Foresight 3 VCT PLC : Annual Financial Report

FORESIGHT 3 VCT PLC

2013 Highlights

• Net asset value per Ordinary Share in the year to 31 March 2013 decreased by 3.0%, represented by a fall in net asset value to 75.2p. 

• Funding totalling £2.6 million was provided to 12 companies. This included £0.4m of capitalised interest which was added to the principal cost. 

• Realisation proceeds and loan repayments totalling £1.0 million were received from seven portfolio companies. 

• The Company raised gross proceeds of £1.7 million in the year ended 31 March 2013, with a further £0.3 million raised after the year end. 

Chairman's Statement

"Despite setbacks in the environmental sector, Foresight Group remains positive about the prospects of the remaining investments in this portfolio."

Graham Ross Russell
Chairman

Performance
The year under review continued to be overshadowed by the poor state of government finances in many parts of the World. In the UK, economic activity was patchy, giving rise to concerns about a triple dip recession (which was ultimately narrowly avoided), while bank lending to smaller businesses continued to be restricted. The US economy showed better performance but US Government spending remains constrained by the impact of the sequester cuts.

The economic environment affected portfolio companies in a variety of ways. Some companies with longer established businesses were able to find growth opportunities in export markets. Others that needed to maintain or increase their borrowing to pursue development projects or to expand their activities had difficulty in doing so. This was particularly so for companies in the environmental sector.

Against this background, I can report that the net asset value of the Ordinary Share portfolio as at 31 March 2013 decreased by 3.0% to 75.2p (31 March 2012: 77.5p).

The Ordinary Shares portfolio benefited from the good performance of investments in Alaric Systems, Datapath Group Holdings, The Message Pad and Ixaris Systems, all of which are traditional private equity investments and saw increases in valuation. There was also a positive performance from Autologic Diagnostics Group and TFC Europe. Amongst other valuation adjustments, however, additional substantial provisions have been made in the cases of 2K Manufacturing and O-Gen Acme Trek which are both in the environmental portfolio. Closed Loop Recycling, our largest environmental investment, has made substantial progress in the year.

Overall, valuation decreases outweighed portfolio gains despite a robust performance from the private equity portfolio companies. This has been largely because of the continued poor performance of many of the environmental investments. The disappointing performance has been caused in most cases by the difficulty in implementing novel technology and the much greater cost than originally estimated by management teams, in bringing these companies to the point where they become self sustaining. Where the required additional funding has not been available from outside sources this has led to the need for the Investment Manager ("Foresight Group") to make difficult judgements about whether to continue to support companies or to let them close. The Board and Foresight Group have concluded in the light of the experience in this sector that no new investments will be made in environmental infrastructure, and that to the extent that funds for new investment become available they should be focused on more mature and established private equity businesses with lower risk profiles.

During the period, £94,920 was received from Alaric Systems comprising redemption premium (£61,320) and repayment of loan principal (£33,600). The Company's entire investment in AIM listed Croma Group's ordinary shares was sold, generating proceeds of £147,730 as was the entire investment in AIM listed Sarantel Group, generating proceeds of £11,282. In addition to the January 2012 sale, a disposal in Autologic Diagnostics Group also took place, generating £1,000 of proceeds. Administration proceeds of £25,000 and £378,947 were received from Crumb Rubber and i-plas Group respectively and were treated as loan repayments in the year. Deferred consideration from Lab901 of £346,766 was also received.

Despite setbacks in the environmental sector, Foresight Group remains positive about the prospects of the remaining investments in this portfolio.

The Board did not pay an interim dividend in the period (2012: 2.5p per share) and is not recommending a final dividend on the Ordinary Shares (2012: nil) for the year ended 31 March 2013.

Share Issues and Share Buy-backs
The Company launched a small top-up offer on 3 December 2012. During the year ended 31 March 2013, 1,027,599 Ordinary Shares were allotted based on net asset values ranging from 78.7p to 85.3p per share, raising £0.82 million.

