Annual Report • Dec 31, 2016
Annual Report
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for the year ended 31 December 2016
Transforming small businesses bscfunds.com
British Smaller Companies VCT2 plc was formed in 2000 and invests in a combination of mature businesses operating in traditional industries and emerging businesses offering opportunities in the application and development of innovation.
A diverse existing portfolio of 41 active investments reduces the exposure to particular markets and individual companies. To date British Smaller Companies VCT2 plc has in total realised 39 investments generating total proceeds of £25.7 million. The current investment portfolio has an audited valuation of £39.3 million as at 31 December 2016.
| ABOUT US | |
|---|---|
| Investment Adviser | British Smaller Companies VCT2 plc ("the Company") is advised by YFM Private Equity Limited ("the Investment Adviser") which is a wholly owned subsidiary of YFM Equity Partners LLP and is authorised and regulated by the Financial Conduct Authority. |
| Investment Policy | The investment strategy of the Company is to create a portfolio with a mix of companies operating in traditional industries and those that offer opportunities in the development and application of innovation.The Company invests in UK businesses across a broad range of sectors including Software, IT & Telecommunications, Business Services, Manufacturing & Industrial Services, Retail & Brands and Healthcare and these investments will primarily be in unquoted companies. Investments will be made with regard to the VCT regulations so as to maintain the Company's venture capital trust status. Wherever possible the Company invests in a combination of equities, preference shares and loan stock to enhance the security of the portfolio. Further details of the Company's investment policy can be found in the Strategic Report on page 10. |
| Dividend Policy | Your Board remains committed to achieving a consistent dividend but this depends upon the level of investment income and realisations that the Company is able to make or achieve in any one period and cannot be guaranteed.The tax reliefs that are available for an investment in a VCT are of particular benefit for qualifying shareholders as there is no income tax payable on the dividend received, or need to declare them in a tax return. |
| Share Buy-Backs | Share buy-backs enable shareholders to obtain some liquidity in an otherwise illiquid market when there is a need to dispose of shares. This policy is kept under active review to ensure that any decisions taken are in the interests of shareholders as a whole. The current rate of discount at which ordinary shares will be bought back is targeted to be no more than five per cent of the latest reported net asset value. |
| Scheme ("DRIS") | Dividend Re-Investment The Company operates a DRIS which gives shareholders the opportunity to re-invest any cash dividends. Currently dividends are re-invested at a 5 per cent discount to the latest reported net asset value as adjusted for the relevant dividend in question if this has not already been recognised. Any dividends that are re-invested by qualifying shareholders are eligible for income tax relief at 30 per cent of the amount invested subject to an annual investment limit of £200,000. The Finance Act 2014 confirmed that shares acquired at any time under dividend re-investment schemes will not impact tax relief on sales of or subscriptions for VCT shares, unless in the latter case it results in a breach of the £200,000 investment limit. |
| Financial Highlights | 4 |
|---|---|
| Financial Calendar | 5 |
| Five Year Summary | 5 |
| Chairman's Statement | 7 |
|---|---|
| Objectives and Key Policies | 10 |
| Processes and Operations | 11 |
| Key Performance Indicators | 12 |
| Investment Performance | 15 |
| Investment Review | 16 |
| Investment Portfolio Summary at 31 December 2016 | 19 |
| Disposal History to 31 December 2016 | 20 |
| Summary of Investment Portfolio Movement since 31 December 2015 | 21 |
| Investee Company Information | 22 |
| Risk Factors | 29 |
| Other Matters | 31 |
| Directors | 32 |
|---|---|
| Directors' Report | 33 |
| Corporate Governance | 36 |
| Directors' Remuneration Report | 42 |
| Directors' Responsibilities Statement | 45 |
| Independent Auditor's Report | 46 |
|---|---|
| Financial Statements | |
|---|---|
| Statement of Comprehensive Income | 50 |
| Balance Sheet | 51 |
| Statement of Changes in Equity | 52 |
| Statement of Cash Flows | 54 |
| Notes to the Financial Statements | 55 |
| Annual General Meeting | |
|---|---|
| Notice of the Annual General Meeting | 76 |
| Form of Proxy | 81 |
Company Advisers 83
| Results Announced | 21 March 2017 |
|---|---|
| Ex-dividend Date | 30 March 2017 |
| Record Date | 31 March 2017 |
| DRIS Election Date | 18 April 2017 |
| Annual General Meeting | 10 May 2017 |
| Dividend Paid | 12 May 2017 |
| Year ended 31 December 2016 |
Year ended 31 December 2015 |
Year ended 31 December 2014 |
Year ended 31 December 2013 |
Year ended 31 December 2012 |
|
|---|---|---|---|---|---|
| Income £'000 | 1,937 | 1,953 | 1,272 | 689 | 594 |
| Profit before and after taxation £'000 | 1,412 | 4,132 | 1,157 | 2,131 | 852 |
| Profit per ordinary share | 1.51p | 4.96p | 2.00p | 4.73p | 2.39p |
| Dividends per ordinary share paid in the year | 4.5p | 4.5p | 4.5p | 4.5p | 4.5p |
| Cumulative dividends paid per ordinary share | 52.5p | 48.0p | 43.5p | 39.0p | 34.5p |
| Net assets attributable to ordinary shares £'000 | 56,109 | 54,850 | 39,333 | 30,458 | 27,152 |
| Net asset value per ordinary share | 59.7p | 62.9p | 62.9p | 65.6p | 65.5p |
| Total Return per ordinary share | 112.2p | 110.9p | 106.4p | 104.6p | 100.0p |
| Increase in Total Return per ordinary share | 1.3p | 4.5p | 1.8p | 4.6p | 1.5p |
| Cumulative 5 year increase in Total Return per ordinary share |
13.7p |
The Company is pleased to present its Strategic Report for the year ended 31 December 2016. The purpose of this report is to inform shareholders and help them to assess how the Directors have performed in their duty to promote the success of the Company. This Report has been prepared by the Directors in accordance with section 414 of the Companies Act 2006.
6 BRITISH SMALLER COMPANIES VCT2 PLC
Total shareholder return for the year was 1.3 pence per ordinary share, which was 2.1 per cent of the net asset value at 31 December 2015 and your Company's portfolio generated a return of 1.5 pence per ordinary share, which was 2.8 per cent over its opening value.
The impact of the new VCT rules on the investment rate over the past two years has been quite marked. Investments in new unquoted trading companies totalled £4.3 million in 2016 and £3.0 million in 2015, compared to £12.3 million in 2014, the last year under the previous rules.
In light of this it is pleasing that there was an increase in the investment rate following HMRC's issuance of its revised guidance on the new VCT rules in May 2016, with 75 per cent of the year's investments being completed in the final quarter of the year. There remains a good pipeline of potential investments which your Board is looking to convert to add to the portfolio during 2017.
In the year to 31 December 2016 your Company's total return increased by 1.3 pence per ordinary share to 112.2 pence per ordinary share, driven mainly by the underlying value growth in the investment portfolio. This equates to an increase of 2.1 per cent on the opening net asset value at 31 December 2015.
During the year your Company has paid total dividends of 4.5 pence per ordinary share, bringing the total cumulative dividends paid since inception to 52.5 pence per ordinary share. The net asset value at 31 December 2016 is 59.7 pence per share as summarised in the table below:
The charts on page 12 of these financial statements show in greater detail the movement in total return, net asset value and dividends paid over time.
The investments held at 31 December 2015, amounting to £36.65 million, have over the year increased by £1.04 million to £37.69 million at 31 December 2016. This return comprises a gain over the opening value from the realisation of investments and deferred proceeds of £0.34 million, and a gain on the revaluation of the portfolio of £0.70 million. There were strong performances from ACC Aviation, Business Collaborator Limited, GTK (Holdco) Limited and Mangar Health Limited, which in part were offset by the poorer performances of Ness (Holdings) Limited, Cambrian Lodges Holdings Limited, Seven Technologies Holdings Limited and Intamac Systems Limited.
The Board remains committed to achieving the objective of a consistent dividend stream over time. Dividends paid in the year comprise a final dividend of 2.5 pence per ordinary share in respect of the year ended 31 December 2015, and an interim dividend of 2.0 pence per ordinary share in respect of the financial year just ended, totalling 4.5 pence per ordinary share. This brings the cumulative dividends paid to 52.5 pence per ordinary share.
Following the modifications to the VCT rules there has been a change in the nature of new investments with a requirement to invest in earlier stage businesses which generally require a higher proportion of equity investment
| Pence per ordinary share |
£000 | |
|---|---|---|
| NAV at 31 December 2015 Net underlying increase in portfolio Net income after expenses Issue/buy-back of new shares |
62.9 1.1 0.4 (0.2) |
54,850 1,043 369 4,038 |
| Dividends paid | 1.3 (4.5) |
5,450 (4,191) |
| (3.2) | 1,259 | |
| NAV at 31 December 2016 Cumulative dividends paid |
59.7 52.5 |
56,109 |
| Total Return: at 31 December 2016 at 31 December 2015 |
112.2 110.9 |
The Annual General Meeting of the Company will be held at 12:00 noon on 10 May 2017 at 33 St James Square, London, SW1Y 4JS. Full details of the agenda for this meeting are included in the Notice of the Annual General Meeting on page 76.
than in the past. As the existing portfolio matures it is anticipated that the resultant future dividend stream and net asset value could as a consequence become more volatile than in the past.
With this in mind and to maintain a sustainable level of future dividends the Board is proposing a final dividend of 1.5 pence per share for the year ended 31 December 2016. This final dividend is subject to approval by the shareholders at the forthcoming Annual General Meeting and if approved will then be paid on 12 May 2017 to shareholders on the register at 31 March 2017. The ex-dividend date is 30 March 2017.
Your Company operates a DRIS, which gives shareholders the opportunity to reinvest any cash dividends and is open to all shareholders, including those who invested under the recent offers. For the financial year ending 31 December 2016 dividends totalling £0.8 million were invested in your Company by way of the DRIS.
During the first half of the financial year your Company raised net proceeds of £3.5 million through a "top-up" offer. Your Company launched a further top-up fundraising on 3 January 2017 and it is pleasing that the offer closed in less than a week. The Company allotted 6,787,231 ordinary shares on 10 February 2017
raising net proceeds of £4.1 million and following this allotment there were 100,761,545 ordinary shares in issue.
As part of the Board's continuing dialogue with shareholders, the 21st shareholder workshop was held in conjunction with British Smaller Companies VCT plc at the British Library on 17 May 2016, with over 200 attendees. There were presentations from the managing directors of two of our newest investments, Ness (Holdings) Limited and KeTech Enterprises Limited, David Hall and David Bell from the Investment Adviser, as well as Wyndham North of HM Treasury.
Your Company's electronic communications policy, whereby documents such as the annual report are disseminated via the website www.bscfunds.com rather than by post, has saved on printing costs as well as being more environmentally friendly. I am pleased to report that this policy continues to be well received, with 84 per cent of shareholders receiving communications in this way.
The website www.bscfunds.com is refreshed on a regular basis, with the emphasis on providing a comprehensive level of information in a user friendly format.
The next Investor Workshop will take place on 3 May 2017 and is being held at The Grand Connaught Rooms, 61-65 Great Queen Street, Covent Garden, London.
I am pleased to inform you that your Board has appointed Panmure Gordon (UK) Limited as corporate broker with effect from 1 January 2017. The Panmure Gordon team has a wealth of experience as broker to numerous VCTs and we look forward to working with them in the future. The Board would like to thank Nplus1 Singer for the work they have done as the Company's broker over many years.
The Board has carried out a competitive tender process for the provision of audit services and, as a result, Grant Thornton LLP resigned as the Company's auditor. The Board has appointed BDO LLP to fill the casual vacancy and a resolution to appoint BDO LLP as auditor is included in the notice of the Company's Annual General Meeting to be held on 10 May 2017.
New investments will continue to be made in earlier stage businesses which have less ability to finance debt instruments as they invest for growth. The majority of new investments are therefore likely to comprise a significantly higher proportion of equity. This is likely to have the impact of reducing the portfolio's income stream with returns more reliant on equity realisations.
Investment will continue to focus on high quality businesses with good growth potential and attractive realisation prospects.
Richard Last Chairman
21 March 2017
The Company's objective is to provide investors with an attractive long-term tax free dividend yield whilst maintaining the Company's status as a venture capital trust.
The investment strategy of the Company is to create a portfolio with a mix of companies operating in traditional industries and those that offer opportunities in the development and application of innovation.
The legislation governing VCTs requires that at least 70 per cent by value of its holdings must be in Qualifying Holdings. The maximum value of any single investment is 15 per cent at the time of investment.
The Company invests in UK businesses across a broad range of sectors including, but not limited to, Software, IT & Telecommunications, Business Services, Manufacturing & Industrial Services, Retail & Brands and Healthcare, in VCT qualifying and non-qualifying securities.
The majority of investments in the current portfolio are in a combination of equities, preference shares and loan stock. The investments made under the new VCT rules consist largely of equity with a preferred return on realisation.
The Company funds the investment programmes out of its own resources and has no borrowing facilities for this purpose.
British Smaller Companies VCT2 plc and British Smaller Companies VCT plc ("the VCTs") have in aggregate first choice of all investment opportunities meeting the VCT qualifying criteria that require up to £4.5 million of equity. Amounts above £4.5 million will be allocated one third to YFM's institutional co-investment funds and two thirds to the VCTs. Where there are opportunities for the VCTs to co-invest with each other the basis for allocation is 40 per cent to the Company and 60 per cent to British Smaller Companies VCT plc. The Board of the Company has discretion as to whether or not to take up, or in the circumstances where British Smaller Companies VCT plc does not take its allocation, increase its allocation in such co-investment opportunities.
The replacement capital element of any investment will be provided by other funds managed/advised by YFM.
Pending investment in VCT-qualifying securities, surplus cash is primarily held in interest bearing instant access, and short-notice bank accounts. Subsequent to the Finance (No. 2) Act 2015 investments can no longer be made in non-qualifying quoted investments traded on an unregulated exchange. This change therefore now excludes AIM investments in this category.
The Company's policy on the remuneration of its directors, all of whom being nonexecutive directors, can be found on page 42.
Details of the Company's policies on the payment of dividends, the DRIS and the buy-back of shares are given on page 2. In addition to these the Company's antibribery and environmental and social responsibilities policies can be found on page 31.
The Investment Adviser is responsible for the sourcing and screening of initial enquiries, carrying out suitable due diligence investigations and making submissions to the Board regarding potential investments. Once approved, further due diligence is carried out as necessary and HMRC clearance is obtained for approval as a Qualifying Holding.
The Board approves all investment and divestment decisions save in that new investments up to £250,000 in companies whose securities are traded on a regulated stock exchange and where the decision is required urgently, in which case the Chairman of the Board of Directors, if appropriate, may act in consultation with the Investment Adviser.
The Board regularly monitors the performance of the portfolio and the investment requirements set by the relevant VCT legislation. Reports are received from the Investment Adviser regarding the trading and financial position of each investee company and senior members of the Investment Advisory Team regularly attend the Company's Board meetings. Monitoring reports are also received at each Board meeting on compliance with VCT regulations so that the Board can monitor that the Venture Capital Trust status of the Company is maintained and take corrective action if appropriate.
The Board reviews the terms of YFM Private Equity Limited's appointment as Investment Adviser on a regular basis.
YFM Private Equity Limited has performed investment advisory, administrative and secretarial services for the Company since its inception on 28 November 2000. The principal terms of the agreement under which these services are performed are set out in note 3 to the financial statements.
The Investment Adviser will receive an amount (satisfied by the issue of shares) equivalent to 20 per cent of the amount by which the cumulative dividends per ordinary share paid as at the last business day in December in any year, plus the average of the middle market price per ordinary share on the five dealing days prior to that day, exceeds 120 pence per ordinary share, multiplied by the number of ordinary shares issued and the ordinary shares under option (if any) (the "Hurdle"). Under the terms of the Subscription Rights Agreement, once the Hurdle has been exceeded it is reset at that value going forward, which becomes the new Hurdle. Any subsequent exercise of these rights will only occur once the new Hurdle has been exceeded. The subscription rights are exercisable in the ratio 95:5 between the Investment Adviser and Chord Capital Limited. Further details are given in note 3 to the financial statements.
In the opinion of the directors the continuing appointment of YFM Private Equity Limited as Investment Adviser is in the interests of the shareholders as a whole in view of its experience in advising venture capital trusts and in making, managing and exiting investments of the kind falling within the Company's investment policies.
The commonly used benchmarks of performance for VCTs are total return, calculated as cumulative dividends paid plus net asset value, and dividends paid.
The evaluation of comparative success of the Company's total return is by way of reference to the share price total return for approximately 60 generalist VCTs as published by the Association of Investment Companies ("the AIC"). This is the Company's stated benchmark index. A comparison and explanation of the calculation of this return is shown in the Directors' Remuneration Report on page 44.
The average dividend paid over the last 5 years was 4.5 pence per ordinary share, equivalent to a 7.5 per cent yield per annum.
The table below shows the cumulative dividends, the total return on each fundraising round per ordinary share and the total return if a shareholder had opted to participate in the Company's DRIS. The cumulative dividend and total return figures in this table exclude the benefits of all tax reliefs, whilst the last column includes the benefit of tax reliefs as noted.
| Tax year | Net asset value as at 31 December 2016 |
Cumulative dividends paid since fundraising1 |
Total return since fundraising/ date of acquisition |
Offer price net of initial tax relief |
Offer price | Overall return including tax relief since fundraising with participation in the DRIS2 |
|---|---|---|---|---|---|---|
| Pence | Pence | Pence | Pence | Pence | Pence | |
| 2000/01 and 2001/02 | 59.7 | 52.5 | 112.2 | 80.0 | 100.0 | 173.2 |
| 2001/02 and 2002/03 | 59.7 | 52.5 | 112.2 | 80.0 | 100.0 | 173.2 |
| December 2005 issue of shares on acquisition of British Smaller Technology Companies 3 |
41.0 | 35.1 | 76.1 | 49.0 | 69.0 | 154.2 |
| 2009/10 and 2010/11 | 59.7 | 30.5 | 90.2 | 54.1 | 77.3 | 132.5 |
| 2010/11 and 2011/12 | 59.7 | 26.5 | 86.2 | 49.2 | 70.3 | 122.9 |
| 2012 | 59.7 | 22.5 | 82.2 | 49.4 | 70.5 | 115.6 |
| 2012/13 and 2013/14 | 59.7 | 18.0 | 77.7 | 47.6 | 68.0 | 107.2 |
| 2013/14 and 2014/15 | 59.7 | 13.5 | 73.2 | 47.6 | 68.0 | 99.8 |
| 2014/15 and 2015/16 | 59.7 | 9.0 | 68.7 | 45.5 | 65.0 | 91.9 |
| 2015/16 | 59.7 | 4.5 | 64.2 | 44.7 | 63.8 | 85.0 |
Notes
This assumes that at the time of investment the tax relief given on the investment was not also invested in shares of the Company
NAV plus tax relief on the initial subscription plus additional tax relief and NAV on DRIS shares purchased. Assuming that all dividends since inception were invested under terms of current DRIS
Assuming initial offer price and initial tax relief from original subscription in British Smaller Technology Companies VCT plc
The Board monitors expenses using the Ongoing Charges figure, as calculated in line with the AIC recommended methodology. This figure shows shareholders the annual percentage
reduction in net asset value as a result of recurring operational expenses which, whilst based on historical information, provides an indication of the likely level of costs that will be incurred in managing the fund in the future.
