Northern 3 VCT PLC – Annual Financial Report

Annual Financial Report

 

3 JUNE 2011

 

NORTHERN 3 VCT PLC

 

RESULTS FOR THE YEAR ENDED 31 MARCH 2011

 

Northern 3 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 – year ended 31 March 2011:
(comparative figures as at 31 March 2010)

 

 

		2011		2010
Net assets		£37.4m		£32.4m
Net asset value per share		92.2p		90.2p
Return per share:
Revenue		1.4p		1.7p
Capital		4.5p		8.2p
Total		5.9p		9.9p
Dividend per share proposed
in respect of the year:
Revenue		1.4p		1.5p
Capital		3.1p		2.5p
Total		4.5p		4.0p
Cumulative return to
shareholders since launch:
Net asset value per share		92.2p		90.2p
Dividends paid per share*		28.9p		24.9p
Net asset value plus dividends
paid per share		121.1p		115.1p
Share price at end of year		75p		76p

*Excluding second interim dividend payable on 15 July 2011

 

 

For further information, please contact:

 

 

NVM Private Equity Limited Alastair Conn/Christopher Mellor Website:  www.nvm.co.uk

0191 244 6000

 

 

NORTHERN 3 VCT PLC

 

CHAIRMAN’S STATEMENT

 

During the past year the UK stock market has continued its steady recovery from the low point reached in early 2009, but the business environment has remained difficult for many smaller companies.  Although the UK economy is technically no longer in recession, growth prospects appear modest and the full effect of planned public sector spending cuts has yet to be felt.  Against this challenging background Northern 3 VCT has made further progress.

 

Results and dividend
The net asset value (NAV) per share at 31 March 2011 was 92.2p, compared with 90.2p 12 months earlier.  The total return for the year as shown in the income statement was 5.9p per share, equivalent to 6.5% of the opening NAV.  Over the same period the FTSE All-Share index (total return) increased by 8.7%.

 

An interim dividend of 2.0p per share was paid in January 2011.  After careful consideration the directors have decided to increase the total distribution for the year to 4.5p, from 4.0p last year.  The annual general meeting this year will be held later than usual, on 14 September 2011, and in order to avoid delaying receipt of funds by shareholders the directors have declared a second interim dividend of 2.5p per share, which will be paid on 15 July 2011 to shareholders on the register on 24 June 2011.  Consequently no final dividend is proposed this year.

 

It is our long-term objective, subject to the availability of distributable reserves, to maintain the annual dividend at not less than the new annual level of 4.5p per share.

 

Investment portfolio
The performance of the venture capital portfolio has been satisfactory given the unhelpful conditions affecting many business sectors.  Six new venture capital investments totalling £4.5 million were completed and proceeds received from investment sales amounted to £2.0 million.  An encouraging number of companies have reported improved trading results and this has resulted in an overall increase in the valuation of the portfolio.

 

At the annual general meeting in July 2010 shareholders approved the board’s proposal to widen the company’s policy in relation to the investment of funds held for future venture capital investment.  Subsequently some £4.0 million has been invested in higher-yielding UK blue chip listed equities, which have shown a modest increase in capital value whilst generating a better income yield than our cash and fixed-income holdings.

 

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.

 

VAT on management fees
During the year a further £99,000 has been recovered in relation to VAT previously paid on investment management fees, taking the cumulative total to £379,000.  Our managers continue to pursue a claim against HM Revenue & Customs for the payment of compound rather than simple interest on VAT repayments, but it seems likely that this will take a considerable time to resolve.

 

Shareholder issues
In response to market demand for new VCT share issues, the opportunity was taken in February 2011 to launch a small top-up issue of new ordinary shares which raised £2.1 million before expenses.  We have maintained our policy of buying back the company’s shares in the market at a 15% discount to NAV, and during the year 950,000 shares were re-purchased at a cost of £0.7 million.

