Annual Financial Report
Baronsmead VCT 2 plc
Annual report and accounts for the year ended 30 September 2010
Investment Objective
Baronsmead VCT 2 is a tax efficient listed company which aims to achieve
long-term investment returns for private investors, including tax free
dividends.
Investment Policy
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 investment policy and risk management are contained in the
Directors' Report.
Dividend policy
The Board of Baronsmead VCT 2 aims to sustain a minimum annual dividend level
at an average of 5.5p per Ordinary Share, mindful of the need to maintain net
asset value. The ability to meet these twin objectives depends significantly on
the level and timing of profitable realisations and cannot be guaranteed. There
will be variations in the amounts of dividends paid year on year.
Since launch, the average annual tax free dividend paid to Shareholders has
been 6.3p per share (equivalent to a pre-tax return of 8.4p per Ordinary Share
for a higher rate taxpayer). For Shareholders who claimed tax reliefs of 20 per
cent, 30 per cent or 40 per cent, their returns would have been higher.
Secondary market in the shares of Baronsmead VCT 2 plc
The existing shares of the Company are listed on the London Stock Exchange and
can be bought and sold using a stockbroker in the same way as shares of any
other listed company.
Qualifying investors* who invest in the existing shares of the Company can
benefit from:
â— Tax free dividends;
â— Realised gains not subject to capital gains tax (although any realised losses
are not allowable);
â— No minimum holding period; and
â— No need to include VCT dividends in annual tax returns.
The UK tax treatment of VCTs is on a first in first out basis and therefore tax
advice should be obtained before shareholders dispose of their shares and also
if they deferred a capital gain in respect of new shares acquired prior to 6
April 2004.
*UK income tax payers, aged 18 or over, who acquire no more than £200,000 worth
of VCT shares in a tax year.
Financial Headlines
â— 13.1% Net asset value ("NAV") per ordinary share increased 13.1 per cent to
97.29p before deduction of dividends.
â— 5.5p Dividends for the year totalled 5.5p per share which includes the
proposed final dividend of 3.0p, payable to shareholders on 14 January 2011,
subject to shareholder approval.
â— 78.9p Cumulative tax free dividends total 78.9p per share for founder
shareholders since 1998, equivalent to an annual average dividend of 6.3p per
share.
â— 208.3p NAV total return to shareholders for every 100p invested since launch.
â— 6.8% A tax free return of 6.8 per cent has been received by qualifying
shareholders, based on the 5.5p dividends paid and proposed in the year and the
mid share price of 81.25p at the year end. The gross equivalent yield for a
higher rate taxpayer is 9.0 per cent.
Summary Since Launch
Performance Summary to 30 September 2010
1 year 5 years 10 years Since launch
Total return* % % % (2 April 1998)
%
Net asset value†13.3 16.4 50.5 108.3
Share price†10.2 17.4 24.8 97.4
FTSE All-Share 12.5 24.7 31.9 51.8
*Source: ISIS EP LLP and AIC
†These returns for Baronsmead VCT 2 ignore up front tax reliefs and the impact
of receiving dividends tax free.
Performance Record
Ordinary share
FTSE Combined
Total Share Net asset All-Share total
net Net price value total expense
asset
assets value (mid) total return ratioâ€
return*
Year ended £m p p p p %
31/03/1999 9.50 95.65 85.00 104.44 105.06 2.90
31/02/2000 31.00 119.59 125.00 134.62 115.45 3.40
31/03/2001 45.00 112.30 125.00 130.66 103.02 3.10
31/03/2002 41.20 100.54 92.50 120.15 99.76 2.70
31/03/2003 36.70 89.65 80.00 115.49 70.02 2.70
31/03/2004 14.10 100.63 90.00 141.80 91.72 2.70
31/03/2005 69.60 116.92 100.50 168.70 105.99 2.70
31/03/2006 69.60 114.62 100.50 190.51 135.69 2.90
30/09/2007 68.70 112.19 101.00 209.62 154.89 3.00
30/09/2008 54.80 91.68 84.50 184.02 121.80 2.85
30/09/2009 61.22 89.06 77.50 183.81 134.96 2.66
30/09/2010 63.67 94.79 81.25 208.25 151.81 2.58
* Source: ISIS EP LLP.
†As a percentage of average total shareholders' funds (excluding performance
fee).
Dividends Paid Since Launch
Total Average
Revenue Capital annual Cumulative total
annual
dividend dividend dividend dividend dividend
Year ended p p p p p
6 months to 30/09/ 1.00 0.00 1.00 1.00 0.50
1998
30/09/1999 3.80 0.00 3.80 4.80 3.20
30/09/2000 3.60 0.00 3.60 8.40 3.36
30/09/2001 3.50 0.00 3.50 11.90 3.40
30/09/2002 2.50 0.00 2.50 14.40 3.20
30/09/2003 1.70 10.20 11.90 26.30 4.78
30/09/2004 1.40 3.50 4.90 31.20 4.80
30/09/2005 2.50 7.70 10.20 41.40 5.52
30/09/2006 1.80 9.20 11.00 52.40 6.16
30/09/2007 2.10 6.40 8.50 60.90 6.41
30/09/2008 2.80 4.20 7.00 67.90 6.47
30/09/2009 0.70 4.80 5.50 73.40 6.38
30/09/2010* 1.50 4.00 5.50 78.90 6.31
* Includes proposed final dividend of 3.00p
Cash Returned to Shareholders
The table below shows the cash returned to shareholders dependent on their
subscription cost, including their income tax reclaimed on subscription.
Net Cumulative
Subscription Income tax Cash dividends Net Gross
annual
price reclaim Invested paid╪ yield* yieldâ€
Year subscribed p p p p % %
1998 (April) - 100.0 20.0 80.0 78.9 7.9 10.5
Ordinary
1999 (May) - 102.0 20.4 81.6 75.4 8.1 10.8
Ordinary
2000 (February) - 137.0 27.4 109.6 72.2 6.2 8.3
Ordinary
2000 (March) - 130.0 26.0 104.0 72.2 6.6 8.7
Ordinary
2004 (October) - 100.0 40.0 60.0 27.6 7.7 10.2
C
2009 (April) 91.6 27.5 64.1 11.0 11.5 15.3
C share dividend calculated using conversion ratio of 0.9657.
* Net annual yield represents the cumulative dividends paid expressed as a
percentage of the net cash invested.
╪ Includes proposed final dividend of 3.0p to be paid on 14 January 2011.
†The gross equivalent yield if the dividends had been subject to higher rate
tax (currently 32.5 per cent on dividend income). The new additional rate of
tax on dividend income of 42.5 per cent which came into force from the 2010 /
11 tax year for those shareholders who earn more than £150,000 has not been
included. For those shareholders who would otherwise pay this additional rate
of tax on dividends, the future gross equivalent yield will be higher than the
figures shown.
Chairman's Statement
This Chairman's Statement forms part of the Report of the Directors.
I am pleased to report an increase in NAV total return of 13.1 per cent for the
year to 30 September 2010, as a result of increased valuations of both unquoted
and AIM investments following improved trading results. The 5.5p per share
dividend has been maintained.
INVESTMENT PERFORMANCE
Results
In the year to 30 September 2010, the Net Asset Value ("NAV") per share
increased 13.1 per cent from 86.06p to 97.29p before dividends. The position
can be summarised as follows:
p per
ordinary
share
NAV as at 1 October 2009 (after 86.06
final dividend of 3.0p deducted)
Valuation uplift 11.23
97.29
Interim dividend paid on 7 June (2.50)
2010
Proposed final dividend payable (3.00)
on 14 January 2011
NAV as at 30 September 2010 91.79
The 13.1 per cent growth in NAV per share over the year was attributable to an
uplift in the valuation of the unquoted investments as a result of strong
trading performances at many companies in the portfolio as well as a sharp
increase in the value of the AIM and listed portfolio towards the end of the
financial year.
During the year, the Company realised profits from the sale of a number of
unquoted and AIM investments, including ScriptSwitch, Active Assistance and
WIN. These profitable realisations underpin the ability of the Company to
continue to pay dividends in accordance with its dividend policy. The proposed
final dividend of 3.0p per share will take total dividends to 5.5p per share
for the year.
The Board is aware of shareholders' previously expressed preference to receive
income while also achieving capital growth and so the increase in NAV per share
to 91.79p is a positive step.
All of the VCT qualifying tests had also been met throughout the year.
Longer term performance
Including the proposed final dividend of 3.0p per share, dividends totalling
78.9p per share will have been paid to founder shareholders. These dividends
are tax free for qualifying shareholders and do not need to be declared in a
tax return. This represents an average annual dividend of 6.3p per share since
launch in April 1998 when founder shareholders subscribed £1 per share (prior
to taking account of any initial income tax relief available to qualifying
shareholders).
Since the initial fundraising, shareholders have invested in four subsequent
prospectus offers. It is pleasing to be able to report that investors in all
five prospectus offers have achieved positive absolute total returns. The
comparable returns for the FTSE All-Share Index over differing time periods are
set out in the Company's Annual Report for the year ended 30 September 2010.
The ten year Share Price total return from Baronsmead VCT 2 is 197.4p for each
100p invested which compares favourably with the 151.8p for the FTSE All-Share.
The returns to shareholders are significantly enhanced by the various VCT tax
reliefs available to qualifying investors. Depending on when investors
subscribed for new shares, qualifying shareholders would have been able to
claim up to 20 per cent, 30 per cent or 40 per cent of the amount they
invested. In addition, qualifying shareholders who subscribed before 6 April
2004 will have benefited by being able to use their subscription to defer a
capital gain.
The tax free nature of VCT dividends are of particular benefit for VCT
qualifying shareholders who do not have to suffer income tax equivalent to 25
per cent (for higher rate taxpayers) and 36.1 per cent (for additional rate
taxpayers) on the cash dividend they receive. To generate the same after-tax
dividends, it would be necessary for the dividend received from a non-VCT from
investment to be 33.3 per cent or 56.5 per cent higher, respectively. If the
initial tax reliefs are taken into account, the extra yield required from a
non-VCT investment to deliver the same after-tax returns is substantial.
PORTFOLIO
The portfolio, consisting of sixty-six companies, has shown a strong valuation
increase over the twelve months to 30 September 2010, particularly in the last
three months of the financial year. The direction of travel of these companies
is recorded every quarter so that the Board can understand overall portfolio
health. At the year end, 92 per cent of companies in the portfolio are
progressing steadily or better, which is the highest level since recording
began in 2004. The level of investee company borrowings has fallen generally
and profit margins have grown.
