Northern 2 VCT PLC – Annual Financial Report

25th May 2011



26 MAY 2011






Northern 2 VCT PLC is a Venture Capital Trust (VCT) managed by NVM Private Equity.  The trust invests mainly in unquoted venture capital holdings and aims to provide high long-term tax-free returns to shareholders through a combination of dividend yield and capital growth.


Financial highlights – 14 months ended 31 March 2011:
(comparative figures for the year ended 31 January 2010):


                                2011                       2010 
Net assets   £45.7m   £44.3m
Net asset value per share   79.5p   77.9p
Return per share        
Revenue   2.1p   1.7p
Capital   4.8p   11.8p
Total   6.9p   13.5p
Dividend per share proposed        
in respect of the period        
Revenue   2.0p   2.0p
Capital   4.5p   3.5p
Total   6.5p   5.5p
Cumulative return to        
shareholders since launch        
Net asset value per share   79.5p   77.9p
Dividends paid per share*   52.4p   46.9p
Net asset value plus dividends        
paid per share   131.9p   124.8p
Share price at end of period   65p   62p

*Excluding proposed final dividend



For further information, please contact:


NVM Private Equity Limited
Alastair Conn/Christopher Mellor

0191 244 6000







Our company has continued to progress well during the 14 month period under review, despite a continuation of difficult conditions in the UK economy and financial markets.  New investments in the venture capital portfolio were at a record level, and solid performance by existing investee companies produced an increase in net asset value (NAV) per share over the period.  The dividend paid to investors was again in line with our annual target rate of 5.5p per share.


NAV and return per share


The NAV per share as at 31 March 2011 was 79.5p, up from 77.9p as at 31 January 2010.  The total return per share for the extended 14 month period to 31 March 2011 was 6.9p, equivalent to 8.9% of the opening net asset value.  On an annualised basis investment income was marginally up over the preceding year, whilst total expenses charged to the revenue account were slightly down, which led to a increase in the revenue return per share from 1.7p to 2.1p.




An interim dividend of 2.0p per share was paid in December 2010.  As indicated in January 2011, the directors have declared a second interim dividend of 1.0p per share to reflect the increased length of the last accounting period due to the change of year end to 31 March.  A final dividend of 3.5p per share is proposed which will, if approved by shareholders at the annual general meeting, be paid with the second interim dividend on 22 July 2011 to shareholders on the register on 1 July 2011.  This is the seventh successive accounting period in which the annual rate of dividend has been 5.5p per share or more.


Following the change in year end, it is intended that in future years an interim dividend will be paid each January with the final dividend being paid in July.


Investment portfolio


New investments in the venture capital portfolio totalled £11.0 million, an all-time high for a single accounting period.  With no major exits during the period, sale proceeds were relatively low at £2.5 million, including £0.8 million in deferred proceeds from the sale of DxS in 2009.


The venture capital portfolio at 31 March 2011 comprised 45 holdings with an aggregate value of £33.0 million.  Despite the unhelpful environment for smaller UK businesses, the portfolio as a whole has made encouraging progress and most of our companies are well positioned to both withstand short-term challenges and take advantage of longer-term opportunities.


At the annual general meeting in May 2010 shareholders approved a resolution to amend the company’s investment policy so as to permit the use of a wider range of financial instruments, with a view to generating an improved return on funds awaiting long-term investment.  For the time being your directors have continued to hold surplus funds in a range of fixed-income bonds and cash deposits, but this is kept under regular review in the light of available returns.


Shareholder issues


It was announced a year ago that the company would follow a policy of repurchasing its shares in the market at a discount of 15% to NAV, in order to provide liquidity for shareholders wishing to realise their investment in the company.  During the 14 months to 31 March 2011 the company repurchased a total of 1,100,000 shares at a cost of £0.7 million, an average price of 64.2p per share.