 

It is pleasing to note that during the past three years the company has returned over £7.5 million to shareholders in the form of dividends and share buy-backs (including the March 2010 tender offer).  Your directors intend as far as possible to maintain a strong flow of funds to shareholders in the future, but we also believe that it is in shareholders’ interests that the asset base of the company should be preserved from erosion and in the longer term increased.  Good investment performance plays an important part in the achievement of this objective, but we will also keep other enlargement opportunities under review.

 

In this connection it has been announced today that discussions are taking place with the board of Northern AIM VCT, a VCT with net assets of £6.5 million and which is also managed by NVM Private Equity, with a view to a merger (subject to shareholder approval) with Northern 3 VCT, which may or may not proceed.  If the merger does proceed then it will be by way of a scheme of reconstruction of Northern AIM VCT under the Insolvency Act 1986, which would be outside the provisions of the City Code on Takeovers and Mergers.  The companies’ portfolios contain a number of common AIM-quoted and unquoted investments, and shareholders in the enlarged company would stand to benefit not only from economies of scale but also from a possible enhancement of the market liquidity of the company’s shares.  A further announcement giving more details will be made in due course.  The company’s 2011 annual general meeting will take place approximately two months later than usual in order to coincide with the provisional timing of the additional general meeting of shareholders that will be required on the assumption that the merger proposal will proceed.

 

Outlook
Reference has already been made to the condition of the UK economy, which reinforces the importance of careful selection of new investments, and effective management of those we already own.  The company’s portfolio is maturing steadily and we believe that it is well positioned to deliver good returns to shareholders.

 

 

James Ferguson
Chairman

 

 

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

 

 

INCOME STATEMENT
for the year ended 31 March 2011

 

 

	Year ended 31 March 2011			Year ended 31 March 2010
	Revenue  £000	Capital  £000	Total  £000	Revenue  £000	Capital  £000	Total  £000
Gain on disposal of
investments	–	778	778	–	1,651	1,651
Movements in fair value
of investments	–	1,361	1,361	–	1,058	1,058
	———	———	———	———	———	———
	–	2,139	2,139	–	2,709	2,709
Income	1,100	–	1,100	926	–	926
Investment management fee	(173)	(603)	(776)	(130)	(390)	(520)
Recoverable VAT	25	74	99	–	–	–
Other expenses	(268)	–	(268)	(217)	–	(217)
	———	———	———	———	———	———
Return on ordinary
activities before tax	684	1,610	2,294	579	2,319	2,898
Tax on return on
ordinary activities	(148)	147	(1)	(93)	93	–
	———	———	———	———	———	———
Return on ordinary
activities after tax	536	1,757	2,293	486	2,412	2,898
	———	———	———	———	———	———
Return per share	1.4p	4.5p	5.9p	1.7p	8.2p	9.9p
Dividends paid/proposed
in respect of the year	1.4p	3.1p	4.5p	1.5p	2.5p	4.0p

 

 

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
for the year ended 31 March 2011

 

 

	Year ended  31 March 2011  £000	Year ended  31 March 2010  £000
Equity shareholders’ funds at 1 April 2010	32,412	24,323
Return on ordinary activities after tax	2,293	2,898
Dividends recognised in the year	(1,556)	(1,157)
Net proceeds of share issues	5,002	9,073
Shares purchased for cancellation	(723)	(2,725)
	———	———
Equity shareholders’ funds at 31 March 2011	37,428	32,412
	———	———

 

 

BALANCE SHEET
as at 31 March 2011

 

 

		31 March 2011  £000	31 March 2010  £000
Venture capital investments
Unquoted		20,347	15,414
Quoted		2,669	2,362
		———	———
Total venture capital investments		23,016	17,776
Listed equity investments		4,237	–
Listed fixed-interest investments		6,493	5,002
		———	———
Total fixed asset investments		33,746	22,778
		———	———
Current assets:
Debtors		397	317
Cash and deposits		3,940	9,510
		———	———
		4,337	9,827
Creditors (amounts falling due
within one year)		(655)	(193)
		———	———
Net current assets		3,682	9,634
		———	———
Net assets		37,428	32,412
		———	———
Capital and reserves:
Called-up equity share capital		2,029	1,796
Share premium		21,378	16,656
Capital redemption reserve		392	345
Capital reserve		12,307	14,488
Revaluation reserve		743	(1,227)
Revenue reserve		579	354
		———	———
Total equity shareholders’ funds		37,428	32,412
		———	———
Net asset value per share		92.2p	90.2p

