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Octopus VCT 2 PLC (OVC2)

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Thursday 29 March, 2012

Octopus VCT 2 PLC

Octopus VCT 2 PLC : Final Results

Octopus VCT 2 PLC : Final Results

FINAL RESULTS

Octopus VCT 2 plc is a venture capital trust which, whilst it will have the ability to invest in a variety of sectors and technologies, the focus will be to build a portfolio of investments in the renewable energy sector, with a particular focus on solar energy where the Octopus team is confident that investments can be structured with a higher level of capital preservation.

Financial Summary

As at
31 December 2011
Net assets (£'000s) 18,048
Return on ordinary activities after tax (£'000s) (192)
Net asset value (NAV) per share 93.5p

Key Dates

Annual General Meeting                                          Wednesday, 27 June 2012 (3.00 p.m. 20 Old Bailey, London EC4M 7AN)

Half Yearly Results to 30 June 2012                      Announced August 2012    


Chairman's Statement

Introduction
I am pleased to present the first Annual Report of Octopus VCT 2 plc (the Company) for the period ended 31 December 2011.

I am also delighted to report that Martijn Kleibergen has agreed to join the Board, effective from 11 November 2011. Martijn has extensive experience in providing debt finance to unquoted companies and joined Octopus Investments six months ago as their Portfolio Director responsible for overseeing the performance of this type of investments. At the same time, Chris Hulatt has decided to step down as Director to focus more on his principal job of CFO at Octopus Investments. I should like to take this opportunity to thank Chris for his dedication and advice to this Board since its inception.

Performance
During the period the Net Asset Value (NAV) of the Company has declined from 94.5 pence per share at inception to 93.5 pence per share, a negative return of 1.1%. This decline is due to the initial start up costs of the Company, together with the standard running costs that outweigh any income or capital gains, as is expected at this stage of the Company's life.  

Going forward, the running costs should be covered by the income generated from investments. Over the longer term, as the underlying portfolio of investments is created, the Company's NAV will be linked increasingly to the value of the investments in the portfolio companies.

Investment Portfolio

The Company made several investments in the period to 31 December 2011, predominately into the Solar renewable energy sector. These investments are discussed in more detail in the Investment Manager's Review on pages X to X. At the period end, these investments remained held at cost as they were made within twelve months of the period, and therefore cost is considered to be a reasonable approximation to fair value at the balance sheet date.

Since the period end, we have added to the portfolio, investing in Borro Limited, a secured asset loan provider. The Investment Manager is seeing a good level of quality investment propositions and these will allow the portfolio to continue to grow.

The Company's portfolio consists entirely of unquoted investments. The current surplus cash of the Company is invested in a range of fixed term deposits and bank current accounts to fit with the Board's policy of preserving the capital of the Company before its deployment into Qualifying Investments.

 

Investment Policy

The Company will invest in a portfolio of predominately unquoted companies in a variety of sectors and technologies where the Octopus team is confident that investments can be structured with a higher level of capital security with the objective of building a portfolio of investments that focus on capital preservation.

Whilst the Company will have the ability to invest in a variety of sectors and technologies, the focus will be to build a portfolio of investments in the renewable energy sector, with a particular focus on solar energy.

VCT Qualifying Status

PricewaterhouseCoopers LLP provides the Board and Investment Manager with advice concerning ongoing compliance with HMRC rules and regulations concerning VCTs.  The Board has been advised that the Company is compliant with the conditions laid down by HMRC for maintaining provisional approval as a VCT. 

A key requirement is to achieve a 70% qualifying investment level prior to 31 December 2013.  As at 31 December 2011, 52.8% of the portfolio, as measured by HMRC rules, was invested in VCT qualifying investments. In view of the current investment activity, the Board continues to be confident that the 70% target will be met by the required date.

Annual General Meeting

I look forward to meeting as many shareholders as possible at our first Annual General Meeting on Wednesday, 27 June 2012 to be held at the offices of Octopus Investments Limited, 20 Old Bailey, London, EC4M 7AN. The AGM will start at 3.00 p.m.

Outlook
It has been well documented in the media that the Government's commitment to feed-in-tariffs is being further reduced. However, before the Government's changes came into effect, the company had already made significant investment in the solar renewable energy sector and therefore your Board and investment manager remain confident that the Company will achieve its investment objectives.

There remains uncertainty in the UK about the sustainability of the economic recovery, and the outlook for the public finances and inflation, while the euro-zone and European markets also face some fundamental challenges. These factors provide an uncertain environment for many businesses. The Board and Investment Manager will conduct the investment activities with these factors in mind.

Ian Pearson
Chairman
29 March 2012


Investment Manager's Review

Personal Service
At Octopus we have a dual focus, on managing your investments and keeping you informed throughout the investment process.  We are committed to providing our investors with regular and open communication. Our updates are designed to keep you informed about the progress of your investment. During this time of economic upheaval, we consider it particularly important to be in contact with our investors. We are working hard to manage your money in the current climate.

Octopus was established in 2000 and has a strong commitment to both smaller companies and to VCTs.  We currently manage 19 VCTs, including this VCT, and currently have over £2.7 billion of funds under management.  Octopus has over 200 employees and has been voted 'Best VCT Provider of the Year' by the financial adviser community every year since 2006.

Portfolio Performance

As at 31 December 2011 the NAV stood at 93.5 pence per share, compared to 94.5 pence per share at inception. This decrease is expected at the company's infancy stage, as fixed running costs of the VCT exceed its income stream. As the portfolio matures, investment income is expected to rise; in addition we expect to attain capital appreciation which will further help to increase the NAV.

The majority of investments are either loan based on which a steady flow of interest is received into the Fund or are invested in equity where there is no prior ranking investment, for example in the case of our solar companies.

Portfolio Review

In-line with the Company's mandate, large investments have been made in renewable energy companies that construct and operate solar sites that benefit from the Government's feed-in-tariffs. Whilst the Government has reviewed its feed-in-tariff rates and policy, the Company's portfolio of investments will still have exposure to the higher rates that were originally on offer, due to the dates at which these investments were completed.

In addition to loan and equity investments in the solar companies, the Company has also invested £578,000 into Acquire Your Business Limited, a Company that acquires existing Independent Financial Advisers' client bases. Since the period end, the VCT has also invested £1million in Borro Limited, an online asset secured loan provider.

There has been no change in the valuation of these investments made as they have all been made within the last twelve months and there are no reasons that indicate there should be any changes to their fair value at the balance sheet date.

Outlook

We remain cautious about the year ahead and continue to be on the lookout for potential difficulties in the portfolio to enable ourselves to be prepared and plan appropriately. However, the majority of the investments made to date are largely unaffected by the macroeconomic climate and we remain cautiously optimistic that your Company's NAV will be able to make progress.

If you have any questions on any aspect of your investment, please call one of the team on 0800 316 2349.

Stuart Nicol
Octopus Investments Limited
29 March 2012

Investment Portfolio

Valuation Methodology

Initial measurement
Financial assets are measured at fair value. The initial best estimate of fair value of a financial asset that is either quoted or not quoted in an active market is the transaction price (i.e. cost).

Subsequent measurement
Further funding rounds are a good indicator of fair value and this measure is used where appropriate.  Subsequent adjustment to the fair value of unquoted investments can be made using sector multiples based on information as at relevant reporting dates, where applicable. In some cases the multiples can be compared to equivalent companies, especially where a particular sector multiple does not appear appropriate. It is currently industry norm to discount the quoted earnings multiple to reflect the lack of liquidity in the investment, there being no ready market for our holding. Typically the discount is 30% but this can be increased where the relevant multiple appears too high. A lower discount would also be possible if an investment was close to an exit event.

In accordance with the International Private Equity and Venture Capital (IPEVC) valuation guidelines investments made within 12 months are usually kept at cost unless performance indicates that fair value has changed.

If you would like to find out more regarding the IPEVC valuation guidelines, please visit their website at: www.privateequityvaluation.com.


Review of Investments
During the period, the Company made twenty investments amounting to £11.6 million, predominately in the solar renewable energy sector.  In the case of unquoted equity investments, these are investments in ordinary shares with full voting rights.

Unquoted investments are valued in accordance with the accounting policy set out on page X, which takes account of current industry guidelines for the valuation of venture capital portfolios and is compliant with IPEVC valuation guidelines and current financial reporting standards. 

Top Ten Holdings

Helaku Power Limited
Helaku Power Limited constructed and operates a solar renewable energy site at a carefully selected location in Trevemper, Cornwall. 

Initial investment date:                                                        March 2011                            
Cost:                                                                                      £1,825,000
Valuation:                                                                              £1,825,000
Voting rights held by Fund:                                                               25.0%
Equity held by all funds managed by Octopus:              100.0%
Last submitted unaudited accounts:                                                31 December 2011
Turnover                                                                                                £169,000
Loss before tax:                                                                   £48,000
Net assets:                                                                            £6,416,000

Shakti Power Limited
Shakti Power Limited constructed and operates a solar renewable energy site at a carefully selected location in Dunsfold, Surrey. 

Initial investment date:                                                        July 2011                
Cost:                                                                                      £650,000
Valuation:                                                                              £650,000
Voting rights held by Fund:                                                               0%
Equity held by all funds managed by Octopus:              100.0%
Last submitted unaudited group accounts:                    31 December 2011
Turnover                                                                                                £91,000
Loss before tax:                                                                   £156,000
Net assets:                                                                            £5,772,000
             
Howbery Limited
Howbery Limited constructed and operates a solar renewable energy site at a carefully selected location in Wallingford, Oxfordshire.

Initial investment date:                                                        April 2011                               
Cost:                                                                                      £600,000
Valuation:                                                                              £600,000
Voting rights held by Fund:                                                               31.6%
Equity held by all funds managed by Octopus:              100.0%
Last submitted unaudited group accounts:                    31 December 2011
Turnover                                                                                                £132,000
Profit before tax:                                                                  £15,000
Net assets:                                                                            £2,399,000

Acquire Your Business Limited
Acquire Your Business Limited is a company that acquires existing Independent Financial Advisers' client bases.

Initial investment date:                                                        December 2011                     
Cost:                                                                                      £578,000
Valuation:                                                                              £578,000
Voting rights held by Fund:                                                               32.0%
Equity held by all funds managed by Octopus:              100.0%
Last submitted unaudited group accounts:                    31 March 2011
Turnover                                                                                                £3,000
Loss before tax:                                                                   £19,000
Net assets:                                                                            £201,000

Aashman Power Limited
Aashman Power Limited constructed and operates a solar renewable energy site at a carefully selected location in Wilburton, Cambridgeshire. 

Initial investment date:                                                        March 2011                            
Cost:                                                                                      £500,000
Valuation:                                                                              £500,000
Voting rights held by Fund:                                                               17.0%
Equity held by all funds managed by Octopus:              100.0%
Last submitted unaudited group accounts:                    31 December 2011
Turnover                                                                                                £711,000
Loss before tax:                                                                   £559,000
Net assets:                                                                            £15,043,000

Cyrah Power Limited
Cyrah Power Limited is currently seeking a suitable location to construct and operate a solar renewable energy site.  

Initial investment date:                                                        April 2011                               
Cost:                                                                                      £500,000
Valuation:                                                                              £500,000
Voting rights held by Fund:                                                               50.0%
Equity held by all funds managed by Octopus:              100.0%
Last submitted unaudited group accounts:                    31 December 2011
Turnover                                                                                                £ -
Profit before tax:                                                                  £5,000
Net assets:                                                                            £975,000

Donoma Power Limited
Donoma Power Limited constructed and operates a solar renewable energy site at a carefully selected location in Howton, Nottinghamshire.   

