TIDMMEQI
M&G Equity Investment Trust P.L.C.
Final Results
For the year ended 30 June 2010
Chairman's statement and Management Report
Performance during the year
On a net asset value (NAV) basis, each Package Unit produced a total
return of 22.5% over the year to 30 June 2010. This was above the total
return of 21.1% from the FTSE All-Share Index over the same period.
Against the buoyant stockmarket background, the Company's balance sheet
gearing (borrowing) had a positive impact on its NAV return during the
first half of the year. The Company's debt as at the year end, stood at
GBP40 million, representing 21.1% of total assets less other creditors.
However, the Company's holdings of defensive assets (government bonds and
cash) also increased.
As at the year end, the Package Unit market price discount was 3.5% to
the NAV, compared with a discount of 4.9% as at 30 June 2009, the Package
Unit mid-market price at the year end being 83.0p and the NAV 86.0p. On a
mid-market price basis, the total return on the Company's Package Units
was 24.7% for the year.
The Company's revenue earnings per Package Unit were 4.20p for the
year. In respect of the review period, the Company declared three
quarterly dividends of 1.25p per Income Share and a fourth interim of
2.25p, making a total of 6.00p. This represents an increase of 4.3% over
the total of 5.75p declared in respect of the previous year. The
annualised rate of inflation as at 30 June 2010 was 5.0% as measured by
the Retail Prices Index (RPI). The Company has built up revenue reserves
over the course of its life, which have been reduced over the period to
ensure continuance of our progressive dividend policy. After allowing for
the payment of the fourth interim dividend, revenue reserves will be
1.26p per Package Unit, leaving the Company well placed over its
remaining life. As at the year end, the mid-market price yield on the
Company's Package Units was 7.2%, compared with the yield of 3.3% on the
FTSE All-Share Index.
The mid market price total return per Zero Dividend Preference Share
was 28.5% over the year (2009: minus 17.6%). The cover improved to 0.81x
from 0.67x over this period and the hurdle rate decreased to 17.17% from
18.96% for Zero Dividend Preference Shareholders. Based on the NAV
entitlement at the period end, the Zero Dividend Preference Shares
remained uncovered by 12.29p. If the Zero Dividend Preference Shares
remain uncovered at wind-up, the capital entitlement of Income
Shareholders of 0.1p per share and the value due to Capital Shareholders
will be zero.
For a detailed description of the management of the portfolio during
the period, I refer you to the Investment Review in the Annual Report and
Financial Statements for the year ended 30 June 2010 ("the Annual report
2010").
Long term performance
Against sharply varying stockmarket conditions, the Company's NAV
return was ahead of the return on the FTSE All-Share Index over the year
under review. This positive outcome meets the Company's capital
appreciation objective and also continues the improvement in performance
relative to the market recorded during the previous year. The strong
performance over the year was particularly creditable as many low
yielding sectors continued to outperform. Stock selection (our focus on
companies with robust finances, stable cash flows and sustainable growth
prospects), coupled with an above-index weighting in the FTSE 250 Index
(mid caps), made an important contribution to the Company's NAV
outperformance, as did the bond portfolio in the second half of the year.
In addition, the substantial switch from equities into UK government
bonds (gilts) made in February had a positive impact.
Despite the outperformance of the Company's NAV total return relative
to the index over the past two years, the return remains below that of
the index over three and five years, and since inception. However, it is
pleasing to note that the underperformance has narrowed.
VAT
In last year's Annual Report and Financial Statements, I reported that
PricewaterhouseCoopers Legal were about to initiate proceedings against
HMRC to recover directly VAT paid on investment management fees in
respect of various trusts in liquidation ('the Lead Claim') and that the
Company had entered into a consultancy agreement with
PricewaterhouseCoopers Legal in order to bring its own restitutionary
proceedings against HMRC on the same basis.
Proceedings were subsequently issued both in respect of the Lead Claim
and on behalf of the Company. HMRC consented to the Company's claim being
stood over pending the outcome of the Lead Claim. If the Lead Claim is
ultimately successful (final resolution may take a number of years), we
or more likely, the Company's appointed Liquidator given the timing of
the Company's winding up, will be able to activate our claim. We expect
that the liquidation of the Company will be kept open until the Company's
claim has been resolved and, if successful, any proceeds distributed to
the Company's shareholders in accordance with their respective
entitlements.
Alternative Investment Fund Managers Directive
Shareholders may recall from my Chairman's Statement in the last
Interim Report and Financial Statements the Board's concerns regarding
the EU proposals under the Alternative Investment Fund Managers Directive
('AIFM'). Since then, there have been some signs that the investment
trust industry is being listened to although there is currently deadlock
between the three parties involved in the negotiation (the European
Commission, the European Council and the European Parliament) on a number
of other issues. The timetable for implementation in the UK is 2012/2013
so the AIFM is not expected to affect the Company directly.
Share buy back and issue
The powers to buy back the Company's own shares were exercised during
the year with 157,000 Package Units bought and cancelled at an average
cost of 78p each. The share repurchases improved the NAV of each
remaining Package Unit by approximately 0.01p. Accordingly, the Board is
seeking to renew the power to buy back and cancel the Company's shares.
Also during the year, the Company issued a total of 1,250,000 Package
Units in relation to the dividend reinvestment facility. Further details
of share issues can be found in note 16 to the Financial Statements.
Winding-up proposals
The Company has today issued the following announcement to the London
Stock Exchange:
"Proposed Reconstruction
The Board of M&G Equity Investment Trust P.L.C. (the 'Company') is
proposing to put forward proposals to coincide with its scheduled
winding-up date of 8 March 2011.
Under the proposals, the Company will be wound up and its shareholders
will be offered the choice of the following:
<li> a tax and cost efficient rollover into new shares to be issued
by M&G High Income Investment Trust P.L.C.;
<li> a full cash exit (at liquidation value); and
<li> an investment in at least one open-ended investment company
managed by M&G Investment Management Limited, the Company's investment
manager.
M&G High Income Investment Trust P.L.C. is listed in London, managed
by the same investment team at M&G Investment Management Limited as the
Company and has both a similar investment objective and structure (being
closed-ended and split capital). The Company currently has gross assets
of GBP198 million whilst M&G High Income Investment Trust P.L.C. has gross
assets of GBP232 million and has a winding-up date of 17 March 2017. As
part of the proposals, M&G Investment Management Limited will make a
significant commitment in relation to the costs of the proposals.
Further precise details of the scheme are expected to be announced in
January 2011."
