Elderstreet VCT plc : Final Results

Elderstreet VCT plc
Final results for the year ended 31 December 2012

FINANCIAL SUMMARY

	2012 pence		2011 pence
Net asset value per share ("NAV")	68.9		65.7
Cumulative dividends paid since launch	58.0		54.0
Total return (NAV plus cumulative dividends paid per share)	126.9		119.7
Dividends in respect of financial year
Interim dividend paid per share	2.0		2.0
Final proposed dividend per share (payable on 28 June 2013)	2.0		2.0
	4.0		4.0

CHAIRMAN'S STATEMENT

I present the Company's Annual Report for the year ended 31 December 2012. The year has seen good progress made by many of the Company's larger investments, resulting in a pleasing uplift in the NAV.

Net asset value, results and dividends
At 31 December 2012, the Company's NAV stood at 68.9p, an increase of 7.2p (11.0%) over the year after adding back dividends of 4.0p per share which were paid during the year.

The total return to Shareholders who invested at the launch of the Company in 1998 (NAV plus cumulative dividends) is now 126.9p compared to the original cost (net of income tax relief) of 80p per share.

The return on ordinary activities after taxation for the year was £2.1 million (2011 loss: £2.0 million), comprising a revenue return of £406,000 (2011: £271,000) and a capital gain of £1.7 million (2011 loss: £2.3 million).

Subject to Shareholder approval at the forthcoming Annual General Meeting ("AGM"), your Board is proposing to pay a final dividend of 2.0p per share on 28 June 2013 to Shareholders on the register at 24 May 2013. This will bring total dividends in respect of the year to 4.0p (2011: 4.0p), equivalent to a tax-free yield of 7.5% p.a. based on the share price at the date of this report.

Venture capital investments
There was a relatively low level of investment activity during the year, with much of the Manager's focus being on existing portfolio companies. However, two new investments and one follow-on investment were made at a total cost of £1.6 million. Two existing loan note investments were partially redeemed, realising gains of £10,000. The Company also received retention proceeds of £113,000 in respect of WeComm Limited which was sold in 2011.

At the year end, the Company held a portfolio of 24 venture capital investments, of which the top ten accounted for just short of 70% of the total value.

During the Board's review of the unquoted investment valuations at the year end a number of adjustments were made. Smart Education, Wessex Advanced Switching Products ("WASP") and Fords Packaging each enjoyed significant positive developments over the year. As a result, their valuations were uplifted by a total of £2.2 million. Total unrealised gains across the portfolio on the unquoted investments were £2.4 million in the year.

The Company's quoted investments had a mixed performance, accounting for a net fall in value of £550,000. The most notable movement was SnackTime, which lost £988,000 in value, although this was somewhat offset by Access Intelligence plc, which rose in value by £611,000.

Further commentary on the portfolio, together with a schedule of additions, disposals and details of the largest investments by value can be found within the Investment Manager's Report and Review of Investments.

Fixed interest investments
The Company continues to hold a portfolio of fixed interest investments which is managed by Smith & Williamson Investment Management Limited. The portfolio, valued at £1.5 million at the year end, recognised unrealised capital losses of £15,000 and realised losses of £3,000 during the year.

Enhanced Share Buyback ("ESB")
In September 2012, the Company launched an Enhanced Share Buyback offer providing Shareholders the option to sell their shares back to the Company via a tender offer and reinvest the proceeds in new shares. The scheme allowed the Company to provide Shareholders with an incentive for remaining invested in the Company for a further five years by offering further income tax relief on their new investment.

With many of the Company's Shareholders having originally invested some 15 years ago, the opportunity for further income tax relief was well received, with approximately 23% of shares that had been held for more than five years participating. 3,563,586 shares were purchased for cancellation at a price of 59.8p per share and 3,456,451 new shares were allotted in respect of the tender proceeds at a price of approximately 61.6p per share.

Fundraising activities
In addition to the Enhanced Share Buyback, the Company undertook several small top up share offers during the year. On 9 December 2011, a top up offer was launched for the main VCT fundraising season for the 2011/12 tax year. The Company allotted 1,348,003 Ordinary Shares under this offer at an average price of 70.7p per share. Gross proceeds received thereon were £953,000.

A further top up offer was launched in conjunction with the Enhanced Share Buyback in September 2012. This raised £181,000 and 293,419 shares were issued at 61.6p per share.

