TIDMDA2O
Downing Absolute Income VCT 2 plc
Final results for the year ended 31 March 2012
FINANCIAL HIGHLIGHTS
Year ended Year ended
31 March 31 March
2012 2011
Pence Pence
Net asset value per Ordinary Share and one 'A' Share 72.3 91.3
Cumulative distributions paid since launch 10.0 5.0
----------------------
Total Return (net asset value plus dividends paid since 82.3 96.3
launch)
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CHAIRMAN'S STATEMENT
Introduction
I present the Company's Annual Report for the year ended 31 March 2012, covering
what has turned out to be a difficult year for several portfolio companies,
resulting in a very disappointing fall in your Company's net asset value.
Venture capital investments
The Company continued to be an active investor throughout the year as it
continued to build its VCT qualifying investment portfolio. The Company invested
GBP8.1 million in investments which are either qualifying, part-qualifying or
expected to become qualifying in due course. A further GBP713,000 was also
invested in non-qualifying secured loans.
There were also a number of disposals, many arising from planned redemptions of
loan notes, which produced total proceeds of GBP7.4 million.
While most of the portfolio companies performed reasonably to plan, there have
been three significant problem investments: Helcim Group; EPI Service; and
Camandale, which have required substantial write downs.
Helcim manages housing for vulnerable tenants and works with local authorities
to let private properties to local authority tenants. The business has failed to
develop to plan and is now the focus of intensive work by the Investment Manager
in trying to secure the best outcome for the VCT. In view of the substantial
difficulties encountered, a provision of GBP1.6 million has been required.
EPI Service was a designer and builder of corporate data rooms, which had
historically generated much of its business from larger contracts. Despite some
small contract wins, the company has failed to secure key large contracts in
recent months, resulting in the company entering into administration. The VCT
was able to recover some value in respect of part of its loan stock investment
at the time of the EPI administration, receiving cash and shares in a new
company, Data Centre Response Limited, which has been established to service
maintenance contracts previously held by EPI. However, a provision of GBP859,000
has been required against the remaining value of the investment.
As I reported in the half-yearly statement, Camandale owned two pubs in
Kilmarnock, which suffered a period of very poor trading, resulting in the
removal of the management which, in turn, uncovered further issues. A new
management team is now in place and is starting to make some progress, however,
to value the investment at a realistic current valuation for the two pubs has
required a provision of GBP782,000.
Two unquoted investments have performed well enough to justify small uplifts in
valuation and the two AIM-quoted investments have also seen increases in their
share prices since the Company invested. Most of the other investments are at a
relatively early stage but have performed more or less to plan and have been
held at valuations equal to original cost. Overall the portfolio has seen total
unrealised losses of GBP3.0 million for the year.
Further details of the portfolio activity are included in the Investment
Manager's report.
Net asset value and results
The net asset value ("NAV") per Ordinary Share at 31 March 2012 stood at 72.2p
and NAV per 'A' Share at 0.1p, representing a decrease of 14.0p (15.4%) over the
year after adjusting for dividends paid during the year of 5.0p per Ordinary
Share. Total Return (combined NAV plus cumulative dividends) stands at 82.3p per
holding of one Ordinary and one 'A' Share.
The loss on ordinary activities after taxation for the period was GBP2,808,000
(2011: Profit GBP356,000) comprising a revenue gain of GBP365,000 (2011: GBP451,000)
and a capital loss of GBP3,173,000 (2011: GBP95,000).
Dividends
It is the Company's intention to pay twice yearly dividends totalling at least
5.0p per annum in respect of the Ordinary Shares.
In line with this intention, the Board is proposing to pay a final dividend in
respect of the period ended 31 March 2012 of 2.5p per Ordinary Share on 28
September 2012 to Shareholders on the register at the close of business on 31
August 2012.
Share buybacks
The Company operates a share buyback policy whereby, subject to certain
restrictions, it intends to buy in any of its own shares that become available
in the market for cancellation. In its initial years the Company has a policy
of undertaking any buybacks at a price equal to the latest published NAV (i.e.
at nil discount).
