RNS Number:6425S
Exeter Smaller Co's Income Fund Ld
28 November 2003
EXETER SMALLER COMPANIES INCOME FUND LIMITED
PRELIMINARY ANNOUNCEMENT OF THE FINAL RESULTS
The Directors announce the unaudited final results for the year ended 30
September, 2003 as follows:-
The financial information set out in this announcement does not constitute the
Company's statutory accounts for the year ended 30 September 2003. These
accounts for the year ended 30 September 2003 are unaudited and will be
finalised on the basis of the financial information presented by the directors
in this preliminary announcement and will be delivered to the UK Listing
Authority and the Channel Islands Stock Exchange following approval.
SUMMARISED CONSOLIDATED STATEMENT OF OPERATIONS
of the Company (unaudited)
1 October 2002 1 October 2001
to to
30 September 2003 30 September 2002
#'000 #'000
Income
Dividends 800 3,491
Bond interest 6 225
Bank interest 58 367
Total income 864 4,083
Expenses
Management fee (77) (480)
Interest payable (348) (2,554)
Interest rate swap breakage costs (1,375) (1,147)
Amortisation on zero dividend preference shares (943) (865)
Custodian and safekeeping fees (26) (25)
Administration fees (80) (66)
Audit fee (33) (26)
Directors' fees (42) (42)
Bond interest uncollected - (69)
Miscellaneous expenses (91) (68)
Total expenses (3,015) (5,342)
Net loss before investment results (2,151) (1,259)
Realised losses on investments (25,194) (11,936)
Movement in unrealised depreciation on investments 24,563 (7,941)
Net loss for the year (2,782) (21,136)
Basic and diluted loss per ordinary share (4.34)p (33.04)p
SUMMARISED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)
1 October 2002 to 30 1 October 2001 to 30
September 2003 September 2002
#'000 #'000
Net loss for the year (2,782) (21,136)
Issue of ordinary share capital, net of issue costs - 3,205
Dividends paid - (2,314)
(2,782) (20,245)
Movement in hedge reserve:
Movement in net unrealised loss on revaluation of cash 1,450 360
flow hedges in respect of the interest rate swap
Net (liabilities)/assets brought forward (4,522) 19,624
Investments revalued from mid to bid at 1 October 2001 - (2,204)
Fair value of interest rate swap at 1 October 2001 - (2,057)
Net liabilities at 30 September (5,854) (4,522)
SUMMARISED CONSOLIDATED BALANCE SHEET (unaudited)
As at As at
30 September 2003 30 September 2002
#'000 #'000
Available-for-sale investments: 8,236 18,384
Cash and cash equivalents 1,058 9,189
Debtors 50 107
Total assets 9,344 27,680
Current liabilities
Creditors 33 30
Non current liabilities
Bank loan 3,500 20,000
Zero dividend preference shares 11,418 10,475
Interest rate swap liability on breakage costs 247 1,697
Total liabilities 15,198 32,202
Net liabilities (5,854) (4,522)
Net asset value per share (as per IAS 33)
Ordinary shares (9.13)p (7.05)p
ZDP shares 129.78p 119.06p
Available assets per share (as per Articles)
Ordinary shares Nil Nil
ZDP shares 63.24p 67.66p
SUMMARISED STATEMENT OF CASH FLOW (unaudited)
1 October 1 October
2002 2001
to to
30 September 2003 30 September 2002
#'000 #'000
Operating activities
Dividends received 879 3,890
Interest received 56 820
Expenses paid (360) (823)
Interest paid (348) (2,570)
Net cash flow from operating activities 227 1,317
Investing activities
Purchase of investments (1,439) (23,437)
Sale of investments 10,956 42,920
Net cash flow from investing activities 9,517 19,483
Financing activities
Proceeds on issue of ordinary share capital - 3,206
Issue costs paid - (1)
Repayment of long term loan (16,500) (18,902)
Interest rate swap breakage costs paid (1,375) (1,147)
Dividends paid - (3,654)
Net cash flow from financing activities (17,875) (20,498)
(Decrease)/increase in cash and cash equivalents (8,131) 302
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, on
the same basis as in the prior year's financial statements. 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) Due to the Company's financial situation the auditors have included a
fundamental uncertainty paragraph in their audit report. This is related to the
uncertainty over the Company's ability to continue as a going concern but their
opinion is not qualified in this respect.
