The Merchants Trust Plc
Annual Report 2002

Plain-text annual report

Report and Accounts for the year ended 31st January 2002 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 Independent 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 34 35 35 38 39 44 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 2002 2001 % change £21,595,671 £21,546,258 £17,051,644 £16,714,573 16.70p 16.80p 16.35p 16.40p £422,160,624 £474,906,733 412.3p 392.0p 4.9% 463.5p 411.3p 11.3% +0.2 +2.0 +2.1 +2.4 −11.1 −11.0 −4.7 n/a 2 I n v e s t o r I n f o r m a t i o n Results Half-year announced September. Full-year announced March. Report and Accounts posted to Shareholders April. Annual General Meeting held May. Ordinary Dividends First quarterly paid August. Second quarterly paid November. Third quarterly paid February. Final paid May. Preference Dividends Payable half-yearly 1st August and 1st February. Dividend Payment Schedule for the years ended: Dividend Payment Date 31 January 1998 31 January 1999 31 January 2000 31 January 2001 31 January 2002 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) 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 4.20p 4.20p 4.20p 4.20p ‡See page 8 “Historical Record” for details of FID enhancements paid. 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 10.08.01 09.11.01 16.02.02 14.05.02 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 Dresdner RCM 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 2002 were 387p-397p. For CGT indexation purposes at 31st March 1982 the share price, after adjustment for bonus issues, was 48.75p. Savings Scheme The Dresdner RCM Global Investors Investment Trusts Savings Scheme 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 Dresdner RCM 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. It manages eleven listed investment trusts, including The Merchants Trust PLC, with total assets under management of some £1.65 billion as at 31st January 2002. Dresdner RCM Global Investors provides a full range of global, regional and country investment capabilities and asset allocation expertise, assisted by the 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. Following the merger of Dresdner Bank AG and Allianz AG the ultimate parent company of Dresdner RCM Global Investors (UK) Ltd is Allianz AG. 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 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 0870 1623100 or, if telephoning from overseas, 0044 20 8639 2157. 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: 0870 1623100 or, if telephoning from overseas, 0044 20 8639 2157 Auditors PricewaterhouseCoopers, Chartered Accountants Southwark Towers 32 London Bridge Street, London SE1 9SY Bankers HSBC Bank PLC Lloyds TSB Bank plc Kleinwort Benson Private Bank Limited Stockbroker Cazenove & Co. Ltd 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 Results shareholders’ funds of 7.4%. The share price fell The year ended 31st January 2002 was by 4.7% from 411.25p to 392p. dominated by difficult and volatile equity markets. A stream of bad news relating to the world Net Earnings Per Share economy, to the level of corporate profitability Net earnings per share rose by 2.1% from 16.35p and to individual companies produced a loss of to 16.70p. Shareholders may recall that last confidence among investors. The tragic events in year’s earnings included 1.21p per share of New York and Washington on 11th September special dividends. In 2001/02 the equivalent 2001 also led to market declines. figure was 0.21p per share and, after adjusting for During the year the FTSE 100 Index – the these payments, the underlying growth in principal benchmark for the Trust – fell by 18%. earnings per share was 8.9%. This represents a The Trust’s other benchmark, the FTSE 350 robust performance at a time when dividend Higher Yield Index, fell by 6%. (As I have stated payments by companies are under scrutiny and previously, the latter index needs to be treated when BT, one of the Trust’s major investments, with caution, since it has a greatly overweight and passed its dividend. underweight position in oils and telecoms respectively.) Dividends Against this background there was also a The Board is recommending a final dividend of decline in the value of the assets attributable to 4.2p per share, giving a total of 16.8p for the full ordinary shareholders in the Trust – a decline year, an increase of just under 2.5% over the which was increased by the effect of the Trust’s dividends for the previous year. The proposed gearing in a falling market. I am able to report, total dividends, costing £17.2m, includes however, that, as in the previous year, the Trust’s £104,000 transferred from the Trust’s revenue portfolio performed relatively well; the Trust’s reserves. This is in accordance with the policy capital returns were some 6% above the average established by the Board two years ago. The for the UK Growth and Income investment trust Trust’s revenue reserves now stand at £10.1m. sub-sector as calculated by Datastream. This is the twentieth consecutive year of Moreover there was a modest increase in dividend increases recorded by the Trust. The earnings per share, reflecting the underlying latest increase in the total dividend payments is quality of the companies in which the Trust broadly in line with the underlying 2.6% increase invests. in the retail prices index over the same twelve months. As at 8th April 2002 the net yield on the Return on Shareholders’ Funds Trust’s shares at 420p is 4.0%, which compares The net asset value per share fell by 11% from with the net yield of 2.7% on the FTSE 100 Index. 463.5p to 412.3p. Adjusting for the effect of the Trust’s gearing, the underlying fall in net asset Repurchase of Shares value was 7.2%. After taking credit for the Trust’s As at the date of this report the company has revenues, there was a negative total return on repurchased and cancelled a total of 225,000 6 C h a i r m a n ’ s S t a t e m e n t shares, including 100,000 during the year under for this economic cycle. Whilst this suggests that review. This is pursuant to the authorisation easier monetary policies have in general been renewed by shareholders at last year’s Annual successfully implemented, there is considerable General Meeting. The Board is proposing that doubt as to how rapid any recovery may be. this authority is renewed again at the forthcoming Nevertheless the likelihood is that in 2002 there AGM on 13th May 2002. should be a recovery in earnings and that inflation should remain subdued. The Board Here in the UK, due to the strength of the Anthony Forbes will retire from the Board at the service sector and to the continued buoyancy of conclusion of the forthcoming AGM after nearly consumer spending prompted by falling interest eight years as a director. He has had a most rates, we appear to have avoided the severe distinguished career in the City and we will miss slowdown in activity seen elsewhere. There his long experience and wise advice. We wish remain questions as to the sustainability of the him every happiness in his retirement. UK’s “two-speed” economy, but growth is Prospects nevertheless forecast at about 2% for the coming year. In the main, UK