Final Results

ACM European Enhanced Inc.Fund PLC 30 April 2003 Final Results ACM European Enhanced Income Fund PLC 30 April 2003 Final results for the year ended 31 December 2002 Enquiries: ACM Mark Hamilton, 020 7470 0100 The Company presents its report together with the audited financial statements for the year ended 31 December 2002. RESULTS The results of operations for the year are set out in the Statement of Total Return on page 15. DIVIDENDS The following dividends were declared and paid in the year: Ex Date Payment Date Amount £ £ Per Share 16-01-02 28-01-02 956,458 0.0175 24-04-02 30-04-02 655,857 0.0120 17-07-02 30-07-02 655,857 0.0120 23-10-02 31-10-02 573,875 0.0105 SIGNIFICANT EVENTS SINCE THE YEAR END The Company paid a dividend on 28 January 2003 of £524,686, in aggregate, at a rate of £0.0096 per Share. The Shares went ex-dividend on 10 January 2003. The Company has applied for admission of the Shares for trading and settlement through the CREST system which should facilitate more efficient dealings in the Shares. It is expected that the Shares will become eligible for settlement from 12 May 2003. FUND MANAGER'S REVIEW INVESTMENT OBJECTIVES AND POLICIES The Company's investment objective is to provide a high level of income through investment in European corporate and sovereign fixed income securities. As a secondary objective, the Company seeks to provide capital growth, which is expected to arise principally through enhancement of the credit rating of specific securities bought by the Company but also through a general re-rating of European high yield debt as that market matures. The Company may borrow an amount of up to 25% of its net asset value at any time. INVESTMENT RESULTS The following table provides performance data for the Company for the six- and 12-month periods ended 31 December 2002. For comparison, we have included a custom blended benchmark consisting of 50% Merrill Lynch European Currency High Yield Index hedged into euros and 50% Lehman Brothers European Corporate Bond Index. This is then leveraged by 25% and converted into sterling. This benchmark represents an unmanaged measure of the markets and instruments in which the Company is able to invest. The performance presented below is reported in sterling. INVESTMENT RESULTS* Periods Ended 31 December 2002 6 Months 12 Months ACM European Enhanced Income Fund Plc 4.98% 6.47% Custom Benchmark** 7.16% 7.70% * The Company's investment results are monthly compounded total returns for the periods shown and are based on the net asset value (NAV) as of 31 December 2002. All fees and expenses related to the operation of the Company have been deducted. Past performance is no guarantee of future results. ** The custom benchmark is comprised of equal 50% weightings of two indices, which are leveraged by 25% and converted into sterling. The unmanaged Merrill Lynch European Currency High Yield Index (hedged into euros) is comprised of corporate bonds with maturities greater than or equal to one year. The Lehman Brothers European Corporate Bond Index is a measure of fixed-rate securities with at least one year remaining until maturity. An investor cannot invest directly in an index, and its results are not indicative of the performance for any particular investment, including the Company. The custom benchmark does not include the operating expenses associated with an investment in an investment company and, in the case of the Company, its borrowing costs. The Company underperformed its custom benchmark for the six- and 12-month periods ended 31 December 2002. The primary source of the Company's underperformance was its underweight position in many so-called 'fallen angels' in the high yield market. Fallen angels, which are formerly investment grade companies that have been downgraded to high yield, have come to dominate the European high yield market. As of the beginning of 2003, the top eight issuers in European high yield were all fallen angels; together they account for over 46% of the market capitalisation of the custom benchmark. Fiat alone accounts for nearly 15% of the index, with Alcatel and Ericsson at nearly 9% and 6%, respectively. These bonds have been very volatile, and on average outperformed during the final quarter of 2002. Of the top eight issuers, we have a negative fundamental outlook on five, namely ABB, Alcatel, Ericsson, Vivendi Universal and Xerox, and so the portfolio has been underexposed to these bonds. However, even if we held a more positive view, we would still likely to underweight the portfolio in these securities as we think it prudent to have greater diversification in the