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Octopus VCT 3 plc (OVC3)

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Thursday 06 December, 2012

Octopus VCT 3 plc

Octopus VCT 3 plc : Final Results

Octopus VCT 3 plc : Final Results

Octopus VCT 3 plc

Final Results

6 December 2012

Octopus VCT 3 plc, managed by Octopus Investments Limited, today announces the final results for the period ended 31 August 2012.

These results were approved by the Board of Directors on 6 December 2012.

You may, in due course, view the Annual Report in full at www.octopusinvestments.com.

Chairman's Statement

Introduction
I am pleased to present the first Annual Report of Octopus VCT 3 plc (the Company) for the period ended 31 August 2012.

Performance
During the period the Net Asset Value (NAV) of the Company has declined from 94.5 pence per share at inception to 93.6 pence per share, a negative return of 1.0%. This decline is largely due to the initial start up costs of the Company, together with the standard running costs, that are capped at 2.15% of the Company's net assets, that outweigh any income or capital gains. This is expected at this stage of the Company's life.

The remainder of the decline in the NAV is due to a write down in the valuation of Kushida Power Limited. This investee company was set up to build and own a solar plant but it is now the Board's view that the money invested will make a better return as non-qualifying loans issued from Octopus VCT 3 plc. The company is therefore being wound down with money invested being returned in full to Octopus VCT 3 plc, less approximately £36,000 in costs. The money returned from the disposal of Kushida Power Limited will be used for non-qualifying loans which are expected to generate improved returns for the VCT. The remaining investments are sufficient to ensure that the VCT satisfies the 70% qualifying test.

Going forward, the running costs should be covered by the income generated from investments. Over the longer term, once the underlying portfolio of investments is completed, the Company's NAV will be linked increasingly to the value of the investments in the portfolio companies.

Investment Portfolio

The Company was fully invested as at 31 August 2012 having made several investments in the period, all of which were into the Solar renewable energy sector. These investments are discussed in more detail in the Investment Manager's Review on pages x to x. At the period end, all of these investments, except Kushida Power Limited, remained held at cost as they were made less than twelve months ago, and therefore cost is considered to be a reasonable approximation to fair value at the balance sheet date.

The Company's portfolio consists entirely of unquoted investments.

 

Investment Policy

The Company has invested, and will continue to invest, into a portfolio of unquoted companies where the focus will be predominantly in the solar sector. These solar investments will typically be 1-5 Mega Watt solar farms in the UK which either benefit from UK Government Feed In Tariffs or Renewable Obligation Certificates.

VCT Qualifying Status

PricewaterhouseCoopers LLP provides the Board and Investment Manager with advice concerning ongoing compliance with HMRC rules and regulations concerning VCTs.  The Board has been advised that the Company is compliant with the conditions laid down by HMRC for maintaining provisional approval as a VCT. 

A key requirement is to achieve a 70% qualifying investment level prior to 31 August 2014.  Encouragingly, as at 31 August 2012, 96% of the portfolio, as measured by HMRC rules, was invested in VCT qualifying investments. Once Kushida Power Limited is wound down this will be 86%. In light of this, the Board continues to be confident that the 70% target will be maintained through to the required date.

Annual General Meeting

I look forward to meeting as many shareholders as possible at our first Annual General Meeting on Thursday, 24 January 2013 to be held at Manor House, Howbery Park, Wallingford, Oxfordshire, OX10 8BA. The AGM will start at 2.00 p.m. and will include a tour of a local solar park. I hope our investors will take up this opportunity to experience an example of a solar site and benefit from being able to see an illustration of where their money has been invested.

Outlook
There remains uncertainty in the UK about the sustainability of the economic recovery, and the outlook for the public finances and inflation. However, whilst your Investment Manager will conduct the management of the Company with this in mind, the investments made to date are largely independent of the wider macro-economic environment. In particular, the income from the solar plants is index linked and guaranteed for at least 20 years.

Against this background your Board and Investment Manager remain confident that the Company will achieve its objective of providing shareholders with a sustained and predictable level of income.

Raymond Greenshields
Chairman
6 December 2012

Investment Manager's Review

Personal Service
At Octopus we have a dual focus, on managing your investments and keeping you informed throughout the investment process.  We are committed to providing our investors with regular and open communication. Our updates are designed to keep you informed about the progress of your investment. During this time of economic upheaval, we consider it particularly important to be in contact with our investors. We are working hard to manage your money in the current climate.

Octopus was established in 2000 and has a strong commitment to both smaller companies and to VCTs.  We currently manage 13 VCTs, including this VCT, and currently have over £2.8 billion of funds under management.  Octopus has over 200 employees and was voted 'Best VCT Provider of the Year' by the financial adviser community four years consecutively.

