QUESTER VCT 4 PLC ("the Company")
Summary of results for the year ended 31 October 2004
Per Ordinary Share 2004 2003 2002
(pence)
Capital Values
Net asset value 67.7 77.2 81.8
Share price 62.0 82.5 82.5
Return and Dividends
Dividend - - 1.2
Cumulative dividend 2.9 2.9 2.9
Total Return* 70.6 80.1 84.7
Interim dividend for 1.0
the year ending 31
October 2005
*Net asset value plus cumulative dividend
Shareholder information
Annual General Meeting 11.30 a.m. on 22 February 2005
Dividend for 2004/2005 1p
Payment date 1 April 2005
Ex dividend date 2 March 2005
Record date 4 March 2005
CHAIRMAN'S STATEMENT
Introduction
During the year, Quester's position in the market continued to attract a strong
flow of investment opportunities. The initial investment phase of the Company
is now essentially complete. The overall funding environment for small
companies is now better than for some time. During the year it was encouraging
that a number of key companies in the portfolio were able to close follow on
funding rounds on satisfactory terms, or are planning to do so shortly. Looking
ahead to possible opportunities for successful sales of new and developing
businesses, it has been encouraging to see a higher level of merger and
acquisition (M&A) activity by larger companies and stock market conditions more
conducive to the achievement of successful flotations, particularly for smaller
companies on the Alternative Investment Market (AIM).
Investments completed
In the current economic environment, with an expectation of relatively low
overall growth and low inflation, it has been the Board's view that a strategy
of investing in high-growth sectors within the economy offers the best
opportunity for the achievement of superior investment returns.
Accordingly, the portfolio of Quester VCT 4, now covering 35 companies
including 29 unquoted companies and six companies whose shares are traded on
AIM or NASDAQ, includes a strong weighting in the ICT and healthcare and life
sciences sectors. The portfolio is well diversified and includes companies
operating in a wide range of markets with high growth potential. Other than in
relation to its early investments and AIM companies, Quester VCT 4 has
generally coinvested alongside Quester's fund for institutional investors, the
Quester Venture Partnership, and other Quester funds. These co-investment
arrangements are appropriate to the needs of ambitious high growth companies,
which may require significant amounts of capital to develop technology based
products or to grow their businesses internationally.
Progress of the portfolio
Shareholders will appreciate that venture capital is a long-term investment
which, in the first few years, may often show a drop in net asset value before
showing any significant uplift, reflecting initial costs and management fees
and the writing down in value of troubled or failed investments which may occur
in the first few years of the life of a fund. At the end of this fourth year,
the portfolio still contains a relatively high proportion of early stage
businesses. In a number of the technology-based sectors in which Quester VCT 4
has holdings, markets have not developed as rapidly as had been anticipated.
Some of the portfolio companies have suffered as a result, with business
performance falling behind plan. Provisions totalling �5.1 million have been
made in respect of 11 unquoted investments. Other portfolio companies 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.
Trade sales and flotations
It is encouraging to be able to report that successful trade sales or
flotations of four venture capital investments were achieved during the year.
These included two realisations for cash, which have together produced realised
gains in the year ended 31 October 2004 of �1,443,000.
The other two transactions have resulted in the Company holding quoted stock in
the acquirer and/or an entitlement to future earn-out consideration. At this
stage the sale of CDC Solutions Limited has been accounted for on a no profit/
no loss basis, while the sale of On Demand Distribution Limited to Loudeye
Corporation ("Loudeye") has produced only a modest unrealised gain. Both
transactions offer significant potential for future uplift in valuation,
through share price performance (in the case of Loudeye) and under the earn-out
entitlements.
Net assets, revenue and dividends
During the year, there was a 12.3% reduction in the net asset value per share
of the Company, from 77.2p at 31 October 2003 to 67.7p at 31 October 2004.
The movement in net assets is summarised as follows:
�'000 Pence per
share
Net asset value at 31 October 2003 40,739 77.2
Income 267 0.5
Investment management fee and other expenses (1,330) (2.5)
Realised net gains on disposal of investments 1,606 3.1
Write-off of investments (1,052) (2.0)
Net unrealised losses on revaluation of investments (4,500) (8.6)
Share buy-backs (serving to enhance NAV by 0.04p per (490) -
share)
Net asset value at 31 October 2004 35,240 67.7
The statement of total return for the year ended 31 October 2004 shows a loss
of �5,009,000, equivalent to 9.5p per share. This comprises a loss of �577,000
on revenue account, with the balance being attributable to capital account.
