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Downing Abs Inc 2 (DA2O)

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Wednesday 11 July, 2012

Downing Abs Inc 2

Downing Absolute Income VCT 2 Plc : Final Results

Downing Absolute Income VCT 2 Plc : Final Results

Downing Absolute Income VCT 2 plc

Final results for the year ended 31 March 2012




  Year ended

31 March

Year ended

31 March

Net asset value per Ordinary Share and one 'A' Share 72.3 91.3
Cumulative distributions paid since launch 10.0 5.0
Total Return (net asset value plus dividends paid since launch) 82.3 96.3





I present the Company's Annual Report for the year ended 31 March 2012, covering what has turned out to be a difficult year for several portfolio companies, resulting in a very disappointing fall in your Company's net asset value.


Venture capital investments

The Company continued to be an active investor throughout the year as it continued to build its VCT qualifying investment portfolio. The Company invested £8.1 million in investments which are either qualifying, part-qualifying or expected to become qualifying in due course. A further £713,000 was also invested in non-qualifying secured loans.


There were also a number of disposals, many arising from planned redemptions of loan notes, which produced total proceeds of £7.4 million.


While most of the portfolio companies performed reasonably to plan, there have been three significant problem investments: Helcim Group; EPI Service; and Camandale, which have required substantial write downs.


Helcim manages housing for vulnerable tenants and works with local authorities to let private properties to local authority tenants. The business has failed to develop to plan and is now the focus of intensive work by the Investment Manager in trying to secure the best outcome for the VCT. In view of the substantial difficulties encountered, a provision of £1.6 million has been required.


EPI Service was a designer and builder of corporate data rooms, which had historically generated much of its business from larger contracts. Despite some small contract wins, the company has failed to secure key large contracts in recent months, resulting in the company entering into administration. The VCT was able to recover some value in respect of part of its loan stock investment at the time of the EPI administration, receiving cash and shares in a new company, Data Centre Response Limited, which has been established to service maintenance contracts previously held by EPI. However, a provision of £859,000 has been required against the remaining value of the investment.


As I reported in the half-yearly statement, Camandale owned two pubs in Kilmarnock, which suffered a period of very poor trading, resulting in the removal of the management which, in turn, uncovered further issues. A new management team is now in place and is starting to make some progress, however, to value the investment at a realistic current valuation for the two pubs has required a provision of £782,000.


Two unquoted investments have performed well enough to justify small uplifts in valuation and the two AIM-quoted investments have also seen increases in their share prices since the Company invested. Most of the other investments are at a relatively early stage but have performed more or less to plan and have been held at valuations equal to original cost. Overall the portfolio has seen total unrealised losses of £3.0 million for the year.


Further details of the portfolio activity are included in the Investment Manager's report.


Net asset value and results

The net asset value ("NAV") per Ordinary Share at 31 March 2012 stood at 72.2p and NAV per 'A' Share at 0.1p, representing a decrease of 14.0p (15.4%) over the year after adjusting for dividends paid during the year of 5.0p per Ordinary Share. Total Return (combined NAV plus cumulative dividends) stands at 82.3p per holding of one Ordinary and one 'A' Share.


The loss on ordinary activities after taxation for the period was £2,808,000 (2011: Profit £356,000) comprising a revenue gain of £365,000 (2011: £451,000) and a capital loss of £3,173,000 (2011: £95,000).



It is the Company's intention to pay twice yearly dividends totalling at least 5.0p per annum in respect of the Ordinary Shares.


In line with this intention, the Board is proposing to pay a final dividend in respect of the period ended 31 March 2012 of 2.5p per Ordinary Share on 28 September 2012 to Shareholders on the register at the close of business on 31 August 2012.


Share buybacks

The Company operates a share buyback policy whereby, subject to certain restrictions, it intends to buy in any of its own shares that become available in the market for cancellation.  In its initial years the Company has a policy of undertaking any buybacks at a price equal to the latest published NAV (i.e. at nil discount).


During the year, the Company repurchased 67,342 Ordinary Shares for an aggregate consideration of £53,390 being an average price of 79.5p per share and which represented 0.3% of the Company's issued Ordinary Share capital and 60,555 'A' Shares for an aggregate consideration of £60 being an average price of 0.1p per share and which represented 0.2% of the Company's issued 'A' Share Capital.


A special resolution to continue this policy is proposed for the forthcoming Annual General Meeting ("AGM").


