A copy of this document, which comprises listing particulars relating to Bank of Scotland in accordance with the listing rules of The Stock Exchange made under Part IV of the Financial Services Act 1986, has been delivered for registration to the Registrar of Companies in Scotland as required by that Act. The Directors of Bank of Scotland, whose names appear below under "Directors and Advisers", accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Directors (who have taken all reasonable care to ensure that such is the case) the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information. In connection with this issue, Cazenove & Co. may effect transactions on The Stock Exchange which stabilise or maintain the market price of the 9 1/4pe r cent. Non-Cumulative Irredeemable Preference Stock at a level which might not otherwise prevail. Such stabilising, if commenced, may be discontinued at any time. Application has been made to the Council of The Stock Exchange for the 9 1/4 per cent. Non-Cumulative Irredeemable Preference Stock of Bank of Scotland, to be issued in connection with the Placing, to be admitted to the Official List. It is expected that such admission will become effective and that dealings will commence on Monday, 12th December, 1988.
The Governor and Company of the BANK OF SCOTLAND
Constituted by Act of Parliament 1695
Placing by Cazenove & Co. of £100,000,000 nominal of 9 1/4pe r cent. Non-Cumulative Irredeemable Preference Stock at 102.5p per £1 nominal of Preference Stock CONTENTS
Page
Directors and Advisers 3
Definitions 4
Part I
1. Activities 5
2. Financial Record 5
3. Current Trading and Prospects 5
4. Reasons for the Placing 5
5. Proposed Division of Ordinary Stock 6
Part II
The Placing 7
Part (II
Financial Information 8
Part IV
Stock Rights 21
Part V
Further Information 26
2 DIRECTORS AND ADVISERS
Directors Sir Thomas Risk, BL, LLD, FRSE (Governor) Lord Balfour of Burleigh, CEng, FIEE, FRSE (Deputy Governor) D. B. Pattuilo, BA, FIB(Scot) (Deputy Governor and Group Chief Executive) A. S. Bell, FFA, FPMI J. E. Boyd, CA J. G. S. Gammell, MBE, CA T. O. Hutchison, BSc Professor R. B. Jack, CBE, MA, LLB N. Lesseis, CA D. J. MacLeod, CBE, CA J. M. Menzies A. M. Pelham Burn, JP, DL A. M. Rankin, CBE R. P. Reid, MA, LLD Sir Robert Smith, CBE, MA, LLD, CA, FRSE M. F. Strachan, CBE, FRSE
Secretary H. K. Young, CA, FIB(Scot)
Financial Advisers The British Linen Bank Limited 4 Melville Street Edinburgh EH3 7NS
Auditors Arthur Young Chartered Accountants 17 Abercromby Place Edinburgh EH3 6LT
Solicitors to Bank of Scotland Tods Murray, W.S. 66 Queen Street Edinburgh EH2 4NE
Solicitors to the Placing Shepherd & Wedderburn, W.S. 16 Charlotte Square Edinburgh EH2 4YS
Brokers Cazenove & Co. 12 Tokenhouse Yard London EC2R 7AN
Bell Lawrie Limited Erskine House 68 Queen Street Edinburgh EH2 4AE
Registrars Bank of Scotland Registrar Department 26A York Place Edinburgh EH1 3EY
3 DEFINITIONS
The following definitions apply throughout this document unless the context requires otherwise:
"Bank of Scotland" or "the Bank" The Governor and Company of the Bank of Scotland.
"Bank of Scotland Group" or Bank of Scotland and its subsidiary companies. "the Group"
"Board" or "the Directors" the Board of Directors of Bank of Scotland.
"British Linen Bank" The British Linen Bank Limited.
"the Executive Scheme" the Bank of Scotland Executive Stock Option Scheme.
"G10 Central Banks" the central banks of Belgium, Canada, France, West Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States of America.
"Ordinary Stock'' the existing Capital Stock of Bank of Scotland and any further Capital Stock ranking pari passu therewith which may be created in the future.
"the Placing" the placing by Cazenove & Co. of Preference Stock as described in Part II of this document.
"the Placing Agreement" the agreement described in Part II of this document.
"Preference Stock" the 91 /4 per cent. Non-Cumulative Irredeemable Preference Stock of Bank of Scotland which it is proposed to create and which it is proposed the Board would be given power to allot in terms of the Resolutions.
"the Regulations" the Regulations for the Management and Administration of Bank of Scotland.
"the Resolutions" the Resolutions to be proposed at the Extraordinary General Meeting of the Proprietors of Bank of Scotland to be held on Friday, 9th December, 1988.
"the Savings Scheme" the Bank of Scotland Savings-Related Stock Option Scheme.
"the Stock Ownership Scheme" the Bank of Scotland Profit Sharing Stock Ownership Scheme.
"The Stock Exchange" The International Stock Exchange of the United Kingdom and the Republic of Ireland Limited.
4 PART I
1. Activities Bank of Scotland, which was established by Act of the Scottish Parliament in 1695, is a major British clearing bank with its headquarters in Edinburgh. It has over 500 branch outlets in Scotland as well as offices in London and major regional commercial centres in England and overseas offices in New York, Chicago, Houston, Jacksonville, Los Angeles, Hong Kong and Moscow. It is a member of both the Committee of London and Scottish Bankers and the Committee of Scottish Clearing Bankers. The Bank issues its own bank notes in Scotland, current circulation being around £270 million. The Bank provides a full range of clearing bank services and through its subsidiaries The British Linen Bank Limited, North West Securities Limited and Kellock Limited, merchant banking, leasing, finance and factoring services are available. Bank of Wales PLC, which is 75 per cent. owned, joined the Group in 1986 and the Bank now has a 40 per cent. investment in Countrywide Banking Corporation Limited which is located in New Zealand.
2. Financial Record The following is a summary of the Bank's financial record for the five years ended 29th February, 1988 as derived from the summary of the audited consolidated accounts of the Bank set out in Part III of this document, and of the unaudited consolidated results of the Bank for the six month period ended 31st August, 1988. 6 months ended 31st August, 1984 1985 1966 1987 1988 1988 (unaudited) £ million £ million £ million £ million £ million £ million Profit before taxation 59.3 80.4 95.2 118.5 131.3 87.1 Profit after taxation and minority interests but before extraordinary items 49.7 40.2 54.5 71.5 81.2 54.8 Dividends 9.2 12.8 17.3 20,5 23.5 9.4 Retained Profit 40.5 26.9 32,0 51.0 58.6 45.4 pence per £1 Ordinary Stock Earnings (Note) 39.2 27.5 30.7 38.4 43.5 29.3 Dividends (Note) 7.3 8.4 9.3 11.0 12.6 5.0 £ million £ million £ million £ million £ million Stock in Issue 33 82 124 124 125 Proprietors* Funds 322 402 515 559 650 Total Assets 6,189 7,277 8,126 9,343 11,005 Total Deposits 5,451 6,367 6,946 8,104 9,623 Total Advances 4,610 5,323 5,814 6,929 8,241
Note:— Adjusted for the capitalisation issues in 1984 and 1988 and the rights issues in 1984 and 1985, but not adjusted to reflect the proposed division of Ordinary Stock referred to in paragraph 5 below. 3. Current Trading and Prospects The current financial year has started weil with continuing substantial growth in business being experienced in all parts of the Group as the unaudited results for the half-year ended 31st August, 1988 demonstrated. Extracts from the interim report issued on 21st September, 1988 appear in Part III of this document. The pre-tax profit for the half-year was 56 per cent. ahead of that for the half-year ended 31 st August, 1987 in absolute terms and 14 per cent. ahead after making adjustments in respect of the exceptional specific provisions for sovereign debt made in the half-year ended 31st August, 1987. The Directors continue to view the prospects for the current year with confidence. 4. Reasons for the Placing The amount of business which may be undertaken by a U.K. bank is governed by the size of its capital base in terms both of prudent business practice and of compliance with Bank of England ratio requirements. The definition of the type of capital to be included in a bank's capital base for regulatory purposes has recently been reviewed by a committee known as "The Basle Committee on Banking Regulations and Supervisory Practices", a body on which the central banks and supervisory authorities of many of the developed nations are represented. The Basle Committee has been working to bring about international convergence of capital adequacy standards and in December 1987 published its draft
5 proposals. Following a period of consultation, the Basle Committee published its final proposals in a paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988. These proposals, which represent the framework for measuring a bank's capital adequacy and set out the minimum standards to be achieved, had been agreed to by the Governors of the G10 Central Banks. In a notice issued in October 1988 the Bank of England, which regulates all institutions authorised under the Banking Act 1987, has described in detail how the agreement will be implemented in the United Kingdom. In particular a two-tier capital structure is to be introduced. In accordance with the Bank of England notice, Tier 1 capital will consist inter alia of allotted, called up and fully paid ordinary stock, non-cumulative irredeemable preferred stock and disclosed reserves (excluding revaluation reserves). This tier is deemed to be the key element of capital on which emphasis should be placed. Tier 2 capital will consist inter alia of hybrid capital instruments and subordinated term debt (although there will be some limits and restrictions on the composition of the Tier 2 elements). Both Tier 1 and Tier 2 capital will be eligible for inclusion in a bank's capital base for capital adequacy purposes although the total of Tier 2 capital for these purposes may not exceed the total of Tier 1 capital. The principal elements of Bank of Scotland's current capital resources which would qualify as Tier 1 capital are its fully paid Ordinary Stock and its reserves (excluding revaluation reserve). However, in view of the classification of non-cumulative irredeemable preferred stock as Tier 1 capital, the Board wishes to take advantage of this development and obtain authority from the Proprietors of the Ordinary Stock to issue £100,000,000 nominal of such preferred stock. The Bank of England has indicated that the terms of the Preference Stock as set out in Part IV of this document will enable such stock to be included in the Bank's Tier 1 capital for capital adequacy purposes. The effect of Bank of Scotland making an issue of Preference Stock will be to increase its Tier 1 capital and also to allow it to augment its capital base further by the inclusion of additional qualifying Tier 2 capital. In the opinion of the Board, the issue of Preference Stock will permit the future development of the Bank to the benefit of the Proprietors of the Ordinary Stock without diluting their equity interests. It is the Board's intention that, in addition to the proposed issue of Preference Stock, the Bank will increase its capital base in the near future by way of one or more transactions involving subordinated long-term borrowing in currencies other than sterling which would qualify as Tier 2 capital. Details of the present long-term borrowings of the Group are set out in paragraph 3 of Part V of this document.
5. Proposed Division of Ordinary Stock At present, in the event of a poll being called at a General Meeting, the Regulations provide that every Proprietor shall have one vote for each complete £1 nominal of Ordinary Stock held. As at 29th February, 1988, after adjusting for the capitalisation issue approved at the Extraordinary General Meeting on 31 st May, 1988, the nominal amount of Ordinary Stock in issue was £186.9 million and the total of Proprietors' Funds amounted to £650.3 million. To bring the number of votes more into line with the amount of Proprietors' Funds, the Board now proposes that each £1 nominal of Ordinary Stock be divided into units of 25p nominal for voting and transfer purposes. Following this division, the Ordinary Stock will be transferable in multiples of 25p nominal, and Proprietors of Ordinary Stock, on a poll, will have one vote for every 25p nominal of Ordinary Stock held. In other respects the rights attaching to Ordinary Stock will be unaffected by the proposed division. Subject to approval of the necessary Resolution by the Proprietors at the Extraordinary General Meeting on Friday, 9th December, 1988 the Ordinary Stock will be transferable in multiples of 25p nominal with effect from Monday, 12th December, 1988. Application will be made to the Council of The Stock Exchange for the Ordinary Stock to be dealt in on The Stock Exchange in multiples of 25p nominal with effect from that date. It is expected that new certificates for the Ordinary Stock will be despatched on Monday, 19th December, 1988 to Proprietors on the register at the close of business on Monday, 5th December, 1988. The existing certificates for the Ordinary Stock will cease to be valid with effect from Monday, 12th December, 1988. Pending the despatch of the new certificates transfers will be certified against the register of Proprietors. As a result of the above proposed division of the Ordinary Stock of the Bank, the nominal amount and subscription price of units of Ordinary Stock subject to options granted under the Savings Scheme and the Executive Scheme will be adjusted by the Board of the Bank in such a manner as it may determine to be appropriate subject to the Bank's auditors confirming in writing that such adjustments in their opinion are fair and reasonable and subject also to such adjustments being approved by the inland Revenue.
