Final Results

British SmallerTechCompaniesVCT2PLC 27 April 2006 BRITISH SMALLER TECHNOLOGY COMPANIES VCT 2 PLC UNAUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 British Smaller Technology Companies VCT 2 plc ("the Company") today announces its unaudited preliminary results for the year ended 31 December 2005. Chairman's Statement The year has been one of consolidation and reorganisation, culminating in this Company's decision to acquire the business of British Smaller Technology Companies VCT plc. This process was completed on 8 December 2005 and I am delighted to welcome our new shareholders to the Company. We expect the enlarged Company to benefit from the economies of scale resulting from a larger VCT. In addition, a more broadly spread portfolio will diversify investment risk across a wider range of technologies, markets and industry sectors. Operations The trend in the second half of the year followed that of the first six months. The general performance of the portfolio was insufficient to offset the operating costs of the Company, resulting in a reduced net asset value over the year as a whole. At the date of the acquisition of British Smaller Technology Companies VCT plc, the net asset value of the Company had fallen to 75.5 pence per share from a cum-dividend level of 97.1 pence per share at 31 December 2004 (as restated in line with the transition to International Financial Reporting Standards (IFRS)); a net decrease of 18% on the ex-dividend net asset value of 92.1 pence per share. As I commented in my interim statement, although disappointing, this volatility is not unexpected in what is still a relatively young, developing portfolio. The failure at ExpressOn Biosystems Limited and Broadreach Networks Limited and the significant write down in the value of Purely Proteins Limited have had a material effect on the net asset value of the Company; as has the fall in share price of AIM quoted Cozart plc, where the share price fell to its all-time low in December 2005. The investment in Cozart was increased as a consequence of the transaction with British Smaller Technology Companies VCT plc. From the date of this transaction to 31 December 2005, Cozart's share price fell 18%. After a significant recovery of the share price during February, based on the release of its interim results and the announcement of a joint development agreement with Philips Corporate Technologies, the share price fell back to nearer its end of 2005 levels in early April before recovering again. Given the relative size of holding within the overall portfolio, the volatility of Cozart's share price will naturally cause some limited volatility in our own net asset value. Nevertheless, we remain confident that the long term potential of this company remains substantial. A total of £867,000 was invested in the year in 8 companies, all but two being in support of existing portfolio businesses where your Board and its Investment Adviser, YFM Private Equity Limited, considered this was merited. The two new investments were in Digital Healthcare Limited, which I commented on in my interim statement and Intuita Limited, a long-established IT solutions provider to end-users in the construction industry, to fund the buy-out and simultaneous acquisition of one of its competitors. The enlarged business has since been renamed Tekton Group Limited. In addition, the acquisition of the business of British Smaller Technology Companies VCT plc brought a further £6 million of investment asset value into the portfolio. During the year, your Company realised part of its holding in Cozart plc and sold its investments in Arakis Limited and Tamesis Limited. Arakis was sold to Japanese biopharmaceutical company, Sosei Co Limited, which acquired Arakis for a total value of £106.5 million. Your Company accepted part payment in the form of Sosei shares which are quoted on the Tokyo Stock Exchange and, therefore, has added this company to its current portfolio. The quoted markets continue to have an appetite for good businesses and during the year, one of the portfolio companies, Oxonica plc, was admitted to AIM at a market capitalisation of £35.3 million. Approximately half of your Company's holding was sold following the flotation in order to realise some profit as the share price rose steeply on demand for the stock. Since that time, the share price has been quite volatile and we continue to hold the remaining shares. I am pleased to report that, following the year end, one of your portfolio companies has successfully achieved a listing on the London Stock Exchange. Optos plc completed its IPO on 10 February 2006, valuing the company at £165 million. The uplift in value resulting from the IPO, which more than doubles the value of your Company's holding in this investment, has not been