TIDMDDV2
Downing Distribution VCT 2 plc
Final Results for the year ended 31 MARCH 2011
FINANCIAL HIGHLIGHTS
Ordinary Shares of 1p each 2011 2010
Pence Pence
(restated)
Net asset value per share ("NAV") 104.5 98.6
Cumulative distributions paid since 1 April 2010 (see below) 7.1 -
------- ----------
Total return (net asset value plus cumulative distributions 111.6 98.6
paid)
'D' Shares of 10p each 2011 2010
Pence Pence
Net asset value per share ("NAV") 92.5 89.6
Cumulative distributions paid since launch of 'D' Share offer 1.0 1.0
------- -----
Total return (net asset value plus cumulative distributions paid) 93.5 90.6
CHAIRMAN'S STATEMENT
Introduction
I am pleased to present the Company's first Annual Report since the merger with
Pennine Downing AIM VCT 2 plc. It has been a busy year in terms of investment
activity, partly as a result of Downing, the new manager, starting to implement
the Company's revised investment policy. In terms of performance, the Company's
Net Asset Values showed steady growth over of the year, supported by a rising
AIM market.
Mergers and reorganisation
The Company completed the merger with Pennine Downing AIM VCT 2 in May 2010,
issuing 7.4 million New Ordinary Shares as consideration. Immediately
afterwards, the Original Ordinary Shares were converted into New Ordinary Shares
at the rate of 0.31556464 New Ordinary Share for every Original Ordinary Share.
At the same time the Company changed its name from Pennine AIM VCT plc to
Downing Distribution VCT 2 plc, changed investment manager and adopted a new
investment policy.
Net asset values
The Net Asset Value ("NAV") per New Ordinary Share at 31 March 2011 stood at
104.5p This is an increase of 13.0p (13.1%) per New Ordinary Share over the
year or 11.6p (11.6%) since the completion of the merger adding back the
dividends of 7.1p paid during the year.
The NAV per 'D' Share stood at 92.5p, an increase of 2.9p (or 3.2%) over the
year. No dividends were paid to holders of 'D' Shares during the year.
Venture capital investments
At the year end the Company held a portfolio of investments valued at GBP13.1
million, which is split across the Ordinary and 'D' Share pool as follows:
Ordinary share pool
Immediately following the completion of the Schemes of Arrangement, the
portfolio expanded substantially, in number and by value. The value of
investments acquired from PDA2 was GBP5.7 million.
During the year, the Company invested GBP4.1 million in new and follow-on venture
capital investments.
A higher than normal amount of disposals have been undertaken by the new
Investment Manager in order to move towards the new investment policy and in
order to generate funds to pay the dividends discussed below.
At 31 March 2011, this portfolio comprised 33 investments which were valued at
GBP10.5 million. The portfolio generated net unrealised losses of GBP825,000 and net
realised gains of GBP573,000 over the year.
'D' Share pool
During the year, the Company invested GBP752,000 in new and follow-on venture
capital investments.
At 31 March 2011, this portfolio comprised 17 investments which were valued at
GBP1.9 million. The portfolio generated net unrealised losses of GBP105,000 and net
realised gains of GBP8,000 over the year.
Details of the Company's venture capital investments, including additions,
disposals and performance, are set out within the Investment Manager's report
and Review of Investments.
Listed fixed income and other investments
The Ordinary Share pool holds a non-qualifying portfolio which comprises two
hedge funds. The portfolio had a value of GBP178,000 at the year end and
generated an unrealised gain of GBP5,000 and realised losses of GBP1,000 over the
year.
The 'D' Share pool holds a non-qualifying portfolio comprising of a FTSE index
tracker, which was valued at GBP512,000 at the year end. The portfolio generated
an unrealised gain of GBP4,000 over the period.
Results
The total return on ordinary activities for the period was as follows:
Revenue Capital Total
GBP'000 GBP'000 GBP'000
Ordinary Shares 81 4,779 4,860
'D' Shares (7) 89 82
----------------------------
74 4,868 4,942
The income statement includes an item entitled "Net gain on acquisition of net
assets" (equivalent to negative goodwill), which is a substantial sum that
relates to the mergers and arises as a quirk of the accounting treatment and the
relatively low share price of the Company's share at the time the merger
completed. The capital gains for the period, before the net gain on acquisition
of net assets, were GBP1.4 million.
Dividends - New Ordinary Shares
In connection with the merger, the Company paid a dividend of 1.5p each to
holders of Pennine AIM VCT plc Original Ordinary Shares on 21 May 2010,
equivalent to 4.26p per New Ordinary Share.
A dividend of 1.5p per share was also paid to former holders of Ordinary Shares
in Pennine Downing AIM VCT 2, equivalent to 4.75p per New Ordinary Share.
The Company also paid an interim dividend of 2.5p per New Ordinary Share on 25
March 2011.