The previous top-up offer, which was launched on 23 December 2011 alongside its enhanced buyback offer to shareholders was open between 1 April 2012 and 30 September 2012, and resulted in 997,114 Ordinary Shares being allotted at a price of 87.26p raising £0.85 million.

It continues to be the Board's policy to consider repurchasing shares when they become available in order to provide a degree of liquidity for the sellers of the Company's shares. During the period, the Company repurchased 599,994 Ordinary Shares for cancellation at a cost of £0.41 million.

Enhanced Buyback
Take up by shareholders of the enhanced buyback offer was significant with shareholders representing 8,753,756 Ordinary Shares (8,490,436 shares issued) taking up the offer during April 2012. During March 2013, enhanced buybacks were mentioned in the Chancellor's budget as an area that was not necessarily in the spirit of the VCT legislation and we expect a consultation paper to be published by HM Treasury during the summer of 2013. The outcome of this consultation will help shape the Board's position with regards to the Company's ability to offer enhanced buybacks in the future.

Valuation Policy
Investments held by the Company have been valued in accordance with the International Private Equity and Venture Capital Valuation ("IPEVCV") guidelines (December 2012) developed by the British Venture Capital Association and other organisations. Through these guidelines, investments are valued as defined at 'fair value'. Ordinarily, unquoted investments will be valued at cost for a limited period following the date of acquisition, being the most suitable approximation of fair value unless there is an impairment or significant accretion in value during the period. Quoted investments and investments traded on AIM and ISDX Growth Market (formerly PLUS) are valued at the bid price as at 31 March 2013. The portfolio valuations are prepared by Foresight Group, reviewed and approved by the Board quarterly and subject to review by the auditors annually.

Annual General Meeting
The Company's Annual General Meeting will take place on 17 September 2013 at 1pm. I look forward to welcoming you to the Meeting, which will be held in Sevenoaks, details of which can be found on page 50 of the annual report and accounts.

Outlook
The Board remains cautious about the general outlook. The first priority is to support the existing portfolio where prospects justify further investment to optimise realising gains from disposal of successful investments. Over the medium term we are optimistic that realisations can be achieved, paving the way to further distributions to shareholders. These realisations are likely to be achieved through trade sales as many large companies have significant cash resources available to them; however in the current climate, such companies are reluctant to invest these reserves. Foresight Group recognises that this has resulted in the Company's holding period for its portfolio companies being longer than originally anticipated, which has impacted the making of material distributions to shareholders. We expect this to change as economic conditions improve and it is our intention then to resume the payment of dividends as soon as possible.

Graham Ross Russell
Chairman
11 July 2013

Investment Manager's Report

Manager's Commentary
The performance of the portfolio during the year to 31 March 2013 was impacted both positively and negatively, resulting overall in a 3.0% decrease in net asset value. Investments experienced mixed trading conditions during the year, with generally weak economic activity in the UK along with restrictions on bank lending to UK SMEs. Activity in the USA was stronger. These factors affected the portfolio with some more established businesses growing successfully and achieving record results, particularly those addressing overseas markets. Others, pursuing development projects or expanding their activities, had real difficulty in raising the necessary finance.

During the year, the private equity portfolio performed well. This was in marked contrast to the environmental infrastructure investments which generally struggled in difficult market conditions. The private equity portfolio benefited from the strong performances of several investments, in particular Datapath Group Holdings, Alaric Systems, Autologic Diagnostics Group and TFC Europe, which all achieved record sales and profits, resulting in substantial increases in their valuations. We expect the private equity investments to drive net asset value performance and generate liquidity through realisations over the coming months.

