Annual Report • Mar 31, 2011
Annual Report
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Northern 3 VCT PLC is a Venture Capital Trust (VCT) managed by NVM Private Equity Limited. It 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 summary | 1 |
|---|---|
| Chairman's statement | 2 |
| Directors and advisers | 4 |
| Business review | 6 |
| Investment portfolio | 11 |
| Fifteen largest venture capital investments | 12 |
| Shareholder information | 16 |
| Directors' report | 17 |
| Directors' remuneration report | 20 |
| Corporate governance | 22 |
| Directors' responsibilities statement | 27 |
| Independent auditors' report | 28 |
| Income statement | 30 |
| Reconciliation of movements in shareholders' funds | 30 |
| Balance sheet | 31 |
| Cash flow statement | 32 |
| Notes to the financial statements | 33 |
| Year ended 31 March | 2011 | 2010 |
|---|---|---|
| Net assets | £37.4m | £32.4m |
| Net asset value per share | 92.2p | 90.2p |
| Return per share | ||
| Revenue | 1.4p | 1.7p |
| Capital | 4.5p | 8.2p |
| Total | 5.9p | 9.9p |
| Dividend per share declared in respect of the year | 4.5p | 4.0p |
| Cumulative return to shareholders since launch | ||
| Net asset value per share | 92.2p | 90.2p |
| Dividends paid per share* | 28.9p | 24.9p |
| Net asset value plus dividends paid per share | 121.1p | 115.1p |
| Share price at end of year | 75.0p | 76.0p |
* Excluding second interim dividend payable on 15 July 2011
| Key dates | ||
|---|---|---|
| Results announced | 3 June 2011 | |
| Shares quoted ex dividend | 22 June 2011 | |
| Annual general meeting | 14 September 2011 | (2.00pm, The George Hotel, 19-21 George Street, Edinburgh EH2 2PB) |
| Second interim dividend paid (to shareholders on register on 24 June 2011) |
15 July 2011 |
During the past year the UK stock market has continued its steady recovery from the low point reached in early 2009, but the business environment has remained difficult for many smaller companies. Although the UK economy is technically no longer in recession, growth prospects appear modest and the full effect of planned public sector spending cuts has yet to be felt. Against this challenging background Northern 3 VCT has made further progress.
The net asset value (NAV) per share at 31 March 2011 was 92.2p, compared with 90.2p 12 months earlier. The total return for the year as shown in the income statement was 5.9p per share, equivalent to 6.5% of the opening NAV. Over the same period the FTSE All-Share index (total return) increased by 8.7%.
An interim dividend of 2.0p per share was paid in January 2011. After careful consideration the directors have decided to increase the total distribution for the year to 4.5p, from 4.0p last year. The annual general meeting this year will be held later than usual, on 14 September 2011, and in order to avoid delaying receipt of funds by shareholders the directors have declared a second interim dividend of 2.5p per share, which will be paid on 15 July 2011 to
shareholders on the register on 24 June 2011. Consequently no final dividend is proposed this year.
It is our long-term objective, subject to the availability of distributable reserves, to maintain the annual dividend at not less than the new annual level of 4.5p per share.
The performance of the venture capital portfolio has been satisfactory given the unhelpful conditions affecting many business sectors. Six new venture capital investments totalling £4.5 million were completed and proceeds received from investment sales amounted to £2.0 million. An encouraging number of companies have reported improved trading results and this has resulted in an overall increase in the valuation of the portfolio.
At the annual general meeting in July 2010 shareholders approved the board's proposal to widen the company's policy in relation to the investment of funds held for future venture capital investment. Subsequently some £4.0 million has been invested in higher-yielding UK blue chip listed equities, which have shown a modest increase in capital value whilst generating a better income yield than our cash and fixed-income holdings.
James Ferguson Chairman
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.
During the year a further £99,000 has been recovered in relation to VAT previously paid on investment management fees, taking the cumulative total to £379,000. Our managers continue to pursue a claim against HM Revenue & Customs for the payment of compound rather than simple interest on VAT repayments, but it seems likely that this will take a considerable time to resolve.
In response to market demand for new VCT share issues, the opportunity was taken in February 2011 to launch a small top-up issue of new ordinary shares which raised £2.1 million before expenses. We have maintained our policy of buying back the company's shares in the market at a 15% discount to NAV, and during the year 950,000 shares were re-purchased at a cost of £0.7 million.
It is pleasing to note that during the past three years the company has returned over £7.5 million to shareholders in the form of dividends and share buy-backs (including the March 2010 tender offer). Your directors intend as far as possible to maintain a strong flow of funds to shareholders in the future, but we also believe that it is in shareholders' interests that the asset base of the company should be preserved from erosion and in the longer term increased. Good investment performance plays an important part in the achievement of this objective, but we will also keep other enlargement opportunities under review.
In this connection it has been announced today that discussions are taking place with the board of Northern AIM VCT, a VCT with net assets of £6.5 million and which is also managed by NVM Private Equity, with a view to a merger (subject to shareholder approval) with Northern 3 VCT, which may or may not proceed. If the merger does proceed then it will be by way of a scheme of reconstruction of Northern AIM VCT under the Insolvency Act 1986, which would be outside the provisions of the City Code on Takeovers and Mergers. The companies' portfolios contain a number of common AIM-quoted and unquoted investments, and shareholders in the enlarged company would stand to benefit not only from economies of scale but also from a possible enhancement of the market liquidity of the company's shares.
A further announcement giving more details will be made in due course. The company's 2011 annual general meeting will take place approximately two months later than usual in order to coincide with the provisional timing of the additional general meeting of shareholders that will be required on the assumption that the merger proposal will proceed.
Reference has already been made to the condition of the UK economy, which reinforces the importance of careful selection of new investments, and effective management of those we already own. The company's portfolio is maturing steadily and we believe that it is well positioned to deliver good returns to shareholders.
Chairman 3 June 2011
from left to right: James Ferguson, Chris Fleetwood, Tim Levett, John Waddell.
was chairman and managing director of Stewart Ivory Limited from 1989 until 2000. He is chairman of Value & Income Trust plc, The Monks Investment Trust PLC, Edinburgh US Tracker Trust plc and The Scottish Oriental Smaller Companies Trust plc, a non-executive director of Independent Investment Trust plc and a former deputy chairman of the Association of Investment Companies. He was appointed to the board in 2001 and became chairman in 2009.
held a number of positions in manufacturing businesses and was group chief executive of Whessoe plc from 1988 until 2000. He is now managing partner of io solutions, e-business strategy advisers, and is chairman of Onyx Group Limited, Adit North and Darlington Building Society. He was appointed to the board in 2001.
is executive chairman of NVM Private Equity Limited, which he co-founded in 1988. He is a non-executive director of several unquoted companies. He was appointed to the board in 2001.
is chief executive of Archangel Informal Investment Limited, a Scottish-based syndicate of individual private equity investors, and was previously a director of Noble Grossart Limited. He was appointed to the board in 2007.
Christopher Mellor FCA MCSI Northumberland House Princess Square Newcastle upon Tyne NE1 8ER Telephone: 0191 244 6000 Fax: 0191 244 6001 E-mail: [email protected]
Registered Number 4280530
NVM Private Equity Limited Northumberland House Princess Square Newcastle upon Tyne NE1 8ER
Sarasin & Partners LLP Juxon House 100 St Paul's Churchyard London EC4M 8BU
KPMG Audit Plc Saltire Court 20 Castle Terrace Edinburgh EH1 2EG
PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6RH
Dickinson Dees LLP St Ann's Wharf 112 Quayside Newcastle upon Tyne NE99 1SB
SJ Berwin LLP 10 Queen Street Place London EC4R 1BE
Singer Capital Markets Limited 1 Hanover Street London W1S 1YZ
Barclays Bank PLC 71 Grey Street Newcastle upon Tyne NE1 6EF
Equiniti Limited Aspect House Spencer Road Lancing BN99 6DA Shareholder helpline: 0800 028 2349
The company 's objective is to provide high long-term tax-free returns to investors through a combination of dividend yield and capital growth.
The company's objective is to provide high long-term tax-free returns to investors through a combination of dividend yield and capital growth, by investing in a portfolio mainly comprising holdings in UK unquoted companies.
The company is a Venture Capital Trust approved by HM Revenue & Customs. In order to maintain approved status, the company must comply on a continuing basis with the provisions of Section 274 of the Income Tax Act 2007; in particular, the company is required at all times to hold at least 70% of its investments (as defined in the legislation) in
VCT-qualifying holdings, of which at least 30% must comprise eligible ordinary shares. For this purpose a "VCT-qualifying holding" consists of up to £1 million invested in any one year in new shares or securities of a UK unquoted company (which may be quoted on AIM) which is carrying on a qualifying trade, and whose gross assets at the time of investment do not exceed a prescribed limit. The definition of "qualifying trade" excludes certain activities such as property investment and development, financial services and asset leasing.
The company's investment policy has been designed to enable the company to comply with the VCT qualifying conditions set out above. The directors intend that the long-term disposition of the company's assets will be approximately 80% in a portfolio of VCT-qualifying unquoted and AIM-quoted investments and 20% in other investments (including but not restricted to listed fixed-interest securities and bank deposits), to provide a reserve of liquidity which will maximise the company's flexibility as to the timing of investment acquisitions and disposals, dividend
payments and share buy-backs. Within the VCT-qualifying portfolio investments will be structured using various listed and unlisted investment instruments, including ordinary and preference shares, loan stocks and convertible securities, to achieve an appropriate balance of income and capital growth, having regard to the VCT legislation. The portfolio will be diversified by investing in a broad range of VCT-qualifying industry sectors and by holding investments in companies at different stages of maturity in the corporate development cycle. The normal investment holding period will be in the range from three to seven years. Up to approximately 10% by value of the company's investments may be in early stage companies with high growth potential.
The target size range for VCTqualifying investments is from approximately £250,000 to £1 million (the maximum permitted within any tax year), with an average investment of over £500,000. As a result, and based on the company's present gross assets of approximately £37 million,
no single investment would normally represent in excess of 3% of the company's total assets at the time of acquisition. However shareholders should be aware that the company's VCT-qualifying investments are held with a view to long-term capital growth as well as income and will often have limited marketability; as a result it is possible that individual holdings may grow in value to the point where they represent a significantly higher proportion of total assets prior to a realisation opportunity being available. Investments will normally be made using the company's equity shareholders' funds and it is not intended that the company will take on any long-term borrowings.
The company is entitled to participate pro rata to net assets in all investment opportunities developed by NVM Private Equity Limited (NVM) and regularly invests alongside the four other funds managed by NVM, enabling the funds together to undertake investment commitments in any one investee company of up to
Table 1: Venture capital portfolio cash flow
| Year ended | New investment £000 |
Disposal proceeds £000 |
Net inflow/ (outflow) £000 |
|---|---|---|---|
| 30 September 2006 | 2,867 | 1,183 | (1,684) |
| 31 March 2008 (18 month period) | 9,211 | 3,738 | (5,473) |
| 31 March 2009 | 2,237 | 3,404 | 1,167 |
| 31 March 2010 | 5,948 | 5,637 | (311) |
| 31 March 2011 | 4,956 | 1,951 | (3,005) |
| Total | 25,219 | 15,913 | (9,306) |
approximately £7 million. Under a co-investment scheme introduced in 2006, NVM executives are required to invest personally alongside the funds in each new investee company on a predetermined basis.
