Close Brothers Venture Capital Trust PLC

Transcription

1 Close Brothers Venture Capital Trust PLC Report & Financial Statements for the year ended 31 March 2007

2 The Weybridge Health Club, developed by The Weybridge Club Limited 37 Degrees Health Club in West Kensington, under development by Kensington Health Club Limited The Crown Hotel in Harrogate acquired and refurbished by The Crown Hotel Harrogate Limited The Picturehouse Cinema in Brixton, operated by CS (Brixton) Limited

3 CONTENTS Page 2 Company information 3 Investment objectives and financial calendar 4 Financial highlights 5 Chairman s statement 6 The Board of Directors 6 The Manager 8 The portfolio of investments 9 The top ten investments 13 Report of the Directors and Business Review 19 Statement of corporate governance 22 Directors remuneration report 24 Independent auditors report 26 Income Statement 27 Balance sheet 28 Reconciliation of movements in shareholders funds 29 Cash flow statement 30 Notes to the financial statements 40 Notice of meeting 1

4 COMPANY INFORMATION Company number Directors Investment manager Secretary and registered office Registrar D J Watkins MBA (Harvard), Chairman (US citizen) R M Davidson J M B L Kerr ACMA J G T Thornton MBA, FCA Close Ventures Limited 10 Crown Place London EC2A 4FT Tel: Close Ventures Limited 10 Crown Place London EC2A 4FT Capita Registrars Northern House Penistone Road Fenay Bridge Huddersfield, HD8 0LA Shareholders helpline Tel: Fax: shareholder.services@capitaregistrars.com Auditors Custodians Deloitte & Touche LLP London Capita Trust Company Ltd 7th Floor, Phoenix House 18 King William Street London EC4N 7HC Close Brothers Venture Capital Trust PLC is a member of the Association of Investment Companies. 2

5 INVESTMENT OBJECTIVES Close Brothers Venture Capital Trust PLC ( Close Brothers VCT or the Company ) is a venture capital trust which raised a total of 39.7 million through an issue of Ordinary Shares in the spring of 1996 and through an issue of C Shares in the following year. The Company offers tax-paying investors substantial tax benefits at the time of investment, on payment of dividends and on the ultimate disposal of the investment. Its investment strategy is to minimise the risk to investors whilst maintaining an attractive yield. This is achieved as follows: qualifying unquoted investments are predominantly in specially-formed companies which provide a high level `of asset backing for the capital value of the investment; Close Brothers VCT PLC invests alongside selected partners with proven experience in the sectors concerned; investments are normally structured as a mixture of equity and loan stock. The loan stock represents the majority of the finance provided, and is secured on the assets of the investee company. Funds managed or advised by Close Ventures Limited typically own 50 per cent. of the equity of the investee company; other than the loan stock issued to funds managed or advised by Close Ventures Limited and, in certain circumstances, temporary bridging finance prior to further investment by funds managed or advised by Close Ventures Limited, investee companies do not normally have external borrowings; and a clear strategy for the realisation of each qualifying unquoted investment within five years or shortly thereafter is identified from the outset. FINANCIAL CALENDAR Annual General Meeting 6 August 2007 Announcement of interim results for the six months ended 30 September 2007 November 2007 Payment of second dividend December

6 FINANCIAL HIGHLIGHTS 31 March 31 March Dividends paid per share (pence) (vii) Net asset value per share (pence) Ordinary shares C shares Shareholder value created per share since launch: (Pence) (Pence) Gross revenue dividends paid during the year ended 31 March Gross revenue dividends paid during the year ended 31 March Gross interim dividends and net final dividend paid during the year ended 31 March Net revenue and capital dividends paid during the year ended 31 March Net revenue and capital dividends paid during the year ended 31 March Net revenue dividends paid during the year ended 31 March Net revenue and capital dividends paid during the year ended 31 March Net revenue and capital dividends paid during the year ended 31 March Net revenue and capital dividends paid during the year ended 31 March Net revenue and capital dividends paid during the year ended 31 March Net revenue and capital dividends paid during the year ended 31 March Total dividends paid to 31 March Net asset value as at 31 March Total shareholder net asset value return to 31 March In addition to the above dividends, the Company has paid a first dividend of 5 pence per share (comprising 3.0 pence revenue and 2.0 pence realised capital profits) on 5 April 2007 to shareholders who were on the register as at 16 March Notes: i) Dividends paid before 5 April 1999 were paid to qualifying shareholders inclusive of the associated tax credit. The dividends for the year to 31 March 1999 were maximised in order to take advantage of this tax credit. ii) A capital dividend of 2.55 pence in the year to 31 March 2000 enabled the Ordinary Shares and the C Shares to merge on an equal basis. iii) Revenue dividends to date amount to 64.8 pence for holders of original Ordinary Shares and 55.8 pence for holders of original C Shares. iv) Capital dividends to date amount to 20.0 pence for holders of original Ordinary Shares and pence for holders of original C Shares. v) All dividends paid by the Company are free of income tax. It is an Inland Revenue requirement that dividend vouchers indicate the tax element should dividends have been subject to income tax. Investors should ignore this figure on their dividend voucher and need not disclose any income they receive from a VCT on their tax return. vi) The net asset value of the Company is not its share price as quoted on the official list of the London Stock Exchange. The share price of the Company can be found in the Investment Companies section of the Financial Times on a daily basis. vii) The apparent dividend reduction is due to the change in the accounting treatment of dividends, which was fully explained in last year s Report and Accounts. 4

