Baronsmead Vt Regulatory News (BVT)

Baronsmead VCT 2 plc Annual report & accounts for the year ended 30 September 2013 Financial Headlines ● Net asset value ("NAV") per share increased 14.6 per cent to 110.13p in theyear ended 30 September 2013, before deduction of dividends. ● 288.2p NAV total return to shareholders for every 100.00p invested at launch. ● Dividends totalled 9.5p in the twelve months to 30 September 2013, includingthe second interim dividend of 6.5p paid on 20 September 2013. ● Net annual dividend yield of 10.1 per cent and gross annual yield of 13.4 percent. Extract of the Strategic Report The Strategic Report included in the Annual Report and Accounts for the year to30 September 2013 has been prepared in accordance with the requirements ofSection 414 of the Companies Act 2006 and best practice. Its purpose is toinform the members of the Company and help them to assess how the Directorshave performed their duty to promote the success of the company, in accordancewith Section 172 of the Companies Act 2006. The Company is registered in England as a Public Limited Company (Registrationnumber 03504214). The Directors have managed,and intend to continue to manage,the Company's affairs in such a manner as to comply with Section 274 of theIncome Tax Act 2007 which grants approval as a VCT. Investment Objective The investment objective of the Company is to achieve long-term investmentreturns for private investors, including tax-free dividends. Investment Policy ● To invest primarily in a diverse portfolio of UK growth businesses, whetherunquoted or traded on AIM. ● Investments are made selectively across a range of sectors in companies thathave the potential to grow and enhance their value. Further details on how this is achieved are set out below Chairman's Statement I am pleased to report that the Company had a very satisfactory year. Net AssetValue ("NAV") before payment of dividends increased by 14.03p a share (14.6 percent). The total dividend for the year was 9.5p all of which has been paid out of theprofits from successful investment realisations in recent years. Pence per ordinary share NAV as at 1 October 2012 96.10 (after deducting the final dividend of 5.0p for the year to 30September 2012) Valuation uplift (14.6 per cent) 14.03 NAV as at 30 September 2013 before dividends 110.13 Less: Interim dividend paid on 14 June 2013 (3.00) Second interim dividend paid on 20 September 2013 (6.50) NAV as at 30 September 2013 after paying dividends 100.63 This year approximately two thirds of the increase in NAV has been paid toshareholders as dividends. While this is pleasing, the level of futuredividends (which the Board aims to keep at a minimum of 6.5p a year) will, ofcourse, depend upon continued profitable realisations. Shareholders haveexpressed a preference to receive consistent tax free income while alsoachieving capital growth and so the increase in NAV per share to 100.63p, afterdividends, is a positive step. Our portfolio is diverse and this has helped to smooth investor returns, fromyear to year. The unquoted portfolio has seen several years of strong growthbut, last year the return was more modest, principally because many of thecurrent investments are relatively new and, as immature companies they are onlyjust starting to deliver their full potential. We remain focused primarily onunquoted investments and the Manager is now working to help these newerinvestments achieve outstanding results in future years. In contrast, the quoted portfolio experienced significant growth of 47 per centin the year. Undoubtedly this performance was due partly to strong markets anda welcome return of investor appetite for smaller quoted companies. However itis also a vindication of the proactive strategies that the Manager has deployedin the quoted arena since 2008. The Wood Street Microcap fund was set up in May2009 as a way of holding a number of more liquid stakes in larger non VCTqualifying companies. Additionally the Manager has built a small number ofsignificant shareholdings in selected AIM companies in order to become a moreinfluential longer term partner and to contribute its private equity experienceto these investees. During the market turbulence of recent years, the Manager has taken a long termview of solid, core investments based on the fundamentals of the investeerather than over reacting to weak and cyclical market sentiment. This approachand these decisions are now paying dividends and have contributed to the quotedperformance. The portfolio (apart from Wood Street Microcap) has increased to 65investments. New and follow-on investments totalled £5.7 million across 8unquoted and 11 AIM companies. Sales of investments realised £9.2 million anddelivered net gains of £5.7 million. The portfolio as a whole, remains in goodhealth with 85 per cent of investees reporting steady or improving performanceagainst their business plans. LONG TERM PERFORMANCE The Company's investment and dividend policies which are aimed at producingconsistent returns over the long-term continue to be met. Following the paymentof the second interim dividend, total tax-free dividends of 102.9p a share havebeen paid since launch. This exceeds the initial subscription price of 100p pershare and, additionally the NAV at the year end is also over 100p. Accordinglyfounder shareholders have received back in tax-free dividends more than theirinitial subscription and that initial gross subscription (before taking accountof upfront income tax relief) is wholly represented in the NAV of 100.63p ashare at the year end. Statistics produced by the Association of Investment Companies(www.theaic.co.uk) show that over the past ten years, the share price totalreturn of 243.60p (before VCT tax benefits) for every 100p invested compares to240.24p for the FTSE All-Share Index during the same period. In the past ten years, annual tax-free dividends have averaged 7.66p a share(6.64p since launch). For the higher rate taxpayer, the gross equivalentrepresents 10.21p a share per annum. The full record of performance sincelaunch is set out in the Annual Report as well as on our website,www.baronsmeadvct2.co.uk. The strong performance this year has continued the cumulative progress achievedsince the onset of the financial crisis in 2008. During the financial year thecumulative NAV Total Return above which the Manager is due a performance feewas exceeded and a performance fee of £1.4 million (the equivalent of 1.9p pershare) became payable to the Manager (see Performance Incentive section of theStrategic Report for further information). A performance fee was last paid in2007. The results for the year are stated net of all running costs as well asthe performance fee earned by the Manager. SHAREHOLDER MATTERS Fundraising An offer for subscription is currently expected to be launched in early 2014 toraise gross proceeds of up to £10 million. The securities note which willcontain the subscription form and the full terms and conditions, will be sentto existing shareholders as soon as it is published. Share price discount policy In November 2012 the Company announced that it would seek to maintain a midshare price discount of 5 per cent to NAV instead of the previous policy of a10 per cent discount to NAV. I am pleased to report that significant progresshas been made in meeting this target. The mid share price discount to NAVaveraged 6.3 per cent in the twelve months to 30 September 2013. During theyear the Company bought in to Treasury 1,005,000 shares at an average discountof 6.3 per cent and sold 200,000 shares out of Treasury at a discount of 4.97per cent to NAV. The net number of shares bought back during the yearrepresents approximately 1.1 per cent of the shares in issue (excluding sharesheld in treasury) at the beginning of the financial year. In view of this experience, the Company will continue to try and maintain a midshare price discount to NAV of 5 per cent. However, the share price discountpolicy will be kept under continuous review and may be subject to revision.Shares will be bought back depending on market conditions at the time and onlywhere the Directors believe such a transaction to be in the best interests ofall shareholders. VCT legislation A recent Treasury consultation regarding the use of "Enhanced Share Buy Backs"has no direct impact on your Company as we have never used such structures andhave preferred to create an orderly market for all shareholders by striving tokeep the discount rate low. However, the Company's Manager has participated indiscussions regarding proposed legislation with the aim of identifying andreducing the impact of any unintended adverse consequences that might arise. In addition, the European Commission is currently undertaking a review of thestate aid regulations including the risk capital guidelines under which VCTsare approved at the European level. The aim of the review is to set out a clearframework to allow member states to grant aid without the need for the EuropeanCommission to be involved. Our trade association, the Association of InvestmentCompanies ("AIC") is engaged in the discussion and the Manager has provideddata and case studies to assist the construction of a suitable response. Management Arrangements The Board has considered the impact on your Company of EU driven legislationregulating Alternative Investment Fund Managers, into which category we fall,along with most other investment funds in the UK. To minimise the regulatorycost of compliance with this directive we have decided that the Company willregister directly under the rules. This will not affect the arrangements withthe Manager (ISIS) who will continue to manage the investment process on a dayto day basis reporting to the Board. Annual General Meeting I look forward to meeting as many shareholders as possible at our sixteenthAnnual General Meeting to be held on Wednesday, 18 December 2013 at thePlaisterers' Hall, One London Wall, London, EC2Y 5JU at 10:30 a.m. This will befollowed by presentations from the Manager, a light lunch and a shareholderworkshop. OUTLOOK There is a growing consensus that the outlook for the UK economy is recoveringand there is a greater degree of optimism than has existed for many years. TheCompany's portfolio has demonstrated a high degree of resilience since 2008.This is testament to the expertise and skill of the Manager who has helpedsteer portfolio companies through the difficult times, enabling them toincrease profits and employment. The overall portfolio remains widely