6 PART II The Placing At an Extraordinary General Meeting of the Bank, to be held on Friday, 9th December, 1988, resolutions will be proposed inter alia to (a) re-classify the existing issued and unissued Capital Stock of the Bank as Ordinary Stock; (b) create £125,000,000 nominal of Preference Stock having the rights set out in the Regulations as amended at that Meeting; (c) amend the Regulations; (d) authorise the Board to allot and issue £100,000,000 nominal of the Preference Stock by way of the Placing; and (e) authorise the Board to allot and issue up to a further £25,000,000 nominal of Preference Stock under the provisions described in paragraph 1(f) of Part IV(A) of this document.
Under a Placing Agreement dated 21st November, 1988 between the Bank and Cazenove & Co., of 12 Tokenhouse Yard, London EC2R 7AN, Cazenove & Co. have agreed to procure (as agents for the Bank) subscribers for, or failing this themselves to subscribe for, £100,000,000 nominal of Preference Stock at a price of 102.5p per £1 nominal of Preference Stock ("the Placing Price") payable in cash, conditional on, inter alia, the approval of the Resolutions, and the Council of The Stock Exchange granting permission for the £100,000,000 nominal of Preference Stock to be admitted to the Official List and such admission becoming effective not later than Monday, 12th December, 1988. The Placing Agreement contains certain representations, warranties, undertakings and indemnities given by the Bank relating, inter alia, to the accuracy of the information contained in this document. Cazenove & Co. may terminate the Placing Agreement in certain exceptional circumstances. Subject to certain conditions the Bank will pay to Cazenove & Co. a commission of 1 % per cent. of the value of the Preference Stock at the Placing Price. Cazenove & Co. will pay commitment commissions to placees. The Bank will also pay to Cazenove & Co. a sum equal to all expenses, charges and disbursements, including legal fees, incurred by Cazenove & Co. in connection with or arising out of the Placing Agreement (together with any amount of value added tax payable on such fees, expenses, charges and disbursements). The subscription price for the £100,000,000 nominal of Preference Stock will be payable in full on Monday, 12th December, 1988. It is estimated that the cash proceeds (net of expenses) accruing to the Bank from the Placing will amount to approximately £100.7 million. The Preference Stock will be registered in the name of placees. Definitive Preference Stock certificates are expected to be despatched on Monday, 12th December, 1988. It is expected that dealings in the Preference Stock will commence on Monday, 12th December, 1988.
7 PART III Financial Information
(A) Interim Report The following are extracts from the unaudited Interim Report of the Bank of Scotland Group for the half-year ended 31st August, 1988, released on 21st September, 1988. "Consolidated Profit and Loss Account 6 months 6 months Year ended ended ended 31st August, 31st August, 29th February, 1988 1987 1988 (unaudited) £ million £ million £ million Operating Profit after interest on subordinated loans 86.4 77.9 157.9 Exceptional specific provision for sovereign debts — (21.5) (25.3) 86.4 56.4 132.6 Associated companies 4.3 1.6 4.1 90.7 58.0 136.7 Provision for profit sharing (3.6) (2.3) (5.4) Profit before taxation 87.1 55.7 131.3 Taxation (32.0) (21.0) (49.4) Profit after taxation 55.1 34.7 81.9 Minority interests (0.3) (0.5) (0.7) 54.8 34.2 81.2 Extraordinary items — — 0.9 Profit attributable to Proprietors 54.8 34.2 82.1 Dividend (9.4) (8.2) (23.5) Retained Profit 45.4 26.0 58.6
Earnings per £1 Ordinary Stock (adjusted for Capitalisation Issue) 29.3p 18.3p 43.5p
Notes:— 1. The Group results have been prepared on the historical cost basis. Accounting policies are as stated on page 38 of the 1988 Annual Accounts. 2. Interest payable on subordinated loans:— 6 months 6 months Year ended ended ended 31st August, 31st August, 29th February, 1988 1987 1988 £ million £ million £ million 16.8 11.6 24.7 3. The charge for taxation is based on the estimated effective rate for the year as a whole, assuming a rate of 35 per cent. lor U.K. Corporation Tax for the current year. 4. Provision has been made in the Interim Accounts towards the end of year allocation of profit to the Staff Profit Sharing Schemes. This provision is calculated on the results for the six months to 31st August, 1988 alone; the bases used, therefore, relate only to that period, whereas the actual allocation will be calculated by reference to the results for the full year. The charge shown for the corresponding period was calculated in a similar manner. Pre-Tax Profits The substantial growth in business over the last few years in all parts of the Group has continued and this is reflected in the further marked improvement in profits for the half-year which ended on 31s t August, 1988. The operating profit of the Group was £86.4 million which represents an 11 per cent. increase over the corresponding figure (£77.9 million) in 1987. The increase in the share of profit from associated companies reflects the first contribution from Countrywide Banking Corporation Limited in New Zealand,
8 together with enhanced returns from other investments,.particularly AA Financial Services Limited. The Group pre-tax profit of £87.1 million was 56 per cent. ahead of the August 1987 figure and would have shown an improvement of 14 per cent. had no exceptional provision against troubled sovereign debt been made a year ago. Dividend The Directors have declared an interim dividend of 5 pence per £1 Ordinary Stock (1987—4.4 pence adjusted for the Capitalisation Issue in May 1988). The dividend will be paid on 3rd November, 1988 to Proprietors on the register at close of business on 6th October, 1988. Group Balance Sheet and Capital Ratios Advances by the Bank of Scotland Group at 31 st August, 1988 had reached £9.5 billion; total assets had risen to £12.4 billion, which compares with £11.0 billion at 29th February, 1988. As a result of the Group's considerably greater thrust in recent years into England and overseas, rather more than half of the total U.K. lending is now to customers outside the Clearing Bank's traditional domestic base in Scotland. The Consolidated capital base at the end of August was £1.1 billion, representing a gearing ratio of 7.3 per cent., with a strong equity content as evidenced by the equity to total assets ratio of 5.6 per cent."
(B) Summary of Audited Consolidated Accounts Basis of presentation and nature of financial information The following financial information does not constitute full accounts within the meaning of Section 254 of the Companies Act 1985 but has been prepared from the audited consolidated accounts of the Bank. For each of the five financial years ended 29th February, 1988, unqualified reports (as defined by Section 255 of the Companies Act 1985) were given on the audited consolidated accounts of the Bank by the Bank's auditors, Arthur Young. 1. Profit and Loss Accounts The following is a summary of the audited consolidated profit and loss accounts of the Bank for the five years ended 29th February, 1988— 1984 1985 1986 1987 1988 Notes £ million £ million £ million £ million £ million Operating Profit 5.1 61.3 82.3 97.1 119.8 157.9 Exceptional specific provision for sovereign debt (25.3) 61.3 82.3 97.1 119.8 132.6 Share of profits of associated companies 0.5 1.4 2.0 3.5 4.1 61.8 83.7 99.1 123.3 136.7 Allocation to Staff Profit Sharing Schemes (2.5) (3.3) (3.9) (4.8) (5.4) Profit before taxation and extraordinary items 59.3 80.4 95.2 118.5 131.3 Taxation 5.3 (9.0) (39.9) (41.1) (46.6) (49.4) Profit after taxation 50.3 40.5 54.1 71.9 81.9 Attributable to minority interests (0.6) (0.3) 0.4 (0.4) (0.7) Profit before extraordinary items 49.7 40.2 54.5 71.5 81.2 Extraordinary items 5.4 (56.3) (0.5) (5.2) — 0.9 Transfer from reserves 56.3 — — Profit attributable to Proprietors 5.5 49.7 39.7 49.3 71.5 82.1 Dividends 5.6 (9.2) (12.8) (17.3) (20.5) (23.5) Retained Profit 5.7,5.15 40.5 26.9 32.0 51.0 58.6
Earnings per £1 Ordinary Stock (Note) 5.8 39.2p 27.5p 30.7p 38.4p 43.5p Dividend per £1 Ordinary Stock (Note) 7.3p 8.4p 9.3p 11.0p 12.6p Note:- Adjusted for the capitalisation issues in 1984 and 1988 and the rightsissue s in 1984 and 1985.
9 2. Balance Sheets The following is a summary of the audited consolidated balance sheets of the Bank for the five years ended 29th February, 1988:—
1984 1985 1986 1987 1988 Notes £ million £ million £ million £ million £ million Capital Stock 5.14 32.8 82.3 123.8 124.2 124.6 Reserves 5.15 289.0 320.0 390.7 434.4 525.7
Proprietors' Funds 321.8 402.3 514.5 558.6 650.3 Minority Interests 1.8 1.5 0.8 2.6 3.7 Dated loan capital 5.12 100.5 183.0 136.0 137.9 241.4 Undated loan capital 5.13 — — 170.1 162.1 141.0
Capital Resources 424.1 586.8 821.4 861.2 1,036.4 Deferred Taxation 5.11 97.6 74.1 87.8 84.6 76.4 Other Liabilities Current, deposit and other accounts 5.10 5,450.6 6,367.2 6,945.9 8,104.1 9,623.4 Notes in circulation 211.3 241,3 260.0 280.2 254.0 Proposed dividend 5.4 7.6 10.5 13.0 15.3
6,189.0 7,277.0 8,125.6 9,343.1 11,005.5
Cash and short-term funds 5.16 944.9 1,317.5 1,630.4 1,787.0 2,079.3 Cheques in course of collection 107.3 132.1 170.7 131.2 159.0 Investments 5.17 375.3 339.0 318.0 282.2 239.3 Advances to customers and other accounts 5.18 4,609.6 5,322.8 5,813.9 6,928.8 8,240.9 Trade investments 5.21 15.7 12.8 13.9 18.1 31.5 Property and equipment 5.22 136.2 152.8 178.7 195.8 255.5
6,189.0 7,277.0 8,125.6 9,343.1 11,005.5
10 3. Source and Application of Funds The following shows the consolidated source and application of funds of the Bank for the three years ended 29th February, 1988:—
1986 1987 1988 £ million £ million £ million FREE CAPITAL Source of funds Profit attributable to Proprietors after extraordinary items 49.3 71.5 82.1 Adjustment for items not involving movement of funds: Depreciation 12.9 17.2 17.9 Retained by associated companies (0.2) (0.3) 0.5 {Surplus) on disposal of investments — — (3.6) (Surplus)/Deficit on sale of property and equipment (0.5) 0.4 0.1 Amortisation of investments 0.2 — 1.6 Funds generated by operations 61.7 88.8 98.6 Funds from other sources Disposals of property and equipment 4.6 5.1 4.8 Disposals of subsidiary, associated company and trade investments — (0.1) 10.2 Proceeds of loan capita) issues 169.4 5.3 120.3 Stock issued under profit sharing scheme 1.2 1.6 2.0 Net proceeds of rights issue 81.3 — — 318.2 100.7 235.9
Application of funds Purchases of property and equipment 43.9 39.9 53.4 Purchases of associated companies and trade investments 1.6 3.9 12.3 Reduction in loan capital 47.0 11.4 37.9 Dividends 17.3 20.5 21.2 Goodwill arising on acquisition of subsidiaries — 8.3 6.6 Other items 0.1 — 0.2 109.9 84.0 131.6
Increase in Free Capital 208.3 16.7 104.3
BANKING FUNDS Source of funds Increase in free capital (above) 208.3 16.7 104.3 Deposits and other accounts 600.3 1,182.7 1,493.1 Investments 21.0 35.8 43.0 Increase in deferred tax 13.7 — — 843.3 1,235.2 1,640.4
Application of funds Liquid assets 351.5 117.1 320.1 Reduction in deferred tax — 3.2 8.2 Advances and other accounts 491.8 1,114.9 1,312.1 843.3 1,235.2 1,640.4 Details of acquisition of subsidiaries are stated in note 5.26.