As announced at the time of the merger, the Company is now targeting annual
dividends of 5.0p per New Ordinary Share. Accordingly, a final dividend of
2.5p per New Ordinary Share will be paid, subject to Shareholder approval at the
AGM, on 29 September 2011 to Shareholders on the register at 26 August 2011.
Dividends - 'D' Shares
As stated in the 'D' Share prospectus issued in 2006, approximately five years
after the close of the 'D' Share offer, the Company is targeting to have paid at
least 30p per 'D' Share to 'D' Shareholders by way of dividends and/or tender
offer. 'D' Shareholders have received dividends of 1p per share to date.
The Board is proposing to pay a final dividend, for the year under review
(subject to Shareholder approval), of 5.0p per 'D' Share on 29 September 2011 to
Shareholders on the register at 26 August 2011. It is expected that a further
sizeable dividend will be paid to 'D' Shareholders during 2012 such that total
dividends equal or exceed the 30p target.
Once this has been paid, the Board intends to convert the 'D' Shares into New
Ordinary Shares. Full details will be sent to Shareholders during 2012.
Fundraising
The Company undertook a small fundraising exercise during the year, issuing
177,965 New Ordinary Shares which produced net proceeds of GBP196,000.
Share buybacks
The Company has a policy of purchasing its own shares that become available in
the market. The Board has currently set a price of a 15% discount to NAV for
such purchases but continues to monitor the market in the Company's shares and
may make adjustments to the policy as appropriate. Any such purchases will be
subject to VCT regulations, company law, liquidity considerations and the
Listing Rules.
During the year, the Company repurchased 600,978 Ordinary Shares of 1p each for
an aggregate consideration of 82.3p per share (approximately equal to a 15% to
the most recently published NAV), and representing 5% of the issued share
capital of the enlarged entity. These shares were subsequently cancelled.
There were no 'D' Share buybacks during the year.
Comparative figures
The Company's previous Annual Report reported NAV, Total Return and Return per
share in terms of Original Ordinary Shares. In order to provide a meaningful
comparison, the comparative figures in this report have been restated, where
applicable, to show them in terms of New Ordinary Shares.
Amendment to investment policy
One of the key elements of the Company's investment strategy has been to try to
utilise the non VCT qualifying portion of its funds effectively. This has been
executed successfully to date with the Company's NAV growing more than it would
have done if non-qualifying funds had been held as cash deposits.
The Investment Manager manages a significant number of VCTs and similar funds
and has a regular pipeline of investment opportunities, some of which would not
be VCT qualifying for this Company by virtue of the size of the business or the
sector in which it operates.
In view of this, the Board has reviewed the Company's Investment Policy and is
proposing a minor amendment to allow the Company to have the option to take
advantage of a small number of such non qualifying investment opportunities.
Resolution 8 to be proposed at the AGM is an ordinary resolution seeking
Shareholder approval for this minor amendment.
Annual General Meeting
The next AGM of the Company will be held at 10 Lower Grosvenor Place, London,
SW1W 0EN at 11:00 am on 22 September 2011.
Four items of special business are proposed: the ordinary resolution to adopt
the revised investment policy; an ordinary resolution and a special resolution
in relation to the allotment of shares; and a special resolution to renew the
authority to allow the Company to make market purchases of the Company's shares.
Outlook
The Company has undergone many changes during the last year and, I believe, is
now better positioned as a result. Over the coming year, the Manager will seek
further opportunities to bring the portfolio into line with the new investment
policy although activity is expected to be lower than in the previous year.
Although the AIM market has risen strongly over the 12 months, the general
economy remains fragile and a sustained recovery may be some way off. With the
higher proportion of unquoted, income-producing investments held, the Company
should now be less vulnerable to market volatility and has a better chance of
achieving its target annual dividend.
Andrew Griffiths
Chairman
INVESTMENT MANAGER'S REPORT
We present this report having completed our first ten months as Investment
Manager.
Following the Company's merger with Pennine Downing AIM 2 VCT plc, and
consistent with the Company's revised investment policy, we have replaced a
number of smaller and less dynamic investments with larger holdings in a more
focused portfolio of both quoted and unquoted investments.
General economic conditions in the UK and Europe remained strained throughout
the period. Base rates have been held low whilst inflation has increased and
investors' risk appetite has returned. In the year to March 2011 the FTSE 100
increased 4.6% to over 6,000 points. There remains considerable uncertainty in
global markets as evidenced by record prices in safe haven assets such as gold
and in the appreciation of the Swiss Franc.
The FTSE AIM All-Share index increased 28.2% to over 900 points in the year to
March 2011. Despite this, the index remains 27% below its July 2007 high. The
recovery is largely driven by mineral and exploration stocks which constitute
over 30% of the Index and in which the Company does not invest.
Since the merger the Ordinary Share pool's total return has increased by 11.6p
to 111.6p. The NAV per share is 104.5p after 7.1p of cumulative dividends in the
in period. This is a strong performance and arises from a combination of
increasing share prices and greater returns on unquoted investments. In the same
period the 'D' Share pool's total return has increased 2.9p to 93.5p.
