Final Results
(Thomson Reuters ONE) - M&G High Income Investment Trust P.L.C.Final ResultsFor the year ended 31 May 2009Chairman's statement and Management ReportI would like to take this opportunity to welcome the former M&GRecovery Investment Company Limited (M&G Recovery) shareholders whobecame shareholders in the Company following M&G Recovery'swinding-up in March. Market conditions were very difficult atwind-up, but as a result of the upswing in markets since then,Package Unit holders have benefited from an 11.2% improvement in NAVfrom transfer to the end of May.Performance during the yearThe Company's revenue earnings per Package Unit were 6.04p. A fifthinterim dividend of 0.25p was declared. However, this includes anadditional 0.05p above that anticipated in the Prospectus issued inconnection with the M&G Recovery Investment Company scheme ofreconstruction. This was as a result of generating more income thananticipated between the date of the Prospectus and the year end, andto ensure that the Company continues to comply with the provisions inSection 842 of the Income & Corporation Taxes Act 1988 on incomeretention.In respect of the year, the Company declared five interim dividendstotalling 5.85p per Income Share, a 0.9% increase in the underlyingdividend on last year. Together with a special dividend of 0.90p perIncome Share, this made a total of 6.75p. This represents an increaseof 5.5% compared with the total of 6.40p (including a specialdividend of 0.60p) declared in respect of the previous year. Theinflation rate as measured by the latest Retail Prices Index (RPI) inMay 2009 was minus 1.1%. As at the year end, the yield on theCompany's Package Units was 5.7%, compared with the yield of 4.6% onthe FTSE All- Share Index.During the year the Board adopted a temporary change in the phasingof the Company's dividend policy to accommodate the M&G IncomeInvestment Company Limited and M&G Recovery Investment CompanyLimited schemes of reconstruction. Total dividends of 4.30p perIncome Share (including a special dividend of 0.90p) was declared inrespect of the first half of the year, with 2.45p being declared inrespect of the second half. In the coming year, the Company intendsto revert to its normal dividend phasing policy, with its weightingof distribution towards the second half.On a net asset value (NAV) basis, each Package Unit delivered anegative total return of 17.7% over the year to 31 May 2009. Whilstdisappointing in absolute terms, this was better than the negativetotal returns of 23.7% and 22.9% respectively from the FTSE All-ShareIndex and the FTSE 350 Higher Yield Index over the same period.As at the year end, there was a market price discount on theCompany's Package Units of 6.9% to the NAV, compared with 4.0% as at31 May 2008, the mid-market price at the year end being 96.0p and theNAV 103.12p. On a mid-market price basis, there was a negative totalreturn on the Company's Package units of 19.9% over the year to 31May 2009. For a detailed description of the management of theportfolio during the period, I refer you to the Investment Review inthe Annual Report and Financial Statements for the year ended 31 May2009.Long term performanceThe Company continues to meet its income objectives. Total dividendsof 6.75p were declared in respect of the year, including the incomereserves special dividend of 0.90p, an increase of 5.5% compared withthe total of 6.40p in the previous year. This maintained the recordof uninterrupted dividend growth since the Company's launch in 1997.The outlook for dividends has become even more uncertain but providedthat the Directors consider revenue reserves and profits to besufficient, they would hope to declare total ordinary dividends forthe financial year ending 31 May 2010 of 5.85p. This should nothowever be taken to be a profit or dividend forecast.The relative out performance of the Company's Package Unit NAV overthe year under review against the FTSE All-Share Index over the sameperiod went some way towards narrowing the shortfall in the return onthe Company's NAV compared with that on the FTSE All-Share Index overthe past three and five years. Moreover, the annualised return on theCompany's NAV since launch in 1997 remains above that on the FTSEAll-Share Index.Share buy backs and treasury sharesFollowing discussions with its advisers, the Board has to seekshareholder approval to grant the Board discretionary powers to buyback shares to either cancel such shares or hold them as PackageUnits in treasury for sale or cancellation at a later date as set outin Resolution 8 in the Annual Report and Financial Statements for theyear ended 31 May 2009. The rationale for proposing a facility tohold package units in treasury in addition to the existing powers tobuy back and cancel package units is that it will provide the Boardwith a means by which it can supplement market liquidity in thePackage Units. It is anticipated that the facility may be used toassist in meeting demand for Package Units and Income & Growth Unitsassociated with the reinvestment of dividends and on other occasionsas the Board determines. In order to minimise the dilution effect tothe NAV, we are proposing that these powers are subject to a numberof restrictions in addition to those required by regulation. All therelevant restrictions are set out in more detail in the Annual Reportand Financial Statements for the year ended 31 May 2009. Further, theBoard will only purchase shares after taking into consideration theeffects on earnings per share.Whilst held in treasury, the Package Units will be treated as ifcancelled and, therefore, they will carry no entitlement to dividendsor to voting rights.If the Board were to decide to use its authority to buy back sharesunder the proposed broader powers, it would, at that time, determinefor the benefit of the shareholders as a whole, whether the sharespurchased should be immediately cancelled or held in treasury. If itdecides to hold