Final Results

ISIS Smaller Companies Trust PLC 11 May 2005 ISIS Smaller Companies Trust plc To: RNS From: ISIS Smaller Companies Trust plc Date: 11 May 2005 UNAUDITED RESULTS FOR THE YEAR ENDED 31 MARCH 2005 Investment Objective To achieve capital growth by investing primarily in a portfolio of smaller companies quoted on the London Stock Exchange. Benchmark Index The benchmark index is the Hoare Govett Smaller Companies (ex Investment Companies) Index. Financial Highlights • Net asset value per share increased by 26.1 per cent, compared with an increase in the benchmark index of 13.6 per cent. • Share price increased by 39.1 per cent. • Unchanged dividend for the year of 4.00p per share. Chairman's Statement Results In my first year as Chairman I am pleased to be able to report on a period of strong performance. The Company's net asset value per share increased by 26.1 per cent. This compares to a rise of 13.6 per cent in the Hoare Govett Smaller Companies (ex Investment Companies) Index, which was adopted as the Company's benchmark on 1 July 2004. By way of additional comparison the Company's previous benchmark, the FTSE SmallCap (ex Investment Companies) Index, rose by 8.8 per cent during the year. The increase in the share price for the year was greater, rising by 39.1 per cent to £2.43 per share. This increase was in part due to the narrowing of the discount of share price to net asset value, which was 15.0 per cent as at 31 March 2005, compared to 23.0 per cent as at the end of the previous year. Following the strong gains posted by small companies in the last financial year, there was an expectation that the year to 31 March 2005 would prove to be a year of consolidation. That the outturn proved to be significantly better can be attributed to the combination of strong underlying profit and dividend growth comfortably exceeding consensus estimates, favourable business developments, and a greater appetite amongst investors to hold small companies. Our Managers added considerable value to these trends through good stock picking on a broad base with investments in the oil and gas (Paladin Resources), beverage (Glenmorangie), leisure (Restaurant Group), electronics (Xaar), and engineering (Morgan Crucible) sectors making significant contributions to the overall performance. It is important to acknowledge that both market and economic conditions over the preceding two years have favoured small company investment. Both the gearing structure and characteristics of the companies within the portfolio have been such that the Managers were able to take full advantage of these conditions. The Board and Managers believe that the forthcoming financial year may prove to be more challenging, for two reasons. Firstly, there are now clear signs that consumers are reining back expenditure. Whilst it may be too early to reach definitive conclusions, the trend of retailers recording sluggish sales activity is one which requires to be monitored closely. Secondly, the revival in the small company market has generated an increase in the level of Initial Public Offerings (IPO) activity. The Managers take the view that in an increasing number of instances this is at the expense of business quality. In the short- term this may also have a detrimental impact on market liquidity. Taking these issues into account, the Managers have increased the proportion of cash within the portfolio. In addition, the balance of new investment ideas has altered to reflect these changing market conditions. As the relative valuation of smaller companies to their larger peers has narrowed, the Managers have retained only those businesses which they believe are capable of continuing to produce superior profit and earnings growth. In general, new investment ideas have been directed to areas such as healthcare (Healthcare Enterprise, Vectura) or to businesses which are experiencing structural changes in their marketplace (Shed Productions, Torex Retail) or have direct exposure to developing economies (Consolidated Minerals). Earnings and Dividends Group earnings per Ordinary Share increased from 3.92 pence to 4.73 pence. The Board recognises that the dividend payment is an important component of total shareholder return. However, it wishes to pursue a policy which recognises the importance of not compromising flexibility in managing the Company's assets. It has therefore proposed a final dividend of 3.00 pence per share, making a total dividend for the year of 4.00 pence per share, unchanged from the previous year. The final dividend is payable on 1 July 2005 to shareholders on the register on 3 June 2005. Although this rate of dividend does not represent a change from the previous year, the Company is now in a position to grow the dividend from this level and would expect over the medium term to achieve growth in dividends.