Octopus Apollo VCT 3 plc : Half-yearly report

Octopus Apollo VCT 3 plc
Half-Yearly Results

25 September 2012

Octopus Apollo VCT 3 plc, managed by Octopus Investments Limited, today announces the Half-Yearly results for the six months ended 31 July 2012.

These results were approved by the Board of Directors on 25 September 2012.

You may shortly view the half-yearly report in full at www.octopusinvestments.com

About Octopus Apollo 3 VCT plc

Octopus Apollo VCT 3 plc ("Apollo 3," "Company" or "Fund") is a venture capital trust ("VCT") and is managed by Octopus Investments Limited ("Octopus").

The Fund was launched in July 2006 and raised over £27.1 million (£25.9 million net of expenses) through an offer for subscription by the time it closed on 5 April 2008. The objective of the Fund is to invest in a diversified portfolio of UK smaller companies in order to generate income and capital growth over the long-term.

Venture Capital Trusts (VCTs)

VCTs were introduced in the Finance Act 1995 to provide a means for private individuals to invest in unlisted companies in the UK.  Subsequent Finance Acts have introduced changes to VCT legislation. The tax benefits currently available to eligible new investors in VCTs include:

• upfront income tax relief of 30%

·                     exemption from income tax on dividends paid; and
·                     exemption from capital gains tax on disposals of shares in VCTs

The Company has been approved as a VCT by HM Revenue & Customs.  In order to maintain its approval, the Company must comply with certain requirements on a continuing basis.  Above all, the Company is required at all times to hold at least 70% of its investments (as defined in the legislation) in VCT qualifying holdings, of which at least 30% must comprise eligible Ordinary shares.  For this purpose, a 'VCT qualifying holding' consists of up to £1 million (£5 million effective from 6 April 2012) invested in any one year in new shares or securities of a UK unquoted company (which may be quoted on AIM) which is carrying on a qualifying trade, and whose gross assets at the time of investment do not exceed a prescribed limit.  The definition of 'qualifying trade' excludes certain activities such as property investment and development, financial services and asset leasing. The Company will continue to ensure its compliance with these qualification requirements.

Financial Summary

	Six months to 31 July 2012	Six months to 31 July 2011	Year to 31 January 2012
Net assets (£'000s)	22,794	24,418	24,337
Net profit after tax (£'000s)	592	514	1,260
Net asset value per share ("NAV")	91.0p	90.0p	90.9p
Cumulative dividends paid since launch
- paid and proposed	17.5p*	12.5p	15.5p

* The final dividend of 3.0p per share for the year ended 31 January 2012 was paid on 9 August 2012, to those shareholders on the register on 13 July 2012.

Chairman's Statement

Introduction
I am pleased to present the half-yearly report of Octopus Apollo VCT 3 plc for the period ended 31 July 2012.

Performance
The Fund has performed well in the first six months of this year, with the total return (net asset value plus cumulative dividends paid to date) increasing by 3.0% for the half year. This positive return in the current economic climate is particularly pleasing and is evidence of the Investment Managers continual success in achieving the lower risk mandate that was originally pursued by this Fund.

The small appreciation in the Net Asset Value (NAV) is due to increased levels of interest income the Fund now generates, over and above the running costs of the Fund.

Due to strong trading results, upward revaluations have been realised in three investment companies; Project Tristar, Hydrobolt and Clifford Thames. As a result, £416,000 of gains on valuation have been recognised in these financial statements. 

Merger
As you are now aware, it is the intention of your Board, subject to shareholder approval on 27 September 2012, to merge the Fund with Octopus Apollo VCT 1 plc, Octopus Apollo VCT 2 plc and Octopus Apollo VCT 4 plc. As a result of the proposed merger, the Fund will be renamed Octopus Apollo VCT plc.

I strongly believe the proposed merger with fellow Apollo funds will bring benefits in the form of economies of scale and efficiencies allowing resources to be focused on portfolio and investment growth. If the merger is approved by shareholders I will step down from my role as Chairman, but will continue to act as a non-executive director.

