Foresight 3 VCT PLC : Annual Financial Report

FORESIGHT 3 VCT PLC 

2016 Highlights

• Net asset value per Ordinary Share at 31 March 2016 was 59.6p (31 March 2015: 66.8p). After allowing for the 3.0p per share dividend paid on 24 March 2016, this represented a fall in net asset value of 6.3% for the year.
   
• The Ordinary Shares fund provided follow-on funding totalling £0.38 million to three portfolio companies and invested £2.5 million in five new investments.
   
• The Ordinary Shares fund realised £2.1 million from sales and loan redemptions from seven portfolio companies.

Chairman's Statement

Performance

During the year to 31 March 2016, the net asset value per Ordinary Share decreased by 6.3% to 59.6p from 66.8p at 31 March 2015, after allowing for the 3.0p per share dividend paid in March 2016.

Overall, the Board is happy with the composition of the portfolio including the recent addition of five new investments for a total consideration of £2.5 million. Several of these investments are already making encouraging progress, particularly Itad and Specac. The performance in the last quarter of the year under review demonstrated some of this portfolio improvement showing a small increase in underlying NAV of 1.6%.

The Board believes the portfolio is well placed to deliver growth, underpin future dividends and enhance shareholder returns.

The fall in the year, however, is disappointing but effectively reflects poor performance of one portfolio company, Aerospace Tooling, which has seen a reduction or delay in orders from some of its customers who have been severely impacted by the significant drop in the price of oil. Although it did not feel the impact as acutely as Aerospace Tooling, TFC Europe also suffered a drop in revenues from market driven factors related to the fall in the price of oil. Aerospace Tooling was reduced by £1.76 million or 3.5p per share. Some encouraging progress has been made in winning orders and new customers but the related sales cycles inevitably takes time. A new experienced CEO was appointed in January 2016 and the company has since seen improving sales and returning to profitability. Despite the further provisions against the valuation of ATL following the period of sustained difficult trading condition, the company has previously repaid the entire cost of the original investment to the VCT.

Derby-based Datapath Group is the largest holding in the portfolio valued at £8.7 million. The company is a world leading innovator in the field of computer graphics and video-wall display technology utilised in a number of international markets. The company is increasing itsmarket share in control rooms, betting shops and signage and entering other new areas such as the medical market. For the year to 31 March 2015, an operating profit of £6.8 million was achieved on sales of £20.3 million, with the North American division trading ahead of budget.

The Board and Manager continue to focus on derisking large portfolio exposures such as Datapath and, in November 2015, Datapath paid a special dividend of £2.1 million to the Company. This was met principally from the company's own cash resources and management loans which are expected to be repaid from internally generated cash flow over the next year.

For a detailed review of all of the Company's investments I refer you to the Manager's Report that starts on page 11 of the Annual Report and Accounts.

Dividends

An interim dividend of 3.0p per Ordinary Share for the year ended 31 March 2016 was paid on 24 March 2016. The shares were quoted ex dividend on 10 March 2016 and the record date for payment was 11 March 2016. It continues to be the Company's policy to provide a flow of tax-free dividends, generated from income and from capital profits realised on the sale of investments. Distributions, however, will inevitably be dependent on cash being generated from portfolio investments and successful realisations.

The recent success in generating cash from portfolio investments within the Ordinary Shares fund gives the Board confidence that it will be able maintain the future payment of dividends to Shareholders.

Share Buybacks

During the period under review 533,877 Ordinary Shares were repurchased for cancellation at a cost of £235,000. These were purchased at a discount to NAV ranging from 22.5% to to 34.9%. There were no shares issued during the year.

VCT Legislation

As previously discussed, changes to VCT regulations were finally confirmed on 18 November 2015. There were no material changes to those detailed in my interim report. One of the principal purposes of the changes was to prevent VCT investment being used to acquire existing shares or the principal trade or assets of businesses.

The key aspects of the proposed new rules are as follows:

• Introducing an 'age of company' restriction of a maximum of seven years at the time of first VCT investment;
• Introducing a lifetime state aided investment limit of £12 million; and
• Prohibiting VCT investment financing acquisitions (as mentioned above).

Although the recent rule changes preclude VCTs investing in replacement capital transactions, the Treasury and HMRC have since agreed to review this policy following representations from inter alia the British Venture Capital Association, the Association of Investment

Companies, a number of legal firms and VCT managers, including Foresight Group.

Rather than an absolute restriction on replacement capital transactions, this review will consider relaxing the current rules to enable VCTs to invest an element of replacement capital alongside a significant element of growth capital in any particular transaction, possibly up to a maximum of 50% of the total amount invested. This review is currently expected to take up to two years and shareholders will be kept informed of any significant developments.

If concluded satisfactorily, the range of potential investment opportunities for VCTs would be widened, compared to the more restrictive regime that currently applies.

Brexit

There are two principal areas where the implementation of Brexit could impact the VCT:

1. Investee Companies - there has been much debate on the possible impact on trade between Europe and the UK following the Brexit vote and how this will impact UK corporates. Although it is much too early to say how large or small the impact may ultimately be, we do not believe that the impact will be material in the short to medium term; and
2. Regulation - many parts of the current VCT legislation has been cast from EU State Aid Directives, however, we do not believe that even following Brexit that changing VCT legislation will be a priority for the UK Government and therefore we do not expect any changes to the existing legislation in the short to medium term.

