Northern 3 VCT PLC

Half-yearly financial report 30 September 2014

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.

1 Financial summary
2 Half-yearly management report
4 Five year performance
5 Investment portfolio
6 Income statement
6 Reconciliation of movements in shareholders' funds
8 Balance sheet
9 Cash flow statement
10 Notes to the financial statements
11 Risk management
12 Company information

Financial summary

	Six months ended 30 September 2014	Six months ended 30 September 2013	Year ended 31 March 2014
Net assets	£70.3m	£50.1m	£71.3m
Net asset value per share	105.5p	104.5p	108.9p
Return per share
Revenue	1.3p	1.4p	2.1p
Capital	(1.1)p	1.9p	8.4p
Total	0.2p	3.3p	10.5p
Dividend declared in respect
of the period	2.0p	2.0p	5.5p
Cumulative return to shareholders since launch
Net asset value per share	105.5p	104.5p	108.9p
Dividends paid per share*	47.4p	41.9p	43.9p
Net asset value plus dividends
paid per share	152.9p	146.4p	152.8p
Mid-market share price
at end of period	95.75p	92.25p	97.00p
Share price discount
to net asset value	9.2%	11.7%	10.9%
Tax-free dividend yield
(based on mid-market share price)	5.7%	6.0%	5.7%

*Excluding interim dividend not yet paid

Key dates

Half-yearly results announced 11 November 2014 Shares quoted ex dividend 4 December 2014 Record date for interim dividend 5 December 2014 Interim dividend paid 16 January 2015

Half-yearly management report

for the six months ended 30 September 2014

Our company's balance sheet remains strong and we hope that performance in the second half of the year will benefit from some profitable realisations.

Results and dividend

The unaudited net asset value (NAV) per share at 30 September 2014, after deducting the 2013/14 final dividend of 3.5p per share which was paid in July, was 105.5p (31 March 2014 108.9p). The return per share as shown in the income statement, before deducting the final dividend, was 0.2p compared with 3.3p in the six month period ended 30 September 2013.

Investment income for the period was £1.3 million, compared with £1.1 million in the corresponding period last year. The revenue return per share, based on the increased number of shares in issue, was slightly lower at 1.3p (corresponding period 1.4p).

Your board has declared an unchanged interim dividend of 2.0p per share, which will be paid on 16 January 2015 to shareholders on the register at the close of business on 5 December 2014. It remains our objective to maintain an annual dividend of at least 5.5p per share.

Investments

The past six months have seen a high level of new investment activity in the venture capital portfolio. The following holdings were added during the period:

Accumuli (£490,000) IT security and risk management specialist, Basingstoke (AIM-quoted)
Hayward Tyler (£515,000) manufacturer of electric motors and pumps, Luton (AIM-quoted)
Arnlea Holdings (£1,138,000) developer of asset management software for the oil and gas industry, Aberdeen
Agilitas Holdings (£1,448,000) provider of outsourced IT inventory management services, Nottingham
Fresh Approach (UK) Holdings (£1,286,000) creative events manager, Manchester
MSQ Partners (£1,477,000) marketing and communications agency group, London

Proceeds from investment sales and repayments amounted to £3.7 million, generating a realised gain of £0.2 million compared with 31 March 2014 carrying values. The AIM-quoted investment in Pilat Media Global was acquired by SintecMedia through an agreed bid, producing proceeds of £1.6 million compared with our original cost of £0.6 million. Tinglobal Holdings raised new equity funding from a strategic trade investor and was able to repay £1.6 million of loan stock. Altacor and Mantis Deposition Holdings, both of which had been written down in value at 31 March 2014 after periods of disappointing performance, were sold for aggregate proceeds of £0.4 million. There are good prospects of some exits in the second half of the financial year.

The AIM portfolio showed no overall gain or loss in the period, compared with a 12% fall in the AIM market index. Our managers continue to seek suitable opportunities for new investment.

