Kings Arms Yard Regulatory News (KAY)

17 May 2006 14:00

QUESTER VCT PLC ANNUAL REPORT 2006 Summary of results for the year ended 28 February 2006Per Ordinary Share 28 February 28 February 31 January(pence) 2006 2005 2004 Capital Values Net asset value 44.5 44.1 50.1 Share price 37.0 44.0 45.0 Return and Dividends Interim dividend 1.25 - - Cumulative dividend 42.8 41.5 41.5 Total Return* 87.3 85.6 91.6 *Net asset value plus cumulative dividend DIVIDENDSThe directors have proposed a final dividend of 2.5p per share in respect ofthe year ending 28 February 2006.Payment date 3 July 2006Ex-dividend date 7 June 2006Associated record date 9 June 2006CHAIRMAN'S STATEMENTOverviewThis has been an extremely active periodYour Company was merged with Quester VCT 2 plc and Quester VCT 3 plc in June2005. The principal benefits from the merger have been an increase in the rangeand diversity of the portfolio, an improved spread of risk and opportunity, areduction in running costs and a flow of dividends as sales are made from awider portfolio.Following the merger, your Board has carried out an energetic and thoroughreview of the way in which your Company's strategy will be implemented, withinthe guidelines laid down last June. The new Board was augmented by ChristopherWright, who was previously totally unconnected with Quester Capital ManagementLimited ("the Manager"). Within the Manager, Simon Acland has become managingdirector.The two areas reviewed by the Board were the process and timetable for therealisation of the venture capital portfolio, as it existed at the time of themerger, and the process of reinvestment of the existing liquid resources andthe proceeds from sale. This led naturally to an assessment of dividends anddividend policy.RealisationsThe merger documents indicated that the portfolio was mature and largely readyfor realisation. It is expected that it will be substantially realised over thenext three years, depending on favourable conditions continuing for companiesin our sectors.The pace of realisations has been strong with over ‚£10million realised in the 8months since the merger, representing about one quarter of the portfolio byvalue. Footfall Limited was sold for a profit of ‚£2.7million; 90% over itsmerger value. However, there were also disappointments, particularly in thefailure of Anadigm Limited to meet its targets in the second half of last year,resulting in a loss of ‚£0.7million. Overall net profits of ‚£3.1million havebeen realised from the Venture Capital portfolio in this period, whichrepresents an encouraging first year for the realisation process.Building a new portfolioYour Board also re-examined your Manager's position in the market place, andtested its ability to reinvest the portfolio in a broad range of companieswithin its areas of expertise and to build a portfolio with attractiveinvestment characteristics. While these sectors were disappointing from 2001 to2005, Quester's performance in the late 80s to mid 90s, before VCTs existed,and for VCTs from 1995 to 2001, gives your Board comfort that good returns canbe made. The Manager's skills are recognised by professional investors in itsinstitutional fund. The Manager will be able to take a disciplined approach,avoiding over valued or hyped situations, and intends to create a spread ofrisk across sectors, balancing early versus later stages of maturity. The Boardexpects that the current period may prove to be an advantageous time in thecycle for investment in these sectors.Quester is one of a limited number of early stage investors with a long anddeep understanding of the information and technology sector, includingbiotechnology and related pharmaceutical businesses. Your Board emphasises thatthis expertise and the new portfolio which is being built, will continue in themain to be focused in these areas and that it is possible to earn good returnsfrom such a portfolio. The individual investments are high risk, but the sizeof your Company will enable a reasonable spread of investments to be made.These high return opportunities may lead to disappointments and losses. It isalso clear that good overall returns will take a number of years to comethrough. Since losses tend to be suffered before the high returns fromsuccessful companies, there are likely to be a few years of dull performanceand it is