Merger Consideration

The Board has been closely monitoring the successful merger of Foresight VCT plc and Foresight 2 VCT plc following Shareholder approval in December 2015. Although the Board has not formally engaged with another company at this time, it is considering whether a merger and the benefits therefrom would be in Shareholders' long term interests and hopes to provide a further update in that regard in due course.

Annual General Meeting

The Company's Annual General Meeting will take place on 30 August 2016 at 1.00pm. I look forward to welcoming you to the Meeting, which will be held at the offices of Shakespeare Martineau LLP in London.

Details can be found on page 61 of the Annual Report and Accounts.

Prior to the formal business of the Annual General Meeting, Foresight Group, the investment Manager and two investee companies will give presentations between 12.00pm and 1.00pm.

Outlook

Although there is still considerable uncertainty in continental Europe as a result of stresses within the Euro area, the UK economy is in reasonable health and many businesses are making steady progress. The recent decision resulting from the referendum on 23 June, for the UK to begin negotiations to leave the European Union has also given rise to further uncertainty and it will take time to gauge the full effect that this may have for the Company. Many of the familiar risks, both financial and political, remain and there can be no grounds for complacency as all of our investments operate in competitive environments.

We hope that the effect of the improvement in the economy over the last few years continues, as this has been reflected in the improving performance of the private equity part of the Ordinary Shares portfolio. Within the portfolio, there is an ongoing focus on performance and realisations, refinancings, dividends and loan repayments which underpin the Board's dividend commitment to Shareholders. It has also enabled several new investments to be made which we anticipate will further enhance Shareholder returns.

Raymond Abbott

Chairman

28 July 2016

Manager's Report

In the year under review for 31 March 2016, the net asset value per Ordinary Share decreased by 6.3% to 59.6p per share as at 31 March 2016 from 66.8p per Ordinary Share as at 31 March 2015 (after taking into account the 3.0p per share dividend paid in March 2016). During the year the Company benefitted from good performances by several portfolio companies, the receipt of a £2.1 million dividend from Datapath and a recapitalisation of £565,000 from TFC, but was negatively impacted by a £1.76 million reduction in the valuation of one investment, Aerospace Tooling Holdings due to a reduced level of orders from its two largest customers.

An interim dividend of 3.0p per Ordinary Share was paid on 24 March 2016 to shareholders on the Register on 10 March 2016.

Having realised a significant number of investments over recent years, the principal focus in the year under review was to make new investments. Five new investments were made during the period, several of which are already making encouraging progress, particularly Itad and Specac. Further details of these new investments can be found in the Portfolio Review later in this report.

Foresight Group continues to see a number of high quality private equity investment opportunities. Foresight believes that, with the UK and US economies slowly recovering, investing in growing, well managed private companies should, based on past experience, generate attractive returns over the longer term. Based on its current deal flow, Foresight Group believes that attractive deals are currently available.

The recent referendum results on the United Kingdom leaving the European Union is not expected to result in any immediate material changes to the overall portfolio. Any prolonged weakness in Sterling will benefit those companies in the portfolio with a high proportion of exports.

Impact of recent changes to VCT legislation

The budget in July 2015 introduced a number of significant changes to VCT legislation. Following receipt of EU State Aid approval, these regulatory changes took effect from 18 November 2015, the date of Royal Assent to the Finance Act 2015. Two of these changes in particular are expected to impact the future management of all VCTs. First the restriction on the age of a company that is eligible for investment by a VCT (generally no more than seven years from the date of the company's first commercial sale) and second, restrictions on VCT funds being used in acquiring an interest in another company or existing business. By precluding replacement capital transactions, such as shareholder recapitalisations, management buy-outs or buy-ins and funding acquisitions by investee companies, the restrictions are designed to encourage more development capital transactions and investment in generally younger, less mature companies.

Foresight VCTs already invest in all these types of transactions so, although the proposed changes will result in a change of investment emphasis, they are not expected to have a material impact. The VCTs will continue to focus on investing in established, growing, profitable companies with an attractive risk/return profile as at present but will change emphasis from replacement capital transactions to development capital investments, including investing in earlier stage companies with a clear path to profitability. It will not be the policy, except in exceptional circumstances, to invest in start up companies.

Foresight has a strong track record in development capital transactions, having invested in both growth capital and replacement capital transactions since its formation over 30 years ago. For example,

40% of all investments made since 2010 were development capital transactions. Since then, 14 of these investments have been successfully realised, generating an average return of 2.2 times original cost.

With this long and successful track record, Foresight's marketing efforts have been refocused towards finding suitable, later stage development capital investment opportunities, with the aim of accelerating their growth. A number of such opportunities are currently under active consideration. Foresight remains confident that sufficient, suitable new and attractive investment opportunities can be sourced which will meet its return criteria and comply with the VCT rules.

While the full implications of the new rules have yet to be established, it is clear that, over the medium term, as existing investments are realised, this change in investment emphasis and the nature of new investments may lead to an increase in the VCTs' risk profile. Over the medium term, however, any such increase in risk profile could be tempered by a favourable outcome to the proposed VCT policy review, as mentioned below. The rule changes will, however, make the VCTs' operating environment more complicated and could limit the number of opportunities available for investment. Similarly, the Company may not necessarily be able to provide further investment funds for companies already in its portfolio.

