Br.small Co.2 Regulatory News (BSC)

1 Nov 2005 15:12

British SmallerTechCompaniesVCT2PLC01 November 2005 ANNOUNCEMENT BRITISH SMALLER TECHNOLOGY COMPANIES VCT 2 PLC AND BRITISH SMALLER TECHNOLOGY COMPANIES VCT PLC 1 November 2005 NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN OR INTOAUSTRALIA, CANADA, JAPAN, THE REPUBLIC OF IRELAND, SOUTH AFRICA OR THE UNITEDSTATES OF AMERICA OR TO U.S. PERSONS. THIS ANNOUNCEMENT DOES NOT CONSTITUTE ORFORM PART OF AN OFFER TO SELL, PURCHASE, EXCHANGE OR SUBSCRIBE FOR ANYSECURITIES OR SOLICITATION OF SUCH AN OFFER IN THE UNITED STATES OF AMERICA ORANY OTHER JURISDICTION. THE SECURITIES REFERRED TO IN THIS ANNOUNCEMENT HAVE NOTBEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933,AS AMENDED, AND WILL NOT BE OFFERED OR SOLD IN THE UNITED STATES EXCEPT PURSUANTTO AN APPLICABLE EXEMPTION FROM REGISTRATION. RECOMMENDED PROPOSALS FOR A MERGER BETWEEN BRITISH SMALLER TECHNOLOGY COMPANIES VCT 2 PLC AND BRITISH SMALLER TECHNOLOGY COMPANIES VCT PLC Summary The boards of British Smaller Technology Companies VCT 2 plc ("BSTC2") andBritish Smaller Technology Companies VCT plc ("BSTC") announce agreement onrecommended proposals for the merger of BSTC2 and BSTC on a formula asset valuebasis (the "Merger"). The boards of BSTC2 and BSTC further announce that theyare today writing to their respective shareholders with full details of theproposed Merger. The Merger will be effected by means of a scheme of reconstruction ("Scheme")under Section 110 of the Insolvency Act 1986 pursuant to which it is proposedthat BSTC will be placed into members voluntary liquidation and the assets andliabilities of BSTC will be transferred to BSTC2 in exchange for new shares inBSTC2, which will be issued to shareholders of BSTC. The Scheme is conditional, among other things, on the approval of BSTC2shareholders and BSTC shareholders and dissent not having been expressed byshareholders of BSTC holding more than 10 per cent in nominal value of theissued BSTC share capital under Section 111 of the Insolvency Act 1986. BSTC has today posted a circular to shareholders in relation to the recommendedScheme for the reconstruction of BSTC. The BSTC circular to shareholders alsocontains details of a deferred fee payment in relation to the terminationarrangements with YFM Private Equity Limited ("YFM") as part of the Schemearrangements. BSTC2's circular to its shareholders also contains details ofproposed amendments to the current management, performance incentive andadministrative arrangements. Introduction Since the flotation of BSTC2 and BSTC, the respective boards have endeavoured toprovide shareholders with a satisfactory investment return whilst maintaining anappropriate level of corporate governance and a full flow of information. Forsome time the boards have been aware of the desirability of achieving largerscale of operations so as to mitigate the impact of the costs of investmentmanagement and administration and to diversify risk to a greater extent. In thelight of recent changes to the legislation governing VCTs, which are intended tofacilitate the consolidation of the VCT sector into larger units, the boardshave taken the opportunity to consider the scope for strengthening eachcompany's position for the longer term. The boards of BSTC2 and BSTC are pleased to advise their respective shareholdersthat, following detailed consideration of the portfolio and financial positionof the other company, both being part of the British Smaller TechnologyCompanies family of VCT funds, which have substantially similar investmentobjectives and a number of common investments, they have reached an agreement tomerge which the boards consider brings significant benefits to both groups ofshareholders. Either company could have acquired the assets and liabilities ofthe other under such a scheme, however, BSTC2 was selected as the acquirer dueto its higher overall return and greater liquidity. Philip Cammerman, a director of BSTC2, is also a director of YFM, the investmentadviser of BSTC2 and BSTC, and further, is a director and shareholder of YFM'sultimate parent company, YFM Group (Holdings) Limited. Philip Cammerman, as adirector of YFM is interested in the revised management, performance incentiveand administration arrangements with YFM (see details below) and has notparticipated in the BSTC2 board's consideration of these proposals. He hasagreed to abstain from voting on the resolutions to be proposed at theExtraordinary General Meeting of BSTC2 and undertaken to take all reasonablesteps to