Company's high yield holdings. Among the positive contributions to performance for the year was the Company's tactical move to a more defensive construction, particularly its opportunistic allocation to government bonds which outperformed both investment grade and high yield corporate bonds for the year. A second key contributor was the avoidance of many distressed high yield issuers; in particular the Company maintained underweight positions in the telecommunications and cable sub-sectors, which suffered significant defaults in the first half of the year. Among specific securities, positions in high yield issuers Euronet Worldwide Inc., Dana Corp. and Weightwatchers International Corp. were all outperformers. Among investment grade issues, the Company's positions in subordinated bank debt added to performance, as did several holdings in the telecommunications sector, notably MMO2 which outperformed significantly during the latter part of the year. INVESTMENT STRATEGY As a result of heightened volatility in the markets during 2002, we adopted a more defensive position for the Company. We reduced the portfolio's overweight positions in high yield and BBB-rated corporates and increased a tactical position in government debt, which benefited the Company over the course of the year. We have shifted the portfolio to more defensive names within the high yield sector, reducing our exposure to the volatile telecommunications and cable sectors and other distressed issuers. Among investment grade issuers, we favour the banking sector, particularly UK and Scandinavian banks, higher quality telecommunications firms such as Vodafone Group, British Telecom Plc and KPN, and industrial names we believe can withstand the continued difficult economic conditions in Europe. Finally, the Company remains predominantly exposed to the euro, with non-euro exposure being marginal. MARKET REVIEW At the start of 2002, signs of a global economic recovery began to appear, evidenced by flatter yield curves among the G-7 countries (a group of seven industrialised nations, including Canada, France, Germany, Italy, Japan, the United Kingdom and the United States), rebounding commodity prices and an end to the European Central Bank (ECB) interest rate reductions. Yet, despite improving economic fundamentals, the anticipated recovery stalled, led by a loss of economic momentum in the United States. Continued weakness in the labour market, anemic business spending, corporate governance issues and a sharp decline in equity valuations dampened prospects for a stronger and quicker economic recovery. U.S. and European government yields declined in light of weakness in the equity markets and rising concerns about corporate integrity. The conflict in the Middle East and the ongoing war against terrorism also contributed to investor nervousness, resulting in a flight to quality that benefited the higher-quality sectors of the fixed-income markets. Euroland's sentiment and production data indicated a recovery in the first quarter of 2002; nonetheless, growth in the second half of the year did not meet expectations. In the first quarter, French industrial production increased more than expected and the German index of business confidence rose above its pre-September 11th level. Yet, by the third quarter, the lack of an economic policy direction by Germany's re-elected Chancellor Schroeder weighed heavily on business and consumer sentiment, which was already affected by upward price adjustments brought on by the euro changeover at the beginning of the year. In addition, geopolitical tensions continued to affect consumer behavior and business decisions. The ECB finally lowered its main refinancing rate to 2.75% in December, as it revised growth expectations downwards. Germany's contracting gross domestic product (GDP) growth pulled down the whole, leaving France's household spending to extend a feeble hand to overall economic growth. The UK outperformed the eurozone, thanks to stronger domestic demand. Despite this, fiscal policy dedicated to increased spending on public services created a fiscal shortfall of -2.8% of GDP, and higher energy costs caused inflation to accelerate rapidly from 1.5% year-over-year in June to 2.7% year-over-year in December. The European investment grade corporate bond market returned 8.54% for the 12-month period ended 31 December 2002 as measured by the Lehman Brothers European Corporate Bond Index. By comparison, European government bonds returned 9.73% for the year, according to the Lehman Brothers European Government Bond Index. Early in the year, corporates suffered relative to government securities