TIDMDPV
Downing Planned Exit VCT 2 plc
(Formerly Downing Protected VCT II PLC)
Final Results for the year ended 31 January 2010
FINANCIAL HIGHLIGHTS
(All "pence per share") Year ended 31 Jan 10 Year ended 31 Jan
09
Ord 'C' & 'A' 'D' & 'E' Ord 'C' & 'A'
pool pools pools pool pools
Net asset value 0.1 96.0 94.5 36.5 94.5
Total distributions paid since 90.4 - - 60.0 -
inception
Total return 90.5 96.0 94.5 96.5 94.5
CHAIRMAN'S STATEMENT
Introduction
During the year the final investments from the Ordinary share pool have been
realised and the proceeds distributed, we have raised and started to invest the
'C' Share funds and we have just completed a very successful further fundraising
of 'D' Shares.
Change of name
As shareholders are probably aware, on 8 December 2009 the Company changed its
name to "Downing Planned Exit VCT 2 plc". The Board believes that the new name
better describes the Company's key objectives and differentiates it from other
Downing-managed VCTs with different strategies.
Ordinary share pool
In line with the Company's strategy, the Ordinary Share pool exited from all its
remaining investments, which realised GBP3.9 million. These proceeds funded
dividends of 30.417p per Ordinary Share paid during the year. The Company is not
expecting to pay any further dividends in respect of its Ordinary Shares.
The total return to Ordinary Shareholders, who originally invested at 60p per
share net of income tax relief, has been 90.417p, paid over the life of the
investment, which is equivalent to 11.2% p.a. (18.7% p.a. gross to a 40%
taxpayer). The Board believes that, considering the economic climate in which
the Investment Manager had to realise much of the portfolio, this is a fair
outcome. Shareholders will also remember that in my statement in the Half Yearly
Report, I drew their attention to the fact that the Company had redeemed the
loan notes held by the Board and Investment Manager under the Performance
Incentive arrangements. This was done at a price equivalent to 5.0p per Ordinary
Share, some 3.5p per share less than the full amount that was due.
At the year end, the Ordinary Share pool continued to hold one small VCT
qualifying investment valued at GBP5,000, which is helpful in ensuring that the
Company continues to comply with the VCT tests.
The total return on ordinary activities for the Ordinary Shares for the year was
as follows:
Revenue Capital Total
GBP'000 GBP'000 GBP'000
Ordinary Shares (57) (549) (606)
The net asset value of the Ordinary Shares stands at approximately 0.05p per
share as at 31 January 2010.
'C' Share pool
Throughout this report, the term "'C' Share(s)" has been used to refer to the
pool of assets allocated to the 'C' Shares and 'A' Shares combined.
Fundraising
The 'C' Share fundraising was launched in September 2008 and closed on 11
September 2009 having raised gross proceeds (along with its sister company,
Downing Planned Exit VCT 3 plc) of GBP14.3 million. This has provided your Company
with net proceeds available for investment of GBP6.8 million.
Portfolio activity
The 'C' Share pool has been an active investor over the year, making four VCT
qualifying investments at a total cost of GBP1.5 million along with a significant
number of non-qualifying investments which have generally been reasonably
short-term loan stock investments which provide the pool with good yields
without taking on any significant levels of risk. There were also a number of
exits from these investments during the year.
In reviewing the investment valuations at the year end, the Board concluded that
it was appropriate to hold all the C Share pool investments at values equivalent
to original cost as none had shown any significant deviation from their plans
and expectation at the time of investment.
Net Asset Value, results and dividends
Investors in the 'C' Share offer for subscription will recall that the structure
of the offer was that they received one 'C' Share (issued at 99.9p) and one 'A'
Share (issued at 0.1p) for every GBP1 they invested.
At 31 January 2010 the 'C' Share NAV stood at 95.9p and the 'A' Share NAV at
0.1p.
The total return on ordinary activities for the 'C' Shares for the year was as
follows:
Revenue Capital Total
GBP'000 GBP'000 GBP'000
'C' Shares 101 - 101
In accordance with its stated policy, the Board is proposing to pay a dividend
of 5.0p per 'C' Share on 30 July 2010 to Shareholders on the register at the
close of business on 25 June 2010.
