Northern 2 VCT PLC – Final Results

9th March 2006

RNS Number:5819Z
Northern 2 VCT PLC
09 March 2006

9 MARCH 2006



Northern 2 VCT PLC is a Venture Capital Trust (VCT) managed by Northern Venture
Managers. The trust was launched in 1999 and has to date raised a total of #47
million from private investors. The trust invests mainly in unquoted venture
capital holdings and aims to provide high long-term returns to shareholders
through a combination of dividend yield and capital growth.

Financial highlights – year ended 31 January 2006:
(comparative figures as at 31 January 2005 in italics)
2006 2005
* Net assets* #38,675,000 #40,272,000
* Net asset value per share* 90.4p 91.0p
* Investment income #2,226,000 #2,074,000
* Return on ordinary activities
before tax:
Revenue #1,736,000 #1,558,000
Capital #(984,000) #(729,000)
Total #752,000 #829,000
* Return per share:
Revenue 2.9p 2.5p
Capital (1.4)p (0.9)p
Total 1.5p 1.6p
* Dividend per share:
Revenue 2.5p 2.5p
Capital 3.0p 6.3p
Total 5.5p 8.8p
* Cumulative return to shareholders
since launch:
Dividends per share** 27.9p 22.4p
Net asset value plus dividends
per share 113.8p 111.9p
* Share price at end of year 80.0p 80.0p

* Before deducting proposed final dividend

**Including proposed final dividend

For further information, please contact:
Northern Venture Managers Limited
Alastair Conn, Managing Director 0191 244 6000

Lansons Communications
Alison Boucher 020 7294 3616



The Chairman of Northern 2 VCT PLC, Dr Matt Ridley, included the following
points in his statement to shareholders:

The past year has brought some successes and some disappointments. The reported
net asset value per share fell slightly from last year’s figure of 91.0p
(re-stated from 89.7p as a result of changes in accounting policy) to 90.4p at
31 January 2006. Income generation from the investment portfolio was strong but
the level of realised gains from investment sales was less than in the preceding

The performance chart in the directors’ remuneration report shows that over five
years the company’s net asset value and share price have continued to
out-perform the FTSE All-Share index on a total return basis.

Presentation of results

The year under review has brought further changes in the way in which we present
our financial statements, in response to the harmonisation of UK accounting
practice with international standards. Full details of the changes and their
implications are given in the notes to the financial statements in the annual
report. The most prominent consequence is that the year-end net asset value is
now stated before deducting the proposed final dividend for the year. I will
leave it to shareholders to form their own view as to whether the new regime is
more informative than the old.

Investment portfolio

During the year eight new venture capital investments were completed and the
portfolio at 31 January 2006 comprised 54 holdings with a total value of almost
#30 million. Exit activity was down on the previous year’s high level, though
satisfactory realisations were achieved by Omnico Plastics and Crabtree of
Gateshead. Oxonica was successfully floated on the Alternative Investment
Market. The overall performance of the portfolio was however adversely affected
by the failure of VPTA and SMS Agencies.

Developments in the portfolio are discussed in more detail in the Investment
Manager’s Review in the annual report. NVM has added considerable new resource
to its investment team over the past 18 months and we expect to see this
reflected in future results.

Revenue and dividends

Through a combination of increased investment income and lower running expenses,
the revenue surplus before tax for the year increased by 11% to #1,736,000. As
a result the revenue return per share rose from 2.5p to 2.9p. The revenue
dividend has been maintained at 2.5p for the fifth year in succession. By
realising gains from the venture capital portfolio we have also been able to
declare capital dividends totalling 3.0p per share (last year 6.3p). The total
dividend of 5.5p per share for the year comprises an interim dividend of 1.0p
per share which was paid in December 2005 and a proposed final dividend of 4.5p
per share which will, if approved by shareholders at the annual general meeting,
be paid on 2 June 2006.

The tax-free total dividend of 5.5p is equivalent to a 9.2% gross yield to a
higher-rate taxpayer subscribing for shares at 100p, and 11.5% if the 20% income
tax relief on subscriptions obtained by subscribers in 1999 is taken into
account. The cumulative total of dividends declared by the company over seven
years is 27.9p per share, which is an average of just under 4.0p per year.

Continuation vote and proposed share issue

In February 2006 shareholders received a circular from the company containing
information about two resolutions to be considered at an extraordinary general
meeting on 9 March 2006. The first resolution was to amend the Articles of
Association so that the next shareholder vote on continuation of the company
will take place in 2011 rather than at the annual general meeting in May 2006,
thus in effect extending the life of the company for a further five years. The
second resolution was to authorise the directors to allot up to 11,000,000 new
ordinary shares, in order that we can launch a ‘top-up’ issue of ordinary shares
which will be open for subscription in the 2005/06 tax year. As stated in the
circular, the present tax reliefs on investment in VCTs are due to continue only
until 5 April 2006 and the Chancellor of the Exchequer has not yet announced
what, if any, changes will apply thereafter, so your directors felt it was
important to be in a position to raise additional funds in the current tax year.
It would clearly be inappropriate to proceed with this without certainty as to
the future continuation of the company.

