Final Results

Elderstreet VCT plc Report & Accounts for the year ended 31 December 2008 FINANCIAL HIGHLIGHTS 2008 2007 pence pence Ordinary Shares Net asset value (per share) 72.8 81.9 Cumulative paid dividends from launch to 31 December 43.0 36.5 2008 (per share) Total return (net asset value plus cumulative dividends paid per 115.8 118.4 share) Final proposed distribution (per share) to be paid on 1.0 3.5 12 June 2009 CHAIRMAN'S STATEMENT It should come as no surprise that the deteriorating economic conditions have had some impact on your Company's performance over the second half of 2008, with the Company's Ordinary Share Total Return falling back to slightly below the level at which it stood at the start of the year. During the year, the Company remained reasonably busy in terms of investment activity, undertook a small top-up fundraising, completed the targeted return of 30p per share to C Shareholders and converted its C Shares into Ordinary shares. C Share conversion In September 2008, the Company paid a dividend of 24p per C Share such that C Shareholders had then received the targeted total of 30p per share since the C Shares were first issued in 2005. On 31 October 2008 and following shareholder approval of proposals to convert the C Shares into Ordinary Shares, all 1,488,078 C Shares in issue were converted into 995,648 Ordinary Shares of 5p each using a conversion rate of 0.6691 Ordinary Shares per C Share. Following the conversion, the Company now has just one class of shares, which simplifies the Company's investment management, reporting and administration activities. Ordinary Share issue 2007/08 and 2008/09 The Company launched a small top-up share issue within the Ordinary Share pool in January 2008. 962,377 Ordinary Shares were issued at an average price of 91.9p per share. The total funds received under the offer were £885,000 with issue costs thereon of £49,000. Net asset value At 31 December 2008, the Company's Net Asset Value per Ordinary Share ("Ordinary NAV") stood at 72.8p, a fall of 2.6p (3.2%) compared to the Ordinary NAV at the previous year end (after adjusting for the dividends of 6.5p per Ordinary share paid during the year). Venture capital investments The Company made a number of new investments during the year and also achieved two significant investment exits. The Company's investment in UM (Holdings) Limited, a provider of trenchless installation equipment, was sold to a trade buyer, generating a profit of £1.5 million against net original cost and £646,000 against the previous year end carrying value. The other major disposal was the Company's holding in AIM-quoted software company, Mediasurface, which was the subject of a takeover offer. The final outcome gave the Company an uplift of £549,000 over the previous carrying value, although this was break-even against original cost. In general AIM-quoted investments within the portfolio performed badly in share price terms over the year, although the biggest disappointment within the portfolio arose late in the year with the failure of Oldbury Aluminium Alloys Group Limited. The company was a recycler and re-smelter of aluminium, but proved not to be resilient enough to withstand the extreme volatility in aluminium prices and demand during the latter parts of the year. The company's main trading subsidiary is now in administration and a full provision of £1.375 million has been made against the investment with no recovery expected. Further commentary on the portfolio, together with a schedule of the additions, disposals and details of the largest investments by value can be found within the Investment Manager's Report and Review of Investments below. Fixed interest investments The Company continues to hold a small portfolio of fixed interest investments which are managed by Smith & Williamson Investment Management Limited. During the year this portfolio produced unrealised gains of £68,000 and realised gains of £2,000. Results and Dividends The loss on activities after taxation for the year was £859,000 (2007 return: £3,021,000), comprising a revenue return of £529,000 and a capital loss of £1,388,000. Subject to shareholder approval at the forthcoming Annual General Meeting ("AGM"), your Board is proposing to pay a final revenue dividend of 1.0p per share on 12 June 2009 to Shareholders on the register at 15 May 2009. Share buybacks During the year, the Company repurchased 615,048 Ordinary shares for cancellation at an average price of 75.3p per share and between 1 January 2008 and 31 October 2008, 54,124 C shares were purchased for cancellation at an average price of 79.2p per share. These purchases were generally undertaken at a discount of approximately 10% to the