The total costs incurred by the Company in the year (excluding any performance related fees, trail commission payable to financial intermediaries and VAT) is capped at 2.9 per cent of the total net asset value as at the relevant year end. The treatment of costs in excess of the cap is described in note 3 on page 60. There was no breach of the expenses cap in the current or prior year.
| Expenses | Year to 31 December 2016 (%) |
Year to 31 December 2015 (%) |
|---|---|---|
| Ongoing Charges figure | 2.51 | 2.28 |
The main business risk facing the Company is the retention of VCT qualifying status. The Board receives regular reports on compliance with the VCT legislative tests from its Investment Adviser. In addition the Board receives formal reports from its VCT Status Adviser twice a year.
The Board can confirm that during the period all of the VCT legislative tests have been met.
Under Chapter 3 Part 6 of the Income Tax Act 2007, in addition to the requirement for a VCT's ordinary share capital to be listed in the Official List on a European regulated market throughout the period, there are a further five specific tests that VCTs must meet following the initial three year provisional period.
| Income Test | The Company's income in the period must be derived wholly or mainly (70 per cent) from shares or securities. |
|---|---|
| Retained Income Test | The Company must not retain more than 15 per cent of its income from shares and securities. |
| Qualifying Holdings Test | At least 70 per cent by value of the Company's investments must be represented throughout the period by shares or securities comprised in Qualifying Holdings of investee companies. |
| Eligible Shares Test | At least 30 per cent of the Company's Qualifying Holdings must be represented throughout the period by holdings of non-preferential ordinary shares. |
| For monies raised from 6 April 2011 onwards the eligible shares test above increases to at least 70 per cent of Qualifying Holdings that must be represented by eligible shares. |
|
| In addition, monies are not permitted to be used to finance buy-outs or otherwise to acquire existing businesses or shares. |
|
| There is also an annual limit for each investee company which provides that they may not raise more than £5.0 million of state aid investment (including from VCTs) in the 12 months ending on the date of each investment. |
|
| Maximum Single Investment Test |
The value of any one investment has, at any time in the period, not represented more than 15 per cent of the Company's total investment value. This is calculated at the time of investment and further additions and therefore cannot be breached passively. |
The Board can confirm that during the period all of the VCT legislative tests set out in the table have been met.
Further restrictions placed on VCT's are:
The Finance Act 2014 introduced a restriction with respect to the use of monies in respect of VCT's. In particular, no dividends can be paid out of cancelled share premium arising from shares allotted on or after 6 April 2014 until at least three financial years have elapsed. In the case of the Company this is 1 January 2018.
From the share premium cancellation of £13.55 million on 10 October 2014, £1.34 million remains undistributable until 1 January 2018.
The Finance (No. 2) Act 2015 imposes further conditions in respect of investments, including those regarded as non-qualifying investments, including:
This illustrates the broad range of the investment portfolio with over one third of the portfolio valuation being held for more than 3 years, whilst 85 per cent is held at cost or above.
50 per cent of the portfolio's value is held in income generating financial instruments.
Also included below is a profile of the investment portfolio by industry sector.
The portfolio delivered a strong performance in the year, with a return of £1.04 million on the opening value and income of £1.94 million.
The portfolio as a whole delivered an increased value of £1.04 million in the year, as shown in Table A below. A value gain of £0.28 million has come from the unquoted portfolio with a very strong performance from ACC Aviation, offset by the impact of difficult trading conditions at Ness (Holdings) Limited and Cambrian Park & Leisure Homes Limited.
The £0.28 million unrealised valuation gain from the unquoted portfolio is as a result of improved profitability by a number of businesses. There were particularly strong performances from ACC Aviation, Business Collaborator Limited, GTK (Holdco) Limited and Mangar Health Limited which reflected in valuation gains. Although these were in part offset by four investments (Cambrian Park & Leisure Homes Limited, Ness (Holdings) Limited, Seven Technologies Holdings Limited and Intamac Systems Limited) where trading conditions were more difficult.
Overall the quoted portfolio produced a value gain of £0.42 million. The main contributor was AB Dynamics plc, with a value gain of £0.24 million.
| TABLE A | ||
|---|---|---|
| Investment portfolio | £million | % |
| Quoted value gain | 0.42 | 40 |
| Unquoted value gain | 0.28 | 27 |
| Gain on disposal over opening value | 0.25 | 24 |
| 0.95 | 91 | |
| Gain from deferred proceeds | 0.09 | 9 |
| Total Value Movement | 1.04 | 100 |
At 31 December 2016 the investment portfolio was valued at £39.32 million, representing 70.0 per cent of net assets (66.8 per cent at 31 December 2015). Cash at 31 December 2016 was £15.86 million representing 28.3 per cent of net assets (31.8 per cent at 31 December 2015).
During the year ended 31 December 2016 the Company completed 6 investments totalling £4.51 million. This comprised 4 new investments of £4.28 million and 2 follow-on investments of £0.23 million. The analysis of these investments is shown in Table B:
| TABLE B | ||||
|---|---|---|---|---|
| Date | Company | Investments made £million | ||
| New | Follow-on | Total | ||
| Mar-16 | Immunobiology Limited | - | 0.15 | 0.15 |
| Jun-16 | Sipsynergy (via Hosted Network Services Limited) | 0.90 | - | 0.90 |
| Aug-16 | Intamac Systems Limited | - | 0.08 | 0.08 |
| Oct-16 | Biz2Mobile Limited | 1.00 | - | 1.00 |
| Oct-16 | Traveltek Group Holdings Limited | 0.98 | - | 0.98 |
| Nov-16 | Matillion Limited | 1.40 | - | 1.40 |
| Invested in the year | 4.28 | 0.23 | 4.51 | |
| Capitalised interest and dividends | 0.08 | |||
| Total additions in the year | 4.59 |
During the year to 31 December 2016 the Company received proceeds from disposals, repayments of loans and deferred consideration of £3.06 million. Overall this resulted in a value gain on disposal of investments of £0.34 million above the 31 December 2015 valuations as set out in Table C.
The most significant proceeds relate to the sale of Callstream Group Limited, for proceeds of £0.75 million.
A further analysis of all investments sold in the year can be found in note 7 to the financial statements on page 65.
As at 31 December 2016 the portfolio had a value of £39.32 million which comprised £37.25 million in unquoted investments (95 per cent) and £2.07 million in quoted investments (5 per cent). An analysis of the movements in the year is shown on page 63.
The portfolio remains well diversified, with 26 investments having a value greater than £0.5 million, compared to 24 a year earlier.
The charts on page 15 of these financial statements show the composition of the portfolio as at 31 December 2016 by industry sector, age of investment, investment instrument and the valuation compared to cost. This demonstrates representation across a wide range of industry sectors.
Unquoted investments are valued in accordance with the valuation policy set out in note 1 on pages 55 and 56, which takes account of current industry guidelines for the valuation of venture capital portfolios. Adjustments to fair value are made where an investment is significantly under-performing. As at 31 December 2016 the value of investments falling into each valuation category is shown in Table D below:
There is a good pipeline of potential investments coming through which should see a higher investment rate in 2017. The combination of an improving portfolio performance and a number of attractive exit opportunities should continue to deliver improving total returns.
| TABLE C | |||
|---|---|---|---|
| Disposal of Investments | Net proceeds | Opening value | Gain on |
| from sale of | 31 December | opening | |
| investments | 2015 | value | |
| £million | £million | £million | |
| Sale of portfolio investments | 2.88 | 2.63 | 0.25 |
| Deferred proceeds received | 0.18 | 0.09 | 0.09 |
| Total investment disposals | 3.06 | 2.72 | 0.34 |
| Total | 39.32 | 100% |
|---|---|---|
| Quoted investments at bid price | 2.07 | 5% |
| Price of recent investment, reviewed for change in fair value | 2.10 | 5% |
| Cost, reviewed for change in fair value | 13.11 | 34% |
| Earnings multiple | 22.04 | 56% |
| Valuation Policy | Valuation £million |
% of portfolio by value |
| TABLE D |
David Hall YFM Private Equity Limited
21 March 2017
| No | Page Name of Company | Date of initial investment |
Location | Industry Sector | Current cost |
Valuation at 31 December 2016 |
Proceeds to date |
Realised & unrealised value |
|---|---|---|---|---|---|---|---|---|
| £000 | £000 | £000 | to date* £000 |
|||||
| Unquoted Portfolio | ||||||||
| 22 | ACC Aviation (via Newacc (2014) Limited) |
Nov-14 | Reigate | Business services | 1,379 | 3,480 | - | 3,480 |
| 23 | Intelligent Office (via IO Outsourcing Limited) |
May-14 | Alloa | Business services | 1,956 | 2,951 | - | 2,951 |
| 23 | Mangar Health Limited | Jan-14 | Powys | Healthcare | 1,640 | 2,486 | - | 2,486 |
| 24 | DisplayPlan Holdings Limited | Jan-12 | Baldock | Business services | 70 | 2,015 | 820 | 2,835 |
| 24 | KeTech Enterprises Limited | Nov-15 | Nottingham | Software IT & Telecomms | 2,000 | 2,000 | - | 2,000 |
| 25 | Business Collaborator Limited | Nov-14 | Reading | Software IT & Telecomms | 1,340 | 1,743 | - | 1,743 |
| 25 | Springboard Research Holdings Ltd Oct-14 | Bedfordshire | Business services | 1,706 | 1,706 | - | 1,706 | |
| 26 | Gill Marine Holdings Limited | Sep-13 | Nottingham | Retail & brands | 1,870 | 1,690 | - | 1,690 |
| 26 | GTK (Holdco) Limited | Oct-13 | Basingstoke | Manufacturing & Ind Services | 741 | 1,675 | 609 | 2,284 |
| 27 | Immunobiology Limited | Jun-03 | Cambridge | Healthcare | 2,382 | 1,486 | - | 1,486 |
| 27 | Leengate Holdings Limited | Dec-13 | Derbyshire | Manufacturing & Ind Services | 934 | 1,408 | - | 1,408 |
| 28 | Matillion Limited | Nov-16 | Knutsford | Software IT & Telecomms | 1,400 | 1,400 | - | 1,400 |
| Biz2Mobile Limited | Oct-16 | Abingdon | Software IT & Telecomms | 1,000 | 1,000 | - | 1,000 | |
| Traveltek Group Holdings Limited | Oct-16 | East Kilbride | Software IT & Telecomms | 980 | 980 | - | 980 | |
| Macro Art Holdings Limited | Jun-14 | Cambridgeshire | Business services | 627 | 959 | 212 | 1,171 | |
| The Heritage Window Company Holdco Limited |
Sep-14 | Sevenoaks | Manufacturing & Ind Services | 1,468 | 954 | - | 954 | |
| Sipsynergy (via Hosted Network Services Limited) |
Jun-16 | Ware | Software IT & Telecomms | 900 | 900 | - | 900 | |
| Wakefield Acoustics (via Malvar Engineering Limited) |
Dec-14 | Heckmondwike | Manufacturing & Ind Services | 720 | 883 | 41 | 924 | |
| Deep-Secure Limited | Dec-09 | Malvern | Software IT & Telecomms | 500 | 625 | - | 625 | |
| Harvey Jones Holdings Limited | May-07 | London | Retail & brands | 442 | 622 | 751 | 1,373 | |
| Seven Technologies Holdings Limited |
Apr-12 | Belfast | Software IT & Telecomms | 1,238 | 619 | 762 | 1,381 | |
| PowerOasis Limited | Nov-11 | Swindon | Software IT & Telecomms | 594 | 594 | - | 594 | |
| Selima Holding Company Ltd | Mar-12 | Sheffield | Software IT & Telecomms | 300 | 586 | - | 586 | |
| TeraView Limited | Dec-11 | Cambridge | Software IT & Telecomms | 375 | 555 | - | 555 | |
| Bagel Nash Group Limited | Jul-11 | Leeds | Retail & brands / Manufacturing & Ind Services |
630 | 548 | 200 | 748 | |
| Other investments £0.5 million and below | 3,661 | 3,382 | 477 | 3,859 | ||||
| Total unquoted investments | 30,853 | 37,247 | 3,872 | 41,119 | ||||
| Quoted Portfolio | ||||||||
| AB Dynamics plc | May-13 | Bradford-on-Avon | Manufacturing & Ind Services | 123 | 636 | 503 | 1,139 | |
| Other investments £0.5 million and below | 1,296 | 1,436 | 534 | 1,970 | ||||
| Total quoted investments | 1,419 | 2,072 | 1,037 | 3,109 | ||||
| 32,272 | 39,319 | 4,909 | 44,228 | |||||
| Full disposals to date | 18,810 | - | 25,670 | 25,670 | ||||
| Total Investment portfolio | 51,082 | 39,319 | 30,579 | 69,898 |
* represents proceeds received to date plus the unrealised valuation at 31 December 2016.
| Name of Company | Date of initial investment |
Date of disposal |
Industry sector | Cost £000 |
Proceeds to date £000 |
Capital multiple x |
Gains return (losses) on disposal £000 |
|---|---|---|---|---|---|---|---|
| Cozart plc | Jul-04 | Oct-07 | Healthcare | 1,566 | 2,978 | 1.90 | 1,412 |
| Sarian Systems Limited | Dec-05 | Apr-08 | Telecoms | 928 | 2,605 | 2.81 | 1,677 |
| DxS Limited | Apr-04 | Sep-09 | Healthcare | 163 | 2,515 | 15.43 | 2,352 |
| Vibration Technology Limited | Mar-02 | Sep-06 | Industrial | 1,061 | 2,328 | 2.19 | 1,267 |
| Primal Pictures Limited | Dec-05 | Sep-12 | Medical instruments | 961 | 2,258 | 2.35 | 1,297 |
| Sirigen Group Limited | Jun-10 | Sep-12 | Medical technology | 517 | 1,962 | 3.79 | 1,445 |
| Amino Technologies plc | Sep-01 | Nov-04 | Electronics | 415 | 1,872 | 4.51 | 1,457 |
| Waterfall Services Limited | Feb-07 | Dec-14 | Business services | 483 | 1,422 | 2.94 | 939 |
| Digital Healthcare Limited | Jun-05 | Aug-13 | Medical instruments | 3,072 | 1,285 | 0.42 | (1,787) |
| Callstream Group Limited | Sep-10 | Mar-16 | Software | 500 | 1,017 | 2.03 | 517 |
| Insider Technologies (Holdings) Limited | Aug-12 | Oct-15 | Software | 780 | 773 | 0.99 | (7) |
| Pressure Technologies plc | Jun-07 | Jul-15 | Industrial | 302 | 657 | 2.18 | 355 |
| The ART Technology Group Inc. | Apr-03 | Oct-09 | Software | 275 | 638 | 2.32 | 363 |
| Brady plc | Dec-10 | Apr-16 | Software | 603 | 484 | 0.80 | (119) |
| Tamesis Limited | Jul-01 | Sep-07 | Software | 150 | 317 | 2.11 | 167 |
| Optos plc | Dec-05 | Jan-14 | Healthcare | 152 | 316 | 2.08 | 164 |
| Tekton Group Limited | Dec-05 | Dec-06 | Software | 103 | 296 | 2.87 | 193 |
| Tikit Group plc | May-11 | Jan-13 | Software | 198 | 283 | 1.43 | 85 |
| Oxonica plc | May-02 | Sep-09 | Chemical | 241 | 258 | 1.07 | 17 |
| Group NBT plc | May-11 | Nov-11 | IT support | 197 | 256 | 1.30 | 59 |
| Vianet Group plc | Oct-06 | Sep-14 | Business services | 243 | 176 | 0.72 | (67) |
| Patsystems plc | Sep-07 | Jan-12 | Software | 317 | 164 | 0.52 | (153) |
| Hargreaves Services plc | Aug-12 | Jun-15 | Transport | 325 | 160 | 0.49 | (165) |
| Cambridge Cognition Holdings plc | May-02 | Jun-15 | Healthcare | 240 | 157 | 0.65 | (83) |
| May Gurney Integrated Services plc | May-11 | Mar-13 | Construction | 211 | 141 | 0.67 | (70) |
| Arakis Limited | Mar-04 | Aug-05 | Healthcare | 14 | 108 | 7.71 | 94 |
| 14,017 | 25,426 | 11,409 | |||||
| Proceeds £0.1m and below | 4,793 | 244 | (4,549) | ||||
| Total | 18,810 | 25,670 | 6,860 |
n Investment acquired solely from the merger with British Smaller Technology Companies VCT plc in December 2005 n Investment made prior to 31 December 2003
| Name of Company | Investment Valuation at 31 December |
Disposal Proceeds |
Additions including capitalised interest and |
Valuation gains including profits / |
Investment Valuation at 31 December |
|---|---|---|---|---|---|
| 2015 | dividends | (losses) on disposal |
2016 | ||
| £000 | £000 | £000 | £000 | £000 | |
| Unquoted portfolio | |||||
| ACC Aviation (via Newacc (2014) Limited) | 1,801 | - | - | 1,679 | 3,480 |
| Intelligent Office (via IO Outsourcing Limited) | 3,350 | - | - | (399) | 2,951 |
| Mangar Health Limited | 2,201 | - | - | 285 | 2,486 |
| DisplayPlan Holdings Limited | 1,753 | - | - | 262 | 2,015 |
| KeTech Enterprises Limited | 2,000 | - | - | - | 2,000 |
| Business Collaborator Limited | 1,384 | - | - | 359 | 1,743 |
| Springboard Research Holdings Ltd | 1,646 | - | 60 | - | 1,706 |
| Gill Marine Holdings Limited | 1,778 | - | - | (88) | 1,690 |
| GTK (Holdco) Limited | 1,560 | (272) | - | 387 | 1,675 |
| Immunobiology Limited | 1,311 | - | 150 | 25 | 1,486 |
| Leengate Holdings Limited | 1,143 | - | - | 265 | 1,408 |
| Matillion Limited | - | - | 1,400 | - | 1,400 |
| Biz2Mobile Limited | - | - | 1,000 | - | 1,000 |
| Traveltek Group Holdings Limited | - | - | 980 | - | 980 |
| Macro Art Holdings Limited | 984 | (104) | - | 79 | 959 |
| The Heritage Window Company Holdco Limited | 1,101 | - | - | (147) | 954 |
| Sipsynergy (via Hosted Network Services Limited) | - | - | 900 | - | 900 |
| Wakefield Acoustics (via Malvar Engineering Limited) | 761 | (41) | - | 163 | 883 |
| Deep-Secure Limited | 357 | - | - | 268 | 625 |
| Harvey Jones Holdings Limited | 1,099 | (469) | - | (8) | 622 |
| Seven Technologies Holdings Limited | 1,208 | - | - | (589) | 619 |
| PowerOasis Limited | 594 | - | - | - | 594 |
| Selima Holding Company Ltd | 463 | - | - | 123 | 586 |
| TeraView Limited | 488 | - | - | 67 | 555 |
| Bagel Nash Group Limited | 583 | (27) | 2 | (10) | 548 |
| Callstream Group Limited | 679 | (752) | - | 73 | - |
| Other investments £0.5 million and below | 5,724 | (61) | 96 | (2,377) | 3,382 |
| Total unquoted investments | 33,968 | (1,726) | 4,588 | 417 | 37,247 |
| Quoted portfolio | |||||
| AB Dynamics plc | 809 | (503) | - | 330 | 636 |
| Other investments £0.5 million and below | 1,875 | (645) | - | 206 | 1,436 |
| Total quoted investments | 2,684 | (1,148) | - | 536 | 2,072 |
| Total Movement | 36,652 | (2,874) | 4,588 | 953 | 39,319 |
* one company is represented in two industry sectors.