Annual General Meeting

The Company's second AGM will be held at 10 Lower Grosvenor Place, London SW1W 0EN at 10:15 a.m. on 17 September 2012.


One item of special business, seeking approval for the Company to be able to buy its own shares as described above, will be proposed. 



The problems encountered by several of the Company's larger investments have highlighted the risks of investing in an almost unprecedented period of economic turmoil. The Board has been working closely with the Manager to ensure that as great a recovery as possible from these investments can be achieved and, where possible, lessons are learned. In view of the disappointing overall performance, the Manager has offered to waive its investment management fee and administration fee for the year, an offer which the Board has accepted.


Going forward, the Company has more or less finished its initial investment phase and the focus is now on nurturing the existing portfolio companies. Despite all the bad news, there are a reasonable number of investments with good prospects that, in time, have the potential to recover value for the Company.



Chad Murrin






At the year end the Company held 32 venture capital investments and two AIM-quoted investments and is now effectively fully invested. Further investment activity will be mostly limited to reinvesting proceeds from divestments when suitable investment opportunities arise. Whilst the majority of the Company's investments are performing to plan, the challenging economic environment has taken a heavy toll on several investments, resulting in a net decrease in valuations of £3.0 million over the year.


Investment activity

The Company began the year with £15.4 million of investments and ended with £13.6 million spread across a portfolio of 34 companies. During the year, the Company made further investments totalling £8.8 million which were offset by divestments of £7.5 million and a net valuation decrease of £3.0 million.


The Company made 28 investments during the year, nine of which were new qualifying investments. Overviews of the largest new qualifying or partially qualifying investments made during the period are detailed below.


The Company invested £607,000 in Data Centre Response Limited in February 2012. Data Centre Response is a new company set up to acquire the commercial property and cash generative maintenance business from EPI Service Limited, which went into administration in February 2012.  Without the legacy of the loss making contracting business, Data Centre Response is performing profitably and ahead of expectation.


In May 2011, the Company invested £562,000 in Redmed Limited which owned The Annexe nightclub in Lincoln city centre. The venue, which is located close to the University of Lincoln, was completely refurbished and relaunched as "Home" in October 2011. Home operates as a large entertainment venue with a restaurant, nightclub with six themed rooms, and a roof terrace all in the one site. Since opening, the business has performed well and in line with expectations.


In April 2011, the Company invested £499,000 in Future Biogas (Reepham Road) Limited which is developing a 1.5MWh self-contained biogas plant in Norfolk. This is the second anaerobic digestion plant with our investment partner, Future Biogas.


In June 2011, a £333,000 investment was made in Alpha Schools (Holdings) Limited to purchase a school in Buckinghamshire and provide working capital to the existing business. The business is performing well and further investment in additional school sites is expected in due course.


In June 2011, £200,000 was invested in Tracsis plc, an AIM-quoted business which provides operational planning and software for the transport industry.

In June 2011, a £419,000 investment was made in Gingerbread Pre-Schools (UK) Limited to purchase two operating children's day nurseries in Liverpool and provide funding to purchase and renovate a third nursery. Unfortunately, the business experienced significant cost overruns on the refurbishment of the new nursery, together with poor performance of one of the existing sites. The investment partner, who was also the Chief Executive, was suspended and later dismissed. In the interim, further liabilities came to light and the business entered into administration in February 2012. The trading assets were purchased from the administrator by four new companies trading under the Liverpool Nurseries name and a new manager was appointed. Since the year end, the companies have been reorganised such that the investment is now held through one holding company.


In December 2011, the Company invested £400,000 in Mosaic Spa and Health Club (Shrewsbury) Limited to purchase the freehold of an operating health club known as Welti.


Portfolio valuation

The majority of the Company's portfolio in 34 investments performed satisfactorily during the year, however, disappointing performance of four of the investments resulted in a net valuation decrease of £3.0 million. Decreases in valuations arose on the following investments at the year end: Helcim Group Limited £1.6 million; EPI Service Limited £859,000; Camandale Limited £782,000; and 3D Pub Co Limited £155,000. These decreases were partially offset by increases in the valuation of four investments: a £63,000 increase in the value of Tramps Night Club Limited; and £56,000 in Antelope Pub Limited were recognised to reflect that the businesses are performing well and in line with expectations. Accumuli plc and Tracsis plc, both AIM-quoted investments, were revalued to reflect the bid share prices at the period end. This resulted in an uplift of £96,000 and £111,000 respectively.


