Interim Results

Baronsmead VCT 2 PLC 07 November 2006 Baronsmead VCT 2 plc To: RNS From: Baronsmead VCT 2 plc Date: 7 November 2006 Interim Results - Six Months Ended 30 September 2006 Highlights • NAV per ordinary share increased by 1.0 per cent to 115.74p before payment of a 5.0p interim dividend. • NAV per C share increased by 5.7 per cent to 107.75p before payment of a 1.6p interim dividend. • Since launch in 1998 the total return for ordinary shareholders is 92.4 per cent (based on the Association of Investment Companies (AIC) method), which is equivalent to an annualised investment return of 8.0 per cent tax-free. • The total return for C shareholders since October 2004 is 17.2 per cent, which is equivalent to an annualised investment return of 8.3 per cent tax-free. The Chairman, Clive Parritt said: 'The 5p interim dividend takes the average annual dividend payments since 1998 to 6.1p tax-free for qualifying shareholders. The total return for the C share pool continues to progress at a rate higher than might have been expected for such an immature portfolio. Following the Finance Act 2006, the Directors have decided to stop issuing new shares for the time being. This means the Company has suspended the current Dividend Reinvestment Scheme (DRIS). However a Dividend Reinvestment Plan (DRIP) will replace the DRIS, under which existing ordinary shares will be issued in lieu of cash dividends to ordinary shareholders who elect to participate. RESULTS In the six months to 30 September 2006, the Net Asset Value (NAV) per ordinary share increased by 1.0% to 115.74p before payment of the interim dividend. A 5p interim dividend for ordinary shares has been declared. The NAV for C shares increased by 5.7% to 107.75p per share. The NAV becomes 106.15p per C share after payment of the interim dividend of 1.6p. Both dividends are payable on 20 December 2006. The required minimum 70% of the portfolio has been invested in qualifying investments throughout the period. 76% of the ordinary capital raised (net of launch costs) prior to 31 March 2004 was invested in VCT qualifying investments and we are on course to invest more than 70% of the C share funds raised in winter 2004/05 by 31 March 2007. The Company bought back 675,000 ordinary shares at an average price of 102.3p representing a discount of approximately 10% to NAV per share. 1.8 million of these shares are currently held in Treasury LONG TERM PERFORMANCE Since inception in April 1998 the total return on the ordinary shares is now 92.4% and since October 2004 the C shares have returned 17.2%. These returns are stated net of running costs but prior to launch costs. The average annual growth in total return over the periods is 8.0% and 8.3% for the respective share classes. The ordinary share total return is over 70% ahead of the peer group average of seven generalist VCTs and is also 54% ahead of the FTSE All-Share over the comparable period. From an investor's perspective, if a shareholder had invested £100 (before launch costs of £5) in 1998, the NAV of their holding, assuming reinvestment of the 52.4p dividends paid, becomes £183. Individual VCT tax reliefs can also be added to this amount. The three and five year total returns to 30 September 2006 place the performance of Baronsmead VCT 2 in the middle of the 19 Private Equity Investment Trusts (as identified by the AIC, source Trustnet). If the tax-free nature of the dividends paid in these periods is also factored into the calculations, as if shareholders were higher rate taxpayers, the relative position improves significantly. The Board believes that it is appropriate to take VCT reliefs into account in this way, as they were designed to redress both the restrictive nature of qualifying investments under VCT legislation and the perceived higher risk of investing in smaller unquoted and AiM-traded companies. THE PORTFOLIO In the six months under review, 6 new investments were made and, after the sale of the investments in neuTec Pharma and Scott Tod plus the write-off of Spaform, the portfolio increased to 76 companies. Further rounds of investment were made in Appian and Driver Group. The C share portfolio now has twenty-six investments valued at £12.8 million. New investments are allocated between the ordinary and C shares in proportions approved quarterly by the Board giving due consideration to the constraints of VCT legislation. The Board reviews