The Merchants Trust Plc
Annual Report 2001

Plain-text annual report

Report and Accounts for the year ended 31st January 2001 Dresdner RCM Global Investors I n v e s t m e n t Tr u s t s T h e M e r c h a n t s Tr u s t P LC www.merchantstrust.co.uk C o n t e n t s Investment Objective Benchmark Financial Highlights Investor Information Contact Details Chairman’s Statement Historical Record Geographical Distribution Thirty Largest Holdings Investment Managers’ Review United Kingdom Listed Holdings Performance Attribution Analysis Distribution of Total Assets Performance Graphs Risk Review Statement of Total Return Balance Sheet Cash Flow Statement Statement of Accounting Policies Notes to the Accounts Report of the Auditors Statement of Directors’ Responsibilities Corporate Governance Directors and Management Directors’ Report Notice of Meeting Form of Proxy 2 2 2 3 5 6 8 8 9 10 12 13 14 15 16 17 18 19 20 21 33 34 34 37 38 43 1 The Merchants Trust PLC I n v e s t m e n t O b j e c t i v e To provide an above average level of income and income growth together with long term growth of capital through a policy of investing mainly in higher yielding UK FTSE 100 companies. B e n c h m a r k The Trust’s investment performance is assessed by comparison with other investment trusts within the UK Growth and Income sector. In addition it is benchmarked against the FTSE 100 Index, reflecting the emphasis within the portfolio, as well as the FTSE 350 Higher Yield Index, reflecting the Trust’s high yield objective. F i n a n c i a l H i g h l i g h t s Revenue Revenue Available for Ordinary Dividend Earnings per Ordinary Share Dividend per Ordinary Share Key Data as at 31st January Total Net Assets Net Asset Value per Ordinary Share Ordinary Share Price Discount of net asset value to Ordinary Share Price For the years ended 31st January 2001 2000 % change £21,546,258 £22,590,052 £16,714,573 £18,344,607 16.35p 16.40p 17.93p 16.00p £474,906,733 £391,495,283 463.5p 411.25p 11.3% 381.4p 337.0p 11.6% −4.6 −8.9 −8.8 +2.5 +21.3 +21.5 +22.0 — 2 I n v e s t o r I n f o r m a t i o n Results Half-year announced mid-September. Full-year announced mid-March. Report and Accounts posted to Shareholders mid-April. Annual General Meeting held mid-May. Ordinary Dividends First quarterly paid late August. Second quarterly paid late November. Third quarterly paid late February. Final paid late May. Preference Dividends Payable half-yearly 1st August and 1st February. Interest on 4% Perpetual Debenture Stock Payable half-yearly 1st May and 1st November. Dividend Payment Schedule Year to: January 1997 January 1998 January 1999 January 2000 January 2001 First Interim Second Interim Third Interim Final First Interim Second Interim Third Interim Final First Interim Second Interim Third Interim Final First Interim Second Interim Third Interim Final First Interim Second Interim Third Interim Final (proposed) 3.25p 3.25p 3.25p 3.90pø 2.35p 4.65p 3.50p 3.75p 3.75p 3.75p 4.34p‡ 3.75p 3.95p 3.95p 4.05p 4.05p 4.10p 4.10p 4.10p 4.10p ø‡ See page 8 “Historical Record” for details of FID enhancements paid. Dividend Payment Date 23.08.96 18.11.96 21.02.97 23.05.97 09.06.97 18.11.97 26.02.98 20.05.98 21.08.98 18.11.98 22.02.99 19.05.99 24.08.99 10.11.99 22.02.00 18.05.00 24.08.00 10.11.00 16.02.01 17.05.01 3 The Merchants Trust PLC I n v e s t o r I n f o r m a t i o n Market and Portfolio Information The Company’s Ordinary Shares are listed on the London Stock Exchange. The market price, price range, gross yield and net asset value are shown daily in the Financial Times and The Daily Telegraph. The net asset value of the Ordinary Shares is calculated weekly and published on the London Stock Exchange Primark Service. The geographical spread of investments and ten largest holdings are published monthly on the London Stock Exchange Primark Service. They are also available to any enquirer from the Investment Trust Helpline or the Dresdner RCM website: www.dresdnerrcm-its.co.uk. Share Prices The share prices quoted in London Stock Exchange Daily Official List for 31st January 2001 were 4061⁄4p-4161⁄4p. For CGT indexation purposes at 31st March 1982 the share price, after adjustment for bonus issues, was 48.75p. Savings Plan The Dresdner RCM Global Investors Investment Trusts Savings Plan provides a convenient and economical way for shareholders to increase their existing holdings. Investments can be in the form of a regular payment or an individual lump sum and there is an arrangement for the reinvestment of dividends. There are also facilities for selling and switching. Investment Trust Maxi ISA Shareholders can invest in the shares of the Trust through the Dresdner RCM Investment Trust ISA. Full details are available from the Investment Trust Helpline on 020 7475 5832. Website Further information about the Trust is available on the Dresdner RCM website www.merchantstrust.co.uk. Dresdner RCM Global Investors Dresdner RCM Global Investors is the global asset management arm of the Dresdner Bank Group, providing management and advisory services with respect to over £57.7 billion of assets. It manages ten listed investment trusts, including the Merchants Trust PLC, with aggregated total assets of some £1.95 billion as at 31st January 2001. Dresdner RCM Global Investors gives enhanced access to a full range of global, regional and country investment capabilities and asset allocation expertise, assisted by their Grassroots market research network throughout Europe and the rest of the world. It is backed by the financial strength and stability of the Dresdner Bank Group – one of the world’s largest financial institutions with a presence in 70 countries around the globe. According to a survey published by Merrill Lynch in April 2000 your Trust’s total expenses of 0.58% as a proportion of total assets compared with a UK Growth and Income peer group average of 0.85%. Payment of Dividends Direct to Bank Accounts Cash dividends will be sent by cheque to first-named shareholders at their registered address together with a tax voucher. Dividends may be paid directly into Shareholders’ bank accounts. Details of how this may be arranged can be obtained from Capita IRG. Dividends mandated in this way are paid via BACS (Bankers’ Automated Clearing Services). Tax vouchers will then be sent directly to Shareholders at their registered address unless other instructions have been given. Association of Investment Trust Companies (AITC) The Company is a member of the AITC, which provides a range of literature including fact sheets and a monthly statistical service. Copies of these publications can be obtained from the AITC, Durrant House, 8-13 Chiswell Street, London EC1Y 4YY. Category: UK Growth and Income ‘its’ Campaign The Company is a supporter of the Association of Investment Trust Companies’ ‘its’ campaign. 4 C o n t a c t D e t a i l s Shareholder Enquiries Capita IRG plc are the Company’s registrars and maintain the share register. In the event of queries regarding their holdings of shares, lost certificates, dividend cheques, registered details, etc., shareholders should contact them on 020 8639 2000. Changes of name and address must be notified to the registrars in writing. Any general enquiries about the Company should be directed to the Company Secretary, The Merchants Trust PLC, 10 Fenchurch Street, London EC3M 3LB. Managers and Advisers Fund Manager Nigel Lanning AUKSIP ACIS Director European Equities, Dresdner RCM Global Investors (UK) Ltd. Secretary and Registered Office Nicola Schrager von Altishofen ACIS 10 Fenchurch Street, London EC3M 3LB Telephone: 020 7475 2700 Deputy Secretary Kirsten Salt BA (Hons) ACIS Registered Number 28276 Registrars and Transfer Office Capita IRG plc Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TU Telephone: 020 8639 2000 Auditors PricewaterhouseCoopers, Chartered Accountants Southwark Towers 32 London Bridge Street, London SE1 9SY Bankers Barclays Bank PLC Lloyds TSB Bank plc Kleinwort Benson Private Bank Limited Stockbroker Cazenove & Co. The Merchants Trust PLC website www.merchantstrust.co.uk Dresdner RCM Investment Trust Helpline 020 7475 5832 Dresdner RCM website www.dresdnerrcm-its.co.uk 5 The Merchants Trust PLC C h a i r m a n ’ s S t a t e m e n t In this my first report to shareholders as Chairman average for the UK Growth and Income sub- of the Trust, I should start by paying tribute to my sector as calculated by Datastream. The Trust’s predecessor, Colin Black, who retired in May of net dividend yield of 4.4% at 374p, is last year. Colin was Chairman for seven of his approximately 0.7% above the sub-sector eight years as a Director. In his time on the Board average. total net assets increased from £220m to nearly Net revenue earnings per ordinary share £400m and earnings per share grew from 10.9p were 16.35p. Taking account of revenue special to 17.9p. His wise advice and deep knowledge of dividend receipts of 1.21p, the underlying investment trusts will be missed by the Board and earnings per share were 15.14p. These figures the Managers. We wish him a long and happy compare with 17.93p per share recorded in retirement. Results 1999/2000, or 16.62p per share after adjusting for revenue special dividend receipts in that year. In the last annual report, we stated that whilst the Shareholders will recall that the year ended 31st Trust would adhere rigorously to its income January 2000 was characterised by the rapid growth objectives, its investment policy would appreciation of the technology, media and accommodate a broader spread of companies telecoms sectors at the expense of the more than previously. This new strategy is reflected in established companies in which your Trust the 8.8% fall in underlying earnings in the latest typically invests. These trends were reversed in year. the year under review. Investors have given much greater attention to basic investment issues, Dividends such as cashflow, dividends and stability of The Board is recommending a final dividend of earnings – factors which have always been the 4.1p per share, giving a total of 16.4p for the full cornerstone of the Merchants portfolio, given the year. On this basis dividends will have increased Trust’s long term dividend growth objective. by 2.5% in 2000/01 without any material The year ended 31st January 2001 recourse to the Trust’s Revenue Reserves which produced a total return to shareholders of 25.8%. now stand at £10.2m. The underlying rate of At the year end the net asset value per share inflation in the UK during the year was 1.8%, so stood at 463.5p, representing an increase of that the recommended dividend sustains the 21.5% over the 381.4p recorded a year Trust’s record of real dividend growth. previously. This compares with capital growth of 0.5% recorded by the FTSE 100 Index and Issue of Secured Bonds 24.6% recorded by the FTSE 350 Higher Yield The decision to increase the Trust’s borrowings Index. (The latter index should, however, be in December 1999 proved to be timely in two treated with caution, since it does not include any respects. The £30 million raised in this way telecoms stocks and is thus not representative of entailed an interest cost of 6.1% per annum over the market as a whole). The Trust’s capital the bonds’ 30 year life. This capital raising returns for the year are some 6% above the preceded a sharp rise in corporate borrowing 6 C h a i r m a n ’ s S t a t e m e n t spreads, which increased significantly the cost of prompt action taken to cut interest rates, both in debt finance to all non-government borrowers. the US and the UK, will have been sufficient to Moreover the investment of these funds last offset these negative trends. Spring in a number of undervalued high yielding In the past when investors have had to equities has already enhanced returns to contend with the conflicting influences of slower shareholders in a meaningful way. earnings growth and falling interest rates, it is the latter that have held sway. With interest rates Repurchase of Shares forecast to be cut further over the course of 2001, As at the date of this report the Company has there is every hope that established UK company repurchased and cancelled a total of 175,000 shares should prove to be relatively attractive shares pursuant to the authorisation granted by investments, not least because the UK market shareholders at last year’s Annual General appears to be good value by global standards. Meeting. The Board is proposing that this The Trust is well placed to take advantage of this. authority be renewed at the Annual General Meeting. Prospects Dividend Forecast In arriving at a dividend forecast the Board has taken due