Downing Distribution VCT 1 plc : Final Results

Downing Distribution VCT 1 plc
Final results for the year ended 31 March 2012

CHAIRMAN'S STATEMENT

I present the Annual Report and Accounts for the year ended 31 March 2012. While the weak economy has provided challenges for many portfolio companies, difficult market conditions have also contributed to lower share prices, resulting in a fall in the Company's net asset value per share ("NAV") over the year.

Net asset value
The NAV at 31 March 2012 stood at 77.9p, a decrease of 9.1p (or 9.9%) over the 12 month period (after taking account of 5.0p per share of dividends paid during the year). By way of comparison, FTSE AIM All-Share Index fell by 11.8% over the same period.

The performance in the first half of the year was very disappointing, although there was some recovery in the second half with an increase in NAV of 2.0p per share.

Share realisation and re-investment scheme
The share realisation and re-investment scheme ("SRRP") was well received by Shareholders with 38% of the shares in issue being tendered and proceeds reinvested shortly after the year end in April. A further £393,000 was received in respect of the top-up share offer, with shares being issued after the year end at 77.9p per share. All Shareholders who participated in the SRRP should have received new share certificates and income tax certificates in April shortly after the transactions dates. If you have not yet received these documents, you should contact Downing.

Venture capital investments
At the year end, the portfolio comprised 35 investments with a total value of £13 million. 21 investments were quoted and 14 unquoted.

During the year, the Company continued to refocus the portfolio in line with the investment policy adopted when the Company merged and changed manager in April 2010. The Company undertook a number of disposals, generating proceeds of £5.2 million. New and follow-on investments of £1.7 million were also made.

Several quoted portfolio companies saw reasonably large falls in value over the year. Ludorum was the largest faller, accounting for a loss of £439,000. The Manager believes that the underlying business is continuing to make good progress and that the fall in share price is more related to market conditions. Other quoted investments that experienced falls were Tristel, Keycom, and Plastics Capital, while Accumuli and IDOX bucked the trend by showing share price growth over the year.

Within the unquoted investments, the failure of DoubleTake Studios resulted in the largest fall in value, with a full provision being made. FirstCare, West Tower, and Cadbury House also experienced significant reduction in value.

In total, the venture capital portfolio made net unrealised losses of £2.0 million and realised gains of £193,000 over the year.

Full details of the Company's investment activities, including the performance of the portfolio, are set out within the Investment Manager's Report and Review of Investments.

Fixed income investment
The Company held one, non-qualifying, fixed income investment at the year end, with a value of £301,000. The investment recorded an unrealised loss of £56,000 during the year.

Results
The total return on ordinary activities for the year to 31 March 2012, as shown in the Income Statement, is a loss of £2.0 million, comprising a £49,000 revenue return, and a £2.1 million capital loss.

Dividends
The Company paid an interim dividend of 2.5p per share on 30 March 2012 to Shareholders on the register at 2 March 2012.

A final dividend is being proposed of 2.5p per share to be paid, subject to Shareholder approval at the AGM, on 28 September 2012 to Shareholders on the register at 31 August 2012.

Share buybacks
The Company has a policy of purchasing its own shares that become available in the market. The Board has currently set a price of a 15% discount to NAV for such purchases but continues to monitor the market in the Company's shares and may make adjustments to the policy as appropriate. Such purchases will be subject to VCT regulations, company law, liquidity considerations and the Listing Rules.

During the year, the Company repurchased 1,011,909 Ordinary Shares of 1p each for an aggregate consideration of 69.6p per share (approximately equal to a 15% discount to the most recently published NAV) and representing 4.9% of the issued Ordinary Share capital held at 1 April 2011. These shares were subsequently cancelled.

Annual General Meeting

The next AGM of the Company will be held at 10 Lower Grosvenor Place, London SW1W 0EN at 11:30 a.m. on 18 September 2012.

Three items of special business are proposed: one ordinary and one special resolution in relation to the allotment of shares; and a special resolution to renew the authority to allow the Company to make market purchases of the Company's shares.

