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Downing Three VCT PLC   -  DP3F   

Annual Financial Report

Released 16:40 25-Apr-2019

Annual Financial Report

Downing THREE VCT PLC
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2018
LEI: 2138008V2JDU2K6ZHF80

FINANCIAL HIGHLIGHTS

  31 Dec
2018
  31 Dec
2017
 Pence Pence
‘F’ Share pool   
Net asset value per ‘F’ Share28.4 69.6
Cumulative distributions per ‘F’ Share67.0 30.0
Total return per ‘F’ Share95.4 99.6
    
‘H’ Share pool   
Net asset value per ‘H’ Share51.3 82.3
Cumulative distribution per ‘H’ Share25.0 20.0
Total return per ‘H’ Share76.3 102.3
    
‘J’ Share pool   
Net asset value per ‘J’ Share88.9 94.7
Cumulative distribution per ‘J’ Share- -
Total return per ‘J’ Share88.9 94.7

CHAIRMAN’S STATEMENT

Introduction
It is disappointing to have to report that there have been negative developments in a number of investee companies in the later part of the year ended 31 December 2018. This has resulted in falls in total return of each of the Company’s share pools across the year.

Three energy related investments in particular have suffered heavily, requiring substantial provisions. A brief summary of each share pool is provided below. More detailed reviews are provided in the Investment Manager’s Report and Review of Investments.

‘F’ Share pool
The ‘F’ Share pool was launched in 2012 and now holds a portfolio of 10 investments with a total value of £3.1 million.

At 31 December 2018, the ‘F’ Share NAV stood at 28.4p, which represents a decrease of 6.0% over the year after adjusting for the dividends of 37.0p per share paid in the year. Dividends paid to date total 67.0p per share such that Total Return (NAV plus cumulative dividends to date) is now 95.4p, compared to the initial cost to original subscribers net of income tax relief of 70.0p.

The F Share pool is in the process of realising its investments and returning funds to investors. The Investment Manager is optimistic that this process will complete before the end of the year.

‘H’ Share pool
The ‘H’ Share pool was launched in 2014 and completed its initial investment phase this year. At 31 December 2018, the pool held 13 investments with a total value of £6.6 million.

At 31 December 2018, the ‘H’ Share NAV stood at 51.3p, which represents a decrease over the year of 31.6% after adjusting for the dividends of 5.0p per share paid in the year. Total Return (NAV plus cumulative dividends to date) is now 76.3p, compared to the initial NAV of 100.0p. Major provisions have been required against the share pool’s investments in Hermes Wood Pellets Limited, Apex Energy Limited, Zora Energy Renewables Limited and Quadrate Spa Limited, accounting for most of the fall in value.

In line with the dividend policy, the Board is proposing to pay a final dividend of 5.0p per ‘H’ Share on 14 June 2019 to Shareholders on the register at the close of business on 17 May 2019.

J’ Share pool
The ‘J’ Share Pool was launched in December 2014 and is now fully qualifying as at the year end. At 31 December 2018, the pool held 16 investments with a total value of £7.5 million.

At 31 December 2018, the ‘J’ Share NAV and Total Return stood at 88.9p, which represents a decrease over the year of 6.1%.

In line with VCT regulations the ‘J’ Share pool is able to pay dividends following its first three years. In line with the dividend policy, the Board is proposing to pay a final dividend of 2.5p per ‘J’ Share on 14 June 2019 to Shareholders on the register at the close of business on 17 May 2019.

Share buybacks
For share classes where all investors are still within the initial five year period (currently the ‘H’ Share and ‘J’ Share classes), the Company operates a general policy of buying in its own shares for cancellation when any become available in the market. During this period, any such purchases will be undertaken at a price equal to the latest published NAV (i.e. at nil discount). Any buybacks are subject to regulatory restrictions and other factors such as the availability of liquid funds.

The Company is now unlikely to make any further purchases of ‘F’ Shares. The process of returning funds to ‘F’ Shareholders is now underway.

During the year to 31 December 2018, the Company repurchased and subsequently cancelled 19,400 ‘H’ Shares and 19,725 ‘J’ Shares for an aggregate consideration of £15,940 and £18,677 respectively, being an average price of 82.0p per ‘H’ Share and 94.5p per ‘J’ Share.

A resolution to renew the buyback authority for the Company to purchase its own shares will be proposed at the forthcoming Annual General Meeting.

