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Exeter Smaller Co's (ESC)

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Monday 20 May, 2002

Exeter Smaller Co's

Interim Results

Exeter Smaller Co's Income Fund Ld
20 May 2002




PRELIMINARY ANNOUNCEMENT OF THE INTERIM RESULTS


The Directors announce the unaudited interim results for the period 1 October,
2001 to 31 March, 2002 as follows:-



Chairman's Statement

The last six months has been a particularly difficult period for the split
capital closed end fund sector of which your Company is a member.  The share
prices of a significant number of 'splits' have fallen sharply due to concerns
about the strength of balance sheets and the sustainability of dividends.  A
number of dividends have been cut or suspended.  This in turn has depressed the
net asset values of those split capital closed end funds that invest a
proportion of their assets in the ordinary, income or zero dividend preference
shares of other splits resulting in further falls in share prices.  A number of
trusts have responded by seeking to strengthen their balance sheets either
through raising further equity and/or reducing the level of their bank
borrowings, but the failure of a small number of funds to restructure has had a
particularly adverse impact on sentiment.



As a result of these continuing difficulties, particularly the reduction or
suspension of dividends by a number of income and ordinary shares held by the
Company, a risk highlighted in my last statement to shareholders, the
distributable return per ordinary share for the period ended 31 March 2002 fell
to 3.82p per share (2001: 4.96p).  Consequently, and in the knowledge that there
may be further cuts and/or suspensions of dividends, the Directors believe it is
prudent for the Company to reduce the level of dividends payable on its ordinary
shares.  Accordingly a second interim dividend of 1.2p per share was declared,
as compared with 2.2p last year, payable on 8 May 2002 to shareholders on the
register at the close of business on 26 April 2002.



This is the first set of accounts issued by the Company since the introduction
of a new accounting standard, IAS39 Financial Instruments: Recognition and
Measurement.  IAS39 has a material effect on investment companies which report
under International Accounting Standards as it  stipulates that portfolios must
be valued using the bid prices of underlying investments as opposed to the mid
market prices which were previously used.  Furthermore, derivatives must be
brought on to the balance sheet and revalued as if they were to be unwound
immediately.  This applies to the derivatives used to convert our floating rate
borrowings to fixed rate borrowings in connection with our term loan.  In both
these instances there is a material reduction in net asset value as the
Company's capital structure magnifies any fall or rise in total assets.



The Company is one of around a dozen split capital investment companies which
prepares its accounts in accordance with International Accounting Standards (the
vast majority of the 130 plus members of the split capital sector utilise UK
Generally Accepted Accounting Principles, 'UK GAAP').  Prior to the introduction
of IAS39 this difference in accounting regimes did not affect the valuation of
quoted investments as both regimes made use of mid-market values for this
purpose.  However the introduction of IAS39 clearly puts the Company at a
disadvantage and leaves it out of step with the majority of the industry.  The
Directors are therefore consulting with their auditors, bankers and other
advisers as to how best to respond.



In the light of weakness in stockmarkets generally and in the Company's assets
in particular, the Board is reviewing whether it may be prudent to charge a
lower proportion of costs and expenses to capital in the future.  It is
consulting with its advisers and expects to conclude this review prior to the
year end.



In the period covered by this report, total assets less current liabilities fell
to £62.4 million, a fall of £8.9 million (£2.6 million of which is as a direct
result of the introduction of IAS39).  The holdings in both UK smaller company
investment trusts and UK smaller company shares, having recovered from their
initial falls following the tragic events of September 11, performed well,
rising by 16.4%.  During the same period the FTSE Small Cap Index rose by 18.3%
and the Lipper Investment Trust UK Smaller Companies Sector Average by 11.5%.
This performance, however, was not sufficient to compensate for the sharp falls
in the prices of the income and ordinary shares of splits and high yield bonds,
to which the Company has a significant exposure.


We continue to make use of the cash set-off facility which was described in my
statement in the last Annual Report in order to ensure full compliance with our
loan covenants.  Our Manager has agreed to waive fees chargeable on sums which
are required to be deposited under this facility.



Looking forward, although the Board and Manager remain optimistic of the outlook
for UK smaller companies and UK smaller company investment trust shares there
remain a number of risks.  The prices of income and ordinary shares of splits
though appearing to stabilise somewhat in recent weeks could be susceptible to
further falls.  It is also extremely difficult to forecast with certainty the
severity of further reductions in dividend payments in the sector, and therefore
difficult to forecast revenue.  In light of this our current strategy is to
continue to manage the portfolio cautiously and cash will only be reinvested as
and when the outlook becomes more positive.  As always the Board and Manager
remain mindful of the risks inherent in the Company's structure from further
falls in the prices of its underlying investments.





Richard Crowder
Chairman


20 May 2002




Net Asset Value
                                                         31 March 2002         31 March 2001
Net asset value per ordinary share
 excluding IAS 39 adjustment (see note)                  24.77p                65.24p
 after IAS 39 adjustment                                 18.69p                N/A

Net asset value per zero dividend preference share       114.03p               104.61p

Mid market price per ordinary share                      29.00p                79.50p

Mid market price per zero dividend preference share      66.00p                106.25p




Consolidated Statement of Operations for the period 1 October 2001 to 31 March
2002


                                                            01.10.01          21.09.00
                                                            to                to
                                                            31.03.02          31.03.01
                                                            £'000             £'000

Income
Dividends                                                   2,265             2,299
Bond interest                                               101               468
Bank interest                                               195               252


Total income                                                2,561             3,019


