Final Results - Year Ended 29 February 2000

3i Smaller Quoted Co's Trust PLC 20 April 2000 Press Information Aldermary House 15 Queen Street London EC4N 1TX Facsimile: 020 7329 6009 Telephone: 020 7329 0096 Issued on behalf of: Date: 3i Smaller Quoted Companies 20 April 2000 Trust plc 3i Smaller Quoted Companies Trust plc A Decade of Outperformance Preliminary Announcement of Final Results 2000 3i Smaller Quoted Companies Trust plc today announces preliminary results for the year ended 29 February 2000. Highlights * NAV per share increased by 68.0% to 336.3p, outperforming the benchmark FTSE Small Cap Index excluding Investment Companies by 21.3% over the period * The Trust has outperformed its benchmark, the FTSE All Share Index and the FTSE 100 Index over the last 1, 3, 5 and 10 years. It was awarded first place in the Standard and Poor's Ten Year UK Investment Trusts Smaller Companies UK Sector reflecting consistency of performance over 10 years * Earnings per share of 4.46p (before receipt of special dividends of 0.51p per share) up from underlying earnings of 4.33p for the comparable period last year * Total dividend increased 5% to 4.20p * 44.5% of investment in companies backed by 3i * Several new issues have recently been purchased direct from 3i Commenting on the results, Bill Govett, Chairman, said: 'The Trust has outperformed its benchmark again over the last year and can now point to outperformance over 1, 3, 5 and 10 years against all the main UK indices. Two factors suggest that smaller companies can continue to outperform in the current year. Firstly, smaller companies continue to offer value compared to larger companies. Secondly, the new issue market has been very active. This has provided an influx of dynamic rapidly growing companies to the universe of stocks in which the Trust invests. The major correction that is taking place in world stock markets, particularly in technology shares, will present an opportunity to buy into companies with strong management and proven growth records.' For further information, please contact: Henrietta Marsh, 3i Asset Management Limited 020 7975 3531 Issued by: Philip Robinson, Shandwick 020 7329 0096 Chairman's statement Performance The year to 29 February 2000 has been a rewarding one for smaller companies with the benchmark FTSE Small Cap Index excluding Investment Companies producing a return of 46.7% compared to 5.8% for the FTSE All Share Index. Furthermore, the Trust strongly outperformed its benchmark producing a return of 68.0% giving net assets per share at the year end of 336.3p. The excellent outcome for the Trust over the last year has more than made up for a longer period of underperformance by smaller companies in general and it is pleasing to note that, in addition to outperforming its benchmark, the Trust has also outperformed both the FTSE All Share and the FTSE 100 Indices over the last one, three, five and ten years. In recognition of its record for consistency of performance, the Trust was recently awarded first place in the Standard and Poor's Ten Year UK Investment Trusts Smaller Companies UK Sector. Earnings and dividends Earnings per share for the year were 4.97p which includes 0.51p from special dividend receipts. In the previous year there were no such receipts and earnings per share were 4.33p. Special dividends are generally unpredictable often being received from companies which are restructuring. Against this background the directors are recommending an increase in the total dividend for the year of 5% to 4.20p. At the time of the interim results I announced that the interim and final dividends would be rebalanced with a greater proportion being paid out at the interim stage. As a result the final dividend will be 2.52p compared with 3.01p in the previous year. Discount and share buy-backs The Board pays close attention to the discount to net assets at which the Trust's shares trade. In general, the Trust's shares have traded at a discount lower than the average for the AITC sector, which the Board believes is appropriate given the strong track record of the Trust. During the year the discount widened slightly from 14.7% at 1 March 1999 to 16.6% at 29 February 2000 - this compares to a sector average of 20% at both the beginning and the end of the year. Shareholders will be aware that the Trust now has the power to buy-back its shares. The primary purpose of share buy-backs is to enhance net asset value for all continuing shareholders, although a secondary aim is to reduce the discount. The Board has established a framework for evaluating such buy-backs and a process for implementing them. However, during the last year it was felt that the Trust's resources were better invested in the market. Recent changes to the Companies Act 1985 have made it possible for investment companies to repurchase their shares without surrendering Investment Company status. At the Annual General Meeting shareholders will be asked to approve certain amendments to the Trust's Articles of Association which will allow the Trust to take advantage of these legislative changes. Gearing Gearing levels are set by the Board, in consultation with the Manager, with a view to increasing the long term returns to shareholders. By the year end, the Trust's Debenture proceeds were for practical purposes fully invested with gearing at 7%. We believe the Trust needs greater flexibility and are examining options to increase potential gearing. Risk management The Board seeks to identify and monitor all the significant risks to which the Trust is exposed. As to portfolio risk, the Board reviews exposures to sectors as well as individual investments at every Board meeting. The policy of the Board