ANNUAL REPORT QUEST FOR GROWTH 2001/2002

Transcription

1 2001 ANNUAL REPORT QUEST FOR GROWTH 2001/ Quest for Growth

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3 Contents ANNUAL REPORT QUEST FOR GROWTH 2001/2002 Chairman s letter to shareholders 5 Profile, Aim, Policy 6 Corporate Governance 7 The Board 8 Key facts 11 Investment Report 12 Investment Manager s Report 12 Sector developments 14 Portfolio 30 Portfolio composition: By country 30 By sector 30 By stock market 30 Holdings at June 30th, Company profiles: Unquoted companies 32 Venture capital funds 34 Quoted companies 35 Financial Data 44 Balance sheet 44 Statement of income 44 Profit distribution 45 Off balance sheet positions 45 Post balance sheet events 45 Notes to the financial statements 46 Valuation rules 48 Report of the Board 49 Report of the Independent Board Members 50 Report of the Statutory Auditor 51 Glossary 52 General Information 54 Key Information 55 Quest for Growth

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5 Dear shareholder, This is the fourth annual report of Quest for Growth. It has been a very difficult year for equity investors of all types, especially technology investors who saw declines of, for example, 68.6% for the Nasdaq Europe index, 32.3% for the Nasdaq index, 55.9% for the Neuer Markt s NEMAX 50 Index and 51.4% for London s Techmark index. A 45% decline in Quest for Growth s net asset value reflects those difficult conditions. Although this is relatively a better, or less bad, performance than the main indices and most other technology funds in the period, it is nonetheless extremely disappointing. The lack of new public offerings (IPOs) meant that Quest for Growth found few opportunities for new pre-ipo private equity investments. Existing investments were affected by sharp valuation reductions which reflected both company fundamentals in a difficult commercial environment and lower valuations applied to private companies by venture investors. It is not surprising in this environment that Quest for Growth s shares have declined. However they have declined by more than the net asset value, causing the shares to trade at a large discount to net asset value. In order to allow investors an opportunity for accelerated performance in a market upturn, the board has recommended the issue of free warrants to existing shareholders to subscribe for new shares of Quest for Growth during the next three years at a price close to the current net asset value. The warrants will be traded independently from the ordinary shares on the Euronext stock exchange. There will be no management fees on additional money raised from the exercise of the warrants. I would like to thank the investment team at Quest Management for continuing their professional approach both in managing the company s assets and participating in regular dialogues with investors through the Quest Investor Club meetings and the web site ( History suggests that major declines such as we have witnessed in the past two and a half years do not reverse quickly. Nonetheless, there is a cleansing effect to such declines, such as improved standards of auditing and corporate governance, which allows future gains to be built on sounder foundations. Dr Jos B. Peeters Chairman Quest for Growth

6 PROFILE, AIM, POLICY Quest for Growth focuses on European technology-based growth companies in sectors such as biotechnology, medical, health care, information technology, software, electronics, new materials and special situations in other growth sectors. Funds under management amount to 60 million, on June 30th Quest for Growth has been listed on Euronext Brussels since September 23rd, The Privak, created by Royal Decree of April 18th, 1997, is an investment vehicle, specially tailored to provide a suitable framework for investments in private equity and in growth companies. The Privak is a closed-end fund under the regulation of the Belgian Banking Commission and subject to specific investment and dividend pay out rules. Investment rules A minimum of 50% of the portfolio must be invested in equity. A minimum of 70% of the portfolio (qualified investments) must be invested in: l Unquoted companies; l Companies quoted on a growth market 1 or l Venture Funds with an investment policy similar to the Privak. However, investments in quoted companies on a growth market can never exceed 50% of the qualified investments. The company is not allowed to invest over 20% of the portfolio in one company, nor invest over 6,2 million in one year, in one company. Tax Benefits The Privak benefits from important tax advantages. These benefits only apply as long as the investment rules are adhered to and: All investments are made in companies, subject to a normal tax regime. Over 80% of the realised benefits of the fiscal year are paid out as dividend. (Quest for Growth states in its bylaws that at least 90% of the realised benefits will be paid out.) Dividends The part of the dividend resulting from capital gains will be exempt from withholding tax. The remaining part of the dividend will be subject to a withholding tax of 15%. Individuals: withholding taxes are considered as final taxes. Companies: 95% of the gross dividend income resulting from capital gains can be deducted from taxable profit (Dividend Received Deduction), withholding taxes can be credited against corporate taxes. Capital gains Exempt from taxation. Investment policy Quest for Growth invests in growth companies with the objective of converting capital gains into tax-free income through the Privak structure. The largest part of the portfolio is invested in companies listed on growth markets (NASDAQ Europe, EuroNM, NASDAQ, AIM) and other regulated markets. Under Privak rules this part may not exceed 65% of the assets from June The balance will be invested in unquoted companies intending to seek an introduction to a stock exchange within 18 months. Investments in startups or early stage companies are allowed, but will be exceptional. Up to 15% of the assets can be invested in venture or private equity funds having an investment policy compatible with that of Quest for Growth. 1Defined by the Belgian Banking Commission as NASDAQ Europe, NASDAQ, Nieuwe Markt (Belgium), Le Nouveau Marché (France), Neuer Markt (Germany), Nuovo Mercato (Italy), EURO.NM (The Netherlands) and Alternative Investment Market (U.K.). 6 Quest for Growth

