British Smaller Companies VCT plc. Annual Report for the year ended 31 March 2014

Transcription

1 Annual Report for the year ended 31 March 2014

2 About Us ( the Company ) was launched in 1996 and has a diverse portfolio of unquoted and AIM quoted investments (with one traded on ISDX). The current investment portfolio has an audited valuation of 40 million as at 31 March 2014, of which 36 million (90 per cent) is held in unquoted investments and 4 million (10 per cent) is held in quoted investments. Fund Manager is managed by YFM Private Equity Limited ( the Fund Manager ) which is a wholly owned subsidiary of YFM Equity Partners LLP and has an experienced team of investment managers based in its offices in London, Leeds, Manchester and Sheffield. The Fund Manager is authorised and regulated by the Financial Conduct Authority (formerly the Financial Services Authority). Investment Policy The investment policy 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, Retail & Brands, Business Services, Manufacturing & Industrial Services and Healthcare and these investments will primarily be in established unquoted companies (including those quoted on AIM and ISDX). Investments will be made with regard to the VCT regulations so as to maintain the VCT s venture capital trust status. Alongside an investment in equities the Company usually invests in preference shares and loan stock to enhance the security of the portfolio and to achieve a balance of income and capital growth. Dividend Policy Your Board remains committed to achieving the objective of a consistent and, where possible, increasing dividend stream over time, but this depends upon the level of realisations and investment income that the Company is able to make or achieve in any one period and cannot be guaranteed. The tax reliefs for a VCT investment are of particular benefit for qualifying Shareholders as there is no income tax payable on the dividends received, or need to declare them in a tax return. This means that qualifying Shareholders in British Smaller Companies VCT plc who are higher and additional rate taxpayers do not have to pay income tax on the dividends they receive from the Company. Share Buy-Backs Share buy-backs enable Shareholders to obtain some liquidity in an otherwise largely 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 ten per cent of the latest reported net asset value. Dividend Re-Investment Scheme (DRIS) The Company operates a dividend re-investment scheme which gives Shareholders the opportunity to re-invest any cash dividends. Currently dividends are re-invested at a five 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 Bill 2014 published in March 2014 has confirmed that shares acquired at any time under dividend re-investment schemes will not impact tax relief given on subscriptions for VCT shares. Further details of the Company s investment policy can be found in the Strategic Report on page 9. 2

3 Contents Financial Overview Financial Highlights for the Year 4 Financial Calendar 5 Five Year Summary 5 Chairman s Statement 6 Strategic Report Introduction 9 Objectives and Key Policies 9 Fund Management and Key Contracts 9 Key Performance Indicators 11 Investment Performance Investment Review 14 Investment Portfolio Summary and Disposal History to 31 March Summary of Investment Portfolio Movement since 31 March Investee Company Information 20 Principal Risks 30 Other Matters 32 Corporate Governance Directors 33 Directors Report 34 Corporate Governance 37 Directors Remuneration Report 43 Directors Responsibilities Statement 46 Auditor s Report Independent Auditor s Report 47 Financial Statements Statement of Comprehensive Income 49 Balance Sheet 50 Statement of Changes in Equity 51 Statement of Cash Flows 53 Notes to the Financial Statements 54 Annual General Meeting Notice of the Annual General Meeting 74 Advisers to the Company 79 3

4 Fi nancial Highlights for the Year 192.7p Total Return Increases by 6.3 per cent Since 31 March 2013 your Company s total return has increased by 11.5 pence per ordinary share from pence per ordinary share to pence per ordinary share, which includes cumulative dividends paid of 90.7 pence per ordinary share. 11.9% Net Asset Value Increase Your Company has continued to make progress this year with an overall increase above the opening net asset value ( NAV ) per share of 11.9 per cent prior to the payment of dividends. In the year NAV increased by 11.5 pence per ordinary share from 97.0 pence per ordinary share at 31 March 2013 to pence per ordinary share at 31 March 2014, out of which dividends totalling 6.5 pence per ordinary share were paid resulting in a year end NAV of pence per ordinary share million Investment Growth The underlying growth in the investment portfolio was 6.66 million. This included 5.97 million of unrealised value growth and 0.69 million of gain over the opening value from disposals. The realised profit over original cost is 1.06 million. 6.5p Dividends for the Year Total dividends paid during the year ended 31 March 2014 were 6.5 pence per ordinary share, which equates to 6.7 per cent of the opening 31 March 2013 net asset value per share. This comprises a final dividend relating to the year to 31 March 2013 of 3.5 pence, a special interim dividend of 1.0 pence following realised gains from the portfolio and an interim dividend for the year to 31 March 2014 of 2.0 pence per ordinary share. The average dividend paid over the five years to 31 March 2014 is 9.2 pence per ordinary share (including the special interim dividend of 18.0 pence per ordinary share paid in August 2011 in respect of the partial disposal of GO Outdoors). 92.7% Original Investor Return Shareholders who subscribed in the Company s first fundraising round for the 1995/96 and 1996/97 Tax Year have received 90.7 pence per ordinary share of dividends to date with the total return of pence per ordinary share representing a 92.7 per cent uplift on their original investment excluding tax relief. The annualised return for Shareholders in each fundraising round is set out on page 12. 4

5 Fi nancial Calendar Financial Overview Results Announced 13 June 2014 Ex-Dividend Date 2 July 2014 Record Date 4 July 2014 Annual General Meeting 22 July 2014 DRIS Election Date 18 July 2014 Dividend Paid 1 August 2014 Five Year Summary Year ended Year ended Year ended Year ended Year ended 31 March 31 March 31 March 31 March 31 March Income 1,341,000 1,323,000 1,236,000 1,174,000 1,129,000 Profit before and after taxation 6,525,000 1,123,000 1,064,000 10,373,000 4,202,000 Profit per ordinary share 13.14p 2.78p 2.92p 31.38p 13.65p Dividend per ordinary share paid in the year 6.5p 5.0p 23.0p 6.2p 5.0p Cumulative dividend paid per ordinary share 90.7p 84.2p 79.2p 56.2p 50.0p Net assets attributed to ordinary shares 62,584,000 42,089,000 37,894,000 41,172,000 29,008,000 Net asset value per ordinary share 102.0p 97.0p 99.6p 120.0p 94.4p Total return per ordinary share 192.7p 181.2p 178.8p 176.2p 144.4p 5

6 I am pleased to be able to report another strong year for your Company with total return (net asset value plus cumulative dividends) rising by 11.5 pence per ordinary share over the year to 31 March This equates to an increase of 11.9 per cent on the opening net asset value at 31 March The recent joint fundraising with British Smaller Companies VCT2 plc (which closed in May 2014) was also a success, raising gross proceeds of 26.9 million in aggregate of which 16.2 million was raised by your Company. 6

7 Chairman s Statement Financial Overview These results have enabled your Company to continue to hold its ranking as a top performing VCT, with Citywire reporting it as the best performing VCT over five years and in the top ten over the last one and ten years. (Source: Citywire data as at 15 May 2014 based on NAV performance) Financial Results The movement in net asset value per ordinary share and the dividends paid in the year are summarised in the table below: Pence per ordinary share March ,089 Net underlying increase in portfolio ,660 Net expenses (0.2) (135) Buy-back of shares 0.1 (606) Issue of new shares , ,716 Dividends paid (6.5) (3,221) , March ,584 The overall value of the investments and the fixed interest securities portfolios has increased by 6.66 million from an opening value at 31 March 2013 of million. This return comprises a gain on the revaluation of the portfolios of 5.97 million and a gain over the opening value from the realisation of investments of 0.69 million. Strong value gains were seen across many portfolio businesses, as a result of the clear growth strategies they have been following as well as a general improvement in market conditions. During the year the Company has paid total dividends of 6.5 pence per ordinary share, bringing the total cumulative dividends paid since inception to 90.7 pence per ordinary share. The total return (being net asset value plus cumulative dividends) increased to pence per ordinary share at 31 March 2014 from pence at the start of the year. The chart on page 11 of these Financial Statements shows in greater detail the movement in total return, net asset value and dividends paid over time. Your Company has seen investment levels rising steadily throughout the year completing investments of million in aggregate, of which 8.26 million was completed in the latter part of the year. This rate of investment has continued into the current financial year. Shareholder Relations Dividends Your Board remains committed to achieving the objective of a consistent and, where possible, increasing dividend stream over time. Dividends paid in the year comprise a final dividend of 3.5 pence per ordinary share in respect of the year ended 31 March 2013, an interim dividend of 2.0 pence per ordinary share in respect of the financial year just ended and a 1.0 pence per ordinary share special interim dividend, totalling 6.5 pence per ordinary share. This represents 6.7 per cent of the opening net asset value per ordinary share and brings the cumulative dividends paid to 90.7 pence per ordinary share. The Board is pleased to propose a final dividend of 3.5 pence per ordinary share for the year ended 31 March This final dividend is subject to approval by the Shareholders at the forthcoming Annual General Meeting and if approved will then be paid on 1 August 2014 to Shareholders on the register at 4 July Dividend Re-investment Scheme (DRIS) The Company operates a DRIS, which gives Shareholders the opportunity to re-invest any cash dividends as described on page 2. The DRIS is open to all Shareholders, including those who invested under the recent joint offers. In total 0.6 million was raised for the financial year ending 31 March 2014 via the DRIS. 7

8 Fundraising In April million was raised by the Company under the linked offer with British Smaller Companies VCT2 plc which was launched on 16 November The Company has seen a continued increase in investment rates coupled with a strong pipeline of prospective investments, primarily as a result of improving economic conditions and favourable legislation changes. In order to take advantage of this a joint fundraising offer with British Smaller Companies VCT2 plc was launched on 14 January On 31 March million was raised through an allotment of shares in respect of this joint offer, bringing the total raised in the year to 31 March 2014 to 17.2 million net of costs. Since the year end the Company has made three further allotments representing further net funds raised of 4.0 million. The joint offer closed on 29 May Shareholder Communications Your Board remains committed to enhancing Shareholder communications and holds Shareholder workshops where investors are invited to meet members of the Board, representatives from YFM Private Equity Limited (the Company s Fund Manager) and the CEOs of one or more of our investee companies. Our 19th Shareholder workshop was held at Central Hall Westminster on 12 February 2014 and achieved the highest ever attendance with over 200 Shareholders attending. Presentations at the workshop were made by David Hall on behalf of YFM Private Equity Limited, Mark Henley (Managing Director of President Engineering Limited) and Angela Lane (former Chairman of Fishawack Communications). After lunch David Hall, David Bell and Paul Cannings, all of YFM Private Equity Limited, hosted a Question and Answer Session which was attended by over 70 Shareholders. The Annual General Meeting of the Company will be held at noon on 22 July 2014 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 74. Regulatory The Board has applied to the Financial Conduct Authority for approval to become a Self-managed Alternative Investment Fund as defined under the new Alternative Investment Fund Manager s Directive following the implementation of the EU s directive on self-managed investment funds. It is not envisaged that this will result in any material change to the operation of the Company. The Company has complied with the new reporting regulations throughout this Annual Report. The Board hopes these changes will help Shareholders gain a greater understanding of the Company s performance and strategy. Changes to Investment Management and Incentive Agreements Your Board has agreed with YFM Private Equity Limited a number of changes to the investment management and incentive agreements. In particular it has added clauses that: (i) cap any deal fees paid by investee companies to the Fund Manager at the point of investment; (ii) limit annual monitoring and directors fees paid by investee companies to the Fund Manager; and (iii) limit the performance incentive fee to be paid in any one year. Your Board believes that these amendments should help enhance returns to Shareholders by limiting the absolute amount of fees charged to investee companies, and also smooth the payment of any particularly large incentive fees earned over several years. Further details are set out on page 58. Subsequent Events Since the end of the reporting period, the Company has completed five additional investments totalling 4.70 million and has approval for two further investments totalling 2.94 million. Subsequent to the year end the Company allotted a total of 4,179,046 ordinary shares on 4 April 2014, 5 April 2014 and 29 May 2014 pursuant to the joint offer detailed under Fundraising. Outlook Our portfolio companies are on the whole well-funded and have focused strategies to maximise the market opportunities open to them. The Company remains well placed to continue to support the portfolio businesses in the year ahead. The Company s new investment activity is focused on small UK businesses with clearly differentiated business models, whether through an established brand, a niche position in a growing market, or an innovative application of services and products. The significant level of investments made during the year to 31 March 2014 has further increased the diversification of the portfolio, with the largest investment representing just 10.2 per cent of net asset value compared to 32.8 per cent three years ago. The UK economy has seen further growth again this year. This is one of the factors encouraging small businesses to invest and consequently demand for equity capital remains strong. In the first two months of the 2014/15 financial year your Company has already completed five investments and approved two others for a total of 7.64 million. The Board remains of the opinion that this investment strategy will provide good returns throughout the economic cycle but in particular that the current market conditions are favourable to making good investments. In the short term the current levels of funds available for investment should enable the Company to take advantage of this opportunity and to continue to maintain its leading performance in terms of investor returns. Helen Sinclair, Chairman 12 June

9 Strategic Report Introduction The Company is pleased to present its Strategic Report for the year ended 31 March 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 Strategic Report Objectives and Key Policies The Company s objective is to provide investors with an attractive long-term tax free dividend yield while maintaining the capital value of their investment and the Company s status as a Venture Capital Trust. 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 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. Diversification 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 unquoted and AIM traded securities. The Company invests in a range of securities including but not limited to ordinary and preference shares, corporate bonds and other fixed income securities. Unquoted investments are structured so as to spread risk and enhance revenue yields, usually as a combination of ordinary shares, preference shares and loan stocks, while AIM securities are generally held in ordinary shares. Borrowing The Company funds the investment programmes out of its own resources and has no borrowing facilities for this purpose. Co-investment Investment opportunities are offered to the Company alongside British Smaller Companies VCT2 plc. The agreed initial basis for allocation is 60 per cent to the Company and 40 per cent to British Smaller Companies VCT2 plc. The Board of the Company has discretion as to whether to take up their allocation of such investment opportunities, or take up a different participation. Asset Mix Pending investment in VCT-qualifying and non-vct qualifying unquoted or AIM traded securities, surplus cash is primarily held in interest bearing instant access, notice and fixed term bank accounts or in UK Gilts. Remuneration Policy The Company s policy on the remuneration of its directors, all of whom are non-executive directors, can be found on page 43. Other Key Policies Details of the Company s policies on the payment of dividends, the dividend re-investment scheme and the buy-back of shares are given on page 2. In addition to these the Company s anti-bribery and environmental and social responsibilities policies can be found on page 32. Fu nd Management and Key Contracts The Fund Manager 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 HM Revenue & Customs clearance is obtained for approval as a qualifying VCT investment. The Board approves all investment and divestment decisions save in that of certain investments up to 250,000 in companies whose shares are to be traded on AIM 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 Fund Manager. The Board regularly monitors the performance of the portfolio and the investment requirements set by the relevant VCT legislation. Reports are received from the Fund Manager regarding the trading and financial position of each investee company and senior members of the Fund Manager 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. 9

10 The Board reviews the terms of YFM Private Equity Limited s appointment as Fund Manager on a regular basis. Three changes since 31 March 2013 have been agreed: i) for investments made on or after 1 October 2013 YFM Private Equity Limited has agreed that, where fees it receives from an investee company on the completion of new and follow-on investments to 31 March each year are above a set percentage of the amount invested, the excess will be rebated back to the Company; ii) for investments made on or after 1 October 2013 any annual monitoring or directors fees received by the Fund Manager from an investee company must be no greater than 40,000 per annum; and iii) effective from 1 April 2014, the amount of any incentive fee payable in any one year shall be capped such that when combined with other costs, the Total Expenses Ratio will not exceed 5.0 per cent of the net asset value after taking account of realised gains. Details of the performance incentive arrangement changes are given in note 3 on page 58. No payment can be made in respect of the year to 31 March 2014 under the Incentive Agreement unless the average quarterly adjusted net asset value of the Company is a minimum of 92.8 pence per ordinary share and, in addition, at least 4.7 pence per ordinary share in dividends has been paid to Shareholders. The Fund Manager has met the adjusted targets for the year under review and a performance fee of 220,531 has accrued to the Fund Manager (31 March 2013: 38,678). In the opinion of the directors the continuing appointment of YFM Private Equity Limited as Fund Manager is in the interests of the Shareholders as a whole in view of its experience in managing venture capital trusts and in making, managing and exiting investments of the kind falling within the Company s investment policies. Administration of the UK Fixed Income Securities Portfolio Reporting to the Fund Manager, this portfolio is managed by Brewin Dolphin Limited on a discretionary basis. The Board receives regular reports on the make-up and market valuation of this portfolio. Administration YFM Private Equity Limited has acted as Fund Manager and performed administrative and secretarial duties for the Company since its inception on 28 February The principal terms of the agreement under which these services are performed are set out in note 3 to the Financial Statements. Performance Incentive The Fund Manager will receive an incentive payment equal to 20 per cent of the amount by which dividends paid in the relevant accounting period exceed 4.0 pence per ordinary share (increasing in line with RPI) once cumulative dividends of 10.0 pence per ordinary share from 1 April 2009 have been paid. These incentive payments are subject to cumulative shortfalls in any prior accounting periods being made up and the average net asset value per ordinary share in the relevant accounting period being not less than 94.0 pence per ordinary share, as adjusted for the impact of share issues and buy-backs. More detail on the agreement as amended from time to time is given in note 3 to the Financial Statements. 10

11 Key Performance Indicators The Company monitors a number of key performance indicators, which are typical for VCTs, as detailed below: Total Return and Dividends Paid Strategic Report Total return (NAV plus cumulative dividends) pps Dividends paid pps As at 31 March 0.0 Total Return Ordinary Dividends Special Dividends Total Return The recognised measurement of financial performance in the VCT industry is that of total return (expressed in pence per share) calculated by adding the total cumulative dividend paid to shareholders from the date a company is launched to its current reporting date, inclusive of any tax credits, to the net asset value at that date. The chart above shows the five year total return of your Company, calculated by reference to the net asset value per ordinary share plus cumulative dividends paid per ordinary share. 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. 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 pages 44 and

