Annual Financial Report

RNS Number : 1852W

Edinburgh New Income Trust plc

23 July 2009

 



News Release

23 July 2009

EDINBURGH NEW INCOME TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2009

Edinburgh New Income Trust's investment objective is to provide ordinary shareholders with an attractive level of income, together with the potential for capital and income growth and its zero dividend preference shareholders with a pre-determined capital entitlement on 31 May 2011.

For further information, please contact:

Stewart Methven, Investment Manager, Aberdeen Asset Managers Limited    Tel: [phone]

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

  EDINBURGH NEW INCOME TRUST PLC

MANAGEMENT REPORT

1. CHAIRMAN'S STATEMENT

It has been an extremely difficult year, and shareholders will be well aware of the turmoil that we have experienced in financial markets, dealt with in more detail in the Managers' Review on the following pages. The Trust's net asset value per share fell by 59.6% and the share price by 52.2% to 43.25p, having been as low as 30.50p in the course of the year.

The fall in net asset value is partly attributable to the Trust's capital gearing through the zero dividend preference shares, which means that any fall in the value of the portfolio affects ordinary shareholders disproportionately, and partly because our equity portfolio did less well than the market as a whole, returning a negative 30.7% in total return terms against a negative 23.7% for the FTSE All-Share index. From the launch of the Trust, our portfolio has had an emphasis on stocks with above average dividend yields, including a number of bank and financial stocks, and these performed poorly during the year.

As falls in the value of our investments automatically mean that equity gearing (defined as the ratio of total equity investments to ordinary shareholders funds) rises, sales of equities were made to keep the equity gearing in check. A net £9.1 million of equities were sold during the year. At the year-end, equity gearing was 163.2%. Because of the extremely low yields available on cash deposits, a number of short dated fixed interest bonds were purchased as an alternative. Cash and fixed interest bonds represent £13.8 million, up from £4.5 million a year ago.

Dividends

The Board announces a fourth interim dividend of 2.1p, which will be paid on 21 August to shareholders on the register on 31 July 2009. This brings the total dividend for the year to 6.0p, which compares with 7.2p last year.

Sales of equities, replaced in part by low yielding cash deposits, and dividend cuts on a number of our holdings have resulted in a fall in earnings per share to 6.47p from 8.41p a year ago. Looking forward the Board expects earnings per share to fall further in the current year and whilst making no forecast, the Board aims to maintain the lower total dividend of 6.0p by drawing on Revenue Reserves.

Gearing

We remain cautious about the immediate outlook, but the Board and the Manager are of the view that there is limited stockmarket downside from current levels, with many investors on the sidelines looking to invest on setbacks. The Board has therefore agreed to suspend the limit on equity gearing and allow the Manager discretion to invest a proportion of our cash balances in equities. The level of equity gearing will continue to be monitored carefully, particularly in the event of renewed market weakness, but it is likely to exceed the equity gearing ratio of 190% that was the previous equity gearing limit set by the Board.

A higher commitment to equities will mean a slightly greater volatility in net asset value, but the higher base makes it easier, provided markets rise, to offset the continuing accrual on the zeros. The cover for the final entitlement of the zero dividend preference shareholders of £21.5 million on 31 May 2011 was almost 1.24 times at 31 May 2009.

VAT on Management Fees

As reported in the interim report and accounts, a rebate of £108,668 has been agreed with the Manager, which reflects a full recovery of the VAT on management fees incurred since the Trust's launch in 2005. It is hoped that a further payment, representing the interest recovered from HMRC, will be credited in due course. 

Outlook

Equity markets have seen a recovery from their March low points, helped by the scale of the policy response and some better than expected newsflow from China. Although economic data in the developed world is still weak, it has proved no worse than expected, helping improve overall investor sentiment leading to a broad based recovery across various sector groups in the UK stockmarket.

Uncertainties remain, not least deteriorating public finances and rising unemployment, pointing to a lacklustre outlook for the UK economy as a whole. In the near term continuing volatility can be expected, so the Manager will focus on soundly financed well-positioned businesses which have the scope to come through this difficult period in a stronger competitive position.

Annual General Meeting

The Company's Annual General Meeting takes place in Edinburgh on 30 September 2009, and I look forward to seeing as many of you there as possible.

David Ritchie 

Chairman

  2. MANAGER'S REVIEW

The year to the end of May 2009 witnessed the most challenging environment for equity investors since the Great Depression. At the start of the period, deteriorating economic growth and the lagged effect of elevated energy and commodity prices were compounded by the collapse of Lehman Brothers that together threatened the sustainability of the global financial system. Since the dark days of September and November, unprecedented intervention of both fiscal and monetary stimulus by financial authorities globally looks likely to have eliminated the worst outcomes, however, the repercussions are likely to be felt for years to come.

Portfolio Review

During the year under review, total assets less current liabilities of the Company fell from £39.4 million as at 31 May 2008 to £27.8 million at 31 May 2009, a fall of 29.5%. The total return, which includes the receipt of dividends, from Edinburgh New Income's equity portfolio was -30.7%. This compares with a total return fall in the FTSE All-Share Index of 23.7%. The negative impact of the structural gearing in falling equity markets meant that the net asset value per ordinary share fell by 59.6%, while the NAV total return over the year was -54.3%.

