QUESTER VCT 3 PLC ("the Company")
Summary of results for the year ended 28 February 2003
Per Ordinary Share 2003 2002 2001
(pence)
Capital Values
Net asset value 50.8 73.7 93.7
Share price 62.5 80.0 90.0
Return and Dividends
Dividend - 0.15 1.75
Cumulative dividend 1.90 1.90 1.75
Total Return* 52.7 75.6 95.5
*Net asset value plus
cumulative dividend
Shareholder information
Annual General Meeting 09.45 a.m. on 24 June 2003
CHAIRMAN'S STATEMENT
Net assets
The year ended 28 February 2003 was a period of continuing difficulty for
businesses and markets in general and for younger, technology-based companies
in particular. Against this background, the net asset value of Quester VCT 3
plc, which began the year at �35.2 million (73.7p per share) fell to �30.4
million (63.6p per share) at the half year and to �24.2 million (50.8p per
share) at the year end. Whilst hugely disappointing, this decline is broadly in
line with the performance of a range of relevant UK indices for the period, as
illustrated in the Annual Report.
Venture capital portfolio performance
A number of companies made encouraging progress during the year. However, the
majority were adversely affected by the prevailing political and economic
situation. A rigorous review of each investment has been conducted, so as to
determine its fair value in present circumstances. This has resulted in
additional provisioning of an aggregate of �8.4 million against the carrying
value of 19 companies and this is reflected in the year end valuation. Of this
amount, �2.3 million represents amounts that the directors consider to be a
permanent diminution in value. The venture capital portfolio is more fully
discussed in the Investment Manager's report.
The absence of an IPO market and a flight of capital from the technology sector
has created a difficult financing environment for some of the companies in the
portfolio. They will therefore look to their existing investors to provide more
of their future funding than was originally envisaged. Quester VCT 3 has
anticipated this and has set aside funds to continue to back those companies
that merit further support. As a consequence of this, no new investments are
currently under consideration.
Total returns and dividends
The Company's statement of total return for the year, shows a negative return
of �10.9 million. This is made up of a negative capital return of �10.6 million
and a negative revenue return of �299,000.
The negative capital return includes �10.2 million of net losses on
investments.
This principally comprises the provisions and write offs against the venture
capital portfolio referred to above, with the balance made up of provisions and
net realised losses from the listed portfolio.
It is not proposed to pay a dividend. 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 the quantum of any such gains and the amount
and timing of future dividends remains uncertain.
Outlook
This has been a tough year for venture capital portfolios and the value of
investments has been substantially eroded. It is difficult to predict recovery
at the present time and there may yet be further reversals. However, we
consider that the portfolio is fairly valued and that it contains a number of
companies that have considerable potential.
I would like to thank our investment advisers for the efforts that they have
applied in working with companies during the year to protect and enhance the
value of the portfolio for the future.
The Annual General Meeting will be held at 9.45 a.m. on 24 June 2003 and I hope
that as many shareholders as possible will be able to attend.
David Quysner
Chairman
15 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% decline in the net asset value over the year from 73.7p to
50.8p, split 14% in the first half and 17% in the second half.
We continue to believe, however, that the portfolio holds attractive
investments with the potential for strong future capital growth.
Venture capital portfolio
Over the past year, business conditions faced by small companies, particularly
in technology-related sectors, have been very difficult. Generally the
companies in which Quester VCT 3 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 established to exploit a new technology, has become
increasingly difficult over the last two years.
Time scales to raise equity have lengthened. Prices have fallen. General
negative sentiment has caught both strong and weak propositions in the same
way. Against this background, provisions of �8.4 million have been made in
respect of 19 investments where the business has fallen behind plan or, in some
cases, to reflect lower values in the private equity market. It is
disappointing that four investments were fully written off during the year,
namely Assethouse Limited, Optical Micro Devices Limited, Purple House Limited
and Purple Technologies Limited. The
portfolio now contains 27 venture capital investments with a wide spread of
both risk and opportunity essential for venture capital investment, given the
inherent risks involved.
