17th Feb 2011 12:22
Baronsmead VCT 3 plc
Annual report & accounts for the year ended 31 December 2010
Investment Objective
Baronsmead VCT 3 is a tax efficient listed company which aims to achieve long-term investment returns for private investors.
Investment Policy
â— To invest primarily in a diverse portfolio of UK growth businesses, whether unquoted or traded on AIM.
â— Investments are made selectively across a range of sectors in companies that have the potential to grow and enhance their value.
Full details on the Company's published investment policy and risk management are contained in the Report of the Directors.
Dividend policy
The Board of Baronsmead VCT 3 has the objective to maintain a minimum annualdividend level of around 4.5p per ordinary share if possible, but this dependsprimarily on the level of realisations achieved and cannot be guaranteed. Therewill be variations in the amount of dividends paid year on year. Since launch,the average annual tax-free dividend paid to Shareholders has been 5.6p perordinary share (equivalent to a pre-tax return of 7.4p per ordinary share for ahigher rate taxpayer). For shareholders who received up front tax reliefs,their returns would have been higher.
Secondary market in the shares of Baronsmead VCT 3
The existing shares of the Company are listed on the London Stock Exchange and can be bought and sold using a stockbroker in the same way as shares of any other listed company.
Qualifying investors* who invest in the existing shares of the Company can benefit from:
• Tax free dividends
• Realised gains not subject to capital gains tax (although any realised losses are not allowable)
• No minimum holding period
• No need to include VCT dividends in annual tax returns
The UK tax treatment of VCTs is on a first in first out basis and therefore taxadvice should be obtained before shareholders dispose of their shares and alsoif they deferred a capital gain in respect of new shares acquired prior to 6April 2004.
*UK income tax payers, aged 18 or over, who acquire no more than £200,000 worth of VCT shares in a tax year.
Financial Headlines
â— 12.4% Net asset value ("NAV") per ordinary share increased 12.4 per cent to 109.60p before deduction of dividends.
â— 7.5p Dividends for the year total 7.5p per share comprising the interim dividend of 3.0p and the proposed final dividend of 4.5p, tax free for qualifying shareholders.
â— 55.8p Cumulative tax free dividends total 55.8p per share for founder shareholders over the last ten years, equivalent to an annual average dividend of 5.6p per share.
â— 180.2p NAV total return to ordinary shareholders for every 100p invested since launch in January 2001, prior to tax relief.
â— 8.0% Dividend yield. Based on the 7.5p dividends paid and proposed in the year and the mid share price of 94.25p at year end, qualifying shareholders have received a tax free cash return of 8.0 per cent, ignoring up front tax relief.
Summary Since Launch
Performance Summary to 31 December 2010
1 year 3 years 5 years Since launch Total return* % % % % Net asset value†+12.7 +5.7 +24.5 +80.2 Share price†+13.0 +2.9 +33.5 +59.1 FTSE All-Share +14.5 +4.4 +28.4 +41.0*Source: ISIS EP LLP and AIC.
†These returns for BVCT 3 ignore up front tax reliefs and the impact of receiving dividends tax free.
Performance Record Ordinary share FTSE Combined Total Net Share Net asset All-Share total net asset price value total expenseYear ended assets value (mid) total return ratio†return* 31 December £m p p p p % 2001 31.1 93.85 88.00 101.21 85.14 2.9 2002 32.1 94.85 85.50 105.35 65.83 3.3 2003 33.0 97.15 90.00 112.65 79.56 3.1 2004 35.1 106.38 92.50 125.64 89.77 3.5 2005 56.2 117.31 100.50 144.77 109.56 3.5 2006 66.5 130.77 116.50 169.27 127.91 3.4 2007 65.2 120.44 111.50 170.56 134.71 3.4 2008 55.1 102.72 90.50 149.56 94.61 3.0 2009 52.9 97.50 86.25 159.89 123.11 3.1 2010 64.6 106.60 94.25 180.19 140.97 3.0* Source: ISIS EP LLP.†As a percentage of average total shareholders' funds (excluding performancefee).Dividends Paid Since Launch Ordinary share Total Average Revenue Capital annual Cumulative total annualYear ended dividend dividend dividend dividends dividend31 December p p p p p 2001 2.30 - 2.30 2.30 2.30 2002 2.80 - 2.80 5.10 2.55 2003 2.20 2.00 4.20 9.30 3.10 2004 1.20 3.30 4.50 13.80 3.45 2005 2.00 3.50 5.50 19.30 3.86 2006 1.75 4.75 6.50 25.80 4.30 2007 2.30 5.20 7.50 33.30 4.76 2008 2.40 5.10 7.50 40.80 5.10 2009 1.20 6.30 7.50 48.30 5.37 2010* 2.00 5.50 7.50 55.80 5.58
* Includes proposed final dividend of 4.5p.
Cash Returned to Shareholders
The table below shows the cash returned to shareholders dependent on their subscription cost, including their income tax reclaimed on subscription.
Net Cumulative Subscription Income tax cash dividends Net annual Gross price reclaim invested paid* yield‡ yield†Year subscribed p p p p % % 2001 100.0 20.0 80.0 55.8 7.0 9.4 2005 - C share 100.0 40.0 60.0 26.3 7.5 10.0 2010 103.1 30.9 72.2 7.5 -^ -^
Note - The total return could be higher for those shareholders who were able to defer a capital gain on subscription and the net sum invested may be less.
* Includes proposed final dividend of 4.5p to be paid on 8 April 2011.
‡ Net annual yield represents the cumulative dividends paid expressed as an annualised percentage of the net cash invested.
†The gross equivalent yield if the dividends had been subject to higher ratetax (32.5 per cent on dividend income at 31 December 2010). As from the taxyear 2010/11, a new additional rate of tax on dividend income of 42.5 per centcame into force for those who earned more than £150,000. For those Shareholderswho would otherwise pay this higher rate of tax on dividends, the future grossequivalent yield will be higher than the figures shown.
Dividends paid to C shareholders post conversion have been adjusted by the conversion ratio (0.85642528).
ˆ The table above excludes returns for shareholders who subscribed in the Joint Offer with Baronsmead VCT 4 plc as those returns are not yet meaningful.
Chairman's Statement
I am pleased to report an increase in Net Asset Value per share of 12.4 percent for the year to 31 December 2010, as a result of increased valuations ofour investments following improved trading results within the portfoliocompanies. The total 7.5p per share dividend paid in the last three years hasbeen sustained.Baronsmead VCT 3 was launched ten years ago in January 2001. Despiteexperiencing two major stock market downturns in this decade, the Company hasgenerated a strong, absolute and relative investment return. Dividend payments(including the proposed final dividend of 4.5p) totalling 55.8p per share havebeen tax free for qualifying private investors.
INVESTMENT PERFORMANCE
In the year to 31 December 2010, the Net Asset Value ("NAV") per share increased 12.4 per cent from 97.50p to 109.60p before payment of dividends. The position can be summarised as follows:
Pence per share NAV as at 1 January 2010 97.50 Valuation up lift 12.10 109.60 Interim dividend paid on 15 September (3.00)2010 Proposed final dividend payable on 8 (4.50)April 2011 NAV as at 31 December 2010 102.10 The 12.4 per cent growth in NAV per share over the year is due to an uplift inthe valuation of the unquoted investments as a result of strong tradingperformances at several companies in the portfolio as well as an increase inthe value of the AIM-traded and listed portfolio in the second half of thefinancial year.During the year, the Company realised profits from the sale of a number ofunquoted and AIM-traded investments, including Active Assistance, AdvancedComputer Software, Credit Solutions and WIN. These profitable realisationsunderpin the ability of the Company to continue to pay dividends in accordancewith its dividend policy. The proposed final dividend of 4.5p per share willtake total dividends to 7.5p per share for the year.The Board is aware of shareholders' previously expressed preference to receiveincome while also achieving capital growth. The increase in NAV per share to102.10p following payment of the proposed dividend is a positive step in thisdirection and above the 100p subscription price for founder shareholders.
All of the VCT qualifying tests have been met throughout the year.
THE LAST TEN YEARS
Since the launch of the Company in January 2001, Baronsmead VCT 3 has raised £71m (after expenses). The Company's net asset value as at 31 December 2010 was£64.6 million, having paid dividends of approximately £25.4 million and boughtback shares at a cost of £9.4 million. The Company has had three majorfundraisings as well as a number of smaller non-prospectus offers during thepast ten years.A little over 2,000 shareholders invested £31 million (after costs) in thefirst quarter of 2001. The first of the major downturns in stock markets thathave occurred during the past ten years happened almost immediately after thelaunch, as the FTSE All-Share Index fell by approximately 50 per cent by March2003. However shareholders in Baronsmead VCT 3 experienced positive year onyear investment returns until 2008 when the second major stock market downturnoccurred. This did have an impact on Baronsmead VCT 3 and in the 2008 yearthere was a negative return. This has now been more than made up by thepositive investment returns in 2009 and more particularly 2010. The chart atthe top of page 2 in the Annual report and accounts for year ended 31 December2010 shows how the total return achieved by Baronsmead VCT 3 has, from theoutset, out-performed the FTSE All-Share index and been less volatile.Shareholders subscribed £23 million after costs in winter 2005/6 and a further£7.7 million in spring 2010. The investment returns for those who invested inthese fundraisings have also been positive with annual dividends of 7.5p perordinary share since the 2007 financial year being a particular feature.Dividends totalling 55.8p per share have been paid to founder shareholders.This represents an average annual dividend of 5.6p per share since launch inJanuary 2001 when founder shareholders subscribed £1 per share (prior to takingaccount of any initial income tax relief or capital gains deferral relief onsubscription).The returns to shareholders are significantly enhanced by the range of VCT taxreliefs available to qualifying investors. The tax free nature of VCT dividendsis of particular benefit for qualifying shareholders as they do not have to payincome tax on the dividends they receive, or declare them in a tax return. As aresult, qualifying shareholders in Baronsmead VCT 3, who are higher oradditional rate tax payers do not have to pay income tax equivalent to 25 percent and 36.1 per cent respectively on the cash dividend they receive from theCompany. To generate the same after-tax dividends, it would be necessary forthe dividend received from a non-VCT investment to be 33.3 per cent or 56.5 percent higher, respectively.Depending on when investors subscribed for new shares, qualifying shareholderswould have been able to reclaim 20 per cent, 30 per cent or 40 per cent of theamount invested. If the initial tax relief on the amounts subscribed is takeninto account, the extra yield required from a non-VCT investment to deliver thesame after-tax returns is substantial.