Investment Portfolio
During the half year period, new qualifying investments were made into Erie Heat and Winnipeg Heat, companies involved in the construction of ground source heat pumps and Sula Power, a solar power company. All three companies have furthered the Fund's investment into renewable energy.

A qualifying investment of £750,000 was also made in Technical Software Consultants, a Company that sells industrial crack detectors principally to the oil and gas pipeline market.   

The loan element of the investment in Tristar Worldwide totalling £700,000 was repaid over the period. In addition, investments in Carebase (Col) and Salus Services Holdings 1 were realised, returning £4,501,000 to the Fund.

Investment Strategy
As is highlighted from the financial results, the Fund continues to be managed in line with the mandate that was set out in the prospectus whereby investments are made on the basis of focussing more on capital preservation than a typical VCT.  Generally the Fund receives its return from interest paid on secured loan notes as well as an exposure to the value of the shares of investee companies.   The investment strategy is to derive sufficient return from the secured loan notes to achieve the Fund's investment aims and to use the equity exposure to boost returns. 

The Manager of the Fund has reduced risk by investing in well managed and profitable businesses with strong recurring cash-flows.  Furthermore with the majority of the investment being made in the form of a secured loan, in the event of a business failing, the Fund will rank ahead of unsecured creditors and equity investors. 

Dividend and Dividend Policy
Dividends paid out of a VCT are attractive as they are received by shareholders free of tax. It is for that reason your Board makes every effort to maintain a consistent dividend flow when possible. Your Board has declared 2.0 pence per share dividend in respect of the half year end. This will be paid on 16 November 2012 to shareholders on the register on 19 October 2012.

This follows the 3.0 pence dividend that was paid to shareholders on 9 August 2012 in relation to the year ended 31 January 2012. Should the proposed merger complete on 27 September 2012, this interim dividend will go to all shareholders of the merged company, being current shareholders of Octopus Apollo VCT 1 plc, Octopus Apollo VCT 2 plc and Octopus Apollo VCT 4 plc.

VCT Qualifying Status
PricewaterhouseCoopers LLP provides the Board and Investment Manager with advice concerning ongoing compliance with Her Majesty's Revenue & Customs (HMRC) rules and regulations concerning VCTs. The Board is pleased to announce it has been advised that Apollo 3 plc is in compliance with the conditions laid down by HMRC for maintaining approval as a VCT.

A key requirement is to maintain at least the 70% qualifying investment level. As at 31 July 2012, 86.4% of the portfolio, as measured by HMRC rules, was invested in VCT qualifying investments.

Principal Risks and Uncertainties
The principal risks and uncertainties are set out in note 6 of the Notes to the Half-Yearly Report on page x.

Outlook
Despite the struggles associated with economic uncertainty prevailing over domestic and world economies, there still remains optimism for growth in small unquoted companies. The investee companies within the Fund's portfolio continue to trade strongly, meeting their interest payments in full and on target.

Whilst challenges remain, continuing growth and profitability of investee companies gives your Board and Investment Manager confidence that the Fund will continue to be successful in adhering to the capital preservation mandate offered in the prospectus, we fully expect the NAV to continue to make progress.

If you have any questions on any aspect of your investment, please call one of the team on 0800 316 2347.

Tony Morgan
Chairman
25 September 2012

Investment Portfolio

* 100% debt investment

Responsibility Statement of the Directors in respect of the Half-Yearly Report

We confirm that to the best of our knowledge:

• the half-yearly financial statements have been prepared in accordance with the statement "Half-Yearly Financial Reports" issued by the UK Accounting Standards Board;

• the half-yearly report includes a fair review of the information required by the Financial Services Authority Disclosure and Transparency Rules, being:

• an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements.
• a description of the principal risks and uncertainties for the remaining six months of the year; and
• a description of related party transactions that have taken place in the first six months of the current financial year, that may have materially affected the financial position or performance of the Company during that period and any changes in the related party transactions described in the last annual report that could do so.

