- Preliminary Results

Edinburgh Small Companies Trust plc 11 September 2006 EDINBURGH SMALL COMPANIES TRUST PLC Edinburgh Small Companies Trust PLC, the investment trust with an investment objective to achieve long term capital growth by investment in UK quoted smaller companies, announces its preliminary results for the year ended 30 June 2006. PRELIMINARY RESULTS FOR THE YEAR ENDED 30 JUNE 2006 For further information, please contact: Gordon Humphries Head of Investment Companies, Standard Life Investments Tel. 0131 245 2735 Richard England Press Manager, Standard Life Investments Tel. 0131 245 2750 Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested. Edinburgh Small Companies Trust PLC Chairman's Statement 'The period under review is the second full year with Standard Life Investments as the Manager of the Company. The Board is pleased with the substantial progress the Company has made in the last twelve months in terms of share price and net asset value performance, even through volatility in smaller companies late in the period. The robust performance, along with the benefit of a strong contribution from the Manager in marketing and distribution, has been reflected in a further narrowing of the discount over the past year. Review of Year ended 30 June 2006 Returns from UK smaller companies were strong over the year as a whole and well ahead of broader markets. The period from October 2005 through to May 2006 was one of particular strength. Robust UK economic growth enabled a wide range of UK smaller companies to report healthy earnings progress. In addition, bid activity remained at high levels. Oil & gas and minerals were among the strongest market areas, while technology was the weakest. During May, fears that rising interest rates and a strengthening pound would impact on corporate earnings and economic growth caused a sharp bout of risk aversion especially among economically sensitive sectors and the smaller companies area of the market. Respectable economic growth figures and first quarter corporate earnings helped to stabilise markets going into June, but volatility continued. Performance I am pleased to report that the Company delivered a 36.3% rise in net asset value over the period. This was comfortably ahead of its benchmark, the Hoare Govett Smaller Companies Index (excluding Investment Trusts) which rose 25.9%. This strong performance reflects the success of the careful stock selection strategy implemented by the Manager since its appointment in September 2003. Performance improved steadily throughout the year reflecting the Manager's style of investing in a well-diversified portfolio of medium and smaller capitalisation stocks with strong business franchises. A broad range of stocks performed well during the year, most notably Paypoint, First Quantum Minerals, Datamonitor and Raymarine. Gearing The amount of 7.75% 2023 debenture outstanding remains at £18.7m with no repurchases made during the year. The potential gearing was reduced from 32.5% to 23.2% of shareholders' funds over the period as a consequence of the underlying increase in net assets. The actual level of gearing was kept at a low level throughout the period, except for the first quarter of 2006 when gearing moved to over 15% to take advantage of an expected strong period for smaller companies. Gearing was reduced to around 3% in April, ahead of anticipated market weakness. As the level of potential gearing was reduced, the impact of the dilutive effect of the interest payable on the 7.75% 2023 debenture continues to fall. Repurchases of the debenture may take place but only if it is advantageous to shareholders. The Board believes that the risks inherent in the potential gearing remain at low levels. Discount The share price of the Company rose by 46.6% to 101.5 pence by the end of the period under review representing a significant narrowing in the discount from 20.3% to 14.3%. Revenue Account Despite dividends from UK companies growing last year, investment income from dividends received fell marginally. This reflected portfolio realignment towards slightly lower yielding shares and a lower level of actual gearing throughout the year. A substantially greater interest payment from funds on deposit meant that overall investment income rose for the year. A strong rise in dividend growth from shares held by the Company should lead to higher levels of income in the coming financial year. The expense ratio of the Company was higher than the previous year, due to the impact of professional costs associated with corporate activity. As a result of the improved capital and revenue performance, the Board is proposing to pay an unchanged dividend of 