During the year, the Company repurchased 67,342 Ordinary Shares for an aggregate
consideration of GBP53,390 being an average price of 79.5p per share and which
represented 0.3% of the Company's issued Ordinary Share capital and 60,555 'A'
Shares for an aggregate consideration of GBP60 being an average price of 0.1p per
share and which represented 0.2% of the Company's issued 'A' Share Capital.
A special resolution to continue this policy is proposed for the forthcoming
Annual General Meeting ("AGM").
Annual General Meeting
The Company's second AGM will be held at 10 Lower Grosvenor Place, London
SW1W 0EN at 10:15 a.m. on 17 September 2012.
One item of special business, seeking approval for the Company to be able to buy
its own shares as described above, will be proposed.
Outlook
The problems encountered by several of the Company's larger investments have
highlighted the risks of investing in an almost unprecedented period of economic
turmoil. The Board has been working closely with the Manager to ensure that as
great a recovery as possible from these investments can be achieved and, where
possible, lessons are learned. In view of the disappointing overall performance,
the Manager has offered to waive its investment management fee and
administration fee for the year, an offer which the Board has accepted.
Going forward, the Company has more or less finished its initial investment
phase and the focus is now on nurturing the existing portfolio companies.
Despite all the bad news, there are a reasonable number of investments with good
prospects that, in time, have the potential to recover value for the Company.
Chad Murrin
Chairman
INVESTMENT MANAGER'S REPORT
Introduction
At the year end the Company held 32 venture capital investments and two AIM-
quoted investments and is now effectively fully invested. Further investment
activity will be mostly limited to reinvesting proceeds from divestments when
suitable investment opportunities arise. Whilst the majority of the Company's
investments are performing to plan, the challenging economic environment has
taken a heavy toll on several investments, resulting in a net decrease in
valuations of GBP3.0 million over the year.
Investment activity
The Company began the year with GBP15.4 million of investments and ended with
GBP13.6 million spread across a portfolio of 34 companies. During the year, the
Company made further investments totalling GBP8.8 million which were offset by
divestments of GBP7.5 million and a net valuation decrease of GBP3.0 million.
The Company made 28 investments during the year, nine of which were new
qualifying investments. Overviews of the largest new qualifying or partially
qualifying investments made during the period are detailed below.
The Company invested GBP607,000 in Data Centre Response Limited in February 2012.
Data Centre Response is a new company set up to acquire the commercial property
and cash generative maintenance business from EPI Service Limited, which went
into administration in February 2012. Without the legacy of the loss making
contracting business, Data Centre Response is performing profitably and ahead of
expectation.
In May 2011, the Company invested GBP562,000 in Redmed Limited which owned The
Annexe nightclub in Lincoln city centre. The venue, which is located close to
the University of Lincoln, was completely refurbished and relaunched as "Home"
in October 2011. Home operates as a large entertainment venue with a restaurant,
nightclub with six themed rooms, and a roof terrace all in the one site. Since
opening, the business has performed well and in line with expectations.
In April 2011, the Company invested GBP499,000 in Future Biogas (Reepham Road)
Limited which is developing a 1.5MWh self-contained biogas plant in Norfolk.
This is the second anaerobic digestion plant with our investment partner, Future
Biogas.
In June 2011, a GBP333,000 investment was made in Alpha Schools (Holdings) Limited
to purchase a school in Buckinghamshire and provide working capital to the
existing business. The business is performing well and further investment in
additional school sites is expected in due course.
In June 2011, GBP200,000 was invested in Tracsis plc, an AIM-quoted business which
provides operational planning and software for the transport industry.
