Downing Structured Opportunities VCT 1 plc
Final results for the year ended 31 March 2012
CHAIRMAN'S STATEMENT
Introduction
I am pleased to present the Company's Report and Accounts for the year ended 31 March 2012. It has been another busy year for the Company, with both of the established share pools continuing to build their Venture Capital portfolios and reducing the level of funds in their Structured Product portfolios. The Company also launched a new fundraising, creating the 'D' Share pool, which started investing its funds towards the end of the year.
Ordinary Share pool
The Ordinary Share pool raised funds during 2009 and will seek to start returning funds to its Shareholders in 2014. The pool now holds the majority of its funds in Venture Capital investments with approximately 15% of the funds still invested in Structured Products.
Although provisions had to be made against two Venture Capital investments, these were offset by uplifts in other investments, realised gains and investment income. The net asset value per share ("NAV") at 31 March 2012 for the Ordinary Shares was 98.7p and for the 'A' Shares was 0.1p. This represents an increase of 2.5p for a combined holding of one Ordinary Share and one 'A' Share (before taking account of dividends of 5p paid in the year). Total Return (combined NAV plus dividends paid to date) stands at 113.8p per combined share, compared to the initial cost to Shareholders, net of income tax relief, of 70p.
'B' Share pool
The 'B' Share pool raised funds during 2010 and has a target to start returning funds to its Shareholders in 2015. The proportion of the pool held in the Structured Product portfolio has now reduced to approximately 30%, by value, as the pool made a large number of Venture Capital investments over the last year.
All but one of the Structured Products produced a positive return over the year. Within the Venture Capital portfolio, two investments faced significant difficulties. The value of one has been written down and the other was reorganised after the original business went into administration, resulting in a realised loss. The net effect has been a fall in NAV over the year of 4.0p for a combined holding of one 'B' Share and one 'C' Share. Total Return for a combined 'B' and 'C' Share holding now stands at 95.0p, compared to the initial cost to Shareholders, net of income tax relief, of 70p.
'D' Share pool
The 'D' Share offer was launched in August 2011 and, by 31 March 2012, had raised gross proceeds of £4.9 million.
Several Structured Product investments were made prior to the year end. The share pool also made its first group of Venture Capital investments, investing in three companies which own nightclubs in Scotland. A fourth investment is in a company which has contracts in place to manage those nightclubs.
At 31 March 2012, the NAV of the 'D' Shares was 94.5p, which is equal to the issue price less issue costs. The cost to Shareholders (net of income tax relief) of each 'D' Share is 70p.
Full details for each share pool are set out in the Summary, Investment Manager's Report and Review of Investments which are presented separately for each pool below.
Dividends
It is the Company's intention to pay dividends of at least 5.0p per annum on each of the Ordinary, 'B' and 'D' Shares on a twice yearly basis.
In line with this policy, final dividends for the year ended 31 March 2012 are proposed as follows:
Ordinary Shares 2.5p
'B' Shares 2.5p
'D' Shares 2.5p
Subject to approval at the forthcoming AGM, each of the dividends will be paid on 28 September 2012 to Shareholders on the register at the close of business on 7 September 2012.
Share buybacks
The Company operates a share buyback policy whereby, subject to any liquidity and regulatory restrictions, it intends to buy in any of its own shares that become available in the market for cancellation.
The Company's current policy is to undertake any buybacks at a price equal to the latest published NAV (i.e. at nil discount). The Board expects to continue with this policy until 31 December 2012 in respect of Ordinary Shares and 'A' Shares, 31 December 2013 in respect of 'B' Shares and 'C' Shares and 30 September 2016 in respect of 'D' Shares. After these dates, the Board will review the buyback policy for the respective share classes.
No shares were purchased during the year.
A special resolution to continue this policy is proposed for the forthcoming Annual General Meeting ("AGM").
Annual General Meeting
The Company's third AGM will be held at 10 Lower Grosvenor Place, London SW1W 0EN at 10:00 a.m. on 25 September 2012.
One item of special business, seeking approval for the Company to be able to buy its own shares as described above, will be proposed. Notice of the meeting is at the end of this document.
Outlook
The Company's three share pools are each at different stages of their lives.
It is now clear that the timing of the launch of the Ordinary Share pool was particularly favourable, with the pool benefiting from strong performance by its Structured Product portfolio. The task of building the Venture Capital portfolio is complete. The Manager will continue to work closely with the investee companies over the next two years as plans are developed to achieve timely exits at target prices.
The timing of the launch of the 'B' Share pool has not allowed the pool to benefit from such strong Structured Product performance, however, this portfolio is still expected to deliver good results over the full term of its life. It is anticipated that there will be a number of further Venture Capital investments made by the pool over the coming year as this investment phase draws to completion. With three years until investment exits will be sought, close monitoring by the Manager will be essential to ensure that full value is ultimately extracted from the Venture Capital portfolio.
The 'D' Share pool fundraising is ongoing and has to date raised gross proceeds of approximately £7.5 million. The Company's defensive approach to Structured Product investing has demonstrated that these investments can deliver good results even in difficult conditions. The Manager and the Board continue to believe that Structured Products offer good value and, as planned, Structured Product investments have been made by the pool since the year end. Further Venture Capital investments have also been made and we expect to see significant further investment activity by this pool over the coming year.
Lord Flight
Chairman
ORDINARY SHARE POOL SUMMARY
Financial highlights
| 31 March 2012 | 31 March 2011 | |
| Pence | Pence | |
| Net asset value per Ordinary Share | 98.7 | 101.2 |
| Net asset value per 'A' Share | 0.1 | 0.1 |
| Cumulative distributions | 15.0 | 10.0 |
| Total Return per Ordinary Share and 'A' Share | 113.8 | 111.3 |
INVESTMENT MANAGER'S REPORT - ORDINARY SHARE POOL
Introduction
The Ordinary Share pool held three Structured Product investments and 18 Venture Capital investments at the year end and is now fully invested. The majority of the Ordinary Share pool's investments are performing to plan. Four Venture Capital investments have been uplifted in value as a result of strong trading performance, although two have faced some difficulties resulting in a reduction in their valuation at the year end. The pool had a net increase in value of its investments of £167,000 over the year (including Structured Products valuation increase of £84,000).
Net asset value and results
The net asset value ("NAV") per Ordinary Share at 31 March 2012 stood at 98.7p and NAV per 'A' Share at 0.1, an increase of 2.5p for a combined holding of one Ordinary Share and one 'A' Share (after adjusting for dividends paid in the year). Total Return (combined NAV plus cumulative dividends) stood at 113.8p for a holding of one Ordinary and one 'A' Share.
The profit on ordinary activities after taxation for the year was £256,000 (2011: £356,000), comprising a revenue profit of £144,000 (2011: £46,000) and a capital profit of £112,000 (2011: £310,000).
Venture Capital investments
Investment activity
At 31 March 2012, the pool held a Venture Capital portfolio with a total valuation of £8.3 million, comprising 18 investments spread across a number of sectors. During the year, the share pool made further investments totalling £3.5 million, which were offset by divestments of £1.8 million and a net increase in value of £0.1 million.
The pool made 10 investments during the year, two of which were new qualifying investments. An overview of the largest new qualifying, or partially qualifying, investments made during the period is detailed below.
