Interim Results

ISIS Smaller Companies Trust PLC 03 November 2004 ISIS SMALLER COMPANIES TRUST PLC Date: 3 November 2004 INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2004 Investment Objective ISIS Smaller Companies Trust plc aims to achieve capital growth by investing primarily in a portfolio of smaller companies quoted on the London Stock Exchange. Financial Highlights Net asset value per share increased by 3.2% Share price increased by 10.3% Unchanged interim dividend of 1.0p per share CHAIRMAN' S STATEMENT Results In my first report to shareholders since being appointed as Chairman it is pleasing to report that over the six months to 30 September 2004 the Company's net asset value rose by 3.2 per cent. This compares to a fall of 0.5 per cent in the Hoare Govett Smaller Companies (ex Investment Companies) Index, which was adopted as the Company 's benchmark on 1 July 2004. By way of additional comparison, the Company's previous benchmark, the FTSE SmallCap (ex Investment Companies) Index fell by 4.2 per cent during the period. At the start of the financial year, markets initially traded lower. Investor confidence appeared to wane, with subdued trading activity. Equity market participants of a bearish disposition could point to negative macro-economic developments such as rising domestic interest rates, rising oil prices, slowing US economic growth, and the undercurrent of geo-political tension. Yet, with equal legitimacy, market bulls were able to draw considerable comfort from reported corporate profit growth and a positive tone of trading statements. The recovery in corporate profitability which began last year has continued and appears well founded. Perhaps the clearest signal of corporate optimism is the extent by which dividend increases have surpassed market expectations. Latterly, there has been a noticeable change in sentiment and markets staged a strong rally during September. Consensus economic growth forecasts for the UK remain healthy yet there are concerns over the lagged impact of rising interest rates on discretionary consumer expenditure. As yet the consumer appears robust and spending patterns do not appear to have been materially disrupted. However, pragmatism dictates the importance of monitoring any signs of an impending slowdown in consumption. Increases in public expenditure remain a key driver of economic growth and equity markets appear to be unconcerned by the increased taxation burden this implies. We recognise that there are risks to the UK economy but the near-term outlook for corporate profit growth appears favourable. Earnings and Dividends Group earnings per Ordinary Share were 2.86 pence in respect of the six months ended 30 September 2004 (2003 - 2.71 pence). The Board has declared an unchanged interim dividend of 1.00 pence per Ordinary Share payable on 7 January 2005 to shareholders on the register on 10 December 2004. Investment Policy and Portfolio The Board continues to emphasise stock selection as the primary determinant of the portfolio constituents. The sectoral themes which fuelled the early stages of the market recovery diminished as the period wore on. Towards the end of 2003 the Managers realigned the portfolio towards companies with more visible earnings and dividend streams. This was predicated on the belief that increasing numbers of small companies would use progressive dividend increases as a means of addressing shareholder value. The Board is of the view that the benefits of this realignment have become apparent during the period under review. The largest contributor to performance during the period was Glenmorangie. The controlling family interests indicated that they wished to realise their investment and the Glenmorangie board instructed its advisers to market the business to potential buyers. At 30 September 2004 the share price had risen by over 70% since 31 March 2004. Paladin Resources benefited from the rise in the oil price, generating what were in effect, windfall profits. In addition there were positive strong performances from Domino Printing, Havelock Europa, Restaurant Group, Thorntons and Xaar. In general, technology and telecoms stocks were weak and Eidos, in particular, after its latest acquisition, failed to meet sales targets. The Managers scaled back the exposure to Eidos during the period and have subsequently sold the remainder of the holding. Shareholder Value There has been an improvement in the discount to net asset value at which the Company's shares trade. At the end of the period the discount was 17.7 per cent which is more closely aligned with its peer group than in the past. In