Northern 3 VCT PLC – Final Results

17th November 2006

RNS Number:2831M
Northern 3 VCT PLC
17 November 2006

17 NOVEMBER 2006



Northern 3 VCT PLC is a Venture Capital Trust (VCT) managed by Northern Venture
Managers. 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 30 September 2006:

(comparative figures as at 30 September 2005, re-stated where appropriate, in
2006 2005
* Net assets #29.3m #30.1m
* Net asset value per share 95.2p 95.8p
* Return per share:
Revenue 2.4p 2.4p
Capital 0.5p 0.7p
Total 2.9p 3.1p

* Dividend per share declared in
respect of the year:
Revenue 2.0p 2.0p
Capital 2.0p 0.4p
Total 4.0p 2.4p
* Cumulative return to shareholders
since launch:
Net asset value per share 95.2p 95.8p
Dividends paid per share* 10.9p 7.2p
Net asset value plus
dividends paid per share 106.1p 103.0p
* Share price at end of year 83.0p 87.0p

* Excluding proposed dividend not yet paid

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 3 VCT PLC, John Hustler, included the following points
in his statement to shareholders:

I am pleased to report that the company has been able to declare an increased
dividend of 4.0p per share in respect of the year ended 30 September 2006. The
increase in the company’s size as a result of the share issues in the preceding
year has allowed us to take a larger share of the unquoted investment
opportunities developed by our managers, and has led to a welcome reduction in
the total expense ratio. Your board views the future with confidence.

Financial results

There have been some changes in the way in which the company’s annual financial
statements are presented, as a result of new UK accounting standards. Last
year’s Profit and Loss Account, Statement of Total Recognised Gains and Losses
and Note of Historical Cost Profits and Losses have been replaced by an Income
Statement which includes all recognised gains and losses and, I believe, gives a
better overall picture of the results for the year. Quoted investments are now
valued at bid rather than mid-market price and proposed dividends are no longer
included in the year-end balance sheet. The comparative figures for the year
ended 30 September 2005 have been re-stated accordingly.

The net asset value (NAV) per share at 30 September 2006 was 95.2p, a slight
reduction from the re-stated figure of 95.8p as at 30 September 2005. The NAV
is stated after dividends of 3.7p per share which were charged to reserves
during the year. The revenue return after tax was 2.4p, unchanged from the
previous year. The directors have declared a second interim dividend rather
than a final dividend, for reasons explained below; the second interim dividend
will be 2.0p per share, of which 1.0p represents revenue and 1.0p a distribution
of capital gains. This makes a total of 4.0p for the year (2.0p revenue and
2.0p capital), compared with 2.4p (2.0p revenue and 0.4p capital) last year.
The second interim dividend will be paid on 19 January 2007 to shareholders on
the register on 15 December 2006.

Investment portfolio

The Business Review in the annual report gives details of developments in the
investment portfolio during the year. Eight new venture capital investments
were completed during the year at a total cost of #2.8 million. The rate of new
investment was lower than expected, reflecting competitive market conditions
following the large inflow of cash into the VCT sector generally over the past
two years. Our managers have maintained an appropriate quality threshold in
assessing new investments and have strengthened their investment team in order
to increase the flow of opportunities. I am pleased to report that entering the
new financial year we currently have two proposed new investments each of #1
million at an advanced stage of due diligence, with an encouraging list of
further work in progress. Your directors and managers are conscious of the need
to maintain a strong flow of new investments in order to satisfy the VCT
qualifying conditions.

During the year successful exits were achieved from the investments in Omnico
Plastics and AFI Aerial Platforms, generating capital profits for distribution
to shareholders. As I reported at the interim stage, we also suffered the
write-off of our investment in SMS Agencies which went into administration
following a period of poor trading results.

Shareholder issues

The company has continued to buy back shares in the market for cancellation at a
10% discount to net asset value. During the year to 30 September 2006 a total
of 857,930 shares, representing approximately 2.7% of the issued ordinary
capital at the beginning of the year, were re-purchased at a cost of #745,000 –
an average of 86.8p per share.

The introduction of 40% income tax relief on new VCT investment in the 2004/05
tax year appears to have resulted in a reduction in the secondary market demand
for VCT shares. We believe that in the longer term it is important that an
active market in VCT shares should be encouraged, and with a view to improving
the way in which the benefits of VCT investment are communicated to the
investing public we have recently (together with approximately 70 other VCTs)
joined the Association of Investment Companies.

