Br.small Co.2 Regulatory News (BSC)

BRITISH SMALLER COMPANIES VCT2 PLC

Annual Financial Report Announcement for

the Year ended 31 December 2014

British Smaller Companies VCT2 plc ("the Company") today announces its audited results for the year ended 31 December 2014.

Financial Highlights

· An increase in total return of 1.7 per cent to 106.4 pence per ordinary share (2013: 104.6 pence per ordinary share).

· An increase in net asset value of 1.8 pence per ordinary share prior to the payment of dividends, representing a 2.7 per cent increase on the opening net asset value.

· Total dividends paid in the year of 4.5 pence per ordinary share (2013: 4.5 pence per ordinary share).

· Total cumulative dividends paid since inception of 43.5 pence per ordinary share (2013: 39.0 pence per ordinary share).

· Proposed final dividend of 2.5 pence per ordinary share in respect of the year ended 31 December 2014.

· Successful joint fundraising with British Smaller Companies VCT plc during the year, raising new funds of £10.2 million for the Company. Following the excellent response to the fundraising launched on 20 October 2014 with British Smaller Companies VCT plc the offers were fully subscribed on 24 March 2015 raising £40 million in aggregate.

· The Company invested a total of £13.6 million into 16 companies during the year, including £12.46 million into 11 new companies and £1.14 million of follow-on investment to support the existing portfolio.

· Successful realisation of the Company's investment in Waterfall Services Limited. Total proceeds of £1.33 million on the original investment of £0.25 million generated a 5.3x return.

Strategic Report

The Company is pleased to present its Strategic Report for the year ended 31 December 2014. The purpose of this report is to inform shareholders and help them to assess how the directors have performed in their duty to promote the success of the Company. This Report has been prepared by the directors in accordance with section 414 of the Companies Act 2006.

Chairman's Statement

Improved economic conditions in 2014 were the background for a very active period for the Company resulting in a positive evolution of the shape of the portfolio. The share offer, which closed on 29 May 2014, raised new funds of £10.2 million. A total of £13.6 million was invested during the year to 31 December 2014 of which £8.1 million was invested in the second half of the year. The eleven new investments made in the year continue our strategy of sector and geographical diversity, with businesses in Scotland, Wales, Cambridgeshire, the Midlands, Yorkshire and London all receiving investment. As at 31 December 2014 the portfolio value was £28.2 million (72 per cent of net assets) which compares to £16.3 million (53 per cent of net assets) a year earlier.

One of the objectives of the Company in building the portfolio is to increase the level of income it receives. I am pleased to report that the majority of new investments include a significant proportion of yielding loans and preference shares. As a result the portfolio income has increased to £1.27 million in the year to 31 December 2014 compared to £0.69 million in 2013. With the benefit of a full year's income from these investments this trend is expected to continue into 2015. The 2014 income exceeded the administrative expenses of the Company by £0.18 million compared to a shortfall of £0.21 million in 2013. Realised gains of £0.87 million increased the surplus to £1.05 million with unrealised gains of £0.11 million taking the aggregate profit for the year to £1.16 million.

Following the strong investment rate in 2014, which is expected to continue into 2015, the Board launched a further share offer alongside British Smaller Companies VCT plc in October 2014 which was fully subscribed by 24 March 2015. These additional funds will ensure that the Company remains well positioned to take advantage of new investment opportunities and to support the portfolio in the coming year. Additionally the increased scale and diversity of the Company will help to underpin consistent returns and improve efficiencies.

Financial Results

In the year to 31 December 2014 the Company's total return increased by 1.8 pence per ordinary share to 106.4 pence per ordinary share, driven mainly by underlying value growth in the investment portfolio. This equates to an increase of 2.7 per cent on the opening net asset value at 31 December 2013.

During the year the Company has paid total dividends of 4.5 pence per ordinary share, bringing the total cumulative dividends paid since inception to 43.5 pence per ordinary share. The net asset value at 31 December 2014 is 62.9 pence per share as summarised in the table below:

The chart on page 11 of the annual report shows in greater detail the movement in total return, net asset value and dividends paid over time.

