Interim Results

ISIS Smaller Companies Trust PLC 09 November 2005 ISIS SMALLER COMPANIES TRUST PLC Date: 9 November 2005 INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2005 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 12.1%, compared with an increase of 9.5% in the benchmark index • Share price increased by 15.2% • Interim dividend of 1.75p per share CHAIRMAN'S STATEMENT Results I am pleased to report on a further period of positive absolute and relative returns. The Company's net asset value rose by 12.1 per cent to 320.56 pence per share over the six months to 30 September 2005, compared to a rise of 9.5 per cent in the Hoare Govett Smaller Companies (ex Investment Companies) Index. It is also pleasing to report that, over the three years to 30 September 2005, the Company was the best performing investment trust in the AITC UK Smaller Companies sector in terms of net asset value total return (source: AITC). During the period markets in general, and the share prices of smaller companies in particular, proved resilient when confronted with a number of challenges, the most acute of which were a sharp escalation in fuel and raw material costs and a weakening in UK consumer demand. The latter is most visible in the poor trading conditions currently experienced by retailers. The recent cut in UK interest rates provided little comfort for investors as, on reflection, this looser monetary policy signified policymakers' concern over the housing market, the high levels of consumer debt and slowing domestic economic growth. Though the consumer looks set to continue to exhibit a more cautious spending pattern, central government appears committed to higher levels of expenditure. In the medium-term, there are concerns over how this expenditure will be financed, especially if the predicted slowdown in economic growth materialises. Whilst this is a more difficult economic background, it is not one that should prohibit well run businesses from creating economic value and improving returns. Equity valuations are neither compellingly cheap nor glaringly expensive and the Board would anticipate that share prices will correlate more closely than previously to underlying corporate performance. Those companies with strong financial characteristics and shareholder friendly managements have produced earnings and dividend growth ahead of market expectations. In the present climate, we would expect this pattern to continue and we believe the portfolio is well positioned in this regard. Earnings and Dividends Revenue earnings per Ordinary Share were 2.78 pence in respect of the six months ended 30 September 2005 (2004 - 2.86 pence). In my statement to shareholders which accompanied the Annual Report for the year ended 31 March 2005, I explained that the Board proposed to change the balance between the interim and final dividend payments in order to reduce the differential between them. The Board has therefore declared an interim dividend of 1.75 pence per Ordinary Share payable on 6 January 2006 to shareholders on the register on 9 December 2005. This compares to an interim dividend of 1.00 pence per Ordinary Share for the previous year. As I explained in my statement to shareholders, the Board would expect to increase the dividend over the medium term. We are not yet, however, in a position to determine if we will recommend an increase in respect of the current financial year. Investment Policy and Portfolio In late 2004 the Managers took the decision to reduce the portfolio's exposure to the UK consumer. In aggregate smaller companies have a higher exposure to both UK based earnings and the UK consumer and, consequently the Managers have had to evaluate a broader range of potential investments. We believe this has been achieved without sacrificing the investment criteria which have served shareholders well of late. A central tenet of the investment approach is to identify high quality management teams. During periods of strong economic and stockmarket growth, the qualities of good managers are often overlooked. In more difficult times, the ability to anticipate changes rather than react to developments is what separates successful from average management. During the period, several of the Company's larger holdings continued to produce very strong performance - Paladin Resources (oil production assets benefiting from a strong oil price), Xaar (enjoying strong demand for its high specification printheads globally), MTL Instruments (enjoying a recovery in demand for capital equipment from customers in the petrochemicals industry), and Victrex (high performance chemicals developing new customers and new applications). On a more negative note, Hitachi Capital's consumer lending activities had to provide more against possible bad debts than the Managers had expected. The performance attribution is again well spread and underlines the Board's confidence in the Managers' stockpicking abilities. Shareholder Value There has been a further narrowing of the discount to net asset value at which the Company's shares trade. At the end of the period the discount was 12.7 per cent which is comparable with the majority of its peers. The Board continues to explore a range of initiatives aimed at sustaining this improvement and, over time, further closing the discount. In order to assist in fulfilling this objective, the Company will participate in the new range of F&C