12 Shareholder Returns 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. Net asset Cumulative value at dividends Total return Offer price 31 March paid since since Overall return Overall return Fundraising round Offer price net of tax 2014 fundraising fundraising 1 (not in DRIS) 2 (in DRIS) 3 Pence Pence Pence Pence Pence Pence Pence 1995/96 & 1996/97 Tax Years /97 & 1997/98 Tax Years /98 & 1998/99 Tax Years /05 Tax Year (C share) /06 Tax Year /07 & 2007/08 Tax Years /08 & 2008/09 Tax Years /10 & 2010/11 Tax Years /11 & 2011/12 Tax Years /2012 Tax Year /13 & 2013/14 Tax Year Notes 1. This assumes that at the time of investment the tax relief given on the investment was not invested in shares of the Company. 2. NAV plus cash dividends paid plus tax relief on the initial subscription. 3. NAV plus tax relief on the initial subscription plus additional tax relief and NAV on DRIS shares purchased. Assuming all dividends since inception were invested under terms of current DRIS. 4. All figures have been adjusted for conversion of C Shares into ordinary shares in May Expenses The Board monitors expenses using the Ongoing Charges Ratio, as calculated in line with the Association of Investment Companies (AIC) recommended methodology. This figure shows Shareholders the annual percentage reduction in net asset value as a result of recurring operational expenses and, 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 Ongoing Charges Ratio replaces the Total Expense Ratio (TER%) previously reported. This is calculated as the annual ongoing charges (excluding any performance related fees, VAT and trail commission payable to financial intermediaries) over total net asset value as at the relevant period end and forms the basis of any expenses in excess of the operating costs cap described in note 3 on page 58. There was no breach of the expenses cap in the current or prior year. Compliance with VCT Legislative Tests 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 Fund Manager. In addition the Board receives formal reports from its VCT Status Adviser, PricewaterhouseCoopers LLP, twice a year. The Board can confirm that during the period all of the VCT legislative tests have been met. The Ongoing Charges Ratio has fallen since 31 March 2013 as the raising of additional capital in the year has spread the fixed costs over a larger asset base. Expenses Year to Year to 31 March March 2013 (%) (%) Ongoing Charges Ratio Ongoing Charges Ratio adjusted for performance incentive fees

13 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 the London Stock Exchange 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. The Company complied with this test in the period, with 92.7 per cent (2013: 90.9 per cent) of income being derived from such sources. Included within this calculation is 57,000 of interest income which has been fully provided against in the Statement of Comprehensive Income. Retained Income Test The Company must not retain more than 15 per cent of its income from shares and securities. The Company complied with this test in the period, with 13.6 per cent (2013: nil per cent) of income being retained in the period subject to payment of the final dividend to be approved at the Annual General Meeting on 22 July 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. The Company complied with this test, with 82.6 per cent (2013: 74.3 per cent) of value being in qualifying holdings. Eligible Shares Test At least 30 per cent of the Company s qualifying holdings must be represented throughout the period by holdings of nonpreferential ordinary shares. The Company complied with this test, with 44.2 per cent (2013: 53.8 per cent) of value being in holdings of non-preferential ordinary shares. In addition, monies raised from share issues from 6 April 2012 onwards are not permitted to be used to finance buy-outs or otherwise to acquire existing 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. The Board and Fund Manager are mindful of these additional requirements and of balancing investments to ensure continued compliance. 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 Company has complied with this test with the highest such value being 4.7 per cent (2013: 7.6 per cent). Other The Finance Bill published in March 2014 proposes further conditions/restrictions 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 31 March Strategic Report For monies raised from 6 April 2011 onwards the eligible shares test highlighted above increases to at least 70 per cent of qualifying holdings that must be represented by eligible shares. 13

14 Investment Performance The objective of increasing diversification within the portfolio continues to be successful. Industry sector Age of investments Business Services Manufacturing & Industrial Services Software, IT & Telecommunications Retail & Brands Healthcare Less than 1 year Between 1 and 3 years Between 3 and 5 years Between 5 and 7 years Greater than 7 years Asset class Financing stage Qualifying and not listed Qualifying and listed Liquidity funds Gilt investments Non qualifying MBO-MBI Later expansion AIM Development IPO 14

15 The improving economic outlook and changes in EU restrictions on qualifying VCT investments are all contributing to an increase in the volume and scale of investment opportunities with the trend continuing into 2014/15. Strategic Report Our Portfolio In vestment Review 39.9 million Fair value of portfolio 2013: 27.6 million 31 Number of portfolio companies 2013: million 5.1 million Investment into portfolio 2013: 5.2 million Disposal proceeds from portfolio 2013: 2.8 million 5 Number of new portfolio companies 2013: 2 Investment Portfolio (excluding gilts portfolio) Table A 000 % Unquoted value gain 4, Quoted value gain 1, Gain on disposal over opening value , Deferred proceeds Considerable progress has been made by many of the businesses in the Company s investment portfolio during the year with an overall value gain of 6.73 million excluding movements due to investments and realisations. This has enabled the Company to maintain its strong investor returns and is further analysed in Table A. This was offset by a fall in the gilt portfolio of 0.07 million to give the reported value gain on investments of 6.66 million. At 31 March 2014 the investment portfolio (excluding the fixed income securities portfolio) was valued at 39.9 million, representing 63.7 per cent of net assets (65.4 per cent at 31 March 2013). Cash and gilt investments at 31 March 2014 were 23.4 million representing 37.3 per cent of net assets (34.8 per cent at 31 March 2013). Significant Investment Movements The 4.66 million unrealised value gain from the unquoted portfolio is as a result of good progress by a number of businesses which have seen profits grow despite the continuing economic uncertainty. The key movements were: GO Outdoors Limited (value gain of 1.67 million) following improving trading after an increase in consumer confidence; Waterfall Services Limited (value gain of 1.30 million) following a period of improved trading; DisplayPlan Holdings Limited (value gain of 1.15 million) after strong cash generation was used to significantly reduce group debt; Total Value Movement 6,

16 Investment Activity New Investments Table B million Gill Marine Holdings Limited 2.50 Mangar Health Limited 2.46 GTK (UK) Limited 1.75 Leengate Holdings Limited 1.40 AB Dynamics plc 0.22 Follow-on Investment Seven Technologies Holdings Limited 0.98 Bagel Nash Group Limited 0.59 EKF Diagnostics plc 0.10 Dryden Human Capital Limited 0.09 GO Outdoors Limited 0.07 Total Cash Investments Capitalised Interest and Non-Cash Proceeds 0.05 Total Invested Disposal of Investments Table C Net Cost of Opening Gain on Gain on proceeds investments value opening cost from sale 31 March value of investments Sale of portfolio investments 4,636 3,592 3, ,044 Deferred proceeds received and accrued Investment portfolio disposals 4,647 3,592 3, ,055 Fixed income securities disposals (2) 8 Total investment and fixed income securities disposals 5,106 4,043 4, ,063 Valuation Policy Table D Valuation % of portfolio 000 by value Earnings multiple 26, Cost of recent investment reviewed for impairment 9, Original cost less provision Quoted investments at bid price 3, Total 39, President Engineering Group Ltd (value gain of 1.00 million) following another strong year of profits and cash generation; Seven Technologies Holdings Limited (value gain of 0.58 million) following the significant strategic acquisition of Datong plc during the year; and These were offset by falls in value for seven companies totalling 1.39 million. The 1.37 million increase from the AIM quoted portfolio movements was in large part a result of a gain of 0.80 million from Pressure Technologies plc following strong trading results and a successful diversification strategy. Other robust value gains were seen from Mattioli Woods plc ( 0.31 million) and AB Dynamics plc ( 0.22 million). New Investments During the year ended 31 March 2014 the Company completed ten investments totalling million (excluding capitalised interest and non-cash proceeds received on the sale of investments). This comprised five new investments in unquoted companies and five follow-on investments into existing portfolio companies and is broken down in Table B. The new investments during the year totalled 8.33 million: In May 2013 the Company invested 0.22 million as part of a 5.0 million AIM placing to support the expansion of AB Dynamics plc; a designer, manufacturer and supplier of advanced testing products to the global automotive industry. In September 2013 the Company invested 2.50 million as part of the management buyout of Gill Marine Holdings Limited, the market leading manufacturer of branded sailing clothing and accessories. In October 2013 the Company invested 1.75 million to support the management buyout of GTK (UK) Limited, a global manufacturer of cable assemblies, connectors, optoelectronics and manufacturing solutions for high technology customers. 16

17 In December 2013 the Company invested 1.40 million into Leengate Holdings Limited; a wholesaler, stockist and distributor of industrial valves to fund the management buyout from the Linde Group. In January 2014 the Company invested 2.46 million to fund the management buyout of Mangar Health Limited, a world leader in inflatable lifting, handling and bathing equipment for the elderly, disabled and emergency services markets. The five investments into existing portfolio companies during the year totalled 1.83 million, the largest of which are described below. In June 2013 a significant investment of 0.98 million was made into Seven Technologies Holdings Limited, a manufacturer of specialist electronic and communications equipment, as part of the funding package for its 7.0 million acquisition of Datong plc, a manufacturer and international supplier of specialist communications products. In July 2013 a further 0.59 million was invested into Bagel Nash Group Limited to support the expansion of its bakery and its retail roll out strategy. Disposal of Investments During the year to 31 March 2014 the Company received proceeds from disposals, repayments of loans and deferred consideration of 5.11 million. Overall this resulted in a value gain on disposal of investments of 0.69 million and a realised gain on cost of 1.06 million. This is broken down in Table C. In November 2013 the 0.67 million investor loan to Waterfall Services Limited was repaid following a period of strong trading. In January 2014 the Company received 0.43 million from DisplayPlan Holdings Limited as part of an agreed early loan repayment giving rise to a 0.10 million early redemption premium. In March 2014 the Company sold part of its holding in GO Outdoors Limited which was under an option to 3i Group plc linked to repayment of shareholder loans. This gave rise to proceeds of 0.35 million, a profit on the 1 April carrying value of 0.03 million and a profit on cost of 0.35 million. The Company also received non-cash proceeds in the form of additional equity valued at 0.03 million. A detailed analysis of all investments sold in the year can be found in note 7 to the Financial Statements on page 64. Portfolio Composition As at 31 March 2014 the portfolio of quoted and unquoted investments had a value of 39.9 million of which the unquoted businesses make up 90 per cent of the value and the quoted investments make up 10 per cent of the value. An analysis of the movements in the year is shown on page 19. The objective of increasing diversification within the portfolio continues to be successful, with the biggest single investment representing 10.2 per cent of the net asset value. Three years ago the largest investment represented 32.8 per cent. Valuation Policy Unquoted investments are valued in accordance with the valuation policy set out on page 55, which takes account of current industry guidelines for the valuation of venture capital portfolios. Provision against cost is made where an investment is significantly under-performing. As at 31 March 2014 the number of investments falling into each valuation category is shown in Table D. Summary and Outlook The early part of the year saw continuation of recent uncertain market conditions although in the latter part of the year there were clearer signs of economic recovery. Many of the portfolio companies have delivered improved results, focusing on proven brands, niche growth sectors or rolling out new technology. We are optimistic that the improvement in economic conditions will continue but we will maintain a cautious approach; only backing successful business models. The increasing diversification of the portfolio, which has continued into the 2014/15 financial year, should also help to reduce any volatility of returns. We have seen a marked increase in new investment enquiries which has resulted in significant levels of investment in 2013/14, with million invested in the year as a whole of which 8.26 million was invested in the latter part of the year. The improving economic outlook and changes in EU restrictions on qualifying VCT investments are all contributing to an increase in the volume and scale of investment opportunities with the trend continuing into 2014/15. Strategic Report The most significant proceeds related to: In June million of nonqualifying loans to Seven Technologies Holdings Limited were repaid as part of the refinancing package ahead of its purchase of Datong plc. During the year the Company sold 49.5 per cent of its holding in Pressure Technologies plc for 0.52 million realising a gain on its opening 1 April 2013 carrying value of 0.28 million and a profit on cost of 0.30 million. The charts on page 14 of these Financial Statements show the composition of the portfolio as at 31 March 2014 by industry sector, age of investment, asset class and the stage of financing at the point of investment. This demonstrates representation across a wide range of industry sectors. The Company has continued to hold a proportion of its surplus cash in fixed income Government Gilts and best A-rated deposit accounts. We believe that the increasing level of investment, combined with several good exit prospects over the next few years, should allow the Board to achieve its aim of a constant dividend stream whilst preserving and enhancing the underlying net asset value. 17

18 Investment Portfolio Summary and Disposal History to 31 March 2014 Page Current investments Date of Location Industry Current Proceeds Investment Return no. initial sector cost to date* valuation at to date investment 31 March Unquoted portfolio 20 GO Outdoors Limited May-98 Sheffield Retail 215 7,380 6,371 13, President Engineering Group Ltd Sep-10 Sheffield Manufacturing ,078 4, DisplayPlan Holdings Limited Feb-10 Baldock, Herts Retail ,854 4, Seven Technologies Apr-12 Belfast Telecommunications 1,984 1,524 2,596 4,120 Holdings Limited 22 Waterfall Services Limited Feb-07 Warrington Support Services ,372 3, Gill Marine Holdings Limited Sep-13 Nottingham Retail 2,500 2,500 2, Mangar Health Limited Jan-14 Powys Manufacturing 2,460 2,460 2, RMS Group Holdings Limited Jul-07 Goole Industrial , Deep-Secure Ltd Dec-09 Malvern Software 1,000 1,751 1, GTK (UK) Limited Oct-13 Basingstoke Manufacturing 1, ,693 1, Leengate Holdings Limited Dec-13 Derbyshire Manufacturing 1,401 1,401 1, Fairlight Bridge Limited Apr-12 Midlands Turnaround Services 1,000 1,000 1, Bagel Nash Group Limited Jul-11 Leeds Food Retail and 1, Manufacture 25 Harvey Jones Holdings Limited May-07 London Consumer Retail Callstream Group Limited** Sep-10 Newcastle Telecommunications Insider Technologies Aug-12 Manchester Software 1, (Holdings) Limited 26 Harris Hill Holdings Limited Jun-07 Kingston-upon-Thames Recruitment Selima Limited Mar-12 Sheffield Software PowerOasis Limited Nov-11 Swindon Energy Infrastructure Other 2, Total unquoted investments 22,063 11,560 35,905 47,465 Quoted portfolio 27 Pressure Technologies plc Jun-07 Sheffield Manufacturing ,038 1, Mattioli Woods plc Nov-05 Leicester Support Services , Hargreaves Services plc Dec-07 Durham Manufacturing EKF Diagnostics Holdings plc Jul-10 London Medical Instruments AB Dynamics plc May-13 Wiltshire Manufacturing Vianet Group plc Oct-06 Stockton-on-Tees Business Services Cambridge Cognition Holdings plc May-02 Cambridge Healthcare Software Other 625 1, ,385 Total quoted investments 2,710 2,714 3,957 6,671 24,773 14,274 39,862 54,136 Full disposals since 31 March ,275 23,772 23,772 Full disposals prior to 31 March ,748 1,899 1,899 Total investment portfolio 46,796 39,945 39,862 79,807 * Proceeds include premiums and profits on loan repayments and preference redemptions. ** Formerly Bluebell Telecoms Group Limited. 18

19 Summary of Investment Portfolio Movement since 31 March 2013 Name of company Investment Disposals Additions including Valuation Investment valuation at proceeds capitalised gains (losses) valuation at 31 March interest including 31 March 2013 profits (losses) 2014 on disposal Quoted portfolio GO Outdoors Limited 4,955 (384) 104 1,696 6,371 President Engineering Group Ltd 3,281 (200) 997 4,078 DisplayPlan Holdings Limited 3,042 (422) 1,234 3,854 Seven Technologies Holdings Limited 2,557 (1,302) ,596 Gill Marine Holdings Limited 2,500 2,500 Mangar Health Limited 2,460 2,460 Waterfall Services Limited 1,736 (667) 1,303 2,372 Deep-Secure Ltd 1,940 (189) 1,751 GTK (UK) Limited (57) 1,750 1,693 Leengate Holdings Limited 1,401 1,401 Harvey Jones Holdings Limited Bagel Nash Group Limited 600 (50) 603 (256) 897 Callstream Group Limited* 608 (130) Harris Hill Holdings Limited Other investments 4, (748) 3,531 Strategic Report Total unquoted investments 24,445 (3,212) 9,892 4,780 35,905 Quoted portfolio Pressure Technologies plc 468 (515) 1,084 1,038 AB Dynamics plc Other investments 2,647 (909) ,477 Total quoted investments 3,115 (1,424) 321 1,945 3,957 Total investment portfolio 27,560 (4,636) 10,213 6,725 39,862 * Formerly Bluebell Telecoms Group Limited. 19

20 Investee Company Information Manufacturing and Industrial Services Retail and Brands IT and Telecommunications Healthcare Business Services Fair value 10.43m 2013: 5.21m Fair value 10.22m 2013: 9.43m Fair value 6.83m 2013: 7.53m Fair value 3.24m 2013: 0.66m Fair value 9.14m 2013: 4.73m Number of companies : 6 Number of companies : 4 Number of companies : 9 Number of companies : 3 Number of companies : 7 Investment Portfolio This section describes the business of the active companies in the portfolio in order of valuation at 31 March The Company s voting rights in an investee company are the same as the percentage of equity held for each investment detailed below. Unquoted Portfolio GO Outdoors Limited Sheffield Cost: 215,000 Valuation: 6,371,000 Dates of investment: May 1998, March 2002, April 2007, and March 2014 Equity held: 13.57% Valuation basis: Earnings multiple Dividends received: 70,859 (2013: nil) 52 weeks ended 27 Jan Jan 2012 million million GO Outdoors is a retailer of outdoor clothing and equipment. The original investment of 500,000 in May 1998 supported the buy-out. The company has continued its expansion opening a further four stores in the year, taking the total number of outlets to forty three, with another opening soon. The 28.0 million investment from 3i plc in April 2011 was in part to fund a continuation of the rollout of this successful retail concept while at the same time purchasing approximately onethird of the Company s investment. Sales EBITDA pre exceptionals Profit (loss) before tax 1.49 (2.56) Retained profits Net assets