A £1.6 million write down in value of the Company's investment in Helcim Group Limited was made at the year end. The business has experienced significant problems since the investment was made, with a new venture failing to attract clients quickly enough and the core business failing to develop as planned and requiring significant working capital funding. The Investment Manager is working very closely with the business and has appointed an interim Financial Director to implement strict cash management controls. 


EPI Service Limited entered into administration in February 2012 and the valuation was written down by £859,000 to reflect the expected return to the Company from the administration. This provision takes account of the proceeds of sale of the profitable parts of EPI acquired by Data Centre Response Limited, where future value growth will accrue. 


At the year end a £782,000 reduction in value was recognised in Camandale Limited which owns two pubs, The Riverbank and the Monkey Bar, located in Kilmarnock, Scotland. After a sustained period of poor trading, the investment partner was removed, the management contracts were terminated, and the subsidiaries were put into administration. A new management team has now been put in place and The Riverbank was purchased out of administration by a new subsidiary of Camandale in January 2012. The Monkey Bar is being marketed for sale and trade at The Riverbank is improving.


A £155,000 reduction in value of The 3D Pub Co Limited was made at the year end to reflect that the business, which operates two pubs in Surrey, is operating behind plan. The business has, however, had a good start to 2012 and it is hoped that the value will recover in due course.


There was one realised loss in the year in relation to Gingerbread Pre-Schools (UK) Limited as mentioned above. The main trading assets of the company were sold to new companies when Gingerbread went into administration. These sales proceeds were in turn distributed to the VCT but left a final deficit of £132,000 on the investment which has been treated as a realised loss.



Naturally, we are very disappointed by the difficulties that the portfolio has encountered at this relatively early stage. As a goodwill gesture, we have agreed to waive our investment management fees and administration fees for the year ended 31 March 2012. We have also committed significant resources to the problem investments and will continue to do so to ensure that the best possible outcomes from the current positions are achieved.


With the weak economic conditions in the UK expected to continue throughout 2012, and consumer confidence likely to remain subdued, we expect the task of developing the portfolio to continue to be challenging. However, we believe that the Company holds a number of investments with good prospects and we expect to see them deliver value over the medium term.



Downing LLP




Portfolio of investments

The following investments were held at 31 March 2012:








in year

% of

Qualifying investments        
Tramps Night Club Limited * 1,303 1,366 63 9.7%
Antelope Pub Limited * 1,050 1,106 56 7.8%
Quadrate Catering Limited * 887 887 - 6.3%
Quadrate Spa Limited * 838 838 - 5.9%
Rostima Limited * 832 832 - 5.9%
Data Centre response Limited 607 607 - 4.3%
Redmed Limited * 562 562 - 4.0%
Residential PV Trading Limited * 532 532 - 3.8%
Future Biogas (Reepham Road) Limited * 499 499 - 3.5%
Accumuli Plc ** 250 423 96 3.0%
Camandale Limited * 1,199 417 (782) 2.9%
Domestic Solar Limited * 400 400 - 2.8%
Mosaic Spa and Health Clubs

 (Shrewsbury) Limited *
400 400 - 2.8%
Slopingtactic Limited 380 380 - 2.7%
The 3D Pub Co Limited 517 362 (155) 2.5%
Mosaic Spa and Health Clubs Limited * 350 350 - 2.5%
Alpha Schools (Holdings) Limited 333 333 - 2.4%
Tracsis plc ** 200 311 111 2.2%
Angel Solar Limited 250 250 - 1.8%
Chapel Street Food and Beverage Limited 250 250 - 1.8%
Chapel Street Services Limited 250 250 - 1.8%
Helcim Group Limited * 1,781 210 (1,571) 1.5%
Ridgeway Pub Company Limited 137 137 - 1.0%
EPI Service Limited (in administration) * 980 121 (859) 0.9%
  14,787 11,823 (3,041) 83.8%
Non-qualifying investments        
Retallack Surfpods Limited 500 500 - 3.5%
Fenkle Street LLP 346 346 - 2.4%
Kidspace Adventures Holdings Limited 300 300 - 2.1%
Kidspace Adventures Limited 200 200 - 1.4%
Liverpool Nurseries (House) Limited 147 147 - 1.0%
Commercial Street Hotel Limited 115 115 - 0.8%
Liverpool Nurseries (Greenbank) Limited 100 100 - 0.7%
Liverpool Nurseries (Cottage) Limited 49 49 - 0.3%
Chapel Street Hotel Limited 10 10 - 0.1%
Liverpool Nurseries (Holdings) Limited 1 1 - 0.0%
  1,768 1,768 - 12.3%
  16,555 13,591 (3,041) 96.1%
Cash at bank and in hand   556   3.9%
Total investments   14,147   100.0%