Outlook
The newly established Office for Budget Responsibility is forecasting
that the UK economy will expand by a modest 1.2% during the 2010/11
financial year. However, with the UK facing significant headwinds, some
economists now argue that a 'double-dip' recession is a distinct
possibility. Recent evidence suggests that the pace of recovery may be
slowing on a broad front. Consumer confidence has weakened, credit
availability remains constrained and some surveys are showing renewed
weakness in house prices. Expansion in manufacturing output will
undoubtedly be adversely impacted by any slowdown in growth in the US and
parts of Europe. In addition, the decision by the new government to
accelerate cuts in public spending is likely to lead to higher
unemployment, whilst further tax increases, particularly the impending
rise in the VAT rate to 20% in January, are likely to further limit
disposable incomes.
On the other hand, the more robust approach to restoring public
finances to health may well boost business confidence. Although inflation
has started to moderate from recent peak levels, it remains well above
its 2% target on a Consumer Prices Index (CPI) basis. Even though base
rates are generally expected to be held at 0.5% until 2011, pressure
within the Bank of England monetary policy committee for higher rates
appears to be increasing. Then again, if the recovery starts to run out
of steam, the quantitative easing programme could well be extended.
The recent correction to share prices, largely in response to the
eurozone sovereign bond crisis, has prompted a more cautious mood among
investors. Surveys of UK fund managers suggest that cash weightings now
stand close to levels recorded at the height of the bank crisis in the
autumn of 2008. Whether this setback proves to be temporary or the start
of a more pronounced downturn will depend on the pattern of economic data
and the ability of companies to meet the ambitious consensus profit
growth forecasts. Company finances are generally robust, leaving them
well placed to increase capital spending and dividends. Equity valuations
are low by historic standards, implying that the market is already
pricing in plenty of bad news.
By contrast, although yields have fallen to relatively low levels
(3.4% for 10-year gilts), current sentiment towards gilts is relatively
upbeat. Progress in tackling the public sector deficit will be well
received, as will evidence that inflation is moderating. Moreover, if
there is a serious threat to recovery, the Bank of England may well
extend its special purchase scheme. Corporate bonds will largely take
their cue from gilts, although if the current mood of caution persists,
buyers are likely to favour bonds issued by financially secure companies
with top credit ratings.
The proximity of the Company's winding-up will have an important
bearing on our investment policy during the remainder of its life.
Although the portfolio was already defensive at the start of the year, we
took further steps to limit risk exposure by switching a proportion of
our equity holdings into gilts and, within the corporate bond portfolio,
raising the credit quality. In an uncertain economic and market
environment, these actions leave the Company well placed to deliver both
an NAV return in excess of the FTSE All-Share Index and to maintain its
income objective. Although the suspension of dividend payments by BP will
have an adverse impact on the Company's revenue, this shortfall should be
limited by increasing income from other holdings in the portfolio. In
addition, the Company is in position to draw down its reserves ahead of
the wind-up on or immediately prior to 8 March 2011.
It is our current intention to pay out the majority of the available
income, including revenue reserves, at the end of the first quarter which
should lead to a payment well above the first interim dividend last year.
The absence of revenue reserves and the nine-week final period means that
the second and third payments are likely to be below the equivalent
payments last year although this is not a dividend or profit forecast.
Finally, we would like to thank Ed Rosengarten, who stepped down from
the Board recently, for his considerable contribution to our
deliberations over the last four years.
Responsibility statements
To the best of my knowledge and belief:
a ) this statement includes a fair review of the development and
performance of the business and the position of the Company together with
a description of the principal risks and uncertainties that the Company
faces; and
b) the financial statements, prepared in accordance with United
Kingdom Accounting Standards, give a true and fair view of the assets,
liabilities, financial position and losses of the Company.
J C Barclay OBE
(Chairman)
Income statement
(audited)
for the year 2010 2009
ended 30 June
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------- -------- ------- -------- ------- --------
Net gains /
(losses) on - 25,481 25,481 - (36,811) (36,811)
investments
Income 8,921 - 8,921 10,431 - 10,431
Investment (438) (1,022) (1,460) (417) (974) (1,391)
management fee
Other expenses (235) (325) (560) (210) - (210)
------- ------- ------- ------ -------- --------
Net return before
finance costs and 8,248 24,134 32,382 9,804 (37,785) (27,981)
tax
Finance costs: - (10,704) (10,704) - (11,737) (11,737)
Appropriations
Finance costs: (9,963) - (9,963) (10,625) - (10,625)
Dividends
Interest payable (893) (2,083) (2,976) (982) (2,939) (3,921)
and similar charges
------- ------- ------- ------ -------- --------
Net return on
ordinary activities (2,608) 11,347 8,739 (1,803) (52,461) (54,264)
before tax
Tax on ordinary (77) 77 - (90) 90 -
activities
------- ------- ------- ------ -------- --------
Net return on
ordinary activities (2,685) 11,424 8,739 (1,893) (52,371) (54,264)
after tax
------- ------- ------- ------ -------- --------
Return per Zero
Dividend Preference - 12.76p 12.76p - (11.53)p (11.53)p
Share
Revenue earnings
/ return per Income 4.20p - 4.20p 5.09p (0.10)p 4.99p
Share
Return per - - - - (12.06)p (12.06)p
Capital Share
Total return per 4.20p 12.76p 16.96p 5.09p (23.69)p (18.60)p
Package Unit
The total column of this statement is the profit and loss account of the
Company. The revenue return and capital return columns are supplementary to this
and are prepared under the guidance published by the Association of Investment
Companies.
All items in the above statement derive from continuing operations. No
operations were acquired or discontinued during the year.
A statement of Total Recognised Gains and Losses is not required as all gains
and losses of the Company have been reflected in the above statement.
The Company's Zero Dividend Preference and Income Shares meet the definition of
a liability under FRS 25 and therefore the Capital Shares which are subordinate
to all other classes of shares, have been classified as equity. This does not
affect the rights and benefits of any class of shares.
The breakdown of the net assets attributable to all shareholders in terms of the
share capital and reserves is given in note 15.
