TIDMDI40
Downing Income VCT 4 plc
Final results for the year ended 30 September 2012
FINANCIAL SUMMARY
2012 2011
Pence Pence
Net asset value per share ("NAV") 34.8 41.8
Cumulative dividends paid since launch 31.0 28.5
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Total return (net asset value plus cumulative distributions paid) 65.8 70.3
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Dividends in respect of financial year
Proposed final dividend per share 2.5 2.5
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CHAIRMAN'S STATEMENT
There have been significant changes to your Company during the last year. On 1
March 2012 Downing LLP was appointed as the new investment manager, the Company
changed its name from Framlington AIM VCT plc to Downing Income VCT 4 plc, and
the new manager started to implement a revised investment strategy.
Change of Manager
As Shareholders will be aware, in light of the generally disappointing
performance of the AIM market in recent years, the Board undertook a strategic
review to determine possible future options for the Company. One of the
conclusions of this process was that a reduced exposure to the AIM Market was
desirable. The Board held discussions with a number of potential managers and
ultimately appointed Downing which was able to offer significant experience in
AIM-quoted and unquoted VCT investing.
In the negotiations with Downing, the Board was able to secure a lower
management fee than the Company had paid to its previous manager and Downing
also agreed to bear the costs of the change of manager and some other costs.
Immediately following the appointment, the Board agreed a new strategy with
Downing, with the objective of balancing the portfolio between AIM-quoted and
unquoted investments and, in respect of the AIM-quoted investments, seeking to
focus on those where Downing has a significant holding and can exert some
influence over the business. Further details of Downing's approach and the
progress made to date are set out in the Investment Manager's Report.
Net asset value, results and dividend
Despite the change in strategy, the Company remained heavily exposed to the AIM
market throughout the year under review. Exiting from some investments which the
new manager does not consider to be long term holds is expected to take some
time.
The AIM market index showed significant volatility during the year, although
finished at a similar level to that at which it started. Unfortunately, many of
the portfolio companies experienced falls in their share prices over the year
and consequently the Company's net asset value ("NAV") has also fallen.
The most significant falls were Music Festivals ( GBP136,000) which has now gone
into administration, Craneware ( GBP174,000), Angle ( GBP157,000) and Rivington Street
( GBP100,000). On a positive note, Anpario gained GBP94,000 and Vertu Motors gained
GBP88,000. There were a significant number of disposals during the year, most
since the change of manager, including a realised gain of GBP160,000 achieved on
the sale of Getech Group. Overall the portfolio experienced unrealised losses of
GBP964,000 and realised gains of GBP86,000 for the year.
As at 30 September 2012, the Company's NAV stood at 34.8p, a decrease of 4.5p
(10.7%) compared to the position at 30 September 2011 (after taking into account
the dividend paid during the year).
The loss on ordinary activities after taxation for the year recorded in the
Income Statement was GBP1.0 million, comprising a revenue loss of GBP82,000 and a
capital loss of GBP922,000.
The Board is proposing a final dividend of 2.5p per share to be paid, subject to
Shareholder approval at the forthcoming AGM, on 15 February 2013 to Shareholders
on the register at 18 January 2013.
Investment activity
The portfolio was managed by AXA Framlington ("AXA") for the first five months
of the year under review. Under AXA's management, the Company invested in six
AIM placings at a total cost of GBP253,000. Proceeds of GBP733,000 were also raised
through a number of disposals.
Since 1 March 2012, Downing has raised GBP2.7 million from full or partial
disposal of 17 investments, producing a small gain of GBP85,000. GBP1.4 million of
the proceeds were subsequently invested in five new investments, three of which
are unquoted.
Further details of the Company's investment activities since Downing's
appointment, including the performance of the portfolio, are set out within the
Investment Manager's Report and Review of Investments.