PORTFOLIO
The portfolio, consisting of 63 companies, has shown a strong valuationincrease over the last twelve months. The direction of travel of thesecompanies is recorded every quarter so that the overall health of the portfoliocan be monitored. At the year-end, 89 per cent of companies in the portfolioare progressing steadily or better. The level of investee company borrowingshas fallen generally and profit margins have been maintained.48 per cent of the £64.6 million of net assets at 31 December 2010 wereinvested in unquoted companies, 25 per cent in AIM-traded and other listedshares and the balance of 27 per cent remained in liquid assets or governmentsecurities. The largest unquoted investment at that date, Reed & Mackay, andthe largest AIM investment, IDOX plc, represented 7 and 2 per cent of net assetvalue respectively.The performance of the unquoted portfolio has been robust and its underlyingvaluation has increased during the year by 19 per cent. On average, the currentportfolio of unquoted investments is valued at 38 per cent higher than cost.This is a reflection of the quality of the portfolio, active management by theManager, ISIS Equity Partners and the effectiveness of their close co-operationwith investee companies.The share prices of the AIM-traded and other listed investments in theportfolio have improved 9 per cent over the last twelve months, although it wasnot until August 2010 that market sentiment really began to recognise the valueimplicit in many profitable AIM-traded companies. Eight AIM-traded investeeshave been sold including three outright to acquirers, which confirms the goodvalue that resided in these relatively lowly rated situations. This alsosupports the longer term strategy of taking more influential stakes in asmaller number of AIM-traded investments, where a likely exit strategy to atrade buyer can be envisaged.
SHAREHOLDER MATTERS
Shareholders can reinvest their dividends by purchasing existing shares throughthe Dividend Reinvestment Plan ("DRIP"). Shareholders who increase theirholdings via the DRIP will be buying into a well-diversified portfolio ofmainly established and profitable unquoted and AIM-traded companies. Currently,shareholders holding approximately 13 per cent of the Company's sharesparticipate in the DRIP. The DRIP may be appropriate for those subscribers whoare investing primarily for capital growth.During the twelve months to 31 December 2010, 286,018 shares were acquired byparticipants of the DRIP. These shares were acquired through the stock marketand the price paid for these shares represented a discount of approximately 10per cent of the prevailing NAV at the time. In addition, third party purchasersacquired 647,051 shares through conventional stock market activity.The Company has consistently maintained its policy of buying back shares andwill continue to do so if, in the opinion of the Board, a repurchase of sharesis in the interests of the shareholders as a whole. Historically, therepurchase price has represented an approximate discount to NAV of 10 per cent.Shareholders are asked annually to give their authority to the Directors toacquire up to 14.99 per cent of the Company's shares. During the twelve monthsto 31 December 2010, the Company bought back 1.51 million shares to be held intreasury representing 2.5 per cent of the share capital at the start of theyear.The Manager works closely with the Company's broker, Matrix Corporate Capital,to put into effect the Company's share buy-back policy, provide shares for theDRIP and maintain a narrow difference between the buy and sell price of theCompany's shares. This difference, known as "the spread", has averagedapproximately 1.5p per share since Matrix' appointment in August 2009.
BOARD SUCCESSION
As discussed in the Interim Report Mark Cannon Brookes, the first Chairman ofthe Company retired at the Annual General Meeting in May 2010. The Board wouldlike to thank Mark for his excellent work as Chairman since formation ofBaronsmead VCT 3 in 2001.The definition of `independence' in the context of a director of a venturecapital trust was amended as from 28 September 2010 to bring it into line withother listed investment companies. This made it necessary for Robert Owen toresign from the Board after becoming Chairman of Baronsmead VCT 4 plc. Robertjoined as a Director on the formation of the Company in 2001 and the Boardthanks him for his very valuable contribution since then.After a formal process using independent recruitment specialists, Ian Orrockwas appointed a Director by the Board on October 2010. Ian has considerablerelevant experience having founded, developed and sold a number of businessesthroughout his career, particularly focusing on the international technologyand telecoms sectors, and has also worked at board level in a number of globalorganisations. Finally he has served on the boards of two Investment Trusts,which specialised in investing in smaller companies. He will of course beproposed for election by shareholders at the Annual General Meeting.
ANNUAL GENERAL MEETING
I look forward to meeting as many shareholders as possible at our 10th AnnualGeneral Meeting to be held on Wednesday 6 April 2011 at the London StockExchange, 10 Paternoster Square near St Paul's Cathedral. The AGM is at 11.00a.m. followed by presentations from the Manager and an investee company. Aftera light lunch, a shareholder workshop is being held and is expected to finishby about 2.00 pm.OUTLOOK
Whilst profits in the portfolio companies continue to grow, the outlook for theeconomy as a whole remains uncertain, particularly since it is not yet clearwhat the impact of the recent public sector cuts and weaker consumer spendingwill be. However, ISIS Equity Partners believe that the uncertain economicclimate will generate specific sector opportunities which they hope the Companycan capitalise on.Many of the portfolio companies have improved their market positions andoperating efficiency over the last year and both the Board and the Managershare the belief that these ambitious companies can continue to grow. We alsobelieve that if the Government succeeds in creating a more business friendlyand less restrictively regulated environment, it is the sort of companies inour portfolio and their like that will drive the growth that the UK economy
desperately needs.Anthony TownsendChairman17 February 2011Manager's ReviewTrading across the unquoted and AIM-traded companies in the portfolio hasmarkedly improved in the last year. During the year under review, more stabletrading conditions were evident in a number of sectors and new investments werecompleted in three unquoted and seven AIM-traded companies.
PORTFOLIO REVIEW
The total portfolio comprised 63 investee companies at the year end after 11full realisations and one write off. All new and further round financings, aswell as realisations, are scheduled below. Cash proceeds from all realisationstotalled £6.3 million and net capital profits realised in the period were £1.8million.
Unquoted investment totalled £3.6 million in the year under review, including further round financings into two existing portfolio companies. The new unquoted investments were in the following companies:
• Surgi C, the UK's leading independent distributor of spinal implants, whichis based in Birmingham. The business has developed its strong market positionas a result of the high levels of education and technical support it providesto spinal surgeons on its broad range of products. www.surgi-c.com.• Inspired Thinking Group also Birmingham based, which provides services thathelp large marketing departments to operate more efficiently, includingimproved procurement of artwork and print management. The new funding was usedto acquire Total Marketing Service, a provider of workflow management systemsto marketing departments. www.inspiredthinkinggroup.com.• Getting Personal, which is a leading online retailer, based in Manchester,that sells personalised and unique gifts. The business was established inNovember 2005 with just one product, a personalised calendar. www.GettingPersonal.co.uk now sells over 4,000 items ranging from personalisedcards, notebooks, mugs and chocolate to non-personalised items for generalgifting.
The further round financings were made into the following companies:
• Nexus Vehicle Holdings, which is a leading provider of vehicle rental services to the UK corporate market and it is a pioneer of paperless rental trading through its web based IRIS procurement system. It acquired Adapted Vehicle Hire, which is a niche rental business providing adapted vehicles for the disabled driver market. www.nexusrental.com
• Independent Living Services which is an acute domiciliary care provider based in Scotland. Two small investments were made firstly to fund a small acquisition and secondly to repurchase shares. www.ilsscotland.com.
The volume of qualifying AIM-traded opportunities also increased from the depressed levels of 2009. In all £1.8 million was invested into seven AIM-traded companies and another £1.8 million as additional capital for seven existing investments.
Wood Street Microcap Investment Fund ("WSM") was established by ISIS in May2009 to provide flexibility for the Baronsmead VCTs to invest in predominantlylarger and more liquid non VCT qualifying AIM-traded and Small Capopportunities. At 31 December 2010, the market value of the holding in WSM hadincreased by 20 per cent to £2.1 million, representing 3.3 per cent of NAV, andwas spread across 27 smaller quoted companies. ISIS receives no additional feefor managing this fund.It is pleasing to see the improvement in trading performance across themajority of the portfolio companies, some of which have exhilarating stories asthey have grown their profits and work-forces through the recession. Often thisgrowth has come from business models which have proved robust despite the slowrecovery of the UK economy, and from companies which are able to deliver realvalue to their customers.The exposure to the UK public sector is relatively light but the only newprovision made is in the investment made in Carnell Contractors, which providesmotorway maintenance and technical services to many of the Highway Agencies,where net revenues have fallen sharply.
Case studies
Four case studies are highlighted within the portfolio and are set out in the Annual report and accounts.
• Reed & Mackay is featured for the third year due to its sustained growth providing a superior travel management service to its business customers.
• Nexus Vehicle Holdings is growing both organically and by acquisition.
• Crew Clothing Company continues to grow its networks of shops, creating jobs as well as experiencing fast growth from its direct mail/website retailing
• Cablecom, an internet access solutions provider, has achieved growth in both core and related markets through product innovation.
The combined growth in value of these four investments in the last twelve months is £5.2 million, an increase of 59 per cent since 31 December 2009.
Active portfolio management
The sale of three unquoted investments in Active Assistance, Occam and CreditSolutions returned £3.90 million, being 1.8 times the original cost. The saleof Occam and Active Assistance were reported in the last interim statement.In November 2010, the unquoted investment in Credit Solutions was successfullysold to arvato, a global business outsourcing partner. Sale proceeds were 1.8times the original cost of £4 million invested by the four generalistBaronsmead VCTs in June 2005. Credit Solutions is ranked as one of the top 10debt collection agencies providing a range of integrated telephone and fieldbased collection and management services on accounts ranging from early arrearsto later stage debt recovery.The investment strategy with regard to AIM-traded companies has increasinglyfocused on taking more influential stakes through the collective shareholdingsof the Baronsmead family of VCTs. For example, the original shareholding of 5per cent in WIN, a provider of mobile data solutions, had been subscribed in2004 and grew to over 19 per cent by August 2009 through a series of marketpurchases. The average price paid for the total shareholding was 85p and thesale price in August 2010 was 150p. ISIS believes that the concentration ofWIN's shareholder base enabled its board to improve on the opening offerreceived for the business.The sale of WIN is an example of how trade purchasers perceive good value in anumber of the portfolio companies and, in all, three trade sales have beenachieved from the AIM portfolio over the last twelve months. Investor sentimenttowards the AIM market has also improved in recent months but ISIS believesthere is still scope for the gap between the price earnings ratings of smallerqualifying AIM-traded companies and that of larger quoted companies to bereduced. The shares in Advanced Computer Software were also sold through aseries of market trades realising an overall profit of £553,000 (2.1 timescost).
Following the period end an unquoted investment of £1.6m was completed in Valldata, a leading provider of outsourced donation processing and fulfilment services for the UK not-for-profit market based in Wiltshire.
