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Northern 2 VCT PLC (NTV)

  Print      Mail a friend       Annual reports

Monday 29 March, 2010

Northern 2 VCT PLC

Annual Financial Report

29 MARCH 2010



Northern  2 VCT PLC  is a  Venture Capital  Trust (VCT)  managed by  NVM Private
Equity.   The trust invests mainly in unquoted venture capital holdings and aims
to provide high long-term tax-free returns to shareholders through a combination
of dividend yield and capital growth.

Financial highlights - year ended 31 January 2010:
(comparative figures as at 31 January 2009 in italics):

                                                  2010            2009

  ·         Net assets                           £44.3m          £39.7m

  ·         Net asset value per share             77.9p           69.8p

  ·         Return per share

  Revenue                                          1.7p            2.6p

  Capital                                         11.8p         (16.8)p

  Total                                           13.5p         (14.2)p

  ·         Dividend per share proposed

  in respect of the year

  Revenue                                          2.0p            2.5p

  Capital                                          3.5p            3.0p

  Total                                            5.5p            5.5p

  ·         Cumulative return to

  shareholders since launch

  Net asset value per share                       77.9p           69.8p

  Dividends paid per share*                       46.9p           41.4p

  Net asset value plus dividends

  paid per share                                 124.8p          111.2p

  ·         Share price at end of year            62.0p           51.0p

*Excluding proposed final dividend

For further information, please contact:

  NVM Private Equity Limited
  Alastair Conn/Christopher Mellor                  0191 244 6000
  Website: <>



I  am pleased to report  that your company has  made good progress over the past
12 months, notwithstanding a background of continuing problems in the global and
UK economies.  Although the rate of new investment was unusually low, there were
some  highly successful exits  from portfolio companies.   It is notable that an
increase  in net asset value (NAV) per  share was achieved over the year despite
the  annual dividend being  maintained at 5.5p per  share - the sixth successive
year in which the dividend has been at or above this level.

NAV and return per share

The  financial statements show an NAV per share of 77.9p as at 31 January 2010,
up  from 69.8p a year earlier, and a total return per share for the year (before
dividends)  of 13.5p, equivalent to  19.3% of the opening  net asset value.  Net
realised  and  unrealised  gains  on  the  investment portfolio amounted to £7.2
million, although investment income was reduced by comparison with the preceding
year  as the unprecedentedly low level of market interest rates took effect.  We
expect  income  to  remain  under  pressure  over  the next 12 months.  It seems
unlikely that interest rates will increase materially, and a number of portfolio
companies have had to postpone interest payments because of restrictions imposed
by banks under their covenant terms.


Your directors are extremely conscious of the high importance which shareholders
attach  to a strong and consistent dividend  flow.  An interim dividend of 2.0p
per  share was paid in December 2009 and the proposed final dividend of 3.5p per
share  will, if approved by shareholders at  the annual general meeting, be paid
on  4 June 2010 to shareholders on the  register on 30 April 2010.  This payment
will  take  the  cumulative  total  of  dividends  declared by the company since
inception to 50.4p per share.

Investment portfolio

The proceeds of sales of venture capital investments during the year amounted to
£11.7  million,  the  highest  annual  total  on  record.   The  largest  single
contribution  came from the molecular diagnostics company DxS, which was sold in
September  2009 to Qiagen NV for initial proceeds of £4.8 million in cash - with
the  possibility of up to  a further £1.8 million  over three years depending on
the  achievement of certain  commercial milestones.  DxS  has grown rapidly over
the  period since  our original  early-stage investment  in 2001 and the outcome
represents  an  overall  cash  return  of  over seven times the money invested.
Satisfactory  exits  were  also  achieved  from Abermed, Liquidlogic and Pivotal
Laboratories Holdings.

Two   new   venture   capital  investments  (one  of  which  resulted  from  the
restructuring of an existing holding) were acquired during the year at a cost of
£2.5  million.  In recent months the flow of new opportunities has improved, and
since  the year end three  more investments have been  completed at an outlay of
£3.5  million.  The venture  capital portfolio at  31 January 2010 comprised 37
holdings  with a book value of £20.8 million, and is discussed in greater detail
in  the business review section  of the annual report.   As I said last year, we
continue to take a cautious and rigorous approach to valuing the portfolio.

