The Merchants Trust Plc
Annual Report 2005

Plain-text annual report

The Merchants Trust PLC Report and Accounts for the year ended 31 January 2005 The Merchants Trust PLC Contents Investment Objective................................................................................. Benchmark.................................................................................................. Financial Highlights ................................................................................... Performance Attribution Analysis............................................................ Chairman’s Statement............................................................................... Historical Record........................................................................................ Thirty Largest Holdings............................................................................. Investment Managers’ Review.................................... ............................. United Kingdom Listed Holdings............................................................. 2 2 2 2 3 4 5 6 8 Statement of Total Return ........................................................................ 16 Balance Sheet............................................................................................. 17 Cash Flow Statement................................................................................. 18 Statement of Accounting Policies............................................................ 19 Notes to the Accounts............................................................................... 20 Independent Auditors’ Report ................................................................. 32 Statement of Directors’ Responsibilities................................................. 33 Corporate Governance ............................................................................. 34 Directors...................................................................................................... 37 Distribution of Total Assets ...................................................................... 10 Directors’ Remuneration Report.............................................................. 38 Performance Graphs............................................. .................................... 12 Directors’ Report........................................................................................ 40 Risk Review.................................................... ............................................. 13 Notice of Meeting ...................................................................................... 44 Investor Information.................................................................................. 14 Form of Proxy Contact Details................................................ ........................................... 15 1 The Merchants Trust PLC Key Facts Investment Objective 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. Benchmark The Company’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 350Higher Yield Index, reflecting the Company’s higher yield objective. Financial Highlights for the years ended 31 January Revenue20052004 % Revenue£22,674,672 Available for Ordinary Dividend Earnings per Ordinary Share Dividends per Ordinary Share Assets Total Net Assets Net Asset Value per Ordinary Share Ordinary Share Price383.8p Discount of Net Asset Value to Ordinary Share Price £17,950,187 17.58p 18.00p £22,246,829 £17,701,638 17.34p 17.60p 20052004 % £416,499,554 £358,620,277 406.8p 5.7%6.8% 350.1p 326.3p Performance Attribution Analysis for the year ended 31 January 2005 Capital return of FTSE 100 Index10.5 Relative return from Portfolio Capital return of Portfolio Impact of gearing on Portfolio Expenses charged to Capital Change in Net Asset Value per Ordinary Share 2 change +1.9 +1.4 +1.4 +2.3 change +16.1 +16.2 +17.6 n/a % 3.5 14.0 3.9 (1.7) 16.2 The Merchants Trust PLC Chairman’s Statement Results In the last financial year the UK stock marketcontinued t he pattern of recovery established in 2003/4. The Trust’s net asset value per share rose by16.2%to 4 06.8p and, including dividends paid, the total underlying return per share was 21.3%compared with the total return of 14.3% recorded by the FTSE 100 Index. The Trust’s total assets increased in valueby14.0%before allowing for the impact of gearing and costs. In comparison, the FTSE 100 Index rose by 10.5%, whilst the FTSE Higher Yield Index rose by 15.3%. As in the previous financial year, the Trust’s gearing hashad a positive impact,adding 3 .9% to the returns to shareholders. The full Performance Attribution Analysis is shown on page 2. In the twelve months to 31 January 2005, the Trust’s share price rose by 17.6% from 326.3p to383.8p. As at4April 2 005, the Trust’s ordinary shares yielded 5.0% compared with the yield on the FTSE 100 Index of 3.2%. Market Background As reported at the interim stage, the level of the UK share market was hardly changed in the first six months of the financial year; nearly all the market appreciation seen in 2004/5 occurred in the second half. Equity markets rose as a result of the continuation of recent growth trends, the fall in bond yields and a significant revival of take-over activity.Furthermore, current buoyant corporate cashflows are in many cases being converted into higher dividend payments toshareholders. Earnings Per Share In 2004/5 net earnings per share rose by1.4% to 17.58p. Over 20% of the Trust’s income is paid in US dollars.During t he year,the negative impact from the decline in value of the US dollar was approximately 0.35p per share or 2.0% of total dividend income (2004 –0.20p or1.2%). The Trust’s reported earnings do not include any special dividends. During the year under review, the Trust received a number of such payments, including Centrica, Great Portland Estates and J Sainsbury. Under current accounting rules the receipts, totalling £2,132,750, or 2.09p per share, fall to be treated as capital disposals. Previously, these would have been treated as revenue receipts. Dividends The Board is recommending a final dividend of 4.5p per share giving a total of 18.0p for the last financial year, which compares with a total of 17.60p for 2003/4, an increase of 2.3%. The total cost of these payments for 2004/5 was £18.4m, which absorbed £0.43m or 0.42p per share from the Trust’s Revenue Reserve. This now stands at £9.50m or9.30p p er share. The Trust has now recorded 23 consecutive years of dividend increases. International Financial Reporting Standards Despite its listing with the UK Listing Authority, the Companyis not currently obliged to adopt International Financial Reporting Standards (‘IFRS’)as it is not part of a group. However, the Board is aware that the well publicised convergence of UK accounting standards towards IFRS will have an impact on the Trust's accounts over the short to medium term, and isin discussion with the Auditors and Managers to ensure that the Trust is well placed to implement these changes as they arise. Repurchases of Shares During the year,the Trust did not add to the number of shares repurchased and cancelled. Thus the total number of shares repurchased remains at 225,000. As in previous years,the Board is proposing to renew this authority at the forthcoming AGM on 10 May 2005. Since December 2003 it has been possible for companies, including investment trusts, to hold shares repurchased in the market in Treasury, rather than cancel them. At this stage, your Board has decided not to seek approval from shareholders to hold shares in Treasury, but we will continue to monitor how the use of this facility by the investment trust sector develops. Prospects The UK equity returns seen in the last year suggest that valuations are, in isolation, less attractive than twelve months ago. However, most financial assets have recorded an appreciation in value, not least because there has been a further fall in bond yields as investors have sought long term security of returns. This augurs well for higher yielding shares, whose attractions are underlined by the recent strength of dividend payments. This may be expected to sustain investors’ interest in the higher yielding sector of the UK share market, in which the Trust is invested. Hugh Stevenson Chairman 5April 2 005 3 The Merchants Trust PLC Historical Record Years ended 31 January Revenue and Capital Revenue (£’000s) Earnings per Share (net) Paid net per Share 199619971998 1999 17,351@ 18,769@ 20,399@ 20,119@ 12.41p 12.25p 13.66p 14.88p 13.65pØ14.25p 15.21p 15.59p‡ Tax Credit per Share3.06p3.41p# 3.56p3.90p§1.78p Gross Ordinary Dividend 15.31p 17.06p 17.81p Total Net Assets (£’000s)303,934335,212421,504 4 Net Assets attributable to 19.49p 26,037 2000 22,590 17.93p 16.00p 17.78p 20012002 2003 20042005 21,546 16.35p 16.40p 1.82p 18.22p 21,596 16.70p 16.80p 1.87p 18.67p 22,10122,247 2 17.26p 17.20p 1.91p 19.11p 17.34p 17.60p 1.96p2.00p 19.56p20.00p 2,675 17.58p 18.00p 391,495 474,907 422,161274,585 358,620 416,500 Ordinary Capital (£’000s)302,756 3 34,034@ 420,326 424,859 390,317473,729 4 20,983 273,407 357,442415,322 Net Asset Value per Ordinary Share295.9p @ 326.4p 410.8p 415.2p381.4p 463.5p 412.3p267.8p 350.1p 406.8p NAV Total Return (%)*+24.9 Retail Price Index Increases (%)& +2.8 +14.9 +3.1 +30.2+4.9 -4.3+25.8 -7.4 -30.9 +37.3+21.3 +2.5 +2.6+2.1 +1.8 +2.6+2.7+2.4 +2.1 Notes @ Restated in accordance with Financial Reporting Standard 16‘Cur rent Taxation’. 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 FID of 2.98p and a final ordinary dividend of 3.75p. The interim FID was enhanced by 0.59p to ensure 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. * 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. & RPIX – excludes the effect of mortgage rates. 