Final Results
Acorn Income Fund Ld
26 March 2002
CHAIRMAN'S STATEMENT
I am pleased to present to Shareholders our Annual Report of the Company for its
third year ended 31 December 2001.
Market values of investments in the categories typically held by the Company
increased throughout the first eight months of the year. However, the 11
September terrorist attacks on the United States and the subsequent global
economic uncertainties resulted in a collapse of liquidity in the financial
market. Whilst I am pleased to report that the smaller companies portfolio still
posted realised and unrealised gains for the year despite the difficult market
conditions, the high income portfolio suffered losses.
The net asset value fell by only 2.65 per cent over the year, despite the
adverse market conditions described above. Our investment advisers successfully
implemented the Company's investment policy during the year, which has resulted
in the Company outperforming both of our selected benchmarks.
The Company successfully achieved its income objectives for the year. The Board
has reviewed with the Manager the income forecasts for 2002 and consider them to
be achievable; accordingly, the Board is optimistic that the current level of
distributions can be maintained. Four quarterly dividends totalling 12.0p (2000:
11.0p) were paid during the year.
The early months of 2002 have seen what is anticipated to be the start of a
recovery in the equity market. However, the high income sector has remained
fairly unstable. As at 28 February 2002, being the latest reporting date, the
net asset value per share and the mid-market price stood at 133.47p and 137.00p
respectively, although, at the time of writing, the share price was 130.50p.
The sympathetic reaction by the world's Monetary Authorities to the market slump
should be a positive move for recovery in world economies in the long-term and
the Board is hopeful that the investment portfolios will benefit
proportionately.
D.M. Bralsford
25 March 2002
INVESTMENT ADVISER'S REPORT - SMALLER COMPANIES PORTFOLIO
The most important event during the period under review was the terrorist
attacks on the United States. Although stockmarkets recovered well to end the
year ahead of 11 September levels, the long lasting economic impact was to
reduce investors' confidence still further. This was reflected in lower
valuations for most 'new economy' stocks as profits expectations were further
downgraded. This benefited the Company with the market favouring solid
businesses with strong cash flows. However, there was a slight negative in that
takeover bids, which have tended to favour the Company, completely disappeared
during the period. Clearly corporate financiers also lost confidence, though we
expect this to prove temporary.
Following the 11 September collapse in the air transport sector, we saw an
opportunity to invest in Alpha Airports. Alpha provides food services for
airlines and at airports and also runs airport shops. This soundly financed
business could prove to be a beneficiary of this crisis as its weaker
competitors retreat. We also purchased British Polythene Industries ('BPI'), the
packaging group, which had fallen back after the MacFarlane takeover bid failed.
This stock still has appeal on both its low valuation and acquisition potential.
The third important purchase was Wolverhampton & Dudley, the Midlands based
brewer. Like BPI, Wolverhampton & Dudley escaped takeover but is now firmly
focussed on delivering value to its shareholders.
The two most significant sales during the period were Greene King and Rotork
(partial sale only). Both had performed exceptionally well but we were concerned
that Rotork had reached a rating which left it vulnerable to a general downturn
in the capital investment cycle whilst Wolverhampton & Dudley offered
potentially better short term returns than Greene King.
Investors have been slow to realise the potential magnitude of the swing back to
continuity and cash flow as valuable criteria for stock selection. We believe
there remain many investors who have yet to make the necessary changes to their
so-called 'growth' portfolios. This trend will continue to benefit the
performance of the Company.
Unicorn Asset Management Limited
25 March 2002
INVESTMENT ADVISER'S REPORT - HIGH INCOME PORTFOLIO
The portfolio continues to meet its objective to deliver a continuous stream of
high income. However, shares, both ordinary and income class, in split capital
investment trusts in which the portfolio has significant investments have
continued to fall in value. The reasons for the weakness can be summarised as
follows:
• The tragic and unprecedented events in the United States in early
September, which had a significant impact on world economies which were
already on the fringe of recession, dented consumer confidence, led to a
fall in global growth rates and a general decline in global equity markets.
