Final Results

British SmallerTechCompaniesVCT2PLC 03 April 2007 BRITISH SMALLER TECHNOLOGY COMPANIES VCT 2 PLC UNAUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006 British Smaller Technology Companies VCT 2 plc ("the Company") today announces its unaudited preliminary results for the year ended 31 December 2006. Chairman's Statement The year under review has seen your Company take positive steps forward following the successful acquisition of British Smaller Technology Companies VCT plc at the end of 2005. In this, the first full financial year of the enlarged Company, net asset value per share has grown by 12.8% due to successful realisations and the stabilisation of the remaining portfolio, which has shown encouraging signs of recovery and growth potential. The benefits of an enlarged Company, envisaged at the time of the acquisition, are already in evidence and your board is hopeful that these will continue to add further value for shareholders. Operations 2006 has seen the portfolio stabilise and mature. Progress has been made by a number of companies within the portfolio as these businesses gain critical volume of sales and move into profitability. This progress is reflected in the net unrealised valuation gain of £473,000. Your board and its Investment Adviser have seen a good flow of propositions during the year. However, entry valuations sought for these businesses have, in general, been overly optimistic and we took the decision to be very selective in the deals we progressed. In the event, a total of £276,000 was invested in the year. In addition to the new investment in AIM quoted Brulines plc and follow-on investments in DxS Limited and Silistix Limited to support their continuing growth, we took the opportunity to invest the residual investment in the secondary management buyout at Tekton Group Limited that followed the successful realisation of our original holding in that company. This new investment is part of a restructuring to allow new institutional investors to take the business through its rapid growth plans. The second half of the year saw a significant realisation from your Company's portfolio with the sale, on 28 September 2006, of Vibration Technology Limited to Sercel Inc, a multinational company head quartered in Nantes, France. The disposal realised cash proceeds of £2.3 million for your Company, compared to a carrying value at the last reporting date of £1.14 million and an original cost of £1.06 million. Following the flotations of Oxonica plc and Optos plc, Vibration Technology is another example of the initial investments made by your Company that focused on earlier stage innovative companies, which, typically, can take four to six years to mature to a position that is attractive to potential acquirers or for listing on a quoted market. For some time, your board has operated an investment strategy of moving toward companies that were at a later stage in their development to give the portfolio a better balance and a more immediate revenue stream, either through ongoing dividends or an earlier realisation profile. This strategy is bearing fruit with your Company's investment in Tekton Group, made in December 2005, being realised in December 2006. Your board continues to review its investment strategy to ensure it is best positioned to provide growth in shareholder value, with particular reference to the developing portfolio and market conditions. I can report that your board has recently agreed to reserve a proportion of available cash for investing in mature companies of a more generalist nature that are expected to become revenue positive at an early stage. Initially, it is intended that these companies will comprise no more than forty per cent of the portfolio. Your directors feel that this broadening of the investment strategy will further enhance shareholder returns over the short to medium term. Financial Results and Dividend The result for the financial year ended 31 December 2006 was a profit of £1.52 million equivalent to 9.1 pence per share. The prior year result was a loss of £421,000 (loss per share of 5.14 pence per share). The prior year comparison is for the original single entity prior to the acquisition of British Smaller Technology Companies VCT plc. The year under review is for a full year of the combined entity; hence the significant increase in income and administrative expenses. The cost economies forecast at the time of the acquisition are in evidence from a comparison of the costs of the two independent companies over the prior year compared to the cost base of the combined entity in the current year. The total cost of the two companies in 2005 was £790,000. The cost base of the combined entity in 2006 was £599,000, representing a saving of 24% (ignoring inflationary effects). As shareholders, you will see the benefits of these cost economies through an improving performance of your Company and improving dividend distributions as realisations from the portfolio are achieved. The total return, taking account of net asset value plus dividends distributed to date, is now 90.7 pence per share. For the year to 31 December 2006, your directors are recommending distributing some of this value as a tax free dividend of 2.0 pence per share. This will bring total distributions to 9.0 pence per share. This dividend will be paid on 25 May 2007 to shareholders on the register at 13 April 