Half-yearly Report

Baronsmead VCT 3 plc Half Yearly Financial Report Announcement 11 August 2009 Investment Objective Baronsmead VCT 3 is a tax efficient listed company which aims to achieve long-term capital growth and generate tax-- free dividends for private investors. Unaudited Half-yearly Financial Report Announcement - Six months ended 30 June 2009 Baronsmead VCT 3 plc Financial Headlines 3.0p Interim dividend of 3.0p per share (unchanged from prior year) payable on 7 September 2009 to shareholders on the register at 21 August 2009. 4.4% NAV per share increased by 4.4 per cent over the six month period to 30 June 2009 from 98.22p to 102.51p before payment of the 3p interim dividend. 56.0% NAV total return to ordinary shareholders since inception in 2001, equivalent to an annualised total return of 5.4 per cent before the 20 per cent income tax relief (on subscription, at launch) and 6.8 per cent afterwards. 8.2% Dividend yield of 8.2 per cent tax free to qualifying shareholders (gross equivalent yield for a higher rate taxpayer is 12.1 per cent). This is based on the 3.0p interim dividend payable in September 2009 plus the 4.5p dividend paid in March 2009 divided by the mid ordinary share price of 91.3p at 30 June 2009. Chairman's Statement - for the six months ended 30 June 2009 The Net Asset Value per share increased by 4.4 per cent in the last six months, mainly because the value of AIM shares in the portfolio has shown a degree of recovery from 2008 lows. The 3p interim dividend reflects this positive total return in the period and is payable largely out of capital reserves accumulated from successful unquoted exits in prior years. The 68 strong portfolio is showing reasonable resilience in a difficult trading environment and the Company is well positioned to make new investments at an advantageous point in the cycle. RESULTS In the six months to 30 June 2009, the Net Asset Value (NAV) per share increased by 4.4 per cent from 98.22p to 102.51p before payment (due on 7 September 2009) of a 3.0p per share interim dividend. This dividend comprises 2.5p per share of undistributed capital profits and 0.5p per share of net revenue. The capital dividend is paid from the reserves accumulated from net profits realised in previous years. The increase in NAV per share of 4.4 per cent is nearly all represented by a rise in the AIM portion of the portfolio, up 20 per cent since the year end. The FTSE All-Share Index fell 2 per cent over the same period. There have inevitably been challenges for some of the unquoted investee companies as a result of the difficult economic climate. In this context the performance of this portfolio has been good and its valuation as a whole has remained stable over the period. The Manager has worked with the management of the investee companies to weather the harder trading conditions and this is reflected in the overall performance and valuation of the portfolio. The Company continued to meet the six VCT operational tests during the period. At the period end, over 70 per cent of the ordinary capital raised (net of launch costs) prior to 31 December 2006 was invested in VCT qualifying investments. LONG TERM PERFORMANCE The interim dividend will take the cumulative dividends paid, tax free to qualifying shareholders, for founder shareholders to 43.8p per share and compares to their original £1 investment (before tax relief). There have been two prospectus fund raisings by Baronsmead VCT 3. All shareholders from these prior offers have to date achieved positive absolute total returns. The returns are also ahead of the FTSE All-Share Index over 1, 3 and 5 years as well as in the period since inception. The results compare favourably with other VCTs and fuller comparisons have recently been facilitated by the Association of Investment Companies (AIC) who publish monthly data on their website, www.theaic.co.uk. The returns to shareholders are even better once the tax benefits available to VCT investors are taken into account. The VCT tax reliefs are designed to address both the VCT constraints as well as the higher risks that relate to investing in smaller unquoted and AIM-traded companies. At a time of lower and sometimes negative investment returns, the proportional benefit from these reliefs is greater. For instance the tax free nature of dividends for qualifying shareholders is significant when deposit rates on cash are presently at a historic low. These tax benefits to the shareholders can be balanced against the ultimate