Although not an official benchmark, the portfolio underperformed the FTSE All-Share Index. On a gross assets basis the underperformance of the fund was disappointing, albeit in an extraordinarily difficult year. There are three main causes for this. Firstly, the areas of the market which had provided the notional yield premium required to meet the income objectives tended to be financials and industrial cyclicals, which suffered the most during the market fall. At the beginning of the period the areas of the market with the highest yields, mainly financial companies, suffered the greatest in the market falls. Secondly, there were a number of specific companies that performed very poorly over the period, including Wolseley and Premier Foods, where the build up of financial leverage accentuated the impact of the economic slowdown. Finally, our gearing control process led us to raise cash towards the market lows, limiting our ability to benefit when the market recovered.  

There are two main consequences of the experience. The stocks within the portfolio have been reviewed to ensure that they are in a position to not only come through this very difficult economic environment, but are in a position to enhance their competitive position as a result of their market position and balance sheet. Secondly, the fall in absolute terms of the market has allowed us to improve the quality of the underlying holdings in the portfolio, and with it, the quality of the income the portfolio generates. While there remains significant uncertainty, the portfolio now encompasses stocks with a greater diversification of end market and geographic exposure than has been possible in the recent past and as such is well placed to benefit from any recovery in global growth. 

The Trust did benefit from its underweight position in Mining and the overweight position in Utilities. However, this was offset by the lower exposure to Oil & Gas which performed relatively strongly, and a number of poorly performing companies in the Support Services and Life Assurance sectors. In addition, from a size perspective, the Small Cap Index, where the Company has an overweight exposure, underperformed both the Mid Cap and FTSE 100 Indices over the year.  

The severe concerns regarding the fragility of the banking system that had risen to the fore in the autumn continued through the start of 2009 pushing equity markets back to their lows of the current bear phase.

Authorities in the United Kingdom and the United States were prompted into a further round of bank bailouts while the Bank of England was authorised to start its programme of quantitative easing. However, the market rallied from the start of March as more benign economic data (despite a fall of 1.9% in first quarter GDP) and a belief that the worst was behind us led to an increased desire for risk assets. Towards the end of the period, this better economic newsflow was manifested in nascent signs of conditions in the domestic housing market ameliorating and consumer confidence slowly returning, coupled with improvements, ahead of expectations, for both the Manufacturing and Services PMI surveys.

As access to capital fell, so did the level of corporate activity. While a number of deals were completed, including the bid for TDG, there were also a number of deals that failed, including the approach for Lonmin by Xstrata, and for Rio Tinto by BHP Billiton. However, towards the end of the period, BPP received an approach from Apollo which was subsequently recommended by its board.

With the deterioration in economic conditions, company cashflows have been pressurised. This has led to a reduction in dividends across the market but particularly among financial companies. Where balance sheets have been stressed, some companies have had rights issues to raise additional capital, and have tended to cut payouts at the same time. In addition, as the stigma attached to dividend cuts wanes, there have been a number of companies which have used the backdrop to rebase them. The market fall however has presented the opportunity to improve the underlying quality of the companies held within the portfolio, and this income stream is more diversified in terms of geography and end market. We aim to be prudent regarding our expectations of dividends, and currently, stocks with a double digit yield, often indicative of a sign of stress, accounts for less than 4% of expected income in the year to 2010.

At the stock level, the defensive attributes of a number of holdings were rewarded over the year. The strong and resilient cashflows of British American Tobacco helped it to perform relatively well over the year while a similar theme that helped the holdings in the Utility Sector, Centrica, National Grid and United Utilities. In addition the two pharmaceutical holdings, GlaxoSmithKline and AstraZeneca also performed strongly, aided by their lack of economic cyclicality, as well as some promising news on individual drug prospects. Customers trading down helped McBride which produces private label household goods products. The financial holdings (with the exception of Provident Financial) were badly impacted by the downturn in the economy, weak equity markets and the requirement to raise more capital. There were a number of disappointing performances from individual companies that were carrying too much debt into the downturn. These included Ennstone, GKN, Wolseley and Rio Tinto. 

Portfolio Activity

Although the requirement to raise cash meant that we were net sellers, we purchased four new holdings for the Trust. Venture Production, an oil and exploration company with a low risk business model focused on the North Sea. Towards the end of the period, we were approached by Centrica for our holding in the company and subsequently sold it at an attractive profit. The second new holding was Rolls Royce, purchased due to its strong balance sheet, long order-book, growth opportunities and attractive valuation. We introduced both BHP Billiton and Rio Tinto as the sharp fall in both their share prices allied to the collapse in commodity prices, provided an attractive entry point.  

Over the course of the year, we increased our holdings in companies that we felt had been oversold by the market including AstraZeneca, Royal Dutch Shell, National Grid and Vodafone. We also took up and sub-underwrote a number of rights issues including Centrica and Standard Chartered.

These purchases were funded from a number of disposals, we sold Lonmin after the approach from Xstrata. We also sold LloydsTSB following the announcement of the purchase of HBOS given concerns over the quality of the latter's loan book. We also exited retailers HMV given its strong relative performance and in view of our concerns over its strategy and Kesa, due to concerns over consumer spending. We took a number of painful decisions to sell a number of companies given concerns over balance sheet strength and/or the ability to pay dividends. These included Wolseley, Royal Bank of Scotland, Legal & General, Barclays and TT Electronics. Finally, following its takeover by Laxey, we sold TDG.

Towards the end of the period we introduced a number of good quality corporate bonds, utilising our cash pool, with a maturity profile to match that of the Trust in order to enhance the revenue account.

Outlook

It seems as though the worst economic outcomes are now unlikely and we are seeing increasing signs of stabilisation in the global economy. Monetary and fiscal policy actions are likely to underpin economic activity over the remainder of 2009. However, for a sustained economy we need to see, amongst other factors, a rebound in consumer confidence and business investment. The former is complicated by rising unemployment, tight credit and falling housing wealth while the latter is likely to be hampered by high levels of spare capacity and a shortage of long term bank finance. In this environment we would expect good quality companies with robust balance sheets to outperform and this is how the portfolio is orientated.  