This section describes the business of the active companies in the portfolio with a value greater than £1.0 million in order of valuation at 31 December 2016. The Company's voting rights in an investee company are the same as the percentage of equity held for each investment detailed below.
| Cost: | £1,379,000 | ||
|---|---|---|---|
| Valuation: | £3,480,000 | ||
| Date of initial Investment: | November 2014 | ||
| Equity held: | 13.22% | ||
| Valuation basis: | Earnings multiple | ||
| Interest: | £37,011 | ||
| (2015 £36,910) | |||
| Dividends: | £76,268 | ||
| (2015 £76,060) | |||
| Year ended 31 December | 2015 2014 |
||
| £million £million |
|||
| Sales | 40.56 52.11 |
||
| EBITA | 1.38 1.12 |
Adjusted to reflect underlying performance as a full year's trading results have not be filed.
www.flyacc.com
With annual sales of over £40m, ACC Aviation has built an excellent reputation for providing services to clients across the world in all aspects of aircraft leasing, charter and flight
management. The airline industry continues to change at a fast pace as passenger demand grows and air travel expands across the globe. The business has successfully transitioned from a simple broker to providing a range of solutions.
| Cost: | £1,956,000 | ||
|---|---|---|---|
| Valuation: | £2,951,000 | ||
| Date of initial Investment: | May 2014 | ||
| Equity held: | 17.77% | ||
| Valuation basis: | Earnings multiple | ||
| Interest: | £39,423 | ||
| (2015 £39,316) | |||
| Dividends: | £84,594 | ||
| (2015 £84,594) | |||
| Year ended 30 September | 2016 | 2015 | |
| £million | £million | ||
| Sales | 29.12 | 22.70 | |
| EBITA | 1.67 | 1.52 | |
| Profit (loss) before tax | 0.06 | (0.15) | |
| Retained losses | (0.87) | (0.62) | |
| Net assets | 7.16 | 7.29 | |
Intelligent Office is a leading provider of process outsourcing solutions to UK legal practices. This typically includes improvements to services offered in addition to operational efficiency. The Managed Services division works within firms' own premises to help them transform and manage key administrative functions and secretarial services
| Cost: | £1,640,000 | ||
|---|---|---|---|
| Valuation: | £2,486,000 | ||
| Date of initial Investment: | January 2014 | ||
| Equity held: | 17.10% | ||
| Valuation basis: | Earnings multiple | ||
| Interest: | £131,559 | ||
| (2015 £131,200) | |||
| Dividends: | £14,194 | ||
| (2015 £6,773) | |||
| Year ended 31 July | 2016 | 2015 | |
| £million | £million | ||
| Sales | 7.74 | 7.39 | |
| EBITA | 1.54 | 1.41 | |
| Profit before tax | 0.06 | 0.08 | |
| Retained losses | (0.33) | (0.25) | |
| Net assets | 0.66 | 0.74 | |
www.mangar.co.uk
Mangar is a world leader in inflatable lifting and handling and
bathing equipment for the elderly, disabled and emergency services markets. It distributes its products to care providers, local authorities, ambulance services and care homes. Products help facilitate extended independence for
elderly users, as well as providing significant cost savings for care providers.
| Cost: | £70,000 | ||
|---|---|---|---|
| Valuation: | £2,015,000 | ||
| Date of initial Investment: | January 2012 | ||
| Equity held: | 12.25% | ||
| Valuation basis: | Earnings multiple | ||
| Interest: | £nil | ||
| (2015 £19,132) | |||
| Dividends: | £73,500 | ||
| (2015 £16,306) | |||
| Year ended 31 December | 2015 | 2014 | |
| £million | £million | ||
| Sales | 16.40 | 14.64 | |
| EBITA | 1.53 | 1.01 | |
| Profit before tax | 1.10 | 0.64 | |
| Retained profits | 5.02 | 4.20 | |
| Net assets | 5.42 | 4.60 |
www.displayplan.com
DisplayPlan provides retail display solutions from design to finished product delivery to branded product manufacturers and UK retailers. The business is typically engaged very early to help define brand values and concepts. Strong profits have been achieved since investment with an emphasis on continuing to broaden its customer base.
| Cost: | £2,000,000 | |
|---|---|---|
| Valuation: | £2,000,000 | |
| Date of initial Investment: | November 2015 | |
| Equity held: | 12.83% | |
| Valuation basis: | Cost, reviewed for | |
| change in fair value | ||
| Interest: | £86,131 | |
| (2015 £12,319) | ||
| Dividends: | £48,432 | |
| (2015 £7,543) | ||
| Year ended 31 August | 2016 | 2015 |
| £million | £million | |
| Sales | 7.13 | 6.87 |
| EBITA | 0.44 | 1.41 |
Adjusted to reflect a full year's trading as the investment was made during the year.
www.ketech.com
KeTech is a specialist manufacturer and distributor to the rail communications and defence sectors. Its core rail products include on train and on platform solutions and are increasingly being specified on some high profile new projects and upgrades.
| Cost: | £1,340,000 |
|---|---|
| Valuation: | £1,743,000 |
| Date of initial Investment: | November 2014 |
| Equity held: | 19.38% |
| Valuation basis: | Earnings multiple |
| Interest: | £119,311 |
| (2015 £121,400) | |
| Year ended 30 November | 2015 |
| £million | |
| Sales | 2.86 |
| EBITA | 0.21 |
| Loss before tax | (0.26) |
| Retained losses | (0.26) |
| Net assets | 0.21 |
www.groupbc.com
Business Collaborator is an established provider of collaboration software hosted on the cloud to the construction sector and a leader in the nascent Building Information Modelling
("BIM") software market. Revenues are derived from a SaaS software model. Sales growth is driven by the products ability to deliver cost savings to its customer base of construction firms and asset owners, supported by government regulations.
| Cost: | £1,706,000 |
|---|---|
| Valuation: | £1,706,000 |
| Date of initial Investment: | October 2014 |
| Equity held: | 12.95% |
| Valuation basis: | Cost, reviewed for |
| change in fair value | |
| Interest: | £107,353 |
| (2015 £65,617) | |
| Dividends: | £59,298 |
| (2015 £59,136) | |
| Year ended 31 December | 2015 |
| £million | |
| Sales | 4.10 |
| EBITA | 0.01 |
| Loss before tax | (0.93) |
| Retained losses | (0.95) |
| Net assets | 2.08 |
Springboard Research is a leading provider of retail performance monitoring; providing footfall, dwell time and analysis of consumer behaviour. It is the official provider of footfall
data and benchmarks to the British Retail Consortium, Shopping Centre Magazine and Drapers magazine this year. A continually shifting retail environment means that retailers and landlords are seeking new ways of improving their competitive advantage. The company has seen a significant increase in sales to North America.
| Cost: Valuation: Date of initial Investment: Equity held: Valuation basis: Interest: |
£1,870,000 £1,690,000 September 2013 13.81% Earnings multiple £168,761 (2015 £168,300) |
|
|---|---|---|
| Year ended 30 September | 2016 £million |
2015 £million |
| Sales EBITA (Loss) profit before tax Retained (losses) profits Net assets |
12.23 1.45 (0.87) (0.51) 1.06 |
12.34 1.52 0.43 0.39 1.95 |
www.gillmarine.com
Gill Marine is a manufacturer of technical sailing equipment and clothing. Exports account for over 70 per cent of turnover. The strategy is to develop the brand further into adjacent markets and increase its share in existing and new markets, including direct to the customer through its relaunched website.
| Cost: Valuation: Date of initial Investment: Equity held: Valuation basis: Interest: |
£741,000 £1,675,000 October 2013 17.70% Earnings multiple £48,194 (2015 £54,669) |
|
|---|---|---|
| Year ended 31 July | 2016 £million |
2015 £million |
| Sales EBITA Profit before tax Retained profits Net assets |
12.19 1.08 0.62 0.97 1.61 |
10.61 0.78 0.29 0.29 0.93 |
www.gtk.co.uk
GTK is a manufacturer of cable assemblies, connectors, optoelectronics and manufacturing solutions for high technology customers. With a small sourcing team in Taiwan it provides design, procurement and manufacturing services of essential but non-core electronic
manufacturing.
components for customers in sectors such as precision instrumentation, defence/security and contract equipment
| Cost: Valuation: Date of initial Investment: Equity held: Valuation basis: |
£2,382,000 £1,486,000 June 2003 26.70% Price of recent investment, reviewed for change in fair value and supporting third party investment |
||
|---|---|---|---|
| Year ended 31 May | 2016 £million |
2015 £million |
|
| Sales LBITA Loss before tax Retained losses Net assets |
- (1.95) (1.94) (12.04) 1.17 |
- (1.70) (1.69) (10.65) 0.97 |
www.immbio.com
Immunobiology has developed a new platform
| Cost: Valuation: Date of initial Investment: Equity held: Valuation basis: |
£934,000 £1,408,000 December 2013 7.00% Earnings multiple |
|
|---|---|---|
| Interest: | £75,737 | |
| (2015 £78,456) | ||
| Dividends: | £22,477 | |
| (2015 £22,416) | ||
| Year ended 31 December | 2015 | 2014 |
| £million | £million | |
| Sales | 7.83 | 7.50 |
| EBITA | 1.53 | 1.19 |
| Profit before tax | 0.63 | 0.27 |
| Retained profits | 0.48 | 0.11 |
| Net assets | 1.06 | 0.69 |
Leengate Valves is a wholesaler, stockist and distributor, supplying one of the largest ranges of industrial valves in the UK to leading re-sellers in the gas, water and industrial sectors. In addition it supplies engineering actuation and automation packages, offering a next day service and high quality technical advice. Leengate is developing some own-branded products for the agriculture and drinking water markets.
Cost: £1,400,000 Valuation: £1,400,000 Date of initial Investment: November 2016 Equity held: 10.50%
Valuation basis: Cost, reviewed for change in fair value
| Year ended 31 December | 2016 |
|---|---|
| £million | |
| Sales | 1.29 |
| LBITA | (0.78) |
Adjusted to reflect underlying performance as a full year's trading results have not been filed.
www.matillion.com
Matillion is a leading provider of cloud-based integration technologies and an Advanced Technology Partner to Amazon Web Services. Products enable its customers to store securely
and easily access large quantities of their data in the cloud.
28 BRITISH SMALLER COMPANIES VCT2 PLC
The Board carries out a regular and robust review of the risk environment in which the Company operates. The principal risks and uncertainties identified by the Board and techniques used to mitigate these risks are set out in this section.
The Board seeks to mitigate its principal risks by setting policy, regularly reviewing performance and monitoring progress and compliance. In the mitigation and management of these risks, the Board applies rigorously the principles detailed in section C.2: "Risk Management & Internal Control" of The UK Corporate Governance Code issued by the Financial
Reporting Council in September 2014. Details of the Company's internal controls are contained in the Corporate Governance Internal Control section on pages 40 and 41 and further information on exposure to risks including those associated with financial instruments is given in note 17a of the financial statements.
Risk - The Company must comply with Chapter 3 Part 6 of the Income Tax Act 2007 which allows it to be exempted from corporation tax on capital gains. Any breach of these rules may lead to the Company losing its approval as a VCT, qualifying shareholders who have not held their shares for the designated holding period having to repay the income tax relief they obtained and future dividends paid by the Company becoming subject to tax. The Company would also lose its exemption from corporation tax on capital gains.
Risk - Events such as recession and interest rate fluctuations could affect investee companies' performance and valuations.
Mitigation - As well as the response to 'Investment and Strategic' risk below the Company has a clear investment policy (summarised on page 10) and a diversified portfolio operating in a range of sectors. The Investment Adviser actively monitors investee performance which provides quality information for monthly reviews of the portfolio.
Risk - Inappropriate strategy, poor asset allocation or consistently weak stock allocation may lead to under performance and poor returns to shareholders. The quality of enquiries, investments, investee company management teams and monitoring, and the risk of not identifying investee under performance might also lead to under performance and poor returns to shareholders.
Mitigation - The Board reviews strategy annually. At each of the Board meetings the directors review the appropriateness of the Company's objectives and stated strategy in response to changes in the operating environment and peer group activity. The Investment Adviser carries out due diligence on potential investee companies and their management teams and utilises external reports where appropriate to assess the viability of investee businesses before investing. Wherever possible a non-executive director will be appointed to the board of the investee on behalf of the Company.
Risk - The Company is required to comply with the Companies Act 2006, the rules of the UK Listing Authority, the Prospectus Rules made by the Financial Conduct Authority and International Financial Reporting Standards as adopted by the European Union and is subject to the EU's Alternative Investment Fund Manager's Directive. Breach of any of these might lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.
Mitigation - The Investment Adviser and the Company Secretary have procedures in place to ensure recurring Listing Rules requirements are met and actively consult with brokers, solicitors and external compliance advisers as appropriate. The key controls around regulatory compliance are explained on pages 40 and 41.
Risk - Inadequate or failed controls might result in breaches of regulations or loss of shareholder trust.
Mitigation - The Board is comprised of directors with suitable experience and qualifications who report annually to the shareholders on their independence. The Investment Adviser is well-respected with a proven track record and has a formal recruitment process to employ experienced investment staff. Allocation rules relating to co-investments with other funds managed/advised by the Investment Adviser, have been agreed between the Investment Adviser and the Company. Advice is sought from external advisors where required. Both the Company and the Investment Adviser maintain appropriate insurances.
Risk - Failure of the Investment Adviser's and administrator's accounting systems or disruption to its business might lead to an inability to provide accurate reporting and monitoring.
Risk - Inadequate controls might lead to misappropriation of assets. Inappropriate accounting policies might lead to misreporting or breaches of regulations.
Risk - Lack of liquidity in both the venture capital and public markets. Investment in unquoted and AIM quoted companies, by their nature, involve a higher degree of risk than investment in companies trading on the main market. In particular, smaller companies often have limited product lines, markets or financial resources and may be dependent for their management on a smaller number of key individuals. The fact that a share is traded on AIM or on the main market does not guarantee its liquidity. The spread between the buying and selling price of such shares may be wide and thus the price used for valuation may not be achievable. In addition, the market for stock in smaller companies is often less liquid than that for stock in larger companies, bringing with it potential difficulties in acquiring, valuing and disposing of such stock.
Mitigation - The Investment Adviser has a documented business continuity plan, which provides for back-up services in the event of a system breakdown.
Mitigation - The key controls around financial reporting are described on pages 40 and 41.
Mitigation - Overall liquidity risks are monitored on an ongoing basis by the Investment Adviser and on a quarterly basis by the Board. Sufficient liquid resources are maintained to pay expenses as they fall due, in the event that investments prove difficult to realise.
The Board recognises the requirement under Section 414C of the Companies Act 2006 to detail information about environmental matters (including the impact of the Company's business on the environment), employee, human rights, social and community issues, including information about any policies it has in relation to these matters and effectiveness of these policies.
The Company seeks to ensure that its business is conducted in a manner that is responsible to the environment and has introduced an electronic communications policy. This policy has led to a significant increase in the number of such communications, with a commensurate reduction in the distribution of hard copy documents. The management and administration of the Company is undertaken by the Investment Adviser. YFM Private Equity Limited recognises the importance of its environmental responsibilities, monitors its impact on the environment and implements policies to reduce any damage that might be caused by its activities. Initiatives of the Investment Adviser designed to minimise its and the Company's impact on the environment include recycling and reducing energy consumption. Given the size and nature of the Company's activities and the fact that it has no employees, the Board considers there is limited scope to develop and implement social and community policies.
The Company has a zero tolerance approach to bribery. The following is a summary of its policy:
The Company had no employees during the year. The Board is composed of three male non-executive directors. For a review of the policies used when appointing directors to the Board of the Company please refer to the Directors' Remuneration Report.
The Strategic Report on pages 6 to 31 is approved
By Order of the Board
Richard Last Chairman 21 March 2017
Name Background and Experience
Richard Last (appointed 16 November 2000) is a Fellow of the Institute of Chartered Accountants in England and Wales with substantial experience in the IT software and services sectors, and is chairman and non-executive director of Servelec Group plc which is listed on the main market of the London Stock Exchange. He is also a chairman and non-executive director of Gamma Communications plc, Lighthouse Group plc, Tribal Group plc and Arcontech Group plc and non–executive director of Corero Network Security plc, all AIM listed. In addition he is a director of a number of private companies including APD Communications Limited, Learn Solutions Limited, both of which he is chairman, and Waste Management Solutions Limited.
Robert Pettigrew (appointed 16 November 2000) has more than 20 years' experience in the development of emerging businesses and, in particular, the commercial exploitation of new technologies. He co-founded The Generics Group of companies (renamed Science Group plc) in 1986, which is one of the country's leading technology consulting and investment groups and was a key member of the team that took the company public in December 2000. He retired from The Generics Group at the end of 2002 to pursue independent investment activities. He is currently an investordirector and non-executive chairman of Sunamp Limited, Odos Imaging Limited and Pervasid Limited as well as being a non-executive director of Acal Energy Limited.
Peter Waller (appointed 1 November 2010) is an experienced chairman and director with extensive UK and international executive experience in the IT technology, software and services sector. He initially worked with IBM and Hitachi then with Spring plc, at that time one of the UK's largest recruitment and training businesses. He is currently chairman of KeyPoint Technologies (UK) Limited, director and founder of Turnberry Management Company Limited and non-executive director of BCS Learning & Development Limited. For the past decade Peter has worked as a board member with a succession of early stage and early growth private and public companies. His particular skills are in sales and marketing and working with companies to develop successful sales growth strategies.
The City Partnership (UK) Limited 5th Floor 110 George Street Valiant Building Edinburgh 14 South Parade EH2 4LH Leeds
LS1 5QS
Registered No: SC269164 Registered No: 04084003
For the year ended 31 December 2016
The directors present their report and audited financial statements of British Smaller Companies VCT2 plc ("the Company") for the year ended 31 December 2016.
The Company is a public limited company incorporated and domiciled in the United Kingdom. The address of the registered office and principal place of business is 5th Floor, Valiant Building, 14 South Parade, Leeds, LS1 5QS.
The Company has its primary, and sole, listing on the London Stock Exchange.
The principal activity of the Company is the making of long term equity and loan investments, mainly in unquoted businesses.
The Company operates as a venture capital trust ("VCT") and has been approved by HM Revenue & Customs as an authorised venture capital trust under Chapter 3 Part 6 of the Income Tax Act 2007. It is the directors' intention to continue to manage the Company's affairs in such a manner as to comply with Chapter 3 Part 6 of the Income Tax Act 2007.
A detailed and fair review of the Company's business, its development, its financial performance during and at the end of the financial year, and its future prospects is set out in the Strategic Report on pages 7 to 31. The principal risks and uncertainties the Company faces are detailed on pages 29 to 30.
The Statement of Comprehensive Income is set out on page 50. The profit before and after taxation for the year amounted to £1,412,000 (2015: £4,132,000).
During the year the Company paid a total of £4,191,000 (2015:£ 3,887,000) in dividends totalling 4.5 pence per ordinary share. A detailed review can be found in note 5 on page 61.
The directors recommend the payment of a final dividend of 1.5 pence per ordinary share (2015: 2.5 pence). A resolution to this effect will be proposed at the Annual General Meeting to be held on 10 May 2017.
The net asset value per ordinary share at 31 December 2016 was 59.7 pence (2015: 62.9 pence). The transfer to and from reserves is given in the Statement of Changes in Equity on page 52.
The directors have carefully considered the issue of going concern and are satisfied that the Company has sufficient resources to meet its obligations for the foreseeable future. The directors therefore believe that it is appropriate to continue to apply the going concern basis of accounting in preparing the financial statements.
