Half-yearly report

Elderstreet VCT plc

I am pleased to present the half yearly report for Elderstreet VCT plc for the six-month period ended 30 June 2008.  The period has been notable for the deterioration in general economic conditions and it is therefore especially pleasing to be able to report an increase in the Ordinary Share net asset value.

 

Net Asset Value

At 30 June 2008, the Company's Net Asset Value ("NAV") per Ordinary Share stood at 88.5p, an increase of 10.1p or 12.9% since 31 December 2007 (after adjusting for the dividend of 3.5p per share paid during the period). 

 

The NAV per 'C' Share at the same date stood at 83.4p, a decrease of 5.5p per 'C' Share (6.2%) since 31 December 2007 (after adjusting for the dividend of 1.5p per share paid during the period). 

 

The Company undertook a small top-up issue for the Ordinary Share pool during the period.  962,377 Ordinary Shares of 5p were issued at an average price of 91.9p per share.  The total funds received under the offer were £884,000 with issue costs thereon of £48,000.

 

Venture capital investments

The Ordinary Share pool made five follow on investments in the period, at a total cost of £924,000, and also achieved two exits, the most significant being that from UM (Holdings) Limited.  The Company's original equity investment was made in the provider of trenchless installation equipment in 1999 at a cost of £53,000, along with an investment in loan stock that was subsequently repaid.  The investment was sold for £1.56 million in March 2008, producing a substantial realised gain. The Board congratulates the management team on delivering another successful and highly profitable exit.

 

Of the investments held at the period end, there were a number of valuation changes over the period.  The most significant changes were uplifts in the valuations of Wessex Automated Switching Products Limited and Baldwin and Francis (Holdings) Limited of £869,000 and £399,000 respectively, both resulting from continued improving trading of the businesses.  The investment in AIM-quoted Mediasurface plc also rose in value by £395,000, caused by a bid approach by Alterian plc.  The bid was declared unconditional in July, resulting in a disposal of the investment for part cash and part Alterian shares.

 

Overall the Ordinary Share pool showed net realised gains of 632,000 and unrealised gains of £1.3 million over the period.

 

The 'C' Share pool made three follow on investments during the period at a total cost of £141,000.  The performance of the pool over the period was hit by the generally poor performance of AIM stocks and produced an unrealised loss of £96,000 for the six months.

 

The listed fixed income securities portfolio (held by the Ordinary Share pool) was valued at £2.6 million at the period end. These funds continue to be managed by Smith and Williamson Investment Management Limited.

 

The return on ordinary activities for the period was as follows:

 

 

The Company will pay an interim dividend to Ordinary Shareholders of 3p per share, comprising of 1.5p revenue dividend and 1.5p capital dividend.  The dividend will be paid on 26 September to Shareholders on the register at 12 September 2008.

In the 'C' Share prospectus published in February 2005, the Company stated its intention to return at least 30p per share (for every £1 invested) to 'C' Shareholders by 30 September 2008.  To date the Company has paid a total of 6p per 'C' Share in dividends. 

 

I am happy to report that the Company will achieve its target by declaring a 'C' Share dividend of 24p per share payable on 26 September 2008.  This will be paid to 'C' Shareholders on the register at 12 September 2008.  Following payment of this dividend 'C' Shareholders will have received dividends and upfront income tax relief totalling 70p per share, against the £1 per share originally subscribed.

Following the payment of the 'C' Share dividend described above, the 'C' Share pool will effectively be fully invested but will also be very small.  This will make the task of maintaining a balanced portfolio for the 'C' Shareholders with adequate levels of liquidity more challenging.

 

In order to simplify the investment management task, the Board is proposing that the 'C' Shares be converted into Ordinary Shares shortly after the payment of the dividend.  It is proposed that the conversion of the 'C' Shares will take place in November based on the relative NAVs of the 'C' Shares and Ordinary Shares as at 30 September 2008. A circular setting out the detailed proposals and seeking Shareholder approval for the conversion will be sent to Shareholders shortly.

The Company continues to operate a policy of buying in for cancellation any of its own shares that become available to ensure that there is liquidity in the market for any Shareholders wishing to dispose of their holdings.

 

During the period the Company purchased 353,754 Ordinary Shares for cancellation at an average price of 76.1p per share and 54,124 'C' Shares for cancellation at an average price of 79.2p per share.

 

Under the Disclosure and Transparency Directive, the Board is now required in the Company's half year results, to report on principal risks and uncertainties facing the Company over the remainder of the financial year.

 

The Board has concluded that the key risks facing the Company over the remainder of the financial period are as follows:

 

(i)       investment risk associated with investing in small and immature businesses; and

(ii)     failure to maintain approval as a VCT.

 

In both cases the Board is satisfied with the Company's approach to these risks.  As a VCT, the Company is forced to have significant exposure to relatively immature businesses.  This risk is mitigated to some extent by holding a well-diversified portfolio.

 

The Company's compliance with the VCT regulations is continually monitored by the Administration Manager, who regularly reports to the Board on the current position.  The Company also retains PricewaterhouseCoopers to provide regular reviews and advice in this area.  The Board considers that this approach reduces the risk of a breach of the VCT regulations to a minimal level.

 

The Board continues to be satisfied by progress made by many of the investments within the Ordinary Share pool, particularly in the current climate.  The relative immaturity of the 'C' Share pool investments has made its performance more vulnerable to the challenging market conditions, however the pool holds a number of investments with good medium term prospects.

 

The economic slowdown is likely to make further profitable exits much more difficult to achieve in the short term, however the Board believes a merged portfolio resulting from the proposed conversion of the 'C' Shares can deliver good results to all Shareholders when conditions improve.

 

Chairman

 

 

UNAUDITED SUMMARISED BALANCE SHEET

as at 30 June 2008

 

for the six months ended 30 June 2008

UNAUDITED INCOME STATEMENT

for the six months ended 30 June 2008

 

for the six months ended 30 June 2008

as at 30 June 2008

 

All venture capital investments are unquoted unless otherwise stated.

 

*  Quoted on AIM

 

for the six months ended 30 June 2008

 

 

 

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

 

1. The unaudited half yearly financial results cover the six months to 30 June 2008 and have been prepared in accordance with the accounting policies set out in the statutory accounts for the year ended 31 December 2007 which were prepared under UK Generally Accepted Accounting Practice ("UK GAAP") and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies" revised December 2005 ("SORP").

 

2. All revenue and capital items in the Income Statement derive from continuing operations.

 

3. The Company has only one class of business and derives its income from investments made in shares, securities and bank deposits.

 

4. The comparative figures are in respect of the six months ended 30 June 2007 and the year ended 31 December 2007 respectively.

 

 

 

The above figures relate to the Company as a whole.  The Special Reserve, Capital Reserve - Realised and Revenue Reserve are all distributable reserves.

 

9. The Directors confirm that, to the best of their knowledge, the half-yearly financial statements have been prepared in accordance with the "Statement: Half-Yearly Financial Reports" issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by:

 

a. DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

 

b. DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

 

10. The unaudited financial statements set out herein do not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985 and have not been delivered to the Registrar of Companies. The figures for the year ended 31 December 2007 have been extracted from the financial statements for that year, which have been delivered to the Registrar of Companies; the auditors' report on those financial statements was unqualified.

 

11. Copies of the unaudited half yearly results will be sent to Shareholders shortly. Further copies can be obtained from the Company's Registered Office and will be available for download from www.downing.co.uk .