Downing Structured Opportunities VCT 1 plc
Final results for the year ended 31 March 2014
FINANCIAL HIGHLIGHTS
| 31 March 2014 | 31 March 2013 | ||
| pence | pence | ||
| Ordinary Share pool | |||
| Net asset value per Ordinary Share | 92.2 | 104.8 | |
| Net asset value per 'A' Share | 0.1 | 0.1 | |
| Cumulative distributions | 37.5 | 20.0 | |
| Total Return per Ordinary Share and 'A' Share | 129.8 | 124.9 | |
| 'B' Share pool | |||
| Net asset value per 'B' Share | 82.3 | 84.9 | |
| Net asset value per 'C' Share | 0.1 | 0.1 | |
| Cumulative distributions | 20.0 | 15.0 | |
| Total return per 'B' Share and 'C' Share | 102.4 | 100.0 | |
| 'D' Share pool | |||
| Net asset value per 'D' Share | 83.0 | 87.7 | |
| Cumulative distributions | 10.0 | 5.0 | |
| Total return per 'D' Share | 93.0 | 92.7 |
CHAIRMAN'S STATEMENT
Introduction
I am pleased to present the Company's Annual Report for the year ended 31 March 2014. Overall, the Company has continued to make satisfactory progress with each of the Company's three share pools reporting an increase in Total Return for the year.
Ordinary Share pool
The net asset value ("NAV") of a combined holding of one Ordinary Share and one 'A' Share stood at 82.2p at the year end, an increase of 4.9p (4.7%) over the year after adjusting for the dividend paid during the year. Total Return (NAV plus cumulative dividends paid to date) stood at 129.8p at the year end, compared to the cost for most Shareholders who invested in the original share offer, net of income tax relief, of 70.0p.
The Venture Capital investments are generally performing well and the pool no longer holds any Structured Product investments as these all matured some time ago. As many of the Ordinary Shareholders have now held their investment for the minimum five year term to retain the upfront VCT income tax relief, the Manager's focus is now on progressing realisation plans which will secure exits at optimal values. Shareholders should note that the task of realising the investments will involve a significant number of transactions and it is difficult to predict accurately when investment exits will be achieved, however the Manager is hopeful that a number will complete during the latter part of this year such that a significant return of capital could be paid early in 2015. It is then likely that one or more further dividends will be paid as more investments are realised. Shareholders should note that the process of exiting from the whole portfolio is likely to take some time, however the Manager is optimistic that many of the largest investments can be realised at an early stage.
A more detailed review of the Ordinary Share pool is presented in the Investment Manager's report.
'B' Share pool
The NAV of a combined holding of one 'B' Share and one 'C' Share stood at 82.4p at the year end, an increase of 2.4p (2.8%) over the year after adjusting for the dividend paid during the year. Total Return stood at 102.4p at the year end, compared to the cost for Shareholders who invested in the 'B' Share offer, net of income tax relief, of 70.0p.
The 'B' Share pool still holds a small portfolio of Structured Products, however most of the funds are now invested in Venture Capital investments. As with the Ordinary Share pool, the majority of investments have continued to make satisfactory progress and have potential to deliver further growth before the planned exit date of 2015. Two investments have experienced weaker trading than had been anticipated resulting in small provisions, however there appears to some prospects for recovery.
A significant number of the original Structured Product investments have now matured and the pool has cumulated £1.7 million of released gains (equivalent to 8.6p per B Share). With opportunities to reinvest in new Structure Products with appropriate time horizons being limited, the Board has decided that it is appropriate to distribute 7.5p per 'B' Share of these realised gains to 'B' Shareholders now and, as a result, will propose an increased year end dividend of 10.0p per 'B' Share.
The 'B' Share pool will start the process of seeking to exit from its investments in summer 2015, following the fifth anniversary of the close of the 'B' Share fundraising. Plans for realisations are still in their very early stages, however it appears that there are possibilities for reasonably early exits from a number of the investments.
A more detailed review of the 'B' Share pool is presented in the Investment Manager's report.
'D' Share pool
The 'D' Share NAV stood at 83.0p at the year end, an increase of 0.3p per share or 0.3% over the year after adjusting for the dividends of 2.5p per share paid in the year. Total Return now stands at 93.0p per share, compared to the cost for Shareholders who invested in the 'D' Share offer, net of income tax relief, of 70.0p.
A number of new Structured Product investments were made during the year when potential returns started to improve. The enlarged portfolio generated a satisfactory returns over the year.
Several further Venture Capital investments were also completed during the year as work continues on building the Venture Capital portfolio. Generally performance has been satisfactory however there was negative news, in the form of weak trading results, from two investments which have resulted in write downs.
A more detailed review of the 'D' Share pool is presented in the Investment Manager's report.
Dividends
In the initial years of each share pool it is the Company's intention to pay dividends of at least 5.0p per annum on a twice yearly basis.
Final dividends for the year ended 31 March 2014 are proposed as follows:
Ordinary Shares 2.5p
'B' Shares 10.0p
'D' Shares 2.5p
The Ordinary and 'D' Share dividend are in line with the standard policy. As mentioned, above the Board is proposing to pay a higher dividend to 'B' Shareholders on this occasion, partly comprising the historic realised gains on the Structured Product investments.
Subject to approval at the forthcoming AGM, the proposed dividends will be paid on 30 September 2014 to Shareholders on the register at the close of business on 22 August 2014
Share buybacks
The Company operates a policy of buying in its own shares that become available in the market subject to regulatory restrictions and other factors such as availability of liquid funds. In the initial years of each share class, purchases are undertaken at prices approximately equal to NAV i.e. at a nil discount.