ensure that his associates will not vote on the resolutions. YFM, as a related party to these arrangements, as well as the arrangementsrelating to the proposed acquisition of the assets and liabilities of BSTC, hasalso agreed not to vote on the resolutions and undertaken to take all reasonablesteps to ensure that any employees or directors of YFM and any other associateswho hold shares in BSTC2 will not vote on these resolutions. In addition to the above, Philip Cammerman, as a director of YFM, is interestedin the termination arrangements with YFM in relation to BSTC and has notparticipated in the BSTC board's consideration of this proposal. He has agreedto abstain from voting on the resolutions to be proposed at the meetings ofBSTC. YFM, as a related party to the termination arrangements relating to BSTC and theproposed transfer of the assets and liabilities of BSTC to BSTC2, has alsoagreed to abstain from voting on the resolutions and has undertaken to take allreasonable steps to ensure that any employees or directors of YFM and any otherassociates of YFM who hold shares in BSTC will not vote on the resolutions to beproposed at the meetings of BSTC. Expected Timetable EXPECTED TIMETABLE FOR BSTC2 Extraordinary General Meeting 10.30 a.m. on 30 November 2005 Effective Date for transfer of assets and 8 December 2005liabilities of BSTC to BSTC2 and the issue ofBSTC2 shares Special Interim Ex-Dividend date on 11 January 2005 EXPECTED TIMETABLE FOR THE SCHEME OF RECONSTRUCTION OF BSTC BSTC First Extraordinary General Meeting 10.00 a.m. on 30 November 2005 Record Date for BSTC shareholders' entitlements under the 5.00 p.m. on 30Scheme November 2005 Dealings in BSTC shares suspended 5.00 p.m. on 30 November 2005 Calculation Date after 5.00 p.m. on 7 December 2005 BSTC Second Extraordinary General Meeting 10.00 a.m. on 8 December 2005 Effective Date for transfer of the assets and liabilities of 8 December 2005BSTC to BSTC2 and the issue of shares in BSTC2 Announcement of results of Second Extraordinary General Meeting Noon on 9and Completion of Scheme December 2005(if applicable) Cancellation of listing of BSTC shares 9 December 2005 Admission of and dealings in the BSTC2 shares to commence 14 December 2005 Background to BSTC2 BSTC2 was launched in November 2000 to offer investors a tax efficient method bywhich to participate in a listed investment fund offering exposure to smaller,earlier stage unquoted companies where innovation, technology or intellectualproperty is evident. BSTC2 raised £7.8 million and has to date invested £5.5million in 18 companies. The net asset value of BSTC2 was 83.8 pence per shareas at 30 June 2005 and the total return was 88.8 pence per share (as extractedfrom the unaudited interim results of BSTC2 for the six months ended 30 June2005). The view of BSTC2's board is that it is a relatively small fund which hassuffered some erosion of its investment return as a result of the level ofmanagement and administration costs being incurred by BSTC2. As at 30 June 2005, BSTC2 had £2.7 million of liquid or near liquid funds (asextracted from the unaudited interim results of BSTC2 for the six months ended30 June 2005). In the opinion of BSTC2, the working capital available to it issufficient for its present requirements, that is for at least the next 12 monthsand sufficient to make a limited number of investments to support existingportfolio companies, but sufficient cash for only a limited number of newinvestments. Following the Venture Capital Trusts (Winding Up and Mergers) (Tax) Regulations2004 coming into force last year, VCTs can now be merged without prejudicing thetax reliefs obtained by shareholders on their original investment. With this inmind, the board of BSTC2 has considered the position of BSTC, a VCT with thesame board of directors and managed by the same investment adviser as BSTC2,with a view to merging the two companies and creating a VCT of a moreeconomically efficient size. The Merger will result in significant cost savings and enhanced administrativeefficiency. Due to their common features, this is achievable without majoradditional costs in terms of rearranging the existing board constitution,investment and administrative arrangements of the two companies. Overall risk should be reduced as the portfolio is spread across a larger numberof investments and industry sectors. The combined entity will have additionalfunds available to support further investment in both new and existing companieswhich require additional investment. After receiving specialist