Annual Financial Report

Baronsmead VCT 3 plc Annual Financial Report for the year ended 31 December 2011 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 of the Company's published investment policy and risk management are contained in the extracts from the Report of the Directors below. Dividend policy The Board of Baronsmead VCT 3 has the objective to maintain a minimum annual dividend level of around 4.5p per ordinary share if possible, but this depends primarily on the level of realisations achieved and cannot be guaranteed. There will be variations in the amount of dividends paid year on year. Since launch, the average annual tax-free dividend paid to shareholders has been 5.75p per ordinary share (equivalent to a pre-tax return of 7.65p per ordinary share for a higher 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: â€¢ Tax free dividends â€¢ Realised gains not subject to capital gains tax (although any realised losses are not allowable) â€¢ No minimum holding period â€¢ 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 tax advice should be obtained before shareholders dispose of their shares and also if they deferred a capital gain in respect of new shares acquired prior to 6 April 2004. *UK income tax payers, aged 18 or over, who acquire no more than Â£200,000 worth of VCT shares in a tax year. Financial Headlines â— 5.5% Net asset value ("NAV") per share increased 5.5 per cent. during the year to 107.66p before deduction of dividends. â— 7.5p Dividends for the year totalled 7.5p per share. â— 189.7p NAV total return to shareholders for every 100.0p invested since launch. â— 8.2% Dividend yield. Based on the 7.5p dividends paid in the year and the mid share price of 91.25p at the year end, qualifying shareholders have received a tax free cash return of 8.2 per cent., ignoring up front tax relief. â— 63.3p Cumulative tax free dividends total 63.3p per share for founder shareholders since 2001, equivalent to an annual average dividend of 5.75p per share. Summary Since Launch Performance Summary to 31 December 2011 1 year 3 years 5 years 10 years Since launch Total return* % % % % % Net asset valueâ€ +5.3 +26.9 +12.1 +87.5 +89.7 Share priceâ€ +4.7 +28.9 +14.0 +87.4 +66.5 FTSE All-Share -3.5 +43.9 +6.2 +59.5 +36.1 *Source: ISIS EP LLP and AIC. â€ These returns for BVCT 3 ignore up front tax reliefs and the impact of receiving dividends tax free. Performance Record Ordinary share Net FTSE Total Net Share asset All-Share Total net asset price value total expense Year ended assets value (mid) total return ratioâ€ 31 December Â£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 2011 60.1 100.16 91.25 189.74 136.10 3.0 * Source: ISIS EP LLP. â€ As a percentage of average total shareholders' funds (excluding performance fee). Dividends Paid Since Launch Ordinary share Total Average Revenue Capital annual Cumulative total annual Year ended dividend dividend dividend dividends dividend 31 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 2011 1.65 5.85 7.50 63.30 5.75 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* yieldâ€ Year subscribed p p p p % % 2001 100.0 20.0 80.0 63.3 7.2 9.7 2005 - C share 100.0 40.0 60.0 32.7 8.0 10.6 2010 103.1 30.9 72.2 15.0 11.7 15.6 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. * Net annual yield represents the cumulative dividends paid expressed as a percentage of the net cash invested. â€ The gross equivalent yield if the dividends had been subject to higher rate (currently 32.5 per cent. on dividend income). The additional rate of tax on dividend income of 42.5 per cent. which came into force from the 2010/2011 tax year for those shareholders who earn more than Â£150,000 has not been included. For those shareholders who would otherwise pay this additional rate of tax on dividends, the future gross equivalent yield will be higher than the figures shown. Dividends paid to C shareholders post conversion have been adjusted by the conversion ratio (0.85642528). Chairman's Statement I am pleased to report an increase in Net Asset Value ("NAV") of 5.56p per share (5.5 per cent.) to 107.66p per share over the year to 31 December 2011, before dividends. Dividends for the year were maintained at 7.5p per share for the fifth successive year. After taking account of the dividends the NAV at the year end was 100.16p per share. INVESTMENT PERFORMANCE In the year to 31 December 2011, the NAV per share increased 5.5 per cent. from 102.10p to 107.66p before payment of dividends totalling 7.5p. The changes over the year can be summarised as follows: Pence per share NAV as at 1 January 2011 (after 2012 final Dividend of 4.5p deducted) 102.10 Valuation uplift (5.45 per cent.) 5.56 107.66 First interim dividend paid on 29 September (3.00) 2011 Second interim dividend paid on 9 December (4.50) 2011 NAV as at 31 December 2011 100.16 During the year three of our unquoted companies were sold at an average of 2.9 times original cost and realised net profits of Â£6.3 million since acquisition. The sale of Reed & Mackay, which was announced with the interim results, was at a multiple of 4.8 times cost. This was an excellent investment return from a company that grew consistently throughout the recent recession as a result of its dedicated focus on service and value for customers. During September, the Company's investment in Quantix was sold realising a profit of Â£1.7 million and delivering a return of 3.1 times cost after achieving fast growth since investment in 2007. All of the VCT qualifying tests had also been met throughout the year. The Company holds a proportion of its assets in cash/near cash investments for new and follow-on investments and to pay dividends and expenses etc. During the year the proportion of the Company's assets held in interest bearing securities and cash fell from 27.2 per cent. (Â£17.5m) to 17.7 per cent. (Â£10.8m). The recent fundraising will enhance the Company's ability to continue to pay dividends and costs without reducing the overall amounts available for investment. LONGER TERM PERFORMANCE AND BENEFIT OF THE VCT TAX RELIEFS The Company's investment objective and the investment and dividend policies are aimed at producing consistent returns over the long-term. As a result, the investment process employed by the Manager is one which strives to achieve consistent returns for investors through the investment in established and profitable investee companies. While not strictly comparable with the Company's investment performance, the FTSE All-Share Index (Total Return) provides an indication of the returns on quoted equities. The graph on page 2 of the Annual Report and Accounts illustrates that since inception the Company's investment returns, as measured by NAV Total Return, calculated on the basis of reinvested dividends has been ahead of the FTSE All-Share Index (Total Return). The Net Asset Value Total Return at 31 December 2011, calculated on the basis of reinvested dividends, is 189.7p for each 100p invested by founder shareholders before taking account of any VCT tax reliefs. The comparable return would be 232.1p if the initial income tax relief available at inception was included. The tax free nature of a VCT is of particular benefit for qualifying shareholders as they do not have to pay income tax on the dividends they receive, or declare them in a tax return. This means that qualifying shareholders in Baronsmead VCT 3, who are higher and additional rate tax payers do not have to pay income tax equivalent to 25 per cent. and 36.1 per cent. respectively on the cash dividend they receive from the Company. To generate the same after-tax dividends, it would be necessary for the dividend received from a non-VCT investment to be 33.3 per cent. or 56.5 per cent. higher, respectively. SHAREHOLDER MATTERS On 12 January 2012 the Company launched an offer for subscription to raise just less than â‚¬5 million ("the Offer") which is the equivalent of Â£4.135 million. I am very pleased to report that the offer became fully subscribed on 7 February 2012. I would like to welcome new shareholders and thank them as well as those existing shareholders who invested in this latest fundraising and contributed to its success. I am also pleased to inform shareholders that on 12 May 2011 Baronsmead VCT 3 won the Best Report & Accounts at the AIC Awards and on 23 November 2011 was voted VCT of the year jointly with Baronsmead VCT 2 at the Investment Trust Awards 2011. With respect to the first the judges praised the ease with which key information could be gleaned from the report and also commended the interesting case studies. The judging process for the second award was based on a mixture of a quantitative assessment of investment performance and a qualitative assessment of the fund manager. VCT LEGISLATION AND WIDER REGULATION There have been some positive actions by the Government to improve VCT legislation. The Pre-Budget Report in November 2011 announced that the limit of Â£1 million per year per investee will be removed from 6 April 2012 and the VCT scheme refocused on risk investments. In addition, subject to EU state aid approval, from 6 April 2012 investee companies will