Portfolio Performance

As at 31 August 2012 the NAV stood at 93.6 pence per share, compared to 94.5 pence per share at inception. This decrease is expected at the company's infancy stage, as fixed running costs of the VCT exceed its income stream.

Portfolio Review

In-line with the Company's mandate, large investments have been made in renewable energy companies that construct and operate solar plants which benefit from the Government's incentives for renewable energy. Five of the current portfolio of eight companies are registered to receive income from the Feed In Tariffs at rates that applied before 1 August 2012, when the government reduced the tariffs. Two further investments in the current pipeline and any future investments are expected to be 1-5 Mega Watt solar farms in the UK which attract the benefit of Renewable Obligation Certificates ("ROCs").

Except for a small decrease in the fair value of Kushida Power Limited, there has been no change in the valuation of the current portfolio companies as they have all been made within the last twelve months and there are no reasons that indicate there should be any changes to their fair value at the balance sheet date.

Outlook

We expect the full FIT accreditation from Ofgem for the first five plants within the next few weeks, at which point these companies will start to receive income that is currently being accrued. We remain cautious about the remaining investments and continue to prepare and plan for potential issues concerning the portfolio and future investments. However, the majority of the investments made to date are largely unaffected by the macroeconomic climate and we remain cautiously optimistic that your Company will be able to make the expected dividend payments of 5p per annum from next year.

If you have any questions on any aspect of your investment, please call one of the team on 0800 316 2349.

Matt Setchell
Octopus Investments Limited
6 December 2012

Investment Portfolio

Valuation Methodology

Initial measurement
Financial assets are measured at fair value. The initial best estimate of fair value of a financial asset that is either quoted or not quoted in an active market is the transaction price (i.e. cost).

In accordance with the International Private Equity and Venture Capital (IPEVC) valuation guidelines investments made within 12 months are usually kept at cost unless performance indicates that fair value has changed.

If you would like to find out more regarding the IPEVC valuation guidelines, please visit their website at: www.privateequityvaluation.com.

Subsequent measurement

Future estimates of fair value will be based on the Investment Manager's assessment of market value. This is normally calculated by assuming the rate of return an incoming investor may require and using this to calculate the price they might pay to buy a particular plant.

Review of Investments

During the period, the Company made eight investments amounting to £7.4 million, all in the solar renewable energy sector.  These are unquoted investments in ordinary shares with full voting rights alongside loan notes.

Unquoted investments are valued in accordance with the accounting policy set out on page x, which takes account of current industry guidelines for the valuation of venture capital portfolios and is compliant with IPEVC valuation guidelines and current financial reporting standards. 

Investment Portfolio

Adala Solar Limited
Adala Solar constructed a 1.2MW solar site near Congresbury in Somerset in July 2012. The site is awaiting formal FIT accreditation which is being processed by Ofgem. Therefore no revenues have been received to date. It is anticipated that FIT Accreditation will be achieved in December with the first FIT revenues being received in February 2013.

Akycha Power Limited
Akycha Power constructed a 1.0MW solar site near Newport on the Isle of Wight in July 2012. The site is awaiting formal FIT accreditation which is being processed by Ofgem. Therefore no revenues have been received to date. Although there was some initial uncertainly around the FIT qualification for this site, no issues have arisen so far in the application process. It is anticipated that FIT Accreditation will be achieved in December with the first FIT revenues being received in February 2013.

Daubree Energy Limited
Daubree Energy constructed a 1.2MW solar site near Cullompton in Devon in July 2012. The site is awaiting formal FIT accreditation which is being processed by Ofgem. Therefore no revenues have been received to date. It is anticipated that FIT Accreditation will be achieved in December with the first FIT revenues being received in February 2013.

Debes Energy Limited
Debes Energy constructed a 1.2MW solar site near Tiverton in Devon in July 2012. The site is awaiting formal FIT accreditation which is being processed by Ofgem. Therefore no revenues have been received to date. It is anticipated that FIT Accreditation will be achieved in December with the first FIT revenues being received in February 2013.

Delambre Energy Limited
Delambre Energy is currently undertaking due diligence on a potential solar site which it may acquire. It is anticipated that once built, it will qualify for ROCs and the first revenues will be received in mid 2013.

Huygens Energy Limited
Huygens Energy is currently undertaking due diligence on a potential solar site which it may acquire. It is anticipated that once built, it will qualify for ROCs and the first revenues will be received in mid 2013.

Kushida Power Limited
Kushida Power is in the process of being wound down with funds due to be returned to Octopus VCT 3 plc. These funds will be used elsewhere as non-qualifying loans issued by Octopus VCT 3 plc.