advice and giving the matter full consideration, theboard of BSTC2 believe that the financial reconstruction of the company by wayof the proposed scheme offers an increased level of certainty together with amore acceptable level of cost. Either BSTC2 or BSTC could have acquired theassets and liabilities of the other under such a scheme and neither group ofshareholders would be disadvantaged. However, BSTC2 was selected as the acquirerdue to its higher overall return and greater liquidity. For the audited 12 month period ended on 31 December 2004, total expenditure forBSTC2 was £375,000 (5.2 per cent of BSTC2's net asset value at that date) andfor both entities was £873,000 (approximately 5.9 per cent of their combined netasset value). Savings in operational expenditure have been made during thecurrent year and the directors of BSTC2 believe that further significant savingswill be achieved by combining the companies and removing certain fixed costs. Background to BSTC BSTC was launched in January 1999 to offer investors a tax efficient method bywhich to participate in a listed investment fund offering exposure to smaller,earlier stage, unquoted companies where innovation, technology or intellectualproperty is evident. BSTC raised £13.9 million and to date has invested £11.4million in 27 companies. The net asset value was 54.7 pence per share as at 30June 2005 with a total return of 58.1 pence per share (as extracted from theunaudited interim results of BSTC for the six months ended on 30 June 2005). The view of the board of BSTC is that it is a relatively small fund which hassuffered erosion of its investment return as a result of weaker investor andmarket sentiment following the late 90's technology "boom" period. Despite animprovement in performance in the last 18 months the level of management andadministration costs being incurred by BSTC is still high relative to the sizeof the fund. As at 30 June 2005, BSTC had £1.47 million of liquid or near liquid funds (asextracted from the unaudited interim results of BSTC for the six months ended on30 June 2005). The directors of BSTC consider that this amount is sufficient tomeet the foreseeable needs of BSTC and to make a limited number of investmentsto support existing portfolio companies, but leaves very limited scope for newinvestments. With the Venture Capital Trusts (Winding Up and Mergers) (Tax) Regulations 2004coming into force last year, the board of BSTC has considered the position ofBSTC2 with a view to merging the two companies and creating a VCT of a moreeconomically efficient size. After receiving independent and specialist advice and giving the matter fullconsideration, the board of BSTC believe that the financial reconstruction ofBSTC by way of the proposed Scheme offers an increased level of certaintytogether with a more acceptable level of costs. Either company could haveacquired the assets and liabilities of the other under such a Scheme and neithergroup of shareholders would be disadvantaged. However, BSTC2 was selected as theacquirer due to its higher overall return and greater liquidity. For the audited 12 month period ended on 31 December 2004, total expenditure forBSTC was £498,000 (6.6 per cent of BSTC's net asset value at that date) and forboth entities was £873,000 (approximately 5.9 per cent of their combined netasset value). Savings in operational expenditure have been made during thecurrent year and the directors of BSTC believe that further significant savingswill be achieved by combining the companies and removing certain fixed costs. The Scheme The Scheme provides for BSTC to be put into members' voluntary liquidation andfor the assets and liabilities of BSTC to be transferred to BSTC2 inconsideration for new shares in BSTC2 of an equivalent value (which would beissued to shareholders in BSTC). These new BSTC2 shares will rank pari passuwith the existing BSTC2 shares. Following the transfer BSTC will be wound up andthe BSTC shares cancelled. The number of new shares in BSTC2 to be issued to the shareholders of BSTC willbe calculated by reference to the relative net asset values of the companies asat the effective date, i.e. 8 December 2005 (the "Roll-Over Value" of BSTC andthe "Merger Value" of BSTC2). These relative net asset values will be based onthe net asset value of each company as at 30 June 2005 adjusted to take intoaccount movements in the valuations of the each company's portfolio and thecosts of implementing the Scheme allocated pro-rata to the relative net assetvalues of each company. Details of