Aberdeen Asset Managers Limited

3. PERFORMANCE TABLES

	31 May 2009	31 May 2008	% change
Total assets less current liabilities	£27,759,000	£39,384,000	(29.5)
Total equity Shareholders' funds	£8,612,000	£21,320,000	(59.6)
Ordinary shares
Net asset value (including undistributed revenue for the period)	42.0p	103.9p	(59.6)
Share price	43.3p	90.5p	(52.2)
Premium/(discount) (see glossary of terms)	3.1%	(12.9%)
Total dividend for period	6.00p	7.20p	(16.7)
ZDP shares
Capital return
Net asset value	126.2p	119.1p	6.0
Share price	127.8p	119.0p	7.4
Capital cover (gross assets A /final repayment entitlement of ZDPs)	1.24	1.77
Gearing
Equity gearing ratio (equities/ordinary shareholders' funds)	163.2%	163.7%
Potential gearing (total assets/ordinary shareholders' funds)	322.3%	184.7%
Capital gearing (ratio of borrowings (ZDPs) to gross assets)	69.0%	45.9%
Expense ratio (as % of average total assets less current liabilities)	0.87%	1.16%

A Excluding revenue reserves, as wholly attributable to the Ordinary Shareholders.

Performance (total return) A

	1 year return	3 year return
	%	%
Ordinary share price	-44.9	-47.7
Net asset value per Ordinary share	-54.3	-56.5
A  Represents capital return plus dividends reinvested.

3. BUSINESS REVIEW

Principal Activity and Status

The Company was incorporated as a public limited company on 22 April 2005 and was listed on the London Stock Exchange on 31 May 2005.

The business of the Company is that of an investment trust and the Directors do not envisage any change in this activity in the foreseeable future.

The Company is registered as a public limited company and is an investment company as defined by Section 833 of the Companies Act 2006. The Company has been approved by HM Revenue & Customs as an investment trust for the purposes of Section 842 of the Income and Corporation Taxes Act 1988 for the year ended 31 May 2008. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 May 2009 so as to be able to continue to obtain approval as an investment trust under Section 842 of the Income and Corporation Taxes Act 1988 for that year, although approval for the year would be subject to review were there to be any enquiry under the Corporate Tax Self Assessment regime.

The Company has conducted its affairs so as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner in the future.

Investment Objective 

The investment objective is to provide the holders of ordinary shares with an attractive level of income, together with the potential for both income and capital growth, and to provide holders of zero dividend preference shares with a pre-determined return of capital.

Performance

An outline of the performance, market background, investment activity and portfolio strategy during the period under review, as well as the investment outlook, is provided in the Chairman's Statement and Manager's Review.

Dividends

The Company has declared dividends totalling 6.0p per ordinary share in respect of the year to 31 May 2009 (2008 - 7.2p).

Risks and Uncertainties

The Board has adopted a matrix of the key risks that affect its business. The principal risks are as follows:

• Stockmarket risk: The Company is exposed to the effect of variations in share prices due to the nature of its business. A fall in the value of its portfolio will have an adverse effect on shareholders' funds, which will be exacerbated by the gearing effect of the zero dividend preference shares. It is not the aim of the Board to eliminate entirely the risk of capital loss, rather it is its aim to seek capital growth so that the gearing effect will multiply the gains for ordinary shareholders. However, the Board has to have regard to the damage which will result from a significant fall in share prices and closely monitors the level of gearing. An aim is to ensure that the future capital entitlement of the zero dividend preference shares can always be met.

• Capital structure risk: The Company's capital structure and its accounting policies mean that the capital accrual on the zero dividend preference shares and 50% of the management fee are charged to the capital account rather than the revenue account. While this enables a higher dividend payment than would otherwise be the case, it means that total assets have to rise by approximately 4.5% in the next twelve months in order to maintain the level of ordinary shareholders' funds in existence at the period end.  

• Income/dividend risk: The investment objective of the Company, to provide ordinary shareholders with an attractive level of income, means that the Manager has to achieve an above average dividend yield on the investments in the portfolio. A consequence is that the performance of the equity portfolio may not always match that of the stockmarket as a whole, with a consequential impact on shareholder returns. The Board's aim is to maximise returns consistent with achieving its dividend requirements.

• Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. A breach of section 842 of the Income and Corporation Taxes Act 1988 could result in the Company being subject to capital gains tax on portfolio investments. Breaches of other regulations such as the UKLA listing rules, could lead to a number of detrimental outcomes and reputational damage. Breaches of controls by service providers such as the Manager could also lead to reputational damage or loss.

The Directors have adopted a robust framework of control which is designed to monitor all key risks facing the Company, and to provide a monitoring system to enable the Directors to mitigate these risks as far as possible.  

Monitoring Performance - Key Performance Indicators

The following key performance indicators (KPIs) have been identified by the Board for determining the progress of the Company:

	Year to 31 May 2009
Dividend	6.0p
Total NAV return per ordinary share	(54.3%)
Premium	3.1%
Total expense ratio	0.87%

At each Board meeting, the Directors consider a number of performance measures, including the above KPIs to assess the Company's success in achieving its objectives. Although the Company has no defined benchmark the portfolio is largely drawn from the large, mid and small cap components of the FTSE All-Share Index. The total return from the FTSE All-Share Index was -23.7% for the year under review.