The investments held at 31 December 2013, amounting to £17.15 million, have over the year increased by £0.98 million to £18.13 million at 31 December 2014. This return comprises a gain over the opening value from the realisation of investments of £0.87 million, and a gain on the revaluation of portfolios of £0.11 million. Strong value gains were seen across many portfolio businesses, as a result of improved trading results and delivery of value growth strategies; these were however partially offset by a decline in the value of two businesses, Seven Technologies Holdings Limited and Deep-Secure Limited, due primarily to a freeze in defence sector spending.

Shareholder Relations

Dividends

Your Board remains committed to achieving the objective of a consistent and, where possible, increasing dividend stream over time whilst seeking to maintain capital value. Dividends paid in the year comprise a final dividend of 2.5 pence per ordinary share in respect of the year ended 31 December 2013, and an interim dividend of 2.0 pence per ordinary share in respect of the financial year just ended, totalling 4.5 pence per ordinary share. This represents 6.9 per cent of the opening net asset value per ordinary share and brings the cumulative dividends paid to 43.5 pence per ordinary share.

The Board is pleased to propose a final dividend of 2.5 pence per ordinary share for the year ended 31 December 2014. This final dividend is subject to approval by the shareholders at the forthcoming Annual General Meeting and if approved will then be paid on 8 June 2015 to shareholders on the register at 8 May 2015. The ex-dividend date is 7 May 2015.

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 of the annual report. The DRIS is open to all shareholders, including those who invested under the recent share offers. For the financial year ending 31 December 2014 dividends totalling £0.4 million were invested in the Company by way of the DRIS.

Fundraising

In the light of the continued strong demand for investment from UK businesses your Company launched a prospectus offer on 20 October 2014 alongside British Smaller Companies VCT plc, to increase its investment capacity. The Company and British Smaller Companies VCT plc received an excellent response and the offers were fully subscribed on 24 March 2015 raising £40 million in aggregate.

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 Investment Adviser") and the CEOs of one or more of our investee companies. Our 20th shareholder workshop was held at Freemasons' Hall, London on 4 February 2015 and achieved the highest ever attendance with over 200 shareholders attending. Presentations at the workshop were made by Andrew Barker MD of Mangar International, Rachel McCorry CEO of IO Outsourcing, Michael Green Commercial Director and Matt Guise Sales Director of Macro Art. After lunch, David Hall presented on behalf of the Investment Adviser, followed by a Question and Answer session hosted by David Hall, David Bell and Paul Cannings, all of the Investment Adviser.

The Annual General Meeting of the Company will be held at 12.00 noon on 15 May 2015 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 pages 74 to 76 of the annual report.

Regulatory

On 21 July 2014 the Financial Conduct Authority approved the Company's application to become a Small Registered UK Alternative Investment Fund Manager as defined under the new Alternative Investment Fund Manager's Directive following the implementation of the EU's directive on self-managed investment funds. Following this the Company has retained responsibility for the custody of its investments. YFM Private Equity Limited has continued to provide advisory and administrative services to the Company. I am pleased to report that The City Partnership (UK) Limited has been appointed as Company Secretary to the Company with effect from 1 December 2014.

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 Advisory Agreement

Your Board has agreed with YFM Private Equity Limited a number of changes to the Investment Advisory Agreement ("the IAA"). In particular it has added clauses that:

i With effect from 1 October 2013 limit total deal fees paid by investee companies to the Investment Adviser at the point of investment to 3.0 per cent of the total sum invested in new unquoted investments during the financial period, and 2.0 per cent of the total sum invested in follow-on unquoted investments during the financial period. Any excess of total fees over these limits will be rebated to the Company; and

ii Limit the annual monitoring and directors fees paid by investee companies to the Investment Adviser to a maximum of £40,000 per annum per unquoted investment.

Further details of the IAA are set out in note 3.