latest published NAV. The Company stated in the Offer Document published on 10 December 2008 in connection with the Share Offer mentioned below: "Elderstreet VCT has from time to time bought back its shares for cancellation. Elderstreet intends to continue to buy back its shares at a discount of approximately 10% to the last published NAV. The implementation of the buyback policy will be at the Board's discretion and subject to the Company's liquidity and to stock market and other applicable regulations." The Board, having considered the current climate, believes that the timing of any further realisations from the existing portfolio is uncertain but it is unlikely that any major realisations will take place in the short-term. In addition, your Board believes that it is not clear that the Company's current Share Offer will raise a significant level of new funds. For these reasons, the Board feels it must take a cautious approach to preserving the Company's liquid funds over the coming months and therefore it has decided not to undertake any further share buybacks at the current time. Shareholders should note that the Board intends to resume the policy of buying in shares in due course and will make a further announcement with the half-year results which are expected to be released in August. In order to give the Company the flexibility to resume share buybacks at an appropriate time, the Company is seeking to renew the authority for it to buy its own shares in the market. Resolution 7 will be put to the forthcoming AGM to seek this approval. Ordinary Share offer On 10 December 2008, the Company announced an Offer for Subscription covering the tax years 2008/09 and 2009/2010 to raise up to £2 million by the issue of further Ordinary shares. As at the date of this report, the Company had allotted 1,862,390 Ordinary shares at a price of approximately 74.7p per share under the Offer. Annual General Meeting The next AGM of the Company will be held at 32 Bedford Row, London WC1R 4HE at 11:00 am on 10 June 2009. One item of Special Business is proposed to authorise the Company to make market purchases of its shares. Outlook Despite some negative developments, the Board generally remains satisfied with the Company's investment portfolio. With the UK now in recession, all portfolio companies will face additional challenges. However, by continuing to take an active involvement in the underlying businesses, the Investment Manager can provide support in a variety ways when it is most needed. The Company also has a reasonable level of liquid funds available for new investment. With business valuations still falling, the optimum point in the economic cycle for investing may be approaching. New investment activities are always risky, particularly during difficult and unpredictable conditions. However, the Board supports the Investment Manager's view that good value opportunities are likely to start to appear over the next year or so. David Brock Chairman INVESTMENT MANAGER'S REPORT During 2008 the investment team was active on both the portfolio and on new investments. As the economic environment deteriorated over the year we have concentrated even more on the existing portfolio to ensure that the companies have put in place defensive strategies in the face of increasingly tough trading conditions. In nine out of the top ten companies by value at 31 December 2008 we have at least one board seat and are actively involved with these businesses. Follow on investments over £100,000 in value were made in five portfolio companies. These were in Wecomm Limited supporting a larger investment round of £2.7 million led by a private family office; The Engine Group Limited in an £8 million round led by a large private equity investor; Snacktime plc in a £1million round raising further expansion capital; Smart Education Limited in a further funding with the founders for an acquisition and to take the business through to profitability; and Servoca plc in a £1.5 million round to fund further acquisitions. During the year we sold three companies; UM Holdings Limited was sold for a profit of £1.5 million on cost; Mediasurface plc was sold to Alterian plc in a mixture of cash and shares realising 95% of cost. The sale is break-even against original cost, but it is a marked improvement on the position in March 2008 where the valuation was 20% of cost. Elderstreet was heavily involved with the sale process through its board representation; Halifax Industrials Limited was also sold recovering close to valuation. Term sheets were issued to seven new potential investments. From these prospects we completed one new deal, acquiring a stake in an AIM-quoted company, Access Intelligence plc. The