NVM has acted as the company's investment manager since inception. NVM has an experienced team of venture capital executives based in its offices in Newcastle upon Tyne and Reading and currently has over £200 million under management in four VCTs and one investment trust.
The board's management engagement committee reviews the terms of NVM's appointment as investment manager on a regular basis. The principal terms of the company's management agreement with NVM are set out in Note 3 to the financial statements.
During the year under review Northern 3 VCT achieved a total return to ordinary shareholders, before dividends, of 5.9p per share, equivalent to 6.5% of the opening net asset value per share of 90.2p. The movement in total net assets and net asset value per share is summarised in Table 2.
The net investment in the venture capital portfolio during the year was £3.0 million, comprising new investments of £5.0 million less sales proceeds and repayments of £2.0 million. Portfolio cash flow over the past five years is summarised in Table 1.
| Pence per | ||
|---|---|---|
| £000 | ordinary share | |
| Net asset value at 31 March 2010 | 32,412 | 90.2 |
| Net revenue (investment income less revenue expenses and tax) | 536 | 1.4 |
| Capital surplus arising on investments: | ||
| Realised net gains on disposals | 778 | 2.0 |
| Movements in fair value of investments | 1,361 | 3.5 |
| Management expenses allocated to capital account (net of tax relief) | (382) | (1.0) |
| Total return for the year as shown in income statement | 2,293 | 5.9 |
| Proceeds of issue of new shares (net of expenses) | 5,002 | – |
| Shares re-purchased for cancellation | (723) | 0.1 |
| Net movement for the year before dividends | 6,572 | 6.0 |
| Net asset value at 31 March 2011 before dividends recognised | 38,984 | 96.2 |
| Dividends recognised in the financial statements for the year | (1,556) | (4.0) |
| Net asset value at 31 March 2011 | 37,428 | 92.2 |
After taking account of other cash flows, the company's total cash balances decreased over the year by £5.6 million to £3.9 million. In addition the company holds listed fixed-interest and equity investments valued at £10.7 million.
The directors have declared dividends of 4.5p per share in respect of the year, comprising 1.4p revenue dividend and a 3.1p capital distribution.
During the year ended 31 March 2011, six new holdings were added to the venture capital portfolio at a cost of £4.5 million, and additional investments totalling £0.5 million were made in existing portfolio companies. The portfolio at 31 March 2011 comprised 40 holdings with an aggregate value of £23.0 million.
A summary of the venture capital holdings at 31 March 2011 is given on page 11, with information on the fifteen largest investments on pages 12 to 15.
The new investments completed during the year were:
management (sister company to Closerstill Holdings), London
• Kitwave One (£1,000,000) – wholesaler of confectionery, soft drinks, snacks, beers, wines and tobacco, North Shields
Details of investment sales during the year are given in Note 10 on page 38. The most significant realisations (original cost or sales proceeds in excess of £0.3m) are summarised in Table 3.
The pie charts above show the composition of the investment portfolio at 31 March 2011 by value according to age, industry sector, financing stage and whether quoted or unquoted.
| Table 3: Significant investment realisations | ||||
|---|---|---|---|---|
| Company | Date of original investment |
Original cost £000 |
Sales proceeds £000 |
Realised surplus/ (deficit) £000 |
| Andor Technology | ||||
| (AIM quoted) | 2004 | 123 | 385 | 262 |
| DxS – deferred consideration | 2001 | – | 597 | 597 |
| Frontier Foods | 2007 | 579 | – | (579) |
The portfolio is well diversified and the company has continued to invest primarily in manufacturing and service businesses which meet the managers' key criteria of good value, growth potential, strong management and ability to generate cash.
Our portfolio companies have generally made good progress during the year under review, despite the continuation of challenging conditions in the UK economy and financial markets. The trend in the underlying trading results of many companies has been positive and this has been reflected in the directors' valuation of investments at 31 March 2011.
The largest individual contributor to NAV growth was Kerridge Commercial Systems, a March 2010 investment which has performed well ahead of expectations. The performance of Britspace Group, which manufactures modular buildings and bathroom pods, has been disappointing and the investment has been written down to nil value, with an additional provision of £339,000 made for potential liabilities under a bank guarantee and contract performance bonds.
Unquoted investments are valued in accordance with the accounting policy set out on page 33, which takes account of current industry guidelines for the valuation of venture capital portfolios. Provision against cost is made where an investment is under-performing significantly, and investments are not normally revalued upwards within 12 months of acquisition.
As at 31 March 2011 the number of investments falling into each valuation category was as shown in Table 4.
The directors regard the following as the key indicators pertaining to the company's performance:
| Category | Number of investments |
Valuation £000 |
% of portfolio by value |
|---|---|---|---|
| Unquoted investments at directors' valuation | |||
| Earnings multiple | 14 | 11,521 | 50.0 |
| Original cost | 12 | 8,280 | 36.0 |
| Original cost less provision | 4 | 347 | 1.5 |
| Net assets | 1 | 198 | 0.9 |
| Quoted investments at bid price | |||
| Quoted on AIM | 9 | 2,669 | 11.6 |
| Total | 40 | 23,015 | 100.0 |
the following charts show the dividends (including proposed final dividends) declared in respect of each of the past five financial years and on a cumulative basis since inception:
Cumulative dividends per share (p)
Total expense ratio: the following chart shows total annual running expenses (including investment management fees charged to capital reserve but excluding performancerelated fees) as a percentage of the average net assets attributable to shareholders for each of the past five financial years:
status: the directors believe that the company has at all times since inception complied with the VCT qualifying conditions laid down by HM Revenue & Customs.
The board carries out a regular review of the risk environment in which the company operates. The principal risks and uncertainties identified by the board are as follows:
Investment risk: the majority of the company's investments are in small and medium-sized unquoted 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 and the managers 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 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 managers on a regular basis.
Financial risk: as most of the company's investments involve a medium- to long-term commitment and 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.
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.
Stock market risk: some of the company's venture capital 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.
The board and manager intend to maintain their well-established approach to the selection of new investment opportunities and the ongoing management of the portfolio, and believe that this will continue to produce good results in the future.
By order of the Board
C D Mellor
Secretary 3 June 2011
| Fifteen largest venture capital investments (see pages 12 to 15) Kerridge Commercial Systems 1,244 2,168 5.8 Promanex Group Holdings 1,695 2,134 5.7 CloserStill Holdings 743 1,129 3.0 Axial Systems Holdings 1,004 1,141 3.0 Kitwave One 1,000 1,000 2.7 Evolve Investments 995 995 2.7 RCC Lifesciences 995 995 2.7 Wear Inns 839 839 2.2 Cawood Scientific 825 825 2.2 Paladin Group 861 797 2.1 Advanced Computer Software Group 381 783 2.1 Control Risks Group Holdings 746 746 2.0 IG Doors 371 726 1.9 IDOX 298 705 1.9 Promatic Group 701 701 1.9 12,698 15,684 41.9 Other venture capital investments Arleigh International 452 690 1.8 Envirotec 456 666 1.8 Closer2 Investments 549 549 1.5 Crantock Bakery 442 544 1.5 Optilan Group 1,000 500 1.3 IS Pharma 426 479 1.3 Lanner Group 475 475 1.3 Mantis Deposition Holdings 457 457 1.2 Direct Valeting 282 372 1.0 KPJ Software Services 362 362 1.0 S&P Coil Products 121 349 0.9 Andor Technology 79 337 0.9 Altacor 336 336 0.9 e-know.net 225 263 0.7 Longhirst Venues 125 198 0.5 Gentronix 313 142 0.4 Cello Group 251 141 0.4 Brulines Group 184 137 0.4 Astbury Marsden Holdings 1,120 120 0.3 Warmseal Windows (Newcastle) 339 85 0.2 Adept Telecom 235 54 0.1 Spectrum Interactive 163 42 0.1 Twenty 198 30 0.1 Summit Corporation* 122 4 – Britspace Group 794 – – Total venture capital investments 22,204 23,016 61.5 Listed equity investments 3,987 4,237 11.3 Listed fixed-interest investments 6,473 6,493 17.4 Total fixed asset investments 32,664 33,746 90.2 Net current assets 3,682 9.8 Net assets 37,428 100.0 |
Cost £000 |
Valuation £000 |
% of net assets by value |
|---|---|---|---|
*Quoted on AIM
| Cost | £1,244,000 |
|---|---|
| Valuation | £2,168,000 |
| Basis of valuation | Earnings multiple |
| Equity held | 5.9% (NVM funds total 45.0%) |
| Business/location | Software developer for wholesale and retail distribution sectors, Hungerford |
| History | Management buy-out from ADP Inc, March 2010, led by NVM |
| Other NVM funds investing |
Northern Investors Company, Northern Venture Trust, Northern 2 VCT, Northern AIM VCT |
| Income in year | Dividends nil, loan interest £93,000 |
| Audited financial information: | |
|---|---|
| Year ended 30 September | * 2010 £m |
| Sales | 11.6 |
| Profit before tax | 0.7 |
| Profit after tax | 0.5 |
| Net assets | 1.7 |
*6 months ended 30 September
| Cost | £1,695,000 | |
|---|---|---|
| Valuation | £2,134,000 | |
| Basis of valuation | Earnings multiple | |
| Equity held | 14.4% (NVM funds total 75.0%) | |
| Business/location | Provider of construction and engineering support services, Nuneaton |
|
| History | Management buy-out from venture capital ownership, March 2007, led by NVM |
|
| Other NVM funds investing |
Northern Investors Company, Northern Venture Trust, Northern 2 VCT |
|
| Income in year | Nil |
| Audited financial information: | ||
|---|---|---|
| Year ended 30 September | 2010 £m |
2009 £m |
| Sales | 56.2 | 58.3 |
| Profit/(loss) before tax | 0.9 | (0.1) |
| Profit/(loss) after tax | 1.6 | (0.7) |
| Net liabilities | (3.7) | (5.8) |
| Cost | £743,000 |
|---|---|
| Valuation | £1,129,000 |
| Basis of valuation | Earnings multiple |
| Equity held | 8.9% (NVM funds 47.6%) |
| Business/location | Business-to-business exhibition management, London |
| History | Acquisition capital financing in September 2008, led by NVM |
| Other NVM funds investing |
Northern Investors Company, Northern Venture Trust, Northern 2 VCT |
| Income in year | Dividends nil, loan stock interest £25,000 |
| Unaudited financial information: | |
|---|---|
| Period ended 31 December* | 2009 £m |
| Sales | – |
| Loss before tax | (0.6) |
| Loss after tax | (0.6) |
| Net assets | 0.9 |
| *16 months ended 31 December |
| Cost | £1,004,000 |
|---|---|
| Valuation | £1,141,000 |
| Basis of valuation | Earnings multiple |
| Equity held | 8.2% (NVM funds total 45.7%) |
| Business/location | Supplier of distributed network management solutions, Maidenhead |