In  the light of the continuing low returns on bank deposits, the directors have
reviewed  the  company's  approach  to  the  short-term  deployment  of the cash
balances  held for future investment in  qualifying venture capital holdings.  A
resolution will be proposed at the annual general meeting to amend the company's
investment  policy  so  as  to  permit  the  use  of  a wider range of financial
instruments  with  a  view  to  generating  an improved return on funds awaiting
long-term investment.

Shareholder issues

We  reported last year on a sequence  of unforeseen events which had impacted on
the  stability of  the market  in the  company's shares.   Following a review of
available options, Singers Capital Markets was appointed as the company's broker
in  April 2009.  The mid-market share price, which reached a low point of 34.5p
in  the same month, has subsequently  recovered steadily and at 31 January 2010
stood at 62p, representing a discount of 20% to the underlying NAV.  As reported
in  our half-yearly statement, the directors decided during the year that in the
market conditions then prevailing it was not appropriate to seek to maintain the
share  price  at  a  fixed  10% discount  to  NAV,  and accordingly some limited
purchases  of shares have been  undertaken at a wider  discount.  However we are
keeping this subject under regular review.

Our  managers  have  continued  to  support  the  efforts  of the Association of
Investment  Companies to  promote the  attractions of  VCT shares as a long-term
tax-free yield investment, with applications in areas such as pension planning.
The imminent increase in the higher rate of income tax, following closely behind
the  slump in  interest rates,  only serves  to emphasis these attractions.  The
Government  has in  recent years  significantly tightened  the parameters within
which  new funds raised by VCTs may be  invested.  We expect that over time this
is  likely  to  increase  the  relative  demand  for shares in companies such as
Northern  2 VCT which have a high proportion of their assets subject only to the
much less restrictive pre-2006 investment rules.

VCT qualifying status

The  company has  continued to  meet the  qualifying conditions  laid down by HM
Revenue  & Customs  for maintaining  its approval  as a  VCT.  The board retains
PricewaterhouseCoopers LLP as independent advisers on VCT taxation matters.

Board of directors

On  behalf of shareholders, I  would like to thank  my board colleagues and also
our  managers for the diligent  and efficient way in  which they carry out their
duties and for their careful attention to shareholders' interests.


Whilst  shareholders may draw some  encouragement from the company's performance
over  the  past  year,  the  future  prospects  for the UK economy and financial
markets  remain uncertain.  The next Government  will be faced with the daunting
challenge  of  restoring  the  health  of  the  national  finances, and it seems
inevitable  that  this  will  entail  a  combination of higher taxes and reduced
public  sector expenditure over an extended period.  Such conditions will create
significant  challenges for the smaller private companies in which VCTs invest.
The  investment community also  faces political challenges  such as the European
Commission's   ill-conceived   Alternative   Investment   Fund  Managers  (AIFM)
Directive,  which  threatens  to  impose  disproportionate  costs  and operating
restrictions  on investment vehicles, including VCTs.   On the latter issue your
directors  are  actively  engaged  in  lobbying  the appropriate UK and European
officials and legislators.

Your  directors remain confident in the well-tried investment approach developed
by  NVM over some 25 years, based on careful investment selection backed up with
close  portfolio  monitoring  by  an  experienced  executive team.  In the early
months  of our new financial  year there are some  indications of an increase in
investment  activity,  and  our  strong  cash  position  will  enable us to take
advantage  of suitable opportunities as they  emerge.  We would therefore expect
the company to make satisfactory progress in the medium term.

