Annual Financial Report

Baronsmead VCT 3 plc Annual report & accounts for the year ended 31 December 2010 Investment Objective Baronsmead VCT 3 is a tax efficient listed company which aims to achieve long-term investment returns for private investors. Investment Policy â— To invest primarily in a diverse portfolio of UK growth businesses, whether unquoted or traded on AIM. â— Investments are made selectively across a range of sectors in companies that have the potential to grow and enhance their value. Full details on the Company's published investment policy and risk management are contained in the Report of the Directors. Dividend policy The Board of Baronsmead VCT 3 has the objective to maintain a minimum 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 5.6p per ordinary share (equivalent to a pre-tax return of 7.4p 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— 12.4% Net asset value ("NAV") per ordinary share increased 12.4 per cent to 109.60p before deduction of dividends. â— 7.5p Dividends for the year total 7.5p per share comprising the interim dividend of 3.0p and the proposed final dividend of 4.5p, tax free for qualifying shareholders. â— 55.8p Cumulative tax free dividends total 55.8p per share for founder shareholders over the last ten years, equivalent to an annual average dividend of 5.6p per share. â— 180.2p NAV total return to ordinary shareholders for every 100p invested since launch in January 2001, prior to tax relief. â— 8.0% Dividend yield. Based on the 7.5p dividends paid and proposed in the year and the mid share price of 94.25p at year end, qualifying shareholders have received a tax free cash return of 8.0 per cent, ignoring up front tax relief. Summary Since Launch Performance Summary to 31 December 2010 1 year 3 years 5 years Since launch Total return* % % % % Net asset valueâ€ +12.7 +5.7 +24.5 +80.2 Share priceâ€ +13.0 +2.9 +33.5 +59.1 FTSE All-Share +14.5 +4.4 +28.4 +41.0 *Source: ISIS EP LLP and AIC. â€ These returns for BVCT 3 ignore up front tax reliefs and the impact of receiving dividends tax free. Performance Record Ordinary share FTSE Combined Total Net Share Net asset All-Share total net asset price value total expense Year ended assets value (mid) total return ratioâ€ return* 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 * 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 * Includes proposed final dividend of 4.5p. Cash Returned to Shareholders The table below shows the cash returned to shareholders dependent on their subscription cost, including their income tax reclaimed on subscription. Net Cumulative Subscription Income tax cash dividends Net annual Gross price reclaim invested paid* yieldâ€¡ yieldâ€ Year subscribed p p p p % % 2001 100.0 20.0 80.0 55.8 7.0 9.4 2005 - C share 100.0 40.0 60.0 26.3 7.5 10.0 2010 103.1 30.9 72.2 7.5 -^ -^ Note - The total return could be higher for those shareholders who were able to defer a capital gain on subscription and the net sum invested may be less. * Includes proposed final dividend of 4.5p to be paid on 8 April 2011. â€¡ Net annual yield represents the cumulative dividends paid expressed as an annualised percentage of the net cash invested. â€ The gross equivalent yield if the dividends had been subject to higher rate tax (32.5 per cent on dividend income at 31 December 2010). As from the tax year 2010/11, a new additional rate of tax on dividend income of 42.5 per cent came into force for those who earned more than Â£150,000. For those Shareholders who would otherwise pay this higher 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). Ë† The table above excludes returns for shareholders who subscribed in the Joint Offer with Baronsmead VCT 4 plc as those returns are not yet meaningful. Chairman's Statement I am pleased to report an increase in Net Asset Value per share of 12.4 per cent for the year to 31 December 2010, as a result of increased valuations of our investments following improved trading results within the portfolio companies. The total 7.5p per share dividend paid in the last three years has been sustained. Baronsmead VCT 3 was launched ten years ago in January 2001. Despite experiencing two major stock market downturns in this decade, the Company has generated a strong, absolute and relative investment return. Dividend payments (including the proposed final dividend of 4.5p) totalling 55.8p per share have been tax free for qualifying private investors. INVESTMENT PERFORMANCE In the year to 31 December 2010, the Net Asset Value ("NAV") per share increased 12.4 per cent from 97.50p to 109.60p before payment of dividends. The position can be summarised as follows: Pence per share NAV as at 1 January 2010 97.50 Valuation up lift 12.10 109.60 Interim dividend paid on 15 September (3.00) 2010 Proposed final dividend payable on 8 (4.50) April 2011 NAV as at 31 December 2010 102.10 The 12.4 per cent growth in NAV per share over the year is due to an uplift in the valuation of the unquoted investments as a result of strong trading performances at several companies in the portfolio as well as an increase in the value of the AIM-traded and listed portfolio in the second half of the financial year. During the year, the Company realised profits from the sale of a number of unquoted and AIM-traded investments, including Active Assistance, Advanced Computer Software, Credit Solutions and WIN. These profitable realisations underpin the ability of the Company to continue to pay dividends in accordance with its dividend policy. The proposed final dividend of 4.5p per share will take total dividends to 7.5p per share for the year. The Board is aware of shareholders' previously expressed preference to receive income while also achieving capital growth. The increase in NAV per share to 102.10p following payment of the proposed dividend is a positive step in this direction and above the 100p subscription price for founder shareholders. All of the VCT qualifying tests have been met throughout the year. THE LAST TEN YEARS Since the launch of the Company in January 2001, Baronsmead VCT 3 has raised Â£ 71m (after expenses). The Company's net asset value as at 31 December 2010 was Â£64.6 million, having paid dividends of approximately Â£25.4 million and bought back shares at a cost of Â£9.4 million. The Company has had three major fundraisings as well as a number of smaller non-prospectus offers during the past ten years. A little over 2,000 shareholders invested Â£31 million (after costs) in the first quarter of 2001. The first of the major downturns in stock markets that have occurred during the past ten years happened almost immediately after the launch, as the FTSE All-Share Index fell by approximately 50 per cent by March 2003. However shareholders in Baronsmead VCT 3 experienced positive year on year investment returns until 2008 when the second major stock market downturn occurred. This did have an impact on Baronsmead VCT 3 and in the 2008 year there was a negative return. This has now been more than made up by the positive investment returns in 2009 and more particularly 2010. The chart at the top of page 2 in the Annual report and accounts for year ended 31 December 2010 shows how the total return achieved by Baronsmead VCT 3 has, from the outset, out-performed the FTSE All-Share index and been less volatile. Shareholders subscribed Â£23 million after costs in winter 2005/6 and a further Â£7.7 million in spring 2010. The investment returns for those who invested in these fundraisings have also been positive with annual dividends of 7.5p per ordinary share since the 2007 financial year being a particular feature. Dividends totalling 55.8p per share have been paid to founder shareholders. This represents an average annual dividend of 5.6p per share since launch in January 2001 when founder shareholders subscribed Â£1 per share (prior to taking account of any initial income tax relief or capital gains deferral relief on subscription). The returns to shareholders are significantly enhanced by the range of VCT tax reliefs available to qualifying investors. The tax free nature of VCT dividends 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. As a result, qualifying shareholders in Baronsmead VCT 3, who are higher or 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. Depending on when investors subscribed for new shares, qualifying shareholders would have been able to reclaim 20 per cent, 30 per cent or 40 per cent of the amount invested. If the initial tax relief on the amounts subscribed is taken into account, the extra yield required from a non-VCT investment to deliver the same after-tax returns is substantial. PORTFOLIO The portfolio, consisting of 63 companies, has shown a strong valuation increase over the last twelve months. The direction of travel of these companies is recorded every quarter so that the overall health of the portfolio can be monitored. At the year-end, 89 per cent of companies in the portfolio are progressing steadily or better. The level of investee company borrowings has fallen generally and profit margins have been maintained. 