The dividend investment scheme introduced two years ago has continued to
operate, enabling shareholders to re-invest their dividend in new ordinary
shares with the benefit of VCT tax reliefs at the current rates. A number of
VCTs have announced the suspension of dividend schemes in response to VCT rule
changes in the Finance Act 2006, but your board believes that the scheme remains
viable under the new legislation and intends to continue it. Shareholders
interested in joining the scheme should contact the company secretary for
further information.

VCT qualifying status

Your board, advised by PricewaterhouseCoopers LLP, has continued to monitor
closely the company’s progress towards meeting the qualifying investment
requirements laid down in the VCT legislation, and we are satisfied that the
company’s VCT qualifying status has been maintained.

Under the VCT rules the proceeds of the share issues in our financial year ended
30 September 2005 are required to be at least 70% invested in qualifying
holdings by 30 September 2007, the date on which the company’s third financial
year end following the issue falls. This means that in practice the company
will have had only 21/2 years to achieve the required investment level. In
order to increase the time available to as near three years as possible, it is
the directors’ intention to extend the company’s financial year ending 30
September 2007 by changing the accounting year end to 31 March, so that the next
audited accounts will be drawn up for the 18 months ending 31 March 2008.
Unaudited interim accounts will be published for the six months ending 31 March
2007 and the 12 months ending 30 September 2007. In order to comply with the
Companies Act rules relating to the timing and frequency of annual general
meetings, it is proposed that the 2007 annual general meeting will be held in
April 2007 and the 2008 meeting in July 2008. So as to avoid a delay in receipt
by shareholders, the dividend scheduled to be paid in January 2007 will take the
form of a second interim dividend for the year ended 30 September 2006, which
does not require the approval of shareholders in general meeting, and there will
be no final dividend. It is intended that dividends for future periods will
continue to be paid half-yearly in July and January.

Management performance incentive

Last year I reported that the directors had decided, after consultation with the
boards of the other funds managed by Northern Venture Managers, to introduce a
new performance incentive scheme under which NVM’s investment executives
co-invest alongside the funds in new venture capital investments. The scheme
came into effect in April 2006 and we will keep its operation under regular
review. We also took the opportunity to reduce NVM’s annual management fee from
2.5% to 2.0% of net assets, but with a mechanism for an additional
performance-related fee of up to 1.0% depending on the margin by which annual
targets set by the board are exceeded. The minimum target for the year under
review was a total return equivalent to 3.5% of opening net asset value per
share; only 3.2% was achieved and accordingly no performance fee is payable.
The target for the year ending 30 September 2007 is a total return of 4.5%.

Future prospects

The priority for our managers in the next 18 months is to achieve an increase in
the rate of new investment whilst maintaining a satisfactory quality standard.
The number of new opportunities currently under review is encouraging. At the
same time the portfolio of existing investments is becoming increasingly mature
and this should present opportunities for the realisation of gains for
distribution by way of dividend, so enhancing the tax-free dividend yield which

your directors believe should in the medium term help to improve the market
liquidity of the company’s shares.

John Hustler


The audited financial statements for the year ended 30 September 2006 will show
the results set out below.

for the year ended 30 September 2006

Year ended 30 September 2006 Year ended 30 September 2005
Revenue Capital Total Revenue Capital Total
#000 #000 #000 #000 #000 #000

(Loss)/gain on disposal of investments – (106) (106) – 29 29
Unrealised adjustments to fair value of – 605 605 – 491 491
———– ———– ———– ———– ———– ———–

– 499 499 – 520 520
Income 1,372 – 1,372 1,232 – 1,232
Investment management fee (167) (502) (669) (158) (475) (633)
Other expenses (180) – (180) (180) – (180)
———– ———– ———– ———– ———– ———–

Return on ordinary activities
before tax 1,025 (3) 1,022 894 45 939
Tax on return on ordinary activities (265) 160 (105) (233) 152 (81)
———– ———– ———– ———– ———– ———–

Return on ordinary activities
after tax 760 157 917 661 197 858
———– ———– ———– ———– ———– ———–

Return per share 2.4p 0.5p 2.9p 2.4p 0.7p 3.1p

for the year ended 30 September 2006

Year ended 30 Year ended 30
September 2006 September 2005
Total Total
#000 #000
Equity shareholders’ funds
at 1 October 2005
As previously reported 29,610 20,802
Prior year adjustment 526 865
———– ———–
As re-stated 30,136 21,667