reflected in the results to 31 December 2005. Your Board remains confident of the long term potential of the portfolio. Financial Results and Dividend With Reporting Standards committed to international convergence, and following the transaction with British Smaller Technology Companies VCT plc toward the end of the year, your Board has considered the option of full adoption of IFRS. In line with our policy of transparent and full reporting, the decision was reached to report the 2005 results under IFRS. Although the interim results were presented under UK accounting standards, the directors consider that there would have been no material difference to those financial statements had they been reported under IFRS. The reported loss for the year was £421,000 after taking account of realised gains of £251,000, net unrealised valuation reductions in the fair value of investments of £1.37 million and the accounting implications of the acquisition. A special interim dividend of 2 pence per share, having been declared subject to the completion of the acquisition of British Smaller Technology Companies VCT, was paid on 10 February 2006 to shareholders of the enlarged, combined Company. This has been recognised in the accounts as the contractual obligation existed at the balance sheet date. No final dividend is being recommended to shareholders. As a result of the acquisition of British Smaller Technology Companies VCT plc and subsequent valuation movements, the net asset value of the combined entity at the end of the year was 74.2 pence per share after allowing for the special interim dividend of 2 pence per share. The total return per share for shareholders who invested in the Company under the terms of the original Prospectus is now 81.2 pence per share. I am pleased to report that the acquisition was completed in line with the budgeted costs outlined in the Prospectus. VCT Qualifying Status Your Board has responsibility for maintaining certain investment ratios on a continuing basis so that your Company retains its VCT qualifying status and that, subject to personal circumstances, shareholders remain eligible for the available VCT tax reliefs. I can confirm that all required ratios continue to be met. I can also report that British Smaller Technology Companies VCT plc was fully qualifying up to the date of business transfer to this Company. Ordinary Share Capital and Shareholder Relations A total of 8,000 shares of 10 pence each were allotted in May 2005 at a subscription price of £1 per share following the exercise of Warrants. Any outstanding Warrants have now lapsed and the credit balance in the Warrant Reserve has been transferred to retained earnings. As a consequence of certain shareholders electing to be paid dividends in the form of shares under the dividend reinvestment scheme, a total of 77,311 Ordinary shares were issued at a price of 76.8 pence per share in July 2005 to those shareholders in respect of the final dividend for the year ended 31 December 2004. As authorised by shareholders, the Company operates a share buyback policy to enable those shareholders with a liquidity requirement to be able to sell their shares in what is, otherwise, still a very illiquid VCT market. The Board has a stated policy of purchasing shares at a 10% discount to the latest net asset value and has approved such buybacks where it considers it to be in the best interests of remaining shareholders to do so. During the year, a total of 200,000 shares were purchased by the Company, and cancelled, at an average price of 78.8 pence per share. The acquisition of the business of British Smaller Technology Companies VCT plc, enabled by the legislative changes in September 2004, was effected by that company being placed in a members' voluntary liquidation under Section 110 of the Insolvency Act 1986 and for its assets and liabilities to be transferred to this Company in exchange for new Ordinary shares based on the relative net asset values of both companies at that date. A total of 9,588,347 Ordinary shares were issued by the Company in consideration for the assets and liabilities transferred. Your Board and YFM Private Equity Limited remain committed to keeping shareholders informed of both the progress of the investment portfolio and general VCT industry developments. To this end, the latest shareholder workshops were held on 14 March 2006 at the Cabinet War Rooms Museum, London and on 16 March at the National Railway Museum, York. Further workshops will be scheduled for later in the year. Outlook The consolidation of the two technology-focused VCTs provides an opportunity to move forward on a sounder foundation given the enlarged shareholder base and combined resources. Shareholders will benefit from the resulting cost economies of scale and your Board remains optimistic