Outlook
Over the coming year, in line with the Company's strategy, the Manager will be seeking opportunities to continue to refine the quoted portfolio to focus on investments where the Manager can have a reasonable level of influence and, in respect of the unquoted portfolio, on investments which own substantial assets and can generate a steady yield. The Company is, however, fully invested and funds for new investments will only be available from further realisations from the existing portfolio.

Markets remain volatile and no significant recovery in economic conditions is expected in the short term. As a result, close monitoring of the existing portfolio will continue to be a very important part of the Manager's role over the next 12 months.

Christopher Powell
Chairman

INVESTMENT MANAGER'S REPORT

Introduction
The Company saw a reasonable level of investment activity during the year to 31 March 2012, as a significant level of funds was raised from the existing portfolio to meet cash requirements for dividends, share buybacks and a number of follow-on investments.

Investment activity
Over the year, £2.6 million was raised from the quoted portfolio, divesting from eight companies in their entirety and partially realising another eight investments.

The Company made three new investments in quoted companies, two of which were into existing portfolio companies.

£101,000 was invested into Tracsis plc. The company provides optimisation software for the rail industry. A follow-on investment of £106,000, at 44p per share, was made into Boomerang Plus plc, which creates programmes for television, radio and the web.  Since the year end there has been an offer for the entire issued share capital in Boomerang, at 77p per share, which has been accepted by shareholders of the company.

A loan note investment in Ludorum was also refinanced during the year, resulting in the redemption of an original loan note of £775,000 at par and a new loan note investment of £682,000 being put in place.

Two companies within the quoted portfolio were also the subject of takeovers. Atlantic Global realised a gain for the year of £83,000. IS Pharma plc was subject to a merger with Sinclair Pharma plc and the resulting share-for-share exchange gave rise to a realised gain of £23,000.

Material quoted sales included Animalcare Group plc, realising a gain of £50,000 and proceeds of £711,000; IDOX plc; and Sinclair IS Pharma, which produced proceeds but a realised loss of £59,000 for the year. An opportunity to realise the investment in ANS Group plc was taken when it delisted from AIM, although this resulted in a realised loss of £44,000 for the year.

The Company made four unquoted follow-on investments during the year at a total cost of £225,000. The largest new unquoted investment was £180,000 in Hoole Hall Spa and Leisure Club Limited which was part of a reorganisation with other investors which involved a part disposal of the Company's holding in Hoole Hall Country Club Holdings Limited.

Notable unquoted disposals during the year include Brasserie Bar Co Limited and Financial News Publishing Limited which realised gains on disposal of £154,000 and £16,000 respectively.

Portfolio valuation
Over the year, in line with the general market trend, many of the Company's quoted investments saw their share prices fall. The FTSE AIM All Share Index was down 11.8% over the 12 months.

The largest fall in value was Ludorum plc, which is one of the Company's largest investments and includes secured loan stock as part of the investment. Ludorum started to become profitable in the period as merchandising income from "Chuggington", the children's animated TV show, started to develop. Although the share price declined over the year, resulting in an unrealised loss of £439,000, we believe the company still has good prospects.

Keycom, a provider of high speed internet access to military and educational establishments, saw its share price fall during the period, resulting in a fall in value of £307,000. The company has consistently struggled to make headway but recent management changes may refresh the business.

Tristel, the infection and contamination control business, saw its share price drift and value of the investment decrease by £232,000 as its new product sales were slow to materialise.

On a positive note, Accumuli plc, the provider of software for security on networks, experienced continued strength in its share price as previous acquisitions became fully integrated. The valuation increased by £123,000 to £540,000 in the period and, after the year end, it produced a maiden set of results which demonstrated growth across all of its software products.

IDOX plc, a provider of software for Engineering and Government Project Management, also saw its share price improve in the period, reflecting an uplift of £196,000 for the Company to £482,000 or 3.2% of the Company. Again, a successful acquisition strategy has been reflected in trading and significant new contract wins. During the period, the Company also realised a gain of £145,000.

In the unquoted portfolio, the majority of investments performed in line with expectations, however, there were four significant departures which, between them, resulted in a total reduction in value of £1.1 million.