Shares purchased in the year to 31 March 2014 are summarised as follows:
| Share class | Number | Average price |
| Ordinary Shares | 72,870 | 90.5p |
| 'A' Shares | 40,600 | 0.1p |
| 'B' Shares | 25,300 | 81.5p |
| 'D' Shares | 10,000 | 83.0p |
All of these shares were subsequently cancelled.
Now that the Ordinary Share pool is about to commence realisations to return funds to Shareholders, the Board does not intend to undertake any further share buybacks in respect of the Ordinary Shares and 'A' Shares. The Board believes it is more appropriate to distribute proceeds from the investment realisations to all Ordinary and 'A' Shareholders by way of dividends, rather than setting aside sums to fund share buybacks.
Investment policy
The Board has reviewed the Company's Investment Policy and has made an immaterial adjustment such that, in future, the Company will be able to invest up to 5% of its funds in investments, such as gilts, fixed deposits and secured loans. This will give the Manager some additional flexibility which may help the Company to maintain investment yields particularly as the planned exit date of the various share pools approach and shorter term investments may be sought.
The Board expects to adopt a similar approach for the 'B' Share pool with effect from December 2014. It is expected that standard share buyback policy with operate in respect of the 'D' Share throughout the forthcoming year.
Annual General Meeting
The Company's fifth AGM will be held at Fifth floor, Ergon House, Horseferry Road, London, SW1P 2AL at 10:30 a.m. on 25 September 2014.
One item of special business is proposed: a special resolution to renew the authority to allow the Company to make market purchases of the Company's shares.
Outlook
During the coming year, the Board is optimistic that a significant number of investment realisations from the Ordinary Share pool will be achieved and a good start made in returning funds to Shareholders. We expect to see realisations at full value and believe that the Ordinary Share pool will ultimately deliver an excellent outcome for investors.
The 'B' Share pool will not start seeking to exit from Venture Capital investments until approximately this time next year. Investment activity is therefore expected to be at a low level until then, with the Manager's focus being on building further growth before the planned exit date.
The 'D' Share pool will continue to build its Venture Capital portfolio over the next year, funds for which will be provided from existing cash plus redemptions or disposals of Structured Product investments. The Manager continues to report a flow of attractive investment opportunities, which, along with existing portfolio companies, can deliver growth over the next three years.
The Board is conscious that as the various pools return funds to Shareholder, the size of the Company will reduce and, as a results, running costs per share may increase. The Board is looking at means by which this effect might be reduced or limited, including the possibility of considering a merger with one or more other VCTs. Naturally, I will report to Shareholders any significant such developments as they arise.
In any event, I look forward to updating Shareholders on developments with the various share pools in my statement with the Half-Yearly Report.
Lord Flight
Chairman
INVESTMENT MANAGER'S REPORT - ORDINARY SHARE POOL
Introduction
The Ordinary Share pool held 18 Venture Capital investments at the year end and continues to be effectively fully invested. The majority of the Ordinary Share pool's investments are performing well and we are pleased to report realised and unrealised gains in the pool's investments of £225,000 over the year as the pool moves towards its realisation phase.
Net asset value and results
The net asset value ("NAV") per Ordinary Share at 31 March 2014 stood at 92.2p and NAV per 'A' Share at 0.1p, an increase of 4.9p 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 129.8p for a holding of one Ordinary and one 'A' Share.
The return on ordinary activities after taxation for the year was £499,000 (2013: £1,158,000), comprising a revenue return of £351,000 (2013: £547,000) and a capital profit of £148,000 (2013: £611,000).
Venture Capital investments
Investment activity
At 31 March 2014, the pool held a Venture Capital portfolio with a total valuation of £8.3m, comprising 18 investments, spread across a number of sectors. During the year, the share pool made further investments totalling £100,000, which were offset by divestments of £900,000 and a net increase in value of £183,000.
The pool made one follow-on investment during the year for £100,000 in to Future Biogas (Spring Farm) Limited. No new investments were made in the year.
Bijou Wedding Venues Limited, the owner of Chertsey based exclusive wedding venue Botleys Mansion, was sold during the year generating proceeds of £934,000.
Portfolio valuation
The majority of the investments within the Ordinary Share portfolio performed well throughout the year with a net valuation uplift of £183,000 recognised at the year end for the Venture Capital investments. The largest valuation movements are discussed below.
Westow House Limited owns the Westow House a pub in Crystal Palace, South London. A £79,000 increase in the valuation was recognised at the year end to reflect that the pub continues to perform beyond the original business plan.
The 3D Pub Co Limited owns two pubs in Surrey: The Jolly Farmers in Reigate; and The Fox Revived in Horley. Recent performance has been encouraging and the valuation has been increased by £77,000.
Atlantic Dogstar Limited owns two pubs in London, The Dogstar in Brixton and The Clapton Hart in Clapton. The
Dogstar's performance in particular has led to an increase in value of £44,000.
The East Dulwich Tavern Limited owns a pub of the same name in East Dulwich, South London. The business is performing in line with the original business plan and an uplift in value of £32,000 has been recognised.
A strong performance in the period from Quadrate Catering Limited, the Marco Pierre White restaurant on the top floor of the Commercial Street Hotel, resulted in an uplift of £26,000.
An increase in value of £19,000 in Future Biogas (Spring Farm) Limited was recognised to reflect that the operational issues that were initially experienced have been resolved and performance has significantly improved.
