Elderstreet VCT plc : Final Results

Elderstreet VCT plc
Final results for the year ended 31 December 2013

FINANCIAL SUMMARY

	2013 pence		2012 pence
Net asset value per share ("NAV")	78.0		68.9
Cumulative dividends paid since launch	62.0		58.0
Total return (NAV plus cumulative dividends paid per share)	140.0		126.9
Dividends in respect of financial year
Interim dividend paid per share	2.0		2.0
Final proposed dividend per share (payable on 30 June 2014)	2.0		2.0
	4.0		4.0

CHAIRMAN'S STATEMENT

I am pleased to present the Company's Annual Report for the year ended 31 December 2013. The year has seen continued good progress made by several of the Company's larger investments, resulting in a pleasing uplift in the NAV.

Net asset value, results and dividends
At 31 December 2013, the Company's NAV stood at 78.0p, an increase of 13.1p (19.0%) over the year after adding back dividends of 4.0p 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 140.0p compared to the original cost (net of income tax relief) of 80.p per share.

The return on ordinary activities after taxation for the year was £4.0 million (2012: £2.1 million), comprising a revenue return of £309,000 (2012: £406,000) and a capital return of £3.7 million (2012: £1.7 million).

Subject to Shareholder approval at the forthcoming Annual General Meeting ("AGM"), your Board is proposing to pay a final dividend of 2.0p per share on 30 June 2014 to Shareholders on the register at 30 May 2014. This will bring total dividends in respect of the year to 4.0p (2012: 4.0p), equivalent to a tax-free yield over 5% p.a. based on the share price at the date of this report.

Venture capital investments
The Company's investment activity during the year continued to focus on the existing portfolio, with two follow on investments being made at a total cost of £441,000 and one loan note redemption. In addition, Fords Packaging Systems undertook a share for share restructuring (incorporating a small share buyback) resulting in the Company acquiring an investment in Fords Packaging Top Co Limited in exchange for the investment in Fords Packaging Systems Limited. As a result, £747,000 has been recognised as a realised gain on the disposal of the original holding.

At the year end, the Company held a portfolio of 24 venture capital investments valued at £21.8 million of which the top ten investments are valued at £18.3 million.

The Board have reviewed the investment valuations at the year end and made a number of adjustments. The most notable uplift in the unquoted portfolio is Wessex Advanced Switching Products Limited ("WASP") which has increased in value by £2.3 million. Improved trading at Smart Education and Baldwin and Francis, along with a strengthening share price of Interquest Group, contributed to a net uplift on the portfolio for the year of £3.4 million.

Further commentary on the portfolio, together with a schedule of additions, disposals and details of the largest investments, can be found within the Investment Manager's Report and Review of Investments.

Fixed interest investments
The Company also continues to hold a 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 £25,000 during the year, although unrealised capital losses of £31,000 were recognised.

Fundraising activities
Shareholders will be aware of the Company's proposals to launch a new sustainable technology share class. A fundraising was launched in December 2013, alongside a top-up offer for the existing Ordinary Shares.

With the benefit of hindsight, the sustainable technology offer was perhaps over complicated to present to potential investors and, along with a pricing issue for the ordinary share offer, the Board decided to withdraw both offers in March 2014.

Earlier in the year, a top up offer in the Ordinary Share class raised gross proceeds of £871,500, with 1,291,055 Ordinary Shares being allotted at an average price of 67.5p per share.

Share buybacks
During the year the Company made a number of market purchases of its shares. In June 2013, the Company purchased 216,480 Ordinary Shares for cancellation for an aggregate consideration of £121,000, at an average price of 55.5p per share. A further 204,950 Ordinary Shares were purchased, in November 2013, for cancellation for an aggregate consideration of £117,000, at an average price of 57.0p per share. Both purchases were undertaken at a price approximately equivalent to a 15% discount to the most recently published NAV at the time of purchase.

The Board plans to make market purchases of its shares several times each year and makes a certain level of funds available for this purpose. The Board has reviewed the price at which buyback are undertaken and has agreed to reduce the buyback discount to approximately 7.5% based on the latest published NAV. This policy will continue to be reviewed from time to time.

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.

Annual General Meeting ("AGM")
The next AGM of the Company will be held on 5 June 2014 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.

Post balance sheet event
On 11 April 2014, the Investment Manager competed the sale of WASP for a sum materially in excess of the carrying value at 31 December 2013.  The Board estimates that the impact on the Company's unaudited NAV has been to increase it to approximately 92.6p per share as at the date of this report.