only in the longer term that shareholders can expect to be able tobenefit from the overall performance of the new portfolio.An amount of ‚£6million has been invested in the year. Of this, ‚£4.7million wasinvested in ten new investments with the balance of ‚£1.3million being providedas further funding to five existing companies.The change in net assets for the whole year, including the period prior to themerger, is summarised in the table below ‚£'000 Pence per share Net asset value at 28 February 2005 14,651 44.1 Pre-merger Formula Asset Value ("FAV") adjustment, (221) (0.7)including merger costs Merger FAV 14,430 43.4 Assets acquired on merger, net of costs 38,599 (0.3) Net realised gains on venture capital investments 3,085 3.4 Net unrealised loss on venture capital investments (1,558) (1.7) Net gains on listed equities and bonds 1,529 1.7 Income less operating expenses (194) (0.3) Dividends paid, less amounts reinvested (1,479) (1.8) Share buy-backs (1,077) 0.1 Net asset value at 28 February 2006 53,335 44.5Board ChangesSimon Bakewell, who had served on the Board since the Company's inception in1996, retired following the merger. I joined the Board (having been Chairman ofQuester VCT 2) and Christopher Wright, who has extensive experience in earlystage investing, joined the Board in July 2005. Tom Scruby, who had served aschairman of the Board from 1996 up to the merger, is to retire at theforthcoming AGM. Tom has continued to provide wise counsel over this period,based on his understanding of early stage investing. On behalf of the Board, Iwould like to express my thanks to both Simon and Tom for their valuablecontribution.Dividend policy and dividendsFollowing the merger, your Company held a portfolio of listed equities valuedat ‚£15.6million, which has subsequently been sold down to ‚£11.0million at theyear end. This portfolio is held, together with a small portfolio of bonds, toprovide reserves to meet the further investment needs of the venture capitalportfolio. The reduction in the listed equity portfolio reflects a reduced needfor reserves arising partly from the merger. The Company's liquid resourceshave been further augmented by the proceeds of realisations and amounted toabout half of your Company's net assets at the year end. While a substantialproportion of these funds are likely to be reinvested, there is also amplescope to pay dividends.HM Revenue & Customs has recently indicated it will toughen up on the rulerequiring the investment of a fixed proportion of the portfolio, namely 70%, inventure capital investments. This change will become effective by 6 April 2007.As the Manager intends to continue to apply a measured approach toreinvestment, the Board currently expects to pay out useful dividends over thenext few years to satisfy this requirement. The rate will fluctuate dependingon the continuing pace of realisations, the rate of reinvestment and the needto maintain reserves to back the new portfolio. It currently expects to payinterim and final dividends. In accordance with VCT rules, these dividendswould be tax free.You will be aware that, post merger, the Manager's incentive is structured toreward payouts over the period to February 2009, the minimum target beingaggregate dividends totalling 20% of post merger FAV over that period, with ahigher hurdle of 40% for an increased payment.An interim dividend of 1.25p per share was paid last November, at a cost of ‚£1.5million. In the light of all the factors above, your Board has decided torecommend payment of a final dividend of 2.5p per share, costing approximately‚£3million.Jock BirneyChairman17 May 2006INVESTMENT MANAGER'S REPORTIntroductionFollowing the merger in June 2005, we have been focusing our efforts in threeareas: the realisation of a number of our earlier investments, supporting thecompanies within the portfolio and identifying new investment opportunities. Ithas been an extremely active period for the venture capital portfolio: severalexits have been achieved and we have made good progress with new investments.The venture capital portfolio has recorded overall positive returns for theyear; the unquoted element of the portfolio generated net gains of ‚£2.0millionwhilst the quoted portion of the portfolio showed a loss of ‚£0.5million.We believe that the prospects for the technology sector are