Mosaic Spa and Health Clubs Limited, owns and manages two health clubs: The Shrewsbury Club, in Shrewsbury; and Holmer Park, in Hereford. It also provides gym and spa management services to hotels, universities and corporate clients. Both Holmer Park and The Shrewsbury club have underperformed throughout the period against budget and the value has been reduced by £39,000.
The Chapel Street Companies consist of three separate investments in Liverpool: Chapel Street Food and Beverage Limited; Chapel Street Hotel Limited; and Chapel Street Services Limited. In light of an independent valuation, the value of these companies was reduced by a total of £39,000.
Redmed Limited owns and operates two bars in Lincoln city centre: Home; and Craft. As part of a new investment by other Downing VCT funds, Craft was purchased in May 2013. The slight fall in value of £10,000 is due to transaction costs incurred on the deal.
A small reduction of £6,000 was made in the value of Camandale Limited, the owner of The Riverbank pub in Kilmarnock, Scotland.
Structured products
There are no longer any Structured Products within the Ordinary Share pool.
The last Structured Product in the portfolio was redeemed in the year providing proceeds of £622,000, representing a profit over cost of £209,000. Over the life of the portfolio, the Structured Product investments produced total gains of £1.8 million. No further Structured Product investments are planned for the Ordinary Share Pool.
Outlook
The Ordinary Share pool remains fully invested with a reasonably well diversified qualifying portfolio that is continuing to deliver satisfactory performance. Our focus is now on developing exit plans with the target of achieving sufficient realisations to enable the Company to pay a significant dividend to Ordinary Shareholders early in 2015.
Downing LLP
Portfolio of investments
The following investments were held at 31 March 2014:
| Cost | Valuation | Valuation movement in year | % of portfolio | |
| £'000 | £'000 | £'000 | ||
| Venture Capital investments | ||||
| Redmed Limited* | 914 | 1,159 | (10) | 12.1% |
| Future Biogas (Spring Farm) Limited* | 1,009 | 1,137 | 19 | 11.9% |
| Domestic Solar Limited | 1,000 | 1,120 | - | 11.7% |
| Atlantic Dogstar Limited | 585 | 1,015 | 44 | 10.6% |
| Westow House Limited | 405 | 636 | 79 | 6.7% |
| Quadrate Spa Limited* | 635 | 635 | - | 6.7% |
| Quadrate Catering Limited | 577 | 629 | 26 | 6.6% |
| The 3D Pub Company Limited* | 627 | 549 | 77 | 5.7% |
| East Dulwich Tavern Limited | 459 | 546 | 32 | 5.7% |
| Ecossol Limited | 500 | 425 | - | 4.4% |
| Mosaic Spa and Health Clubs Limited* | 250 | 211 | (39) | 2.2% |
| Slopingtactic Limited | 102 | 102 | - | 1.1% |
| Fenkle Street LLP** | 58 | 58 | - | 0.6% |
| Camandale Limited* | 269 | 24 | (6) | 0.3% |
| Kilmarnock Monkey Bar Limited** | 22 | 22 | - | 0.3% |
| Chapel Street Services Limited | 75 | 19 | (19) | 0.2% |
| Chapel Street Food and Beverage Limited | 75 | 19 | (19) | 0.2% |
| Chapel Street Hotel Limited** | 3 | 1 | (1) | 0.0% |
| 7,565 | 8,307 | 183 | 87.0% | |
| Cash at bank and in hand | 1,245 | 13.0% | ||
| Total investments | 9,552 | 100.0% |
* partially qualifying investment
** non-qualifying investment
All Venture Capital investments are incorporated in England and Wales.
Investment movements for the year ended 31 March 2014
ADDITIONS
| £'000 | |
| Venture Capital investments | |
| Future Biogas (Spring Farm) Limited | 100 |
DISPOSALS
| Cost | Valuation at 31/03/13 *** | Proceeds | Profit vs. cost | Realised gain/(loss) | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Structured Product investments | |||||
| Elders Capital Accumulator VIII (29A) | 486 | 613 | 622 | 209 | 9 |
| 486 | 613 | 622 | 209 | 9 | |
| Venture Capital investments | |||||
| Bijou Wedding Venues Limited | 815 | 901 | 934 | 119 | 33 |
| Redmed Limited | 85 | 85 | 85 | - | - |
| 900 | 986 | 1,019 | 119 | 33 | |
| 1,386 | 1,599 | 1,641 | 328 | 42 |
* partially non-qualifying investment
** non-qualifying investment
*** adjusted for purchases during the year
INVESTMENT MANAGER'S REPORT- 'B' SHARE POOL
Introduction
The 'B' Share pool held 21 Venture Capital investments and three Structured Product investments at the year end and is fully invested. The majority of the 'B' Share pool's investments are performing well, resulting in an increase to net asset value (NAV) over the year. Overall the pool had a net increase in value of its investments held of £126,000 over the year (including Structured Products valuation increase of £61,000.
Net asset value and results
The NAV per 'B' Share at 31 March 2014 stood at 82.3p and per 'C' Share at 0.1p, a rise of 2.3p 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 102.4p for a combined holding.
The return on ordinary activities after taxation for the year was £472,000 (2013: £1,004,000), comprising a revenue return of £480,000 (2013: £472,000) and a capital loss of £8,000 (2013: profit £532,000).
Venture Capital investments
Investment activity
At 31 March 2014, the 'B' Share pool held a venture Capital portfolio with a valuation of £11.9 million comprising investments in 21 companies. During the year, the Company made one further investment of £186,000 in to Future Biogas (Reepham Road) Limited; this was partially offset by divestments of £144,000.