7 CORPORATE GOVERNANCE Quest for Growth is governed by a set of rules imposed by corporate law, by the Privak legislation in particular and by a set of rules, laid out in the Ethical Code that applies to the directors of the Privak, of Quest Management NV and its personnel, the depositary bank and the investment advisers. Quest Management NV is the investment manager for Quest for Growth NV. The board of Quest for Growth includes 11 Board members, of which 4 are nominated by the owners of the A-shares and 4 are nominated by the holders of the B-shares. The board of directors of Quest for Growth has appointed two independent board members to monitor the daily management of the company by its managing director, Quest Management nv. They verify, in particular, any situations where one of the following persons has a direct or indirect interest in a transaction by the company: l l l The depository bank or the management company, or Persons with whom the company, the management company or the depository bank are linked or Board members, directors, persons who are responsible for the daily management of the Privak, the management company or the depository bank. The annual report must justify these transactions, especially with regard to the benefit the Privak could draw from the transactions and compliance with its investment policy. The auditor, in his general responsibility for the control of the accounts, also has the duty to report specifically about such situations in the annual report. The Board also created an audit committee. The audit committee is composed of four directors amongst them, two independent directors who have no operational or functional responsibilities in the company. The primary function of the audit committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing: l The quality and integrity of the company s auditing, accounting and financial reporting processes; l The financial reports and other financial information provided by the Company to the shareholders, government bodies and the public; l The company s systems of internal controls regarding finance, accounting, legal compliance and ethics that management and Board have established. The audit committee has unlimited and direct access to all information and personnel with information pertinent to the proper performance of its duties and can dispose of all resources necessary to perform its tasks. The committee is expected to maintain free and open communication with the auditors and management of the corporation. The audit committee took place 3 times over the past year The daily management of the company has to abide to the general principle in the Privak legislation that the company has to be managed in the sole interest of the shareholders (Art. 24, Royal Decree 18th April 1997). In addition, the company has to act according to Articles 60 and 60bis of the coordinated laws on commercial companies (new articles 523, 524 and 529 of the Belgian Company Code). These articles contain a set of special rules, which apply in the case where a company represented by a board member has a commercial interest in a decision to be taken by the Board. Board of Directors Dr. Jos B. Peeters, Chairman Quest Management NV, Managing Director, represented by Philip Fearnhead BVBA, Managing Director, Quest Management NV Comte Diego du Monceau de Bergendal, Vice Chairman Tacan BVBA, Vice Chairman, represented by Mr Johan Tack Philippe Haspeslagh BVBA, Board Member, represented by Prof. Philippe Haspeslagh Joedheco NV, Board Member, represented by Mr Leo Claeys Patrick Millecam, Board Member René Avonts, Board Member Gengest BVBA, Independent Board Member, represented by Mr Rudi Mariën Prof. Koen Debackere, Independent Board Member John Boeckmann, Board Member Quest for Growth