Resources

The Company has no employees. The management of the Company has been delegated to Aberdeen Asset Managers Limited. Details of the Management Agreement are provided in the notes to the accounts.

Environmental Policy

As an investment trust, the Company has no direct social or environmental responsibilities. Its focus is on ensuring that its portfolio is properly managed and invested. The Company has, however, adopted an environmental policy, details of which are set out in the Corporate Governance Report.

4.    DIRECTOR'S RESPONSIBILITY STATEMENT

The Directors are responsible for preparing the Annual Report & Accounts and the financial statements, in accordance with applicable law and regulations.  

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards.

The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;  

• make judgments and estimates that are reasonable and prudent;  

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements: and 

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.  

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors confirm that to the best of their knowledge that:

• the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

• the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

For Edinburgh New Income Trust plc

David Ritchie 

Chairman

  INCOME STATEMENT (audited)

		Year ended 31 May 2009
		Revenue	Capital	Total
	Notes	£'000	£'000	£'000
Losses on investments held at fair value through profit or loss	8	-	(11,431)	(11,431)
Income	2	1,539	-	1,539
Investment management fee	3	(96)	(96)	(192)
VAT recoverable on investment management fee	19	54	54	108
Administration expenses	4	(170)	-	(170)
		_______	_______	_______
Net return on ordinary activities before finance costs and taxation		1,327	(11,473)	(10,146)
Finance costs of ZDP Shareholders		-	(1,084)	(1,084)
		_______	_______	_______
Net return on ordinary activities before and after taxation		1,327	(12,557)	(11,230)
		_______	_______	_______
Return per Ordinary share (pence)	7	6.47	(61.20)	(54.73)
		_______	_______	_______

______________________________________________________________________________________________

		Year ended 31 May 2008
		Revenue	Capital	Total
	Notes	£'000	£'000	£'000
(Losses)/gains on investments	8	-	(9,445)	(9,445)
Income	2	2,068	-	2,068
Investment management fee	3	(139)	(138)	(277)
Administration expenses	4	(204)	-	(204)
		_______	_______	_______
Net return on ordinary activities before finance costs and taxation		1,725	(9,583)	(7,858)
Finance costs of ZDP Shareholders		-	(1,026)	(1,026)
		_______	_______	_______
Net return on ordinary activities before and after taxation		1,725	(10,609)	(8,884)
		_______	_______	_______
Return per Ordinary share (pence)	7	8.41	(51.70)	(43.29)
		_______	_______	_______

The total column of this statement represents the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued in the period.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement.

The accompanying notes are an integral part of the financial statements.

BALANCE SHEET (audited)

		As at	As at
		31 May 2009	31 May 2008
	Notes	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	8	19,314	34,909
Current assets
Debtors and prepayments	9	379	313
AAA Money Market funds		1,250	3,215
Cash and short term deposits		6,909	1,058
		____________	____________
		8,538	4,586
Creditors: amounts falling due within one year	10	(93)	(111)
		____________	____________
Net current assets		8,445	4,475
		____________	____________
Total assets less current liabilities		27,759	39,384
Creditors: amounts falling due in more than one year	11	(19,147)	(18,064)
		____________	____________
Net assets		8,612	21,320
		____________	____________
Share capital and reserves
Called-up share capital	12	205	205
Special reserve		20,035	20,035
Capital reserve	13	(12,795)	(238)
Revenue reserve		1,167	1,318
		____________	____________
Equity Shareholders' Funds		8,612	21,320
		____________	____________
Net asset value per Ordinary share (pence)	14	42.0	103.9
		____________	____________

The accompanying notes are an integral part of the financial statements.

  RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS (audited)

For the year ended 31 May 2009
				Capital
		Share	Special	reserve -	Revenue
		capital	reserve	realised	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
Balance at 31 May 2008		205	20,035	(238)	1,318	21,320
Return on ordinary activities after taxation		-	-	(12,557)	1,327	(11,230)
Dividends paid	6	-	-	-	(1,478)	(1,478)
		_________	_________	_________	_________	_________
Balance at 31 May 2009		205	20,035	(12,795)	1,167	8,612
		_________	_________	_________	_________	_________
For the year ended 31 May 2008
				Capital
		Share	Special	reserve -	Revenue
		capital	reserve	realised	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
Balance at 31 May 2007		205	20,035	10,371	1,010	31,621
Return on ordinary activities after taxation		-	-	(10,609)	1,725	(8,884)
Dividends paid	6	-	-	-	(1,417)	(1,417)
		_________	_________	_________	_________	_________
Balance at 31 May 2008		205	20,035	(238)	1,318	21,320
		_________	_________	_________	_________	_________

The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.

The accompanying notes are an integral part of the financial statements.

   CASHFLOW STATEMENT (audited)

		Year ended		Year ended
		31 May 2009		31 May 2008
	Notes	£'000	£'000	£'000	£'000
Net cash inflow from operating activities	15		1,088		1,633
Taxation
Net taxation paid			(1)		-
Financial investment
Purchases of investments		(7,827)		(5,561)
Sales of investments		12,100		5,504
		________		________
Net cash inflow/(outflow) from financial investment			4,273		(57)
Equity dividends paid			(1,478)		(1,417)
			________		________
Net cash inflow before use of liquid resources and financing			3,882		159
Net cash inflow from management of liquid resources			1,965		535
			________		________
Increase in cash			5,847		694
			________		________
Reconciliation of net cash flow to movements in net debt
Increase in cash as above			5,847		694
Net change in liquid resources			(1,965)		(535)
Net change in debt due in more than one year			(1,079)		(1,026)
			________		________
Movement in net debt in the year			2,803		(867)
Net debt as at 1 June			(13,791)		(12,924)
			________		________
Net debt as at 31 May	16		(10,988)		(13,791)
			________		________

The accompanying notes are an integral part of the financial statements.

