Northern 2 VCT PLC – Final Results

27th March 2009

Final Results

27 MARCH 2009



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

Financial highlights – year ended 31 January 2009:
(comparative figures as at 31 January 2008 in italics):

2009 2008
* Net assets #39.7m #43.8m

* Net asset value per share 69.8p 89.1p

* Return/(loss) per share
Revenue 2.6p 2.5p
Capital (16.8)p 3.9p
Total (14.2)p 6.4p

* Dividend per share proposed
in respect of the year
Revenue 2.5p 2.5p
Capital 3.0p 3.5p
Total 5.5p 6.0p

* Cumulative return to
shareholders since launch
Net asset value per share 69.8p 89.1p
Dividends paid per share* 41.4p 35.4p
Net asset value plus dividends
paid per share 111.2p 124.5p

* Share price at end of year 51.0p 80.5p

*Excluding proposed final dividend

For further information, please contact:

NVM Private Equity Limited
Alastair Conn/Christopher Mellor 0191 244 6000
Lansons Communications
Karen Mignon 020 7294 3685



My report is set against an extremely difficult background for most
investment companies. The past year has seen the UK economy move
sharply into recession. The global financial system is in an
extremely fragile state. The operating environment for businesses in
the UK has been deeply affected by the reduced availability of bank
finance, the fall in consumer demand, the weakness of the housing
market and a general lack of confidence in virtually all parts of the
economy. The UK stock market has fallen to a six-year low and there
appears to be little reason for optimism in the short to medium term.

In this context it is perhaps unsurprising that your company has had
a difficult year so far as asset values are concerned. The
accompanying results show a net asset value (NAV) per share of 69.8p
as at 31 January 2009 and a negative total return per share for the
year (before dividends) of 14.2p, equivalent to 15.9% of the opening
net asset value. This disappointing outcome should however be set
against the fact that over the same period the FTSE All-Share index
produced a negative total return of 27.8%. Notwithstanding the fall
in NAV, investment income and realised gains in the year held up well
and the directors are pleased to declare a total dividend for the
year of 5.5p per share, in line with our previously stated objective.

Investment portfolio
During the year six new venture capital investments (two of which are
AIM-quoted) were acquired at a cost of #4.6 million. Six investments
were fully exited and the total disposal proceeds for the year
amounted to #7.2 million. The portfolio at 31 January 2009 comprised
48 holdings with a book value of #22.9 million. Investment
valuations generally have been depressed by a combination of lower
price-earnings ratios applying to comparable industry sectors in the
quoted markets and some falls in underlying company profitability and
asset values. The board continues to take a cautious and rigorous
approach to valuing the portfolio and has marked down a number of
individual holdings, which we believe is prudent and realistic in the
current circumstances.

Despite these lower valuations it is noteworthy that no company in
the portfolio actually failed during the year, although our
investment in DMN was sold for a token consideration which realised a
substantial loss and we have made appropriate provisions against a
number of other companies where prospects are presently uncertain.
DxS has made strong progress and is now our largest holding by value,
and several other investments have defied the challenging conditions
to report excellent results. Developments in the portfolio are
discussed in more detail in the business review in the annual report.

Revenue and dividends
The revenue return per share for the year was marginally higher than
last year at 2.6p, enabling the revenue dividend to be maintained at
2.5p per share for the eighth successive year. The venture capital
portfolio continued to contribute a strong flow of income and the
revenue account also benefited from the interest income on the funds
subscribed in the public share offer as well as the exemption from
VAT on management fees referred to below. In addition we are able to
distribute realised gains from the venture capital portfolio
equivalent to 3.0p per share, making a total dividend for the year of
5.5p which is in line with the objective we set out in 2007. An
interim dividend of 2.0p per share was paid in December 2008 and the
proposed final dividend of 3.5p per share will, if approved by
shareholders at the annual general meeting, be paid on 5 June 2009 to
shareholders on the register on 1 May 2009. This payment will take
the cumulative total of dividends declared by the company since
inception to 44.9p per share.

We do not expect to achieve a similar level of investment income in
the year ending 31 January 2010, with interest rates on short-term
deposits drastically reduced and some portfolio companies coming
under increasing pressure from their bankers to suspend dividend and
interest payments. This means that we will be more reliant than
hitherto on realised capital gains in order to maintain the total
dividend, and I am glad to report that in this regard the new
financial year has started well with the sale of Pivotal Laboratories
Holdings in March 2009. However with market conditions unlikely to
improve in the near future, the challenge of achieving further
realisations on acceptable terms should not be underestimated.
Shareholders should therefore recognise that in the short term our
target annual dividend of 5.5p per share may not be sustainable.