49 per cent of the £63.7 million of net assets was invested in unquoted
companies, 25 per cent in AIM and other listed elements and the balance of 26
per cent remained in liquid assets or government securities. The largest
unquoted investment, Reed & Mackay, and the largest AIM investment, Staffline
Group represented 6.7 and 2.4 per cent of net asset value respectively.
The performance of the unquoted portfolio has been robust and its valuation has
increased by 20 per cent. On average, the current portfolio of unquoted
investments is valued at some 36 per cent higher than original cost. This is a
reflection of the quality of the portfolio and the effectiveness of close
cooperation and active management by the Manager, ISIS Equity Partners.
The share prices of the AIM and other listed investments in the portfolio have
improved 10 per cent over the last twelve months, although it was not until
August 2010 that market sentiment really began to recognise the value implicit
in many profitable AIM-traded companies. Nine investees have been sold outright
to acquirers, which confirm the good value that resided in these relatively
lowly rated situations. This also supports the longer term strategy of taking
more influential stakes in a smaller number of AIM investments, where a likely
exit strategy to a trade buyer can be envisaged. The exposure to the UK public
sector is relatively light and the only new provision made is in the investment
Carnell Contractors, which provides motorway maintenance and technical services
to many of the Highway Agencies.
ACQUIRING SHARES IN BARONSMEAD VCT 2 PLC
Offer for Subscription
An offer for subscription to raise up to the sterling equivalent of €2.5
million is being sent to shareholders to coincide with the publication of this
Annual Report. This offer is restricted to existing shareholders and in the
event that subscriptions are received in excess of the limit, the Directors
reserve the right to use their discretion in the allocation of successful
subscriptions but will otherwise seek to deal with subscriptions on a "first
come, first served" basis. The full terms and conditions of this offer are
contained in the offer document.
Dividend Reinvestment and the market for the Company's shares
Shareholders can reinvest their dividends by purchasing further shares through
the Dividend Reinvestment Plan ("DRIP"). Shareholders who increase their
holdings via the DRIP will be buying into a well-diversified portfolio, which
has shown positive returns. Currently, shareholders holding approximately 11
per cent of the Company's shares participate in the DRIP. The DRIP may be
appropriate for those subscribers who are investing primarily for capital
growth.
During the twelve months to 30 September 2010, 553,688 shares were acquired by
participants of the DRIP. These shares were acquired through the market in the
Company's shares and the price paid for these shares represented a discount of
approximately 10 per cent to the then prevailing NAV during the time the shares
were purchased. In addition, third party purchasers acquired 127,625 shares
through conventional stock market activity.
In contrast to many other VCTs, the Company has consistently maintained its
policy of buying back shares if, in the opinion of the Board, a repurchase of
shares is in the interests of the shareholders as a whole. Historically, the
repurchase price has represented an approximate discount to NAV of 10 per cent.
Shareholders are asked annually to give their authority to the Directors to
acquire up to 14.99 per cent of the Company's shares. During the twelve months
to 30 September 2010, the Company bought back 1.56 million shares to be held in
treasury representing 2 per cent of the share capital at the start of the year.
The Manager works closely with the Company's broker, Matrix Corporate Capital,
and the difference between the buy and sell price of the Company's shares (the
spread) has been an average of 2p per share since their appointment in August
2009. The quarterly valuation of the unquoted investments and regular
communication to shareholders and financial advisers also enables the market to
have better information on which the buying and selling of shares can be
transacted.
ANNUAL GENERAL MEETING
I look forward to meeting as many shareholders as possible at our 13th Annual
General Meeting to be held on Tuesday 11 January 2011 at the London Stock
Exchange, 10 Paternoster Square near St Paul's Cathedral. Proceedings for the
day commence at 11.30 a.m with presentations from the Manager and an investee
company plus a light lunch. The AGM will be held at 1.30 pm followed by a
shareholder workshop.
OUTLOOK
While corporate profits in the portfolio companies have grown, there remains
uncertainty in the economy as a whole, particularly while the impact of the
anticipated UK public sector cuts is being assessed. Furthermore international
markets are not providing a clear sense of direction either. In this rapidly
changing economic climate there will be many specific sector opportunities and
threats to which the Manager remains alert.
Many of our portfolio companies have improved their market positions and
operating efficiency over the last year. Both the Board and Manager share the
belief that these ambitious companies can continue to grow and also benefit
from a more favourable investment environment when it comes. It is companies
such as those within our portfolio which are the lifeblood of the United
Kingdom economy. If the Government succeeds in creating a more business
friendly and less restrictively regulated environment, it is companies like our
investees which will drive the growth that our economy needs.
Clive Parritt
Chairman
19 November 2010
Manager's Review
Trading across the unquoted and AIM companies in the portfolio has markedly
improved in the last year. Stability has also begun to be restored in a number
of sectors and new transactions completed in three unquoted and five AIM
companies.
PORTFOLIO REVIEW
The total portfolio comprised sixty-six investee companies at the year end
after thirteen full realisations and four write offs. All new and further round
financings as well as realisations are scheduled below. Cash proceeds from all
realisations totalled £8.4 million and net capital profits realised in the
period were £1.9 million.
Unquoted investment totalled £3.8 million in the year under review, including
further round financings into two existing portfolio companies. The new
unquoted investments were:
â— Surgi C, the UK's leading independent distributor of spinal implants is based
in Birmingham. The business has developed its strong market position as a
result of the high levels of education and technical support it provides to
spinal surgeons on its broad range of products. www.surgi-c.com.
â— Birmingham based Inspired Thinking Group ("ITG") provides services that help
large marketing departments operate more efficiently, including improved
procurement of artwork and print management. The new funding was used to
acquire Total Marketing Service, a provider of workflow management systems to
marketing departments. www.inspiredthinkinggroup.com.
â— Getting Personal is a leading online retailer, based in Manchester, which
sells personalised and unique gifts. The business was established in November
2005 with just one product, a personalised calendar. www. GettingPersonal.co.uk
now sells over 4,000 items ranging from personalised cards, notebooks, mugs and
chocolate to non-personalised items for general gifting.
The further round financings were:
â— Nexus Vehicle Holdings is a leading provider of vehicle rental services to
the UK corporate market and it is a pioneer of paperless rental trading through
its web based IRIS procurement system. It acquired Adapted Vehicle Hire, which
is a niche rental business providing adapted vehicles for the disabled driver
market. www.nexusrental.com
â— Two small investments were made into portfolio company Independent Living
Services ("ILS"), an acute domiciliary care provider based in Scotland, firstly
to fund a small acquisition and secondly to repurchase shares.
www.ilsscotland.com.
The volume of qualifying AIM opportunities also increased from the depressed
levels of 2009. In all £1.4 million was invested into five AIM-traded companies
and another £1.2 million as additional capital for six existing investments.
Wood Street Microcap Investment Fund ("Wood Street") was established by ISIS in
May 2009 to provide flexibility for the Baronsmead VCT's to invest in generally
larger and more liquid non VCT qualifying AIM and Small Cap opportunities. At
30 September 2010 Baronsmead VCT 2 had invested £1.5 million across twenty-four
companies through Wood Street and had generated a positive return of 10.4 per
cent over the year. The Manager receives no additional fee for managing this
fund.
It is pleasing to see the improvement in trading performance across the
majority of the portfolio companies, some of which have exhilarating stories as
they have grown their profits and work-forces through the recession. Often this
has come from robust business models where growth has been less dependent on
the overall UK economy, and where these companies have delivered superior value
to their customers.
Case studies
The four case studies highlighted within the portfolio are set out in the
Company's Annual Report for the year ended 30 September 2010.
- Reed & Mackay is featured for the third year due to its sustained growth
providing a superior travel management service to its business customers.
- Nexus Vehicle Holdings is growing both organically and by acquisition.
- Crew Clothing Company continues to grow its networks of shops, creating jobs
as well as experiencing fast growth from its direct mail/website retailing
- Staffline Group is an AIM-traded company showing very strong revenue and
profits growth.
The combined value growth of these four investments in the last twelve months
is £4.7 million, up 64 per cent year on year.
Active portfolio management
The investment in Occam DM Ltd, the longest standing unquoted company in the
portfolio, was sold in May 2010 to St Ives Group realising 1.7 times and an
internal rate of return of 11 per cent over six years. At 31 December 2009, it
had been valued at 25 per cent of cost, which illustrates how quickly the
business was successfully repositioned towards data-centred direct marketing
and data management solutions. The new management team was led by an executive
chairman who is one of the operating partners at ISIS.
Post the year end the unquoted investment in Credit Solutions Limited was
successfully sold realising a 1.76x money multiple on original cost for
Baronsmead VCT 2.
The investment strategy for AIM-traded companies has increasingly focused on
taking more influential stakes through the collective shareholdings of the
Baronsmead family of VCTs. For example, the original shareholding in WIN plc, a
provider of mobile data solutions, had been subscribed in 2004 but the
aggregate shareholding had increased to over 20 per cent of the company by
August 2009. The average price paid for the total shareholding was 85p and the
sale price in August 2010 was 150p. ISIS believed that the concentration of
WIN's shareholder base enabled its board to improve on the original lower offer
received for the business.
The sale of WIN is an example of how trade purchasers perceive good value in a
number of the portfolio companies and three other full trade sales have been
completed over the last twelve months. Investor sentiment towards the AIM
market too has improved in recent months as earnings growth for smaller
companies has started to catch up larger quoteds.
This strategy will lead to the AIM portfolio becoming more concentrated and
already the tail of smaller investments has been shortened with a number of
sales and write offs. Some of these investments, however, may be retained over
the medium term as they still contribute significantly to the 70 per cent VCT
qualifying test even though they have a relatively low market value.
OUTLOOK
The focus of both the unquoted and AIM-traded portfolio companies has moved
from cautious management to now taking advantage of opportunities which have
emerged. This is evidenced in many cases by increased profits, stronger balance
sheets and higher valuations. Hopefully any improvement to the present economic
climate can also assist these companies to grow and continue to be important
job creators for the UK.
It will be the continued innovation and drive of these companies aided by our
encouragement and experience as active investors that can generate shareholder
value for Baronsmead VCT 2.