8 THE BOARD Dr. Jos B. Peeters Chairman Jos B. Peeters is the founder and managing partner of Capricorn Venture Partners NV. For seven years he was managing director of BeneVent Management, a Belgian based venture capital operation associated with the Kredietbank-Almanij Group. Previously he worked for the international technology based consulting group PA Technology and for the Bell Telephone Manufacturing Company, now part of Alcatel. Dr. Peeters has Belgian nationality and holds a Ph.D. in Physics from the University of Leuven. He has also been chairman of the European Venture Capital Association (EVCA) and of the working group, which founded the European Association of Securities Dealers (EASD). He was a co-founder of EASDAQ and is currently a director of NASDAQ Europe. Comte Diego du Monceau de Bergendal Vice Chairman Diego du Monceau brings with him a wealth of senior management experience. After a successful career in corporate finance with Merrill Lynch and Swiss Bank International Corporation, he joined GIB Group where he rose to become Managing Director and subsequently Chief Executive Officer. Today he is Vice Chairman of GIB Group, Chairman of Continental Bakeries (Netherlands), Chairman of the Executive Committee of E-Capital, an independent director of Banque Bruxelles Lambert, of IBA (Ion Beam Applications) and of WE International, as well as being on the boards of several non-profit organisations. Tacan BVBA Vice Chairman Represented by Mr Johan Tack Johan Tack obtained a degree in Economic Sciences and a Special License in Management at the University of Ghent. Since 1976 he has been active within various commercial and managerial functions with Generale Bank (now Fortis Bank). As a member of the Executive Committee of Fortis Bank, he was responsible for Marketing and Finance and Control ( ), Asset Management ( ) and the Credit Department ( ). Mr. Tack also created in 1981 the Vlaamse Investeringsvennootschap, currently Fortis Private Equity, where he was Managing Director until 1983 and Board Member until Today, he is an independent director on several boards such as Samsonite Corp. and City Hotels. He is also advising different companies as a consultant. Quest Management NV Managing Director, represented by Philip Fearnhead BVBA, Managing Director Quest Management NV Quest Management, the investment manager for Quest for Growth, carries out due diligence investigations, recommends investment and divestment decisions, and monitors and produces valuations of the portfolio. Philip Fearnhead BVBA, represented by Mr Philip Fearnhead, is Managing Director of Quest Management NV. Mr Fearnhead holds a B.Sc. degree in Physics from Imperial College in London, and a M.Sc. degree from the University of Wales. He spent nearly ten years in sales and marketing posts with IBM before joining Kleinwort Benson (now Dresdner Kleinwort Benson) as their computer industry analyst and has worked as a consultant to international IT and Telecommunications vendors. In 1993 he joined London insurer NPI (National Provident Institution) where he was responsible for international investments in both quoted and unquoted companies, with a particular focus on technology investments. Joedheco NV Director Represented by Mr Leo Claeys Mr Claeys is shareholder of the Roularta Media Group since He built up the internal structure of the media group and is Vice-Chairman of the Board of Directors. Mr Claeys is also active in the Boards of Directors of Covatel, Accentis, EasySolutions, Vincent Sheppard and various family partnerships. He is President of the Cennini Investment Holding. Philippe Haspeslagh BVBA Director Represented by Prof. Philippe Haspeslagh Philippe Haspeslagh is a Professor at INSEAD, the international business school with campuses in Fontainebleau and Singapore, where he holds the Paul Desmarais Chair in Partnership and Active Ownership. He is also a Professor at the Vlerick Leuven Gent Management School. He previously taught as a Visiting Faculty member at the Harvard Business School and the Stanford Business School, and was a Chief of Cabinet for the Belgian Minister of Agriculture and Small and Medium Enterprises. His research is in the areas of Mergers and Acquisitions, Corporate Strategy, Managing for Value and Corporate Governance. Philippe Haspeslagh is the Academic Director of the Conference Board's European Council on Corporate Strategy, as well as the Director of the ABN-AMRO Research Initiative in Managing for Value at INSEAD. He is the Chairman of Brains in Motion NV, Dujardin Foods NV, and Quest Management NV. He is a Board Member of Capricorn Venture Partners NV and Kinepolis. He is also a non-executive partner in Procuritas, a Scandinavian buy-out firm. 8 Quest for Growth

9 Patrick Millecam Director Patrick Millecam has a degree in Economic Sciences from the University of Ghent (RUG) and a degree in informatics from the University of Brussels (VUB). In the beginning of 1993 P. Millecam joined Corluy as a financial analyst. As a portfolio manager he won a lot of recognitions and awards for Bank Corluy: the Tijd Award for the highest return in 1 year in the pension funds category in 1996 and 1997, the Tijd Award for highest return in 1 year for the Belgian stocks category in 1997, the Tijd Award for the highest return in 3 years in the pension funds category in 1997 and 1998 and the Sicav de Cristal for the highest return in 1 year for the Belgian stocks category in P. Millecam is currently responsible for the investments in Flemish stocks (VLAM21), Belgian stocks (Top Global Belgian Shares) and the pension fund (Top Global Pension) of Bank Corluy. René Avonts Director Graduated in applied economics (Ingénieur Commercial) from the University of Leuven in 1970 and started his career in the IT-division of Paribas Belgique. He joined the International Division in 1972 and became head of that Department in He was elected member of the Executive Commitee and Director in 1995 with responsibility over Capital Markets and Corporate Banking. In 1998, he became member of the Executive Committee of Artesia Bank and Bacob, in charge of Financial Markets and Investment Banking as well as chairman of Artesia Securities, the groups equity broker, which was renamed Dexia Securities after the acquisition of Artesia by Dexia in He left the bank in March 2002 at the time of the legal merger between Dexia and Artesia. He was subsequently appointed Director and CFO of Elex nv: the reference shareholder of e.g. Melexis, Xfabs and EPIQ. He also joined Unit International, an investor in energy projects in Turkey and the Middle East, as Company Director and Chief Financial Officer. Gengest BVBA Director - Independent Board member Represented by Mr Rudi Mariën Rudi M. Mariën, born in 1945, is co-founder of INNOGENETICS; he has been Chairman of the Board of Directors and major shareholder since the foundation of the company. Mr. Mariën is also the founder, shareholder and Representative Director of several medical laboratories. He is the President of BARC NV, an accredited international leading central clinical laboratory, specialised in pharmaceutical studies and in performing analyses within the framework of occupational medicine. He has a degree in pharmaceutical sciences at the State University of Ghent and a specialisation in clinical biology. Koen Debackere Director - Independent board member Koenraad Debackere holds M.Sc. and Ph.D. degrees in Electrical Engineering and Management. He studied at the University of Ghent and MIT, Cambridge, U.S. He is a full professor in Technology and Innovation Management at the University of Leuven. He has been a visiting professor at Nijmegen Business School and is a faculty member at the Vlerick Leuven Ghent Management School. He has been a guest lecturer at various European business schools (Manchester, Kiel, Tilburg, Insead). He is the head of the research division INCENTIM at the University of Leuven. This division has developed extensive experience in doing fundamental and applied research in the area of technology and innovation management. Koenraad Debackere has received several international awards and nominations for his research activities in the area of technology and innovation management. He obtained Best Research Paper Awards from the American Academy of Management and the Decisions Sciences Institute. He has authored over 70 articles and book chapters in this field. He has been involved in projects for the European Commission, the Belgian and Dutch government and multinationals. Koenraad Debackere is the Managing Director of K.U.Leuven Research & Development and Chairman of Gemma Frisius-Fonds K.U.Leuven nv, the Venture Fund of the University. In November 1999 he was nominated Chairman of Leuven.Inc (Leuven Innovation Networking Circle). John Boeckmann Director After training as a stockbroker, John Boeckmann joined M&G in 1967 as an Investment Manager for UK assets. Between 1971 and 1978 he was a director of two listed public companies, specialising in asset realignment, which were both successfully sold. Until he left M&G in 1997, he managed a wide range of M&G funds such as equities, bonds, for retail and charity accounts, UK mutual funds, pension funds and special accounts including US accounts. From 1985 he successfully developed M&G Continental European exposure for specialist, pension and mutual fund activities. In 1997 he joined Compagnie Monégasque de Banque as a director responsible for Compagnie Monégasque de Gestion. He remains a consultant to banks in Portugal and Switzerland. 9 Quest for Growth

