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Octopus VCT 3 plc (OVC3)

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Wednesday 11 December, 2013

Octopus VCT 3 plc

Octopus VCT 3 plc : Final Results

Octopus VCT 3 plc : Final Results

Octopus VCT 3 plc

Final Results

11 December 2013

Octopus VCT 3 plc, managed by Octopus Investments Limited, today announces the final results for the year ended 31 August 2013.

These results were approved by the Board of Directors on 11 December 2013.

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

Financial Summary

As at
31 August 2013
As at
31 August 2012
Net assets (£'000s)7,8187,732
Return on ordinary activities after tax (£'000s)86(77)
Net asset value (NAV) per share94.6p93.6p
Proposed final dividend for the year5.0pn/a

Key Dates

Annual General Meeting                29 January 2014 at 4.00 p.m.

Dividend Payment Date                                          12 February 2014

Half Yearly Results to 28 February 2014                 Announced April 2014

Chairman's Statement

Introduction
I am pleased to present the Annual Report of Octopus VCT 3 plc (the Company) for the year ended 31 August 2013.

Performance
During the period the Net Asset Value (NAV) of the Company has risen from 93.6 pence per share at 31 August 2012 to 94.6 pence per share at 31 August 2013, a positive return of 1.1%. This rise is largely due to the loan interest receivable by the Company exceeding the running costs, which are capped at 2.15% of the Company's net assets.

Going forward, the running costs should continue to be covered by the income generated from investments. However, due to the nature of the Company's investments, which have an estimated twenty five year life, together with the intention to pay an annual dividend it is anticipated that the NAV will fall over the life of the Company.

Dividend Policy and Dividend
In line with the dividend policy stated in the Prospectus your Board has proposed a final dividend of 5p per share in respect of the year ended 31 August 2013. This dividend, if approved by shareholders at the AGM, will be paid on 12 February 2014 to shareholders on the register on 10 January 2014.

Investment Portfolio
The Company has invested into a portfolio of unquoted companies with a focus in the solar sector. The Company was fully invested as at 31 August 2013 with the majority of its investments having been made in the period to 31 August 2012, all of which were into the Solar renewable energy sector. In the year to 31 August 2013, partial loan repayments were received from Adala Solar Limited and Akycha Power Limited for £125,000 and £250,000 respectively. Kushida Power Limited was fully disposed of in the year for proceeds of £764,000. Having written down the fair value of Kushida Power Limited by £36,000 in the period ended 31 August 2012 the disposal resulted in a modest gain in the year under review of £3,000. Proceeds from these disposals were used to fund non qualifying loan investments in Delambre Energy Limited for £395,000 and Huygens Energy Limited for £405,000.

These investments are discussed in more detail in the Investment Manager's Review. At the year end, all of these investments remained held at cost. 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.

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 2013, 82.3% of the portfolio, as measured by HMRC rules, was invested in VCT qualifying investments. The Board continues to be confident that the 70% target will be maintained through to and beyond the required date.

Annual General Meeting
I look forward to meeting as many shareholders as possible at our Annual General Meeting on Wednesday, 29 January 2014 to be held at 20 Old Bailey, London, EC4M 7AN. The AGM will start at 4.00 p.m.

Outlook
The Company has made satisfactory progress during the year and is now fully invested with a relatively stable outlook. While the main variable in the medium to longer term is uncertainty surrounding the wholesale electricity price achieved by each site, it is hoped that as the portfolio of sites matures, longer term contracts can be entered into to reduce operating costs and provide more certainty over returns.

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
11 December 2013

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.

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 £3.2 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 2013 the NAV stood at 94.6 pence per share, compared to 93.6 pence per share at 31 August 2012. This increase is as a result of the loan interest receivable by the Company exceeding the running costs.

Portfolio Review
All solar investments have now been made by the seven companies held within the portfolio. To add to the initial five sites built on the Feed In Tariff  in 2012, two additional sites were built and commissioned on Renewable Obligation Certificates  in March 2013.