7 CHAIRMAN S STATEMENT Introduction The year has been a busy and successful one for your Company. The year end net asset value per Share rose to p while dividends paid from launch to 31 March 2007 amount to 84.8p per Ordinary Share and 73.25p per C Share. This results in a compound annual return of 8.4 per cent. per Ordinary Share and 8.2 per cent. per C Share over the period from 1996 and 1997 respectively. In addition, not only has this return been free of tax to all shareholders but original subscribers for the Shares would have benefited from both income tax relief and, where relevant, the deferral of capital gains tax. Performance A total of 5.34 million was invested in 16 new and existing investee companies during the year. Amongst the investments in new investee companies, it is worth mentioning 1 million invested and reserved for investment in Kensington Health Clubs Limited, which will develop a 29,000 square foot health and fitness club on a 999 year lease at Olympia in Kensington and 380,000 invested in Premier Leisure (Suffolk) which is developing and will operate a freehold leisure centre at Ipswich in Suffolk. Your Company disposed of the holding in Premier VCT Mailbox Limited, owner and operator of the 90-bedroom Ramada Hotel in the Mailbox development in Birmingham. This realised a capital profit of 3 million on the net cost of 4.6 million, in addition to the annual yield on investment of in excess of 10% per annum. In addition, as reported in last year s annual report and accounts, our two care homes at Romford and Dover were sold in April 2006 for a profit of just over 1 million. Investment portfolio as a whole continues to perform well with particular strong performances from our investment in Kew Green VCT (Stansted) Limited, which owns the Express by Holiday Inn Hotel at Stansted Airport, and The Bold Pub Company Ltd, which owns and operates 30 pubs in the north west of England. We continue to review a variety of promising new investment opportunities in the hotel, leisure and healthcare sectors. Results and dividends As at 31 March 2007 the net asset value was 43.1 million or p per Share, which compares with the net asset value as at 31 March 2006 of 41.8 million or p per Share. The revenue return before taxation was 2.54 million compared to 2.68 million for the previous period. Following the disposal of Premier VCT (Mailbox), your board declared a dividend payable to shareholders on 5 April 2007 of 5p per Share, which constitutes the first dividend for the current financial year. The second dividend, which is expected to be of a similar amount, will be declared at the time of the announcement of the interim results. Prospects Overall, we continue to be confident about the prospects of the Company and its property backed investments. While the UK property market in general has risen to new highs, the investments that we make are in sound operating businesses, supported by long-term property assets. Our strategy remains to build up sufficient revenue and realised capital reserves to maintain a 10p per annum dividend, while seeking to continue to enhance net asset value per share over the medium term. D J Watkins Chairman 29 June

8 THE BOARD OF DIRECTORS The following are the Directors of the Company, all of whom operate in a non-executive capacity: David Watkins (62) MBA (Harvard), Chairman. From 1972 until 1991, he worked for Goldman Sachs, where he was head of Euromarkets Syndication and Head of European Real Estate. He subsequently joined Mountleigh Group PLC where he worked as a director on the restructuring of the business prior to it being placed into administration. Until late 1995, he worked at Baring Securities Limited as Head of Equity Capital Markets London, before leaving ultimately to become Chief Financial Officer and one of the principal shareholders of his current company, The Distinguished Programs Group LLC, an insurance distribution and underwriting group. From 1986 to 1990 he was a member of the Council of the London Stock Exchange. He is currently a director of Close Income & Growth VCT PLC (which is also managed by Close Ventures Limited) and a number of private UK companies. Roderick Davidson (69). He joined B S Stock & Co, stockbrokers in Bristol in 1960, becoming a partner in 1965 and managing director of Stock Beech & Co. Limited in In 1990 he joined Albert E Sharp where he managed investment portfolios on behalf of pension funds, charitable trusts and private investors. He retired in the spring of He is chairman of Close Brothers Development VCT PLC (which is also managed by Close Ventures Limited). Roderick Davidson will be retiring from the Board prior to the end of 2007 as he approaches his 70 th birthday. John Kerr (64) ACMA. John Kerr has worked as a venture capitalist and also in manufacturing and service industries. He held a number of finance and general management posts in the UK and USA, before joining SUMIT Equity Ventures, an independent Midlands based venture capital company, where he was managing director from 1985 to He then became chief executive of Price & Pierce Limited, which acted as the UK agent for overseas producers of forestry products, before leaving in 1997 to become finance director of Ambion Brick, a building material company bought out from Ibstock PLC. After retiring in 2002, he now works as a consultant. He is also a director of Close Income & Growth VCT PLC. Jonathan Thornton (60) MBA, FCA. He retired as a director of Close Brothers Group plc in In 1984 he was responsible for establishing Close Brothers Private Equity. Prior to this he worked for both 3i plc and Cinven. He is a director of Close Brothers Development VCT PLC. THE MANAGER Close Ventures Limited, which is authorised and regulated by the Financial Services Authority, is the Manager of Close Brothers Venture Capital Trust PLC. In addition to Close Brothers Venture Capital Trust PLC, it manages a further six VCTs with total funds under management of 250 million. Close Ventures Limited won the VCT Manager of the Year at the 2005 and 2006 Growth Company Awards and Best VCT Provider category in the Professional Adviser Awards 2005 and The Manager s ultimate parent company is Close Brothers Group plc, a substantial independent merchant banking group incorporated in the United Kingdom and listed on the London Stock Exchange. The following are specifically responsible for the management and administration of the VCTs managed by Close Ventures Limited: Patrick Reeve, (47), MA, ACA. He qualified as a chartered accountant with Deloitte Haskins & Sells before joining Cazenove & Co where he spent three years in the corporate finance department. He joined the Close Brothers Group plc in 1989, initially in the development capital subsidiary, where he was a director specialising in the financing of smaller unquoted companies. He joined the corporate finance division in 1991, where he was also a director. He established Close Ventures Limited with the launch of Close Brothers Venture Capital Trust PLC in the spring of