Reconciliation of movements in shareholders' funds (Capital Shares) (audited)
For the year ended 30 June 2010 2009
GBP'000 GBP'000
---------- ----------
Capital return on ordinary activities after tax 11,424 (52,371)
Net losses attributable to Income Shares 2 172
Net (gains) / losses attributable to Zero Dividend (11,426) 31,515
Preference Shares
---------- ----------
Net movement in net assets attributable to Capital - (20,684)
Shares
Opening net assets attributable to Capital Shares - 20,684
---------- ----------
Closing net assets attributable to Capital Shares - -
---------- ----------
Balance sheet (audited)
As at 30 June 2010 2009
GBP'000 GBP'000
------- -------
Fixed assets
Portfolio of investments - 166,476
------- -------
Current assets
Portfolio of investments 183,033 -
Debtors 1,830 1,967
Cash at bank and short-term deposits 5,181 696
------- -------
190,044 2,663
------- -------
Total financial assets 190,044 169,139
Creditors: Amounts falling due within one year
7.376% Debenture 2011 (40,000) -
Share classes defined as liability:
Zero Dividend Preference Shares (143,150) -
Income Shares (6,085) -
Other creditors (809) (354)
------- -------
Total assets less current liabilities - 168,785
Creditors: Amounts falling due after more than one year
7.376% Debenture 2011 - (39,977)
Share classes defined as liability:
Zero Dividend Preference Shares - (120,038)
Income Shares - (8,770)
------- -------
- (168,785)
------- -------
Net assets attributable to Capital Shares - -
------- -------
Capital and Reserves attributable to Capital Shares comprise:
As at 30 June 2010 2009
GBP'000 GBP'000
------- -------
Called up share capital 1,735 1,725
Share premium account 35,085 35,039
Capital redemption reserve 487 486
Special reserve 7,241 7,242
Capital reserves - Investment holding gains / (losses) - -
- Other capital reserves (44,548) (44,492)
-------- --------
Capital and Reserves attributable to Capital Shares - -
-------- --------
The net assets attributable to all shareholders at the year end is GBP149,235,000
(2009: GBP128,808,000). This equates to the total financial assets of the Company
of GBP190,044,000 (2009: GBP169,139,000) less the debenture outstanding of
GBP40,000,000 (2009: GBP39,977,000) and other creditors of GBP809,000 (2009:
GBP354,000).
The net assets attributable to shareholders have been calculated in accordance
with the Company's Articles of Association and the net asset values (per share)
applicable to each class of shareholding as shown below.
The Company's Zero Dividend Preference and Income Shares meet the definition of
a liability and therefore the Capital Shares which are subordinate to all other
classes of shares, have been classified as equity. This does not affect the
rights and benefits of any class as disclosed in Note 16.
The breakdown of the net assets attributable to shareholders into the share
capital and reserves attributable to them is given in notes 15 to 18.
As at 30 June 2010 2009
Net asset value per Zero Dividend 82.49p 69.61p
Preference Share
Net asset value per Income Share 3.51p 5.08p
Net asset value per Capital Share - -
Net asset value per Package Unit 86.00p 74.69p
The net asset values per share are calculated on the basis of 173,544,139
(2009: 172,451,139) shares of each class in issue and the value per class
of share as shown on the Balance Sheet.
The net asset value of each Zero Dividend Preference Share has been
calculated on the basis that it will grow at a monthly compound growth
rate of 0.65% to give an entitlement to 100p at 8 March 2011. However, as
at 30 June 2010, the Company had insufficient assets to cover the net
asset value entitlement of the Zero Dividend Preference Shares and the
capital entitlement of the Income Shares. As a result the capital
entitlement of the Income Shares and the Capital Shares is zero. The
82.49p of the Zero Dividend Preference Shares is equal to the total net
assets less that standing to the revenue reserve, 12.29p less than their
current entitlement of 94.78p.
The redemption value of each Income Share on winding-up is 0.10p, subject
to the prior entitlement of the Zero Dividend Preference Shares.
The net asset value of each Capital Share has been calculated on the basis
of the total net assets of the Company less amounts attributable to Zero
Dividend Preference and Income Shareholders.
Cash flow statement (audited)
For the year ended 30 2010 2009
June
GBP'000 GBP'000 GBP'000 GBP'000
------ -------- -------- -------
Net cash inflow from 6,969 11,561
operating activities
Servicing of finance
Dividends paid (9,963) (10,625)
(non-equity)
Annual monitoring fee (3) (3)
paid
Interest paid on (2,950) (3,370)
Debenture Stock
------ ------
(12,916) (13,998)
Financial investment
Capital distributions - 705
Purchase of investments (52,171) (62,207)
Sale of investments 61,619 76,641
------ ------
9,448 15,139
Financing
Partial repayment of - (14,000)
Debenture Stock
Cost of early partial
redemption of Debenture - (648)
Stock
Issue of Package Units 1,108 1,306
(including related costs)
Repurchase of Package
Units (including related (124) (461)
costs)
------ ------
984 (13,803)
------- -------
Net increase / (decrease) 4,485 (1,101)
in cash
------- -------
Notes to the Financial Statements
1. Accounting policies
a) Basis of accounting: These financial statements have been prepared in
accordance with the historical cost convention, as modified by the revaluation
of investments, in accordance with applicable United Kingdom Accounting and
Financial Reporting Standards, and the Statement of Recommended Practice:
'Financial Statement of Investment Trust Companies and Venture Capital Trusts'
(SORP) issued by the Association of Investment Companies in January 2009 which
was adopted during the year.
The Company has a planned life to 8 March 2011. In accordance with the Company's
Articles of Association the Directors are required to convene a general meeting
of the Company to be held on or immediately prior to 8 March 2011 at which a
resolution will be proposed requiring the Company be wound up voluntarily unless
the Board has been released from its obligations to do so by a special
resolution of the Company. The Board are reviewing the options available for the
future of the Company. As it is probable that the Company will not continue in
the foreseeable future in its current legal form, the financial statements have
been prepared on a break up basis rather than a going concern basis. As a
consequence, all assets and liabilities are classified as current; investments
continue to be stated at bid price which is a reasonable estimation of their
realisable value with no provision for impairment, and the costs of winding up
the Company have been estimated as GBP325,000 and accrued. The comparative figures
are on a going concern basis.
During the year, the Company has early adopted the Amendment to FRS 25,
'Financial instruments: presentation' on Puttable Financial Instruments and
Obligations arising on Liquidation, resulting in the reclassification of Capital
Shares, which are the most subordinate class of shares issued by the Company,
from debt to equity. The Zero Dividend Preference Shares and the Income Shares
continue to meet the definition of a liability under FRS 25 and have been
treated as such. The adoption of this amendment has resulted in presentational
changes to the balance sheet and does not affect the rights and benefits of any
class of shares.
In order to improve the disclosure of how companies measure the fair value of
their financial investments, the disclosure requirements in FRS 29 have been
extended to include a fair value hierarchy. Details of the fair value hierarchy
are given in note 20 to the financial statements.
b) Portfolio of investments: All investments have been designated as 'at fair
value through profit or loss'. Purchases of investments are initially recognised
on the trade date at fair value, being the consideration paid, and subsequently
valued at their fair value, excluding any accrued interest, at the balance sheet
date. For the balance sheet date 30 June 2010 the realisable value for listed
investments is deemed to be bid value. Investments which are unquoted or not
listed are valued at the Director's best estimate of fair / realisable value.
