Elderstreet VCT plc : Final Results (correction)

28 april 2017

Elderstreet VCT plc
Final Results (correction)
28 April 2017

The announcement released by Elderstreet VCT plc entitled "Final Results" on 27 April at 5:17pm incorrectly stated the record date for the dividend as 20 May 2017.

The announcement should have shown the correct record date of 19 May 2017 . 

The remainder of the announcement is unchanged.

The full corrected text of the announcement is as follows: -

FINANCIAL SUMMARY

	2016 pence		2015 pence
Net asset value per share ("NAV")	62.8		70.6
Cumulative dividends paid since launch	96.0		91.0
Total return (NAV plus cumulative dividends paid per share)	158.8		161.6
Dividends in respect of financial year ended 31 December 2016
Interim dividend paid per share	2.5		2.5
Special dividend paid per share	-		5.0
Final dividend per share (payable on 30 June 2017)	1.5		2.5
	4.0		10.0

CHAIRMAN'S STATEMENT
I am pleased to present the Company's Annual Report for the year ended 31 December 2016.

It has been a year with significant developments for your Company. In November we announced that the Company's manager, Elderstreet Investments, had negotiated a significant co-investment agreement with Draper Esprit, a leading venture capital provider in the high-growth technology sector, which will lead to sharing deal flow, management experience and investment opportunities going forward. Draper Esprit also acquired a 30% stake in Elderstreet Investments, with an option to purchase the remainder of the company in the future.  The Board is fully supportive of this arrangement which subsequently allowed the Company to successfully launch a major new fundraising.  The Company now has a significant level of new funds available to take advantage of the flow of new opportunities and, over the coming years, we expect to see the portfolio become refocussed on sectors that can deliver high growth.

Net asset value and results
At 31 December 2016, the Company's Net Asset Value per share ("NAV") stood at 62.8p, which represents a fall of 2.8p (3.9%) over the year after adding back dividends of 5.0p 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) now stands at 158.8p compared to the original cost (net of income tax relief) of 80.0p per share.

The loss on ordinary activities after taxation for the year was £1.0 million (2015: £3.4 million profit), comprising a revenue return of £222,000 (2015: £262,000) and a capital loss of £1.3 million (2015: £3.1 million return).

Venture capital investments
In terms of new investment activity, the Company invested a total of £1.4 million in two existing portfolio companies; Concorde and AngloINFO.

One new Company was added to the portfolio during the year. An investment of £499,000 was made into Ridee Limited, which trades as Jinn, a fast growing 24/7 last mile urban logistics and delivery platform that allows users to order anything they want from local stores and restaurants.

During the year, the Company also benefitted from further deferred proceeds of £440,000 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 £432,000.

At the year end, the Company held a portfolio of 23 venture capital investments valued at £19.2 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 valuation adjustments to the unquoted investments. The main movements are summarised as follows; Lyalvale Express Limited was increased by £571,000 as the investment continues to exceed expectations and Fords Packaging Topco Limited was uplifted by £556,000, following strong results in the past period.  These increases were offset by a £1.3 million write down in the value of Baldwin & Francis Limited, a manufacturer of equipment for the mining, rail, oil and gas industries. The company generally works on large contracts, and delays to a number of new orders has significantly impacted the business.

The management of Lyalvale Property Limited had been optimistic that planning permission would be obtained in respect of some development land that it owns. Unfortunately, ultimately planning permission was not granted and this has resulted in a write down of £786,000. The valuation of Ridee Limited has also been reduced by £149,000.

A number of the Company's investments are quoted on AIM and experienced significant movements over the year. The investment in Fulcrum Utility Services Limited increased in value by £1 million, Access Intelligence plc fell by £299,000, Interquest Group plc by £188,000 and Proxama  plc by £276,000.

Overall the portfolio had net unrealised losses for the year of 1.3 million.

Fixed interest investments
The Company held a small portfolio of fixed interest investments which is managed by Smith & Williamson Investment Management Limited. The portfolio, valued at £1.6 million at the year end, generated investment income of £17,000 during the year and unrealised capital gains of £9,000 were recognised.

The remaining investments in the fixed interest portfolio was sold after year end for £1.6 million.

Management
As mentioned above, in November it was announced that Draper Esprit plc, a leading AIM quoted venture capital firm, had acquired a stake in Elderstreet Investments Limited, the Company's investment manager. At the same time, Elderstreet Investments put in place a co-investment agreement with Draper Esprit plc, which will provide the VCT with the benefit of deal flow and the considerable management experience of Draper Esprit.