diversified, well resourced and adequatelyfunded. There are also encouraging signs that the number of availableinvestment opportunities is increasing with eight unquoted investmentscompleted in the year together with some notable successful exits. We believethat the Company is well placed to take advantage of the recovery as it gathersmomentum. We will continue to focus on delivering a consistent yield forshareholders while protecting the asset base. Clive ParrittChairman18 November 2013 Manager's Review The year has been characterised by a stronger period of new investment,particularly in unquoted investments. Five new unquoted investee companies havebeen added to the portfolio and a further one has been added since the date ofthese Accounts. In addition, strong upward performance had been delivered by the quotedportfolio which is a welcome reward for patience through an uncertain marketover the recent past. The unquoted portfolio has remained robust and deliveredtwo successful realisations of longstanding investments. Portfolio Review Overview The net assets of £75.8 million were invested as follows: Asset class NAV % of Number of Annual return £m NAV investees % Unquoted £36.5 48 26 5 Quoted £27.2 36 47 43 Wood Street Microcap £6.1 8 34 47 Cash and near cash £6.0 8 - - During the year there were: ● New investments of £4.2 million in 9 new companies and £1.4 million in 10follow ons; ● Divestments of £9.2 million from 4 full exits and 5 partial realisations. Each quarter the director of general trading and profitability of all investeecompanies is recorded so that the Board can monitor the overall health andtrajectory of the portfolio. At 30 September 2013, 78 per cent of the 73companies in the portfolio (excluding Wood Street Microcap) were progressingsteadily or better. Unquoted Private Equity Portfolio After a strong year of growth last year of 8 per cent, the unquoted portfolioshowed more modest growth this year of 5 per cent including income. Theunquoted portion of the portfolio is valued using a consistent process everythree months which the Board oversees and approves. Almost all of the valuecreation in unquoted investments comes from operational improvements (revenueand margin growth), rather than financial leverage A very pleasing result during the period was the successful realisation of twolongstanding investments. Independent Living Services Ltd, the care businessbased in Scotland, has been in the portfolio since 2005 and was sold to MearsGroup plc generating a profit multiple of 2.5x cost. MLS Ltd, the schoollibrary software business, was an investment from 2006 that realised 2.8x coston its sale to Capita plc. These represent strong realised returns. Since the period end, there has been a further significant realisation.CableCom has been in the portfolio since 2007 and manages internet services tohigh density accommodation such as student accommodation. The business has beensold via a secondary management buy-out and the realisation has delivered 4.8xthe original cost of investment which is an excellent result. In addition, a £5million investment (£1.25 million for Baronsmead VCT 2) has been negotiated inthe new transaction on the same terms as the lead private equity buyer as ISISbelieves there is an opportunity for further growth. Quoted Portfolio (AIM traded and other listed investments) There has been a significant uplift in the quoted portfolio of 43 per centreflecting a positive re-rating of the small cap sector in the year. Thisrecovery has been welcome following recent years of headwinds from achallenging AIM market environment and weak share prices. The performance of the quoted portfolio also reflected the changes introducedby the ISIS Quoted Investment team since 2009. The Quoted team is now morelikely to build progressive stakes. An investment in a new smaller companymight start at an initial low level. As the team become more comfortable withperformance and where it is possible within the constraints of VCT qualifyinginvesting, the holding will be increased. Several more significant holdings ofover 20 per cent have now been built where the team has a closer, moreinfluential relationship and can utilise some of the good practice from PrivateEquity experience. In addition, during the weaker AIM market, the teamendeavoured to focus on the fundamentals of the investees and demonstratedpatient support when market sentiment depressed share prices of soundcompanies. The ISIS team believes the benefits of this work are now beingreflected in improved Quoted performance. Realisations during the year from the quoted portfolio totalled £4.9 million atan average multiple of 3.9x cost which is an excellent result. Notably withinthis is the full realisation due to a takeover of FFastFill plc (2.8x cost) andthe partial sales in the market of IDOX plc (at 5.5x cost) and Staffline Groupplc (at 6.0x). Whilst it is expected that work in the Quoted arena will deliver futurepositive growth, the high annual growth achieved in this period should beconsidered as exceptional. Wood Street Wood Street Microcap Investment Fund ("Wood Street") was established by ISIS inMay 2009 to provide flexibility for the Baronsmead VCTs to invest in larger andmore liquid non VCT qualifying AIM and Small Cap opportunities. It representsanother innovation introduced by the ISIS Quoted team to seek performanceimprovement. At 30 September 2013, Baronsmead VCT 2 had invested £3.5 millionthrough Wood Street into a portfolio of 34 companies, now valued at £6.1million. Wood Street generated a positive return of 47 per cent over the year. Liquid assts (cash and near cash) Baronsmead VCT 2 had cash and near cash resources of approximately £6.0 millionat the year-end. This asset class is conservatively managed to take minimal orno capital risk, a strategy outlined in prospectuses that have been issued inthe past. In addition, investments within the Wood Street fund are expected to berelatively more liquid than other investments as explained in the sectionabove. This gives the Manager the possibility of realising cash from WoodStreet should this ever be required to supplement liquid assets. Unquoted investments During the year, £4.0 million was invested in 8 unquoted companies including 5new additions to the unquoted portfolio, one of which utilised an existingacquisition vehicle. The new unquoted investments were: ● Create Health is an internationally renowned fertility clinic which is theUK's leading specialist in natural and mild IVF techniques. Natural and mildIVF uses lower levels of drugs and is viewed as more ethical and healthier - itis used widely in advanced overseas fertility markets and is growing inpopularity in the UK. The investment will fund the opening of a new flagshipsite in London. ● Eque2 is a software business that was previously owned by Sage plc and knownas Sage Construction. It provides enterprise wide software systems that caterfor firms of all sizes in the construction industry, helping them to controland manage all types of construction projects. ● Armstrong Craven is an HR consultancy and provider of specialist executivesearch services to many large global and national clients. It has offices inManchester and London. The ISIS support helped the original founder andmanagement team acquire the business from its parent plc in a Management BuyOut. ● Luxury for Less is a fast growing online bathroom products retailer whichoperates the transactional website www.bathempire.com. In 2012, the businesswas recognised as the Small Online Business of the Year. ISIS will help thebusiness expand its range and help fund new facilities to support growth. Theinvestment was made by using an already established acquisition vehicle andtherefore is not listed as a new investment in the following tables. ● Key Travel is a leading travel management company dedicated to serving thetravel requirements of the not-for-profit, academic and faith sectors from itsbases in the UK, Europe and the US. Major clients include Oxfam, Save theChildren and Cambridge University. Travel arranged for clients will breakthrough the £100m mark this year. The investment will help support thecontinued growth of the business. After the period end, Baronsmead VCT2 invested £1.0 million in an unquotedinvestment, Carousel Logistics Limited, a provider of bespoke logistics andsupply chain solutions. Top Ten Investments The average investment value of the top ten companies held by Baronsmead VCT 2is £2.9 million per company. Because these investments are normally held by theother Baronsmead VCTs, the total managed by ISIS in each investee issignificantly larger than this, which enables ISIS to dedicate significantresource to manage each investment and their progress. The top ten investeesemploy some 2,277 people, which is an increase of 24 per cent over the lastyear. Their turnover has also grown by some 21 per cent. In this year's AnnualReport, each of the top ten companies is described in more detail. Investment Management ISIS continues to invest in its skills and capacity with over 40 of its totalteam of 60 devoted to investment management activities across all itsinvestment management activities. Its focus is on generating strong investmentreturns from its portfolio through a mixture of intelligent investmentselection and hands on portfolio management. Its ability to select goodinvestments owes much to its in depth sector research and specialisation and toits strong origination team that help the team to generate proprietary dealflow. Its investments are supported from the outset by an experienced internal valueenhancement team together with a panel of proven Operating Partners who workexclusively with ISIS to assist management teams to deliver both strategicdevelopment and operational efficiencies. Both have enabled ISIS to build astrong track record of producing consistent returns from its unquotedinvestments. ISIS has pursued a strategy of sector specialisation over many years and inthat time its executives have developed in-depth knowledge of these sectors andvaluable networks of contacts which have enabled it to capitalise onopportunities that have presented themselves in an ever changing environment.Its key sectors are: ● Business services ● Financial services ● Consumer markets ● Healthcare & Education ● Technology, Media and Telecommunications Outlook A number of commentators believe that the UK economy is unlikely to experiencesignificant GDP growth in the medium term. This is debatable but it is a fairworking assumption for investors