'D' Share pool
During the year the Company launched a new fundraising along with its sister
company, Downing Planned Exit VCT 3 plc. Subscribers in this offer for
subscription received one 'D' Share and one 'E' Share for every GBP1 per share
that they subscribed. By 31 January 2010, the Company had allotted 3,699,349
'D' Shares and 8,699,349 'E' Shares to investors, producing net proceeds (after
share issue costs) of GBP3.5 million. In March 2010 the fundraising was fully
subscribed, having raised a gross amount of GBP20 million between the two VCTs.
As with the 'A' Shares that were issued in conjunction with the 'C' Shares, the
'E' Shares are being issued in conjunction with the 'D' Shares as a means of
performance incentive for the management team. Initially, the 'E' Shares will
have a value of 0.1p per share, but, if certain hurdles are met, then the 'E'
Shares will accumulate value and will pay a dividend determined by a formula in
the Articles of Association. Throughout this report, the term "'D' Share(s)"
has been used to refer to the pool of assets allocated to the 'D' Shares and 'E'
Shares combined.
As at 31 January 2010, no investments had been made by the 'D' share pool, whose
funds were held as cash deposits.
Net Asset Value and results
Within the year, there was negligible income or expenditure attributable to the
'D' Share pool such that at 31 January 2010, the 'D' Share NAV stood at 94.4p
and the 'E' Share NAV at 0.1p.
No dividends have been declared or paid to date in respect of the 'D' Shares or
the 'E' Shares.
Share buybacks
The Company has a general policy of buying in for cancellation its own shares
that become available in the market. During the year, the Company repurchased
and cancelled 8,240 'C' and 'A' Shares at an average price of 86.0p and 0.1p
respectively per share for cancellation.
In view of the fact that that all funds have essentially been returned to
Ordinary Shareholders, the Company will not make any further share buybacks of
Ordinary shares. The Board expects to undertake any buybacks in respect of the
'C' Shares/'A' Shares and 'D' Shares and 'E' Shares at approximately a 10%
discount to the latest published NAV of those share classes, subject to
regulatory restrictions and other factors such as availability of liquid funds.
Annual General Meeting
The Company's fourth Annual General Meeting will be held at Kings Scholars
House, 230 Vauxhall Bridge Road, London SW1V 1AU at 11.00 a.m. on 27 July 2010.
One item of special business is proposed in respect of the authority to make
market purchases of shares.
Outlook
With the Ordinary Share activities brought to a close, the focus is now on the
'C' Share pool and the newly raised funds in the 'D' Share pool.
Good progress has been made in investing the 'C' Share funds, with some further
qualifying investments being made since the year end.
With approximately GBP9.5 million of new funds in the 'D' Share pool to invest, a
small number of non-qualifying investments have been made from that pool since
the year-end, which help to counter the "cash drag" which arises from holding
uninvested funds as low-yielding cash deposits.
The general consensus for the economy continues to be one of caution. While this
means that it remains a risky time for investing, there are entrepreneurs that
are able to take advantage of these conditions and provide investment
opportunities which can fulfil the Company's objectives.
Hugh Gillespie
Chairman
27 May 2010
INVESTMENT MANAGER'S REPORT
Introduction
The Company has three share pools, each at different phases of their investment
cycles. The Ordinary Share Pool realised its investments and returned GBP3.0m to
investors. The C Share Pool raised a total of GBP6.8m and began investing. The D
Share Pool had raised GBP6.4m by the year-end which increased to GBP9.5m when the
offer closed in March 2010.
Investment activity
Ordinary Share Pool
The Ordinary Share Pool began the year with GBP3.8m of investments, made 11
disposals in the year and held a residual GBP5,000 investment at year end. This
share pool has now returned a total of 90.4p to shareholders, including 30.4p in
the year, and has no remaining cash at the year end.
The portfolio was realised near to its valuation of GBP3.8m at the beginning of
the year. The share pool made a GBP0.6m loss in the year (2009: GBP0.3m) which
included a GBP0.5m performance fee paid to the Directors and the Management Team.
C Share Pool
When the C Share offer closed in September 2009 it had raised a total of GBP6.8m.
By the year-end, the pool had invested GBP4.3m across 12 companies and held a
further GBP2.6m in cash for future investments. The current portfolio includes
GBP1.2m invested into Hoole Hall Country Club Holdings Ltd, GBP1.0m in Bijou Wedding
Venues Limited and GBP0.5m in The Thames Club Limited, a health club near Staines.