is that risks should be managed in a fashion appropriate for a broadly diversified general smaller companies trust. Market conditions Despite near term uncertainty over interest rates, there is the likelihood these will peak at levels that are low in the context of historical comparisons. The outlook for company profits therefore remains positive. Furthermore, most of last year's market price rises were focused in a narrow range of shares leaving many others attractively rated. At the same time, an active new issue market has refreshed the universe of smaller company stocks with a number of dynamic rapidly growing businesses. At the time of writing, considerable volatility has developed in the world stock markets and a major correction is under way in technology shares. This inevitably has had an impact on the Trust's net asset value, but it will provide opportunities to buy into companies with strong management and proven growth records, at levels not seen for several months. I remain confident that attractive returns can be achieved in the longer term. W J R Govett 19 April 2000 Investment manager's review Strategy The Manager aims to select and manage a diversified portfolio of shares which will outperform the FTSE Small Cap Index excluding Investment Companies in the medium term. The Trust is distinguished from others in the smaller companies sector by the use which is made of 3i Group's personnel and information base. The latter includes extensive non-confidential historical information concerning companies prior to their flotation which helps in the appraisal of recently floated companies. In certain circumstances the Manager has the ability to buy shares directly from 3i Group in companies which are being floated. This can provide the Trust with a larger allocation of stock which might otherwise be in short supply. This strategy tends to lead to the Trust being overweight in those sectors in which 3i Group has particular knowledge or experience and for the Trust to follow a growth orientated style although investment in value or cyclical stocks is not precluded. The risk in the portfolio is managed through owning a broadly diversified portfolio, with a maximum of 5% of net assets being held in any one stock, and sector exposures carefully compared to those of the benchmark (FTSE Small Cap Index excluding Investment Companies). Overall performance Investment performance has been good during the year to 29 February 2000 with the net asset value per ordinary share increasing by 68.0%. This exceeds the benchmark by 21.3%. After an initial quarter when value stocks and cyclicals performed well, equity markets in general were characterised by strong price rises in an increasingly narrow range of growth stocks, particularly technology stocks. It was therefore important to be geared into the rising market and to have appropriate sector weightings, in particular overweight positions in information technology, media, telecommunications and biotechnology going into the fourth quarter of calendar 1999. Furthermore, within the strongly performing sectors there were a small number of spectacular performances which are quite unusual in a historical context. Gearing Gearing was increased from 4.7% at 1 March 1999 to 7.3% at 29 February 2000. Given the strong growth in share prices of UK smaller companies the increased gearing helped the Trust's performance. Stocks and sector performance The weightings of the Trust by sector have, during the last year, proved less important than the weightings in the key sub-sectors going into the fourth quarter of 1999. At the end of September, the Trust was 3.6% overweight in Software & Computer Services and 1.5% overweight in Media. It was broadly weighted in line in Telecommunications Services and Pharmaceuticals (which in the FTSE Small Cap Index largely comprised biotechnology stocks). The Information Technology sector performed strongly as concerns evaporated about the slowdown in IT spending ahead of the new millennium and investors began to appreciate the sector's continued long term growth potential and the high levels of spend likely to arise as businesses focus on the internet. The Trust's holdings in NSB Retail and royalblue performed exceptionally well - both are suppliers of software which have leading positions with their customer bases - the retail and investment banking businesses respectively. In Cyclical Services the key sub-sector was Media. An excellent performance was seen from Bloomsbury Publishing which achieved very good sales of its Harry Potter children's books, several of which have featured regularly in the top 10 sales lists. It also published the Encarta World English Dictionary, the result of many years' work - the CD Rom version is published in conjunction with Microsoft. In the Distributors sub-sector, Abacus Polar finally saw a good result after three years of share price decline. The semiconductor cycle has moved to one of shortage of supply. The Non-Cyclical Services sector includes Telecommunications Services which performed excellently. The Trust's holdings included IMS which owned a business called Teamtalk. This business specialises in sports information on the internet and was recently demerged from the parent. Fibernet, a holding bought during the year, produced a good return. The company provides high speed digital networks for the interconnection of computers, telephones and video devices. The key sub-sector in Non-Cyclical Consumer Goods was Pharmaceuticals. An excellent uplift was seen in Oxford GlycoSciences where the stock market attributed greater value to the company's proteomics technology which has allowed the company to apply for more than 800 patents