* As at 31 March 2005 the Company had revenue reserves equivalent to more than one year's dividend. The Board will also change the balance of payment of the interim and final dividends to reduce the differential that currently exists between the two payments. Shareholder Value As stated above, the discount of net asset value to share price narrowed during the year to 15.0 per cent. However, whilst this represents an improvement, the Board considers that there are further measures which can be taken to maintain a lower level of discount. As previously reported to shareholders, the Board has engaged Intelli Corporate Finance with the mandate to introduce the Company to potential new shareholders and ultimately improve the demand for its shares. In addition, the Board believes that a key strength of F&C Asset Management plc is its ability to access distribution channels. The Board considers that these initiatives allied to continuing strong investment performance should yield a sustainable improvement in the Company's rating. The Board believes it is important to have a share buy-back facility in place and will therefore seek to renew the facility at the forthcoming Annual General Meeting. The Board made limited use of the facility during the year, but in the future intends to adopt a more progressive buy back policy with the principal aim of enhancing shareholder value. Gearing The Company benefited from the utilisation of its debt facilities throughout the year. Its borrowings are represented by a £7 million revolving credit facility which was taken out in August 2004, to replace the equivalent value term loan which matured at that time. The new facility provides greater flexibility for the Company to actively manage its level of gearing. Due to the rise in the net asset value over the past two years, the Company's borrowing limit represents a lower proportion of its assets. The Board will therefore seek to amend the Company's borrowing limits to reflect this movement, although there are no current intentions to draw down any additional borrowings. This will enable the Board to increase the Company's borrowing level when it considers market conditions to be appropriate. Management and Investment Policy In the Interim Report I explained to Shareholders that the Company's Managers, ISIS Asset Management plc, had merged with F&C (Group Holdings) Limited to create F&C Asset Management plc, one of the largest fund management businesses in the UK. The merger of the two fund management companies has not had an impact on the Company's investment approach. The Board believes that stability is a key element in successful long-term investment management and anticipates that the merger process will entail the minimum of disruption. The results achieved over the last three years underline the Board's confidence in the Managers' investment approach. It re-iterates its belief that the Managers' investment approach, which emphasises each holding's unique characteristics and does not merely aspire to replicate a benchmark index, best serves the goal of pursuit of capital appreciation. Corporate Governance The Board takes corporate governance matters seriously and, during the year, put in place the necessary procedures to ensure that the Company complies, in so far as practicable, with the relevant parts of the recently revised Combined Code on Corporate Governance, which applied to the Company for the first time during the financial year. Annual General Meeting The Annual General Meeting will be held at 12.30pm on Tuesday 21 June 2005 at the offices of F&C Asset Management plc, 80 George Street, Edinburgh. As in previous years, the Meeting will include a presentation by the Company's lead fund manager, Stephen Grant. Outlook The Board has assessed the prospects for the current financial year. We believe that both business and stockmarket conditions will be more demanding than in the preceding two years, especially for those companies closer to the UK consumer. Furthermore, it is likely that existing and potential tax increases will further constrain consumer expenditure. The Company's portfolio is invested in businesses which the Managers believe are capable of continuing to produce superior profit and earnings growth. We will continue to seek to invest in such companies, which have good management, strong business franchises and robust financial characteristics, where we expect returns to be the most attractive. There are a number of such opportunities to be found and consequently, the Board remains optimistic about the medium-term outlook for shareholder returns. A R Irvine Chairman *This does not represent a change to the Company's investment policy. Group Statement of Total Return (Incorporating the Revenue Account) For the Year Ended 31 March 2005 £'000 £'000 £'000 Revenue Capital Total