The portfolio, with 35% of qualifying investments, is making good progress
towards the 70% threshold. The C Share pool generated GBP0.3m of income and GBP0.1m
of net profit in the year. No dividends have yet been paid on this share class
and the NAV per C Share is 95.9p.
D Share Pool
The D Share Pool raised GBP10.0m when the offer closed in March 2010, with GBP9.5m
available for investment. This has since been partially invested.
Portfolio valuation
Whilst the Ordinary Share Pool GBP3.8m divestment programme was a success, the
Pool suffered a loss of GBP75,000 on its investment in Vermont Developments
Limited.
The C Share portfolio has only recently been invested and is currently valued at
cost.
Outlook
Whilst the general economic conditions in the UK are expected to see an
improvement in 2010, the continued lack of available funding from traditional
sources creates investment opportunities for the Company. We remain cautious
about the prospects for a sustained economic recovery and expect the trading
environments for many of the Company's investments to remain challenging.
The Company will continue to expand its current C Share portfolio and to develop
its new D Share investments to provide the core of its income and growth in the
medium term. The Company is focused on achieving its target returns through
these difficult economic times and will seek to return funds to C Share
investors in 2013-2014.
Downing Managers II Limited
27 May 2010
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments, all of which are incorporated in England and Wales,
were held at 31 January 2010:
Ordinary Share pool Valuation
movement
Cost Valuation in year % of
GBP GBP GBP portfolio
Tancred Trading Limited 5,000 5,000 - 99%
------- ----------- ------------ ----------
5,000 -
Cash at bank and in hand 54 1%
----------- ----------
Total investments 5,054 100%
'C' Share pool Valuation
movement
Cost Valuation in year % of
GBP000 GBP000 GBP000 portfolio
Hoole Hall Country Club Holdings 1,206 1,206 - 17.4%
Limited*
Bijou Wedding Venues Limited** 1,015 1,015 - 14.7%
The Thames Club Limited* 500 500 - 7.2%
East Dulwich Tavern Limited 344 344 - 5.0%
Lilliput Development LLP* 328 328 - 4.7%
Westow House Limited 304 304 - 4.4%
Uno Developments Limited* 182 182 - 2.6%
Honeycombe Pubs VCT plc* 175 175 - 2.5%
Atlantic Dogstar Limited 162 162 - 2.3%
Chapel Street Hotel (2008) LLP* 63 63 - 0.9%
Vermont Developments Limited* 25 25 - 0.4%
------- ----------- ------------ ----------
4,304 4,304 - 62.1%
Cash at bank and in hand 2,624 37.9%
----------- ----------
Total investments 6,928 100.0%
*Non
qualifying investment
**Partially qualifying investment
Summary of investment movements
Additions Cost
GBP'000
Ordinary Share pool
Tancred Trading Limited 5
Honeycombe Pubs VCT plc* (disposed of in the year) 200
--------
Total Ordinary Share pool 205
C Share pool
Hoole Hall Country Club Holdings Limited* 1,375
Bijou Wedding Venues Limited** 1,015
The Thames Club Limited* 500
East Dulwich Tavern Limited 344
Lilliput Development LLP* (partial disposal in the year) 742
Westow House Limited 304
Uno Developments Limited* 182
Honeycombe Pubs VCT plc* 175
Atlantic Dogstar Limited 162
Chapel Street Hotel (2008) LLP* 63
Vermont Developments Limited* 25
Liongold Acquisitions Limited (disposed of in the year)* 1,000
Downing Acquisition Limited (disposed of in the year)* 750
Coastal Partnerships Limited (disposed of in the year)* 330
Close Imperial Pub Company Limited (disposed of in the year)* 175
Sanguine Hospitality Limited* -
--------
Total 'C' Share pool 7,142
--------
Total 7,347
Disposals
Total
(Loss) / gain realised
MV at Disposal against (loss)/ gain
Cost 01/02/09 proceeds cost during the
year
GBP'000 GBP000 GBP'000 GBP'000 GBP'000
Ordinary Share pool
Liongold Contracting 1,000
Limited 1,000 1,000 - -
Honeycombe Pubs VCT 200
