Half-yearly Report

QUESTER VCT plc HALF YEARLY FINANCIAL REPORT 2007 Financial highlights Per ordinary share (pence) 31 28 31 August February August 2007 2007 2006 Capital values Net asset value 34.2 41.6 41.8 Return and dividends Dividend 2.8 3.9 3.9 Cumulative dividend (tax free) 49.5 46.7 46.7 (1) Total return (2) Quester VCT plc 83.7 88.3 88.5 Total return to former shareholders of: Quester VCT 2 plc (3) 68.9 73.5 73.7 Quester VCT 3 plc (3) 44.0 48.6 48.8 (1) cumulative dividends paid by Quester VCT plc. (2) net asset value plus cumulative dividend per share. (3) Quester VCT 2 plc and Quester VCT 3 plc were merged with Quester VCT plc in June 2005. The Directors have declared an interim dividend of 1.4p per share amounting to £1,600,000 to be paid on 7 December 2007. This dividend, which is not reflected in the table above, will increase cumulative dividends paid to 50.9p per share. The above table excludes any tax benefits (20% income tax relief and capital gains deferral) received on subscription for shares in the Company. Inclusive of initial income tax relief, the total return as at 31 August 2007 to an original shareholder in Quester VCT plc would be 103.7p, and to former shareholders of Quester VCT 2 plc and Quester VCT 3 plc 88.9p and 64.0p per share respectively. Chairman's statement Net assets The movement in net assets is summarised in the table below: £'000 Pence per share Net asset value at 28 February 2007 48,328 41.6 Income 418 0.4 Operating expenses (771) (0.7) Net realised gain on investments 459 0.4 Net unrealised loss on investments (5,395) (4.7) Net assets before dividends and share buy-backs 43,039 37.0 Dividends paid net of amounts reinvested (3,186) (2.8) Share buy-backs (723) - Net asset value at 31 August 2007 39,130 34.2 Comments, dividend and outlook The Quester management company was acquired by SPARK in May of this year and the two teams have been integrated. SPARK is adopting a fresh approach to Quester VCT, which has been endorsed by the Board. The accounting date is going to be changed to 31 December 2007 to simplify the administration of all of the Quester VCTs, which will report on the same date. In addition the name of the Manager has been changed to SPARK Venture Management Limited and it is intended to seek shareholders approval to a change of name of your Company to SPARK VCT plc in 2008. The combined management team has been conducting a detailed and fresh review of the investments, which has focused on uncertainty that has arisen around poorly performing companies in the portfolio. Several investments have seen a transition to new managers within SPARK, while long standing and valuable relationships with former Quester managers have been retained, especially where they can contribute to an exit process. At this interim stage the review has resulted in a write down of 8 unquoted investments by £3.8 million resulting in a reduction in Net Asset Value of 3.3p per share. The quoted venture capital portfolio that is marked-to-market fell in value by £1.4 million (1.2p per share). The other major movement in Net Asset Value was the dividend of 2.8p per share in respect of the year ended 28 February 2007 that was paid in lieu of a final dividend on 21 March 2007. Substantial progress has been made, but the review is continuing and the outcome, which may be positive or negative, will not be known until the year end. We are beginning to see the benefit of additional deal flow from SPARK, though the pace of investment has slowed while the investment review is ongoing. SPARK intends to invest a greater proportion of funds into revenue generating companies to reduce the capital-intensive, early stage risk that has bedevilled the portfolio in past years. As noted in the Investment Manager's Report, a few companies may achieve an exit in the short term, however the rate of realisation is unlikely to pick up until 2009. The longer term outlook for the portfolio is reasonably solid, with good progress being made in our investments in the life sciences sector. As previously indicated, the Board is maintaining a high pay out for the moment and has declared an Interim Dividend of 1.4p per share, payable on 7 December 2007. This will bring the total paid out since the merger in July 2005 to 9.35p per share. While your Board expects to maintain this policy in respect of the period to 31 December 2007, future dividends will naturally depend much more on the rate of reinvestment of the liquid resources and the overall performance of the portfolio. Jock Birney Chairman 26 October 2007 Responsibility statement The Directors confirm to the best of their knowledge that: • the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with the Accounting Standards Board's Statement `Half- Yearly Financial Reports'; and • the Chairman's statement includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7R 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 remainder of the financial year; and • the condensed set of financial statements (note 