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Quester VCT 2 PLC (QUE)

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Wednesday 12 May, 2004

Quester VCT 2 PLC

Final Results

QUESTER VCT 2 PLC ('the Company')

Summary of results for the year ended 29 February 2004

Per Ordinary Share         2004      2003       2002
Capital Values                                      
Net asset value            49.1      52.0       75.9
Share price                49.5      64.5       90.0
Return and Dividends                                
Dividend                      -         -          -
Cumulative dividend        26.6      26.6       26.6
Total Return*              75.7      78.6      102.5
*Net asset value plus                               
cumulative dividend                                 

Shareholder information

Annual General Meeting 11.30 a.m. on 22 June 2004


Overview of the year

There has been a marked improvement in the trading and financial position of a
number of our more promising investments, but it is disappointing that this has
not been reflected in the net asset value of your company. This fell from 52.0p
per share at the end of February 2003 to 49.1p per share at 29 February
2004.This fall is more than accounted for by two investments, one of which
failed and the other, which shows good long-term promise, was written down to
reflect a follow-on investment round in which we participated at a lower price.

The investment manager's report highlights the progress that a number of
investments have made, some of which are becoming leaders in their fields of
activity. In addition, there has been a marked pick-up in the level of merger,
sale and IPO activity in the portfolio. This increase in corporate activity has
not yet resulted in an overall improvement in the carrying value of any of the
promising investments in the portfolio. The board, having given careful
consideration to the values of the portfolio companies, are satisfied that they
have been made in accordance with guidelines issued by the British Venture
Capital Association.

Profit and loss account and dividends

The profit and loss account for the year shows a retained loss of £1.0million,
consisting of a realised loss on investments of £0.4million and net running
costs of £0.6million. In addition, the statement of total recognised gains and
losses shows a net loss on revaluation of investments of £0.3million.The total
loss for the year therefore amounted to £1.3million or 3.0p per share.

Exclusive of the net running costs of £0.6million, the total return
attributable to each class of investment for the year is detailed in the table

                             Unquoted        Quoted  Listed bonds       Total
                                                       & equities            
                              Venture       Venture                 £ million
                                                        £ million            
                              capital       capital                          
                            portfolio     portfolio                          
                            £ million     £ million                          
Realised net gain on                -           0.3           0.1         0.4
Net realised write-off of       (0.8)             -             -       (0.8)
                                (0.8)           0.3           0.1       (0.4)
Unrealised (loss) / gain        (1.6)           0.4           0.9       (0.3)
on revaluation of                                                            
Total return                    (2.4)           0.7           1.0       (0.7)
(excluding running costs)                                                    

It is interesting to note that the Company's listed investments have
outperformed its unquoted portfolio. The value of the unquoted portfolio often
lags similar quoted investments.

A transfer of £3.1million has been made to the profit and loss account from the
special reserve, which was created following the reduction of the share premium
account in November 2000.The amount of this transfer represents the total of
realised losses on investments incurred during the year. Subject to the
approval of resolution 7 in the Notice of Annual General Meeting, this transfer
will enable dividends to be paid out of capital gains achieved from future
investment realisations at an earlier date than would otherwise be possible.
Following this transfer, the

profit and loss account shows a net credit balance of £569,000 as at 29
February 2004.

The directors do not propose a dividend in respect of the year however in view
of the losses.


As a whole the portfolio has matured to a stage where a number of companies are
trading well and their financial position leads us to believe that they will
not require significant further support. Reserves for follow-on investments
have reduced significantly.

We cannot yet be confident that the net asset value will not fall further. The
portfolio inevitably comprises investments with a relatively high degree of
risk, and there will be occasional disappointments.

The focus is switching to achieving satisfactory exits. Judging the best
timing, and assessing the best prospects for uplifts in value, are becoming the
principal objectives for the managers. However, it is difficult to predict when
exits will be achieved, although there is currently a good level of corporate
activity within the portfolio.

It remains your board's policy to pay dividends out of capital profits as and
when exits showing profits over current values have been achieved.

