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Quester VCT 2 PLC (QUE)

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Wednesday 24 October, 2001

Quester VCT 2 PLC

Interim Results

Quester VCT 2 PLC
24 October 2001

                              Quester VCT 2 plc

          Interim statement for the six months ended 31 August 2001

  Financial highlights

  Period ended            6 months   6 months    Year to    Year to   71 weeks
                             to 31         to     28 Feb     29 Feb      to 31
                          Aug 2001     31 Aug       2001       2000   Jan 1999

  Total return per            (29)         70         17         36          3
  share (pence)                                                               
  - from quoted               (13)         64          9         32          -
  venture capital                                                             
  - from unquoted             (15)          6          9          2          -
  - other                      (1)          -        (1)          2          3
  Net asset value plus       123.1      204.6      151.7      134.4       98.1
  cumulative dividend                                                         
  per share (pence)                                                           
  Dividend per share             -       19.7       21.7        1.8        3.1
  Cumulative dividend         26.6       24.6       26.6        4.9        3.1
  per share (pence)*                                                          
  Cumulative dividends      11,104     10,203     11,104      1,415        616
  Shareholders' funds       43,394     80,320     56,296     57,802     22,650
  Shareholders' funds       54,498     90,523     67,400     59,217     23,266
  plus cumulative                                                             
  dividends (£'000)                                                           
  Net asset value per         96.5      180.0      125.1      129.5       95.0
  share (pence)                                                               
  Mid-market price per          90      130.0      154.0      147.5      100.0
  share (pence)                                                               
  Share price                (6.5)       (50)       28.9         18          5

* The cumulative dividend includes tax credits paid to eligible shareholders
prior to the abolition of ACT in 1999

Chairman's statement


As envisaged in the report for last year, this year has seen a considerable
change in investment sentiment generally and towards the technology sector in
particular. Against this background it is not surprising that the net asset
value per share of Quester VCT 2 has declined, particularly because the market
values of its listed technology-based venture capital investments have reacted
broadly in line with that sector.


During the half year the Company invested a further £2.5 million in its
existing portfolio companies, taking the total of unquoted venture capital
investments at cost to some £29.4 million (carried in the balance sheet at an
overall valuation of £29.7 million). The managers have always held reserves to
continue to fund the Company's early stage companies. Attracting new investors
into later stage funding rounds has become increasingly difficult in the last
six months and the prudent reserving policy has enabled the Company to
continue to back those investments which show promise.

The individual investment valuations relating to the unquoted venture capital
portfolio at 31 August 2001 have been carefully reviewed, and reductions have
been made in a number of cases (the total of the reductions, less certain
upwards revaluations, amounting to £7.1 million). The reductions have been
applied in cases where companies have fallen behind plan, or where a reduction
in valuation is appropriate to reflect present conditions in the private
equity market.

Stock market valuations of technology companies during 1999 and 2000 reached
historically very high levels. In a number of cases, Quester VCT 2 was able to
take advantage of opportunities to sell holdings in venture capital
investments for which a public quotation had been obtained. This was the case
on the London listing of Surfcontrol plc in January 2000, the flotation of
Orchestream Holdings plc in June 2000 and the acquisition of First Fibre
Limited by Adva AG Optical Networking in July 2000. However, in the latter two
cases, following partial disposals, the remainder of the holdings were subject
to restrictions on sale within a defined period.

Where a public quotation has been obtained for a venture capital investment,
its value is included in the reported net asset value per share of Quester VCT
2 by reference to the quoted market value of the relevant holding at the
accounts date. Accordingly, during the period when technology stocks were at
their very high levels the reported net asset value of Quester VCT 2 included
substantial unrealised gains.

The current value of the Company's quoted and unquoted venture capital
investments has fallen by £12.2 million since 28 February 2001 of which £5.1
million is attributable to the quoted holdings. Further details can be found
in the Manager's report below.

The portfolio of FT-SE 350 equities showed a net reduction in value of £0.2
million over the period.

The Quester VCT 2 net asset value per share has fallen from 125.1p at 28
February 2001 to 96.5p at the half year. At this level, the total return to
date, taking account of the dividends already distributed to shareholders,
shows a premium over the original cost of 100p per share.