The Feed-in-Tariff ('FiT') is one of the Government's support mechanisms for renewable energy generation. Accredited renewable energy generating plants are eligible to receive a payment for every kilowatt hour ('kWh') of electricity produced for a period of up to 25 years. The level of payment is dependent on the eligibility date of the generating station, its capacity, and the technology employed. The scheme is administered and paid for by utility companies who are nominated as FiT licensees. As of 1 August 2012 the Government reduced the FiT level for solar sites in the 250kWp to 5MWp range to below the value that could be received for generating ROCs.

Renewable Obligation Certificates ('ROCs') are the Government's primary support mechanism for large-scale renewable energy generation. ROCs are tradable green certificates issued to renewable generators for every megawatt hour ('MWh') of electricity that is produced for a period of up to 20 years. The number of ROCs issued per MWh (the 'Banding') is dependent on the technology and the eligibility date of the generating plant. Under the terms of the Renewables Obligation, utility companies have to purchase ROCs from renewable energy generators and present to OFGEM (who administer the scheme) a certain number of these certificates for every MWh of electricity they supply to end-users.

Accreditation of all sites has unfortunately taken longer than expected and, as of 31 August 2013, only four of the seven sites have received formal accreditation from Ofgem. This is partly due to the high volume of applications being processed due to the rapid growth in UK based solar. The remaining three accreditations are expected before the end of the calendar year, however it should be noted that revenue is still accrued from the first day of operation. Some of the solar assets have now reached the 12 month point since the start of operation. Each of the assets that have reached this milestone has performed broadly in line with expectations. There was lower than anticipated production over the winter months due to the inclement weather, but the good summer reversed this situation and performance ended on target for the year. The delays in getting accreditation mean that no FIT revenues had been received by the portfolio companies by 31 August 2013, however, the first cash revenues were received in November 2013.

The disposal of Kushida Power Limited in the year under review resulted in a small gain of £3,000, with the carrying value previously having been written down by £36,000 in the period ended 31 August 2012.  

Outlook
Now that all the main investments have been made each company within the portfolio should track against a relatively certain performance forecast, especially where solar sites have been operating for at least 12 months and underlying assumptions validated. Additionally, now that a number of the sites have been up and running for this first year, along with the fact that the UK solar industry is becoming more established and economies of scale are being gained, the aim is to negotiate new contracts for the operational side of the sites to reduce costs and therefore provide better value for the companies going forward. However, it should be noted that the key variable in the medium to longer term is the price at which the electricity generated by the sites can be sold on the wholesale market.

If you have any questions on any aspect of your investment, please call one of the team on 0800 316 2295.

Matt Setchell
Octopus Investments Limited
11 December 2013

Investment Portfolio

Valuation Overview

Due to the nature of assets owned by the portfolio companies being UK based solar sites with 25 year revenue streams, they are considered to be limited life assets which are expected to decrease in value over their productive life. This is because the Government backed revenue streams only extend to 25 years (for FiT projects), and the planning permission, lease length and design life of equipment also only last for 25 years. As the number of years of remaining production falls, the value of the assets is expected to decline. Therefore, after each dividend is paid out you should expect to see the NAV decrease at the following valuation.

However, it should be noted that, in addition to the expected decline over time, the NAV may fluctuate slightly year-on-year. This is because the valuation is also based on the revenues from selling the electricity generated by the sites as well as the underlying performance of each solar plant (which is impacted by factors such as the level of sunlight in any particular year).

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). Therefore at 31 August 2013, the entire portfolio remained valued at cost.

If you would like to find out more regarding the International Private Equity and Venture Capital (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.  However, until the first dividend has been paid it has been decided to leave the valuations at cost for a number of reasons. Firstly, until all sites have been accredited by Ofgem their revenue streams are not guaranteed. Secondly, not all sites have reached the 12 month point in their operations to validate their performance against various assumptions. Finally, there are a number of new operational contracts still being negotiated for the sites with the aim of reducing costs and therefore providing better value for the companies going forward.