Initial investment date:                                                        April 2011                               
Cost:                                                                                      £500,000
Valuation:                                                                              £500,000
Voting rights held by Fund:                                                               18.4%
Equity held by all funds managed by Octopus:              100.0%
Last submitted unaudited group accounts:                    31 December 2011
Turnover                                                                                                £513,000
Loss before tax:                                                                   £615,000
Net assets:                                                                            £13,951,000

Evaki Power Limited
Evaki Power Limited is currently seeking a suitable location to construct and operate a solar renewable energy site. 

Initial investment date:                                                        April 2011                               
Cost:                                                                                      £500,000
Valuation:                                                                              £500,000
Voting rights held by Fund:                                                               50.0%
Equity held by all funds managed by Octopus:              100.0%
Last submitted unaudited group accounts:                    31 December 2011
Turnover                                                                                                £ -
Profit before tax:                                                                  £6,000
Net assets:                                                                            £976,000

Gnowee Power Limited
Helaku Power Limited constructed and operates a solar renewable energy site at a carefully selected location in Spalding, Lincolnshire. 

Initial investment date:                                                        April 2011                               
Cost:                                                                                      £500,000
Valuation:                                                                              £500,000
Voting rights held by Fund:                                                               25.0%
Equity held by all funds managed by Octopus:              100.0%
Last submitted unaudited group accounts:                    31 December 2011
Turnover                                                                                                £136,000
Loss before tax:                                                                   £44,000
Net assets:                                                                            £3,038,000

Grian Power Limited
Grian Power Limited is currently seeking a suitable location to construct and operate a solar renewable energy site. 

Initial investment date:                                                        March 2011                            
Cost:                                                                                      £500,000
Valuation:                                                                              £500,000
Voting rights held by Fund:                                                               25.0%
Equity held by all funds managed by Octopus:              100.0%
Last submitted unaudited group accounts:                    31 December 2011
Turnover                                                                                                £ -
Profit before tax:                                                                  £17,000
Net assets:                                                                            £1,938,000


Shareholder Information and Contact Details

The Company was incorporated on 6 January 2011 with the first allotment of equity taking place on 16 March 2011. The Offer for new subscriptions for shares was open until 31 December 2011 by which time the Offer had raised a total amount of £19.3 million (£18.2 million net of upfront costs). The Company invests primarily in unquoted UK smaller companies and aims to deliver a high level of capital security.

Venture Capital Trusts

VCTs were introduced in the Finance Act 1995 to provide a means for private individuals to invest in unquoted companies in the UK.  Subsequent Finance Acts have introduced changes to VCT legislation. The tax benefits currently available to eligible new investors in VCTs include:

  • up to 30% up-front income tax relief;

·                     exemption from income tax on dividends paid; and
·                     exemption from capital gains tax on disposals of shares in VCTs.

The Company has been provisionally approved as a VCT by HMRC.  In order to achieve approval the Company must comply with certain requirements on a continuing basis: 

  • at least 70% of the Company's investments must comprise 'qualifying holdings'* (as defined in the legislation) by 31 October 2013;
  • at least 30% of the 70% of qualifying holdings must be invested into Ordinary shares with no preferential rights (from April 2011 this changed to 70% for new investments);
  • no single investment made can exceed 15% of the total company value; and
  • a minimum of 10% of each Qualifying Investment must be in Ordinary shares with no preferential rights.

*A 'qualifying holding' consists of up to £1 million invested in any one year in new shares or securities in an unquoted UK company (or companies listed on AIM) which is carrying on a qualifying trade and whose gross assets do not exceed a prescribed limit at the time of investment.  The definition of a 'qualifying trade' excludes certain activities such as property investment and development, financial services and asset leasing.

Share Price
The Company's share price can be found on various financial websites including www.londonstockexchange.com, with the following TIDM/EPIC code:

Ordinary shares
TIDM/EPIC code           OV2
Latest share price (28 March 2012) 100p per share

                                               
Buying and Selling Shares
The Company's Ordinary shares can be bought and sold in the same way as any other company quoted on the London Stock Exchange via a stockbroker. There may be tax implications in respect of selling all or part of your holdings, so shareholders should contact their independent financial adviser if they have any queries.

The Company operates a policy of buying its own shares for cancellation as they become available, and envisages that purchases will be made at a 10% discount to the prevailing net asset value. The Company is, however, unable to buy back shares directly from shareholders. If you are considering selling your shares or trading in the secondary market, please contact the Company's corporate broker, Matrix Corporate Capital ('Matrix').

Matrix is able to provide details of close periods (when the Company is prohibited from buying in shares) and details of the price at which the Company has bought in shares. Matrix can be contacted as follows:

Chris Lloyd       0203 206 7176               [email protected]

Paul Nolan        0203 206 7177               [email protected]

Notification of Change of Address
Communications with shareholders are mailed to the registered address held on the share register. In the event of a change of address or other amendment this should be notified to the Company's registrar, Capita Registrars, as well as Octopus under the signature of the registered holder. Their contact details are provided on page X.

Other Information for Shareholders
Previously published documents are available for viewing on the Investment Manager's website at www.octopusinvestments.com.  All other statutory information will also be found there.

Warning to Shareholders
Many companies are aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas based 'brokers' who target UK shareholders offering to sell them what often turn out to be worthless or high risk shares in US or UK investments. They can be very persistent and extremely persuasive. Shareholders are therefore advised to be very wary of any unsolicited advice, offer to buy shares at a discount, or offer for free company reports.

Please note that it is very unlikely that either the Company or Octopus would make unsolicited telephone calls to shareholders and that any such calls would relate only to official documentation already circulated to shareholders and never in respect of investment advice.

If you are in any doubt about the authenticity of an unsolicited phone call, please call Octopus at the number provided at the back of this report.


Details of Directors

Ian Pearson (Non-Executive Chairman - Age 53)
Ian is currently engaged in strategy and business development as Senior Vice President to Global Crossing UK. He is also senior adviser to Avanti Communications, Maven Capital Partners and MCD Developments. Until standing down before the general election in 2010, Ian had over nine years experience at a senior level in government, including important roles as Minister for Climate Change and the Environment, Minister for Trade, Minister for Science and Innovation, and a Minister in Northern Ireland. More recently, as Economic Secretary to the Treasury until May 2010, Ian was at the heart of the UK's response to the global financial crisis. Amongst other things, he was responsible for growth, enterprise and productivity issues, the EU Budget, where he led negotiations for the UK, Public/Private Partnerships including Private Finance Initiative, and Infrastructure UK. Prior to his governmental career, Ian was joint chief executive of WMEB Group, providing venture and growth capital to SMEs and consultancy to a range of public and private clients.

Richard Hodgson (Non-Executive Director - Age 43)
Richard is currently finance director at Green Compliance plc, an AIM traded company. Prior to this, Richard held positions as chief financial officer at Reconomy, a private equity backed waste management company that provided waste management and recycling services across the UK, as chief financial officer for Triplearc plc, an AIM traded print management company and as European finance director for Iron Mountain Europe, an information and records management company. Richard also spent several years in the music industry working as a finance director for Universal Music International and Warner Music International and prior to that Richard qualified as a chartered accountant whilst working for the financial services group of Deloittes in London.

Martijn Kleibergen (Non-Executive Director - Age 39) Appointed 11 November 2011
Martijn was appointed a director on 11 November 2011.  He joined Investment Manager, Octopus in 2011.  Prior to that Martijn spent 12 years at Fortis Bank N.V. (renamed ABN AMRO Bank N.V. in 2010) both in the Netherlands and in the UK.  He held various positions over this period, most recently as Country Manager for its UK operations.  Other positions Martijn held within Fortis Bank included: Executive Director in its UK Corporate Banking & Project Finance team and Director in its Credit Restructuring / Portfolio Management Unit.  Mr Kleibergen holds a Master of Science Degree in Business Economics from Erasmus University Rotterdam where he specialised in Financial Economics.

Chris Hulatt (Non-Executive Director - Age 35) Resigned 11 November 2011
Chris Hulatt is chief financial officer and co-founder of Octopus. He has particular responsibility for finance, compliance and risk management. He oversaw the transfer of three VCTs from Close Brothers to Octopus in August 2008 and is responsible for analysing acquisition opportunities. He sits on the investment committees of a number of funds managed by Octopus and has been a director of four other VCTs managed by Octopus. Chris has a first class MA in Pharmacology from the University of Cambridge and is a Chartered Financial Analyst.

Directors' Report

The Directors present their report and the audited financial statements for the period ended 31 December 2011.

 

Principal Activity and Status

The principal activity of the Company is to invest in a diversified portfolio of UK smaller companies with the focus on the renewable energy sector.  The Company has been granted provisional approval as a VCT by HMRC. 

The Directors have managed the affairs of the Company with the intention of achieving its status as a Venture Capital Trust.

In order to gain approved status, the Company must comply on a continuing basis with the provisions of s280A of the Income Tax Act 2007; in particular, the Company is required to hold at least 70% of its investments (as defined in the legislation) in VCT 'qualifying holdings', of which at least 30% must comprise eligible ordinary shares by the end of the third accounting period (i.e. 31 December 2013).

The Directors are required by the Articles of Association to propose an Ordinary Resolution at the Company's Annual General Meeting in 2016 that the Company should continue as a VCT for a further five year period and at each fifth subsequent Annual General Meeting thereafter.  If any such Resolution is not passed, the Directors shall within nine months convene a general meeting to consider the proposals for the reorganisation or winding-up of the Company.

Review of Business Activities
The Directors are required by section 417 of the Companies Act 2006, to include a business review in their report to shareholders.  The Business Review is set out in the Chairman's Statement on pages X and X, and the Investment Manager's Review on pages X and X and is included in this Directors' Report by reference.

The purpose of the review is to provide shareholders with a snapshot 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 used to measure performance.

Performance and Key Performance Indicators

As a VCT, the Company's objective is to provide shareholders with a high level of capital security with the objective of building a portfolio of investments that focus on capital preservation in both debt and equity instruments with the focus on renewable energy.

The Board expects the Investment Manager to deliver a performance which aims to meet the objective of returning 105p per Ordinary share to shareholders upon the winding up of the Company. The key performance indicator (KPI) in meeting this objective is the cumulative distributions paid to shareholders. Additional key performance indicators reviewed by the Board include the discount of the share price relative to the net asset value and the total expense as a proportion of shareholders' funds. The total running costs in the period, as defined in the prospectus, were 1.1% of the Company's net assets, below the annual limit of 1.2%.

A record of some of the indicators is detailed on the first page entitled Financial Summary. Additional comments are provided in the Chairman's Statement regarding the performance of the Company over the current period.

The Board regularly assesses the performance of the Investment Manager in meeting the Company's objectives against the KPIs highlighted above.

Clearly, when making investments in unquoted companies at an early stage of their development, some are likely to disappoint, but investing the funds raised in high growth companies with the potential to become market leaders creates an environment of improved return for shareholders. The growth of these companies is largely dependent on continuing the existing levels of corporate spending. The current volatile economic environment could adversely affect corporate spending patterns, which would in turn have a negative impact on the development of the investee companies.

Performance, measured by the change in NAV and total return per share, is also measured against the FTSE Small-Cap index.  This is shown in the graph on page X in the Directors' Remuneration Report. This index 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 the other generalist VCTs. 

The Chairman's Statement, on pages X and X, includes a review of the Company's activities and future prospects; further details are also provided within the Investment Manager's Review on pages X and X.

Results and dividend

Period ended

 

31 December 2011

 

£'000

Net return attributable to shareholders

(192)

Objective and Investment Policy

The Objective and Investment Policy is defined on Page X of the Chairman's Statement.

