Final Results

City of London Investment Group PLC 18 September 2006 For release at 0700h, 18 September 2006 CITY OF LONDON INVESTMENT GROUP PLC ('City of London', 'the Group', or 'the Company') PRELIMINARY RESULTS FOR THE YEAR TO 31 MAY 2006 SUMMARY City of London Investment Group PLC (AIM: CLIG), a leading emerging market asset management group, announces preliminary results for the year to 31 May 2006. •Admission to AIM on 12 April 2006 after placing 24.51% of the issued share capital in order to provide existing institutional shareholders with liquidity and the ability to realise part of their investment. The Company raised no new money. •Funds under management were US$2.8 billion at the year end (2005: US$1.6 billion) and the same at 31 August 2006. •Operating profit before AIM costs was £5.2 million (2005: £2.1 million), reflecting the Group's growth in funds under management and the operational gearing inherent in the business. •The Board is not recommending a final dividend reflecting the fact that City of London was a publicly traded company for less than two months of the period. It is the Board's intention going forward to pay dividends to shareholders twice a year, an interim and a final, with the level of payout based on cover of two times. Andrew Davison, Chairman, said, 'During the year under review, we were successful in winning new mandates but also further diversified our asset management product portfolio with the growth of our natural resources fund and the seeding of three new funds: a global emerging market fund, a frontier fund and an emerging markets yield fund. In addition, the Group commenced marketing its services and products in Europe. It is our strategic objective to globalise our business, building on the very strong base created in the North American market.' Enquiries to: Doug Allison (CFO) / Barry Olliff (CEO) John West / Clemmie Carr City of London Investment Group PLC Tavistock Communications Tel: 020 7711 0771 Tel: 020 7920 3150 For further information about City of London, please visit www.citlon.com Chairman's Statement The year to 31st May 2006 was a successful one for City of London and I am pleased to be able to report substantial progress to both our long term and new shareholders. Despite our achievements during the year under review, recent falls in emerging markets have inevitably overshadowed some of this success. However, the Board believes that our business model - based on tried and tested processes and an experienced management team - can cope with the volatility in our target investment markets. Emerging markets have always displayed volatility and it is our ability to outperform in all market conditions that has enabled the Group to consistently win investment mandates from sophisticated institutional investors. Our CEO, Barry Olliff, addresses operational issues, including investment markets, in his review which follows my statement. Results Funds under management during the period doubled to a peak in April 2006 of over US$3 billion before declining, with the markets, to US$2.8 billion at 31st May, a level which has since been maintained. Turnover from continuing activities during the year increased by 82% to £14.08 million (2005 - £7.74 million), producing a 127% rise in operating profits to £4.68 million (2005 - £2.06 million) as a result of the operational leverage in our activities whereby costs do not rise proportionally with turnover. Operating profit for the current year is stated net of £0.48 million costs related to the Admission to AIM. Discontinued activities represent the closure of a subsidiary and contributed just £38,700 of turnover and £9,357 of operating profit. Profit before tax increased to £4.79 million (2005 - £2.12 million), a rise of 125%. The tax charge for the year was £1.78 million (2005 - £0.79 million) and dividends paid to shareholders pre-Admission to AIM were £2.28 million (2005 - £0.35 million). Retained profit for the year was £0.72 million (2005 - £0.98 million), which contributed to the significant increase in shareholders' funds to £4.33 million (2005 - £2.56 million). Cash balances at the year end were £2.71 million (2005 - £2.40 million). There were no borrowings. A more detailed explanation of the results is contained in the Financial review. Dividends The Board is not recommending a final dividend in respect of the financial year under review, reflecting the fact that City of London was a publicly traded company for less than two months of the period. The dividends paid to our pre-IPO shareholders in the period comprised an interim dividend of £1.98 million in respect of the year to 31st May 2006 and a final dividend of £0.30 million in respect of the year to 31st May 2005. It is the Board's intention going forward to pay dividends to shareholders twice a year, an interim and a final, with the level of payout based on cover of two times - dividends will represent approximately half of post tax profits. We intend to declare or recommend dividends with the interim and full year results announced in January and September