Final Results

ACM European Enhanced Inc.Fund PLC 3 April 2001 ACM European Enhanced Income Fund Plc Final Results for Year Ended 31 December 2001 Enquiries: ACM Chris Wilson 020 7470 0100 Deutsche Bank AG Mark Bloomfield 020 7545 8000 The Company presents its report together with the audited financial statements for the period ended 31 December 2000. DIVIDENDS The following dividends were paid and proposed in the period: Ex Date Paid Date Amount £ £ Per Share 14-01-00 24-01-00 371,617 0.007454 24-03-00 03-04-00 1,121,732 0.022500 14-07-00 24-07-00 1,121,732 0.022500 13-10-00 23-10-00 1,121,732 0.022500 SIGNIFICANT EVENTS SINCE THE PERIOD END The Company paid a dividend on 29 January 2001 of £1,121,732, in aggregate, at a rate of £0.0225 per share. The shares went ex-dividend on the 15 January 2001. On 29 January 2001, 4,800,000 shares of the Company were issued at the net asset value per share, a price of £0.85. Fund Manager's review INVESTMENT OBJECTIVES AND POLICIES The Company's investment objective is to provide a high level of income through investment in European corporate and sovereign fixed-income securities. As a secondary objective, the Company seeks to provide capital growth, which is expected to arise principally through enhancement of the credit rating of specific securities bought by the Company but also through a general re-rating of European high-yield debt as that market matures. The Company may borrow an amount of up to 25% of its net asset value (NAV) at any time. INVESTMENT RESULTS The following table provides performance data for the Company since its inception date and over the six-month period ended 31 December 2000. For comparison, we have included a custom blended benchmark consisting of 50% Merrill Lynch European Currency High Yield Index hedged into euros and 50% Lehman Brothers European Corporate Bond Index. This is then leveraged by 25% and converted into British pounds. This benchmark represents an unmanaged measure of the markets and instruments in which the Company is able to invest. INVESTMENT RESULTS* Periods Ended 31 December 2000 Total Returns 6 Months Since Inception*** ACM European Enhanced Income Fund Plc -8.95% -7.74% Custom Benchmark** -5.15% -3.82% * The Company's investment results are total returns for the periods shown and are based on the net asset value (NAV) as of 31 December 2000. All fees and expenses related to the operation of the Company have been deducted, but no adjustment has been made for sales charges that may apply when shares are purchased or redeemed. Past performance is no guarantee of future results. ** The custom benchmark is comprised of equal 50% weightings of two indices, which are leveraged by 25% and converted into British pounds. The unmanaged Merrill Lynch European Currency High Yield Index (hedged into euros) is comprised of corporate bonds with maturities greater than or equal to one year. The Lehman Brothers European Corporate Bond Index is a measure of fixed-rate securities with at least one year remaining until maturity. An investor cannot invest directly in an index, and its results are not indicative of the performance for any particular investment, including the Company. *** Inception date is 2 November 1999. The Company underperformed its benchmark during periods ended 31 December 2000, primarily due to our overweighting of the European high-yield corporate bond sector. Contrary to our expectations, this sector underperformed as slowing global growth, high oil prices, equity market volatility and weakening sentiment toward the technology sector increased investors' risk aversion. In addition, our strategy of overweighting BBB-rated European corporates detracted from the Company's relative performance. Like high-yield corporates, BBB-rated securities appeared to be historically undervalued, but underperformed due to increased risk aversion. Despite its underperformance versus its benchmark, the Company remained on target to earn a 9% annual yield. MARKET REVIEW After a strong first half of the year, the global economy lost some momentum during the third and fourth quarters. Higher interest rates, lower stock prices and higher oil prices contributed to the global slowdown. Following the same pattern, European economic growth moderated in the second half of 2000. The European Central Bank (ECB) raised rates, and oil prices reached a high of more than $35 a barrel during the period. Inflation moved upward, but remained modest. The euro declined 1% against the U.S. dollar and 0.1% against the British pound during the six-month period ending 31 December 2000. Although the