In the Chairman's statement accompanying the last annual report, we explained
that the Company's ability to pay dividends in future would depend upon
further realisation of capital profits from the existing portfolio of
investments. The year ended 28 February 2001 was particularly favourable in
this respect. In the first half of the current year, however, market
conditions and other factors have been such that no realisations have been

The profit and loss account for the six months ended 31 August 2001 shows a
loss before tax of £447,000. In the absence of capital gains achieved on the
realisation of investments, an operating loss is to be expected from a venture
capital portfolio that is substantially invested in early stage companies
which generally do not pay significant dividends. It is therefore
inappropriate for the Company to pay an interim dividend.

In current market conditions it is not possible to predict the timing of
realisation of capital profits. Unless capital profits are realised in the
second half of the current year, the Company will incur a loss. The amount and
timing of payment of future dividends is therefore uncertain.


The fall in the markets since 31 August 2001, particularly since the appalling
events in the United States on 11 September, has further reduced the Company's
net asset value, which stood at 91.2p per share as at 30 September 2001.

An investment in a venture capital trust is a medium term investment. The
portfolio of Quester VCT 2 provides a spread of investments across a range of
differing sectors with an emphasis on the technology sector. Changes in
sentiment and market conditions can combine to cause significant swings in
investment values. The managers have invested in companies in which they see
medium term prospects for growth and the creation of value. History has shown
that over time prices of stocks with good intrinsic worth generally recover.
When this happens there should be a revival in Quester VCT 2's net asset value
and the opportunity for the Company to continue to generate good returns for
its shareholders.

Jock Birney


24 October 2001

Investment Manager's Report


The value of the total investment portfolio at £41.0 million as at 31 August
2001 compares with an original cost of £42.6 million and is held having made
cumulative distributions to shareholders of £11.1 million. Viewed in aggregate
this is a solid and satisfactory performance. However the portfolio has seen a
significant reduction in value when compared with its value a year ago, when
the prices of some quoted technology stocks reached very high levels.

The value of the portfolio over the last six months been impacted both by a
significant reduction in the prices of the six quoted technology investments
held forming part of the original venture capital portfolio and by
provisioning of £7.1 million applied to some of the Company's unquoted
portfolio. In certain cases provisions have reversed earlier up-valuations
based on transactions in the shares at higher prices, which are not
sustainable in current market conditions. In other cases provisions have been
made against original cost.

As at 28 February 2001, the venture capital portfolio as a whole was showing
unrealised gains of £10.7 million which, by 31 August 2001, had become
unrealised losses of £1.5 million. We are pleased to have been able to lock-in
and distribute significant gains of approximately £8.5 million during 2000
following a series of profitable realisations.

The fall in value attributable to the quoted venture capital investments,
which are valued by reference to their market prices, is £5.1 million, as the
unrealised gains have reduced from £5.6 million to £0.5 million. The
investment in Orchestream, which has fallen in value by £2.8 million, accounts
for the majority of this decline with its price falling from 160.5 pence on 28
February 2001 to stand at 65 pence as at 31 August 2001. It has fallen
significantly since that date. The investments in XKO, Adva and Surfcontrol
fell in value by £0.8 million, £0.7 million and £0.7 million respectively
during the period.

As has been demonstrated by past performance, we have sold a proportion of
profitable quoted venture capital investments in order to generate significant
distributable profits for shareholders. When one of our investments achieves a
listing, or is purchased by a quoted company via a paper transaction, it is
normal market practice for the existing shareholders to be subject to a
'lock-up' preventing the sale of the retained balance of shares. Quester VCT 2
was subject to such lock-ups following the flotation of Orchestream and the
purchase of First Fibre by Adva. When the lock-ups expired, the selling
opportunity that had been available in previous market conditions had
radically changed.


During the six months, Quester VCT 2 has increased its investment in eleven
companies as detailed in the table below.

                                                     Industry sector Investment

Increased investment in existing portfolio companies
Artisan Software Tools Limited                       Software               104
Bowman Power Limited                                 Manufacturing          264
Elateral Holdings Limited                            Software               250
HTC Healthcare Group plc                             Other services         275
Nomad Software Limited                               Software               113
On Demand Distribution Limited                       Internet               250
Opsys Limited                                        Electronics            591
Optical Micro Devices Limited                        Communications          27
Parascan Technologies Limited                        Software               232
Purple Technologies Limited                          Software               394
Web X Limited                                        Software                40



As previously reported, the only investments likely to be made during the
foreseeable future will be further investments in companies in the existing
widely spread portfolio.