improving, asevidenced by much increased M&A activity and improved sentiment towards AIM,and this should continue through the current year. We believe that we aretherefore in a more favourable climate for early stage venture capitalinvestment than in recent years.Realisation from the venture capital portfolioThe year to 28 February 2006 has been an extremely active period for theportfolio in terms of sales achieved. We realised ten investments, eitherwholly or in part, generating cash proceeds of‚£10.5million and a gain of ‚£2.9million over merger FAV, as detailed below:Company Cash proceeds Merger FAV Gain/loss over merger FAV ‚£'000 ‚£'000 ‚£'000 Anadigm Limited - 729 (729) Casella Group Limited 1,121 1,121 - Crown Sports plc 440 435 5 Dycem Limited 408 373 35 Footfall Limited 5,630 2,900 2,730 HTC Healthcare Group plc 120 120 - International Resources Group 925 400 525plc Loudeye Corp. 1,491 1,204 287 Sirius Financial Solutions plc 128 122 6 XKO Group plc 271 232 39 10,534 7,636 2,898We reported on the sales of Anadigm, Casella, Loudeye and Crown Sports at theinterim stage. The significant sales achieved since the half year are:¢â‚¬¢ Footfall, the leading provider of customer counting technology and statisticsto both the retail and retail property sectors, was sold to Experian, theinformation solutions company, for over ‚£35million. This was the mostsignificant exit for Quester VCT during the year generating proceeds of ‚£5.6million, a profit of ‚£2.7million and an IRR of 13%.¢â‚¬¢ The residual holding in International Resources Group, which trades as OdgersRay & Berndtson, a leading executive search firm, was sold during the period.This investment was made in 1998 and returned a total of ‚£1.7million, includingincome, on a cost of ‚£0.4million, generating an IRR of 42%.¢â‚¬¢ The disposal of Dycem, a leading manufacturer of quality non-slip productsaddressing a number of stabilisation and gripping problems and a pioneer ofcontamination control flooring solutions has resulted in overall cash proceeds,inclusive of income, of ‚£1.5million on an original cost of ‚£0.7million givingrise to an IRR of 14%.Venture Capital Investments made during the yearWe continue to seek new venture capital investments. The selection process fornew investment opportunities is structured so that only those investments withthe greatest potential are chosen. It would certainly be possible to acceleratethe rate of investment by being less selective: however, we believe that thiswould compromise quality and ultimately returns to investors.Company Industry sector ‚£'000 Cluster Seven Limited Software 743 Genosis plc Diagnostics & devices 1,140 Global Silicon Limited Semiconductors 600 Haemostatix Limited Biotechnology 53 Lectus Therapeutics Limited Biotechnology 248 Level Four Software Limited Software 518 Nanotecture Limited Industrial products & 25 services PanOpSys Limited Diagnostics & devices 240 Pelikon Limited Electronics 708 Perpetuum Limited Electronics 435 4,710A number of these investments are made on a tranched basis, with each tranchesubject to milestones being met. This is a deliberate strategy and appropriatereserves are maintained to fund the additional tranches of investment. Thisretention of reserves is an integral aspect of early stage venture capitalinvestment, as it ensures the ability to continue to back investments, as andwhen further funding is required.We reported on the new investments in Global Silicon, Level Four Software,Nanotecture and Pelikon in the interim report. The new investments madesubsequent to the half year are covered below:¢â‚¬¢ Cluster Seven develops and sells enterprise spreadsheet management software.The company's products provide control over spreadsheets being used in missioncritical environments. In the current regulatory environment, the control ofspreadsheets is paramount and there is a substantial global market for ClusterSeven's products. The company has built an impressive client base, principallyin the UK, and the ‚£2.4million first round funding will be invested in productdevelopment and expansion in the US. Henry Sallitt, a Quester director, hasjoined its board.