respectively followed by payments in February and November. The Board expects to declare a first dividend in respect of the current financial year with the interim results for the period to 30th November 2006 in January 2007. Review The major corporate event during the year was our Admission to AIM which took place at the very end of the period in April 2006. We sought a listing in order to provide our existing institutional shareholders with liquidity and the ability to realise their investments in the Group. At Admission, these shareholders sold shares representing approximately one quarter of the issued share capital and these shares were placed with a deliberately small list of high quality institutions. I welcome our new shareholders and thank the old ones for their support over a number of years. Those shareholders who sold shares at Admission agreed long term lock-in arrangements in respect of their remaining holding, and all directors and senior managers entered into similar lock-in agreements. City of London's asset management activities are principally focused on providing emerging market products and services predominantly to institutional investor clients who include some of the United States' leading blue chip institutions and endowment funds. We manage Open Ended Funds as well as a number of segregated accounts from offices in London, the US and Singapore. During the year under review, we were successful in winning new mandates but also further diversified our asset management product portfolio with the growth of our natural resources fund and the seeding of three new funds: a global emerging market fund, a frontier fund and an emerging markets yield fund. In addition, the Group commenced marketing its services and products in Europe. It is our strategic objective to globalise our business, building on the very strong base created in the North American market. Although we believe that there is scope for considerable growth in our activities in the United States in particular, we aim to diversify the client base to become a truly global business. To that end we are actively marketing our distinctive investment management services and pursuing opportunities in Europe and the Far East. Directors, management and staff I am delighted to welcome our new non-executive director, David Cardale, to the Board. David was appointed at the time of our Admission to AIM. David has spent his career in investment markets with significant experience in corporate finance and private equity in Europe and the United States. He is a co-founder and Chairman of Global Investor Relations, one of Europe's leading providers of online investor relations services. Perhaps the principal benefit to the Company of the Admission to AIM is our increased ability to incentivise our staff and management through the use of option schemes. The Group has put in place schemes for staff in London, the US and Singapore as well as for senior management. Directors and employees now hold options to acquire a total of 4.75 million shares representing approximately 17.7% of the current issued share capital. Of the total shares under option, some 2.25 million shares (representing 8.4% of the issued share capital) are over shares held by an employee share trust and on exercise will therefore occasion no dilution. The Board believes that the recruitment, motivation and retention of talented people is vital to the success of the Group and that these schemes can give us a real advantage in so doing compared to non-listed rivals. Outlook Our expertise in emerging markets, natural resources and closed end funds in general is, we believe, exportable to a wider and more geographically diverse client base than that we currently serve. City of London has the people, systems and culture in place to enable this growth without the addition of significant extra costs. Despite the current volatility in emerging markets, we believe we are well placed to deliver further growth. A Davison Chairman 15th September 2006 Chief Executive Officer's Review This is our first Report and Accounts as a listed company and I would like to let you know that we value you as a shareholder in the City of London Investment Group. Over the years, we have developed close relationships with our clients and now that we have a number of new shareholders we would like to develop close relationships with you too. I believe that one of the best ways of developing close relationships is by being as open as possible and I would hope that the information that you will find within this document is both interesting and useful. You will probably be well aware that part of our work revolves around closed end fund corporate governance, for this reason as well, we feel bound to lead by example regarding the quality of information disclosed to our shareholders. The past financial year This past financial year, like the preceding two, has allowed us to grow our business significantly. Funds under management ('FUM') increased from $1,558 million to $2,750 million or, measured in sterling, from £855 million to £1,471 million. However, we have recently experienced significant £/$ currency volatility. Most of our fees are paid in US dollars and are then repatriated back to the United Kingdom. Please refer to the Financial review for more details regarding our hedging strategy and a table showing the sensitivity of our income to moves in the $/£ exchange rate. Over the past year there has been significant demand for our products, not just relating to emerging markets closed end funds, but also via equities providing natural resource exposure. By the end of 2005, we had closed all of our US-based emerging market commingled funds to new investors. This was principally because we were concerned regarding their size and in our ability, in the event that they grew significantly larger, to continue to outperform versus the various emerging market benchmarks via which we are measured. Separate from our emerging market commingled accounts, over the past year we have benefited from significant growth in the area of segregated accounts as well. Diversification But to return for a moment to our Natural Resources business, it is worth making the point that this part of our business has grown from $73 million at end May 2004 to $193 million as of end May 2006, which is the end of our financial year. As at the end of August, this figure has increased to $215 million, which was the end of our first quarter this new financial year. This business, which is one of the areas of diversification that we have embarked upon, invests significantly in listed equities, rather than our traditional area of closed end funds. We are assuming, and planning, for this business to grow substantially over the next few years. As with our Closed End Fund business, we are positioned at the performance end of the marketplace which focuses on relative return products for institutional clients. A possible new office As a result of both the growth of the local stock markets in the Middle East, and the growth of interest in the region's emerging markets from the equity index providers, we are beginning to consider the possibility of opening an office within the Gulf Cooperation Council Region (GCC). The GCC, when combined with other countries within the Middle East, now represents in excess of 15% of the S&P/IFC Global Emerging Markets Index. As more securities from this region become investable and as new issuance continues to grow, it seems increasingly likely that we will need to research this area on a daily basis in a manner that could prove increasingly difficult from our offices in London or Singapore. As a result of our risk-averse approach to the development of our business, we would only undertake this type of expansion if we thought it would add significant value to our investment process. If we proceeded, we would additionally intend, over a period of time to use this office to market City of London products. As occurred in 1997 when we opened our US office, and again in 2000 when we opened our Singapore office, this office would be initially staffed by one or two existing City of London employees. Business continuity plans I thought it wise to relay some information regarding our Business Continuity Plans which would come into play in the event that we had, as a firm, to deal with some type of disaster scenario. First, we have the advantage of three diverse offices, with most key personnel having undertaken some form of training, typically for a few weeks, in at least two if not all three offices. On top of this, we have in place a contract with NDR Ltd, a leading UK provider of disaster recovery facilities, which could be called upon to replace any loss of operating capability, whether the result of something simple like a power cut or something more calamitous such as a flood or an explosion. This facility has been extensively tested, as have our daily back up routines, the source of full data and systems duplicates, which are stored off-site. On top of this, all key staff have remote internet access to the company's servers, whether in the UK, the US, or Singapore. Naturally, all of the above, plus additional detail, is described in our disaster recovery procedures, which are divided into two sections: technical and operational. Cost income ratio One of the ratios that is often cited within the investment management industry is the cost-income ratio, with the industry average being around 65%. City of London's cost-income ratio last year was 56% (after adjusting operating costs to strip out listing costs and third party marketing commission, which within this context is a reduction in fee income rather than a cost). A substantial part of our operating costs is represented by profit-share, as described in more detail in the Financial review, and the cost-income ratio adjusted to exclude these variable costs was 38%. In other words, the 'fixed' overhead cost of supporting our FUM when measured as a percentage of net fee income, was 38%. The major components of our overheads are personnel, premises, IT and communications, and marketing and business development. We