listed companies are When I wrote to shareholders at the time of the modestly rated by comparison with equivalent interim results, I stated that the market’s volatility companies overseas and there should be useful was likely to be much greater and persist for opportunities to purchase good quality higher much longer than we had expected. This has yielding shares in the coming months. indeed proved to be the case. Looking ahead, leading indicators in the Hugh Stevenson US, Europe and the Far East, but not in Japan, Chairman are suggesting that the worst has now been seen 9th April 2002 7 The Merchants Trust PLC H i s t o r i c a l R e c o r d Years ended 31st January Revenue and Capital 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Revenue (£000s) Earnings per share (net) Paid net per Share Tax Credit per Share Gross Ordinary Dividend Total Net Assets (£000s) Net Assets attributable to Ordinary 13,563†*L 15,514L 10.20p†* 11.04p 11.00p 10.60p 2.75p 3.31p 13.75p 13.91p 17,466L 12.12p 11.50p 2.88p 14.38p 17,351L 12.41p 12.25p 3.06p 15.31p 18,769L 13.66p 13.65pø 3.41p# 17.06p 20,399L 14.88p 14.25p 3.56p 17.81p 20,119L 15.21p 15.59p‡ 3.90p§ 19.49p 22,590 21,546 21,596 17.93p 16.00p 1.78p 17.78p 16.35p 16.40p 1.82p 18.22p 16.70p 16.80p 1.87p 18.67p 242,331†* 311,127 253,604 303,934L 335,212 421,504 426,037 391,495 474,907 422,161 Capital (£000s) 241,153†* 309,949 252,426 302,756L 334,034 420,326 424,859 390,317 473,729 420,983 Net Asset Value per Ordinary Share NAV Total Return (%)× Retail Price Index Increase (%)d Notes 235.7p†* 302.9p +15.1 +3.2 +33.2 +2.8 246.7p −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 +1.8 412.3p −7.4 +2.6 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 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Percentage of Portfolio Investments United Kingdom North America 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 0.1 100.0 100.0 — — 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 HSBC GIaxoSmithkline HBOS Shell Royal Bank of Scotland Lloyds TSB Abbey National Vodafone Alliance & Leicester Scottish & Newcastle Imperial Tobacco British Telecommunications Gallaher Prudential CGNU Sainsbury(J) Six Continents BOC Legal & General BPB United Utilities Rio Tinto Bradford & Bingley Royal & Sun Alliance Lattice Wolseley George Wimpey Rank Allied Domecq at 31st January 2002 Unrealised Gain (Loss) over Book Cost £’000s 3,043 (2,072) 3,700 4,746 3,822 8,579 1,522 192 (11,758) 4,241 (2,337) 3,580 (8,976) 3,302 2,602 1,373 962 656 139 (125) 2,083 (1,627) 1,993 700 (4,659) 401 1,982 2,879 900 2,578 Valuation £’000s 34,798 32,989 28,713 21,844 19,220 16,827 14,005 13,384 11,723 11,686 10,152 10,010 9,205 9,031 8,777 8,714 8,624 8,257 8,176 7,888 7,836 7,706 7,645 7,340 7,009 6,950 6,934 6,840 6,797 6,682 % 6.36 6.03 5.25 4.00 3.52 3.08 2.56 2.45 2.14 2.14 1.86 1.83 1.68 1.65 1.61 1.59 1.58 1.51 1.50 1.44 1.43 1.41 1.40 1.34 1.28 1.27 1.27 1.25 1.24 1.22 365,762 66.89 % of Total Invested Funds 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 sustainable, and the Index fell back to its March The unusual aspect of the UK economy in the last low, at just above 5200, in July. The terrorist year has been the predictability of the key attacks in September led to a further rapid fall in economic indicators. Despite the contrast values with the FTSE 100 Index closing at just between the buoyant consumer sector and above 4400 on the 21st of that month. tough conditions for manufacturing, both growth and inflation have been in line with most expectations at about 2%. Much of the credit for this state of affairs must go to the actions of the Monetary Policy Committee, which cut interest rates sharply from 6% to 4% in the face of the slowdown in overseas economies and the terrorist atrocities in the US in September. The easing of monetary policy was in line with, but much less extreme than, the rate cuts seen in the US where Fed Funds were cut from 6% to 13⁄4% during 2001. The trends in the UK are all the more remarkable given the extent of the slowdown in growth seen elsewhere. Inevitably this has been at the expense of the UK’s overseas trade current account, where the rise in the deficit, coupled with the 6% growth in UK retail sales, has led fixed interest markets to expect a rise in UK base rates later in 2002. In this climate, overall profit growth for UK companies has been dull, but there FTSE 100 - PRICE INDEX From 31/1/01 to 31/1/02 Daily 6400 6200 6000 5800 5600 5400 5200 5000 4800 4600 4400 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN Source: DATASTREAM The following two months saw a very sharp recovery in values, largely prompted by an aggressive easing of monetary policy in all Western economies. Central Banks were intent on sustaining growth rather than containing inflation. The year ended in a quiet fashion with the FTSE 100 index in a trading range just above have been extremes of performance depending the 5000 level. on the nature of individual companies and also their market positions. Defensive companies in general have done well. The foreign exchanges have influenced corporate profits, with US revenues and profits gaining from the strength in the dollar, but with interests elsewhere suffering from weakness in the Euro and most Far Eastern currencies. Market Trends Despite some recovery towards the end of the financial year, the last twelve months has been disappointing overall for investors. As the first chart on this page shows, the FTSE 100 Index drifted off in the first half. This was in response to adverse trends in overseas economies and Looking at sector performances, the impact of the further decline in the “new economy” components can be seen in the second graph on page 11, which shows the market excluding Telecoms, Media and Technology (TMT). For this latter index the total return, including dividends, was of the order of −5.6%, compared with −15.6% for the FTSE All Share Index. Of note were returns recorded by Information Technology (−70.1%), Telecoms (−48.4%) and Media (−38.3%). In contrast the market leaders included Tobacco (+35.2%), Beverages (+21.9%) and Retailers (+21.5%). As in the past, the portfolio has put greater emphasis on the latter grouping, thus protecting shareholders from the worst of the market markets. A rally in April did not prove to be decline. 