¢â‚¬¢ Genosis focuses on developing innovative and unique solutions for thediagnosis of reproductive disorders. This is a growing market with an estimated1 in 6 couples globally experiencing fertility issues. Genosis' first product,Fertell, is a combined male and female home fertility test availableexclusively over-the-counter at Boots. Quester VCT's initial investment was apre-AIM investment. The company subsequently raised ‚£7million on its admissionto trading on AIM in December enabling manufacturing capabilities to be scaledup and marketing and sales resources to be enhanced.¢â‚¬¢ Haemostatix is a drug discovery company concentrating on the development ofan alternative to blood platelet transfusion. Its product, HaemoPlaxTM, isdesigned to be a safer and more cost effective alternative to existingprocedures. In January, Quester led a ‚£3.1million investment in Haemostatix,which will enable the company to finance the development of HaemoPlax throughto preliminary clinical trials and also advance its pipeline of follow-onproducts. Jonathan Gee, a Quester director, has joined its board.¢â‚¬¢ Lectus Therapeutics specialises in the discovery and development of noveldrugs (ion channel modulators) for diseases associated with pain management,urinary incontinence and angina, offering important clinical and economicadvantages over existing therapies in this growing market. The company raised ‚£8.2million in the Series A funding in which Quester VCT participated alongsideleading French venture capital firm Sofinnova and the top two Japanesepharmaceutical firms, Takeda and Astellas. The new funds will be used toadvance existing programmes and provide opportunities for commercialpartnerships with pharmaceutical companies.¢â‚¬¢ PanOpSys is a medical diagnostics company specialising in the development ofinnovative diagnostic devices to be used to speed up diagnosis and improvehealthcare delivery at the point of care. The company is at an exciting stagein the commercialisation of its patented piezofilm technology in a growingmarket. The company raised ‚£3million in a Series `A' funding led by Quester.These funds will be used to develop a range of rapid, sensitive, whole bloodimmunoassay based products for the measurement of clinically critical markersin non-laboratory settings. Iain Wilcock, a Quester director, has joined itsboard.¢â‚¬¢ Perpetuum produces electromechanical vibration energy harvestingmicro-generators to power wireless sensor nodes, eliminating the need for hardwiring or batteries. This technology addresses the growing and substantialmarket for wireless sensor systems, which are used for a wide range ofapplications. The Quester led ‚£2.2million Series `A' funding round will enablethe company to begin commercialising its technology. Henry Sallitt has joinedthe board.The majority of these new investments are shared with Quester's institutionalfund, Quester Venture Partnership. Several of these investments have also beenseed funded by Quester managed university linked funds, as part of Quester'sproactive deal sourcing strategy.We have also supported the existing portfolio with five further follow-oninvestments totalling ‚£1.3million:Company Industry sector ‚£'000 Advanced Valve Technologies Industrial products & 261Limited services Anthropics Technology Limited Communications 25 Avidex Limited Biotechnology 69 HTC Healthcare Group plc Consumer services 811 Teraview Limited Diagnostics & devices 125 1,291Developments in the venture capital portfolioA number of companies have made positive progress since we reported at the halfyear.The valuations of the investments in Methuen Publishing Limited and SibeliusSoftware Limited have been marked-up by ‚£344,000 and ‚£62,000 respectively toreflect the perceived fair value of these investments.Allergy Therapeutics plc, the AIM quoted company that develops and sellsallergy vaccines, has recently released positive news about one of itsproducts, Pollinex, progressing into phase III trials. The market has respondedpositively to this news resulting in an initial 20% uplift in the share price.The company has raised a further ‚£19million and, encouraged by the progressmade and future prospects, we made a further ‚£200,000 investment in April 2006.Avidex Limited, a biotechnology company focused on the novel development oftherapeutics involving T-cell receptors leading to the treatment of cancer,inflammation and autoimmune diseases, has secured further funding via asignificant investment from a new trade partner, Syngenta. This