work hard to keep these items as low as possible whilst continuing to take a very long-term view regarding the development of our business. Operational leverage One of the advantages of maintaining a low ratio of costs to FUM is the extent to which Shareholders will benefit from the Operational Leverage within our business that can develop as a result of further growth in FUM. Over the next year we will be focusing upon developing our business outside the US where around 85% of our assets are currently sourced. That is to say, that to the extent possible, we will be seeking additional assets to manage in the UK, Europe and the Far East. Recently we seeded three new funds domiciled in the Cayman Islands, these three funds are Natural Resources, Emerging Markets and a Global Equity Fund. With minor variations these funds will be similar to existing City of London funds, they will however be marketed outside North America thus providing us with a new suite of Funds via which we would intend to develop our business over the next few years. End of first quarter FUM As of the end of August, total FUM was US$2,815 million. We are just over three months into the year and in the difficult markets that we have recently experienced I would like to point out that investment performance has been maintained. Thanks to CoL employees Finally, I would like to thank my colleagues for their hard work and continuing commitment in what has been a challenging year. B M Olliff Chief Executive Officer 15th September 2006 Financial Review Turnover, representing management fees charged as a percentage of funds under management, rose in line with the underlying increase in funds under management, and at £14.1million was almost double the previous year's figure. The largest proportion of turnover, 93% (2005 - 78%), was derived from North America where the Group has increased funds under management significantly during the period. Fee margins were maintained, reflecting the Group's premium service positioning. A substantial portion of Administrative Expenses is represented by costs that vary with turnover. This variable cost has two principal elements. First, commissions payable to marketing agents, principally in the US and generally fixed at 20% of fee income, amounted to £2.18 million for the year (2005 - £1.00 million). Second, it is the Group's policy to align staff costs with profitability by closely controlling our fixed salary overhead, and supplementing this with a profit-share scheme. Profit sharing accounted for £2.20 million (2005 - £0.94 million), representing 49% of total staff costs of £4.50 million (2005 - £2.93 million). The overall increase of 54% in staff costs therefore comprises a 134% increase in profit share but only a 16% increase in fixed overhead, which was largely accounted for by the increase in the average number of employees from 32 to 38 to accommodate the expansion of the business during the period. Discontinued activities resulted from the closure of a subsidiary, City of London Quantitative Management Limited, in June 2005. This was, in turn, the result of the expiry of the sole management contract serviced by that subsidiary, which was in respect of a Chilean registered fund. Dividends are reported in accordance with FRS 21, as a result of which the restated 2005 figure of £0.35 million comprises the final dividend for the year to 31st May 2004 and the interim dividend for the year to 31st May 2005, while the 2006 figure of £2.28 million comprises the final dividend for the year to 31st May 2005 and the interim dividends for the year to 31st May 2006. The tax charge rate, at 37% of pre-tax profits (2005 - 37%), is higher than the 30% prevailing rate of UK corporation tax because that part of net income attributable to the US operations under the Group's transfer pricing policy attracts the higher US corporate tax rate, which - with federal and state taxes - is marginally in excess of 40%. Recognised gains and losses Recognised gains and losses include a revaluation reserve of £0.13 million (2005 - nil) which reflects the increase in the value of investments made by the Group in order to seed new funds. At 31st May 2006, these investments had a current market value of £1.36 million (2005 - £0.46 million), and the increase of £0.90 million during the year represents new investments of £0.77 million plus the revaluation reserve of £0.13 million. The prior year adjustment of £0.30 million (2005 - nil) is the final dividend for the year to 31st May 2005, restated as a result of the adoption of FRS 21, as described above. Balance sheet Net current assets make up 93% of total net assets (2005 - 91%). For the most part debtors and creditors convert to cash within a three month cycle, which is the longest fee billing period. Historically, there have been no overdue or bad debts, and the nature of our debtors - the funds we manage - is such that the risks of delay or default is low. Creditors comprise accruals of £1.07 million (2005 - £0.83 million), and tax of £0.78 million (2005 - £0.64 million). With regard to