• Worries that the dividends on some income shares may be cut and that
cross-holdings between certain trusts within the sector could inflate the
extent of these cuts; such concerns in turn caused the price of some income
shares to fall further.
• An additional deterioration in sentiment towards split capital investment
trusts as declining asset values have brought funds near to or in breach of
their banking covenants.
Looking forward, we believe that global equity markets will recover and will
eventually benefit from a low interest rate, low inflation environment. In
addition, massive Central Bank stimulus is bound to spark a recovery in 2002.
Of equal importance, many split capital funds have either paid down bank loans
or raised additional capital from their shareholders; this process is ongoing.
Although, in our view, the bad news and bad publicity has been a little overdone
market prices may not recover in the immediate future.
Turning now to the Sterling bond markets, they have gained in value as interest
rates were reduced and UK inflation fell below 2 per cent. We anticipate that
Sterling bonds will continue to perform strongly during the first half of 2002,
but they may eventually be undermined by the Government's ambitious public
spending plans.
Collins Stewart Asset Management Limited
25 March 2002
10 PRINCIPAL PORTFOLIO INVESTMENTS
As at 31 December 2001
Stock Sector Portfolio Market Value
£'000
Guaranteed Exp Fin 12.875% bonds UK Government Bond High income 3,714
29/09/02
Pendragon Motor Distributors Smaller companies 3,542
Vp Construction & Building Smaller companies 3,201
Materials
European Motor Holdings Motor Distributors Smaller companies 2,858
British Polythene Containers - Paper & Plastic Smaller companies 2,818
Rotork Engineering Smaller companies 2,700
Metalrax Group Engineering Smaller companies 2,516
James Halstead Miscellaneous Manufacture Smaller companies 2,434
Dowding & Mills Electronic & Electrical Smaller companies 2,415
Zotefoams Chemicals & Plastics Smaller companies 2,346
28,544
The 10 principal investments represent 46.0% of the investment portfolio (2000: 42.9%).
10 PRINCIPAL PORTFOLIO INVESTMENTS
As at 31 December 2000
Stock Sector Portfolio Market Value
£'000
Guaranteed Exp Finance 12.875% UK Government Bond High income 3,904
bonds 29/09/02
Rotork Engineering Smaller companies 3,774
Charles Baynes Distributors Smaller companies 2,585
Metalrax Group Engineering Smaller companies 2,464
Dowding & Mills Electronic & Electrical Smaller companies 2,358
Renold Engineering Smaller companies 2,291
Elementis Chemicals Smaller companies 2,220
Sirdar Group Household Goods & Textiles Smaller companies 2,119
Heywood Williams Construction & Building Smaller companies 2,026
Materials
Pendragon Motor Distributors Smaller companies 1,859
25,600
STATEMENT OF TOTAL RETURN
for the year ended 31 December 2001
Notes 2001 2000
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments 3 - 364 364 - 2,521 2,521
Income 4 4,714 - 4,714 4,405 - 4,405
Management fee 5 (161) (482) (643) (144) (432) (576)
Other expenses 6 (133) - (133) (123) (217) (340)
Net return / (loss) on 4,420 (118) 4,302 4,138 1,872 6,010
ordinary activities before
finance costs
Interest payable and
similar charges 8 (447) (1,333) (1,780) (449) (1,348) (1,797)
Net return / (loss) on 3,973 (1,451) 2,522 3,689 524 4,213
ordinary activities for
the year
Dividends in respect of
equity shares 9 (3,552) - (3,552) (2,970) - (2,970)
Transfer to / (from)
reserves 421 (1,451) (1,030) 719 524 1,243
Total Return per Ordinary Share 10 13.42p (4.90)p 8.52p 13.59p 1.93p 15.52p
Dividend per Ordinary Share
(distributed) 10 12.00p - 12.00p 11.0p - 11.00p
Return per Ordinary Share
(retained) 10 1.42p (4.90)p (3.48)p 2.59p 1.93p 4.52p
The revenue columns of this statement represent the revenue account of the
Company.