5) includes a fair review of the information concerning related parties transactions as required by Disclosure and Transparency Rule 4.2.8R. The half yearly financial report was approved by the Board on 26 October 2007 and the above responsibility statement was signed on its behalf by the Chairman. Investment manager's report The investment team responsible for the management of Quester VCT plc is now being led by Andrew Carruthers, CEO of SPARK, along with Jay Patel, Executive Director, and Tom Teichman, Chairman of SPARK, and ongoing members of the Quester team. The combined management team has been in place for more than half the period under review and is conducting an assessment of the existing portfolio investments, which we expect to complete by 31 December 2007. This review, combined with market events, has resulted in several significant down valuations, which are explained below. On 24 October 2007, the name of the Manager was changed to SPARK Venture Management Limited following the lead of its new parent which is now called SPARK Ventures plc. Following completion of the current review of the portfolio, we expect to be able to set out our position on new investment and the resulting composition of the portfolio going forward. It is intended to approach shareholders at the 2008 AGM to seek a name change of your Company to SPARK VCT plc, which will finalise the process that began on 11 May 2007 when NewMedia SPARK acquired Quester. Venture capital portfolio: investment activity Investment activity has been restrained in the first six months of the year: one new venture capital investment of £108,000 was made (Symetrica, a company set up to commercialise proprietary, high performance gamma-ray spectroscopy, imaging hardware and software for use in nuclear, medical and process control industries) and £1.2m was made in follow-on investments. Venture capital portfolio: realisations Realisations from the portfolio of quoted venture capital investments generated £1.2 million in proceeds and a net gain of £281,000 over carrying values at 28 February 2007. These transactions included the sale of the entire holdings in Cyclacel Pharmaceuticals, Revenue Assurance and Sopheon; and the tradable shares in MediGene AG that had been held following its acquisition of Avidex in September 2006. Venture capital portfolio: valuation changes The fresh assessment of the fair values and events over the last six months of the investments in the individual portfolio companies being undertaken by the new combined management team has resulted in a net reduction in valuations of unquoted venture capital investments of £3.7 million: • The valuations of two companies have been adjusted in line with the terms of funding rounds: Teraview completed a round in March 2007 resulting in a down valuation of £237,000 and in the case of Perpetuum, a new round has just been completed with new investors giving an uplift in the valuation of £130,000. In both cases we were encouraged by the commercial development of the companies concerned. • Artisan and Community Internet Europe are implementing corporate restructuring programmes and in the light of current trading circumstances a reassessment has resulted in down valuations totalling £893,000. • In the case of Pelikon, the company is at a critical inflection point ahead of a likely further funding round (subsequent to financing earlier in the year). We have taken a cautious view and made a down valuation of £695,000 which values the investment at 25% of cost. • Advanced Valve Technologies and HTC Healthcare have found it difficult to achieve success with their planned strategies and the provision for impairment against both investments has been increased to 100% (reduction in valuations £ 1,170,000). We are continuing to work with these companies to achieve value from an exit from these investments. • In the case of Keronite an impairment provision of 50% of the cost of our investment has been made to reflect the uncertainty arising from a downturn in trading conditions and similarly, Arithmatica has experienced difficulties in achieving its target cash flow and a provision of 75% of the cost of our investment has been made (reduction in valuations £844,000). Quoted venture capital investments, which represent 19% of the value of the venture capital portfolio, have fallen in valuation by £1.4 million during the period. The portfolio suffered in line with other thinly traded AIM stocks. The share prices of Allergy Therapeutics and Vernalis suffered following adverse interim decisions on their respective products by the US Food and Drug Administration. Listed equity portfolio The valuation of the listed equity portfolio has fallen by £294,000 over the half year partly offset by realised gains of £179,000. Conclusion The level of provisions and consequently the effect on the Net Asset Value has been substantial since the new combined management team started its fresh assessment of the portfolio. The pace of new investment activity has also been