the calculation of the Roll-Over Value,Merger Value and the issue of BSTC2 shares is set out in Annex I below. As at 30 June 2005, the unaudited net asset value of BSTC was 54.7 pence pershare and its Roll-Over Value, if BSTC had been wound up on that date, wouldhave been approximately 51.8 pence per BSTC share (assuming no dissenting BSTCshareholders). The Roll-Over Value cannot finally be determined until after theclose of business on 7 December 2005, this being the last dealing dayimmediately prior to the effective date. The unaudited net asset value of BSTC2 was 83.8 pence per share as at 30 June2005 and the Merger Value of BSTC2 if the Scheme had been implemented on thatdate would have been approximately 82.1 pence per share. BSTC2's Merger Valuealso cannot be finally determined until after the close of business on 7December 2005, this being the last dealing day immediately prior to theeffective date. If the two companies had been merged as at 30 June 2005, by reference to theunaudited estimated Roll-Over Value of BSTC and Merger Value of BSTC2 under theScheme, shareholders in BSTC would have received 0.63 shares in BSTC2 for everyBSTC share held. Benefits of the Merger The boards of BSTC and BSTC2 consider that a merged entity would provide anumber of benefits: • participation in a larger VCT with a more diversified portfolio - this will disperse the portfolio risk across a broader range of investments, technologies, markets and industry sectors; • a VCT of a more economically efficient size with a greater capital base over which to spread administration and management costs; • a significant reduction in management and administrative costs for the combined entity (including a lower management fee for the merged entity compared to those currently being paid in aggregate by the two companies to the investment adviser); • merger with a VCT which has a substantially similar investment policy, structure and manager without prejudicing existing tax reliefs obtained; • a larger pool of investment funds providing the opportunity for improved liquidity and flexibility to provide further support for those investments offering the highest potential rewards; and • increased flexibility in meeting the various requirements for qualifying VCT status. Cancellation of Listing of BSTC It is the intention of BSTC to apply for cancellation of its listing upon thesuccessful completion of the Scheme, which is anticipated to be on 8 December2005. Costs of the Scheme The anticipated cost of undertaking the Scheme is £280,000 including legal,professional and other fees including the winding up of BSTC. Followingcompletion of the Scheme, annual cost savings for the merged entity of at least20 per cent per annum will be achieved. On this basis, the directors of BSTC andBSTC2 believe the transaction costs would be recovered within 18-20 months. Inaddition, the Merger is expected to deliver important operational benefits. Special Interim Dividend Payment Following the Merger, BSTC2 intends to continue its existing policy of seekingto pay regular dividends when practicable. BSTC2 and BSTC both paid dividends inthe last 12 months reflecting their strengthened performance. The ability of theenlarged company to pay dividends should be improved by having a larger, morediverse portfolio from which income and capital gains can be generated. In accordance with the above policy, BSTC2 intends to pay a special interimdividend of 2.0 pence per share to all shareholders (including in respect of thenew BSTC2 shares to be issued pursuant to the Scheme to shareholders of BSTC) onor about 10 February 2006. The payment of this dividend is conditional on thecompletion of the Scheme. The dividend will be payable out of BSTC2's thenavailable cash resources. Management, administrative and performance incentive arrangements in BSTC2 YFM has been appointed to provide certain investment advisory and administrativeservices to both BSTC2 and BSTC. The directors of BSTC2 have entered into a newinvestment advisory agreement, conditional on shareholder approval at theExtraordinary General Meeting and implementation of the Scheme, under which YFMwill continue to act in their current role and in light of the enlarged entitythe management fee payable to YFM in terms of a proportion of the net assets ofboth companies will be reduced. In order to bring the management fee arrangements for the merged entity intoline with current market practice, it has been agreed by BSTC2 and YFM that,subject to approval by the shareholders of BSTC2, the fees