The Company's current portfolio
The Company's current investment portfolio is valued at GBP13 million, of which
GBP11 million is held by the Ordinary Share pool, and GBP2 million is held by the
'D', Share pool, and is broadly split between quoted and unquoted investments.
GBP4.9 million of investments were made in the period, 80% of which was invested
into new unquoted investments and all of which include a mix of equity and
interest yielding debt.
The Company's future growth rate may not continue at its recent pace as it
strategically reduces its exposure to the volatile quoted investment sector in
favour of unquoted investments. Nevertheless, the Company's longer term
performance is expected to be more stable and resilient.
Ordinary Share pool
Quoted investments
Additions
The Share pool has invested GBP0.9 million into four quoted investments. This
includes GBP400,000 invested in Accumuli plc (previously NetServices Plc), a
provider of IT security software and services, at 7.0p per share. The investment
is alongside GBP600,000 from other Downing funds. The share price has increased
from 7.1p to 9.0p in the year and at the year end the investment was valued at
GBP523,000. Downing related funds now hold, in aggregate, over 10% of the share
capital in Accumuli plc which provides additional influence and leverage for the
Company.
The Share pool has also increased its investment in Ludorum plc by GBP72,000,
alongside the 'D' Share pool which has also invested a further GBP49,000. Combined
with its original GBP238,000 investment and the GBP815,000 investment acquired on
the merger, the Share pool's investment in Ludorum plc is now valued at
GBP1,259,000. At 10.2% of the Ordinary Share portfolio this is the single largest
quoted holding, although the investment is structured between loan notes and
equity. This provides some downside protection through the security over the
intellectual property of the children's TV title "Chuggington".
The Share pool also invested GBP225,000 in IS Pharma plc, a skin and mouth disease
specialist in which the 'D' Share pool already holds a GBP110,000 investment.
Since the period end IS Pharma plc has merged with Sinclair Pharma plc and will
soon be renamed Sinclair IS Pharma plc. The Ordinary Share pool also made a
follow-on investment of GBP246,000 in Tristel plc, an existing investee company
for both Share pools, which produces infection control products for public and
private healthcare providers.
Disposals and realised profits
The Ordinary Share pool exited in full from a selection of quoted investments to
focus on a dozen core holdings. The net realised gain across all quoted
investments is GBP356,000.
The GBP3.5 million disposal program included a GBP1.0 million partial disposal of
Synergy Health plc with a realised gain of GBP205,000, the exit from Spice plc
with a realised gain of GBP244,000, the takeover of Neutrahealth plc which
resulted in a realised gain of GBP94,000 and the sale of GBP364,000 of bonds.
As previously reported at the half year, Connaught plc has gone into
liquidation. The failure of Connaught has created a GBP298,000 realised loss in
the period but the overall net gain from this investment over its entire life in
the fund has been GBP514,000. A number of ex-Connaught contracts have been
acquired by Mears plc; also an investee company (investment valued at GBP465,000
at year end). In May 2011, Mears posted strong results which give us confidence
in the longevity of the business.
Changes in value in period
Overall, the quoted portfolio benefited from a GBP700,000 valuation increase
driven by a combination of share price movements. This net increase was driven
by the value of the investment in Elektron plc (+ GBP427,000) and in Pennant
International plc (+ GBP234,000). These two companies currently represent 8.9% and
3.6%, respectively, of the Ordinary Share pool quoted investments.
Unquoted investments
Additions
The Ordinary Share pool invested GBP3.2 million across ten new unquoted
investments. GBP500,000 was invested in Domestic Solar Limited which specialises
in the promotion and installation of solar panels to generate renewable
electricity from private homes. GBP454,000 was invested in Leytonstone Pubs
Limited which owns and operates public houses in East London. The operator is
experienced and already has a significant number of units across south London.
GBP375,000 was invested in Helcim Group Limited which acts a letting agent between
landlord and tenant on properties where rents are paid by local authorities.
GBP250,000 was invested in Tramps Nightclub Limited in Worcester, GBP300,000 was
invested in Aminghurst Limited, a Devon based property developer, and GBP295,000
was invested in EPI Services Limited. EPI Services specialises in the design,
installation and support of corporate data centres. The balance was invested
with further established public house operators and another renewable energy
business (Future Biogas (SF) Limited).
Disposals and realised profits
The Ordinary share pool realised a GBP216,000 gain on the redemption of loan stock
in Real Time Logistic Solutions Limited; the related equity investment continues
to be valued at nil.
Changes in value in period
Loan stock and equity in SPC International plc were acquired at nil value as
part of the merger. The Company has since reversed the GBP240,000 provision
against the loan stock although the equity investment continues to be valued at
nil.
As previously reported, the GBP125,000 investment in the Thames Club Limited, has
been fully provided for following the major refurbishment of this health club.