further fundingwill take the company through to the next stage of its development anddemonstrates the progress made with its science, although the fair value of theinvestment has been reduced by ‚£326,000 to reflect the pricing of this thirdparty investment.Cyclacel Limited has successfully merged with Xcyte Therapies, Inc. to form alarger international biopharmaceutical company, Cyclacel Pharmaceuticals, Inc.,a publicly-traded company with a franchise in one of the most exciting fieldsof biology, a development-stage portfolio of targeted oncology drug candidatesaffecting the cancer cell cycle and holding approximately $20million in cash.The fair value of the investment in Cyclacel has been reduced by ‚£437,000 toreflect its implied valuation based upon the market valuation of CyclacelPharmaceuticals, Inc.These latter two valuation changes reflect current valuation trends across thebiotechnology sector generally, as opposed to specific performance issues withthe individual businesses themselves.The investment in Linguaphone, previously valued at ‚£299,000, has been writtenoff.Sector spreadThe spread of sectors covered by the portfolio at 28 February 2006 is providedin the table below:Industry sector Percentage of venture capital portfolio at Number of valuation Valuation investments % ‚£'000 Software 32.0 7,611 11 Diagnostics & devices 12.2 2,901 4 Internet 11.6 2,748 2 Biotechnology 11.4 2,708 6 Consumer services 7.0 1,664 1 Publishing 6.2 1,463 1 Electronics 6.0 1,411 3 Industrial products & services 5.4 1,295 3 Communications 4.3 1,029 2 Semiconductors 3.9 938 2 100.0 23,768 35We will endeavour to keep a spread of investments in the portfolio so as tomaintain a balance between early stage, higher risk, investments with potentialhigh returns and later stage, lower risk, investments with correspondinglylower returns. However, given that this is a venture capital portfolio, itshould be noted that all investments will remain relatively high risk.Listed equity and bond portfoliosThe listed equity portfolio has performed well over the year generating a totalreturn of 29.3%. The FTSE All Share Index generated a return of 22.3% over thesame period. During the year, the opportunity was taken to reduce the weightingof this portfolio in relation to the net assets of the Company and a number ofinvestments were realised. At 28 February 2006, this portfolio was valued at ‚£11million and was showing an unrealised gain of ‚£1.1million.The Company retains a small bond portfolio effectively valued at par at ‚£2.3million. Over the year, this portfolio has provided a yield of approximately4.6%.CostsA key objective of the merger was a reduction in running costs. Annualised postmerger running costs, amounted to 3.0% of closing net assets. This comparesfavourably with the percentage for the prior year of 3.9%.OutlookThrough the merger we achieved our objectives of increasing the range anddiversity of the venture capital portfolio, an increasing pace of realisationsand a reduction in running costs. We have subsequently concentrated onsupporting companies within the portfolio, realising earlier investments andmaking investments in a cross section of exciting new companies. We have madegood progress and will continue to concentrate our efforts in these areas inthe current year.The prospects for the technology sector are improving and the climate is morefavourable for early stage venture capital investment. We are optimistic thatthe investments we are now making will deliver attractive returns in the mediumto longer term.Quester17 May 2006Fund Summary as at 28 February 2006 Industry sector Original Cost Valuation Equity % of fund ‚£'000 ‚£'000 % held by value Quoted venture capital investments Allergy Therapeutics Biotechnology 572 603 1.1% 1.1%plc Genosis plc Diagnostics & 1,140 1,113 6.5% 2.1% devices Imagesound plc Software 1,848 541 12.4% 1.0% Sopheon plc Software 178 43 0.2% 0.1% Surfcontrol plc Software 493 669 0.4% 1.3% Vernalis plc Biotechnology 886 1,166 0.5% 2.2% XKO Group plc Software 611 704 1.4% 1.3% Total quoted venture capital investments 5,728 4,839 9.1% Unquoted venture capital investments Advanced Valve Industrial products 2,752 610 12.8% 1.1%Technologies Limited & services Antenova Limited Semiconductors 1,004 1,004 5.4% 1.9% Anthropics Technology Communications 95 