| History | Management buy-out from private ownership, March 2008, led by NVM |
| Other NVM funds investing |
Northern Investors Company, Northern Venture Trust, Northern 2 VCT, Northern AIM VCT |
| Income in year | Dividends nil, loan stock interest £41,000 |
| Audited financial information: | |||
|---|---|---|---|
| Period ended 31 May | 2010 £m |
* 2009 £m |
|
| Sales | 18.3 | 21.9 | |
| Profit before tax | 0.2 | – | |
| Loss after tax | – | (0.3) | |
| Net assets | 1.3 | 1.3 | |
*14 months ended 31 May
| Cost | £1,000,000 | |
|---|---|---|
| Valuation | £1,000,000 | |
| Basis of valuation | Cost | ending 30 April 2012 |
| Equity held | 5.1% (NVM funds total 41.6%) | |
| Business/location | Wholesaler of confectionery, soft drinks, snacks, beers, wines and tobacco, North Shields |
|
| History | Growth capital investment in March 2011, led by NVM |
|
| Other NVM funds investing |
Northern Investors Company, Northern Venture Trust, Northern 2 VCT |
|
| Income in year | Nil |
Audited financial information: First audited accounts will be for the period
| Cost | £995,000 | Audited financial information: |
|---|---|---|
| Valuation | £995,000 | First audited accounts will be for the period |
| Basis of valuation | Cost | ended 31 March 2011 |
| Equity held | 15.5% (NVM funds total 46.5%) | |
| Business/location | Acquisition of underperforming businesses, Birmingham |
|
| History | Acquisition capital financing in April 2010, led by NVM |
|
| Other NVM funds investing |
Northern Venture Trust, Northern 2 VCT | |
| Income in year | Nil |
| Cost | £995,000 | Audited financial information: |
|---|---|---|
| Valuation | £995,000 | First audited accounts will be for the period |
| Basis of valuation | Cost | ended 31 March 2011 |
| Equity held | 15.8% (NVM funds total 47.4%) | |
| Business/location | Development of lifescience products, London |
|
| History | Acquisition capital financing in March 2010, led by NVM |
|
| Other NVM funds investing |
Northern Venture Trust, Northern 2 VCT | |
| Income in year | Nil |
| Cost | £839,000 |
|---|---|
| Valuation | £839,000 |
| Basis of valuation | Cost |
| Equity held | 10.3% (NVM funds total 48.2%) |
| Business/location | Owner of managed public houses, Newcastle upon Tyne |
| History | Acquisition capital financing in February 2006, led by NVM |
| Other NVM funds investing |
Northern Investors Company, Northern Venture Trust, Northern 2 VCT |
| Income in year | Dividends nil, loan stock interest £63,000 |
| Audited financial information: | ||
|---|---|---|
| Year ended 31 March | 2010 £m |
2009 £m |
| Sales | 3.8 | 2.7 |
| Loss before tax | (0.1) | (0.1) |
| Loss after tax | (0.1) | (0.1) |
| Net assets | 0.1 | – |
| £825,000 |
|---|
| £825,000 |
| Cost |
| 9.1% (NVM funds total 45.6%) |
| Laboratory services for land-based industries, Bracknell/Cawood |
| Management buy-out financing in December 2010, led by NVM |
| Northern Investors Company, Northern Venture Trust, Northern 2 VCT |
| Dividends nil, loan stock interest £19,000 |
Audited financial information:
First audited accounts will be for the period ended 31 March 2011
| Cost | £861,000 |
|---|---|
| Valuation | £797,000 |
| Basis of valuation | Earnings multiple |
| Equity held | 6.7% (NVM funds total 34.7%) |
| Business/location | Provider of property management services, Bath |
| History | Development capital investment, June 2006, led by NVM |
| Other NVM funds investing |
Northern Investors Company, Northern Venture Trust, Northern 2 VCT |
| Income in year | Dividends nil, loan stock interest £32,000 |
| Cost | £381,000 |
|---|---|
| Valuation | £783,000 |
| Basis of valuation | Bid price (AIM) |
| Equity held | 0.6% (NVM funds total 2.1%) |
| Business/location | Provider of software to the healthcare sector, London |
| History | Reverse take-over of an AIM listed company and additional fundraising, August 2008 |
| Other NVM funds investing |
Northern Venture Trust, Northern AIM VCT, Northern 2 VCT |
| Income in year | Nil |
| Audited financial information: | |||
|---|---|---|---|
| Year ended 31 March | 2010 | 2009 * |
|
| £m | £m | ||
| Sales | 19.6 | 20.3 | |
| Loss before tax | (1.1) | (0.6) | |
| Loss after tax | (0.9) | (0.7) | |
| Net assets | 1.2 | 1.9 |
| Audited financial information: | ||
|---|---|---|
| Year ended 28 February | 2010 £m |
* 2009 £m |
| Sales | 30.2 | 7.3 |
| Profit before tax | 4.2 | 1.1 |
| Profit after tax | 3.2 | 0.8 |
| Net assets | 78.5 | 25.4 |
*14 months ended 28 February
| Cost | £746,000 |
|---|---|
| Valuation | £746,000 |
| Basis of valuation | Cost |
| Equity held | 1.4% (NVM funds total 11.0%) |
| Business/location | International specialist risk consultancy, London |
| History | Growth capital investment in March 2011, led by NVM |
| Other NVM funds investing |
Northern Investors Company, Northern Venture Trust, Northern 3 VCT |
| Income in year | Nil |
| Audited financial information: | ||||
|---|---|---|---|---|
| Year ended 31 March | 2010 £m |
2009 £m |
||
| Sales | 136.6 | 124.0 | ||
| Profit before tax | 5.1 | 5.6 | ||
| Profit after tax | 4.2 | 3.0 | ||
| Net assets | 8.3 | 8.1 |
| Cost | £371,000 |
|---|---|
| Valuation | £726,000 |
| Basis of valuation | Earnings multiple |
| Equity held | 4.8% (NVM funds total 35.1%) |
| Business/location | Manufacture of steel and GRP composite doors, Cwmbran |
| History | Management buy-out from Expamet International, November 2003, led by NVM |
| Other NVM funds investing |
Northern Investors Company, Northern Venture Trust, Northern 2 VCT, Northern AIM VCT |
| Income in year | Dividends £8,000, loan stock interest £42,000 |
| Cost | £298,000 |
|---|---|
| Valuation | £705,000 |
| Basis of valuation | Bid price (AIM) |
| Equity held | 1.2% (NVM funds total 3.0%) |
| Business/location | Developer of software products for document, content and information management, London |
| History | The company floated on AIM in December 2000 |
| Other NVM funds investing |
Northern Venture Trust, Northern AIM VCT |
| Income in year | Dividends £9,000 |
| Audited financial information: | ||||
|---|---|---|---|---|
| Year ended 31 October | 2010 £m |
2009 £m |
||
| Sales | 31.1 | 32.2 | ||
| Profit before tax | 4.9 | 4.5 | ||
| Profit after tax | 3.6 | 3.5 | ||
| Net assets | 31.0 | 28.2 | ||
| Cost | £701,000 |
|---|---|
| Valuation | £701,000 |
| Basis of valuation | Cost |
| Equity held | 7.9% (NVM funds total 42.3%) |
| Business/location | Manufacturer and distributor of clay target launch equipment, Ellesmere Port |
| History | Management buy-out from private ownership, August 2007, led by NVM |
| Other NVM funds investing |
Northern Investors Company, Northern Venture Trust, Northern 2 VCT |
| Income in year | Dividends nil, loan stock interest £195,000 |
| Audited financial information: | |||||
|---|---|---|---|---|---|
| Year ended 31 January | 2010 £m |
2009 £m |
|||
| Sales | 7.2 | 7.2 | |||
| Loss before tax | (0.1) | (0.5) | |||
| Loss after tax | (0.2) | (0.5) | |||
| Net liabilities | (0.2) | (0.1) |
Northern 3 VCT PLC is a Venture Capital Trust (VCT) launched in September 2001. The company invests mainly in unquoted venture capital holdings, with its remaining assets invested in a portfolio of listed fixedinterest and equity investments and bank deposits.
The company is a member of the Association of Investment Companies (AIC).
Northern 3 VCT PLC is managed by NVM Private Equity Limited (NVM), an independent specialist firm of venture capital managers based in Newcastle upon Tyne and Reading. NVM also acts as manager of four other listed investment companies, Northern Investors Company PLC, Northern Venture Trust PLC, Northern AIM VCT PLC and Northern 2 VCT PLC, and has a total of over £200 million under management.
Venture Capital Trusts (VCTs) were introduced by the Chancellor of the Exchequer in the November 1994 Budget, the relevant legislation being contained in the Finance Act 1995. VCTs are intended to provide a means whereby private individuals can invest in small unquoted trading companies in the UK, with an incentive in the form of a range of tax benefits. With effect from 6 April 2006, the benefits to eligible investors include:
Subscribers for shares in VCTs between 6 April 2004 and 5 April 2006 were entitled to income tax relief at 40% rather than 30% and the shares had to be held for at least three years rather than five years. Prior to 6 April 2004, subscribers for shares in VCTs were entitled to income tax relief at 20% and could also obtain capital gains deferral relief. Capital gains deferred by pre-6 April 2004 subscriptions are not affected by the subsequent changes in VCT tax reliefs.
The company's financial calendar for the year ending 31 March 2012 is as follows:
Half-yearly financial report for six months ending 30 September 2011 published
January 2012 Interim dividend paid
May 2012 Final dividend and results for year to 31 March 2012 announced
Annual report and accounts published
Annual general meeting; final dividend paid
The company's share price is carried daily in the Financial Times, the Daily Telegraph, the Newcastle Journal and The Herald. The company's FTSE Actuaries classification is "Investment Companies – VCTs".
A range of shareholder information is provided on the internet at www.shareview.co.uk by the company's registrars, Equiniti Limited, including details of shareholdings, indicative share prices and information on recent dividends (see page 5 for contact details for Equiniti Limited).
Share price information can also be obtained via the NVM website at www.nvm.co.uk.
The company operates a dividend reinvestment plan, giving shareholders the option of reinvesting their dividends in existing shares purchased in the market. Information about the plan can be obtained from the Company Secretary (see page 5 for contact details).
The directors have managed the affairs of the company with the intention of maintaining its status as an approved venture capital trust.
The directors present their report and the audited financial statements for the year ended 31 March 2011.
The principal activity of the company during the year was the making of long term equity and loan investments, mainly in unquoted companies.
The directors have managed the affairs of the company with the intention of maintaining its status as an approved venture capital trust for the purposes of Section 274 of the Income Tax Act 2007. The directors consider that the company was not at any time up to the date of this report a close company within the meaning of Chapter 2 of Part 10 of the Corporation Tax Act 2010.
The directors are required by the articles of association to propose an ordinary resolution at the company's annual general meeting in 2015 that the company should continue as a venture capital trust for a further five year period, and at each fifth subsequent annual general meeting thereafter. If any such resolution is not passed, the directors shall within four months convene an extraordinary general meeting to consider proposals for the reorganisation or winding-up of the company.
The directors are required by Section 417 of the Companies Act 2006 to include a business review in their
report to shareholders. The business review is set out on pages 6 to 10 and is included in the directors' report by reference.
The statement on corporate governance set out on pages 22 to 26 is included in the directors' report by reference.
The return on ordinary activities after tax for the year of £2,293,000 has been transferred to reserves.