The Directors control the overall risk of the portfolio by ensuring that the Company has exposure to a range of companies that focus on capital preservation. In order to limit the risk to the portfolio that is derived from any particular investment, no more than 10% of the amount invested by shareholders in the Company will be invested in any one unquoted company (including both Qualifying and Non-Qualifying Investments). Further details of the Company's risk management policies are provided in note 14 to the financial statements.

Non-Qualifying Investments
An active approach has been taken to manage the cash prior to investing in qualifying companies. Specifically, the majority of the funds raised were invested in a range of money market securities that place emphasis upon capital preservation.

The Company may also make Non-Qualifying Investments where the Investment Manager believes that the risk/return profile is consistent with the overall objective of the Company, which may include, from time to time, making a small number of investments or further investments in companies which meet the profile of a Qualifying Investment but would otherwise not be a Qualifying Investment.

Qualifying Investments

The Company intends to have the following investment profile at the end of the three year investment period:

  • 75-85% Qualifying Investments, primarily in unquoted companies
  • 15-25% in cash and money market securities

The Company will not borrow money for the purposes of making investments.  The investment decisions made must adhere to the HMRC qualification rules as stated in the above section.  The Directors will continually monitor the investment process and ensure compliance with the investment policy.

A review of the investment portfolio and of market conditions during the period is included in the Chairman's Statement and Investment Manager's Review.

No material changes may be made to the Company's investment policy described above without the prior approval of shareholders by the passing of an Ordinary Resolution.

VCT Regulation
Compliance with required rules and regulations is considered when all investment decisions are made. The Company is further monitored on a continual basis to ensure compliance. The main criteria to which the Company must adhere is detailed on page X (Shareholder Information and Contact Details).

The Company will continue to ensure its compliance with the qualification requirements.

Principal Risks, Risk Management and Regulatory Environment

The Board carries out a regular review of the risk environment in which the Company operates.  The main areas of risk identified by the Board are as follows:

VCT qualifying status risk: from the end of the third accounting period onwards, the Company is required at all times to observe the conditions laid down in the Income Tax Act 2007 for the maintenance of approved VCT status.  The loss of such approval could lead to the Company losing its exemption from corporation tax on capital gains, to investors being liable to pay income tax on dividends received from the Company and, in certain circumstances, to investors being required to repay the initial income tax relief on their investment. 

The Investment Manager keeps the Company's VCT qualifying status under continual review and reports to the Board regularly throughout the year.  The Board has also retained PricewaterhouseCoopers LLP to undertake an independent VCT status monitoring role.

Investment risk: the majority of the Company's investments will be in small and medium-sized companies which are VCT qualifying holdings, which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies. 

The Directors and the Investment Manager aim to limit the risk attached to the portfolio as a whole by careful selection and timely realisation of investments, by carrying out due diligence procedures and by maintaining a wide spread of holdings in terms of financing stage, industry sector and geographical location.  The Board reviews the investment portfolio with the Investment Manager on a regular basis.

Financial risk: as most of the Company's investments involve medium to long-term commitment and are relatively illiquid, the Directors consider that it is inappropriate to finance the Company's activities through borrowing.  Accordingly, they seek to maintain a proportion of the Company's assets in cash or cash equivalents in order to be in a position to take advantage of new investment opportunities.

The Company has very little exposure to foreign currency risk and does not enter into derivative transactions.  The Company has cash deposits which are held on the balance sheet of HSBC Bank plc and the Co-operative Bank plc.  The risk of loss to this cash is deemed to be low due to the historical credit ratings. Inadequate controls might lead to misappropriation of assets. Inappropriate accounting policies might lead to mis-posting or breaches of regulations.

Regulatory: the Company is required to comply with the Companies Act 2006, the rules of the UK Listing Authority and United Kingdom Accounting Standards. Breach of any of these might lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.

Reputational: inadequate or failed controls might result in breaches of regulation or loss of shareholder trust.

Internal control risk: the Board reviews annually the system of internal controls, financial and non-financial, operated by the Company and the Investment Manager.  These include controls designed to ensure that the Company's assets are safeguarded and that proper accounting records are maintained.

Competitive Risk: retention of key personnel within Octopus is vital to the success of the Company. Incentives to the Investment Manager's key staff are continuously monitored.

Price risk: the risk that the value of a security or portfolio of securities will decline in the future is mitigated by holding a diversified portfolio, across a broad range of sectors.

Cash flow risk: the risk that the Company's available cash will not be sufficient to meet its financial obligations is managed by frequent budgeting and close monitoring of available cash resources.

Due to the nature of the Company, environmental, social and employee issues do not apply and therefore no disclosures in respect of these have been included in the Directors' Report.

The Board seeks to mitigate the internal risks by setting policy, regularly reviewing performance, enforcing contractual obligations and monitoring progress and compliance. In the mitigation and management of these risks, the Board applies rigorously the principles detailed in the 'Turnbull' guidance. Details of the Company's internal controls are contained in the Corporate Governance section on pages X to X.

Further details of the Company's risk management policies are provided in note 15 to the financial statements.

 

Directors

The Directors of the Company during the period and their interests (in respect of which transactions are notifiable under Disclosure and Transparency Rule 3.1.2R) in the issued ordinary shares of 1p are shown in the table below:

 

31 December 2011

Ian Pearson (Chairman) 10,550
Richard Hodgson 10,550
Chris Hulatt (resigned 11 November 2011) N/A
Martijn Kleibergen (appointed 11 November 2011) N/A

All of the Directors' shares were held beneficially. There have been no changes in the Directors' share interests between 31 December 2011 and the date of this report.

The following appointments were made during the accounting period:

  • Chris Hulatt was appointed as a Director on 6 January 2011 and resigned on 11 November 2011
  • Martijn Kleibergen was appointed as a Director on 11 November 2011
  • Meaujo Incorporation Limited was appointed as a Corporate Director on 6 January 2011 and resigned on
    17 January 2011
  • Ian Pearson was appointed as a Director on 17 January 2011
  • Richard Hodgson was appointed as a Director on 17 January 2011

Brief biographical notes on the Directors are given on page X.

All the Directors will retire at the Annual General Meeting and, being eligible, will offer themselves for election. The Board has considered provision B.7.2 of the UK Corporate Governance Code and believes that all the Directors are effective and demonstrate commitment to their role, the Board and the Company.

Directors' and Officers' Liability Insurance
The Company has, as permitted by the Companies Act 2006, maintained insurance cover on behalf of the Directors and Company Secretary indemnifying them against certain liabilities which may be incurred by them in relation to the Company.

Whistleblowing
The Board has considered the arrangements implemented by the Investment Manager in accordance with the UK Corporate Governance Code's recommendations, to encourage staff of the Investment Manager or Company Secretary of the Company to raise concerns, in confidence, within their organisation about possible improprieties in matters of financial reporting or other matters. It is satisfied that adequate arrangements are in place to allow an independent investigation, and follow on action where necessary, to take place within the organisation.

Management

Octopus acts as Investment Manager to the Company.  The principal terms of the Company's management agreement with Octopus is set out in note 17 to the financial statements. The Investment Manager also provides secretarial, administrative and custodian services to the Company. 

The Company has in place an agreement with Octopus to act as Investment Manager which is central to the ability of the Company to continue in business. There are no other contracts which are deemed to be essential to the business of the Company.

As required by the Listing Rules, the Directors confirm that, in their opinion, the continuing appointment of Octopus as Investment Manager is in the best interests of the shareholders as a whole.  In reaching this conclusion the Directors have taken into account the performance of the investment portfolio and the ability of the Investment Manager to produce satisfactory investment performance in the future. It also considered the length of the notice period of the management agreement and fees payable to the Investment Manager together with the standard of other services provided which include secretarial and accounting services.

With the exception of Martijn Kleibergen (and Chris Hulatt until his resignation on 11 November 2011) no Director has an interest in any contract to which the Company is a party.  Details of the fees paid to Octopus in respect of services provided are detailed in note 17 to the financial statements.

It should be noted that there is no formal Management Engagement Committee as matters of this nature are dealt with by the independent Non-Executive Directors.

The Board has delegated the routine management decisions such as the payment of standard running costs to the Investment Manager. However, investment decisions are discussed and agreed with the Board.

Share Issues

A total of 19,300,111 ordinary shares with a nominal value of £193,001.11 were issued during the period to 31 December 2011.

The 50,000 Redeemable Shares were redeemed upon Admission of the ordinary shares in accordance with their terms of issue.

Share Buy Backs

There were no share buy backs during the period.

Share Capital & Rights Attaching to the Shares and Restrictions on Voting and Transfer
The Company's ordinary share capital as at 31 December 2011 comprised 19,300,111 ordinary shares of 1p each.      

Subject to any suspension or abrogation of rights pursuant to relevant law or the Company's Articles of Association, the shares confer on their holders (other than the Company in respect of any Treasury shares) the following principal rights:

(a) the right to receive out of profits available for distribution such dividends as may be agreed to be paid (in the case of a final dividend in an amount not exceeding the amount recommended by the Board as approved by shareholders in a general meeting or in the case of an interim dividend in an amount determined by the Board). All dividends unclaimed for a period of 12 years after having become due for payment are forfeited automatically and cease to remain owing by the Company;

(b) the right, on a return of assets on a liquidation, reduction of capital or otherwise, to share in the surplus assets of the Company remaining after payment of its liabilities pari passu with the other holders of Ordinary shares; and

(c) the right to receive notice of and to attend and speak and vote in person or by proxy at any general meeting of the Company. On a show of hands, every member present or represented and voting has one vote, and on a poll, every member present or represented and voting has one vote for every share of which that member is the holder. The appointment of a proxy must be received not less than 48 hours before the time of the holding of the relevant meeting or adjourned meeting or, in the case of a poll taken otherwise than at or on the same day as the relevant meeting or adjourned meeting, be received after the poll has been demanded and not less than 24 hours before the time appointed for the taking of the poll.

These rights can be suspended. If a member, or any other person appearing to be interested in shares held by that member, has failed to comply within the time limits specified in the Company's Articles of Association with a notice pursuant to s793 of the Companies Act 2006 (notice by the Company requiring information about interests in its shares), the Company can, until the default ceases, suspend the right to attend and speak and vote at a general meeting. If the shares represent at least 0.25% of their class the Company can also withhold any dividend or other money payable in respect of the shares (without any obligation to pay interest) and refuse to accept certain transfers of the relevant shares. Shareholders, either alone or with other shareholders, have other rights as set out in the Company's Articles of Association and in company law (principally the Companies Act 2006).

A member may choose whether his shares are evidenced by share certificates (certificated shares) or held in electronic (un-certificated) form in CREST (the UK electronic settlement system). Any member may transfer all or any of his shares, subject in the case of certificated shares to the rules set out in the Company's Articles of Association or in the case of un-certificated shares to the regulations governing the operation of CREST (which allow the Directors to refuse to register a transfer as therein set out); the transferor remains the holder of the shares until the name of the transferee is entered in the register of members. The Directors may refuse to register a transfer of certificated shares in favour of more than four persons jointly or where there is no adequate evidence of ownership or the transfer is not duly stamped (if so required). The Directors may also refuse to register a share transfer if it is in respect of a certificated share which is not fully paid up or on which the Company has a lien provided that, where the share transfer is in respect of any share admitted to the Official List maintained by the UK Listing Authority, any such discretion may not be exercised so as to prevent dealings taking place on an open and proper basis, or if in the opinion of the Directors (and with the concurrence of the UK Listing Authority) exceptional circumstances so warrant, provided that the exercise of such power will not disturb the market in those shares. Whilst there are no squeeze-out and sell out rules relating to the shares in the Company's Articles of Association, shareholders are subject to the compulsory acquisition provisions in s974 to s991 of the Companies Act 2006.

