Annual Financial Report
29 MARCH 2010
NORTHERN 2 VCT PLC
RESULTS FOR THE YEAR ENDED 31 JANUARY 2010
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 - year ended 31 January 2010:
(comparative figures as at 31 January 2009 in italics):
         2010         2009
·        Net assets £44.3m £39.7m
·        Net asset value per share 77.9p 69.8p
·        Return per share
Revenue 1.7p 2.6p
Capital 11.8p (16.8)p
Total 13.5p (14.2)p
·        Dividend per share proposed
in respect of the year
Revenue 2.0p 2.5p
Capital 3.5p 3.0p
Total 5.5p 5.5p
·        Cumulative return to
shareholders since launch
Net asset value per share 77.9p 69.8p
Dividends paid per share* 46.9p 41.4p
Net asset value plus dividends
paid per share 124.8p 111.2p
·        Share price at end of year 62.0p 51.0p
*Excluding proposed final dividend
For further information, please contact:
NVM Private Equity Limited
Alastair Conn/Christopher Mellor 0191 244 6000
Website:Â www.nvm.co.uk <
http://www.nvm.co.uk/>
NORTHERN 2 VCT PLC
CHAIRMAN'S STATEMENT
I am pleased to report that your company has made good progress over the past
12 months, notwithstanding a background of continuing problems in the global and
UK economies. Although the rate of new investment was unusually low, there were
some highly successful exits from portfolio companies. It is notable that an
increase in net asset value (NAV) per share was achieved over the year despite
the annual dividend being maintained at 5.5p per share - the sixth successive
year in which the dividend has been at or above this level.
NAV and return per share
The financial statements show an NAV per share of 77.9p as at 31 January 2010,
up from 69.8p a year earlier, and a total return per share for the year (before
dividends) of 13.5p, equivalent to 19.3% of the opening net asset value. Net
realised and unrealised gains on the investment portfolio amounted to £7.2
million, although investment income was reduced by comparison with the preceding
year as the unprecedentedly low level of market interest rates took effect. We
expect income to remain under pressure over the next 12 months. It seems
unlikely that interest rates will increase materially, and a number of portfolio
companies have had to postpone interest payments because of restrictions imposed
by banks under their covenant terms.
Dividend
Your directors are extremely conscious of the high importance which shareholders
attach to a strong and consistent dividend flow. An interim dividend of 2.0p
per share was paid in December 2009 and the proposed final dividend of 3.5p per
share will, if approved by shareholders at the annual general meeting, be paid
on 4 June 2010 to shareholders on the register on 30 April 2010. This payment
will take the cumulative total of dividends declared by the company since
inception to 50.4p per share.
Investment portfolio
The proceeds of sales of venture capital investments during the year amounted to
£11.7 million, the highest annual total on record. The largest single
contribution came from the molecular diagnostics company DxS, which was sold in
September 2009 to Qiagen NV for initial proceeds of £4.8 million in cash - with
the possibility of up to a further £1.8 million over three years depending on
the achievement of certain commercial milestones. DxS has grown rapidly over
the period since our original early-stage investment in 2001 and the outcome
represents an overall cash return of over seven times the money invested.
Satisfactory exits were also achieved from Abermed, Liquidlogic and Pivotal
Laboratories Holdings.
Two new venture capital investments (one of which resulted from the
restructuring of an existing holding) were acquired during the year at a cost of
£2.5 million. In recent months the flow of new opportunities has improved, and
since the year end three more investments have been completed at an outlay of
£3.5 million. The venture capital portfolio at 31 January 2010 comprised 37
holdings with a book value of £20.8 million, and is discussed in greater detail
in the business review section of the annual report. As I said last year, we
continue to take a cautious and rigorous approach to valuing the portfolio.
In the light of the continuing low returns on bank deposits, the directors have
reviewed the company's approach to the short-term deployment of the cash
balances held for future investment in qualifying venture capital holdings. A
resolution will be proposed at the annual general meeting 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.
Shareholder issues
We reported last year on a sequence of unforeseen events which had impacted on
the stability of the market in the company's shares. Following a review of
available options, Singers Capital Markets was appointed as the company's broker
in April 2009. The mid-market share price, which reached a low point of 34.5p
in the same month, has subsequently recovered steadily and at 31 January 2010
stood at 62p, representing a discount of 20% to the underlying NAV. As reported
in our half-yearly statement, the directors decided during the year that in the
market conditions then prevailing it was not appropriate to seek to maintain the
share price at a fixed 10% discount to NAV, and accordingly some limited
purchases of shares have been undertaken at a wider discount. However we are
keeping this subject under regular review.