the shares in treasury, it may decide at a later dateto cancel them. Further, the board will only purchase shares aftertaking into consideration the effects on earnings per share.VATIn the Directors' Report in the Annual Financial Statements for theyear ended 31May 2008, we reported that a payment was expected by wayof a VAT repayment following agreement with M&G that in light of theHMRC confirmation in November 2007 that fund management servicessupplied to investment companies were VAT exempt, M&G would refund(i) all amounts charged to the Company in relation to VAT plusinterest since April 2004 including amounts it was unable to recoveragainst HMRC and (ii) for periods prior to April 2004, all amountsM&G was able to recover against HMRC. Payment in the sum of £843,140was received by the Company on 15 August 2008.During the course of the year, the Board has been in discussion withPwC Legal regarding its proposals to issue proceedings against HMRCon behalf of companies in liquidation to which certain of PwC'spartners are appointed liquidators by way of a restitutionary claimin respect of VAT payments made on investment management fees. TheBoard understands that these proceedings are expected to be initiatedvery shortly ('the Lead Proceedings'). In this connection, theCompany has entered into a consultancy agreement with PwC with a viewto bringing its own restitutionary proceedings on the same legalbasis as the Lead Proceedings so as to enable further recoveries ofVAT to be secured. Whilst there is no certainty as to the ultimateoutcome of the Company's proposed litigation, the Board believes thaton balance the potential benefits to shareholders justify theestimated costs. The timescale for the ultimate resolution of theLead Proceedings, and therefore any proceedings which the Companybrings in its own name, is likely to take a number of years.Investment policyFollowing discussions with M&G, the Board has decided to make a minoramendment to the Company's investment policy to increase the maximumnumber of permitted stocks within the portfolio from 100 to 120. Therationale for the proposed increase is to help improve the overallliquidity of the enlarged equity portfolio following the M&G IncomeInvestment Company Limited and M&G Recovery Investment CompanyLimited schemes of reconstruction and to allow for a greater numberof holdings in mid and small cap stocks when the economic outlookimproves. The Board does not regard this change as material and, onthis basis shareholder approval is not therefore required.OutlookThe balance of recent reports suggest that the worst of the recessionmay be over, with some economists now predicting a return to modestgrowth by the second half of 2009. Surveys of business and consumerconfidence showed a marked improvement from the depths plumbed duringthe winter months, with most respondents expecting the economicoutlook to improve. Optimistic reports of 'green shoots' havemultiplied. Industrial output increased modestly in May and activityin services appears to be on a rising trend once more. Retail salesalso appear resilient, with lower inflation and reduced mortgagebills outweighing stagnant earnings and reduced return on cash-basedsavings. Likewise, the housing market is busier and prices rose inMay, although the availability of mortgage finance remainsconstrained. Base rates may well remain at their current level of0.5% for some time and the Bank of England is likely to continue itsinitiative to support government bond prices. However, there areconstraints on recovery and a strong possibility that a prolongedphase of mediocre growth is in prospect.Unemployment is widely predicted to rise from 2.38 million to over 3million, credit availability is still restricted and household debtremains high. In addition, the alarming rise in the public sector netborrowing to 12.4% of GDP in 2009/10 and official forecasts of aprolonged period of abnormally high government debt is highly likelyto lead to an 'age of austerity', involving tax increases and cuts inpublic spending. Although inflation could trend lower in the nearterm, there is a growing risk that a combination of higher commodityprices, a possible further slide in sterling and the consequences ofcurrent excessively loose fiscal and monetary policies may createrenewed upward inflation pressures.On the whole, the corporate sector, particularly large companies withtop quality credit ratings have managed to cope comparatively well sofar during recession. Record amounts have been raised from equity andcorporate bond issues, costs have been pared back and balance sheetsstrengthened. Further rights issues are likely to add to the £40billion announced so far in 2009. The overall level of companyprofits is likely to be lower in 2009 and further cuts in dividendsare possible. However, profitability should improve in 2010 even inthis 'age of austerity', albeit modestly.The recent stock market rally has disproportionately favoured sharesin cyclical sectors which are deemed to be the best recovery plays.Many of the defensive high yielding shares which form the core of theCompany's portfolio have been overlooked and consequently remainundervalued, particularly on a yield basis. A few examples illustratethis point. Royal Dutch Shell in the oil & gas sector andGlaxoSmithKline in pharmaceuticals are both financially robustleading global players in their respective industries. Their yieldsare 6.2% and 5.6% respectively, at the top end of their historicrelative range and well above the current market average of 4.4%. Inan uncertain environment, we are comfortable focusing on such stocksthat are well placed to meet the Company's core objectives.Government bond prices have drifted lower since early March withbuyers demanding ever increasing yields to compensate for theimplicit risks arising from the deterioration of government finances,the surge in issuance and the possibility of a rebound in inflation.However, their