In June 2011, a GBP419,000 investment was made in Gingerbread Pre-Schools (UK)
Limited to purchase two operating children's day nurseries in Liverpool and
provide funding to purchase and renovate a third nursery. Unfortunately, the
business experienced significant cost overruns on the refurbishment of the new
nursery, together with poor performance of one of the existing sites. The
investment partner, who was also the Chief Executive, was suspended and later
dismissed. In the interim, further liabilities came to light and the business
entered into administration in February 2012. The trading assets were purchased
from the administrator by four new companies trading under the Liverpool
Nurseries name and a new manager was appointed. Since the year end, the
companies have been reorganised such that the investment is now held through one
holding company.
In December 2011, the Company invested GBP400,000 in Mosaic Spa and Health Club
(Shrewsbury) Limited to purchase the freehold of an operating health club known
as Welti.
Portfolio valuation
The majority of the Company's portfolio in 34 investments performed
satisfactorily during the year, however, disappointing performance of four of
the investments resulted in a net valuation decrease of GBP3.0 million. Decreases
in valuations arose on the following investments at the year end: Helcim Group
Limited GBP1.6 million; EPI Service Limited GBP859,000; Camandale Limited GBP782,000;
and 3D Pub Co Limited GBP155,000. These decreases were partially offset by
increases in the valuation of four investments: a GBP63,000 increase in the value
of Tramps Night Club Limited; and GBP56,000 in Antelope Pub Limited were
recognised to reflect that the businesses are performing well and in line with
expectations. Accumuli plc and Tracsis plc, both AIM-quoted investments, were
revalued to reflect the bid share prices at the period end. This resulted in an
uplift of GBP96,000 and GBP111,000 respectively.
A GBP1.6 million write down in value of the Company's investment in Helcim Group
Limited was made at the year end. The business has experienced significant
problems since the investment was made, with a new venture failing to attract
clients quickly enough and the core business failing to develop as planned and
requiring significant working capital funding. The Investment Manager is working
very closely with the business and has appointed an interim Financial Director
to implement strict cash management controls.
EPI Service Limited entered into administration in February 2012 and the
valuation was written down by GBP859,000 to reflect the expected return to the
Company from the administration. This provision takes account of the proceeds of
sale of the profitable parts of EPI acquired by Data Centre Response Limited,
where future value growth will accrue.
At the year end a GBP782,000 reduction in value was recognised in Camandale
Limited which owns two pubs, The Riverbank and the Monkey Bar, located in
Kilmarnock, Scotland. After a sustained period of poor trading, the investment
partner was removed, the management contracts were terminated, and the
subsidiaries were put into administration. A new management team has now been
put in place and The Riverbank was purchased out of administration by a new
subsidiary of Camandale in January 2012. The Monkey Bar is being marketed for
sale and trade at The Riverbank is improving.
A GBP155,000 reduction in value of The 3D Pub Co Limited was made at the year end
to reflect that the business, which operates two pubs in Surrey, is operating
behind plan. The business has, however, had a good start to 2012 and it is hoped
that the value will recover in due course.
There was one realised loss in the year in relation to Gingerbread Pre-Schools
(UK) Limited as mentioned above. The main trading assets of the company were
sold to new companies when Gingerbread went into administration. These sales
proceeds were in turn distributed to the VCT but left a final deficit of
GBP132,000 on the investment which has been treated as a realised loss.
Outlook
Naturally, we are very disappointed by the difficulties that the portfolio has
encountered at this relatively early stage. As a goodwill gesture, we have
agreed to waive our investment management fees and administration fees for the
year ended 31 March 2012. We have also committed significant resources to the
problem investments and will continue to do so to ensure that the best possible
outcomes from the current positions are achieved.
With the weak economic conditions in the UK expected to continue throughout
2012, and consumer confidence likely to remain subdued, we expect the task of
developing the portfolio to continue to be challenging. However, we believe that
the Company holds a number of investments with good prospects and we expect to
see them deliver value over the medium term.