Foresight Group has carefully assessed and reviewed the environmental infrastructure investments to identify those with potential that merit further support and those struggling to make progress. In consequence, decisions were made during the year not to continue to finance certain environmental investments, namely i-plas Group and Silvigen which were placed into administration. Reflecting further delays in redeveloping O-Gen Acme Trek's waste wood to energy plant in Stoke, a provision of £2,170,327 was made during the year against the cost of the investment. As these difficult conditions are expected to continue for some time, the Board and Investment Manager have agreed that no further environmental infrastructure investments will be made, other than for possible small follow on investments necessary to support those environmental companies considered to have potential. Reflecting the better risk adjusted returns available from private equity investments, in future the Investment Manager will focus solely on making this type of investment. The five remaining environmental investments now represent less than 25% of net assets with Closed Loop Recycling being the most significant holding.

The valuations of several of the portfolio companies have been impacted by applying lower multiples to earnings despite their good performances.

Foresight Group remains positive about the prospects for the portfolio overall and is focussed on achieving realisations from the existing portfolio to increase net asset value, facilitate shareholder distributions and provide additional funding for new investments. Although remaining cautious about the economic outlook, Foresight Group is now seeing an increasing number of high quality private equity investment opportunities.

Annual Portfolio Review
1. Follow-on funding

Company                                                                                      £
2K Manufacturing                                                            1,192,000
AtFutsal Group                                                                   196,346
Autologic Diagnostics Group (includes £148,203
of capitalised interest)                                                        148,403
Crumb Rubber                                                                      35,000
Flowrite Refrigeration Holdings (capitalised
interest)                                                                                  7,635
i-plas Group                                                                        150,000
Ixaris Systems                                                                      96,533
Silvigen                                                                                 16,666
The Bunker Secure Hosting (includes £272,641
of capitalised interest)                                                        315,075
The Message Pad                                                              190,003
Vertal                                                                                    34,757
Zoo Digital Group                                                                   7,792
Total                                                                                2,390,210

2. New Investments
Company                                                                                      £
Flowrite Refrigeration Holdings                                          200,000
Total                                                                                  200,000

3. Exits
Company                                                                                      £
Croma Group                                                                     147,730
Sarantel Group                                                                    11,282
Total                                                                                  159,012

4. Realisations
Company                                                                                      £
Autologic Diagnostics Group                                                  1,000
Alaric Systems                                                                      94,920
Crumb Rubber                                                                      25,000
i-plas Group                                                                        378,947
Lab901                                                                               346,766
Total                                                                                   846,633

5. Material Provisions
Company                                                                                      £
2K Manufacturing                                                            1,502,057
Global Immersion                                                               872,061
ICA Group                                                                            91,889
i-plas Group                                                                       644,733
O-Gen Acme Trek                                                           2,170,327
Silvigen                                                                              384,706
O-Gen UK                                                                          130,468
Total                                                                                5,796,241

Performance Summary
A number of companies in the portfolio performed strongly during the year, most notably Datapath Group Holdings, Alaric Systems, Autologic Diagnostics Group and TFC Europe which all achieved record sales and profits, resulting in substantial increases in their valuations totalling £4.94 million. The Message Pad and The Bunker Secure Hosting also performed well, as did the new investment in Flowrite Refrigeration Holdings completed in May 2012. Flowrite Refrigeration Holdings is a well established Kent based company offering refrigeration and air conditioning maintenance and services to leisure and commercial businesses nationally which is already trading well ahead of budget. In February 2013, Closed Loop Recycling raised loans totalling £12.8 million to double its production capacity and good progress is now being made in installing new sorting and production equipment. Once this is fully installed and commissioned, the company's profitability is expected to be enhanced substantially.

As explained below and summarised in Table 5 above, provisions totalling £5.8 million were made against seven investments, mainly environmental, including 2K Manufacturing, i-plas Group, Silvigen, O-Gen Acme Trek and O-Gen UK. Where provisions have been made against the value of underlying investments, we have also provided against the income due from such investments.

The present mixed trading conditions are expected to continue for some time while the general economic climate remains uncertain and a prolonged period of low growth is considered likely.