Expenses

Management fee                                              (279)             (403)
Amounts payable under interest rate swap agreement          (1,422)           (1,453)
Finance costs on zero dividend preference shares            (422)             (406)
Custodian and safekeeping fees                              (11)              (14)
Administration fees                                         (31)              (51)
Audit fee                                                   (7)               (3)
Directors' fees                                             (24)              (23)
Miscellaneous expenses                                      (38)              (36)


Total expenses                                              (2,234)           (2,389)



Net investment income                                       327               630

Realised loss on sale of investments                        (5,114)           (1,612)

Movement in unrealised loss on investments                  (10)             (15,088)





Net (loss) for the period                                   (4,797)          (16,070)



Basic and diluted deficit per ordinary share                 (7.52)p          (27.57)p
Return per zero dividend preference share                    4.80p            4.61p











Consolidated Balance Sheet as at 31 March 2002

                                                                31.03.02               31.03.01
                                                                £'000                  £'000

NON-CURRENT ASSETS

Available for sale investments:
At mid market value                                             54,383                 85,669
IAS 39 adjustment (see note)                                    (2,641)                -
Adjusted market value                                           51,742                 85,669



CURRENT ASSETS

Cash and cash equivalents                                       11,071                 962
Debtors                                                         512                    1,217


Total assets                                                    63,325                 87,848


LIABILITIES


CURRENT LIABILITIES
Creditors                                                       878                    1,706



NON-CURRENT LIABILITIES
Long term loan                                                  38,902                 38,902
Zero dividend preference shares                                 10,032                 9,204
Interest rate swap market value                                 1,525                  -


Total liabilities                                               51,337                 49,812



NET ASSETS                                                      11,988                 38,036



Represented by:
Share capital                                                   6,413                  5,830
Share premium                                                   53,482                 50,841
Reserves                                                        (47,907)               (18,635)


Issued capital and reserves                                     11,988                 38,036


Shares outstanding at 31 March:                                 64,129,999             58,300,000

Equivalent to a net asset value per                             18.69p                 65.24p
ordinary share outstanding of:

Net asset value per zero dividend                               114.03p                104.61p
preference share:









Consolidated Statement of Changes in Equity for the period 1 October 2001 to 31
March 2002
                                                                    01.10.01               21.09.00
                                                                     to                    to
                                                                    31.03.02               31.03.01
                                                                    £'000                  £'000

Net (loss) for the period                                           (4,797)                (16,070)
Issue of ordinary share capital, net of formation expenses          3,205                  56,671
Dividends paid and proposed                                         (2,315)                (2,565)
                                                                    (3,907)                38,036
Movement in hedge reserve
Movement in net unrealised loss in revaluation of cash
flow hedges                                                         (532)                  -
Net assets at beginning of period                                   19,624                 -
Investments revalued from mid to bid price at 1 October             (2,204)                -
Market value of interest rate swap at 1 October                     (2,057)                -


Net assets at 31 March 2002                                         11,988                 38,036





Consolidated Statement of Cash Flow for the period 1 October 2001 to 31 March
2002
                                                                   01.10.01               21.09.00
                                                                   to                     to
                                                                   31.03.02               31.03.01
                                                                   £'000                  £'000
Operating Activities

Dividends received                                                 2,495                  1,853
Bond interest received                                             178                    184
Bank interest received                                             211                    252
Expenses paid                                                      (395)                  (500)
Payments under interest rate swap agreement                        (1,414)                (1,445)


Net cash inflow from operating activities                          1,075                  344



Investing activities
Purchase of investments                                            (16,048)               (125,566)
Sale of investments                                                16,838                 23,096


Net cash inflow/(outflow) from investing activities                790                    (102,470)


Financing
Proceeds on issue of ordinary share capital                        3,206                  58,281
Formation expenses paid                                            (1)                    (1,610)
Proceeds on issue of zero dividend preference shares               -                      8,798
Draw down of long term loan                                        -                      38,902
Dividends paid                                                     (2,886)                (1,283)


Net cash inflow from financing activities                          319                    103,088


Increase in cash                                                   2,184                  962
Cash and cash equivalents at start of period                       8,887                  -


Cash and cash equivalents at 31 March 2002                         11,071                 962




Notes


1. Reserves
                                                    Profit and        Hedge            Total
                                                    loss reserve      reserve
                                                     £'000            £'000            £'000

At 1 October 2001                                   (37,066)          -                (37,066)
Valuation of investments at bid prices              (2,204)           -                (2,204)
Accounting for derivatives on balance sheet         -                 (2,057)          (2,057)


Adjusted balance as at 1 October 2001               (39,270)          (2,057)          (41,327)

Net loss for the period                             (4,797)           -                (4,797)

Movement in net unrealised loss on revaluation
of cash flow hedges (note 2)                         -                 532              532

Dividends paid and proposed                         (2,315)           -                (2,315)


Balance as at 31 March 2002                         (46,382)          (1,525)          (47,907)







2. Reconciliation of net asset value to published net asset value
                                                                                    Per share
                                                                       £'000        Pence



Published net asset value                                              15,885       24.77p
Add back distributable reserves                                        269          0.42p
Valuation of investments at bid prices (a)                             (2,641)      (4.12)p
Accounting for derivatives on balance sheet (b)                        (1,525)      (2.38)p


Net asset value per accounts                                           11,988       18.69p




(a)        In accordance with International Accounting Standards (IAS39),
investments have been valued at Stock Exchange quoted market bid prices at the
close of business on the balance sheet date. However, in accordance with general
business practice, the net asset value reported each week reflects these
investments valued at Stock Exchange quoted market mid prices.



(b)    In accordance with International Accounting Standards (IAS39), derivative
instruments, whether hedging or not, are remeasured to fair value and recognised
in the Balance Sheet. However, in accordance with general business practice, the
net asset value reported each day to the London Stock Exchange excludes the
value of derivative instruments, even if used for hedging purposes.



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