The final dividend of 2.0p per share in respect of the year ended 31 March 2010 and an interim dividend of 2.0p per share in respect of the year ended 31 March 2011 were paid during the year at a cost of £1,556,000 and have been charged to reserves.
A second interim dividend of 2.5p per share for the year ended 31 March 2011 will be paid on 15 July 2011 to shareholders on the register on 24 June 2011. No final dividend is proposed.
Each of the directors who held office at the date of approval of this directors' report confirms that, so far as he is aware, there is no relevant audit information of which the company's auditors are unaware and that he has taken all the steps that he could reasonably be expected to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company's auditors are aware of that information.
After making the necessary enquiries, the directors believe that it is appropriate to continue to apply the going concern basis in preparing the financial statements.
The directors of the company during the year and their interests in respect of which transactions are notifiable to the company under Disclosure and Transparency Rule 3.1.2R
| 31 March 2011 | 1 April 2010 | |
|---|---|---|
| J G D Ferguson (Chairman) | 176,734 | 176,734 |
| C J Fleetwood | 25,577 | 25,577 |
| J R Hustler (retired 23 September 2010) | – | 23,742 |
| T R Levett | 169,182 | 169,182 |
| J M O Waddell | 7,283 | 7,283 |
(and so far as the company is, or ought upon reasonable enquiry to become, aware, the interests of their connected persons) in the issued ordinary shares of 5p of the company as at 31 March 2011 are shown in Table 1.
All of the directors' share interests were held beneficially. There have been no changes in the directors' share interests between 31 March 2011 and the date of this report.
None of the directors has a contract of service with the company and, except as mentioned below under the heading "Management", no contract or arrangement subsisted during or at the end of the year in which any director was materially interested and which was significant in relation to the company's business.
The company has, as permitted by the Companies Act 2006, maintained insurance cover on behalf of the
directors and secretary indemnifying them against certain liabilities which may be incurred by any of them in relation to the company.
The company's payment policy for the forthcoming financial year is to agree terms of payment before business is transacted and to settle accounts in accordance with those terms. There were no amounts owing to trade creditors at 31 March 2011.
NVM Private Equity Limited (NVM) has acted as investment adviser and manager to the company since incorporation. The principal terms of the company's management agreement with NVM are set out in Note 3 to the financial statements. Mr T R Levett is an executive director of NVM.
With effect from April 2006 a management performance incentive scheme was introduced under which investment executives employed by NVM are required to invest personally (and on the same terms as the company and other funds managed by NVM) in the ordinary share capital of investee companies in which the company invests. The directors review the operation of the scheme annually.
As required by the Listing Rules, the directors confirm that in their opinion the continuing appointment of NVM as investment manager on the terms agreed is in the interests of the company's shareholders as a whole. In reaching this conclusion the directors have taken into account the performance of the investment portfolio and the efficient and effective service provided by NVM to the company.
During the year the company purchased for cancellation 950,000 of its own shares, representing 2.6% of the called-up share capital of the
company at the beginning of the year, for a consideration of £723,000. Purchases were made in line with the company's policy of purchasing available shares at a discount to net asset value.
At the 2010 annual general meeting shareholders authorised the company to purchase in the market up to 3,929,076 ordinary shares (equivalent to approximately 10% of the then issued ordinary share capital) at a minimum price of 5p per share and a maximum price per share of not more than 105% of the average market value for the ordinary shares in the company for the five business days prior to the date on which the ordinary shares were purchased. As at 31 March 2011 950,000 shares had been purchased under this authority, which at that date remained effective in respect of 2,979,076 shares; the authority will lapse at the conclusion of the 2011 annual general meeting of the company on 14 September 2011.
Share capital - issue of shares
During the year the company issued 5,604,002 new ordinary shares of 5p for a cash consideration of £5,301,000 through public offers for subscription.
Movements in fixed asset investments during the year are set out in Note 9 to the financial statements.
Notice of the 2011 annual general meeting to be held on 14 September 2011 is set out in a separate circular to shareholders along with explanatory comments on the resolutions.
No disclosures of major shareholdings had been made to the company under Disclosure and Transparency Rule 5 (Vote Holder and Issuer Notification Rules) as at the date of this report.
KPMG Audit Plc have indicated their willingness to continue as auditors of the company and resolutions to re-appoint them and to authorise the directors to fix their remuneration will be proposed at the annual general meeting.
By order of the Board
C D MELLOR Secretary 3 June 2011
This report has been prepared by the directors in accordance with the requirements of the Companies Act 2006. A resolution to approve the report will be proposed at the annual general meeting.
The company's independent auditors, KPMG Audit Plc, are required to give their opinion on certain information included in this report, as indicated below. Their report on these and other matters is set out on page 28.
The board currently comprises four directors, all of whom are nonexecutive. The board does not have a separate remuneration committee, as the company has no employees or executive directors. The board has established a nomination committee, chaired by Mr J G D Ferguson and comprising all the directors, which considers the selection and
appointment of directors and makes recommendations to the board as to the level of directors' fees. The board has not retained external advisors in relation to remuneration matters but has access to information about directors' fees paid by other companies of a similar size and type.
The board considers that directors' fees should reflect the time commitment required and the high level of responsibility borne by directors, and should be broadly comparable to those paid by similar companies. It is not considered appropriate that directors' remuneration should be performancerelated, and none of the directors is eligible for bonuses, pension benefits, share options, long-term incentive schemes or other benefits in respect of their services as non-executive directors of the company.
Mr T R Levett is entitled to participate in performance incentive arrangements established for the benefit of certain executives of NVM, as described in the directors' report on page 18.
Directors' fees were reviewed by the nomination committee during its meeting in March 2011, when it was recommended that fees should be increased to £20,000 (previously £19,500) per annum for the chairman and £15,000 (previously £14,500) for other directors for the year ending 31 March 2012. The articles of association place an overall limit (currently £100,000 per annum) on directors' remuneration.
The fees paid to individual directors in respect of the years ended 31 March 2011 and 31 March 2010 are shown in Table 1.
| Table 1: Directors' fees | ||
|---|---|---|
| Year ended | Year ended | |
| 31 March 2011 | 31 March 2010 | |
| £ | £ | |
| J G D Ferguson | 19,500 | 18,000 |
| C J Fleetwood | 14,500 | 13,500 |
| J R Hustler (retired 23 September 2010) | 6,750 | 13,500 |
| T R Levett | – | – |
| J M O Waddell | 14,500 | 13,500 |
Mr T R Levett waived his entitlement to directors' fees in respect of both years.
The articles of association provide that directors shall retire and be subject to re-election at the first annual general meeting after their appointment and any director who was not appointed or re-appointed at one of the preceding two annual general meetings shall retire and be subject to re-election at each annual general meeting. None of the directors has a service contract with the company. On being appointed or reelected, directors receive a letter from the company setting out the terms of their appointment and their specific duties and responsibilities. A director's appointment may be terminated on three months' notice being given by the company and in certain other circumstances.
The graph below compares the total return (assuming all dividends are reinvested) to ordinary shareholders in the company over the five years ended 31 March 2011 with the total return from a notional investment in the FTSE All-Share index over the same period. This index is considered to be the most appropriate broad equity market index for comparative purposes.
By order of the Board
C D MELLOR Secretary 3 June 2011
Return to shareholders in Northern 3 VCT PLC
Five years to 31 March 2011 (March 2006 = 100)
The board of Northern 3 VCT PLC has considered the principles and recommendations of the Association of Investment Companies Code of Corporate Governance (AIC Code) by reference to the related Association of Investment Companies Corporate Governance Guide for Investment Companies (AIC Guide). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Corporate Governance Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to the company. The AIC Code can be viewed at www.theaic.co.uk/ Documents/Technical/AICCodeof CorporateGovernance March2010.pdf.
The board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the UK Corporate Governance Code), will provide better information to shareholders.
The company is committed to maintaining high standards in corporate governance and during the year ended 31 March 2011 complied with the recommendations of the AIC Code and the relevant provisions of the UK Corporate Governance Code, except as set out below.
The UK Corporate Governance Code includes provisions relating to the role of the chief executive, executive directors' remuneration and the need for an internal audit function. For the
reasons set out in the AIC Guide, and in the preamble to the UK Corporate Governance Code, the board considers these provisions are not relevant to the position of Northern 3 VCT PLC, which is an externally managed venture capital trust. The company has therefore not reported further in respect of these provisions.
The company has a board of four non-executive directors, the majority of whom are considered to be independent of the company's investment manager, NVM. The board meets regularly on a quarterly basis, and on other occasions as required. The board isresponsible to shareholders for the effective stewardship of the company's affairs and has a formal schedule of matters specifically reserved for its decision which include:
A brief biographical summary of each director is given on page 4.
The chairman, Mr J G D Ferguson, leads the board in the determination of its strategy and in the achievement of its objectives. The chairman is responsible for organising the business of the board, ensuring its effectiveness and setting its agenda, and has no involvement in the day to day business
of the company. He facilitates the effective contribution of the directors and ensures that they receive accurate, timely and clear information and that they communicate effectively with shareholders.
The board has established a formal process, led by the chairman, for the annual evaluation of the performance of the board, its principal committees and individual directors.The directors are made aware on appointment that their performance will be subject to regular evaluation. The performance of the chairman is evaluated by a meeting of the other board members under the leadership of Mr C J Fleetwood.
The company secretary, Mr C D Mellor, is responsible for advising the board through the chairman on all governance matters. All of the directors have access to the advice and services of the company secretary, who has administrative responsibility for the meetings of the board and its committees. Directors may also take independent professional advice at the company's expense where necessary in the performance of their duties. As all of the directors are non-executive, it is not considered appropriate to identify a member of the board as the senior non-executive director of the company.
The company's articles of association and the schedule of matters reserved to the board for decision provide that the appointment and removal of the company secretary is a matter for the board.
The company's articles of association require that one third of the directors should retire by rotation each year and seek re-election at the annual general meeting, and that directors newly appointed by the board should seek re-appointment at the next annual general meeting. The board complies with the requirement of the UK Corporate Governance Code that all directors are required to submit themselves for re-election at least every three years.
The board regularly reviews the independence of its members and is satisfied that (with the exception of Mr T R Levett who is a director and employee of NVM, the company's investment manager) the company's directors are independent in character and judgement and there are no relationships or circumstances which could affect their objectivity.
The AIC Code recommends that where a director has served for more than nine years, the board should state its reasons for believing that the individual remains independent. The board is of the view that a term of service in excess of nine years is not in itself prejudicial to a director's ability to carry out his/her duties effectively and from an independent perspective; the nature of the company's business is such that individual directors' experience and continuity of board membership can significantly enhance the effectiveness of the board as a whole. Accordingly it is not considered appropriate to require directors who have served for more than nine years to seek annual reelection. Nevertheless the board acknowledges that periodic refreshment of its membership is desirable.
The board has appointed three standing committees to make recommendations to the board in specific areas. The board does not have a separate remuneration committee, as the company has no employees or executive directors. Detailed information relating to the remuneration of directors is given in the directors' remuneration report on pages 20 and 21.