48 per cent of the Â£64.6 million of net assets at 31 December 2010 were invested in unquoted companies, 25 per cent in AIM-traded and other listed shares and the balance of 27 per cent remained in liquid assets or government securities. The largest unquoted investment at that date, Reed & Mackay, and the largest AIM investment, IDOX plc, represented 7 and 2 per cent of net asset value respectively. The performance of the unquoted portfolio has been robust and its underlying valuation has increased during the year by 19 per cent. On average, the current portfolio of unquoted investments is valued at 38 per cent higher than cost. This is a reflection of the quality of the portfolio, active management by the Manager, ISIS Equity Partners and the effectiveness of their close co-operation with investee companies. The share prices of the AIM-traded and other listed investments in the portfolio have improved 9 per cent over the last twelve months, although it was not until August 2010 that market sentiment really began to recognise the value implicit in many profitable AIM-traded companies. Eight AIM-traded investees have been sold including three outright to acquirers, which confirms the good value that resided in these relatively lowly rated situations. This also supports the longer term strategy of taking more influential stakes in a smaller number of AIM-traded investments, where a likely exit strategy to a trade buyer can be envisaged. SHAREHOLDER MATTERS Shareholders can reinvest their dividends by purchasing existing shares through the Dividend Reinvestment Plan ("DRIP"). Shareholders who increase their holdings via the DRIP will be buying into a well-diversified portfolio of mainly established and profitable unquoted and AIM-traded companies. Currently, shareholders holding approximately 13 per cent of the Company's shares participate in the DRIP. The DRIP may be appropriate for those subscribers who are investing primarily for capital growth. During the twelve months to 31 December 2010, 286,018 shares were acquired by participants of the DRIP. These shares were acquired through the stock market and the price paid for these shares represented a discount of approximately 10 per cent of the prevailing NAV at the time. In addition, third party purchasers acquired 647,051 shares through conventional stock market activity. The Company has consistently maintained its policy of buying back shares and will continue to do so if, in the opinion of the Board, a repurchase of shares is in the interests of the shareholders as a whole. Historically, the repurchase price has represented an approximate discount to NAV of 10 per cent. Shareholders are asked annually to give their authority to the Directors to acquire up to 14.99 per cent of the Company's shares. During the twelve months to 31 December 2010, the Company bought back 1.51 million shares to be held in treasury representing 2.5 per cent of the share capital at the start of the year. The Manager works closely with the Company's broker, Matrix Corporate Capital, to put into effect the Company's share buy-back policy, provide shares for the DRIP and maintain a narrow difference between the buy and sell price of the Company's shares. This difference, known as "the spread", has averaged approximately 1.5p per share since Matrix' appointment in August 2009. BOARD SUCCESSION As discussed in the Interim Report Mark Cannon Brookes, the first Chairman of the Company retired at the Annual General Meeting in May 2010. The Board would like to thank Mark for his excellent work as Chairman since formation of Baronsmead VCT 3 in 2001. The definition of `independence' in the context of a director of a venture capital trust was amended as from 28 September 2010 to bring it into line with other listed investment companies. This made it necessary for Robert Owen to resign from the Board after becoming Chairman of Baronsmead VCT 4 plc. Robert joined as a Director on the formation of the Company in 2001 and the Board thanks him for his very valuable contribution since then. After a formal process using independent recruitment specialists, Ian Orrock was appointed a Director by the Board on October 2010. Ian has considerable relevant experience having founded, developed and sold a number of businesses throughout his career, particularly focusing on the international technology and telecoms sectors, and has also worked at board level in a number of global organisations. Finally he has served on the boards of two Investment Trusts, which specialised in investing in smaller companies. He will of course be proposed for election by shareholders at the Annual General Meeting. ANNUAL GENERAL MEETING I look forward to meeting as many shareholders as possible at our 10th Annual General Meeting to be held on Wednesday 6 April 2011 at the London Stock Exchange, 10 Paternoster Square near St Paul's Cathedral. The AGM is at 11.00 a.m. followed by presentations from the Manager and an investee company. After a light lunch, a shareholder workshop is being held and is expected to finish by about 2.00 pm. OUTLOOK Whilst profits in the portfolio companies continue to grow, the outlook for the economy as a whole remains uncertain, particularly since it is not yet clear what the impact of the recent public sector cuts and weaker consumer spending will be. However, ISIS Equity Partners believe that the uncertain economic climate will generate specific sector opportunities which they hope the Company can capitalise on. Many of the portfolio companies have improved their market positions and operating efficiency over the last year and both the Board and the Manager share the belief that these ambitious companies can continue to grow. We also believe that if the Government succeeds in creating a more business friendly and less restrictively regulated environment, it is the sort of companies in our portfolio and their like that will drive the growth that the UK economy desperately needs. Anthony Townsend Chairman 17 February 2011 Manager's Review Trading across the unquoted and AIM-traded companies in the portfolio has markedly improved in the last year. During the year under review, more stable trading conditions were evident in a number of sectors and new investments were completed in three unquoted and seven AIM-traded companies. PORTFOLIO REVIEW The total portfolio comprised 63 investee companies at the year end after 11 full realisations and one write off. All new and further round financings, as well as realisations, are scheduled below. Cash proceeds from all realisations totalled Â£6.3 million and net capital profits realised in the period were Â£1.8 million. Unquoted investment totalled Â£3.6 million in the year under review, including further round financings into two existing portfolio companies. The new unquoted investments were in the following companies: â€¢ Surgi C, the UK's leading independent distributor of spinal implants, which is based in Birmingham. The business has developed its strong market position as a result of the high levels of education and technical support it provides to spinal surgeons on its broad range of products. www.surgi-c.com. â€¢ Inspired Thinking Group also Birmingham based, which provides services that help large marketing departments to operate more efficiently, including improved procurement of artwork and print management. The new funding was used to acquire Total Marketing Service, a