Doubletake Studios Limited operated photographic studios around the country which saw trade adversely affected by the challenging economic environment. This, coupled with the withdrawal of short-term financing arrangements, led to the company being unable to generate sufficient working capital to its creditors and the company entered into administration in November 2011. The valuation was written down by £475,000 to nil as any recovery in value through the administration process is unlikely.

FirstCare Limited fell significantly behind budget as it tried to develop its absence management business. A new management team has recently been appointed and initial trading in 2012 is improving, however, a provision of £275,000 has been made against the investment.

The basis of valuation of the investment in Cadbury House has been reviewed and an adjustment made resulting in a reduction in value of £200,000. The company is, however, performing reasonably in line with plans and has the potential to build value as the business matures.

A full provision of £167,000 was made against the remaining value of the investment in West Tower Holdings Limited which was written down to nil during the year. Although the company's wedding venue is making good progress, the company has a high level of loan stock investment which ranks ahead of Downing Distribution VCT 1 and is likely to absorb all of the value of the business.

A small number of unquoted investments justified an uplift in value over the year, including Future Biogas (SF) Limited, Tramps Nightclub Limited, and Business Control Solutions.

Overall, the portfolio produced net realised gains of £193,000 but unrealised losses of £2.0 million for the year.

Outlook
The Company continues to have a significant exposure to the AIM market and will continue to be impacted by the performance of that market. Over the coming year, opportunities will be sought to further refocus the portfolio in line with the current strategy which we believe can deliver results in the medium term when market conditions and the economy in general start to improve.

Downing LLP

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 March 2012:

All venture capital investments are listed on AIM unless otherwise stated

*Unquoted         **Quoted on the PLUS market       

Investment movements for the year ended 31 March 2012

* Adjusted for purchases in the year
** The consideration for IS Pharma plc was settled by shares in Sinclair Pharma plc

STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Report of the Directors, the Directors' Remuneration Report, the separate corporate governance statement 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 and 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 and to 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 Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the 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.

STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITOR
The Directors in office at the date of the report have confirmed that, as far as they are aware, there is no relevant audit information of which the Auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditor.

By order of the Board

Grant Whitehouse
Company Secretary
Company Number: 3150868

INCOME STATEMENT
for the year ended 31 March 2012

The 'Total' column within the Income Statement represents the profit and loss account of the Company. No operations were acquired or discontinued during the year.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement shown above.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 March 2012

BALANCE SHEET
as at 31 March 2012

CASH FLOW STATEMENT
for the year ended 31 March 2012

NOTES TO THE ACCOUNTS  
for the year ended 31 March 2012

1. Accounting policies

Basis of accounting
The Company has prepared its financial statements under UK Generally Accepted Accounting Practice and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" January 2009 ("SORP").

The financial statements are prepared under the historical cost convention except for the revaluation of certain financial instruments.

The Company implements new Financial Reporting Standards issued by the Accounting Standards Board when required.  

Presentation of income statement
In order to better reflect the activities of a Venture Capital Trust and in accordance with guidance issued by the Association of Investment Companies ("AIC"), supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Investments
Venture capital investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis.   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 FRS 26.

Listed fixed income investments and investments quoted on recognised stock markets are measured using bid prices.  

The valuation methodologies for unlisted instruments used by the IPEV to ascertain the fair value of an investment are as follows:

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

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

Where an investee company has gone into receivership, liquidation, or administration where there is little likelihood of a recovery, the loss on the investment, although not physically disposed of, is treated as being realised.

Gains and losses arising from changes in fair value are included in the income statement as a capital item.

It is not the Company's policy to exercise either significant or controlling influence over investee companies.  Therefore, the results of these companies are not incorporated into the revenue account except to the extent of any income accrued. This is in accordance with the SORP that does not require portfolio investments to be accounted for using the equity method of accounting.

In respect of disclosures required by the SORP for the 10 largest investments held by the Company, the most recent publicly available accounts information, either as filed at Companies House, or announced to the London Stock Exchange, is disclosed.  In the case of unlisted investments, this may be abbreviated information only.

Income
Dividend income from investments is recognised when the Shareholders' rights to receive payment has been established, normally the ex-dividend date.

