Exeter investment group plc




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EXETER INVESTMENT GROUP PLC

Proposed disposal of fund management rights for a maximum of £10 million in cash


Introduction
Further to the announcement on July 21, 2003 that [Exeter Investment] was in discussions which might lead to the sale of the management contracts of its open-ended funds to another investment management group, the company announces on Tuesday that its subsidiary, EFM, has conditionally agreed to sell the rights to manage the Funds to New Star for a maximum cash consideration of GBP10.0 million. The initial consideration comprises up to GBP9.0 million in cash payable at Completion, and deferred cash consideration of up to GBP1.0 million payable one year and ten days after Completion.
In view of its size, the Disposal is conditional inter alia on Shareholders' approval at an extraordinary general meeting of the Company to be held on August 26, 2003. The Directors have undertaken to vote in favor of the Resolution in respect of their own aggregate beneficial and non-beneficial holdings of 4,066,977 Shares representing (in aggregate) approximately 39.4% of Exeter's issued Shares.
Background to and reasons for the Disposal
Since it was established in 1986, Exeter has built an investment services business that largely comprises the management of portfolios for closed-ended investment companies and open-ended funds. Separately, Exeter has also developed a successful fund administration business that has a client base consisting of funds managed by a wide range of third party fund management groups, as well as funds managed by Exeter.
At September 30, 2000 the assets in the Funds total ed approximately GBP363 million. This had risen to GBP402 million by 30 September 2001. However, as a result of redemptions and the lack of new investments in the Funds, the significant falls in world equity markets since their highs in 2000 and the well-publicized difficulties in the Splits Sector, the figure had fallen to approximately GBP270 million by 30 September 2002 and GBP250 million by March 31, 2003. As a result the Funds are now collectively of insufficient size to generate enough revenue for Exeter to cover their direct costs, particularly if professional service levels are to be maintained.
EFM made an audited loss before tax of approximately GBP788,000 in the six months ended March 31, 2003. EFM's results have had a material adverse effect on the recent trading performance of the Exeter Group.
As announced in the Interim Statement, the Board undertook a strategic review of the Group earlier this year. The Directors concluded that it would take a relatively long time for the Funds to recover the necessary levels of income and that it was unlikely that the associated losses could be turned into profit within an acceptable timeframe. The Directors considered a series of options to improve the company's prospects and decided to seek a purchaser for the rights to manage the Funds. This process has resulted in the Disposal Agreement exchanged on Tuesday with New Star.
Information on the Rights
The asset management rights that are the subject of the Disposal are in respect of the 11 authorized unit trusts and two OEIC sub-funds listed below which are currently managed by EFM. Assets under management for each of the Funds as at August 4, 2003, being the latest practicable date prior to the date of this announcement, were:

Assets under

management

(excluding

internal

holdings)

Fund name GBP million

Exeter Capital Growth Fund 58.66

Exeter Equity Income Fund 6.21

Exeter European Fund 0.55

Exeter Fixed Interest Fund 4.49

Exeter Global Opportunities Fund 18.51

Exeter High Income Unit Trust 21.11

Exeter Managed Growth Fund 44.53

Exeter Money Market Fund 0.85

Exeter Pacific Growth Fund 14.86

Exeter Smaller Companies Unit Trust 5.36

Exeter Zero Preference Fund 122.60

Exeter Hidden Value Portfolio 1.21

Exeter Zero Portfolio 12.70

---------

Total 311.64

---------

In the six months ended March 31, 2003 unaudited fees from funds under management attributable to the Rights totaled approximately GBP1.6 million. As the Rights are not a discrete business with their own balance sheet, there were no net assets attributable to the Rights at March 31, 2003. Exeter's unaudited interim balance sheet at March 31, 2003 included approximately GBP356,000 relating to the goodwill on the acquisition of certain investment mandates from Sanwa Asset