as accounting irregularities, apparent fraud, aggressive rating-agency actions and investors' increased risk aversion disrupted the markets. Also holding back investment grade returns were difficulties in the technology sector, where both Alcatel and Ericsson were downgraded to junk status during the period. In the cyclical services sector, ABB was hurt by liquidity concerns and asbestos liabilities, and eventually was downgraded to junk status by Moody's in October. The European high yield market, as represented by the Merrill Lynch European Currency High Yield Index, returned -6.65% for the period. Performance of the index was hurt by weak equity performance, credit quality downgrades and poor earnings reports for much of the year. High yield was rocked early in the year by deterioration in the cable and telecommunications sectors, culminating in defaults by issuers such as UPC, Energis, NTL, KPNQwest and Callahan. Through the end of September, the high yield market was down over 16%. However, the market rallied over 10% in the fourth quarter, led by many of the fallen angels mentioned previously. In the currency market, the euro surged over 17% against the dollar and rose over 6.5% against sterling for the year, from 0.6117 E/GBP at the end of 2001 to 0.6518 E /GBP. OUTLOOK Looking ahead, we expect that the European economy should improve modestly in 2003 as compared with 2002, but still at a pace below its long-term trend rate of 2.0%-2.5%. The ECB's December 5 interest rate reduction was ineffective in igniting an upsurge in confidence. Accordingly, our forecast for real GDP growth in the eurozone is 1.3%. While the U.S. Federal Reserve has probably completed its easing cycle, the ECB is likely to continue. The weakness in production and sentiment indicators, as well as the sluggishness of the global recovery, will require Europe to provide additional stimulus. Improving inflation performance and a strong euro will give the ECB the leeway to act. Accordingly, European yields will remain low, and may even have further to fall in shorter maturities, while longer maturities are likely to rise less than those in the U.S. where recovery is expected to be more vigorous. Therefore, European government bond markets are likely to outperform U.S. Treasuries. With expected weakness in the European economy and prospects for further ECB rate cuts, we continue to have a cautious outlook toward corporate credit markets in Europe. In the near-term, the Company will likely remain underweight in corporate bonds, particularly to highly cyclical credits, as these holdings remain the most sensitive to economic weakness, market volatility and global uncertainty. We are monitoring both the macroeconomy and individual corporate financials in Europe for signs of improvement. We will alter our investment strategy when we see a change in the underlying fundamental situation. As always, we will also look to take advantage of specific mispricing opportunities in the marketplace. Statement Of Total Return For the year ended 31 December 2002 Notes Revenue Capital 2002 2001 £ £ Total Total £ £ Net losses on investments during the 3 -0- (582,934) (582,934) (10,368,908) year Net gains/(losses) on foreign exchange 4 -0- 292,383 292,383 (397,511) Net investment losses for the year -0- (290,551) (290,551) (10,766,419) Gross income 5 2,963,582 -0- 2,963,582 4,773,538 Expenses 6 (551,895) (183,966) (735,861) (880,817) Net income for the year 2,411,687 (183,966) 2,227,721 3,892,721 Return on ordinary activities 2,411,687 (474,517) 1,937,170 (6,873,698) Distributions 8 (2,842,047) -0- (2,842,047) (4,537,652) Income equalisation 9 -0- -0- -0- 96,000 Net decrease in Shareholders' funds from investment activities (430,360) (474,517) (904,877) (11,315,350) Statement Of Movements In Shareholders' Funds For the year ended 31 December 2002 2002 2001 £ £ Net assets at the start of the year 33,790,218 41,121,568 Net proceeds on sale of Shares -0- 3,984,000 Net decrease in Shareholders' funds from investment activities (904,877) (11,315,350) Net assets at the end of the year 32,885,341 33,790,218 All returns are generated by continuing operations. There are no gains or losses other than those included in the Statement of Total Return. Balance Sheet as at 31 December 2002 Notes 2002 2001 Total Total £ £ Portfolio of investments 1(e) 38,371,525 36,167,697 Current assets Debtors 10 1,238,620 1,522,155 Cash and bank balances 11 764,440 1,035,878 2,003,060 2,558,033 Less: Current liabilities Bank overdraft 11 (62,270) -0- Creditors 12 (126,752) (194,291) Loan 12 (7,300,222) (4,741,221) (7,489,244) (4,935,512) Net current liabilities (5,486,184) (2,377,479) Net current liabilities (5,486,184) (2,377,479) Net assets 32,885,341 33,790,218 Shareholders' Funds 32,885,341 33,790,218 Number of Shares in issue 54,654,743 54,654,743 Net Asset Value per Share £0.6017 £0.6182 Cashflow Statement For the year ended 31 December 2002 Notes 2002 2001 £ £ Net cash inflow from operating activities 13 2,996,948 3,995,539 Servicing of finance Interest paid 6 (260,848) (358,604) Net cash outflow from servicing of finance (260,848) (358,604) Capital expenditure and financial investment Acquisition of investments (43,321,828) (67,403,581) Sale of investments 40,535,066 68,642,699 Net cash (outflow)/inflow from capital expenditure and financial (2,786,762) 1,239,118 investment Distributions 8 (2,842,047) (4,537,652) Financing Amounts received on sale of Shares -0- 3,984,000 Income equalisation 9 -0- 96,000 Increase (Decrease) in loan 12 2,559,001 (5,157,591) Net cash inflow/(outflow) from financing 2,559,001 (1,077,591) Decrease in cash (333,708) (739,190) Closing cash balance 11 702,170 1,035,878 Opening cash balance 1,035,878 1,775,068 Movement in cash balance (333,708) (739,190) 1. Accounting policies a) Basis of accounting The financial statements are prepared under the historical cost convention as modified by the inclusion of securities at valuation. The financial statements are prepared in sterling (£). b) Income recognition Income on interest bearing securities is accounted for on an accrual basis and bank deposit interest is accounted for on a receipts basis. Income is shown gross of any withholding tax. The Company accretes discounts and amortises premiums as adjustments to interest income. c) Realised gains and losses on investments Realised gains and losses on sales of investments are calculated on the FIFO basis of the investment in local currency. The associated foreign exchange movement between the date of purchase and the date of sale on the sale of investments is included in net gains or losses on foreign exchange in the Statement of Total Return. d) Unrealised gains and losses on investments Unrealised gains and losses on investments arising during the year are reflected as a component of net gains or losses on investments in the Statement of Total Return. e) Valuation of securities Assets listed or traded on a regulated market are valued at the official close of business prices at the year end. If for specific assets the official close of business prices do not, in the opinion of the Administrator, reflect their fair value or if prices are unavailable, the values are calculated with care and in good faith by the Administrator, approved for that purpose by the Custodian, in consultation with the Investment Manager, on the basis of the probable realisation values for such assets as at the close of business as at the year end. f) Foreign exchange Foreign currency assets and liabilities, including investments, are translated into sterling at the exchange rate prevailing at the year end. The foreign exchange gain or loss based on the translation of the original cost of the investments, together with the gain or loss arising on the translation of other assets and liabilities, is included in net gains or losses on foreign exchange in the Statement of Total Return. Foreign currency forward exchange contracts are revalued to a forward rate as at their close of business price at the year end. The resulting unrealised gain or loss between this rate and the contract rate is included in net gains or losses on foreign exchange in the Statement of Total Return and is shown as a debtor or creditor in the Balance Sheet. g) Distribution policy It is intended that substantially all of the net income of the Company is distributed as dividends. Dividends will, if declared, be declared and paid quarterly in or about January, April, July and October of each year. h) Issue costs Issue costs incurred directly in connection with the issue of the Shares are deducted from the consideration received in the Statement of Movements in Shareholders' Funds. 2. Taxation Under current law and practice, the Company qualifies as an investment undertaking as defined in Section 739B (1) of the Taxes Consolidation Act, 1997, as amended. It is not chargeable to Irish tax on its income or capital gains. However, a tax can arise on the happening of a 'chargeable event' in the Company. A chargeable event includes any distribution payments to Shareholders or any encashment, redemption or transfer of Shares. Any tax arising on a chargeable event is a liability of the Shareholder, albeit that it is paid by the Company (although if the Company fails to deduct the tax or the correct amount of tax, it becomes ultimately a liability of the Company). No tax will arise on a chargeable event in respect of a Shareholder who is an Exempt Irish Investor (as defined in Section 739D of the Taxes Consolidation Act, 1997, as amended) or who is neither Irish resident nor ordinarily resident in Ireland at the time of the chargeable event provided that the necessary signed declaration is in place. 