Elderstreet VCT plc : Final Results

ELDERSTREET VCT PLC
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2011

FINANCIAL SUMMARY

	2011 pence	2010 pence
Net asset value per share ("NAV")	65.7	76.6
Cumulative dividends paid since launch	54.0	50.0
Total return (NAV plus cumulative dividends paid per share)	119.7	126.6
Dividends in respect of financial year
Interim dividend paid per share	2.0	2.0
Final proposed dividend per share (payable on 22 June 2012)	2.0	2.0
	4.0	4.0

CHAIRMAN'S STATEMENT
I present the Company's Annual Report for the year ended 31 December 2011. Conditions have continued to be difficult throughout the year, providing challenges for many of the investee companies. In line with general market movements, the Company's two major AIM-quoted investments saw their share prices fall which has contributed significantly to the reduction in the Company's net asset value per share ("NAV").

Net Asset Value
At 31 December 2011, the Company's NAV stood at 65.7p, equivalent to a decrease of 6.9p (9.0%) 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 119.7p compared to the original cost (net of income tax relief) of 80p per share.

Venture capital investments
The Company undertook two small follow-on investments during the year totalling £235,000.  One loan note was also partially redeemed during the year and WeComm Limited was sold, realising gains of £4,000 in the year.   

The quoted portfolio fell in value over the year by a net amount of £2.1 million, of which £2.0 million related to falls in value in Access Intelligence plc and Snacktime plc.

The Board has reviewed the valuation of the unquoted investments at the year end and made a number of adjustments.

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.  A small addition to the portfolio was made during the year for £19,000.  This portfolio recognised unrealised gains of £43,000 over the period.

Results and dividends
The loss on ordinary activities after taxation for the year was £2.0 million (2010 return: £893,000), comprising a revenue return of £271,000 (2010: £185,000) and a capital loss of £2.3 million (2010 gain: £708,000).

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 22 June 2012 to Shareholders on the register at 25 May 2012.

Fundraising activities
As stated in the half yearly report to 30 June 2011, the Company issued 4,778,800 Ordinary Shares, under an Offer for Subscription launched on 21 December 2010 at an average price of 80.0p per Share.  Net proceeds thereon, after accounting for issue costs, totalled £3.6 million.

On 9 December 2011, the Company launched a further Ordinary Share top-up fundraising seeking to raise up to approximately £2 million. As at the date of this report, the Company had allotted shares producing net proceeds of approximately £827,000.

Share buybacks
In June 2011, the Company spent approximately £160,000 purchasing 263,000 Shares for cancellation at a price of 60.5p per Share.  A further purchase was made in November 2011, with the Company purchasing a further 330,327 Shares for cancellation at a price of 55.5p per Share, equating to approximately £184,000. Both purchases were undertaken at prices approximately equivalent to a 15% discount to the most recently published NAV.

The Board intends to make funds of up to approximately £200,000 available for buybacks following the release of these results with a view to buying in any Shares that are available in the market at approximately a 15% discount to the latest published NAV. It is expected that the next buyback will take place at the end of May. In future, the Board intends to buy in shares approximately four times each year. Any Shareholders who wish to sell their shares will need to use a stockbroker.  Such Shareholders should ask their stockbroker to register their interest that they wish to sell Shares with Shore Capital.

Share premium cancellation
The Board is seeking Shareholders approval at the forthcoming AGM to cancel the amount of the Share Premium account at the close of the latest fundraising issue.  Subject to Shareholders approval of this resolution, the Company expects to apply to the court to increase the level of distributable reserves available to the Company by an equivalent amount, thereby ensuring the Company has sufficient reserves to make dividend payments and to buyback its own shares for the foreseeable future.

Continuation as a VCT
The Board is also proposing to amend the Articles of Association to remove the requirement for a resolution to be put to Shareholders in 2013 and at the fifth annual general meeting thereafter to vote on whether the Company should continue as a venture capital trust.

As the Company is a generalist VCT with no expectation of a fixed wind up date and seeking to provide long term tax free income, the Directors are proposing to remove the requirement for Shareholders to regularly vote on a resolution for the Company to continue as a venture capital trust.  The Directors do not believe that this will have any significant negative impact on the way the Company is run and does not prevent Directors from putting such a resolution to Shareholders if they believed it to be in the best interest of Shareholders.