provider of workflow management systems to marketing departments. www.inspiredthinkinggroup.com. â€¢ Getting Personal, which is a leading online retailer, based in Manchester, that sells personalised and unique gifts. The business was established in November 2005 with just one product, a personalised calendar. www.GettingPersonal.co.uk now sells over 4,000 items ranging from personalised cards, notebooks, mugs and chocolate to non-personalised items for general gifting. The further round financings were made into the following companies: â€¢ Nexus Vehicle Holdings, which is a leading provider of vehicle rental services to the UK corporate market and it is a pioneer of paperless rental trading through its web based IRIS procurement system. It acquired Adapted Vehicle Hire, which is a niche rental business providing adapted vehicles for the disabled driver market. www.nexusrental.com â€¢ Independent Living Services which is an acute domiciliary care provider based in Scotland. Two small investments were made firstly to fund a small acquisition and secondly to repurchase shares. www.ilsscotland.com. The volume of qualifying AIM-traded opportunities also increased from the depressed levels of 2009. In all Â£1.8 million was invested into seven AIM-traded companies and another Â£1.8 million as additional capital for seven existing investments. Wood Street Microcap Investment Fund ("WSM") was established by ISIS in May 2009 to provide flexibility for the Baronsmead VCTs to invest in predominantly larger and more liquid non VCT qualifying AIM-traded and Small Cap opportunities. At 31 December 2010, the market value of the holding in WSM had increased by 20 per cent to Â£2.1 million, representing 3.3 per cent of NAV, and was spread across 27 smaller quoted companies. ISIS receives no additional fee for managing this fund. It is pleasing to see the improvement in trading performance across the majority of the portfolio companies, some of which have exhilarating stories as they have grown their profits and work-forces through the recession. Often this growth has come from business models which have proved robust despite the slow recovery of the UK economy, and from companies which are able to deliver real value to their customers. The exposure to the UK public sector is relatively light but the only new provision made is in the investment made in Carnell Contractors, which provides motorway maintenance and technical services to many of the Highway Agencies, where net revenues have fallen sharply. Case studies Four case studies are highlighted within the portfolio and are set out in the Annual report and accounts. â€¢ Reed & Mackay is featured for the third year due to its sustained growth providing a superior travel management service to its business customers. â€¢ Nexus Vehicle Holdings is growing both organically and by acquisition. â€¢ Crew Clothing Company continues to grow its networks of shops, creating jobs as well as experiencing fast growth from its direct mail/website retailing â€¢ Cablecom, an internet access solutions provider, has achieved growth in both core and related markets through product innovation. The combined growth in value of these four investments in the last twelve months is Â£5.2 million, an increase of 59 per cent since 31 December 2009. Active portfolio management The sale of three unquoted investments in Active Assistance, Occam and Credit Solutions returned Â£3.90 million, being 1.8 times the original cost. The sale of Occam and Active Assistance were reported in the last interim statement. In November 2010, the unquoted investment in Credit Solutions was successfully sold to arvato, a global business outsourcing partner. Sale proceeds were 1.8 times the original cost of Â£4 million invested by the four generalist Baronsmead VCTs in June 2005. Credit Solutions is ranked as one of the top 10 debt collection agencies providing a range of integrated telephone and field based collection and management services on accounts ranging from early arrears to later stage debt recovery. The investment strategy with regard to AIM-traded companies has increasingly focused on taking more influential stakes through the collective shareholdings of the Baronsmead family of VCTs. For example, the original shareholding of 5 per cent in WIN, a provider of mobile data solutions, had been subscribed in 2004 and grew to over 19 per cent by August 2009 through a series of market purchases. The average price paid for the total shareholding was 85p and the sale price in August 2010 was 150p. ISIS believes that the concentration of WIN's shareholder base enabled its board to improve on the opening offer received for the business. The sale of WIN is an example of how trade purchasers perceive good value in a number of the portfolio companies and, in all, three trade sales have been achieved from the AIM portfolio over the last twelve months. Investor sentiment towards the AIM market has also improved in recent months but ISIS believes there is still scope for the gap between the price earnings ratings of smaller qualifying AIM-traded companies and that of larger quoted companies to be reduced. The shares in Advanced Computer Software were also sold through a series of market trades realising an overall profit of Â£553,000 (2.1 times cost). Following the period end an unquoted investment of Â£1.6m was completed in Valldata, a leading provider of outsourced donation processing and fulfilment services for the UK not-for-profit market based in Wiltshire. OUTLOOK The focus of both the unquoted and AIM-traded portfolio companies has moved from cautious management in 2008/09 to actively pursuing and taking advantage of emerging opportunities. This is evidenced by increased profits, stronger balance sheets and higher valuations in a number of cases. Hopefully further improvements in the economic environment will assist these companies to continue to grow and be important job creators for the UK. It will be the continued innovation and drive of these companies aided by the encouragement and experience of ISIS as active investors that can help generate shareholder value. ISIS EP LLP Investment Managers 17 February 2011 Table of Investments and Realisations New investments in the year to 31 December 2010 Company Location Sector Activity Investment cost (Â£'000) Unquoted investments New Surgi C Ltd Birmingham Healthcare & Distribution of 1,102 Education spinal implants Getting Personal Manchester Consumer On-line retail of 988 Ltd markets personalised gifts Inspired Thinking Birmingham Business Marketing 796 Group Ltd Services services & work flow systems Follow on Nexus Vehicle Pudsey Business Vehicle rental 499 Holdings Ltd Services provider to corporates Independent Living Alloa Healthcare & Care at home 211 Services Ltd Education services Paper consideration Independent Living Alloa Healthcare & Care at home 150 Services Ltd* Education services Crew Clothing London Consumer Branded clothing 51 Company Ltd* markets retailer Total unquoted 3,797 investments AIM-traded & listed investments New Netcall plc St Ives IT & Media Communications 789 software Accumuli plc Salford IT & Media Managed IT 333 security Tristel plc Newmarket Healthcare & Infection control 217 Education Bglobal plc Darwen Business Smart metering 176 Services Brady plc Cambridge IT & Media Commodities 176 trading software Hangar8 plc Oxford Business Business jet 44 Services management Strategic Thought Maidenhead IT & Media Risk management 35 Group plc software Follow on Green Compliance Cirencester Business Small business 531 plc Services compliance Electric Word plc London IT & Media Business to 380 business publisher IS Pharma plc Chester Healthcare & Specialist 278 Education hospital medicines group Proactis Holdings Wetherby IT & Media Procurement 219 plc Software Jelf Group plc Bristol Financial Financial 210 Services solutions consultancy Tasty plc London Consumer Restaurant 114 Markets operator Tangent London Business Digital direct 88 Communications plc Services marketing Total AIM-traded & listed investments 3,590 Collective investment vehicle Follow on Wood Street 1,300 Microcap Investment Fund Total collective investment 1,300 vehicle Total investments in period 8,687 * Paper consideration