21 President Engineering Group Ltd Sheffield Cost: 800,000 Valuation: 4,078,000 Date of investment: September 2010 Equity held: 20.00% Valuation basis: Earnings multiple Interest: 76,586 (2013: 81,000) Year ended 31 October million million Sales EBITA Profit before tax Retained profits Net assets President Engineering is a niche manufacturer of branded engineering products sold through agents to a diverse international customer base. The company produces mining safety systems sold into developed and developing economies under the Conflow brand and also cryogenic valves sold to the oil and gas sector under the Bestobell brand. The Company backed a management buy-out by the existing management team. Since that time the company has been extremely successful in continuing the international development of its brands supported by strong underlying market growth. Strategic Report DisplayPlan Holdings Limited Baldock, Herts Cost: 975,000 Valuation: 3,854,000 Dates of investment: February 2010 and January 2012 Equity held: 22.75% Valuation basis: Earnings multiple Interest: 109,699 (2013: 117,000) Year ended 31 December (2012: nine months ended) million million Sales EBITA Profit before taxation Retained profits Net assets In January 2012 an investment was made to support the management buy-out of DisplayPlan Holdings. The company provides a complete retail display service, from concept through design and sourcing to finished product delivery supplying established branded product manufacturers and UK retailers. Typical products include bespoke point of purchase (POP) stands in high street retail stores and the business enjoys regular repeat work from a long-established customer base. The company has delivered very strong profits since the investment although results are volatile due to the nature of large retail rollout programmes. Seven Technologies Holdings Limited Belfast Cost: 1,984,000 Valuation: 2,596,000 Date of investment: April 2012 Equity held: 10.02% Valuation basis: Earnings multiple Interest: 15,244 (2013: 116,647) Year ended 31 May 2013 million Sales EBITA 2.58 Loss before taxation (0.17) Retained losses (0.57) Net assets Seven Technologies is a fast growing specialist engineering business based in Northern Ireland specialising in the development and manufacture of bespoke electronics and communications applications for operation in inhospitable environments. The strategy is to maintain the impressive expansion to date through significantly growing contract sizes. In June 2013 Seven Technologies acquired Datong plc in order to expand its product offering and significantly extend its international customer base. The deal was funded by a mixture of new equity from existing shareholders and bank debt, with the Company s existing non-qualifying loans being repaid. 21

22 Waterfall Services Limited Warrington Cost: 100,000 Valuation: 2,372,000 Date of investment: February 2007 Equity held: 19.53% Valuation basis: Earnings multiple Interest: 66,775 (2013: nil) Year ended 31 March million million Sales EBITA Profit before tax Retained profits Net assets Waterfall is a contract caterer specialising in the care home and educational sector. Since the original investment in 2007 the company has expanded its original catering services business from supplying residential and care homes to supplying the educational market. There has been both organic and acquisitive growth which has broadened and diversified the customer base with significant progress being made in expanding the services provided to both the education and care home sectors. Gill Marine Holdings Limited Nottingham Cost: 2,500,000 Valuation: 2,500,000 Date of investment: September 2013 Equity held: 18.50% Valuation basis: Price of recent investment reviewed for changes in fair value Interest: 115,274 (2013: n/a) Following the buy-out of the Company in September 2013 the first set of accounts are not yet due. In September 2013 the Company supported the management buy-out of Gill Marine Holdings, the Nottingham based manufacturer of technical sailing clothing and accessories which it exports to over 35 countries. It is the official technical clothing sponsor for the internationally renowned Aberdeen Asset Management Cowes Week Regatta and exports over 70% of turnover. The strategy is to develop the brand further and increase market share in both existing and new markets. Mangar Health Limited Powys Cost: 2,460,000 Valuation: 2,460,000 Date of investment: January 2014 Equity held: 22.30% Valuation basis: Price of recent investment reviewed for changes in fair value Interest: 32,351 (2013: n/a) Following the buy-out of the Company in January 2014 the first set of accounts are not yet due. Mangar Health, headquartered in Wales, 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, through its sales force, mobility retailers and website. The Company backed the management buy-out in January 2014 with plans to continue to grow sales in the UK and overseas. 22

23 RMS Group Holdings Limited Goole Cost: 180,000 Valuation: 878,000 Dates of investment: July 2007 and August 2008 Equity held: 8.10% Valuation basis: Earnings multiple Year ended 31 December million million Sales EBITDA Profit before tax Retained profits Net assets RMS operates from six sites on the Humber estuary handling around two million tonnes of cargo a year and has continued to broaden its range of customer services which now include, amongst others, shipping, stevedoring, warehousing, stock control, transport and logistics. The management team has used the tough economic conditions to consolidate their market position and all the Company s original loan instrument has been repaid in full. Strategic Report Deep-Secure Ltd Malvern Cost: 1,000,000 Valuation: 1,751,000 Date of investment: December 2009 Equity held: 14.29% Valuation basis: Earnings multiple Interest: 108,000 (2013: 108,000) Year ended 31 December million million Sales EBITA (Loss) profit before taxation (1.16) 0.24 Retained losses (1.28) (0.26) Net (liabilities) assets (0.88) 0.14 Deep-Secure s market leading products protect against threats to IT security via high security network border gateway technology, which enables customers to maintain network separation and apply content inspection so as to defend sensitive and protected information from intruders. As working practices change and more information is shared electronically, many organisations face exposure to leakage and attack. Customers include international governments, cross border forces and defence sectors and new customers are being targeted in other sectors where high security is a priority. GTK (UK) Limited Basingstoke Cost: 1,693,000 Valuation: 1,693,000 Date of investment: October 2013 Equity held: 25.00% Valuation basis: Price of recent investment reviewed for changes in fair value Interest: 56,752 (2013: n/a) Following the buy-out of the Company in October 2013 the first set of accounts are not yet due. In October 2013 the Company backed the management buy-out of GTK (UK) Limited, a manufacturer of cable assemblies, connectors, optoelectronics and manufacturing solutions for high technology customers. Headquartered in Basingstoke and with a small sourcing team in Taiwan, GTK has an established management team and a loyal and diverse customer base. It provides design, procurement and manufacturing services of essential but non-core electronic components for customers in the UK and internationally in sectors such as precision instrumentation, defence/security and contract equipment manufacturing. 23

24 Leengate Holdings Limited Derbyshire Cost: 1,401,000 Valuation: 1,401,000 Date of investment: December 2013 Equity held: 10.50% Valuation basis: Price of recent investment reviewed for changes in fair value Interest: 29,018 (2013: n/a) Following the buy-out of the Company in December 2013 the first set of accounts are not yet due. In December 2013 the Company backed the existing management team at Leengate Valves Ltd, a wholesaler, stockist and distributor of industrial valves in their management buy-out from an engineering group. Based in Derbyshire, Leengate supplies one of the largest ranges of industrial valves in the UK to leading re-sellers in the gas, water and industrial sectors. It is also a specialist supplier of engineering actuation and automation packages, offering a next day service and high quality technical advice. Fairlight Bridge Limited Midlands Cost: 1,000,000 Valuation: 1,000,000 Date of investment: April 2012 Equity held: 50.00% Valuation basis: Price of recent investment, reviewed for change in fair value Interest: 7,619 (2013: 10,313) Fairlight Bridge was formed to provide investment in SME businesses whose performance is in need of improvement. It is particularly focused on the Midlands and South West regions. With links to banks and other lenders it is well placed to expand its activities in turnaround management. Period ended 31 March 2013 million Net assets 0.07 Bagel Nash Group Limited Leeds Cost: 1,182,000 Valuation: 897,000 Date of investment: July 2011 Equity held: 6.80% Valuation basis: Earnings multiple Interest: 88,466 (2013: 56,160) Year ended 30 April million million Bagel Nash is an established operator of espresso and bagel bars in the north of England and also runs a bakery supplying products to its own stores and the UK wholesale trade. An experienced team completed the buy-in during July 2011 with value growth expected to come from a retail rollout strategy. The team has completed a relocation of its bakery to increase capacity and rolled out four new outlets. Sales EBITA Loss before tax (0.28) (0.26) Retained losses (0.57) (0.28) Net assets

25 Harvey Jones Holdings Limited London Cost: 777,000 Valuation: 900,000 Date of investment: May 2007 Equity held: 6.88% Valuation basis: Earnings multiple Interest: 83,931 (2013: 82,850) Year ended 31 December million million Sales EBITA (Loss) profit before tax (0.12) 0.13 Retained profits Net assets Harvey Jones is a manufacturer/retailer of kitchen furniture. The business has a manufacturing facility in the UK and stores in London and affluent provincial towns and cities principally in the South of England. Its strong brand positioning has helped Harvey Jones to maintain volumes through the economic downturn. The business has continued to selectively open new stores increasing its footprint to 30 from 10 at the time of investment. This increased market share coupled with a low level of gearing positions Harvey Jones well to benefit as market conditions improve. Strategic Report Callstream Group Limited (formerly Bluebell Telecoms Group Limited) Henley-in-Arden Cost: 415,000 Valuation: 752,000 Date of investment: September 2010 Equity held: 6.75% Valuation basis: Earnings multiple Interest: 28,041 (2013: 35,005) Year ended 30 April million million Sales EBITA Profit before tax Retained profits (losses) 0.10 (0.23) Net assets Callstream is a telecommunications service provider that aggregates a range of services including fixed line, mobile and data to UK businesses. The Company s initial investment in 2010 was made to fund the acquisition of a competitor. In August 2011 another telecommunications group, Worldwide ISDN Limited, was acquired which has now been successfully integrated. In August 2103 a number of its smaller non-core contracts were sold to focus on selling niche value-added products into targeted sectors. Insider Technologies (Holdings) Limited Manchester Cost: 1,170,000 Valuation: 880,000 Date of investment: August 2012 Equity held: 25.80% Valuation basis: Earnings multiple Interest: 88,020 (2013: 54,741) Period (14 June 2012 to 31 March 2013) 2013 million Insider Technologies is an established provider of monitoring and scheduling software to the financial services and national security sectors. The Company backed the buy-out of the business introducing new senior management to complement the existing team, who also invested in the deal. The strategy is to increase the sales focus and roll out existing and new complementary products in the UK and overseas. Retained earnings 1.51 Net assets 2.51 Insider Technologies (Holdings) Limited has a small company exemption from filing full audited financial statements at Companies House. 25

26 Harris Hill Holdings Limited Kingston-Upon-Thames Cost: 600,000 Valuation: 643,000 Date of investment: June 2007 Equity held: 10.70% Valuation basis: Earnings multiple Interest: nil (2013: 43,987) Year ended 31 March million million Harris Hill is a niche recruitment business with a strong reputation for providing excellent permanent and temporary recruitment solutions to the charity and not-for-profit sectors. Whilst market conditions have been difficult over recent years, the business has remained profitable at an EBITA level and has seen a recovery in sales and profits since Sales EBITA Loss before tax (0.16) (0.15) Retained losses (2.85) (2.62) Net liabilities (2.37) (2.14) Selima Limited Sheffield Cost: 600,000 Valuation: 593,000 Date of investment: March 2012 Equity held: 12.50% Valuation basis: Earnings multiple Interest: 43,200 (2012: 43,200) Year ended 31 December million million Retained profits Net assets Headquartered in Sheffield, Selima has considerable experience of deploying comprehensive payroll, HR and expenses solutions and bureau services that save organisations significant sums of money. Selima s customers include Bristol City Council, Young s Brewery and Greater Manchester Police. The investment was made to expand the business including improvements to services for new and existing clients and the introduction of new, innovative products. Selima Limited has a small company exemption from filing full financial statements at Companies House. PowerOasis Limited Swindon Cost: 425,000 Valuation: 212,000 Dates of investment: November 2011 and March 2013 Equity held: 2.40% Valuation basis: Price of recent investment, reviewed for change in fair value Year ended 31 January million million PowerOasis is a leader in power management solutions to the mobile telecommunications sector. Their power systems are installed at communication masts in remote international locations, often not connected to an electricity grid, facilitating significant cost savings by selectively switching between a range of alternative power sources. A further $5 million funding round was completed in February 2013 which included a significant new investment from a trade partner. Sales Loss before tax (2.88) (2.12) Retained losses (7.19) (4.65) Net assets

27 Quoted Portfolio Pressure Technologies plc Sheffield Cost: 216,000 Valuation: 1,038,000 Dates of investment: June and July 2007, January 2010, September 2013 and March 2014 Equity held: 1.00% Valuation basis: Quoted bid price Dividends received: 16,115 (2013: 21,265) Year ended 28 September (2012: 29 September) million million Pressure Technologies specialises in the manufacture of ultra-large high pressure cylinders for the offshore oil and gas industry but is increasingly diversifying into other sectors, such as biogas and defence. In March 2014 Pressure Technologies acquired Rotherham-based Roota Engineering Limited (Roota), a manufacturer of bespoke engineered products for the oil and gas industry. The acquisition price was 13.5 million. Strategic Report Sales EBITA Profit before tax Retained profits Net assets Mattioli Woods plc Leicester Cost: 258,000 Valuation: 857,000 Dates of investment: November 2005, February, March and October 2006, July 2007 and September 2013 Equity held: 0.98% Valuation basis: Quoted bid price Dividends received: 17,553 (2013: 14,870) Year ended 31 May million million Sales EBITA Profit before tax Retained profits Net assets Mattioli Woods provides pensions consultancy and administration services primarily to ownermanagers, senior executives and professional persons. The group s key activities include complex pensions consultancy, the provision of Self-Invested Personal Pensions ( SIPP ) and Small Self-Administered Pension Schemes ( SSAS ). The group operates a fee-driven model which has been well-received following the implementation of the Retail Distribution Review in January In January 2014 the interim results for the six months to 30 November 2013 were announced. Revenue for the period increased by 19.4% to 13.4 million and operating profits increased by 3% to 2.2 million. 27

28 Hargreaves Services plc Durham Cost: 310,000 Valuation: 454,000 Dates of investment: December 2007, January, February and March 2008 and August 2012 Equity held: 0.17% Valuation basis: Quoted bid price Dividends received: 17,982 (2013: 15,501) Year ended 31 May million million Sales EBITA Profit before tax Retained profits Net assets In the years following its foundation in 1994 Hargreaves Services established itself as the largest independent bulk haulage company in Britain. The group has a national network of depots and facilities, and specialises in supplying and processing carbon-based minerals. It expanded into energy trading in mainland Europe, operating two collieries and a coke plant. In February 2014 the interim results to 31 November 2013 were announced. Turnover in the period increased by 23% to million and underlying operating profit rose by 25% to 30.9 million. EKF Diagnostics Holdings plc London Cost: 348,000 Valuation: 614,000 Dates of investment: July 2010, June 2011, September 2013 and March 2014 Equity held: 0.37% Valuation basis: Quoted bid price Year ended 31 December million million Sales EBITA Profit (loss) before tax 0.61 (0.20) Retained losses (3.41) (3.00) Net assets EKF is a provider of a wide range of diagnostic needs in clinical care, blood donor services and dialysis centres, recreation institutes, sports medicine and industrial applications. EKF s name consists of the first three letters of German words, Entwicklung (development), Konstruktion (construction) and Fertigung (production), which are the main business divisions. EKF is well funded and has made a number of acquisitions and commercial progress. AB Dynamics plc Bradford-on-Avon Cost: 224,000 Valuation: 442,000 Dates of investment: May 2013 and September 2013 Equity held: 1.17% Valuation basis: Quoted bid price Year ended 31 August million million Sales EBITA Profit before tax Retained profits Net assets The Company invested in the initial public offering in May 2013 of AB Dynamics, a designer and manufacturer of advanced testing systems for the automotive industry. The strategy is to continue the historic growth profile through the development of new products and to relocate the manufacturing facility to increase capacity. In April 2014 AB Dynamics released its interim results for the six months ending 28 February In the period turnover increased 14% over the same period in the previous year, with operating profit increased by 1% over the same period. 28

29 Vianet Group plc Stockton-on-Tees Cost: 404,000 Valuation: 279,000 Dates of investment: October 2006, July 2007 and July 2012 Equity held: 1.30% Valuation basis: Quoted bid price Dividends received: 20,640 (2013: 20,640) Year ended 31 March million million Sales EBITA Profit before tax Retained profits Net assets Vianet Group is the leading provider of volume and revenue protection systems for draught alcoholic drinks for the UK licensed on-trade. The company has consolidated its market leading position and continues to seek to expand its service and product offering. Dividend yield remains strong, but the pub chains continue to struggle, leading Vianet to diversify into related markets, such as petrol forecourts and vending machines. The recent trading update for the year ended 31 March 2014 indicated that pre-exceptional operating profits are expected to be in the region of 3.0 million in line with previously published expectations. Strategic Report Cambridge Cognition Holdings plc (formerly Cambridge Cognition Limited) Cambridge Cost: 325,000 Valuation: 163,000 Date of investment: May 2002 Equity held: 1.61% Valuation basis: Quoted bid price Year ended 31 December million million Sales EBIT/LBIT 2.96 (1.45) Loss before tax (2.99) (1.58) Retained losses (10.15) (7.70) Net assets (liabilities) 2.13 (1.68) Cambridge Cognition is a cognitive test development company specialising in computerised psychological testing of a wide variety of mental health conditions. It received funding from a range of investors to assist with commercialising its intellectual property. A profitable business model has been established providing its tests for use in evaluating clinical trials but a much bigger opportunity could exist in the personal care market. On 18 April 2013 the company floated on AIM, raising 5.0 million to support the development of point of care diagnostic applications. 29

30 Principal Risks The Board carries out a regular 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 Details of the Company s internal controls are contained in the Corporate Governance and Internal Control sections on pages 41 and 42 and further information on exposure to risks including those associated with financial instruments is given in note 17a of the Financial Statements. Loss of Approval as a VCT 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. Mitigation One of the Key Performance Indicators monitored by the Company is the compliance with legislative tests. Details of how the Company manages these requirements can be found under the heading Compliance with VCT Legislative Tests on page 12. Economic 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 2) and a diversified portfolio operating in a range of sectors. The Fund Manager actively monitors investee performance which provides quality information for the monthly review of the portfolio. Investment and Strategic 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 Fund Manager 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. 30

31 Regulatory 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 will (assuming its application to become a Self-managed Alternative Investment Fund is accepted by the Financial Conduct Authority) be subject to the EU s Alternative Investment Fund Manager s Directive with effect from 22 July 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 Fund Manager has procedures in place to ensure recurring Listing Rules requirements are met and actively consults with brokers, solicitors and external compliance advisers as appropriate. The key controls around regulatory compliance are explained on page 42. Strategic Report Reputational 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 Fund Manager is well-respected with a proven track record and has a formal recruitment process to employ experienced investment staff. Allocation rules relating to coinvestments with other funds managed by the Fund Manager have been agreed between the Fund Manager and the Company. Advice is sought from external advisers where required. Both the Company and the Fund Manager maintain appropriate insurances. Operational Risk Failure of the Fund Manager s and administrator s accounting systems or disruption to its business might lead to an inability to provide accurate reporting and monitoring. Mitigation The Fund Manager has a documented disaster recovery plan. Financial Risk Inadequate controls might lead to misappropriation of assets. Inappropriate accounting policies might lead to misreporting or breaches of regulations. Mitigation The key controls around financial reporting are described on page 42. Market/Liquidity Risk Lack of liquidity in both the venture capital and public markets. Investment in AIM quoted and unquoted 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 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 Overall liquidity risks are monitored on an ongoing basis by the Fund Manager and on a quarterly basis by the Board. Sufficient investments in cash and fixed income securities are maintained to pay expenses as they fall due. 31

