Interim Results
North Atlantic Smlr Co Inv Tst PLC
25 October 2002
NORTH ATLANTIC SMALLER COMPANIES INVESTMENT TRUST PLC
INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 JULY 2002
FINANCIAL HIGHLIGHTS
31 July 31 January
2002 2002 %
Unaudited Audited Change
Net asset value per Ordinary Share:*
Basic 1,055p 1,253p (15.8)
Fully diluted 642p 696p (7.8)
Middle market quotation per 5p Ordinary Share 527.5p 575.0p (8.3)
Standard & Poor's Composite Index ** 583.5 799.7 (27.0)
Russell 2000 Index ** 251.2 341.8 (26.5)
Exchange rate (US$/£) 1.5622 1.4133 (10.5)
*After retained deficit for the period
** Adjusted for exchange rate movement
CHIEF EXECUTIVE'S REVIEW
The period under review has been extraordinarily difficult for world equity
markets compounded by a 10.5% fall in the United States dollar relative to
sterling which also obviously impacted our net asset value. Whilst it is
satisfying to inform you that the Trust very significantly outperformed all the
relevant indices, falling by only 7.8% fully diluted as against a fall for
example in the adjusted Standard & Poor's Composite Index (Sterling adjusted) of
27.0%, the reality is the net asset value of the Trust declined during the
period.
Shareholders may wish to reflect on the Trust's performance since the market
high at the end of March 2000.
31 July 31 March %
2002 2000 Change
Trust (fully diluted NAV) 641.7 688.4 (6.8)
S&P 500 Sterling adjusted 583.5 949.3 (38.5)
NASDAQ Sterling adjusted 850.2 2,896.6 (70.6)
FTSE 100 4,246.2 6,540.2 (35.1)
FTSE TechMARK 100 773.7 4,330.8 (82.1)
I think this demonstrates how shareholders' capital has been preserved despite
the most severe bear market since the early 1970s.
United States Equities
I believe that the United States equity market, despite the significant falls,
remains overvalued. Far too many companies have adopted questionable accounting
procedures, so whilst underlying corporate profits may improve, this is unlikely
to translate into rising earnings per share. Furthermore, these questionable
accounting procedures have served to undermine investor confidence and must, in
my opinion, increase the risk premium on equities for the foreseeable future.
In the equity portfolio our strategy has been twofold. Firstly, to optimise the
value of our existing portfolio, significantly increasing cash reserves and,
secondly, on a highly selective basis making a number of modest new investments,
where effectively we are buying the underlying businesses at a significant
discount to our estimate of private market value.
Unquoted
Two new important investments have been made in the unquoted portfolio, both in
the UK, United Industries and Nationwide Accident Repair Services. Brief
summaries of both these investments can be found below. Perhaps more
significantly, I am happy to report that all our major North American private
company investments are achieving operating profits significantly higher than
last year (and in most cases, ahead of budget).
The Trust's net loss for the period which includes a number of exceptional items
amounted to £3,708,000 (2001: loss £1,141,000). Consistent with our stated
practice, no interim dividend is being paid.
During the period 569,300 convertible loan notes were purchased at a significant
discount to fully diluted net asset value for cancellation. This modestly
increased the net asset value for the benefit of all shareholders.
United Industries
The company was purchased at a significant discount to our perceived value of
its operating subsidiaries, as the stock market had failed to realise the
substantial value inherent in Perplas Medical, the company's orthopaedic
business.
Nationwide Accident Repair Services
The Trust supported a management buy-in of the largest car repair business in
the United Kingdom. The new management team intends to cut costs, sell
peripheral assets and significantly increase profits and cash flow. The current
year will see significant rationalisation costs, but it is expected that by 2003
operating profits will increase very significantly.
2002 Executive Share Option Scheme
Following the approval of the 2002 Executive Share Option Scheme (the 'Scheme')
at the Extraordinary General Meeting on 17 June 2002 (the 'EGM') and
consultation with major shareholders, the Board has amended the Scheme in
accordance with the authorisation given at the EGM to include an additional
equity index-related performance benchmark.
Director
On 19 August 2002 the Board was saddened to announce the resignation of Roger
Adams due to ill health. His long association with the Trust and his most
recent participation as a Director is very much appreciated both by his fellow
directors and all those shareholders who have had the privilege of knowing him.
