted investments were: â— Create Health is an internationally renowned fertility clinic which is the UK's leading specialist in natural and mild IVF techniques. Natural and mild IVF uses lower levels of drugs and is viewed as more ethical and healthier - it is used widely in advanced overseas fertility markets and is growing in popularity in the UK. The investment will fund the opening of a new flagship site in London. â— Eque2 is a software business that was previously owned by Sage plc and known as Sage Construction. It provides enterprise wide software systems that cater for firms of all sizes in the construction industry, helping them to control and manage all types of construction projects. â— Armstrong Craven is an HR consultancy and provider of specialist executive search services to many large global and national clients. It has offices in Manchester and London. The ISIS support helped the original founder and management team acquire the business from its parent plc in a Management Buy Out. â— Luxury for Less is a fast growing online bathroom products retailer which operates the transactional website www.bathempire.com. In 2012, the business was recognised as the Small Online Business of the Year. ISIS will help the business expand its range and help fund new facilities to support growth. The investment was made by using an already established acquisition vehicle and therefore is not listed as a new investment in the following tables. â— Key Travel is a leading travel management company dedicated to serving the travel requirements of the not-for-profit, academic and faith sectors from its bases in the UK, Europe and the US. Major clients include Oxfam, Save the Children and Cambridge University. Travel arranged for clients will break through the Â£100m mark this year. The investment will help support the continued growth of the business. After the period end, Baronsmead VCT2 invested Â£1.0 million in an unquoted investment, Carousel Logistics Limited, a provider of bespoke logistics and supply chain solutions. Top Ten Investments The average investment value of the top ten companies held by Baronsmead VCT 2 is Â£2.9 million per company. Because these investments are normally held by the other 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 their progress. The top ten investees employ some 2,277 people, which is an increase of 24 per cent over the last year. Their turnover has also grown by some 21 per cent. In this year's Annual Report, each of the top ten companies is described in more detail. Investment Management ISIS continues to invest in its skills and capacity with over 40 of its total team of 60 devoted to investment management activities across all its investment management 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. Both 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 many 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: â— Business services â— Financial services â— Consumer markets â— Healthcare & Education â— Technology, Media and Telecommunications Outlook A number of commentators believe that the UK economy is unlikely to experience significant GDP growth in the medium term. This is debatable but it is a fair working assumption for investors and may mean investment returns are not going to be easy to capture. 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 and build resilient, well invested businesses, able to maintain standards, whilst growing. Our intention is to seek out the best opportunities where growth in 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 Managers 18 November 2013 Dividend policy The Board of Baronsmead VCT 2 aim 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 6.64p per share (equivalent to a pre-tax return of 8.85p per ordinary share for a higher rate taxpayer). For shareholders who claimed tax reliefs of 20 per cent, 30 per cent or 40 percent, their returns would have been higher. Share price discount policy The Company buys back shares if, in the opinion of the Board, a repurchase would be in the best interests of the Company's shareholders as a whole. Shares are bought back through the market rather than directly from shareholders. This minimises the number of shares bought back by the Company while maximising the opportunity for investors to invest in the Company's existing shares. 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 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. Investment securities The Company invests in a range of securities including, but not limited to, ordinary and preference shares, loan stocks, convertible securities and interest bearing securities as well as cash. Unquoted investments are usually structured as a combination of ordinary shares and loan stocks, while AIM-traded investments are primarily held in ordinary shares. Pending investment in VCT qualifying and non-VCT qualifying unquoted, AIM-traded and other quoted securities (which may be held directly or indirectly through collective investment vehicles), 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 may have some 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, directly or indirectly, in VCT qualifying and non-qualifying growth businesses subject always to the quality of investment opportunities and the timing of realisations. It is intended that at least 75 per cent of any funds raised by the Company will be invested in VCT qualifying investments. Non-VCT qualifying investments held in unquoted, AIM-traded and other quoted companies may be held directly or indirectly through collective investment vehicles. 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 maximum the Company will invest in a single company (including a collective investment vehicle) is 15 per cent of its investments by VCT Value. 