Subsequent Events

Since the end of the reporting period, the Company has completed one additional investment for £0.4 million. At the date of this report the Company has approval for four further investments totalling £3.4 million.

Outlook

During the year there have been some indicators of improved economic conditions which have continued into the early part of 2015. Consequently 2014 has been a year of strong new investment levels and this momentum has continued into 2015, although we continue to take a cautious approach and look for businesses with resilient growth strategies. Funds raised under the recent prospectus offer will ensure your Company can continue to take advantage of these opportunities.

Good progress continues to be made across the portfolio to position businesses to grow and realise shareholder value.

Richard Last

Chairman

26 March 2015

Objectives and Key Policies

The Company's objective is to provide investors with an attractive long-term tax free dividend yield whilst seeking to maintain 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.

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 which may include ordinary and preference shares, and fixed income securities, such as corporate bonds and gilts. Unquoted investments are structured so as to spread risk and enhance revenue yields, usually as a combination of ordinary shares, preference shares and loan stock, 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

British Smaller Companies VCT plc and British Smaller Companies VCT2 plc ("the VCTs") have in aggregate first choice of all investment opportunities requiring up to £4.5 million of equity. Amounts above £4.5 million may be allocated one third to YFM's institutional co-investment fund and two thirds to the VCTs. Where there are opportunities for the VCTs to co-invest with each other the proposed basis for allocation is 40 per cent to the Company and 60 per cent to British Smaller Companies VCT plc. The Board of the Company has discretion as to whether or not to take up, or in the circumstances where British Smaller Companies VCT plc does not take its allocation, increase its allocation in such co-investment opportunities.

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 and can also be invested in non-qualifying unquoted investments.

Remuneration Policy

The Company's policy on the remuneration of its directors, all of whom being non-executive directors, can be found on page 43 of the annual report.

Other Key Policies

Details of the Company's policies on the payment of dividends, the DRIS and the buy-back of shares are given on page 2 of the annual report. In addition to these the Company's anti-bribery and environmental and social responsibilities policies can be found on page 32 of the annual report.

Practices and Operations

The Investment Adviser is responsible for the sourcing and screening of initial enquiries, carrying out suitable due diligence investigations and making submissions to the Board regarding potential investments. Once approved, further due diligence is carried out as necessary and HMRC clearance is obtained for approval as a Qualifying Investment.

The Board approves all investment and divestment decisions save in that new investments up to £250,000 in companies whose shares are traded on AIM or a recognised UK Exchange and where the decision is required urgently, in which case the Chairman of the Board of directors, if appropriate, may act in consultation with the Investment Adviser.

The Board regularly monitors the performance of the portfolio and the investment requirements set by the relevant VCT legislation. Reports are received from the Investment Adviser regarding the trading and financial position of each investee company and senior members of the Investment Advisory Team regularly attend the Company's Board meetings. Monitoring reports are also received at each Board meeting on compliance with VCT regulations so that the Board can monitor that the venture capital trust status of the Company is maintained and take corrective action if appropriate.

The Board reviews the terms of YFM Private Equity Limited's appointment as Investment Adviser on a regular basis.

YFM Private Equity Limited has performed investment advisory, administrative and secretarial services for the Company since its inception on 28 November 2000. The principal terms of the agreement under which these services are performed are set out in note 3.

Performance Incentive

The Investment Adviser will receive an amount (satisfied by the issue of shares) equivalent to 20 per cent of the amount by which the cumulative dividends paid as at the last Business Day in December in any year plus the middle market quotation per share exceeds 120 pence per share on that same day, multiplied by the number of shares issued and the shares under option (if any). These subscription rights are exercisable in the ratio 95:5 between the Investment Adviser and Chord Capital Limited. Further details are given in note 3.

In the opinion of the directors the continuing appointment of YFM Private Equity Limited as Investment Adviser is in the interests of the shareholders as a whole in view of its experience in advising venture capital trusts and in making, managing and exiting investments of the kind falling within the Company's investment policies.