The AIC's Code of Corporate Governance requires the Board to assess the Company's viability over an appropriate period and the directors consider that for the purpose of this exercise it is not practical or meaningful to look forward over a period of more than three years. Taking into account the Company's current position and principal risks, the directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over that period.
In making their assessment the directors have taken into account the principal risks and their mitigation identified in the strategic report on pages 29 to 30, the nature of the Company's business, including its substantial reserves of cash, the potential of its venture capital portfolio to generate future income and capital proceeds, and the ability of the directors to minimise the level of cash outflows should this be necessary.
The statement on corporate governance set out on pages 36 to 41 is included in the Directors' Report by reference.
The Company has, as permitted by the Companies Act 2006, maintained insurance cover on behalf of the directors indemnifying them against certain liabilities which may be incurred by any of them in relation to the Company.
The directors confirm that so far as each director is aware, there is no relevant audit information of which the Company's auditor is unaware; and that each of the directors has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.
As shown in note 11 of the financial statements, the Company has only one class of share, being ordinary shares of 10 pence each.
In accordance with the Company's stated buy-back policy the Company purchased during the year (under the authority granted by the shareholders at a general meeting held on 6 May 2016) 417,743 ordinary shares of 10 pence each in the
market (as disclosed in the table below) for aggregate consideration of £240,000 These shares are held in treasury.
Under the existing authority, which expires on 6 May 2019, the Company has the power to purchase shares up to 14.99 per cent of the Company's ordinary share capital as at 24 March 2016, being 13,932,647 ordinary shares.
During the year to 31 December 2016 a total of 7,129,482 ordinary shares were issued. As a result of the offer for subscription 5,683,709 shares were issued, while 1,445,773 were issued under the Company's DRIS. Further details are given in note 11 on page 70.
The directors have unconditional authority to allot shares in the Company or to grant rights to subscribe for or to convert any security into ordinary shares in the Company until 10 May 2017 up to an aggregate nominal amount of £3,000,000.
This authority will be replaced by a new authority to issue shares up to an aggregate nominal amount of £4,000,000 at the next Annual General Meeting.
In addition, the directors have a separate unconditional authority to allot shares in the Company in connection with the Company's DRIS until 3 December 2019.
| Buy-Back of Shares | |||
|---|---|---|---|
| Date | Number of ordinary shares of 10p bought-back |
% of issued share capital at that date |
Consideration paid per ordinary share (pence) |
| 24 March 2016 | 74,364 | 0.08% | 56.86 |
| 27 April 2016 | 62,946 | 0.07% | 57.63 |
| 15 June 2016 | 102,220 | 0.11% | 58.30 |
| 29 November 2016 | 178,213 | 0.19% | 57.54 |
The following information has been disclosed in accordance with Schedule 7 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended):
The Company has no greenhouse gas emissions to report from the operations of the Company, nor does it have responsibility for any emissions producing sources including those within its underlying investment portfolio under part 7 of schedule 7 to the Large and Mediumsized Companies and Groups (Accounts and Reports) Regulations 2008, as amended.
The directors of the Company at 31 December 2016, their interests and contracts of significance are set out in the Directors' Remuneration Report on pages 42 to 44.
The directors are not aware of any substantial shareholdings representing 3 per cent or more of the Company's issued share capital as at 31 December 2016 and the date of this report.
The Board has carried out a competitive tender process for the provision of audit services and, as a result, Grant Thornton LLP resigned as the Company's auditor. The Board appointed BDO LLP to fill the casual vacancy until the Company's next Annual General Meeting.
BDO LLP has indicated its willingness to continue in office and a resolution concerning its reappointment will be proposed at the Annual General Meeting.
No fees are payable to the auditor in respect of non-audit services.
The employment policies of the Company are set out on page 43.
Subsequent to the year end the Company allotted a total of 6,787,231 ordinary shares on 10 February 2017 pursuant to the offer detailed under "Fundraising" on page 8, raising net proceeds of approximately £4.1 million.
Shareholders will find the Notice of the Annual General Meeting on pages 76 to 79 of these financial statements.
The ordinary business of the meeting includes a resolution (resolution 9) to be proposed to ensure the directors retain the authority to allot shares in the Company until the date of the 2018 Annual General Meeting up to an aggregate nominal amount of £4,000,000 (representing approximately 41 per cent of the issued ordinary share capital of the Company as at 10 May 2017, excluding treasury shares).
Also included are three Special resolutions:
Resolution 10 is proposed to empower the directors to allot shares under the authority granted by resolution 9 and to sell treasury shares without regard to any rights of pre-emption on the part of the existing shareholders.
Resolution 11 is proposed to amend the Articles of Association to increase the cap on aggregate directors' fees to £100,000 per annum.
The directors have agreed to forego the ability to reclaim certain expenses and their fees were increased to compensate for this. As a result the cap on aggregate director's fees of £75,000 has been reached and your Board propose to increase the cap on aggregate fees to £100,000 in order to provide the flexibility to recruit new Directors in the future.
Resolution 12 will, if passed, approve, subject to the sanction of the High Court, the cancellation of the amount standing to the credit of the share premium account of the Company at the date that the court order granting the cancellation is made. The directors consider it appropriate to obtain the approval of shareholders to cancel the share premium account (subject to the sanction of the High Court) to create further distributable reserves to fund distributions to shareholders and share buy-backs, to set off or write off losses and for other corporate purposes of the Company. Application to court will be made if and when the Board feels this is appropriate. This authority is being taken now to provide flexibility to the Board in the future without a further general meeting of the Company having to be convened.
This report was approved by the Board on 21 March 2017 and signed on its behalf by
Richard Last Chairman
British Smaller Companies VCT2 plc.
Registered number 04084003
The Board is committed to the principle and application of sound corporate governance and confirms that the Company has taken steps, appropriate to a venture capital trust and relevant to its size and operational complexity, to comply with the principles and recommendations of the Association of Investment Companies' Code of Corporate Governance issued in July 2016 ("AIC Code") by reference to the AIC Corporate Governance Guide for Investment Companies ("AIC Guide") available on the AIC website www.theaic.co.uk.
The AIC Code as explained by the AIC Guide, addresses all the principles set out in the UK Corporate Governance Code issued by the Financial Reporting Council ("FRC"), as well as setting out additional principles and recommendations on issues which are of specific relevance to the Company.
The UK Corporate Governance Code can be found on the website of the FRC at www.frc.org.uk.
The Board considers that reporting against the principles and recommendations of the AIC Code and by reference the AIC Guide (which incorporates the UK Corporate Governance Code), will provide better information to shareholders.
The Company is committed to maintaining the highest standards of corporate governance and during the year to 31 December 2016 complied with the recommendations of the AIC Code and relevant provisions of the UK Corporate Governance Code, except as set out below.
The UK Corporate Governance Code includes provisions relating to the appointment of a chief executive and a recognised senior independent nonexecutive director, those relating to the establishment of an independent Remuneration Committee, the presumption concerning the Chairman's independence and the need for an internal audit function. For reasons set out in the AIC Guide, and in the preamble to the UK Corporate Governance Code, the Board
considers these provisions are not relevant to the position of British Smaller Companies VCT2 plc, which is an externally advised venture capital trust. The Company has therefore not reported further in respect of these provisions.
In accordance with The UK Corporate Governance Code issued in April 2016 section C.3.1 the Board should establish an Audit Committee of at least three independent non-executive directors and the Chairman of the Company should not be chair of this Committee. The Company has not complied with this criteria as the chair of the Audit Committee is Mr R Last. Given the size and nature of the Company and the significant experience of Mr R Last at performing this duty it was felt that adequate controls were in place to ensure the Audit Committee remained independent.
An investment advisory agreement between the Company and YFM Private Equity Limited sets out the matters over which the Investment Adviser has authority. This includes monitoring of the Company's assets and the provision of accounting, company secretarial, administration and some marketing services. All other matters are reserved for the approval of the Board. A formal schedule of matters reserved to the Board for decision has been approved. This includes determination and monitoring of
the Company's investment objectives and policy and its future strategic direction, gearing policy, management of the capital structure, appointment and removal of third party service providers, review of key investment and financial data and the Company's corporate governance, risk control and custody arrangements.
The Board meets at least quarterly and additional meetings are arranged as necessary. Full and timely information is provided to the Board to enable it to function effectively and to allow directors to discharge their responsibilities.
There is an agreed procedure for directors to take independent professional advice if necessary and at the Company's expense. This is in addition to the access that every director has to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that applicable rules and regulations are complied with and that Board procedures are followed. The Company indemnifies its directors and officers and has purchased insurance to cover its directors. Neither the insurance nor the indemnity provide cover if the director has acted fraudulently or dishonestly.
The Board consists of three non-executive directors, all of whom are regarded by the Board as independent and also as independent of the Company's Investment Adviser, including the Chairman. The
independence of the Chairman was assessed upon his appointment. Although The UK Corporate Governance Code presumes that the chairman of a company is deemed not to be an independent director, the remaining directors, having considered the nature of the role in the Company, are satisfied that Mr R Last fulfils the criteria for independence as a non-executive director. The directors have a breadth of investment, business and financial skills and experience relevant to the Company's business and provide a balance of power and authority including recent and relevant financial experience. Brief biographical details of each director are set out on page 32.
A review of Board composition and balance is included as part of the annual performance evaluation of the Board, details of which are given below.
There are no executive officers of the Company. Given the structure of the Board and the fact that the Company's administration is conducted by YFM Private Equity Limited, the Company has not appointed a chief executive officer or a senior independent non-executive director. In addition, the directors consider that the role of a senior independent non-executive director is taken on by all of the directors. Shareholders are therefore able to approach any director with any queries they may have.
The Board is committed to ensuring that the Company is run in the most effective manner. Consequently the Board monitors the diversity of all directors to ensure an appropriate level of experience and qualification.
The Board believes in the value and importance of diversity in the boardroom but does not consider that it is appropriate or in the best interests of the Company and its shareholders to set prescriptive targets for gender or nationality on the Board.
Diversity of thought, experience and approach are all important and the directors will always seek to appoint on merit against objective criteria.
Directors are initially appointed until the following Annual General Meeting when, under the Company's Articles of Association, it is required that they be elected by shareholders. Thereafter, it is the Board's policy that a director's appointment will run for a term of one year until the next Annual General Meeting. Subject to the performance evaluation carried out each year, the Board will agree whether it is appropriate for the director to seek a further term. The Board does not believe that length of service in itself necessarily disqualifies a director from seeking re-election but, when making a recommendation, the Board will take into account the ongoing requirements of The UK Corporate Governance Code, including the need to refresh the Board and its Committees.
The Board seeks to maintain a balance of skills and the directors are satisfied that as currently composed the balance of experience and skills of the individual directors is appropriate for the Company, in particular with regards to investment appraisal and investment risk management.
The terms and conditions of directors' appointments are set out in formal letters of appointment, copies of which are available for inspection on request at the Company's registered office and at the Annual General Meeting. There are no set minimum notice periods for Mr R Last or Mr R M Pettigrew, though Mr P C Waller's appointment is terminable by him or the Company on three months' notice.
The directors recommend the re-election of Mr P C Waller, Mr R M Pettigrew, and Mr R Last at this year's Annual General Meeting, because of their commitment, experience and continued contribution to the Company.
The Board delegates certain responsibilities and functions to Committees. Directors who are not members of Committees may attend at the invitation of the Chairman.
The table below details the number and function of the meetings attended by each director. There were no Nominations Committee meetings held in the year.
During the year there were seven formal Board meetings, three Audit Committee meetings, one Allotment Committee meeting, and one General Meeting. The directors met via telephone and electronic conferences on 16 other occasions.
| Mr R Last |
Mr P C Waller |
Mr R M Pettigrew |
Total | |
|---|---|---|---|---|
| Board meetings | 7 | 7 | 7 | 7 |
| Audit Committee | 3 | 3 | 3 | 3 |
| Allotment Committee | 1 | 1 | 1 | 1 |
| Telephone and electronic conferences |
15 | 16 | 16 | 16 |
| General meetings | 1 | 1 | 1 | 1 |
| Total | 27 | 28 | 28 | 28 |
As set out on page 39 the quorum for the Allotment Committee is one director.
In addition there were two DRIS allotment meetings which the directors were not required to attend, but which were attended by the Company Secretary.
On appointment, the Investment Adviser and Company Secretary provide all directors with induction training. Thereafter, regular briefings are provided on changes in regulatory requirements that affect the Company and its directors. Directors are encouraged to attend industry and other seminars covering issues and developments relevant to VCTs.
The performance of the Board has been evaluated in respect of the financial year ended 31 December 2016. The Board, led by the Chairman, has conducted a performance evaluation to determine whether it and individual directors are functioning effectively.
The factors taken into account were based on the relevant provisions of The UK Corporate Governance Code and included attendance and participation at Board and Committee meetings, commitment to Board activities and the effectiveness of their contribution. The results of the overall evaluation process are communicated to the Board. Performance evaluation continues to be conducted on an annual basis.
The Chairman has confirmed that the performance of the other directors being proposed for re-election continues to be effective and that they continue to show commitment to the role. The independent directors have similarly appraised the performance of the Chairman. They considered that the performance of Mr R Last continues to be effective and that he continues to demonstrate a strong commitment to the role.
Due to the size of the Board and the remuneration procedures currently in place, in the directors' opinion, there is no role for an independent Remuneration Committee. The Directors' Remuneration Report may be found on pages 42 to 44.
The Audit Committee consists of Mr R Last, Mr R M Pettigrew and Mr P C Waller and meets at least three times each year. The directors consider that it is appropriate that the Chairman of the Committee should be Mr R Last. The members of the Committee consider that they have the requisite skills and experience to fulfil the responsibilities of the Committee, and that the Chair of the Committee meets the requirements of The UK Corporate Governance Code as to recent and relevant financial experience.
The Audit Committee's terms of reference include the following roles and responsibilities:
making recommendations to the Board in relation to the appointment, re-appointment and removal of the external auditor and approving the remuneration and terms of engagement of the external auditor;
reviewing and monitoring the external auditor's independence and objectivity and effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements;
It reviews the terms of the investment advisory agreement and examines the effectiveness of the Company's internal control and risk management systems, receives information from the Investment Adviser's compliance department and reviews the scope and results of the external audit, its cost effectiveness and the independence and objectivity of the external auditor.
The directors' statement on the Company's system of internal control is set out on pages 40 and 41.
The Audit Committee has written terms of reference which define clearly its responsibilities, copies of which are available for inspection on request at the Company's registered office and at the Annual General Meeting, and also on the Company's website at www.bscfunds.com.
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.
During the year ended 31 December 2016 the Audit Committee discharged its responsibilities by:
The key areas of risk that have been identified and considered by the Audit Committee in relation to the business activities and financial statements of the Company are as follows:
These issues were discussed with the Investment Adviser and the auditor at the pre-year-end audit planning meeting and at the conclusion of the audit of the financial statements.
The Audit Committee reviewed the estimates and judgements made in the investment valuations and was satisfied that they were appropriate. The Investment Adviser and the auditor confirmed to the Audit Committee that the investment valuations had been carried out consistently with prior periods and in accordance with the published industry guidelines, taking account of the latest available information about investee companies and current market data.
The Investment Adviser confirmed to the Audit Committee that the conditions for maintaining the Company's status as an approved venture capital trust had been complied with throughout the year. The position was also reviewed by the Company's advisers.
The Investment Adviser confirmed to the Audit Committee that it was not aware of any material unadjusted misstatements. Having reviewed the reports received from the Investment Adviser and the auditor, the Audit Committee is satisfied that the key areas of risk and judgement have been appropriately addressed in the financial statements and that the significant assumptions used in determining the value of assets and liabilities and revenue recognition have been properly appraised and are sufficiently robust. The Committee considers that BDO LLP has carried out its duties as auditor in a diligent and professional manner.
As part of the review of audit effectiveness and independence, BDO LLP has confirmed that it is independent of the Company and has complied with applicable auditing standards. BDO LLP was appointed as the result of a competitive tendering process in 2016. As a consequence, this is their first year of office as auditor.
Having completed its review the Audit Committee is satisfied that BDO LLP remained effective and independent in carrying out its responsibilities up to the date of signing this report. No non-audit services were provided by BDO LLP during the year.
The Company has a Nominations Committee which consists of Mr R Last, Mr R M Pettigrew and Mr P C Waller, all of whom who are considered by the Board to be independent of the Investment Adviser. The Chairman of the Board acts as Chairman of the Committee.
In considering appointments to the Board, the Nominations Committee takes into account the ongoing requirements of the Company and the need to have a balance of skills and experience within the Board.
Meetings are held as and when required. There were no Nominations Committee meetings during the year.
The Board has determined that, due to the investment procedures currently in place, in its opinion there is no role for an independent Investment Committee.
The Company has an Allotment Committee which consists of the directors who are considered by the Board to be independent of the Investment Adviser. The quorum for Committee meetings is one director, unless otherwise determined by the Board. In addition the Company Secretary has an authority to allot shares under the DRIS.
The Committee considers and, if appropriate, authorises the allotment of shares. The Committee ensures that the total number of shares to be issued does not exceed the authority given by the shareholders. There are no written terms of reference.
The Board regularly monitors the shareholder profile of the Company. It aims to provide shareholders with a full understanding of the Company's activities and performance, and reports formally to shareholders twice a year by way of the Annual Report and the Interim Report. This is supplemented by the daily publication of the Company's share price and the publication for the two quarters of the year where an Annual or Interim Report is not issued (31 March and 30 September), through the London Stock Exchange, of the net asset value of the Company together with a factsheet detailing developments for the Company in that quarter.
All shareholders have the opportunity, and are encouraged, to attend the Company's Annual General Meeting at which the directors and representatives of the Investment Adviser are available in person to meet with and answer shareholders' questions. In addition representatives of the Investment Adviser periodically hold shareholder workshops which review the Company's performance and industry developments, and which give shareholders a further opportunity to meet members of the Board and chief executives or chairmen of some of the investee companies. During the year the Company's Investment Adviser has held regular discussions with shareholders. The directors are made fully aware of shareholders' views. The Chairman and directors make themselves available, as and when required, to address shareholder queries. The directors may be contacted through the Company Secretary whose details are shown on page 83.
The Company's Annual Report is published in time to give shareholders at least 21 clear days' notice of the Annual General Meeting. Shareholders wishing to raise questions in advance of the meeting are encouraged to write to the Company Secretary at the address shown on page 83. Separate resolutions are proposed for each separate issue. Proxy votes will be counted and the results announced at the Annual General Meeting for and against each resolution.
Under an agreement dated 28 November 2000, superseded by an agreement dated 31 October 2005 and as varied by agreements dated 8 December 2010, 26 October 2011, 16 November 2012, 17 October 2014 and 7 August 2015, certain functions of the Company have been subcontracted to YFM Private Equity Limited. The Board receives operational and financial reports on the current state of the business and on appropriate strategic, financial, operational and compliance issues. These matters include, but are not limited to:
The Board confirms the procedures to implement the guidance detailed in section C.2: "Risk Management & Internal Control" of The UK Corporate Governance Code and those identified in the Principles 13 and 15 of the AIC Code were in place throughout the year ended 31 December 2016 and up to the date of this report. A detailed review of the risks faced by the Company and the techniques used to mitigate these risks can be found in the Strategic Report on page 29.