Proposed VCT Policy Review

Although the recent rule changes preclude VCTs investing in replacement capital transactions, the Treasury and HMRC have since agreed to review this policy following representations from inter alia the British Venture Capital Association, the Association of Investment Companies and a number of legal firms and VCT managers, including Foresight. Rather than an absolute restriction on replacement capital transactions, this review will consider relaxing the current rules to enable VCTs to invest an element of replacement capital alongside a significant element of growth capital in any particular transaction, possibly up to a maximum of 50% of the total amount invested. This review and possible consultation process are expected to start in the near future. At this stage, it is not possible to forecast the ultimate outcome of the review, particularly since any proposed amendments will currently require both EU State Aid and Parliamentary approval. This process is expected to take up to two years and shareholders will be kept informed of any significant developments.

If this review concludes satisfactorily, the range of potential investment opportunities for VCTs would be widened, compared to the more restrictive regime that currently applies.

Portfolio Review

1. New investments

In September 2015, as part of a £4.2 million round alongside other Foresight VCTs, the Company invested £475,000 in ABL Investments Limited ("ABL") to support its continuing growth. ABL, based in Wellingborough, Northants and with a manufacturing subsidiary in Serbia, manufactures and distributes office power supplies and distributes monitor arms, cable tidies and CPU holders to office equipment manufacturers and distributors across the UK.

In September 2015, as part of a £4.0 million round alongside other Foresight VCTs, the Company invested £250,000 in Itad Limited, a long established consulting firm which monitors and evaluates the impact of international development and aid programmes, largely in developing countries. Customers include the UK Government's Department for International Development, other European governments, philanthropic foundations, charities and international NGOs. Most contracts are long term, providing good revenue visibility, while more than half of the employees are experienced consultants.

In July 2015, the Company invested £500,000 as part of a £4.0 million round alongside other Foresight VCTs to finance a management buy in/buy out of Coventry based Protean Software Limited ("Protean"). Protean develops and sells business management and field service management software for organisations involved in the supply, installation and maintenance of equipment, across sectors including facilities management, HVAC and elevator installation. Foresight has introduced two experienced software executives as CEO and Chairman respectively, who are working alongside three of the current directors to drive the business forward and execute growth plans.

In April 2015, the Company and Foresight 4 VCT each invested £650,000 in shares and loan notes, alongside a further a £1.3 million investment by Foresight VCT, in Specac International Limited ("Specac") to finance a £2.6 million management buy-out of Specac Limited from Smiths Group plc. The three Foresight VCTs together acquired a majority equity shareholding with the management team holding the remaining equity.

Specac, based in Orpington, Kent, is a long established, scientific instrumentation accessories business, manufacturing high specification sample analysis and sample preparation equipment used across a broad range of applications in testing, research and quality control laboratories and other end markets worldwide. The company's products are primarily focused on supporting IR Spectroscopy, an important analytical technique widely used in research and commercial/ industrial laboratories.

In September 2015, as part of a £3.3 million round alongside other Foresight VCTs, the Company invested £650,000 in The Business Advisory Limited. This company provides a range of advice and support services to UK based small businesses seeking to gain access to Government tax incentives, largely on a contingent success fee basis. With a large number of small customers signed up under medium term contracts, the company enjoys a high level of recurring income and good visibility on future revenues.

  2.  Follow-on funding 

* Representing capitalised interest. 

  3.  Realisations

Cole Henry PE 2, Kingsclere PE 3 and Whitchurch PE 1, all acquisition vehicles preparing to trade, repaid loans totaling £1,322,000. The resultant funds were utilised in making new investments during the year.

In November 2015, the Company received a dividend of £2,111,929 from Datapath.

In March 2016 the Company's interest in O-Gen Acme Trek was sold to Blackmead Infrastructure Limited, a subsidiary of Foresight's Inheritance Tax Solution, at book value for an initial cash consideration and a deferred consideration.

In July 2015, TFC effected a successful recapitalisation and share reorganisation, through which the Foresight VCTs were repaid all their outstanding loans, together with accrued interest and a redemption premium. The company was repaid £568,165 and increased its shareholding from 14.29% to 17.78%.

During the year, 71,313 ordinary shares in AIM listed Zoo Digital were sold, realising £8,023.

Loan repayments of £93,096 were received from the administrators of i-plas Group.

After financial year end, on 8 July 2016, the investment in Integrated Environmental Solutions Limited was sold for the current valuation amount £425,000, realising a profit of £100,000 on original cost.

4. Material provisions to a level below cost

The valuation of the investment in Aerospace Tooling Holdings Limited was reduced by £1,755,797 to £93,000 during the year due to a lower level of orders from its two largest customers. The cost of investment at the year end was £50,000. The full original cost of the investment has already been repaid to Foresight 3 VCT plc.

5. Performance Summary

The net asset value per Ordinary Share decreased by 6.3% to 59.6p per share as at 31 March 2016 from 66.8p per Ordinary Share as at 31 March 2015 (after incorporating the 3p per share dividend paid in March 2016). As explained below, the net asset value was negatively impacted by a £1.76m reduction in the valuation of Aerospace Tooling Holdings. During the year the Company benefitted from good performances by several portfolio companies. Together with Itad and Specac, CoGen Limited, Industrial Efficiency II, Ixaris Systems Limited, Positive Response Communications Limited, and The Bunker Secure Hosting Limited all performed well, supporting an increase in their aggregate valuation of over £1.7 million. Five new investments totalling £2.5 million were made during the year and are already making encouraging progress, particularly Itad and Specac.

Itad has won several large long term contracts, providing good revenue visibility for the current and future years, while Specac has successfully launched new products and increased sales, particularly in the important US market.

TFC's valuation was reduced by £1.13 million during the year reflecting reduced demand from the Oil & Gas sector in marked contrast to positive signs of improvement across a variety of other industry sectors.