OUTLOOK
The focus of both the unquoted and AIM-traded portfolio companies has movedfrom cautious management in 2008/09 to actively pursuing and taking advantageof emerging opportunities. This is evidenced by increased profits, strongerbalance sheets and higher valuations in a number of cases. Hopefully furtherimprovements in the economic environment will assist these companies tocontinue to grow and be important job creators for the UK.It will be the continued innovation and drive of these companies aided by theencouragement and experience of ISIS as active investors that can help generateshareholder value.ISIS EP LLPInvestment Managers17 February 2011
Table of Investments and Realisations
New investments in the year to 31 December 2010
Company Location Sector Activity Investment cost (£'000)Unquoted investments New Surgi C Ltd Birmingham Healthcare & Distribution of 1,102 Education spinal implants Getting Personal Manchester Consumer On-line retail of 988Ltd markets personalised gifts Inspired Thinking Birmingham Business Marketing 796Group Ltd Services services & work flow systems Follow on Nexus Vehicle Pudsey Business Vehicle rental 499Holdings Ltd Services provider to corporates Independent Living Alloa Healthcare & Care at home 211Services Ltd Education services Paper consideration Independent Living Alloa Healthcare & Care at home 150Services Ltd* Education services Crew Clothing London Consumer Branded clothing 51Company Ltd* markets retailer Total unquoted 3,797investments
AIM-traded & listed investments
New Netcall plc St Ives IT & Media Communications 789 software Accumuli plc Salford IT & Media Managed IT 333 security Tristel plc Newmarket Healthcare & Infection control 217 Education Bglobal plc Darwen Business Smart metering 176 Services Brady plc Cambridge IT & Media Commodities 176 trading software Hangar8 plc Oxford Business Business jet 44 Services management Strategic Thought Maidenhead IT & Media Risk management 35Group plc software Follow on Green Compliance Cirencester Business Small business 531plc Services compliance Electric Word plc London IT & Media Business to 380 business publisher IS Pharma plc Chester Healthcare & Specialist 278 Education hospital medicines group Proactis Holdings Wetherby IT & Media Procurement 219plc Software Jelf Group plc Bristol Financial Financial 210 Services solutions consultancy Tasty plc London Consumer Restaurant 114 Markets operator Tangent London Business Digital direct 88Communications plc Services marketing Total AIM-traded & listed investments 3,590 Collective investment vehicle Follow on Wood Street 1,300Microcap Investment Fund Total collective investment 1,300vehicle Total investments in period 8,687
* Paper consideration from rolled up interest.
Realisations in the year to 31 December 2010
Realised profit/ 31 December (loss) First 2009 this Overall investment valuation period multiple Company date £'000 £'000 return* Unquoted realisations Active Assistance Trade sale Mar 08 1,155 414 2.8 Credit Solutions Trade sale May 05 1,127 167 1.8 Occam DM Ltd Trade sale Jul 04 121 422 1.7 Total unquoted 2,403 1,003 realisations
AIM-traded & listed realisations
Advanced Computer Full Market Jul 08 1,081 (3) 2.1Software plc Sale Alere Inc Part Sale Aug 09 28 - 1.3 Brainjuicer Group plc Full Market Nov 06 59 26 1.7 Sale Character Group plc Full Market Feb 08 88 44 0.9 Sale INVU plc Full Market May 07 1 (1) 0.0 Sale Mission Marketing Full Market Dec 07 35 (22) 0.1Group (The) plc Sale Mount Engineering plc Full Trade Jun 07 275 176 1.2 Sale Vero Software Full Trade Apr 02 181 63 0.8 Sale WIN plc Full Trade Oct 04 374 302 1.6 Sale 2,122 585 Written off Payzone plc May 03 1 (1) - 1 (1)
Total AIM-traded & listed 2,123 584
realisations Total realisations 4,526 1,587â€
* Includes interest/dividends received, loan note redemptions and partial realisations accounted for in prior periods.
†Proceeds of £173,000 were received in respect of an investment, Scriptswitchwhich had been sold in a prior period and proceeds of £6,000 were received inrespect of an investment, Interactive Prospect Targeting plc, which had beenwritten off in a prior period. In addition, a loss of £9,000 was realisedduring the year on the redemption on 7 June 2010 of a UK Treasury Gilt whichhad paid a rate of interest of 4.75 per cent.
Investment Portfolio
Investment Classification at 31 December2010
Sector* Percentage Business 36Services Consumer 18Markets Financial 2Services Healthcare & 12Education IT & Media 32Total Assets* Percentage Unquoted - 30loan stock Unquoted - 18ordinary and preference shares AIM, Listed & 25Collective Investments Interest 25bearing securities Net current 2assets Time Investments PercentageHeld* Less than 1 year 10 Between 1 and 3 25years Between 3 and 5 31years Greater than 5 34years
* at 31 December 2010 valuation
31 31 % of % of December December total Equity Book 2009 2010 % of held by held by cost valuation valuation net Baronsmead all Company Sector £'000 £'000†£'000 assets VCT 3 plc funds* Unquoted Reed & Mackay Ltd Business 1,211 3,145 4,779 7.4 9.5 40.0 Services Nexus Vehicle Business 2,368 2,511 4,182 6.5 12.6 57.4 Holdings Limited Services Crew Clothing Consumer 984 1,300 2,569 4.0 5.7 24.1 Company Ltd Markets
CableCom IT & Media 1,381 1,848 2,490 3.9 10.6
48.0 Networking Holdings Ltd Kafevend Holdings Consumer 1,252 1,445 2,032 3.1 15.8 66.5 Ltd Markets Quantix Limited IT & Media 1,194 1,862 2,025 3.1 11.4 48.0
Independent Healthcare 1,161 1,566 1,849 2.9 16.2 68.1 Living Services & Education
Ltd Fisher Outdoor Consumer 1,423 1,777 1,777 2.7 10.5 44.0 Leisure Holdings Markets Ltd CSC (World) Ltd IT & Media 1,606 1,250 1,687 2.6 8.8 40.0 MLS Ltd IT & Media 781 1,138 1,161 1.8 5.3 22.5 Playforce Business 1,033 1,106 1,023 1.6 9.7 44.0 Holdings Limited Services Getting Personal Consumer 988 - 1,013 1.6 8.3 37.5 Limited Markets Inspired Thinking Business 796 - 976 1.5 5.0 22.5 Group Ltd Services
Surgi C Ltd Healthcare 1,102 - 919 1.4 9.8 44.7 & Education Empire World Business 1,297 658 869 1.3 ╪ ╪Trade Limited Services TVC Group Limited IT & Media 1,233 341 774 1.2 13.0 59.3 Carnell Business 1,499 2,639 337 0.5 8.3 37.5 Contractors Ltd Services
Xention Pharma Healthcare 893 183 104 0.2 2.2 3.0 Ltd & Education Kidsunlimited Business 113 113 113 0.2 0.0 0.0 Group Ltd Services
Provesica Ltd Healthcare - - 56 0.1 1.0
1.6^ & Education Total unquoted 22,315 22,882 30,735 47.5 AIM IDOX plc IT & Media 1,038 1,136 1,525 2.4 3.3 9.7 Green Compliance Business 781 500 938 1.5 3.4 17.0plc Services Murgitroyd Group Business 319 712 751 1.2 3.1 6.2plc Services
Electric Word plc IT & Media 616 247 702 1.1 5.2
28.8 Jelf Group plc Financial 761 235 670 1.0 1.4 6.3 Services
Proactis Holdings IT & Media 619 307 614 1.0 5.4
26.5plc Brulines Group Business 646 715 544 0.8 1.8 9.6 Services IS Pharma plc Healthcare 524 239 540 0.8 1.3 7.1 & Education Netcall plc IT & Media 789 - 508 0.8 3.6 18.2 Accumuli plc IT & Media 333 - 409 0.6 4.7 26.6 InterQuest Group Business 310 259 360 0.6 1.8 7.3plc Services
EG Solutions plc IT & Media 375 101 357 0.6 3.1
14.2
Begbies Traynor Financial 231 607 347 0.5 0.6
2.5Group plc Services Kiotech Healthcare 275 298 339 0.5 2.2 15.8
International plc & Education
Craneware plc IT & Media 71 184 335 0.5 0.2 1.1 Tasty plc Consumer 469 161 316 0.5 2.5 17.1 Markets FFastFill plc IT & Media 251 297 316 0.5 0.9 6.5 Plastics Capital Business 473 184 307 0.5 1.7 9.8plc Services Tristel plc Healthcare 217 - 232 0.4 1.0 5.4 & Education
Sanderson Group IT & Media 387 132 209 0.3 1.8
6.9plc Brady plc IT & Media 176 - 199 0.3 0.6 3.1 Quadnetics Group Business 296 162 192 0.3 0.6 2.1plc Services Prologic plc IT & Media 310 124 186 0.3 4.1 15.0 Stagecoach Consumer 419 194 180 0.3 4.5 9.1Theatre Arts plc Markets Bglobal plc Business 176 - 172 0.3 0.5 2.7 Services Praesepe plc Consumer 525 185 167 0.3 0.6 3.6 Markets Tangent Business 268 73 158 0.2 2.0 10.3Communications Services plc Dods Group plc IT & Media 541 158 142 0.2 1.4 4.4 Driver Group plc Business 438 294 138 0.2 2.3 10.4 Services Autoclenz Business 400 122 115 0.2 3.1 12.3Holdings plc Services Real Good Food Consumer 540 17 92 0.1 0.6 2.3Company (The) plc Markets Adventis Group IT & Media 361 267 89 0.1 3.1 20.7plc Cohort plc Business 179 138 84 0.1 0.3 1.4 Services
Colliers CRE plc Financial 470 78 76 0.1 0.3
0.8 Services STM Group plc Financial 140 58 47 0.1 0.5 3.8 Services Hangar8 plc Business 44 - 44 0.1 0.5 2.6 Services
Strategic Thought IT & Media 35 - 44 0.1 0.4
2.1Group plc
Clarity Commerce IT & Media 50 40 43 0.1 0.3
6.0Solutions plc
Zoo Digital Group IT & Media 584 15 36 0.1 0.3
0.9plc Total AIM 15,437 8,239 12,522 19.4 Listed Vectura Group Healthcare 771 1,208 1,120 1.7 0.5 1.3plc & Education Chime IT & Media 369 372 386 0.6 0.2 1.5Communications plc Marwyn Value Financial 64 62 55 0.1 1.3 6.0Investors plc Services Total listed 1,204 1,642 1,561 2.4 New York Stock Exchange Alere Inc Healthcare 157 224 179 0.3 0.0 0.0 & Education
Total New York Stock Exchange 157 224 179 0.3
Interest bearing securities UK T-Bill 10/01/ 6,888 - 6,888 10.7 11 BlackRock Cash 5,700 5,700 5,700 8.8 Market OEIC UK T-Bill 17/01/ 2,499 - 2,499 3.9 11 JPMorgan Europe 1,200 - 1,200 1.9 OEIC Total interest 16,287 5,700 16,287 25.2 bearing securities Collective i nvestment v ehicles Wood Street 1,825 526 2,123 3.3 27.3 100#Microcap Investment Fund
Total collective investment v 1,825 526 2,123 3.3
ehicles Total investments 57,225 63,407 98.1 Net current 1,236 1.9 assets Net assets 64,643 100.0
* All funds managed by the same investment manager, ISIS EP LLP, including Baronsmead VCT 3.