Management (U.K.) plc and DLUM. There were no other intangible assets held on Exeter's unaudited interim balance sheet as at March 31, 2003 in respect of the Rights.
Structure of the Disposal
The Disposal is structured as a sale by EFM of the rights to manage the Funds with no transfer of tangible assets, liabilities or infrastructure from Exeter to New Star. The Disposal is, however, a transfer of an undertaking for employment law purposes. Prior to Completion a consultation process will commence with all Exeter employees who are affected by the Disposal and whose employment would transfer to New Star on Completion. New Star has informed EFM that following Completion it proposes to carry on the management of the Funds from its premises in London and that, as a consequence, employees engaged by EFM and other Exeter Group companies in the management of the Funds may be made redundant. Therefore EFM and other Exeter Group companies as appropriate will, as part of its consultation process, offer redundancy terms to affected employees. If any affected employees do not accept such terms and consequently transfer to New Star then, if they are made redundant by New Star within ten business days from Completion, such redundancy costs will be borne by EFM and other Exeter Group companies. It is estimated that total redundancy costs could amount to up to approximately GBP700,000.

Principal terms and conditions of the Disposal


Exeter has agreed to sell the Rights for a maximum cash consideration of GBP10.0 million in cash, of which up to GBP9.0 million will be paid on Completion and up to GBP1.0 million will be paid one year and ten days after Completion.
The precise level of consideration is based upon the values of the Funds at Completion and one year after Completion. If Completion had occurred on August 4, 2003 (being the latest practicable date prior to the date of this announcement), when the value of the Funds was GBP311.6 million, the full GBP9.0 million would have been payable.
In practice the maximum GBP9.0 million initial consideration will be payable if the Funds have a value on Completion of GBP300.0 million or more, being 95% of GBP315.7 million. If they are less than GBP300.0 million the initial consideration will reduce by the proportion that Funds at Completion are less than GBP315.7 million. It is a condition of Completion that the Funds are worth at least GBP236.8 million on Completion. Assuming, that Completion occurs, the minimum initial consideration therefore would be GBP6.8 million.
The maximum deferred consideration of GBP1.0 million can only be achieved if the maximum GBP9.0 million initial consideration is achieved and if the value of the Funds does not fall in the 12 months after Completion. If the value of the Funds falls by more than GBP45.0 million between Completion and such first anniversary then no deferred consideration is payable.
The Disposal Agreement contains warranties and restrictive covenants appropriate for a transaction of this type and indemnities by Exeter in favour of New Star in respect of the management of the Funds prior to Completion.
The FSA has consented to New Star Funds becoming ACD of the OEIC Sub-Funds andmanager of the Unit Trusts and to their re-branding with the name New Star. HSBC as the trustee of the Unit Trusts and the depositary of the Exeter Open-Ended Investment Company has also given its consent and will continue to perform such functions in relation to the Funds after Completion. The Disposal is further conditional on the Completion Proforma Revenue being not less than GBP2.03 million on August 29, 2003, which would equate to funds under management of GBP236.8 million.
In the course of negotiations leading up to the Disposal Agreement exchanged on Tuesday with New Star, Exeter has had discussions with a number of parties and has received unsolicited approaches with regard to an acquisition of the Rights. The levels of such offers have been such that the Directors consider that the value to Exeter justifies the cash consideration payable to Exeter for the Rights under the Disposal Agreement.
The Company has also received a preliminary approach for the entire issued share capital of Exeter, which was conditional on several factors, including the Disposal not proceeding. The Board has considered this approach in the light of its conditionality and the value that, as a share for share offer, it potentially puts on the Company as a whole. However, the Board concluded that as the Disposal represented greater certainty and value to the Company and Shareholders as a whole, it should proceed with the Disposal.
Use of Proceeds
It is not possible to state with any accuracy what the initial and deferred net cash proceeds will be. However, if the initial consideration were GBP9.0 million it is estimated that the initial net cash proceeds would be approximately GBP8.4 million after deduction of transaction expenses. As a result of the Disposal, Exeter also anticipates a tax charge of approximately GBP2.3 million and redundancy costs of up to approximately GBP700,000. Exeter intends to use the net proceeds (after transaction expenses, tax and redundancy costs) of approximately GBP5.4 million to strengthen the Group's balance sheet. The use of the net proceeds by the Continuing Exeter Group is restricted by the requirements of the FSA as described in the section below headed 'Financial effects of the Disposal'.

