Foresight 3 VCT PLC : Annual Financial Report

FORESIGHT 3 VCT PLC

2012 Highlights

• Net asset value total return per Ordinary Share in the year to 31 March 2012 decreased by 19.1%, represented by a fall in net asset value of to 77.5p. Of this fall, 2.5p per share (2.6%) related to the dividend paid during February 2012.  

• The fund provided funding totalling £8.7 million for 15 companies.  

• Realisation proceeds and loan repayments totalling £6.7 million were received from 13 portfolio companies.  

• The linked offer with Foresight 4 VCT, launched on 7 January 2011, raised gross proceeds of £2.6 million in the year ended 31 March 2012, of which the Company's share was £1.3 million.  

• An interim dividend of 2.5p per share was paid on 24 February 2012.  

Chairman's Statement

Performance and Dividends

The period under review was one of considerable market volatility and extreme concern about the state of government finances in many parts of Europe. In the UK, economic activity was patchy and bank lending to SMEs was severely constrained.

These factors affected portfolio companies in a variety of ways. Some companies that needed to maintain or increase their borrowing to pursue development projects or to expand their activities had difficulty in doing so; others, with more established businesses, were able to find growth opportunities, particularly via exports.

Against this background, the net asset value of the Ordinary Share portfolio as at 31 March 2012, declined by 19.1% to 77.5p (31 March 2011: 95.8p). Of this fall in net asset value, 2.5p per share (2.6%) related to the dividend paid during February 2012.

This performance, noted above, for the year under review is very disappointing, and is an illustration of the cost of being a pioneer in environmental infrastructure investment. Of the 19.1% fall in net asset value, 16.7% relates to the investments in environmental infrastructure including Vertal, Closed Loop Recycling, O-Gen Acme Trek, i-plas Group, Crumb Rubber and Silvigen. In many of these companies ongoing technical issues led to delays in achieving profitability and necessitated further funding.

Although many of these companies are at the forefront of innovative and promising environmental processes, they have taken significantly longer to develop than we had originally envisaged. Foresight Group, our investment manager, however, believes that the environmental portfolio should start to see a recovery in value in the coming months.

Other companies are making progress but at the same time have encountered delays in project implementation and in building their businesses in a very difficult environment. AIM-listed Zoo Digital Group suffered a sharp decline in its share price following disappointing results.

The non-environmental portfolio benefited from the strong performances of five investments in particular: Alaric Systems; Autologic Diagnostics Group; Datapath Group; Ixaris Systems and TFC Europe, all of which saw increases in valuation. Overall, we expect these companies to drive net asset value (NAV) performance in the coming months as well as see the environmental portfolio start to recover value.

A total of £3.38 million was received from the investment in Autologic Diagnostics Holdings and £713,423 received from a capital distribution by Datapath Holdings. A further £927,982 was realised on the successful sale of Onyx Scientific.

Overall, however, despite these setbacks, Foresight remains positive about the prospects for this portfolio and the net asset value at 30 June 2012 is expected to be higher.

A summary of how the differing elements of the portfolio impacted the movement in NAV in the year is detailed below:

*In addition to the above movements, a 2.5p per share dividend payment was made on 24 February 2012, which further reduced net assets.

A comparison of the relative performances of and returns achieved by the Fund's environmental infrastructure investments and private equity investments during the year under review (and noted above), highlights the better returns achieved from private equity investments. Foresight Group are now putting more emphasis on the private equity area and are also seeing an increase in deal flow from this sector.

Over the last two or so years, weak economic conditions and lack of availability of bank and equity finance have adversely affected the performances of and hindered the planned expansion of the environmental investments. As these poor macro economic conditions are expected to continue for some time, the Board and Investment Manager have agreed that, within the existing investment policy, greater emphasis should, for the foreseeable future, be placed on private equity investments and less emphasis on environmental infrastructure
investments.