†The total investment valuation at 31 December 2009 per the table above does not agree to the audited accounts at 31 December 2009 due to purchases and sales since that date.
‡ Following a restructuring, the effective ownership percentage is dependent on final exit proceeds.
^ Provesica Ltd shares received after a company restructure by Xention.
# Fund managed by FPPE LLP.
AIM, Listed & NYSE Portfolio Concentration Analysis at 31 December 2010
Investment % ofranking Book cost Valuation Quoted by valuation £'000 £'000 portfolio Top Ten 6,864 7,910 55.6 11-20 3,158 3,472 24.3 21-30 2,931 1,875 13.1 30+ 3,846 1,005 7.0 Total 16,799 14,262 100.0Ten Largest Investments
The top ten investments by current value at 31 December 2010 illustrate thediversity and size of investee companies within the portfolio. This financialinformation is taken from publicly available information published on CompaniesHouse, which has been audited by the auditors of the investee companies.
1. REED & MACKAY HOLDINGS LIMITED - London
All ISIS EP LLP managed funds
First Investment: November 2005 Total Cost: £4,870,000 Total equity held: 40.00% Baronsmead VCT 3 onlyCost: £1,211,000 Valuation: £4,779,000 Valuation basis: Earning multiple % of equity held: 9.49% Year ended 31 March 2010 2009 £ million £ million Sales 16.0 16.0 EBITA 3.5 2.7 Profit before tax 2.4 1.6 Net Assets 3.9 2.3 No. of Employees 218 221
(Source: Reed & Mackay Holdings Limited, Report and Financial Statements 2010).
2. NEXUS VEHICLE HOLDINGS LIMITED - Leeds
All ISIS EP LLP managed funds
First Investment: February 2008 Total Cost: £9,500,000 Total equity held: 57.38%
Baronsmead VCT 3 only
Cost: £2,368,000 Valuation: £4,182,000 Valuation basis: Earnings Multiple % of equity held: 12.62% Year ended 2009 2008*30 September £ million £ million Sales 19.4 6.9 EBITA 2.2 0.4 Loss before tax (0.1) (0.5) Net Assets 0.3 0.2 No. of Employees 32 22
* Accounts for a 9 month period.
(Source: Nexus Vehicle Holdings Limited, Financial Statements 2009)
3. CREW CLOTHING COMPANY LIMITED - London
All ISIS EP LLP managed funds
First Investment: November 2006 Total Cost: £3,935,000 Total equity held: 24.08% Baronsmead VCT 3 onlyCost: £984,000 Valuation: £2,569,000 Valuation basis: Earnings Multiple % of equity held: 5.72% Year ended 25 October 2009 2008 £ million £ million Sales 29.3 22.0 EBITA 0.8 1.4 Profit before tax 0.2 0.8 Net Assets 2.3 2.3 No. of Employees 273 209
(Source: Crew Clothing Holdings Limited, Consolidated Financial Statements 2009)
4. CABLECOM NETWORKING HOLDINGS LIMITED - Clevedon
All ISIS EP LLP managed funds
First Investment: May 2007 Total Cost: £5,600,000 Total equity held: 48.00% Baronsmead VCT 3 onlyCost: £1,381,000 Valuation: £2,490,000 Valuation basis: Earnings Multiple % of equity held: 10.56% Year ended 2010 200930 September £ million £ million Sales 8.2 8.1 EBITA 0.9 0.9 Loss before tax (0.5) (0.4) Net Assets 0.5 0.9 No. of Employees 52 40
(Source: CableCom Networking Holdings Limited, Audited Annual Report and Accounts 2010)
5. KAF‰VEND HOLDINGS LIMITED - Crawley
All ISIS EP LLP managed funds
First Investment: October 2005 Total Cost: £5,024,000 Total equity held: 66.50% Baronsmead VCT 3 onlyCost: £1,252,000 Valuation: £2,032,000 Valuation basis: Earnings Multiple % of equity held: 15.79% Year ended 2009 200830 September £ million £ million Sales 14.7 16.1 EBITA 1.0 1.1 Profit before tax 1.0 1.2 Net Assets 3.5 2.7 No. of Employees 98 107
(Source: Kafevend Holdings Limited, audited Annual Report and Accounts 2009)
6. QUANTIX LIMITED - Nottingham
(A trading name of Newincco 635 Limited)
All ISIS EP LLP managed funds
First Investment: March 2007 Total Cost: £4,800,000 Total equity held: 48.00% Baronsmead VCT 3 onlyCost: £1,194,000 Valuation: £2.025,000 Valuation basis: Earnings Multiple % of equity held: 11.40% Year ended 2009 200830 September £ million £ million Sales 8.6 8.3 EBITA 1.6 1.2 Profit/(Loss) before 0.2 (0.3)tax Net Assets 0.7 0.7 No. of Employees 46 42
(Source: Newincco 635 Limited, audited Annual Report and Accounts 2009)
7. ILS GROUP LIMITED - Alloa
All ISIS EP LLP managed funds
First Investment: September 2005 Total Cost: £4,679,000 Total equity held: 68.12% Baronsmead VCT 3 onlyCost: £1,161,000 Valuation: £1,849,000 Valuation basis: Earnings Multiple % of equity held: 16.18% Year ended 2009 200830 September £ million £ million Sales 16.5 12.7 EBITA 1.8 1.8 PBT 0.1 0.6 Net Assets 0.9 0.9 No. of Employees 1,133 838
(Source: ILS Group Limited, Directors Report and Financial Statements 2009)
8. FISHER OUTDOOR LEISURE HOLDINGS LIMITED - St Albans
All ISIS EP LLP managed funds
First Investment: June 2006 Total Cost: £5,700,000 Total equity held: 44.00% Baronsmead VCT 3 onlyCost: £1,423,000 Valuation: £1,777,000 Valuation basis: Earnings Multiple % of equity held: 10.45% Year ended 31 January 2010 2009 £ million £ million Sales 26.5 22.2 EBITA 2.3 1.8 Profit before tax 0.7 0.1 Net Assets 1.4 1.0 No. of Employees 96 83
(Source: Fisher Outdoor Leisure Holdings Limited, Directors Report and Financial Statements 2010)
9. CSC (WORLD) LIMITED - Leeds
(A trading name of Cobco 867 Limited)
All ISIS EP LLP managed funds
First Investment: January 2008 Total Cost: £6,450,000 Total equity held: 40.03% Baronsmead VCT 3 onlyCost: £1,606,000 Valuation: £1,687,000 Valuation basis: Earnings Multiple % of equity held: 8.81% Year ended 31 March 2010 2009 £ million £ million Sales 6.4 6.6 EBITA 1.9 1.9 Loss before tax (0.8) (1.0) Net (Liabilities)/ (0.6) 0.3 Assets No. of Employees 55 51
(Source: Cobco 867 Limited, Directors Report and Consolidated Financial Statements 2010)
10. IDOX PLC - LondonAll ISIS EP LLP managed fundsFirst Investment: June 2006 Total Cost: £3,014,800 Total equity held: 9.74% Baronsmead VCT 3 onlyCost: £1,038,000 Valuation: £1,525,000 Valuation basis: Bid price % of equity held: 3.26% Year ended 31 October 2010 2009 £ million £ million Sales 31.3 32.2 EBITA 7.5 6.6 Profit before tax 4.9 4.5 Net Assets 31.0 28.2 No. of Employees 332 304
(Source: IDOX plc Annual Report and Accounts 2010)
Note: EBITA represents earnings before interest, tax and amortisation.
Profit before tax represents earnings before tax, after interest, amortisation and depreciation.
Extract from the Report of the Directors
The Chairman's Statement and the Corporate Governance statement in the Annual report and accounts form part of the Report of the Directors.
Results and Dividends
The Directors present the tenth Report and audited financial statements of the Company for the year ended 31 December 2010.
Ordinary shares £'000 Profit on ordinary activities after 7,235 taxation Interim dividend of 3.0p per ordinary share paid on 15 September 2010 (1,837) Final dividend of 4.5p per ordinary share paid on 8 April 2011 (2,729) Total dividends for the year (4,566)
Subject to approval at the forthcoming Annual General Meeting the final proposed dividend of 4.5p per ordinary share will be paid on 8 April 2011 to shareholders recorded on the register on 11 March 2011.
Principal Activity and Status
The Company is registered as a Public Limited Company (Registration number 04115341). The Directors have managed and intend to continue to manage the Company's affairs in such a manner so as to comply with Section 274 of the Income Tax Act 2007 which grants approval as a VCT. A review of the Company's business during the period is contained in the Chairman's Statement and Manager's Review.
Business Review
The Business Review has been prepared in accordance with the requirements of Section 417 of the Companies Act 2006 and best practice.
The purpose of this review is to provide shareholders with a summary setting out the business objectives of the Company, the Board's strategy to achieve those objectives, the risks faced, the regulatory environment and the key performance indicators (KPIs) used to measure performance.
Strategy for achieving objectives
Baronsmead VCT 3 plc is a tax efficient company listed on The London Stock Exchange's main market which aims to achieve long-term investment returns for private investors.
Investment Policy
The Company's investment policy is to invest primarily in a diverse portfolio of UK growth businesses, whether unquoted or traded on AIM.
Investments are made selectively across a range of sectors in companies that have the potential to grow and enhance their value.
Investment securities
The Company invests in a range of securities including, but not limited to, ordinary and preference shares, loan stocks, convertible securities, and fixed-interest securities as well as cash. Unquoted investments are usually structured as a combination of ordinary shares and loan stocks, while AIM investments are primarily held in ordinary shares. Pending investment in unquoted and AIM-traded securities, cash is primarily held in an interest bearing money market open ended investment company (OEIC), UK gilts and Treasury Bills.
UK companies
Investments are primarily made in companies which are substantially based inthe UK, although many of these investees will trade overseas. The companies inwhich investments are made must have no more than £15 million of gross assetsat the time of investment (or £7 million if the funds being invested wereraised after 5 April 2006) to be classed as a VCT qualifying holding.
VCT regulation
The investment policy is designed to ensure that the Company continues toqualify and is approved as a VCT by HM Revenue and Customs. Amongst otherconditions, the Company may not invest more than 15 per cent of its investmentsin a single company and must have at least 70 per cent by value of itsinvestments throughout the period in shares or securities comprised inqualifying holdings, of which 30 per cent by value must be ordinary shareswhich carry no preferential rights. In addition, it must have at least 10 percent by value of its total investments in any qualifying company in ordinaryshares which carry no preferential rights.