addition to regular dialogue with shareholders, the Board believes that it is important to generate new sources of demand for the Company's shares and has therefore recently appointed Intelli Corporate Finance as advisers to assist in broadening the shareholder base. The Board has also made use of the Company's share buy-back powers to enhance shareholder value. The Company bought back 67,000 Ordinary Shares for cancellation during the period. Gearing The Managers made full use of the Company's borrowing facilities during the period. At 30 September 2004 the level of gearing was 14.3 per cent which compares to 13.7 per cent as at 31 March 2004. Given the encouraging nature of recent trading statements the Board and Managers believe that the immediate prospects for smaller companies remain favourable and therefore expect to maintain a fully invested position for the remainder of the financial year. On 4 August 2004 the Company's £7 million fixed rate term loan matured and was replaced by an equivalent value revolving credit facility which will provide the Managers with greater flexibility in terms of managing the level of gearing in the future. Management On 2 July 2004, the Company's Managers, ISIS Asset Management plc, announced a proposed merger with F&C Group Limited to create F&C Asset Management plc, the third largest manager of investment trusts. The merger became effective on 11 October 2004. Board Following the retirement of Mr Michael Walker from the Board at the Annual General Meeting on 22 June 2004, the Company announced the appointment of Mr Alex Hammond-Chambers as a Director. Mr Hammond-Chambers is currently chairman of the Association of Investment Trust Companies and a director of several other companies and investment trusts. He has a significant amount of investment experience which the Board believes will add considerable value to its deliberations. Outlook The major economies have moved from the recovery phase to more steady and sustainable, albeit lower headline, rates of growth. This should be supportive of profit growth and help underpin equity valuations. Challenges exist in the form of a number of potentially destabilising influences on the international scene, including oil price volatility, global political uncertainties and the US presidential election. Domestically, any signs of weakness in consumer demand caused by higher interest rates could unsettle the stock market. Consequently, the Board believes that it is companies with good management, proven business models, sound finances, and those which are capable of anticipating changes in their marketplaces that will deliver increased shareholder value. On the whole, corporate news flow continues to be positive and, given the outlook for earnings and dividend growth, the Board is optimistic that there are further opportunities for improvements in the net asset value in the medium term. A R Irvine Chairman Group Balance Sheet (Unaudited) As at 30 As at 30 As at 31 September 2004 September 2003 March 2004 £'000 £'000 £'000 Fixed Assets Investments 57,619 44,974 55,688 _______ _______ _______ Current Assets Debtors 107 174 237 Cash at bank and on deposit 94 4,960 1,070 _______ _______ _______ 201 5,134 1,307 Creditors Amounts falling due within one year (7,392) (331) (8,002) _______ _______ _______ Net Current (liabilities)/ Assets (7,191) 4,803 (6,695) _______ _______ _______ Total Assets less current liabilities 50,428 49,777 48,993 Creditors amounts falling due after more than one year - (7,000) - _______ _______ _______ Net Assets 50,428 42,777 48,993 _______ _______ _______ Capital and reserves Called-up share capital 10,777 10,836 10,811 Share premium account 3,935 3,935 3,935 Capital redemption reserve 159 100 125 Capital reserve -realised 26,296 24,406 26,010 - unrealised 7,922 2,174 7,173 Revenue reserve 1,339 1,326 939 _______ _______ _______ Equity Shareholders' funds 50,428 42,777 48,993 _______ _______ _______ Net asset value per Ordinary Share 233.97p 197.40p 226.61p _______ _______ _______ Group Statement Of Total Return (Unaudited) (Incorporating the Revenue Account) Six Months to 30 September 2004 Revenue Capital Total £'000 £'000 £'000 Gains on investments - 1,470 1,470 Income 958 - 958 Investment management and secretarial fees (114) (167) (281) Other expenses (145) - (145) ______ ______ ______ Net return before finance costs and taxation 699 1,303 2,002 Interest payable (83) (155) (238) ______ ______ ______ Return on ordinary activities before taxation 616 1,148 1,764 Tax on ordinary activities - - - ______ ______ ______ Return attributable to shareholders 616 1,148 1,764 