A vital issue which many companies in the portfolio will face, in either the
short or medium term, is their projected requirements for further equity
capital. Some companies in the portfolio were planning to raise capital on
either the main London market or on AIM. These markets are closed to them in
the short term so that alternative funding strategies have been evolved over
the last few months and cost cutting strategies implemented to address the
changed conditions. The majority of these companies, as well as the majority
of the other companies who are not yet planning for a listing, will meet these
challenges and raise the required capital. If the period of uncertainty
affecting financial markets extends significantly, some companies in the
portfolio may be unable to achieve their funding needs.

Quester VCT 2 has set aside appropriate reserves to contribute to the funding
requirements of our investee companies. The portfolio holds a number of
attractive investments with good potential and it is the intention that
Quester VCT 2 will increase the level of its investment in certain companies,
where appropriate.

In the current market conditions, judgement of the best allocation of the
reserves retained to support the development of the venture capital portfolio
is an important priority for us.


Quester VCT 2 continues to hold a portfolio of FT-SE 350 equities and fixed
interest securities. The FT-SE 350 portfolio, covering 30 investments, was
showing a small loss of £62,000 on an overall cost of £6.4 million as at the
half year and the fixed interest holdings with an overall cost of £6.9 million
were just better than break-even. This portfolio, which is managed on behalf
of Quester VCT by OLIM Limited, is retained as a potential reserve for future
venture capital investment.


This year has become an increasingly challenging period for the portfolio. Our
current focus is to support our investments to promote their continued growth
and development, including the provision of further rounds of finance where
this is appropriate. We have backed some promising businesses with strong and
experienced management teams which gives us confidence. The potential for good
future gains to be made in the medium term given improved market conditions,
therefore, remains intact. In current turbulent conditions it is, however,
very difficult to predict the timing and values of those future realisations.

Andrew Holmes

Managing Director

Quester Capital Management Limited

24 October 2001

Composition of the fund

AS AT 31 AUGUST 2001
                                                  Cost Valuation % of portfolio
                                                 £'000     £'000       by value
Quoted venture capital investments
Orchestream Holdings plc (3,472,455 ords)          985     2,257           5.5%
Surfcontrol plc (40,000 ADS)                       280       495           1.2%
XKO Group plc (421,000 ords)                       505       181           0.4%
Adva AG Optical Networking (65,374 ords)           682       145           0.3%
Sirius Group plc (53,532 ords)                      96        72           0.2%
Sopheon Plc (107,000 ords)                         134        36           0.1%
                                                 2,682     3,186           7.7%
Ten largest unquoted venture capital
Anadigm Limited                                  1,263     2,022           4.9%
Purple Technologies Limited                      1,394     1,789           4.4%
CDC Solutions Limited                            1,020     1,770           4.3%
Elateral Holdings Limited                        1,756     1,756           4.3%
Optical Micro Devices Limited                      527     1,260           3.1%
Bowman Power Limited                             1,014     1,014           2.5%
Purple House Limited                             1,000     1,000           2.4%
Imagesound Limited                               1,000     1,000           2.4%
Sift Group Limited                                 875       972           2.4%
Footfall Limited                                   950       950           2.3%
                                                10,799    13,533          33.0%

Other unquoted venture capital investments      15,893    11,154          27.2%
Total venture capital investments               29,374    27,873          67.9%
Listed fixed interest investments                6,876     6,882          16.8%
Listed equity investments                        6,355     6,293          15.3%
Total investments                               42,605    41,048         100.0%