Share premium
In August 2018, the ‘H’ and ‘J’ Share premium reserve was cancelled and transferred to the special reserve, contributing an additional £24.6 million to distributable reserves.

Annual General Meeting (“AGM”)
The Company’s twelfth AGM will be held at St. Magnus House, 3 Lower Thames Street, London, EC3R 6HD at 11.05 a.m. on 5 June 2019.

One item of special business will be proposed at the AGM. As mentioned above, the Company will seek to renew the authority for the Company to buy back shares.

Outlook
Despite the fact that many of the businesses in which the Company has invested own substantial assets, the fact that the businesses are young (in line with the VCT regulations) and thus immature means there are still significant risks associated with them. This has been highlighted by the setbacks seen in several of the investee companies during the year. Close monitoring of the investee companies has always been a key part of the Investment Manager’s role and will continue to remain so. The Board is ensuring that the Manager takes all reasonable steps that it can to seek to recover as much value as possible from the investments that have faced difficulties.

With the backdrop of Brexit, the economic and political environment in the UK has remained uncertain over the past year and little clarity has been obtained as to the likely outcome of the ongoing negotiations between the UK and the EU. Although this could potentially have some impact on the process of disposing of investments, the Board feels that any impact will be relatively limited.

In the coming year, we expect to see the remaining ‘F’ Share portfolio realised in order to distribute the final funds to invesetors. The ‘H’ Share pool passes its five year anniversary at the end of 2019 and will then seek to start the return of capital process.

I will update Shareholders on progress in my statement with the Half Yearly Report to 30 June 2019. I will also communicate with ‘F’ Shareholders as and when there is news about further dividends.

Michael Robinson
Chairman
25 April 2019

INVESTMENT MANAGER’S REPORT- ‘F’ SHARE POOL
Introduction
The ‘F’ Share pool holds 10 investments and is fully invested in a portfolio focussed on asset backed businesses and those with predictable revenue streams. The focus for this year has been on realisations with the ‘F’ Share pool making two significant distributions during the period.

Net asset value and results
At 31 December 2018, the ‘F’ Share NAV stood at 28.4p. This represents a net decrease of 4.2p per share over the year (after adjusting for dividends paid during the year of 37.0p per Share), equivalent to a decrease of 6.0%. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 95.4p.

The return on ordinary activities for the ‘F’ Share pool for the year was a loss of £451,000 (2017: £561,000) being a revenue loss of £21,000 (2017: £215,000) and a capital loss of £430,000 (2017: £346,000).

‘F’ Share pool - investment activity
During the year, total proceeds of £2.0 million were received from three full exits and one partial exit, generating a total gain over opening value of £350,000.

Goonhilly Earth Station Limited, the operator of a satellite earth station in Cornwall, was sold during the summer and generated proceeds of £1.2 million for the Share pool. This represented an uplift over cost of £217,000.

Proceeds of £770,000 were received from the sale of Merlin Renewables Limited, the anaerobic digestion plant in Norfolk compared to a cost of £500,000.

In addition to the above, there was also a full exit of the Scottish licensed leisure company, Fubar Stirling Limited, which generated proceeds of £12,000 and a total gain over carrying value of £5,000.

There was also a partial loan note redemption in Fresh Green Power Limited, the domestic rooftop solar company, which was redeemed at par.

With the pool in the process of realising its investments following the passing of the five year anniversary of the close of the ‘F’ Share offer, no new investments were made in the period.

Plans are in place for the exit of the remaining portfolio companies and we anticipate this exercise will complete in full by the third quarter of 2019.

‘F’ Share pool – portfolio valuation
The majority of investments remain valued at or above cost, however there were a small number of substantial decreases in value in the portfolio that resulted in an unrealised loss over opening value of £780,000.

Pearce and Saunders Limited, the owner of three freehold pubs in south east London, has increased in value by £174,000 in line with expected exit proceeds.

Portfolio company, Atlantic Dogstar Limited was uplifted by £35,000, based on the minimum expected returns.

The most notable write down in the period related to Apex Energy Limited, who are the developer of a standby electricity generation plant in the East Midlands. The investment was reduced in value by £900,000 following several material shortcomings in the plant and equipment supplied that have severely impacted operations. Work is ongoing to establish what steps could result in some recovery of value, including legal action against the third party operator.