* Part-qualifying investment

** AIM-quoted investment


All venture capital investments are incorporated in England and Wales.




Qualifying investments  
Helcim Group Limited * 882
Data Centre Response Limited 607
Redmed Limited * 562
Residential PV Trading Limited * 532
EPI Service Limited * 520
Angel Solar Limited 500
Future Biogas (Reepham Road) Limited * 499
Quadrate Catering Limited * 460
Quadrate Spa Limited * 460
Gingerbread Pre-School (UK) Limited * 419
Mosaic Spa and Health Clubs (Shrewsbury) Limited * 400
Rostima Limited * 382
Alpha Schools (Holdings) Limited 333
Kidspace Adventures Holdings Limited *** 300
Camandale Limited * 278
Kidspace Adventures Limited *** 200
Tracsis plc ** 200
Domestic Solar Limited * 200
Liverpool Nurseries (House) Limited *** 147
Mosaic Spa and Health Clubs Limited * 100
Liverpool Nurseries (Greenbank) Limited *** 100
Liverpool Nurseries (Cottage) Limited *** 49
Liverpool Nurseries (Holdings) Limited *** 1
Non-qualifying investments  
Lullingstone Limited 277
Commercial Street Hotel Limited 230
Edison House Limited 118
Woolmer Properties Limited 65
Looe Road Student Accommodation 23
Total 8,844


* Part-qualifying investment

** AIM-quoted investment

*** Investment expected to become qualifying in due course





value at






loss during

the year
Qualifying investments          
EPI Service Limited 1,040 1,040 1,040 - -
Gingerbread Pre-Schools (UK)

 Limited *
419 419 287 (132) (132)
Angel Solar Limited 250 250 250 - -
Camandale Limited * 215 215 215 - -
Tramps Night Club Limited * 119 119 119 - -
Helcim Group Limited * 100 100 100 - -
Antelope Pub Limited * 38 38 38 - -
  2,181 2,181 2,049 (132) (132)
Non-qualifying investments          
Lullingstone Limited 1,500 1,500 1,500 - -
Edison House Limited 1,384 1,384 1,384 - -
Woolmer Properties Limited 1,211 1,211 1,211 - -
Quadrate Catering Limited 408 408 408 - -
Looe Road Student

403 403 403 - -
Quadrate Spa Limited 362 362 362 - -
Commercial Street Hotel Limited 149 149 149 - -
Bowman Care Homes Limited 1 1 1 - -
  5,418 5,418 5,418 - -
  7,599 7,599 7,467 (132) (132)


* Part-qualifying investment

** AIM-quoted investment


Lullingstone Limited and Woolmer Limited are companies registered in the Isle of Man. Edison House Limited is a company registered in Guernsey.


Directors' responsibilities statement

The Directors are responsible for preparing the Report of the Directors, the Directors' Remuneration Report, and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Services Authority.


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


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


* select suitable accounting policies and then apply them consistently;

* make judgments and 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 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 requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.


The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Manager'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, as far as they are aware, that 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.



for the period ended 31 March 2012


Year ended

31 March 2012
17 month period

ended 31 March 2011
  RevenueCapitalTotal RevenueCapitalTotal
  £'000£'000£'000 £'000£'000£'000
Income 669 - 669   1,051 - 1,051
Net (loss)/gain on

- (3,173) (3,173)   - 77 77
  669 (3,173) (2,504)   1,051 77 1,128
Investment management

- - -   (172) (172) (344)
Other expenses (191) - (191)   (317) - (317)
Return/(loss) on ordinary

 activities before tax






Tax on ordinary activities (113) - (113)   (111) - (111)
Return/(loss) attributable

to equity shareholders






Basic and diluted return per share:              
Ordinary Share 1.8 (15.9) (14.1)   3.2 (0.7) 2.5
'A' Share - - -   - - -


All Revenue and Capital items in the above statement derive from continuing operations. 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 noted above.