the latter, the increase over the prior year is relatively small because this year Corporation Tax has been paid in quarterly instalments in both the UK and the US (previously just the US). The other major component of creditors is third party marketing commission of £0.25 million (2005 - £0.12m). The Company has extended loans amounting to £1.03 million (2005 - £1.26 million) to a trust set up for the purpose of acquiring and holding the Company's shares to service the Employee Share Option scheme. These loans are repaid on the exercise of options issued by the trust. The amount outstanding was reduced by £0.23 million during the year, following the exercise of options in respect of 513,300 shares. These options were all issued to staff between 1997 and 2001 at an exercise price of £0.45. Share capital and the share premium account have increased by £0.03 million and £0.65 million respectively as a result of the exercise of 667,500 dilutive options issued to Barry Olliff in 1997 at £0.04, and 2,500,000 warrants issued to shareholders in 2004 at £0.26. Currency exposure The Group's income is substantially sourced in US$ (in the region of 90% of total income), while its expenses are roughly evenly divided between £ and US$ (with a small Singapore $ element). Consequently, net income as reported in £ is significantly exposed to movements in the $/£ exchange rate, which during the year to 31st May 2006 moved within the approximate range 1.70 to 1.90. The following table illustrates the approximate effect across a range of funds under management assumptions, given the current geographical distribution of the expense base: Average FUM US$bn 2.5 3.0 3.5 4.0 US$/£ Pre-tax, £m ------ -------- -------- -------- ------- 1.80 6.2 8.7 11.2 13.7 1.85 5.9 8.4 10.8 13.2 1.90 5.7 8.1 10.4 12.8 1.95 5.5 7.8 10.1 12.4 2.00 5.3 7.5 9.8 12.0 ------ -------- -------- -------- ------- Assumes: 1 Average net fee 0.9%. 2 Annual operating costs £3.0m plus US$6.0m. A deeper analysis, however, would show that the Group's profitability is not as exposed as it might superficially appear to be, because the underlying dynamic offers a significant degree of natural hedge. This is so because the funds' underlying investments are substantially non-US$ denominated, and so a weaker US$ gives uplift to the US$ value of funds under management. Accordingly, the Group's hedging strategy is focused upon balance sheet exposure rather than revenue exposure, with forward sales of US$ being used when appropriate to substantially offset or eliminate the intrinsic long US$ position. Accounting standards and policies As an AIM listed company, City of London Investment Group is required to adopt International Financial Reporting Standards (IFRS) for the year ended 31st May 2008. The Board's current intention is to continue to produce accounts in line with UK GAAP until that time. The first results prepared under IFRS will therefore be the interim results for the six months to 30th November 2007. Dividends have been restated in accordance with FRS 21 as described above. The Group's seed investments (as described above) have been included this year in current assets on the basis that they are available for immediate conversion to cash, and are not expected to be maintained in the long term. The comparative figures have been restated accordingly. D F Allison Finance Director 15th September 2006 Consolidated profit & loss account For the year ended 31st May 2006 Discontinued Continuing Total Total 2005 2006 2006 2006 (as restated) Note £ £ £ £ --------------- ------ ---------- -------- ---------- ------------ Turnover 2 38,700 14,079,939 14,118,639 7,744,770 Administrative expenses Staff costs 16,455 4,488,282 4,504,737 2,934,801 Other administrative 21,264 4,329,643 4,350,907 2,651,112 expenses AIM listing - 482,708 482,708 - costs Depreciation 35 108,077 108,112 98,541 --------------- ------ ---------- -------- ---------- ------------ (37,754) (9,408,710) (9,446,464) (5,684,454) Other operating income 8,411 1,109 9,520 - -------------- ------ ---------- -------- ---------- ------------ Operating profit 9,357 4,672,338 4,681,695 2,060,316 Interest receivable and similar income 109,562 64,065 --------------- ------ ---------- -------- ---------- ------------ Profit on ordinary activities before taxation 4,791,257 2,124,381 Tax charge on profit on ordinary activities 3 (1,784,138) (790,890) --------------- ------ ---------- -------- ---------- ------------ Profit on ordinary activities after 3,007,119 1,333,491 taxation Dividends 4 (2,282,675) (350,009) --------------- ------ ---------- -------- ---------- ------------ Retained profit for the financial year 6 724,444 983,482 --------------- ------ ---------- -------- ---------- ------------ Basic profit per 5 13.8p 6.4p share --------------- ------ ---------- -------- ---------- ------------ Diluted profit per share 5 11.9p 4.8p --------------- ------ ---------- -------- ---------- ------------ Consolidated statement of total recognised gains and losses For the year ended 31st May 2006 2005 2006 (as restated) Note £ £ ------------------- ----- -------- ---------- Retained profit for the period 724,444 983,482 Increase in revaluation reserve 134,506 - ------------------- ----- -------- ---------- Total recognised gains and losses for the 858,950 983,482 period Prior year adjustment 6 300,013 ------------------- ----- -------- ---------- Total gains and losses recognised since the last 1,158,963 annual report ----- -------- ---------- Consolidated balance sheet 31st May 2006 2005 2006 (as restated) Note £ £ -------------------------- ------ --------- ---------- Fixed assets Tangible assets 225,939 201,993 Investments 61,253 20,028 -------------------------- ------ --------- ---------- 287,192 222,021 -------------------------- ------ --------- ---------- Current assets Debtors 2,136,312 1,092,529 Investments 1,359,563 463,890 Cash at bank and in hand 2,708,915 2,398,040 -------------------------- ------ --------- ---------- 6,204,790 3,954,459 Creditors, amounts falling due within one (2,160,169) (1,611,302) year ------ --------- ---------- Net current assets 4,044,621 2,343,157 -------------------------- ------ --------- ---------- Total assets less current liabilities 4,331,813 2,565,178 -------------------------- ------ --------- ---------- Capital and reserves Called up share capital 267,777 236,102 Share premium account 6 1,357,283 712,258 Investment in own shares 6 (1,027,283) (1,258,268) Revaluation reserve 6 134,506 - Profit and loss account 6 3,599,530 2,875,086 -------------------------- ------ --------- ---------- Shareholders' funds 6 4,331,813 2,565,178 -------------------------- ------ --------- ---------- The Board of directors approved these financial statements on 15th September 2006. Signed on behalf of the Board of directors B M Olliff Chief Executive Officer D F Allison Finance Director Cash flow statement For the year ended 31st May 2006 2006 2005 Note £ £ --------------------------- - ------- -------- --------- Consolidated cash flow statement Net cash inflow from operating activities 7 4,145,424 2,199,337 Returns on investments and servicing of 109,562 64,065 finance Taxation (1,643,687) (223,889) Capital expenditure and financial investment (164,267) (222,509) Equity dividends paid (2,282,675) (350,009) Financing 907,685 - Management of liquid resources (761,167) (311,027) --------------------------- ------- --------- --------- Increase in cash 9 310,875 1,155,968 --------------------------- ------- --------- --------- Notes to the financial statements For the year ended 31st May 2006 1. Basis of preparation and financial information The financial information set out in this preliminary announcement has been prepared on the same basis as the accounting policies used in the Company's 2005 statutory accounts. The information shown for the years ended 31 May 2006 and 31 May 2005 does not constitute statutory accounts within the meaning of S240 of the Companies Act 1985 and has been extracted from the full accounts for the years ended 31 May 2006 and 31 May 2005 The reports of the auditors on those accounts were unqualified and did not contain a statement under either S237(2) or S237(3) of the Companies Act 1985. The accounts for the year ended 31 May 2005 have been filed with the Registrar of Companies. The accounts for the year ended 31 May 2006 will be delivered to the Registrar of Companies in due course. 2. Analysis of turnover, operating profit and net assets The directors consider that the group only undertakes one class of business, and hence only analysis by geographical location is given. Turnover Operating Net assets profit 2005 2006 2005 2006 2005 2006 (as restated) £ £ £ £ £ £ ----------- -------- -------- -------- -------- -------- -------- Europe 585,206 360,512 919,223 97,514 2,271,782 2,670,533 North America 13,185,903 6,093,723 3,538,613 1,203,505 2,014,559 31,082 South America 298,173 1,290,535 205,660 759,297 5,084 (136,437) Other 49,357 - 18,199 - 40,388 - ----------- --------- -------- -------- -------- -------- -------- 14,118,639 7,744,770 4,681,695 2,060,316 4,331,813 2,565,178 ----------- --------- -------- -------- -------- -------- -------- 3. Tax charge on profit on ordinary activities (a) Analysis of tax charge on ordinary activities: 2006 2005 £ £ ---------------------------- - ------- -------- Tax at 30% (2005 - 30%) based on the profit for the year 1,538,223 628,628 Double taxation relief (415,360) (331,628) Adjustments in respect of prior years (3,148) (7,995) ---------------------------- -------- -------- 1,119,715 289,005 Foreign tax for the current period 652,983 503,000 Adjustments in respect of prior years 11,440 (1,115) ---------------------------- -------- -------- 664,423 501,885 -------- -------- 1,784,138 790,890 -------- -------- (b) Factors affecting tax charge for the current period: The tax assessed for the period is different to that resulting from applying the standard rate of corporation tax in the UK: 30% (prior year: 30%). The differences are explained below: 2006 2005 £ £ ---------------------------- -------- -------- Profit on ordinary activities before tax 