Downing Planned Exit VCT 3 PLC : Final Results

DOWNING PLANNED EXIT VCT 3 PLC
FINAL RESULTS FOR THE YEAR ENDED 31 JANUARY 2013

FINANCIAL SUMMARY

CHAIRMAN'S STATEMENT

Introduction
I am pleased to present the Annual Report for the year ended 31 January 2013. The Company has continued to increase in size over the year, with a successful 'F' Share fundraising. Although a small number of investments have faced difficulties, generally investment performance has been satisfactory over the year.

Fundraisings and company structure
The original 'F' Share offer for subscription launched in October 2011 and closed on 28 September 2012. This was followed by an 'F' Share top-up offer that closed in December 2013. In total, the offers raised gross proceeds of £10.8 million for the 'F' Share class.

With the Company's Ordinary Shares having been cancelled in August 2012 (after returning all their funds to Shareholders) the Company now has three active share pools; 'C' Shares (and 'A' Shares), 'D' Shares (and 'E' Shares), 'F' Shares.

'C' Share pool
The Company's 'C' Shares were originally issued in 2008 and 2009. The 'C' Share pool is effectively fully invested and holds a portfolio of 19 investments, of which 14 are VCT qualifying or part qualifying.

At 31 January 2013, the NAV of a combined holding of one 'C' Share and one 'A' Share stood at 94.8p, an increase of 9% over the year after adding back dividends of 5p paid in the year. 'C' Share dividends paid to date total 17.5p such that total return (NAV plus cumulative dividends to date) is now 112.3p

In line with the intention set out in the 'C' Share prospectus, the Board is proposing to pay a final dividend of 2.5p per 'C' Share on 19 July 2013 to Shareholders on the register at the close of business on 28 June 2013.

A detailed review of the 'C' Share pool is presented in the Investment Manager's report and Review of Investments.

'D' Share pool
The 'D' Shares were originally issued in 2010. The 'D' Share pool is now also effectively fully invested and holds a portfolio of 20 investments, of which 17 are qualifying or partially qualifying.

At 31 January 2013, the NAV of a combined holding of one 'D' Share and one 'E' Share stood at 79.8p, an increase of 1.8% over the year after adding back dividends of 5p per share paid in the year. 'D' Share dividends paid to date total 12.5p such that total return (NAV plus cumulative dividends to date) is now 92.3p.

In line with the intention set out in the 'D' Share prospectus, the Board is proposing to pay a final dividend of 2.5p per 'D' Share on 19 July 2013 to Shareholders on the register at the close of business on 28 June 2013.

A detailed review of the 'D' Share pool is presented in the Investment Manager's report and Review of Investments.

'F' Share pool
The 'F' Share pool was launched in 2012 and the Manager has been actively investing its fund over its initial period. At 31 January 2013, the pool held eight VCT qualifying investments and a further 9 non-qualifying investments, most of which are in the form of secured loans.

At 31 January 2013, the 'F' Share NAV stood at 88.5p, which represents a small decrease over the initial period after adjusting for the dividends of 5p per share paid in the year. Total Return (NAV plus cumulative dividends to date) is now 93.5p.

In line with the intention set out in the 'F' Share prospectus, the Board is proposing to pay a final dividend of 2.5p per 'F' Share on 19 July 2013 to Shareholders on the register at the close of business on 28 June 2013.

A detailed review of the 'F' Share pool is presented in the Investment Manager's report and Review of Investments.

Share buybacks
The Company has a general policy of buying in its own shares for cancellation when any become available in the market. The current policy is to buy in 'C' Shares, 'A' Shares, 'D' Shares or 'E' Shares at approximately a 10% discount to the latest published NAV of those share classes. In respect of the new 'F' Shares, in the initial years after issue, any such purchases will be undertaken at a price equal to the latest published NAV (i.e. at nil discount). All buybacks are subject to regulatory restrictions and other factors such as availability of liquid funds.