Portfolio valuation
The majority of the 'B' Share pool continued to make progress. The portfolio delivered a net gain of £65,000. An overview of the most significant movements is shown below.
Kidspace Adventure Holdings Limited is the holding company of Kidspace Adventures Limited which owns two indoor children's play centres in Croydon and Romford as well as an adventure park called Hobbledown, located in Surrey. An increase in value of £112,000 is reflective of continued good performance at all three sites.
Green Electricity Generation Limited has installed 198 domestic rooftop solar installations since 2011. Strong performance in the period resulted in an increase in value of £68,000 being recognised.
A strong performance in the year from Quadrate Catering Limited, the Marco Pierre White restaurant on the top floor of the Commercial Street Hotel, resulted in an uplift of £38,000.
Antelope Pub Limited owns The Antelope public house in Tooting, south London. An uplift of £40,000 has been recognised in the year reflecting the pubs performance.
Continued on plan performance at Alpha Schools Holdings Limited, the independent primary school operator, resulted in an uplift of £28,000 in the period.
Mosaic Spa and Health Clubs Limited, owns and manages two health clubs: The Shrewsbury Club, in Shrewsbury; and Holmer Park, in Hereford. It also provides gym and spa management services to hotels, universities and corporate clients. Both Holmer Park and The Shrewsbury club have underperformed throughout the year against budget and the value has been reduced by £107,000.
A £98,000 reduction in value was recognised for Liverpool Nurseries (Holdings) Limited. This cautionary reduction in value reflects that the business is performing behind budget.
A small reduction of £16,000 was made in the value of Camandale Limited, the owner of The Riverbank pub in Kilmarnock, Scotland.
Structured Products
The Structured Product portfolio was valued at £2.6m as at 31 March 2014. During the year, sales and redemptions realised £3.3m, and £1.2m was reinvested into new Structured Products.
The objective with the Structured Product portfolio has been to focus on investments such as defensive auto-callables or synthetic zero's 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. We are pleased to report that this strategy has once again produced a positive return.
Since the 'B ' Share pool was launched, the Structured Product portfolio has recorded gains of £610,000. The defensive approach to Structured Product investing has delivered what was expected of it. Most of the uplift has now been recognised, and more modest returns are expected in the coming year or so as the remaining products are redeemed or sold.
Outlook
Many of the Venture Capital investments are making satisfactory progress however a small number have shown some deviation from plan and will continue to receive close attention in an effort to bring them back on track. We believe that there are prospects for growth from this portfolio, along with a continued steady flow of investment income, before the task of exiting the investments commences in 2015. We also expect the remaining Structured Products to redeem within the next 15 months at a small uplift over current values.
Downing LLP
Portfolio of investments
The following investments were held at 31 March 2014:
| Cost | Valuation | Valuation movement in year | % of portfolio | |
| £'000 | £'000 | £'000 | ||
| Structured Product investments | ||||
| Barclays 5Y Synthetic Zero | 1,003 | 1,365 | 37 | 8.2% |
| HSBC 5.67% Defensive Worst Of Auto Call | 952 | 962 | 10 | 5.8% |
| UBS 7.3% Defensive Worst Of Auto Call | 251 | 265 | 14 | 1.6% |
| 2,206 | 2,592 | 61 | 15.6% | |
| Venture Capital investments | ||||
| Future Biogas (Reepham Road) Limited | 1,662 | 1,662 | - | 10.0% |
| Quadrate Spa Limited* | 954 | 954 | - | 5.7% |
| Quadrate Catering Limited | 850 | 926 | 38 | 5.6% |
| Kidspace Adventures Holdings Limited | 750 | 896 | 112 | 5.4% |
| Domestic Solar Limited | 800 | 896 | - | 5.4% |
| Antelope Pub Limited | 750 | 869 | 40 | 5.2% |
| Alpha Schools Holdings Limited | 733 | 805 | 28 | 4.8% |
| Liverpool Nurseries (Holdings) Limited | 870 | 772 | (98) | 4.6% |
| Green Electricity Generation Limited | 500 | 605 | 68 | 3.6% |
| Westcountry Solar Solutions Limited | 500 | 500 | - | 3.0% |
| West Tower Property Limited | 500 | 500 | - | 3.0% |
| Mosaic Spa and Health Clubs Limited* | 600 | 493 | (107) | 3.0% |
| Ecossol Limited | 500 | 425 | - | 2.6% |
| Avon Solar Energy Limited | 420 | 420 | - | 2.5% |
| Progressive Energies Limited | 340 | 340 | - | 2.0% |
| Slopingtactic Limited | 277 | 277 | - | 1.7% |
| Commercial Street Hotel Limited** | 185 | 185 | - | 1.1% |
| Fenkle Street LLP** | 154 | 154 | - | 0.9% |
| Ridgeway Pub Company Limited | 136 | 126 | - | 0.8% |
| Camandale Limited* | 732 | 65 | (16) | 0.5% |
| Kilmarnock Monkey Bar Limited** | 60 | 60 | - | 0.5% |
| 12,273 | 11,930 | 65 | 71.9% | |
| 14,479 | 14,522 | 126 | 87.5% | |
| Cash at bank and in hand | 2,083 | 12.5% | ||
| Total investments | 16,605 | 100.0% |
* partially qualifying investment
** non-qualifying investment
All Venture Capital investments are incorporated in England and Wales.