9 THE MANAGER (continued) Isabel Dolan, (42), ACA, MBA, is Finance Director of Close Ventures Limited having previously been Finance Director for a number of unquoted companies. From she was Head of Recoveries at the Specialised Lending Services of The Royal Bank of Scotland plc and from she was a Portfolio Director at 3i plc. She joined Close Ventures Limited in July Dr Andrew Elder (36), MA, FRCS, after qualifying as a surgeon he practiced for six years, specialising in neurosurgery before joining the Boston Consulting Group as a consultant in 2001 specialising in healthcare strategy. He joined Close Ventures Limited in Will Fraser-Allen (36), BA (Hons), ACA, qualified as a chartered accountant with Cooper Lancaster Brewers in 1996 before specialising in corporate finance and investigation. He joined Close Ventures Limited in Emil Gigov, (37), BA (Hons), ACA, qualified as a chartered accountant with KPMG in 1997 and subsequently worked in KPMG s corporate finance division working on the media, marketing and leisure sectors. He joined Close Ventures Limited in David Gudgin, (35), BSc (Hons), ACMA, after working for ICL from 1993 to 1999 where he qualified as an accountant, he joined 3i Plc as an investment manager based in London and Amsterdam. In 2002 he joined Foursome Investments, the venture capital arm of the Englehorn family, responsible for investing an evergreen fund of US$80 million, before joining Close Ventures Limited in Michael Kaplan, (31), BA, MBA, after graduating from the University of Washington in 1999 with a BA in International Finance, he joined Marakon Associates as an Analyst. In 2000, he became the Chief Financial Officer of Widevine Technologies, a security software company based out of Seattle. Then, after graduating with his MBA from INSEAD, in 2004 he joined The Boston Consulting Group (BCG) focusing on the retail and financial services industries. He joined Close Ventures Limited in Ed Lascelles, (31), BA (Hons), joined the corporate broking department of Charterhouse Securities in 1998 focusing on primary and secondary equity fundraisings. He then moved to the corporate finance department of ING Barings in 2000, retaining his focus on smaller UK companies. He joined Close Ventures Limited in Henry Stanford, (42), MA, ACA. He qualified as a chartered accountant with Arthur Andersen before joining the corporate finance division of the Close Brothers Group plc in He became an assistant director in 1996 and transferred to Close Ventures Limited in 1998 to concentrate on VCT investment. Mark Toomey, (30), BA (Hons), ACMA, after graduating from The London School of Economics with a degree in Geography and Economics, he joined Lee & Allen Consulting focusing on forensic accounting. He joined Close Ventures Limited in Robert Whitby-Smith, (32), BA (Hons), MSI, ACA, qualified as a chartered accountant with KPMG in their corporate finance division. From 2000 to early 2005 he worked in the UK corporate finance departments of Credit Suisse First Boston and subsequently ING Barings, where he was a vice president. He joined Close Ventures Limited in

10 THE PORTFOLIO OF INVESTMENTS The following is a summary of qualifying investments as at 31 March 2007: At 31 March 2007 At 31 March 2006 Cumulative Cumulative movement Total movement Total Investment in carrying/ carrying/ Investment in carrying/ carrying % voting at cost fair value(i) fair value at cost fair value(i) fair value Sector and investment rights Hotels Kew Green VCT (Stansted) Limited ,000 4,031 9,031 4,000 1,549 5,549 The Bear Hungerford Limited ,088 (473) 1,615 1,700 (491) 1,209 The Crown Hotel Harrogate Limited ,000 (394) 1,606 1,000 (233) 767 The Place Sandwich VCT Limited , ,266 1,000 (83) 917 The Rutland Pub Company (Hotels) Limited ,138 (65) 1, Premier VCT (Mailbox) Limited 4,643 2,332 6,975 Total investment in the hotel sector 11,476 3,115 14,591 12,753 3,091 15,844 Care Homes Applecroft Care Home Limited 1, ,375 Barleycroft Care Home Limited 2, ,899 Total investment in the care home sector 4,200 1,074 5,274 Leisure The Bold Pub Company Limited , ,722 1, ,620 City Screen (Cambridge) Limited , ,711 1, ,491 The Weybridge Club Limited 8.8 1, ,390 1, ,006 Kensington Health Clubs Limited 8.3 1, ,009 CS (Greenwich) Limited ,005 (84) (79) 821 Tower Bridge Health Club Limited Premier Leisure (Suffolk) Limited Churchill Taverns VCT Limited City Screen (Liverpool) Limited CS (Brixton) Limited The Pelican Inn Limited (formerly The Independent Pub Company Limited) (94) (68) 222 GB Pub Company Limited (29) The Dunedin Pub Company VCT Limited (30) The Rutland Pub Company Limited Novello Limited (formerly The Independent Beer Company Limited) (63) (11) 139 CS (Exeter) Limited River Bourne Limited Total investment in the leisure sector 8, ,632 6, ,956 Residential property development Country & Metropolitan VCT Limited , ,013 3,000 (4) 2,996 Prime VCT Limited , ,230 2,200 (46) 2,154 Chase Midland VCT Limited ,600 (2) 1,598 1,600 (2) 1,598 Youngs VCT Limited ,200 1,200 1,200 1,200 Total investment in the residential property development sector 8, ,041 8,000 (52) 7,948 Total qualifying investments 28,238 4,026 32,264 31,478 4,544 36,022 (i) Included in this movement is capital appreciation of equity instruments amounting to 3,737,000 (2006: 4,449,000 appreciation) including 25,000 loan depreciation, and movement in carrying value of loans and receivables of 289,000 (2006: 95,000). 8