During the year the audit committee comprised:
Mr C J Fleetwood (Chairman) Mr J G D Ferguson Mr J R Hustler (retired 23 September 2010) Mr J M O Waddell
The audit committee's terms of reference include the following roles and responsibilities:
The committee reviews its terms of reference and its effectiveness annually and recommends to the board any changes required as a result of the review. The terms of reference are available on request from the company secretary and on the NVM Private Equity website, www.nvm.co.uk.
The audit committee meets three times per year and has direct access to KPMG Audit Plc, the company's external auditors. The board considers that the members of the committee are independent and have collectively the skills and experience required to discharge their duties effectively, and that the chairman of the committee meets the requirements of the UK Corporate Governance Code as to recent and relevant financial experience.
The company does not have an independent internal audit function as it is not deemed appropriate given the size of the company and the nature of the company's business. However, the committee considers annually whether there is a need for such a function and if so would recommend this to the board.
During the year ended 31 March 2011 the audit committee discharged its responsibilities by:
During the year the nomination committee comprised:
Mr J G D Ferguson (Chairman) Mr C J Fleetwood Mr J R Hustler (retired 23 September 2010) Mr T R Levett Mr J M O Waddell
The nomination committee considers the selection and appointment of directors and makes annual recommendations to the board as to the level of directors' fees. The committee monitors the balance of skills, knowledge and experience offered by board members, and satisfies itself that they are able to devote sufficient time to carry out their role efficiently and effectively. When recommending new appointments to the board the committee draws on its members' extensive business experience and range of contacts to identify suitable candidates; the use of formal advertisements and external consultants is not considered costeffective given the company's size. New directors are provided with briefing material relating to the company, its investment managers and the venture capital industry as well as to their own legal responsibilities as directors. The committee has written terms of reference which are reviewed annually and are available on request from the company secretary and on the NVM Private Equity website www.nvm.co.uk.
During the year the management engagement committee comprised:
Mr J G D Ferguson (Chairman) Mr C J Fleetwood Mr J R Hustler (retired 23 September 2010) Mr J M O Waddell
The management engagement committee undertakes a periodic review of the performance of the investment manager, NVM, and of the terms of the management agreement including the level of fees payable and the length of the notice period. The principal terms of the agreement are set out in Note 3 to the financial statements on page 34.
Following the latest review by the committee, the board concluded that the continuing appointment of NVM was in the interests of the company and its shareholders as a whole. NVM has demonstrated its commitment to and expertise in venture capital investment over an extended period, as a result of which the company has established a consistent long-term performance record. NVM has also performed its company secretarial and accounting duties efficiently and effectively.
Table 1 sets out the number of formal board and committee meetings held during the year ended 31 March 2011 and the number attended by each director compared with the maximum possible attendance.
The board aims to ensure that the company takes a positive approach to corporate responsibility, in relation both to itself and to the companies it invests in. This entails maintaining a responsible attitude to ethical, environmental, governance and social issues, and the encouragement of good practice in investee companies. The board seeks to avoid investing in companies which do not operate within relevant ethical, environmental and social legislation or otherwise fail to comply with appropriate industry standards.
In fulfilment of the chairman's obligations under the UK Corporate Governance Code, the chairman gives feedback to the board on issues raised with him by shareholders with a view to ensuring that members of the board develop an understanding of the views of shareholders about their company. The board recognises the value of maintaining regular communications with shareholders. Formal reports are sent to shareholders at the half-year and year-end stages, and an opportunity is given to shareholders at the annual general meeting to question the board and the investment manager on matters relating to the company's operation and performance. Proxy voting figures for each resolution are announced at general meetings and are made available publicly following the relevant meeting.
Further information can also be obtained via the NVM website at www.nvm.co.uk.
The directors have overall responsibility for ensuring that there are in place systems of internal control, both financial and non-financial, and for reviewing their effectiveness. The purpose of the internal financial controls is to ensure that proper accounting records are maintained, the company's assets are safeguarded and the financial information used within the business and for publication is accurate and reliable; such a system can provide only reasonable and not absolute assurance against material misstatement or loss. The board regularly reviews financial performance and results with the investment manager. Responsibility for accounting, secretarial services and physical custody of documents of title relating to venture capital investments
| Board | Audit Committee |
Nomination Committee |
Management Engagement Committee |
|
|---|---|---|---|---|
| Number of meetings held | 6 | 3 | 1 | 1 |
| Attendance (actual/possible): | ||||
| J G D Ferguson (Chairman) | 6/6 | 3/3 | 1/1 | 1/1 |
| C J Fleetwood | 6/6 | 3/3 | 1/1 | 1/1 |
| J R Hustler | ||||
| (retired 23 September 2010) | 3/3 | 1/1 | 0/0 | 0/0 |
| T R Levett | 6/6 | N/A | 1/1 | N/A |
| J M O Waddell | 6/6 | 3/3 | 1/1 | 1/1 |
has been contractually delegated to NVM under the management agreement. NVM has established its own system of internal controls in relation to these matters, details of which have been reviewed by the audit committee.
Non-financial internal controls include the systems of operational and compliance controls maintained by the investment manager in relation to the company's business as well as the management of key risks as referred to in the section headed "Risk management" below.
The directors confirm that by means of the procedures set out above, and in accordance with "Internal Controls: Guidance for Directors on the Combined Code", published by the Institute of Chartered Accountants in England and Wales, they have established a continuing process for identifying, evaluating and managing the significant potential risks faced by the company and have reviewed the effectiveness of the internal control systems. This process has been in place throughout and subsequent to the accounting period under review.
Risk management is discussed in the business review on page 10.
As at 31 March 2011 40,574,802 ordinary shares were in issue (as at that date none of the issued shares were held by the company as treasury shares). Subject to any suspension or abrogation of rights pursuant to relevant law or the company's articles of association, the shares confer on their holders (other than the company in respect of any treasury shares) the following principal rights:
(a) the right to receive out of profits available for distribution such dividends as may be agreed to be paid (in the case of a final dividend in an amount not exceeding the amount recommended by the board as approved by shareholders in general meeting or in the case of an interim dividend in an amount
determined by the board). All dividends unclaimed for a period of 12 years after having become due for payment are forfeited automatically and cease to remain owing by the company;
These rights can be suspended. If a member, or any other person appearing to be interested in shares held by that member, has failed to comply within the time limits specified in the company's articles of association with a notice pursuant to Section 793 of the Companies Act 2006 (notice by company requiring information about interests in its shares), the company can until the default ceases suspend the right to attend and speak and vote at a general meeting and if the shares represent at least 0.25% of their class the company can also withhold any dividend or other money payable in respect of the shares (without any obligation to pay interest) and refuse to accept certain transfers of the relevant shares.
Shareholders, either alone or with
other shareholders, have other rights as set out in the company's articles of association and in the Companies Act 2006.
A member may choose whether his shares are evidenced by share certificates (certificated shares) or held in electronic (uncertificated) form in CREST (the UK electronic settlement system). Any member may transfer all or any of his shares, subject in the case of certificated shares to the rules set out in the company's articles of association or in the case of uncertificated shares to the regulations governing the operation of CREST (which allow the directors to refuse to register a transfer as therein set out); the transferor remains the holder of the shares until the name of the transferee is entered in the register of members. The directors may refuse to register a transfer of certificated shares in favour of more than four persons jointly or where there is no adequate evidence of ownership or the transfer is not duly stamped (if so required). The directors may also refuse to register a share transfer if it is in respect of a certificated share which is not fully paid up or on which the company has a lien provided that, where the share transfer is in respect of any share admitted to the Official List maintained by the UK Listing Authority, any such discretion may not be exercised so as to prevent dealings taking place on an open and proper basis, or if in the opinion of the directors (and with the concurrence of the UK Listing Authority) exceptional circumstances so warrant, provided that the exercise of such power will not disturb the market in those shares. Whilst there are no squeeze-out and sell out rules relating to the shares in the company's articles of association, shareholders are subject to the compulsory acquisition provisions in Sections 974 to 991 of the Companies Act 2006.
The company's articles of association may be amended by the members of the company by special resolution (requiring a majority of at least 75% of the persons voting on the relevant resolution).
A person may be appointed as a director of the company by the shareholders in general meeting by ordinary resolution (requiring a simple majority of the persons voting on the relevant resolution) or by the directors; no person, other than a director retiring by rotation or otherwise, shall be appointed or reappointed a director at any general meeting unless he is recommended by the directors or, not less than seven nor more than 42 clear days before the date appointed for the meeting, notice is given to the company of the intention to propose that person for appointment or re-appointment in the form and manner set out in the company's articles of association.
Each director who is appointed by the directors (and who has not been elected as a director of the company by the members at a general meeting held in the interval since his appointment as a director of the company) is to be subject to election as a director of the company by the members at the first annual general meeting of the company following his appointment. At each annual general meeting of the company one third of the directors for the time being, or if their number is not three or an integral multiple of three the number nearest to but not exceeding one third, are to be subject to re-election.
The Companies Act 2006 allows shareholders in general meeting by ordinary resolution (requiring a simple majority of the persons voting on the relevant resolution) to remove any director before the expiration of his or her period of office, but without prejudice to any claim for damages which the director may have for breach of any contract of service between him or her and the company. A person also ceases to be a director if he or she resigns in writing, ceases to be a director by virtue of any provision of the Companies Act, becomes prohibited by law from being a director, becomes bankrupt or is the subject of a relevant insolvency procedure, or becomes of unsound mind, or if the board so decides following at least six months' absence without leave or if he or she becomes subject to relevant procedures under the mental health laws, as set out in the company's articles of association.
The company's articles of association specify that, subject to the provisions of the Companies Act 2006 and articles of association of the company and any directions given by shareholders by special resolution, the business of the company is to be managed by the directors, who may exercise all the powers of the company, whether relating to the management of the business or not, except where the Companies Act
2006 or the articles of association of the company otherwise require. In particular the directors may exercise on behalf of the company its powers to purchase its own shares to the extent permitted by shareholders. Authority was given at the company's 2010 annual general meeting to make market purchases of up to 3,929,076 ordinary shares at any time up to the 2011 annual general meeting and otherwise on the terms set out in the relevant resolution, and authority is being sought at the annual general meeting to be held on 14 September 2011 as set out in a separate circular.
By order of the Board
C D MELLOR Secretary 3 June 2011
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 period.
In preparing these financial statements, the directors are required to:
make judgements and estimates that are reasonable and prudent;
state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
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, 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 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 Audit Plc as independent auditors 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.
By order of the Board
C D MELLOR Secretary 3 June 2011
We have audited the financial statements of Northern 3 VCT PLC for the year ended 31 March 2011 set out on pages 30 to 43. The financial reporting framework that has been applied in their preparation is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice).
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members, as a body, for our audit work, for this report, or for the opinions we have formed.
As explained more fully in the Directors' Responsibilities Statement set out on page 27, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.
A description of the scope of an audit of financial statements is provided on the APB's web-site at www.frc.org.uk/apb/scope/ private.cfm.