from rolled up interest. Realisations in the year to 31 December 2010 Realised profit/ 31 December (loss) First 2009 this Overall investment valuation period multiple Company date Â£'000 Â£'000 return* Unquoted realisations Active Assistance Trade sale Mar 08 1,155 414 2.8 Credit Solutions Trade sale May 05 1,127 167 1.8 Occam DM Ltd Trade sale Jul 04 121 422 1.7 Total unquoted 2,403 1,003 realisations AIM-traded & listed realisations Advanced Computer Full Market Jul 08 1,081 (3) 2.1 Software plc Sale Alere Inc Part Sale Aug 09 28 - 1.3 Brainjuicer Group plc Full Market Nov 06 59 26 1.7 Sale Character Group plc Full Market Feb 08 88 44 0.9 Sale INVU plc Full Market May 07 1 (1) 0.0 Sale Mission Marketing Full Market Dec 07 35 (22) 0.1 Group (The) plc Sale Mount Engineering plc Full Trade Jun 07 275 176 1.2 Sale Vero Software Full Trade Apr 02 181 63 0.8 Sale WIN plc Full Trade Oct 04 374 302 1.6 Sale 2,122 585 Written off Payzone plc May 03 1 (1) - 1 (1) Total AIM-traded & listed 2,123 584 realisations Total realisations 4,526 1,587â€ * Includes interest/dividends received, loan note redemptions and partial realisations accounted for in prior periods. â€ Proceeds of Â£173,000 were received in respect of an investment, Scriptswitch which had been sold in a prior period and proceeds of Â£6,000 were received in respect of an investment, Interactive Prospect Targeting plc, which had been written off in a prior period. In addition, a loss of Â£9,000 was realised during the year on the redemption on 7 June 2010 of a UK Treasury Gilt which had paid a rate of interest of 4.75 per cent. Investment Portfolio Investment Classification at 31 December2010 Sector* Percentage Business 36 Services Consumer 18 Markets Financial 2 Services Healthcare & 12 Education IT & Media 32 Total Assets* Percentage Unquoted - 30 loan stock Unquoted - 18 ordinary and preference shares AIM, Listed & 25 Collective Investments Interest 25 bearing securities Net current 2 assets Time Investments Percentage Held* Less than 1 year 10 Between 1 and 3 25 years Between 3 and 5 31 years Greater than 5 34 years * at 31 December 2010 valuation 31 31 % of % of December December total Equity Book 2009 2010 % of held by held by cost valuation valuation net Baronsmead all Company Sector Â£'000 Â£'000â€ Â£'000 assets VCT 3 plc funds* Unquoted Reed & Mackay Ltd Business 1,211 3,145 4,779 7.4 9.5 40.0 Services Nexus Vehicle Business 2,368 2,511 4,182 6.5 12.6 57.4 Holdings Limited Services Crew Clothing Consumer 984 1,300 2,569 4.0 5.7 24.1 Company Ltd Markets CableCom IT & Media 1,381 1,848 2,490 3.9 10.6 48.0 Networking Holdings Ltd Kafevend Holdings Consumer 1,252 1,445 2,032 3.1 15.8 66.5 Ltd Markets Quantix Limited IT & Media 1,194 1,862 2,025 3.1 11.4 48.0 Independent Healthcare 1,161 1,566 1,849 2.9 16.2 68.1 Living Services & Education Ltd Fisher Outdoor Consumer 1,423 1,777 1,777 2.7 10.5 44.0 Leisure Holdings Markets Ltd CSC (World) Ltd IT & Media 1,606 1,250 1,687 2.6 8.8 40.0 MLS Ltd IT & Media 781 1,138 1,161 1.8 5.3 22.5 Playforce Business 1,033 1,106 1,023 1.6 9.7 44.0 Holdings Limited Services Getting Personal Consumer 988 - 1,013 1.6 8.3 37.5 Limited Markets Inspired Thinking Business 796 - 976 1.5 5.0 22.5 Group Ltd Services Surgi C Ltd Healthcare 1,102 - 919 1.4 9.8 44.7 & Education Empire World Business 1,297 658 869 1.3 â•ª â•ª Trade Limited Services TVC Group Limited IT & Media 1,233 341 774 1.2 13.0 59.3 Carnell Business 1,499 2,639 337 0.5 8.3 37.5 Contractors Ltd Services Xention Pharma Healthcare 893 183 104 0.2 2.2 3.0 Ltd & Education Kidsunlimited Business 113 113 113 0.2 0.0 0.0 Group Ltd Services Provesica Ltd Healthcare - - 56 0.1 1.0 1.6^ & Education Total unquoted 22,315 22,882 30,735 47.5 AIM IDOX plc IT & Media 1,038 1,136 1,525 2.4 3.3 9.7 Green Compliance Business 781 500 938 1.5 3.4 17.0 plc Services Murgitroyd Group Business 319 712 751 1.2 3.1 6.2 plc Services Electric Word plc IT & Media 616 247 702 1.1 5.2 28.8 Jelf Group plc Financial 761 235 670 1.0 1.4 6.3 Services Proactis Holdings IT & Media 619 307 614 1.0 5.4 26.5 plc Brulines Group Business 646 715 544 0.8 1.8 9.6 Services IS Pharma plc Healthcare 524 239 540 0.8 1.3 7.1 & Education Netcall plc IT & Media 789 - 508 0.8 3.6 18.2 Accumuli plc IT & Media 333 - 409 0.6 4.7 26.6 InterQuest Group Business 310 259 360 0.6 1.8 7.3 plc Services EG Solutions plc IT & Media 375 101 357 0.6 3.1 14.2 Begbies Traynor Financial 231 607 347 0.5 0.6 2.5 Group plc Services Kiotech Healthcare 275 298 339 0.5 2.2 15.8 International plc & Education Craneware plc IT & Media 71 184 335 0.5 0.2 1.1 Tasty plc Consumer 469 161 316 0.5 2.5 17.1 Markets FFastFill plc IT & Media 251 297 316 0.5 0.9 6.5 Plastics Capital Business 473 184 307 0.5 1.7 9.8 plc Services Tristel plc Healthcare 217 - 232 0.4 1.0 5.4 & Education Sanderson Group IT & Media 387 132 209 0.3 1.8 6.9 plc Brady plc IT & Media 176 - 199 0.3 0.6 3.1 Quadnetics Group Business 296 162 192 0.3 0.6 2.1 plc Services Prologic plc IT & Media 310 124 186 0.3 4.1 15.0 Stagecoach Consumer 419 194 180 0.3 4.5 9.1 Theatre Arts plc Markets Bglobal plc Business 176 - 172 0.3 0.5 2.7 Services Praesepe plc Consumer 525 185 167 0.3 0.6 3.6 Markets Tangent Business 268 73 158 0.2 2.0 10.3 Communications Services plc Dods Group plc IT & Media 541 158 142 0.2 1.4 4.4 Driver Group plc Business 438 294 138 0.2 2.3 10.4 Services Autoclenz Business 400 122 115 0.2 3.1 12.3 Holdings plc Services Real Good Food Consumer 540 17 92 0.1 0.6 2.3 Company (The) plc Markets Adventis Group IT & Media 361 267 89 0.1 3.1 20.7 plc Cohort plc Business 179 138 84 0.1 0.3 1.4 Services Colliers CRE plc Financial 470 78 76 0.1 0.3 0.8 Services STM Group plc Financial 140 58 47 0.1 0.5 3.8 Services Hangar8 plc Business 44 - 44 0.1 0.5 2.6 Services Strategic Thought IT & Media 35 - 44 0.1 0.4 2.1 Group plc Clarity Commerce IT & Media 50 40 43 0.1 0.3 6.0 Solutions plc Zoo Digital Group IT & Media 584 15 36 0.1 0.3 0.9 plc Total AIM 15,437 8,239 12,522 19.4 Listed Vectura Group Healthcare 771 1,208 1,120 1.7 0.5 1.3 plc & Education Chime IT & Media 369 372 386 0.6 0.2 1.5 Communications plc Marwyn Value Financial 64 62 55 0.1 1.3 6.0 Investors plc Services Total listed 1,204 1,642 1,561 2.4 New York Stock Exchange Alere Inc Healthcare 157 224 179 0.3 0.0 0.0 & Education Total New York Stock Exchange 157 224 179 0.3 Interest bearing securities UK T-Bill 10/01/ 6,888 - 6,888 10.7 11 BlackRock Cash 5,700 5,700 5,700 8.8 Market OEIC UK T-Bill 17/01/ 2,499 - 2,499 3.9 11 JPMorgan Europe 1,200 - 1,200 1.9 OEIC Total interest 16,287 5,700 16,287 25.2 bearing securities Collective i nvestment v ehicles Wood Street 1,825 526 2,123 3.3 27.3 100# Microcap Investment Fund Total collective investment v 1,825 526 2,123 3.3 ehicles Total investments 57,225 63,407 98.1 Net current 1,236 1.9 assets Net assets 64,643 100.0 * All funds managed by the same investment manager, ISIS EP LLP, including Baronsmead VCT 3. â€ The total investment valuation at 31 December 2009 per the table above does not agree to the audited accounts at 31 December 2009 due to purchases and sales since that date. â€¡ Following a restructuring, the effective ownership percentage is dependent on final exit proceeds. ^ Provesica Ltd shares received after a company restructure by Xention. # Fund managed by FPPE LLP. AIM, Listed & NYSE Portfolio Concentration Analysis at 31 December 2010 Investment % of ranking Book cost Valuation Quoted by valuation Â£'000 Â£'000 portfolio Top Ten 6,864 7,910 55.6 11-20 3,158 3,472 24.3 21-30 2,931 1,875 13.1 30+ 3,846 1,005 7.0 Total 16,799 14,262 100.0 Ten Largest Investments The top ten investments by current value at 31 December 2010 illustrate the diversity and size of investee companies within the portfolio. This financial information is taken from publicly available information published on Companies House, which has been audited by the auditors of the investee companies. 1. REED & MACKAY HOLDINGS LIMITED - London All ISIS EP LLP managed funds First Investment: November 2005 Total Cost: Â£4,870,000 Total equity held: 40.00% Baronsmead VCT 3 only Cost: Â£1,211,000 Valuation: Â£4,779,000 Valuation basis: Earning multiple % of equity held: 9.49% Year ended 31 March 2010 2009 Â£ million Â£ million Sales 16.0 16.0 EBITA 3.5 2.7 Profit before tax 2.4 1.6 Net Assets 3.9 2.3 No. of Employees 218 221 (Source: Reed & Mackay Holdings Limited, Report and Financial Statements 2010). 