Dividends in respect of Ordinary Shares (216) - (216) ______ ______ ______ Transfer to reserves 400 1,148 1,548 ______ ______ ______ Return per Ordinary Share 2.86p 5.32p 8.18p _______ ______ ______ Group Statement Of Total Return (Unaudited) (Incorporating the Revenue Account) Six Months to 30 September 2003 Revenue Capital Total £'000 £'000 £'000 Gains on investments - 12,727 12,727 Income 880 - 880 Investment management and secretarial fees (89) (123) (212) Other expenses (115) - (115) ______ ______ ______ Net return before finance costs and taxation 676 12,604 13,280 Interest payable (88) (163) (251) ______ ______ ______ Return on ordinary activities before taxation 588 12,441 13,029 Tax on ordinary activities - - - ______ ______ ______ Return attributable to shareholders 588 12,441 13,029 Dividends in respect of Ordinary Shares (217) - (217) ______ ______ ______ Transfer to reserves 371 12,441 12,812 ______ ______ ______ Return per Ordinary Share 2.71p 57.41p 60.12p ______ ______ ______ Group Statement of Total Return (Unaudited) (Incorporating the Revenue Account) Year to 31 March 2004 Revenue Capital Total £'000 £'000 £'000 Gains on investments - 19,734 19,734 Income 1,441 - 1,441 Investment management and secretarial fees (200) (275) (475) Other expenses (216) - (216) ________ _______ ________ Net return before finance costs and taxation 1,025 19,459 20,484 Interest payable (176) (328) (504) ________ _______ _______ Return on ordinary activities before taxation 849 19,131 19,980 Tax on ordinary activities - - - ________ _______ _______ Return attributable to shareholders 849 19,131 19,980 Dividends in respect of Ordinary Shares (865) - (865) ________ _______ _______ Transfer (from)/ to reserves (16) 19,131 19,115 ________ _______ _______ Return per Ordinary Share 3.92p 88.29p 92.21p ________ _______ _______ Summarised Group Statement of Cash Flows (Unaudited) Six months to Six months to Year to 30 September 30 September 31 March 2004 2003 2004 £'000 £ '000 £'000 Net cash inflow from operating activities 500 493 782 Servicing of finance (252) (251) (504) Financial investments (543) 4,291 668 Equity dividends paid (649) (650) (866) ______ _____ _____ Net cash (outflow)/inflow before financing (944) 3,883 80 Financing (113) (104) (191) ______ _____ _____ (Decrease)/increase in cash (1,057) 3,779 (111) ______ _____ _____ Reconciliation of net cash flow to movement in net debt (Decrease)/increase in cash (1,057) 3,779 (111) Net debt at 1 April (5,930) (5,819) (5,819) ______ _____ _____ Net debt at 30 September/31 March (6,987) (2,040) (5,930) ______ _____ _____ Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities Net return before finance costs and taxation 699 676 1,025 Investment management fees charged to capital (167) (123) (275) Changes in working capital and other non-cash (32) (60) 32 items ______ _____ _____ Net cash inflow from operating activities 500 493 782 ______ _____ _____ Notes 1. The unaudited interim results have been prepared on the basis of the accounting policies set out in the statutory accounts of the Group for the year ended 31 March 2004 2. Earnings for the first six months should not be taken as a guide to the results for the full year. 3. Basic return per Ordinary Share is based on a weighted average of 21,567,077 Ordinary Shares in issue during the period (2003- 21,670,260). 4. The interim dividend of 1.00 pence per Ordinary Share will be paid on 7 January 2005 to shareholders on the Register on 10 December 2004. 5. There were 21,553,260 Ordinary Shares in issue at 30 September 2004 (31 March 2004-21,620,260 and 30 September 2003 - 21,670,260). 6. The group results consolidate those of ISIS UK Securities Limited, a wholly owned subsidiary which deals in securities. These are not statutory accounts in terms of Section 240 of the Companies Act 1985 and are unaudited. Statutory accounts for the year to 31 March 2004, which received an unqualified audit report, have been lodged with the Registrar of Companies. No statutory accounts in respect of any period after 31 March 2004 have been reported on by the Company's auditors or delivered to the Registrar of Companies. Copies of the Interim Report, which has been reviewed by the Company 's auditors, will be mailed to shareholders and will be available for inspection at the Registered Office of the Company, 80 George Street, Edinburgh, EH2 3BU. For further information contact: Stephen Grant/Gordon Hay Smith F & C Asset Management plc : tel. 0131 465 1000 This information is provided by RNS The company news service from the London Stock Exchange

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