intention is to use the company as an acquisition vehicle to acquire further software companies. Elderstreet employed this strategy in a previous investment, Computer Software Group plc, where the VCT made a profit of £2.5 million. We have two board seats and have already made the first acquisition. The reduced valuation on cost in the accounts is a reflection of the bid to offer spread in the market. Unfortunately the main trading subsidiary of the Oldbury Aluminium Alloys Group Limited was placed into administration in the autumn. This followed a dramatic reduction in demand for its products from its customers who principally supplied the automotive industry and the extreme volatility of related commodity prices. After careful review we decided not to invest further in the business. The current outlook for AIM and FTSE quoted stock is generally more difficult. Share prices have been severely affected by the general downturn. Our largest quoted investment is in Snacktime plc which represents 56% of the listed portfolio. Here we have two board seats. Snacktime recently raised further capital to fund its growth. So far the lack of funding in the financial system has had relatively little effect on our largest investments. Of the top ten investments only one has a large external debt position which is well covered by earnings and comfortably within its banking covenants. Finally we believe that the current downturn will result in some good opportunities to invest at realistic prices. While we are in no rush to invest the economic climate should form the basis of some good investments in the coming year. Elderstreet Private Equity Limited REVIEW OF INVESTMENTS Portfolio of investments The following investments were held at 31 December 2008. All companies are registered in England and Wales, with the exception of Component Source Inc, which is registered in the United States of America: Valuation movement % of Cost Valuation in year portfolio £'000 £'000 £'000 by value Top ten venture capital investments Wessex Advanced Switching 60 2,673 873 17.2% Products Limited Snacktime plc * 1,725 1,971 (673) 12.7% Lyalvale Express Limited 915 1,027 112 6.6% Baldwin & Francis (Holdings) 690 1,020 (300) 6.6% Limited Smart Education Limited 1,403 985 32 6.3% Wecomm Limited 850 745 (105) 4.8% The Engine Group Limited 600 726 - 4.7% Fords Packaging Systems Limited 83 542 - 3.5% Access Intelligence plc * 633 460 (173) 3.0% AngloINFO Limited 328 328 - 2.1% 7,287 10,477 (234) 67.5% Other venture capital investments Mears Group plc * 264 296 36 1.9% Interquest Group plc * 351 223 (319) 1.5% Cashfac Initiative Limited 260 197 164 1.3% Servoca plc * 350 190 (250) 1.2% Sift Limited 250 187 - 1.2% The QSS Group Limited 268 135 (35) 0.9% Melorio plc * 200 126 (84) 0.8% Rosebowl plc 188 125 - 0.8% NorthWest Transport Supplies 101 101 - 0.6% Limited Veterinary Practice Initiatives 100 100 - 0.6% Limited The Kellan Group plc 657 75 (120) 0.5% (formerly Berkeley Scott Group)* Infoserve plc * 150 73 17 0.5% Alterian plc * 125 57 (68) 0.3% SparesFinder Limited 103 12 - 0.1% Expansys plc * 202 10 (95) 0.1% Lanchon Holdings Limited 7 7 - - Oldbury Aluminium Alloys Group 1,375 - (1,375) - Limited Business Meetings ASP Limited 12 - - - Component Source Inc 250 - - - The National Solicitors Network 901 - (150) - Limited 6,114 1,914 (2,279) 12.3% Listed fixed income securities Treasury 8% Stock 2013 1,421 1,484 62 9.6% Treasury 4% Stock 2009 936 962 10 6.2% Nucleus Cash Trust 341 337 (4) 2.2% 2,698 2,783 68 18.0% 16,099 15,174 (2,445) 97.8% Cash at bank and in hand 348 2.2% Total investments 15,522 100.0% All venture capital investments are unquoted unless otherwise stated * Quoted on AIM Investment movements for the year ended 31 December 2008 ADDITIONS £'000 New investments Access Intelligence plc 633 Alterian plc 282 915 Follow on investments AngloINFO Limited 5 MediaSurface plc 34 Servoca plc 200 Smart Education Limited 351 Snacktime plc 100 The Engine Group Limited 350 Wecomm Limited 250 Wessex Advanced Switching Products Limited 4 1,294 Listed fixed income securities Nucleus Cash Trust 197 Treasury 8% Stock 2013 1,421 1,618 3,827 DISPOSALS Cost MV at Proceeds Profit/ Realised 31/12/07* (loss) gain/ vs cost (loss) £'000 £'000 £'000 £'000 £'000 Full disposals MediaSurface plc 823 274 823 - 549 Halifax Industrial Limited 331 320 320 (11) - UM Holdings Limited 54 915 1,561 1,507 646 Partial disposals Alterian plc 157 157 151 (6) (6) Liquidation Shopcreator Limited 375 - - (375) - Retention monies from prior disposals - - 16 16 16 Listed fixed income securities Nucleus Cash Trust 1 1 1 - - Treasury 5% Stock 2008 1,469 1,470 1,470 1 - Treasury 4% Stock 2009 520 533 535 15 2 3,730 3,670 