Final Results
ELDERSTREET VCT PLC
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2010
FINANCIAL HIGHLIGHTS
 2010  2009
pence pence
Net asset value per share ("NAV") 76.6 Â 76.7
Cumulative dividends paid since launch 50.0 Â 46.0
Total return (NAV plus cumulative dividends paid per share) 126.6 Â 122.7
CHAIRMAN'S STATEMENT
I am pleased to present to Shareholders the Report and Accounts for the year
ended 31 December 2010 and, despite the ongoing challenges produced by the
economy, to report a further increase in Net Asset Value per share ("NAV").
Net Asset Value
At 31 December 2010, the Company's NAV stood at 76.6p, equivalent to an increase
of 3.9p (5.1%) over the year after adding back dividends of 4.0p per share which
were paid during the year. The Company had a particularly strong performance
over the last six months of the year gaining 7.1p in value since the half-year
date.
The Total Return to Shareholders who invested at the launch of the Company in
1998 (NAV plus cumulative dividends) is now 126.6p compared to the original cost
(net of income tax relief) of 80p per share. A summary of net cost and Total
Return for Shareholders who invested in the Company's various other fundraisings
is included within the year end financial report.
Venture capital investments
There was a moderate level of portfolio activity over the year, with £1.6
million being invested in new and follow-on investments, and £947,000 of
disposal proceeds being received during the year.
The quoted portfolio fell in value over the year by a net amount of £767,000.
The major part of this movement was accounted for by Snacktime plc (fall of
£898,000) and is discussed further within the Investment Manager's Report.
The Board has reviewed the valuation of the unquoted investments at the year end
and made a number of adjustments. Both Smart Education Limited and Wecomm
Limited made good progress during the year. Â This has been reflected by
significantly higher valuations for both investments.
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. Â During the
year this portfolio recognised unrealised gains of £16,000 and realised losses
of £6,000.
Results and dividends
The return on activities after taxation for the year was £893,000 (2009:
£1,628,000), comprising a revenue return of £185,000 (2009: £282,000) and a
capital gain of £708,000 (2009: £1,346,000).
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 6
July 2011 to Shareholders on the register at 3 June 2011.
Ordinary Share fundraisings
As stated in the half yearly report to 30 June 2010, the Company issued
1,807,957 Ordinary Shares, under an Offer for Subscription launched on 1
December 2009 at an average price of 80.4p per Share. Â Net proceeds thereon,
after accounting for issue costs, totalled £1.4 million.
On 21 December 2010, the Company launched a further Ordinary Share top-up
fundraising seeking to raise up to £7 million.  As at the date of this report,
the Company had allotted shares producing net proceeds of approximately £3.3
million.
Performance incentive fee
Following the agreement by Shareholders at a General Meeting on 22 July 2010, a
revised performance incentive scheme is now in place, with an effective date of
1 January 2009
Under the revised scheme, the Investment Manager is entitled to 20% of any
dividends paid in excess of 3.5p per annum, as long as the NAV before any such
dividend payment exceeds 70.6p per Share.
Under these new arrangements, a fee of £23,000 has been paid in respect of the
year ended 31Â December 2009 and, subject to Shareholder approval of the final
dividend, a fee of £25,000 will be payable in respect of the year ended
31Â December 2010.
Share buybacks
In June 2010, the Company spent approximately £158,000 purchasing 250,000 Shares
for cancellation at a price of 63.0p per Share. Â A further purchase was made in
November 2010, with the Company purchasing a further 329,642 Shares for
cancellation at a price of 57.5p per Share, equating to approximately £191,000.
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. Any Shareholders who wish to sell their shares will need to use
a stockbroker. Â Such Shareholders should ask their stockbroker to register their
interest that they wish to sell Shares with Shore Capital.
Annual General Meeting
The next AGM of the Company will be held at 32 Bedford Row, London WC1R 4HE at
11:00 a.m. on 29 June 2011.
Three items of Special Business are proposed; one ordinary resolution and one
special resolution in relation to the allotment of shares; and a special
resolution to make market purchases of its shares.
Outlook
The funds raised under the current share offer will give the Company the
opportunity to participate in new investment opportunities as well as ensuring
adequate liquid resources to continue to support the existing portfolio
companies. Â The new funds will also ensure that the Company's existing liquid
resources are available for the Board to continue with its policy of providing
Shareholders with a healthy dividend stream.
The Board remains satisfied with the investment portfolio and believes that,
with continued active involvement of the Investment Manager, the underlying
companies have the potential to deliver good returns to Shareholders in the
medium term.
David Brock
Chairman
INVESTMENT MANAGER'S REPORT
In spite of the recovery in the UK economy remaining patchy it is pleasing to
report that the Company recorded a positive movement in the total return,
increasing from 122.7p to 126.6p after paying dividends of 4p per share over the
year. Net Asset Value per share reduced slightly from 76.7p to 76.6p.