10 I n v e s t m e n t M a n a g e r s ’ R e v i e w FTSE All Share & Ex-TMT (Indexed to 100)(cid:255) 31/1/01 to 31/1/02 FTSE ALL SHARE EX TMT FTSE ALL SHARE a defensive nature included AstraZeneca, the leading pharmaceutical group, and Northern Foods, a key supplier to the UK’s major supermarket chains. There were purchases of two recovery situations in the cases of BPB and Rank, where new management and changed market circumstances are exerting a positive influence. The Trust also invested in Woolworths, following its de-merger from the Kingfisher Group. Regarding corporate activity, the take- JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN over of Beazer by Persimmon benefited the Source: DATASTREAM portfolio, along with the latter’s appreciation 105 100 95 90 85 80 75 Portfolio Changes The fundamental structure of the portfolio has meant that, in broad terms, it was well placed to show defensive qualities in the above market environment. Nevertheless it was necessary to review a number of investments, where it appeared that the companies concerned were vulnerable to these trends. Accordingly it was decided to dispose of all the holdings in Amvescap, Carlton Communications, ICI, Reuters and WPP. Additionally there was a complete disposal of the holding in Man Group, the specialist fund management group, following its substantial appreciation. Lastly in terms of significant disposals, the holding in mm02, which incorporates BT’s mobile telephone interests, was sold following its de-merger from its parent. In the last year there have been a number of opportunities to add to existing holdings, particularly in the banking sector, on attractive yields. Such purchases included Halifax (now HBOS), Lloyds TSB and Royal Bank of Scotland as well as additions to Gallaher and Lattice. The latter two additions can be categorised by the defensiveness of their earnings at a time of economic uncertainty. Other new investments of following completion. In addition the merger of Bank of Scotland and Halifax had a similar advantageous impact. Lastly the Trust crystallised useful gains during the year through shorter-term holdings in Misys and the London Stock Exchange. Future Policy Although established UK company shares have out-performed the market as a whole, the fall in their value means that many such shares are now lowly rated by recent standards. Clearly there is a need to be very conscious of their balance sheet and cashflow characteristics, especially in the light of the current debate over accounting and auditing standards. Given the likely persistence of low inflation, and therefore lower nominal returns from equities, yield is becoming a more important factor for investors. Although there have been some high-profile reductions in individual dividend payments, the overall trend has remained reasonably robust, largely through payments by the financial sector. There are grounds for a little more optimism overall and an improved economic environment should follow through to increased dividend payments from the quoted sector as a whole. 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 2002 Value (£) 34,798,000 32,988,800 28,713,000 21,843,597 19,220,000 16,826,552 14,004,500 13,384,051 11,723,250 11,686,100 10,152,000 10,010,000 9,204,500 9,031,050 8,777,250 8,714,300 8,624,000 8,257,000 8,176,000 7,887,500 7,835,520 7,705,600 7,645,000 7,339,846 7,008,750 6,950,125 6,934,200 6,840,000 6,797,250 6,681,575 6,629,970 6,396,000 6,349,250 6,326,250 6,315,000 6,141,750 5,687,500 5,572,095 5,542,000 5,310,500 5,292,000 5,285,000 5,255,250 5,253,000 5,023,500 4,826,250 4,821,421 Principal Activities Oil exploration and production Banking Pharmaceuticals Banking Oil and gas Banking Banking Banking Telecommunications Banking Brewing and leisure Tobacco Telecommunications Tobacco Life and general insurance Life and general insurance Food retailing Leisure and hotels Industrial gases Life and general insurance Building materials Water Mining Banking Life and general insurance Gas distribution Building materials distribution Housebuilding Leisure and gaming Spirits and food Housebuilding Sugar Mining Property Airports and retailing Betting and hotels Pharmaceuticals Banking Retailing Transport and storage Retailing Food retailing Electricity Food Engineering Building materials Retailing BP Amoco HSBC GlaxoSmithkline HBOS Shell Royal Bank of Scotland Lloyds TSB Abbey National Vodafone Alliance & Leicester Scottish & Newcastle Imperial Tobacco British Telecommunications Gallaher Prudential CGNU Sainsbury(J) Six Continents BOC Legal & General BPB United Utilities Rio Tinto Bradford & Bingley Royal & Sun Alliance Lattice Wolseley Wimpey Rank Allied Domecq Wilson Connolly Tate & Lyle Anglo American Land Securities BAA Hilton AstraZeneca Standard Chartered Boots Associated British Ports General Universal Stores Safeway Scottish Power Northern Foods Tomkins RMC Next 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 2002 FKI 3i Group Kingfisher Scottish & Southern Energy BBA Britannic *Airtours United Business Media Rexam Pennon Persimmon Slough Estates Close Bros Morgan Crucible EMI Lonmin Woolworths Provident Schroders National Grid Exel Severn Trent Johnson Matthey Marconi *Consists of Convertible Bonds Value (£) 4,800,000 4,596,000 4,528,125 4,354,000 4,352,000 4,312,500 4,197,155 4,188,502 4,173,000 4,148,000 3,948,768 3,914,431 3,901,125 3,580,000 3,360,000 3,181,500 3,143,374 3,118,800 3,024,600 2,806,250 2,772,000 2,639,997 1,642,428 285,843 £546,754,450 Principal Activities Engineering Investment company Retailing Electricity Engineering Life insurance Travel Media Consumer packaging Water Housebuilding Property Banking Engineering Media Mining Retailing Consumer lending Fund management Electricity Logistics Water Chemicals Telecommunications equipment 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 2002 Capital return on FTSE 100 Index Relative return from Portfolio Change in total assets Impact of gearing Expenses charged to capital Impact of repurchases of shares Change in Net Asset Value per Ordinary Share *Share repurchases had a minimal impact in 2001/2002 % (18.0) 10.8 (7.2) (2.3) (1.5) 0.0* (11.0) % 13 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 2002 Total Assets (less creditors falling due within one year) £534,248,098 (2001: £586,989,188) Percentage of Total Assets 2002 3.2 10.1 13.3 1.8 6.9 0.0 8.7 0.0 3.3 3.3 1.3 2.2 6.4 3.5 13.4 4.4 6.7 1.4 0.8 2.7 16.0 2.6 3.9 6.5 2.3 1.3 2.7 6.3 23.1 1.3 5.6 0.9 1.9 1.9 34.7 0.1 0.1 2001 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 0.0 4.0 16.8 1.9 9.1 11.0 2.7 0.8 1.7 5.2 17.2 1.9 4.2 0.0 2.1 1.6 27.0 1.4 1.4 2002 2001 2002 2001 13.3% 14.6% Resources 8.7% 10.2% Basic Industries 2002 2001 3.3% 4.8% General Industrials 13.4% 9.7% Non-Cyclical Consumer Goods 16.0% 16.8% Cyclical Services 6.5% 11.0% Non-Cyclical Services 2002 2001 2002 2001 2002 2001 2002 2001 6.3% 5.2% Utilities 2002 2001 Financials 2002 0.1% 2001 1.4% 34.7% 27.0% Information Technology 102.3 (2.3) 100.0 100.7 (0.7) 100.0 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 Pharmaceuticals Tobacco Cyclical Services General retailers Leisure, entertainment & hotels Media & photography Support services Transport Non-Cyclical Services Food & drug retail Telecommunication services Utilities Electricity Gas distribution Water Financials Banks Insurance Life assurance Investment companies Real estate Speciality & other financials Information Technology Information technology hardware Total Equities Net Current Liabilities Total Assets 14 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 Merchants NAV total return Merchants share price total return FTSE 100 total return 250 200 150 100 50 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Rebased to 100, net income reinvested) Source: Datastream Merchants Net Dividend Growth compared to Inflation* Dividend Growth Rate UK Retail Price Index 160 150 140 130 120 110 100 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 *excluding FID enhancements (see page 8 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(cid:255) Asset Value 92 93 