The Draper Esprit team has been involved in investing over £800 million into more than 200 technology businesses and also in creating businesses with a total aggregate value of over £6.4 billion of which over £5 billion has been exited. Draper Esprit currently manages institutional and EIS funds so is already familiar with many of the restrictions that apply to VCT investments.

The Board believes that Draper Esprit will bring considerable benefits to the VCT and looks forwards to working with them as the VCT moves into a new phase.

Fundraising activities
As discussed above, in December 2016, the Company launched a new offer for subscription seeking to raise up to a total of £10 million, with an option to increase the maximum level to £20 million. The offer has been well received by investors and, to date, has raised £15 million and allotted 21.7 million shares at an average share price of 64.99p.

Dividends
In recent years the Board has targeted annual dividends of between 4 and 5 pence per share. In view of the significant level of new funds raised in the fundraising and the expected steady shift of the portfolio towards less mature investments, the Board expects that annual dividends will be slightly reduced over the coming years and has set a revised target of between 3 and 4 pence per share. The Board believes that the upsides of having a larger asset base and greater exposure to the potentially high growth investments that Draper Esprit can introduce outweighs any short term potential reduction compared to the historic yields.

With this in mind, the Board is proposing a final dividend of 1.5p per share to be paid on 30 June 2017 to Shareholders on the register at 19 May 2017. This will bring total dividends paid in respect of the year to 4.0p (2015: 10.0p), equivalent to a yield for a 40% tax payer of 10.9% p.a. based on the share price at the date of this report.

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 217,500 shares at an average price of 63.6p 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.

Auditors
In accordance with new regulations, the Company is obliged to review its auditors and undertake a competitive tender process at least every 10 years.

As BDO (and its predecessor firm) has been the Company's auditor for the last 10 years, the Audit Committee has undertaken such a review this year.
The Audit Committee approached four audit firms seeking proposals to be considered for appointment as the Company's auditors. Two formal proposals were considered and ultimately the Committee decided to re-appoint BDO, the existing auditors. The Committee is satisfied that BDO has suitable experience and resources to provide a good quality audit service and have indicated that future audit fees will be maintained at a reasonable level. A proposal for their re-appointment will be put to Shareholders at the forthcoming AGM.

Year end and Company name
In view of the changes to the management, the Board is considering changing the Company's year end from 31 December to 31 March to align it better with other Draper Esprit funds. We will update Shareholders as and when any final decision is made. The Board is also giving consideration to whether it might be appropriate to change the Company's name in due course. In order to give the Board some flexibility to this end, a resolution will be proposed at the forthcoming AGM to amend the Articles of Association to give the Board the power to change the Company name without the requirement for a Shareholder Circular. Naturally we will ensure that any decision to change the Company's name is communicated to all Shareholders at that time.

Annual General Meeting ("AGM")
The next AGM of the Company will be held on 23 June 2017 at 20 Garrick Street, London, WC2E 9BT at 11:00 a.m.

Notice of the meeting is at the end of this document. Four items of Special Business are proposed; one ordinary resolution and two special resolutions in relation to the allotment of shares and share buybacks and one special resolution in respect of the amendments to the Articles of Association described above.

Outlook
A small number of setbacks in the portfolio have held back performance over the last year. However, the majority of the portfolio has performed reasonably well and the portfolio continues to include a number of investments that have prospects to deliver good outcomes for Shareholders.

With a significant level of new funds now available to invest, we expect to see a higher level of investment activity over the coming year and a number of new companies being introduced into the portfolio by Draper Esprit. The ongoing impact of the new VCT regulations and the expected dealflow from Draper Esprit is likely to result in a gradual increase in the risk profile of the portfolio over time. However, we believe that the enhanced management team and resources provide an excellent foundation for this new phase of the Company and have the potential to continue delivering the levels of performance that Shareholders have benefitted from in recent years.

David Brock
Chairman
26 April  2017

INVESTMENT MANAGER'S REPORT
Over the year the Company recorded a decrease in the total return of 2.8p (net asset value including cumulative dividends), from 161.6p to 158.8p including paying dividends of 5.0p per share. NAV per share decreased from 70.6p to 62.8p.

