Interim Results
Acorn Income Fund Ld
08 September 2003
ACORN INCOME FUND LIMITED
PRELIMINARY ANNOUNCEMENT OF UNAUDITED INTERIM RESULTS
FOR THE PERIOD ENDED 30 JUNE 2003
CHAIRMAN'S STATEMENT
I am pleased to present to Shareholders our unaudited interim report and accounts for the six months ended 30 June 2003.
Market values of investments held by the Company fell during the first quarter to end March. Markets were volatile
which, together with the downward trend, continued to dent the public's propensity to invest in equity and this, in
itself, brings funding challenges to many businesses. These factors were compounded by war in Iraq and the nuclear
threat from North Korea, adding to the unsettled tone of world equity markets.
However, following the cessation of hostilities in Iraq, equity markets in general started to recover. This has been
reflected in an increase in the net asset value per Ordinary Share from a low at 31 March 2003 of 72.42p to 103.64p at
30 June 2003. This increase, which is due to the exceptional performance of the Smaller Companies Portfolio, has
continued after the period end. At 31 August 2003 the net asset value per Ordinary Share had increased a further 17.01%
to 121.27p.
Following the collapse of the share prices and prospects of many investment companies with split capital structures,
which previously had provided one of our sources of investments with high yield characteristics, the Board, in
consultation with the Investment Manager of the High Income Portfolio, has concluded that the risks of seeking such high
yields outweighs the potential rewards and it would now be appropriate to change the basis on which the High Income
Portfolio is invested. Accordingly, in a circular to Shareholders dated today, it is proposed that the High Income
Portfolio is now invested solely in Sterling denominated investment grade fixed interest bonds (rating not to be lower
than A). The current holdings of the High Income Portfolio will gradually be disposed of, as advised by the Investment
Manager from time to time, and the proceeds reinvested in accordance with the new investment policy.
As detailed in the Company's original prospectus dated 5 February 1999, the Company aimed to increase dividends over its
anticipated life, as extended by Shareholders from time to time. The total dividends of 8.5p, 11p, 12p and 12p per
Ordinary Share were declared in respect of the period ended 31 December 1999 and the years ended 31 December 2000, 2001
and 2002 respectively. In the current financial year to 31 December 2003, two interim dividends each of 1.5p per
Ordinary Share have been declared to date. In light of both the proposed change in investment policy and the income
forecasts by our Manager the Board has today declared a third interim dividend of 2.0 pence per Ordinary Share and in
the absence of unforeseen circumstances expects to declare a further fourth interim dividend of not less than 2.0 pence*
per Ordinary Share in respect of the year ending 31 December 2003. In addition, and as more fully explained in the
circular to Shareholders, the Board has declared a special dividend of 2.0 pence per Ordinary Share, conditional on the
passing of the resolutions contained in that circular.
Despite the increase in the net asset value per Ordinary Share during the six months ended 30 June 2003, the share price
fell from 80.00p at 31 December 2002 to 76.00p at 30 June 2003. The Board is aware that a number of the Company's
Shareholders are split capital investment trusts which themselves have suffered the aggravated effects of the general
stockmarket volatility on their own asset values and, therefore, have been sellers of this Company's Shares leading to a
significant imbalance between the supply and demand for the Ordinary Shares. The circular posted to Shareholders today
includes proposals, inter alia, to enable the Company to buy back Ordinary Shares for cancellation. The Board believes
that the ability to repurchase Ordinary Shares will be a useful tool in helping to achieve value for all Shareholders
while also enabling the Company to address imbalances between the supply and demand for the Company's Ordinary Shares
and the discount to assets at which they stand.
The ending of hostilities in Iraq has removed some of the uncertainty affecting equity markets worldwide. In addition,
the rise in corporate activity over the last five months and generally improving corporate results provide some grounds
for confidence that the recent recovery may be sustainable. The Board also hopes that the change in investment policy
will enable it to take advantage of improving corporate fundamentals to establish a more stable income stream while
limiting the Company's exposure to any future falls in capital value in the High Income Portfolio.
MARTIN BRALSFORD
8 September 2003
* This is an estimate only and is not intended to be, nor should it be taken as, a forecast of profits.
INVESTMENT ADVISER'S REPORT - SMALLER COMPANIES PORTFOLIO
Stock market conditions improved during the latter part of the period under review, as the major hostilities in Iraq
ended and interest rates were cut further. Investors returned to the smaller companies market, enticed by attractive
valuations, as evidenced by historically high dividend yields. Despite the strong performance of recent months we
continue to believe that smaller companies remain undervalued, especially compared to their larger competitors. Merger
and acquisition activity is expected to increase as corporate buyers and venture capitalists are attracted by low
valuations.