In May 2011, the pool invested £1,063,000 in Redmed Limited which owned The Annexe nightclub in Lincoln city centre. The venue, which is located close to the University of Lincoln, was completely refurbished and relaunched as "Home" in October 2011. Home operates as a large entertainment venue with a restaurant, nightclub with six themed rooms, and a roof terrace all in the one site. Since opening, the business has performed well and in line with expectations.
In August 2011, a £500,000 investment was made in Ecossol Limited, which invests in commercial solar installations. The business benefits from the receipt of Feed-in Tariffs from solar energy generation.
The pool also invested further funds into existing investments as follows:
| Investee company | Amount invested £'000 | |||
| Domestic Solar Limited Rooftop solar panel installer. | 500 | |||
| Atlantic Dogstar Limited Owns and operates a pub in Tooting, South London. | 356 | |||
| Quadrate Catering Limited Operates a Marco Pierre White restaurant in "The Cube", a mixed use building in the centre of Birmingham. | 317 | |||
| Quadrate Spa Limited Operates a spa and health club in "The Cube", a mixed use building in the centre of Birmingham. | 313 | |||
| Bijou Wedding Venues Limited Wedding venue operator. | 150 | |||
| Commercial Street Hotel Limited Operates a 52 bedroom Hotel Indigo in "The Cube", a mixed use building in the centre of Birmingham. | 140 | |||
| Camandale Limited Operates two pubs/bars in Kilmarnock, Scotland. | 70 | |||
| Future Biogas (SF) Limited A 1.4MWh self-contained biogas plant in Norfolk. | 69 |
Portfolio valuation
The majority of the Ordinary Share portfolio performed well during the year with a net valuation uplift of £83,000 recognised at the year end for the Venture Capital investments. Valuation increases arose on four investments: £234,000 in Atlantic Dogstar Limited; £109,000 in Future Biogas (SF) Limited; £69,000 in Bijou Wedding Venues Limited; and £36,000 in Westow House Limited. These increases were partially offset by a £210,000 reduction in the value of Camandale Limited and a £155,000 reduction in the value of The 3D Pub Co Limited.
At the year end, a £210,000 reduction in value was recognised in Camandale Limited which owns two pubs, The Riverbank and The Monkey Bar, located in Kilmarnock, Scotland. After a sustained period of poor trading, the investment partner was removed, the management contracts were terminated, and the subsidiaries were put into administration. A new management team has now been put in place and The Riverbank was purchased out of administration by a new subsidiary of Camandale in January 2012. The Monkey Bar is being marketed for sale and trade at The Riverbank is improving.
A £155,000 reduction in value of The 3D Pub Co Limited was made at the year end to reflect that the business, which operates two pubs in Surrey, is operating behind plan at the year end. The business has, however, had a good start to 2012 and it is hoped that the value will recover in due course.
An uplift in value of £234,000 was recognised on Atlantic Dogstar Limited, which operates a pub based in Brixton, South London, to reflect the excellent performance of the business which is significantly surpassing its original business plan.
A £109,000 increase in value of Future Biogas (SF) Limited was recognised to reflect that the biogas plant is now complete and operating at target levels. Further increases in value were recognised in Bijou Wedding Venues Limited, £69,000, and Westow House Limited, £36,000, to reflect that both businesses are performing well and in line with expectations.
In addition to Future Biogas (SF), the pool holds a number of other renewable energy investments each which are still valued at original cost at the year end. We believe that these have good potential to build value over the coming years.
Structured Products
The Structured Product portfolio was valued at £1.5 million as at 31 March 2012. During the year, sales and redemptions realised £1.5 million giving an adjusted total return for the year of 4.61%. This is comfortably ahead of cash and also the FTSE 100 Index which only managed a 0.78% return with dividends reinvested. It was, however, some way behind the FT Government All Stocks Index which returned 14.53% as gilt yields carried on falling to record lows as the Eurozone crisis once again reared its ugly head.
Our objective with the Structured Product portfolio has always been to produce positive returns and for this reason we have tended to avoid products which have involved taking an asset allocation or directional view and have instead focused on investments such as defensive auto-callables or synthetic zeros which offer clearly defined returns that, although linked to equity markets, do not require a positive performance from the underlying index to generate a positive return.
This strategy has once again produced a positive return but, with the portfolio now focused on the repayment of capital, its duration is quite short and the levels of returns available are consequently lower than they have been in previous years.
We sold one half of the one 'directional' product we hold - the Symphony 4.85% FTSE Call Spread - to reduce counterparty exposure. This product offers 4.85 times the first 15% of the FTSE 100 index from 4,149.64 giving a maximum upside of 172.25p. This will be paid as long as the FTSE is above 4,772.09 in August 2012. The sale realised a profit of £140,700 - nearly 40% above cost. The shares are currently priced at 165.93 and are on course to repay their maximum maturity proceeds this August.
The Barclays 4 Synthetic Zero holding was reduced in May 2011 with the balance of the holding maturing in January this year. The Elders 16A roll-over shares matured in June 2011 with both holdings generating useful profits for the portfolio.
Outlook
Apart from the Symphony Structured Product holding, there are two other investments left in the Structured Product portfolio. The Morgan Stanley Synthetic Zero is due to mature at 150p in March 2013 which compares with a current price of 143.30p and the Elders 29A is due to redeem in April 2013 at a price of 155.49 compared with a current price of 131p.
The short duration of the Structured Product portfolio means that it has been little impacted by the current uncertainty in markets and we may be able to take advantage of this by investing some of the surplus cash which will be left following the payment of the forthcoming dividend.
In summary, we believe that the Structure Product portfolio has delivered considerably in excess of what was expected of it at inception and should continue to produce positive returns up to the wind-up date.
The weak UK economy is expected to continue throughout 2012 with consumer confidence likely to remain subdued. The Ordinary Share pool is now fully invested and, therefore, further investment will be limited to the reinvestment of non-qualifying loan stock disposals where good quality investment opportunities exist. The Company is focused on achieving its target returns through these challenging economic times and will seek to return funds to Ordinary Share pool investors in 2014-2015.