Post the year end of 31 March 2013, the Company invested £250,000 alongside other Foresight VCTs in a £1.8 million management buy-out of Battersea based Procam Television, one of the UK's leading broadcast hire companies, supplying equipment and crew for location TV production.

Portfolio Company Highlights
Alaric Systems, which develops and sells credit card authorisation and credit card anti fraud software to major financial institutions and retailers worldwide, performed particularly strongly in the year to 31 March 2013, generating an unaudited profit before interest and tax of £2.1 million on sales of £10.4 million, well ahead of the previous year (PBIT of £1.5 million on sales of £8.7 million). A number of significant orders have been won recently which support achievement of the demanding budget for the current year. Capacity to satisfy these orders and further develop the product range is being met through continuing expansion of offices in Kuala Lumpur, Rome and London. In May and September 2012, reflecting strong cash generation, Alaric paid a total of £103,000 to the Company, comprising loan stock interest (£8,080), redemption premium (£61,320) and repayment of loan principal (£33,600). The strong performance resulted in an increase in Alaric's valuation by £1.9 million.

AtFutsal Group provides facilities for futsal, a fast growing type of indoor football with 30 million participants worldwide and the only type of indoor football recognised by the Football Association. Sales have built up steadily in the flagship super arena in Birmingham and the second super arena in Leeds which opened in August 2012 has made a promising start. The company has recently reached cash break even on a monthly basis. As part of a £762,500 funding round to finance the opening of the new super arena in Leeds, £196,346 was invested in equity and loans in April 2012. Educational activities are increasingly important with some 700 students now taking sports related courses with AtFutsal Group and a number of partnerships have been created with educational establishments, football clubs and training organisations. This student number is lower than budgeted although there are plans for nearly 2,000 students to be recruited in the academic year starting in September 2013. At this point the company should reach EBITDA profitability.

Following the successful £48 million secondary buy-out by ISIS Private Equity in January 2012, the Company retained investments in equity and loan stock valued at £1.98 million in Autologic Diagnostics Group. Unaudited results for the year ended 31 December 2012 show an operating profit of £6.0 million (pre exceptional deal costs) was achieved on sales of £17.2 million (£5.2 million on sales of £12.2 million in 2011). Autologic is continuing to grow sales and profits further, particularly in the USA. Interest of £148,203 deferred under the terms of the loan agreement with Autologic was capitalised during the year. In addition to this, a disposal also took place in the year, in which a small number of shares were bought by a new operating partner, generating £1,000 of proceeds.

Biofortuna, a molecular diagnostics business based in the Wirral, has developed unique expertise in the important area of enzyme stabilisation, effectively hi-tech freeze drying. Its first range of products, SSPGo, is a series of genetic compatibility tests for organ transplant recipients, although the application of the technology is extremely broad. Because of the company's stabilisation and freeze-drying technology, its products can be transported easily (by post if needed) and stored at room temperature for up to two years. The company is making progress in a number of areas, including expanding into adjacent premises, broadening its product range, increasing manufacturing capacity and improving internal processes. FDA trials for its SSPGo product range, required to obtain approval, showed notably good results. The SSPGo product range continues to see repeat orders from Abbott. The freeze-dried kit manufacturing service shows promise, with contract discussions with a number of parties.

In February 2013, Closed Loop Recycling successfully raised £12.8m of loans to double the capacity of its Dagenham plant by investing in additional plastic sorting facilities and production lines. Following completion of this expansion in late 2013, annual sales are expected to double and profitability is expected to increase substantially. In April 2013, the first part of this new capacity came on stream, resulting in record monthly turnover. Although demand for the company's recycled PET and HDPE exceeds its current capacity, weak current PET prices and raw material quality issues (resulting in below target but now improving yields) have resulted in trading losses being incurred over the last few months. The company's main raw material supplier opened a new plastic sorting facility in late 2012 which initially experienced quality issues but these have now been substantially addressed. Performance is expected to improve further over the coming months and the major focus for the management team is to improve yield while maintaining/increasing production volumes.