Review of Investments
Unquoted investments are valued in accordance with the accounting policy set out in the Notes to the Accounts and 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 has now received formal FIT accreditation from Ofgem and the first cash revenues, accrued since the start of generation, were received in November 2013 enabling the outstanding loan interest to be paid to Octopus VCT 3 plc.

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 by Ofgem, however it has been held up by administrative delays. Therefore no FIT revenues have been received to date. It is anticipated that FIT accreditation and first FIT revenues, accrued since the start of generation, will be received before the end of the calendar year.

Daubree Energy Limited
Daubree Energy constructed a 1.2MW solar site near Cullompton in Devon in July 2012. The site has now received formal FIT accreditation from Ofgem and the first cash revenues, accrued since the start of generation, were received in November 2013 enabling the outstanding loan interest to be paid to Octopus VCT 3 plc.

Debes Energy Limited
Debes Energy constructed a 1.2MW solar site near Tiverton in Devon in July 2012. The site has now received formal FIT accreditation from Ofgem and the first cash revenues, accrued since the start of generation, were received in November 2013 enabling the outstanding loan interest to be paid to Octopus VCT 3 plc.

Delambre Energy Limited
Delambre Energy constructed a 1.9MW solar site near Ivybridge in Devon in March 2013. It is anticipated that ROC accreditation and the first cash revenues due from the sale of the ROC certificates, accrued since the start of generation, will be received before the end of the calendar year.

Huygens Energy Limited
Huygens Energy constructed a 1.8MW solar site near Cullompton in Devon in March 2013. It is anticipated that ROC accreditation and the first cash revenues due from the sale of the ROC certificates, accrued since the start of generation, will be received before the end of the calendar year.

Lacaille Energy Limited
Lacaille Energy constructed a 1.1MW solar site near Crediton in Devon in July 2012. The site has now received formal FIT accreditation from Ofgem and the first cash revenues, accrued since the start of generation, were received in November 2013 enabling the outstanding loan interest to be paid to Octopus VCT 3 plc.

Investment Policy

The investment policy of Octopus VCT 3 plc is to invest in a portfolio of unquoted companies where the focus is predominantly in the solar sector. These solar investments will typically be sub-50kWp installations which attract the benefit of the government's Feed-in Tariff scheme. Currently all investments are in the solar sector. The Company also has the ability to invest in a variety of other sectors and technologies, where the Investment Manager is confident that investments can be structured to achieve more predictable returns. These may include investments quoted on AIM or ISDX Growth Market.

The Board does not intend to materially vary the investment policy. However, should a material change in the investment policy be deemed appropriate this will be done with Shareholders' approval and in accordance with the Listing Rules.

Qualifying investments and asset allocation
In order to qualify as a VCT, at least 70% (by VCT Value) of the funds raised by the Company must be invested in Qualifying Investments (i.e. investments which satisfy the requirements of Chapter 4 of Part 6 of ITA 2007) by the beginning of the accounting period in which the third anniversary of such funds being raised falls. The majority of the funds raised have already been invested in Qualifying Investments and sufficient liquidity is maintained for working capital and follow-on investments.

Non-Qualifying investments 
For monies held pending investment, either awaiting investment into Qualifying Investments or retained to provide liquidity as mentioned above, the Company will invest in money market cash funds, fixed income instruments, unit trusts, open ended investment companies and other instruments where the Investment Manager believes that the overall downside risk is low. The Company may also make Non-Qualifying Investments where the Investment Manager believes that the risk/return profile is consistent with the overall objective of the Company, which may include, from time to time, making investments or further investments in companies which meet the profile of a Qualifying Investment but which would otherwise not meet VCT Qualifying Investment status. One such opportunity may be to provide additional funding (over and above the Qualifying Investment) for the solar installations. A benefit to this is that greater returns on the uninvested cash may be achieved than compared to cash funds or fixed income securities.

