Elderstreet VCT plc : Annual Financial Report

ELDERSTREET VCT PLC
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2015

FINANCIAL SUMMARY

  2015
pence
  2014
pence
     
Net asset value per share ("NAV")70.6 70.8
Cumulative dividends paid since launch91.0 81.0
Total return (NAV plus cumulative dividends paid per share) 161.6 151.8
    
Dividends in respect of financial year ended 31 December 2015    
Interim dividend paid per share2.5 2.0
Special dividend paid per share5.0 15.0
Final dividend per share (payable on 30 June 2016)2.5 2.5
 10.0 19.5

CHAIRMAN'S STATEMENT
I am pleased to present the Company's Annual Report for the year ended 31 December 2015. The period saw another strong performance with a further major successful realisation being achieved as well as good progress being made by many portfolio companies.

Net asset value and results
At 31 December 2015, the Company's NAV stood at 70.6p, an increase of 9.8p (13.8%) over the year after adding back dividends of 10.0p per share which were paid during the year.

The total return to Shareholders who invested at the launch of the Company in 1998 (NAV plus cumulative dividends) is now 161.6p compared to the original cost (net of income tax relief) of 80.0p per share.

The return on ordinary activities after taxation for the year was £3.4 million (2014: £3.7 million), comprising a revenue return of £262,000 (2014: £147,000) and a capital return of £3.1 million (2014: £3.5 million).

Venture capital investments
The most significant portfolio event of the year was the sale of the investment in SMART Education Limited. The VCT had been an early backer of the recruitment consultancy business in 2005. The Investment Manager worked closely with the business throughout its development, with the VCT providing additional financial support at a number of key points along the way.  At the point of disposal the investment had a net cost remaining (after earlier redemptions of loan stock) of £160,000 and was sold for £4.1 million, comprising  £2.6 million in cash and deferred proceeds valued at £1.5 million due to be paid in December 2016. Over the full life of the investment, a total of £1.8 million was invested in the company and total proceeds (including earlier loan stock redemptions) were £5.7 million, which the Board considers to be a very successful outcome.

During the year, the Company also benefitted from further deferred proceeds of £449,000 from Wessex Advanced Switching Products Limited, the investment was sold in 2014. There were a small number of other disposals which brought total net realised gains for the year to £754,000.

In terms of new investment activity, the Company invested a total of £2.7 million in six investments, all of which were in existing portfolio companies.

At the year end, the Company held a portfolio of 21 venture capital investments valued at £18.6 million, with the vast majority of value held in the top ten investments.

In reviewing the investment valuations at the year end, the Board made a number of unquoted valuation adjustments. The main movements are summarised as follows; Lyalvale Express was increased by £735,000 following the purchase of further shares from an exiting shareholder, Lyalvale Property Limited was uplifted by £614,000 in view of progress made in respect of development opportunities on land owned by the company and AngloINFO was increased by £389,000 with prospects for the business now improving.

A number of the Company's investments are quoted on AIM and experienced significant movements over the year. The investment in Access Intelligence increased by £1.0 million with several of the company's divisions making progress, Fulcrum Utility Services also increased by £833,000 fuelled by good trading results, while Proxama fell by £246,000.

Overall the portfolio had net unrealised gains for the year of £3.2 million.

Fixed interest investments
The Company also continues to hold a small portfolio of fixed interest investments which is managed by Smith & Williamson Investment Management Limited. The portfolio, valued at £1.5 million at the year end, generated investment income of £17,000 during the year and unrealised capital losses of £3,000 were recognised.

Dividends
A final dividend of 2.5p per share is proposed to be paid on 30 June 2016 to Shareholders on the register at 20 May 2016.

This will bring total dividends in respect of the year to 10.0p (2014: 19.5p), equivalent to a tax-free yield over 17.3% p.a. equivalent to a yield for a 40% tax payer of 28.9% p.a. based on the share price at the date of this report.

Fundraising activities
In December 2015, the Company launched a new Top-Up Offer for Subscription and a further Top-Up Offer for Subscription seeking to raise up to a total of £1.8 million. The offers were very well received by investors and were fully subscribed within 30 days of the launch. Shares were allotted to new investors in March 2016.

Share buybacks
The Company operates a policy of buying in shares that become available in the market at a discount of approximately 7.5% to the latest published NAV.

During the year the Company purchased a total of 180,000 shares at an average price of 63p per share.