Jock Birney


12 May 2004



After the difficult conditions in the venture capital market in the two
previous years, it has been encouraging in the year ended 29 February 2004 to
see greater stability in the venture capital portfolio as a whole and improved
stock market conditions.

The accounts for the year ended 29 February 2004 show a decline in the reported
net asset value per share of the Company. However, in the light of improved
business conditions for many of our portfolio companies, the success of new
funding rounds and, in relation to a number of the portfolio companies, the
prospects for M&A activity, we are optimistic about the prospects for the
venture capital portfolio as a whole.

Progress of the venture capital portfolio

The majority of companies in the portfolio improved their performance during
the year, although this underlying improvement is not reflected in the net
asset performance of the Company. It was an active year for the portfolio. Four
companies in the portfolio achieved important funding rounds, but two failed to
do so. The first tangible signs of smaller company merger and acquisition
activity in the portfolio emerged with the CDC Solutions Limited ('CDC')

It was encouraging that Anadigm Limited ('Anadigm') closed a $15million funding
round in

September 2003, to which Quester VCT 2 contributed £245,000. Current conditions
in the private equity market and the stage of development reached by the
company, caused the round to be priced at a lower level than previous rounds.
As a result, a downward adjustment of £1,111,000 has been made to the carrying
value of this investment. Anadigm provides breakthrough technology to the
electronics market, its devices enabling electronic system developers to gain
significant improvements in design times, control and flexibility in the
production of analogue circuits. The market for the company's products is
expected to be in excess of $500 million, and Anadigm has the potential to
dominate this market with its technology. Despite the valuation adjustment
necessitated at 29 February 2004, we believe that Anadigm offers strong
prospects of achieving an ultimately attractive return on the investment cost.

The investment in Bowman Power Systems Limited, which was held in the previous
year's accounts at cost less a provision, has been written off. The company
failed to secure further institutional funding from its broadly spread
syndicate of institutional shareholders. It specialised in micro-turbine power
generation systems, an emerging technology sector which suffered badly from the
weakening of wholesale electricity prices during the previous two years of
weaker general economic conditions. It substantially under-performed during

leading to a lack of investor confidence in the speed of market acceptance for
the technology. There will be a nominal recovery from the existing liquidation
process. This was a disappointing result from an investment we previously
considered to have attractive potential.

Footfall Limited, which provides pedestrian counting information services,
continues to build on its strong UK market position. During the last year,
sales performance has been most encouraging, ahead of plan and well ahead of
the previous year. We see this investment, which is currently valued at cost,
as likely to generate an attractive medium term return.

A new round of funding has been successfully secured by HTC Healthcare Group
plc, after delays during the previous year caused by weak conditions in the
private equity market. This new funding provides the necessary financing to
allow it to develop its fourth day-care nursery. The underlying performance of
the company was positive over the period.

Significant revenue growth has been achieved by On Demand Distribution Limited,
which provides an online music delivery system. It is now the clear European
leader in this field. On the back of this improved performance, the valuation
of this investment has been marked-up back to cost, releasing a prior year
provision of £755,000.The company operates in a fast growing and exciting
market and the investment is showing the potential to deliver a good investment

Improved performance by Nomad Software Limited, which develops and provides
banking payment systems, has allowed a modest up lift in carrying value to be
applied. The company achieved a 36% sales increase in 2003, as compared with
the previous year.

The net impact of the above, together with a mark down in value of four other
investments during the year, is to reduce the value of the unquoted venture
capital portfolio by £2.4million at the end of the year. This includes a
balance of £1.6million being the net amount treated as unrealised losses in the
balance sheet. These unrealised mark-downs reflect short term conditions
affecting the companies concerned and they may be reversed as conditions
improve and tangible achievements are demonstrated, such as a third party
financing or some form of exit. Improvement in individual company valuations,
within the long term portfolio being developed by the Company, will not
therefore necessarily correlate with short term movements in the quoted

The quoted venture capital portfolio has recovered value during the year on the
back of rising stock markets generally.The investments in Surfcontrol plc and
the XKO Group plc have performed particularly well with gains of 64% and 225%
respectively. Over the year, the value of the remaining portfolio rose by £
417,000 to £1.4million.