ISIS EP LLP
Investment Managers
19 November 2010
Table of Investments and Realisations
Investments in the year to 30 September 2010
Company Location Sector Activity Book Cost
(£'000)
Unquoted in
vestments
New
Surgi C Limited Birmingham Healthcare & Distribution of 1,102
Education spinal implants
Getting Personal Manchester Consumer On-line retail of 988
Limited Markets personalised
gifts
Inspired Thinking Birmingham Business Marketing 796
Group Limited Services services & work
flow systems
Follow on
Nexus Vehicle Pudsey Business Vehicle rental 499
Holdings Limited Services provider to
corporates
Independent Living Alloa Healthcare & Care at home 211
Services Limited Education services
Paper consideration
Independent Living Alloa Healthcare & Care at home 150
Services Limited* Education services
Crew Clothing London Consumer Branded clothing 51
Company Limited* Markets retailer
Total unquoted investments 3,797
AIM-traded & listed investments
New
Netcall plc St Ives IT & Media Communications 712
software
Green Compliance Cirencester Business Small business 406
plc Services compliance
Bglobal plc Darwen Business Smart metering 176
Services
Marwyn Value Guernsey Financial Specialist fund 64
Investors plc Services
Strategic Thought Maidenhead IT & Media Risk management 35
Group plc software
Follow on
PROACTIS Holdings Wetherby IT & Media Procurement 219
plc software
Jelf Group plc Bristol Financial Financial 210
Services solutions
consultancy
Electric Word plc London IT & Media Business to 179
business
publisher
Tasty plc London Consumer Restaurant 114
Markets operator
Adventis Group plc London IT & Media Marketing 81
services agency
Paper consideration
Chime London IT & Media Marketing 369
Communications services agency
Group plcâ€
Total AIM-traded & listed in 2,565
vestments
Collective investment vehicles
Follow on
Wood Street Microcap Investment 1,000
Fund
Total collective investment 1,000
vehicles
Total investments in the year 7,362
* Paper consideration from rolled up interest reinvested.
†Paper consideration from sale of Essentially Group Ltd.
Realisations in the year to 30 September 2010
Company First 30 Realised Overall
September profit/ Multiple
Investment 2009 (loss) this Return*
date valuation period £'000
£'000
Unquoted realisation
Active Trade sale Mar 08 1,044 525 2.7
Assistance
Occam DM Ltd Trade sale Jul 04 121 423 1.7
ScriptSwitch Trade sale May 07 2,959 361 4.1
Total unquoted realisations 4,124 1,309
AIM-traded & listed realisa
tions
WIN plc Trade sale Oct 04 315 360 1.6
Ffastfill plc Part sale Jun 07 233 125 1.6
Essentially Paper Jun 04 283 86 0.8
Group Ltd consideration
Research Now plc Trade sale Dec 07 306 70 1.4
Character Group Trade sale Feb 08 86 46 0.9
plc
Brainjuicer Trade sale Nov 06 65 20 1.7
Group plc
Vero Software Trade sale Mar 98 390 17 0.8
plc
Alere Inc Part sale Aug 09 27 2 1.3
Cobra Trade sale Jun 03 7 (1) -
Biomanufacturing
plc
Silverdell plc Trade sale May 08 2 (1) 0.1
INVU plc Trade sale May 07 3 (2) -
Advanced Part sale Jul 08 579 (26) 2.1
Computer
Software plc
Mission Trade sale Dec 07 60 (43) 0.1
Marketing Group
(The) plc
2,356 653
Written off
Optimisa plc Oct 07 0 0 -
Payzone plc May 03 2 (2) -
MKM Group plc May 04 6 (6) -
Relax Group plc Feb 08 70 (70) -
78 (78) -
Total AIM-traded& listedrealisations 2,434 575
Total realisations in 6,558 1,884â€
the year
* Includes interest/dividends received, loan note redemptions and partial
realisations accounted for in prior periods.
†Proceeds of £5,000 were also received in respect of an investment, Interactive
Prospect Targeting plc, which had been written off in a prior period. In
addition, a loss of £14,000 was realised during the year on the redemption on 7
December 2009 of a UK Treasury Gilt which had paid a rate of interest of 5.75
per cent.
Investment Portfolio
Investment Classification at 30 September2010
Sector* Percentage
Business 39
Services
Consumer 18
Markets
Financial 5
Services
Healthcare & 9
Education
IT & Media 29
100
* at 30 September 2010 valuation.
Total Assets* Percentage
Unquoted - 49
loan stock,
ordinary and
preference
shares
AIM, Listed, 25
PLUS &
Collective
Investment
Vehicles
Interest 23
bearing
securities
Net current 3
Assets
100
* at 30 September 2010 valuation.
Time Investments Percentage
Held*
Less than 1 year 11
Between 1 and 3 22
years
Between 3 and 5 44
years
Greater than 5 23
years
100
* at 30 September 2010 valuation.
30 30 Equity
September September % of total held
Book 2009 2010 % of held by by
cost valuation valuation net Baronsmead all
Company Sector £'000 £'000 £'000 assets VCT 2 plc Funds*
Unquoted
Reed & Mackay Business 1,211 2,984 4,247 6.7 9.5 40.0
Limited Services
Nexus Vehicle Business 2,367 2,528 4,197 6.6 12.6 57.4
Holdings Limited Services
Crew Clothing Consumer 984 1,286 2,519 4.0 5.7 24.1
Company Limited Markets
CableCom IT & Media 1,381 1,846 2,200 3.4 10.6 48.0
Networking
Holdings Limited
Quantix Limited IT & Media 1,194 1,801 1,984 3.1 11.4 48.0
Kafevend Holdings Consumer 1,252 1,346 1,786 2.8 15.8 66.5
Limited Markets
Fisher Outdoor Consumer 1,423 1,433 1,777 2.8 10.5 44.0
Leisure Holdings Markets
Limited
Independent Healthcare 1,161 1,568 1,755 2.8 16.2 68.1
Living Services & Education
Limited
CSC (World) IT & Media 1,606 1,250 1,687 2.6 8.8 40.1
Limited
Credit Solutions Financial 1,032 1,126 1,253 2.0 8.6 35.0
Limited Services
MLS Ltd IT & Media 781 1,132 1,136 1.8 5.3 22.5
Surgi C Limited Healthcare 1,102 - 1,102 1.7 9.8 44.7
& Education
Playforce Business 1,033 1,096 1,024 1.6 9.7 44.0
Holdings Limited Services
Getting Personal Consumer 988 - 988 1.5 8.3 37.5
Limited Markets
Inspired Thinking Business 796 - 979 1.5 5.0 22.5
Group Limited Services
Empire World Business 1,297 765 833 1.3 ╪ ╪
Trade Limited Services
TVC Group Limited IT & Media 1,233 293 698 1.1 13.0 59.3
Carnell Business 1,499 2,468 674 1.1 8.3 37.5
Contractors Services
Limited
Kidsunlimited Business 113 113 113 0.2 0.0 0.0
Group Limited Services
Xention Discovery Healthcare 316 63 55 0.1 1.2 4.9
Limited & Education
Total unquoted 22,769 23,098 31,007 48.7
AIM
Staffline Group Business 249 499 1,534 2.4 4.3 8.5
plc Services
IDOX plc IT & Media 1,038 1,081 1,276 2.0 3.3 9.7
Murgitroyd Group Business 319 711 711 1.1 3.1 6.2
plc Services
Green Compliance Business 406 - 656 1.0 2.6 14.4
plc Services
Brulines Group Business 646 595 621 1.0 1.8 9.6
plc Services
PROACTIS Holdings IT & Media 619 326 563 0.9 5.4 26.5
plc
Jelf Group plc Financial 761 381 548 0.9 1.4 6.3
Services
Netcall plc IT & Media 712 - 504 0.8 3.2 16.1
Advanced Computer IT & Media 263 1,158 494 0.8 0.4 2.2
Software Group
plc
Electric Word plc IT & Media 378 207 450 0.7 4.2 26.8
Begbies Traynor Financial 231 625 425 0.7 0.6 2.5
Group plc Services
Mount Engineering Business 385 319 413 0.6 2.3 13.4
plc Services
EG Solutions plc IT & Media 375 110 397 0.6 3.1 14.2
Tasty plc Consumer 469 226 364 0.6 2.5 17.1
Markets
Kiotech Healthcare 275 342 321 0.5 2.2 15.8
International plc & Education
InterQuest Group Business 310 270 309 0.5 1.8 7.2
plc Services
Craneware plc IT & Media 72 180 302 0.5 0.2 1.1
FfastFill plc IT & Media 251 475 288 0.5 0.9 6.5
Dods Group plc IT & Media 666 201 246 0.4 1.7 4.4
Bglobal plc Business 176 - 218 0.3 0.5 2.7
Services
IS Pharma plc Healthcare 246 268 217 0.3 1.0 5.9
& Education
Stagecoach Consumer 419 248 198 0.3 4.5 9.1
Theatre Arts plc Markets
Quadnetics Group Business 296 176 196 0.3 0.6 2.1
plc Services
Plastics Capital Business 473 151 180 0.3 1.7 9.8
plc Services
Sanderson Group IT & Media 387 102 170 0.3 1.8 6.9
plc
Adventis Group IT & Media 361 197 163 0.3 3.1 20.7
plc
Praesepe plc Consumer 525 179 155 0.2 0.6 3.6
Markets
Autoclenz Business 400 134 122 0.2 3.1 12.3
Holdings plc Services
Driver Group plc Business 438 372 120 0.2 2.3 10.4
Services
Prologic plc IT & Media 310 132 103 0.2 4.1 15.0
Real Good Food Consumer 620 31 101 0.2 0.7 2.3
Company (The) plc Markets
Cohort plc Business 179 189 74 0.1 0.3 1.4
Services
Colliers Financial 470 158 63 0.1 0.3 0.8
International UK Services
plc
STM Group plc Financial 140 72 49 0.1 0.5 3.8
Services
Clarity Commerce IT & Media 50 50 48 0.1 0.3 6.0
Solutions plc
Tangent Business 180 90 42 0.1 0.8 4.5
Communications Services
plc
RTC Group plc Business 355 37 37 0.0 4.2 8.5
Services
Strategic Thought IT & Media 35 - 36 0.0 0.4 2.1
Group plc
Zoo Digital Group IT & Media 438 12 36 0.0 0.2 0.9
plc
AorTech Healthcare 285 28 25 0.0 0.3 0.6
International plc & Education
Highams Systems Business 197 3 6 0.0 0.3 1.0
Services Group Services
plc
Total AIM 15,405 10,335 12,781 20.1
Listed
Vectura Group plc Healthcare 578 1,019 615 1.0 0.4 1.3
& Education
Chime IT & Media 369 - 343 0.5 0.2 1.5
Communications
plc
Marwyn Value Financial 64 - 59 0.1 1.3 6.0
Investors plc Services
Total Listed 1,011 1,019 1,017 1.6
PLUS
Chemistry Business 500 109 136 0.2 3.1 6.3
Communications Services
Group plc
Total PLUS 500 109 136 0.2
New York Stock
Exchange
Alere Inc Healthcare 157 212 150 0.2 0.0 0.0
& Education
Total New York Stock Exchange 157 212 150 0.2
Interest bearing
securities
UK T-Bill 11/10/ 1,598 - 1,598 2.5
10
UK T-Bill 10/01/ 1,596 - 1,596 2.5
11
BlackRock Cash 7,000 7,000 7,000 11.0
Market OEIC
JP Morgan Europe 4,800 - 4,800 7.6
OEIC
Total interest 14,994 7,000 14,994 23.6
bearing
securities
Collective
investment v
ehicles
Wood Street 1,525 525 1,654 2.6
Microcap
Investment Fund
Total collective investment v 1,525 525 1,654 2.6
ehicles
Total investments 56,361 42,298 61,739 97.0
Net current 1,934 3.0
assets
Net assets 63,673 100.0
†The total investment valuation at 30 September 2009 per the table above does
not agree to the audited accounts due to purchases and sales since that date.