During the year, we invested £1.9 million as we continued to support the existing portfolio companies, and completed one new investment. Two follow-ons were made into Concorde Solutions Limited, and AngloINFO Limited, and one new investment was completed into Ridee Limited. The core portfolio has had a mixed performance.

Since the period end, the planning permission for Lyalvale Property Limited, which was sent to central government level for a decision, was declined post the year-end. This has resulted in a reduction of valuation of £786,000. Baldwin & Francis Limited ("BFH") has also suffered a decline in trading as orders that were expected to be received have been delayed. BFH operates in the rail, oil and gas, and mining markets, the latter two of which are still suffering from the decline in commodity prices. Your Manager has taken action to turn around the decline and made a provision of £1.3 million against the valuation.

On a positive note trading has performed better than expected in Fords Packaging Topco Limited ("Fords") and Lyalvale Express Limited which have been valued up by £556,000 and £571,000 respectively.

We flagged in last years' report that Fords innovation and investment in R&D could lead to better future trading performance. We have seen this come through in record orders for new machines as they enter their 2017/18 trading year. Post the year end Fords repaid the Elderstreet VCT loan and is now debt free.

A new investment of £499,000 was made into Ridee Limited (trading as Jinn ( www.jinnapp.com ), a digital platform operating in the fast growing but competitive space of last mile delivery from restaurants and local stores.

A further investment of £750,000 was made in Concorde in April 2016 to support the further development of the business, which made progress following that funding round and since the year end has been sold generating proceeds slightly in excess of the year end carrying value.

Further follow-on investments totalling £643,000 were made into AngloINFO Limited during the year. The launch of the new website has taken longer than expected but a new mobile compliant digital platform is now live and the short to medium term target is to get the company to breakeven. We continue to believe that the business has reasonable growth prospects.

The highlight of the AIM portfolio was our investment in Fulcrum Utility Services Limited which rose by £1 million year on year as the company reported six monthly pre-tax profits of £3.1 million versus £1.6 million in the previous year.

Access Intelligence plc continues to successfully integrate the business acquired in 2015.

Generally, it is worth noting that in nine out of the top ten companies by value at 31 December 2016 the Manager has at least one board seat or observer rights and is very actively involved with these businesses.

Escrow payments from two exits were received in the year totalling £1.9 million, of which £1.5 million was recognised in 2015 in relation to Smart Education Limited.

On the corporate front, your Manager, with the support of the VCT Board, sold a minority stake to Draper Esprit plc, who also have an option to acquire 100% in the future.

Draper Esprit is one of the leading venture capital investors involved in the creation, funding and development of high-growth technology businesses with an emphasis on digital technologies in the UK, the Republic of Ireland and Europe. Draper Esprit floated on the AIM market in June 2016 and at the time of writing has a market capitalisation of £144.7 million. The Manager has agreed a significant co-investment agreement with Draper Esprit to share deal flow, management experience, and investment opportunities going forward.

We are delighted to report that the new fundraising round of £10 million for this season is performing well and a further over allotment of £10 million has been released. At the time of writing this new fundraising had raised £15 million.

In summary, although there have been mixed results in the core portfolio over the year, we remain cautiously optimistic, and confident, given the co-investment agreement with Draper Esprit, that we can find suitable new opportunities to invest in and refresh the portfolio.

Elderstreet Investments Limited
26 April 2017

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments were held at 31 December 2016. 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 Limited	1,915	3,903		571	16.9%
Fords Packaging Topco Limited	2,883	3,795		556	16.4%
Access Intelligence plc *	2,333	2,989		(128)	13.0%
Fulcrum Utility Services Limited *	500	2,146		1,000	9.3%
AngloINFO Limited	2,277	1,569		(299)	6.8%
Concorde Solutions Limited	1,650	1,525		(142)	6.6%
Baldwin & Francis Limited	1,534	912		(1,340)	4.0%
Macranet Limited	863	863		-	3.7%
Ridee Limited	499	350		(149)	1.5%
Cashfac plc	260	328		-	1.4%
	14,714	18,380		69	79.6%
Other venture capital investments
Servoca plc *	333	228		(96)	1.0%
Interquest Group plc *	226	156		(188)	0.7%
Lyalvale Property Limited	300	128		(786)	0.6%
Proxama plc*	860	123		(276)	0.5%
Uvenco UK plc *	1,326	72		(18)	0.3%
Sift Digital Limited	125	48		(8)	0.2%
Sift Limited	125	42		(14)	0.2%
SparesFinder Limited	103		34	-	0.1%
The Kellan Group plc *	657		7	(4)	0.0%
Infoserve Group plc	127		-	-	-
The National Solicitors Network Limited	501		-	-	-
The QSS Group Limited	268		-	-	-
RB Sport & Leisure Holdings plc	188		-	-	-
	5,139		838	(1,390)	3.6%
Fixed income securities
United Kingdom 1.25% Gilt 22/07/2018	892		925	8	4.0%
United Kingdom 1.00% Gilt 07/09/2017	614		616	1	2.7%
S&W Investment Funds Cash Fund	10		10	-	0.0%
	1,516		1,551	9	6.7%
	21,369		20,769	(1,312)	89.9%
Cash at bank and in hand			2,302		10.1%
Total investments			23,071		100.0%