11 4. Accounting Policies The principal accounting policies that have been adopted in the preparation of the accounts for the year ended 29th February, 1988 are given below. In the past five years there have been no significant changes in the accounting policies except as noted below in respect of depreciation. (a) Subsidiary Companies In order to avoid undue delay in the submission of the Bank's Accounts, the Accounts of the following principal subsidiaries have been made up as follows:— North West Securities Limited—Year to 31st December, 1987 The British Linen Bank Limited—Year to 31 st January, 1988 Kellock Limited—Year to 31st December, 1987 Kellock Limited became a subsidiary of the Bank on 16th September, 1987. Previously it was accounted for as an associated company. (b) Associated companies The attributable share of results of associated companies, generally based on audited accounts, is included in the Group Accounts using the equity method of accounting. The investments are stated in the consolidated balance sheet at the Group's share of their net tangible assets. In the Bank's balance sheet, the investments in associated companies are stated at cost. (c) Goodwill Goodwill arising on the acquisition of a subsidiary or associated company is written off directly against reserves in the year in which it arises. Similarly, negative goodwill is credited directly to Group reserves. (d) Bad and Doubtful Debts Specific provisions are made for advances which are recognised to be bad or doubtful. A general provision, to cover advances which are bad or doubtful but not yet identified as such, is also maintained for use in appropriate circumstances. The general provision is augmented regularly by a figure which takes account of the magnitude and character of the portfolio of advances. Provisions made during the year are charged to revenue net of recoveries. Interest is normally applied to doubtful debts and related specific provisions increased accordingly. (e) Investments (other than Trade Investments) Premiums or discounts arising on purchase of investments redeemable at fixed dates, other than those held for dealing, are taken to revenue over the period to redemption. Income from these investments is stated after taking these adjustments into account and book values are based on cost, similarly adjusted. These investments are normally held to or close to maturity. Gains or losses on realisation are taken to revenue as they arise. Investments held for dealing are included at market value. (f) Pension Contribution The Group operates several funded defined benefit pension schemes. Pension fund liabilities are assessed by professionally qualified actuaries at triennial valuations and at intervening dates if considered necessary. Contributions to fund these liabilities are charged against profits. (g) Finance Leases and Instalment Credit Income from assets leased to customers, including the release of government grants and leasing earnings equalisation provisions, and from instalment credit agreements is determined by spreading interest and charges over the period of repayment in proportion to monthly balances outstanding. The net investment in finance leases is included as amounts receivable in advances and the net obligation under leases with third party finance lessors is included in current, deposit and other accounts. Provisions are made to equalise the effects of falling corporation tax rates and are released to revenue, grossed up at the prevailing corporation tax rate, over the anticipated lives of the leases affected. Government grants are credited to revenue in equal annual instalments, grossed up at the prevailing corporation tax rate, over the expected lives of the related assets. (h) Depreciation Short leaseholds are depreciated in equal instalments over the remaining life of the lease up to a maximum of fifty years, having regard to the incidence of rent reviews. Equipment is written off by equal instalments over the expected life of the asset, generally between five and fifteen years. Commencing 1st March, 1987, freehold and long leasehold properties are no longer depreciated as they are maintained in a sound state of repair to the effect that book values are unlikely to diminish. Previously, such properties were depreciated over 50 years.
12 (i) Taxation The charge for taxation takes into account the timing differences in the accounting and taxation treatment of certain items to the extent that they are expected to reverse in the future. Deferred tax is provided at the estimated rates at which future taxation is expected to become payable and takes into account recoverable Advance Corporation Tax. (j) Foreign Currencies Assets and liabilities in foreign currencies are expressed in sterling at the rates of exchange ruling on the relevant balance sheet dates. Exchange differences arising on the translation of currency fixed assets are taken to reserves except to the extent that they are offset by equal and opposite differences arising on the translation of related currency borrowing. All other exchange differences are included in operating profit.
5. Notes to the 1988 Accounts The following is a summary of notes to the audited consolidated accounts of the Bank for the financial year ended 29th February, 1988 other than the notes relating to "Principal Subsidiary Companies" and "Principal Trade Investments"; current information relating to these is given in Part V, paragraphs 6 and 7 below:—
5.1 Operating Profit 1987 1988 £ million £ million Operating profit is stated after crediting:— Income from investments:— listed 30.8 18.7 unlisted 1.4 1.3 Profits on realisation of investments 2.2 1.7 and after charging:— Interest to depositors 641.5 660.4 Interest on loan notes 25.5 25.5 Bad and doubtful debts 55.5 47.6 Contribution to Pension Schemes (Note 5.2) 8.1 2.4 Depreciation 17.2 17.9 Property rentals 3.2 4.5 Directors' emoluments 0.4 0.5 Auditors' remuneration 0.3 0.4 In 1987 depreciation included £1.8 million in respect of freehold and long leasehold properties which, from 1st March, 1987, are no longer being depreciated. 5.2 Pension Costs Pension costs are assessed by professionally qualified actuaries, normally on a triennial basis. On the advice of the actuary following an additional formal valuation as at 31 st December, 1986, no contributions are being paid to the principal scheme for a period of four years commencing 1st March, 1987. The actuary to the principal scheme is a partner in the firm of R. Watson & Sons, Consulting Actuaries.
5.3 Taxation 1987 1988 £ million £ million U.K. Corporation Tax, at 35 percent. (1987—35.42 percent.) 44.6 53.8 Deferred tax — (6.1) Relief for overseas taxation (1.3) (1.4) 43.3 46.3 Overseas taxation 2.0 1.9 Share of associated companies' taxation 1.3 1.2 46.6 49.4 The charge for taxation includes £7.5 million (1987—£10.6 million) in respect of the notional tax on the release from regional development grants and leasing earnings equalisation provisions.
13 5.4 Extraordinary Items 1987 1988 £ million £ million Gain on disposal of investments in associated companies — 1.9 Other — (0.5) — 1.4 Corporation Tax — (0.5) — 0.9 5.5 Profit Attributable to Proprietors Of the profit attributable to Proprietors, £65.2 million (1987—£57.3 million) has been dealt with in the accounts of the Bank. 5.6 Dividends 1987 1988 £ million £ million Interim dividend of 6.6p per £1 Ordinary Stock 7.5 8.2 (1987—6p) Proposed final dividend of 12.3p per £1 Ordinary Stock 13.0 15.3 (1987—10.5p) 20.5 23.5
5.7 Retained Profit 1987 1988 £ million £ million The profit of the Group has been retained by:— The Bank 36.8 41.7 Subsidiary companies 13.9 17.4 50.7 59.1 Associated companies 0.3 (0.5) 51.0 58.6 5.8 Earnings per £1 Ordinary Stock Earnings per £1 Ordinary Stock are based upon Group profit, before extraordinary items, of £81.2 million (1987—£71.5 million) and the weighted average Ordinary Stock of £124.4 million (1987—£124.2 million). 5.9 Emoluments of Directors and Employees 1987 1988 £000 £000 Fees as Directors of the Bank 122 115 Other emoluments of Directors, including additional remuneration and pension contributions in respect of Governor and Deputy Governor 315 321 Pensions paid to former Directors 36 41 Emoluments of. Governor excluding pension contribution 51 57 Emoluments of highest paid Director excluding pension contribution 119 134 Ex gratia payment to former Directors — 60 Number of Directors whose emoluments, excluding pension contributions, were within the undernoted limits:— 1987 1988 1987 1988 Not more than £5,000 1 4 £30,001— £35,000 1 £5,001—£10,000 2 2 £35,001— £40,000 1 £10,001—£15,000 9 5 £50,001— £55,000 1 £15,001—£20,000 2 £55,001— £60,000 1 £20,001— £25,000 2 1 £115,001—£120,000 1 £25,001— £30,000 1 £130,001—£135,000 1 The number of employees of the Group, other than Directors, whose emoluments, excluding pension contributions, exceeded £30,000 were:— 1987 1988 1987 1988 £30,001—£35,000 80 95 £60,001—£65,000 3 5 £35,001—£40,000 27 48 £65,001—£70,000 2 6 £40,001—£45,000 11 20 £70,001—£75,000 4 2 £45,001—£50,000 9 11 £75,001—£80,000 3 1 £50,001—£55,000 6 8 £80,001—£85,000 4 £55,001—£60,000 4 3 £85,001—£90,000 1 £90,001—£95,000 1
14 5.10 Current, Deposit and other Accounts 1987 1988 £ million £ million Sterling Retail Customers—non-interest bearing 693.9 765,5 —interest bearing 2,805.1 3,319.4 Wholesale Customers—corporate 2,032.3 2,605.9 —inter-bank 828.4 1,174.8 6,359.7 7,865.6 Currency Customers—interest bearing 671.1 564.7 Inter-bank 628.6 679.0 1,299.7 1,243.7 Deposits 7,659.4 9,109.3 Other accounts 444.7 514.1 8,104.1 9,623.4
5.11 Deferred Tax 1987 1988 Provided for Potential Provided for Potential in Accounts Liability in Accounts Liability £ million £ million £ million £ million Capital allowances:— on assets leased to customers 81.6 121.4 75.2 115.0 on other assets 8.7 14.4 8.3 14.0 Other timing differences (0.8) (0.1) (2.0) (1.2) A.C.T. recoverable (4.9) (4.9) (5.1) (5.1) 84.6 130.8 76.4 122.7
No provision is made for any liability to taxation which might arise if properties were disposed of at their balance sheet values as it is expected that they will be retained by the Group.
5.12 Dated Loan Capital 1987 1988 £ million £ million £ million £ million The Bank 9 1/2 per cent. Unsecured Loan Notes 1989/2010 5.3 5.3 Variable Rate Loan Notes 2010 — 7.5 Due to a subsidiary:* 103 /4 per cent. Notes redeemable not later than 1990 (US $50 million) 32.4 28.2 Floating Rate Notes redeemable not later than 1992 (US $100 million) 64.8 56.4 1414 percent. Fixed/Floating Rate Notes redeemable not later than 1996 (US $50 million) 32.4 28.2 Floating Rate Notes redeemable not later than 1997 (US $200 million) — 129.6 112.8 225.6 134.9 238.4 Subsidiaries 13 1/2 per cent. Subordinated Unsecured Loan Stock 1995/97 3.0 3.0 137.9 241.4
* These notes have been issued by Scotland International Finance B. V., a wholly owned subsidiary of the Bank and the funds onlent to the Bank. The notes are guaranteed unconditionally by the Bank on a subordinated basis.
15 5.13 Undated Loan Capital 1987 1988 £ million £ million The Bank Floating Rate Primary Capital Notes (US $250 million) 162.1 141.0 The notes are subordinated to the claims of depositors, are undated and have no final date of maturity. All or some of the notes may be redeemed at the option of the Bank at par in or after November 1990. 5.14 Capital Stock 1987 1988 £ million £ million Ordinary Stock:— authorised 136.2 136.2 issued:— At 1st March, 1987 123.8 124.2 Issued under the Stock Ownership and Savings Schemes 0.4 0.4 At 29th February, 1988 124.2 124.6 The Stock Ownership Scheme contains provisions for the issue of Ordinary Stock to employees of the Group. The issue of Ordinary Stock arising from profits for the year ended 29th February, 1988, will take place during the year to 28th February, 1989. At 29th February, 1988, options were outstanding under the Savings Scheme and the Executive Scheme as follows (Note):— Savings Scheme: exercisable between 1991 and 1993 at 256.8p—on £2,070,133 of Ordinary Stock exercisable between 1991 and 1993 at 259.2p—on £577,161 of Ordinary Stock exercisable between 1992 and 1994 at 378.0p—on £594,864 of Ordinary Stock Executive Scheme: exercisable between 1988 and 1995 at 276.66p—on £357,750 of Ordinary Stock exercisable between 1989 and 1996 at 292.66p—on £400,875 of Ordinary Stock exercisable between 1990 and 1997 at 418.00p—on £430,875 of Ordinary Stock Note:— These figures have been adjusted for the 1 for 2 capitalisation issue in May 1988. 5.15 Reserves The Bank and its Associated Subsidiaries Companies Total £ million £ million £ million At 1st March, 1987 432.6 1.8 434.4 Reclassifications (0.6) 0.6 — Surplus on revaluation of properties 29.5 — 29.5 Exchange movements (0.4) 0.6 0.2 Premium arising on issue of stock 1.6 — 1.6 Net negative goodwill, being the excess of net tangible assets — acquired over the purchase price paid for subsidiary and associated companies 1.7 1.7 Part-disposal of interests in associated and subsidiary companies 0.6 (0.7) (0.1) Other movements (0.2) — (0.2) Retained profit 59.1 (0.5) 58.6 523.9 1.8 525.7 The reserves of the Group include share premium of the Bank £68.6 million (1987—£67.0 million), and surplus on revaluation of fixed assets £60.7 million (1987—£32.7 million).