All revenue and capital items in the above statement derive from continuing
operations.
The Statement of Total Return is presented in accordance with the Statement of
Recommended Practice for Financial Statements of Investment Trust Companies.
The accompanying notes form an integral part of the financial statements.
BALANCE SHEET
as at 31 December 2001
2001 2000
Notes £'000 £'000
Fixed assets
Listed investments 11 62,045 59,680
Current assets
Debtors 12 555 2,068
Cash at bank 1,346 5,136
1,901 7,204
Creditors - amounts falling due within one year
Creditors 13 (485) (2,393)
Net current assets 1,416 4,811
Total assets less current liabilities 63,461 64,491
Creditors - amounts falling due after more than one year
Long term bank loan 14 (25,616) (25,616)
Net asset value 37,845 38,875
Share capital and reserves
Called-up share capital 15 7,400 7,400
Share premium 16 27,079 27,079
Revenue reserve 16 1,377 956
Capital reserve 16 1,989 3,440
Shareholders' funds attributable to equity interests 17 37,845 38,875
Net asset value per Ordinary Share 18 127.85p 131.33p
These financial statements on were approved by the Board of Directors on 4 March
2002. Signed on behalf of the Board
D.M. Bralsford J.M. McKean
Director Director
25 March 2002 25 March 2002
The accompanying notes form an integral part of the financial statements.
CASH FLOW STATEMENT
for the year ended 31 December 2001
Notes 2001 2000
£'000 £'000
Net cash inflow from operating activities 19 3,830 3,267
Servicing of finance
Interest paid (1,774) (1,760)
Net cash outflow from servicing of finance (1,774) (1,760)
Investing activities
Purchase of investments (29,327) (44,345)
Sale of investments 27,033 43,791
Net cash outflow from investing activities (2,294) (554)
Equity dividends paid (3,552) (3,645)
Cash outflow before financing (3,790) (2,692)
Financing
Issue of Ordinary Shares - 3,412
Loan proceeds - 2,279
Net cash inflow from financing - 5,691
(Decrease) / increase in cash in the year 20 (3,790) 2,999
The accompanying notes form an integral part of the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2001
1. Accounting policies
The accounting policies, all of which have been applied consistently throughout
the year, in the preparation of the Company's financial statements, are set out
below:
a. Accounting convention
The financial statements have been prepared under the historical cost
convention, as modified by the revaluation of investments, and in accordance
with applicable United Kingdom accounting standards and with the Statement of
Recommended Practice for Financial Statements of Investment Trust Companies.
b. Investments held as fixed assets
Quoted investments are valued at the mid-market price on the relevant Stock
Exchange at the balance sheet date.
Realised surpluses or deficits on the disposal of investments, permanent
impairments in the value of investments and unrealised surpluses and deficits on
the revaluation of investments are taken to the statement of total return as
capital.
c. Income
Dividends receivable on equity shares are taken into account on the ex-dividend
date. Income on debt and fixed interest securities is recognised on an accruals
basis. United Kingdom dividend income is shown excluding tax credits. Bank
interest is accounted for on an accruals basis.
d. Expenses
All expenses are accounted for on an accruals basis. Expenses are charged
through the revenue account except as follows:
i. expenses which are incidental to the acquisition or disposal of an investment
are treated as part of the cost or proceeds of the investment;
ii. 75% of the Company's management fee and financing costs are charged to the
capital reserve in line with the Board's expected long term split of returns
between income and capital gains from the investment portfolio;
iii. 100% of any performance fee is charged to the capital account.
e. Capital reserve
The following are accounted for in the capital reserve:
i. realised gains and losses on the realisation of investments;
ii. unrealised gains and losses on investments; and
iii. expenses charged to the capital reserve in accordance with the above
accounting
policies.
2. Taxation
The Company has been granted exemption from Guernsey taxation under the Income
Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and is charged an annual exemption
fee of £600 (2000: £600).