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-traded companies and to achieve this it invests alongside the other Baronsmead VCTs and ISIS Growth Fund 1. Management retention The Manager's members and staff invest in unquoted investments alongside the Company. This scheme is in line with current practice of private equity houses and its objective is to attract, recruit, retain and incentivise the Manager's team and is made on terms which align the interests of shareholders and the Manager. Borrowing powers The Company's policy is to use borrowing for short term liquidity purposes only up to a maximum of 25 per cent of the Company's gross assets, as permitted by the Company's articles. The Company currently has no borrowings. 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, including the main trends and factors likely to affect the future development, performance and position of the business. 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. 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 accounts 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 full Annual Report. 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 assess the performance of the Manager in meeting the Company's objectives against the primary KPIs as outlined in the Annual Report. Performance Incentive A performance fee will not be payable to the Manager until the total return on shareholders' funds exceeds an annual threshold of the higher of 4 per cent or base rate plus 2 per cent calculated on a compound basis. To the extent that the total return exceeds the threshold over the relevant period then a performance fee of a blended rate of 16.66 per cent of such excess to 31 March 2008, 13.33 per cent to 31 March 2009 and 10 per cent thereafter will be paid to the Manager. 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. During the financial year the threshold has been exceeded and a performance fee of Â£1,436,000 is payable. Environmental, Human Rights, Employee, Social and Community Issues The Board recognises the requirement under Section 414 of the Act to detail information about environmental matters (including the impact of the Company's business on the environment), employee, human rights, social and community issues; including information about any policies it has in relation to these matters and effectiveness of these policies. As the Company has no employees or policies in these matters this requirement does not apply. Gender Diversity The Board has an equal representation of male and female Directors, with the current Board of Directors comprising two female and two male Directors. The Manager has an equal opportunities policy and currently employs 34 men and 24 women. Shareholder choice The Board wishes to provide shareholders with a number of choices that enable them to utilise their investment in Baronsmead VCT 2 in ways that best suit their personal investment and tax planning and in a way that treats all shareholders equally. â€¢ Fund raising | From time to time the Company seeks to raise additional funds by issuing new shares at a premium to the latest published net asset value to account for issue costs. In December 2012, the Company's offer for subscription to raise Â£5 million before costs was fully subscribed. â€¢ Dividend Reinvestment Plan | The Company offers a Dividend Reinvestment Plan which enables shareholders to purchase additional shares through the market in lieu of cash dividends. Approximately 1,198,000 shares were bought in this way during the year to 30 September 2013. â€¢ Buy back of shares | From time to time the Company buys its own shares through the market in accordance with its share price discount policy. The Board has undertaken a review of this policy and will, subject to certain conditions, seek to maintain a mid share price discount of approximately 5 per cent to net asset value. This constitutes a revision to the Company's existing policy of buying back shares through the market at an approximate 10 per cent discount to the latest published net asset value. Further details are provided in the Chairman's Statement. In the year to 30 September 2013, 1,005,000 shares were bought back representing 1.4 per cent of the shares in issue at 30 September 212 at an average price which represented a 3.9 per cent discount to the latest published net asset value. â€¢ Secondary market | The Company's shares are listed on the London Stock Exchange and can be bought using a stockbroker or authorised share dealing service in the same way as shares of any other listed company. Approximately 622,000 shares were bought by investors in the Company's existing shares in the year to 30 September 2013. On behalf of the Board Clive Parritt, Chairman 18 November 2013 Summary Investment Portfolio Investment Classification at 30 September 2013 Sector by value Percentage Business Services 40% Consumer Markets 15% Financial Services 2% Healthcare & Education 12% Technology, Media & Telecommunications ("TMT") 31% Total Assets by value Percentage Unquoted - loan note 34% Unquoted - equity 14% AIM, listed, PLUS & collective investment vehicles 44% Listed interest bearing securities 4% Net current assets principally cash 4% Time Investments Held by value Percentage Less than 1 year 7% Between 1 and 3 years 27% Between 3 and 5 years 7% Greater than 5 years 59% Table of Investments and Realisations Investments in the year Book cost Company Location Sector Activity Â£'000 Unquoted investments New Create Health London Healthcare Provider of fertility 1,065 Limited & services Education Key Travel London Business Travel