2. NEXUS VEHICLE HOLDINGS LIMITED - Leeds All ISIS EP LLP managed funds First Investment: February 2008 Total Cost: Â£9,500,000 Total equity held: 57.38% Baronsmead VCT 3 only Cost: Â£2,368,000 Valuation: Â£4,182,000 Valuation basis: Earnings Multiple % of equity held: 12.62% Year ended 2009 2008* 30 September Â£ million Â£ million Sales 19.4 6.9 EBITA 2.2 0.4 Loss before tax (0.1) (0.5) Net Assets 0.3 0.2 No. of Employees 32 22 * Accounts for a 9 month period. (Source: Nexus Vehicle Holdings Limited, Financial Statements 2009) 3. CREW CLOTHING COMPANY LIMITED - London All ISIS EP LLP managed funds First Investment: November 2006 Total Cost: Â£3,935,000 Total equity held: 24.08% Baronsmead VCT 3 only Cost: Â£984,000 Valuation: Â£2,569,000 Valuation basis: Earnings Multiple % of equity held: 5.72% Year ended 25 October 2009 2008 Â£ million Â£ million Sales 29.3 22.0 EBITA 0.8 1.4 Profit before tax 0.2 0.8 Net Assets 2.3 2.3 No. of Employees 273 209 (Source: Crew Clothing Holdings Limited, Consolidated Financial Statements 2009) 4. CABLECOM NETWORKING HOLDINGS LIMITED - Clevedon All ISIS EP LLP managed funds First Investment: May 2007 Total Cost: Â£5,600,000 Total equity held: 48.00% Baronsmead VCT 3 only Cost: Â£1,381,000 Valuation: Â£2,490,000 Valuation basis: Earnings Multiple % of equity held: 10.56% Year ended 2010 2009 30 September Â£ million Â£ million Sales 8.2 8.1 EBITA 0.9 0.9 Loss before tax (0.5) (0.4) Net Assets 0.5 0.9 No. of Employees 52 40 (Source: CableCom Networking Holdings Limited, Audited Annual Report and Accounts 2010) 5. 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£2,032,000 Valuation basis: Earnings Multiple % of equity held: 15.79% Year ended 2009 2008 30 September Â£ million Â£ million Sales 14.7 16.1 EBITA 1.0 1.1 Profit before tax 1.0 1.2 Net Assets 3.5 2.7 No. of Employees 98 107 (Source: Kafevend Holdings Limited, audited Annual Report and Accounts 2009) 6. QUANTIX LIMITED - Nottingham (A trading name of Newincco 635 Limited) All ISIS EP LLP managed funds First Investment: March 2007 Total Cost: Â£4,800,000 Total equity held: 48.00% Baronsmead VCT 3 only Cost: Â£1,194,000 Valuation: Â£2.025,000 Valuation basis: Earnings Multiple % of equity held: 11.40% Year ended 2009 2008 30 September Â£ million Â£ million Sales 8.6 8.3 EBITA 1.6 1.2 Profit/(Loss) before 0.2 (0.3) tax Net Assets 0.7 0.7 No. of Employees 46 42 (Source: Newincco 635 Limited, audited Annual Report and Accounts 2009) 7. ILS GROUP LIMITED - Alloa All ISIS EP LLP managed funds First Investment: September 2005 Total Cost: Â£4,679,000 Total equity held: 68.12% Baronsmead VCT 3 only Cost: Â£1,161,000 Valuation: Â£1,849,000 Valuation basis: Earnings Multiple % of equity held: 16.18% Year ended 2009 2008 30 September Â£ million Â£ million Sales 16.5 12.7 EBITA 1.8 1.8 PBT 0.1 0.6 Net Assets 0.9 0.9 No. of Employees 1,133 838 (Source: ILS Group Limited, Directors Report and Financial Statements 2009) 8. FISHER OUTDOOR LEISURE HOLDINGS LIMITED - St Albans All ISIS EP LLP managed funds First Investment: June 2006 Total Cost: 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 (Source: Fisher Outdoor Leisure Holdings Limited, Directors Report and Financial Statements 2010) 9. CSC (WORLD) LIMITED - Leeds (A trading name of Cobco 867 Limited) All ISIS EP LLP managed funds First Investment: January 2008 Total Cost: Â£6,450,000 Total equity held: 40.03% Baronsmead VCT 3 only Cost: Â£1,606,000 Valuation: Â£1,687,000 Valuation basis: Earnings Multiple % of equity held: 8.81% Year ended 31 March 2010 2009 Â£ million Â£ million Sales 6.4 6.6 EBITA 1.9 1.9 Loss before tax (0.8) (1.0) Net (Liabilities)/ (0.6) 0.3 Assets No. of Employees 55 51 (Source: Cobco 867 Limited, Directors Report and Consolidated Financial Statements 2010) 10. IDOX PLC - London All ISIS EP LLP managed funds First Investment: June 2006 Total Cost: Â£3,014,800 Total equity held: 9.74% Baronsmead VCT 3 only Cost: Â£1,038,000 Valuation: Â£1,525,000 Valuation basis: Bid price % of equity held: 3.26% Year ended 31 October 2010 2009 Â£ million Â£ million Sales 31.3 32.2 EBITA 7.5 6.6 Profit before tax 4.9 4.5 Net Assets 31.0 28.2 No. of Employees 332 304 (Source: IDOX plc Annual Report and Accounts 2010) Note: EBITA represents earnings before interest, tax and amortisation. Profit before tax represents earnings before tax, after interest, amortisation and depreciation. Extract from the Report of the Directors The Chairman's Statement and the Corporate Governance statement in the Annual report and accounts form part of the Report of the Directors. Results and Dividends The Directors present the tenth Report and audited financial statements of the Company for the year ended 31 December 2010. Ordinary shares Â£'000 Profit on ordinary activities after 7,235 taxation Interim dividend of 3.0p per ordinary share paid on 15 September 2010 (1,837) Final dividend of 4.5p per ordinary share paid on 8 April 2011 (2,729) Total dividends for the year (4,566) Subject to approval at the forthcoming Annual General Meeting the final proposed dividend of 4.5p per ordinary share will be paid on 8 April 2011 to shareholders recorded on the register on 11 March 2011. Principal Activity and Status The Company is registered as a Public Limited Company (Registration number 04115341). The Directors have managed and intend to continue to manage the Company's affairs in such a manner so as to comply with Section 274 of the Income Tax Act 2007 which grants approval as a VCT. A review of the Company's business during the period is contained in the Chairman's Statement and Manager's Review. Business Review The Business Review has been prepared in accordance with the requirements of Section 417 of the Companies Act 2006 and best practice. The purpose of this review is to provide shareholders with a summary setting out the business objectives of the Company, the Board's strategy to achieve those objectives, the risks faced, the regulatory environment and the key performance indicators (KPIs) used to measure performance. Strategy for achieving objectives Baronsmead VCT 3 plc is a tax efficient company listed on The London Stock Exchange's main market which aims to achieve long-term investment returns for private investors. Investment Policy The Company's investment policy is to invest primarily in a diverse portfolio of UK growth businesses, whether unquoted or traded on AIM. Investments are made selectively across a range of sectors in companies that have the potential to grow and enhance their value. Investment securities The Company invests in a range of securities including, but not limited to, ordinary and preference shares, loan stocks, convertible securities, and fixed-interest securities as well as cash. Unquoted investments are usually structured as a combination of ordinary shares and loan stocks, while AIM investments are primarily held in ordinary shares. Pending investment in unquoted and AIM-traded securities, cash is primarily held in an interest bearing money market open ended investment company (OEIC), UK gilts and Treasury Bills. UK companies Investments are primarily made in companies which are substantially based 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 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. The maximum qualifying amount invested in any one company is limited to Â£1 million in a fiscal year and 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 assts 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 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 listed, 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 Revised Guidance for Directors on the Combined Code. Details of the Company's internal controls are contained in the Corporate Governance section of the Annual report and accounts for the year ended 31 December 2010. Performance and key performance indicators (KPIs) The Board expects the Manager to deliver a performance which meets the objectives of achieving long term investment returns for private investors. Performance, measured by dividends paid to shareholders and the change in 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 in the Annual report and accounts for the year ended 31 December 2010. Issue and Buy-Back of Shares During the period the Company issued 7,920,298 ordinary shares. During the period the Company bought back 1,510,000 ordinary shares with a nominal value of 10p to be held in Treasury, representing 2.2 per cent of the issued share capital at an aggregate cost of Â£1,350,100. These 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 6,977,317 ordinary shares in Treasury representing 10.3 per cent of the issued share capital as at 16 February 2011. 