and may mean investment returns are not goingto be easy to capture. However, many of our portfolio companies and their management teams are nowmore experienced at handling the economic uncertainties, including managingtheir growth and operations in a tougher environment than in previous decades.Low bank borrowings within the portfolio give them robust financial structures. ISIS is an active investment manager who partners with our investees to helpthem to grow revenue and earnings and build resilient, well investedbusinesses, able to maintain standards, whilst growing. Our intention is toseek out the best opportunities where growth in driven by innovation andgaining market share through differentiation rather than relying on favourableeconomic growth. We continue to be confident that good levels of performancecan be maintained through the ongoing challenging environment. ISIS EP LLPInvestment Managers18 November 2013 Dividend policy The Board of Baronsmead VCT 2 aim to sustain a minimum annual dividend level atan average of 6.5p per ordinary share, mindful of the need to maintain netasset value. The ability to meet these twin objectives depends significantlyon the level and timing of profitable realisations and cannot be guaranteed.There will be variations in the amounts of dividends paid year on year. Since launch, the average annual tax free dividend paid to shareholders hasbeen 6.64p per share (equivalent to a pre-tax return of 8.85p per ordinaryshare for a higher rate taxpayer). For shareholders who claimed tax reliefs of20 per cent, 30 per cent or 40 percent, their returns would have been higher. Share price discount policy The Company buys back shares if, in the opinion of the Board, a repurchasewould be in the best interests of the Company's shareholders as a whole.Shares are bought back through the market rather than directly fromshareholders. This minimises the number of shares bought back by the Companywhile maximising the opportunity for investors to invest in the Company'sexisting shares. Strategy for achieving objectives Baronsmead VCT 2 plc is a tax efficient Company listed on the London StockExchange's main market for listed securities. Investment Policy To invest primarily in a diverse portfolio of UK growth businesses, whetherunquoted or traded on AIM; Investments are made selectively across a range of sectors in companies thathave the potential to grow and enhance their value. Investment securities The Company invests in a range of securities including, but not limited to,ordinary and preference shares, loan stocks, convertible securities andinterest bearing securities as well as cash. Unquoted investments are usuallystructured as a combination of ordinary shares and loan stocks, whileAIM-traded investments are primarily held in ordinary shares. Pendinginvestment in VCT qualifying and non-VCT qualifying unquoted, AIM-traded andother quoted securities (which may be held directly or indirectly throughcollective investment vehicles), cash is primarily held in interest bearingaccounts, money market open ended investment companies ("OEICs"), UK gilts andtreasury bills. UK companies Investments are primarily made in companies which are substantially based inthe UK, although many of these investees may have some trade overseas. VCT regulation The investment policy is designed to ensure that the Company continues toqualify and is approved as a VCT by HM Revenue and Customs. Amongst otherconditions, the Company may not invest more than 15 per cent by value of itsinvestments calculated in accordance with Section 278 of the Income Tax Act2007 (as amended) ("VCT Value") in a single company or group of companies andmust have at least 70 per cent of its investments by VCT Value throughout theperiod in shares and securities comprised in qualifying holdings. At least 70per cent by VCT Value of qualifying holdings must be in "eligible shares",which are ordinary shares which have no preferential rights to assets on awinding up and no rights to be redeemed, but may have certain preferentialrights to dividends. For funds raised before 6 April 2011, at least 30 percent by VCT Value of qualifying holdings must be in "eligible shares" which areordinary shares which do not carry any rights to be redeemed or preferentialrights to dividends or to assets on a winding up. At least 10 per cent of eachqualifying investment must be in "eligible shares". The companies in which investments are made must have no more than £15 millionof gross assets at the time of investment to be classed as a VCT qualifyingholding. Asset mix The Company aims to be at least 90 per cent invested, directly or indirectly,in VCT qualifying and non-qualifying growth businesses subject always to thequality of investment opportunities and the timing of realisations. It isintended that at least 75 per cent of any funds raised by the Company will beinvested in VCT qualifying investments. Non-VCT qualifying investments held inunquoted, AIM-traded and other quoted companies may be held directly orindirectly through collective investment vehicles. Risk diversification and maximum exposures Risk is spread by investing in a number of different businesses withindifferent qualifying industry sectors using a mixture of securities. Generallyno more than £2.5 million, at cost, is invested in the same company. Themaximum the Company will invest in a single company (including a collectiveinvestment vehicle) is 15 per cent of its investments by VCT Value. The valueof an individual investment is expected to increase over time as a result oftrading progress and a continuous assessment is made of its suitability forsale. Investment style Investments are selected in the expectation that the application of privateequity disciplines, including an active management style for unquotedcompanies, will enhance value and enable profits to be realised from plannedexits. Co-investment The Company aims to invest in larger more mature unquoted and AIM-tradedcompanies and to achieve this it invests alongside the other Baronsmead VCTsand ISIS Growth Fund 1. Management retention The Manager's members and staff invest in unquoted investments alongside theCompany. This scheme is in line with current practice of private equity housesand its objective is to attract, recruit, retain and incentivise the Manager'steam and is made on terms which align the interests of shareholders and theManager. Borrowing powers The Company's policy is to use borrowing for short term liquidity purposes onlyup to a maximum of 25 per cent of the Company's gross assets, as permitted bythe Company's articles. The Company currently has no borrowings. Management The Board has delegated the management of the investment portfolio to theManager. The Manager also provides or procures the provision of companysecretarial, administrative, accounting and custodian services to the Company. The Manager has adopted a 'top-down, sector-driven' approach to identifying andevaluating potential investment opportunities, by assessing a forward view offirstly the business environment, then the sector and finally the specificpotential investment opportunity. Based on its research, the Manager hasselected a number of sectors that it believes will offer attractive growthprospects and investment opportunities. Diversification is also achieved byspreading investments across different asset classes and making investments fora variety of different periods. The Manager's Review above provides a review of the investment portfolio and ofmarket conditions during the year, including the main trends and factors likelyto affect the future development, performance and position of the business. Principal risks, risk management and regulatory environment The Board believes that the principal risks faced by the Company are: - Economic risk - events such as an economic recession and movement in interestrates could affect smaller companies' valuations. - Loss of approval as a Venture Capital Trust - the Company must comply withSection 274 of the Income Tax Act 2007. Any breach of these rules may lead tothe Company losing its approval as a VCT, qualifying shareholders who have notheld their shares for the designated holding period having to repay the incometax relief they obtained and future dividends paid by the Company becomingsubject to tax. The Company would also lose its exemption from corporation taxon capital gains. - Investment and strategic - an inappropriate strategy, poor asset allocationor consistent weak stock selection might lead to under performance and poorreturns to shareholders. Therefore the Company's investment strategy isperiodically reviewed by the Board which considers at each meeting theperformance of the investment portfolio. - Regulatory - the Company is required to comply with the Companies Act 2006,the rules of the UK Listing Authority and United Kingdom Accounting Standards.Breach of any of these might lead to suspension of the Company's Stock Exchangelisting, financial penalties or a qualified audit report. General changes inlegislation, regulations or government policy could significantly influence thedecisions of investors or impact upon the markets in which the Company invests. - Reputational - inadequate or failed controls might result in breaches ofregulations or loss of shareholder trust. - Operational - failure of the Manager's and administrator's accounting systemsor disruption to its business might lead to an inability to provide accuratereporting and monitoring. - Financial - the Board has identified the Company's principal financial riskswhich are set out in the notes to the accounts below. Inadequate controls mightlead to misappropriation of assets. Inappropriate accounting policies mightlead to misreporting or breaches of regulations. - Market risk - investment in AIM traded and unquoted companies by natureinvolve a higher degree of risk than investment in companies traded on the mainmarket. In particular, smaller companies often have limited product lines,markets or financial resources and may be dependent for their management on asmaller number of key individuals. In addition, the market for stock in smallercompanies is often less liquid than that for stock in larger companies,bringing with it potential difficulties in acquiring, valuing and disposing ofsuch stock. - Liquidity risk - the Company's investments may be difficult to realise. Thefact that a share is traded on AIM does not guarantee its liquidity. The spreadbetween the buying and selling price of such shares may be wide and