QUESTER VCT 4 PLC ("the Company")
Summary of results for the year ended 31 October 2003
Per Ordinary Share 2003 2002 2001
(pence)
(60 weeks)
Capital Values
Net asset value 77.2 81.8 92.0
Share price 82.5 82.5 80.0
Return and Dividends
Dividend - 1.15 1.75
Cumulative dividend 2.90 2.90 1.75
Total Return* 80.10 84.70 93.75
*Net asset value plus
cumulative dividend
Shareholder information
Annual General Meeting 11.30 a.m. on 24 February 2004
CHAIRMAN'S STATEMENT
Introduction
In the year ended 31 October 2003, and particularly in the second half,
conditions in the venture capital market have been more encouraging, and it is
pleasing to report that Quester VCT 4 has been able to take advantage of an
attractive deal flow. As this document goes to press, the initial investment
phase of the Company is approaching completion, with five new investments
having been made in the year ended 31 October 2003 and a further four having
been completed since that date.
Investments
During the year, the Company made new venture capital investments totaling �3.0
million in five companies at an average cost of �609,000. All of these
investments were made alongside other Quester funds. In addition, a further �
3.3 million was invested in 12 of the existing portfolio companies, either as
further tranches of originally agreed commitment or as follow-on investment.
These transactions brought the total amount invested at 31 October 2003 to �
25.4 million in 30 unquoted companies and one company whose shares are traded
on AIM.
Since the year end, another four new investments have been completed, with �2.2
million being invested on behalf of Quester VCT 4, and an additional �1.4
million has been invested in follow-on rounds of five of the existing portfolio
companies.
The portfolio is focused on technology-related companies addressing markets
that have considerable growth potential over the long term. At the end of this
third year of the Company's initial investment phase, the portfolio contains a
relatively high proportion of early stage businesses. In a number of the
technology-related sectors in which Quester VCT 4 holds investments, business
conditions have continued to be very difficult, and in certain cases markets
have not developed as rapidly as had been anticipated. A number of companies in
which Quester VCT 4 has invested have suffered as a result. However, others
have achieved good progress and show the potential to fulfil expectations. The
Board is confident that, across the portfolio as a
whole, progress is satisfactory at this stage in Quester VCT 4's development
and that there are prospects for substantial upside potential.
The venture capital investments have been valued in accordance with the new
valuation guidelines issued by the British Venture Capital Association (BVCA)
in June 2003. In cases in which the business concerned has fallen behind plan,
the underperformance has been reflected in a reduction in the carrying value of
the investment. In a number of other instances, the valuation attributed to
Quester VCT 4's investment has been required to be reduced to below cost as a
result of current conditions in the venture capital market (as reflected in the
prices of follow-on investment rounds): in these latter cases, however, we
consider that the companies concerned continue to offer Quester VCT 4 strong
prospects for achieving an ultimately satisfactory return.
In parallel with the near completion of the initial portfolio, we are placing
much emphasis on the need for the Company to retain prudent reserves for
follow-on investment. The method, and impact on income, of following this
necessary strategy, while ensuring compliance with the Inland Revenue's 70%
test as from 31 October 2003, is dealt with in the Investment Manager's Report.
Realisation
It is pleasing to be able to report Quester VCT 4's first successful
realisation. Since the year-end, the investment in CDC Solutions Limited has
been realised, upon the acquisition of that company by a subsidiary of the
US-based information services group Information Holdings Inc. The terms of the
transaction involve some early return of cash together with an entitlement to
additional consideration dependent upon future operating results of the
combined businesses, this arrangement offering the prospect (subject to the
future performance of the combined businesses) of a satisfactory ultimate
return on this investment.
Net assets, revenue and dividends
Net revenue attributable to shareholders for the year was �84,000 (2002: �
610,000), which was derived from dividends on listed equities, interest on
bonds and bank deposit interest. The decline in net revenue as compared with
the previous year principally reflects the reduction in the level of bond
interest (as the bond portfolio has been gradually reduced to fund venture
capital investment).
Dividends totalling 2.9 pence per share have been paid in respect of previous
years, representing tax-free income for eligible shareholders. No dividend has
been proposed in respect of the year ended 31 October 2003.
Valuation changes over the year in respect of venture capital investments,
together with valuation changes in respect of the listed equity and bond
portfolios and expenses charged to capital, amounted to a net recognised loss
of �2.6 million or 4.8 pence per share. The overall result is a reduction in
the net asset value per share from 81.8 pence at 31 October 2002 to 77.2 pence
at 31 October 2003.