be able to employ up to 250 employees (rather than the present limit of up to 50 employees) and have gross assets of Â£15 million (Â£7 million at present). Additionally the annual investment limit for qualifying companies is to be raised to Â£10 million from Â£2 million. ANNUAL GENERAL MEETING I look forward to meeting as many shareholders as possible at our 11th Annual General Meeting to be held on Wednesday 11 April 2012 at the London Stock Exchange, 10 Paternoster Square. Proceedings for the day commence with the AGM at 10.30 a.m. followed by presentations from the Manager and an investee company. After a light lunch, there will be a shareholders workshop with a finish time of about 2 p.m. OUTLOOK In the Half-yearly report I anticipated continued uncertainty and slower growth for the UK economy. During the second six months of the year the EU sovereign debt crisis, volatile public markets and increasingly scarce credit have all impacted the economy adversely. Against this backdrop Baronsmead VCT 3 has realised good profits from the sale of a number of private companies and its portfolio is lowly geared. The Board believes that the Manager, ISIS, as an award winning house, has the experience to guide portfolio companies through difficult trading environments and in this rapidly changing economic climate there will be specific sector opportunities to which the Manager remains alert and in which it intends to invest. The Government needs to create a more business friendly environment and drive private sector growth, particularly by encouraging investment by individuals and the corporate sector. The liberalisation arising from the increase in a number of the VCT size limitations has moved in the right direction however the restriction in relation to funds raised after 6 April 2012 fails to recognise the economic benefit that can be gained from a change of ownership and the injection of new or renewed ambitions for the future prospects of these businesses. Anthony Townsend Chairman 17 February 2011 Manager's Review Until summer 2011, trading performance across the unquoted and AIM portfolio companies had improved compared to the previous year, including a series of profi table exits. The deterioration in the economy and now the threat of further recession is having some impact on the portfolio but in general the companies are well placed to trade through another downturn. PORTFOLIO REVIEW The portfolio comprised sixty-nine investee companies at the year end after making five realisations and adding twelve new investments. Capital proceeds from realisations totalled Â£10.9 million and net capital profits realised in the period were Â£6.5 million. Investment in unquoted and AIM traded companies were Â£6.4 million and Â£2.9 million respectively, including further round financings. The new unquoted investments were in Valldata Group, a UK leading provider of outsourced donation processing and fulfilment services for the UK not-for profit sector; and Independent Community Care Management a live out community care provider supporting people with complex long term conditions at home throughout the UK, plus three companies set up and led by experienced chairmen seeking to acquire businesses within their three different areas of expertise. Each of the chairmen had previously been backed by ISIS through investment by the Baronsmead VCTs. These prior investee companies were ScriptSwitch a healthcare IT company, Reed & Mackay a business travel management company and Hawksmere a business training company. All three investments delivered successful realisations for shareholders and the three chairmen are now seeking new opportunities in their chosen sectors. The volume of qualifying AIM opportunities again increased from the depressed levels of 2009 and 2010. A total of Â£2.4 million was invested into seven AIM-traded companies and another Â£0.5 million of additional capital was provided to existing investments. The three largest AIM investments were in Music Festivals, TLA Worldwide and Escher Group Holdings. Music Festivals focuses on the ownership, development, and production of music festivals including Festival Internacional de BenicÃ ssim in Spain and the Hop Farm Music Festival in Kent. TLA Worldwide provides management and marketing for baseball. Escher Group Holdings provides software for the global post office automation market. Wood Street Microcap Investment Fund ("Wood Street") was established by ISIS in May 2009 to provide flexibility for the Baronsmead VCTs to invest in generally larger and more liquid non VCT qualifying AIM and Small Cap opportunities. At 31 December 2011 Baronsmead VCT 3 had invested Â£2.5 million through Wood Street into a portfolio of thirty-two companies. In total Wood Street has generated a positive return of 5.4 per cent. over the year. The Manager receives no additional fee for managing this fund. EXITS IN THE YEAR UNDER REVIEW The three unquoted, one AIM and one NYSE full exits have together delivered significant realised profits. The former were sold at an aggregate of 2.9 times cost yielding profits of Â£6.3 million since acquisition. The three unquoted companies were Reed & Mackay, Quantix and Getting Personal. The companies had sustained growth through and since the 2008/09 recession. â€¢ Reed & Mackay provides business travel management to mostly financial services and professional services firms and prides itself on its exceptional customer service. Over the five and half years that the Baronsmead VCTs were shareholders, ISIS worked with the business to strengthen the senior management team and further develop the technological support for their travel consultants. The work-force more than doubled from the 140 employees at the outset. â€¢ Quantix is an IT managed services provider of database support and cloud services to enterprises throughout the UK. Since the Baronsmead VCTs invested in the company in 2007 it has tripled its client base and become a recognised leader in its field particularly for its innovative approach. Simon Goodenough, MD of Quantix said "We have really enjoyed having ISIS as a partner for the past four and a half years. The business has definitely benefitted from having such a supportive investor. They gave us the confidence to invest in the sales force and internal operations processes ahead of our original plan." â€¢ Getting Personal is a leading internet retailer of personalised gifts which had grown rapidly since its launch 5 years ago and generated sales of Â£11.5 million in the year to April 2011. The business was profitably sold to Card Factory in July 2011. CASE STUDIES The four case studies highlighted in the Annual Report have shown sustained growth over the last three years. â€¢ CableCom Networking Holdings supplies IT and communication services to the UK student accommodation and key worker sectors. The latter includes high quality accommodation around the BBC's new northern base at Salford. â€¢ Nexus Vehicle Holdings, a leading provider of vehicle rental services to the UK corporate market, is growing both organically and by acquisition. â€¢ Crew Clothing Holdings, an active and casual wear clothing brand, continues to grow its portfolio of sites, creating jobs as well as experiencing growth from its direct mail/website retailing. â€¢ IDOX is a leading developer and supplier of software solutions and information services to UK local government. The investment was made in 2003 and took some years to establish its current business model and profitability. It is now a market leader in its field with turnover increasing from Â£3 million at the date of investment to Â£39 million in the year to 31 October 2011. OUTLOOK The economic optimism of 2010 has diminished during 2011 with widespread concern about growth prospects. Many of the portfolio companies are now more experienced at handling the economic uncertainties. This environment, however, does not help to encourage the entrepreneurial spirit so vital for the development of the SME sector that will be key to the regeneration of the economy. It is simply much more difficult to evaluate the future and the associated risks. As an active investment manager ISIS continues to work with our investee companies to help to steer them on an appropriate course in these difficult conditions. Few of the portfolio companies are reliant on bank finance and so the focus will be on sustaining sales growth whilst continuing to enhance customer service so as to build resilient businesses with continued momentum. ISIS EP LLP Investment Managers 17 February 2011 Table of Investments and Realisations Investments in the year to 31 December 2011 Company Location Sector Activity Book cost Â£'000 Unquoted investments New Valldata Group Melksham Business Payment processing 1,616 Limited Services for not-for-profit sector Independent Kettering Healthcare & High acuity care for 1,346 Community Care Education home based care Management Limited users Arcas Investments London Business Company seeking to 1,000 Limited Services acquire businesses in the business services sector HealthTech London Healthcare & Company seeking to 1,000 Innovation Partners Education