Any Shareholders who are considering selling their shares will need to use a stockbroker. Such Shareholders should ask their stockbroker to register their interest in selling their shares with Shore Capital.

VCT Rule changes
Shareholders may be aware that a number of potentially significant changes to the VCTs rules were made in November. The new rules have introduced a limit on the age for most new investee companies of seven years, a lifetime cap of £15 million on the total amount of VCT and similar funding a company can receive and a ban on VCT funds being   used   by an   investee   company   to acquire another trade or business and have been brought in to bring the VCT scheme into line with the European Union's Risk Capital Guidelines.

At first inspection, it appeared that the impact of the main new regulations might be relatively limited on the Company in view of the types of investments typically made. However, it has subsequently become clear that the new rules have some surprising implications in restricting the support that the Company may be able to provide to existing portfolio companies. So far the Manager has been able to restructure two transactions so as to avoid any significant negative impact on the Company. However, it is concerning that the new regulations appear to create potential threats to businesses that the Company has supported under the historic VCT regulations for many years. The Board remains satisfied that the impact of the new rules on the Company will not be significant for new investments, but the Board and Manager will continue to closely monitor developments.

Annual General Meeting ("AGM")
The next AGM of the Company will be held on 28 June 2016 at 10-11 Charterhouse Square, London EC1M 6EE at 11:00 a.m.

Three items of Special Business are proposed; one ordinary resolution and two special resolutions in relation to the allotment of shares and share buybacks.

Outlook
The Board is pleased that the Investment Manager's style of management of working very closely with a relatively small number of portfolio companies has once again produced good returns for Shareholders and believes that this approach can continue to be rewarding.

The investment portfolio now comprises ten main investments. Generally, prospects appear positive although, as is to be expected, a number of investments will face challenges. As noted above, the new VCT regulations may provide some additional challenges. However, the Board is hopeful that HMRC will soon publish guidance on the new regulations which will provide greater clarity and perhaps address some consequences which appear to be at odds with the overall objectives of the VCT scheme.

I look forward to updating Shareholders on all developments in my statement in the Half Year Report to 30 June 2016.

David Brock
Chairman
26 April 2016

INVESTMENT MANAGER'S REPORT
Over the year the Company recorded an increase in the total return of 9.8p (net asset value including cumulative dividends), from 151.8p to 161.6p including paying dividends of 10p per share. NAV per share decreased from 70.8p to 70.6p.

During the year we invested £2.7 million as we continued to support the existing portfolio companies, and completed one successful exit. Six follow-ons were made into Concorde Solutions Limited, AngloINFO Limited, Access Intelligence plc, Lyalvale Express Limited, Lyalvale Property Limited and Fords Packaging Topco Limited, and one full exit was completed in respect of SMART Education Limited. Overall the core portfolio has performed satisfactorily.

The major news of the year was the exit from SMART Education Limited ("SMART") in December 2015. SMART is a teacher supply agency. The investment was made in 2005 as a start-up, backing a proven management team who we had previously invested in and who had successfully sold a previous business. During the course of its investment, we completed seven follow-on rounds as the company grew turnover from zero to over £15 million. The Company received an initial cash consideration of £2.6 million with a further minimum payment of £1.5 million due in December 2016.  The exit will return a projected IRR of over 20%.

A further investment of £0.5 million was made into Access Intelligence plc ("Access") in June as part of a £3 million funding round to acquire a complementary company for AIMediaComms. A divestment of a 100% subsidiary WillowStarcom was made in April 2015, and post the year end Access also divested its subsidiary Due North Ltd for £4.5 million to Proactis Holdings plc. Access is listed on AIM and the share price has risen 58% year on year.

In the last quarter two follow on investments were made into Lyalvale Express Limited and Lyalvale Property Limited. These were a result of an existing shareholder offering their shares for sale as part of a larger secondary sale of their investment fund. The VCT exercised its pre-emption rights and the holdings have been increased to 44% and 28% respectively. The valuations of both holdings rose as these shares were acquired at a discount to the VCT carrying value. Following this transaction, Lyalvale Express Limited purchased some of its own shares for cancellation, such that the net new investment by the Company was £1 million.

Fords Packaging Topco Limited continues to invest in its R&D and innovate new products. This innovation has resulted in a tripling of the sales pipeline and interest from other non-food sectors. While the sales cycle is long we hope to see the results of the past two years of investment coming through in late 2016.  Fords is debt free and pays a regular dividend.