Downing LLP
REVIEW OF INVESTMENTS - ORDINARY SHARE POOL
Portfolio of investments
The following investments were held at 31 March 2012:
| Cost | Valuation | Valuation movement in year | % of | |
| £'000 | £'000 | £'000 | portfolio | |
| Structured Product investments | ||||
| Symphony Structure 3.5yr FTSE 4.85 Call Spread | 355 | 539 | 52 | 5.2% |
| Elders Capital Accumulator VIII (29A) | 486 | 524 | 8 | 5.1% |
| Morgan Stanley Synthetic Zero | 297 | 473 | 24 | 4.6% |
| 1,138 | 1,536 | 84 | 14.9% | |
| Venture Capital investments | ||||
| Redmed Limited | 1,063 | 1,063 | - | 10.3% |
| Future Biogas (SF) Limited | 909 | 1,018 | 109 | 9.9% |
| Domestic Solar Limited* | 1,000 | 1,000 | - | 9.7% |
| Bijou Wedding Venues Limited | 815 | 884 | 69 | 8.6% |
| Atlantic Dogstar Limited | 572 | 806 | 234 | 7.8% |
| Quadrate Catering Limited | 577 | 577 | - | 5.6% |
| Quadrate Spa Limited | 543 | 543 | - | 5.3% |
| Ecossol Limited | 500 | 500 | - | 4.9% |
| East Dulwich Tavern Limited | 459 | 459 | - | 4.5% |
| Westow House Limited | 405 | 441 | 36 | 4.3% |
| The 3D Pub Company Limited | 517 | 362 | (155) | 3.5% |
| Mosaic Spa and Health Clubs Limited* | 250 | 250 | - | 2.5% |
| Slopingtactic Limited* | 102 | 102 | - | 1.0% |
| Camandale Limited* | 292 | 82 | (210) | 0.8% |
| Chapel Street Services Limited | 75 | 75 | - | 0.7% |
| Chapel Street Food and Beverage Limited | 75 | 75 | - | 0.7% |
| Fenkle Street LLP** | 69 | 69 | - | 0.7% |
| Chapel Street Hotel Limited** | 3 | 3 | - | 0.0% |
| 8,226 | 8,309 | 83 | 80.8% | |
| 9,364 | 9,845 | 167 | 95.7% | |
| Cash at bank and in hand | 445 | 4.3% | ||
| Total investments | 10,290 | 100.0% |
* partially qualifying VCT investment
** non-qualifying VCT investment
All Venture Capital investments are incorporated in England and Wales.
Investment movements for the year ended 31 March 2012
ADDITIONS
| £'000 | |
| Venture Capital investments | |
| Redmed Limited* | 1,063 |
| Domestic Solar Limited* | 500 |
| Ecossol Limited | 500 |
| Atlantic Dogstar Limited | 356 |
| Quadrate Catering Limited | 317 |
| Quadrate Spa Limited | 313 |
| Bijou Wedding Venues Limited | 150 |
| Commercial Street Hotel Limited** | 140 |
| Camandale Limited* | 70 |
| Future Biogas (SF) Limited | 69 |
| 3,478 |
DISPOSALS
| Cost | Valuation*** at 31/03/11 | Proceeds | Profit vs. cost | Realised gain | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Structured Product investments | |||||
| Symphony Structure 3.5yr FTSE 4.85 Call Spread | 355 | 488 | 496 | 141 | 8 |
| Barclays 4Y Synthetic Zero | 570 | 644 | 654 | 84 | 10 |
| Elders Capital Accumulation 2 (Delayed Settlement) | 259 | 356 | 362 | 103 | 6 |
| 1,184 | 1,488 | 1,512 | 328 | 24 | |
| Venture Capital investments | |||||
| Bijou Wedding Venues Limited** | 750 | 750 | 750 | - | - |
| Future Biogas (SF) Limited** | 350 | 350 | 350 | - | - |
| Quadrate Spa Limited** | 221 | 221 | 211 | - | - |
| Quadrate Catering Limited** | 248 | 248 | 248 | - | - |
| Commercial Street Hotel Limited** | 161 | 161 | 161 | - | - |
| Camandale Limited** | 55 | 55 | 55 | - | - |
| 1,785 | 1,785 | 1,785 | - | - | |
| 2,969 | 3 | 3,297 | 328 | 24 |
* partially non-qualifying VCT investment
** non-qualifying VCT investment
*** adjusted for purchases during the year
'B' SHARE POOL SUMMARY
Financial Highlights
| 31 March 2012 | 31 March 2011 | |
| Pence | Pence | |
| Net asset value per 'B' Share | 84.9 | 93.9 |
| Net asset value per 'C' Share | 0.1 | 0.1 |
| Cumulative distributions | 10.0 | 5.0 |
| Total return per 'B' Share and 'C' Share | 95.0 | 99.0 |
INVESTMENT MANAGER'S REPORT- 'B' SHARE POOL
Introduction
The 'B' Share pool currently holds seven Structured Product investments and 24 Venture Capital investments and is expected to become fully invested over the course of 2012/13. Whilst most of the 'B' Share pool's investments are performing more or less to plan, two investments have faced some difficulties.
Net asset value and results
The net asset value ("NAV") per 'B' Share at 31 March 2012 stood at 84.9p and NAV per 'C' Share at 0.1p, a fall of 4.0p for a combined holding of one 'B' Share and one 'C Share over the year after adjusting for dividends. Total Return (combined NAV plus cumulative dividends) stood at 95.0p for a combined holding.
The loss in ordinary activities after taxation for the year was £801,000, comprising a revenue loss of £133,000 and a capital loss of £668,000. Structured products deliver their returns as capital gains and do not generally produce any investment income while they are held. This is a very tax-efficient structure for the VCT but does mean that the share pool is likely to report losses on its revenue account in its initial years, as has been the case in the year under review.
Venture Capital investments
Investment activity
At 31 March 2012 the 'B' Share pool held a Venture Capital portfolio with a valuation of £11.3 million comprising investments in 24 companies. During the year, the Company made investments totalling £9.7 million, which was partly funded by divestments of £2.6 million.
The pool made 20 Venture Capital investments during the year, 14 of which were new qualifying investments. An overview of the largest new qualifying, or partially qualifying, investments is detailed below:
In April 2011, the pool invested £1,476,000 in Future Biogas (Reepham Road) Limited which is developing a 1.5MWh self-contained biogas plant in Norfolk. This is the second anaerobic digestion plant with our investment partner Future Biogas.
In June 2011, a £733,000 investment was made in Alpha Schools (Holdings) Limited to purchase a school in Buckinghamshire and provide working capital to the existing business. The business is performing well and further investment in additional school sites is expected in due course.
In December 2011, the 'B' Share pool invested £350,000 in Mosaic Spa and Health Club (Shrewsbury) Limited to purchase the freehold of an operating health club known as Welti. The purchase was made out of administration for £2.1m.
In January 2012, a £750,000 investment was made in Kidspace Adventures Holdings Limited to purchase a site in Epsom, Surrey, which will be redeveloped into an indoor and outdoor children's play centre. This business also owns Kidspace Adventures Limited, which owns two indoor play centres in Croydon and Romford.
In June 2011, a £1,152,000 investment was made in Gingerbread Pre-Schools (UK) Limited to purchase two operating children's day nurseries in Liverpool and provide funding to purchase and renovate a third nursery. Unfortunately, Gingerbread experienced significant cost overruns on the renovation, together with poor performance of one of the existing sites. The investment partner, who was also the Chief Executive, was suspended and later dismissed. In the interim, further liabilities came to light, and the business went into administration in February 2012. The trading assets were subsequently purchased from the Administrator by four new companies trading under the "Liverpool Nurseries" name in which the VCT has a stake. A new manager has been appointed and the nurseries are now starting to make progress. A realised loss of £363,000 arose on the reorganisation; however most of the investment value was rolled into the new vehicles.
During the year, the pool invested £2.8m in six qualifying solar power investments. Four investments were made in companies which install, own and manage solar panels on domestic rooftops. These include: £400,000 in Domestic Solar Limited; £500,000 in Avon Solar Energy Limited; £500,000 in Green Electricity Generation Limited; and £340,000 in Progressive Energies Limited. Two investments were made in solar companies which invest in commercial solar installations, being a £594,000 investment in Westcountry Solar Solutions Limited and a £500,000 investment in Ecossol Limited.