Until trading improves significantly it is too early to consider reversing this
provision.
Liquidity
The Ordinary Share pool holds over GBP1.5 million of cash at the year end. This
liquidity will ensure it is well placed to take advantage of further unquoted
investment opportunities and to build on its refocused quoted company portfolio.
'D' Share Pool
Quoted investments
Additions
The 'D' Share pool made a GBP49,000 follow-on investment in Ludorum plc, alongside
GBP72,000 from the Ordinary Share pool. Combined with its original GBP135,000
investment the Share pool's investment in Ludorum plc is now valued at GBP284,000,
and is structured in the same manner. At 10.8% of the portfolio this is one the
two largest quoted holdings together with Animal Care Group plc; also 10.8% of
the 'D' Share pool.
Disposals and realised profits
There were no material disposals or realised profits in the period.
Changes in value in period
The 'D' Share pool holds five core quoted investments: Animalcare Group plc, IS
Pharma plc, Ludorum plc, Plastics Capital plc and Tristel plc. In aggregate they
are valued at GBP914,000 at the period end and include GBP155,000 of valuation
uplift from the beginning of the period.
Unquoted investments
Additions
The 'D' Share pool invested GBP700,000, alongside the Ordinary Share pool, into
eight new unquoted investments in the period. This includes GBP490,000 across four
companies which own and operate public houses, GBP83,000 into Tramps Nightclub
Limited, GBP80,000 into EPI Services Limited, GBP75,000 into Aminghurst Limited and
GBP75,000 into Future Biogas (SF) Limited.
Disposals and realised profits
There were no material disposals or realised profits in the period.
Changes in value in period
The remaining GBP50,000 investment in The Thames Club Limited has been fully
provided for until the health club's trading improves.
Developments since the year end
Since the year end, as part of the revised investment policy, the Company
continues to make strategic changes to the investment portfolio. The Ordinary
Share pool has made a GBP350,000 investment in AIM listed Tracsis plc which
specialises in optimisation software for the rail industry. Again, Downing
related investment funds account for over 8% of the shareholdings in Tracsis
plc. This provides additional influence to the Company's investment, and is
consistent with the strategy to take more meaningful and influential stakes in a
select number of companies.
Outlook
Whilst the economic conditions in the UK are expected to see a modest
improvement in 2011, the after effects of the credit crunch will continue to be
felt for some time. The historic low UK interest rate, at 0.5% since March
2009, has done little to improve lending to small businesses despite political
pressure on banks to do more. Even those with sufficient equity continue to be
charged high margins. These factors should provide investment opportunities for
the unquoted portfolio as small businesses struggle to access finance.
The refocusing of the quoted portfolio will continue into next year to ensure
the portfolio is resilient in the current macro-economic climate but also poised
to take advantage of future growth.
Downing LLP
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments, all of which are incorporated in England and Wales,
were held at 31 March 2011:
Ordinary Share pool
Valuation movement
in year % of portfolio by
Cost Valuation GBP'000 value
GBP'000 GBP'000
Top ten venture capital
investments (by value)
Ludorum plc 1,127 1,259 (52) 10.2%
Elektron plc 667 1,093 427 8.9%
Cadbury House Holdings 974 1,009 - 8.2%
Limited *
Accumuli plc 400 523 123 4.3%
Domestic Solar Limited 500 500 - 4.1%
*
Mears Group plc *** 551 465 (91) 3.8%
Leytonstone Pub Limited 454 454 - 3.7%
*
Pennant International 212 446 234 3.6%
plc
Hoole Hall Spa and 420 420 - 3.4%
Leisure Limited *
Tristel plc 362 376 9 3.1%
---------------------------------------------------------
5,667 6,545 650 53.3%
---------------------------------------------------------
Other venture capital
investments
Helcim Group Limited * 375 375 - 3.1%
Aminghurst Limited * 300 300 - 2.4%
Camandale Limited * 300 300 - 2.4%
The 3D Pub Co Limited * 300 300 - 2.4%
Straight plc 335 297 13 2.4%
EPI Services Limited * 295 295 - 2.4%
Synergy Health plc *** 201 267 66 2.2%
Tramps Nightclub 250 250 - 2.0%
Limited *
Hoole Hall Country Club 240 240 - 2.0%
Holdings Limited *
SPC International - 240 240 2.0%
Limited *
IS Pharma plc 225 236 11 1.9%
DODs Group plc 283 173 (30) 1.4%
(formerly Huveaux plc)
Ludlow Taverns 150 150 - 1.2%
Springhill Limited *
Financial News 150 150 - 1.2%
Publishing Limited *
Future Biogas (SF) 125 125 - 1.0%
Limited *
@UK plc 300 87 81 0.7%
Giving Limited 83 83 - 0.7%
Keycom plc ** 275 63 (10) 0.5%
Colliers CRE plc 266 50 (54) 0.4%
Media Square plc 259 15 (17) 0.1%