The Continuing Exeter Group and its prospects


The Continuing Exeter Group has agreed to withdraw from managing open-ended funds for two years, but it will continue to manage investment portfolios for its seven existing closed-ended investment company clients. At 31 March 2003 these portfolios had funds under management totaling approximately GBP152 million. Exeter expects to continue to perform this role for the foreseeable future. The continuing operating costs of the fund management operation will be significantly reduced as a result of the Disposal.

The main focus of Exeter will, however, be the further development of the Group's successful fund administration business. This is conducted through EFA, which currently provides services to 48 open-ended funds, Sinclair Henderson, which acts for 48 closed-ended investment company clients, and ACD Services, which provides services for three of EFA's clients. On Completion, it is proposed that EFA and New Star Funds will enter into the Service Agreements under which, EFA will continue to provide fund accounting services for the Funds for a minimum of six months following Completion and fund administration and registration services for such period as EFA and New Star Funds shall agree.


It is intended that two executive Directors, Ian Jolliffe, Unit Trust Director, and Christopher Whittingslow, Investment Director, will resign from the Board and as directors of the Group subsidiaries and that they will leave the employment of Exeter in October 2003.
The Directors believe that the Disposal will:
(a) crystallize the value of the rights to manage the Funds
(b) release financial and management resources thereby enabling the Continuing Exeter Group to focus its efforts on the further development of its successful fund administration business
(c) enhance the overall financial and trading prospects of the Continuing Exeter Group.
Consequently, the Directors are confident about the financial and trading prospects of the Continuing Exeter Group for at least the current financial year and consider the administration business to represent a significant asset to the Group with growth potential over the long term.
Financial effects of the Disposal
The level of distributable reserves in various Group subsidiaries will prevent the net proceeds of the Disposal from being distributed to Shareholders by way of a dividend. At the time of admission of the Company's shares to AIM in 1996, a reconstruction took place to remove minority holdings and to create a new holding company, Exeter. The reconstruction transactions resulted in a total carrying value of subsidiary companies within the accounts of this holding company of GBP12.1 million. Subject to minor increases in the share capital of subsidiary companies, this figure has remained relatively constant since 1996 and stood at GBP12.2 million at the Company's most recent financial year end, 30 September 2002.
The Disposal fixes the value of certain subsidiaries and, as a result, the Board has had to compare the carrying values of subsidiaries with the value achieved for the Disposal and the value of the Group's remaining businesses. In 1996, the bulk of the value of the subsidiary companies was attributable to EFM and EAM, the carrying values of which will be reassessed following the sales of the Rights by EFM and the resultant fall in the value of funds under management for EAM.
There is no impairment to the carrying value of EFM due to the amounts receivable by this subsidiary for the Disposal. Therefore, there will be no requirement for a writedown within the accounts of Exeter in respect of EFM.
However, the position relating to EAM is less favorable as the ongoing value of the business without the Funds is likely to be significantly less than its carrying value of GBP5.7 million. As a result, the Directors believe the carrying value of EAM should be reduced to net assets, which will require a writedown of approximately GBP3.4 million within Exeter's accounts.
The impairment review of subsidiary valuations will therefore affect distributable profits within Exeter even though the Disposal results in a consolidated profit for the Group. When combined with the writedown of EAM within the holding company's accounts, the operating results and the Disposal is likely to be insufficient to permit a distribution for this financial year ending 30 September 2003 and, based on the unaudited interim balance sheet as at March 31, 2003 for Exeter, a deficit of GBP1.2 million is expected to be carried forward.
The share premium account of GBP2.6 million could be reduced to eliminate the deficit and enable a distribution to be made. However, this would require both Shareholder and court approval and any future distributions would also depend upon future profitability.
The Group has given undertakings to the FSA that the net proceeds of the Disposal receivable by EFM (after deduction of all costs, which may legitimately be deducted, as well as the ongoing costs of operations), shall be retained within EFM until all complaints to the FOS regarding split capital investment trusts relating to the Group have been resolved. In addition, the company has agreed that neither it nor EAM will make any transfers of capital assets without FSA consent until such complaints are resolved.
However, the FSA has confirmed that these undertakings are wholly precautionary and it has not reached any concluded view as to whether the investigation underway discloses evidence that EAM has failed to meet its regulatory obligations or has thereby incurred liabilities, and FOS complaints against EFM remain undetermined.
In addition, the company has agreed that neither it nor EAM will make any distributions without FSA consent. The combined effect of such undertakings could prevent further payment of dividends by the Group if outstanding FOS complaints are not resolved by the time the Group would otherwise be in a position to pay such dividends or if FSA consent is not otherwise obtained.