Downing LLP
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments were held at 31 March 2012:
Valuation
movement % of
Cost Valuation in year portfolio
GBP'000 GBP'000 GBP'000
Qualifying investments
Tramps Night Club Limited * 1,303 1,366 63 9.7%
Antelope Pub Limited * 1,050 1,106 56 7.8%
Quadrate Catering Limited * 887 887 - 6.3%
Quadrate Spa Limited * 838 838 - 5.9%
Rostima Limited * 832 832 - 5.9%
Data Centre response Limited 607 607 - 4.3%
Redmed Limited * 562 562 - 4.0%
Residential PV Trading Limited * 532 532 - 3.8%
Future Biogas (Reepham Road) Limited * 499 499 - 3.5%
Accumuli Plc ** 250 423 96 3.0%
Camandale Limited * 1,199 417 (782) 2.9%
Domestic Solar Limited * 400 400 - 2.8%
Mosaic Spa and Health Clubs 400 400 - 2.8%
(Shrewsbury) Limited *
Slopingtactic Limited 380 380 - 2.7%
The 3D Pub Co Limited 517 362 (155) 2.5%
Mosaic Spa and Health Clubs Limited * 350 350 - 2.5%
Alpha Schools (Holdings) Limited 333 333 - 2.4%
Tracsis plc ** 200 311 111 2.2%
Angel Solar Limited 250 250 - 1.8%
Chapel Street Food and Beverage Limited 250 250 - 1.8%
Chapel Street Services Limited 250 250 - 1.8%
Helcim Group Limited * 1,781 210 (1,571) 1.5%
Ridgeway Pub Company Limited 137 137 - 1.0%
EPI Service Limited (in administration) * 980 121 (859) 0.9%
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14,787 11,823 (3,041) 83.8%
-------------------------------------
Non-qualifying investments
Retallack Surfpods Limited 500 500 - 3.5%
Fenkle Street LLP 346 346 - 2.4%
Kidspace Adventures Holdings Limited 300 300 - 2.1%
Kidspace Adventures Limited 200 200 - 1.4%
Liverpool Nurseries (House) Limited 147 147 - 1.0%
Commercial Street Hotel Limited 115 115 - 0.8%
Liverpool Nurseries (Greenbank) Limited 100 100 - 0.7%
Liverpool Nurseries (Cottage) Limited 49 49 - 0.3%
Chapel Street Hotel Limited 10 10 - 0.1%
Liverpool Nurseries (Holdings) Limited 1 1 - 0.0%
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1,768 1,768 - 12.3%
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16,555 13,591 (3,041) 96.1%
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Cash at bank and in hand 556 3.9%
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Total investments 14,147 100.0%
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* Part-qualifying investment
** AIM-quoted investment
All venture capital investments are incorporated in England and Wales.
ADDITIONS
GBP'000
Qualifying investments
Helcim Group Limited * 882
Data Centre Response Limited 607
Redmed Limited * 562
Residential PV Trading Limited * 532
EPI Service Limited * 520
Angel Solar Limited 500
Future Biogas (Reepham Road) Limited * 499
Quadrate Catering Limited * 460
Quadrate Spa Limited * 460
Gingerbread Pre-School (UK) Limited * 419
Mosaic Spa and Health Clubs (Shrewsbury) Limited * 400
Rostima Limited * 382
Alpha Schools (Holdings) Limited 333
Kidspace Adventures Holdings Limited *** 300
Camandale Limited * 278
Kidspace Adventures Limited *** 200
Tracsis plc ** 200
Domestic Solar Limited * 200
Liverpool Nurseries (House) Limited *** 147
Mosaic Spa and Health Clubs Limited * 100
Liverpool Nurseries (Greenbank) Limited *** 100
Liverpool Nurseries (Cottage) Limited *** 49
Liverpool Nurseries (Holdings) Limited *** 1
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8,131
Non-qualifying investments
Lullingstone Limited 277
Commercial Street Hotel Limited 230
Edison House Limited 118
Woolmer Properties Limited 65
Looe Road Student Accommodation 23
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713
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Total 8,844
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* Part-qualifying investment
** AIM-quoted investment
*** Investment expected to become qualifying in due course
DISPOSALS
Total
Market Loss realised
value at Disposal against loss during
Cost 01/04/11 proceeds cost the year