As reported in my statement in the Interim Report in November, an interim dividend of 2.5p per Ordinary Share for the year ended 31 March 2012 was paid to the Ordinary Shareholders on 24 February 2012. The Company's objective is to provide a steady flow of tax-free dividends, generated from income or from capital profits realised on the sale of investments, but to some extent, this will be conditional on economic prospects.

Share Issues and Share Buy-backs

The Company launched a linked offer for new Ordinary Shares alongside Foresight 4 VCT plc on 7 January 2011. During the period from 1 April 2011 until the offer closed on 30 June 2011 1,256,713 Ordinary Shares were allotted at prices ranging from 102.0p to 103.0p per share representing £1.3 million of funds raised at 31 March 2012. It continues to be the Board's policy to consider repurchasing shares when they become available in order to provide a degree of liquidity for the sellers of the Company's shares. During the period, the Company repurchased 1,482,533 Ordinary Shares for cancellation at a cost of £1,212,000.

The open offer that accompanied the enhanced buyback, resulted in a further total of 997,114 Ordinary Shares being issued at 87.26p per share. Of this total, 825,235 shares were issued on 5 April 2012 and 171,879 on 10 April 2012.

Enhanced Buyback

I am pleased to report that the take up by shareholders of the enhanced buyback offer to shareholders was significant with shareholders representing 8,753,756 Ordinary Shares taking up the offer during April 2012. The Board will consider offering further enhanced buybacks to shareholders in the future providing that legislation continues to allow the practice and it remains popular with the Company's shareholders.

Valuation Policy

Investments held by the Company have been valued in accordance with the International Private Equity and Venture Capital (IPEVC) valuation guidelines (August 2010) developed by the British Venture Capital Association and other organisations. Through these guidelines, investments are valued as defined at 'fair value'. Ordinarily, unquoted investments will be valued at cost for a limited period following the date of acquisition, being the most suitable approximation of fair value unless there is an impairment or significant accretion in value during the period. Quoted investments and investments traded on AIM and PLUS (formerly OFEX) are valued at the bid price as at 31 March 2012. The portfolio valuations are prepared by Foresight Group, reviewed and approved by the Board quarterly and subject to review by the auditors annually.

Annual General Meeting

The Company's Annual General Meeting will take place on 17 September 2012. I look forward to welcoming you to the Meeting, which will be held in Sevenoaks, details of which can be found on page 52 of the annual report and accounts.

Investment Manager Novation

On 1 March 2012, the Board approved the novation of the investment management contract from Foresight Group LLP to Foresight Group CI Limited, another Foresight Group Company. The novation does not affect the services provided to the Company or the terms, conditions or costs of those
services.

Outlook

Although there have been few realisations in recent years, the Investment Manager reports that potential acquirers have returned to the market and is hopeful that further realisations will be achieved resulting in an increase in net asset value, further distributions to shareholders and new investments in private equity type deals. We remain cautious about the economic outlook and the Investment Manager is being extremely selective in its approach to proposals received. Over the medium term we are still optimistic that further realisations can be achieved and so increase net asset value and facilitate shareholder distributions.

Graham Ross Russell
Chairman
31 July 2012

Investment Manager's Report

During the year under review, notwithstanding the generally weak UK macro economic environment and the recent dip into a mild recession, the performances of most companies in the portfolio held up relatively well, with those serving export markets trading appreciably better than those serving largely domestic markets. Economic fundamentals remain challenging with continuing uncertainties and volatility. We believe these mixed trading conditions will continue to prevail during 2012 and beyond, putting a premium on companies with robust business models and good management teams while necessitating careful cost control by others. Against this background, we are only looking at new opportunities which are considered sufficiently robust and attractive, particularly in valuation terms.

The performance of the portfolio during the period has been affected by a number of negative factors, and some positive factors resulting overall in a 16.5% fall in net asset value after allowing for the 2.5p per share dividend paid in February 2012.