4 The Merchants Trust PLC Thirty Largest Holdings at 31 January 2005 BP HSBC GlaxoSmithKline Shell Transport & Trading Royal Bank of Scotland Barclays HBOS Lloyds TSB BT Vodafone Valuation £’000s 41,840 31,977 31,137 30,035 24,830 23,629 22,602 22,455 17,160 % NetGain Assets %£’000s 7.82 5.98 5.82(4,305) 5.612,704 4.646,142 4.42 4.22 4.20 3.21 14,8782.78 ( Scottish & Southern Energy10,896 2 .042,933 Land Securities10,672 Diageo Slough Estates10,225 1 Bradford & Bingley10,223 Severn Trent Water10,1421.901,953 Imperial Tobacco Rio Tinto National Grid Transco 10,3101.93888 9,744 9,405 8,905 British American Tobacco 8,2801.55 Friends Provident Rank Centrica Anglo American6,6531.24 Dixons Hanson Lonmin United Utilities5,9571.11 Alliance & Leicester5,8521.09 7,207 7,102 6,928 6,3401.18 6,2901.18 6,061 ( 1 1.99 .91 1.91 1.82 1.76 1.66 1.352,135 1.33 1.29 1.13949 BOC 5,6461.05 4 Unrealised (Loss) Over Book Cost 2,952 2,238 2,473 3,465 (2,211) (9,926) 1,073) 4,445 3,462 1,387 6,306 1,923 1,677 1,446 1,205 (349) 52) 1,693 2,518 (5) ,636 52 423,381 79.12% of Total Invested Funds 5 The Merchants Trust PLC Investment Managers’ Review Market Trends In contrast to recent years, the FTSE 100 Index described a remarkably steady course in the first half of 2004/5. Until the middle of August, it fluctuated between 4300 and 4550 without showing signs of breaking away from these parameters. However, from this point onwards, investor confidence started to grow appreciably, prompted by the view that interest rates had in practical terms peaked, falling bond yields and good corporate cashflows and profits. As a consequence, the FTSE 100 Index rose quite sharply, ending the financial year at 4852, some 10% or so above its starting level. Looking at the key sector trends over 2004/5, the leaders included Real Estate (+40.2%), Aerospace (+39.5%) and Building (+31.7%). The Trust has been well represented in these areas, with the exception of Aerospace, given the high yields available at the start of the period. In contrast, the weakest sectors were Information Technology (-15.2%), Pharmaceuticals (-7.3%) and Insurance (-5.5%). I.T. was the leading market sector in 2003/4, however the portfolio’s low weightings in this area,and in Pharmaceuticals, have had a positive impact on investment performance in the last year. More generally, the market at large has again been led by ‘mid-caps’ with the FTSE Mid 250 Index rising by 19.0% over the year to last January. Economic Background 2004 was a further year when the UK recorded useful economic growth. At present, the latest estimates for the last calendar year suggest a 3.0% rate of expansion, meaning that the UK now has an uninterrupted record of growth since 1992. Progress in 2004 occurred despite the rapid rise in crude oil prices, effectively a tax on developed economies, to over US$50 per barrel for Brent crude in October. The other remarkable feature arising from the latter was the stability of inflation, which has hardly changed over the course of the year. This appears to reflect the effectiveness of current UK monetary policy, as well as a competitive consumer environment. UK interest rates continued the rising trend seen in the latter months of 2003, with base rates rising from 3¾% in January to 4¾% in August 2004. Thereafter they remained unchanged until the year end. More importantly, the interest rate futures market changed dramatically in the second half of the last financial year, with end 2005 expectations falling from over 5.5% in July 2004 to 4.75% by January 2005. This clearly implied limited expectations for rate increases from the current level. It also appears to have been a major contributor to market strength inthe s econd half of 2004/5. Taking the year as a whole, Sterling’s value against its major trading currencies was little changed. Nevertheless, the pound stood well above its 2003 US dollar exchange rate for most of 2004, which had a depressing effect on the 25% of UK profits denominated in that currency. Despite all these sources of uncertainty, UK corporate profits are estimated to have risen by just over 10% in 2004. As a result, the overall level of share market values has only broadly kept pace with the level of corporate profitability. 6 The Merchants Trust PLC Investment Managers’ Review Future Policy Although equity markets are now significantly above the lows recorded in March 2003, the parallel rise in bond markets means that on a comparative basis shares are still under-valued. Although there is clearly the potential for bond yields to rise, whilst inflation remains well contained, the upside potential appears to be limited. A slowdown in UK growth in 2005, partly prompted by the likelihood of a General Election, would help to sustain gilt yields at low historic levels. With dividends now growing well, this environment should support higher yielding shares despite their recent out-performance, and this should provide worthwhile opportunities to sustain the Trust’s record in the coming year. Portfolio Changes In common with recent years, 2004/5 was a year in which ‘value’ as an investment style continued to lead the market. This environment has been helpful for higher yielding portfolios, including the Trust’s. In this light, new purchases have included a number of utilities, including AWG, Centrica and Pennon. Aside from their high dividend yields, regulation in this sector appears to have entered a much more benign phase. In the food sector we added to Tate & Lyle, given the potential of its new sweetener, Sucralose, and subscribed for the new issue of shares in Premier Foods. The banking sector remains a key area for performance and dividend income and, whilst there were reductions to the holdings in Alliance & Leicester and HSBC, the investments in HBOS and Royal Bank of Scotland were increased. Other significant additions to holdings were Rio Tinto, Shell and Slough Estates, whilst Vodafone was a new investment, reflecting the group’s decision to almost double its dividend payments. Bearing in mind the portfolio’s inherently conservative nature, disposals in the last year were driven by valuation considerations rather than by major changes in trading circumstances. Examples of such sales would include BAA, Close Brothers, Mitchells& Butlers, Northern Foods, Pearson and Rexam. The sums invested in Prudential were switched into a number of other life assurance groups with higher yields, following a substantial recovery in its share price. Finally the holdings in BBA and Hanson were ‘top-sliced’, as were the Trust’s holdings in house builders, given their trading uncertainties. FTSE 100 – PRICE INDEX From 31 January 2001 to 31 January 2005 6500 6000 5500 5000 4500 4000 3500 3000 31 Jan 2001 31 Jan 2002 31 Jan 2003 31 Jan 2004 Source: RCM/Datastream 31 Jan 2005 7 The Merchants Trust PLC United Kingdom Listed Holdings at 31 January 2005 BP HSBC GlaxoSmithKline Shell Transport & Trading Royal Bank of Scotland Barclays HBOS Lloyds TSB BT Vodafone Scottish & Southern Energy10,896,375Electricity Land Securities10,671,750Real Diageo Slough Estates10,225,000 Bradord & Bingley10,223,182Banking Severn Trent Water10,142,000 Imperial Tobacco Rio Tinto National Grid Transco British American Tobacco Friends Provident Rank Centrica Anglo American6,652,800 Dixons Hanson Lonmin United Utilities5,956,650Water Alliance & Leicester5,852,425Banking BOC Legal & General Allied Domecq Aviva5,397,500 AWG Value (£)Principal Activities 41,840,000 Oil &gasproduction 31,977,400 Banking 31,137,500 Pharmaceuticals 30,034,800 Oil &gasproduction 24,830,100 Banking 23,629,200 Banking 22,601,550Banking 22,455,313Banking 17,160,000 Telecommunications 14,878,200 Telecommunications estate 10,309,875Beverages Real estate Water 9,744,000 Tobacco 9,405,000 Mining 8,905,313Electricity 8,280,000 Tobacco 7,206,618 Life assurance 7,102,000 Leisure and gaming 6,927,525Gas Mining 6,340,000 Retailing 6,289,675Building materials 6,060,600 Mining and Electricity 5,646,500 Chemicals 5,491,250Life and general insurance 5,488,000 Beverages Life and general insurance 5,334,000 Water Provident Financial 5,175,000 Speciality finance Boots 8 5,165,375Retailing The Merchants Trust PLC United Kingdom Listed Holdings at 31 January 2005 Tomkins5,139,500 Persimmon GKN Hilton EMI Gallaher4,587,405Tobacco BritInsurance Tate & Lyle Premier Foods4,345,200 Britannic4,325,394 Kesa Electricals4,153,500 Taylor Woodrow4,011,000 IMI Great Portland Estates Pennon C&C* Marks & Spencer F&C Asset Management Rexam2,592,075Packaging BBA *Registered in Ireland. Value (£)Principal Activities Engineering 5,033,000 Housebuilding 4,865,000 Engineering 4,698,450Hotels and betting 4,659,600 Music 4 ,413,750Insurance 4,378,000 Food production Food production Life assurance Retailing Housebuilding 3,988,600 Engineering 3,874,400 Real estate 3,450,600 Water 3,144,654 Beverages 2,978,250Retailing 2,625,000 Speciality finance 2,357,900 Engineering 535,053,754 9 The Merchants Trust PLC Distribution of Total Assets at 31 January 2005 Total Assets (less creditors falling due within one year) £528,641,010(2004 – £470,736,654) Percentage of Total Assets 20052004 4.2 17.8 2.9 4.0 – 2.61.6 2.6 3.6 1.71.9 4.34.6 3.0 15.6 – 3.8 3.8 0.5 2.1 3.9 5.0 15.5 15.4 3.5 2.2 0.9 0.5 0.4 7.5 – 6.1 6.1 3.7 6.0 9.7 4.4 3.4 1.1 1.1 3.1 13.1 1.0 3.1 4.1 2.5 3.6 6.1 Resources 2005 2004 17.8% 15.6% Basic Industries 2005 4.0% 2004 3.8% General Industrials 2005 2.6% 2004 2.1% Non-Cyclical Consumer Goods 2005 2004 15.5% 15.4% Cyclical Services 2005 2004 7.5% 13.1% Non-Cyclical Services 2005 6.1% 2004 4.1% Utilities 2005 9.7% 2004 6.1% Equities Resources Mining Oil &gas13.612.6 Basic Industries Chemicals1.1 Construction & building materials Steel &other metals– – General Industrials Aerospace Engineering & machinery Non-Cyclical Consumer Goods Beverages Food products & processing Pharmaceuticals5.9 Tobacco Cyclical Services General retailers Leisure, entertainment & hotels Media & photography Support services Transport Non-Cyclical Services Food & drug retail Telecommunication services Utilities Electricity Other 10 The Merchants Trust PLC Distribution of Total Assets at 31 January 2005 Financials Banks Insurance0.8 Life assurance Real estate Speciality & other financials1.5 Total Equities Net Current Liabilities Total Assets Financials 2005 2004 38.0% 40.5% Percentage of Total Assets 20052004 27.7 0.5 2.0 26.8 4.25.8 4.74.5 38.040.5 101.2100.7 (1.2) (0.7) 100.0100.0 11 The Merchants Trust PLC Performance Graphs 10 year recordas at 31 January The Merchants Trust Total Return compared to FTSE 100 Total Return 275 240 205 170 135 100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 The Merchants Trust share price* The Merchants Trust NAV* FTSE 100* *net income reinvested (Rebased to 100) Source: Russell/Mellon The Merchants Trust Net Dividend Growth compared to inflation* Net Dividend Growth Rate UK Retail Price Index 170 160 150 140 130 120 110 100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 *excluding FID enhancement (see page 4 for details) (Rebased to 100) Source: RCM/Datastream The Merchants Trust Share Price Discount/Premium to Net Asset Value Discount/Premium to Net Asset Value 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 10 % Premium 5 0 -5 -10 % Discount -15 1995 Source: Datastream 12 The Merchants Trust PLC Risk Review Financial Reporting Standard 13 – Derivatives and Other Financial Instruments: Disclosure FRS 13 requires entities to disclose narrative and numerical information about the financial instruments that they use. This information is given so that investors in the Company can decide for themselves whether their investment is high or low risk. It allows them to assess what kind of impact the 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 Note20(a) m erely 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 Note20 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 price risk, liquidity risk and interest rate risk. The risk profile and the policies adopted to manage risk did not change materially during either the current or previous year. Market price risk Market price risk arises mainly from the uncertainty about future prices of financial instruments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Board meets regularly to consider the asset allocation of the portfolio in order to evaluate the risk associated with particular industry sectors. A dedicated fund manager has the responsibility for monitoring the existing portfolio selection in accordance with the Company’s investment objectives and seeks to ensure that individual stocks meet an acceptable risk reward profile. Liquidity risk Liquidity risk relates to the capacity to meet liabilities. 