account of all these issues, as well as For a number of reasons, the US economy stalled the strength of the Trust’s Revenue Reserves. in the closing months of last year and this has The Directors forecast that, in the absence of been reflected in weaker stockmarkets unforeseen circumstances, dividend payments throughout the world, including the UK. For the for 2001/2 will total at least 16.8p per share, an first time in nearly a decade, a number of increase of just under 2.5%. forecasters are questioning the sustainability of economic growth in the US. It is unclear at Hugh Stevenson present whether this represents a serious Chairman impediment to growth world-wide or whether the 5th April 2001 7 The Merchants Trust PLC H i s t o r i c a l R e c o r d Revenue and Capital 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Years ended 31st January Revenue (£000’s) Earnings per share (net) Paid net per Share Tax Credit per Share Gross Ordinary Dividend Total Net Assets (£000’s) Net Assets attributable to Ordinary Capital (£000’s) Net Asset Value per Ordinary Share NAV Total Return (%)× Retail Price Index Increase (%)d Notes 13,823L 14,456L 13,563†*L15,514L 17,466L 17,351L 18,769L 20,399L 20,119L 22,590 21,546 10.46p† 10.92p† 10.20p†* 11.04p 11.00p 2.75p 13.75p 10.00p 3.30p 13.30p 9.00p 3.00p 12.00p 10.60p 3.31p 13.91p 12.12p 11.50p 2.88p 14.38p 12.41p 12.25p 3.06p 15.31p 13.66p 14.88p 13.65pø 14.25p 3.56p 17.81p 17.06p 3.41p# 15.21p 17.93p 15.59p‡ 16.00p 1.78p 17.78p 19.49p 3.90p§ 16.35p 16.40p 1.82p 18.22p 197,514† 220,007† 242,331†*311,127 253,604 303,934L 335,212 421,504 426,037 391,495 474,907 196,336† 218,829† 241,153†*309,949 252,426 302,756L 334,034 420,326 424,859 390,317 473,729 191.9p† 213.9p† 235.7p†* 302.9p −10.7 +8.5 +16.7 +5.6 +33.2 +2.8 +15.1 +3.2 246.7p −14.8 +2.8 295.9L +24.9 +2.8 326.4p +14.9 +3.1 410.8p +30.2 +2.5 415.2p +4.9 +2.6 381.4p −4.3 +2.1 463.5p +25.8 +1.8 L Restated in accordance with Financial Reporting Standard 16 “Current Taxation”. † Restated to reflect the change in accounting policy during the year ended 31st January 1994 for finance costs of long-term borrowings. * Restated to reflect the change in accounting policy during the year ended 31st January 1994 for dividends and interest receivable on investments. x NAV total return reflects both the change in net asset value per ordinary share and the net ordinary dividends declared in respect of each year. ø The total distribution for 1997 was 13.65p. This was made up of interim dividends of 9.75p, a final foreign income dividend (FID) of 2.00p and a final ordinary dividend of 1.90p. The final ordinary dividend was enhanced by 0.40p to ensure no shareholder would be adversely affected by the FID. Excluding this enhancement the “normal” distribution for 1997 was therefore 13.25p. # Inclusive of 0.50p tax credit on the FID which is notional and not repayable. ‡ The total distribution for 1999 was 15.59p. This was made up of interim ordinary dividends of 8.86p, an interim foreign income dividend (FID) of 2.98p and a final ordinary dividend of 3.75p. The FID was enhanced by 0.59p to ensure that no shareholder would be adversely affected by receiving this form of dividend. Excluding this enhancement the “normal’ distribution for 1999 was therefore 15.00p. § Inclusive of 0.74p tax credit on the FID which is notional and not repayable. d RPIX – excludes the effect of mortgage rates. G e o g r a p h i c a l D i s t r i b u t i o n 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Percentage of Portfolio Investments United Kingdom North America 95.7 4.3 98.8 1.2 99.1 0.9 99.5 0.5 99.5 0.5 99.6 0.4 99.6 0.4 99.8 0.2 99.8 0.2 99.9 100.0 0.1 — 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 8 T h i r t y L a r g e s t H o l d i n g s BP Amoco British Telecommunications Shell GlaxoSmithkline Vodafone Royal Bank of Scotland *Standard Chartered Lloyds TSB Bank of Scotland Imperial Tobacco Royal & Sun Alliance Wimpey CGNU Scottish & Southern Energy Barclays Halifax Alliance & Leicester Wolseley Boots Legal & General Scottish & Newcastle BOC Marconi Sainsbury (J) Abbey National Anglo American Associated British Ports United Utilities Allied Domecq Great Universal Stores at 31st January 2001 Unrealised Gain (Loss) over Book Cost £’000s 6,447 5,742 8,827 5,489 (4,847) 9,177 3,078 378 2,723 1,112 (622) 1,783 3,229 (732) 5,816 (1,887) 2,351 2,263 (604) 375 (4,479) (37) (788) 280 897 1,343 1,428 (2,036) 2,916 134 Valuation £’000s 38,547 29,192 26,790 23,261 18,634 16,270 14,878 13,300 12,495 11,050 11,046 11,025 10,571 10,566 10,379 10,265 9,796 9,555 8,456 8,388 8,010 8,000 7,946 7,942 7,731 7,475 7,380 7,296 7,020 6,885 % 6.55 4.97 4.56 3.96 3.17 2.77 2.53 2.27 2.13 1.88 1.88 1.88 1.81 1.81 1.78 1.76 1.67 1.63 1.44 1.43 1.36 1.36 1.35 1.35 1.32 1.27 1.26 1.24 1.20 1.17 *Includes £2,724,425 of Convertible Bonds £380,149 64.76 9 The Merchants Trust PLC I n v e s t m e n t M a n a g e r s ’ R e v i e w Economic Background second graph on this page that a different picture The year 2000 proved to be another year of emerges. Further, the FTSE 350 Higher Yield progress for the UK economy with provisional Index recorded consistent progress throughout figures showing growth of nearly 3%. This the year under review. continued the sequence of unbroken expansion dating back to 1992. Perhaps even more remarkably inflation has remained well under control, especially in the light of the rapid increase in crude oil prices during the last year. In fact inflation has now stayed below the Monetary Policy Committee’s 2.5% target for nearly two years. Thus, although base rates rose to 6% in February 2000, the MPC did not consider it necessary to raise them above that level. Furthermore, they were reduced to 5.75% in February of this year. The reduction in interest rates in the UK followed a marked easing in US monetary policy involving two cuts of 0.5% in the Fed Funds rate in the early weeks of 2001. It appears that US growth slowed considerably in the closing months of 2000, giving rise to fears of recessionary conditions in the US and elsewhere in 2001. To date the evidence from UK Government statistics and from UK company news is that the slowdown is chiefly affecting the technology sector. Whilst there are signs of a slowdown elsewhere, progress is still being recorded as far as the main economic variables are concerned. In this light it seems feasible that economic growth in the UK will continue in 2001, albeit at a slower rate than that seen recently. This should help to sustain the level of corporate profits and dividends during 2001. Market Trends The UK equity market, as a whole, struggled to make meaningful progress over the course of 2000/01. Over the last financial year a trading range varying from 6000 to 6800 proved to be reasonably robust for the FTSE 100 Index. If one ignores the impact of the Technology, Media and Telecoms sectors (TMT), one can see from the 10 FTSE 100 - PRICE INDEX From 31/1/00 to 31/1/01 Daily 6900 6800 6700 6600 6500 6400 6300 6200 6100 6000 5900 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN Source: DATASTREAM In terms of sector contribution to returns, it is notable that there has been an almost complete reversal of the trends seen in 1999/ 2000, as the Chairman has said. Specifically, the leading sectors were Tobacco (+83.4%), Insurance (+53.9%) and Banks (+49.9%). The characteristics of financial strength evidenced in these sectors show a marked contrast to those exhibited by the weakest performers over the latest year. The latter included IT Software (-41.8%), Telecoms (-33.4%) and IT Hardware FTSE All Share Ex-TMT (Indexed to 100) 31/1/00 to 31/1/01 115 110 105 100 95 90 85 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN Source: DATASTREAM I n v e s t m e n t M a n a g e r s ’ R e v i e w (-30.3%). All of the leading sectors are renowned of shares where it was considered profit for their dividend paying credentials and, as a forecasts had run ahead of reasonable consequence, have made major contributions to expectations. These sales included BAE the Trust’s performance in the last twelve Systems (formerly British Aerospace) and months. Although there have been significant Reuters. Further, towards the end of the financial weaknesses in all security values since the year year, profits were also taken in companies such end, these broad sector trends have as Johnson Matthey, Prudential and Smith and nevertheless been sustained in relative terms. Nephew, where the share ratings appeared to be Portfolio Changes Shareholders will recall that at the 1999/2000 year end the Trust held nearly £27m, or some 5% of total assets, in short dated gilt-edged securities. These investments represented a temporary home for the funds raised through the December 1999 bond issue. In early March of last year, two-thirds of these holdings were sold to facilitate purchases of a number of high yielding UK equities which had suffered a sharp fall in their ratings. In particular, these purchases included Associated British Foods, Anglo American, BP Amoco, Burmah, Imperial Tobacco, Royal Bank of Scotland and Scottish & Newcastle. The up with events. Additionally, the last year was a good one for take-overs amongst the Trust’s holdings. As a result there were disposals of Burmah, NatWest Bank, Tarmac, Thames Water and United Assurance as well as the bids for Beazer and Abbey National, which were current at the year end. Lastly, it is pleasing to report the sale of one of the remaining unquoted investments, O’Connor, which largely completes our long term objective to invest only in listed stocks in this category. The remaining unquoted investment, valued at £51,458, is not sufficiently material to warrant a separate listing in the latest accounts. remaining gilt-edged holdings were Future Policy subsequently sold in June. At present, the economic uncertainties for 2001 Looking at other purchases made during are overlaid by the probability of a general the last year, they can broadly be divided into two election in the UK. Whilst this climate demands categories. Firstly there were several shares great vigilance from a fund management which were forecast to produce a stable and viewpoint, the UK equity market still exhibits growing income, including BAA, British Land and many attractive qualities. In general, companies Shell. Secondly, there were some more cyclical are well run by historic standards and there is companies where the prospective fall in interest widespread acceptance of the need to target rates was expected to have a positive impact on shareholders’ best long term interests. Whilst the valuations. These included Alliance & Leicester, fall in new economy shares means that value is Bank of Scotland and Wolseley. In addition to now to be found in some of these growth areas, in these, the Trust purchased a holding in Man general best advantage seems most in evidence Group, the specialist fund management group. amongst the established blue chip companies in Amongst the “new” economy sectors, the Trust which the Trust typically invests. With interest exploited profitable opportunities in Alliance rates appearing to be on a downward path, the Unichem, Dimension Data, Energis and Misys. managers will continue to seek good investment With growing uncertainties regarding the opportunities in the months ahead. economic outlook, there were a number of sales 11 The Merchants Trust PLC U n i t e d K i n g d o m L i s t e d H o l d i n g s at 31st January 2001 Value (£) 38,546,750 29,192,000 26,790,000 23,261,046 18,634,000 16,270,000 14,877,925 13,300,000 12,495,000 11,050,000 11,046,000 11,025,000 10,571,100 10,566,000 10,378,750 10,264,800 9,795,500 9,555,000 8,456,000 8,387,500 8,010,000 8,000,000 7,946,422 7,942,000 7,731,340 7,475,400 7,380,000 7,296,000 7,019,883 6,885,000 6,870,000 6,797,250 6,697,500 6,587,500 6,556,000 6,532,000 6,456,000 6,350,000 6,318,866 6,247,500 6,229,600 5,980,000 5,900,000 5,880,000 5,839,500 Principal Activities Oil exploration and production Telecommunications Oil and gas Pharmaceuticals Telecommunications Banking Banking Banking Banking Tobacco Insurance Housebuilding Life & general insurance Electricity Banking Banking Banking Building materials distribution Retailing Life & general insurance Brewing and leisure Industrial gases Telecom equipment Food retailing Banking Mining Transportation & storage Water Spirits and food Retailing Property Betting & hotels Electrical equipment Tobacco Mining Mining Retailing Chemicals Housebuilding Housebuilding Banking Engineering Media Airports and retailing Engineering BP Amoco British Telecommunications Shell GlaxoSmithkline Vodafone Royal Bank