Final Results
Elderstreet VCT plc
Final Results for the year ended 31 December 2009
FINANCIAL HIGHLIGHTS
 2009  2008
pence pence
Net asset value per share ("NAV") 76.7 Â 72.8
Cumulative dividends paid since launch 46.0 Â 43.0
Total return (NAV plus cumulative dividends paid per share) 122.7 Â 115.8
Dividends in respect of financial year
Interim dividend per share 2.0 Â 3.0
Final proposed dividend per share (payable on 23 June 2010) 1.0 Â 1.0
------- ------
 3.0  4.0
CHAIRMAN'S STATEMENT
In view of the continuing challenging conditions which prevailed throughout
2009, it is pleasing to be able to report a positive performance by your Company
and a reasonable increase in its Net Asset Value over the year.
Net Asset Value
At 31 December 2009, the Company's Net Asset Value per Ordinary Share ("NAV")
stood at 76.7p, an increase of 6.9p (9.5%) compared to the NAV at the previous
year end (after adjusting for the dividends of 3.0p per share 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 122.7p compared to the original cost
(net of income tax relief) of 80p per share.
Venture capital investments
Portfolio activity during the year was reasonably limited, although the Company
made two significant follow-on investments.
Over the year, two investments showed substantial increases in value.
AIM-quoted companies, Snacktime plc and Access Intelligence plc, were both able
to make good progress giving rise to increases in valuation of £1.5 million and
£865,000 respectively.
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
are managed by Smith & Williamson Investment Management Limited. During the
year this portfolio produced unrealised losses of £24,000 and realised losses of
£21,000.
Results and dividends
The return on activities after taxation for the year was £1,628,000 (2008: loss
£859,000), comprising a revenue return of £282,000 (2008: £529,000 and a capital
gain of £1,346,000 (2008: loss £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 23 June 2010 to Shareholders on the register at 28 May 2010.
Investment management and administration fees
As noted in my statement with the Half-Yearly Report, following changes to the
legislation regarding VAT on investment management fees for VCTs, during the
year, the Board reviewed the investment management and administration fees and
agreed and small increase in the investment management fee and, in view of the
fact that the Company now just has one share class, a small decrease in
administration fees. The net overall effect of these changes to Shareholders,
including the changes to the VAT legislation, is negligible.
Performance incentive fee
The Board recognises that the existing performance incentive arrangements do not
act to incentivise the Manager as there is no realistic possibility of any
incentive fee being paid.
In order to address this, Board is proposing to re-structure the performance
incentive arrangements.
Under the proposals, the Investment Manager will be entitled to a 20% share of
any dividends in excess of 3.5p per annum (assuming that adjusted NAV is higher
than 70.6p per share) and Directors will no longer be entitled to any
performance fees. The Board believes the proposals provide a realistic
incentive and better align the interests of the Shareholders and the Manager in
maximising dividends.
Full details of the proposals will be put to Shareholders in a circular to be
issued by the Company shortly.
Ordinary Share issue 2008/09 and 2009/10
The Company undertook a small top-up share issue in December 2008. 1,979,406
Ordinary Shares were issued at an average price of 74.71p per share. The total
funds received under the offer were £1.5 million with issue costs thereon of
£81,000.
Ordinary Share issue 2009/10 and 2010/11
On 1 December 2009, the Company announced a new Offer for Subscription covering
the tax years 2009/10 and 2010/2011 to raise up to £1.6 million by the issue of
further Ordinary Shares. As at the date of this report, the Company had
allotted 1,540,945 Ordinary Shares at a price of approximately 76.0p per share
under the Offer.
Share buybacks
As I reported in my statement with the Half-Yearly Report, the Board has
introduced a modified system for share buybacks, whereby the Board will allocate
a fixed level of funds for the Company to acquire its own shares at a standard
discount to NAV twice each year, normally expected to be in May and October.
In October 2009, the Company spent approximately £150,000 purchasing 262,000
Shares for cancellation at a price of 58.0p per share at a 15% to the latest
published NAV.
The Board has allocated a further £150,000 for share buybacks which it intends
to undertake at a 15% discount to the latest published NAV in May 2010.
Shareholders who wish to sell their Shares should contact Downing Management
Services Limited.