3) 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 previous financial year and alterations to the
loan covenant were negotiated. The Company had repaid #18.9 million of the loan
during the previous financial year and #16.5 million has been paid during the
current financial year (see note 8). 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 and maintain a satisfactory
level of liquidity to accommodate further repayments if required.
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 20.3% (2002: 17.6%) per annum based on market mid prices and
20.8% (2002: 19.2%) based on market bid prices in the period to 30 September
2007. This calculation is as at 30 September 2003 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.
If the financial statements had not been prepared on a going concern basis it
would have been necessary to value the Company's investments at their net
realisable values which may be lower than their year end bid prices. It would
also be necessary to accrue for winding-up costs. These have not been quantified
because of their uncertainty. The remaining bank loan would also have to be
reclassified from creditors falling due after one year to creditors falling due
within one year.
4) 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.
5) Distributions are made under the terms of the Company's articles of
association and in accordance with the accounting policy. As at 30 September
2003 the amount available for distribution was #379,383 (0.59 pence per share).
No distributions have been made or declared. The retained amount of #379,383 was
included in reserves.
6) Reconciliation of net cash inflow from operating activities
1 October 2002 1 October 2001
to to
30 September 2003 30 September 2002
#'000 #'000
Net (loss) before investment results (2,151) (1,259)
Interest rate swap breakage costs 1,375 1,147
Adjustment for non cash items:
Finance costs on zero dividend preference shares 943 865
Decrease in interest and dividends receivable 71 627
Increase in other debtors (14) (2)
Increase/(decrease) in other creditors and accruals 3 (61)
Net cash flow from operating activities 227 1,317
7) 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 30 September 2003 the accrued value was #11,418,013. Due to a fall in the
value of the portfolio the net assets available for the ZDP shareholders
amounted to #5,563,831. This is the accrued value of #11,418,013 less the net
liabilities of #5,854,182. At 30 September 2003 the fair value of the ZDP shares
is #3,343,240 (2002: #1,055,760) based on a market offer price of 38 pence per
share (2002: 12 pence per share).
8) 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 30 September 2003
complied with all loan covenant requirements. Its ratio of permitted investments
to loan balance was 2.70:1, specified investments to loan balance was 1.71:1 and
income coverage of interest was 2.48:1. 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.
During the financial year ended 30 September 2002 the Company repaid #18,902,000
of the loan facility as well as breaking #18,902,000 of the swap agreement at a
cost of #1,147,191. During this financial year, the Company repaid another
#16,500,000 of the loan facility as well as breaking #16,500,000 of the swap
agreement at a cost of #1,375,052.
International Accounting Standard number 32 requires the disclosure of the fair
value of the loan at 30 September 2003. 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.
9) The preliminary announcement of the final results was approved by the board
of Directors on 28 November 2003.
Chairman's Statement
It is disappointing to report a further decline in the assets of your Company
over the last year despite the recent recovery in equity markets. As reported
in the last Interim Statement, the weakness in equity markets in the first half
of the year resulted in the Company having to repay #16.5 million of bank
borrowings. As a result of the lower gearing, the Company has had a reduced
benefit from the recovery in equity markets since their lows in March.
At the end of September 2003, total assets were #9.3 million, a fall of #18.3
million over the full year of which #17.9 million relates to the repayment of
bank borrowings and associated costs. The FTSE Small Cap Index during this
period rose by 32.2% and the fall in net assets reflects the need to raise cash
earlier in the year to facilitate the repayment of bank borrowings as well as
the poor performance of a number of the Company's split-capital investment trust
holdings.