4,877 1,147 1,207 * Adjusted for purchases in the year Statement of Directors' responsibilities The Directors are responsible for preparing the annual 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). The financial statements are required to 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 estimates that are reasonable and prudent; * state whether applicable 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 confirm that they have complied with the above requirements in preparing the financial statements. They also confirm that the annual report includes a fair review of the development and performance of the business together with a description of the principal risks and uncertainties faced by the Company. The Directors of the Company as at 31 December 2008 are shown on page 15 of the Annual Report and Accounts. The Directors are responsible for ensuring that the Company keeps proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 1985. 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 relating to the Company included on the Manager'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 Auditors The Directors in office at the date of the report have confirmed, as far as they are aware, that there is no relevant audit information of which the auditors are unaware. Each of the Directors have 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 INCOME STATEMENT for the year ended 31 December 2008 Year ended 31 December Year ended 31 December 2008 2007 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Income - Continuing 861 - 861 455 - 455 operations - - - - 199 - 199 Acquisitions Gains/(losses) on investments - Continuing - (1,238) (1,238) - 1,330 1,330 operations - Acquisitions - - - - 1,582 1,582 861 (1,238) (377) 654 2,912 3,566 Investment (90) (272) (362) (85) (254) (339) management fees Recoverable VAT 25 75 100 - - - Other expenses (218) (2) (220) (206) - (206) Return on ordinary activities 578 (1,437) (859) 2,658 3,021 before tax 363 Tax on ordinary (49) 49 - (57) 57 - activities Return attributable to equity 529 (1,388) (859) 2,715 3,021 Shareholders 306 Basic and diluted return per share: Ordinary share 2.5p (6.7p) (4.2p) 1.4p 14.3p 15.7p C share N/A N/A N/A 1.8p (6.5p) (4.7p) The revenue and capital movements in the year relate to 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/deficit as stated above and historical cost. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS for the year ended 31 December 2008 2008 2007 £'000 £'000 Opening shareholders' funds 17,968 12,922 Issue of shares 885 3,782 Share issue costs (49) - Purchase of own shares (509) (665) Total recognised losses for the year (859) 3,021 Dividends paid (1,738) (1,092) Closing shareholders' funds 15,698 17,968 BALANCE SHEET at 31 December 2008 2008 2007 £'000 £'000 £'000 £'000 Fixed assets Investments 15,174 17,462 Current assets Investments 5,110 5,110 Debtors 392 168 Cash at bank and in hand 348 381 5,850 5,659 Creditors: amounts falling due within (5,326) (5,153) one year Net current assets 524 506 Net assets 15,698 17,968 Capital and reserves Called up share capital 1,079 1,088 Capital redemption reserve 157 124 Merger reserve 3,475 3,475 Share premium 3,042 2,230 Special reserve 3,461 4,563 Investment holding gains 124 2,509 Capital reserve - realised 4,141 3,649 Revenue reserve 219 330 Equity shareholders' funds 15,698 17,968 Basic and diluted net asset value per share Ordinary share 72.8p 81.9p C share N/A 90.4p CASH FLOW STATEMENT for year ended 31 December 2008 2008 2007 £'000 £'000 Net cash inflow from operating activities 211 48 Capital expenditure Purchase of investments (3,827) (4,114) Sale of investments 4,877 3,932 Net cash inflow/(outflow) from capital expenditure 1,050 (182) Acquisitions Purchase of subsidiary undertaking - (225) Cash acquired from subsidiary undertaking 162 369 Net cash inflow from capital expenditure 162 144 Equity dividends paid (1,738) (1,092) Net cash outflow before financing (315) (1,082) Financing Proceeds from share issue 885 - Share issue costs (94) (6) Purchase of own shares (509) (745) Net cash inflow/(outflow) from financing 282 (751) Decrease in cash (33) (1,833) NOTES TO THE ACCOUNTS for year ended 31 December 2008 1. Accounting policies Basis of accounting The Company has prepared its financial statements under UK Generally Accepted Accounting Practice ("UK GAAP") and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" revised January 2009 ("SORP"). The financial statements are prepared under the historical cost convention as modified by the revaluation of certain financial instruments and on the basis that it is not necessary to prepare consolidated accounts. The Company implements new Financial Reporting Standards ("FRS") issued by the Accounting Standards Board when required. The Association of Investment Companies issued a new SORP in January 2009 which has been adopted for these financial statements. No comparative restatements have been required as a result of the implementation of the new SORP. 