A number of new investment opportunities were reviewed resulting in two new
investments. In March 2010 we completed an investment into Aconite Technology
Limited, a financial processing software company, and in July 2010 an investment
into Fulcrum Utility Services Limited, a gas utilities design and connections
business. Within the portfolio a further £500,000 was invested in Access
Intelligence plc by way of ordinary stock as part of a larger funding round to
make an acquisition. There was one other small follow on investment into
AngloInfo Limited.
During the year we fully realised holdings in two companies, Melorio plc and
ComponentSource Inc raising £436,000, and made a partial realisation from The
Engine Group Limited raising £161,000. In addition, Snacktime plc repaid loan
capital of £350,000. These realisations, together with further loan and dividend
income from the portfolio of £412,000, have provided a solid cash flow for
paying the year's dividends.
Post year end, we are delighted to announce the sale of WeComm Limited resulting
in a return of just above cost. This represents an uplift of 47% over the prior
year carrying value. Additionally there is a potential further £100,000
consideration held in escrow for twelve months.
Within the portfolio we continue to be cautiously optimistic over the resilience
of the majority of the companies. Snacktime plc has completed an acquisition,
which is forecast will double turnover and profits. However over the year the
share price of Snacktime which is quoted on the AIM market, has fallen from
£1.70 to £1.20 on very little trading volume. This has resulted in a decline in
value of £898,000 equivalent to about 3.6p of NAV per share. Management are very
busy integrating the acquisition and are confident considerable cost savings can
be made across the combined businesses. The holding in Snacktime represented
11.6% of the investment portfolio at the year end of December 2010.
Two further acquisitions were made by portfolio companies Fords Packaging and
Access Intelligence. Your Manager was heavily involved with sourcing and
executing both of these acquisitions.
We are also seeing encouraging signs of growth within other companies; for the
year end 2010 Smart Education has increased turnover by 45% and recorded an
increase in EBITDA profit of 320%; AngloInfo has reported an increase in revenue
of 40%. Elsewhere Fords, Lyalvale, and Wessex remain stable and are paying
dividends. Wecomm are forecasting a swing from an EBITDA loss to profit for the
year and Baldwin and Francis, although facing some challenges, remains
profitable and cash generative. Generally it is worth noting that in nine out of
the top ten companies by value at 31 December 2010 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 to make
acquisitions. 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.
In conclusion your Manager holds a positive outlook but remains cautious.
Elderstreet Investments Limited
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments were held at 31 December 2010. All companies are
registered in England and Wales.
     Valuation movement
   in year % of portfolio
 Cost Valuation £'000 by value
 £'000 £'000
Ten largest venture
capital investments
(by value)
Wessex Advanced  60  2,673  -  14.1%
Switching Products
Limited
Access Intelligence  1,633  2,301  (25)  12.2%
plc *
Snacktime plc * Â 1,375 Â 2,206 Â (898) Â 11.6%
Smart Education  1,473  2,165  1,162  11.4%
Limited
Fords Packaging  1,047  1,152  -  6.1%
Systems Limited
Lyalvale Express  915  1,027  -  5.4%
Limited
Wecomm Limited  850  935  463  4.9%
Baldwin & Francis  690  770  -  4.1%
(Holdings) Limited
Fulcrum Utility  500  646  146  3.4%
Services Limited *
AngloINFO Limited  528  598  70  3.1%
-------- ----------- -------------------- ---------------
  9,071  14,473  918  76.3%
-------- ----------- -------------------- ---------------
Other venture capital
investments
Aconite Technology  460  460  -  2.4%
Limited
Interquest Group plc  336  391  110  2.0%
*
The Engine Group  455  385  17  2.0%
Limited
Mears Group plc ** Â 188 Â 242 Â 19 Â 1.3%
Cashfac Initiative  260  197  -  1.0%
Limited
Rosebowl plc  188  125  -  0.7%
Servoca plc * Â 333 Â 84 Â (84) Â 0.5%
Sift Limited  250  38  -  0.2%
The Kellan Group plc  657  13  (24)  0.1%
*
SparesFinder Limited  104  12  -  0.1%
Infoserve plc * Â 127 Â 7 Â (10) Â -
The National  501  -  -  -
Solicitors Network
Limited
The QSS Group Limited  268  -  (135)  -
-------- ----------- -------------------- ---------------
  4,127  1,954  (107)  10.3%
-------- ----------- -------------------- ---------------
Listed fixed income
securities
United Kingdom 2.25% Â 830 Â 861 Â 29 Â 4.5%
Gilt 07/03/2014
United Kingdom 2.75% Â 559 Â 546 Â (13) Â 2.9%
Gilt 22/01/2015
-------- ----------- -------------------- ---------------
  1,389  1,407  16  7.4%
-------- ----------- -------------------- ---------------
  14,587  17,834  827  94.0%
Cash at bank and in    1,127    6.0%
hand
----------- ---------------
Total investments    18,961    100.0%
All venture capital investments are unquoted unless otherwise stated
* Quoted on AIM
** Â Â Â Â Quoted on the Main Market
Investment movements for the year ended 31 December 2010
ADDITIONS
 £'000
New investments
Aconite Technology Limited 460
Fulcrum Utility Services Ltd 500