Investments are derecognised on the trade date of the sale.
c) Recognition of income: Income from quoted equity shares is recognised net of
attributable tax credits when the security is quoted ex-dividend. Interest on
debt securities and income from preference shares are accounted for on an
effective yield basis. Bank interest and underwriting commission are accounted
for on an accruals basis. Where the Company enters into a commitment to
underwrite an issue of securities in exchange for the receipt of commission,
this creates a derivative financial instrument. Any such derivatives are
recognised initially at fair value and are subsequently re-measured at fair
value, with the related gains and losses being reflected in the Income
Statement. Net losses arising from these derivatives, where the actual or
expected loss from taking up the securities underwritten exceeds the commission
income, are allocated to the capital return. Net gains are allocated to the
revenue return.
d) Stock dividends: The ordinary element of stocks received in lieu of cash
dividends is recognised as revenue. Any enhancement above the cash dividend is
treated as capital.
e) Special dividends: These are recognised when the security is quoted
ex-dividend and treated as either revenue or capital depending upon the nature
and circumstances of the dividend receivable.
f) Investment management fees: These have been charged 30% to the revenue
account and 70% to capital reserves. This is in line with the Board's expected
long-term split of returns in the form of capital gains and income respectively
from the investment portfolio of the Company. The charge to the capital reserve
allows for corporation tax relief on that proportion. Relief on expenses charged
to the capital account has been allowed for at the corporation tax rate for the
Company.
g) Other expenses: All expenses (other than those incidental to the purchase or
sale of investments or the winding-up of the Company) are charged against
revenue on an accruals basis.
h) Appropriations: Appropriations for premiums payable on redemption are
accounted for as finance costs and transferred from capital reserves. They
represent an apportionment of the increase in the redemption value of Zero
Dividend Preference Shares over the amounts originally subscribed.
i) Dividends payable to Income Shareholders: Dividends approved by the Board and
declared after the balance sheet date, in respect of the net revenue for the
year, are recognised as a finance cost when the shareholders' right to receive
them is established.
j) Debenture stock: Finance costs of debt, insofar as they relate to the
financing of the Company's investments or to financing activities aimed at
maintaining or enhancing the value of the Company's investments, are allocated
30% to the revenue account and 70% to the capital reserves, in line with the
Board's expected long term split of returns, in the form of capital gains and
income respectively, from the investment portfolio of the Company. Costs
specific to arranging the debt finance have been capitalised and will be
amortised over the term of the finance.
k) Capital reserves: Gains and losses on the realisation of investments together
with finance costs, expenses and appropriations in accordance with the above
policies are accounted for in capital reserves - other capital reserves.
Increases and decreases in the valuation of investments held at the balance
sheet date are accounted for in capital reserves - investment holding gains /
(losses).
l) Share capital: Zero Dividend Preference Shares and Income Shares meet the
definition of a financial liability under FRS 25. The Capital Shares of the
Company are equity shares. Appropriations in respect of Zero Dividend Preference
Shares and dividends payable to Income Shareholders are accounted for as finance
costs. The appropriations are charged 100% to capital and dividends are charged
100% to revenue to reflect the rights and benefits of the different classes of
share in issue.
m) Taxation: The charge for taxation is based upon the revenue for the year and
is allocated according to the marginal basis between revenue and capital using
the Company's effective tax rate of corporation tax for the accounting period.
n) Deferred taxation: This is provided for in respect of all timing differences.
Any liability is provided at the average rate of tax expected to apply. Deferred
tax assets and liabilities are not discounted to reflect the time value of
money.
o) Foreign currency transactions: These are translated at the rate of exchange
ruling on the date of the transaction. Assets and liabilities denominated in
foreign currencies are translated into sterling at the rate of exchange ruling
at the balance sheet date.
p) Issue costs: These have been offset against the proceeds of share issues and
dealt with in the share premium account.
q) Functional and presentation currency: The functional and presentation
currency of the Company is pounds sterling because that is the currency of the
primary economic environment in which the Company operates.
2. Investments: At fair value through profit or loss
2010 2009
Capital Capital
a) Net gains / (losses) on investments GBP'000 GBP'000
-------------- --------------
Losses on disposal of investments (4,350) (30,110)
Increase in investment holding gains / 29,831 (7,406)
(losses)
Capital distributions - 705
-------------- --------------
Net gains / (losses) on investments 25,481 (36,811)
-------------- --------------
b) Investments
-------------- --------------
Opening book cost 210,475 252,570
Opening investment holding loss (43,999) (36,593)
-------------- --------------
Opening valuation 166,476 215,977
Movements in the year:
Effective yield adjustments (153) (79)
Purchases - at cost 52,139 61,978
- transaction charges 143 236
Sales - proceeds (61,642) (74,432)
- transaction charges 23 54
- realised losses on
disposal of investments (4,350) (30,110)
Stock dividends 566 258
Increase in investment holding gains / 29,831 (7,406)
(losses)
-------------- --------------
Closing valuation 183,033 166,476
-------------- --------------
Closing book cost 197,201 210,475
Closing investment holding loss (14,168) (43,999)
-------------- --------------
Portfolio of Investments 183,033 166,476
-------------- --------------
3. Income
2010 Revenue 2009
Revenue
Income from investments GBP'000 GBP'000
-------------- --------------
Interest on debt securities 1,729 1,684
Property income dividends 69 92
Overseas dividends 26 7
Stock dividends 566 258
UK dividends 6,483 8,211
-------------- --------------
8,873 10,252
-------------- --------------
Other income
-------------- --------------
Bank interest 10 21
Deposit interest - 85
HM Revenue & Customs interest - 10
Unclaimed distributions 4 -
Underwriting commission 34 63
-------------- --------------
48 179
-------------- --------------
Total income 8,921 10,431
-------------- --------------
Total income comprises
-------------- --------------
Dividends 7,144 8,568
Interest 1,739 1,800
Other income 38 63
-------------- --------------
8,921 10,431
-------------- --------------
4. Investment management fee
2010 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------- ------------- -------------- -------------- -------------- --------------
Investment
management 438 1,022 1,460 417 974 1,391
fee
-------------- ------------- -------------- -------------- ------------- --------------
The name of the investment manager and the terms and duration of its appointment
are disclosed in the Directors' Report in the Annual report 2010.
The basis of allocating the investment management fee to revenue and capital is
dealt with in note 1f.
During the year no performance related fees were paid (2009: same).
5. Other expenses
2010 2009
GBP'000 GBP'000
-------------- --------------
Annual listing fee 6 5
Auditors' fees: [a]
audit services 25 25
non-audit services 42 2
Bank charges and safe custody fees 3 9
Directors' remuneration 70 68
FSA fees 5 4
Registrar's fees 16 19
The Association of Investment Companies fees 17 20
Legal advice 7 15
Stockbroker fees 12 9
Estimated costs in relation to winding-up 325 -
Other fees 32 34
-------------- --------------
560 210
-------------- --------------
[a] During the year GBP42,000 of non-audit fees were paid to
PricewaterhouseCoopers (2009: GBP2,000) GBP40,000 of which were in relation to the
VAT recovery proceedings as detailed in the Chairman's Statement above (2009:
GBPnil). Auditors' fees include VAT of GBP9,275 (2009: GBP3,450).