As noted above, we have continued to back companies within the portfolio and,
during the year to 29 February 2004, an additional of £1.3million was invested
in nine of the unquoted portfolio companies and, in eight of the nine cases,
the investments by the Company led on to successful funding transactions, the
small investment in Printable Field Emitters Limited being the exception. The
details are summarised in the table below:

Company                                   Industry Sector                  Cost
Anadigm Limited                           Semiconductors                    245
The Casella Group Limited                 Industrial products &             232
Communication & Control Electronics       Electronics                        75
Elateral Holdings Limited                 Software                           61
HTC Healthcare Group plc                  Consumer services                 500
On Demand Distribution Limited            Internet                          108
Opsys Limited                             Computer products                  13
Printable Field Emitters Limited          Software                           39
Ticketing Solutions Limited               Internet                           16

Holding reserves for further investment in existing portfolio companies has
enabled the Company to support the companies concerned with further funding
rounds over the last few years and also protect the Company's own investment
position. Given the improving picture in the portfolio and satisfactory
liquidity within the Company's assets, we are now in a position to consider
making new venture capital investments.

Sector analysis of the venture capital portfolio

The portfolio of Quester VCT 2 is balanced by sector and well spread. A summary
of the sectors covered by the portfolio is as follows:

Industry Sector                  Percentage of     Valuation at      Number of
                                  portfolio at                     investments
                                     valuation 29 February 2004               
                                             %            £'000               
Internet                                  21.4            2,601              3
Software                                  20.3            2,467              9
Industrial products & services            20.3            2,462              3
Consumer services                          8.3            1,000              1
Media                                      8.3            1,000              1
Electronics                                5.5              668              1
Consumer goods                             4.6              560              1
Publishing                                 4.1              501              1
Healthcare & life sciences                 3.9              471              1
Semiconductors                             3.3              396              1
                                         100.0           12,126             22

Realisation of venture capital investments

We are pleased to be able to report the sale of CDC Solutions Limited to
Information Holdings Inc., a US-based information services group listed on the
NewYork Stock Exchange. This company owns Liquent Inc, CDC's major US based
competitor. The CDC Board and Quester considered CDC shareholders would
ultimately benefit from a merger of the two companies and their improved
prospects for growth as a combined business. The investment which cost £
1,020,000 was sold for cash and deferred guaranteed cash equivalents to repay a
substantial part of the original investment cost. Depending upon the future
performance of the combined business over the coming three years, a good uplift
on the previous carrying value of £1,770,000 may ultimately be achieved. This
transaction has currently been reflected in the accounts on a no profit/no loss

One third of the holding in Surfcontrol was sold during the year together with
the remaining holding in Adva A.G. Optical Networking realising proceeds of £
474,000 and a profit of £260,000.

Outlook for the venture capital portfolio

We believe that, despite the difficulties suffered in the last two or three
years by a number of the companies in which Quester VCT 2 has invested, the
portfolio at 29 February 2004 holds a number of attractive investments with
good potential for future capital growth.

The summary of the businesses of the ten largest investments shown in the
Annual Report gives a flavour of the significant commercial opportunities that
these companies are seeking to address.

It is emphasised, however, that a number of the companies concerned are still
at a relatively early stage of development. Some of those involved in
technology-related opportunities, for example, while showing satisfactory
underlying development in their businesses, may still have only limited sales
revenues and may still be lossmaking.

Listed equity and fixed interest portfolio

The portfolio of listed equities held by the Company has performed well over
the year generating realised and unrealised gains of £132,000 and £941,000
respectively, equivalent to growth of 26% in the value of the portfolio during
the year. At 29 February 2004, the portfolio was valued at £5.1million on an
original cost of £5.4million and, as a result of a good year, most of the
ground lost in previous years has been recovered.