* All funds managed by the same investment manager, ISIS EP LLP, including
Baronsmead VCT 2.
╪ Following a restructuring, the effective ownership percentage is dependent on
final exit proceeds.
Unquoted, AIM, Listed,PLUS and NYSE Portfolio
Concentration Analysis at 30 September2010
Investment Book cost Valuation % of
ranking
by valuation £'000 £'000 portfolio
Top Ten 12,828 23,686 52.5
11-20 9,619 10,000 22.2
21-30 6,093 5,550 12.3
30+ 11,302 5,855 13.0
Total 39,842 45,091 100.0
Ten Largest Investments
The top ten investments by current value at 30 September 2010 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. REED & MACKAY LIMITED - London
All ISIS EP LLP managed funds
First Investment: November 2005
Total Cost: £4,870,000
Total equity held: 40.00%
Baronsmead VCT 2 only
Cost: £1,211,000
Valuation: £4,247,000
Valuation basis: Earnings Multiple
% of equity held: 9.49%
Year ended 31 March 2010 2009
£ million £ million
Sales 16.0 16.0
EBITA 3.5 2.7
PBT 2.4 1.6
Net Assets 3.9 2.3
No. of Employees 218 221
(Source: Reed & Mackay Holdings Limited, Report and Financial Statements 2010).
2. NEXUS VEHICLE HOLDINGS LIMITED - Leeds
All ISIS EP LLP managed funds
First Investment: February 2008
Total Cost: £9,500,000
Total equity held: 57.38%
Baronsmead VCT 2 only
Cost: £2,367,000
Valuation: £4,197,000
Valuation basis: Earnings Multiple
% of equity held: 12.62%
Year ended 30 2009 2008*
September
£ million £ million
Sales 19.4 6.9
EBITA 2.2 0.4
Loss before tax (0.1) (0.5)
Net Assets 0.3 0.2
No. of Employees 32 22
* Accounts for 9 month period)
(Source: Nexus Vehicle Holdings Limited, Financial Statements 2009)
3. CREW CLOTHING COMPANY LIMITED - London
All ISIS EP LLP managed funds
First Investment: November 2006
Total Cost: £3,935,000
Total equity held: 24.08%
Baronsmead VCT 2 only
Cost: £984,000
Valuation: £2,519,000
Valuation basis: Earnings Multiple
% of equity held: 5.72%
Year ended 25 October 2009 2008
£ million £ million
Sales 29.3 22.0
EBITA 0.8 1.4
PBT 0.2 0.8
Net Assets 2.3 2.3
No. of Employees 273 209
(Source: Crew Clothing Holdings Limited, Consolidated Financial Statements
2009)
4. CABLECOM NETWORKING HOLDINGS LIMITED - Clevedon
All ISIS EP LLP managed funds
First Investment: May 2007
Total Cost: £5,600,000
Total equity held: 48.00%
Baronsmead VCT 2 only
Cost: £1,381,000
Valuation: £2,200,000
Valuation basis: Earnings Multiple
% of equity held: 10.56%
Year ended 30 2009 2008
September
£ million £ million
Sales 8.1 6.1
EBITA 0.9 1.3
Loss before tax (0.4) (0.1)
Net Assets 0.9 1.3
No. of Employees 40 41
(Source: Cablecom Networking Holdings Limited, Audited Annual Report and
Accounts 2009).
5. QUANTIX LIMITED - Nottingham
(A trading name of Newincco 635 Limited)
All ISIS EP LLP managed funds
First Investment: March 2007
Total Cost: £4,800,000
Total equity held: 48.00%
Baronsmead VCT 2 only
Cost: £1,194,000
Valuation: £1,984,000
Valuation basis: Earnings Multiple
% of equity held: 11.40%
Year ended 30 2009 2008
September
£ million £ million
Sales 8.6 8.3
EBITA 1.6 1.2
Profit/ (Loss) before 0.2 (0.3)
tax
Net Assets 0.7 0.7
No. of Employees 46 42
(Source: Newincco 635 Limited, audited Annual Report and Accounts 2009)
6. KAFÉVEND HOLDINGS LIMITED - Crawley
All ISIS EP LLP managed funds
First Investment: October 2005
Total Cost: £5,024,000
Total equity held: 66.50%
Baronsmead VCT 2 only
Cost: £1,252,000
Valuation: £1,786,000
Valuation basis: Earnings Multiple
% of equity held: 15.79%
Year ended 30 2009 2008
September
£ million £ million
Sales 14.7 16.1
EBITA 1.0 1.1
PBT 1.0 1.2
Net Assets 3.5 2.7
No. of Employees 98 107
(Source: Kafevend Group Limited, audited Annual Report and Accounts 2009)
7. FISHER OUTDOOR LEISURE HOLDINGS LIMITED - St Albans
All ISIS EP LLP managed funds
First Investment: June 2006
Total Cost: £5,700,000
Total equity held: 44.00%
Baronsmead VCT 2 only
Cost: £1,423,000
Valuation: £1,777,000
Valuation basis: Earnings Multiple
% of equity held: 10.45%
Year ended 31 January 2010 2009
£ million £ million
Sales 26.5 22.2
EBITA 2.3 1.8
PBT 0.7 0.1
Net Assets 1.4 1.0
No. of Employees 96 83
(Source: Fisher Outdoor Leisure Holdings Limited, Directors Report and
Financial Statements 2010)
8. INDEPENDENT LIVING SERVICES LIMITED - Alloa
All ISIS EP LLP managed funds
First Investment: September 2005
Total Cost: £4,679,000
Total equity held: 68.12%
Baronsmead VCT 2 only
Cost: £1,161,000
Valuation: £1,755,000
Valuation basis: Earnings Multiple
% of equity held: 16.18%
Year ended 30 2009 2008
September
£ million £ million
Sales 16.5 12.7
EBITA 1.8 1.8
PBT 0.1 0.6
Net Assets 0.9 0.9
No. of Employees 1,133 838
(Source: ILS Group Limited, Directors Report and Financial Statements 2009)
9. CSC (WORLD) LIMITED - Pudsey, Leeds
All ISIS EP LLP managed funds
First Investment: January 2008
Total Cost: £6,450,000
Total equity held: 40.03%
Baronsmead VCT 2 only
Cost: £1,607,000
Valuation: £1,687,000
Valuation basis: Earnings Multiple
% of equity held: 8.81%
Year ended 31 March 2010 2009
£ million £ million
Sales 6.4 6.6
EBITA 1.9 1.9
Loss before tax (0.8) (1.0)
Net Assets (0.6) 0.3
No. of Employees 55 51
(Source: Cobco 867 Limited, Directors Report and Consolidated Financial
Statements 2010)
10. STAFFLINE GROUP PLC - Nottingham
All ISIS EP LLP managed funds
First Investment: July 2000
Total Cost: £497,497
Total equity held: 8.53%
Baronsmead VCT 2 only
Cost: £249,000
Valuation: £1,534,000
Valuation basis: Bid price
% of equity held: 4.26%
Year ended 31 2009 2008
December
£ million £ million
Sales 115.0 120.8
EBITA 3.6 3.7
PBT 3.5 3.4
Net Assets 26.1 24.3
No. of Employees 243 217
(Source: Staffline Group plc Financial Statements 2009)
Extract from the Report of the Directors
The Chairman's Statement and the Corporate Governance statement form part of
the Report of the Directors.
Results and Dividends
The Directors present their thirteenth Report and audited financial statements
of the Company for the year ended 30 September 2010.
Ordinary Shares £'000
Profit on ordinary activities after 7,443
taxation
Final dividend for 2009 of 3.0p per
ordinary share
paid on 30 December 2009 (2,062)
Interim dividend of 2.5p per ordinary share
paid on 7 June 2010 (1,692)
Total dividends paid during the year (3,754)
Subject to approval at the forthcoming Annual General Meeting the final
proposed dividend in respect of the year ended 30 September 2010 of 3.0p per
ordinary share will be paid on 14 January 2011 to shareholders recorded on the
register on 24 December 2010.
Principal Activity and Status
The Company is registered in England as a Public Limited Company (Registration
number 03504214). The Directors have managed, and intend to continue to manage,
the Company's affairs in such a manner as to comply with Section 274 of the
Income Tax Act 2007 which grants approval as a VCT.
Business Review
The Business Review has been prepared in accordance with the requirements of
Section 417 of the Companies Act 2006 and best practice. The purpose of this
review is to provide shareholders with a summary setting out the business
objectives of the Company, the Board's strategy to achieve those objectives,
the risks faced, the regulatory environment and the key performance indicators
("KPIs") used to measure performance.
Strategy for achieving objectives
Baronsmead VCT 2 plc is a tax efficient company listed on the London Stock
Exchange's main market for listed securities.
Investment Objective
The investment objective of the Company is to achieve long-term investment
returns for private investors, including tax-free dividends.
Investment Policy
The Company's investment policy is to invest primarily in a diverse portfolio
of UK growth businesses, whether unquoted or traded on AIM.
Investments are made selectively across a range of sectors in companies that
have the potential to grow and enhance their value.
Investment securities
The Company invests in a range of securities including, but not limited to,
ordinary and preference shares, loan stocks, convertible securities, and
fixed-interest securities as well as cash. Unquoted investments are usually
structured as a combination of ordinary shares and loan stocks, while AIM
investments are primarily held in ordinary shares. Pending investment in
unquoted and AIM-traded securities, cash is primarily held in an interest
bearing money market open ended investment company ("OEIC"), UK gilts and
Treasury Bills.
