Annual Report and Accounts

QUESTER VCT PLC ANNUAL REPORT 2002 22nd April 2002 Summary of results Year ended 31 January 2002 2001 2000 1999 1998 1997 Per Ordinary Share (58 weeks) Capital Values Net asset value 78.3p 159.3p 136.5p 110.1p 107.6p 97.2p Share price 87.5p 163.0p 150.0p 89.0p 102.0p 95.0p Return and Dividends Dividend - 28.0p 5.8p 2.4p 2.8p 2.5p Cumulative dividend 41.5p 41.5p 13.5p 7.7p 5.3p 2.5p Total Return 119.8p 200.8p 150.0p 117.8p 112.9p 99.7p *Net asset value plus cumulative dividend Composition of the fund 8.4% Quoted venture capital investments Unquoted venture capital investments 67.9% FTSE 350 equity and fixed interest investments 18.4% Cash and other net assets 5.3% DIVIDENDS The directors do not propose the payment of a dividend in respect of the year ended 31 January 2002. CHAIRMAN'S STATEMENT Overview The year ended 31 January 2002 was a difficult one for stock markets generally. Technology-related stocks, which in 1999 and 2000 had reached historically very high levels, suffered particularly badly. Quester VCT plc holds a number of quoted technology-related venture capital investments in its portfolio and has therefore not been immune to this change in sentiment. In addition, the business conditions faced by small companies, particularly in the technology-related sector, and the financing environment for such companies have become increasingly difficult. This has severely impacted upon a number of the companies in the venture capital portfolio, requiring a number of provisions to be made. The net effect has been to reduce the net asset value per share from 159.3 pence at 31 January 2001 to 78.3 pence at 31 January 2002. Overall, the net asset value of the Company has been reduced from Â£49.8 million at 31 January 2001 to Â£27.6 million (including the new capital subscribed in the top-up share issue) at 31 January 2002. This movement includes a decline of Â£13.3 million in the valuation of quoted venture capital investments (equivalent to 40.6 pence per share in terms of the weighted average number of shares in issue during the year) and valuation reductions and provisions in respect of unquoted venture capital investments totalling Â£10.6 million (equivalent to 32.3 pence per share), including amounts written off in respect of two company failures. Whilst the fall in the net asset value is disappointing, the performance of the fund, as demonstrated in the chart on page 3 of the financial statements, shows a trend comparable with that of a range of other indices, though subject to greater volatility, and represents a positive result when compared to, for example, the performance of the FTSE AIM index over the life of the Company. Venture capital portfolio performance The performance of the venture capital portfolio, both the quoted companies and the larger number of unquoted companies, has been disappointing and includes the effect of the significant change in market sentiment. Unrealised gains of Â£ 14.2 million at 31 January 2001 had become unrealised losses of Â£5.7 million by the year end. The majority of this movement was attributable to the valuations of the quoted technology-related investments, which reduced by a total of Â£13.3 million. This partly represented a correction of the very high valuations of the previous period. Our portfolio of unquoted investments, which contains a relatively high proportion of early stage businesses operating in a number of technology areas, has suffered from a particularly harsh economic environment affecting those sectors. As a result of these conditions it has been necessary to make certain provisions, both in respect of company failures and also in respect of businesses that have fallen behind plan. In present business and market conditions, the valuation of unquoted investments involves a difficult exercise of judgement. The Board considers that, after careful review, the valuations adopted at 31 January 2002 give a fair reflection of the overall value of the unquoted portfolio in accordance with the Guidelines issued by the British Venture Capital Association. During the year a further 4.8 million has been committed to existing investments. Whilst the investment environment has been very testing, the significant fall in valuations has produced some benefits for the Company. We are continuing to back a number of potentially attractive opportunities and lower valuations have given the Company the opportunity to invest at significantly lower prices thus reducing the average cost of these investments. Generally we see the