In our opinion:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
Under the Listing Rules we are required to review:
Simon Pashby (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants Edinburgh 3 June 2011
for the year ended 31 March 2011
| Year ended 31 March 2011 | Year ended 31 March 2010 | ||||||
|---|---|---|---|---|---|---|---|
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| Notes | £000 | £000 | £000 | £000 | £000 | £000 | |
| Gain on disposal of investments | 9 | – | 778 | 778 | – | 1,651 | 1,651 |
| Movements in fair value of investments | 9,16 | – | 1,361 | 1,361 | – | 1,058 | 1,058 |
| – | 2,139 | 2,139 | – | 2,709 | 2,709 | ||
| Income | 2 | 1,100 | – | 1,100 | 926 | – | 926 |
| Investment management fee | 3 | (173) | (603) | (776) | (130) | (390) | (520) |
| Recoverable VAT | 4 | 25 | 74 | 99 | – | – | – |
| Other expenses | 5 | (268) | – | (268) | (217) | – | (217) |
| Return on ordinary activities before tax | 684 | 1,610 | 2,294 | 579 | 2,319 | 2,898 | |
| Tax on return on ordinary activities | 6 | (148) | 147 | (1) | (93) | 93 | – |
| Return on ordinary activities after tax | 536 | 1,757 | 2,293 | 486 | 2,412 | 2,898 | |
| Return per share | 8 | 1.4p | 4.5p | 5.9p | 1.7p | 8.2p | 9.9p |
| Dividends paid/proposed in respect of the year | 7 | 1.4p | 3.1p | 4.5p | 1.5p | 2.5p | 4.0p |
• The total column of this statement is the profit and loss account of the company. The supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
• There are no recognised gains or losses other than those disclosed in the income statement.
• All items in the above statement derive from continuing operations.
• The accompanying notes are an integral part of this statement.
for the year ended 31 March 2011
| Notes | Year ended 31 March 2011 £000 |
Year ended 31 March 2010 £000 |
|
|---|---|---|---|
| Equity shareholders' funds at 1 April 2010 | 32,412 | 24,323 | |
| Return on ordinary activities after tax | 2,293 | 2,898 | |
| Dividends recognised in the year | 7 | (1,556) | (1,157) |
| Net proceeds of share issues | 15 | 5,002 | 9,073 |
| Shares purchased for cancellation | 15 | (723) | (2,725) |
| Equity shareholders' funds at 31 March 2011 | 37,428 | 32,412 |
• The accompanying notes are an integral part of this statement.
Balance Sheet as at 31 March 2011
| Notes | 31 March 2011 £000 |
31 March 2010 £000 |
|
|---|---|---|---|
| Fixed assets | |||
| Investments | 9 | 33,746 | 22,778 |
| Current assets | |||
| Debtors | 13 | 397 | 317 |
| Cash and deposits | 3,940 | 9,510 | |
| 4,337 | 9,827 | ||
| Creditors (amounts falling due within one year) | 14 | (655) | (193) |
| Net current assets | 3,682 | 9,634 | |
| Net assets | 37,428 | 32,412 | |
| Capital and reserves | |||
| Called-up equity share capital | 15 | 2,029 | 1,796 |
| Share premium | 16 | 21,378 | 16,656 |
| Capital redemption reserve | 16 | 392 | 345 |
| Capital reserve | 16 | 12,307 | 14,488 |
| Revaluation reserve | 16 | 743 | (1,227) |
| Revenue reserve | 16 | 579 | 354 |
| Total equity shareholders' funds | 37,428 | 32,412 | |
| Net asset value per share | 17 | 92.2p | 90.2p |
• The accompanying notes are an integral part of this statement.
The financial statements on pages 30 to 43 were approved by the directors on 3 June 2011 and are signed on their behalf by:
J G D Ferguson C J Fleetwood Director Director
for the year ended 31 March 2011
| Year ended 31 March 2011 | Year ended 31 March 2010 | ||||
|---|---|---|---|---|---|
| Net cash inflow from operating activities | £000 | £000 197 |
£000 | £000 868 |
|
| Taxation | |||||
| Corporation tax paid | – | (174) | |||
| Financial investment | |||||
| Purchase of investments | (12,741) | (9,818) | |||
| Sale/repayment of investments | 4,251 | 10,658 | |||
| Net cash inflow/(outflow) from financial investment | (8,490) | 840 | |||
| Equity dividends paid | (1,556) | (1,157) | |||
| Net cash inflow/(outflow) before financing | (9,849) | 377 | |||
| Financing | |||||
| Issue of ordinary shares | 5,301 | 9,602 | |||
| Share issue expenses | (299) | (529) | |||
| Purchase of ordinary shares for cancellation | (723) | (2,725) | |||
| Net cash inflow from financing | 4,279 | 6,348 | |||
| Increase/(decrease) in cash and deposits | (5,570) | 6,725 | |||
| Reconciliation of return before tax | |||||
| to net cash flow from operating activities | |||||
| Return on ordinary activities before tax | 2,294 | 2,898 | |||
| Gain on disposal of investments | (778) | (1,651) | |||
| Movements in fair value of investments | (1,361) | (1,058) | |||
| (Increase)/decrease in debtors | (80) | 531 | |||
| Increase/(decrease) in creditors | 122 | 148 | |||
| Net cash inflow from operating activities | 197 | 868 |
| Analysis of movement in net funds | ||||
|---|---|---|---|---|
| 1 April 2010 | Cash flows | 31 March 2011 | ||
| £000 | £000 | £000 | ||
| Cash and deposits | 9,510 | (5,570) | 3,940 |
for the year ended 31 March 2011
A summary of the principal accounting policies, all of which have been consistently applied throughout the year and the preceding year, is set out below.
The financial statements have been prepared on a going concern basis under the historical cost convention, except for the revaluation of certain financial instruments, and in accordance with UK Generally Accepted Accounting Practice (UK GAAP). Where presentational guidance set out in the Statement of Recommended Practice (SORP) "Financial Statements of Investment Trust Companies", revised in January 2009, is consistent with the requirements of UK GAAP, the directors have sought to prepare the financial statements on a consistent basis compliant with the recommendations of the SORP.
Purchases and sales of investments are recognised in the financial statements at the date of transaction (trade date).
The company's investments have been designated by the directors as fair value through profit and loss at the time of acquisition and are measured at subsequent reporting dates at fair value. In the case of investments quoted on a recognised stock exchange, fair value is established by reference to the closing bid price on the relevant date or the last traded price, depending on the convention of the exchange on which the investment is quoted. In the case of unquoted investments, fair value is established in accordance with industry guidelines by using measurements of value such as price of recent transaction, earnings multiple and net assets; where no reliable fair value can be estimated using such techniques, unquoted investments are carried at cost subject to provision for impairment where necessary.
Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the income statement and allocated to the revaluation reserve. Transaction costs attributable to the acquisition or disposal of investments are charged to capital return within the income statement.
Those venture capital investments that may be termed associated undertakings are carried at fair value as determined by the directors in accordance with the company's normal policy and are not equity accounted as required by the Companies Act 2006. The directors consider that, as these investments are held as part of the company's portfolio with a view to the ultimate realisation of capital gains, equity accounting would not give a true and fair view of the company's interests in these investments. Quantification of the effect of this departure is not practicable. Carrying investments at fair value is specifically permitted under Financial Reporting Standard 9 "Associates and Joint Ventures", where venture capital entities hold investments as part of a portfolio.
Dividends receivable on quoted equity shares are brought into account on the ex-dividend date. Dividends receivable on unquoted equity shares are brought into account when the company's right to receive payment is established and there is no reasonable doubt that payment will be received. Fixed returns on non-equity shares and debt securities are recognised on an effective interest rate basis, provided there is no reasonable doubt that payment will be received in due course.
All expenses are accounted for on an accruals basis. Expenses are charged to revenue return within the income statement except that:
The revenue column of the income statement includes all income and revenue expenses of the company. The capital column includes realised and unrealised gains and losses on investments and that part of the investment management fee which is allocated to capital return.
UK corporation tax payable is provided on taxable profits at the current rate. The tax charge for the year is allocated between revenue return and capital return on the "marginal basis" as recommended in the SORP.
Provision is made for deferred taxation on all timing differences calculated at the current rate of tax relevant to the benefit or liability.
Dividends payable are recognised as distributions in the financial statements when the company's liability to make payment has been established.
A provision is recognised in the balance sheet when the company has a legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. No provision is established where a reliable estimate of the obligation cannot be made. Provisions are allocated to revenue or capital depending on the nature of the circumstances.
for the year ended 31 March 2011
The following are accounted for in the capital reserve: gains or losses on the realisation of investments; realised and unrealised exchange differences of a capital nature; the cost of repurchasing ordinary shares, including stamp duty and transaction costs; and other capital charges and credits charged to this account in accordance with the above policies.
Changes in fair value of investments are dealt with in this reserve.
| 2 Income | ||
|---|---|---|
| Year ended | Year ended | |
| 31 March 2011 | 31 March 2010 | |
| £000 | £000 | |
| Franked investment income: | ||
| Unquoted companies | 97 | 191 |
| Quoted companies | 61 | 21 |
| Interest receivable: | ||
| Bank deposits* | 19 | 22 |
| Loans to unquoted companies | 728 | 461 |
| Listed fixed-interest investments | 186 | 183 |
| Sundry income* | 9 | 48 |
| 1,100 | 926 |
* Denotes income arising from investments not designated as fair value through profit or loss at the time of acquisition.
| Year ended 31 March 2011 | Year ended 31 March 2010 | ||||||
|---|---|---|---|---|---|---|---|
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| £000 | £000 | £000 | £000 | £000 | £000 | ||
| Investment management fee: | |||||||
| Basic | 173 | 518 | 691 | 130 | 390 | 520 | |
| Performance-related | – | 85 | 85 | – | – | – | |
| 173 | 603 | 776 | 130 | 390 | 520 |
NVM Private Equity Limited (NVM) provides investment management and secretarial services to the company under an agreement dated 24 September 2001, which may be terminated at any time by not less than twelve months' notice being given by either party.
NVM receives a basic management fee, payable quarterly in advance, at the rate of 2.06% per annum of net assets calculated half-yearly as at 31 March and 30 September. NVM bears the cost of Sarasin & Partners' fees for managing the listed fixed-interest portfolio. NVM also provides administrative and secretarial services to the company for a fee of £45,000 per annum (linked to the movement in the RPI). This fee is included in other expenses (see Note 5).
NVM is also entitled to receive a performance-related management fee equivalent to 14.2% of the amount, if any, by which the total return in each financial year (expressed as a percentage of opening net asset value) exceeds a performance hurdle. The hurdle is a composite rate based on 7% on average long-term investments and the higher of base rate and 3% on average cash and near-cash investments during the year. Following a period in which net assets decline, a "high water mark" will apply to the calculation of the performance-related fee but will be then adjusted downwards to the extent that a positive return is achieved in the following financial year. The performance-related management fee is subject to an overall cap of 2.25% of net assets.
The total running costs of the company, excluding performance-related management fees and any irrecoverable VAT thereon, are capped at 3.5% of its net assets and NVM has agreed that any excess will be refunded by way of a reduction in its fees.