Shareholder issues

As a result of the success of the company's £20 million public share offer in the 2013/14 tax year, cash balances are presently healthy and we have the option of withdrawing funds from the listed equity and fixed-income portfolios if necessary. The board has reviewed projected future cash requirements in the light of new investment activity and potential realisations of existing investments, and has concluded that it would not be appropriate to raise further funds by launching a share issue in the 2014/15 tax year.

James Ferguson Chairman

We have maintained our policy of being prepared to buy back the company's shares in the market at a 10% discount to NAV. In the half year under review a total of 150,000 shares, equivalent to 0.2% of the issued share capital, was repurchased at an average price of 98p.

Earlier this year the opportunity was extended to shareholders to receive communications from the company electronically rather than by paper copy. The option remains open to any other shareholders who wish to join the scheme.

VCT qualifying status

The company has continued to comply with the conditions laid down by HM Revenue & Customs for the maintenance of approved venture capital trust status. Our managers monitor the position closely and the board also receives regular reports from our taxation advisers at PricewaterhouseCoopers LLP.

VCT legislation and regulation

We have previously reported on the Government's proposals to introduce restrictions on investors who sell shares in a VCT within the period six months before and after subscribing for shares in the same VCT, and to restrict the ability of VCTs to pay dividends to shareholders out of distributable reserves created by cancelling the share premium arising where new shares are allotted after 6 April 2014. The 2014 Finance Act containing the relevant legislation duly received Royal Assent in July 2014.

The Government has recently undertaken a consultation exercise on the future of VCTs and other tax-advantaged investment schemes, against the background of a European Commission review of the rules relating to state aid for businesses in member countries, which in the UK includes VCTs. The outcome of this review is awaited; we hope that there will be no significant change in the positioning of VCTs as an important part of the UK government's strategy for supporting small and medium-sized enterprises.

The Commission's Alternative Investment Fund Managers Directive (AIFMD) is now part of UK law. The Directive regulates the management of alternative investment funds, including venture capital funds such as VCTs. The directors have appointed the company's existing manager, NVM Private Equity, as our AIFM for the purposes of the Directive with effect from May 2014.

Prospects

The UK stock market has made little progress over the half year, reflecting concerns over the global economic outlook as well as uncertainty as to the outcome of the impending general election. Our managers have a full workload as they seek to maintain the required rate of new investment as well as helping existing portfolio companies implement their strategic plans. Our company's balance sheet remains strong and we hope that performance in the second half of the year will benefit from some profitable realisations.

On behalf of the Board

James Ferguson

Chairman 11 November 2014

Five year performance

Comparative return to shareholders (assuming dividends re-invested)

Net asset value and cumulative dividends per share

Investment portfolio

as at 30 September 2014

	Cost £000	Valuation £000	% of net assets by value
Fifteen largest venture capital investments
Kerridge Commercial Systems	1,537	6,744	9.6
Advanced Computer Software Group*	1,036	4,357	6.2
Volumatic Holdings	2,096	2,308	3.3
IDOX*	600	2,043	2.9
Silverwing	1,272	1,852	2.6
Wear Inns	1,406	1,767	2.5
Buoyant Upholstery	1,294	1,565	2.2
Control Risks Group Holdings	746	1,534	2.2
MSQ Partners	1,477	1,477	2.1
Agilitas Holdings	1,448	1,448	2.1
No 1 Traveller	1,441	1,441	2.1
Fresh Approach (UK) Holdings	1,286	1,286	1.8
Optilan Group	1,125	1,169	1.7
Intuitive Holding	1,293	1,159	1.6
Arnlea Holdings	1,138	1,138	1.6
	19,195	31,288	44.5
Other venture capital investments	18,467	17,855	25.4
Total venture capital investments	37,662	49,143	69.9
Listed equity investments	7,477	8,166	11.6
Listed interest-bearing investments	2,911	2,917	4.2
Total fixed asset investments	48,050	60,226	85.7
Net current assets		10,034	14.3
Net assets		70,260	100.0