UK companies
Investments are primarily made in companies which are substantially based in
the UK, although many of these investees will trade overseas. The companies in
which investments are made must have no more than £15 million of gross assets
at the time of investment (or £7 million if the funds being invested were
raised after 5 April 2006) to be classed as a VCT qualifying holding.
VCT regulation
The investment policy is designed to ensure that the Company continues to
qualify and is approved as a VCT by HM Revenue and Customs. Amongst other
conditions, the Company may not invest more than 15 per cent of its investments
in a single company and must have at least 70 per cent by value of its
investments throughout the period in shares or securities comprised in
qualifying holdings, of which 30 per cent by value must be ordinary shares
which carry no preferential rights. In addition, it must have at least 10 per
cent by value of its total investments in any qualifying company in ordinary
shares which carry no preferential rights.
Asset mix
The Company aims to be at least 90 per cent invested in growth businesses
subject always to the quality of investment opportunities and the timing of
realisations. Any un-invested funds are held in cash and interest bearing
securities. It is intended that at least 75 per cent of any funds raised by the
Company will be invested in VCT qualifying investments.
Risk diversification and maximum exposures
Risk is spread by investing in a number of different businesses within
different qualifying industry sectors using a mixture of securities. The
maximum qualifying amount invested in any one company is limited to £1 million
in a fiscal year and generally no more than £2.5 million at cost is invested in
the same company. The value of an individual investment is expected to increase
over time as a result of trading progress and a continuous assessment is made
of its suitability for sale.
Investment style
Investments are selected in the expectation that the application of private
equity disciplines including an active management style for unquoted companies
will enhance value and enable profits to be realised from planned exits.
Co-investment
The Company aims to invest in larger more mature unquoted and AIM companies and
to achieve this it invests alongside the other Baronsmead VCTs. Currently, ISIS
EP LLP (`the Manager') and its executive members are mandated to invest in
unquoteds alongside the Company on terms which align the interests of
shareholders and the Manager.
Borrowing powers
The Company's Articles permit borrowing to give a degree of investment
flexibility. The Company's policy is to use borrowing for short term liquidity
purposes only.
Management
The Board has delegated the management of the investment portfolio to the
Manager. The Manager also provides or procures the provision of company
secretarial, administrative, accounting and custodian services to the Company.
The Manager has adopted a `top-down, sector-driven' approach to identifying and
evaluating potential investment opportunities, by assessing a forward view of
firstly the business environment, then the sector and finally the specific
potential investment opportunity. Based on its research, the Manager has
selected a number of sectors that it believes will offer attractive growth
prospects and investment opportunities. Diversification is also achieved by
spreading investments across different asset classes and making investments for
a variety of different periods.
The Manager's Review above provides a review of the investment portfolio and of
market conditions during the year.
Principal risks, risk management and regulatory environment
The Board believes that the principal risks faced by the Company are:
- Economic risk - events such as an economic recession and movement in interest
rates could affect smaller companies' valuations.
- Loss of approval as a Venture Capital Trust - the Company must comply with
Section 274 of the Income Tax Act 2007 which allows it to be exempted from
capital gains tax on investment gains. Any breach of these rules may lead to
the Company losing its approval as a VCT, qualifying shareholders who have not
held their shares for the designated holding period having to repay the income
tax relief they obtained and future dividends paid by the Company becoming
subject to tax. The Company would also lose its exemption from corporation tax
on capital gains.
- Investment and strategic - an inappropriate strategy, poor asset allocation
or consistent weak stock selection might lead to under performance and poor
returns to shareholders. Therefore the Company's investment strategy is
periodically reviewed by the Board which considers at each meeting the
performance of the investment portfolio.
- Regulatory - the Company is required to comply with the Companies Acts 2006,
the rules of the UK Listing Authority and United Kingdom Accounting Standards.
Breach of any of these might lead to suspension of the Company's Stock Exchange
listing, financial penalties or a qualified audit report. General changes in
legislation, regulations or government policy could significantly influence the
decisions of investors or impact upon the markets in which the Company invests.
- Reputational - inadequate or failed controls might result in breaches of
regulations or loss of shareholder trust.
- Operational - failure of the Manager's and administrator's accounting systems
or disruption to its business might lead to an inability to provide accurate
reporting and monitoring.
- Financial - the Board has identified the Company's principal financial risks
which are set out in the notes to the Financial Statements below. Inadequate
controls might lead to misappropriation of assets. Inappropriate accounting
policies might lead to misreporting or breaches of regulations.
- Market Risk - investment in AIM traded, PLUS traded and unquoted companies by
nature involve a higher degree of risk than investment in companies traded on
the main market. In particular, smaller companies often have limited product
lines, markets or financial resources and may be dependent for their management
on a smaller number of key individuals. In addition, the market for stock in
smaller companies is often less liquid than that for stock in larger companies,
bringing with it potential difficulties in acquiring, valuing and disposing of
such stock.
- Liquidity Risk - the Company's investments may be difficult to realise. The
fact that a share is traded on AIM does not guarantee its liquidity. The spread
between the buying and selling price of such shares may be wide and thus the
price used for valuation may not be achievable.
- Competitive Risk - retention of key personnel of the Manager is vital to the
success of the Company. Appropriate incentives are in place to ensure retention
of such personnel.
The Board seeks to mitigate the internal risks by setting policy, regular
review of performance, enforcement of contractual obligations and monitoring
progress and compliance. In the mitigation and management of these risks, the
Board applies rigorously the principles detailed in the FRC's "Revised Guidance
for Directors on the Combined Code".
Details of the Company's internal controls are contained in the Corporate
Governance section of the Company's Annual Report for the year ended 30
September 2010.
Performance and key performance indicators ("KPIs")
The Board expects the Manager to deliver a performance which meets the
objective of achieving long term investment returns, including tax-free
dividends.
Performance, measured by dividends paid to shareholders and the change in NAV
per share, is also measured against the FTSE All-Share Total Return Index. This
index, as the widest measure of UK quoted equities, has been adopted as an
informal benchmark. Investment performance, cash returned to shareholders and
share price are also measured against the Company's peer group of seven other
generalist venture capital trusts. A review of the Company's performance during
the financial period, the position of the Company at the year end and the
outlook for the coming year is contained within the Chairman's statement above.
The Board assesses the performance of the Manager in meeting the Company's
objective against the primary KPIs highlighted above.
Issue and Buy-Back of Shares
During the period the Company issued no ordinary shares .
During the period the Company bought back 1,560,000 ordinary shares with a
nominal value of 10p to be held in Treasury, representing at an aggregate cost
of £1,224,904. These shares will not be sold at a discount wider than the
discount prevailing at the time the shares were initially bought back by the
Company. The Company holds 7,553,906 ordinary shares in Treasury representing
10.1 per cent of the issued share capital as at 18 November 2010. The maximum
number of shares held in Treasury during the year was 7,553,906 shares
representing 10.1 per cent of the issued share capital.
Management
ISIS EP LLP manages the investments for the Company. The liquid assets within
the portfolio (being cash, gilts and other assets, which are not categorised as
venture capital investments for the purpose of the FSA's rules) have been
managed by FPPE LLP. This is a limited partnership, which is authorised and
regulated by the FSA and which has the same controlling members as the Manager.
The Manager has continued to act as the manager of the Company and as the
Investment Manager of the Company's illiquid assets (being all AIM-traded and
other venture capital investments).
The Manager also provides or procures the provision of secretarial,
administrative and custodian services to the Company. The management agreement
may be terminated at any date by either party giving twelve months' notice of
termination. Under the management agreement, the Manager receives a fee of 2.0
per cent per annum of the net assets of the Company. If the management
agreement is terminated, the Manager is only entitled to the management fees
paid to it and any interest due on unpaid fees.
In addition, the Manager receives an annual secretarial and accounting fee of £
36,380 (linked to the movement in the UK Retail Price Index ("RPI")), subject
to annual review, plus a variable fee of 0.125 per cent of the net assets of
the Company which exceed £5 million. The annual secretarial and accounting fee
is subject to a maximum of £105,634 per annum (linked to the movement in RPI)
subject to annual review.
Annual running costs are capped at 3.5 per cent of the net assets of the
Company (excluding any performance fee payable to the Manager and irrecoverable
VAT), any excess being refunded by the Manager by way of an adjustment to its
management fee.
It is the Board's opinion that the continuing appointment of ISIS EP LLP on the
terms agreed is in the best interests of shareholders as a whole. The Board
believes that the knowledge and experience accumulated by the Manager in the
period since the launch of the first Baronsmead VCT in 1995 is reflected in
processes which are designed to find, manage and realise good quality growth
businesses.
Co-investment Scheme
The Scheme is intended to help attract, retain and incentivise certain
executive members of the Manager and reflects schemes which are used elsewhere
in the private equity industry in the UK. It requires all the members of the
Scheme to invest their own capital into a proportion of the ordinary shares of
each and every unquoted investment made by the Baronsmead VCTs (except those
life sciences transactions where the Manager is not the lead investor).
The shares held by the members of the Co-investment Scheme in any portfolio
company can only be sold at the same time as the investment held by the
generalist Baronsmead VCTs. In addition, any prior ranking financial
instruments, e.g. loan stock, held by the Baronsmead VCTs have to be repaid in
full prior to any gain accruing to the ordinary shares.
As at 30 September 2010 forty-two executives of the Manager had invested a
total of approximately £141,000 in the ordinary shares of twenty-two unquoted
investments through the Co-investment Scheme alongside Baronsmead VCT 2 plc.
The amount invested by Baronsmead VCT 2 in those twenty-two companies totals
approximately £24.5 million. As at September 2010 four of the investments in
the scheme have been sold realising total proceeds of £7.3 million for
Baronsmead VCT 2, and £0.6 million for the members of the Co-investment Scheme.
The Board reviews the operation of the Co-investment Scheme at each quarterly
valuation meeting.
Performance Incentive
A performance fee will not be payable to the Manager until the total return on
shareholders' funds exceeds an annual threshold of base rate plus 2 per cent
calculated on a compound basis. To the extent that the total return exceeds the
threshold of base rate plus 2 per cent on shareholders' funds compounded over
the relevant period then a performance fee will be paid to the Manager of 10
per cent. The amount of any performance fee which is paid in an accounting
period shall be capped at 5 per cent of shareholders' funds for that period.