retail marketing schemes, which the Board hopes will stimulate new demand from the private investor. The Board believes that attracting new shareholders who have the same long term goals as the Company offers the best prospect of closing the discount. The use of the Company's share buy-back powers was a contributor to the enhancement in shareholder value during the period, adding 6.0 pence per share to the net asset value. The Company bought back 3,355,000 Ordinary Shares for cancellation during the period and since the end of the period has bought back a further 700,000 Ordinary Shares. Gearing The Managers invested the Company's flexible borrowing facilities for much of the period. As at 30 September 2005 the level of gearing net of cash was 9.9 per cent. As the Managers are more cautious on the immediate outlook for corporate earnings they continue to monitor a range of possible new investment opportunities. However, they are less inclined to re-invest cash raised from sales immediately, believing that there may be more profitable re-investment opportunities at a later date. Board Having joined the Board in 1983, Mr James Laurenson retired as a Director on 30 September 2005. On behalf of the Board I would like to thank Mr Laurenson for his significant contribution to the Company over this period. The Board is in the process of seeking to recruit a new independent non-executive Director. International Financial Reporting Standards Following recent changes to accounting regulations, the Company is now required to prepare its accounts in accordance with International Financial Reporting Standards ('IFRS'). The Company's accounts had previously been prepared in accordance with UK Generally Accepted Accounting Principles ('UK GAAP'). Under IFRS, the Company's investments are valued at bid prices in the accounts, and not middle market prices as had been the treatment under UK GAAP. In addition, under IFRS, dividends paid by the Company are only recognised in the accounts when paid to shareholders. The resultant effect on the net asset value as at 30 September 2005 was a reduction of 1.8p per Ordinary Share. Comparative figures in the accounts have been restated accordingly. Outlook Smaller companies' shares have enjoyed an exceptionally strong run since March 2003 and, in some quarters, there is a belief that smaller companies are now ' out of fashion'. The Board views the future with optimism, albeit that this is tempered in the short-term by the recognition that economic conditions are likely to be more challenging than of late. The Board firmly believes that a combination of strong business fundamentals, consistent cash generation and, most importantly, good management is more than capable of weathering any short-term disruption in markets or economies. Shareholders in ISIS Smaller Companies Trust should expect good medium term equity returns and we are confident of meeting those expectations. A R Irvine Chairman Condensed Unaudited Group Balance Sheet As at 30 September As at 30 As at 31 2005 September 2004 March 2005 (restated) (restated) £'000 £'000 £'000 Non-current assets Investments held at fair value 63,492 56,934 67,062 Current Assets Investments held by dealing subsidiary 101 - 343 Due from brokers 85 - 241 Other receivables 99 107 215 Cash and cash equivalents 3,819 94 1,542 4,104 201 2,341 Total Assets 67,596 57,135 69,403 Current Liabilities Revolving credit facility (9,000) (7,000) (7,000) Due to brokers (163) - (649) Other payables (97) (177) (139) Total Liabilities (9,260) (7,177) (7,788) Net Assets 58,336 49,958 61,615 Capital and reserves Called-up share capital 9,099 10,777 10,777 Reserves 49,237 38,181 50,838 Equity shareholders' funds 58,336 49,958 61,615 Net asset value per Ordinary Share 320.56p 231.79p 285.87p Condensed Unaudited Statement of Changes in Equity Six Months to 30 September 2005 Share Capital Reserves Total £'000 £'000 £'000 As at 31 March 2005 (restated) 10,777 50,838 61,615 Share buy backs (1,678) (6,899) (8,577) Dividends paid - (592) (592) Net profit for the period - 5,890 5,890 As at 30 September 2005 9,099 49,237 58,336 Condensed Unaudited Group Income Statement* (Incorporating the Revenue Account) Six Months to 30 September 2005 Revenue Capital Total £'000 £'000 £'000 Income Investment income 740 - 740 Other operating income 187 - 187 Gains on investments held at fair value - 5,695 5,695 927 5,695 6,622 Expenses Investment management and secretarial fees (135) (202) (337) Other expenses (161) - (161) Net operating profit before finance costs and tax 631 5,493 6,124 Finance costs (82) (152) (234) Profit before taxation 549 5,341 5,890 Taxation - - - Net profit 549 5,341 5,890 Return per Ordinary Share 2.78p 27.09p 29.87p The total column of this statement represents the Group Income Statement, prepared in accordance with IFRS. The supplementary revenue and capital return columns are both prepared under guidance published by the Association of Investment Trust Companies. All items in the above statement derive from continuing operations. * Under IFRS the Income Statement is the equivalent of the Statement of Total Return as reported previously Condensed Unaudited Group Income Statement (Incorporating the Revenue Account) Six Months to 30 September 2004 (restated) Revenue Capital Total £'000 £'000 £'000 Income Investment income 916 - 916 Other operating income 42 - 42 Gains on investments held at fair