6. Finance costs: Appropriations 2010 2009
Capital Capital
Appropriation for premium payable on GBP'000 GBP'000
redemption
-------------- --------------
Zero Dividend Preference Shares 10,704 11,737
-------------- --------------
This constitutes an appropriation of reserves in respect of the premium to issue
proceeds payable to holders of Zero Dividend Preference Shares on redemption.
The appropriation for the year represents an apportionment of the increase in
redemption value of the amounts originally subscribed. However, as at 30 June
2010, there was a deficiency of assets available amounting to GBP21,329,000 (2009:
GBP31,519,000) to fully cover the NAV entitlement of the Zero Dividend Preference
Shares under the articles of association of the Company.
7. Finance costs: Dividends
2010 2009
Revenue Revenue
Dividends (payable to Income Shareholders) GBP'000 GBP'000
-------------- --------------
Fourth interim 2009: 2p paid 18 September 3,449 3,418
2009 (2008: 2p)
Special Dividend: nil paid (2008: 0.45p) - 769
First interim 2010: 1.25p paid 18 December 2,171 2,146
2009 (2008: 1.25p)
Second interim 2010: 1.25p paid 19 March 2010 2,171 2,146
(2009: 1.25p)
Third interim 2010: 1.25p paid 18 June 2,172 2,146
2010 (2009: 1.25p)
-------------- --------------
9,963 10,625
-------------- --------------
On 24 August 2010 the Board declared a fourth interim dividend of 2.25p (2009:
2p) per Income Share totalling GBP3,905,000 (2009: GBP3,449,000), payable on 20
September 2010 to Income Shareholders on the register at the close of business
on 3 September 2010. The ex-dividend date is 1 September 2010.
All dividends are payable to holders of Income Shares and Package Units.
8. Interest payable and similar charges
2010 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------ ---------- ------- ------------ --------- -------
7.376%
Debenture Stock 885 2,065 2,950 973 2,270 3,243
2011 interest
Annual 1 2 3 1 2 3
monitoring fee
Amortisation of
costs specific
to the 7.376% 7 16 23 8 19 27
Debenture Stock
2011
Partial
redemption - - - - 648 648
charges
------------ ---------- ------- ------------ --------- -------
893 2,083 2,976 982 2,939 3,921
------------ ---------- ------- ------------ --------- -------
The terms of the 7.376% Debenture Stock 2011 are dealt with in note 13.
9. Tax on
ordinary 2010 2009
activities
Revenue Capital Total Revenue Capital Total
a) Analysis
of the GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
charge in
the year
-------------- ------------- ---------- -------------- -------------- --------------
Corporation
tax / 77 (77) - 90 (90) -
(relief)
-------------- ------------- ---------- -------------- ------------- --------------
Total
current tax
charge / 77 (77) - 90 (90) -
(relief)
(note 9b)
Deferred
tax (note - - - - - -
9c)
------------ ----------- ---------- ------------ ------------- --------------
Tax on
profit on 77 (77) - 90 (90) -
ordinary
activities
------------ ----------- ---------- ------------ ------------- --------------
b) Factors affecting the tax charge for the year
------------ ----------- ----------- ------------ ------------- --------------
Net return on
ordinary (2,608) 11,347 8,739 (1,803) (52,461) (54,264)
activities
before tax
------------ ----------- ----------- ------------ ------------- --------------
Corporation tax (730) 3,177 2,447 (505) (14,689) (15,194)
at 28%
Effects of:
Finance costs:
Appropriations - 2,997 2,997 - 3,286 3,286
[a]
Finance costs: 2,790 - 2,790 2,975 - 2,975
Dividends [a]
Capital returns - (7,044) (7,044) - 10,307 10,307
[a]
Stock dividends (158) - (158) (72) - (72)
[a]
UK dividends (1,815) - (1,815) (2,299) - (2,299)
[a]
Overseas (7) - (7)
dividends [a]
Income taxable
in different (3) - (3) (9) - (9)
periods
Current year
expenses not - 793 793 - 1,006 1,006
utilised[b]
------------ ----------- ----------- ------------ ------------- --------------
Current tax
charge / 77 (77) - 90 (90) -
(relief) (note
9a)
------------ ----------- ----------- ------------ ------------- --------------
[a] As an investment trust company these items are not subject to corporation
tax.
[b] Current year expenses include interest paid on debenture stock.
c) Provision for deferred tax
There is no provision for deferred tax at the start or end of the year (2009:
same)
d) Deferred tax asset not
recognised
-------------- ------------- -------------- -------------- ------------- --------------
Resulting
from
unutilised - 8,857 8,857 - 8,064 8,064
expenses
[c]
-------------- ------------- -------------- -------------- ------------- --------------
[c] These expenses will not be utilised unless the tax treatment of UK
dividends and capital gains for an investment trust company changes.
10. Earnings / returns per share
a) Return per Zero Dividend Preference 2010 2009
Share Capital Capital
-------------- --------------
Appropriations GBP10,704,000 GBP11,737,000
Gains / (losses) offset against Zero Dividend
Preference
shares (Note 10c) GBP11,426,000 GBP(31,515,000)
-------------- --------------
Net capital return attributable to Zero GBP22,130,000 GBP(19,778,000)
Dividend Preference Shares
Weighted average shares in issue throughout 173,414,829 171,579,496
the year
-------------- --------------
Return per Zero Dividend Preference Share 12.76p (11.53)p
-------------- --------------
b) Revenue earnings per Income Share 2010 2009
-------------- --------------
Net revenue return on ordinary activities GBP(1,893,000)
after tax GBP(2,685,000)
Finance costs: Dividends GBP9,963,000 GBP10,625,000
-------------- --------------
Revenue return attributable to Income GBP7,278,000 GBP8,732,000
Shares
Weighted average shares in issue throughout 173,414,829 171,579,496
the year
-------------- --------------
Revenue earnings per Income share 4.20p 5.09p
-------------- --------------
Capital return attributable to Income Shares
(note 10c) GBP(2,000) GBP(172,000)
Weighted average shares in issue throughout
the year 173,414,829 171,579,496
-------------- --------------
Capital return per Income Share - (0.10)p
-------------- --------------
c) Return per Capital Share 2010 2009
-------------- --------------
Net capital return on ordinary activities GBP(52,371,000)
after tax GBP11,424,000
Losses offset against Income Shares GBP2,000 GBP172,000
(Gains)/losses offset against Zero Dividend GBP(11,426,000) GBP31,515,000
Preference Shares
-------------- --------------
Net capital return attributable to Capital - GBP(20,684,000)
Shares
Weighted average shares in issue throughout
the year 173,414,829 171,579,496
-------------- --------------
Return per Capital Share - (12.06)p
-------------- --------------
d) Package Units
The earnings and returns per Package Unit are calculated by reference to their
component shares.