During the year, the Company repurchased 15,050 'C' Shares for an aggregate consideration of £12,267 being an average price of 81.5p per share and which represented 0.2% of the Company's issued 'C' Share capital. 10,000 'A' Shares were repurchased for an aggregate consideration of £10 being an average price of 0.1p per share and which represented 0.1% of the Company's issued 'A' Share capital. These shares were subsequently cancelled. No 'D' Shares, 'E' Shares or 'F' Shares were repurchased during the year.

Annual General Meeting and Share Class Meetings
The Company's eighth Annual General Meeting will be held at 10 Lower Grosvenor Place, London SW1W 0EN at 11:05 a.m. on 5 July 2013.

On item of special business will be proposed at the AGM in connection with authority for the Company to buy back shares as described above.

Outlook
The Company has three share pools, each of them are at different stages in their life. In respect of the 'C' Share pool and, to a lesser extent, the 'D' Share pool, during the current year the Manager will be starting to look ahead to potential exit plans for the investments, while continuing to closely monitor the portfolio companies to ensure that they stay on track to deliver full value.

The current year will see the process of building the 'F' Share portfolio continue. The Manager reports that it is continuing to see a good flow of investment opportunities which should allow the share pools to develop portfolios which have the potential to deliver the targeted returns. I look forward to reporting progress to Shareholders in my report with the Half-Yearly Statement to 31 July 2013.

Hugh Gillespie
Chairman

INVESTMENT MANAGER'S REPORT- 'C' SHARE POOL

Introduction
The 'C' Share pool holds investments in 19 companies and is now fully invested. Further investment activity is likely to be limited to reinvesting proceeds from divestments when short term investment opportunities arise. The 'C' Share portfolio has continued to perform well and this has been reflected in a healthy increase in net asset value over the year.

Net asset value and results
At 31 January 2013, the 'C' Share NAV stood at 94.7p and the 'A' Share NAV at 0.1p, giving a combined NAV of 94.8p. Total Return (NAV plus cumulative dividends to date) was 112.3p for a combined holding of one 'C' and one 'A' Share. This represents a net increase of 8.2p over the year (after adjusting for dividends paid during the year of 5.0p per 'C' Share), equivalent to an increase of 9%.

The Total Return on ordinary activities for 'C' Share pool for the year was £585,000 (2012: 444,000) comprising a revenue profit of £286,000 (2012: £124,000) and a capital gain of £299,000 (2012: £320,000).

'C' Share pool - Investment activity
During the year, the Company made three small follow on investments totalling £80,000 and also had loan stock redemptions of £27,000.

'C' Share pool - Portfolio valuation
The majority of the investments within the 'C' Share portfolio performed well throughout the year and the values of a number of these have been uplifted at the year end.

The valuation of the investment in Atlantic Dogstar Limited was increased by £114,000. The company owns and operates The Dogstar pub in Brixton and The Clapton Hart in Clapton. Both pubs are trading significantly ahead of their original business plans. An independent valuation of each of pubs was commissioned, on which the year end valuation has been based.

The valuation of the investment in Redmed Limited was increased by £105,000. The company owns The Annexe nightclub in Lincoln city centre, which is producing results that are 40% ahead of the original business plan.

Domestic Solar Limited owns a portfolio of solar panels on the rooftops of domestic properties across the UK. The panels have now been operational for over a year and are starting to establish a track record of income generation. An uplift of £60,000 in the value of the investment in Domestic Solar was made at the year end.

Further increases in value were recognised in Westow House Limited, £87,000, East Dulwich Tavern Limited, £41,000 and Bijou Wedding Venues Limited, £17,000, to reflect that the businesses are performing well and in line with expectations.

On the negative side, a reduction in valuation of £88,000 was made against Honeycombe Pubs VCT plc. The company owns a bar in Burnley, Lancashire. Trading continues to be difficult and a third party valuation has indicated that the value had fallen from previous carrying levels.