David Gravells

The  audited financial statements for the year ended 31 January 2010 are set out

for the year ended 31 January 2010

                       Year ended 31 January 2010          Year ended 31 January 2009

                  Revenue     Capital       Total     Revenue     Capital       Total
                     £000        £000        £000        £000        £000        £000

 Gain on
 disposal of

   investments          -       4,676       4,676           -         784         784

 Movements in
 fair value

   of                   -       2,505       2,505           -      (9,985)     (9,985)

               ----------  ----------  ----------  ----------  ----------  ----------

                        -       7,181       7,181           -      (9,201)     (9,201)

 Income             1,704           -       1,704       2,456           -       2,456

 Investment          (215)       (647)       (862)       (246)       (740)       (986)

 Recoverable            -           -           -          99         315         414

 Other               (303)          -        (303)       (298)          -        (298)

               ----------  ----------  ----------  ----------  ----------  ----------

 Return on

   activities       1,186       6,534       7,720       2,011      (9,626)     (7,615)
 before tax

 Tax on return

   ordinary          (198)        185         (13)       (538)        120        (418)

               ----------  ----------  ----------  ----------  ----------  ----------

 Return on

   activities         988       6,719       7,707       1,473      (9,506)     (8,033)
 after tax

               ----------  ----------  ----------  ----------  ----------  ----------

 Return per           1.7p       11.8p       13.5p        2.6p     (16.8)p     (14.2)p

for the year ended 31 January 2010

                                          Year ended         Year ended
                                     31 January 2010    31 January 2009
                                                £000               £000

  Equity shareholders' funds

    at 1 February 2009                        39,702             43,753

  Return on ordinary

    activities after tax                       7,707             (8,033)

  Dividends recognised

    in the year                               (3,130)            (3,005)

  Net proceeds of share issues                   271              7,573

  Shares purchased for

    cancellation                                (201)              (586)

                                          ----------         ----------

  Equity shareholders' funds

    at 31 January 2010                        44,349             39,702

                                          ----------         ----------

as at 31 January 2010

                                          31 January    31 January
                                                2010          2009
                                                £000          £000

  Venture capital investments

    Unquoted                                  18,250        21,090

    Quoted                                     2,542         1,823

                                          ----------    ----------

  Total venture capital investments           20,792        22,913

  Listed fixed-interest investments            8,837         4,636

                                          ----------    ----------

  Total fixed asset investments               29,629        27,549

                                          ----------    ----------

  Current assets:

    Debtors                                      658           813

    Cash and deposits                         14,180        11,891

                                          ----------    ----------

                                              14,838        12,704

  Creditors (amounts falling due

    within one year)                            (118)         (551)

                                          ----------    ----------

  Net current assets                          14,720        12,153

                                          ----------    ----------

  Net assets                                  44,349        39,702

                                          ----------    ----------

  Capital and reserves:

  Called-up equity share capital               2,845         2,843

  Share premium                               34,272        34,021

  Capital redemption reserve                     355           337

  Capital reserve                              8,348         8,157

  Revaluation reserve                         (2,243)       (6,863)

  Revenue reserve                                772         1,207

                                          ----------    ----------

  Total equity shareholders' funds            44,349        39,702

                                          ----------    ----------

  Net asset value per share                     77.9p         69.8p

for the year ended 31 January 2010

                                             Year ended              Year ended
                                        31 January 2010         31 January 2009

                                       £000        £000        £000        £000

 Cash flow

 Net cash
 inflow from

   operating                                        657                     574


 Corporation                                       (409)                   (108)
 tax paid


 Purchase of                        (11,220)                 (7,864)


   Investments                       16,321                   7,855

                                 ----------              ----------

 Net cash

   from financial                                 5,101                      (9)

 Equity                                          (3,130)                 (3,005)
 dividends paid

                                             ----------              ----------

 Net cash

   before financing                               2,219                  (2,548)


 Issue of                               297                   7,999

 Share issue                            (26)                   (426)

 Purchase of

   for                                 (201)                   (586)

                                 ----------              ----------

 Net cash inflow                                     70                   6,987
 from financing

                                             ----------              ----------

 Increase in                                      2,289                   4,439
 cash and

                                             ----------              ----------

 Reconciliation of

 before tax to net
 cash flow from


 Return on ordinary

   activities                                     7,720                  (7,615)
 before tax