thus theprice used for valuation may not be achievable. - Competitive risk - retention of key personnel of the Manager is vital to thesuccess of the Company. Appropriate incentives are in place to ensure retentionof such personnel. The Board seeks to mitigate the internal risks by setting policy, regularreview of performance, enforcement of contractual obligations and monitoringprogress and compliance. In the mitigation and management of these risks, theBoard applies rigorously the principles detailed in the FRC's "InternalControls: Guidance to Directors". Details of the Company's internal controls are contained in the CorporateGovernance section of the full Annual Report. Performance and key performance indicators ("KPIs") The Board expects the Manager to deliver a performance which meets theobjective of achieving NAV total return which is in the top quartile ofgeneralist VCTs. A review of the Company's performance during the financialperiod, the position of the Company at the year end and the outlook for thecoming year is contained within the Chairman's statement above. The Boardassess the performance of the Manager in meeting the Company's objectivesagainst the primary KPIs as outlined in the Annual Report. Performance Incentive A performance fee will not be payable to the Manager until the total return onshareholders' funds exceeds an annual threshold of the higher of 4 per cent orbase rate plus 2 per cent calculated on a compound basis. To the extent thatthe total return exceeds the threshold over the relevant period then aperformance fee of a blended rate of 16.66 per cent of such excess to 31 March2008, 13.33 per cent to 31 March 2009 and 10 per cent thereafter will be paidto the Manager. The amount of any performance fee which is paid in anaccounting period shall be capped at 5 per cent of shareholders' funds for thatperiod. During the financial year the threshold has been exceeded and a performance feeof £1,436,000 is payable. Environmental, Human Rights, Employee, Social and Community Issues The Board recognises the requirement under Section 414 of the Act to detailinformation about environmental matters (including the impact of the Company'sbusiness on the environment), employee, human rights, social and communityissues; including information about any policies it has in relation to thesematters and effectiveness of these policies. As the Company has no employeesor policies in these matters this requirement does not apply. Gender Diversity The Board has an equal representation of male and female Directors, with thecurrent Board of Directors comprising two female and two male Directors. The Manager has an equal opportunities policy and currently employs 34 men and24 women. Shareholder choice The Board wishes to provide shareholders with a number of choices that enablethem to utilise their investment in Baronsmead VCT 2 in ways that best suittheir personal investment and tax planning and in a way that treats allshareholders equally. • Fund raising | From time to time the Company seeks to raise additional fundsby issuing new shares at a premium to the latest published net asset value toaccount for issue costs. In December 2012, the Company's offer forsubscription to raise £5 million before costs was fully subscribed. • Dividend Reinvestment Plan | The Company offers a Dividend Reinvestment Planwhich enables shareholders to purchase additional shares through the market inlieu of cash dividends. Approximately 1,198,000 shares were bought in this wayduring the year to 30 September 2013. • Buy back of shares | From time to time the Company buys its own sharesthrough the market in accordance with its share price discount policy. TheBoard has undertaken a review of this policy and will, subject to certainconditions, seek to maintain a mid share price discount of approximately 5 percent to net asset value. This constitutes a revision to the Company's existingpolicy of buying back shares through the market at an approximate 10 per centdiscount to the latest published net asset value. Further details are providedin the Chairman's Statement. In the year to 30 September 2013, 1,005,000shares were bought back representing 1.4 per cent of the shares in issue at 30September 212 at an average price which represented a 3.9 per cent discount tothe latest published net asset value. • Secondary market | The Company's shares are listed on the London StockExchange and can be bought using a stockbroker or authorised share dealingservice in the same way as shares of any other listed company. Approximately622,000 shares were bought by investors in the Company's existing shares in theyear to 30 September 2013. On behalf of the Board Clive Parritt, Chairman 18 November 2013 Summary Investment Portfolio Investment Classification at 30 September 2013 Sector by value Percentage Business Services 40% Consumer Markets 15% Financial Services 2% Healthcare & Education 12% Technology, Media & Telecommunications ("TMT") 31% Total Assets by value Percentage Unquoted - loan note 34% Unquoted - equity 14% AIM, listed, PLUS & collective investment vehicles 44% Listed interest bearing securities 4% Net current assets principally cash 4% Time Investments Held by value Percentage Less than 1 year 7% Between 1 and 3 years 27% Between 3 and 5 years 7% Greater than 5 years 59% Table of Investments and Realisations Investments in the year Book costCompany Location Sector Activity £'000 Unquotedinvestments New Create Health London Healthcare Provider of fertility 1,065Limited & services Education Key Travel London Business Travel management company, 954Limited Services focused on the non-profit sector Eque2 Limited Manchester TMT* Enterprise resource planning 877 (ERP) solutions provider to the construction industry Armstrong Manchester Business Provider of executive search 673Craven Limited Services and business intelligence services Follow on Impetus London Business Automotive consultancy andHoldings Services outsourced service providerLimited 230 Playforce Melksham Business Design and installation of 163Holdings Services playground equipmentLimited Valldata Group Melksham Business Payment processing to the 55Limited Services charity sector 4,017Total unquoted investments † AIM-traded &PLUS investments New Bioventix plc Farnham, Surrey Healthcare Develops sheep monoclonal 227 & antibodies Education Ideagen plc Matlock TMT* Compliance software solutions 225 Pinnacle Stirlingshire TMT* B2B telecoms and IT resellerTechnologyGroup plc 169 One Media iP Buckinghamshire TMT* Content acquisition and 56Group plc distribution Follow on Hangar8 plc Oxford Business Business jet management Services 344 Tangent London Business Digital direct marketingCommunications Servicesplc 254 TLA Worldwide London Business Baseball sports managementplc Services and marketing business 113 Accumuli plc Salford TMT* Managed IT security 95 EG Solutions Staffordshire TMT* Back office optimisationplc software company 78 Green BusinessCompliance plc Worcester Services Small business compliance 50 ParagonEntertainment ConsumerLimited London Markets Visitor attraction business 45 Total AIM-traded & PLUSinvestments 1,656 Total investments in the year 5,673 \* Technology, Media and Telecommunications ("TMT"). †In addition, Consumer Investment Partners, an existing portfolio companyestablished in 2012 to seek investments in the Consumer Markets sector,invested £0.96 million in Luxury for Less, an online bathroom productsretailing business. Realisations in the year 30 September First 2012 Overall investment valuation Proceeds╪ multiple*Company date £'000 £'000 return Unquoted realisations FullIndependent Living tradeServices Limited sale Sep 05 2,705 3,426 2.5 Kidsunlimited Group LoanLimited repayment Jun 01 113 176 † Full tradeMLS Limited sale Jul 06 1,036 984 2.8 LoanValldata Group Limited repayment Jan 11 450 540 1.2 Consumer Investment LoanPartners Limited repayment Apr 12 45 45 1.0 Total Unquoted realisations 4,349 5,171 AIM-traded & listed realisations MarketIDOX plc sale Jan 09 1,721 2,347 5.5 MarketStaffline Group plc sale Jul 00 889 1,575 6.0 Full Jun 07 557 874 2.8 tradeFFastFill plc sale Full tradeActive Risk Group plc sale May 10 90 126 0.8 Total AIM-traded & listed realisations 3,257 4,922 Total realisations in the year 7,606 10,093# ╪ Proceeds at time of realisation including redemption premium and interest. * Includes interest / dividends received, loan note redemptions and partialrealisations accounted for in prior periods. † Kidsunlimited Group Limited was realised in April 2008. As part of theconsideration, Baronsmead VCT 2 received £113,000 in loan stock, which wasredeemed in April 2013. The overall multiple return for the investment inKidsunlimited was 4.9 times original cost. #Proceeds of £2,000 were alsoreceived in respect of Adventis Group plc and £2,000 in respect of ConclusiveLogic Limited, both of which were written off in a prior period. Ten Largest Investments The top ten investments by current value at 30 September 2013 illustrate thediversity and size of investee companies within the portfolio. This financialinformation is taken from publicly available information, which has beenaudited by the auditors of the investee companies. 1. CABLECOM NETWORKING HOLDINGS LIMITED - Clevedon All ISIS EP LLP managed funds First investment: May 2007 Total cost: £5,600,000 Total equity held: 48.00% Baronsmead VCT 2 only Cost: £1,381,000 Valuation: £5,447,000 Valuation basis: Exit value % of equity held: 10.56% Year ended 30 September 2012 2011 £ million £ million Sales: 15.2 12.2 EBITA: 1.9 1.4 Net Assets 0.3 0.3 No. of Employees: 68 61 (Source: CableCom Networking Holdings Limited, Report and Financial Statement30 September 2012) Note: This investment was sold after the year end. 2. NEXUS VEHICLE HOLDINGS LIMITED - Leeds All ISIS EP LLP managed funds First investment: February 2008 Total cost: £9,500,000 Total equity held: 56.00% Baronsmead VCT 2 only Cost: £2,367,000 Valuation: £4,748,000 Valuation basis: Earnings multiple % of equity held: 12.32% Year ended 30 September 2012 2011 £ million £ million Sales: 36.5 38.3 EBITA: 3.3 4.3 Net Assets: 1.8 1.7 No. of Employees: 113 90 (Source: Nexus Vehicle Holdings Limited, Report & Financial Statements 30September 2012). 