Investment movements for the year ended 31 March 2014
ADDITIONS
| £'000 | |
| Structured Product investments | |
| HSBC 5.67% Defensive Worst Of Auto Call | 952 |
| UBS 7.3% Defensive Worst Of Auto Call | 251 |
| 1,203 | |
| Venture Capital investments | |
| Future Biogas (Reepham Road) Limited | 186 |
| 1,389 |
DISPOSALS
| Cost | Valuation at 31/3/13 *** | Proceeds | Profit vs. cost | Realised gain/(loss) | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Structured Product investments | |||||
| Goldman Sachs 6YR Phoenix Autocall 3 | 1,003 | 1,108 | 1,135 | 132 | 27 |
| Elders Capital Accumulator VIII | 970 | 1,226 | 1,244 | 274 | 18 |
| HSBC Trade Range | 752 | 1,011 | 957 | 205 | (54) |
| 2,725 | 3,345 | 3,336 | 611 | (9) | |
| Venture Capital investments | |||||
| Avon Solar Energy Limited | 80 | 80 | 80 | - | - |
| Liverpool Nurseries (Holdings) Limited | 64 | 64 | 64 | - | - |
| 144 | 144 | 144 | - | - | |
| 2,869 | 3,489 | 3,480 | 611 | (9) |
* partially qualifying investment
*** adjusted for purchases during the year
INVESTMENT MANAGER'S REPORT- 'D' SHARE POOL
Introduction
A steady performance from the Structured Product portfolio within the 'D' Share pool has offset poor performance from two related Venture Capital investments (City Falkirk and Cheers Dumbarton) and resulted in small overall gain in net asset value for the year (after adjusting for dividend paid).
The 'D' share pool began the year with £2.2m of venture capital investments and ended the year with £3.0m. Structured Product investments were £1.7 million at the start of the year and ended at £2.4 million. There were no disposals of Venture Capital investments in the year.
Net asset value and results
The net asset value ("NAV") per 'D' Share at 31 March 2014 stood at 83.0p, an increase of 0.3p or 0.3% after adjusting for the dividend paid in the year. Total Return stands at 93.0p per share compared to initial cost to Shareholders, net of income tax relief, of 70.0p per share.
The profit on ordinary activities after taxation for the year was £26,000 (2013: loss £143,000), comprising a revenue profit of £34,000 (2013: loss £60,000) and a capital loss of £8,000 (2013: loss £83,000).
Venture Capital investments
Investment activity
During the year, two new investments were made in the Venture Capital portfolio. £570,000 was invested in Goonhilly Earth Station Limited. The company is based in Cornwall and provides satellite communications services. £280,000 was invested in Pearce and Saunders. The company was set up to purchase the freehold of three south London pubs: Jam Circus in Brockley; Old Post Office in Eltham; and John Jakson in Wallington. One follow on investment of £28,000 was made in Vulcan Renewables Limited, the developer of a Biogas plant near Doncaster.
Portfolio valuation
The majority of investments were held at valuations equal to cost at the year end. Some valuation adjustments have, however, been necessary where businesses have not performed to plan. These are detailed below.
City Falkirk Limited owns a large nightclub in Falkirk, Scotland. This business has traded disappointingly since it was bought out of administration in March 2012 and a further reduction of £50,000 was made at the year end.
A reduction of £42,000 has been made to Cheers Dumbarton Limited following a period of below budget trading. The company was set up to purchase the freehold trade and assets of Cheers nightclub in Dumbarton, Scotland.
In respect of the solar investments (Tor Solar PV, Fresh Green Power and Green Energy Production) progress is satisfactory but we take a relatively prudent view of valuing these type of assets in continuing to hold them at cost. The investments are still young but as they established a reliable record of electricity generation, we believe that there are good prospects for capital uplifts.
Structured Products
All three of the Structured Products held at the start of the year were redeemed as a result of the strong stock market performance triggering redemptions. These generated a profit of £143,000 over cost of £1.5 million. A further seven Structured Products were purchased during the year, and at the year-end were showing an uplift of £101,000 on the cost of £2.3m.
Outlook
The 'D' Share pool's funds are spread between a portfolio of Structured Products, a portfolio of venture capital investments and cash. The remaining cash will be invested into further venture capital investments in the current year. A new investment has been made since the year-end in a large Sussex pub, which is a popular wedding venue. A number of promising opportunities are currently being considered in the renewable energy businesses, and this is likely to result in a higher weighting to this sector. We will continue to monitor the portfolio closely, as we work towards the target exit date of 2017.
Downing LLP
Portfolio of investments
The following investments were held at 31 March 2014:
| Cost | Valuation | Valuation movement in year | % of portfolio | |
| £'000 | £'000 | £'000 | ||
| Structured Product investments | ||||
| HSBC 5.4% Dual Index Synthetic Zero | 501 | 525 | 24 | 8.4% |
| Barclays 7.75% Defensive Worst-Of-Auto-Call | 401 | 424 | 23 | 6.7% |
| Goldman Sachs 8.5% Defensive Worst-Of-Auto-Call | 351 | 371 | 20 | 5.9% |
| UBS 7.3% Defensive Worst-Of-Auto-Call | 251 | 265 | 14 | 4.2% |
| Credit Suisse 7% Defensive Worst-Of-Auto-Call | 251 | 261 | 10 | 4.2% |
| HSBC 7.1% Defensive Worst-Of-Auto-Call | 251 | 259 | 8 | 4.1% |
| HSBC 5.67% Defensive Worst-Of-Auto-Call | 251 | 253 | 2 | 4.0% |
| 2,257 | 2,358 | 101 | 37.5% | |
| Venture Capital investments | ||||
| Tor Solar PV Limited | 640 | 640 | - | 10.2% |
| Vulcan Renewables Limited | 588 | 588 | - | 9.4% |
| Goonhilly Earth Station Limited | 570 | 570 | - | 9.1% |
| Fubar Stirling Limited | 358 | 358 | - | 5.7% |
| Pearce and Saunders Limited* | 280 | 280 | - | 4.5% |
| City Falkirk Limited | 562 | 275 | (50) | 4.4% |
| Fresh Green Power Limited | 200 | 200 | - | 3.2% |
| Green Energy Production UK Limited | 100 | 100 | - | 1.5% |
| Cheers Dumbarton Limited | 64 | 22 | (42) | 0.3% |
| Lochrise Limited | 17 | - | - | 0.0% |
| 3,379 | 3,033 | (92) | 48.3% | |
| 5,636 | 5,391 | 9 | 85.8% | |
| Cash at bank and in hand | 892 | 14.2% | ||
| Total investments | 6,283 | 100.0% |
* partially qualifying investment
All Venture Capital investments are incorporated in England and Wales.
