Final Results
Downing Distribution VCT 1 plc
Final Results for the year ended 31 MARCH 2011
FINANCIAL HIGHLIGHTS
 2011  2010
Pence Pence
(restated)
Net asset value per share ("NAV") 92.0 Â 105.8
Cumulative distributions paid since 1 April 2010 5.0 Â -
------- ----------
Total return (net asset value plus cumulative distributions 97.0 Â 105.8
paid)
CHAIRMAN'S STATEMENT
Introduction
I present the Company's first Annual Report covering the period since the merger
with Pennine AIM VCT 5 ("P5") and Pennine AIM VCT 6 ("P6"). It has been a busy
year in terms of investment activity, primarily as a result of Downing, the new
manager, starting to implement the Company's revised investment policy.
Mergers and reorganisation
The Company completed the mergers with P5 and P6 in April 2010, issuing 17.3
million New Ordinary Shares as consideration. Â Immediately afterwards, the
Original Ordinary Shares were converted into New Ordinary Shares at the rate of
0.3495 New Ordinary Share for every Original Ordinary Share.
At the same time the Company changed its name from The AIM Distribution Trust
plc to Downing Distribution VCT 1 plc, changed investment manager and adopted a
new investment policy. The new investment policy reflects a move from holding a
portfolio consisting of mainly quoted companies, to a portfolio consisting of
income producing investments, and growth investments.
Net Asset Value
The NAV per New Ordinary Share at 31 March 2011 stood at 92.0p, a decrease of
8.8p (or 8.3%) over the year, compared to the restated 31 March 2010 NAV of
105.8p and after adding back the 5.0p per share of dividends paid in the year.
This is a disappointing result, particularly in view of the reasonably strong
performance by the AIM market over the second half of the year. The most
significant factor has been a major write down of one unquoted investment which
is detailed below.
Venture capital investments
As a result of the merger, the Company's investment portfolio expanded
substantially, in terms of value and number of investments.
During the year a significant number of disposals were made as the new
investment manager sought to rebalance the portfolio in line with the revised
investment policy.  Total proceeds from disposals were £3.1 million.
A total of £2.0 million was invested into new and follow-on investments.  The
four new investments are all in unquoted companies and are intended to produce a
running yield.
In terms of the performance, there was mixed news from the portfolio over the
year. Â A number of AIM-quoted investments, such as Plastics Capital plc,
Animalcare Group plc, IDOX plc and IS Pharma plc, made strong gains. Â On the
negative side, the Company suffered a substantial downwards revaluation of
unquoted investment, Doubletake Studios Limited. Â Doubletake is facing
challenging trading conditions and increased borrowings. Â Accordingly, a full
provision has been made against the equity part of the Company's investment,
amounting to £2.0 million.  Earlier in the year, the Company also suffered from
the collapse of AIM-quoted Connaught plc, which resulted in a realised loss of
£247,000. Overall, the portfolio generated net unrealised losses of £1.6 million
and net realised gains of £353,000 over the year.
At the year-end, the portfolio comprised 48 investments which were valued at
£18.8 million.
Full details of the Company's investment activities are set out within the
Investment Manager's report and Review of Investments.
Listed fixed income and other investments
The Company holds a small portfolio of non-qualifying investments. At the year-
end, this comprised one fixed income security which had a value of £357,000.
 The portfolio generated an unrealised gain of £40,000 and realised gains of
£13,000 during the year.
Results
The total return on ordinary activities for the year to 31 March 2011 as shown
in the Income Statement is a gain of £3.9 million, comprising £20,000 revenue
loss, a £1.5 million capital loss and a £5.4 million capital gain in respect of
the merger.
It should be noted that the £5.4 million capital gain is a one off gain which
relates to the merger and has arisen as a quirk of the accounting treatment and
the relatively low share price of the Company's share at the time the merger
completed.
Dividends
In line with the policy set out at the time of the merger, the Company paid an
interim dividend of 2.5p per share on 30 September 2010 to Shareholders on the
register at 27 August 2010, and a further interim dividend of 2.5p on 31 March
2011 to Shareholders on the register at 25 February 2011.
A final dividend is being proposed of 2.5p per share to be paid, subject to
Shareholder approval at the AGM, on 30 September 2011 to Shareholders on the
register at 2 September 2011.