3. STAFFLINE GROUP PLC - Nottingham All ISIS EP LLP managed funds First investment: July 2000 Total cost: £290,000 Total equity held: 4.42% Baronsmead VCT 2 only Cost: £145,000 Valuation: £3,213,000 Valuation basis: Last Traded Price % of equity held: 2.21% Year ended 31 December 2012 2011 £ million £ million Sales: 367.0 288.3 EBITA: 10.7 10.3 Net Assets: 39.8 34.9 No. of Employees: 693 498 (Source: Staffline Group Plc, Report and Financial Statements 31 December2012) 4. CSC (WORLD) LIMITED - Pudsey, Leeds All ISIS EP LLP managed funds First investment: January 2008 Total cost: £6,450,000 Total equity held: 40.03% Baronsmead VCT 2 only Cost: £1,606,000 Valuation: £2,838,000 Valuation basis: Exit value % of equity held: 8.81% Year ended 31 March 2012 2011 £ million £ million Sales: 7.9 7.3 EBITA: 2.4 2.3 Net Liabilities: (2.0) (1.3) No. of Employees: 59 58 (Source: Cobco 867 Limited, Financial Statements 31 March 2012) 5. KAFEVEND HOLDINGS LIMITED - Crawley All ISIS EP LLP managed funds First investment: October 2005 Total cost: £5,024,000 Total equity held: 66.50% Baronsmead VCT 2 only Cost: £1,252,000 Valuation: £2,569,000 Valuation basis: Discounted Offer % of equity held: 15.79% Year ended 30 September 2012 2011 £ million £ million Sales: 19.1 18.4 EBITA: 2.5 1.9 Net Assets 2.2 1.5 No. of Employees: 97 105 (Source: Kafevend Holdings Limited, Directors Report and Financial Statements30 September 2012) 6. IDOX PLC - London All ISIS EP LLP managed funds First investment: May 2002 Total cost: £1,641,000 Total equity held: 5.01% Baronsmead VCT 2 only Cost: £614,000 Valuation: £2,498,000 Valuation basis: Last traded price % of equity held: 1.84% Year ended 31 October 2012 2011 £ million £ million Sales: 57.9 38.6 EBITA: 12.8 9.5 Net Assets: 38.9 34.4 No. of Employees: 467 363 (Source: IDOX Plc, Directors' Report and Financial Statements 31 October 2012). 7. CREW CLOTHING HOLDINGS LIMITED - London All ISIS EP LLP managed funds First investment: November 2006 Total cost: £5,395,000 Total equity held: 25.51% Baronsmead VCT 2 only Cost: £1,344,000 Valuation: £1,999,000 Valuation basis: Earnings Multiple % of equity held: 6.08% Year ended 28 October 2012 2011 £ million £ million Sales: 48.5 40.7 EBITA: 3.5 3.3 Net Assets: 6.0 5.7 No. of Employees: 363 311 (Source: Crew Clothing Holdings Limited, Report and Financial Statements 28October 2012) 8. NETCALL PLC - Hemel Hempstead All ISIS EP LLP managed funds First investment: July 2010 Total cost: £4,354,000 Total equity held: 20.50% Baronsmead VCT 2 only Cost: £869,000 Valuation: £1,968,000 Valuation basis: Bid price % of equity held: 4.08% Year ended 30 September 2013 2012 £ million £ million Sales: 16.1 14.6 EBITA: 3.4 3.1 Net Assets: 16.9 15.5 No. of Employees: 141 123 (Source: Netcall plc, Annual Report and Accounts 30 June 2013) 9. INSPIRED THINKING GROUP LIMITED - Birmingham All ISIS EP LLP managed funds First investment: May 2010 Total cost: £3,200,000 Total equity held: 22.50% Baronsmead VCT 2 only Cost: £796,000 Valuation: £1,837,000 Valuation basis: Earnings Multiple % of equity held: 4.95% Year ended 31 August 2012 2011 £ million £ million Sales: 32.7 21.5 EBITA: 1.6 1.4 Net Assets: 2.0 0.1 No. of Employees: 158 117 (Source: Inspired Thinking Group Holdings Limited, Report and FinancialStatements 31 August 2012) 10. FISHER OUTDOOR LEISURE HOLDINGS LIMITED - St Albans All ISIS EP LLP managed funds First investment: June 2006 Total cost: £5,700,000 Total equity held: 44.00% Baronsmead VCT only Cost: £1,423,000 Valuation: £1,682,000 Valuation basis: Earnings Multiple % of equity held: 10.45% Year ended 31 July 2012 2011* £ million £ million Sales: 32.7 43.6 EBITA: 0.1 2.7 Net (Liabilities)/assets: (0.8) 1.2 No. of Employees: 118 110 (Source: Fisher Outdoor Leisure Holdings Limited, Directors Report andFinancial Statements 31 July 2012) *18 month period ended 31 July 2011. The Company changed its year end from 31January to 31 July EBITA: Earnings before interest, tax and amortisation Extract from the Report of the Directors The Chairman's Statement and the Corporate Governance statement in the AnnualReport form part of the Report of the Directors. Results and Dividends The Directors present the sixteenth Report and audited financial statements ofthe Company for the year ended 30 September 2013. Ordinary shares £'000 Profit on ordinary activities after taxation 10,325 Final dividend for 2012 of 5.0p per ordinary share (3,772) paid on 18 January 2013 First interim dividend of 3.0p per ordinary share (2,254) paid on 14 June 2013 Second interim dividend of 6.5p per ordinary share (4,882) paid on 20 September 2013 Total dividends paid during the year (10,908) Issue and Buy-Back of Shares As a result of a top-up offer on 21 December 2012 the Company allotted4,471,998 ordinary shares at a price of 111.80p representing 5.2 per cent ofthe then issued share capital with an aggregate nominal value of £447,199.80raising £5,000,000 of new funds in total. The terms of issue were set out inthe Offer document dated 20 November 2012 and the offer price was set on 21December 2012 The Company also bought back 1,005,000 ordinary shares with a nominal value of10p each to be held in treasury, representing an aggregate cost of £964,575.200,000 ordinary shares were sold from treasury during the period. Shares willnot be sold from treasury at a discount wider than the discount prevailing atthe time the shares were initially bought back by the Company. The Companyholds 10,023,819 ordinary shares in treasury representing 11.75 per cent of theissued share capital as at 18 November 2013. This was the maximum number ofshares held in treasury during the year. Management ISIS EP LLP manages the investments for the Company. The liquid assets withinthe portfolio (being cash, gilts and other assets, which are not categorised asventure capital investments for the purpose of the FCA's rules) have beenmanaged by FPPE LLP. This is a limited liability partnership, which isauthorised and regulated by the FCA and which has the same controlling membersas the Manager. The Manager has continued to act as the Manager of the Companyand as the Investment Manager of the Company's illiquid assets (being allAIM-traded and other venture capital investments). The Manager also provides or procures the provision of secretarial,administrative and custodian services to the Company. The management agreementmay be terminated at any date by either party giving twelve months' notice oftermination. Under the management agreement, the Manager receives a fee of 2.0per cent per annum of the net assets of the Company. If the managementagreement is terminated, the Manager is only entitled to the management feespaid to it and any interest due on unpaid fees. In addition, the Manager receives an annual secretarial and accounting fee of £36,380 (linked to the movement in the UK Retail Price Index ("RPI")), subjectto annual review, plus a variable fee of 0.125 per cent of the net assets ofthe Company which exceed £5 million. The annual secretarial and accounting feeis subject to a maximum of £105,634 per annum (linked to the movement in RPI)subject to annual review. Annual running costs are capped at 3.5 per cent of the net assets of theCompany (excluding any performance fee payable to the Manager and irrecoverableVAT), any excess being refunded by the Manager by way of an adjustment to itsmanagement fee. The running cost as at 30 September 2013 was 2.49 per cent. It is the Board's opinion that the continuing appointment of ISIS EP LLP on theterms agreed is in the best interests of shareholders as a whole. The Boardbelieves that the knowledge and experience accumulated by the Manager in theperiod since the launch of the first Baronsmead VCT in 1995 is reflected inprocesses which are designed to find, manage and realise good quality growthbusinesses. Co-investment Scheme The Co-investment Scheme was introduced in November 2004. Members of theManager's investment team invest their own capital into a proportion of theordinary shares of each and every unquoted investment made by the BaronsmeadVCTs. The shares held by the members of the Co-investment Scheme in anyportfolio company can only be sold at the same time as the investment held bythe Baronsmead VCTs is sold. In addition, any prior ranking financialinstruments, such as loan stock, held by the Baronsmead VCTs have to be repaidin full together with any agreed priority annual return before any gain accruesto the ordinary shares. This ensures that the Baronsmead VCTs achieve a goodpriority return before profits accrue to the Co-investment Scheme. The Board is keen to ensure that the Manager continues to have one of the bestinvestment teams in the VCT and private equity market place and considers thescheme to be essential in order to attract, retain and incentivise the besttalent. The scheme is in line with current market practice in the privateequity industry and the Board believes that it aligns the interests of theManager with those of the Baronsmead VCTs since executives have to invest theirown capital in every unquoted transaction and cannot decide selectively inwhich investments to participate. In addition the co-investment only deliversa return after each VCT has realised a priority return built into thestructure. The executives participating in the Co-investment Scheme subscribe jointly fora portion (currently 12 per cent) of the ordinary shares available to theBaronsmead VCTs in each unquoted investment. The level of participation wasincreased from 5 per cent in 2007 when the Manager's performance fee wasreduced from 20 per cent to its current level of 10 per cent. Since the formation of the scheme in 2004, 52 executives have invested a totalof £781k in 39 companies. At 30 September 2013 eleven of these investmentshave been realised generating proceeds of £103m for the Baronsmead VCTs and £5.1m for the Co-investment Scheme. For Baronsmead VCT 2 the average moneymultiple on these eleven realisations was 2.5 times cost. Had theco-investment shares been held instead by the Baronsmead VCTs that moneymultiple would have been 2.7 times cost. Over the period of nine years (basedupon the current number of shares in issue) this equates to approximately 1.7pper share. The Board reviews the operation of the Co-investment Scheme at each quarterlyvaluation meeting. The Co-investment Scheme was also independently reviewedduring the period by Singer Capital Markets who confirmed that the investmentswere compliant with the Co-investment Scheme rules. ISISEquity Partners - Advisory Fees During the year to 30 September 2013, ISIS EP LLP received income of £146,000(2012: £130,000) from investee companies in connection with advisory fees andincurred abort fees of £1,000 (2012:£59,000), with respect to investmentsattributable to Baronsmead VCT2. Directors' fees