A £37,000 reduction in value of Ecossol Limited was made at the year end to reflect that the business, which owns a portfolio of commercial solar installations, has experienced technical difficulties at a number of the installations. This has affected the income generating abilities of the panels. This performance is below forecast and, therefore, a cautionary provision has been made until the technical difficulties are resolved.

Overall the portfolio showed net unrealised gains of £299,000.

Outlook
Although the British economy remains in a fragile state, we believe that 'C' Share portfolio is reasonably resilient and can continue to produce good results over the remaining planned life of the share pool.

We will be seeking to start returning funds to 'C' Shareholders late in 2014, being five years after the close of the 'C' Share offer, and will be starting preliminary work on planning investment realisations during the coming year.

Downing Managers 3 Limited

REVIEW OF INVESTMENTS - 'C' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 January 2013:

'C' Share pool

*Part-qualifying investment

Summary of investment movements

Additions

Disposals

*Part-qualifying investment
~Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'D' SHARE POOL

Introduction
The 'D' Share pool now holds investments in 20 companies and is effectively fully invested. The portfolio has experienced reasonably stable performance over the year, with the main problems encountered early in the share pool's life mostly now behind us.

Net asset value and results
At 31 January 2013, the 'D' Share NAV stood at 79.7p and the 'E' Share NAV at 0.1p, giving a combined NAV of 79.8p. Total Return (NAV plus cumulative dividends to date) was 92.3p for a combined holding of one 'D' and one 'E' Share. This represents a net increase of 1.5p over the year (after adjusting for dividends paid during the year of 5.0p per 'D' Share), equivalent to an increase of 1.8%.

The return on ordinary activities for the 'D' Shares for the year was a return of £150,000 (2012 loss: £527,000) being a revenue surplus of £174,000 (2012: £57,000) and a capital loss of £24,000 (2012: £584,000).

'D' Share pool - investment activity
During the year, the Company made a small number of new investments totalling £600,000. These were partly financed by loan stock redemptions which produced proceeds of £469,000.

The main new addition was an investment of £250,000 in West Tower Property Limited in January 2013. The funding assisted the company in its purchase of "The West Tower", an exclusive wedding venue located in Aughton, Lancashire.

A further £150,000 was invested in Aminghurst Limited, which is completing the development of an apartment and hotel complex near Salcombe in South Devon. This is a non-qualifying investment for the share pool which should deliver an attractive yield and gives the company a charge over the development.

In addition to the above, a number of transactions also took place in respect of a reorganisation of Gingerbread Pre-School Nurseries where the trade was ultimately acquired by Liverpool Nurseries (Holdings). As part of the reorganisation a new manager and investment partner was brought in and is making progress in recovering from the initial difficulties that the business faced.

'D' Share pool - portfolio valuation
The majority of the 'D' Share portfolio performed in line with expectations during the year, however, there were a small number of valuation movements which resulted in a net unrealised loss of £24,000.

Domestic Solar Limited and Green Electricity Generation Limited both own a portfolio of solar panels on the rooftops of domestic properties across the UK. The panels have now been generating income for over a year and have started to establish reliable track records, resulting in an uplift of £48,000 for Domestic Solar Limited and £7,000 for Green Electricity Generation Limited.

Alpha Schools (Holdings) Limited, an independent primary school operator, is performing well and in line with expectations and was revalued upwards by £14,000.

On the negative side, Camandale Limited suffered a further write down of £45,000 as independent valuations of the two bars owned by the company in Kilmarnock indicated that their value has fallen.

A £38,000 reduction in value of Ecossol Limited was made at the year end to reflect that the business, which owns a portfolio of commercial solar installations, has experienced technical difficulties at a number of the installations which has affected the income generating abilities of the panels. This performance is below forecast; therefore, a cautionary provision has been made until the technical difficulties are resolved.

A £10,000 decrease in the value of Ridgeway Pub Company Limited was made at the year end. The investment, which owns and operates two pubs in Oxfordshire, is operating behind budget with no immediate sign of improvement. As a result, a small reduction in value has been made.