Against this background, the Directors are not recommending a final dividend
for the year ended 31 October 2004. However, it is intended that the Company
should shortly revoke its investment company status, to enable a dividend to be
paid in respect of the realised gains achieved on venture capital investments
during the year. This will be paid as an interim dividend in respect of the
year ending 31 October 2005 of 1.0p per share, payable on 1 April 2005.
Change of corporate broker and market makers
In July 2004 the Company appointed Noble & Company Limited as its corporate
broker, replacing Evolution Beeson Gregory Limited. Following this change,
Winterflood Securities Limited became market makers in the Company's shares.
Outlook
The investments completed by the Company are, in most cases, still 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
21 January 2005
INVESTMENT MANAGER'S REPORT
Progress with venture capital investment
During the year ended 31 October 2004, 11 new investments were completed at an
initial cost of �4.1 million.
The new investments included six in unquoted companies: three in software,
Argelcom Limited (�89,000), Celona Technologies Limited (�321,000) and Digital
Union (UK) Limited (�536,000); one in communications, Amino Technologies plc (�
357,000); one in electronics, Mesophotonics Limited (�893,000); and one in
consumer services, HTC Healthcare Limited (�536,000).
In pursuit of the Company's strategy to invest in attractive companies raising
capital on AIM, a total of �1.3 million was invested in five companies covering
a range of different sectors: Allergy Therapeutics plc, Offshore Hydrocarbon
Mapping plc, Polaron plc, Public Recruitment Group plc and Quadnetics Group
plc.
An additional �2.9 million was invested in 16 of the existing portfolio
companies, either as further tranches of originally agreed commitment or as
follow-on investment. The follow-on investments included additional commitments
to Advanced Valve Technologies Limited (�544,000), Cylacel Group plc (�
500,000), Lorantis Holdings Limited (�650,000) and Teraview Limited (�250,000).
As previously reported, 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.
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, there may at this stage still be only limited, if any, sales
revenues and a reported financial loss. This pattern of financial results
should be appreciated as typical of early-stage companies exploiting
technology-related opportunities and their business plan.
Trade sales and flotations
We are pleased to be able to report that successful trade sales or flotations
of four venture capital investments were achieved during the year, including
two realisations for cash and two transactions resulting in the Company holding
quoted stock in the acquirer and/or an entitlement to future earnout
consideration:
* The biopharmaceutical company Sterix Limited was sold in February 2004 to the
European pharmaceutical group Ipsen, Quester VCT 4's investment realising cash
proceeds of �1,062,000 and generating a gain of �495,000 on cost of �567,000.
* The holding in Amino Technologies plc, which had been acquired for �357,000
in November 2003 as an unquoted investment, was sold in tranches upon the
admission of the company's shares to trading on AIM in June 2004 and
subsequently, realising total proceeds of �1,305,000 and a gain of �948,000.
* The digital music service provider On Demand Distribution Limited ("OD2") was
acquired by the NASDAQ-quoted company Loudeye Corporation ("Loudeye") in June
2004, to create the largest business-to-business digital media provider in the
world with the largest licensed digital music catalogue in the industry. For
Quester VCT 4, the initial consideration received in the form of Loudeye shares
- based on the last traded price of these shares on NASDAQ, appropriately
discounted - and the accounting value of the deferred consideration receivable
together amount as at 31 October 2004 to �694,000, producing an unrealised gain
at this stage of �126,000. The ultimate return to Quester VCT 4 will depend
upon movements in Loudeye's share price, foreign exchange movements and the
future performance of the business itself (under an earn-out entitlement).
* The software company CDC Solutions Limited ("CDC") was sold in December 2003
to Information Holdings Inc., a US-based information services group (since
acquired by The Thomson Corporation) which is the parent company of Liquent,
Inc. ("Liquent"), hitherto CDC's major competitor. The CDC board and Quester
considered that CDC shareholders would ultimately benefit from a merger of the
two companies and their improved prospects for growth as a combined business.
Quester VCT 4's investment was sold for cash and cash equivalents repaying a
substantial part of the original �1.0 million cost of this investment.
Depending upon the future performance of the combined business over the coming
two years, a good uplift on cost may ultimately be achieved, under an earn-out
entitlement. At 31 October 2004, this transaction has been reflected in the
accounts on a no profit/no loss basis.
In addition, in July 2004 the Company sold its holding in Offshore Hydrocarbon
Mapping plc, which had been acquired for �175,000 in March 2004, realising a
gain of �53,000.