Lacaille Energy Limited
Lacaille Energy constructed a 1.1MW solar site near Crediton in Devon in July 2012. The site is awaiting formal FIT accreditation which is being processed by Ofgem. Therefore no revenues have been received to date. It is anticipated that FIT Accreditation will be achieved in December with the first FIT revenues being received in February 2013.

Shareholder Information and Contact Details

The Company was incorporated on 17 August 2011 with the first allotment of equity taking place on 6 March 2012. The Offer for new subscriptions for shares was open until 19 June 2012 by which time the Offer had raised a total amount of £8.2 million (£7.8 million net of upfront costs). The Company invests primarily in renewable energy companies that construct and operate solar sites.

Venture Capital Trusts

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

  • up to 30% up-front income tax relief;

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

The Company has been provisionally approved as a VCT by HMRC.  In order to achieve approval the Company must comply with certain requirements on a continuing basis: 

  • at least 70% of the Company's investments must comprise 'qualifying holdings'* (as defined in the legislation) by 31 August 2014;
  • at least 30% of the 70% of qualifying holdings must be invested into Ordinary shares with no preferential rights (from April 2012 this changed to 70% for new investments);
  • no single investment made can exceed 15% of the total company value; and
  • a minimum of 10% of each Qualifying Investment must be in Ordinary shares with no preferential rights.

*A 'qualifying holding' consists of up to £5 million invested in any one year in new shares or securities in an unquoted UK company (or companies listed on AIM) which is carrying on a qualifying trade and whose gross assets do not exceed a prescribed limit at the time of investment.  The definition of a 'qualifying trade' excludes certain activities such as property investment and development, financial services and asset leasing.

Share Price
The Company's share price can be found on various financial websites including www.londonstockexchange.com, with the following TIDM/EPIC code:

Ordinary shares
TIDM/EPIC code           OCV3
Latest share price (6 December 2012) 100p per share

                                               
Buying and Selling Shares
The Company's Ordinary shares can be bought and sold in the same way as any other company quoted on the London Stock Exchange via a stockbroker. There may be tax implications in respect of selling all or part of your holdings, so shareholders should contact their independent financial adviser if they have any queries.

The Company operates a policy of buying its own shares for cancellation as they become available, and envisages that purchases will be made at a 10% discount to the prevailing net asset value. The Company is, however, unable to buy back shares directly from shareholders. If you are considering selling your shares or trading in the secondary market, you can contact Panmure Gordon (UK) Limited.

Panmure Gordon (UK) Limited is able to provide details of close periods (when the Company is prohibited from buying in shares) and details of the price at which the Company has bought in shares. Panmure Gordon (UK) Limited can be contacted as follows:

Chris Lloyd       020 7886 2716               [email protected]

Paul Nolan        020 7886 2717               [email protected]

Notification of Change of Address
Communications with shareholders are mailed to the registered address held on the share register. In the event of a change of address or other amendment this should be notified to the Company's registrar, Capita Registrars, as well as Octopus under the signature of the registered holder. Their contact details are provided on page x.

Other Information for Shareholders
Previously published documents are available for viewing on the Investment Manager's website at www.octopusinvestments.com.  All other statutory information will also be found there.

Warning to Shareholders
Many companies are aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas based 'brokers' who target UK shareholders offering to sell them what often turn out to be worthless or high risk shares in US or UK investments. They can be very persistent and extremely persuasive. Shareholders are therefore advised to be very wary of any unsolicited advice, offer to buy shares at a discount, or offer for free company reports.

Please note that it is very unlikely that either the Company or Octopus would make unsolicited telephone calls to shareholders and that any such calls would relate only to official documentation already circulated to shareholders and never in respect of investment advice.

If you are in any doubt about the authenticity of an unsolicited phone call, please call Octopus at the number provided at the back of this report.

Details of Directors

Raymond Greenshields (Non-Executive Chairman)
Ray is a non-executive director and chairman of the Board Risk Committee of Close Brothers Group plc and adviser to Standard Life Assurance. Ray held chief executive and managing director positions at AMP, Zurich Financial Services and Barclays Bank and has served as director and chairman on the boards of a number of companies and industry associations including AMP, The Investment and Financial Services Association of Australia, Zurich Financial Services (UKISA), Threadneedle Investments, Barclays Wealth, Barclays Stockbrokers and Standard Life Assurance.

Ian Leaman (Non-Executive Director)
Ian is a chartered accountant who qualified with Deloitte (then Touche Ross). He has held various financial management positions in industry and has concentrated for the last 20 years of his career on an advisory role in the UK SME market. Ian is Director of and Chief Financial Officer of Enteq Upstream plc, whose shares are listed on AiM. He is vice chairman of the Corporate Finance Faculty at the Institute of Chartered Accountants in England and Wales.