As a consequence of the VCT rule changes referred to above, Foresight's marketing efforts have already been refocused towards finding more suitable, later stage development capital investment opportunities, with the aim of accelerating the growth of established, profitable companies. A number of such opportunities are currently under active consideration. The M&A market continues to be active, providing opportunities for future realisations.

Portfolio Company Highlights

In September 2015, as part of a £4.2 million round alongside other Foresight VCTs, the Company invested £475,000 in ABL Investments Limited ("ABL") to support further growth. ABL, based in Wellingborough, Northants and with a manufacturing subsidiary in Serbia, manufactures and distributes office power supplies and distributes monitor arms, cable tidies and CPU holders to office equipment manufacturers and distributors across the UK. Founded in 2003, ABL has grown strongly over the last five years, achieving an EBITDA of £1.9 million on sales of £5.5 million in its financial year to 31 August 2015, reflecting a strong focus on customer service, speed of delivery and value for money. Growth is forecast to be achieved by broadening both the product range and customer base in the UK, improving efficiency, marketing materials and the website and, in due course, expanding internationally. A new Chairman with experience of the office supplies market has been appointed to the Board, alongside a new Finance Director, with plans in hand to recruit a COO. A Financial Controller and additional salesmen have been recruited.

In June 2013, the Company invested £500,000 alongside other Foresight VCTs in a £3.5 million investment in Dundee-based Aerospace Tooling Holdings ("ATL"), a well-established specialist engineering company. ATL provides repair, refurbishment and remanufacturing services to large international companies for components in high-specification aerospace and turbine engines. With a heavy focus on quality assurance, the company enjoys well established relationships with companies serving the aerospace, military, marine and industrial markets. In the year to 30 June 2014, a number of large orders underpinned exceptional growth, with turnover doubling and EBITDA profits increasing significantly to a record £4.3 million.

Reflecting particularly strong cash generation, the company effected a recapitalisation and dividend distribution in September 2014, returning the entire £3.5 million cost of the Foresight VCTs' investments made only 15 months previously. Having received full repayment of its loan of £450,000 and dividends of £50,000 equal to the cost of its equity investment, the Company retained its original 7.7% equity shareholding in the company, effectively at nil cost.

Although sales and profitability were expected to be lower in the year to 30 June 2015, the actual trading results were weaker than budgeted, EBITDA of £2.5 million being achieved on sales of £8.1 million, reflecting weak trading in the final quarter of the year due to a premature reduction of work under a major defence contract. This unexpected early contract termination was subsequently followed by a significant reduction in work for an important customer in the Oil and Gas industries, as a consequence of the falling oil price. With poor order visibility, costs were reduced, management changes made and sales efforts increased substantially.

Trading in the first half to December 2015 continued to be weak, with EBITDA losses being incurred on significantly lower sales. A new experienced CEO was appointed in January 2016 and the company has since seen improving sales, winning customers and returning to profitability.

Following the £48.0 million secondary buy-out of Autologic Diagnostics Group, an automotive diagnostics software company, by Living Bridge (formerly ISIS Private Equity) in January 2012, the Company retained investments in equity and loan stock valued at £1.98 million. For the year to 31 December 2014, an EBITDA of £5.4 million was achieved on sales of £19.7 million, with sales relatively stronger in the UK and Europe compared with the USA. In May 2015, a new business model was launched to generate recurring revenues and improve the quality of the company's earnings from a new product, Assist Plus, and associated Assist Plus service. This change in strategy towards a pure recurring revenue model has resulted in certain exceptional costs being incurred and impacted EBITDA during 2015, reducing this to £4.0 million on revenues of £18.5 million for the year to 31 December 2015, in line with expectations. At 31 March 2016, the company had cash balances of over £6.0 million. Management are transitioning the existing customer base onto the new support service platform and growing sales of the new product and service to both new and existing customers. Depending on the number of existing customers transitioning onto the new product and service and level of new customer sales, this change in strategy will also impact EBITDA in 2016 but is expected to increase shareholder value over the longer term. Initial signs are promising, with largely positive feedback from customers.

Biofortuna, established in 2008, is a molecular diagnostics business based in the North West, which has developed unique expertise in the manufacture of freeze dried, stabilised DNA tests. Biofortuna develops and sells both its own proprietary tests as well as a comprehensive range of contract manufacturing services. A £1.3 million round to finance capital expenditure and working capital was completed in August 2013, in which the Company invested £99,066 in the first tranche and a further £50,901 in the second, final tranche in April 2014. For the year to March 2015, a substantially reduced operating loss of £528,000 was incurred on higher sales of £1.1 million (2014: an operating loss of £1.1 million incurred on sales of £325,000). Trading in the year to 31 March 2016 was well ahead of budget and the previous year, with an improved, reduced EBITDA loss, the profitable Contract Manufacturing division helping to offset investment in the proprietary products being developed by the Molecular Diagnostics division.

To finance the development of new products, a £1.6 million round was concluded in January 2015, of which £890,000 was committed by the Foresight VCTs. The Company committed to invest £214,335, of which £127,997 was invested as the first tranche. With a lower than planned cash outflow, the second, final tranche is now expected to be drawn down during late 2016.