Directors' Authority to Allot Shares, to disapply Pre-emption Rights

The authority proposed under Resolution 7 is required so that the Directors may offer existing shareholders the opportunity to add to their investment or to offer potential shareholders an opportunity to invest in the Company in a tax-efficient manner without the Company having to incur substantial costs. Any consequent modest increase in the size of the Company will, in the opinion of the Directors, be in the interests of shareholders generally. Any issue proceeds will be available for investment in line with the Company's investment policy and may be used, in part, to purchase ordinary shares in the market.

Resolution 7 renews the Directors' authority to allot ordinary shares. This would enable the Directors until June 2013, to allot up to 1,930,011 ordinary shares (representing approximately 10% of the Company's issued share capital as at 31 December 2011).

Resolution 8 renews and extends the Directors' authority to allot equity securities for cash without pre-emption rights applying in certain circumstances. This Resolution would authorise the Directors, until the date falling 15 months after the date of the passing of the Resolution or, if earlier, the conclusion of the next Annual General Meeting of the Company, to issue ordinary shares for cash without pre-emption rights applying by way of an offer to existing shareholders, or re-issuing shares out of Treasury up to a maximum of 1,930,011 ordinary shares (representing approximately 10% of the Company's issued share capital as at 31 December 2011). This power will be exercised only if, in the opinion of the Directors, it would be in the best interests of shareholders, as a whole.

Directors' Authority to Make Market Purchase of its Own Shares

The authority proposed under Resolution 9 is required so that the Directors may make purchases of up to approximately 10% of the Company's issued share capital and seeks renewal of such authority until the next Annual General Meeting (or the expiry of 15 months, if earlier). The price paid for shares will not be less than the nominal value nor more than the maximum amount permitted to be paid in accordance with the rules of the UK Listing Authority in force as at the date of purchase. This power will be exercised only if, in the opinion of the Directors, a repurchase would be in the best interests of shareholders as a whole. Any shares repurchased under this authority will either be cancelled or held in Treasury for future re-sale in appropriate market conditions.

International Financial Reporting Standards
As the Company is not part of a group it is not mandatory for it to comply with International Financial Reporting Standards. The Company does not anticipate that it will voluntarily adopt International Financial Reporting Standards, nor would the current proposals issued by the ASB require that it does. If IFRS were to be adopted, it is not expected to have a significant impact upon the balances included in the financial statements, but would give rise to significant changes in presentation of information and disclosures.

 

Creditor Payment Policy

The Company's payment policy for the forthcoming financial year is to agree terms of payment before business is transacted and to settle accounts in accordance with those terms.  The Company does not follow any code or standard with regard to creditor payment practice.  At 31 December 2011 there were £nil trade creditors.

Environmental Policy

The Company always makes full effort to conduct its business in a manner that is responsible to the environment. This responsibility is maintained in investment decisions where possible.

Going Concern
The Company's business activities and the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and Investment Manager's Review on pages X to X. Further details on the management of financial risk may be found in note 14 to the Financial Statements.

The Board receives regular reports from the Investment Manager and the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The assets of the company consist of cash, Money Market Funds and OEIC Investments, which are readily realisable (37.1% of net assets) and accordingly, the company has adequate financial resources to continue in operational existence for the foreseeable future.  Thus, as no material uncertainties leading to significant doubt about going concern have been identified, it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

Substantial Shareholdings

As at the date of this report, no disclosures of major shareholdings had been made to the Company under Disclosure and Transparency Rule 5 (Vote Holder and Issuer Notification Rules).

Annual General Meeting

The notice convening the 2012 Annual General Meeting of the Company and a form of proxy in relation to the meeting can each be found at the end of this document.

Independent Auditor

James Cowper LLP was appointed as auditor on 17 January 2011.   A Resolution to re-appoint James Cowper LLP and to authorise the directors to fix their remuneration will be proposed at the forthcoming Annual General Meeting.

Amendment to the Company's Articles
A resolution to amend Articles of Association of the Company to bring them into line with the Prospectus issued by the Company on 28 January 2011 will be proposed at the forthcoming Annual General Meeting.  This will provide that the directors are required to put continuation proposals to the Company at its fifth Annual General Meeting and, if passed, every five years thereafter. 

Corporate Governance
The Board of the Company has considered the principles and recommendations of the AIC Code of Corporate Governance (AIC Code) by reference to the Association of Investment Companies Corporate Governance Guide for Investment Companies (AIC Guide). 

The AIC Code, as explained by the AIC Guide, addresses all the principles set out in The UK Corporate Governance Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to the Company.  The Board considers that reporting against principles and recommendations of the AIC Code, by reference to the AIC Guide (which incorporates The UK Corporate Governance Code), will provide better information to shareholders.

The Company is committed to maintaining high standards in corporate governance. The Directors consider that the Company has, throughout the period under review, complied with the provisions set out in The UK Corporate Governance Code with the exceptions set out in the Compliance Statement on page X.

Performance Evaluation
In accordance with The UK Corporate Governance Code, a performance evaluation must be completed by the Directors each year.  No evaluation was carried out during the period due to the early stage of the Company.

Appointment and Replacement of Directors
A person may be appointed as a Director of the Company by the shareholders in a general meeting by Ordinary Resolution (requiring a simple majority of the persons voting on the relevant resolution) or by the Directors. No person, other than a Director retiring by rotation or otherwise, shall be appointed or reappointed a Director at any general meeting unless he is recommended by the Directors or, not less than seven nor more than 42 clear days before the date appointed for the meeting, notice is given to the Company of the intention to propose that person for appointment or re-appointment in the form and manner set out in the Company's Articles of Association. Each Director who is appointed by the Directors (and who has not been elected as a Director of the Company by the members at a general meeting held in the interval since his appointment as a Director of the Company) is to be subject to election as a Director of the Company by the members at the first Annual General Meeting of the Company following his or her appointment. At each Annual General Meeting of the Company one third of the Directors for the time being, or if their number is not three or an integral multiple of three the number nearest to but not exceeding one-third, are to be subject to re-election. The Companies Act allows shareholders in a general meeting by Ordinary Resolution (requiring a simple majority of the persons voting on the relevant resolution) to remove any Director before the expiration of his or her period of office, but without prejudice to any claim for damages which the Director may have for breach of any contract of service between him or her and the Company. A person also ceases to be a Director if he or she resigns in writing, ceases to be a Director by virtue of any provision of the Companies Act, becomes prohibited by law from being a Director, becomes bankrupt or is the subject of a relevant insolvency procedure, or becomes of unsound mind, or if the Board so decides following at least six months' absence without leave or if he or she becomes subject to relevant procedures under the mental health laws, as set out in the Company's Articles of Association.

Board of Directors

The Company has a Board of three non-executive Directors, two of whom are considered to be independent.  Martijn Kleibergen and, at the time of his appointment, Chris Hulatt were not considered to be independent due to their roles within Octopus Investments Limited. The Board meets regularly on a quarterly basis, and on other occasions as required, to review the investment performance and monitor compliance with the investment policy laid down by the Board.

Subject to the provisions of the Companies Act, the Memorandum and Articles of Association of the Company and any directions given by shareholders by Special Resolution, the Articles of Association specify that the business of the Company is to be managed by the Directors, who may exercise all the powers of the Company, whether relating to the management of the business or not. In particular the Directors may exercise on behalf of the Company its powers to purchase its own shares to the extent permitted by shareholders.

The Board has a formal schedule of matters specifically reserved for its decision which include:

  • the consideration and approval of future developments or changes to the investment policy, including risk and asset allocation;
  • consideration of corporate strategy;
  • approval of the appropriate dividend to be paid to the shareholders;
  • the appointment, evaluation, removal and remuneration of the Investment Manager;
  • the performance of the Company, including monitoring of the discount of the net asset value to the share price; and
  • monitoring shareholder profiles and considering shareholder communications.

The Chairman leads the Board in the determination of its strategy and in the achievement of its objectives.  The Chairman is responsible for organising the business of the Board, ensuring its effectiveness and setting its agenda, and has no involvement in the day to day business of the Company.  He facilitates the effective contribution of the Directors and ensures that they receive accurate, timely and clear information and that they communicate effectively with shareholders.

The Company Secretary is responsible for advising the Board through the Chairman on all governance matters.  All of the Directors have access to the advice and services of the Company Secretary, who has administrative responsibility for the meetings of the Board and its committees.  Directors may also take independent professional advice at the Company's expense where necessary in the performance of their duties. The Board does not consider it necessary for the size of the Board or the Company to identify a member of the Board as the senior non-executive director.

The Company's Articles of Association and the schedule of matters reserved to the Board for decision provide that the appointment and removal of the Company Secretary is a matter for the full Board.


During the period the following were held:

Full Board meetings heldNo. of meetings attendedAudit Committee meetings heldAudit Committee meetings attended
Ian Pearson 1 1 1 1
Richard Hodgson 1 1 1 1
Martijn Kleibergen
(appointed 11 November 2011)
- N/A - N/A
Chris Hulatt
(resigned 11 November 2011)
1 - - N/A

The Company's Articles of Association require that one third of Directors should retire by rotation each year and seek re-election at the Annual General Meeting, and that Directors appointed by the Board should seek re-appointment at the next Annual General Meeting. All Directors are required to submit themselves for re-election at least every three years.

Date of Original AppointmentDue date for Re-election
Ian Pearson 17/01/2011 AGM 2012
Richard Hodgson 17/01/2011 AGM 2012
Martijn Kleibergen 11/11/2011 AGM 2012

Board Committees
The Board has appointed two committees to make recommendations to the Board in specific areas: 

Audit Committee:

Richard Hodgson
Ian Pearson

The Audit Committee, chaired by Richard Hodgson, consists of two independent Directors. The Audit Committee believes Richard possesses appropriate and relevant financial experience as per the requirements of the UK Corporate Governance Code.  The Board considers that the members of the Committee are independent and have collectively the skills and experience required to discharge their duties effectively.

The Audit Committee's terms of reference include the following roles and responsibilities:

  • reviewing and making recommendations to the Board in relation to the Company's published financial statements and other formal announcements relating to the Company's financial performance;
  • reviewing and making recommendations to the Board in relation to the Company's internal control (including internal financial control) and risk management systems;
  • periodically considering the need for an internal audit function;
  • making recommendations to the Board in relation to the appointment, re-appointment, removal and non-audit services of the external auditor, consider any  and approving the remuneration and terms of engagement of the external auditor;
  • reviewing and monitoring the external auditor's independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional regulatory requirements;
  • monitoring the extent to which the external auditor is engaged to supply non-audit services; and
  • ensuring that the Investment Manager has arrangements in place for the investigation and follow-up of any concerns raised confidentially by staff in relation to propriety of financial reporting or other matters.

The Committee will review its terms of reference and its effectiveness annually and will recommend to the Board any changes required as a result of the review.  The terms of reference are available on request from the Company Secretary.  The Committee will meet twice per year and has direct access to James Cowper LLP, the Company's external auditor. The Audit Committee has reviewed the non-audit services provided by the external auditor and does not believe they are sufficient to influence their independence or objectivity, due to the fee being an immaterial expense. When considering whether to recommend the re-appointment of the external auditor, the committee take into account the tenure of the current auditor in addition to comparing the fees charged to similar sized audit firms. 