Conclusion
Out strategy will be to maximise the value of our current holdings and increase
cash. Should however markets rebound sharply it is most unlikely that the Trust
will perform in line. Given the defensive nature of the portfolio, however, I do
believe that this strategy will generate value for shareholders over the balance
of the year, provided the United States dollar stabilises around current levels.
Our private companies are performing well, whilst specific events should
continue to assist the quoted portfolio, even if the market remains turbulent.
C H B Mills
Chief Executive
25 October 2002
CONSOLIDATED STATEMENT OF TOTAL RETURN (UNAUDITED)
(*incorporating the revenue account) for the six months ended 31 July
Revenue Capital Total Revenue Capital Total
2002 2002 2002 2001 2001 2001
£'000 £'000 £'000 £'000 £'000 £'000
Losses on investments - (12,597) (12,597) - (8,171) (8,171)
Exchange differences on - 1,622 1,622 - (481) (481)
capital items
Dividends and interest 2,094 - 2,094 2,650 - 2,650
Other income (261) - (261) (273) - (273)
Investment management fee** (872) - (872) (2,014) - (2,014)
Cost of purchase and
cancellation of options*** (3,508) - (3,508) - - -
Other expenses (272) - (272) (489) - (489)
Net return before
finance costs and taxation (2,819) (10,975) (13,794) (126) (8,652) (8,778)
Premium paid on repurchase of
CULS - (3,387) (3,387) - - -
Interest payable and similar (846) - (846) (964) - (964)
charges
Return on ordinary activities
before taxation (3,665) (14,362) (18,027) (1,090) (8,652) (9,742)
Taxation on ordinary (43) - (43) (51) - (51)
activities
Return on ordinary activities
after taxation for the period (3,708) (14,362) (18,070) (1,141) (8,652) (9,793)
Return per ordinary share: pence pence pence pence pence pence
Basic (see note 2) (31.55) (122.22) (153.77) (10.16) (77.07) (87.23)
Diluted (see note 2)+ (18.02) (70.19) (88.21) (5.22) (41.27) (46.49)
*The revenue column of this statement is the consolidated profit and loss
account of the Group.
** See note 4.
*** See note 6.
+ Although Financial Reporting Standard No. 14: Earnings per Share states that
Returns per share which are not diluted should not be disclosed, they have been
shown here for information.
All revenue and capital items in the above statement derive from continuing
operations.
CONSOLIDATED BALANCE SHEET
31 July 31 January 31 July
2002 2002 2001
Unaudited Audited Unaudited
£'000 £'000 £'000
Fixed assets
Investments* 140,859 167,677 164,275
Current assets
Investments 231 183 301
Debtors 7,709 2,738 2,579
Cash at bank 6,227 8,416 24,044
14,167 11,337 26,924
Creditors: amounts falling due within one year
Bank loans and overdrafts 10,107 3,600 3,532
Other creditors and accruals 2,669 4,020 3,697
12,776 7,620 7,229
Net current assets 1,391 3,717 19,695
Total assets less current liabilities 142,250 171,394 183,970
Creditors: amounts falling due after
more than one year
Bank loans 14,383 25,429 25,260
Debenture loan - Convertible Unsecured
Loan Stock 2013 393 444 444
127,474 145,521 158,266
Capital and reserves
Called up share capital 604 581 581
Share premium account 629 629 629
Capital reserve - realised 127,613 134,725 133,717
Capital reserve - unrealised 2,240 9,490 23,865
Revenue reserve (3,612) 96 (526)
Equity shareholders' funds 127,474 145,521 158,266
* See note 3.
CONSOLIDATED STATEMENT OF CASHFLOWS (UNAUDITED)
for the year ended 31 July
2002 2001
£'000 £'000
Net cash outflow from operating activities (3,067) (26)
Net cash outflow from servicing of finance (823) (916)
Taxation paid in the period - (4)
Investing activities
Purchases of fixed asset investments (90,293) (114,897)
Proceeds from sale of fixed asset investments
(including option premiums) 98,249 128,611
Net cash inflow from investing activities 7,956 13,714
Net cash inflow before financing 4,066 12,768
Financing
Repurchase of CULS for cancellation (3,415) -
Decrease in fixed term borrowings (2,500) -
Net cash outflow from financing (5,915) -
(Decrease)/increase in cash (1,849) 12,768
Notes:
The above results for the six months to 31 July 2002 are unaudited.
