Final Results

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 2004. PRELIMINARY RESULTS FOR THE YEAR ENDED 30 JUNE 2004 For further information, please contact: Donald MacDonald Edinburgh Small Companies Trust plc Tel. 0131 557 5065 Brian Simmons Press Manager, Standard Life Investments Tel. 0131 245 5935 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 Review The Manager As intimated a year ago the board decided to appoint Standard Life Investments as investment manager with effect from 1 September 2003. The year under review therefore reflects the fact that Standard Life Investments was manager for part of the year but also the substantial restructuring of the portfolio. Portfolio Rebalancing The board agreed with the new manager that the portfolio should be significantly repositioned, to align the trust with Standard Life Investments' investment process. The manager has had to reduce significantly the number of holdings in the sub-£50 million market capitalisation range and raise the average market capitalisation of the constituents of the trust. The manager also reduced the size of some stakes in individual companies to allow greater investment flexibility. This process was largely completed by the end of 2003, by which time more than 60% of the portfolio had been changed. While there is inevitably a cost associated with a restructuring of this magnitude, the company was fortunate that the strength of the market for small company shares in the fourth quarter of 2003 kept the costs of the transition below expectations. The overall outcome is that the level of risk and volatility within the portfolio is now much reduced. Review of Year ended 30 June 2004 Within a strong market overall, smaller company shares continued to rally from the low point reached during the Gulf War. Lower market capitalisation stocks are generally more geared to the economic cycle. Therefore, recovery stocks performed strongly, particularly in the second half of 2003 as the market became less risk averse. This was helped by the sustained period of low interest rates that continued until November. In January 2004, a traditional cyclical rally favoured smaller companies. A different market psychology was evident from February, as interest rates started to move up. Investors then favoured lower risk and more sustainable business models. Over the course of the period under review, the Extended Hoare Govett index rose by 29.2%. The last three months of the financial year, however, brought only a 0.6% rise in the benchmark index. Performance Compared with the Extended Hoare Govett index, which rose by 29.2%, the net asset value of the company rose by 22.2%. The main factors influencing the underperformance were the costs involved in the restructuring of the portfolio towards the investment process of the new manager, while in the final quarter of the period under review the oil & gas exploration sector in which the company was underweight showed extreme strength. Over the year the share price of your company rose strongly by 36.7%. Gearing Following the repurchase for cancellation of £0.5 million of outstanding debenture stock, there is currently £18.7 million outstanding. The potential gearing of the trust was reduced from 48.9% of shareholders funds to 38.9% over the course of the year. The board asked the new investment manager to actively manage the effective gearing of the trust in a range of 10% to 20%. During the period, the effective gearing was increased to a high of 16.9%, and was later reduced to end the year at 11.5%, reflecting the manager's more cautious outlook for markets. The cash held on deposit represents the difference between actual and potential gearing. As UK interest rates rise, the dilutive effect of the mismatch between interest payable on the 7.75% 2023 debenture and interest receivable on cash deposits will fall. Further repurchases of the debenture may take place but only if it is advantageous to shareholders. The board believes that the risks inherent in the effective gearing are greatly reduced compared with last year. Discount The share price of the company rose by 36.7% to 51.25p by the end of the period under review representing a significant narrowing in the discount to net asset value from 35.7% to 28.1%. Revenue Account Whilst in general dividends from UK companies grew last year, investment income for the trust remained broadly unchanged. This was mainly as a result of the portfolio rebalancing, which involved buying stocks with lower dividend yields. However, holdings are mainly in strong companies with good earnings and dividend growth prospects. A resumption of rising investment income is expected in the coming financial year. The expense ratio of the trust was lower when compared with last year, falling from 1.68% of average shareholders' funds to 1.50%. The board is proposing to pay an unchanged dividend of 0.75p, partly from accumulated revenue reserves. If approved, the final dividend will be paid on 25 October 2004 to shareholders on the register at the close of business on 8 October 2004. Following the payment of the dividend, the company will have revenue reserves of 0.9p per share. Share and Warrant buybacks No shares or warrants were purchased by the company for cancellation over the period. The board is seeking permission from shareholders to renew the authority to purchase up to 14.99% of the shares in issues. Board Iain Bell has decided to retire from the board at the annual general meeting. The Nomination Committee is currently considering a new appointment. It is only fitting that I place on record our thanks to Iain for his immense contribution to the board's deliberations since the inception of the company. His contribution will be greatly missed in the future. Prospects While the next year is unlikely to show as strong growth in