Half-yearly report

 

 

The six months ended 31 July 2008 has seen your Company focussing on the process of liquidating its investment portfolio to allow it to return funds to Shareholders.  Progress to date has been good, although there are some challenges in coordinating the timing of investment disposals with the planned schedule for distributions to Shareholders.

 

During the period, the Company achieved seven significant investment exits generating proceeds of £2.7 million.  In all cases, the exits returned proceeds equal to or slightly in excess of original cost and current valuation.

 

Since the period end, the Company has finalised one further complete exit and one partial exit producing proceeds of approximately £850,000, being equal to original cost.

 

Of the investments that are still held, most have continued to perform satisfactorily.  Unfortunately the investment in Vermont Developments has been an exception.  The Company originally made an investment of £500,000 in Vermont to partially fund the purchase of development land in Salford, with a charge being taken over the land.  The sharp change in the property market has resulted in the development of the site being delayed and has created some considerable uncertainty over the current market value of the land.  After reviewing the position, the decision was taken to seek the appointment of an administrator to provide the best opportunity of recovering value for your Company.  In view of the current uncertainty, the Board has made a 50% provision against the investment, being £250,000.  This equates to 2.5p per share in terms of Net Asset Value.

 

The valuations of the other investments held at 31 July 2008 were reviewed and no adjustments made from previous carrying values.  In total, over the period, the portfolio produced realised gains of £8,000 and unrealised losses of £240,000.

 

At 31 July 2008, the Net Asset Value per Ordinary Share ("NAV") stood at 93.6p, a decrease of 0.9p since the previous year end of 31 January 2008 (after adjusting for the 2.0p dividend paid during the period).  Total Return (NAV plus cumulative dividends since launch) now stands at 98.1p per share.

 

The loss on ordinary activities after taxation for the period was £118,000, comprising a revenue profit of £114,000 and a net capital loss of £232,000.

 

In my statement with the Annual Report, I reported that the Board had set a target of paying a substantial dividend by 30 September 2008.  Following the disposals mentioned above the Company will soon have liquid funds in excess of £4 million (equivalent to approximately 40p per share). 

 

An exit from the investment in Cymbal Contracting Limited is also now at an advanced stage and expected to complete in the next few weeks.  The Board has therefore decided to defer the announcement of a dividend until early October when we hope to be able to declare a dividend that includes the proceeds from Cymbal.

 

The dividend is likely to be paid in early November 2008 and will be for a minimum of 40p per share, possibly significantly higher if the above transaction completes as it is currently scheduled.

 

I will write to all Shareholders with details of the dividend as soon as it is finalised and declared.

 

The Board has had some discussions with the Investment Manager about the future of the Company.  At the Company's outset it was planned to wind up within six years of launch, having returned its funds to Shareholders.  The Board has now considered the merits of a 'C' Share offer and believes that such an offer will have beneficial impact for Ordinary Shareholders as detailed below.

 

The proposed 'C' Share offer will not affect the Company's strategy of liquidating its portfolio and returning funds to Ordinary Shareholders.  The 'C' Share funds will be maintained as a completely separate pool of assets.  Funds raised under the 'C' Share offer will reduce the burden of running costs on Ordinary Shareholders, which will be particularly significant after the Company has returned a major part of its funds.

 

The Company is planning to give Ordinary Shareholders the opportunity to reinvest funds returned to them by way of dividends into the 'C' Share offer.  Full details of the 'C' Share offer proposals will be sent to Shareholders shortly.

 

As I mentioned in my statement with the last Annual Report, the Company is reluctant to undertake any significant volume of share buybacks while it is in the process of realising investments and distributing proceeds. 

 

In order to provide liquidity for forced sellers of shares, the Company intends to continue to buy its own shares should they become available.  The current policy is to undertake share buybacks at a price equivalent to 20% discount to the latest NAV. However, the Board will review this discount level from time to time. 

 

The Company bought a total of 148,880 shares for cancellation in the period at an average price of 77p per share.