of Scotland *Standard Chartered Lloyds TSB Bank of Scotland Imperial Tobacco Royal & Sun Alliance Wimpey CGNU Scottish & Southern Energy Barclays Halifax Alliance & Leicester Wolseley Boots Legal & General Scottish & Newcastle BOC Marconi Sainsbury (J) Abbey National Anglo American Associated British Ports United Utilities Allied Domecq Great Universal Stores Land Securities Hilton Group FKI Gallaher Rio Tinto Billiton Dixons ICI Beazer Wilson Connolly Bradford & Bingley Morgan Crucible British Sky Broadcasting BAA BBA 12 U n i t e d K i n g d o m L i s t e d H o l d i n g s at 31st January 2001 #BAE Systems United Business Media Kingfisher Cable & Wireless Prudential Corporation Scottish Power UK Amvescap Great Portland Estates EMI Aggregate Industries Tate & Lyle Granada Lattice Reuters Associated British Foods †Airtours Man Tomkins P & O Princess Cruises British Airways Corus Johnson Matthey P&O Safeway Severn Trent WPP RMC Carlton Communications Value (£) 5,827,500 5,824,000 5,755,750 5,583,860 5,515,850 5,500,250 5,446,800 5,310,300 5,244,750 5,094,375 4,992,000 4,844,000 4,593,750 4,420,000 4,410,000 3,932,262 3,905,000 3,784,000 3,475,000 3,472,500 3,064,750 3,013,637 2,987,500 2,965,000 2,545,452 2,205,000 1,175,636 880,169 £591,159,223 Principal Activities Aerospace & defence Media Retailer Telecommunications Life and general insurance Electricity Fund management Property Media Building materials Sugar TV and media Gas distribution Media Food manufacturing Travel Fund management Holding company Leisure Airline Steel Chemicals and metals Ports and logistics Food retailing Water Advertising Building materials TV and media †Consists of Convertible Bonds *Includes £2,724,425 of Convertible Bonds #Consists of Convertible Preference shares P e r f o r m a n c e A t t r i b u t i o n A n a l y s i s For the year ended 31st January 2001 Capital return on FTSE 100 Index Relative return from Portfolio Less: Expenses charged to capital Net relative return from portfolio Change in total assets Impact of gearing Increase due to repurchase of shares Increase in Net Asset Value per Ordinary Share Computed relative to FTSE 100 % 17.4 (1.4) 13 % 0.5 16.0 16.5 4.8 0.2 21.5 The Merchants Trust PLC D i s t r i b u t i o n o f T o t a l A s s e t s at 31st January 2001 Total Assets (less creditors falling due within one year) £586,989,188 (2000: £503,729,701) Percentage of Total Assets 2001 2000 Equities (including convertibles) Resources Mining Oil and gas Basic Industries Chemicals Construction & building materials Steel & other metals General Industrials Aerospace & defence Engineering & machinery Non-Cyclical Consumer Goods Beverages Food products & process Health Pharmaceuticals Tobacco Cyclical Services General retailers Leisure, entertainment & hotels Media & photography Restaurants, pubs & breweries Transport Non-Cyclical Services Food & drug retail Telecommunication services Utilities Electricity Gas distribution Water Financials Banks Insurance Life assurance Real estate Speciality & other financials Information Technology Information technology hardware Total Equities Fixed Interest Government Securities Total Fixed Interest Net Current Liabilities Total Assets 14 3.5 11.1 14.6 3.0 6.7 0.5 10.2 1.0 3.8 4.8 1.2 1.5 — 4.0 3.0 9.7 4.6 4.0 4.2 — 4.0 16.8 1.9 9.1 11.0 2.7 0.8 1.7 5.2 17.2 1.9 4.2 2.1 1.6 27.0 1.4 1.4 100.7 0.0 0.0 (0.7) 100.0 2001 2000 2001 2000 14.6% 10.1% Resources 10.2% 10.7% Basic Industries 2001 2000 4.8% 5.0% General Industrials 9.7% 13.1% Non-Cyclical Consumer Goods 16.8% 11.3% Cyclical Services 11.0% 15.9% Non-Cyclical Services 2001 2000 2001 2000 2001 2000 2001 2000 5.2% 8.0% Utilities 2001 2000 Financials 2001 1.4% 2000 0.0% 27.0% 21.5% Information Technology 1.2 8.9 10.1 3.9 5.8 1.0 10.7 1.7 3.3 5.0 1.9 2.1 1.2 4.7 3.2 13.1 2.1 1.8 4.5 2.0 0.9 11.3 2.9 13.0 15.9 4.3 1.7 2.0 8.0 12.1 1.9 3.5 2.8 1.2 21.5 0.0 0.0 95.6 2001 0.0% 2000 5.3% Fixed interest 5.3 5.3 (0.9) 100.0 P e r f o r m a n c e G r a p h s 10 year record—as at 31st January Merchants Total Return compared to FTSE 100 Total Return 500 450 400 350 300 250 200 150 100 50 0 Merchants NAV total return Merchants share price total return FTSE 100 total return 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 (Rebased to 100, net income reinvested) Source: Datastream Merchants Net Dividend Growth compared to Inflation UK Retail Price Index Dividend Growth Rate 190 180 170 160 150 140 130 120 110 100 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 *excluding FID enhancements (see page 9 for details) (Rebased to 100) Source: Dresdner RCM/Datastream Merchants Share Price Discount/Premium to Net Asset Value 10 Premium 5 0 -5 -10 Discount -15 Discount/Premium to Net Asset Value 91 92 93 94 95 96 97 98 99 00 01 15 The Merchants Trust PLC R i s k R e v i e w Financial Reporting Standard 13—Derivatives dedicated fund manager has the responsibility for and Other Financial Instruments: Disclosure monitoring the existing portfolio selection in FRS 13 requires entities to disclose narrative and accordance with the Company’s investment numerical information about the financial objectives and seeks to ensure that individual instruments that they use. stocks meet an acceptable risk reward profile. The purpose of these disclosures is to ensure that enough information is provided to Liquidity risk investors to enable them to make their own The Company’s assets mainly comprise decisions about the risk profile of the entity in realisable securities, which can be sold to meet which they have invested and to assess for funding requirements if necessary. Short-term themselves the impact of the use of financial flexibility is achieved through the use of overdraft instruments (investments, cash/overdraft and facilities. borrowings) on the performance of the entity. Numerical disclosures are listed in Note Interest rate risk 20 to the Accounts. These disclosures are in line The Company invests predominantly in equities, with the requirements of FRS 13. the values of which are not directly affected by As an investment trust, the Company changes in prevailing market interest rates. invests in securities for the long term. Accordingly The Company finances its operations it is, and has been throughout the year under through a mixture of share capital, retained review, the Company’s policy that no short term earnings and long term borrowings. trading in investments or other financial instruments shall be undertaken. Foreign currency risk The main risks arising from the The Company invests predominantly in UK Company’s financial instruments are market listed securities. Accordingly, the income and price risk, liquidity risk and interest rate risk. The capital value of the Company’s investments are overall risk profile of the Company and the not materially affected by exchange rate policies adopted to manage risk remain movements. unchanged from the prior year. Credit risk Market price risk As from February 2000 the Trust has Market price risk arises mainly from the commenced stock lending in order to generate uncertainty about future prices of financial additional income. The risk of default is managed instruments held. It represents the potential loss by holding collateral, in the form of letters of the Company might suffer through holding credit, G7 bonds and G7 equities amounting to market positions in the face of price movements. 105% of the mid value of the stock on loan. The The Board meets regularly to consider the asset level of collateral required is recalculated on a allocation of the portfolio in order to evaluate the daily basis. risk associated with particular industry sectors. A 16 S t a t e m e n t o f T o t a l R e t u r n for the year ended 31st January 2001 2001 £ 2001 £ 2001 £ 2000 £ 2000 £ Revenue Capital Total Revenue Capital 2000 £ Total Note 8 1 2 3 Net gains (losses) on investments Exchange rate differences Income Investment management fee Expenses of administration Net return before finance costs and taxation — 89,852,702 89,852,702 — (30,408,125) (30,408,125) — 1,158,076 1,158,076 — (743) (743) 21,546,258 — 21,546,258 22,590,052 — 22,590,052 (826,964) (1,535,791) (2,362,755) (779,436) (1,447,525) (2,226,961) (642,557) — (642,557) (551,804) — (551,804) 20,076,737 89,474,987 109,551,724 21,258,812 (31,856,393) (10,597,581) Finance costs of borrowings 4 (3,134,815) (5,723,936) (8,858,751) (2,650,058) (4,877,533) (7,527,591) Return on ordinary activities before taxation 16,941,922 83,751,051 100,692,973 18,608,754 (36,733,926) (18,125,172) Taxation 5 (184,352) 184,352 — (221,150) 220,411 (739) Return on ordinary activities after taxation for the financial year Dividends on Preference Stock Return attributable to 16,757,570 83,935,403 100,692,973 18,387,604 (36,513,515) (18,125,911) (42,997) — (42,997) (42,997) — (42,997) Ordinary Shareholders 16,714,573 83,935,403 100,649,976 18,344,607 (36,513,515) (18,168,908) Dividends on Ordinary Shares Transfer to (from) reserves Return per Ordinary Share Net Asset Value Per Ordinary Share Per Preference Stock Unit 6 (16,769,646) — (16,769,646) (16,372,630) — (16,372,630) (55,073) 83,935,403 83,880,330 1,971,977 (36,513,515) (34,541,538) 16.35p 82.09p 98.44p 17.93p (35.68)p (17.75)p 7 15 463.5p 100.0p 381.4p 100.0p The revenue column of this statement is 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 year. The Notes on pages 21 to 32 form part of these Accounts. 17 The Merchants Trust PLC B a l a n c e S h e e t Fixed Assets Investments Current Assets Debtors Cash at bank Note 8 10 10 7,771,150 1,044,517 8,815,667 at 31st January 2001 2001 £ 2001 £ 2000 £ 591,210,681 508,246,237 18,962,194 1,586,682 20,548,876 (25,065,412) (4,221,493) (4,516,536) 586,989,188 503,729,701 Creditors—Amounts falling due within one year 10 (13,037,160) Net Current Liabilities Total Assets less Current Liabilities Creditors—Amounts falling due after more than one year 10 (112,082,455) (112,234,418) Total Net Assets Capital and Reserves Called up Share Capital: Ordinary Preference Capital Redemption Reserve Share premium account Capital Reserves: Realised Unrealised Revenue Reserve Shareholders’ Funds Analysis of Shareholders’ Funds Equity interests Non-equity interests Approved by the Board of Directors on 5th April 2001 and signed on its behalf by: 474,906,733 391,495,283 25,550,984 25,582,234 1,178,000 1,178,000 26,728,984 26,760,234 31,250 39,809 — 39,809 384,849,145 53,024,144 347,584,119 6,822,647 437,873,289 354,406,766 10,233,401 10,288,474 474,906,733 391,495,283 473,728,733 390,317,283 1,178,000 1,178,000 474,906,733 391,495,283 11 11 12 13 13 14 16 15 15 Hugh Stevenson   Directors  Joe Scott Plummer The Notes on pages 21 to 32 form part of these Accounts 18 C a s h F l o w S t a t e m e n t Net cash inflow from operating activities Servicing of finance Interest paid Preference dividends paid for the year ended 31st January 2001 2001 £ 2001 £ 2000 £ 17,748,009 20,942,289 Note 18 (8,850,396) (42,997) (7,340,354) (42,997) Net cash outflow on servicing of finance (8,893,393) (7,383,351) Taxation UK income tax repaid Advance corporation tax recovered Net tax repaid Investing Activities 865,492 — 47,545 142,667 190,212 865,492 Payments to acquire fixed asset investments Proceeds on disposal of fixed asset investments (334,875,548) 340,271,533 (444,356,135) 412,048,368 Net cash inflow (outflow) from financial investment 5,395,985 (32,307,767) Equity dividends paid Net cash outflow before financing Financing Increase (decrease) in short term loan Issue of Secured Bonds Purchase of Ordinary Shares for cancellation Cash inflow from financing Decrease in cash (16,677,567) (16,362,397) (1,561,474) (34,921,014) 1,488,189 — (468,880) (497,256) 28,942,800 — 1,019,309 28,445,544 19 (542,165) (6,475,470) The Notes on pages 21 to 32 form part of these Accounts. 19 The Merchants Trust PLC S t a t e m e n t o f A c c o u n t i n g P o l i c i e s for the year ended 31st January 2001 (i) The financial statements have been prepared under the historical cost convention, modified to include the revaluation of investments, and in accordance with applicable accounting standards including the Statement of Recommended Practice – “Financial Statements of Investment Trust Companies” issued by the Association of Investment Trust Companies. (ii) Revenue – Dividends on equity shares are accounted for on an ex-dividend basis. UK dividends are shown net of tax credits and foreign dividends are grossed up at the appropriate rate of withholding tax. Income from convertible securities having an element of equity is recognised on an accruals basis. Fixed returns on non-equity shares are recognised on an accruals basis. Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the equivalent of the cash dividend is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital reserves. Deposit interest receivable and stock lenders’ fee income are accounted for on an accruals basis. Underwriting commission is recognised when the issue underwritten closes. (iii) Investment management fee – The investment management fee is calculated on the basis set out in Note 2 to the financial statements and is charged to capital and revenue in the ratio 65:35 to reflect the prospective split of capital and income returns. (iv) Valuation—Investments listed in the United Kingdom have been valued at middle market prices. Those listed abroad have been valued at closing or middle market prices as available. Unlisted investments are valued by the Directors based upon the latest dealing prices, stockbrokers’ valuations, net asset values, earnings and other known accounting information in accordance with the principles set out by the British Venture Capital Association. An unrealised Capital Reserve has been established to reflect differences between value and book cost. Net gains or losses arising on realisations of investments are taken directly to a realised Capital Reserve. (v) Finance costs – In accordance with Financial Reporting Standard 4 “Capital Instruments”, long term borrowings are stated at the amount of net proceeds immediately after issue plus the appropriate accrued finance costs at the balance sheet date. The finance costs of such borrowings, being the difference between the net proceeds of a borrowing and the total payments that may be required in respect of that borrowing, are allocated to periods over the term of the debt at a constant rate on the carrying amount. Finance costs on long term borrowings are charged to Capital Reserves and the Revenue Account in the ratio 65:35 to reflect the Company’s prospective split of capital and income returns. (vi) Taxation – Where expenses are allocated between capital and revenue, any tax relief obtained in respect of those expenses is allocated between capital and revenue, using the Company’s effective rate of corporation tax for the accounting period. Deferred taxation, where applicable, is provided for on the liability method on all timing differences which are expected to crystallise in the foreseeable future, calculated at the rate at which it is estimated that the tax liability or asset will accrue. (vii) Foreign currency – Transactions in foreign currencies are translated into sterling at the rates of exchange ruling on the date of the transaction. Foreign currency assets and liabilities are translated into sterling at the rates of exchange ruling at the balance sheet date. Profits and losses thereon are recognised in Capital Reserves. (viii) No Statement of Recognised Gains and Losses as required by Financial Reporting Standard 3 has been prepared. The Managers consider that the additional information provided would not add materially to the information disclosed in the Statement of Total Return from which recognised gains and losses can be derived. 20 N o t e s t o t h e A c c o u n t s 1. Income Income from Investments Equity income from UK investments Special dividends from UK investments Unfranked income: Interest from UK fixed income securities Dividends from overseas equity securities Interest from overseas fixed income securities Foreign income dividends from UK equity securities Other income Deposit interest Underwriting commission Stocklending fees Total income Income from Investments Listed Unlisted for the year ended 31st January 2001 2001 £ 2001 £ 2000 £ 18,956,896 19,408,241 1,240,814 1,335,600 957,769 — 63,139 — 310,266 6,527 10,847 926,532 70,969 202,100 412,540 1,020,908 1,612,141 21,218,618 22,355,982 222,707 11,363 — 327,640 234,070 21,546,258 22,590,052 21,218,618 22,343,243 — 12,739 21,218,618 22,355,982 2. Investment Management Fee 2001 £ 2001 £ 2001 £ 2000 £ 2000 £ Revenue Capital Total Revenue Capital 2000 £ Total Investment management fee 826,964 1,535,791 2,362,755 779,436 1,447,525 2,226,961 The management contract with Dresdner RCM Global Investors (UK) Ltd (“Dresdner RCM”), terminable at one year’s notice, provides for a management fee based on 0.35% (2000 – 0.35%) per annum of the value of the Company’s assets calculated quarterly after deduction of current liabilities, short-term loans under one year and any funds within the portfolio managed by Dresdner RCM. The amounts stated include irrecoverable VAT of £351,900 (2000 – £331,675). Under the contract Dresdner RCM provides the Company with investment management, accounting, secretarial, administration and custodial services. 21 The Merchants Trust PLC N o t e s t o t h e A c c o u n t s 3. Expenses of Administration Directors’ fees Auditors’ remuneration for audit services Marketing costs Contribution to “its” campaign costs Other administrative expenses for the year ended 31st January 2001 2001 £ 70,637 13,548 302,472 56,558 199,342 2000 £ 76,915 11,860 167,630 99,168 196,231 642,557 551,804 (i) The above expenses include value added tax where applicable. (ii) There were no payments in respect of non-audit services included in other administrative expenses (2000 – £2,408). (iii) Directors’ fees are paid at the rate of £10,000 (2000 – £10,000) per annum with an additional sum of £3,000 (2000 – £3,000) per annum paid to the Chairman of the Audit Committee and an additional sum of £5,000 (2000 – £5,000) per annum paid to the Chairman. 4. Finance Costs of Borrowings 2001 £ 2001 £ 2001 £ 2000 £ 2000 £ Revenue Capital Total Revenue Capital 2000 £ Total On Stepped Rate Interest Loan repayable after more than five years 1,091,316 2,026,728 3,118,044 1,205,200 2,238,229 3,443,429 On Fixed Rate Interest Loan repayable after more than five years 1,326,416 2,463,344 3,789,760 1,328,899 2,467,957 3,796,856 On 4% Perpetual Debenture Stock repayable after more than five years 19,250 35,750 55,000 19,250 35,750 55,000 On 5.875% Secured Bonds repayable after more than five years On sterling overdraft 645,138 1,198,114 1,843,252 52,695 — 52,695 73,014 23,695 135,597 — 208,611 23,695 3,134,815 5,723,936 8,858,751 2,650,058 4,877,533 7,527,591 Included in the finance costs of the 5.875% Secured Bonds 2029 is £26,731 payable to the Auditors in respect of non-audit services. 5. Taxation Credit for expenses allocated to capital Overseas taxation 22 2001 £ Revenue 184,352 — 2001 £ Capital (184,352) — 184,352 (184,352) 2001 £ 2000 £ 2000 £ Total Revenue Capital — — — 220,411 (220,411) 739 — 221,150 (220,411) 2000 £ Total — 739 739 N o t e s t o t h e A c c o u n t s 6. Dividends on Ordinary Shares Dividends on Ordinary Shares of 25p— First interim 4.10p paid 24th August 2000 (1999 – 3.95p) Second interim 4.10p paid 10th November 2000 (1999 – 3.95p) Third interim 4.10p paid 16th February 2001 (1999 – 4.05p) Final proposed – ordinary dividend 4.10p paid 17th May 2001 (1999 – 4.05p) for the year ended 31st January 2001 2001 £ 2000 £ 4,195,486 4,041,993 4,193,436 4,041,993 4,190,362 4,144,322 4,190,362 4,144,322 16,769,646 16,372,630 The proposed final dividend accrued is based on the number of shares in issue at the year end. However, the dividend payable will be based on the number of shares in issue on the record date and will reflect any purchases and cancellation of shares by the Company settled subsequent to the year end. Ordinary dividends paid by the Company carry a tax credit of 10%. The credit discharges the tax liability of shareholders subject to income tax at less than the higher rate. Shareholders liable to pay tax at the higher rate will have further tax to pay. PEP and ISA holders may be able to reclaim this tax credit and charities are subject to transitional provisions. 7. Return per Ordinary Share 2001 £ 2001 £ 2001 £ 2000 £ 2000 £ Revenue Capital Total Revenue Capital 2000 £ Total Return after taxation 16,757,570 83,935,403 100,692,973 18,387,604 (36,513,515) (18,125,911) Attributable to Preference Stockholders (42,997) — (42,997) (42,997) — (42,997) Attributable to Ordinary Shareholders 16,714,573 83,935,403 100,649,976 18,344,607 (36,513,515) (18,168,908) Return per Ordinary Share 16.35p 82.09p 98.44p 17.93p (35.68)p (17.75)p The return per Ordinary Share is based on a weighted average of 102,250,726 Ordinary Shares of 25p in issue throughout the period (2000 – 102,328,936). 23 The Merchants Trust PLC N o t e s t o t h e A c c o u n t s 8. Fixed Asset Investments Note for the year ended 31st January 2001 Listed at market valuation on recognised Stock Exchanges— United Kingdom Abroad Unlisted at Directors’ valuation— Abroad Subsidiary at Directors’ valuation 2001 £ 2000 £ 591,159,223 — 501,741,736 6,261,257 591,159,223 508,002,993 9 51,458 — 51,458 35,359 207,885 243,244 Total fixed asset investments 591,210,681 508,246,237 Market value of investments brought forward Unrealised gains brought forward Cost of investments held brought forward Additions at cost Disposals at cost Cost of investments held at 31st January Unrealised gains at 31st January Market value of investments held at 31st January Gains on investments Net realised gains based on historical costs Less: Net unrealised gains recognised on these investments at the previous balance sheet date Net realised (losses) gains based on carrying value at previous balance sheet date Net unrealised gains (losses) arising in the year Net gains (losses) on investments 508,246,237 (6,822,647) 508,503,479 (76,884,400) 501,423,590 320,738,103 (283,975,156) 431,619,079 447,509,026 (377,704,515) 538,186,537 53,024,144 501,423,590 6,822,647 591,210,681 508,246,237 43,651,205 39,653,628 (44,810,715) (31,339,013) (1,159,510) 91,012,212 8,314,615 (38,722,740) 89,852,702 (30,408,125) The Board considers that the Company’s remaining unquoted investment is not material to the financial statements. Stock Lending Aggregate value of securities on loan at year-end Maximum aggregate value of securities on loan during the year Fee income from stock lending during the year £ 6.8m 32.7m 10,847 £ — — — In respect of securities on loan at the year-end, the Company held £7.2m (2000 – £nil) letters of credit as collateral, the value of which exceeded the value of the loan securities by £0.4m (2000 – £nil). In respect of the maximum aggregate value of securities on loan during the year, the Company held £34.4m (2000 – £nil) as collateral, the value of which exceeded the value of the securities on loan, by £1.7m (2000 – £nil). 24 N o t e s t o t h e A c c o u n t s for the year ended 31st January 2001 9. Investments in Subsidiary and Other Companies Surrey Investments Inc. is a wholly owned subsidiary registered in the State of Delaware, U.S.A. with an issued share capital of US$300,000. It was formed to act as a Limited Partner in JW O’Connor Associates LP and a shareholder in JW O’Connor & Co Inc., both of which are engaged in property development in the US. This company is now in the process of liquidation following the disposal of the interest in O’Connor. The Company has not produced consolidated accounts in view of the immaterial amounts involved. The Company held more than 10% of the share capital of the following companies, both of which are incorporated in Great Britain and registered in England and Wales: Company First Debenture Finance PLC (‘FDF’) Fintrust Debenture PLC (‘Fintrust’) Class of Shares Held % of Class held % Equity ‘B‘ Shares Ordinary 41.0 49.5 20.4 49.5 In the opinion of the Directors, the Company is not in a position to exert significant influence over these companies. The aggregate share capital, reserves and results are immaterial to the Trust’s accounts. FDF and Fintrust are the lenders of the Company’s Stepped Rate Loan and Fixed Rate Interest Loan, as detailed in notes 10(i) and (ii), respectively. The finance costs of these borrowings and outstanding balances at the year end are shown in notes 4 and 10 respectively. Apart from the finance costs and the provision of a short term loan by FDF, there were no other transactions between FDF, Fintrust and the Company during the year. 10. Current Assets and Creditors Debtors— Sales for future settlement Accrued income Other debtors Taxation recoverable Cash at bank— Sterling bank balances— Current account Deposit accounts Barclays Bank plc Kleinwort Benson Private Bank Ltd 2001 £ 2000 £ 4,802,246 2,940,209 28,695 — 16,289,342 2,476,885 53,152 142,815 7,771,150 18,962,194 404,517 125,724 640,000 — 342,044 1,118,914 1,044,517 1,586,682 25 The Merchants Trust PLC N o t e s t o t h e A c c o u n t s 10. Current Assets and Creditors (continued) Note for the year ended 31st January 2001 Creditors: Amounts falling due