management company, 954 Limited Services focused on the non-profit sector Eque2 Limited Manchester TMT* Enterprise resource planning 877 (ERP) solutions provider to the construction industry Armstrong Manchester Business Provider of executive search 673 Craven Limited Services and business intelligence services Follow on Impetus London Business Automotive consultancy and Holdings Services outsourced service provider Limited 230 Playforce Melksham Business Design and installation of 163 Holdings Services playground equipment Limited Valldata Group Melksham Business Payment processing to the 55 Limited Services charity sector 4,017 Total unquoted investments â€ AIM-traded &PLUS investments New Bioventix plc Farnham, Surrey Healthcare Develops sheep monoclonal 227 & antibodies Education Ideagen plc Matlock TMT* Compliance software solutions 225 Pinnacle Stirlingshire TMT* B2B telecoms and IT reseller Technology Group plc 169 One Media iP Buckinghamshire TMT* Content acquisition and 56 Group plc distribution Follow on Hangar8 plc Oxford Business Business jet management Services 344 Tangent London Business Digital direct marketing Communications Services plc 254 TLA Worldwide London Business Baseball sports management plc Services and marketing business 113 Accumuli plc Salford TMT* Managed IT security 95 EG Solutions Staffordshire TMT* Back office optimisation plc software company 78 Green Business Compliance plc Worcester Services Small business compliance 50 Paragon Entertainment Consumer Limited London Markets Visitor attraction business 45 Total AIM-traded & PLUS investments 1,656 Total investments in the year 5,673 *Technology, Media and Telecommunications ("TMT"). â€ In addition, Consumer Investment Partners, an existing portfolio company established in 2012 to seek investments in the Consumer Markets sector, invested Â£0.96 million in Luxury for Less, an online bathroom products retailing business. Realisations in the year 30 September First 2012 Overall investment valuation Proceedsâ•ª multiple* Company date Â£'000 Â£'000 return Unquoted realisations Full Independent Living trade Services Limited sale Sep 05 2,705 3,426 2.5 Kidsunlimited Group Loan Limited repayment Jun 01 113 176 â€ Full trade MLS Limited sale Jul 06 1,036 984 2.8 Loan Valldata Group Limited repayment Jan 11 450 540 1.2 Consumer Investment Loan Partners Limited repayment Apr 12 45 45 1.0 Total Unquoted realisations 4,349 5,171 AIM-traded & listed realisations Market IDOX plc sale Jan 09 1,721 2,347 5.5 Market Staffline Group plc sale Jul 00 889 1,575 6.0 Full Jun 07 557 874 2.8 trade FFastFill plc sale Full trade Active Risk Group plc sale May 10 90 126 0.8 Total AIM-traded & listed realisations 3,257 4,922 Total realisations in the year 7,606 10,093# â•ª Proceeds at time of realisation including redemption premium and interest. * Includes interest / dividends received, loan note redemptions and partial realisations accounted for in prior periods. â€ Kidsunlimited Group Limited was realised in April 2008. As part of the consideration, Baronsmead VCT 2 received Â£113,000 in loan stock, which was redeemed in April 2013. The overall multiple return for the investment in Kidsunlimited was 4.9 times original cost. #Proceeds of Â£2,000 were also received in respect of Adventis Group plc and Â£2,000 in respect of Conclusive Logic Limited, both of which were written off in a prior period. Ten Largest Investments The top ten investments by current value at 30 September 2013 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. 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£5,447,000 Valuation basis: Exit value % of equity held: 10.56% Year ended 30 September 2012 2011 Â£ million Â£ million Sales: 15.2 12.2 EBITA: 1.9 1.4 Net Assets 0.3 0.3 No. of Employees: 68 61 (Source: CableCom Networking Holdings Limited, Report and Financial Statement 30 September 2012) Note: This investment was sold after the year end. 2. NEXUS VEHICLE HOLDINGS LIMITED - Leeds All ISIS EP LLP managed funds First investment: February 2008 Total cost: Â£9,500,000 Total equity held: 56.00% Baronsmead VCT 2 only Cost: Â£2,367,000 Valuation: Â£4,748,000 Valuation basis: Earnings multiple % of equity held: 12.32% Year ended 30 September 2012 2011 Â£ million Â£ million Sales: 36.5 38.3 EBITA: 3.3 4.3 Net Assets: 1.8 1.7 No. of Employees: 113 90 (Source: Nexus Vehicle Holdings Limited, Report & Financial Statements 30 September 2012). 3. STAFFLINE GROUP PLC - Nottingham All ISIS EP LLP managed funds First investment: July 2000 Total cost: Â£290,000 Total equity held: 4.42% Baronsmead VCT 2 only Cost: Â£145,000 Valuation: Â£3,213,000 Valuation basis: Last Traded Price % of equity held: 2.21% Year ended 31 December 2012 2011 Â£ million Â£ million Sales: 367.0 288.3 EBITA: 10.7 10.3 Net Assets: 39.8 34.9 No. of Employees: 693 498 (Source: Staffline Group Plc, Report and Financial Statements 31 December 2012) 4. 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£2,838,000 Valuation basis: Exit value % of equity held: 8.81% Year ended 31 March 2012 2011 Â£ million Â£ million Sales: 7.9 7.3 EBITA: 2.4 2.3 Net Liabilities: (2.0) (1.3) No. of Employees: 59 58 (Source: Cobco 867 Limited, Financial Statements 31 March 2012) 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£2,569,000 Valuation basis: Discounted Offer % of equity held: 15.79% Year ended 30 September 2012 2011 Â£ million Â£ million Sales: 19.1 18.4 EBITA: 2.5 1.9 Net Assets 2.2 1.5 No. of Employees: 97 105 (Source: Kafevend Holdings Limited, Directors Report and Financial Statements 30 September 2012) 6. IDOX PLC - London All ISIS EP LLP managed funds First investment: May 2002 Total cost: Â£1,641,000 Total equity held: 5.01% Baronsmead VCT 2 only Cost: Â£614,000 Valuation: Â£2,498,000 Valuation basis: Last traded price % of equity held: 1.84% Year ended 31 October 2012 2011 Â£ million Â£ million Sales: 57.9 38.6 EBITA: 12.8 9.5 Net Assets: 38.9 34.4 No. of Employees: 467 363 (Source: IDOX Plc, Directors' Report and Financial Statements 31 October 2012). 