Enhanced share buyback
A number of VCTs have offered schemes whereby shareholders have been able to sell their shares back to the VCT at a very small discount to NAV on the basis that they reinvest the proceeds in a new issue of shares by the same VCT.  This allows investors to obtain a further 30% income tax relief on their investment if they continue to hold their new shares for a further five years.

Elderstreet VCT is progressing plans with a view to offering such a facility to the Company's Shareholders in due course. Full details will be sent to all Shareholders as soon as they are available.

Annual General Meeting
The next AGM of the Company will be held on 14 June 2012 at 32 Bedford Row, London WC1R 4HE at 11.00a.m.

Notice of the meeting is at the end of the Annual Report and Accounts. Five items of Special Business are proposed; one ordinary resolution and special resolutions in relation to: the allotment of shares; making market purchases of its shares, to cancel the share premium account and to remove Article 174 relating to the duration of the Company.

Outlook
Despite the falls in value by some investments over the last year, the Board remains reasonably satisfied with most of the portfolio companies and believes that many the potential to deliver attractive returns in the medium term.

As a result of the previous and current fundraisings, the Company now has a significant level of funds available to invest which will allow the Company to take advantage of attractive new investment opportunities as they arise.

David Brock
Chairman

INVESTMENT MANAGER'S REPORT
The VCT recorded a decline in the total return (net asset value including cumulative dividends), from 126.6p to 119.7p after paying dividends of 4p per share over the year. Net asset value ("NAV") per share reduced from 76.6p to 65.7p. A large proportion of this drop in NAV was due to the fall in share prices of two AIM quoted companies, Access Intelligence plc and Snacktime plc. Their fall represents £2 million of value and 7p of NAV. While this is a disappointing performance, the underlying trading outlook is encouraging and is commented on below.

Two new investments were made in the year.  A short term loan was extended to Aconite which has subsequently been repaid, and a secondary purchase of management shares was made in AngloInfo. Since the year end, we have completed further follow-on rounds to support Baldwin and Francis, and to further increase our holding in AngloInfo. During the year, we fully realised the holding in WeComm Limited, resulting in a return just above cost, and an uplift of 47% over the previous carrying value.

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

Following its 2011 year end, Access Intelligence informed the market that sales and profits before tax would be in line with market expectations. The company announced the sale of its subsidiary Solcara Ltd to Thomson Reuters for a sum of £2.5 million. Solcara was purchased in November 2008 at a cost of £750,000. However the share price has drifted from 4.75p to 2.25p over the year resulting in a fall of just over £1 million, equivalent to about 3.7p of the VCT NAV, although the shares have subsequently recovered to in excess of 4p at the time of writing. At 2.25p the company is valued at £5.1 million of which cash represented £4.1 million at the November year end. Your manager believes that at this price the company is substantially undervalued and the benefits of investment in increased marketing and R&D will manifest themselves over the coming 18 months.

Snacktime has substantially completed the integration of the Vendia acquisition made in 2010. In February 2012, the company announced a profits downgrade for the year end March 2012 to EBITDA of £1.5 million from the forecast £3.7 million reflecting tough market conditions in the sector. The company's brokers are forecasting EBITDA OF £2.5 million for the year end March 2013, the first year where the full benefit of substantial reorganization and overhead reduction will come through. Over the year the share price has fallen from £1.20 to 65p on very little trading volume, a decline in value of £988,000 equivalent to about 3.4p of VCT NAV per share. At the time of writing the share price was 46.5p. We believe that the shares have substantial upside potential over the next 12-18 month period.

The management of Fulcrum Utilities reported the six months to September 2011 has been a transformational period for Fulcrum with the company now well positioned to deliver growth and to move into profitability. Management remain confident that the underlying financial performance in the second half will be in line with expectations.

We are also seeing encouraging signs of growth within other portfolio companies; for the year end 2011 Smart Education has increased its turnover by 11% and repaid one third of the VCT debt principal ahead of schedule; AngloInfo has reported an increase in turnover for the fourth consecutive year. Elsewhere Fords and Lyalvale remain stable and are paying solid dividends. Baldwin and Francis is subject to long sales cycles and 'lumpy orders' which are coming through now, and your Manager has put in place an Executive Chairman to help the existing managers to consolidate and build the business.

Within the private company portfolio Wessex Advanced Switching Products Ltd ("WASP") has been adversely affected by the decline in US defence budgets. This reduced level of orders is expected to continue through 2012. However WASP expects to derive two thirds of its sales in the next year (2011 63%) from its non defence related aviation products where demand remains strong.