0.80p per share. If approved, the final dividend will be paid on 3 November 2006 to shareholders on the register at the close of business on 20 October 2006 and the shares will go ex-dividend on 18 October 2006. Share and Warrant buybacks No shares or warrants were purchased by the Company for cancellation over the twelve month period. The Board is seeking permission from shareholders to renew the authority to purchase up to 14.99% of the shares in issues. Details of the special resolution will be set out in the Notice of Annual General Meeting within the Annual Report. Prospects While the next twelve months may not show as strong growth in smaller company markets as the year just ended, there is likely to be measured progress. Moderating growth in the US economy, risk aversion brought on by the high oil price and geopolitical tensions may have an impact on markets in the short term. While valuations for smaller companies are less compelling than they were a few years ago, the long term investment prospects for smaller companies are attractive. The investment process of the current Manager is carefully risk controlled. It is focused on companies with proven business models and is therefore well placed to capitalise on growth while remaining resilient in an uncertain world. The Board is most confident that good progress will be made in the coming year. Proposals for the Company's future At the Extraordinary General Meeting held on 14 August 2006, resolutions relating to the future of the Company were put to shareholders and passed by over 95% of shareholders who voted. As stated in the Circular sent to shareholders on 20 July 2006, the Board considers that shareholder approval of these resolutions gave authority to the Board to bring forward proposals involving inter alia, a tender offer for up to 50 per cent. of the Company's shares, or should the tender offer be oversubscribed, a voluntary liquidation of the Company with a tax and cost efficient rollover offered into the UK Smaller Companies Fund, an open ended investment company managed by Standard Life Investments. The Company expects to post documents to shareholders with further information on these proposals in early October and further meetings of shareholders, warrant holders and debenture stockholders will be held within the next two months to effect the proposals. In the three years ended 31 August 2006, during which time Standard Life Investments has been the Manager, the share price of the Trust and its net asset value have risen by 118.3 per cent. and 84.0 per cent., respectively, compared to an increase of 76.0 per cent. in the benchmark Hoare Govett Smaller Companies Index (ex Investment Trusts) (all figures are calculated on a total return basis). The Directors believe that this excellent performance reinforces the Board's desire for the Company to continue in existence. Consequently, the Directors will not be tendering any of their ordinary shares and believe that this is also the appropriate course of action for other shareholders who wish the Company to continue as an investment trust. Donald MacDonald Chairman 8 September 2006' Income Statement Year ended 30 June 2006 (Unaudited) Revenue Capital Total £'000 £'000 £'000 Realised gains on investments - 7,885 7,885 Unrealised gains on investments - 14,726 14,726 Currency gains - 3 3 Income 1,808 - 1,808 Investment management fee (393) (393) (786) Administrative expenses (362) - (362) __________ __________ __________ Net return before finance costs and taxation 1,053 22,221 23,274 Finance costs (709) (709) (1,418) __________ __________ __________ Return on ordinary activities before taxation 344 21,512 21,856 Taxation (1) - (1) __________ __________ __________ Return on ordinary activities after taxation 343 21,512 21,855 __________ __________ __________ Return per Ordinary share (pence): 0.51 31.91 32.42 __________ __________ __________ The total column of this statement represents the profit and loss account of the Company. The Company had no recognised gains or losses other than those recognised in the Income Statement. The financial statements for the year to 30 June 2005 have been restated to reflect the changes to accounting practices as set out in the accompanying notes. All revenue and capital items in the above statement derive from continuing operations. The accompanying notes are an integral part of the financial statements. Income Statement Year ended 30 June 2005 (Restated) (Unaudited) Revenue Capital Total £'000 £'000 £'000 Realised gains on investments 3,505 3,505 Unrealised gains on investments - 7,418 7,418 Currency gains - - - Income 1,967 - 1,967 Investment management fee (292) (293) (585) Administrative