within one year— Taxation payable Purchases for future settlement Short term loan Other creditors Interest on borrowings (see (vi) below) Dividend on Cumulative Preference Stock Units Dividend on Ordinary Shares (declared) Dividend on Ordinary Shares (proposed) Creditors: Amounts falling due after more than one year— Stepped Rate Interest Loan (see (i) below) Fixed Rate Interest Loan (see (ii) below) 5.875% Secured Bonds 2029 (see (iii) below) 4% Perpetual Debenture Stock (see (iv) below) 6 6 2001 £ 650,578 — 1,488,189 1,176,904 1,319,266 21,499 4,190,362 4,190,362 2000 £ — 14,137,445 — 1,458,876 1,158,948 21,499 4,144,322 4,144,322 13,037,160 25,065,412 34,900,297 46,849,398 28,957,760 1,375,000 34,812,495 46,949,468 29,097,455 1,375,000 112,082,455 112,234,418 (i) The Stepped Rate Interest Loan comprises adjustable Stepped Rate Interest Loan Notes of £5,133,520 and Stepped Rate Interest Bonds of £20,534,079 issued at 97.4%. £34,034,112 is repayable in 2018 inclusive of a premium of £8,366,513 but exclusive of any redemption expenses. Interest, payable on the Bonds in July and January, was an initial rate of 7.16% per annum increasing annually by 7.5% compound until January 1998. Thereafter it became payable at 14.75% per annum until maturity on 2nd January 2018. Interest on the Loan Notes is variable in accordance with the terms of the agreement with the lender, First Debenture Finance PLC (“FDF”). The effective interest rate of the Stepped Rate Interest loan over its term is 11.28% per annum. The Company has guaranteed the repayment of £34,012,852, being its proportionate share (42.52%) of the required amount to enable FDF to meet all of its liabilities to repay principal and interest on its £80 million of 11.125% Severally Guaranteed Debenture Stock 2018. There is a floating charge on all the Company’s present and future assets to secure this obligation. The Company has also agreed to meet its proportionate share of any expenses incurred by FDF, including any tax liability which may accrue to FDF as a result of the redemption or earlier transfer of the Stepped Rate Loan Notes and Bonds held by FDF. The accounting treatment adopted in respect of the stepped rate interest and redemption premiums is set out in the Statement of Accounting Policies. (ii) The Fixed Rate Interest Loan of £42,000,000 is due to Fintrust Debenture PLC (‘Fintrust’). This loan is repayable in 2023 and carries interest at the rate of 9.25125% per annum on the principal amount payable in arrears by equal half yearly instalments in May and November in each year. As security for this loan, the Company has granted a floating charge over all its undertakings, property and assets in favour of the lender. This charge ranks pari passu with the floating charge noted in (i) above. Following the liquidation of Kleinwort Overseas Investment Trust plc (‘KOIT’) in March 1998, the Company assumed £12,000,000 of its obligations to Fintrust. Both the interest cost and repayment terms of this additional borrowing are identical to the Company’s existing loan. In order that the finance costs on this new borrowing be comparable to existing market rates at that time, the Company also received a premium payment from KOIT of £5,286,564. This premium is being amortised over the remaining life of the loan in accordance with FRS 4, as set out in the Statement of Accounting Policies. At 31st January 2001, the unamortised premium included within the Fixed Rate Interest Loan balance of greater than one year amounted to £4,980,907 (2000 £5,082,626). The original loan from Fintrust is stated at net proceeds (being the principal amount of £30,000,000 less issue costs of £141,053) plus accrued finance costs. 26 N o t e s t o t h e A c c o u n t s for the year ended 31st January 2001 10. Current Assets and Creditors (continued) (iii) The £30,000,000 5.875% Secured Bonds, repayable on 20th December 2029, carry interest at the rate of 5.875% per annum on the principal amount payable in arrears by equal half yearly instalments in June and December in each year. As security for this loan the Company has granted a floating charge ranking pari passu with the floating charges referred to in note (i) and (ii) above over the whole of the present and future undertakings, property, assets and rights of the Company. The accounting treatment adopted in respect of the Bond is set out in the Statement of Accounting Policies. (iv) The 4% Perpetual Debenture Stock is secured by a floating charge on the assets of the Company, which ranks prior to any other floating charge. (v) The short term loan from FDF is interest free and repayable on demand. (vi) Interest on borrowings consists of interest on the following: 2001 £ 313,728 783,545 208,243 13,750 2000 £ 312,003 779,240 53,955 13,750 1,319,266 1,158,948 2001 £ 2000 £ Stepped Rate Interest Loan Fixed Rate Interest Loan 5.875% Secured Bond 2029 4% Perpetual Debenture Stock 11. Share Capital Authorised 1,178,000 3.65% Cumulative Preference Stock Units of £1 1,178,000 1,178,000 107,431,248 Ordinary Shares of 25p 26,857,812 26,857,812 Allotted and fully paid 1,178,000 3.65% Cumulative Preference Stock Units of £1 102,203,936 Ordinary Shares of 25p (2000 – 102,328,936) 1,178,000 1,178,000 25,550,984 25,582,234 26,728,984 26,760,234 (i) The Cumulative Preference Stock Units have been classified as non-equity interests in shareholders’ funds under the provisions of FRS 4 on Capital Instruments. The rights of the Stock to receive payments are not calculated by reference to the Company’s profits and, in the event of a return of capital are limited to a specific amount, being £1,178,000. Dividends on the Preference Stock are payable half yearly on 1st August and 1st February. (ii) The Directors are authorised by an ordinary resolution passed on 8th May 2000 to allot relevant securities, in accordance with Section 80 of the Companies Act 1985, up to a maximum aggregate nominal amount of £1,275,578. This authority, if not previously revoked or varied, expires five years from the date of the resolution. The Directors are also authorised by a special resolution passed on 8th May 2000 to allot relevant securities for cash, in accordance with Section 95 of the Companies Act 1995, up to a maximum aggregate nominal amount of £1,275,578. This authority, if not previously revoked or renewed, expires at the next Annual General Meeting and a resolution will be proposed at the Annual General Meeting for its renewal. 27 The Merchants Trust PLC N o t e s t o t h e A c c o u n t s 12. Capital Redemption Reserve for the year ended 31st January 2001 The balance on this account was created by the transfer of £31,250 in respect of 125,000 Ordinary Shares of 25p each which were purchased by the Company and subsequently cancelled. 13. Capital Reserves Realised £ Unrealised £ Total £ Balance at 1st February 2000 347,584,119 6,822,647 354,406,766 Net loss on realisation of investments Increase in unrealised appreciation Transfer on disposal of investments Exchange rate differences Investment management fee Finance costs of borrowings Attributable taxation in respect of management fee and finance costs Purchase of ordinary shares for cancellation (1,159,510) — 44,810,715 1,158,076 (1,535,791) (5,723,936) 184,352 (468,880) — 91,012,212 (44,810,715) — — — — — (1,159,510) 91,012,212 — 1,158,076 (1,535,791) (5,723,936) 184,352 (468,880) Balance at 31st January 2001 384,849,145 53,024,144 437,873,289 14. Revenue Reserve Balance at 1st February 2000 Deficit for the year Balance at 31st January 2001 15. Net Asset Value per Share £ 10,288,474 (55,073) 10,233,401 The Net Asset Value per share (which equals the net asset values attributable to each class of share at the year end calculated in accordance with the Articles of Association) were as follows: Net Asset Value per Share attributable 2000 381.4p 100.0p 2001 463.5p 100.0p Ordinary Shares of 25p 3.65% Cumulative Preference Stock Units of £1 Ordinary Shares of 25p 3.65% Cumulative Preference Stock Units of £1 The movements during the year of the assets attributable to each class of share were as follows: Total net assets attributable at 1st February 2000 Total return on ordinary activities after taxation for the year Purchase of Ordinary Shares for cancellation Dividends appropriated in the year Ordinary Shares £ 390,317,283 100,649,976 (468,880) (16,769,646) Net Asset Values attributable 2000 £ 390,317,283 1,178,000 2001 £ 473,728,733 1,178,000 Cumulative Preference Stock £ 1,178,000 42,997 — (42,997) Total £ 391,495,283 100,692,973 (468,880) (16,812,643) Total net assets attributable at 31st January 2001 473,728,733 1,178,000 474,906,733 The Net Asset Value per Ordinary Share is based on 102,203,936 Ordinary Shares in issue at the year end (2000 – 102,328,936). 28 N o t e s t o t h e A c c o u n t s for the year ended 31st January 2001 16. Reconciliation of Movements in Shareholders’ Funds Revenue reserves Revenue profit available for distribution Dividends appropriated in the year Transfer (from) to distributable reserves Other reserves Recognised net capital profits (losses) transferred to capital reserves Purchase of Ordinary Shares for cancellation Net increase (decrease) in Shareholders’ Funds Opening Shareholders’ Funds Closing Shareholders’ Funds 2001 £ 2000 £ 16,757,570 18,387,604 (16,812,643) (16,415,627) (55,073) 1,971,977 83,935,403 (36,513,515) (468,880) — 83,411,450 (34,541,538) 391,495,283 426,036,821 474,906,733 391,495,283 17. Contingent Liabilities and Guarantees At 31st January 2001 there were no outstanding contingent liabilities (2000 – £nil) in respect of underwriting commitments and calls on partly paid investments. Details of the guarantee provided by the Company as part of the terms of its Stepped Rate Loan are provided in Note 10(i) “Current Assets and Creditors” on page 26. 18. Reconciliation of Operating Revenue before Taxation to Net Cash Inflow from Operating Activities Revenue before taxation Add: Finance costs of borrowings Less: Management fee charged to capital Less: Overseas tax suffered Less: UK income tax deducted from unfranked income (Increase) decrease in debtors (Decrease) increase in creditors Net cash inflow from operating activities 2001 £ 2000 £ 16,941,922 18,608,754 3,134,815 2,650,058 (1,535,791) (1,447,525) — (739) (72,098) (178,299) 18,468,848 19,632,249 (438,867) (281,972) 697,210 612,830 17,748,009 20,942,289 29 The Merchants Trust PLC N o t e s t o t h e A c c o u n t s for the year ended 31st January 2001 19. Reconciliation of net cash flow to movement in net debt (i) Analysis of Net Debt Stepped 5.875% 4% Short and Fixed Secured Perpetual term loan £ Rate loans £ Bond 2029 £ Debenture Stock £ Net Debt £ Cash £ 1,586,682 — (81,761,963) (29,097,455) (1,375,000) (110,647,736) (542,165) (1,488,189) 12,268 139,695 — (1,878,391) 1,044,517 (1,488,189) (81,749,695) (28,957,760) (1,375,000) (112,526,127) At 1st February 2000 Movement in year At 31st January 2001 (ii) Reconciliation of net cash flow to movement in net debt Net cash outflow (Increase) decrease in short term loan Decrease (increase) in long term loans Movement in net funds Net debt brought forward Net debt carried forward 2001 £ 2000 £ (542,165) (6,475,470) (1,488,189) 497,256 151,963 (29,082,111) (1,878,391) (35,060,325) (110,647,736) (75,587,411) (112,526,127) (110,647,736) 30 N o t e s t o t h e A c c o u n t s for the year ended 31st January 2001 20. Financial Reporting Standard 13 – Derivatives and other Financial Instruments: Disclosures The note below should be read in conjunction with the Risk Review of the Company detailed on page 16. (a) Interest Rate Risk Profile The tables below summarise in sterling terms the assets and liabilities whose values are affected by changes in interest rates, together with the weighted average rates and periods for which rates are fixed on the fixed interest bearing assets and liabilities. 