Generally it is worth noting that in nine out of the top ten companies by value at 31 December 2011 we have 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 and over the year have followed our strategy of investing into the existing portfolio. A new investment into a software business is currently progressing on track. 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, 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 2011. All companies are registered in England and Wales.

	Cost £'000	Valuation £'000	Valuation movement in year £'000	% of portfolio by value
Ten largest venture capital investments (by value)
Smart Education Limited	1,274	1,901	-	10.0%
Fords Packaging Systems Limited	1,047	1,845	693	9.7%
Wessex Advanced Switching Products Limited	60	1,799	(874)	9.5%
Lyalvale Express Limited	915	1,255	228	6.6%
Access Intelligence plc *	1,633	1,243	(1,058)	6.6%
Snacktime plc *	1,375	1,218	(988)	6.4%
AngloINFO Limited	662	1,037	305	5.5%
Fulcrum Utility Services Limited *	500	708	63	3.7%
Baldwin & Francis (Holdings) Limited	690	690	(80)	3.6%
Aconite Technology Limited	562	412	(149)	2.2%
	8,718	12,108	(1,860)	63.8%
Other venture capital investments
The Engine Group Limited	455	385	-	2.0%
Interquest Group plc *	336	323	(67)	1.7%
Cashfac Initiative Limited	260	263	66	1.4%
Mears Group plc **	188	175	(68)	0.9%
Rosebowl plc	187	47	(78)	0.3%
Servoca plc *	333	42	(42)	0.2%
Sift Limited	250	38	1	0.2%
The Kellan Group plc *	657	22	9	0.1%
SparesFinder Limited	104	12	-	0.1%
City Visitor Group plc (formerly Infoserve plc)	127	-	(7)	-
The National Solicitors Network Limited	501	-	-	-
The QSS Group Limited	268	-	-	-
	3,666	1,307	(186)	6.9%
Listed fixed income securities
United Kingdom 2.25% Gilt 07/03/2014	830	880	19	4.6%
United Kingdom 2.75% Gilt 22/01/2015	559	570	23	3.0%
S&W Investment Funds Cash Fund	19	19	-	0.1%
	1,408	1,469	42	7.7%
	13,792	14,884	(2,004)	78.4%
Cash at bank and in hand		4,111		21.6%
Total investments		18,995		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.

ADDITIONS

	£'000
Venture capital investments
Aconite Technology Limited	102
AngloINFO Limited	133
Listed fixed income securities
S&W Investment Funds Cash Fund	19
	254

DISPOSALS

	Cost	MV at 01/01/11	Proceeds	Profit/ (loss) vs cost	Realised gain/ (loss)
	£'000	£'000	£'000	£'000	£'000
Smart Education Limited	199	265	265	66	-
WeComm Limited	850	935	939	85	4
	1,049	1,200	1,204	151	4

DIRECTORS' RESONSPIBILITIES STATEMENT

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

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

By order of the Board

Grant Whitehouse
Secretary of Elderstreet VCT plc

INCOME STATEMENT
for the year ended 31 December 2011

	2011			2010
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Income	575	-	575	493	-	493
(Losses)/gains on investments	-	(2,000)	(2,000)	-	1,024	1,024
	575	(2,000)	(1,425)	493	1,024	1,517
Investment management fees	(98)	(296)	(394)	(88)	(263)	(351)
Performance incentive fees	-	-	-	-	(48)	(48)
Other expenses	(206)	(1)	(207)	(214)	(11)	(225)
Return/(loss) on ordinary activities before tax	271	(2,297)	(2,026)	191	702	893
Tax on ordinary activities	-	-	-	(6)	6	-
Return/(loss) attributable to equity Shareholders	271	(2,297)	(2,026)	185	708	893
Basic and diluted return/(loss) per share	1.0p	(8.2p)	(7.2p)	0.8p	2.9p	3.7p

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 2011

	2011	2010
	£'000	£'000
Opening shareholders' funds	18,785	17,865
Issue of shares	3,823	1,455
Share issue costs	(210)	(80)
Purchase of own shares	(344)	(349)
Total recognised (losses)/gains for the year	(2,026)	893
Dividends paid	(1,167)	(999)
Closing shareholders' funds	18,861	18,785