All six of the qualifying solar investments made during the year benefit from the receipt of Feed-in Tariffs from solar energy generation.
Portfolio valuation
The majority of the investments were all made during the year and, accordingly, were held at cost as reviewed for impairment at the year end. The £516,000 net valuation reduction at the year end arose on two investments: £572,000 decrease in value of Camandale Limited and £56,000 valuation increase in Antelope Pub Limited.
Camandale Limited owns two pubs, The Riverbank and The Monkey Bar, located in Kilmarnock, Scotland. The pubs performed very poorly and, in November 2011, the investment partner was removed as the manager and the management contracts were terminated. A new management team was put in place to manage The Riverbank and the decision was made to close The Monkey Bar and market it for sale in January 2012. A reduction in value of £572,000 was made at the 'B' Share pool's year end to reflect the closed value of The Monkey Bar and the revised view of the value of The Riverbank.
As described above, Gingerbread Pre-Schools (UK) Limited went into administration in February 2012. The trading assets were sold to new companies (in which the VCT has a stake), however, the value received was not sufficient to repay the whole of the original investment and a realised loss of £363,000 was recognised.
An uplift in value of £56,000 was recognised on the Antelope Pub Limited, a pub based in Tooting, South London, to reflect that the businesses is performing well and in line with expectations.
As with the Ordinary Share pool, the 'B' Share pool holds a significant number of renewable energy investments each which were all valued original cost at the year end. We believe that these have good potential to build value over the coming years.
Structured Products
The Structured Product portfolio was valued at £5.5 million as at 31 March 2012. During the year, sales and redemptions realised £6.9 million although £497,000 was reinvested, giving an adjusted total return for the year of 5.02%. This is comfortably ahead of cash and also the FTSE 100 Index which only managed a 0.78% return with dividends reinvested. It was, however, some way behind the FT Government All Stocks Index which returned 14.53% as gilt yields carried on falling to record lows as the Eurozone crisis once again reared its ugly head.
Our objective with the Structured Product portfolio has always been to produce positive returns and, for this reason, we have tended to avoid products which have involved taking an asset allocation or directional view and have instead focused on investments such as defensive auto-callables or synthetic zeros which offer clearly defined returns that, although linked to equity markets, do not require a positive performance from the underlying index to generate a positive return.
This strategy has once again produced a positive return but, with the Structured Product portfolio now in its third year, much of the focus will be on moving the Venture Capital qualifying portfolio closer to completion. The Company's investment policy targets at least 75% of the pool invested in qualifying Venture Capital investments after three years which means that 30% of the portfolio can remain in non-qualifying investments such as Structured Products, subject to other cash requirements such as the payment of dividends. As a result, the pool's Structured Product portfolio is likely to see further sales and redemptions in the future rather than new investments.
As long as the FTSE 100 Index remains above 5,045, the Barclays 10% Defensive Auto-Call will realise £348,000 in July 2012 with a further £434,000 due in November 2012 from the JP Morgan product as long at the FTSE is above 5,126.
The 'B' Share pool bought the 325,000 Symphony 4.85 Call Spread product from the Ordinary Share portfolio as the return to maturity remained at attractive levels. This is due to mature in August and should release £561,438, a profit of £64,000 over book cost.
In 2013, the Elders 29A product requires a FTSE level of 5,587 to mature which will realise £1.24 million. The remaining three products have maturity dates of between April 2015 and April 2016. Two of these products are fixed life Synthetic Zeros so are likely to form part of the longer term residuary portfolio.
The Goldman Sachs product does have auto-call opportunities but these are fixed at a FTSE level of 6,180 each year until April 2016. However, in the meantime, the product pays an annual return, taxed to capital, of 6.75p as long as the FTSE 100 Index remains above 4,213.38.
The FTSE 100 Index ended the two year period to 31 March 2012 at almost the same value as that at which it started. Over the same period, the 'B' Share Structured Product portfolio recorded realised gains of £899,000 and unrealised gains of £229,000. In summary, we believe that, by employing our defensive approach to Structured Product investing, the portfolio has delivered what was expected of it and is well placed to continue generating positive returns.
Outlook
The general economic conditions in the UK are expected to continue throughout 2012 with consumer confidence likely to remain subdued. The 'B' Share pool is nearing full investment and, therefore, further investment will be limited to the reinvestment of non-qualifying loan stock disposals where good quality investment opportunities exist. The Company is focused on working closely with investee companies to ensure that its target returns are met through these challenging economic times.
Downing LLP
REVIEW OF INVESTMENTS - 'B' SHARE POOL
Portfolio of investments
The following investments were held at 31 March 2012:
| Valuation | ||||
| movement | ||||
| Cost | Valuation | in year | % of | |
| £'000 | £'000 | £'000 | portfolio | |
| Structured Product investments | ||||
| Barclays 5Y Synthetic Zero | 1,003 | 1,140 | 77 | 6.7% |
| Goldman Sachs 6YR Phoenix Autocall 3 | 1,003 | 1,054 | (40) | 6.2% |
| Elders Capital Accumulator VIII | 970 | 1,048 | 16 | 6.1% |
| HSBC US Trade Range | 752 | 915 | 94 | 5.3% |
| Symphony Structure 3.5yr FTSE 4.85 Call Spread | 497 | 539 | 42 | 3.1% |
| JP Morgan 8% Defensive FTSE Autocall | 356 | 413 | 21 | 2.4% |
| Barclays 6Y 10% Defensive FTSE Autocall | 291 | 339 | 19 | 2.0% |
| 4,872 | 5,448 | 229 | 31.8% | |
| Venture Capital investments | ||||
| Future Biogas (Reepham Road) Limited* | 1,476 | 1,476 | - | 8.6% |
| Quadrate Catering Limited | 850 | 850 | - | 5.0% |
| Antelope Pub Limited | 750 | 806 | 56 | 4.7% |
| Quadrate Spa Limited | 806 | 806 | - | 4.7% |
| Domestic Solar Limited* | 800 | 800 | - | 4.7% |
| Kidspace Adventures Holdings Limited** | 750 | 750 | - | 4.4% |
| Alpha Schools Holdings Limited | 733 | 733 | - | 4.3% |
| Avon Solar Energy Limited | 500 | 500 | - | 2.9% |
| Ecossol Limited | 500 | 500 | - | 2.9% |
| Green Electricity Generation Limited | 500 | 500 | - | 2.9% |
| Westcountry Solar Solutions Limited | 500 | 500 | - | 2.9% |
| Liverpool Nurseries (House) Limited** | 406 | 406 | - | 2.4% |
| Mosaic Spa and Health Club (Shrewsbury) Limited | 350 | 350 | - | 2.0% |
| Progressive Energies Limited | 340 | 340 | - | 2.0% |
| Slopingtactic Limited | 277 | 277 | - | 1.6% |
| Liverpool Nurseries (Greenbank) Limited** | 276 | 276 | - | 1.6% |
| Kidspace Adventures Limited** | 270 | 270 | - | 1.6% |
| Mosaic Spa and Health Clubs Limited* | 250 | 250 | - | 1.4% |
| Camandale Limited* | 796 | 224 | (572) | 1.3% |
| Fenkle Street LLP** | 185 | 185 | - | 1.1% |
| Commercial Street Hotel Limited** | 185 | 185 | - | 1.1% |
| Ridgeway Pub Company Limited | 137 | 137 | - | 0.8% |
| Liverpool Nurseries (Cottage) Limited** | 135 | 135 | - | 0.8% |
| Liverpool Nurseries (Holdings) Limited** | 2 | 2 | - | 0.0% |
| 11,774 | 11,258 | (516) | 65.7% | |
| 16,646 | 16,706 | (287) | 97.5% | |
| Cash at bank and in hand | 421 | 2.5% | ||
| Total investments | 17,127 | 100.0% |
*partially qualifying VCT investment
** non qualifying VCT investment
All Venture Capital investments are incorporated in England and Wales.