acquire businesses Limited in the business healthcare IT sector Quest Venture London Business Company seeking to 1,000 Partners Limited Services acquire businesses in the business travel sector Music Festivals plc London Consumer Owner and operator 400 Loan note Markets of live music festivals and events Follow on Independent Living Alloa Healthcare & Care at home 438 Services Limited Education services Total unquoted in 6,800 vestments AIM-traded & listed investments New TLA Worldwide plc London Business Baseball sports 620 Services management and marketing business Escher Group Dublin TMT# Postal automation 614 Holdings plc software and services Inspired Energy plc Kirkham Business Energy Consultancy 200 Services focused on corporate customers Paragon London Consumer Visitor attraction 200 Entertainment Markets business Limited GB Group plc Chester TMT# ID verification and 150 data solutions Ubisense Group plc Cambridge TMT# Technology & 130 services offering real time location systems solutions Music Festivals plc London Consumer Owner and operator 100 Markets of live music festivals and events Follow on Active Risk Group Maidenhead TMT# Risk management 124 plc software Green Compliance Cirencester Business Small business 101 plc Services compliance Netcall plc St Ives TMT# Communications 80 software Driver Group plc Rossendale Business Dispute resolution 65 Services FFastFill plc London TMT# Trading platform 63 software provider STM Group plc Gibraltar Financial Offshore trust and 22 Services company administration services Total AIM-traded & listed investments 2,469 Collective investment vehicle Follow on Wood Street 700 Microcap Investment Fund Total collective investment 700 vehicle Total investments in the year 9,969 # Technology, Media and Telecommunications ("TMT") Realisations in the year to 31 December 2011 Company Realised 31 December profit/ First 2010 (loss) overall investment valuation this period multiple date Â£'000 Â£'000 return* Unquoted realisations Quantix Limited Full trade Mar 07 2,025 879 3.1 sale Getting Personal Full trade Jun 10 1,013 797 ND^ Limited sale Reed & Mackay Limited Full trade Nov 05 4,779 229 4.8 sale Carnell Contractors Loan Mar 08 558 0 0.6 Limited repayment MLS Limited Loan Jul 06 271 0 1.0 repayment Total unquoted 8,646 1,905 realisations AIM-traded, listed & NYSE realisations CranewarÃ© plc Full market Sep 07 335 (37) 2.7 sale Alere Inc Full market Aug 09 179 (70) 0.8 sale Total AIM-traded, listed & NYSE 514 (107) realisations Total realisations 9,160 1,798â€ * Includes interest/dividends received, loan note redemptions and partial realisations accounted for in prior periods. â€ Proceeds of Â£19,000 were received in respect of Country Artists Limited and a further Â£7,000 in respect of MKM Group plc, both of which had been written off in a prior period. ^ Not Disclosed. Investment Portfolio Investment Classification at 31 December 2011 Sector* Percentage Business Services 34% Consumer Markets 18% Financial Services 2% Healthcare & 13% Education Technology, Media 33% and Telecommunications ("TMT") Total Assets* Percentage Unquoted - loan 35% stock Unquoted - 16% ordinary and preference shares AIM, Listed & 31% Collective investment vehicle Listed interest 17% bearing securities Net current 1% assets Time Investments Percentage Held* Less than 1 year 20% Between 1 and 3 10% years Between 3 and 5 31% years Greater than 5 39% years * at 31 December 2011 valuation 31 31 % of % of December December Equity Equity Book 2010 2011 % of held by held by cost valuation valuation net Baronsmead by all Company Sector Â£'000 Â£'000 â€ Â£'000 assets VCT 3 plc funds* Unquoted Nexus Vehicle Business 2,368 4,182 5,658 9.4 12.6 57.4 Holdings Limited Services CableCom TMT 1,381 2,490 3,707 6.2 10.6 48.0 Networking Holdings Limited Crew Clothing Consumer 984 2,569 2,676 4.4 5.4 22.8 Holdings Limited Markets KafÃ©vend Holdings Consumer 1,252 2,032 1,991 3.3 15.8 66.5 Limited Markets CSC (World) TMT 1,606 1,687 1,940 3.2 8.8 40.0 Limited Fisher Outdoor Consumer 1,423 1,777 1,777 3.0 10.5 44.0 Leisure Holdings Markets Limited Valldata Group Business 1,616 - 1,694 2.8 8.9 40.6 Limited Services Inspired Thinking Business 796 976 1,368 2.3 5.0 22.5 Group Limited Services Independent Healthcare & 1,346 - 1,346 2.2 10.9 55.0 Community Care Education Management Limited TVC Group Limited TMT 1,233 774 1,298 2.2 13.0 59.3 Independent Healthcare & 1,599 1,849 1,293 2.1 16.2 65.7 Living Services Education Limited MLS Limited TMT 510 1,161 1,043 1.7 5.3 22.5 Arcas Investments Business 1,000 - 1,000 1.7 9.6 48.6 Limited Services HealthTech Healthcare & 1,000 - 1,000 1.7 9.6 48.6 Innovation Education Partners Limited Quest Venture Business 1,000 - 1,000 1.7 9.6 48.6 Partners Limited Services Surgi C Limited Healthcare & 1,102 919 650 1.1 9.8 44.7 Education Playforce Business 1,033 1,023 512 0.8 9.7 44.0 Holdings Limited Services Music Festivals Consumer 400 - 400 0.7 N/A N/A plc Loan note Markets Empire World Business 1,297 869 321 0.5 â€¡ â€¡ Trade Limited Services Kidsunlimited Business 113 113 113 0.2 N/A N/A Group Limited Services Carnell Business 941 337 0 0.0 # # Contractors Services Limited Xention Discovery Healthcare & 893 104 0 0.0 2.2 3.0 Limited Education Total unquoted 24,893 22,862 30,787 51.2 AIM IDOX plc TMT 1,038 1,525 2,661 4.4 3.2 9.6 Jelf Group plc Financial 761 670 877 1.5 1.4 6.3 Services Netcall plc TMT 869 508 842 1.4 4.1 20.4 Murgitroyd Group Business 319 751 791 1.3 3.1 6.2 plc Services TLA Worldwide plc Business 620 - 620 1.0 4.9 24.3 Services Escher Group TMT 614 - 564 1.0 2.1 10.6 Holdings plc Tasty plc Consumer 469 316 547 0.9 2.5 17.1 Markets Accumuli plc TMTâ€ â€ 333 409 473 0.8 3.6 20.7 Green Compliance Business 882 938 450 0.7 4.0 19.8 plc Services FFastFill plc TMT 314 316 448 0.7 0.9 6.2 Paragon Consumer 200 - 425 0.7 3.2 17.7 Entertainment Markets Limited Sinclair IS Healthcare & 524 - 399 0.7 0.4 2.4 Pharma plc^ Education Brulines Group Business 646 544 388 0.6 1.8 9.6 plc Services PROACTIS Holdings TMT 619 614 341 0.6 5.4 26.2 plc Plastics Capital Business 473 307 321 0.5 1.7 9.8 plc Services Anpario plc Healthcare & 275 339 315 0.5 2.0 14.8 Education Electric Word plc TMT 616 702 312 0.5 5.2 28.8 InterQuest Group Business 310 360 298 0.5 1.8 7.0 plc Services Quadnetics Group Business 296 192 261 0.4 0.6 2.1 plc Services Driver Group plc Business 503 138 259 0.4 3.5 16.2 Services EG Solutions plc TMT 375 357 256 0.4 3.1 14.2 Brady plc TMT 176 199 217 0.4 0.5 3.1 Inspired Energy Business 200 - 217 0.4 1.9 9.4 plc Services Sanderson Group TMT 387 209 201 0.3 1.8 6.9 plc GB Group plc TMT 150 - 176 0.3 0.4 1.8 Tangent Business 268 158 175 0.3 2.0 10.2 Communications Services plc Real Good Food Consumer 540 92 160 0.3 0.6 2.3 Company (The) plc Markets Begbies Traynor Financial 231 347 156 0.3 0.6 2.5 Group plc Services Stagecoach Consumer 419 180 153 0.3 4.5 9.0 Theatre Arts plc Markets Tristel plc Healthcare & 217 232 145 0.3 1.0 5.4 Education Ubisense Group TMT 130 - 137 0.2 0.3 1.7 plc Active Risk Group TMT 159 44 125 0.2 1.1 5.6 plc Cohort plc Business 179 84 119 0.2 0.3 1.4 Services Dods Group plc TMT 541 142 105 0.2 1.4 4.4 Prologic plc TMT 310 186 103 0.2 4.1 15.0 Music Festivals Consumer 100 - 87 0.2 1.0 5.2 plc Markets Autoclenz Business 400 115 77 0.1 3.1 12.3 Holdings plc Services Bglobal plc Business 176 172 67 0.1 0.4 2.5 Services STM Group plc Financial 162 47 52 0.1 0.8 4.9 Services Hangar8 plc Business 44 44 31 0.1 0.5 2.6 Services Clarity Commerce TMT 50 43 29 0.0 0.3 6.0 Solutions plc Adventis Group TMT 361 89 10 0.0 3.1 20.7 plc Zoo Digital Group TMT 584 36 8 0.0 0.2 0.6 plc Colliers Financial 470 76 4 0.0 0.3 0.8 International UK Services plc Total AIM 17,310 11,481 14,402 24.0 Listed Vectura Group plc Healthcare & 771 1,120 900 1.5 0.5 1.3 Education Chime TMT 369 386 293 0.5 0.2 1.3 Communications plc Marwyn Management Financial 525 - 81 0.1 0.3 1.8 Partners plc^^ Services Marwyn Value Financial 64 55 44 0.1 1.3 6.0 Investors Limited Services Total listed 1,729 1,561 1,318 2.2 Listed interest bearing securities UK T-Bill 03/01/ 6,799 - 6,799 11.4 12 BlackRock ICS plc 1,590 5,700 1,590 2.6 - Institutional Sterling Liquidity Fund JPMorgan 1,590 1,200 1,590 2.6 Liquidity Funds - Sterling Liquidity Fund Total listed 9,979 6,900 9,979 16.6 interest bearing securities Collective investment vehicle Wood Street 2,525 2,123 2,826 4.7 Microcap Investment Fund Total collective investment 2,525 2,123 2,826 4.7 vehicle Total investments 56,436 44,927 59,312 98.7 Net current 783 1.3 assets Net assets 60,095 100.0 â€¡ Following a restructuring, the effective ownership percentage is dependent on final exit proceeds. # Following a restructuring and partial redemption the funds no longer hold equity in Carnell Contractors Limited ^ Sinclair IS Pharma plc shares received in exchange for IS Pharma plc shares following a merger of the two companies. ^^ Marwyn Management Partners plc shares received in exchange for Praesepe plc shares following a takeover. â€ The total investment valuation at 31 December 2010 per the table above does not agree to the audited accounts due to purchases and sales since that date. * All funds managed by the same investment manager, ISIS EP LLP, including Baronsmead VCT 3. AIM & Listed Portfolio Concentration Analysis at 31 December 2011 Investment % of ranking Book cost Valuation Quoted by valuation Â£'000 Â£'000 portfolio Top Ten 6,676 8,725 55.5 11-20 4,346 3,540 22.5 21-30 3,126 2,078 13.2 30+ 4,891 1,377 8.8 Total 19,039 15,720 100.0 Ten Largest Investments The top ten investments by current value at 31 December 2011 illustrate the diversity and size of investee companies within the portfolio. This financial information is taken from publicly available information published at Companies House, which has been audited by the auditors of the investee companies. 