Katrina Johnston (Non-Executive Director)
Katrina joined the specialist finance team of Octopus in January 2011 and is responsible for sourcing and completing deals in renewable energy technologies. Having started her career at IBM, Katrina spent eleven years working in the solar photovoltaic industry with Solar Century, a leading solar energy company, where she was involved in raising significant venture capital investment and structuring and negotiating large value project finance deals. She is a non-executive director of Demand Logic Limited, a start-up company focused on demand response in buildings. Katrina was awarded an MBA with distinction from London Business School and has a degree in Mathematical Statistics and Operational Research from Exeter University.

Directors' Responsibilities Statement

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations.

Company law requires the Directors to prepare financial statements for each financial year which they must not approve unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company for that period. Under that law the Directors have elected to prepare financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws).

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

  • select suitable accounting policies and then apply them consistently;
  • make judgments and accounting estimates that are reasonable and prudent;
  • state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
  • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In so far as each of the Directors is aware:

·            there is no relevant audit information of which the Company's auditor is unaware; and
·            the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

To the best of their knowledge:

  • the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
  • the management report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

The financial statements are published at www.octopusinvestments.com, a website maintained by Octopus. The maintenance and integrity of the website is, so far as it relates to the Company, the responsibility of Octopus. The work carried out by the auditor does not involve considerations of the maintenance and integrity of the website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the accounts since they were originally presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the accounts differ from legislation in other jurisdictions.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

On Behalf of the Board

Raymond Greenshields
Chairman
6 December 2012

Income Statement

Period from 17 August 2011 to 31 August 2012
RevenueCapitalTotal
Notes£'000£'000£'000
Loss on valuation of fixed asset investments 8-(36)(36)
Other income 2150-150
Management fees (12)(36)(48)
Other expenses 3(143)-(143)
Loss on ordinary activities before tax(5)(72)(77)
Taxation on return on ordinary activities ---
Return on ordinary activities after tax(5)(72)(77)
Earnings per share - basic and diluted(0.1)p(2.1)p(2.2)p
  • The 'Total' column of this statement is the profit or loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies
  • All revenue and capital items in the above statement derive from continuing operations
  • The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds

The Company has no recognised gains or losses other than the results for the period as set out above.

The accompanying notes form an integral part of the financial statements.

Reconciliation of Movements in Shareholders' Funds
Period from
17 August2011
to 31 August 2012
£'000
Shareholders' funds at start of period -
Loss on ordinary activities after tax (77)
Issue of equity (net of expenses) 7,909
Buy back of shares (100)
Shareholders' funds at end of period 7,732

The accompanying notes form an integral part of the financial statements.

Balance Sheet
As at 31 August 2012
Notes£'000£'000
Fixed asset investments* 87,356
Current assets:
Debtors 9152
Cash at bank 307
459
Creditors: amounts falling due within one year 10(83)
Net current assets 376
Net assets7,732
Called up equity share capital 1183
Share Premium 1299
Special Distributable Reserve 127,626
Capital Redemption Reserve 121
Capital Reserve - Unrealised 12(36)
Capital Reserve - Realised 12(36)
Revenue reserve 12(5)
Total shareholders' funds7,732
Net asset value per share793.6p

*Held at fair value through profit or loss

The statements were approved by the Directors and authorised for issue on 6 December 2012 and are signed on their behalf by:

Raymond Greenshields
Chairman
Company No: 07744056

The accompanying notes form an integral part of the financial statements.

Cash Flow Statement
Period from 17 August 2011 to 31 August 2012
£'000
Net cash outflow from operating activities(110)
Financial investment:
Purchase of fixed asset investments 8(7,392)
Management of liquid resources:
Financing:
Issue of shares 8,310
Cost of issue of shares (401)
Buy back of shares (100)
Increase in cash resources at bank307

The accompanying notes form an integral part of the financial statements.

Reconciliation of Return before Taxation to Cash Flow from Operating Activities
Period from 17 August 2011 to 31 August 2012
£'000
Loss on ordinary activities before tax (77)
Increase in debtors (152)
Increase in creditors 83
Loss on valuation of fixed asset investments 36
Outflow from operating activities(110)

Reconciliation of Net Cash Flow to Movement in Net Funds
Period from 17 August 2011 to 31 August 2012
£'000
Increase in cash resources at bank 307
Net funds at 31 August 2012307

Net Funds at 31 August comprised:

Period from 17 August 2011 to 31 August 2012
£'000
Cash at bank 307
Net Funds at 31 August 2012307

The accompanying notes form an integral part of the financial statements.