ISIS Equity Partners - Arrangement Fees
During the year to 30 September 2010, ISIS EP LLP received net income of £
92,750 (2009: £nil) from investee companies in connection with arrangement fees
and incurred abort fees of £12,896 (2009: £7,780), with respect to investments
attributable to Baronsmead VCT 2.
VCT Status Adviser
The Company has retained PricewaterhouseCoopers LLP ("PwC") as their VCT Tax
Status Advisers to advise it on compliance with VCT requirements. PwC review
new investment opportunities, as appropriate, and review regularly the
investment portfolio of the Company. PwC work closely with the Manager but
report directly to the Board.
Creditor Payment Policy
The Company's payment policy is to settle investment transactions in accordance
with market practice and to ensure settlement of supplier invoices in
accordance with stated terms. At 30 September 2010, there were no outstanding
supplier invoices (2009: none).
Environment
The Company seeks to conduct its affairs responsibly and environmental factors
are, where appropriate, taken into consideration with regard to investment
decisions.
Substantial Interests in Share Capital
At 18 November 2010 the Company was not aware of any beneficial interests
exceeding 3 per cent of the Ordinary Share capital in circulation.
Going Concern
After making enquires, and bearing in mind the nature of the Company's business
and assets, the Directors consider that the Company has adequate resources to
continue in operational existence for the foreseeable future. In arriving at
this conclusion the Directors have considered the liquidity of the Company and
its ability to meet obligations as they fall due for a period of at least
twelve months from the date that these financial statements were approved. As
at 30 September 2010 the Company held cash balances & investments in UK Gilts
and Money Market Funds with a combined value of £16,862,000. Cash flow
projections have been reviewed and show that the Company has sufficient funds
to meet both its contracted expenditure and its discretionary cash outflows in
the form of the share buyback programme and dividend policy. The Company has no
external loan finance in place and therefore is not exposed to any gearing
covenants.
By Order of the Board,
ISIS EP LLP
Secretary
100 Wood Street
London EC2V 7AN
19 November 2010
Statement of Directors' Responsibilities
Statement of Directors' Responsibilities in respect of the Annual Report and
the Financial Statements
The Directors are responsible for preparing the Annual Report and the Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the financial
statements in accordance with UK Accounting Standards ("UK GAAP").
The financial statements are required by law to give a true and fair view of
the state of affairs of the Company and of the profit or loss of the Company
for that period.
In preparing these financial statements, the Directors are required to:
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 ("UK GAAP") 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
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that its financial statements comply with the
Companies Act 2006. They have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of the Company and to
prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Directors' Report (including Business Review), Directors'
Remuneration Report and Corporate Governance Statement that comply with that
law and those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website
www.baronsmeadvct2.co.uk. Visitors to the website should be aware that
legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial
report
We confirm that to the best of our knowledge:
â— the financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
â—the Directors' Report includes a fair review of the development and
performance of the business and the position of the issuer together with a
description of the principal risks and uncertainties that they face.
On behalf of the Board,
Clive A Parritt
Chairman
19 November 2010
Income Statement
For the year ended 30 September 2010
2010 2009
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Unrealised gains on 9 - 4,924 4,924 - 343 343
investments
Realised gains/ 9 - 1,875 1,875 - (154) (154)
(losses) on
investments
Income 2 2,218 - 2,218 1,297 - 1,297
Recoverable VAT 3 - - - 68 299 367
Investment 4 (304) (910) (1,214) (291) (872) (1,163)
management fee
Other expenses 5 (360) - (360) (405) - (405)
Profit/(loss) on 1,554 5,889 7,443 669 (384) 285
ordinary activities
before taxation
Taxation on 6 (354) 354 - (120) 120 -
ordinary activities
Profit/(loss) on 1,200 6,243 7,443 549 (264) 285
ordinary activities
after taxation
Return per ordinary 8 1.77p 9.19p 10.96p 0.83p (0.40p) 0.43p
share: Basic
The `Total' column of this statement is the profit and loss account of the
Company.
All revenue and capital items in this statement derive from continuing
operations.
No operations were acquired or discontinued in the year.
Reconciliation of Movements in Shareholders' Funds
For the year ended 30 September 2010
2010 2009
Note £'000 £'000
Opening shareholders' funds 61,215 54,822
Profit for the year 7,443 285
Purchase of shares for treasury 13 (1,225) (582)
Increase in issued share capital - 8,881
Expenses of share issue and buybacks 13 (6) (477)
Dividends paid 7 (3,754) (1,714)
Closing shareholders' funds 63,673 61,215
The accompanying notes are an integral part of these statements.
Balance Sheet
As at 30 September 2010
2010 2009
Notes £'000 £'000
Fixed assets
Investments 9 61,739 59,529
Current assets
Debtors 10 479 554
Cash at bank and on deposit 1,868 1,684
2,347 2,238
Creditors (amounts falling due within one year) 11 (413) (552)
Net current assets 1,934 1,686
Net assets 63,673 61,215
Capital and reserves
Called-up share capital 12 7,473 7,473
Share premium account 13 12,573 12,573
Capital redemption reserve 13 9,254 9,254
Capital reserve 13 27,590 29,665
Revaluation reserve 13 5,378 1,569
Revenue reserve 13 1,405 681
Equity shareholders' funds 14 63,673 61,215
Net asset value per share
- Basic 14 94.79p 89.06p
- Treasury 14 93.42p 88.13p
The financial statements were approved by the Board of Directors on 19 November
2010 and were signed on its behalf by:
CLIVE A PARRITT FCA (Chairman)
The accompanying notes are an integral part of this balance.
Cash Flow Statement
For the year ended 30 September 2010
2010 2009
Notes £'000 £'000
Operating activities
Investment income received 1,991 1,301
Interest received 4 123
Recoverable VAT - 1,108
Investment management fees (1,202) (1,134)
Other cash payments (373) (434)
Net cash inflow from operating activities 16 420 964
Capital expenditure and financial investment
Purchases of investments (58,627) (75,075)
Disposals of investments 63,391 65,885
Net cash inflow/(outflow) from capital 4,764 (9,190)
expenditure and financial investment
Dividends
Equity dividends paid (3,754) (1,714)
Net cash inflow/(outflow) before financing 1,430 (9,940)
Financing
Purchase of shares for treasury (1,225) (924)
Increase in issued share capital - 8,886
Expenses of share issue and buybacks (21) (461)
Net cash (outflow)/inflow from financing (1,246) 7,501
Increase/(decrease) in cash in the year 184 (2,439)
Reconciliation of net cash flow to movement in
net cash
Increase/(decrease) in cash 184 (2,439)
Opening cash position 1,684 4,123
Closing cash position 15 1,868 1,684
The accompanying notes are an integral part of these statements.
Notes to the Accounts
1. Accounting polices
(a) Basis of accounting
These financial statements have been prepared under UK Generally Accepted
Accounting Practice ("UK GAAP") and in accordance with the Statement of
Recommended Practice ("SORP") for investment trust companies and venture
capital trusts issued by the Association of Investment Companies ("AIC") in
January 2009 and on the assumption that the Company maintains VCT status.
The Company is no longer an investment Company as defined by Section 833 of the
Companies Act 2006, as investment Company status was revoked on 10 March 2003
in order to permit the distribution of capital profits.
The principal accounting policies adopted are set out below.
Presentation of the Income Statement
In order to better reflect the activities of a VCT and in accordance with the
SORP, supplementary information which analyses the income statement between
items of a revenue and capital nature has been presented alongside the income
statement. Net revenue is the measure the Directors believe appropriate in
assessing the Company's compliance with certain requirements set out in Section
274 of the Income Tax Act 2007.
(b) Valuation of investments
Purchases or sales of investments are recognised at the date of transaction.
Investments are valued at fair value. For AIM traded 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 quoted.
In respect of unquoted investments, these are fair valued by the Directors
using methodology which is consistent with the International Private Equity and
Venture Capital Valuation ("IPEV") guidelines. This means investments are
valued using an earnings multiple, which has a discount or premium applied
which adjusts for points of difference to appropriate stock market or
comparable transaction multiples. Alternative methods of valuation will include
application of an arm's length third party valuation, a provision on cost or a
net asset value basis.
Gains and losses arising from changes in the fair value of the investments are
included in the Income Statement for the period as a capital item. Transaction
costs on acquisition are included within the initial recognition and the profit
or loss on disposal is calculated net of transaction costs on disposal.
(c) Income
Interest income on loan stock and dividends on preference shares are accrued on
a daily basis. Provision is made against this income where recovery is
doubtful. Where the terms of unquoted loan stocks only require interest or a
redemption premium to be paid on redemption, the interest and redemption
premium is recognised as income once redemption is reasonably certain. Until
such date interest is accrued daily and included within the valuation of the
investment.
Income from fixed interest securities and deposit interest is included on an
effective interest rate basis.
Dividends on quoted shares are recognised as income on the date that the
related investments are marked ex dividend and where no dividend date is
quoted, when the Company's right to receive payment is established.
(d) Expenses
All expenses are recorded on an accruals basis.
(e) Revenue/capital
The revenue column of the income statement includes all income and expenses.
The capital column accounts for the realised and unrealised profit and loss on
investments and the proportion of management fee charged to capital.
(f) Issue costs
Issue costs are deducted from the share premium account.
(g) Deferred taxation
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more, or the right to pay less, tax
in future have occurred at the balance sheet date. This is subject to deferred
tax assets only being recognised if it is considered more likely than not that
there will be suitable profits from which the future reversal of the underlying
timing differences can be deducted. Timing differences are differences arising
between the Company's taxable profits and its results as stated in the
financial statements which are capable of reversal in one or more subsequent
periods.
(h) Capital reserves
(i) Capital Reserve
Gains and losses on realisation of investments of a capital nature are dealt
with in this reserve. Purchase of the Company's own shares to be either held in
treasury or cancelled are also funded from this reserve. 75 per cent of
management fees are allocated to the capital reserve in accordance with the
Board's expected split between long term income and capital returns.
(ii) Revaluation Reserve
Changes in fair value of investments, are dealt with in this reserve.
2. Income
2010 2009
£'000 £'000
Income from investmentsâ€
UK franked 290 208
UK unfranked 1,413 896
UK unfranked - reinvested 201 -
Redemption premium 310 78
2,214 1,182
Other income╪
Interest 4 115
Total income 2,218 1,297
Total income comprises:
Dividends 291 208
Interest 1,927 1,089
Income from investments:
AIM-traded & listed securities 319 453
Unquoted securities 1,895 729
2,214 1,182
†All investments have been designated fair value through profit or loss on
initial recognition, therefore all investment income arises on investments at
fair value through profit or loss.