Share Realisation and Reinvestment Programme ("SRRP")
Shareholders will be aware that the Company recently launched an SRRP which
allows Shareholders to obtain a further 30% income tax relief on the current
value of their investment on the basis that they continue to hold their shares
for a further five years.
The scheme is expected to close on 21 February 2013 with the substitute shares
to be issued shortly after that.
Share buybacks
From time to time, the Company has purchased its own shares that become
available in the market. During the year, the Company repurchased 461,034 shares
for an average consideration of 25.0p per share and representing 2.2% of the
issued share capital. These shares were subsequently cancelled.
In due course, and following the closure of the SRRP, the Board intends to
introduce a more formal share buyback policy to ensure that there is liquidity
in the market for the Company's shares for those Shareholders that need it.
Annual General Meeting
The next AGM of the Company will be held at 10 Lower Grosvenor Place, London
SW1W 0EN at 11:00 a.m. on 7 February 2012.
Three items of special business are proposed: one ordinary and one 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 Board believes that the appointment of the new Manager, the commencement of
the implementation the new strategy and the SRRP are positive steps that will
ultimately help improve performance for investors. As the Company is effectively
fully invested and liquidity in many AIM stock is weak, the task of fully
rebalancing the portfolio is likely take some time so we may not see all the
rewards in the short term.
The Board recognises that, with net assets of approximately GBP7.3 million, the
Company is relatively small for a VCT and a further reduction in size may start
to raise the burden of fixed running costs to an unreasonable level. The
possibilities of fundraising and/or seeking a merger with one or more other VCTs
are being reviewed with the Manager. I will write to Shareholders in due course
if there are any developments before the half yearly report to 31 March 2013.
Tim How
Chairman
INVESTMENT MANAGER'S REPORT
Downing assumed the Investment Management mandate of the Company on 1 March
2012.
The purpose of the following report is:
* To further explain our investment style and process;
* To disclose our performance over the period; and
* To discuss our rationale behind any significant new
investments/divestments.
Investment style and process
The AIM market can be fairly inefficient for smaller companies and there can be
overreaction to disappointing news. This is compounded further for the types of
companies in which the Company invests by three factors;
1. The poor quality and volume of research available for potential investors.
The availability of research for companies within the larger capitalisations of
the UK stock market is very good. There are sometimes 5-10 analysts covering
each company, creating an independent network of researchers. Conversely,
research on smaller companies is often scarce, non-independent and not
sufficiently detailed.
Research is often written by the house broker who is potentially conflicted as
they are paid agents of the company. Therefore little, if any, independent
analysis is available to investors in small companies.
2. The lack of institutional money allocated to this segment of the market.
The market for smaller companies has suffered from continuous capital outflows
over the last five years. In the current environment, the charge that an
investment manager can ascribe per annum in order to run the Company (the annual
management charge) is under pressure and so the Company only increases
profitability by increasing 'funds under management' ("FUM"). In general, the
greater the FUM, the larger the investee company must be in order to make a
meaningful investment. If you run a fund with GBP500 million under management, it
would not be economic or efficient to consider investing in a company with a GBP10
million market capitalisation, no matter how undervalued it might be.
3. Venture Capital Trusts facing restrictions on the companies in which they
invest.
Adding this constraint to the inefficiencies of the market highlighted above,
the universe of companies in which your Company can invest therefore becomes
smaller.
How does Downing cope with the restrictions and inefficiencies of investment in
small companies from VCT funds?
Downing views the inefficiencies in the small company markets as an opportunity.
The ability of the Company to invest in both quoted and unquoted companies helps
address the issue of the lack of availability of good qualifying AIM
investments. Our immediate challenges are to improve the performance and focus
of the existing portfolio and seek liquidity to allow the Company to invest in
qualifying unquoted assets, and selectively add to the quoted investments where
appropriate.
We ignore the markets as an arbiter of value and rely upon our own proprietary
research to determine value. We will never speculatively "punt" in the hope that
a stock provides a short term gain, we will only invest once we have conviction
in the quality of the business, the management team and the price we are paying.