Risk management and borrowing
In order to limit concentration in the portfolio that is derived from any particular investment, at all times no more than 15% by value of the Company's qualifying investments (at the time of investment) will be invested in any single company. A non-material change to the investment policy stated in the prospectus has been approved by the Board such that the Company may, however, provide non-qualifying loans to portfolio companies provided that such aggregate investment does not exceed 20% by value of the Company's investments (at the time of investment) in any single company. In addition, no more than 10%, in aggregate, of the assets of the Company (at the time the investment is made) will be invested in other listed closed-ended investment funds.

The Company may invest in a range of securities including, but not limited to, ordinary and preference shares, loan stocks and convertible securities, and other interest-bearing securities. Qualifying unquoted investments will usually be structured as a combination of ordinary shares, preference shares and loan stocks.

Whilst the Board does not intend that the Company will borrow funds, it is entitled to do so up to 20% of the value of its adjusted capital and reserves (being, in summary, the aggregate of the issued share capital, plus any amount standing to the credit of the Company's reserves, deducting for any distributions declared and intangible assets and adjusting for any variations to the above since the date of the relevant balance sheet).

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 by the end of the third accounting period 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; 

  • for cash raised pre 6 April 2011 at least 30% of the 70% of qualifying holdings must be invested into Ordinary shares with no preferential rights; 

  • for cash raised post 5 April 2011 at least 70% of the 70% of qualifying holdings must be invested into Ordinary shares with no preferential rights; 

  • 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 (11 December 2013)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. Purchases will be made at net asset value, subject to relevant regulatory and statutory requirements and the Company having sufficient distributable reserves and financial reserves available. 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.

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.

Directors' Responsibilities Statement

The Directors are responsible for preparing the Directors' Report, the Directors' Remuneration 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. 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). Under Company law the Directors must not approve the financial statements 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.

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 Investments. 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 consideration 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
11 December 2013

Income Statement

Year ended 31 August 2013Period from 17 August 2011 to 31 August 2012
RevenueCapitalTotalRevenueCapitalTotal
Notes£'000£'000£'000£'000£'000£'000
Gain on disposal of fixed asset investments-33---
Loss on valuation of fixed asset investments8----(36)(36)
Other income2307-307150-150
Management fees(8)(25)(33)(12)(36)(48)
Other expenses3(177)-(177)(143)-(143)
Profit/(loss) on ordinary activities before tax122(22)100(5)(72)(77)
Taxation on return on ordinary activities(14)-(14)---
Profit/(loss) on ordinary activities after tax108(22)86(5)(72)(77)
Earnings per share - basic and diluted1.3p(0.3)p1.0p(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
Year ended 31 August 2013Period from
17 August 2011
to 31 August 2012
£'000£'000
Shareholders' funds at start of period7,732-
Profit/(loss) on ordinary activities after tax86(77)
Issue of equity (net of expenses)-7,909
Buy back of shares-(100)
Shareholders' funds at end of period7,8187,732

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

 
Balance Sheet
As at 31 August 2013As at 31 August 2012
Notes£'000£'000£'000£'000
Fixed asset investments*87,0207,356
Current assets:
Debtors9312152
Cash at bank536307
848459
Creditors: amounts falling due within one year10(50)(83)
Net current assets798376
Net assets7,8187,732
Called up equity share capital118383
Share Premium129999
Special Distributable Reserve127,6267,626
Capital Redemption Reserve1211
Capital Reserve - Unrealised12-(36)
Capital Reserve - Realised12(94)(36)
Revenue Reserve12103(5)
Total shareholders' funds7,8187,732
Net asset value per share794.6p93.6p

*Held at fair value through profit or loss

The statements were approved by the Directors and authorised for issue on 11 December 2013 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
Year ended 31 August 2013Period from 17 August 2011 to 31 August 2012
£'000£'000
Net cash outflow from operating activities(110)(110)
Financial investment:
Purchase of fixed asset investments8(800)(7,392)
Disposal of fixed asset investments81,139-
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 bank229307