euro fell versus the dollar and the pound in the first four months of this period, the euro recovered sharply in the final two months, as economic growth improved in Europe relative to the U.S. and U.K. The European investment-grade corporate bond market, as measured by the Lehman Brothers European Credit Index, returned 4.52% during the period. In general, high-quality fixed-income securities benefited from slowing economic growth, falling interest rates and weakening equity markets. However, corporate bonds underperformed government securities because of decelerating corporate earnings, escalating defaults and tighter credit availability. Many industries were hampered by over capacity and wrestled with short-term pressures from higher energy costs and tight labor markets. Particularly hard hit were telecommunications (profit warnings and tightening credit standards), retailers (a slowing economy), auto parts (lackluster sales and weak earnings reports) and banks (an increase in bad loans). As measured by the Merrill Lynch European Currency High Yield Index hedged into euros, the European high-yield market returned a very weak -12.34% during the six-month period. Higher-quality debt outperformed lower-quality securities, as investors showed a preference for greater safety and liquidity. Buoyed by the rising price of oil, energy and utilities were among the best-performing high-yield sectors, while telecommunications, wireless and cable were among the worst performing. These sectors were hurt by investor concerns regarding their future financing needs and their ability to execute and achieve their business plans. INVESTMENT STRATEGY Our key investment strategies were an overweighting in European high-yield - particularly the communications sector - and in BBB-rated corporates. We had expected the European high-yield sector to outperform other fixed-income sectors after prices on high-yield debt had fallen to historic lows. Instead, slowing global growth, high oil prices, equity market volatility and weakening sentiment toward the technology sector during the period under review increased investors' risk aversion, which further hurt European high-yield performance. In hindsight, our overweighting was merely premature, as high yield began to outperform in the last weeks of 2000 and into 2001. Like high-yield corporates, BBB-rated securities appeared historically undervalued, in our analysis. INVESTMENT OUTLOOK Although we have lowered our euro-zone growth forecast for 2001, we currently believe that the global economy will benefit from easier monetary policies--and tax cuts--in Europe. Headline inflation remains the key to future interest-rate cuts by the ECB. ECB members continue to express concern that the spike in inflation during 2000 could translate into increased wage pressures. More recently, headline inflation pressures have receded. We currently believe that a continuing downward trend in inflation will allow the ECB to begin cutting rates by mid-2001. The corporate bond markets are in a state of flux. On the one hand, ongoing interest rate cuts by the U.S. Federal Reserve and likely future easings by the ECB and Bank of England are creating a supportive environment for corporate issuers. On the other hand, corporations are facing a difficult economic and operating environment in the first half of 2001. We plan to maintain the Company's duration within a close range of its benchmark. In addition, the Company remains 100% exposed to the euro. We believe that continued improvements in the relative strength of the euro-zone economies and a narrowing of interest-rate and growth differentials should support the euro versus the world's major currencies. Statement Of Total Return From 2 November 1999 to 31 December 2000 Revenue Capital Total Notes £ £ £ Net losses on 3 -0- (7,836,213) (7,836,213) investments during the period Other losses 4 -0- (873,024) (873,024) Gross income 5 5,978,112 -0- 5,978,112 Withholding tax 1(b) (16,868) -0- (16,868) Expenses 6 (900,319) (585,883) (1,486,202) Net income for the period 5,060,925 (585,883) 4,475,042 Return on ordinary 5,060,925 (9,295,120) (4,234,195) activities Distributions 8 (3,736,813) -0- (3,736,813) 1,324,112 (9,295,120) (7,971,008) Statement Of Movements In Shareholders' Funds From 2 November 1999 to 31 December 2000 2000 Notes £ £ Net assets at the start of the period -0- Amounts received on sale of Shares 49,854,743 Less: Issue costs 1(h) (762,167) Net proceeds on sale of Shares 49,092,576 Net decrease in Shareholders' Funds (7,971,008) from investment activities Net assets at the end of the