Interim Results
Acorn Income Fund Ld
23 September 2002
ACORN INCOME FUND LIMITED
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2002
CHAIRMAN'S STATEMENT
This interim report for the period ended 30 June 2002 comes at a time of considerable uncertainty in world
stockmarkets, which has been characterised by extremely volatile trading conditions.
Despite this, the net asset value per share of the Company increased by 1.0% over the period, outperforming both of
the selected benchmarks.
During 2002, the United States' economy has struggled to avoid recession and the economy of the United Kingdom has
slowed. This has had a significant impact on the high income portfolio, with a number of its holdings in split
capital investment trusts cutting dividend payments completely. However, despite these conditions, the Company
continued its practice of paying income to Shareholders as it arises on a quarterly basis whilst retaining a prudent
level of revenue reserves. The Company paid first and second interim dividends of 3.0p each (2001: 2.75p) per
Ordinary Share to Shareholders on 27 March 2002 and 26 June 2002 respectively. A third interim dividend for the year
ended 31 December 2002 of 3.0p (2001: 3.25p) per Ordinary Share was declared on 9 September 2002, so that aggregate
dividends so far in 2002 are 9.0p (2001: 8.75p).
The Board, in conjunction with the Manager, has reviewed the income forecasts for the remainder of 2002 which are
considered to be achievable, and, accordingly, subject to the continued success of the Company's investment strategy
and in the absence of any unforeseen circumstances, the Board expects to be able to continue to pursue a high
dividend distribution policy.
The market slump during June resulted in the net asset value of the Company falling from a high for the period of
141.67p per Ordinary Share, at 31 May 2002, to 129.13p at 30 June 2002. The market fell further during July and
August, resulting in a decrease in the net asset value per Ordinary Share of 11.37% from 30 June 2002 to 31 August
2002, whilst over the same period the Company's share price fell 13.67%.
The Board is hopeful that the remainder of 2002 will see some recovery, but, due to the continued uncertainty in
world markets, its stance is still one of caution.
Martin Bralsford
23 September 2002
INVESTMENT ADVISER'S REPORT - Smaller Companies Portfolio
During the first half of the year, the performance of the smaller companies portfolio has been excellent. There have
been few changes to the portfolio and the core holdings continue to deliver steady growth in income.
Recent additions to the portfolio include Eurodis Electron, a leading distributor of electronic components throughout
Europe. Attractively rated versus the level of profitability achieved in past economic cycles, we expect to make
significant gains from this investment.
The Company's investment in motor dealers has been very rewarding for shareholders. Pendragon and European Motors
have benefited from strong demand for new cars and changes in block exemption rules that improve the security of
their relationship with motor manufacturers. Both companies are good cash generators, with strong asset backing and
the ability to finance above average dividend payouts.
Corporate activity has been scarce, but FCX International did attract a private equity buyer at a useful premium to
the cost of our investment.
In many cases, there remains considerable potential for improvement in the profitability of our investee companies.
In the 'old economy' sectors the process of re-organisation and rationalisation continues to generate positive
returns.
It seems likely that the trading outlook for many of the companies that we hold will improve during the next 12
months. The recent strength of the Euro versus Sterling is improving the competitiveness of many of our companies.
Looking forward, share buybacks are also contributing to an overall improving earnings outlook.
We believe that there is scope for an improvement in the share prices of companies within the portfolio. However, an
improvement in share prices will ultimately depend on investor sentiment. Since the period end, market volatility has
been high and many share prices have fallen.
Despite short term uncertainty, we are hopeful that the income from the smaller companies portfolio will increase
during the second half of the year.
Peter Webb
Unicorn Asset Management Limited
23 September 2002
INVESTMENT ADVISERS' REPORT - High Income Portfolio
The high-income portfolio continues to deliver a regular stream of income to shareholders. However, the two different
component parts of the portfolio have enjoyed mixed fortunes. The split capital sector has continued to struggle with
liquidity continuing to contract. Indeed, the lack of liquidity in the market place has been reflected in portfolio
activity where turnover has been extremely modest.
Global equity markets came under intense pressure during May through July this year. This largely stemmed from a loss
of confidence in corporate America as many large companies owned up to deliberately misstating corporate earnings.
Worries over the future path of corporate profits merely served to compound the selling, as many analysts chose to
further downgrade their forecasts.
The effect of gearing in the split capital market meant that the sector suffered more than the broad equity markets.
For example, the Datastream Highly Geared Investment Trust NAV Index fell by 54.5% between 30 April 2002 and 24 July
2002.
Numerous funds have breached or are close to breaching their banking covenants, which has resulted in either reduced
or cancelled dividends. The knock on effect on income shares has been particularly severe and has been exaggerated by
adverse media comment. Some funds have now repaid bank loans to varying degrees.