smaller company markets as the year just ended, there is likely to be measured progress. Given that interest rates are rising, it is likely that economic growth in the UK will slow over the next six to twelve months. Stock market sentiment is still fragile and may be susceptible to unpredictable geopolitical events. On a more positive note, stock market valuations, including those of smaller companies, are not stretched by historical measures and are close to previous averages. The investment process of the current manager incorporates careful risk controls and focuses on strong companies with proven business track records. We believe the new manager is able to capitalise on growth while remaining resilient in an uncertain world. Donald MacDonald Chairman STATEMENT OF TOTAL RETURN for the year ended 30 June 2004 (audited) Revenue Capital Total £000 £000 £000 Realised net losses on - (12,361) (12,361) investments Unrealised net gains on - 22,184 22,184 investments _______ _________ _________ TOTAL CAPITAL LOSSES ON - 9,823 9,823 INVESTMENTS Investment Income 1,337 - 1,337 Interest from AAA money market 292 - 292 funds Interest from Treasury Bills 30 - 30 Interest receivable 179 - 179 Other income 6 - 6 Investment management fee (267) (267) (534) Administrative expenses (377) - (377) _______ _________ _________ Net return before finance costs 1,200 9,556 10,756 and taxation Interest payable and similar (712) (770) (1,482) charges _______ _________ _________ Return on ordinary activities 488 8,786 9,274 before taxation Taxation - - - _______ _________ _________ Return on ordinary activities 488 8,786 9,274 after taxation Dividends in respect of equity (506) - (506) shares _______ _________ _________ Transfer (from)/to reserves (18) 8,786 8,768 _______ _________ _________ Return per ordinary share 0.72p 13.03p 13.75p _______ _________ _________ Dividends per ordinary share 0.75p - 0.75p _______ _________ _________ STATEMENT OF TOTAL RETURN for the year ended 30 June 2003 (audited) Revenue Capital Total £000 £000 £000 Realised net losses on - (50,675) (50,675) investments Unrealised net gains on - 31,230 31,230 investments _______ _________ _________ TOTAL CAPITAL LOSSES ON - (19,445) (19,445) INVESTMENTS Investment Income 1,242 - 1,242 Interest from AAA money market 221 - 221 funds Interest from Treasury Bills 200 - 200 Interest receivable 120 - 120 Other income 8 - 8 Investment management fee (267) (267) (534) Administrative expenses (299) - (299) _______ ________ _________ Net return before finance costs 1,225 (19,712) (18,487) and taxation Interest payable and similar (895) (1,834) (2,729) charges _______ _________ _________ Return on ordinary activities 330 (21,546) (21,216) before taxation Taxation - - - _______ _________ _________ Return on ordinary activities 330 (21,546) (21,216) after taxation Dividends in respect of equity (506) - (506) shares _______ _________ _________ Transfer from reserves (176) (21,546) (21,722) _______ _________ _________ Return per ordinary share 0.49p (31.97p) (31.48p) _______ _________ _________ Dividends per ordinary share 0.75p - 0.75p _______ _________ _________ BALANCE SHEET (audited) At 30 At 30 June June 2004 2003 £000 £000 £000 £000 Fixed assets Investments 53,551 45,490 ______ Current assets Debtors 916 505 AAA money market funds 8,110 6,800 Treasury Bills - 4,970 Cash and short term deposits 5,386 1,790 ______ ______ 14,412 14,065 Creditors: amounts falling due 1,252 1,065 within one year ______ ______ Net current assets 13,160 13,000 ______ ______ Total assets less current 66,711 58,490 liabilities Creditors: amounts falling due after more than one year 19,295 19,843 ______ ______ 47,416 38,647 ______ ______ Capital and reserves Called up share capital 16,851 16,851 Share premium 56 55 Capital redemption reserve 17,219 17,219 Warrant reserve 777 777 Special reserve 28,618 28,618 Capital reserve - unrealised 2,456 (19,728) Capital reserve - realised (19,167) (5,769) Revenue reserve 606 624 ______ ______ Total equity shareholders' funds 47,416 38,647 ______ ______ Adjusted net asset value per 71.23p 58.29p share ______ ______ CASHFLOW STATEMENT (audited) For the For the year year ended ended 30 June 30 June 2004 2003 £000 £000 Net cash inflow from operating 849 837 activities Net cash outflow from servicing of (1,541) (3,918) finance Net cash inflow from capital expenditure 1,633 10,752 and financial investment Equity dividend paid (506) (506) Management of Liquid Resources 3,660 12,193 Net cash outflow from financing (499) (20,800) ______ ______ INCREASE/(DECREASE) IN CASH 3,596 (1,442) ______ ______ NOTES: 1. The accounts are prepared under the same accounting policies used for the year ended 30 June 2003. 2. The financial information for the year ended 30 June 2003 has been extracted from the Annual Report and Accounts of the company, which have been filed with the Registrar of Companies and contained an unqualified auditors' report. The statutory accounts for 2004 are unqualified and 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 Thursday 21 October 2004 at 12 noon. 3. The statement of total return (incorporating the revenue account) and balance sheet set out above do not represent full accounts in accordance with Section 240 of the Companies Act 1985. 4. The investment management fee in each case includes irrecoverable VAT calculated at 17.5%. 5. The final dividend, subject to shareholder approval, will be paid on 25 October 2004 to shareholders on the register at the close of business on 8 October 2004. The ex-dividend date is 6 October 2004. 6. The Annual Report will be posted to shareholders mid September 2004 and copies will be available from the registered office of the company. For Edinburgh Small Companies Trust plc Edinburgh Fund Managers plc, Secretary END

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