Shareholders should note that the future payment of dividends will depend both
on the level of income received from investments and, more significantly, on
realized capital gains, so that there may be no dividend in some years. It is
unlikely that a dividend will be payable for the year ending 31 October 2004.
Outlook
It should be appreciated that the investments completed by the Company are, in
most cases, at an early stage and will take time to mature.
The Board considers that the portfolio of investments that has now been
constructed, covering a diverse range of companies operating in high-growth
sectors, is capable of delivering attractive returns to shareholders in the
longer term.
Robert Wright
Chairman
15 January 2004
INVESTMENT MANAGER'S REPORT
Overview
We have made substantial progress towards completion of the initial investment
phase. We started the year with �20.2 million invested in 26 venture capital
investments and ended the year with �25.4 million invested in 31 venture
capital investments, giving a diversified portfolio of companies operating in a
wide range of markets with high growth potential. A further four new
investments have been completed since the year-end.
Recent months have proved an advantageous time to be investing in unquoted
companies. Despite the recent recovery in the quoted markets, and particularly
in quoted technology stocks, prices for unquoted companies' shares have
generally remained at the lower levels seen over the last two years and
competition for deals has remained limited. Attractive investment opportunities
have been available providing the potential for the achievement of good returns
to shareholders over the long term.
After the difficult conditions in the venture capital market in the early part
of the year, it has been encouraging in more recent months that a number of key
companies in the portfolio have been successful in raising new funding rounds -
from syndicates that have attracted other leading venture capital firms as new
investors, as well as including further participation from the Company and
other Quester funds.
Another encouraging development has been the re-emergence of M&A activity in
the unquoted company sector. Since the year-end, the Company has benefited from
the realisation of one of its earliest investments - CDC Solutions Limited, a
software company, one of the leading providers of regulatory publishing
solutions for the life sciences industry.
Progress with venture capital investment
Quester's position in the market has continued to attract a strong flow of
investment opportunities. From among those selected during the year as having
attractive growth potential, five investments were completed by 31 October
2003, with �3.0 million being invested on behalf of Quester VCT 4.A further
four new investments sourced and subject to due diligence during the year have
been completed subsequently, with �2.2 million being invested on behalf of
Quester VCT 4.
In addition, �3.3 million was invested during the year in 12 of the existing
portfolio companies, either as further tranches of originally agreed commitment
or as follow-on investment. Since the year-end, a further �1.4 million has been
invested in significant follow-on funding rounds of another five portfolio
companies.
Investments completed during the year brought the total of Quester VCT 4's
venture capital investments at 31 October 2003 to �25.4 million in 31 portfolio
companies at an average cost of �818,000. At the date of this report the
portfolio has grown to 35 companies at a total cost of �29.0 million, with
outstanding legal commitments to existing portfolio companies totalling a
further �125,000.
The portfolio that we have been building for Quester VCT 4 is an early stage
venture capital portfolio, consisting largely of technology-related companies
serving markets with considerable potential over the long term. The summary of
the businesses of the ten largest investments gives a flavour of the
significant commercial opportunities that companies in the portfolio are
seeking to address.
It is emphasised, however, that most of the companies concerned are still at a
relatively early stage of development. For those involved in technology-related
opportunities, even where the underlying business development is in line with
plan, there will at this stage be only limited, if any, sales revenues and the
company will typically remain lossmaking.
The net amounts invested in new companies during the year are as follows:
Company Industry Sector �'000
Advanced Valve Technologies Limited Industrial products & 519
services
Oxford Immunotec Limited Healthcare & life sciences 625
Oxxon Pharmaccines Limited Healthcare & life sciences 987
Reqio Limited Software 580
Xention Discovery Limited Healthcare & life sciences 333
3,044
The four additional investments completed since the year end include two in the
electronics sector, Mesophotonics Limited (�761,000) and Amino Holdings plc (�
357,000); one in software, Digital Union Limited (�536,000); and one in
consumer services, HTC Healthcare Limited (�536,000).
The further net investments made during the year in existing portfolio
companies are detailed as follows:
Company Industry Sector �'000
AIT Group plc Software 463
Anadigm Limited Semiconductors 144
Antenova Limited Communications 250
Arithmatica Limited Semiconductors 483
Azea Networks Limited Communications 1,037
Elateral Holdings Limited Software 155
Nexagent Limited Software 203
Printable Field Emitters Limited Electronics 174
Sterix Limited Healthcare & life sciences 317
Others (3) 118
3,344
Since the year end follow-on investments have been completed in relation to two
of the Company's holdings in the technology sector, with additional commitments
to Cyclacel Limited (�500,000), Lorantis Holdings Limited (�650,000) and
Teraview Limited (�125,000).