Asset mix
The Company aims to be at least 90 per cent invested in growth businesses subject always to the quality of investment opportunities and the timing of realisations. Any un-invested funds are held in cash and interest bearing securities. It is intended that at least 75 per cent of any funds raised by the Company will be invested in VCT qualifying investments.
Risk diversification and maximum exposures
Risk is spread by investing in a number of different businesses withindifferent industry sectors using a mixture of securities. The maximumqualifying amount invested in any one company is limited to £1 million in afiscal year and generally no more than £2.5 million, at cost, is invested inthe same company. The value of an individual investment is expected to increaseover time as a result of trading progress and a continuous assessment is madeof its suitability for sale.Investment style
Investments are selected in the expectation that the application of private equity disciplines including an active management style for unquoted companies will enhance value and enable profits to be realised from planned exits.
Co-investment
The Company aims to invest in larger more mature unquoted and AIM companies andto achieve this it invests alongside the other Baronsmead VCTs. Currently ISISEP LLP (`the Manager') and its executive members are mandated to invest inunquoteds alongside the Company on terms which align the interests ofshareholders and the Manager.
Borrowing powers
The Company's Articles permit borrowing to give a degree of investmentflexibility. The Company's policy is to use borrowing for short term liquiditypurposes only. The Company's borrowings are restricted to 25 per cent of thevalue of the gross assts of that company. The Company currently has noborrowings.
Management
The Board has delegated the management of the investment portfolio to the Manager. The Manager also provides or procures the provision of company secretarial, administrative, accounting and custodian services to the Company.
The Manager has adopted a `top-down, sector-driven' approach to identifying andevaluating potential investment opportunities, by assessing a forward view offirstly the business environment, then the sector and finally the specificpotential investment opportunity. Based on its research, the Manager hasselected a number of sectors that it believes will offer attractive growthprospects and investment opportunities. Diversification is also achieved byspreading investments across different asset classes and making investments fora variety of different periods.
The Manager's Review provides a review of the investment portfolio and of market conditions during the year.
Principal risks, risk management and regulatory environment
The Board believes that the principal risks faced by the Company are:
- Economic risk - events such as an economic recession and movement in interest rates could affect smaller companies valuations.
- Loss of approval as a Venture Capital Trust - the Company must comply withSection 274 of the Income Tax Act 2007 which allows it to be exempted fromcapital gains tax on investment gains. Any breach of these rules may lead tothe Company losing its approval as a VCT, qualifying shareholders who have notheld their shares for the designated holding period having to repay the incometax relief they obtained and future dividends paid by the Company becomingsubject to tax. The Company would also lose its exemption from corporation taxon capital gains.
- Investment and strategic - an inappropriate strategy, poor asset allocation or consistent weak stock selection might lead to under performance and poor returns to shareholders. Therefore the Company's investment strategy is periodically reviewed by the Board which considers at each meeting the performance of the investment portfolio.
- Regulatory - the Company is required to comply with the Companies Act 2006,the rules of the UK Listing Authority and United Kingdom Accounting Standards.Breach of any of these might lead to suspension of the Company's Stock Exchangelisting, financial penalties or a qualified audit report. General changes inlegislation, regulations or government policy could significantly influence thedecisions of investors or impact upon the markets in which the Company invests.
- Reputational - inadequate or failed controls might result in breaches of regulations or loss of shareholder trust.
- Operational - failure of the Manager's and administrator's accounting systemsor disruption to its business might lead to an inability to provide accuratereporting and monitoring.- Financial - the Board has identified the Company's principal financial riskswhich are set out in the notes to the Financial Statements below. Inadequatecontrols might lead to misappropriation of assets. Inappropriate accountingpolicies might lead to misreporting or breaches of regulations.- Market Risk - Investment in listed, AIM-traded and unquoted companies, by itsnature, involves a higher degree of risk than investment in companies traded onthe main market. In particular, smaller companies often have limited productlines, markets or financial resources and may be dependent for their managementon a smaller number of key individuals. In addition, the market for stock insmaller companies is often less liquid than that for stock in larger companies,bringing with it potential difficulties in acquiring, valuing and disposing ofsuch stock.- Liquidity Risk - The Company's investments may be difficult to realise. Thefact that a share is traded on AIM does not guarantee its liquidity. The spreadbetween the buying and selling price of such shares may be wide and thus theprice used for valuation may not be achievable.- Competitive Risk - Retention of key personnel of the Manager is vital to thesuccess of the Company. Appropriate incentives are in place to ensure retentionof such personnel.The Board seeks to mitigate the internal risks by setting policy, regularreview of performance, enforcement of contractual obligations and monitoringprogress and compliance. In the mitigation and management of these risks, theBoard applies rigorously the principles detailed in the FRC's Revised Guidancefor Directors on the Combined Code. Details of the Company's internal controlsare contained in the Corporate Governance section of the Annual report andaccounts for the year ended 31 December 2010.
Performance and key performance indicators (KPIs)
The Board expects the Manager to deliver a performance which meets the objectives of achieving long term investment returns for private investors.
Performance, measured by dividends paid to shareholders and the change in NAVper share, is also measured against the FTSE All-Share Index Total Return. Thisindex, as the widest measure of UK quoted equities, has been adopted as aninformal benchmark. Investment performance, cash returned to shareholders andshare price are also measured against the Company's peer group of othergeneralist venture capital trusts. A review of the Company's performance duringthe financial period, the position of the Company at the year end and theoutlook for the coming year is contained within the Chairman's Statement above.
The Board assesses the performance of the Manager in meeting the Company's objective against the primary KPIs highlighted in the Annual report and accounts for the year ended 31 December 2010.
Issue and Buy-Back of Shares
During the period the Company issued 7,920,298 ordinary shares.
During the period the Company bought back 1,510,000 ordinary shares with anominal value of 10p to be held in Treasury, representing 2.2 per cent of theissued share capital at an aggregate cost of £1,350,100. These shares will notbe sold at a discount wider than the discount prevailing at the time the shareswere initially bought back by the Company. The Company holds 6,977,317 ordinaryshares in Treasury representing 10.3 per cent of the issued share capital as at16 February 2011.ManagementISIS EP LLP manages the investments for the Company. The liquid assets withinthe portfolio (being cash, interest bearing securities, gilts and other assets,which are not categorised as venture capital investments for the purpose of theFSA's rules) have been managed by FPPE LLP. This is a limited liabilitypartnership, which is authorised and regulated by the FSA and which has thesame controlling members as the Manager. The Manager has continued to act asthe manager of the Company and as the investment manager of the Company'silliquid assets (being all AIM-traded and other venture capital investments).The Manager also provides or procures the provision of accounting, secretarial,administrative and custodian services to the Company. The management agreementmay be terminated at any date by either party giving twelve months notice oftermination. Under the management agreement, the Manager receives a fee of 2.5per cent per annum of the net assets of the Company. If the managementagreement is terminated, the Manager is only entitled to the management feespaid to it and any interest due on unpaid fees.In addition, the Manager receives an annual secretarial and accounting fee thatwas initially fixed at £33,816 in 2006 and is revised annually to reflect themovement in RPI, plus a variable fee of 0.125 per cent of the net assets of theCompany which exceed £5 million. The annual secretarial and accounting fee iscapped at £102,212 per annum and the cap is revised annually to reflect themovement in RPI.Annual running costs are capped at 3.5 per cent of the net assets of theCompany (excluding any performance fee payable to the Manager and irrecoverableVAT), any excess being refunded by the Manager by way of an adjustment to itsmanagement fee.It is the Board's opinion that the continuing appointment of ISIS EP LLP on theterms agreed is in the best interests of shareholders as a whole. The Boardbelieves that the knowledge and experience accumulated by the Manager in theperiod since the launch of the first Baronsmead VCT in 1995 is reflected inprocesses which are designed to find, manage and realise good quality growthbusinesses.Co-investment SchemeThe Scheme is intended to help attract, retain and incentivise certainexecutive members of the Manager and reflects schemes which are used elsewherein the private equity industry in the UK. It requires all the members of theScheme to invest their own capital into a proportion of the ordinary shares ofeach and every unquoted investment made by the Baronsmead VCTs (except thoselife sciences transactions where the Manager is not the lead investor).
The shares held by the members of the Co-investment Scheme in any portfolio company can only be sold at the same time as the investment held by the generalist Baronsmead VCTs. In addition, any prior ranking financial instruments, e.g. loan stock, held by the Baronsmead VCTs have to be repaid in full prior to any gain accruing to the ordinary shares.
As at 31 December 2010 forty-two executives of the Manager had invested a totalof approximately £141,000 in the ordinary shares of twenty-two unquotedinvestments through the Co-investment Scheme with respect to investmentsattributable to Baronsmead VCT 3 plc. The amount invested by Baronsmead VCT 3plc in these twenty-two companies totals approximately £24.5 million. As at 31December 2010 five of the investments in the Scheme have been sold realisingtotal proceeds of £8.7 million for Baronsmead VCT 3 and £0.7 million for themembers of the Co-investment Scheme.
The Board reviews the operation of the Co-investment Scheme at each quarterly valuation meeting.
Performance IncentiveA performance fee is payable to the Manager when the total return on netproceeds of the ordinary share offers exceeds 8 per cent per annum (simple) onnet funds raised. The performance fee payable in any one year is capped at 5.00per cent of net assets.To the extent that the total return exceeds the threshold, a performance fee(plus VAT) will be paid to the Manager of 20.00 per cent of the excess inrespect of the period to 31 March 2007, 16.66 per cent of the excess in respectof the period to 31 March 2008, 13.33 per cent in respect of the period to 31March 2009, and 10 per cent thereafter. No performance fee is payable for theyear to 31 December 2010.
ISIS Equity Partners - Advisory Fees
During the year to 31 December 2010, ISIS EP LLP received net income of £92,750(2009: £nil) in connection with advisory fees and incurred abort fees of £13,286 (2009: £1,945) with respect to investments attributable to BaronsmeadVCT 3.VCT Status AdviserThe Company has retained PricewaterhouseCoopers LLP (`PwC') as their VCT TaxStatus Advisers to advise it on compliance with VCT requirements. PwC reviewnew investment opportunities, as appropriate, and review regularly theinvestment portfolio of the Company. PwC work closely with the Manager butreport directly to the Board.
Creditor Payment Policy
The Company's payment policy is to settle investment transactions in accordancewith market practice and to ensure settlement of supplier invoices inaccordance with stated terms. At 31 December 2010, there were no outstandingsupplier invoices (2009: none).
Environment
The Company seeks to conduct its affairs responsibly and environmental factors are, where appropriate, taken into consideration with regard to investment decisions.
Substantial Interests
At 16 February 2011 the Company was not aware of any beneficial interest exceeding 3 per cent of the total voting rights of the Company.