3. Net losses on investments The net gains (losses) on investments during the year comprise: Notes 2002 2001 £ £ Proceeds from sales of investments during the year 40,535,066 68,642,699 Original cost of investments sold during the year (46,654,292) (80,422,301) Net losses realised on investments sold during the year 1(c) (6,119,226) (11,779,602) Net change in unrealised appreciation (depreciation) at the end of 1(d) 5,536,292 1,410,694 the year Net losses on investments during the year (582,934) (10,368,908) 4. Net gains/(losses) on foreign exchange 2002 2001 £ £ Net realised and change in unrealised foreign exchange gains/ 292,383 (397,511) (losses) 5. Gross income 2002 2001 £ £ Interest on securities 1(b) 2,942,573 4,704,166 Bank interest 1(b) 21,009 36,962 Income from new Shares issued 1(h) -0- 32,410 2,963,582 4,773,538 6. Expenses The Company charges 25% of the investment management fees, operational expenses and borrowing expenses in each year to capital (such expenses amounted to £183,966 for the year ended 31 December 2002 and £222,185 for the year ended 31 December 2001) and 75% of such fees and expenses to its income account. Thus, on realisation of Shares, Shareholders may not receive back the full amount invested. 2002 2002 2002 2001 £ £ £ £ Revene Capital Total Total Payable to the Administrator and Registrar Administration fee (40,500) (13,500) (54,000) (55,122) Share registration and transfer agency (17,912) (5,971) (23,883) -0- fee Payable to the Custodian Custody fee (19,848) (6,616) (26,464) (17,675) Payable to the Investment Manager Investment management fee (207,459) (69,153) (276,612) (323,461) Other expenses Loan interest (195,636) (65,212) (260,848) (358,604) Legal fees (31,412) (10,471) (41,883) (57,223) Printing & postage (11,862) (3,954) (15,816) (28,812) Directors' remuneration and expenses (16,622) (5,541) (22,163) (20,011) Audit fee (7,885) (2,628) (10,513) (7,172) Miscellaneous (2,759) (920) (3,679) (12,737) (266,176) (88,726) (354,902) (484,559) Total expenses (551,895) (183,966) (735,861) (880,817) 7. Related party transactions Investment Manager The Investment Manager (Alliance Capital Management L.P.) is entitled to an annual investment management fee of 0.65% of the Company's average weekly Net Asset Value (having added back the amount borrowed at any time under the Company's borrowing facility with Deutsche Bank AG London). The Investment Manager is entitled, subject to approval of the Directors, to receive from the Company an amount not to exceed USD 45,000 annually exclusive of VAT, if any, thereon, to cover certain ancillary expenses incurred by the Investment Manager in connection with its provision of investment management services to the Company. Such compensation amounted to £27,945 (or USD 45,000) for the year ended 31 December 2002. The Investment Management Agreement may be terminated by the Investment Manager or the Company giving not less than 90 days' notice in writing. Alliance Capital Management L.P. has not entered into transactions for the Company in relation to a placing and/or a new issue in which a connected person with the Investment Manager has a material interest as a member of the underwriting syndicate. Administrator State Street Fund Services (Ireland) Limited has been appointed to act as Administrator pursuant to the Administration Agreement. For this service, the Company pays to the Administrator an annual fee, accrued daily based on the average weekly Net Asset Value and payable monthly in arrears at the following rates: Rate NAV 0.15% p.a. 0-£30 million 0.10% p.a. £30 million-£60 million 0.075% p.a. £60 million + The Administrator receives a minimum fee of £4,500 per month. The Administrator is also entitled to an annual fee of £20 per Shareholder for registrar maintenance, £15 for each share registry entry, £10 for each dividend payment, £15 for each statement issued and £7 for each payment by telegraphic transfer. The Administrator is also reimbursed by the Company, as appropriate, for all reasonable costs, expenses and disbursements incurred by it in the performance of its duties for the Company. Custodian State Street Custodial Services (Ireland) Limited has been appointed Custodian to the Company pursuant to the Custodian Agreement. For this service, the Company pays to the Custodian a fee of 0.025% per annum of the average weekly Net Asset Value of the Company. The Custodian's fee is paid monthly in arrears and is accrued daily based on the average weekly Net Asset Value of the Company. In addition, the Custodian is entitled to a transaction charge of £20 per transaction. The Custodian is also reimbursed by the Company for all reasonable out-of-pocket expenses, including sub-custody fees and expenses which are charged at normal commercial rates. 