11 THE TOP TEN INVESTMENTS Unquoted loan stock held by the following investments are classified as loans and receivables in accordance with FRS 26 and carried at amortised cost using the effective interest rate. The top ten investments by value are as follows: Kew Green VCT (Stansted) Limited 000 Value of the company: 9,031 The company was established to develop and operate a limited service hotel under the Express by Holiday Inn brand at Stansted Airport. The 183 bedroom hotel opened in January An extension which will take the hotel to 254 bedrooms is due to open at the end of June Latest audited results - year to 31 August Turnover 4,285 Profit before Tax (PBT) 152 Profit after Tax (PAT) (29) Net assets 2,411 % of equity held 26.6% Basis of valuation: Average of two third party valuations Website: Other funds managed and advised by Close Ventures Limited have invested in this company. Country and Metropolitan VCT Limited 000 Value of the company: 3,013 The company is a residential property development company formed in It has undertaken a series of successful residential developments in the North of England. It recently completed the sale of a 12 apartment development in Nottingham. It recently completed a 13 unit development in Leeds. Latest audited results - year to 31 December Turnover 5,017 PBT 398 PAT 297 Net assets 1,633 % of equity held 42.8% Basis of valuation: Cost plus amortised cost movements Other funds advised by Close Ventures Limited have invested in this company. 9

12 THE TOP TEN INVESTMENTS (continued) Prime VCT Limited 000 Value of the company: 2,230 The company is a residential development company formed in 1996 and currently developing a site for 10 apartments beside the River Avon in Bristol. Construction is expected to complete at the end of June Latest audited results - year to 30 September Turnover 1,611 PBT (82) PAT (82) Net assets 710 % of equity held 50.0% Basis of valuation: Cost plus amortised cost movements The Bold Pub Company Limited 000 Value of the company: 1,722 The company owns and operates 30 freehold and long leasehold pubs in the North West of England. Latest audited results - year to 31 March 2006 As a small company, The Bold Pub Company is exempt from filing full accounts. 000 Net assets 1,994 % of equity held 4.4% Basis of valuation: Third party valuation Other funds managed and advised by Close Ventures Limited have invested in this company. City Screen (Cambridge) Limited 000 Value of the company: 1,711 The company was formed to develop and operate a three screen art house cinema in the centre of Cambridge. The cinema opened in August Latest audited results - year to 31 December 2006 As a small company, City Screen (Cambridge) is exempt from filing full accounts. 000 Net assets (127) % of equity held 11.1% Basis of valuation: Third party valuation Website: 10

13 THE TOP TEN INVESTMENTS (continued) The Bear Hungerford Limited 000 Value of the company: 1,615 The company was formed to acquire the historic 41 room Bear Hotel in Hungerford. The hotel was acquired in 2005 and a refurbishment programme has taken place. Latest audited results - year to 31 March Turnover 691 PBT (791) PAT (791) Net assets 284 % of equity held 26.1% Basis of valuation: Third party valuation Website: Other funds managed and advised by Close Ventures Limited have invested in this company. The Crown Hotel Harrogate Limited 000 Value of the company: 1,606 The company owns and operates the historic 110 bedroom Crown Hotel in Harrogate, Yorkshire. Substantial refurbishment has taken place. Latest audited results - year to 2 April 2006 As a small company, The Crown Hotel Harrogate is exempt from filing full accounts. 000 Net assets 1,304 % of equity held 8.9% Basis of valuation: Third party valuation Website: Other funds managed and advised by Close Ventures Limited have invested in this company. 11