The Company does not have an independent internal audit function as it is not deemed appropriate given the size of the Company and the nature of the Company's business.  However, the Committee considers annually whether there is a need for such a function and if so would recommend this to the Board.

Once the committee has made a recommendation to the Board, in relation to the appointment of the external auditor, this is then ratified at the AGM through an Ordinary Resolution.

During the period ended 31 December 2011, the Audit Committee discharged its responsibilities by:

  • reviewing and approving the external auditor's terms of engagement and remuneration;
  • reviewing the external auditor's plan for the audit of the Company's financial statements, including identification of key risks and confirmation of auditor independence;
  • reviewing Octopus Investments Limited's statement of internal controls in relation to the Company's business and assessing the effectiveness of those controls in minimising the impact of key risks;
  • reviewing periodic reports on the effectiveness of Octopus Investments Limited's compliance procedures;
  • reviewing the appropriateness of the Company's accounting policies;
  • reviewing the Company's annual and interim financial results statement prior to Board approval; and
  • reviewing the external auditor's detailed reports to the Committee on the annual financial statements.

Nomination Committee:

Ian Pearson
Richard Hodgson

The Nomination Committee considers the selection and appointment of Directors considering the composition and selection of the Board, appointing members on merit, measured against objective criteria with due regard for the benefits of diversity.  It also makes recommendations to the Board as to the level of Directors' fees. 

A person may be appointed as a Director of the Company by the shareholders in general meeting by Ordinary Resolution  or by the Directors; no person, other than a Director retiring by rotation or otherwise, shall be appointed or reappointed a Director at any general meeting unless he is recommended by the Directors or notice is given to the Company of the intention to propose that person for appointment or re-appointment in the form and manner set out in the Company's Articles of Association. 

Each Director who is appointed by the Directors (and who has not been elected as a Director of the Company by the members at a general meeting held in the interval since his appointment as a Director of the Company) is to be subject to election as a Director of the Company by the members at the first Annual General Meeting of the Company following his appointment. At each Annual General Meeting of the Company one third of the Directors for the time being, or if their number is not three or an integral multiple of three the number nearest to but not exceeding one-third, are to be subject to re-election. 

The Companies Act allows shareholders in a general meeting by Ordinary Resolution to remove any Director before the expiration of his or her period of office, but without prejudice to any claim for damages which the Director may have for breach of any contract of service between him or her and the Company. 

A person also ceases to be a Director if he or she resigns in writing, ceases to be a Director by virtue of any provision of the Companies Act, becomes prohibited by law from being a Director, becomes bankrupt or is the subject of a relevant insolvency procedure, or becomes of unsound mind, or if the Board so decides following at least six months' absence without leave or if he or she becomes subject to relevant procedures under the mental health laws, as set out in the Company's Articles of Association.

It has not yet been necessary for the Committee to meet and so terms of reference will be agreed if and when appropriate. The Board does not have a separate remuneration committee as the Company has no employees or executive Directors. Detailed information relating to the remuneration of Directors is given in the Directors' remuneration report.

Internal Control

The Directors have overall responsibility for keeping under review the effectiveness of the Company's systems of internal controls. The purpose of these controls is to ensure that proper accounting records are maintained, the Company's assets are safeguarded and the financial information used within the business and for publication is accurate and reliable; such a system can only provide reasonable and not absolute assurance against material misstatement or loss. The system of internal controls is designed to manage rather than eliminate the risk of failure to achieve the business objectives.  The Board regularly reviews financial results and investment performance with its Investment Manager.

Octopus identifies the investment opportunities for the consideration of the Board who ultimately makes the decision whether to proceed with that opportunity.  Octopus monitors the portfolio of investments and makes recommendations to the Board in terms of suggested disposals and further acquisitions.

Octopus is engaged to carry out the accounting function and retains physical custody of the documents of title relating to unquoted investments. Octopus regularly reconciles the client asset register with the physical documents. 

The Directors confirm that they have established a continuing process throughout the period and up to the date of this report for identifying, evaluating and managing the significant potential risks faced by the Company and have reviewed the effectiveness of the internal control systems. As part of this process an annual review of the internal control systems is carried out in accordance with the Financial Reporting Council guidelines for internal control.

Internal control systems include the production and review of monthly bank reconciliations and management accounts. All outflows made from the Company's accounts require the authority of two signatories from Octopus. The Company is subject to a full annual audit whereby the auditor is the same auditor as other VCTs managed by the Investment Manager. Further to this, the Audit Partner has open access to the Directors of the Company and the Investment Manager is subject to regular review by the Octopus Compliance Department.

Financial Risk Management Objectives and Policies
The Company is exposed to the risks arising from its operational and investment activities. Further details can be found in note 14 to the Financial Statements.

Relations with Shareholders
Shareholders have the opportunity to meet the Board at the Annual General Meeting.  In addition to the formal business of the Annual General Meeting, the Board is available to answer any questions a shareholder may have.

The Board is also happy to respond to any written queries made by shareholders during the course of the year and can be contacted at 20 Old Bailey, London, EC4M 7AN.  Alternatively, the team at Octopus is happy to answer any questions you may have and can be contacted on 0800 316 2396.

Compliance Statement
The Listing Rules require the Board to report on compliance throughout the accounting period with all relevant provisions set out in The UK Corporate Governance Code. The preamble to The UK Corporate Governance Code does, however, acknowledge that some provisions may have less relevance for investment companies adding that the AIC Code and AIC Guide can assist in meeting the obligations under The UK Corporate Governance Code. With the exception of the limited items outlined below, the Company has complied throughout the accounting period to 31 December 2011 with the provisions set out in The UK Corporate Governance Code. The section references to The UK Corporate Governance Code are shown in brackets.

1. The Company does not have a Chief Executive Officer or a senior independent Director. The Board does not consider this necessary for the size of the Company. [A.2.2 and A.4.1]

2. New Directors do not receive a full, formal and tailored induction on joining the Board. Such matters are addressed on an individual basis as they arise. [B.4.1]

3. The Company had two independent Directors, Ian Pearson and Richard Hodgson, as defined by The UK Corporate Governance Code. Martijn Kleibergen and, at the time of his appointment, Chris Hulatt were not considered to be independent due to their roles with Octopus. The Board considers that all Directors have sufficient experience to be able to exercise proper judgement within the meaning of The UK Corporate Governance Code. [B.1.1]

 4. No performance evaluation was carried out during the year due to the early stage of the Company. [B.6.2.]

5.  The Directors are not subject to annual election by the shareholders as one third of the Directors retire by rotation and are offered for re-election at the Annual General Meeting in accordance with the Articles of Association of the Company. At the first annual general meeting all the directors will offer themselves for election. [B.7.1]

6. The Company conducts a formal review as to whether there is a need for an internal audit function. However, the Directors do not consider that an internal audit would be an appropriate control for a VCT. [C.3.2]

7. The Company does not have a Remuneration Committee as it does not have any executive directors. [D.1.1 - 2.4]

8. The Company has no major shareholders therefore shareholders are not given the opportunity to meet any Non-Executive Directors at a specific meeting other than the Annual General Meeting. [E.1.1 & E.1.2]

By order of the Board

Tracey Spevack
Company Secretary
29 March 2012

Directors' Remuneration Report

 

Introduction

This report is submitted in accordance with chapter 6 of Part 15 of the Companies Act 2006, in respect of the period ended 31 December 2011.  An Ordinary Resolution for the approval of this report will be put to the members at the forthcoming Annual General Meeting.

The Company's auditor, James Cowper LLP, is required to give its opinion on certain information included in this report; this comprises the Directors' emoluments section below only.  Their report on these and other matters is set out on pages X and X.

Consideration by the Directors of Matters Relating to Directors' Remuneration
The Board as a whole considers Directors' remuneration and has not appointed a separate committee in this respect.  The Board has not sought advice or services from any person in respect of its consideration of Directors' remuneration during the period (although the Directors expect from time to time to review the fees against those paid to the boards of directors of other VCTs).

Statement of the Company's policy on Directors' Remuneration 

The Board consists entirely of non-executive Directors, who will meet at least four times a year and on other occasions as necessary, to deal with the important aspects of the Company's affairs.  Directors are appointed with the expectation that they will serve for, at least, a period of three years.  All Directors retire at the first general meeting after election and thereafter one third of all Directors are subject to retirement by rotation at subsequent Annual General Meetings.  Re-election will be recommended by the Board but is dependent upon shareholder vote.

Each Director received a letter of appointment which is subject to termination by the Director or the Company on three months' notice in writing.  None of the Directors are entitled to compensation payable upon early termination of their contract other than in respect of any unexpired notice period.

The Company's policy is that the fees payable to the Directors should reflect the time spent by the Board on the Company's affairs and the responsibilities borne by the Directors. They should be sufficient to attract candidates of high calibre to be recruited.  The policy is for the Chairman of the Board to be paid higher fees than the other Directors in recognition of his more onerous role.  The policy is to review these rates from time to time, although such review will not necessarily result in any changes. Due to the nature of the Company, there are no employees other than the Directors and therefore no such issues to consider when determining the Directors' remuneration.

The Company's policy is for the Directors to be remunerated in the form of fees, payable quarterly in arrears.  The fees are not specifically related to the Directors' performance, either individually or collectively. There are no long-term incentive schemes, share option schemes or pension schemes in place.  The Board is also entitled to be repaid all reasonable travelling, subsistence and other expenses incurred by them respectively whilst conducting their duties as Directors; however no other remuneration or compensation was paid or payable by the Company during the period to any of the current Directors.

The Board has not sought advice or services from any person in respect of its consideration of Directors' remuneration during the period.

Company Performance
The Board is responsible for the Company's investment strategy and performance, although the management of the Company's investment portfolio is delegated to the Investment Manager through the investment management agreement.

The graph below compares the NAV total return and Share Price total return (gross dividend re-invested) of The Company over the period from March 2011 to December 2011, with the total return from a notional investment in the FTSE Small-Cap index over the same period (all rebased to 100p).  This index is considered to be the most appropriate broad equity market index for comparative purposes. The Directors wish to point out that VCTs are not able to make qualifying investments in companies quoted on the Main Market in their observance of the Company rules.


Directors' Emoluments (Information Subject to Audit)

Amount of each Director's emoluments:

Directors' fees

Period ended

 

31 December 2011

£

Ian Pearson

15,777

Richard Hodgson 11,942
Chris Hulatt (Paid to Octopus Investments Limited) 9,916
Martijn Kleibergen (Paid to Octopus Investments Limited) 2,029
Total 39,664

The Directors do not receive any other form of emoluments in addition to the Directors' fees.

By Order of the Board

Tracey Spevack
Company Secretary
29 March 2012


Directors' Responsibilities Statement

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations.

Company law requires the Directors to prepare financial statements for each financial year which they must not approve unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company for that period. Under that law the Directors have elected to prepare financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws).

In preparing these financial statements, the Directors are required to:

  • select suitable accounting policies and then apply them consistently;
  • make judgments and accounting estimates that are reasonable and prudent;
  • state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
  • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In so far as each of the Directors is aware:

·            there is no relevant audit information of which the Company's auditor is unaware; and
·            the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

To the best of my knowledge:

  • the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
  • the management report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

The financial statements are published at www.octopusinvestments.com, a website maintained by Octopus. The maintenance and integrity of the website is, so far as it relates to the Company, the responsibility of Octopus. The work carried out by the auditor does not involve considerations of the maintenance and integrity of the website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the accounts since they were originally presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the accounts differ from legislation in other jurisdictions.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

On Behalf of the Board

Ian Pearson
Chairman
29 March 2012


Independent Auditor's Report to the Members of Octopus VCT 2 plc

Independent auditor's report to the members of Octopus VCT 2Plc
We have audited the financial statements of Octopus VCT 2 Plc for the period ended 31 December 2011 which comprise the income statement, balance sheet, cashflow statement, accounting policies and related notes. We have also audited the information set out in the Directors' Remuneration Report that is described as having been audited. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

Respective responsibilities of Directors and auditors
As explained more fully in the Statement of directors' responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an Auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Scope of the audit of the financial statements

A description of the scope of an audit of financial statements is provided on the APB's web-site at www.frc.org.uk/apb/scope/UKP.