The Interim report will be posted to shareholders and those individuals on
the Company's mailing list as soon as practicable after printing and will also
be available on request from the Company Secretary, J O Hambro Capital
Management Limited, Ground Floor, Ryder Court, 14 Ryder Street, London SW1Y 6QB.
1. Basis of preparation
The figures for the six months to 31 July 2002 have been prepared on a basis
consistent with the accounting policies adopted in the audited financial
statements for the year ended 31 January 2002. The figures for the comparative
six months to 31 July 2001 have been recalculated using the recently issued
Financial Reporting Standard No. 19: Deferred Tax, but have not been restated as
no adjustment was necessary.
2. Return per share
The calculation of the basic revenue and capital returns per Ordinary share are
based on the deficit and average number of Ordinary shares in issue in the
period shown in the table below.
Six months to Six months to
31 July 2002 31 July 2001
Deficit No of Deficit No of
£ Shares £ Shares
Revenue (3,708,000) 11,751,673 (1,141,000) 11,225,903
Capital (14,362,000) 11,751,673 (8,652,000) 11,225,903
The diluted revenue and capital returns per Ordinary share are based on the
returns as above plus interest saved on loan stock and on 20,460,151 (six months
to 31 July 2001: 20,886,626) shares which includes 197,842 shares for the six
months to 31 July 2002, and 463,594 shares for the six months to 31 July 2001,
being the excess of the total number of potential shares on option conversion
over the number that could be issued at fair value as calculated in accordance
with Financial Reporting Standard No. 14: Earnings per Share.
3. Distribution of fixed asset investments
31 July 2002 31 January 2002 31 July 2001
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Listed at market value:
Overseas 20,751 33,635 46,288
United Kingdom 41,332 49,566 42,184
Listed at Directors' 7,776 9,287 10,044
valuation
Total listed investments 69,859 92,488 98,516
Unlisted at market value 20,790 35,469 23,924
Unlisted at Directors' 50,210 39,720 41,835
valuation
Total fixed asset 140,859 167,677 164,275
investments
4 Performance fees
Included in Investment Management Fees and as set out in the Annual Report to 31
January 2002, is a performance fee, payable to Growth Financial Services Limited
in respect of Mr C H B Mills, which was calculated annually to 31 March. This
fee is only payable if the investment portfolio outperforms the
sterling-adjusted Standard & Poor Composite Index, and is limited to a maximum
payment of 0.5% of Shareholders' Funds. No performance fee was payable in
respect of the period to 31 March 2002 (31 March 2001: £794,000 plus VAT). By an
amendment to the Secondment Services Agreement dated 1 October 2002 the date of
assessment of the performance fee payable was changed from 31 March to 31
January. No provision for any potential performance fee that may become due for
the period 1 April 2002 to 31 January 2003 has been included in these interim
financial statements.
5. Consolidated net asset value per Ordinary Share
The fully diluted net asset value per Ordinary Share is based on net assets,
including current period revenue, of £127,474,000 and has been calculated on the
basis that (a) the 100,000 outstanding management options were not exercised at
the prevailing exercise price as the net asset value is less than the exercise
price, and (b) that full conversion of all of the 2013 Loan Stock outstanding at
the period end had occurred, resulting in a total issued share capital of
19,932,052 Ordinary Shares.
The fully diluted net asset value at 31 January 2002 is based on net assets of
£145,521,000 and has been calculated on the basis that (a) all 900,000
outstanding management options were exercised at the prevailing exercise prices
and (b) full conversion of all of the 2013 Loan Stock outstanding at that date
had occurred, resulting in a total issued share capital of 21,401,352 Ordinary
Shares.
6. Cost of purchase and cancellation of options
At the Annual General Meeting in July 1998 the Directors were granted authority
to purchase for cancellation up to 800,000 share options granted to Mr C H B
Mills at any time prior to their expiry. The price to be paid was not to exceed
the difference between the fully diluted net asset value per share at the time
of buying in and the exercise price per share of the option.
During the period, the Directors exercised this authority. Based on the formula
above, a total of £3,508,000 became payable to Mr Mills. As required, Mr Mills
used that amount, net of taxation and expenses, to purchase shares in the
Company.
In the opinion of the Directors, the payment to Mr Mills effectively constitutes
a fee for investment performance and it has therefore been charged as a revenue
expense in these financial statements.
7. Financial information
The financial information shown in this interim report does not constitute full
statutory accounts as defined in Section 240 of the Companies Act 1985. The
financial information for the six months ended 31 July 2002 and 31 July 2001 has
not been audited.
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