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11 KEY FACTS 1/7/2001-1/7/2000-1/7/ /9/ /6/ /6/ /6/ /06/1999 Net profit / loss: (49,311,136) (19,523,576) 56,426,078 3,126,851 Net profit / loss per share: (9.10) (3.60) Ordinary dividend: ,363,457 3,106,746 Dividend to A and B shares: 0 0 7,053,266 0 Profit / loss carried forward: (56,805,252) (7,494,116) 12,029,460 20,105 Ordinary Dividend per share (before withholding taxes): Ordinary Dividend per share (after withholding taxes): June 30th, 2002 June 30th, 2001 June 30th, 2000 June 30th, 1999 N.A.V.: 60,422, ,733, ,575,750 70,256,418 N.A.V. / share: Stock Price / share: Number of Shares: 5,416,000 5,416,000 2,708,000 2,708,000 STOCK PRICE Euro VOLUME Volume , ,000 80,000 60,000 40,000 20, Quest for Growth

12 INVESTMENT REPORT Investment Manager s Report Total OECD The year to 30th June 2002 was a terrible one for investors in technology and biotechnology shares and private equity. Major European indices of quoted technology companies fell by amounts ranging from 47.2% (Bloomberg New Markets 50 Index) to 68.6% (NASDAQ Europe Index). Private equity portfolios have suffered -8 many casualties and survivors have had to accept new financing at substantially lower valuations than previously. Euro area, Japan, USA Quest for Growth has not been immune to these fac- USA 12 Euro area tors. The overall loss of 45% on Quest for Growth s portfolio included several substantial valuation reductions (up Japan 8 4 to 100%) on private companies which were unable to secure additional financing after missing business objectives. While we are pleased to have outperformed many indices and comparable funds, the size of the loss is still very disappointing. Many of the problems of the past year are well known Source : OECD composite leading indicators Paris, 2 August 2002 including the terrorist attack on the World Trade Centre, false accounting by several major US corporations (particularly in the telecommunications and energy sectors), and reported profits artificially boosted by using generous stock options (which are not reported in companies Income Statements) to pay senior executives. These factors were most notable in the US, but Europe was not without its scandals. However, we should not ignore the underlying problems of a weaker economy and overvaluation of equities arising from the "bubble" period of the late 1990s. 10% 8% 6% US GDP Growth Ifo Business Climate Trade Business Climate 1 Balances, seasonally adjusted data 20 Western Germany Eastern Germany % 2% 0% % 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q % % -8% Y-Y % Change Q-Q % Change annualised Manufacturing industry, construction, wholesale and retail trade. 25/07/2002 Source : ifo Business Survey Business expectations for the next 6 months Upswing Assessment of Current Business Situation vs. Business Expectations Trade and Industry to 2002 Jan Jan Boom 0 Jan Juli 2002 Jan Jan Jan Downswing Recession Current business situation 1 Manufacturing industry, construction, wholesale and retail trade. Balances, seasonally adjusted data. Source : ifo Business Survey, WEST Germany The global economic outlook looked promising during most of the year, albeit overshadowed by the September 11th attack. Towards the end of the year, the OECD Composite Leading Indicators of economic activity rolled over, signaling possible weakness ahead. In Germany, Europe s largest economy, the ifo Business Survey showed persistent weakness in current business conditions during the year, despite an improvement in expected conditions. US GDP estimates for 2001 and Q were revised downwards in July, and the advance estimate of Q2 GDP growth was half the expected rate. This led to fears that the US economy might slide back into recession. 12 Quest for Growth