about the long term potential of the portfolio, whilst acknowledging that relatively early stage businesses, particularly of a technology-based nature, will produce some short-to-medium term volatility in value. The AIM market remains buoyant and the flotations of Oxonica and, latterly, the IPO of Optos, which follow on the previous successes of Amino Technologies and Cozart, show there is wider investor appetite for technology businesses that have proven applications and market traction. Sir Andrew Hugh Smith Chairman 27 April 2006 Unaudited Balance Sheet at 31 December 2005 Notes 2005 2004 £000 £000 Assets Non-current assets Investments at fair value through profit or loss 9,503 3,775 ------- ------- Current assets Trade and other receivables 150 112 Cash and cash equivalents 3,834 3,824 ------- ------- 3,984 3,936 Liabilities Current liabilities Trade and other payables (647) (105) ------- ------- Net current assets 3,337 3,831 ------- ------- Net assets 12,840 7,606 ======= ======= Shareholders' equity Share capital 1,731 783 Share premium 69 9 Capital redemption reserve 21 1 Revaluation reserve - 223 Warrant reserve - 3 Merger reserve 5,525 - Special reserve - 5,364 Other reserve 2 2 Retained earnings 5,492 1,221 ------- ------- Total shareholders' equity 12,840 7,606 ======= ======= Net asset value per Ordinary share 6 74.2p 97.1p ======= ======= Unaudited Income Statement for the year ended 31 December 2005 Notes 2005 2004 £000 £000 Income 82 77 Administrative expenses: Investment advisory fee (172) (197) Other expenses (186) (178) ------- ------- (358) (375) Excess of acquirer's interest in the fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over cost 975 - Gain on realisation of investments 251 1,398 Losses on investments held at fair value (1,371) (20) ------- ------- (Loss) profit on ordinary activities before taxation (421) 1,080 Taxation - - ------- ------- (Loss) profit for the year from continuing operations (421) 1,080 ------- ------- (Loss) earnings per Ordinary share basic and diluted 5 (5.14)p 13.79p ======= ======= Unaudited Statement of Changes in Equity Share Share premium Revaluation Merger Special *Other Retained Total capital account reserve reserve reserve reserves earnings equity £000 £000 £000 £000 £000 £000 £000 £000 Balance at 31 December 2003 782 - 354 - 6,592 6 (1,118) 6,616 ------- ------- ------- ------- ------- ------- ------- ------- Valuation losses taken to equity - - (100) - - - - (100) Gains realised on disposal - - (31) - - - 31 - ------- ------- ------- ------- ------- ------- ------- ------- Net income recognised directly in equity - - (131) - - - 31 (100) Profit for the year - - - - - - 1,080 1,080 ------- ------- ------- ------- ------- ------- ------- ------- Total recognised income and expense for the period - - (131) - - - 1,111 980 Exercise of warrants 1 9 - - - - - 10 Transfer of the special reserve - - - - (1,228) - 1,228 - ------- ------- ------- ------- ------- ------- ------- ------- Balance at 31 December 2004 783 9 223 - 5,364 6 1,221 7,606 ------- ------- ------- ------- ------- ------- ------- ------- Loss for the year - - - - - - (421) (421) Transfer of the revaluation reserve on adoption of IAS39 - - (223) - - - 223 - Dividends - - - - - - (738) (738) Purchase of own shares (20) - - - (159) 20 - (159) Exercise of warrants 1 8 - - - (1) - 8 Issue of share capital on acquisition 959 - - 5,561 - - - 6,520 Issue costs - - - (36) - - - (36) Issue of share capital on DRIS** 8 52 - - - - - 60 Transfer of the special reserve - - - - (5,205) - 5,205 - Transfer of the warrant reserve - - - - - (2) 2 - ------- ------- ------- ------- ------- ------- ------- ------- Balance at 31 December 2005 1,731 69 - 5,525 - 23 5,492 12,840 ======= ======= ======= ======= ======= ======= ======= ====== *Other reserves include the capital redemption reserve, the warrant reserve and other reserve. **DRIS being the Dividend Re-investment Scheme. Shareholders' equity as at 31 December 2003 and 2004 has been restated following adoption of IFRS. The adoption of IFRS caused no restatement to the 31 December 2003 balances. The special reserve, which is a distributable reserve, has been transferred into retained earnings during the year. Unaudited Cash Flow Statement for the year ended 31 December 2005 2005 2004 £000 £000 Net cash flows from operating activities (290) (307) ------- ------- Cash flows from investing activities Cash acquired 1,386 - Costs of acquisition (39) - ------- ------- Acquisition net of cash acquired 1,347 - Purchase of fixed asset investments (867) (1,881) Proceeds from sale of fixed asset investments 331 1,901 ------- ------- Net cash from investing activities 811 20 ------- ------- Cash flows from financing activities Issue of Ordinary shares on exercise of warrants 8 10 Issue costs in respect