7. 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£1,999,000 Valuation basis: Earnings Multiple % of equity held: 6.08% Year ended 28 October 2012 2011 Â£ million Â£ million Sales: 48.5 40.7 EBITA: 3.5 3.3 Net Assets: 6.0 5.7 No. of Employees: 363 311 (Source: Crew Clothing Holdings Limited, Report and Financial Statements 28 October 2012) 8. NETCALL PLC - Hemel Hempstead All ISIS EP LLP managed funds First investment: July 2010 Total cost: Â£4,354,000 Total equity held: 20.50% Baronsmead VCT 2 only Cost: Â£869,000 Valuation: Â£1,968,000 Valuation basis: Bid price % of equity held: 4.08% Year ended 30 September 2013 2012 Â£ million Â£ million Sales: 16.1 14.6 EBITA: 3.4 3.1 Net Assets: 16.9 15.5 No. of Employees: 141 123 (Source: Netcall plc, Annual Report and Accounts 30 June 2013) 9. INSPIRED THINKING GROUP LIMITED - Birmingham All ISIS EP LLP managed funds First investment: May 2010 Total cost: Â£3,200,000 Total equity held: 22.50% Baronsmead VCT 2 only Cost: Â£796,000 Valuation: Â£1,837,000 Valuation basis: Earnings Multiple % of equity held: 4.95% Year ended 31 August 2012 2011 Â£ million Â£ million Sales: 32.7 21.5 EBITA: 1.6 1.4 Net Assets: 2.0 0.1 No. of Employees: 158 117 (Source: Inspired Thinking Group Holdings Limited, Report and Financial Statements 31 August 2012) 10. 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 only Cost: Â£1,423,000 Valuation: Â£1,682,000 Valuation basis: Earnings Multiple % of equity held: 10.45% Year ended 31 July 2012 2011* Â£ million Â£ million Sales: 32.7 43.6 EBITA: 0.1 2.7 Net (Liabilities)/assets: (0.8) 1.2 No. of Employees: 118 110 (Source: Fisher Outdoor Leisure Holdings Limited, Directors Report and Financial Statements 31 July 2012) *18 month period ended 31 July 2011. The Company changed its year end from 31 January to 31 July EBITA: Earnings before interest, tax and amortisation Extract from the Report of the Directors The Chairman's Statement and the Corporate Governance statement in the Annual Report form part of the Report of the Directors. Results and Dividends The Directors present the sixteenth Report and audited financial statements of the Company for the year ended 30 September 2013. Ordinary shares Â£'000 Profit on ordinary activities after taxation 10,325 Final dividend for 2012 of 5.0p per ordinary share (3,772) paid on 18 January 2013 First interim dividend of 3.0p per ordinary share (2,254) paid on 14 June 2013 Second interim dividend of 6.5p per ordinary share (4,882) paid on 20 September 2013 Total dividends paid during the year (10,908) Issue and Buy-Back of Shares As a result of a top-up offer on 21 December 2012 the Company allotted 4,471,998 ordinary shares at a price of 111.80p representing 5.2 per cent of the then issued share capital with an aggregate nominal value of Â£447,199.80 raising Â£5,000,000 of new funds in total. The terms of issue were set out in the Offer document dated 20 November 2012 and the offer price was set on 21 December 2012 The Company also bought back 1,005,000 ordinary shares with a nominal value of 10p each to be held in treasury, representing an aggregate cost of Â£964,575. 200,000 ordinary 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 10,023,819 ordinary shares in treasury representing 11.75 per cent of the issued share capital as at 18 November 2013. This was the maximum number of shares held in treasury during the year. 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 FCA's rules) have been managed by FPPE LLP. This is a limited liability partnership, which is authorised and regulated by the FCA 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 2013 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. 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 any 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 portion (currently 12 per cent) of the ordinary shares available to the Baronsmead VCTs in each unquoted investment. The level of participation was increased from 5 per cent in 2007 when the Manager's performance fee was reduced from 20 per cent to its current level of 10 per cent. Since the formation of the scheme in 2004, 52 executives have invested a total of Â£781k in 39 companies. At 30 September 2013 eleven of these investments have been realised generating proceeds of Â£103m for the Baronsmead VCTs and Â£ 5.1m for the Co-investment Scheme. For Baronsmead VCT 2 the average money multiple on these eleven realisations was 2.5 times cost. Had the co-investment shares been held instead by the Baronsmead VCTs that money multiple would have been 2.7 times cost. Over the period of nine years (based upon the current number of shares in issue) this equates to approximately 1.7p per 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. ISISEquity Partners - Advisory Fees During the year to 30 September 2013, ISIS EP LLP received income of Â£146,000 (2012: Â£130,000) from investee companies in connection with advisory fees and incurred abort fees of Â£1,000 (2012:Â£59,000), with respect to investments attributable to Baronsmead VCT2. Directors' fees of Â£203, 000 were received in relation to services provided to companies in the investment portfolio during the year. VCT Status Adviser The Company has retained PricewaterhouseCoopers LLP ("PwC) as their VCT Tax Status Advisors 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. Environment The Company seeks to conduct its affairs responsibly and environmental factors are, where appropriate, taken into consideration with regard to investment decisions. Global Greenhouse Gas Emissions The Company has no greenhouse gas emissions to report from the operations of the Company, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013, including those within our underlying investment portfolio. Substantial Interests in Share Capital At 18 November 2013 the Company was not aware of any beneficial interests exceeding three per cent of the ordinary share capital in circulation. Going Concern After making enquiries, 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 2013 the Company held cash balances & investments in UK Gilts with a combined value of Â£5,874,000. 