During the year the company received a repayment of £99,000 relating to VAT previously paid on investment management fees between 2002 and 2005. The managers continue to pursue a claim against HM Revenue & Customs in relation to the payment of compound rather than simple interest on VAT repayments, but the directors have been advised that the outcome of this claim is uncertain and accordingly any proceeds will be recognised only at the time of receipt.
| Year ended 31 March 2011 £000 |
Year ended 31 March 2010 £000 |
|
|---|---|---|
| Administrative and secretarial services | 44 | 44 |
| Directors' remuneration | 56 | 59 |
| Auditors' remuneration – audit services | 19 | 16 |
| Legal and professional expenses | 15 | 21 |
| Share issue promoter's commission | 25 | – |
| Irrecoverable VAT | 12 | 11 |
| Other expenses | 97 | 66 |
| 268 | 217 |
Information on directors' remuneration is given in the directors' remuneration report on pages 20 and 21.
| Year ended 31 March 2011 | Year ended 31 March 2010 | ||||||
|---|---|---|---|---|---|---|---|
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| £000 | £000 | £000 | £000 | £000 | £000 | ||
| (a) Analysis of charge/(credit) for the year | |||||||
| UK corporation tax payable/(recoverable) | |||||||
| on the return for the year | 148 | (147) | 1 | 93 | (93) | – | |
| (b) Tax reconciliation | |||||||
| Return on ordinary activities before tax | 684 | 1,610 | 2,294 | 579 | 2,319 | 2,898 | |
| Return on ordinary activities multiplied | |||||||
| by the standard rate of UK corporation tax | |||||||
| of 28% (2010 28%) | 192 | 451 | 643 | 162 | 649 | 811 | |
| Effect of: | |||||||
| UK dividends not subject to tax | (44) | – | (44) | (59) | – | (59) | |
| Capital returns not subject to tax | – | (218) | (218) | – | (462) | (462) | |
| Unrealised adjustments to fair value | – | (381) | (381) | – | (296) | (296) | |
| Marginal relief | – | – | – | (10) | 10 | – | |
| Increase in surplus management expenses | – | 2 | 2 | – | 6 | 6 | |
| Adjustment to tax charge in | |||||||
| respect of prior periods | – | (1) | (1) | – | – | – | |
| Current tax charge/(credit) for the period | 148 | (147) | 1 | 93 | (93) | – |
The company has not recognised a deferred tax asset in respect of surplus management expenses carried forward of £27,000 (31 March 2010 £23,000), as the company may not generate sufficient taxable income in the foreseeable future to utilise these expenses. There is no other unprovided deferred taxation.
Approved venture capital trusts are exempt from tax on capital gains within the company. Since the directors intend that the company will continue to conduct its affairs so as to maintain its approval as a venture capital trust, no current or deferred tax has been provided in respect of any capital gains or losses arising on the revaluation or disposal of investments.
for the year ended 31 March 2011
| Year ended 31 March 2011 | Year ended 31 March 2010 | |||||
|---|---|---|---|---|---|---|
| Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
| (a) Recognised as distributions in the | ||||||
| financial statements for the year | ||||||
| Previous year's final dividend | 39 | 741 | 780 | 318 | 260 | 578 |
| Current year's interim dividend | 272 | 504 | 776 | 405 | 174 | 579 |
| 311 | 1,245 | 1,556 | 723 | 434 | 1,157 | |
| (b) Paid and proposed in respect of the year | ||||||
| Interim paid – 2.0p (2010 2.0p) per share | 272 | 504 | 776 | 405 | 174 | 579 |
| Second interim declared – 2.5p (2010 nil) per share | 284 | 730 | 1,014 | – | – | – |
| Final proposed – nil (2010 2.0p) per share | – | – | – | 36 | 682 | 718 |
| 556 | 1,234 | 1,790 | 441 | 856 | 1,297 |
The revenue dividends paid and proposed in respect of the year form the basis for determining whether the company has complied with the requirements of Section 274 of the Income Tax Act 2007 as to the distribution of investment income.
The second interim dividend of 2.5p per share for the year ended 31 March 2011 is scheduled to be paid on 15 July 2011 and has not been recognised as a liability in these financial statements. No final dividend is proposed in respect of the year.
The calculation of the return per share is based on the return on ordinary activities after tax for the year of £2,293,000 (2010 £2,898,000) and on 38,787,115 (2010 29,185,666) shares, being the weighted average number of shares in issue during the year.
All investments are designated as fair value through profit or loss on initial recognition, therefore all gains and losses arise on investments designated at fair value through profit or loss.
Financial Reporting Standard 29 'Financial Instruments: Disclosures' (FRS 29) requires an analysis of investments valued at fair value based on the reliability and significance of the information used to measure their fair value. The level is determined by the lowest (that is the least reliable or independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:
| 31 March 2011 £000 |
31 March 2010 £000 |
|
|---|---|---|
| Level 1 | ||
| Quoted venture capital investments | 2,669 | 2,362 |
| Listed equity investments | 4,237 | – |
| Listed fixed-interest investments | 6,493 | 5,002 |
| Level 2 | ||
| None | – | – |
| Level 3 | ||
| Unquoted venture capital investments | 20,347 | 15,414 |
| 33,746 | 22,778 |
Movements in investments during the year are summarised as follows:
| Venture | Venture | ||||
|---|---|---|---|---|---|
| capital | capital | Listed | Listed | ||
| – unquoted | – quoted | equity | fixed-interest | ||
| Level 3 | Level 1 | Level 1 | Level 1 | Total | |
| £000 | £000 | £000 | £000 | £000 | |
| Book cost at 1 April 2010 | 16,424 | 2,618 | – | 4,963 | 24,005 |
| Fair value adjustment at 1 April 2010 | (1,010) | (256) | – | 39 | (1,227) |
| Fair value at 1 April 2010 | 15,414 | 2,362 | – | 5,002 | 22,778 |
| Movements in the year: | |||||
| Purchases at cost | 4,806 | 150 | 3,987 | 3,798 | 12,741 |
| Disposals – proceeds | (1,566) | (385) | – | (2,300) | (4,251) |
| – net realised gains/(losses) | 756 | 41 | – | (19) | 778 |
| Movements in fair value | 937 | 501 | 250 | 12 | 1,700 |
| Fair value at 31 March 2011 | 20,347 | 2,669 | 4,237 | 6,493 | 33,746 |
| Comprising: | |||||
| Book cost at 31 March 2011 | 20,030 | 2,174 | 3,987 | 6,473 | 32,664 |
| Fair value adjustment at 31 March 2011 | 317 | 495 | 250 | 20 | 1,082 |
| 20,347 | 2,669 | 4,237 | 6,493 | 33,746 | |
| Equity shares | 6,699 | 2,669 | 4,237 | – | 13,605 |
| Preference shares | 210 | – | – | – | 210 |
| Interest-bearing securities | 13,438 | – | – | 6,493 | 19,931 |
| 20,347 | 2,669 | 4,237 | 6,493 | 33,746 |
The gains and losses included in the above table have all been recognised in the Income Statement on page 30.
FRS 29 requires disclosure, by class of financial instrument, if the effect of changing one or more inputs to reasonably possible alternative assumptions would result in a significant change to the fair value measurement. The information used in determination of the fair value of Level 3 investments is chosen with reference to the specific underlying circumstances and position of each investee company. On that prudent basis the directors consider that the impact of changing one or more of the inputs to reasonably possible alternative assumptions would not change the fair value significantly.
At 31 March 2011 there were commitments totalling £613,000 (31 March 2010 £1,717,000) in respect of investments approved by the manager but not yet completed.
for the year ended 31 March 2011
Disposals of venture capital investments during the year were as follows:
| Realised gain/(loss) | ||||
|---|---|---|---|---|
| Original | Carrying value | Disposal | against carrying | |
| cost | prior to disposal | proceeds | value | |
| £000 | £000 | £000 | £000 | |
| Andor Technology | 123 | 245 | 385 | 140 |
| Connaught | 60 | 39 | – | (39) |
| DxS – deferred consideration | – | – | 597 | 597 |
| Frontier Foods | 579 | 37 | – | (37) |
| IG Doors – loan stock repayment | 129 | 129 | 148 | 19 |
| Phusion Healthcare – loan stock repayment | 538 | 538 | 538 | – |
| Product Support (Holdings) – deferred consideration | – | – | 104 | 104 |
| S&P Coil Products – loan stock redemption | 64 | 64 | 71 | 7 |
| Shieldtech | 248 | 59 | – | (59) |
| Other | 40 | 43 | 108 | 65 |
| 1,781 | 1,154 | 1,951 | 797 |
The cost and carrying value of material investments in unquoted companies held at 31 March 2011 are shown below. For this purpose any investment included in the table of the fifteen largest venture capital investments on page 11, or in the corresponding table in the previous year's annual report, is regarded as material.
| 31 March 2010 | ||||
|---|---|---|---|---|
| Carrying | ||||
| value | ||||
| £000 | £000 | £000 | £000 | |
| 125 | ||||
| 1,119 | 1,119 | 1,119 | 1,119 | |
| 1,244 | 2,168 | 1,244 | 1,244 | |
| 178 | ||||
| 1,417 | ||||
| 1,695 | 2,134 | 1,595 | 1,595 | |
| 345 | ||||
| 601 | ||||
| 743 | 1,129 | 743 | 946 | |
| 164 | ||||
| 859 | ||||
| 1,004 | 1,141 | 1,004 | 1,023 | |
| – | ||||
| – | ||||
| 1,000 | 1,000 | – | – | |
| – | ||||
| – | ||||
| 995 | 995 | – | – | |
| Total cost 125 178 1,517 142 601 145 859 102 898 100 895 |
31 March 2011 Carrying value 1,049 617 1,517 528 601 282 859 102 898 100 895 |
Total cost 125 178 1,417 142 601 145 859 – – – – |
| 31 March 2011 | 31 March 2010 | |||
|---|---|---|---|---|
| Total | Carrying | Total | Carrying | |
| cost | value | cost | value | |
| £000 | £000 | £000 | £000 | |
| RCC Lifesciences Limited | ||||
| Ordinary shares | 100 | 100 | 100 | 100 |
| Loan stock | 895 | 895 | 895 | 895 |
| 995 | 995 | 995 | 995 | |
| Wear Inns Limited | ||||
| Ordinary shares | 208 | 208 | 208 | 208 |
| Loan stock | 631 | 631 | 631 | 631 |
| 839 | 839 | 839 | 839 | |
| Cawood Scientific Limited | ||||
| Ordinary shares | 95 | 95 | – | – |
| Loan stock | 730 | 730 | – | – |
| 825 | 825 | – | – | |
| Paladin Group Limited | ||||
| Ordinary shares | 256 | 192 | 256 | 226 |
| Loan stock | 605 | 605 | 605 | 605 |
| 861 | 797 | 861 | 831 | |
| Control Risks Group Holdings Limited | ||||
| Ordinary shares | 746 | 746 | – | – |
| IG Doors Limited | ||||
| Ordinary shares | 50 | 356 | 50 | 150 |
| Loan stock | 321 | 370 | 450 | 450 |
| 371 | 726 | 500 | 600 | |
| Promatic Group Limited | ||||
| Ordinary shares | 59 | 59 | 59 | – |
| Loan stock | 642 | 642 | 511 | 428 |
| 701 | 701 | 570 | 428 | |
| Arleigh International Limited | ||||
| Ordinary shares | 21 | 259 | 21 | 246 |
| Loan stock | 431 | 431 | 431 | 431 |
| 452 | 690 | 452 | 677 | |
| Envirotec Limited | ||||
| Ordinary shares | 106 | 246 | 106 | 288 |
| Loan stock | 350 | 420 | 350 | 420 |
| 456 | 666 | 456 | 708 | |
| Crantock Bakery Limited | ||||
| Ordinary shares | 90 | 192 | 90 | 419 |
| Loan stock | 352 | 352 | 352 | 352 |
| 442 | 544 | 442 | 771 | |
| Optilan Group Limited | ||||
| Ordinary shares | 179 | – | 179 | – |
| Loan stock | 821 | 500 | 821 | 821 |
| 1,000 | 500 | 1,000 | 821 | |
| Mantis Deposition Holdings Limited | ||||
| Ordinary shares | 110 | 110 | 100 | 100 |
| Loan stock | 347 | 347 | 895 | 895 |
| 457 | 457 | 995 | 995 | |
| Britspace Group Limited | ||||
| Ordinary shares | 467 | – | 467 | 256 |
| Loan stock | 327 | – | 327 | 327 |
| 794 | – | 794 | 583 |
Additional information relating to material investments in unquoted companies is given on pages 12 to 15.