London City Shopping Centre Limited, which was seeking to develop a site near the Barbican, London, was unable to find a buyer for the site or secure additional funding to progress with the development. As a result, the business has entered administration and has now been fully provided against. This resulted in a valuation decrease of £66,000.

Outlook
Focus for the ‘F’ Share pool remains on the realisation of its investments. Realisation plans are in place for the remaining investments in the portfolio with some expected to complete in the next few months in order to distribute the final funds to investors.

Downing LLP
25 April 2019

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 December 2018:

‘F’ Share pool 

Cost
 

Valuation
Valuation
 movement
in year

% of
portfolio
  £’000  £’000 £’000 
     
VCT qualifying and partially qualifying investments    
Pearce and Saunders Limited49767117421.7%
Downing Pub EIS One Limited4906203220.1%
Lambridge Solar Limited5006051019.6%
Atlantic Dogstar Limited200270358.8%
Fresh Green Power Limited189210(19)6.8%
Apex Energy Limited1,000100(900)3.2%
Green Energy Production UK Limited10054(46)1.7%
 2,9762,530(714)81.9%
Non-qualifying investments    
Baron House Developments LLP481481-15.6%
Pearce and Saunders DevCo Limited4646-1.5%
London City Shopping Centre Limited66-(66)0.0%
 593527(66)17.1%
     
 3,5693,057(780)99.0%
     
Cash at bank and in hand 31 1.0%
     
Total investments  3,088 100.0%

Summary of investment movements

Disposals

  


Cost
 
 

MV at  01/01/18
  

Disposal
proceeds
 Gain/
(loss)
against
cost
 Total realised
gain during 
the year
 £’000£’000 £’000 £’000 £’000
VCT qualifying and partially qualifying
  investments
 
Goonhilly Earth Station Limited954 954 1,171 217 217
Merlin Renewables Limited500 642 770 270 128
Fubar Stirling Limited101 7 12 (89) 5
Fresh Green Power Limited11 11 11 - -
          
Total ‘F’ Share pool1,566 1,614 1,964 398 350

INVESTMENT MANAGER’S REPORT- ‘H’ SHARE POOL

The ‘H’ Share pool raised funds in 2014 and the task of building the initial VCT qualifying portfolio is now complete. It is disappointing to report that the ‘H’ Share pool has suffered heavily from difficulties in a several of its investments. The required write downs have had a significant negative impact on Total Return over the year.

Net asset value and results
At 31 December 2018, the net asset value per ‘H’ Share was 51.3p. This represents a net decrease of 26.0p per share over the year (after adjusting for dividends paid during the year of 5.0p per share), equivalent to a decrease of 31.6%. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 76.3p.

The return on ordinary activities for the ‘H’ Share pool for the year was a loss of £3.5 million (2017: £148,000) being a revenue profit of £194,000 (2017: £58,000) and a capital loss of £3.7 million (2017: £90,000).

Investment activity

With the pool being fully qualifying, no new investments were made in the period. One full and one partial exit completed generating proceeds of £632,000.

Proceeds of £257,000 were generated from the sale of Oak Grove Renewables Limited, the operator of an anaerobic digestion plant in Norfolk. This represented a loss over cost of £163,000.

In December 2018, the £375,000 non-qualifying loan in Hedderwick Limited was transferred to the Downing Three VCT plc ‘J’ Share.

‘H’ Share pool – portfolio valuation
The period to 31 December 2018 has seen a number of disappointing developments, resulting in an unrealised loss of £3.7 million.

The most notable write down in the period related to Hermes Wood Pellets Limited. The company was planning to build, commission and operate a wood pelleting plant in Goole, Yorkshire. However, due to significant delays and cost overruns the contractor was unable to procure a construction contractor which would deliver the project within budget. As a result, a significant shortfall has been created resulting in a valuation write down of £1.3 million. Management is working to find a solution which can recover some equity value to Shareholders.

Apex Energy Limited is the developer of a standby electricity generation plant in the East Midlands. The investment was reduced in value by £1.2 million following several material shortcomings in the plant and equipment supplied that have severely impacted operations. Work is ongoing to establish what steps could result in some recovery of value, including legal action against the third party operator.

The investments in Quadrate Spa Limited and Quadrate Catering Limited, which own and operate a health club business and a top floor restaurant in The Cube complex in Birmingham were reduced in value by £458,000 and £149,000 respectively as a result of continued performances issues.

