12 JUNE 2017
NORTHERN 3 VCT PLC
RESULTS FOR THE YEAR ENDED 31 MARCH 2017
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 2016):
| | 2017 | 2016 |
| Net assets | £69.9m | £67.0m |
| Net asset value per share | 106.2p | 102.2p |
| Return per share: | ||
| Revenue | 2.6p | 2.1p |
| Capital | 12.0p | 8.3p |
| Total | 14.6p | 10.4p |
| Dividend per share for the year: | ||
| First interim dividend | 2.0p | 2.0p |
| Second interim (special) dividend | 5.0p | 5.0p |
| Proposed final dividend | 3.5p | 3.5p |
| Total | 10.5p | 10.5p |
| Cumulative return to shareholders since launch: | ||
| Net asset value per share | 106.2p | 102.2p |
| Dividends paid per share* | 75.4p | 64.9p |
| Net asset value plus dividends paid per share | 181.6p | 167.1p |
| Mid-market share price at end of year | 101.0p | 95.75p |
| Share price discount to net asset value | 4.9% | 6.3% |
| Tax-free dividend yield (based on mid-market share price at end of year): | ||
| Excluding special dividend Including special dividend | 5.4% 10.4% | 5.7% 11.0% |
*Excluding second interim and proposed final dividend payable on 21 July 2017
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
The company made good progress during the past year against a background of global political and economic uncertainty, with the added complication of major changes in the VCT legislation.
Results and dividend
The NAV per share at 31 March 2017, after deducting dividends totalling 10.5p which were paid during the year, was 106.2p compared with 102.2p as at 31 March 2016. The total return per share for the year as shown in the income statement was 14.6p (last year 10.4p), equivalent to 14.3% of the opening NAV. These strong results reflect another creditable performance across the investment portfolio. Northern 3 VCT has continued to outperform by a comfortable margin the NAV total return index for the generalist VCT sector published by the Association of Investment Companies.
The directors' policy is to pay a dividend which is sustainable from one year to another, smoothing out the fluctuations in annual results. Since 2012, this has resulted in an objective of maintaining the annual dividend at 5.5p per share.
In the light of the results for the year ended 31 March 2017 we propose an unchanged final dividend of 3.5p in respect of the year, which together with the interim dividend of 2.0p paid in January takes us to our target of 5.5p. In addition to this, we have again decided to recognise the strong generation of cash from investment sales by declaring a special dividend of 5.0p per share, so that the total payable in respect of the year will be 10.5p.
The special dividend will take the form of a second interim dividend for the year ended 31 March 2017, which will be paid on 21 July 2017 to shareholders on the register on 23 June 2017. The proposed final dividend will, subject to approval by shareholders at the annual general meeting, be paid on the same date.
The company's dividend investment scheme, under which dividends can be re-invested in new ordinary shares free of dealing costs and with the benefit of the tax reliefs available on new VCT share subscriptions, continues to operate. Shareholders who wish to join the scheme or amend their current participation in the scheme may obtain an updated scheme mandate form from NVM's website at www.nvm.co.uk.
Investment portfolio
During the past year seven new VCT-qualifying investments have been completed at a total cost of £5.6 million. Shareholders will be aware that last year the Government introduced radical changes to the parameters for VCT-qualifying investments, as a result of which management buyouts have been removed from the permitted range and investment activity is instead focussed on earlier-stage companies requiring capital for the development of new products and markets. We are still coming to terms with some of the detailed implications, as are HM Revenue & Customs whose advance clearance system for new investments has been subject to unacceptably long delays. Our manager, however, currently reports an encouraging level of new investment prospects, and has strengthened its investment team to address the changes in the investment requirements.
Cash proceeds from sales of investments in the unquoted venture capital portfolio totalled £10.6 million, with satisfactory exits from Silverwing, Arleigh Group and Cawood Scientific. Shortly after the year end a further £2.8 million was received from the sale of Optilan Group.
The portfolio of AIM-quoted investments performed well and some profits were taken on a rise in the share prices of IDOX and Gear4music (Holdings).
Shareholder issues
In February 2017 we raised £4.3 million of new capital through a top-up offer of ordinary shares, launched in conjunction with similar offers by Northern Venture Trust and Northern 2 VCT. The offer was rapidly subscribed by existing Northern VCT shareholders, and we naturally regret the disappointment felt by unsuccessful applicants. The resulting new shares were allotted on 3 April 2017 and therefore do not form part of the issued capital shown in our 31 March 2017 accounts. The possibility of future share issues will be kept under review, and will depend on the rate of new investments and realisations from the existing portfolio.
