Annual Financial Report

20 MAY 2010 NORTHERN 3 VCT PLC RESULTS FOR THE YEAR ENDED 31 MARCH 2010 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 2010: (comparative figures as at 31 March 2009)   2010 2009 - Net assets £32.4m £24.3m - Net asset value per share 90.2p 84.0p - Return per share:   Revenue 1.7p 2.6p   Capital 8.2p (13.0)p   Total 9.9p (10.4)p - Dividend per share proposed   in respect of the year:   Revenue 1.5p 2.5p   Capital 2.5p 1.5p   Total 4.0p 4.0p - Cumulative return to   shareholders since launch:   Net asset value per share 90.2p 84.0p   Dividends paid per share* 24.9p 20.9p   Net asset value plus dividends   paid per share 115.1p 104.9p - Share price at end of year 76.0p 45.5p *Excluding proposed final dividend For further information, please contact: NVM Private Equity Limited         0191 244 6000 Alastair Conn/Christopher Mellor Website:  www.nvm.co.uk < http://www.nvm.co.uk/> NORTHERN 3 VCT PLC CHAIRMAN'S STATEMENT I am glad to report that Northern 3 VCT has made good progress over the past year, despite the challenges posed by the economic and financial climate. Results and dividend The net asset value (NAV) per share at 31 March 2010 was 90.2p, an increase of 7.4% from the corresponding figure of 84.0p at 31 March 2009.  The total return for the year as shown in the income statement was 9.9p per share, equivalent to 11.8% of the opening NAV. An interim dividend of 2.0p per share was paid in January 2010 and the directors propose a final dividend also of 2.0p per share, making a total of 4.0p for the year - unchanged from the previous year.  This is in line with the board's stated minimum dividend objective and we will aim to maintain a satisfactory flow of dividends to shareholders in future periods, though the income from our investments continues to be adversely affected by low interest rates. Investment portfolio The business review in the annual report gives details of recent developments in the investment portfolio.  The rate of new investment activity showed a welcome increase over the previous year, and we also made additional investments in several existing portfolio companies in order to finance growth and where appropriate reduce exposure to bank lending. Some of our investments have continued to be affected by adverse market conditions but despite this the portfolio has generally proved resilient, with some encouraging successes.  The sale of the diagnostics company DxS in September 2009 has been widely recognised as an excellent result, which led to our colleague Tim Levett being presented with the prestigious BVCA/Real Deals Deal of the Year Award for 2010 on behalf of NVM Private Equity - a splendid accolade won in competition with the entire UK venture capital industry. Satisfactory exits were also achieved from the investments in Liquidlogic and Abermed. Investment policy Investment returns on cash and near-cash assets have continued to be very low over the past year.  The directors have reviewed the company's approach to the short-term deployment of funds held for future investment in qualifying venture capital holdings and have decided to bring a resolution to the 2010 annual general meeting which would amend the company's investment policy so as to permit the use of a wider range of financial instruments, with a view to generating a better return on funds. Shareholder issues The company's latest public offer of new ordinary shares closed on 12 May 2010 with a total of £12.7 million (before deducting issue costs) raised.  This is a satisfactory outcome and I would like to thank our new shareholders for their support. A year ago your directors felt it appropriate, in the light of the very difficult market conditions then prevailing, to suspend the company's policy of buying back shares in the market at a fixed discount of 10% to NAV.  Following a further review, it was announced in November 2009 that the company would in future buy back shares at a 15% discount, and we have subsequently purchased a total of 200,000 shares in the market for cancellation.  We also made a special tender offer to purchase up to 10% of the company's issued capital at a 1% discount to NAV, on the basis that the proceeds would be re-invested in new shares under the public share offer mentioned above.  The tender offer was taken up in respect of 2,858,255 shares, representing 9.9% of the issued capital, and the shares were duly re-purchased by the company on 1 March 2010 at a cost of £2.5 million. We continue to support efforts to promote the secondary market in VCT shares, whose attractions can only be enhanced by the current UK regime of low interest rates, high personal tax rates and restrictions on pension contributions. 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 Following HM Revenue & Customs' announcement in 2008 that investment management fees paid by VCTs should have been exempt from VAT, repayment has been obtained of £280,000 of VAT paid on management fees for the period from 2005 to 2008. Our managers have not at this stage been able to obtain repayment in respect of earlier periods, where claims are subject to time limits, but discussions are continuing. Board of directors John Hustler, who was chairman of the company for the first seven years of its existence, has indicated that he will be retiring from the board in September 2010.  Regrettably this is necessary in order to avoid a deemed conflict with his role as chairman of Northern Venture Trust PLC, following the introduction of new FSA rules relating to the independence of listed company chairmen.  On behalf of shareholders and the board, I thank John for his valuable service and wise counsel, which we shall miss. Outlook Any assessment of the future prospects for small and medium-sized businesses must take into account the poor state of the public finances, as a result of which higher taxation and reduced public sector spending can be expected. Recent economic data suggest that the UK may now be slowly emerging from recession, though a relapse seems entirely possible.  