Zora Energy Renewables Limited is a wood pellet sales and distribution business. To date the business has been unable to develop at the rate originally planned and a provision of £896,000 has been required.

The unrealised losses were partially offset by gains in the period totalling £235,000.

The most significant gain related to Atlantic Dogstar Limited, which owns a group of London pubs. The investment was uplifted by £176,000 based on the minimum expected returns.

Outlook
The falls in value experienced by the ‘H’ Share pool are extremely disappointing. We have dedicated substantial resources to the portfolio companies in question in seeking to address the issues and are developing plans to recover as much value as possible for investors.

The process of realising all of the investments to return funds to investors is scheduled to commence in 2020. We believe there are opportunities to achieve some growth from the current portfolio valuation before the exit date.

Downing LLP
25 April 2019

REVIEW OF INVESTMENTS – ‘H’ SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2018:

‘H’ Share pool 

Cost
 

Valuation
Valuation
 movement
in year
 
% of
portfolio
  £’000  £’000 £’000 
     
VCT qualifying investments and partially qualifying investments    
Atlantic Dogstar Limited1,0001,35017620.2%
Quadrate Catering Limited851702(149)10.5%
Ironhide Generation Limited613613-9.2%
Indigo Generation Limited613613-9.2%
Antelope Pub Limited500500-7.5%
Rockhopper Renewables Limited492492-7.4%
SF Renewables (Solar) Limited282324424.8%
Hermes Wood Pellets Limited1,500228(1,272)3.4%
Pearce and Saunders Limited193193-2.9%
Apex Energy Limited1,300130(1,170)1.9%
Zora Energy Renewables Limited1,000104(896)1.5%
 8,3445,249(3,269)78.5%
     
Non-qualifying investments    
Hedderwick Limited8759451714.1%
Quadrate Spa Limited850392(458)5.9%
 1,7251,337(441)20.0%
     
 10,0696,586(3,710)98.5%
     
Cash at bank and in hand 103 1.5%
     
Total investments  6,689 100.0%

Summary of investment movements

Disposals

  

Cost


MV at  01/01/18
 
Disposal
proceeds
 Gain
against
cost
 Total realised
gain during
  the year
 £’000 £’000 £’000 £’000 £’000
VCT qualifying and partially qualifying
  investments
         
Oak Grove Renewables Limited420 231 257 (163) 26
          
Non-qualifying investments         
Hedderwick Limited375 375 375 - -
          
 795 606 632 (163) 26

REVIEW OF INVESTMENTS – ‘J’ SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2018:

‘J’ Share pool 

Cost
 

Valuation
Valuation
 movement
in year
 
% of
portfolio
  £’000  £’000 £’000 
     
VCT qualifying investments and partially qualifying investments    
Pilgrim Trading Limited1,2971,297-14.2%
Jito Trading Limited1,0001,000-11.0%
Yamuna Renewables Limited800800-8.8%
Ormsborough Limited1,000689(358)7.5%
Indigo Generation Limited613613-6.7%
Ironhide Generation Limited613613-6.7%
Exclusive Events Venues Limited500500-5.5%
Rockhopper Renewables Limited492492-5.4%
Garthcliff Shipping Limited400400-4.4%
SF Renewables (Solar) Limited281323423.5%
Zora Energy Renewables Limited30031(269)0.3%
Mosaic Spa and Healthclubs Limited242620.3%
 7,3206,784(583)74.3%
     
Non-qualifying investments    
Hedderwick Limited375375-4.1%
Fenkle Street LLP28729583.2%
Snow Hill Developments LLP4343-0.5%
London City Shopping Centre Limited15-(15)0.0%
 720713(7)7.8%
     
 8,0407,497(590)82.1%
     
Cash at bank and in hand 1,628 17.9%
     
Total investments  9,125 100.0%

Summary of investment movements

Additions

 Cost
 £’000
Non-qualifying investments 
Hedderwick Limited375
  
Total ‘J’ Share pool375


  


Cost
 


MV at  01/01/18
  

Disposal
proceeds
 Gain/
(loss)
against
cost
 Total realised
gain during
  the year
 £’000£’000 £’000 £’000 £’000
          
VCT qualifying and partially qualifying investments        
Oak Grove Renewables Limited420 231 257 (163) 26
Mosaic Spa and Healthclubs Limited3 3 4 1 1
Managed Storage Services (1) Limited400 400 400 - -
          
Total ‘J’ Share pool823 634 661 (162) 27

Directors’ responsibilities statement
The Director’s are responsible for preparing the Strategic Report, 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), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102). 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 judgements 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.