economic benefit for the UK of supporting entrepreneurial growth businesses. This can be observed by measuring the increased employment and consequent increase in tax revenue to the Treasury from investee companies that have benefited from VCT investment. For example the top ten investee companies in BVCT 3 have shown over 50 per cent growth in employment numbers over an average duration of 3 years after investment based on their last audited annual reports. PORTFOLIO REVIEW The Board reviews the relative health of portfolio companies quarterly, in terms of profitability as well as other non-financial benchmarks. At the period-end, 75 per cent of the portfolio companies were reporting better or steady progress. Following the write off of four AIM investments, the total portfolio was 68 companies (these four investments had a combined market value of £70k at 31 December 2008). 50 per cent of the portfolio by value was invested in unquoted companies, 22 per cent in AIM investees and the balance of 28 per cent remained in cash or government securities. The mix of AIM and unquoted companies helps to create a more diversified portfolio whose constituent parts perform better at different points in the cycle. The Manager has endeavoured to prepare for the current downturn over the last two years by selecting new investments in sub-sectors that are less cyclical and with growth strategies that are intended to be less reliant on general economic growth. The charts on page 7 of the interim report show the proportion of the portfolio by value (including AIM-traded companies). Healthcare & Education has almost doubled to 21 per cent and IT & Media has increased by around a third to 27 per cent whilst the level invested in Consumer Markets has remained relatively low at around 14 per cent. Unquoted Portfolio The chart on page 4 of the interim report shows that, on average, the portfolio of the current unquoted investments is valued at some 30 per cent higher than original cost. Fourteen companies are valued at a level greater than cost and whilst six are valued below cost only two of these have a provision against cost of greater than 25 per cent. In addition, in the unquoted portfolio financial structures have been designed to be prudent wherever possible with relatively low levels of external debt. There are several ways of measuring borrowings but the most common relates to the level of net borrowings divided by annual operating profits defined as EBITDA - earnings before interest, tax, depreciation and amortisation. At an average ratio of 1.8 times across the unquoted portfolio, the level of debt within the portfolio as a whole is relatively low and considerably less than those typically used in larger private equity transactions. The Manager is actively involved in its private equity investments. Tight control of overheads, a focus on efficient working capital management and early communication with each investee company's banks have all helped to manage risk and minimise issues. Presentations by investee companies at each AGM have illustrated the close relationship between the executive management of unquoted companies and the Manager. The CEO of Nexus, Neil McCrossan, based in Leeds, presented to the AGM held in March 2009 to some 50 shareholders. Since first investment in early 2008, this vehicle rental business has deployed its highly advanced web based software platform to obtain good growth both by acquisition and organically. AIM-traded portfolio The AIM market was oversold towards the end of 2008 and during the period, this portion of the portfolio has bounced back with 20 per cent growth in value over the last six months. Quoted share prices tend to move ahead of announced earnings and the valuation movement in the AIM part of the portfolio anticipated the recession. While returns from AIM investments were poor throughout 2008, it is now making a positive contribution. PROSPECTS FOR NEW INVESTMENT The market for new unquoted deals remains relatively depressed at present with overall M&A volumes significantly down. Hence, no new investments have been completed recently although this does not reflect any lack of appetite. The Manager is rightly focused on ensuring only high quality businesses with good management teams are added to the portfolio. The M&A market will turn as confidence starts to return and we will benefit from asset prices lower than the recent peak. In the meantime, the Manager has an active programme of directly approaching prospective