currently depressed market as creating a potentially attractive investment climate and it is reassuring that the Company is able to take advantage of this by continuing to invest in the existing portfolio. A more detailed review of the performance of the venture capital portfolio is provided in the investment manager's report below. Income statement and dividends The Profit and Loss account for the year ended 31 January 2002 shows a loss before tax of Â£3.1 million, including realised losses on investments totalling Â£2.4 million. The net loss per share amounted to 9.4 pence. The Statement of Total Recognised Gains and Losses shows net unrealised losses totalling Â£21.9 million (66.9 pence per share), mainly relating to the falling valuation of the venture capital portfolio. The total return attributable to shareholders for the year amounted to a net loss of 76.3 pence per share. Against the background of the losses reported, the directors are unable to recommend the payment of a dividend to shareholders. For the year ending 31 January 2003 and in future, dividends will be dependent on the realisation of capital profits. In current market conditions it is not possible to predict either the timing or level of the realisation of capital profits, and accordingly the amount and timing of future dividends remains uncertain. Share issue During the year the Company raised net proceeds of approximately Â£2.9 million through the issue of ordinary shares pursuant to the arrangements described in the Interim Statement. The shares were issued at a price of 100 pence each, which was approximately equal to the net asset value per share of the Company at the time the offer was made. The proceeds of this offer enhance the Company's ability to take advantage of good investment opportunities within the existing portfolio. Conclusion and outlook The fall in the Company's net asset value has been disappointing, although cumulative performance is broadly comparable with the other indices that we have shown by way of comparison. A significant proportion of the losses of the year ended 31 January 2002 represent a market correction from the very high prices seen at the peak of the market. Despite this overall loss in value, the total return attributable to original investors in the Company remains significantly above the original subscription price of 100 pence. Inclusive of the dividends totalling 41.5 pence that have been distributed to shareholders over the life of the Company to date, the total value attributable to an original investor as at the year end is 119.8 pence. This return is enhanced by the up front income tax relief available to eligible shareholders. We remain cautious but positive about the outlook for the Company and its investments. The portfolio of the Company is broadly spread and includes a range of investments that we believe have significant potential for the future. As has been said before, an investment in a VCT should be considered as an investment held for the medium to long term. Given the current environment, it is over that time frame that the inherent value of the portfolio should become apparent and it is hoped that we will be able in due course to distribute further significant gains to shareholders. Tom Scruby Chairman 22 April 2002 INVESTMENT MANAGER'S REPORT Introduction The year ended 31 January 2002 was an increasingly challenging period for the portfolio. The business conditions and financing environment faced by small companies became increasingly difficult as the year progressed. The change in sentiment in the quoted markets, particularly towards technology-related companies, had a severely adverse effect on the valuations of some venture capital investments which had raised money on AIM or the main London market in prior years. The high valuations for these quoted investments, which ruled at the end of our last financial year, were not sustained through 2001. Quoted venture capital investments The table below entitled 'Fund Summary' shows an overall valuation of the Company's holdings of quoted venture capital investments at 31 January 2002 of Â£2.3 million. This compares with a valuation of the same holdings at 31 January 2001 of Â£15.6 million and represents a reduction in unrealised surplus over the year of Â£13.3 million. Orchestream Holdings plc accounts for the majority of the reduction in unrealised surplus with a fall in value of Â£8.5 million, its share price falling from 282.5 pence at 31 January 2001 to 10 pence at 31 January 2002. The holding in Adva AG Optical Networking