On behalf of the Board

Tony Morgan
Chairman
25 September 2012

Income Statement
	Six months to 31 July 2012			Six months to 31 July 2011			Year to 31 January 2012
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gain on disposal of fixed asset investments	-	22	22	-	-	-	-	1,200	1,200
Gain on disposal of current asset investments	-	-	-	-	15	15	-	15	15
Fixed asset investment holding gains/(losses)	-	416	416	-	290	290	-	(445)	(445)
Current asset investment holding gains	-	-	-	-	-	-	-	-	-
Income	632	-	632	607	-	607	1,392	-	1,392
Investment management fees	(61)	(183)	(244)	(61)	(182)	(243)	(121)	(365)	(486)
Other expenses	(234)	-	(234)	(155)	-	(155)	(320)	-	(320)
Profit on ordinary activities before tax	337	255	592	391	123	514	951	405	1,356
Taxation on profit on ordinary activities	-	-	-	-	-	-	(96)	-	(96)
Profit on ordinary activities after tax	337	255	592	391	123	514	855	405	1,260
Earnings per share - basic and diluted	1.3p	0.9p	2.2p	1.4p	0.5p	1.9p	3.2p	1.5p	4.7p

• The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
• All revenue and capital items in the above statement derive from continuing operations
• The accompanying notes are an integral part of the half-yearly report
• The Company has no recognised gains or losses other than those disclosed in the income statement.

Reconciliation of Movements in Shareholders' Funds
	Six months ended 31 July 2012	Six months ended 31 July 2011	Year to 31 January 2012
	£'000	£'000	£'000
Shareholders' funds at start of period	24,337	24,332	24,332
Profit on ordinary activities after tax	592	514	1,260
Cancellation of own shares	(1,332)	(21)	(304)
Dividends paid	(803)	(407)	(951)
Shareholders' funds at end of period	22,794	24,418	24,337

Balance Sheet
	As at 31 July 2012		As at 31 July 2011		As at 31 January 2012
	£'000	£'000	£'000	£'000	£'000	£'000
Fixed asset investments*		18,658		22,998		19,671
Current assets:
Investments*	265		545		3,059
Debtors	551		335		374
Cash at bank	3,469		586		1,447
	4,285		1,466		4,880
Creditors: amounts falling due within one year	(149)		(46)		(214)
Net current assets		4,136		1,420		4,666
Net assets		22,794		24,418		24,337
Called up equity share capital		2,506		2,713		2,677
Special distributable reserve		19,160		21,319		21,443
Capital redemption reserve		233		25		61
Capital reserve - gains & losses on disposal		(465)		(1,347)		(343)
- holding gains & losses		470		813		91
Revenue reserve		890		895		408
Total equity shareholders' funds		22,794		24,418		24,337
Net asset value per share		91.0p		90.0p		90.9p

*Held at fair value through profit and loss

The statements were approved by the Directors and authorised for issue on 25 September 2012 and are signed on their behalf by:

Tony Morgan
Chairman
Company Number: 05840377

Cash Flow Statement
	Six months to 31 July 2012	Six months to 31 July 2011	Year to 31 January 2011
	£'000	£'000	£'000
Net cash (outflow)/inflow from operating activities	(88)	137	643
Taxation	-	-	(96)
Financial investment :
Purchase of fixed asset investments	(3,750)	(3,282)	(4,714)
Sale of fixed asset investments	5,201	208	5,432
Management of liquid resources:
Purchase of current asset investments	-	(6,230)	(9,957)
Sale of current asset investments	2,794	9,974	11,187
Dividends paid	(803)	(407)	(951)
Financing:
Cancellation of own shares	(1,332)	(21)	(304)
Decrease in cash at bank	2,022	379	1,240

Reconciliation of profit before taxation to cash flow from operating activities
	Six months to 31 July 2012	Six months to 31 July 2011	Year to 31 January 2012
	£'000	£'000	£'000
Profit on ordinary activities before tax	592	514	1,356
Gain on disposal of fixed asset investments	(22)	-	(1,200)
Gain on disposal of current asset investments	-	(15)	(15)
Holding gain on fixed asset investments	(416)	(290)	445
Holding gain on current asset investments	-	-	-
Increase in debtors	(177)	(61)	(100)
(Decrease)/increase in creditors	(65)	(11)	157
Net cash inflow from operating activities	(88)	137	643