8. Distributions It is intended that substantially all of the net income of the Company is distributed as dividends. Dividends will, if declared, be declared and paid quarterly in or about January, April, July and October of each year. The following dividends were paid during the year: Date paid 2002 Date paid 2001 £ £ Distribution based on income from 28/1/02 (956,458) 29/1/01 (1,121,732) prior year Distribution based on income from 30/4/02 (655,857) 10/4/01 (1,229,731) current year 30/7/02 (655,857) 10/7/01 (1,229,731) 31/10/02 (573,875) 9/10/01 (956,458) Total Distribution (2,842,047) (4,537,652) 9. Equalisation Income equalisation arrangements are applied and are intended to ensure that the income per Share which is distributed in respect of the distribution period is not affected by changes in the number of Shares in issue during that period. The calculation of equalisation is based on net income. No shares were issued during the year ended 31 December 2002. 10. Debtors 2002 2001 £ £ Accrued income 1,198,291 1,269,249 Unrealised gain on forward exchange currency contracts 40,329 -0- Unrealised gain on Index Swap (notional value EUR5,000,000) -0- 252,906 1,238,620 1,522,155 11. Analysis of cash on the Balance Sheet 2002 2001 £ £ Cash and bank balances 764,440 1,035,878 Bank overdraft (62,270) -0- 702,170 1,035,878 All cash and bank balances are held with Deutsche Bank A.G., London 12. Creditors All settlements are scheduled for less than one year. As at 31 December 2002, the Company had a loan outstanding with Deutsche Bank AG London of EUR 11,200,000 with an interest rate of 3.59% per annum. The facility is open for a period of five years renewable on such terms as may be mutually agreed between the Company and such banks and financial institutions as may be parties to the Facility Agreement at such time, although the facility is repayable earlier under certain circumstances. 2002 2001 £ £ Accrued expenses (126,752) (108,435) Unrealised loss on forward exchange currency contracts -0- (85,856) Loan (7,300,222) (4,741,221) (7,426,974) (4,935,512) 13. Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities Notes 2002 2001 £ £ Net income 5,6 2,227,721 3,892,721 Interest on loan 6 260,848 358,604 2,488,569 4,251,325 Net gains/(losses) on foreign exchange 4 292,383 (397,511) Decrease in debtors 10 283,535 107,695 Decrease)/Increase in creditors 12 (67,539) 34,030 Net cash inflow from operating activities 2,996,948 3,995,539 14. Exchange rate The following sterling exchange rates as at 31 December 2002 have been used in this report: EUR 1.5342 USD 1.6099 15. Soft commission arrangements There were no soft commission arrangements during the year under review. 16. Efficient Portfolio Management The Company entered into forward exchange currency contracts to provide a cross currency hedge to protect against adverse movement in the exchange rates with the Euro. While the base currency of the Company is sterling the policy of the Company is to invest in European markets, therefore hedging non-Euro currencies to Euro occurs. A forward exchange currency contract is a commitment to purchase or sell a non-Euro currency at a future date at a negotiated forward rate. The gain or loss arising from the difference between the original contract and the closing of such contract is included in net gains or losses on foreign exchange. Fluctuations in the value of open forward exchange currency contracts are reflected for financial reporting purposes as a component of debtors or creditors. Risks may arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the Euro. At 31 December 2002, the Company had outstanding forward exchange currency contracts as follows: £ £ £ Value on Current Unrealised Contract Origination Value Appreciation Amount Date Depreciation) Forward Exchange Currency Buy Contract Euro, settling 10/1/03 3,337,047 2,129,904 2,175,584 45,680 US Dollar, settling 10/1/03 25,000 16,049 15,537 (512) 45,168 Sell Contract Euro, settling 06/1/03 (313,701) (200,000) (204,491) (4,491) Euro, settling 10/1/03 (25,151) (16,049) (16,397) (348) (4,839) 