Building on the success of its £48.0 million, 10MW Birmingham Bio Power Limited project ("BBPL") with Carbonarius (a 50:50 joint venture with Plymouth-based Una Group), O-Gen UK has become the UK's leading independent developer of Advanced Conversion Technology waste to energy projects. In March 2015, O-Gen UK and Una Group combined their two teams into a new company, CoGen Limited, to further develop their substantial, combined pipeline of projects. In order to accelerate growth and provide additional working capital, a new investor subscribed £750,000 for equity in CoGen, alongside a loan of £500,000 from Una Group. Funds managed by Foresight hold 22.13% of CoGen's equity, including Foresight VCT (3.53%), Foresight 3 VCT (7.73%), Foresight 4 VCT (8.55%) and the Foresight UK Sustainable EIS fund (2.32%). O-Gen UK remains the shareholder in BBPL.

In March 2015, CoGen reached financial close on a £53.0 million, 10MWe waste wood to energy plant in Welland, Northamptonshire, using the same technology and partners as BBPL. This latest project was funded with investment from Balfour Beatty plc, Equitix and Noy (an Israeli investment fund), with CoGen earning development fees on the transaction while retaining a 12.5% shareholding in the project.

Also in March, CoGen completed the acquisition of the entire O-Gen Plymtrek site in Plymouth, originally developed by Carbonarius and MITIE plc, on which an £8.0 million 4.5MW waste to energy plant is planned to be built utilising much of the footprint of the existing plant. The funding for this transaction was provided by Aurium Capital Markets, with CoGen owning 50% of the acquisition vehicle and Aurium 50% but with a prior ranking return on the latter's invested capital.

In October 2015, CoGen reached financial close on a £98.0 million, 21.5MW project in Ince Park, Merseyside to be fuelled with circa 160,000 tonnes per annum of recycled wood fibre. All of the funding was provided by the Bioenergy Infrastructure Group ("BIG", of which Foresight Group is a co-sponsor) through a combination of shareholder loan and shares which receive a preferential return.

Cogen is developing its pipeline of projects and funding relationships, with active support from Foresight and BIG. The market has become more uncertain with the Government's changes in renewables policy, in particular uncertainty relating to future CfD auctions. Cogen was unfortunately not able to close its final, potential £120.0 million Renewable Obligation Certificates ("ROC") project as time expired under the ROC deadline. Cogen's primary deal pipeline comprises four projects in Northern England and it plans to bid in the CfD auction due at the end of 2016, with the aim of closing projects, if successful in that auction, during 2017. BIG is expected to jointly fund this process, requiring a total of £5.0 million of investment.

It is unlikely that full value will be secured for Foresight VCT's stakes in Cogen and O-Gen UK until the portfolio of plants is fully operational. However, Foresight Group will keep this situation under review.

In February 2014, the O-Gen Acme Trek facility in Stoke-on-Trent was granted planning permission for an enlarged 8MW waste wood to energy plant. It was not possible, however, to finance and redevelop the site as a project qualifying for ROCs in time for the ROC deadline. In March 2016 the Company's interest in O-Gen Acme Trek was sold to Blackmead Infrastructure Limited, a subsidiary of Foresight's Inheritance Tax Solution, at book value based on an independent valuation for an initial cash consideration and a deferred consideration element.

Derby-based Datapath Group is a world leading innovator in the field of computer graphics and video-wall display technology utilised in a number of international markets. The company is increasing its market share in control rooms, betting shops and signage and entering other new markets such as medical. For the year to 31 March 2015, an operating profit of £6.8 million was achieved on sales of £19.3 million, with the North American division trading ahead of budget (2014: record operating profits of £7.4 million on sales of £18.7 million). In November 2015, Datapath paid dividends of £6.3 million, comprising £2.1 million to the Company and the same amount to each of Foresight 2 VCT and Foresight 4 VCT. This was met principally from the company's own cash resources and short term loans which are expected to be repaid from internally generated cash flow over the next year. For the year to March 2016, the company made an operating profit of £5.9 million on sales of £19.9 million.

In May 2012, the Company invested £200,000 in Flowrite Refrigeration Holdings alongside other Foresight VCTs to finance the £3.2 million management buy-out of Kent-based Flowrite Services Limited. Flowrite Refrigeration Holdings provides refrigeration and air conditioning maintenance and related services nationally, principally to leisure and commercial businesses such as hotels, clubs, pubs and restaurants. In the year to 31 October 2014, the company traded well, achieving an operating profit of £740,000 on sales of £10.8 million after substantial investment in new engineers and systems.

In July 2015, the company completed another recapitalisation, returning £156,000 of accrued interest to the Foresight VCTs, including £23,000 to the Company, taking total cash returned on this investment to 85% of cost. For the 14 months to 31 December 2015, the company achieved a disappointing operating profit of £404,000 on sales of £12.8 million, reflecting difficulties arising from installing a new workflow IT system to improve operational efficiency and optimise profitability. To drive the business forward, steps were taken in August 2015 to broaden the management team through the appointment of a new Chairman and a new Finance Director.

ICA Group is a leading document management solutions provider in the South East of England, reselling and maintaining office printing equipment to customers in the commercial and public sectors. For the year to 31 January 2015, trading was strong and ahead of budget, with an EBITDA of £645,000 being achieved on sales of £3.7 million (2014: EBITDA of £561,000 on sales of £3.0 million). Trading in the year to 31 January 2016 was in line with expectations and reflected continuing investment in developing the sales team. With stronger demand from

 SMEs and good cash generation, ICA completed a recapitalisation and reorganisation in December 2014, enabling loans and interest totalling £600,000 to be repaid. The recapitalisation was financed through a £1.0 million bank loan facility and the company's cash resources. As part of the reorganisation, Steven Hallisey, a seasoned executive with relevant sector experience, was appointed Executive Chairman in January 2015.