Our managers have continued to support the efforts of the Association of
Investment Companies to promote the attractions of VCT shares as a long-term
tax-free yield investment, with applications in areas such as pension planning.
The imminent increase in the higher rate of income tax, following closely behind
the slump in interest rates, only serves to emphasis these attractions. The
Government has in recent years significantly tightened the parameters within
which new funds raised by VCTs may be invested. We expect that over time this
is likely to increase the relative demand for shares in companies such as
Northern 2 VCT which have a high proportion of their assets subject only to the
much less restrictive pre-2006 investment rules.
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
On behalf of shareholders, I would like to thank my board colleagues and also
our managers for the diligent and efficient way in which they carry out their
duties and for their careful attention to shareholders' interests.
Prospects
Whilst shareholders may draw some encouragement from the company's performance
over the past year, the future prospects for the UK economy and financial
markets remain uncertain. The next Government will be faced with the daunting
challenge of restoring the health of the national finances, and it seems
inevitable that this will entail a combination of higher taxes and reduced
public sector expenditure over an extended period. Such conditions will create
significant challenges for the smaller private companies in which VCTs invest.
The investment community also faces political challenges such as the European
Commission's ill-conceived Alternative Investment Fund Managers (AIFM)
Directive, which threatens to impose disproportionate costs and operating
restrictions on investment vehicles, including VCTs. On the latter issue your
directors are actively engaged in lobbying the appropriate UK and European
officials and legislators.
Your directors remain confident in the well-tried investment approach developed
by NVM over some 25 years, based on careful investment selection backed up with
close portfolio monitoring by an experienced executive team. In the early
months of our new financial year there are some indications of an increase in
investment activity, and our strong cash position will enable us to take
advantage of suitable opportunities as they emerge. We would therefore expect
the company to make satisfactory progress in the medium term.
David Gravells
Chairman
The audited financial statements for the year ended 31 January 2010 are set out
below.
INCOME STATEMENT
for the year ended 31 January 2010
 Year ended 31 January 2010 Year ended 31 January 2009
 Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Gain on
disposal of
  investments - 4,676 4,676 - 784 784
Movements in
fair value
  of - 2,505 2,505 - (9,985) (9,985)
investments
 ---------- ---------- ---------- ---------- ---------- ----------
 - 7,181 7,181 - (9,201) (9,201)
Income 1,704Â -Â 1,704Â 2,456Â -Â 2,456
Investment (215) (647) (862) (246) (740) (986)
management
fee
Recoverable -Â -Â -Â 99Â 315Â 414
VAT
Other (303) -Â (303) (298) -Â (298)
expenses
 ---------- ---------- ---------- ---------- ---------- ----------
Return on
ordinary
  activities 1,186 6,534 7,720 2,011 (9,626) (7,615)
before tax
Tax on return
on
  ordinary (198) 185 (13) (538) 120 (418)
activities
 ---------- ---------- ---------- ---------- ---------- ----------
Return on
ordinary
  activities 988 6,719 7,707 1,473 (9,506) (8,033)
after tax
 ---------- ---------- ---------- ---------- ---------- ----------
Return per 1.7p 11.8p 13.5p 2.6p (16.8)p (14.2)p
share
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 January 2010
  Year ended Year ended
31 January 2010Â 31 January 2009
£000 £000
Equity shareholders' funds
  at 1 February 2009  39,702 43,753
Return on ordinary
  activities after tax  7,707 (8,033)
Dividends recognised
  in the year  (3,130) (3,005)
Net proceeds of share issues  271 7,573
Shares purchased for
  cancellation  (201) (586)
  ---------- ----------
Equity shareholders' funds
  at 31 January 2010  44,349 39,702
  ---------- ----------
BALANCE SHEET
as at 31 January 2010
  31 January 31 January
2010Â 2009
£000 £000
Venture capital investments
  Unquoted  18,250 21,090
  Quoted  2,542 1,823
  ---------- ----------
Total venture capital investments  20,792 22,913
Listed fixed-interest investments  8,837 4,636
  ---------- ----------
Total fixed asset investments  29,629 27,549
  ---------- ----------
Current assets:
  Debtors  658 813
  Cash and deposits  14,180 11,891
  ---------- ----------
  14,838 12,704
Creditors (amounts falling due
  within one year)  (118) (551)
  ---------- ----------
Net current assets  14,720 12,153
  ---------- ----------
Net assets  44,349 39,702
  ---------- ----------
Capital and reserves:
Called-up equity share capital  2,845 2,843
Share premium  34,272 34,021