As mentioned in the Chairman's Statement, £3.38 million was realised from the investment in Autologic Diagnostics Holdings and £713,423 received as a capital distribution from Datapath Holdings.

With regard to the environmental investments, which have been affected by the current economic headwinds, the need is now to build market traction and increase sales. Reflecting slower than expected growth in sales at i-plas Group and Crumb Rubber, further provisions have been made against these investments totalling £2,023,368. Despite achieving periods of extended electricity production at O-Gen Acme Trek's Stoke facility, the plant has been put into hibernation as explained below pending further validation of the technology and a provision of £1,981,713 has been made against the previous carrying value of this investment.

Vertal's trading performance has been hindered by various technical plant issues, as well as by much higher than expected disposal costs, resulting in significant continuing trading losses. After a thorough strategic review, both before and after monies we invested in the current year, Foresight Group declined to provide any further funds, resulting in the company going into administration on 21 June 2012. No recoveries are expected for this investment and the investment of £3,372,099 had been written off in full in the valuation at the year end.

Although Closed Loop Recycling is trading well and plans to increase capacity are well advanced, it has been necessary to make a provision of £584,863 against the original cost of the investment to reflect the proposed introduction of an executive share option scheme as explained below. Where provisions have been made against the value of underlying investments, we have also provided against the income due from such investments and this is reflected in the negative income amount in the Income Statement of the Company.

Portfolio Review

Over recent years, the number of follow-on investments made by the Company has continued at a high level as a result of tougher trading and credit conditions, resulting in a consequent need for additional working capital as well as funding for growth.

During the year to 31 March 2012, the Company made follow-on investments totalling £8.4 million in fourteen portfolio companies: Vertal (£2,619,348), 2K Manufacturing (£1,249,614), O-Gen Acme Trek (£1,234,735), Closed Loop Recycling (£1,148,628), Silvigen (£404,150), Crumb Rubber (£362,500), AtFutsal Group (£341,977), i-plas Group (£330,000), Probability (£283,066), Heritage House Media (£160,038), Corero Network Security (£136,317), Autologic Diagnostics Group (£84,805), Convivial London Pubs (£50,000) and Zoo Digital Group (£18,406).

The performance highlights during the period were as follows:

Although 2K Manufacturing is manufacturing and selling up to 1,000 Ecosheet boards per week from its impressive fully automated Luton factory, its limited production capacity constrains output volumes and so it is continuing to incur trading losses. Customer demand comfortably exceeds the company's ability to supply, even at full plant capacity, and product prices have been increased. To meet additional working capital requirements, the Company invested a further £1,249,614 alongside the management and other equity investors. Having successfully commissioned its first 10 mould production line, optimised pricing and reduced costs of raw materials to increase margin per board, the company now needs to raise substantial funds of some £10 million to increase the number of moulding machines to 40 and to increase production volumes. Discussions are underway with existing and new investors to raise this necessary expansion capital.

Alaric Systems, which develops and sells credit card authorisation and anti credit card fraud software to major financial institutions and retailers Worldwide, performed particularly strongly in the year to 31 March 2012, generating profits and cash flows markedly ahead of the previous year, in which a PBIT of £540k was achieved on sales of £5.54 million. The growing sales pipeline includes a number of large contracts which are either in negotiation or prospect and support the demanding budget for the current year but timing is difficult to predict. In May 2012, Alaric paid £36,488 to the company, comprising a loan redemption premium payment and interest.

AtFutsal Group provides facilities for futsal, a fast growing type of indoor football with 30 million participants worldwide and the only type of indoor football recognised by the Football Association. Alongside the Swindon and Cardiff facilities, a third, much larger, flagship super arena has been opened in Birmingham, the expansion being funded with £341,977 from the Company. Sales have built up steadily in this new arena, which hosted a number of Football Association events over the summer and is now operating near break even. Good progress is being made in developing the increasingly important educational services with several hundred students now taking a variety of sports related courses within AtFutsal's arenas and a number of partnerships have been entered into with educational establishments, football clubs and training organisations. Plans are progressing well to open a further super arena in Northern England to create national coverage. Sales growth, however, is behind original expectations with UK consumer spending under pressure, and progress towards profitability has been impacted as a result. The benefits of economies of scale from extended national coverage are anticipated to enhance the significant growth of the educational activities.