32 Other Matters 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. The management and administration of the Company is undertaken by the Fund Manager. 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 Fund Manager 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. Anti-Bribery and Corruption Policy The Company has a zero tolerance approach to bribery. The following is a summary of its policy: it is the Company s policy to conduct all of its business in an honest and ethical manner. The Company is committed to acting professionally, fairly and with integrity in all its business dealings and relationships; the directors of the Company, the Fund Manager and any other service providers must not promise, offer, give, request, agree to receive or accept financial or other advantage in return for favourable treatment, to influence a business outcome or gain any business advantage on behalf of the Company or encourage others to do so; and the Company has communicated its antibribery policy to the Fund Manager and its other service providers. The Company had no employees during the year. The Board is composed of three nonexecutive directors, one female and two male. For a review of the policies used when appointing directors to the Board of the Company please refer to the Directors Remuneration Report. By Order of the Board Helen Sinclair Chairman 12 June

33 Di rectors Name Background and Experience Helen Sinclair Chairman Philip Cammerman Helen has an MA in Economics from the University of Cambridge and an MBA from INSEAD Business School. After working in investment banking Helen spent nearly 8 years at 3i plc focusing on MBOs and growth capital investments. She later co-founded Matrix Private Equity Partners Limited (now Mobeus) in early 2000 raising Mobeus Income & Growth 2 VCT plc (formerly Matrix e-ventures VCT plc). She subsequently became managing director of Matrix Private Equity Partners Limited before moving to take on a portfolio of non-executive director roles in She is currently a non-executive director of The Income & Growth VCT plc, Mobeus Income & Growth 4 VCT plc, Spark Ventures plc and Downing One VCT plc and chairs the investment committees of the Third Sector Loan Fund and the Community Investment Fund, both part of Social & Sustainable Capital LLP. Philip has an engineering degree from Imperial College and an MBA from Stanford University. He has over twenty years of industrial experience in engineering and technology orientated industries and has worked in both the USA and the UK. He has spent the last twenty-six years in the venture capital industry and was chairman of YFM Private Equity and a director of YFM Group (Holdings) Limited until he retired in April He has been responsible for a wide range of venture capital deals in a variety of industries including software, computer maintenance, engineering, printing, safety equipment, design and textiles. He is a non-executive director of Pressure Technologies plc and Hargreave Hale AIM VCT 2 plc. Corporate Governance Edward Buchan Edward is a Fellow of the Institute of Chartered Accountants in England and Wales, starting his career with Deloitte before moving to Hill Samuel Bank Limited where he became Head of Corporate Finance and a member of the Bank Executive Committee. He subsequently joined Close Brothers Corporate Finance Limited and then West LB Panmure, specialising in the transport and logistics industry sectors. He is currently a senior adviser in corporate finance at Edmond De Rothschild Securities and is a non-executive director of Wallem Group Limited, an international ship management and shipping services company based in Hong Kong. Secretary Registered Office KHM Secretarial Services Limited Old Cathedral Vicarage St James Row Sheffield S1 1XA St Martins House Chapeltown Road Leeds LS7 4HZ Registered No:

34 Di rectors Report For the year ended 31 March 2014 The directors present their Report and audited Financial Statements of ("the Company") for the year ended 31 March Principal Activity 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 Saint Martins House, Chapeltown Road, Leeds, LS7 4HZ. The Company has its primary, and sole, listing on the London Stock Exchange. The principal activity of the Company is making long term equity and loan investments, mainly in unquoted businesses. The Company operates as a venture capital trust and has been approved by HM Revenue & Customs as an authorised VCT under Chapter 3 Part 6 of the Income Tax Act 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 Results and Dividends The Statement of Comprehensive Income for the year is set out on page 49. The profit before and after taxation for the year amounted to 6,525,000 (2013: 1,123,000). During the year the Company paid a total of 3,221,000 worth of dividends totalling 6.5 pence per ordinary share. Details of these can be found in note 5 of the Financial Statements on page 60. The directors recommend the payment of a final dividend of 3.5 pence per ordinary share (2013: 3.5 pence). A resolution to this effect will be proposed at the Annual General Meeting to be held on 22 July The net asset value per ordinary share at 31 March 2014 was pence (2013: 97.0 pence).the transfer to and from reserves is given in the Statement of Changes in Equity on page 51. Future Prospects For a discussion of the Company s future prospects, please see the Chairman s Statement on page 8. Going Concern The Company s business activities, liquidity position and factors likely to affect its future development, performance and position are set out in the Chairman s Statement and the Strategic Report. In addition notes 17 and 18 of the Financial Statements describe the Company s objectives, policies and processes for managing capital, its financial risk management objectives, details of its financial instruments, and its exposures to credit and liquidity risk. The Company has considerable financial resources, a carefully controlled cost base and investments across various industry sectors. The directors believe these factors have placed the Company in a strong position to take advantage of new investment opportunities despite the uncertain economic outlook and with this in mind have sought to further increase the investment capacity of the Company this year. 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. Corporate Governance The statement on corporate governance set out on pages 37 to 42 is included in the Directors Report by reference. Directors and Officers Liability Insurance 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. Provision of Information to the External Auditor 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. Share Capital As shown in note 11 of the Financial Statements, the Company has only one class of share, being ordinary shares of 10 pence each. Buy-Back and Issue of Ordinary Shares In accordance with the Company s stated buy-back policy the Company purchased during the year (under the existing authority granted by Shareholders at the Annual General Meeting on 20 July 2012), 685,217 ordinary shares of 10 pence each in the market (as disclosed in the table opposite) for aggregate consideration of 605,900. These shares are held in treasury. 34

35 Under the existing authority, which expires on the earlier of 20 July 2015, or at the conclusion of the Annual General Meeting held in 2015, the Company has the power to purchase shares up to per cent of the Company s issued ordinary share capital as at 13 June 2012, being 5,930,868 ordinary shares. 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 18 May 2015 in connection with the following. the joint offers for subscription with British Smaller Companies VCT2 plc (which closed on 29 May 2014), up to an aggregate nominal amount of 3,000,000; an offer of shares by way of a rights issue; an allotment of shares for cash up to an aggregate nominal amount of 10 per cent of the issued ordinary share capital of the Company immediately following the final closing of the joint offers for subscription. In order to ensure the directors retain the authority to allot ordinary shares in the Company (other than pursuant to its dividend re-investment scheme) until the date of the 2015 Annual General Meeting and allow a prospectus offer, it is recommended that the authority to allot shares is renewed at the 2014 Annual General Meeting for up to an aggregate nominal amount representing approximately 46 per cent of the issued ordinary share capital of the Company (as at the date of the Notice of Annual General Meeting), with all existing authorities to allot, other than the existing authority to allot pursuant to the Company s dividend re-investment scheme, being revoked. Buy-Back of Ordinary Shares In addition, the directors have a separate unconditional authority to allot ordinary shares in the Company in connection with the Company s dividend re-investment scheme until the commencement of the Annual General Meeting in During the year to 31 March 2014 a total of 18,680,132 ordinary shares were issued, of which 687,857 were issued under the Company s dividend re-investment scheme. Subsequent to the year end the Company allotted ordinary shares under the joint offer with British Smaller Companies VCT2 plc. Further details are given in note 11 on page 68. Cancellation of Ordinary Shares Following the prior period adjustment described in the Interim Report of the Company to 30 September ,431,373 ordinary shares bought back in the period between 20 September 2011 and 19 June 2013 were cancelled pursuant to an order of the High Court on 12 February This had no impact on the net asset value of the Company. Further details are given under the heading Prior Period Adjustment on page 54. Capital Disclosures 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 s capital structure is summarised in note 11 of the Financial Statements. Each ordinary share carries one vote. There are no restrictions on voting rights or any agreement between holders of securities that result in restrictions on the transfer of securities or on voting rights; there are no securities carrying special rights with regard to the control of the Company; the Company does not have an employee share scheme; the rules concerning the appointment and replacement of directors, amendments to the Articles of Association and powers to issue or buy-back the Company s shares are contained in the Articles of Association of the Company and the Companies Act 2006; with the exception of the Fund Manager s Incentive Agreement, more details of which can be found in note 3 of the Financial Statements, there are no agreements to which the Company is party that take effect, alter or terminate upon a change in control following a takeover bid; and there are no agreements between the Company and its directors providing for compensation for loss of office that may occur because of a takeover bid. Environment 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 Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008, as amended. Directors and their Interests The directors of the Company at 31 March 2014, their interests and contracts of significance are set out in the Directors Remuneration Report on pages 43 to 45. Substantial Shareholdings The directors are not aware of any substantial shareholdings representing three per cent or more of the Company's issued share capital as at 31 March 2014 and the date of this Report. Strategic Report Corporate Governance Date Number of Percentage of Consideration ordinary shares issued share paid per of 10p capital at ordinary share bought-back that date (pence) 19 June , % March , %

36 Independent Auditor During the year Grant Thornton UK LLP resigned as the Company s auditors following a tender process. BDO LLP were appointed to fill the casual vacancy. BDO LLP has indicated their willingness to continue in office and a resolution concerning their appointment will be proposed at the Annual General Meeting. Annual General Meeting Shareholders will find the Notice of the Annual General Meeting and the associated Proxy Form on pages 74 to 78. The business of the meeting includes a resolution (Resolution 9) to be proposed to authorise the directors to issue and allot new ordinary shares up to an aggregate nominal amount representing approximately 46 per cent of the ordinary share capital of the Company in issue at 12 June 2014 and a special resolution (Resolution 11) proposed to empower the directors to allot ordinary shares up to an aggregate nominal amount representing approximately 46 per cent of the issued ordinary share capital of the Company as at 12 June 2014, without regard to any rights of pre-emption on the part of the existing Shareholders. A further special resolution (Resolution 14) is included to amend the Articles of the Company so as to allow for the continuance of the Company for five years following any allotment of ordinary shares. This report was approved by the Board on 12 June 2014 and signed on its behalf by Helen Sinclair Chairman Registered number The directors believe this to be in the Company s interest as it will allow a fundraising to be launched in the current year without an additional general meeting. Furthermore from time to time the Company is approached by persons interested in purchasing new ordinary shares and if so authorised the directors will be able to respond positively to such applications. A special resolution (Resolution 13) will 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. This resolution will be acted upon at the discretion of the Board. 36

37 Corporate Governance 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, where it feels appropriate, with the principles and recommendations of the Association of Investment Companies Code of Corporate Governance issued in February 2013 ( AIC Code ) by reference to the AIC Corporate Governance Guide for Investment Companies ( AIC Guide ) available on the AIC website The AIC Code as explained by the AIC Guide, addresses all the principles set out in the UK Corporate Governance Code 2012 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 FRC confirmed in January 2013 that they consider the updated AIC Guide to be appropriate and that investment companies may report against the AIC Code. The UK Corporate Governance Code 2012 can be found on the website of the Financial Reporting Council at The Board considers that reporting against the principles and recommendations of the AIC Code and by reference to the AIC Guide (which incorporates the UK Corporate Governance Code), will provide better information to Shareholders. The Company is committed to maintaining the highest standards of corporate governance and during the year to 31 March 2014 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 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 VCT plc, which is an externally managed venture capital trust. The Company has therefore not reported further in respect of these provisions. Role of the Board A management agreement between the Company and YFM Private Equity Limited sets out the matters over which the Fund Manager has authority. This includes management 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, investment and divestment decisions, 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 and risk control 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. Board Composition The Board consists of three non-executive directors including the Chairman, all of whom are regarded by the Board as independent and also as independent of the Company s Fund Manager. The independence of the Chairman was assessed upon her 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 Helen Sinclair 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 33. Corporate Governance 37

38 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. Boardroom Diversity 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. Tenure Directors are initially appointed until the following Annual General Meeting when, under the Company s Articles of Association, Meetings and Committees 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 a 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 regard 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 Ms H Sinclair or Mr P S Cammerman, though Mr C W E R Buchan s appointment is terminable by him or the Company on three months notice. The directors recommend the re-election of Ms H Sinclair, Mr C W E R Buchan and Mr P S Cammerman at this year s Annual General Meeting, because of their commitment, experience and continued contribution to the Company. Meetings attended Ms H Sinclair Mr C W E R Buchan Mr P S Cammerman Board meetings Audit Committee meetings Allotment Committee meetings Investment Committee meetings Remuneration Committee meetings General meetings Telephone conferences Total Meetings and Committees 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. During the year there were ten formal Board meetings, two Audit Committee meetings, six Allotment Committee meetings, fourteen Investment Committee meetings, one Remuneration Committee meeting and three General meetings. The directors met via telephone conference on five other occasions. Training and Appraisal On appointment, the Fund Manager and Company Secretary provide all directors with induction training. Thereafter, regular briefings are provided on changes in regulatory requirements that affect the Company and 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 March 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 Ms H Sinclair continues to be effective and that she continues to demonstrate a strong commitment to the role. 38

39 Remuneration and Nominations Committee During the financial year the Board decided to combine the Remuneration Committee with the Nominations Committee to form a Remuneration and Nominations Committee. The new Committee consists of three directors who are considered to be independent of the Fund Manager, this currently being Ms H Sinclair, Mr P S Cammerman and Mr C W E R Buchan. Mr C W E R Buchan is the Chairman of the Committee. The Committee met once in the year. New terms of reference have been produced which are available for inspection on request at the Company s registered office and at the Annual General Meeting and on the Fund Manager s website at During the year the Company had a Remuneration Committee and a Nominations Committee, both of which consisted of three directors who were considered by the Board to be independent of the Fund Manager, being Ms H Sinclair, Mr P S Cammerman and Mr C W E R Buchan. The Chairman of the Board acted as the Chairman of both the Remuneration Committee and the Nominations Committee (save in the event the Nominations Committee was to meet to consider a successor to the Chairmanship). The Remuneration Committee reviewed the Company s remuneration policy so as to determine and agree the remuneration to be paid to each director of the Company and was responsible for the production of the Directors Remuneration Report which may be found on pages 43 to 45. In considering appointments to the Board, the Renumeration and 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. Audit Committee The Audit Committee consists of Ms H Sinclair, Mr P S Cammerman and Mr C W E R Buchan and meets at least twice a year. The directors consider that it is appropriate that the Chairman of the Committee should be Mr C W E R Buchan. The members of the Committee consider that they have the requisite skills and experience to fulfil the responsibilities of the Committee. The Audit Committee s terms of reference include the following roles and responsibilities: monitoring and making recommendations to the Board in relation to the Company s published financial statements (including in relation to the valuation of the Company s unquoted investments) and other formal announcements relating to the Company s financial performance; monitoring and making recommendations to the Board in relation to the Company s internal control (including internal financial control) and risk management systems; annually considering the need for an internal audit function; 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; monitoring the extent to which the external auditor is engaged to supply non-audit services; and ensuring that the Fund Manager has arrangements in place for the investigation and follow-up of any concerns raised confidentially by staff in relation to the propriety of financial reporting or other matters. It reviews the terms of the management agreement and examines the effectiveness of the Company s internal control and risk management systems, receives information from the Fund Manager 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 page 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 website of the Fund Manager at The members of the Committee consider that they have the requisite skills and experience to fulfil the responsibilities of the Committee, and that the chairman of the Committee meets the requirements of The UK Corporate Governance Code as to recent and relevant financial experience. 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 March 2014 the Audit Committee discharged its responsibilities by: reviewing tenders received by potential external auditors and making recommendations to the Board for the appointment of BDO LLP as the Company s external auditor to fill the casual vacancy following Grant Thornton LLP s resignation. reviewing and approving the external auditor s terms of engagement, remuneration and independence; reviewing the external auditor s plan for the audit of the Company s financial statements, including identification of key risks; reviewing YFM Private Equity Limited s statement of internal controls operated in relation to the Company s business and assessing the effectiveness of those controls in minimising the impact of key risks; reviewing reports on the effectiveness of YFM Private Equity Limited s compliance procedures; reviewing the appropriateness of the Company s accounting policies; Corporate Governance 39

40 reviewing the Company s draft annual financial statements, half yearly results statement and interim management statements prior to Board approval, including the proposed fair value of investments as determined by the directors; and reviewing the external auditor s detailed reports to the Committee on the annual financial statements. 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: valuation of unquoted investments; compliance with HM Revenue & Customs conditions for maintenance of approved venture capital trust status; and review with the Company s then auditor, Grant Thornton UK LLP, of the prior period adjustment and restatement of reserves as set out on page 54. These issues were discussed with the Fund Manager and the auditor at the pre-year end audit planning meeting and at the conclusion of the audit of the financial statements. Valuation of unquoted investments: the Fund Manager 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 Audit Committee reviewed the estimates and judgements made in the investment valuations and were satisfied that they were appropriate. Venture capital trust status: the Fund Manager 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 PricewaterhouseCoopers LLP in its capacity as adviser to the Company on taxation matters. The Fund Manager confirmed to the Audit Committee that they were not aware of any material unadjusted misstatements. Having reviewed the reports received from the Fund Manager 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 has held office for less than one year; in accordance with professional guidelines the engagement partner will be rotated after at most five years, and the current partner has served for less than one year. Relationship with the Auditor The Committee is responsible for overseeing the relationship with the external auditor, assessing the effectiveness of the external audit process and making recommendations on the appointment and removal of the external auditor. It makes recommendations to the Board on the level of audit fees and the terms of engagement for the auditor. The external auditor is invited to attend committee meetings, where appropriate, and also meets with the Committee and its Chairman without the representatives of the Fund Manager being present. The Committee undertakes a review of the external auditor s effectiveness of the audit process. The Committee considers whether the auditor has: demonstrated strong technical knowledge and clear understanding of the business; indicated professional scepticism in key judgements and raised any significant issues in advance of the audit process commencing; allocated an audit team that is appropriately resourced; demonstrated a proactive approach to the audit planning process and engaged with the Committee Chairman and other key individuals within the business; provided a clear explanation of the scope and strategy of the audit; demonstrated the ability to communicate clearly and promptly with the members of the Committee and the adviser and produce comprehensive reports on its findings; demonstrated that it has appropriate procedures and safeguards in place to maintain its independence and objectivity; and charged justifiable fees in respect of the scope of services provided. The Board regularly reviews and monitors the external auditor s independence and objectivity. As part of this process it reviews the nature and extent of services supplied by the auditor to ensure that independence is maintained. During the year no additional services were contracted from the external auditor, given the requirements of the Company. The auditor prepares an audit strategy document on an annual basis. This provides information on the audit team and timetable, audit scope and objectives, evaluation of materiality, initial assessment of key audit and accounting risks, confirmation of independence and proposed fees. This is reviewed and approved by the Committee with an opportunity to consider the audit approach and to raise any queries with the auditor. The outcome of the review together with any actions that have arisen are formally minuted and a summary is submitted to the Board for consideration. The Committee assesses the effectiveness of the external audit process annually and makes a recommendation to the Board on the re-appointment of the auditor. This is considered by the Board prior to agreeing the recommendation to Shareholders for the re-appointment of the auditor at each Annual General Meeting of the Company. As part of its review, the Committee considers 40