Investment movements for the year ended 31 March 2012
ADDITIONS
| £'000 | |
| Structured Product investments | |
| Symphony Structure 3.5yr FTSE 4.85 Call Spread | 497 |
| 497 | |
| Venture Capital investments | |
| Future Biogas (Reepham Road) Limited* | 1,476 |
| Gingerbread Pre-School (UK) Limited* | 1,151 |
| Kidspace Adventures Holdings Limited** | 750 |
| Alpha Schools Holdings Limited | 733 |
| Westcountry Solar Solutions Limited* | 594 |
| Avon Solar Energy Limited | 500 |
| Ecossol Limited | 500 |
| Green Electricity Generation Limited | 500 |
| Quadrate Spa Limited | 427 |
| Quadrate Catering Limited | 423 |
| Domestic Solar Limited* | 400 |
| Liverpool Nurseries (House) Limited** | 406 |
| Mosaic Spa and Health Club (Shrewsbury) Limited | 350 |
| Progressive Energies Limited | 340 |
| Liverpool Nurseries (Greenbank) Limited** | 276 |
| Kidspace Adventures Limited** | 270 |
| Commercial Street Hotel Limited** | 230 |
| Camandale Limited* | 193 |
| Liverpool Nurseries (Cottage) Limited** | 135 |
| Liverpool Nurseries (Holdings) Limited** | 2 |
| 9,656 | |
| 10,153 |
DISPOSALS
| Valuation*** | Profit | Realised | |||
| Cost | at 31/3/11 | Proceeds | vs cost | gain | |
| Structured Product investments | £'000 | £'000 | £'000 | £'000 | £'000 |
| JP Morgan 5Y 9.75% Defensive FTSE Autocall | 1,504 | 1,620 | 1,646 | 142 | 26 |
| HSBC FTSE/S&P 'Worst of' Autocall | 1,003 | 1,103 | 1,110 | 107 | 7 |
| Societe Generale FSTE/S&P Defensive AutoLock 4 | 1,003 | 1,091 | 1,108 | 105 | 17 |
| Morgan Stanley 5YR Synthetic Zero | 811 | 883 | 916 | 105 | 33 |
| Morgan Stanley 3YR Synthetic Zero Accrual | 761 | 825 | 847 | 86 | 22 |
| HSBC 5 Year 9% Defensive FTSE 100 Autocall | 702 | 758 | 763 | 61 | 5 |
| Barclays FTSE 100 Def 10.75% Autocall | 451 | 492 | 498 | 47 | 6 |
| 6,235 | 6,772 | 6,888 | 653 | 116 | |
| Venture Capital investments | |||||
| Gingerbread Pre-School (UK) Limited* | 1,151 | 1,151 | 789 | (362) | (362) |
| Antelope Pub Limited** | 338 | 338 | 338 | - | - |
| Quadrate Spa Limited** | 362 | 362 | 362 | - | - |
| Quadrate Catering Limited** | 408 | 408 | 408 | - | - |
| Camandale Limited** | 151 | 151 | 151 | - | - |
| Commercial Street Hotel Limited** | 80 | 80 | 80 | - | - |
| Westcountry Solar Solutions Limited** | 94 | 94 | 94 | - | - |
| 2,584 | 2,584 | 2,222 | (362) | (362) | |
| 8,819 | 9,356 | 9,110 | 291 | (246) |
* partially qualifying VCT investment
** non qualifying VCT investment
*** adjusted for purchases during the year
'D' SHARE POOL SUMMARY
Financial Highlights
| 31 March 2012 | |
| Pence | |
| Net asset value per 'D' Share | 94.5 |
| Total return per 'D' Share | 94.5 |
INVESTMENT MANAGER'S REPORT- 'D' SHARE POOL
Introduction
The 'D' Share pool fundraising opened in August 2011 and issued approximately £4.9 million 'D' Shares by the year end, giving net proceeds of £4.6 million. During the 'D' Share pool's first period it made Venture Capital investments with a total cost of £1.0 million and Structured Product investments of £1.8 million. No investments were disposed of during the period.
Net asset value and results
The net asset value ("NAV") per 'D' Share at 31 March 2012 stood at 94.5p, equal to the initial NAV after issue costs.
The profit on ordinary activities after taxation for the period was £2,000, comprising a revenue profit of £5,000 and a capital loss of £3,000.
Investment activity
Venture Capital investments
The four Venture Capital investments made during the pool's first period are summarised as follows:
| Investee company | Amount invested £'000 |
| City Falkirk Limited Nightclub, sports bar and diner located in Falkirk, Scotland. | 562 |
| Fubar Stirling Limited Nightclub in Stirling, Scotland. | 357 |
| Cheers Dumbarton Limited Nightclub in Dumbarton, Scotland. | 64 |
| Lochrise Limited Provides management services to City Falkirk, Fubar and Cheers and other nightclub/bar operations. | 17 |
| Total | 1,000 |
Although the pool's initial Venture Capital investments are all in one sector, it is intended that the portfolio will be well balanced across a number of sectors as it develops. Since the year end, the pool has completed a number of further investments, including several investments in the renewable energy sector.
Structured Products
The objective of the Structured Product portfolio will be to produce positive returns and, for this reason, we will tend to avoid products which involve taking an asset allocation or directional view of the market. Our focus is likely to be towards investments such as defensive auto-callables or synthetic zeros which offer clearly defined returns that, although linked to equity markets, do not require a positive performance from the underlying index to generate a positive return.
At the year-end, the pool had invested a total of £1.8 million spread across 3 products and 3 counterparties - Barclays, Credit Suisse and JP Morgan. All three are defensive auto-calls with two based on the FTSE 100 Index and one on the worst of the FTSE 100 and S&P 500 Indices. The inclusion of dual index products enables us to obtain a higher coupon than would be available on a single index product. However, we are unlikely to extend this past the FTSE 100 and S&P Indices as other indices, such as the Eurostoxx exhibit too much volatility which would exceed our risk tolerances.
Outlook
Much of the remaining cash funds arising from the fundraising will be invested in Structured Products as and when suitable opportunities arise. We are in no hurry to commit funds to the market as, currently, implied volatility is relatively low, which puts downward pressure on returns. Given the continuing uncertainty in the global economy, we do not expect volatility to remain subdued for long. Any 'spike' up in volatility will give a better entry point for the cash currently uninvested.