fell in value by Â£2.4 million, its share price declining from Euro 63.7 at 31 January 2001 to Euro 4.9 at 31 January 2002. The share price of Surfcontrol plc declined over the year from Â£12.43 per share at 31 January 2001 to Â£6.20 at 31 January 2002 (producing a fall in value of Â£0.7 million), although the year end share price represented a significant recovery from the low touched in September 2001. The decline in valuation of the residual holdings of these three quoted venture capital investments is clearly disappointing but it should be recalled that these investments had already delivered significant gains for shareholders in the Company. A proportion of each investment was sold on listing and generated distributable profits of Â£11.8 million from the three investments taken together. The remaining shareholdings were subject to 'lock-up' preventing the sale of further shares within a defined period. Unquoted venture capital investments During the year we have supported a number of companies in the investment portfolio with further rounds of finance and also made a significant contribution to their key strategic business planning decisions. A total of Â£4.8 million has been provided in additional financial support to 11 of the unquoted portfolio companies, some of the funding required having resulted from the postponement of IPOs planned for 2001. Of this total, Â£3.0 million has been provided to companies included in the 'ten largest unquoted venture capital investments', including Anadigm Limited, Elateral Holdings Limited, Nomad Software Limited and Bowman Power Limited, which are regarded as having attractive prospects for growth. Among the 'ten largest unquoted venture capital investments', five are carried at valuations above cost, namely Anadigm Limited, CDC Solutions Limited, Nomad Software Limited, The Casella Group Limited and Sift Group Limited, while two are carried at cost and three at less than cost. Outside the 'top ten', companies that have continued to receive further investment include Opsys Limited and Advanced Valve Technologies Limited, both early stage investments. A disappointment during the year was the failure of Power X Limited, which had been developing as a leading designer of high performance switch fabrics for the telecommunications market. The Â£1.1 million cost of this investment has been written off and a further Â£1.4 million eliminated from the previously stated amount of unrealised gain. The performance of the company's products suggested significant potential, but the company was nonetheless unable to attract the required level of equity funding to continue its development programme. Provisions have also been made to reduce the carrying value of 11 other unquoted investments: Â£3.9 million has been provided against cost with a further Â£2.9 million being eliminated from the previously stated amounts of unrealised gain. The failure of Shalibane plc, which was carried at a valuation of Â£195,000 at the start of the year, is reflected in the write-off of this amount. Venture capital investments made during the year Follow-on investments were made during the year as shown below: Company Industry sector Â£'000 Advanced Valve Technologies Industrial products & 691 Limited services Anadigm Limited Electronics 638 Artisan Software Tools Limited Software 141 Bowman Power Limited Manufacturing 329 Elateral Holdings Limited Software 375 HTC Healthcare Group plc Other services 475 International Diagnostics Group Healthcare 60 plc Nomad Software Limited Software 363 Opsys Limited Electronics 729 Power X Limited IT hardware 201 Purple Technologies Limited Software 788 4,790 Further venture capital investment In current market conditions, the only investments likely to be made in the current year will be follow-on investments to support the continuing development of companies in the existing broadly spread portfolio. The portfolio holds a number of attractive investments with good potential and funds are in place to ensure that Quester VCT plc can continue to contribute to the funding of these investments, often on improved terms, as appropriate. FTSE 350 equity and fixed interest portfolio The Company continues to hold a portfolio of FTSE 350 equities and fixed interest securities. The FTSE 350 holdings, covering 20 investments, stood at a valuation approximately equal to the overall cost of Â£2.1 million as at the year end. The fixed interest holdings with an overall cost of Â£3.0 million were also at break-even. This portfolio, which is managed on behalf of