Interim Results

Shires Smaller Companies PLC 16 August 2001 Shires Smaller Companies plc Interim Results for the six months to 30 June 2001 Shires Smaller Companies plc aims to provide a high and growing dividend and capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities. 30 June 31 December 2001 2000 Net assets attributable to shareholders £48.9m £52.5m Net asset value per share 223.4p 240.1p Share price 206.5p 200.0p Discount 7.6% 16.7% Dividends per share 6.0p 3.0p* *Half year to 30 June 2000 - Total return on net assets was -4.5%, significantly better than the FTSE All-Share Index, which returned -7.3%, and the FTSE SmallCap Index (excluding Investment Companies), which returned -6.6%. - Return to shareholders was +6.3%, having benefited from a reduction in the discount, from 16.7% at 31 December 2000 to 7.6% at 30 June 2001. - Second interim dividend of 3.0p has been declared, making total dividends for the period to 30 June 2001 6.0p, compared with 3.0p for the corresponding period last year. - At the share price of 188p at 31 July 2001, the minimum dividend forecast of 13.75p for the year to 31 December 2001 represents a yield of 7.3%. - The Board has introduced low cost partial hedging of the ordinary share portfolio to limit the rise in gearing which could result from further equity price weakness. - Ratings of UK equities have fallen to lower levels than have been seen for some time, presenting an increasing number of attractive investment opportunities. Chairman's Statement Background On the UK stockmarket the prices of the shares of both large and small capitalisation stocks weakened in the first half of 2001 as the rate of output growth in the UK fell and evidence mounted that the economic slowdown was spreading from manufacturing into the previously more resilient service sector. As forecasts of corporate profits were revised downwards, the shares of companies to which investors had attributed growth ratings suffered worse than those which appeared to offer defensive characteristics. Investment Returns The Company has performed well against this difficult background. The total return on net assets was -4.5%, which was significantly better than the returns of -7.3% on the FTSE All-Share Index and of -6.6% on the FTSE SmallCap Index (excluding Investment Companies). The total return to shareholders was +6.3%, well ahead of the stockmarket indices, having benefited from a reduction in the discount of share price to underlying net asset value per share. Investment Strategy In order to encourage an improvement in the rating of the Company's shares, additional gearing was introduced in the third quarter of 2000 to generate a higher income from invested assets and thus permit an increase in dividend distributions. Between 30 June 2000 and 30 June 2001 the discount fell from 24.6% to 7.6%. Part of this fall was due to a decline in discounts generally, but undoubtedly the new strategy was also an important factor. Earnings and Dividends The revenue return per ordinary share was 6.99p. Because of the change in strategy this figure is much higher than the 2.42p per share for the equivalent period last year. The Board has declared a second interim dividend of 3.0p per share, to be paid on 28 September 2001 to shareholders on the Register at close of business on 7 September 2001. A first interim dividend of 3.0p was paid on 29 June 2001. Dividends paid in 2001 to date under the new strategy total 6.0p, compared with 3.0p for the equivalent period last year. The Board intends to pay total dividends of not less than 13.75p in respect of the year to 31 December 2001. At the share price of 188p on 31 July 2001 the forecast dividend represented a net annual yield of 7.3% on the Company's ordinary shares. Portfolio Profile At 30 June 2001 the value of the Company's exposure to ordinary shares amounted to 103.7% of net assets, reflecting the Board's policy of maintaining the growth characteristics of the portfolio. Investments in corporate fixed interest and convertible securities, from which the major portion of the Company's income arises, are equivalent to 56.0% of net assets. Total gearing was 59.7%, comprising the secured loan 20.4%, zero coupon finance 26.3% and short-term borrowing 13.0%. When share prices fell in the early part of 2001 gearing rose briefly above 60%, before falling again as the stock market rallied. To limit the further major rise in gearing - and attendant erosion of net assets - which could result from renewed weakness of ordinary share prices, the Board decided to introduce low cost partial hedging of the ordinary share portfolio. This was put in place in early August 2001. Outlook Interest rates have been reduced several times in both the USA and the UK to counter the threatened onset of recession, but there is little sign as yet of an improvement in economic prospects on either side of the Atlantic. Meanwhile, in this climate of uncertainty, the ratings of UK equities have fallen to lower levels than have been seen for some time, presenting an increasing