The Merchants Trust Plc Annual Report 2005

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FY2005 Annual Report · The Merchants Trust Plc

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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.............................................................

Statement of Total Return ........................................................................

Balance Sheet.............................................................................................

Cash Flow Statement.................................................................................

Statement of Accounting Policies............................................................

Notes to the Accounts...............................................................................

Independent Auditors’ Report .................................................................

Statement of Directors’ Responsibilities.................................................

Corporate Governance .............................................................................

Directors......................................................................................................

Distribution of Total Assets ......................................................................

Directors’ Remuneration Report..............................................................

Performance Graphs............................................. ....................................

Directors’ Report........................................................................................

Risk Review.................................................... .............................................

Notice of Meeting ......................................................................................

Investor Information..................................................................................

Form of Proxy

Contact Details................................................ ...........................................

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

change

+1.9

+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

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

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

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

34,034@

420,326

424,859

390,317473,729

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.

The Merchants Trust PLC

Thirty Largest Holdings

at 31 January 2005

HSBC

GlaxoSmithKline

Shell Transport & Trading

Royal Bank of Scotland

Barclays

HBOS

Lloyds TSB

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

.042,933

Land Securities10,672

Diageo

Slough Estates10,225

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

(

1.99

.91

1.91

1.82

1.76

1.66

1.352,135

1.33

1.29

1.13949

BOC

5,6461.05

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

423,381

79.12%

of Total Invested Funds

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.

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

The Merchants Trust PLC

United Kingdom Listed Holdings

at 31 January 2005

HSBC

GlaxoSmithKline

Shell Transport & Trading

Royal Bank of Scotland

Barclays

HBOS

Lloyds TSB

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

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

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

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

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

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

% Premium
5

-5

-10

% Discount
-15

1995

Source: Datastream

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.

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.

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.

The Merchants Trust PLC

Statement of Total Return

for the year ended 31 January 2005

200520052005200420042004

RevenueCapitalTotalRevenueCapitalTotal

Note

122,674,672

2(722,44

3(593,85

–

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

–

(5,427)

–

(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

(18,378,708)

17,993,184

58,307,798

76,300,98217,744,635

4,303,661

102,048,296

–

(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

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.

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

101,713,769

3,192,907

4,906,676

535,094,994

473,911,875

,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

25,525,984

1,178,000

25,525,984

1,178,000

1256,25056,250

322,240,327

1357,962,642(9,233,782)

26,703,984

39,80939,809

331,128,953

16416,499,554

380,202,969321,895,171

9,496,5429,925,063

358,620,277

415,321,554

357,442,277

1,178,000

416,499,554

358,620,277

The Notes on pages19 to31 f orm part of these Accounts.

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

(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)

(3,040,195)

2,366,399

The Notes on pages19 to31 f orm part of these Accounts.

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.

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.

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

The Merchants Trust PLC

Notes to the Accounts

for the year ended 31 January 2005

5. Taxation

200520052005200420042004

RevenueCapitalTotalRevenueCapitalTotal

–

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

Excess of allowable expenses over taxable income

1,265,6652,238,847

Overseas tax suffered

Relief on overseas tax suffered

Current year tax charge

–

,504,5121,199,722

–

0,561

5,427

(1,629)

5,427

(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

104,594,677

4,390,470

4,390,469

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.

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).

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

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)

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

747,426

1,312,099

21,499

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.

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

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

26,857,812

1,178,000

25,525,984

1,178,000

25,525,984

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.

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

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

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

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)

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

Total
£000s

interest
£000s

Floating

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

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

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

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

20,534,079

5,133,520

30,000,000

12,000,000

20/12/202930,000,000

n/a1,375,000

14.75%

9.25125%

5.875%

4.00%

Effective
rate since
inception1

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.

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

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).

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.

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.

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

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

Sir John Banham61

R. A. Barfield

Sir Bob Reid

P. J. Scott Plummer521

H. A. Stevenson

521

421

AuditNomination

Committee

Management
Engagement
Committee

2*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.

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.

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.

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

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

160

150

140

130

120

110

100

P
e
r
c
e
n
t

C
h
a
n
g
e

-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

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.

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

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

Since the year end, Mr Barfield has increased his beneficial
holding to 2,204 Ordinary Shares.

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

Nominees4,574

Insurance Companies

25280.2

Other holders

Pension Funds

439

Investment Trusts and Funds163

,76163.7

,073

547

80.0

1821.1

31.9

3.1

2.6

32.5

3.5

1.21,009

31,247

65,376

398

4,038

32,515

63,33164.0

553

4,4564.04.4

980.0

,1501.01.1

30.6

0.4

31.9

2.0

0.5

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).

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

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

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

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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.

The Merchants Trust PLC
The Merchants Trust PLC

The Merchants Trust PLC

Form of Proxy and Voting Direction Form

for Savings Scheme Investors – see

below

Shareholders’Name and Address

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.

(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

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.

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

SavingsScheme Investors

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.

PEP and/or ISA Investors

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

Returning the form

The form must reach the office of the Registrars of the Company no later
than 48 hours before the time of the Meeting, 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

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 . . . . . . . . . . . . . . .

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.

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

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

Capita Registrars (proxies)
PO Box 25
BECKENHAM
Kent
BR3 4BR

Second fold

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AllianzGlobalInvestors
Phone 0800 317 573
Fax 020 7638 3508
www.al lianz globalinvestors. co.uk