Shareholder issues
The company’s public offer of new ordinary shares for subscription in
the 2007/08 and 2008/09 tax years, launched in November 2007, closed
in April 2008 having raised a total of #9.5 million – a satisfactory
outcome. A further #0.3 million was subscribed for new shares during
the year through the company’s dividend investment scheme, under
which investors can currently claim income tax relief at 30% on the
amount invested.

During the year the company purchased for cancellation 742,786
ordinary shares, equivalent to approximately 1.5% of the issued
capital at the start of the year, at a total cost of #586,000. This
buy-back activity was concentrated in the earlier part of the year
and in recent months we have stood back from the market because of
the volatility of asset prices generally. However it remains the
board’s policy to buy back the company’s ordinary shares in the
market at a 10% discount to NAV, subject to market conditions and the
terms of the authority granted by shareholders.

The turmoil in the financial markets has produced various side
effects, one of which was the failure of our corporate brokers and
market-makers, Landsbanki Securities (UK), in October 2008. A
successor firm, Teathers, was appointed by your company but
regrettably in March 2009 this firm in turn was obliged to cease
trading due to the financial difficulties of its parent group. We
are presently reviewing the future provision of corporate broking
services. The most obvious result of these disruptions has been the
volatility of the company’s share price, which has been trading at a
discount to NAV of over 40% during the recent closed period leading
up to the announcement of these annual results. Although in the long
run it is our objective to stimulate secondary market demand for the
company’s shares by maintaining an attractive dividend yield, in the
immediate future we may have to make more extensive use of our
buy-back powers in order to restore the discount to a more acceptable
level in the short term.

VAT on management fees
Following the Chancellor of the Exchequer’s announcement in the 2008
Budget that investment management fees paid by VCTs were to become
exempt from VAT, HM Revenue & Customs has acknowledged that under
European Union VAT law this exemption should have applied from 1990
onwards. Our managers had already submitted a claim for repayment of
VAT previously paid and your company has so far recovered #414,000,
which has been recognised as a separate credit in the income
statement. It is possible that a further repayment will be obtained
but the position is not sufficiently clear-cut for us to predict the
outcome at this stage.

The ongoing saving in VAT on management fees is especially welcome at
a time when the Government’s policy of driving down interest rates is
having a significant effect on our investment income.

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
In April 2008 Matt Ridley retired from the board, having chaired
Northern 2 VCT since its inception in 1999. I would like to thank
Matt on behalf of shareholders and the board for his contribution to
the company over the first nine years of its life. I am grateful to
my colleagues for their support and encouragement during what has
been by any measure an interesting first year in the chair.

The immediate outlook for the UK economy is uncertain and it seems

likely that the financial markets will remain depressed for a
considerable period into the future. The flow of new venture capital
deals has slowed considerably and your board and managers will
continue to take a cautious approach to making new investment
commitments. Nevertheless our experience of previous recessions
suggests that in time there will be opportunities to acquire
fundamentally sound businesses at attractive valuations with a view
to benefiting from the eventual recovery. In the meantime, with a
defensively managed portfolio and ample liquid funds, the emphasis
will remain on ensuring as far as possible that our company is well
placed to emerge from the present downturn in a strong position.

David Gravells

The audited financial statements for the year ended 31 January 2009
are set out below.

for the year ended 31 January 2009

Year ended 31 January 2009 Year ended 31 January
Revenue Capital Total Revenue Capital Total
#000 #000 #000 #000 #000 #000
Gain on
disposal of
investments – 784 784 – 1,759 1,759
Movements in
fair value
of – (9,985) (9,985) – 802 802
—— —— —— —— —— ——
– (9,201) (9,201) – 2,561 2,561
Income 2,456 – 2,456 2,111 – 2,111
Investment (246) (740) (986) (253) (968) (1,221)
management fee
Recoverable VAT 99 315 414 – – –
Other expenses (298) – (298) (266) – (266)
—— —— —— —— —— ——
Return on
activities 2,011 (9,626) (7,615) 1,592 1.593 3,185
before tax
Tax on return
ordinary (538) 120 (418) (416) 303 (113)
—— —— —— —— —— ——
Return on
activities 1,473 (9,506) (8,033) 1,176 1,896 3,072
after tax
—— —— —— —— —— ——
Return/(loss) 2.6p (16.8)p (14.2)p 2.5p 3.9p 6.4p
per share

for the year ended 31 January 2009

Year ended Year ended
31 January 2009 31 January 2008
#000 #000
Equity shareholders’ funds
at 1 February 2008 43,753 42,909
Return on ordinary
activities after tax (8,033) 3,072
Dividends recognised
in the year (3,005) (3,109)
Net proceeds of share issues 7,573 2,038
Shares purchased for
Cancellation (586) (1,157)
—— ——
Equity shareholders’ funds
at 31 January 2009 39,702 43,753
—— ——

as at 31 January 2009

31 January 31 January
2009 2008
#000 #000
Venture capital investments
Unquoted 21,090 29,326
Quoted 1,823 2,349
—— ——
Total venture capital investments 22,913 31,675
Listed fixed-interest investments 4,636 5,066
—— ——
Total fixed asset investments 27,549 36,741
—— ——
Current assets:
Debtors 813 355
Cash and deposits 11,891 7,452
—— ——
12,704 7,807
Creditors (amounts falling due
within one year) (551) (795)
—— ——
Net current assets 12,153 7,012
—— ——