A well balanced portfolio
The portfolio so far established is balanced by sector and well spread. A
summary of the sectors covered by the portfolio at 31 October 2003 is provided
in the table below:
Industry Sector Percentage of Cost Number of
portfolio at investments
valuation �'000
%
Software 26.8 6,797 8
Healthcare & life sciences 22.2 5,620 9
Communications 14.7 3,720 4
Industrial products & 11.4 2,892 3
services
Semiconductors 10.4 2,630 2
Internet 5.5 1,402 2
Electronics 5.1 1,292 2
Energy 3.9 1,000 1
100.0 25,353 31
Reserves for follow-on investment
The young companies in which Quester VCT 4 has invested will require further
rounds of finance as they grow. It is important that Quester VCT 4 should be in
a position to contribute to this funding process, provided the companies
concerned continue to make satisfactory progress. It is, therefore,
particularly important in current market conditions, where fund-raising for
young technology companies remains difficult that Quester VCT 4 holds reserves
for further investment in existing portfolio companies. The retention of
reserves for follow-on investment is of particular importance in constructing a
portfolio of this type, and is one of the reasons why we consider that a
venture capital portfolio of about 35 investments is now appropriate for the
company.
The VCT legislation requires that, with effect from 31 October 2003, at least
70% of the Company's investments must be represented by qualifying holdings
(within the definitions laid down by the Inland Revenue). In the context of the
investment strategy described above, the Manager has considered it
inappropriate to accelerate the rate of new investment beyond the level
achieved. Accordingly, in order that the 70% requirement is complied with, part
of the Company's funds have been switched out of bonds and into non-interest
bearing cash accounts. This will result in a reduction in the income of the
Company but permits the venture capital portfolio to be constructed in a manner
that is appropriate to current market conditions and in the interests of
long-term capital growth.
Valuation of the venture capital portfolio
The venture capital investments have been valued in line with the accounting
policies, which are based on the new valuation guidelines issued by the British
Venture Capital Association (BVCA) in June 2003.The application of the new
guidelines, which require the estimation of "fair value" of each of the venture
capital investments, has involved a review of the progress and prospects of
each of the 31 companies in the portfolio as well as the implications of
current conditions in the market for venture capital finance.
As mentioned previously, a number of Quester VCT 4's portfolio companies have
recently had success in raising new funding rounds. However, in certain cases,
current conditions in the investment market have meant that the new round has
been priced at a lower level than previously. In each of these cases, however,
we are satisfied that the company concerned has made good progress and that
there are strong prospects for Quester VCT 4 achieving an ultimate realisation
at a multiple of its total cost of investment.
In a number of the technology-based sectors in which Quester VCT 4 holds
investments, business conditions have been very difficult, and in certain cases
markets have not developed as rapidly as had been anticipated. A number of the
companies in which Quester VCT 4 has invested have suffered as a result: in
such cases, the underperformance has been reflected by making a provision
against cost reflecting the estimated impairment of value.
In contrast, a number of companies about which we previously had concerns have
more recently shown greater potential. As a result we have been able to release
some or all of the provisions previously made against these companies.
The net effect of valuation changes during the year, including those considered
to be permanent diminutions in value, has been a reduction in the carrying
value of venture capital investments of �2.7 million. The cumulative total of
valuation reductions against cost (net of valuation increases) at 31 October
2003 is �5.5 million.
Realisation of venture capital investments
Since the year end, the Company's investment in CDC Solutions has been sold to
a subsidiary of the US-based information services group Information Holdings
Inc. ("IHI"). The terms of the acquisition have resulted in the Company being
in a position whereby it will receive at least its cost back in cash and cash
equivalents. Depending on future performance, a multiple of cost may be
achieved.
Listed equity and bond portfolio
At the outset, approximately �7.6 million, representing 15% of net funds
raised, was set aside as a reserve for further investment; this reserve to be
invested in a portfolio of listed equities managed by Newton Investment
Management Limited. As at 31 October 2003, a total of �5.2 million at cost was
held invested in listed equities, representing some 68% of the funds allocated
to this portfolio, with the balance, net of realised losses, being retained in
cash or bonds. The valuation of the portfolio of listed equities as at the
year-end was �5.1 million.
Until immediately prior to 31 October 2003, funds awaiting investment in
venture capital opportunities were largely invested in short dated bonds. A
proportion of this portfolio was switched into venture capital investments
during the year, and the entire remaining balance (other than bonds to a value
of �1.7 million) was then switched into cash for the reasons as explained above
under "Reserves for Follow-On Investment".