  Notes:

1.    Accounting policies

A summary of the principal accounting policies, all of which have been consistently applied throughout the year and the preceding year is set out below:

(a)    Basis of accounting

The financial statements have been prepared in accordance with the applicable UK Accounting Standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (issued in January 2009 and adopted early). The early adoption of the January 2009 SORP had no effect on the financial statements of the Company, other than:

•      the requirement to separately disclose capital reserves that relate to the revaluation of investments held at the reporting date. These are disclosed in note 13. This new requirement replaces the previous requirement to disclose the value of the capital reserve that was unrealised.

• the requirement to present tax reconciliations based on the total column of the Income Statement rather than the revenue column as was previously recommended. The reconciliation is disclosed in note 5.

They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis. 

(b)    Valuation of investments

Investments have been designated upon initial recognition as fair value through the profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured as fair value. Subsequent to initial recognition, investments are valued at fair value. For listed investments, this is deemed to be bid market prices or closing prices for SETS (London Stock Exchange's electronic trading service) stocks sourced from The London Stock Exchange. Gains and losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Income Statement and are ultimately recognised in the unrealised capital reserve.

(c)    Income

Income from equity investments (other than special dividends), including taxes deducted at source, is included as a revenue item in the Income Statement by reference to the date on which the investment is quoted ex dividend. Special dividends are credited to capital or revenue in the Income Statement, according to the circumstances. Short term deposit interest is dealt with on an accruals basis.

(d)    Expenses

All expenses are accounted for on an accruals basis. Expenses are charged through the revenue column of the Income Statement except as follows:

- transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Income Statement.

- the Company charges 50% of investment management fees to capital, in accordance with the Board's expected long term return in the form of capital gains and income respectively from the investment portfolio of the Company.

(e)    Taxation

Deferred tax

Deferred taxation is recognised in respect of all temporary differences that have originated but not reversed at the Balance Sheet date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Balance Sheet date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the Financial Statements which are capable of reversal in one or more subsequent periods.

Due to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided for deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.  

(f)    Capital reserves

Realised

Gains or losses on disposal of investments and changes in fair value of investments are transferred to the capital reserve. The capital element of the management fee and relevant finance costs are charged to this reserve. Any associated tax relief is also credited to this reserve.

The ordinary share capital on the Balance Sheet relates to the number of shares in issue and in treasury. Only when the shares are cancelled, either from treasury or directly, is a transfer made to the capital redemption reserve.   

            (g)    Compound growth entitlement of the Zero Dividend Preference ('ZDP') shares

The increase in the annual compound growth entitlement of the ZDP shares is accrued on a daily basis as a finance cost through the capital column of the Income Statement and allocated to the capital reserve.

		2009	2008
2.	Income	£'000	£'000
	Income from investments
	UK dividend income	1,148	1,831
	Overseas dividends	20	20
	Stock dividend	13	-
	PID dividend	26
	Fixed interest	62	-
		______	______
		1,269	1,851
		______	______
	Other income
	AAA rated money market funds interest	57	180
	Deposit interest	68	35
	Certificates of deposit interest	117	-
	Treasury bill interest	14	-
	Underwriting commission	14	-
	Other	-	2
		______	______
		270	217
		______	______
	Total income	1,539	2,068
		______	______

		2009			2008
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Investment management fee	£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	96	96	192	133	132	265
	VAT thereon	-	-	-	6	6	12
		______	______	______	______	______	______
		96	96	192	139	138	277
		______	______	______	______	______	______
	The fees disclosed above were paid to Aberdeen Asset Managers Limited ('AAM'), a wholly owned subsidiary of Aberdeen Asset Management PLC.
	The management fee is charged at 0.65% of gross assets less the value of any investment funds managed by AAM. 50% of the management fee is charged to capital.  The notice period is six months.
	The balance due to AAM at the year end was £46,000 (2008 - £65,000) excluding VAT.

		2009			2008
		Revenue	Capital	Total	Revenue	Capital	Total
4.	Administration expenses	£'000	£'000	£'000	£'000	£'000	£'000
	Directors' fees (excluding irrecoverable VAT)	55	-	55	44	-	44
	Auditor's remuneration (excluding irrecoverable VAT):
	- fees payable to the Company's auditors for the audit of the annual accounts	18	-	18	17	-	17
	Contributions to Investment Trust Initiative	14	-	14	42	-	42
	Custody fees and bank charges	10	-	10	10	-	10
	Registrars fees	20	-	20	24	-	24
	Printing	13	-	13	10	-	10
	Other	40	-	40	57	-	57
		______	______	______	______	______	______
		170	-	170	204	-	204
		______	______	______	______	______	______
	The contribution to the Investment Trust Initiative of £14,000 (2008: £42,000) paid to AAM was in respect of marketing and promotion of the Company.  At the year end there was a prepayment of £1,000 (2008 - £3,000) paid to AAM.
	With the exception of the Directors' fees and Auditors' remuneration, irrecoverable VAT has been included under the relevant expense line above. Irrecoverable VAT on Directors' fees and Auditors' remuneration is included within other expenses.
	Directors' emoluments of £55,000 (2008 - £44,000) relate entirely to fees.