The difficult general economic conditions in the UK are expected to continue throughout 2012. The continued lack of traditional funding means we are continuing to see a steady flow of potential Venture Capital Investment opportunities for the share pool. Identifying the strongest of these opportunities which fit the share pool's investment criteria will be one of the keys to the overall success of the pool. Once the Structure Product portfolio had been built, our focus for most of the coming year will be on securing qualifying investments for the 'D' Share pool and developing a Venture Capital portfolio with a target exit date commencing in 2017.
Downing LLP
REVIEW OF INVESTMENTS - 'D' SHARE POOL
Portfolio of investments
The following investments were held at 31 March 2012:
| Valuation | ||||
| movement | ||||
| Cost | Valuation | in year | % of | |
| £'000 | £'000 | £'000 | portfolio | |
| Structured Product investments | ||||
| Credit Suisse 7.25% FTSE Autocall | 523 | 520 | (3) | 9.5% |
| JPMorgan 7% Defensive FTSE AC | 517 | 516 | (1) | 9.5% |
| Barclays 8% FTSE/S&P Worst -Of Def AC | 752 | 758 | 6 | 13.9% |
| 1,792 | 1,794 | 2 | 32.9% | |
| Venture Capital investments | ||||
| City Falkirk Limited** | 562 | 562 | - | 10.3% |
| Fubar Stirling Limited** | 357 | 357 | - | 6.5% |
| Cheers Dumbarton Limited** | 64 | 64 | - | 1.2% |
| Lochrise Limited** | 17 | 17 | - | 0.3% |
| 1,000 | 1,000 | - | 18.3% | |
| 2,792 | 2,794 | 2 | 51.2% | |
| Cash at bank and in hand | 2,665 | 48.8% | ||
| Total investments | 5,459 | 100.0% |
** non qualifying VCT investment
All Venture Capital investments are incorporated in England and Wales.
Investment movements for the year ended 31 March 2012
ADDITIONS
| £'000 | |
| Structured Product investments | |
| Credit Suisse 7.25% FTSE Autocall | 523 |
| Barclays 8% FTSE/S&P Worst -Of Def AC | 752 |
| JPMorgan 7% Defensive FTSE AC | 517 |
| 1,792 | |
| Venture Capital investments | |
| City Falkirk Limited** | 562 |
| Fubar Stirling Limited** | 357 |
| Cheers Dumbarton Limited** | 64 |
| Lochrise Limited** | 17 |
| 1,000 | |
| 2,792 |
** non qualifying VCT investment
There were no investment disposals by the 'D' Share pool during the year.
Directors' responsibilities statement
The Directors are responsible for preparing the Report of the Directors, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Services Authority.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgments and accounting estimates that are reasonable and prudent;
* state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
* prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions, to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Manager's website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.
Statement as to disclosure of information to Auditors
The Directors in office at the date of the report have confirmed, as far as they are aware, that there is no relevant audit information of which the Auditors are unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditors.
By Order of the Board
Grant Whitehouse
Secretary of Downing Structured Opportunities VCT 1 plc
Company number: 6789187
INCOME STATEMENT
for the year ended 31 March 2012
| Year ended 31 March 2012 | Year ended 31 March 2011 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Income | 620 | - | 620 | 556 | - | 556 |
| Net (loss)/gain on investments | - | (340) | (340) | - | 1,439 | 1,439 |
| 620 | (340) | 280 | 556 | 1,439 | 1,995 | |
| Investment management fees | (219) | (219) | (438) | (218) | (218) | (436) |
| Other expenses | (385) | - | (385) | (338) | - | (338) |
| Return/(loss) on ordinary activities before tax | 16 | (559) | (543) | - | 1,221 | 1,221 |
| Tax on ordinary activities | - | - | - | - | - | - |
| Return/(loss) attributable to equity Shareholders | 16 | (559) | (543) | - | 1,221 | 1,221 |
| Basic and diluted return per share: | ||||||
| Ordinary Share | 1.4p | 1.1p | 2.5p | 0.4p | 3.0p | 3.4p |
| 'A' Share | - | - | - | - | - | - |
| 'B' Share | (0.7p) | (3.3p) | (4.0p) | (0.2p) | 4.5p | 4.3p |
| 'C' Share | - | - | - | - | - | - |
| 'D' Share | 0.2p | (0.1p) | 0.1p | n/a | n/a | n/a |
All Revenue and Capital items in the above statement derive from continuing operations. The total column within the Income Statement represents the profit and loss account of the Company. No operations were acquired or discontinued during the year.
A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement noted above.
Other than revaluation movements arising on investments held at fair value through profit and loss, there were no differences between the loss/return as stated above and historical cost.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 March 2012
| Year ended 31 March 2012 | Year ended 31 March 2011 | |
| £'000 | £'000 | |
| Opening Shareholders' funds | 29,262 | 28,636 |
| Proceeds from share issue | 4,859 | 9,503 |
| Share issue costs | (267) | (523) |
| Purchase of own shares | - | (58) |
| Unalloted shares | 1,491 | (7,998) |
| Dividends paid | (1,515) | (1,519) |
| Total gains for the year/period | (543) | 1,221 |
| Closing Shareholders' funds | 33,287 | 29,262 |
INCOME STATEMENT
for the year ended 31 March 2012
Split as:
Ordinary Share pool
| Year ended 31 March 2012 | Year ended 31 March 2011 | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
| Income | 367 | - | 367 | 272 | - | 272 | |
| Net gain on investments | - | 191 | 191 | - | 389 | 389 | |
| 367 | 191 | 558 | 272 | 389 | 661 | ||
| Investment management fees | (79) | (79) | (158) | (79) | (79) | (158) | |
| Other expenses | (144) | - | (144) | (147) | - | (147) | |
| Return on ordinary activities before tax | 144 | 112 | 256 | 46 | 310 | 356 | |
| Tax on ordinary activities | - | - | - | - | - | - | |
| Return attributable to equity Shareholders | 144 | 112 | 256 | 46 | 310 | 356 | |
'B' Share pool
| Year ended 31 March 2012 | Year ended 31 March 2011 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Income | 240 | - | 240 | 284 | - | 284 |
| Net (loss)/gain on investments | - | (533) | (533) | - | 1,050 | 1,050 |
| 240 | (533) | (293) | 284 | 1,050 | 1,334 | |
| Investment management fees | (135) | (135) | (270) | (139) | (139) | (278) |
| Other expenses | (238) | - | (238) | (191) | - | (191) |
| (Loss)/return on ordinary activities before tax | (133) | (668) | (801) | (46) | 911 | 865 |
| Tax on ordinary activities | - | - | - | - | - | - |
| (Loss)/return attributable to equity Shareholders | (133) | (668) | (801) | (46) | 911 | 865 |
'D' Share pool
| Year ended 31 March 2012 | Year ended 31 March 2011 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Income | 13 | - | 13 | - | - | - |
| Net gain on investments | - | 2 | 2 | - | - | - |
| 13 | 2 | 15 | - | - | - | |
| Investment management fees | (5) | (5) | (10) | - | - | - |
| Other expenses | (3) | - | (3) | - | - | - |