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. 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 and applicable law ("UK GAAP"). 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: â€¢ select suitable accounting policies and then apply them consistently; â€¢ make judgments and estimates that are reasonable and prudent; â€¢ state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and â€¢ 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 Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies 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: â€¢ the Financial Statements, prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and â€¢ the Annual Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that they face. â€¢ the report and accounts, taken as a whole, are fair, balanced, and understandable and provide the necessary information for shareholders to assess the company's performance, business model and strategy. On behalf of the Board Clive Parritt Chairman 18 November 2013 NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company's statutory accounts for the years ended 30 September 2013 and 2012 but is derived from those accounts. Statutory accounts for 2012 have been delivered to the Registrar of Companies, and those for 2013 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.baronsmeadvct.co.uk Income Statement For the year ended 30 September 2013 2013 2012 Revenue Capital Total Revenue Capital Total Notes Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Unrealised gains on movements in fair value of investments 2.3 - 8,678 8,678 - 5,842 5,842 Realised gains on disposal of investments 2.3 - 1,535 1,535 - 750 750 Income 2.5 3,456 - 3,456 1,101 - 1,101 Investment management fee 2.6 (368) (2,541) (2,909) (337) (1,011) (1,348) Other expenses 2.6 (435) - (435) (381) - (381) Profit on ordinary activities before taxation 2,653 7,672 10,325 383 5,581 5,964 Taxation on ordinary activities 2.9 (505) 505 - (16) 16 - Profit on ordinary activities after taxation 2,148 8,177 10,325 367 5,597 5,964 Return per ordinary share: Basic 2.2 2.89p 10.99p 13.88p 0.52p 7.93p 8.45p All items in the above statement derive from continuing operations. There are no recognised gains and losses other than those disclosed in the Income Statement The revenue column of the Income Statement includes all income and expenses. The capital column accounts for the realised and unrealised profit or loss on investments and the proportion of the management fee charged to capital. Reconciliation of Movements in Shareholders' Funds For the year ended 30 September 2013 2013 2012 Notes Â£'000 Â£'000 Opening shareholders' funds 72,433 64,999 Profit on ordinary activities after taxation 10,325 5,964 Net proceeds of share issues & buy-backs 3,944 3,284 Other costs charged to capital 3.2 (5) (10) Dividends paid 2.4 (10,908) (1,804) Closing shareholders' funds 75,789 72,433 Balance Sheet As at 30 September 2013 2013 2012 Notes Â£'000 Â£'000 Fixed assets Investments 2.3 72,865 69,118 Current assets Debtors 2.7 1,965 310 Cash at bank and on deposit 2,875 3,465 4,840 3,775 Creditors (amounts falling due within one year) 2.8 (1,916) (460) Net current assets 2,924 3,315 Net assets 75,789 72,433 Capital and reserves Called-up share capital 3.1 8,534 8,087 Share premium account 3.2 7,809 3,531 Capital reserve 3.2 41,921 47,452 Revaluation reserve 3.2 17,274 12,742 Revenue reserve 3.2 251 621 Equity shareholders' funds 75,789 72,433 Net asset value per share - Basic 2.1 100.63p 101.10p - Treasury 2.1 99.88p 99.83p The financial statements were approved by the Board of Directors on 18 November 2013 and were signed on its behalf by: Clive Parritt Chairman) Cash Flow Statement For the year ended 30 September 2013 2013 2012 Â£'000 Â£'000 Operating activities Investment income received 2,738 1,343 Deposit interest received 20 6 Investment management fees paid (1,449) (1,311) Other cash payments (441) (375) Net cash inflow/(outflow) from operating activities 868 (337) Financial investment Purchases of investments (36,620) (99,024) Disposals of investments 42,131 100,857 Net cash inflow from financial investment 5,511 1,833 Equity dividends paid (10,908) (1,804) Net cash outflow before financing (4,529) (308) Financing Net proceeds of share issues & buybacks 3,944 3,241 Other costs charged to capital (5) (10) Net cash inflow from financing 3,939 3,231 (Decrease)/increase in cash (590) 2,923 Reconciliation of net cash flow to movement in net cash (Decrease)/increase in cash (590) 2,923 Opening cash position 3,465 542 Closing cash at bank and on deposit 2,875 3,465 Reconciliation of profit on ordinary activities before taxation to net cash inflow/(outflow) from operating activities Profit on ordinary activities before taxation 10,325 5,964 Gains on investments (10,213) (6,592) (Increase)/decrease in debtors (700) 276 Increase in creditors 1,456 44 Income reinvested - (29) Net cash inflow/(outflow) from operating activities 868 (337) Notes to the Accounts In preparing the 2013 financial statements, Baronsmead VCT 2 has made a number of changes in structure, layout and wording in order to make the financial statements less complex and more relevant for shareholders and other users. We have grouped notes into sections under three key categories: 1. Basis of preparation 2. Investments, performance and shareholder returns 3. Other required disclosures 1. Basis of Preparation 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. 