 Gain on disposal of                             (4,676)                   (784)

 Movements in fair                               (2,505)                  9,985
 value of

 (Increase)/decrease                                155                    (458)
 in debtors

 Decrease in                                        (37)                   (554)

                                             ----------              ----------

 Net cash
 inflow from

   operating                                        657                     574

                                             ----------              ----------

 Reconciliation of

 in net funds

                1 February 2009              Cash flows         31 January 2010

                           £000                    £000                    £000

 Cash at bank            11,891                   2,289                  14,180

                     ----------              ----------              ----------

as at 31 January 2010

                                                Cost  Valuation % of net assets
                                                £000       £000        by value

 Fifteen largest venture capital

 Crantock Bakery                               1,107      1,759             4.0

 Britspace Group                               1,474      1,474             3.3

 Envirotec                                       975      1,448             3.3

 CloserStill Holdings                          1,000      1,274             2.9

 Paladin Group                                 1,307      1,261             2.8

 Axial Systems Holdings                        1,004      1,105             2.5

 IG Doors                                      1,000      1,000             2.3

 Phusion Healthcare                              995        995             2.2

 Arleigh International                           435        954             2.2

 Longhirst Venues                                375        928             2.1

 Advanced Computer Software*                     429        909             2.0

 S&P Coil Products                               479        890             2.0

 Optilan Group                                 1,000        821             1.8

 Promanex Group Holdings                       1,000        750             1.7

 Direct Valeting                                 694        694             1.6

                                          ---------- ----------      ----------

                                              13,274     16,262            36.7

 Other venture capital investments             9,529      4,530            10.2

                                          ---------- ----------      ----------

 Total venture capital investments            22,803     20,792            46.9

 Listed fixed-interest investments             9,069      8,837            19.9

                                          ---------- ----------      ----------

 Total fixed asset investments                31,872     29,629            66.8


 Net current assets                                      14,720            33.2

                                                     ----------      ----------

 Net assets                                              44,349           100.0

                                                     ----------      ----------

*Quoted on AIM


The  board carries  out a  regular review  of the  risk environment in which the
company  operates.   The  main  areas  of  risk  identified  by the board are as

Investment  risk:  The  majority of  the company's  investments are in small and
medium-sized   unquoted  and  AIM-quoted  companies  which  are  VCT  qualifying
holdings,  and which  by their  nature entail  a higher  level of risk and lower
liquidity than investments in large quoted companies. The directors aim to limit
the  risk attaching to the portfolio as  a whole by careful selection and timely
realisation  of investments, by  carrying out rigorous  due diligence procedures
and  by  maintaining  a  wide  spread  of  holdings in terms of financing stage,
industry  sector and  geographical location.   The board  reviews the investment
portfolio with the investment managers on a regular basis.

Financial  risk:   As  most  of  the  company's  investments involve a medium to
long-term  commitment and many  are relatively illiquid,  the directors consider
that  it is inappropriate to finance  the company's activities through borrowing
except  on an occasional short-term basis.  The company has very little exposure
to foreign currency risk and does not enter into derivative transactions.

Economic  risk:  Events  such as  economic recession  or general fluctuations in
stock  markets and interest rates may affect the valuation of investee companies
and  their ability to access adequate  financial resources, as well as affecting
the company's own share price and discount to net asset value.

Stock  market risk:   Some of  the company's  investments are  quoted on the AIM
market  and  will  be  subject  to  market  fluctuations  upwards and downwards.
 External factors such as terrorist activity can negatively impact stock markets
worldwide  and the  AIM market  is no  exception to  this.  In  times of adverse
sentiment there tends to be very little, if any, market demand for shares in the
smaller companies quoted on AIM.

Liquidity  risk:  The  company's investments  may be  difficult to realise.  The
fact  that a stock is  quoted on AIM does  not guarantee its liquidity and there
may  be a large spread  between bid and offer  prices.  Unquoted investments are
not traded on a recognised stock exchange and are inherently illiquid.

