QUESTER VCT 2 PLC ("the Company")
Summary of results for the year ended 28 February 2003
Per Ordinary Share 2003 2002 2001 2000
(pence)
Capital Values
Net asset value 52.0 75.9 125.1 129.5
Share price 64.5 90.0 154.0 147.5
Return and Dividends
Dividend - - 21.7 1.8
Cumulative dividend 26.6 26.6 26.6 4.9
Total Return* 78.6 102.5 151.7 134.4
*Net asset value plus
cumulative dividend
As at 30 April 2003, the unaudited net asset value per share was 53.0p.
Shareholder information
Annual General Meeting 11.30 a.m. on 24 June 2003
CHAIRMAN'S STATEMENT
Overview
Last year was another difficult one for the Company. The net asset value of the
Company fell by �10.8 million from 75.9p at last year end to 52.0p at 28
February 2003. This poor performance is due in part to the difficult business
conditions faced by the small companies in which Quester VCT 2 has invested,
and far more to the poor financing climate in the private equity market, both
of which factors are commented upon further below. While the results for the
year are undoubtedly disappointing, the poor performance of the Company was
similar to that shown by many equity market indices, some examples being shown
in the Annual Report, and was broadly in line with similar VCTs of the same
vintage.
Progress of the venture capital portfolio
In the current difficult business conditions, it is encouraging that the
majority of the companies in the portfolio are working through to cash flow
break even using the capital they have, having taken steps to cut costs, where
necessary.
Despite the difficult conditions, a number of companies in the portfolio are
well down the track of proving out their original plans. Although external
financial markets remain heavily depressed, they are "creating value" by
implementing their technology and building market positions, and thereby
justifying the original decision to invest. Sufficient reserves are being
maintained to continue to support these promising companies. In present
conditions it must remain to be seen whether these companies will succeed in
completing their plans. At this stage it is not possible to predict whether the
scale of upside potential will match that envisaged at the time of original
investment.
Members of the Quester team have been proactive in assisting companies which
have failed to deliver their plans. Underperformance may have resulted from
general market conditions or from misjudgement of the size or speed of build up
of new markets or the strength of the management team. Despite these efforts,
however, a number of the companies backed by Quester VCT 2 have failed and it
is disappointing, but not unusual, that out of a total of 39 investments
originally made,
nine have been written down to nil.
In the current poor financing climate, it has often been difficult to find
third parties to lead subsequent financing rounds. When these have successfully
taken place, they have often been at lower values, which became the norm of the
industry during this period. In a number of cases third party investors have
not been forthcoming, with the result that in some cases financing rounds have
had to be internal to the current investor group and in other cases it has not
been possible to support companies through a further development stage. In some
instances, the delays in raising capital have stretched out the companies'
development plans, resulting in a reduction in the rate of return that may
ultimately be achievable.
In arriving at the results for the year ended 28 February 2003, valuations have
been rigorously reviewed and reflect current depressed valuations for early
stage companies. A number of investments are protected on the downside by
special rights which protect the Company's interest against the founders, or
previous institutional investors. If these investments are realised, a floor
under the value has potentially been created.
Profit and loss account and dividends
The profit and loss account for the year shows a retained loss of �4.7 million.
This is comprised of an operating loss of �801,000 and realised capital losses
of �3.9 million. This latter amount is made up of realised losses on venture
capital investments of �3.7 million and a loss of �231,000 on listed bonds and
equities.
The statement of total recognized gains and losses, which also includes net
unrealised losses of �6.0 million relating to the decline in value of the
Company's investments, reports a total loss for the year of �10.7 million,
equivalent to 23.9p per share.
A transfer of �15.3 million has been made from the Special Reserve, which was
created on 3 November 2000 following the reduction of the share premium
account, to the Profit and Loss reserve. This transfer represents the total of
realised losses on investments incurred since that date (i.e. from 3 November
2000 to 28 February 2003). The effect of this transfer is to enable dividends
to be paid out of capital gains achieved on future investment realisations at
an earlier date than would otherwise be possible.
Given current circumstances, the directors do not recommend the payment of a
dividend in respect of the year ended 28 February 2003. 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.
Outlook
Your Company continues to hold investments in a solid core of companies capable
of delivering some recovery of value over current levels. A smaller number of
the portfolio investments show real promise.
Stock markets seem to be recovering from their lows. A confirmation of this
recovery should add a firmer tone to valuations. There is no sign yet of a
return of the IPO or M&A markets, which usually follow a recovery in stock
markets and are essential to achieve good exits. Any significant increase in
value will be dependent on these markets. On the other hand, a continuation of
current conditions for the financing of smaller companies would result in
further disappointments. We expect conditions to improve, although the timing
is quite uncertain. We believe that a number of key companies in the portfolio
will achieve their goals. There is scope for a recovery of at least part of the
significant falls in value over the past two years.