41 the performance of the auditor and whether it has met the agreed audit plan, the quality of its reporting in its management letter and the cost effectiveness of the services provided as well as the manner in which it has handled key audit issues and responded to the Committee s questions. The Committee concluded that the appointment of BDO LLP as auditor was in the best interests of the Company and of Shareholders and its recommendation was endorsed by the Board. BDO LLP was appointed during the year following the resignation of Grant Thornton UK LLP during the year. Investment Committee The Investment Committee currently consists of Ms H Sinclair, Mr P S Cammerman and Mr C W E R Buchan. The Chairman of the Committee is Mr P S Cammerman. The Investment Committee is authorised to make investment decisions (including new investment, further investment, variation and realisation decisions) on behalf of the Board. Where an urgent decision is required in respect of a potential new quoted investment, the Fund Manager in conjunction with the Chairman is permitted to make a decision up to an investment level of 250,000, provided that papers have first been circulated to at least the Chairman of the Committee. With regard to the realisation of AIM holdings, the Fund Manager is authorised to implement the Company s existing strategy for the holding in question within parameters previously agreed by the directors. The Investment 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 on the Fund Manager s website at Allotment Committee The Company has an Allotment Committee which consists of the directors who are considered by the Board to be independent of the Fund Manager. The quorum for Committee meetings is one director, unless otherwise determined by the Board. 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 Shareholders. There are no written terms of reference. Relations with Shareholders 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 (30 June and 31 December), 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 Fund Manager are available in person to meet with and answer Shareholders questions. In addition, representatives of the Fund Manager 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 Fund Manager 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 33. 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 33. 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. Internal Control and Risk Management Under an agreement dated 28 February 1996, as varied by agreements dated 1 July 2009 and 16 November 2012, the executive 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: a clearly defined investment strategy for YFM Private Equity Limited, the Fund Manager to the Company; all decisions concerning the acquisition or disposal of investments are taken by the Board after due consideration of the recommendations made by the Fund Manager, save for those in respect of quoted investments which are taken by the Fund Manager (as regards new investment, in conjunction with the Chairman of the Investment Committee) in accordance with the terms as set out earlier on this page; regular reviews of the Company s investments, liquid assets and liabilities, and revenue and expenditure; regular reviews of compliance with the VCT regulations to retain status; and the Board receives copies of the Company s management accounts on a regular basis showing comparisons with budget. These include a report by the Fund Manager with a review of performance. Additional information is supplied on request. 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 March 2014 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 30. Corporate Governance 41

42 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 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 at least 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 terms of the Turnbull Guidance (being the Internal Control: Guidance for Directors on the Combined Code 2005). 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: a robust system of internal control is maintained by the Fund Manager over the preparation and reconciliation of investment portfolio valuations; monthly reconciliation of assets held as fixed income securities and cash; independent review of the valuations of portfolio investments by the Board (quarterly); the Audit Committee review of financial reporting and compliance (as set out on page 39); the Board reviews financial information including the Annual Report, Interim Report and interim management statements prior to their external communication; and the Board reviews the financial information in any prospectus issued by the Company in connection with the issue of new share capital. The Board has reviewed the effectiveness of the Company s systems of internal control and risk management for the year 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. Conflicts of Interest 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. Corporate Governance in relation to Investee Companies The Company delegates responsibility for monitoring its investments to its Fund Manager 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 investee company performance in accordance with best practice in the private equity sector. Co-investment Typically the Company invests alongside other venture capital funds, such syndication spreading investment risk. Details of the amounts invested in individual companies are set out in the Strategic Report which accompanies this Annual Report. Co-investments are detailed in note 7 to the Financial Statements on pages 65 and 66. Management The Board has delegated the management of the investment portfolio to the Fund Manager. This report was approved by the Board on 12 June 2014 and signed on its behalf by Helen Sinclair, Chairman Registered number

43 Di rectors Remuneration Report 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 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 47 to 48. Directors Remuneration Policy This statement of the Directors Remuneration Policy is intended to take effect following approval by Shareholders at the Annual General Meeting to be held on 22 July The Board currently comprises three directors, all of whom are non-executive. The Company currently has an independent Remuneration and Nominations Committee, which is comprised by the full Board and of which Mr C W E R Buchan is the independent Chairman. 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 98 per cent of Shareholders who exercised their voting rights voted for the resolution approving the Directors Remuneration Report, showing significant Shareholder support. 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 reelection on an annual basis. Excluding Mr C W E R Buchan, who has a three month notice period, there are no notice periods, and 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. Assuming this policy is approved by the members at the forthcoming Annual General Meeting, it is intended that this policy will continue for the year ending 31 March 2015 and subsequent years. In accordance with the regulations, an ordinary resolution to approve the Directors Remuneration Policy will be put to Shareholders at least once every three years. Brief biographical notes on the directors are given on page 33. Statement by the Chairman of the Remuneration and Nominations Committee In accordance with the Directors Remuneration Policy the directors fees were reviewed in June 2014 by the Board who agreed that, as a result of the significant additional workload due to increas ed regulatory requirements, these fees should be increased for the year ending Corporate Governance 43

44 31 March 2015 to 40,000 for the Chairman and 25,000 per annum for the other directors. This is the first increase since the year ended 31 March Under the Company s articles of association the directors may determine their own remuneration until the aggregate of the ordinary remuneration for all directors exceeds 115,000, when any excess over such amount will need to be approved by Shareholders in a general meeting. Directors Remuneration for the Year Ended 31 March 2014 (audited) The directors who served in the year received their emoluments in the form of fees, which represent the entire remuneration payable to directors. These are shown in Table A. Directors and their Interests (unaudited) The directors of the Company at 31 March 2014 and their beneficial interests in the share capital of the Company (including those of immediate family members) are shown in Table B. None of the directors held any options to acquire additional shares at the year end. In addition to the above, the directors have since the year end subscribed for new ordinary shares under the recent joint offers for subscription, which were allotted as shown in Table C. The Company has not set up any formal requirement or guidelines concerning their ownership of shares in the Company. Relative Importance of Spend on Pay As the Company has no employees, the directors do not consider it appropriate to present a table comparing remuneration paid to employees with distributions to Shareholders. Consideration of Employment Conditions of Non-director Employees The Company has no 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. Company Performance There are no executive directors (2013: none). Directors Remuneration (Audited) Directors and their Interests (Unaudited) Number of ordinary shares Table B 31 March 31 March Ms H Sinclair 17,004 13,407 Mr P S Cammerman 67,975 44,614 Mr C W E R Buchan 5,963 2,082 Directors and their Interests (Unaudited) Table A Ms H Sinclair 35,000 35,000 Mr P S Cammerman 20,000 20,000 Mr C W E R Buchan 20,000 20,000 75,000 75,000 Table C Future Commitments Shares subscribed for Date of and allotted since Allotment 31 March 2014 Ms H Sinclair Mr P S Cammerman Mr C W E R Buchan 6, May 2014 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 Fund Manager through the management 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 11. Legislation requires that a supplemental performance measure be given in the Directors Remuneration Report which should be based on a company s share price, adjusted for the impact of participating in a dividend re-investment scheme whereby cash dividends are re-invested in that company s shares. This performance measure which excludes all tax reliefs received by Shareholders is called share price total return. The Company s net asset value has increased over time and, as a result of applying this improvement to additional shares issued under the dividend 44

45 Pence per ordinary share Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Corporate Governance VCT Generalist Share Price Total Return (Source: Index compiled by AIC) BSC Share Price Total Return BSC Net Asset Value Total Return re-investment scheme, the Company s share price total return is higher than its net asset value total return. The graph above shows a comparison over the last five 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 March The directors consider this to be the most appropriate published index on which to report on comparative performance. The Company is currently outperforming the published index by 8.9 per cent. 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 dividend re-investment scheme. Net asset value total return is calculated by reference to the net asset value and cumulative dividends paid (see note 13 of these financial statements) excluding tax reliefs received by Shareholders. Helen Sinclair Chairman 45

46 Di rectors Responsibilities Statement The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law 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: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and prepare a strategic report, director s report and director s remuneration report which comply with the requirements of the Companies Act The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 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. Website Publication 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 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. Directors Responsibilities Pursuant to DTR4 The directors confirm to the best of their knowledge: The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company; and The annual report includes a fair review of the development and performance of the business and the financial position of the Company, together with a description or the principal risks and uncertainties that they face. 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 33. For and on behalf of the Board This statement was approved by the Board and signed on its behalf on 12 June Helen Sinclair Chairman 46

47 Independent Auditor s Report To the members of We have audited the financial statements of British Smaller Companies VCT plc (the company ) for the year ended 31 March 2014 which comprise the statement of comprehensive income, the balance sheet, the statement of changes in equity, the statement of cash flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Opinion on Financial Statements In our opinion the Financial Statements: give a true and fair view of the state of the company s affairs as at 31 March 2014 and of its profit for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act Our Assessment of Risks of Material Misstatement and our Audit Approach to these Risks We identified the following risks that we believe have had the greatest impact on our audit strategy and scope: statements and recent management information available for the unquoted investments used to support assumptions about maintainable earnings used in the valuations, considering the multiples applied by reference to independent market data and challenging the adjustments made to such market data in arriving at the valuations adopted. Where alternative assumptions could reasonably be applied, we developed our own point estimates and considered the overall impact of such sensitisations on the portfolio of investments in determining whether the valuations as a whole are reasonable and unbiased. Where other valuation approaches were adopted, in addition to challenging the assumptions used, we considered the appropriateness of the valuation techniques adopted by reference to both the circumstances of the investee company and the International Private Equity and Venture Capital Valuation guidelines. companies and, where appropriate, independent confirmation from the investee companies. We challenged the treatment of accrued loan interest as realised income and considered the classification of income between revenue and capital. The Audit Committee s consideration of risks in relation to the financial statements is set out on pages 39 and 40. Purpose of this Report 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 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. Auditor s Report The assessment of the carrying value of investments This is a key accounting estimate where there is an inherent risk of management override arising from the investment valuations being prepared by the Investment Manager, who is remunerated based on the net asset value of the company, derived using those valuations. We challenged the assumptions inherent in the valuation of unquoted investments and we assessed the impact of the estimation uncertainty concerning these assumptions and the disclosure of these uncertainties in the financial statements. Our audit procedures included reviewing the historical financial Revenue recognition Revenue consists of dividends receivable from investee companies and interest earned on loans to investee companies and other financial assets. Revenue recognition is considered to be a significant risk as it is one of the key drivers of dividend returns to investors. We considered the controls relating to revenue recognition and undertook testing of interest income by comparing actual income to expectations generated using the interest rates in the loan instruments. We also tested dividends receivable to cash received, as well as to supporting documentation and management accounts of the investee Respective Responsibilities of Directors and Auditor As explained more fully in the statement of directors responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit 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. 47

48 Scope of the Audit of the Financial Statements A description of the scope of an audit of financial statements is provided on the FRC s website at Our Application of the Concept of Materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements on our audit and on the financial statements. We define planning materiality as 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. We also determine a level of performance materiality which we use to determine the extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. We determined materiality for the financial statements as a whole to be 795,000. In determining this, we based our assessment on a percentage of invested assets which reflects the underlying level of precision within the valuation of the investment portfolio and the range of reasonably possible alternative valuations that could be expected to apply to the unquoted investments. On the basis of our risk assessment, together with our assessment of the company s control environment and having consideration to this being our first year of appointment, our judgement is that performance materiality for the financial statements should be approximately 60 per cent of planning materiality, namely 475,000. Our objective in adopting this approach is to ensure that total detected and undetected audit differences do not exceed materiality of 795,000 for the financial statements as a whole. International Standards on Auditing (UK & Ireland) also allow the auditor to set a lower materiality for particular classes of transaction, 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. In this context, we set a lower level of materiality to apply to those classes of transactions and balances which impact on the costs and the net revenue returns of the company. We determined materiality for this area to be 75,000. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of 14,000, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. Opinion on other Matters Prescribed by the Companies Act 2006 In our opinion: the part of the directors remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; the information given in the strategic report and directors report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the information given in the Corporate Governance Statement set out on pages 41 to 42 of the annual report with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements. Matters on which we are Required to Report by Exception Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: 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. Under the Companies Act 2006 we are required to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the financial statements and the part of the directors remuneration report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit; or a Corporate Governance Statement has not been prepared by the company. Under the Listing Rules we are required to review: the directors statement, set out on page 34, in relation to going concern; and the part of the corporate governance statement relating to the company s compliance with the nine provisions of The UK Corporate Governance Code specified for our review. We have nothing to report in respect of these matters. Jason Homewood (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor, London, United Kingdom 12 June 2014 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 48

49 St atement of Comprehensive Income For the year ended 31 March Notes Revenue Capital Total Revenue Capital Total Gain on disposal of investments Gains on investments held at fair value 7 5,969 5, Income 2 1,341 1,341 1,323 1,323 Administrative expenses: 3 Fund management fee (221) (665) (886) (188) (564) (752) Incentive fee (221) (221) (39) (39) Other expenses (369) (369) (341) (341) (590) (886) (1,476) (529) (603) (1,132) Profit before taxation 751 5,774 6, ,123 Taxation 4 (105) 105 (138) 138 Profit for the year 646 5,879 6, ,123 Total comprehensive income for the year 646 5,879 6, ,123 Basic and diluted earnings per ordinary share p 11.84p 13.14p 1.62p 1.16p 2.78p The accompanying notes on pages 54 to 73 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 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 ) 2009 published by the Association of Investment Companies. Financial Statements 49

50 Balance Sheet At 31 March 2014 Notes Assets Non-current assets Investments 39,862 27,560 Fixed income government securities 2,403 2,474 Financial assets at fair value through profit or loss 7 42,265 30,034 Trade and other receivables ,416 30,034 Current assets Trade and other receivables Cash on fixed term deposit 9 2,000 1,500 Cash and cash equivalents 9 18,962 10,669 21,205 12,366 Liabilities Current liabilities Trade and other payables 10 (1,037) (311) Net current assets 20,168 12,055 Net assets 62,584 42,089 Shareholders equity Share capital 11 6,386 4,661 Share premium account 23,165 7,236 Capital redemption reserve Capital reserve 16,535 19,349 Investment holding gains 15,879 9,259 Revenue reserve 398 1,363 Total Shareholders equity 62,584 42,089 Basic and diluted net asset value per ordinary share p 97.0p The accompanying notes on pages 54 to 73 are an integral part of these Financial Statements. The Financial Statements were approved and authorised for issue by the Board on 12 June 2014 and were signed on its behalf by: Helen Sinclair Chairman 50

51 St atement of Changes in Equity For the year ended 31 March 2014 Share Share Capital Capital Investment Revenue Total capital premium redemption reserve holding reserve equity account reserve gains (losses) Balance at 31 March ,039 23, ,432 2,666 37,894 Prior Period Adjustment (note 1) (1,578) 1,578 Restated at 31 March ,039 23, (1,218) 9,010 2,666 37,894 Revenue return for the year Capital expenses (465) (465) Gain on investments held at fair value Gain on disposal of investments in the year Total comprehensive income for the year ,123 Issue of share capital 577 5,091 5,668 Issue costs (300) (300) Issue of shares DRIS Issue costs DRIS (23) (23) Purchase of own shares (705) (705) Dividends (1,959) (1,959) Total transactions with owners 622 5,124 (705) (1,959) 3,082 Reduction in share premium account (21,064) 21,064 Reduction in share premium account expenses (10) (10) Realisation of prior year investment holding gains (16) 16 Balance at 31 March ,661 7, ,349 9,259 1,363 42,089 Financial Statements Revenue return for the year before tax Capital expenses (886) (886) Gain on investments held at fair value 5,969 5,969 Gain on disposal of investments in the year Taxation 105 (105) Total comprehensive income for the year (90) 5, ,525 Issue of share capital 1,799 16,302 18,101 Issue costs (915) (915) Issue of shares DRIS Issue costs DRIS (20) (20) Purchase of own shares (606) (606) Dividends (1,610) (1,611) (3,221) Treasury share cancellation (143) 143 Financial Statements Total transactions with owners 1,725 15,929 (2,073) (1,611) 13,970 Realisation of prior year investment holding losses (651) 651 Balance at 31 March ,386 23, ,535 15, ,584 The accompanying notes on pages 54 to 73 are an integral part of these Financial Statements. 51

52 The capital reserve and revenue reserve are both distributable reserves. These reserves total 16,933,000 (2013: 20,712,000) representing a decrease of 3,779,000 (2013: 19,264,000 increase) during the year. This change arises from the profit in the year of 556,000 (2013: 890,000), a transfer of valuation losses from the investment holding reserve of 651,000 (2013: 16,000 transfer of valuation profits), dividends of 3,221,000 (2013: 1,959,000), transfer of 143,000 (2013: nil) on the cancellation of treasury shares and the purchase of own ordinary shares of 606,000 (2013: 705,000). 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. The revenue reserve includes 148,000 (2013: nil) of interest receivable in 2018 which should be excluded in the calculation of the Company s distributable reserves at 31 March As at 31 March 2013 the capital reserve was presented as three separate reserves in the Statement of Changes in Equity. As at 31 March 2014 these have been combined so as to present the Company s distributable reserves more clearly, with the balances as at 31 March 2012 and 31 March 2013 summarised accordingly and reconciled in the table below: As reported in the Interim Report As reported 31 March 2014 for six months to 30 September 2013 Capital Special Treasury Revised Capital reserve reserve reserve reserve Balance at 31 March 2012 (1,578) 2,408 (2,048) (1,218) Balance at 31 March 2013 (1,360) 23,462 (2,753) 19,349 52