the relative health of portfolio companies quarterly, in terms of profitability as well as other non-financial benchmarks. At the period end, 83% by number and 95% by value of portfolio companies were reporting better or steady progress, which is an improving trend. Occam and SLR both showed strong trading progress while recent investments in ILS, Kafevend and Reed & Mackay were revalued for the first time. This last company presented to the eighth AGM in June and outlined their philosophy of being 'best in class' for providing strategic business travel management services to professional services firms. The additional provision against Country Artists' valuation has been balanced by a partial write-back of the provision for Hawksmere and Oxxon. There was considerable volatility in the prices of AiM-traded companies, as the market rose strongly until the end of May and then went sharply into reverse, reducing the gains. Overall, this part of the portfolio was down 2% at a time when the FTSE AIM Index fell 15%. Two new investments in the flotations of Worthington Nicholls and Proactis opened strongly. Realised gains (on a historical cost basis) of £503,000 over the six month period, together with gains brought forward from 2005, contributed towards the capital dividends paid out at the interim stage. INTRODUCTION OF THE DIVIDEND REINVESTMENT PLAN (DRIP) The Finance Act 2006 signalled that the Government wishes to redirect capital raised by VCTs after 6 April 2006 into smaller companies with gross assets of up to £7 million, a level half that applying to capital raised before this date. An analysis of the last 42 investments made by Baronsmead VCT 2 showed that most would have qualified within the revised level, although a significant minority of investees would have failed to qualify for further rounds of capital. The Board has decided not to issue new shares until the impact of the revisions is better understood. The immediate consequence is that the current DRIS is suspended and the Board has introduced a Dividend Reinvestment Plan (DRIP) to purchase existing ordinary shares, which is similar to more conventional dividend reinvestment schemes. Purchasing existing shares can provide investment attractions for ordinary shareholders who wish to build their capital as opposed to receiving cash dividends. Shareholders who increase their holding using the DRIP will be buying into a well-diversified portfolio, which has shown consistent overall growth. Realised capital profits and net revenue have historically supported the current dividend policy and this is also the future intention. The principal difference between the DRIP and the suspended DRIS is that no initial tax-relief is available on the invested cash. However dividends generated by the DRIP shares will still be tax-free for qualifying ordinary shareholders and the shares are not subject to capital gains tax. The DRIP is not available to C shareholders as existing shares are unlikely to be available in the market until after conversion into ordinary shares in 2007. The resolution at the EGM to enable the Board to re-issue shares out of Treasury was passed on the 2 November 2006 with 94% of shareholders voting in favour, some 26% of the shareholder base. The authority will help satisfy demand in the event that there are insufficient existing ordinary shares available in the market. DEVELOPMENT OF THE SECONDARY MARKET The main thrust of the survey in October 2006 was to understand shareholders' priorities, especially as the number of shareholders has grown significantly since the last survey in 2004. Over 1,000 replies were received (25% of the total shareholder base) and give invaluable guidance to the Board on the key messages necessary for development of the secondary market. In summary: • The requirement to achieve good total returns from the portfolio of investments is paramount, but tax remains an important motivation for purchasers, ie: the ability to receive tax free dividends and incur no capital gains tax on disposal of VCT shares; • Performance measures should focus on absolute rather than comparative results, although reports such as this will continue to state both; • As regards the priority to maximise income or capital growth, a majority favoured capital growth; and • Approximately 70% of ordinary shareholders and 65% of C shareholders intend to hold their shares indefinitely, and the