In July 2014, as part of the first £1.4 million tranche of a phased funding round totalling up to £4.4 million by three Foresight managed funds, a new investment of £326,740 was made by the Company in Industrial Efficiency II, alongside £990,760 from Foresight VCT. In December 2014, the second £500,000 tranche was advanced, £125,000 from the Company and £375,000 from Foresight VCT. Industrial Efficiency II provides energy efficiency fuel switching services, enabling customers to make significant cost savings and reduce emissions. Once each installation is completed, the company charges the customer based on the volume of fuel and electricity consumed at each site up to a pre agreed level, which is expected to be reached after five years, at which time the contract will terminate and payments reduce to a nominal level. The company is trading well to date, with healthy cash balances.

In September 2015, as part of a £4.0 million round alongside other Foresight VCTs, the Company invested £250,000 in Itad Limited, a long established consulting firm which monitors and evaluates the impact of international development and aid programmes, largely in developing countries. Customers include the UK Government's Department for International Development, other European governments, philanthropic foundations, charities and international NGOs. For the year to 31 January 2015, Itad achieved an EBITDA of

£1.5 million on revenues of £8.8 million with significant future growth forecast. A number of significant contracts have been won recently and, as most contracts are long term, this provides good revenue visibility for the current and future years.

Ixaris Systems has developed and operates Entropay, a web-based global prepaid payment service using the VISA network. Ixaris also offers its IxSol product on a 'Platform as a Service' basis to enable enterprises to develop their own customised global applications for payments over various payment networks. During 2013, the company invested in developing and marketing its Ixaris Payment System, the platform that runs IxSol, to financial institutions. The platform enables financial institutions to offer payment services to customers based on prepaid cards. This division continues to make good progress. The first deployment went live in late 2015, the second in early 2016 with a third expected shortly. Ixaris was awarded an EU grant of €2.5 million, of which €1.6 million will be received over three years, to help fund the existing platform technology roadmap, which highlights the innovative nature of the Payment System.

For part of the year to 31 December 2015, the company operated at around EBITDA and cash flow break even while continuing to invest further in Ixsol and Ixaris Payment System. For the full year to 31 December 2015, reflecting strong trading and continuing investment in software and systems, an EBITDA loss of £501,000 was incurred on sales of £10.8 million, ahead of budget (2014: an EBITDA loss of £622,000 on sales of £9.5 million).

Mplsystems Limited (formerly The Message Pad) develops and sells contact centre and customer service software on a SaaS (Software as a Service) basis to improve the efficiency of its customers' call centres and customer experience. For the year to 31 May 2015, the company incurred a small operating loss on sales of £2.4 million, appreciably ahead of the budgeted loss (2014: operating loss of £777,000 on sales of £1.8 million). The transition towards a SaaS business model continues to progress well in the current year to date with a number of new contracts and customers being won. The focus remains on sales, principally expanding initial ticket sizes for larger customers in order to justify a relatively high cost of customer acquisition.

For the year to the 31st May 2016, mplsystems achieved generated revenue of £2.9 million, 22% ahead of revenue for the same period last year. Focus remains on new business sales signing more SaaS deals. In terms of the full year outlook, management forecast strong growth momentum to continue. An experienced business development manager from IBM is due to join the sales team in June 2016. Mplsystems has been included for the second year running in the prestigious Gartner CRM Magic Quadrant.

In December 2014, the Company invested £500,000 alongside other Foresight VCTs in a £2.0 million round to finance a shareholder recapitalisation of Positive Response Communications. Established in 1997, the company monitors the safety of people and property from its 24 hour monitoring centre in Dumfries, Scotland. Customers include several major restaurant and retail chains. For the year ended 31 March 2015, an EBITDA of £637,000 was achieved on sales of £2.0 million. In the financial year to 31 March 2016, sales grew modestly with reduced EBITDA profits, reflecting investment in improving efficiency and systems and recruitment of more sales staff. The management team has been strengthened with the appointment of three experienced executives as Chairman, CEO and Finance Director respectively.

In April 2013, the Company invested £650,000 alongside other Foresight VCTs in a £1.8 million round to finance a management buy- out of Procam Television Holdings. Procam is one of the UK's leading broadcast hire companies, supplying equipment and crews for UK location TV production to broadcasters, production companies and other businesses for over 20 years. Headquartered in Acton, London, with additional facilities in Manchester, Edinburgh and Glasgow, Procam is a preferred supplier to BSkyB and an approved supplier to the BBC and ITV. Revenues and profits have grown strongly, following the introduction of new camera formats, acquisitions in both the UK and USA and increased sales and marketing efforts.

In December 2014, Procam acquired True Lens Services, based in Leicester, which specialises in the repair, refurbishment and supply of camera lenses with further support from the Foresight VCTs. In March 2015, in order to service the requirements of many of its existing UK customers and enter the large US market, Procam acquired HotCam New York City which provides camera, audio and lighting rental for TV production, plus crew and related production services. These two acquisitions were supported by a further investment of £1.3 million from the Foresight VCTs, of which the Company invested £451,385.

In February 2016, ProCam acquired the trading assets of the film division of Take 2 Films which provides digital and film camera equipment for Film and TV. This was funded by bank debt and asset finance facilities.

For the year to 31 December 2014, the company achieved an EBITDA of £2.3 million on revenues of £8.1 million, ahead of the prior year, reflecting organic growth and the integration of the Hammerhead acquisition. Trading in the year to 31 December 2015 was strong with an EBITDA of £3.3 million being achieved on sales of £11.5 million, reflecting both organic growth, driven principally by the strong performance of the London office, and impact of the acquisitions during the year.