payable to YFMfollowing the merger will be an annual fee of 2.5 per cent of the net assets ofthe enlarged company from time to time, calculated and payable quarterly inadvance (plus VAT thereon). Based upon the respective companies' unaudited netasset value as at 30 June 2005 adjusted for the expected costs of the Scheme andthe payment of the proposed Special Interim Dividend, YFM would be paid anannual fee of £331,000 (plus VAT). Currently, YFM is entitled to fees of£420,000 (plus VAT) per annum, calculated as a percentage of the funds raised byBSTC2 and a fixed fee in relation to BSTC. The current fees equate to 3.2 percent of the respective companies combined unaudited net asset value as at 30June 2005 adjusted as above. As the revised management, performance incentive and administrative arrangementsare being entered into with BSTC2's investment adviser, which is a party"related" to BSTC2 under the Listing Rules, these arrangements will be regardedas related party transactions under the Listing Rules and thus require theapproval of the shareholders of BSTC2. The acquisition of the assets and liabilities from BSTC is also a related partytransaction as it is an arrangement with a company whose funds are also managedby the BSTC2's investment adviser. The size of the transaction also necessitatesshareholders' approval. Deferred Management Fees and Related Party Arrangements in BSTC In its role as investment adviser to BSTC and pursuant to an agreement dated 26August 2004 reflecting a significant reduction of £170,487 per annum in itsoriginal investment advisory fee, YFM is currently entitled to a fee of £200,000per annum (increased annually in line with RPI). YFM is also entitled to adeferred fee arrangement (payable half in shares and half in cash) of an amountequal to 15 per cent of the aggregate value of the cumulative cash proceedsrealised after 1 January 2004 on the sale or listing of BSTC's investments inexcess of the value of those investments as at 31 October 2003 (subject to a capof 110 per cent of the cumulative investment advisory fees foregone) ("DeferredFee Arrangement"). In light of the above new fee arrangements the existing management andadministration arrangements (including the Deferred Fee Arrangements) haveagreed to be settled and terminated prior to the transfer and YFM have agreed tosuch termination for a one off payment of an amount equal to £199,750 (inclusiveof VAT) to be satisfied by the issue of 439,010 shares in BSTC (at an allotmentprice of 45.5 pence per share, this being the average of the mid-market value ofBSTC's shares at close of business on the five business days up to and including27 October 2005) ("Termination Arrangements"). These shares will be issued toYFM immediately prior to the transfer on the effective date and will be includedin the transfer of BSTC2 under the Scheme as though such shares were on theregister of members of BSTC on the record date for entitlements under theScheme. The Termination Arrangements are conditional on the Scheme beingapproved by shareholders and the shares in BSTC will be issued to YFMimmediately prior to the transfer. Had the underlying investments been realisedas at 30 September 2005 by reference to the valuations approved by the board ofBSTC as at that date, YFM would have been entitled to a payment (in cash andshares) amounting to £284,916 (inclusive of VAT). As the Termination Arrangements are an arrangement with BSTC's investmentadviser, which is a party 'related' to BSTC under the Listing Rules, theTermination Arrangements will be regarded as a related party transaction underthe Listing Rules and thus require the approval of the shareholders of BSTC. Theproposed transfer of the assets and liabilities of BSTC to BSTC2 is also arelated party transaction under the Listing Rules, as it is a transaction with acompany which is also managed by BSTC's investment adviser and therefore alsorequires shareholder approval. Approval is also required given the nature of thetransaction. Transfer arrangementsOn the effective date, i.e. 8 December 2005, the liquidators of BSTC, WilliamDuncan and Ian Schofield of PKF (UK) LLP (the "Liquidators") shall procure thatBSTC shall enter into a transfer agreement under which the Liquidators shallprocure the transfer of all the assets and liabilities of BSTC to BSTC2 inexchange for the issue of shares in BSTC2 to the shareholders of BSTC.In consideration of such transfer of assets and liabilities of BSTC to BSTC2,BSTC2 will, pursuant to the transfer agreement, undertake to pay all