Annual Financial Report

17 MAY 2016

NORTHERN 3 VCT PLC

RESULTS FOR THE YEAR ENDED 31 MARCH 2016

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 (comparative figures as at 31 March 2015):

 

 
 2016  2015
Net assets £67.0m £71.2m
Net asset value per share 102.2p 107.2p
Return per share:    
Revenue 2.1p 2.5p
Capital 8.3p 1.4p
Total 10.4p 3.9p
Dividend per share for the year:    
First interim dividend 2.0p 2.0p
Second interim (special) dividend 5.0p 10.0p
Proposed final dividend 3.5p 3.5p
Total 10.5p 15.5p
Cumulative return to shareholders since launch:    
Net asset value per share 102.2p 107.2p
Dividends paid per share* 64.9p 49.4p
Net asset value plus dividends paid per share 167.1p 156.6p
Mid-market share price at end of year 95.75p 96.75p
Share price discount to net asset value 6.3% 9.7%
Tax-free dividend yield (based on mid-market share price at end of year):    
Excluding special dividend
Including special dividend
5.7%
11.0%
5.7%
16.0%

*Excluding second interim and proposed final dividend payable on 15 July 2016

For further information, please contact:

NVM Private Equity LLP
Alastair Conn/Christopher Mellor                  0191 244 6000

Website:  www.nvm.co.uk

NORTHERN 3 VCT PLC

CHAIRMAN'S STATEMENT

I am pleased to report on another productive year for our company.  The investment portfolio has performed well and a number of satisfactory sales were completed, from both unquoted and AIM-quoted holdings.

Results and dividend
The NAV per share at 31 March 2016, after deducting dividends totalling 15.5p which were paid during the year, was 102.2p compared with 107.2p as at 31 March 2015.  The total return per share for the year as shown in the income statement was 10.4p (last year 3.9p), equivalent to 9.7% of the opening NAV.  Net realised and unrealised capital gains for the year totalled £6.8 million, reflecting sales made during the year and the generally positive performance achieved by portfolio companies.

Your directors' policy is to set the annual dividend at a level which is sustainable taking one year with another, seeking to smooth out the inevitable fluctuations in annual results.  Since 2012 it has been our objective to maintain the annual dividend at 5.5p per share, and we now propose an unchanged final dividend of 3.5p in respect of the year ended 31 March 2016, maintaining the total recurring dividend for the year at the target level of 5.5p.  We have also decided to recognise the healthy inflow of sales proceeds during the year by declaring a special dividend of 5.0p per share, which takes the total payable in respect of the year to 10.5 pence.

The special dividend will take the form of a second interim dividend for the year ended 31 March 2016, which will be paid on 15 July 2016 to shareholders on the register on 17 June 2016.  The proposed final dividend of 3.5p per share will, subject to approval by shareholders at the annual general meeting, be paid on the same date, making a total payment of 8.5p per share.

We announced in January 2016 that the company's dividend investment scheme, which was suspended in July 2015 because of the uncertainty surrounding the Government's review of the VCT legislation, was reinstated with immediate effect.  The scheme enables shareholders to re-invest their dividends in new ordinary shares in the company, with the benefit of the tax reliefs available on new subscriptions to VCTs.  Further information about the scheme is included in a separate letter sent to shareholders with the annual report.

Your directors attach a high priority to maintaining a strong flow of tax-free dividends to shareholders.  At this stage it is difficult to gauge the likely impact on future investment returns of the recent VCT rule changes, and we will keep the company's dividend policy under regular review.

Investment portfolio
The past six months have seen a lull in new unquoted investment activity, as the market began to come to terms with the new VCT investment parameters and HM Revenue & Customs seemingly struggled to process investment clearance applications on a timely basis.  During the first half we invested £8.2 million in six new companies launched with a view to commencing a VCT-qualifying trade, and completed investments in Love Saving Group and Entertainment Magpie Group.  The investments in Kitwave One, Control Risks Group Holdings, Tinglobal Holdings and Direct Valeting were sold on satisfactory terms.

In the AIM-quoted portfolio, the only new investment was in Gear4music (Holdings).  The investments in Accumuli, Nationwide Accident Repair Services and Jelf Group were all sold at a profit as a result of agreed bids.  The number of VCT-qualifying new issues on AIM has remained low and under the new VCT rules we are now prohibited from acquiring any further holdings in the secondary market, so it seems likely that the number of AIM investments in the portfolio will reduce further in the medium term.  This is regrettable as AIM-quoted investments have made a useful contribution to the company's performance in recent years.