3. Gains on investments
2001 2000
£'000 £'000
Realised gains on sales 1,050 6,771
Movement in unrealised appreciation / depreciation (686) (4,250)
364 2,521
4. Income
2001 2000
£'000 £'000
Dividend income 3,806 3,414
Bond interest 836 903
Bank interest 72 88
4,714 4,405
5. Management fees
The Manager of the Company is entitled under the Management Agreement with the
Company to receive a management fee from the Company at the annual rate of 1.0
per cent of the total assets of the Company, payable quarterly in arrears. Where
any investments comprised in the assets of the Company are in funds managed by
or advised by the Manager or Investment Adviser or an affiliate of either of
them, the value of such investments is deducted from total assets for the
purposes of calculating the management fee.
In addition, the Manager is entitled to receive a performance fee, payable at
the end of each financial period of the Company, at the rate of 15 per cent of
any excess of the net asset value per share over the benchmark net asset value
per share as at the last calculation day in the relevant financial period,
multiplied by the time weighted number of shares in issue within such period.
The benchmark net asset value per share is the higher of 104.80p, compounded at
10 per cent per annum since 31 December 1999 (126.81p at 31 December 2001), and
the highest net asset value per share as of the last calculation day in any
preceding financial period. As at 31 December 2001, the benchmark figure to be
used to calculate the performance fee for the year ending 31 December 2002 was
127.85p. When calculating the performance fee, the net asset value per share is
reduced by the amount that the dividend per share paid during that year is less
than 8.5 pence.
6. Other expenses
2001 2000
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Custody and settlement fees 40 - 40 36 - 36
Auditors' remuneration 8 - 8 9 - 9
Directors' remuneration 30 - 30 30 - 30
Performance fee - - - - 217 217
Other expenses 55 - 55 48 - 48
133 - 133 123 217 340
7. Directors' remuneration
2001 2000
£'000 £'000
David Martin Bralsford 12 12
John Michael McKean 9 9
John Claude Tibbo 9 9
30 30
No bonus or pension contributions were paid or payable on behalf of the
Directors.
8. Interest payable and similar charges
The interest payable relates to interest due on the bank loan, details of which
are disclosed in note 14.
9. Dividends in respect of equity shares
2001 2000
£'000 £'000
Dividends on Ordinary Shares:
First interim paid of 2.75p (2000: 2.5p) 814 675
Second interim paid of 2.75p (2000: 2.5p) 814 675
Third interim paid of 3.25p (2000: 3.0p) 962 810
Fourth interim paid of 3.25p (2000: 3.0p) 962 810
3,552 2,970
10. Return per Ordinary Share
The revenue return per Ordinary Share is based on net revenue of £3,973,048
(2000: £3,688,534) and on a weighted average number of 29,600,002 (2000:
27,135,344) Ordinary Shares in issue throughout the year. The capital return per
Ordinary Share is based on the net capital deficit of £1,450,734 (2000: profit
of £524,180) and on a weighted average number of 29,600,002 (2000: 27,135,344)
Ordinary Shares in issue throughout the year.