We remain wary of consumer stocks. United Kingdom consumers have continued to build personal debt levels to new highs
at a time when disposable incomes are being squeezed by higher taxation. We do not believe that this situation is
sustainable and have consequently reduced our exposure to general retailers, leisure and hotels, building and
construction and real estate.
A number of our investee companies have performed well with Vp Group, British Polythene Industries, Wellington Holdings
and Bodycote International performing particularly strongly.
During recent months we have been wary of seeking yield for yield's sake and have introduced a greater bias towards
more growth orientated companies. Because of the relative unpopularity of smaller companies in recent years we have
been able to identify business models that have yet to reach maturity. These companies offer good capital growth
potential, together with yields that meet the requirements of this portfolio.
A new investment was made during the period in Abacus Group, a distributor of electronic components. The holding in
recruitment company Robert Walters was increased during the period. Disposals included Heywood Williams, Interserve
and European Motors where we believe profitability is likely to come under pressure.
The existing portfolio continues to deliver a healthy flow of dividends. While the general economic background is not
overly inspiring, we believe that the portfolio's emphasis on fundamentally attractive business with good cash flow
characteristics will achieve relatively good performances over the coming year.
P Webb
Unicorn Asset Management Limited
8 September 2003
INVESTMENT ADVISER'S REPORT - HIGH INCOME PORTFOLIO
The recent rally in equity markets has led to a strong recovery in the value of split-capital trusts.
This has been most pronounced in capital and income shares which have posted gains in excess of 30%. These two share
classes, recently ostracised by investors due to high bank debt and prior-ranking obligations to zero dividend
preference shares, have benefited from the rising asset values in split-capital portfolios.
There is still plenty of scope for equity markets to rally and therefore, for split-capital trusts to edge higher.
However, in the near term, we anticipate a period of consolidation.
Turning now to the fixed income market, conditions have begun to deteriorate. Whilst low interest rates have been
supportive for bonds, inflation has begun to edge higher. In addition, both policy makers and central bankers have
embarked upon a series of reflationary measures in an effort to engender some growth into flagging economies. Indeed,
both in the United Kingdom and the USA, officials have set themselves growth targets of 3% and 4% respectively -
worrying for bonds. A further consequence of these reflationary strategies has been an ever expanding fiscal agenda
resulting in a dramatic increase in the government borrowing requirement. This has been especially noticeable in the
United Kingdom where Chancellor Brown has undertaken a costly programme of upgrading and improving public services.
This combination of anticipated faster growth and more debt to finance has unnerved the bond market, which, in our view
has now moved from being overvalued to a fair value. Accordingly, going forward, we are anxious to rebuild a weighting
in high coupon gilt-edged securities. Assuming that Shareholders approve the proposed change to the investment policy
to be adopted by this portfolio, we expect to be able to utilise existing cash resources to achieve a higher weighting
of investment grade fixed interest holdings. Existing split capital and non-investment grade holdings will also
gradually be realised in order to fully implement the new policy.
J Goodey
Collins Stewart Asset Management Limited
8 September 2003
STATEMENT OF TOTAL RETURN (unaudited)
for the six months ended 30 June 2003
Six months Year ended
ended 30 June 31 December
2002 2002
Six months ended 30 June 2003
(unaudited) (unaudited) (audited)
Note Revenue Capital Total Total Total
£'000 £'000 £'000 £'000 £'000
Gain / (loss) on investments 3 - 5,331 5,331 1,034 (10,654)
Income 4 1,706 - 1,706 2,275 4,185
Management fee 5 (61) (182) (243) (320) (592)
Other expenses (78) - (78) (77) (147)
-------- -------- -------- -------- --------
Net return / (loss) on ordinary activities 1,567 5,149 6,716 2,912 (7,208)
before finance costs
Interest payable and similar charges (179) (537) (716) (758) (1,520)
-------- -------- -------- -------- --------
Net return / (loss) on ordinary activities for 1,388 4,612 6,000 2,154 (8,728)
the period
Dividends in respect of equity shares 6 (888) - (888) (1,776) (3,552)
-------- -------- -------- -------- --------
Transfer to / (from) reserves 11 500 4,612 5,112 378 (12,280)
-------- -------- -------- -------- --------
Total return / (loss) per Ordinary Share 7 4.69p 15.58p 20.27p 7.28p (29.49)p
Dividend per Ordinary Share (distributed) 6 3.00p - 3.00p 6.00p 12.00p
BALANCE SHEET (unaudited)
as at 30 June 2003
31 December
2002
30 June 2003 30 June 2002