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Qualifying investments
EPI Service Limited 1,040 1,040 1,040 - -
Gingerbread Pre-Schools (UK) 419 287 (132) (132)
Limited * 419
Angel Solar Limited 250 250 250 - -
Camandale Limited * 215 215 215 - -
Tramps Night Club Limited * 119 119 119 - -
Helcim Group Limited * 100 100 100 - -
Antelope Pub Limited * 38 38 38 - -
--------------------------------------------
2,181 2,181 2,049 (132) (132)
Non-qualifying investments
Lullingstone Limited 1,500 1,500 1,500 - -
Edison House Limited 1,384 1,384 1,384 - -
Woolmer Properties Limited 1,211 1,211 1,211 - -
Quadrate Catering Limited 408 408 408 - -
Looe Road Student 403 403 403 - -
Accommodation
Quadrate Spa Limited 362 362 362 - -
Commercial Street Hotel Limited 149 149 149 - -
Bowman Care Homes Limited 1 1 1 - -
--------------------------------------------
5,418 5,418 5,418 - -
--------------------------------------------
7,599 7,599 7,467 (132) (132)
--------------------------------------------
* Part-qualifying investment
** AIM-quoted investment
Lullingstone Limited and Woolmer Limited are companies registered in the Isle of
Man. Edison House Limited is a company registered in Guernsey.
Directors' responsibilities statement
The Directors are responsible for preparing the Report of the Directors, the
Directors' Remuneration Report, and the financial statements in accordance with
applicable law and regulations. They are also responsible for ensuring that the
Annual Report includes information required by the Listing Rules of the
Financial Services Authority.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and applicable law).
Under company law the Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of affairs
of the Company and of the profit 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 judgments and accounting estimates that are reasonable and prudent;
* state whether applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the financial statements;
and
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and to
enable them to ensure that the financial statements comply with the 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.
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 Auditor
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 Auditor is
unaware. Each of the Directors has confirmed that they have taken all the steps
that they ought to have taken as Directors in order to make themselves aware of
any relevant audit information and to establish that it has been communicated to
the Auditor.
INCOME STATEMENT
for the period ended 31 March 2012
Year ended 17 month period
31 March 2012 ended 31 March 2011
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income 669 - 669 1,051 - 1,051
Net (loss)/gain on - (3,173) (3,173) - 77 77
investments
------------------------- ----------------------
669 (3,173) (2,504) 1,051 77 1,128
Investment management - - - (172) (172) (344)
fees
Other expenses (191) - (191) (317) - (317)
------------------------- ----------------------
Return/(loss) on ordinary
activities before tax 478 (3,173) (2,695) 562 (95) 467
Tax on ordinary activities (113) - (113) (111) - (111)
------------------------- ----------------------
Return/(loss) attributable
to equity shareholders 365 (3,173) (2,808) 451 (95) 356
------------------------- ----------------------
Basic and diluted return per
share:
Ordinary Share 1.8 (15.9) (14.1) 3.2 (0.7) 2.5
'A' Share - - - - - -
All Revenue and Capital items in the above statement derive from continuing
operations. The total column within the Income Statement represents the profit
and loss account of the Company. No operations were acquired or discontinued
during the year.
A Statement of Total Recognised Gains and Losses has not been prepared as all
gains and losses are recognised in the Income Statement noted above.