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 Interest rate risk is the risk of movements in the value of financial instruments as a result of fluctuations in interest rates. The Company invests predominantly in equities, the values of which are not directly affected by changes in prevailing market interest rates. Therefore there is minimal exposure to interest rate risk. The Company finances its operations through a mixture of share capital, retained earnings and long term borrowings. Foreign currency risk Foreign currency risk is the risk of movement in the values of overseas financial instruments as a result of fluctuations in exchange rates. The Company invests predominantly in UK listed securities. Accordingly, the capital value of the Company’s investments are not materially affected by exchange rate movements. As a proportion of the investments pay their dividends in US dollars, income can be subject to exchange rate risk. Credit risk Credit risk is the risk of default by a counterparty. In February 2000 the Company commenced stock lending in order to generate additional income. The risk of default is managed by holding collateral, in the form of letters of credit and FTSE 100 equities,amounting t o 105% of the mid market value of the stock on loan. The level of collateral required is recalculated on a daily basis. 13 The Merchants Trust PLC Investor Information The Managers Allianz Global Investors is the marketing name of RCM (UK) Limited, Allianz Group’s regulated UK fund management company, which is authorised and regulated by the Financial Services Authority. Allianz Global Investors is one of the largest fund managers in Europe, and as at 31 December 2004, had combined assets of £709billion u nder management.Through its predecessors, it has a heritage of investment trust management expertise in the UK stretching back to the nineteenth century and had £1.09 billion assets under management in a range of investment trusts as at 31 December 2004. Results Half-year announced September Full-year announced March Report and Accounts posted toshareholders April Annual General Meeting held May Ordinary Dividends First quarterly paid August Second quarterly paid November Third quarterly paid February Final usually paid May Preference Dividends Payable half-yearly 1 August and 1 February 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 the Registrars, Capita Registrars, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU. Dividends mandated in this way are paid via BACS (Bankers’ Automated Clearing Service). Tax vouchers will then be sent directly to shareholders at their registered address unless other instructions have been given. 14 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 by the London Stock Exchange Regulatory News Service. The geographical spread of investments and ten largest holdings are also published monthly by the London Stock Exchange Regulatory News Service. They are also available to any enquirer of AllianzGlobal Investors, either via Investor Services on 0800 317 573 or on the Managers’ website: www.allianzglobalinvestors.co.uk. Share Prices The share prices quoted in the London Stock Exchange Daily Official List for 31 January 2005were383.5p-384.0p. For CGT indexation purposes,at 31 March 1982 the share price, after adjustment for bonus issues, was 48.75p. Savings Scheme The AllianzGlobal Investors Investment Trust Savings Scheme provides a convenient and economical way for shareholders to increase their existing holdings. Investments can be in the form of a regularmonthly contribution, or an individual lump sum or a combination of the two. Thereare arrangements for the reinvestment of dividendsand for selling and switching. Full details of the scheme are available from AllianzGlobal Investors, either via Investor Services on 0800 317 573 or the Managers’ website: www.allianzglobalinvestors.co.uk. Investment Trust Maxi ISA and PEP Transfer Shareholders can invest in the shares of the Company through the AllianzGlobal Investors Investment Trust Maxi ISA and PEP Transfer. Full details are available from AllianzGlobal Investors, either via Investor Services on 0800 317 573 or the Managers’ website: www.allianzglobalinvestors.co.uk. Website Further information about the The Merchants Trust PLC is available on the Managers’ website: www.allianzglobalinvestors.co.uk. Association of Investment Trust Companies (AITC) The Company is a member of the AITC, the trade body of the investment trust industry, which provides a range of literature including fact sheets and amonthly statistical service. Copies of these publications can be obtained from the AITC, 9th Floor, 24 Chiswell Street, London EC1Y 4YY, or at www.aitc.co.uk. Category:UK Growth and Income The Merchants Trust PLC Contact Details Shareholders’ Enquiries Capita Registrars 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 162 3100 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, 155 Bishopsgate, London EC2M 3AD. Managers and Advisers Fund Manager RCM (UK)Limited Represented by Nigel Lanning ASIP ACIS Director UK Equities, RCM (UK)Limited Secretary, Deputy Secretary and Registered Office Kirsten Salt BA (Hons)ACIS Peter Ingram FCIS 155 Bishopsgate London EC2M 3AD Telephone: 020 7859 9000 Registered Number 28276 Registrars and Transfer Office Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Telephone (if calling from within the UK): 0870 162 3100 Telephone (if calling from overseas): 0044 20 8639 2157 Email: ssd@capitaregistrars.com Independent Auditors PricewaterhouseCoopers LLP Southwark Towers 32 London Bridge Street London SE1 9SY Bankers HSBC Bank Barclays Bank Stockbroker JPMorgan Cazenove Legal Advisers Herbert SmithLLP AllianzGlobal Investors Telephone: 0800 317 573 or www.allianzglobalinvestors.co.uk. 15 The Merchants Trust PLC Statement of Total Return for the year ended 31 January 2005 200520052005200420042004 £ £ £ RevenueCapitalTotalRevenueCapitalTotal Note 8 122,674,672 2(722,44 3(593,85 – 6) 0) 65,859,676 65,859,676 –22,674,672 (1,341,685) (2,064,131) – (593,850) £ – 22,246,829 (662,470) (502,417) £ £ 91,703,301 – 91,703,301 22,246,829 (1,230,302) (1,892,772) – (502,417) Net gainson investments Income Investment management fee Expenses of administration Net return before finance costs and taxation 21,358,376 64,517,991 85,876,367 21,081,94290,472,999 111,554,941 Finance costs of borrowings4 ( 3,365,192) (6,210,193) (9,575,385) (3,331,880) (6,169,338) (9,501,218) Return on ordinary activities before taxation 17,993,184 58,307,798 76,300,98217,750,062 84,303,661 102,053,723 Taxation 5 – – – (5,427) – (5,427) Return on ordinary activities after taxation for the financial year Dividends on Preference Stock (42,997) Return attributable to Ordinary Shareholders 17,950,18758,307,798 Dividends on Ordinary Shares 6 (18,378,708) 17,993,184 58,307,798 76,300,98217,744,635 8 4,303,661 102,048,296 – – (42,997) (42,997) – (42,997) 76,257,985 17,701,638 84,303,661 102,005,299 (18,378,708) (17,970,293) – (17,970,293) Transfer (from) to reserves (428,521) 58,307,798 57,879,277 (268,655) 84,303,661 84,035,006 Return per Ordinary Share 717.58p 57.11p 74.69p 17.34p 82.57p 99.91p Net Asset Value Per Ordinary Share Per Preference Stock Unit15 15 406.8p 100.0p 350.1p 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 pages19 to31 f orm part of these Accounts. 16 The Merchants Trust PLC Balance Sheet at 31 January 2005 Fixed Assets Investments Current Assets Debtors Cash at bank Creditors: Amounts falling due within one year10(11,360,660) ( Net Current Liabilities Total Assets less Current Liabilities Creditors: Amounts falling due after more than one year10(112,141,456) ( 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 5April 2 005 and signed on its behalf by: Hugh Stevenson Joe Scott Plummer 200520052004 £ £ £ Note 8 101,713,769 10 3,192,907 4,906,676 535,094,994 473,911,875 1 ,862,055 6,233,102 8,095,157 11,270,378) (6,453,984) (3,175,221) 528,641,010470,736,654 112,116,377) 416,499,554 358,620,277 11 11 25,525,984 1,178,000 25,525,984 1,178,000 1256,25056,250 13 322,240,327 1357,962,642(9,233,782) 26,703,984 26,703,984 39,80939,809 331,128,953 14 16416,499,554 380,202,969321,895,171 9,496,5429,925,063 358,620,277 15 15 415,321,554 357,442,277 1,178,000 1,178,000 416,499,554 358,620,277 The Notes on pages19 to31 f orm part of these Accounts. 17 The Merchants Trust PLC Cash Flow Statement for the year ended 31 January 2005 Net cash inflow from operating activities Servicing of finance Interest paid Preference dividends paid Net cash outflow on servicing of finance Investing Activities Payments to acquire fixed asset investments Proceeds on disposal of fixed asset investments Net cash inflow from investing activities Equity dividends paid Net cash (outflow) inflow before financing Financing Decrease in short term loan (Decrease) increase in cash 200520052004 £ £ £ 22,380,842 20,140,829 Note 18 (9,543,139) (42,997) (9,459,243) (21,498) (9,586,136) (9,480,741) (142,790,215) 145,334,022 (148,695,240) 158,187,790 2,543,807 9,492,550 (18,378,708) (17,561,878) (3,040,195) 2,590,760 – (224,361) 19 (3,040,195) 2,366,399 The Notes on pages19 to31 f orm part of these Accounts. 18 The Merchants Trust PLC Statement of Accounting Policies for the year ended 31 January 2005 1. The financial statements have been prepared under the historical cost convention, modified to include the revaluation of investments, and in accordance with United Kingdom law and applicable accounting standards including the Statement of Recommended Practice – ‘Financial Statements of Investment Trust Companies’ issued in January 2003 by the Association of Investment Trust Companies. 2.Revenue – Dividends on equity shares are accounted for on an ex-dividend basis and shown in the revenue account except where, in the opinion of the Directors, the nature of the dividends indicate they should be treated as capital receipts. 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 stocklending fees are accounted for on an accruals basis. Underwriting commission is recognised when the issue underwritten closes. 3.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. 4. Valuation – Investments listed in the United Kingdom have been valued at middle market prices.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 issued in July 2003. 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 the realised Capital Reserve. 5. Finance costs – In accordance with Financial Reporting Standard 4 ‘Capital Instruments’, long term borrowings are stated as 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. 6.Taxation – Where expenses are allocated between capital and revenue, any tax relief obtained in respect of those expenses is allocated between capital and revenue on the marginal basis using the Company’s effective rate of corporation tax for the accounting period. Deferred tax is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date. Where deferred tax assets are likely to be considered irrecoverable no provision is made. 7.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. 8. 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. 19 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 1. Income Income from investments* Franked income: Equity income from UK investments Unfranked income: Equity income from overseas investments Other income: Deposit interest Underwriting commission Stocklending fees Total income Income from investments Listed *All equity income is derived from listed investments. 