In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company’s position and performance, business model and strategy.

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 December 2018


 
 Year ended 31 December 2018 Year ended 31 December 2017*
   

Revenue
 

Capital
 

Total
  

Revenue
 

Capital
 

Total
 £’000£’000£’000 £’000£’000£’000
         
Income 88532917 993341,027
         
(Loss)/return on investments -(4,677)(4,677) -535535
  885(4,645)(3,760) 9935691,562
         
Investment management fees (430)-(430) (594)-(594)
         
Other expenses (256)-(256) (264)-(264)
         
(Loss)/return on ordinary activities before tax199(4,645)(4,446) 135569704
         
Tax on total comprehensive income and ordinary activities (112)-(112)  (27) -(27)
         
(Loss)/return for the year attributable to equity shareholders87(4,645)(4,558) 108569677
         
Basic and diluted (loss)/return per:       
‘D’ Share --- -0.9p0.9p
‘F’ Share (0.2p)(4.0p)(4.2p) 2.0p3.2p5.2p
‘H’ Share 1.5p(27.6p)(26.1p) 0.4p0.7p1.1p
‘J’ Share (0.8p)(5.0p)(5.8p) (1.5p)0.4p(1.1p)

All Revenue and Capital items in the above statement are derived from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards (“FRS 102”). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 and updated January 2017 by the Association of Investment Companies (“AIC SORP”).

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 historical cost.

* The comparative Income Statement as at 31 December 2017 includes the ‘D’ Share pool which has subsequently been cancelled.

INCOME STATEMENT (ANALYSED BY SHARE POOL)
for the year ended 31 December 2018

‘D’ Share pool


 
 Year ended 31 December 2018 Year ended 31 December 2017
     
  RevenueCapitalTotal RevenueCapitalTotal
 £’000£’000£’000 £’000£’000£’000
         
Income --- 123446
Gain on investments --- -5959
  --- 1293105
Investment management fees --- (32)-(32)
Other expenses --- (17)-(17)
(Loss)/return on ordinary activities before tax- -- (37)9356
Tax on total comprehensive income and ordinary activities --- 31-31
(Loss)/return attributable to equity shareholders   --- (6)9387

‘F’ Share pool


 
 Year ended 31 December 2018 Year ended 31 December 2017
     
  RevenueCapitalTotal RevenueCapitalTotal
 £’000£’000£’000 £’000£’000£’000
         
Income 172-172 449-449
(Loss)/gain on investments -(430)(430) -346346
  172(430)(258) 449346795
Investment management fees (98)-(98) (136)-(136)
Other expenses (68)-(68) (91)-(91)
(Loss)/return on ordinary activities before tax6(430)(424) 222346568
Tax on total comprehensive income and ordinary activities (27)-(27) (7)-(7)
(Loss)/return attributable to equity shareholders   (21)(430)(451) 215346561

‘H’ Share pool


 
 Year ended 31 December 2018 Year ended 31 December 2017
     
  RevenueCapitalTotal RevenueCapitalTotal
 £’000£’000£’000 £’000£’000£’000
         
Income 515-515 364-364
(Loss)/gain on investments -(3,684)(3,684) -9090
  515(3,684)(3,169) 36490454
Investment management fees (169)-(169) (229)-(229)
Other expenses (105)-(105) (82)-(82)
Return on ordinary activities before tax241(3,684)(3,443) 5390143
Tax on total comprehensive income and ordinary activities (47)-(47) 5-5
Return attributable to equity shareholders   194(3,684)(3,490) 5890148

‘J’ Share pool


 
 Year ended 31 December 2018 Year ended 31 December 2017
     
  RevenueCapitalTotal RevenueCapitalTotal
 £’000£’000£’000 £’000£’000£’000
         
Income 19832230 168-168
(Loss)/gain on investments -(563)(563) -4040
  198(531)(333) 16840208
Investment management fees (163)-(163) (197)-(197)
Other expenses (83)-(83) (74)-(74)
(Loss)/return on ordinary activities before tax(48)(531)(579) (103)40(63)
Tax on total comprehensive income and ordinary activities (38)-(38) (56)-(56)
(Loss)/return attributable to equity shareholders   (86)(531)(617) (159)40(119)

