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Exeter Smaller Co's (ESC)

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Tuesday 11 May, 2004

Exeter Smaller Co's

Interim Results

Exeter Smaller Co's Income Fund Ld
11 May 2004


EXETER SMALLER COMPANIES INCOME FUND LIMITED

PRELIMINARY ANNOUNCEMENT OF THE INTERIM RESULTS


The directors announce the unaudited interim results for the period 1 October
2003 to 31 March 2004 as follows:-


CONSOLIDATED STATEMENT OF OPERATIONS
of the Company

   1 October 2002                                          1 October 2003       1 October 2002
         to                                                      to                   to
 30 September 2003                                         31 March 2004        31 March 2003
£'000                                                           £'000               £'000
                     Income

800                  Dividends                                  325                  546
6                    Bond interest                              7                    -
58                   Bank interest                              16                   42

864                  Total income                               348                  588

                     Expenses
(77)                 Management fee                             (37)                 (48)
(348)                Interest payable                           (129)                (219)
(1,375)              Interest rate swap breakage costs          -                    (1,329)
                     Amortisation on zero dividend preference   (504)                (460)
(943)                shares
(26)                 Custodian and safekeeping fees             (13)                 (13)
(80)                 Administration fees                        (36)                 (36)
(33)                 Audit fee                                  (12)                 (19)
(42)                 Directors' fees                            (17)                 (21)
(91)                 Miscellaneous expenses                     (43)                 (52)

(3,015)              Total expenses                             (791)                (2,197)

(2,151)              Net loss before investment results         (443)                (1,609)
(25,194)             Realised losses on investments             (17)                 (19,433)
24,563               Movement in unrealised depreciation on     965                  16,133
                     investments


(2,782)              Net profit/(loss) for the period           505                  (4,909)


                     Basic and diluted profit/(loss) per        0.79p                (7.66)p
(4.34)p              ordinary share


The figures to 31 March 2004 and 31 March 2003 are unaudited. The figures for
the year to 30 September 2003 are taken from the Company's full financial
statements for that year, which carry an unqualified audit report.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

   1 October 2002                                          1 October 2003          1 October 2002
         to                                                     to                      to
 30 September 2003                                         31 March 2004           31 March 2003
       £'000                                                   £'000                    £'000

(2,782)              Net profit/(loss) for the period          505                      (4,909)
1,450                Movement in unrealised loss in            78                       1,316
                     revaluation of cash flow hedges
(4,522)              Net liabilities brought forward           (5,854)                  (4,522)

(5,854)              Net liabilities carried forward           (5,271)                  (8,115)


The figures to 31 March 2004 and 31 March 2003 are unaudited. The figures for
the year to 30 September 2003 are taken from the Company's full financial
statements for that year, which carry an unqualified audit report.


CONSOLIDATED BALANCE SHEET

       As at                                                   As at                   As at
 30 September 2003                                         31 March 2004           31 March 2003
       £'000                                                   £'000                    £'000

8,236                Available-for-sale investments            9,848                    5,917

1,058                Cash and cash equivalents                 436                      1,387
50                   Debtors                                   63                       80
9,344                Total assets                              10,347                   7,384

                     Current liabilities
-                    Bank loan                                 -                        500
33                   Creditors                                 27                       184

                     Non current liabilities
3,500                Bank loan                                 3,500                    3,500
11,418               Zero dividend preference shares           11,922                   10,935
247                  Interest rate swap liability on breakage  169                      380
                     costs
15,198               Total liabilities                         15,618                   15,499
(5,854)              Net liabilities                           (5,271)                  (8,115)

                     Represented by:
6,413                Share capital                             6,413                    6,413
53,483               Share premium                             53,483                   53,483
(65,750)             Reserves                                  (65,167)                 (68,011)
(5,854)              Issued capital and reserves               (5,271)                  (8,115)

64,129,999           Shares outstanding at 31 March            64,129,999               64,129,999

                     Net asset value per share (as per IAS 33)
(9.13)p              Ordinary shares                           (8.22)p                  (12.65)p
129.78p              ZDP shares                                135.51p                  124.29p

                     Available assets per share (as per
                     Articles)
Nil                  Ordinary shares                           Nil                      Nil
63.24p               ZDP shares                                75.59p                   32.05p



The figures at 31 March 2004 and at 31 March 2003 are unaudited. The figures at
30 September 2003 are taken from the Company's full financial statements for
that financial year, which carry an unqualified audit report.