As a result of the switch of assets out of bonds into the venture capital
portfolio, and of the remaining bonds into cash, it is expected that there will
be a substantial reduction in the level of interest income of the Company in
the year ending 31 October 2004.
Conclusion
As at the date of this report, the initial investment phase of the Company is
largely complete with a portfolio of 35 venture capital investments. The total
number of venture capital investments will be kept under review and further
investments will be made if appropriate.
While a number of the companies in which Quester VCT 4 has invested have not
met their objectives during the period, we are pleased to report that others
continue to show the potential to fulfil expectations. Overall, we are
confident that the portfolio has substantial upside potential.
Quester Capital Management Limited
15 January 2004
FUND SUMMARY AS AT 31 OCTOBER 2003
Ten largest venture capital Industry sector Cost Valuation % of
investments by value fund
�'000 �'000
by value
AIT Group plc* Software 1,130 1,948 4.7%
Arithmatica Limited ** Semiconductors 1,486 1,486 3.6%
Azea Networks Limited Communications 1,332 1,332 3.3%
Anadigm Limited Semiconductors 1,144 1,144 2.8%
First Index Group Limited Industrial products & 1,373 1,030 2.5%
services
Workshare Limited Software 1,000 1,000 2.5%
CDC Solutions Limited Software 1,000 1,000 2.5%
Footfall Limited Industrial products & 1,000 1,000 2.5%
services
Oxxon Pharmaccines Limited Healthcare & life 987 987 2.4%
sciences
Nomad Software Limited Software 1,000 900 2.2%
11,452 11,827 29.0%
Other venture capital 13,901 8,029 19.7%
investments
Total venture capital investments 25,353 19,856 48.7%
Listed fixed interest 1,733 1,733 4.3%
investments
Listed equity investments 5,203 5,098 12.5%
Total investments 32,289 26,687 65.5%
Cash and other net assets 14,052 14,052 34.5%
Net assets 46,341 40,739 100.0%
* AIT Group plc is traded on the Alternative Investment Market (AIM)
** Formerly know as Automatic Parrallel DesignsSTATEMENT OF TOTAL RETURN
(incorporating the revenue account)
FOR THE YEAR ENDED 31 OCTOBER 2003
Notes 2003 2003 2003 2002 2002 2002
Revenue Capital Total Total
Revenue Capital
�'000 �'000 �'000 �'000
�'000 �'000
Loss on investments - (2,056) (2,056) - (5,008) (5,008)
Income 1 1,016 - 1,016 1,479 - 1,479
Investment management 2 (501) (501) (1,002) (481) (481) (962)
fee
Other expenses 3 (436) - (436) (296) - (296)
Return on ordinary 79 (2,557) (2,478) 702 (5,489) (4,787)
activities before tax
Tax on ordinary 5 5 (1) 4 (92) 86 (6)
activities
Return on ordinary 84 (2,558) (2,474) 610 (5,403) (4,793)
activities after tax
Dividends proposed 6 - - - (607) - (607)
Transfer to /(from) 84 (2,558) (2,474) 3 (5,403) (5,400)
reserves
Return per share 7 0.2p (4.8)p (4.6)p 1.2p (10.2)p (9.0)p
The revenue column of this statement is the profit and loss account of the
Company.
All revenue and capital 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.
The accompanying notes are an integral part of this statement.
BALANCE SHEET
AS AT 31 OCTOBER 2003
Note 2003 2002
�'000 �'000
Fixed assets
Investments 26,687 42,054
Current assets
Debtors 609 3,099
Cash at bank 13,809 1,320
14,418 4,419
Creditors (amounts falling due within one year) (266) (3,178)
Net current assets 14,152 1,241
Creditors (amounts falling due after more than 1 (100) (97)
one year)
Net assets 40,739 43,198
Capital and reserves
Called-up equity share capital 528 528
Share premium 218 137
Special reserve 49,466 49,532
Capital reserve - realised (3,993) (2,140)
- unrealised (5,602) (4,897)
Revenue reserve 122 38
Equity shareholders' funds 40,739 43,198
Net asset value per share 8 77.2p 81.8p
The financial statements were approved by the directors on 15 January 2004 and
are signed on their behalf by:
Robert Wright
Chairman
The accompanying notes are an integral part of this statement.