| (Loss)/return on ordinary activities before tax | 5 | (3) | 2 | - | - | - |
| Tax on ordinary activities | - | - | - | - | - | - |
| (Loss)/return attributable to equity Shareholders | 5 | (3) | 2 | - | - | - |
BALANCE SHEET
as at 31 March 2012
| 2012 | 2011 | ||||||
| | Ordinary Share pool | 'B' Share pool | 'D' Share pool | Total | Ordinary Share pool | 'B' Share pool | Total |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Fixed assets | |||||||
| Investments | 9,845 | 16,706 | 2,794 | 29,345 | 9,474 | 16,195 | 25,669 |
| Current assets | |||||||
| Debtors | 64 | 10 | 644 | 718 | 606 | 1,961 | 2,567 |
| Cash at bank and in hand | 445 | 421 | 2,665 | 3,531 | 544 | 798 | 1,342 |
| 509 | 431 | 3,309 | 4,249 | 1,150 | 2,759 | 3,909 | |
| Creditors: amounts falling due within one year | (107) | (182) | (18) | (307) | (115) | (201) | (316) |
| Net current assets | 402 | 249 | 3,291 | 3,942 | 1,035 | 2,558 | 3,593 |
| Net assets | 10,247 | 16,955 | 6,085 | 33,287 | 10,509 | 18,753 | 29,262 |
| Capital and reserves | |||||||
| Called up Ordinary/ 'B'/'D' Share capital | 10 | 20 | 5 | 35 | 10 | 20 | 30 |
| Called up 'A'/'C' Share capital | 16 | 30 | - | 46 | 16 | 30 | 46 |
| Capital redemption Reserve | 5 | - | - | 5 | 5 | - | 5 |
| Special reserve | 5,818 | 16,441 | - | 22,259 | 6,077 | 17,802 | 23,879 |
| Share premium account | 2,794 | - | 4,587 | 7,381 | 2,794 | - | 2,794 |
| Share capital to be issued | - | - | 1,491 | 1,491 | - | - | - |
| Revaluation reserve | 482 | 62 | 2 | 546 | 619 | 884 | 1,503 |
| Capital reserve - realised | 1,091 | 618 | (5) | 1,704 | 1,101 | 100 | 1,201 |
| Revenue reserve | 31 | (216) | 5 | (180) | (113) | (83) | (196) |
| Total equity shareholders' funds | 10,247 | 16,955 | 6,085 | 33,287 | 10,509 | 18,753 | 29,262 |
| Basic and diluted net asset value per: | |||||||
| Ordinary/'B' Share /D' Share | 98.7p | 84.9p | 94.5p | 101.2p | 93.9p | ||
| 'A' Share/'C' Share | 0.1p | 0.1p | - | 0.1p | 0.1p | ||
CASH FLOW STATEMENT
for the year ended 31 March 2012
| As reclassified | |||||||
| Year ended 31 March 2012 | Year ended 31 March 2011 | ||||||
| Ordinary Share pool | 'B' Share pool | 'D' Share pool | Total | Ordinary Share pool | 'B' Share pool | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Net cash (outflow)/ inflow from operating activities | 100 | (213) | 14 | (99) | (17) | (115) | (132) |
| Capital expenditure | |||||||
| Purchase of Investments | (3,478) | (10,153) | (2,792) | (16,423) | (5,139) | (18,481) | (23,620) |
| Proceeds from disposal of investments | 3,297 | 9,110 | - | 12,407 | 5,542 | 5,898 | 11,440 |
| Movements in deposit held for purchase of investments | 500 | 1,876 | (640) | 1,736 | (500) | (1,876) | (2,376) |
| Net cash inflow/(outflow) from capital expenditure | 319 | 833 | (3,432) | (2,280) | (97) | (14,459) | (14,556) |
| Equity dividends paid | (518) | (997) | - | (1,515) | (519) | (1,000) | (1,519) |
| Net cash outflow before financing | (99) | (377) | (3,418) | (3,894) | (633) | (15,574) | (16,207) |
| Financing | |||||||
| Proceeds from 'D' Share issue | - | - | 4,859 | 4,859 | - | - | - |
| Proceeds from 'B' Share issue | - | - | - | - | - | 9,503 | 9,503 |
| Share issue costs | - | - | (267) | (267) | - | (523) | (523) |
| Unalloted share Capital | - | - | 1,491 | 1,491 | - | (7,998) | (7,998) |
| Purchase of own Shares | - | - | - | - | - | (58) | (58) |
| Net cash inflow from financing | - | - | 6,083 | 6,083 | - | 924 | 924 |
| (Decrease)/increase in cash | (99) | (377) | 2,665 | 2,189 | (633) | (14,650) | (15,283) |
NOTES TO THE ACCOUNTS
for the year ended 31 March 2012
1. Accounting policies
Basis of accounting
The Company has prepared its financial statements under UK Generally Accepted Accounting Practice ("UK GAAP") and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" revised January 2009 ("SORP").
The financial statements are prepared under the historical cost convention except for certain financial instruments measured at fair value.
The Company implements new Financial Reporting Standards ("FRS") issued by the Accounting Standards Board when required.
Presentation of Income Statement
In order to better reflect the activities of a Venture Capital Trust, and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.
Investments
All investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company's documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS 26.
Structured product investments are measured using bid prices in accordance with the IPEV.
For unquoted investments, fair value is established by using the IPEV guidelines. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:
* Price of recent investment;
* Multiple;
* Net assets;
* Discounted cash flows or earnings (of underlying business);
* Discounted cash flows (from the investment); and
* Industry valuation benchmarks.
The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.
Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment are expensed. Where an investee company has gone into receivership or liquidation, or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised.
It is not the Company's policy to exercise significant influence over investee companies. Therefore, the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP that does not require portfolio investments to be accounted for using the equity method of accounting.
Income
Dividend income from investments is recognised when the Shareholders' rights to receive payment has been established, normally the ex-dividend date.
Interest income is accrued on a time apportionment basis, by reference to the principal sum outstanding and at the effective rate applicable and only where there is reasonable certainty of collection.
Expenses
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:
* Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.
* Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted a policy of charging 50% of the investment management fees to the revenue account and 50% to the capital account to reflect the Board's estimated split of investment returns which will be achieved by the company over the long term.
Expenses and liabilities not specific to a share class are generally allocated pro rata to the net assets.
Taxation
The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate, using the Company's effective rate of tax for the accounting period.
Due to the Company's status as a Venture Capital Trust, and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments which arises.
Deferred taxation, which is not discounted, is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts.
Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost, equivalent to the fair value of the expected balance receivable/payable by the Company.
Issue costs
Issue costs in relation to the shares issued for each share class have been deducted from the share premium account for the relevant share class.