Other than revaluation movements arising on investments held at fair value
through the profit and loss, there were no differences between the (loss)/return
as stated above and historical cost.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
17 month
Year ended period ended
31 March 2012 31 March 2011
GBP'000 GBP'000
Opening Shareholders' funds 18,266 -
Proceeds from share issue - 20,010
Share issue costs - (1,100)
Dividends paid (997) (1,000)
Purchase of own shares (54) -
Total (losses)/gains for the year (2,808) 356
--------------------------------
Closing Shareholders' funds 14,407 18,266
--------------------------------
BALANCE SHEET
as at 31 March 2012
2012 2011
GBP'000 GBP'000 GBP'000 GBP'000
Fixed assets
Investments 13,591 15,387
Current assets
Debtors 482 1,183
Cash at bank and in hand 556 2,025
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1,038 3,208
Creditors: amounts falling due within (222) (329)
one year
--------- ---------
Net current assets 816 2,879
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Net assets 14,407 18,266
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Capital and reserves
Called up Ordinary Share capital 20 20
Called up 'A' Share capital 30 30
Special reserve 17,204 18,188
Revaluation reserve (2,964) 77
Capital reserve - realised - -
Revenue reserve 117 (49)
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Total equity shareholders' funds 14,407 18,266
----------- ---------
Basic and diluted net asset value per
share (pence)
Ordinary Share 72.2 91.2
'A' Share 0.1 0.1
CASH FLOW STATEMENT
for the year ended 31 March 2012
17 month
Year ended period ended
31 March 31 March
2012 2011
GBP'000 GBP'000
Net cash inflow/(outflow) from 1,070 (575)
operating activities
Taxation
Corporation tax paid (111) -
Capital expenditure
Purchase of investments (8,844) (17,991)
Proceeds from disposal of investments 7,467 2,681
----------------------------
Net cash outflow from capital expenditure (1,377) (15,310)
----------------------------
Equity dividends paid (997) (1,000)
Net cash outflow before financing (1,415) (16,885)
Financing
Proceeds from Ordinary Share issue - 19,980
Proceeds from 'A' Share issue - 30
Proceeds from Preference Share issue - 50
Redemption of Preference Shares - (50)
Share issue costs - (1,100)
Purchase of own shares (54) -
----------------------------
Net cash (outflow)/inflow from financing (54) 18,910
----------------------------
(Decrease)/increase in cash (1,469) 2,025
----------------------------
NOTES TO THE ACCOUNTS
for the year ended 31 March 2012
1. Accounting policies
Basis of accounting
The Company has prepared its financial statements under UK Generally Accepted
Accounting Practice ("UK GAAP") and in accordance with the Statement of
Recommended Practice "Financial Statements of Investment Trust Companies and
Venture Capital Trusts" revised January 2009 ("SORP").
The financial statements are prepared under the historical cost convention
except for certain financial instruments measured at fair value.
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
All 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 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.
For unquoted investments, fair value is established by using the IPEV
guidelines. 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;
* Multiple;
* Net assets;
* Discounted cash flows or earnings (of underlying business);
* Closing bid price;
* 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.
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 are expensed. 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.
It is not the Company's policy to exercise significant 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 time apportionment basis, by reference to the
principal sum outstanding and at the effective rate applicable and only where
there is reasonable certainty of collection in the foreseeable future.
Expenses
All expenses are accounted for on an accruals basis. In respect of the analysis
between revenue and capital items presented within the Income Statement, all
expenses have been presented as revenue items except as follows:
* Expenses which are incidental to the disposal of an investment are deducted
from the disposal proceeds of the investment.
* Expenses are split and presented partly as capital items where a connection
with the maintenance or enhancement of the value of the investments held can be
demonstrated. The Company has adopted a policy of charging 50% of the investment
management fees to the revenue account and 50% to the capital account to reflect
the Board's estimated split of investment returns which will be achieved by the
company over the long term.
Taxation
The tax effects on different items in the Income Statement are allocated between
capital and revenue on the same basis as the particular item to which they
relate, using the Company's effective rate of tax for the accounting period.
Due to the Company's status as a Venture Capital Trust and the continued
intention to meet the conditions required to comply with Part 6 of the Income
Tax Act 2007, no provision for taxation is required in respect of any realised
or unrealised appreciation of the Company's investments which arises.
Deferred taxation, which is not discounted, 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, other creditors and loan notes
Other debtors (including accrued income), other creditors and loan notes are
included within the accounts at amortised cost.
Issue costs
Issue costs in relation to the shares issued for each share class have been
deducted from the share premium account.