2001 Fixed rate interest paid £000s — — — — 12,484 — — 12,484 12,484 Currency Financial Assets Values directly affected by changes in interest rates: Treasury Stocks Sterling Values not directly affected by changes in interest rates: Equities Equities Preference Shares Sterling US Dollar and Bonds Bonds Cash Sterling US Dollar Sterling Total Financial Assets Financial Liabilities Values affected by changes in interest rates: First Debenture Finance loan Fintrust loan 5.875% Secured Bonds 2029 Sterling Sterling (46,849) (34,900) Sterling (28,958) 4% Perpetual Debenture Stock Sterling (1,375) Total Financial Liabilities (112,082) 2001 Floating rate interest paid £000s — — — — — — 1,045 1,045 1,045 — — — — — 2001 2001 Nil interest paid £000s — — 578,675 51 — — — Total £000s — — 578,675 51 12,484 — 1,045 578,726 592,255 578,726 592,255 2000 Fixed rate interest paid £000s 26,708 26,708 — — 19,971 15,013 — 34,984 61,692 — — — — — (46,849) (34,900) (34,813) (46,950) (28,958) (29,097) (1,375) (1,375) (112,082) (112,235) 2000 Floating rate interest paid £000s — — — — — — 1,587 1,587 1,587 — — — — — 2000 2000 Nil interest paid £000s — — 446,311 243 — — — Total £000s 26,708 26,708 446,311 243 19,971 15,013 1,587 446,554 483,125 446,554 509,833 — — — — — (34,813) (46,950) (29,097) (1,375) (112,235) Net Financial Assets (99,598) 1,045 578,726 480,173 (50,543) 1,587 446,554 397,598 Short term debtors and creditors Net Assets per Balance Sheet (5,266) 474,907 (6,103) 391,495 31 The Merchants Trust PLC N o t e s t o t h e A c c o u n t s for the year ended 31st January 2001 20. Financial Reporting Standard 13 – Derivatives and other Financial Instruments: Disclosures (continued) The fixed rate interest liabilities bear the following coupon and effective rates: First Debenture Finance loan—bonds First Debenture Finance loan—notes Fintrust—original loan Fintrust—new loan 5.875% Secured Bond 4% Perpetual Debenture Stock Maturity date 2/1/2018 2/1/2018 20/11/2023 20/11/2023 20/11/2029 n/a Amount borrowed £ 20,534,079 5,133,520 30,000,000 12,000,000 30,000,000 1,375,000 Effective rate Coupon rate since inception* 14.75% 14.75% 9.25125% 9.25125% 5.875% 4.00% 11.28% 11.28% 9.30% 6.00% 6.13% n/a *The effective rates are calculated in accordance with FRS 4 as detailed in the Accounting Policies. The weighted average coupon rate of the Company’s fixed interest bearing liabilities is 9.58% (2000 – 9.58%) and the weighted average period to maturity of these liabilities (excluding the 4% perpetual debenture stock) is 23.2 years (2000 – 24.2) years. The weighted average coupon rate of the Company’s fixed interest bearing assets is 6.41% (2000 – 6.01%) and the weighted average period to maturity of those assets is 3.2 years (2000 – 4.1) years. (b) Currency Risk Profile A portion of the assets and liabilities of the Company is denominated in currencies other than Sterling, with the effect that the total net assets and total return can be affected by currency movements. 2001 Investments £000s 591,160 51 2001 Current Assets £000s 8,816 — 2001 Creditors £000s (125,120) — 2001 Net currency exposure £000s 474,856 51 2000 Investments £000s 492,990 15,256 2000 Current Assets £000s 20,549 — 2000 Creditors £000s (137,300) — 2000 Net currency exposure £000s 376,239 15,256 Sterling US Dollar 591,211 8,816 (125,120) 474,907 508,246 20,549 (137,300) 391,495 (c) Fair Values Disclosures The assets and liabilities of the Company are held at fair value with the exception of the FDF and Fintrust loans shown below: First Debenture Finance Loan Fintrust loan (d) Liquidity profile 2001 £ million Book value 34.8 46.9 2001 £ million Fair value 50.9 57.8 2000 £ million Book value 34.8 46.9 2000 £ million Fair value 50.6 58.4 The maturity profile of the Company’s financial liabilities at the 31st January 2001 (being the borrowings from Fintrust, First Debenture Finance, the 5.875% Secured Bond and the 4% Perpetual Debenture stock) is detailed in Note 10—“Current Assets and Creditors” on pages 25 to 27. The undrawn committed borrowing facilities available to the Company at 31st January 2001 were £10 million. (e) Hedging instruments At the year end the Company had no hedging arrangements in place. (2000 – Nil) 32 R e p o r t o f t h e A u d i t o r s Independent auditors’ report to the members of The Merchant Trust PLC We have audited the financial statements on pages 17 to 32 which have been prepared under the historical cost convention (as modified by the revaluation of investments) and the accounting policies set out on page 20. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report and the financial statements in accordance with applicable United Kingdom law and accounting standards are set out in the statement of directors’ responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements, United Kingdom Auditing Standards issued by the Auditing Practices Board and the Listing Rules of the Financial Services Authority. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions is not disclosed. We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. The other information comprises only the directors’ report, the chairman’s statement, the operating and financial review and the corporate governance statement. We review whether the corporate governance statement reflects the company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the company’s corporate governance procedures or its risk and control procedures. Basis of audit opinion We conducted our audit in accordance with auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of the company’s affairs at 31st January 2001 and of its total return and cash flows for the year then ended and have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers Chartered Accountants and Registered Auditors Southwark Towers 32 London Bridge Street London SE1 9SY 5th April 2001 33 The Merchants Trust PLC S t a t e m e n t o f D i r e c t o r s ’ R e s p o n s i b i l i t i e s Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the revenue of the Company for that period. In preparing those financial statements, the Directors are required to: (cid:254) (cid:254) (cid:254) (cid:254) select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; 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 which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. C o r p o r a t e G o v e r n a n c e The Board has put in place a framework for corporate governance which it believes is appropriate for an investment trust company and which enables the Company to comply with the Combined Code on Corporate Governance (“the Combined Code”) issued by the Financial Services Authority. The Board considers that the Company has complied with the provisions contained within Section 1 of the Combined Code throughout the year ended 31st January 2001 except that full compliance with the Internal Control Guidance for Directors in the Combined Code published in September 1999 (“the Turnbull guidance”) was not achieved until part way through the year. As detailed below, the Board has not identified a senior non-executive Director. This statement describes how the relevant principles of governance are applied to the Company. The Board The Board currently consists of six Directors, all of whom are non-executive and deemed by the Board to be independent of the Company’s investment manager. Their biographies, on page 37, demonstrate a breadth of investment, industrial and commercial experience. 34 C o r p o r a t e G o v e r n a n c e The Board meets at least six times a year and between these meetings there is regular contact with the Investment Manager. Matters specifically reserved for decision by the full Board have been defined and a procedure adopted for Directors, in the furtherance of their duties, to take independent professional advice at the expense of the Company. The Directors have access to the advice and services of the Company Secretary who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. When a new Director is appointed there is an induction process carried out by the Investment Manager. Directors are provided, on a regular basis, with key information on the Company’s policies, regulatory and statutory requirements and internal controls. Changes affecting Directors’ responsibilities are advised to the Board as they arise. A senior non-executive Director has not been identified as the Board considers that this is not necessary for a non-executive Board of this size where the positions of Chairman of the Board and Chairman of the Audit Committee are held by different Directors. The Board has contractually delegated to the Investment Manager the management of the investment portfolio, the custodial services and the day to day accounting and company secretarial requirements. This contract was entered into after due consideration by the Board of the quality and cost of services offered including the internal control systems in operation in so far as they relate to the affairs of the Company. The Board receives and considers reports regularly from the Investment Manager and ad hoc reports and information are supplied to the Board as required. All non-executive Directors are appointed for an initial term of three years, subject to re-election and Companies Act provisions. In accordance with the Articles of Association, new Directors stand for election at the first Annual General Meeting following their appointment and every Director stands for re-election at intervals of not more than three years. Board Committees The Board has established a nominations committee to make recommendations on the appointment and re-appointment of Directors. Due to its size, the Board as a whole considers nominations made in accordance with an agreed procedure. The Audit Committee carries out the functions of a management engagement committee, to review and discuss the terms of the management contract with the Investment Manager. The Audit Committee consisting of the full Board has defined terms of reference and duties. This committee is also responsible for review of the annual accounts and interim report, terms of appointment of the auditors together with their remuneration as well as the non-audit services provided by the auditors. It also meets with representatives of the Investment Manager and receives reports on the effectiveness of the internal controls maintained on behalf of the Company and reviews the effectiveness of the Company’s internal controls. Environmental Policy The Investment Managers have been directed by the Board to take account of companies’ environmental performance when taking investment decisions. Directors’ Remuneration Under the Financial Services Authority’s Listing Rule 21.20(i), where an investment trust company has no executive Directors the Code principles relating to Directors’ remuneration do not apply and accordingly the financial statements do not include a Directors’ Remuneration Report. Relations with Shareholders The Board strongly believes that the Annual General Meeting should be an event which private shareholders are encouraged to attend and in which they are invited to participate. The Annual General Meeting is attended by the Chairman of the Board and the Chairman of the Audit Committee and the Investment Manager makes a presentation to the meeting. The Notice of Meeting sets out the business of the meeting and resolutions proposed under special business are explained more fully in the Directors’ Report on pages 38 to 42. Separate resolutions are proposed for each substantive issue. 35 The Merchants Trust PLC C o r p o r a t e G o v e r n a n c e Accountability and Audit The Directors’ statement of responsibilities in respect of the accounts is on page 34 and a statement of going concern is on page 38. The report of the auditors can be found on page 33. Internal Control The Directors have overall responsibility for the Company’s system of internal controls. Whilst acknowledging their responsibility for the system of internal control, the Directors are aware that such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable but not absolute assurance against material misstatement or loss. The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. This process is subject to review by the Board and accords with the Turnbull guidance. The process was fully in place from 8th May 2000 and up to the date of the signing of this Report and Accounts. During the earlier months of 2000, the Board’s review of the measures necessary to implement the Turnbull guidance was being finalised. The key elements of the procedures that the Directors have established and which are designed to provide effective internal control are as follows: The Board, assisted by the Managers, undertook a full review of the Company’s business risks and these are analysed and (cid:254) recorded in a risk matrix. The Board receives every six months from the Managers a formal report which details any known internal controls failures, including those that are not directly the responsibility of the Managers. Steps will be taken to continue to ensure that the system of internal control and risk management becomes embedded into the operations and culture of the Company and its key suppliers. The appointment of Dresdner RCM Global Investors (UK) Limited (‘Dresdner RCM’) as the Managers and Custodian. Dresdner (cid:254) RCM provides all investment management, custodial, accounting and secretarial services to the Company. The Managers and Custodian maintain the internal controls associated with the day to day operation of the Company. These responsibilities are included in the Management Agreement between the Company and the Managers (see page 21). The Managers’ system of internal control includes organisation arrangements with clearly defined lines of responsibility and delegated authority as well as control procedures and systems which are regularly evaluated by management and monitored by their internal audit department. Dresdner RCM is regulated by IMRO and its compliance department regularly monitors their compliance with IMRO rules. The effectiveness of the internal controls is assessed by the Managers’ compliance and risk management department on an ongoing basis. The regular review and control by the Board of asset allocation and any risk implications. Regular and comprehensive review by (cid:254) the Board of management accounting information including revenue and expenditure projections, actual revenue against projections, and performance comparisons. (cid:254) Authorisation and exposure limits are set and maintained by the Board. An Audit Committee which reviews the terms of the agreement with the Managers and Custodians, assesses the Managers’ and (cid:254) Custodians’ systems of controls and approves the appointment of sub-custodians. The Audit Committee also receives reports from the Managers’ and Custodians’ internal auditors and compliance department. The Board has undertaken a full review of the aspects covered by the Turnbull guidance and believes that there is an effective framework substantially in place to meet the requirements of the Combined Code. Exercise of Voting Powers The Company’s investments are held in a nominee name. The Board has delegated discretion to the Managers to exercise voting powers on its behalf. 