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, a total of �2.3 million has been invested
in 12 companies, as detailed in the table below:
Company Industry Sector �'000
Printable Field Emitters Limited Electronics 493
Reqio Limited Software 313
Avidex Limited Biotechnology 250
Antenova Limited Communications 250
BlazePhotonics Limited Communications 234
First Index Group Limited Industrial products & 166
services
Automatic Parallel Designs Limited Semiconductors 153
Casella Group Limited Industrial products & 150
services
Opsys Limited Electronics 118
Purple House Limited Other services 75
Sterix Limited Biotechnology 62
Assethouse Limited Software 23
2,287
Sector analysis of the venture capital portfolio
The portfolio of Quester VCT 3 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
Industrial products & 18 2,742 3
services
Software 15 2,281 6
Internet 14 2,130 3
Semiconductors 13 2,003 2
Biotechnology 10 1,591 4
Communications 7 1,128 3
Media 7 1,000 1
Electronics 6 950 2
Energy 5 832 1
Healthcare 5 750 2
100 15,407 27
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 judgement. 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 actions members of the team can
take in helping 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 the 12 unquoted
software, Internet and industrial products and services companies in the
portfolio during the first quarter of 2003, as compared with 2002, was
approximately 50%. This is clearly an 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. These samples of
companies and others of those involved in technology-related opportunities may
still have only limited sales revenues, 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 in the Annual
Report gives a flavour of the significant commercial opportunities that these
companies are seeking to address.
As noted above, many of the companies in which Quester VCT 3 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 in the listed equity, fixed interest and
cash portfolios are considered currently to be at a satisfactory level in
relation to the likely requirements.
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 �5.0 million against an overall
cost of �6.7 million as at the year end, reflecting a loss of some �1.7
million. Following the recent market gains, the portfolio's valuation has
increased by �387,000 or 7% as at 30 April 2003, since the year end.
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 �1.7
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.
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 young
and some years away from translating their potential into achievement, are well
positioned to deliver very strong growth, 30% p.a. or above. A further solid
core 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
15 May 2003
FUND SUMMARY AS AT 28 FEBRUARY 2003
Ten largest venture capital Industry sector Cost Valuation % of
investments fund
�'000 �'000
by value
Footfall Limited Industrial products & 1,450 1,450 6.0%
services
Automatic Parrallel Designs Semiconductors 1,003 1,003 4.2%
Limited
Anadigm Limited Semiconductors 1,000 1,000 4.1%
CDC Solutions Limited Software 1,000 1,000 4.1%
Imagesound Limited Media 1,000 1,000 4.1%
First Index Group Limited Industrial products & 1,291 969 4.0%
services
Sift Group Limited Internet 875 875 3.6%
Bowman Power Systems Limited Energy 1,026 832 3.5%
On Demand Distribution Internet 1,510 755 3.1%
Limited
Printable Field Emitters Electronics 1,349 674 2.8%
Limited
11,504 9,558 39.5%
Other venture capital 14,686 5,849 24.2%
investments
Total venture capital investments 26,190 15,407 63.7%
Listed fixed interest 1,657 1,660 6.9%
investments
Listed equity investments 6,662 5,021 20.7%
Total investments 34,509 22,088 91.3%
Cash and other net current assets 2,118 2,118 8.7%
Net assets 36,627 24,206 100.0%
STATEMENT OF TOTAL RETURN (incorporating the revenue account)
FOR THE YEAR ENDED 28 FEBRUARY 2003
Notes 2003 2003 2003 2002 2002 2002
Revenue Capital Total Total
Revenue Capital
�'000 �'000 �'000 �'000
�'000 �'000
Loss on investments - (10,195) (10,195) - (9,264) (9,264)
Income 1 502 - 502 941 - 941
Investment management 2 (441) (441) (882) (444) (444) (888)
fee
Other expenses 3 (360) - (360) (301) - (301)
(Loss)/profit on (299) (10,636) (10,935) 196 (9,708) (9,512)
ordinary activities
before tax
Tax on ordinary 5 - - - (8) - (8)
activities
(Loss)/profit on (299) (10,636) (10,935) 188 (9,708) (9,520)