Chariot (UK) Limited * 125 - - -
Real Time Logistic 32 - - -
Solutions Limited *
The Thames Club Limited 125 - (125) -
*
---------------------------------------------------------
4,994 3,996 175 32.4%
---------------------------------------------------------
Other investments
Goldman Sachs Dynamic 182 163 3 1.4%
Opp. LD
Signet Global Fixed Inc 20 15 2 0.1%
Strategy LD
---------------------------------------------------------
202 178 5 1.5%
---------------------------------------------------------
Total investments 10,863 10,719 830 87.2%
Cash at bank and in 1,569 12.8%
hand
----------- --------------------
12,288 100.0%
All venture capital investments are listed on AIM unless otherwise stated
* Unquoted ** Quoted on the PLUS market *** Quoted on London Stock Exchange full
list
'D' Share pool
Valuation movement
in year % of portfolio by
Cost Valuation GBP'000 value
GBP'000 GBP'000
Top ten venture capital
investments (by value)
Animalcare Group plc 103 286 64 10.8%
Ludorum plc 184 284 (1) 10.8%
Cadbury House Holdings 160 179 - 6.8%
Limited *
Tristel plc 113 151 - 5.7%
Leytonstone Pubs Limited 129 129 - 4.9%
*
IS Pharma plc 100 110 37 4.2%
The 3D Pub Co Limited * 83 83 - 3.1%
Tramps Nightclub Limited 83 83 - 3.1%
*
Plastics Capital plc 100 83 55 3.1%
EPI Services Limited * 80 80 - 3.0%
-------------------------------------------------------
1,135 1,468 155 55.5%
Other venture capital
investments
Aminghurst Limited * 75 75 - 2.8%
Camandale Limited * 75 75 - 2.8%
Future Biogas (SF) 75 75 - 2.8%
Limited *
Hoole Hall Country Club 60 60 - 2.3%
Holdings Limited *
Hoole Hall Spa and 60 60 - 2.3%
Leisure Limited *
Ludlow Taverns Springhill 50 50 - 2.0%
Limited*
The Thames Club Limited * 100 - (50) -
-------------------------------------------------------
495 395 (50) 15.0%
Protected Plan
Barclays Bank FTSE 531 512 4 19.4%
155% 16/03/2012
Total investments 2,161 2,375 109 89.9%
Cash at bank and in hand 268 10.1%
----------- -------------------
2,643 100.0%
All venture capital investments are listed on AIM unless otherwise stated
* Unquoted ** Quoted on the PLUS market *** Quoted
on London Stock Exchange full list
1 Investments made by other funds also managed by Downing Corporate Finance
Limited as at 31 March 2011.
DD1 Downing Distribution VCT 1 plc DSO Downing
Structured Opportunities plc
DAI1Downing Absolute Income VCT 1 plcDAI2Downing Absolute Income VCT 2 plc
Investment movements for the year ended 31 March 2011
Acquired as part the Merger Ordinary 'D' Share
Share Pool Total
Pool
GBP'000 GBP'000 GBP'000
From Pennine Downing AIM VCT 2 plc 5,714 - 5,714
Additions Ordinary 'D' Share
Share Pool Total
Pool
GBP'000 GBP'000 GBP'000
New investments
Accumuli plc 400 - 400
Aminghurst Limited 300 75 375
Camandale Limited 300 75 375
Domestic Solar Limited 500 - 500
EPI Services Limited 295 80 375
Future Biogas (SF) Limited 125 75 200
Helcim Group Limited 375 - 375
Leytonstone Pubs Limited 454 129 583
Ludlow Taverns Springhill Limited 307 103 410
The 3D Pub Co Limited 300 83 383
Tramps Nightclub Limited 250 83 333
Follow-on investments
IS Pharma plc 225 - 225
Ludorum plc 72 49 121
Tristel plc 246 - 246
Sundry investments 1 - 1
-------------------------------
4,150 752 4,902
Disposals Profit/
MV at (loss) Realised gain/(loss)
Cost 01/04/10* Proceeds vs cost
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Ordinary Share Pool
1st Dental Laboratories
plc 101 10 11 (90) 1
Carecapital Group plc 100 15 17 (83) 2
Connaught plc 36 342 44 8 (298)
Elektron plc 117 117 183 66 66
Forest Support plc 202 159 220 18 61
Interserve plc 122 138 122 - (16)
Ludlow Taverns Springhill 158 158 158 - -
Limited
Neutrahealth plc 345 227 321 (24) 94
Preston North End plc 99 99 5 (94) (94)
Quadnetics Group plc 198 157 184 (14) 27
Real Time Logistic
Solutions Ltd 225 144 360 135 216
Spice plc 433 312 556 123 244
Synergy Health plc 674 820 1,025 351 205
The Clapham House Group
plc 94 77 81 (13) 4
Liquidations, dissolutions
and administrations 590 - 61 (529) 61
------------------------------------------------------
3,494 2,775 3,348 (146) 573
------------------------------------------------------
Other investments
Bluecrest Allblue Fund LD 134 202 204 70 2
Henderson Global Investors
Fund 163 163 160 (3) (3)
------------------------------------------------------
297 365 364 67 (1)
------------------------------------------------------
3,791 3,140 3,712 (79) 572
'D' Share Pool
Ludlow Taverns Springhill 52 52 52 - -
Limited
Liquidations, dissolutions 108 (100) 8
and administrations - 8
------------------------------------------------------
160 52 60 (100) 8
Total disposals 3,951 3,192 3,772 (179) 580
* Adjusted for purchases in the year
Liquidations, dissolutions and administrations include investments in
Clerkenwell Ventures plc, FSG Security plc, Maverick Entertainment plc and Pubs
'n' Bars plc.