14 THE TOP TEN INVESTMENTS (continued) Chase Midland VCT Limited 000 Value of the company: 1,598 The company is a residential development company formed in It is currently marketing its eighth development, comprising seven apartments overlooking the Trent in Nottingham and is completing construction of 2 houses in Warwickshire which have been pre-sold. Latest audited results - year to 30 June Turnover 1,819 PBT 70 PAT 49 Net assets 955 % of equity held 38.1% Basis of valuation: Cost plus amortised cost movements Other funds managed and advised by Close Ventures Limited have invested in this company. The Weybridge Club Limited 000 Value of the company: 1,390 The company has developed and operates a health and fitness club on a 30 acre freehold site near to the centre of Weybridge, Surrey. The club opened in May Latest audited results - year to 31 August Turnover PBT (82) PAT (82) Net assets 484 % of equity held 9.7% Basis of valuation: Third partyvaluation Website: Other funds managed by Close Ventures Limited have invested in this company. The Place Sandwich VCT Limited 000 Value of the company: 1,266 The company owns the freehold of the 34 bedroom Bell Hotel at Sandwich in Kent. Most of the refurbishment has been completed and the hotel s reputation has increased significantly. Latest audited results - year to 30 June Turnover 875 PBT (348) PAT (348) Net assets 565 % of equity held 25.0% Basis of valuation: Third party valuation Website Other funds managed and advised by Close Ventures Limited have invested in this company. 12

15 REPORT OF THE DIRECTORS AND BUSINESS REVIEW The Directors submit their Annual Report and audited Financial Statements on the affairs of the Company for the year ended 31 March Principal activity and business review The principal activity of the Company is that of a venture capital trust. It has been approved by H.M. Revenue & Customs as a venture capital trust in accordance with Section 842AA of the Income and Corporation Taxes Act 1988 and in the opinion of the Directors, the Company has subsequently conducted its affairs so as to enable it to continue to obtain such approval. Approval for the year ended 31 March 2007 is subject to review should there be any subsequent enquiry under corporation tax self assessment. The Company is not a close company for taxation purposes. The Company is no longer an investment company as defined in Section 266 of the Companies Act The Company revoked its investment trust status on 15 May 2000 in order for the Company to pay dividends from realised capital profits. The Company is listed on The London Stock Exchange. Under current tax legislation, shares in the Company provide tax-free capital growth and income distribution, in addition to the tax relief some investors would have obtained when they invested at the time of the initial fundraising. The Company s investment strategy is to provide investors with a regular and predictable source of dividend income combined with the prospect of long term capital growth through allowing investors the opportunity to participate in a balanced portfolio of asset-backed businesses. The Company has delegated the investment management of the portfolio to Close Ventures Limited, a subsidiary of Close Brothers Group plc and which is authorised and regulated by the Financial Services Authority. Close Ventures Limited also provides company secretarial and other accounting and administrative support to the Company. Further details regarding the terms of engagement of the Manager are shown on page 15. The Directors do not foresee any major changes in the activity undertaken by the Company in the current year, as the Company continues with its objective to invest in unquoted companies throughout the United Kingdom. Details of the principal investments made by the Company are shown in the portfolio of investments on page 8. A detailed review of the Company s business during the year and future prospects is contained in the Chairman s Statement on page 5. Results and dividends 000 Revenue return for the year ended 31 March 2007 available for distribution 2,010 First revenue dividend of 2.5p per share paid on 14 July 2006 (897) Second revenue dividend of 2.5p per share paid on 5 January 2007 (897) Transferred to revenue reserve Realised capital return for the year ended 31 March 2007 available for distribution 3,611 Unrealised capital return for the year ended 31 March 2007 (712) Total capital return for the year ended 31 March ,899 First capital dividend of 2.5p per share paid on 14 July 2006 (897) Second capital dividend of 2.5p per share paid on 5 January 2007 (897) Transferred to capital reserves 1,105 The Company has also paid a first dividend for the year ended 31 March 2008 of 5 pence per share on 5 April 2007 to shareholders on the register as at 16 March As shown in the Company s Income Statement on page 26 of the financial statements, the Ordinary Shares investment income has decreased slightly to 2,997,000 (2006: 3,044,000) as a result of the sale of the high yielding Applecroft and Barleycroft investments. As a result, the revenue return to equity holders has reduced slightly to 2,010,000 (2006: 2,137,000). The capital return for the year was a profit of 2,899,000 (2006: profit 562,000), reflecting the high level of realised gains, offset by a net unrealised capital depreciation on the portfolio for the year. The total return per share was pence per share (2006: 7.52 pence per share). The Balance Sheet on page 27 of the financial statements shows that the net asset value per share has increased over the last year to pence per share (2006: pence per share) reflecting the offset of the payment of 10 pence per share dividends during the period and capitalisation of management fees against the uplift in realised gains within the portfolio. The cashflow for the business has been positive for the year, reflecting the disposal of three investments: Applecroft, Barleycroft and Premier Mailbox. 13