During the year, £35,000 was invested in Crumb Rubber to meet its urgent working capital requirements. However, extended customer decision making and lengthy sales cycles combined with slower than expected growth in sales resulted in the company incurring significant losses. The decision was reluctantly made not to provide further funding. The investment was sold to the other shareholders in November 2012 in return for £25,000 of loans being repaid.

Datapath Group is a world leading innovator in the field of computer graphics and video-wall display technology. For the year ended 31 March 2012, the combined (pre and post re-capitalisation) group company achieved an operating profit of £4.5 million on sales of £12.1 million (£3.1 million operating profit on sales of £10.3 million in 2011). The company continued its strong growth in the year to 31 March 2013 with draft financials showing record profits and sales being achieved, supporting an increase in valuation of £2.65 million during the year.

Evance Wind Turbines, which manufactures 5kW tree sized (up to 50 feet) wind turbines, enjoyed strong sales growth during 2012, driven primarily by the introduction of the UK Feed in Tariff regime. For the year to 31 March 2012, the company achieved its first operating profit on sales of £7.25 million (over three times the level of sales in the previous year). Both sales and profits grew well in the year to 31 March 2013, with the company delivering its 1,500th machine. However, the reduction in the Feed in Tariff from 1 October 2012, combined with a noticeable tightening and lengthening of the planning permission process nationally, has since adversely affected orders and sales. The company is increasing its sales efforts overseas and in the developing corporate market where it has won some initial orders.

In May 2012, £200,000 was invested in Flowrite Refrigeration Holdings alongside other Foresight VCTs to finance the £3.2 million management buyout of Flowrite Services Limited, a long established Kent based company which provides refrigeration and air conditioning maintenance and related services nationally, principally to leisure and commercial businesses, such as hotels, clubs, pubs and restaurants. The management team has accelerated sales efforts, already winning a number of significant new customers and contracts, and a number of possible acquisitions are being considered to broaden the national coverage. The company is enjoying strong growth and is trading markedly ahead of budget.

Global Immersion, which designed, built and maintained visualisation systems for immersive theatres and planetariums Worldwide, won several major orders in 2010 which led to a record operating profit of £0.5 million being achieved on sales of £8.0 million in the year to 30 June 2011. Reflecting prevailing difficult economic conditions, market demand subsequently fell materially with lengthening sales cycles and strong margin pressure, resulting in substantial trading losses being incurred. Administrators were appointed in December 2012, so a full provision of £872,061 was made against this investment.

Following a cost cutting programme, management reorganisation and price rises for its recycled plastic building products in late 2011, i-plas Group's trading improved in Spring 2012, break even EBITDA being achieved in April 2012. To fund working capital, the Company invested a further £150,000 in May and June 2012. However, during summer 2012, the company experienced a marked fall in demand from its customers in the construction industries and also significant margin pressure, resulting in growing losses. With little prospect of a sustained recovery in its markets, the decision was made not to provide further funding, and an administrator was appointed in October. This necessitated a further provision of £644,733 being made against the original cost of investment to reduce it to nil. £378,947 was subsequently recovered from asset sales by the administrator.

An investment of £96,533 was made in Ixaris Systems in April 2012 as part of a £1.35 million fund raising for the continuing development of its Opn platform. Ixaris Systems, which develops and operates Entropay, a prepaid payment service using the VISA network, has also continued to develop and increase sales of Opn, its platform that enables enterprises to develop custom applications for payments. This platform is being used by companies in the affiliate marketing and travel sectors. Unaudited results for the year to 31 December 2012 show an operating loss of £0.4 million was incurred on sales of £8.4 million, reflecting continuing investment in software and systems. Trading in the current year to date is ahead of budget and the management team has been strengthened by the appointment of a new Chief Operating Officer.

Following the successful sale of the investment in Lab901 to Agilent Technologies in February 2010, a final payment of £346,766 was received in March 2013 representing deferred consideration.