The Investment Manager has worked closely with the company since the original investment was made in 1999 and supported that company's development and path towards its ultimate sale. The Board congratulates the Manager on delivering this excellent result for Shareholders.

Outlook
With the general economic outlook brighter than it has been for some time, the Company appears well placed to take advantage of the improving conditions.  The profitable disposal of WASP in April supports this view.  The majority of the remaining investments held by the Company have been held for a significant period and, with close attention from the Manager and, in some cases, intervention, a number have matured well and further attractive exit opportunities may arise.

Despite the disappointment of having to withdraw the recent fundraising offer, the Board feels that the success with the disposal of WASP endorses the Manager's approach to investing and believes that the Company continues to hold a good quality portfolio that has the potential to deliver further value for Shareholders over the coming years.

David Brock
Chairman

INVESTMENT MANAGER'S REPORT

Over the year the Company recorded an increase in the total return of 13.1p (net asset value including cumulative dividends), from 126.9p to 140.0p including paying dividends of 4.0p per share. NAV per share increased from 68.9p to 78.0p an increase of 19.0%. Overall the core portfolio has performed well and there have been some substantial revaluations upwards, notably Wessex Advanced Switching Products Limited, Smart Education Limited and Baldwin and Francis Limited which are commented on below. There were also some revaluations downwards but these were offset by the increases.

No new investments were made in the year but two follow on investments were made in the period into Snacktime plc (£400,000), and The Engine Group Limited (£41,000). Within the portfolio Fords Packaging Systems Ltd was restructured into a new company called Fords Packaging Topco Limited with new management incentives and better loan note terms negotiated for our shareholders, but substantially the same business. For ease of reporting we refer to both companies as 'Fords' in this report.

Post year-end a new investment of £562,500 was made into Macranet Limited, a social media software analytics company, alongside AIM listed Netcall plc. Another portfolio company, Concorde Solutions Limited, has attracted a £1 million investment from a third party USA based investor which completed in March 2014 and in which the Company invested a further £250,000 alongside matched funding from our incumbent syndicate investor.

Within the core unquoted portfolio upward revaluations were recorded in Wessex Advanced Switching Products ('WASP'), Baldwin and Francis ('BFH') and Smart Education ('Smart').

WASP continued to perform well throughout the year with significant advances being made in sales to the aerospace sector. As a cash generative business with no debt, and which pays a regular dividend, the business supported a significant increase in valuation as at 31 December 2013.  We are pleased to report that, since the year end, in April 2014, we completed the sale of WASP for a cash sum well in excess of the 31 December 2013 valuation. We have worked very closely with management in recent years as the business sought to position itself for an exit. The outcome has been very positive for management and the VCT and fellow investors.

BFH has undergone a transformational change over the past eighteen months. In 2012 a new executive chairman was appointed alongside further funding of £700,000 into B&F Management Limited ('BFM'). The change in management and to business practices has turned the company around from a loss making, indebted cash flow negative business, to a profitable cash flow positive company with excellent prospects for future growth. The final corporate restructuring of the BFH business and winding up of BFM was completed post the year end, and has resulted in a larger equity holding for the Company with enhanced loan note terms.

Smart has continued to grow its turnover and the subsequent cash generation has resulted in a repayment of £250,000 of the Company's loan note. The current year will see a further loan note repayment and scaling up of the business to ensure future growth is sustainable.

Fords, has had a steady year and additional management was hired to assist the growth strategy. We are pleased to report the order book for large capping machines is at its highest level for many years which we are hopeful will feed through into higher sales and profitability in 2014. Fords is debt free and pays a regular dividend.

Within the quoted portfolio two companies, Interquest plc and Mears Group plc, have increased in value benefiting from the general increase in economic activity. We also continue to be cautiously optimistic over Access Intelligence plc ('Access') and SnackTime plc ('Snacktime'). 

Access recently released its year end November 2013 figures. Revenue was up by 5% year on year to £8.5 million. On a "company stated" basis (before R&D capitalisation adjustment, share based payments and exceptionals) 2013 EBITDA was up from £370,000 in 2012 to c£520,000 representing circa 40% year on year growth. The continued commitment to the software-as-a-service business model has enabled Access to build long-term visibility of revenues.

In the previous year we reported that Snacktime shares had fallen to 10 pence reflecting a profits warning as a result of the failure to successfully integrate the Vendia acquisition made in 2010, a decline in sales from certain product lines, and gross margins being hit by inflationary pressure. New management were introduced in 2012 to turnaround the business. Since then considerable progress in the turnaround has been made despite tough market conditions and the Company made a further follow on funding of £400,000 in 2013. 