Statement of Directors' responsibilities
The Directors are responsible for preparing the Annual Report, the Directors'
Remuneration Report, the Corporate Governance Statement, and the financial
statements in accordance with applicable law and regulations.
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 those financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and 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 accounting records that are sufficient
to show and explain the Company's transactions and disclose with reasonable
accuracy at any time the financial position of the Company and to enable them to
ensure that the financial statements, and the Directors' Remuneration Report,
comply with the requirements of 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.
By order of the Board
Grant Whitehouse
Secretary
INCOME STATEMENT for the year ended 31 March 2011
Company position
Year ended 31 March 2011 14 months ended 31 March
2010
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income
Continuing operations 214 - 214 141 - 141
Acquisitions 145 - 145 - - -
--------- --------- ------- --------- --------- ------
359 - 359 141 - 141
--------- --------- ------- --------- --------- ------
Gains on investments:
Continuing operations - 239 239 - 406 406
Acquisitions - 1,280 1,280 - - -
--------- --------- ------- --------- --------- ------
- 1,519 1,519 - 406 406
--------- --------- ------- --------- --------- ------
Net gain on acquisition
of net assets - 3,512 3,512 - - -
--------- --------- ------- --------- --------- ------
359 5,031 5,390 141 406 547
Investment management (52) (158) (210) (20) (60) (80)
fees
Other expenses (233) (5) (238) (236) - (236)
--------- --------- ------- --------- --------- ------
Return on ordinary
activities 74 4,868 4,942 (115) 346 231
before tax
Tax on ordinary - - - - - -
activities
--------- --------- ------- --------- --------- ------
Return attributable to
equity Shareholders 74 4,868 4,942 (115) 346 231
Basic and diluted return
per Ordinary Share 0.7p 40.6p 41.3p (1.7p) 4.7p 3.0p
(2010 restated)
Basic and diluted return
per 'D' Share (0.2p) 3.1p 2.9p (1.3p) 4.6p 3.3p
The total column within the Income Statement represents the profit and loss
account of the Company.
A Statement of Total Recognised Gains and Losses has not been prepared as all
gains and losses are recognised in the Income Statement.
Split as:
Ordinary Shares
Year ended 31 March 2011 14 months ended 31 March
2010
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income
Continuing operations 167 - 167 94 - 94
Acquisitions 145 - 145 - - -
--------- --------- ------- --------- --------- ------
312 - 312 94 - 94
--------- --------- ------- --------- --------- ------
Gains on investments:
Continuing operations - 122 122 - 252 252
Acquisitions - 1,280 1,280 - - -
--------- --------- ------- --------- --------- ------
- 1,402 1,402 - 252 252
--------- --------- ------- --------- --------- ------
Net gain on acquisition
of net assets - 3,512 3,512 - - -
--------- --------- ------- --------- --------- ------
312 4,914 5,226 94 252 346
Investment management (42) (130) (172) (12) (36) (48)
fees
Other expenses (189) (5) (194) (160) - (160)
--------- --------- ------- --------- --------- ------
Return on ordinary
activities 81 4,779 4,860 (78) 216 138
before tax
Tax on ordinary - - - - - -
activities
--------- --------- ------- --------- --------- ------
Return attributable to
equity Shareholders 81 4,779 4,860 (78) 216 138
'D' Shares
Year ended 31 March 2011 14 months ended 31 March
2010
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income - continuing 47 - 47 47 - 47
operations
Gains on investments
- continuing - 117 117 - 154 154
operations
--------- --------- ------- --------- --------- ------
47 117 164 47 154 201
Investment management (10) (28) (38) (8) (24) (32)
fees
Other expenses (44) - (44) (76) - (76)
--------- --------- ------- --------- --------- ------
Return on ordinary
activities (7) 89 82 (37) 130 93
before tax
Tax on ordinary - - - - - -
activities
--------- --------- ------- --------- --------- ------
Return attributable to
equity Shareholders (7) 89 82 (37) 130 93
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 March 2011
Year ended 31 March 2011 14 months ended 31 March
2010
Ordinary 'D' Ordinary 'D'
Shares Shares Total Shares Shares Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Opening 4,541 2,542 7,083 4,403 2,449 6,852
Shareholders'
funds
Issue of share
capital on 3,913 - 3,913 - - -
acquisition
Proceeds of new 163 - 163 - - -
share issue
Share issue (19) - (19) - - -
costs
Repurchase of (498) - (498) - - -
own shares
Total
recognised 4,860 82 4,942 138 93 231
gains
for the year
Dividends paid (839) - (839) - - -