investee companies in selected sectors, and this is building a strong pipeline of entrepreneurs that would like to work with the Manager when timing is right. This continues to be a significant investment for the future. The volume of qualifying AIM opportunities has increased from very low levels earlier in the year. However, conversion rates have so far remained low as the Manager seeks to maintain a high quality threshold for new investments. With capital still scarce for smaller AIM companies and support from the recent recovery in equity markets, prospects for new AIM investment during the remainder of the year are improving. SHAREHOLDER ISSUES The top up offer in March/April 2009 raised gross proceeds of £1.5 million. Of the 166 individual subscribers, we welcome 55 new shareholders to those 111 shareholders that invested again. The Directors continue to believe that it is an advantageous time in the UK economic cycle to be investing in smaller companies and that it is appropriate for the Company to raise further funds in order to fund future investments. The Board's current intention is that there will be a significant fundraising in the current tax year under the existing shareholder authorities and it is considering making such an offer on a joint basis with Baronsmead VCT 4. During the six months to 30 June 2009 0.9 million shares were bought back at an average discount to NAV of 10 per cent. This compares against the rest of the VCT sector where discounts to NAV were generally much higher at the period end. The Company's former broker, Teathers, ceased to operate as a market maker during March 2009. However, several other firms became market makers during that month thereby minimising the impact this could have had on the discount to NAV at which the Company's shares were traded at. Currently there are three market makers, namely Matrix Corporate Capital, Winterflood and Singer Capital Markets. Following a review of brokers the Board agreed to appoint Matrix Corporate Capital as the new broker to the Company from the beginning of August 2009. In the April 2009 Budget there were only minor changes to the VCT rules and regulations. However, the proposed 50 per cent income tax rate and restriction of tax relief on pension contributions may mean that VCTs become increasingly attractive. In the autumn, the Manager will seek to articulate these changes as a follow up to the letter on utilising VCTs in retirement and estate planning sent to shareholders in March 2009. Again it is important to stress the need to consult professional advisers as so much depends on the circumstances of individual shareholders. Please email Michael.probin@isisep.com if you wish to contribute to these topics and state what is important from your perspective as an interested shareholder. APPOINTMENT OF NEW DIRECTOR I am delighted to welcome Anthony Townsend who joined the Board with effect from 4 August 2009. Anthony brings a wealth of experience from working in investment banking and fund management. He currently chairs several investment trusts and this appointment further strengthens your Board. OUTLOOK The extreme volatility in the UK economy during 2008 may now have passed and there is higher confidence that many of the portfolio companies are trading more steadily. Balance sheets are a little stronger and so investees should be able to anticipate and benefit from the upswing when it comes. The Board and Manager share the belief that we are entering one of the better environments for making new investments now that a degree of stability has returned to UK financial and industrial markets. Mark Cannon Brookes Chairman 11 August 2009 TABLE OF INVESTMENTS IN THE SIX MONTHS TO 30 JUNE 2009 Company Location Sector Activity Investment cost (£'000) Unquoted invest ments follow on Occam DM Ltd Bath IT & Media Integrated data services 8 Xention Discovery Cambridge Healthcare & Developer of ion channel 91 Ltd education modulating drugs Total Unquoted 99 investments AIM-traded in vestments follow on Ffastfill plc London IT & Media Trading platform 106 software providers IDOX plc London IT & Media Document management 118 software Total AIM-traded 224 investments Total Investments 323 REALISATIONS FOR THE SIX MONTHS TO 30 JUNE 2009 Company First Value at Realised Overall investment profit/ date 31 December (loss) this Multiple 2008 £'000 period £'000 return* Unquoted realisations Scriptswitch Partial loan May 07 361 - 1.3 note redemption Written off Green Issues Dec 05 - - 0.2 Total