11. Debtors
2010 2009
GBP'000 GBP'000
-------------- --------------
Bank interest receivable 1 -
Debt security interest receivable 702 599
Underwriting commission receivable 6 15
Dividends receivable 1,101 1,332
Income tax recoverable 20 21
-------------- --------------
1,830 1,967
-------------- --------------
None of the Company's receivables are past due or impaired
12. Creditors: Amounts
falling due within one year
As the Company is due to wind up on or immediately prior to 8 March 2011,
all creditors will fall due within one year. For the year ending 30 June
2009, the debenture and share classes defined as a liability shown in
notes 13 and 14 were classified as creditors falling due after more than
one year.
2010 2009
GBP'000 GBP'000 GBP'000 GBP'000
Amounts
falling due -------------- -------------- -------------- --------------
within one
year
Debenture
stock 40,000 -
7.376% 2011
Share
classes
defined as
liability:
Zero
Dividend 143,150 -
Preference
Shares
Income 6,085 -
Shares
Other
creditors:
Amounts
due to 118 7
brokers
Interest 291 291
payable
Estimated
costs in 325 -
relation to
winding-up
Other
expenses and 75 56
accruals
-------------- -------------
809 354
-------------- --------------
190,044 354
-------------- --------------
13.
Debenture
stock
7.376% 2011
2010 2009
GBP'000 GBP'000
-------------- --------------
Opening 40,000 54,000
nominal
Opening
specific (23) (50)
costs
capitalised
-------------- --------------
Opening 39,977 53,950
value
Partial - (14,000)
redemption
Specific
costs 23 27
amortised
-------------- --------------
Closing 40,000 39,977
value
-------------- --------------
Closing 40,000 40,000
nominal
Closing
specific - (23)
costs
capitalised
-------------- --------------
40,000 39,977
-------------- --------------
The 7.376% Debenture Stock 2011 is secured by a first floating charge over
the assets of the Company and is due to be repaid on the 8 March 2011.
The Company has no undrawn loan facilities at the year end (2009: same).
14. Share classes defined as liability
Zero Dividend Preference Shares Income Shares
2010 2009 2009
2010
GBP'000 GBP'000 GBP'000 GBP'000
------ -------- -------- -------
Opening 120,038 138,972 8,770 10,834
balance
Net revenue
return on
ordinary - - (2,685) (1,893)
activities
after tax [a]
Zero
Dividend
Preference 10,704 11,737 - -
Shares
appropriation
Repurchase
of Package (124) (405) - (1)
Units
Issue of 1,106 1,249 2 2
Package Units
Net capital
gains /
(losses)
offset against 11,426 (31,515) (2) (172)
Zero Dividend
Preference and
Income Shares
------ ------ ------ ------
Closing
balance as at 143,150 120,038 6,085 8,770
30 June
------ ------ ------ ------
[a] Movement in revenue reserves attributable to Income Shareholders
2010
2009
GBP'000 GBP'000 GBP'000 GBP'000
------ ------ ------ ------
Opening
balance of 8,770 10,663
revenue
reserve
Income 8,921 10,431
Investment
management (438) (417)
fee
Other (235) (210)
expenses
Finance
costs: (9,963) (10,625)
Dividends
Interest
payable and (893) (982)
similar
charges
Corporation
tax relief on (77) (90)
expenses
------ ------
Net revenue
return on
ordinary (2,685) (1,893)
activities
after tax
------ ------
Balance
reported as 6,085 8,770
at 30 June
Fourth
interim (3,905) (3,449)
dividend
declared
------ ------
Revenue
reserves
adjusted for 2,180 5,321
dividend
declared
------ ------
15. Capital and reserves attributable to shareholders (equity and non-equity)
2010 2009
As at 30 June GBP'000 GBP'000
-------------- --------------
Called up share capital 5,206 5,174
Share premium account 142,207 141,137
Capital redemption reserve 1,468 1,463
Zero Dividend Preference Shares appropriation 107,925 97,319
reserve
Special reserve 24,982 25,007
Capital reserves - Investment holding losses (14,168) (43,999)
- Other capital (124,470) (106,063)
reserves
Revenue reserve 6,085 8,770
-------------- --------------
Net assets attributable to all shareholders 149,235 128,808
-------------- --------------
Zero Dividend Preference Shares 143,150 120,038
Income Shares 6,085 8,770
-------------- --------------
Total non-equity shares 149,235 128,808
Capital Shares (equity) - -
-------------- --------------
Net assets attributable to all shareholders 149,235 128,808
-------------- --------------
Under the terms of the Company's Articles of Association, sums standing to the
credit of the special reserve are available for distribution only by way of
redemption or purchase of the Company's own shares. The Company may only
distribute accumulated 'realised' profits.
The Institute of Chartered Accountants of England and Wales has issued guidance
(TECH 01/08), stating that profits arising out of a change in fair value of
assets, recognised in accordance with the Accounting Standards may be
distributed provided the relevant assets can be readily converted into cash.
Securities listed on recognised stock exchanges are generally regarded as being
readily convertible into cash and hence investment holding gains in respect of
such securities currently included within capital reserves may be regarded as
distributable under Company Law. As at 30 June 2010 the Company had investment
holding losses amounting to GBP14,168,000 (2009: GBP43,999,000) in respect of such
securities.
The Zero Dividend Preference Share appropriation reserve, together with the
amounts originally subscribed, represent the asset entitlement for the Zero
Dividend Preference Shares set out in the Balance Sheet. However, as at 30 June
2010, there was a deficiency of assets available amounting to GBP21,329,000 (2009:
GBP31,519,000) to fully cover the NAV entitlement of the Zero Dividend Preference
Shares under the Articles of Association of the Company.
Share premium represents the surplus of subscription monies after expenses over
the nominal value of the issued share capital. With the shareholders' approval
and confirmation of the Court, a special reserve was created by the cancellation
of GBP70,000,000 of the share premium account, with effect from 10 October 1997,
to be issued by the Company to purchase its shares.
The special reserve, resulting from the cancellation of share premium, may only
be used for the purpose of the share repurchases. On the repurchase and
cancellation of Package Units a transfer is made from the Zero Dividend
Preference Share reserve to the special reserve. This represents the
appropriation contained within the Zero Dividend Preference Share reserve
relating to those Zero Dividend Preference Shares repurchased and cancelled as
part of the Package Units.
16. Share capital (equity and non-equity)
2010 % of total 2009 % of total
GBP'000 share capital GBP'000 share capital
Alloted, called up and fully ------- ---------- ------ --------------
paid:
173,544,139 (2009:
172,451,139) Zero Dividend 1,735 33.33% 1,725 33.33%
Preference Shares of 1p each
173,544,139 (2009:
172,451,139) Income Shares of 1,735 33.33% 1,725 33.33%
1p each
173,544,139 (2009:
172,451,139) Capital Shares of 1,735 33.33% 1,725 33.33%
1p each
------ --------- ----- -------------
During the year the Company repurchased and cancelled 157,000 Package Units at
an average cost of 78p per Package Unit costing GBP124,000.