Fundraising activities (continued)
On 14 January 2013, the Company launched another top up share offer seeking to raise up to approximately £886,000. As at the date of this report, the Company had allotted 1,282,167 shares equivalent to net proceeds of approximately £865,000.

Share buybacks
During the year the Company made a number of market purchases of its shares. In June 2012, the Company purchased 237,429 Ordinary Shares for cancellation for an aggregate consideration of £131,000, at an average price of 55.0p per share. A further 125,000 Ordinary Shares were purchased, in October 2012, for cancellation for an aggregate consideration of £67,000, at an average price of 53.0p per share. Both purchases were undertaken at a price approximately equivalent to a 15% discount to the most recently published NAV at the time of purchase

The Board intends to make market purchases of its shares approximately four times each year and will make a certain level of funds available for this purpose. The Board expects to purchase shares at approximately a 15% discount to the latest published NAV, although this policy will be reviewed from time to time.

Any Shareholders who are considering selling their shares will need to use a stockbroker. Such Shareholders should ask their stockbroker to register their interest in selling their shares with Shore Capital.

Annual General Meeting ("AGM")

The next AGM of the Company will be held on 5 June 2013 at 32 Bedford Row, London WC1R 4HE at 11:00 a.m.

Three items of Special Business are proposed; one ordinary resolution and two special resolutions in relation to the allotment of shares and share buybacks.

Outlook

In line with the Manager's approach to investing, much of the portfolio value is concentrated in a reasonably small number of investments in which the Manager takes a highly active role. Although there have been some decreases in value over the year, the portfolio as a whole has made good progress and the Board remains satisfied that the portfolio is well balanced and has the potential to deliver further rewards.

 

As a result of the fundraising activities and the prospect of a lower demand for share buybacks as result of the ESB, the Company has a reasonable level of funds available for new investment. This allows the Company to continue to comfortably support existing investments should they require it and also to take advantage of potential new investment opportunities that may arise.

David Brock

Chairman

INVESTMENT MANAGER'S REPORT

The VCT recorded an increase in the total return of 7.2p, (net asset value including cumulative dividends), from 119.7p to 126.9p after paying dividends of 4p per share over the year. NAV per share increased from 65.7p to 68.9p. This increase was recorded despite the loss of 3.3p of NAV due to the fall in the share price of AIM company, SnackTime plc. The fall represented just under £1 million of value. While SnackTime was disappointing, the remainder of the core portfolio's performance is encouraging and several companies were revalued upwards over the year. These are commented on below.

Two new investments were made in the year. An investment of £500,000 was made into Concorde Solutions, a Software Asset Management solutions company, which the manager has known for several years. An investment of £700,000 was made into B&F Management Ltd, and a further £446,000 follow-on investment was made into AngloINFO Limited.

Within the core portfolio upward revaluations were recorded in Smart Education Limited ('Smart'), Wessex Advanced Switching Products Limited ('WASP'), Fords Packaging ('Fords'), and Access Intelligence plc ('Access').

Smart has grown its turnover by 20% over the year and the subsequent cash generation has resulted in a repayment of over £500,000 of the VCTs debt. The current year will see further scaling up of the business to ensure future growth is sustainable.

WASP grew its EBITDA by over 25% during the year with significant advances being made in sales to the aerospace sector. Demand for the switch products, which WASP supplies to the US defence industry via a large UK contractor, is expected to recover with the development of new military radios. The company is cash rich, has no debt, and doubled its dividend over the year.

Fords, which has a year end of June 2013, is on track to record an increase in both turnover and EBITDA. The company is exploring new innovative sealing technology and further streamlining its manufacturing processes. The company is debt free and pays a regular dividend.

Within the AIM portfolio we continue to be cautiously optimistic over the resilience of the two significant holdings, Access Intelligence plc and Fulcrum Utilities plc.

Access released its year end November 2012 figures. Revenue was up by 11% to £8 million. The continued commitment to the software-as-a-service business model has enabled Access to build long-term visibility of revenues and in 2012 recurring revenues on continuing operations represented 69% of revenue. The share price rose 66% over the year. The company has positive net cash and pays a regular dividend.

Fulcrum Utilities provided a trading update ahead of its financial year end on 31 March. EBITDA performance is expected to show a significant improvement over the loss of £2.1 million generated in FY12, with positive EBITDA for the full year between £1.2 million and £1.4 million. However, results will therefore be materially behind market expectations. Following a pronounced deterioration in the final quarter of the financial year, revenues in the second half are expected to be approximately 10% lower than in the same period last year. Revenue for the full year to 31 March 2013 will be between £38 million and £39 million, approximately 7% lower than the prior year. Weaker gross margins in the second half will result in a marginally positive EBITDA result in that period. The share price declined 29% over the year.