Note (unaudited) (unaudited) (audited)
£'000 £'000 £'000
Fixed assets
Listed investments 8 46,759 60,426 50,175
Current assets
Debtors 256 702 419
Cash at bank 9,749 3,847 1,052
-------- -------- --------
10,005 4,549 1,471
Creditors - amounts falling due within one year
Creditors (471) (1,136) (465)
-------- -------- --------
Net current assets 9,534 3,413 1,006
-------- -------- --------
Total assets less current liabilities 56,293 63,839 51,181
Creditors - amounts falling due after more than one year
Long term bank loan 9 (25,616) (25,616) (25,616)
-------- -------- --------
Net asset value 30,677 38,223 25,565
-------- -------- --------
Share capital and reserves
Called-up share capital 10 7,400 7,400 7,400
Share premium 11 27,079 27,079 27,079
Revenue reserve 11 1,833 1,529 1,333
Capital reserve 11 (5,635) 2,215 (10,247)
-------- -------- --------
Total shareholders' funds attributable to equity interests 30,677 38,223 25,565
-------- -------- --------
Net asset value per Ordinary Share 12 103.64p 129.13p 86.37p
CASH FLOW STATEMENT (unaudited)
for the six months ended 30 June 2003
Six months Six months Year ended
ended 30 June ended 30 June 31 December
2003 2002 2002
Note (unaudited) (unaudited) (audited)
£'000 £'000 £'000
Net cash inflow from operating activities 13 1,528 1,776 3,646
Servicing of finance
Interest paid (711) (769) (1,543)
-------- -------- --------
Net cash outflow from servicing of finance (711) (769) (1,543)
Investing activities
Purchase of investments (1,342) (5,391) (22,093)
Sale of investments 10,110 8,661 23,248
-------- -------- --------
Net cash inflow from investing activities 8,768 3,270 1,155
Equity dividends paid (888) (1,776) (3,552)
-------- -------- --------
Cash inflow / (outflow) before financing 8,697 2,501 (294)
Net cash flow from financing - - -
-------- -------- --------
Increase / (decrease) in cash in the period / year 8,697 2,501 (294)
-------- -------- --------
NOTES TO THE UNAUDITED INTERIM ACCOUNTS
for the six months ended 30 June 2003
1. Accounting policies
The accounting policies, all of which have been applied consistently throughout the period, in the
preparation of the Company's unaudited interim results, are set out below:
a) Accounting convention
The preliminary announcement of the unaudited interim results 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.However, certain investments have previously been revalued downwards to take account of the high
volatility and poor liquidity in the split capital investment trust market.
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 to the revenue reserve 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.
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 (2002: £600).
3. Gain / (loss) on investments
Six months Six months Year ended 31
ended 30 June ended 30 June December 2002
2003 2002
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Realised loss on sales (3,907) (552) (1,640)
Movement in unrealised gains and losses 9,238 1,586 (9,014)
-------- -------- --------
5,331 1,034 (10,654)
-------- -------- --------
4. Income
Six months Six months Year ended 31
ended 30 June ended 30 June December 2002
2003 2002
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Dividend income 1,524 1,863 3,436
Bond interest 90 379 685
Bank interest 92 33 64
-------- -------- --------
1,706 2,275 4,185
-------- -------- --------
5. Management fee
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% 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% 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 annum since 31 December 1999, and the highest net asset value per
share as of the last calculation day in any preceding financial period. When calculating the performance
fee, the net asset value per share is reduced by the amount that the dividend per share paid during that
financial year is less than 8.5 pence. As at 30 June 2003 the benchmark net asset value per share was
146.41p. No performance fee has been paid in respect of the period ended 30 June 2003 (30 June 2002: nil, 31
December 2002: nil).
The Manager has delegated the obligations for the performance of the investment management services to
Unicorn Asset Management Limited ('the Smaller Companies Investment Adviser') and Collins Stewart Asset
Managers ('the High Income Investment Adviser'). The agreements are between the Investment Advisers and the
Manager, not the Company. All Investment Advisory fees are paid out of the management fees and performance
fees received by the Manager from the Company.
Both Investment Advisers are entitled to receive an annual fee at the rate of 0.5% of the total assets
attributable to the investments in relation to which the Investment Adviser acts. The Smaller Companies
Investment Adviser is entitled to 5/8ths of the Manager's performance fee, while the Manager may, at its
discretion, pay the High Income Investment Adviser a proportion of the remaining performance fee. In
addition, the Smaller Companies Investment Adviser is entitled to receive, from the Manager, a fixed annual
fee of £7,500 in relation to marketing services provided to investors.