2. Investment Management Fee 200520052004 £ £ £ 114,267 12,296 32,115 22,463,026 22,012,244 52,96836,182 22,515,994 22,048,426 104,568 69,592 24,243 198,403 158,678 22,674,672 22,246,829 22,515,994 22,048,426 22,515,994 22,048,426 200520052005200420042004 £ £ RevenueCapitalTotalRevenueCapitalTotal £ £ £ £ Investment management fee 722,4461,341,685 2,064,131662,470 1,230,302 1,892,772 The management contract with RCM (UK) Limited (‘RCM’), terminable at one year’s notice, provides for a management fee based on 0.35% (2004 – 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 RCM. The amounts stated include irrecoverable VAT of £307,423 (2004 – £281,902). Under the contract, RCM provides the Company with investment management, accounting, secretarial and administration services. 20 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 3. Expenses of Administration Directors’ fees Auditors’ remuneration for audit services16,703 Marketing costs of Savings Scheme Other administrative expenses 20052004 £ 68,236 202,600 306,311 593,850502,417 £ 62,000 16,130 179,098 245,189 (i) The above expenses include value added tax where applicable. (ii) There were no fees payable to the Auditors in respect of non-audit services(2004 – £1,175). (iii) Between 1 February 2004 and 31 May 2004, Directors’ fees were paid at the rate of £11,000 (2004 – £11,000) per annum with an additional sum of £4,000 (2004 – £4,000) per annum paid to the Chairman and an additional sum of £3,000 (2004 – £3,000) per annum paid to the Chairman of the Audit Committee. Between 1 June 2004 and 31 January 2005, Directors’ fees were paid at the rate of £12,000 per annum with an additional sum of £8,000 per annum paid to the Chairman and an additional sum of £3,000 per annum paid to the Chairman of the Audit Committee. 4. Finance Costs of Borrowings 200520052005200420042004 £ £ £ £ £ £ RevenueCapitalTotalRevenueCapitalTotal On Stepped Rate Interest Loan repayable after more than five years 1,379,152 2,561,283 3,940,435 1,359,620 2,525,0093,884,629 On Fixed Rate Interest Loan repayable after more than five years 1,322,399 2,455,885 3,778,284 1,321,0752,453,4253,774,500 On 4% Perpetual Debenture Stock repayable after more than five years 19,250 35,75055,000 19,250 35,75055,000 On 5.875% Secured Bonds repayable after more than five years OnSterling overdraft 623,148 1,157,275 1,780,423 622,006 1,155,154 21,243–21,2439,929 – 1,777,160 9,929 3,365,192 6,210,1939,575,385 3,331,880 6,169,338 9,501,218 21 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 5. Taxation 200520052005200420042004 £ £ RevenueCapitalTotalRevenueCapitalTotal – – – – £ – – £ – 5,427 5,427 £ – – – £ – 5,427 5,427 Corporation tax at 30% Overseas tax suffered Current year tax charge Reconciliation of current charge Return on ordinary activities before taxation 17,993,184 58,307,798 76,300,98217,750,062 84,303,661 102,053,723 Tax on return on ordinary activities at 30% (2004 –30%) Reconciling factors: Non taxable income 5,397,955 17,492,33922,890,294 5,325,019 25,291,098 30,616,117 (6,738,908) (639,825) (7,378,733) (6,603,673) – (6,603,673) Non taxable capital gains– ( Disallowable expenses 19,118,078) (19,118,078) 75,288 26,717102,005 8 Excess of allowable expenses over taxable income 1,265,6652,238,847 Overseas tax suffered Relief on overseas tax suffered Current year tax charge – – – 3 – – – ,504,5121,199,722 – – – – 0,561 5,427 (1,629) 5,427 (27,510,990) (27,510,990) 49,830 2,170,062 – – – 130,391 3,369,784 5,427 (1,629) 5,427 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 £79m (2004 – £67m). Given the Company’s current investment strategy, it is unlikely to generate sufficient UK taxable profits to relieve these expenses. As at 31 January 2005there is an unrecognised deferred tax asset, measured at the standard rate of 30%, of £23.6m (2004 – £20.1m). This deferred tax asset relates to the current and prior year unutilised expenses. It is considered unlikely that there will be a liability in the future against which the deferred tax asset can be offset. Therefore, the tax asset has not been recognised. Due to the Company’s status as an investment trust and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the disposal of investments. 6. Dividends on Ordinary Shares Dividends on Ordinary Shares of 25p:– First interim 4.5p paid 13 August 2004 (2003 – 4.3p) Second interim 4.5p paid 10 November 2004 (2003 – 4.3p) Third interim 4.5p payable 17 February 2005 (2004 – 4.5p) Final proposed 4.5p payable 11 May 2005 (2004 – Fourth interim 4.5p) Note£ 20052004 £ 4,594,677 4,594,677 104,594,677 104,594,677 4,390,470 4,390,469 4,594,677 4,594,677 18,378,708 17,970,293 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. 22 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 7. Return per Ordinary Share 200520052005200420042004 £ £ £ £ £ £ RevenueCapitalTotalRevenueCapitalTotal Return after taxation Attributable to Preference Stockholders 17,993,184 (42,997) 58,307,798 – 76,300,98217,744,635 (42,997) 8 (42,997) 4,303,661 – 102,048,296 (42,997) Attributable to Ordinary Shareholders 17,950,18758,307,798 76,257,985 17,701,638 84,303,661 102,005,299 Return per Ordinary Share 17.58p 57.11p 74.69p 17.34p 82.57p 99.91p The weighted average number of shares in issue during the year was102,103,936 (2004 – 102,103,936). 8. Fixed Asset Investments Listed at market valuation on recognised Stock Exchanges:– United Kingdom Unlisted at Directors’ valuation Total fixed asset investments Market value of investments brought forward Unrealised losses brought forward Cost of investments held brought forward Additions at cost Disposals at cost Costs of investments held at 31 January Unrealised gains (losses)at 31 January Market value of investments held at 31 January Gainson investments Net realised losses based on historical costs Adjustment for net unrealised losses recognised in previous years Net realised gainsbased on carrying value at previous balance sheet date28,666,10123,312,376 Net unrealised gainsarising in the year Net gains on investments before special dividends Special dividends credited to capital2,132,750– Net gainson investments The Board considers that the Company’s remaining unquoted investment is not material to the financial statements. Stocklending Aggregate value of securities on loan at year-end Maximum aggregate value of securities on loan during the year Fee income from stocklending during the year 20052004 £ £ 535,053,754 473,870,408 41,24041,467 535,094,994 473,911,875 473,911,875391,703,740 9,233,782115,624,254 483,145,657507,327,994 142,790,215 (148,803,520) 148,248,658 (172,430,995) 477,132,352483,145,657 57,962,642(9,233,782) 535,094,994 473,911,875 (3,469,498) 32,135,599 (14,687,171) 37,999,547 35,060,82568,390,925 63,726,926 91,703,301 65,859,676 91,703,301 12.5m 76.2m61.6m 32,115 40.7m 24,243 In respect of securities on loan at the year-end, the Company held £13.2m (2004 – £42.8m) as collateral, the value of which exceeded the value of the loan securities by £0.7m (2004 – £2.1m). In respect of the maximum aggregate value of securities on loan during the year, the Company held £80.1m (2004 – £64.7m) as collateral, the value of which exceeded the value of securities on loan by £3.9m (2004 – £3.1m). 23 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 9. Investments in Subsidiary and Other Companies Surrey Investments Inc. is a wholly owned subsidiary registered in the State of Delaware, USA with an issued share capital of US$300,000. It was formed to act as a Limited Partner in 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 its interest in JW O’Connor & Co. Inc. 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: Company First Debenture Finance PLC (‘FDF’) Total Net Assets* £ Class of Sharesheld (5,630,879) ‘A’ Shares % of Class held 39.2 ‘B’ Shares59.2 ‘C’ Shares45.6 ‘D’ Shares53.3 % Equity 49.2 } Fintrust Debenture PLC (‘Fintrust’) 12,920 Ordinary 50.050.0 In the opinion of the Directors, the Company is not in a position to exert significant influence over the financial or operating policies of FDF or Fintrust, either through voting rights or through agreement withthose companies’ other shareholders, due to provisions in FDF and Fintrust’sArticles of Association and in certain contracts between the Company and each of FDF and Fintrust. The aggregate share capital, reserves and results are immaterial to the Company’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 10(ii), 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. *As at the date of the latest published financial statements of FDF or Fintrust, as appropriate. 10. Current Assets and Creditors 20052004 £ £ 1,676,805 1,834,345 36,96427,710 1,713,769 1,862,055 3,192,907 6,233,102 Debtors:– Accrued income Other debtors Cash at bank:– Current account 24 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 10. Current Assets and Creditors (continued) Creditors: Amounts falling due within one year– Other creditors Interest on borrowings10(v) 1 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 Fixed Rate Interest Loan 5.875% Secured Bonds 2029 4% Perpetual Debenture Stock Note£ 20052004 £ 830,541 ,319,266 21,499 64,594,677 64,594,677 747,426 1,312,099 21,499 4,594,677 4,594,677 11,360,660 11,270,378 10(i) 10(ii) 10(iii) 10(iv) 35,362,362 46,386,538 29,017,556 1,375,000 35,227,722 46,512,584 29,001,071 1,375,000 112,141,456112,116,377 (i) The effective interest rate onthe Stepped Rate Interest Loan over its terms 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 2 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 (65.15%) of the required amount to enable FDF to meet all of its liabilities to repay principal and interest on its £52.2million 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 10(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 31 January 2005, the unamortised premium included within the Fixed Rate Interest Loan balance of greater than one year amounted to £4,509,738 (2004 – £4,638,156). 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. 25 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 10. Current Assets and Creditors (continued) (iii) The £30,000,000 5.875% Secured Bonds, repayable on 20 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 Decembereac h year. As security for this loan the Company has granted a floating charge ranking pari passu with the floating charges referred to in Note 10(i) and 10(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 repayable in arrears by equal half yearly instalments in May and November. (v)Interest on borrowings consists of: Stepped Rate Interest Loan313,728312,004 Fixed Rate Interest Loan783,545 5.875% Secured Bonds 2029208,243 2 4% Perpetual Debenture Stock 11. Share Capital Authorised 1,178,000 3.65% Cumulative Preference Stock Units of £1 107,431,248 Ordinary Shares of 25p Allotted and fully paid 1,178,000 102,103,936 3.65% Cumulative Preference Stock Units of £1 Ordinary Shares of 25p 20052004 £ £ 779,240 07,105 13,75013,750 1,319,266 1,312,099 20052004 £ £ 1,178,000 1,178,000 26,857,812 26,857,812 1,178,000 25,525,984 1,178,000 25,525,984 26,703,984 26,703,984 (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 PreferenceStock are payable half yearly on 1 August and 1 February. (ii) The Directors are authorised by an ordinary resolution passed on 11 May 2004to 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, 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 11 May 2004to allot relevant securities for cash, in accordance with Section 95 of the Companies Act 1985, up to a maximum aggregate nominal amount of £1,273,746. This authority, if not previously revoked or renewed, expires at the forthcoming Annual General Meeting and a resolution will be proposed at thatmeeting for its renewal. 