of £203, 000 were received in relation to services provided tocompanies in the investment portfolio during the year. VCT Status Adviser The Company has retained PricewaterhouseCoopers LLP ("PwC) as their VCT TaxStatus Advisors to advise it on compliance with VCT requirements. PwC reviewnew investment opportunities, as appropriate, and review regularly theinvestment portfolio of the Company. PwC work closely with the Manager butreport directly to the Board. Environment The Company seeks to conduct its affairs responsibly and environmental factorsare, where appropriate, taken into consideration with regard to investmentdecisions. Global Greenhouse Gas Emissions The Company has no greenhouse gas emissions to report from the operations ofthe Company, nor does it have responsibility for any other emissions producingsources under the Companies Act 2006 (Strategic Report and Directors' Reports)Regulations 2013, including those within our underlying investment portfolio. Substantial Interests in Share Capital At 18 November 2013 the Company was not aware of any beneficial interestsexceeding three per cent of the ordinary share capital in circulation. Going Concern After making enquiries, and bearing in mind the nature of the Company'sbusiness and assets, the Directors consider that the Company has adequateresources to continue in operational existence for the foreseeable future. Inarriving at this conclusion the Directors have considered the liquidity of theCompany and its ability to meet obligations as they fall due for a period of atleast twelve months from the date that these financial statements wereapproved. As at 30 September 2013 the Company held cash balances & investmentsin UK Gilts with a combined value of £5,874,000. Cash flow projections havebeen reviewed and show that the Company has sufficient funds to meet both itscontracted expenditure and its discretionary cash outflows in the form of theshare buyback programme and dividend policy. The Company has no external loanfinance in place and therefore is not exposed to any gearing covenants. Statement of Directors' Responsibilities in respect of the Annual Report andthe Financial Statements The Directors are responsible for preparing the Annual Report and the FinancialStatements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for eachfinancial year. Under that law they have elected to prepare the financialstatements in accordance with UK Accounting Standards and applicable law ("UKGAAP"). Under company law the directors must not approve the financial statementsunless they are satisfied that they give a true and fair view of the state ofaffairs of the Company and of the profit or loss of the Company for thatperiod. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • state whether applicable UK Accounting Standards have been followed, subjectto any material departures disclosed and explained in the financial statements;and • prepare the financial statements on the going concern basis unless it isinappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that aresufficient to show and explain the Company's transactions and disclose withreasonable accuracy at any time the financial position of the Company andenable them to ensure that the financial statements comply with the CompaniesAct 2006. They have general responsibility for taking such steps as arereasonably open to them to safeguard the assets of the Company and to preventand detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible forpreparing a Strategic Report, Directors' Report, Directors' Remuneration Reportand Corporate Governance Statement that complies with that law and thoseregulations. The Directors are responsible for the maintenance and integrity of thecorporate and financial information included on the Company's website. Visitorsto the website should be aware that legislation in the UK governing thepreparation and dissemination of financial statements may differ fromlegislation in other jurisdictions. Responsibility Statement of the Directors in respect of the Annual FinancialReport We confirm that to the best of our knowledge: • the Financial Statements, prepared in accordance with UK AccountingStandards, give a true and fair view of the assets, liabilities, financialposition and profit or loss of the Company; and • the Annual Report includes a fair review of the development and performanceof the business and the position of the Company together with a description ofthe principal risks and uncertainties that they face. • the report and accounts, taken as a whole, are fair, balanced, andunderstandable and provide the necessary information for shareholders to assessthe company's performance, business model and strategy. On behalf of the Board Clive Parritt Chairman 18 November 2013 NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company'sstatutory accounts for the years ended 30 September 2013 and 2012 but isderived from those accounts. Statutory accounts for 2012 have been delivered tothe Registrar of Companies, and those for 2013 will be delivered in due course.The Auditors have reported on those accounts; their report was (i) unqualified,(ii) did not include a reference to any matters to which the Auditors drewattention by way of emphasis without qualifying their report and (iii) did notcontain a statement under Section 498 (2) or (3) of the Companies Act 2006. Thetext of the Auditors' report can be found in the Company's full Annual Reportand Accounts at www.baronsmeadvct.co.uk Income Statement For the year ended 30 September 2013 2013 2012 Revenue Capital Total Revenue Capital Total Notes £'000 £'000 £'000 £'000 £'000 £'000 Unrealised gains onmovements in fairvalue of investments 2.3 - 8,678 8,678 - 5,842 5,842 Realised gains ondisposal ofinvestments 2.3 - 1,535 1,535 - 750 750 Income 2.5 3,456 - 3,456 1,101 - 1,101 Investment managementfee 2.6 (368) (2,541) (2,909) (337) (1,011) (1,348) Other expenses 2.6 (435) - (435) (381) - (381) Profit on ordinaryactivities beforetaxation 2,653 7,672 10,325 383 5,581 5,964 Taxation on ordinaryactivities 2.9 (505) 505 - (16) 16 - Profit on ordinaryactivities aftertaxation 2,148 8,177 10,325 367 5,597 5,964 Return per ordinaryshare: Basic 2.2 2.89p 10.99p 13.88p 0.52p 7.93p 8.45p All items in the above statement derive from continuing operations. There are no recognised gains and losses other than those disclosed in theIncome Statement The revenue column of the Income Statement includes all income and expenses.The capital column accounts for the realised and unrealised profit or loss oninvestments and the proportion of the management fee charged to capital. Reconciliation of Movements in Shareholders' Funds For the year ended 30 September 2013 2013 2012 Notes £'000 £'000 Opening shareholders' funds 72,433 64,999 Profit on ordinary activities after taxation 10,325 5,964 Net proceeds of share issues & buy-backs 3,944 3,284 Other costs charged to capital 3.2 (5) (10) Dividends paid 2.4 (10,908) (1,804) Closing shareholders' funds 75,789 72,433 Balance Sheet As at 30 September 2013 2013 2012 Notes £'000 £'000 Fixed assets Investments 2.3 72,865 69,118 Current assets Debtors 2.7 1,965 310 Cash at bank and on deposit 2,875 3,465 4,840 3,775 Creditors (amounts falling due within one year) 2.8 (1,916) (460) Net current assets 2,924 3,315 Net assets 75,789 72,433 Capital and reserves Called-up share capital 3.1 8,534 8,087 Share premium account 3.2 7,809 3,531 Capital reserve 3.2 41,921 47,452 Revaluation reserve 3.2 17,274 12,742 Revenue reserve 3.2 251 621 Equity shareholders' funds 75,789 72,433 Net asset value per share - Basic 2.1 100.63p 101.10p - Treasury 2.1 99.88p 99.83p The financial statements were approved by the Board of Directors on 18 November2013 and were signed on its behalf by: Clive Parritt Chairman) Cash Flow Statement For the year ended 30 September 2013 2013 2012 £'000 £'000 Operating activities Investment income received 2,738 1,343 Deposit interest received 20 6 Investment management fees paid (1,449) (1,311) Other cash payments (441) (375) Net cash inflow/(outflow) from operating activities 868 (337) Financial investment Purchases of investments (36,620) (99,024) Disposals of investments 42,131 100,857 Net cash inflow from financial investment 5,511 1,833 Equity dividends paid (10,908) (1,804) Net cash outflow before financing (4,529) (308) Financing Net proceeds of share issues & buybacks 3,944 3,241 Other costs charged to capital (5) (10) Net cash inflow from financing 3,939 3,231 (Decrease)/increase in cash (590) 2,923 Reconciliation of net cash flow to movement in net cash (Decrease)/increase in cash (590) 2,923 Opening cash position 3,465 542 Closing cash at bank and on deposit 2,875 3,465 Reconciliation of profit on ordinary activities beforetaxation to net cash inflow/(outflow) from operatingactivities Profit on ordinary activities before taxation 10,325 5,964 Gains on investments (10,213) (6,592) (Increase)/decrease in debtors (700) 276 Increase in creditors 1,456 44 Income reinvested - (29) Net cash inflow/(outflow) from operating activities 868 (337) Notes to the Accounts In preparing the 2013 financial statements, Baronsmead VCT 2 has made a numberof changes in structure, layout and wording in order to make the financialstatements less complex and more relevant for shareholders and other users. We have grouped notes into sections under three key categories: 1. Basis of preparation 2. Investments, performance and shareholder returns 3. Other required disclosures 1. Basis of Preparation Basis of accounting These financial statements have been prepared under UK Generally AcceptedAccounting Practice ("UK GAAP") and in accordance with the Statement ofRecommended Practice ("SORP") for investment trust companies and venturecapital trusts issued by the Association of Investment Companies ("AIC") inJanuary 2009 and on the assumption that the Company maintains VCT status. 2. Investments, performance and shareholder returns 2.1 Net asset value per share Number of shares Net asset value per Net asset share value attributable attributable 2013 2012 2013 2012 2013 2012 number number pence pence £'000 £'000 Ordinary shares (basic) 75,314,950 71,647,952 100.63 101.10 75,789 72,433 Ordinary shares (including 85,338,769 80,866,771 99.88 99.83 85,236 80,730treasury) The treasury net asset value per share as at 30 September 2013 includedordinary shares held in Treasury valued at the mid share price of 94.25p at 30September 2013 (2012: 90.00p). 