11. Listed investments
Smaller High Income Total Total
Companies Portfolio
Portfolio
2001 2001 2001 2000
£'000 £'000 £'000 £'000
Opening valuation 45,590 14,090 59,680 56,754
Purchases at cost 14,378 13,262 27,640 45,591
Sales - proceeds (16,865) (8,774) (25,639) (45,186)
- realised gains/(losses) 1,445 (395) 1,050 6,771
Increase/(decrease) in unrealised appreciation 2,669 (3,355) (686) (4,250)
Closing valuation 47,217 14,828 62,045 59,680
Closing book cost 45,375 19,637 65,012 61,961
Closing unrealised appreciation / (depreciation) 1,842 (4,809) (2,967) (2,281)
Closing valuation 47,217 14,828 62,045 59,680
12. Debtors
2001 2000
£'000 £'000
Accrued income 548 667
Amounts due from brokers - 1,394
Other debtors 7 7
555 2,068
13. Creditors - amounts falling due within one year
2001 2000
£'000 £'000
Amounts due to brokers - 1,687
Management fee 132 142
Performance fee - 217
Bank interest 324 318
Other creditors 29 29
485 2,393
14. Long term bank loan
2001 2000
£'000 £'000
Bank of Scotland Offshore facility 25,616 25,616
Under loan agreements dated 28 September 1999 and 21 December 2000 between the
Company and Bank of Scotland Offshore, a term loan of £25,616,000 has been made
available. The interest rates payable on the loan are based on LIBOR plus a
margin of 1 per cent plus MLA costs and are fixed as follows:
2001 2000
£'000 £'000
Fixed for less than 3 months at 5.645% 5,000 -
Fixed for less than 3 months at 6.065% (2000: 7.750%) 5,000 7,500
Fixed for 3 months at 5.335% (2000: 7%) 5,616 2,279
Fixed for 4 months at 5.135% (2000: 7.344%) 5,000 5,837
Fixed for 7 months at 7.406% - 5,000
Fixed for 3 years at 8.285% 5,000 -
Fixed for 4 years at 8.285% - 5,000
25,616 25,616
15. Share capital
2001 2000
£'000 £'000
Authorised:
40,000,000 Ordinary Shares of 25p 10,000 10,000
Allotted, called up and fully paid:
29,600,002 Ordinary Shares of 25p 7,400 7,400
16. Reserves
Share Capital Revenue Total
premium reserve reserve £'000
account £'000
£'000
£'000
At 1 January 2001 27,079 3,440 956 31,475
Realised gains on sales of investments - 1,050 - 1,050
Movement in unrealised gains on investments - (686) - (686)
Costs charged to capital - (1,815) - (1,815)
Revenue Return for the year - - 3,973 3,973
Dividends paid - - (3,552) (3,552)
At 31 December 2001 27,079 1,989 1,377 30,445
17. Reconciliation of movements in Shareholders' funds
2001 2000
£'000 £'000
Balance as at 1 January 2001 38,875 34,220
Share capital and share premium issued - 3,412
Capital (deficit)/return for the year (1,451) 524
Revenue Return for the year 3,973 3,689
Dividends paid (3,552) (2,970)
Balance as at 31 December 2001 37,845 38,875
18. Net asset value per Ordinary Share
2001 2000
pence pence
Net asset value per Ordinary Share 127.85 131.33
The net asset value per Ordinary Share is based on the net assets attributable
to equity Shareholders of £37,844,891 (2000: £38,874,575) and on 29,600,002
(2000: 29,600,002) Ordinary Shares in issue at the end of the year.
19. Reconciliation of net revenue before finance costs and taxation to net cash
inflow from operating activities
2001 2000
£'000 £'000
Net revenue before finance costs and taxation 4,420 4,138
Management fee charged to the capital reserve (482) (432)
Performance fee charged to the capital reserve - (217)
Decrease in accrued income 119 138
Decrease in other debtors - 2
Decrease in other creditors and accruals (227) (362)
Net cash inflow from operating activities 3,830 3,267
20. Reconciliation of net cash flow to net debt
At Cash Other movements At 31 December
2001
1 January 2001 flows £'000
£'000
£'000 £'000
Investments 59,680 2,294 71 62,045
Cash at bank and in hand 5,136 (3,790) - 1,346
Debt due after more than one year (25,616) - - (25,616)
Total 39,200 (1,496) 71 37,775
21. Capital commitments
All contracted capital commitments have been provided for.
22. Related parties
Details of the relationship between the Company, Collins Stewart Fund Management
Limited, Collins Stewart Asset Management Limited and Collins Stewart (CI)
Limited are disclosed in the Report of the Directors.
The Directors are not aware of any ultimate controlling party.
23. Risk profile of financial assets and liabilities
Financial Summary
The principal investment objectives of the Company are to provide Shareholders
with a high income and also the opportunity for income and capital growth by
investing primarily in smaller capitalised United Kingdom companies admitted to
the Official List of the United Kingdom Listing Authority and traded on the
London Stock Exchange or traded on AIM.