Investment movements for the year ended 31 March 2014
ADDITIONS
| Structured Product investments | £'000 |
| HSBC 5.4% Dual Index Synthetic Zero | 501 |
| Barclays 7.75% Defensive Worst-Of-Auto-Call | 401 |
| Goldman Sachs 8.5% Defensive Worst-Of-Auto-Call | 351 |
| UBS 7.3% Defensive Worst-Of-Auto-Call | 251 |
| Credit Suisse 7% Defensive Worst-Of-Auto-Call | 251 |
| HSBC 7.1% Defensive Worst-Of-Auto-Call | 251 |
| HSBC 5.67% Defensive Worst-Of-Auto-Call | 251 |
| 2,257 | |
| Venture Capital investments | |
| Goonhilly Earth Station Limited | 570 |
| Pearce and Saunders Limited | 280 |
| Vulcan Renewables Limited | 28 |
| 3,135 |
* partially qualifying investment
DISPOSALS
| Cost | Valuation at 31/3/13 *** | Proceeds | Profit vs. cost | Realised gain | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Structured Product investments | |||||
| Credit Suisse 7.25% FTSE Autocall | 523 | 565 | 575 | 52 | 10 |
| JPMorgan 7% Defensive FTSE Autocall | 517 | 565 | 570 | 53 | 5 |
| Royal Bank of Canada 8% Worst-Of-Auto-Call | 502 | 524 | 541 | 38 | 17 |
| 1,542 | 1,654 | 1,686 | 143 | 32 |
*** adjusted for purchases during the year
Directors' responsibilities
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 Conduct 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.
In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in the annual reports may differ from legislation in other jurisdictions.
Directors' statement pursuant to the Disclosure Rules and Transparency Rules
Each of the Directors, confirms that, to the best of each person's knowledge:
the financial statements, which have been prepared in accordance with UK Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
the management report included within the Report of the Directors, Chairman's Statement, Investment Manager's Report, and Review of Investments includes a fair review of the development and performance of the business and the position of the company together with a description of the principal risks and uncertainties that it faces.
By order of the Board
Grant Whitehouse
Secretary of Downing Structured Opportunities VCT 1 plc
INCOME STATEMENT
for the year ended 31 March 2014
| Year ended 31 March 2014 | | Year ended 31 March 2013 | |||||||
| | |||||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||||
| Income | 1,705 | - | 1,705 | 1,704 | - | 1,704 | |||
| | |||||||||
| Net gain on investments | - | 383 | 383 | - | 1,318 | 1,318 | |||
| 1,705 | 383 | 2,088 | 1,704 | 1,318 | 3,022 | ||||
| Investment management fees | (250) | (250) | (500) | (258) | (258) | (516) | |||
| Other expenses | (367) | (1) | (368) | (375) | - | (375) | |||
| Return on ordinary activities before tax | 1,088 | 132 | 1,220 | 1,071 | 1,060 | 2,131 | |||
| Tax on ordinary activities | (223) | - | (223) | (112) | - | (112) | |||
| Return attributable to equity shareholders | 865 | 132 | 997 | 959 | 1,060 | 2,019 | |||
| Basic and diluted return per share: | |||||||||
| Ordinary Share | 3.4p | 1.4p | 4.8p | 5.3p | 5.9p | 11.2p | |||
| 'A' Share | - | - | - | - | - | - | |||
| 'B' Share | 2.4p | 0.0p | 2.4p | 2.4p | 2.7p | 5.1p | |||
| 'C' Share | - | - | - | - | - | - | |||
| 'D' Share | 0.4p | (0.1p) | 0.3p | (0.8p) | (1.1p) | (1.9p) | |||
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 return as stated above and historical cost.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
| Year ended 31 March 2014 | 2013 | ||||||
| Ordinary Share pool | 'B' Share pool | 'D' Share pool | Total | Total | |||
| £'000 | £'000 | £'000 | £'000 | £'000 | |||
| Opening Shareholders' funds | 10,877 | 16,962 | 6,917 | 34,756 | 33,287 | ||
| Proceeds from share issue | - | - | - | - | 3,025 | ||
| Share issue costs | - | - | - | - | (166) | ||
| Purchase of own shares | (66) | (22) | (9) | (97) | (10) | ||
| Unalloted shares | - | - | - | - | (1,491) | ||
| Dividends paid | (1,811) | (997) | (394) | (3,202) | (1,908) | ||
| Total return for the year | 499 | 472 | 26 | 997 | 2,019 | ||
| Closing Shareholders' funds | 9,499 | 16,415 | 6,540 | 32,454 | 34,756 | ||
INCOME STATEMENT (ANALYSED BY SHARE POOL) for the year ended 31 March 2014
Ordinary Share pool | Year ended 31 March 2014 | | Year ended 31 March 2013 | ||||
| | |||||||
| | Revenue | Capital | Total | Revenue | Capital | Total | |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Income | 644 | - | 644 | 827 | - | 827 | |
| | |||||||
| Net gain on investments | - | 225 | 225 | - | 689 | 689 | |
| 644 | 225 | 869 | 827 | 689 | 1,516 | ||
| Investment management fees | (76) | (76) | (152) | (78) | (78) | (156) | |
| Other expenses | (127) | (1) | (128) | (116) | - | (116) | |