2. Basic and diluted return per share
Weighted average Revenue Capital
number of shares return loss
in issue
Return per share is GBP'000 GBP'000
calculated on the following:
Year ended 31 March 2012 Ordinary 19,981,516 365 (3,173)
Shares
'A' Shares 29,982,480 - -
Period ended 31 March Ordinary 14,380,191 451 (95)
2011 Shares
'A' Shares 22,091,730 - -
As the Company has not issued any convertible securities or share options, there
is no dilutive effect on return per Ordinary Share or 'A' Share. The return per
share disclosed therefore represents both the basic and diluted return per
Ordinary Share or 'A' Share.
3. Basic and diluted net asset value per share
2012 2011
Shares in issue Net asset value Net asset value
Pence per Pence per
2012 2011 share GBP'000 share GBP'000
Ordinary Shares 19,932,658 20,000,000 72.2 14,385 91.2 18,244
'A' Shares 29,939,445 30,000,000 0.1 22 0.1 22
-------- -------
Net assets per Balance
Sheet 14,407 18,266
-------- -------
The Directors allocate the assets and liabilities of the Company between the
Ordinary Shares and 'A' Shares such that each share class has sufficient net
assets to represent its dividend and return of capital rights.
As the Company has not issued any convertible shares or share options, there is
no dilutive net asset value per Ordinary Share or per 'A' Share. The Net Asset
Value per share disclosed therefore represents both the basic and diluted net
asset value per Ordinary Share or per 'A' Share.
4. Financial instruments
The Company's financial instruments comprise investments held at fair value
through the profit and loss, being equity and loan stock investments in quoted
companies and unquoted companies, loans and receivables being cash deposits and
short term debtors and financial liabilities being creditors arising from its
operations. The main purpose of these financial instruments is to generate
cashflow and revenue and capital appreciation for the Company's operations. The
Company has no gearing or other financial liabilities apart from short-term
creditors and does not use any derivatives.
The fair value of investments is determined using the detailed accounting policy
as shown in note 1.
Loans and receivables and other financial liabilities are stated at amortised
cost which the Directors consider is equivalent to fair value.
The Company's investment activities expose the Company to a number of risks
associated with financial instruments and the sectors in which the Company
invests. The principal financial risk arising from the Company's operations are:
*Market risks
*Credit risk
*Liquidity risk
The Board regularly reviews these risks and the policies in place for managing
them. There have been no significant changes to the nature of the risks that
the Company is exposed to over the year and there have also have 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. 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
*Interest rate risk
Market price risk
Market price risk arises from uncertainty about the future prices and valuations
of financial instruments held in accordance with the Company's investment
objectives. It represents the potential loss that the Company might suffer
through market price movements in respect of quoted investments and also changes
in the fair value of unquoted investments that it holds.
At 31 March 2012, the AIM-quoted portfolio was valued at GBP734,000 (2011:
GBP327,000).
At 31 March 2012, the unquoted portfolio was valued at GBP12,857,000 (2011:
GBP15,060,000).
As the larger proportion of the Company's unlisted investments are classified as
'asset-backed', a fall in share prices generally would have a lesser impact on
the valuation of the unlisted portfolio.
The sensitivity analysis for unquoted valuations above assumes that each of the
sub-categories of financial instruments (ordinary shares and loan stocks) held
by the Company produces an overall movement of 10%. Shareholders should note
that equal correlation between these sub-categories is unlikely to be the case
in reality, particularly in the case of loan stock instruments. Where share
prices are falling, the equity instrument could fall in value before the loan
stock instrument. It is not considered practical to assess the sensitivity of
the loan stock instruments to market price risk in isolation.
Interest rate risk
The Company accepts exposure to interest rate risk on floating-rate financial
assets through the effect of changes in prevailing interest rates. The Company
receives interest on its cash deposits at a rate agreed with its bankers.
Investments in loan stock attract interest predominately at fixed rates. A
summary of the interest rate profile of the Company's investments is shown
below.