13 One of the causes for concern is that consumer confidence in the US weakened during the year, after an initial rebound following the September 11 attack, and consumer spending accounts for about 2/3 of US GDP. The main drivers of consumer spending - and the US economy in the latter months of our fiscal year have been auto sales (fuelled by zero rate financing) and real estate sales (fuelled by low mortgage rates) US Consumer Confidence Index Consumer Confidence Y-Y Change (RHS) Mar-94 Sep-94 Mar-95 Sep-95 Mar-96 Sep-96 Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Source : The Conference Board Tech forward earnings flattening this year after briefly rebounding earlier this year earnings expected to be down 4% from expected to be up 60%, but only back to 1998 level. Analysts still slashing 2002 and 2003 estimate. Long-term expected growth down from recors 29% in late 2000 to 18% now. Still selling at high premium to market multiple. Prior to 1998, Tech traded at same multiple as market's Source : Thomson Financial S&P 500 INFORMATION TECHNOLOGY OPERATING EARINGS PER SHARE (analysts average forecasts, ratio scale) S&P 500 INFORMATION TECHNOLOGY VALUATION & GROWTH P/E* Earnings Growth 99 P/E Relative to S&P % 30% 20% 10% 0% -10% -20% -30% -40% -50% Price divided by 12-month forward consensus excepted operating earnings per share using mid-month data. 5-year forward consensus excepted earnings growth. Percent annual rate. 01 Consensus Forecasts months forward Annual estimates 03 Jul Against this background, it is not surprising that analyst estimates of earnings for 2002 and 2003 continued to be slashed (see the chart below). This lack of profitability had a direct effect upon capital expenditures, including spending on computers and telecommunications. Technology companies valuations still looked expensive in July compared to historic measures, mainly as a result of the collapse in earnings. The chart below shows how the Price/Earnings ratio for the S&P 500 Technology Sector compares to both expected earnings growth and the totality of S&P 500 companies. On both measures, the technology sector looks expensive. The weakness of the equity markets itself has an impact on the future level of share prices. Company results for the coming year are likely to be adversely affected by the need to support their own pension funds. During the 1990s it was common for companies to take surplus assets from their pension funds and use them as an extra source of profits. That positive cycle is now changing to a negative one. This is unlikely to be a major issue for young companies which are typical of Quest for Growth s portfolio, but may set a negative backdrop for equity markets. Insurance companies, which manage the bulk of institutional pension funds, are finding that the reduced surplus of their assets over actuarial liabilities is putting them in a position where they may be forced to sell equities in favour of bonds to meet regulatory requirements. The near term outlook for equities in general, and growth stocks in particular, remains difficult. A stable economic environment with improved corporate profitability is needed to boost capital spending. Lower interest rates would help consumers to continue to purchase items like computers and cellular telephones, but the present high level of consumer debt in the US may hamper growth in consumer spending for some time. Source : Thomson Financial Quest for Growth

14 Sector developments Overview Private Equity Investments in unquoted companies Quest for Growth targets pre-ipo investments accelerate the company and prepare the balance sheet Investments in private companies can take place for going public. at various stages In 1999 and 2000, there was an enormous boom in the number of IPOs in the technology and life sciences sector. Replacement/ This boom was abruptly ended in 2001, after the much Buyout talked about burst of the bubble and the collapse of the Seed Start-UP Expansion Pre-IPO IPO extremely high start-up valuations. The booming IPO market in 1999 and 2000 lead to the fact that even relatively Private Equity Public Equity immature companies could go to the public markets companies that historically would not have been considered to QfG's target be ready to become listed, having little or no revenues, certainly Source : QM no profit and often still being far from having a com- mercially available offering. Traditionally, these would have Investments in private companies can take place at various stages of a company s life-cycle. Each type of financing is usually provided by a specialized player in the market. Very few investors span different phases. been the companies that would be looking for growth financing and feeding the pipeline for pre-ipo investment rounds. But since these type of companies already went public, the pipeline of pre-ipo companies is greatly depleted. Seed capital is provided at the business plan stage, followed by start-up and expansion capital as the company is developing its products and starting to market them. The next step is the so-called pre-ipo financing. This is the stage of financing Quest for Growth is targeting for its unquoted investments. Being a cross-over fund, Quest for Growth invests in both public and private equity. For its private equity investments, it is looking for companies that are in their last Since 2001, there were very few European technology and life sciences IPOs round of financing before potentially going public. When an initially private equity investment becomes publicly quoted, Quest for Number of European Technology and Life Sciences IPOs 400 Growth can still keep it in its portfolio if it wishes to do so The pre-ipo market currently lacks opportunities Technology Life Sciences 238 The pre-ipo market for technology and life sciences investments currently lacks opportunities, as there is little drive neither from the IPO side nor from the earlier stage investments. No pull effect by non-existing IPO market In a booming IPO environment, there is a strong pull towards the pre-ipo financing stage. Many venture backed companies are looking for a last round of private financing in order to further Source : Bloomberg 14 Quest for Growth