restrained while we conclude that assessment, which will be complete by 31 December 2007. Nevertheless, SPARK initiated investment opportunities are now being made available to the Company. There are a number of companies in the portfolio where the opportunity may exist for the achievement of a profitable exit in the relatively short term (late 2007-2008). However, the majority of the unquoted investments are in companies which are in the course of transition from the early stage, at which Quester VCT first invested, into the secondary phase of stronger revenue growth and progress towards profitability (or in the case of life science based companies, achieving demonstrable progress in developing drug candidates). Consequently, it is too soon to expect cash realisations from these investments in the near future; indications are that the flow of cash realisation proceeds from these investments, provided general market conditions are favourable, looks likely to be concentrated in the years from 2009. SPARK Venture Management Limited Manager 26 October 2007 Fund summary as at 31 August 2007 Industry sector Original Valuation Equity % of Cost (1) £'000 % held fund by value £'000 Quoted venture capital investments Allergy Therapeutics Biotechnology 772 584 1.1% 1.5% plc Genosis plc Diagnostics & 1,355 347 8.0% 0.9% devices Imagesound plc (2) Industrial 2,848 1,896 11.8% 4.9% products & services Landround plc Other services 178 133 6.3% 0.3% MediGene AG Biotechnology 601 274 0.5% 0.7% Phoqus Group plc Biotechnology 497 265 0.9% 0.7% Vernalis plc Biotechnology 886 670 0.5% 1.7% Total quoted venture capital 7,137 4,169 10.7% investments Unquoted venture capital investments Advanced Valve Industrial 2,773 - 12.8% 0.0% Technologies Limited products & services Antenova Limited Communications 1,134 1,019 4.7% 2.6% Anthropics Communications 115 45 7.0% 0.1% Technology Limited Arithmatica Limited Semiconductors 494 124 12.5% 0.3% Artisan Software Software 2,122 120 23.4% 0.3% Tools Limited Casella Group Industrial 902 110 17.8% 0.3% Limited products & services Celldex Therapeutics Biotechnology 625 225 1.7% 0.6% Inc Cluster Seven Software 1,196 1,196 11.1% 3.1% Limited Community Internet Internet 1,015 317 20.0% 0.8% Europe Limited Elateral Holdings Software 2,126 1,009 24.4% 2.6% Limited Haemostatix Limited Biotechnology 247 247 5.9% 0.6% HTC Healthcare Group Consumer goods & 2,448 - 36.7% 0.0% plc services International Diagnostics & 1,176 690 23.9% 1.8% Diagnostics Group devices plc Keronite Limited Chemicals & 947 473 7.1% 1.2% materials Lectus Therapeutics Biotechnology 854 854 7.0% 2.2% Limited Level Four Software Software 725 725 5.1% 1.9% Limited Nanotecture Group Chemicals & 87 87 0.8% 0.2% Limited materials Nomad Payments Software 2,675 3,605 18.7% 9.2% Limited Opsys Management Electronics 1,562 - 13.6% 0.0% Limited Pelikon Limited Hardware 927 232 5.5% 0.6% Perpetuum Limited Electronics 435 565 8.0% 1.4% Secerno Limited Software 446 446 4.2% 1.1% Sift Group Limited Internet 2,395 2,249 19.8% 5.7% Symetrica Limited Chemicals & 108 108 2.2% 0.3% materials Teraview Limited Diagnostics & 1,056 711 5.4% 1.8% devices Uniservity Limited Software 1,000 1,000 16.5% 2.6% Vivacta Limited Diagnostics & 915 915 12.9% 2.3% devices We7 Limited Software 249 249 9.6% 0.6% Workshare Limited Software 695 695 1.9% 1.8% Total unquoted venture capital 31,449 18,016 46.0% investments Total venture 38,586 22,185 56.7% capital investments Listed fixed 2,885 2,884 7.4% interest investments Listed equity 10,774 12,677 32.4% investments Total investments 52,245 37,746 96.5% Cash and other net 1,384 1,384 3.5% current assets Net assets 53,629 39,130 100.0% (1) The cost of investment shown above represents the post merger cost to Quester VCT plc, which is the original cost to the Company immediately prior to the merger with Quester VCT 2 plc and Quester VCT 3 plc together with the merger value of those investments assumed from Quester VCT 2 and Quester VCT 3. (2) Includes £1 million 5% fixed rate unsecured subordinated convertible loan notes 2012. Condensed financial statements Profit and loss account Note 6 months 6 months Year ended ended 31 ended 31 28 February August August 2007 2007 2006 £'000 £'000 £'000 Net (loss)/profit on (4,936) 1,673 1,712 investments at fair value through profit or loss Income 418 517 909 Investment management fee (442) (525) (1,183) Other expenses (329) (309) (455) (Loss)/profit on ordinary (5,289) 1,356 983 activities before taxation Tax on ordinary activities - - - (Loss)/profit on ordinary (5,289) 1,356 983 activities after taxation Basic and diluted (loss)/profit 4 (4.6)p 1.1p 0.8p per share All items in the above statement are derived from continuing operations. The Company has only one class of business and derives its income from investments made in shares and securities and from bank deposits. A statement of total recognised gains and losses has not been presented because all gains and losses are included in the statement above. Balance sheet 31 August 28 