Our first job is to seek out companies that can consistently generate a high
return on invested capital ("ROIC") over the long term. In order to do this we
require a process for screening. We ensure that the company is qualifying for
VCT purposes then start our filter to remove candidates that possess too many of
the following negative attributes;
* Companies within a sector/area that we do not understand or cannot predict;
* Low historic ROIC;
* Commodity type products with little to no pricing power;
* Dependency on a small group of customers;
* Low barriers to market entry;
* High gearing: relative to assets and earnings;
* High fixed cost base relative to secure revenue.
We then analyse the operations, the sector that the company operates in and the
business' ecosystem. This knowledge can be assimilated through various ways
including; annual reports, regulatory reports (such as from the OFT), Mintel
reports, competitors' annual reports and discussion with competitors, past
employees, suppliers and customers.
Having established the above, we then look to understand the board and the
executive team, their integrity and ability to allocate capital together with
any incentive packages issued. Generally, CEOs feel that they are paid by
reference to market capitalisation and judged against EPS growth. We want them
to focus on the returns generated by invested capital and we consequently look
for management teams with significant (by their standards) 'skin in the game'.
Once a company has progressed fully through our identification process, we
create a valuation range. We look to buy or hold equity at a price that returns
our initial investment in a worst case scenario and offers at least 15% returns
within our other valuation ranges. We are very patient in waiting for the stock
market to offer us the opportunity to buy equity within these companies at a
price that gives us these risk/reward odds and are long term investors.
It is challenging to drive performance from a large number of small holdings, as
is typical of the portfolio of the Fund. We have been implementing the
investment process detailed above on the Company and seek to arrive at a smaller
focused pool of AIM investments that we will have fully reviewed and that meet
our criteria. We will carefully dispose of those that do not meet our strict
criteria but will not do so hastily, as we aim to achieve the best possible
prices and valuations for these companies. Meanwhile, we are adding unquoted
yielding assets to the portfolio which should aid the Company's ability to pay
(tax free) dividends.
Downing is making some progress in this strategy and has partly/fully divested
in seventeen companies since 1 March 2012, raising proceeds of GBP2.7 million and
invested GBP1.4 million in two quoted holdings and three unquoted holdings which
are discussed later in this report.
Performance for the year
In the year to 30 September 2012, the NAV fell from 41.8p to 34.8p, a fall of
10.7% after taking the dividend paid in the year into account.
Major movements in the period include Craneware, which saw a fall in value of
GBP174,000 as it announced delays in its sale of software into the US healthcare
market. This negative share price movement has been partially negated by
subsequent announcements that trading has improved. Craneware has long term
contracts with major health trusts in the USA and is a key part of the insurance
claim process. We continue to believe Craneware is a good company and will
monitor its valuation in relation to contract news.
Other contributors to negative performance were Angle (down GBP157,000), and a
loss on the investment, made in June 2011 by the previous manager, in Music
Festivals ( GBP136,000). Music Festivals suffered as its summer festivals competed
with the Olympics impacting on its onerous debt facilities. The company was
placed into administration during September and any equity value is lost.
Meanwhile the carrying value of the loan stock investment in Rivington Street
Holdings was written down to zero as higher ranking loan stock was issued to
help restructure the company.
There were a few bright spots to talk about in the portfolio; Anpario, a
manufacturer of supplements for the animal food industry saw its valuation
increase by GBP94,000, while Cohort, the supplier of support for the defence
industry saw its share price partially recover and this had a positive impact of
GBP71,000 to the Company, while the valuation of Vertu Motors increased by GBP88,000
over the year.
The general underperformance of the portfolio can clearly be attributed to a few
larger holdings, however, across the board the portfolio performance was very
disappointing and is reflective of challenging trading within the underlying
companies against a difficult macro-economic backdrop.