the Company by Laing & Cruickshank Investment Management Limited, is retained as a potential reserve for future venture capital investment. It is currently used as security for the banking facility provided by Barclays Bank, which was unutilised as at 31 January 2002. Conclusion Last year was tough. We suffered some disappointments and regret that shareholders, after two very good years, will have seen a significant fall in the value of the Company's assets. As the companies in the venture capital portfolio address such varied markets a consistent picture of either improving business conditions or investment confidence cannot be reported. Many companies continue to report uncertain investment conditions and fragile demand for their products. However the performance and prospects for a number of key investments give cause for some cautious optimism that companies in the portfolio will see improving performance this year. Quester Capital Management Limited 22 April 2002 FUND SUMMARY AS AT 31 JANUARY 2002 Quoted venture capital Industry Cost Valuation Â£ % of fund investments Sector '000 Â£'000 by value Surfcontrol plc Software 274 744 2.7% Crown Sports plc Leisure 475 662 2.4% Orchestream Holdings plc Software 985 356 1.3% XKO Group plc Software 505 204 0.7% Adva AG Optical Networking Telecoms 682 196 0.7% Sirius Financial Solutions plc Software 144 74 0.3% Deep Sea Leisure plc Leisure 200 53 0.2% Sopheon plc Software 150 29 0.1% 3,415 2,318 8.4% Ten largest unquoted venture capital investments Anadigm Limited Electronics 1,263 2,022 7.3% CDC Solutions Limited Software 1,020 1,770 6.4% Elateral Holdings Limited Software 1,881 1,641 5.9% Nomad Software Limited Software 1,102 1,241 4.5% The Casella Group Limited Consultancy 750 1,042 3.8% Bowman Power Limited Manufacturing 1,026 1,026 3.7% Sift Group Limited Internet 875 972 3.5% HMV Group plc Retail 1,119 840 3.0% HTC Healthcare Group plc Other 800 800 2.9% services Purple Technologies Limited Software 1,788 788 2.9% 11,624 12,142 43.9% Other unquoted venture capital 11,737 6,622 24.0% investments Total venture capital 26,776 21,082 76.3% investments Listed fixed interest 2,978 2,969 10.8% investments FTSE 350 equity investments 2,066 2,101 7.6% Total investments 31,820 26,152 94.7% Cash and other net current 1,462 1,462 5.3% assets Net assets 33,282 27,614 100.0% PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 JANUARY 2002 Notes 2002 2001 Â£'000 Â£'000 (Loss)/profit on realisation of 1 (2,383) 5,285 investments Income 2 483 1,141 Investment management fee (723) (1,054) Other expenses 3 (453) (283) (Loss)/profit on ordinary (3,076) 5,089 activities before taxation Tax on ordinary activities 4 - (22) (Loss)/profit on ordinary (3,076) 5,067 activities after taxation Dividends paid and proposed 5 - (8,662) Transfer from reserves (3,076) (3,595) Basic (loss)/earnings per share 6 (9.4)p 16.4p Diluted (loss)/earnings per 6 (9.4)p 15.8p share All items in the above statement derive 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. In accordance with Financial Reporting Standard (FRS) 14, the outstanding option (see note 11 to the financial statements) gives rise to no dilution of the return per share. The accompanying notes are an integral part of this statement. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 JANUARY 2002 2002 2001 Â£'000 Â£'000 (Loss)/profit on ordinary (3,076) 5,067 activities after taxation Unrealised (loss)/gain on (21,911) 10,509 revaluation of investments Total gains and losses (24,987) 15,576 recognised during the period Total recognised (losses)/ 5 (76.3)p 50.3p gains per share NOTE OF HISTORICAL COST PROFITS AND LOSSES FOR THE YEAR ENDED 31 JANUARY 2002 2002 2001 Â£'000 Â£'000 Reported (loss)/profit on ordinary (3,076) 5,089 activities before taxation Realisation of investment (1,047) 6,677 revaluation (losses)/gains of prior years Historical cost (loss)/profit on (4,123) 11,766 ordinary activities before taxation Historical cost (loss)/profit for (4,123) 3,082 the year retained after taxation and dividends BALANCE SHEET AS AT 31 JANUARY 2002 Notes 2002 2001 Â£'000 Â£'000 Fixed assets Investments 26,152 46,919 Current assets Debtors 831 577 Cash at bank 1,400 3,088 2,231 3,665 Creditors (amounts falling due within one (769) (818) year) Net current assets 1,462 2,847 Net assets 27,614 49,766 Capital and reserves Called-up equity share capital 1,764 1,562 Share premium account 2,787 - Special reserve 29,302 29,456 Revaluation reserve (4,495) 16,369 Profit and loss account (1,744) 2,379 Total equity shareholders' funds 