 

Opinion on financial statements
In our opinion the financial statements:
·            give a true and fair view of the state of the Company's affairs as at 31 December 2011 and of its loss for the period then ended;
·            have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
·            have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006
In our opinion:

  • the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006;
  • the information given in the Chairman's statement, Investment Manager's Report and Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
  • the information given in the Corporate Governance statement with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements.

Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

  • adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
  • the financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
  • certain disclosures of director's remuneration specified by law are not made; or
  • we have not received all the information and explanations we require for our audit.

Under the listing rules we are required to review:

  • the information given in the Report of the Directors in relation to going concern; and
  • the part of the Corporate Governance statement relating to the Company's compliance with the nine provisions of the UK Corporate Governance Code specified for our review.

                                                                                                           

Mr Alexander Peal (Senior Statutory Auditor)

For and on behalf of James Cowper LLP
Chartered Accountants and Statutory Auditors
Oxford


Income Statement

Period from 6 January 2011 to 31 December 2011
RevenueCapitalTotal
Notes£'000£'000£'000
Other income 287-87
Other expenses 3(279)-(279)
Loss on ordinary activities before tax(192)-(192)
Taxation on return on ordinary activities 5---
Return on ordinary activities after tax(192)-(192)
Earnings per share - basic and diluted6(1.3)p-(1.3)p
  • The 'Total' column of this statement is the profit or loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies
  • All revenue and capital items in the above statement derive from continuing operations
  • The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds

The Company has no recognised gains or losses other than the results for the period as set out above.

The accompanying notes form an integral part of the financial statements.

Reconciliation of Movements in Shareholders' Funds
Period from
6 January2011
to 31 December 2011
£'000
Shareholders' funds at start of period -
Loss on ordinary activities after tax (192)
Issue of equity (net of expenses) 18,240
Shareholders' funds at end of period 18,048

The accompanying notes form an integral part of the financial statements.


Balance Sheet
As at 31 December 2011
Notes£'000£'000
Fixed asset investments* 811,653
Current assets:
Debtors 953
Cash at bank 6,693
6,746
Creditors: amounts falling due within one year 11(351)
Net current assets 6,395
Net assets18,048
Called up equity share capital 12193
Special Distributable Reserve 1318,047
Revenue reserve 13(192)
Total shareholders' funds18,048
Net asset value per share793.5p

*Held at fair value through profit or loss

The statements were approved by the Directors and authorised for issue on 29 March 2012 and are signed on their behalf by:

Ian Pearson
Chairman
Company No: 07484406

The accompanying notes form an integral part of the financial statements.


Cash Flow Statement
Period from 6 January 2010 to 31 December 2011
£'000
Net cash outflow from operating activities106
Financial investment:
Purchase of fixed asset investments 8(11,795)
Disposal of fixed asset investments 8142
Management of liquid resources:
Purchase of current asset investments 10(3,000)
Sale of current asset investments 103,000
Financing:
Issue of shares 19,350
Cost of shares issue (1,060)
Redemption of shares (50)
Increase in cash resources at bank6,693

The accompanying notes form an integral part of the financial statements.



Reconciliation of Return before Taxation to Cash Flow from Operating Activities
Period from 6 January 2011 to 31 December 2011
£'000
Loss on ordinary activities before tax (192)
Increase in debtors (53)
Increase in creditors 351
Inflow from operating activities106

Reconciliation of Net Cash Flow to Movement in Net Funds
Period from 6 January 2011 to 31 December 2011
£'000
Increase in cash resources at bank 6,693
Net funds at 31 December 20116,693

Net Funds at 31 December comprised:

Period from 6 January 2011 to 31 December 2011
£'000
Cash at bank 6,693
Net Funds at 31 December 20116,693

The accompanying notes form an integral part of the financial statements.


Notes to the Financial Statements

1.         Principal accounting policies
           
Basis of accounting
The financial statements have been prepared under the historical cost convention, except for the measurement at fair value of certain financial instruments, and in accordance with UK Generally Accepted Accounting Practice (UK GAAP), and the Statement of Recommended Practice (SORP) 'Financial Statements of Investment Trust Companies' (revised 2009). A summary of the principal accounting policies is set out below.

The Company's business activities and the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and Investment Manager's Review on pages X to X. Further details on the management of financial risk may be found in note 14 to the Financial Statements.

The Board receives regular reports from the Investment Manager and the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The assets of the company consist of cash, which are readily realisable (37% of net assets) and accordingly, the company has adequate financial resources to continue in operational existence for the foreseeable future.  Thus, as no material uncertainties leading to significant doubt about going concern have been identified, it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

The Company presents its income statement in a three column format to give shareholders additional detail of the performance of the Company, split between items of a revenue or capital nature.

The preparation of the financial statements requires management to make judgements and estimates that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Estimates and assumptions mainly relate to the fair valuation of the fixed asset investments, particularly unquoted investments. Estimates are based on historical experience and other assumptions that are considered reasonable under the circumstances. The estimates and the assumptions are under continuous review with particular attention paid to the carrying value of the investments.

Capital valuation policies are those that are most important to the depiction of the Company's financial position and that require the application of subjective and complex judgements, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. The critical accounting policies that are declared will not necessarily result in material changes to the financial statements in any given period but rather contain a potential for material change. The main accounting and valuation policies used by the Company are disclosed below.  Whilst not all of the significant accounting policies require subjective or complex judgements; the Company considers that the following accounting policies should be considered critical.

The Company has designated all fixed asset investments as being held at fair value through profit or loss; therefore all gains and losses arising from investments held are attributable to financial assets held at fair value through profit or loss.  Accordingly, all interest income, fee income, expenses and impairment losses are attributable to assets designated as being at fair value through profit or loss. 

Current asset investments comprising money market funds and deposits are held at fair value through profit or loss. Cash and short term deposits are held at amortised cost.

Investments are regularly reviewed to ensure that the fair values are appropriately stated.  Quoted investments are valued in accordance with the bid-price on the relevant date, unquoted investments are valued in accordance with current International Private Equity and Venture Capital (IPEVC) valuation guidelines, although this does rely on subjective estimates such as appropriate sector earnings multiples, forecast results of investee companies, asset values of subsidiary companies and liquidity or marketability of the investments held.

Although the Company believes that the assumptions concerning the business environment and estimate of future cash flows are appropriate, changes in estimates and assumptions could require changes in the stated values. This could lead to additional changes in fair value in the future.

Investments
Purchases and sales of investments are recognised in the financial statements at the date of the transaction (trade date).

These investments will be managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy and information about them has to be provided internally on that basis to the Board. Accordingly, as permitted by FRS 26, the investments will be designated as fair value through profit or loss (FVTPL) on the basis that they qualify as a group of assets managed, and whose performance is evaluated, on a fair value basis in accordance with the documented investment strategy. The Company's investments are measured at subsequent reporting dates at fair value, with the holding gains and losses recorded in the income statement each year. In accordance with the investment strategy, the investments are held with a view to long-term capital growth and it is therefore possible that individual holdings may increase in value to a point where they represent a significantly higher proportion of total assets than the original cost.

In the case of investments quoted on a recognised stock exchange, fair value is established by reference to the closing bid price on the relevant date or the last traded price, depending upon convention of the exchange on which the investment is quoted. This is consistent with the IPEVC valuation guidelines.

In the case of unquoted investments, fair value is established by using measures of value such as the price of recent transactions, earnings multiple and net assets. This is consistent with IPEVC valuation guidelines.

Gains or losses arising from the changes in fair value of investments at the period end are recognised as part of the capital return within the income statement and allocated to the capital reserve - investment holding gains/(losses). 

In the preparation of the valuations of assets the Directors are required to make judgements and estimates that are reasonable and incorporate their knowledge of the performance of the investee companies.

Current asset investments
Gains and losses arising from changes in fair value of current asset investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - investment gains/(losses) on disposal. 

The current asset investments are all invested with the Company's cash manager and are readily convertible into cash at the choice of the Company.  The current asset investments are held for trading, are actively managed and the performance is evaluated on a fair value basis in accordance with a documented investment strategy.  Information about them has to be provided internally on that basis to the Board.

Other income
Investment income includes interest earned on bank balances and money market funds and includes income tax withheld at source. 

Fixed returns on debt and money market funds are recognised on a time apportionment basis so as to reflect the effective yield; provided there is no reasonable doubt that payment will be received in due course.

Expenses
All expenses are accounted for on an accruals basis.  Expenses are charged wholly to revenue with the exception of the investment management fee, which, if payable, is to be charged 25% to the revenue account and 75% to the capital reserve to reflect, in the Directors' opinion, the expected long-term split of returns in the form of income and capital gains respectively from the investment portfolio.

The transaction costs incurred when purchasing or selling assets are written off to the income statement in the period that they occur.

Revenue and capital
The revenue column of the income statement includes all income and revenue expenses of the Company.  The capital column includes gains and losses on disposal of investments and on holding investments.  Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the income statement.

Taxation
Corporation tax payable is applied to profits chargeable to corporation tax, if any, at the current rate. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue return on the 'marginal' basis as recommended in the SORP.
                  
Deferred tax is recognised on an undiscounted basis in respect of all timing differences that have originated but not reversed at the balance sheet date or where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less tax. This is with the exception that deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Cash and liquid resources
Cash, for the purposes of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand.  Liquid resources are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market.  Liquid resources comprise term deposits of less than one year (other than cash), government securities, investment grade bonds and investments in money market managed funds.

Loans and receivables
The Company's loans and receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method.

Financing strategy and capital structure
We define capital as shareholders' funds and our financial strategy in the medium term is to manage a level of cash that balances the risks of the business with optimising the return on equity.  The Company currently has no borrowings nor does it anticipate that it will drawdown any borrowing facilities in the future to fund the acquisition of investments.

The company does not have any externally imposed capital requirements.

The value of the managed capital is indicated in note 12. The Board considers the distributable reserves and the total return for the year when recommending a dividend. In addition, the Board is authorised to make market purchases up to a maximum of 5% of the issued Ordinary share capital of the Company in accordance with Special Resolution 9 in order to maintain sufficient liquidity in the Company.

Capital management is monitored and controlled using the internal control procedures set out on page X of this report. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.

Financial instruments
The Company's principal financial assets are its investments and the policies in relation to those assets are set out above. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited direct to equity.

Dividends
Dividends payable are recognised as distributions in the financial statements when the Company's liability to make payment has been established.  This liability is established for interim dividends when they are paid, and for final dividends when they are approved by the shareholders. For the avoidance of doubt, no dividend has been proposed for the period ended 31 December 2011.

2.         Other income

Period ended
31 December 2011
£'000
Interest receivable on bank balances 38
Interest receivable on investments 49
87

3.         Other expenses

Period ended
31 December 2011
£'000
Directors' remuneration 40
Fees payable to the Company's auditor for the audit of the financial statements 8
Fees payable to the Company's auditor for other services - tax compliance 2
Accounting and administration services 41
UK Listing Fees 47
Trail commission 74
Other expenses 67
279

Total annual running costs are capped at 1.2% of net assets (excluding irrecoverable VAT, rolled up management fees and IFA trail commission).  For the period to 31 December 2011 the running costs, as defined in the prospectus, were 1.1% of net assets.