Key Performance Indicators

The Company monitors a number of key performance indicators, which are typical for VCTs, as detailed below:

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 on page 11 of the annual report 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 ("the AIC"). This is the Company's stated benchmark index. A comparison and explanation of the calculation of this return is shown in the Directors' Remuneration Report on page 45 of the annual report.

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 while the last two columns include the benefit of tax relief as noted.

Notes

1. This assumes that at the time of investment the tax relief given on the investment was not also invested in shares of the Company.

2. NAV plus cash dividends paid plus tax relief on initial subscription.

3. NAV plus tax relief on the initial subscription plus additional tax relief and NAV on DRIS shares purchased. Assuming that all dividends. since inception were invested under terms of current DRIS.

4. Assuming initial offer price and initial tax relief from original subscription in British Smaller Technology Companies VCT plc.

Expenses

The Board monitors expenses using the Ongoing Charges figure, as calculated in line with the AIC recommended methodology. This figure shows shareholders the annual percentage reduction in net asset value as a result of recurring operational expenses 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 figure has fallen since 31 December 2013 as the raising of additional capital in the year has spread the fixed costs over a larger asset base.

The Ongoing Charges figure replaces the Total Expense Ratio (TER%) previously reported. TER% is calculated as the annual ongoing charges (excluding any performance related fees, trail commission payable to financial intermediaries, but excluding VAT) 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 of the annual report. There was no breach of the cap in the current or prior year. Following the final allotment in respect of the current fundraising the costs cap will be reduced from 3.25 per cent to 2.9 per cent.

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 Investment Adviser. In addition the Board receives formal reports from its VCT Status Advisers twice a year. The Board can confirm that during the period all of the VCT legislative tests have been met. With effect from 1 January 2015 Robertson Hare LLP replaced PricewaterhouseCoopers LLP as VCT Status Adviser to the Company.

Under Chapter 3 Part 6 of the Income Tax Act 2007, in addition to the requirement for a VCT's ordinary share capital to be listed in the Official List on a European regulated market throughout the period, there are a further five specific tests that VCTs must meet following the initial three year provisional period:

Income Test

The Company's income in the period must be derived wholly or mainly (70 per cent) from shares or securities. The Company complied with this test in the period, with 89.68 per cent (2013: 72.79 per cent) of income being derived from such sources.

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 0 per cent (2013: 0 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 15 May 2015.

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 77.54 per cent (2013: 85.04 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 non-preferential ordinary shares. The Company complied with this test, with 39.95 per cent (2013: 46.42 per cent) of value being in holdings of eligible ordinary shares.

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. The Company complied with this test, with 76.92 per cent of value being in holdings of eligible 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 Investment Adviser 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 5.24 per cent (2013: 6.72 per cent).

Other

The Finance Bill 2014 contained conditions/restrictions with respect to the use of monies in respect of VCTs. 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 December 2017.

From the share premium cancellation of £13.55 million on 10 October 2014, £12.21 million will be available for distribution following the filing of the annual report and accounts and £1.34 million will remain undistributable until 31 December 2017.

Investment Review

The £13.6 million of investments in the year to 31 December 2014 has significantly increased the scale and diversification of the portfolio.

The improving economic outlook and changes in EU restrictions on qualifying VCT investments allowing investments in any 12 month period up to £5.0 million from VCT funds have contributed to an increase in the volume and size of investment opportunities with this trend continuing into 2015.

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 £0.98 million excluding movements due to investments and realisations. This has enabled the Company to maintain its strong investor returns and is further analysed below. The proposed final dividend is 2.5 pence per ordinary share. Since the year end one investment for £0.4 million has been completed. A further four investments totalling £3.4 million have been approved at the date of this report.

At 31 December 2014 the investment portfolio was valued at £28.2 million, representing 71.7 per cent of net assets (53.4 per cent at 31 December 2013). Cash at 31 December 2014 was £10.6 million representing 27.0 per cent of net assets (43.3 per cent at 31 December 2013, 46.19 per cent including gilt investments).