Follow on investments
Access Intelligence plc 500
AngloINFO Limited 200
--------
 1,660
Listed fixed income securities
United Kingdom 2.75% Gilt 22/01/2015 743
--------
 2,403
DISPOSALS
    Profit/ Realised gain/
 MV at  (loss) vs cost (loss)
Cost 01/01/10* Proceeds
 £'000 £'000 £'000 £'000 £'000
Full disposals
Component Source Inc. 250 8 8 (242) -
Melorio plc 190 222 428 238 206
Partial disposals
Snacktime plc 350 350 350 - -
The Engine Group Limited 145 158 161 16 3
The National Solicitors
Network Limited 400 - - (400) -
Liquidations and
dissolutions
BusinessMeetings ASP
Limited 12 - - (12) -
Lanchon Holdings Limited 6 6 - (6) (6)
-------------------------------------------------------
 1,353 744 947 (406) 203
-------------------------------------------------------
Listed fixed income
securities
Nucleus Cash Trust 95 93 93 (2) -
United Kingdom 3.25% Gilt
07/12/2011 719 716 711 (8) (5)
United Kingdom 8% Stock
2013 711 718 717 6 (1)
United Kingdom 2.75% Gilt
22/01/2015 184 184 184 - -
-------------------------------------------------------
 1,709 1,711 1,705 (4) (6)
-------------------------------------------------------
 3,062 2,455 2,652 (410) 197
* Â Adjusted for purchases in the year
Statement of Directors' responsibilities
The Directors are responsible for preparing the Report of the Directors, the
Directors' Remuneration Report and the financial statements in accordance with
applicable law and regulations. They are also responsible for ensuring that the
annual report includes information required by the Listing Rules of the
Financial Services Authority.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and applicable law).
Under company law the Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of affairs
of the Company and of the profit 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 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 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 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 Auditors
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
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.
Grant Whitehouse
Secretary of Elderstreet VCT plc
Company number: 03424984
Registered Office:
10 Lower Grosvenor Place
London SW1W 0EN
INCOME STATEMENT
for the year ended 31 December 2010
  2010 2009
Revenue  Capital  Total  Revenue  Capital  Total
£'000  £'000  £'000  £'000  £'000  £'000
Income  493  -  493  571  -  571
Distribution in specie  -  -  -  -  5,110  5,110
Gains on investments  -  1,024  1,024  -  1,569  1,569
Loss on subsidiary  -  -  -  -  (5,110)  (5,110)
undertaking
--------- --------- ------- --------- --------- --------
  493  1,024  1,517  571  1,569  2,140
Investment management  (88)  (263)  (351)  (78)  (234)  (312)
fees
Performance incentive  -  (48)  (48)  -  -  -
fees
Other expenses  (214)  (11)  (225)  (199)  (1)  (200)
--------- --------- ------- --------- --------- --------
Return on ordinary
activities before tax 191 702 893 294 1,334 1,628
Tax on ordinary  (6)  6  -  (12)  12  -
activities
--------- --------- ------- --------- --------- --------
Return attributable to
equity Shareholders 185 708 893 282 1,346 1,628
Basic and diluted
return per share 0.8p 2.9p 3.7p 1.2p 5.9p 7.1p
All Revenue and Capital items in the above statement derive from continuing
operations. Â No operations were acquired or discontinued during the year. Â 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 2010
2010 Â 2009
£'000  £'000
Opening shareholders' funds  17,865  15,698
Issue of shares  1,455  1,478
Share issue costs  (80)  (81)
Purchase of own shares  (349)  (153)
Total recognised gains for the year  893  1,628
Dividends paid  (999)  (705)
---------- ---------
Closing shareholders' funds  18,785  17,865
BALANCE SHEET
at 31 December 2010
   2010   2009
  £'000 £'000  £'000 £'000
Fixed assets
Investments   17,834   17,059
Current assets
Debtors  33   91
Cash at bank and in hand  1,127   899
------- -------
  1,160   990
Creditors: amounts falling due within one year  (209)   (184)
------- -------
Net current assets   951   806
-------- -------
Net assets   18,785   17,865
Capital and reserves
Called up share capital   1,226   1,164
Capital redemption reserve   199   170
Merger reserve   2,082   2,211
Share premium   5,625   4,341
Special reserve   1,728   2,895
Revaluation reserve   3,875   2,481
Capital reserve - realised   3,775   4,395
Revenue reserve   275   208
-------- -------
Total equity shareholders' funds   18,785   17,865
Basic and diluted net asset value per share   76.6p   76.7p
CASH FLOW STATEMENT
for the year ended 31 December 2010
  2010  2009
  £'000  £'000
Net cash (outflow)/inflow from operating activities  (42)  307
Capital expenditure
Purchase of investments  (2,403)  (3,166)
Sale of investments  2,652  2,850
--------- --------
Net cash inflow/(outflow) from capital expenditure  249  (316)
--------- --------
Equity dividends paid  (999)  (735)
--------- --------
Net cash outflow before financing  (792)  (744)
Financing
Proceeds from share issue  1,455  1,478
Share issue costs  (86)  (30)
Purchase of own shares  (349)  (153)
--------- --------
Net cash inflow from financing  1,020  1,295
--------- --------
Increase in cash  228  551
NOTES TO THE ACCOUNTS
for the year ended 31 December 2010
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.