Going Concern
After making enquires, and bearing in mind the nature of the Company's businessand assets, the Directors consider that the Company has adequate resources tocontinue in operational existence for the foreseeable future. In arriving atthis conclusion the Directors have considered the liquidity of the Company andits ability to meet obligations as they fall due for a period of at leasttwelve months from the date that these financial statements were approved. Asat 31 December 2010 the Company held cash balances & investments in interestbearing securities and Money Market Funds with a combined value of £17,555,000.Cash flow projections have been reviewed and show that the Company hassufficient funds to meet both its contracted expenditure and its discretionarycash outflows in the form of the share buy-back programme and dividend policy.The Company has no external loan finance in place and therefore is not exposedto any gearing covenants.By Order of the Board,ISIS EP LLPSecretary100 Wood StreetLondon EC2V 7AN17 February 2011
Statement of Directors' Responsibilities
Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards.
The financial statements are required by law to give a true and fair view ofthe state of affairs of the Company and of the profit or loss of the Companyfor that period.
In preparing these financial statements, the Directors are required to:
â— select suitable accounting policies and then apply them consistently;
â— make judgments and estimates that are reasonable and prudent;
â— state whether applicable UK Accounting Standards ("UK GAAP") have been followed, subject to any material departures disclosed and explained in the financial statements; and
â— 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 thatdisclose with reasonable accuracy at any time the financial position of theCompany and enable them to ensure that its financial statements comply with theCompanies Act 2006. They have general responsibility for taking such steps asare reasonably open to them to safeguard the assets of the Company and toprevent and detect fraud and other irregularities.Under applicable law and regulations, the Directors are also responsible forpreparing a Directors' Report (including Business Review), Directors'Remuneration Report and Corporate Governance Statement that comply with thatlaw and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website, www.baronsmeadvct3.co.uk. Visitors to the website should be aware that legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the Annual Financial Report
We confirm that to the best of our knowledge:
â— the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
â— the Report of the Directors includes a fair review of the development and performance of the business and the position of the issuer together with a description of the principal risks and uncertainties that they face.
On behalf of the Board,Anthony TownsendChairman17 February 2011Independent Auditors' Report
The Company's Financial Statements for the year ended 31 December 2010 have been audited by KPMG Audit Plc. The text of the Auditor's report can be found in the Company's Annual Report and Accounts at www.baronsmeadvct3.co.uk
Income Statement
For the year ended 31 December 2010
2010 2009 Revenue Capital Total Revenue Capital Total Notes £'000 £'000 £'000 £'000 £'000 £'000 Unrealised gains on 9 - 4,951 4,951 - 2,434 2,434 investments Realised gains on 9 - 1,757 1,757 - 1,350 1,350 investments Income 2 2,407 - 2,407 1,513 - 1,513 VAT 3 - - - (2) (6) (8) Investment 4 (380) (1,140) (1,520) (339) (1,016) (1,355)management fee Other expenses 5 (360) - (360) (347) - (347) Profit on ordinary 1,667 5,568 7,235 825 2,762 3,587 activities before taxation Taxation on 6 (412) 412 - (167) 167 - ordinary activities Profit on ordinary 1,255 5,980 7,235 658 2,929 3,587 activities after taxation Return per ordinary 8 2.09p 9.98p 12.07p 1.22p 5.41p 6.63pshare: Basic
The `Total' column of this statement is the profit and loss account of the Company.
All revenue and capital items in this statement derive from continuing operations.
No operations were acquired or discontinued in the year.
There are no recognised gains and losses other than those disclosed in the Income Statement therefore a separate statement of total recognised gains and losses has not been prepared.
Reconciliation of Movements in Shareholders' Funds
For the year ended 31 December 2010
2010 2009 Notes £'000 £'000 Opening shareholders' funds 52,878 55,136 Profit for the year 7,235 3,587 Increase in share capital in issue 8,165
1,524
Purchase of shares for Treasury 13,14 (1,357) (821) Dividends paid 7 (1,837) (6,483)* Expenses of share issue 14 (441) (65) Closing shareholders' funds 64,643 52,878
* Includes payment of 2008 final dividend.
Balance SheetAs at 31 December 2010 2010 2009 Notes £'000 £'000 Fixed assets Investments 9 63,407 50,965 Current assets Debtors 10 461 349 Cash at bank and on deposit 1,268 2,033 1,729 2,382 Creditors (amounts falling due within one year) 11 (493) (439) Net current assets 1,236 1,943 Total assets less current liabilities 64,643
52,908
Creditors (amounts falling due after one year) 12 -
(30) Net assets 64,643 52,878 Capital and reserves Called-up share capital 13 6,762 5,970 Share premium account 14 15,012 8,080 Capital redemption reserve 14 10,862 10,862 Revaluation reserve 14 6,182 1,393 Capital reserve 14 24,941 26,271 Revenue reserve 14 884 302 Equity shareholders' funds 15 64,643 52,878 Net asset value per share - Basic 15 106.60p 97.50p - Treasury 15 105.32p 96.47p
The financial statements were approved by the Board of Directors on 17 February 2011 and were signed on its behalf by:
Anthony Townsend (Chairman)Cash Flow Statement
For the year ended 31 December 2010
2010 2009 Notes £'000 £'000 Operating activities Investment income received 2,099 1,302 VAT income received - 1,296 Interest received 5 144 Investment management fees (1,446) (1,371) Other cash payments (426) (416)
Net cash inflow from operating activities 17 232
955
Capital expenditure and financial investment
Purchases of investments (76,980) (39,388) Disposals of investments 71,447 44,583 Net cash (outflow)/inflow from capital (5,533) 5,195 expenditure and financial investment
Dividends Equity dividends paid (1,837) (6,483) Net cash outflow before financing (7,138) (333) Financing Issue of shares 8,165 1,524 Buy-back of ordinary shares (1,357) (821)
Expenses relating to issue of shares (435)
(69)
Net cash inflow from financing 6,373
634 (Decrease)/increase in cash (765) 301
Reconciliation of net cash flow to movement in
net cash (Decrease)/increase in cash (765) 301 Opening cash position 2,033 1,732 Closing cash position 16 1,268 2,033
The accompanying notes are an integral part of these statements.
Notes to the Accounts1. Accounting polices(a) Basis of accounting
These financial statements have been prepared under UK Generally Accepted Accounting Practice ("UK GAAP") 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") in January 2009, and on the assumption that the Company maintains VCT status.
The Company is no longer an investment Company as defined by Section 833 of theCompanies Act 2006, as investment Company status was revoked on 4 February 2004in order to permit the distribution of capital profits.
The principle accounting policies adopted are set out below.
Presentation of the Income Statement
In order to better reflect the activities of a VCT and in accordance with theSORP, supplementary information which analyses the income statement betweenitems of a revenue and capital nature has been presented alongside the incomestatement.
Profit/(loss) on ordinary activities after taxation is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Section 274 of the Income Tax Act 2007.
(b) Valuation of investments
Purchases or sales of investments are recognised at the date of transaction.
Investments are valued at fair value. For AIM traded, listed securities and Collective Investment Vehicles this is either bid price or the last traded price, depending on the convention of the exchange on which the investment is traded.
In respect of unquoted investments, these are fair valued by the Directorsusing methodology which is consistent with the International Private Equity andVenture Capital Valuation ("IPEV") guidelines. This means investments arevalued using an earnings multiple, which has a discount or premium appliedwhich adjusts for points of difference to appropriate stock market orcomparable transaction multiples. Alternative methods of valuation will includeapplication of an arm's length third party valuation, a provision on cost or anet asset value basis.Gains and losses arising from changes in the fair value of the investments areincluded in the Income Statement for the period as a capital item. Transactioncosts on acquisition are included within the initial recognition and the profitor loss on disposal is calculated net of transaction costs on disposal.
(c) Income
Interest income on loan stock and dividends on preference shares are accrued ona daily basis. Provision is made against this income where recovery isdoubtful. Where the terms of unquoted loan stocks only require interest or aredemption premium to be paid on redemption, the interest and redemptionpremium is recognised as income once redemption is reasonably certain. Untilsuch date interest is accrued daily and included within the valuation of theinvestment.
Income from fixed interest securities and deposit interest is included on an effective interest rate basis.
Dividends on quoted shares are recognised as income on the date that the related investments are marked ex-dividend and where no dividend date is quoted, when the Company's right to receive payment is established.
(d) Expenses
All expenses are recorded on an accruals basis.
(e) Revenue/capital
The revenue column of the Income Statement includes all income and expenses.The capital column accounts for the realised and unrealised profit and loss oninvestments and the proportion of management fee charged to capital.
(f) Issue costs
Issue costs are deducted from the share premium account.
(g) Deferred taxation
Deferred taxation is recognised in respect of all timing differences that haveoriginated but not reversed at the balance sheet date where transactions orevents that result in an obligation to pay more, or the right to pay less, taxin future have occurred at the balance sheet date. This is subject to deferredtax assets only being recognised if it is considered more likely than not thatthere will be suitable profits from which the future reversal of the underlyingtiming differences can be deducted. Timing differences are differences arisingbetween the Company's taxable profits and its results as stated in thefinancial statements which are capable of reversal in one or more subsequentperiods.(h) Capital reserves(i) Capital ReserveGains and losses on realisation of investments of a capital nature are dealtwith in this reserve. Purchase of the Company's own shares to be either held intreasury or cancelled are also funded from this reserve. 75 per cent ofmanagement fees are allocated to the capital reserve in accordance with theBoard's expected split between long term income and capital returns.
(ii) Revaluation Reserve
Changes in fair value of unrealised investments, are dealt with in thisreserve.2. Income 2010 2009 £'000 £'000 Income from investments†UK franked 195 198 UK unfranked 1,872 1,005
Redemption premium on repayment of Loan Notes 335
168 2,402 1,371 Other income╪ Interest 5 142 Total income 2,407 1,513 Total income comprises: Dividends 195 198 Interest 2,212 1,315 2,407 1,513 Income from investments: Listed and AIM securities 234 456 Unquoted securities 2,168 915 2,402 1,371
†All investments have been designated fair value through profit or loss on initial recognition, therefore all investment income arises on investments at
fair value through profit or loss.
╪ Other income on financial assets not designated fair value through profit or loss.