26 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 12. Capital Redemption Reserve Balance at 1 February 2004 Movement in the year– Balance at 31 January 2005 13. Capital Reserves Balance at 1 February 2004331,128,953(9,233,782)321,895,171 Net gain on realisation of investments Increase in unrealised appreciation Transferof net unrealised losses recognised in previous years Investment management fee Finance costs of borrowings(6,210,193) – £ 56,250 56,250 Realised £ Unrealised £ Total £ 30,798,851 –30,798,851 –35,060,82535,060,825 (32,135,599) 32,135,599 (1,341,685) – – (1,341,685) (6,210,193) Balance at 31 January 2005322,240,327 57,962,642 380,202,969 14. Revenue Reserve Balance at 1 February 2004 Deficit for the year(428,521) Balance at 31 January 2005 £ 9,925,063 9,496,542 27 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 15. Net Asset Value per Share 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 The Net Asset Value per Ordinary Share is based on 102,103,936 Ordinary Shares in issue at the year end (2004 – 102,103,936). Ordinary Shares of 25p 3.65% Cumulative Preference Stock Units of £1£1,178,000 The movements during the year of the assets attributable to each class of share were as follows: Net Asset Value per Share attributable 20052004 406.8p 100.0p 350.1p 100.0p Net Asset Values attributable 20052004 £415,321,554 £357,442,277 £1,178,000 Total net assets attributable at 1 February 2004357,442,277 Total return on ordinary activities after taxation for the year Dividends appropriated in the year(18,378,708) Ordinary Cumulative Preference SharesStockTotal £ £ £ 76,257,985 1,178,000 358,620,277 42,997 (42,997) 76,300,982 (18,421,705) Total net assets attributable at 31 January 2005 415,321,554 1,178,000 416,499,554 20052004 £ £ 17,993,184 17,744,635 (18,013,290) (428,521) (268,655) 7,798 84,303,661 84,035,006 358,620,277 274,585,271 358,620,277 16. Reconciliation of Movements in Shareholders’ Funds Revenue reserves Revenue profit available for distribution Dividends appropriated in the year(18,421,705) Transferfrom distributable reserve Other reserves Recognised net capital gains transferred to capital reserves58,30 Net increase in Shareholders’ Funds57,879,277 Opening Shareholders’ Funds Closing Shareholders’ Funds416,499,554 28 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 17. Contingent Liabilities and Guarantees At 31 January 2005 there were no outstanding contingent liabilities (2004 – £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 the Stepped Rate Loan are provided in Note 10(i) ‘Current Assets and Creditors’ on page 24. 18. Reconciliation of Operating Revenue before Taxation to Net Cash Flow from Operating Activities Revenue before taxation Add: Finance costs of borrowings Add: Special dividends credited to capital2,132,750– Less: Management fee charged to capital Less: Overseas tax suffered Decrease in debtors Increase in creditors Net cash inflow from operating activities 19. Reconciliation of Net Cash Flow to Movement in Net Debt (i) Analysis of net debt Cash £ 20052004 £ £ 17,993,184 3,365,192 17,750,062 3,331,880 (1,341,685) (1,230,302) – (5,427) 22,149,441 19,846,213 148,28645,269 83,115 249,347 22,380,842 20,140,829 Stepped and Fixed 5.875% Secured RateBondsDebentureNet loans £ £ 2029StockDebt 4% Perpetual £ £ At 1 February 20046,233,102 Movement in year(3,040,195) At 31 January 20053,192,907 (ii) Reconciliation of net cash flow to movement in net debt (81,740,306) (29,001,071) (1,375,000) (105,883,275) (8,594) (16,485) – (3,065,274) (81,748,900) (29,017,556) (1,375,000) (108,948,549) Net cash (outflow) inflow(3,040,195) Decrease in short term loan Increase in long term loans(25,079) Movement in net funds(3,065,274) Net debt brought forward Net debt carried forward 20052004 £ – £ 2,366,399 224,361 (17,769) 2,572,991 (105,883,275) (108,456,266) (108,948,549) (105,883,275) 29 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 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 13. (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 interest rates and periods for which rates are fixed on the fixed interest bearing assets and liabilities. 20052005200520052004200420042004 Fixed raterateNil Floating Fixed raterateNil Currencyinterest £000s interest £000s interest £000s Total £000s interest £000s Floating interest £000s interest £000s Total £000s Financial Assets Values not directly affected by changes in interest rates: Equities Equities Cash Total Financial Assets Sterling US Dollar Sterling – – – – –3,193–3,193–6,233 –3,193535,095 535,081 14 535,081 14 538,288 – – –6,233 Financial Liabilities Values directly affected by changes in interest rates: First Debenture Sterling Finance loanSterling Fintrust loan 5.875% Secured Bonds 2029Sterling 4% Perpetual (35,362) (46,386) (29,018) Debenture Stock Sterling (1,375) Total Financial Liabilities(112,141) – – – – – – – – – – (35,362) (46,386) (35,228) (46,512) (29,018) (29,001) (1,375) (112,141) (1,375) (112,116) – – – – – – – 473,899 473,899 1313 –6,233 473,912480,145 – – – – – (35,228) (46,512) (29,001) (1,375) (112,116) Net Financial (Liabilities) Assets (112,141) 3,193535,095 426,147(112,116)6,233 473,912 368,029 Short term debtors and creditors Net Assets per Balance Sheet (9,647) 416,500 (9,409) 358,620 30 The Merchants Trust PLC Notes to the Accounts for the year ended 31 January 2005 20. Financial Reporting Standard 13 – Derivatives and Other Financial Instruments: Disclosures (continued) The fixed rate interest bearing liabilities bear the following coupon and effective rates as at 31 January 2004and 3 1 January 2005: First Debenture Finance loan – bonds First Debenture Finance loan – notes Fintrust – original loan20/11/2023 Fintrust – new loan20/11/2023 5.875% Secured Bonds 4% Perpetual Debenture Stock Maturity AmountCoupon dateborrowed rate 2/1/2018 2/1/2018 £ 20,534,079 5,133,520 30,000,000 12,000,000 20/12/202930,000,000 n/a1,375,000 14.75% 14.75% 9.25125% 9.25125% 5.875% 4.00% Effective rate since inception1 11.28% 11.28% 9.30% 6.00% 6.13% n/a 1The 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 is9.58% (2004 – 9.58%) and the weighted average period to maturity of these liabilities (excluding the 4% Perpetual Debenture Stock) is19.2 y ears (2004 – 20.2) years. (b) Currency Risk Profile As at 31 January 2005 £13,695 (2004 – £146,334) of the assets of the Company were denominated in US Dollars with the effect that the total net assets and total return are not materially affected by currency movements. (c) Fair Value Disclosures The assets and liabilities of the Company are held at fair value with the exception of the liabilities shown below:2 First Debenture Finance Loan35.350.1 Fintrust Loan 5.875% Secured Bonds 4% Perpetual Debenture Stock 2005200520042004 £ million Book valueFair £ million £ million valueBook v alueFair £ million value 46.4 29.0 1.4 58.646.5 28.7 1.01.4 35.248.6 29.0 55.7 28.3 1.0 2The fair value is derived from the closing market value as at 31 January 2004and 2 005. (d) Liquidity Profile The maturity profile of the Company’s financial liabilities at 31 January 2005, (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 24to26. The undrawn committed borrowings facilities available to the Company at 31 January 2005were £ 10,000,000. (e) Hedging Instruments At the year end the Company had no hedging arrangements in place (2004 – nil). 31 The Merchants Trust PLC Independent Auditors’ Report IndependentAuditors’ 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, the Cash Flow Statement and the related notes 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. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the Directors’ Remuneration Report (‘the auditable part’). Respective responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the AnnualReport and the financial statements in accordance with applicable United Kingdom law and accounting standards are set out in the Statement of Directors’ Responsibilities. The Directors are also responsible for preparing the Directors’ Remuneration Report. Our responsibility is to audit the financial statements and the auditable part of the Directors’ Remuneration Report in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards issued by the Auditing Practices Board. This report, including the opinion, has been prepared for and only for the Company’s Members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the auditable part of the Directors’ Remuneration Report have been 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 regarding Directors’ remuneration and transactions is not disclosed. We read the other information contained in the AnnualReport 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 unaudited part of the Directors’ Remuneration Report, the Chairman’s Statement, the Investment Managers’ Reviewand t he CorporateGovernancestatement. 32 We review whether the CorporateGovernance s tatement reflects the Company’s compliance with the nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, 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 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 and the auditable part of the Directors’ Remuneration Report. 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 and the auditable part of the Directors’ Remuneration Report 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 31 January 2005 and of its total return and cash flows for the year then ended; •the financial statements have been properly prepared in accordance with the Companies Act 1985; and •those parts of the Directors’ Remuneration Report required by Part 3 of Schedule 7A to the Companies Act 1985 have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 5 April 2005 The Merchants Trust PLC Statement of Directors’ Responsibilities 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: •select suitable accounting policies and then apply them consistently; •make judgements and estimates that are reasonable and prudent; •state w hether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; •prepare t he financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and 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. The financial statements are published on www.allianzglobalinvestors.co.uk, which is a website maintained by the Company’s Investment Managers, RCM (UK) Limited. The work undertaken by the Auditors does not involve consideration of the maintenance and integrity of the website and, accordingly, the Auditors accept no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in other jurisdictions. 