The second half of the year saw a much better performance from the Company's
assets which rose sharply on the back of the underlying recovery in equity
markets. As a result, the hurdle rate for zero dividend preference shareholders
to be paid their final entitlements of 183.24p per share at the end of September
2007 has improved. At the year end, total assets would have had to rise by
around 20.3% per annum (2002:17.6%). For comparison, the figure at the half
year stood at 26.6%. Consequently, ordinary shareholders would need total
assets to rise in excess of this figure per annum before their shares would
achieve a positive net asset value.
The Board, on the advice of its Manager, took the decision in May not to invest
a higher percentage of the Company's assets in investment grade sterling
corporate bonds or gilts as a means of reducing the sensitivity of the Company's
portfolio of investments to further falls in equity markets. In particular, at
the time many of the Company's investment trust holdings were trading on
historically wide discounts to net asset value. This has proved to be the
correct decision in the short term, but mindful of the recent recovery in equity
markets and conversely the weakness in bond markets, the Board continues to keep
this matter under review.
The Board has also discussed the recent publication of the Investment Entities
(Listing Rules and Conduct of Business) Instrument 2003 which have an impact on
your Company. 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. Both myself and Nigel Taylor
each hold a current directorship of other investment companies advised by Exeter
Asset Management and therefore the Board will in due course be addressing this
issue to ensure compliance.
From the beginning of November this year, UK listed companies may not invest
more than 10%, in aggregate, of their gross assets (at the time the investment
is made) in other investment companies unless those investment companies
themselves have a stated investment policy of investing no more than 15% of
their assets in other listed investment companies. Although at the end of
September the Company had approximately 70% of its assets in other listed
investment companies, the Company was and remains compliant with this rule as
there was no material investment in any investment company which itself had more
than 15% of its assets invested in other listed investment companies.
Three months ago Exeter Asset Management's sister company, Exeter Fund Managers,
sold the management contracts to its open-ended fund management business. The
Board has sought and received assurances from Exeter Asset Management that it
remains committed to its closed-ended investment company clients and in
particular to providing the necessary resources to advise on the Company's
investment portfolio. It has, however, agreed to a reduction in its notice
period from twelve months to six months, which will become effective on 1
December 2003. The Board therefore believes that Exeter Investments (Guernsey)
Limited (the Company's Manager) and Exeter Asset Management Limited (the
Company's Investment Adviser) are the most appropriate entities to continue
managing and advising upon the assets of the Company based on their management
expertise, knowledge of the Company's portfolio and the terms of their
appointment. In light of the foregoing and in accordance with the new Listing
Rules, I am pleased to confirm that in the opinion of the Directors, the
continuing appointment of Exeter Investments (Guernsey) Limited and Exeter Asset
Management Limited on the terms of the management and investment advisory
agreements, is in the interests of the shareholders as a whole.
The Board earlier in the year asked its advisers to review all of the possible
options available to the Company. At the time the conclusion was that the only
satisfactory option was to retain the current capital structure. The Board
continues to keep an open mind as to any course which might secure an
enhancement of value for shareholders.
The rise in total assets over the second half of the year and the repayment of
bank borrowings has significantly improved the position of the Company in
relation to its bank covenants. As at 31 October 2003 the Company complied with
all loan covenant requirements. In particular, the key ratio of permitted
investments to loan balance was 2.76:1 as against the covenant of 1.75:1.
Furthermore, the recent increase in bond yields has resulted in a fall in the
potential cost to the Company of any further early repayment of bank borrowings,
although none is envisaged.
The Board has given careful consideration to the matter of dividend payments
bearing in mind the interests of both classes of shareholders. It has concluded
that it is not appropriate to pay dividends at this time although the Board will
keep this matter under review.
Looking forward, although the recent recovery in equity markets has put the
Company on a firmer footing, the Board is conscious of the losses which both
classes of shareholders have suffered or may suffer and continues to work with
its Manager and Advisors to look for ways to enhance shareholder value. The
Board remains hopeful that the next twelve months will result in a further
improvement in equity markets and the assets of your Company.
Richard Crowder
28 November 2003
The annual report will be issued to shareholders in December and will be
available to members of the public from the Company's registered office,
Trafalgar Court, Admiral Park, St Peter Port, Guernsey, GY1 2JA.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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