However, progress to achieve the focused approach that Downing aims to deploy
with this Fund is making good headway. The vast majority of investee companies
have been met and evaluated and are in our diligence process. Those that do not
fit our criteria are being sold into liquidity, however, we are never forced
sellers of stock and will be patient. A small handful of illiquid legacy stocks
could continue to dampen performance, however, we are confident that over the
longer term liquidity will be achieved and the stronger attributes of the core
holdings will outweigh any downside from poor legacy holdings.
Portfolio Activity
Quoted Portfolio
Aside from the disposal program already discussed, two new quoted holdings were
added to the portfolio.
The Company made a GBP254,000 investment into Ludorum Plc, into both equity and
yielding 7.5% Loan Stock in the company. Ludorum owns the Intellectual Property
of "Chuggington", which is a popular under-fives TV programme set in the
fictional village of Chuggington and is focussed on its trains.
Portfolio Activity (continued)
It is shown in over 170 territories and has consistently been rated as a top
title for its demographic. TOMY, the Japanese manufacturer and distributor of
children's toys, holds the "Master Toy" licence for Chuggington, which allows
TOMY to manufacture and distribute the toys worldwide. Over $150m of
merchandising has been sold since launch of the toy only 2 years ago.
Ludorum is a company that is familiar to Downing. Downing-managed funds and
associated parties hold nearly 14% of the equity in Ludorum and half of the loan
stock, alongside DC Thomson. This loan stock confers some investor rights
including limiting the ability of the company to raise additional debt and the
right to a board position. This allows Downing to exert some influence over the
cost base and future strategy for the company, ultimately working with
management to drive shareholder returns. This is typical of our investment focus
and style where we seek to take larger more influential holding, once we have
completed our diligence.
The coming twelve months are very important for Ludorum as TOMY launch two new
product lines, Plarail and Stacktrack. We believe that the traction that the
company has already got with its young audience, combined with the strength and
power of TOMY, gives this IP inherent value which protects the downside at our
entry price while providing upside on the basis of new product launches.
Although the share price has fallen a little since the Company made its
investment, we do not believe that this in indicative of any issues with the
underlying business.
In addition, the Company took a small equity holding ( GBP65,000) in Universe Group
Plc which is one of Europe's largest providers of loyalty, payment and forecourt
technology. They have on-going maintenance and support agreements with all of
the UK's major forecourt retailers, including Asda and Morrisons. The Company
has also made a post year-end investment of GBP40,000 in Universe loan stock which
confers some investor rights.
Unquoted Portfolio
The Company invested GBP400,000 into Vulcan Renewables Limited, which is a new
company developing an anaerobic digestion plant near Doncaster. The plant is
managed by Future Biogas Limited who have developed and operate two other
anaerobic digestion plants in which Downing VCTs are invested. The anaerobic
digestion process converts energy crops, such as maize, into bio-methane gas by
a process of fermentation. In this case, the gas will be treated and then fed
into the national gas grid.
The plant is expected to qualify under the Renewable Heat Incentive scheme which
the UK Government has set up to encourage the uptake of renewable heat
technologies among householders, communities and businesses. As a result, Vulcan
should receive a tariff based on the amount of gas injected into the grid, which
will be paid for 20 years and increase annually with RPI. In order to secure the
maize being used as feedstock, Vulcan is renting approximately 2,000 acres of
land from local farmers under cropping licences, and will engage contract
farmers to grow maize on the land. The plant is currently under construction,
and is expected to be operational by the end of next summer.
The Company's investment in Vulcan is a combination of equity, qualifying loan
notes and non-qualifying loan notes, which is intended to provide a yield and a
share in the upside. We are seeking further qualifying investments of this
nature.