4.         Directors' remuneration

Period ended
31 December 2011
£'000
Directors' emoluments
Ian Pearson (Chairman)16
Richard Hodgson 12
Chris Hulatt (paid to Octopus Investments Limited) to 11 November 2011 10
Martijn Kleibergen (paid to Octopus Investments Limited) from 12 November 2011 2
40

None of the Directors received any other remuneration or benefit from the Company during the period.  The Company has no employees other than non-executive Directors.  The average number of non-executive Directors in the period was three.

5.         Tax on ordinary activities
The corporation tax charge for the period was £nil.

The current rate of tax is the small companies' rate of corporation tax at 20.25%
                                                                                                                                                           

Current tax reconciliation: 31 December 2011
£'000
Loss on ordinary activities before tax (192)
Current tax at 20.25% (39)
Unrecognised tax losses 39
Total current tax charge -

Approved VCTs are exempt from tax on capital gains within the Company.  Since the Directors intend that the Company will continue to conduct its affairs so as to achieve approval as a VCT, no current deferred tax has been provided in respect of any capital gains or losses arising on the revaluation or disposal of investments.

6.         Earnings per Share
The total, revenue and capital earnings per share is based on 14,677,386 Ordinary shares, being the weighted average number of Ordinary shares in issue during the period.

There are no potentially dilutive capital instruments in issue and, therefore no diluted return per share figures are relevant. The basic and diluted earnings per share are therefore identical.

7.        Net asset value per share
The calculation of net asset value per share as at 31 December 2011 is based on net assets of £18,048,000 and 19,300,111 Ordinary shares in issue at that date.

8.         Fixed asset investments
The Company has adopted the amendment to FRS 29 regarding financial instruments that are measured in the balance sheet at fair value; this requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

Level 1: quoted prices in active markets for identical assets and liabilities. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held is the current bid price. These instruments are included in level 1 and comprise AIM-listed investments classified as held at fair value through profit or loss. The Company held no such investment in the current period.

Level 2: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable data where it is available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. The Company held no such investment in the current period.

Level 3: the fair value of financial instruments that are not traded in an active market (for example investments in unquoted companies) is determined by using valuation techniques such as earnings multiples. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.

There have been no transfers between these classifications in the period. The change in fair value for the current period is recognised through the income statement.

All items held at fair value through profit or loss were designated as such upon initial recognition. Movements in investments at fair value through profit or loss during the period to 31 December 2011 are summarised below and in note 10.

Level 3:
Unquoted investments
Total investments
31 December 201131 December 2011
£'000£'000
Purchases at cost 11,795 11,795
Disposals (142) (142)
Profit/(loss) on realisation of investments - current period - -
Revaluation in period - -
Valuation at 31 December 201111,65311,653
Book cost at 31 December 2011: 11,653 11.653
Revaluation to 31 December 2011: - -
Valuation at 31 December 201111,65311,653

Further details in respect of the methods and assumptions applied in determining the fair value of the investments are disclosed in the Investment Manager's Review and within the principal accounting policies in note 1.

At 31 December 2011, there were no commitments in respect of investments not yet completed.

9.         Debtors

31 December 2011
£'000
Prepayments 4
Accrued income 49
53

10.        Current Asset Investments
Current asset investments at 31 December 2011 comprised fixed term deposits.

£'000£'000
Purchase at cost:
- Fixed term deposits 3,000
3,000
Disposal proceeds
- Fixed term deposits (3,000)
(3,000)
Valuation as at 31 December 2011-

All current asset investments held at the period end sit with the level 1 hierarchy for the purposes of FRS 29.

Level 1 money market funds: Level 1 valuations are based on quoted prices (unadjusted) in active markets for identical assets or liabilities. The valuation of money market funds at 31 December 2011 was £nil.

11.        Creditors: amounts falling due within one year

31 December 2011
£'000
Accruals 121
Other creditors 230
351

12.        Share capital

31 December 2011
£'000
Allotted and fully paid up:
19,300,111 ordinary shares of 1.0p 193

The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective as set on page X.  The Company is not subject to any externally imposed capital requirements.

We define capital as shareholders' funds and our financial strategy in the medium term is to manage a level of cash that balances the risks of the business with optimising the return on equity.  The Company currently has no borrowings nor does it anticipate that it will drawdown any borrowing facilities in the future to fund the acquisition of investments.

The Board considers the distributable reserves and the total return for the year when recommending a dividend. In addition, the Board is authorised to make market purchases up to a maximum of 5% of the issued Ordinary share capital of the Company in accordance with Special Resolution 8 in order to maintain sufficient liquidity in the Company.

Capital management is monitored and controlled using the internal control procedures set out on page X of this report. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.

The Company issued 19,300,109 Ordinary shares during the period at a price of 100p per share and 2 Ordinary shares at a price of 1p per share on incorporation. The share premium arising on these shares totalled £18,047,022 after the company incurred total share issue costs of £1,060,086. The Company did not repurchase any Ordinary shares for cancellation during the period.

On 17 January 2011, the company made an allotment of 50,000 redeemable preference shares of £1 each. These shares were allotted at par and fully paid up. These were subsequently redeemed on 28 March 2011 out of the proceeds of a further share issue.

13.        Reserves

Share Capital
£'000
Share premium
£'000
Special Distributable Reserves
£'000
Revenue reserve
£'000
As at date of incorporation ----
Issue of equity 193 19,107 - -
Cost of shares issue - (1,060) - -
Loss on ordinary activities after tax - - - (192)
Cancellation of share premium account - (18,047) 18,047 -
Balance as at 31 December 2011193-18,047*(192)*

*Reserves considered when calculating potential distribution by way of a dividend.

When the Company re-values its investments during the period, any gains or losses arising are credited/ charged to the income statement.  Changes in fair value of investments held are then transferred to the capital reserve - holding gains/(losses).  When an investment is sold, any balance held on the 'capital reserve - holding gains/(losses)' is transferred to the 'capital reserve - gains/(losses) on disposal' as a movement in reserves.

Following the company's petition which was heard on 2 November 2011, the Companies Court ordered that the
special resolution passed by the shareholders on 17 January 2011 to effect the cancellation of the share premium
account be confirmed. The Order relating to the same was duly registered by the Registrar of Companies on 2 November 2011. The purpose of the cancellation was to create a reserve which will be capable of being used by
the Company for the purpose of making repurchases of its own shares in the market with a view to narrowing
the discount at which the Company's Ordinary Shares trade to net asset value.

14.        Financial instruments and risk management
The Company's financial instruments comprise equity and fixed interest investments and cash balances and liquid resources including debtors and creditors. The Company intends to hold financial assets in accordance with its investment policy of investing mainly in a portfolio of VCT qualifying unquoted securities whilst holding a proportion of its assets in cash or near-cash investments in order to provide a reserve of liquidity.

Classification of financial instruments

The company held the following categories of financial instruments, all of which are included in the balance sheet at fair value, at 31 December 2011.

31 December 2011
£000
Assets at fair value through profit or loss
Fixed asset investments 11,653
Total11,653
Loans and receivables
Cash at bank 6,693
Other debtors 4
Accrued income 49
Total6,746
Liabilities at amortised cost
Accruals and other creditors (351)
Total18,048

Fixed asset investments (see note 8) are carried at fair value. Unquoted investments are carried at fair value as determined by the directors in accordance with current venture capital industry guidelines. The fair value of all other financial assets and liabilities is represented by their carrying value in the balance sheet.  The Directors believe that the fair value of the assets held at the period end is equal to their book value.

In carrying on its investment activities, the Company is exposed to various types of risk associated with the financial instruments and markets in which it invests. The most significant types of financial risk facing the Company are price risk, interest rate risk, credit risk and liquidity risk. The Company's approach to managing these risks is set out below together with a description of the nature and amount of the financial instruments held at the balance sheet date.

Market risk
The Company's strategy for managing investment risk is determined with regard to the Company's investment objective, as outlined on page X. The management of market risk is part of the investment management process and is a central feature of venture capital investment. The Company's portfolio is managed with regard to the possible effects of adverse price movements and, with the objective of maximising overall returns to shareholders. Investments in unquoted companies, by their nature, usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by diversifying the portfolio across business sectors and asset classes. The overall disposition of the Company's assets is regularly monitored by the Board.

Details of the Company's investment portfolio at the balance sheet date are set out on pages X and X.  An analysis of investments is given in note 8.

64.6% by value of the Company's net assets comprises investments in unquoted companies held at fair value.  A 10% overall increase in the valuation of the unquoted investments at 31 December 2011 would have increased net assets and the total return for the period by £1,165,000. An equivalent change in the opposite direction would have reduced net assets and the total return for the period by the same amount. 

Interest rate risk
Some of the Company's financial assets are interest-bearing, some of which are at variable rates.  As a result, the Company is exposed to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates.

Floating rate
The Company's floating rate investments comprise cash held on interest-bearing deposit accounts and, where appropriate, within interest bearing money market funds.  The benchmark rate which determines the rate of interest receivable on such investments is the bank base rate, which was 0.5% at 31 December 2011. The amounts held in floating rate investments at the balance sheet date were as follows:

31 December 2011
£'000
Cash on deposit 6,693

A 1% increase in the base rate would increase income receivable from these investments and the total return for the period by £66,930.

Credit risk
There were no significant concentrations of credit risk to counterparties at 31 December 2011.  By cost, no individual investment exceeded 15.7% of the Company's net assets at 31 December 2011.

Credit risk is the risk that counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Investment Manager and the Board carry out a regular review of counterparty risk. The carrying values of financial assets represent the maximum credit risk exposure at the balance sheet date. 

At 31 December 2011 the Company's financial assets exposed to credit risk comprised the following:

31 December 2011
£000
Cash on deposit 6,693

Credit risk relating to listed money market securities is mitigated by investing in a portfolio of investment instruments of high credit quality, comprising securities issued by the UK Government and major UK companies and institutions. Credit risk relating to loans to and preference shares in unquoted companies is considered to be part of market risk. 

Those assets of the Company which are traded on recognised stock exchanges are held on the Company's behalf by third party custodians (The Co-operative bank in the case of fixed term deposits and Capita Financial in the case of quoted equity securities).  Bankruptcy or insolvency of a custodian could cause the Company's rights with respect to securities held by the custodian to be delayed or limited.

Credit risk arising on the sale of investments is considered to be small due to the short settlement and the contracted agreements in place with the settlement lawyers.

The Company's interest-bearing deposit and current accounts are maintained with HSBC Bank plc and The Co-operative bank.

Liquidity risk
The Company's fixed term deposits are considered to be readily realisable as they are of high credit quality as outlined above. 

The Company's liquidity risk is managed on a continuing basis by the Investment Manager in accordance with policies and procedures laid down by the Board. 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 31 December 2011 these investments were valued at £6,693,000.

15.        Post balance sheet events
The following events occurred between the balance sheet date and the signing of these financial statements:

  • On 20 January 2012 an equity investment of £400,000 was made into Atlantic Screen International, a media company.
  • On 3 February 2012 a debt investment of £1,000,000 was made into Borro Limited, an asset secured loan provider.

16.        Contingencies, guarantees and financial commitments
Provided that an intermediary continues to act for a shareholder and the shareholder continues to be the beneficial owner of the shares, intermediaries will be paid an annual trail commission of 0.5% of the initial net asset value. Trail commission of £74,000 was accrued during the period and there was £nil outstanding at the period end.

There were no contingencies, guarantees or financial commitments as at 31 December 2011.