╪ Other income on financial assets not designated fair value through profit or
loss.
3. Recoverable VAT
HM Revenue and Customs ("HMRC") confirmed in October 2007, following the
European Court of Justice decision in the JP Morgan Claverhouse case, that the
provision of management services to investment trusts is exempt from VAT.
Accordingly ISIS EP LLP ceased to charge VAT on management fees payable by the
Company with effect from 30 June 2008.
During the year no VAT (2009: £367,000) has been recovered. In the prior year
the recovered VAT was recognised as a separate item in the income statement
allocated between revenue and capital return in the same proportion as that in
which the irrecoverable VAT was originally charged. Interest relating to the
VAT claim amounting to £93,000 in the year to 30 September 2009 was also
recognised in the period.
4. Investment management fee
2010 2009
£'000 £'000
Investment management fee 1,214 1,163
Performance fee - -
1,214 1,163
For the purposes of the revenue and capital columns in the income statement,
the management fee (including VAT) has been allocated 25 per cent to revenue
and 75 per cent to capital, in line with the Board's expected long term return
in the form of income and capital gains respectively from the Company's
investment portfolio.
The management agreement may be terminated by either party giving twelve months
notice of termination. The Manager, ISIS EP LLP, receives a fee of 2 per cent
per annum of the net assets of the Company, calculated and payable on a
quarterly basis.
The Manager is entitled to a performance fee if at the end of any calculation
period, the total return on shareholders' funds, exceeds the threshold of UK
base rate plus 2 per cent on shareholders' funds (calculated on a compound
basis). The Manager is entitled to 10 per cent of the excess. The amount of any
performance fee payable in a year will be capped at 5 per cent of shareholders'
funds at the end of the period.
In addition, the Manager receives an annual secretarial and accounting fee of £
36,380 (linked to the movement in the UK Retail Price Index ("RPI")), subject
to annual review, plus a variable fee of 0.125 per cent of the net assets of
the Company which exceed £5 million. The annual secretarial and accounting fee
is subject to a maximum of £105,634 per annum (linked to the movement in RPI)
subject to annual review. It is chargeable 100 per cent to revenue.
Amounts payable to the Manager at the year end are disclosed in note 11.
5. Other expenses
2010 2009
£'000 £'000
Directors' fees 71 63
Secretarial and accounting fees 110 108
Remuneration of the auditors and their associates:
- audit 20 22
- other services supplied pursuant to legislation 5 5
(interim review)
- other services supplied relating to taxation 5 5
Other 149 202
360 405
The Chairman received £23,500 per annum (2009: £21,000). Each of the other
Directors received £15,500 per annum (2009: £14,000).
The Audit Committee reviews the nature and extent of non-audit services to
ensure that independence is maintained. The Directors consider that the
auditors were best placed to provide such services.
All figures include irrecoverable VAT, where applicable. The Company is not
registered for VAT.
6. Tax on ordinary activities
6a. Analysis of charge for the year
2010 2009
£'000 £'000
UK corporation tax - -
The income statement shows the tax change allocated between revenue and
capital.
6b. Factors affecting tax charge for the year
The tax charge for the year is lower than the standard rate of corporation tax
in the UK for a company. The differences are explained below:
2010 2009
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Profit/(loss) on ordinary 1,554 5,889 7,443 669 (384) 285
activities before tax
Corporation tax at 28% 435 1,649 2,084 187 (108) 79
Effect of:
Non-taxable dividend income (81) - (81) (58) - (58)
Non-taxable gains - (1,904) (1,904) - (53) (53)
Losses (utilised)/carried - (99) (99) - 32 32
forward
Marginal tax relief - - - (9) 9 -
Tax charge/(credit) for the 354 (354) - 120 (120) -
year (note 6a)
At 30 September 2010 the Company had surplus management expenses of £1,268,823
(30 September 2009: £1,636,459) 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.
7. Dividends
2010 2009
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Amounts recognised as
distributions to equity
holders in the year:
For the year ended 30
September 2010
- First interim dividend of 338 1,354 1,692 - - -
2.5p per ordinary share
paid on 7 June 2010
Amount recognised as
distributions to equity
holders in the year:
For the year ended 30
September 2009
- First interim dividend of - - - 344 1,370 1,714
2.5p per ordinary share
paid on 26 June 2009
- Final dividend of 3.0p 138 1,924 2,062 - - -
per ordinary share paid on
30 December 2009
476 3,278 3,754 344 1,370 1,714
8. Returns per share
The 10.96p return per ordinary share (2009: 0.43p) is based on the net profit
from ordinary activities after tax of £7,443,000 (2009: £285,000) and on
67,917,384 ordinary shares (2009: 65,802,901), being the weighted average
number of shares in issue during the year.
9. Investments
All investments are designated fair value through profit or loss at initial
recognition, therefore all gains and losses arise on investments designated at
fair value through profit or loss.
Financial Reporting Standard 29 `Financial Instruments: Disclosures' (the
Standard) requires an analysis of investments valued at fair value based on the
reliability and significance of the information used to measure their fair
value. The level is determined by the lowest (that is the least reliable or
independently observable) level of input that is significant to the fair value
measurement for the individual investment in its entirety as follows:
â— Level 1 - investment prices quoted prices in an active market.
â— Level 2 - investments whose fair value is based directly on observable
current market prices or indirectly being derived from market prices.
â— Level 3 - investments whose fair value is determined using a valuation
technique based on assumptions that are not supported by observable current
market prices or based on observable market data.
2010 2009
£'000 £'000
Level 1
Interest bearing securities 14,994 18,512
Investments traded on AIM 12,781 11,930
Investment listed on LSE 1,017 1,019
Investments traded on NYSE 150 212
Investment traded on PLUS 136 109
29,078 31,782
Level 2
Collective investment vehicle (Wood Street Microcap 1,654 525
Investment Fund)
Level 3
Unquoted investments 31,007 27,222
61,739 59,529
2010 2009
£'000 £'000
Equity shares 25,696 21,724
Loan notes 20,994 19,196
Preference shares 55 97
Fixed income securities 14,994 18,512
61,739 59,529
Level 1 Level 2 Level 3
Interest Collective
bearing Traded Listed Traded Traded investment
securities on AIM on LSE on on vehicle Unquoted Total
NYSE PLUS
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening book cost 18,538 17,086 578 180 500 525 20,553 57,960
Opening unrealised (26) (5,156) 441 32 (391) - 6,669 1,569
(depreciation)/
appreciation
Opening valuation 18,512 11,930 1,019 212 109 525 27,222 59,529
Movements in the
year:
Purchases at cost 51,710 2,132 433 - - 1,000 3,797 59,072
Sales - proceeds (55,214) (2,985) - (29) - - (5,433) (63,661)
- realised (losses)/ (14) 578 - 2 - - 1,309 1,875
gains on sales
Unrealised (losses)/ (26) (1,406) - 4 - - 2,543 1,115
gains realised during
the year
Increase/(decrease) 26 2,532 (435) (39) 27 129 1,569 3,809
in unrealised
appreciation
Closing valuation 14,994 12,781 1,017 150 136 1,654 31,007 61,739
Closing book cost 14,994 15,405 1,011 157 500 1,525 22,769 56,361
Closing unrealised - (2,624) 6 (7) (364) 129 8,238 5,378
(depreciation)/
appreciation
14,994 12,781 1,017 150 136 1,654 31,007 61,739
During the year the Company incurred brokerage costs on sales and purchases of
£7,500 (2009: £5,338).
The gains and losses included in the above table have all been recognised in
the Income Statement.
The Standard requires disclosure, by class of financial instruments, if the
effect of changing one or more inputs to reasonably possible alternative
assumptions would result in a significant change to the fair value measurement.
The information used in determination of the fair value of Level 3 investments
is chosen with reference to the specific underlying circumstances and position
of the investee company. The portfolio has been reviewed and both downside and
upside reasonable possible alternatives have been identified and applied to the
valuation of each of the unquoted investments. The inputs flexed in determining
the reasonably possible alternative assumptions include the earnings stream and
marketability discount. Applying the downside alternatives the value of the
unquoted investments would be £2.6 million or 8.3 per cent lower. Using the
upside alternative the value would be increased by £3.0 million or 9.6 per
cent.
10. Debtors
2010 2009
£'000 £'000
Prepayments and accrued income 307 283
Amounts due from escrow 172 -
Amounts due from brokers - 271
479 554
11. Creditors (amounts falling due within one year)
2010 2009
£'000 £'000
Management, secretarial and accounting fees due to 348 336
Manager
Amounts due to brokers - 125
Other creditors 65 91
413 552
12. Called-up share capital
The Companies Act 2006 abolished the requirement for a company to have an
authorised share capital and at the Company's last Annual General Meeting, the
Company's Articles of Association were amended to reflect this. Whilst the
Company no longer has authorised share capital, the Directors will still be
limited as to the number of shares they can at any time allot as the Companies
Act 2006 requires that Directors seek authority from the shareholders for the
allotment of new shares.
Allotted, called-up and fully paid:
£'000
Ordinary shares
74,730,194 ordinary shares of 10p each listed at 30 September 2009 7,473
74,730,194 ordinary shares of 10p each listed at 30 September 2010 7,473
5,993,906 ordinary shares of 10p each held in treasury at 30 (599)
September 2009
1,560,000 ordinary shares of 10p each repurchased during the year (156)
and held in treasury
7,553,906 ordinary shares of 10p each held in treasury at 30 (755)
September 2010
67,176,288 ordinary shares of 10p each in circulation at 30 6,718
September 2010
As at 18 November 2010 the Company's issued share capital was 74,730,194
ordinary shares, of which 7,553,906 shares were held in treasury. The number of
shares in circulation was 67,176,288 ordinary shares carrying one vote each.
Treasury shares
The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003
came into force on 1 December 2003 and allowed the Company to hold shares
acquired by way of market purchase as treasury shares, rather than having to
cancel them. Shareholders have previously approved a resolution permitting the
Company to issue shares from treasury at a discount to the prevailing NAV if
the Board considers it in the best interests of the Company to do so. However,
treasury shares will not be sold at a discount wider than the discount
prevailing at the time the shares were initially bought back by the Company. It
is the Board's intention only to use the mechanism of re-issuing treasury
shares when demand for the Company's shares is greater than the supply
available in the market place. Such issues would be captured under the terms of
the Prospectus Directive and subject to the annual cap of Euro 2.5 million on
funds raised before requiring a full prospectus, although they would not be
considered by HM Revenue & Customs to be new shares entitling the purchaser to
initial income tax relief, and therefore shares are unlikely to be issued from
treasury in the same year as a ``top up'' offer for subscription.