The company has maintained its policy of buying back its own shares in the market, where necessary to maintain market liquidity, at a discount of 5% to NAV. During the year 730,000 shares, equivalent to approximately 1.1% of the opening share capital, were re-purchased for cancellation at an average cost of 96p per share.
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 continues to act as independent adviser to the company on VCT taxation matters.
VCT legislation
The recent changes to the VCT legislation were in part a response to restrictions contained in the European Commission's State aid rules, but it is apparent that the UK Government is also seeking to bring about some changes in direction. In November 2016 the Government announced its Patient Capital Review, with a remit to identify barriers to access to long-term finance for growing firms in the UK and to assess what changes in government policy may be needed to improve the supply of funding. It is to be hoped that this exercise takes due note of the significant role which VCTs have played, and continue to play, in the provision of growth capital to the smaller companies whose future development is so important to the well-being of the UK economy.
Outlook
Northern 3 VCT is well positioned to meet the challenges presented both by the new VCT investment regime and by the recent changes and current uncertainties on the wider political and economic scene.
James Ferguson
Chairman
The audited financial statements for the year ended 31 March 2017 are set out below.
INCOME STATEMENT
for the year ended 31 March 2017
| Year ended 31 March 2017 | Year ended 31 March 2016 | |||||
| Revenue £000 | Capital £000 | Total £000 | Revenue £000 | Capital £000 | Total £000 | |
| Gain on disposal of investments | - | 1,775 | 1,775 | - | 1,796 | 1,796 |
| Movements in fair value of investments | - | 7,785 | 7,785 | - | 5,037 | 5,037 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| - | 9,560 | 9,560 | - | 6,833 | 6,833 | |
| Income | 2,626 | - | 2,626 | 2,201 | - | 2,201 |
| Investment management fee | (354) | (1,951) | (2,305) | (354) | (1,530) | (1,884) |
| Other expenses | (306) | - | (306) | (314) | - | (314) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return on ordinary activities before tax | 1,966 | 7,609 | 9,575 | 1,533 | 5,303 | 6,836 |
| Tax on return on ordinary activities | (274) | 274 | - | (145) | 145 | - |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return on ordinary activities after tax | 1,692 | 7,883 | 9,575 | 1,388 | 5,448 | 6,836 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return per share | 2.6p | 12.0p | 14.6p | 2.1p | 8.3p | 10.4p |
| Dividend per share | 2.0p | 8.5p | 10.5p | 2.0p | 8.5p | 10.5p |
BALANCE SHEET
as at 31 March 2017
| 31 March 2017 £000 | 31 March 2016 £000 | |
| Fixed assets: | ||
| Investments | 62,717 | 58,695 |
| ---------- | ---------- | |
| Current assets: | ||
| Debtors | 652 | 252 |
| Cash and cash equivalents | 11,811 | 8,637 |
| ---------- | ---------- | |
| 12,463 | 8,889 | |
| Creditors (amounts falling due within one year) | (5,288) | (620) |
| ---------- | ---------- | |
| Net current assets | 7,175 | 8,269 |
| ---------- | ---------- | |
| Net assets | 69,892 | 66,964 |
| ---------- | ---------- | |
| Capital and reserves: | ||
| Called-up equity share capital | 3,290 | 3,277 |
| Share premium | 2,223 | 1,348 |
| Capital redemption reserve | 113 | 76 |
| Capital reserve | 50,850 | 54,452 |
| Revaluation reserve | 12,124 | 6,899 |
| Revenue reserve | 1,292 | 912 |
| ---------- | ---------- | |
| Total equity shareholders' funds | 69,892 | 66,964 |
| ---------- | ---------- | |
| Net asset value per share | 106.2p | 102.2p |
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2017
| ---------------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 2016 | 3,277 | 1,348 | 76 | 6,899 | 54,452 | 912 | 66,964 | |
| Return on ordinary activities | ||||||||
| after tax for the year | - | - | - | 5,225 | 2,658 | 1,692 | 9,575 | |
| Dividends paid | - | - | - | - | (5,559) | (1,312) | (6,871) | |
| Net proceeds of share issues | 50 | 875 | - | - | - | - | 925 | |
| Re-purchase of shares | (37) | - | 37 | - | (701) | - | (701) | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
| At 31 March 2017 | 3,290 | 2,223 | 113 | 12,124 | 50,850 | 1,292 | 69,892 | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
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 2015 | 3,318 | 1,348 | 35 | 2,393 | 62,884 | 1,177 | 71,155 | |
| Return on ordinary activities | ||||||||