Jock Birney
Chairman
16 May 2003
INVESTMENT MANAGER'S REPORT
Introduction
The year ended 28 February 2003 was another difficult period for the Company
with the portfolio of both quoted and venture capital investments continuing to
feel the pressure of the economic downturn. This has resulted in a very
disappointing 31.5% decline in the net asset value over the year from 75.9p to
52.0p, split 16.6% in the first half and 14.9% in the second half. As at 30
April 2003, the unaudited net asset value per share had risen somewhat to
53.0p.
We continue to believe, however, that the portfolio holds attractive
investments with the potential for strong future capital growth.
Unquoted venture capital portfolio
Over the past year, business conditions faced by small companies have been very
difficult. Generally the companies in which Quester VCT 2 has invested have
suffered either through weaker than expected sales or because of the extremely
tough funding environment for young companies. Raising equity for young
companies, particularly those with a technology related business, has become
increasingly difficult over the last two years. Time scales to raise equity
have
lengthened. Prices have fallen. Negative sentiment has caught both strong and
weak propositions in the same bear trap.
Against this background, provisions of �4.1 million have been made to reduce
the value of eight investments where the business has fallen behind plan or, in
some cases, to reflect lower values in the private equity market. A further �
3.7 million has been written off the value of five venture capital investments
reflecting permanent diminutions in value.
We have been very active during the year in our work with portfolio companies.
We have continued to support a number of companies in the investment portfolio
with further rounds of finance and have also made significant contributions to
their key strategic business planning decisions.
During the year to 28 February 2003, an additional of �1.1 million has been
invested in eight companies, as detailed in table below:
Company Industry Sector Cost
�'000
The Casella Group Limited Industrial products & 225
services
Communication & Control Electronics Electronics 113
Limited
HTC Healthcare Group plc Consumer services 150
Linguaphone Group plc Computer goods 120
Nomad Software Limited Software 9
Opsys Limited Electronics 165
Printable Field Emitters Limited Electronics 211
Purple House Limited Other services 75
1,068
Quoted venture capital portfolio
Apart from the disposal of Orchestream plc, the composition of the quoted
venture capital portfolio remained largely unchanged during the period. The
remaining balance of the Orchestream holding was sold following the acceptance
of a takeover offer of 6p per share. The additional sales proceeds of �208,000
take the aggregate proceeds from this investment, with an original cost of �
1.25 million, to �1.82 million giving an overall profit of �580,000 equivalent
to an annual internal rate of return of 23%.
The value of the remainder of the quoted venture capital portfolio fell 38%
during the year from �1.1 million to �0.7 million. However, as at 30 April 2003
and following the post war market `bounce', the portfolio's value has increased
by �201,000 or 29.2%. The main mover has been the holding in Surfcontrol plc
which has risen by �168,000 or 39.7% since 28 February 2003.
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 28 February 2003
% �'000
Software 26.3 4,088 11
Internet 14.3 2,226 3
Industrial products & 12.4 1,936 2
services
Semiconductors 8.1 1,263 1
Electronics 7.4 1,151 3
Consumer services 6.4 1,000 1
Media 6.4 1,000 1
Energy 5.4 832 1
Consumer goods 3.7 560 1
Biotechnology 3.5 549 1
Publishing 3.2 501 1
Healthcare 2.4 375 1
Communications 0.5 73 1
100.0 15,554 28
Valuation of the venture capital portfolio
The unquoted investments have been valued in line with the accounting policies
detailed in the Annual Report, which are based on the guidelines issued by the
British Venture Capital association.
Setting reasonable valuations on venture capital investments - especially in
current market conditions - presents difficult issues of judgment. As noted
above, provisions have been made in some cases where the business concerned has
fallen behind plan or to reflect current conditions in the private equity
market (i.e. where, in the case of the company concerned, the need for a new
funding round is approaching and the previous round valuation at which the
investment has been held looks high in current conditions).
Outlook for the venture capital portfolio
Quester's investment team regularly conducts reviews of the portfolio to
identify those investee companies considered most likely to provide attractive
opportunities for capital growth, to review their potential requirements for
further rounds of finance and to determine what action can be taken to support
the management teams of these companies develop the full potential of their
businesses.
The conclusion of the most recent review has been to confirm that the portfolio
holds a number of attractive investments with good potential for future capital
growth. For example, the median revenue growth achieved by 12 of the 16
unquoted software, internet and industrial products and services companies in
the portfolio during the first quarter of 2003, as compared with 2002, was 39%.