The Board acknowledges that it is responsible for overseeing the Company's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
The Board arranges its meeting agenda so that risk management and internal control is considered on a regular basis and a full robust risk and control assessment takes place no less frequently than twice a year. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. This process has been in place for longer than the year under review and up to the date of approval of the Annual Report. The process is formally reviewed bi-annually by the Board. However, due to the size and nature of the Company, the Board has concluded that it is not necessary at this stage to set up an internal audit function. This decision will be kept under review. The directors are satisfied that the systems of risk management that they have introduced are sufficient to comply with the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting.
In particular the Board, together with the Audit Committee, is responsible for overseeing and reviewing internal controls concerning financial reporting. In addition to those controls sub-contracted as listed above the following controls have been in place throughout the year:
• the Board reviews the financial information in any prospectus or offer for subscription issued by the Company in connection with the issue of new share capital.
Following the FCA's registration of the Company as a Small Registered Alternative Investment Fund Manager the Company holds its own investments. All investments made for the accounts of and monies received for the Company will be deposited in the name of the Company or will be held by a custodian or the Company's solicitors. All certificates and other documents evidencing title (whether or not in registered form) will be received by the Company and will be held in the Company's name or forwarded directly to the custodian or the Company's solicitors. No third party custodian has been appointed. The Company will take legal ownership of its assets.
The Board has reviewed the effectiveness of the Company's systems of internal control and risk management for the year and up to the date of this Report. The Board is of the opinion that the Company's systems of internal, financial, and other controls are appropriate to the nature of its business activities and methods of operation given the size of the Company, and the Board has a reasonable expectation that the Company will continue in operational existence for the foreseeable future.
The directors have declared any conflicts or potential conflicts of interest to the Board which has the authority to authorise such situations if appropriate. The Company Secretary maintains the Register of Directors' Interests which is reviewed quarterly by the Board, when changes are notified, and the directors advise the Company Secretary and the Board as soon as they become aware of any conflicts of interest. Directors who have conflicts of interest which have been approved by the Board do not take part in discussions or decisions which relate to any of their conflicts. Details of all Related Party Transactions are shown in note 15 on page 71.
The Company delegates responsibility for monitoring its investments to its Investment Adviser whose policy, which has been noted by the Board, is as follows:
YFM Private Equity Limited is committed to introducing corporate governance standards into the companies in which its clients invest. With this in mind, the Company's investment agreements contain contractual terms specifying the required frequency of management board meetings and of annual shareholders' meetings, and for representation at such meetings through YFM Private Equity Limited. In addition, provision is made for the preparation of regular and timely management information to facilitate the monitoring of an investee company performance in accordance with best practice in the private equity sector.
Typically the Company invests alongside other venture capital funds and other private equity funds advised or managed by the Investment Adviser, such syndication spreading investment risk. Details of the amounts invested in individual companies are set out in the Strategic Report. Co-Investments are detailed in note 7 to the financial statements on page 68.
The Board has delegated the monitoring of the investment portfolio to the Investment Adviser.
This report was approved by the Board on 21 March 2017 and signed on its behalf by
Richard Last Chairman British Smaller Companies VCT2 plc
Registered number 04084003
The Board has prepared this report in accordance with the requirements of the Large and Medium Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. Ordinary resolutions for the approval of this report and the Directors' Remuneration Policy will be put to the members at the forthcoming Annual General Meeting.
The law requires the Company's auditor, BDO LLP, to audit certain information included in this report. Where disclosures have been audited, they are indicated as such. The auditor's opinion is included in the Independent Auditor's Report on pages 46 to 49.
This statement of the Directors' Remuneration Policy took effect following approval by shareholders at the Annual General Meeting held on 19 May 2014. A resolution to approve the Directors' Remuneration Policy will be put to shareholders every three years.
The Board currently comprises three directors, all of whom are non-executive. The Board does not have a separate Remuneration Committee due to the size of the Board and the remuneration procedures currently in place. In the directors' opinion and under the Listing Rules, there is no requirement for an independent Remuneration Committee.
The Board has not retained external advisors in relation to remuneration matters but has access to information about directors' fees paid by other companies of a similar size and nature. Shareholders' views in respect of the directors' remuneration are communicated at the Company's AGM and are taken into consideration in formulating the Directors Remuneration Policy.
At the last Annual General Meeting over 99 per cent of shareholders who exercised their voting rights voted for the resolution approving the Directors' Remuneration Report, showing significant shareholder approval.
The Board's policy is that the remuneration of non-executive directors should reflect the experience of the Board as a whole, to be fair and comparable to that of other relevant venture capital trusts that are similar in size and have similar investment objectives and structures. Furthermore, the level of remuneration should be sufficient to attract and retain the directors needed to oversee properly the Company and to reflect the duties and responsibilities of the Directors and the value and amount of time committed to the Company's affairs.
It is not considered appropriate that directors' remuneration should be performance-related, and as such the directors are not eligible for bonuses, share options, pension benefits, long-term incentive schemes or other benefits in respect of their services as non-executive directors of the Company.
It is the Board's policy that directors do not have service contracts, but new directors are provided with a letter of appointment. The terms of directors' appointments provide that directors should retire and be subject to election at the first Annual General Meeting after their appointment. Thereafter, it has been agreed that all directors will offer themselves for re-election on an annual
basis. There is no notice period other than for Mr P C Waller, whose appointment is terminable by him or the Company on three months' notice. Any director who ceases to hold office is not entitled to receive any payment other than accrued fees (if any) for past services. There were no payments for loss of office made during the period.
The policy will continue to be applied in the forthcoming year.
Brief biographical notes on the directors are given on page 32.
In accordance with the Directors' Remuneration Policy the directors' fees were reviewed by the Board during the year. The Board agreed that the directors' fees payable by the Company should be increased from 1 April 2016 to £34,000 per annum for the Chairman and £20,500 per annum for the other directors.
As noted on page 35 the directors have agreed to forego the ability to reclaim certain expenses and their fees were increased to compensate for this. As a result the cap on aggregate director's fees of £75,000 has been reached and your Board propose to increase the cap on aggregate fees to £100,000 in order to provide the flexibility to recruit new directors in the future.
The directors who served in the year received the following emoluments in the form of fees, which represent the entire remuneration payable to directors (see Table A):
There are no executive directors (2015: none).
The directors of the Company at 31 December 2016 and their beneficial interests in the share capital of the Company (including those of immediate family members) were as shown in Table B
None of the directors held any options to acquire additional shares at the year end.
The Company has not set out any formal requirement or guidelines concerning their ownership of shares in the Company.
Directors' remuneration, dividend distribution and share buy-backs are shown in Table C.
The Company does not have any employees. Accordingly, the disclosures required under paragraph 38 and 39 of Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 are not required.
| Total fees paid (audited) | TABLE A | |
|---|---|---|
| 2016 £ |
2015 £ |
|
| R Last | 33,375 | 31,500 |
| R M Pettigrew | 19,875 | 18,000 |
| P C Waller | 19,875 | 18,000 |
| 73,125 | 67,500 |
| Directors and their interests (audited) | TABLE B | |||
|---|---|---|---|---|
| Number of ordinary shares at: 31 December 31 December 2016 |
31 December 2016 |
Percentage of voting rights: 31 December 2015 |
||
| R Last | 134,632 | 134,632 | 0.14% | 0.15% |
| R M Pettigrew | 80,333 | 80,333 | 0.09% | 0.09% |
| P C Waller | 35,560 | 35,560 | 0.04% | 0.04% |
| Relative importance of pay | TABLE C | |
|---|---|---|
| 2016 £ |
2015 £ |
|
| Dividends | 4,191,000 | 3,887,000 |
| Share buy-backs | 240,000 | 123,000 |
| Total directors fees | 73,125 | 67,500 |
VCT Generalist Share Price Total Return (Source: Index compiled by the AIC)
BSC2 Share price return (Dividends reinvested since inception)
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 Adviser through the advisory agreement, as referred to in the Directors' Report.
Net asset value total return (calculated by reference to the net asset value and cumulative dividends paid, as set out in note 13 of these financial statements and excluding tax reliefs received by shareholders) is the primary recognised measure of performance in the VCT industry. This measure is discussed on page 12.
The graph above shows a comparison over the last eight years of the movements in both the Company's share price total return and the share price total return for approximately 60 Generalist VCTs as published by the Association of Investment Companies (AIC). In line with the AIC index all the relative performance measures have been rebased to 100 as at December 2008. The directors consider this to be the most appropriate published index on which to report on comparative performance.
BSC2 Net Asset Value Total Return (NAV plus dividends paid)
Changes in the Company's net asset value total return are included on the graph as the Board believes this reflects the return to shareholders not participating in the DRIS.
This report was approved by the Board and signed on its behalf on 21 March 2017
Richard Last Chairman
The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare the financial statements for each financial year. Under that law the directors are required to prepare the financial statements and have elected to prepare the Company's financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss for the Company for that period.
In preparing these financial statements, the directors are required to:
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 its 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.
The directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the Company's website at www.bscfunds.com in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.
The directors confirm to the best of their knowledge:
Having taken advice from the Audit Committee, the Board considers the annual report and accounts, taken as a whole, are fair, balanced and understandable and that it provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
The names and functions of all the directors are stated on page 32.
For and on behalf of the Board
This statement was approved by the Board and signed on its behalf on 21 March 2017.
Richard Last Chairman
TO THE MEMBERS OF BRITISH SMALLER COMPANIES VCT2 PLC
In our opinion British Smaller Companies VCT2 plc's financial statements for the year ended 31 December 2016, which have been prepared by the directors in accordance with applicable law and International Financial Reporting Standards as adopted by the European Union ("IFRSs"):
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.
Our audit opinion on the financial statements covers the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, the Statement of Cash Flows and the related notes.
As explained more fully in the Directors' Responsibility Statement, 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 and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council's (FRC's) Ethical Standards for Auditors.
A description of the scope of an audit of financial statements is provided on the FRC's website at
www.frc.org.uk/auditscopeukprivate
Our audit approach was developed by obtaining an understanding of the Company's activities, the key functions undertaken on behalf of the Board by the Investment Adviser and the overall control environment. Based on this understanding we assessed those aspects of the Company's transactions and balances which were most likely to give rise to a material misstatement. Below are those risks which we considered to have the greatest effect on the overall audit strategy including the allocation of resources in the audit, and our audit response:
The valuation of investments is a key accounting estimate where there is an inherent risk of management override arising from the investment valuations being prepared by the Investment Adviser, who is remunerated based on the net asset value of the company. In addition, there is a high level of estimation uncertainty involved in determining the unquoted investment valuations.
We performed initial analytical procedures to determine the extent of our work considering, inter alia, the value of individual investments, the nature of the investment and the extent of the fair value movement. A breakdown of the investment portfolio by nature of instrument and valuation method is shown below.
In respect of unquoted equity our sample for testing was stratified according to risk, having regard to the subjectivity of the inputs to the valuations. 40% of the portfolio is based on price of recent investment or cost, reviewed for impairment. For such investments, on a sample basis, we verified the cost or price of recent investment to supporting documentation and reviewed the Investment Adviser's determination of whether there were any reasons why the valuation did not remain appropriate, including obtaining evidence of the cash balance where appropriate.
59% of the unquoted investment portfolio is valued in accordance with more subjective techniques, mainly on an earnings multiple basis, as described in note 7. In respect of the sample selected for detailed testing (representing 99% by value of the investments valued using more subjective techniques) we:
Where appropriate, we performed a sensitivity analysis by developing our own point estimate where we considered that alternative input assumptions could reasonably have been applied and we considered the overall impact of such sensitivities on the portfolio of investments in determining whether the valuations as a whole are reasonable and free from bias.
In respect of quoted equity investments (5% of the total portfolio value), we obtained the year end price and confirmed that bid price had been used as the most appropriate indication of fair value.
The remainder of the portfolio was subject to analytical procedures to confirm there were no unexpected movements in value warranting further investigation.
The extent of our testing is detailed below:
Revenue consists primarily of interest earned on loans to investee companies and cash balances, as well as dividends receivable from investee companies. Revenue recognition is considered to be a significant audit risk as it is a key factor in demonstrating the performance of the portfolio.
We developed expectations for interest income receivable based on loan instruments and investigated any variations in amounts recognised to ensure they were valid. We traced a sample of interest income receipts to bank.
We considered whether the accounting policy had been applied correctly by management in determining provisions against income where recovery is considered doubtful, considering management information relevant to the ability of the investee company to service the loan and the reasons for any arrears of loan interest. We considered the appropriateness of the accounting treatment of other fixed returns, including redemption premia.
We considered the completeness of dividend income receivable by reviewing independent data including published dividend histories for quoted investments and statutory and management information for a sample of unquoted investments. We traced dividend income received to bank statements and considered the appropriate classification of dividends between revenue and capital.
The audit committee's consideration of their key issues is set out on page 39.
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. For planning, we consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. Importantly, misstatements below this level will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements. The application of these key considerations gives rise to two levels of materiality, the quantum and purpose of which are tabulated on page 48.
| Materiality measure | Purpose | Key considerations and benchmarks | Quantum (£) |
|---|---|---|---|
| Financial statement materiality (2% value of investments) |
Assessing whether the financial statements as a whole present a true and fair view |
• The value of investments • The level of judgement inherent in the valuation |
800,000 |
| • The range of reasonable alternative valuation |
|||
| Specific materiality – classes of transactions and balances which impact on revenue profits (10% revenue return before tax) |
Assessing those classes of transactions, balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. |
• The level of net income return |
120,000 |
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £10,000, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
In our opinion the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion: based on the work undertaken in the course of the audit:
Statement regarding the directors' assessment of principal risks, going concern and longer term viability of the company
We have nothing material to add or to draw attention to in relation to:
in preparing them and their identification of any material uncertainties to the Company's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and
• the directors' explanation in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
| Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: |
We have nothing to report in respect of these matters. |
|---|---|
| • materially inconsistent with the information in the audited financial statements; or |
|
| • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Company acquired in the course of performing our audit; or |
|
| • is otherwise misleading. |
|
| In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors' statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. |
|
| In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors' Report. |
We have nothing to report in respect of these matters. |
| Under the Companies Act 2006 we are required to report to you if, in our opinion: | We have nothing to report in respect |
| • adequate accounting records have not been kept or returns adequate for our audit have not been received from branches not visited by us; or |
of these matters. |
| • 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 directors' 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 part of the corporate governance statement relating to the Company's compliance with the provisions of the UK Corporate Governance Code specified for review by the auditor in accordance with Listing Rule 9.8.10 R(2). The Listing Rules also require that we review the directors' statements set out on page 33 regarding going concern and longer term viability. |
We have nothing to report in respect of these matters. |
For and on behalf of BDO LLP, statutory auditor London United Kingdom
21 March 2017
BDO LLP is a limited liability partnership
For the year ended 31 December 2016
| 2016 | 2015 | ||||||
|---|---|---|---|---|---|---|---|
| Notes | Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
| Income | 2 | 1,937 | - | 1,937 | 1,953 | - | 1,953 |
| Gains on investments held at fair value | 7 | - | 704 | 704 | - | 3,316 | 3,316 |
| Gain on disposal of investments | 7 | - | 339 | 339 | - | 232 | 232 |
| Total income | 1,937 | 1,043 | 2,980 | 1,953 | 3,548 | 5,501 | |
| Administrative expenses: | |||||||
| Investment Adviser's fee | (280) | (839) | (1,119) | (234) | (701) | (935) | |
| Other expenses | (449) | - | (449) | (434) | - | (434) | |
| 3 | (729) | (839) | (1,568) | (668) | (701) | (1,369) | |
| Profit before taxation | 1,208 | 204 | 1,412 | 1,285 | 2,847 | 4,132 | |
| Taxation | 4 | (116) | 116 | - | (152) | 152 | - |
| Profit for the year | 1,092 | 320 | 1,412 | 1,133 | 2,999 | 4,132 | |
| Total comprehensive income for the year | 1,092 | 320 | 1,412 | 1,133 | 2,999 | 4,132 | |
| Basic and diluted earnings | |||||||
| per ordinary share | 6 | 1.17p | 0.34p | 1.51p | 1.36p | 3.60p | 4.96p |
The accompanying notes on pages 55 to 75 are an integral part of these financial statements.
The Total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union. The supplementary Revenue and Capital columns are prepared under the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP') 2014 published by the AIC.
At 31 December 2016
| Notes | 2016 £000 |
2015 £000 |
|---|---|---|
| Assets | ||
| Non-current assets | ||
| Financial assets at fair value through profit or loss 7 |
39,319 | 36,652 |
| Trade and other receivables 8 |
837 | 678 |
| 40,156 | 37,330 | |
| Current assets | ||
| Trade and other receivables 8 |
391 | 368 |
| Cash on fixed term deposit 9 |
3,037 | 1,992 |
| Cash and cash equivalents 9 |
12,826 | 15,444 |
| 16,254 | 17,804 | |
| Liabilities | ||
| Current liabilities | ||
| Trade and other payables 10 |
(301) | (284) |
| Net current assets | 15,953 | 17,520 |
| Net assets | 56,109 | 54,850 |
| Shareholders' equity | ||
| Share capital 11 |
9,652 | 8,939 |
| Share premium account | 16,902 | 13,337 |
| Capital redemption reserve | 88 | 88 |
| Other reserve | 2 | 2 |
| Merger reserve | 5,525 | 5,525 |
| Capital reserve | 15,621 | 20,781 |
| Investment holding gains and losses | 7,077 | 5,127 |
| Revenue reserve | 1,242 | 1,051 |
| Total shareholders' equity | 56,109 | 54,850 |
| Net asset value per ordinary share 12 |
59.7p | 62.9p |
The accompanying notes on pages 55 to 75 are an integral part of these financial statements.
The financial statements were approved and authorised for issue by the Board of Directors and were signed on its behalf on 21 March 2017.
Richard Last Chairman
| Share capital |
Share premium account |
Other reserves* |
Capital reserve |
Investment holding gains (losses) |
Revenue reserve |
Total equity |
|
|---|---|---|---|---|---|---|---|
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| Balance at 31 December 2014 | 6,447 | 342 | 5,615 | 24,822 | 1,507 | 600 | 39,333 |
| Revenue return for the year Capital expenses |
- - |
- - |
- - |
- (701) |
- - |
1,285 - |
1,285 (701) |
| Investment holding gain on investments held at fair value |
- | - | - | - | 3,316 | - | 3,316 |
| Realisation of investments in the year Taxation |
- - |
- - |
- - |
232 152 |
- - |
- (152) |
232 - |
| Total comprehensive (expense) | |||||||
| income for the year | - | - | - | (317) | 3,316 | 1,133 | 4,132 |
| Issue of share capital Issue costs ** |
2,366 - |
13,056 (667) |
- - |
- (92) |
- - |
- - |
15,422 (759) |
| Purchase of own shares Issue of shares – DRIS |
- 126 |
- 606 |
- | (123) | - | - | (123) 732 |
| Dividends | - | - | - - |
- (3,205) |
- - |
- (682) |
(3,887) |
| Total transactions with owners | 2,492 | 12,995 | - | (3,420) | - | (682) | 11,385 |
| Realisation of prior year | |||||||
| investment holding losses | - | - | - | (304) | 304 | - | - |
| Balance at 31 December 2015 | 8,939 | 13,337 | 5,615 | 20,781 | 5,127 | 1,051 | 54,850 |
| Revenue return for the year | - | - | - | - (839) |
- | 1,208 | 1,208 (839) |
| Capital expenses Investment holding gain on |
- | - | - | - | - | ||
| investments held at fair value | - | - | - | - | 704 | - | 704 |
| Realisation of investments in the year Taxation |
- - |
- - |
- - |
339 116 |
- - |
- (116) |
339 - |
| Total comprehensive (expense) | |||||||
| income for the year | - | - | - | (384) | 704 | 1,092 | 1,412 |
| Issue of share capital | 568 | 3,030 | - | - | - | - | 3,598 |
| Issue costs ** | - | (146) | - | - | - | - | (146) |
| Purchase of own shares | - | - | - | (240) | - | - | (240) |
| Issue of shares – DRIS Dividends |
145 - |
681 - |
- - |
- (3,321) |
- - |
- (870) |
826 (4,191) |
| Total transactions with owners | 713 | 3,565 | - | (3,561) | - | (870) | (153) |
| Transfer between reserves | - | - | - | (1,933) | 1,964 | (31) | - |
| Realisation of prior year investment holding gains |
- | - | - | 718 | (718) | - | - |
| Balance at 31 December 2016 | 9,652 | 16,902 | 5,615 | 15,621 | 7,077 | 1,242 | 56,109 |
The accompanying notes on pages 55 to 75 are an integral part of these financial statements.