At the time of writing it has become noticeable that the more stalwart investor has begun to scrutinise the market
place in search of 'cheap' buying opportunities, picking issues that have been sold or marked down significantly
below their net asset value. This has coincided with a modest slowing of the pace of dividend cuts. It is too early
to conclude that the worst is now over in the split capital investment trust market, we expect conditions to remain
turbulent and it could be some time yet before prices begin to recover significantly.
The fixed income element of the portfolio has performed strongly, underpinned by low inflation and low interest
rates. However, looking forward United Kingdom fixed income markets will be required to grapple with a booming
housing market and rising average earnings, especially in the public sector. Higher Government spending at a time
when the economy is contracting and the early, but intensifying, signs of trade union militancy, which may well
culminate in more strikes and disputes, is expected to have a negative impact on the fixed income markets. Equally
importantly, the Government's popularity is plummeting. We intend to keep our Sterling bonds centred at the very
short end of the maturity scale.
Jim Goodey
Collins Stewart Asset Management Limited
23 September 2002
STATEMENT OF TOTAL RETURN
For the six months ended 30 June 2002 (unaudited)
Six months Year ended 31
Six months ended ended 30 June December 2001
2001
30 June 2002 (unaudited) (audited)
(unaudited)
Notes Revenue Capital Total Total Total
£'000 £'000 £'000 £'000 £'000
Gains on investments 3 - 1,034 1,034 4,798 364
Income 4 2,275 - 2,275 2,232 4,714
Management fees (80) (240) (320) (329) (643)
Other expenses (77) - (77) (678) (133)
Net return on ordinary activities 2,118 794 2,912 6,023
before finance costs 4,302
Interest payable and similar charges (190) (568) (758) (927) (1,780)
Net return on ordinary activities for 1,928 226 2,154 5,096 2,522
the period
Dividends in respect of equity shares 5 (1,776) - (1,776) (1,628) (3,552)
Transfer to/(from) reserves 152 226 378 3,468 (1,030)
Total Return per Ordinary Share 6 6.51p 0.77p 7.28p 17.22p 8.52p
BALANCE SHEET
as at 30 June 2002 (unaudited)
30 June 30 June 31 December
2001
2002 2001
(unaudited) (unaudited) (audited)
Notes £'000 £'000 £'000
Fixed assets
Investments listed at market value 7 60,426 67,397 62,045
Current assets
Debtors 702 990 555
Cash at bank 3,847 627 1,346
4,549 1,617 1,901
Creditors - amounts falling due within one year
Creditors (1,136) (1,055) (485)
Net current assets 3,413 562 1,416
Total assets less current liabilities 63,839 67,959 63,461
Creditors - amounts falling due after more than one year
Long term bank loan 8 (25,616) (25,616) (25,616)
Net asset value 38,223 42,343 37,845
Share capital and reserves
Called-up share capital 9 7,400 7,400 7,400
Share premium 27,079 27,079 27,079
Revenue reserve 1,529 1,180 1,377
Capital reserve 2,215 6,684 1,989
Shareholders' funds attributable to equity interests 38,223 42,343 37,845
Net assets per 25p Ordinary Share 10 129.13p 143.05p 127.85p
CASH FLOW STATEMENT
For the six months ended 30 June 2002 (unaudited)
Six months ended Six months ended Year
30 June 2002 30 June 2001 ended 31 December
(unaudited) (unaudited) 2001
(audited)
Note £'000 £'000 £'000
Net cash inflow from operating activities 11 1,776 1,365 3,830
Servicing of finance
Interest paid (769) (1,034) (1,774)
Net cash outflow from servicing of finance (769) (1,034) (1,774)
Investing activities
Purchase of investments (5,391) (12,154) (29,327)
Sale of investments 8,661 8,942 27,033
Net cash inflow/(outflow) from investing activities 3,270 (3,212) (2,294)
Equity dividends paid (1,776) (1,628) (3,552)
Cash inflow/(outflow) before financing 2,501 (4,509) (3,790)
Financing - - -
Increase/(decrease) in cash in the period 2,501 (4,509) (3,790)
NOTES TO THE INTERIM ACCOUNTS
for the six months ended 30 June 2002
1. Accounting policies
The accounting policies, all of which have been applied consistently throughout the period, in the preparation of
the Company's interim accounts, are set out below:
Accounting convention
The interim accounts 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 ('SORP') for Financial Statements of Investment Trust Companies as it is considered best
practice to do so, although the Company, as an overseas company, does not meet all criteria set out in the SORP.
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.
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.