This is a climate in which a highly selective approach to new investments will remain essential, whilst our managers continue their supportive monitoring of the existing portfolio. Nevertheless it has been a feature of past economic cycles that attractive opportunities can become available following a time of recession, and we would therefore expect to see some upturn in investment activity over the next 12 months. James Ferguson Chairman The audited financial statements for the year ended 31 March 2010 are set out below. INCOME STATEMENT for the year ended 31 March 2010   Year ended 31 March 2010  Year ended 31 March 2009   Revenue  Capital  Total  Revenue  Capital  Total £000  £000  £000  £000  £000  £000 Gain on disposal of   investments -  1,651  1,651  -  814  814 Movements in fair value   of -  1,058  1,058  -  (4,460) (4,460) investments   ---------  ---------  ---------  ---------  ---------  ---------   -  2,709  2,709  -  (3,646) (3,646) Income 926  -  926  1,249  -  1,249 Investment (130) (390) (520) (140) (420) (560) management fee Recoverable -  -  -  67  213  280 VAT Other expenses (217) -  (217) (213) -  (213)   ---------  ---------  ---------  ---------  ---------  --------- Return on ordinary   activities 579  2,319  2,898  963  (3,853) (2,890) before tax Tax on return on   ordinary (93) 93  -  (208) 61  (147) activities   ---------  ---------  ---------  ---------  ---------  --------- Return on ordinary   activities 486  2,412  2,898  755  (3,792) (3,037) after tax   ---------  ---------  ---------  ---------  ---------  --------- Return per 1.7p 8.2p 9.9p 2.6p (13.0)p (10.4)p share Dividends paid/proposed in respect of 1.5p 2.5p 4.0p 2.5p 1.5p 4.0p the year RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS for the year ended 31 March 2010   Year ended  Year ended 31 March 2010  31 March 2009 £000  £000 Equity shareholders' funds at 1 April 2009 24,323  28,645 Return on ordinary activities after tax 2,898  (3,037) Dividends recognised in the year (1,157) (575) Net proceeds of share issues 9,073  63 Shares purchased for cancellation (2,725) (773)   ---------  --------- Equity shareholders' funds at 31 March 2010 32,412  24,323   ---------  --------- BALANCE SHEET as at 31 March 2010     31 March 2010  31 March 2009 £000  £000 Venture capital investments   Unquoted   15,414  13,606   Quoted   2,362  1,603     ---------  --------- Total venture capital investments   17,776  15,209 Listed fixed-interest investments   5,002  5,700     ---------  --------- Total fixed asset investments   22,778  20,909     ---------  --------- Current assets:   Debtors   317  848   Cash and deposits   9,510  2,785     ---------  ---------     9,827  3,633 Creditors (amounts falling due   within one year)   (193) (219)     ---------  --------- Net current assets   9,634  3,414     ---------  --------- Net assets   32,412  24,323     ---------  --------- Capital and reserves: Called-up equity share capital   1,796  1,447 Share premium   16,656  8,089 Capital redemption reserve   345  188 Capital reserve   14,488  16,432 Revaluation reserve   (1,227) (2,424) Revenue reserve   354  591     ---------  --------- Total equity shareholders' funds   32,412  24,323     ---------  --------- Net asset value per share   90.2p 84.0p CASH FLOW STATEMENT for the year ended 31 March 2010     Year ended  Year ended 31 March 2010  31 March 2009       £000  £000  £000  £000 Cash flow statement Net cash inflow from   operating       868    42 activities Taxation: Corporation tax       (174)   (143) paid Financial investment: Purchase of     (9,818)   (2,234) investments Sale/repayment of   Investments     10,658    4,879       ---------    --------- Net cash inflow   from financial     840    2,645 investment Equity dividends       (1,157)   (575) paid         ---------    --------- Net cash inflow   before financing     377    1,969 Financing: Issue of shares     9,602    72 Share issue     (529)   (9) expenses Purchase of shares   for     (2,725)   (773) cancellation       ---------    --------- Net cash inflow/(outflow)     6,348    (710) from financing         ---------    --------- Increase in cash and deposits   6,725    1,259         ---------    --------- Reconciliation of return before tax to net cash flow from operating activities Return on ordinary   activities       2,898    (2,890) before tax Gain on disposal of     (1,651)   (814) investments Movements in fair value     (1,058)   4,460 of investments (Increase)/decrease in     531    (583) debtors Increase/(decrease) in     148    (131) creditors         ---------    --------- Net cash inflow from   operating       868    42 activities         ---------    --------- Reconciliation of movement in net funds   1 April 2009  Cash flows  31 March 2010     £000    £000    £000 Cash and deposits   2,785    6,725    9,510     ---------    ---------    --------- INVESTMENT PORTFOLIO SUMMARY as at 31 March 2010   Cost Valuation % of net assets £000 £000 by value Fifteen largest venture capital investments Promanex Group Holdings 1,595 1,595 4.9 Kerridge Commercial Systems 1,244 1,244 3.8 Axial Systems Holdings 1,004 1,023 3.2 Phusion Healthcare 995 995 3.1 RCC Lifesciences 995 995 3.1 CloserStill Holdings 743 946 2.9 Advanced Computer Software* 381 872 2.7 Wear Inns 839 839 2.6 Paladin Group 861 831 2.6 Optilan Group 1,000 821 2.5 Crantock Bakery 442 772 2.4 Envirotec 456 708 2.2 Arleigh International 452 677 2.1 IG Doors 500 600 1.8 Britspace Group 794 583 1.8   --------- --------- --------   12,301 13,501 41.7 Other venture capital investments 6,741 4,275 13.2   --------- --------- -------- Total fixed asset investments 19,042 17,776 54.9 Listed fixed-interest investments 4,963 5,002 15.4   --------- --------- -------- Total fixed asset investments 24,005 22,778 70.3   --------- Net current assets   9,634 29.7     --------- -------- Net assets   32,412 100.0     --------- -------- *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:  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.  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;  (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. In relation to the financial statements for the year ended 31 March 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;  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.  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 March 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;  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 2.0p per share for the year ended 31 March 2010 will, if approved by shareholders, be paid on 9 July 2010 to shareholders on the register at the close of business on 18 June 2010. The full annual report including financial statements for the year ended 31 March 2010 is expected to be posted to shareholders on 28 May 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. [HUG#1417681]
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