Unaudited financial statements


                             6 months ended   6 months ended              Year  
                             31 August 2001   31 August 2000             ended 
                                      £'000            £'000       28 February
  Net profit on                          19            5,178             3,286
  realisation of                                                              
  Income                                501              766             1.331
  Investment management               (700)            (726)           (1,445)
  Other expenses                      (267)            (187)             (393)
  (Loss)/profit on                    (447)            5,031             2,779
  ordinary activities                                                         
  before taxation                                                             
  Tax on ordinary                       (6)             (11)                 -
  (Loss)/profit on                    (453)            5,020             2,779
  ordinary activities                                                         
  after taxation                                                              
  Dividends paid and                      -          (8,789)           (9,689)
  Transfer from reserves              (453)          (3,769)           (6,910)
  (Loss)/earnings per                (1.0)p            11.2p              6.2p


                          6 months ended     6 months ended               Year  
                           31 August 2001    31 August 2000              ended 
                                    £'000             £'000   28 February 2001 

  (Loss)/profit for the              (453)            5,020              2,779
  Unrealised                      (12,439)           26,287              4,796
  (loss)/gain on                                                              
  revaluation of                                                              
  Total recognised                (12,892)           31,307              7,575
  gains and losses                                                            
  relating to the period                                                      

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, securities and bank deposits.

                                             Note       31       31         28
                                                    August   August   February
                                                      2001     2000       2001
                                                     £'000    £'000      £'000
Fixed assets
Fixed asset investments                             41,048   81,269     55,033
Current assets
Debtors                                                591    2,109      1,200
Cash at bank and in hand                             1,868    2,870      1,442
                                                     2,459    4,979      2,642
Creditors: amounts falling due within one
                                                     (113)  (1,241)      (479)
Other creditors
                                                         -  (4,687)      (900)
Declared dividend
                                                     (113)  (5,928)    (1,379)
Net current (liabilities)/assets                     2,346    (949)      1,263

Net assets                                          43,394   80,320     56,296

Capital and reserves
Called up equity share capital                       2,248    2,232      2,250
Special reserve                                 1   41,129        -     41,251
Share premium account                           1      704   41,251        590
Revaluation reserve                             1    (807)   36,241     11,613
Profit and loss account                         1      120      596        592
Total equity shareholders' funds                    43,394   80,320     56,296

Net asset value per share                            96.5p   180.0p     125.1p

                                      6 months   6 months ended     Year ended 
                                         ended   31 August 2000    28 February 
                                     31 August                            2001 
                                        £'000             £'000          £'000
  Net cash (outflow)/inflow              (331)              508            482
  from operating activities                                                   
  Taxation                                   -             (10)          (113)
  Net capital expenditure and            1,546            (816)          1,960
  financial investment                                                        
  Equity dividends paid                  (779)          (4,463)        (9,146)
  Financing                               (10)                -            608
  Increase/(decrease) in cash              426          (4,781)        (6,209)
  for the period                                                              
  Reconciliation of net cash                                                  
  flow to movement in net funds                                                 
  Increase/(decrease) in cash              426          (4,781)        (6,209)
  for the period                                                              
  Net funds at the start of              1,442            7,651          7,651
  the period                                                                  
  Net funds at the end of the            1,868            2,870          1,442

Notes to the unaudited financial statements


                          Special         Share      Revaluation        Profit 
                          reserve       premium          reserve      and loss
                            £'000       account            £'000       account 
                                          £'000                          £'000 

  At 1 March 2000          41,251           590           11,613           592
  Shares bought in          (122)             -                -             -
  Shares issued                 -           114                -             -
  Transfer of net               -             -               19          (19)
  realised losses                                                             
  to profit and                                                               
  loss account                                                                
  Net decrease in               -             -         (12,439)             -
  value of                                                                    
  Retained loss                 -             -                -         (453)
  for the period                                                              
  At 31 August             41,129           704            (807)           120

 2. The number of ordinary shares in issue as at 31 August 2001 was 44,964,970
    (31 August 2000: 44,633,410).

 3. The calculation of earnings per share for the period is based on loss after
    tax of £453,000 divided by the weighted average number of shares in issue
    during the period being 44,974,488 ordinary shares of 5p each.

 4. The financial information contained in this report has been prepared on the
    basis of the accounting policies set out in the Annual Report.

 5. The unaudited financial statements set out above do not constitute
    statutory accounts within the meaning of Section 240 of the Companies Act

 6. Copies of the unaudited interim results are being sent to shareholders on
    26 October 2001. Further copies can be obtained from the Company's
    registered office.


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