Internal  control  risk:   The  board  regularly  reviews the system of internal
controls,  both financial  and non-financial,  operated by  the company  and the
manager.   These include controls  designed to ensure  that the company's assets
are safeguarded and that proper accounting records are maintained.

VCT qualifying status risk:  The company is required at all times to observe the
conditions  laid down in the Income Tax Act 2007 for the maintenance of approved
VCT  status.  The  loss of  such approval  could lead  to the company losing its
exemption  from corporation tax  on capital gains,  to investors being liable to
pay  income  tax  on  dividends  received  from  the  company  and,  in  certain
circumstances,  to  investors  being  required  to  repay the initial income tax
relief  on their  investment.  The  manager keeps  the company's  VCT qualifying
status  under continual review  and reports to  the board on  a quarterly basis.
 The  board  has  also  retained  PricewaterhouseCoopers  LLP  to  undertake  an
independent VCT status monitoring role.


The  directors  are  responsible  for  preparing  the annual financial report in
accordance  with  applicable  law  and  regulations.   Company  law requires the
directors  to prepare financial statements for  each financial year.  Under that
law the directors have elected to prepare the financial statements in accordance
with  UK Accounting Standards.  The financial  statements are required by law to
give  a true and fair view of the state  of affairs of the company at the end of
the  financial period  and of  the return  of the  company for  that period.  In
preparing  these financial statements, the directors  are required to (i) select
suitable  accounting  policies  and  then  apply  them  consistently;  (ii) make
judgements  and estimates that are reasonable  and prudent;  (iii) state whether
applicable  UK Accounting Standards have been  followed, subject to any material
departures  disclosed  and  explained  in  the  financial  statements;  and (iv)
prepare  the  financial  statements  on  the  going  concern  basis unless it is
inappropriate to presume that the company will continue in business.

In relation to the financial statements for the year ended 31 January 2010, each
of  the  directors  has  confirmed  that  to  the  best of his knowledge (i) the
financial statements, which have been prepared in accordance with the applicable
set  of  accounting  standards,  give  a  true  and  fair  view  of  the assets,
liabilities, financial position and profit or loss of the company;  and (ii) the
directors'  report includes a fair review  of the development and performance of
the  business and the position of the company together with a description of the
principal risks and uncertainties which it faces.

The  directors are also  responsible for keeping  proper accounting records that
disclose  with reasonable  accuracy at  any time  the financial  position of the
company  and enable them to ensure that its financial statements comply with the
Companies  Act 2006.  They have general responsibility  for taking such steps as
are  reasonably  open  to  them  to  safeguard  the assets of the company and to
prevent and detect fraud and other irregularities.

Under  applicable law  and regulations,  the directors  are also responsible for
preparing  a  directors'  report,  directors'  remuneration report and corporate
governance statement that comply with that law and those regulations.

The  company's  financial  statements  are  published  on the NVM Private Equity
Limited  website,  The maintenance  and integrity of this website
is  the responsibility of NVM  and not of the  company.  Visitors to the website
should be aware that legislation in the United Kingdom governing the preparation
and  dissemination of financial statements may  differ from legislation in other


The  above  summary  of  results  for  the  year  ended 31 January 2010 does not
constitute  statutory financial statements within  the meaning of Section 435 of
the  Companies  Act  2006 and  has  not  been  delivered  to  the  Registrar  of
Companies.   Statutory financial statements will be  filed with the Registrar of
Companies  in due course;   the independent auditors'  report on those financial
statements  under Section 495 of the Companies  Act 2006 is unqualified and does
not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

The  proposed final  dividend of  3.5p per share  for the  year ended 31 January
2010 will,  if approved by shareholders, be  paid on 4 June 2010 to shareholders
on the register at the close of business on 30 April 2010.

The  full annual  report including  financial statements  for the year ended 31
January  2010 is expected to be posted to shareholders on 13 April 2010 and will
be  available  to  the  public  at  the  registered  office  of  the  company at
Northumberland  House, Princess Square,  Newcastle upon Tyne  NE1 8ER and on the
NVM Private Equity Limited website.




a d v e r t i s e m e n t