safe haven status might again come into play in theevent of any disappointment in economic recovery hopes. Althoughpotentially exposed to many of the influences facing governmentsecurities, good quality corporate bonds currently offer yields of atleast 2% higher than government bonds of similar duration. They forma key part of the Company's fixed income portfolio and are expectedto deliver positive returns over the coming year.Perhaps our biggest worry now is the further damage to the countrythat could be wrought by the malicious hand of a dying anddiscredited Government, still pretending that they are capable ofprudent governance. It is hard to conclude that any of their 'bigprojects' has been successful, and success now seems to be measuredby their ability to dance away from responsibility or blame. Let uspray that their death rattle is swift and conclusive.Responsibility statementsTo the best of my knowledge and belief:a ) this statement includes a fair review of the development andperformance of the business and the position of the Company togetherwith a description of the principal risks and uncertainties that theCompany faces; andb) the financial statements, prepared in accordance with UnitedKingdom Accounting Standards, give a true and fair view of theassets, liabilities, financial position and losses of the Company.F C Carr(Chairman)Income statement (audited)for the year 2009 2008ended 31 May Revenue Capital Total Revenue Capital Total £000 £000 £000 £000 £000 £000 -------- -------- ------- -------- ------- --------Net losses on - (8,160) (8,160) - (16,816) (16,816)investmentsIncome 7,248 - 7,248 3,965 - 3,965Investment (373) (758) (1,131) (42) (83) (125)management feeOther expenses (176) - (176) (130) - (130) ------- ------- ------- ------ -------- --------Net returnbefore finance 6,699 (8,918) (2,219) 3,794 (16,900) (13,106)costs and taxFinance costs: - (5,779) (5,779) - (2,495) (2,495)AppropriationsFinance costs: (6,779) - (6,779) (3,107) - (3,107)Dividends ------- ------- ------- ------ -------- --------Net return onordinary (80) (14,697) (14,777) 686 (19,394) (18,708)activitiesbefore taxTax on ordinary - - - - - -activities ------- ------- ------- ------ -------- --------Net return onordinary (80) (14,697) (14,777) 686 (19,394) (18,708)activitiesafter tax ------- ------- ------- ------ -------- --------Return per ZeroDividend - 5.21p 5.21p - 4.66p 4.66pPreferenceShareRevenueearnings / 6.04p (9.98)p (3.94)p 7.08p - 7.08preturn perIncome ShareReturn per - (3.27)p (3.27)p - (36.22)p (36.22)pCapital ShareTotal returnper Income and 6.04p (13.25)p (7.21)p 7.08p (36.22)p (29.14)pGrowth UnitTotal returnper Package 6.04p (8.04)p (2.00)p 7.08p (31.56)p (24.48)pUnitReturn per Income Share is calculated on the basis of net capitallosses for the year, after deduction for appropriations in respect ofZero Dividend Preference Shares and after offsetting maximum capitallosses against Capital Shares, of £11,068,000 (31.05.2008: nil) and aweighted average number of 110,848,036 shares (31.05.2008: 53,552,179shares) in issue during the year.The total column of this statement is the profit and loss account ofthe Company. The revenue return and capital return columns aresupplementary to this and are prepared under the guidance publishedby 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 asall gains and losses of the Company have been reflected in the abovestatement.Statement of movements in net assets attributable to shareholders(audited)For the year ended 31 May 2009 2008 £000 £000 ---------- ----------Return on ordinary activities after tax (14,777) (18,708)Finance costs: Appropriations 5,779 2,495Issue of Package Units 140,505 -Cost of issuing Package Units (416) -Repurchase of Package Units (including (1,596) -related costs) ---------- ----------Net movement in net assets attributable 129,495 (16,213)to shareholdersOpening net assets attributable to 73,391 89,604shareholders (all non-equity) ---------- ----------Closing net assets attributable to 202,886 73,391shareholders (all non-equity) ---------- ----------Balance sheet (audited)As at 31 May 2009 2008 £000 £000 ------- -------Fixed assetsPortfolio of investments 198,335 69,192 ------- -------Current assetsDebtors 2,353 1,434Cash at bank and short-term deposits 3,842 2,814 ------- ------- 6,195 4,248 ------- -------Total financial assets 204,530 73,440Creditors: Amounts falling due within one year (1,644) (49) ------- -------Net assets attributable to shareholders (all 202,886 73,391non-equity) ------- -------Net assets attributable to Shareholders comprise:As at 31 May 2009 2008 £000 £000 ------- -------Zero Dividend Preference Shareholders 119,243 29,641Income Shareholders 83,643 40,121Capital Shareholders - 3,629 -------- --------Net assets attributable to shareholders (all 202,886 73,391non-equity) -------- --------The net assets attributable to shareholders have been calculated inaccordance with the Company's Articles of Association and the netasset values (per share) applicable to each class of shareholding asshown below.Each class of the Company's shares meets the definition of aliability and therefore the Company has no equity shares.This does not affect the rights and benefits of each class. Thebreakdown of the net assets attributable to shareholders into thecapital and reserves attributable to them is given in the notesbelow.As at 31 May 2009 2008Net asset value per Zero Dividend Preference Share 60.61p 55.35pNet asset value per Income Share 42.51p 74.92pNet asset value per Capital Share - 6.78pNet asset value per Income & Growth Unit 42.51p 81.70pNet asset value per Package Unit 103.12p 137.05pCash flow statement (audited)For the year ended 31 May 2009 2008 £000 £000 £000 £000 ------ -------- -------- -------Net cash inflow from operating 4,866 2,655activitiesServicing of financeDividends paid (non-equity) (5,426) (3,107)Financial investmentCapital distributions 298 215Purchase of investments [a] (37,665) (12,073)Sale