17.        Related party transactions
Chris Hulatt, a non-executive director of Octopus VCT 2 plc during the period ended 31 December 2011, who resigned on 11 November 2011, is a Director of Octopus Investments Limited.   Following Chris Hulatt's resignation, Martijn Kleibergen, an employee of Octopus Investments Limited, was appointed as a non-executive director of Octopus VCT 2 plc on 11 November 2011.  

Octopus provides investment management and administration & accounting services to the Company under a management agreement which runs for a period of five years with effect from 6 January 2011 and may be terminated at any time thereafter by not less than twelve months' notice given by either party.  No compensation is payable in the event of terminating the agreement by either party, if the required notice period is given.  The fee payable, should insufficient notice be given, will be equal to the fee that would have been paid should continuous service be provided, or the required notice period was given.  The administration and accounting fee is payable quarterly in arrears for a fee of 0.3% of the NAV calculated at annual intervals as at 31 December. During the year £41,000 was paid to Octopus Investments and there was £nil outstanding at the balance sheet date, for the accounting and administrative services.

Octopus is entitled to an annual management fee of 2.0% of net assets. In order to ensure the alignment of interests between Octopus and Shareholders, the annual management fee will be rolled up (without interest) and will only be paid to Octopus once shareholders have received dividends during the life of the Fund and distributions totaling or exceeding 105p per Share. Octopus will only be entitled to receive an annual management fee for the period from the date on which shares are first allotted under the Offer until the date on which the general meeting is held (expected to be in August 2016) at which shareholders will be asked to approve a notion regarding the future of the Company.

In addition, Octopus also provides secretarial services for an additional fee of £15,000 per annum.  During the year £12,000 was due to Octopus Investments Limited and there was £nil outstanding at the balance sheet date. 

Octopus will also be entitled to receive a performance related incentive fee of 20% on returns to shareholders
in excess of 105p per share. The calculation of this fee is based wholly on the payment of cash proceeds to
shareholders and will, therefore, not be paid until after the general meeting in 2016.


Directors and Advisers

Board of Directors
Ian Pearson (Chairman)
Richard Hodgson
Martijn Kleibergen

Company Number
Registered in England No. 07484406

Secretary and Registered office
Tracey Spevack ACIS
20 Old Bailey
London
EC4M 7AN

Investment and Administration Manager
Octopus Investments Limited
20 Old Bailey
London
EC4M 7AN
Tel: 0800 316 2349
www.octopusinvestments.com

Corporate Broker
Matrix Corporate Capital LLP
1 Vine Street
London
W1J 0AH
Tel: 0203 206 7176
Independent Auditor and Taxation Adviser
James Cowper LLP
3 Wesley Gate
Queen's Road
Reading
Berkshire
RG1 4AP

VCT Status Adviser
PricewaterhouseCoopers LLP
1 Embankment Place
London
WC2N 6RH

Bankers
HSBC Bank plc
31 Holborn
London
EC1N 2HR

Registrars
Capita Registrars Limited
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Tel: 0871 664 0300
(Calls cost 10p per minute plus network extras. Lines are open Monday - Friday 8.30am - 5.30pm)
www.capitaregistrars.com 

Notice of Annual General Meeting

Notice is hereby given that the Annual General Meeting of Octopus VCT 2 plc will be held at 20 Old Bailey, London, EC4M 7AN on Wednesday, 27 June 2012 at 3.00 p.m. for the for the purposes of considering and if thought fit, passing the following resolutions of which Resolutions 1 to 7 will be proposed as Ordinary Resolutions and Resolutions 8, 9 and 10 will be proposed as Special Resolutions:

ORDINARY BUSINESS

  1. To receive and adopt the financial statements for the period to 31 December 2011 and the Directors' and Auditor's Reports thereon.
     
  2. To approve the Directors' Remuneration Report.
     
  3. To elect Ian Pearson as a Director.
     
  4. To elect Richard Hodgson as a Director.
     
  5. To elect Martijn Kleibergen as a Director.
     
  6. To re-appoint James Cowper LLP as auditor of the Company and to authorise the Directors to agree their remuneration.

SPECIAL BUSINESS
To consider and if thought fit, pass Resolution 7 as an Ordinary Resolution and Resolutions 8, 9 and 10 as Special Resolutions:

7.    AUTHORITY TO ALLOT RELEVANT SECURITIES
THAT the Directors be and are generally and unconditionally authorised in accordance with s551 of the Companies Act 2006 to exercise all the powers of the Company to allot shares in the Company up to a maximum nominal amount of £19,300 (representing approximately 10% of the ordinary share capital in issue at today's date) such authority to expire at the later of the conclusion of the Company's next Annual General Meeting following the passing of this Resolution and the expiry of 15 months from the passing of the relevant Resolution (unless previously revoked, varied or extended by the Company in a general meeting but so that such authority allows the Company to make offers or agreements before the expiry thereof, which would or might require relevant securities to be allotted after the expiry of such authority).

8.    EMPOWERMENT TO MAKE ALLOTMENTS OF EQUITY SECURITIES
TO empower the Directors pursuant to s571 of the Companies Act 2006 to allot or make offers or agreements to allot equity securities (as defined in s560(1) of the said Act) for cash pursuant to the authority referred to in Resolution 7 as if s561 (1) of the said Act did not apply to any such allotments and so that:

  1. reference to allotment in this Resolution shall be construed in accordance with s560(2) of the said Act; and
    1. the power conferred by this Resolution shall enable the Company to make any offer or agreement before the expiry of the said power which would or might require equity securities to be allotted after the expiry of the said power and the Directors may allot equity securities in pursuance of such offer or agreement notwithstanding the expiry of such power.

And this power, unless previously varied, revoked or renewed, shall come to an end at the conclusion of the next Annual General Meeting of the Company following the passing of this Resolution or, if earlier, on the expiry of 15 months from the passing of this Resolution.

9.   AUTHORITY TO MAKE MARKET PURCHASES
THAT the Company be and is hereby generally and unconditionally authorised to make market purchases (within the meaning of s693(4) of the Companies Act 2006 of ordinary shares of 10p each in the Company ("Ordinary shares") provided that:

  1. the maximum number of ordinary shares so authorised to be purchased shall not exceed 5% of the present issued ordinary share capital of the Company;

(b)     the minimum price which may be paid for an ordinary share shall be 10p;

  1. the maximum price, exclusive of expenses, which may be paid for an ordinary share is an amount equal to 105 per cent of the average of the middle market quotations for an ordinary share taken from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which the ordinary share is contracted to be purchased;

(d)     the authority conferred comes to an end at the conclusion of the next Annual General Meeting of the
            Company or upon the expiry of 15 months from the passing of this Resolution, whichever is the later; and
(e)     the Company may enter into a contract to purchase its ordinary shares under this authority prior to the expiry of this authority which would or might be completed wholly or partly after the expiry of this authority.

10.   TO AMEND THE ARTICLES OF ASSOCIATION
       THAT Article 165.1 of the Company's Articles of Association be amended by deleting the word "tenth" and substituting the word "fifth" therefor.                                                                                                                   

By Order of the Board                                                                                                                                             20 Old Bailey
                                                                                                                                                                                                  London
                                                                                                                                                                                            EC4M 7AN

Tracey Spevack (ACIS)                                                                                                                        
Company Secretary                                                                                                                              
29 March 2012


 

Notice of Annual General Meeting (continued)

NOTES:

  1. A member entitled to attend and vote at the Annual General Meeting may appoint one or more proxies to attend and vote on his or her behalf. A proxy need not be a member.
  2. A form of proxy is enclosed which, to be effective, must be completed and delivered to the registrars of the Company, Capita Registrars, PXS, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU so as to be received by no later than 48 hours before the time the Annual General Meeting is scheduled to begin. The completion and return of the form of proxy will not affect the right of a member to attend and vote at the Annual General Meeting.
  3. As an alternative to returning a hard-copy proxy form by post, you can appoint a proxy by sending it by fax to Octopus Investments Limited on 020 7657 3338. For the proxy appointment to be valid, your appointment must be received by Octopus Investments Limited in such time as it can be transmitted to the registrars of the Company so as to be received no later than 48 hours before the time appointed for the meeting or any adjourned meeting, or in the case of a poll taken subsequent to the date of the meeting or adjourned meeting, so as to be received no later than 24 hours before the time appointed for taking the poll. Capita Registrars will not be liable for any proxy forms rendered illegible by means of fax transmission.
  4. Any person receiving a copy of the Notice as a person nominated by a member to enjoy information rights under section 146 of the Companies Act 2006 (a 'Nominated Person') should note that the provisions in Notes (a) and (b) above concerning the appointment of a proxy or proxies to attend the meeting in place of a member, do not apply to a Nominated Person as only Shareholders have the right to appoint a proxy. However, a Nominated Person may have a right under an agreement between the Nominated Person and the member by whom he or she was nominated to be appointed, or to have someone else appointed, as a proxy for the meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may have a right under such an agreement to give instructions to the member as to the exercise of voting rights at the meeting.
  5. Section 319A of the Companies Act 2006 requires the Directors to answer any question raised at the AGM which relates to the business of the meeting although no answer need be given (a) if to do so would interfere unduly with the preparation of the meeting or involve disclosure of confidential information; (b) if the answer has already been given on the Company's website; or (c) if it is undesirable in the best interests of the Company or the good order of the meeting.
  6. Members satisfying the thresholds in section 527 of the Companies Act 2006 can require the Company to publish a statement on its website setting out any matter relating to (a) the audit of the Company's accounts (including the auditor's report and the conduct of the audit) that are to be laid before the Annual General Meeting; or (b) any circumstances connected with an auditor of the Company ceasing to hold office since the last Annual General Meeting, that the members propose to raise at the meeting. The Company cannot require the members requesting the publication to pay its expenses. Any statement required to be placed on the website must also be sent to the Company's auditors no later than the time it makes its statement available on the website. The business which may be dealt with at the meeting includes any statement that the Company has been required to publish on its website.
  7. Under sections 338 and 338A Companies Act 2006, members meeting the threshold requirements in those sections have the right to require the Company:
    1. To give, to members of the Company entitled to receive notice of the meeting, notice of a resolution which may properly be moved and is intended to be moved at the meeting, and/or
    2. To include the business to be dealt with at the meeting any matters (other than a proposed resolution) which may be properly included in the business.

A resolution may properly be moved or a matter may properly be included in the business unless:

  1. (in the case of a resolution only) it would, if passed, be ineffective (whether by reason of inconsistency with any enactment or the company's constitution or otherwise);
  2. It is defamatory of any person; or
  3. It is frivolous or vexatious.

Such a request may be in hard copy form or in electronic form, and must identify the resolution of which notice is to be given or the matter to be included in the business, must be authorised by the person or persons making it, must be received by the Company not later than six weeks before the meeting, and (in the case of a matter to be included in the business only) must be accompanied by a statement setting out the grounds for the request.

  1. A copy of the Notice of Annual General Meeting and the information required by Section 311A Companies Act 2006 is included on the Company's website, www.octopusinvestments.com under Products/Venture Capital Trusts.
  2. Copies of the Directors' Letters of Appointment, the Register of Directors' Interests in the Ordinary shares of the Company kept in accordance with the Listing Rules and a copy of the Memorandum and Articles of Association of the Company will be available for inspection at the registered office of the Company during usual business hours on any weekday from the date of this notice until the Annual General Meeting, and at the place of that meeting for at least 15 minutes prior to the commencement of the meeting until its conclusion.   



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information contained therein.

Source: Octopus VCT 2 PLC via Thomson Reuters ONE

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