Reconciliation of net cash flow to movement in net funds
	Six months to 31 July 2012	Six months to 31 July 2011	Year to 31 January 2012
	£'000	£'000	£'000
Increase in cash at bank	2,022	379	1,240
Decrease in cash equivalents	(2,794)	(3,729)	(1,215)
Opening net cash resources	4,506	4,481	4,481
Net cash resources at end of period	3,734	1,131	4,506

Notes to the Half-Yearly Report

1.         Basis of preparation
The unaudited half-yearly results which cover the six months to 31 July 2012 have been prepared in accordance with the Accounting Standard Board's (ASB) statement on half-yearly financial reports (July 2007) and adopting the accounting policies set out in the statutory accounts of the Company for the year ended 31 January 2012, which were prepared under UK GAAP and in accordance with the Statement of Recommended Practice for Investment Companies issued by the Association of Investment Companies in January 2009.

2.         Publication of non-statutory accounts
The unaudited half-yearly results for the six months ended 31 July 2012 do not constitute statutory accounts within the meaning of s.415 of the Companies Act 2006. The comparative figures for the year ended 31 January 2012 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies. The independent auditor's report on those financial statements, in accordance with chapter 3 of part 16 of the Companies Act 2006, was unqualified. This half-yearly report has not been reviewed by the Company's auditor.

3.         Earnings per share
The earnings per share at 31 July 2012 is calculated on the basis of 26,871,445 (31 July 2011: 27,145,052 and 31 January 2011: 26,997,980) shares, being the weighted average number of shares in issue during the period.

There are no potentially dilutive capital instruments in issue and, therefore, no diluted earnings per share figures are relevant. The basic and diluted earnings per share are therefore identical.

4.         Net asset value per share
The net asset value per share is based on net assets as at 31 July 2012 divided by 25,056,684 (31 July 2011: 27,126,984 and 31 January 2011: 26,771,709 shares in issue at that date.
               
5.         Dividends
The interim dividend of 2.0 pence per share for the six months ending 31 July 2012 will be paid on 16 November 2012, to those shareholders on the register on 19 October 2011.

A final dividend, for the year ending 31 January 2011, of 3.0 pence per share was paid on 9 August 2012 to shareholders on the register on 13 July 2012.

6.         Principal Risks and Uncertainties
The Company's assets consist of equity and fixed-rate 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 VCT, investment and strategic, regulatory, reputational, operational and financial risks. These risks, and the way in which they are managed, are described in more detail in the Company's Annual Report and Accounts for the year ended 31 January 2012. The Company's principal risks and uncertainties have not changed materially since the date of that report.

7.         Related Party Transactions
Octopus acts as the investment manager of the Company. Under the management agreement, Octopus receives a fee of 2.0 per cent per annum of the net assets of the Company for the investment management services. During the period, the Company incurred management fees of £244,000 (31 July 2012: £243,000 and 31 January 2012: £486,000) payable to Octopus. At the period end there was £nil (31 January 2012: £nil and 31 July 2012: £nil) outstanding to Octopus.  Furthermore, Octopus provides administration and company secretarial services to the Company.  Octopus receives a fee of 0.3 per cent per annum of net assets of the Company for administration services and £10,000 per annum for company secretarial services.

8.         A version of this statement will be made available to all shareholders. Copies are also available from the registered office of the Company at 20 Old Bailey, London, EC4M 7AN, and will also be available to view on the Investment Manager's website at www.octopusinvestments.com.

9.         Post Balance Sheet Events
The following events occurred between the balance sheet date and the signing of these financial statements:

- 21 August 2012 - a follow-on investment of £500,000 was made in Borro Loan 2 Limited.

- 21 August 2012 - a follow-on investment of £34,000 was made in Bluebell Telecom Services Limited.

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Source: Octopus Apollo VCT 3 plc via Thomson Reuters ONE

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