36 D i r e c t o r s a n d M a n a g e m e n t Directors Hugh Stevenson* (Chairman) (Born September 1942) joined the board in September 1999. Formerly Chairman of Mercury Asset Management Group plc, he is Chairman of Equitas Limited, a Director of Standard Life Assurance Company and a member of the Investment Committee of the Wellcome Trust. Sir John Banham* (Born August 1940) joined the Board in August 1992. Formerly Director General of the Confederation of British Industry, he is Chairman of Kingfisher PLC, ECI Ventures Ltd and Whitbread PLC. He is also a Director of Amvescap Plc. Dick Barfield* (Born April 1947) joined the board in May 1999. Formerly Chief Investment Manager of Standard Life Assurance Company, he is a Director of Equitas Limited, Baillie Gifford Japan Trust PLC, Marshalls PLC, New Look Group PLC and other companies. Anthony Forbes* (Born January 1938) joined the Board in July 1994. Formerly joint senior partner of Cazenove & Co, he is a Director of Royal and Sun Alliance Insurance Group plc and Carlton Communications plc. Sir Bob Reid* (Born May 1934) joined the Board in January 1995. Formerly Chairman of Shell (UK), British Rail, London Electricity plc, and Sears PLC he is a Deputy Governor of the Bank of Scotland. Joe Scott Plummer* (Born August 1943) joined the Board in May 1997. He is Chairman of Martin Currie Limited and is a Director of Candover Investments PLC and Martin Currie Portfolio Investment Trust PLC. *All of the above Directors are non-executive and independent of the Manager, and each serves on the Company’s Audit and Nomination Committees. 37 The Merchants Trust PLC D i r e c t o r s ’ R e p o r t Status The Company operates as an approved investment trust within the meaning of Section 842 of the Income and Corporation Taxes Act 1988. Such approval is expected to be granted for the previous accounting year and the accounting year now under review. The Company is not a close company. The Company is an Investment Company within the meaning of Part VIII of the Companies Act 1985. Going Concern After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. Share Capital During the year under review a total of 125,000 ordinary shares were repurchased and cancelled as part of the share buyback programme that was approved last year. The consideration paid, excluding buyback expenses, amounted to £462,000. After the year end the purchase of a further 50,000 shares was completed at a cost of £205,750. Payment Policy It is the Company’s payment policy for the forthcoming financial year to obtain the best terms for all business and therefore there is no consistent policy as to the terms used. In general the Company agrees with its suppliers the terms on which business will take place and it is our policy to abide by these terms. The Company had no trade creditors at the year end. Invested Funds Sales of investments during the year resulted in net gains based on historical costs of £43,651,205 (2000 – £39,653,628). Provisions contained in the Finance Act 1980 exempt approved Investment Trusts from corporation tax on their chargeable gains. Invested funds at 31st January 2001 had a value of £591,210,681 before deducting net liabilities of £116,303,948 (2000 – £508,246,237 and £116,750,954). Net Asset Value The Net Asset Value of the Ordinary Shares of 25p at the year end, after deducting the provision for final dividend, was 463.5p as compared with a value of 381.4p at 31st January 2000. Donations and Subscriptions Aggregate charitable donations and subscriptions in respect of the year amounted to £Nil (2000 – £1,599). No political donations were made during the year. Historical Record There is included on page 9 a schedule of the Company’s thirty largest holdings. The distribution of total assets is shown on page 14, and the historical record of the Company’s revenue, capital and invested funds over the past ten years is shown on page 8. Graphs are included on page 15 showing the performance on a total return basis over the past ten years of the net asset value of the Company’s Ordinary Shares against the Company’s benchmark indices, the growth in net ordinary distributions made by the Company against the Retail Price Index, and the Company’s discount to net asset value over the same period. 38 D i r e c t o r s ’ R e p o r t Business Review A review of the Company’s activities is given in the Chairman’s Statement on pages 6 and 7 and in the Investment Managers’ Review on pages 10 and 11. Revenue £ Revenue for the year after deducting management and general expenses and finance costs of borrowings amounted to 16,941,922 Taxation and there remained a balance of from which has been deducted the dividend on £1,178,000 of Preference Stock leaving available for distribution to the Ordinary Shareholders Dividends Provision has been made in the Accounts for dividends announced on the Ordinary Shares of 25p as follows: 1st Interim 4.10p per Share paid 24th August 2000 2nd Interim 4.10p per Share paid 10th November 2000 3rd Interim 4.10p per Share paid 16th February 2001 Final 4.10p per Share proposed payable on 17th May 2001 leaving a deficit to be transferred to Revenue Reserve of £ (4,195,486) (4,193,436) (4,190,362) (4,190,362) (184,352) 16,757,570 (42,997) 16,714,573 (16,769,646) (55,073) Subject to the final dividend being approved payment will be made on 17th May 2001 to shareholders on the Register of Members at the close of business on 20th April 2001 at the rate of 4.10p per Ordinary Share. Further details are provided in Note 6 on page 23. Substantial Shareholdings In accordance with Section 198 of the Companies Act 1985 and the Disclosure of Interests in Shares (Amendment) Regulations 1993, as at the date of this report, the Company has been advised of the following substantial share interests in its relevant share capital: 3.65% Cumulative Preference Stock: The Prudential Corporation PLC—176,000 (14.9%); Ecclesiastical Insurance Office PLC—134,690 (11.4%); Zurich Financial Services Group—90,000 (7.6%); Royal Insurance PLC—60,000 (5.1%). Ordinary Shares of 25p: Barclays PLC and its subsidiaries—4,209,758 (4.1%). Directors and Management All Directors listed below served throughout the financial year under review except Mr C. H. Black who retired from the Board and as Chairman on 8th May 2000. Mr H. A. Stevenson was appointed Chairman on 8th May 2000. 39 The Merchants Trust PLC D i r e c t o r s ’ R e p o r t Mr A. D. A. W. Forbes, Mr P. J. Scott Plummer and Sir Bob Reid retire by rotation in accordance with the Articles of Association and, being eligible, offer themselves for re-election. The present Board and their interests in the share capital of the Company as at 31st January 2001 and 2000 (or date of appointment if later) are listed below: R. A. Barfield Sir John Banham A. D. A. W. Forbes Sir Bob Reid P. J. Scott Plummer H. A. Stevenson Ordinary Shares of 25p 2001 2000 Beneficial Non-Beneficial Beneficial Non-Beneficial 1,872 800 1,000 500 1,000 25,000 — — — — — — 400 800 1,000 500 1,000 25,000 — — — — — — Between the end of the period under review and the date of this report Mr R. A. Barfield has acquired a further 14 ordinary shares of 25p each through the Dresdner RCM Investment Trust ISA bringing his total holding in the Trust to 1,886 shares. No contracts of significance in which Directors are deemed to have been interested have subsisted during the year under review. Management Agreement The management agreement with Dresdner RCM Global Investors (UK) Limited provides for a fee of 0.35% per annum (2000—0.35%) of the value of the assets, calculated quarterly, after deduction of current liabilities, short term loans under one year and any funds within the portfolio managed by Dresdner RCM. The management agreement is terminable at one years’ notice (2000—one year). The Managers have discretion to exercise voting rights at the meetings of companies in which the Trust is invested, and will usually do so. However, in cases of takeover, merger or other offer involving a corporate client of the Managers or any of its associated companies the voting rights may only be exercised with the approval of at least one independent Director of the Trust. Similar approval must be sought in the case of any investment transactions in such companies or underwriting participations involving the securities of corporate clients of the Managers or any of its associated companies. The Managers do not have any discretion over any securities of Dresdner Bank Group or its subsidiaries that may be held by the Trust. The Company has entered into an annual agreement with Dresdner RCM to operate the Savings Plan. The cost to the Company for the year ended 1st February 2002 will be £265,806 (excluding VAT) (2001—£257,423 excluding VAT). The fee relates to generic costs and is partially calculated on a usage and market capitalisation basis. Individual Savings Accounts/PEPs The affairs of the Company are conducted in such a way as to meet the requirement of a qualifying investment trust for Personal Equity Plans and the requirements for an Individual Savings Account and it is the intention to continue to do so. 40 D i r e c t o r s ’ R e p o r t Analysis of Share Register Shareholder Accounts Ordinary Shareholding Number % 000’s % Shareholder Type 2001 2000 2001 2000 2001 2000 2001 2000 Private holders* Nominees Insurance Companies Other holders Pension Funds Investment Trusts and Funds 10,084 10,802 4,476 3,993 57 546 8 312 67 617 7 378 65.1 28.9 0.4 3.5 0.1 2.0 68.1 25.2 0.4 3.8 0.1 2.4 27,145 64,387 2,266 4,076 74 37,472 53,654 2,265 3,816 59 4,208 5,063 26.6 63.0 2.2 4.0 0.1 4.1 36.6 52.4 2.2 3.7 0.1 5.0 15,483 15,864 100.0 100.0 102,156 102,329 100.0 100.0 *Including PEP, ISA and Saving Plan Nominees. Based on an analysis of the Ordinary Share register at 29th March 2001 (28th February 2000). Directors’ and Officers’ Liability Insurance The Company maintained Directors’ and Officers’ liability insurance during the year. Purchase of own shares As referred to in the Chairman’s statement, the Board is proposing that the Company should be given renewed authority to purchase Ordinary Shares in the market for cancellation. The Board believes that such purchases in the market at appropriate times and prices would be a suitable method of enhancing shareholder value. The Company would make either a single purchase or a series of purchases, when market conditions are suitable, with the aim of maximising the benefits to shareholders and within guidelines set from time to time by the Board. Where purchases are made at prices below the prevailing net asset value of the Ordinary Shares, this will enhance net asset value for the remaining shareholders. It is therefore intended that purchases would only be made at prices below net asset value, with the purchases to be funded from the realised capital profits of the Company (which are currently in excess of £395 million). The rules of the London Stock Exchange limit the price which may be paid by the Company to 105% of the average middle-market quotation for an Ordinary Share on the 5 business days immediately preceding the date of the relevant purchase. The minimum price to be paid will be 25p per Ordinary Share (being the nominal value). Additionally, the Board believes that the Company’s continued ability to purchase its own shares should create additional demand for the Ordinary Shares in the market and that this increase in liquidity should assist shareholders wishing to sell their Ordinary Shares. The Board considers that it will be most advantageous to shareholders for the Company to be able to make such purchases as and when it considers the timing to be most favourable and therefore does not propose to set a timetable for making any such purchases. 