Autologic Diagnostics Group develops and sells sophisticated automotive diagnostic software and hardware to independent mechanics and garages to allow them to service and repair vehicles. In the year ended 31 December 2011, an operating profit of £5.2 million was achieved on sales of £12.2 million. Autologic is continuing to grow sales and profits in its current financial year, particularly in the USA. On 1 July 2011, a recapitalisation was completed which yielded net proceeds of £586,667 for the Company against cost of £106,667, while maintaining an undiluted equity position. As part of the recapitalisation, £84,805 of loan interest was capitalised. As mentioned above, part of the investment in Autologic was sold in January 2012 in a £48 million secondary management buy-out funded by ISIS Private Equity. The sale generated cash proceeds of £2.79 million, against original cost of £0.6 million and the Company has retained an ongoing investment of £1.98 million in a combination of equity and loan stock in the new company formed to effect the buy-out.

Despite early setbacks, Closed Loop Recycling is now making solid operational, commercial and revenue progress with production rates at record levels alongside significantly improved plant reliability. Further investments totalling £1,148,628 were made in the period to provide additional working capital and finance an upgrade to the conveyor system. Product quality remains high and demand exceeds supply for all the recycled material produced. The company continues to be affected by raw material quality which restricts throughput and yield, but is making some progress in addressing this problem. A significant investment is planned at the site in Dagenham to increase capacity to sort greater volumes of mixed plastic waste. In addition, a further investment is planned to increase production capacity to meet the demand for the cleaned and sorted output, which should be possible without adding significantly to its fixed overhead cost. Notwithstanding the above solid trading and exciting expansion plans, a provision of £584,863 has been made in the current year against the original cost of the investment to reflect the proposed introduction of an executive share option scheme. Principally because of the weight of prior ranking capital provided by the Foresight funds, the recently enlarged management team currently have no realistic equity incentive, a situation which is not considered to be in the best, longer term interests of all shareholders. To address this, a capital reorganisation is being effected to facilitate the introduction of such an incentive scheme, which is in line with normal market practice but necessitates making such a provision. Following completion of the expansion plans, the value of the company should be significantly enhanced, enabling this provision to be reversed.

Crumb Rubber, which manufactures fine rubber powders from waste tyres, is making only slow commercial progress and so a full provision of £362,500 has been made against the cost of this investment.

Datapath Group is a world leading innovator in the field of computer graphics and video wall display technology. In the year ended 31 March 2011, an operating profit of £3.1 million was achieved on sales of £10.3 million. The company continued its strong growth in the year to 31 March 2012 with record sales being achieved in January 2012. In that month, a recapitalisation was effected, generating cash proceeds of £713,423 with no resultant equity dilution to the fund.

Evance Wind Turbines, which manufactures 5kW tree sized wind turbines, has enjoyed strong sales growth driven primarily by the introduction of the UK Feed in Tariff regime. For the year to 31 March 2012, the company achieved its first operating profit on sales of £7.25 million, over three times the level of sales in the previous year. However, the Tariff is proposed to be reduced from 1 October 2012 which may affect sales thereafter.

Global Immersion, which designs, builds and maintains visualisation systems for immersive theatres and planetariums worldwide, won several major orders in 2010 which led to a record order book and an operating profit of £0.5 million being achieved on sales of £8.0 million in the year to 30 June 2011. These included immersive theatres and related services for projects in Asia, Africa, North America and Europe. The company also installed its first two Zorro projection theatres. Zorro is a market leading technology which enables the projection of unmatched levels of picture quality. Reflecting prevailing economic conditions, orders slowed appreciably in the current year, resulting in substantial trading losses being incurred but sales efforts have been increased and the sales pipeline is now improving, with a number of orders in prospect.