The Company's portfolio is invested in equities and high income and fixed
interest securities in order to achieve its investment objectives. It is the aim
of the Company to provide both income and capital growth predominantly through
investment of approximately 75 per cent of the portfolio in smaller capitalised
United Kingdom companies. The Company also aims to further enhance income for
Shareholders by investing in a high income portfolio constituting about 25 per
cent of its assets comprising ordinary shares and income shares of split capital
investment trusts and fixed interest, sterling denominated debt and
convertibles.
In addition, the Company holds cash and liquid resources as well as having
debtors and creditors that arise directly from its operations.
The main risks arising from the Company's financial instruments are market price
risk, interest rate risk and liquidity risk. As all the assets and liabilities
of the Company are denominated in Sterling, there is no currency risk.
Market price risk
The Company's exposure to market price risk comprises mainly of movements in the
value of the Company's investments. The Company's investment portfolio complies
with the investment parameters as disclosed in its prospectus and the spread of
the 10 principal investments.
A 10 per cent increase / decrease in the market prices of investments would
result in a 16.39 per cent increase / decrease in the net asset value per
Ordinary Share as at the balance sheet date (2000: 15.35%).
Interest rate risk
The Company finances its operations through a mixture of bank borrowings and
retained profits. Bank of Scotland Offshore has made available a term loan of up
to £25,616,000. The interest payable under the facility is fixed at regular
intervals based on the aggregate rate of LIBOR plus certain additional
regulatory costs charged by the bank and a margin of 1.0 per cent per annum (see
note 14).
Liquidity risk
The Company entered into a loan agreement with Bank of Scotland Offshore, under
which Bank of Scotland made available a loan of £25,616,000 (see note 14). The
terms of the Company's bank borrowings entitle the lender to require early
repayment should the Company breach any of the covenants placed upon it by Bank
of Scotland.
The Company's liquidity is monitored regularly to ensure that the covenants are
not breached. Managing the liquidity risk is made simpler as all of the
investments are highly liquid.
Interest rate risk - profile
The Company's financial fixed assets comprise a fixed interest portfolio of
£8,717,507 (2000: £6,895,088) which bears a weighted average interest rate of
11.50% (2000: 12.08%) fixed for a weighted average period of 1.7 years (2000:
2.0 years).
The balance of the investment portfolio consists of non-interest bearing
investments of £53,327,863 (2000: £52,784,947).
The Company's other exposure to interest rate risk arises through its long term
loan, details of which are given in note 14.
Financial assets
Non-interest Fixed Floating Total Non-interest Fixed Floating Total
bearing rate rate bearing rate rate
2001 2000
2001 2001 2001 2000 2000 2000
£'000 £'000
£'000 £'000 £'000 £'000 £'000 £'000
Equity shares 53,328 - - 53,328 52,682 - - 52,682
Debt investments - 8,441 - 8,441 - 6,895 - 6,895
Zero dividend
preference shares - 277 - 277 - 103 - 103
Cash at bank - - 1,346 1,346 - - 5,136 5,136
53,328 8,718 1,346 63,392 52,682 6,998 5,136 64,816
The above analysis excludes short-term debtors as all the material amounts are
non-interest bearing.
Fixed rate financial assets
Weighted average Weighted average
rate period
2001 2001
% years
Zero dividend preference shares 9.08 4.43
Medium term debt investments 11.64 1.59
The Company's financial fixed assets comprise a fixed interest portfolio of
£8,718,000 (2000: £6,998,000) which bears a weighted average interest rate of
11.50% (2000: 12.08%) fixed for a weighted average period of 1.71 years
(2000: 2.00 years).
The balance of the investment portfolio consists of non-interest bearing
investments of £53,328,000 (2000: £52,682,000).
Financial liabilities
Floating rate Floating rate
financial liabilities financial liabilities
2001 2000
£'000 £'000
Long term bank loan 25,616 25,616
The above analysis excludes short-term creditors as all the material amounts are
non-interest bearing.
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