Under the Companies Act 2006 the capital reserve and the revenue reserve are distributable reserves. The table below shows amounts that are available for distribution.
| Capital reserve £000 |
Revenue reserve £000 |
Total £000 |
|
|---|---|---|---|
| Distributable reserves as above | 15,621 | 1,242 | 16,863 |
| Less : Interest and dividends not yet distributable : Cancelled share premium not yet distributable |
- (1,343) |
(1,065) - |
(1,065) (1,343) |
| Reserves available for distribution*** | 14,278 | 177 | 14,455 |
* Other reserves include the capital redemption reserve, the merger reserve and the other reserve, which are non-distributable. The other reserve was created upon the exercise of warrants, the capital redemption reserve was created for the purchase and cancellation of own shares, and the merger reserve was created on the merger with British Smaller Technologies Company VCT plc.
** Issue costs include both fundraising costs and costs incurred from the Company's DRIS.
*** Subject to filing these financial statements at Companies House.
The merger reserve was created to account for the difference between the nominal and fair value of shares issued as consideration for the acquisition of the assets and liabilities of British Smaller Technology Companies VCT plc. The reserve was created after meeting the criteria under section 131 of the Companies Act 1985 and the provisions of the Companies Act 2006 for merger relief. The merger reserve is a non-distributable reserve.
The capital reserve and revenue reserve are both distributable reserves. The reserves total £16,863,000 representing a decrease of £4,969,000 during the year. The directors also take into account the level of the investment holding gains (losses) reserve and the future requirements of the Company when determining the level of dividend payments.
Of the potentially distributable reserves of £16,863,000 shown above, £1,065,000 relates to interest and dividends not yet distributable and £1,343,000 of share premium which becomes distributable from 1 January 2018.
On filing these financial statements at Companies House the reserves available for distribution will be £14,455,000.
For the year ended 31 December 2016
| Notes | 2016 £000 |
2015 £000 |
|
|---|---|---|---|
| Net cash inflow from operating activities | 20 | 147 | |
| Cash flows from (used in) investing activities | |||
| Purchase of financial assets at fair value through profit or loss | 7 | (4,508) | (7,239) |
| Proceeds from sale of financial assets at fair value through profit or loss | 7 | 2,874 | 2,458 |
| Deferred consideration | 7 | 183 | 13 |
| Cash placed on fixed term deposit | (1,045) | (1,992) | |
| Net cash outflow from investing activities | (2,496) | (6,760) | |
| Cash flows from (used in) financing activities | |||
| Issue of ordinary shares | 3,598 | 15,422 | |
| Costs of ordinary share issues* | (146) | (733) | |
| Purchase of own ordinary shares | (240) | (123) | |
| Dividends paid | 5 | (3,354) | (3,142) |
| Net cash (outflow) inflow from financing activities | (142) | 11,424 | |
| Net (decrease) increase in cash and cash equivalents | (2,618) | 4,811 | |
| Cash and cash equivalents at the beginning of the year | 15,444 | 10,633 | |
| Cash and cash equivalents at the end of the year | 9 | 12,826 | 15,444 |
* Issue costs include both fundraising costs and expenses incurred from the Company's DRIS.
| 2016 £000 |
2015 £000 |
|
|---|---|---|
| Profit before taxation | 1,412 | 4,132 |
| Increase in trade and other payables | 6 | 24 |
| Increase in trade and other receivables | (275) | (345) |
| Gains on disposal of investments in the year | (339) | (232) |
| Profit on investments held at fair value | (704) | (3,316) |
| Capitalised interest and dividends | (80) | (116) |
| Net cash inflow from operating activities | 20 | 147 |
The accompanying notes on pages 55 to 75 are an integral part of these financial statements.
For the year ended 31 December 2016
The accounts have been prepared on a going concern basis and in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The financial statements have been prepared under the historical cost basis as modified by the measurement of investments at fair value through profit or loss.
The accounts have been prepared in compliance with the recommendations set out in the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies in November 2014 (SORP) to the extent that they do not conflict with IFRSs as adopted by the European Union.
The financial statements are prepared in accordance with IFRSs and interpretations in force at the reporting date. New standards coming into force during the year have not had a material impact on these financial statements.
Standards, amendments to standards and interpretations have been issued which will be effective for future reporting periods but have not been adopted early in these financial statements. These include IFRS 9, IFRS 15, IFRS 16, IFRIC 22 and amendments to IFRS 1, IFRS 2, IFRS 4, IFRS 12, IFRS 15, IFRS 16, IAS 7, IAS 12, IAS 28 and IAS 40. Following an initial assessment, the Company does not expect that these standards, amendments and interpretations, issued but not yet effective, will have a material impact on its results or net assets.
The financial statements are presented in sterling and all values are rounded to the nearest thousand (£000), except where stated.
Financial assets designated as at fair value through profit or loss at inception are those that are managed and whose performance is evaluated on a fair value basis, in accordance with the documented investment strategy of the Company. Information about these financial assets is provided internally on a fair value basis to the Company's key management. The Company's investment strategy is to invest cash resources in venture capital investments as part of the Company's long-term capital growth strategy. Consequently, all investments are classified as held at fair value through profit or loss.
All investments are measured at fair value on the whole unit of account basis with gains and losses arising from changes in fair value being included in the Statement of Comprehensive Income as gains or losses on investments held at fair value.
Transaction costs on purchases are expensed immediately through profit or loss.
Redemption premiums are designed to protect the value of the Company's investment. These are accrued daily on an effective rate basis and included within the capital valuation of the investment (and thus classified under "Gain or loss on investments held at fair value" in the Statement of Comprehensive Income).
Although the Company holds more than 20 per cent of the equity of certain companies, it is considered that the investments are held as part of the investment portfolio, and their value to the Company lies in their marketable value as part of that portfolio, so none represent investments in associated undertakings. These investments are therefore not accounted for using equity accounting, as permitted by IAS 28 'Investments in associates' and FRS 11 'Joint arrangements' which give exemptions from equity accounting for venture capital organisations.
Under IFRS10 "Consolidated Financial Statements", control is presumed to exist when the Company has power over an investee (whether or not used in practice); exposure or rights; to variable returns from that investee, and ability to use that power to affect the reporting entities returns from the investees. The Company does not hold more than 50 per cent of the equity of any of the companies within the portfolio. The Company does not control any of the companies held as part of the investment portfolio. It is not considered that any of the holdings represent investments in subsidiary undertakings.
Unquoted investments are valued in accordance with IFRS 13 "Fair Value Measurement" and, where appropriate, the International Private Equity and Venture Capital (IPEVC) Valuation Guidelines ("the Guidelines") issued in December 2015. Quoted investments are valued at market bid prices. A detailed explanation of the valuation policies of the Company is included below.
Financial assets are initially measured at fair value. The best estimate of the initial fair value of a financial asset that is either quoted or not quoted in an active market is the transaction price (i.e. cost).
The Guidelines identify six of the most widely used valuation methodologies for unquoted investments. The Guidelines advocate that the best valuation methodologies are those that draw on external, objective market based data in order to derive a fair value.
Discounted cash flows and industry valuation benchmarks are only likely to be reliable as the main basis of estimating fair value in limited situations. Their main use is to support valuations derived using other methodologies and for assessing reductions in fair value.
Where an independent third party valuation exists, this will be used as the basis to derive the gross attributable enterprise value of the company. In other cases, the most suitable valuation technique, as set out above, is used to determine this value. This value is then apportioned appropriately to reflect the respective amounts accruing to each financial instrument holder in the event of a sale at that level at the reporting date.
Unquoted investments held in the form of loan investments are valued at fair value using the appropriate methodologies as used for valuing equity investments, primarily being price of recent investment and earnings multiple.
Quoted investments are valued at active market bid price. An active market is defined as one where transactions take place regularly with sufficient volume and frequency to determine price on an ongoing basis. Where the Company judges that the level of trading does not meet these requirements one of the methodologies above will be used to value the investment. No methodology other than active market bid price has been applied as at 31 December 2016
Dividend income on unquoted equity shares is recognised at the time when the right to the income is established. Interest on loan stock and dividends on preference shares are accrued daily on an effective rate basis. Provision is made against this income where recovery is doubtful. Where interest and preference dividends are rolled up and/or payable at redemption then they are recognised as income unless there is reasonable doubt as to their receipt.
Expenses are accounted for on an accruals basis. Expenses are charged through the Revenue column of the Statement of Comprehensive Income, except for Investment Adviser's fee and incentive fees. Of the Investment Adviser's fees 75 per cent are allocated to the capital column of the Statement of Comprehensive Income, to the extent that these relate to an enhancement in the value of the investments and in line with the Board's expectation that over the long term 75 per cent of the Company's investment returns will be in the form of capital gains. The incentive fee payable to the Investment Adviser (as set out in note 3) is charged wholly through the Capital column.
Tax relief is allocated to the Capital Reserve using a marginal basis.
Cash and cash equivalents include cash at hand as this meets the definition in IAS 7 'Statement of cash flows' of a short term highly liquid investment that is readily convertible into known amounts of cash and subject to insignificant risk of change in value.
Balances held in fixed term deposits are not classified as cash and cash equivalents, unless they are due for maturity within three months, as they do not meet the definition in IAS 7 'Statement of cash flows' of short-term highly liquid investments.
Cash flows classified as "operating activities" for the purposes of the Statement of Cash Flows are those arising from the Revenue column of the Income Statement, together with the items in the Capital column that do not fall to be easily classified under the headings for "Investing Activities" given by IAS 7 'Statement of cash flows', being advisory and incentive fees payable to the Investment Adviser. The Capital cash flows relating to acquisition and disposal of investments are presented under "investing activities" in the Statement of Cash Flows in line with both the requirements of IAS 7 and the positioning given to these headings by general practice in the industry.
This reserve contains the nominal value of all shares allotted under offers for subscription.
This reserve contains the excess of gross proceeds less issue costs over the nominal value of shares allotted under offers for subscription, to the extent that it has not been cancelled.
The nominal value of shares bought back and cancelled is held in this reserve, so that the Company's capital is maintained.
The following are included within this reserve:
Increases and decreases in the valuation of investments held at the year end are accounted for in this reserve, except to the extent that the diminution is deemed permanent.
In accordance with stating all investments at fair value through the profit and loss, all such movements through both revaluation and realised capital reserves are now shown within the Statement of Comprehensive Income for the year.
This reserve includes all income from investments along with any costs associated with the running of the Company – less 75 per cent of the advisory fee expense as detailed in the Capital Reserve above.
Due to the Company's status as a venture capital trust and the continued intention to meet the conditions required to comply with Chapter 3 Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments which arises. Deferred tax is recognised on all temporary differences that have originated, but not reversed, by the balance sheet date.
Deferred tax assets are only recognised to the extent that they are regarded as recoverable. Deferred tax is calculated at the tax rates that are expected to apply when the asset is realised. Deferred tax assets and liabilities are not discounted.
Dividends payable are recognised only when an obligation exists. Interim and special dividends are recognised when paid and final dividends are recognised when approved by shareholders in general meetings.
In accordance with IFRS 8 'Operating segments' and the criteria for aggregating reportable segments, segmental reporting has been determined by the directors based upon the reports reviewed by the Board. The directors are of the opinion that the Company has engaged in a single operating segment - investing in equity and debt securities within the United Kingdom - and therefore no reportable segmental analysis is provided.
The preparation of financial statements in conformity with generally accepted accounting practice requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are those used to determine the fair value of investments at fair value through profit or loss, as disclosed in note 7 to the financial statements.
The fair value of investments at fair value through profit or loss is determined by using valuation techniques. As explained above, the Board uses its judgement to select from a variety of methods and makes assumptions that are mainly based on market conditions at each balance sheet date.
| 2016 £000 |
2015 £000 |
|
|---|---|---|
| Dividends from unquoted companies | 611 | 490 |
| Dividends from AIM quoted companies | 17 | 35 |
| Interest on loans to unquoted companies | 1,140 | 1,264 |
| Income from investments held at fair value through profit or loss | 1,768 | 1,789 |
| Interest on bank deposits | 169 | 164 |
| 1,937 | 1,953 |
The above is stated net of £133,000 (2015: £nil) of income in relation to loan interest and preference dividends, which has been fully provided for.
| 2016 £000 |
2015 £000 |
|
|---|---|---|
| Investment Adviser's fee | 1,119 | 935 |
| Administration fee | 62 | 61 |
| Total payable to YFM Private Equity Limited | 1,181 | 996 |
| Other expenses: | ||
| Trail commission | 133 | 134 |
| Directors' remuneration | 81 | 76 |
| General expenses | 52 | 43 |
| Listing and registrar fees | 46 | 57 |
| Printing | 34 | 24 |
| Auditor's remuneration - audit fees (excluding irrecoverable VAT) | 23 | 19 |
| Irrecoverable VAT | 18 | 20 |
| 1,568 | 1,369 | |
| Ongoing charges figure | 2.51% | 2.28% |
Directors' remuneration comprises only short term benefits including social security contributions of £7,000 (2015: £6,000).
The directors are the Company's only key management personnel.
No fees are payable to the auditor in respect of non-audit services supplied pursuant to legislation (2015: £nil).
YFM Private Equity Limited has acted as Investment Adviser and performed administrative and secretarial duties for the Company under an agreement dated 28 November 2000, superseded by an agreement dated 31 October 2005 and as varied by agreements dated 8 December 2010, 26 October 2011, 16 November 2012, 17 October 2014 and 7 August 2015 (the "IAA"). The agreement may be terminated by not less than twelve months' notice given by either party at any time. Following the Financial Conduct Authority's registration of the Company as a Small Registered Alternative Investment Fund Manager, the Company has retained responsibility for the custody of its investments.
The key features of the agreement are:
When the Company makes investments into its unquoted portfolio the Investment Adviser charges that investee an advisory fee. With effect from 1 October 2013 if the average of relevant fees exceeds 3.0 per cent of the total invested into new portfolio companies and 2.0 per cent into follow-on investments over the Company's financial year, this excess will be rebated to the Company. As at 31 December 2016, the Company was due a rebate from the Investment Adviser of £Nil (2015: £Nil).
Monitoring and directors' fees the Investment Adviser receives from the investee companies are limited to a maximum of £40,000 (excluding VAT) per annum per company.
The total remuneration payable to YFM Private Equity Limited under the IAA in the period was £1,181,000 (2015: £996,000).
Under the IAA, YFM Private Equity Limited is entitled to receive fees from investee companies in respect of the provision of nonexecutive directors and other advisory services. YFM Private Equity Limited is responsible for paying the due diligence and other costs incurred in connection with proposed investments which for whatever reason do not proceed to completion. In the year ended 31 December 2016 the fees receivable by YFM Private Equity Limited from investee companies which were attributable to advisory and directors' and monitoring fees amounted to £412,000 (2015: £340,000).
Under the Subscription Rights Agreement dated 23 November 2001 between the Company, YFM Private Equity Limited and Chord Capital Limited ("Chord" formerly Generics Asset Management Limited), as amended by an agreement between those parties dated 31 October 2005, YFM Private Equity Limited and Chord have a performance-related incentive, structured so as to entitle them to an amount (satisfied by the issue by the Company of ordinary shares) equivalent to 20 per cent of the amount by which the cumulative dividends per ordinary share paid as at the last business day in December in any year, plus the average of the middle market price per ordinary share on the five dealing days prior to that day, exceeds 120 pence per ordinary share, multiplied by the number of ordinary shares issued and the ordinary shares under option (if any) (the "Hurdle"). Under the terms of the Subscription Rights Agreement, once the Hurdle has been exceeded it is reset at that value going forward, which becomes the new Hurdle. Any subsequent exercise of these rights will only occur once the new Hurdle has been exceeded. The subscription rights are exercisable in the ratio 95:5 between the Investment Adviser and Chord Capital Limited.
By a Deed of Assignment dated 19 December 2003 (together with a supplemental agreement dated 5 October 2005), the benefit of the YFM Private Equity Limited subscription right was assigned to YFM Private Equity Limited Carried Interest Trust (the "Trust"), an employee benefit trust formed for the benefit of certain employees of YFM Private Equity Limited and associated companies. Pursuant to a deed of variation dated 16 November 2012 between the Company, the trustees of the Trust and Chord, the Subscription Rights Agreement was varied so that the subscription rights will be exercisable in the ratio of 95:5 between the trustees of the Trust and Chord. Pursuant to a deed of variation dated 5 August 2014 the Subscription Rights Agreement was varied so that the recipient was changed from the Trust to YFM Private Equity Limited.
As at 31 December 2016 the total of cumulative cash dividends paid and mid-market price was 112.50 pence per ordinary share. No shares have been issued under this agreement.
Under the terms of the offer launched on 8 December 2015, YFM Private Equity Limited was entitled to 5.0 per cent of gross subscriptions from execution brokers and 3.0 per cent of gross subscriptions for applications through intermediaries offering financial advice or directly from applicants, less the cost of incentive shares and re-investment of intermediary commission. The net amount paid to YFM Private Equity Limited under this offer amounted to £108,200.
The Investment Adviser met all costs and expenses arising from this offer out of this fee, including any payment or re-investment of initial intermediary commissions.
The details of directors' remuneration are set out in the Directors' Remuneration Report on page 43 under the heading "Directors' Remuneration for the year ended 31 December 2016 (audited)".
| 2016 | 2015 | |||||
|---|---|---|---|---|---|---|
| Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
| Profit before taxation | 1,208 | 204 | 1,412 | 1,285 | 2,847 | 4,132 |
| Profit before taxation multiplied by standard rate of corporation tax in UK of 20% (2015: 20%) |
242 | 40 | 282 | 257 | 569 | 826 |
| Effect of: | ||||||
| UK dividends received | (126) | - | (126) | (105) | - | (105) |
| Non-taxable profits on investments | - | (209) | (209) | - | (709) | (709) |
| Excess advisory expenses | - | 53 | 53 | - | (12) | (12) |
| Tax charge (credit) | 116 | (116) | - | 152 | (152) | - |
The Company has no provided or unprovided deferred tax liability in either year.
Deferred tax assets of £514,000 calculated at 17% (2015: £497,000 at 18%) in respect of unrelieved management expenses (£3.021 million as at 31 December 2016 and £2.761 million as at 31 December 2015) have not been recognised as the directors do not currently believe that it is probable that sufficient taxable profits will be available against which assets can be recovered.
Due to the Company's status as a venture capital trust and the continued intention to meet with the conditions required to comply with Section 274 of the Income Tax Act 2007, the Company has not provided for deferred tax on any capital gains or losses arising on the revaluation or realisation of investments.