of investments 34,921 14,494 ------ ------- (2,446) 2,636FinancingRepurchase of Package Units (1,596) -(including related costs)Shares issued for cash 6,046 -Share issue costs (416) - ------ ------- 4,034 - ------- -------Net increase in cash 1,028 2,184 ------- -------[a] Purchase of investments does not include the transfers ofsecurities under the rollover schemes, which were non-cash movements.Notes to the Financial Statements1. Accounting policiesa) Basis of accounting: These financial statements have been preparedin accordance with the historical cost convention, as modified by therevaluation of investments, in accordance with applicable UnitedKingdom Accounting and Financial Reporting Standards and theStatement of Recommended Practice for Financial Statements ofInvestment Trust Companies (SORP) issued by the Association ofInvestment Companies in December 2005.b) Portfolio of investments: All investments have been designated as'at fair value through profit or loss'. Purchases of investments areinitially recognised on the trade date at fair value, being theconsideration paid, and subsequently valued at their fair value,excluding any accrued interest, at the balance sheet date. The fairvalue for listed investments is deemed to be bid value. Investmentsare derecognised on the trade date of the sale.c) Recognition of Income: Income from quoted equity shares isrecognised net of attributable tax credits when the security isquoted ex-dividend. Interest on debt securities and income frompreference shares is accounted for on an effective yield basis. Bankinterest and underwriting commission are accounted for on an accrualsbasis.d) Stock dividends: The ordinary element of stocks received in lieuof cash dividends is recognised as revenue. Any enhancement above thecash dividend is treated as capital.e) Special dividends: These are recognised when the security isquoted ex-dividend and treated as either revenue or capital dependingupon the nature and circumstances of the dividend receivable.f) Investment management fees: These have been charged 33% to therevenue account and 67% to capital reserve - realised. This is inline with the Board's expected long term split of returns in the formof capital gains and income respectively from the investmentportfolio of the Company. The charge to the capital reserve -realised allows for corporation tax relief on that proportion. Reliefon expenses charged to the capital account has been allowed for atthe corporation tax rate for the Company.g) Other expenses: All expenses (other than those incidental to thepurchase or sale of investments) are charged against revenue on anaccruals basis.h) Appropriations: Appropriations for premiums payable on redemptionare accounted for as finance costs and transferred from capitalreserves - realised. They represent an apportionment of the increasein the redemption value of Zero Dividend Preference Shares over theamounts originally subscribed.i) Dividends payable to Income Shareholders: Dividends approved bythe board and declared after the balance sheet date, in respect ofthe net revenue for the period, are recognised as a finance cost whenthe shareholders' right to receive them is established.j) Capital reserves: Gains and losses on the realisation ofinvestments together with finance costs, expenses and appropriationsin accordance with the above policies are accounted for in capitalreserves - realised. Increases and decreases in the valuation ofinvestments held at the balance sheet date are accounted for incapital reserves - unrealised.k) Share capital: All classes of the Company's shares meet thedefinition of a financial liability under FRS 25 therefore theCompany has no equity shares and appropriations in respect of ZeroDividend Preference Shares and dividends payable to IncomeShareholders are accounted for as finance costs. The appropriationsare charged 100% to capital and dividends are charged 100% to revenueto reflect the rights and benefits of the different classes of sharein issue.l) Taxation: The charge for taxation is based upon the revenue forthe year and is allocated according to the marginal basis betweenrevenue and capital using the Company's effective tax rate ofcorporation tax for the accounting period.m) Deferred taxation: This is provided for in respect of all timingdifferences. Any liability is provided at the average rate of taxexpected to apply. Deferred tax assets and liabilities are notdiscounted to reflect the time value of money.n) Foreign currency transactions: These are translated at the rate ofexchange ruling on the date of the transaction. Assets andliabilities denominated in foreign currencies are translated intosterling at the rate of exchange ruling at the balance sheet date.o) Functional and presentation currency: The functional andpresentation currency of the Company is pounds sterling because thatis the currency of the primary economic environment in which theCompany operates.p) Issue costs: These have been offset against proceeds of shareissues and are reflected in the share premium account2. Investments: At fair value through profit or loss 2009 2008 Capital Capitala) Net losses on investments £'000 £'000 -------------- --------------Realised losses on sales of (5,729) (109)investmentsIncrease in unrealised (2,729) (16,922)depreciationCapital distributions 298 215 -------------- --------------Net losses on investments (8,160) (16,816) -------------- -------------- -------------- --------------b) InvestmentsOpening book cost 67,175 69,372Opening unrealised appreciation 2,017 18,939 -------------- --------------Opening valuation 69,192 88,311Movements in the year:Effective yield adjustments (95) (2)Purchases - at cost [a] 171,609 12,026 - transaction 747 47chargesSales - proceeds (34,957) (14,367) - transaction 36 11charges - realised (5,729) (109)losses on sales of investmentsStock dividends 261 197Increase in unrealised (2,729) (16,922)depreciation -------------- --------------Closing valuation 198,335 69,192 -------------- --------------Closing book cost 199,047 67,175Closing unrealised (depreciation) (712) 2,017/ appreciation -------------- --------------Portfolio of Investments 198,335 69,192 -------------- --------------[a] Purchases include stock transferred under the rollover schemes of£134,459,000.3. Income 2009 2008 Revenue RevenueIncome from investments £'000 £'000 -------------- --------------Interest on debt securities 839 118Property Income dividends 40 -Overseas dividends 33 27Stock dividends 261 197UK dividends 6,012 3,447 -------------- -------------- 7,185 3,789 -------------- --------------Other income -------------- --------------Bank interest 43 85HM Revenue & Customs interest [a] 5 91Underwriting commission 15 - -------------- -------------- 63 176 -------------- --------------Total income 7,248 3,965 -------------- --------------Total income comprises -------------- --------------Dividends 6,346 3,671Interest 887 294Other income 15 - -------------- -------------- 7,248 3,965 -------------- --------------[a] Interest in relation to the VAT recoverable as disclosed in Note4.4. Investment management fee 2009 2008 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 -------------- ------------- -------------- -------------- -------------- --------------Investment 373 758 1,131 264 537 801management feeIrrecoverable - - - 26 49 75VAT thereon[a] -------------- ------------- -------------- -------------- ------------- -------------- 373 758 1,131 290 586 876 -------------- ------------- -------------- -------------- ------------- --------------VAT - - - (248) (503) (751)Recoverable[a] -------------- ------------- -------------- -------------- ------------- -------------- 373 758 1,131 42 83 125 -------------- ------------- -------------- -------------- ------------- --------------The name of the investment manager and the terms and duration of itsappointment are disclosed in the Directors' Report. The basis ofallocating the investment management fee to revenue and capital isdealt with in note 1f.[a] Following the decision of the European Court of Justice and theBusiness Brief issued by HMRC in 2007 the Company received from theinvestment manager a refund in respect of a proportion of the VATpaid on investment management fees which has therefore beenrecognised as recoverable VAT. With effect from 7 November 2007, VATis no longer charged on the investment management fee.5. Other expenses 2009 2008 Revenue Revenue £'000 £'000 -------------- --------------Annual listing fee 4 4Auditors' fees[a] 31 24Bank charges and safe custody 2 1feesDirectors' remuneration 56 50FSA fees 5 4Registrar's fees 20 14The Association of Investment 8 9Companies feesBroker fees 12 12Legal advice 11 -Other fees 27 12 -------------- -------------- 176 130 -------------- --------------[a] No non-audit fees were paid during the year (2008: same).Auditors fees include VAT charged of £3,525 (2008: £4,025)6. Finance costs: Appropriations 2009 2008Appropriation for premium payable £'000 £'000on redemption -------------- --------------Zero Dividend Preference Shares 5,779 2,495 -------------- --------------This constitutes an appropriation of reserves in respect of thepremium to issue proceeds payable to holders of Zero DividendPreference Shares on redemption. The appropriation of the yearrepresents the increase in redemption value of the amounts originallysubscribed.7. Finance costs: Dividends 2009 2008Dividends (payable to Income £'000 £'000Shareholders) -------------- --------------Fourth interim: 2.2p paid 22 1,178 1,178August 2008 (2007: 2.2p)Special Dividend: 0.6p paid 22 321 -August 2008 (2007: nil)First interim: 1.2p paid 25 643 643November 2008 (2007: 1.2p)Second interim: 2.2p paid 25 1,178 643February 2009 (2008: 1.2p) [a]Special Dividend interim: 0.9ppaid 25 February 2009 (2008: nil) 482 -[a]Third interim: 1.2p paid 22 May 1,624 6432009 (2008: 1.2p)Fourth interim: 1.0p payable 25 1,353 -August 2009 (2008: 2.2p) [a] -------------- -------------- 6,779 3,107 -------------- --------------[a] This is a change in the distribution pattern of dividendpayments, with a second quarterly dividend of 2.20p and a specialdividend of 0.90p reflecting the decision of the Board to pay out themajority of the current revenue reserves ahead of the rollover of M&GIncome Investment Company Limited into the Company. The ex-dividenddate for both dividends was 29th October 2008 and they were paid toIncome Shareholders on the register at the close of business on 31October 2008. Also on 19 March 2009 the Board declared a fourthinterim dividend of 1.0p per Income Share, in respect of the yearending 31 May 2009, representing substantially all of the revenuereserves of the Company before the rollover of M&G RecoveryInvestment Company Limited completed. This dividend will be payableon 25 August 2009 to Income Shareholders on the register at the closeof business on 27 March 2009. The ex-dividend date was 25 March 2009.On 22 July 2009 the Board declared a fifth interim dividend of 0.25p(2008: nil) per Income Share, totalling £492,000 (2008: nil), payableon 25 August 2009 to Income Shareholders on the register at the closeof business on 31 July 2009. The ex-dividend date is 29 July 2009.All dividends are payable to holders of Income Shares, Income &Growth Units & Package Units.8. Tax on ordinary activities 2009 2008 Revenue Capital Total Revenue Capital Totala) Analysis ofthe charge in £'000 £'000 £'000 £'000 £'000 £'000the year -------------- ------------- -------------- -------------- -------------- --------------Corporation - - - - - -tax -------------- ------------- -------------- -------------- ------------- --------------Total currenttax charge - - - - - -(note 8b)Deferred tax - - - - - -(note 8c) -------------- ------------- -------------- -------------- ------------- --------------Tax on profiton ordinary - - - - - -activities -------------- ------------- -------------- -------------- ------------- --------------b) Factors affecting the tax charge for the year -------------- ------------- -------------- -------------- ------------- --------------Net return onordinary (80) (14,697) (14,777) 686 (19,394) (18,708)activitiesbefore tax -------------- ------------- -------------- -------------- ------------- --------------Corporation (22) (4,115) (4,137) 204 (5,754) (5,550)tax [a]Effects of:Finance costs:Appropriations - 1,618 1,618 - 740 740[b]Finance costs: 1,898 - 1,898 922 - 922Dividends [b]Capital - 2,285 2,285 - 4,989 4,989returns [b]Stock (73) - (73) (58) - (58)dividends [b]UK dividends (1,683) - (1,683) (1,023) - (1,023)[b]Income taxablein different (2) - (2) 3 - 3periodsCurrent yearexpenses not - 212 212 - 25 25utilisedPrior periodexpenses (118) - (118) (48) - (48)utilised -------------- ------------- -------------- -------------- ------------- --------------Current taxcharge (note - - - - - -8a) -------------- ------------- -------------- -------------- ------------- --------------[a] Corporation tax charged at 30% to 31 March 2008 and at 28% from 1 April 2008[b] As an investment trust company these items are not subject to corporation tax.c) Provision for deferred taxThere is no provision for deferred tax at the start or end of the year (2008: same)d) Deferredtax asset notrecognised -------------- ------------- -------------- -------------- ------------- --------------Resulting fromunutilised 115 1,350 1,465 235 1,138 1,373expenses [c] -------------- ------------- -------------- -------------- ------------- -------------- [c] These expenses will not be utilised unless the tax treatment ofUK dividends and capital gains for an investment trust companychanges.9. Earnings / returns per share 2009 2008 Capital Capitala) Return per Zero Dividend £'000 £'000Preference Share -------------- --------------Appropriations £5,779,000 £2,495,000Weighted average shares in issue 110,848,036 53,552,179throughout the year -------------- --------------Return per share 5.21p 4.66p -------------- --------------b) Revenue earnings per Income 2009 2009Share -------------- --------------Net revenue return on ordinary £(80,000) £686,000activities after taxFinance costs: Dividends £6,779,000 £3,107,000 -------------- --------------Revenue return attributable to £6,699,000 £3,793,000shareholdersWeighted average shares in issue 110,848,036 53,552,179throughout the year -------------- --------------Revenue earnings per Income share 6.04p 7.08p -------------- --------------Capital return attributable to £(11,068,000) -Income ShareholdersWeighted average shares in issue 110,848,036 53,552,179throughout the year -------------- --------------Capital return per share (9.98)p - -------------- --------------c) Return per Capital Share 2009 2009 -------------- --------------Net capital return on ordinary £(14,697,000) (19,394,000)activities after taxLosses offset against Income £11,068,000 -Shareholders -------------- --------------Net capital return attributable £(3,629,000) (19,394,000)to shareholdersWeighted average shares in issue 110,848,036 53,552,179throughout the year -------------- --------------Return per share (3.27)p (36.22)p -------------- --------------d) Income & Growth Units and Package unitsThe earnings and returns per Income & Growth Unit and Package Unitare calculated by reference to their component shares.10. Debtors 2009 2008 £'000 £'000 -------------- --------------Bank interest receivable - 16Debt security interest receivable 693 114Dividends receivable 1,652 462Income tax recoverable 8 -HM Revenue & Customs interest - 91receivableVAT Recoverable - 751 -------------- -------------- 2,353 1,434 -------------- --------------None of the Company's receivables are past due or impaired11. Creditors: Amounts falling due within one year 2009 2008 £'000 £'000 -------------- --------------Amounts due to brokers 232 -Fourth interim dividend payable 1,353 -Other fees payable 59 49 -------------- -------------- 1,644 49 -------------- --------------12. Capital and reserves attributable to shareholders 2009 2008As at 31 May £'000 £'000 -------------- --------------Called up share capital 5,902 1,607Share premium account 135,743 -Capital redemption reserve 15,606 15,555Zero Dividend Preference Shares 23,230 18,593appropriation reserveSpecial reserve 36,716 37,170Capital reserves - realised (16,153) (4,185) - (712) 2,017unrealisedRevenue reserve 2,554 2,634 -------------- --------------Net assets attributable to 202,886 73,391shareholders (all non-equity) -------------- --------------Under the terms of the Articles of Association, sums standing to thecredit of the Special Reserve are available for distribution only byway of redemption or purchase of the Company's own shares. TheCompany may only distribute accumulated 'realised' profits.The Institute of Chartered Accountants of England and Wales hasissued guidance (TECH 01/08), stating that profits arising out of achange in fair value of assets, recognised in accordance with theAccounting Standards may be distributed provided the relevant assetscan be readily converted into cash. Securities listed on recognisedstock exchanges are generally regarded as being readily convertibleinto cash and hence unrealised profits in respect of such securitiescurrently included within Capital Reserves - Unrealised may beregarded as distributable under Company Law.13. Share capital (all non-equity) 2009 % of total 2008 % of total £'000 share capital £'000 share capitalAllocated,called up ------------- -------------- -------------- --------------and fullypaid:196,748,306(2008:53,552,179)Zero 1,967 33.33% 536 33.33%DividendPreferenceShares of1p each196,748,306(2008:53,552,179)Income 1,967 33.33% 536 33.33%Shares of1p each196,748,306(2008:53,552,179)Capital 1,967 33.33% 536 33.33%Shares of1p each ------------- -------------- ------------- --------------During the year the Company issued a total of 144,871,127 shares asfollows:a) In