AngloINFO Limited has been the subject of much change and investment over the past eighteen months and the new management have grown sales by 17% year on year. The new mobile compliant digital platform went live in the first quarter of 2016 and the target for 2016 is to get the company to breakeven.

Baldwin and Francis Limited has endured a tough year as the mining and energy sector has gone through a marked downturn globally. Turnover is projected to increase 10% year on year and the company continues to make sales in the oil sector despite the drop in the oil price. A renewed sales focus on the UK rail sector and professional technical services has been initiated and we are hopeful a number of meaningful contracts will land in calendar 2016. The services business grew by 70% in the year. We have every confidence in the new management team who have set the company up with good prospects for future growth.

On the AIM market our investment in Fulcrum Utility Services Limited rose over 300% as the company reported six monthly pre-tax profits of £1.6 million versus a loss of £0.2 million in the previous year.  Conversely our investment in Proxama plc, which was acquired as a result of selling a previous VCT investment Aconite Technology to them, fell 35%.

Generally, it is worth noting that in eight out of the top ten companies by value at 31 December 2015 the Manager has at least one board seat or observer rights and is very actively involved with these businesses.

We are delighted to report that the new fundraising round of £1.8 million for this season reached full subscription in 30 days from launch. Your Manager is confident they can find suitable new investments to invest this capital. 

Post the year end we have completed a new investment of £0.5 million into Ridee Limited (trading as Jinn - www.jinnapp.com ) a fast growing digital company, in a £5 million funding round alongside a syndicate of other venture capitalists, family offices and high net investors.

2015 has also been an interesting year with the introduction of the new HMRC investment rules for VCTs. The rule changes have had a number of unintentional consequences for existing portfolio companies. For example the VCT owned convertible loans in Snacktime plc, which although invested some years before the current rule changes, HMRC deemed a conversion of these loans could be a breach of VCT qualifying status. This issue was solved after taking advice from two specialist VCT tax advisers. At this moment in time we do not see the challenges of the new rules as having a material effect on the portfolio or the ability to invest in new companies.

In summary, we are pleased with the SMART exit and the overall outlook of the core portfolio companies. We remain cautiously optimistic.

Elderstreet Investments Limited
26 April 2016

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments were held at 31 December 2015. All companies are registered in England and Wales, with the exception of Fulcrum Utility Services Limited which is registered in the Cayman Islands.

 

 

 
 

 

Cost
 

 

Valuation
Valuation
movement
in year
% of
portfolio
by value
  £'000 £'000 £'000  
Ten largest venture capital investments (by value)     
 
Lyalvale Express Limited1,9153,33273514.3%
Fords Packaging Topco Limited2,8833,239313.9%
Access Intelligence plc *2,3333,1181,01013.4%
Baldwin & Francis Limited1,5342,252(246)9.7%
AngloINFO Limited1,6341,2253895.3%
Fulcrum Utility Services Limited *5001,1468334.9%
Concorde Solutions Limited900917173.9%
Lyalvale Property Limited3009146143.9%
Macranet Limited863862-3.7%
Proxama plc*860399(246)1.7%
 13,72217,4043,10974.7%
Other venture capital investments     
Interquest Group plc *226344(78)1.5%
Cashfac plc260328-1.4%
Servoca plc *3333241201.4%
Sift Limited250112740.5%
SnackTime plc *1,32690(72)0.4%
SparesFinder Limited10334-0.1%
The Kellan Group plc *657112-
Infoserve Group plc127---
The National Solicitors Network Limited501---
The QSS Group Limited268---
RB Sport & Leisure Holdings plc188---
 4,2391,243465.3%
Fixed income securities     
United Kingdom 1.25% Gilt 22/07/2018892917(1)3.9%
United Kingdom 1.00% Gilt 07/09/2017614615(2)2.6%
S&W Investment Funds Cash Fund1010-0.1%
 1,5161,542(3)6.6%
     
 19,47720,1893,15286.6%
     
Cash at bank and in hand 3,113 13.4%
      
Total investments  23,302 100.0%

All venture capital investments are unquoted unless otherwise stated

* Quoted on AIM
Investment movements for the year ended 31 December 2015

ADDITIONS

  £'000
Venture capital investments  
Lyalvale Express Limited1,500
Access Intelligence plc *500
Lyalvale Property Limited300
AngloINFO Limited230
Concorde Solutions Limited150
Fords Packaging Topco Limited1
  
 2,681

* Quoted on AIM

DISPOSALS

   

 