2.2 Return per share Weighted average number of Return per Net profit on ordinary ordinary shares ordinary share activities after taxation 2013 2012 2013 2013 2013 2012 number number pence pence £'000 £'000 Revenue 74,397,698 70,544,594 2.89 0.52 2,148 367 Capital 74,397,698 70,544,594 10.99 7.93 8,177 5,597 Total 13.88 8.45 10,325 5,964 2.3 Investments Purchases or sales of investments are recognised at the date of transaction. Investments are measured at fair value. For AIM-traded and listed securitiesthis is either bid price or the last traded price, depending on the conventionof the exchange on which the investment is traded. In respect of unquoted investments, these are valued at fair value by theDirectors using methodology which is consistent with the International PrivateEquity and Venture Capital Valuation guidelines ("IPEV"). This meansinvestments are valued using an earnings multiple, which has a discount orpremium applied which adjusts for points of difference to appropriate stockmarket or comparable transaction multiples. Alternative methods of valuationwill include application of an arm's length third party valuation, a provisionon cost or a net asset value basis. Gains and losses arising from changes in the fair value of the investments areincluded in the Income Statement for the period as a capital item. Transactioncosts on acquisition are included within the initial recognition and the profitor loss on disposal is calculated net of transaction costs on disposal. All investments are initially recognised and subsequently measured at fairvalue. Changes in fair value are recognised in the income statement. The methods of fair value measurement are classified into a hierarchy based onreliability of the information used to determine the valuation. • Level 1 - Fair value is measured based on quoted prices in an active market. • Level 2 - Fair value is measured based on directly observable current marketprices or indirectly being derived from market prices. • Level 3 - Fair value is measured using a valuation technique that is notbased on data from an observable market. 2013 2012 £'000 £'000 Level 1 Listed interest bearing securities 2,999 5,939 Investments traded on AIM 24,994 20,750 Investments listed on PLUS 346 - Investments listed on LSE 1,901 1,526 30,240 28,215 Level 2 Collective investment vehicle (Wood Street Microcap Investment 6,140 4,183Fund) Level 3 Unquoted investments 36,485 36,720 72,865 69,118 Level 1 Level 2 Level 3 Interest Traded Collective bearing Traded on Listed investment securities on AIM PLUS on LSE vehicle Unquoted Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Opening book cost 5,939 17,338 - 1,536 3,525 28,038 56,376 Opening unrealised - 3,412 - (10) 658 8,682 12,742appreciation/(depreciation) Opening valuation 5,939 20,750 - 1,526 4,183 36,720 69,118 Movements in theyear: Purchases at cost 29,992 1,429 227 - - 4,017 35,665 Sales - proceeds (32,932) (4,926) - - - (4,273) (42,131) -realised gains/(losses) on sales - 1,611 - - - (76) 1,535 Unrealised gainsrealised during theyear - 2,215 - - - 1,931 4,146 Increase/(decrease)in unrealisedappreciation - 3,915 119 375 1,957 (1,834) 4,532 Closing valuation 2,999 24,994 346 1,901 6,140 36,485 72,865 Closing book cost 2,999 17,667 227 1,536 3,525 29,637 55,591 Closing unrealisedappreciation - 7,327 119 365 2,615 6,848 17,274 Closing valuation 2,999 24,994 346 1,901 6,140 36,485 72,865 Equity shares - 24,994 346 1,901 6,140 10,907 44,288 Loan notes - - - - - 25,578 25,578 Fixed income 2,999 - - - - - 2,999securities Closing valuation 2,999 24,994 346 1,901 6,140 36,485 72,865 The gains and losses included in the above table have all been recognised inthe Income Statement above. For Level 3 unquoted investments, the effect on fair value of changing one ormore assumptions to reasonably possible alternatives has been considered. Theportfolio has been reviewed and both downside and upside reasonable possiblealternatives have been identified and applied to the valuation of each of theinvestments. The inputs flexed in determining the reasonably possiblealternative assumptions include the earnings stream and marketabilitydiscount. Applying the downside alternatives the value of the unquoted investments wouldbe £2.1 million or 5.8% lower. Using the upside alternatives the value would beincreased by £2.6 million or 7%. 2.4 Dividends 2013 2012 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Amounts recognised asdistributions to equity holders inthe year: For the year ended 30 September2013 - First interim dividend of 3.0pper ordinary share paid on 14 June2013 451 1,803 2,254 - - - - Second interim dividend of 6.5pper ordinary share paid on 20September 2013 1,690 3,192 4,882 - - - For the year ended 30 September2012 - First interim dividend of 2.5pper ordinary share paid on 15 June2012 - - - - 1,804 1,804 - Final dividend of 5.0p perordinary share paid on 18 January2013 377 3,395 3,772 - - - 2,518 8,390 10,908 - 1,804 1,804 2.5 Income Interest income on loan notes and dividends on preference shares are accrued ona daily basis. Provision is made against this income where recovery isdoubtful. Where the terms of unquoted loan notes only require interest or a redemptionpremium to be paid on redemption, the interest and redemption premium isrecognised as income once redemption is reasonably certain. Until such dateinterest is accrued daily and included within the valuation of the investment. Income from fixed interest securities and deposit interest is included on aneffective interest rate basis. Dividends on quoted shares are recognised as income when the relatedinvestments are marked ex-dividend and where no dividend date is quoted, whenthe Company's right to receive payment is established. 2013 2012 Quoted Unquoted Quoted Unquoted securities securities Total securities securities Total £'000 £'000 £'000 £'000 £'000 £'000 Income from investments† UK franked 505 - 505 323 - 323 UK unfranked 8 2,468 2,476 21 689 710 UK unfranked - - - -reinvested - 29 29 Redemption premium - 455 455 - 33 33 513 2,923 3,436 344 751 1,095 Other income╪ Deposit income 14 6 Other income 6 - Total income 3,456 1,101 Total income comprises: Dividends 505 323 Interest 2,951 778 3,456 1,101 † All investments have been designated at fair value through profit or loss oninitial recognition, therefore all investment income arises on investments atfair value through profit or loss. ╪ Other income on financial assets not designated fair value through profit orloss. 2.6. Investment management fee and other expenses All expenses are recorded on an accruals basis. 2013 2012 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Investment management fee 368 1,105 1,473 337 1,011 1,348 Performance fee - 1,436 1,436 - - - 368 2,541 2,909 337 1,011 1,348 Management fees are allocated 25 per cent income: 75 per cent capital derivedin accordance with the Board's expected split between long term income andcapital returns. Performance fees are allocated 100 per cent to capital. The management agreement may be terminated by either party giving twelve monthsnotice of termination. The Manager, ISIS EP LLP, receives a fee of 2 per cent per annum of the netassets of the Company, calculated and payable on a quarterly basis. The Manager is entitled to a performance fee if at the end of any calculationperiod, the total return on shareholders' funds exceeds the threshold of UKbase rate plus 2 per cent (calculated on a compound basis). The Manager isentitled to 10 per cent of the excess. The amount of any performance fee whichis paid in respect of a calculation period shall be capped at 5 per cent ofshareholders' funds at the end of the period. Amounts payable to the Manager at the year end are disclosed in note 2.8. Other expenses 2013 2012 £ £ '000 '000 Directors' fees 81 78 Secretarial and accounting fees paid to the Manager 134 125 Remuneration of the auditors and their associates: - audit 22 22 - other services supplied pursuant to legislation (interim review) - 5 - other services supplied relating to taxation 6 11 - other services supplied relating to financial statements' 6 -reorganisation Other 186 140 435 381 Information on directors' remuneration is given in the directors' remunerationtable in the full Annual Report. Charges for other services provided by the auditors in the year ended 30September 2012 were in relation to the interim reviews and tax compliance work(including iXBRL). The Audit Committee reviews the nature and extent ofnon-audit services to ensure that independence is maintained. The Directorsconsider that the auditors were best placed to provide such services. 2.7 Debtors 2013 2012 £'000 £'000 Prepayments and accrued income 1,010 310 Amounts paid future settlement 955 - 1,965 310 2.8 Creditors (amounts falling due within one year) 2012 2013 £ £'000 '000 Management, performance, secretarial and accounting fees due to the 1,859 397Manager Other creditors 57 63 1,916 460 2.9 Tax UK corporation tax payable is provided on taxable profits at the current rate. Provision is made for deferred taxation on all timing differences calculated atthe current rate of tax relevant to the benefit or liability. The tax charge for the year is lower than the standard rate of corporation taxin the UK for a company. The differences are explained below: 2013 2012 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Profit on ordinaryactivities before taxation 2,653 7,672 10,325 383 5,581 5,964 Corporation tax at 23.5% 624 1,803 2,427 100 1,451 1,551(2012: 26 per cent) Effect of: Non-taxable gains - (2,400) (2,400) - (1,714) (1,714) Non-taxable dividend (119) - (119) (84) - (84)income Other movements - 92 92 - 247 247 Tax charge/(credit) for theyear 505 (505) - 16 (16) - At 30 September 2013 the Company had surplus management expenses of £2,349,443(2012: £1,785,618) which have not been recognised as a deferred tax asset. Thisis because the Company is not expected to generate taxable income in a futureperiod in excess of the deductible expenses of that future period and,accordingly, the Company is unlikely to be able to reduce future taxliabilities through the use of existing surplus expenses. Due to the Company'sstatus as a VCT, and the intention to continue meeting the conditions requiredto obtain approval in the foreseeable future, the Company has not provideddeferred tax on any capital gains and losses arising on the revaluation ordisposal of investments. 