balance indicated their intention to hold for the medium term. Since launch in 1998, the track record of Baronsmead VCT 2 has shown a strong positive total return. The share price typically trades at 10% below the NAV per ordinary share. The Board believes that the yield on the ordinary shares may well be a more appropriate basis for judging share price. The average annual dividend paid is currently 6.1p, for basic rate taxpayers, or 9.0p for those paying tax at the higher rate, which represents an attractive yield for purchasers with a preference for income. OUTLOOK Quoted markets became more volatile in summer 2006 but the direction of travel for the existing portfolio is stronger than for some time. The Manager remains selective in its new unquoted and AiM-traded opportunities and has continued to improve its active management once invested. A key priority for the Board is to ensure that the secondary market develops and can offer shareholders the ability to buy and sell the Company's shares advantageously.' Contacts: David Thorp, ISIS EP LLP: 0207 506 1609 Rhonda Nicoll, F&C Asset Management plc 0131 465 1000 Unaudited Income Statement Six months to 30 September 2006 Ordinary Shares Revenue Capital Total £'000 £'000 £'000 Realised gains on investments - 413 413 Income 621 - 621 Investment management fee (138) (413) (551) Other expenses (106) - (106) ---------- ----------- ----------- Profit on ordinary activities before taxation 377 - 377 Tax on ordinary activities (66) 66 - ---------- ----------- ----------- Profit on ordinary activities after taxation 311 66 377 ---------- ---------- ----------- Return per ordinary share 0.77p 0.16p 0.93p ---------- ---------- ----------- Unaudited Reconciliation of Movement in Shareholders' Funds Six months to 30 September 2006 Ordinary Shares £'000 Opening shareholders' funds 46,897 Profit for the period 377 Decrease in share capital in issue (696) Closing shareholders' funds 46,578 Unaudited Income Statement Six months to 30 September 2006 C Shares Revenue Capital Total £'000 £'000 £'000 Unrealised gains on investments - 1,229 1,229 Realised gains on investments - 42 42 Income 433 - 433 Investment management fee (70) (211) (281) Other expenses (127) - (127) ---------- ----------- ----------- Profit on ordinary activities before taxation 236 1,060 1,296 Tax on ordinary activities (54) 54 - ---------- ----------- ----------- Profit on ordinary activities after taxation 182 1,114 1,296 ---------- ---------- ----------- Return per C share 0.81p 5.01p 5.82p ---------- ----------- ----------- Unaudited Reconciliation of Movement in Shareholders' Funds Six months to 30 September 2006 C Shares £'000 Opening shareholders' funds 22,677 Profit for the period 1,296 Decrease in share capital in issue (2) Closing shareholders' funds 23,971 Unaudited Income Statement Six months to 30 September 2006 Total Revenue Capital Total £'000 £'000 £'000 Unrealised gains on investments - 1,229 1,229 Realised gains on investments - 455 455 Income 1,054 - 1,054 Investment management fee (208) (624) (832) Other expenses (233) - (233) ---------- ----------- ----------- Profit on ordinary activities before taxation 613 1,060 1,673 Tax on ordinary activities (120) 120 - ---------- ----------- ----------- Profit on ordinary activities after taxation 493 1,180 1,673 ---------- ---------- ----------- Return per share 0.78p 1.88p 2.66p ---------- ---------- ----------- Unaudited Reconciliation of Movement in Shareholders' Funds Six months to 30 September 2006 Total £'000 Opening shareholders' funds 69,574 Profit for the period 1,673 Decrease in share capital in issue (698) Closing shareholders' funds 70,549 Unaudited Income Statement Six months to 30 September 2005 Ordinary Shares Revenue Capital Total £'000 £'000 £'000 Unrealised gains on investments - 1,258 1,258 Realised gains on investments - 920 920 Income 1,011 - 1,011 Investment management fee (137) (412) (549) Other expenses (109) - (109) ---------- ----------- ----------- Profit on ordinary activities before taxation 765 1,766 2,531 Tax on ordinary activities (175) 250 75 ---------- ----------- ----------- Profit on ordinary activities after taxation 590 2,016 2,606 ---------- ---------- ----------- Return per ordinary share 1.43p 4.89p 6.32p ---------- ---------- ------------ Unaudited Reconciliation of Movement in Shareholders' Funds Six months to 30 September 2005 Ordinary Shares £'000 