Comparative figures
The Company's previous Annual Report reported NAV, Total Return and Return per
share in terms of Original Ordinary Shares. Â In order to provide a meaningful
comparison, the comparative figures in this report have been restated, where
applicable, to show them in terms of New Ordinary Shares.
Share buybacks
The Company has a policy of purchasing its own shares that become available in
the market. The Board has currently set a price of a 15% discount to NAV for
such purchases but continues to monitor the market in the Company's shares and
may make adjustments to the policy as appropriate. Such purchases will be
subject to VCT regulations, company law, liquidity considerations and the
Listing Rules.
There was substantial demand for buybacks over the year with the Company
purchasing 1,050,182 New Ordinary Share for an aggregate consideration of 81.8p
per share (approximately equal to a 15% to the most recently published NAV), and
representing 5% of the issued Ordinary Share capital of the enlarged entity.
 These shares were subsequently cancelled.
Board change
As Shareholders will be aware from my statement with the Half-Yearly Report, Sir
Aubrey Brocklebank resigned as a director of the Company with effect from 29
November 2010 in order to take on the role of chairman with another VCT.
The Board reviewed the composition of the Board following Aubrey's departure and
have concluded a board of four non-executive directors (of which three are
independent of the Manager) is adequate for a VCT of this size and have not
sought to appoint a replacement.
Annual General Meeting
The next AGM of the Company will be held at 10 Lower Grosvenor Place, London,
SW1W 0EN at 11:00 am on 13 September 2011.
Three items of special business are proposed: one ordinary and one special
resolution in relation to the allotment of shares; and a special resolution to
renew the authority to allow the Company to make market purchases of the
Company's shares.
Outlook
The Company has undergone a lot of changes over the last year and, I believe, is
now better positioned as a result. Â Having said that, it has been a challenge
for the Manager to achieve a sufficient number of realisations to fund new
investments and also the high demand for share buybacks that has been
experienced.
Although the AIM market has risen strongly over the last year, the general
economy remains fragile and a sustained recovery may be some way off. The larger
proportion of unquoted, income- producing investments which the Company now
holds should mean it is somewhat less vulnerable to market volatility and may
have a better chance of making headway even in challenging conditions.
The Company continues to be effectively fully invested and much of its
investment portfolio is reasonably illiquid. Â The Board is giving consideration
to ways in which the Company can improve its liquidity, possibly by undertaking
a new fundraising in due course.
At the time of the merger, the Company indicated that it hoped to be able to
offer Shareholders an "enhanced share buyback" scheme whereby they could sell
their shares and reinvest the proceeds in a new issue of shares, allowing them
to obtain a further 30% income tax relief in the process. Â After initially
encountering some difficulties, progress has recently been made to this end and
we now expect to be able to offer this to Shareholders in the coming months.
 Further information will be sent to Shareholders in due course.
Christopher Powell
Chairman
INVESTMENT MANAGER'S REPORT
We present this report having completed our first year as Investment Manager.
Following the Company's merger with Pennine 5 VCT plc and Pennine 6 VCT plc in
April 2010, the combined portfolio of quoted investments had become more
concentrated. Consistent with the Company's revised investment policy, we have
replaced a number of smaller and less dynamic investments with larger holdings
in a more focused portfolio of both quoted and unquoted investments.
The general economic conditions of the UK and Europe remained strained
throughout the period. Base rates have been held low whilst inflation has
increased and investors' risk appetite has returned. In the year to March 2011,
the FTSE 100 increased 4.6% to over 6,000 points; but has since declined. There
remains considerable uncertainty in global markets as evidenced by record prices
in safe haven assets such as gold and in the appreciation of the Swiss Franc.
The FTSE AIM All-Share index increased 28.2% to over 900 points in the year to
March 2011. Despite this, the index remains 27% below its July 2007 high. The
recovery is largely driven by mineral and exploration stocks which constitute
over 30% of the Index and in which the Company does not invest.
The current investment portfolio is valued at £19.1 million and is split broadly
equally between quoted and unquoted investments.
Quoted investments
Additions
During the year the Company invested £750,000 in quoted investments.
In November 2010, the Company invested a further £250,000 alongside £650,000
from other Downing Funds, in Accumuli plc (previously NetServices Plc), a
provider of IT security software and services, at 7.0p pence per share. The
share price has increased from 7.1p to 9.0p in the year, and at the year end the
overall investment was valued at £417,000. Downing related investment funds now
hold, in aggregate, over 10% of the share capital in Accumuli plc which provides
additional influence and leverage for the Company.