I am pleased to report that at the extraordinary general meeting both
resolutions were passed by a wide margin; a prospectus setting out details of
for the share issue will be published in the near future and copies will be sent
to all shareholders. If the share issue is fully subscribed the company’s net
assets will increase to approximately #48 million.

Management arrangements

The February 2006 shareholder circular also contained details of new management
fee and performance incentive arrangements entered into between the company and
NVM. Following a thorough review of the existing arrangements, your board
decided to establish a co-investment scheme under which NVM executives are
required to invest personally in the ordinary shares of companies, including
those quoted on AIM, in which Northern 2 VCT invests. We believe this will
benefit shareholders by enhancing NVM’s ability to recruit and retain
high-calibre investment executives in a competitive market environment. At the
same time we took the opportunity to reduce the fixed element of NVM’s annual
management fee from 2.5% to 2.0% of net assets, whilst introducing a new
performance-related element linked to future net asset growth and dividend

Share buy-backs and market liquidity

During the year the company bought back for cancellation 1,583,148 shares,
equivalent to approximately 3.6% of the issued capital at the start of the year,
at an average price of 79p per share. A resolution will as usual be proposed at
the annual general meeting to renew the board’s authority to make market
purchases of shares. The secondary market for VCT shares has remained depressed
over the past year and it will be interesting to see what effect the
Chancellor’s forthcoming announcement on future tax reliefs has on the relative
attractions of new and second-hand VCT shares.

VCT qualifying status

The company has continued to retain PricewaterhouseCoopers LLP as advisers on
VCT taxation matters, and has throughout the year met the qualifying conditions
laid down by HM Revenue & Customs for approval as a VCT.

The future

The future of the VCT sector is subject to some uncertainty as we await the
Chancellor’s Budget announcement on 22 March. VCTs have made a substantial
contribution to business enterprise in the UK over the past decade and I hope
that any changes to the VCT regulations will be gradual and judicious.

Our company is now well established, and the forthcoming share issue should
ensure that liquid resources are sufficient for our investment requirements for
the foreseeable future. As we begin the next five year cycle in our corporate
life, we remain focussed on producing a strong dividend flow and asset growth
for shareholders.

The audited financial statements for the year ended 31 January 2006 will show
the results set out below.


for the year ended 31 January 2006

Year ended 31 January 2006 Year ended 31 January 2005

Revenue Capital Total Revenue Capital Total

#000 #000 #000 #000 #000 #000
(Loss)/gain on disposal of investments – (388) (388) – 1,164 1,164
held at fair value
Unrealised adjustments to fair value of – 265 265 – (950) (950)

Income 2,226 – 2,226 2,074 – 2,074
Investment management fee (287) (861) (1,148) (315) (943) (1,258)
Other expenses (203) – (203) (201) – (201)
—— —— —— —— —— ——
Return on ordinary activities
before tax 1,736 (984) 752 1,558 (729) 829
Tax on return on ordinary activities (455) 352 (103) (422) 301 (121)
—— —— —— —— —— ——
Return on ordinary activities
after tax 1,281 (632) 649 1,136 (428) 708
—— —— —— —— —— ——
Return per share 2.9p (1.4)p 1.5p 2.5p (0.9)p 1.6p


for the year ended 31 January 2006

Year ended 31 January Year ended 31
2006 January 2005

Total Total

#000 #000
Equity shareholders’ funds
at 1 February 2005
As previously reported 39,693 43,233
Prior year adjustment 579 1,289
——- ——-
As re-stated 40,272 44,522

Return on ordinary activities after tax 649 708
Dividends recognised in the year (1,092) (4,564)
Net proceeds of share issues 97 305
Shares purchased for cancellation (1,251) (699)
——- ——-
Equity shareholders’ funds
at 31 January 2006 38,675 40,272
——- ——-


as at 31 January 2006

31 January 31 January
2006 2005


#000 #000
Venture capital
Unquoted 25,259 25,391
Quoted 4,548 3,939
——- ——-
29,807 29,330
Listed fixed-interest 6,029 6,965
——- ——-
Total fixed asset 35,836 36,295
——- ——-
Current assets:
Debtors 409 420
Cash at bank 2,664 3,795
——- ——-
3,073 4,215
Creditors (amounts
falling due
within one year) (234) (238)
——- ——-
Net current assets 2,839 3,977
——- ——-