			2009			2008
		Revenue	Capital	Total	Revenue	Capital	Total
5.	Taxation	£'000	£'000	£'000	£'000	£'000	£'000
(a)	Analysis of charge for year
	Total current tax (note 5(b))	-	-	-	-	-	-
		______	______	______	______	______	______
(b)	Factors affecting current tax charge for year

The tax assessed for the year is lower than the standard rate of corporation tax in the UK for a large company (28%). The differences are explained below:

	2009			2008
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Net revenue on ordinary activities before taxation	1,327	(12,557)	(11,230)	1,725	(10,609)	(8,884)
Net revenue on ordinary activities multiplied by the standard rate of corporation tax of 28% (2008 - 29.7%)	372	(3,516)	(3,144)	512	(3,151)	(2,639)
Effects of:
UK dividend receipts not chargeable to corporation tax	(321)	-	(321)	(544)	-	(544)
UK scrip dividend income not chargeable to corporation tax	(7)	-	(7)	-	-	-
Finance costs of ZDP shares	-	304	304	-	346	346
Capital gains not subjected to tax	-	3,200	3,200	-	2,805	2,805
Excess management expenses	(44)	12	(32)	32	-	32
	______	______	______	______	______	______
Current tax charge for the year	-	-	-	-	-	-
	______	______	______	______	______	______

Due to the Company's status as an investment trust, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided for deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.

(c)     Provision for deferred taxation 

There was no provision for deferred taxation made for this year. 

The Company has not recognised a deferred tax asset of £230,000 (2008 - £276,000) arising as a result of excess management charges. These expenses would only be utilised if the Company has profits chargeable to corporation tax in future accounting periods.

		2009	2008
6.	Dividends	£'000	£'000
	Amounts recognised as distributions to equity holders in the period:
	Fourth interim dividend payable 22 August 2008 - 3.3p (2007 - 3.0p)	677	616
	First interim dividend paid 31 October 2008 - 1.3p (2007 - 1.3p)	267	267
	Second interim dividend paid 20 February 2009 - 1.3p (2008 - 1.3p)	267	267
	Third interim dividend paid 22 May 2009 - 1.3p (2008 - 1.3p)	267	267
		_________	_________
		1,478	1,417
		_________	_________
	The fourth interim dividend for 2009 has not been included as a liability in these financial statements.
	The table below sets out total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 842 of the Income and Corporation Taxes Act 1988 are considered. The revenue available for distribution by way of dividend for the year is £1,327,000 (2008 - £1,725,000).
		2009	2008
		£'000	£'000
	First interim dividend paid 31 October 2008 - 1.3p (2007 - 1.3p)	267	267
	Second interim dividend paid 20 February 2009 - 1.3p (2008 - 1.3p)	267	267
	Third interim dividend paid 22 May 2009 - 1.3p (2008 - 1.3p)	267	267
	Fourth interim dividend payable 21 August 2009 - 2.1p (2008 - 3.3p)	431	677
		_________	_________
		1,232	1,478
		_________	_________

		2009		2008
7.	Return per share	£'000	p	£'000	p
	Revenue return	1,327	6.47	1,725	8.41
	Capital return	(12,557)	(61.20)	(10,609)	(51.70)
		_________	_________	_________	_________
	Total return	(11,230)	(54.73)	(8,884)	(43.29)
		_________	_________	_________	_________
	Weighted average number of Ordinary shares in issue		20,519,056		20,519,056

			2009	2008
			Listed	Listed
			in UK	in UK
8.	Investments		£'000	£'000
	Fair value through profit or loss:
	Opening fair value		34,909	44,413
	Opening fair value losses/(gains) on investments held		1,171	(8,392)
			_________	_________
	Opening book cost		36,080	36,021
	Purchases at cost		7,827	5,558
	Sales	- proceeds	(11,987)	(5,617)
		- (losses)/gains	(9,782)	118
			_________	_________
	Closing book cost		22,138	36,080
	Closing fair value losses on investments held		(2,824)	(1,171)
			_________	_________
	Closing fair value		19,314	34,909
			_________	_________
	Investments listed on a recognised investment exchange		19,314	34,909
			_________	_________
	Losses on investments
	(Losses)/gains on sales		(9,782)	118
	Increase in fair value losses on investments held		(1,653)	(9,563)
	Increase in value of Certificate of Deposit		4	-
			_________	_________
			(11,431)	(9,445)
			_________	_________
	Transaction costs
	During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within (losses)/gains on investments in the Income Statement. The total costs were as follows:
			2009	2008
			£'000	£'000
	Purchases		11	35
	Sales		8	6
			_________	_________
			19	41
			_________	_________

		2009	2008
9.	Debtors: amounts falling due within one year	£'000	£'000
	Net dividends and interest receivable	261	191
	VAT recoverable on investment management fees	108	-
	Prepayments	10	9
	Amounts due from brokers	-	113
		_________	_________
		379	313
		_________	_________

		2009	2008
10.	Creditors: amounts falling due within one year	£'000	£'000
	Management fees	46	65
	Other creditors	47	46
		_________	_________
		93	111
		_________	_________

		2009	2008
11.	Creditors: amounts falling due in more than one year	£'000	£'000
	Issue of Zero Dividend Preference shares	15,167	15,167
	Accrued finance costs	3,980	2,897
		_________	_________
		19,147	18,064
		_________	_________
	15,166,618 Zero Dividend Preferences shares (ZDP) were issued under a Placing and Reconstruction Scheme. The ZDP shares had an initial capital entitlement of 100p per share, growing to approximately 141.85p on 31 May 2011. The assets of the Company over which the ZDP shares have a prior ranking entitlement do not include the Company's accumulated revenue reserves, which will be attributable to the Ordinary shares.