94 95 96 97 98 99 00 01 02 15 The Merchants Trust PLC R i s k R e v i e w Financial Reporting Standard 13—Derivatives market positions in the face of price movements. and Other Financial Instruments: Disclosure The Board meets regularly to consider the asset FRS 13 requires entities to disclose narrative and allocation of the portfolio in order to evaluate the numerical information about the financial risk associated with particular industry sectors. A instruments that they use. dedicated fund manager has the responsibility for This information is given so that investors monitoring the existing portfolio selection in in the Company can decide for themselves accordance with the Company’s investment whether their investment is high or low risk. It also objectives and seeks to ensure that individual allows them to assess what kind of impact the stocks meet an acceptable risk reward profile. use of financial instruments (investments, cash/ overdraft and borrowings) will have on the performance of the entity. Short term debtors and creditors are not considered to be financial instruments. They have been included at the bottom of the numerical disclosure in Note 20(a) merely to enable users of the accounts to reconcile the summary provided to total net assets per the balance sheet. The narrative below explains the different types of risks the Company may face. Numerical disclosures are listed in Note 20 to the Accounts. These disclosures are in line with the requirements of FRS 13. As an investment trust, the Company invests in securities for the long term. Accordingly it is, and has been throughout the year under review, the Company’s policy that no short term trading in investments or other financial instruments shall be undertaken. The main risks arising from the Company’s financial instruments are market Liquidity risk The Company’s assets mainly comprise realisable securities, which can be sold to meet funding requirements if necessary. Short-term flexibility can be achieved through the use of overdraft facilities where necessary. Interest rate risk The Company invests predominantly in equities, the values of which are not directly affected by changes in prevailing market interest rates. The Company finances its operations through a mixture of share capital, retained earnings and long term borrowings. Foreign currency risk The Company invests predominantly in UK listed securities. Accordingly, the income and capital value of the Company’s investments are not materially affected by exchange rate price risk, liquidity risk and interest rate risk. The movements. risk profile and the policies adopted to manage risk did not change materially during either the Credit risk current or the previous period. Market price risk In February 2000 the Trust commenced stock lending in order to generate additional income. The risk of default is managed by holding Market price risk arises mainly from the collateral, in the form of sterling letters of credit uncertainty about future prices of financial and FTSE 100 equities amounting to 105% of the instruments held. It represents the potential loss mid value of the stock on loan. The level of the Company might suffer through holding collateral required is recalculated on a daily basis. 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 2002 2002 £ 2002 £ 2002 £ 2001 £ 2001 £ Revenue Capital Total Revenue Capital 2001 £ Total Note 8 1 2 3 Net (losses) gains on investments Exchange rate differences Income Investment management fee Expenses of administration Net return before finance costs and taxation — (45,049,190) (45,049,190) — 89,852,702 89,852,702 — (47,836) (47,836) — 1,158,076 1,158,076 21,595,671 — 21,595,671 21,546,258 — 21,546,258 (805,463) (1,495,860) (2,301,323) (826,964) (1,535,791) (2,362,755) (588,430) — (588,430) (642,557) — (642,557) 20,201,778 (46,592,886) (26,391,108) 20,076,737 89,474,987 109,551,724 Finance costs of borrowings 4 (3,068,058) (5,682,815) (8,750,873) (3,134,815) (5,723,936) (8,858,751) Return on ordinary activities before taxation 17,133,720 (52,275,701) (35,141,981) 16,941,922 83,751,051 100,692,973 Taxation 5 (39,079) 39,079 — (184,352) 184,352 — Return on ordinary activities after taxation for the financial year Dividends on Preference Stock Return attributable to 17,094,641 (52,236,622) (35,141,981) 16,757,570 83,935,403 100,692,973 (42,997) — (42,997) (42,997) — (42,997) Ordinary Shareholders 17,051,644 (52,236,622) (35,184,978) 16,714,573 83,935,403 100,649,976 Dividends on Ordinary Shares Transfer (from) to reserves Return per Ordinary Share Net Asset Value Per Ordinary Share Per Preference Stock Unit 6 (17,155,611) — (17,155,611) (16,769,646) — (16,769,646) (103,967) (52,236,622) (52,340,589) (55,073) 83,935,403 83,880,330 16.70p (51.15p) (34.45p) 16.35p 82.09p 98.44p 7 15 412.3p 100.0p 463.5p 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 20 to 33 form part of these Accounts. 17 The Merchants Trust PLC B a l a n c e S h e e t at 31st January 2002 2002 £ 2002 £ 2001 £ Fixed Assets Investments Current Assets Debtors Cash at bank Note 8 10 10 2,628,868 — Creditors—Amounts falling due within one year 10 (15,152,435) 25,525,984 1,178,000 385,653,373 (422,226) 10 11 11 12 13 13 14 16 15 15 Net Current Liabilities Total Assets less Current Liabilities Creditors—Amounts falling due after more than one year 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 9th April 2002 and signed on its behalf by: Hugh Stevenson Joe Scott Plummer   Directors  The Notes on pages 20 to 33 form part of these Accounts. 18 546,771,665 591,210,681 7,771,150 1,044,517 8,815,667 (13,037,160) (12,523,567) (4,221,493) 534,248,098 586,989,188 (112,087,474) (112,082,455) 422,160,624 474,906,733 26,703,984 56,250 39,809 25,550,984 1,178,000 26,728,984 31,250 39,809 384,849,145 53,024,144 385,231,147 10,129,434 437,873,289 10,233,401 422,160,624 474,906,733 420,982,624 1,178,000 473,728,733 1,178,000 422,160,624 474,906,733 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 2002 2002 £ 2002 £ 2001 £ 19,433,017 17,748,009 Note 18 (8,745,854) (42,997) (8,850,396) (42,997) Net cash outflow on servicing of finance (8,788,851) (8,893,393) Taxation UK income tax (paid) repaid Investing Activities Payments to acquire fixed asset investments Proceeds on disposal of fixed asset investments (660,987) 865,492 (221,291,887) 227,689,157 (334,875,548) 340,271,533 Net cash inflow from financial investment 6,397,270 5,395,985 Equity dividends paid Net cash outflow before financing Financing (Decrease) increase in short term loan Purchase of Ordinary Shares for cancellation Cash (outflow) inflow from financing (16,959,605) (16,677,567) (579,156) (1,561,474) (802,368) (405,520) 1,488,189 (468,880) (1,207,888) 1,019,309 Decrease in cash 19 (1,787,044) (542,165) The Notes on pages 20 to 33 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 2002 (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. 