2 Basic and diluted return per share
| Weighted average number of shares in issue | Revenue return/(loss) | Capital gain | ||
| Return per share is calculated on the following: | £'000 | £'000 | ||
| Year ended 31 March 2012 | Ordinary Shares | 10,371,227 | 144 | 112 |
| 'A' Shares | 15,556,838 | - | - | |
| 'B' Shares | 19,936,370 | (133) | (668) | |
| 'C' Shares | 29,936,370 | - | - | |
| 'D' Shares | 2,720,954 | 5 | (3) | |
| Year ended 31 March 2011 | Ordinary Shares | 10,371,227 | 46 | 310 |
| 'A' Shares | 15,556,838 | - | - | |
| 'B' Shares | 19,931,087 | (46) | 910 | |
| 'C' Shares | 29,931,087 | - | 1 | |
As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per Ordinary Share, 'A' Share, 'B' Share, 'C' Share or 'D' Share. The return per share disclosed therefore represents both the basic and diluted return per Ordinary Share, 'A' Share, 'B' Share, 'C' Share or 'D' Share.
3 Basic and diluted net asset value per share
| 2012 | 2011 | |||||
| Net Asset Value | Net Asset Value | |||||
| Shares in issue | Pence per share | £'000 | Pence per share | £'000 | ||
| 2012 | 2011 | |||||
| Ordinary Shares | 10,371,227 | 10,371,227 | 98.7 | 10,232 | 101.2 | 10,494 |
| 'A' Shares | 15,556,838 | 15,556,838 | 0.1 | 15 | 0.1 | 15 |
| 'B' Shares | 19,936,370 | 19,936,370 | 84.9 | 16,925 | 93.9 | 18,723 |
| 'C' Shares | 29,936,370 | 29,936,370 | 0.1 | 30 | 0.1 | 30 |
| 'D' Shares | 4,859,588 | - | 94.5 | 4,594 | - | - |
| Share capital to be issued | 1,491 | - | ||||
| Net assets per Balance Sheet | 33,287 | 29,262 | ||||
The Directors allocate the assets and liabilities of the Company between the Ordinary Shares, 'A' Shares, 'B' Shares, 'C' Shares and 'D' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights as described in note 12.
As the Company has not issued any convertible shares or share options, there is no dilutive net asset value per Ordinary Share, per 'A' Share, per 'B' Share, per 'C' Share or per 'D' Share. The Net Asset Value per share disclosed therefore represents both the basic and diluted net asset value per Ordinary Share, per 'A' Share, per 'B' Share, per 'C' Share and per 'D' Share.
4 Financial instruments
The Company's financial instruments comprise investments held at fair value through the profit and loss account, being equity and loan stock investments in unquoted companies, Structured Products, loans and receivables being cash deposits and short term debtors and financial liabilities being creditors arising from its operations. The main purpose of these financial instruments is to generate cashflow and revenue and capital appreciation for the Company's operations. The Company has no gearing or other financial liabilities apart from short-term creditors and does not use any derivatives.
The fair value of investments is determined using the detailed accounting policy as shown in note 1.
Loans and receivables and other financial liabilities, as set out in the balance sheet, are stated at amortised cost which the Directors consider is equivalent to fair value.
The Company's investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company's operations are:
* Market risks,
* Credit risk; and
* Liquidity risk
The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also have been no significant changes to the policies for managing those risks during the year.
The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year end are provided below:
Market risks
As a VCT, the Company is exposed to market risks in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of these market risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Market risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.
The key market risks to which the Company is exposed are:
* Market price risk and
* Interest rate risk
Market price risk
Market price risk arises from uncertainty about the future prices and valuations of financial instruments held in accordance with the Company's investment objectives. It represents the potential loss that the Company might suffer through market price movements in respect of Structured Products and also changes in the fair value of unquoted investments that it holds.
At 31 March 2012, the Structured Product portfolio was valued at £8,779,000.
At 31 March 2012, the unquoted portfolio was valued at £20,566,000.
As many of the Company's unquoted investments are classified as 'asset backed', a fall in share prices generally would have a lesser impact on the valuation of the unlisted portfolio.
Interest rate risk
The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers. Investments in loan stock attract interest predominately at fixed rates. A summary of the interest rate profile of the Company's investments is shown below.
There are three categories in respect of interest which are attributable to the financial instruments held by the Company as follows:
"Fixed rate" assets represent investments with predetermined yield targets and comprise certain loan note investments and preference shares.
"Floating rate" assets predominantly bear interest at rates linked to Bank of England base rate or LIBOR and comprise cash at bank and liquidity fund investments and certain loan note investments.
"No interest rate" assets do not attract interest and comprise equity investments, certain loan note investments, loans and receivables (excluding cash at bank) and other financial liabilities.
| Average | Average period | 2012 | 2011 | |
| interest rate | until maturity | £'000 | £'000 | |
| Fixed rate | 3.1% | 1,019 days | 15,799 | 8,791 |
| Floating rate | 0.5% | 3,531 | 1,342 | |
| No interest rate | 13,957 | 19,129 | ||
| 33,287 | 29,262 |
The Company monitors the level of income received from fixed and floating rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, if this should be required to ensure compliance with the VCT regulations.
It is estimated that an increase of 1% in interest rates would have increased total return before taxation for the year by £35,000. As the Bank of England base rate stood at 0.5% per annum throughout the year, it is not believed that a reduction from this level is likely.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan stock in investee companies, cash deposits and debtors. Credit risk relating to loan stock investee companies is considered to be part of market risk.
The Company's financial assets that are exposed to credit risk are summarised as follows:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Investments in loan stocks | 15,799 | 8,791 |
| Investments in Structured Products | 8,779 | 14,435 |
| Cash and cash equivalents | 3,531 | 1,342 |
| Interest and other receivables | 60 | 175 |
| 28,169 | 24,743 |
The Manager manages credit risk in respect of loan stock with a similar approach as described under Market risks above. Investments in Structured Products are managed so as to limit exposure to any one counterparty and taking into account the credit rating of the counterparty. Similarly, the management of credit risk associated interest, dividends and other receivables is covered within the investment management procedures.
Cash is mainly held by Bank of Scotland plc and Royal Bank of Scotland plc, both of which are A-rated financial institutions and both also ultimately part-owned by the UK Government. Consequently, the Directors consider that the credit risk associated with cash deposits is low.
There have been no changes in fair value during the year that are directly attributable to changes in credit risk.
Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required.
As the Company has a relatively low level of creditors, being £307,000 (2011: £316,000), and has no borrowings, the Board believes that the Company's exposure to liquidity risk is low. Also, some quoted investments held by the Company are considered to be readily realisable. The Company always holds sufficient levels of funds as cash and readily realisable investments in order to meet expenses and other cash outflows as they arise. For these reasons, the Board believes that the Company's exposure to liquidity risk is minimal.
The Company's liquidity risk is managed by the investment manager in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.
5 Contingencies, guarantees and financial commitments
At 31 March 2012, the Company had no contingencies, guarantees or financial commitments.
6 Post Balance Sheet event
Since the year, the Company received further subscription monies of approximately £1.3 million. Between 2 April 2012 and 1 June 2012 the Company issues 2,737,418 'D' Shares for an average price of £1 and an aggregate consideration of £2.6 million, which excludes issue costs of £151,000.
ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 March 2012, but has been extracted from the statutory financial statements for the year ended 31 March 2012 which were approved by the Board of Directors on 22 July 2011 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.
The statutory accounts for the year ended 31 March 2011 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.
A copy of the full annual report and financial statements for the year ended 31 March 2012 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 10 Lower Grosvenor Place, London SW1W 0EN and will be available for download from and www.downing.co.uk