Amounts recognised as distributions to equity holders in the period to 31 December:
| 2016 | 2015 | |||||
|---|---|---|---|---|---|---|
| Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
| Final dividend for the year ended 31 December 2015 of 2.5p (2014: 2.5p) per ordinary share |
277 | 2,045 | 2,322 | 268 | 1,885 | 2,153 |
| Interim dividend for the year ended 31 December 2016 of 2.0p (2015: 2.0p) per ordinary share |
593 | 1,276 | 1,869 | 414 | 1,320 | 1,734 |
| 870 | 3,321 | 4,191 | 682 | 3,205 | 3,887 | |
| Shares allotted under DRIS | (826) | (732) | ||||
| Unclaimed dividends | (11) | (13) | ||||
| Dividends paid in Statement of Cash Flows | 3,354 | 3,142 |
The final year-end dividend of 2.5 pence per ordinary share in respect of the year to 31 December 2015 was paid on 9 May 2016 to shareholders on the register at 8 April 2016.
The interim dividend of 2.0 pence per ordinary share was paid on 26 September 2016 to shareholders on the register as at 26 August 2016.
A final dividend of 1.5 pence per ordinary share in respect of the year to 31 December 2016 is proposed. This dividend has not been recognised in the year ended 31 December 2016 as the obligation did not exist at the balance sheet date.
During the year the Company has received £14,000 (2015: £16,000) from the Registrars in respect of unclaimed dividends. The Company has made efforts to contact the relevant shareholders, with the result that £3,000 (2015: £3,000) has been paid to shareholders in the year. The unclaimed balance is held in a separate bank account until contact can be made with the shareholders affected.
The basic and diluted earnings per ordinary share is based on the profit after tax attributable to shareholders of £1,412,000 (2015: £4,132,000) and 93,363,744 (2015: 83,224,240) ordinary shares being the weighted average number of ordinary shares in issue during the year.
The basic and diluted revenue earnings per ordinary share is based on the profit for the year attributable to shareholders of £1,092,000 (2015: £1,133,000) and 93,363,744 (2015: 83,224,240) ordinary shares being the weighted average number of ordinary shares in issue during the year.
The basic and diluted capital earnings per ordinary share is based on the capital profit for the year attributable to shareholders of £320,000 (2015: £2,999,000) and 93,363,744 (2015: 83,224,240) ordinary shares being the weighted average number of ordinary shares in issue during the year.
During the year the Company allotted 5,683,709 new ordinary shares from a top up offer, and 1,445,773 new ordinary shares in respect of its DRIS.
The Company has also repurchased 417,743 of its own shares in the year, and these shares are held in the capital reserve. The total of 2,545,746 treasury shares has been excluded in calculating the weighted average number of ordinary shares for the period. The Company has no securities that would have a dilutive effect and hence basic and diluted earnings per share are the same.
The only potentially dilutive shares are those shares which, subject to certain criteria being achieved in the future, may be issued by the Company to meet its obligations under the Subscription Rights Agreement as set out in Note 3. No such shares have been issued or are currently expected to be issued. There are, therefore, considered to be no potentially dilutive shares in issue at 31 December 2016 or 31 December 2015
IFRS13, in respect of financial instruments that are measured in the balance sheet at fair value, requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
Each investment is reviewed at least quarterly to ensure that it has not ceased to meet the criteria of the level in which it is included at the beginning of each accounting period. The change in fair value for the current and previous year is recognised through profit or loss.
There have been no transfers between these classifications in either period.
All items held at fair value through profit or loss were designated as such upon initial recognition.
Full details of the methods used by the Company are set out in note 1 of these financial statements. Where investments are held in quoted stocks, fair value is set at the market bid price.
| IFRS13 measurement classification | Level 3 | Level 1 | |
|---|---|---|---|
| Unquoted Investments £000 |
Quoted Equity Investments £000 |
Total Investments £000 |
|
| Opening cost | 29,332 | 2,223 | 31,555 |
| Opening investment holding gain | 4,636 | 461 | 5,097 |
| Opening fair value at 1 January 2016 | 33,968 | 2,684 | 36,652 |
| Additions at cost | 4,508 | - | 4,508 |
| Capitalised interest and dividends | 80 | - | 80 |
| Disposal proceeds | (1,727) | (1,147) | (2,874) |
| Net profit on disposal* | 133 | 116 | 249 |
| Change in fair value | 285 | 419 | 704 |
| Closing fair value at 31 December 2016 | 37,247 | 2,072 | 39,319 |
| Closing cost | 30,853 | 1,419 | 32,272 |
| Closing investment holding gain** | 6,394 | 653 | 7,047 |
| Closing fair value at 31 December 2016 | 37,247 | 2,072 | 39,319 |
Movements in investments at fair value through profit or loss during the year to 31 December 2016 are summarised as follows:
* The net profit on disposal in the table above is £249,000 whereas that shown in the Statement of Comprehensive Income is £339,000. The difference comprises deferred proceeds of £90,000 in respect of assets which have been disposed of and are not included within the investment portfolio at the year-end (see page 65).
** Following the merger between the Company and British Smaller Technologies Company VCT plc a total of £975,000 of negative goodwill was recognised in the investment holding gains and losses reserve in respect of the investments acquired. The relevant amount per investment is realised, at the point of disposal to the capital reserve. At 31 December 2016 a total of £30,000 (2015: £30,000) was held on investments yet to be realised in the investment holdings gains and losses reserve.
There were no individual reductions in fair value during the year that exceeded 5 per cent of the total assets of the Company (2015: £nil).
Level 3 valuations include assumptions based on non-observable market data, such as discounts applied either to reflect change in fair value of financial assets held at the price of recent investment, or to adjust earnings multiples. IFRS 13 requires an entity to disclose quantitative information about the significant unobservable inputs used. Of the Company's Level 3 investments, 59 per cent are held on an earnings multiple basis, which have significant judgement applied to the valuation inputs. The table on page 64 sets out the range of Price Earnings ratios and discounts applied in arriving at investments valued on an earnings multiple basis. 35 per cent are recent deals held at cost. The remaining 6 per cent are valued based on previous investment round reviewed for impairment.
| Manufacturing & Industrial Services |
Retail & Brands |
Software, IT and Telecommunications |
Healthcare | Business Services |
|
|---|---|---|---|---|---|
| Earnings multiple inputs | |||||
| PE Multiple Range | 24.18 – 32.34 | 15.99 – 27.26 | 36.29 | 35.25 | 24.18 – 24.63 |
| PE Multiple Weighted Average | 29.45 | 19.31 | 36.29 | 35.25 | 24.46 |
| Combined PE and/or Marketability | |||||
| Discount Range | 56% - 72% | 48% - 60% | 40% - 68% | 72% | 60% - 68% |
| Combined PE and/or Marketability | |||||
| Discount Weighted Average | 68% | 52% | 60% | 72% | 64% |
The standard also requires disclosure, by class of financial instruments, if the effect of changing one or more inputs to reasonably possible alternative assumptions would result in a significant change to the fair value measurement. Each unquoted portfolio company has been reviewed in order to identify the sensitivity of the valuation methodology to using alternative assumptions. Where discounts have been applied (for example to Earnings Levels or PE ratios) alternatives have been considered which still fall within the IPEVC Guidelines (see page 56). For each unquoted investment, two scenarios have been modelled: more prudent assumptions (downside case) and more optimistic assumptions (upside case). Applying the downside alternative the value of the unquoted investments would be £2.7 million or 7.1 per cent lower. Using the upside alternative the value would be increased by £2.6 million or 7.1 per cent.
Movements in investments at fair value through profit or loss during the year to 31 December 2015 are summarised as follows:
| IFRS 13 measurement classification | Level 3* | Level 1 | |
|---|---|---|---|
| Unquoted Investments £000 |
Quoted Equity Investments £000 |
Total Investments £000 |
|
| Opening cost | 24,593 | 2,146 | 26,739 |
| Opening investment holding gain (loss) | 1,495 | (18) | 1,477 |
| Opening fair value at 1 January 2015 | 26,088 | 2,128 | 28,216 |
| Additions at cost | 6,478 | 761 | 7,239 |
| Capitalised interest and dividends | 116 | - | 116 |
| Disposal proceeds | (1,984) | (474) | (2,458) |
| Net profit (loss) on disposal* | 312 | (89) | 223 |
| Change in fair value | 2,958 | 358 | 3,316 |
| Closing fair value at 31 December 2015 | 33,968 | 2,684 | 36,652 |
| Closing cost | 29,332 | 2,223 | 31,555 |
| Closing investment holding gain | 4,636 | 461 | 5,097 |
| Closing fair value at 31 December 2015 | 33,968 | 2,684 | 36,652 |
*All of the changes in fair value during the year to level 3 investments relate to assets held at the year end.
The following disposals took place in the year (all companies are unquoted except where otherwise indicated):
| Net proceeds from sale |
Cost | Opening carrying value as at 1 January |
Profit (loss) on disposal |
|
|---|---|---|---|---|
| £000 | £000 | 2016 £000 |
£000 | |
| Unquoted investments: | ||||
| Bagel Nash Group Limited | 27 | 27 | 27 | - |
| Callstream Group Limited | 752 | 329 | 679 | 73 |
| Cambrian Park and Leisure Homes Limited (via Cambrian Lodges Holdings Limited) |
61 | 61 | 61 | - |
| GTK (Holdco) Limited | 272 | 72 | 212 | 60 |
| Harvey Jones Holdings Limited | 469 | 469 | 469 | - |
| Macro Art Holdings Limited | 104 | 104 | 104 | - |
| Wakefield Acoustics (via Malvar Engineering Limited) | 41 | 41 | 41 | - |
| Quoted investments: | ||||
| AB Dynamics plc | 503 | 131 | 416 | 87 |
| Brady plc | 320 | 498 | 315 | 5 |
| Gamma Communications plc | 170 | 73 | 171 | (1) |
| Gooch & Housego plc | 155 | 102 | 130 | 25 |
| Total proceeds on disposals in the year | 2,874 | 1,907 | 2,625 | 249 |
| Deferred proceeds: | ||||
| Ellfin Homecare Limited | 1 | - | - | 1 |
| Primal Pictures Limited | 2 | - | - | 2 |
| Silistix Limited | 9 | - | - | 9 |
| Sirigen Group Limited | 171 | - | 93 | 78 |
| Deferred proceeds received | 183 | - | 93 | 90 |
| Total proceeds from quoted and unquoted investments | 3,057 | 1,907 | 2,718 | 339 |
The following disposals took place in 2015:
| Net proceeds from sale |
Cost | Opening carrying value as at 1 January 2015 |
Profit (loss) on disposal |
|
|---|---|---|---|---|
| £000 | £000 | £000 | £000 | |
| Unquoted investments: | ||||
| Insider Technologies (Holdings) Limited | 773 | 780 | 522 | 251 |
| DisplayPlan Holdings Limited | 592 | 455 | 531 | 61 |
| GTK (Holdco) Limited | 103 | 103 | 103 | - |
| Macro Art Holdings Limited | 87 | 87 | 87 | - |
| Cambrian Park & Leisure Homes Limited | ||||
| (via Cambrian Lodges Holdings Limited) | 67 | 67 | 67 | - |
| Bagel Nash Group Limited | 80 | 80 | 80 | - |
| Harvey Jones Holdings Limited | 282 | 282 | 282 | - |
| Quoted investments: | ||||
| Hargreaves Services plc | 159 | 325 | 262 | (103) |
| Cambridge Cognition Holdings plc | 156 | 240 | 140 | 16 |
| Pressure Technologies plc | 159 | 120 | 161 | (2) |
| Total proceeds on disposals in the year | 2,458 | 2,539 | 2,235 | 223 |
| Deferred proceeds: | ||||
| Primal Pictures Limited | 12 | - | 12 | - |
| DxS Limited | 1 | - | - | 1 |
| Deferred proceeds received | 13 | - | 12 | 1 |
| Revaluation of deferred proceeds: | ||||
| Sirigen Group Limited | - | - | - | 8 |
| Total proceeds from quoted and unquoted investments | 2,471 | 2,539 | 2,247 | 232 |
YFM Private Equity Limited, the Company's Investment Adviser, also acts as investment adviser or manager to certain other funds that have invested in some of the companies within the current portfolio of the Company. Details of these investments are summarised in the tables below.
At 31 December 2016 the Company held a significant holding of at least 20 per cent of the issued ordinary share capital, either individually or alongside commonly managed funds, in the following companies:
| Company | Principal activity | No of shares held by the Company |
Percentage of class held by the Company* |
Percentage of class held by commonly advised/ managed funds* |
|---|---|---|---|---|
| ACC Aviation (via Newacc (2014) Limited) | Business Services | 14,365,817 | 13% | 50% |
| Bagel Nash Group Limited | Food Retail and Manufacturing | 33,091 | 5% | 40% |
| Biz2Mobile Limited | Software IT & Telecomms | 1,694,916 | 11% | 27% |
| Business Collaborator Limited | Software IT & Telecomms | 126,000 | 19% | 48% |
| Cambrian Park & Leisure Homes Limited (via Cambrian Lodges Holdings Limited) |
Manufacturing & Industrial | 100,000 | 16% | 41% |
| Deep-Secure Limited | Software IT & Telecomms | 49,678 | 8% | 57% |
| DisplayPlan Holdings Limited | Business Services | 1,260 | 12% | 35% |
| EL Support Services Limited | Business Services | 3,500 | 50% | 100% |
| Gill Marine Holdings Limited | Retail & Brands | 138,137 | 14% | 66% |
| GTK (Holdco) Limited | Manufacturing & Industrial | 14,603,200 | 18% | 48% |
| Harvey Jones Holdings Limited | Retail & Brands | 38,858 | 3% | 30% |
| The Heritage Windows Company Holdco Limited | Manufacturing & Industrial | 1,142,400 | 28% | 70% |
| Immunobiology Limited | Healthcare | 20,109,968 | 27% | 27% |
| Intamac Systems Limited | Software IT & Telecomms | 1,500,000 | 12% | 34% |
| Intelligent Office (via IO Outsourcing Limited) | Business Services | 106,609 | 18% | 44% |
| KeTech Enterprises Limited | Software IT & Telecomms | 128,333 | 13% | 38% |
| Macro Art Holdings Limited | Business Services | 100,000 | 13% | 32% |
| Mangar Health Limited | Healthcare | 78,555 | 17% | 48% |
| Matillion Limited | Software IT & Telecomms | 22,987 | 11% | 30% |
| NB Technology Services Limited | Software IT & Telecomms | 3,500 | 50% | 100% |
| Ness (Holdings) Limited | Retail & Brands | 10,000,000 | 17% | 43% |
| OC Engineering Services Limited | Retail & Brands | 3,500 | 50% | 100% |
| RMS Group Holdings Limited | Manufacturing & Industrial | 59,619 | 3% | 23% |
| Seven Technologies Holdings Limited | Software IT & Telecomms | 619,130 | 6% | 38% |
| SH Healthcare Services Limited | Healthcare | 3,500 | 50% | 100% |
| Sipsynergy (via Hosted Network Services Limited) | Software IT & Telecomms | 135,832 | 10% | 30% |
| SP Manufacturing Services Limited | Manufacturing & Industrial | 3,500 | 50% | 100% |
| Springboard Research Holdings Limited | Business Services | 171,892 | 13% | 32% |
| Wakefield Acoustics (via Malvar Engineering Limited) | Manufacturing & Industrial | 49,600 | 15% | 37% |
*Fully diluted holding.
In a number of cases the issued ordinary share capital of an investee company is split into different classes of shares and thus the percentages given above do not necessarily represent the Company's (or other commonly managed funds') percentage holding of an investee company's total equity.
The amounts shown below are the net cost of investments as at 31 December 2016 and exclude those companies which are in receivership or liquidation.
| British Smaller Companies VCT2 plc |
British Smaller Companies VCT plc |
British Smaller Companies EIS Fund |
The Chandos LP |
YFM Equity Partners 2015 Fund Co-Investment LP |
Total | |
|---|---|---|---|---|---|---|
| £000 | £000 | £000 | £000 | £000 | £000 | |
| AB Dynamics plc | 123 | 137 | - | - | - | 260 |
| ACC Aviation (via Newacc (2014) Limited) | 1,379 | 2,068 | - | - | 1,723 | 5,170 |
| Bagel Nash Group Limited | 630 | 944 | - | 2,185 | - | 3,759 |
| Biz2Mobile Limited | 1,000 | 1,500 | - | - | - | 2,500 |
| Business Collaborator Limited | 1,340 | 2,010 | - | - | - | 3,350 |
| Cambrian Park & Leisure Homes Limited (via Cambrian Lodges Holdings Limited) |
1,072 | 1,608 | - | - | - | 2,680 |
| Deep-Secure Limited | 500 | 1,000 | - | 2,000 | - | 3,500 |
| DisplayPlan Holdings Limited | 70 | 130 | - | - | - | 200 |
| EKF Diagnostics plc | 437 | 448 | - | - | - | 885 |
| EL Support Services Limited | 500 | 500 | - | - | - | 1,000 |
| Gamma Communication plc | 95 | 139 | - | - | - | 234 |
| Gill Marine Holdings Limited | 1,870 | 2,500 | 600 | 4,000 | - | 8,970 |
| GTK (Holdco) Limited | 741 | 1,127 | 250 | - | - | 2,118 |
| Harvey Jones Holdings Limited | 442 | 735 | - | 223 | - | 1,400 |
| The Heritage Window Company Holdco Limited | 1,468 | 2,203 | - | - | - | 3,671 |
| Intamac Systems Limited | 905 | 302 | - | 2,422 | - | 3,629 |
| Intelligent Office (via IO Outsourcing Limited) | 1,956 | 2,934 | - | - | - | 4,890 |
| KeTech Enterprises Limited | 2,000 | 2,000 | - | - | 1,000 | 5,000 |
| Leengate Holdings Limited | 934 | 1,401 | - | - | - | 2,335 |
| Macro Art Holdings Limited | 627 | 941 | - | - | - | 1,568 |
| Mangar Health Limited | 1,640 | 2,460 | 500 | - | - | 4,600 |
| Matillion Limited | 1,400 | 2,100 | - | - | 500 | 4,000 |
| NB Technology Services Limited | 500 | 500 | - | - | - | 1,000 |
| OC Engineering Services Limited | 500 | 500 | - | - | - | 1,000 |
| PowerOasis Limited | 594 | 445 | - | 1,186 | - | 2,225 |
| RMS Group Holdings Limited | 70 | 180 | - | 250 | - | 500 |
| Selima Holding Company Ltd | 300 | 600 | - | - | - | 900 |
| Seven Technologies Holdings Limited | 1,238 | 1,984 | 370 | 3,941 | - | 7,533 |
| SH Healthcare Services Limited | 500 | 500 | - | - | - | 1,000 |
| SP Manufacturing Services Limited | 500 | 500 | - | - | - | 1,000 |
| Springboard Research Holdings Limited | 1,706 | 2,558 | - | - | - | 4,264 |
| Sipsynergy (via Hosted Network Services Ltd) | 900 | 1,350 | - | - | 500 | 2,750 |
| TeraView Limited | 375 | 375 | - | - | - | 750 |
| Traveltek Group Holdings Limited | 980 | 1,470 | - | - | 1,250 | 3,700 |
| Wakefield Acoustics (via Malvar Engineering Limited) | 720 | 1,095 | - | - | - | 1,815 |
| 2016 £000 |
2015 £000 |
|
|---|---|---|
| Non-current assets: | ||
| Accrued income | 837 | 678 |
| Current assets: | ||
| Trade receivables | 449 | 186 |
| Less: Allowances for credit losses on trade receivables | (133) | - |
| Prepayments and accrued income | 75 | 182 |
| 391 | 368 | |
| Allowance for credit losses on trade receivables: | ||
| Allowances as at 1 January | - | 197 |
| Trade receivable written off | - | (197) |
| Additions – charged to Statement of Comprehensive Income | 133 | - |
| Allowances as at 31 December | 133 | - |
Trade receivables are assessed for reduction in fair value when older than 90 days or where there is reasonable doubt that payment will be received in due course. As of 31 December 2016, there were no trade receivables that were past due but not impaired (2015: £nil).