The fixed interest portfolio has been sold or redeemed over the year with the
proceeds being held as cash pending further investment in venture capital


While business conditions vary in the different sectors in which the Company
holds investments, the performance and prospects of a number of companies in
the portfolio give cause for optimism. The current level of activity in
relation to certain of the companies, and the opportunities now beginning to
open up, suggest prospects for the future have strengthened.

Quester Capital Management Limited

12 May 2004


Ten largest venture       Industry sector           Cost £   Valuation     % of
capital investments                                   '000                 fund
                                                                       by value
On Demand Distribution    Internet                 1,618         1,618     7.5%
Footfall Limited          Industrial products and  1,450         1,450     6.7%
HTC Healthcare Group plc  Consumer services        1,000         1,000     4.6%
Imagesound Limited        Media                    1,000         1,000     4.6%
Sift Group Limited        Internet                 875             729     3.4%
The Casella Group Limited Industrial products &    1,206           716     3.3%
Sibelius Software Limited Software                 700             700     3.2%
Linguaphone Group plc     Consumer goods           1,120           560     2.6%
Methuen Publishing        Publishing               501             501     2.3%
Vernalis Group plc        Healthcare & life        965             471     2.3%
                                                   10,435        8,745    40.5%
Other venture capital                              11,330        3,381    15.7%
Total venture capital investments                  21,765       12,126    56.2%
Listed equity investments                          5,414         5,093    23.6%
Total investments                                  27,179       17,219    79.8%
Cash and other net assets                          4,366         4,366    20.2%
Net assets                                         31,545  21,585        100.0%



                            Notes        2004       2003
                                        £'000      £'000
Loss on realisation of                  (457)    (3,882)
Income                        1           370        474
Investment management fee     2         (580)      (849)
Other expenses                3         (363)      (426)
Loss on ordinary                      (1,030)    (4,683)
activities before taxation                              
Tax on ordinary activities    5             -          -
Loss on ordinary                      (1,030)    (4,683)
activities after taxation                               
Dividends paid and                          -          -
Transfer from reserves                (1,030)    (4,683)
Basic and diluted loss per             (2.3)p    (10.5)p

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 currently gives rise to no dilution to the return per share.

The accompanying notes are an integral part of this statement.



                                                           2004            2003
                                                          £'000           £'000
Loss on ordinary activities after                       (1,030)         (4,683)
Net unrealised loss on revaluation of                     (291)         (5,976)
Total losses recognised during the year                 (1,321)        (10,659)
Total recognised losses per share                        (3.0)p         (23.9)p



                                                           2004            2003
                                                          £'000           £'000
Loss on ordinary activities before                      (1,030)         (4,683)
Realisation of prior years' net                         (2,036)         (7,045)
unrealised losses on investments                                               
Historical cost loss on ordinary                        (3,066)        (11,728)
activities before taxation                                                     
Historical cost loss for the year                       (3,066)        (11,728)
retained after taxation and dividends                                          

The accompanying notes are an integral part of this statement.



                                                      Note   2004     2003    
                                                             £'000    £'000   
Fixed assets                                                                  
Investments                                                  17,219   21,301  
Current assets                                                                
Debtors                                                      1,399    240     
Cash at bank                                                 3,146    1,827   
                                                             4,545    2,067   
Creditors (amounts falling due within one year)              (179)    (177)   
Net current assets                                           4,366    1,890   
Net assets                                                   21,585   23,191  
Capital and reserves                                                          
Called-up equity share capital                               2,198    2,228   
Share premium account                                        704      704     
Special reserve                                              22,277   25,606  
Revaluation reserve                                          (4,163)  (5,908) 
Profit and loss account                                      569      561     
Total equity shareholders' funds                             21,585   23,191  
Net asset value per share                               6    49.1p    52.0p   

The financial statements in the Annual Report were approved by the directors on
12 May 2004 and are signed on their behalf by:

JD Birney


The accompanying notes are an integral part of this statement.