number of attractive investment opportunities. The Interim Report will be posted to shareholders on 24 August 2001. Copies may be obtained from the managers, Glasgow Investment Managers Limited, Sutherland House, 149 St. Vincent Street, Glasgow G2 5DR, after that date. J Stubbs Chairman Consolidated Statement of Total Return (incorporating the Revenue Account) For the half year ended 30 June 2001 Half year to 30 June 2001 Half year to 30 June 2000 (unaudited) (unaudited) £000 £000 £000 £000 £000 £000 Revenue Capital Total Revenue Capital Total Gains/(Losses) - (2,852) (2,852) - 2,673 2,673 on investments Dividends and 2,109 - 2,109 883 - 883 interest receivable Profits less - - - 40 - 40 losses of dealing subsidiary Underwriting 10 - 10 4 - 4 commission Investment (171) (171) (342) (122) (122) (244) and management fee Other (97) - (97) (89) - (89) administrative expenses NET RETURN 1,851 (3,023) (1,172) 716 2,551 3,267 BEFORE FINANCE COSTS AND TAXATION Finance costs 321 321 642 232 232 464 of borrowings Zero coupon - 520 520 - - - finance RETURN ON 1,530 (3,864) (2,334) 484 2,319 2,803 ORDINARY ACTIVITIES BEFORE TAXATION Taxation - - - - - - RETURN ON 1,530 (3,864) (2,334) 484 2,319 2,803 ORDINARY ACTIVITIES AFTER TAXATION FOR THE PERIOD Dividends on 1,313 - 1,313 623 - 623 equity shares TRANSFER TO / 217 (3,864) (3,647) (139) 2,319 2,180 (FROM) RESERVES Return per ordinary share - undiluted 6.99p (17.66)p (10.67)p 2.42p 11.58p 14.00p - fully diluted 2.33p 11.17p 13.50p Dividends per 6.00p 3.00p ordinary share Consolidated Statement of Total Return (incorporating the Revenue Account) for the half year ended 30 June 2001 Year to 31 December 2000 (audited) £000 £000 £000 Revenue Capital Total Gains/(Losses) on investments - 3,463 3,463 Dividends and interest receivable 2,597 - 2,597 Profits less losses of dealing subsidiary 130 - 130 Underwriting commission 7 - 7 Investment and management fee (278) (278) (556) Other administrative expenses (188) - (188) NET RETURN BEFORE FINANCE 2,268 3,185 5,453 COSTS AND TAXATION Finance costs of borrowings 500 500 1,000 Zero coupon finance - 353 353 RETURN ON ORDINARY ACTIVITIES 1,768 2,332 4,100 BEFORE TAXATION Taxation - - - RETURN ON ORDINARY ACTIVITIES 1,768 2,332 4,100 AFTER TAXATION FOR THE PERIOD Dividends on equity shares 1,608 - 1,608 TRANSFER TO / (FROM) RESERVES 160 2,332 2,492 Return per ordinary share - undiluted 8.44p 11.12p 19.56p - fully diluted 8.27p 10.91p 19.18p Dividends per ordinary share 7.50p Group Balance Sheet as at 30 June 2001 30 June 31 December 2001 2000 (unaudited) (audited) £000 % £000 % Fixed assets Investments listed on the London Stock Exchange - ordinary shares 50,682 103.7 52,638 100.2 - convertibles 3,582 7.3 3,898 7.4 - other fixed interest 125 0.3 158 0.3 Corporate bonds 23,681 48.4 23,357 44.5 78,070 159.7 80,051 152.4 Current assets Debtors 927 968 Cash at bank - 850 927 1,818 Creditors: amounts falling 7,257 7,004 due within one year Net current liabilities (6,330) (13.0) (5,186) (9.9) Total assets less current 71,740 146.7 74,865 142.5 liabilities Creditors: amounts falling due after more than one year Long-term loan 9,975 (20.4) 9,973 (19.0) Zero coupon finance 12,872 (26.3) 12,352 (23.5) Net assets 48,893 100.0 52,540 100.0 Capital and reserves Called up share capital 10,943 10,943 Share premium account 11,490 11,490 Capital redemption reserve 2,032 2,032 Realised capital reserve 15,062 15,284 Unrealised capital reserve 8,282 11,924 Revenue reserve 1,084 867 Equity shareholders' funds 48,893 52,540 Net asset value per ordinary 223.4p 240.1p share Note: These are not statutory accounts under section 240 of the Companies Act 1985 and are unaudited. The information as at 31 December 2000 is derived from the audited company balance sheet as at that date contained in the latest audited accounts which have been delivered to the Registrar of Companies; the report of the auditors on these accounts was unqualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. Consolidated Cash Flow Statement for the half year ended 30 June 2001 Half year to Half year to Year to 30 June 30 June 31 December 2001 2000 2000 (unaudited) (unaudited) (audited) £000 £000 £000 Net cash inflow from 1,754 510 1,215 operating activities Servicing of finance Interest paid (680) (477) (972) Investing activities Purchases of (21,330) (9,444) (42,257) investments Sales of investments 19,253 13,523 26,217 (2,077) 4,079 (16,040) Equity dividends paid (1,203) (737) (1,503) Net cash (2,206) 3,375 (17,300) (outflow)/inflow before financing Financing Zero coupon finance - - 11,999 Exercise of warrants - 2,233 2,233 - 2,233 14,232 (Decrease)/Increase (2,206) 5,608 (3,068) in cash Analysis of Changes in Net Debt At Other At 31 December Cash non-cash 30 June 2000 flows changes 2001 £000 £000 £000 £000 Cash at bank 850 (850) - - Bank loans and (5,000) (1,356) - (6,356) overdrafts Long-term loan (9,973) - (2) (9,975) Zero coupon finance (12,352) - (520) (12,872) (26,475) (2,206) (522) (29,203)

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