5.16 Cash and Short Term Funds 1987 1988 £ million £ million Cash and balances with the Bank of England 431.9 340.1 Money at call and short notice 1,076.9 1,234.2 U.K. Treasury Bills 19.8 16.9 Bills discounted 119,4 230.0 Certificates of deposit 139,0 258.1 1,787.0 2,079.3
16 5.17 Investments 1987 1988 Book Value Valuation Book Value Valuation £ million £ million £ million £ million Listed Securities of, or guaranteed by, the British Government 265.0 266.5 201.2 200.5 Others 7,3 7.7 10.5 9.7 272.3 274.2 211.7 210.2 Unlisted 9.9 11.0 27.6 29.7 282.2 285.2 239.3 239.9 Listed investments have been valued at middle market prices. Unlisted investments have been valued by the Directors. All listed securities of, or guaranteed by, the British Government are redeemable on fixed dates, mostly within five years.
5.18 Advances to Customers and other Accounts Amounts are stated after deducting provisions for bad and doubtful debts (Note 5.19) and leasing earnings equalisation provisions. 1987 1988 £ million £ million Banking advances and other accounts 5,781.2 6,816.3 instalment credit and other financial agreements 430.3 517.7 Assets leased to customers 636.5 745.0 Advances to associated companies 80.8 161.9 6,928.8 8,240.9 The cost of assets acquired during the year for the purpose of letting under finance leases amounted to £298.5 million (1987—£229.3 million).
5.19 Group Provisions for Bad and Doubtful Debts The general provision for banking advances is maintained at a level of around 1 per cent. of risk advances and the major subsidiaries maintain provisions at a level appropriate to their type of business. 1987 1988 Specific General Total Specific General Total £ million £ million £ million £ million £ million £ million At 1st March, 1987 93.8 40.6 134.4 107.7 47.9 155.6 Amounts written off (36.7) — (36.7) (32.9) — (32.9) Exchange movements (1.2) — (1.2) (6.0) — (6.0) Adjustment for acquisition and disposal of subsidiaries 1.4 0.5 1.9 (0.2) — (0.2) New provisions less releases 50.6 — 50.6 69.5 — 69.5 Augmentation — 6.6 6.6 — 6.0 6.0 Reallocation (0.2) 0.2 — — — — At 29th February, 1988 107.7 47.9 155.6 138.1 53.9 192.0 Revenue charge 50.6 6.6 57.2 69.5 6.0 75.5 Recoveries of amounts previously written off (1.7) — (1.7) (2.6) — (2.6) Net charge to revenue 48.9 6.6 55.5 66.9 6.0 72.9 The Group charge to Revenue in 1988 includes an exceptional specific provision of £25.3 million in respect of sovereign debt. The cumulative provisions at 29th February, 1988 against all exposures to 15 problem countries represents 33 per cent. of the total US $233.9 million (£132 million) outstanding.
5.20 Advances to Directors and Connected Persons The number and the total amounts outstanding of loans to Directors and connected persons were 18 (1987—28) and £1.6 million (1987—£3.4 million) respectively.
17 5.21 Trade Investments Listed investments are those listed on recognised stock exchanges and have been valued at mid-market prices. Unlisted investments have been valued by the Directors. The principal trade investments are listed in Part V, paragraph 7 of this document. 1987 1988 Book Value Valuation Book Value Valuation £ million £ million £ million £ million Associated companies —listed — — 17.1 12.1 —unlisted 12.2 12.2 9.8 9.8 Others —unlisted 5.9 5.9 4.6 4.6 18.1 18.1 31.5 26.5 Dividends received from unlisted associated companies amounted to £3.4 million (1987—£1.7 million).
5.22 Property and Equipment Property Equipment £ million £ million Cost or valuation at 1 st March, 1987 126.2 116.8 Exchange movements and reclassifications (0.3) (0.2) Acquisitions — 1.1 Additions 17.1 35.7 Surplus on revaluation 23.6 — Disposals (2.2) (6.6) At 29th February, 1988 164.4 146.8 Consisting of:— At valuation 31 st December, 1987 156.8 — At cost 7.6 146.8 164.4 146.8 Accumulated depreciation 0.1 55.6 Net book value 29th February, 1988 164.3 91.2
255.5 Net book value 28th February, 1987 121.0 74.8 195.8 Cost or valuation of property comprises:— Freehold 158.2 Leaseholds fifty years and over unexpired 0.7 Leaseholds less than fifty years unexpired 5.5 164.4 The valuation of property, on the basis of open market value for existing use, was carried out as at 31 st December, 1987 by professionally qualified employees of the Group and external valuers. The surplus of £29.5 million including depreciation released of £5.9 million has been credited to reserves.
18 5.23 Commitments 1987 1988 £ million £ million There are commitments in respect of:— Capital expenditure on fixed assets, authorised, not provided for in the accounts: for which contracts have been entered into 26.6 17.8 for which contracts have not been entered into 22.1 21.0 Other financial commitments — 15.6 Revenue commitments in respect of non-cancellable operating lease rentals for property and equipment, expiring: within one year — 0.1 between two and five years 0.3 0.3 over five years 3.0 4.8 3.3 5.2 Included in current, deposit and other accounts are net obligations under finance leases, payable as follows: within one year 27.7 23.6 between two and five years 28.0 30 3 55.7 53.9
5.24 Contingencies 1987 1988 £ million £ million There are contingent liabilities in respect of:— Acceptances 265.0 337.3 Guarantees and other obligations 569.7 663.2 Outstanding contracts for the purchase and sale of foreign currencies, financial futures contracts and foreign currency option contracts. Calls in terms of the Deposit Protection Scheme established under the Banking Act 1979 (which has now been replaced by the Banking Act 1987). 5.25 Litigation *In connection with a Joan to Placid Oil Company, the Bank, together with twenty-two other banks, has been cited in cases for damages. The plaintiffs include Placid Oil Company and various Hunt family members and entities. The Directors, while expressing no opinion as to the possible outcome of this litigation, believe that all actions by the Bank have been proper and deny all allegations of wrongdoing. These lawsuits are being strenuously defended by the Bank. *See statement in Part V, paragraph 12(c) of this document. 5.26 Acquisition of Subsidiaries The statement of Source and Application of Funds incorporates the undernoted amounts relating to the acquisition of subsidiary companies:— 1987 1988 £ million £ million Property and equipment 0.9 0.6 Goodwill 8.3 6.6 Dated loan capital (3.0) — Free capital 6.2 7.2 Deposits and other accounts (102.5) (60.9) Deferred tax (1.5) (0.2) Liquid assets 29.8 — Investments 0 3 — Advances and other accounts 86.3 61.9 18.6 8.0 Consideration:— Issue of loan notes 5.3 7.5 Liquid assets 13.3 0.5 18.6 8.0
19 5.27 Turnover The Group turnover is mainly attributable to the business of banking and related activities. Finance lease rental income amounted to £187 million (1987—£164 million). 5.28 Approval of Accounts The accounts, which were prepared in accordance with Chapter (I of Part VII of the Companies Act 1985, were approved by the Directors on 19th April, 1988.
20 PART IV
Stock Rights
(A) Rights to be attached to the Preference Stock 1. Income (a) The Preference Stock shall (subject to the further provisions described below) entitle the proprietors holding the same to receive a fixed non-cumulative preferential dividend (hereinafter called "the Preference Dividend"), which shall be calculated at the rate of 9 1/4pe r cent. per annum (exclusive of any imputed tax credit available to such proprietors) on the amounts (excluding any premium) from time to time paid up or credited as paid up thereon. The Preference Dividend shall be payable in each year in equal half-yearly instalments on 31st May in respect of the half-yearly period ending on the preceding 28th February (or in a leap year 29th February) and on 30th November in respect of the half-yearly period ending on the preceding 31 st August, provided that the first instalment of Preference Dividend, in respect of the period from the date of first issue of the Preference Stock on 12th December, 1988 up to and including 28th February, 1989, shall be a special payment amounting to 4.308p per £1 nominal of Preference Stock (exclusive of any imputed tax credit available to proprietors of such stock) and shall be payable on 31 st May, 1989. The Preference Dividend payable in respect of any financial year shall be paid in priority to the payment of any dividend on the Ordinary Stock in respect of that financial year. The expression "financial year" shall include any period in respect of which an audited profit and loss account (whether consolidated or not) of the Bank is prepared and is laid before the proprietors in general meeting. (b) The Preference Stock shall rank for dividend pari passu with any further preference stock created and issued pursuant either to sub-paragraph (f) below or to paragraph 4 below and otherwise in priority to any other capital stock of the Bank. (c) If, on any date on which an instalment of the Preference Dividend would fall to be paid under sub-paragraph (a) above, the distributable profits and distributable reserves of the Bank are together insufficient to enable payment in full to be made of such instalment and, if applicable, of any instalments of dividends payable on such date on any other preference stock ranking pari passu with the Preference Stock as regards dividend, then none of the said instalments shall be paid. If it shall subsequently appear that any instalment of the Preference Dividend or of any such other preferential dividend which has been paid should not, in accordance with the provisions of this sub-paragraph, have been so paid, then provided the Board shall have acted in good faith, they shall not incur any liability for any loss which any proprietor may suffer in consequence of such payment having been made. (d) Where any instalment of the Preference Dividend is payable in terms of the provisions described above, the Board shall resolve to make payment of such instalment, provided however that such instalment shall not be payable if in the judgment of the Board the payment of such instalment would breach or cause a breach of the Bank of England's capital adequacy requirements from time to time applicable to the Bank. (e) Subject to sub-paragraph (f) below, the Preference Stock shall carry no further right to participate in the profits and reserves of the Bank other than the Preference Dividend and if on any occasion a half-yearly instalment of the Preference Dividend is not paid for the reasons described in sub-paragraph (c) or sub-paragraph (d) above, the holders of Preference Stock shall have no claim in respect of such shortfall. (f) (i) The provisions described in this sub-paragraph shall apply where any instalment of the Preference Dividend is, for the reasons specified in sub-paragraph (c) or sub-paragraph (d) above, not to be payable and the amount (if any) at credit of the profit and loss account of the Bank together with the amount of the reserves of the Bank available for the purpose are sufficient to enable the allotments of additional preference stock referred to in the further provisions of this sub-paragraph to be made in full. (ii) For the purposes of this sub-paragraph: (A) "Relevant Stock" means Preference Stock and any preference stock of the Bank ranking pari passu with the Preference Stock as regards dividend in respect of which an instalment of preference dividend which would have been payable on the same date as a Relevant Instalment on Preference Stock is not to be paid; and (B) "Relevant Instalment" means an instalment of preference dividend which is not to be paid on Relevant Stock on any occasion, and where a proprietor holds Relevant Stock of more than one class, the provisions of this sub-paragraph shall be interpreted and applied separately in respect of each class of Relevant Stock held by him.