of the shares issued in consideration for the acquisition (36) - Purchase of own shares and associated warrants (159) - Dividends paid (332) - ------- ------- Net cash (used in) from financing activities (519) 10 ------- ------- Net increase (decrease) in cash and cash 2 (277) equivalents Cash and cash equivalents at beginning of the 3,824 4,083 year Effect of market value changes in cash 8 18 equivalents ------- ------- Cash and cash equivalents at the end of the year 3,834 3,824 ======= ======= Notes to Financial Statements for the year ended 31 December 2005 1. Accounting Policies This preliminary announcement does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The information for the year ended 31 December 2004, with the exception of the adjustments in respect of the transition to IFRS, is an extract from the statutory accounts to that date which have been delivered to the Registrar of Companies. Those accounts included an audit report which was unqualified and which did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. The statutory accounts for the year ended 31 December 2005, upon which the auditors have still to report, will be delivered to the Registrar following the Company's annual general meeting. The financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC) as adopted by the European Union. These are the Company's first annual results prepared in accordance with IFRS. Previous financial statements were prepared in accordance with UK Generally Accepted Accounting Principles (UK GAAP) including the requirements of Schedule 4 of the Companies Act 1985. The Company is required to determine its IFRS accounting policies and apply them retrospectively to establish its opening balance sheet under IFRS. The date of transition for the Company is 1 January 2004. In preparing these financial statements certain accounting and valuation methods previously applied under UK GAAP have been amended to comply with IFRS as follows: Under IAS 10 'Events after the Balance Sheet Date' dividends are only recorded where an obligation exists at the balance sheet date. Consequently, dividends which the Company proposes after the balance sheet date are no longer accrued for but are required to be disclosed in the notes to the financial statements. Under IAS 39 'Financial Instruments: Recognition and Measurement', the Company has designated its investments as fair value through profit and loss resulting in a transfer of the of the revaluation reserve to retained earnings. The Company has taken advantage of the exception available to it under IFRS 1 'First-time Adoption of International Financial Reporting Standards' not to adopt IAS 39 and IAS 32 'Financial Instruments: Disclosure and Presentation' retrospectively but to adopt them with effect from 1 January 2005. Consequently, prior year comparatives have not been restated. As required with IFRS 1 'First-time Adoption of International Financial Reporting Standards' reconciliations showing the effects of the changes are set out below. A summary of the principle accounting policies followed is set out below. Income Dividend income on unquoted equity shares is recognised at the time when the right to the income is established. Fixed returns on non-equity shares are recognised on a time apportionment basis so as to reflect the effective yield, provided there is no reasonable doubt that payment will be received in due course. All other income is recognised on an accruals basis. Expenses Expenses are accounted for on an accruals basis. Investments Held at Fair Value All investments are classified as held at fair value through profit or loss. Transaction costs on purchases are expensed immediately through the income statement in accordance with IFRS. All investments are measured at fair value with gains and losses arising from changes in fair value being included in net profit or loss for the year. Quoted investments are valued at market bid prices. Unquoted investments are valued in accordance with IAS 39 'Financial Instruments: Recognition and measurement' and where appropriate the International Private Equity and Valuation Guidelines issued in 2005. A detailed explanation of the valuation policies of the Company will be included in the audited financial statements. Investments are derecognised at the date of disposal. Due to the Company's status as a venture capital trust and the continued intention to meet the conditions required to comply with Section 842AA of the Income and Corporation Taxes Act (1988), no provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments which arises. Although the Company holds more than 20% of the equity of certain companies, it is considered that the investments are held as part of the investment portfolio. Accordingly, and as permitted by IAS 28 'Investments in associates' and