Net assets 39,702 43,753
—— ——

Capital and reserves:
Called-up equity share capital 2,843 2,456
Share premium 34,021 26,872
Capital redemption reserve 337 300
Capital reserve – realised 8,157 8,727
Capital reserve – unrealised (6,863) 4,396
Revenue reserve 1,207 1,002
—— ——
Total equity shareholders’ funds 39,702 43,753
—— ——
Net asset value per share 69.8p 89.1p

for the year ended 31 January 2009

Year ended Year ended
31 January 2009 31 January 2008
#000 #000 #000 #000
Cash flow statement
Net cash inflow from
operating activities 574 1,283
Corporation tax paid (108) (106)
Financial investment:
Purchase of investments (7,864) (8,066)
Sale/repayment of
Investments 7,855 14,159
—— ——
Net cash inflow/(outflow)
from financial investment (9) 6,093
Equity dividends paid (3,005) (3,109)
—— ——
Net cash inflow/(outflow)
before financing (2,548) 4,161
Issue of shares 7,999 2,146
Share issue expenses (426) (108)
Purchase of shares
for cancellation (586) (1,157)
—— ——
Net cash inflow from 6,987 881
—— ——
Increase in cash and 4,439 5,042
—— ——
Reconciliation of return
before tax to net cash flow
operating activities
Return on ordinary
activities before tax (7,615) 3,185
Gain on disposal of (784) (1,759)
Movements in fair value of 9,985 (802)
Decrease/(increase) in (458) 116
Increase/(decrease) in (554) 543
—— ——
Net cash inflow from
operating activities 574 1,283
—— ——
Reconciliation of movement
in net funds
1 February Cash flows 31 January 2009
#000 #000 #000
Cash at bank 7,452 4,439 11,891
—— —— ——

as at 31 January 2009

Cost Valuation % of net
#000 #000 assets
by value
Fifteen largest venture capital investments

DxS 684 2,083 5.2
Envirotec 975 1,744 4.4
Paladin Group 1,307 1,567 4.0
Pivotal Laboratories Holdings 857 1,563 3.9
Crantock Bakery 1,107 1,406 3.6
Britspace Holdings 2,230 1,295 3.3
Axial Systems Holdings 1,000 1,000 2.5
Closerstill Holdings 1,000 1,000 2.5
Optilan Group 1,000 1,000 2.5
Abermed 725 989 2.5
Longhirst Venues 353 958 2.4
S&P Coil Products 620 834 2.1
Arleigh International 435 769 1.9
Liquidlogic 169 672 1.7
Ingleby (1804) 633 633 1.6
—— —— —–
13,095 17,513 44.1
Other venture capital investments 15,900 5,400 13.6
—— —— —–
Total venture capital investments 28,995 22,913 57.7
Listed fixed-interest investments 5,418 4,636 11.7
—— —— —–
Total fixed asset investments 34,413 27,549 69.4
Net current assets 12,153 30.6
—— —–
Net assets 39,702 100.0
—— —–


The board carries out a regular review of the risk environment in
which the company operates. The main areas of risk 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 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.

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.
The financial statements are required by law to give a true and fair
view of the state of affairs of the company at the end of the
financial period and of the return of the company for that period.
In preparing these financial statements, the directors are required

* select suitable accounting policies and then apply them
* 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.

In relation to the financial statements for the year ended 31 January
2009, each of the directors has confirmed that to the best of his

* 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
* 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 directors are also responsible for keeping proper accounting
records that 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 1985. 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 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


The above summary of results for the year ended 31 January 2009 does
not constitute statutory financial statements within the meaning of
Section 240 of the Companies Act 1985 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 235 of
the Companies Act 1985 is unqualified and does not contain a
statement under Section 237(2) or (3) of the Companies Act 1985.
The proposed final dividend of 3.5p per share for the year ended 31
January 2009 will, if approved by shareholders, be paid on 5 June
2009 to shareholders on the register at the close of business on 1
May 2009.
The full annual report including financial statements for the year
ended 31 January 2009 is expected to be posted to shareholders on 14
April 2009 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


This announcement was originally distributed by Hugin. The issuer is
solely responsible for the content of this announcement.