We mentioned earlier the decline in the valuation of SnackTime. Over the year the share price fell from 65p to 10p. The setback in the share price reflected a profits warning as a result of several factors: the failure to successfully integrate the Vendia acquisition made in 2010; a decline in sales from certain product lines; and gross margins being hit by inflationary pressure. As a result new management were introduced in 2012 to turnaround the business. Considerable progress in the turnaround has been made over the last 6 months despite tough market conditions.

Generally it is worth noting that in nine out of the top ten companies by value at 31 December 2012 the Manager has at least one board seat or observer rights and are very actively involved with these businesses. We continue to maintain a good level of liquidity so that we are able to respond to investment opportunities that become available. Overall the low external debt position of the portfolio is well covered by earnings and comfortably within banking covenants, and gives us confidence for the future.

While the past year has not been without issues the broad range of investments in the portfolio has outweighed the adverse effect of the SnackTime decline. Overall your Manager retains a balanced but positive outlook for the portfolio.

Elderstreet Investments Limited

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments were held at 31 December 2012. All companies are registered in England and Wales, with the exception of Fulcrum Utility Services Limited which is registered in the Cayman Islands.

	Cost	Valuation	Valuation movement in year	% of portfolio by value
	£'000	£'000	£'000
Ten largest venture capital investments (by value)
Smart Education Limited	761	2,471	1,260	11.9%
Wessex Advanced Switching Products Limited	60	2,313	514	11.2%
Fords Packaging Systems Limited	1,047	2,272	427	11.0%
Access Intelligence plc *	1,633	1,854	611	9.0%
AngloINFO Limited	1,108	1,483	-	7.2%
Lyalvale Express Limited	915	1,255	-	6.1%
B&F Management Limited	700	700	-	3.4%
Baldwin & Francis (Holdings) Limited	690	690	-	3.3%
Concorde Solutions Limited	500	500	-	2.4%
Fulcrum Utility Services Limited *	500	500	(208)	2.4%
	7,914	14,038	2,604	67.9%
Other venture capital investments
Aconite Technology Limited	462	493	181	2.4%
The Engine Group Limited	455	386	-	1.8%
Cashfac plc	260	328	66	1.6%
Interquest Group plc *	336	287	(36)	1.4%
Mears Group plc **	188	260	85	1.2%
SnackTime plc *	1,375	230	(988)	1.1%
RB Sport & Leisure Holdings plc (formerly Rosebowl plc)	188	47	-	0.2%
Servoca plc *	333	39	(3)	0.2%
Sift Limited	250	38	-	0.2%
SparesFinder Limited	103	12	-	0.1%
The Kellan Group plc *	657	11	(11)	0.1%
Infoserve Group plc	127	-	-	-
The National Solicitors Network Limited	501	-	-	-
The QSS Group Limited	268	-	-	-
	5,503	2,131	(706)	10.3%
Fixed income securities
United Kingdom 2.25% Gilt 07/03/2014	830	864	(16)	4.2%
United Kingdom 1.00% Gilt 07/09/2017	614	616	1	3.0%
S&W Investment Funds Cash Fund	10	10	-	-
	1,454	1,490	(15)	7.2%
	14,871	17,659	1,883	85.4%
Cash at bank and in hand		3,030		14.6%
Total investments		20,689		100.0%

All venture capital investments are unquoted unless otherwise stated

*         Quoted on AIM
**         Quoted on the Main Market

Elderstreet Investments Limited also acts as investment manager for Bedford Row VCT plc which has co-invested in SnackTime plc investment.