The Company has also increased its investment in Ludorum plc by £194,000.
Combined with the additional holding acquired on the Scheme of Acquisition, the
Company's investment in Ludorum is now valued at £2.2 million. At 10.9% of the
portfolio this is the single largest quoted holding, although the investment is
structured between loan notes and equity. This provides some downside protection
through security over the intellectual property of the children's TV title
"Chuggington".
Disposals
In the period the Company sold out in full from seven quoted investments,
reducing their number to 24. This included the exit from Telephonetics plc for
£348,000 which was taken over by Netcall plc, with the consideration comprising
shares in Netcall plc and cash, realising a £37,000 gain. Similarly the Company
exited Neutrahealth plc as part of a takeover offer, for cash, resulting in a
£53,000 realised gain.
The Company also sold its holding in Spice plc, realising a gain of £142,000.
Changes in value in period
Overall, the quoted portfolio benefited from a £553,000 valuation increase
driven by a combination of share price fluctuations.
The value of the investment in Plastic Capital plc increased by £441,000, the
value of the IDOX plc investment increased by £202,000 and the value of the
Animalcare Group plc investment increased by £221,000. Some proceeds were taken
on each of these investments during the year.
In the meantime, the fall in share price of Zamano plc and of Servoca plc have
resulted in a combined valuation reduction of £581,000, whilst Shieldtech plc
has gone into liquidation resulting in a further £120,000 realised loss in the
year. Â As previously reported at the half year, Connaught plc has gone into
liquidation.  The failure of Connaught has created £247,000 realised loss in the
period but the overall net gain from this investment over its entire life in the
fund has been £1.5 million.
A number of ex-Connaught contracts have been acquired by Mears plc; also an
investee company (valued at £185,000 at year end). In May 2011, Mears posted
strong results which give us confidence in the longevity of the business.
Unquoted investments
Additions
£1.2 million was invested across four new unquoted investments. £415,000 was
invested in Leytonstone Pubs Limited which owns and operates public houses in
East London. The operator is experienced and already has a significant number of
units across south London. £333,000 was invested in Tramps Nightclub Limited in
Worcester, £300,000 was invested in Aminghurst Limited, a Devon based property
developer, and £175,000 was invested in Future Biogas (SF) Limited. Future
Biogas generates renewable electricity and sells it back to the national grid
taking advantage of government feed in tariffs.
Disposals
The loan note in Real Time Logistic Solutions Limited was redeemed at par for
£450,000 resulting in a realised gain of £270,000 against its merger acquisition
value. Â The company retains its equity holding in the company, although this is
valued at nil.
Changes in value in period
Doubletake Studios Limited and The Thames Club Limited were both previously
reported at the half year as requiring significant impairments against their
carrying values.
Doubletake Studios Limited suffered a disappointing year in 2010, and increased
borrowing levels. Â The company is still facing challenging conditions and high
levels of indebtedness; therefore we have taken the decision to write down the
investment further. This has resulted in an overall write down on this
investment of nearly £2 million in the year.
The £175,000 impairment, taken at the half year point, against The Thames Club
is unlikely to be reversed until trading improves significantly.
A full schedule of additions and disposals across both investment pools is
disclosed further on in this document.
Developments since the year end
Since the year end, as part of the revised investment policy, the Company
continues to make strategic changes to the investment portfolio. It has made a
£100,000 investment in AIM listed Tracsis plc which specialises in optimisation
software for the rail industry. Again, Downing related investment funds account
for over 8% of the shareholdings in Tracsis plc. This provides additional
influence to the Company's investment, and is consistent with the strategy to
take more meaningful and influential stakes in a select number of companies.
Outlook
Whilst the economic conditions in the UK are expected to see a modest
improvement in 2011, the after effects of the credit crunch will continue to be
felt for some time. The historic low UK interest rate, at 0.5% since March
2009, has done little to improve lending to small businesses despite political
pressure on banks to do more. Even those with sufficient equity continue to be
charged high margins. These factors will continue to provide investment
opportunities for the unquoted portfolio as small businesses struggle to access
finance.
The refocusing of the quoted portfolio will continue into next year to ensure
the portfolio is resilient in the current macro-economic climate but also poised
to take advantage of future growth.