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 secretarial and accounting fee is capped at Â£102,212 per annum and the cap is 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. 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 Baronsmead 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 2010 forty-two executives of the Manager had invested a total of approximately Â£141,000 in the ordinary shares of twenty-two 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-two companies totals approximately Â£24.5 million. As at 31 December 2010 five of the investments in the Scheme have been sold realising total proceeds of Â£8.7 million for Baronsmead VCT 3 and Â£0.7 million for the members of the Co-investment Scheme. The Board reviews the operation of the Co-investment Scheme at each quarterly valuation meeting. 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 5.00 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 20.00 per cent of the excess in respect of the period to 31 March 2007, 16.66 per cent of the excess in respect of the period to 31 March 2008, 13.33 per cent in respect of the period to 31 March 2009, and 10 per cent thereafter. No performance fee is payable for the year to 31 December 2010. ISIS Equity Partners - Advisory Fees During the year to 31 December 2010, ISIS EP LLP received net income of Â£92,750 (2009: Â£nil) in connection with advisory fees and incurred abort fees of Â£ 13,286 (2009: Â£1,945) with respect to investments attributable to Baronsmead VCT 3. VCT Status Adviser The Company has retained PricewaterhouseCoopers LLP (`PwC') as their VCT Tax Status Advisers to advise it on compliance with VCT requirements. PwC review new investment opportunities, as appropriate, and review regularly the investment portfolio of the Company. PwC work closely with the Manager but report directly to the Board. Creditor Payment Policy The Company's payment policy is to settle investment transactions in accordance with market practice and to ensure settlement of supplier invoices in accordance with stated terms. At 31 December 2010, there were no outstanding supplier invoices (2009: none). Environment The Company seeks to conduct its affairs responsibly and environmental factors are, where appropriate, taken into consideration with regard to investment decisions. Substantial Interests At 16 February 2011 the Company was not aware of any beneficial interest exceeding 3 per cent of the total voting rights of the Company. Going Concern After making enquires, and bearing in mind the nature of the Company's 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 2010 the Company held cash balances & investments in interest bearing securities and Money Market Funds with a combined value of Â£17,555,000. Cash flow projections have been reviewed and show that the Company has sufficient funds to meet both its contracted expenditure and its discretionary cash outflows in the form of the share buy-back programme and dividend policy. The Company has no external loan finance in place and therefore is not exposed to any gearing covenants. By Order of the Board, ISIS EP LLP Secretary 100 Wood Street London EC2V 7AN 17 February 2011 Statement of Directors' Responsibilities Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to: 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 issuer together with a description of the principal risks and uncertainties that they face. On behalf of the Board, Anthony Townsend Chairman 17 February 2011 Independent Auditors' Report The Company's Financial Statements for the year ended 31 December 2010 have been audited by KPMG Audit Plc. The text of the Auditor's report can be found in the Company's Annual Report and Accounts at www.baronsmeadvct3.co.uk Income Statement For the year ended 31 December 2010 2010 2009 Revenue Capital Total Revenue Capital Total Notes Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Unrealised gains on 9 - 4,951 4,951 - 2,434 2,434 investments Realised gains on 9 - 1,757 1,757 - 1,350 1,350 investments Income 2 2,407 - 2,407 1,513 - 1,513 VAT 3 - - - (2) (6) (8) Investment 4 (380) (1,140) (1,520) (339) (1,016) (1,355) management fee Other expenses 5 (360) - (360) (347) - (347) Profit on ordinary 1,667 5,568 7,235 825 2,762 3,587 activities before taxation Taxation on 6 (412) 412 - (167) 167 - ordinary activities Profit on ordinary 1,255 5,980 7,235 658 2,929 3,587 activities after taxation Return per ordinary 8 2.09p 9.98p 12.07p 1.22p 5.41p 6.63p 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 2010 2010 2009 Notes Â£'000 Â£'000 Opening shareholders' funds 52,878 55,136 Profit for the year 7,235 3,587 Increase in share capital in issue 8,165 1,524 Purchase of shares for Treasury 13,14 (1,357) (821) Dividends paid 7 (1,837) (6,483)* Expenses of share issue 14 (441) (65) Closing shareholders' funds 64,643 52,878 * Includes payment of 2008 final dividend. Balance Sheet As at 31 December 2010 2010 2009 Notes Â£'000 Â£'000 Fixed assets Investments 9 63,407 50,965 Current assets Debtors 10 461 349 Cash at bank and on deposit 1,268 2,033 1,729 2,382 Creditors (amounts falling due within one year) 11 (493) (439) Net current assets 1,236 1,943 Total assets less current liabilities 64,643 52,908 Creditors (amounts falling due after one year) 12 - (30) Net assets 64,643 52,878 Capital and reserves Called-up share capital 13 6,762 5,970 Share premium account 14 15,012 8,080 Capital redemption reserve 14 10,862 10,862 Revaluation reserve 14 6,182 1,393 Capital reserve 14 24,941 26,271 Revenue reserve 14 884 302 Equity shareholders' funds 15 64,643 52,878 Net asset value per share - Basic 15 106.60p 97.50p - Treasury 15 105.32p 96.47p The financial statements were approved by the Board of Directors on 17 February 2011 and were signed on its behalf by: Anthony Townsend (Chairman) Cash Flow Statement For the year ended 31 December 2010 2010 2009 Notes Â£'000 Â£'000 Operating activities Investment income received 2,099 1,302 VAT income received - 1,296 Interest received 5 144 Investment management fees (1,446) (1,371) Other cash payments (426) (416) Net cash inflow from operating activities 17 232 955 Capital expenditure and financial investment Purchases of investments (76,980) (39,388) Disposals of investments 71,447 44,583 Net cash (outflow)/inflow from capital (5,533) 5,195 expenditure and financial investment Dividends Equity dividends paid (1,837) (6,483) Net cash outflow before financing (7,138) (333) Financing Issue of shares 8,165 1,524 Buy-back of ordinary shares (1,357) (821) Expenses relating to issue of shares (435) (69) Net cash inflow from financing 6,373 634 (Decrease)/increase in cash (765) 301 Reconciliation of net cash flow to movement in net cash (Decrease)/increase in cash (765) 301 Opening cash position 2,033 1,732 Closing cash position 16 1,268 2,033 The accompanying notes are an integral part of these statements. Notes to the 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 principle accounting policies adopted are set out below. Presentation of the Income Statement In order to better reflect the activities of a VCT and in accordance with 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 2010 2009 Â£'000 Â£'000 Income from investmentsâ€ UK franked 195 198 UK unfranked 1,872 1,005 Redemption premium on repayment of Loan Notes 335 168 2,402 1,371 Other incomeâ•ª Interest 5 142 Total income 2,407 1,513 Total income comprises: Dividends 195 198 Interest 2,212 1,315 2,407 1,513 Income from investments: Listed and AIM securities 234 456 Unquoted securities 2,168 915 2,402 1,371 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•ª Other income on financial assets not designated