Also during the year the Company issued 1,250,000 shares of each class at an
issue price of 76.24p per Zero Dividend Preference Share, 9.72p per Income Share
and 5.12p per Capital Share. The issue price was at a premium of 1% to the Net
Asset Value of the Package Units.
The Company's Zero Dividend Preference and Income Shares meet the definition of
a liability under FRS 25 and therefore Capital Shares are the Company's only
equity shares.
The holders of Income Shares are entitled to receive revenue profits of the
Company by way of dividends. Holders of Zero Dividend Preference Shares and
Capital Shares are not entitled to receive dividends out of the revenue or any
other profits of the Company.
On the basis that the Company is wound up on 8 March 2011, as planned and,
subject to the repayment of the 7.376% Debenture Stock 2011 and any other
liabilities of the Company, the holders of Zero Dividend Preference Shares will
be entitled to a capital payment of 100p per share or such a lesser sum as
remains. Holders of Income Shares will become entitled to a return of capital of
0.10p per share, subject to the prior entitlement of the Zero Dividend
Preference shareholders, plus any balance standing to the revenue reserve.
Capital shareholders will then become entitled to any surplus assets, after
satisfying all the liabilities of the Company.
Voting rights are subject to certain restrictions. Holders of Zero Dividend
Preference Shares generally have no entitlement to vote other than in the
exceptional circumstances prescribed in the Articles of Association.
Where voting rights apply, holders of Zero Dividend Preference, Income and
Capital Shares are, on a show of hands, each entitled to one vote at general
meetings of the Company and on a poll are entitled to one vote for each share
held.
The Company has an authorised share capital of GBP38,850,000 (2009: GBP38,850,000)
consisting of 1,295,000,000 (2009: 1,295,000,000) shares of each class.
17. Capital reserves (equity)
Other capital Investment holding
reserves gains / (losses)
GBP'000 GBP'000
-------------- --------------
Opening balance as at 30 June 2009 (44,492) -
Increase in
investment holding - 29,831
gains
Losses on disposal of (4,350) -
investments
Investment management (1,022) -
fee
Estimated costs in (325) -
relation to winding-up
Finance costs: (10,704) -
Appropriations
Interest payable and (2,083) -
similar charges
Tax on ordinary 77 -
activities
Capital shares repurchased and 2 -
cancelled
Capital shares issued (58) -
Net capital return attributable to 18,407 (29,831)
Zero Dividend Preference Shares
------------- -------------
Balance reported as at 30 June (44,548) -
2010
------------- -------------
18. Other reserves (equity)
Called up share Capital Share premium
capital redemption account Special reserve
reserve
GBP'000 GBP'000 GBP'000 GBP'000
-------------- -------------- -------------- --------------
Opening
balance as at 1,725 486 35,039 7,242
30 June 2009
Capital 12 - 46 -
shares issued
Capital
shares (2) 1 - (1)
repurchased
and cancelled
-------------- -------------- -------------- --------------
Closing
balance as at 1,735 487 35,085 7,241
30 June 2010
-------------- -------------- -------------- --------------
19. Cash flow
2010 2009
a) Reconciliation of net return on ordinary
activities before tax to net cash inflow from GBP'000 GBP'000
operating activities:
-------------- --------------
Net return on ordinary 8,739 (54,264)
activities before tax
Net (gains) / losses on (25,481) 36,811
investments
Finance costs: Appropriations 10,704 11,737
Finance costs: Dividends 9,963 10,625
Interest payable and similar 2,976 3,921
charges
Effective interest adjustment 153 79
Stock dividends (566) (258)
Decrease in other debtors 137 2,908
Increase in other creditors 344 2
-------------- --------------
Net cash inflow from 6,969 11,561
operating activities
-------------- --------------
b) Reconciliation of net cash
inflow / (outflow) to GBP'000 GBP'000
movements in net debt:
-------------- --------------
Net cash inflow / (outflow) 4,485 (1,101)
Net funds brought forward - 14,000
-------------- --------------
Movement in net debt 4,485 12,899
Net debt brought forward (39,304) (52,203)
-------------- --------------
Closing net debt (34,819) (39,304)
-------------- --------------
c) Comprising: GBP'000 GBP'000
-------------- --------------
Cash at bank and in hand 5,181 696
Debt due: 7.376% Debenture (40,000) (40,000)
Stock 2011
-------------- --------------
Closing net debt attributable (34,819) (39,304)
to shareholders
-------------- --------------
20. Financial instruments
In pursuing the Company's objectives, as set out in the Annual report 2010, the
Company accepts market price risk and interest rate risk, in relation to the
portfolio of investments. Since the Company's investment objectives are to
deliver returns over the long term, transactions with the sole intention of
realising short-term returns are not undertaken. The risk policies below and in
the Directors' Report in the Annual report 2010, along with the Company's
capital management policies have been consistently applied throughout both this
and the preceding financial year and the quantitative data disclosed is
representative of the Company's exposure to risk throughout the year.
Fair value of financial assets and financial liabilities: All financial assets
and liabilities are either included in the balance sheet at fair value or the
carrying amount in the balance sheet is a reasonable approximation of fair
value.
Fair value of assets and liabilities are classified using a fair value hierarchy
that reflects the significance of the inputs used in making the measurements.
The fair value hierarchy has the following levels for assets and liabilities:
Level 1: Valued by using quoted prices in active markets for the same instrument
without modification or repackaging.
Level 2: Valued by reference to quoted prices in active markets for similar
assets or liabilities or other valuation techniques for which all significant
inputs are based on observable market data.
Level 3: Valued by using valuation techniques for which any significant input is
not based on observable market data.
The level in the fair value hierarchy within which the fair value measurement is
categorised in its entirety is determined on the basis of the lowest level input
that is significant to the fair value measurement in its entirety. For this
purpose, the significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses observable inputs
that require significant adjustment based on unobservable inputs, that
measurement is a level 3 measurement. Assessing the significance of a particular
input to the fair value measurement in its entirety requires judgement,
considering factors specific to the asset or liability.
The determination of what constitutes 'observable' requires significant
judgement by the Company. The Company considers observable data to be that
market data that is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary, and provided by independent sources
that are actively involved in the relevant market.
The following table analyses within the fair value hierarchy the fund's
financial assets and liabilities (by class) measured at fair value as at 30 June
2010:
Level 1 Level 2 Level 3 Total
-------------- -------------- -------------- --------------
Financial assets
Equities 138,649 - 63 138,712
Government Bonds 24,243 - - 24,243
Corporate Bonds - 20,078 - 20,078
-------------- -------------- -------------- --------------
Total assets 162,892 20,078 63 183,033
-------------- -------------- -------------- --------------
There were no transfers between levels for the year ended 30 June 2010.