Return on ordinary activities after tax 917 858
Dividends recognised in the year (1,153) (1,098)
Net proceeds of share issues 126 9,208
Shares purchased for cancellation (745) (499)
———– ———–
Equity shareholders’ funds
at 30 September 2006 29,281 30,136
———– ———–

as at 30 September 2006

30 September 30 September
2006 2005
#000 #000
Venture capital
Unquoted 10,012 8,433
Quoted 1,997 1,301
———– ———–
12,009 9,734
Listed fixed-interest 13,229 14,308
———– ———–
Total fixed asset 25,238 24,042
———– ———–
Current assets:
Debtors 600 617
Cash at bank 3,606 5,631
———– ———–
4,206 6,248
Creditors (amounts
falling due
within one year) (163) (154)
———– ———–
Net current assets 4,043 6,094
———– ———–

Net assets 29,281 30,136
———– ———–

Capital and reserves:
Called-up equity share 1,538 1,573
Share premium 22,759 22,641
Capital redemption 77 34
Capital reserve:
Realised 3,703 5,031
Unrealised 629 324
Revenue reserve 575 533
———– ———–
Total equity 29,281 30,136
shareholders’ funds
———– ———–
Net asset value per 95.2p 95.8p

for the year ended 30 September 2006
Year ended Year ended
30 September 2006 30 September 2005
#000 #000 #000 #000
Net cash inflow from
operating activities 525 204
Corporation tax paid (81) (24)
Financial investment:
Purchase of (9,740) (17,372)
Sale/repayment of 9,043 6,028
———– ———–

Net cash outflow from
financial investment (697) (11,344)
Equity dividends paid (1,153) (1,098)
———– ———–

Net cash outflow
financing (1,406) (12,262)
Issue of ordinary 145 9,698
Share issue expenses (19) (490)
Purchase of ordinary
for cancellation (745) (499)
———– ———–

Net cash (outflow)/
from financing (619) 8,709
———– ———–

Decrease in cash at (2,025) (3,553)
———– ———–

Reconciliation of
return before
tax to net cash flow
operating activities
Return on ordinary
before tax 1,022 939
Loss/(gain) on
disposal of
investments 106 (29)
Unrealised adjustments
fair value of (605) (491)
Decrease/(increase) in 17 (222)
(Decrease)/increase in (15) 7
———– ———–

Net cash inflow from
operating activities 525 204
———– ———–

Analysis of movement
in net funds
1 October 2005 Cash flows 30 September 2006
#000 #000 #000
Cash at bank 5,631 (2,025) 3,606
———– ———– ———–

as at 30 September 2006
Valuation % of net assets
#000 by valuation
Fifteen largest venture capital investments:
John Laing Partnership 1,014 3.5
Nightingales Holdings 992 3.4
IG Doors 683 2.3

Pivotal Laboratories Holdings 679 2.3
Envirotec 658 2.2
Touchstone Asset Management 593 2.0
Longhirst Group 547 1.9
Crantock Bakery 442 1.5
Abermed Group 375 1.3
Arleigh International 346 1.2
Arrow Industrial Group 344 1.2
KCS Global Holdings 338 1.2
Direct Valeting 320 1.1
Cello Group* 319 1.1
Ithaca Holdings 307 1.0
———– ———–
7,957 27.2
Other venture capital investments 4,052 13.8
———– ———–
Total venture capital investments 12,009 41.0
Listed fixed-interest investments 13,229 45.2
———– ———–
Total fixed asset investments 25,238 86.2
Net current assets 4,043 13.8
———– ———–
Net assets 29,281 100.0
———– ———–
*Quoted on Alternative Investment Market

The above summary of results for the year ended 30 September 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 Practice
(UK GAAP), in presenting its financial statements for the year ended 30
September 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 30 September 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 26 ‘Financial Instruments: Measurement’;

* 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’.
Dividends payable are treated as a charge on reserves and accounted for through
the reconciliation of movements in shareholders’ funds rather than in the profit
and loss account as previously.

The comparative figures for the year ended 30 September 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:

30 September 2005 1 October 2004
Net asset Net asset
Net value per Net value per
assets share assets share
#000 p #000 p
As reported under previous UK GAAP 29,610 94.1 20,802 93.4
Less: adjustment in valuation of quoted (9) – (3) –
investments to bid price
Add: proposed dividends not accounted for 535 1.7 868 3.9
until declared and paid
———– ———– ———– ———–
As reported under revised UK GAAP 30,136 95.8 21,667 97.3
———– ———– ———– ———–

The second interim dividend of 2.0p per share for the year ended 30 September
2006 will be paid on 19 January 2007 to shareholders on the register at the
close of business on 15 December 2006.

The full annual report including financial statements for the year ended 30
September 2006 is expected to be posted to shareholders on 15 December 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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