*Quoted on AIM

Asset allocation

50.7% Venture capital unquoted 50.7%
19.3% Venture capital quoted 17.6%
11.6% Listed equity 10.2%
4.2% Listed interest-bearing 5.3%
14.2% Cash and short term deposits 16.2%

Income statement

(unaudited) for the six months ended 30 September 2014

Six months ended 30 September 2014 Revenue Capital £000 £000 Gain on disposal of investments – 97 Movements in fair value of investments – (369) – (272) Income 1,328 – Investment management fee (184) (551)	Total £000 97 (369) (272)






	1,328
	(735)
Other expenses (185) –	(185)
Return on ordinary activities before tax 959 (823)	136
Tax on return on ordinary activities (113) 113	–

Return on ordinary activities after tax 846 (710)	136
Return per share 1.3p (1.1)p	0.2p
Dividends paid/proposed in respect of the period 1.0p 1.0p	2.0p

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.

Reconciliation of movements in shareholders' funds

(unaudited) for the six months ended 30 September 2014

	Six months ended 30 September 2014 £000
Equity shareholders' funds at 1 April 2014	71,297
Return on ordinary activities after tax	136
Dividends recognised in the period	(2,322)
Net proceeds of share issues	1,296
Shares purchased for cancellation	(147)
Equity shareholders' funds at 30 September 2014	70,260

		Year ended 31 March 2014			Six months ended 30 September 2013
	Total	Capital	Revenue	Total	Capital	Revenue
	£000	£000	£000	£000	£000	£000

	1,254	1,254	–	623	623	–
	4,382	4,382	–	563	563	–
	5,636	5,636	–	1,186	1,186	–
	2,006	–	2,006	1,100	–	1,100
	(1,464)	(1,181)	(283)	(521)	(391)	(130)
	(372)	(15)	(357)	(173)	–	(173)

	5,806	4,440	1,366	1,592	795	797
–		202	(202)	–	102	(102)
	5,806	4,642	1,164	1,592	897	695
10.5p		8.4p	2.1p	3.3p	1.9p	1.4p
5.5p		3.7p	1.8p	2.0p	1.0p	1.0p

Six months ended 30 September 2014	Six months ended 30 September 2013	Year ended 31 March 2014
£000	£000	£000

Equity shareholders' funds at 1 April 2014 71,297	50,556	50,556
Return on ordinary activities after tax 136	1,592	5,806
Dividends recognised in the period (2,322)	(1,686)	(2,999)
Net proceeds of share issues 1,296	100	18,671
Shares purchased for cancellation (147)	(496)	(737)

Equity shareholders' funds at 30 September 2014 70,260	50,066	71,297

Balance sheet

(unaudited) as at 30 September 2014

	30 September 2014 £000	30 September 2013 £000	31 March 2014 £000

Fixed assets
Investments	60,226	47,459	58,443
Current assets
Debtors	223	217	288
Cash and deposits	9,979	9,139	13,568

	10,202	9,356	13,856
Creditors (amounts falling
due within one year)	(168)	(6,749)	(1,002)
Net current assets	10,034	2,607	12,854

Net assets	70,260	50,066	71,297
Capital and reserves
Called-up equity share capital	3,329	2,395	3,275
Share premium	1,235	3,314	–
Capital redemption reserve	17	511	10
Capital reserve	52,489	34,362	55,264
Revaluation reserve	12,176	8,598	12,049
Revenue reserve	1,014	886	699
Total equity shareholders' funds	70,260	50,066	71,297
Net asset value per share	105.5p	104.5p	108.9p