1. NEXUS VEHICLE HOLDINGS LIMITED - Leeds All ISIS EP LLP managed funds First Investment: February 2008 Total Cost: Â£9,500,000 Total equity held: 57.38% Baronsmead VCT 3 only Cost: Â£2,368,000 Valuation: Â£5,658,000 Valuation basis: Earnings multiple % of equity held: 12.62% Year ended 30 2011 2010 September Â£ million Â£ million Sales 38.3 33.5 EBITA 4.3 4.0 Profit before tax 1.4 1.3 Net Assets 1.7 0.8 No. of Employees 90 73 (Source: Nexus Vehicle Holdings Limited, Financial Statements 2011). 2. CABLECOM NETWORKING HOLDINGS LIMITED - Clevedon All ISIS EP LLP managed funds First Investment: May 2007 Total Cost: Â£5,600,000 Total equity held: 48.00% Baronsmead VCT 3 only Cost: Â£1,381,000 Valuation: Â£3,707,000 Valuation basis: Earnings Multiple % of equity held: 10.56% Year ended 30 2011 2010 September Â£ million Â£ million Sales 12.2 8.2 EBITA 1.4 0.9 Loss before tax (0.2) (0.5) Net Assets 0.3 0.5 No. of Employees 61 52 (Source: Cablecom Networking Holdings Limited, Audited Annual Report and Accounts 2011) 3. CREW CLOTHING HOLDINGS LIMITED - London All ISIS EP LLP managed funds First Investment: November 2006 Total Cost: Â£3,955,000 Total equity held: 22.79% Baronsmead VCT 3 only Cost: Â£984,000 Valuation: Â£2,676,000 Valuation basis: Earnings Multiple % of equity held: 5.41% Year ended 31 October 2010 2009 Â£ million Â£ million Sales 34.6 29.3 EBITA 2.7 0.8 Profit before tax 2.0 0.2 Net Assets 3.8 2.3 No. of Employees 284 273 (Source: Crew Clothing Holdings Limited, Consolidated Financial Statements 2010) 4. IDOX PLC - London All ISIS EP LLP managed funds First Investment: May 2002 Total Cost: Â£3,015,000 Total equity held: 9.60% Baronsmead VCT 3 only Cost: Â£1,038,000 Valuation: Â£2,661,000 Valuation basis: Bid price % of equity held: 3.21% Year ended 31 October 2011 2010 Â£ million Â£ million Sales 38.6 31.3 EBITA 9.5 7.5 Profit before tax 5.6 4.9 Net Assets 34.4 31.0 No. of Employees 363 332 (Source: IDOX plc Annual Report and Accounts 2011) 5. KAFÃ‰VEND HOLDINGS LIMITED - Crawley All ISIS EP LLP managed funds First Investment: October 2005 Total Cost: Â£5,024,000 Total equity held: 66.50% Baronsmead VCT 3 only Cost: Â£1,252,000 Valuation: Â£1,991,000 Valuation basis: Earnings Multiple % of equity held: 15.79% Year ended 30 2010 2009 September Â£ million Â£ million Sales 15.6 14.7 EBITA 2.0 1.9 Profit before tax 0.8 0.5 Net Assets 1.2 0.8 No. of Employees 95 98 (Source: KafÃ©vend Group Limited, audited Annual Report and Accounts 2010) 6. CSC (WORLD) LIMITED - Pudsey, Leeds (A trading name of Cobco 867 Limited) All ISIS EP LLP managed funds First Investment: January 2008 Total Cost: Â£6,450,000 Total equity held: 40.03% Baronsmead VCT 3 only Cost: Â£1,606,000 Valuation: Â£1,940,00 Valuation basis: Earnings Multiple % of equity held: 8.81% Year ended 31 March 2011 2010 Â£ million Â£ million Sales 7.3 6.4 EBITA 2.3 1.9 Loss before tax (0.4) (0.8) Net Liabilities (1.3) (0.6) No. of Employees 58 55 (Source: Cobco 867 Limited, Directors Report and Consolidated Financial Statements 2011) 7. FISHER OUTDOOR LEISURE HOLDINGS LIMITED - St. Albans All ISIS EP LLP managed funds First Investment: June 2006 Total Cost: Â£5,700,000 Total equity held: 44.00% Baronsmead VCT 3 only Cost: Â£1,423,000 Valuation: Â£1,777,000 Valuation basis: Earnings Multiple % of equity held: 10.45% Year ended 31 January 2010 2009 Â£ million Â£ 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 *Year end has changed to July. The next Financial Statements will be for the 18 month period ended 31 July 2011. (Source: Fisher Outdoor Leisure Holdings Limited, Directors Report and Financial Statements 2010) 8. VALLDATA GROUP LIMITED - Melksham All ISIS EP LLP managed funds First Investment: January 2011 Total Cost: Â£6,475,000 Total equity held: 40.57% Baronsmead VCT 3 only Cost: Â£1,616,000 Valuation: Â£1,694,000 Valuation basis: Earnings Multiple % of equity held: 8.92% Year ended 31 March 2011 2010* Â£ million Â£ million Sales 6.3 5.4 EBITA 0.9 0.8 Profit before tax 0.8 0.7 Net Assets 0.6 0.4 No. of Employees 292 234 * Restated (Source: Valldata Services Limited, Directors Report and Financial Statements 2011) 9. INSPIRED THINKING GROUP LIMITED - Birmingham All ISIS EP LLP managed funds First Investment: May 2010 Total Cost: Â£3,200,000 Total equity held: 22.50% Baronsmead VCT 3 only Cost: Â£796,000 Valuation: Â£1,368,000 Valuation basis: Earnings Multiple % of equity held: 4.95% Year ended 31 August 2010 Â£ million Sales 12.9 EBITA 0.5 Profit before tax 0.4 Net Assets 0.9 No. of Employees 96 (Source: Inspired Thinking Group Holdings, Directors Report and Consolidated Financial Statements for year ended 31 August 2010) 10. INDEPENDENT COMMUNITY CARE MANAGEMENT LIMIITED - Kettering All ISIS EP LLP managed funds First Investment: October 2011 Total Cost: Â£6,010,000 Total equity held: 55.00% Baronsmead VCT 3 only Cost: Â£1,346,000 Valuation: Â£1,346,000 Valuation basis: Cost % of equity held: 10.89% Period ended 31 December/31 2010* 2009 August Â£ million Â£ million Sales 9.1 6.8 EBITA 0.2 0.1 Profit before tax 0.2 0.1 Net Assets/(Liabilities) 0.0 (0.1) No. of Employees 316 360 *Period ended 31 December 2010 numbers (Source: Independent Community Care Management Ltd, Abbreviated Accounts for period ended 31 December 2010) Extracts 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 eleventh Report and audited financial statements of the Company for the year ended 31 December 2011. Ordinary shares Â£'000 Profit on ordinary activities after 3,285 taxation Final dividend for 2010 of 4.5p per ordinary share paid on 8 April 2011 (2,729) First interim dividend of 3.0p per ordinary share paid on 29 September 2011 (1,796) Second interim dividend of 4.5p per ordinary share paid on 9 December 2011 (2,689) Total dividends paid during the year (7,214) Principal Activity and Status The Company is registered in England 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 year 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 for listed securities and 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 in the UK, although many of these investees will trade overseas. The companies in which investments are made must have no more than Â£15 million of gross assets at the time of investment (or Â£7 million if the funds being invested were raised 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 to qualify and is approved as a VCT by HM Revenue and Customs. Amongst other conditions, the Company may not invest more than 15 per cent. of its investments in a single company and must have at least 70 per cent. by value of its investments throughout the period in shares or securities comprised in qualifying holdings, of which 30 per cent. by value must be ordinary shares which carry no preferential rights. In addition, it must have at least 10 per cent. by value of its total investments in any qualifying company in ordinary shares 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, any given time, 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 within different industry sectors using a mixture of securities. Generally no more than Â£2.5 million, at cost, is invested in the same company. The value of an individual investment is expected to increase over time as a result of trading progress and a continuous assessment is made of 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 and to achieve this it invests alongside the other Baronsmead VCTs. Currently ISIS EP LLP ("the Manager") and its executive members are mandated to invest in unquoteds alongside the Company on terms which align the interests of shareholders and the Manager. Borrowing powers The Company's Articles permit borrowing to give a degree of investment flexibility. The Company's policy is to use borrowing for short term liquidity purposes only. The Company's borrowings are restricted to 25 per cent. of the value of the gross assets of that company. The Company currently has no borrowings. 