An investment of £160,038 was made in early 2011 in Heritage House Media to provide additional working capital. Trading through 2010 and 2011 was adversely impacted by the recession as both advertising revenues fell and visitors to stately homes spent considerably less than in prior years, resulting in continuing operating losses. With further funding required, the investment was sold in November 2011 to co-investors in the company for £10,525.

i-plas Group, which manufactures a range of building products from waste plastics to replace concrete/timber products, increased its production capacity by investing in additional plastic moulding equipment in early 2011. Reflecting the present poor trading conditions in the UK construction markets, sales growth was slower than forecast (but still 50% higher than last year) resulting in continuing but reducing trading losses. In late 2011 and early 2012, £330,000 was advanced by way of loan by the Company as part of a £700,000 funding round provided by the Foresight VCTs to finance working capital requirements. Costs were cut, price rises instituted and management reorganised with the result that positive EBITDA is expected to be achieved shortly. Reflecting the slower than expected growth in sales, a further provision has been made against this investment totalling £1,660,868.

Ixaris Systems, which develops and operates Entropay, a prepaid payment service using the VISA network, has also continued to develop Opn, its platform that enables enterprises to develop custom applications for payments. This platform is being used by companies in the affiliate marketing and travel sectors. In the year to 31 December 2011, an operating loss of some £0.2 million was achieved on sales of £9.1 million with further growth expected in the year to 31 December 2012.

O-Gen UK's partnership with MITIE, the major UK FTSE 250 outsourcing group, to build a series of up to five biomass-energy facilities in South West England may be extended further. These facilities are fully funded by this partner, with O-Gen UK benefitting from an equity stake and an operation and maintenance contract as a result of the technology and know-how O-Gen brings to the agreement. The first of these facilities, for 5MW, is under construction in Plymouth and is due to commence operation during Q3 2012. O-Gen will benefit further financially through sourcing fuel supplies for the facilities. The similar facility in Derby with partner Withion Power has now been successfully constructed and has recently started to generate electricity as part of the commissioning phase, further validating the technology.

Further investments were made in O-Gen Acme Trek totalling £1,234,735 to fund additional working capital and to purchase all the outstanding bank debt at a substantial discount. In December 2011, in the light of the capital expenditure required to bring the plant into full time production and resolve shortfalls in the quality of the original engineering, a detailed strategic review was carried out. It was decided to make all staff redundant and hibernate the plant until the above mentioned second generation Plymouth and Derby plants fully validated the technology and then find a partner to retro fit the facility based on experience gained from these plants. As part of this review and hibernation, the Company, Foresight 2 VCT and Foresight 4 VCT acquired the outstanding £6.3 million of bank debt for £1.9 million, of which the Company provided £835,468, and a provision of £1,981,713 has been made against the previous carrying value of this investment.

Following the approach from William Hill and subsequent termination of discussions in November 2011, the Company acquired further shares in AIM listed Probability for £283,066 in the market and also from Foresight 2 VCT plc at the market price.

Silvigen received further funding of £404,150 to finance additional capital expenditure to increase production at its waste wood processing facility and provide additional working capital. After a series of trials over the last six or so months with a number of chicken farms in Lincolnshire, the first deliveries of the shredded waste wood animal bedding product have been made recently and further trials continue. Sales growth is still much slower than expected and trading losses continue to be incurred, and it was deemed prudent to make a further provision of £898,018 against the cost of this investment increasing the total provision to 75% of cost (£1,154,118).