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 and are measured at fair value. 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 are measured using bid prices, with marketability discounts applied where deemed appropriate, in accordance with the IPEV. In respect of unquoted instruments, fair value is established by 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; * Earnings multiple; * 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 or liquidation 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. It is not the Company's policy to exercise either significant or controlling influence over investee companies. Therefore the results of these companies are not incorporated into the Revenue Account except to the extent of any income accrued. 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 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 which arises. Deferred taxation 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. Issue Costs Issue costs in relation to the shares issued are deducted from the respective share premium account. 2. Return per share Revenue return per Ordinary share is based on the net revenue return after taxation of £529,000 (2007: £278,000), in respect of 20,770,524 (2007: 19,718,057) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year. Revenue return per C share is based on the net revenue return after taxation of £Nil (2007: £28,000), in respect of 1,512,843 (2007: 1,542,202) C shares, being the weighted average number of C shares in issue during the year. Capital return per Ordinary share is based on the net capital loss for the financial year of £1,388,000 (2007 return: £2,815,000), in respect of 20,770,524 (2007: 19,718,057) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year. Capital return per C share is based on the net revenue return after taxation of £Nil (2007 loss: £100,000), in respect of 1,512,843 (2007: 1,542,202) C shares, being the weighted average number of C shares in issue during the year. As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per ordinary share. The return per share disclosed therefore represents both basic and diluted return per share. 3. Net asset value per share 2008 2007 Shares in issue Net asset value Net asset value pence pence per per 2008 2007 share £'000 share £'000 Ordinary 21,570,481 20,227,504 72.8 15,698 81.9 16,573 shares C shares N/A 1,542,202 N/A N/A 90.4 1,395 15,698 17,968 As the Company has not issued any convertible securities or share options, there is no dilutive effect on net asset per share. The net asset value per share disclosed therefore represents both basic and diluted return per share. 4 Principal financial risks The principal financial risks are as follows: Market risks The key market risks to which the Company is exposed are interest rate risk and market price 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. Interest rate risk The Company receives interest on cash deposits at a rate agreed with its banker, while investments in loan stock and fixed interest investments predominately attract interest at fixed rates. The Company's future cash flows can be influenced by changes in interest rates resulting in an increase or decrease in income from investments linked to the base rate. As the Company must comply with the VCT regulations, increases in interest rates could lead to a potential breach of these regulations as the proportion of the Company's income from sources other than shares and securities could exceed the required level. The Company therefore monitors the level of income received from fixed, floating and non interest bearing assets to ensure that the regulations are not breached. The Company has reviewed the financial impact that a 1.0% change in base rate (i.e. reducing base rate to nil) would have on the Company with income and the total return for the year changing by £10,000, equivalent to a 6.4% impact on overall income receivable by the Company. Such a change would have an immaterial impact on Net Asset Value. Market price risk Market price risk arises from uncertainty about the future prices of financial instruments held in accordance with the Company's investment objectives. It represents the potential loss that the Company might suffer through holding market positions in the face of market movements. At 31 December 2008, the unrealised loss on the quoted portfolios (AIM quoted and Fixed Income