for different protein and use combinations especially for breast cancer and neurological disorders. Shire Pharmaceuticals appreciated well with continued good results. This sector also included some of the poorer performing sub-sectors, notably Food Producers where the Trust held Brake Brothers. This company has produced reasonable results but perception towards the sector is poor. The Trust also held Robert Wiseman which saw its share price halve following announcements on the competitive market conditions and a Monopolies and Mergers Commission investigation. In the Printing and Packaging sub-sector, the Trust held British Polythene whose results have been hit by higher input prices. In the General Industrials sector, the Trust has for some time sought new holdings in companies with a technological edge. In manufacturing businesses these can be a source of long term competitive advantage and barriers to entry. Excellent performances were seen by the Trust's holdings in IQE which makes epitaxial wafers used in opto-electronic components and the holding in Gooch and Housego which makes acousto-optic devices and has developed a switch for use in telecommunications applications. However, Firth Rixson had a disappointing performance with depressed conditions in the aerospace market. The Trust's holdings in the Resources sector produced an uninspiring performance but exceeded that of the equivalent sector in the benchmark index. Abbott Group fell with reduced activity levels in the North Sea resulting from last year's low oil price. In the Basic Industries sector of the portfolio there were no individual stock performances which had a significant impact on the results as a whole. Holdings in the Cyclical Consumer Goods sector produced a mediocre performance held back in particular by Cornwell Parker where bid talks fell through. The main underweight sector position continued to be Financials (particularly the Real Estate sub-sector). This proved to be an appropriate asset allocation. The holding in Brewin Dolphin performed well as rising stock markets have been beneficial to private client brokers. In addition, the company was one of the first to launch an internet broking arm and this has helped market perception of the stock. Takeovers Activity in the portfolio was high with 12 companies taken over in the period and a further two (BTP and Critchley) in progress at the year end. Since the year end offers for City Technology, Joseph Holt, British Borneo and Border TV have been announced. Examples of takeovers by financial buyers include Denby, Wardle Storeys, Hozelock and Joseph Holt but the remainder have been by trade buyers. New issues The new issues market started the year quietly but it became increasingly receptive to technology new issues. The Trust participated in 16 new issues of which four were companies where 3i was a selling shareholder. Consequent new holdings include IQE, Glotel, and Authorizsor and, bought from 3i, Morse and Just2clicks. Market capitalisation breakdown The normal universe in which the Trust invests comprises those stocks in the bottom 10% of the market capitalisation of the London Stock Exchange. In addition, investments may be made in UK based companies listed on AIM, EASDAQ or NASDAQ and, by exception, on OFEX and other OTC markets. At 31 March 2000, the smallest constituent of the FTSE Small Cap Index excluding Investment Companies had a market capitalisation of £27m, and the largest a capitalisation of £437m. At that date, 69% of the Trust's portfolio by value was comprised of stocks within this market capitalisation range, 29% was above the range and 2% below it. The Manager will continue to make new investments above this range from time to time where a stock is regarded as attractive and the market capitalisation does not exceed £740m. It would be rare for the Manager to make a new investment in a company with a market capitalisation of less than £30m. Conclusion and outlook The performance of the Trust and the UK Smaller Companies sector over the last year has been strong both in actual terms and relative to other main UK indices. Nevertheless, smaller companies continue to offer good relative value - on 31 March 2000 the FTSE 100 Index traded at an average price earnings ratio and yield of 30.4 and 2.0% respectively compared to 14.9 and 3.2% respectively for the FTSE Small Cap Index excluding Investment Companies. The Trust is positioned to take advantage of a continuation of the trends which have been prevalent last year in the smaller companies market, being geared and having a growth style and an overweight position in the Information Technology sector. The Manager continues to believe that good quality growing companies with the potential for upgrades in their forecast earnings will outperform over the medium term. The benchmark index (the FTSE Small Cap excluding Investment Companies) underwent significant re-balancing at the end of March 2000 with the result that the benchmark's weighting in the Information Technology sector fell from 14.9% at the end of February to 7.0% at the end of March as some constituents were promoted to the FTSE 250. Conversely, some poor performers in the FTSE 250 were demoted to the FTSE Small Cap - these included some companies in the Building and Construction sector where the benchmark weightings increased. Although most of the Trust's holdings in the Information Technology sector are unchanged since the year end, the Trust is more overweight in the sector than it was as a result of the changes to the benchmark. In the weeks since the year end the flow of new issues has been strong and the Trust has participated in several including Bookham Technology, Profile