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 lending fees 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 Company’s 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 and revenue 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. Full provision is made for deferred taxation except to the extent that deferred tax assets are likely to be considered irrecoverable. (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 Interest from overseas fixed income securities Other income Deposit interest Underwriting commission Stocklending fees Total income Income from Investments Listed Unlisted for the year ended 31st January 2002 2002 £ 2002 £ 2001 £ 199,287 — 256,202 11,321 10,983 20,905,128 18,956,896 212,750 1,240,814 957,769 63,139 199,287 1,020,908 21,317,165 21,218,618 310,266 6,527 10,847 278,506 327,640 21,595,671 21,546,258 21,317,165 21,218,618 — — 21,317,165 21,218,618 2. Investment Management Fee 2002 £ 2002 £ 2002 £ 2001 £ 2001 £ Revenue Capital Total Revenue Capital 2001 £ Total Investment management fee 805,463 1,495,860 2,301,323 826,964 1,535,791 2,362,755 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% (2001 – 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 £342,750 (2001 – £351,900). 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 of Savings Scheme Other promotional activity Other administrative expenses for the year ended 31st January 2002 2002 £ 68,053 15,891 281,994 34,561 187,931 2001 £ 70,637 13,548 302,472 56,558 199,342 588,430 642,557 (i) The above expenses include value added tax where applicable. (ii) There were no payments to the Auditors in respect of non-audit services included in other administrative expenses (2001 – £nil). (iii) Directors’ fees are paid at the rate of £10,000 (2001 – £10,000) per annum with an additional sum of £3,000 (2001 – £3,000) per annum paid to the Chairman of the Audit Committee and an additional sum of £5,000 (2001 – £5,000) per annum paid to the Chairman. 4. Finance Costs of Borrowings 2002 £ 2002 £ 2002 £ 2001 £ 2001 £ Revenue Capital Total Revenue Capital 2001 £ Total On Stepped Rate Interest Loan repayable after more than five years 1,094,179 2,032,046 3,126,225 1,091,316 2,026,728 3,118,044 On Fixed Rate Interest Loan repayable after more than five years 1,324,943 2,460,609 3,785,552 1,326,416 2,463,344 3,789,760 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 621,605 1,154,410 1,776,015 645,138 1,198,114 1,843,252 8,081 — 8,081 52,695 — 52,695 3,068,058 5,682,815 8,750,873 3,134,815 5,723,936 8,858,751 22 N o t e s t o t h e A c c o u n t s 5. Taxation Reconciliation of current charge for the year ended 31st January 2002 2002 £ 2002 £ 2002 £ 2001 £ 2001 £ Revenue Capital Total Revenue Capital 2001 £ Total Return on ordinary activities before taxation 17,133,720 (52,275,701) (35,141,981) 16,941,922 83,751,051 100,692,973 Tax on return on ordinary activities at 30% (2001—30%) 5,140,116 (15,682,710) (10,542,594) 5,082,577 25,125,315 30,207,892 Reconciling factors: Non taxable income Non taxable capital gains Disallowable expenses Excess of allowable expenses over taxable (6,335,363) — (6,335,363) (6,059,313) — (6,059,313) — 13,529,108 13,529,108 — (27,303,233) (27,303,233) 106,184 19,405 125,589 136,090 17,443 153,533 income 1,128,142 2,095,118 3,223,260 1,024,998 1,976,123 3,001,121 Current year tax charge 39,079 (39,079) — 184,352 (184,352) — The Company’s taxable income is exceeded by its tax allowable expenses, which include both the capital and revenue elements of the management fee and finance costs of borrowings. The Company has surplus expenses carried forward of £45m (2001: £34m). Given the Company’s current investment strategy, it is unlikely to generate sufficient UK taxable profits to relieve these expenses. As at 31st January 2002 there is an unrecognised deferred tax asset, measured at the standard rate of 30%, of £13.5m (2001: £10.3m). This deferred tax asset relates to the current and prior year unutilised expenses. It is considered uncertain that there will be taxable profits in the future against which the deferred tax asset can be offset. Therefore the asset has not been recognised. 23 The Merchants Trust PLC 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 4.2p paid 10th August 2001 (2000 – 4.10p) Second interim 4.2p paid 9th November 2001 (2000 – 4.10p) Third interim 4.2p paid 16th February 2002 (2001 – 4.10p) Final proposed – 4.2p payable 14th May 2002 (2001 – 4.10p) Prior year over accrual for the year ended 31st January 2002 2002 £ 2001 £ 4,290,465 4,195,486 4,290,465 4,193,436 4,288,365 4,190,362 4,288,365 4,190,362 (2,049) — 17,155,611 16,769,646 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 all or part of this tax credit and charities are subject to transitional provisions. 7. Return per Ordinary Share 2002 £ 2002 £ 2002 £ 2001 £ 2001 £ Revenue Capital Total Revenue Capital 2001 £ Total Return after taxation 17,094,641 (52,236,622) (35,141,981) 16,757,570 83,935,403 100,692,973 Attributable to Preference Stockholders (42,997) — (42,997) (42,997) — (42,997) Attributable to Ordinary Shareholders 17,051,644 (52,236,622) (35,184,978) 16,714,573 83,935,403 100,649,976 Return per Ordinary Share 16.70p (51.15p) (34.45p) 16.35p 82.09p 98.44p The return per Ordinary Share is based on a weighted average of 102,131,744 Ordinary Shares of 25p in issue throughout the period (2001 – 102,250,726). 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 2002 8. Fixed Asset Investments Note Listed at market valuation on recognised Stock Exchanges— United Kingdom Unlisted at Directors’ valuation— Abroad Subsidiary at Directors’ valuation 2002 £ 2001 £ 546,754,450 591,159,223 9 17,215 — 17,215 51,458 — 51,458 Total fixed asset investments 546,771,665 591,210,681 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 (losses) 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 gains (losses) based on carrying value at previous balance sheet date Net unrealised (losses) gains arising in the year Net (losses) gains on investments 591,210,681 (53,024,144) 508,246,237 (6,822,647) 538,186,537 224,015,391 (215,008,037) 501,423,590 320,738,103 (283,975,156) 547,193,891 (422,226) 538,186,537 53,024,144 546,771,665 591,210,681 8,397,180 43,651,205 (1,889,072) (44,810,715) 6,508,108 (51,557,298) (1,159,510) 91,012,212 (45,049,190) 89,852,702 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 £ 15.2m 41.6m 10,983 £ 6.8m 32.7m 10,847 In respect of securities on loan at the year-end, the Company held £16.0m (2001 – £7.2m) as collateral, the value of which exceeded the value of the loan securities by £0.8m (2001 – £0.4m). In respect of the maximum aggregate value of securities on loan during the year, the Company held £43.7m (2001 – £34.4m) as collateral, the value of which exceeded the value of the securities on loan by £2.1m (2001 – £1.7m). 25 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 2002 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. This subsidiary is deemed not material for the purposes of giving a true and fair view. 