------------ ---------- -------- ------------ ---------- ------
Closing 12,121 2,624 14,745 4,541 2,542 7,083
Shareholders'
funds
BALANCE SHEET
as at 31 March 2011
31 March 2011 31 March 2010
Ordinary 'D' Ordinary 'D'
Shares Shares Total Shares Shares Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Fixed assets
Investments 10,719 2,375 13,094 3,165 1,566 4,731
------------ ---------- -------- ----------- --------- --------
Current assets
Debtors 39 9 48 138 4 142
Cash at bank 1,569 268 1,837 1,413 1,005 2,418
and in hand
------------ ---------- -------- ----------- --------- --------
1,608 277 1,885 1,551 1,009 2,560
Creditors:
amounts falling (206) (28) (234) (175) (33) (208)
due
within one year
------------ ---------- -------- ----------- --------- --------
Net current 1,402 249 1,651 1,376 976 2,352
assets
------------ ---------- -------- ----------- --------- --------
Net assets 12,121 2,624 14,745 4,541 2,542 7,083
Capital and
reserves
Called up share 116 284 400 1,308 284 1,592
capital
Capital 3,608 - 3,608 299 - 299
redemption
reserve
Share premium 1,940 - 1,940 - - -
account
Special reserve 4,379 2,158 6,537 2,240 2,287 4,527
Capital reserve 2,444 4 2,448 2,436 4 2,440
- realised
Revaluation (144) 214 70 (1,622) (4) (1,626)
reserve
Revenue reserve (533) (36) (569) (556) (29) (585)
Merger reserve 311 - 311 436 - 436
------------ ---------- -------- ----------- --------- --------
Total equity
Shareholders' 12,121 2,624 14,745 4,541 2,542 7,083
funds
Restated
Basic and
diluted net 104.5p 92.5p 98.6p 89.6p
asset
value per
Share
CASH FLOW STATEMENT
for the year ended 31 March 2011
31 March 2011 14 months ended 31 March
2010
Ordinary 'D' Ordinary 'D'
Shares Shares Total Shares Shares Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net cash outflow
from (34) (46) (80) (16) (14) (30)
operating
activities
----------- --------- --------- ---------- -------- ------
Capital expenditure
Purchase of (4,150) (752) (4,902) (344) (232) (576)
investments
Disposal of 3,711 61 3,772 1,588 1,239 2,827
investments
----------- --------- --------- ---------- -------- ------
Net cash
(outflow)/inflow (439) (691) (1,130) 1,244 1,007 2,251
from capital
expenditure
----------- --------- --------- ---------- -------- ------
Acquisitions
Cash acquired 1,990 - 1,990 - - -
Acquisition costs (200) - (200) (8) - (8)
----------- --------- --------- ---------- -------- ------
Net cash
inflow/(outflow) 1,790 - 1,790 (8) - (8)
from acquisitions
----------- --------- --------- ---------- -------- ------
Equity distributions (841) - (841) - - -
paid
----------- --------- --------- ---------- -------- ------
Net cash
inflow/(outflow) 476 (737) (261) 1,220 993 2,213
before financing
Financing
Proceeds of share 168 - 168 - - -
issue
Share issue costs (12) - (12) - - -
Purchase of own (476) - (476) (6) - (6)
shares
----------- --------- --------- ---------- -------- ------
Net cash outflow
from financing (320) - (320) (6) - (6)
----------- --------- --------- ---------- -------- ------
Increase/(decrease)
in cash 156 (737) (581) 1,214 993 2,207
NOTES TO THE ACCOUNTS
for the year ended 31 March 2011
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" January 2009 ("SORP").
The financial statements are prepared under the historical cost convention
except for the revaluation of certain financial instruments.
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 guidance issued by the Association of Investment Companies
("AIC"), 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
Venture capital 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 FRS26.
Listed fixed income investments, hedge funds and investments quoted on
recognised stock markets are measured using bid prices.
The valuation methodologies for unlisted instruments 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 the 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.
Where an investee company has gone into receivership, liquidation, or
administration where there is little likelihood of a recovery, the loss on the
investment, although not physically disposed of, is treated as being realised.
Gains and losses arising from changes in fair value are included in the income
statement as a capital item.
It is not the Company's policy to exercise either significant or controlling
influence over investee companies. Therefore, the results of these companies
are not incorporated into the revenue account 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.
In respect of disclosures required by the SORP for the ten largest investments
held by the Company, the most recent publicly available accounts information,
either as filed at Companies House, or announced to the London Stock Exchange,
are disclosed, which may be abbreviated information only in the case of unlisted
investments.