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

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

* Expenses which are incidental to the acquisition of an investment are deducted from the Capital Account.
* Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.
* Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated and accordingly the investment management fee and finance costs have been allocated 25% to revenue and 75% to capital, in order to reflect the Directors' expected long-term view of the nature of the investment returns of the Company.

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

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

Deferred taxation is not discounted and is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when the obligations or rights crystallise based on tax rates and law enacted or substantively enacted at the balance sheet date.  Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts. Deferred tax assets are only recognised if it is expected that future taxable profits will be available to utilise such assets and are recognised on a non-discounted basis.

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

Share issue costs
Share issue costs have been deducted from the share premium account.

Segmental reporting
The Company only has one class of business and one market.

Acquisitions
Acquisitions are accounted for using the acquisition method.  The purchase consideration is measured at the fair value of equity issued compared to the fair value of the assets and liabilities of the company acquired.  Negative goodwill represents the excess of the fair value of the assets, liabilities and contingent liabilities of the company acquired over the purchase consideration.  Any negative goodwill in excess of the fair value of the non-monetary assets acquired is recognised in the Capital Account within the Income Statement in the periods expected to benefit and is described as "Net gain on acquisition of net assets".

2.Return per share

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.Net asset value per share

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

4.Financial instruments

The Company's financial instruments comprise investments held at fair value through profit and loss, being equity and loan stock investments in quoted companies and unquoted companies, loans and receivables, being cash deposits and short term debtors, and financial liabilities, being  creditors arising from its operations. The main purpose of these financial instruments is to generate cashflow, revenue and capital appreciation for the Company's operations. The Company has no gearing or other financial liabilities apart from short-term creditors and does not use any derivatives.

The fair value of investments is determined using the detailed accounting policy as shown in note 1. The fair value of cash deposits and short-term debtors and creditors equates to their carrying value in the balance sheet.

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 and gains 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 the investment activities undertaken by the 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. Investments in loan stock 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 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.
* "No interest rate" assets do not attract interest and comprise equity investments, non-interest bearing convertible loan notes, loans and receivables (excluding cash at bank) and other financial liabilities.

Interest rate risk profile of financial assets and financial liabilities

* In respect of non-interest bearing loan notes only.

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; and it is currently likely that a change from this level may occur.  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 stock in investee companies, investments in listed fixed interest investments, cash deposits and debtors.  

The Company's financial assets that are exposed to credit risk are summarised as follows:

The Manager manages credit risk in respect of loan stock with a similar approach as described under Investment risks above. Similarly the management of credit risk associated trades awaiting settlement, interest, dividends and other receivables is covered within the investment management procedures.

Cash is mainly held at Royal Bank of Scotland plc and Bank of Scotland plc, both of which are A/A- rated financial institutions and both also 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 are directly attributable to changes in credit risk.

Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. The Company only normally ever has a relatively low level of creditors (2012: £263,000, 2011: £333,000) and has no borrowings. Additionally, most quoted investments held by the Company are considered to be readily realisable.  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 Manager in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.  

5.Post balance sheet events

On 3 February 2012, the Company published an Offer Document in respect of (i) a Tender Offer to buy back up to 20,097,712 ordinary shares of 1p each ("Ordinary Shares") from existing shareholders and (ii) an Open Offer to the issue of up to 22,107,483 Ordinary Shares, together the Share Realisation and Reinvestment Programme ("SRRP").

Between 4 April 2012 and 13 April 2012, the following transactions took place under the SRRP:

• 7,587,377 Ordinary Shares were purchased for cancellation at a price of 77.1p per Ordinary Share. 

• 7,510,952 Ordinary Shares were allotted in respect of the shares tendered for cancellation at a price of approximately 77.9p per Ordinary Share. 

Between 4 April 2012 and 13 April 2012, 504,727 Ordinary Shares were allotted at a price of 77.9p per Ordinary Share as a result of new subscriptions under the open offer.

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 March 2012, but has been extracted from the statutory financial statements for the year ended 31 March 2012 which were approved by the Board of  Directors on 26 July 2012 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 March 2011 have been delivered to  the Registrar of Companies and received an Independent Auditors report which was  unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 31 March 2012 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 10 Lower Grosvenor Place, London SW1W 0EN and will be available for download from and www.downing.co.uk