In March 2011 1,278,565 new ordinary shares were issued at a price of 82p per share through a small public offer in conjunction with a similar offer by Northern 3 VCT, raising a total of £1.0 million net of expenses.  I would like to welcome our new shareholders to the company and thank both them and our existing investors for their support.


VCT qualifying status


The company has continued to meet the qualifying conditions laid down by HM Revenue & Customs for maintaining its approval as a VCT.  The board retains PricewaterhouseCoopers LLP as independent advisers on VCT taxation matters.


Board of directors


Professor Sir Frederick Holliday has indicated that he intends to retire from the board at the close of the forthcoming annual general meeting.  Fred has had an immensely distinguished academic and business career and has served on the boards of many public companies.  We have been very fortunate to have had the benefit of his involvement with Northern 2 VCT since the inception of the company in 1999.  On behalf of shareholders and Fred’s board colleagues I would like to thank him for his enormous contribution as a director and wish him a long and happy retirement.




Northern 2 VCT has continued to build on its sound long-term performance record and we believe that our current investment portfolio represents a good foundation for further growth in the future. The flow of potential new investments has been strong in recent months, and we must seek to capitalise on these opportunities whilst achieving satisfactory exits from existing investments in order to generate funds for dividend payments to shareholders.  In the current economic climate this presents a considerable challenge, but one which your board and managers face with confidence in the knowledge that our investment policy and practice have been well tried and tested over many years.



David Gravells



The audited financial statements for the 14 months ended 31 March 2011 are set out below.



for the 14 months ended 31 March 2011


  14 months ended 31 March 2011  Year ended 31 January 2010 
Gain on disposal of            
  investments –  1,065  1,065  –  4,676  4,676 
Movements in fair value            
  of investments –  2,206  2,206  –  2,505  2,505 
  ———-  ———-  ———-  ———-  ———-  ———- 
  –  3,271  3,271  –  7,181  7,181 
Income 2,034  –  2,034  1,704  –  1,704 
Investment management fee (263) (983) (1,246) (215) (647) (862)
Recoverable VAT 72  215  287  –  –  – 
Other expenses (329) –  (329) (303) –  (303)
  ———-  ———-  ———-  ———-  ———-  ———- 
Return on ordinary            
  activities before tax 1,514  2,503  4,017  1,186  6,534  7,720 
Tax on return on            
  ordinary activities (321) 215  (106) (198) 185  (13)
  ———-  ———-  ———-  ———-  ———-  ———- 
Return on ordinary            
  activities after tax 1,193  2,718  3,911  988  6,719  7,707 
  ———-  ———-  ———-  ———-  ———-  ———- 
Return per share 2.1p 4.8p 6.9p 1.7p 11.8p 13.5p



for the 14 months ended 31 March 2011


    14 months ended 
31 March 2011 
Year ended 
31 January 2010 
Equity shareholders’ funds      
  at 1 February 2010   44,349  39,702 
Return on ordinary      
  activities after tax   3,911  7,707 
Dividends recognised      
  in the period   (3,113) (3,130)
Net proceeds of share issues   1,272  271 
Shares purchased for      
  cancellation   (706) (201)
    ———-  ———- 
Equity shareholders’ funds      
  at 31 March 2011   45,713  44,349 
    ———-  ———- 



as at 31 March 2011


    31 March 
31 January 
Venture capital investments      
  Unquoted   30,114  18,250 
  Quoted   2,915  2,542 
    ———-  ———- 
Total venture capital investments   33,029  20,792 
Listed fixed-interest investments   8,955  8,837 
    ———-  ———- 
Total fixed asset investments   41,984  29,629 
    ———-  ———- 
Current assets:      
  Debtors   798  658 
  Cash and deposits   3,996  14,180 
    ———-  ———- 
    4,794  14,838 
Creditors (amounts falling due      
  within one year)   (1,065) (118)
    ———-  ———- 
Net current assets   3,729  14,720 
    ———-  ———- 
Net assets   45,713  44,349 
    ———-  ———- 
Capital and reserves:      
Called-up equity share capital   2,873  2,845 
Share premium   35,461  34,272 
Capital redemption reserve   410  355 
Capital reserve   6,167  8,348 
Revaluation reserve   (31) (2,243)
Revenue reserve   833  772 
    ———-  ———- 
Total equity shareholders’ funds   45,713  44,349 
    ———-  ———- 
Net asset value per share   79.5p 77.9p