The Company does not have any externally imposed capital requirements.
Where shares are bought back but not cancelled the share capital remains
unchanged. The NAV is calculated by using the number of shares in issue less
those bought back and held in treasury.
13. Reserves
Capital
Share redemption Capital Revaluation Revenue
premium reserve reserve reserve reserve
£'000 £'000 £'000 £'000 £'000
At 1 October 2009 12,573 9,254 29,665 1,569 681
Purchase of shares for - - (1,225) - -
treasury
Expenses of share issue - - (6) - -
and buybacks
Reallocation of prior year - - 1,115 (1,115) -
unrealised gains
Realised on disposal of - - 1,875 - -
investments
Net increase in value of - - - 4,924 -
investments
Management fee capitalised - - (910) - -
net of associated tax
Revenue return on ordinary - - - - 1,200
activities after tax
Dividends paid in the year - - (3,278) - (476)
Taxation relief from - - 354 - -
capital expenses
At 30 September 2010 12,573 9,254 27,590 5,378 1,405
At 30 September 2010, reserves distributable by way of dividend amounted to £
26,006,000 (2009: £25,246,000) comprising the capital reserve, revenue reserve
and the net unrealised loss on those level one investments whose prices are
quoted in an active market and deemed readily realisable in cash.
14. Net asset value per share
The net asset value per share and the net asset values attributable to the
ordinary shares at the year end are calculated in accordance with their
entitlements in the Articles of Association and were:
Net asset value Net asset value
per
Number of shares share attributable attributable
2010 2009 2010 2009 2010 2009
number number pence pence £'000 £'000
Ordinary shares 67,176,288 68,736,288 94.79 89.06 63,673 61,215
(basic)
Ordinary shares 74,730,194 74,730,194 93.42 88.13 69,811 65,861
(treasury)
Basic net asset value per share is based on net assets at the year end, and on
67,176,288 (2009: 68,736,288) ordinary shares, being the respective number of
shares in circulation at the year end.
The treasury net asset value per share as at 30 September 2010 included
ordinary shares held in treasury valued at the mid share price of 81.25p at 30
September 2010.
15. Analysis of changes in cash
2010 2009
£'000 £'000
Beginning of year 1,684 4,123
Net cash inflow/(outflow) 184 (2,439)
As at 30 September 2010 1,868 1,684
16. Reconciliation of profit on ordinary activities before taxation to net cash
inflow from operating activities
2010 2009
£'000 £'000
Profit on ordinary activities before taxation 7,443 285
Gains on investments (6,799) (189)
(Increase)/decrease in debtors (24) 870
Increase/(decease) in creditors 1 (2)
Income reinvested (201) -
Net cash inflow from operating activities 420 964
17. Contingencies, guarantees and financial commitments
There were no contingencies, guarantees or financial commitments of the Company
as at 30 September 2010 (30 September 2009: nil).
18. Significant interests
There are no interests of 20 per cent or more of any class of share capital.
Further information on the significant interests is disclosed in the Schedule
of Investments set out above.
19. Financial instruments
The Company's financial instruments comprise equity and fixed interest
investments, cash balances and liquid resources. The Company holds financial
assets in accordance with its investment policy to invest in a diverse
portfolio of established and profitable UK unquoted companies and companies
raising new share capital on AIM.
Fixed asset investments held (see note 9) are valued at fair value. For quoted
securities this is either bid price or the last traded price, depending on the
convention of the exchange on which the investment is quoted. In respect of
unquoted investments, these are fair valued by the Directors (using rules
consistent with IPEV guidelines). The fair value of all other financial assets
and liabilities is represented by their carrying value in the Balance sheet.
The Company's investing activities expose it to various types of risk that are
associated with financial instruments and markets in which it invests. The most
important types of financial risk to which the Company is exposed are market
risk, credit risk and liquidity risk. The nature and extent of the financial
instruments held at the balance sheet date and the risk management policies
employed by the Company are discussed in notes 20 to 23.
20. Market risk
Market risk embodies the potential for both loss and gains and includes
interest rate risk and price risk.
The Company's strategy on the management of investment risk is driven by the
Company's investment objective as outlined in note 19. The management of market
risk is part of the investment management process and is typical of private
equity investment. The portfolio is managed in accordance with policies and
procedures in place as described in more detail in the Report of the Directors,
with an awareness of the effects of adverse price movements through detailed
and continuing analysis, with an objective of maximising overall returns to
shareholders. Investments in unquoted stocks and AIM traded companies, by their
nature, involve a higher degree of risk than investments in the main market.
Some of that risk can be mitigated by diversifying the portfolio across
business sectors and asset classes. The Company's overall market positions are
monitored by the Board on a quarterly basis.
Details of the Company's investment portfolio at the balance sheet date are
disclosed in the schedule of investments set out above. An analysis of
investments between debt and equity instruments is disclosed in note 9.
23 per cent (2009: 22 per cent) of the Company's investments are listed on the
London or New York Stock Exchange or traded on AIM or PLUS. A 5 per cent
increase in stock prices as at 30 September 2010 would have increased the net
assets attributable to the Company's shareholders and the total profit for the
year by £704,000 (2009: £664,000); an equal change in the opposite direction
would have decreased the net assets attributable to the Company's shareholders
and the total profit for the year by an equal amount.
49 per cent (2009: 44 per cent) of the Company's investments are in unquoted
companies held at fair value. Valuation methodology includes the application of
earnings multiples derived from either listed companies with similar
characteristics or recent comparable transactions. Therefore the value of the
unquoted element of the portfolio may also be indirectly affected by price
movements on the listed exchanges. A 5 per cent increase in the valuations of
unquoted investments at 30 September 2010 would have increased the net assets
attributable to the Company's shareholders and the total profit for the year by
£1,550,000 (2009: £1,361,000); an equal change in the opposite direction would
have decreased the net assets attributable to the Company's shareholders and
the total profit for the year by an equal amount.
21. Interest rate risk
At 30 September 2010 £3,194,000 (2009: £11,512,000) fixed rate securities were
held by the Company. As a result, the Company is subject to exposure to fair
value interest rate risk due to fluctuations in the prevailing levels of market
interest rates.
At 30 September 2010 £20,994,000 (2009: £19,196,000) fixed rate loan notes were
held by the Company. The weighted average effective interest rate for the loan
note securities is 10.87 per cent as at 30 September 2010 (2009: 8.79 per
cent). Due to the complexity of the instruments and uncertainty surrounding
timing of redemption the weighted average time for which the rate is fixed has
not been calculated.
The table below summarises weighted average effective interest rates for the
fixed interest-bearing financial instruments:
2010 2009
Weighted Weighted
Total Weighted average Total Weighted average
fixed average time for fixed average time for
rate interest which rate rate interest which
rate
portfolio rate is fixed portfolio rate is fixed
£'000 % days £'000 % days
Fixed rate
Fixed interest 3,194 0.51 57 11,512 1.02 31
securities
Floating rate
When the Company retains cash balances, the majority of cash is ordinarily held
on interest bearing deposit accounts and, where appropriate, within an interest
bearing money market open ended investment company ("OEIC"). The benchmark rate
which determines the interest payments received on interest bearing cash
balances is the bank base rate which was 0.5 per cent as at 30 September 2010
(2009: 0.5 per cent).
2010 2009
£'000 £'000
Floating rate
OEIC 11,800 7,000
Cash at bank and on deposit 1,868 1,684
22. Credit risk
Credit risk is the risk that a counterparty to a financial instrument will fail
to discharge an obligation or commitment that it has entered into with the
Company. The Investment Manager has in place a monitoring procedure in respect
of counterparty risk which is reviewed on an ongoing basis. The carrying
amounts of financial assets best represent the maximum credit risk exposure at
the balance sheet date.
At the reporting date, the Company's financial assets exposed to credit risk
amounted to the following:
2010 2009
£'000 £'000
Investments in floating rate instruments 11,800 7,000
Investments in fixed rate instruments 3,194 11,512
Cash at bank and on deposits 1,868 1,684
Interest, dividends and other receivables 479 283
17,341 20,479
Credit risk arising on fixed interest instruments is mitigated by investing in
UK Government Stock.
Credit risk arising on floating rate instruments is mitigated by investing in
money market open ended investment companies managed by BlackRock and JP Morgan
Chase ("JPM"). Credit risk on unquoted loan stock held within unlisted
investments is considered to be part of market risk as disclosed in note 20.
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 JPM, the Company's custodian. The Board monitors the Company's risk by
reviewing the custodian's internal controls reports as described in the
Corporate Governance section in the Annual report.
Substantially all of the cash held by the Company is held by JPM. The Board
monitors the Company's risk by reviewing regularly JPM's internal controls
reports as previously described. Should the credit quality or the financial
position of JPM deteriorate significantly the Investment Manager will seek to
move the cash holdings to another bank.
There were no significant concentrations of credit risk to counterparties at 30
September 2010 or 30 September 2009. No individual investment exceeded 11.0 per
cent of the net assets attributable to the Company's shareholders at 30
September 2010 (2009: 11.5 per cent).
23. Liquidity risk
The Company's financial instruments include investments in unquoted companies
which are not traded in an organised public market and which generally may be
illiquid. As a result, the Company may not be able to liquidate quickly some of
its investments in these instruments at an amount close to their fair value in
order to meet its liquidity requirements, or to respond to specific events such
as deterioration in the creditworthiness of any particular issuer.
The Company's liquidity risk is managed on an ongoing basis by the Investment
Manager in accordance with policies and procedures in place as described in the
Report of the Directors above. The Company's overall liquidity risks are
monitored on a quarterly basis by the Board.
The Company maintains sufficient investments in cash and readily realisable
securities to pay accounts payable and accrued expenses. At 30 September 2010
these investments were valued at £16,862,000 (2009: £20,196,000).
24. Related parties
Related party transactions include Management, Secretarial, Accounting and
Performance fees payable to the Manager, ISIS EP LLP, as disclosed in notes 4,
5 and 11, and fees paid to the Directors as disclosed in note 5. In addition,
the Manager operates a Co-investment Scheme, detailed in the Report of the
Directors detailed above, whereby employees of the Manager are entitled to
participate in certain unquoted investments alongside the Company.
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: www.hemscott.com/nsm.do.
Annual General Meeting
The Company's Annual General Meeting will be held on 11 January 2011 at 1:30pm
at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS.
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