Significant Investment Movements

Unquoted

The £0.37 million unrealised valuation gain from the unquoted portfolio is as a result of good progress by a number of businesses which have seen profit growth. The top four value gains in the period all resulted from filing of improved profitability:

· GTK (Holdco) Limited (value gain of £0.45 million) supplier of specialist electronic components;

· Mangar Health Limited (value gain of £0.44 million) manufacturer of lifting products for care of the elderly;

· Intelligent Office Limited (value gain of £0.40 million) provider of outsourced business services; and

· Callstream Group Limited (value gain of £0.27 million) supplier of telephone services to SMEs.

These gains were partially offset by two businesses which saw profits impacted by short term reductions in public sector defence budgets:

· Seven Technologies Holdings Limited (down £0.79 million) a supplier of remote telecoms surveillance systems: and

· Deep-Secure Limited (down £0.49 million) supplier of secure communication software to high security government and military departments.

Quoted

The performance of the quoted portfolio in the period has been mixed resulting in a £0.26 million overall reduction. The two most significant value movements were EKF Diagnostic Holdings plc (a fall of £0.12 million) and Iomart Group plc (a fall of £0.12 million); albeit both have subsequently recovered.

New Investments

During the year ended 31 December 2014 the Company completed sixteen investments totalling £13.6 million (excluding capitalised interest and non-cash proceeds received on the sale of investments). This comprised of ten new unquoted and one new quoted investment and five follow-on investments into existing portfolio companies and is analysed below.

New and Follow-On Investments Investments made £m

*Quoted company

The eleven new investments during the year totalled £12.46 million:

· In January 2014 the Company invested £1.64 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.

· In May 2014 the Company invested £1.96 million to fund the management buyout of Intelligent Office UK Limited, a leading provider of business process outsourcing solutions to the UK legal sector.

· In June 2014 the Company provided £0.75 million of growth capital funding to Intamac Systems Limited, which develops technology to connect physical products via the internet so they can be monitored and controlled using smart mobile phones and computers.

· In June 2014 the Company invested £0.84 million to fund the management buyout and growth capital for Macro Art Holdings Limited, a specialist wide-format digital printer.

· In September 2014 the Company funded the management buyout and provided development capital with an investment of £1.27 million into The Heritage Window Company Holdco Limited, a specialist manufacturer and supplier of slim line aluminium windows.

· In October 2014 the Company invested £0.17 million as part of an AIM placing to support the expansion of Gamma Communications plc, a leading provider of voice, data and mobile communication services to UK businesses.

· In October 2014 the Company invested £1.20 million to support the management buyout of Cambrian Park & Leisure Homes Limited, the largest holiday lodge builder in Wales.

· In October 2014 the Company invested £1.19 million to support the management buyout of Springboard Research Holdings Limited, a leading provider of retail performance monitoring and data services.

· In November 2014 the Company invested £1.38 million to support the management buyout and future growth plans of ACC Aviation, a specialist broker of leasing and chartering services to international airlines.

· In November 2014 the Company invested £1.34 million in backing the management buyout of market leading software company Business Collaborator Limited which facilitates collaboration within the construction sector.

· In December 2014 the Company invested £0.72 million in the management buyout of Wakefield Acoustics, a specialist supplier of industrial acoustic solutions.

The majority of the above investments are valued at cost and will be moved to earnings-based valuations during 2015.

The £1.14 million of investments into existing portfolio companies during the year was dominated by £0.80 million invested into kitchen manufacturer and retailer Harvey Jones Holdings Limited in the form of a high-yielding debt instrument.

Disposal of Investments

During the year to 31 December 2014 the Company received proceeds from disposals, repayments of loans and deferred consideration of £2.74 million, and £1.37 million from the disposal of fixed income securities. Overall this resulted in a value gain on disposal of investments of £0.87 million compared to 31 December 2013 valuations and a realised gain on cost of £1.71 million. This is analysed below.