4,791,257 2,124,381 ---------------------------- -------- -------- Tax at 30% thereon (1,437,377) (637,314) Effects of: Expenses not deductible for tax purposes (100,000) (2,968) Capital allowances more than depreciation - 9,202 Unrelieved overseas tax (237,623) (171,372) Prior period adjustments (8,292) 9,110 Other (846) 2,452 ---------------------------- -------- -------- (1,784,138) (790,890) -------- -------- 4. Dividend 2005 2006 (as restated) £ £ ---------------------------- -------- -------- Dividends paid: Interim dividend of £2.15 per share (2005 - £0.24) 1,982,662 200,009 Final dividend in respect of year ended: 31st May 2004 of £0.18 per share - 150,000 31st May 2005 of £0.36 per share 300,013 - ---------------------------- -------- -------- 2,282,675 350,009 -------- -------- 5. Earnings per share The calculation of basic earnings per share is based on the profit for the year of £3,007,119 (2005 - £1,333,491) divided by the weighted average of ordinary shares in issue for the year ended 31st May 2006 of 21,855,212 (2005 - 20,834,250). As set out in Note 6 the Employee Benefit Trust held ordinary shares in the Company as at 31st May 2006. The Trustees of the Trust have waived all rights to dividends associated with these shares. In accordance with FRS22 the ordinary shares held by the Employee Benefit Trust have been excluded from the calculation of the weighted average of ordinary shares in issue. The calculation of diluted earnings per share is based on the profit for the year of £3,007,119 (2005 - £1,333,491) divided by the diluted weighted average of ordinary shares for the year ended 31st May 2006 of 25,272,459 (2005 - 27,587,026). FRS22 requires that diluted earnings per share is calculated using the average share price during the year. The company listed on AIM during the year, and so the average share price since that time has been used in the above calculation. Comparative figures for ordinary shares anticipate the 25:1 share split to facilitate comparison with the current year. 6. Combined statement of movement in reserves and reconciliation of shareholders' funds Group Year ended 31st May Share Investment Profit 2005 Share premium in own Revaluation and loss Total capital account shares reserve account Total (as restated) £ £ £ £ £ £ £ -------- ------- -------- -------- -------- -------- -------- -------- At 1st June 2005 - as previously 236,102 712,258 (1,258,268) - 2,575,073 2,265,165 1,431,696 stated Prior year adjustment FRS 21 - - - - 300,013 300,013 150,000 ------- -------- -------- -------- -------- -------- -------- At 1st June 2005 - as restated 236,102 712,258 (1,258,268) - 2,875,086 2,565,178 1,581,696 Revaluation reserve - - - 134,506 - 134,506 - Share 31,675 645,025 230,985 - - 907,685 - allotment Profit retained for - - - - 724,444 724,444 983,482 the period ------- -------- -------- -------- -------- -------- -------- At 31st May 267,777 1,357,283 (1,027,283) 134,506 3,599,530 4,331,813 2,565,178 2006 ------- -------- -------- -------- -------- -------- -------- Investments in own shares relate to City of London Investments Group Plc shares held by an Employee Benefit Trust on behalf of City of London Investment Group Plc. At 31st May 2006 the Trust held 2,262,750 ordinary 1p shares (2005 - 111,042 ordinary 25p shares), of which 2,247,050 ordinary 1p shares (2005 - 102,748 ordinary 25p shares) were subject to options in issue. In total, the company has granted options over 4,747,050 ordinary shares at exercise prices from £0.26 to £1.40. These options have a range of exercise dates from September 2000 to March 2016. 7. Reconciliation of operating profit to net cash inflow from operating activities 2005 2006 (as restated) £ £ --------------------------- ---------- ------------ Operating profit 4,681,695 2,060,316 Profit on sale of fixed assets (9,519) - Depreciation charges 108,112 98,541 Decrease in debtors (1,043,783) (468,946) Increase in creditors 408,417 509,527 Translation adjustments on investments 502 (101) --------------------------- ---------- ------------ Net cash inflow from operating activities 4,145,424 2,199,337 --------------------------- ---------- ------------ 8. Reconciliation of net cash flow to movement in net funds 2005 2006 (as restated) £ £ Increase in cash in the year 310,875 1,155,968 Increase in liquid assets 761,167 311,027 Non cash changes 134,506 - Change in net funds 1,206,548 1,466,995 Net funds at 1st June 2,861,930 1,394,935 Net funds at 31st May 4,068,478 2,861,930 9. Analysis of changes in net funds At At 1st June Cash Revaluation 31st May 2005 flows reserve 2006 £ £ £ £ Cash at bank and in hand 2,398,040 310,875 - 2,708,915 Current asset investments 463,890 761,167 134,506 1,359,563 2,861,930 1,072,042 134,506 4,068,478 10. Copies of the Annual Report for the year ended 31st May 2006 are available from the Company's Registered office 10 Eastcheap, London EC3M 1LX, and will be sent to shareholders shortly. This information is provided by RNS The company news service from the London Stock Exchange

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