Despite much effort by all involved during 2010 and 2011, the attempted turnaround of SkillsMarket ultimately failed. Notwithstanding signs of increasing sales of Recruiter Account in late 2010, sales slowed appreciably during early 2011 and fell well behind budget. As substantial further investment was required, the company's Board accelerated a sales process but no offers were ultimately received and in consequence administrators were appointed in May 2011.

TFC Europe, a leading distributor of technical fasteners in the UK and Germany, reported an operating profit of £1.3 million on sales of £13.5 million for the year ended 31 March 2011. The company enjoyed notably strong growth in the year to 31 March 2012 which is continuing. The original buy and build strategy resumed during 2011, with the acquisition of Colchester-based Specialised Fasteners Products and of the larger Keighley-based Engineered Services (Fasteners) Limited. The acquisitions were funded with loans from RBS, which also refinanced existing bank debt, and have since been successfully integrated and both are trading well.

The Bunker Secure Hosting, which operates two ultra secure data centres, continues to win new orders, grow its annual revenues and generate substantial profits. For the year to 31 December 2010, an EBITDA of £1.5 million was achieved on sales of £6.2 million, at which date recurring annual revenues were running at £6.4 million. The company continues to grow strongly and recurring annual revenues now exceed £8 million. Further space has been fitted out in both data centres to meet growing customer demand and investment continues in upgrading infrastructure, funded by retained profits and additional bank facilities.

Although Vertal enjoyed strong demand for its food waste recycling services, technical issues continued to hinder the rate of output, as well as higher than expected disposal costs resulting in substantial, continuing losses. Despite much progress, the process ultimately proved uneconomic and unsupportable, leading to administration. Operations were stable, with the end product being used as on-farm fertilizer as well as sold as a fuel for energy production in on-farm anaerobic digestion plants. The Mitcham, South London, recycling facility had steadily increased its volume of waste food inputs, operating at up to 900 tonnes per week, with a series of ongoing plant improvements underway, particularly relating to odour control and reducing water and energy consumption. The installation of a new shredder had successfully resolved the issue of plastic contamination and improved throughput, although this was still appreciably slower than projected. In funding rounds in September 2011 and February 2012, the Company invested a net amount of £1,602,257 in the year under review, after taking account of a loan repayment of £1,017,091. Following a detailed strategic review, no viable, supportable business model could be established and so Foresight Group declined to provide any further funding, resulting in the company going into administration on 21 June 2012. The Company's total investment in Vertal (£3,372,099) has been written off in full as no recoveries are expected.

The Company sold £48,000 of AIM listed Zoo Digital Group loan notes during the period. Simultaneously, Zoo successfully concluded an equity placing in August 2011 prior to the downturn in equity markets, to accelerate the roll-out of the company's software in new markets, particularly the creation of eBooks. The fundraising was contingent on the restructuring of Zoo Digital's loan notes, necessitating partial conversion of the company's loans (£483,750).Taking advantage of price weakness in the market in early 2012, the opportunity was taken to buy further shares at a cost of £18,406.

Realisations

In addition to the £3.38 million generated from the Autologic Diagnostics Holdings investment and £713,423 capital distribution from Datapath Holdings referred to above, the Company also generated £927,982 from the profitable sale in August 2011 of Onyx Scientific to IPCA, one of India's largest pharma companies. Onyx provides manufacturing scale up services for the Worldwide pharma industry.

There were six full or partial AIM company disposals during the period, generating proceeds of £616,163, including sales of Croma Group loan stock (£200,000) and Northern Bear (£58,674). The Company's holding of Rivington Street Holdings loan notes with a nominal value of £145,025 were exchanged for AIM listed Corero Network Security ordinary shares with a market value of £136,317.

New Investments

As part of a £2.1 million growth capital funding round, alongside existing shareholders and other Foresight VCTs, the Company invested £312,531 in Wirral based Biofortuna Limited, a molecular diagnostics company with leading, proprietary expertise in cryo-preserving, enabling molecular reagents to be freeze-dried and stabilised, thereby substantially reducing distribution costs and transport losses while increasing the ease of use of such reagents.