Net assets 38,675 40,272
——- ——-

Capital and reserves:
Called-up equity share 2,139 2,212
Share premium 34,141 34,050
Capital redemption 142 63
Capital reserve:
Realised 351 2,263
Unrealised 977 948
Revenue reserve 925 736
——- ——-
Total equity 38,675 40,272
shareholders’ funds
——- ——-
Net asset value per 90.4p 91.0p


for the year ended 31 January 2006

Year ended Year ended
31 January 2006 31 January 2005
#000 #000 #000 #000
Net cash inflow from
operating 972 539
Corporation tax paid (115) (88)
Financial investment:
Purchase of (6,293) (10,341)
Sale/repayment of 6,551 9,142
—— ——
Net cash inflow/
(outflow) from
financial 258 (1,199)
Equity dividends paid (1,092) (4,563)
—— ——
Net cash inflow/
before financing 23 (5,311)
Issue of ordinary 112 305
Share issue expenses (15) –
Purchase of ordinary
for cancellation (1,251) (699)
—— ——
Net cash outflow from
financing (1,154) (394)
—— ——
Decrease in cash at (1,131) (5,705)
—— ——
Reconciliation of
return before
tax to net cash flow
operating activities
Return on ordinary
before tax 752 829
Loss/(gain) on
disposal of
investments held at 388 (1,164)
fair value
adjustments to
fair value of (265) 950
Decrease/(increase) 89 (70)
in debtors
Increase/(decrease) 8 (6)
in creditors
—— ——
Net cash inflow from
operating 972 539
—— ——

Analysis of movement
in net funds

1 February Cash flows 31 January
2005 2006
#000 #000 #000
Cash at bank 3,795 (1,131) 2,664
—— —— ——


as at 31 January 2006
Valuation % of net assets

#000 by valuation
Fifteen largest venture capital investments:
DMN 1,600 4.1
Crantock Bakery 1,491 3.9
Longhirst Group 1,484 3.8
Computer Software Group* 1,337 3.5
IG Doors 1,316 3.4
Stainton Metal Company 1,118 2.9
Arrow Industrial Group 1,099 2.8
Warmseal Windows (Newcastle) 1,082 2.8
Envirotec 975 2.5
John Laing Partnership 925 2.4
Alaric Systems 921 2.4
Direct Valeting 915 2.4
Pivotal Laboratories Holdings 857 2.2
LEDA Holdings 825 2.1
Iris Technology 797 2.1
——- ——
16,742 43.3

Other venture capital investments 13,065 33.8
——- ——
Total venture capital investments 29,807 77.1
Listed fixed-interest investments 6,029 15.6
——- ——
Total fixed asset investments 35,836 92.7
Net current assets 2,839 7.3
——- ——
Net assets 38,675 100.0
——- ——
*Quoted on Alternative Investment Market

The above summary of results for the year ended 31 January 2006 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 company is required to comply with a number of new UK Financial Reporting
Standards (FRS), which now represent UK Generally Accepted Accounting Principles
(UK GAAP), in presenting its financial statements for the year ended 31 January
2006. These Standards have been introduced as part of the process of aligning UK
accounting principles with International Accounting Standards.

The revised accounting policies differ from those used in preparing the annual
financial statements for the year ended 31 January 2005 in the following

* The unrealised gain or loss resulting from the revaluation of fixed
asset investments held at fair value is now recognised in the income statement,
as required by FRS 25 ‘Financial Instruments: Disclosure and Presentation’;

* Quoted investments are valued at bid price rather than mid-market
price, as required by FRS 26 ‘Financial instruments: Measurement’; and

* Dividends to shareholders are accounted for in the period in which
the company is liable to pay them, rather than in the period in respect of which
they are declared, as required by FRS 21 ‘Events after the Balance Sheet Date’.

The comparative figures for the year ended 31 January 2005 have been re-stated

The effect of the above changes on the reported net assets and net asset value
per share of the company is as follows:

31 January 2006 31 January 2005 31 January 2004
Net asset Net asset Net asset

Net value per Net value per Net value per

assets share assets share assets share

#000 p #000 p #000 p
As reported under previous UK 36,819 86.1 39,693 89.7 43,233 96.5
Less: adjustment in valuation (69) (0.2) (84) (0.2) (58) (0.1)
of quoted investments to bid
Add: proposed dividends not 1,925 4.5 663 1.5 1,347 3.0
accounted for until declared
and paid
——- ——- ——- ——- ——- ——-
As reported under revised UK 38,675 90.4 40,272 91.0 44,522 99.4
——- ——- ——- ——- ——- ——-

The proposed final dividend of 4.5p per share for the year ended 31 January 2006
will, if approved by shareholders, be paid on 2 June 2006 to shareholders on the
register at the close of business on 24 March 2006.

The full annual report including financial statements for the year ended 31
January 2006 is expected to be posted to shareholders on 24 March 2006 and will
be available to the public at the registered office of the company at
Northumberland House, Princess Square, Newcastle upon Tyne NE1 8ER.


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