2. Investments, performance and shareholder returns 2.1 Net asset value per share Number of shares Net asset value per Net asset share value attributable attributable 2013 2012 2013 2012 2013 2012 number number pence pence Â£'000 Â£'000 Ordinary shares (basic) 75,314,950 71,647,952 100.63 101.10 75,789 72,433 Ordinary shares (including 85,338,769 80,866,771 99.88 99.83 85,236 80,730 treasury) The treasury net asset value per share as at 30 September 2013 included ordinary shares held in Treasury valued at the mid share price of 94.25p at 30 September 2013 (2012: 90.00p). 2.2 Return per share Weighted average number of Return per Net profit on ordinary ordinary shares ordinary share activities after taxation 2013 2012 2013 2013 2013 2012 number number pence pence Â£'000 Â£'000 Revenue 74,397,698 70,544,594 2.89 0.52 2,148 367 Capital 74,397,698 70,544,594 10.99 7.93 8,177 5,597 Total 13.88 8.45 10,325 5,964 2.3 Investments Purchases or sales of investments are recognised at the date of transaction. Investments are measured at fair value. For AIM-traded and listed securities this is either bid price or the last traded price, depending on the convention of the exchange on which the investment is traded. 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 guidelines ("IPEV"). 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. All investments are initially recognised and subsequently measured at fair value. Changes in fair value are recognised in the income statement. The methods of fair value measurement are classified into a hierarchy based on reliability of the information used to determine the valuation. â€¢ Level 1 - Fair value is measured based on quoted prices in an active market. â€¢ Level 2 - Fair value is measured based on directly observable current market prices or indirectly being derived from market prices. â€¢ Level 3 - Fair value is measured using a valuation technique that is not based on data from an observable market. 2013 2012 Â£'000 Â£'000 Level 1 Listed interest bearing securities 2,999 5,939 Investments traded on AIM 24,994 20,750 Investments listed on PLUS 346 - Investments listed on LSE 1,901 1,526 30,240 28,215 Level 2 Collective investment vehicle (Wood Street Microcap Investment 6,140 4,183 Fund) Level 3 Unquoted investments 36,485 36,720 72,865 69,118 Level 1 Level 2 Level 3 Interest Traded Collective bearing Traded on Listed investment securities on AIM PLUS on LSE vehicle Unquoted Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening book cost 5,939 17,338 - 1,536 3,525 28,038 56,376 Opening unrealised - 3,412 - (10) 658 8,682 12,742 appreciation/ (depreciation) Opening valuation 5,939 20,750 - 1,526 4,183 36,720 69,118 Movements in the year: Purchases at cost 29,992 1,429 227 - - 4,017 35,665 Sales - proceeds (32,932) (4,926) - - - (4,273) (42,131) - realised gains/ (losses) on sales - 1,611 - - - (76) 1,535 Unrealised gains realised during the year - 2,215 - - - 1,931 4,146 Increase/(decrease) in unrealised appreciation - 3,915 119 375 1,957 (1,834) 4,532 Closing valuation 2,999 24,994 346 1,901 6,140 36,485 72,865 Closing book cost 2,999 17,667 227 1,536 3,525 29,637 55,591 Closing unrealised appreciation - 7,327 119 365 2,615 6,848 17,274 Closing valuation 2,999 24,994 346 1,901 6,140 36,485 72,865 Equity shares - 24,994 346 1,901 6,140 10,907 44,288 Loan notes - - - - - 25,578 25,578 Fixed income 2,999 - - - - - 2,999 securities Closing valuation 2,999 24,994 346 1,901 6,140 36,485 72,865 The gains and losses included in the above table have all been recognised in the Income Statement above. For Level 3 unquoted investments, the effect on fair value of changing one or more assumptions to reasonably possible alternatives has been considered. 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 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£2.1 million or 5.8% lower. Using the upside alternatives the value would be increased by Â£2.6 million or 7%. 2.4 Dividends 2013 2012 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 2013 - First interim dividend of 3.0p per ordinary share paid on 14 June 2013 451 1,803 2,254 - - - - Second interim dividend of 6.5p per ordinary share paid on 20 September 2013 1,690 3,192 4,882 - - - For the year ended 30 September 2012 - First interim dividend of 2.5p per ordinary share paid on 15 June 2012 - - - - 1,804 1,804 - Final dividend of 5.0p per ordinary share paid on 18 January 2013 377 3,395 3,772 - - - 2,518 8,390 10,908 - 1,804 1,804 2.5 Income Interest income on loan notes 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 notes 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 when the related investments are marked ex-dividend and where no dividend date is quoted, when the Company's right to receive payment is established. 