IAS 31 'Financial reporting of interest in joint ventures' their value to the Company lies in the marketable value as part of that portfolio. It is not considered that any of the holdings represent investments in associated undertakings. Under IAS 27 'Consolidated and separate financial statements' Control is presumed to exist when the parent owns, directly or indirectly more than half of the voting power by a number of means. The company does not hold more than 50% of the equity of any of the companies within the portfolio. In addition, they do not control any of the companies held as part of the investment portfolio. It is not considered that any of the holdings represent investments in subsidiary undertakings. Cash and Cash Equivalents. Investments in quoted Government Securities are classified as cash equivalents as they meet the definition in IAS 7 'Cash flow statements' of short-term highly liquid investments that are readily convertible into known amounts of cash and subject to insignificant risk of change in value. Government Securities are valued at market bid prices. Deferred Taxation Deferred tax is recognised on all timing differences that have originated, but not reversed, by the balance sheet date. Deferred tax assets are only recognised to the extent that they are regarded as recoverable. Deferred tax is calculated at the tax rates that are expected to apply when the asset is realised. Foreign Exchange Foreign currency assets at the balance sheet date are translated into sterling at the rates of exchange ruling at that date. Transactions in foreign currencies are translated into sterling at the rate of exchange ruling on the date of each transaction. Realised losses or profits on exchange, together with differences arising on the translation of foreign currency assets, are taken to the income statement. Dividends Payable Dividends payable are recognised only when an obligation exists. Interim dividends are recognised when paid and final and special dividends are recognised when approved by Shareholders in general meetings. Segmental Reporting Business segments are considered to be the primary reporting segment. The directors are of the opinion that the Company has engaged in a single segment of business of investing in equity and debt securities and therefore no segmental reporting is provided. Geographical segments are considered to be the secondary reporting segment. Investment income and expenses are all derived from one geographical segment being that of the United Kingdom. An analysis of investments and the remaining assets and liabilities of the Company by geographical segment has not been given as the results are not considered to be significant. Restatement of balances as at 1 January 2004 The following is a reconciliation of the balance sheet as at 1 January 2004 (the date of transition to IFRS) as previously reported at that date to the restated figures following adoption of IFRS. Notes Previously Effect of reported transition Restated UK GAAP to IFRS Reclassifications IFRS £000 £000 £000 £000 Assets Non-current assets Investments at fair value through profit or loss 2,535 - - 2,535 ------- ------- ------- ------- Current assets Trade and other receivables 26 - - 26 Investments 2 1,026 - (1,026) - Cash 2 3,057 - (3,057) - Cash and cash equivalents 2 - - 4,083 4,083 ------- ------- ------- ------- 4,109 - - 4,109 Liabilities Current liabilities Trade and other payables (28) - - (28) ------- ------- ------- ------- Net current assets 4,081 - - 4,081 ------- ------- ------- ------- Net assets 6,616 - - 6,616 ======= ======= ======= ======= Shareholders' equity Share capital 782 - - 782 Capital redemption reserve 1 - - 1 Revaluation reserve 354 - - 354 Warrant reserve 4 - - 4 Special reserve 6,592 - - 6,592 Other reserve 1 - - 1 Retained earnings (1,118) - - (1,118) ------- ------- ------- ------- Total shareholders' equity 6,616 - - 6,616 ======= ======= ======= ======= Net asset value per Ordinary share 84.6p - - 84.6p ======= ======= ======= ======= The adoption of IFRS resulted in no adjustments to the balances as at 1 January 2004. Restatement of balances as at 31 December 2004 The following is a reconciliation of the balance sheet at 31 December 2004 and the income statement and cash flow statement for the year ended 31 December 2004 as previously reported in the annual report to the restated figures following adoption of IFRS. Balance Sheet as at 31 December 2004 Notes Previously Effect of reported transition Restated UK GAAP to IFRS Reclassifications IFRS £000 £000 £000 £000 Assets Non-current assets Investments at fair value through profit or loss 3,775 - - 3,775 ------- ------- ------- ------- Current assets Trade and other receivables 112 - - 112 Investments 2 1,280 - (1,280) - Cash 2 2,544 - (2,544) - Cash and