fair value through profit or loss. 3. Recoverable VAT HM Revenue and Customs ("HMRC") confirmed in October 2007, following the European Court of Justice decision in the JPMorgan Claverhouse case, that the provision of management services to investment trusts is exempt from VAT. Accordingly ISIS EP LLP ceased to charge VAT on management fees payable by the Company with effect from 30 June 2008. During the year ended 31 December 2008, Â£1,304,000 for VAT recovery was recognised in the income statement. However only Â£1,296,000 was eventually received during the year ended 31 December 2009 and the difference was charged in the Income Statement in that year. The Company does not foresee any further future repayment of VAT. 4. Investment management fee 2010 2009 Â£'000 Â£'000 Investment management fee 1,520 1,355 Performance fee - - 1,520 1,355 For the purposes of the revenue and capital columns in the income statement, the management fee has been allocated 25 per cent to revenue and 75 per cent 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 funds raised 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. No performance fee is payable for the year ended 31 December 2010 (2009: 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 period end are disclosed in note 11. 5. Other expenses 2010 2009 Â£'000 Â£'000 Directors' fees 74 69 Secretarial and accounting fees 109 96 Remuneration of the auditors and their associates: - audit 16 21 - other services supplied pursuant to legislation 5 5 (interim review) - other services supplied relating to taxation 5 6 Trail Commission (17) (2) Other 168 152 360 347 The Chairman received Â£23,500 per annum (2009: Â£21,000). Each of the other Directors received Â£15,500 per annum (2009: Â£14,000). Charges for other services provided by the auditors in the year ended 31 December 2010 were in relation to the interim review and tax compliance work. The Audit Committee reviews the nature and extent of non-audit services to ensure that independence is maintained. The Directors consider the auditors were best placed to provide these services. 6. Tax on ordinary activities 6a. Analysis of charge for the year 2010 2009 Â£'000 Â£'000 UK corporation tax - - The Income Statement shows the tax charge allocated between revenue and capital. 6b. Factors affecting tax charge for the year The tax charge for the year is lower than the standard rate of corporation tax in the UK for a company. The differences are explained below: 2010 2009 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Profit on ordinary 1,667 5,568 7,235 825 2,762 3,587 activities before tax Corporation tax at rate of 467 1,559 2,026 231 773 1,004 28% (2009: 28%) Effect of: Non-taxable dividend income (55) - (55) (55) - (55) Non-taxable investment - (1,878) (1,878) - (1,059) (1,059) gains Marginal tax relief - - - (9) 9 - Losses (utilised)/carried - (93) (93) - 110 110 forward Tax charge for the year 412 (412) - 167 (167) - (note 6a) At 31 December 2010 the Company had surplus management expenses of Â£1,498,000 (2009: Â£1,830,000) 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. 7. Dividends 2010 2009 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 2008 - Final dividend of 4.5p - - - 537 1,879 2,416 per ordinary share paid on 20 March 2009 For the year ended 31 December 2009 - First interim dividend of - - - 271 1,356 1,627 3.0p per ordinary share paid on 7 September 2009 - Second interim dividend - - - 380 2,060 2,440 of 4.5p per ordinary share paid on 30 December 2010 For the year ended to 31 December 2010: - Interim dividend of 3.0p 673 1,164 1,837 - - - per share paid on 15 September 2010 673 1,164 1,837 1,188 5,295 6,483 8. Returns per share The 12.07p return per ordinary share (2009: 6.63p) is based on the net profit from ordinary activities after tax of Â£7,235,000 (2009: Â£3,587,000) and on 59,933,988 ordinary shares (2009: 54,121,721 ordinary shares), being the weighted average number of shares in circulation during the year. 9. Investments All investments are designated fair value through profit or loss at initial recognition, therefore all gains and losses arise on investments designated at fair value through profit or loss. Financial Reporting Standard 29 `Financial Instruments: Disclosures' (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. 2010 2009 Â£'000 Â£'000 Level 1 Interest bearing securities 16,287 12,956 Investments traded on AIM 12,522 10,394 Investment traded on NYSE 179 224 Investments listed on LSE 1,561 1,580 30,549 25,154 Level 2 Collective investment vehicle (Wood Street Microcap 2,123 526 Investment Fund) Level 3 Unquoted investments 30,735 25,285 63,407 50,965 2010 2009 Â£'000 Â£'000 Equity shares 18,170 18,582 Loan notes 28,790 19,226 Preference shares 160 201 Interest bearing securities 16,287 12,956 63,407 50,965 Level 1 Level 2 Level 3 Interset Traded Listed Collective bearing Traded on on investment securities on AIM NYSE LSE vehicle Unquoted Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening book cost 12,940 14,042 180 1,140 525 20,745 49,572 Opening unrealised 16 (3,648) 44 440 1 4,540 1,393 appreciation/ (depreciation) Opening valuation 12,956 10,394 224 1,580 526 25,285 50,965 Movements in the year: Purchases at cost 68,495 3,590 - - 1,300 3,796 77,181 Sales - proceeds (65,155) (2,685) (29) - - (3,578) (71,447) - realised (losses)/ (9) 590 - - - 1,176 1,757 gains on sales Transfer between two - (64) - 64 - - - categories Unrealised gains/ 16 (36) 6 - - 176 162 (losses) realised during the year Increase/(decrease) in (16) 733 (22) (83) 297 3,880 4,789 unrealised appreciation 16,287 12,522 179 1,561 2,123 30,735 63,407 Closing book cost 16,287 15,437 157 1,204 1,825 22,315 57,225 Closing unrealised - (2,915) 22 357 298 8,420 6,182 appreciation/ (depreciation) 16,287 12,522 179 1,561 2,123 30,735 63,407 During the year the Company incurred brokerage costs on purchases of Â£1,600 (2009: Â£1,700) and brokerage costs on sales of Â£4,000 (2009: Â£2,800) in respect of ordinary shareholder interests. The gains and losses included in the above table have all been recognised in the Income Statement. The Standard requires disclosure, by class of financial instruments, if 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£2.9 million or 9.5 per cent lower. Using the upside alternative the value would be increased by Â£ 2.3 million or 7.5 per cent. 10. Debtors 2010 2009 Â£'000 Â£'000 Prepayments and accrued income 447 349 Other debtors 14 - 461 349 11. Creditors (amounts falling due within one year) 2010 2009 Â£'000 Â£'000 Management, secretarial and accounting fees due to the 435 357 Manager Trail commission payable - 29 Other creditors 58 53 493 439 12. Creditors (amounts falling due after one year) 2010 2009 Â£'000 Â£'000 Trail commission payable - 30 13. Called-up share capital The Companies Act 2006 abolished the requirement for a company to have an authorised share capital and at the Company's last Annual General Meeting, the Company's Articles of Association were amended to reflect this. Whilst the Company no longer has authorised share capital, the Directors will still be limited as to the number of shares they can at any time allot as the Companies Act 2006 requires that Directors seek authority from the shareholders for the allotment of new shares. Allotted, called-up and fully paid: Ordinary shares 59,699,553 ordinary shares of 10p each listed at 31 December 2009 5,970 7,920,298 ordinary shares of 10p issued and allotted during the year 792 67,619,851 ordinary shares of 10p each listed at 31 December 2010 6,762 5,467,317 ordinary shares of 10p each held in treasury at 31 (547) December 2009 1,510,000 ordinary shares of 10p each repurchased during the year (151) and held in treasury 6,977,317 ordinary shares of 10p each held in treasury at 31 (698) December 2010 60,642,534 ordinary shares of 10p each in circulation at 31 December 6,064 2010 As at 16 February 2011 the Company's issued share capital was 67,619,851 ordinary shares of 10 pence each, of which 6,977,317 were held in treasury. The number of shares in circulation was 60,642,534 ordinary shares carrying one vote each. The capital of the Company is managed in accordance with its investment policy, in pursuit of its investment objectives, both of which are detailed in the Report of the Directors. Treasury shares The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 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 re-issuing 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 2.5 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. 