Downing LLP
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments, all of which are incorporated in England and Wales,
were held at 31 March 2011:
   Valuation movement
  in year % of portfolio by
Cost Valuation £'000 value
£'000 £'000
Top ten venture capital
investments (by value)
Cadbury House Holdings 2,518 2,546 - 13.2%
Limited *
Ludorum plc 2,161 2,213 (62) 11.4%
Hoole Hall Country Club 2,100 2,100 - 10.9%
Holdings Limited *
Hoole Hall Spa and 1,020 1,020 - 5.3%
Leisure Limited *
Animalcare Group plc 757 978 221 5.1%
First Care Limited * 879 879 - 4.5%
Plastics Capital plc 224 666 441 3.4%
Tristel plc 631 639 (6) 3.3%
IS Pharma plc 392 587 196 3.0%
IDOX plc 372 574 202 3.0%
---------------------------------------------------------
 11,054 12,202 992 63.1%
---------------------------------------------------------
Other venture capital
investments
Craneware plc 371 508 137 2.6%
Doubletake Studios 2,204 475 (1,978) 2.5%
Limited *
ANS Group plc ** 201 463 (52) 2.4%
Keycom plc ** 815 418 (70) 2.2%
Accumuli plc 337 417 79 2.2%
Leytonstone Pubs 415 415 - 2.2%
Limited *
Boomerang Plus plc 490 338 (152) 1.8%
Tramps Nightclub 333 333 - 1.7%
Limited *
Aminghurst Limited * 300 300 - 1.6%
Deltex Medical Group 233 247 140 1.3%
plc
Brulines (Holdings) plc 333 245 (88) 1.3%
Netcall plc 141 230 89 1.2%
Mears Group plc *** 204 185 (23) 1.0%
Servoca plc 477 183 (293) 1.0%
Richoux Group plc 307 183 92 1.0%
Future Biogas (SF) 175 175 - 0.9%
Limited *
Atlantic Global plc 310 174 (37) 0.9%
West Tower Holdings 167 167 - 0.8%
Limited *
Hasgrove plc 147 138 (9) 0.7%
Brasserie Bar Co 125 125 - 0.6%
Limited *
Autoclenz Holdings plc 136 110 (26) 0.5%
Travelzest plc 96 103 7 0.5%
@UK plc 7 99 92 0.5%
Universe Group plc 152 91 (61) 0.4%
Zamano plc 374 86 (288) 0.4%
DODs Group plc 283 82 (20) 0.4%
(formerly Huveaux plc)
Belgravium Technologies 43 61 18 0.3%
plc
Straight plc 72 57 2 0.3%
Business Control 52 52 - 0.3%
Solutions plc *
Financial News 50 50 - 0.2%
Publishing Limited *
Aortech International 569 39 11 0.2%
plc
The Kellan Group plc 34 25 (10) 0.1%
Media Square plc 119 3 (4) -
Camaxys plc * 223 - - -
Chariot (UK) Limited * 125 - - -
Sport Media Group plc 14 - (14) -
The Thames Club Limited 175 - (175) -
*
Top Ten Holdings plc 399 - - -
---------------------------------------------------------
 11,008 6,577 (2,633) 34.0%
---------------------------------------------------------
Bonds
Ulster Bank (IRE) 558 357 40 1.9%
11.75% Subord
---------------------------------------------------------
22,620 19,136 (1,601) 99.0%
Cash at bank and in  199  1.0%
hand
----------- --------------------
Total investments 19,335 Â 100.0%
All venture capital investments are listed on AIM unless otherwise stated
*    Unlisted     **    Quoted on the PLUS market    *** Quoted
on London Stock Exchange full list
Investment movements for the year ended 31 March 2011
Acquired through Mergers
 £'000
From Pennine AIM VCT 5 plc 6,037
From Pennine AIM VCT 6 plc 11,135
---------
 17,172
Additions
  £'000
Aminghurst Limited New investment 300
Future Biogas (SF) Limited New investment 175
Leytonstone Pubs Limited New investment 415
Tramps Nightclub Limited New investment 333
Accumuli plc Follow-on investment 250
Ludorum plc Follow-on investment 194
Tristel plc Follow-on investment 165
Consideration from Telephonetics plc takeover
Netcall plc ** 140
Sundry investments  1
------
  1,973
Disposals    Profit/ Realised
  MV at  (loss) gain/(loss) in
Cost 01/04/10* Proceeds vs cost year
 £'000 £'000 £'000 £'000 £'000
1st Dental Laboratories plc 200 17 18 (182) 1
Animalcare Group plc 157 157 198 41 41
Belgravium Technologies plc 4 4 6 2 2
Connaught plc 3 24 32 29 8
Craneware plc 347 347 436 89 89
IDOX plc 115 115 112 (3) (3)
Plastics Capital plc 14 14 42 28 28
Printing.com plc 178 233 252 74 19
Quadnetics Group plc 34 20 23 (11) 3
Real Time Logistic Solutions Ltd 180 180 450 270 270
Spice plc 273 124 266 (7) 142
The Kellan Group plc 75 75 42 (33) (33)
The Mission Marketing Group plc 129 129 87 (42) (42)
Takeovers
Glisten plc 84 49 50 (34) 1
Neutrahealth plc 240 146 199 (41) 53
Telephonetics plc ** 311 311 348 37 37
Liquidations/administrations
Clerkenwell Ventures plc 18 - 104 86 104
Coffee Republic plc 713 - - (713) -
Connaught plc 25 247 - (25) (247)
Sheildtech plc 120 120 - (120) (120)
------------------------------------------------
 3,220 2,312 2,665 (555) 353
------------------------------------------------
