RNS Number:7497L
Exeter Smaller Co's Income Fund Ld
30 May 2003
EXETER SMALLER COMPANIES INCOME FUND LIMITED
PRELIMINARY ANNOUNCEMENT OF THE INTERIM RESULTS
The directors announce the unaudited interim results for the period 1 October
2002 to 31 March 2003 as follows:-
CONSOLIDATED STATEMENT OF OPERATIONS
of the Company (unaudited)
1 October 2002 1 October 2001
to to
31 March 2003 31 March 2002
#'000 #'000
Income
Dividends 546 2,265
Bond interest - 101
Bank interest 42 195
Total income 588 2,561
Expenses
Management fee (48) (279)
Interest payable (219) (1,422)
Interest rate swap breakage costs (1,329) -
Amortisation on zero dividend preference shares (460) (422)
Custodian and safekeeping fees (13) (11)
Administration fees (36) (31)
Audit fee (19) (7)
Directors' fees (21) (24)
Miscellaneous expenses (52) (38)
Total expenses (2,197) (2,234)
Net (loss)/income before investment results (1,609)
327
Realised losses on investments (19,433) (5,114)
Movement in unrealised depreciation on investments 16,133 (10)
Net loss for the period (4,909) (4,797)
Basic and diluted loss per ordinary share (7.66)p (7.52)p
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)
1 October 2002 to 31 1 October 2001 to 31
March 2003 March 2002
#'000 #'000
Net loss for the period (4,909) (4,797)
Issue of ordinary share capital, net of issue costs - 3,205
Dividends paid - (2,315)
(4,909) (3,907)
Movement in hedge reserve
Fair value of interest rate swap at 1 October 2001 - (2,057)
Movement in net unrealised loss on revaluation of cash 1,317 532
flow hedges
Investments revalued from mid to bid at 1 October 2001 - (2,204)
Net (liabilities)/assets brought forward (4,523) 19,624
Net (liabilities)/assets at 31 March (8,115) 11,988
CONSOLIDATED BALANCE SHEET (unaudited)
As at As at
31 March 2003 31 March 2002
#'000 #'000
Available-for-sale investments 5,917 51,742
Cash and cash equivalents 1,387 11,071
Debtors 80 512
Total assets 7,384 63,325
Current liabilities
Bank loan 500 -
Creditors 184 878
Non current liabilities
Bank loan 3,500 38,902
Zero dividend preference shares 10,935 10,032
Interest rate swap liability on breakage costs 380 1,525
Total liabilities 15,499 51,337
Net (liabilities)/assets (8,115) 11,988
Represented by:
Share capital 6,413 6,413
Share premium 53,482 53,482
Reserves (68,010) (47,907)
Issued capital and reserves (8,115) 11,988
Shares outstanding at 31 March 64,129,999 64,129,999
Net asset value per share (as per IAS 33)
Ordinary shares (12.65)p 18.69p
ZDP shares 124.29p 114.03p
Available assets per share (as per Articles)
Ordinary shares Nil 18.69p
ZDP shares 32.05p 114.03p
CONSOLIDATED STATEMENT OF CASH FLOW (unaudited)
1 October 2002 1 October 2001
to to
31 March 2003 31 March 2002
#'000 #'000
Operating activities
Dividends received 616 2,495
Interest received 42 389
Expenses paid (198) (395)
Interest paid (219) (1,414)
Net cash inflow from operating activities 241 1,075
Investing activities
Purchase of investments (661) (16,048)
Sale of investments 9,947 16,838
Net cash inflow from investing activities 9,286 790
Financing activities
Proceeds on issue of ordinary share capital - 3,206
Issue costs paid - (1)
Repayment of bank loan (16,000) -
Interest rate swap breakage costs paid (1,329) -
Dividends paid - (2,886)
Net cash (outflow)/inflow from financing activities (17,329) 319
(Decrease)/increase in cash and cash equivalents (7,802) 2,184
Notes:
1) The Company's financial statements are prepared in conformity with
International Accounting Standards and applicable requirements of Guernsey Law.
2) Going Concern
The Company was established with the principal objective to provide ordinary
shareholder 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 these returns and the
ability of the Company to operate as a going concern is 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
up to 30 September 2002, #16 million was repaid during the period to 31 March
2003 and another #500,000 was repaid on 2 April 2003. 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 the 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.
2) Going Concern - continued
The Company would only 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 26.6% per annum based on market mid prices and 27.8% per annum based
on market bid prices in the period to 30 September 2007. This is calculated as
at 30 April 2003 and is based on #3.5m of bank borrowings.
It is the view of the directors 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
meet its obligation there under as they fall 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, in the current difficult market conditions, may be
significantly lower than their market 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.
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. The Group's policy has been to
pay dividends out of gross revenue less running costs (all of the ongoing costs
and expenses of the Group other than management fees and bank facility
interest), effectively charging all management fees and finance costs against
capital. In view of the continuing falls in the value of the Group's assets and
the proximity of banking covenants, the Board concluded that, with effect from 1
July 2002, in determining the amount available for dividends, 50% of management
fees and bank facility interest would be deducted from gross revenue. The effect
is to preserve capital, reducing the amount available for distribution.
4) Distributions are made under the terms of the Company's articles of
association and in accordance with the above mentioned accounting policy note.
As at 31 March 2003 the amount available for distribution was #312,817 (0.49
pence per share). No distributions have been paid or declared. The retained
amount of #312,817 was included in reserves.