Meridian Technique enjoyed buoyant trading during the year for its orthopaedic surgery planning software which is sold to hospitals and surgeries, principally in the UK and USA. Unaudited results for the year to 31 March 2013 show an EBITDA of £0.68 million on sales of £3.04 million. The company continues to be strongly cash generative and post the year end, repaid loans of £327,000. New partnerships have been established in Asia further enhancing prospects.

An investment of £190,003 was made in The Message Pad in June 2012 as part of a £771,000 rights issue to finance the continuing growth of the company's contact centre software technology division. Operating profitability was achieved recently with a growing level of contracted recurring SaaS revenues and the sales pipeline remains strong. The company was recently accredited within the G Cloud framework enabling it to provide contact centre services to all government departments and the wider public sector over the Cloud.

Following a detailed strategic review in December 2011 and in the light of the likely expenditure required to bring O-Gen Acme Trek's advanced gasification 3MW waste wood to energy plant in Stoke into full production, the decision was made to mothball the plant until the similar 3.8MW plant in Plymouth recently completed by MITIE validated this technology. Following a change in the ROC subsidy regime in late 2012, O-Gen UK is currently working to redevelop the Stoke facility into an 8MW plant using alternative, well established standard gasification technology. Discussions are currently taking place with the technology provider, a major EPC contractor and potential funders. Reflecting continuing delays in progressing these plans, a provision of £2,170,327 was made against the cost of this investment in the year.

O-Gen UK is a leading developer of waste wood gasification facilities in the UK and is currently in advanced stages of developing a £40m project in Birmingham, for which planning permission has been obtained. The company is also developing a growing pipeline of opportunities at various stages of maturity. The company continues to develop relationships with a number of technology providers and major EPC contractors. The company has a partnership with MITIE, the major UK FTSE 250 outsourcing group, which has built a 3.8MW plant in Plymouth which is now being commissioned, with operations expected to commence in mid 2013. O-Gen UK will not finance the construction of these plants but will benefit from project management fees, equity shareholdings, fuel, operation and maintenance contracts. A provision of £130,468 has been made against the valuation of this investment.

A further £16,666 was invested during the year in Silvigen to fund urgently needed working capital. Reflecting much slower than expected growth in sales and continuing losses, the decision was made not to provide further funding, resulting in the company going into administration in September 2012. A provision of £384,706 was made in the year to fully provide against the cost of this investment.

TFC Europe, a leading distributor of technical fasteners in the UK and Germany, continued to enjoy strong growth during the year to 31 March 2013, achieving record sales and profits. Trading continues to remain strong in the current year to date with a growing order book.

The Bunker Secure Hosting, which operates two ultra secure data centres, continues to win new orders, grow its annual revenues and generate substantial profits. Unaudited results in the year to 31 December 2012 show an EBITDA of £1.77 million on sales of £8.5 million, at which date recurring annual revenues were running at £8.8 million. To strengthen sales efforts, additional sales resource has been recruited and a series of new Cloud based services is currently being launched. Growth has continued in the current year whilst investment in upgrading the existing infrastructure continues. Interest of £272,641 deferred under the terms of the loan agreement with The Bunker Secure Hosting was capitalised during the year. In October 2012, a small number of shares were purchased from a minority shareholder at a cost of £42,435.

2K Manufacturing manufactures and sells high quality Ecosheet boards from its fully automated Luton factory. Limited production capacity continues to constrain output and the company continues to incur losses despite a record order book. Double shift working and price increases have been introduced but customer demand still cannot be met even at full plant capacity. To meet working capital requirements, a further £1,192,000 was invested in loans during the year. The company has been seeking to raise up to a further £10 million to increase its production capacity for some time but discussions with existing and prospective investors have been frustratingly slow. Discussions continue with both potential purchasers and merger partners. Reflecting these delays in raising this expansion capital, a provision of £1,502,057 has been made against the cost of this investment.