 

 

CASH FLOW STATEMENT
for the year ended 31 March 2011

 

 

			Year ended  31 March 2011		Year ended  31 March 2010
			£000	£000	£000	£000
Cash flow statement
Net cash inflow from
operating activities				197		868
Taxation:
Corporation tax paid				–		(174)
Financial investment:
Purchase of investments			(12,741)		(9,818)
Sale/repayment of
investments			4,251		10,658
			———		———
Net cash inflow/(outflow)
from financial investment				(8,490)		840
Equity dividends paid				(1,556)		(1,157)
				———		———
Net cash inflow/(outflow)
before financing				(9,849)		377
Financing:
Issue of shares			5,301		9,602
Share issue expenses			(299)		(529)
Purchase of shares
for cancellation			(723)		(2,725)
			———		———
Net cash inflow from financing				4,279		6,348
				———		———
Increase/(decrease) in cash and deposits				(5,570)		6,725
				———		———
Reconciliation of return
before tax to net cash flow from
operating activities
Return on ordinary
activities before tax				2,294		2,898
Gain on disposal of investments				(778)		(1,651)
Movements in fair value of investments				(1,361)		(1,058)
(Increase)/decrease in debtors				(80)		531
Increase in creditors				122		148
				———		———
Net cash inflow from
operating activities				197		868
				———		———
Reconciliation of movement
in net funds
	1 April 2010		Cash flows		31 March 2011
		£000		£000		£000
Cash and deposits		9,510		(5,570)		3,940
		———		———		———

 

 

INVESTMENT PORTFOLIO SUMMARY
as at 31 March 2011

 

 

	Cost £000	Valuation £000	% of net assets by value
Fifteen largest venture capital investments
Kerridge Commercial Systems	1,244	2,168	5.8
Promanex Group Holdings	1,695	2,134	5.7
CloserStill Holdings	743	1,129	3.0
Axial Systems Holdings	1,004	1,141	3.0
Kitwave One	1,000	1,000	2.7
Evolve Investments	995	995	2.7
RCC Lifesciences	995	995	2.7
Wear Inns	839	839	2.2
Cawood Scientific	825	825	2.2
Paladin Group	861	797	2.1
Advanced Computer Software Group*	381	783	2.1
Control Risks Group Holdings	746	746	2.0
IG Doors	371	726	1.9
IDOX*	298	705	1.9
Promatic Group	701	701	1.9
	———	———	——–
	12,698	15,684	41.9
Other venture capital investments	9,506	7,331	19.6
	———	———	——–
Total venture capital investments	22,204	23,015	61.5
Listed equity investments	3,987	4,237	11.3
Listed fixed-interest investments	6,473	6,494	17.4
	———	———	——–
Total fixed asset investments	32,664	33,746	90.2
	———
Net current assets		3,682	9.8
		———	——–
Net assets		37,428	100.0
		———	——–

*Quoted on AIM

 

 

BUSINESS RISKS

 

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 and industry sector.  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.  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.

 

 

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

 

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 year 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, www.nvm.co.uk.  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 J G D Ferguson (Chairman), Mr C J Fleetwood, Mr T R Levett and Mr J M O Waddell.

 

 

OTHER MATTERS

 

The above summary of results for the year 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 2.5p per share which has been declared in respect of the year ended 31 March 2011 will be paid on 15 July 2011 to shareholders on the register at the close of business on 24 June 2011.  The directors do not propose the payment of a final dividend.

 

The full annual report including financial statements for the year ended 31 March 2011 is expected to be posted to shareholders on 24 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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