There are three categories in respect of interest which are attributable to the
financial instruments held by the Company as follows:
"Fixed rate" assets represent investments with predetermined yield targets and
comprise certain loan note investments and Preference Shares.
"Floating rate" assets predominantly bear interest at rates linked to Bank of
England base rate or LIBOR and comprise cash at bank and liquidity fund
investments and certain loan note investments.
"No interest rate" assets do not attract interest and comprise equity
investments, certain loan note investments, loans and receivables (excluding
cash at bank) and other financial liabilities.
Average
Average period 2012 2011
interest rate until maturity GBP'000 GBP'000
Fixed rate 10.7% 942 days 9,926 12,719
Floating rate 0.5% 556 2,025
No interest rate 4,147 3,851
------------------
14,629 18,595
------------------
The Company monitors the level of income received from fixed and floating 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.
It is estimated that an increase of 1% in interest rates would have increased
total return before taxation for the year by GBP56,000. As the Bank of England
base rate stood at 0.5% per annum throughout the year, it is not believed that a
reduction from this level is likely.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument is unable
to discharge a commitment to the Company made under that instrument. The Company
is exposed to credit risk through its holdings of loan stock in investee
companies, investments in liquidity funds, cash deposits and debtors.
The Company's financial assets that are exposed to credit risk are summarised as
follows:
2012 2011
GBP'000 GBP'000
Investments in loan stocks 9,926 12,719
Cash and cash equivalents 556 2,025
Interest, dividends and other receivables 190 484
------------------
10,672 15,228
------------------
Credit risk in respect of loan stock of GBP9,926,000 is partially mitigated by
registering floating charges over the assets of the respective investee
companies. The strength of this security in each case is dependent of the nature
of the investee companies business and its identifiable assets. Similarly the
management of credit risk associated interest, dividends and other receivables
is covered within the investment management procedures. The level of security is
a key means of managing credit risk.
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. Consequently, the Directors consider that the credit risk
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. As
the Company has a relatively low level of creditors ( GBP222,000) and has no
borrowings the Board believes that the Company's exposure to liquidity risk is
low. The Company always holds sufficient levels of funds as cash in order to
meet expenses and other cash outflows as they arise. For these reasons the
Board believes that the Company's exposure to liquidity risk is minimal.
The Company's liquidity risk is managed by the Investment Manager in line with
guidance agreed with the Board and is reviewed by the Board at regular
intervals.
5. Related party transactions
Nicholas Lewis is a director of Downing Corporate Finance Limited ("DCF") and
partner in Downing LLP. DCF was the Company's Investment Manager for the first
three months of the period at which point the contract was novated to Downing
LLP. During the year ended 31 March 2012, GBP82,000 was payable to DCF and
GBP246,000 was payable to Downing LLP, all of which was waived, in respect of
these services. At the year end, Downing LLP owed the Company GBP241,000 as a
result of investment management fees received and subsequently waived. This
balance has been cleared since the year end.
DCF provided administration services for the first three months of the period at
which point the contract was novated to Downing LLP, for an annual fee of
GBP65,000 plus RPI. During the year to 31 March 2012, GBP17,000 was payable to DCF
in respect of administration fees and GBP51,000 to Downing LLP. All of these fees
for the year were waived. At the year end, Downing LLP owed the Company GBP51,000
as a result of administration fees received and subsequently waived. This
balance has been cleared since the year end.
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 2012, but has been extracted from
the statutory financial statements for the year ended 31 March 2012, which were
approved by the Board of Directors on 11 July 2012 and will be delivered to the
Registrar of Companies following the Company's Annual General Meeting. The
Independent Auditor's Report on those financial statements was unqualified and
did not contain any emphasis of matter nor statements under s498(2) and (3) of
the Companies Act 2006.
The statutory accounts for the period ended 31 March 2011 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 2012 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 Absolute Income VCT 2 Plc via Thomson Reuters ONE
[HUG#1625858]
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