Outlook
The difficult economic conditions are expected to continue for some time and will provide challenges for many of the portfolio companies. Although some minor problems in the portfolio remain, the major ones have been resolved and we are working closely with all investment partners to ensure that full value can be extracted from the investments over the life of the share pool.

Downing Managers 3 Limited

REVIEW OF INVESTMENTS - 'D' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 January 2013:

'D' Share pool

*Part-qualifying investment

Summary of investment movements

Additions

Disposals

*Part-qualifying investments
**Part of reorganisation of Liverpool Nurseries companies
~Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'F' SHARE POOL

Introduction
As set out in the 'F' Share prospectus, the pool is expected to initially invest much of its funds in non-qualifying secured loans and, over the next three years, the pool will build a qualifying investment portfolio with a focus on asset backed businesses and those with predictable revenue streams.

Fundraising
The original 'F' Share fundraising closed in September 2012, shortly after which a top up share offer was launched, which, in turn, closed in December 2012. Both share offers were launched in conjunction with Downing Planned Exit VCT 3 plc. The joint offers raised total proceeds of £21.6 million, of which £10.8 million was in respect of Downing Planned Exit VCT 2 plc.

Net asset value and results
At 31 January 2013, the 'F' Share NAV stood at 88.5p. The 'F' Shares paid a first dividend of 5p per share in November 2012. Total Return (NAV plus cumulative dividends to date) for shareholders who invested in the original share offer is now 93.5p. This represents a net decrease of 1.0p per share against the price at launch of 94.5p per share (after adjusting for dividends paid during the year of 5.0p per Share), equivalent to a decrease of 1.1%.

The return on ordinary activities for the 'F' Share pool for the year was a loss of £105,000 being a revenue loss of £10,000 and a capital loss of £95,000.

'F' Share pool - investment activity
During the 'F' Share pool's first period, the Company invested £1.8 million in eight VCT qualifying investments.

Three separate investments were made in City Falkirk Limited, Fubar Stirling Limited and Cheers Dumbarton Limited totalling £738,000. Each of these companies owns and operates a nightclub in Scotland. A £13,000 investment was also made in Lochrise Limited who manages the nightclubs and is associated with the Castle Leisure Group, an experienced operator in the region.

Four investments during the year were made in secure Government-backed renewable investments:

A net investment of £680,000 was made in Tor Solar PV Limited which owns a portfolio of Solar PV panels located on farms in the South West of the UK.

£560,000 was invested in Vulcan Renewables Limited. Vulcan Renewables is developing a 2MW maize fed biogas plant near Doncaster which will generate both gas and electricity.

A £200,000 investment was made in Fresh Green Power Limited and £100,000 was invested in Green Energy Production UK Limited. Both companies install and own solar PV systems on the roofs of domestic properties in the UK.

The four investments above will benefit from the receipt of Feed-in-Tariffs from the production of electricity. Vulcan Renewables will also receive payments under the Renewable Heat Incentive scheme from gas injection into the gas main.

In addition, the share pool made 9 non-qualifying investments and two investments with a non-qualifying element, mostly in the form of short-term secured loans. These provide the share pool with a steady yield on its funds which are not yet employed in qualifying opportunities.

There were also a small number of loan stock redemptions that took place, returning some £561,000 to the share pool.

'F' Share pool - portfolio valuation
As all the investments were made within the last 12 months, the majority of the investments were held at valuations equal to cost at the year end. Some valuation adjustments have however been necessary where businesses have not performed to plan.

As mentioned above, City Falkirk owns a large nightclub in Falkirk, Scotland. The club was purchased out of administration in April 2012 at, what was considered to be, an attractive price. It has become apparent that the long period in administration, when there was poor customer service and a lack of maintenance, has damaged the business. This along with generally challenging trading conditions has resulted in the performance of the club falling well behind forecast. Accordingly, a cautionary reduction in value of £82,000 was recognised at the year end. Lochrise Limited acts as the manager to City Falkirk and a number of other bars and clubs. The value of Lochrise is based on the performance of the nightclubs and bars that it manages. In view of the performance of City Falkirk and other disappointing trading, a full provision of £13,000 has been made.