14. Reserves Capital Share redemption Revaluation Capital Revenue premium reserve reserve reserve reserve Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 At 31 December 2009 8,080 10,862 1,393 26,271 302 Premium on issue of 7,373 - - - - ordinary shares Expenses of share issue (441) - - (6) - and buybacks Shares bought back - - - (1,351) - Transfer of prior years' - - (162) 162 - revaluation to capital reserve Realised gain on disposal - - - 1,757 - of investments Net increase in value of - - 4,951 - - investments Management fee - - - (1,140) - capitalised Revenue return on - - - - 1,255 ordinary activities after tax Dividends recognised in - - - (1,164) (673) the period Taxation - - - 412 - At 31 December 2010 15,012 10,862 6,182 24,941 884 At 31 December 2010, reserves distributable by way of dividend amounted to Â£23,587,000 (2009: Â£23,426,000), comprising the capital reserve and revenue reserve less the net unrealised loss on those investments whose prices are quoted in an active market and deemed readily realisable. 15. Net asset value per share The net asset value per share and the net asset values attributable to the ordinary shares at the year end are calculated in accordance with their entitlements in the Articles of Association and were: Net asset value per Net asset value Number of shares share attributable attributable 2010 2009 2010 2009 2010 2009 number number pence pence Â£'000 Â£'000 Ordinary shares 60,642,534 54,232,236 106.60 97.50 64,643 52,878 (basic) Ordinary shares 67,619,851 59,699,553 105.32 96.47 71,219 57,593 (treasury) Basic net asset value per share is based on net assets at the year end, and on 60,642,534 (2009: 54,232,236) 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 2010 included ordinary shares held in treasury valued at the mid share price of 94.25p at 31 December 2010 (31 December 2009: 86.25p). 16. Analysis of changes in cash 2010 2009 Â£'000 Â£'000 Beginning of year 2,033 1,732 Net cash (outflow)/inflow (765) 301 As at 31 December 2010 1,268 2,033 17. Reconciliation of profit before taxation to net cash inflow from operating activities 2010 2009 Â£'000 Â£'000 Profit on ordinary activities before taxation 7,235 3,587 Profit on realisation of investments (1,757) (1,350) Unrealised gains on investments (4,951) (2,434) Interest reinvested (201) - (Increase)/decrease in debtors (117) 1,234 Increase/(decrease) in creditors 23 (82) Net cash inflow from operating activities 232 955 18. Contingencies, guarantees and financial commitments At 31 December 2010 there were no contingent liabilities, guarantees or financial commitments of the Company. 19. Significant interests There are no interests of 20 per cent or more of any class of share capital. Further information on the significant interests is disclosed in the Annual report. 20. Financial instruments The Company's financial instruments comprise equity and fixed interest investments, cash balances and liquid resources including debtors and creditors. The Company holds financial assets in accordance with its investment policy to invest in a diverse portfolio of UK growth businesses, whether unquoted or traded on AIM. Fixed asset investments (see note 9) are valued at fair value. For 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 21 to 24. 21. Market risk Market risk embodies the potential for both loss and gains and includes interest rate risk and price risk. The Company's strategy on the management of investment risk is driven by the Company's investment objective as outlined in note 20. 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 Report of the Directors in the Annual Report, 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 listed 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 9. 25 per cent (2009: 25 per cent) of the Company's investments are listed on the London Stock Exchange, traded on AIM, NYSE or invested through Wood Street Microcap Fund. A 5 per cent increase in stock prices as at 31 December 2010 would have increased the net assets attributable to the Company's shareholders and the total profit for the year by Â£819,000 (2009: Â£636,000); 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. 48 per cent (2009: 50 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 2010 would have increased the net assets attributable to the Company's shareholders and the total profit for the year by Â£1,537,000 (2009: Â£1,264,000); 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. 22. Interest rate risk At 31 December 2010 Â£9,387,000 (2009: Â£7,256,000) 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 2010 Â£ 17,611,000 (2009: Â£19,226,000) fixed rate loan notes were held by the Company. The weighted average effective interest rate for the loan note securities is 8.48 per cent as at 31 December 2010 (2009: 8.28 per cent). Due to complexity of the instruments and uncertainty surrounding timing 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: 2010 2009 Weighted Weighted Total Weighted average Total Weighted average fixed average time for fixed average time for rate interest which rate rate interest which rate portfolio rate is fixed portfolio rate is fixed Â£'000 % days Â£'000 % days Fixed rate Fixed interest 9,387 0.5 12 7,256 0.7 21 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 2010 (2009: 0.5 per cent). 2010 2009 Â£'000 Â£'000 Floating rate OEIC 6,900 5,700 Cash on deposit 1,268 2,033 23. Credit risk Credit risk is the risk that a counterparty to a financial instrument will 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: 2010 2009 Â£'000 Â£'000 Investments in fixed rate instruments 9,387 7,256 Investments in floating rate instruments 6,900 5,700 Cash and cash equivalents 1,268 2,033 Interest, dividends and other receivables 461 349 18,016 15,338 Credit risk arising on fixed interest instruments is mitigated by investing in UK Government Stock. Credit risk arising on floating rate instruments is mitigated by investing 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 21. 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 for further mitigate this risk. Credit risk on fixed interest investments in unlisted companies is managed as part of the Company's main investment management procedures. All the assets of the Company which are traded on a recognised exchange are held by JPM, the Company's custodian. The Board monitors the Company's risk by reviewing the custodian's internal control reports as described in the Corporate Governance section of the Annual Report. Substantially all of the cash held by the Company is held by JPM. The Board monitors the Company's risk by reviewing regularly JPM's internal control reports as previously described. Should the credit quality or the financial position of JPM deteriorate significantly the Investment Manager will seek to move the cash holdings to another bank. There were no significant concentrations of credit risk to counterparties at 31 December 2010 or 31 December 2009. No individual investment exceeded 8.8 per cent of the net assets attributable to the Company's shareholders at 31 December 2010 (2009: 10.7 per cent). 24. 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 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 2010 these investments were valued at Â£17,555,000 (2009: Â£14,989,000). 25. Related parties Related party transactions include Management, Secretarial, Accounting and Performance fees payable to the Manager, ISIS EP LLP, as disclosed in notes 4 and 5, and fees paid to the Directors as disclosed in note 5. In addition, the Manager operates a Co-Investment Scheme, detailed in the Report of the Directors in the Annual Report, whereby employees of the Manager are entitled to participate in certain unquoted investments alongside the Company. 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 Wednesday, 6 April 2011 at 11am at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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