16 REPORT OF THE DIRECTORS AND BUSINESS REVIEW (continued) Key Performance Indicators The graphs below show Close Brothers Venture Capital Trust PLC s net asset values against the FTSE All-Share Index, in both instances with dividends reinvested, for the eleven years since the launch of the Ordinary Shares in April Net asset value return (pence) CBVCT NAV total return FTSE All Share total return Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Source: Close Ventures Limited The total expense ratio for the year to 31 March 2007 was 2.6% including the performance incentive fee provision of 124,000 (2006: 2.2%). The dividend paid during the year to 31 March 2007 was 10 pence per Ordinary share (2006: pence per share). Principal risks and uncertainties The Board considers that the Company faces the following major risks and uncertainties: 1. Investment risk This is the risk of investment in poor quality assets which reduces the capital and income returns to shareholders and negatively impacts on the Company s reputation. By nature, smaller unquoted businesses, such as those that qualify for venture capital trust purposes, are more fragile than larger, long established businesses. To reduce this risk, the Board places reliance upon the skills and expertise of the Manager and its strong track record for investing in this segment of the market. The Company s policy is to lower investment risk by investing in property-backed businesses and taking a first charge over the relevant property asset. In addition, the Manager operates a formal and structured investment process, which includes an Investment Committee comprising investment professionals from the Manager and senior investment personnel from within the Close Brothers Group. Investments are actively and regularly monitored by the Manager (investment managers normally sit on investee company boards) and the Board receives detailed reports on each investment as part of the Manager s report at quarterly board meetings. 2. Venture Capital Trust approval risk The current approval as a venture capital trust allows investors to take advantage of tax reliefs on initial investment and ongoing tax free capital gains and dividend income. Failure to meet the qualifying requirements could result in investors losing the tax relief on initial investment and loss of tax relief on any tax free income or capital gains received. In addition, failure to meet the qualifying requirements could result in a loss of listing of the shares. To reduce this risk, the Board has appointed the Manager, who has significant experience in venture capital trust management, and is used to operating within the requirements of the venture capital trust legislation. In addition, to provide further formal reassurance, the Board has appointed Ernst & Young LLP as its taxation advisors. Ernst & Young LLP report quarterly to the Board to independently confirm compliance with the venture capital trust legislation, to highlight areas of risk and to inform on changes in legislation. 3. Compliance risk The Company is listed on The London Stock Exchange and is required to comply with the rules of the UK Listing Authority, as well as with the Companies Act, Accounting Standards and other legislation. Failure to comply with these regulations could result in a delisting of the Company s shares, or other penalties under the Companies Act or from financial reporting oversight bodies. Board members and the Manager have considerable experience of operating at the most senior levels within quoted businesses. In addition, the Board and the Manager receive regular updates on new regulation from its auditors, lawyers and other professional bodies. 4. Internal control risk Failures in key controls, within the Board or within the Manager s business, could put assets of the Company at risk or result in reduced or inaccurate information being passed to the Board or to shareholders. The Audit Committee meets with the Head of Internal Audit from Close Brothers Group plc at least once a year, receiving a report regarding the last formal internal audit performed on the Manager, and providing the opportunity for the Audit Committee to ask specific and detailed questions. The Manager has a comprehensive business continuity plan in place in the event that operational continuity is threatened. Further details regarding the Board s management and review of the Company s internal controls through the implementation of the Turnbull guidance are detailed on page 20. Measures are in place to mitigate information risk in order to ensure the integrity, availability and confidentiality of information used within the business. 14

17 REPORT OF THE DIRECTORS AND BUSINESS REVIEW (continued) 5. Reliance upon third parties risk The Company is reliant upon the services of Close Ventures Limited for the provision of investment management and administrative functions. There are provisions within the Management Agreement for the change of Manager under certain circumstances (for more detail, see the Management Agreement paragraph below). In addition, the Manager has demonstrated to the Board that there is no undue reliance placed upon any one individual within Close Ventures Limited, or its parent company Close Brothers Group plc. 6. Financial risks By its nature, as a venture capital trust, the Company is exposed to market price risk, foreign currency exposure risk, credit risk, liquidity risk and cash flow interest rate risk. The Company s policies for managing these risks and its financial instruments are outlined in full in note 20 to the financial statements. The Company is financed through equity and does not have any borrowings. Environment The management and administration of Close Brothers Venture Capital Trust PLC is undertaken by the Manager. Close Ventures Limited recognises the importance of its environmental responsibilities, monitors its impact on the environment, and designs and implements policies to reduce any damage that might be caused by its activities. Initiatives designed to minimise the Company s impact on the environment include recycling and reducing energy consumption as shown in the financial statements of Close Ventures Limited. Employees The Company is managed by Close Ventures Limited and hence has no employees. In the Directors view, there are no other non-financial performance indicators materially relevant to the business. Directors The Directors who held office throughout the year, and their interests in the Ordinary Shares of the Company (together with those of their immediate family) are shown below: 31 March March 2006 Ordinary Shares Ordinary Shares held held D J Watkins 10,000 10,000 R M Davidson 9,000* 9,000* J M B L Kerr 13,109 13,109 J G T Thornton 41,218 41,218 * At the year end, 4,000 of the Ordinary Shares held by Mr Davidson were held as a non-beneficial trustee. There have been no changes in the holdings of the Directors between 31 March 2007 and the date of this report. No Director has a service contract with the Company. All Directors are members of the Audit Committee of which Mr Kerr is Chairman. Directors retirement and re-election is subject to the Articles of Association and the Combined Code on Corporate Governance. Management agreement The Company and Close Ventures Limited ( the Manager ) entered into a management agreement for an initial fixed period to 3 April 2000 which may now be terminated by either party on 12 months notice. Under this agreement, the Manager also provides secretarial and administrative services to the Company. The management agreement is subject to earlier termination in the event of certain breaches or on the insolvency of either party. The following fees are payable to the Manager by the Company under the terms of the agreement: Non-Qualifying Investments: A fee equal to 0.50 per cent. of funds invested in non-qualifying investments. Qualifying Investments: A fee equal to 1.8 per cent. of funds invested in qualifying investments. Secretarial and administrative services: A fee of 34,509 per annum, plus VAT, rising annually in line with the Retail Prices Index. The Manager is also entitled to an arrangement fee, payable by each company in which the Company invests, in the region of two per cent. on each investment made. Under the terms of the Circular issued to shareholders dated 29 June 2007, the Directors propose that the Management fee is changed to 2 per cent. of the net asset value. More detail is shown in the Circular to shareholders dated 29 June 2007 which accompanies this Annual Report & Financial Statements. 15