33 The Merchants Trust PLC Corporate Governance 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’). In addition, the AITC Code of Corporate Governance was issued by the Association of Investment Trust Companies in July 2003. The Board has reviewed and applied the additional requirements of both documents except where stated otherwise. The Board considers that the Company has complied with the applicable provisions contained within Section 1 of the Combined Code throughout the accounting period to 31 January 2005, with the exceptions thatduring t he year there was no senior independent directorand t he Board assessment process did not take place until after the year end. Much of this statement describes how the relevant principles of governance are applied to the Company. The Board The Board currently consists of five Directors, all of whom are non-executive and independent of the Company’s investment manager.Their biographies, on page 37, demonstrate a breadth of investment, industrial, commercial and professional experience. The Chairman of the Company is a non-executive Director and Joe Scott Plummer has been appointed as the Senior Independent Director with effect from 7 March 2005. The Board considers Sir John Banham and Sir Bob Reid to be independent, notwithstanding that each has served on the Board for more than nine years. The Board does not consider that length of service has diminished the independence of Sir John Banham or Sir Bob Reid and continues to be of the view that their extensive experience and knowledge isa greatbenefit to the Board. In accordance with the Articles of Association, new Directors stand for election at the first Annual General Meeting following their appointment and then at least one third of Directors retire by rotation at each Annual General Meeting. Every Director is required to seek re-election at least every three years and annually after nine years’ service. The names of the Directors retiring by rotation at this year’s Annual General Meeting are given on page 41. The Board meets at least six times a year and convenes ad hoc meetings as and when required. Between meetings,regular contact with the investment manager is maintained. 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 34 and services of the Company Secretary,who is responsible to the Board for ensuring that Board procedures are followed and that the Company complies with applicable rules and regulations.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 regulatory and statutory requirements and internal financial controls. Changes affecting Directors’ responsibilities are advised to the Board as they arise. During the current year, the effectiveness of the Board was assessed through interviews conducted by the Chairman with each Director. In addition, the performance of the Directors was evaluated by each Director, followed by a discussion with the Chairman. The Chairman’s own performance was evaluated by the other Directors, who met under the chairmanship of Joe Scott Plummer. The results of the effectiveness assessment and performance evaluation have been presented to the Nomination Committee. The effectiveness assessment determined that the balance of the Board was satisfactory. The Board has contractually delegated to the investment manager the management of the investment portfolio, and the day to day accounting and company secretarial requirements. This contract was entered into after full and proper consideration by the Board of the quality and cost of services offered, including the financial 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. The Board’s statement on its review of the management contract appears on page 42. Attendance by Directors at formal Board and committee meetings during the year was as follows: DirectorBoardCommittee No. of meetings 6 Sir John Banham61 1 R. A. Barfield Sir Bob Reid P. J. Scott Plummer521 H. A. Stevenson 521 421 6 1 AuditNomination Committee Management Engagement Committee 1 21 1 1 2*1 1 1 *Invited to attend meetings, although not a committee member. The Merchants Trust PLC Corporate Governance Board Committees The Audit Committee consists of all of the independent non- executive Directors, with the exception of the Chairman, and has defined terms of reference and duties. The Audit Committee is chaired by Joe Scott Plummer. This committee meets at least twice each year and reviews the annual accounts and interim report and the terms of appointment of the Auditors together with their remuneration as well as any non-audit services provided by the Auditors. It meets representatives of the investment manager and receives reports on the internal controls maintained on behalf of the Company and reviews the effectiveness of these controls. The Nomination Committee meets at least once each year and makes recommendations on the appointment of new Directors and the re-election of existing Directors by shareholders. The committee also determines the process for the annual evaluation of the Board. The Committee is chaired by Hugh Stevenson, the Chairman of the Board. All Directors serve on the committee and consider nominations made in accordance with an agreed procedure. The Management Engagement Committee meets at least once each year to review the Management Agreement and the Managers’ performance. It has defined terms of reference and consists of the non-executive Directors and excludes any Directors previously employed by the Managers. It is chaired by Hugh Stevenson, the Chairman of the Board. The Board has not constituted a Remuneration Committee; all Directors are non-executive and remuneration matters are dealt with by the whole Board. The Terms of Reference for each of the committees may be viewed by shareholders on request. Accountability and Audit The Statement of Directors’ Responsibilitiesin r espect of the accounts is on page 33 and a statement of going concern is on page 40. The Independent Auditors’ Report can be found on page 32. The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. This process is subject to review by the Board and accords with the Turnbull guidance. The process has been fully in place throughout the year under review and up to the date of signing of these Report and Accounts. 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 recorded in a risk matrix. Every six months the Board receives from the Managers a formal report which details any known internal controls failures, including those that are not directly the responsibility of the Managers. The Board continues to check that good systems of internal control and risk management are embedded in the operations and culture of the Company and its key suppliers. • The appointment of RCM (UK) Limited (‘RCM’) as the Managers provides investment management, accounting and company secretarial services to the Company. The Managers therefore 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,whose s ystem 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 its internal audit department. RCM is regulated by the Financial Services Authority (‘FSA’) and its compliance department regularly monitors compliance with FSA’s rules. • There is a regular review by the Board of asset allocation and any risk implications. There is also regular and comprehensive review by the Board of management accounting information including revenue and expenditure projections, actual revenue against projectionsand performance comparisons. Internal Control The Directors have overall responsibility for the Company’s system of internal control. 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. • Authorisation and exposure limits are set and maintained by the Board. • The Audit Committee assesses the Managers’ and Custodian’s systems of controls and approves the appointment of sub- custodians. The Audit Committee also receives reports from the Managers’ and Custodian’s internal auditors, compliance department and independentAuditors. 35 The Merchants Trust PLC Corporate Governance Socially Responsible Investment and Environmental Policy The Investment Managers have been directed by the Board to take account of companies’ socially responsible investment and environmental performance when taking investment decisions. Exercise of Voting Powers The Company’s investments are held in a nominee name. The Board has delegated discretion to discharge its responsibilities in respect of investments, including the exercise of voting powers on its behalf, to the Managers. 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. An extract from the Trust’s voting record inthe previous calendar year will be available for inspection at the annual general meeting each year. 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. • The Board reviews the Internal Control reports of third party service providers, including those of the Company’s Registrars, Capita Registrars, and Custodian, HSBC Bank plc. The Board has undertaken a full review of the aspects covered by the Turnbull guidance and believes that there is an effective framework substantially in place to meet the requirements of the Combined Code. The Directors confirm that the Audit Committee has reviewed the effectiveness of the system of internal control. As set out elsewhere in this report, the Managers provide certain services, including internal audit services, to the Company. Consequently, the Company does not have its own internal audit function. Relations with Shareholders The Board strongly believes that the annual general meeting should be an event which private shareholders are encouraged to attend. 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 at the meeting. The number of proxy votes cast in respect of each resolution will be made available at the annual general meeting. The Managers meet with institutional shareholders on a regular basis and report to the Board on matters raised at these meetings. All correspondence with shareholders is reviewed by the Board. Shareholders who wish to communicate directly with the Chairman, the Senior Independent Directoror other Directors may write care of the Company Secretary at 155 Bishopsgate, London EC2M 3AD. The Notice of Meeting sets out the business of the meeting and special resolutions are explained more fully in the Directors’ Report. Separate resolutions are proposed for each substantive issue. 36 The Merchants Trust PLC Directors Mr H. A. 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, Chairman of Standard Life Investments, a Director of Standard Life Assurance Company, a Non-Executive Director of the Financial Services Authority 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, Geest plc and Cyclacel Limited. He is also the Senior Non- Executive Director of Amvescap Plc. Mr R. A. 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, The Baillie Gifford Japan Trust PLC, JPMorgan Fleming Overseas Investment Trust PLC, The Edinburgh Investment Trust PLC, Standard Life Investments Property Income Trust Limited, Umbro PLC and other companies. Sir Bob Reid (Born May 1934) joined the Board in January 1995. He was formerly Chairman of Shell (UK), British Rail, London Electricity plc and Sears PLC. He is Senior Non-Executive Director of HBOS plc. Mr P. J. Scott Plummer(Senior Independent Director and Chairman of Audit Committee) (Born August 1943) is a Chartered Accountant and joined the Board in May 1997. He is Non-Executive Chairman of Martin Currie Limited and is a Director of Martin Currie Portfolio Investment Trust PLC. He was formerly a Director of Candover Investments PLC. All the above Directors are non-executive and independent of the Managers. 