relation to the M&G Income rollover scheme, the Company issued83,275,360 shares of each class at an issue price of 57.71p per ZeroDividend Preference Share, 36.86p per Income Share and 5.88p perCapital Share. The issue prices were at a premium of 0.5% to the NetAsset Value. This premium was used to pay the issue cost as shown inthe Statement of Movement in Net Assets Attributable to Shareholders.b) In relation to the M&G Recovery rollover scheme, the Company alsoissued 61,595,767 shares of each class at an issue price of 59.55pper Zero Dividend Preference Share, 29.60p per Income Share and 3.15pper Capital Share. The issue prices were at par of the Net AssetValue.Also during the year the Company repurchased and cancelled 1,675,000Package Units at an average cost of 95p per Package Unit costing£1,596,000. Each class of the Company's shares meets the definitionof a liability under FRS 25 and therefore the Company has no equityshares.The holders of Income Shares are entitled to receive revenue profitsof the Company byway of dividends. Holders of Zero DividendPreference Shares and Capital Shares are not entitled to receivedividends out of the revenue or any other profits of the Company.On the basis that the Company is wound-up on 17 March 2017, asplanned, the holders of Zero Dividend Preference Shares will beentitled to a capital payment of 122.83224p per share or such alesser sum as remains. Holders of Income Shares will become entitledto a return of capital of 70p per share, subject to the priorentitlement of the Zero Dividend Preference Shareholders, plus anybalance standing to the revenue reserve. Capital Shareholders willthen become entitled to the balance of net assets after payment toZero Dividend Preference and Income Shareholders.Where voting rights apply, holders of Zero Dividend Preference,Income and Capital Shares are, on a show of hands, each entitled toone vote at general meetings of the Company and on a poll areentitled to one vote for each share held. Voting rights are subjectto certain restrictions. Holders of Zero Dividend Preference Sharesgenerally have no entitlement to vote other than in the exceptionalcircumstances prescribed in the Articles of Association.The Company has an authorised share capital of £29,850,000 (2008:£29,850,000) consisting of 995,000,000 (2008: 995,000,000) shares ofeach class.14. Revenue and capital reserves Revenue Capital reserve realised unrealised £'000 £'000 £'000 -------------- -------------- --------------Opening balance as 2,634 (4,185) 2,017at 31 May 2008Net losses on - (5,431) (2,729)investmentsIncome 7,248 - -Expenses (549) (758) -Finance costs: - (5,779) -AppropriationsFinance costs: (6,779) - -Dividends -------------- ------------- --------------Balance reported as 2,554 (16,153) (712)at 31 May 2009Fifth interimdividend: 0.25ppayable to Income (492) - -Shareholders on 25August 2009 ------------- ------------- --------------Reserves adjustedfor dividend 2,062 (16,153) (712)declared ------------- ------------- --------------15. Called up share capital, capital redemption reserve and sharepremium account Called Capital Share up share redemption premium capital reserve account £'000 £'000 £'000 -------------- -------------- --------------Opening balance as 1,607 15,555 -at 31 May 2008Package Units issued 4,346 - 136,159Cost of issuing - - (416)Package UnitsPackage Unitsrepurchased and (51) 51 -cancelled -------------- -------------- --------------Closing balance as 5,902 15,606 135,743at 31 May 2009 -------------- -------------- --------------Share premium represents the surplus of subscription monies afterexpenses over the nominal value of the issued share capital. With theshareholders' approval and confirmation of the Court, a specialreserve (see note 16) was created by the cancellation of £37,761,000of the share premium account, with effect from 6 September 2000, tobe issued by the Company to purchase its shares.16. Other reserves Zero Dividend Preference Special Share Appropriation reserve reserve £'000 £'000 -------------- --------------Opening balance as at 18,593 37,17031 May 2008Zero Dividend Preference Shares (1,142) 1,142repurchased and cancelledZero DividendPreference Share 5,779 -appropriationPackage Unitsrepurchased and - (1,596)cancelled -------------- ------------Closing balance as at 23,230 36,71631 May 2009 -------------- ------------The Zero Dividend Preference Share appropriation reserve, togetherwith the amounts originally subscribed, represent the assetentitlement for the Zero Dividend Preference Shares set out in theBalance Sheet.The special reserve, resulting from the cancellation of sharepremium, may only be used for the purpose of the share repurchases.On the repurchase and cancellation of Package Units a transfer ismade from the Zero Dividend Preference Share reserve to the specialreserve. This represents the appropriation contained within the ZeroDividend Preference Share reserve relating to those Zero DividendPreference Shares repurchased and cancelled as part of the PackageUnits.17. Reconciliation of movement in net assets attributable toshareholders Zero Dividend Income Capital Preference Shares Shares Shares £'000 £'000 £'000 -------------- -------------- --------------Opening balance as 29,641 40,121 3,629at 31 May 2008Net return onordinary activities - (80) (14,697)after taxAppropriation from 5,779 - -Capital ReservesRepurchase of (927) (669) -Package UnitsIssue of Package Unitsin respect of 'the 84,750 48,524 6,815schemes' [a]Issue of CapitalShares repaid to - 6,815 (6,815)Income SharesLosses offsetagainst Income - (11,068) 11,068shares -------------- ------------- --------------Closing balance as 119,243 83,643 -at 31 May 2009 -------------- ------------- --------------[a] The M&G Income Investment Company Limited and the M&G RecoveryInvestment Company Limited schemes of reconstruction.18. Cash flow 2009 2008 Capital Capitala) Reconciliation of net return onordinary activities before tax