Unquoted realisations 361 - AIM-traded realisations Craneware plc Part sale Sep 07 174 11 1.7 Electric Word Market sale Mar 08 9 3 0.7 Plc Independent Market sale Mar 08 9 4 0.8 Media Distribution Plc MBL Group Plc Part sale Jan 03 13 11 0.6 205 29 Written off EBTM plc May 07 51 (51) FishWorks plc Jun 05 15 (15) IPT Holdings Nov 04 4 (4) plc 70 (70) Total AIM-traded realisations 275 (41) Total 636 (41) Realisations *Includes interest/dividends received, loan note redemptions and partial realisations accounted for in prior periods. Deferred proceeds were received for Language Line £26,000. Responsibility statement of the Directors in respect of the half-yearly financial report We confirm that to the best of our knowledge: •the condensed set of financial statements has been prepared in accordance with the Statement `Half-yearly financial reports' issued by the UK Accounting Standards Board; •the Chairman's Statement (constituting the interim management report) includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; •the Statement of Principal Risks and Uncertainties on page 12 of the interim report is a fair review of the information required by DTR 4.2. 7R; and •the financial statements include a fair review of the information required by DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so. By Order of the Board, M Cannon Brookes Chairman 11 August 2009 Unaudited Income Statement For the six months to 30 June 2009 Six months to 30 June Six months to 30 June Year to 31 December 2009 (£'000) 2008 (£'000) 2008 (£'000*) Revenue Capital Total Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Unrealised - 2,438 2,438 - (7,785) (7,785) - (8,894) (8,894) gains/ (losses) on investments Realised - (15) (15) - 3,393 3,393 - (808) (808) (losses)/ gains on investments Income 678 - 678 1,400 - 1,400 2,255 - 2,255 Recoverable (2) (6) (8) - - - 266 1,038 1,304 VAT Investment (170) (510) (680) (227) (679) (906) (405) (1,215) (1,620) management fee Other (166) - (166) (153) - (153) (362) - (362) expenses Profit/(loss) 340 1,907 2,247 1,020 (5,071) (4,051) 1,754 (9,879) (8,125) on ordinary activities before taxa tion Taxation on (54) 54 - (238) 238 - (433) 433 - ordinary activities Profit/(loss) 286 1,961 2,247 782 (4,833) (4,051) 1,321 (9,446) (8,125) on ordinary activities after taxa tion Return per 0.53p 3.65p 4.18p 1.44p (8.89)p (7.45)p 2.44p (17.43) (14.99) share: p p Basic *These figures are audited. Unaudited Reconciliation of Movements in Shareholders' Funds For the six months to 30 June 2009 Six months to Six months to Year to 31 30 June 2009 £ 30 June 2008 £ December 2008 £ '000 '000 '000* Opening shareholders' funds 55,136 65,221 65,221 Profit/(loss) for the period 2,247 (4,051) (8,125) Increase/(decrease) in share 1,524 (1,011) 1,118 capital in issue Purchase of shares for treasury (816) (51) (1,398) Expenses of share issue and (80) 1,118 (1,629) conversion of share premium Dividends paid (2,415) - (51) Closing shareholders' funds 55,596 61,226 55,136 *These figures are audited. Unaudited Balance Sheet As at 30 June As at 30 June As at 31 2009 Total 2008 Total December 2008 Total £'000 £'000 £'000* Fixed assets Unquoted investments 28,021 26,145 27,821 Traded on AIM 10,866 13,758 9,128 Quoted on FTSE SmallCap 1,087 720 804 Collective investment vehicles 516 - - Interest bearing securities 12,864 19,128 14,203 53,354 59,751 51,956 Current assets Debtors 236 539 2,000 Cash at bank and on deposit 2,490 1,556 1,732 2,726 2,095 3,732 Creditors (amounts falling due (484) (620) (493) within one year) Net current assets 2,242 1,475 3,239 Net assets 55,596 61,226 55,136 Capital and reserves Called-up share capital 5,970 5,823 5,822 Share premium account 8,065 6,768 6,768 Capital redemption reserve 10,862 10,862 10,862 Revaluation reserve 1,630 791 (1,765) Profit and loss account 29,069 36,982 33,449 Equity shareholders' funds 55,596 61,226 55,136 As at 30 June As at 30 June As at 31 2009 Ordinary 2008 Ordinary December 2008 Shares Shares Ordinary Shares * Net asset value per share 102.51p 113.19p 102.72p Number of ordinary shares in 54,232,236 54,091,997 53,674,846 issue Treasury net asset value per 101.49p 112.57p 101.77p share Number of ordinary shares in 54,232,236 54,091,997 53,674,846 issue Number of ordinary shares held 5,467,317 4,135,000 4,552,151 in Treasury Number of listed ordinary 59,699,553 58,226,997 58,226,997 shares *These figures are audited. Unaudited Statement of Cash Flows Six months to Six months to Year to 31 30 June 2009 £ 30 June 