expenses (286) - (286) __________ __________ __________ Net return before finance costs and taxation 1,389 10,630 12,019 Finance costs (709) (709) (1,418) __________ __________ __________ Return on ordinary activities before taxation 680 9,921 10,601 Taxation - - - __________ __________ __________ Return on ordinary activities after taxation 680 9,921 10,601 __________ __________ __________ Return per Ordinary share (pence): 1.01 14.72 15.73 __________ __________ __________ The total column of this statement represents the profit and loss account of the Company. The Company had no recognised gains or losses other than those recognised in the Income Statement. The financial statements for the year to 30 June 2005 have been restated to reflect the changes to accounting practices as set out in the accompanying notes. All revenue and capital items in the above statement derive from continuing operations. The accompanying notes are an integral part of the financial statements. Reconciliation of Movements in Shareholders' Funds As at 30 June 2006 For the year ended 30 June 2006 Share Capital Capital Capital (Unaudited) Share premium redemption Warrant Special reserve reserve Revenue capital account reserve reserve reserve unrealised realised reserve Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 30 June 2005 as 16,851 56 17,219 777 28,618 9,873 (16,664) 747 57,477 originally reported Restatements - - - - - (36) - 539 503 ______ ______ ______ ______ ______ ______ ______ ______ ______ Balance at 30 June 2005 as 16,851 56 17,219 777 28,618 9,837 (16,664) 1,286 57,980 restated Return on ordinary activities - - - - - 14,726 6,786 343 21,855 after taxation Dividends paid - - - - - - - (539) (539) ______ ______ ______ ______ ______ ______ ______ ______ ______ Balance at 30 June 2006 16,851 56 17,219 777 28,618 24,563 (9,878) 1,090 79,296 ______ ______ ______ ______ ______ ______ ______ ______ ______ For the year ended 30 June 2005 Share Capital Capital Capital (Unaudited) Share premium redemption Warrant Special reserve- reserve Revenue capital account reserve reserve reserve unrealised realised reserve Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 30 June 2004 as 16,851 56 17,219 777 28,618 2,456 (19,167) 606 47,416 originally reported Restatements - - - - - (37) - 506 469 ______ ______ ______ ______ ______ ______ ______ ______ ______ Balance at 30 June 2004 as 16,851 56 17,219 777 28,618 2,419 (19,167) 1,112 47,885 restated Return on ordinary activities - - - - - 7,418 2,503 680 10,601 after taxation Dividends paid - - - - - - - (506) (506) ______ ______ ______ ______ ______ ______ ______ ______ ______ Balance at 30 June 2005 16,851 56 17,219 777 28,618 9,837 (16,664) 1,286 57,980 (restated) ______ ______ ______ ______ ______ ______ ______ ______ ______ BALANCE SHEET As at As at 30 June 2006 30 June 2005 (Restated) (Unaudited) (Unaudited) £'000 £'000 Fixed assets Investments at fair value through profit or loss 82,393 60,826 _________ _________ Current assets Debtors and prepayments 705 372 AAA Money Market funds 10,200 8,110 Cash and short term deposits 5,912 8,713 _________ _________ 16,817 17,195 _________ _________ Creditors: amounts falling due within one year (681) (777) _________ _________ Net current assets 16,136 16,418 _________ _________ Total assets less current liabilities 98,529 77,244 Creditors Amounts falling due after more than one year (19,233) (19,264) _________ _________ Net assets 79,296 57,980 _________ _________ Capital and reserves Called-up share capital 16,851 16,851 Share premium account 56 56 Capital redemption reserve 17,219 17,219 Warrant reserve 777 777 Special reserve 28,618 28,618 Capital reserve - unrealised 24,563 9,837 Capital reserve - realised (9,878) (16,664) Revenue reserve 1,090 1,286 _________ _________ Equity Shareholders' funds 79,296 57,980 _________ _________ Net asset value per Ordinary share (pence): 118.43 86.86 _________ _________ CASHFLOW STATEMENT Year ended Year ended 30 June 2006 30 June 2005 (Unaudited) (Audited) £'000 £'000 £'000 £'000 Net cash inflow from operating activities 403 1,081 Servicing of finance Interest paid (1,449) (1,449) Financial investment Purchase of investments (27,942) (24,942) Sale of investments 28,813 29,143 _______ _______ Net cash inflow from financial investment 871 4,201 Equity dividends paid (539) (506) _______ _______ Net cash (outflow)/inflow before management of liquid (714) 3,327 resources and financing Management of liquid resources Purchase of AAA Money Market funds (5,090) (8,110) Sale of AAA Money Market funds 3,000 8,110 Net cash outflow from management of liquid resources (2,090) - _______ _______ (Decrease)/increase in