Other investments
Bluecrest Allblue Fund LD 145 227 229 84 2
Goldman Sachs Dynamic Opp. LD 207 186 197 (10) 11
------------------------------------------------
 352 413 426 74 13
------------------------------------------------
Total disposals 3,572 2,725 3,091 (481) 366
* Adjusted for purchases in the year
** The consideration for Telephonetics plc was settled by cash and shares in
Netcall plc.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report, the Directors'
Remuneration Report, the Corporate Governance Statement, and the financial
statements in accordance with applicable law and regulations.
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 those financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements 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 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 to enable them to
ensure that the financial statements, and the Directors' Remuneration Report,
comply with the requirements of 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.
Grant Whitehouse
Secretary
INCOME STATEMENT for the year ended 31 March 2011
  2011 2010
Revenue  Capital  Total  Revenue  Capital  Total
£'000  £'000  £'000  £'000  £'000  £'000
Income
Continuing 188 Â - Â 188 Â 139 Â - Â 139
operations
Acquisitions 152 Â - Â 152 Â - Â - Â -
--------- --------- --------- ---------- ---------- ---------
340 Â - Â 340 Â 139 Â - Â 139
--------- --------- --------- ---------- ---------- ---------
(Losses)/gains on
investments
Continuing - Â (79) Â (79) Â - Â 792 Â 792
operations
Acquisitions - Â (1,156) Â (1,156) Â - Â - Â -
--------- --------- --------- ---------- ---------- ---------
  -  (1,235)  (1,235)  -  792  792
--------- --------- --------- ---------- ---------- ---------
Net gain on
acquisition of - 5,403 5,403 - - -
net assets
--------- --------- --------- ---------- ---------- ---------
  340  4,168  4,508  139  792  931
Investment  (94)  (280)  (374)  (17)  (51)  (68)
management fees
Other expenses  (266)  (3)  (269)  (186)  -  (186)
--------- --------- --------- ---------- ---------- ---------
Return on
ordinary (20) 3,885 3,865 (64) 741 677
activities
  before tax
Tax on ordinary  -  -  -  -  -  -
activities
--------- --------- --------- ---------- ---------- ---------
Return
attributable to (20) 3,885 3,865 (64) 741 677
equity
Shareholders
        Restated  Restated  Restated
Basic and diluted
return per (0.1p) 18.1p 18.0p (1.4p) 16.1p 14.7p
 Ordinary Share
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 shown above.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 March 2011
 2011 2010
 £'000  £'000
Opening Shareholders' funds 4,860 Â 4,413
Issue of share capital on acquisition 12,353 Â -
Proceeds of new share issue 10 Â -
Purchase of own shares (862) Â -
Total recognised gains for the year
3,865 677
Distributions paid (1,065) Â (230)
----------- --------
Closing Shareholders' funds 19,161 Â 4,860
BALANCE SHEET as at 31 March 2011
 2011  2010
 £'000  £'000
Fixed assets
Investments 19,136 Â 4,317
----------- -----------
Current assets
Debtors 159 Â 219
Cash at bank and in hand 199 Â 425
----------- -----------
 358  644
Creditors: amounts falling due within one year (333) Â (101)
----------- -----------
Net current assets 25 Â 543
----------- -----------
Net assets 19,161 Â 4,860
Capital and reserves
Called up share capital 208 Â 3,285
Capital redemption reserve 1,137 Â 1,126
Share premium account 2 Â 348
Special reserve 14,913 Â -
Capital reserve - realised 6,444 Â 2,871
Revaluation reserve (3,484) Â (2,731)
Revenue reserve (59) Â (39)
----------- -----------
Total equity Shareholders' funds 19,161 Â 4,860
   Restated
Basic and diluted net asset value per Share 92.0p  105.8p
CASH FLOW STATEMENT for the year ended 31 March 2011
 2011  2010
 £'000  £'000
Net cash outflow from operating activities (262) Â (73)
----------- --------
Capital expenditure
Purchase of investments (1,833) Â (352)
Disposal of investments 2,879 Â 805
----------- --------
Net cash inflow from capital expenditure 1,046 Â 453
----------- --------
Acquisitions
Cash acquired 970 Â -
Acquisition costs (149) Â (170)
----------- --------
Net cash inflow/(outflow) from acquisitions 821 Â (170)
----------- --------
Equity distributions paid (1,067) Â (230)
----------- --------
Net cash inflow/(outflow) before financing 538 Â (20)
Financing
Unallotted share issue - Â 10
Purchase of own shares (764) Â -
----------- --------