for the year ended 31 March 2011
There are no shareholdings in companies where the company's holding at 31 March 2011 represents (1) more than 20% of the allotted equity share capital of any class, (2) more than 20% of the total allotted share capital or (3) more than 20% of the assets of the company itself.
| 31 March 2011 | 31 March 2010 | |
|---|---|---|
| £000 | £000 | |
| Prepayments and accrued income | 298 | 158 |
| Other debtors | 99 | 159 |
| 397 | 317 |
| 31 March 2011 £000 |
31 March 2010 £000 |
|
|---|---|---|
| Accruals and deferred income | 316 | 193 |
| Provision for investment liabilities (Note 19) | 339 | – |
| 655 | 193 | |
| 31 March 2011 | 31 March 2010 | |
|---|---|---|
| £000 | £000 | |
| Allotted and fully paid: | ||
| 40,574,802 (2010 35,920,800) ordinary shares of 5p | 2,029 | 1,796 |
The capital of the company is managed in accordance with its investment policy with a view to the achievement of its investment objective, as set out on pages 6 and 7. The company is not subject to externally imposed capital requirements.
During the year the company issued 5,604,002 ordinary shares of 5p for cash at an average premium of 89.6p per share through offers for subscription. 950,000 shares were re-purchased for cancellation at a cost of £723,000.
| Share premium £000 |
Capital redemption reserve £000 |
Capital reserve £000 |
Revaluation reserve £000 |
Revenue reserve £000 |
|
|---|---|---|---|---|---|
| At 1 April 2010 | 16,656 | 345 | 14,488 | (1,227) | 354 |
| Premium on issue of ordinary shares | 5,021 | – | – | – | – |
| Share issue expenses | (299) | – | – | – | – |
| Shares purchased for cancellation | – | 47 | (723) | – | – |
| Realised on disposal of investments | – | – | 778 | – | – |
| Transfer on disposal of investments | – | – | (609) | 609 | – |
| Movements in fair value of investments | – | – | – | 1,700 | – |
| Provision for investment liabilities (Note 19) | – | – | – | (339) | – |
| Management fee capitalised net of associated tax | – | – | (382) | – | – |
| Revenue return on ordinary activities after tax | – | – | – | – | 536 |
| Dividends recognised in the year | – | – | (1,245) | – | (311) |
| At 31 March 2011 | 21,378 | 392 | 12,307 | 743 | 579 |
At 31 March 2011 distributable reserves amounted to £13,156,000 (31 March 2010 £14,881,000), comprising the capital reserve, the revenue reserve and that part of the revaluation reserve relating to holding gains/losses on readily realisable listed fixed-interest and equity investments.
The calculation of net asset value per share as at 31 March 2011 is based on net assets of £37,428,000 (2010 £32,412,000) divided by the 40,574,802 (2010 35,920,800) ordinary shares in issue at that date.
The company's financial instruments comprise equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors. The company holds financial assets in accordance with its investment policy of investing mainly in a portfolio of VCT-qualifying unquoted and AIM-quoted securities whilst holding a proportion of its assets in cash or near-cash investments in order to provide a reserve of liquidity.
Fixed asset investments (see Note 9) are valued at fair value. For quoted investments this is either bid price or the latest traded price, depending on the convention of the exchange on which the investment is quoted. Unquoted investments are carried at fair value as determined by the directors in accordance with current venture capital industry guidelines. The fair value of all other financial assets and liabilities is represented by their carrying value in the balance sheet.
In carrying on its investment activities, the company is exposed to various types of risk associated with the financial instruments and markets in which it invests. The most significant types of financial risk facing the company are market risk, credit risk and liquidity risk. The company's approach to managing these risks is set out below together with a description of the nature and amount of the financial instruments held at the balance sheet date.
The company's strategy for managing investment risk is determined with regard to the company's investment objective, as outlined in the business review on pages 6 and 7. The management of market risk is part of the investment management process and is a central feature of venture capital investment. The company's portfolio is managed in accordance with the policies and procedures described in the corporate governance statement on pages 22 to 26, having regard to the possible effects of adverse price movements, with the objective of maximising overall returns to shareholders. Investments in unquoted companies, by their nature, usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by diversifying the portfolio across business sectors and asset classes. The overall disposition of the company's assets is monitored by the board on a quarterly basis.
Details of the company's investment portfolio at the balance sheet date are set out on page 11. An analysis of investments between debt and equity instruments is given in Note 9.
18.5% (31 March 2010 7.3%) by value of the company's net assets comprises equity securities listed on the London Stock Exchange or quoted on AIM. A 5% movement in the bid price of these securities as at 31 March 2011 would have changed net assets and the total return for the year by £345,000 (31 March 2010 £118,000).
54.4% (31 March 2010 47.6%) by value of the company's net assets comprises investments in unquoted companies held at fair value. The valuation methods used by the company include the application of a price/earnings ratio derived from listed companies with similar characteristics, and consequently the value of the unquoted element of the portfolio can be indirectly affected by price movements on the London Stock Exchange. A 5% movement in the valuation of the unquoted investments at 31 March 2011 would have changed net assets and the total return for the year by £1,017,000 (31 March 2010 £770,000).
Some of the company's financial assets are interest-bearing, of which some are at fixed rates and some variable. As a result, the company is exposed to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates.
for the year ended 31 March 2011
The table below summarises weighted average effective interest rates for the company's fixed rate interest-bearing financial instruments:
| 31 March 2011 | 31 March 2010 | |||||
|---|---|---|---|---|---|---|
| Weighted | Weighted | |||||
| Weighted | average | Weighted | average | |||
| Total | average | period for | Total | average | period for | |
| fixed rate | interest | which rate | fixed rate | interest | which rate | |
| portfolio | rate | is fixed | portfolio | rate | is fixed | |
| £000 | % | Years | £000 | % | Years | |
| Listed fixed-interest investments | 6,493 | 3.0% | 1.6 | 5,002 | 4.3% | 1.2 |
| Fixed-rate investments in unquoted companies | 1,500 | 9.8% | 2.2 | 2,003 | 10.6% | 1.5 |
| 7,993 | 7,005 |
Due to the relatively short period to maturity of the fixed rate investments held within the portfolio, it is considered that an increase or decrease of 25 basis points in interest rates as at the reporting date would not have had a significant effect on the company's net assets or total return for the period.
The company's floating rate investments comprise floating-rate loans to unquoted companies and cash held in interest-bearing deposit accounts. The benchmark rate which determines the rate of interest receivable on such investments is the UK bank base rate, which was 0.5% at 31 March 2011 (31 March 2010 0.5%). The amounts held in floating rate investments at the balance sheet date were as follows:
| 31 March 2011 £000 |
31 March 2010 £000 |
|
|---|---|---|
| Floating rate loans to unquoted companies | 11,938 | 9,483 |
| Interest-bearing deposit accounts | 3,940 | 9,510 |
| 15,878 | 18,993 |
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the company. The investment manager and the board carry out a regular review of counterparty risk. The carrying values of financial assets represent the maximum credit risk exposure at the balance sheet date.
At 31 March 2011 the company's financial assets exposed to credit risk comprised the following:
| 31 March 2011 £000 |
31 March 2010 £000 |
|
|---|---|---|
| Listed fixed-interest investments | 6,493 | 5,002 |
| Fixed-rate investments in unquoted companies | 1,500 | 2,003 |
| Floating rate loans to unquoted companies | 11,938 | 9,483 |
| Interest-bearing deposit accounts | 3,940 | 9,510 |
| Accrued dividends and interest receivable | 290 | 158 |
| 24,161 | 26,156 |
Credit risk relating to listed fixed-interest investments is mitigated by investing in a portfolio of investment instruments of high credit quality, comprising securities issued by the UK Government, European Union governments and major UK and international companies and institutions. Credit risk relating to loans to and preference shares in unquoted companies is considered to be part of market risk.
Those assets of the company which are traded on recognised stock exchanges are held on the company's behalf by third party custodians (The Bank of New York Mellon Corporation in the case of listed fixed-interest investments and and nominee companies of Brewin Dolphin Limited or Speirs & Jeffrey Limited in the case of quoted equity securities). Bankruptcy or insolvency of a custodian could cause the company's rights with respect to securities held by the custodian to be delayed or limited.
Credit risk arising on transactions with brokers relates to transactions in quoted securities awaiting settlement. Risk relating to unsettled transactions is considered to be low due to the short settlement period involved and the high credit quality of the brokers used. The board further mitigates the risk by monitoring the quality of service provided by the brokers.
The company's interest-bearing deposit accounts are maintained with major UK clearing banks.
There were no significant concentrations of credit risk to counterparties at 31 March 2011 or 31 March 2010. No individual investment exceeded 5.8% of the company's net assets at 31 March 2011 (31 March 2010 4.4%).
The company's financial assets include investments in unquoted equity securities which are not traded on a recognised stock exchange and which generally may be illiquid. As a result, the company may not be able to realise some of its investments in these instruments quickly at an amount close to their fair value in order to meet its liquidity requirements, or to respond to specific events such as a deterioration in the creditworthiness of any particular issuer.
The company's listed fixed-interest investments are considered to be readily realisable as they are of high credit quality as outlined above.
The company's liquidity risk is managed on a continuing basis by the investment manager in accordance with policies and procedures laid down by the board. The company's overall liquidity risks are monitored on a quarterly basis by the board.
The company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and accrued expenses. At 31 March 2011 these investments were valued at £14,670,000 (31 March 2010 £14,512,000).
At 31 March 2011 the company had a potential liability not recognised in the financial statements of £nil (31 March 2010 £623,000) in respect of guarantees given to secure certain liabilities and obligations of investee companies. The directors consider that there is a significant probability of these guarantees being called upon within the next 12 months and have decided to recognise a potential liability of £339,000 as at 31 March 2011 (31 March 2010 £nil) in respect of such guarantees; this amount has been treated as an unrealised loss in the revaluation reserve and is included in creditors (amounts falling due within one year).
At 31 March 2011 contingent assets not recognised in the financial statements in respect of potential deferred proceeds from the sale of investee companies amounted to approximately £1,105,000 (31 March 2010 £2,570,000). The extent to which these amounts will become receivable in due course is dependent on future events.
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