21 (iii) Each proprietor of Relevant Stock shall, on the date for payment of the Relevant Instalment had such instalment been paid in cash, be allotted such additional nominal amount of preference stock of the class in question, credited as fully paid, as is equal to an amount determined by multiplying the cash amount of the Relevant Instalment that would have been payable to him, had such instalment been payable in cash, by four-thirds and rounding the resulting sum down to the nearest integral multiple of £1, A proprietor receiving an allotment of additional preference stock in terms of this sub-paragraph shall not be entitled to receive any part of the Relevant Instalment relating to Relevant Stock of that class in cash. (iv) For the purpose of paying up preference stock to be allotted on any occasion pursuant to this sub-paragraph, the Board shall capitalise out of the sums standing to the credit of the profit and loss account of the Bank and/or to the credit of the Bank's reserve accounts (including share premium account) available for the purpose, as the Board may determine, a sum equal to the aggregate nominal amount of the additional preference stock, then to be allotted and apply the same in paying up in full the appropriate amount of unissued preference stock of the class or classes in question. (v) The additional preference stock so allotted shall rank pari passu in all respects with the fully paid Relevant Stock of the same class then in issue save only as regards participation in the Relevant Instalment. (vi) The Board may undertake and do such acts and things as they may consider necessary or expedient for the purpose of giving effect to the provisions described in this paragraph. 2. Capital (a) On a distribution of assets on a sequestration or winding-up of the Bank, proprietors holding Preference Stock shall in respect thereof be entitled to receive, out of the surplus assets remaining after payment of the Bank's liabilities, an amount equal to the amount paid up or credited as paid up on the Preference Stock (excluding any premium paid to the Bank in respect thereof). (b) In addition to the amount repayable on the Preference Stock in accordance with sub-paragraph (a) above there shall be payable:— (i) the amount of any half-yearly instalment of the Preference Dividend which is properly payable in accordance with the provisions described in paragraph 1 above in respect of a period ending prior to the date of commencement of the sequestration or winding-up of the Bank but in respect of which the date for payment had not occurred prior to the date of such commencement; and (ii) a sum equal to the Preference Dividend which would have been payable by the Bank in accordance with the provisions described in paragraph 1 above calculated at the annual rate specified in sub-paragraph (a) of that paragraph in respect of the number of days included in the period commencing with whichever of 1st March or 1st September shall more recently have occurred prior to the date of commencement of the sequestration or winding-up of the Bank and ending with the date of such commencement, as though such period had been one in relation to which a half-yearly instalment of the Preference Dividend would have been payable pursuant to the provisions described in paragraph 1 (a) above, but subject always to the provisions described in paragraph 1 (c), (d) and (e) above. (c) The amounts payable or repayable under sub-paragraphs (a) and (b) of this paragraph in the event of a sequestration or winding-up of the Bank shall be so paid pari passu with any amounts payable or repayable in that event upon or in respect of any further preference stock of the Bank ranking pari passu with the Preference Stock as regards repayment of capital, and shall be so paid in priority to any repayment of capital on any other class of capital stock of the Bank. The proprietors of Preference Stock shall not be entitled in respect thereof to any further or other right of participation in the assets of the Bank upon a sequestration or winding-up. 3. Voting The proprietors of Preference Stock shall be entitled to receive notice of and to attend any general meeting of the Bank but shall not, in respect of the Preference Stock, be entitled to speak and/or vote upon any resolution other than:— (i) a resolution for, or in relation to,.the sequestration or winding-up of the Bank; or (ii) a resolution varying, altering or abrogating any of the rights, privileges, limitations or restrictions attached to the Preference Stock, unless at the date of such meeting the most recent half-yearly instalment of the Preference Dividend due to be paid prior to such meeting shall not have been paid in cash. On a show of hands every proprietor of Preference Stock who is entitled to vote and who (being an individual) is present in person or (being a corporation) is present by a representative shall have one vote. On a poll each proprietor of Preference Stock present in person or by proxy and entitled to vote shall have one vote for each complete £1 nominal of Preference Stock held by him.
22 4. Further Stock (a) Save as described in paragraph 1 (f) above and in this paragraph, the Bank shall not create or issue any further stock ranking as regards participation in the profits or assets of the Bank pari passu with or in priority to the Preference Stock. (b) The Bank may from time to time create and issue further preference stock ranking as regards participation in the profits and assets of the Bank pari passu with the Preference Stock but so that any such further preference stock may carry as regards participation in the profits and assets of the Bank only rights identical in all respects to those attaching to the Preference Stock or rights differing therefrom in one or more of the following respects, viz:— (i) the rate of dividend may differ: (ii) the dates for payment of dividend and/or the periods by reference to which dividend is payable may differ; provided that an issue of such further preference stock may only be made if the auditors of the Bank shall have certified in writing to the Bank that immediately following such issue (i) the aggregate nominal amount of the Preference Stock and all further preference stock then in issue and ranking pari passu therewith will not exceed an amount equal to 25 per cent. of the Adjusted Capital and Reserves (as hereinafter defined); and (ii) the average of the profits after taxation and before extraordinary items and dividends, on an annualised basis, for the three most recent financial years of the Bank to have ended prior to the date of such issue, as shown in the audited consolidated accounts relating thereto, shall exceed four and one half times the aggregate annual amount of the dividends (exclusive of any imputed tax credit available to proprietors) payable on the Preference Stock and any further preference stock of the Bank which is in issue immediately following such issue and ranks pari passu with the Preference Stock.
For the purposes of this sub-paragraph (b):— (A) "the Adjusted Capital and Reserves" means the aggregate from time to time of:— (I) the amount paid up or credited as paid up on the issued capital stock of the Bank; and (II) the amount standing to the credit of reserve accounts, including any share premium account and revaluation reserve and the credit balance on profit and loss account all as shown in the then latest audited consolidated balance sheet dealing with the state of affairs of the Bank and such of its subsidiaries as are dealt with in the audited consolidated accounts ("the Balance Sheet") but after (1 ) deducting from the aggregate any debit balance on profit and loss account subsisting at the date of the Balance Sheet except to the extent that deduction has already been made on that account, (2) deducting any amount referable to goodwill (arising other than on consolidation) or any other intangible asset (as that term falls to be interpreted for the purpose of the preparation of a balance sheet in accordance with Schedule 4 to the Companies Act 1985), (3) deducting an amount equal to any distribution (other than distributions to any member of the Group) out of the profits accrued prior to the date of the Balance Sheet, in so far as not provided for therein, (4) excluding any sums set aside for future taxation (including deferred taxation), (5) excluding any amounts attributable to outside interests in subsidiaries, (6) making such adjustments as may be appropriate to reflect any variation in the amount of the paid up capital stock or share premium account since the date of the Balance Sheet, and (7) making such adjustments as may be appropriate to reflect the issue of the further preference stock then to be issued; (B) the Bank may from time to time change the accounting conventions on which the audited consolidated accounts are based provided that any new convention adopted complies with the requirements of the Companies Act 1985; (C) "the Group" means the Bank and its subsidiaries (if any); and (D) a certificate or report by the auditors of the Bank as to the amount of the Adjusted Capital and Reserves or to the effect that a limit described in this sub-paragraph (b) has not been or will not be exceeded at any particular time or times shall be conclusive evidence of the amount or of that fact. (c) The creation or issue of further preference stock ranking pari passu with the Preference Stock as provided for under sub-paragraph (b) above (and the creation or issue of, or the variation, alteration or abrogation of or addition to the rights attaching to, any stock of the Bank ranking after the Preference
23 Stock as regards participation in the profits and assets of the Bank) shall be deemed not to be a variation, alteration or abrogation of the rights, privileges, limitations or restrictions attached to the Preference Stock. If any further preference stock of the Bank shall have been issued, then any subsequent variation, alteration or abrogation of or addition to the rights, privileges, limitations or restrictions attaching to any of such further preference stock shall be deemed not to be a variation, alteration or abrogation of the rights attaching to the Preference Stock provided that the rights attaching to such further preference stock thereafter shall be such that the creation and issue by the Bank of further preference stock carrying those rights would have been permitted under the provisions described in sub-paragraph (b) above.
5. Class Consent The Board shall not without the consent in writing of proprietors holding a majority of the issued Preference Stock or the sanction of a resolution passed at a meeting of proprietors holding Preference Stock, capitalise for appropriation to the proprietors of Ordinary Stock any part of the sums standing at credit of the profit and loss account and at credit of any of the reserve accounts of the Bank available for distribution if after such capitalisation the aggregate of the sums standing to the credit of the profit and loss account and to the credit of the Bank's reserve accounts available for distribution would be a sum less than ten times the aggregate amount of the annual preferential dividends (exclusive of any imputed tax credit available to such proprietors) payable on the issued Preference Stock and any other issued preference stock ranking pari passu therewith.
6. Transfer Subject to the other terms of the Regulations, the Preference Stock will be transferable in multiples of £1 nominal.
(B) Summary of revised Rights to be attached to the Ordinary Stock 1. Voting Subject to restrictions on voting arising under the Regulations in certain circumstances, on a show of hands every proprietor who (being an individual) is present in person or (being a corporation) is present by a representative shall have one vote and on a poll every proprietor who is present in person or by proxy (or in the case of a corporation, by representative) shall have one vote for every 25p of the nominal amount of Ordinary Stock held by him.
2. Dividend Provided that the first instalment of the dividend on Preference Stock payable in respect of a financial year has been or is to be paid in full, the Board has power to make payment of an interim dividend on the Ordinary Stock. Provided that the instalments of dividend payable on the Preference Stock in respect of a financial year have been or are to be paid in full, the Bank may in general meeting declare a dividend to be paid to the proprietors of Ordinary Stock in respect of that financial year but such dividend may not exceed the amount recommended by the Board.
3. Transfer Subject to the other terms of the Regulations, the Ordinary Stock is currently transferable in multiples of £1 nominal and will, provided the Regulations are amended as proposed, be transferable in multiples of 25p nominal with effect from 12th December, 1988.
(C) Summary of Rights to be common to both the Preference Stock and the Ordinary Stock 1. Dividends Any dividend which has remained unclaimed for twelve years from the date when it became due for payment may be forfeited by resolution Of the Board. 2. Variation of Rights The rights attached to stock of any class may (unless otherwise provided by the terms of issue) be varied or abrogated either with the consent in writing of proprietors holding a majority of the issued stock of that Class or with the sanction of an ordinary resolution passed at a separate meeting of the proprietors holding stock of that class. The quorum for the purposes of any such separate meeting shall be at least two proprietors holding stock of that class present in person or by proxy and entitled to vote at the meeting holding at least one-third of the issued stock of that class but so that, if at any adjourned meeting of such proprietors, a quorum as defined above is not present, those proprietors of the relevant class of stock who are present in person or by proxy shall be a quorum.
24 3. Transfers of Stock The instrument oí transfer oí any stock may be in any usual or common form or in any other form which the Board may approve. The Board may refuse to register a transfer:— (a) which is of partly paid stock, to a person of whom they do not approve; or (b) which is of stock on which the Bank has a lien; or (c) which is not in an appropriate form or is not lodged at the Head Office or other place appointed by the Board accompanied by the stock certificate in respect of the stock to be transferred and by such other evidence as the Board may require to prove the title of the transferor to make the transfer or which is in favour of an infant, pupil, minor or person of unsound mind; or (d) which is in favour of more than four transferees; or (e) which relates to more than one class of stock.