53 St atement of Cash Flows For the year ended 31 March 2014 Notes Net cash outflow from operating activities (93) (1,098) Cash flows from investing activities Cash maturing from/(placed on) fixed term deposit (500) 3,500 Purchase of financial assets at fair value through profit or loss 7 (10,620) (6,097) Proceeds from sale of financial assets at fair value through profit or loss 7 5,093 3,801 Net cash from investing activities (6,027) 1,204 Cash flows from (used in) financing activities Issue of ordinary shares 17,712 5,668 Costs of ordinary share issues* (234) (349) Purchase of own ordinary shares (466) (569) Share premium reduction costs (9) (1) Dividends paid net of dividends re-invested 5 (2,590) (1,558) Net cash from (used in) financing activities 14,413 3,191 Net increase in cash and cash equivalents 8,293 3,297 Cash and cash equivalents at the beginning of the year 10,669 7,372 Cash and cash equivalents at the end of the year 9 18,962 10,669 *Issue costs include both fundraising costs and expenses incurred from the Company s dividend re-investment scheme. The accompanying notes on pages 54 to 73 are an integral part of these Financial Statements. Reconciliation of Profit before Taxation to Net Cash Outflow from Operating Activities Profit before taxation 6,525 1,123 (Increase) decrease in trade and other receivables (214) 246 Increase (decrease) in trade and other payables 277 (1,517) Profit on disposal of investments in the year (691) (699) Profit on investments held at fair value (5,969) (233) Capitalised interest (21) (18) Financial Statements Net cash outflow from operating activities (93) (1,098) 53

54 Notes to the Financial Statements For the year ended 31 March Principal Accounting Policies Basis of Preparation 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 (including quoted Government Securities) 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 January 2009 (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. The only new standard effective for the year ended 31 March 2014 which has had a material impact on the financial statements is IFRS 13 Fair Value Measurement. Note 7 of the financial statements includes investments disclosed in the fair value hierarchy classification under IFRS 13 and includes the relevant fair value disclosures as required by IFRS 13. There has been no material change to the measurement of fair values of investments from the implementation of IFRS 13. Other 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 amendments to IFRS 9, IFRS 10, IFRS 11 and IFRS 12, and amendments to IAS 24, IAS 27, IAS 28, IAS 32 and IAS 36. A full impact assessment has not yet been completed in order to assess whether these new standards will have a material impact on the Financial Statements. Prior Period Adjustment The full background to the prior period adjustment is described in the Interim Report of the Company to 30 September Whilst not impacting the Company s net asset value during this time, the consequent reclassification of losses had a material impact on the Company s distributable reserves. As a result the Company has restated the balance sheets as at 31 March 2012 and 31 March 2013 (this adjustment was recognised in the Interim Report of the Company to 30 September 2013) to transfer net realised losses of million arising between 2006 and 2008 from the Investment Holding Gains (Losses) Reserve to the Capital Reserve. A third balance sheet has not been prepared as the prior period adjustment related to a reclassification of reserves, which is shown in the Statement of Changes in Equity. The Company was advised that the payment of dividends and buy back of shares in the period since 31 March 2011 should be sanctioned by the passing of certain special resolutions, followed by an application to the Court to approve a reduction in share capital. The Company put the relevant resolutions to Shareholders at a General Meeting held in January 2014 which were approved. Following the passing of these resolutions 1,431,373 ordinary shares bought back in the period between 20 September 2011 and 19 June 2013 were cancelled pursuant to an order of the High Court on 12 February This had no impact on the net asset value of the Company. Financial Assets Held at Fair Value Through Profit or Loss 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 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. All investments are measured at fair value 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. Investments in quoted Government securities and corporate bonds are classified at fair value through profit or loss under the criteria given above. These are valued at market bid prices. 54

55 1. Principal Accounting Policies (continued) Redemption premiums 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 IAS 31 Financial reporting of interest in joint ventures, which give exemptions from equity accounting for venture capital organisations. Under IAS 27 Consolidated and separate financial statements control is presumed to exist when the parent owns, directly or indirectly, more than half of the voting power by a number of means. The Company does not hold more than 50 per cent of the equity of any of the companies within the portfolio. In addition, the Company does not control any of the companies held as part of the investment portfolio. Therefore it is not considered that any of the holdings represent investments in subsidiary undertakings. Valuation of Investments Unquoted investments are valued in accordance with IAS 39 Financial instruments: Recognition and Measurement and, where appropriate, the International Private Equity and Venture Capital (IPEVC) Valuation Guidelines issued in December Quoted investments are valued at market bid prices. A detailed explanation of the valuation policies of the Company is included below. Initial Measurement 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). Subsequent Measurement The International Private Equity and Venture Capital (IPEVC) Valuation Guidelines ( 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. Unquoted Investments Price of recent investment, reviewed for change in fair value. This represents the cost of the investment or the price at which a significant amount of new investment has been made by an independent third party adjusted, if necessary, for factors relevant to the background of the specific investment. The value of the investment is assessed for changes or events that would imply either a reduction or increase to its fair value through comparison of financial, technical and marketing milestones set at the time of investment. Where it is considered that the fair value no longer approximates to the cost of the recent investment an estimated adjustment to the cost, based on objective data, will be made to the investment s carrying value. Earnings multiple. A multiple that is appropriate and reasonable, given the risk profile and earnings growth prospects of the underlying company, is applied to the maintainable earnings of that company. The multiple is adjusted to reflect any risk associated with lack of marketability and to take account of the differences between the investee company and the benchmark company or companies. Net assets. The value of the business is derived by using appropriate measures to value the assets and liabilities of the investee company. Financial Statements Discounted cash flows of the underlying business. The present value of the underlying business is derived by using reasonable assumptions and estimations of expected future cash flows and the terminal value, and discounted by applying the appropriate riskadjusted rate that quantifies the risk inherent in the company. Discounted cash flows from the investment. Under this method, the discounted cash flow concept is applied to the expected cash flows from the investment itself rather than the underlying business as a whole. Sales multiples and industry valuation benchmarks. Where appropriate comparator companies can be identified, multiples of revenues may be used as a valuation benchmark. 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. 55

56 1. Principal Accounting Policies (continued) 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 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 March Income 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 is rolled up and/or payable at redemption then it is recognised as income unless there is reasonable doubt as to its receipt. Expenses Expenses are accounted for on an accruals basis. Expenses are charged through the Revenue column of the Statement of Comprehensive Income, except for fund management and incentive fees. Of the fund management 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 Fund Manager (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 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 3 months of the balance sheet date, 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 management and incentive fees payable to the Fund Manager. 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. Reserves Share Capital This reserve contains the nominal value of all shares allotted under recent Offers for subscription. Share Premium Account This reserve contains the excess of gross proceeds less issue costs over the nominal value of shares allotted under recent offers for subscription. Capital Redemption Reserve The nominal value of shares bought back and cancelled is held in this reserve, so that the Company s capital is maintained. 56

57 1. Principal Accounting Policies (continued) Capital Reserve The following are included within this reserve: Gains and losses on realisation of investments; Realised losses upon permanent diminution in value of investments; 75 per cent of management fee expense, together with the related taxation effect to this reserve in accordance with the policy on expenses in note 1 of the financial statements; Incentive fee payable to the Fund Manager; Capital dividends paid to Shareholders; Purchase and holding of the Company s own shares; Credit arising from the cancellation of the share premium account as follows: following approval of the Court and a resolution of the Shareholders passed on 16 July 1999 to cancel the Company s share premium account. Following the approval of the Court the amount standing to the credit of the share premium account at 5 May 2011 was cancelled and transferred to this reserve on 13 March The credit arising of 21,603,637 less legal costs may be utilised in any manner in which the Company s profits available for distribution are able to be applied. Investment Holding Gains (Losses) 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. Revenue Reserve This reserve includes all yield income from investments along with any costs associated with the running of the Company less 75 per cent of the management fee expense as detailed in the Capital Reserve above. Taxation 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 Dividends payable are recognised only when an obligation exists. Interim dividends are recognised when paid and final dividends are recognised when approved by Shareholders in general meetings. Segmental Reporting 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. Financial Statements Critical Accounting Estimates and Judgements 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. 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 a variety of methods and makes assumptions that are mainly based on market conditions at each balance sheet date. 57

58 2. Income Dividends from unquoted companies Dividends from quoted companies Interest on loans to unquoted companies 952 1,017 Fixed interest Government securities Income from investments held at fair value through profit or loss 1,232 1,182 Interest on deposits ,341 1,323 In addition, an amount of 158,000 (2013: 228,000) of income in relation to loan interest has not been recognised due to uncertainty over its future receipt. 3. Administrative Expenses Fund management fee (net of rebate) Other expenses: Administration fee Incentive fee Directors' remuneration (comprises only short term benefits including social security contributions) Auditor s remuneration audit fees (excluding irrecoverable VAT) General expenses: Trail commission paid to financial intermediaries Other expenses Irrecoverable VAT ,476 1,132 No fees are payable to the auditor in respect of other services (2013: nil). Fund Administration YFM Private Equity Limited provides fund management services to the Company under a subscription rights agreement dated 28 February 1996 ( Subscription Rights Agreement ) as varied by agreements dated 1 July 2009 and 16 November The agreement may be terminated by not less than 12 months notice given by either party at any time. No notice has been issued to or by YFM Private Equity Limited terminating the contract as at the date of this Report. The key features of the agreement are: YFM Private Equity Limited receives a fund management fee, calculated at half-yearly intervals as at 31 March and 30 September, at the rate of 2 per cent of gross assets less current liabilities. The fund management fee is allocated between capital and revenue as described in note 1. The fee is payable quarterly in advance. This fee totalled 886,000 for the year ended 31 March 2014 (2013: 752,000), net of the rebate set out below; Under this same agreement YFM Private Equity Limited also provides administrative and secretarial services to the Company for a fee based on 35,000 (at 28 February 1996) per annum plus annual adjustments to reflect movements in the Retail Prices Index. This fee is charged fully to revenue and totalled 58,000 for the year to 31 March 2014 (2013: 56,000); and Under a deed of variation dated 16 November 2012 YFM Private Equity Limited shall bear the annual operating costs (excluding VAT and trail commissions payable to financial intermediaries) of the Company to the extent that these costs, calculated on a TER basis, exceed 3.25 per cent of its net asset value. The excess expenses during the year payable to the Company from YFM Private Equity Limited amounted to nil (2013: nil). 58

59 3. Administrative Expenses (continued) When the Company makes investments into its unquoted portfolio the Fund Manager charges that investee an arrangement fee, calculated by applying a percentage to the investment amount. During the year the Company and Fund Manager agreed that, with effect from 1 October 2013, if the average of the relevant fees during the Company s financial year exceeds 3.0 per cent of the total invested into new portfolio companies and 2.0 per cent into follow-on holdings this excess will be rebated to the Company. As at 31 March 2014, the Company was due a rebate from the Fund Manager of 29,800. The Board has also agreed with the Fund Manager that the monitoring and directors fees it receives from investee companies will be limited to a range between 20,000 to 40,000 (excluding VAT) per annum per company. Following approval of the relevant resolution at the Annual General Meeting of the Company held in August 2009, the incentive scheme set out in the Subscription Rights Agreement was replaced by a revised incentive agreement dated 7 July 2009 ( the Incentive Agreement ). Under the Incentive Agreement the Fund Manager will receive an incentive payment equal to 20 per cent of the amount by which dividends paid in the relevant accounting period exceed 4 pence per ordinary share (increasing in line with RPI) once cumulative dividends of 10 pence per ordinary share from 1 April 2009 have been paid. These incentive payments are also subject to cumulative shortfalls in any prior accounting periods being made up and the average net asset value per ordinary share in the relevant accounting period being not less than 94.0 pence per ordinary share, as adjusted for the impact of share issues and buy-backs. No payment can be made in respect of the year to 31 March 2014 under the Incentive Agreement unless the average quarterly adjusted net asset value of the Company is a minimum of 92.8 pence per ordinary share and in addition at least 4.7 pence per ordinary share in dividends has been paid to Shareholders. Payment is made five business days after the relevant Annual General Meeting at which the audited accounts are presented to Shareholders. With effect from 1 April 2014 the Board has agreed that the amount of the incentive payment paid to the Fund Manager for any one year shall, when taken with all other relevant costs, ensure that the Total Expenses Ratio is no greater than 5 per cent of the net asset value at the end of the financial year (as adjusted for all realised gains that have been distributed during that year). Any unpaid incentive payment will be carried over to subsequent financial years and be included in the calculation of the Total Expenses Ratio. Both in the current and prior year, the Fund Manager had achieved its adjusted targets and 220,531 (2013: 38,678) has been accrued within trade and other payables. The incentive fee is payable following the Annual General Meeting on 22 July There are also provisions for a compensatory fee in circumstances where the Company is taken over or the Incentive Agreement is terminated, which is calculated as a percentage of the fee that would otherwise be payable under the Incentive Agreement by reference to the accounting period following its termination. In this instance 80 per cent is payable in the first accounting period after such an event, 55 per cent in the second, 35 per cent in the third and nothing is payable thereafter. The maximum fee payable in any 12 month period cannot exceed an amount which would represent 25 per cent or more of the net asset value or market capitalisation of the Company. Under the terms of the joint offer with British Smaller Companies VCT2 plc launched on 16 November 2012 (which closed on 30 April 2013), YFM Private Equity Limited was entitled to 5.5 per cent of gross subscriptions, less the cost of incentive shares and re-investment of intermediary commission, for all applications on or before 28 December After this date YFM Private Equity Limited was entitled to 5.5 per cent of gross subscriptions from execution brokers and 3.5 per cent of gross subscriptions for applications directly from applicants or through intermediaries offering financial advice, less the cost of incentive shares and re-investment of intermediary commission. This net amount totalled 217,035, with 182,436 in the year to 31 March 2014 (2013: 34,599). Financial Statements Under the terms of the joint offers with British Smaller Companies VCT2 plc launched on 14 January 2014 (which closed on 5 April 2014 and 29 May 2014 respectively) YFM Private Equity Limited was entitled to 5.5 per cent of gross subscriptions from execution brokers and 3.5 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 payable to YFM Private Equity amounted to 313,048 in total, with 251,871 in the year to 31 March YFM Private Equity Limited met all costs and expenses arising from these offers out of these fees, including any early investment incentive and any payment or re-investment of initial intermediary commission (excluding permissible trail commission, which will continue to be met by the Company). The details of the directors remuneration are set out in the Directors Remuneration Report on page 44 under the heading Directors Remuneration (audited). 59

60 4. Taxation Revenue Capital Total Revenue Capital Total Profit before taxation 751 5,774 6, ,123 Profit before taxation multiplied by standard small company rate of corporation tax in the UK of 20% 150 1,155 1, Effect of: UK dividends received (45) (45) (21) (21) Non taxable profits on investments (1,332) (1,332) (187) (187) Excess management expenses (17) (17) Tax charge (credit) 105 (105) 138 (138) The Company has no provided or unprovided deferred tax liability in either year. Deferred tax assets of 688,000 (2013: 618,000) calculated at 20 per cent in respect of unrelieved management expenses of 3,442,000 as at 31 March 2014 (31 March 2013: 3,087,000) have not been recognised as the directors do not currently believe that it is probable that sufficient taxable profits will be available against which the assets can be recovered. 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, the Company has not provided for deferred tax on any capital gains or losses arising on the revaluation or realisation of investments. 5. Dividends Amounts recognised as distributions to equity holders in the year to 31 March: Revenue Capital Total Revenue Capital Total Final dividend for 2013 of 3.5p per ordinary share and a special dividend of 1.0p per ordinary share (2013: 3.0p per ordinary share) 1, ,223 1,176 1,176 Interim dividend for 2014 of 2.0p per ordinary share (2013: 2.0p per ordinary share) ,611 1,610 3,221 1,959 1,959 Shares issued under the DRIS (631) (401) Dividends paid in the Statement of Cash Flows 2,590 1,558 The final dividend of 3.5 pence per ordinary share, plus the special dividend of 1.0 pence per ordinary share in respect of the year to 31 March 2013 was paid on 13 August 2013 to Shareholders on the register at 12 July The interim dividend of 2.0 pence per ordinary share was paid on 18 March 2014 to Shareholders on the register at 21 February A final dividend of 3.5 pence per ordinary share in respect of the year to 31 March 2014 has been proposed, amounting to 2.15 million. This dividend has not been recognised in the year ended 31 March 2014 as the obligation will not exist until the dividend is approved by Shareholders at the Annual General Meeting on 22 July

61 6. Basic and Diluted Earnings per Ordinary Share The basic and diluted earnings per ordinary share is based on the profit after tax attributable to equity Shareholders of 6,525,000 (2013: 1,123,000) and 49,655,831 (2013: 40,389,708) ordinary shares, being the weighted average number of ordinary shares in issue during the year. The basic and diluted revenue return per ordinary share is based on the revenue profit for the year attributable to equity Shareholders after tax of 646,000 (2013: 656,000) and 49,655,831 (2013: 40,389,708) ordinary shares being the weighted average number of ordinary shares in issue during the year. The basic and diluted capital return per ordinary share is based on the capital profit for the year after tax attributable to equity Shareholders of 5,879,000 (2013: 467,000) and 49,655,831 (2013: 40,389,708) ordinary shares being the weighted average number of ordinary shares in issue during the year. During the year the Company issued 18,680,132 new ordinary shares. The Company also repurchased 685,217 of its own ordinary shares, which are held in treasury. Treasury shares have been excluded in calculating the weighted average number of ordinary shares during the year. The Company has no securities that would have a dilutive effect in either period and hence the basic and diluted earnings per ordinary share are the same. After the year end the Company issued 4,179,046 new ordinary shares (note 11). If these ordinary shares had been issued on 31 March 2014 the weighted average number of ordinary shares in issue during the year would have been unchanged and there would have been no change in the basic and diluted earnings per ordinary share figures shown at the foot of the Statement of Comprehensive Income. 7. Financial Assets at Fair Value through Profit or Loss IFRS 7 and IFRS 13, in respect of financial instruments that are measured in the balance sheet at fair value, requires disclosure of fair value measurements by level within the following fair value measurement hierarchy: Level 1: quoted prices in active markets for identical assets or liabilities. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is defined as a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The quoted market price used for financial assets held by the Company is the current bid price. These instruments are included in Level 1 and comprise AIM quoted investments (with one investment traded on ISDX Growth Market) or government securities and other fixed income securities classified as held at fair value through profit or loss. Level 2: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. The Company held no such instruments in the current or prior year. Level 3: the fair value of financial instruments that are not traded in an active market (for example, investments in unquoted companies) is determined by using valuation techniques such as earnings multiples. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. Financial Statements Each investment is reviewed at least quarterly to ensure that it has not ceased to meet the criteria of the level in which it was included at the beginning of each accounting period. There has been one transfer between these classifications in the period (2013: none). During the year Cambridge Cognition Limited was listed on AIM becoming Cambridge Cognition Holdings plc. The change in fair value for the current and previous year is recognised through profit or loss. All items held at fair value through profit or loss were designated as such upon initial recognition. Movements in investments at fair value through profit or loss during the year to 31 March 2014 are summarised as follows: Valuation of Investments 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 price. 61