This is clearly encouraging performance and demonstrates the capacity of small
companies to grow fast from a small sales base. It is emphasised, however, that
a number of the
companies concerned are still at a relatively early stage of development. This
sample of companies and others of those involved in technology-related
opportunities may still have only limited sales revenues, may still be
loss-making and will very often require further rounds of finance before their
full potential can be achieved.
The summary of the businesses of the ten largest investments provided in the
Annual Report gives a flavour of the significant commercial opportunities that
these companies are seeking to address.
As noted earlier, many of the companies in which Quester VCT 2 has invested
will require further rounds of finance as they grow. It is important that the
Company should be in a position to contribute to this funding process, provided
the companies concerned continue to make satisfactory progress. For this reason
the Company continues to hold reserves for further investment in these existing
portfolio companies. These reserves are currently invested in the listed
equity, fixed interest and cash portfolios and are considered currently to be
at a satisfactory level in relation to the likely requirements of the companies
in the portfolio.
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 portfolio.
Listed equity and fixed interest portfolio
The Company continues to hold a portfolio of listed equities and fixed interest
securities. The listed equity holdings, which are managed on the Company's
behalf by OLIM Limited stood at a valuation of �4.1 million against an overall
cost of �5.7 million as at the year end, reflecting a loss of some �1.6
million. Following the recent market gains, the portfolio's valuation has
increased by �313,000 or 7.6% as at 30 April 2003.
The fixed interest portfolio has been partially liquidated over the year with
the proceeds being used to fund the continuing programme of venture capital
investment. As at the year end, the portfolio had an amortised cost of �1.6
million and was at break-even. It is probable that this portfolio will, over
the next 12 months, be fully sold to fund future investment in existing
portfolio companies.
Conclusion
Last year was another difficult year for the Company's investments. We suffered
some disappointments and regret that shareholders will have seen a third year
during which the value of the Company's assets fell, following the increases in
the earlier years.
Despite this severe setback, we still feel positive about the prospects for the
portfolio as a whole. A number of companies in the portfolio, although still
young and some years away from translating their potential into achievement,
are well positioned to deliver strong growth, 30% p.a. or above. A further
group of portfolio companies should produce reasonable ultimate returns, 15%
p.a. to 20% p.a. Although not all of these boats will come home, we see the
prospect for a sound recovery of value from current levels. This is likely to
show through in the medium term rather than immediately in the year ahead.
Quester Capital Management Limited
16 May 2003
FUND SUMMARY AS AT 28 FEBRUARY 2003
Ten largest venture capital Industry sector Cost � Valuation % of
investments '000 fund
�'000
by value
CDC Solutions Limited Software 1,020 1,770 7.6%
Footfall Limited Industrial products 1,450 1,450 6.3%
and services
Anadigm Limited Semiconductors 1,263 1,263 5.4%
HTC Healthcare Group plc Consumer services 1,000 1,000 4.3%
Imagesound Limited Media 1,000 1,000 4.3%
Sift Group Limited Internet 875 972 4.2%
Bowman Power Systems Limited Energy 1,026 832 3.6%
On Demand Distribution Internet 1,510 755 3.3%
Limited
Sibelius Software Limited Software 700 700 3.0%
Linguaphone Group plc Consumer goods 1,120 560 2.4%
10,964 10,302 44.4%
Quoted venture capital 1,697 688 3.0%
investments
Other unquoted venture 12,491 4,564 19.7%
capital investments
Total venture capital investments 25,152 15,554 67.1%
Listed fixed interest 1,599 1,607 6.9%
investments
Listed equity investments 5,688 4,140 17.9%
Total investments 32,439 21,301 91.9%
Cash and other net current assets 1,890 1,890 8.1%
Net assets 34,329 23,191 100.0%
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 28 FEBRUARY 2003
Notes 2003 2002
�'000 �'000
Loss on realisation of (3,882) (2,536)
investments
Income 1 474 827
Investment management fee 2 (849) (1,398)
Other expenses 3 (426) (546)
Loss on ordinary (4,683) (3,653)
activities before taxation
Tax on ordinary activities 5 - (6)
Loss on ordinary (4,683) (3,659)
activities after taxation
Dividends paid and - -
proposed
Transfer from reserves (4,683) (3,659)
Basic and diluted loss per (10.5)p (8.1)p
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 currently gives rise to no dilution to 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 28 FEBRUARY 2003
2003 2002
�'000 �'000
Loss on ordinary activities after (4,683) (3,659)
taxation
Net unrealised loss on revaluation of (5,976) (18,512)
investments
Total gains and losses recognised (10,659) (22,171)
during the year
Total recognised losses per share (23.9)p (49.4)p
NOTE OF HISTORICAL COST PROFITS AND LOSSES
FOR THE YEAR ENDED 28 FEBRUARY 2003
2003 2002
�'000 �'000
Loss on ordinary activities before (4,683) (3,653)
taxation
Realisation of prior years' net (7,045) 78
unrealised (losses)/gains on
investments
Historical cost loss on ordinary (11,728) (3,575)
activities before taxation
Historical cost loss for the year (11,728) (3,581)
retained after taxation and dividends
The accompanying notes are an integral part of this statement.