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

Reconciliation of Return after Taxation to Cash Flow from Operating Activities
Year ended 31 August 2013Period from 17 August 2011 to 31 August 2012
£'000
Profit/(loss) on ordinary activities after tax86(77)
Increase in debtors(160)(152)
(Decrease)/increase in creditors(33)83
Loss on valuation of fixed asset investments-36
Gain on disposal of fixed asset investments(3)-
Outflow from operating activities(110)(110)

Reconciliation of Net Cash Flow to Movement in Net Funds
Year ended 31 August 2013Period from 17 August 2011 to 31 August 2012
£'000
Increase in cash resources at bank229307
Opening net liquid resources307-
Net funds at 31 August 2013536307

Net Funds at 31 August comprised:

As at 31 August 2013Period from 17 August 2011 to 31 August 2012
£'000
Cash at bank536307
Net Funds at 31 August 2013536307

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. 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 (6.8% 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 the Board 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 in 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.

2.        Other income

Year ended 31 August 2013Period ended
31 August 2012
£'000
Loan interest receivable*305146
Interest receivable on bank balances24
307150

3.        Other expenses

Year ended 31 August 2013Period ended
31 August 2012
£'000
Directors' remuneration4339
Fees payable to the Company's auditor for the audit of the financial statements77
Fees payable to the Company's auditor for other services - tax compliance11
Accounting and administration services and company secretarial services3115
UK Listing Fees1233
Trail commission3220
Registrars Fees126
Legal Fees19
Other expenses3813
177143

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 2013 the running costs, as defined in the prospectus, were 2.12% of net assets.

4.        Directors' remuneration

Year ended 31 August 2013Period ended
31 August 2012
£'000
Directors' emoluments
Raymond Greenshields (Chairman)2020
Ian Leaman1515
Katrina Johnston (paid to Octopus Investments Limited) 84
4339

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 £14,000.

The current rate of tax is the small companies' rate of corporation tax at 20%.
   

Current tax reconciliation:31 August 201331 August 2012
£'000£'000
Profit on ordinary activities before tax122(5)
Current tax at 20% 24(1)
Other eligible expenses(5)-
Income not taxable for tax purposes(1)-
Loss brought forward(4)1
Total current tax charge 14-

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 8,263,597 Ordinary shares, being the weighted average number of Ordinary shares in issue during the period (2012: 3,520,883 Ordinary Shares).

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 2013 is based on net assets of £7,818,000 and 8,263,597 Ordinary shares in issue at that date (2012: £7,732,000 and 8,263,597 Ordinary Shares).

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 2013 are summarised below:

Level 3: Unquoted investments
£'000
Total unquoted investments
£'000
Valuation and net book amount:
Book cost at 1 September 20127,3927,392
Cumulative revaluation(36)(36)
Valuation at 1 September 20127,3567,356
Movement in the year:
Purchases at cost800800
Proceeds from the sale of investments(1,139)(1,139)
Gain on sale of investments 33
Closing fair value at 31 August 20137,0207,020
Closing cost at 31 August 2013: 7,0207,020
Closing holding gain/(loss) at 31 August 2013:--
Valuation at 31 August 20137,0207,020

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 2013, there were no commitments in respect of investments not yet completed.

9.        Debtors

31 August 201331 August 2012
£'000£'000
Prepayments106
Accrued income302146
312152

10.        Creditors: amounts falling due within one year

31 August 201331 August 2012
£'000£'000
Accruals5083
5083

11.        Share capital

31 August 201331 August 2012
£'000£'000
Allotted and fully paid up:
8,263,597 ordinary shares of 1.0p (2012: 8,263,597)8383

The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective. The Company is not subject to any externally imposed capital requirements, other than those imposed by company law.

Capital is defined as shareholders' funds and the Company's 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 will it drawdown any borrowing facilities in the future to fund the acquisition of investments.