tonet cash inflow from operating £'000 £'000activities: -------------- --------------Net return on ordinary (14,777) (18,708)activities before taxNet losses on investments 8,160 16,816Finance costs: Appropriations 5,779 2,495Finance costs: Dividends 6,779 3,107Effective interest adjustment 95 2Stock dividends (261) (197)Increase in other debtors (919) (866)Increase in other creditors 10 6 -------------- --------------Net cash inflow from operating 4,866 2,655activities -------------- --------------b) Reconciliation of net cash £'000 £'000inflow to movements in netdebt: -------------- --------------Net cash inflow 1,028 2,184Net funds brought forward 2,814 630 -------------- --------------Closing net funds 3,842 2,814 -------------- -------------- £'000 £'000c) Comprising: -------------- --------------Cash at bank and in hand 3,842 2,814 -------------- --------------19. Financial instrumentsIn pursuing the Company's objectives, the Company accepts marketprice risk and interest rate risk in relation to the portfolio ofinvestments. Since the Company's investment objectives are to deliverreturns over the long term, transactions with the sole intention ofrealising short term returns are not undertaken. The risk policiesalong with the Company's capital management policies have beenconsistently applied throughout both this and the preceding financialyear and the quantitative data disclosed is representative of theCompany's exposure to risk throughout the year.Fair value of financial assets and financial liabilities: Allfinancial assets and liabilities are either included in the balancesheet at fair value or the carrying amount in the balance sheet is areasonable approximation of fair value.Market price risk: The investment manager has the responsibility formonitoring the existing portfolio selected in accordance with theoverall asset allocation parameters and seeks to ensure thatindividual stocks also meet an appropriate risk / reward profile. Theportfolio's relative exposure to the FTSE All-Share Index is alsomonitored with the sector and individual stock variances kept withinreasonable levels. At its quarterly meetings, the Board reviews theasset allocation of the Company's portfolio having regard to therisks associated with particular industry sectors whilst continuingto follow the investment objectives. The Company's exposure tochanges in market prices on quoted equity investments at 31 May 2009is £164,033,000 (2008: £58,702,000).Price risk sensitivity: The following table illustrates thesensitivity of revenue and capital return on ordinary activitiesafter tax and net assets attributable to shareholders to an increaseor decrease of 10% in the fair value of the Company's equityinvestments. This level of change is considered to be reasonablypossible based on observation of market conditions and historictrends. The sensitivity analysis is based on the Company's equitiesat each balance sheet date, with all other variables held constant. Increase in fair value Decrease in fair valueIncome 2009 2008 2009 2008Statement £'000 £'000 £'000 £'000 ------------- -------------- -------------- --------------Revenue (43) (20) 43 20returnCapital 16,315 5,831 (16,315) (5,831)return ------------- ------------- ------------- -------------Total changeto netreturn on 16,272 5,811 (16,272) (5,811)ordinaryactivitiesafter tax ------------- ------------- ------------- -------------Change tonet assetsattributable 16,272 5,811 (16,272) (5,811)toshareholders ------------- -------------- ------------- --------------Credit risk associated with the portfolio of investments: The bondportfolio is structured so as to provide the Company with a highlevel of revenue but without exposing the Company to an undue risk tocapital. This is achieved through direct investment in investmentgrade corporate bonds, or those considered by the investment managerto have an equivalent grade, with a maximum exposure including cashbalances of £38,144,000 at the 31 May 2009 (2008: £13,304,000).The investment manager considers the credit rating of each securitytogether with its yield and its maturity in order to ensure that theyield fully reflects any perceived risk and invests in bonds issuedby a broad spread of companies and institutions to reduce credit riskand the impact of default by any one user. The credit rating of eachbond is shown on the Portfolio of Investments.Interest rate risk associated with the portfolio of investments: Thebonds within the portfolio are mainly fixed rate securities, andaccordingly whilst changes in interest rates will not in the shortterm affect earnings, both the capital value of these securities andthe ability to acquire securities on similar terms may be affected.The level of exposure to interest risk at the year end and themaximum and minimum exposures throughout the year are shown below. 2009 2008 31.05.09 Maximum Minimum 31.05.08 Maximum MinimumAmountof £'000 £'000 £'000 £'000 £'000 £'000exposure ------------- ------------- -------------- -------------- -------------- --------------Cash at 3,842 3,842 911 2,814 2,814 574bankFixedrate 30,968 30,968 9,446 8,814 8,814 6,428bondsFloatingrate 3,334 3,349 1,200 1,676 1,676 744bonds ------------- ------------- -------------- -------------- -------------- --------------Interest receivable on cash balances is at base rate minus 0.25%The following table illustrates the sensitivity of revenue andcapital return on ordinary activities after tax and net assetsattributable to shareholders to an increase or decrease of 2% ininterest rates. This level of change is considered to be reasonablypossible based on observation of market conditions and historictrends. The sensitivity analysis is based on the Company's bondholdings at each balance sheet date, with all other variables heldconstant. Increase in interest rates Decrease in interest ratesIncome 2009 2008 2009 2008Statement
Datum: 30.07.2009 - 13:36 Uhr
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