Outlook

The underlying trading of many of the portfolio companies during the year under review has been stronger than was expected a year ago, benefitting, to varying degrees, from the positive export conditions created by a weaker currency and relatively stronger markets overseas. Conversely, although some investments in the environmental portfolio made progress, others experienced difficulties with sales growth generally being constrained by the weak economic climate in the UK.

The economic conditions are expected to continue during 2012 and beyond but we remain reasonably optimistic about current prospects and the outlook, as many portfolio companies continue to display good order books and revenue and profit growth. Economic fundamentals and uncertainties could however lead to a prolonged period of low growth. Across the portfolio, we have, where appropriate, ensured that management are focused on cash conservation and cost reductions in light of these conditions.

Foresight Group is actively pursuing both potential portfolio realisations in several market sectors to generate value and also pursuing new investment opportunities with appropriate caution.

David Hughes
Foresight Group
Chief Investment Officer
31 July 2012

The Disclosure and Transparency Rules ("DTR") of the UK Listing Authority require certain disclosures in relation to the annual financial report, as follows:

Principal risks, risk management and regulatory environment

The Board believes that the principal risks faced by the Company are:

• Economic risk - events such as an economic recession and movement in interest rates could affect smaller companies' performance and valuations.  

• Loss of approval as a Venture Capital Trust - the Company must comply with Section 274 of the Income Tax Act 2007 which allows it to be exempted from capital gains tax on investment gains. Any breach of these rules may lead to: the Company losing its approval as a VCT; qualifying shareholders who have not held their shares for the designated holding period having to repay the income tax relief they obtained; and future dividends paid by the Company becoming subject to tax. The Company would also lose its exemption from corporation tax on capital gains.  

• Investment and strategic - inappropriate strategy, poor asset allocation or consistent weak stock selection might lead to under performance and poor returns to shareholders.  

• Regulatory - the Company is required to comply with the Companies Act 2006, the rules of the UK Listing Authority and United Kingdom Accounting Standards. Breach of any of these might lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.  

• Reputational - inadequate or failed controls might result in breaches of regulations or loss of shareholder trust.  

• Operational - failure of the Manager's or Company Secretary's accounting systems or disruption to its business might lead to an inability to provide accurate reporting and monitoring.  

• Financial - inadequate controls might lead to misappropriation of assets. Inappropriate accounting policies might lead to misreporting or breaches of regulations. Additional financial risks, including interest rate, credit, market price and currency, are detailed in note 15 to the Annual Report & Accounts.  

• Market risk - investment in AIM traded, PLUS traded and unquoted companies by its nature involves a higher degree of risk than investment in companies traded on the main market. In particular, smaller companies often have limited product lines, markets or financial resources and may be dependent for their management on a smaller number of key individuals. In addition, the market for stock in smaller companies is often less liquid than that for stock in larger companies, bringing with it potential difficulties in acquiring, valuing and disposing of such stock.  

• Liquidity risk - the Company's investments, both unquoted and quoted, may be difficult to realise. Furthermore, the fact that a share is traded on AIM or PLUS Markets does not guarantee its liquidity. The spread between the buying and selling price of such shares may be wide and thus the price used for valuation may not be achievable.  

The Board seeks to mitigate the internal risks by setting policy, regular review of performance, enforcement of contractual obligations and monitoring progress and compliance. In the mitigation and management of these risks, the Board applies the principles detailed in the UK Corporate Governance Code. Details of the Company's internal controls are contained in the Corporate Governance and Internal Control sections of the Annual Report & Accounts.  

Statement of Directors' Responsibilities

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

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).

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 state of affairs of the Company and of the profit or loss of the Company for that period.

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

- select suitable accounting policies and then apply them consistently;

- make judgements and 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 its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website (which is delegated to Foresight Group and incorporated into their website). Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our 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 Directors' 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 the Company faces.