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: Total Net Assets* Class of Company First Debenture Finance PLC (‘FDF’) Fintrust Debenture PLC (‘Fintrust’) £ Shares Held % of Class held % Equity (863,650) 5,690 ‘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. *At the date of the latest published financial statements 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 account 26 2002 £ 2001 £ 470,470 2,129,245 19,484 9,669 4,802,246 2,940,209 28,695 — 2,628,868 7,771,150 — — — 404,517 640,000 1,044,517 N o t e s t o t h e A c c o u n t s for the year ended 31st January 2002 10. Current Assets and Creditors (continued) Note Creditors: Amounts falling due within one year— Bank overdraft Taxation payable Purchases for future settlement Short term loan (see (v) below) 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) 2002 £ 742,527 — 2,723,504 685,821 1,083,088 1,319,266 21,499 4,288,365 4,288,365 2001 £ — 650,578 — 1,488,189 1,176,904 1,319,266 21,499 4,190,362 4,190,362 15,152,435 13,037,160 34,998,003 46,743,496 28,970,975 1,375,000 34,900,297 46,849,398 28,957,760 1,375,000 112,087,474 112,082,455 6 6 (i) The effective interest rate of the Stepped Rate Interest Loan over its term is 11.28% per annum. 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%. These amounts are repayable on 2nd January 2018 exclusive of any redemption expenses, together with a premium of £8,366,513. The initial interest rate in 1987 on the Loan Notes and Bonds was 7.16% per annum. This increased annually by 7.5% compound until January 1998 when it reached its current rate of 14.75%. However, the combined effect of this interest charge and the accrual of the premium referred to above results in an effective interest rate of 11.28% per annum. Interest is payable in January and July each year. Interest on the Loan Notes is variable in accordance with the terms of the agreement with the lender, First Debenture Finance PLC (“FDF”). 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 KOIT’s 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 £4,873,202 (2001 – £4,980,907). 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. 27 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 2002 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 Bonds 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. Interest is payable in arrears by equal half yearly instalments in May and November. (v) The short term loan from FDF is interest free and repayable on demand. (vi) Interest on borrowings consists of: 2002 £ 313,728 783,545 208,243 13,750 2001 £ 313,728 783,545 208,243 13,750 1,319,266 1,319,266 2002 £ 2001 £ Stepped Rate Interest Loan Fixed Rate Interest Loan 5.875% Secured Bonds 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 1,178,000 102,103,936 3.65% Cumulative Preference Stock Units of £1 Ordinary Shares of 25p (2001 – 102,203,936) 1,178,000 25,525,984 1,178,000 25,550,984 26,703,984 26,728,984 (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 14th May 2001 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, 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 14th May 2001 to allot relevant securities for cash, in accordance with Section 95 of the Companies Act 1995, up to a maximum aggregate nominal amount of £1,274,703. 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. (iii) During the year the Company repurchased 100,000 Ordinary Shares for cancellation at a cost of £405,520. 28 N o t e s t o t h e A c c o u n t s 12. Capital Redemption Reserve Balance at 1st February 2001 Movement in the year Balance at 31st January 2002 for the year ended 31st January 2002 £ 31,250 25,000 56,250 The balance of this reserve was increased by the transfer of £25,000 relating to the repurchase for cancellation by the Company of 100,000 Ordinary Shares of 25p. 13. Capital Reserve Balance at 1st February 2001 Net gain on realisation of investments Decrease 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 Realised Unrealised £ £ Total £ 384,849,145 53,024,144 437,873,289 6,508,108 — 6,508,108 — (51,557,298) (51,557,298) 1,889,072 (1,889,072) — (47,836) (1,495,860) (5,682,815) 39,079 (405,520) — — — — — (47,836) (1,495,860) (5,682,815) 39,079 (405,520) Balance at 31st January 2002 385,653,373 (422,226) 385,231,147 14. Revenue Reserve Balance at 1st February 2001 Deficit for the year Balance at 31st January 2002 £ 10,233,401 (103,967) 10,129,434 29 The Merchants Trust PLC N o t e s t o t h e A c c o u n t s 15. Net Asset Value per Share for the year ended 31st January 2002 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: Ordinary Shares of 25p 3.65% Cumulative Preference Stock Units of £1 Ordinary Shares of 25p 3.65% Cumulative Preference Stock Units of £1 Net Asset Value per Share attributable 2002 412.3p 100.0p 2001 463.5p 100.0p Net Asset Values attributable 2002 £ 2001 £ 420,982,624 473,728,733 1,178,000 1,178,000 The movements during the year of the assets attributable to each class of share were as follows: Total net assets attributable at 1st February 2001 Total return on ordinary activities after taxation for the year Purchase of Ordinary Shares for cancellation Dividends appropriated in the year Ordinary Shares £ Cumulative Preference Stock £ Total £ 473,728,733 1,178,000 474,906,733 (35,184,978) (405,520) 42,997 (35,141,981) — (405,520) (17,155,611) (42,997) (17,198,608) Total net assets attributable at 31st January 2002 420,982,624 1,178,000 422,160,624 The Net Asset Value per Ordinary Share is based on 102,103,936 Ordinary Shares in issue at the year end (2001 – 102,203,936). 16. Reconciliation of Movements in Shareholders’ Funds Revenue reserves Revenue profit available for distribution Dividends appropriated in the year Transfer from distributable reserves Other reserves Recognised net capital (losses) profits transferred to capital reserves Purchase of Ordinary Shares for cancellation Net (decrease) increase in Shareholders’ Funds Opening Shareholders’ Funds Closing Shareholders’ Funds 30 2002 £ 2001 £ 17,094,641 16,757,570 (17,198,608) (16,812,643) (103,967) (55,073) (52,236,622) 83,935,403 (405,520) (468,880) (52,746,109) 83,411,450 474,906,733 391,495,283 422,160,624 474,906,733 N o t e s t o t h e A c c o u n t s for the year ended 31st January 2002 17. Contingent Liabilities and Guarantees At 31st January 2002 there were no outstanding contingent liabilities (2001 – £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 UK income tax deducted from unfranked income Decrease (increase) in debtors Decrease in creditors Net cash inflow from operating activities 2002 £ 2001 £ 17,133,720 16,941,922 3,068,058 3,134,815 (1,495,860) (1,535,791) 740 (72,098) 18,706,658 18,468,848 820,175 (93,816) (438,867) (281,972) 19,433,017 17,748,009 19. Reconciliation of net cash flow to movement in net debt (i) Analysis of Net Debt Overdraft £ Cash £ Stepped 5.875% 4% Short and Fixed Secured Perpetual term loan £ Rate loans £ Bonds Debenture 2029 £ Stock £ Net Debt £ At 1st February 2001 Movement in year — 1,044,517 (1,488,189) (81,749,695) (28,957,760) (1,375,000) (112,526,127) (742,527) (1,044,517) 802,368 8,196 (13,215) — (989,695) At 31st January 2002 (742,527) — (685,821) (81,741,499) (28,970,975) (1,375,000) (113,515,822) (ii) Reconciliation of net cash flow to movement in net debt Net cash outflow Decrease (increase) in short term loan (Increase) decrease in long term loans Movement in net funds Net debt brought forward Net debt carried forward 2002 £ 2001 £ (1,787,044) (542,165) 802,368 (1,488,189) (5,019) 151,963 (989,695) (1,878,391) (112,526,127) (110,647,736) (113,515,822) (112,526,127) 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 2002 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. 