Cost

 
Value
at
01/01/15

 
 

 

Proceeds

 
Profit
Vs
cost

 
 

Realised
profit

 
  £'000 £'000 £'000 £'000 £'000
Venture capital investments      
Smart Education Limited1603,6704,1533,993483
Lyalvale Express Limited50050050999
SnackTime plc450450212(238)(238)
Mears Group plc18829835016252
Proxama plc302120(10)(1)
 1,3284,9395,2443,916305
      
Wessex Advanced Switching Products Limited- -449449449
      
  1,3284,9395,6934,365754
 

* Adjusted for purchases in the year where applicable

Directors' responsibilities statement
The Directors are responsible for preparing the Report of the Directors, the Strategic Report, 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 Conduct Authority.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;
· make judgments and 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, to 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 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.

In addition, each of the Directors considers that the Annual report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.

By order of the Board

Grant Whitehouse
Secretary of Elderstreet VCT plc
26 April 2016

INCOME STATEMENT
for the year ended 31 December 2015


 
  2015

 

2014
     

 

 

 

 

Revenue Capital Total   Revenue Capital Total
  £'000 £'000 £'000   £'000 £'000 £'000
           
Income   688-688 544-544
Gains on investments   -3,9063,906 -4,8914,891
    6883,9064,594    
        5444,8915,435
           
Investment management fees   (118)(354)(472) (128)(383)(511)
Performance incentive fees   -(454)(454) -(991)(991)
Other expenses   (308)(6)(314) (269)-(269)
           
Return on ordinary activities before tax 2623,0923,354 1473,5173,664
           
Tax on total comprehensive income and ordinary activities    

-
 

-
 

-
   

-
 

-
 

-
           
Return attributable to equity shareholders    

262
 

3,092
 

3,354
   

147
 

3,517
 

3,664
           
Basic and diluted return per share   0.8p9.0p9.8p 0.5p11.4p11.9p

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 Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards ("FRS102"). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 by the Association of Investment Companies ("AIC SORP").

Other than revaluation movements arising on investments held at fair value through the Income Statement, there were no differences between the return as stated above and at historical cost.

STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2015

  Called up share capital Capital
Redemption
reserve
Share
premium
Merger
reserve
Special
reserve
Capital
reserve
- unrealised
Capital
reserve
- realised
Revenue
reserve
Total
  £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
          
For the year ended 31 December 2015       
           
At 1 January
2015
 

1,678
4652,9081,8822,9914,9088,713224  

23,769
Issue of new
shares
 

45
 

-
 

596
 

-
 

-
 

-
 

-
 

-
 

641
Issue of new
shares under
Dividend
Reinvestment
Scheme
 

 

 

 

19
 

 

 

 

-
 

 

 

 

239
 

 

 

 

-
 

 

 

 

-
 

 

 

 

-
 

 

 

 

-
 

 

 

 

-
 

 

 

 

258
Share issue
costs
 

-
 

-
 

-
 

-
 

(9)
 

-
 

-
 

-
 

(9)
Purchase of
own shares
(9)9--(114)---(114)
Expenses charged
to capital
 

-
 

-
 

-
 

-
 

-
 

-
 

(814)
 

-
 

(814)
Gains on
investments
 

-
 

-
 

-
 

-
 

-
 

3,152
 

754
 

-
 

3,906
Realisation of
revaluations from
prior years
 

 

-
 

 

-
 

 

-
 

 

-
 

 

-
 

 

(3,627)
 

 

3,627
 

 

-
 

 

-
Transfer between
reserves
 

-
 

-
 

-
 

(54)
 

(239)
 

-
 

293
 

-
 

-
Revenue return-------262262
Dividends paid------(3,441)-(3,441)
           
At 31
December 2015
 

1,733
 

474
 

3,743
 

1,828
 

2,629
 

4,433
 

9,132
 

486
 

24,458
             
For the year ended 31 December 2014        
           
At 1 January
2014
 

1,537
4468561,8826,9508,6833,118505  

23,977
Issue of new
shares
 

112
 

-
 

1,415
 

-
 

-
 

-
 

-
 

-
 

1,527
Issue of new shares
under Dividend
Reinvestment
Scheme
48  

 

 

-
 

 

 

637
 

 

 

-
 

 

 

-
 

 

 

-
 

 

 

-
 

 

 

-
 

 

 

685
Share issue
costs
 

-
 

-
 

-
 

-
 

(8)
 