Opening shareholders' funds 48,469 Profit for the period 2,606 Deferred consideration 12 Decrease in share capital in issue (389) Dividends paid (3,192) Closing shareholders' funds 47,506 Unaudited Income Statement Six months to 30 September 2005 C Shares Revenue Capital Total £'000 £'000 £'000 Unrealised gains on investments - 408 408 Realised losses on investments - (2) (2) Income 625 - 625 Investment management fee (63) (190) (253) Other expenses (74) - (74) ---------- ----------- ----------- Profit on ordinary activities before taxation 488 216 704 Tax on ordinary activities (138) 63 (75) ---------- ----------- ----------- Profit on ordinary activities after taxation 350 279 629 ---------- ---------- ----------- Return per C share 1.59p 1.26p 2.85p ---------- ---------- ----------- Unaudited Reconciliation of Movement in Shareholders' Funds Six months to 30 September 2005 C Shares £'000 Opening shareholders' funds 21,129 Profit for the period 629 Increase in share capital in issue 69 Dividends paid (220) Closing shareholders' funds 21,607 Unaudited Income Statement Six months to 30 September 2005 Total Revenue Capital Total £'000 £'000 £'000 Unrealised gains on investments - 1,666 1,666 Realised gains on investments - 918 918 Income 1,636 - 1,636 Investment management fee (200) (602) (802) Other expenses (183) - (183) ---------- ----------- ----------- Profit on ordinary activities before taxation 1,253 1,982 3,235 Tax on ordinary activities (313) 313 - ---------- ----------- ----------- Profit on ordinary activities after taxation 940 2,295 3,235 ---------- ---------- ----------- Return per share 1.48p 3.63p 5.11p ---------- ----------- ----------- Unaudited Reconciliation of Movement in Shareholders' Funds Six months to 30 September 2005 Total £'000 Opening shareholders' funds 69,598 Profit for the period 3,235 Deferred consideration 12 Decrease in share capital in issue (320) Dividends paid (3,412) Closing shareholders' funds 69,113 Audited Income Statement For the year to 31 March 2006 Ordinary Shares Revenue Capital Total £'000 £'000 £'000 Unrealised gains on investments - 3,997 3,997 Realised gains on investments - 1,590 1,590 Income 1,903 - 1,903 Investment management fee (278) (1,517) (1,795) Other expenses (241) - (241) ---------- ----------- ----------- Profit on ordinary activities before taxation 1,384 4,070 5,454 Tax on ordinary activities (284) 375 91 ---------- ----------- ----------- Profit on ordinary activities after taxation 1,100 4,445 5,545 ---------- ---------- ----------- Return per ordinary share 2.68p 10.81p 13.49p ---------- ----------- ------------ Audited Reconciliation of Movement in Shareholders' Funds Year to 31 March 2006 Ordinary Shares £'000 Opening shareholders' funds 48,469 Profit for the year 5,545 Deferred consideration 12 Decrease in shares in issue (459) Dividends paid (6,670) Closing shareholders' funds 46,897 Audited Income Statement For the year to 31 March 2006 C Shares Revenue Capital Total £'000 £'000 £'000 Unrealised gains on investments - 1,838 1,838 Realised losses on investments - (60) (60) Income 1,091 - 1,091 Investment management fee (129) (485) (614) Other expenses (127) - (127) ---------- ----------- ----------- Profit on ordinary activities before taxation 835 1,293 2,128 Tax on ordinary activities (247) 156 (91) ---------- ----------- ----------- Profit on ordinary activities after taxation 588 1,449 2,037 ---------- ---------- ----------- Return per C share 2.66p 6.56p 9.22p ---------- ----------- ----------- Audited Reconciliation of Movement in Shareholders' Funds Year to 31 March 2006 C Shares £'000 Opening shareholders' funds 21,129 Profit for the year 2,037 Increase in share capital in issue 239 Dividends paid (728) Closing shareholders' funds 22,677 Audited Income Statement For the year to 31 March 2006 Total Revenue Capital Total £'000 £'000 £'000 Unrealised gains on investments - 5,835 5,835 Realised gains on investments - 1,530 1,530 Income 2,994 - 2,994 Investment management fee (407) (2,002) (2,409) Other expenses (368) - (368) ---------- ----------- ----------- Profit on ordinary activities before taxation 2,219 5,363 7,582 Tax on ordinary activities (531) 531 - ---------- ----------- ----------- Profit on ordinary activities after taxation 1,688 5,894 7,582 ---------- ---------- ----------- Return per share 2.67p 9.33p 12.00p ---------- ---------- ----------- Audited Reconciliation