Investment movements for the year ended 31 December 2012

ADDITIONS

	£'000
Venture capital investments
AngloINFO Limited	446
B & F Management Limited	700
Concorde Solutions Limited	500
Fixed income securities
S&W Investment Funds Cash Fund	24
United Kingdom 1.00% Gilt 07/09/2017	614
	2,284

DISPOSALS

	Cost	Market value at 01/01/12 *	Proceeds	Profit vs cost	Realised gain/(loss)
	£'000	£'000	£'000	£'000	£'000
Venture capital investments
Aconite Technology Limited	100	100	110	10	10
Smart Education Limited	513	690	690	177	-
WeComm Limited	-	-	113	113	113
Fixed income securities
S&W Investment Funds Cash Fund	33	33	33	-	-
United Kingdom 2.75% Gilt 22/01/2015	559	569	566	7	(3)
	1,205	1,392	1,512	307	120

*        Adjusted for purchases in the year where applicable

Directors' responsibilities statement
The Directors are responsible for preparing the Report of the Directors, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the annual report includes information required by the Listing Rules of the Financial Conduct Authority.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

* select suitable accounting policies and then apply them consistently;
* make judgments and accounting estimates that are reasonable and prudent;
* state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
* prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions, to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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 31 December 2012

	2012				2011
	Revenue	Capital	Total		Revenue	Capital	Total
	£'000	£'000	£'000		£'000	£'000	£'000
Income	715	-	715		575	-	575
Gains/(losses) on investments	-	2,003	2,003		-	(2,000)	(2,000)
	715	2,003	2,718		575	(2,000)	(1,425)
Investment management fees	(95)	(285)	(380)		(98)	(296)	(394)
Other expenses	(214)	-	(214)		(206)	(1)	(207)
Return/(loss) on ordinary activities before tax	406	1,718	2,124		271	(2,297)	(2,026)
Tax on ordinary activities	-	-	-		-	-	-
Return/(loss) attributable to equity shareholders	406	1,718	2,124		271	(2,297)	(2,026)
Basic and diluted return/(loss) per share	1.4p	5.8p	7.2p		1.0p	(8.2p)	(7.2p)

All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. 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 as shown above.

Other than revaluation movements arising on investments held at fair value through the Income Statement, there were no differences between the return as stated above and at historical cost.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 December 2012

	2012		2011
	£'000		£'000
Opening Shareholders' funds	18,861		18,785
Issue of shares	1,134		3,823
Issue of shares under Enhanced Share Buyback scheme	2,131		-
Share issue costs	(127)		(210)
Purchase of own shares	(198)		(344)
Purchase of own shares under Enhanced Share Buyback scheme	(2,142)		-
Total recognised gains/(losses) for the year	2,124		(2,026)
Dividends paid	(1,195)		(1,167)
Closing Shareholders' funds	20,588		18,861

BALANCE SHEET
at 31 December 2012

		2012			2011
	£'000	£'000		£'000	£'000
Fixed assets
Investments		17,659			14,884
Current assets
Debtors	90			52
Cash at bank and in hand	3,030			4,111
	3,120			4,163
Creditors: amounts falling due within one year	(191)			(186)
Net current assets		2,929			3,977
Net assets		20,588			18,861
Capital and reserves
Called up share capital		1,494			1,435
Capital redemption reserve		425			229
Merger reserve		1,882			2,034
Share premium		9,929			8,999
Special reserve		-			1,216
Capital reserve - unrealised		6,540			1,705
Capital reserve - realised		(187)			2,844
Revenue reserve		505			399
Total equity shareholders' funds		20,588			18,861
Basic and diluted net asset value per share		68.9p			65.7p

CASH FLOW STATEMENT
for the year ended 31 December 2012

	2012		2011
	£'000		£'000
Net cash inflow/(outflow) from operating activities	83		(74)
Capital expenditure
Purchase of investments	(2,284)		(254)
Sale of investments	1,512		1,204
Net cash (outflow/)inflow from capital expenditure	(772)		950
Equity dividends paid	(1,201)		(1,167)
Net cash outflow before financing	(1,890)		(291)
Financing
Proceeds from share issue	1,093		3,695
Proceeds from shares issued under Enhanced Share Buyback	2,131		-
Share issue costs	(75)		(76)
Purchase of own shares	(198)		(344)
Purchase of own shares under Enhanced Share Buyback	(2,142)		-
Net cash inflow from financing	809		3,275
(Decrease)/increase in cash	(1,081)		2,984

NOTES TO THE ACCOUNTS
for the year ended 31 December 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" revised January 2009 ("SORP").

The financial statements are prepared under the historical cost convention modified by 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 the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Fixed asset investments
Investments are designated as "fair value through profit or loss" assets, upon acquisition, 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, 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 AIM and the Main Market are measured using bid prices in accordance with the IPEV.