BALANCE SHEET

as at 31 December 2018


 
 2018 2017
  £000 £000
Fixed assets    
Investments 17,140 24,699
     
Current assets    
Debtors 779 322
Cash at bank and in hand 1,762 3,933
  2,541 4,255
 

Creditors: amounts falling due within one year
 (255) (262)
     
Net current assets 2,286 3,993
     
Net assets 19,426 28,692
     
Capital and reserves    
Called up share capital 35 60
Capital redemption reserve 149 124
Special reserve 25,206 5,146
Share premium reserve - 24,639
Revaluation reserve (4,748) 1
Capital reserve – realised (1,029) (1,039)
Revenue reserve (187) (239)
     
Total equity shareholders’ funds 19,426 28,692
     
Basic and diluted net asset value per Share:    
‘F’ Share 28.4p 69.6p
‘H’ Share  51.3p 82.3p
‘J’ Share 88.9p 94.7p

The financial statements were approved and authorised for issue by the Board of Directors on 25 April 2019 and were signed on its behalf by:

Michael Robinson
Chairman
Company number: 5334413

* The comparative Balance Sheet at 31 December 2017 includes the ‘D’ Share pool which has subsequently been cancelled.

BALANCE SHEET (ANALYSED BY SHARE POOL)

as at 31 December 2018

‘D’ Shares


 
 2018 2017
  £000 £000
Fixed assets    
Investments - -
Current assets    
Debtors - 1
Cash at bank and in hand - 20
  - 21
Creditors: amounts falling due within one year - (21)
Net current assets - -
Net assets - -
     
Capital and reserves    
Called up share capital - 25
Capital redemption reserve - 124
Revaluation reserve - (249)
Revenue reserve - 100
Total equity shareholders’ funds - -

‘F’ Shares


 
 2018 2017
  £000 £000
Fixed assets    
Investments 3,057 5,451
Current assets    
Debtors 55 123
Cash at bank and in hand 31 2,042
  86 2,165
Creditors: amounts falling due within one year (70) (88)
Net current assets 16 2,077
Net assets 3,073 7,528
     
Capital and reserves    
Called up share capital 11 11
Capital redemption reserve 149 -
Special reserve 4,229 7,835
Revaluation reserve (721) 356
Capital reserve – realised (1,033) (1,033)
Revenue reserve 438 359
Total equity shareholders’ funds 3,073 7,528

‘H’ Shares


 
 2018 2017
  £000 £000
Fixed assets    
Investments 6,586 10,902
Current assets    
Debtors 284 89
Cash at bank and in hand 103 128
  387 217
Creditors: amounts falling due within one year (111) (82)
Net current assets 276 135
Net assets 6,862 11,037
     
Capital and reserves    
Called up share capital 13 13
Special reserve 10,086 (2,689)
Share premium reserve - 13,608
Revaluation reserve (3,483) 38
Revenue reserve 246 67
Total equity shareholders’ funds 6,862 11,037

‘J’ Shares


 
 2018 2017
  £000 £000
Fixed assets    
Investments 7,497 8,346
Current assets    
Debtors 440 109
Cash at bank and in hand 1,628 1,743
  2,068 1,852
Creditors: amounts falling due within one year (74) (71)
Net current assets 1,994 1,781
Net assets 9,491 10,127
     
Capital and reserves    
Called up share capital 11 11
Special reserve 10,891 -
Share premium reserve - 11,031
Revaluation reserve (544) (144)
Capital reserve – realised 4 (6)
Revenue reserve (871) (765)
Total equity shareholders’ funds 9,491 10,127

STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2018

 Called up share
capital
Capital
redemption
reserve
Special
reserve
Share
premium
reserve
Revaluation
reserve
Capital
reserve
- realised
Revenue
reserve
Total
 £’000£’000£’000£’000£’000£’000£’000£’000
         
At 1 January 2017781069,88824,639(790)(1,033)13233,020
Total comprehensive income----268301108677
Transactions with owners        
Purchase of own shares------(66)(66)
Transfer between
  Reserves*