The Board is aware that there may be forced sellers of the Company's Shares who
are unable to wait for the next scheduled share buyback.  Accordingly, the
Board may consider making further buybacks outside the scheduled times, however
these will be made at a greater discount to NAV.
Annual General Meeting
The next AGM of the Company will be held at 32 Bedford Row, London WC1R 4HE at
11:00a.m. on 21 June 2010.
Three items of Special Business are proposed; two special resolutions in
relation to the allotment of shares; and a special resolution to make market
purchases of its shares.
Outlook
A substantial proportion of the Company's value is now accounted for by a
reasonably small number of investments. The performance of these investments
will therefore have a significant influence on the performance of the Company
over the coming year.
Prospects for these key investments generally look positive. Having traded
through the difficult conditions of the last 2 years, some of them may now be
stronger and well placed to take advantage of better conditions when they
arrive.
David Brock
Chairman
30 April 2010
INVESTMENT MANAGER'S REPORT
In spite of the UK economy being in recession for most of the year it is
pleasing to report that the VCT made a positive return over the year with the
net asset value per share increasing by 8.8% to 76.7p after paying a 3.0p
dividend. Most of our activity has been focused on the management of the
existing portfolio. There were no completely new investments made during the
year but over £1.0 million was invested in portfolio companies.
In February we completed a secondary buy-out of Fords Packaging Limited in order
to facilitate the retirement of three of the directors. A further £500,000 was
invested in Access Intelligence plc by way of a £500,000 convertible loan stock
as part of a £2.0 million funding round to make an acquisition. There were a
number of other small follow on investments to several companies in the
portfolio.
During the year we fully realised holdings in four companies raising £683,000.
These included; North West Transport Supplies, Fords Packaging Systems 1998
Limited, Expansys plc and Alterian plc. Since the year end we have also sold our
holding in ComponentSource. Holdings Inc. A number of new investment
opportunities were reviewed and indicative terms discussed but we chose not to
proceed with any.
Within the portfolio, we are generally pleased with the resilience of the
majority of the companies. Overall the portfolio has weathered the downturn in
trading conditions, although companies with sales order profiles relying on
'large ticket orders' in global markets are still subject to the lack of
liquidity in global credit. The portfolio has relatively little external bank
debt which has helped in the downturn. The Manager is confident that barring any
unforeseen major shock to the global economy the portfolio is well positioned to
trade through the existing economic climate.
Positive news has been forthcoming from Snacktime plc and Access Intelligence
plc which have both raised external capital and made earnings enhancing
acquisitions over the last thirteen months. Within the high growth early stage
portfolio weComm Limited, a mobile application software investment, has recently
reported its best ever quarter's trading. Generally it is worth noting that in
nine out of the top ten companies by value at 31 December 2009 we have at least
one board seat and are very actively involved with these businesses.
Over the year the movement in the net asset value including cumulative dividends
has been positive. Of the top ten investments three have increased in value,
three have remained constant; and four have reduced. Valuation increases have
outnumbered decreases by over £1.0 million. The majority of this increase has
been in Access Intelligence plc and Snacktime plc, where the VCT has significant
shareholdings and Board representation. Excluding these holdings, the AIM
portfolio has increased in value by £75,000 reflecting the recovery in the
markets.
We continue to maintain a good level of liquidity so that we are able to respond
to investment opportunities that become available. We expect that as the economy
recovers that some of the portfolio companies will need further support to
underpin their growth. Given the uncertainty in the general economy we believe
our strategy of investing into the existing portfolio to make acquisitions while
enterprise values are relatively low will enhance the value of the VCT in the
medium term. The low external debt position of the portfolio, which is well
covered by earnings and comfortably within banking covenants, gives us
confidence for the future.
Overall we remain cautiously optimistic.