cash equivalents 2 - - 3,824 3,824 ------- ------- ------- ------- 3,936 - - 3,936 Liabilities Current liabilities Trade and other payables 3 (497) 392 - (105) ------- ------- ------- ------- Net current assets 3,439 392 - 3,831 ------- ------- ------- ------- Net assets 7,214 392 - 7,606 ======= ======= ======= ======= Shareholders' equity Share capital 783 - - 783 Share premium account 9 - - 9 Capital redemption reserve 1 - - 1 Revaluation reserve 223 - - 223 Warrant reserve 3 - - 3 Special reserve 5,364 - - 5,364 Other reserve 2 - - 2 Retained earnings 3 829 392 - 1,221 ------- ------- ------- ------- Total shareholders'equity 7,214 392 - 7,606 ======= ======= ======= ======= Net asset value per Ordinary share 92.1p 5.0p - 97.1p ======= ======= ======= ======= Income Statement for the year ended 31 December 2004 Notes Previously Effect of reported transition Restated UK GAAP to IFRS IFRS £000 £000 £000 Income 77 - 77 ------- ------- ------- Administrative expenses: Investment advisory fee (197) - (197) Other expenses (178) - (178) ------- ------- ------- (375) - (375) Gain on realisation of investments 1,398 - 1,398 Losses on investments held at fair value (20) - (20) ------- ------- ------- Profit on ordinary activities before taxation 1,080 - 1,080 Taxation - - - ------- ------- ------- Profit for the year from continuing operations 1,080 - 1,080 Dividends 3 (392) 392 - ------- ------- ------- Retained profit for the year 688 392 1,080 ======= ======= ======= Earnings per Ordinary share basic and diluted 13.79p - 13.79p ======= ======= ======= Summarised Cash Flow for the year ended 31 December 2004 Notes Previously Effect of reported transition Restated UK GAAP to IFRS IFRS £000 £000 £000 Net cash used in operating activities (307) - (307) ------- ------- ------- Net cash from investing activities 20 - 20 ------- ------- ------- Net cash used in management of liquid resources 4 (236) 236 - ------- ------- ------- Net cash from financing activities 10 - 10 ------- ------- ------- Net increase in cash and cash equivalents 4 (513) 236 (277) ======= Cash and cash equivalents at beginning of the year 4,083 4,083 Effect of market value changes in cash equivalents 4 18 18 ------- Cash and cash equivalents at the end of the year 3,824 ======= 2. Under IFRS liquid fund investments are now classified as cash equivalents. Cash and cash equivalents being shown together on the face of the Balance Sheet. 3. No provision has been made for the final dividend for the year ended 31 December 2004 of £392,000. Under IFRS, this dividend is not recognised until it is declared. 4. Under IFRS investments in fixed income securities are classified as cash equivalents as they meet the definition of short-term highly liquid investments that are readily convertible into known amounts of cash and subject to insignificant risk of change in value. A cash flow presented under IFRS reconciles the movement in cash and cash equivalents and includes market value changes in cash and cash equivalents. 5. Loss per Ordinary Share The (loss) earnings per Ordinary share is based on net loss from ordinary activities after tax of £421,000 (2004: profit of £1,080,000) and 8,185,000 (2004: 7,830,000) shares, being the weighted average number of shares in issue during the year. The only potentially dilutive shares are those shares which, subject to certain criteria being achieved in the future, may be issued by the Company to meet its obligations under the investment management agreement. No such shares have been issued or are currently expected to be issued. There are, therefore, considered to be no potentially dilutive shares in issue at 31 December 2005 or 31 December 2004. Consequently, basic and diluted earnings per share are the same for the year ended 31 December 2005 and 31 December 2004. 6. Net Asset Value per Share The net asset value per Ordinary share is calculated on attributable assets of £12,840,000 (2004: £7,606,000) and 17,307,124 (2004: 7,833,466) shares in issue at the year end. The Company has no securities that would have a dilutive effect in either period and hence the basic and diluted net asset value per share are the same. 7. Annual Report Copies of the full financial statements for the year ended 31 December 2005 will be available to the public at the registered office of the Company at Saint Martins House, 210-212 Chapeltown Road, Leeds, LS7 4HZ . For further information, please contact: David Hall YFM Private Equity Limited Tel: 0161 832 7603 Alan Davies YFM Private Equity Limited Tel: 0113 294 5000 Jonathan Becher Teather & Greenwood Limited Tel: 0207 426 3269 Michael Bellamy Teather & Greenwood Limited Tel: 0207 426 9547 This information is provided by RNS The company news service from the London Stock Exchange

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