liabilitiesincurred by the Liquidators including but not limited to the implementation ofthe Scheme, the winding up of BSTC and the purchase for cash of any holdings ofdissenting shareholders in BSTC. Conditions of the Scheme This Scheme is conditional upon: • the passing of the resolutions to be proposed at the Extraordinary General Meeting of BSTC2; • the passing of the resolutions to be proposed at the First and Second Extraordinary General Meeting of BSTC; • dissent not having been received from BSTC shareholders holding more than 10 per cent in nominal value of the issued BSTC share capital under Section 111 Insolvency Act 1986 (this condition may be waived by the board of directors of BSTC). Documents and Approvals BSTC2 shareholders, inter alia, will receive a copy of the prospectus togetherwith a circular convening an Extraordinary General Meeting to be held on 30November 2005 at which BSTC2 shareholders will be invited to approve resolutionsin connection with the Merger proposals and the arrangements with YFM. BSTC shareholders will also receive a circular in relation to the Scheme,together with the prospectus in respect of the BSTC2 shares to be issued to BSTCshareholders in connection with the Merger. The circular convenes the First andSecond Extraordinary General Meeting at which BSTC shareholders will be invitedto approve resolutions in connection with the Merger and the TerminationArrangements with YFM. Copies of the prospectus and the circulars for both BSTC2 and BSTC have beensubmitted to the UK Listing Authority and will be shortly available forinspection at the UK Listing Authority's Document Viewing Facility which issituated at: Financial Services Authority25 The North ColonnadeCanary WharfLondon E14 5HS Telephone number: 020 7066 1000 Enquiries: British Smaller Technology Companies VCT 2 plc:Jim GervasioTelephone number: 0113 244 3121 British Smaller Technology Companies VCT plc:Jim GervasioTelephone number: 0113 244 3121 YFM Private Equity LimitedPeter Hindle or David GeeTelephone number: 0113 294 5050 Nabarro Wells & Co Limited:Robert Lo and Marc CramsieTelephone number: 020 7710 7400 Howard Kennedy:Keith Lassman or Paul MillerTelephone number: 020 7636 1616 Martineau Johnson:Roger Blears or Kavita PatelTelephone number: 0870 763 2000 The directors of BSTC2 accept responsibility for the information relating to BSTC2 and its directors contained in this announcement. To the best of the knowledge and belief of such directors (who have taken all reasonable care to ensure that such is the case), the information relating to BSTC2 and its directors contained in this announcement, for which they are solely responsible,is in accordance with the facts and does not omit anything likely to affect the import of such information. The directors of BSTC accept responsibility for the information relating to BSTCand its directors contained in this announcement. To the best of the knowledge and belief of such directors (who have taken all reasonable care to ensure that such is the case), the information relating to BSTC and its directors contained in this document, for which they are solely responsible, is in accordance with the facts and does not omit anything likely to affect the importof such information. Howard Kennedy are acting exclusively for BSTC2 and for no one else in connection with the matters described herein and will not be responsible to anyone other than BSTC2 for providing the protections afforded to clients of Howard Kennedy for providing advice in relation to the matters described herein. Nabarro Wells & Co. Limited are acting exclusively for BSTC and for no one elsein connection with the matters described herein and will not be responsible to anyone other than BSTC for providing the protections afforded to clients of Nabarro Wells & Co. Limited for providing advice in relation to the matters described herein. Martineau Johnson are acting exclusively for BSTC2 and for no one else in connection with the matters described herein and will not be responsible to anyone other than BSTC2 for providing the protections afforded to clients of Martineau Johnson for providing advice in relation to the matters described herein. ANNEX I THE SCHEME Definitions and interpretation The defined terms set out below shall have the same meanings as those defined inthe BSTC2 circular and / or the BSTC circular. On or immediately prior to the Effective Date, YFM, on the instruction of theLiquidators, shall calculate the Roll-Over Value in relation to BSTC and theMerger Value in relation to