40,329 The Company may utilise swap contracts for efficient portfolio management. A swap is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to changes in specified prices or rates for a specified amount of an underlying asset or otherwise determined notional amount. The payment flows are usually netted against each other, with the difference being paid by one party to the other. Risks may arise as a result of the failure of the counterparty to the swap agreement. The loss incurred by the failure of a counterparty is generally limited to the net interest payment to be received by the Company, and/or the termination value at the end of the agreement. Therefore, the Company considers the creditworthiness of each counterparty to a swap agreement in evaluating potential credit risk. Additionally, risks may arise from unanticipated movements in interest rates or in the value of the underlying assets. At 31 December 2002, the Company did not have any such swap agreements outstanding. 17. Financial Instruments The main risks and policies relating to financial instruments are set out below. The financial instruments held by the Company are set out in the Portfolio of Investments. The Company has no financial liabilities other than short term creditors as outlined in note 12 on page 21. Market Risk Potential investors should note that the investments of the Company are subject to market fluctuations and other risks inherent in investing in securities in Europe and there can be no assurances that any appreciation in value will occur. The value of investments can go down as well as up and an investor may not get back the amount invested. Liquidity Risk Liquidity risk exists when a particular instrument is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid (as is the case with many privately negotiated derivatives), it may not be possible to initiate a transaction or liquidate a position at an advantageous price. Foreign Exchange Risk Changes in exchange rates between currencies may also cause the value of the investments to diminish. A substantial portion of the portfolio of investments and other net assets/liabilities of the Company are denominated in currencies other than sterling and are included below: Currency Exposure as at 31 December 2002 Investments Other Net Total £ Liabilities £ £ Currency Euro 36,683,565 (5,340,642) 31,342,923 Sterling 1,687,960 (145,542) 1,542,418 38,371,525 (5,486,184) 32,885,341 Currency Exposure as at 31 December 2002 Investments Other Net Total £ Liabilities £ £ Currency Euro 29,543,782 2,034,238 31,578,020 German Mark 1,891,536 18,497 1,910,033 Sterling 4,732,379 (4,430,214) 302,165 36,167,697 (2,377,479) 33,790,218 ___ Interest Rate Exposure The interest rate profile of the Company's financial assets (excluding short term debtors and creditors) at 31 December 2002 was: Financial on which Fixed rate Floating rate no interest Total financial financial assets is paid assets Currency £ £ £ £ Euro 36,683,565 35,278,305 1,405,249 11 Sterling 1,687,960 1,687,960 -0- -0- 38,371,525 36,966,265 1,405,249 11 Fixed rate Fixed rate financial assets financial assets weighted average weighted average interest rate period for which % rate is fixed Currency Years Euro 8.01 6.04 Sterling 10.14 7.39 The interest rate profile of the Company's financial assets (excluding short term debtors and creditors) at 31 December 2001 was: Financial on which Fixed rate Floating rate no interest Total financial assets financial assets is paid Currency £ £ £ £ Euro 29,543,782 28,010,165 1,532,638 979 German Mark 1,891,536 688,835 1,202,701 -0- Sterling 4,732,379 3,970,127 762,252 -0- 36,167,697 32,669,127 3,497,591 979 Fixed rate Fixed rate financial assets financial assets weighted average weighted average interest rate period for which % rate is fixed Currency Years Euro 8.47 6.55 German Mark 8.69 6.03 Sterling 10.13 8.34 18. Historical net assets and net asset value per share 31 December 31 December 31 December 2002 2001 2000 Net assets £32,885,341 £33,790,218 £41,121,568 Net asset value per share £0.6017 £33,790,218 £41,121,568 £0.6017 £0.6182 £0.8248 19. Changes during the year On 18 October 2002 HSBC Investment Bank Plc ceased its role as corporate broker and Close Brothers Securities (a division of Winterflood Securities Limited) was appointed as corporate stockbroker and financial adviser to the Company. 20. Approval of annual report The annual audited report was approved by the Board of Directors on 11 April 2003. This information is provided by RNS The company news service from the London Stock Exchange

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