The Company's entire investment in AIM listed Croma Group's ordinary shares was sold, generating proceeds of £147,730 as was the entire investment in AIM listed Sarantel Group, generating proceeds of £11,282. A small number of shares were purchased in AIM listed Zoo Digital at a cost of £7,792.

Outlook
Despite a period of forecast low growth and weak UK economic conditions, the private equity portfolio is considered to be well positioned and is expected to continue to perform robustly overall, driving increased NAV and liquidity, whereas the environmental infrastructure portfolio is expected to face continuing difficult market conditions. As stated above, no further environmental investments will be made, other than for possible small follow on investments where necessary to support environmental investments considered to have potential. The Investment Manager will focus solely on making private equity investments where they are currently experiencing a strong deal flow.

Foresight remains positive about the prospects for the portfolio overall and is focussed on achieving realisations. Although generally cautious about the economic outlook, Foresight is now seeing an increasing number of high quality private equity investment opportunities.

David Hughes
Foresight Group
Chief Investment Officer
11 July 2013

The Disclosure and Transparency Rules ("DTR") of the UK Listing Authority require certain disclosures in relation to the annual financial report, as follows:

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' performance and valuations.  

• Loss of approval as a Venture Capital Trust - the Company must comply with Section 274 of the Income Tax Act 2007 which allows it to be exempted from capital gains tax on investment gains. Any breach of these rules may lead to: the Company losing its approval as a VCT; qualifying shareholders who have not held their shares for the designated holding period having to repay the income tax relief they obtained; and future dividends paid by the Company becoming subject to tax. The Company would also lose its exemption from corporation tax on capital gains.  

• Investment and strategic - inappropriate strategy, poor asset allocation or consistent weak stock selection might lead to under performance and poor returns to shareholders.  

• 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 Exchange listing, financial penalties or a qualified audit report.  

• Reputational - inadequate or failed controls might result in breaches of regulations or loss of shareholder trust.  

• Operational - failure of the Manager's or Company Secretary's accounting systems or disruption to its business might lead to an inability to provide accurate reporting and monitoring.  

• Financial - inadequate controls might lead to misappropriation of assets. Inappropriate accounting policies might lead to misreporting or breaches of regulations. Additional financial risks, including interest rate, credit, market price and currency, are detailed in note 15 to the Annual Report & Accounts.  

• Market risk - investment in AIM traded, ISDX Growth market and unquoted companies by its nature involves a higher degree of risk than investment in companies traded on the main market. In particular, smaller companies often have limited product lines, markets or financial resources and may be dependent for their management on a smaller number of key individuals. In addition, the market for stock in smaller companies is often less liquid than that for stock in larger companies, bringing with it potential difficulties in acquiring, valuing and disposing of such stock.  

• Liquidity risk - the Company's investments, both unquoted and quoted, may be difficult to realise. Furthermore, the fact that a share is traded on AIM or ISDX Growth markets does not guarantee its liquidity. The spread between the buying and selling price of such shares may be wide and thus the price used for valuation may not be achievable.  

The Board seeks to mitigate the internal risks by setting policy, regular review of performance, enforcement of contractual obligations and monitoring progress and compliance. In the mitigation and management of these risks, the Board applies the principles detailed in the UK Corporate Governance Code. Details of the Company's internal controls are contained in the Corporate Governance and Internal Control sections.  

Statement of Directors' Responsibilities

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 the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

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

- select suitable accounting policies and then apply them consistently;

- make judgements and estimates that are reasonable and prudent;

-   state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website (which is delegated to Foresight Group and incorporated into their website). Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

-   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

-   the Directors' Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces.

On behalf of the Board

Graham Ross Russell
Chairman
11 July 2013

Audited Income Statement
for the year ended 31 March 2013

The total column of this statement is the profit and loss account of the Company and the revenue and capital columns represent supplementary information.

All revenue and capital items in the above Income Statement are derived from continuing operations. No operations were acquired or discontinued in the year.

The Company has no recognised gains or losses other than those shown above, therefore no separate statement of total recognised gains and losses has been presented.