of Movement in Shareholders' Funds Year to 31 March 2006 Total £'000 Opening shareholders' funds 69,598 Profit for the year 7,582 Deferred consideration 12 Decrease in shares in issue (220) Dividends paid (7,398) Closing shareholders' funds 69,574 Unaudited Balance Sheet As at 30 September 2006 Ordinary C Shares Shares Total £'000 £'000 £'000 Fixed Assets Traded on AIM 14,973 4,967 19,940 Unquoted investments 17,949 7,821 25,770 Quoted on OFEX 125 - 125 Listed investments 513 - 513 Listed interest bearing securities 11,715 10,194 21,909 _______ _______ _______ 45,275 22,982 68,257 Net current assets 1,303 989 2,292 ______ ______ ______ Net assets 46,578 23,971 70,549 ______ ______ ______ Financed by: Equity shareholders' funds 46,578 23,971 70,549 ______ ______ ______ Net asset value per share: 115.74p 107.75p - Ordinary shares in issue 40,241,427 22,247,650 - Treasury net asset value per share* 115.17p Number of ordinary shares in issue 40,241,427 Number of ordinary shares held in Treasury 1,770,000 Number of listed ordinary shares 42,011,427 *At an EGM held on 2 November 2006, shareholders renewed the existing authority to disapply pre-emption rights in relation to the allotment or sale from Treasury of up to 10 per cent of the listed share capital. The Board is now mandated to sell Treasury shares at a discount to the prevailing NAV. Accordingly, the shares held in Treasury at 30 September 2006 have been valued at middle market price (102p). Unaudited Balance Sheet As at 30 September 2005 Ordinary C Shares Shares Total £'000 £'000 £'000 Fixed Assets Traded on AIM 14,985 2,536 17,521 Unquoted investments 17,417 1,700 19,117 Quoted on OFEX 98 - 98 Listed investments 471 - 471 Listed interest bearing securities 12,759 15,358 28,117 _______ _______ _______ 45,730 19,594 65,324 Net current assets 1,776 2,013 3,789 ______ ______ ______ Net assets 47,506 21,607 69,113 ______ ______ ______ Financed by: Equity shareholders' funds 47,506 21,607 69,113 ______ ______ ______ Net asset value per share: 115.76p 97.88p - Ordinary shares in issue 41,038,015 22,074,995 - Treasury net asset value per share 115.76p Number of ordinary shares in issue 41,038,015 Number of ordinary shares held in Treasury 425,000 Number of listed ordinary shares 41,463,015 Audited Balance Sheet As at 31 March 2006 Ordinary C Shares Shares Total £'000 £'000 £'000 Fixed Assets Traded on AIM 16,404 3,909 20,313 Unquoted investments 16,230 4,110 20,340 Quoted on OFEX 119 - 119 Listed investments 530 - 530 Listed interest bearing securities 11,229 13,302 24,531 _______ _______ _______ 44,512 21,321 65,833 Net current assets 2,385 1,356 3,741 ______ ______ ______ Net assets 46,897 22,677 69,574 ______ ______ ______ Financed by: Equity shareholders' funds 46,897 22,677 69,574 ______ ______ ______ Net asset value per share: 114.62p 101.93p - Ordinary shares in issue 40,916,427 22,247,650 Treasury net asset value per share 114.62p Number of ordinary shares in issue 40,916,427 Number of ordinary shares held in Treasury 1,095,000 Number of listed ordinary shares 42,011,427 Summarised Unaudited Statement of Cash Flows Six months to 30 September 2006 Ordinary C Shares Shares Total £'000 £'000 £'000 Net cash outflow from operating activities (927) (48) (975) Tax received/(paid) 29 (29) - Capital expenditure and financial investment (345) (355) (700) Equity dividends paid - - - ----------- ----------- ----------- Net cash outflow before financing (1,243) (432) (1,675) Financing (822) - (822) ----------- ----------- ----------- Decrease in cash (2,065) (432) (2,497) ----------- ----------- ----------- Reconciliation of net cash flow to movement in net cash Decrease in cash (2,065) (432) (2,497) Opening net cash 3,290 1,672 4,962 ----------- ----------- ----------- Net cash at end of period 1,225 1,240 2,465 ----------- ----------- ----------- Reconciliation of operating profit before taxation to net cash flow from operating activities Profit on ordinary activities before taxation 377 1,296 1,673 Unrealised gains on investments - (1,229) (1,229) Realised (gains)/losses on investments (413) (42) (455) Changes in working capital and other non cash items (891) (73) (964) ----------- ----------- ----------- Net cash outflow from operating activities (927) (48) (975) ----------- ----------- ----------- Summarised Unaudited Statement of Cash Flows Six months to 30 September 2005 Ordinary C Shares Shares Total £'000 £'000 £'000 Net cash (outflow)/inflow from operating activities (1,369) 285 (1,084) Capital expenditure and financial investment 2,479 (418) 2,061 Equity dividends paid (3,192) (220) (3,412) ----------- ----------- ----------- Net cash outflow before financing (2,082) (353) (2,435) Financing (389) (281) (670) ----------- ----------- ----------- Decrease in cash (2,471) (634) (3,105) ----------- ----------- ----------- Reconciliation of net cash flow to movement in net cash Decrease in cash (2,471) (634) (3,105) Opening net cash 4,100 2,589 6,689 ----------- ----------- ----------- Net cash at end of period 1,629 1,955 3,584 ----------- ----------- ----------- Reconciliation of operating profit before taxation to net cash flow from operating activities Profit on ordinary activities before taxation 2,531 704 3,235 Unrealised gains on investments (1,258) (408) (1,666) Realised (gains)/losses on investments (920) 2 (918) Changes in working capital and other non cash items (1,722) (13) (1,735) ----------- ----------- ----------- Net cash (outflow)/inflow from operating activities (1,369) 285 (1,084) ----------- ----------- ----------- Summarised Audited Statement of Cash Flows Year to 31 March 2006 Ordinary C Shares Shares Total £'000 £'000 £'000 Net cash (outflow)/inflow from operating activities (974) 697 (277) Capital expenditure and financial investment 7,319 (773) 6,546 Equity dividends paid (6,670) (728) (7,398) ----------- ----------- ----------- Net cash outflow before financing (325) (804) (1,129) Financing (485) (113) (598) ----------- ----------- ----------- Decrease in cash (810) (917) (1,727) ----------- ----------- ----------- Reconciliation of net cash flow to movement in net cash Decrease in cash (810) (917) (1,727) Opening net cash 4,100 2,589 6,689 ----------- ----------- ----------- Net cash at end of period 3,290 1,672 4,962 ----------- ----------- ----------- Reconciliation of operating profit before taxation to net cash flow from operating activities Profit on ordinary activities before taxation 5,454 2,128 7,582 Unrealised gains on investments (3,997) (1,838) (5,835) Realised gains on investments (1,590) 60 (1,530) Changes in working capital and other non cash items (841) 347 (494) ----------- ----------- ----------- Net cash (outflow)/inflow from operating activities (974) 697 (277) ----------- ----------- ----------- Notes 1. The unaudited results which cover the six months to 30 September 2006 have been drawn up in accordance with applicable accounting standards and adopting the accounting policies set out in the statutory accounts for the year ended 31 March 2006. 2. Return per Ordinary Share is based on a weighted average of 40,627,493 ordinary shares in issue (31 March 2006 - 41,108,544; 30 September 2005 - 41,266,797). Return per C share is based on a weighted average of 22,247,650 C shares in issue (31 March 2006 - 22,080,010; 30 September 2005 - 22,035,653). 3. During the six months ended 30 September 2006, the Company purchased 675,000 ordinary shares to be held in Treasury at a cost of £694,000. There were 40,241,427 ordinary shares in issue at 30 September 2006 (31 March 2006 - 40,916,427; 30 September 2005 - 41,038,015). There were 22,247,650 C shares in issue at 30 September 2006 (31 March 2006 - 22,247,650; 30 September 2005 - 22,074,995). 4. Earnings for the first six months should not be taken as a guide to the results of the full year. 5. An interim dividend comprising 0.7p (revenue) and 4.3p (capital) will be paid on 20 December 2006 to ordinary shareholders on the register on 17 November 2006. An interim dividend comprising 0.8p (revenue) and 0.8p (capital) will also be paid on 20 December 2006 to C shareholders on the register on 17 November 2006. 6. These are not full accounts in terms of Section 240 of the Companies Act 1985. Full audited accounts for the year to 31 March 2006, which were unqualified, have been lodged with the Registrar of Companies. No statutory accounts in respect of any period after 31 March 2006 have been reported on by the Company's auditors or delivered to the Registrars of Companies. 7. Copies of the Interim Report will be mailed to shareholders and will be available from the Registered Office of the Company at 100 Wood Street, London EC2V 7AN. This information is provided by RNS The company news service from the London Stock Exchange

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