41 The Merchants Trust PLC D i r e c t o r s ’ R e p o r t Under the rules of the London Stock Exchange, the maximum number of shares which a listed company may purchase through the market pursuant to a general authority such as this is equivalent to 14.99% of its issued share capital. For this reason, the Company is limiting its renewed authority to make such purchases to 15,312,875 Ordinary Shares, representing 14.99% of the issued share capital at the date of this document. The authority will last until the Annual General Meeting of the Company to be held in 2001 or the expiry of 18 months from the date of the passing of this resolution, whichever is the earlier. The authority will be subject to renewal by shareholders at subsequent Annual General Meetings. Allotment of new shares Approval is sought for the renewal of the Directors authority to allot relevant securities, in accordance with Section 80 of the Companies Act 1985, up to a maximum aggregate nominal amount of £1,319,328. This authority would expire 5 years from the date of renewal, if not previously revoked or varied. A Resolution was passed at the Annual General Meeting held on 8th May 2000 to authorise the Directors to allot the unissued share capital for cash. The power to allot new shares for cash other than pro rata to existing shareholders, limited to the aggregate nominal amount of £1,274,703 Ordinary capital, being approximately 4.99 per cent of the issued Ordinary Share capital of the Company as at the date of this report, is renewable annually and expires at the conclusion of the Annual General Meeting in 2001. A Special Resolution is therefore proposed under special business at the forthcoming Annual General Meeting to renew this authority for a further year. Whilst it is anticipated that allotments under this authority will normally be to the Dresdner RCM Investment Trusts Savings Plan the resolution allows for allotments of new shares at the discretion of the Directors and is not limited only to this Plan. The Directors confirm that no allotment of new shares will be made unless the lowest market offer price of the Ordinary Shares is at least at a premium to net asset value. Auditors PricewaterhouseCoopers have indicated their willingness to continue in office and resolutions concerning their re-appointment and authorising the Directors to determine their remuneration will be proposed at the forthcoming Annual General Meeting. 5th April 2001 By Order of the Board Kirsten Salt Deputy Secretary 42 N o t i c e o f M e e t i n g Notice is hereby given that the Annual General Meeting of The Merchants Trust PLC will be held at 20 Fenchurch Street, London EC3P 3DB, on Monday, 14th May 2001 at 12.30 p.m. to transact the following business: Routine Business 1 To receive and adopt the Report of the Directors and the Accounts for the year ended 31st January 2001 together with the Auditors’ Report thereon. To declare a final ordinary dividend of 4.10p per Ordinary Share. To re-elect Mr. A. D. A. W. Forbes as a Director. To re-elect Mr. P. J. Scott Plummer as a Director. To re-elect Sir Bob Reid as a Director. To re-appoint PricewaterhouseCoopers as Auditors of the Company. To authorise the Directors to determine the remuneration of the Auditors. 2 3 4 5 6 7 Special Business Resolution 9 will be proposed as an Ordinary Resolution and resolutions 8 and 10 as Special Resolutions: 8 THAT the Company be and is hereby generally and unconditionally authorised in accordance with Section 166 of the Companies Act 1985 (the “Act”) to make market purchases (within the meaning of Section 163 of the Act) of Ordinary Shares of 25p each in the capital of the Company (“Ordinary Shares”), provided that: (i) (ii) the maximum number of Ordinary Shares hereby authorised to be purchased shall be 15,312,875; the minimum price which may be paid for an Ordinary Share is 25p; (iii) the maximum price which may be paid for an Ordinary Share is an amount equal to 105 per cent of the average of the middle market quotations for an Ordinary Share taken from the London Stock Exchange Official List for the 5 business days immediately preceding the day on which the Ordinary Share is purchased or such other amount as may be specified by the London Stock Exchange from time to time; (iv) the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company in 2002 or, if earlier, on the expiry of 18 months from the passing of this resolution, unless such authority is renewed prior to such time; and (v) the Company may make a contract to purchase Ordinary Shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiration of such authority and may make a purchase of Ordinary Shares pursuant to any such contract. 43 The Merchants Trust PLC N o t i c e o f M e e t i n g 9 THAT for the purposes of Section 80 of the Companies Act 1985 the Directors be generally and unconditionally authorised to exercise all the powers of the Company to allot relevant securities (within the meaning of the said section) up to an aggregate nominal amount of £1,319,328 provided that: (i) the authority granted shall expire five years from the date upon which this Resolution is passed but may be revoked or varied by the Company in General Meeting and may be renewed by the Company in General Meeting for a further period not exceeding five years; and (ii) the said authority shall allow and enable the Directors to make an offer or agreement before the expiry of that authority which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of any such offer or agreement as if that authority had not expired. 10 THAT the Directors be empowered in accordance with Section 95 of the Companies Act 1985 to allot equity securities (within the meaning of Section 94 of that Act) for cash as if sub-section (1) of Section 89 of the Act did not apply to any such allotment provided that: (i) the power granted shall be limited to the allotment of equity securities wholly for cash up to an aggregate nominal amount of £1,274,703 (being within 5 per cent of the issued Ordinary Share capital at the date of this Notice). (ii) the power granted shall (unless previously revoked or renewed) expire at the conclusion of the next Annual General Meeting of the Company after the passing of this resolution; and (iii) the said power shall allow and enable the Directors to make an offer or agreement before the expiry of that power which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuant of such offer or agreement as if that power had not expired. 10 Fenchurch Street, London EC3M 3LB 5th April 2001 By Order of the Board Kirsten Salt Deputy Secretary Notes: Members entitled to attend and vote at this Meeting may appoint one or more proxies to attend and, on a poll, vote in their stead. The proxy need not be a Member of the Company. Duly completed forms of proxy must reach the office of the Registrars at least 48 hours before the Meeting. A form of proxy is provided with the Annual Report. Completion of the enclosed form of proxy does not preclude a Member from attending the Meeting and voting in person. To be entitled to attend and vote at the Meeting (and for the purpose of the determination by the Company of the number of votes they may cast), Members must be entered on the Company’s register of Members at 12.30 pm on 12th May 2001 (“the specified time”). If the Meeting is adjourned to a time not more than 48 hours after the specified time applicable to the original Meeting, that time will also apply for the purpose of determining the entitlement of Members to attend and vote (and for the purpose of determining the number of votes they may cast) at the adjourned Meeting. If, however, the Meeting is adjourned for a longer period then, to be so entitled, Members must be entered on the Company’s register of Members at the time which is 48 hours before the time fixed for the adjourned Meeting or, if the Company gives notice of the adjourned Meeting, at the time specified in that notice. Contracts of service are not entered into with the Directors, who hold office in accordance with the Articles of Association. 44 Printed by Park Communications, London 02/13956 F o r m o f P r o x y Notes on how to complete the proxy form If you are a registered Shareholder and you are unable to attend the Meeting you may appoint a proxy to attend and, on a poll, to vote on your behalf. jA Appointing a proxy If you wish to appoint someone other than the Chairman as your proxy please cross out the words “the Chairman of the Meeting”, initial the deletion, and insert the name and address of your proxy. A proxy need not be a member of the Company, but must attend the Meeting in order to represent you. jB Telling your proxy how to vote Tick the appropriate box indicating how your proxy should vote on the Resolutions. If you do not give instructions, your proxy will vote or abstain at his discretion. jC How to sign the form (i) Please print your name and address in the space provided and sign and date the form. (ii) If someone else signs the form on your behalf, the authority entitling them to do so, or a certified copy of it, must accompany the form. (iii) In the case of a corporation, this form must be executed either under its common seal or be signed on its behalf by an attorney or duly authorised officer of the corporation. (iv) In the case of joint holders, the signature of the first-named on the Register of Members, in respect of the joint holding, shall be accepted to the exclusion of the other joint holders. Returning the form The form must reach the office of the Registrars of the Company no later than 48 hours before the time of the Meeting. If you are a registered Shareholder and you subsequently decide to attend the Meeting you may do so. THE MERCHANTS TRUST PLC FORM OF PROXY FOR ANNUAL GENERAL MEETING Appointment of Proxy jA I/We, the undersigned, being (a) member(s) of the above-named Company hereby appoint the Chairman of the Meeting or SURNAME MR/MRS/MISS/TITLE FORENAMES ADDRESS as my/our proxy to attend and vote for me/us and on my/our behalf as directed below at the Annual General Meeting of the Company to be held on Monday 14th May 2001 at 12.30 pm and at any adjournment thereof. POSTCODE jB Routine Business For Against To receive the Report and Accounts......................................... M................... M To declare a final dividend of 4.10p .......................................... M................... M To re-elect Mr. A. D. A. W. Forbes as a Director ........................ M................... M To re-elect Mr. P. J. Scott Plummer as a Director...................... M................... M To re-elect Sir Bob Reid as a Director ....................................... M................... M To re-appoint PricewaterhouseCoopers as Auditors................. M................... M 1 2 3 4 5 6 7 To authorise the Directors to determine the remuneration of the Auditors ......................................................................... M................... M Special Business 8 To authorise the Company to make market purchases of its own shares.............................................................................. M................... M To renew the Directors’ authority to allot shares........................ M................... M 9 10 To renew the Directors’ authority to allot shares for cash........... M................... M jC Shareholders Details SURNAME MR/MRS/MISS/TITLE FORENAMES ADDRESS SIGNATURE POSTCODE DATE I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I Third Fold and Tuck in BUSINESS REPLY SERVICE Licence No. MB 122 2 Capita IRG plc Proxies Department, Bourne House, 34 Beckenham Road, BECKENHAM, Kent BR3 4BR Second Fold F I R S T F O L D 

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