                                                            2004      2003     
                                                            £'000     £'000    
Cash outflow from operating activities                      (1,700)   (675)    
Financial investment                                                           
Purchase of venture capital investments                     (1,289)   (1,068)  
Purchase of listed equities and fixed interest              (1,784)   (3,248)  
Sale/redemption of venture capital investments              2,897     254      
Sale/redemption of equities and fixed interest              3,480     4,204    
Total financial investment                                  3,304     142      
Buy-in of shares                                            (285)     (125)    
Increase/(decrease) in cash for the year                    1,319     (658)    
Reconciliation of net cash flow to movement                                    
in net funds                                                                   
Increase/(decrease) in cash for the year                    1,319     (658)    
Net funds at the start of the year                          1,827     2,485    
Net funds at the end of the year                            3,146     1,827    

The accompanying notes are an integral part of this statement.


1 Income                                                  2004       2003      
                                                          £'000      £'000     
Dividend income                                                                
Unquoted companies                                        5          5         
Quoted companies                                          186        208       
Interest receivable                                                            
Fixed interest securities                                 49         122       
Loans to unquoted companies                               49         88        
Bank deposits                                             38         50        
Sundry income                                             43         1         
                                                          370        474       

2 Investment Management Fee

Quester Capital Management Limited ('QCML') provides investment management
services to the Company under an agreement dated 9 February 1998.

QCML is a wholly owned subsidiary of Querist Limited, a company in which APG
Holmes and JA Spooner are beneficial shareholders. APG Holmes and JA Spooner
are executive directors of QCML.

QCML receives a management fee, payable quarterly in advance, at the rate of
2.5% on the value of the audited net assets of the Company as at the end of the
preceding accounting period. The net management fee for the year amounted to £
580,000 (2003: £849,000).

QCML also provides administrative and secretarial services to the Company for
which it is entitled to a fee of £45,000 per annum (linked to the movement in
the RPI). This fee is included in other expenses (note 3).

  * Other expenses                                      2004        2003       
                                                        £'000       £'000      
Administrative and secretarial services                 45          43         
Directors' remuneration (note 4)                        51          51         
Auditor's remuneration - audit services                 20          20         
- non audit services                                    10          10         
Legal and professional expenses                         28          43         
Irrecoverable VAT                                       129         201        
Other expenses                                          80          58         
                                                        363         426        

  * Directors' remuneration
                                                        2004        2003       
                                                        £'000       £'000      
Fees paid to directors                                  12          12         
Amounts paid to third parties, excluding VAT, in        39          39         
consideration of the services of directors                                     
                                                        51          51         

The total fees paid or payable in respect of individual directors for the year
is detailed in the directors' remuneration report in the Annual Report.

5 Loss per share

The 2.3p loss per share (2003: 10.5p loss) is based on the loss on ordinary
activities after taxation of £1,030,000 (2003: loss of £4,683,000) and on
shares of 44,394,772 (2003: 44,667,037), being the weighted average number of
shares in issue during the year.

The total recognised losses per share of 3.0p (2003: loss of 23.9p) is based on
the total net losses recognised for the year of £1,321,000 (2003: net losses of
£10,659,000) and on 44,394,772 (2003: 44,667,037) ordinary shares, being the
weighted average number of shares in issue during the year.

6 Net asset value per share

The calculation of net asset value per share as at 29 February 2004 of 49.1p
(2003: 52.0p) is based on net assets of £21,585,000 (2003: £23,191,000) divided
by the 43,959,973 (2003: 44,555,712) ordinary shares in issue at that date.

The financial information set out above does not constitute the Company's
statutory accounts for the year ended 29 February 2004. The statutory accounts
for the year ended 29 February 2004 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.

A copy of the above document will 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


E14 5HS

Copies of the full financial statements for the year ended 29 February 2004 are
expected to be posted to shareholders on 14 May 2004 and will be available to
the public at the registered office of the Company at 29 Queen Anne's Gate,
London, SW1H 9BU.