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 and evaluating potential investment opportunities, by assessing a forward view of firstly the business environment, then the sector and finally the specific potential investment opportunity. Based on its research, the Manager has selected a number of sectors that it believes will offer attractive growth prospects and investment opportunities. Diversification is also achieved by spreading investments across different asset classes and making investments for a variety of different periods. The Manager's Review above 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 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 - 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 Exchange listing, financial penalties or a qualified audit report. General changes in legislation, regulations or government policy could significantly influence the decisions 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 systems or disruption to its business might lead to an inability to provide accurate reporting and monitoring. - Financial - the Board has identified the Company's principal financial risks which are set out in the notes to the Financial Statements below. Inadequate controls might lead to misappropriation of assets. Inappropriate accounting policies might lead to misreporting or breaches of regulations. - Market Risk - Investment in AIM-traded 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 may be difficult to realise. The fact that a share is traded on AIM 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. - Competitive Risk - Retention of key personnel of the Manager is vital to the success of the Company. Appropriate incentives are in place to ensure retention of such personnel. 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 rigorously the principles detailed in the FRC's "Internal Controls: Guidance to Directors". Details of the Company's internal controls are contained in the Corporate Governance section of the Annual Report and Accounts. 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, including tax-free dividends, for private investors. Performance, measured by dividends paid to shareholders and the change in NAV per share, is also measured against the FTSE All-Share Index Total Return. This index, as the widest measure of UK quoted equities, has been adopted as an informal benchmark. Investment performance, cash returned to shareholders and share price are also measured against the Company's peer group of other generalist venture capital trusts. A review of the Company's performance during the financial period, the position of the Company at the year end and the outlook 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 above. Issue and Buy-Back of Shares During the period the Company issued no ordinary shares. During the period the Company bought back 880,000 ordinary shares with a nominal value of 10p to be held in treasury representing 1.3 per cent. of the issued share capital at a cost of Â£832,350 and sold 235,000 ordinary shares with a nominal value of 10p from treasury, representing 0.3 per cent. of the issued share capital of Â£217,370. The remaining shares will not be sold at a discount wider than the discount prevailing at the time the shares were initially bought back by the Company. The Company holds 7,622,317 ordinary shares in treasury representing 11.3 per cent. of the issued share capital as at 16 February 2012 and the maximum amount of ordinary shares held in treasury during the year was 7,857,317. Management ISIS EP LLP manages the investments for the Company. The liquid assets within the portfolio (being cash, interest bearing securities, gilts and other assets, which are not categorised as venture capital investments for the purpose of the FSA's rules) have been managed by FPPE LLP. This is a limited liability partnership, which is authorised and regulated by the FSA and which has the same controlling members as the Manager. The Manager has continued to act as the Manager of the Company and as the investment Manager of the Company's illiquid 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 agreement may be terminated at any date by either party giving twelve months notice of termination. Under the management agreement, the Manager receives a fee of 2.5 per cent. per annum of the net assets of the Company. If the management agreement is terminated, the Manager is only entitled to the management fees paid to it and any interest due on unpaid fees. In addition, the Manager receives an annual secretarial and accounting fee that was initially fixed at Â£33,816 in 2006 and is revised annually to reflect the movement in RPI, plus a variable fee of 0.125 per cent. of the net assets of the Company which exceed Â£5 million. The annual fee was initially capped at Â£102,212 per annum and is also revised annually to reflect the movement in RPI. Annual running costs are capped at 3.5 per cent. of the net assets of the Company (excluding any performance fee payable to the Manager and irrecoverable VAT), any excess being refunded by the Manager by way of an adjustment to its management fee. During the year the Management Engagement and Remuneration Committee met to discuss and consider the continuing appointment of the Manager. The Committee reviewed and considered the agreements between the Company and the Manager and the Manager's performance and after careful consideration the Committee recommended to the Board that ISIS EP LLP should continue as Manager of the Company. It is the Board's opinion that the continuing appointment of ISIS EP LLP on the terms agreed is in the best interests of shareholders as a whole. The Board believes that the knowledge and experience accumulated by the Manager in the period since the launch of the first Barsonmead VCT in 1995 is reflected in processes which are designed to find, manage and realise good quality growth businesses. Co-investment Scheme The Scheme is intended to help attract, retain and incentivise certain executive members of the Manager and reflects schemes which are used elsewhere in the private equity industry in the UK. It requires all the members of the Scheme to invest their own capital into a proportion of the ordinary shares of each and every unquoted investment made by the Baronsmead VCTs (except those life 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 2011 forty-five executives of the Manager had invested a total of approximately Â£149,000 in the ordinary shares of twenty-seven unquoted investments through the Co-investment Scheme with respect to investments attributable to Baronsmead VCT 3 plc. The amount invested by Baronsmead VCT 3 plc in these twenty-seven companies totals approximately Â£30.4 million. As at 31 December 2011, eight of the investments in the Scheme have been sold realising total proceeds of Â£18.9 million for Baronsmead VCT 3 plc and Â£1.0 million for the members of the Co-investment Scheme. The Board reviews the operation of the Co-investment Scheme at each quarterly valuation meeting. The Co-investment Scheme was also independently reviewed during the period by Singer Capital Markets who confirmed that the investments were compliant with the Co-investment Scheme rules. Performance Incentive A performance fee is payable to the Manager when the total return on net proceeds of the ordinary share offers exceeds 8 per cent. per annum (simple) on net funds raised. The performance fee payable in any one year is capped at 5 per 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 10 per cent. of excess performance. No performance fee was paid in 2010 and there is no performance fee payable for the year to 31 December 2011. ISIS Equity Partners - Advisory Fees During the year to 31 December 2011, ISIS EP LLP received net income of Â£71,250 (2010: Â£92,750) in connection with advisory fees and incurred abort fees of Â£15,246 (2010: Â£13,286) with respect to investments attributable to Baronsmead VCT 3. Going Concern After making enquires, and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. In arriving at this conclusion the Directors have considered the liquidity of the Company and its ability to meet obligations as they fall due for a period of at least twelve months from the date that these financial statements were approved. As at 31 December 2011 the Company held cash balances & investments in interest bearing securities and Money Market Funds with a combined value of Â£10,662,000. Cash flow projections have been reviewed and show that the Company has sufficient funds to meet both its contracted expenditure and its discretionary cash out flows 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 exposed to any gearing covenants. By Order of the Board, ISIS EP LLP Secretary 100 Wood Street London EC2V 7AN 17 February 2012 The full Annual Report contains the following statements regarding responsibility for the Annual Report and financial statements (references in the following statements are to pages in the Annual Report). 