On behalf of the Board

Graham Ross Russell
Chairman
31 July 2012

Audited Income Statement
for the year ended 31 March 2012

The total column of this statement is the profit and loss account of the Company and the revenue and capital columns represent supplementary information.

All revenue and capital items in the above Income Statement are derived from continuing operations. No operations were acquired or discontinued in the year.

The Company has no recognised gains or losses other than those shown above, therefore no separate statement of total recognised gains and losses has been presented.

Audited Reconciliation of Movements in Shareholders' Funds

 *The share premium of the Company was cancelled by order of the High Court of Justice, Chancery Division, on 23 November 2011 and
   registered at Companies House on 23 November 2011. This has enabled the Company to increase its distributable reserve to which, amongst
   other things, losses can be written off, providing the Company greater flexibility when considering dividend payments to shareholders and from
   which share buybacks can be financed.

Audited Balance Sheet
at 31 March 2012

Graham Ross Russell
Chairman
31 July 2012

Audited Cash Flow Statement
for the year ended 31 March 2012

Notes

1.     The Audited Annual Financial Report has been prepared on the basis of accounting policies set out in the statutory accounts of the Company for the year ended 31 March 2012. All investments held by the Company are classified as "fair value through profit and loss". The Directors fair value investments in accordance with the International Private Equity and Venture Capital Valuation ("IPEVCV") guidelines, as updated in August 2010. This classification is followed as the Company's business is to invest in financial assets with a view to profiting from their total return in the form of capital growth and income.

2.    These are not statutory accounts in accordance with S436 of the Companies Act 2006. The full audited accounts for the year ended 31 March 2012, which were unqualified and did not contain any statements under S498(2) of Companies Act 2006 or S498(3) of Companies Act 2006, will be lodged with the Registrar of Companies. Statutory accounts for the year ended 31 March 2012 including an unqualified audit report and containing no statements under the Companies Act 2006 will be delivered to the Registrar of Companies in due course.  

3.    Copies of the Annual Report will be sent to shareholders and will be available for inspection at the Registered Office of the Company at ECA Court, 24-26 South Park, Sevenoaks, Kent TN13 1DU and can be accessed on the following website: www.foresightgroup.eu

4.    Net asset value per Ordinary Share

Net asset value per Ordinary Share is based on net assets at the year end of £38,980,000 (2011: £48,425,000), and on 50,310,366 Ordinary Shares (2011: 50,536,186 Ordinary Shares), being the number of Ordinary Shares in issue at that date.

5.    Return per share

Notes:
a) Total return per share is total return after taxation divided by the weighted average number of shares in issue during the year.
b) Revenue return per share is revenue return after taxation divided by the weighted average number of shares in issue during the year.
c) Capital return per share is capital return after taxation divided by the weighted average number of shares in issue during the year.

6.    The Annual General Meeting of Foresight 3 VCT plc ("the Company") will be held on 17 September 2012 at 12 pm at the offices of Foresight Group, ECA Court, 24-26 South Park, Sevenoaks, Kent TN13 1DU.

7.   (Interest expense)/income

8.    Investments held at fair value through profit or loss

Deferred consideration of £7,000, recognised in realised gains, was received during the year.

9.    Related party transactions

Foresight Group and Foresight Fund Managers Limited are considered to be Related Parties of the Company.

Foresight Group which acts as investment manager to the Company in respect of its venture capital investments earned fees of £1,185,000 during the year (2011: £1,516,000, including carried interest of £368,000). Foresight Fund Managers Limited, Company Secretary, received fees excluding VAT of £119,000 (2011: £113,000) during the year.

At the balance sheet date, there was £13,000 due from Foresight Group (2011: £1,000 due to Foresight Group) and £2,000 due from Foresight Fund Managers Limited (2011: £nil). No amounts have been written off in the year in respect of debts due to or from the related parties.

END