For unquoted instruments, fair value is established using the IPEV. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

* Price of recent investment;
* Multiples;
* Net assets;
* Discounted cash flows or earnings (of underlying business);
* Discounted cash flows (from the investment); and
* Industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

Where an investee company has gone into receivership, liquidation, or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised. 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 are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment expensed.

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 Income Statement except to the extent of any income accrued. This is in accordance with the SORP that does not require portfolio investments to be accounted for using the equity method of accounting.
Income
Dividend income from investments is recognised when the Shareholders' rights to receive payment has been established, normally the ex-dividend date.

Interest income is accrued on a timely 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 as a capital item.

* Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.

* Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted the policy of allocating investment manager's fees, 75% to capital and 25% to revenue as permitted by the SORP. The allocation is in line with the Board's expectation of long term returns from the Company's investments in the form of capital gains and income respectively.

* Performance incentive fees arising are treated as a capital item.

Taxation
The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company's effective rate of tax for the accounting period.

Due to the Company's status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments which arise.

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 they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts.

Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.

Issue costs
Issue costs in relation to the shares issued are deducted from the share premium account.

2.Basic and diluted return per share

	2012		2011
Return per share based on:
Net revenue return for the financial year (£'000)	406		271
Capital return per share based on:
Net capital gain/(loss) for the financial year (£'000)	1,718		(2,297)
Weighted average number of shares in issue	29,559,342		27,950,201

3.Basic and diluted net asset value per share

			2012				2011
Shares in issue			Net asset value				Net asset value
2012		2011		Pence per share		£'000		Pence per share		£'000
Ordinary Shares	29,873,533	28,701,675		68.9		20,588		65.7		18,861

As the Company has not issued any convertible securities or share options, there is no dilutive effect on net asset value per share. The net asset value per share disclosed therefore represents both basic and diluted net asset value per share.

4.Principal risks

The Company's investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company's operations are:

*Investment risks,
*Credit risk, and
*Liquidity risk

The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.

The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year end are provided below.

Investment risks
As a VCT, the Company is exposed to investment risks in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The key 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 and on liquidity funds at rates based on the underlying investments. Investments in loan notes 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 risk 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 and Cash Trust investments.
*"No interest rate" assets do not attract interest and comprise equity investments, 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.

The Bank of England base rate stood at 0.5% per annum throughout the year. Any potential change in the base rate, at the current level, would have an immaterial impact on the net assets and total return of the Company.

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 notes in investee companies, investments in fixed income securities, cash deposits and debtors.

The Manager manages credit risk in respect of loan notes 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 company's business and its identifiable assets. The level of security is a key means of managing credit risk. Similarly, the management of credit risk associated interest, dividends and other receivables is covered within the investment management procedures.

Cash is mainly held at Royal Bank of Scotland plc, with a balance also maintained at Bank of Scotland plc, both of which are A-rated financial institutions and 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 can be 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 has a relatively low level of creditors (2012: £191,000, 2011: £186, 000) and has no borrowings. The Company always holds sufficient levels of funds as cash and readily realisable investments in order to meet expenses and other cash outflows as they arise. For these reasons, the Board believes that the Company's exposure to liquidity risk is minimal.

The Company's liquidity risk is managed by the Investment Manager in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.

5.Related party transactions

In the opinion of the Directors there is no immediate or ultimate controlling party.

Michael Jackson is a director of Elderstreet Investments Limited which provides investment management services to the Company. During the year, £380,000 (2011: £394,000) was due in respect of these services. No performance incentive fees are due to Elderstreet Investments Limited in respect of the year under review (2011: £Nil). The Company also paid £53,000 to Elderstreet Investments Limited in respect of the fundraising undertaken during 2012 (2011: £66,000), and a further £2,500 in respect of work undertaken on the Enhanced Share Buyback scheme. Michael Jackson is also chairman of Access Intelligence plc and Concorde Solutions Limited. Details of these investments, including amounts invested and interest received during the year are shown within the Annual Report.

Nicholas Lewis is a partner of Downing LLP which provides administration services to the Company. During the year, £60,000 (2011: £60,000) (including VAT) was due to Downing in respect of these services. The Company also paid £7,500 to Downing LLP in respect of work undertaken on the Enhanced Share Buyback scheme.

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 December 2012, but has been extracted from the statutory financial statements for the year ended 31 December 2012, which were approved by the Board of Directors on 24 April 2013 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 31 December 2011 fhave 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 December 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: Elderstreet VCT plc via Thomson Reuters ONE

HUG#1695775