All venture capital investments are unquoted unless otherwise stated
*    Quoted on AIM

Investment movements for the year ended 31 December 2016

ADDITIONS

	£'000
Venture capital investments
Concorde Solutions Limited	750
AngloINFO Limited	643
Ridee Limited	499
	1,892

DISPOSALS

	Cost	Value at 01/01/16	Proceeds	Profit vs cost	Realised profit
	£'000	£'000	£'000	£'000	£'000
Retention proceeds
Wessex Advanced Switching Products Limited	-	-	440	440	440
Smart Education Limited	-	-	5	5	5
	-	-	445	445	445

 

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), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS102). 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 the 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; and
· prepare a director's report, a strategic report and director's remuneration report which comply with the requirements of the Companies Act 2006.

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.

The maintenance and integrity of the Company's website is the responsibility of the Directors.  The Directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

By order of the Board

Grant Whitehouse
Secretary of Elderstreet VCT plc
26 April 2017

INCOME STATEMENT
for the year ended 31 December 2016

		2016				2015
		Revenue	Capital	Total		Revenue	Capital	Total
		£'000	£'000	£'000		£'000	£'000	£'000
Income		603	-	603		688	-	688
Gains on investments		-	(867)	(867)		-	3,906	3,906
		603	(867)	(264)		688	3,906	4,594
Investment management fees		(125)	(375)	(500)		(118)	(354)	(472)
Performance incentive fees		-	-	-		-	(454)	(454)
Other expenses		(256)	(13)	(269)		(308)	(6)	(314)
Return/(Loss) on ordinary activities before tax		222	(1,255)	(1,033)		262	3,092	3,354
Tax on total comprehensive income and ordinary activities		-	-	-	-	-	-	-
Return/(Loss) attributable to equity shareholders, being total comprehensive income for the year		222	(1,255)	(1,033)		262	3,092	3,354
Basic and diluted return/(loss) per share		0.6p	(3.6p)	(3.0p)		0.8p	9.0p	9.8p

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").

STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2016

	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 2016
At 1 January 2016	1,733	474	3,743	1,828	2,629	4,433	9,132	486	24,458
Total comprehensive income	-	-	-	-	-	(1,312)	57	222	(1,033)
Transfer between reserves	-	-	-	-	(423)	40	383	-	-
Transactions with owners
Issue of new shares	130	-	1,709	-	-	-	-	-	1,839
Share issue costs	-	-	-	-	(9)	-	-	-	(9)
Purchase of own shares	(11)	11	-	-	(139)	-	-	-	(139)
Dividends paid	-	-	-	-	-	-	(1,484)	(372)	(1,856)
At 31 December 2016	1,852	485	5,452	1,828	2,058	3,161	8,088	336	23,260
For the year ended 31 December 2015
At 1 January 2015	1,678	465	2,908	1,882	2,991	4,908	8,713	224	23,769
Total comprehensive income	-	-	-	-	-	3,152	(60)	262	3,354
Realisation of revaluations from prior years	-	-	-	-	-	(3,627)	3,627	-	-
Transfer between reserves	-	-	-	(54)	(239)	-	293	-	-
Transactions with owners
Issue of new shares	45	-	596	-	-	-	-	-	641
Issue of new shares under DRIS*	19	-	239	-	-	-	-	-	258
Share issue costs	-	-	-	-	(9)	-	-	-	(9)
Purchase of own shares	(9)	9	-	-	(114)	-	-	-	(114)
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