Audited Reconciliation of Movements in Shareholders' Funds

*The share premium of the Company was cancelled by order of the High Court of Justice, Chancery Division, on 23 November 2011 and
  registered at Companies House on 23 November 2011. This has enabled the Company to increase its distributable reserve to which, amongst
  other things, losses can be written off, providing the Company greater flexibility when considering dividend payments to shareholders and from
  which share buybacks can be financed.

Audited Balance Sheet
at 31 March 2013

Graham Ross Russell
Chairman
11 July 2013

Audited Cash Flow Statement
for the year ended 31 March 2013

Notes

1.     The Audited Annual Report and Accounts has been prepared on the basis of accounting policies set out in the statutory accounts of the Company for the year ended 31 March 2013. All investments held by the Company are classified as "held at fair value through profit and loss". The Directors fair value investments in accordance with the International Private Equity and Venture Capital Valuation ("IPEVCV") guidelines, as updated in December 2012. This classification is followed as the Company's business is to invest in financial assets with a view to profiting from their total return in the form of capital growth and income.

2.    These are not statutory accounts in accordance with S436 of the Companies Act 2006. The full audited accounts for the year ended 31 March 2013, which were unqualified and did not contain any statements under S498(2) of Companies Act 2006 or S498(3) of Companies Act 2006, will be lodged with the Registrar of Companies. Statutory accounts for the year ended 31 March 2013 including an unqualified audit report and containing no statements under the Companies Act 2006 will be delivered to the Registrar of Companies in due course.  

3.    Copies of the Annual Report & Accounts will be sent to shareholders and will be available for inspection at the Registered Office of the Company at ECA Court, 24-26 South Park, Sevenoaks, Kent TN13 1DU and can be accessed on the following website: www.foresightgroup.eu

4.    Net asset value per Ordinary Share

Net asset value per Ordinary Share is based on net assets at the year end of £38,704,618 (2012: £38,980,499), and on 51,471,765 Ordinary Shares (2012: 50,310,366 Ordinary Shares), being the number of Ordinary Shares in issue at that date.

5.    Loss per Ordinary Share

Notes:
a) Total loss per share is total loss after taxation divided by the weighted average number of shares in issue during the year.
b) Revenue loss per share is revenue loss after taxation divided by the weighted average number of shares in issue during the year.
c) Capital loss per share is capital loss after taxation divided by the weighted average number of shares in issue during the year.

6.    The Annual General Meeting of Foresight 3 VCT plc ("the Company") will be held on 17 September 2013 at 1 pm at the offices of Foresight Group, ECA Court, 24-26 South Park, Sevenoaks, Kent TN13 1DU.

7.   Income/(interest expense)

*The interest expense in the year ended 31 March 2012 arose because of provisions made against loan stock interest receivable from investee companies.

8.    Investments held at fair value through profit or loss

Deferred consideration of £171,000, not recognised in realised losses in the Income Statement, was received during the year.

9.    Transactions with the manager

Foresight Group and Foresight Fund Managers Limited are considered to be Related Parties of the Company. Details of arrangements with these parties are given in the Director's Report and Note 3.

Foresight Group, acting as investment manager to the Company in respect of its venture capital investments, earned fees of £983,000 during the year (2012: £1,185,000). Fees excluding VAT of £123,000 (2012: £119,000) were received during the year for company secretarial, administrative and custodian services to the Company.

At the balance sheet date, there was £24,755 due from Foresight Group (£2012: £13,000 due from Foresight Group) and £nil due to Foresight Fund Managers Limited (2012: £2,000 due from Foresight Fund Managers). No amounts have been written off in the year in respect of debts due to or from the related parties.

Foresight Group also received investee companies arrangement fees of £58,563 (2012: £203,722). VCF Partners, an associate of Foresight Group, received from investee companies, Directors' fees of £190,975 (2012: £225,773).

No carried interest payments were made in the year.

END