 

Under the Disclosure and Transparency Directive, the Board is required in the Company's half-yearly results, to report on principal risks and uncertainties facing the Company over the remainder of the financial year.

 

The Board has reviewed the principal risks and uncertainties facing the Company over the remainder of the financial period and concluded that the key risks are:

 

(i)       investment risk associated with investing in small and immature businesses; and

(ii)     failure to maintain approval as a VCT.

 

In both cases the Board is satisfied with the Company's approach to these risks.  The strategy of, where possible, taking charges over assets to secure its investments helps to limit any potential losses which could arise from the failure of an investee business.

 

The Company continually monitors its compliance with the VCT regulations and retains PricewaterhouseCoopers to provide regular reviews and advice in this area.  The Board considers that this approach reduces the risk of a breach of the VCT regulations to a minimal level.

 

The downturn in the economy and the continuing "credit-crunch" has added to the challenge of unwinding and extracting full value from the Company's portfolio in a timely manner. With the exception of one reasonably small investment, the realisation process has so far progressed to plan and the Investment Manager continues to work towards realising the remainder of the investments at amounts similar to the current valuations over the next year or so.

 

I shall write to Shareholders again in the next few weeks when I am able to confirm full details of the dividend to be paid in early November 2008.

 

 

Chairman

 

as at 31 July 2008

 

 

INCOME STATEMENT

for the six months ended 31 July 2008

 

 

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

 

for the six months ended 31 July 2008

 

as at 31 July 2008

 

* Part of investment is non-VCT qualifying

 

for the six months ended 31 July 2008

 

There were no additions during period.

 

 

1. The unaudited half-yearly results cover the six months to 31 July 2008 and have been prepared in accordance with the accounting policies set out in the statutory accounts for the year ended 31 January 2008 which were prepared under UK Generally Accepted Accounting Practice ("UK GAAP") and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies" revised December 2005 ("SORP").

 

2. All revenue and capital items in the Income Statement derive from continuing operations.

 

3. The Company has only one class of business and derives its income from investments made in shares, securities and bank deposits.

 

4. The comparative figures are in respect of the six-month period ended 31 July 2007 and the 12 month period ended 31 January 2008 respectively.

 

5. Net Asset Value per share has been calculated on 9,994,968 shares, being the share in issue at the period end.

 

6. Return per share for the period has been calculated on 10,092,377 shares, being the weighted average number of shares in issue during the period.

 

 

 

The Special reserve, Capital reserve realised and Revenue reserve are all distributable reserves.

 

9. The unaudited condensed financial statements set out herein do not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985 and have not been delivered to the Registrar of Companies.  The figures for the year ended 31 January 2008 have been extracted from the financial statements for that year, which have been delivered to the Registrar of Companies; the auditors' report on those financial statements was unqualified.

 

The Company may be liable to pay performance incentives by way of additional interest on the loan notes issued to the Management Team and Directors.  The amount of additional interest, if any, is dependent on the level of distributions made to Shareholders before 27 June 2011.  The maximum amount payable under these arrangements is 10% of the net proceeds paid to Shareholders. 

 

Assuming the Company were able to liquidate all its assets and liabilities (at amounts equal to the valuations at 31 July 2008) and distribute these in full to Shareholders before 27 June 2009, the maximum amount payable under the performance incentive arrangements would be approximately £980,000 (equivalent to 9.8p per share).  The Directors' best estimate at 31 July 2008 of the sum that will be payable is £360,000 (equivalent to 3.6p per share), although the Directors note that, should an exit not be able to be achieved from any one large investment before 27 June 2011, it is likely that no fee would be payable.

 

Other than as described above, at 31 July 2008, the Company had no contingencies.

 

11.The Directors confirm that, to the best of their knowledge, the half-yearly financial statements have been prepared in accordance with the "Statement: Half-Yearly Financial Reports" issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by:

 

(a)    DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

 

(b)   DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

 

12.Copies of the unaudited half-yearly report will be sent to Shareholders shortly. Further copies can be obtained from the Company's Registered Office or will be available for download from www.downing.co.uk.