plc 216 199 (17) (1)
Vermont Developments 100
Limited* 452 25 (427) (75)
Chapel Street Hotel 32
(2008) LLP 32 63 31 31
Universe Contracting -
Limited 25 25 - 25
Downing Acquisition 1 750
Limited 750 750 - -
Hoole Hall Country 1,375
Club Holdings Ltd 1,375 1,375 - -
Heyford Homes 9
(Thornton Hall) Ltd 9 9 - -
Sanguine Hospitality 5
Limited 5 - (5) (5)
Coastal Partnerships 330
Limited 330 330 - -
Honeycombe Pubs VCT n/a
plc 200 175 (25) (25)
------- ---------- ----------- --------------- -----------
4,394 3,801 3,951 (443) (50)
C Share Pool
Liongold Acquisitions n/a
Limited 1,000 1,000 - -
Downing Acquisition 1 n/a
Limited 750 750 - -
Hoole Hall Country
Club Holdings n/a
Limited 168 168 - -
Coastal Partnerships n/a
Limited 330 330 - -
Close Imperial Pub n/a
Company Limited 175 175 - -
Lilliput Development n/a
LLP 415 415 - -
------- ---------- ----------- --------------- -----------
2,838 n/a 2,838 - -
------- ---------- ----------- --------------- -----------
7,232 3,801 6,789 (443) (50)
*Non qualifying
investment
**Partially qualifying
investment
Statement of Directors' responsibilities
The Directors are responsible for preparing the Report of the Directors, the
Directors' Remuneration Report and the financial statements in accordance with
applicable law and regulations. They are also responsible for ensuring that the
annual report includes information required by the Listing Rules of the
Financial Services Authority
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and applicable law).
Under company law the directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of the profit or loss of the Company for that period.
In preparing those 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 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.
The Directors are responsible for the maintenance and integrity of the corporate
and financial information relating to the Company included on the Manager's
websites. 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 jurisdiction.
Statement as to disclosure of information to Auditors
The Directors in office at the date of the report have confirmed, as far as they
are aware, that there is no relevant audit information of which the Auditors are
unaware. Each of the Directors has confirmed that they have taken all the steps
that they ought to have taken as Directors in order to make themselves aware of
any relevant audit information and to establish that it has been communicated to
the Auditor.
By Order of the Board
Grant Whitehouse
Secretary
Kings Scholars House
230 Vauxhall Bridge Road
London SW1V 1AU
27 May 2010
INCOME STATEMENT
for the year ended 31 January 2010
Year ended 31 January Year ended 31 January
2010 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income 307 - 307 425 - 425
Losses on investments - (50) (50) - (427) (427)
----------------------------------------------
307 (50) 257 425 (427) (2)
Investment management fees (69) - (69) (89) - (89)
Other expenses (178) (499) (677) (125) - (125)
----------------------------------------------
Return/ (loss) on ordinary
activities before tax 60 (549) (489) 211 (427) (216)
Tax on ordinary activities (16) - (16) (54) - (54)
----------------------------------------------
Return/ (loss) attributable to
equity shareholders 44 (549) (505) 157 (427) (270)
Basic and diluted return/ (loss)
per:
Ordinary share (0.6p) (5.5p) (6.1p) 1.6p (4.3p) (2.7)
'C' share 1.5p - 1.5p - - -
'A' share 0.1p - 0.1p - - -
'D' share - - - - - -
'E' share - - - - - -
All Revenue and Capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued during the year. The
total column within the Income Statement represents the profit and loss account
of the Company.
A Statement of Total Recognised Gains and Losses has not been prepared as all
gains and losses are recognised in the Income Statement noted above.