BSTC2. Provision of information On the Effective Date the Liquidators shall receive all the cash, undertakingsand other assets and liabilities of BSTC and shall deliver to BSTC2: • particulars of all of the assets and liabilities comprised in BSTC; • a list certified by the BSTC's registrars of the names and addresses of, and the number of BSTC shares held by, the shareholders on the register at 5.00 p.m. on the Record Date; • an estimate of the costs to wind-up BSTC which will form part of the Scheme costs; • the amount estimated to purchase the holdings of dissenting shareholders; and • the Roll-Over Value of BSTC. Calculations of value/issue of Shares Except as otherwise provided in this Scheme, for the purposes of calculations ofvalue and the issue of shares in BSTC2, the following provisions shall apply: Roll-Over Value of BSTC shall be calculated as: A + (B + C + D) - (E + F) where: A = the unaudited net asset value of BSTC as at 30 June 2005; B = any increase/decrease in the valuation of the investments of BSTC held insecurities listed on a recognised stock exchange (including AIM and OFEX) byreference to their bid price as at the close of business from 30 June 2005 to 7December 2005; C = any increase/decrease in the valuations of unquoted investments held by BSTCwhere there has been an event in the period between 1 July 2005 and 7 December2005 which (i) requires a revaluation of the investment in accordance withFinancial Reporting Standard 26 'Financial Instruments: measurement (IAS 39)'and using the International Private Equity and Venture Capital ValuationGuidelines or (ii) in the opinion of the directors of BSTC has had a materialimpact on the value of the investment; D = changes in the working capital of BSTC including changes in cash balancesfrom 30 June 2005 to 7 December 2005; E = an amount equal to the pro-rata allocation (such allocation to be based onRoll Over Value / Merger Value of the companies as at 7 December 2005 excludingE) of the costs of the Scheme which are payable by BSTC plus £10,000representing an amount of contingency to cover any unforeseen additional costsincurred by BSTC2 which will undertake to meet all costs of BSTC following thetransfer on the Effective Date; and F = the amount estimated to purchase the shareholdings of dissentingshareholders. The Merger Value of BSTC2 shall be calculated as follows: A + (B + C + D) - Ewhere: A = the unaudited net asset value of BSTC2 as at 30 June 2005; B = any increase/decrease in the valuation of the investments of BSTC2 held insecurities listed on a recognised stock exchange (including AIM and OFEX) byreference to their bid price as at the close of business from 30 June 2005 to 7December 2005; C = any increase/decrease in the valuations of unquoted investments held byBSTC2 where there has been an event in the period between 1 July 2005 and 7December 2005 which (i) requires a revaluation of the investment in accordancewith Financial Reporting Standard 26 'Financial Instruments: measurement (IAS39)' and using the International Private Equity and Venture Capital ValuationGuidelines or (ii) in the opinion of the Directors has had a material impact onthe value of the investment; D = changes in the working capital of BSTC2 including changes in cash balancesfrom 30 June 2005 to 7 December 2005; and E = an amount equal to the pro-rata allocation (such allocation to be based onthe Roll-Over Value/Merger Value of the companies as at 7 December 2005excluding E) of the costs of the Scheme which are payable by BSTC2. The number of shares in BSTC2 to be issued to the shareholders of BSTC pursuantto the Scheme shall be calculated as follows: A x (B/C) where: A = the number of BSTC shares in issue (including the BSTC shares to be issuedto YFM in connection with the termination of a deferred fee arrangement withBSTC); B = the Roll-Over Value divided by the number of BSTC shares in issue (includingthe BSTC shares to be issued to YFM referred to above); and C = the Merger Value divided by the number of shares in issue in BSTC2. The shares in BSTC2 will be issued to the shareholders of BSTC pro rata to theirholdings in BSTC on the Record Date (including the BSTC shares to be issued toYFM in connection with the Termination Arrangements as though such shares wereon the register of members of BSTC on the Record Date). Entitlements will berounded down to the nearest whole number and any fractional entitlements notexceeding £5 in value will be sold in the market for the benefit of BSTC2. 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