period 41,121,568 Balance Sheet as at 31 December 2000 2000 Note £ £ Portfolio of investments 1 (e) 47,775,723 Net current assets Debtors 9 1,629,850 Cash and bank balances 10 2,097,712 3,727,562 Less Bank overdraft 10 (322,644) Creditors (less than one year) 11 (10,059,073) (10,381,717) Net current liabilites (6,654,155) Net assets 41,121,568 Shareholders' funds 41,121,568 Number of Shares in issue 49,854,743 Net Asset Value per Share £0.82 Cashflow Statement from 2 November 1999 to 31 December 2000 Note £ £ Net cash inflow from operating 12 2,657,081 activities Servicing of finance Interest paid (524,652) Net cash outflow from servicing of (524,652) finance Capital expenditure and financial investment Acquisition of investments (147,838,475) Sale of investments 92,226,539 Net cash outflow from capital (55,611,936) expenditure and financial investment Dividends paid (3,736,813) Financing Amounts received on sale of Shares 49,092,576 Increase in short term loans 9,898,812 Net cash inflow from financing 58,991,388 Increase in cash 1,775,068 Cash at 31 December 10 1,775,068 Notes To Financial Statements as at 31 December 2000 1. Accounting policies a) Basis of accounting The financial statements are prepared under the historical cost convention as modified by the inclusion of securities at valuation. The financial statements are prepared in sterling (£). b) Income recognition Income on interest bearing securities together with bank deposit interest are accounted for on an accruals basis. Income is shown gross of withholding tax. The Company accretes discounts and amortizes premiums as adjustments to interest income. c) Realised gains and losses on investments Realised gains and losses on sales of investments are calculated on the FIFO basis of the investment in local currency. The associated foreign exchange movement between the date of purchase and the date of sale on the sale of investments is included in other gains or losses in the Statement of Total Return. d) Unrealised gains and losses on investments Unrealised gains and losses on investments arising during the period are reflected as a component of net gains or losses on investments on the Statement of Total Return. e) Valuation of securities Assets listed or traded on a regulated market are valued at the close of business prices at the period end. If for specific assets the official close of business prices do not, in the opinion of the Administrator, reflect their fair value or if prices are unavailable, the value shall be calculated with care and in good faith by the Administrator, approved for that purpose by the Custodian, in consultation with the Investment Manager, on the basis of the probable realisation value for such assets as at the close of business as at the period end. f) Foreign exchange Foreign currency assets and liabilities, including investments, are translated into sterling at the exchange rate prevailing at the period end. The foreign exchange gain or loss based on the translation of the original cost of the investments, together with the gain or loss arising on the translation of other assets and liabilities, is included in other gains or losses in the Statement of Total Return. Foreign currency forward exchange contracts are revalued to a forward rate as at the close of business price at the period end. The resulting unrealised gain or loss between this rate and the contract rate is included in other gains or losses in the Statement of Total Return and is shown as a debtor or creditor in the Balance Sheet. g) Distribution policy Substantially all of the net income of the Company will be distributed as dividends. Dividends, will be declared and paid quarterly in or about January, April, July and October of each year. h) Issue costs Issue costs incurred directly in connection with the issue of the Shares of the Company are deducted from the consideration received in the Statement of Movements in Shareholders' Funds. 2. Taxation Under current law and practice, the Company qualifies as an investment undertaking as defined in Section 739B of the Taxes Consolidation Act, 1997, as amended. It is not chargeable to Irish tax on its income or capital gains. However, a tax can arise on the happening of a 'chargeable event' in the Company. A chargeable event includes any distribution payments to Shareholders or any encashment, redemption or transfer of shares. Any tax arising on a chargeable event is a liability of the Shareholder, albeit it is paid by the Company (although if the Company fails to deduct the tax or the correct amount of tax, it becomes ultimately a liability of the Company.) No tax will arise on a chargeable event in respect of a shareholder who is an Exempt Irish Investor (as defined in Section 739D of the Taxes Consolidation Act, 1997, as amended) or who is neither Irish resident nor ordinarily resident in Ireland at the time of the chargeable event provided that the necessary signed declaration is in place. 