Outlook
The 'F' Share pool is expected to continue to be an active investor over the next year. Dealflow of potential investments is looking promising so we expect to see the pool complete a number of new qualifying investments.

Monitoring of the portfolio companies will become an increasing proportion of our work and is essential to ensure that the businesses remain on track and that, if it is required, prompt, appropriate action is taken.

Downing Managers 3 Limited

REVIEW OF INVESTMENTS - 'F' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 January 2013:

*Part-qualifying investment
All of the above were also additions during the year.

Summary of investment movements

Disposals

~Adjusted for additions in the year
All of the above were also additions during the year.
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 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.

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.

INCOME STATEMENT
for the year ended 31 January 2013

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 noted above.

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

INCOME STATEMENT (ANALYSED BY SHARE POOL)
for the year ended 31 January 2013

'C' Share pool

'D' Share pool

'F' Share pool

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

Other share pools comprise the Ordinary Share pool and the 'F' Share pool.

The Ordinary Share pool had opening Shareholders funds of £5,000 at 1 February 2012. These were eliminated when the class was cancelled during the year.

BALANCE SHEET
as at 31 January 2013

Other share pools comprise the Ordinary Share pool and the 'F' Share pool.

CASH FLOW STATEMENT
for the year ended 31 January 2013

Other Share pools comprise the Ordinary and 'F' Share pools.

There were no cash flow movements with respect to the Ordinary Share pool in either year.

NOTES TO THE ACCOUNTS
for the year ended 31 January 2013

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 and on the basis that it is not necessary to prepare consolidated accounts.

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

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 FRS26.

For unquoted investments, fair value is established 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;
*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.

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.

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 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.

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 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 100% as revenue.
*Expenses and liabilities not specific to a Share class are generally allocated pro rata to the net assets.

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 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. Deferred taxation is not discounted.

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 for the relevant share class.

2. Basic and diluted return per share

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

3. Basic and diluted net asset value per share

The 'C' Share pool, 'D' Share pool and 'F' Share pool are treated as separate investment pools. Within the 'C' Share pool the Directors allocate the assets and liabilities of the Company between the 'C' Shares and 'A' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights. Within the 'D' Share pool the Directors allocate the assets and liabilities of the Company between the 'D' Shares and 'E' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights

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
*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 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
*Interest rate risk

Investment price risk

Investment price risk arises from uncertainty about the valuation of financial instruments held in accordance with the Company's investment objectives. It represents the potential loss that the Company might suffer through 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 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.
*"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 and debtors.

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 £4,000 for the 'C' Share pool, £- for the 'D' Share pool and £44,000 for the 'F' Share pool. 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, cash deposits and debtors.

The Manager manages credit risk in respect of loan stock 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.  Similarly the management of credit risk associated with interest, dividends and other receivables is covered within the investment management procedures.

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, (£363,000) 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
Downing Managers 3 Limited ("DM3"), a wholly owned subsidiary, is the Company's Investment Manager.
During the year ended 31 January 2013, £308,000 (2012: £211,000) was payable to DM3. Additionally, DM3 provides accounting, secretarial and administrative services for an annual fee of £47,500 (plus VAT and RPI) per annum.

During the year ended 31 January 2013, £52,000 (2012: £49,000) was due in respect of administration fees. At the year end a balance of £94,000 (2012: £61,000) was due to DM3.

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 January 2013, but has been extracted from the statutory financial statements for the year ended 31 January 2013, which were approved by the Board of Directors on 24 May 2013 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 January 2012 have been delivered to the Registrar of Companies and received an Independent Auditor's Report which was unqualified and did not contain any emphasis of matter nor statements under s498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 31 January 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.