CONSOLIDATED STATEMENT OF CASH FLOW

   1 October 2002                                          1 October 2003          1 October 2002
         to                                                      to                      to
 30 September 2003                                         31 March 2004           31 March 2003
£'000                                                          £'000                    £'000

                     Operating activities
879                  Dividends received                        296                      616
56                   Interest received                         24                       42
(360)                Expenses paid                             (150)                    (198)
(348)                Interest paid                             (129)                    (219)

227                  Net cash flow from operating activities   41                       241

                     Investing activities
(1,439)              Purchase of investments                   (1,409)                  (661)
10,956               Sale of investments                       746                      9,947

9,517                Net cash flow from investing activities   (663)                    9,286

                     Financing activities
(16,500)             Repayment of bank loan                    -                        (16,000)
(1,375)              Interest rate swap breakage costs paid    -                        (1,329)

(17,875)             Net cash flow from financing activities   -                        (17,329)

(8,131)              Decrease in cash and cash equivalents     (622)                    (7,802)


The figures to 31 March 2004 and 31 March 2003 are unaudited. The figures for
the year to 30 September 2003 are taken from the Company's full financial
statements for that year, which carry an unqualified audit report.


Notes:

1)The preliminary announcement has been prepared in conformity with The
Companies (Guernsey) Law, 1994 and International Financial Reporting Standards
issued by the International Accounting Standards Board and interpretations
issued by the International Financial Reporting Interpretations Committee. The
following accounting policies have been applied consistently in dealing with
items which are considered material in relation to the Company's preliminary
announcement.

2) Going Concern

The Company was established with the principal objective to provide ordinary
shareholders with a high level of income together with the opportunity for
growth of both income and capital, and holders of the zero dividend preference
shares with a pre-determined capital return.  Achievement of this return and the
ability of the Company to operate as a going concern are dependent on the
performance of the Company's portfolio of investments and ability to operate
within its banking facilities.  To avoid breaching the provisions of its £38.9
million loan facility, a cash offset agreement was entered into between the
Company and the Bank during the year ended 30 September 2002 and alterations to
the loan covenant were negotiated.  The Company had repaid £35.4 million of the
loan up to 30 September 2003. No further repayments have been made during the
current financial period (see note 7).  An associated interest rate swap
agreement was also renegotiated to facilitate these and further repayments.  The
cash offset agreement expired on 31 October 2002.

One of the provisions of the loan facility is that total assets to loan ratio
should not at any time be less than 1.75:1. In order to avoid breaching this
ratio, the Directors keep it under constant review.

The Company would expect to be in a position to continue in operational
existence past 30 September 2007 (the date on which the zero dividend preference
shares mature) if the investments of the Group generate a positive

return in excess of 21.0% per annum based on market mid prices and 21.7% based
on market bid prices in the period to 30 September 2007. This calculation is as
at 31 March 2004 and assumes that the remaining bank loan of £3.5m is not
repaid.

It is the view of the Directors of the Company that the likelihood of achieving
the required investment return is very low, but they are of the opinion that the
Company is able for the time being to operate within the terms of the loan
facility, and to settle it as it becomes due.

Given the Company's structure and stock market uncertainties, the Directors have
concluded that although they believe the going concern basis is still
appropriate there is a fundamental uncertainty regarding the ability of the
Company to remain in operational existence for the foreseeable future.

3) The Company's investment management and administration fees, finance costs
(including interest on the bank facility) and all other expenses are charged
through the consolidated statement of operations.

4) Distributions are made under the terms of the Company's Articles of
Association. For the six months to 31 March 2004 the amount available for
distribution was £143,972 being 0.22 pence per share (2003:£312,817 being 0.49
pence per share). No distributions have been paid or declared. The retained
amount of £143,972 was included in reserves. The total amount of undistributed
retained revenue from inception to 31 March 2004 of £2,310,209 is included in
the negative reserves figure of £65,167,177.

5) Reconciliation of net cash inflow from operating activities to net loss
before investment results

   1 October 2002                                         1 October 2003         1 October 2002
         to                                                     to                     to
 30 September 2003                                        31 March 2004          31 March 2003
       £'000                                                  £'000                  £'000

(2,151)              Net loss before investment results       (443)                   (1,609)
1,375                Interest rate swap breakage costs        -                       1,329
                     Adjustment for non cash items:
943                  Finance costs on zero dividend           504                     460
                     preference shares
                     (Increase)/decrease in interest and
71                   dividends receivable                     (27)                    70
(14)                 Decrease/(increase) in other debtors     13                      (1)
3                    (Decrease)/increase in other creditors   (6)                     (8)
                     and accruals

227                  Net cash inflow from operating           41                      241
                     activities


6) In accordance with the Articles of Association of ESCIF Securities Limited,
the holders of the 8,798,000 zero dividend preference shares are entitled on a
winding up to an amount equal to 100p per ZDP share as increased daily at such a
compound rate as would give a final capital entitlement of 183.24p on the ZDP
Repayment Date, the first such increase occurring on 22 September 2000 and the
last on the date of actual payment.