The most significant proceeds related to:

· In December 2014 the Company realised its investment in leading independent contract caterer Waterfall Sevices Limited via a secondary buyout backed by LDC. Proceeds from the sale in December were £0.96 million, a profit on the 31 December 2013 carrying value of £0.48 million and a profit on cost of £0.94 million.

· £0.35 million of additional deferred proceeds was received from Beckton Dickinson relating to the trade sale of Sirigen Group Limited in 2012, following successful delivery of the two year development milestones. This brings the total proceeds to date to £1.88 million and increases the cash return to 3.6x.

· During the year the Company sold various shares in quoted holdings. The non-core holdings in Vianet Group plc and Optos plc were realised for £0.33 million in line with the opening 31 December 2013 value. Holdings in Pressure Technologies plc and Iomart Group plc were also partially realised for combined proceeds of £0.30 million, realising a gain on their opening carrying value of £0.06 million.

· Several unquoted investments repaid loan balances totalling £0.72 million following strong cash generation, resulting in a small realised profit on carrying value due to redemption premium. This included DisplayPlan Holdings Limited (£0.23 million), GTK (Holdco) Limited (£0.23 million), Callstream Group Limited (£0.17 million), Bagel Nash Group Limited (£0.08 million) and Macro Art Holdings Limited (£0.02 million).

A further analysis of all investments sold in the year can be found in note 7 to the financial statements on page 63 of the annual report.

Portfolio Composition

As at 31 December 2014 the portfolio of quoted and unquoted investments had a value of £28.2 million of which the unquoted investments constitute 92 per cent of the value and the quoted investments 8 per cent of the value. An analysis of the movements in the year is shown on page 21 of the annual report.

This year we have continued to improve the diversification of the portfolio. This is probably shown most clearly by the fact that at 31 December 2014 there were 21 investments with a value greater than £0.5 million which compares to 11 a year earlier. Investment company information is shown on pages 22 to 29 of the annual report.

The charts on page 14 of the annual report show the composition of the portfolio as at 31 December 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.

Valuation Policy

Unquoted investments are valued in accordance with the valuation policy set out on page 55 of the annual report, which takes account of current industry guidelines for the valuation of venture capital portfolios. Adjustments to fair value are made where an investment is significantly under-performing. As at 31 December 2014 the percentage of investments falling into each valuation category is shown in the table below:

Summary and Outlook

Some clearer signs of economic recovery have been seen during the year but there remains some uncertainty in global markets. Many of the portfolio companies have delivered improved results, focusing on proven brands, niche growth sectors or rolling out new technology. We will maintain a cautious approach to new investments; only backing proven business models with a clear strategy for value growth.

We have seen a marked increase in new investment levels in 2014. This is in part due to changes in EU restrictions on qualifying VCT investments and we expect to see this investment level continue in 2015.

We believe that the increasing level of investment, combined with several good exit prospects over the next few years, affords the Board the opportunity to achieve its aim of increasing dividends whilst preserving and enhancing the underlying net asset value. The increasing diversification of the portfolio should also help to reduce volatility of returns.

Investment Portfolio Summary to 31 December 2014

*Proceeds include premiums and profits on loan repayments and preference redemptions

Disposal History to 31 December 2014

* Investment acquired solely from the merger with British Smaller Technology Companies VCT plc in December 2005

** Investment made prior to 31 December 2003

Reconciliation of Investment Portfolio Movement since 31 December 2013

Risk Factors

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 as follows:

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 2012. Details of the Company's internal controls are contained in the Corporate Governance and Internal Control sections on page 41 of the annual report and further information on exposure to risks including those associated with financial instruments is given in note 17a on page 70 of the annual report.

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 pages 12 and 13 of the annual report.

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 9 of the annual report) and a diversified portfolio operating in a range of sectors. The Investment Adviser 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 Investment Adviser carries out due diligence on potential investee companies and their management teams and utilises external reports where appropriate to assess the viability of investee businesses before investing. Wherever possible a non-executive director will be appointed to the board of the investee.