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;
and
(iii) 100% of any performance fee is charged to the capital account.
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 (2001: £600).
3. Gains on investments
Six months ended Six months ended 30 Year ended 31
30 June 2002 June 2001 December 2001
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Realised (losses) / gains on sales (552) (754) 1,050
Increase / (decrease) in unrealised appreciation 1,586 5,552 (686)
1,034 4,798 364
4. Income
Six months ended Six months ended 30 Year ended 31
30 June 2002 June 2001 December 2001
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Dividend income 1,863 1,802 3,806
Bond interest 379 398 836
Bank interest 33 32 72
2,275 2,232 4,714
5. Dividends paid
Six months ended Six months ended 30 Year ended 31
30 June 2002 June 2001 December2001
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Dividends on Ordinary Shares:
First interim paid of 3.00p (2001: 2.75p) 888 814 814
Second interim paid of 3.00p (2001: 2.75p) 888 814 814
Third interim paid n/a (2001: 3.25p) - - 962
Fourth interim paid n/a (2001: 3.25p) - - 962
1,776 1,628 3,552
6. Return per Ordinary Share
The revenue return per Ordinary Share is based on a net revenue return on ordinary activities of £1,928,000 (30
June 2001: £1,852,000, 31 December 2001: £3,973,000) and on a weighted average number of 29,600,002 (30 June
2001: 29,600,002, 31 December 2001: 29,600,002) Ordinary Shares in issue throughout the period. The capital
return on ordinary activities per Ordinary Share is based on the net capital return of £226,000 (30 June 2001:
£3,244,000, 31 December 2001: deficit of £1,451,000) and on a weighted average number of 29,600,002 (30 June
2001: 29,600,002, 31 December 2001: 29,600,002) Ordinary Shares in issue throughout the period.
7. Investments at market value
Six months ended 30 Year ended 31
June 2001 December 2001
Six months ended 30 June 2002 (unaudited) (audited)
(unaudited)
Smaller High income Total Total Total
companies
£'000 £'000 £'000 £'000 £'000
Opening valuation 47,217 14,828 62,045 59,680 59,680
Purchases at cost 4,369 1,639 6,008 10,467 27,640
Sales - proceeds (7,167) (1,494) (8,661) (7,548) (25,639)
- realised gains/(losses) (488) (64) (552) (754) 1,050
Increase / (decrease) in unrealised
appreciation 4,980 (3,394) 1,586 5,552 (686)
Closing valuation 48,911 11,515 60,426 67,397 62,045
Closing book cost 42,089 19,718 61,807 64,126 65,012
Closing unrealised appreciation/
(depreciation) 6,822 (8,203) (1,381) 3,271 (2,967)
Closing valuation 48,911 11,515 60,426 67,397 62,045
8. Long term bank loan
30 June 2002 30 June 2001 31 December 2001
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Bank of Scotland Offshore facility 25,616 25,616 25,616
Under loan agreements dated 28 September 1999 and 21 December 2000 between the Company and the Bank of Scotland
Offshore, a term loan of £25,616,000 has been made available. The Company pays interest based on LIBOR plus a
margin of 1% plus MLA costs.
9. Share capital
30 June 2002 30 June 2001 31 December 2001
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Authorised:
40,000,000 Ordinary Shares of 25p 10,000 10,000 10,000
Allotted, called up and fully paid:
29,600,002 Ordinary Shares of 25p 7,400 7,400 7,400
10. Net asset value per share
30 June 2002 30 June 2001 31 December 2001
(unaudited) (unaudited) (audited)
pence pence pence
Net asset value per Ordinary Share 129.13 143.05 127.85
The net asset value per Ordinary Share is based on the net assets attributable to equity Shareholders of
£38,223,000 (30 June 2001: £42,342,000, 31 December 2001: £37,845,000) and on 29,600,002 (30 June 2001:
29,600,002, 31 December 2001: 29,600,002) shares in issue at the end of the period.
11. Reconciliation of return on ordinary activities before financing to net cash inflow from operating activities
Six months ended 30 Six months Year ended 31
June 2002 ended 30 June December 2001
2001
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Net revenue return before finance costs 2,118 2,084 4,420
Investment management fees charged to the capital account (240) (247) (482)
Performance fees charged to the capital account - (612) -
Movement in accrued income (145) (317) 119
Movement in other debtors (2) 2 -
Movement in other creditors and accruals 45 455 (227)
Net cash inflow from operating activities 1,776 1,365 3,830
If you have any queries please contact:
Andrew Duquemin
Collins Stewart Fund Management Limited
TSB House
Le Truchot
St Peter Port
Guernsey
GY1 4AE
Tel: 01481 731 987
Fax: 01481 720 018
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