The Company also made non-qualifying loans of GBP400,000 and GBP300,000 to Baron
House Developments LLP ("Baron House") and Southampton Hotel Developments
Limited ("Southampton Hotel") respectively. The loan to Baron House was part of
a larger loan to enable Baron House to acquire a building in central Newcastle,
which has the potential to be converted into a hotel. The loan is secured by a
first charge on the land and buildings, and the Company is entitled to interest
and a share in any development profit from the scheme. Similarly the loan to
Southampton Hotel was part of a GBP3 million loan to build a 175 room hotel, under
the Hilton brand, at the Ageas Bowl, home of the Hampshire Cricket Club.
Summary
The re-focusing of the portfolio into a blend of unquoted and quoted holdings
has made some early progress. There has been an immediate focus on retaining
those existing portfolio companies that should drive performance, with efforts
to seek liquidity on those that are now not core holdings. The pipeline of
yielding unquoted assets is strong and we expect to report that this momentum to
focus and add yielding assets has continued by the time of the release of the
Half Yearly accounts to 31 March 2013.
Portfolio of investments
The following investments, all of which are incorporated in England and Wales,
were held at 30 September 2012:
Valuation % of
movement portfolio
Cost Valuation in year by value
GBP'000 GBP'000 GBP'000
Top ten venture capital investments
Baron House Developments LLP * 400 400 - 6.1%
Vulcan Renewables Limited * 400 400 - 6.1%
Craneware plc 125 399 (174) 6.1%
Anpario plc 251 392 94 6.0%
Southampton Hotel Developments Ltd* 300 300 - 4.5%
Vertu Motors plc 500 292 88 4.4%
Brooks Macdonald Group plc 35 291 (13) 4.4%
Cohort plc 242 238 71 3.6%
Ludorum plc 254 232 (23) 3.5%
Angle plc 330 218 (157) 3.3%
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2,837 3,162 (114) 48.0%
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Other venture capital investments
Sanderson Group plc 250 185 50 2.8%
Tristel plc 239 171 (30) 2.6%
Energetix Group plc 216 162 3 2.5%
Brady plc 88 144 40 2.2%
EG Solutions plc 200 144 (2) 2.2%
Manroy plc 195 143 (92) 2.2%
Interquest Group plc 218 136 (64) 2.1%
Vianet Group plc 162 126 4 1.9%
Avacta Group plc 150 120 (12) 1.8%
Photonstar LED Group plc 136 117 (68) 1.8%
Instem plc 168 115 (96) 1.7%
Corero Network Security plc 364 112 (14) 1.7%
Dillistone Group plc 88 105 (14) 1.6%
Tangent Communications plc 150 104 46 1.6%
Accumuli plc 675 100 29 1.5%
Surface Transforms plc 150 88 9 1.3%
Universe Group plc 65 85 20 1.3%
Active Risk Group plc 116 79 (41) 1.2%
Belgravium Technologies plc 175 69 (19) 1.0%
Maxima Holdings plc 507 65 (8) 1.0%
AFC Energy plc 25 63 (20) 1.0%
Pressure Technologies plc 54 56 7 0.8%
PHSC plc 121 48 9 0.7%
Tawa plc 143 48 (15) 0.7%
Cyan Holdings plc 195 41 (10) 0.6%
Porta Communications plc 215 37 (31) 0.6%
Theo Fennell plc 141 37 (35) 0.6%
Hightex Group plc 113 34 4 0.5%
Datong plc 150 33 1 0.5%
Plastics Capital plc 50 33 (3) 0.5%
VSA Capital Group plc 100 33 (28) 0.5%
Ant plc 183 29 (3) 0.4%
Wheelsure Holdings plc ** 75 26 (32) 0.4%
Corac Group plc 94 24 2 0.4%
Plethora Solutions Holdings plc 675 24 12 0.4%
Bglobal plc 107 19 (1) 0.3%
Imagelinx plc 200 14 4 0.2%
Savile Group plc 101 14 (2) 0.2%
Concha plc 149 13 (22) 0.2%
Suretrack Monitoring plc 120 11 (78) 0.2%
Travelzest plc 100 4 (2) 0.1%
3D Diagnostic Imaging plc 150 3 (76) -
Consolidated General Minerals plc * 111 - (23) -
Invocas Group plc * 152 - (13) -
Music Festivals plc 150 - (136) -
Rivington Street Holdings plc * 136 - (100) -
Welby Holdings plc * 100 - - -