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 2004 is provided
in the table below:
Industry sector Existing venture Valuation Number of
capital investments
portfolio at
valuation
% �'000
Healthcare & life sciences 33.8 6,368 9
Software 23.0 4,330 10
Industrial products & services 12.1 2,270 4
Communications 11.6 2,184 4
Internet 7.2 1,350 2
Electronics 6.0 1,125 3
Semiconductors 3.5 652 2
Consumer goods & services 2.8 536 1
100.0 18,815 35
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 holds
reserves to cover this funding process, provided the companies concerned
continue to make satisfactory progress. This is particularly important for a
portfolio of this type, and is one of the reasons why we consider that a
venture capital portfolio of about 35 investments is appropriate for the
Company.
Under the VCT legislation, at least 70% of the Company's investments have to be
represented by qualifying holdings. In order to comply with this requirement
and maintain an appropriate level of reserves, �5.6 million was held in
non-interest bearing cash accounts at the year end (this balance is expected to
be significantly reduced by the end of the current year). This results in a
lower level of interest income but is consistent with managing the venture
capital portfolio appropriately for current market conditions and long-term
capital growth.
Valuation of the venture capital portfolio
The venture capital investments have been valued in line with the Company's
accounting policies, which are based on the valuation guidelines issued by the
British Venture Capital Association ("BVCA") in June 2003.
Holdings in companies whose shares are traded on AIM are valued on the basis of
mid-market price on 31 October 2004. It was disappointing that AIT Group plc,
which had reported satisfactory results for its financial year ended 31 March
2004, was obliged in August 2004 to issue an announcement that expectations for
the year to 31 March 2005 would be lower than anticipated. The share price fell
following that announcement and stood at 33p as at 31 October 2004. For Quester
VCT 4, the effect was a reduction of �1,066,000 over the year in carrying value
of this investment (the valuation at 31 October 2004 being �883,000 against
cost of �1,130,000). Other AIM investments showed a net appreciation in value
of �201,000.
As regards the unquoted investments, in a number of the technology-based
sectors in which Quester VCT 4 has holdings, markets have not developed as
rapidly as had been anticipated. Some of the companies in the Quester VCT 4
portfolio have suffered as a result, with business performance falling behind
plan. Provisions have been made against cost of the investments concerned:
these total �5.1 million in respect of 11 unquoted investments, including
Advanced Valve Technologies Limited (�74,000), Anadigm Limited (�1,055,000),
Anthropics Technology Limited (�250,000), Arithmatica Limited (�1,057,000),
First Index Limited (�1,030,000), Mesophotonics Limited (�223,000), Nexagent
Limited (�311,000), Nomad Software Limited (�450,000), Printable Field Emitters
Limited (�22,000) and Reqio Limited (�580,000). The investments in First Index
Group Limited and Printable Field Emitters Limited have now been treated as
write-offs.
Teraview Limited closed a new funding round at a higher price, resulting in a
valuation uplift of �108,000. The carrying value of the investment in Sift
Group plc has been reduced by �219,000 to reflect current valuation conditions
in the venture capital market.
Overall, write-offs resulting from business failures totalled �1.0 million,
while the net reduction in carrying value of the ongoing portfolio of unquoted
venture capital investments amounted to �4.1 million.
As at 31 October 2004, the Company held entitlements to additional earn-out
consideration following two of the trade sales (CDC and OD2), which may in due
course add to the overall portfolio valuation.
Listed equity and bond portfolios
At 31 October 2004 the Company retained bonds to a value of �876,000. In
addition, at 31 October 2004 the Company held a portfolio of listed equities
valued at �6.1 million (showing an unrealised capital profit of �312,000).
Conclusion
As at the date of this report, the initial investment phase of the Company is
essentially 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, it is pleasing to see a significant evolution of the
portfolio with a number of trade sales and flotations having been achieved
which will lead in due course to full realisation of these investments. Other
portfolio companies continue to show the potential to fulfil expectations.
Overall, we are confident that the portfolio has substantial upside potential.