for the 14 months ended 31 March 2011


    14 months ended 
31 March 2011 
Year ended 
31 January 2010 
      £000  £000  £000  £000 
Cash flow statement            
Net cash inflow from            
  operating activities       839    657 
Corporation tax paid       (22)   (409)
Financial investment:            
Purchase of investments     (14,839)   (11,220)  
Sale/repayment of            
  Investments     6,385    16,321   
      ———-    ———-   
Net cash inflow/(outflow)          
  from financial investment     (8,454)   5,101 
Equity dividends paid       (3,113)   (3,130)
        ———-    ———- 
Net cash inflow/(outflow)          
  before financing     (10,750)   2,219 
Issue of shares     1,340    297   
Share issue expenses     (68)   (26)  
Purchase of shares            
  for cancellation     (706)   (201)  
      ———-    ———-   
Net cash inflow from financing     566    70 
        ———-    ———- 
Increase/(decrease) in cash and deposits     (10,184)    2,289 
        ———-    ———- 
Reconciliation of return          
before tax to net cash flow from          
operating activities            
Return on ordinary          
  activities before tax       4,017    7,720 
Gain on disposal of investments     (1,065)   (4,676)
Movements in fair value of investments     (2,206)   (2,505)
(Increase)/decrease in debtors     (140)   155 
Increase/(decrease) in creditors     233    (37)
        ———-    ———- 
Net cash inflow from            
  operating activities       839    657 
        ———-    ———- 
Reconciliation of movement          
in net funds            
  1 February 2010  Cash flows  31 March 2011 
    £000    £000    £000 
Cash at bank   14,180    (10,184)   3,996 
    ———-    ———-    ———- 



as at 31 March 2011


% of net assets
by value
Fifteen largest venture capital investments      
Kerridge Commercial Systems 1,740 3,041 6.7
Promanex Group Holdings 1,694 2,135 4.7
CloserStill Holdings 1,001 1,521 3.3
Arleigh International 939 1,438 3.1
Envirotec 975 1,431 3.1
IG Doors 744 1,362 3.0
Crantock Bakery 1,107 1,359 3.0
Kitwave One 1,246 1,246 2.7
Paladin Group 1,307 1,209 2.6
Alaric Systems 1,269 1,200 2.6
Axial Systems Holdings 1,004 1,141 2.5
Wear Inns 1,116 1,116 2.4
Cawood Scientific 1,031 1,031 2.3
Evolve Investments 995 995 2.2
RCC Lifesciences 995 995 2.2
  ———- ———- ———-
  17,163 21,220 46.4
Other venture capital investments 15,146 11,809 25.8
  ———- ———- ———-
Total venture capital investments 32,309 33,029 72.2
Listed fixed-interest investments 9,076 8,955 19.6
  ———- ———- ———-
Total fixed asset investments 41,385 41,984 91.8
Net current assets   3,729 8.2
    ———- ———-
Net assets   45,713 100.0
    ———- ———-

*Quoted on AIM





The board carries out a regular review of the risk environment in which the company operates.  The principal risks and uncertainties identified by the board are as follows:


Investment risk:  The majority of the company’s investments are in small and medium-sized unquoted and AIM-quoted companies which are VCT qualifying holdings, and which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies. The directors aim to limit the risk attaching to the portfolio as a whole by careful selection and timely realisation of investments, by carrying out rigorous due diligence procedures and by maintaining a wide spread of holdings in terms of financing stage, industry sector and geographical location.  The board reviews the investment portfolio with the investment managers on a regular basis.