Furthermore, the level 3 holdings have remained unchanged at GBP63,000 since 30
June 2009.
Market price risk: The investment manager has the responsibility for monitoring
the existing portfolio selected in accordance with the overall asset allocation
parameters, described in the investment policy in the Annual report 2010, and
seeks to ensure that individual stocks also meet an appropriate risk / reward
profile. The portfolio's relative exposure to the FTSE All-Share Index is also
monitored with the sector and individual stock variances kept within reasonable
levels. At its quarterly meetings, the Board reviews the asset allocation of the
Company's portfolio having regard to the risks associated with particular
industry sectors whilst continuing to follow the investment objectives. The
Company's exposure to changes in market prices on quoted equity investments as
at 30 June 2010 is GBP138,649,000 (2009: GBP136,470,000).
Price risk sensitivity: The following table illustrates the sensitivity of
revenue and capital return on ordinary activities after tax and net assets
attributable to shareholders to an increase or decrease of 10% in the fair value
of the Company's equity investments. This level of change is considered to be
reasonably possible based on observation of market conditions and historic
trends. The sensitivity analysis is based on the Company's equities at each
balance sheet date, with all other variables held constant.
Increase in fair value Decrease in fair value
Income Statement 2010 2009 2010 2009
GBP'000 GBP'000 GBP'000 GBP'000
------------- -------------- -------------- --------------
Revenue return (22) (22) 22 22
Capital return 13,790 13,567 (13,790) (13,567)
------------- ------------- ------------- -------------
Total change to
net return on
ordinary 13,768 13,545 (13,768) (13,545)
activities after
tax
------------- ------------- ------------- -------------
Change to net
assets 13,768 13,545 (13,768) (13,545)
attributable to
shareholders
------------- ------------- ------------- -------------
Credit risk associated with the portfolio of investments: The bond portfolio is
invested in both investment grade and sub-investment grade corporate bonds, with
a maximum exposure of GBP44,321,000 as at the 30 June 2010 (2009: GBP30,006,000).
The investment manager considers the credit rating of each security together
with its yield and its maturity in order to ensure that the yield fully reflects
any perceived risk and invests in bonds issued by a broad spread of companies
and institutions to reduce credit risk and the impact of default by any one
user. The credit rating of each bond is shown in the portfolio of investments.
Interest rate risk associated with the portfolio of investments: The bonds
within the portfolio are mainly fixed rate securities and, accordingly whilst
changes in interest rates will not in the short term affect earnings, both the
capital value of these securities and the ability to acquire securities on
similar terms may be affected.
The level of exposure to interest rate risk at the year end and the maximum and
minimum exposures throughout the year are shown below.
2010 2009
30 June Maximum Minimum 30 June Maximum Minimum
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------- ------------- -------------- -------------- -------------- --------------
Cash at 5,181 7,390 2,472 696 7,064 696
bank
Fixed
rate 41,459 46,821 26,978 25,917 27,497 23,376
bonds
Floating
rate 2,862 3,784 2,862 4,089 5,434 3,423
bonds
------------- ------------- -------------- -------------- -------------- --------------
Interest receivable on cash balances is at base rate minus 0.25%
The following table illustrates the sensitivity of revenue and capital return on
ordinary activities after tax and net assets attributable to shareholders to an
increase or decrease of 2% in interest rates. As at 30 June 2010 the prevailing
base rate was 0.5%. The decrease in interest rates illustrated above is 0.5%
i.e. the maximum possible. This level of change is considered to be reasonably
possible based on observation of market conditions and historic trends. The
sensitivity analysis is based on the Company's bond holdings at each balance
sheet date, with all other variables held constant.
Increase in interest rates Decrease in interest rates
Income Statement 2010 2009 2010 2009
GBP'000 GBP'000 GBP'000 GBP'000
------------- -------------- -------------- --------------
Revenue return 7 4 (9) (5)
Capital return (4,417) (2,474) 5,235 2,951
------------- ------------- ------------- -------------
Total change to
net return on
ordinary (4,410) (2,470) 5,226 2,946
activities after
tax
------------- ------------- ------------- -------------
Change to net
assets (4,410) (2,470) 5,226 2,946
attributable to
shareholders
------------- -------------- ------------- --------------
Currency risk: The Company's exposure to currency risk is immaterial as the
Company does not hold assets denominated in currency other than sterling (2009:
same).
Liquidity risk: The Company's assets comprise securities that can be readily
realised to meet obligations arising on the redemption of Zero Dividend
Preference Shares, Income Shares and Capital Shares on 8 March 2011, as well as
the 7.376% Debenture Stock 2011, as planned. Cash balances are kept to a
minimum.
A maturity analysis of financial liabilities is provided below:
Carry Value Fair Value
As at 30 June
Maturity profile of 2010 2009 2010 2009
financial GBP'000 GBP'000 GBP'000 GBP'000
liabilities
------------- -------------- -------------- --------------
Less than 3 484 354 484 354
months
More than 3
months but 189,560 - 182,426 -
not more than
one year
More than one - 168,785 - 167,659
year
------------- ------------- ------------- -------------
190,044 169,139 182,910 168,013
------------- ------------- ------------- --------------
The undiscounted maturity value of the financial liabilities is GBP133,195,000
(2009: GBP103,040,000) in relation to the Zero Dividend Preference Shares
redeeming on 8 March 2011.
The Company's Zero Dividend Preference and Income shares meet the definition of
a liability and are included in the profile of the financial liabilities above.
Capital shares are the Company's only equity shares.
The fair value of the non-equity shares is determined by reference to their
market values as set out in the net asset values applicable to each class of
shareholding. Based on the Package Units, the fair value is GBP144,042,000 (2009:
GBP122,440,000).
21. Contingent liabilities and outstanding commitments
At the balance sheet date, the Company had contingent liabilities totalling
GBP317,936 in respect of underwriting commitments (2009: GBP865,984). After the
balance sheet date, this commitment fell away as no shares were required to be
taken up.
22. Related parties
Details of related parties and transactions are included in notes 4, 5 and 12
and also within the Directors' Report and Directors' Remuneration Report in the
Annual report 2010.
Note: the results for 2009 are based on financial statements filed with the
Registrar of Companies which carry an audit report which is unqualified and
includes no matters of adverse comment.
The 2010 figures have been extracted from the audited financial statements which
will be filed with the Registrar of Companies with an unqualified audit report
with no matters of adverse comment.
The Annual Report and Financial Statements will be posted to shareholders on or
before 8 September 2010 and will be available on the M&G
website,www.mandg.co.uk. The Annual General Meeting will be held at 11.00 am on
12 October 2010 at Laurence Pountney Hill, London EC4R 0HH.
J. P. McClelland
Secretary
24 August 2010
[HUG#1440822]
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