The Board considers the distributable reserves and the total return for the year when recommending a dividend. The distributable reserves of the Company as at 31 August 2013 were £7,635,000 made up of the Special Distributable Reserve, the Capital Reserve - Realised and the Revenue Reserve.

In addition, the Board is authorised to make market purchases up to a maximum of 10% of the issued Ordinary shares 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 in this report. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.

The Company did not issue any shares during the year (2012: 8,363,597 shares).

The Company did not repurchase any shares for cancellation during the year (2012: 100,000 shares).

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 incorporation83997,6261(36)(36)(5)
Issue of equity
Cost of issue of equity
Buy back of shares
Management fees allocated as capital expenditure(25)
Gains on disposal of fixed asset investments3
Prior period holding losses realised on disposal36(36)
Loss on fair value of investments
Profit on ordinary activities after tax108
Cancellation of Share Premium Account
Balance as at 31 August 201383997,6261-(94)103

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.

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 2013:

31 August 201331 August 2012
£,000£'000
Assets at fair value through profit or loss
Fixed asset investments7,0207,356
Total7,0207,356
Cash at bank536307
Other debtors106
Accrued income301146
Total847459
Liabilities at amortised cost
Accruals and other creditors(49)(83)
Total7,8187,732

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 the IPEVC 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. 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 delivering its investment objectives. 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 in the Investment Manager's Review.  An analysis of investments is given in note 8.

89.7% 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 2013 would have increased net assets and the total return for the period by £702,000. 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 2013.  By cost, no individual investment exceeded 17.8% of the Company's net assets at 31 August 2013.

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 2013 the Company's financial assets exposed to credit risk comprised the following:

31 August 201331 August 2012
£'000£'000
Cash on deposit 536307

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 2013 these investments were valued at £536,000 (2012: £307,000).

14.          Post balance sheet events
Non qualifying loan investments of £50,000 each were made in Adala Solar Limited and Akycha Power Limited on 19 September 2013.

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 paid in relation to the year to 31 August 2013 (2012: £nil). £12,000 was accrued during the year to 31 August 2013 and there was £nil outstanding at the year end (2012: £20,000 and £nil).

There were no contingencies, guarantees or financial commitments as at 31 August 2013.

16.        Related party transactions
Katrina Johnston, a non-executive director of Octopus VCT 3 plc during the period ended 31 August 2013, is an employee of Octopus Investments Limited. Octopus VCT 3 plc paid Octopus Investments Limited £7,500 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 is entitled to receive an 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 Company exceeding its total expense cap of 2.15%. As a result, £33,000 (2012: £48,000) was payable to Octopus in the period for management fees and there was £nil (2012: £48,000) owed to Octopus at the balance sheet date. A management fee rebate of £60,000 (2012: £nil) was due to the Company from Octopus at the balance sheet date as a result of the reduction in management fees.

Octopus is also entitled to receive an annual accounting and administration fee and 0.3% of net funds raised. During the year £23,000 was paid to Octopus Investments Limited and there was £nil outstanding at the balance sheet date (2012: £11,000 and £nil).

In addition, Octopus also provides Company secretarial services for an additional fee of £7,500 per annum.  During the year £7,500 was paid to Octopus Investments Limited and there was £nil outstanding at the balance sheet date (2012: £7,500 and £nil).  

Octopus Capital Limited, a related party by virtue of being the 100% owner of Octopus Investments Limited, owns 49.5% of Lightsource Renewable Energy Limited. Lightsource managed the underlying assets in the portfolio during the period.

Octopus VCT 3 plc owns 49.9% of the equity in each of its investee companies with Octopus VCT 4 plc also owning 49.9%. The remainder of the equity in each investee company is owned by OCS Services Limited, a wholly owned subsidiary of Octopus Capital Limited.




This announcement is distributed by NASDAQ OMX Corporate Solutions on behalf of NASDAQ OMX Corporate Solutions clients.
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Octopus VCT 3 plc via Globenewswire

HUG#1749319

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