In July 2015, as part of a £4.0 million round alongside other Foresight VCTs, the Company invested £500,000 in Coventry-based Protean Software. Protean develops and sells business management and field service management software, together with related support and maintenance services, to organisations involved in the supply, installation and maintenance of equipment, across a number of sectors including facilities management, HVAC and elevator  installation.

Protean's software suite offers both desktop and mobile variants used on engineers' Android devices. A new CEO and an experienced Chairman were appointed at completion and a new Financial Controller recruited subsequently. For the year to 31 March 2015, EBITDA of £900,000 was achieved on sales of £3.0 million. Trading in the year to 31 March 2016 was ahead of the previous year while profits were in line with the previous year, reflecting increased investment and overheads.

In April 2015, Foresight funds invested £2.6 million in shares and loan notes in Specac International ("Specac") to finance a management buy-out of Specac Limited from Smiths Group plc. The Company invested £650,000, alongside £1.3 million from Foresight VCT and

£650,000 from Foresight 4 VCT, together acquiring a majority equity shareholding with the management team holding the remaining equity. Specac, based in Orpington, Kent, is a long established, leading scientific instrumentation accessories business, manufacturing high specification sample analysis and sample preparation equipment a broad range of applications in testing, research and quality control laboratories and other end markets Worldwide. The company's products are primarily focused on supporting IR Spectroscopy, an important analytical technique widely used in research and commercial / industrial laboratories.

For the year to 31 July 2015, the company achieved EBITDA of £906,000 on sales of £6.9 million. Trading in the current year to date has exceeded expectations with profit growth ahead of forecast, reflecting greater focus on sales and costs. The company has accelerated new product development and successfully launched new products. A non-executive Chairman has also been appointed with a strong sales and marketing background in the scientific instrumentation market who will complement the existing management team and assist in further developing the business.

TFC Europe, a leading distributor of technical fasteners in the UK and Germany, performed satisfactorily during the year to 31 March 2015, achieving an operating profit of £2.8 million on sales of £20.3 million (2014: operating profit of £2.8 million on sales of £19.5 million). Trading in the year to 31 March 2016, however, was appreciably weaker than budgeted due to a general downturn in the UK manufacturing sector, particularly the Oil and Gas sector.

In July 2015, the company effected a successful recapitalisation, as a result of which £2.4 million was received by the Foresight VCTs, repaying all their outstanding loans, together with accrued interest and a redemption premium. The overall Foresight shareholding increased from 53.6% to 66.7%. The Company received £568,165 and increased its shareholding from 14.29% to 17.78%. A number of senior management changes and promotions were made to facilitate the planned retirement of the Chairman, helping the CEO to drive strategic growth projects, particularly in Germany and focus on new customer targets within the aerospace sector. In April 2015, two senior managers were promoted to Sales Director and Commercial Director roles. A Group Operations Manager has been appointed to drive cost efficiencies and introduce best operational practice across the Group.

The Bunker Secure Hosting, which operates two ultra-secure data centres, continues to generate substantial profits at the EBITDA level. For the year to 31 December 2015, an EBITDA of £2.2 million was achieved on sales of £9.6 million (2014: EBITDA of £2.2 million on sales of £9.3 million). Recurring annual revenues presently exceed £9.3 million while cash balances remain healthy. On 31 March 2015, The Bunker repaid all its shareholder loans and outstanding interest totalling £6.5 million, financed through a £5.7 million secured medium term bank loan plus £1.0 million from its own cash resources. In total, £5.1 million was repaid to the Foresight VCTs, comprising £3.0 million of loan principal and £2.1 million of interest. The Company received £1.7 million, comprising £1.3 million of loan principal and £408,994 of interest and retains an 10.3% shareholding. The company has now commenced a trial with a large distributor which serves many value added resellers. A new, experienced Sales Manager has been recruited to lead channel sales. A number of acquisitions have been reviewed with a view to increasing the scale of operations.

In September 2015, as part of a £3.3 million round alongside other Foresight VCTs, the Company invested £650,000 in The Business Advisory Limited. This company provides a range of advice and support services to UK-based small businesses seeking to gain access to Government tax incentives, largely on a contingent success fee basis. With a large number of small customers signed up under medium term contracts, the company enjoys a high level of recurring income and good visibility on future revenues.

For the year to 30 September 2015, a net profit before tax of £1.4 million on sales of £4.2 million was achieved, well ahead of the prior year. Management has been strengthened by the appointment of a new COO in January 2016 and a new experienced, non-executive Chairman.

Reflecting a decline in trading in the second half of the year, The SkillsGroup (formerly named AtFutsal Group) was placed into administration on 10 December 2015, with the prospect of only minimal recoveries. The company ran government-approved education programmes for students aged 16-18 years old, sourced from Football clubs, colleges, academies and training/accreditation organisations, the funding for which was provided by the Education Funding Agency. Arenas in Birmingham, Leeds and Swindon were used in part for these education programmes.

Trading during 2015 was weak, resulting in a small EBITDA loss being incurred, compounded by the number of students undertaking programmes for the new academic year which began in September 2015 falling by 50% compared to the previous year. In early 2015, as part of a £355,000 funding round to support the planned growth of the Educational division and a related share reorganisation, the Foresight VCTs invested a further £300,000 (£100,000 in February 2015 and £200,000 in April 2015) of which the Company invested £34,014. Despite changes made to senior management trading remained weak and the decision was made to make a full provision of £411,679 against the cost of the investment, reducing the valuation to nil.