Generally it is worth noting that in nine out of the top ten companies by value at 31 December 2013 the Manager has at least one board seat or observer rights and are very actively involved with these businesses.  We continue to maintain a reasonable level of liquidity so that we are able to respond to investment opportunities that become available. Overall the low external debt position of the portfolio is well covered by earnings and comfortably within banking covenants, and gives us confidence for the future

In summary, we are pleased to report that the general movement in valuations is upwards, and that while we have been actively working on the portfolio we have also made new investments post the year end. Given the recent economic uplift, we maintain a positive outlook and are hopeful that further profitable exits can be achieved from portfolio companies in the near future.

Elderstreet Investments Limited

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments were held at 31 December 2013. 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)
Wessex Advanced Switching Products Limited	60	4,627	2,314	19.8%
Smart Education Limited	511	3,121	900	13.3%
Fords Packaging Top Co Limited	2,882	2,882	-	12.3%
Access Intelligence plc *	1,633	1,519	(335)	6.5%
AngloINFO Limited	1,108	1,483	-	6.3%
Lyalvale Express Limited	915	1,369	114	5.9%
Baldwin & Francis Limited    (formerly Baldwin & Francis (Holdings) Ltd)	690	1,332	642	5.7%
B&F Management Limited	700	763	63	3.3%
SnackTime plc *	1,775	648	18	2.8%
Interquest Group plc *	336	549	262	2.3%
	10,610	18,293	3,978	78.2%
Other venture capital investments
Concorde Solutions Limited	500	500	-	2.2%
Mears Group plc **	188	379	119	1.6%
Cashfac plc	260	328	-	1.4%
Fulcrum Utility Services Limited *	500	292	(208)	1.3%
Aconite Technology Limited	462	210	(283)	0.9%
The Engine Group Limited	496	171	(256)	0.7%
Servoca plc *	333	72	33	0.3%
RB Sport & Leisure Holdings plc	188	47	-	0.2%
Sift Limited	250	38	-	0.2%
SparesFinder Limited	103	34	22	0.1%
The Kellan Group plc *	657	5	(6)	-
Infoserve Group plc	127	-	-	-
The National Solicitors Network Limited	501	-	-	-
The QSS Group Limited	268	-	-	-
	4,833	2,076	(579)	8.9%
Fixed income securities
United Kingdom 2.25% Gilt 07/03/2014	830	848	(16)	3.6%
United Kingdom 1.00% Gilt 07/09/2017	614	601	(15)	2.6%
S&W Investment Funds Cash Fund	10	10	-	-
	1,454	1,459	(31)	6.2%
	16,897	21,828	3,368	93.3%
Cash at bank and in hand		1,556		6.7%
Total investments		23,384		100.0%

All venture capital investments are unquoted unless otherwise stated

*    Quoted on AIM
** Quoted on the Main Market

Elderstreet Investments Limited also acts as investment manager for Bedford Row VCT plc which has co-invested in SnackTime plc investment.

Investment movements for the year ended 31 December 2013

ADDITIONS

	£'000
Venture capital investments
Fords Packaging Top Co Limited **	2,882
SnackTime plc	400
The Engine Group Limited	41
	3,323

DISPOSALS

	Cost	Value at 01/01/13	Proceeds	Profit vs cost	Realised  profit
	£'000	£'000	£'000	£'000	£'000
Venture capital investments
Fords Packaging Systems Limited **	1,047	2,272	3,019	1,972	747
Smart Education Limited	250	250	250	-	-
	1,297	2,522	3,269	1,972	747

 

*    Adjusted for purchases in the year where applicable
** Includes share for share purchase of Fords Packaging Top Co Limited

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.

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.

INCOME STATEMENT
for the year ended 31 December 2013

	2013			2012
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Income	625	-	625	715	-	715
Gains on investments	-	4,115	4,115	-	2,003	2,003
	625	4,115	4,740	715	2,003	2,718
Investment management fees	(106)	(317)	(423)	(95)	(285)	(380)
Performance incentive fees	-	(61)	(61)	-	-	-
Other expenses	(210)	-	(210)	(214)	-	(214)
Return on ordinary activities before tax	309	3,737	4,046	406	1,718	2,124
Tax on ordinary activities	-	-	-	-	-	-
Return attributable to equity shareholders	309	3,737	4,046	406	1,718	2,124
Basic and diluted return per share	1.0p	12.2p	13.2p	1.4p	5.8p	7.2p

All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the profit and loss account of the Company.