2002 Fixed rate interest paid £000s 2002 Floating rate interest paid £000s Currency Financial Assets Values directly affected by changes in interest rates: Bonds Sterling Values not directly affected by changes in interest rates: Equities Equities Preference Shares Sterling US Dollar and Bonds Cash Sterling Sterling Total Financial Assets Financial Liabilities Values affected by changes in interest rates: First Debenture Finance — — — — 4,197 — 4,197 4,197 loan Fintrust loan 5.875% Secured Bonds 2029 Sterling Sterling (46,743) (34,998) Sterling (28,971) 4% Perpetual Debenture Stock Sterling (1,375) Values not directly affected by changes in interest rates: Cash Sterling (112,087) — — Total Financial Liabilities (112,087) 2002 2002 Nil interest paid £000s — — 478,428 64,147 — — Total £000s — — 478,428 64,147 4,197 — 542,575 546,772 542,575 546,772 2001 Fixed rate interest paid £000s — — — — 12,484 — 12,484 12,484 — — — — — — — — (46,743) (34,998) (46,849) (34,900) (28,971) (28,958) (1,375) (1,375) (112,087) (112,082) (743) (743) — — (112,830) (112,082) 2001 Floating rate interest paid £000s — — — — — 1,045 1,045 1,045 — — — — — — — — 2001 2001 Nil interest paid £000s — — 491,858 86,868 — — Total £000s — — 491,858 86,868 12,484 1,045 578,726 592,255 578,726 592,255 — — — — — — — — (46,849) (34,900) (28,958) (1,375) (112,082) — — (112,082) — — — — — — — — — — — — — (743) (743) (743) (107,890) (743) 542,575 433,942 (99,598) 1,045 578,726 480,173 (11,781) 422,161 (5,266) 474,907 Net Financial Assets (Liabilities) Short term debtors and creditors Net Assets per Balance Sheet 32 N o t e s t o t h e A c c o u n t s for the year ended 31st January 2002 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 Bonds 4% Perpetual Debenture Stock Maturity date 2/1/2018 2/1/2018 20/11/2023 20/11/2023 20/12/2029 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% (2001 – 9.58%) and the weighted average period to maturity of these liabilities (excluding the 4% perpetual debenture stock) is 22.2 years (2001 – 23.2) years. The Company’s only fixed interest asset has a coupon rate of 5.75% (2001 – 6.41%). It matures in 2.2 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. 2002 Investments £000s 488,196 58,576 2002 Current Assets £000s 2,629 — 2002 Creditors £000s (127,240) — 2002 Net currency exposure £000s 363,585 58,576 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 Sterling US Dollar 546,772 2,629 (127,240) 422,161 591,211 8,816 (125,120) 474,907 (c) Fair Values Disclosures The assets and liabilities of the Company are held at fair value with the exception of the liabilities shown below: First Debenture Finance Loan Fintrust Loan 5.875% Secured Bonds 4% Perpetual Debenture Stock (d) Liquidity profile 2002 £ million Book value 2002 £ million Fair value 2001 £ million Book value 2001 £ million Fair value 35.0 46.7 29.0 1.4 51.9 55.8 26.2 1.0 34.9 46.8 29.0 1.4 50.9 57.8 27.2 1.1 The maturity profile of the Company’s financial liabilities at the 31st January 2002 (being the borrowings from Fintrust, First Debenture Finance, the 5.875% Secured Bonds and the 4% Perpetual Debenture stock) is detailed in Note 10—“Current Assets and Creditors” on pages 26 to 28. The undrawn committed borrowing facilities available to the Company at 31st January 2002 were £9,257,473. (e) Hedging instruments At the year end the Company had no hedging arrangements in place. (2001 – Nil) 33 The Merchants Trust PLC I n d e p e n d e n t 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 Merchants Trust PLC We have audited the financial statements which comprise the statement of total return, the balance sheet and the cash flow statement and notes 1 to 20, which have been prepared under the historical cost convention (as modified by the revaluation of certain fixed assets) and the accounting policies set out in the statement of accounting policies. 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 investment manager’s report 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 2002 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 34 9th April 2002 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 2002 and with the Internal Control Guidance for Directors in the Combined Code published in September 1999 (“the Turnbull guidance”) except that, 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 38, demonstrate a breadth of investment, industrial and commercial experience. 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. 35 The Merchants Trust PLC C o r p o r a t e G o v e r n a n c e 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 42 to 43. Separate resolutions are proposed for each substantive issue. Accountability and Audit The Directors’ statement of responsibilities in respect of the accounts is on page 35 and a statement of going concern is on page 39. The report of the auditors can be found on page 34. 36 C o r p o r a t e G o v e r n a n c e Internal Control The Directors have overall responsibility for the Company’s system of internal controls and are also responsible for reviewing its effectiveness. 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 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 have been taken to continue to ensure that the system of internal control and risk management is embedded in 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 Note 2 on 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 the FSA and its compliance department regularly monitors their compliance with FSA 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. The regular and comprehensive review (cid:254) by the Board of management of 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. By means of the process above, the Board has reviewed the effectiveness of internal controls for the period under review and up to the date of the signing of this Report and Accounts. 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. The Managers use a proxy voting service which casts votes in accordance with the guidelines of the National Association of Pension Funds (NAPF) research material, unless its clients request a very specific policy to be voted by its fund managers. Where Directors hold directorships on the boards of companies in which the Company is invested, they do not participate in decisions made concerning those investments. 37 The Merchants Trust PLC 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 Controller of the Audit Commission and Director General of the Confederation of British Industry, he is Chairman of Whitbread PLC and ECI Ventures Ltd. He is also the Senior Non-Executive 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, The Fleming Overseas Investment Trust PLC, The Edinburgh Investment 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. 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. 38 D i r e c t o r s ’ R e p o r t Status The Company was last approved by the Inland Revenue as an investment trust for the year ended 31st January 2001. Approval for the year ended 31st January 2002 is subject to there being no subsequent enquiry under Corporate Tax Self Assessment. In the opinion of the Directors the Company has subsequently conducted its affairs so as to enable it to continue to obtain S.842 approval. 