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8,222 3,014 (850) 45.8%
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11,059 6,176 (964) 93.8%
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Cash at bank and in hand 406 6.2%
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Total investments 6,582 100.0%
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All venture capital investments are listed on AIM unless otherwise stated
* Unquoted
** Quoted on the ISDX trading facility ("ISDX") (formerly PLUS market)
Additions in the year to 30 September 2012
GBP'000
Period from 1 October 2011 to 29 February 2012
Market purchases
Byotrol plc 50
Cyan Holdings plc 25
Hightex Group plc 13
Photonstar LED Group plc 75
Porta Communications plc 65
Wheelsure Holdings plc 25
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253
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Period from 1 March 2012 to 30 September 2012
Market purchases
Ludorum plc 254
Universe Group plc 65
Other sundry investments 5
Unquoted investments
Baron House Developments LLP 400
Southampton Hotel Developments Limited 300
Vulcan Renewables Limited 400
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1,424
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1,677
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Disposals in the year to 30 September 2012
Realised Profit/
MV at gain/(loss) (loss) vs
Cost 01/10/11* Proceeds in year cost
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Period from 1 October 2011 to
29 February 2012
Alterian plc 22 7 10 3 (12)
Angle plc 100 85 97 12 (3)
Brooks Macdonald Group plc 42 371 337 (34) 295
Craneware plc 6 29 30 1 24
Green Compliance plc 93 2 1 (1) (92)
Noble Investments (UK) plc 15 45 46 1 31
Orosur Mining plc 141 25 30 5 (111)
Plastics Capital plc 100 70 68 (2) (32)
Sanderson Group plc 100 54 75 21 (25)
T. Clarke plc 248 41 39 (2) (209)
Administrations/liquidations and
dissolutions:
AT Communications Group plc 522 - - - (522)
Bioganix plc 253 - - - (253)
Fishworks plc 248 - - - (248)
Hat Pin plc 169 - - - (169)
Hexagon Human Capital plc 298 - - - (298)
Legion FM plc 350 - - - (350)
MediaSquare plc 250 3 - (3) (250)
Relax Group plc 100 - - - (100)
Rok plc 33 - - - (33)
Sovereign Oilfield Group plc 201 - - - (201)
Sport Media Group plc 250 - - - (250)
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3,541 732 733 1 (2,808)
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Period from 1 March 2012 to 30
September 2012
@UK plc 250 53 48 (5) (202)
AFC Energy plc 62 203 152 (51) 90
Brooks Macdonald Group plc 30 253 264 11 234
Byotrol plc 333 91 76 (15) (257)
Craneware plc 61 283 199 (84) 138
Digital Barriers plc 200 266 308 42 108
EKF Diagnostics plc 150 250 279 29 129
Energetix Group plc 24 18 17 (1) (7)
Getech Group plc 361 167 327 160 (34)
Instem plc 83 105 75 (30) (8)
Lidco plc 95 59 80 21 (15)
Managed Support Services plc 254 6 - (6) (254)
Nanoco plc 575 197 271 74 (304)
Noble Investments (UK) plc 102 312 312 - 210
Photonstar Led plc 261 140 65 (75) (196)
Pure Wafer plc 175 8 8 - (167)
Sinclair IS Pharma plc 260 245 260 15 -
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3,276 2,656 2,741 85 (535)
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Total 6,817 3,388 3,474 86 (3,343)
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* Adjusted for purchases in the year
Statement of 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 Services Authority.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law, the Directors have elected to prepare the
financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and applicable law).