Financial risk:  As most of the company’s investments involve a medium to long-term commitment and many are relatively illiquid, the directors consider that it is inappropriate to finance the company’s activities through borrowing except on an occasional short-term basis.  Accordingly they seek to maintain a proportion of the company’s assets in cash or near-cash equivalents in order to be in a position to take advantage of new unquoted investment opportunities.  The company has very little exposure to foreign currency risk and does not enter into derivative transactions.


Economic risk:  Events such as economic recession or general fluctuations in stock markets and interest rates may affect the valuation of investee companies and their ability to access adequate financial resources, as well as affecting the company’s own share price and discount to net asset value.


Stock market risk:  Some of the company’s investments are quoted on the AIM market and will be subject to market fluctuations upwards and downwards.  External factors such as terrorist activity can negatively impact stock markets worldwide and the AIM market is no exception to this.  In times of adverse sentiment there tends to be very little, if any, market demand for shares in the smaller companies quoted on AIM.


Liquidity risk:  The company’s investments may be difficult to realise.  The fact that a stock is quoted on AIM does not guarantee its liquidity and there may be a large spread between bid and offer prices.  Unquoted investments are not traded on a recognised stock exchange and are inherently illiquid.


Internal control risk:  The board regularly reviews the system of internal controls, both financial and non-financial, operated by the company and the manager.  These include controls designed to ensure that the company’s assets are safeguarded and that proper accounting records are maintained.


VCT qualifying status risk:  The company is required at all times to observe the conditions laid down in the Income Tax Act 2007 for the maintenance of approved VCT status.  The loss of such approval could lead to the company losing its exemption from corporation tax on capital gains, to investors being liable to pay income tax on dividends received from the company and, in certain circumstances, to investors being required to repay the initial income tax relief on their investment.  The manager keeps the company’s VCT qualifying status under continual review and reports to the board on a quarterly basis.  The board has also retained PricewaterhouseCoopers LLP to undertake an independent VCT status monitoring role.





The directors are responsible for preparing the annual financial report 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 the period.


In preparing these financial statements, the directors are required to (i) select suitable accounting policies and then apply them consistently;  (ii) make judgements and estimates that are reasonable and prudent;  (iii) state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements;  and (iv) 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 also 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.


In relation to the financial statements for the 14 months ended 31 March 2011, each of the directors has confirmed that to the best of his knowledge (i) the financial statements, which have been 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 (ii) 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 which it faces.


The company’s financial statements are published on the NVM Private Equity Limited website,  The maintenance and integrity of this website is the responsibility of NVM and not of the company.  Visitors to the website should be aware that legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


The directors of the company at the date of this announcement were Mr D P A Gravells (Chairman), Mr A M Conn, Mr E M P Denny, Mr C G A Fletcher, Professor Sir Frederick Holliday and Mr F L G Neale.





The above summary of results for the 14 month period ended 31 March 2011 does not constitute statutory financial statements within the meaning of Section 435 of the Companies Act 2006 and has not been delivered to the Registrar of Companies.  Statutory financial statements will be filed with the Registrar of Companies in due course;  the independent auditors’ report on those financial statements under Section 495 of the Companies Act 2006 is unqualified and does not contain a statement under Section 498(2) or (3) of the Companies Act 2006.


The second interim dividend of 1.0p per share and (if approved by shareholders) the proposed final dividend of 3.5p per share in respect of the 14 month period ended 31 March 2011 will be paid on 22 July 2011 to shareholders on the register at the close of business on 1 July 2011.


The full annual report including financial statements for the 14 month period ended 31 March 2011 is expected to be posted to shareholders on 7 June 2011 and will be available to the public at the registered office of the company at Northumberland House, Princess Square, Newcastle upon Tyne NE1 8ER and on the NVM Private Equity Limited website.


Neither the contents of the NVM Private Equity Limited website nor the contents of any website accessible from hyperlinks on the NVM Private Equity Limited website (or any other website) is incorporated into, or forms part of, this announcement.


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Source: Northern 2 VCT PLC via Thomson Reuters ONE