BALANCE SHEET
at 31 December 2011

		2011		2010
	£'000	£'000	£'000	£'000
Fixed assets
Investments		14,884		17,834
Current assets
Debtors	52		33
Cash at bank and in hand	4,111		1,127
	4,163		1,160
Creditors: amounts falling due within one year	(186)		(209)
Net current assets		3,977		951
Net assets		18,861		18,785
Capital and reserves
Called up share capital		1,435		1,226
Capital redemption reserve		229		199
Merger reserve		2,034		2,082
Share premium		8,999		5,625
Special reserve		1,216		1,728
Revaluation reserve		1,705		3,875
Capital reserve - realised		2,844		3,775
Revenue reserve		399		275
Total equity shareholders' funds		18,861		18,785
Basic and diluted net asset value per share		65.7p		76.6p

CASH FLOW STATEMENT
for the year ended 31 December 2011

	2011	2010
	£'000	£'000
Net cash outflow from operating activities	(74)	(42)
Capital expenditure
Purchase of investments	(254)	(2,403)
Sale of investments	1,204	2,652
Net cash inflow from capital expenditure	950	249
Equity dividends paid	(1,167)	(999)
Net cash outflow before financing	(291)	(792)
Financing
Proceeds from share issue	3,695	1,455
Share issue costs	(76)	(86)
Purchase of own shares	(344)	(349)
Net cash inflow from financing	3,275	1,020
Increase in cash	2,984	228

NOTES TO THE ACCOUNTS
for the year ended 31 December 2011

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 Accounting Standards Board when required. 

Presentation of Income Statement
In order to better reflect the activities of a venture capital trust, and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

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 FRS26.

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.

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.

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

	2011	2010
	£'000	£'000
Return per share based on:
Net revenue return for the financial year (£'000)	271	185
Capital return per share based on:
Net capital (loss)/gain for the financial year (£'000)	(2,297)	708
Weighted average number of Shares in issue	27,950,201	24,429,890

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. Basic and diluted net asset value per share

			2011		2010
Shares in issue			Net asset value		Net asset value
	2011	2010	pence per share	£'000	pence per share	£'000
Ordinary shares	28,701,675	24,516,202	65.7	18,861	76.6	18,785

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. Financial instruments and derivatives

The Company's financial instruments comprise investments held at fair value through profit and loss, being equity and loan stock investments in quoted companies and unquoted companies; loans and receivables, being cash deposits and short term debtors; and financial liabilities, being creditors arising from its operations.  The main purpose of these financial instruments is to generate cash flow, revenue and capital appreciation for the Company's operations. The Company has no gearing or other financial liabilities apart from short-term creditors and does not use any derivatives.

The fair value of investments is determined using the detailed accounting policy as shown in note 1.  The fair value of cash deposits and short-term debtors and creditors equates to their carrying value in the balance sheet.

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

* Market risks,
* Credit risk and
* Liquidity risk

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

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

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

The key market risks to which the Company is exposed are:
* Market price risk and
* Interest rate risk.

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.

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.

It is estimated that an increase of 1.25% in interest rates would increase net assets and total return before taxation for the year by £12,000.  As the Bank of England base rate stood at 0.5% per annum throughout the year, it is not believed that a reduction from this level is likely.

Credit risk
Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument.  The Company is exposed to credit risk through its holdings of loan stock in investee companies, investments in liquidity funds, cash deposits and debtors. 

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 (2011: £186,000, 2010: £209,000) 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 £394,000 (2010: £351,000) was due in respect of these services.  No performance incentive fees are due to Elderstreet Investments Limited in respect of the year under review (2010: £48,000).  The Company also paid £66,000 to Elderstreet Investments Limited in respect of the fundraising undertaken during 2011 (2010: £27,000). 

Nicholas Lewis is a director of Downing Management Services Limited, which until 31 May 2011 provided administration services to the Company.  On 25 August 2011, and with effect from 1 June 2011, the administration contract was novated to Downing LLP, a company in which Nicholas Lewis is a partner. During the year £60,000 (2010: £59,000) (including VAT) was due to Downing in respect of administration services. 

6. Post balance sheet event

On 5 April 2012, the Company allotted 1,238,457 Ordinary Shares of 5p each, under the terms of a prospectus dated 9 December 2011, at an average price of 70.7p per share, with gross proceeds received thereon of £875,000. Issue costs in respect of these allotments amounted to £48,000.

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 December 2011, but has been extracted from the statutory financial statements for the year ended 31 December 2011, which were approved by the Board of Directors on 27 April 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 s 498(2) and (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 December 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 December 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. 

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(ii) they are solely responsible for the content, accuracy and originality of the
information contained therein.

Source: Elderstreet VCT plc via Thomson Reuters ONE

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