Investments) was £1,089,000 (2007 gain: 35,000). The investments the Company holds are, in the main, thinly traded and as such the prices are more volatile than those of more widely traded securities. In addition, the ability of the Company to realise the investments at their carrying value may at times not be possible if there are no willing purchasers. The ability of the Company to purchase or sell investments is also constrained by the requirements set down for Venture Capital Trusts. The Board considers each investment purchase to ensure that an acquisition will enable the Company to continue to have an appropriate spread of market risk and that an appropriate risk reward profile is maintained. It is not the Company's policy to use derivative instruments to mitigate market risk, as the Board believes that the effectiveness of such instruments does not justify the cost involved. 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. Credit risk in respect of Investments in listed fixed interest securities is minimised by investing in UK Government Stocks. Investments in loan stocks comprise a fundamental part of the Company's venture capital investments and are managed within the main investment management procedures. Cash is mainly held by Bank of Scotland plc, which is an A+ rated financial institution and, consequently the Directors consider that the risk profile associated with cash deposits is low and thus the carrying value in the financial statements is a close approximation of its fair value. Interest, dividends and other receivables are predominantly covered within the investment management procedures. Liquidity risk Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. As the Company only ever has a very low level of creditors and has no borrowings, the Board believes that the Company's exposure to liquidity risk is minimal. In addition to these risks, the Company, as a fully listed Company on the London Stock Exchange and as a Venture Capital Trust, operates in a complex regulatory environment and therefore faces a number of related risks. A breach of the VCT Regulations could result in the loss of VCT status and consequent loss of tax reliefs currently available to shareholders and the Company being subject to capital gains tax. Serious breaches of other regulations, such as the UK Listing Authority Listing rules and the Companies Act could lead to suspension from the Stock Exchange and damage to the Company's reputation. The Board reviews and agrees policies for managing each of these risks. They receive quarterly reports from the Investment and Administration Managers ("the Managers") which monitor the compliance of these risks, and place reliance on the Managers to give updates in the intervening periods. These policies have remained unchanged since the beginning of the financial period. 7. Related party transactions Michael Jackson is a director of Elderstreet Private Equity Limited which provides investment management services to the Company. During the year £377,000 (2007: £340,000) was due to Elderstreet Private Equity Limited in respect of these services, including VAT. At the year end £126,000 was repayable to the Company in respect of recoverable VAT on investment management fees which was received in full after the year end. A further £10,000 plus VAT was paid to Elderstreet Private Equity Limited in respect of work undertaken by to recover the VAT on behalf of the Company. In addition, £51,000 is repayable to the Company in respect of fundraising costs paid by the Company on behalf of Elderstreet Private Equity Limited during the year. Nicholas Lewis is a director of Downing Management Services Limited, which provides administration services to the Company. During the year £60,000 plus VAT (2007: £60,000 plus VAT) was due to Downing Management Services Limited in respect of these services. 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 2008, but has been extracted from the statutory financial statements for the year ended 31 December 2008, which were approved by the Board of Directors on 8 April 2009 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 2007 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 S237(2) or (3) of the Companies Act 1985. A copy of the full annual report and financial statements for the year ended 31 December 2008 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at Kings Scholars House, 230 Vauxhall Bridge Road, London SW1V 1AU and will be available for download from www.downing.co.uk. ---END OF MESSAGE--- This announcement was originally distributed by Hugin. The issuer is solely responsible for the content of this announcement.

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