62 7. Financial Assets at Fair Value through Profit or Loss (continued) Movements in investments at fair value through profit or loss during the year to 31 March 2014 are summarised as follows: IFRS 7 measurement classification Level 3 Level 1 Level 1 Unquoted Quoted Total Fixed Total Investments Equity Quoted and Income Investments Investments Unquoted Securities Opening cost 15,084 3,366 18,450 2,427 20,877 Opening valuation gain 9,553 (443) 9, ,157 Opening fair value at 1 April ,637 2,923 27,560 2,474 30,034 Transfer between Level 1 & Level 3 1 (192) 192 Additions at cost 9, , ,652 Capitalised interest Disposal proceeds (3,212) (1,424) (4,636) (459) (5,095) Net profit (loss) on disposal (2) 684 Change in fair value 4,666 1,373 6,039 (70) 5,969 Closing fair value at 31 March ,905 3,957 39,862 2,403 42,265 Closing cost 22,063 2,710 24,773 2,436 27,209 Closing valuation gain (loss) 13,842 1,247 15,089 (33) 15,056 Closing fair value at 31 March ,905 3,957 39,862 2,403 42, During the year Cambridge Cognition was listed on AIM becoming Cambridge Cognition Holdings plc. 2. The net profit on disposal in the table above is 684,000 whereas that shown in the Statement of Comprehensive Income and the table at the top of page 64 is 691,000. The difference comprises deferred proceeds of 7,000 in respect of assets which have been disposed and are not included within the investment portfolio at the year end. All of the changes in fair value during the year related to assets held at the year end. The total of fair value adjustments below cost made against unquoted investments at 31 March 2014 amounted to 4,108,000 (2013: 1,655,000). There have been no individual fair value adjustments downwards during the year that exceeded five per cent of the total assets of the Company (2013: none). During the year four investments moved from being held at price of recent investment, reviewed for change in fair value, to an earnings multiple basis. Each company was valued upwards, with the net impact being a gain of 8,227,000. One investment has moved from an earnings multiple basis to be valued at price of recent investment, reviewed for change in fair value and has decreased in value by 130,

63 7. Financial Assets at Fair Value through Profit or Loss (continued) Movements in investments at fair value through profit or loss during the year to 31 March 2013 are summarised below. All of the changes in fair value during the year related to assets held at 31 March IFRS 7 measurement classification Level 3 Level 1 Level 1 Unquoted Quoted Total Fixed Total Investments Equity Quoted and Income Investments Investments Unquoted Securities Opening cost 11,781 3,529 15,310 2,383 17,693 Opening valuation gain 8, , ,006 Opening fair value at 1 April ,479 3,721 24,200 2,499 26,699 Additions at cost 4, , ,097 Capitalised interest Disposal proceeds (2,112) (695) (2,807) (901) (3,708) Net profit on disposal Change in fair value 811 (544) 267 (34) 233 Closing fair value at 31 March ,637 2,923 27,560 2,474 30,034 Closing cost 15,084 3,366 18,450 2,427 20,877 Closing valuation gain (loss) 9,553 (443) 9, ,157 Closing fair value at 31 March ,637 2,923 27,560 2,474 30,034 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, 74 per cent are held on an earnings multiple basis, which have significant judgement applied to the valuation inputs. The table below sets out the range of Price Earnings ratios and discounts applied in arriving at investments valued on an earnings multiple basis. The remainder of Level 3 investments are held at cost, reviewed for change in fair value and the range of discounts applied is set out below. Manufacturing & Retail & Brands Software, IT & Business Industrial Services Telecommunications Services Earning multiple inputs PE Multiple Range PE Multiple Weighted Average Combined PE and/or Marketability Discount Range 60-68% 28% 36% 41% - 69% 60% 68% Combined PE and/or Marketability Discount Weighted Average 67% 35% 57% 63% Cost reviewed for impairment Discount applied 0% - 100% Weighted discount applied 18% Financial Statements 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 Price Earnings ratios) alternatives have been considered which would still fall within the IPEVC Guidelines (see page 55). For each unquoted investment, two scenarios have been modelled: more prudent assumptions (downside case) and more optimistic assumptions (upside case). Applying the downside alternatives the value of the unquoted investments would be 3.19 million or 8.8 per cent lower. Using the upside alternative the value would be increased by 3.76 million or 10.5 per cent. Fixed income securities comprise UK Government stocks and are classified as financial assets at fair value through profit or loss. Their use is as temporary holdings until capital investment opportunities arise. 63

64 7. Financial Assets at Fair Value through Profit or Loss (continued) The following disposals took place in the year (all companies are unquoted except where otherwise indicated): Net Cost Opening Gain (loss) Profit (loss) proceeds carrying on opening on from sale value as at carrying disposal 1 April value Unquoted investments: Seven Technologies Holdings Limited 1,302 1,302 1,302 Waterfall Services Limited DisplayPlan Holdings Limited Callstream Group Limited * President Engineering Group Limited Bagel Nash Group Limited GTK (UK) Limited Go Outdoors Limited Quoted investments: Pressure Technologies plc Straight plc (85) Hargreaves Integrated Services plc Mattioli Woods plc K3 Business Services plc ,636 3,592 3, ,044 Deferred proceeds: Primal Pictures Limited (received in the year) Primal Pictures Limited (included in receivables) Total proceeds from quoted and unquoted investments 4,647 3,592 3, ,055 Fixed income securities (2) 8 Total 5,106 4,043 4, ,063 *Formerly Bluebell Telecoms Group Limited 64

65 7. Financial Assets at Fair Value through Profit or Loss (continued) The following disposals took place in 2013 (all companies are unquoted except where otherwise indicated): Net Cost Opening Gain (loss) Profit (loss) proceeds carrying on opening on from sale value as at carrying disposal 1 April value Unquoted investments: Fishawack Limited 1, Primal Pictures Limited EKF Diagnostics Holdings Limited Seven Technologies Holdings Limited Quoted investments: Tikit Group plc Straight plc (20) (77) 2,807 1,889 2, Deferred proceeds: Primal Pictures Limited Total proceeds from quoted and unquoted investments 2,811 1,889 2, Fixed income securities Total 3,712 2,747 3, Significant Interests YFM Private Equity Limited, the Company s Fund Manager, also acts as fund manager to certain other funds under its management that have invested in some of the companies within the current portfolio of the Company. Furthermore, certain portfolio companies have been invested in by funds managed by other fund managers within the YFM Equity Partners group. Details of these investments are summarised in the tables below. At 31 March 2014 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 Percentage Percentage of of class held class held by by the commonly Company managed funds Bagel Nash Group Limited Food Retail and Manufacture 49, % 33.20% Deep-Secure Ltd Software 100, % 40.71% DisplayPlan Holdings Limited Retail 2, % 12.25% Dryden Human Capital Group Limited Recruitment 327, % 36.90% Ellfin Home Care Limited Healthcare 71, % 57.96% Fairlight Bridge Limited Turnaround % Gill Marine Holdings Limited Consumer Retail 184, % 47.8% GTK (UK) Limited Manufacturing 22,222, % 20.10% Harris Hill Holdings Limited Recruitment 65, % 26.80% Harvey Jones Holdings Limited Consumer Retail 77, % 23.24% Insider Technologies (Holdings) Limited Software 289, % 17.20% Lightmain Company Limited Manufacturing 1,178, % Mangar Health Limited Healthcare 230, % 41.6% President Engineering Group Ltd Manufacturing % RMS Group Holdings Limited Industrial 153, % 23.40% Seven Technologies Holdings Limited Manufacturing 992, % 28.10% Waterfall Services Limited Support Services 100, % 24.41% Financial Statements 65

66 7. Financial Assets at Fair Value through Profit or Loss (continued) 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 Company does not hold more than 50 per cent of the equity of any company in the investment portfolio, either on its own or in conjunction with other commonly managed funds. As of 1 April 2014 the YFM Equity Partners group ceased to manage one of the funds that has a holding in RMS Group Holdings Limited, lowering the percentage managed by other commonly managed funds to 14.4%. The amounts shown below are the net cost of investments as at 31 March 2014 and exclude those companies which are in receivership or liquidation. British British British The Other Total Smaller Smaller Smaller Chandos commonly Companies Companies Companies Fund LP managed VCT plc VCT2 plc EIS Fund funds AB Dynamics plc Bagel Nash Group Limited 1, ,936 3,881 Bluebell Telecoms Group Limited Vianet Group plc Cambridge Cognition Holdings plc Dryden Human Capital Group Limited , ,893 Deep-Secure Ltd 1, ,000 3,500 DisplayPlan Holdings Limited ,500 EKF Diagnostic Holdings plc Ellfin Home Care Limited , ,884 Gill Marine Holdings Limited 2,500 1, ,000 8,970 GTK (UK) Limited 1,693 1, ,056 Hargreaves Services plc Harris Hill Holdings Limited 600 1,500 2,100 Harvey Jones Holdings Limited ,234 3,400 Insider Technologies (Holdings) Limited 1, ,950 Leengate Holdings Limited 1, ,335 Mangar Health Limited 2,460 1, ,600 PowerOasis Limited ,133 2,125 Pressure Technologies plc RMS Group Holdings Limited Selima Limited Seven Technologies Holdings Limited 1,984 1, ,940 7,509 TeraView Limited Waterfall Services Limited As of 1 April 2014 the YFM Equity Partners group ceased to manage Partnership Investment Finance Equity Fund Limited Partnership, which holds an investment at a net cost of 200,000 in RMS Group Holdings Limited. 66

67 8. Trade and Other Receivables Non-current assets: Accrued income 148 Other debtor Amounts receivable within one year: Trade receivables Other debtors 29 Prepayments and accrued income Trade receivables are assessed for reduction in fair value when older than 90 days or when there is reasonable doubt that payment will be received in due course. As of 31 March 2014 no trade receivables were past due but not impaired (2013: nil). As of 31 March 2014, trade receivables of nil (2013: nil) were impaired and provided for. The maximum exposure to credit risk at the reporting date in respect of trade and other receivables is 381,000 (2013: 160,000). The Company does not hold any collateral as security. The carrying amounts of the Company s trade and other receivables are denominated in sterling. 9. Cash and Cash Equivalents Cash in transit for post year end investment 24 Cash at bank 18,962 10,645 18,962 10,669 A further 2.0 million is also held in a fixed term deposit account (2013: 1.5 million) which is due to mature in August In accordance with the definition of cash and cash equivalents the amount is shown separately on the face of the balance sheet. 10. Trade and Other Payables Financial Statements Amounts payable within one year: Accrued expenses Incentive fee Other creditors ,

68 11. Called-up Share Capital Allotted, Allotted, Called-up and Called-up and Fully paid Fully paid Ordinary shares of 10.0 pence each Issued: 63,855,189 (2013: 46,606,430) 6,386 4,661 The movements in the year were as follows: Price Date Number Share of shares Capital 000 Total as at 1 April ,606,430 4,661 Issue of shares Fundraising pence 5 April ,730, Issue of shares Fundraising pence 5 April ,929, Issue of shares Fundraising pence 30 April , Issue of shares Fundraising pence 30 April , Issue of shares Fundraising pence 9 May ,109 3 Issue of shares DRIS pence 13 August , Issue of shares DRIS pence 21 March , Issue of shares Fundraising pence 31 March ,592,132 1,159 Cancellation of shares Reduction of Capital 12 February 2014 (1,431,373) (143) As at 31 March 2014 (including treasury shares) 63,855,189 6,386 As at 31 March 2014 (excluding treasury shares) 61,385,687 The allotment on 9 May 2013 was made in response to an application by an individual Shareholder that was received by the Company after the close of the joint offer on 30 April 2013, the allotment therefore being outside of the offer. During the year the Company purchased 685,217 (2013: 855,173) of its own ordinary shares and these are held on the balance sheet in the Capital Reserve. Full details of the share purchases are set out in the Directors Report under the heading Buy-Back and Issue of Ordinary Shares. In addition on 12 February 2014 pursuant to an order of the Court the Company cancelled 1,431,373 ordinary shares held in Treasury. The 2,469,502 (2013: 3,215,658) treasury shares have been included in calculating the number of ordinary shares in issue, and excluded in calculating the number of ordinary shares with voting rights in issue, at 31 March 2014 and 31 March Between the year end and the date of these Financial Statements the Company allotted new ordinary shares of 10.0 pence each at prices ranging between pence and pence pursuant to the joint offer for subscription made by the Company and British Smaller Companies VCT2 plc. Date Number of Offer price ordinary shares 4 April ,312, April , May ,400,

69 12. Basic and Diluted Net Asset Value per Ordinary Share The basic and diluted net asset value per ordinary share is calculated on attributable assets of 62,584,000 (2013: 42,089,000) and 61,385,687 (2013: 43,390,772) ordinary shares with voting rights in issue at the year end. The treasury shares have been excluded in calculating the number of ordinary shares in issue at 31 March The Company has no securities that would have a dilutive effect in either period and hence the basic and diluted net asset values per ordinary share are the same. 13. Total Return per Ordinary Share The total return per ordinary share is calculated on cumulative dividends paid of 90.7 pence per ordinary share (2013: 84.2 pence per ordinary share) plus the net asset value as calculated in note Financial Commitments At 31 March 2014 the Board had committed a total of 3.03 million into new portfolio companies subject to satisfactory due diligence and legal completion. Since the year end five further investments totalling 4.61 million have been approved by the Board. 15. Related Party Transactions Mr P S Cammerman is a non-executive director of Pressure Technologies plc. During the year he received 30,000 (2013: 23,000) from Pressure Technologies plc in respect of his services. He also holds 0.25 per cent equity stake in Pressure Technologies plc. 16. Events after the Balance Sheet Date Since the end of the reporting period, the Company has completed five additional investments totalling 4.70 million and approved further investments totalling 2.94 million. Subsequent to the year end the Company allotted a total of 4,179,046 ordinary shares on 4 April 2014, 5 April 2014 and 29 May 2014 pursuant to the joint offer detailed under Fundraising on page Financial Instruments 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. 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 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 or fixed rate Government securities 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. Financial Statements 69

70 17. Financial Instruments (continued) The accounting policies for financial instruments have been applied to the items below: Assets as per balance sheet Loans and Assets at Loans and Assets at receivables fair value receivables fair value through profit through profit or loss or loss Non-current assets Financial assets at fair value through profit or loss 42,265 30,034 Accrued income 148 Other debtors ,265 30,034 Current assets Cash and cash equivalents 18,962 10,669 Cash on fixed term deposit 2,000 1,500 Trade and other receivables ,272 42,265 12,241 30,034 Other assets not financial instruments ,356 42,265 12,366 30,034 Liabilities as per balance sheet Financial Financial liabilities liabilities Trade and other payables 1, 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. 17a Market Risk Market Price Risk The Company invests in young 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. 70

71 17. Financial Instruments (continued) To manage price risk arising from investments in equity securities, the Company diversifies its portfolio. Diversification of the portfolio is done in accordance with the limits set by the Board. Exposure to any one stock is limited to 20 per cent of the total cost of investments and 25 per cent of total net asset value. The Board seeks to invest in counter-cyclical stocks where these are identified. Of the Company s investments, 10 per cent are quoted on AIM/ISDX (2013: 17 per cent). A five per cent increase in stock prices as at 31 March 2014 would have increased the net assets attributable to the Company s Shareholders and the total profit for the year by 198,000 (2013: 146,000). 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, 90 per cent are in unquoted companies held at fair value (2013: 83 per cent). The valuation methodology for these investments includes the application of externally produced FTSE 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 ten 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 3,007,000 (4.8 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 3,165,000 (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 0.1 per cent of net assets. The largest single concentration of risk relates to the Company s investment in GO Outdoors Limited which constitutes 10.2 per cent (2013: 11.8 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 2.2 per cent (2013: 2.3 per cent) of the value of net assets. Interest Rate Risk The Company s venture capital investments include 15,159,000 (2013: 10,150,000) of loan stock at cost in unquoted companies. The majority of this loan stock at 31 March 2014 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 900,000 (2013: 900,000) of its loan stock portfolio. The Company holds a number of fixed income Government securities. The value of such holdings is inversely linked to movements in market interest rates and as such this portfolio is subject to fair value interest rate risk. The Board believes this risk to be satisfactorily mitigated through the portfolio s active management on which it receives regular reports, together with the make-up and market valuation of this portfolio. 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. Financial Statements Weighted Weighted Weighted Weighted average average average average interest rate time for interest rate time for which rate which rate is fixed is fixed 000 % Months 000 % Months Fixed rate loan stock and preference shares 15, , Fixed income securities 2, , Cash on fixed term deposit 2, , Combined 19, ,

72 17. Financial Instruments (continued) Exchange Rate Risk The Company has no significant exposure to exchange rate risk. 17b Credit 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 Fund Manager has in place a monitoring procedure in respect of credit risk which is reviewed on an ongoing basis. The carrying amounts of financial assets, excluding equity investments but including preference shares and loan stock, total 39,948,000 (2013: 24,867,000) which best represents the maximum credit risk exposure at the balance sheet date. Credit risk arising on fixed interest instruments is mitigated by investing in UK Government stock. 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 Fund Manager 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 bank and broker (for the gilts) used by the Company are large and reputable. Should the credit quality or the financial position of the banks or fund deteriorate significantly the Fund Manager, gilt and money market managers will move the cash holdings to another bank or fund. The maturities of the loan stock portfolio are as follows: <1 year 1-2 years 2-5 years >5 years <1 year 1-2 years 2-5 years Unquoted loan investments 3,359 1,781 8,635 1,384 3, ,296 The past due maturity dates of the loan stock portfolio are as follows: months 3-6 months > 6 months 1-2 months 3-6 months > 6 months Interest Capital All amounts where loan stock is overdue are subject to ongoing negotiations as to the rescheduling of capital repayments. 17c Liquidity Risk 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 a mixture of Government gilts and bank interest deposit accounts. Investments in Government stocks 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 Fund Manager 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 30.3 per cent (2013: 25.3 per cent) are in the form of liquid cash and cash equivalents. There are no undrawn committed borrowing facilities at either year end. The Company does not have a material liability as at the year end. 72