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

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.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 December 2013

	2013	2012
	£'000	£'000
Opening Shareholders' funds	20,588	18,861
Issue of shares	871	1,134
Issue of shares under Enhanced Share Buyback scheme	-	2,131
Share issue costs	(48)	(127)
Purchase of own shares	(238)	(198)
Purchase of own shares under Enhanced Share Buyback scheme	-	(2,142)
Total recognised gains for the year	4,046	2,124
Dividends paid	(1,242)	(1,195)
Closing Shareholders' funds	23,977	20,588

BALANCE SHEET
at 31 December 2013

		2013			2012
	£'000	£'000		£'000	£'000
Fixed assets
Investments		21,828			17,659
Current assets
Debtors	831			90
Cash at bank and in hand	1,556			3,030
	2,387			3,120
Creditors: amounts falling due within one year	(238)			(191)
Net current assets		2,149			2,929
Net assets		23,977			20,588
Capital and reserves
Called up share capital		1,537			1,494
Capital redemption reserve		446			425
Share premium		856			9,929
Merger reserve		1,882			1,882
Special reserve		6,950			-
Capital reserve - unrealised		8,683			6,540
Capital reserve - realised		3,118			(187)
Revenue reserve		505			505
Total equity shareholders' funds		23,977			20,588
Basic and diluted net asset value per share		78.0p			68.9p

CASH FLOW STATEMENT
for the year ended 31 December 2013

	2013	2012
	£'000	£'000
Net cash (outflow)/inflow from operating activities	(105)	83
Capital expenditure
Purchase of investments	(1,004)	(2,284)
Sale of investments	303	1,512
Net cash outflow from capital expenditure	(701)	(772)
Equity dividends paid	(1,242)	(1,201)
Net cash outflow before financing	(2,048)	(1,890)
Financing
Proceeds from share issue	870	1,093
Proceeds from shares issued under Enhanced Share Buyback	-	2,131
Share issue costs	(58)	(75)
Purchase of own shares	(238)	(198)
Purchase of own shares under Enhanced Share Buyback	-	(2,142)
Net cash inflow from financing	574	809
Decrease in cash	(1,474)	(1,081)

NOTES TO THE ACCOUNTS
for the year ended 31 December 2013

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" revised January 2009 ("SORP").

The financial statements are prepared under the historical cost convention modified by the revaluation of certain financial instruments.

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. 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 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 controlling influence over investee companies. Therefore the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP that does not require portfolio investments to be accounted for using the equity method of accounting.

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

Interest income is accrued on a 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

	2013	2012
Return per share based on:
Net revenue return for the financial year (£'000)	309	406
Capital return per share based on:
Net capital gains for the financial year (£'000)	3,737	1,718
Weighted average number of shares in issue	30,684,457	29,559,342

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

			2013				2012
Shares in issue			Net asset value				Net asset value
2013		2012		Pence per share		£'000		Pence per share		£'000
Ordinary Shares	30,743,158	29,873,533		78.0		23,977		68.9		20,588

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. 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.

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 only normally has a relatively low level of creditors (2013: £238,000, 2012: £191,000) 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, £423,000 (2012: £380,000) was due in respect of these services. Performance incentive fees totalling £61,000 were due to Elderstreet Investments Limited in respect of the year under review (2012: £Nil).  These fees were outstanding in full at the year end (2012: £Nil).  The Company also paid £46,000 to Elderstreet Investments Limited in respect of the fundraising undertaken during 2013 (2012: £53,000), and £Nil in respect of work undertaken on the Enhanced Share Buyback scheme (2012: £2,500). Michael Jackson is also chairman of Access Intelligence plc and Concorde Solutions Limited. Details of these investments, including amounts invested and interest received during the year by Access Intelligence plc are shown on page 11. £36,000 of loan stock interest was due and payable by Concorde Solutions Limited to the Company during the year.

Nicholas Lewis is a partner of Downing LLP which provides administration services to the Company. During the year, £50,000 (2012: £60,000) was due to Downing LLP in respect of these services. The Company received a one-off VAT refund of £15,000 from Downing LLP during the year. The Company paid £Nil (2012: £7,500) to Downing LLP in respect of work undertaken on the Enhanced Share Buyback Scheme.

6.Post balance sheet event
On 11 April 2014, the Company disposed of its investment in Wessex Advanced Switching Products Limited at a cash sum estimated to be £4.2 million above the carrying value as at 31 December 2013.

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 2013, but has been extracted from the statutory financial statements for the year ended 31 December 2013, which were approved by the Board of Directors on 28 April 2014 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 2012 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 2013 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 10 Lower Grosvenor Place, London, SW1W 0EN and will be available for download from www.downing.co.uk.

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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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