Notes to the Financial Statements

1.         Principal accounting policies
           
Basis of accounting
The financial statements have been prepared under the historical cost convention, except for the measurement at fair value of certain financial instruments, and in accordance with UK Generally Accepted Accounting Practice (UK GAAP), and the Statement of Recommended Practice (SORP) 'Financial Statements of Investment Trust Companies' (revised 2009). A summary of the principal accounting policies is set out below.

The Company's business activities and the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and Investment Manager's Review on pages x to x. Further details on the management of financial risk may be found in note 13 to the Financial Statements.

The Board receives regular reports from the Investment Manager and the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The assets of the company consist of cash, which are readily realisable (4% of net assets) and accordingly, the company has adequate financial resources to continue in operational existence for the foreseeable future.  Thus, as no material uncertainties leading to significant doubt about going concern have been identified, it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

The Company presents its income statement in a three column format to give shareholders additional detail of the performance of the Company, split between items of a revenue or capital nature.

The preparation of the financial statements requires management to make judgements and estimates that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Estimates and assumptions mainly relate to the fair valuation of the fixed asset investments, particularly unquoted investments. Estimates are based on historical experience and other assumptions that are considered reasonable under the circumstances. The estimates and the assumptions are under continuous review with particular attention paid to the carrying value of the investments.

Capital valuation policies are those that are most important to the depiction of the Company's financial position and that require the application of subjective and complex judgements, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. The critical accounting policies that are declared will not necessarily result in material changes to the financial statements in any given period but rather contain a potential for material change. The main accounting and valuation policies used by the Company are disclosed below.  Whilst not all of the significant accounting policies require subjective or complex judgements; the Company considers that the following accounting policies should be considered critical.

The Company has designated all fixed asset investments as being held at fair value through profit or loss; therefore all gains and losses arising from investments held are attributable to financial assets held at fair value through profit or loss.  Accordingly, all interest income, fee income, expenses and impairment losses are attributable to assets designated as being at fair value through profit or loss. 

Current asset investments comprising money market funds and deposits are held at fair value through profit or loss. Cash and short term deposits are held at amortised cost.

Investments are regularly reviewed to ensure that the fair values are appropriately stated.  Quoted investments are valued in accordance with the bid-price on the relevant date, unquoted investments are valued in accordance with current International Private Equity and Venture Capital (IPEVC) valuation guidelines, although this does rely on subjective estimates such as appropriate sector earnings multiples, forecast results of investee companies, asset values of subsidiary companies and liquidity or marketability of the investments held.

Although the Company believes that the assumptions concerning the business environment and estimate of future cash flows are appropriate, changes in estimates and assumptions could require changes in the stated values. This could lead to additional changes in fair value in the future.

Investments
Purchases and sales of investments are recognised in the financial statements at the date of the transaction (trade date).

These investments will be managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy and information about them has to be provided internally on that basis to the Board. Accordingly, as permitted by FRS 26, the investments will be designated as fair value through profit or loss (FVTPL) on the basis that they qualify as a group of assets managed, and whose performance is evaluated, on a fair value basis in accordance with the documented investment strategy. The Company's investments are measured at subsequent reporting dates at fair value, with the holding gains and losses recorded in the income statement each year. In accordance with the investment strategy, the investments are held with a view to long-term capital growth and it is therefore possible that individual holdings may increase in value to a point where they represent a significantly higher proportion of total assets than the original cost.

In the case of unquoted investments, fair value is established by using measures of value such as the price of recent transactions, earnings multiple and net assets. This is consistent with IPEVC valuation guidelines.

Gains or losses arising from the changes in fair value of investments at the period end are recognised as part of the capital return within the income statement and allocated to the capital reserve - investment holding gains/(losses). 

In the preparation of the valuations of assets the Directors are required to make judgements and estimates that are reasonable and incorporate their knowledge of the performance of the investee companies.

Other income
The majority of Investment income is derived from loan interest on loan notes issued in the period. The remaining Investment income includes interest earned on bank balances and includes income tax withheld at source. 

Fixed returns on debt and money market funds are recognised on a time apportionment basis so as to reflect the effective yield; provided there is no reasonable doubt that payment will be received in due course.

Expenses
All expenses are accounted for on an accruals basis.  Expenses are charged wholly to revenue with the exception of the investment management fee, which, if payable, is to be charged 25% to the revenue account and 75% to the capital reserve to reflect, in the Directors' opinion, the expected long-term split of returns in the form of income and capital gains respectively from the investment portfolio.

The transaction costs incurred when purchasing or selling assets are written off to the income statement in the period that they occur.

Revenue and capital
The revenue column of the income statement includes all income and revenue expenses of the Company.  The capital column includes gains and losses on disposal of investments and on holding investments.  Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the income statement.

Taxation
Corporation tax payable is applied to profits chargeable to corporation tax, if any, at the current rate. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue return on the 'marginal' basis as recommended in the SORP.
                  