Shareholder issues
12 months ago we reduced, from 10% to 5%, the discount to NAV at which the company offers to buy back its shares in the market.  The number of shares re-purchased during the year ended 31 March 2016 was 820,000, compared with 500,000 during the preceding year.

The company's most recent public offer of new shares took place in the 2013/14 financial year, almost three years ago, when £20 million was raised.  The proceeds of that share issue, together with the substantial amounts realised from successful investment sales, have been more than sufficient to meet subsequent new investment requirements.  Your directors are conscious that many shareholders would like to have the opportunity to make a further investment in the company, and the possibility of further share offers will be kept under review.

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 reviews the company's compliance position on a regular basis with the manager.  Philip Hare & Associates LLP (formerly Robertson Hare LLP) continues to act as independent adviser to the company on VCT taxation matters.

VCT legislation
Shareholders will no doubt be aware that the Finance Act (No 2) 2015, which became law in November 2015, made some radical changes to the legislation defining investments qualifying under the VCT scheme.  We understand that the Government's intention is to make the VCT scheme more compliant with the European Commission's State aid rules.  VCTs investment is now to be focused on "growth and development" funding for relatively immature businesses, whilst transactions involving ownership change, such as management buyouts, are prohibited.  The new measures apply to all funds raised by VCTs in the past as well as the proceeds of future share issues.

There is widespread agreement that the change in investment emphasis is likely to result in future returns from VCT portfolios becoming more volatile, with a greater proportion of investments which carry high risk but also potentially high reward.  Northern 3 VCT is unlikely to prove an exception to this but we are encouraged by the fact that our manager NVM has a strong record in early-stage investment, and is building up its investment resource to meet the new requirements.

A resolution will be proposed at the annual general meeting to amend the wording of the company's investment policy, so as to conform with the revised VCT qualifying investment requirements.

Outlook
We are entering into an interesting phase in the development of the VCT sector, and inevitably there is some uncertainty as to how the new rules will be interpreted and whether those VCTs which have built strong performance records will continue to thrive under the altered regime.  Your board and manager are confident that the foundations which have been established over the past 15 years give us a good basis to meet the challenges ahead.

James Ferguson
Chairman

The audited financial statements for the year ended 31 March 2016 are set out below.

INCOME STATEMENT
for the year ended 31 March 2016

  Year ended 31 March 2016 Year ended 31 March 2015
  Revenue 
£000 
Capital 
£000 
Total 
£000 
Revenue 
£000 
Capital 
£000 
Total 
£000 
Gain on disposal of investments1,796 1,796 3,429 3,429 
Movements in fair value of investments5,037 5,037 (1,693)(1,693)
 ---------- ---------- ---------- ---------- ---------- ---------- 
 6,833 6,833 1,736 1,736 
Income2,201 2,201 2,676 2,676 
Investment management fee(354)(1,530)(1,884)(364)(1,094)(1,458)
Other expenses(314)(314)(376)(376)
 ---------- ---------- ---------- ---------- ---------- ---------- 
Return on ordinary activities before tax1,533 5,303 6,836 1,936 642 2,578 
Tax on return on ordinary activities(145)145 (261)261 
 ---------- ---------- ---------- ---------- ---------- ---------- 
Return on ordinary activities after tax1,388 5,448 6,836 1,675 903 2,578 
 ---------- ---------- ---------- ---------- ---------- ---------- 
Return per share2.1p8.3p10.4p2.5p1.4p3.9p
Dividend per share2.0p8.5p10.5p2.5p13.0p15.5p

BALANCE SHEET
as at 31 March 2016

  31 March 2016 
£000 
31 March 2015 
£000 
Fixed assets:  
 Investments58,695 50,371 
 ---------- ---------- 
Current assets:  
 Debtors252 255 
 Cash and cash equivalents8,637 20,726 
 ---------- ---------- 
 8,889 20,981 
Creditors (amounts falling due within one year)(620)(197)
 ---------- ---------- 
Net current assets8,269 20,784 
 ---------- ---------- 
   
Net assets66,964 71,155 
 ---------- ---------- 
   
Capital and reserves:  
Called-up equity share capital3,277 3,318 
Share premium1,348 1,348 
Capital redemption reserve76 35 
Capital reserve54,452 62,884 
Revaluation reserve6,899 2,393 
Revenue reserve912 1,177 
 ---------- ---------- 
Total equity shareholders' funds66,964 71,155 
 ---------- ---------- 
Net asset value per share102.2p107.2p

STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2016

  ---------------Non-distributable reserves--------------- Distributable reserves Total 
   

Share 
capital 
 

Share 
premium 
Capital 
redemption 
reserve 
 

Revaluation 
reserve 
 

Capital 
reserve 
 

Revenue 
reserve 
 
  £000  £000  £000  £000  £000  £000  £000 
At 1 April 20153,318 1,348 35 2,393 62,884 1,177 71,155 
Return on ordinary activities       
after tax for the year4,506 942 1,388 6,836 
Net proceeds of share issues
Re-purchase of shares(41)41 (754)(754)
Dividends recognised(8,620)(1,653)(10,273)
 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 
At 31 March 20163,277 1,348 76 6,899 54,452 912 66,964 
 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 
         

STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2015

  ---------------Non-distributable reserves--------------- Distributable reserves Total 
   

Share 
capital 
 

Share 
premium 
Capital 
redemption 
reserve 
 

Revaluation 
reserve 
 

Capital 
reserve 
 

Revenue 
reserve 
 
  £000  £000  £000  £000  £000  £000  £000 
At 1 April 20143,275 10 12,049 55,264 699 71,297 
Return on ordinary activities       
after tax for the year(9,656)10,559 1,675 2,578 
Net proceeds of share issues68 1,348 1,416 
Re-purchase of shares(25)25 (482)(482)
Dividends recognised(2,457)(1,197)(3,654)
 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 
At 31 March 20153,318 1,348 35 2,393 62,884 1,177 71,155 
 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 
         

STATEMENT OF CASH FLOWS
for the year ended 31 March 2016

  Year ended  Year ended 
  31 March 2016  31 March 2015 
  £000  £000 
Cash flows from operating activities:  
Return on ordinary activities before tax6,836 2,578 
Adjustments for:  
Gain on disposal of investments(1,796)(3,429)
Movement in fair value of investments(5,037)1,693 
(Increase)/decrease in debtors33 
Increase/(decrease) in creditors423 (805)
 ---------- ---------- 
Net cash inflow from operating activities429 70 
 ---------- ---------- 
Cash flows from investing activities:  
Purchase of investments(12,320)(12,986)
Sale/repayment of investments10,829 22,794 
 ---------- ---------- 
Net cash inflow/(outflow) from investing activities(1,491)9,808 
 ---------- ---------- 
Cash flows from financing activities:  
Issue of shares1,463 
Share issue expenses(47)
Repurchase of ordinary shares for cancellation(754)(482)
Dividends paid on ordinary shares(10,273)(3,654)
 ---------- ---------- 
Net cash outflow from financing activities(11,027)(2,720)
 ---------- ---------- 
Net increase/(decrease) in cash/cash equivalents(12,089)7,158 
Cash and cash equivalents at beginning of year20,726 13,568 
 ---------- ---------- 
Cash and cash equivalents at end of year8,637 20,726 
 ---------- ---------- 

INVESTMENT PORTFOLIO SUMMARY
as at 31 March 2016

   

Cost
£000
 

Valuation
£000
% of
net assets
by value
Venture capital investments:   
Buoyant Upholstery1,2943,1194.7
IDOX*6002,4763.7
Lineup Systems9742,4703.7
MSQ Partners Group1,4782,2753.4
Axial Systems Holdings1,2932,1473.2
No 1 Traveller1,8932,0633.1
Silverwing1,2721,9542.9
Entertainment Magpie Group1,3601,8302.7
Volumatic Holdings1,7621,6952.5
Wear Inns1,4061,6812.5
It's All Good1,1311,6422.4
Closerstill Group1,5201,5202.3
Agilitas IT Holdings1,4481,4692.2
Biological Preparations Group1,9151,4122.1
Cawood Scientific8251,3752.1
 ----------------------------
Fifteen largest venture capital investments20,17129,12843.5
Other venture capital investments24,28722,02932.9
 ----------------------------
Total venture capital investments44,45851,15776.4
Listed equity investments7,3377,53811.3
 ----------------------------
Total fixed asset investments51,79558,69587.7
 ----------  
Net current assets 8,26912.3
  ------------------
Net assets 66,964100.0
  ------------------

*Quoted on AIM

BUSINESS RISKS

The board carries out a regular and robust review of the risk environment in which the company operates.  The principal risks and uncertainties identified by the board which might affect the company's business model and future performance, and the steps taken with a view to their mitigation, are as follows:

Investment and liquidity risk: many 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.  Mitigation: the directors aim to limit the risk attaching to the portfolio as a whole by careful selection, close monitoring and timely realisation of investments, by carrying out rigorous due diligence procedures and maintaining a wide spread of holdings in terms of financing stage and industry sector.  The board reviews the investment portfolio with the manager on a regular basis.