3. Other Required Disclosures 3.1 Called-up share capital Allotted, called-up and fully paid: Ordinary shares £'000 80,866,771 ordinary shares of 10p each listed at 30 September 2012 8,087 4,471,998 ordinary shares of 10p each issued during the year 447 85,338,769 ordinary shares of 10p each listed at 30 September 2013 8,534 9,218,819 ordinary shares of 10p each held in Treasury at 30 September (922)2012 (200,000) ordinary shares of 10p each sold during the year previously 20held in treasury 1,005,000 ordinary shares of 10p each repurchased during the year and (101)held in treasury 10,023,819 ordinary shares of 10p each held in treasury at 30 September (1,003)2013 75,314,950 ordinary shares of 10p each in circulation* at 30 September 7,5312013 * Carrying one vote each. During the year the Company bought back 1,005,000 ordinary shares and sold fromtreasury 200,000 ordinary shares representing 1.0 per cent of the ordinaryshares in issue at the beginning of the financial year. There were no changes in share capital between the year end and when thefinancial statements were approved. Treasury shares When the Company reacquires its own shares, they are held as treasury sharesand not cancelled. Shareholders have authorised the Board to re-issue treasury shares at adiscount to the prevailing NAV subject to the following conditions: - It is in the best interests of the Company; - Demand for the Company's shares exceeds the shares available in the market; - A full prospectus must be produced if funds raised are greater than €5m; and - HMRC will not consider these 'new shares' for the purposes of thepurchasers' entitlement to initial income tax relief. 3.2 Reserves Gains and losses on realisation of investments of a capital nature are dealtwith in the capital reserve. Purchases of the Company's own shares to be eitherheld in treasury or cancelled are also funded from this reserve. 75 per cent.of management fees are allocated to the capital reserve in accordance with theBoard's expected split between long term income and capital returns. Distributable reserves Non-distributable reserves Capital Revenue Total Share Revaluation Total reserve reserve premium reserve* £'000 £'000 £'000 £'000 £'000 £'000 At 1 October 2012 47,452 621 48,073 3,531 12,742 16,273 Gross proceeds ofshare issues - - - 4,553 - 4,553 Purchase of shares forTreasury (964) - (964) - - - Sale of shares fromTreasury - cost 190 - 190 - - - Sale of shares fromTreasury - loss (2) - (2) - - - Expenses of shareissue and buybacks (5) - (5) (275) - (275) Other costs charged tocapital (5) - (5) - - - Reallocation of prioryear unrealised gains 4,146 - 4,146 - (4,146) (4,146) Realised gain ondisposal ofinvestments # 1,535 - 1,535 - - - Net increase in valueof investments # - - - - 8,678 8,678 Management feecapitalised # (2,541) - (2,541) - - - Taxation relief fromcapital expenses # 505 - 505 - - - Revenue return onordinary activitiesafter taxation # - 2,148 2,148 - - - Dividends paid in theyear (8,390) (2,518) (10,908) - - - At 30 September 2013 41,921 251 42,172 7,809 17,274 25,083 # The total of these items is £10,325,000 which agrees to the total profit onordinary activities. * Changes in fair value of investments are dealt with in this reserve. Distributable reserves include the net unrealised loss on investments whoseprices are quoted in an active market and deemed readily realisable in cash. Share premium is recognised net of issue costs. The Company does not have any externally imposed capital requirements. 3.3 Financial instruments risks The Company's financial instruments comprise equity and fixed interestinvestments, cash balances and liquid resources including debtors andcreditors. The Company holds financial assets in accordance with its investmentpolicy to invest in a diverse portfolio of UK growth businesses. The Company's investing activities expose it to a range of financial risks.These key risks and the associated risk management policies to mitigate theserisks are described below. Market risk Market risk includes price risk on investments and interest rate risk oninvestments and other financial assets and liabilities. Price risk The investment portfolio is managed in accordance with the policies andprocedures described in the full Annual Report and Accounts. Investments in unquoted stocks, AIM & PLUS quoted companies involve a higherdegree of risk than investments in the main market. The Company aims to reducethis risk by diversifying the portfolio across business sectors and assetclasses. Management performs continuing analysis on the fair value of investments andthe Company's overall market positions are monitored by the Board on aquarterly basis. 2013 2012 5% 5% decrease increase 5% increase 5% decrease in share in share in share in share price price price price effect on effect on effect on effect on % of total net assets net assets % of total net assets net assets investment and profit and profit investment and profit and profit £'000 £'000 £'000 £'000 LSE, AIM & 37 1,362 (1,362) 38 1,323 (1,323)PLUS Unquoted 50 1,824 (1,824) 53 1,836 (1,836) Valuation methodology includes the application of earnings multiples derivedfrom either listed companies with similar characteristics or recent comparabletransactions. Therefore the value of the unquoted element of the portfolio mayalso indirectly be affected by price movements on the listed exchanges. Interest rate risk The Company has the following investments in fixed and floating rate financialassets: 2013 2012 Weighted Weighted average average Weighted time for Weighted time for average which average which Total interest rate Total interest rate investment rate is fixed investment rate is fixed £'000 % days £'000 % days Fixed rate loan note 25,578 9.27 # 25,947 9.41 #securities Fixed interest instruments 2,999 0.23 14 4,699 0.18 10 Floating rate instrument - - - 1,240 - -("OEIC") Cash at bank & on deposit 2,875 - - 3,465 - - 31,452 35,351 # Due to the complexity of the instruments and uncertainty surrounding timingof realisation the weighted average time for which the rate is fixed has notbeen calculated. Credit risk Credit risk refers to the risk that counterparty will default on its obligationresulting to a financial loss to the Company. The Investment Manager monitorscredit risk on an ongoing basis. At the reporting date, the Company's financial assets exposed to credit riskamounted to the following: 2013 2012 £'000 £'000 Investments in fixed rate instruments 2,999 4,699 Investments in floating rate instruments - 1,240 Cash at bank & on deposit 2,875 3,465 Interest, dividends and other receivables 1,965 310 7,839 9,714 Credit risk arising on fixed interest instruments is mitigated by investing inUK Government Stock. Credit risk on unquoted loan stock held within unlisted investments isconsidered to be part of market risk as disclosed earlier in the note. Credit risk arising on transactions with brokers relates to transactionsawaiting settlement. Risk relating to unsettled transactions is considered tobe small due to the short settlement period involved and the high creditquality of the brokers used. The Board monitors the quality of service providedby the brokers used to further mitigate this risk. All the assets of the Company which are traded on a recognised exchange areheld by JP Morgan Chase ("JPM"), the Company's custodian. The Board monitorsthe Company's risk by reviewing the custodian's internal controls reports asdescribed in the Corporate Governance section of this report. The cash held by the Company is held by JPM and Lloyds TSB. The Board monitorsthe Company's risk by reviewing regularly the internal control reports of thesebanks. Should the credit quality or the financial position of either bankdeteriorate significantly the Investment Manager will seek to move the cashholdings to another bank. There were no significant concentrations of credit risk to counterparties at 30September 2013 or 30 September 2012. No individual investment exceeded 7.2 percent. of the net assets attributable to the Company's shareholders at 30September 2013 (2012: 6.5 per cent.) Liquidity risk The Company's financial instruments include investments in unquoted companieswhich are not traded in an organised public market, as well as AIM and PLUStraded equity investments, all of which generally may be illiquid. As a result,the Company may not be able to liquidate quickly some of its investments inthese instruments at an amount close to their fair value in order to meet itsliquidity requirements, or to respond to specific events such as deteriorationin the creditworthiness of any particular issuer. The Company's liquidity risk is managed on an ongoing basis by the InvestmentManager in accordance with policies and procedures in place as described in theExtract from the Report of the Directors above. The Company's overall liquidityrisks are monitored on a quarterly basis by the Board. The Company maintains sufficient investments in cash and readily realisablesecurities to pay accounts payable and accrued expenses. At 30 September 2013these investments were valued at £5,874,000 (2012: £9,404,000). 3.4 Related parties Related party transactions include Management, Secretarial, Accounting andPerformance fees payable to the Manager, ISIS EP LLP, as disclosed in notes 2.6and 2.8, and fees paid to the Directors as disclosed in note 2.6. In addition,the Manager operates a Co-investment Scheme, detailed in the Extract from theReport of the Directors above, whereby employees of the Manager are entitled toparticipate in all unquoted investments alongside the Company. 3.5 Post balance sheet event The Company's investment in CableCom Networking Holdings Limited was sold to afinancial buyer on 25 October 2013 for proceeds of £5,684,000 of which £1,250,000 was rolled over into a new investment in CableCom alongside thefinancial buyer and £740,000 into a bridging loan note that is expected to berefinanced within twelve months. A new investment of £955,000 was made in Carousel Logistics Limited, a providerof bespoke logistics and supply chain solutions, on 2 October 2013. National Storage Mechanism A copy of the Annual Report and Financial Statements will be submitted shortlyto the National Storage Mechanism ("NSM") and will be available for inspectionat the NSM, which is situated at: http://www.morningstar.co.uk/uk/NSM Annual General Meeting The Company's Annual General Meeting will be held on 18 December 2013 at12.30pm at the Plaisterers' Hall, One London Wall, London, EC2Y 5JU. Neither the contents of the Company's website nor the contents of any websiteaccessible from hyperlinks on this announcement (or any other website) isincorporated into, or forms part of, this announcement.