Deferred tax is recognised on an undiscounted basis in respect of all timing differences that have originated but not reversed at the balance sheet date or where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less tax. This is with the exception that deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Cash and liquid resources
Cash, for the purposes of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand.  Liquid resources are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market.  Liquid resources comprise term deposits of less than one year (other than cash), government securities, investment grade bonds and investments in money market managed funds.

Loans and receivables
The Company's loans and receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method.

Financing strategy and capital structure
We define capital as shareholders' funds and our financial strategy in the medium term is to manage a level of cash that balances the risks of the business with optimising the return on equity.  The Company currently has no borrowings nor does it anticipate that it will drawdown any borrowing facilities in the future to fund the acquisition of investments.

The company does not have any externally imposed capital requirements.

The value of the managed capital is indicated in note 12. The Board considers the distributable reserves and the total return for the year when recommending a dividend. In addition, the Board is authorised to make market purchases up to a maximum of 5% of the issued Ordinary share capital of the Company in accordance with Special Resolution 9 in order to maintain sufficient liquidity in the Company.

Capital management is monitored and controlled using the internal control procedures set out on page x of this report. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.

Financial instruments
The Company's principal financial assets are its investments and the policies in relation to those assets are set out above. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited direct to equity.

Dividends
Dividends payable are recognised as distributions in the financial statements when the Company's liability to make payment has been established.  This liability is established for interim dividends when they are paid, and for final dividends when they are approved by the shareholders. For the avoidance of doubt, no dividend has been proposed for the period ended 31 August 2012.

2.         Other income

Period ended
31 August 2012
£'000
Loan interest receivable * 146
Interest receivable on bank balances 4
150

*for efficient structuring, investments are made with a 30% shareholder loan which facilitates movement of cash from the investee company to the VCT, in the form of loan interest, to allow dividends to be paid.

3.         Other expenses

Period ended
31 August 2012
£'000
Directors' remuneration 39
Fees payable to the Company's auditor for the audit of the financial statements 7
Fees payable to the Company's auditor for other services - tax compliance 1
Accounting and administration services and company secretarial services 15
UK Listing Fees 33
Trail commission 20
Registrars Fees 6
Legal Fees 9
Other expenses 13
143

Total annual running costs are capped at 2.15% of net assets (excluding irrecoverable VAT, exceptional costs and trail commission).  For the period to 31 August 2012 the running costs, as defined in the prospectus, were 2.15% of net assets.

4.         Directors' remuneration

Period ended
31 August 2012
£'000
Directors' emoluments
Raymond Greenshields (Chairman)20
Ian Leaman 15
Katrina Johnston (paid to Octopus Investments Limited) 4
39

None of the Directors received any other remuneration or benefit from the Company during the period.  The Company has no employees other than non-executive Directors.  The average number of non-executive Directors in the period was three.

5.         Tax on ordinary activities
The corporation tax charge for the period was £nil.

The current rate of tax is the small companies' rate of corporation tax at 20.0%.
                                                                                                                                                           

Current tax reconciliation: 31 August 2012
£'000
Loss on ordinary activities before tax (5)
Current tax at 20.0% (1)
Ineligible expenses 1
Total current tax charge -

Approved VCTs are exempt from tax on capital gains within the Company.  Since the Directors intend that the Company will continue to conduct its affairs so as to achieve approval as a VCT, no current deferred tax has been provided in respect of any capital gains or losses arising on the revaluation or disposal of investments.

6.         Earnings per Share
The total, revenue and capital earnings per share is based on 3,520,883 Ordinary shares, being the weighted average number of Ordinary shares in issue during the period.

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

7.        Net asset value per share
The calculation of net asset value per share as at 31 August 2012 is based on net assets of £7,732,000 and 8,263,597 Ordinary shares in issue at that date.

8.         Fixed asset investments
The Company has adopted the amendment to FRS 29 regarding financial instruments that are measured in the balance sheet at fair value; this requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

Level 1: quoted prices in active markets for identical assets and liabilities. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held is the current bid price. These instruments are included in level 1 and comprise AIM-listed investments classified as held at fair value through profit or loss. The Company held no such investment in the current period.

Level 2: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable data where it is available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. The Company held no such investment in the current period.

Level 3: the fair value of financial instruments that are not traded in an active market (for example investments in unquoted companies) is determined by using valuation techniques such as earnings multiples. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.

There have been no transfers between these classifications in the period. The change in fair value for the current period is recognised through the income statement.

All items held at fair value through profit or loss were designated as such upon initial recognition. Movements in investments at fair value through profit or loss during the period to 31 August 2012 are summarised below.