| Return on ordinary activities before tax | 441 | 148 | 589 | 633 | 611 | 1,244 | |
| Tax on ordinary activities | (90) | - | (90) | (86) | - | (86) | |
| Return attributable to equity shareholders | 351 | 148 | 499 | 547 | 611 | 1,158 | |
'B' Share pool | Year ended 31 March 2014 | | Year ended 31 March 2013 | ||||
| | |||||||
| | Revenue | Capital | Total | Revenue | Capital | Total | |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Income | 904 | - | 904 | 808 | - | 808 | |
| | |||||||
| Net gain on investments | - | 117 | 117 | - | 658 | 658 | |
| 904 | 117 | 1,021 | 808 | 658 | 1,466 | ||
| Investment management fees | (125) | (125) | (250) | (126) | (126) | (252) | |
| Other expenses | (171) | - | (171) | (184) | - | (184) | |
| Return/(loss) on ordinary activities before tax | 608 | (8) | 600 | 498 | 532 | 1,030 | |
| Tax on ordinary activities | (128) | - | (128) | (26) | - | (26) | |
| Return/(loss) attributable to equity shareholders | 480 | (8) | 472 | 472 | 532 | 1,004 | |
'D' Share pool | Year ended 31 March 2014 | | Year ended 31 March 2013 | ||||
| | |||||||
| | Revenue | Capital | Total | Revenue | Capital | Total | |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Income | 157 | - | 157 | 69 | - | 69 | |
| | |||||||
| Net gain on investments | - | 41 | 41 | - | (29) | (29) | |
| 157 | 41 | 198 | 69 | (29) | 40 | ||
| Investment management fees | (49) | (49) | (98) | (54) | (54) | (108) | |
| Other expenses | (69) | - | (69) | (75) | - | (75) | |
| Return/(loss) on ordinary activities before tax | 39 | (8) | 31 | (60) | (83) | (143) | |
| Tax on ordinary activities | (5) | - | (5) | - | - | - | |
| Return/(loss) attributable to equity shareholders | 34 | (8) | 26 | (60) | (83) | (143) | |
BALANCE SHEET as at 31 March 2014
| | 2014 | 2013 | |||||||||||||||||||
| | |||||||||||||||||||||
| Ordinary Share pool | 'B' Share pool | 'D' Share pool | Total | Ordinary Share pool | 'B' Share pool | 'D' Share pool | Total | ||||||||||||||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||||||||||||||
| | |||||||||||||||||||||
| Fixed assets | |||||||||||||||||||||
| Investments | 8,307 | 14,522 | 5,391 | 28,220 | 9,623 | 16,496 | 3,901 | 30,020 | |||||||||||||
| Current assets | |||||||||||||||||||||
| Debtors | 137 | 124 | 337 | 598 | 134 | 100 | 1 | 235 | |||||||||||||
| Cash at bank and in hand | 1,245 | 2,083 | 892 | 4,220 | 1,316 | 564 | 3,092 | 4,972 | |||||||||||||
| 1,382 | 2,207 | 1,229 | 4,818 | 1,450 | 664 | 3,093 | 5,207 | ||||||||||||||
| Creditors: amounts falling due within one year | (190) | (314) | (80) | (584) | (196) | (198) | (77) | (471) | |||||||||||||
| Net current assets | 1,192 | 1,893 | 1,149 | 4,234 | 1,254 | 466 | 3,016 | 4,736 | |||||||||||||
| Net assets | 9,499 | 16,415 | 6,540 | 32,454 | 10,877 | 16,962 | 6,917 | 34,756 | |||||||||||||
Capital and reserves | |||||||||||||||||||||
| Called up Ordinary/'B'/'D' Share capital | 10 | 20 | 8 | 38 | 10 | 20 | 8 | 38 | |||||||||||||
| Called up 'A'/'C' Share capital | 16 | 30 | - | 46 | 16 | 30 | - | 46 | |||||||||||||
| Capital redemption reserve | 5 | - | - | 5 | 5 | - | - | 5 | |||||||||||||
| Special reserve | 4,113 | 15,540 | 7,437 | 27,090 | 5,812 | 15,924 | - | 21,736 | |||||||||||||
| Share premium account | 2,794 | - | - | 2,794 | 2,794 | - | 7,446 | 10,240 | |||||||||||||
| Revaluation reserve | 743 | 43 | (243) | 543 | 772 | 536 | (141) | 1,167 | |||||||||||||
| Capital reserve - realised | 1,148 | 344 | (641) | 851 | 1,149 | 345 | (341) | 1,153 | |||||||||||||
| Revenue reserve | 670 | 438 | (21) | 1,087 | 319 | 107 | (55) | 371 | |||||||||||||
| Total equity shareholders' funds | 9,499 | 16,415 | 6,540 | 32,454 | 10,877 | 16,962 | 6,917 | 34,756 | |||||||||||||
| Basic and diluted net asset value per: | |||||||||||||||||||||
| Ordinary Share/'B' Share/'D' Share | 92.2p | 82.3p | 83.0p | 104.8p | 84.9p | 87.7p | |||||||||||||||
| 'A' Share/'C' Share | 0.1p | 0.1p | - | 0.1p | 0.1p | - | |||||||||||||||
CASH FLOW STATEMENT for the year ended 31 March 2014
| | Year ended 31 March 2014 | Year ended 31 March 2013 | |||||||||
| | |||||||||||
| Ordinary Share pool | 'B' Share pool | 'D' Share pool | Total | Ordinary Share pool | 'B' Share pool | 'D' Share pool | Total | ||||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||||
| | |||||||||||
| Net cash inflow/(outflow) from operating activities | 352 | 473 | (54) | 771 | 488 | 271 | (49) | 710 | |||
| | |||||||||||
Taxation | |||||||||||
Corporation tax paid | (86) | (26) | - | (112) | - | - | - | - | |||
| | |||||||||||
Capital expenditure | |||||||||||
Purchase of investments | (100) | (1,389) | (3,135) | (4,624) | (237) | (1,989) | (3,189) | (5,415) | |||