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 of the state of affairs of the Company and of the profit t or loss of the Company for 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 that 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 (including Business Review), 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, 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 Company together with a description of the principal risks and uncertainties that they face. On behalf of the Board, Anthony Townsend Chairman 17 February 2012 NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2011 and 2010 but is derived from those accounts. Statutory accounts for 2010 have been delivered to the Registrar of Companies, and those for 2011 will be delivered in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts at www.baronsmeadvct3.co.uk. Income Statement For the year ended 31 December 2011 2011 2010 Revenue Capital Total Revenue Capital Total Notes Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Unrealised gains on 8 - 1,403 1,403 - 4,951 4,951 investments Realised gains on 8 - 1,824 1,824 - 1,757 1,757 investments Income 2 1,963 - 1,963 2,407 - 2,407 Investment management 3 (385) (1,155) (1,540) (380) (1,140) (1,520) fee Other expenses 4 (365) - (365) (360) - (360) Profit on ordinary 1,213 2,072 3,285 1,667 5,568 7,235 activities before taxation Taxation on ordinary 5 (244) 244 - (412) 412 - activities Profit on ordinary 969 2,316 3,285 1,255 5,980 7,235 activities after taxation Return per ordinary 7 1.61p 3.85p 5.46p 2.09p 9.98p 12.07p share: 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 2011 2011 2010 Notes Â£'000 Â£'000 Opening shareholders' funds 64,643 52,878 Profit for the year 3,285 7,235 Gross proceeds of share issues - 8,165 Purchase and sales of shares for treasury 12 (613) (1,357) Expenses of share issue and buybacks 12 (6) (441) Dividends paid 6 (7,214) (1,837) Closing shareholders' funds 60,095 64,643 Balance Sheet As at 31 December 2011 2011 2010 Notes Â£'000 Â£'000 Fixed assets Investments 8 59,312 63,407 Current assets Debtors 9 562 461 Cash at bank and on deposit 683 1,268 1,245 1,729 Creditors (amounts falling due within one year) 10 (462) (493) Net current assets 783 1,236 Net assets 60,095 64,643 Capital and reserves Called-up share capital 11 6,762 6,762 Share premium account 12 15,012 15,012 Capital redemption reserve 12 10,862 10,862 Capital reserve 12 24,262 24,941 Revaluation reserve 12 2,876 6,182 Revenue reserve 12 321 884 Equity shareholders' funds 13 60,095 64,643 Net asset value per share - Basic 13 100.16p 106.60p - Treasury 13 99.16p 105.32p The financial statements were approved by the Board of Directors on 17 February 2012 and were signed on its behalf by: Anthony Townsend (Chairman) Cash Flow Statement For the year ended 31 December 2011 2011 2010 Notes Â£'000 Â£'000 Operating activities Investment income received 1,787 2,099 Deposit interest received 3 5 Other income received 63 - Investment management fees (1,570) (1,446) Other cash payments (357) (426) Net cash (outflow)/inflow from operating 15 (74) 232 activities Capital expenditure and financial investment Purchases of investments (91,893) (76,980) Disposals of investments 99,215 71,447 Net cash (outflow)/inflow from capital 7,322 (5,533) expenditure and financial investment Dividends Equity dividends paid (7,214) (1,837) Net cash inflow/(outflow) before financing 34 (7,138) Financing Gross proceeds of share issues - 8,165 Purchase and sale of shares for treasury (613) (1,357) Expenses on share issue and buybacks (6) (435) Net cash (outflow)/inflow from financing (619) 6,373 Decreasein cashin the year (585) (765) Reconciliation of net cash flow to movement in net cash Decrease in cash (585) (765) Opening cash at bank and on deposit 1,268 2,033 Closing cash at bank and on deposit 14 683 1,268 The accompanying notes are an integral part of these statements. Notes to the Accounts 1. 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 the Companies Act 2006, as investment company status was revoked on 4 February 2004 in order to permit the distribution of capital profits. The principal 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 the SORP, supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement. 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 Directors using methodology which is consistent with the International Private Equity and Venture Capital Valuation ("IPEV") guidelines. This means investments are valued using an earnings multiple, which has a discount or premium applied which adjusts for points of difference to appropriate stock market or comparable transaction multiples. Alternative methods of valuation will include application of an arm's length third party valuation, a provision on cost or a net asset value basis. Gains and losses arising from changes in the fair value of the investments are included in the Income Statement for the period as a capital item. Transaction costs on acquisition are included within the initial recognition and the profit or 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 on a daily basis. Provision is made against this income where recovery is doubtful. Where the terms of unquoted loan stocks only require interest or a redemption premium to be paid on redemption, the interest and redemption premium is recognised as income once redemption is reasonably certain. Until such date interest is accrued daily and included within the valuation of the investment. 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 on investments 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 have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more, or the right to pay less, tax in future have occurred at the balance sheet date. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the financial statements which are capable of reversal in one or more subsequent periods. (h) Capital reserves (i) Capital Reserve Gains and losses on realisation of investments of a capital nature are dealt with in this reserve. Purchase of the Company's own shares to be either held in treasury or cancelled are also funded from this reserve. 75 per cent. of management fees are allocated to the capital reserve in accordance with the Board's expected split between long-term income and capital returns. (ii) Revaluation Reserve Changes in fair value of unrealised investments, are dealt with in this reserve. 2. Income 2011 2010 Â£'000 Â£'000 Income from investmentsâ€ UK franked 281 195 UK unfranked 1,242 1,872 Redemption premium 374 335 1,897 2,402 Other incomeâ€¡ Deposit interest 3 5 Other income 63 - Total income 1,963 2,407 Total income comprises: Dividends 282 195 Interest 1,681 2,212 1,963 2,407 Income from investments: AIM-traded & listed securities 309 234 Unquoted securities 1,588 2,168 1,897 2,402 â€ 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. â€¡ Other income on financial assets not designated fair value through profit or loss. 3. Investment management fee 2011 2010 Â£'000 Â£'000 Investment management fee 1,540 1,520 Performance fee - - 1,540 1,520 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. to capital, in line with the Board's expected long term return in the form of income and capital gains respectively from the Company's investment portfolio. The management agreement may be terminated by either party giving twelve months notice of termination. The Manager, ISIS EP LLP, receives a fee of 2.5 per cent. per annum of the net assets of the Company, calculated and payable on a quarterly basis. The Manager is entitled to a performance fee when the total return on net proceeds of the ordinary share offers exceeds 8 per cent. per annum (on a simple rather than compound basis) on net funds raised. The performance fee payable in any one year will be capped at 5 per cent. of shareholders' funds at the end of the period. To the extent that the total return exceeds this threshold, a performance fee (plus VAT) will be paid to the Manager of 10 per cent. of the excess. No performance fee is payable for the year ended 31 December 2011 (2010: Â£Nil). Performance fees are chargeable 100 per cent. to capital. In addition, the Manager receives an annual secretarial and accounting fee that was initially fixed at Â£33,816 in 2006 and is revised annually to reflect the movement in RPI, plus a variable fee of 0.125 per cent. of the net assets of the Company which exceed Â£5 million. The annual fee was initially capped at Â£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 year end are disclosed in note 10. 4. Other expenses 2011 2010 Â£'000 Â£'000 Directors' fees 73 74 Secretarial and accounting fees 113 109 Remuneration of the auditors and their associates: - audit 22 16 - other services supplied pursuant to legislation 5 5 (interim review) - other services supplied relating to taxation 9 5 Trail Commission - (17) Other 143 168 365 360 From 1 January 2011 to 30 September 2011, the Chairman received Â£23,500 per annum (2010: Â£23,500). Each of the other Directors received Â£15,500 per annum (2010: Â£15,500). From 1 October 2011 to 31 December 2011, the Chairman received Â£25,000 per annum and the Chairman of the Audit and Risk Committee received Â£20,000 per annum. Each of the other Directors received Â£17,500 per annum. Charges for other services provided by the auditors in the year ended 31 December 2011 were in relation to the interim review and tax compliance work (including iXBRL). The Audit and Risk 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. 5. Tax on ordinary activities 5a. Analysis of charge for the year 2011 2010 Â£'000 Â£'000 UK corporation tax - - The Income Statement shows the tax charge allocated between revenue and capital. 5b. 