Level 3:
Unquoted investments
Total investments
31 August 201231 August 2012
£'000£'000
Purchases at cost 7,392 7,392
Disposals - -
Profit/(loss) on realisation of investments - current period - -
Revaluation in period (36) (36)
Valuation at 31 August 20127,3567,356
Book cost at 31 August 2012: 7,392 7,392
Revaluation to 31 August 2012: (36) (36)
Valuation at 31 August 20127,3567,356

Further details in respect of the methods and assumptions applied in determining the fair value of the investments are disclosed in the Investment Manager's Review and within the principal accounting policies in note 1.

At 31 August 2012, there were no commitments in respect of investments not yet completed.

9.         Debtors

31 August 2012
£'000
Prepayments 6
Accrued income 146
152

10.        Creditors: amounts falling due within one year

31 August 2012
£'000
Accruals 83
83

11.        Share capital

31 August 2012
£'000
Allotted and fully paid up:
8,263,597 ordinary shares of 1.0p 83

The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective as set on page x.  The Company is not subject to any externally imposed capital requirements.

We define capital as shareholders' funds and our financial strategy in the medium term is to manage a level of cash that balances the risks of the business with optimising the return on equity.  The Company currently has no borrowings nor does it anticipate that it will drawdown any borrowing facilities in the future to fund the acquisition of investments.

Capital management is monitored and controlled using the internal control procedures set out on page x of this report. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.

The Company issued 8,363,597 Ordinary shares during the period at a price of 100p per share and 2 Ordinary shares at a price of 1p per share on incorporation. The share premium arising on these shares totalled £7,825,624 after the company incurred total share issue costs of £401,323. The Company repurchased 100,000 Ordinary shares for cancellation during the period.

On 17 August 2011, the Company made an allotment of 50,000 redeemable preference shares of £1 each. These shares were allotted at £1 per share and partly paid up at £0.25 per share. These were subsequently redeemed on 26 April 2012 out of the proceeds of a further share issue.

12.        Reserves

Share Capital
£'000
Share premium
£'000
Special Distributable Reserves
£'000
Capital Redemption Reserves
£'000
Capital reserve - unrealised
£'000
Capital reserve - realised
£'000
 Revenue Reserves
£'000
As at date of incorporation -------
Issue of equity 97 8,226 - - - - -
Cost of issue of equity - (401) - - - - -
Buy back of shares (14) - (100) 1 - - -
Management fees allocated as capital expenditure - - - - - (36) -
Loss on fair value of investments - - - - (36) - -
Loss on ordinary activities after tax - - - - - - (5)
Cancellation of Share Premium Account - (7,726) 7,726 - - - -
Balance as at 31 August 201283997,6261(36)(36)(5)

When the Company re-values its investments during the period, any gains or losses arising are credited/ charged to the income statement. Changes in fair value of investments held are then transferred to the 'capital reserve - unrealised'. When an investment is sold, any balance held on the 'capital reserve - unrealised' is transferred to the 'capital reserve - realised' as a movement in reserves.

Following the Company's petition which was heard on 18 June 2012, the Companies Court ordered that the special resolution passed by the shareholders on 31 August 2011 to effect the cancellation of the share premium account to be confirmed. The Order relating to the same was duly registered by the Registrar of Companies on 27 June 2012. The purpose of the cancellation was to create a reserve which will be capable of being used by the Company for the purpose of making repurchases of its own shares in the market with a view to narrowing the discount at which the Company's Ordinary Shares trade to net asset value and to also create a reserve from which dividends can be paid in future.

13.        Financial instruments and risk management
The Company's financial instruments comprise equity and fixed interest investments and cash balances and liquid resources including debtors and creditors. The Company intends to hold financial assets in accordance with its investment policy of investing mainly in a portfolio of VCT qualifying unquoted securities whilst holding a proportion of its assets in cash or near-cash investments in order to provide a reserve of liquidity.

 

Classification of financial instruments

The company held the following categories of financial instruments, all of which are included in the balance sheet at fair value, at 31 August 2012:

31 August 2012
£000
Assets at fair value through profit or loss
Fixed asset investments 7,356
Total7,356
Cash at bank 307
Other debtors 6
Accrued income 146
Total459
Liabilities at amortised cost
Accruals and other creditors (83)
Total7,732

Fixed asset investments (see note 8) are carried at fair value. Unquoted investments are carried at fair value as determined by the directors in accordance with current venture capital industry guidelines. The fair value of all other financial assets and liabilities is represented by their carrying value in the balance sheet.  The Directors believe that the fair value of the assets held at the period end is equal to their book value.

In carrying on its investment activities, the Company is exposed to various types of risk associated with the financial instruments and markets in which it invests. The most significant types of financial risk facing the Company are price risk, interest rate risk, credit risk and liquidity risk. The Company's approach to managing these risks is set out below together with a description of the nature and amount of the financial instruments held at the balance sheet date.