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 is subject to the EU's Alternative Investment Fund Manager's Directive which took effect from 22 July 2014. Breach of any of these might lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.

Mitigation - The Investment Adviser and the Company Secretary have procedures in place to ensure recurring Listing Rules requirements are met and actively consults with brokers, solicitors and external compliance advisers as appropriate. The key controls around regulatory compliance are explained on page 41 of the annual 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 Investment Adviser is well-respected with a proven track record and has a formal recruitment process to employ experienced investment staff. Allocation rules relating to co-investments with other funds advised by the Investment Adviser, have been agreed between the Investment Adviser and the Company. Advice is sought from external advisors where required. Both the Company and the Investment Adviser maintain appropriate insurances.

Operational

Risk - Failure of the Investment Adviser's and administrator's accounting systems or disruption to its business might lead to an inability to provide accurate reporting and monitoring.

Mitigation - The Investment Adviser 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 41 of the annual report.

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 Investment Adviser 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.

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 Investment Adviser. YFM Private Equity Limited recognises the importance of its environmental responsibilities, monitors its impact on the environment and implements policies to reduce any damage that might be caused by its activities. Initiatives of the Investment Adviser designed to minimise its and the Company's impact on the environment include recycling and reducing energy consumption. Given the size and nature of the Company's activities and the fact that it has no employees, the Board considers there is limited scope to develop and implement social and community policies.

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 Investment Adviser 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 anti-bribery policy to the Investment Adviser and its other service providers.

The Company had no employees during the year. The Board is composed of three male non-executive directors. For a review of the policies used when appointing directors to the Board of the Company please refer to the Directors' Remuneration Report in the annual report.

Directors' 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 the financial statements for each financial year. Under that law the directors are required to prepare the financial statements and have elected to prepare the Company's financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss for the Company for that period.

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

· 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, Directors' Report and Directors' Remuneration Report which comply with the requirements of the Companies Act 2006.

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

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 www.bscfunds.com in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

Directors' Responsibilities pursuant to DTR4

The directors confirm to the best of their knowledge:

· the financial statements have been prepared in accordance with IFRSs as adopted by the European Union 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 of the principal risks and uncertainties that it faces.

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 of the annual report.

For and on behalf of the Board.

This statement was approved by the Board and signed on its behalf on 26 March 2015.

Richard Last

Chairman

Financial Statements

Statement of Comprehensive Income for the year ended 31 December 2014

The Total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union. The supplementary Revenue and Capital columns are prepared under the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP') 2009 published by The AIC.

Balance Sheet At 31 December 2014

Statement of Changes in Equity for the year ended 31 December 2014

1 Other reserves include the capital redemption reserve and other reserve, which are non-distributable. The other reserve was created upon the exercise of warrants and the capital redemption reserve was created for the purchase and cancellation of own shares.

2 Issue costs include both fundraising costs and costs incurred from the Company's DRIS.

3 Subject to filing these financial statements at Companies House.

The merger reserve was created to account for the difference between the nominal and fair value of shares issued as consideration for the acquisition of the assets and liabilities of British Smaller Technology Companies VCT plc. The reserve was created after meeting the criteria under section 131 of the Companies Act 1985 and the provisions of the Companies Act 2006 for merger relief. The merger reserve is a non-distributable reserve.

The capital reserve and revenue reserve are both primarily distributable reserves. The reserves total £25,422,000 (2013: £14,647,000) representing an increase of £10,775,000 (2013: £7,268,000 increase) during the year. This change arises from the profit in the year of £1,046,000 (2013: £383,000), a transfer of valuation losses from the investment holding reserve of £961,000 (2013: £3,796,000), dividends of £2,794,000 (2013: £2,083,000), purchase of shares of £75,000 (2013: £309,000), realisation of negative goodwill of £13,000 (2013: £177,000) and the cancellation of the Company's share premium account of £13,546,000 (2013: £12,896,000). An analysis of the distributable elements of these reserves is given above. 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.

Statement of Cash Flows for the year ended 31 December 2014