3. Recoverable VATHM Revenue and Customs ("HMRC") confirmed in October 2007, following theEuropean Court of Justice decision in the JPMorgan Claverhouse case, that theprovision of management services to investment trusts is exempt from VAT.Accordingly ISIS EP LLP ceased to charge VAT on management fees payable by theCompany with effect from 30 June 2008. During the year ended 31 December 2008,£1,304,000 for VAT recovery was recognised in the income statement. Howeveronly £1,296,000 was eventually received during the year ended 31 December 2009and the difference was charged in the Income Statement in that year. TheCompany does not foresee any further future repayment of VAT.4. Investment management fee 2010 2009 £'000 £'000 Investment management fee 1,520 1,355 Performance fee - - 1,520 1,355 For the purposes of the revenue and capital columns in the income statement,the management fee has been allocated 25 per cent to revenue and 75 per cent tocapital, in line with the Board's expected long term return in the form ofincome and capital gains respectively from the Company's investment portfolio.The management agreement may be terminated by either party giving twelve monthsnotice of termination. The Manager, ISIS EP LLP, receives a fee of 2.5 per centper annum of the net assets of the Company, calculated and payable on aquarterly basis.The Manager is entitled to a performance fee when the total return on fundsraised exceeds 8 per cent per annum (on a simple rather than compound basis) onnet funds raised. The performance fee payable in any one year will be capped at5 per cent of shareholders' funds at the end of the period. No performance feeis payable for the year ended 31 December 2010 (2009: £ Nil). Performance feesare chargeable 100 per cent to capital.In addition, the Manager receives an annual secretarial and accounting fee thatwas initially fixed at £33,816 in 2006 and is revised annually to reflect themovement in RPI, plus a variable fee of 0.125 per cent of the net assets of theCompany which exceed £5 million. The annual fee was initially capped at £102,212 per annum and is also revised annually to reflect the movement in RPI.It is chargeable 100 per cent to revenue.Amounts payable to the Manager at the period end are disclosed in note 11.
5. Other expenses 2010 2009 £'000 £'000 Directors' fees 74 69
Secretarial and accounting fees 109
96
Remuneration of the auditors and their associates:
- audit 16 21
- other services supplied pursuant to legislation 5
5 (interim review)
- other services supplied relating to taxation 5
6 Trail Commission (17) (2) Other 168 152 360 347
The Chairman received £23,500 per annum (2009: £21,000). Each of the other Directors received £15,500 per annum (2009: £14,000).
Charges for other services provided by the auditors in the year ended 31 December 2010 were in relation to the interim review and tax compliance work. The Audit Committee reviews the nature and extent of non-audit services to ensure that independence is maintained. The Directors consider the auditors were best placed to provide these services.
6. Tax on ordinary activities
6a. Analysis of charge for the year
2010 2009 £'000 £'000 UK corporation tax - -
The Income Statement shows the tax charge allocated between revenue and capital.
6b. Factors affecting tax charge for the year
The tax charge for the year is lower than the standard rate of corporation tax in the UK for a company. The differences are explained below:
2010 2009 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Profit on ordinary 1,667 5,568 7,235 825 2,762 3,587 activities before tax Corporation tax at rate of 467 1,559 2,026 231 773 1,004 28% (2009: 28%) Effect of: Non-taxable dividend income (55) - (55) (55) - (55) Non-taxable investment - (1,878) (1,878) - (1,059) (1,059)gains Marginal tax relief - - - (9) 9 - Losses (utilised)/carried - (93) (93) - 110 110 forward Tax charge for the year 412 (412) - 167 (167) - (note 6a) At 31 December 2010 the Company had surplus management expenses of £1,498,000(2009: £1,830,000) which have not been recognised as a deferred tax asset. Thisis because the Company is not expected to generate taxable income in a futureperiod in excess of the deductible expenses of that future period and,accordingly, the Company is unlikely to be able to reduce future taxliabilities through the use of existing surplus expenses. Due to the Company'sstatus as a VCT, and the intention to continue meeting the conditions requiredto obtain approval in the foreseeable future the Company has not provideddeferred tax on any capital gains and losses arising on the revaluation ordisposal of investments.7. Dividends 2010 2009 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Amounts recognised as distributions to equity holders in the year: For the year ended 31 December 2008 - Final dividend of 4.5p - - - 537 1,879 2,416 per ordinary share paid on 20 March 2009 For the year ended 31 December 2009 - First interim dividend of - - - 271 1,356 1,627 3.0p per ordinary share paid on 7 September 2009 - Second interim dividend - - - 380 2,060 2,440 of 4.5p per ordinary share paid on 30 December 2010 For the year ended to 31 December 2010: - Interim dividend of 3.0p 673 1,164 1,837 - - - per share paid on 15 September 2010 673 1,164 1,837 1,188 5,295 6,483 8. Returns per shareThe 12.07p return per ordinary share (2009: 6.63p) is based on the net profitfrom ordinary activities after tax of £7,235,000 (2009: £3,587,000) and on59,933,988 ordinary shares (2009: 54,121,721 ordinary shares), being theweighted average number of shares in circulation during the year.
9. Investments
All investments are designated fair value through profit or loss at initial recognition, therefore all gains and losses arise on investments designated at fair value through profit or loss.
Financial Reporting Standard 29 `Financial Instruments: Disclosures' (theStandard) requires an analysis of investments valued at fair value based on thereliability and significance of the information used to measure their fairvalue. The level is determined by the lowest (that is the least reliable orindependently observable) level of input that is significant to the fair valuemeasurement for the individual investment in its entirety as follows:
â— Level 1 - investments whose prices are quoted in an active market.
â— Level 2 - investments whose fair value is based directly on observable current market prices or indirectly being derived from market prices.
â— Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or based on observable market data.
2010 2009 £'000 £'000 Level 1 Interest bearing securities 16,287 12,956 Investments traded on AIM 12,522 10,394 Investment traded on NYSE 179 224 Investments listed on LSE 1,561 1,580 30,549 25,154 Level 2
Collective investment vehicle (Wood Street Microcap 2,123
526 Investment Fund) Level 3 Unquoted investments 30,735 25,285 63,407 50,965 2010 2009 £'000 £'000 Equity shares 18,170 18,582 Loan notes 28,790 19,226 Preference shares 160 201 Interest bearing securities 16,287 12,956 63,407 50,965 Level 1 Level 2 Level 3 Interset Traded Listed Collective bearing Traded on on investment securities on AIM NYSE LSE vehicle Unquoted Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Opening book cost 12,940 14,042 180 1,140 525 20,745 49,572 Opening unrealised 16 (3,648) 44 440 1 4,540 1,393 appreciation/ (depreciation) Opening valuation 12,956 10,394 224 1,580 526 25,285 50,965 Movements in the year: Purchases at cost 68,495 3,590 - - 1,300 3,796 77,181 Sales - proceeds (65,155) (2,685) (29) - - (3,578) (71,447) - realised (losses)/ (9) 590 - - - 1,176 1,757 gains on sales Transfer between two - (64) - 64 - - - categories Unrealised gains/ 16 (36) 6 - - 176 162 (losses) realised during the year Increase/(decrease) in (16) 733 (22) (83) 297 3,880 4,789 unrealised appreciation 16,287 12,522 179 1,561 2,123 30,735 63,407 Closing book cost 16,287 15,437 157 1,204 1,825 22,315 57,225 Closing unrealised - (2,915) 22 357 298 8,420 6,182 appreciation/ (depreciation) 16,287 12,522 179 1,561 2,123 30,735 63,407 During the year the Company incurred brokerage costs on purchases of £1,600(2009: £1,700) and brokerage costs on sales of £4,000 (2009: £2,800) in respectof ordinary shareholder interests.
The gains and losses included in the above table have all been recognised in the Income Statement.
The Standard requires disclosure, by class of financial instruments, if theeffect of changing one or more inputs to reasonably possible alternativeassumptions would result in a significant change to the fair value measurement.The information used in determination of the fair value of Level 3 investmentsis chosen with reference to the specific underlying circumstances and positionof the investee company. The portfolio has been reviewed and both downside andupside reasonable possible alternatives have been identified and applied to thevaluation of each of the unquoted investments. Applying the downsidealternatives the value of the unquoted investments would be £2.9 million or 9.5per cent lower. Using the upside alternative the value would be increased by £2.3 million or 7.5 per cent.10. Debtors 2010 2009 £'000 £'000
Prepayments and accrued income 447
349 Other debtors 14 - 461 349 11. Creditors (amounts falling due within one year) 2010 2009 £'000 £'000 Management, secretarial and accounting fees due to the 435 357 Manager Trail commission payable - 29 Other creditors 58 53 493 439
12. Creditors (amounts falling due after one year)
2010 2009 £'000 £'000 Trail commission payable - 30 13. Called-up share capitalThe Companies Act 2006 abolished the requirement for a company to have anauthorised share capital and at the Company's last Annual General Meeting, theCompany's Articles of Association were amended to reflect this. Whilst theCompany no longer has authorised share capital, the Directors will still belimited as to the number of shares they can at any time allot as the CompaniesAct 2006 requires that Directors seek authority from the shareholders for theallotment of new shares.
Allotted, called-up and fully paid:
Ordinary shares
59,699,553 ordinary shares of 10p each listed at 31 December 2009 5,970
7,920,298 ordinary shares of 10p issued and allotted during the year 792
67,619,851 ordinary shares of 10p each listed at 31 December 2010 6,762
5,467,317 ordinary shares of 10p each held in treasury at 31 (547)December 2009 1,510,000 ordinary shares of 10p each repurchased during the year (151)and held in treasury 6,977,317 ordinary shares of 10p each held in treasury at 31 (698)December 2010
60,642,534 ordinary shares of 10p each in circulation at 31 December 6,064 2010
As at 16 February 2011 the Company's issued share capital was 67,619,851 ordinary shares of 10 pence each, of which 6,977,317 were held in treasury. The number of shares in circulation was 60,642,534 ordinary shares carrying one vote each.
The capital of the Company is managed in accordance with its investment policy, in pursuit of its investment objectives, both of which are detailed in the Report of the Directors.
Treasury shares
The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003came into force on 1 December 2003 and allowed the Company to hold sharesacquired by way of market purchase as treasury shares, rather than having tocancel them. Shareholders have previously approved a resolution permitting theCompany to issue shares from treasury at a discount to the prevailing NAV ifthe Board considers it in the best interests of the Company to do so. However,treasury shares will not be sold at a discount wider than the discountprevailing at the time the shares were initially bought back by the Company. Itis the Board's intention only to use the mechanism of re-issuing treasuryshares when demand for the Company's shares is greater than the supplyavailable in the market place. Such issues would be captured under the terms ofthe Prospectus Directive and subject to the annual cap of 2.5 million Euros onfunds raised before requiring a full prospectus, although they would not beconsidered by HM Revenue & Customs to be new shares entitling the purchaser toinitial income tax relief, and therefore shares are unlikely to be issued fromtreasury in the same year as a ``top up'' offer for subscription.
The Company does not have any externally imposed capital requirements.
Where shares are bought back but not cancelled the share capital remains unchanged. The NAV is calculated by using the number of shares in issue less those bought back and held in treasury.