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. Â 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. Â The fair value of an investment upon
acquisition is deemed to be cost. Â 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.
It is not the Company's policy to exercise either significant or controlling
influence over investee companies. Â Therefore, the results of these companies
are not incorporated into the Income Statement except to the extent of any
income accrued. Â 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. Â 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, 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
2010 2009
 £'000  £'000
Return per share based on:
Net revenue return for the financial year (£'000) 185  282
Capital return per share based on:
Net capital gain for the financial year (£'000) 708  1,346
Weighted average number of Shares in issue 24,429,890 Â 23,010,569
As the Company has not issued any convertible securities or share options, there
is no dilutive effect on return per share. Â The return per share disclosed
therefore represents both basic and diluted return per share.
3. Basic and diluted net asset value per share
2010 2009
Shares in issue Net asset value Net asset value
   pence per    pence per
  share  share
2010 2009 £'000 £'000
Ordinary 24,516,002 23,287,887 Â 76.6 Â 18,785 Â 76.7 Â 17,865
shares
As the Company has not issued any convertible securities or share options, there
is no dilutive effect on net asset value per share. Â 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 Company'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. Â Investments are
designated at "fair value through the profit and loss account" and are
recognised as such on acquisition.
In addition to its investment portfolio, the VCT holds cash balances with two 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. Â 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.
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. Â It
represents the potential loss that the Company might suffer through holding
market positions in the face of market movements. At 31 December 2010, the net
unrealised gain on the quoted portfolios (quoted on the Main Market, AIM-quoted
and fixed income investments) was £758,000 (2009: £1,544,000).
The investments the Company holds are (with the exception of listed fixed income
securities and investments listed on the Main Market), 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. Â 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. Â 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.
Operating cash is mainly held at either Bank of Scotland plc or Royal Bank of
Scotland plc, both of which are Aa3 rated financial institutions (Moody's) and,
consequently the Directors consider that the risk profile associated with cash
deposits is low. Â 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. Â 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 (2010: £209,000
2009: £184,000), has no borrowings and has a healthy bank balance, 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 which provides
investment management services to the Company. During the year £351,000 (2009:
£312,000) was due in respect of these services.  £48,000 of performance
incentive fees are also due to Elderstreet Investments Limited (subject to the
Shareholder agreement to the final dividend) in respect of the year under
review, of which £25,000 is outstanding at the year end (2009: £nil).  In
addition, Elderstreet Investments Limited have received one-off fees from the
Company totalling £10,000 in respect of additional investment advisory fees
(£9,000) and recharge of printing costs (£1,000).
Nicholas Lewis is a director of Downing Management Services Limited, which
provides administration services to the Company.  During the year £59,000 (2009:
£59,000) was due to Downing Management Services Limited in respect of these
services.
6. Post balance sheet event
Between 22 March 2011 and 5 April 2011, the Company allotted 4,373,543 Ordinary
Shares of 5p each, under the terms of a prospectus dated 21 December 2010, at an
average price of 80.2p per share, with gross proceeds received thereon of £3.5
million. Issue costs in respect of these allotments amounted to £193,000.
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 2010, but has been extracted
from the statutory financial statements for the year ended 31 December 2010,
which were approved by the Board of Directors on 8 April 2011 and will be
delivered to the Registrar of Companies following the Company's Annual General
Meeting. Â 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 2009 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 2010 will be printed and posted to Shareholders shortly. Copies will
also be available to the public at the registered office of the Company at 10
Lower Grosvenor Place, London, SW1W 0EN and will be available for download from
www.downing.co.uk.
This announcement is distributed by Thomson Reuters on behalf of
Thomson Reuters clients. The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and
other applicable laws; and
(ii) they are solely responsible for the content, accuracy and
originality of the information contained therein.
Source: Elderstreet VCT plc via Thomson Reuters ONE
[HUG#1504765]
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