15 In 1999 and 2000, companies went to the public markets early on in their lifetime Average age of a firm conducting an IPO on the US market Venture capitalists are finding it difficult to find exit strategies for their investments in order to cash in the return of their investments. The stock market s appetite for IPOs has all but disappeared, with few signs of it reemerging soon. The other common exit strategy, having a company merge or be acquired by another firm, has also slowed significantly. Many companies that would be natural trade buyers in the technology sector, just aren t looking to acquire at the moment with capital expenditure being down Source : Reuter With the ongoing difficult market environment and the excesses of the recent past, investors have turned away from the IPO market. Many of the planned IPOs of the last months were delayed or cancelled because of low valuations and lack of appetite from investors. Companies that are still contemplating an IPO in the near future need to be of substantial size ($ 100 million+), have a significant history of revenue growth and preferably be profitable already. The market will remain unreceptive to companies without a proven track record or profitable business model. In the first quarter of 2002, only 0.9% of European Venture Capital divestments were done by flotation 1. The lack of IPO candidates in the European technology and life sciences field results in little or no pull effect from the IPO market to the pre-ipo financing space. No push effect by decreased earlier stage investments While VC investors have not stopped backing early stage companies with the promise of high growth, they are a lot more cautious than they used to be. European venture capitalists have put EUR billion into companies in the first quarter of 2002, down 32% from EUR billion in the fourth quarter of The proportion of companies receiving follow-on investments from their existing shareholders is high, with VCs focusing their efforts more on nursing their existing portfolio than on originating new investments. But valuations kept going down in the past months and thus also returns have decreased. Quest for Growth did not make any new unquoted investments the past year In the past year, Quest for Growth did not invest in any new pre-ipo companies. Although Quest is reviewing many private placements, none of them were deemed to be a real pre-ipo investment within the envisaged time frame, with having an attractive valuation QfG's keeps analyzing potential unquoted investments, but very few qualify as potential pre-ipo opportunities Number of files Q Q Q Q Q Q Q Q Q Q Q Q Q # files received # Potential pre-ipo (12-18 months) (R ight hand scale) Source : QM Source: EVCA press release 20/7/02; divestment at cost, including all VC sectors in Europe 2 Source: Ernst & Young and Venture One survey Wall Street Journal Europe 24 May 2002 Quest for Growth

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17 Investments in quoted companies Introduction Global markets were very volatile in the last months of our fiscal year, both on an intra- and inter-day basis influenced by negative economic news and continued concerns over corporate governance in the US, and in particular over the accounting of former telco giants WorldCom and Qwest Communications and energy company Enron, as well as from traditional companies as Xerox and Merck. The technology sector was at the end of our fiscal year trading at levels below the lows reached immediately after 11 September If the current crisis has demonstrated anything, it is that cash is king specially in the biotech area. For this reason, it is crucial to look at the balance sheets of the tech companies and their potential for generating cashflow. The European IT services market has seen a progressive slowdown in demand over the last 12 months. The beginning of 2002 was marked by numerous profit warnings. Total IT spending in 2001 in Western Europe was estimated by the European Information Technology Observatory (EITO) to be over 640 billion Euro, of which 21%, or 133 billion euro, was in IT services. This represents an increase of 8.0% compared with Growth rates declined substantially in the UK, France, Germany and Scandinavia in IT Services is cyclical and highly competitive, making it a tough market at present. The poor performance of companies shows how the current climate is harming the sector. The downturn in the semiconductor industry is a result of slower demand in the communications industry; in particular the logic products for mobile and wire-bound communication. End products from the mobile communication segment include mobile telephones and cordless telephone systems, systems for cordless data transmission (e.g. bluetooth) and navigation systems (Global Positioning System). The markets for all these products are characterised by a trend towards lower costs, significantly shorter product cycles and higher system integration. To meet the ever increasing demands of semiconductor applications, manufacturers are constantly searching for new materials with qualities superior to those of traditional silicon. Silicon has been the lifeblood of semiconductors since the 1960s, but demands for miniaturisation, battery life and power to run GPRS mobile handsets, future UMTS handsets, PDAs and portable computers will require new materials. Two possible answers are Compound Semiconductors and Silicon-On-Insulator (SOI). In a difficult operating environment, larger companies appear to be better positioned to survive periods of acute competition, pricing pressure and low utilisation rates. They tend to be included in the lists of preferred providers of the largest industrial groups. They also have the financial weight to bid for large outsourcing contracts (a source of growth as well as stabilising recurring revenues), suffer temporary price declines and higher pre-sales costs generated by longer bidding processes. The global players have been gaining market share and posting higher growth rates in Europe than the smaller European firms (including the large caps). The activities of the global players are more diversified by economic sector, geographic region and offerings, enabling a better balance in their portfolio of activities. These firms are therefore able to benefit from improvements in any one of their businesses or geographic markets before the smaller firms, which are more limited in scope. Uptake Incubation EV/subscribers EV/sales Growth Shake-out EV/gross margins V/EBITDA EV/FCF Maturity Quest for Growth