Therapeutics, Beeson Gregory and Netstore which were bought direct from 3i. Henrietta Marsh 3i Asset Management Limited 19 April 2000 Statement of total return for the year ended 29 February 2000 (incorporating the Revenue Account) Year ended Year ended 29 February 2000 28 February 1999 (as restated)* Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Gains on investments Net realised gains over previous 12,631 12,631 4,962 4,962 valuation Net unrealised appreciation/ 67,490 67,490 (6,504) (6,504) (depreciation) ------- ------- ------- ------- ------- ------- 80,121 80,121 (1,542) (1,542) Income 4,107 4,107 3,572 3,572 Investment management fee (378) (1,135) (1,513) (221) (661) (882) Other expenses (253) (253) (251) (251) ------- ------- ------- ------- ------- ------- Net return before finance costs 3,476 78,986 82,462 3,100 (2,203) 897 Interest payable and similar charges (599) (578) (1,177) (595) (582) (1,177) ------- ------- ------- ------- ------- ------- Return on ordinary activities for the financial year 2,877 78,408 81,285 2,505 (2,785) (280) Dividends (2,433) (2,433) (2,316) (2,316) ------- ------- ------- ------- ------- ------- Transfer to reserves 444 78,408 78,852 189 (2,785) (2,596) Return per ordinary share 4.97p 135.37p 140.34p 4.33p (4.81p) (0.48p) * In accordance with Financial Reporting Standard 16 - Current Tax, dividends receivable have been recognised at an amount that excludes attributable tax credits. This represents a change in accounting policy from previous years, when dividends receivable included attributable tax credits. This change in accounting policy has been reflected by restating the revenue column for the year ended 28 February 1999. No change in the brought forward revenue reserves results from this change in accounting policy. All revenue and capital items in the above statement derive from continuing operations. Balance sheet as at 29 February 2000 2000 1999 £'000 £'000 Fixed assets Investments 210,558 124,020 ---------- ---------- Current assets Debtors 1,716 382 Cash and short term deposits 576 9,263 ---------- ---------- 2,292 9,645 Creditors: amounts falling due within one year (3,379) (3,061) ---------- ---------- Net current (liabilities)/assets (1,087) 6,584 ---------- ---------- Total assets less current liabilities 209,471 130,604 Creditors: amounts falling due after more than one year (14,674) (14,659) ---------- ---------- Net assets 194,797 115,945 ---------- ---------- Capital and reserves Called-up share capital 14,480 14,480 Share premium 38,952 38,952 Capital reserve - realised 48,742 34,883 - unrealised 90,359 25,810 Revenue reserve 2,264 1,820 ---------- ---------- Total shareholders' funds 194,797 115,945 ====== ====== Net asset value per share 336.3p 200.2p Approved by the Board 19 April 2000 Cash flow statement for the year ended 29 February 2000 Notes 2000 1999 £'000 £'000 Operating activities Investment income received 3,775 3,166 Deposit interest received 313 305 Underwriting commission received 30 24 Investment management fees paid (942) (844) Secretarial fees paid (59) (59) Other cash receipts 8 8 Other cash payments (201) (180) -------- ------- Net cash inflow from operating activities 1. 2,924 2,420 -------- ------- Servicing of finance Interest paid (1,162) (1,178) -------- ------- Net cash outflow from servicing of finance (1,162) (1,178) -------- ------- Taxation Taxation recovered - 245 -------- ------- Total taxation recovered - 245 -------- ------- Financial investment Purchase of investments (42,324) (28,834) Sale of investments 34,591 32,591 -------- ------- Net cash (outflow)/inflow from financial investment (7,733) 3,757 -------- -------- Equity dividends paid (2,716) (2,264) -------- ------- (Decrease)/increase in cash 2. (8,687) 2,980 ====== ====== Notes to the Cash Flow statement 1. Reconciliation of net revenue before finance costs to net cash inflow from operating activities 2000 1999 (as restated) £'000 £'000 Net revenue before finance costs 3,476 3,100 Scrip dividends (40) (68) Investment management fee charged to capital (1,135) (661) Decrease/(increase) in accrued income 50 (9) Increase in creditors 581 61 Increase in debtors (8) (3) ---------- ---------- Net cash inflow from operating activities 2,924 2,420 ====== ====== 2. Reconciliation of net cash flow to movement in net debt 2000 1999 £'000 £'000 (Decrease)/increase in cash in the year (8,687) 2,980 Amortised debenture stock issue expenses (15) (14) ---------- ---------- Movement in net debt in the year (8,702) 2,966 Opening net debt (5,396) (8,362) ---------- ---------- Closing net debt (14,098) (5,396) ---------- ---------- Notes 1 A final dividend of 2.52p per ordinary share is recommended and, subject to its approval at the Annual General Meeting in May 2000, will be paid on 14 June 2000 to shareholders on the register at 19 May 2000. Together with an interim dividend of 1.68p paid in November 1999 this makes a total of 4.20p for the year, compared with 4.00p for the year ended 28 February 1999. 2 The Report and Accounts will be posted to shareholders on 27 April 2000 and the Annual General Meeting will be held at 12.00pm on 31 May 2000 at the offices of 3i plc at 91 Waterloo Road, London SE1 8XP. 3 The statutory accounts for the year to 29 February 2000 have not yet been delivered to the Registrar of Companies. The report of the auditors on the statutory accounts is unqualified and does not contain any statements under Section 237(2) or (3) of the Companies Act 1985. This announcement does not constitute statutory accounts. The statutory accounts for the year to 28 February 1999 were filed with the Registrar of Companies on 14 June 1999.

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