5) Reconciliation of net cash inflow from operating activities to net loss
before investment results
1 October 2002 1 October 2001
to to
31 March 2003 31 March 2002
#'000 #'000
Net (loss)/income before investment results (1,609) 327
Interest rate swap breakage costs 1,329 -
Adjustment for non cash items:
Finance costs on zero dividend preference shares 460 422
Decrease in interest and dividends receivable 70 314
Increase in other debtors (1) -
(Decrease)/increase in other creditors and accruals (8) 12
Net cash inflow from operating activities 241 1,075
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 2003 the accrued value was #10,935,164. Due to a fall in the value
of the portfolio the net assets available for the ZDP shareholders amounted to
#2,820,125. This is the accrued value of #10,935,164 less the net liabilities of
#8,115,039. At 31 March 2003, the fair value of the ZDP shares is #1,143,740
based on a market offer price of 13 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.
Interest is payable quarterly in arrears. The loan is 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.
Previously, the Company had broken #18,902,000 of the swap agreement and during
the period, the Company closed out another #16,000,000. On 2 April 2003, a
further #500,000 of the interest rate swap was broken to allow a further loan
repayment to be made.
8) The preliminary announcement of the interim results was approved by the Board
of Directors on 30 May 2003.
Chairman's Statement
The last six months has been a further disappointment for your Company with most
major stock market indices extending their declines into a fourth year. There
have been a number of reasons for this, in particular continued concerns over
the lack of evidence to support a pick up in economic activity and corporate
profitability. Fears also grew that life assurance companies were contributing
to the falls as they sold equities to maintain solvency levels; while increasing
pension fund deficits caused analysts to lower earnings forecasts further to
take into account the increased costs of pension fund liabilities on corporate
earnings and balance sheets.
Against this background, the increase in risk aversion among equity investors
proved very detrimental to the Company. In particular the Company suffered from
its exposure to split capital investment companies, a number of which have
fallen significantly in value, although some other holdings performed poorly as
well. As a result of these investment losses the Company had to repay a further
#16 million of bank borrowings, at a cost of #1.3 million in swap breakage
costs, to remain compliant with its bank covenants. A further #0.5 million of
bank borrowings has been repaid for the same reason since the end of April. We
remain in regular contact with our bankers who have worked constructively with
us in response to these very testing financial conditions.
Total assets have therefore fallen sharply and, as a result of the reduced level
of bank borrowings, the recovery prospects for both ordinary and zero dividend
preference shareholders are significantly diminished. For zero dividend
preference shareholders to be paid their final entitlement of 183.24p per share
at the end of September 2007, total assets would have to rise by around 26.6%
per annum*. This 'hurdle rate' has risen markedly since the last year end at
which time it stood at 17.6%. Ordinary shareholders would need total assets to
rise in excess of 26.6% pre annum before they would achieve a positive net asset
value.
As a result of the fall in total assets the Company's costs, including finance
costs on the Company's bank borrowings, now represent a much higher percentage
of total assets, than previously. This will have a detrimental effect on
performance, as the investment portfolio will need to grow sufficiently to cover
these before any value is accrued to shareholders. The Board has reviewed all
costs and secured some concessions regarding fee levels from both the Company's
Manager and its Administrator. In addition, a decision has been taken to reduce
the number of Directors in order to further reduce costs. In this connection
the Board has accepted the resignation of Dr. Martin Hawkins and would like to
thank him for his considerable contribution to their deliberations during his
period of service. His resignation will take effect from 30 June 2003. The
Board has concluded that further savings are not currently possible without
significantly impairing the conduct of the Company's affairs.
Against this disappointing background the Board asked its advisers to review all
possible options available to the Company. The advice that has been received
regrettably leads us to the conclusion that there are few courses of action open
to us at present other than to persevere with the current capital structure and
hope for some recovery in the value of the company's investments. Key
considerations in leading us to form this view have been: the illiquidity of a
number of the Company's holdings; and the adverse impact which the costs of any
reconstruction or merger proposal would have on what is now a relatively small
asset base. However, the marketability of investments held may well improve
with time along with their value, and the level of breakage costs triggered by
any further loan repayments is also a variable which may move in a more
favourable direction in due course. Against this background, the Board will
continue to review the options on a regular basis and keep an open mind as to
any course which might secure an enhancement of value for shareholders.
The Board has also considered whether the Company's investment policy should be
modified. In particular it has examined whether a higher percentage of the
Company's assets should be invested 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. At present the Board, on the
advice of its Manager, believe that it would not be in shareholders interests to
do so as many of the Company's investment trust holdings (which would be
required to be sold to finance additional fixed income investments) are
currently trading on historically wide discounts to net asset value. We are
advised that these investments, therefore, offer the prospect of a significant
recovery in share prices as and when the discounts narrow.
Looking forward the Board remains mindful of the need to preserve capital and
reduce costs where possible in order to offer shareholders the prospect of some
recovery in the value of their investments as and when sentiment in equity
markets improves. Meanwhile the Board will continue to consider carefully the
interests of both classes of shareholders while keeping the matter of dividend
payments under review.
Although equity markets appear to have stabilised in recent weeks, confidence is
likely to remain fragile until economic data and company statements are
supportive of a pick up in economic activity and corporate profitability. There
are grounds to hope, however, that share prices will not retest their recent
lows as analysis recently undertaken highlights the very attractive free cash
flow yields available on many smaller and mid market capitalisation companies.
The pick up in corporate activity in recent months with a number of listed
companies agreeing to or receiving bid approaches also provides further evidence
of the perceived value in equity prices at their current depressed levels.
RICHARD CROWDER
30 May 2003
*See Note 2 above
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR ILFSSEAIIVIV