27,614 49,766 Net asset value per share 7 78.3p 159.3p Diluted net asset value per share 7 78.3p 153.4p CASHFLOW STATEMENT FOR THE YEAR ENDING 31 JANUARY 2002 2002 2001 Â£'000 Â£'000 Reconciliation of operating (loss)/profit to net cash (outflow)/inflow from operating activities (Loss)/profit on ordinary activities before (3,076) 5,089 taxation (Increase)/decrease in debtors (252) 323 Increase in creditors 118 39 Amortisation of bonds 59 - Purchase of bought interest (20) - Tax withheld at source on franked investment - (22) income Repayment of income tax suffered at source 79 132 Income tax suffered at source (61) (162) Loss/(profit) on realisation of investments 2,383 (5,285) Cash (outflow)/inflow from operating activities (770) 114 Financial investment Purchase of investments (10,142) (18,393) Sale/redemption of investments 6,811 27,874 (4,101) 9,595 Equity dividends paid (422) (8,240) Financing Issue of ordinary shares under the dividend 54 639 reinvestment scheme Issue of shares under the terms of the 60 - subscription share option agreement Issue of shares (net of issue expenses) 2,885 - Buy-in of shares (164) - (Decrease)/increase in cash for the year (1,688) 1,994 Reconciliation of net cash flow to movement in net funds (Decrease)/increase in cash for the year (1,688) 1,994 Cash balance at the start of the year 3,088 1,094 Net funds at the end of the year 1,400 3,088 1. (Loss)/profit on realisation of investments 2002 2001 Â£'000 Â£'000 Net gains on disposal 44 6,984 Write-off of investments (2,172) (1,699) Provision for bank guarantees given in respect of investee (255) - companies (2,383) (5,285) 2. Income 2002 2001 Â£'000 Â£'000 Dividend income Unlisted companies 96 96 Listed companies 77 125 Interest receivable Fixed interest securities 177 160 Bank deposits 83 74 Loans to unquoted companies 46 680 Sundry income 4 6 483 1,141 3. Other expenses 2002 2001 Â£'000 Â£'000 Administrative and secretarial services 40 39 Directors' remuneration 39 43 Auditor's remuneration - audit services 17 17 - non-audit services 10 14 Legal and professional expenses 42 45 Irrecoverable VAT 246 74 Other expenses 59 51 453 283 4. Tax on ordinary activities 2002 2001 Â£'000 Â£'000 Tax attributable to dividend income - 22 - 22 5. Dividends paid and proposed 2002 2001 Â£'000 Â£'000 First interim dividend - 3,092 Second interim dividend - 5,148 Final dividend - 422 - 8,662 6. Earnings per share The loss per share of 9.4p (2001: earnings per share of 16.4p) is based on the loss on ordinary activities after tax of Â£3,076,000 (2001: profit of Â£ 5,067,000) and on ordinary shares of 32,739,524 (2001: 30,982,686), being the weighted average number of shares in issue during the year. The prior year's diluted earnings per share of 15.8p is based on the profit on ordinary activities after taxation of Â£5,067,000 and on shares of 32,094,399, being the weighted average number of shares in issue during the year adjusted to reflect the dilution effect detailed in note 11 to the financial statements. There is no dilution effect in respect of the year ended 31 January 2002. The total recognised loss per share of 76.3p (2001: gain of 50.3p) is based on the total recognised losses for the year of Â£24,987,000 (2001: net gains of Â£ 15,576,000) and on 32,739,524 ordinary shares (2001: 30,982,686), being the weighted average number of shares in issue during the year. 7. Net asset value per share The calculation of net asset value per share as at 31 January 2002 is based on net assets of Â£27,614,000 (2001: Â£49,766,000) divided by the 35,278,821 ordinary shares in issue at that date (2001: 31,239,758). The calculation of the diluted net asset value per share as at 31 January 2001 is based on the net assets of Â£49,766,000 divided by the 32,441,387 ordinary shares in issue at that date, as increased by the allotment of 1,201,629 ordinary shares of 5p each under the terms of the share option agreement detailed in note 11 to the financial statements. The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 January 2002. The statutory accounts for the year ended 31 January 2002 will be finalised on the basis of the financial information presented by the directors in the preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. Copies of the full financial statements for the year ended 31 January 2002 are expected to be posted to shareholders on 22 April 2002 and will be available to the public at the registered office of the Company at 29 Queen Anne's Gate, London, SW1H 9BU.

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