The carrying amounts of the Company's trade and other receivables are denominated in sterling.
The maximum exposure to credit risk at the reporting date in respect of trade and other receivables is £449,000 (2015: £186,000). The Company does not hold any collateral as security.
| 2016 £000 |
2015 £000 |
|
|---|---|---|
| Cash at bank | 12,826 | 15,444 |
| Cash and Cash Equivalents | 12,826 | 15,444 |
At 31 December 2016 a further £3.04 million (2015: £1.99 million) was also held in fixed term deposit accounts which were due to mature in April 2017. In accordance with the definition of cash and cash equivalents the amounts in both the current and prior year are shown separately as a current asset on the face of the balance sheet.
| 2016 £000 |
2015 £000 |
|
|---|---|---|
| Amounts payable within one year: | ||
| Accrued expenses | 301 | 284 |
| 301 | 284 |
| 2016 Allotted, Called-up and Fully paid £000 |
2015 Allotted, Called-up and Fully paid £000 |
|
|---|---|---|
| Ordinary shares of 10 pence | ||
| Issued: 96,520,060 (2015: 89,390,578) including 2,545,746 shares held in treasury (2015: 2,128,003). | 9,652 | 8,939 |
The movement in the year was as follows:
| Price pence |
Date | Number of shares |
Share Capital £000 |
||
|---|---|---|---|---|---|
| Total as at 1 January 2016 | 89,390,578 | 8,939 | |||
| Issue of shares | Fundraising | 63.00-64.50 | 14 January 2016 | 5,683,709 | 569 |
| Issue of shares | DRIS | 58.05 | 9 May 2016 | 763,247 | 76 |
| Issue of shares | DRIS | 56.05 | 26 September 2016 | 682,526 | 68 |
| As at 31 December 2016 (including treasury shares) | 96,520,060 | 9,652 |
The movement in the year to 31 December 2015 was as follows:
| Price pence |
Date | Number of shares |
Share Capital £000 |
||
|---|---|---|---|---|---|
| Total as at 1 January 2015 | 64,466,898 | 6,447 | |||
| Issue of shares | Fundraising | 64.75 | 6 January 2015 | 4,480,709 | 448 |
| Issue of shares | Fundraising | 65.50-69.13 | 6 January 2015 | 3,181,424 | 318 |
| Issue of shares | Fundraising | 64.75 | 2 February 2015 | 1,672,709 | 167 |
| Issue of shares | Fundraising | 63.25-66.23 | 2 February 2015 | 976,469 | 98 |
| Issue of shares | Fundraising | 64.75 | 2 March 2015 | 2,486,374 | 249 |
| Issue of shares | Fundraising | 63.25-66.23 | 2 March 2015 | 1,313,296 | 131 |
| Issue of shares | Fundraising | 66.25 | 30 March 2015 | 4,267,036 | 427 |
| Issue of shares | Fundraising | 65.00-68.06 | 30 March 2015 | 4,145,378 | 415 |
| Issue of shares | Fundraising | 66.25 | 22 April 2015 | 911,888 | 91 |
| Issue of shares | Fundraising | 65.00-68.06 | 22 April 2015 | 229,866 | 23 |
| Issue of shares | DRIS | 58.71 | 8 June 2015 | 677,522 | 67 |
| Issue of shares | DRIS | 57.48 | 28 September 2015 | 581,009 | 58 |
| As at 31 December 2015 (including treasury shares) | 89,390,578 | 8,939 |
During the year the Company purchased 417,743 (2015: 217,981) of its own shares and these shares are held in treasury on the balance sheet. Full details of the share purchases are set out in the Directors' Report under the heading 'Issue and Buy-Back of Shares'. The treasury shares have been included in calculating the number of ordinary shares in issue at 31 December 2016.
The Company is party to a share based payment arrangement as defined by IFRS 2 'Share based payments'. The details of the arrangement are explained in Note 3: Administration Expenses. As the arrangement was entered into prior to 7 November 2002, the Company is not required to account for the arrangement under IFRS 2. No shares have been issued to date under this arrangement.
The basic and diluted net asset value per ordinary share is calculated on attributable assets of £56,109,000 (2015: £54,850,000) and 93,974,314 (2015: 87,262,575) ordinary shares in issue at the year end.
The treasury shares have been excluded in calculating the number of ordinary shares in issue at 31 December 2016.
The only potentially dilutive shares are those shares which, subject to certain criteria being achieved in the future, may be issued by the Company to meet its obligations under the Subscription Rights Agreement as set out in note 3. No such shares have been issued or are currently expected to be issued. There are therefore considered to be no potentially dilutive shares in issue at 31 December 2016 or 31 December 2015. Consequently, basic and diluted net asset values per ordinary share are equivalent in both the year ended 31 December 2016 and 31 December 2015.
The total return per ordinary share is calculated on cumulative dividends paid of 52.5 pence per ordinary share (2015: 48.0 pence per ordinary share) plus the net asset value as calculated per note 12.
There are no financial commitments at 31 December 2016.
Mr R Last is chairman and non-executive director of Gamma Communications plc, in which he has a 0.06 per cent equity stake. During the year to 31 December 2016 he received remuneration of £75,000 from Gamma in respect of his services.
Subsequent to the year end the Company allotted a total of 6,787,231 ordinary shares on 10 February 2017 pursuant to the offer detailed under "Fundraising" on page 8, raising net proceeds of approximately £4.1 million.
The Company has no derivative financial instruments and has no financial asset or liability for which hedge accounting has been used in either year. The Company classifies its financial assets as either fair value through profit or loss or loans and receivables, and its financial liabilities, primarily accrued expenses, as fair value through profit or loss.
It is the directors' opinion that the carrying value of trade receivables and trade payables approximates their fair value. Therefore, the directors consider all assets and liabilities to be carried at a valuation which equates to fair value.
Investments are made in a combination of equity, fixed rate and variable rate financial instruments so as to comply with VCT legislation and provide potential future capital growth. Surplus funds are held in bank deposits until suitable qualifying investment opportunities arise.
In accordance with IAS 39, the Company has reviewed all contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain criteria set out in the standard. No embedded derivatives have been identified by the Company.
The accounting policies for financial instruments have been applied to the items below:
| 2016 | 2015 | |||
|---|---|---|---|---|
| Loans and receivables £000 |
Assets at fair value through profit or loss £000 |
Loans and receivables £000 |
Assets at fair value through profit or loss £000 |
|
| Non-current assets | ||||
| Financial assets at fair value through profit and loss | - | 39,319 | - | 36,652 |
| Accrued income | 837 | - | 678 | - |
| Current assets | ||||
| Cash and cash equivalents | 12,826 | - | 15,444 | - |
| Cash on fixed term deposit | 3,037 | - | 1,992 | - |
| Trade and other receivables | 316 | - | 186 | - |
| 17,016 | 39,319 | 18,300 | 36,652 | |
| Other assets – not financial instruments | 75 | - | 182 | - |
| 17,091 | 39,319 | 18,482 | 36,652 |
| 2016 Other financial liabilities £000 |
2015 Other financial liabilities £000 |
|
|---|---|---|
| Trade and other payables | (301) | (284) |
| (301) | (284) |
Assets classified as fair value through profit or loss were designated as such upon initial recognition. The Company has not reclassified financial assets between any of the categories detailed in IAS 39, either in current or prior periods.
The Company's investing activities expose it to various types of risk that are associated with the financial instruments and markets in which it invests. The most important types of financial risk to which the Company is exposed are market risk, credit risk and liquidity risk. The nature and extent of the financial instruments outstanding at the balance sheet date and the risk management policies employed by the Company are discussed below. There have been no changes since last year in the objectives, policies, and processes for managing and measuring risks facing the Company.
The Company invests in new and expanding businesses, the shares of which may not be traded on the stock market. Consequently, exposure to market factors, in relation to many investments, stems from market based measures that may be used to value unlisted investments.
The market also defines the value at which investments may be sold. Returns are therefore maximised when investments are bought or sold at appropriate times in the economic cycle.
Market price risk arises from uncertainty about the future prices of financial instruments held in accordance with the Company's investment objectives. It represents the potential loss that the Company might suffer through holding market positions in the face of market movements. In addition, the ability of the Company to purchase or sell investments is also constrained by requirements set down for VCTs.
Of the Company's investments, 5 per cent are quoted on AIM (2015: 7 per cent). A 5 per cent increase in stock prices as at 31 December 2016 would have increased the net assets attributable to the Company's shareholders and the total profit for the year by £104,000 (2015: £134,000). An equal change in the opposite direction would have decreased the net assets attributable to the Company's shareholders and the total profit for the year by an equal amount.
Of the Company's investments, 95 per cent are in unquoted companies held at fair value (2015: 93 per cent). The valuation methodology for these investments includes the application of externally produced FTSE® PE multiples. Therefore the value of the unquoted element of the portfolio is also indirectly affected by price movements on the listed market. Investments have been valued in line with the valuation guidelines described within Note 1. Those using an earnings multiple methodology include judgements regarding the level of discount applied to that multiple. A 10 per cent decrease in the discount applied would have increased the net assets attributable to the Company's shareholders and the total profit for the year by £2,990,000 (5.3 per cent of net assets). An equal change in the opposite direction would have decreased net assets attributable to the Company's shareholders and the total profit for the year by £2,849,000 (5.1 per cent of net assets).
Other valuations are valued at the price of recent investment, reviewed and discounted where the fair value of the investment no longer equates to the cost of the recent investment. A 10 per cent decrease in the discount applied would have increased the net assets attributable to the Company's shareholders and the total profit for the year by less than 0.5 per cent of net assets.
The largest single concentration of risk relates to the Company's investment in ACC Aviation (via Newacc (2014) Limited) which constitutes 6.2 per cent of the net assets attributable to the Company's shareholders. The Board seeks to mitigate this risk by diversifying the portfolio and monitors the status of all investments on an ongoing basis. The average investment, excluding those that have had their fair value reduced to nil, is 1.8 per cent (2015: 1.7 per cent) of the value of net assets.
Date of Disposal Sale Valuation Increase proceeds one year (decrease) to date earlier £000 £000 £000 Primal Pictures Limited* Aug-12 1,916 1,008 908 Sirigen Group Limited * Aug-12 1,962 517 1,445 Digital Healthcare Limited Aug-13 1,285 1,156 129 Ellfin Home Care Limited Dec-14 1 - 1 Waterfall Services Limited Dec-14 964 489 475 Insider Technologies (Holdings) Limited Oct-15 773 587 186 Callstream Group Limited Mar-16 752 773 (21) 7,653 4,530 3,123
The table below shows a comparison of the realised proceeds to the unrealised valuations one year prior to sale, for all disposals of unquoted investments over the last five years.
* Includes estimated value of deferred consideration on exit
The Company's venture capital investments include £14,527,000 (2015: £14,726,000) of loan stock in unquoted companies. The majority of this loan stock at 31 December 2016 is at fixed rates to guard against fluctuations in interest rates. As a result the Company is exposed to cash flow interest rate risk on £750,000 (2015: £883,000) of its loan stock portfolio.
Other financial assets (being accrued income) and other financial liabilities (being accrued expenses) attract no interest and have an expected maturity date of less than one year.
The Company has some exposure to interest rates as a result of interest earned on bank deposits. Other financial assets (being accrued income) and other financial liabilities (being accrued expenses) attract no interest and have an expected maturity date of less than one year. A sensitivity analysis has not been performed as the amounts involved are not considered to be significant.
| 2016 | 2015 | |||||
|---|---|---|---|---|---|---|
| £000 | Weighted average interest rate % |
Weighted average time for which rate is fixed Months |
£000 | Weighted average interest rate % |
Weighted average time for which rate is fixed Months |
|
| Fixed rate loan stock and preference shares | 18,727 | 9.3 | 27 | 19,907 | 8.8 | 35 |
| Cash on fixed term deposit | 3,037 | 0.9 | 3 | 1,992 | 1.0 | 3 |
| Combined | 21,764 | 8.2 | 24 | 21,899 | 8.1 | 32 |
The Company has no significant exposure to exchange rate risk.
Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Investment Adviser has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts of financial assets excluding equity investments total £36,492,000 (2015: £39,224,000) which best represents the maximum credit risk exposure at the balance sheet date.
The Company does not invest in floating rate instruments other than, on occasion, unquoted loan stock. Credit risk on unquoted loan stock held within unlisted investments is considered to be part of market risk as disclosed above.
The fair value of the loans and receivables is not regarded as having changed due to the changes in credit risk in either year.
Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the high credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk. Bankruptcy or insolvency of the broker may cause the Company's rights with respect to securities held by the broker to be delayed or limited. The Investment Adviser monitors the Company's risk by reviewing the broker's internal control reports on a regular basis.
The cash held by the Company is held across a number of banks to spread the risk. Bankruptcy or insolvency of these banks may cause the Company's rights with respect to the cash held by the bank to be delayed or limited. The banks used by the Company are large and reputable. Should the credit quality or the financial position of the banks or broker deteriorate significantly the Investment Adviser will move the cash holdings to another bank.
The maturities of the loan stock portfolio are as follows:
| 2016 £000 | 2015 £000 | |||||||
|---|---|---|---|---|---|---|---|---|
| <1 year | 1-2 years | 2-5 years | >5 years | <1 year | 1-2 years | 2-5 years | >5 years | |
| Unquoted loan | ||||||||
| investments | 2,603 | 2,835 | 9,089 | - | 1,822 | 1,403 | 11,245 | 256 |
The past due maturity dates of the loan stock portfolio are as follows:
Included within unquoted loan investments are £548,000 of loans which are past their due date but have been re-negotiated.
An aged analysis of the unquoted loan investments included above, which are past due but not individually impaired, is set out below. For this purpose these loans are considered to be past due when any payment due date under the loan's contractual terms (such as payment of interest) is received late or missed. The full value of the loan is given even though, in some cases, the only default is in respect of interest.
| 2016 £000 0-6 months |
2015 £000 0-6 months |
|
|---|---|---|
| Loans to investee companies past due | 1,225 | 876 |
The risk to the Company relates to liabilities which fall due within one year. These liabilities are deemed immaterial and as such the risk associated with them is minimal.
The Company needs to retain enough liquid resources to support the financing needs of its investment businesses. To meet this aim the Company places its surplus funds in bank interest deposit accounts. Investments in liquid funds are held for the purpose of liquidity whilst waiting for suitable qualifying investment opportunities to arise.
The Company's liquidity risk is managed on an ongoing basis by the Investment Adviser in accordance with policies and procedures in place. The cash requirements of the Company in respect of each investment are assessed at monthly portfolio meetings.
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. Of the Company's assets 22.9 per cent (2015: 28.2 per cent) are in the forms of liquid cash. There are no undrawn committed borrowing facilities at either year end. The Company does not have a material amount of liabilities at the year end.
The Company's objectives when managing capital are:
The Company has no external debt; consequently all capital is represented by the value of share capital, distributable and other reserves. Total shareholder equity at 31 December 2016 was £56.11 million (2015: £54.85 million).
In order to maintain or adjust its capital structure the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets.
There have been no changes in capital management objectives or the capital structure of the business from the previous year. The Company is not subject to any externally imposed capital requirements.
NOTICE IS HEREBY GIVEN that the ANNUAL GENERAL MEETING of the Company will be held at 33 St James Square, London, SW1Y 4JS on 10 May 2017 at 12:00 noon for the following purposes:
To consider and, if thought fit, pass the following resolutions:
(12) That, subject to the sanction of the High Court, the amount standing to the credit of the share premium account of the Company as at the date of the final hearing before the Court at which confirmation of said cancellation is sought, be cancelled.
Company Secretary
Registered office: 5th Floor, Valiant Building, 14 South Parade, Leeds LS1 5QS
Information regarding the Annual General Meeting, including the information required by section 311A of the Companies Act 2006, is available from www.bscfunds.com.
Capita Asset Services PXS1 34 Beckenham Road Beckenham BR3 4ZF;
Your main point of contact in terms of your investment in the Company remains the Relevant Member (or, perhaps your custodian or broker) and you should continue to contact them (and not the Company) regarding any changes or queries relating to your personal details and your interest in the Company (including any administrative matters). The only exception to this is where the Company expressly requests a response from you.
(l) A corporation which is a member can appoint one or more corporate representatives who may exercise, on its behalf, all its powers as a member provided that no more than one corporate representative exercises powers over the same share.
I/We _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________being a member/members of the above named Company entitled to attend and vote at the Annual General Meeting of the Company hereby appoint the Chairman of the Annual General Meeting or (see notes (2) and (3) and (4)) _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________of
_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ as my/our proxy to vote for me/us on my/our behalf at the Annual General Meeting of the Company to be held on 10 May 2017 at 12:00 noon and at any adjournment thereof.
Number of ordinary shares proxy is appointed over
Please tick here if this proxy is one of multiple proxy appointments being made (see note 2) n
___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
My/our proxy is to vote on the resolutions as indicated below. Please indicate with an "x" how you wish your vote to be cast. If no voting indication is given, your proxy will vote or abstain from voting on the resolutions at their discretion.
| FOR | AGAINST | WITHHELD | ||
|---|---|---|---|---|
| Ordinary Resolutions | ||||
| 1. | To receive the annual report and accounts | n | n | n |
| 2. | To approve a final dividend of 1.5 pence per ordinary share | n | n | n |
| 3. | To approve the Directors' Remuneration Report | n | n | n |
| 4. | To approve the Directors' Remuneration Policy | n | n | n |
| 5. | To re-elect Mr P C Waller as a director | n | n | n |
| 6. | To re-elect Mr R M Pettigrew as a director | n | n | n |
| 7. | To re-elect Mr R Last as a director | n | n | n |
| 8. | To appoint BDO LLP as auditor | n | n | n |
| 9 | To authorise the directors to allot shares. | n | n | n |
| Special Resolutions | ||||
| 10 | To waive pre-emption rights in respect of the allotment of shares. | n | n | n |
| 11 | To amend the Articles of Association of the Company to increase the limit on the aggregate remuneration of the non-executive directors from £75,000 to £100,000 per annum. |
n | n | n |
| 12 | To cancel, subject to the sanction of the High Court, the share premium account. | n | n | n |
Please refer to notes overleaf.
If you would like to submit your form of proxy using the web-based voting facility go to www.capitashareportal.com. You will be asked to enter your investor code, surname and postcode to be able to lodge your vote. Your investor code can be found on your share certificate #or recent tax voucher.
To be used at the Annual General Meeting of the Company to be held at 33 St James Square, London, SW1Y 4JS on 10 May 2017 at 12:00 noon
YFM Private Equity Limited 5th Floor, Valiant Building 14 South Parade Leeds LS1 5QS
Beckenham Kent BR3 4TU
Howard Kennedy LLP 1 London Bridge London SE1 9BG
Panmure Gordon (UK) Limited One New Change London EC4M 9AF
BDO LLP 55 Baker Street London W1U 7EU
Santander UK plc 44 Merrion Street Leeds LS2 8JQ
The City Partnership (UK) Limited 110 George Street Edinburgh EH2 4LH
5th Floor, Valiant Building 14 South Parade Leeds LS1 5QS
Telephone 0113 244 1000 Email [email protected]
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