25 PART V Further Information
1. Incorporation and Objects Bank of Scotland, which is an unregistered company incorporated in Scotland by an Act of the Scottish Parliament in 1695, is an authorised institution within the meaning of the Banking Act 1987 and qualifies as a bank under the latter Act. The objects of the Bank, as set out in the Act of 1695, are the carrying on and managing of a public bank,
2. Capital Stock (a) The following table shows the authorised and the issued and fully paid capital stock of the Bank as at the date of this document:— Issued and Authorised Fully Paid £ £ Ordinary Stock (in units of £1 nominal) 204,325,760 187,632,090
The authorised but unissued Ordinary Stock is available only for future issues under the Stock Ownership Scheme, the Savings Scheme and the Executive Scheme. (b) Save for the issue of any Ordinary Stock pursuant to the exercise of any options after the date of this document, the authorised and the issued and fully paid capital stock of the Bank following the approval of the Resolutions and the allotment of Preference Stock under the Placing will be as follows:— Issued and Authorised Fully Paid £ £ Ordinary Stock (in units of 25p nominal) 204,325,760 187,632,090 Preference Stock (in units of £1 nominal) 125,000,000 100,000,000 329,325,760 287,632,090
(c) On 1st November, 1985, the Bank's issued Ordinary Stock was £123,833,794. Since then the following changes (adjusted where necessary for the 1 for 2 capitalisation issue in May 1988) in the Bank's issued Ordinary Stock have taken place, namely:— (i) Ordinary Stock issued under the Stock Ownership Scheme Amount of Price per £1 Date of issue Ordinary Stock Ordinary Stock £ 3rd June, 1986 566,707 272.33p 15th July, 1986 1,257 272.33p 2nd June, 1987 637,005 313.33p 31st May, 1988 664,050 340.47p (ii) Ordinary Stock issued in respect of exercised options (under the Savings Scheme unless otherwise stated) Amount of Price per £7 Date of issue Ordinary Stock Ordinary Stock £ 17th February, 1987 105 256.8p 17th March, 1987 986 256.8p 14th April, 1987 554 256.8p 21 st July, 1987 720 256.8p 15th September, 1987 1,519 256.8p 22nd September, 1987 804 256.8p 15th December, 1987 189 256.8p 16th February, 1988 90 256.8p 15th March, 1988 378 256.8p 15th March, 1988 56 259.2p 12th April, 1988 531 256-8p 21st June, 1988 1,608 256.8p 19th July, 1988 149 256.8p 16th August, 1988 777 256.8p 16th August, 1988 167 259.2p
26 Amount of Price per £1 Date of issue Ordinary Stock Ordinary Stock £ 16th August, 1988 10 378.0p 16th August, 1988 1,125 276.66p (under the Executive Scheme) 16th August, 1988 1,125 292.66p (under the Executive Scheme) 13th September, 1988 1,487 256.8p (iii) Ordinary Stock issued as a result of a 1 for 2 capitalisation issue to Proprietors on the register on 12th May, 1988. Amount of Date of Issue Ordinary Stock 31st May, 1988 £62,320,531 (d) As at 21st November, 1988 there were outstanding options to subscribe for a total of 3,715,326 Ordinary Stock granted under the Savings Scheme as follows:— Amount of Date of Grant Ordinary Stock Exercisable between Option Price per 5 year 7 year £1 Ordinary Stock £ £ 19th November, 1985 762,561 1,223,872 1991 and 1993 256.8p 21st October, 1986 223,067 328,403 1991 and 1993 259.2p 20th October, 1987 244,950 332,769 1992 and 1994 378.0p 18th October, 1988 262,453 337,251 1993 and 1995 310.5p As at 21st November, 1988 there were outstanding options to subscribe for a total of £1,611,250 Ordinary Stock granted under the Executive Scheme as follows:— Amount of Date of Grant Ordinary Stock Exercisable between Option Price per £ £1 Ordinary Stock 19th November, 1985 355,125 1988 and 1995 276.66p 21st October, 1986 396,750 1989 and 1996 292.66p 20th October, 1987 428,625 1990 and 1997 418.00p 18th October, 1988 430,750 1991 and 1998 347.00p No consideration is payable for options granted under the Savings Scheme or the Executive Scheme. (e) The Ordinary Stock is listed on The Stock Exchange and is in registered form. (f) The capital stock of the Bank may be increased by ordinary resolution of the Proprietors in general meeting. 3. Long Term Borrowings The outstanding long term borrowings of the Group at 1st November, 1988 were as follows:— Dated Loan Capital £ million 13 1/2pe r cent. Subordinated Unsecured Loan Stock 1995/1997 3.0 9 1/2pe r cent. Unsecured Loan Notes 1989/2010 5.3 Variable Rate Loan Notes 2010 7,5 US$ 50 million 103 /4 per cent. Guaranteed Notes 1990* 28.3 US$ 100 million Guaranteed Floating Rate Notes 1992* 56.6 US$ 50 million 14 1/4 per cent. Guaranteed Fixed/Floating Rate Notes 1996* 28.3 US$ 200 million Guaranteed Floating Rate Notes 1997* 113.2 Undated Loan Capital US$ 250 million Floating Rate Primary Capital Notes 141.5 Total Loan Capital 383.7
The above US$ currency loans have been translated into sterling at a rate of exchange of £1=US$1.767 which was the mid closing rate on 1st November, 1988. By means of interest swap arrangements with third parties, the fixed rates of interest due on the US$50 million 10 3/4 per cent. Guaranteed Notes and the US$ 50 million 14 1/4 per cent. Guaranteed Notes are effectively converted into commitments to pay interest at floating rates. The US$ 250 million Floating Rate Primary Capital Notes are subordinated to the claims of depositors, are perpetual and therefore have no final maturity date. All or some of the Floating Rate Primary Capital Notes may, however, be redeemed at the option of the Bank at par in or after November 1990. *These notes have been issued by Scotland International Finance B.V., a wholly-owned subsidiary of the Bank, and have been guaranteed unconditionally by the Bank on a subordinated basis.
27 4. Employee Stock Schemes (a) The Stock Ownership Scheme The Stock Ownership Scheme was established by Deed of Trust on 19th February, 1980 as an approved profit sharing scheme under the Finance Act 1978. It is operated in conjunction with the Bank of Scotland Profit Sharing Cash Scheme ("the Cash Scheme"), which was established in April 1981. In respect of each financial year, up to 4 per cent. of the Bank's consolidated profits before taxation and extraordinary items (after making certain adjustments regarding associated companies and income received with associated tax credits) may be set aside for distribution under the two profit sharing schemes. The precise profit sharing percentage, which is calculated by reference to the return on Average Proprietors' Funds, may not exceed the following percentages:— Profit Share percentage If return on Average Proprietors ' Funds is:— of allocable profits under 12 per cent. Nil 12 per cent. or over but less than l2 1/2pe r cent. 2.0 12 1/2 per cent. or over but less than 13 per cent. 2.2 13 per cent. or over but less than 13 1/2pe r cent. 2.4 13 1/2pe r cent. or over but less than 14 per cent. 2.6 14 per cent. or over but less than 14 1/2 per cent. 2.8 14 1/2pe r cent. or over but less than 15 percent. 3.0 15 per cent. or over but less than 15 1/2pe r cent. 3.2 15 1/2 per cent. or over but less than 16 per cent. 3.4 16 per cent. or over but less than 16 1/2pe r cent. 3.6 I6 1/2 per cent. or over but less than 17 per cent. 3.8 17 per cent. or over 4.0 Average Proprietors Funds, for the purpose of this calculation, correspond to the average of the amounts so described in the Consolidated Balance Sheet as at the commencement and the end of the relevant financial year. In any year in which new capital stock is issued (other than stock issued under the Stock Ownership Scheme) the amount of Average Proprietors' Funds is adjusted to reflect the actual period during which new stock has been in issue. Return on Average Proprietors' Funds is defined as the audited consolidated profits (adjusted to exclude any minority interests and before profit share, taxation and extraordinary items) expressed as a percentage of Average Proprietors' Funds. Once the amount to be set aside for the profit sharing schemes is known, the amount available is expressed as a percentage of the total eligible salaries of all eligible employees for the relevant financial year. The profit share of each eligible employee is the corresponding percentage of his or her eligible salary. The maximum staff profit share is further limited in that it may not exceed 10 per cent. of total eligible salaries. The principal further provisions of the Stock Ownership Scheme may be summarised as follows:— Eligibility Participation in the Stock Ownership Scheme in respect of a given financial year is in general open to every full-time director or employee of the Bank or of any of the subsidiary companies participating in the Stock Ownership Scheme and to all part-time employees who come within the categories specified by the Board, provided in the case of each such individual that he or she:— (i) held the relevant office or employment at the end of the relevant financial year, or retired during the course of that financial year; and (ii) had at the end of the financial year, or at the date of retirement during that year, completed not less than twelve months' continuous service. Eligible Salary An eligible employee's eligible salary in relation to a financial year is equal to his or her gross annual rate of basic salary at the end of that year (or at the date of his or her earlier retirement), subject where applicable to a proportionate reduction in respect of any part of the year which is included in the initial twelve-month qualifying period for eligibility under the Stock Ownership Scheme, or which falls after the eligible employee's retirement, as the case may be. Application of Profit Share Each eligible employee may decide what proportion of his or her profit share he or she wishes to receive in cash, under the Cash Scheme, and what proportion he or she wishes to be applied on his or her behalf under the Stock Ownership Scheme. He or she may determine that the whole of his or her profit share is to be applied under the Stock Ownership Scheme, subject to the maximum amount which may be applied in this way in any one year not exceeding £5,000. The proportion of his or her profit share which an eligible employee wishes to have applied on his or her behalf under the Stock Ownership Scheme is applied by the Trustees in subscribing for Ordinary Stock
28 to be held for the eligible employee under the Stock Ownership Scheme. Ordinary Stock may be held in whole stock units only and any balance of the profit share which may not be applied in purchasing units under the Stock Ownership Scheme is paid in cash under the Cash Scheme. Subscription Price The price at which the Trustees subscribe for Ordinary Stock under the Stock Ownership Scheme is determined by reference to the average of the middle-market quotations for the Bank's Ordinary Stock on The Stock Exchange for up to five consecutive dealing days immediately following (but not including) the day on which the Bank makes the preliminary announcement to The Stock Exchange of its consolidated results for the relevant financial year. The price is adjusted so that it is calculated on an ex-dividend basis, is also subject to appropriate adjustment in the case of a capitalisation or rights issue or a sub-division, consolidation or reduction of the Bank's Ordinary Stock, and cannot in any event be less than par. Overall Limits The amount of Ordinary Stock which may be subscribed for under the Stock Ownership Scheme in respect of any one financial year may not exceed 1 per cent. of the Ordinary Stock in issue on the day prior to the date of the allotment. Participation will, if necessary, be scaled down to avoid this limit being exceeded. When the Stock Ownership Scheme was established, the overall aggregate limit placed on the nominal amount of Ordinary Stock which could be issued under it, without requiring the further approval of proprietors of the Bank, was set at £2,750,000 (being equivalent approximately to 8.527 per cent. of the Ordinary Stock of the Bank in issue on 19th February, 1980). This figure was to be adjusted to take account of capitalisation or rights issues of Ordinary Stock and of any sub-division, consolidation or reduction of Ordinary Stock. The amount presently remaining available for future issues under the Stock Ownership Scheme is £9,255,290, which is subject to adjustment in the circumstances mentioned above. Retention and Release of Stock Each participant in the Stock Ownership Scheme is required to agree that the Ordinary Stock appropriated to him or her under the Stock Ownership Scheme may not, except in certain specified circumstances, be disposed of during the two year period of retention following immediately upon its appropriation, which is a statutory condition of Inland Revenue approval of the Stock Ownership Scheme. If Ordinary Stock held under the Stock Ownership Scheme is disposed of more than two years but less than five years after the date of its appropriation, a charge to tax arises. After five years, the Ordinary Stock is released from the Stock Ownership Scheme and transferred to the participant, who may dispose of it freely. Dividends in respect of Ordinary Stock held under the Stock Ownership Scheme are paid to the participant beneficially entitled to the Ordinary Stock. The participant is also entitled to the benefit of all other rights arising in respect of Ordinary Stock held under the Stock Ownership Scheme, although any additional Ordinary Stock arising under a capitalisation issue or rights issue in respect of the Ordinary Stock so held is retained under the Stock Ownership Scheme until the release date applicable to the Ordinary Stock in respect of which it was issued.
(b) The Savings Scheme The Savings Scheme was adopted by the Proprietors on 15th October, 1985 and approved by the Inland Revenue under the Finance Act 1980, as amended, on 30th October, 1985. The principal provisions of the Savings Scheme may be summarised as follows:— Eligibility The Savings Scheme is open in general to all United Kingdom resident employees or directors of the Bank and specified participating subsidiary companies who have completed not less than three years ' continuous service at the relevant Qualifying Date, provided they either work full-time or, if part-time, are included in an employee grading scheme and work at least 16 hours per week. "Qualifying Dates" are dates on which the annual or interim results of the Bank are announced to The Stock Exchange. The Board has discretion to nominate other employees and directors of the Bank and the specified participating subsidiaries for admission to the Savings Scheme. Grant of Options The Board may on the occasion of any Qualifying Date issue invitations to apply for options to all persons eligible on that Qualifying Date. Prior to inviting applications the Board may at its discretion determine the maximum amount of Ordinary Stock over which it may grant options pursuant to applications received in response to those invitations. If applications received exceed the maximum amount available then scaling down pro rata is applied. No payment is required for the grant of an option.
29 Subscription Price The subscription price of Ordinary Stock in respect of which an option is granted is determined by the Board but may not be less than the higher of:— (i) its nominal value; and (ii) an amount equal to 90 per cent. of the middle-market quotation of the existing Ordinary Stock of the Bank, as derived from The Stock Exchange Daily Official List, fôr the fourth Stock Exchange dealing day after the Qualifying Date by reference to which the invitation was made. Scheme Limits (i) The maximum amount of Ordinary Stock which may be issued pursuant to options granted under the Savings Scheme may not exceed £8,994,069 Ordinary Stock (4.793 per cent. of the present issued Ordinary Stock), subject to adjustment as set out in the paragraph entitled "Variation of Capital" below. (ii) The amount of Ordinary Stock over which options may be granted on any date, when added to the amount of Ordinary Stock issued or remaining issuable in respect of rights conferred in the previous ten years under the Savings Scheme and any other stock acquisition scheme for the employees and directors of the Bank and the other participating companies, may not exceed 10 per cent. of the amount of Ordinary Stock in issue immediately before that date. (iii) In addition to the limits referred to in sub-paragraphs (i) and (ii) above the amount of Ordinary Stock over which options may be granted in any one period of three calendar years when aggregated with the amount of Ordinary Stock issued during such period under the Stock Ownership Scheme and the aggregate amount of Ordinary Stock issued, or remaining issuable, pursuant to rights already granted during such period under the Savings Scheme and the Executive Scheme shall be limited so that in the case of any period of three calendar years commencing with 1986 or any later year it may not exceed 3 per cent, of the issued Ordinary Stock on the day preceding a date of grant. (iv) No option is to be granted after 15th October, 1995.