Net cash (outflow)/inflow from financing (764) Â 10
----------- --------
Decrease in cash (226) Â (10)
NOTES TO THE ACCOUNTS for the year ended 31 March 2011
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" January 2009 ("SORP").
The financial statements are prepared under the historical cost convention
except for 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 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 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 on a fair value basis, 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, hedge funds and investments quoted on
recognised stock markets are measured using bid prices.
The valuation methodologies for unlisted instruments 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 the 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 a 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 as a capital item.
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 revenue account 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.
In respect of disclosures required by the SORP for the ten largest investments
held by the Company, the most recent publicly available accounts information,
either as filed at Companies House, or announced to the London Stock Exchange,
are disclosed, which may be abbreviated information only in the case of unlisted
investments.
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 time apportioned basis, by reference to the
principal outstanding and at the effective interest rate applicable and only
where there is reasonable certainty of collection.
Accounting policies (continued)
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 from the Capital Account.
* 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.
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 the obligations or rights crystallise based on tax rates and law enacted or
substantively enacted at the balance sheet date. Â 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.
 Deferred tax assets are only recognised if it is expected that future taxable
profits will be available to utilise such assets and are recognised on a non-
discounted basis.
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.
Share issue costs
Share issue costs have been deducted from the share premium account.
Segmental reporting
The Company only has one class of business and one market.
Acquisitions
Acquisitions made during the year are accounted for using the acquisition
method. Â The purchase consideration is measured at the fair value of equity
issued compared to the fair value of the assets and liabilities of the company
acquired. Â Negative goodwill represents the excess of the fair value of the
assets, liabilities and contingent liabilities of the company acquired over the
purchase consideration. Â Any negative goodwill in excess of the fair value of
the non-monetary assets acquired is recognised in the Capital Account within the
Income Statement in the periods expected to benefit and is described as "Net
gain on acquisition of net assets".
2. Return per Share
 2011  2010
Return per Share based on:
Net revenue loss for the financial year (£'000) 20  64
Capital return per Share based on:
Net capital gain for the financial year (£'000) 3,885  741
   Restated
Weighted average number of Shares in issue 21,493,659 Â 4,593,244
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.
On 1 April 2010 the 13,140,436 Ordinary Shares of 25p each, as shown in note 12
were converted into 4,593,244 Ordinary Shares of 1p each under the Schemes of
Arrangement. The return per share disclosed on the face of the Income Statement
for the period to 31 March 2010 has been restated accordingly.
3. Net asset value per Share
  2011 2010
Shares in issue Net asset value Net asset value
 2011  2010  Pence per  £'000  Pence per  £'000
Share Share
(restated)
Ordinary 19,161 4,860
Shares 20,823,586  4,593,244  92.0p   105.8p
As the Company has not issued any convertible securities or share options, there
is no dilutive effect on net asset value per class of share in issue. Â The net
asset value per share disclosed therefore represents both basic and diluted net
asset value per class of share in issue.
On 1 April 2010 the 13,140,436 Ordinary Shares of 25p each, as shown above were
converted into 4,593,244 Ordinary Shares of 1p each under the Schemes of
Arrangement. The net asset value for the period to 31 March 2010 has been
restated accordingly.