The Investment Advisory Agreements may be terminated by the Manager or the Investment Advisers, giving not
less than 12 months' notice in writing, or otherwise in circumstances where one of the parties has a receiver
appointed over its assets or if an order is made or an effective resolution passed for the winding up of one
of the parties. On termination the Investment Adviser shall be entitled to receive all fees accrued up to
the date of the termination (or thereafter if the Investment Adviser necessarily incurs expenses arising out
of the termination of the agreement) but shall not be entitled to compensation, except in the case of a
wrongful termination by the Manager.
6. Dividends in respect of equity shares
Six months Six months Year ended 31
ended 30 June ended 30 June December 2002
2003 2002
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Dividends on Ordinary Shares:
First interim paid of 1.50p (2002: 3.00p) 444 888 888
Second interim paid of 1.50p (2002: 3.00p) 444 888 888
Third interim paid, n/a (2002: 3.00p) - - 888
Fourth interim paid, n/a (2002: 3.00p) - - 888
-------- -------- --------
888 1,776 3,552
-------- -------- --------
7. Return per Ordinary Share
The revenue return per Ordinary Share is based on net revenue of £1,387,544 (30 June 2002: £1,928,057, 31
December 2002: £3,508,519) and on a weighted average number of 29,600,002 (30 June 2002 and 31 December 2002:
29,600,002) Ordinary Shares in issue throughout the period. The capital return per Ordinary Share is based
on the net capital return of £4,612,366 (30 June 2002: £226,445, 31 December 2002: deficit of £12,236,432)
and on a weighted average number of 29,600,002 (30 June 2002 and 31 December 2002: 29,600,002) Ordinary
Shares in issue throughout the period.
8. Listed investments
Six months Year ended 31
ended 30 June December 2002
2002
Six months ended 30 June 2003
(unaudited) (unaudited) (audited)
Smaller High
Companies Income
Portfolio Portfolio
Total Total Total
£'000 £'000 £'000 £'000 £'000
Opening valuation 41,091 9,084 50,175 62,045 62,045
Purchases at cost 1,301 41 1,342 6,008 22,093
Sales - proceeds (4,718) (5,371) (10,089) (8,661) (23,309)
- realised losses (1,770) (2,138) (3,908) (552) (1,640)
Movement in unrealised gain/(losses) 7,500 1,739 9,239 1,586 (9,014)
-------- -------- -------- -------- --------
Closing valuation 43,404 3,355 46,759 60,426 50,175
-------- -------- -------- -------- --------
Closing book cost 38,851 10,650 49,501 61,807 62,156
Closing unrealised gain/(losses) 4,553 (7,295) (2,742) (1,381) (11,981)
-------- -------- -------- -------- --------
Closing valuation 43,404 3,355 46,759 60,426 50,175
-------- -------- -------- -------- --------
9. Long term bank loan
30 June 2003 30 June 2002 31 December 2002
(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 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% plus MLA costs.
10. Share capital
30 June 2003 30 June 2002 31 December 2002
(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
-------- -------- --------
11. Reserves
Share
premium
account Revenue Capital
reserve reserve
Total
(unaudited) (unaudited) (unaudited) (unaudited)
£'000 £'000 £'000 £'000
At 1 January 2003 27,079 1,333 (10,247) 18,165
Return for the period - 500 4,612 5,112
-------- -------- -------- --------
At 30 June 2003 27,079 1,833 (5,635) 23,277
-------- -------- -------- --------
12. Net asset value per Ordinary Share
30 June 2003 30 June 2002 31 December 2002
(unaudited) (unaudited) (audited)
pence pence pence
Net asset value per Ordinary Share 103.64 129.13 86.37
-------- -------- --------
The net asset value per Ordinary Share is based on the net assets attributable to equity Shareholders of
£30,676,787 (30 June 2002: £38,223,393, 31 December 2002: £25,564,878) and on 29,600,002 (30 June 2002 and 31
December 2002: 29,600,002) Ordinary Shares in issue at the end of the period.
13. Reconciliation of net revenue before finance costs and taxation to net cash inflow from operating
activities
Six months Six months Year ended 31
ended 30 June ended 30 June December 2002
2003 2002
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Net revenue before finance costs and taxation 1,567 2,118 3,890
Management fees charged to the capital reserve (182) (240) (444)
Movement in accrued income 139 (145) 206
Movement in other debtors 2 (2) (9)
Movement in other creditors and accruals 2 45 3
-------- -------- --------
Net cash inflow from operating activities 1,528 1,776 3,646
-------- -------- --------
If you have any queries please contact:
Andrew Duquemin
Collins Stewart Fund Management Limited
2nd Floor
TSB House
Le Truchot
St Peter Port
Guernsey
GY1 4AE
Tel: 01481 731 987
Fax: 01481 720 018
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