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: 2011 2010 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Profit on ordinary 1,213 2,072 3,285 1,667 5,568 7,235 activities before taxation Corporation tax at rate of 321 549 870 467 1,559 2,026 26.5% (2010: 28%) Effect of: Non-taxable dividend income (74) - (74) (55) - (55) Non-taxable investment - (855) (855) - (1,878) (1,878) gains Marginal relief (3) 3 - - - - Losses carried forward/ - 59 59 - (93) (93) (utilised) Tax charge for the year 244 (244) - 412 (412) - (note 5a) At 31 December 2011 the Company had surplus management expenses of Â£1,856,000 (2010: Â£1,498,000) which have not been recognised as a deferred tax asset. This is because the Company is not expected to generate taxable income in a future period in excess of the deductible expenses of that future period and, accordingly, the Company is unlikely to be able to reduce future tax liabilities through the use of existing surplus expenses. Due to the Company's status as a VCT, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments. 6. Dividends 2011 2010 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Amounts recognised as distributions to equity holders in the year: For the year ended 31 December 2010 - interim dividend of 3.0p - - - 673 1,164 1,837 per ordinary share paid on 15 September 2010 - Final dividend of 4.5p 546 2,183 2,729 - - - per ordinary share paid on 8 April 2011 For the year ended 31 December 2011 - First interim dividend of 389 1,407 1,796 - - - 3.0p per ordinary share paid on 29 September 2011 - Second interim divided of 597 2,092 2,689 - - - 4.5p per ordinary share paid on 9 December 2011 1,532 5,682 7,214 673 1,164 1,837 In the 2011 financial year Baronsmead VCT 3 paid a second interim dividend in lieu of a final dividend which resulted in three dividend payments during the year. 7. Returns per share The 5.46p return per ordinary share (2010: 12.07p return) is based on the net profit from ordinary activities after taxation of Â£3,285,000 (2010: Â£7,235,000 profit) and on 60,112,945 ordinary shares (2010: 59,933,988), being the weighted average number of shares in circulation during the year. 8. 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' (the Standard) requires an analysis of investments valued at fair value based on the reliability and significance of the information used to measure their fair value. The level is determined by the lowest (that is the least reliable or independently observable) level of input that is significant to the fair value measurement 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. 2011 2010 Â£'000 Â£'000 Level 1 Interest bearing securities 9,979 16,287 Investments traded on AIM 14,402 12,522 Investments listed on LSE 1,318 1,561 Investment traded on NYSE - 179 25,699 30,549 Level 2 Collective investment vehicle (Wood Street Microcap 2,826 2,123 Investment Fund) Level 3 Unquoted investments 30,787 30,735 59,312 63,407 2011 2010 Â£'000 Â£'000 Equity shares 28,324 18,170 Loan notes 21,009 28,790 Preference shares - 160 Interest bearing securities 9,979 16,287 59,312 63,407 8. Investments(continued) Level 1 Level 2 Level 3 Listed Interest Collective Bearing Traded Listed Traded Investment Securities on AIM on LSE on NYSE Vehicle Unquoted Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening book cost 16,287 15,437 1,204 157 1,825 22,315 57,225 Opening unrealised - (2,915) 357 22 298 8,420 6,182 (depreciation)/ appreciation Opening valuation 16,287 12,522 1,561 179 2,123 30,735 63,407 Movements in the year: Reclassification in - (525) 525 - - - - year Purchases at cost 81,924 2,469 - - 700 6,800 91,893 Sales - proceeds (88,232) (323) - (109) - (10,551) (99,215) - realised (losses)/ - (11) - (70) - 1,905 1,824 gains on sales Unrealised gains - 263 - 22 - 4,424 4,709 realised during the year Increase/(decrease) in - 7 (768) (22) 3 (2,526) (3,306) unrealised appreciation 9,979 14,402 1,318 - 2,826 30,787 59,312 Closing book cost 9,979 17,310 1,729 - 2,525 24,893 56,436 Closing unrealised - (2,908) (411) - 301 5,894 2,876 (depreciation)/ appreciation 9,979 14,402 1,318 - 2,826 30,787 59,312 During the year the Company incurred brokerage costs on purchases of Â£1,800 (2010: Â£1,600) and brokerage costs on sales of Â£1,000 (2010: Â£4,000) in respect of ordinary shareholder interests. The gains and losses included in the above table have all been recognised in the Income Statement above. The Standard requires disclosure, by class of financial instruments, if the effect of changing one or more inputs to reasonably possible alternative assumptions would result in a significant change to the fair value measurement. The information used in determination of the fair value of Level 3 investments is chosen with reference to the specific underlying circumstances and position of the investee company. The portfolio has been reviewed and both downside and upside reasonable possible alternatives have been identified and applied to the valuation of each of the unquoted investments. Applying the downside alternatives the value of the unquoted investments would be Â£2.8 million or 9.2 per cent. lower. Using the upside alternative the value would be increased by Â£ 2.4 million or 7.8 per cent. 9. Debtors 2011 2010 Â£'000 Â£'000 Prepayments and accrued income 562 447 Other debtors - 14 562 461 10. Creditors (amounts falling due within one year) 2011 2010 Â£'000 Â£'000 Management, secretarial and accounting fees due to the 405 435 Manager Other creditors 57 58 462 493 11. Called-up share capital Allotted, called-up and fully paid: Ordinary shares Â£'000 67,619,851 ordinary shares of 10p each listed at 31 December 2010 6,762 67,619,851 ordinary shares of 10p each listed at 31 December 2011 6,762 6,977,317 ordinary shares of 10p each held in treasury at 31 (698) December 2010 235,000 ordinary share of 10p each sold during the year previously 24 held in treasury 880,000 ordinary shares of 10p each repurchased during the year and (88) held in treasury 7,622,317 ordinary shares of 10p each held in treasury at 31 (762) December 2011 59,997,534 ordinary shares of 10p each in circulation at 31 December 6,000 2011 As at 16 February 2012 the Company's issued share capital was 67,619,851 ordinary shares of 10 pence each, of which 7,622,317 were held in treasury. The number of shares in circulation was 59,997,534 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 in the Annual Report and Accounts. Treasury shares The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003 came into force on 1 December 2003 and allowed the Company to hold shares acquired by way of market purchase as treasury shares, rather than having to cancel them. Shareholders have previously approved a resolution permitting the Company to issue shares from treasury at a discount to the prevailing NAV if the 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 discount prevailing at the time the shares were initially bought back by the Company. It is the Board's intention only to use the mechanism of reissuing treasury shares when demand for the Company's shares is greater than the supply available in the market place. Such issues would be captured under the terms of the Prospectus Directive and subject to the annual cap of 5 million Euros on funds raised before requiring a full prospectus, although they would not be considered by HM Revenue & Customs to be new shares entitling the purchaser to initial income tax relief, and therefore shares are unlikely to be issued from treasury 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. 12. Reserves Capital Share redemption Capital Revaluation Revenue premium reserve reserve reserve reserve Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 At 31 December 2010 15,012 10,862 24,941 6,182 884 Purchase and sale of - - (613) - - shares for treasury Expenses of share issue - - (6) - - and buybacks Reallocation of prior - - 4,709 (4,709) - year unrealised gains Realised gain on - - 1,824 - - disposal of investments* Net increase in value of - - - 1,403 - investments* Management fee - - (1,155) - - capitalised* Taxation relief from - - 244 - - capital expenses* Revenue profit on - - - - 969 ordinary activities after taxation* Dividends paid in the - - (5,682) - (1,532) year 31 December 2011 15,012 10,862 24,262 2,876 321 At 31 December 2011, reserves distributable by way of dividend amounted to Â£21,264,000 (2010:Â£23,587,000), comprising the capital reserve and revenue reserve less the net unrealised loss on those level one investments whose prices are quoted in an active market and deemed readily realisable. * The total of these items is Â£3,285,000 which agrees to the total profit on ordinary activities after taxation. 13. 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 Net asset value per share per share Number of shares attributable attributable 2011 2010 2011 2010 2011 2010 Number Number Pence pence Â£'000 Â£'000 Ordinary shares 59,997,534 60,642,534 100.16 106.60 60,095 64,643 (basic) Ordinary shares 67,619,851 67,619,851 99.16 105.32 67,050 71,219 (treasury) Basic net asset value per share is based on net assets at the year end, and on 59,997,534 (2010: 60,642,534) ordinary shares, being the respective number of shares in circulation at the year end. The treasury net asset value per share as at 31 December 2011 included ordinary shares held in treasury valued at the mid share price of 91.25p at 31 December 2011 (2010: 94.25p). 