Other than revaluation movements arising on investments held at fair value through the profit and loss, there were no differences between the (loss)/return as stated above and historical cost.






Year ended

31 March 2012
17 month

period ended

31 March 2011
Opening Shareholders' funds 18,266 -
Proceeds from share issue - 20,010
Share issue costs - (1,100)
Dividends paid (997) (1,000)
Purchase of own shares (54) -
Total (losses)/gains for the year (2,808) 356
Closing Shareholders' funds 14,407 18,266




as at 31 March 2012


   2012 2011
Fixed assets        
Investments   13,591   15,387
Current assets        
Debtors 482   1,183  
Cash at bank and in hand 556   2,025  
  1,038   3,208  
Creditors: amounts falling due within

one year
(222)   (329)  
Net current assets   816   2,879
Net assets   14,407   18,266
Capital and reserves        
Called up Ordinary Share capital   20   20
Called up 'A' Share capital   30   30
Special reserve   17,204   18,188
Revaluation reserve   (2,964)   77
Capital reserve - realised   -   -
Revenue reserve   117   (49)
Total equity shareholders' funds   14,407   18,266
Basic and diluted net asset value per

share (pence)
Ordinary Share   72.2   91.2
'A' Share   0.1   0.1




for the year ended 31 March 2012



Year ended

31 March

17 month

period ended

31 March

Net cash inflow/(outflow) from

operating activities
1,070 (575)
Corporation tax paid (111) -
Capital expenditure    
Purchase of investments (8,844) (17,991)
Proceeds from disposal of investments 7,467 2,681
Net cash outflow from capital expenditure (1,377) (15,310)
Equity dividends paid (997) (1,000)
Net cash outflow before financing (1,415) (16,885)
Proceeds from Ordinary Share issue - 19,980
Proceeds from 'A' Share issue - 30
Proceeds from Preference Share issue - 50
Redemption of Preference Shares - (50)
Share issue costs - (1,100)
Purchase of own shares (54) -
Net cash (outflow)/inflow from financing (54) 18,910
(Decrease)/increase in cash (1,469) 2,025




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 ("UK GAAP") and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" revised January 2009 ("SORP").


The financial statements are prepared under the historical cost convention except for certain financial instruments measured at fair value.


The Company implements new Financial Reporting Standards ("FRS") 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 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.



All investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company's documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS26.


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


* Price of recent investment;

* Multiple;

* Net assets;

* Discounted cash flows or earnings (of underlying business);

* Closing bid price;

* Discounted cash flows (from the investment); and

* Industry valuation benchmarks.


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


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


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



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


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



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


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

* Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted a policy of charging 50% of the investment management fees to the revenue account and 50% to the capital account to reflect the Board's estimated split of investment returns which will be achieved by the company over the long term.



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 arises.


Deferred taxation, which is not discounted, 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, other creditors and loan notes

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


Issue costs

Issue costs in relation to the shares issued for each share class have been deducted from the share premium account.


2. Basic and diluted return per share

 Weighted average

number of shares

in issue


Return per share is

calculated on the following:
Year ended 31 March 2012 Ordinary

19,981,516 365 (3,173)
  'A' Shares 29,982,480 - -
Period ended 31 March


14,380,191 451 (95)
  'A' Shares 22,091,730 - -


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


3. Basic and diluted net asset value per share



Shares in issue

Net asset value

Net asset value


Pence per


Pence per


Ordinary Shares 19,932,658 20,000,000 72.2 14,385 91.2 18,244
'A' Shares 29,939,445 30,000,000 0.1 22 0.1 22
Net assets per Balance





The Directors allocate the assets and liabilities of the Company between the Ordinary Shares and 'A' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights.


As the Company has not issued any convertible shares or share options, there is no dilutive net asset value per Ordinary Share or per 'A' Share. The Net Asset Value per share disclosed therefore represents both the basic and diluted net asset value per Ordinary Share or per 'A' Share.


4. Financial instruments

The Company's financial instruments comprise investments held at fair value through the 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 and 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.


Loans and receivables and other financial liabilities are stated at amortised cost which the Directors consider is equivalent to fair value.