25 7.0% -Limited Arithmatica Limited Semiconductors 338 338 12.5% 0.6% Artisan Software Tools Software 2,100 1,173 23.4% 2.2%Limited Avidex Limited Biotechnology 602 275 1.4% 0.5% Casella Group Limited Industrial products 1,389 598 15.8% 1.1% & services Cluster Seven Limited Software 743 743 9.3% 1.4% Community Internet Internet 1,015 634 17.4% 1.2%Europe Limited Cyclacel Limited Biotechnology 800 363 1.1% 0.7% Elateral Holdings Software 2,125 245 24.4% 0.5%Limited Global Silicon Limited Semiconductors 600 600 7.6% 1.1% Haemostatix Limited Biotechnology 53 53 3.6% 0.1% HTC Healthcare Group Consumer services 2,207 1,664 36.7% 3.1%plc International Diagnostics & 1,176 690 23.9% 1.3%Diagnostics Group plc devices Lectus Therapeutics Biotechnology 248 248 7.0% 0.5%Limited Level Four Software Software 518 518 9.3% 1.0%Limited Lorantis Holdings Biotechnology 625 625 1.7% 1.2%Limited Methuen Publishing Publishing 1,119 1,463 43.7% 2.7%Limited Nanotecture Limited Industrial products 87 87 0.8% 0.2% & services Nomad Software Limited Software 1,818 887 18.7% 1.7% Opsys Management Electronics 1,561 268 - 0.5%Limited PanOpSys Limited Diagnostics & 240 240 9.1% 0.5% devices Perpetuum Limited Electronics 435 435 8.0% 0.8% Pelikon Liimted Electronics 708 708 5.5% 1.3% Sibelius Software Software 1,400 1,463 12.0% 2.7%Limited Sift Group Limited Internet 2,260 2,114 14.4% 4.0% Teraview Limited Diagnostics & 858 858 4.9% 1.6% devices Total unquoted venture capital investments 28,876 18,929 35.5% Total venture capital 34,604 23,768 44.6%investments Listed fixed interest 2,302 2,302 4.3%investments Listed equity 9,969 11,035 20.7%investments Total investments 46,875 37,105 69.6% Cash and other net 16,230 16,230 30.4%current assets Net assets 63,105 53,335 100.0%The respective cost of investments shown above represents the post merger costto Quester VCT plc. This reflects the original cost of the Company'sinvestments held immediately prior to the merger with Quester VCT 2 plc andQuester VCT 3 plc together with the merger value of those investments assumedfrom Quester VCT 2 and Quester VCT 3 on the merger.Profit and loss accountFor the year ended 28 February 2006 Notes 2005 (13 months) 2006 Restated ‚£'000 ‚£'000 Gain/(loss) on fair value through 1 3,056 (1,128)profit or loss on investments Loss on fair value through profit or - (750)loss on debtors Income 2 1,070 457 Investment management fee 3 (778) (331) Other expenses 4 (486) (285) Profit/(loss) on ordinary activities 2,862 (2,037)before taxation Tax on profit/(loss) on ordinary 6 - -activities Profit/(loss) on ordinary activities 2,862 (2,037)after taxation Basic and diluted profit/(loss) per 8 3.3p (5.9)pshare All items in the above statement derive from continuing operations.The Company has only one class of business and derives its income frominvestments made in shares and securities and from bank deposits.The assets and liabilities of Quester VCT 2 plc and Quester VCT 3 plc wereacquired by means of a Scheme of Arrangement during the year. The acquisitionmethod of accounting has been adopted.The accompanying notes are an integral part of this statement.Note of historical cost profits and lossesFor the year ended 28 February 2006 2005 (13 months) 2006 Restated ‚£'000 ‚£'000 Reported loss on ordinary activities 2,862 (2,037)before taxation Realisation of prior year's net 429 (5,155)unrealised gains/(losses) on investments Historical cost loss on ordinary 3,291 (7,192)activities before taxation Historical cost loss for the period 3,291 (7,192)The accompanying notes are an integral part of this statement.BALANCE SHEETAs at 28 February 2006 2005 (13 months) 2006 Restated Note ‚£'000 ‚£'000 Fixed assets Investments 37,105 12,677 Current assets Debtors 1,095 793 Cash at bank 15,693 1,518 16,788 2,311 Creditors (amounts falling due within (558) (337)one year) Net current assets 16,230 1,974 Net assets 53,335 14,651 Capital and reserves Called-up equity share capital 5,992 1,661 Share premium account 37,359 3,410 Capital redemption reserve 260 112 Special reserve 4,348 7,900 Fair value reserve (2,477) (1,474) Profit and loss account 7,853 3,042 Total equity shareholders' funds 53,335 14,651 Net asset value per share 9 44.5p 44.1pThe financial statements were approved by the directors on 17 May 2006 and weresigned on their behalf by:Jock