Further information


A circular containing further details of the Disposal and a notice convening the

Extraordinary General Meeting of the Company will be posted to Shareholders

shortly.

Definitions


'ACD' Authorised Corporate Director
'ACD Services' ACD Services Limited, a wholly owned subsidiary of Exeter,

formerly known as DLUM


'Arbuthnot' Arbuthnot Securities Limited, joint financial adviser to

Exeter
'Board' or the directors of Exeter

'Directors'
'Completion' completion of the Disposal in accordance with the terms of the

Disposal Agreement


'Continuing the Exeter Group following Completion

Exeter Group'


'Disposal' the proposed disposal by EFM of its rights to manage the Funds

pursuant to the Disposal Agreement


'Disposal the conditional transfer agreement dated 5 August 2003 between

Agreement' Exeter, EFM and New Star


'DLUM' Duncan Lawrie Unit Management Limited
'EAM' Exeter Asset Management Limited, a wholly owned subsidiary of

Exeter
'EFA' Exeter Fund Administration Limited, a wholly owned subsidiary

of Exeter
'EFM' Exeter Fund Managers Limited, a wholly owned subsidiary of

Exeter
'Exeter', Exeter Investment Group plc

'Exeter

Investment



Group' or

'Company'


'Exeter Group' Exeter Investment Group and its subsidiary undertakings

or 'Group'


'Extraordinary the extraordinary general meeting of the Company convened for

General 10.00 a.m. on 26 August 2003

Meeting'
'FOS' the Financial Ombudsman Service
'FSA' the Financial Services Authority
'HSBC' HSBC Bank plc
'Interim the unaudited interim statement for Exeter for the six months

Statement' ended 31 March 2003 announced on 26 May 2003


'Funds' or the Unit Trusts and the OEIC Sub-Funds, the rights to

'Fund' management of which are to be disposed of by EFM


'New Star' New Star Asset Management Group Limited
'New Star New Star Investment Funds Limited, a wholly owned subsidiary of

Funds' New Star


'OEIC' open-ended investment company
'OEIC the sub-funds of the Exeter Open Ended Investment Company named

Sub-Funds' Exeter Zero Portfolio and Exeter Hidden Value Portfolio


'Rights' the rights to manage the Funds
'Service the agreements to be entered into between EFA and New Star

Agreements'


'Shareholders' holders of Shares
'Shares' ordinary shares of 10p each in the capital of the Company
'Sinclair Sinclair Henderson Limited, a wholly owned subsidiary of

Henderson' Exeter


'Splits the UK split capital closed-end investment fund sector

Sector'
'TR Van Oss' TR Van Oss, joint financial adviser to Exeter


'Unit Trusts' or the unit trusts named Exeter Capital Growth Fund, Exeter

'Unit Trust' Smaller Companies Unit Trust, Exeter Fixed Interest Fund,

Exeter Managed Growth Fund, Exeter Pacific Growth Fund, Exeter

Global Opportunities Fund, Exeter European Fund, Exeter Money



Market Fund, Exeter Zero Preference Fund, Exeter Equity Income

Fund and Exeter High Income Unit Trust


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