BALANCE SHEET
AS AT 28 FEBRUARY 2003
Note 2003 2002
�'000 �'000
Fixed assets
Investments 21,301 31,278
Current assets
Debtors 240 361
Cash at bank 1,827 2,485
2,067 2,846
Creditors (amounts falling due within one year) (177) (149)
Net current assets 1,890 2,697
Net assets 23,191 33,975
Capital and reserves
Called-up equity share capital 2,228 2,239
Share premium account 704 704
Special reserve 25,606 40,998
Revaluation reserve (5,908) (6,977)
Profit and loss account 561 (2,989)
Total equity shareholders' funds 23,191 33,975
Net asset value per share 7 52.0p 75.9p
The financial statements in the Annual Report were approved by the directors on
16 May
2003 and are signed on their behalf by:
JD Birney
Chairman
The accompanying notes are an integral part of this statement.
CASHFLOW STATEMENT
FOR THE YEAR ENDED 28 FEBRUARY 2003
2003 2002
�'000 �'000
Cash outflow from operating activities (675) (493)
Financial investment
Purchase of venture capital investments (1,068) (6,372)
Purchase of listed equities and fixed interest (3,248) (6,048)
investments
Sale/redemption of venture capital investments 254 553
Sale/redemption of equities and fixed interest 4,204 14,574
investments
Total financial investment 142 2,707
Corporation tax paid - (123)
Equity dividends paid - (900)
Financing
Issue of ordinary shares under the terms of the - 120
dividend reinvestment scheme
Buy-in of shares (125) (268)
Total financing (125) (148)
(Decrease)/increase in cash for the year (658) 1,043
Reconciliation of net cash flow to movement
in net funds
(Decrease)/increase in cash for the year (658) 1,043
Net funds at the start of the year 2,485 1,442
Net funds at the end of the year 1,827 2,485
The accompanying notes are an integral part of this statement.
NOTES TO THE FINANCIAL STATEMENTS
1 Income 2003 2002
�'000 �'000
Dividend income
Unquoted companies 5 20
Quoted companies 208 232
Interest receivable
Fixed interest securities 122 400
Loans to unquoted companies 88 89
Bank deposits 50 79
Sundry income 1 7
474 827
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 �
849,000 (2002: �1,398,000).
QCML also provides administrative and secretarial services to the Company for
which it is entitled to a fee of �43,000 per annum (linked to the movement in
the RPI).This fee is included in other expenses (note 3).
* Other expenses 2003 2002
�'000 �'000
Administrative and secretarial services 43 42
Directors' remuneration (note 4) 51 51
Auditor's remuneration - audit services 20 19
- non audit services 10 11
Legal and professional expenses 43 44
Irrecoverable VAT 201 268
Other expenses 58 111
426 546
* Directors' remuneration
2003 2002
�'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 Tax on ordinary activities
2003 2002
�'000 �'000
Corporation tax payable - adjustment in respect of - 6
prior year
6 Earnings per share
The 10.5p loss per share (2002: 8.1p loss) is based on the loss on ordinary
activities after taxation of �4,683,000 (2002: loss of �3,659,000) and on
shares of 44,667,037 (2002: 44,927,378), being the weighted average number of
shares in issue during the year.
The total recognised losses per share of 23.9p (2002: loss of 49.4p) is based
on the total net losses recognised for the year of �10,659,000 (2002: net
losses of �22,171,000) and on 44,667,037 (2002: 44,927,378) ordinary shares,
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 28 February 2003 of 52.0p
(2002: 75.9p) is based on net assets of �23,191,000 (2002: �33,975,000) divided
by the 44,555,712 (2002: 44,779,970) 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 28 February 2003. The statutory accounts
for the year ended 28 February 2003 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
London
E14 5HS
Copies of the full financial statements for the year ended 28 February 2003 are
expected to be posted to shareholders on 19 May 2003 and will be available to
the public at the registered office of the Company at 29 Queen Anne's Gate,
London, SW1H 9BU.
END