2013 2012 Quoted Unquoted Quoted Unquoted securities securities Total securities securities Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Income from investmentsâ€ UK franked 505 - 505 323 - 323 UK unfranked 8 2,468 2,476 21 689 710 UK unfranked - - - - reinvested - 29 29 Redemption premium - 455 455 - 33 33 513 2,923 3,436 344 751 1,095 Other incomeâ•ª Deposit income 14 6 Other income 6 - Total income 3,456 1,101 Total income comprises: Dividends 505 323 Interest 2,951 778 3,456 1,101 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•ª Other income on financial assets not designated fair value through profit or loss. 2.6. Investment management fee and other expenses All expenses are recorded on an accruals basis. 2013 2012 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Investment management fee 368 1,105 1,473 337 1,011 1,348 Performance fee - 1,436 1,436 - - - 368 2,541 2,909 337 1,011 1,348 Management fees are allocated 25 per cent income: 75 per cent capital derived in accordance with the Board's expected split between long term income and capital returns. Performance fees are allocated 100 per cent to capital. 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 (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. Amounts payable to the Manager at the year end are disclosed in note 2.8. Other expenses 2013 2012 Â£ Â£ '000 '000 Directors' fees 81 78 Secretarial and accounting fees paid to the Manager 134 125 Remuneration of the auditors and their associates: - audit 22 22 - other services supplied pursuant to legislation (interim review) - 5 - other services supplied relating to taxation 6 11 - other services supplied relating to financial statements' 6 - reorganisation Other 186 140 435 381 Information on directors' remuneration is given in the directors' remuneration table in the full Annual Report. 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. 2.7 Debtors 2013 2012 Â£'000 Â£'000 Prepayments and accrued income 1,010 310 Amounts paid future settlement 955 - 1,965 310 2.8 Creditors (amounts falling due within one year) 2012 2013 Â£ Â£'000 '000 Management, performance, secretarial and accounting fees due to the 1,859 397 Manager Other creditors 57 63 1,916 460 2.9 Tax UK corporation tax payable is provided on taxable profits at the current rate. Provision is made for deferred taxation on all timing differences calculated at the current rate of tax relevant to the benefit or liability. 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: 2013 2012 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Profit on ordinary activities before taxation 2,653 7,672 10,325 383 5,581 5,964 Corporation tax at 23.5% 624 1,803 2,427 100 1,451 1,551 (2012: 26 per cent) Effect of: Non-taxable gains - (2,400) (2,400) - (1,714) (1,714) Non-taxable dividend (119) - (119) (84) - (84) income Other movements - 92 92 - 247 247 Tax charge/(credit) for the year 505 (505) - 16 (16) - At 30 September 2013 the Company had surplus management expenses of Â£2,349,443 (2012: Â£1,785,618) 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. 3. Other Required Disclosures 3.1 Called-up share capital Allotted, called-up and fully paid: Ordinary shares Â£'000 80,866,771 ordinary shares of 10p each listed at 30 September 2012 8,087 4,471,998 ordinary shares of 10p each issued during the year 447 85,338,769 ordinary shares of 10p each listed at 30 September 2013 8,534 9,218,819 ordinary shares of 10p each held in Treasury at 30 September (922) 2012 (200,000) ordinary shares of 10p each sold during the year previously 20 held in treasury 1,005,000 ordinary shares of 10p each repurchased during the year and (101) held in treasury 10,023,819 ordinary shares of 10p each held in treasury at 30 September (1,003) 2013 75,314,950 ordinary shares of 10p each in circulation* at 30 September 7,531 2013 * Carrying one vote each. During the year the Company bought back 1,005,000 ordinary shares and sold from treasury 200,000 ordinary shares representing 1.0 per cent of the ordinary shares in issue at the beginning of the financial year. There were no changes in share capital between the year end and when the financial statements were approved. Treasury shares When the Company reacquires its own shares, they are held as treasury shares and not cancelled. Shareholders have authorised the Board to re-issue treasury shares at a discount to the prevailing NAV subject to the following conditions: - It is in the best interests of the Company; - Demand for the Company's shares exceeds the shares available in the market; - A full prospectus must be produced if funds raised are greater than â‚¬5m; and - HMRC will not consider these 'new shares' for the purposes of the purchasers' entitlement to initial income tax relief. 3.2 Reserves Gains and losses on realisation of investments of a capital nature are dealt with in the capital reserve. Purchases 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. Distributable reserves Non-distributable reserves Capital Revenue Total Share Revaluation Total reserve reserve premium reserve* Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 At 1 October 2012 47,452 621 48,073 3,531 12,742 16,273 Gross proceeds of share issues - - - 4,553 - 4,553 Purchase of shares for Treasury (964) - (964) - - - Sale of shares from Treasury - cost 190 - 190 - - - Sale of shares from Treasury - loss (2) - (2) - - - Expenses of share issue and buybacks (5) - (5) (275) - (275) Other costs charged to capital (5) - (5) - - - Reallocation of prior year unrealised gains 4,146 - 4,146 - (4,146) (4,146) Realised gain on disposal of investments # 1,535 - 1,535 - - - Net increase in value of investments # - - - - 8,678 8,678 Management fee capitalised # (2,541) - (2,541) - - - Taxation relief from capital expenses # 505 - 505 - - - Revenue return on ordinary activities after taxation # - 2,148 2,148 - - - Dividends paid in the year (8,390) (2,518) (10,908) - - - At 30 September 2013 41,921 251 42,172 7,809 17,274 25,083 # The total of these items is Â£10,325,000 which agrees to the total profit on ordinary activities. * Changes in fair value of investments are dealt with in this reserve. Distributable reserves include the net unrealised loss on investments whose prices are quoted in an active market and deemed readily realisable in cash. Share premium is recognised net of issue costs. The Company does not have any externally imposed capital requirements. 