ordinary activities
after tax
Dividends paid and 6 - - - (72) - (72)
proposed
Transfer (from) /to (299) (10,636) (10,935) 116 (9,708) (9,592)
reserves
Basic and diluted 7 (0.6)p (22.8)p (23.4)p 0.4p (20.3)p (19.9)p
(loss)/earnings per
share
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 28 FEBRUARY 2003
Note 2003 2002
�'000 �'000
Fixed assets
Investments 22,088 32,964
Current assets
Debtors 152 191
Cash at bank 2,096 2,285
2,248 2,476
Creditors (amounts falling due within one year) (130) (191)
Net current assets 2,118 2,285
Net assets 24,206 35,249
Capital and reserves
Called-up equity share capital 476 478
Share premium 2 -
Special reserve 44,878 44,986
Capital reserve - realised (12,267) (3,852)
- unrealised (8,782) (6,561)
Revenue reserve (101) 198
Total equity shareholders' funds 24,206 35,249
Net asset value per share 8 50.8p 73.7p
David Quysner
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 (582) (4,196)
Financial investment
Purchase of venture capital investments (2,287) (11,007)
Purchase of listed equities and fixed interest (3,454) (9,499)
investments
Sale/redemption of venture capital investments 14 53
Sale/redemption of listed equity and fixed 6,300 17,471
interest investments
Total financial investment 573 (2,982)
Equity dividends paid (72)- (479)
Financing
Issue of ordinary shares in accordance with the 2 47
terms of the dividend reinvestment scheme
Buy-in of shares (110) (64)
Total financing (108) (17)
Decrease in cash for the period (189) (7,674)
Reconciliation of net cash flow to movement
in net funds
Decrease in cash for the year (189) (7,674)
Net funds balance at the start of the year 2,285 9,959
Net funds at the end of the year 2,096 2,285
The accompanying notes are an integral part of this statement.
NOTES TO THE FINANCIAL STATEMENTS
1 Income 2003 2002
�'000 �'000
Dividend income
Unlisted companies - 24
Listed companies 256 275
Interest receivable
Fixed interest investments 164 509
Bank deposits 53 123
Loans to unquoted companies 28 10
Other 1 -
502 941
2 Investment Management Fee
Quester Capital Management Limited ("QCML") provides investment management
services to the Company under an agreement dated 19 January 2000.
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 �882,000 (2002: �888,000) in respect of the management fee payable
to QCML was paid during the year.This was payable quarterly in advance and was
equivalent to 2.5% (plus VAT, if any) of the Company's audited net asset value
at the close of the preceding accounting period.
QCML also provides administrative and secretarial services to the Company for
which it is entitled to a fee of �42,000 per annum (linked to the movement in
the RPI), which is included in other expenses (note 3).
* Other expenses 2003 2002
�'000 �'000
Administrative and secretarial services 42 41
Directors' remuneration (note 4) 39 39
Auditor's remuneration - audit services 21 19
- non audit services 3 15
Legal and professional expenses 28 35
Other expenses 56 47
Irrecoverable VAT 171 105
360 301
* Directors' remuneration
2003 2002
�'000 �'000
Fees paid to directors 10 10
Amounts paid to third parties, excluding VAT, in 29 29
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 2003 2003
Revenue � Capital � Revenue � Capital �
'000 '000 '000 '000
Corporation tax payable - - 8 -
- prior year adjustment
- - 8 -
6 Dividends paid and proposed
2003 2002
�'000 �'000
Final dividend - 72
- 72
7 Return per share
The revenue loss per share of 0.6p (2002: 0.4p profit per share) is based on
the net loss on ordinary activities after tax of �299,000 (2002: profit of �
188,000) and on 46,640,771 shares (2002: 47,878,833), being the weighted
average number of shares in issue during the period of trading.
The negative capital return per share of 22.8p (2002: 20.3p) is based on the
net realised and unrealised capital loss for the period of �10,636,000 (2002: �
9,708,000) and on 46,640,771 shares (2002: 47,878,833), being the weighted
average number of shares in issue during the period of trading.
* Net asset value per share
The calculation of net asset value per share as at 28 February 2003 of 50.8p
(2002: 73.7p) is based on net assets of �24,206,000 (2002: �35,249,000) divided
by the 47,634,905 ordinary shares (2002: 47,841,467) 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 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 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