Cash flow statement

(unaudited) for the six months ended 30 September 2014

	Six months ended 30 September 2014 £000	Six months ended 30 September 2013 £000	Year ended 31 March 2014 £000
Net cash (outflow)/inflow from operating activities	(361)	(198)	391
Taxation Corporation tax paid	–	–	–
Financial investment Purchase of investments Sale/repayment of investments	(7,694) 5,639	(5,603) 3,862	(15,437) 7,162
Net cash outflow from financial investment	(2,055)	(1,741)	(8,275)
Equity dividends paid	(2,322)	(1,686)	(2,999)
Net cash outflow before financing	(4,738)	(3,625)	(10,883)
Financing Issue of ordinary shares Share issue expenses Share subscriptions held pending allotment	1,330 (34) –	112 (12) 6,643	19,122 (451) –
Purchase of ordinary shares for cancellation Net cash inflow from financing	(147) 1,149	(496) 6,247	(737) 17,934
(Decrease)/increase in cash and deposits	(3,589)	2,622	7,051
Reconciliation of return before tax to net cash flow from operating activities Return on ordinary activities before tax Gain on disposal of investments Movements in fair value of investments Decrease/(increase) in debtors (Decrease)/increase in creditors	136 (97) 369 65 (834)	1,592 (623) (563) 24 (628)	5,806 (1,254) (4,382) (47) 268
Net cash (outflow)/inflow from operating activities	(361)	(198)	391
Analysis of movement in net funds	1 April 2014 £000	Cash flows £000	30 September 2014 £000
Cash and deposits	13,568	(3,589)	9,979

Notes to the financial statements

(unaudited) for the six months ended 30 September 2014

1 The financial statements have been prepared 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.
2 The calculation of return per share is based on the return on ordinary activities after tax for the six months ended 30 September 2014 and on 66,269,375 (2013 48,202,080) ordinary shares, being the weighted average number of shares in issue during the period.
3 The calculation of net asset value per share is based on the net assets at 30 September 2014 divided by the 66,575,347 (2013 47,895,561) ordinary shares in issue at that date.
4 The proposed interim dividend of 2.0p per share for the year ending 31 March 2015 will be paid on 16 January 2015 to shareholders on the register at the close of business on 5 December 2014.
5 The unaudited half-yearly financial statements for the six months ended 30 September 2014 do not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006, have not been reviewed or audited by the company's independent auditor and have not been delivered to the Registrar of Companies. The comparative figures for the year ended 31 March 2014 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies. The auditor's report on those financial statements (i) was unqualified, (ii) did not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and (iii) did not contain a statement under Section 498(2) or (3) of the Companies Act 2006. The half-yearly financial statements have been prepared on the basis of the accounting policies set out in the annual financial statements for the year ended 31 March 2014.
6 Each of the directors confirms that to the best of their knowledge the half-yearly financial statements have been prepared in accordance with the Statement "Half-yearly financial reports" issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by (a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year, and (b) DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.
7 Copies of this half-yearly report have been sent to shareholders and are available to the public at the company's registered office and on the NVM Private Equity Limited website, www.nvm.co.uk.

Risk management

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: many of the company's investments are in small and medium-sized unquoted and AIMquoted companies which are VCT qualifying holdings and which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies. The directors aim to limit the risk attaching to the portfolio as a whole by careful selection, 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 and industry sector. The board reviews the investment portfolio with the manager 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 London Stock Exchange or AIM and will be subject to market fluctuations upwards and downwards. External factors such as terrorist activity can negatively impact stock markets worldwide. In times of adverse sentiment there can be very little, if any, market demand for shares in the smaller companies quoted on AIM.

Credit risk: the company holds a number of financial instruments and cash deposits and is dependent on the counterparty discharging their commitment. The directors review the counterparties to these instruments and cash deposits in addition to ensuring there is no undue concentration of credit risk with any one counterparty.

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.

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

Internal control risk: the board regularly reviews the system of internal controls, both financial and nonfinancial, 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.

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NORTHERN 3 VCT PLC

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Northern 3 VCT PLC