value - 1,399 1,399 958 1,399 2,357 Expenses Investment management and secretarial fees (114) (167) (281) Other expenses (145) - (145) Net operating profit before finance costs and tax 699 1,232 1,931 Finance costs (83) (155) (238) Profit before taxation 616 1,077 1,693 Taxation - - - Net profit 616 1,077 1,693 Return per Ordinary Share 2.86p 4.99p 7.85p Condensed Unaudited Group Income Statement (Incorporating the Revenue Account) Year to 31 March 2005 (restated) Revenue Capital Total £'000 £'000 £'000 Income Investment income 1,545 - 1,545 Other operating income 145 - 145 Gains on investments held at fair value - 13,186 13,186 1,690 13,186 14,876 Expenses Investment management and secretarial fees (244) (348) (592) Other expenses (268) - (268) Net operating profit before finance costs and tax 1,178 12,838 14,016 Finance costs (158) (293) (451) Profit before taxation 1,020 12,545 13,565 Taxation - - - Net profit 1,020 12,545 13,565 Return per Ordinary Share 4.73p 58.17p 62.90p Condensed Unaudited Group Statement of Cash Flows Six months to 30 Six months to 30 Year to 31 March September 2005 September 2004 2005 (restated) (restated) £'000 £ '000 £'000 Net cash flow from operating activities 278 248 127 Cash flows from investing activities 9,168 (543) 1,322 Cash flows from financing activities (7,169) (762) (977) Increase in cash and cash equivalents 2,277 (1,057) 472 Reconciliation of net operating profit before taxation to net cash flow from operating activities. £'000 £ '000 £'000 Net operating profit before taxation 5,890 1,693 13,565 Gains on investments held at fair value (5,695) (1,399) (13,186) Changes in working capital and other non-cash items 83 (46) (252 Net cash flow from operating activities 278 248 127 Notes to the Interim Report 1. Account Policies The financial statements have been prepared on the basis of the recognition and measurement requirements of International Financial Reporting Standards ('IFRS') issued by the International Accounting Standards Board ('IASB'), and interpretations issued by the International Reporting Interpretations Committee of the IASB ('IFRIC'). These are the first financial statements prepared on this basis. Previously the financial statements were prepared in accordance with UK Generally Accepted Accounting Principles ('UK GAAP') including the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies'. UK GAAP differs in certain respects from IFRS. When preparing the financial statements for the period to 30 September 2005 the Directors have amended certain accounting and valuation methods applied in the UK GAAP financial statements. Reconciliations of Balance Sheet, Statement of Total Return to the Income Statement and Cash Flow Statement at date of conversion (1 April 2004) and previously reported periods are shown in notes 2 to 4. The Company does not comply with IAS 34 'Interim Financial Statements' and is not required to do so until next year. 2. Restatement of opening balances at 31 March 2004 In accordance with IFRS1, 'First Time Adoption of Financial Reporting Standards ', the following is a reconciliation of the figures at 31 March 2004 previously reported under the applicable UK Accounting Standards and with the Statement of Recommended Practice. Previously reported 31 March 2004 Restated Adjustments 31 March 2004 £'000 £'000 £'000 Fixed Assets Investments 55,688 (615) 55,073 Current Assets 1,307 - 1,307 Creditors: amounts falling due within one year (8,002) 649 (7,353) Net Assets 48,993 34 49,027 Capital and reserves Called-up share capital 10,811 - 10,811 Reserves 38,182 34 38,216 Equity shareholders' funds 48,993 34 49,027 Net asset value per Ordinary Share 226.61p 0.15p 226.76p Investments are classified as held at fair value under IFRS and are carried at bid prices which equates to their fair value of £55,073,000 as at 31 March 2004. They were carried at mid prices previously. The resultant difference of £615,000 is included in reserves. No provision has been made for the final dividend for the year ended 31 March 2004, of £649,000. Under IFRS this is not recognised until paid. This amount is added to reserves. Notes to the Interim Report 3(a) Restatement of balances at 30 September 2004 In accordance with IFRS1, 'First Time Adoption of Financial Reporting Standards ', the following is a reconciliation of the figures at 30 September 2004 previously reported under the applicable UK Accounting Standards and with the Statement of Recommended Practice. Previously reported 30 September 2004 Restated Adjustments 30 September 2004 £'000 £'000 £'000 Fixed Assets Investments 57,619 (685) 56,934 Current Assets 201 - 201 Creditors: amounts falling due within one year (7,392) 215 (7,177) Net Assets 50,428 (470) 49,958 Capital and reserves Called-up share capital 10,777 - 10,777 Reserves 39,651 (470) 39,181 Equity shareholders' funds 50,428 (470) 49,958 Net asset value per Ordinary Share 233.97p (2.18)p 231.79p Investments are classified as held at fair value under IFRS and are carried at bid prices which equates to their fair value of £56,934,000 as at 30 September 2004. They were carried at mid prices previously. The resultant difference of £685,000 is included in reserves. No provision has been made for the interim dividend for the six months ended 30 September 2004, of £215,000. Under IFRS this is not recognised until paid. This amount is added to reserves. Notes to the Interim Report (b) Reconciliation