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 apportioned basis, by reference to the
principal outstanding and at the effective interest 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 acquisition of an investment are
deducted from the Capital Account.
* 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 and accordingly the investment management fee and finance
costs have been allocated 25% to revenue and 75% to capital, in order to
reflect the Directors' expected long-term view of the nature of the
investment returns of the Company.
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.
Deferred taxation is not discounted and 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 the obligations or rights crystallise based on tax rates and law enacted or
substantively enacted at the balance sheet date. 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.
Deferred tax assets are only recognised if it is expected that future taxable
profits will be available to utilise such assets and are recognised on a non-
discounted basis.
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.
Share issue costs
Share issue costs have been deducted from the share premium account.
Segmental reporting
The Company only has one class of business and one market.
Acquisitions
Acquisitions made during the year are accounted for using the acquisition
method. The purchase consideration is measured at the fair value of equity
issued compared to the fair value of the assets and liabilities of the company
acquired. Negative goodwill represents the excess of the fair value of the
assets, liabilities and contingent liabilities of the company acquired over the
purchase consideration. Any negative goodwill in excess of the fair value of
the non-monetary assets acquired is recognised in the Capital Account within the
Income Statement in the periods expected to benefit and is described as "Net
gain on acquisition of net assets".
2. Return per Share
Ordinary Shares 'D' Shares
Year ended 31 14 months to Year ended 31 14 months to
March 2011 31 March 2010 March 2011 31 March 2010
Return per Share
based on:
Net revenue 81 (78) (7) (37)
gain/(loss) for
the period
( GBP'000)
Capital return
per Share based
on:
Net capital gain 4,779 216 89 130
for the period
( GBP'000)
Restated
Weighted average 11,767,213 4,605,085 2,836,269 2,836,269
number of Shares
in issue
As the Company has not issued any convertible securities or share options, there
is no dilutive effect on return per share class in issue. The return per share
disclosed therefore represents both basic and diluted return per share class in
issue.
On 12 May 2010 the 13,086,372 Original Ordinary Shares of 10p each were
converted into 4,605,085 Ordinary Shares under the Scheme of Arrangement. The
return per share disclosed on the face of the Income Statement for the period to
31 March 2010 has been restated accordingly.
3. Net asset value per Share
2011 2010
Shares in issue Net asset value Net asset value
2011 2010 Pence GBP'000 Pence GBP'000
per per
share share
Ordinary Shares 11,598,424 4,605,085 104.5p 12,121 98.6p 4,541
'D' Shares 2,836,269 2,836,269 92.5p 2,624 89.6p 2,542
-------- ------
14,745 7,083
On 12 May 2010 the 13,086,372 Original Ordinary Shares of 10p each were
converted into 4,605,085 Ordinary Shares under the Scheme of Arrangement. The
Net Asset Value for the Ordinary Shares for the period to 31 March 2010 has been
restated accordingly.
As the Company has not issued any convertible securities or share options, there
is no dilutive effect on net asset value per class of share in issue. The net
asset value per share disclosed therefore represents both basic and diluted net
asset value per class of share in issue.
4. Principal risks and uncertainties
The Company's investment activities expose the Company to a number of risks
associated with financial instruments and the sectors in which the Company
invest. The principal financial risk 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 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 though 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 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.
The Company has undertaken sensitivity analysis on its financial instruments,
split into the relevant component parts, taking into consideration the economic
climate at the time of review in order to ascertain the appropriate risk
allocation.
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 quoted investments and also changes
in the fair value of unquoted investments that it holds.
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 and on
liquidity funds at rates based on the underlying investments. Investments in
loan stock and fixed interest investments attract interest predominately at
fixed rates. A summary of the interest rate profile of the Company's
investments is shown below.
The Company monitors the level of income received from fixed, floating and non
interest rate assets and, if appropriate, may make adjustments to the allocation
between the categories, in particular should this be required to ensure
compliance with the VCT regulations.
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, investments in liquidity funds, cash deposits and debtors.
The Manager manages credit risk in respect of loan stock with a similar approach
as described under Market risks above. 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 risk
profile 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.
The Company only normally ever has a relatively low level of creditors (2011:
GBP234,000, 2010: GBP208,000) and has no borrowings. Also most 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 2011, but has been extracted from
the statutory financial statements for the year ended 31 March 2011 which were
approved by the Board of Directors on 22 July 2011 and will be delivered to the
Registrar of Companies following the Company's Annual General Meeting. 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 period ended 31 March 2010 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 2011 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
www.downing.co.uk.
This announcement is distributed by Thomson Reuters on behalf of
Thomson Reuters clients. The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and
other applicable laws; and
(ii) they are solely responsible for the content, accuracy and
originality of the information contained therein.
Source: Downing Distribution VCT 2 plc via Thomson Reuters ONE
[HUG#1532996]
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