Other than revaluation movements arising on investments held at fair value
through the Income Statement, there were no differences between the
return/deficit at historical cost.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
Year ended 31 January 2010 Year ended 31 January
2009
Ordinary 'C' 'D' Ordinary 'C'
Share Share Share Share Share
pool pool pool Total pool pool Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Opening shareholders' funds 3,652 2,631 - 6,283 9,785 - 9,785
Issue of shares - 4,386 3,704 8,090 - 2,792 2,792
Share issue costs - (232) (203) (435) - (162) (162)
Purchase of own shares - (3) - (3) (115) - (115)
Total recognised
(losses)/gains (606) 101 - (505) (271) 1 (270)
for the year
Distributions (3,041) - - (3,041) (5,747) - (5,747)
----------------------------------------------------
Closing shareholders' funds 5 6,883 3,501 10,389 3,652 2,631 6,283
INCOME STATEMENT (ANALYSED BY SHARE POOL)
for the year ended 31 January 2010
Ordinary Share pool
Year ended 31 January Year ended 31 January
2010 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income 31 - 31 413 - 413
Losses on investments - (50) (50) - (427) (427)
----------------------------------------------
31 (50) (19) 413 (427) (14)
Investment management fees (10) - (10) (81) - (81)
Other expenses (78) (499) (577) (123) - (123)
----------------------------------------------
(Loss)/ return on ordinary
activities before tax (57) (549) (606) 209 (427) (218)
Tax on ordinary activities - - - (53) - (53)
----------------------------------------------
(Loss)/ return attributable to
equity shareholders (57) (549) (606) 156 (427) (271)
'C' Share pool
Year ended 31 January Year ended 31 January
2010 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income 276 - 276 12 - 12
Gains on investments - - - - - -
----------------------------------------------
276 - 276 12 - 12
Investment management fees (59) - (59) (8) - (8)
Other expenses (100) - (100) (2) - (2)
----------------------------------------------
Return on ordinary activities
before tax 117 - 117 2 - 2
Tax on ordinary activities (16) - (16) (1) - (1)
----------------------------------------------
Return attributable to equity
shareholders 101 - 101 1 - 1
The 'D' Share pool had negligible income and expenditure during the year.
BALANCE SHEET
as at 31 January 2010
2010 2009
Ordinary 'C' 'D' Ordinary 'C'
Share Share Share Share Share
pool pool pool Total pool pool Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Fixed assets
Investments 5 4,304 - 4,309 3,801 - 3,801
Current assets
Debtors - 70 - 70 20 - 20
Cash at bank and in hand - 2,624 6,424 9,048 17 2,821 2,838
----------------------------------------------------
2,694 6,424 9,118 37 2,821 2,858
Creditors: amounts falling
due within one year - (115) (2,923) (3,038) (166) (190) (356)
----------------------------------------------------
Net current assets /
(liabilities) - 2,579 3,501 6,080 (129) 2,631 2,502
Creditors: amounts falling
due after one year - - - - (20) - (20)
----------------------------------------------------
Net assets 5 6,883 3,501 10,389 3,652 2,631 6,283
Capital and reserves
Called up share capital 100 18 12 130 100 13 113
Capital redemption reserve 2 4 - 6 2 - 2
Special reserve - - - - 3,871 - 3,871
Share premium account - 6,766 3,489 10,255 - 2,617 2,617
Investment holding losses - - - - (393) - (393)
Capital reserve - realised - - - - - - -
Revenue reserve (97) 95 - (2) 72 1 73
----------------------------------------------------
Total equity shareholders' 5 6,883 3,501 10,389 3,652 2,631 6,283
funds
Basic and diluted net asset
value per
Ordinary Share 0.1p 36.5p
'C'/'D' Share 95.9p 94.4p 94.4p
'A'/'E' Share 0.1p 0.1p n/a 0.1p
CASH FLOW STATEMENT
for the year ended 31 January 2010
Year ended Year ended
31 January 2010 31 January 2009
Ordinary 'C' 'D' Ordinary 'C'
Share Share Share Share Share
pool pool pool Total pool pool Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net cash inflow from
operating activities (669) (34) - (703) 361 11 372
------------------------------------------------------
Taxation
Corporation tax paid (53) (1) - (54) (100) - (100)
Capital expenditure
Purchase of
investments (205) (7,142) - (7,347) (3,006) - (3,006)
Sale of investments 3,951 2,838 - 6,789 7,989 - 7,989
------------------------------------------------------
Net cash inflow/
(outflow) from capital
expenditure 3,746 (4,304) - (558) 4,983 - 4,983
------------------------------------------------------
Equity dividends paid (3,041) - - (3,041) (5,747) - (5,747)
------------------------------------------------------
Net cash outflow
before financing (17) (4,339) - (4,356) (503) 11 (492)
Financing
Proceeds from share
issue - 4,390 6,556 10,946 - 2,905 2,905
Share issue costs - (241) (132) (373) - (96) (96)
Purchase of own shares - (7) - (7) (115) - (115)
------------------------------------------------------
Net cash inflow from
financing - 4,142 6,424 10,566 (115) 2,809 2,694
------------------------------------------------------
Increase/ (decrease) in
cash (17) (197) 6,424 6,210 (618) 2,820 2,202
NOTES TO THE ACCOUNTS
for the year ended 31 January 2010
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 the certain financial instruments measured at fair value and on the
basis that it is not necessary to prepare consolidated accounts.