-
 

-
 

-
 

(8)
Purchase of
own shares
(19)19--(319)---(319)
Expenses charged
to capital
------(1,374)-(1,374)
Gains on
investments
-----3814,510-4,891
Realisation of
revaluations from
prior years
 

-
 

-
 

-
 

-
 

-
 

(4,156)
 

4,156
 

-
 

-
Transfer between
reserves
----(3,632)-3,632--
Revenue return-------147147
Dividends paid------(5,329)(428)(5,757)
          
At 31
December 2014
1,6784652,9081,8822,9914,9088,71322423,769

BALANCE SHEET
at 31 December 2015

        2015     2014
    £'000 £'000   £'000 £'000
Fixed assets            
Investments     20,189  19,295
          
Current assets         
Debtors    1,757  3,704 
Cash at bank and in hand    3,113  1,562 
     4,870  5,266 
          
Creditors: amounts falling due within one year    (601)  (792) 
          
Net current assets     4,269  4,474
          
Net assets     24,458  23,769
            

Capital and reserves

          
Called up share capital     1,733    1,678
Capital redemption reserve     474    465
Share premium     3,743    2,908
Merger reserve     1,828    1,882
Special reserve     2,629    2,991
Capital reserve - unrealised     4,433    4,908
Capital reserve - realised     9,132    8,713
Revenue reserve     486    224
            
Total equity shareholders' funds     24,458    23,769
            
Basic and diluted net asset value per share     70.6p    70.8p

STATEMENT OF CASH FLOWS
for the year ended 31 December 2015

      2015   2014
      £'000   £'000
   
 
     
Net cash outflow from operating activities    (757) (431)
        
Cash flow from investing activities       
Purchase of investments    (2,677) (3,880)
Proceeds from disposal of investments    7,509 8,362
Net cash inflow from investing activities    4,832 4,482
        
Equity dividends paid    (3,183) (5,105)
        
Net cash inflow/(outflow) before financing    892 (1,054)
        
Cash flows from financing       
Proceeds from share issue    773 1,379
Purchase of own shares    (114) (319)
Net cash inflow from financing    659 1,060
        
Increase in cash    1,551 6

NOTES TO THE ACCOUNTS
for the year ended 31 December 2015

1. Accounting policies

Basis of accounting
The Company has prepared its financial statements in accordance with the Financial Reporting Standard 102 ("FRS102") and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies" revised November 2014 ("SORP").

This is the first period in which the financial statements have been prepared under FRS102, however, it has not been necessary to restate comparatives as the treatment previously applied aligns with the requirements of FRS102. As a result, there are no reconciling differences between the previous financial reporting framework and the current financial reporting framework and the comparative figures represent the position under both current and previous financial reporting frameworks.

The Company implements new Financial Reporting Standards issued by the Financial Reporting Council 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.

Fixed asset investments
Investments are designated as "fair value through profit or loss" assets, upon acquisition, due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed, with a view to selling after a period of time, in accordance with the Company's documented investment policy.

Key sources of estimation uncertainty
Of the Company's assets measured at fair value, it is possible to determine their fair values within a reasonable range of estimates. 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 FRS 102 sections 11 and 12.

Listed fixed income investments and investments quoted on AIM and the Main Market are measured using bid prices in accordance with the IPEV.

For unquoted instruments, fair value is established using the IPEV. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

· Price of recent investment;
· Multiples;
· Net assets;
· Discounted cash flows or earnings (of underlying business);
· Discounted cash flows (from the investment); and
· Industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

Where an investee company has gone into receivership, liquidation, or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised. Permanent impairments in the value of investments are deemed to be realised losses and held within the Capital Reserve - Realised.

Key sources of estimation uncertainty (continued)
Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment expensed.

It is not the Company's policy to exercise 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 and FRS102 sections 14 and 15 that do 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 have been established, normally the ex-dividend date.

Interest income is accrued on a timely basis, by reference to the principal outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection.

Expenses
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:

·Expenses which are incidental to the acquisition of an investment are deducted as a capital item.

·Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.

·Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted the policy of allocating investment manager's fees, 75% to capital and 25% to revenue as permitted by the SORP. The allocation is in line with the Board's expectation of long term returns from the Company's investments in the form of capital gains and income respectively.

· Performance incentive fees arising are treated as a capital item.

Taxation
The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company's effective rate of tax for the accounting period.

Due to the Company's status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments which arise.

Deferred taxation is not discounted and is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts.

Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.