CASHFLOW STATEMENT
FOR THE YEAR ENDED 31 OCTOBER 2003
2003 2002
�'000 �'000
Net cash inflow from operating activities 327 926
Corporation tax paid (23) (281)
Financial investment
Purchase of venture capital investments (6,496) (8,419)
Purchase of listed equities and fixed interest (25,083) (46,217)
investments
Sale/redemption of venture capital investments 108 14
Sale/redemption of listed equity and fixed 44,248 52,308
interest investments
Total financial investment 12,777 (2,314)
Equity dividends paid (607) (925)
Financing
Issue of ordinary shares in accordance with the 82 139
terms of the dividend reinvestment scheme
Buy-back of ordinary shares (67) (172)
Total financing 15 (33)
Increase / (decrease) in cash for the period 12,489 (2,627)
Reconciliation of net cash flow to movement
in net funds
Increase /(decrease) in cash for the period 12,489 (2,627)
Net funds balance at the start of the period 1,320 3,947
Net funds at the end of the period 13,809 1,320
The accompanying notes are an integral part of this statement.
NOTES TO THE FINANCIAL STATEMENTS
1 Income 2003 2002
�'000 �'000
Dividend income
Listed equity shares 132 101
Interest receivable
Listed fixed interest securities 735 1,276
Loans to unquoted companies 4 5
Bank deposits 137 96
Sundry income 8 1
1,016 1,479
2 Investment Management Fee
Quester Capital Management Limited ("QCML") provides investment management
services to the Company under an agreement dated 30 October 2000.
Quester 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.
A charge of �1,002,000 (2002: �962,000) in respect of the management fee
payable to QCML was accrued during the year, irrecoverableVAT of �185,000
(2002: �96,000) was also charged. Of this, �91,000 remained unpaid as at 31
October 2003.The fee, which is calculated monthly and is payable in advance,
was levied at a rate of 2.5% (2002: 2.0%) on the net assets during the
financial year ended 31 October 2003.
The management fee payable to Newton Investment Management Limited, to the
extent that it is not covered by transaction fees payable by the Company, will
be met by QCML out of the above fee.
QCML provides administrative and secretarial services to the Company for which
it is entitled to a fee of �51,000 per annum (linked to the movement in the
RPI), which is included in other expenses (note 3).
* Other expenses 2003 2002
�'000 �'000
Administration and secretarial services 51 51
Directors' remuneration (note 4) 39 39
Auditor's remuneration - audit services 21 19
- non audit services 10 5
Legal and professional expenses 27 22
Other expenses 71 42
Irrecoverable VAT 217 118
436 296
* Directors' remuneration
2003 2002
�'000 �'000
Fees paid to directors 15 12
Amounts paid to third parties, excluding VAT, in 24 27
consideration of the services of directors
39 39
The total fees paid or payable in respect of individual directors for the year
is detailed in the Directors' remuneration section in the Annual Report.
5 Tax on ordinary activities
2003 2003 2002 2002
Revenue � Capital � Revenue � Capital �
'000 '000 '000 '000
Corporation tax payable
- current year - - 120 (93)
- prior year adjustment 5 (1) (28) 7
5 (1) 92 (86)
Reconciliation of profit on ordinary activities to taxation
2003 2003 2002 2002
Revenue � Capital � Revenue � Capital �
'000 '000 '000 '000
Profit on ordinary activities before tax 79 (2,557) 702 (5,489)
Tax on profit on ordinary activities at 24 (767) 211 (1,647)
standard UK corporation tax rate of 30%
(2002:30%)
Effects of:
Loss on investments - 617 - 1,502
Disallowable items (24) 150 (20) -
Marginal relief for small companies - - (71) 52
Current year corporation tax payable - - 120 (93)
6 Dividends proposed
2003 2002
�'000 �'000
Final dividend: nil (2002: 1.15p per share) - 607
7 Return per share
The revenue return per share of 0.2p (2002: 1.2p) is based on the aggregate of
the net return from ordinary activities after tax of �84,000 (2002: �610,000)
and on ordinary shares of 52,791,612 (2002: 52,905,315), being the weighted
average number of shares in issue during the year.
The capital loss per share of 4.8p (2002: 10.2p) is based on the net realised
and unrealised capital loss for the period after tax of �2,558,000 (2002: �
5,403,000) and on ordinary shares of 52,791,612 (2002: 52,905,315), being the
weighted average number of shares in issue during the year.
8 Net asset value per share
The net asset value per share as at 31 October 2003 of 77.2p (2002: 81.8p) is
based
on net assets of �40,739,000 (2002: �43,198,000) divided by the 52,781,815
(2002: 52,780,452) 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 31 October 2003. The statutory accounts
for the year ended 31 October 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 has been 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 31 October 2003 are
expected to be posted to shareholders on 16th January 2004 and will be
available to the public at the registered office of the Company at 29 Queen
Anne's Gate, London, SW1H 9BU.
END