| after tax for the year | - | - | - | 4,506 | 942 | 1,388 | 6,836 | |
| Dividends paid | - | - | - | - | (8,620) | (1,653) | (10,273) | |
| Re-purchase of shares | (41) | - | 41 | - | (754) | - | (754) | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
| At 31 March 2016 | 3,277 | 1,348 | 76 | 6,899 | 54,452 | 912 | 66,964 | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
STATEMENT OF CASH FLOWS
for the year ended 31 March 2017
| Year ended | Year ended | |
| 31 March 2017 | 31 March 2016 | |
| £000 | £000 | |
| Cash flows from operating activities: | ||
| Return on ordinary activities before tax | 9,575 | 6,836 |
| Adjustments for: | ||
| Gain on disposal of investments | (1,775) | (1,796) |
| Movement in fair value of investments | (7,785) | (5,037) |
| (Increase)/decrease in debtors | (400) | 3 |
| Increase/(decrease) in creditors | 387 | 423 |
| ---------- | ---------- | |
| Net cash inflow from operating activities | 2 | 429 |
| ---------- | ---------- | |
| Cash flows from investing activities: | ||
| Purchase of investments | (6,856) | (12,320) |
| Sale/repayment of investments | 12,394 | 10,829 |
| ---------- | ---------- | |
| Net cash inflow/(outflow) from investing activities | 5,538 | (1,491) |
| ---------- | ---------- | |
| Cash flows from financing activities: | ||
| Issue of shares | 951 | - |
| Share issue expenses | (26) | - |
| Share subscriptions held pending allotment | 4,281 | - |
| Repurchase of ordinary shares for cancellation | (701) | (754) |
| Dividends paid on ordinary shares | (6,871) | (10,273) |
| ---------- | ---------- | |
| Net cash outflow from financing activities | (2,366) | (11,027) |
| ---------- | ---------- | |
| Net increase/(decrease) in cash/cash equivalents | 3,174 | (12,089) |
| Cash and cash equivalents at beginning of year | 8,637 | 20,726 |
| ---------- | ---------- | |
| Cash and cash equivalents at end of year | 11,811 | 8,637 |
| ---------- | ---------- |
INVESTMENT PORTFOLIO SUMMARY
as at 31 March 2017
| Cost £000 | Valuation £000 | % of net assets by value | |
| Venture capital investments: | |||
| Entertainment Magpie Group | 1,360 | 4,657 | 6.7 |
| No 1 Lounges | 1,748 | 3,511 | 5.0 |
| IDOX* | 530 | 3,060 | 4.4 |
| Optilan Group | 1,125 | 2,751 | 3.9 |
| MSQ Partners Group | 1,478 | 2,628 | 3.8 |
| Buoyant Upholstery | 1,294 | 2,518 | 3.6 |
| Lineup Systems | 974 | 2,470 | 3.5 |
| Volumatic Holdings | 1,595 | 1,678 | 2.4 |
| It's All Good | 1,131 | 1,656 | 2.4 |
| Agilitas IT Holdings | 1,448 | 1,625 | 2.3 |
| Wear Inns | 1,406 | 1,589 | 2.2 |
| Closerstill Group | 1,520 | 1,520 | 2.2 |
| Axial Systems Holdings | 1,293 | 1,463 | 2.1 |
| Biological Preparations Group | 1,915 | 1,412 | 2.0 |
| Graza | 1,375 | 1,375 | 2.0 |
| ---------- | ---------- | -------- | |
| Fifteen largest venture capital investments | 20,192 | 33,913 | 48.5 |
| Other venture capital investments | 22,534 | 20,356 | 29.1 |
| ---------- | ---------- | -------- | |
| Total venture capital investments | 42,726 | 54,269 | 77.6 |
| Listed equity investments | 7,867 | 8,448 | 12.1 |
| ---------- | ---------- | -------- | |
| Total fixed asset investments | 50,593 | 62,717 | 89.7 |
| ---------- | |||
| Net current assets | 7,175 | 10.3 | |
| ---------- | -------- | ||
| Net assets | 69,892 | 100.0 | |
| ---------- | -------- |
*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 including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland".
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 directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
In relation to the financial statements for the year ended 31 March 2017, the directors confirm that to the best of their knowledge (i) taken as a whole 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; and (ii) the strategic report and directors' 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 they face. The directors consider that 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 position and performance, business model and strategy.
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 2017 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 65,796,762 (2016 65,999,656) 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 2017 divided by the 65,797,970 (2016 65,533,399) 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 2017 will be paid on 21 July 2017 to shareholders on the register at the close of business on 23 June 2017.
The full annual report including financial statements for the year ended 31 March 2017 is expected to be posted to shareholders on 16 June 2017 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.