*Dividend Reinvestment Scheme

BALANCE SHEET
at 31 December 2016

				2016			2015
			£'000	£'000		£'000	£'000
Fixed assets
Investments				20,769			20,189
Current assets
Debtors			342			1,757
Cash at bank and in hand			2,302			3,113
			2,644			4,870
Creditors: amounts falling due within one year			(153)			(601)
Net current assets				2,491			4,269
Net assets				23,260			24,458
Capital and reserves
Called up share capital				1,852			1,733
Capital redemption reserve				485			474
Share premium				5,452			3,743
Merger reserve				1,828			1,828
Special reserve				2,058			2,629
Capital reserve - unrealised				3,161			4,433
Capital reserve - realised				8,088			9,132
Revenue reserve				336			486
Total equity shareholders' funds				23,260			24,458
Basic and diluted net asset value per share				62.8p			70.6p

STATEMENT OF CASH FLOWS
for the year ended 31 December 2016

	2016		2015
	£'000		£'000
Cash flow from operating activities
(Loss)/profit on ordinary activities before taxation	(1,033)		3,354
Losses/gains on investments	867		(3,906)
Decrease/(increase) in debtors	1,415		(20)
Decrease in creditors	(448)		(185)
Net cash inflow/(outflow) from operating activities	801		(757)
Cash flow from investing activities
Purchase of investments	(1,892)		(2,677)
Proceeds from disposal of investments	445		7,509
Net cash (outflow)/inflow from investing activities	(1,447)		4,832
Cash flow for financing activities
Equity dividends paid	(1,856)		(3,183)
Proceeds from share issue	1,830		773
Purchase of own shares	(139)		(114)
Net cash outflow from financing activities	(165)		(2,524)
Net (Decrease)/increase in cash	(811)		1,551
Cash and cash equivalents at start of year	3,113		1,562
Cash and cash equivalents at end of year	2,302		3,113
Cash and cash equivalents comprise
Cash at bank and in hand	2,302		3,113
Total cash and cash equivalents	2,302		3,113

NOTES TO THE ACCOUNTS
for the year ended 31 December 2016

1. Accounting policies

General information
Elderstreet VCT plc ("the Company") is a venture capital trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales.  The Company is a premium listed entity on the London Stock Exchange.

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 and Venture Capital Trusts" issued November 2014 ("SORP").  The Company implements new Financial Reporting Standards issued by the Financial Reporting Council when required.  There were no new Standards issued during the year.

Presentation of Income Statement
In order to better reflect the activities of a venture capital trust, and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Investments
Investments are designated as "fair value through profit or loss" assets, 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.

Judgement in applying accounting policies and 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 FRS102 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.

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 special reserve account.

2. Basic and diluted return per share

	2016		2015
Return per share based on:
Net revenue return for the financial year (£'000)	222		262
Net capital (losses)/gains for the financial year (£'000)	(1,255)		3,092
Total return for the financial year (£'000)	(1,033)		3,354
Weighted average number of shares in issue	35,214,342		34,356,056

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 return per share

			2016				2015
Shares in issue			Net asset value				Net asset value
2016		2015		Pence per share		£'000		Pence per share		£'000
Ordinary Shares	37,034,366	34,660,694		62.8		23,260		70.6		24,458

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:

· Market 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. A summary of the interest rate profile of the Company's investments is shown below.

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 decreased from 0.5% per annum to 0.25% per annum on 4 August 2016. 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 market 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 (2016: £153,000, 2015: £428,000) 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, £500,000 (2015: £472,000) was due in respect of these services. No performance incentive fees were due to Elderstreet Investments Limited in respect of the year under review (2015: £454,000). £454,000 was outstanding at 31 December 2015.

Nicholas Lewis is a partner of Downing LLP which provides administration services to the Company. During the year, £50,000 (2015: £50,000) was due to Downing LLP in respect of these services.

During 2015, as a result of changes to the VCT rules, the Company was unable to convert its existing loans in Uvenco UK plc (formerly SnackTime plc).  Following advice from specialist VCT advisors, the Company sold the loans to the Investment Manager, who converted the loans into equity.  Under the terms of the transaction, the Company is due sums equal to 75% of any disposal proceeds that the Investment manager may receive on the shares arising from the conversion.  The market value of those shares decreased by £17,000 and accordingly the debtor due from the Investment Manager was reduced in 2016 by £12,697, being 75% of the value adjustment.

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 2016, but has been extracted from the statutory financial statements for the year ended 31 December 2016, which were approved by the Board of Directors on 27 April 2017 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 2015 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 2016 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.

---