Elderstreet Investments Limited
30 April 2010
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments were held at 31 December 2009. 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
Ten largest venture capital investments (by
value)
Snacktime plc * 1,725 3,453 1,482 19.2%
Wessex Advanced Switching Products Limited 60 2,673 - 14.9%
Access Intelligence plc * 1,133 1,826 865 10.2%
Fords Packaging Systems Limited
(formerly Fords Packaging Systems Holdings 1,047 1,152 105 6.4%
Limited)
Lyalvale Express Limited 915 1,027 - 5.7%
Smart Education Limited 1,473 1,003 (53) 5.6%
Baldwin & Francis (Holdings) Limited 690 770 (250) 4.3%
The Engine Group Limited 600 526 (200) 2.9%
Wecomm Limited 850 472 (273) 2.7%
AngloINFO Limited 328 328 - 1.8%
-------------------------------------
 8,821 13,230 1,676 73.7%
-------------------------------------
Other venture capital investments
Interquest Group plc * 336 280 67 1.6%
Mears Group plc ** 188 223 14 1.2%
Melorio plc * 190 222 103 1.2%
Cashfac Initiative Limited 260 197 - 1.1%
Servoca plc * 333 168 (12) 0.9%
The QSS Group Limited 268 135 - 0.7%
Rosebowl plc 188 125 - 0.7%
The Kellan Group plc* 657 38 (38) 0.2%
Sift Limited 250 38 (150) 0.2%
Infoserve plc * 127 17 (45) 0.1%
SparesFinder Limited 103 12 - 0.1%
Component Source Inc 250 8 8 0.1%
Lanchon Holdings Limited 7 7 - 0.1%
Business Meetings ASP Limited 12 - - Â Â Â Â Â -
The National Solicitors Network Limited 901 - - Â Â Â Â Â -
-------------------------------------
 4,070 1,470 (53) 8.2%
-------------------------------------
Listed fixed income securities
Treasury 2¼% Stock 07/03/2014 830 832 2 4.6%
Treasury 8% Stock 2013 711 718 (24) 4.0%
Treasury 3¼% Stock 07/12/2011 718 716 (2) 4.0%
Nucleus Cash Trust 95 93 - 0.5%
-------------------------------------
 2,354 2,359 (24) 13.1%
-------------------------------------
 15,245 17,059 1,599 95.0%
Cash at bank and in hand  899  5.0
----------- ----------
Total investments  17,958  100.0%
All venture capital investments are unquoted unless otherwise stated
* Â Â Â Â Â Â Â Â Â Â Â Â Quoted on AIM
** Â Â Â Â Â Â Â Â Â Quoted on the Main Market
Investment movements for the year ended 31 December 2009
ADDITIONS
 £'000
New investments
Fords Packaging Systems Limited (formerly Fords Packaging Systems Holdings 1,047
Limited) **
Follow on investments
Access Intelligence plc 500
Smart Education Limited 70
Listed fixed income securities
Treasury 3¼% Stock 07/12/2011 719
Treasury 2¼% Stock 07/03/2014 830
------
 3,166
DISPOSALS
    Profit/ Realised
 MV at  (loss) vs gain/
Cost 01/01/09* Proceeds cost (loss)
 £'000 £'000 £'000 £'000 £'000
Full disposals
Alterian plc 125 57 49 (76) (8)
Expansys plc 202 10 5 (197) (5)
Fords Packaging Systems 1998 Limited
(formerly Fords Packaging Systems
Limited) ** 83 542 542 459 -
Northwest Transport Supplies Limited 101 101 87 (14) (14)
Partial disposals
Interquest plc 15 9 13 (2) 4
Infoserve plc 22 11 5 (17) (6)
Mears Group plc 77 87 74 (3) (13)
Melorio plc 10 6 12 2 6
Servoca plc 17 10 10 (7) -
Liquidations and dissolutions
Oldbury Aluminium Alloys Group 1,375 - - (1,375) -
Limited
Veterinary Practices Initiatives 100 100 127 27 27
Limited
Listed fixed income securities
Treasury 4% Stock 2009 936 962 956 20 (6)
Treasury 8% Stock 2013 711 742 726 15 (16)
Nucleus Cash Trust 246 243 244 (2) 1
--------------------------------------------
 4,020 2,880 2,850 (1,170) (30)
*Â Â Â Â Â Â Â Â Â Â Â Â Â Adjusted for purchases in the year
** Â Â Â Â Â Â Â Â Â Restructuring of investment
Statement of Directors' responsibilities
The Directors are responsible for preparing the Report of the Directors, the
Directors' Remuneration Report and the financial statements in accordance with
applicable law and regulations. They are also responsible for ensuring that the
annual report includes information required by the Listing Rules of the
Financial Services Authority.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and applicable law).