37 The Merchants Trust PLC The Merchants Trust PLC Directors’ Remuneration Report This report is submitted in accordance with the Directors’ Remuneration Report Regulations 2002 for the year ended 31 January 2005. The following disclosures on Directors’ remuneration have been audited as required by Part 3 of Schedule 7A of the Companies Act 1985. The Board The Board of Directors is composed solely of non-executive Directors and the determination of the Directors’ fees is a matter dealt with by the whole Board. The Board has not been provided with advice or services by any person to assist it to make its remuneration decisions, although the Directors carry out reviews from time to time of the fees paid to the directors of other investment trusts. Policy on Directors’ Remuneration Directors meet at least six times a year. The AuditCommittee meets twice each year and the other Board committees meet at least once a year. Directors offer themselves for retirement at least once every three years and annually after nine years. No Director has a service contract with the Company. The Company’s policy is for the Directors to be remunerated in the form of fees, payable quarterly in arrears. There are no long term incentive schemes, bonuses, pension benefits, share options or other benefits and fees are not related to the individual Director’s performance, nor to the performance of the Board as a whole. The Company’s Articles of Association limit the aggregate fees payable to the Board of Directors to a total of £100,000 per annum. Subject to this overall limit, it is the Board’s policy to determine the level of Directors’ fees having regard to the level of fees payable to non-executive Directors in the investment trust industry generally, the role that individual Directors fulfil, and the time committed to the Company’s affairs. The Board believes that levels of remuneration should be sufficient to attract and retain non-executive directors to oversee the Company. Remuneration The policy is to review Directors’ fees from time to time, but reviews will not necessarily result in a change to the rates. Prior to the year ended 31 January 2005, the last review resulting in an increase for Directors was in 2002; the Chairman’s fees were not increased at that time. Increasingly since then, and most particularly in the past year, the role of non-executive Directors has become more onerous, involving greater time commitment and a higher degree of responsibility against a more demanding regulatory environment. In 2004, the Companyconducted its own research into fees paid within the investment trust industry and its peer group and, with the weight of evidence supporting an increase, with effect from 1 June 2004, it raised the annual fee for each Director from £11,000 to £12,000, and for the Chairman from £15,000 to £20,000. The Chairman of the Audit Committee continues to receive an additional £3,000 per annum. The increases reflect market levels in the Company’s investment trust sector and the increased volume of work of investment trust directors. Directors’ emoluments The payments receivable during the year and in the previous year are as follows: H. A. Stevenson P. J. Scott Plummer14,667 Sir John Banham R. A. Barfield Sir Bob Reid Directors’ fees £ 15,000 14,000 20052004 £ 18,481 11,69611,000 11,69611,000 11,69611,000 68,236 62,000 Directors’ and officers’ liability insurance cover is held by the Company. Totals Performance Graph The graph on the next page measures the Company’s share price and net asset value performance against its benchmark index of the FTSE 100 Index. The Company’s performance is measured against the FTSE 100 Index as this is the most appropriate comparator in respect of its asset allocation. An explanation of the Company’s performance is given in the Chairman’s Statement and the Investment Managers’ Review. By Order of the Board P. W. I. Ingram Deputy Secretary 5 April 2005 38 The Merchants Trust PLC Directors’ Remuneration Report Performance Graph The graph belowillustrates t he total return on the Company’s share price with net income reinvested and net asset value total return performance against that of the benchmark ofthe FTSE 100 Index, for the five years ended 31 January 2005. d e x e d n I 160 150 140 130 120 110 100 90 80 70 60 50 P e r c e n t C h a n g e 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 2000 2001 2002 2003 2004 2005 The Merchants Trust share price total return The Merchants Trust net asset value total return FTSE 100 total return (Rebased to 100) Source: Datastream 39 Donations and Subscriptions There were no charitable donations and subscriptions in respect of the year (2004 –£nil). No political donations were made during the year. Historical Record There is included on page 5aschedule of the Company’s thirty largest holdings. The distribution of total assets is shown on page 10, and the historical record of the Company’s revenue, capital and invested funds over the past ten years is shown on page 4. Graphsappear on page 12 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. Business Review A review of the Company’s activities is given in the Chairman’s Statement on page 3and in the Investment Managers’ Review on pages 6and 7 . Corporate Governance The Corporate Governancestatement is set out on pages 34 to 36. Directors’ Fees A report on the Directors’ remuneration is set out on page 38. The Merchants Trust PLC The Merchants Trust PLC Directors’ Report Status The Company is an investment company as defined in Section 266 of the Companies Act 1985. The Company was approved by the Inland Revenue as an investment trust for the year ended 31 January 2004 and approval is expected to be given for the year ended 31 January 2005. In the opinion of the Directors,the Company has conducted its affairs so as to enable it to continue to obtain Section 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 The share capital of the Company is set out in Note 11 on page 26. Payment Policy It is the Company’s payment policy for the financial year to 31 January 2006 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 (2004 – £nil). Invested Funds Sales of investments during the year resulted in net losses based on historical costs of £3,469,498 (2004 – £14,687,171 losses). Provisions contained in the Finance Act 1980 exempt approved Investment Trusts from corporation tax on their chargeable gains. Invested funds at 31 January 2005 had a value of £535,094,994 (2004 – £473,911,875) before deducting net liabilities of £118,595,440 (2004 –£115,291,598). Net Asset Value The Net Asset Value of the Ordinary Shares of 25p at the year end, after deducting the provision for the final dividend, was 406.8p as compared with a value of 350.1p at 31 January 2004. 40 The Merchants Trust PLC Directors’ Report Revenue Revenue for the year after deducting management and general expenses and finance costs of borrowing amounted to 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 toOrdinary Shareholders Dividends Provisions have been made in the Accounts for dividends announced on the Ordinary Shares of 25p as follows: £ £ 17,993,184 – 17,993,184 (42,997) 17,950,187 4,594,677 4,594,677 4,594,677 4,594,677 18,378,708 (428,521) John Banham and Sir Bob Reid to be independent, notwithstanding their length of service, and continues to be of the view that their extensive experience and knowledge is agreat benefit to the Board. Sir Bob Reid attained the age of 70 years on 1 May 2004 and special notice has been received, pursuant to Sections 293 and 379 Companies Act 1985, of the intention to propose the resolution concerning his re-election. The Chairman has confirmed that, since the year end, the performances of Sir John Banham and Sir Bob Reid have been subject to a formal evaluation, and that each continues to be effective in, and to demonstrate commitment to, his role. Biographical details of the Directors are on page 37. The current Directors and their beneficial interests in the share capital of the Company as at 31 January 2005 and 2004 are listed below: Sir John Banham2,000 R. A. Barfield Sir Bob Reid P. J. Scott Plummer1,000 H. A. Stevenson Ordinary Shares of 25p 20052004 2,183 500 2,000 2,120 500 1,000 25,000 25,000 Since the year end, Mr Barfield has increased his beneficial holding to 2,204 Ordinary Shares. 41 First Interim 4.5p per Share paid 13August 2004 Second Interim 4.5p per Share paid 10November 2004 Third Interim 4.5p per Share payable 17 February 2005 Final proposed 4.5p per Share payable 11 May 2005 leaving a deficit to be transferred from the Revenue Reserve Subject to the final dividend being approved by shareholders at the Annual General Meeting, payment will be made on 11 May 2005 to shareholders on the Register of Members at the close of business on 15 April 2005 at the rate of 4.50p per Ordinary Share. Further details are provided in Note6on page 22. Substantial Shareholdings In accordance with Section 198 of the Companies Act 1985 and the Disclosure of Interests in Shares (Amendment) (No. 2) 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: P. S. & J. M. Allen – 185,582 (15.75%) Prudential plc– 176,000 (14.9%); Ecclesiastical Insurance Office plc– 134,690 (11.4%); F&C Asset Management plc– 6 0,000 (5.1%) D. J. Edwards – 50,000 (4.2%) J. Y. Miller – 36,000 (3.0%) Ordinary Shares: Legal & General Group PLC – 3,155,760 (3.1%) Directors and Management All Directors listed below served throughout the financial year under review. Sir John Banham and Sir Bob Reid, having each held office for more than nine years, are subject to annual re-election under the provisions of the Combined Code, and accordingly each retires by rotation and offers himself for re-election. The Board considers Sir The Merchants Trust PLC The Merchants Trust PLC Directors’ Report No contracts of significance in which Directors are deemed to have been interested have subsisted during the year under review. Contracts of service are not entered into with the Directors, who hold office in accordance with the Articles of Association. Management Contract and Management Fee The management contract with RCM (UK) Limited (‘RCM’) provides for a fee of 0.35% per annum (2004 – 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 RCM. The management contract is terminable at one year’s notice (2004 – one year). The Managers’ performance under the contract and the contract terms are reviewed at least annually by the Management Engagement Committee. This committee consists of the Directors not employed by the management company in the past five years and therefore includes the entire Board. During the year,the committee met the Managers to review the current investment framework, including the Trust’s performance, marketing activity and total expense ratio. The committee also reviewed the terms of the management contract and considered the level of the management fee, which it found to be appropriate. The committee was satisfied with its review and believes that the continuing appointment of the Managers is in the best interests of shareholders as a whole. The Managers have discretion to exercise voting rights at the meeting of companies in which the Company 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 Company. 