Proceeds from disposal of investments | 1,641 | 3,480 | 1,686 | 6,807 | 1,148 | 2,857 | 2,051 | 6,056 | |||
Movements in deposit held for purchase of investments | - | - | (294) | (294) | - | - | 640 | 640 | |||
Net cash inflow/(outflow) from capital expenditure | | 1,541 | 2,091 | (1,743) | 1,889 | 911 | 868 | (498) | 1,281 | ||
| | |||||||||||
Equity dividends paid | (1,811) | (997) | (394) | (3,202) | (518) | (996) | (394) | (1,908) | |||
| | |||||||||||
Net cash (outflow)/inflow beforefinancing | (4) | 1,541 | (2,191) | (654) | 881 | 143 | (941) | 83 | |||
| | |||||||||||
Financing | |||||||||||
| Proceeds from 'D' Share issue | - | - | - | - | - | - | 1,534 | 1,534 | |||
Share issue costs | - | - | - | - | - | - | - | (166) | (166) | ||
Purchase of own shares | (67) | (22) | (9) | (98) | (10) | - | - | (10) | |||
| Net cash inflow from financing | (67) | (22) | (9) | (98) | (10) | - | 1,368 | 1,358 | |||
| | |||||||||||
(Decrease)/increase in cash | (71) | 1,519 | (2,200) | (752) | 871 | 143 | 427 | 1,441 | |||
NOTES TO THE ACCOUNTS
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 Financial Reporting Council 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 revenue return 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;
*Multiples;
*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 in the foreseeable future.
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 loan notes other than those held as part of the investment portfolio and other creditors are included within the accounts at amortised cost.
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/(loss) | ||
| Return per share is calculated on the following: | £'000 | £'000 | ||
| Year ended 31 March 2014 | Ordinary Shares | 10,329,656 | 351 | 148 |
| 'A' Shares | 15,532,691 | - | - | |
| 'B' Shares | 19,933,528 | 480 | (8) | |
| 'C' Shares | 29,926,070 | - | - | |
| 'D' Shares | 7,747,890 | 34 | (8) | |
| Year ended 31 March 2013 | Ordinary Shares | 10,366,195 | 547 | 611 |
| 'A' Shares | 15,552,030 | - | - | |
| 'B' Shares | 19,936,370 | 472 | 532 | |
| 'C' Shares | 29,931,291 | - | - | |
| 'D' Shares | 7,749,013 | (60) | (83) | |
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
| 2014 | 2013 | ||||||||
| Net asset value | Net asset value | ||||||||
| Shares in issue | Pence per share | £'000 | Pence per share | £'000 | |||||
| 2014 | 2013 | ||||||||
| Ordinary Shares | 10,288,157 | 10,361,027 | 92.2 | 9,484 | 104.8 | 10,862 | |||
| 'A' Shares | 15,506,488 | 15,547,088 | 0.1 | 15 | 0.1 | 15 | |||
| 'B' Shares | 19,911,070 | 19,936,370 | 82.3 | 16,385 | 84.9 | 16,932 | |||
| 'C' Shares | 29,926,070 | 29,926,070 | 0.1 | 30 | 0.1 | 30 | |||
| 'D' Shares | 7,877,527 | 7,887,527 | 83.0 | 6,540 | 87.7 | 6,917 | |||
| Net assets per Balance Sheet | 32,454 | 34,756 | |||||||
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. Principal Risks
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:
*Investment 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 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:
Investment risks
As a VCT, the Company is exposed to investment 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. Investment 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:
*Investment price risk; and
*Interest rate risk.
Investment price risk
Investment 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 2014, the Structured Product portfolio was valued at £4,950,000.
The fair values of Structured Products are influenced primarily by changes in the FTSE 100 Index.
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, Structured Products, loans and receivables (excluding cash at bank) and other financial liabilities.
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, debtors and Structured Products. Credit risk relating to loan stock investee companies is considered to be part of market risk.
The Manager manages credit risk in respect of loan stock with a similar approach as described under Investment 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 £584,000 (2013: £471,000), 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.
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 2014, but has been extracted from the statutory financial statements for the year ended 31 March 2014 which were approved by the Board of Directors on 25 July 2014 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 2013 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 2014 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at Fifth floor, Ergon House, Horseferry Road, London, SW1P 2AL and will be available for download from www.downing.co.uk.