Under company law the Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of affairs
of the Company and of the profit or loss of the Company for that period. In
preparing these financial statements the Directors are required to:
*select suitable accounting policies and then apply them consistently;
*make judgments and 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 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
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 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 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
Company number: 03424984
Registered Office:
Kings Scholars House
230 Vauxhall Bridge Road
London SW1V 1AU
30 April 2010
INCOME STATEMENT
for the year ended 31 December 2009
2009 2008
 Revenue Capital Total Revenue Capital Total
 £'000 £'000 £'000 £'000 £'000 £'000
Income 571 - 571 861 - 861
Distribution in specie - 5,110 5,110 - - -
Gains/(losses) on investments - 1,569 1,569 - (1,238) (1,238)
Loss on subsidiary undertaking - (5,110) (5,110) - - -
------------------------------------------------
 571 1,569 2,140 861 (1,238) (377)
Investment management fees (78) (234) (312) (90) (272) (362)
Recoverable VAT - - - 25 75 100
Other expenses (199) (1) (200) (218) (2) (220)
------------------------------------------------
Return on ordinary activities
before tax 294 1,334 1,628 578 (1,437) (859)
Tax on ordinary activities (12) 12 - (49) 49 -
------------------------------------------------
Return attributable to equity
Shareholders 282 1,346 1,628 529 (1,388) (859)
Basic and diluted return per 1.2p 5.9p 7.1p 2.5p (6.7p) (4.2p)
share
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/deficit as stated above and at historical cost.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 December 2009
 2009  2008
 £'000  £'000
Opening shareholders' funds 15,698 Â 17,968
Issue of shares 1,478 Â 885
Share issue costs (81) Â (49)
Purchase of own shares (153) Â (509)
Total recognised gains/(losses) for the year 1,628 Â Â (859)
Dividends paid (705) Â (1,738)
---------- ----------
Closing shareholders' funds 17,865 Â 15,698
BALANCE SHEET
at 31 December 2009
  2009 2008
 £'000 £'000 £'000 £'000
Fixed assets
Investments  17,059  15,174
Current assets
Investments - Â 5,110
Debtors 91 Â 392
Cash at bank and in hand 899 Â 348
------- ---------
 990  5,850
Creditors: amounts falling due within one year (184) Â (5,326)
------- ---------
Net current assets  806  524
-------- -------
Net assets  17,865  15,698
Capital and reserves
Called up share capital  1,164  1,079
Capital redemption reserve  170  157
Merger reserve  2,211  3,475
Share premium  4,341  3,042
Special reserve  2,895  3,461
Investment holding gains  2,481  124
Capital reserve - realised  4,395  4,141
Revenue reserve  208  219
-------- -------
Total equity shareholders' funds  17,865  15,698
Basic and diluted net asset value per share  76.7p  72.8p
CASH FLOW STATEMENT
for year ended 31 December 2009
 2009  2008
 £'000  £'000
Net cash inflow from operating activities 307 Â 211
Capital expenditure
Purchase of investments (3,166) Â (3,827)
Sale of investments 2,850 Â 4,877
----------- ----------
Net cash (outflow)/inflow from capital expenditure (316) Â 1,050
----------- ----------
Acquisitions
Cash acquired from subsidiary undertaking - Â 162
----------- ----------
Net cash inflow from capital expenditure - Â 162
----------- ----------
Equity dividends paid (735) Â (1,738)
----------- ----------
Net cash outflow before financing (744) Â (315)
Financing
Proceeds from share issue 1,478 Â 885
Share issue costs (30) Â (94)
Purchase of own shares (153) Â (509)
----------- ----------
Net cash inflow from financing 1,295 Â 282
----------- ----------
Increase/(decrease) in cash 551 Â (33)
NOTES TO THE ACCOUNTS
for year ended 31 December 2009
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 ("FRS") issued by the
Accounting Standards Board when required.
Presentation of Income Statement
In order to better reflect the activities of a venture capital trust and in
accordance with 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.
Investments
Investments are designated as "fair value through profit or loss" assets due to
investments being managed and performance evaluated on a fair value basis.  A
financial asset is designated within this category if it is both acquired and
managed, 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 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 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.
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 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, equivalent to the fair value of the expected
balance receivable/payable by the Company.