14. Analysis of changes in cash 2011 2010 Â£'000 Â£'000 Beginning of year 1,268 2,033 Net cash outflow (585) (765) As at 31 December 2011 683 1,268 15. Reconciliation of profit on ordinary activities before taxation to net cash (outflow)/inflow from operating activities 2011 2010 Â£'000 Â£'000 Profit on ordinary activities before taxation 3,285 7,235 Gains on investments (3,227) (6,708) Increase in debtors (101) (117) (Decrease)/increase in creditors (31) 23 Income reinvested - (201) Net cash (outflow)/inflow from operating activities (74) 232 16. Contingencies, guarantees and financial commitments At 31 December 2011 there were no contingent liabilities, guarantees or financial commitments of the Company. 17. Significant interests There are no interests of 20 per cent. or more of any class of share capital in any underlying holdings in investee companies. Further information on the significant interests is disclosed in the Investment Portfolio above. 18. 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 8) are valued at fair value. For quoted securities this is either bid price or the last traded price, depending on the convention of the exchange on which the investment is quoted. In respect of unquoted investments, these are fair valued by the Directors (using rules consistent with the International Private Equity and Venture Capital Valuation Guidelines). The fair value of all other financial assets and liabilities is represented by their carrying value in the balance sheet. The Company's investing activities expose it to various types of risk that are associated with financial instruments and markets in which it invests. The most important types of financial risk to which the Company is exposed are market risk, 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 19 to 22. 19. 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 the Company's investment objective as outlined in note 18. The management of market risk is part of the investment management process and is typical of private equity investment. The portfolio is managed in accordance with policies and procedures in place as described in more detail in the extracts from the Report of the Directors above, with an awareness of the effects of adverse price movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in unquoted stocks and AIM traded companies, by their nature, involve a higher degree of risk than investments in the main market. Some of that risk can be mitigated by diversifying the portfolio across business sectors and asset classes. The Company's overall market positions are monitored by the Board on a quarterly basis. 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 8. 31 per cent. (2010: 25 per cent.) of the Company's investments are listed on the London Stock Exchange, traded on AIM or invested through Wood Street Microcap Fund. A 5 per cent. increase in stock prices as at 31 December 2011 would have increased the net assets attributable to the Company's shareholders and the total profit for the year by Â£927,000 (2010: Â£819,000); an equal change in the opposite direction would have decreased the net assets attributable to the Company's shareholders and the total profit for the year by an equal amount. 52 per cent. (2010: 48 per cent.) of the Company's investments are in unquoted companies held at fair value. Valuation methodology includes the application of earning multiples derived from either listed companies with similar characteristics or recent comparable transactions. Therefore the value of the unquoted element of the portfolio may also be indirectly affected by price movements on the listed exchanges. A 5 per cent. increase in the valuations of unquoted investments at 31 December 2011 would have increased the net assets attributable to the Company's shareholders and the total profit for the year by Â£1,539,000 (2010: Â£1,537,000); an equal change in the opposite direction would have decreased the net assets attributable to the Company's shareholders and the total profit for the year by an equal amount. 20. Interest rate risk At 31 December 2011 Â£6,799,000 (2010: Â£9,387,000) fixed rate securities were held by the Company. As a result, the Company is subject to exposure to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates. At 31 December 2011 Â£21,009,000 (2010: Â£17,611,000) fixed rate loan notes were held by the Company. The weighted average coupon rate for the loan note securities is 9.34 per cent. as at 31 December 2011 (2010: 8.48 per cent.). Due to complexity of the instruments and uncertainty surrounding timing of redemption the weighted average time for which the rate is fixed has not been calculated. The table below summarises weighted average effective interest rates for the fixed interest-bearing financial instruments: 2011 2010 Weighted Weighted Total Weighted average Total Weighted average fixed average time for fixed average time for rate interest which rate interest which rate rate portfolio rate is fixed portfolio rate is fixed Â£'000 % days Â£'000 % days Fixed rate Fixed interest 6,799 0.2 3 9,387 0.5 12 securities Floating rate When the Company retains cash balances, the majority of cash is ordinarily held on interest bearing deposit accounts and, where appropriate, within an interest bearing money market open ended investment company ("OEIC"). The benchmark rate which determines the interest payments received on interest bearing cash balances is the bank base rate which was 0.5 per cent. as at 31 December 2011 (2010: 0.5 per cent.). 2011 2010 Â£'000 Â£'000 Floating rate Floating rate instruments ("OEIC") 3,180 6,900 Cash at bank and on deposit 683 1,268 3,863 8,168 21. Credit risk Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts (value) of financial assets best represents the maximum credit risk exposure at the balance sheet date. At the reporting date, the Company's financial assets exposed to credit risk amounted to the following: 2011 2010 Â£'000 Â£'000 Investments in fixed interest instruments 6,799 9,387 Investments in floating rate instruments 3,180 6,900 Cash at bank and on deposit 683 1,268 Interest, dividends and other receivables 562 461 11,224 18,016 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 in money market open ended investment companies managed by BlackRock and JPMorgan Chase ("JPM"). Credit risk on unquoted loan stock held within unlisted investments is considered to be part of market risk as disclosed in note 19. Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the high credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to 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. 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 2011 or 31 December 2010. No individual investment exceeded 9.4 per cent. of the net assets attributable to the Company's shareholders at 31 December 2011 (2010: 8.8 per cent.). 22. Liquidity risk The Company's financial instruments include investments in unquoted companies which are not traded in an organised public market as well as AIM-traded equity investments both of which generally may be illiquid. As a result, the Company may not be able to liquidate quickly some of its investments in these instruments at an amount close to their fair value in order to meet its liquidity requirements, or to respond to specific events such as deterioration in the creditworthiness of any particular issuer. The Company's liquidity risk is managed on an ongoing basis by the Investment Manager in accordance with policies and procedures in place as described in the extracts from the Report of the Directors above. The Company's overall liquidity risks are monitored 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 2011 these investments were valued at Â£10,662,000 (2010: Â£17,555,000). 23. Related parties Related party transactions include Management, Secretarial, Accounting and Performance fees payable to the Manager, ISIS EP LLP, as disclosed in notes 3 and 4, and fees paid to the Directors as disclosed in note 4. In addition, the Manager operates a Co-Investment Scheme, detailed above, whereby employees of the Manager are entitled to participate in certain unquoted investments alongside the Company. 24. Post balance sheet events On 12 January 2012 the Company launched an offer for subscription to raise just less than â‚¬5 million which is the equivalent of Â£4.135 million. This offer became fully subscribed on 7 February 2012. National Storage Mechanism A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.hemscott.com/nsm.do. Annual General Meeting The Company's Annual General Meeting will be held on 11 April 2012 at 10:30 am at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS. Annual Report and Accounts The Annual Report and Accounts will be posted to shareholders on Wednesday, 29 February and will shortly be available on the Company's website located at www.baronsmeadvct3.co.uk. 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.

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