18 REPORT OF THE DIRECTORS AND BUSINESS REVIEW (continued) Management performance incentive In order to provide the Manager with an incentive to maximise the return to investors, the Company has entered into a management performance fee agreement with the Manager. The incentive arrangement is an 8 per cent. share of the excess return above the hurdle rate, paid out annually in cash as an addition to the management fee. The hurdle rate is set at an annual return of 5 per cent. per annum, representing dividends paid and growth in share value, on the preceding year s share value. Share value is calculated as the average of: (i) (ii) the net asset value per Share at the end of the relevant financial year, and the average mid-market price of a Share, between the date of the preliminary announcement of the results for the relevant financial year and the AGM at which the accounts are presented to Shareholders. The amounts payable under the performance incentive will be limited to the extent that, over any two year period, the aggregate total amount payable under the new incentive and the ongoing management fees may not exceed 5 per cent. of the Company s gross asset value at the relevant period end. Incentive fees will be paid out on an annual basis, following the Annual General Meeting. Both the total return and the hurdle rate will be cumulative from the inception of the new scheme, with any shortfall resulting in payments not being made until performance catches up. Under the terms of the circular issued to shareholders dated 29 June 2007, the Directors propose two amendments. First, they propose that the second element of the formula to calculate share value, numbered (ii) above, relating to the average share price, be removed, as the share price is ultimately beyond the Manager s control. Second, they propose that the cap of 5 per cent. of the Company s gross Management fee is removed. These two changes, along with the change to the management fee, are contained in a supplemental management agreement. More detail is shown in the Circular to shareholders dated 29 June 2007 which accompanies this Annual Report and Financial Statements. Auditors A resolution to re-appoint Deloitte & Touche LLP as auditors will be proposed at the Annual General Meeting on 6 August Substantial interests As at 31 March 2007 and at the date of this report, the Company was aware that JM Finn Nominees Limited had a beneficial interest exceeding 3 per cent of the issued share capital. Statement of Directors responsibilities The Directors are responsible for preparing the Annual Report and the financial statements. The Directors have chosen to prepare accounts for the Company in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP). Company law requires the Directors to prepare such financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the total return for that period and comply with UK GAAP and the Companies Act In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether all applicable accounting standards have been followed; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the financial statements comply with the Companies Act They are also responsible for the system of internal control, for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that applicable accounting standards have been followed in the financial statements accompanying this report. Disclosure of information to auditors In the case of the persons who are Directors of the Company at the date of approval of this report: so far as each of the Directors are aware, there is no relevant audit information (as defined in the Companies Act 1985) of which the Company s auditors are unaware; and each of the Directors has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information (as defined) and to establish that the Company s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s234za of the Companies Act The Directors are responsible for ensuring that any electronic publication or distribution of financial information properly presents the financial information and any report by us thereon and for the controls over, and security of, the website. The Directors are also responsible for establishing and controlling the process for electronically distributing annual reports and other information. Supplier payment policy The Company s policy is to pay all supplier invoices within 30 days of the invoice date, or as otherwise agreed. There were no overdue trade creditors at 31 March 2007 (2006: Nil). 16