Issue costs
Issue costs in relation to the shares issued are deducted from the share premium account.

2. Basic and diluted return per share

 

2015

 

2014
       
Return per share based on:    
Net revenue return for the financial year (£'000)262 147
Net capital gains for the financial year (£'000)3,092 3,517
Total return for the financial year (£'000)3,354 3,664
    
Weighted average number of shares in issue34,356,056 30,865,652

As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share. The return per share disclosed, therefore, represents both basic and diluted return per share.

3. Basic and diluted net asset value per share

 

2015 2014
Shares in issue Net asset value Net asset value
     
 

2015
 

2014
  Pence
per share
   

£'000
  Pence
per share
   

£'000

 

 

                 

Ordinary Shares

34,660,694

33,561,433

  70.6 24,458 70.8 23,769

As the Company has not issued any convertible securities or share options, there is no dilutive effect on net asset value per share. The net asset value per share disclosed therefore represents both basic and diluted net asset value per share.

4. Principal risks
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 risks arising from the Company's operations are:

· Investment risks;
· Credit risk; and
· 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 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.

Investment risks
As a VCT, the Company is exposed to investment risks in the form of potential losses that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments through 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. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The key investment risks to which the Company is exposed are:

· Investment 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.

Investment price risk
Investment 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 investment 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. 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 notes and fixed interest investments attract interest predominately at fixed rates.

Interest rate risk profile of financial assets and financial liabilities
There are three levels of interest which are attributable to the financial instruments as follows:

· "Fixed rate" assets represent investments with predetermined yield targets and comprise fixed interest and loan note investments.
· "Floating rate" assets predominantly bear interest at rates linked to Bank of England base rate and comprise cash at bank and Cash Trust investments.
· "No interest rate" assets do not attract interest and comprise equity investments, loans and receivables (excluding cash at bank) and other financial liabilities.

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.

The Bank of England base rate stood at 0.5% per annum throughout the year. Any potential change in the base rate, at the current level, would have an immaterial impact on the net assets and total return of the Company.

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 notes in investee companies, investments in fixed income securities, cash deposits and debtors.

The Manager manages credit risk in respect of loan notes with a similar approach as described under investment risks above. In addition the credit risk is partially mitigated by registering floating charges over the assets of certain investee companies. The strength of this security in each case is dependent on the nature of the investee company's business and its identifiable assets. The level of security is a key means of managing credit risk. Similarly, the management of credit risk associated interest, dividends and other receivables is covered within the investment management procedures.

Cash is mainly held at Royal Bank of Scotland plc, with a balance also maintained at Bank of Scotland plc, both of which are A-rated financial institutions and ultimately part-owned by the UK Government. 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 can be 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 normally has a relatively low level of creditors (2015: £428,000, 2014: £759,000) and has no borrowings. 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. 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

Michael Jackson is a Director of Elderstreet Investments Limited which provides investment management services to the Company. During the year, £472,000 (2014: £511,000) was due in respect of these services. Performance incentive fees totalling £454,000 (2014: £991,000) were due to Elderstreet Investments Limited in respect of the year under review. £454,000 (2014: £642,372) was outstanding at the year-end.

Nicholas Lewis is a partner of Downing LLP which provides administration services to the Company. During the year, £50,000 (2014: £50,000) was due to Downing LLP in respect of these services.

As a result of the recent VCT rule changes, the Company was unable to convert its existing loans in SnackTime plc, which were invested some years before the rule changes. Under the new rules, the conversion of these loans would constitute a breach which would jeopardise the Company's VCT status. This issue was resolved after taking advice from two specialist VCT tax advisers, and a resulting related party transaction, whereby the VCT sold its loans to the Investment Manager, who then converted these loans into equity, resulted in SnackTime being able to take further investment from third parties. Under the term of the transaction, the Company will received a total of £50,000 in cash from the Investment Manager and also sums equal to 75% of any disposal proceeds that the Investment Manager receives on the shares arising from the conversion.

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 December 2015, but has been extracted from the statutory financial statements for the year ended 31 December 2015, which were approved by the Board of Directors on 26 April 2016 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 year ended 31 December 2014 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 31 December 2015 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at Ergon House, Horseferry Road , London, SW1P 2AL and will be available for download from www.downing.co.uk.




This announcement is distributed by NASDAQ OMX Corporate Solutions on behalf of NASDAQ OMX Corporate Solutions clients.

The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.

Source: Elderstreet VCT plc via GlobeNewswire

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