Quester Capital Management Limited
Manager
21 January 2005
FUND SUMMARY AS AT 31 OCTOBER 2004
Quoted venture Industry sector Original Valuation Equity % % of fund
capital
Investments cost held by value
�'000 �'000
AIT Group plc Software 1,130 883 5.8% 2.5%
Allergy Therapeutics Healthcare and life 500 510 1.1% 1.4%
plc sciences
Loudeye Corp. Internet 568 694 0.8% 2.0%
Polaron plc Industrial products 250 308 1.2% 0.9%
and services
Public Recruitment Industrial products 250 233 0.8% 0.6%
Group plc and services
Quadnetics Group plc Electronics 143 167 0.5% 0.5%
Total quoted venture capital investments 2,841 2,795 7.9%
Unquoted venture
capital
Advanced Valve Industrial products 1,062 729 26.4% 2.1%
Technologies Limited and services
Anadigm Limited Semiconductors 1,278 223 2.8% 0.6%
Antenova Limited Communications 999 750 6.8% 2.1%
Anthropics Technology Communications 1,070 70 7.0% 0.2%
Limited
Argelcom Limited Software 89 89 6.2% 0.3%
Arithmatica Limited Semiconductors 1,486 429 13.7% 1.2%
Avidex Limited Healthcare & life 801 801 2.8% 2.3%
sciences
Azea Networks, Inc Communications 1,332 1,332 6.8% 3.8%
BlazePhotonics Communications 514 32 2.9% 0.1%
Limited
Celona Technologies Software 321 321 9.0% 0.9%
Limited
Celoxica Holdings Software 1,148 648 2.8% 1.9%
Limited
Cyclacel Group plc Healthcare & life 1,000 1,000 1.4% 2.9%
sciences
De Novo Healthcare & life 750 187 2.8% 0.5%
Pharmaceuticals sciences
Limited
Digital Union UK Software 536 536 13.4% 1.5%
Limited
Elateral Holdings Software 1,155 155 15.5% 0.5%
Limited
Footfall Limited Industrial products 1,000 1,000 7.7% 2.8%
and services
HTC Healthcare Group Consumer goods and 536 536 8.7% 1.5%
plc services
Lorantis Holdings Healthcare & life 1,400 1,025 2.5% 2.9%
Limited sciences
Mesophotonics Limited Electronics 893 670 6.0% 1.9%
Nexagent Limited Software 467 117 1.2% 0.3%
Nomad Software Software 1,087 537 6.5% 1.5%
Limited
Opsys Limited Electronics 1,038 288 2.9% 0.8%
Oxford Immunotec Healthcare & life 625 625 9.6% 1.8%
Limited sciences
Oxxon Therapeutics Healthcare & life 987 987 3.5% 2.8%
Holdings, Inc. sciences
Reqio Limited Software 624 44 12.2% 0.1%
Sift Group Limited Internet 875 656 4.5% 1.9%
Teraview Limited Healthcare & life 625 733 4.9% 2.1%
sciences
Workshare Limited Software 1,000 1,000 6.6% 2.8%
Xention Discovery Healthcare & life 500 500 5.8% 1.4%
Limited sciences
Total unquoted venture capital 25,198 16,020 45.5%
investments
Total venture capital 28,039 18,815 53.4%
investments
Listed fixed interest 852 876 2.5%
investments
Listed equity investments 5,811 6,123 17.4%
Total investments 34,702 25,814 73.3%
Cash and other net assets 9,426 9,426 26.7%
Net assets 44,128 35,240 100%
STATEMENT OF TOTAL RETURN (incorporating the revenue account)
FOR THE YEAR ENDED 31 OCTOBER 2004
Notes 2004 2004 2004 2003 2003 2003
Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
Loss on investments - (3,946) (3,946) - (2,056) (2,056)
Income 2 267 - 267 1,016 - 1,016
Investment management 3 (486) (486) (972) (501) (501) (1,002)
fee
Other expenses 4 (358) - (358) (436) - (436)
Return on ordinary (577) (4,432) (5,009) 79 (2,557) (2,478)
activities before tax
Tax on ordinary 6 - - - 5 (1) 4
activities
Return on ordinary (577) (4,432) (5,009) 84 (2,558) (2,474)
activities after tax
Dividends proposed - - - - - -
Transfer (from)/ to (577) (4,432) (5,009) 84 (2,558) (2,474)
reserves
Return per share 7 (1.1)p (8.4)p (9.5)p 0.2p (4.8)p (4.6)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 2004
Note 2004 2003
�'000 �'000
Fixed assets
Investments 25,814 26,687
Current assets
Debtors 578 609
Cash at bank 9,185 13,809
9,763 14,418
Creditors (amounts falling due within one year) (237) (266)
Net current assets 9,526 14,152
Creditors (amounts falling due in over one (100) (100)
year)
Net assets 35,240 40,739
Capital and reserves
Called-up equity share capital 520 528
Share premium 218 218
Special reserve 41,975 49,466
Capital reserve - realised 619 (3,993)
- unrealised (7,637) (5,602)
Revenue reserve (455) 122
Equity shareholders' funds 35,240 40,739
Net asset value per share 15 67.7p 77.2p
The financial statements were approved by the directors on 21 January 2005 and
were 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 2004
Notes 2004 2003
�'000 �'000
Cash outflow from operating activities (1,030) 327
Corporation tax paid - (23)
Financial investment
Purchase of venture capital investments (6,993) (6,496)
Purchase of listed equities and fixed interest (2,557) (25,083)
investments
Sale/redemption of venture capital investments 3,715 108
Sale/redemption of listed equity and fixed 2,731 44,248
interest investments
Total financial investment (3,104) 12,777
Equity dividends paid - (607)
Financing
Issue of shares in accordance with the terms of - 82
the dividend reinvestment scheme
Buy back of shares (490) (67)
Total financing (490) 15
(Decrease) / increase in cash for the period (4,624) 12,489
Reconciliation of net cash flow to movement
in net funds
(Decrease) / increase in cash for the period (4,624) 12,489
Net funds at the start of the period 13,809 1,320
Net funds at the end of the period 9,185 13,809
The accompanying notes are an integral part of this statement.