-
-(4,742)-5234,632(413)
-
Cancellation of shares(18)18------
Dividend paid-----(4,939)-(4,939)
At 31 December 2017601245,14624,6391(1,039)(239)28,692
Total comprehensive income----(5,079)43487(4,558)
Share premium cancellation--24,639(24,639)----
Transactions with owners        
Purchase of own shares------(35)(35)
Transfer between
  Reserves*
--(4,579)-3304,249--
Cancellation of shares(25)25------
Dividend paid-----(4,673)-(4,673)
At 31 December 20183514925,206-(4,748)(1,029)(187)19,426
          

* A transfer of £330,000 (2017: £523,000) representing previously recognised unrealised gains on disposal of investments during the year ended 31 December 2018 has been made from the Revaluation Reserve to the Capital Reserve realised. A transfer of £4.2 million (2017: £4.6 million) representing realised gains on disposal of investments, less capital expenses and capital dividends in the year was made from Capital Reserve – realised to Special reserve. In 2017 a transfer of £413,000 was made from Capital Reserve – realised to Revenue reserve to reconcile the D Share pool reserves.

CASH FLOW STATEMENT
for the year ended 31 December 2018

  Year ended 31 December 2018
 

 
  ‘F’
Share
pool
‘H’
Share
pool
‘J’
 Share
pool
 
Total
   £’000£’000£’000£’000
Net cash (outflow)/inflow from operating activities  928(382)(345)
        
Cash flow from investing activities       
Purchase of investments   --(375)(375)
Sale of investments   1,9646326613,257
  Net cash inflow from investing activities  1,9646322862,882
        
Net cash inflow before financing activities  1,973660(96)2,537
        
Cash flows from financing activities       
Equity dividends paid   (4,004)(669)-(4,673)
Purchase of own shares   -(16)(19)(35)
Net cash outflow from financing activities  (4,004)(685)(19)(4,708)
        
(Decrease)/increase in cash   (2,031)(25)(115)(2,171)
Cash and cash equivalents at start of year   2,0621281,7433,933
Cash and cash equivalents at end of year   311031,6281,762
        
Cash and cash equivalents comprise       
Cash at bank and in hand   311031,6281,762
Total cash and cash equivalents   311031,6281,762
        


  Year ended 31 December 2017
 

 
 ‘D’
Share
pool
‘F’
Share
pool
‘H’
Share
pool
‘J’
 Share
pool
 
Total
 £’000£’000£’000£’000£’000
Net cash inflow/(outflow) from operating activities (33)12466(228)(71)
        
Cash flow from investing activities       
Purchase of investments  -(684)-(2,969)(3,653)
Sale of investments  2,4402,7861554,94410,325
Net cash inflow/(outflow) from investing activities2,4402,1021551,9756,672
        
Net cash inflow/(outflow) before financing activities 2,4072,2262211,7476,601
        
Cash flows from financing activities       
Equity dividends paid (3,726)(541)(672)-(4,939)
Purchase of own shares --(30)(36)(66)
Net cash outflow from financing activities (3,726)(541)(702)(36)(5,005)
        
(Decrease)/increase in cash  (1,319)1,685(481)1,7111,596
Cash and cash equivalents at start of year  1,339357609322,337
Cash and cash equivalents at end of year  202,0421281,7433,933
        
Cash and cash equivalents comprise       
Cash at bank and in hand  202,0421281,7433,933
Total cash and cash equivalents  202,0421281,7433,933
        

NOTES TO THE ACCOUNTS
for the year ended 31 December 2018

1. General information

Downing THREE VCT plc (“the Company”) is a venture capital trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales, and its registered office is St. Magnus House, 3 Lower Thames Street, London, EC3R 6HD.

2. Accounting policies

Basis of accounting
The Company has prepared its financial statements under FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ and in accordance with the Statement of Recommended Practice (“SORP”) for investment trust companies and venture capital trusts issued by the Association of Investment Companies (“AIC”) revised November 2014 and updated January 2017 as well as the Companies Act 2006.

The financial statements are presented in Sterling (£) and rounded to thousands.

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 return on ordinary activities is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Investments
Venture capital investments are designated as “fair value through profit or loss” assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company’s documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines (“IPEV”) together with FRS 102 sections 11 and 12.

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.