19 REPORT OF THE DIRECTORS AND BUSINESS REVIEW (continued) Annual General Meeting The Annual General Meeting will be held at 10 Crown Place, London EC2A 4FT at 11.30am on 6 August The notice of the Annual General Meeting is at the end of this document. The following information is important and requires your immediate attention. If you are in any doubt about the action you should take, you should consult an independent financial advisor authorised under the Financial Services and Markets Act If you have sold or transferred all of your shares in the Company, please forward this document with its accompanying form of proxy at once to the purchaser or transferee, or to the stockbroker, bank or other agent through whom the sale or transfer was effected, for onward transmission to the purchaser or transferee. Resolutions relating to the following items of special business will be proposed at the forthcoming Annual General Meeting for which shareholder approval is required in order to comply either with the Companies Act or the Listing Rules of the Financial Services Authority. Resolutions number 5 to 7 are explained in detail in the Circular to shareholders dated 29 June 2007 which is included with this Annual Report and Financial Statements. Continuation as a venture capital trust Under the terms of your Company s Articles of Association, members have the opportunity, every five years, to confirm that they wish the Company to continue as a venture capital trust. Otherwise the Board is required to make proposals for the reorganisation, reconstruction or the orderly liquidation and winding up of the Company. The last such vote took place in August Since launch, Close Brothers Venture Capital Trust has provided a strong return to Shareholders. Given the unique nature of the Company, and in particular its asset-based investment policy focussed on the protection of capital, combined with the very strong tax free dividend stream that its investment portfolio generates, your Board recommends that Shareholders vote for the Company to continue as a VCT for a further five years. This is proposed under Resolution 5 to be considered at the Annual General Meeting. Amendment to Management fee and Manager s incentive fee Resolution number 6 will propose an amendment in the fees paid to the Manager under the Management Agreement Under the Management Agreement entered into at the time of the launch of the Company in 1996, the management fees paid to Close Ventures Limited were set at 1.8 per cent of the value of qualifying unquoted investments and 0.5 per cent of the value of non qualifying investments such as cash deposits. The Board considers that it is appropriate that the basis for charging the management fees should be amended to a level more in line with the general VCT and private equity market. The Management Incentive Fee Agreement dated 26 July 2004, provides the payment of an incentive fee equivalent to 8 per cent. of the excess of the Company s total return above 5 per cent. per annum, as is detailed in paragraph 5.2 of Part 2 of the circular. In addition, however, there is a provision whereby the incentive fee, together with the ongoing management fee, should not exceed 5 per cent of the Company s gross asset value over any two year period. The Board considers that this could limit any performance incentive fee to a material extent, and would therefore significantly reduce its effectiveness as an important tool in rewarding the Manager for achieving strong returns on behalf of Shareholders. The Board therefore proposes that this restriction should be removed from the Management Incentive Fee Agreement. Resolution 6 to be proposed at the AGM, as special business, therefore proposes that, with effect from 1 st April 2007, the Management Agreement be amended such that annual management fees going forward will amount to 2 per cent of the Company s net asset value and that the cap on the combined management fee and incentive fee be removed. Increase in Directors remuneration Resolution 7 to be proposed as special business at the AGM increases the limit for the overall level of Directors remuneration under the Company s Articles of Association from 70,000 to 100,000 with effect from 1 April The Directors are currently each paid director s fees of 17,500 per annum. In view of the continuing and increasing regulatory and corporate governance obligations that fall upon the boards of public company directors, it is intended that these fees be increased to 20,000 per annum for each Director. The new level proposed under the Articles of Association accommodates this increase and also provides extra flexibility in the case, for example, of an additional Board member being appointed prior to the retirement of an existing Director. Power to allot shares Ordinary resolution number 8 in the notice of the meeting will request the authority to allot up to a maximum aggregate nominal amount of 1,793,911 representing 10% of the issued share capital of the Company as at 31 March This authority will expire on 5 February The Directors have no present intention to exercise such authority. Dis-application of pre-emption rights Special resolution number 9 will request the authority to disapply pre-emption rights in circumstances of a rights or other pre-emptive issue, the allotment of shares with an aggregate nominal value of up to 896,956, representing up to 5% of the issued capital. Purchase of own shares Special resolution number 10 will request the authority to purchase an aggregate of 14.99% of the Ordinary Shares in issue subject to the provisions shown in the notice to the meeting attached to the back of the financial statements. Shares bought back under this authority may be cancelled and up to 10% can be held in Treasury. The Board believes that it is helpful for the Company to continue to have the flexibility to buy its own shares and this resolution seeks authority from shareholders to do so. 17

20 REPORT OF THE DIRECTORS AND BUSINESS REVIEW (continued) This resolution would renew the 2006 authority, which was in similar terms. During the financial year under review the Company did not purchase any shares for cancellation. The Company holds no shares in Treasury. The minimum repurchase price will be the nominal value of the shares from time to time and, in accordance with the Listing Rules, the maximum repurchase price will be the higher of: a) 105 per cent of the average of the middle market quotations for a share, as derived from the Daily Official List of the London Stock Exchange for the five business days immediately preceding the day on which that share is purchased; and b) the higher of the price of the last independent trade in the shares and the highest then current independent bid for the shares on the London Stock Exchange. The Board will only authorise repurchases at prices representing a discount to the NAV per share which would have the effect of enhancing the NAV per share for remaining holders. Treasury shares Under the Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003, shares purchased by the Company out of distributable profits can be held as Treasury shares, which may then be cancelled or sold for cash. The authority sought by this special resolution number 8 is intended to apply equally to shares to be held by the Company as Treasury shares in accordance with the Regulations. At the Annual General Meeting, resolutions as described above will be proposed that the Directors will be authorised to allot relevant securities in accordance with section 80 of the Companies Act 1985 (the Act ) and to empower to allot equity securities for cash in accordance with section 95 of the Act. Again, these replace existing authorities and powers which allow the Directors to sell Treasury shares at a price not less than that at which they were purchased. Recommendation The Board believes that these Resolutions are, in its opinion, in the best interest of Shareholders as a whole and on that basis recommends that Shareholders vote in favour of these Resolutions as proposed at the Annual General Meeting. The Board intends to vote in favour of the special business Resolutions 5, 6, 8, 9 and 10 in respect of their own holdings of Ordinary Shares amounting to 73,327 Ordinary Shares representing 0.2 per cent of the Company s issued share capital, but will be abstaining from voting in respect of Resolution 7. By Order of the Board Close Ventures Limited Company Secretary 10 Crown Place London EC2A 4FT 29 June