cash (2,804) 3,327 _______ _______ Reconciliation of net cashflow to movement in net debt (Decrease) /increase in cash (2,804) 3,327 Net change in liquid resources 2,090 - Other non-cash movements 34 31 _______ _______ Movement in net debt in year (680) 3,358 Opening debt (2,441) (5,799) _______ _______ Closing debt (3,121) (2,441) _______ _______ Notes: 1 Basis of accounting - The financial statements have been prepared in accordance with applicable UK Accounting Standards and with the Statement of Recommended Practice for 'Financial Statements of Investment Trust Companies' (issued January 2003 and revised in December 2005). They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements and the net asset value per share figures have been prepared in accordance with UK Generally Accepted Accounting Principles (UK GAAP). The new Financial Reporting Standards, issued as part of the programme to converge UK GAAP with International Financial Reporting Standards (IFRS), were applicable for the accounting year ended 30 June 2006 and the financial statements for the twelve months ended 30 June 2005 have also been restated. The main change arising from these revisions to UK GAAP, in relation to the Company's financial statements, is that dividends to shareholders declared after the balance sheet date are now shown in the period of payment rather than in the reporting period. Dividends were previously recognised in the statement of total return (now income statement). These are now dealt with as an appropriation of equity and are taken directly through equity in the reconciliation of movements in shareholders' funds. The Company expects to post to shareholders, in early October, a document outlining a tender offer for up to 50 per cent. of the ordinary shares in issue. The Directors will not tender any of their shares. The Board believes that the investment performance has been excellent since the appointment of Standard Life Investments. The Board have prepared the financial statements on a going concern basis. The proposals outlined in the document which is to be posted to shareholders in the near future provide for a default mechanism whereby if the tender offer proves an insufficient exit mechanism such that the Company is no longer considered viable in size, the Company would be liquidated and shareholders would be offered a tax-efficient roll-over into Standard Life Investments UK Smaller Companies Fund, an open ended investment company. In the event that the Company proceeds to liquidation, the financial statements would have been restated to take account of reclassification and revaluation of the investments in view of the requirement to realise the assets, the accrual of additional professional fees and other costs associated only with liquidation of the Company and an adjustment to the carrying value of the Debenture Stock 2023 from fair value to a higher, repayment value. The net asset value on this break-up basis would have been approximately 14% lower than the going concern basis, as at 14 July 2006, as set out in the Circular to shareholders issued on 20 July 2006, predominately due to the effect of valuing the Company's debt on a repayment basis. There can be no certainty as to the actual outcome of the forthcoming shareholder vote and tender offer. Accordingly, the nature of this uncertainty is expected to be described in the Notes to the Financial Statements and the Auditor's Report thereon, although unqualified, is expected to contain an emphasis of matter which will refer to these disclosures. 2 The final dividend, subject to shareholder approval, will be paid on 3 November 2006 to shareholders on the register at the close of business on 20 October 2006. The ex-dividend date will be 18 October 2006. 3 The income statement, balance sheet, reconciliation of movement in shareholders' funds and the cash flow statement set out above do not represent full financial statements in accordance with Section 240 of the Companies Act 1985 and are based on the financial statements for the year ended 30 June 2006 which are at present unaudited. The statutory financial statements for 2006 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held at the offices of Standard Life, 1 George Street, Edinburgh on Friday 27 October 2006 at 12.30pm. 4 The Annual Report and Financial Statements will be posted to shareholders in October 2006 and copies will be available from the investment manager and Secretary. For Edinburgh Small Companies Trust PLC Edinburgh Fund Managers plc, Secretary END This information is provided by RNS The company news service from the London Stock Exchange ARR

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