2007. Shareholder Matters In the first half of 2006, a total of 665,867 shares were purchased by your Company under its stated share buy-back policy. Following that transaction, your board became aware that further substantial shareholdings were about to be offered for buy-back. This would have significantly reduced the available cash for investing in, and growing, the current portfolio, which, the board believes, is not in the interests of shareholders as a whole. Your directors believe that the investment strategy for bringing later stage growing businesses into the portfolio, and in the active support of the successful companies already in the portfolio, will bring stability and recovery to shareholder value. Therefore, your board took the decision to withdraw the Company's share buy-back policy for an indefinite period. An inevitable consequence of this decision has been to increase the discount between the share price and the reported net asset value. This is unfortunate but does reflect the long term nature of VCT shares and the effect of the legislation that only offers tax relief on a subscription to new shares. We continue to work with the Company's brokers to improve secondary market liquidity and the level of the discount, with some progress being made in the last quarter of the year. With the revised investment strategy already showing evidence of success and the earlier stage portfolio companies showing signs of maturity with the requirement, in some cases, for follow-on funding to support their growth plans, your board is focused on reserving cash for these purposes. We will consider the reinstatement of a similar buy-back policy to that operated previously at the appropriate time, but this is unlikely to be in the foreseeable future. I can confirm that your Company continues to meet all the investment ratios required by legislation to maintain its status as a qualifying VCT. The Annual General Meeting of the Company will be held at 11.30am on 22 May 2007 at 23 Berkeley Square, Mayfair, London, W1J 6HE. Full details of the agenda for this meeting will be included in the Annual Report which will be circulated to shareholders. Outlook Early stage companies at the leading edge of technological innovation are inevitably fragile when market conditions change and failure rates can be relatively high. However, those companies that do gain market acceptance can provide their investors with significant returns. Your Company has seen some improvement from these earlier investments as they begin reaching maturity and become attractive to secondary purchasers through either a trade sale or flotation. With an investment strategy, firstly, to target innovative companies that already have a proven market acceptance and, latterly, to include a proportion of more generalist mainstream businesses, your Company intends to have a balanced portfolio well positioned to provide a more constant rate of growth and tax free dividend income to shareholders. Sir Andrew Hugh Smith Chairman 3 April 2007 Unaudited Income Statement for the year ended 31 December 2006 Notes 2006 2005 £000 £000 Income 220 82 Administrative expenses: ------ ------ Investment advisory fee (371) (172) Other expenses (228) (186) ------ ------ (599) (358) Excess of acquirer's interest in the fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over cost - 975 Gain on realisation of investments 1,421 251 Gains (losses) on investments held at fair value 473 (1,371) ------ ------ Profit (loss) on ordinary activities before taxation 1,515 (421) Taxation 2 - - ------ ------ Profit (loss) for the year from continuing operations 1,515 (421) ------ ------ Earnings (loss) per Ordinary share basic and diluted 3 9.10p (5.14)p ====== ====== Unaudited Balance Sheet at 31 December 2006 Notes 2006 2005 £000 £000 Assets Non-current assets Investments at fair value through profit or loss 9,008 9,503 ------ ------ Current assets Trade and other receivables 335 150 Cash and cash equivalents 4,984 3,834 ------ ------ 5,319 3,984 Liabilities Current liabilities Trade and other payables (391) (647) ------ ------ Net current assets 4,928 3,337 ------ ------ Net assets 13,936 12,840 ====== ====== Shareholders' equity Share capital 1,664 1,731 Share premium 69 69 Capital redemption reserve 88 21 Merger reserve 5,525 5,525 Other reserve 2 2 Retained earnings 6,588 5,492 ------ ------ Total shareholders' equity 13,936 12,840 ====== ====== Net asset value per Ordinary share 4 83.7p 74.2p ====== ====== Unaudited Statement of Changes in Equity Share Share premium Revaluation Merger Special *Other Retained Total capital account reserve reserve reserve reserves earnings equity £000 £000 £000 £000 £000 £000 £000 £000 Balance at 31 December 2004 783 9 223 - 5,364 6 1,221 7,606 Loss for the year - - - - - - (421) (421) Transfer of the revaluation reserve onadoption of IAS39 - - (223) - - - 223 - Dividends - - - - - - (738) (738) Purchase of own shares (20) - - - (159) 20 - (159) Exercise of warrants 1 8 - - - (1) - 8 Issue of share capital on acquisition 959 - - 5,561 - - - 6,520 Issue costs - - - (36) - - - (36) Issue of share capital on DRIS** 8 52 - - - - - 60 Transfer of the special reserve - - - - (5,205) - 5,205 - Transfer of the warrant reserve - - - - - (2) 2 - ------ ------ ------ ------ ------ ------ ------ ------ Balance at 31 December 2005 1,731 69 - 5,525 - 23 5,492 12,840 Profit for the year - - - - - - 1,515 