Under company law the Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of affairs
of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgments and accounting estimates that are reasonable and prudent;
* state whether applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the financial
statements; and
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions, to disclose with
reasonable accuracy at any time the financial position of the Company and to
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate
and financial information included on the Company's website. Legislation in the
United Kingdom governing the preparation and dissemination of the financial
statements and other information included in annual reports may differ from
legislation in other jurisdictions.
Statement as to disclosure of information to Auditor
The Directors in office at the date of this report have confirmed, as far as
they are aware, that there is no relevant audit information of which the Auditor
is unaware. Each of the Directors has confirmed that they have taken all the
steps that they ought to have taken as Directors in order to make themselves
aware of any relevant audit information and to establish that it has been
communicated to the Auditor.
INCOME STATEMENT
for the year ended 30 September 2012
2012 2011
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income 108 - 108 132 - 132
Net (losses)/gains on - (878) (878) - 323 323
investments
------------------------- ----------------------
108 (878) (770) 132 323 455
Investment management fees (14) (43) (57) (51) (152) (203)
Other expenses (176) (1) (177) (151) - (151)
------------------------- ----------------------
(Loss)/return on ordinary
activities before taxation (82) (922) (1,004) (70) 171 101
Taxation - - - - - -
------------------------- ----------------------
(Loss)/return attributable to
equity shareholders (82) (922) (1,004) (70) 171 101
------------------------- ----------------------
(Loss)/return per share (0.4p) (4.3p) (4.7p) (0.3p) 0. 8p 0.5p
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 shown above.
Other than revaluation movements arising on investments held at fair value
through the profit and loss, there were no differences between the
return/deficit as stated above and on a historical cost basis.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 30 September 2012
2012 2011
GBP'000 GBP'000
Opening Shareholders' funds 8,952 10,015
Purchase of own shares (117) (385)
Total recognised (losses)/gains for the year (1,004) 101
Dividends paid (535) (779)
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Closing Shareholders' funds 7,296 8,952
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BALANCE SHEET
as at 30 September 2012
2012 2011
GBP'000 GBP'000
Fixed assets
Investments 6,176 8,851
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Current assets
Debtors 769 68
Cash at bank and in hand 406 157
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1,175 225
Creditors: amounts falling due within one year (55) (124)
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Net current assets 1,120 101
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Net assets 7,296 8,952
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Capital and reserves
Called up share capital 2,095 2,141
Capital redemption reserve 416 370
Share premium account 117 117
Special reserve 4,899 13,568
Capital reserve - realised 862 138
Capital reserve - unrealised (977) (7,348)
Revenue reserve (116) (34)
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Total equity shareholders' funds 7,296 8,952
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Basic and diluted net asset value per share 34.8p 41.8p
CASH FLOW STATEMENT
for the year ended 30 September 2012
2012 2011
GBP'000 GBP'000
Net cash outflow from operating activities and returns on
investments (146) (184)
--------- --------
Capital expenditure
Payments to acquire investments (1,728) (1,386)
Receipts from sale of investments 3,417 2,605
--------- --------
Net cash inflow from capital expenditure 1,689 1,219
--------- --------
Equity dividends paid (535) (779)
--------- --------
Net cash inflow before financing 1,008 256
Financing
Purchase of own shares (116) (385)
Funds held on Company's behalf (643) -
--------- --------
Net cash outflow from financing (759) (385)
--------- --------
Increase/(decrease) in cash 249 (129)
--------- --------
NOTES TO THE ACCOUNTS
for the year ended 30 September 2012
1. Accounting policies
Basis of accounting
The Company has prepared its financial statements under UK Generally Accepted
Accounting Practice 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 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 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 FRS 26.
Listed fixed income investments 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 a disposal.
Permanent impairments in the value of investments are deemed to be realised
losses and held within the Capital Reserve - Realised.
Gains and losses arising from changes in fair value during the year are included
in the income statement as a capital item.
It is not the Company's policy to exercise 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 10 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,
is disclosed. In the case of unlisted investments, this may be abbreviated
information only.