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 AG or its subsidiaries that may be held by the Company. The Company has entered into an annual agreement withAllianz Global Investors to operate the Investment Trust Savings Scheme. The cost to the Company for the year ending 31 January 2005 is £172,426 excluding VAT (2004 – £152,424 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 to Personal Equity Plans and the requirements for an Individual Savings Account and it is the intention to continue to do so. Analysis of Share Register Shareholder Accounts Number%000’s% 20052004200520042005200420052004 Ordinary Shares held Private holders*9,124 9 Nominees4,574 5 Insurance Companies 25280.2 Other holders Pension Funds 439 7 Investment Trusts and Funds163 ,76163.7 ,073 0 547 80.0 1821.1 31.9 3.1 6 0 2.6 32.5 .1 3.5 .1 1.21,009 31,247 65,376 398 4,038 35 1 32,515 63,33164.0 553 4,4564.04.4 980.0 ,1501.01.1 30.6 0.4 6 0 31.9 2.0 0.5 .1 14,332 15,599 100.0100.0102,103 102,103 100.0100.0 *Including PEP, ISA and Savings Plan Nominees. Based on an analysis of the Ordinary Share register at1 April 2005 (2004 – 29 March). 42 The Merchants Trust PLC Directors’ Report Directors’ and Officers’ Liability Insurance The Company maintained Directors’ and officers’ liability insurance during the year. Purchase of Own Shares 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 £416 million). The rules of the UK Listing Authority (‘Listing Rules’) limit the price which may be paid by the Company to 105% of the average middle-market quotation for an Ordinary Share on the five 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 own Ordinary Shares. Overall, this proposed if used, should help to reduce the share buy-backauthority, discount to net asset value at which the Company’s shares currently trade. 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. The Company’s Articles of Association permit the Company to redeem or purchase its own shares out of capital profits. Under the Listing Rules, 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 15,305,380Ordinary Shares, representing 14.99% of the issued share capital, provided that there is no change in the issued share capital between the date of this report and the Annual General Meeting to be held on 10 May 2005. The authority will last until the Annual General Meeting of the Company to be held in 2006 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 fiveyears from the date of renewal, if not previously revoked or varied. A resolution was passed at the Annual General Meeting held on 11 May 2004to authorise the Directors to allot the unissued Ordinary Share capital for cash. The authority is renewable annually and expires at the conclusion of the Annual General Meeting in 2005. A Special Resolution is therefore proposed under special business at the forthcoming Annual General Meeting to renew this authority for a further year. The power to allot newOrdinary Shares for cash, other than pro rata to existing shareholders, is limited to the aggregate nominal amount of £1,273,746 Ordinary Share capital, being approximately 4.99 per cent of the issued Ordinary Share capital of the Company as at the date of this report, provided that there is no change in the issued share capital between the date of this report and the Annual General Meeting to be held on 10 May 2005. Whilst it is anticipated that allotments under this authority will normally be to the AllianzGlobal Investors Investment Trust Savings Scheme, the resolution allows for allotments of new shares at the discretion of the Directors and is not limited only to this Scheme. 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 The Directors will place a resolution before the Annual General Meeting to re-appoint PricewaterhouseCoopers LLP as Auditors for the ensuing year. A resolution to authorise the Directors to determine the Auditors’ remuneration will also be proposed at the Annual General Meeting. By Order of the Board P. W. I. Ingram Deputy Secretary 5April 2005 43 taken from the London Stock Exchange Official List for the fivebusiness 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 2006 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. 9That 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 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. The Merchants Trust PLC The Merchants Trust PLC Notice of Meeting Notice is hereby given that the Annual General Meeting of The Merchants Trust PLC will be held at 20 Moorgate, London EC2R 6DA, on 10 May 2005 at 12.00 noon to transact the following business. Routine Business 1To r eceive and adopt the Report of the Directors and the Accounts for the year ended 31 January 2005 together with the Auditors’ Report thereon. 2To declare a final dividend of 4.50p per Ordinary Share. 3To r e-elect Sir John Banham as a Director. 4To r e-elect Sir Bob Reid as a Director, special notice having been received of the intention to propose his re-election. 5To approve the Directors’ Remuneration Report. 6To r e-appoint PricewaterhouseCoopers LLP as Auditors of the Company, to hold office until the conclusion of the next general meeting at which accounts are laid before the Company. 7To authorise the Directors to determine the remuneration of the Auditors. Special Business Resolution 9 will be proposed as an Ordinary Resolution and Resolutions 8 and 10 as Special Resolutions: 8That 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) the maximum number of Ordinary Shares hereby authorised to be purchased shall be 15,305,380; (ii) 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 44 The Merchants Trust PLC Notice of Meeting 10That 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 the Act) for cash as if sub-section (1) of Section 89 of the Act did not apply to any such allotment provided that: Annual General Meeting Venue Moorgate tube London Wall JPMorgan Cazenove 20 Moorgate Great Swan Alley Telegraph St e u n e v A l l a h t p o C d r a Y e s u o h n e k o T Lothbury e t a g r o o M Bank tube (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 w ithin five 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 pursuance of such offer or agreement as if that power had not expired. 155 Bishopgate, London EC2M 3AD 5April 2 005Deputy By Order of the Board P. W. I. Ingram Secretary Notes: Members entitled to attend and vote at this Meeting may appointone 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 6 p.m. on 8 May 2005 (‘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 The Merchants Trust PLC 46 The Merchants Trust PLC Form of Proxy and Voting Direction Form for Savings Scheme Investors – see D below A Shareholders’Name and Address E below for PEP and/or ISA Investors – see Notes on how to complete the proxy form If you are a registered Ordinary Shareholder and you are unable to attend the Meeting or you are an investor through the AllianzGlobal Investors InvestmentTrust Savings Scheme (‘Savings Scheme Investors’) and/or AllianzGlobal Investors InvestmentTrust PEP and/or ISA (‘PEP and/or ISA Investors’) you may appoint aproxy to attend and, on a poll, to vote on your behalf. A (i) (ii) (iii) How to sign the form Please print your name and address in the space provided and sign and date the form. 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. 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 t he 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. B 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. C 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 or relevant Administrator/Manager (see noteand D their discretion. They will also vote or abstain at their discretion on any other business which may lawfully be put before the Meeting. below) will vote or abstain at E D SavingsScheme Investors A C and of thisformyou will be deemed to have instructed the The Ordinary Shares held on your behalf in the Savings Scheme are registered in the name of the Scheme Nominee Company. If you complete parts Scheme Administrator to vote as indicated in part in respect of all such Ordinary Shares. You will also be deemed to have appointed the Chairman of the Meeting or, if you complete part ,the person named there, as your proxy in respect of any Ordinary Shares registered in your name on the Company’s Register of Members. C B E PEP and/or ISA Investors A and The Ordinary Shares held on your behalf in the PEP and/or ISA are registered in the name of the Plan/Account Nominee Company. If you complete parts instructed the Plan/Account Manager to vote as indicated in part in C respect of all such Ordinary Shares. You will also be deemed to have appointed the Chairman of the Meeting or, if you completed part , the B person named there, as your proxy in respect of any Ordinary Shares registered in your name on the Company’s Register of Members. of thisformyou will be deemed to have C Returning the form s The form must reach the office of the Registrars of the Company no later than 48 hours before the time of the Meeting, 96 hours in the case of Savings Scheme Investors and PEP and/or ISA Investors. If you are a registered Ordinary Shareholder and you subsequently decide to attend the Meeting you may do so. Attendance at the AGM C Please indicate in part if you wish to attend the Annual General Meeting. This will facilitate the Company’s planning of the AGM in general, and in respect of Scheme, PEP and ISA Investors, enable the relevant Nominee Company to send a Letter of Representation, for you to bring to the Meeting. Title and Surname . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forenames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Postcode . . . . . . . . . . . . . . . B Appointment of Proxy I/We, the undersigned, being (a)Member(s) of The Merchants Trust PLC hereby appoint the Chairman of the Meeting or Title and Surname (of your chosen proxy) . . . . . . . . . . . . . . . . . . . Forenames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Postcode . . . . . . . . . . . . . . . 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 10 May 2005 at 12.00 noon and at any adjournment. C Ordinary Business ForAgainst Abstain 1To r 2To d 3To r eceive the Report and Accounts eclare a final dividend e-electSir John Banham as a Director 4To r e-elect Sir Bob Reid as a Director 5To approve the Directors’ Remuneration Report 6To r e-appoint PricewaterhouseCoopers LLP as Auditors 7To authorise the Directors to determine the remuneration of the Auditors Special Business 8To authorise the Company to make market purchases of its own Ordinary Shares 9To r enew the Directors’ authority to allot shares 10To r enew the Directors’ authority to allot shares for cash I/We wish to attend the AGM (all shareholders)YesNo D E Savings Scheme Investors only (please tick) PEP and/or ISA Investors only (please tick) Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third fold and tuck in BUSINESS REPLY SERVICE Licence No. MB 122 22 Capita Registrars (proxies) PO Box 25 BECKENHAM Kent BR3 4BR Second fold F i r s t f o l d AllianzGlobalInvestors Phone 0800 317 573 Fax 020 7638 3508 www.al lianz globalinvestors. co.uk 

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