		2009		2008
			Issued and		Issued and
		Authorised	fully paid	Authorised	fully paid
12.	Called-up share capital	£'000	£'000	£'000	£'000
	Ordinary shares of 1p each	500	205	500	205
		_________	_________	_________	_________
	As at 31 May 2009 there were 20,519,056 (2008 - 20,519,056) Ordinary shares of 1p in issue.

		2009	2008
13.	Retained earnings	£'000	£'000
	Capital reserve
	At 31 May 2008	(238)	10,371
	Movement in investment holdings fair value losses	(1,653)	(9,563)
	Losses on realisation of investments at fair value	(9,782)	118
	Finance costs of ZDP Shareholders	(1,084)	(1,026)
	Movement in fair value of Certificate of Deposit	4	-
	Investment management fees	(96)	(138)
	VAT recoverable on investment management fees	54	-
		_________	_________
	At 31 May 2009	(12,795)	(238)
		_________	_________
	Revenue reserve
		2009	2008
		£'000	£'000
	At 31 May 2008	1,318	1,010
	Revenue	1,327	1,725
	Dividends paid	(1,478)	(1,417)
		_________	_________
	At 31 May 2009	1,167	1,318
		_________	_________

14.	Net asset value per share
	The net asset value per share and the net assets attributable to Shareholders at the period end, calculated in accordance with the Articles of Association were as follows:
		Net asset		Net asset
		value	Net asset	value	Net asset
		per share	values	per share	values
		attributable	attributable	attributable	attributable
		2009	2009	2008	2008
		p	£'000	p	£'000
	Zero Dividend Preference share	126.24	19,147	119.10	18,064
		_________	_________	_________	_________
	Ordinary share	41.97	8,612	103.90	21,320
		_________	_________	_________	_________
	The net asset value per ZDP share is based on funds attributable to ZDP Shareholders and on 15,166,618 (2008 - 15,166,618) ZDP shares, being the number of ZDP shares in issue at the year end.
	The net asset value per Ordinary share is based on funds attributable to Ordinary Shareholders and on 20,519,056 (2008 - 20,519,056) Ordinary shares, being the number of Ordinary shares in issue at the year end.

15.	Reconciliation of net total return before finance costs and	2009	2008
	taxation to net cash inflow from operating activities	£'000	£'000
	Net total return on ordinary activities before finance costs and taxation	(10,146)	(7,858)
	Less: losses on investments	11,431	9,445
	(Increase)/decrease in accrued income	(70)	63
	(Increase)/decrease in other debtors	(109)	1
	Decrease in other creditors	(18)	(18)
		_________	_________
	Net cash inflow from operating activities	1,088	1,633
		_________	_________

		At			At
		31 May		Non-cash	31 May
		2008	Cashflow	movements	2009
16.	Analysis of changes in net debt	£'000	£'000	£'000	£'000
	Cash at bank	1,058	5,847	4	6,909
	AAA Money Market funds	3,215	(1,965)	-	1,250
	Debt due after more than one year	(18,064)	-	(1,083)	(19,147)
		_________	_________	_________	_________
	Net debt	(13,791)	3,882	(1,079)	(10,988)
		_________	_________	_________	_________

17.	Risk management, financial assets and liabilities
	The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company also has the ability to enter into derivative transactions in the form of forward foreign currency contracts and futures and options for the purpose of managing currency and market risks arising from the Company's activities.
	The main risks the Company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk.
	The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures.
	(i)	Market price risk
		The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk.
		Interest rate risk
		Interest rate movements may affect:
		- the fair value of the investments in fixed interest rate securities;
		- the level of income receivable on cash deposits;
		- interest payable on the Company's variable rate borrowings.
		The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.
		Cash balances can be managed to reduce the effective level of gearing. The Company places funds with authorised deposit takers from time to time and is therefore potentially at risk from the failure of any such institution of which it is a creditor.
		Interest risk profile
		The interest rate risk profile of the portfolio of financial assets and liabilities at the Balance Sheet date was as follows:
			Weighted
			average	Fixed	Floating
			interest rate	rate	rate
		At 31 May 2009	%	£'000	£'000
		Assets
		Sterling	2.32	-	8,159
			_________	_________	_________
		Total assets	2.32	-	8,159
			_________	_________	_________
		Liabilities
		Zero Dividend Preference shares	5.84	(19,147)	-
			_________	_________	_________
		Total liabilities	-	(19,147)	-
			_________	_________	_________
			Weighted
			average	Fixed	Floating
			interest rate	rate	rate
		At 31 May 2008	%	£'000	£'000
		Assets
		Sterling	5.55	-	4,273
			_________	_________	_________
		Total assets	5.55	-	4,273
			_________	_________	_________
		Liabilities
		Zero Dividend Preference shares	5.84	(18,064)	-
			_________	_________	_________
		Total liabilities	-	(18,064)	-
			_________	_________	_________
		15,166,618 Zero Dividend Preferences shares (ZDP) have an initial capital entitlement of 100p per share, growing to approximately 141.85p on 31 May 2011.
		The floating rate assets consist of cash deposits on call earning interest at prevailing market rates.
		The Company's equity portfolio and short-term debtors and creditors have been excluded from the above tables.
		All financial liabilities are measured at amortised cost.
		Interest rate sensitivity
		The sensitivity analyses below have been determined based on the exposure to interest rates at the balance sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.
		If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's:
		- profit for the year ended 31 May 2009 would increase/decrease by £82,000 (2008 - increase/decrease by £43,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances.
		- the Company holds no financial instruments that will have an equity reserve impact.
		In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives.