Income
Dividend income from investments is recognised when the Shareholders' rights to
receive payment have 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 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 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 cost.
Segmental reporting
The Company only has one class of business and one market.
2. Return per share
2012 2011
Return per share based on:
Net revenue loss for the financial year ( GBP'000) (82) (70)
------------ -----------
Capital return per share based on:
Net capital (loss)/gain for the financial year ( GBP'000) (922) 171
------------ -----------
Weighted average number of shares in issue 21,291,149 22,026,742
------------ -----------
As the Company has not issued any convertible securities or share options, there
is no dilutive effect on return per share. The return per share disclosed
therefore represents both basic and diluted return per share.
3. Net asset value per share
2012 2011
Shares in issue Net asset value Net asset value
Pence Pence
per share per share
2012 2011 GBP'000 GBP'000
Ordinary Shares 20,944,744 21,405,778 34.8p 7,296 41.8p 8,952
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
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 Venture Capital Trust, 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 investment risks
is a fundamental part of the investment activities undertaken by the Manager and
overseen by the Board. The Manager monitors investments through regular contact
with management of investee companies and regularly reviewing management
accounts and other available financial information and, in respect of unquoted
investments, attendance at investee company board meetings. This enables the
Manager to manage the investment risk in respect of individual investments and
with respect to the quoted investments, make appropriate decisions as to whether
to hold, buy or sell. Investment risk is also mitigated by holding a diversified
portfolio spread across various business sectors and asset classes.
The key investment risks to which the Company is exposed are:
* Investment 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.
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 investment 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.
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.
Interest rate profile of financial assets and financial liabilities
There are three levels of interest which are attributable to the financial
instruments as follows:
* "Fixed rate" assets represent investments with predetermined yield targets
and comprise fixed interest and loan note investments.
* "Floating rate" assets predominantly bear interest at rates linked to Bank
of England base rate and comprise cash at bank.
* "No interest rate" assets do not attract interest and comprise equity
investments, non-interest bearing convertible loan notes, loans and
receivables (excluding cash at bank) and other financial liabilities.
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 listed fixed interest investments, cash deposits and
debtors.
The Manager manages credit risk in respect of loan stock with a similar approach
as described under Investment risks above. In addition the credit risk is
partially mitigated by registering floating charges over the assets of certain
investee companies. The strength of this security in each case is dependent on
the nature of the investee companies business and its identifiable assets. The
level of security is a key means of managing credit risk. Similarly the
management of credit risk associated trades awaiting settlement, interest,
dividends and other receivables is covered within the investment management
procedures.
Cash is mainly held at Royal Bank of Scotland plc which is an A-rated financial
institution and 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 usually has a relatively low level of creditors (2012: GBP55,000,
2011: GBP124,000) and has no borrowings. The Company 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 Manager in line with guidance
agreed with the Board and is reviewed by the Board at regular intervals.
5. Related party transactions
At the year-end GBP643,000 was held by Downing Income VCT plc, a company in which
Chris Kay is a Director, on behalf of the Company. The amount was transferred
into the Company's bank account immediately after the year-end.
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 30 September 2012, but has been extracted
from the statutory financial statements for the year ended 30 September 2012,
which were approved by the Board of Directors on 19 December 2012 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
s498(2) and (3) of the Companies Act 2006.
The statutory accounts for the year ended 30 September 2011 have been delivered
to the Registrar of Companies and received an Independent Auditors report which
was unqualified and did not contain any emphasis of matter nor statements under
s 498(2) and (3) of the Companies Act 2006.
A copy of the full annual report and financial statements for the year ended 30
September 2012 will be printed and posted to shareholders shortly. Copies will
also be available to the public at the registered office of the Company at 10
Lower Grosvenor Place, London, SW1W 0EN and will be available for download from
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 Income VCT 4 plc via Thomson Reuters ONE
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