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 £49.8 million
at 31 January 2001 to £27.6 million (including the new capital subscribed in
the top-up share issue) at 31 January 2002. This movement includes a decline of
£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 £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 £
14.2 million at 31 January 2001 had become unrealised losses of £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 £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 £3.1 million, including realised losses on investments totalling
£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 £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 £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
£2.3 million. This compares with a valuation of the same holdings at 31 January
2001 of £15.6 million and represents a reduction in unrealised surplus over the
year of £13.3 million.
Orchestream Holdings plc accounts for the majority of the reduction in
unrealised surplus with a fall in value of £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 £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 £12.43 per
share at 31 January 2001 to £6.20 at 31 January 2002 (producing a fall in value
of £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 £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 £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, £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 £1.1 million cost of this investment has
been written off and a further £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: £3.9 million has been provided against cost with a
further £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 £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
£'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 £2.1 million as at the
year end. The fixed interest holdings with an overall cost of £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 £ % of fund
investments Sector '000
£'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
£'000 £'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
£'000 £'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
£'000 £'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
£'000 £'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
£'000 £'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
£'000 £'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
£'000 £'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
£'000 £'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
£'000 £'000
Tax attributable to dividend income - 22
- 22
5. Dividends paid and proposed
2002 2001
£'000 £'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 £3,076,000 (2001: profit of £
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 £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 £24,987,000 (2001: net gains of £
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 £27,614,000 (2001: £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 £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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