2008 £ December 2008 '000 '000 £'000* Net cash inflow from operating 1,123 452 951 activities Capital expenditure and 1,423 (3,528) (1,830) financial investment Equity dividends paid (2,415) 5 (1,629) Net cash inflow/(outflow) 131 (3,071) (2,508) before financing Net cash inflow/(outflow) from 627 56 (331) financing Increase/(decrease) in cash 758 (3,015) (2,839) Reconciliation of net cash flow to movement in cash Increase/(decrease) in cash 758 (3,015) (2,839) Opening net cash 1,732 4,571 4,571 Net cash at 30 June/31 December 2,490 1,556 1,732 Reconciliation of operating profit before taxation to net cash flow from operating activities Profit/(loss) on ordinary 2,247 (4,051) (8,125) activities before taxation Unrealised (gains)/losses on (2,438) 7,785 8,894 investments Loss/(profit) on realisation of 15 (3,393) 808 investments Changes in working capital and 1,299 111 (626) other non-cash items Net cash (outflow)/inflow from 1,123 452 951 operating activities *These figures are audited. PRINCIPAL RISKS AND UNCERTAINTIES The Company's assets consist of equity and fixed interest investments, cash and liquid resources. Its principal risks are therefore market risk, credit risk and liquidity risk. Other risks faced by the Company include economic, loss of approval as a Venture Capital Trust, investment and strategic, regulatory, reputational, operational and financial risks. These risks, and the way in which they are managed, are described in more detail under the heading Principal risks, risk management and regulatory environment within the Business Review in the Company's Annual Report and Accounts for the year ended 31 December 2008. The Company's principal risks and uncertainties have not changed materially since the date of that report. RELATED PARTIES ISIS EP LLP (`the Manager') manages the investments of the Company. The Manager also provides or procures the provision of secretarial, accounting, administrative and custodian services to the Company. Under the management agreement, the Manager receives a fee of 2.5 per cent per annum of the net assets of the Company. This is described in more detail under the heading Management within the Report of the Directors in the Company's Annual Report and Accounts for the year ended 31 December 2008. During the period the Company has incurred management fees of £680,000 and secretarial and accounting fees of £48,000 payable to the Manager. Notes 1. The unaudited interim results which cover the six months to 30 June 2009 have been prepared in accordance with applicable accounting standards and adopting the accounting policies set out in the statutory accounts of the Company for the period ended 31 December 2008. 2. Return per share is based on a weighted average of 53,697,653 ordinary shares in issue (31 December 2008 - 54,385,064 ordinary shares). 3.Earnings for the first six months to 30 June 2009 should not be taken as a guide to the results of the full financial year. 4. During the six months ended 30 June 2009 the Company issued 1,472,556 ordinary shares pursuant to the offer for subscription at an offer price of 103.5p per share which raised £1,524,095, before costs. During this period the Company purchased 915,166 ordinary shares to be held in Treasury at a cost of £ 816,926. At 30 June 2009 the Company holds 5,467,317 ordinary shares in Treasury. Excluding Treasury shares, there were 54,232,236 ordinary shares in issue at 30 June 2009 (31 December 2008 - 53,674,846 ordinary shares and 30 June 2008 - 54,091,997 ordinary shares). 5. The interim dividend of 3 pence per ordinary share (0.5 pence revenue and 2.5 pence capital) will be paid on 7 September 2009 to shareholders on the register on 21 August 2009. The ex-dividend date is 19 August 2009. 6. The financial information contained in this half year report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The information for the year ended 31 December 2008 has been extracted from the latest published audited financial statements. The audited financial statements for the year to 31 December 2008, which were unqualified, have been filed with the Registrar of Companies. No statutory accounts in respect of any period after 31 December 2008 have been reported on by the Companies auditors or delivered to the Registrar of Companies. 7. Copies of the Interim Report will be mailed to shareholders and are available from the Registered Office of the Company at 100 Wood Street, London EC2V 7AN. Date: 11/08/2009

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