Issue costs
Issue costs in relation to the shares issued are deducted from the Share Premium
account.
2. Basic and diluted return per share
 Weighted
average
number of Revenue Capital gain/
shares in return per loss per
issue share share
  £'000 £'000
Return per share is calculated on the
following:
Year ended 31 December 2009
Ordinary Shares 23,010,569 282 1,346
Year ended 31 December 2008
Ordinary Shares 20,770,524 529 (1,388)
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
 2009 2008
 Shares in issue Net asset value Net asset value
   pence    pence
  per  per
2009 2008 share £'000 share £'000
Ordinary shares 23,287,887 21,570,481 Â 76.7 Â 17,865 Â 72.8 Â 15,698
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 net asset value per share.
4. Principal financial risks
As a VCT, the majority of the Company's assets are represented by financial
instruments which are held as part of the investment portfolio. In order to
ensure continued compliance with relevant VCT regulations and to be in a
position to deliver the long term capital growth, which is part of the Company's
investment objective, the Board is very much aware of the need to manage and
mitigate the risks associated with these financial instruments.
The management of these risks starts with the application of a clear investment
policy which has been developed by the Board who are experienced investment
professionals. Furthermore, the Board has appointed an experienced Investment
Manager to whom they have communicated the Company's investment objectives and
whose remuneration is linked to the achievement of those objectives. The
Investment Manager reports regularly to the Board on performance, and to
facilitate the direct Board involvement with key decisions, on whether or not to
invest, disinvest and the nature, terms and the security of investments being
made.
Further information about the VCT's investment policy is set out in the Report
of the Directors.
In assessing the risk profile of its investment portfolio, the Board has
identified three principal classes of financial instrument. Investments are
"fair value through the profit and loss account" and are recognised as such on
initial recognition.
In addition to its investment portfolio, the VCT holds cash balances with one of
the main UK banks and the Listed Fixed Income Securities Manager. 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.
The Board has reviewed the Company's financial risk profile and concluded that
the current sensitivity level remains appropriate.
A review of the specific financial risks faced by the Company 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
Board decisions in relation to amounts to be retained as cash deposits and held
in fixed interest investments (including yields) are influenced by actual and
potential changes in the Bank of England base rate.  Sensitivity has been
tested by the impact on the NAV over a one year period of a fall in the base
rate to nil, being the largest possible fall, and also a graduating increase in
base rate to 4%.
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 2009, the net
unrealised gain on the quoted portfolios (quoted on the Main Market, AIM-quoted
and fixed income investments) was £1,544,000 (2008: loss £1,089,000).
The investments the Company holds are (with the exception of listed fixed income
securities), in the main, thinly traded (due to the underlying nature of the
investments) and, as such, the prices are more volatile than those of more
widely traded, full list, 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 VCTs.
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 or risk 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.
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 Aa3 rated financial
institution (Moody's) and, consequently the Directors consider that the risk
profile associated with cash deposits is low. There have been no changes in
fair value that are directly attributable to changes in credit risk.
Interest, dividends and other receivables are predominantly covered within the
investment management procedures. There have been no changes in fair value that
are directly attributable to changes in credit risk.
Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting
obligations associated with its financial liabilities. Liquidity risk may also
arise from either the inability to sell financial instruments when required at
their fair values or from the inability to generate cash inflows as required.
As the Company only ever has a very low level of creditors, (2009: £184,000,
2008: £216,000), has no borrowings and holds £899,000 of funds in the Bank at
the year end (2008: £348,000), the Board believes that the Company's exposure to
liquidity risk is minimal.
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 and Elderstreet
Private Equity Limited which provides investment management services to the
Company. During the year £312,000 (2008: £377,000) was due to the companies in
respect of these services. At the year end £Nil (2008: £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. In addition, £Nil (2008: £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 £52,000 plus
VAT (2008: £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 2009, but has been extracted
from the statutory financial statements for the year ended 31 December 2009,
which were approved by the Board of Directors on 30 April 2010 and will be
delivered to the Registrar of Companies following the Company's Annual General
Meeting. The Independent Auditor's Report on those financial statements was
unqualified and did not contain any emphasis of matter nor statements under s
498(2) and (3) of the Companies Act 2006.
The statutory accounts for the period ended 31 December 2008 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 2009 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.
[HUG#1410767]
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