Individual Limits When a grant of options is to be made, each eligible person is given the opportunity to apply for an option over an amount of Ordinary Stock, the total subscription price of which does not exceed the amount (including the tax-free bonus) which would be repaid to such person under the approved Save-As-You-Earn ("SAYE ' ') contract to be entered into by him or her as a condition of the grant of the option. Contributions are payable under SAYE contracts for a period of five years. The aggregate maximum monthly contribution payable by a person under all SAYE contracts linked to the Savings Scheme may not exceed £ 100 or such greater sum (not exceeding £ 150) as may from time to time be permitted by the relevant legislation and approved by the Board. Exercise of Options In normal circumstances, an option may be exercised in whole or in part only during the period of six months starting with the bonus date previously specified by the participant. Early exercise of the option is permitted in certain circumstances specified in the scheme rules. If a participant ceases to be employed within the Group other than in these specified circumstances, his or her option ordinarily lapses. Early exercise will also be permitted if there is a change in control of the Bank. Alternatively, on such a change of control, the rules enable participants with the agreement of the acquiring company to convert their options into equivalent options over the shares of that company. Early exercise will also be permitted in the event of a reconstruction or amalgamation of the Bank, unless arrangements are made for the substitution of new options which are certified by the auditors to be, in their opinion, fair and reasonable and which are approved by the Inland Revenue. In any case where early exercise of an option is permitted, the option is exercisable only to the extent of the amount which is then repayable under the related SAYE contract (including any interest or bonus included in such repayment). Non- transferability Options granted under the Savings Scheme may not be transferred or assigned. Variation of Capital In the event of any capitalisation or rights issue, or any consolidation, subdivision or reduction of the capital stock of the Bank, the amount and nominal value of the Ordinary Stock which may be issued under the Savings Scheme and the amount, nominal value and subscription price of the Ordinary Stock subject to any option may be adjusted by the Board in such manner as it may determine to be appropriate subject to the Bank's auditors confirming in writing that such adjustment is, in their opinion, fair and reasonable.
30 Inland Revenue Approval The Board may make such amendments to the Savings Scheme as are necessary or desirable to retain the approval of the Inland Revenue. Amendments The Board may amend the Savings Scheme with the approval of the Inland Revenue. However, except for the purpose of retaining Inland Revenue approval, no amendment may be made:— (i) which would adversely affect the existing rights of participants, without the consent of participants holding options which, if fully exercised, would result in subscription for 75 per cent. of the Ordinary Stock subject to outstanding options; or (ii) which would alter certain provisions of the Rules to the advantage of eligible employees or participants, without the prior approval of the Proprietors in general meeting. (c) The Executive Scheme The Executive Scheme was adopted by the Proprietors on 15th October, 1985 and approved by the Inland Revenue under the Finance Act 1984 on 24th October, 1985. The principal provisions of the Executive Scheme may be summarised as follows:— Eligibility Employees or directors of the Bank and of specified participating subsidiary companies working at least 25 hours per week (or in the case of an employee who is not a director 20 hours per week) at the intended date of the grant of options, provided that they are not within 2 years of the date on which they are due to retire, are eligible to be selected as participants. Grant of Options The Board may in its absolute discretion invite selected individuals to apply for options. Invitations must be made within 21 days of a date on which the annual or interim results of the Bank are announced to The Stock Exchange but no earlier than the fourth Stock Exchange dealing day after such announcement. No payment is required for the grant of an option. Subscription Price The subscription price of Ordinary Stock in respect of which an option is granted is determined by the Board but may not be less than the higher of:— (i) its nominal value; and (ii) the average of the middle-market quotations of the existing Ordinary Stock, as derived from The Stock Exchange Daily Official List, for the three dealing days immediately preceding the date of the invitation to apply for an option. Scheme Limits (i) The amount of Ordinary Stock over which options may be granted on any date, when added to any other Ordinary Stock issued or over which options have been granted under the Executive Scheme and any other stock option scheme (not being savings-related) for employees and directors of companies participating in the Executive Scheme during the 10 year period from the adoption of the Executive Scheme, shall not exceed £9,000,000 Ordinary Stock (4.796 per cent. of the present issued Ordinary Stock) or such greater amount as may be approved by the Proprietors in general meeting not exceeding 5 per cent. of the issued Ordinary Stock at that date. (ii) The amount of Ordinary Stock over which options may be granted on any date, when added to the amount of Ordinary Stock issued or remaining issuable in respect of rights conferred in the previous ten years under the Executive Scheme and any other stock acquisition scheme for the employees and directors of companies participating in the Executive Scheme, shall not exceed 10 per cent. of the amount of Ordinary Stock in issue immediately before that date. (iii) In addition to the limits referred to in paragraphs (i) and (ii) above, the amount of Ordinary Stock over which options may be granted in any one period of three calendar years when aggregated with the amount of Ordinary Stock issued during such period under the Stock Ownership Scheme and the aggregate amount of stock issued, or remaining issuable, pursuant to rights already granted during such period under the Executive Scheme and the Savings Scheme shall be limited so that in the case of any period of three calendar years commencing with 1986 or any later year it shall not exceed 3 per cent. of the issued Ordinary Stock on the day preceding a date of grant. (iv) No option will be granted after 15th October, 1995. Individual Limits No options will be granted to a participant if thereafter he or she would hold options over Ordinary Stock (under the Executive Scheme or any other option scheme established by the Bank or any associated company and approved under the Income and Corporation Taxes Act 1988, not being a
31 savings-related stock option scheme) with an aggregate subscription price exceeding four times his or her taxable earnings (including any bonuses or commissions but excluding benefits in kind). Exercise of Options In normal circumstances an option may be exercised in whole or in part not earlier than three nor later than ten years after the date of grant. However, any participant who is a director or employee of any company participating in the Executive Scheme may only exercise any option within the period of 30 days immediately following upon the announcement of the Bank's Annual or Half-Yearly Results. Early exercise will be permitted in certain circumstances specified in the scheme rules. If a participant ceases to be a director or employee of any participating company in certain specified circumstances any option held by such participant shall lapse on the later of (i) 6 months after such cessation; and (ii) 6 months after the later of the third anniversary of the date of grant of the option and the third anniversary of the date (prior to such cessation) when the participant last made a tax-free exercise of an option obtained under the Executive Scheme or any other scheme approved under the Income and Corporation Taxes Act 1988, not being a savings-related share option scheme. Except in these circumstances, options will normally lapse if the participant ceases to be employed in the Group. Early exercise will also be permitted if there is a change in control of the Bank. Alternatively, on such a change of control, the rules enable participants with the agreement of the acquiring company to convert their options into equivalent options over the shares of that company. Early exercise will also be permitted in the event of a reconstruction or amalgamation of the Bank, unless arrangements are made for the substitution of new options which are certified by the auditors to be, in their opinion, fair and reasonable and which are approved by the Inland Revenue. Non-transferability Options granted under the Executive Scheme may not be transferred or assigned. Variation of Capital In the event of any capitalisation or rights issue, or any consolidation, subdivision or reduction of the capital stock of the Bank, the amount and nominal value of the Ordinary Stock which may be issued under the Executive Scheme and the amount, nominal value and subscription price of the Ordinary Stock subject to any option may be adjusted by the Board in such manner as it may determine to be appropriate subject to the auditors confirming in writing that such adjustment is, in their opinion, fair and reasonable, and subject to such adjustment being approved by the Inland Revenue. Inland Revenue Approval The Board may make such amendments to the Executive Scheme as are necessary or desirable to retain the approval of the Inland Revenue. Amendments The Board may amend the Executive Scheme with the approval of the Inland Revenue. However, except for the purpose of retaining Inland Revenue approval, no amendment may be made:— (i) which would adversely affect the existing rights of participants, without the consent of participants holding options which, if fully exercised, would result in subscription for 75 per cent. of the Ordinary Stock subject to outstanding options; or (ii) which would make the option terms more generous or which would alter certain provisions specified in the Rules to the advantage of eligible employees or participants, without prior approval of the Proprietors in general meeting.
(d) The Bank of Wales Executive Share Option Scheme The Bank of Wales Executive Share Option Scheme ("the Bank of Wales Scheme") was adopted by the shareholders of Bank of Wales PLC ("Bank of Wales") on 26th May, 1988, amended by the Board of Bank of Wales on 4th August, 1988, and approved by the Inland Revenue under the Income and Corporation Taxes Act 1988 on 3rd October, 1988. The principal provisions of the Bank of Wales Scheme may be summarised as follows:— Eligibility Employees or directors of Bank of Wales, and of specified participating subsidiary companies working at least 25 hours per week (or in the case of an employee who is not a director 20 hours per week) at the intended date of the grant of options, provided that they are not within 2 years of the date on which they are due to retire, are eligible to be selected as participants. Grant of Options The board of directors of Bank of Wales may in its absolute discretion invite selected individuals to
32 apply for options. Invitations must be made within 21 days of a date on which the annual or interim results of Bank of Wales are announced to The Stock Exchange but no earlier than the fourth Stock Exchange dealing day after such announcement. No payment will be required for the grant of an option. Subscription Price The subscription price of ordinary shares of 25p nominal each of Bank of Wales ("Ordinary Shares") in respect of which an option is granted is determined by the board of directors of Bank of Wales but may not be less than the higher of:— (i) its nominal value; and (ii) the average of the middle-market quotations of the existing Ordinary Shares, as derived from The Stock Exchange Daily Official List, for the three dealing days immediately preceding the date of the invitation to apply for an option. Scheme Limits (i) the amount of Ordinary Shares over which options may be granted on any date, when added to any other Ordinary Shares issued or over which options have been or may be granted under the Bank of Wales Scheme and any other share option scheme (not being savings-related) for employees and directors of companies participating in the Bank of Wales Scheme during the 10 year period from the adoption of the Bank of Wales Scheme, shall not exceed £400,000 nominal (5 per cent. of the present issued share capital) or such greater amount as may be approved by the shareholders in general meeting not exceeding 5 per cent. of the issued share capital at that date. (ii) In addition to the limit referred to in paragraph (i) above, the amount of Ordinary Shares over which options may be granted in any one period of three calendar years when aggregated with the amount of Ordinary Shares issued or remaining issuable, pursuant to rights already granted during such period under the Bank of Wales Scheme, shall be limited so that in the case of any period of three calendar years commencing with 1988 or any later year it shall not exceed 5 per cent. of the issued Ordinary Shares on the day preceding a date of grant. (iii) No option is to be granted after 26th May, 1998. individual Limits No options will be granted to a participant if thereafter he or she would hold options over Ordinary Shares (under the Bank of Wales Scheme or any other share option scheme established by Bank of Wales or any associated company and approved under the Income and Corporation Taxes Act 1988, not being a savings-related share option scheme) with an aggregate subscription price exceeding four times his or her taxable earnings (including any bonuses or commissions but excluding benefits in kind). Exercise of Options In normal circumstances an option may be exercised in whole or in part not earlier than three nor later than ten years after the date of grant. However, any participant