1,515 Purchase of own shares (67) - - - - 67 (419) (419) ------ ------ ------ ------ ------ ------ ------ ------ Balance at 31 December 2006 1,664 69 - 5,525 - 90 6,588 13,936 ====== ====== ====== ====== ====== ====== ====== ====== *Other reserves include the capital redemption reserve and other reserve, which are non-distributable. ** DRIS being the Dividend Re-investment Scheme. The Merger reserve was created to account for the difference between the nominal and fair value of shares issued as consideration for the acquisition of the assets and liabilities of British Smaller Technology Companies VCT plc. The reserve was created after meeting the criteria under section 131 of the Companies Act 1985 for merger relief. The merger reserve is a non-distributable reserve. The special distributable reserve was created following the approval of the Court and the resolution of the Shareholders to cancel the Company's share premium account and is available for use for other corporate purposes of the Company. Included within retained earnings is £1,211,000 (2005: £632,000) in respect of unrealised gains in respect of investments held at fair value through profit or loss. These gains are not distributable under the Companies Act 1985. Unaudited Cash Flow Statement for the year ended 31 December 2006 2006 2005 £000 £000 Net cash flows from operating activities (393) (290) ------ ------ Cash flows from investing activities Cash acquired - 1,386 Costs of acquisition (172) (39) ------ ------ Acquisition net of cash acquired (172) 1,347 Purchase of fixed asset investments (276) (867) Proceeds from sale of fixed asset investments 2,875 331 ------ ------ Net cash from investing activities 2,427 811 ------ ------ Cash flows from financing activities Issue of Ordinary shares on exercise of warrants - 8 Issue costs in respect of the shares issued in consideration for the acquisition - (36) Purchase of own shares and associated warrants (419) (159) Dividends paid (346) (332) ------ ------ Net cash used in financing activities (765) (519) ------ ------ Net increase in cash and cash equivalents 1,269 2 Cash and cash equivalents at beginning of the year 3,834 3,824 Effect of market value changes in cash equivalents (119) 8 ------ ------ Cash and cash equivalents at the end of the year 4,984 3,834 ====== ====== Notes to Financial Statements for the year ended 31 December 2006 1. Accounting Policies This preliminary announcement does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The information for the year ended 31 December 2005 is an extract from the statutory accounts to that date which have been delivered to the Registrar of Companies. Those accounts included an audit report which was unqualified and which did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. The statutory accounts for the year ended 31 December 2006, upon which the auditors have still to report, will be delivered to the Registrar following the Company's annual general meeting. The financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC) as adopted by the European Union. 2. Taxation on Ordinary Activities 2006 2005 £000 £000 Corporation tax payable at 19% (2005: 19%) - - ------ ------ Profit (loss) on ordinary activities before taxation 1,515 (421) ------ ------ Profit (loss) on ordinary activities multiplied by standard small company rate of corporation tax in UK of 19% (2005: 19%) 288 (80) Effect of: UK dividends received (4) - Non taxable (profits) losses on investments (360) 213 Excess management expenses 76 (133) ------ ------ Current tax charge for the year - - ------ ------ 3. Earnings (loss) per Ordinary Share The earnings (loss) per Ordinary share is based on net profit from ordinary activities after tax of £1,515,000 (2005: loss of £421,000) and 16,878,000 (2005: 8,185,000) shares, being the weighted average number of shares in issue during the year. The only potentially dilutive shares are those shares which, subject to certain criteria being achieved in the future, may be issued by the Company to meet its obligations under the investment management agreement. No such shares have been issued or are currently expected to be issued. There are, therefore, considered to be no potentially dilutive shares in issue at 31 December 2006 or 31 December 2005. Consequently, basic and diluted earnings per share are the same for the year ended 31 December 2006 and 31 December 2005. 4. Net Asset Value per Ordinary Share The net asset value per Ordinary share is calculated on attributable assets of £13,936,000 (2005: £12,840,000) and 16,641,257 (2005: 17,307,124) shares in issue at the year end. The Company has no securities that would have a dilutive effect in either period and hence the basic and diluted net asset value per share are the same. 5. Annual Report Copies of the full financial statements for the year ended 31 December 2006 will be available to the public at the registered office of the Company at Saint Martins House, 210-212 Chapeltown Road, Leeds, LS7 4HZ . For further information, please contact: David Hall YFM Private Equity Limited Tel: 0161 832 7603 Alan Davies YFM Private Equity Limited Tel: 0113 294 5000 Jonathan Becher Teather & Greenwood Limited Tel: 0207 426 3269 Michael Bellamy Teather & Greenwood Limited Tel: 0207 426 9547 This information is provided by RNS The company news service from the London Stock Exchange

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