Market risk
The Company's strategy for managing investment risk is determined with regard to the Company's investment objective, as outlined on page x. The management of market risk is part of the investment management process and is a central feature of venture capital investment. The Company's portfolio is managed with regard to the possible effects of adverse price movements and, with the objective of maximising overall returns to shareholders. Investments in unquoted companies, by their nature, usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by diversifying the portfolio across business sectors and asset classes. The overall disposition of the Company's assets is regularly monitored by the Board.

Details of the Company's investment portfolio at the balance sheet date are set out on pages x and x.  An analysis of investments is given in note 8.

95.1% by value of the Company's net assets comprises investments in unquoted companies held at fair value.  A 10% overall increase in the valuation of the unquoted investments at 31 August 2012 would have increased net assets and the total return for the period by £735,600. An equivalent change in the opposite direction would have reduced net assets and the total return for the period by the same amount. 

Interest rate risk
Some of the Company's financial assets are interest-bearing, some of which are at variable rates.  As a result, the Company is exposed to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates.

Credit risk
There were no significant concentrations of credit risk to counterparties at 31 August 2012.  By cost, no individual investment exceeded 12.9% of the Company's net assets at 31 August 2012.

Credit risk is the risk that counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Investment Manager and the Board carry out a regular review of counterparty risk. The carrying values of financial assets represent the maximum credit risk exposure at the balance sheet date. 

At 31 August 2012 the Company's financial assets exposed to credit risk comprised the following:

31 August 2012
£000
Cash on deposit 307

Credit risk arising on the sale of investments is considered to be small due to the short settlement and the contracted agreements in place with the settlement lawyers.

The Company's interest-bearing current accounts are maintained with HSBC Bank plc.

Liquidity risk
The Company's cash is considered to be readily realisable as they are of high credit quality as outlined above. 

The Company's liquidity risk is managed on a continuing basis by the Investment Manager in accordance with policies and procedures laid down by the Board. The Company's overall liquidity risks are monitored on a quarterly basis by the Board. 

The Company maintains sufficient cash to pay accounts payable and accrued expenses.  At 31 August 2012 these investments were valued at £307,000.

14.        Post balance sheet events
A loan of £239,190 in relation to Kushida Power Limited was fully repaid including all interest on 20 September 2012.
Kushida Power Limited is in the process of being wound down with funds due to be returned to Octopus VCT 3 plc. These funds will be used elsewhere as non-qualifying loans issued by Octopus VCT 3 plc.

15.        Contingencies, guarantees and financial commitments
Provided that an intermediary continues to act for a shareholder and the shareholder continues to be the beneficial owner of the shares, intermediaries will be paid an annual trail commission of 0.5% of the initial net asset value. Trail commission of £20,000 was accrued during the period and there was £nil outstanding at the period end.

There were no contingencies, guarantees or financial commitments as at 31 August 2012.

16.        Related party transactions
Katrina Johnston, a non-executive director of Octopus VCT 3 plc during the period ended 31 August 2012, is an employee of Octopus Investments Limited. Octopus VCT 3 plc paid Octopus Investments Limited £3,648 in the period for Katrina Johnston's Director's fees. However Katrina Johnston was not paid anything personally in the period as this was considered to be a normal part of her role as an Octopus Investments Limited employee.

Octopus provides investment management, administration & accounting services and company secretarial services to the Company under a management agreement which runs for a period of five years with effect from 17 August 2011 and may be terminated at any time thereafter by not less than twelve months' notice given by either party.  No compensation is payable in the event of terminating the agreement by either party, if the required notice period is given.  The fee payable, should insufficient notice be given, will be equal to the fee that would have been paid should continuous service be provided.

Octopus will be entitled to receive and annual management fee of 1.25% of net funds raised. However, it is agreed that Octopus will reduce its annual management fee as necessary in order to avoid the fund exceeding its total expense cap of 2.15%. As a result, £48,000 was payable to Octopus in the period for management fees and there was £48,000 outstanding at the balance sheet date.

Octopus will also be entitled to receive annual accounting and administration fee and 0.3% of net funds raised. During the year £11,000 was paid to Octopus Investments Limited and there was £nil outstanding at the balance sheet date.

In addition, Octopus also provides Company secretarial services for an additional fee of £7,500 per annum.  During the year £4,000 was paid to Octopus Investments Limited and there was £nil outstanding at the balance sheet date. 

Octopus Investments Limited owns 25% of Lightsource Renewable Energy Limited. Lightsource managed the investments in the portfolio during the period.




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Source: Octopus VCT 3 plc via Thomson Reuters ONE

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