3.3 Financial instruments risks The Company's financial instruments comprise equity and fixed interest investments, cash balances and liquid resources including debtors and creditors. The Company holds financial assets in accordance with its investment policy to invest in a diverse portfolio of UK growth businesses. The Company's investing activities expose it to a range of financial risks. These key risks and the associated risk management policies to mitigate these risks are described below. Market risk Market risk includes price risk on investments and interest rate risk on investments and other financial assets and liabilities. Price risk The investment portfolio is managed in accordance with the policies and procedures described in the full Annual Report and Accounts. Investments in unquoted stocks, AIM & PLUS quoted companies involve a higher degree of risk than investments in the main market. The Company aims to reduce this risk by diversifying the portfolio across business sectors and asset classes. Management performs continuing analysis on the fair value of investments and the Company's overall market positions are monitored by the Board on a quarterly basis. 2013 2012 5% 5% decrease increase 5% increase 5% decrease in share in share in share in share price price price price effect on effect on effect on effect on % of total net assets net assets % of total net assets net assets investment and profit and profit investment and profit and profit Â£'000 Â£'000 Â£'000 Â£'000 LSE, AIM & 37 1,362 (1,362) 38 1,323 (1,323) PLUS Unquoted 50 1,824 (1,824) 53 1,836 (1,836) 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 indirectly be affected by price movements on the listed exchanges. Interest rate risk The Company has the following investments in fixed and floating rate financial assets: 2013 2012 Weighted Weighted average average Weighted time for Weighted time for average which average which Total interest rate Total interest rate investment rate is fixed investment rate is fixed Â£'000 % days Â£'000 % days Fixed rate loan note 25,578 9.27 # 25,947 9.41 # securities Fixed interest instruments 2,999 0.23 14 4,699 0.18 10 Floating rate instrument - - - 1,240 - - ("OEIC") Cash at bank & on deposit 2,875 - - 3,465 - - 31,452 35,351 # Due to the complexity of the instruments and uncertainty surrounding timing of realisation the weighted average time for which the rate is fixed has not been calculated. Credit risk Credit risk refers to the risk that counterparty will default on its obligation resulting to a financial loss to the Company. The Investment Manager monitors credit risk on an ongoing basis. At the reporting date, the Company's financial assets exposed to credit risk amounted to the following: 2013 2012 Â£'000 Â£'000 Investments in fixed rate instruments 2,999 4,699 Investments in floating rate instruments - 1,240 Cash at bank & on deposit 2,875 3,465 Interest, dividends and other receivables 1,965 310 7,839 9,714 Credit risk arising on fixed interest instruments is mitigated by investing in UK Government Stock. Credit risk on unquoted loan stock held within unlisted investments is considered to be part of market risk as disclosed earlier in the note. 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 the assets of the Company which are traded on a recognised exchange are held by JP Morgan Chase ("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 of this report. 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 2013 or 30 September 2012. No individual investment exceeded 7.2 per cent. of the net assets attributable to the Company's shareholders at 30 September 2013 (2012: 6.5 per cent.) 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 and PLUS traded equity investments, all 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 Extract from 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 2013 these investments were valued at Â£5,874,000 (2012: Â£9,404,000). 3.4 Related parties Related party transactions include Management, Secretarial, Accounting and Performance fees payable to the Manager, ISIS EP LLP, as disclosed in notes 2.6 and 2.8, and fees paid to the Directors as disclosed in note 2.6. In addition, the Manager operates a Co-investment Scheme, detailed in the Extract from the Report of the Directors above, whereby employees of the Manager are entitled to participate in all unquoted investments alongside the Company. 3.5 Post balance sheet event The Company's investment in CableCom Networking Holdings Limited was sold to a financial buyer on 25 October 2013 for proceeds of Â£5,684,000 of which Â£ 1,250,000 was rolled over into a new investment in CableCom alongside the financial buyer and Â£740,000 into a bridging loan note that is expected to be refinanced within twelve months. A new investment of Â£955,000 was made in Carousel Logistics Limited, a provider of bespoke logistics and supply chain solutions, on 2 October 2013. National Storage Mechanism A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: http://www.morningstar.co.uk/uk/NSM Annual General Meeting The Company's Annual General Meeting will be held on 18 December 2013 at 12.30pm at the Plaisterers' Hall, One London Wall, London, EC2Y 5JU. 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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