The Company implements new Financial Reporting Standards ("FRS") issued by the
Accounting Standards Board when required. No new standards were issued for
implementation for the year under review. The Association of Investment
Companies issued a new SORP in January 2009 which has been adopted for these
financial statements. No comparative restatements have been required as a
result of the implementation of the new SORP.
Presentation of Income Statement
In order to better reflect the activities of a venture capital trust and in
accordance with 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
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. 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 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;
*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.
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.
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.
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 the policy of allocating Investment
Manager's fees 100% as revenue.
Taxation
The tax effects on different items in the Income Statement are allocated between
capital and revenue on the same basis as the particular item to which they
relate using the Company's effective rate of tax for the accounting period.
Due to the Company's status as a Venture Capital Trust and the continued
intention to meet the conditions required to comply with Part 6 of the Income
Tax Act 2007, no provision for taxation is required in respect of any realised
or unrealised appreciation of the Company's investments which arise.
Deferred taxation is provided in full on timing differences that result in an
obligation at the balance sheet date to pay more tax, or a right to pay less
tax, at a future date, at rates expected to apply when they crystallise based on
current tax rates and law. Timing differences arise from the inclusion of items
of income and expenditure in taxation computations in periods different from
those in which they are included in the accounts.
2. Basic and diluted return per share
Ordinary Shares 'C' Shares 'A' Shares 'D' Shares 'E' Shares
Revenue return/ (57) 93 8 - -
(loss) ( GBP'000)
Weighted average 9,994,968 6,216,192 13,716,192 1,894,930 3,241,084
number of shares in
issue
Net capital gain/
(loss) for the (549) - - - -
financial year
( GBP'000)
Weighted average 9,994,968 6,216,192 13,716,192 1,894,930 3,241,084
number of shares in
issue
As the Company has not issued any convertible securities or share options, there
is no dilutive effect on return per share. The return per share disclosed
therefore represents both the 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
per share per share
2010 2009 GBP'000 GBP'000
Ordinary Shares 9,994,968 9,994,968 0.1p 5 36.5p 3,652
'C' Shares 7,166,806 2,784,790 95.9p 6,872 94.4p 2,628
'A' Shares 10,754,329 10,284,790 0.1p 11 0.1p 3
'D' Shares 3,699,349 n/a 94.4p 3,493 n/a n/a
'E' Shares 8,699,349 n/a 0.1p 8 n/a n/a
-------- ------
10,389 6,283
The Ordinary Share pool and 'C' Share pool and 'D' Share pool are treated as
separate investment pools. Within the 'C' Share pool the Directors allocate the
assets and liabilities of the Company between the 'C' Shares and 'A' Shares such
that each share class has sufficient net assets to represent its dividend and
return of capital rights. Within the 'D' Share pool the Directors allocate the
assets and liabilities of the Company between the 'D' Shares and 'E' Shares such
that each share class has sufficient net assets to represent its dividend and
return of capital rights.
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 regulation 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.
In assessing the risk profile of its investment portfolio, the Board has
identified two principal classes of financial instrument. All investments are
"fair value through the profit and loss account".
In addition to its investment portfolio, the VCT maintains a cash position.
Cash is mainly held by Bank of Scotland plc and Royal Bank of Scotland plc. 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 the fair value.
The Board has reviewed the Company's financial risk profile. Despite the fact
that there has been a clear deterioration in the economic climate, the Board has
concluded that, as a result of the manner in which the Company structures its
investments so as to try to reduce downside risk, the Company's exposure to
financial risk has not changed significantly since the previous year.
The main risks arising from the Company's financial instruments are interest
rate, market risk and credit risk. The Board reviews and agrees policies for
managing each of these risks and they are summarised below. These policies have
remained unchanged since the beginning of the financial year. A review of the
specific financial risks faced by the Company is presented below.