Capital redemption reserve  355 337
Capital reserve  8,348 8,157
Revaluation reserve  (2,243) (6,863)
Revenue reserve  772 1,207
  ---------- ----------
Total equity shareholders' funds  44,349 39,702
  ---------- ----------
Net asset value per share  77.9p 69.8p
CASH FLOW STATEMENT
for the year ended 31 January 2010
  Year ended Year ended
31 January 2010Â 31 January 2009
   £000 £000 £000 £000
Cash flow
statement
Net cash
inflow from
  operating    657  574
activities
Taxation:
Corporation    (409)  (108)
tax paid
Financial
investment:
Purchase of   (11,220)  (7,864)
investments
Sale/repayment
of
  Investments   16,321  7,855
   ----------  ----------
Net cash
inflow/(outflow)
  from financial   5,101  (9)
investment
Equity    (3,130)  (3,005)
dividends paid
    ----------  ----------
Net cash
inflow/(outflow)
  before financing   2,219  (2,548)
Financing:
Issue of   297  7,999
shares
Share issue   (26)  (426)
expenses
Purchase of
shares
  for   (201)  (586)
cancellation
   ----------  ----------
Net cash inflow   70  6,987
from financing
    ----------  ----------
Increase in    2,289  4,439
cash and
deposits
    ----------  ----------
Reconciliation of
return
before tax to net
cash flow from
operating
activities
Return on ordinary
  activities    7,720  (7,615)
before tax
Gain on disposal of   (4,676)  (784)
investments
Movements in fair   (2,505)  9,985
value of
investments
(Increase)/decrease   155  (458)
in debtors
Decrease in   (37)  (554)
creditors
    ----------  ----------
Net cash
inflow from
  operating    657  574
activities
    ----------  ----------
Reconciliation of
movement
in net funds
 1 February 2009 Cash flows 31 January 2010
  £000  £000  £000
Cash at bank  11,891  2,289  14,180
  ----------  ----------  ----------
INVESTMENT PORTFOLIO SUMMARY
as at 31 January 2010
 Cost Valuation % of net assets
£000 £000 by value
Fifteen largest venture capital
investments
Crantock Bakery 1,107 1,759 4.0
Britspace Group 1,474 1,474 3.3
Envirotec 975 1,448 3.3
CloserStill Holdings 1,000 1,274 2.9
Paladin Group 1,307 1,261 2.8
Axial Systems Holdings 1,004 1,105 2.5
IG Doors 1,000 1,000 2.3
Phusion Healthcare 995 995 2.2
Arleigh International 435 954 2.2
Longhirst Venues 375 928 2.1
Advanced Computer Software* 429 909 2.0
S&P Coil Products 479 890 2.0
Optilan Group 1,000 821 1.8
Promanex Group Holdings 1,000 750 1.7
Direct Valeting 694 694 1.6
 ---------- ---------- ----------
 13,274 16,262 36.7
Other venture capital investments 9,529 4,530 10.2
 ---------- ---------- ----------
Total venture capital investments 22,803 20,792 46.9
Listed fixed-interest investments 9,069 8,837 19.9
 ---------- ---------- ----------
Total fixed asset investments 31,872 29,629 66.8
 ----------
Net current assets  14,720 33.2
  ---------- ----------
Net assets  44,349 100.0
  ---------- ----------
*Quoted on AIM
BUSINESS RISKS
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:Â 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:Â 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:Â 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: Â 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:Â The board regularly reviews the system of internal
controls, both financial and non-financial, operated by the company and the
manager. Â These include controls designed to ensure that the company's assets
are safeguarded and that proper accounting records are maintained.
VCT qualifying status risk:Â 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. Â 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. Â 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 to (i) select
suitable accounting policies and then apply them consistently;Â (ii) make
judgements and estimates that are reasonable and prudent;Â (iii) state whether
applicable UK Accounting Standards have been followed, subject to any material
departures disclosed and explained in the financial statements; Â and (iv)
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 2010, 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;Â 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 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 2006. Â 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, 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.
OTHER MATTERS
The above summary of results for the year ended 31 January 2010 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;Â 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 proposed final dividend of 3.5p per share for the year ended 31 January
2010 will, if approved by shareholders, be paid on 4 June 2010 to shareholders
on the register at the close of business on 30 April 2010.
The full annual report including financial statements for the year ended 31
January 2010 is expected to be posted to shareholders on 13 April 2010 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.
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