Gains on investments - 13,204 13,204 Income 1,690 - 1,690 Investment management and secretarial fees (244) (348) (592) Other expenses (268) - (268) --------- --------- --------- Net return before finance costs and taxation 1,178 12,856 14,034 Interest payable (158) (293) (451) --------- --------- --------- Return on ordinary activities before taxation 1,020 12,563 13,583 Tax on ordinary activities - - - --------- --------- --------- Return attributable to shareholders 1,020 12,563 13,583 Dividends in respect of Ordinary Shares (862) - (862) --------- --------- --------- Transfer to reserves 158 12,563 12,721 --------- --------- --------- Return per share: 4.73p 58.25p 62.98p Group Statement of Total Return (Incorporating the Revenue Account) For the Year Ended 31 March 2004 £'000 £'000 £'000 Revenue Capital Total Gains on investments - 19,734 19,734 Income 1,441 - 1,441 Investment management and secretarial fees (200) (275) (475) Other expenses (216) - (216) --------- --------- --------- Net return before finance costs and taxation 1,025 19,459 20,484 Interest payable (176) (328) (504) --------- --------- --------- Return on ordinary activities before taxation 849 19,131 19,980 Tax on ordinary activities - - - --------- --------- --------- Return attributable to shareholders 849 19,131 19,980 Dividends in respect of Ordinary Shares (865) - (865) --------- --------- --------- Transfer (from)/to reserves (16) 19,131 19,115 --------- --------- --------- Return per share: 3.92p 88.29p 92.21p Group Balance Sheet As at 31 March 2005 2005 2004 £'000 £'000 Fixed assets Investments 67,695 55,688 --------- --------- Current assets Investments held by dealing subsidiary 343 - Debtors 456 237 Cash at bank and on deposit 1,542 1,070 --------- --------- 2,341 1,307 Creditors: Amounts falling due within one year (8,435) (8,002) --------- --------- Net current liabilities (6,094) (6,695) --------- --------- Net assets 61,601 48,993 --------- --------- Capital and reserves Called-up share capital 10,777 10,811 Capital redemption reserve 159 125 Share premium account 3,935 3,935 Capital reserve - realised 28,559 26,010 - unrealised 17,074 7,173 Revenue reserve 1,097 939 --------- --------- Equity shareholders' funds 61,601 48,993 --------- --------- Net asset value per share: 285.8p 226.6p Group Cash Flow Statement For the Year Ended 31 March 2005 2005 2004 £'000 £'000 Operating activities Investment income received 1,444 1,327 Deposit interest received 27 117 Underwriting commission received 9 3 Dealing activities in subsidiary (34) - Investment management fees paid (535) (423) Secretarial fees paid (57) (52) Other cash payments (259) (190) --------- --------- Net cash inflow from operating activities 595 782 --------- --------- Servicing of finance Interest paid (468) (504) --------- --------- Net cash outflow from servicing of finance (468) (504) --------- --------- Capital expenditure and financial investment Purchases of investments (18,948) (19,876) Disposals of investments 20,270 20,544 --------- --------- Net cash inflow from capital expenditure and Financial investment 1,322 668 --------- --------- Equity dividends paid (864) (866) --------- --------- Net cash inflow before financing 585 80 --------- --------- Financing Ordinary Shares purchased for cancellation (113) (191) --------- --------- Net cash outflow from financing (113) (191) --------- --------- Increase/(decrease) in cash 472 (111) --------- --------- Reconciliation of net cash flow to movement in net debt Increase/(decrease) in cash in the year 472 (111) --------- --------- Net debt at 1 April (5,930) (5,819) --------- --------- Net debt at 31 March (5,458) (5,930) --------- --------- Notes 1. The return per Ordinary Share is based on a weighted average of 21,567,115 Ordinary Shares in issue during the year (2004 - 21,668,347). 2. The final dividend of 3.00p (2004 - 3.00p) will be paid on 1 July 2005 to shareholders on the Register on 3 June 2005. 3. There were 21,553,260 Ordinary Shares in issue at 31 March 2005 (2004 - 21,620,260). During the year 67,000 Ordinary Shares of 50p each were purchased for cancellation at an aggregate cost of £113,000. 4. These are not statutory accounts in terms of Section 240 of the Companies Act 1985. Statutory accounts for the year to 31 March 2004, which were unqualified, have been lodged with the Registrar of Companies. The statutory accounts for the year to 31 March 2005 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. 5. The Annual General Meeting will be held at 80 George Street, Edinburgh on Tuesday 21 June 2005 at 12.30pm. For further information please contact: Stephen Grant Gordon Hay Smith F&C Asset Management plc: Tel. 0131 465 1000 This information is provided by RNS The company news service from the London Stock Exchange

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