73 17. Financial Instruments (continued) Fair Value Methods and Assumptions Detailed valuation policies in respect of the investment portfolio are set out in note 1. Where investments are in quoted stocks, fair value is set at market price. Non-quoted investments are valued in line with International Private Equity and Venture Capital ( IPEVC ) valuation guidelines. The primary methods used, and the key assumptions relating to them, are: Price of recent investment, reviewed for change in fair value: the cost of the investment, adjusted for background factors specific to the investment, is taken as a reasonable assessment of fair value for a period of up to one year. During this period performance against budget is monitored for evidence of changes to this initial fair value. Valuations may be re-based following substantial investment by a third party when this offers evidence that there has been a change to fair value. Earnings multiple: the appropriate sector FTSE multiples are used as a market-based indication of the enterprise value of an investment company. A discount is applied to the multiple by the Fund Manager based on the perceived market interest in that company or sector and on any benefit that may be observed by holding a significant shareholding or superior rights. Although permitted by the IPEVC valuation guidelines, other valuation methods have not been used in the year. 18. Capital Management The Company s objectives when managing capital are: to safeguard its ability to continue as a going concern, so that it can continue to provide returns for Shareholders and benefits for other stakeholders; and to ensure sufficient liquid resources are available to meet the funding requirements of its investments and to fund new investments where identified. 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 March 2014 was 62.6 million (2013: 42.1 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 the 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. Financial Statements 73

74 Notice of the Annual General Meeting THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR ATTENTION. If you are in any doubt about the action to be taken, you should immediately consult with your bank manager, stockbroker, solicitor, accountant or other appropriate independent adviser authorised pursuant to the Financial Services and Markets Act If you have sold or otherwise transferred all of your shares in British Smaller Companies VCT plc, please send this document and accompanying documents as soon as possible to the purchaser or transferee or to the stockbroker, independent financial adviser or other person through whom the sale or transfer was effected for delivery to the purchaser or transferee. No: BRITISH SMALLER COMPANIES VCT PLC NOTICE IS HEREBY GIVEN that the ANNUAL GENERAL MEETING of the Company will be held at 33 St James Square, London, SW1Y 4JS on 22 July 2014 at noon for the following purposes: To consider and, if thought fit, pass the following resolutions: ORDINARY RESOLUTIONS (1) That the Report of the Directors, the Report of the Auditors, the Strategic Report and the Financial Statements of the Company for the year ended 31 March 2014 be received. (2) That the final dividend of 3.5 pence per ordinary share for the year ended 31 March 2014 be approved. (3) That the Directors' Remuneration Report for the year ended 31 March 2014 be approved other than the part of such Report containing the Directors Remuneration Policy. (4) That the Directors Remuneration Policy contained in the Directors Remuneration Report for the year ended 31 March 2014 be approved. (5) That Ms H Sinclair be re-elected as a director. (6) That Mr C W E R Buchan be re-elected as a director. (7) That Mr P S Cammerman be re-elected as a director. (8) That BDO LLP be appointed as auditor to the Company to hold office until the conclusion of the next general meeting at which accounts are laid before the Company and that the directors be authorised to fix their remuneration. (9) That, the directors of the Company be and hereby are generally and unconditionally authorised in accordance with Section 551 of the Companies Act 2006 ( CA 2006 ) to exercise all the powers of the Company to allot and issue shares in the capital of the Company and to grant rights to subscribe for or to convert any security into shares in the Company up to an aggregate nominal amount of 3,000,000, representing 46 per cent of the issued share capital (excluding treasury shares) of the Company as at 12 June 2014, being the last practical date prior to the notice of this meeting, provided that the authority conferred by this resolution 9 shall expire on the conclusion of the Annual General Meeting of the Company to be held in 2016 (unless renewed, varied or revoked by the Company in a general meeting) but so that this authority shall allow the Company to make before the expiry of this authority offers or agreements which would or might require shares to be allotted or rights to be granted after such expiry. All previous authorities to allot given to the directors, other than the authority granted pursuant to resolution 11 (authority to allot shares in respect of the dividend re-investment scheme) at the Annual General Meeting of the Company held on 19 July 2013, be and are hereby revoked provided that such revocation shall not have retrospective effect. (10) That, in addition to the authority granted to the directors pursuant to resolution 10 at the Annual General Meeting of the Company held on 19 July 2013, the directors of the Company, be and are hereby authorised, pursuant to article 166 of the Company s articles of association, to extend their ability to offer holders of shares in the Company, pursuant to the Company s dividend re-investment scheme, the right to receive shares, credited as fully paid, instead of cash in respect of the whole (or some part to be determined by the directors) of all or any dividend declared during the period commencing immediately after the beginning of the Annual General Meeting in 2018 and ending on 31 December SPECIAL RESOLUTIONS (11) That, the directors of the Company be and hereby are empowered pursuant to Sections 570(1) of the CA 2006 to allot or make offers to or agreements to allot equity securities (which expression shall have the meaning ascribed to it in Section 560(1) of the CA 2006) for cash pursuant to the authority given pursuant to resolution 9, as if Section 561(1) of the CA 2006 did not apply to such allotment, provided that the power provided by this resolution 11 shall expire on the conclusion of the annual general meeting of the Company to be held in 2016 (unless renewed, varied or revoked by the Company in general meeting). All previous authorities to allot given to the directors, other than the authority granted pursuant to resolution 13 (authority to allot shares in respect of the dividend re-investment scheme) at the Annual General Meeting of the Company held on 19 July 2013, be and are hereby revoked provided that such revocation shall not have retrospective effect. 74

75 (12) That in substitution for any existing authority but without prejudice to the exercise of any such power prior to the date hereof, the Company be generally and unconditionally authorised to make one or more market purchases (within the meaning of Section 693(4) of the Companies Act 2006 of ordinary shares of 10 pence in the capital of the Company provided that: a. The maximum aggregate number of ordinary shares that may be purchased is 9,828,153 being per cent of the issued ordinary shares (excluding treasury shares) as at 12 June 2014; b. The maximum price (excluding expenses) which may be paid for an ordinary share is an amount equal to the maximum amount permitted to be paid in accordance with rules of the UK Listing Authority in force as at the data of purchase; c. The minimum price (excluding expenses) which may be paid for an ordinary share is its nominal value; d. This authority shall take effect from 22 July 2014 and shall expire at the conclusion of the Company s Annual General Meeting in 2017 or on 22 July 2017, whichever is the later; and e. The Company may make a contract or contracts to purchase ordinary shares under this authority before the expiry of the authority, which will or may be executed wholly or partly after the expiry of the authority, and may make a purchase of ordinary shares in pursuance of any such contract or contracts. (13) That, subject to the sanction of the High Court of Justice, 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, be cancelled. (14) That article 191 of the Company s articles of association be amended to delete the reference to in 2020 in line 1 and substitute after the later of i) 31 March 2020 and ii) the fifth anniversary of the last allotment of shares (from time to time) in the Company therefor. BY ORDER OF THE BOARD KHM Secretarial Services Limited Secretary 12 June 2014 Registered office: Saint Martins House, Chapeltown Road, Leeds LS7 4HZ Information regarding the Annual General Meeting, including the information required by section 311A of the Companies Act 2006, is available from Notes: (a) Any member of the Company entitled to attend and vote at the Annual General Meeting is also entitled to appoint one or more proxies to attend, speak and vote instead of that member. Any such appointment can only be made using the procedures set out in these notes and the notes of the Form of Proxy. A member may appoint more than one proxy in relation to the Annual General Meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. A proxy may demand, or join in demanding, a poll. A proxy need not be a member of the Company but must attend the Annual General Meeting in order to represent his appointer. A member entitled to attend and vote at the Annual General Meeting may appoint the Chairman or another person as his proxy although the Chairman will not speak for the member. A member who wishes his proxy to speak for him should appoint his own choice of proxy (not the Chairman) and give instructions directly to that person. If you are not a member of the Company but you have been nominated by a member of the Company to enjoy information rights, you do not have a right to appoint any proxies under the procedures set out in these notes. Please read note (h) below. Under section 319A of the Companies Act 2006, the Company must answer any question a member asks relating to the business being dealt with at the Annual General Meeting unless: answering the question would interfere unduly with the preparation for the Annual General Meeting or involve the disclosure of confidential information; the answer has already been given on a website in the form of an answer to a question; or it is undesirable in the interests of the Company or the good order of the Annual General Meeting that the question be answered. (b) To be valid, a Form of Proxy must be completed and signed and with the power of attorney or other written authority, if any, under which it is signed or an office or notarially certified copy or a copy certified in accordance with the Powers of Attorney Act 1971 of such power and written authority must be delivered, to Capita Asset Services, PXS, 34 Beckenham Road, Beckenham BR3 4TU not less than 48 hours (excluding weekends and public holidays) before the time appointed for holding the Annual General Meeting or adjourned meeting at which the person named in the Form of Proxy proposes to vote. In the case of a poll taken more than 48 hours (excluding weekends and public holidays) after it is demanded, the document(s) must be delivered as aforesaid not less than 24 hours (excluding weekends and public holidays) before the time appointed for taking the poll, or where the poll is taken not more than 48 hours (excluding weekends and public holidays) after it was demanded, be delivered at (and prior to the commencement of) the meeting at which the demand is made. If no voting indication is given in the Form of Proxy, your proxy will vote (or abstain from voting) as they think fit in relation to any matter put to the Annual General Meeting. Annual General Meeting 75

76 (c) In order to revoke a proxy instruction a member will need to inform the Company by sending a signed hard copy notice clearly stating the intention to revoke the proxy appointment to Capita Asset Services, PXS, 34 Beckenham Road, Beckenham BR3 4TU. In the case of a member which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under which the revocation notice is signed (or a duly certified copy of such power or authority) must be included with the revocation notice. The revocation notice must be received by Capita Asset Services before the Annual General Meeting or the holding of a poll subsequently thereto. If a member attempts to revoke his or her proxy appointment but the revocation is received after the time specified then, subject to note (d) directly below, the proxy appointment will remain valid. (d) Completion and return of a Form of Proxy will not preclude a member of the Company from attending and voting in person. If a member appoints a proxy and that member attends the Annual General Meeting in person, the proxy appointment will automatically be terminated. (e) Copies of the directors Letters of Appointment, the Register of Directors Interests in the ordinary shares of the Company, a copy of the amended articles of association (marked up to show the changes) and a copy of the current articles of association of the Company will be available for inspection at the registered office of the Company during usual business hours on any weekday (weekend and public holidays excluded) from the date of this Notice, until the end of the Annual General Meeting and at the Annual General Meeting venue itself for at least 15 minutes prior to and during the meeting. (f) Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, the Company has specified that only those holders of the Company s shares registered on the Register of Members of the Company as at 6.00pm on 18 July 2014 or, in the event that the Annual General Meeting is adjourned, on the Register of Members at 6.00pm on the day two days before the time of any adjourned meeting, shall be entitled to attend and vote at the said Annual General Meeting in respect of such shares registered in their name at the relevant time. Changes to entries on the Register of Members after 6.00pm on 18 July 2014 or, in the event that the Annual General Meeting is adjourned, on the Register of Members less than 48 hours before the time of any adjourned meeting, shall be disregarded in determining the right of any person to attend and vote at the Annual General Meeting. (g) As at 12 June 2014, the Company's issued share capital comprised 65,564,733 ordinary shares of 10.0 pence each with a further 2,469,502 shares held in treasury. These treasury shares represented 4.0 per cent of the total issued share capital (excluding treasury shares) at the aforementioned date. Each ordinary share carries one voting right at a general meeting of the Company and so the total number of voting rights in the Company as at 12 June 2014 was 65,564,733. The website referred to above will include information on the number of ordinary shares and voting rights. (h) If you are a person who has been nominated under section 146 of the Companies Act 2006 to enjoy information rights ( Nominated Person ): You may have a right under an agreement between you and the member of the Company who has nominated you to have information rights ( Relevant Member ) to be appointed or to have someone else appointed as a proxy for the Annual General Meeting. If you either do not have such a right or if you have such a right but do not wish to exercise it, you may have a right under an agreement between you and the Relevant Member to give instructions to the Relevant Member as to the exercise of voting rights. 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. (i) 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. (j) In the case of joint members, any one of them may sign the Form of Proxy. The vote of the person whose names stands first in the register of members of the Company will be accepted to the exclusion of the votes of the other joint holders. (k) A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolution. If no voting indication is given on the Form of Proxy, the proxy will vote or abstain from voting at his or her discretion. The proxy will also vote (or abstain from voting) as he or she thinks fit in relation to any other matter which is put before the Annual General Meeting. (l) Members may not use any electronic address provided either in this Notice of Annual General Meeting, or any related documents (including the Chairman s letter and Form of Proxy), to communicate for any purpose other than those expressly stated. (m) CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a CREST Proxy Instruction ) must be properly authenticated in accordance with Euroclear UK & Ireland s specifications, and must contain the information required for such instruction, as described in the CREST Manual (available via The message, regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer s agent (ID RA10) not less than 48 hours (excluding weekends and public holidays) before the time of the Annual General Meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Application Host) from which the issuer s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. 76

77 BRITISH SMALLER COMPANIES VCT PLC FORM OF PROXY To be used at the Annual General Meeting of the Company to be held at 33 St James Square, London, SW1Y 4JS on 22 July 2014 at noon 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), (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 22 July 2014 at 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) 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. ORDINARY RESOLUTIONS 1. To receive the Annual Report and Accounts 2. To approve a final dividend of 3.5 pence per ordinary share 3. To approve the Directors' Remuneration Report 4. To approve the Directors Remuneration Policy 5. To re-elect Ms H Sinclair as a director 6. To re-elect Mr C W E R Buchan as a director 7. To re-elect Mr P S Cammerman as a director 8. To appoint BDO LLP as auditor 9. To authorise the directors to allot shares (other than pursuant to the dividend re-investment scheme) 10. To continue the dividend re-investment scheme SPECIAL RESOLUTIONS 11. To waive pre-emption rights in respect of the allotment of shares under resolution To authorise the Company to make purchases of its own shares 13. To cancel, subject to the sanction of the High Court, the share premium account 14. To amend article 191 of the Company s articles of association with respect to the Company s status as a VCT FOR AGAINST WITHHELD Signature Dated 2014 Please refer to notes overleaf. Please complete, sign and date, detach and return the Form of Proxy in the pre-paid envelope provided. 77

78 BRITISH SMALLER COMPANIES VCT PLC FORM OF PROXY To be used at the Annual General Meeting of the Company to be held at 33 St James Square, London, SW1Y 4JS on 22 July 2014 at noon NOTES 1. The Notice of the Annual General Meeting is set out on pages 74 to 76 of the Annual Report. 2. Any member of the Company entitled to attend and vote at the Annual General Meeting is also entitled to appoint one or more proxies to attend, speak and vote instead of that member. Any such appointment can only be made using the procedures set out in these notes and in the Notice of Annual General Meeting. A member may appoint more than one proxy in relation to the Annual General Meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. A proxy may demand, or join in demanding, a poll. A proxy need not be a member of the Company but must attend the Annual General Meeting in order to represent his appointer. A member entitled to attend and vote at the Annual General Meeting may appoint the Chairman or another person as his proxy although the Chairman will not speak for the member. A member who wishes his proxy to speak for him should appoint his own choice of proxy (not the Chairman) and give instructions directly to that person. 3. If you wish to appoint a proxy of your own choice delete the words the Chairman of the Annual General Meeting and insert the name and address of the person whom you wish to appoint in the space provided. 4. To be valid, a Form of Proxy must be completed and signed by the member(s) and delivered with the power of attorney or other written authority, if any, under which it is signed or an office or notarially certified copy or a copy certified in accordance with the Powers of Attorney Act 1971 of such power and written authority, to Capita Asset Services, PXS, 34 Beckenham Road, Beckenham, BR3 4TU not less than 48 hours (excluding weekends and public holidays) before the time appointed for holding the Annual General Meeting or adjourned meeting at which the person named in the Form of Proxy proposes to vote. In the case of a poll taken more than 48 hours (excluding weekends and public holidays) after it is demanded, the document(s) must be delivered as aforesaid not less than 24 hours (excluding weekends and public holidays) before the time appointed for taking the poll, or where the poll is taken not more than 48 hours (excluding weekends and public holidays) after it was demanded, be delivered at (and prior to the commencement of) the meeting at which the demand is made. 5. Any alterations to the Form of Proxy should be initialled by the person who has signed the Form of Proxy. 6. In the case of a corporation, this Form of Proxy must be executed under its common seal or signed on its behalf by its attorney or a duly authorised officer of the corporation. 7. In the case of joint Shareholders, any one of them may sign. The vote of the person whose name stands first in the register of members of the Company will be accepted to the exclusion of the votes of the other joint holders. 8. Completion and return of a Form of Proxy will not preclude a member of the Company from attending and voting in person. If a member appoints a proxy and that member attends the Annual General Meeting in person, the proxy appointment will automatically be terminated. 9. In order to revoke a proxy instruction a member will need to inform the Company by sending a signed hard copy notice clearly stating the intention to revoke the proxy appointment to Capita Asset Services, PXS, 34 Beckenham Road, Beckenham BR3 4TU. In the case of a member which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under which the revocation notice is signed (or a duly certified copy of such power or authority) must be included with the revocation notice. The revocation notice must be received by Capita Asset Services before the Annual General Meeting or the holding of a poll subsequently thereto. If a member attempts to revoke his or her proxy appointment but the revocation is received after the time specified then, subject to note 10 below, the proxy appointment will remain valid. 10. A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolution. If no voting indication is given, the proxy will vote or abstain from voting at his or her discretion. The proxy will also vote (or abstain from voting) as he or she thinks fit in relation to any other matter which is put before the Annual General Meeting. 11. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. Please complete, sign and date, detach and return the Form of Proxy in the pre-paid envelope provided. 78

79 Ad visers to the Company Fund Manager and Custodian YFM Private Equity Limited Saint Martins House Chapeltown Road Leeds LS7 4HZ Registrars Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Solicitors hlw Keeble Hawson LLP Protection House East Parade Leeds LS1 2BR Stockbrokers Nplus1 Singer Advisory LLP 1 Bartholomew Lane London EC2N 2AX Fixed Interest Securities Adviser Brewin Dolphin Securities Limited 34 Lisbon Street Leeds LS1 4LX Independent Auditor BDO LLP 55 Baker Street London W1U 7EU VCT Status Adviser PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6RH Bankers The Royal Bank of Scotland plc 27 Park Row Leeds LS1 5QB Lloyds Banking Corporate Markets 40 Spring Gardens Manchester M2 1EN Company Secretary KHM Secretarial Services Limited Old Cathedral Vicarage St James Row Sheffield S1 1XA 79

80 Saint Martins House T: Chapeltown Road F: Leeds LS7 4HZ E: Transforming Small Businesses yfmep.com