February 31 August 2007 2007 2006 £'000 £'000 £'000 Fixed assets Investments 37,746 42,659 40,286 Current assets Debtors 284 989 709 Cash at bank 1,319 5,014 10,400 1,603 6,003 11,109 Creditors: amounts (219) (334) (1,827) falling due within one year Other creditors Net current assets 1,384 5,669 9,282 Net assets 39,130 48,328 49,568 Capital and reserves Called-up equity share 5,716 5,805 5,928 capital Capital redemption 568 465 335 reserve Share premium account 150 51 - Special reserve 37,478 38,820 41,239 Fair value reserve (6,517) (1,102) (2,079) Profit and loss 1,735 4,289 4,145 account Total equity 39,130 48,328 49,568 shareholders' funds Net asset value per 34.2p 41.6p 41.8p share Summarised cash flow statement 6 months Year 6 months ended ended ended 31 August 31 August 28 February 2006 2007 2007 £'000 £'000 £'000 Net cash inflow/(outflow) 243 (828) (317) from operating activities Net capital expenditure and (29) (3,861) (1,513) financial investment Dividends paid net of (3,186) (4,519) (2,915) amounts reinvested under the dividend reinvestment scheme Buy-back of ordinary shares (723) (1,471) (548) Decrease in cash for the (3,695) (10,679) (5,293) period Reconciliation of net cash flow to movement in net funds Decrease in cash for the (3,695) (10,679) (5,293) period Net funds at the start of 5,014 15,693 15,693 the period Net funds at the end of the 1,319 5,014 10,400 period Reconciliation of operating (loss)/profit to net cash flow from operations (Loss)/profit on ordinary (5,289) 983 1,356 activities before taxation Net loss/(profit) on 4,936 (1,712) (1,673) investments at fair value through profit or loss Decrease/(increase) in 705 (137) 124 debtors (Decrease)/increase in (115) 19 (129) creditors Amortisation of fixed 6 19 5 interest investments Net cash inflow/(outflow) 243 (828) (317) from operating activities Reconciliation of movement in shareholders' funds Share c Capital Share Special Fair Profit Total apital redemption premium reserve value and loss reserve account reserve account £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 March 5,805 465 51 38,820 (1,102) 4,289 48,328 2007 Shares 14 - 99 - - - 113 issued under the Dividend Reinvestment Scheme Shares (103) 103 - (723) - - (723) bought back Realisation - - - - (20) 20 - of prior years' net unrealised profits on investments Transfer - - - (619) - 619 - from special reserve to profit and loss account Transfer of - - - - (5,395) 5,395 - net unrealised loss on revaluation of investments to fair value reserve Loss on - - - - - (5,289) (5,289) ordinary activities after taxation Dividend - - - - - (3,299) (3,299) paid At 31 August 5,716 568 150 37,478 (6,517) 1,735 39,130 2007 Notes 1. The financial information contained in this report has been prepared on the basis of the accounting policies set out in the Annual Report for the year ended 28 February 2007. 2. A second interim dividend in respect of the prior year of 2.8p per share totalling £3,299,000 was paid on 21 March 2007. 3. The number of ordinary shares in issue as at 31 August 2007 was 114,312,656 (31 August 2006: 118,559,937). 4. The calculation of earnings per share for the period is based on the loss after tax of £5,289,000 (2006: profit of £1,356,000) divided by the weighted average number of shares in issue during the period being 115,321,504 (2006: 119,086,216) ordinary shares of 5p each. 5. Quester Services Limited (a fellow subsidiary of the Manager) received transaction fees and directors' fees from investee companies totalling £27,000 during the period to 11 May 2007. Andrew Holmes was a director of Quester Services Limited until 11 May 2007. 6. The Finance Acts 2006 and 2007 set out new regulations relating to the investment of new capital raised, which extend to dividend reinvestment schemes. The regulations levy an undue administrative burden on the operation of such schemes and the Board has resolved to discontinue the Scheme, which will not operate in respect of the interim dividend. 7. The half yearly financial report has been neither audited nor reviewed by the Company's auditors and does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The statutory accounts for the period ended 28 February 2007 have been delivered to the Registrar of Companies and received an audit report which was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain any statements under S237 (2) and (3) of the Companies Act 1985. 8. Interim management statements relating to the first and third quarters of the financial year will be released via the Regulatory News Service on or shortly before 20 July and 17 January each year. 9. Copies of the half yearly financial report are expected to be sent to shareholders on 26 October 2007. Further copies can be obtained from the Company's registered office. A copy of the above document is to be submitted to the UK Listing Authority, and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at: Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS

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