who is a director or employee of any company participating in the Bank of Wales Scheme may only exercise any option within the period of 30 days immediately following upon the announcement of the Bank of Wales Annual or Half-Yearly Results. Early exercise will be permitted in certain circumstances specified in the scheme rules. If a participant ceases to be a director or employee of any participating company in certain specified circumstances any option held by such participant shall lapse on the later of (i) 6 months after such cessation; and (ii) 6 months after the later of the third anniversary of the date of grant of the option and the third anniversary of the date (prior to such cessation) when the participant last made a tax-free exercise of an option obtained under the Bank of Wales Scheme or any other scheme approved under the Income and Corporation Taxes Act 1988, not being a savings-related share option scheme. Except in these circumstances, options will normally lapse if the participant ceases to be employed by Bank of Wales or any of its specified participating subsidiary companies. Early exercise will also be permitted if there is a change in control of the Bank of Wales or in the event of a reconstruction or amalgamation of the Bank of Wales, unless arrangements are made for the substitution of new options which are certified by the auditors to be, in their opinion, fair and reasonable and which are approved by the Inland Revenue. Non-transferability Options granted under the Bank of Wales Scheme may not be transferred or assigned. Variation of Capital In the event of any capitalisation or rights issue, or any consolidation, subdivision or reduction of the issued share capital of Bank of Wales, the amount and nominal value of the Ordinary Shares which 33 may be issued under the Bank of Wales Scheme and the amount, nominal value and subscription price of the Ordinary Shares subject to any option may be adjusted by the board of directors of Bank of Wales in such manner as it may determine to be appropriate subject to the auditors confirming in writing that such adjustment is, in their opinion, fair and reasonable, and subject to such adjustment being approved by the Inland Revenue. inland Revenue Approval The board of directors of Bank of Wales may make such amendments to the Bank of Wales Scheme as are necessary or desirable to obtain or retain the approval of the Inland Revenue. Amendments The board of directors of Bank of Wales may amend the Bank of Wales Scheme with the approval of the Inland Revenue. However, except for the purpose of retaining Inland Revenue approval, no amendment may be made:— (i) which would adversely affect the existing rights of participants, without the consent of participants holding options which, if fully exercised, would result in subscription for 75 per cent. of the Ordinary Shares subject to outstanding options; or (ii) which would make the option terms more generous or which would alter certain provisions specified in the Rules to the advantage of eligible employees or participants, without prior approval of the shareholders in general meeting. (e) Outstanding Options to subscribe for Ordinary Shares under the Bank of Wales Scheme As at the date of this document there were outstanding options to subscribe for Ordinary Shares under the Bank of Wales Scheme as follows:— Number of Exercisable Option Price per Date of Grant Ordinary Shares between Ordinary Share 10th October, 1988 243,000 1991 and 1998 59p 5. Directors and Directors' Interests (a) The Directors of the Bank (who are non-executive unless a title or office is specified below) and their interests (including where applicable the interests of wives and children under 18) in the issued Ordinary Stock of the Bank are:— Not Beneficially Beneficially Owned Owned Name £ £ Sir Thomas Risk (Governor) 30,000 — Lord Balfour of Burleigh (Deputy Governor) 4,218 — D. B. Pattullo (Deputy Governor and Group Chief Executive) 16,647 9,750 A. S, Bell 300 — J. E. Boyd 675 — J. G. S. Gammell 15,570 226,950 T. 0. Hutchison 1,125 — Professor R. B. Jack 1,875 — N. Lessels 6,812 — D. J. MacLeod 6,187 — J. M. Menzies 4,500 — A. M. Petham Burn 37,000 1,500 A. M. Rankin 600 — R. P. Reid 1,500 — Sir Robert Smith 750 — M. F, Strachan 5,620 3,300 all of The Mound. Edinburgh EH1 1YZ. Mr. Pattullo has been granted options to acquire Ordinary Stock of the Bank, under the terms of the Executive Scheme, as follows:— Amount of Date of Grant Ordinary Stock Exercisable between Option Price per £ £1 Ordinary Stock 19th November, 1985 12,000 1988 and 1995 276.66p 21st October. 1986 13,500 1969 and 1996 292.66p 20th October. 1987 13,500 1990 and 1997 418.00p 18th October, 1988 15,000 1991 and 1998 347.00p Individual Directors of the Bank are directors of a number of other companies including listed companies. Messrs. A. S. Bell. J. G. S. Gammell, N. Lessels and D. B. Pattullo and Sir Robert Smith
34 are directors of The Standard Life Assurance Company which is the beneficial owner of 33.84 per cent. of the issued Ordinary Stock of the Bank. (b) There are no contracts of service between any Director of the Bank and the Bank or any of its subsidiaries other than contracts expiring or determinable by the employing company without payment of compensation, other than statutory compensation, within one year. (c) No Director of the Bank has or has had any interest in transactions which are or were unusual in their nature or conditions or significant to the business of the Bank and which were effected by the Bank during its current or immediately preceding financial year or were effected by the Bank during an earlier financial year and remain in any respect outstanding or unperformed. (d) The aggregate of the remuneration paid and benefits in kind granted to the Directors of the Bank by all the companies in the Group during the year ended 29th February, 1988 amounted to £436,000. The total emoluments of the Directors of the Bank will not be varied as a result of the Placing. (e) The total amount of loans granted outstanding to the then Directors of the Bank and their connected persons amounted to £1.6 million at 29th February, 1988. (f) British Linen Bank, which will be receiving a fee in connection with its advice in relation to the Placing and the preparation of the associated documentation, is a wholly-owned subsidiary of the Bank and Sir Thomas Risk and Messrs. J. E. Boyd, D. J. MacLeod and D. B. Pattullo, Directors of the Bank, are also directors of British Linen Bank.
6. Principal Subsidiary Companies The principal subsidiaries of the Bank are as follows:— issued Bank's Share Percentage Principal Name Capital Interest Activity £ million Bank of Wales PLC and 8.0 75.0 Banking subsidiaries including Forthright Finance Limited Personal Finance The British Linen Bank 18.0 100.0 Merchant Banking Limited and subsidiaries, including Capital Leasing Limited Finance Leasing Kellock Limited 3.0 95.0 Debt Factoring North West Securities Limited 21.4 100.0 Personal Finance & and subsidiaries, including Banking Services IBOS Finance Limited Finance Leasing The registered offices of the above principal subsidiaries are as follows:— Name Registered Office Bank of Wales PLC 114-116 St. Mary Street, Cardiff CF1 1XJ The British Linen Bank Limited PO Box No. 49, 4 Melville Street, Edinburgh EH3 7NS Kellock Limited Abbey Gardens, 4 Abbey Street, Reading, Berkshire RG13BA North West Securities Limited North West House, City Road, Chester CH1 3AN
7. Principal Trade Investments (a) The principal associated companies are as follows:— Bank's Issued Share Percentage Principal Name and Loan Capital Interest Activity Scottish Agricultural Ordinary £2,000,000 33.3 Agricultural Securities Corporation Loan £10,000,000 Lending p.l.c. Automobile Association Ordinary £3,000,000 50.0 Finance Financial Services Loan £4,500,000 Limited Renault Loan Limited Ordinary £5,000,000 50.0 Finance Countrywide Banking Ordinary NZ$33,000,000 40.0 Banking Corporation Limited
35 The registered offices of the above principal associated companies are as follows:— Name Registered Offices The Scottish Agricultural 48 Palmerston Place, Edinburgh EH12 5BR Securities Corporation p.l.c. Automobile Association Financial North West House, City Road, Chester CH1 3AN Services Limited Renault Loan Limited North West House, City Road, Chester CH1 3AN Countrywide Banking PO Box 5445, 280 Queen Street, Auckland 1, New Zealand Corporation Limited (b) The Bank also has a 3.1 per cent. interest in the ordinary share capital of Investors in Industry Group plc.
8. Principal Place of Business and Number of Staff (a) The Bank's principal place of business in the United Kingdom is at The Mound, Edinburgh EH1 1YZ. (b) The average number of staff (including part-time) of the Group for the three financial years ended 29th February, 1988 was as follows:— 1986 10,771 1987 12,074 1988 13,426
9. Principal Acquisitions and Investments since 28th February, 1985 The principal investments made by the Bank since 28th February, 1985 are as follows:— (a) The acquisition of 18,000,000 ordinary shares in Bank of Wales PLC for a consideration of approximately £12.6 million pursuant to an offer to the ordinary shareholders of Bank of Wales PLC dated 16th July, 1986 ("the Offer Document") and a subsequent placing by means of a Placing Letter between Bell Lawrie Limited and the Bank dated 1st May, 1987. (b) The acquisition of (i) 600,060 "A" ordinary shares and in addition (ii) £1.8 million 51/2 per cent. irredeemable unsecured loan stock in Kelscot Limited, the parent company of Kellock Limited, which was completed on 16th September, 1987 for an aggregate consideration of £7.5 million satisfied by the issue of that amount of Variable Rate Loan Notes 2010. As a result the Bank is the beneficial owner of all of the issued share capital of Kelscot Limited. The agreement for the acquisition was between Kellock Trust PLC, Uberior Investments Limited and the Bank and was dated 13th August, 1987. (c) The acquisition of 26,400,000 ordinary shares in Countrywide Banking Corporation Limited which was completed on 4th December, 1987 for a consideration of NZ$23.76 million in terms of a Deed of Implementation between the Bank and Countrywide Building Society (now Countrywide Banking Corporation Limited) dated 2nd September, 1987. (d) Subscription for 6,000,000 ordinary shares in Bank of Wales PLC for a consideration of £2.7 million pursuant to a 1 for 3 rights offer to ordinary shareholders of Bank of Wales PLC dated 3rd May, 1988.
10. Material Contracts The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the Bank in the two years preceding the date of this document and are or may be material:— (a) the Placing Agreement referred to in Part II of this document. (b) the Offer Document and the Placing Letter referred to in paragraph 9(a) above; (c) the Acquisition Agreement referred to in paragraph 9(b) above; (d) the Deed of Implementation referred to in paragraph 9(c) above; (e) Purchase Agreement dated 7th December, 1987 between Scotland International Finance B.V., the Bank, Buah Susu S.A. and Merrill Lynch International & Co. whereby the last two parties agreed to purchase at par the US$200,000,000 Guaranteed Floating Rate Notes due 1997 of Scotland International Finance B. V., such notes being guaranteed by the Bank; such Notes shall (insofar as not previously redeemed) be redeemed on the Interest Payment Date falling in December 1997 and may be redeemed on earlier Interest Payment Dates in certain specified circumstances; the guarantee obligations of the Bank are, on a sequestration or winding-up of the Bank, subordinated to the claims of ordinary creditors; interest on the Notes is payable at a rate which is in general 1/2 per cent. per annum
36 13. Documents for Inspection Copies of the following documents will be available for inspection during usual business hours on any weekday (Saturdays and public holidays excepted) at the Head Office of the Bank, The Mound, Edinburgh EH1 1YZ and at the Bank's London Chief Office, 38 Threadneedle Street, London EC2P 2EH, up to and including Friday, 9th December, 1988:— (a) Bank of Scotland Acts 1695 to 1970 and the Regulations; (b) the published accounts of the Group for the two financial years ended 28th February, 1987 and 29th February, 1988 and the unaudited interim report for the half-year ended 31st August, 1988; (c) Deed of Trust between the Bank and the Trustees constituting the Stock Ownership Scheme dated 19th February, 1980 and five deeds supplemental thereto; (d) Rules of the Savings Scheme; (e) Rules of the Executive Scheme; (f) Letter from Arthur Young dated 17th November, 1988 regarding adjustments to be made to the Savings and Executive Scheme options referred to in Part I, paragraph 5 above; (g) the material contracts referred to in paragraph 10 above; (h) July 1988 Basle Committee Paper, entitled "International Convergence of Capital Measurement and Capital Standards", referred to in Part I, paragraph 4 above; (i) Bank of England notice, dated October 1988, entitled "Implementation of the Basle Convergence Agreement in the United Kingdom", referred to in Part I, paragraph 4 above; (j) the following Trust Deeds amongst Scotland International Finance B.V., the Bank and Standard Life Trustee Company Limited:— (i) dated 23rd December, 1981, constituting US$100 million Floating Rate Notes redeemable not later than 1992; (ii) dated 1 st February, 1983, constituting US$50 million 103/4 per cent. Notes redeemable not later than 1990; (iii) dated 28th June, 1984, constituting US$50 million 14 1/4 per cent. Fixed/Floating Rate Notes redeemable not later than 1996; (k) the following Trust Deeds amongst Scotland International Finance B.V., the Bank and General Accident Executor and Trustee Company Limited:— (i) dated 14th November, 1985 constituting US$250 million Floating Rate Primary Capital Notes; (ii) dated 10th December, 1987, constituting US$200 million Floating Rate Notes redeemable not later than 1997; (I) Trust Deed between Bank of Wales PLC and Lloyds Bank plc dated 6th December, 1984, constituting £3 million 13 1/2pe r cent. Subordinated Unsecured Loan Stock 1995/97 of Bank of Wale's PLC; and (m) the letters of consent referred to in paragraph 12(f) above.
23rd November, 1988
39