All investments are held at the price of recent investment for an appropriate period where there is considered to have been no change in fair value. Where this basis is no longer considered appropriate, the following factors will be considered:

- Where a value is demonstrated by a material arms-length transaction by an independent third party in the shares of a company, this value may be used;
- In the absence of the above, depending on each of the subsequent trading performance and investment structure of an investee company, the valuation basis will likely move to either:
i) an earnings multiple basis; or
ii) where a company’s underperformance against plan indicates a diminution in the value of the investment, provision against cost is made, as appropriate.
- Premiums on loan stock investments are accrued at fair value when the Company receives the right to the premium and when considered recoverable;
- Where an earnings multiple or cost less impairment basis is not appropriate and overriding factors apply, discounted cash flow, a net asset valuation, or industry specific valuation benchmarks may be applied.

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 and FRS 102 sections 14 and 15 that does not require portfolio investments, where the interest held is greater than 20%, 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.

Distributions from investments in limited liability partnerships (“LLPs”) are recognised as they are paid to the Company. Where such items are considered capital in nature they are recognised as capital profits.

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.
- Performance incentive fees arising from the disposal of investments are deducted as a capital item.

Dividends payable
Dividends payable are recognised as distributions in the financial statements when the Company’s liability to make payment has been established, normally the record date.

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 year.

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 financial statements. Deferred taxation is not discounted.

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 for each share class have been deducted from the revenue reserve account for the relevant share class.

Significant estimates and judgements
Disclosure is required of judgements and estimates made by management in applying the accounting policies that have a significant effect on the financial statements. The area involving a higher degree of judgement and estimates is the valuation of unquoted investments as explained in the investment accounting policy above.

3. Basic and diluted return per share

    ‘F’ Shares‘H’ Shares‘J’ Shares
       
       
Revenue return/ (loss) (£’000)   (21)194(86)
Per share   (0.2p)1.5p(0.8p)
       
Net capital (loss)/gain for the year (£’000) (430)(3,684)(531)
Per share   (4.0p)(27.6p)(5.0p)
       
Total return/ (loss) after taxation (£’000) (451)(3,490)(617)
Per share (4.2p)(26.1p)(5.8p)
       
Weighted average number of shares in issue 10,821,66013,350,47710,653,285

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.

4. Basic and diluted net asset value per share

  20182017
 Shares in issue  Net asset valueNet asset value
 31 Dec 201831 Dec 2017per share£’000 per share£’000
           
‘D’ Shares-9,979,109 - - - -
‘E’ Shares-14,994,862   - - - -
‘F’ Shares10,821,66010,821,660 28.4p 3,073 69.6p 7,528
‘H’ shares13,389,75813,409,158 51.3p 6,862 82.3p 11,037
‘J’ Shares10,675,53310,695,258 88.9p 9,491 94.7p 10,127
      19,426   28,692

The ‘F’ Share pool, ‘H’ Share pool and ‘J’ Share pool are treated as separate investment pools. 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.

5. Principal risk
The Company’s financial instruments comprise investments held at fair value through profit and loss, being equity and loan stock investments in unquoted companies, loans and receivables consisting of short term debtors, cash deposits 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 above.

The fair value of cash deposits and short term debtors and creditors equates to their carrying value in the Balance Sheet.

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 risks 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 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 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 in addition to the appropriateness of the valuation method used. 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.

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 “Market risks” above. In addition, the credit risk is mitigated for all investments in loan stocks by taking security, covering the full par value of the loan stock in the form of fixed and floating charges over the assets of the 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. 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.

 

Of the investments in loan stock above, as at 31 December 2018 £510,000 relates to the principal of loan notes where, although the principal remains within term, the investee company is not fully servicing the interest obligations under the loan note and is thus in arrears.

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, (£255,000, 2017: £262,000) 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.

6. Events after the end of the reporting period
After the end of the reporting period, in February 2019, a fire occurred at the plant owned by Yamuna Renewables Limited, which is an invesetment held by the 'J' Share pool. The facility has been brought back to full operational capability and an insurance claim is being pursued, but the interruption in supply during the key season trading period has impacted customer confidence which is likely to take time to rebuild. A provision against the valuation may be required when the impact has been fully assessed. By way of illustration, a provision of 25% against the previous carrying value would equate to a write down of £200,000, equivalent to 1.9 pence per share, in the 'J' Share pool.

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 2018, but has been extracted from the statutory financial statements for the year ended 31 December 2018 which were approved by the Board of Directors on 25 April 2019 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

The statutory accounts for the period ended 31 December 2017 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 2018 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at St. Magnus House, London, EC3R 6HD and will be available for download from www.downing.co.uk.


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Annual Financial Report - RNS