18 IT Services : the low point in the cycle may have been reached but the market remains challenging But none of the existing ERP, SCM and CRM systems was intended to manage products and their dynamically changing content during the complex journey from the drawing board, through the supply chain, to the manufacturing site, to the end user, and back again to the drawing board. In some IT areas, notably consulting and systems integration, the market in the first half of 2002 remained just as poor as in 2001 and pricing pressure continues. Gartner Group s survey of large European companies planned IT budgets for 2002 shows that 74% of firms foresee flat spending in IT at best, suggesting that 2002 will remain a difficult year for most IT service providers. However, it should be noted that the same survey in 2001 put budgetary declines at almost 35%, 9 points higher than this year. This underlines that the low point in the cycle may have been reached but that the market remains challenging, particularly for the smaller players. Companies are looking logically to improve what they have already installed, optimising existing systems and addressing immediate problem areas, which could improve efficiency and productivity. They are not looking to invest in new projects unless a rapid return on investment (less than 12 months) can be shown or the systems concerned are mission critical. Decrease 26% Evolution of company IT budgets in 2002 Source : Gartner Group, May 2002 Flat 48% Increase 26% The current market environment favours the largest firms. However, despite a centralisation of investment decisions, IT services require a local presence, which can favour the smaller players. Will Product Lifecycle Management (PLM) be the next big enterprise application? Product Definition Manufacturing Sale & Services In the history of enterprise software, companies have first improved their internal efficiencies through Enterprise Resource Planning (ERP), then the effectiveness of their supply networks with Supply Chain Management (SCM). Both solutions address asset management functions, with the first one focusing on fixed capital and the second on working capital. In the next step, companies have rolled out customer relationship management (CRM) solutions to automate the business processes related to the customers. Concept Design Testing Source Manufacturing Market Logistics Support Product Lifecycle Management (PLM) platform PLM could succeed ERP, SCM and CRM as the next opportunity for revenue growth. 18 Quest for Growth

19 Internet Media services While the internet remains a growth industry, Quest Management believes that European internet media services are rapidly maturing. The industry is entering its final shake-out phase for the following reasons: Internet penetration in Europe is attaining the levels of PC penetration in most countries with a few notable exceptions. While this trend will hinder subscriber growth for the industry, ISP-Portal may continue to increase access revenues in Europe through greater ARPU (average rate per user) driven by increased usage per subscriber and Broadband sales. Industry consolidation will continue with most second-tier companies being acquired or exit the industry. Regulation changes combined with the growing demand for broadband Almost all of the western European incumbent telecom operators have recently announced aggressive plans to deploy DSL (digital subscriber line) technology in their respective domestic markets in order to capitalise on the expected strong demand for high speed broadband services by both residential and business customers. The market will increasingly focus on the operating performance and fundamentals of all European ISP-Portals. As the industry matures, valuation metrics evolve. will substantially alter the traffic dynamics of the industry and accelerate the consolidation of the ISP-Portal sector in Europe. The online advertising market should recover in 2003/2004 when new advertising models are developed as broadband penetration attains critical mass. Online directory advertising will continue to grow at a fast pace, underlying the importance of local based information and the fact that convergence between consumer internet portals and online directories is happening. Comparative growth in the European IT S ervices sector and GDP 20.00% 15.00% 10.00% 5.00% 0.00% Growth in IT servi ces sector Growth i n E ur opean G DP (r ight hand scale) 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% Quest for Growth

20 Telecommunication industry : The past few years have been a roller coaster ride. What went wrong? Is UMTS the answer? Growth in the capital invested by telcos has risen more quickly over recent years than at any other point in the industry s history. During the 1990s the industry was on a growth trend in terms of perceived future revenues. But to achieve that revenue growth the industry needed an advance guard of capital. The key factors driving that capital inflow were: New opportunities for growth in particular data/ip and mobile communications Expanded competitive environment as deregulation grew Rapid formation of new operators as capital became very cheap Consolidation among manufacturers improved their negotiating position with respect to the operators. The trend towards declining capital spending is now clearly established and the pace of decline has been accelerating (see graph). The need to pull back spending by the alternative operators has in turn reduced competitive pressure on incumbents to deploy new technology, at least in the near term. Delays to the roll out of new 3G mobile technology are widespread. Reduced economic growth and over-leveraged balance sheets have delayed capital spending. Fundamental shifts in the industry structure causes Quest Management to view the near and medium term outlook for capital spending with prudence. The graph shows a sharp decline in wireline capex and the growth expected for wireless in In particular European wireless estimates still assume strong growth as new entrants start to build 3G networks Telco Equipment Capex 62,1 36, ,4 14, ,9 117,3 115,7 111,2 103,7 176,3 173,5 131,2 128,7 133,3 140, e2002 e2003 e Wireline Wireless Alternative Source : Industry Data, Deutsche Bank, CSFB 20 Quest for Growth