BirneyChairmanThe accompanying notes are an integral part of this statement.CASHFLOW STATEMENTFor the year ended February 2006 2005 (13 months) 2006 Restated ‚£'000 ‚£'000 Cash inflow/(outflow) from operating 96 (92)activities Financial investment Purchase of venture capital investments (6,001) (864) Purchase of listed equities and fixed interest (1,508) (2,962)securities Sale/redemption of venture capital investments 9,868 850 Sale/redemption of listed equity and fixed 8,190 3,240interest securities Amounts recovered from investments previously 166 -written-off Total financial investment 10,715 264 Mergers and acquisitions Funds received as part of the merger 6,141 - Merger costs (220) - Total mergers and acquisitions 5,921 - Equity dividends paid Equity dividends paid net of amounts re- (1,480) -invested through Dividend Reinvestment Scheme Financing Buy back of shares (1,077) (370) Increase/(decrease) in cash for the period 14,175 (198) Reconciliation of net cash flow to movement in net funds Increase/(decrease) in cash for the period 14,175 (198) Net funds at the start of the period 1,518 1,716 Net funds at the end of the period 15,693 1,518The accompanying notes are an integral part of this statement.Reconciliation of movement in shareholders' fundsFor the year ended 28 February 2006 Share Share Capital Special Fair Profit and Total capital premium redemption reserve value loss account reserve reserve account ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 At 1 March 2005 1,661 3,410 - 8,012 (1,474) 3,042 14,651 Effect of - - 112 (112) - - -creating a capital redemption reserve - At 1 March 1,661 3,410 112 7,900 (1,474) 3,042 14,6512005 (restated) Shares issued in 4,473 34,126 - - - - 38,599connection with the merger Shares issued 6 43 - - - - 49under the Dividend Reinvestment Scheme Shares purchased (148) - 148 (1,077) - - (1,077)for cancellation Merger costs - (220) - - - - (220) Realisation of - - - - (429) 429 -prior years' net unrealised gains on investments Profit on - - - - - 2,862 2,862ordinary activities after taxation Unrealsied loss - - - - (574) 574 -on revaluation of investments Transfer from - - - (2,475) - 2,475 -special reserve to profit and loss account Interim dividend - - - - - (1.529) (1,529)paid At 28 February 5,992 37,359 260 4,348 (2,477) 7,853 53,3352006 NOTES TO THE FINANCIAL STATEMENTS 1. Gain/(loss) on fair value through profit or loss on investments 2005 2006 (13 months) ‚£'000 ‚£'000 Net gain on disposal 4,193 (14) Write-off of investments (729) (839) Write-down of debtors - (91) Recoveries made in respect of investments previously 166 51written-off Unrealised loss on revaluation of investments (574) (235) 3,056 (1,128) 2. Income 2005 2006 (13 months) ‚£'000 ‚£'000 Dividend income Unlisted companies 228 37 Listed companies 405 92 Interest receivable Fixed interest securities 162 125 Loans to unquoted companies 124 154 Bank deposits 82 39 Other income 69 10 1,070 457 3. Investment management fee 2005 2006 (13 months) ‚£'000 ‚£'000 Investment management fee 778 331 Irrecoverable VAT 104 37 882 368Quester Capital Management Limited ("QCML") provides investment managementservices to the Company under an amended and restated management agreementdated 20 May 2005.QCML is a wholly owned subsidiary of Querist Limited, a company in which APGHolmes is a beneficial shareholder. APG Holmes is an executive director ofQCML.Prior to the merger, QCML was entitled to receive an annual management fee,payable quarterly in arrears, at the rate of 2.5% on the value of the auditednet assets of the Company as at the end of the previous accounting period. Thisfee was capped to ensure that the Company's running costs did not exceed 3.25%of closing net asset value. Following the merger, QCML is entitled to receive amanagement fee, determined quarterly in arrears, at the annual rate of 2.0% onthe value of the Company's net assets at the end of each quarter. This new feeis similarly capped to ensure that the Company's running costs do not exceed3.25% of closing net asset value. The management fee for the year amounted to ‚£778,000 (2005: ‚£331,000). This is stated net of an amount of ‚£9,000 (2005: ‚£116,000) being a reduction to achieve the necessary cap on running costs.Upon the Company having paid or declared cash dividends (excluding 1.0p of thespecial interim