NOTES TO THE FINANCIAL STATEMENTS
2 Income 2004 2003
�'000 �'000
Dividend income
Listed equity shares 179 132
Interest receivable
Fixed interest securities 39 735
Loans to unquoted companies - 4
Bank deposits 40 137
Sundry income 9 8
267 1,016
3 Investment management fee
Quester Capital Management Limited ("QCML") provides investment management
services to the Company under an agreement dated 30 October 2000.
A charge of �972,000 (2003: �1,002,000) in respect of the management fee
payable to QCML was accrued during the year together with irrecoverable VAT of
�181,000 (2003: �185,000). The fee, which is calculated monthly and is payable
in advance, was levied at a rate of 2.5% (2003: 2.5%) on the Company's net
assets during the financial year ended 31 October 2004.
The manager's appointment is for a fixed term which shall expire on the seventh
anniversary of the commencement of the fund and shall continue until terminated
by either party subject to a notice period. If such notice is given on or after
the seventh anniversary of the commencement of the fund, the notice period
shall be the longer of (i) twelve months and (ii) the period from the date on
which notice is given to the tenth anniversary of the commencement of the fund.
Thereafter the notice period shall be twelve months.
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 �53,000 per annum (linked to the movement in the
RPI). This fee is included in other expenses (note 4).
4 Other expenses 2004 2003
�'000 �'000
Administrative and secretarial services 53 51
Directors' remuneration (note 5) 39 39
Auditor's remuneration
- audit services 22 21
- non audit services 9 10
Insurance 11 7
Legal and professional expenses 21 27
UKLA, LSE and registrars fees 19 21
Other expenses (7) 43
Irrecoverable VAT 191 217
358 436
5 Directors' remuneration
2004 2003
�'000 �'000
Fees paid to directors 15 15
Amounts paid to third parties, excluding VAT, in 24 24
consideration of the services of directors
39 39
6 Tax on ordinary activities
2004 2004 2003 2003
Revenue Capital Revenue Capital
�'000 �'000 �'000 �'000
Corporation tax payable -prior - - 5 (1)
year adjustment
- - 5 (1)
Reconciliation of profit on
ordinary activities to taxation
2004 2004 2003 2003
Revenue Capital Revenue Capital
�'000 �'000 �'000 �'000
(Loss)/ profit on ordinary (577) (4,432) 79 (2,557)
activities before tax
Tax on profit on ordinary (173) (1,330) 24 (767)
activities at standard UK
corporation tax rate at 30%
(2003:30%)
Effects of:
Loss on investments - 1,184 - 617
Loss on operating activities 173 146 (24) 150
Prior year adjustment - - 5 (1)
- - 5 (1)
7 Return per share
The revenue loss per share of 1.1p (2003: profit of 0.2p) is based on the
aggregate of the net loss from ordinary activities after tax of �577,000 (2003:
profit of �84,000) and on ordinary shares of 52,471,757 (2003: 52,791,612),
being the weighted average number of shares in issue during the year.
The capital loss per share of 8.4p (2003: 4.8p) is based on the net realised
and unrealised capital loss for the period after tax of �4,432,000 (2003: �
2,558,000) and on ordinary shares of 52,471,757 (2003: 52,791,612), being the
weighted average number of shares in issue during the year.
15 Net asset value per share
The net asset value per share as at 31 October 2004 of 67.7p (2003: 77.2p) is
based on net assets of �35,240,000 (2003: �40,739,000) divided by the
52,047,965 (2003: 52,781,815) 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 2004. The statutory accounts
for the year ended 31 October 2004 will be finalised on the basis of the
financial information presented by the directors in the preliminary
announcement and will be delivered to the Registrar of Companies following the
Company's Annual General Meeting.
A copy of the above document 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 2004 are
expected to be posted to shareholders on 25 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
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