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 100,000 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 £405,520. 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. Commission The Managers had arrangements in place whereby some stockbrokers paid for the use by the Managers of specific investment services in return for business placed with these stockbrokers. With effect from 12th March 2002 these arrangements ceased to apply to any business carried out for the Company. Invested Funds Sales of investments during the year resulted in net gains based on historical costs of £8,397,180 (2001 – £43,651,205). Provisions contained in the Finance Act 1980 exempt approved Investment Trusts from corporation tax on their chargeable gains. Invested funds at 31st January 2002 had a value of £546,754,450 before deducting net liabilities of £124,611,041 (2001 – £591,210,681 and £116,303,948). 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 412.3p as compared with a value of 463.5p at 31st January 2001. Donations and Subscriptions Aggregate charitable donations and subscriptions in respect of the year amounted to £2,564 (2001 – £Nil). 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. 39 The Merchants Trust PLC 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 17,133,720 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 4.2p per Share paid 10th August 2001 2nd Interim 4.2p per Share paid 9th November 2001 3rd Interim 4.2p per Share paid 16th February 2002 Final 4.2p per Share proposed payable on 14th May 2002 Prior year over accrual leaving a deficit to be transferred from the Revenue Reserve of £ 4,290,465 4,290,465 4,288,365 4,288,365 (2,049) (39,079) 17,094,641 (42,997) 17,051,644 (17,155,611) (103,967) Subject to the final dividend being approved payment will be made on 14th May 2002 to shareholders on the Register of Members at the close of business on 12th April 2002 at the rate of 4.2p per Ordinary Share. Further details are provided in Note 6 on page 24. 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 (5.0%). Ordinary Shares of 25p: Barclays PLC and its subsidiaries–4,209,758 (4.1%). 40 D i r e c t o r s ’ R e p o r t Directors and Management All Directors listed below served throughout the financial year under review. Sir John Banham and Mr A. D. W. Forbes retire by rotation in accordance with the Articles of Association. Mr Forbes is not seeking re-election and will retire from the Board with effect from the conclusion of the Annual General Meeting. Sir John Banham being eligible offers himself for re-election. The present Board and their interests in the share capital of the Company as at 31st January 2002 and 2001 (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 2002 2001 Beneficial Non-Beneficial Beneficial Non-Beneficial 1,930 800 1,000 500 1,000 25,000 — — — — — — 1,872 800 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 17 ordinary share of 25p each through the Dresdner RCM Investment Trust ISA bringing his total holding in the Trust to 1,947 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 (2001 – 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 (2001 – 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 31st January 2003 will be £272,140 excluding VAT (2002 – £265,806 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. 41 The Merchants Trust PLC 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 2002 2001 2002 2001 2002 2001 2002 2001 Private holders* Nominees Insurance Companies Other holders Pension Funds Investment Trusts and Funds 10,212 10,084 4,844 4,476 43 559 9 240 57 546 8 312 64.2 30.4 0.3 3.5 0.1 1.5 65.1 28.9 0.4 3.5 0.1 2.0 26,829 66,015 1,784 3,796 91 27,145 64,387 2,266 4,076 74 3,588 4,208 26.3 64.7 1.7 3.7 0.1 3.5 26.6 63.0 2.2 4.0 0.1 4.1 15,907 15,483 100.0 100.0 102,103 102,156 100.0 100.0 *Including PEP, ISA and Saving Plan Nominees. Based on an analysis of the Ordinary Share register at 25th March 2002 (28th March 2001). 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. 42 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 15,305,380 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 2003 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 £1,331,828. 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 14th May 2001 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 £1,273,746 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 2002. 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. By Order of the Board Kirsten Salt Deputy Secretary 9th April 2002 43 The Merchants Trust PLC 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, 13th May 2002 at 12 noon 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 2002 together with the Auditors’ Report thereon. To declare a final ordinary dividend of 4.2p per Ordinary Share. To re-elect Sir John Banham 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 Special Business Resolution 7 will be proposed as an Ordinary Resolution and resolutions 6 and 8 as Special Resolutions: 6 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 15,305,380; 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 2003 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. 44 N o t i c e o f M e e t i n g 7 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 £1,331,828 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. 8 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 £1,273,746 (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 9th April 2002 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 noon on 11th May 2002 (“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. 45 The Merchants Trust PLC 46 Printed by Park Communications, London 02/18269 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 F o r m o f P r o x y 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/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 13th May 2002 at 12 noon and at any adjournment thereof. POSTCODE jB Routine Business Against To receive the Report and Accounts......................................... M................... M To declare a final dividend of 4.2p ............................................ M................... M To re-elect Sir John Banham as a Director................................ M................... M To re-appoint PricewaterhouseCoopers as Auditors................. M................... M For To authorise the Directors to determine the remuneration of the Auditors ......................................................................... M................... M Special Business To authorise the Company to make market purchases of its own shares.............................................................................. M................... M To renew the Directors’ authority to allot shares........................ M................... M To renew the Directors’ authority to allot shares for cash........... M................... M 1 2 3 4 5 6 7 8 jC Shareholders Details SURNAME/TITLE FORENAMES ADDRESS SIGNATURE POSTCODE DATE 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. BUSINESS REPLY SERVICE Licence No. MB 122 Third Fold and Tuck in 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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