dividend paid post merger) of an aggregate amount equal to 20%or more of the Company's Formula Asset Value (net of 1.0p of the specialinterim dividend) multiplied by the number of ordinary shares in issueimmediately following the merger ("the FAV") by 28 February 2009, the Managerwill then become entitled to a performance incentive fee of 2% of the FAV.Should cash dividends (excluding 1.0p of the special dividend) of an aggregateamount equal to 40% or more of the FAV (net of 1.0p of the special interimdividend) be paid or declared by the same date, the Manager will then becomeentitled to an additional performance incentive fee of a further 1% of the FAV.QCML also provides administrative and secretarial services to the Company. Forthe period prior to the merger it was entitled to a fee of ‚£44,000 per annum(based on an amount adjusted in line with the RPI), which was pro rated toreflect a four month period. Following the merger the fee was increased to anannual amount of ‚£60,000, to be adjusted annually in line with changes in theRPI. The resulting fee for the year amounted to ‚£55,000, as stated in note 4. 4. Other expenses 2005 2006 (13 months) ‚£'000 ‚£'000 Administration and secretarial services 55 46 Directors' remuneration (note 5) 52 42 Auditor's remuneration audit services 14 18 non audit services 9 8 Legal and professional expenses 47 29 Insurance 32 17 UKLA, LSE and registrar's fees 38 19 Management fees payable to OLIM Limited 44 - Transaction costs 20 - Irrecoverable VAT 146 82 Other 29 24 486 285 5. Directors remuneration 2005 2006 (13 months) ‚£'000 ‚£'000 Fees paid to directors 4 13 Amounts paid to third parties, excluding VAT, in 48 29consideration of the services of directors 52 42 6. Tax on ordinary activities 2005 2006 (13 months) ‚£'000 ‚£'000 Corporation tax payable - - Reconciliation of profit on ordinary activities to taxation Profit/(loss) on ordinary activities before tax 2,862 (2,037) Tax on profit on ordinary activities at standard UK 859 (611)corporation tax rate of 30% (2005: 30%) Effects of: Non-taxable items (1,107) 131 Unutilised expenses 248 480 Corporation tax payable - - 7. Dividends paid and proposed 2005 2006 (13 months) ‚£'000 ‚£'000 Interim dividend: 1.25p per share paid 11 November 2005 1,529 - The directors have proposed a final dividend of 2.5p per share, equivalent to ‚£2,996,000, in respect of the year ended 28 February 2006, which, if approved byshareholders, would be payable on 3 July 2006. 8. Profit per share The profit per share of 3.3p (2005: loss of 5.9p) is based on the profit onordinary activities after tax of ‚£2,862,000 (2005: loss of ‚£2,037,000) and onthe weighted average number of ordinary shares in issue during the year of85,789,025 (2005: 33,699,680). There is no dilution effect in respect of theyear ended 28 February 2006 (2005: ‚£nil). 9. Net asset value The calculation of net asset value per share as at 28 February 2006 of 44.5p(2005: 44.1p) is based on net assets of ‚£53,335,000 (2005: ‚£14,651,000) dividedby the 119,848,625 ordinary shares in issue at that date (2005: 33,227,610).There is no dilution effect in respect of the year ended 28 February 2006(2005: nil).This preliminary statement, which has been agreed with the auditors, wasapproved by the Board on 16 May 2006. It is not the company's statutoryaccounts. The statutory accounts for the year ended 28 February 2005 have beendelivered to the Registrar of Companies and received an audit report which wasunqualified, did not include a reference to any matters to which the auditorsdrew attention by way of emphasis without qualifying the report, and did notcontain statements under section 237(2) and (3) of the Companies Act 1985. Thestatutory accounts for the year ended 28 February 2006 have not yet beenapproved, audited or filed.A copy of the above document will be submitted to the UK Listing Authority, andwill shortly be available for inspection at the UK Listing Authority's DocumentViewing Facility, which is situated at:Financial Services Authority25 The North ColonnadeCanary WharfLondonE14 5HSCopies of the full financial statements for the period ended 28 February 2006are expected to be posted to shareholders on 19 May 2006 and will be availableto the public at the registered office of the Company at 29 Queen Anne's Gate,London, SW1H 9BU.ENDQUESTER VCT PLC