21 But before UMTS first MMS, GPRS and EDGE have to become buzzwords MMS (Multimedia Messaging Services) Forecasting potential demand for particular services is difficult. SMS, for example, evolved more or less as a technical byproduct. No one expected that SMS would develop into such a major application. In Europe, every mobile subscriber sent 20 SMS per month on average in 2001, even though the service is inconvenient, rudimentary, and expensive (a short message costs on average 0,15 Euro in Europe). European mobile communications companies currently generate about 10% of their revenue with SMS. One may suppose from the success of SMS, chatting, and that people have a need to send each other messages with text and images. Examples of that would be taking vacation photos with a digital camera and sending them directly to friends or attaching image or music files to greeting messages. Mobile phone manufacturers expect that MMS (Multimedia Messaging Services) will bring a new mobile communications boom. However, opinions and forecasts regarding the success of MMS are very divided. GPRS (General Packet Radio Switched) GPRS is a mobile communications technology that is integrated into existing GSM networks and builds on GSM technology. GPRS is a packetoriented data communications system in which data is transmitted not "circuit- switched" as in the past but in individual "packets". Billing is no longer done by time units, but by data amounts. EDGE (Enhanced Data rates for Global Evolution) EDGE is a farther reaching technology designed to achieve data transmission rates that fully utilise the physical properties of the GSM/GPRS networks. EDGE can be used to upgrade GSM/GPRS networks so that data transmission rates of up to 384 kbit/s are achieved. It is now assumed that the possibilities of increasing GSM/GPRS data transmission rates are fully exploited with EDGE, i.e., installing the EDGE technology in existing GSM networks will fully realize their potential for extension. DOWNLOAD SPEEDS OF VARIOUS APPLICATIONS ON DIFFERENT DATA TECHNOLOGIES GSM (9.6kbps) GPRS (30kbps) UMTS (144kbps) (2 sides A4) 2 KB 2 seconds 1 second 0 seconds Mobile banking (transfers) 4 KB 3 seconds 1 second 0 seconds Web page 20 KB 17 seconds 6 seconds 1 second Pictures (colour, jpeg 349x519) 100 KB 1 minute 25 seconds 5 seconds Mini video (30 seconds) 700 KB 10 minutes 3 minutes 38 seconds Audio file (4 min) 4 MB 55 minutes 17 minutes 3.5 minutes MTV video (4 min) 9 MB 125 minutes 40 minutes 8 minutes Movie (2 hours, 6x6cm) 360 MB 83 hours 26 hours 5.5 hours Quest for Growth

22 UMTS :The final goal UMTS stands for Universal Mobile Telecommunications System and is designated as the mobile communications standard of the third generation (3G). UMTS holds the prospect of very high data transfer rates (2 MB/sec) over wireless networks. GPRS/WLAN card UMTS PC Card UMTS WAN/LAN 4G 3G The goal of the UMTS standard was to develop criteria that are, as far as possible, accepted worldwide so as to establish a globally uniform standard. GPRS GSM/GPRS Embedded Module 2.5G The rates of adoption of MMS/GPRS and UMTS 2G can be estimated by reference to previous prod- GSM uct cycles. The chart shows the direct relationship between the rate at which handset retail prices decline and at which penetration increases, for three product cycles: Source : Option Early 90 s G (wireless voice). The two key tipping points for 2G/wireless-voice appeared to be in 1994/5 when retail prices fell below 600 Euro, and then most critically in 1996/7, when retail prices fell below 400 Euro. 2.5G (picture-messaging). The compelling precedents for the pace at which MMS/picture-messaging can scale the S-curve are: l (a) the pace at which its SMS predecessor was adopted, l (b) the relevant handset price points are likely to come in below the 2G "600 Euro tipping point" in 2002, and "400 Euro tipping point" in G (bandwidth/service quality). This technology offers a unit of capacity for at least a third of the dollar cost of GSM. The direct implication of the picture-messaging S-curve is a material increase in the level of data traffic. Retail price, pre-subsidy (Euro) Source : Nokia, Deutsche Bank European penetration (RHS) GPRS/MMS penetration (RHS) Retail price, pre-subsidy (LHS) 3G handset retail price, pre subsidy (LHS) SMS penetration (RHS) 3G penetration (RHS) Colour/MMS/GPRS handset price (LHS) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Subscriber Penetration 22 Quest for Growth

23 The Semiconductor Industry In 2001 and the first half of 2002, the semiconductor industry registered its largest ever year on year decline. The pronounced contraction can be attributed to the global economic slowdown which hit important markets for semiconductor products as well as an inventory overbuild. Supply shortages in mid-2000 prompted customers in all segments to build up safety reserves, with double orders even being assigned in some cases in order to satisfy the upswing anticipated at that time. The effects of the unexpected downswing are now being compounded by destocking of inventories. After the weak phase in 2001, the sector appears to be emerging from the trough in There are positive signs of a recovery in demand in certain segments. Nonetheless, the global market environment still carries the stamp of unkind price competition in all end-products that include semiconductors. Although unit shipments of semiconductors have increased rapidly, prices have fallen just as fast, so revenues show little growth. Year on year sales of semiconductors have been improving to rs 70% 50% 30% 10% -10% nov/90 nov/91 nov/92 nov/93 nov/94 nov/95 nov/96 nov/97 nov/98 nov/99 nov/00 nov/01-30% -50% -70% World USA Europe Japan Asie Source : Semiconductor Industry Association May but actual sales value is the same as in jan/90 jan/91 jan/92 jan/93 3months moving averages, $ millions jan/94 jan/95 jan/96 jan/97 jan/98 jan/99 jan/00 jan/01 jan/ United States Europe Japan Asia Worldwide (right hand scale) Source : Semiconductor Industry Association May 2002 Quest for Growth