Market risk
Market risk arises from uncertainty about fair values or future cash flows of
financial instruments because of changes in market prices. This is a fundamental
aspect of investing in unquoted companies and one which is regularly assessed by
the board and the investment manager.
Market price risk
The Company has no holdings in any listed or quoted equities at the year end. As
such it has no direct exposure to substantial movements experienced by stock
markets. The Company generally structures its investments such that the
majority of any losses are initially borne by its investment partners. Therefore
the Company has reduced its exposure to a fall in the value of the businesses in
which it invests and any underlying assets held by those businesses, such that
it has a charge over substantial assets of the underlying business.
Interest rate risk
The Company's investment portfolio includes floating rate and fixed rate
financial instruments, the fair values of which are influenced by differing
degrees to changes in market price. Generally, unless the risk profile
attaching to the loan note changes, the fair value of variable and floating rate
investments is unlikely to alter materiality. The fair value of fixed rate
investments would, theoretically, increase as base rates fall. However, as a
result of the structuring of the Company's investments, the fixed rate
investments (loan notes) have strict redemption and transferability conditions
and, therefore, any theoretical uplift in fair value would not be a fair
reflection of the realisable value of this class of investment.
The Company's future cash flows can be influenced by changes in interest rates
resulting in an increase or decrease in income from investments linked to the
base rate, and by the credit worthiness of the borrowers of the funds. The
maximum exposure to this risk amounts to the value of variable and floating rate
assets of GBP9 million (2009: GBP10.0 million). Sensitivity has been tested by the
impact on the NAV over a one year period of a fall in the base rate to nil,
being the largest possible fall. The estimated impact on performance and NAV is
not deemed significant.
Credit risk
Credit risk is the risk that the counterparty to a financial instrument is
unable to discharge a commitment to the Company made under that instrument.
Credit risk in respect of investments in liquidity funds is minimised by
investing in AA-, or better, rated funds.
Investments in loan stocks comprise a fundamental part of the Company's venture
capital investments and are managed within the main investment management
procedures. The Company's policy is to invest in businesses with substantial
assets, with security being taken over the assets of the business.
Cash is mainly held by Bank of Scotland plc, consequently the Directors consider
that the risk profile associated with cash deposits is low.
Interest, dividends and other receivables are predominantly covered within the
investment management procedures.
Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting
obligations associated with its financial liabilities. As the Company only ever
has a very low level of creditors (excluding the subscriptions received for D
Shares not yet allotted) being GBPNIL (2009: GBP150,000), holds significant cash
balances and no borrowings, the Board believes that the Company's exposure to
liquidity risk is low.
5. Related party transactions
Downing Managers II Limited ("DMII"), a wholly owned subsidiary, is the
Company's Investment Manager. During the year ended 31 January 2010, GBP68,000
(2009: GBP89,000) was payable to DMII. Additionally, DMII provides accounting,
secretarial and administrative services for an annual fee of GBP47,500 (plus VAT
and RPI) per annum. During the year ended 31 January 2010, GBP44,000 (2009:
GBP44,000) was due in respect of administration fees. At the year end a balance of
GBP19,000 (2009: GBP63,000) was due to DMII.
Downing Corporate Finance Limited, a company of which Nicholas Lewis and Tony
McGing are directors, was owed GBP71,000 in commission on share allotments at the
year end (2009: GBPnil).
Each director held loan notes issued by the company as part of the performance
incentive fee arrangements. The performance fee targets were met in the year and
the loan note therefore redeemed and performance fees paid.
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 January 2010, but has been extracted
from the statutory financial statements for the year ended 31 January 2010,
which were approved by the Board of Directors on 27 May 2010 and will be
delivered to the Registrar of Companies following the Company's Annual General
Meeting. The Independent Auditor's Report on those financial statements was
unqualified and did not contain any emphasis of matter nor statements under s
498(2) and (3) of the Companies Act 2006.
The statutory accounts for the year ended 31 January 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
S237(2) or (3) of the Companies Act 1985.
A copy of the full annual report and financial statements for the year ended 31
January 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 Kings
Scholars House, 230 Vauxhall Bridge Road, London SW1V 1AU and will be available
for download from www.downing.co.uk.
[HUG#1419510]
Downing Protected Vct Ii (LSE:DPV)
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