of the Statement of Total Return for the six months ended 30 September 2004 to the Income Statement Under IFRS the Income Statement is the equivalent of the Statement of Total Return as reported previously. Per share £'000 P Total transfer to reserves per Statement of Total Return 1,548 7.18 Change from mid to bid basis at 31 March 2004 615 2.85 Change from mid to bid basis at 30 September 2004 (685) (3.18) Interim dividend for the year ended 31 March 2005 215 1.00 Net profit per Income Statement 1,693 7.85 Note to the reconciliation Investments at 31 March 2004 and 30 September 2004 are required to be valued at bid prices which equates to their fair value under IFRS. They were valued at mid prices previously. These values differ from the previous valuations by £615,000 and £685,000 respectively. (c) Reconciliation of the Cash Flow Statement for the six months ended 30 September 2004 Previously Reported Effect of Adjusted Cash flows transition to Cash flows 2004 IFRS 2004 £'000 £'000 £'000 Net cash inflow from operating activities 500 (252) 248 Servicing of finance (252) 252 - Capital expenditure and financial investment (543) - (543) Dividends paid (649) 649 - Net cash flow before financing (944) 649 (295) Financing (113) (649) (762) Decrease in cash (1,057) - (1,057) In accordance with IFRS bank interest paid is now shown under operating activities rather than servicing of finance. Notes to the Interim Report 4(a) Restatement of balances at 31 March 2005 In accordance with IFRS1, 'First Time Adoption of Financial Reporting Standards ', the following is a reconciliation of the figures at 31 March 2005 previously reported under the applicable UK Accounting Standards and with the Statement of Recommended Practice. Previously reported 31 March 2005 Restated Adjustments 31 March 2005 £'000 £'000 £'000 Fixed Assets Investments 67,695 (633) 67,062 Current Assets 2,341 - 2,341 Creditors: amounts falling due within one year (8,435) 647 (7,788) Net Assets 61,601 14 61,615 Capital and reserves Called-up share capital 10,777 - 10,777 Reserves 50,824 14 50,838 Equity shareholders' funds 61,601 14 61,615 Net asset value per Ordinary Share 285.81p 0.06p 285.87p Investments are classified as held at fair value under IFRS and are carried at bid prices which equates to their fair value of £67,062,000 as at 31 March 2005. They were carried at mid prices previously. The resultant difference of £633,000 is included in reserves. No provision has been made for the final dividend for the year ended 31 March 2005, of £647,000. Under IFRS this is not recognised until paid. This amount is added to reserves. Notes to the Interim Report (b) Reconciliation of the Statement of Total Return for the year ended 31 March 2005 to the Income Statement Under IFRS the Income Statement is the equivalent of the Statement of Total Return as reported previously. Per share £'000 P Total transfer to reserves per Statement of Total Return 12,721 52.99 Change from mid to bid basis at 31 March 2004 615 2.85 Change from mid to bid basis at 30 September 2004 (633) (2.94) Interim dividend for the year ended 31 March 2005 215 1.00 Final dividend for the year ended 31 March 2005 647 3.00 Net profit per Income Statement 13,565 62.90 Note to the reconciliation Investments at 31 March 2004 and 31 March 2005 are required to be valued at bid prices which equates to their fair value under IFRS. They were valued at mid prices previously. These values differ from the previous valuations by £615,000 and £633,000 respectively. (c) Reconciliation of the Cash Flow Statement for the year ended 31 March 2005 Previously Reported Effect of Adjusted Cash flows transition to Cash flows 2004 IFRS 2004 £'000 £'000 £'000 Net cash inflow from operating activities 595 (468) 127 Servicing of finance (468) 468 - Capital expenditure and financial investment 1,322 - 1,322 Dividends paid (864) 864 - Net cash flow before financing 585 864 1,449 Financing (113) (864) (977) Increase in cash 472 - 472 In accordance with IFRS bank interest paid is now shown under operating activities rather than servicing of finance. Notes to the Interim Report 5. Earnings for the first six months should not be taken as a guide to the results for the full year. 6. Return per Ordinary Share is based on a weighted average of 19,718.779 Ordinary Shares in issue during the period (2004: 21,567,077) 7. The interim dividend of 1.75 pence per Ordinary Share will be paid on 6 January 2006 to shareholders on the register on 9 December 2005. 8. Net asset value per ordinary share is based on 18,198,260 Ordinary Shares in issue (31 March 2005: 21,553,260 and 30 September 2004: 21,553,260). 9. The Group results consolidate those of ISIS UK Securities Limited, a wholly owned subsidiary which deals in securities. 10. These are not statutory accounts in terms of section 240 of the Companies Act 1985 and are unaudited. The information for the year ended 31 March 2005 has been extracted from the latest published financial statements, as restated (see note 1), which received an unqualified audit report and have been filed with the Registrar of Companies. No statutory accounts in respect of any period after 31 March 2005 have been reported on by the Company's auditors or delivered to the Registrar of Companies. This information is provided by RNS The company news service from the London Stock Exchange

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