14. Reserves Capital Share redemption Revaluation Capital Revenue premium reserve reserve reserve reserve £'000 £'000 £'000 £'000 £'000 At 31 December 2009 8,080 10,862 1,393 26,271 302 Premium on issue of 7,373 - - - - ordinary shares
Expenses of share issue (441) - - (6)
- and buybacks Shares bought back - - - (1,351) -
Transfer of prior years' - - (162) 162
- revaluation to capital reserve
Realised gain on disposal - - - 1,757
- of investments
Net increase in value of - - 4,951 -
- investments Management fee - - - (1,140) - capitalised Revenue return on - - - - 1,255
ordinary activities after
tax Dividends recognised in - - - (1,164) (673)the period Taxation - - - 412 - At 31 December 2010 15,012 10,862 6,182 24,941 884
At 31 December 2010, reserves distributable by way of dividend amounted to £23,587,000 (2009: £23,426,000), comprising the capital reserve and revenue reserve less the net unrealised loss on those investments whose prices are quoted in an active market and deemed readily realisable.
15. Net asset value per share
The net asset value per share and the net asset values attributable to the ordinary shares at the year end are calculated in accordance with their entitlements in the Articles of Association and were:
Net asset value per Net asset value Number of shares share attributable attributable 2010 2009 2010 2009 2010 2009 number number pence pence £'000 £'000 Ordinary shares 60,642,534 54,232,236 106.60 97.50 64,643 52,878 (basic) Ordinary shares 67,619,851 59,699,553 105.32 96.47 71,219 57,593 (treasury)
Basic net asset value per share is based on net assets at the year end, and on60,642,534 (2009: 54,232,236) ordinary shares, being the respective number ofshares in circulation at the year end.The treasury net asset value per share as at 31 December 2010 included ordinaryshares held in treasury valued at the mid share price of 94.25p at 31 December2010 (31 December 2009: 86.25p).
16. Analysis of changes in cash
2010 2009 £'000 £'000 Beginning of year 2,033 1,732 Net cash (outflow)/inflow (765) 301 As at 31 December 2010 1,268 2,033 17. Reconciliation of profit before taxation to net cash inflow from operatingactivities 2010 2009 £'000 £'000 Profit on ordinary activities before taxation 7,235
3,587
Profit on realisation of investments (1,757)
(1,350)
Unrealised gains on investments (4,951) (2,434) Interest reinvested (201) - (Increase)/decrease in debtors (117)
1,234
Increase/(decrease) in creditors 23
(82)
Net cash inflow from operating activities 232
955
18. Contingencies, guarantees and financial commitments
At 31 December 2010 there were no contingent liabilities, guarantees or financial commitments of the Company.
19. Significant interests
There are no interests of 20 per cent or more of any class of share capital.
Further information on the significant interests is disclosed in the Annual report.
20. Financial instruments
The Company's financial instruments comprise equity and fixed interest investments, cash balances and liquid resources including debtors and creditors. The Company holds financial assets in accordance with its investment policy to invest in a diverse portfolio of UK growth businesses, whether unquoted or traded on AIM.
Fixed asset investments (see note 9) are valued at fair value. For quotedsecurities this is either bid price or the last traded price, depending on theconvention of the exchange on which the investment is quoted. In respect ofunquoted investments, these are fair valued by the Directors (using rulesconsistent with the International Private Equity and Venture Capital ValuationGuidelines). The fair value of all other financial assets and liabilities isrepresented by their carrying value in the Balance Sheet.The Company's investing activities expose it to various types of risk that areassociated with financial instruments and markets in which it invests. The mostimportant types of financial risk to which the Company is exposed are marketrisk, credit risk and liquidity risk.
The nature and extent of the financial instruments outstanding at the balance sheet date and the risk management policies employed by the Company are discussed in notes 21 to 24.
21. Market risk
Market risk embodies the potential for both loss and gains and includes interest rate risk and price risk.
The Company's strategy on the management of investment risk is driven by theCompany's investment objective as outlined in note 20. The management of marketrisk is part of the investment management process and is typical of privateequity investment. The portfolio is managed in accordance with policies andprocedures in place as described in more detail in the Report of the Directorsin the Annual Report, with an awareness of the effects of adverse pricemovements through detailed and continuing analysis, with an objective ofmaximising overall returns to shareholders. Investments in unquoted stocks andAIM listed companies, by their nature, involve a higher degree of risk thaninvestments in the main market. Some of that risk can be mitigated bydiversifying the portfolio across business sectors and asset classes. TheCompany's overall market positions are monitored by the Board on a quarterlybasis.
Details of the Company's investment portfolio at the balance sheet date are disclosed in the schedule of investments set out above. An analysis of investments between debt and equity instruments is disclosed in note 9.
25 per cent (2009: 25 per cent) of the Company's investments are listed on theLondon Stock Exchange, traded on AIM, NYSE or invested through Wood StreetMicrocap Fund. A 5 per cent increase in stock prices as at 31 December 2010would have increased the net assets attributable to the Company's shareholdersand the total profit for the year by £819,000 (2009: £636,000); an equal changein the opposite direction would have decreased the net assets attributable tothe Company's shareholders and the total profit for the year by an equalamount.48 per cent (2009: 50 per cent) of the Company's investments are in unquotedcompanies held at fair value. Valuation methodology includes the application ofearning multiples derived from either listed companies with similarcharacteristics or recent comparable transactions. Therefore the value of theunquoted element of the portfolio may also be indirectly affected by pricemovements on the listed exchanges. A 5 per cent increase in the valuations ofunquoted investments at 31 December 2010 would have increased the net assetsattributable to the Company's shareholders and the total profit for the year by£1,537,000 (2009: £1,264,000); an equal change in the opposite direction wouldhave decreased the net assets attributable to the Company's shareholders andthe total profit for the year by an equal amount.
22. Interest rate risk
At 31 December 2010 £9,387,000 (2009: £7,256,000) fixed rate securities wereheld by the Company. As a result, the Company is subject to exposure to fairvalue interest rate risk due to fluctuations in the prevailing levels of marketinterest rates.At 31 December 2010 £ 17,611,000 (2009: £19,226,000) fixed rate loan notes wereheld by the Company. The weighted average effective interest rate for the loannote securities is 8.48 per cent as at 31 December 2010 (2009: 8.28 per cent).Due to complexity of the instruments and uncertainty surrounding timing ofredemption the weighted average time for which the rate is fixed has not beencalculated.
The table below summarises weighted average effective interest rates for the fixed interest-bearing financial instruments:
2010 2009 Weighted Weighted Total Weighted average Total Weighted average fixed average time for fixed average time for rate interest which rate rate interest which rate portfolio rate is fixed portfolio rate is fixed £'000 % days £'000 % days Fixed rate Fixed interest 9,387 0.5 12 7,256 0.7 21securities Floating rate
When the Company retains cash balances, the majority of cash is ordinarily heldon interest bearing deposit accounts and, where appropriate, within an interestbearing money market open ended investment company (OEIC). The benchmark ratewhich determines the interest payments received on interest bearing cashbalances is the bank base rate which was 0.5 per cent as at 31 December 2010(2009: 0.5 per cent). 2010 2009 £'000 £'000 Floating rate OEIC 6,900 5,700 Cash on deposit 1,268 2,033 23. Credit risk
Credit risk is the risk that a counterparty to a financial instrument will failto discharge an obligation or commitment that it has entered into with theCompany. The Investment Manager has in place a monitoring procedure in respectof counterparty risk which is reviewed on an ongoing basis. The carryingamounts (value) of financial assets best represents the maximum credit riskexposure at the balance sheet date.At the reporting date, the Company's financial assets exposed to credit riskamounted to the following: 2010 2009 £'000 £'000 Investments in fixed rate instruments 9,387
7,256
Investments in floating rate instruments 6,900 5,700 Cash and cash equivalents 1,268 2,033
Interest, dividends and other receivables 461
349 18,016 15,338
Credit risk arising on fixed interest instruments is mitigated by investing in UK Government Stock.
Credit risk arising on floating rate instruments is mitigated by investing inmoney market open ended investment companies managed by BlackRock and JPMorganChase ("JPM"). Credit risk on unquoted loan stock held within unlistedinvestments is considered to be part of market risk as disclosed in note 21.Credit risk arising on transactions with brokers relates to transactionsawaiting settlement. Risk relating to unsettled transactions is considered tobe small due to the short settlement period involved and the high creditquality of the brokers used. The Board monitors the quality of service providedby the brokers used for further mitigate this risk.
Credit risk on fixed interest investments in unlisted companies is managed as part of the Company's main investment management procedures.
All the assets of the Company which are traded on a recognised exchange are held by JPM, the Company's custodian. The Board monitors the Company's risk by reviewing the custodian's internal control reports as described in the Corporate Governance section of the Annual Report.
Substantially all of the cash held by the Company is held by JPM. The Board monitors the Company's risk by reviewing regularly JPM's internal control reports as previously described. Should the credit quality or the financial position of JPM deteriorate significantly the Investment Manager will seek to move the cash holdings to another bank.
There were no significant concentrations of credit risk to counterparties at 31 December 2010 or 31 December 2009. No individual investment exceeded 8.8 percent of the net assets attributable to the Company's shareholders at 31December 2010 (2009: 10.7 per cent).
24. Liquidity risk
The Company's financial instruments include investments in unquoted companieswhich are not traded in an organised public market as well as AIM-traded equityinvestments both of which generally may be illiquid. As a result, the Companymay not be able to liquidate quickly some of its investments in theseinstruments at an amount close to their fair value in order to meet itsliquidity requirements, or to respond to specific events such as deteriorationin the creditworthiness of any particular issuer.The Company's liquidity risk is managed on an ongoing basis by the InvestmentManager in accordance with policies and procedures in place as described in theReport of the Directors above. The Company's overall liquidity risks aremonitored on a quarterly basis by the Board.
The Company maintains sufficient investments in cash and readily realisable interest bearing securities to pay accounts payable and accrued expenses. At 31 December 2010 these investments were valued at £17,555,000 (2009: £14,989,000).
25. Related parties
Related party transactions include Management, Secretarial, Accounting andPerformance fees payable to the Manager, ISIS EP LLP, as disclosed in notes 4and 5, and fees paid to the Directors as disclosed in note 5. In addition, theManager operates a Co-Investment Scheme, detailed in the Report of theDirectors in the Annual Report, whereby employees of the Manager are entitledto participate in certain unquoted investments alongside the Company.
National Storage Mechanism
A copy of the Annual Report and Financial Statements will be submitted shortlyto the National Storage Mechanism ("NSM") and will be available for inspectionat the NSM, which is situated at: www.hemscott.com/nsm.do.
Annual General Meeting
The Company's Annual General Meeting will be held on Wednesday, 6 April 2011 at 11am at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.
vendorRelated Shares:
Baronsmead 2vt