	Foreign currency risk
	None of the Company's investment portfolio is invested in overseas securities and the Balance Sheet cannot be affected by movements in foreign exchange rates.
	The revenue account is subject to currency fluctuation arising on overseas income but the effect is immaterial and the Company does not hedge this currency risk.
	Foreign currency risk exposure by currency of denomination:
		31 May 2009					31 May 2008
			Net		Total				Net		Total
			monetary		currency				monetary		currency
		Investments	assets		exposure		Investments		assets		exposure
		£'000	£'000		£'000		£'000		£'000		£'000
	Sterling	19,314	8,159		27,473		34,909		4,273		39,182
		_________	_________		_________		_________		_________		_________
	Other price risk
	Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments, which amounted to £19,314,000 (2008 - £34,909,000) at the year end.
	The Company has two objectives, to provide Ordinary Shareholders with an attractive level of income, together with the potential for capital and income growth, and to provide ZDP Shareholders with a fixed capital return of 141.85p per share (£21,514,000) on 31 May 2011. The Company aims to achieve this through investing in a portfolio of diversified securities which, given the income requirements of the Company, are likely to yield in excess of the yield available on the broader UK Equity market.
	Other price risk sensitivity
	If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to ordinary Shareholders for the year ended 31 May 2009 would have increased/decreased by £1,931,000 (2008 - increase/decrease of £3,491,000) and equity reserves would have increased/decreased by the same amount.
(ii)	Liquidity risk
	This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
	Liquidity risk is not considered to be significant as the Company's fair value assets comprise readily realisable securities, which can be sold to meet funding commitments if necessary. In addition, all current assets and current liabilities are receivable/payable within three months and the ZDP's are payable within two years.
(iii)	Credit risk
	This is failure of the counter party to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.
	The risk is not considered to be significant, and is managed as follows:
	-   where the investment manager makes an investment in a bond, corporate or      otherwise, the credit rating of the issuer is taken into account so as to minimise the risk      to the Company of default;
	-    investment transactions are carried out with a large number of brokers, whose credit      rating of which is taken into account so as to minimise the risk to the Company of       default;
	-   investment transactions are carried out with a large number of brokers, whose credit-     standing is reviewed periodically by the investment manager, and limits are set on the     amount that may be due from any one broker;
	-  cash is held only with reputable banks with high quality external credit enhancements.
	Credit risk exposure
	In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 May was as follows:
				Balance		Maximum		Balance		Maximum
				Sheet		exposure		Sheet		exposure
				2009		2009		2008		2008
				£'000		£'000		£'000		£'000
	Loans and receivables			369		369		304		304
	AAA Money Market funds			1,250		1,250		3,215		3,215
	Cash at bank and in hand			6,909		6,909		1,058		1,058
				_________		_________		_________		_________
				8,528		8,528		4,577		4,577
				_________		_________		_________		_________

	None of the Company's financial assets is past due or impaired.
	Fair values of financial assets and financial liabilities
	The fair and book value of the financial liabilities are stated below:
		Book value	Fair value{A}	Book value	Fair value{A}
		2009	2009	2008	2008
		£'000	£'000	£'000	£'000
	Zero Dividend Preference share	19,147	19,383	18,064	18,048
		_________	_________	_________	_________
	{A}Based on market value at the year end.
	All other assets and liabilities of the Company are included in the Balance Sheet at fair value.

18.	Capital management policies and procedures
	The objective of the Company is to provide Ordinary Shareholders with an attractive level of income, together with the potential for capital and income growth and to provide ZDP Shareholders with a pre-determined capital entitlement on 31 May 2011.
	The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to Shareholders through the optimisation of the debt and equity balance.
	The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:
	-     the planned level of gearing which takes account of the Investment Manager's views       on the market;
	-     the level of equity and ZDP shares in issue;
	-     the extent to which revenue in excess of that which is required to be distributed       should be retained.
	The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.
	The Company does not have any externally imposed capital requirements.

19.	Contingent assets
	On 5 November 2007, the European Court of Justice ruled that management fees on investment trusts should be exempt from VAT. HMRC has announced its intention not to appeal against this ruling to the UK VAT Tribunal and therefore protective claims which have been made in relation to the Company will be processed by HMRC in due course.
	The Company has accepted the Manager's offer to refund £108,000 to the Company, representing all VAT charged on investment management fees for the period 1 June 2005 to 31 August 2007; this has been recognised in these financial statements and has been allocated to revenue and capital respectively, in accordance with the accounting policy of the Company for the periods in which the VAT was charged. The amount for any interest due on recoverable amounts and the timescale for receipt are at present uncertain and the Company has therefore taken no account in these financial statements of any such repayment.
	The Company has not been charged VAT on its investment management fees from 1 September 2007.

20.    The fourth interim dividend of 2.1p per share will be paid on 21 August 2009 to shareholders on the register at 
        the close of business on 31 July 2009. The ex-dividend date is 29 July 2009.

21.    The income statement, balance sheet, reconciliation of movement in shareholders' funds, cashflow statement and
         the notes to the accounts set out above do not represent full financial statements in accordance with Section 240 
         of the Companies Act 1985 and are extracted from the financial statements for the year ended 31 May 2009. The
         audit report on the statutory financial statements for 2009 is unqualified and will be delivered to the Registrar of 
         Companies.

22.    The Annual Report and Accounts will be posted to shareholders in August 2009 and copies will be available 
        from the investment manager or from the Company's website, www.edinburghnewincome.co.uk.

For Edinburgh New Income Trust plc

Aberdeen Asset Managers Limited, Company Secretary

END 

 

END

 

 

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