At 31 March 2004 the accrued value was £11,922,182. Due to a fall in the value
of the portfolio the net assets available for the ZDP shareholders amounted to
£6,650,825. This is the accrued value of £11,922,182 less the net liabilities of
£5,271,357. At 31 March 2004 the fair value of the ZDP shares is £4,838,900
based on a market offer price of 55 pence per share.

7) Under a loan agreement dated 8 September 2000 between the Company and Bank of
Scotland, a term loan facility of up to the lower of £38,902,000 and an amount
equal to one third of the aggregate issue price of the ordinary and zero
dividend preference shares issued under the placing has been made available. The
Company is subject to restrictions on its loan balance and at 31 March 2004
complied with all loan covenant requirements.

The loan covenant requirements are as follows:

(i)   the permitted investments to loan ratio should not at any time be less than 
      1.75:1

(ii)  the ratio of aggregate value of specified investments to loan shall not at 
      any time be less than 1.00:1; and

(iii) the ratio of income to total interest shall not at any time be less than 
      1.50:1.

Its ratio of permitted investments to loan balance was 2.99:1, specified
investments to loan balance was 2.01:1 and income coverage of interest was 2.70:
1. Interest is payable quarterly in arrears. The loan was due to mature on 28
September 2007. On 26 September 2000, the Company entered into an interest rate
swap agreement with a notional amount of £38,902,000 used to hedge exposure to
changes in interest rates. The swap expires on 28 September 2007, the date of
the repayment of the loan. The swap arrangement fixed the interest rate payable
at 7.33% per annum on the notional amount.

In the period to 30 September 2003 the Company had repaid £35,402,000 of the
loan facility as well as breaking £35,402,000 of the swap agreement at a total
cost of £2,522,243. No further repayments have been made.

International Accounting Standard number 32 requires the disclosure of the fair
value of the loan at 31 March 2004.  No fair value of the loan has been
disclosed because it is impracticable to obtain an appropriate risk rate from
the market that would apply to the bank loan and the particular issues
surrounding it.

8) The preliminary announcement of the interim results was approved by the Board
of Directors on 11 May 2004.


CHAIRMAN'S STATEMENT

I am pleased to report a rise in the assets of your Company over the last six
months on the back of the continued recovery in equity markets. This
performance, however, must be set against the disappointing performance over the
previous three years which led to a significant reduction in gearing.
Therefore, despite the recovery in equity markets since their lows in March
2003, total assets still need to rise substantially for the Company's ordinary
shares to have a positive net asset value.

At the end of March 2004, total assets were £10.3 million, a rise of £1.0
million over the half year.  This is equivalent to a rise of 10.7% while, in
comparison, the FTSE Small Cap Index during this period rose by 11.8%.  However,
despite this rise in total assets, the hurdle rate for zero dividend preference
shareholders to be paid the final entitlement of 183.24p per share at the end of
September 2007 is broadly unchanged over the last six months.  At the end of
March total assets would have to rise by 21.0% per annum. For ordinary
shareholders, total assets would need to rise in excess of this figure before
their shares would have a positive net asset value.

Following the publication of the Investment Entities (Listing Rules and Conduct
of Business) Instrument 2003, from 1 April 2005, the Chairman and the majority
of the Board must be 'independent'.  To be classed as independent under the
Listing Rules, a director must not, amongst other things, be a director of
another investment company advised by the same investment manager.  The Company
announced on 2 February 2004 my resignation from the Boards of Exeter Equity
Growth & Income Fund Limited and its subsidiary Exeter Securities (Guernsey)
Limited.  As a result your Company now has a majority of independent directors
and an independent chairman and accordingly complies with the new provision on
independence.

The Board continues to give careful consideration to the matter of dividend
payments bearing in mind the interests of both classes of shareholders. It
concludes that it is still not appropriate to pay dividends at this time;
however, the Board will keep this matter under review. The rise in total assets
of the Company over the last twelve months has put the Company on a firmer
footing. Against this background the Board has looked at various possibilities
and continues to explore opportunities as to any course of action which might
secure enhancement of value or prospects for shareholders.

The recent performance of the Company's portfolio has been satisfactory,
benefiting from rises in the share prices of a number of the investment trust
holdings as their discounts to net asset value have narrowed, as well as good
underlying asset performance.  A number of smaller company holdings also
performed well while the holdings in split capital investment trusts have
continued to recover, albeit with reduced levels of gearing.  The opportunity
has also been taken to introduce selectively a number of new holdings in this
part of the portfolio.

Looking forward, recent economic data remains broadly supportive for equity
markets to continue to make positive returns over the next six months. Although
returns may not be as good as they have been over the last twelve months the
Board remains hopeful that the next time I report will be against a background
of a further recovery in the assets of your Company.


Richard Crowder
11 May 2004


                      This information is provided by RNS
            The company news service from the London Stock Exchange                                                                 

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