Financial risk: most of the company's investments involve a medium- to long-term commitment and many are relatively illiquid.  Mitigation: the directors consider that it is inappropriate to finance the company's activities through borrowing except on an occasional short-term basis.  Accordingly they seek to maintain a proportion of the company's assets in cash or cash equivalents in order to be in a position to take advantage of new unquoted investment opportunities.  The company has very little direct exposure to foreign currency risk and does not enter into derivative transactions.

Economic risk: events such as economic recession or general fluctuation 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.  Mitigation: the company invests in a diversified portfolio of investments spanning various industry sectors, and maintains sufficient cash reserves to be able to provide additional funding to investee companies where appropriate.

Stock market risk: some of the company's investments are quoted on the London Stock Exchange or AIM and will be subject to market fluctuations upwards and downwards.  External factors such as terrorist activity can negatively impact stock markets worldwide.  In times of adverse sentiment there can be very little, if any, market demand for shares in smaller companies quoted on AIM.  Mitigation: the company's quoted investments are actively managed by specialist managers and the board keeps the portfolio under ongoing review.

Credit risk: the company holds a number of financial instruments and cash deposits and is dependent on the counterparties discharging their commitment.  Mitigation: the directors review the creditworthiness of the counterparties to these instruments and cash deposits and seek to ensure there is no undue concentration of credit risk with any one party.

Legislative and regulatory risk: in order to maintain its approval as a VCT, the company is required to comply with current VCT legislation in the UK, which reflects the European Commission's State aid rules.  Changes to the UK legislation or the State aid rules in the future could have an adverse effect on the company's ability to achieve satisfactory investment returns whilst retaining its VCT approval.  Mitigation: The board and the manager monitor political developments and where appropriate seek to make representations either directly or through relevant trade bodies.

Internal control risk: the company's assets could be at risk in the absence of an appropriate internal control regime.  Mitigation: 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.  Mitigation: the manager keeps the company's VCT qualifying status under continual review and its reports are reviewed by the board on a quarterly basis.  The board has also retained Philip Hare & Associates LLP to undertake an independent VCT status monitoring role.

DIRECTORS' RESPONSIBILITIES STATEMENT

The directors are responsible for preparing the annual report and the financial statements 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 year.

In preparing the 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 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, strategic 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 LLP (NVM) website, www.nvm.co.uk .  The maintenance and integrity of this website is the responsibility of NVM and not of the company.  The work carried out by KPMG LLP as independent auditor of the company does not involve consideration of the maintenance and integrity of the website and accordingly they accept no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website.  Visitors to the website should be aware that legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction.

In relation to the financial statements for the year ended 31 March 2016 each of the directors has confirmed that, to the best of his knowledge, (i) the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the company;  (ii) the annual report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company's performance, business model and strategy;  and (iii) the directors' report and strategic report include 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 that the company faces.

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 2016 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 auditor's report on those financial statements under Section 495 of the Companies Act 2006 is unqualified, does not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and does not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

The calculation of the revenue and capital return per share is based on the return on ordinary activities after tax for the year and on 65,999,656 (2015 66,416,764) ordinary shares, being the weighted average number of shares in issue during the year.

The calculation of the net asset value per share is based on the net assets at 31 March 2016 divided by the 65,533,399 (2015 66,353,399) ordinary shares in issue at that date.

The second interim dividend of 5.0p per share and, if approved by shareholders, the proposed final dividend of 3.5p per share for the year ended 31 March 2016 will be paid on 15 July 2016 to shareholders on the register at the close of business on 17 June 2016.

The full annual report including financial statements for the year ended 31 March 2016 is expected to be posted to shareholders by 10 June 2016 and will be available to the public at the registered office of the company at Time Central, 32 Gallowgate, Newcastle upon Tyne NE1 4SN and on the NVM Private Equity LLP website, www.nvm.co.uk .

Neither the contents of the NVM Private Equity LLP website nor the contents of any website accessible from hyperlinks on the NVM Private Equity LLP website (or any other website) is incorporated into, or forms part of, this announcement.




This announcement is distributed by NASDAQ OMX Corporate Solutions on behalf of NASDAQ OMX Corporate Solutions clients.

The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.

Source: Northern 3 VCT PLC via GlobeNewswire

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