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 risk arising from the Company's operations are:


*Market risks

*Credit risk

*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 have 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:


Market risks

As a VCT, the Company is exposed to market 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 market risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments though 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. Market risk is also mitigated by holding diversified portfolio spread across various business sectors and asset classes.


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


*Market price risk

*Interest rate risk


Market price risk

Market 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 market price movements in respect of quoted investments and also changes in the fair value of unquoted investments that it holds.


At 31 March 2012, the AIM-quoted portfolio was valued at £734,000 (2011: £327,000).


At 31 March 2012, the unquoted portfolio was valued at £12,857,000 (2011: £15,060,000).


As the larger proportion of the Company's unlisted investments are classified as 'asset-backed', a fall in share prices generally would have a lesser impact on the valuation of the unlisted portfolio.


The sensitivity analysis for unquoted valuations above assumes that each of the sub-categories of financial instruments (ordinary shares and loan stocks) held by the Company produces an overall movement of 10%. Shareholders should note that equal correlation between these sub-categories is unlikely to be the case in reality, particularly in the case of loan stock instruments. Where share prices are falling, the equity instrument could fall in value before the loan stock instrument. It is not considered practical to assess the sensitivity of the loan stock instruments to market price risk in isolation.


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 attract interest predominately at fixed rates. A summary of the interest rate profile of the Company's investments is shown below.


There are three categories in respect of interest which are attributable to the financial instruments held by the Company as follows:


"Fixed rate" assets represent investments with predetermined yield targets and comprise certain loan note investments and Preference Shares.

"Floating rate" assets predominantly bear interest at rates linked to Bank of England base rate or LIBOR and comprise cash at bank and liquidity fund investments and certain loan note investments.

"No interest rate" assets do not attract interest and comprise equity investments, certain loan note investments, loans and receivables (excluding cash at bank) and other financial liabilities.






  interest rateuntil maturity£'000£'000
Fixed rate 10.7% 942 days 9,926 12,719
Floating rate 0.5%   556 2,025
No interest rate     4,147 3,851
      14,629 18,595


The Company monitors the level of income received from fixed and floating 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.


It is estimated that an increase of 1% in interest rates would have increased total return before taxation for the year by £56,000. As the Bank of England base rate stood at 0.5% per annum throughout the year, it is not believed that a reduction from this level is likely.


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 liquidity funds, cash deposits and debtors. 


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


Investments in loan stocks 9,926 12,719
Cash and cash equivalents 556 2,025
Interest, dividends and other receivables 190 484
  10,672 15,228


Credit risk in respect of loan stock of £9,926,000 is partially mitigated by registering floating charges over the assets of the respective investee companies. The strength of this security in each case is dependent of the nature of the investee companies business and its identifiable assets. Similarly the management of credit risk associated interest, dividends and other receivables is covered within the investment management procedures. The level of security is a key means of managing credit risk.


Cash is mainly held by Bank of Scotland plc and Royal Bank of Scotland plc, both of which are A-rated financial institutions and both also ultimately part-owned by the UK Government.  Consequently, the Directors consider that the credit risk 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. As the Company has a relatively low level of creditors (£222,000) and has no borrowings the Board believes that the Company's exposure to liquidity risk is low. The Company always holds sufficient levels of funds as cash 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

Nicholas Lewis is a director of Downing Corporate Finance Limited ("DCF") and partner in Downing LLP. DCF was the Company's Investment Manager for the first three months of the period at which point the contract was novated to Downing LLP. During the year ended 31 March 2012, £82,000 was payable to DCF and £246,000 was payable to Downing LLP, all of which was waived, in respect of these services. At the year end, Downing LLP owed the Company £241,000 as a result of investment management fees received and subsequently waived. This balance has been cleared since the year end.


DCF provided administration services for the first three months of the period at which point the contract was novated to Downing LLP, for an annual fee of £65,000 plus RPI. During the year to 31 March 2012, £17,000 was payable to DCF in respect of administration fees and £51,000 to Downing LLP. All of these fees for the year were waived. At the year end, Downing LLP owed the Company £51,000 as a result of administration fees received and subsequently waived. This balance has been cleared since the year end.



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 11 July 2012 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 period 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


This announcement is distributed by Thomson Reuters on behalf of Thomson Reuters clients.

The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and other applicable laws; and
(ii) they are solely responsible for the content, accuracy and originality of the
information contained therein.

Source: Downing Absolute Income VCT 2 Plc via Thomson Reuters ONE


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