Russell Healey

Head of Private Equity Foresight Group

28 July 2016

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. The Company mitigates this risk by investing in a diversified portfolio of companies across a variety of sectors which provides protection against such events.
• 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 corporation 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 in the hands of investors. The Company would also lose its exemption from corporation tax on capital gains. To mitigate this risk the company employs specialists lawyers to monitor and advise on matters that may impact qualifying status.
• Investment and strategic - inappropriate strategy, poor asset allocation or consistently weak stock selection leading to under performance and poor returns to shareholders. To mitigate this risk the Company ensures its directors have the appropriate qualities and experience to make decisions that maximise shareholder benefit.
• Regulatory - the Company is required to comply with the Companies Acts 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. To mitigate this risk the company ensures the staff of the Investment Manager have the appropriate knowledge and experience to prevent breaches of any required standards and where appropriate will seek professional advice on regulatory matters concerning the company.
• Reputational - inadequate or failed controls might result in breaches of regulations or loss of shareholder trust. To mitigate this risk the Company maintains a transparent relationship with its shareholders and regularly solicits their views.
• Operational - failure of the Manager's or Company Secretary's accounting systems or disruption to its business leading to an inability to provide accurate reporting and monitoring. To mitigate this risk the Company has a business continuity plan in place and regularly reviews all third party service providers to ensure they have similar plans and procedures in place.
• Financial - inadequate controls might lead to misappropriation or loss 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 later in this note.
• Market risk - investment in AIM traded, ISDX Growth Market 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 small 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 ISDX Growth Markets does not guarantee that it can be realised. The spread between the buying and selling price of such shares may not reflect the price that any realisation is actually made.

The Board regularly reviews the principal risks and uncertainties facing the Company which the Board and the Manager have identified and the Board sets out delegated controls designed to manage those risks and uncertainties. Key risks within investment strategy are managed by the Board through a defined investment policy, with guidelines and restrictions, and by the process of oversight at each Board meeting. Operational disruption, accounting and legal risks are also covered at least annually and regulatory compliance is reviewed at each Board meeting. The Directors have adopted a robust framework of internal controls which is designed to monitor the principal risks and uncertainties facing the Company and provide a monitoring system to enable the Directors to mitigate these risks as far as possible. Details of the Company's internal controls are contained in the Corporate Governance and Internal Control sections.

Income Statement

for the year ended 31 March 2016

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.

Reconciliation of Movements in Shareholders' Funds

* Trail commission payable to financial advisors in the year.

** Of this amount £5,417,000 (2015: £16,815,000) is realised and distributable.

Balance Sheet

at 31 March 2016

Cash Flow Statement

for the year ended 31 March 2016

Reconciliation of net cash flow to movement in net cash

Notes  

1.  These are not statutory accounts in accordance with S436 of the Companies Act 2006. The full audited accounts for the year ended 31 March 2016, which were unmodified 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 2016 including an unmodified audit report and containing no statements under the Companies Act 2006 will be delivered to the Registrar of Companies in due course.    

2.  The disclosures in this announcement have been prepared on the basis of accounting policies set out in the statutory accounts of the Company for the year ended 31 March 2016. All investments held by the Company are classified as 'fair value through the profit and loss'. Unquoted investments have been valued in accordance with IPEVC guidelines. Quoted investments are stated at bid prices in accordance with the IPEVC guidelines and Generally Accepted Accounting Practice.    

3.    Copies of the Annual Financial Report will be sent to shareholders and will be available for inspection at the Registered Office of the Company at The Shard, 32 London Bridge Street, London SE1 9SG 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 £29,695,000 (2015: £33,663,000), and on 49,836,524 Ordinary Shares (2015: 50,370,401 Ordinary Shares), being the number of Ordinary Shares in issue at that date.
5.    Return per Ordinary Share

Notes:
a) Total loss 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 loss per share is capital return after taxation divided by the weighted average number of shares in issue during the year.

6.    Annual General Meeting
The Company's Annual General Meeting will take place on 30 August 2016 at 1.00pm. I look forward to welcoming you to the Meeting, which will be held at the offices of Shakespeare Martineau LLP in London.

Prior to the formal business of the Annual General Meeting, Foresight Group, the investment Manager and two investee companies will give presentations between 12.00pm and 1.00pm.

7.    Income

8.    Investments held at fair value through profit or loss

* Included within realised gains/(losses) on investments in the Income Statement is £88,000 of deferred consideration in relation to the disposal of Alaric Systems Limited in a previous year.

** Not included within purchases of investments in the cashflow statement is £159,000 of capitalised interest which was recognised in the year.

*** Investment holding gains in the income statement includes £466,000 of deferred consideration recognised in the year.

9.  Transactions with the manager

Foresight Group, acting as investment manager to the Company in respect of its venture capital investments, earned fees of £745,000 during the year (2015: £864,000). Fees excluding VAT of £127,000 (2015: £127,000) were received during the year for company secretarial, administrative and custodian services to the Company.

At the balance sheet date, there was £1,839 due from Foresight Group (2015: £14,446 due to Foresight Group) and £nil due to Foresight Fund Managers Limited (2015: £nil due to Foresight Fund Managers). No amounts have been written off in the year in respect of debts due to or from these parties.

Foresight Group also received from investee companies arrangement fees of £75,750 (2015: £41,828). VCF partners, an associate of Foresight Group, received from investee companies, Directors' fees of £113,072 (2014: £144,795).

10.    Related party transactions

No Director has an interest in any contract to which the Company is a party.