4. Principal risks and uncertainties
The Company's investment activities expose the Company to a number of risks
associated with financial instruments and the sectors in which the Company
invest. Â The principal financial risk arising from the Company's operations are:
* Market risks,
* Credit risk and
* Liquidity risk
The Board regularly reviews these risks and the policies in place for managing
them. Â There have been no significant changes to the nature of the risks that
the Company is exposed to over the year and there have also been no significant
changes to the policies for managing those risks during the year.
The risk management policies used by the Company in respect of the principal
financial risks and a review of the financial instruments held at the year-end
are provided below:
Market risks
As a VCT, the Company is exposed to market risks in the form of potential losses
and gains that may arise on the investments it holds in accordance with its
investment policy. The management of these market risks is a fundamental part of
investment activities undertaken by the Investment Manager and overseen by the
Board. The Manager monitors investments though regular contact with management
of investee companies, regular review of management accounts and other financial
information and attendance at investee company board meetings. Â This enables the
Manager to manage the investment risk in respect of individual investments.
Market risk is also mitigated by holding diversified portfolio spread across
various business sectors and asset classes.
The key market risks to which the Company is exposed are:
* Market price risk and
* Interest rate risk.
The Company has undertaken sensitivity analysis on its financial instruments,
split into the relevant component parts, taking into consideration the economic
climate at the time of review in order to ascertain the appropriate risk
allocation.
Market price risk
Market price risk arises from uncertainty about the future prices and valuations
of financial instruments held in accordance with the Company's investment
objectives. Â It represents the potential loss that the Company might suffer
through market price movements in respect of quoted investments and also changes
in the fair value of unquoted investments that it holds.
Interest rate risk
The Company accepts exposure to interest rate risk on floating-rate financial
assets through the effect of changes in prevailing interest rates. Â The Company
receives interest on its cash deposits at a rate agreed with its bankers and on
liquidity funds at rates based on the underlying investments. Investments in
loan stock and fixed interest investments attract interest predominately at
fixed rates. Â A summary of the interest rate profile of the Company's
investments is shown below.
The Company monitors the level of income received from fixed, floating and non
interest rate assets and, if appropriate, may make adjustments to the allocation
between the categories, in particular should this be required to ensure
compliance with the VCT regulations.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument is unable
to discharge a commitment to the Company made under that instrument. The Company
is exposed to credit risk through its holdings of loan stock in investee
companies, investments in liquidity funds, cash deposits and debtors.
The Manager manages credit risk in respect of loan stock with a similar approach
as described under Market risks above. Similarly the management of credit risk
associated interest, dividends and other receivables is covered within the
investment management procedures.
Cash is mainly held by Bank of Scotland plc and Royal Bank of Scotland plc, both
of which are A-rated financial institutions and both also ultimately part-owned
by the UK Government. Â Consequently, the Directors consider that the risk
profile associated with cash deposits is low.
There have been no changes in fair value during the year that 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.
The Company only normally ever has a relatively low level of creditors (2011:
£332,000, 2010: £101,000) and has no borrowings. Also most quoted investments
held by the Company are considered to be readily realisable. Â The Company always
holds sufficient levels of funds as cash and readily realisable investments in
order to meet expenses and other cash outflows as they arise. Â For these reasons
the Board believes that the Company's exposure to liquidity risk is minimal.
The Company's liquidity risk is managed by the investment manager in line with
guidance agreed with the Board and is reviewed by the Board at regular
intervals. Â Due to the level of unquoted, illiquid, assets held by the Company,
the Investment Manager and the Board is giving due consideration to methods to
improve liquidity.
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 March 2011, but has been extracted from
the statutory financial statements for the year ended 31 March 2011 which were
approved by the Board of Directors on 28 July 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 March 2010 have been delivered to
the Registrar of Companies and received an Independent Auditors report which was
unqualified and did not contain any emphasis of matter nor statements under s
498(2) and (3) of the Companies Act 2006.
A copy of the full annual report and financial statements for the year ended 31
March 2011 will be printed and posted to shareholders shortly. Copies will also
be available to the public at the registered office of the Company at 10 Lower
Grosvenor Place, London, SW1W 0EN and will be available for download from
www.downing.co.uk.
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: Downing Distribution VCT 1 plc via Thomson Reuters ONE
[HUG#1534359]
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