3. Net gains/(losses) on investments The net losses on investments during the period comprise: 2000 Note £ Proceeds from sales of investments during the period 92,226,539 Original cost of investments sold during the period (94,395,029) Net losses realised on investments sold during the 1(c) (2,168,490) period Net unrealised depreciation at the end of the period 1(d) (5,667,723) Net losses on investments during the period (7,836,213) 4. Other losses 2000 Net realised and unrealised foreign exchange losses (873,024) 5. Gross income 2000 Note £ Interest on securities 1(b) 5,932,742 Bank interest 1(b) 45,370 5,978,112 6. Expenses The Company intends to charge 25% of the investment management fees, operational expenses and borrowing expenses in each year to capital (such expenses amounted to £296,693 for the period ended 31 December 2000) and 75% of such fees and expenses to its income account. Thus, on realisation of Shares, Shareholders may not receive back the full amount invested. In addition, the set up expenses of the Company, other than those defined as issue costs, are written off as incurred. 2000 2000 2000 £ £ £ Revenue Capital Total Payable to the Administrator Administration fee (49,397) (16,397) (65,794) Payable to the Custodian Custody fee (20,337) (6,779) (27,116) Payable to the Investment Manager Investment management fee (313,205) (104,272) (417,477) Other expenses Audit fee (12,871) (4,285) (17,156) Loan interest (393,943) (130,709) (524,652) Legal fees (71,189) (23,713) (94,902) Directors' remuneration (23,066) (7,680) (30,746) Printing & postage (2,574) (857) (3,431) Set up expenses -0- (289,190) (289,190) Miscellaneous (13,737) (2,001) (15,738) (517,380) (458,435) (975,815) Total expenses (900,319) (585,883) (1,486,202) 7. Related party transactions Investment Manager The Investment Manager (Alliance Capital Management L.P.) is entitled to an investment management fee of 0.65% of the Company's average weekly Net Asset Value (having added back the amount borrowed at any time under the Company's borrowing facility with Deutsche Bank AG Frankfurt). The Investment Manager is entitled, subject to approval of the Directors, to receive from the Company an amount not to exceed $45,000 annually exclusive of VAT, if any, thereon, to cover certain ancillary expenses incurred by the Investment Manager in connection with its provision of investment management services to the Company. Such compensation amounted to £20,083 (or $30,000) for the period ended 31 December 2000. TheInvestment Management Agreement may be terminated by the Investment Manager or the Company giving not less than 90 days' notice in writing. Alliance Capital Management L.P. has entered into transactions in relation to a placing and/or a new issue in which a connected person with the Investment Manager has a material interest as a member of the underwriting syndicate. All the transactions executed on behalf of the Company were entered into in the ordinary course of business and/or normal commercial terms. The total aggregate value of the transactions of the Company affected through an affiliated firm, Donaldson, Lufkin & Jenerette Securities Corp., (whose affiliation ended on 2 November 2000) is £2,174,752. Such transactions represent 0.62% of total transactions. There was no commission paid for the period ended 31 December 2000, on securities transactions, utilizing the services of Donaldson, Lufkin & Jenerette Securities Corp. Effective 2 October 2000, Sanford C. Bernstein & Co. LLC became an affiliate of the Investment Manager. For the period from 2 October 2000 to 31 December 2000, no transactions were entered into with Sanford C. Bernstein & Co. LLC. Administrator Deutsche International Fund Services (Ireland) Limited has been appointed to act as Administrator pursuant to the Administration Agreement. For this service, the Company pays to the Administrator a fee, accrued daily based on the average weekly NAV and payable monthly in arrears at the following rates: Rate NAV 0.15% p.a. 0 - £30 Million 0.10% p.a. £30 Million - £60 Million 0.075% p.a. £60 Million + The Administrator receives a minimum fee of £4,500 per month. The Administrator is also entitled to an annual fee of £20 per Shareholder for registrar maintenance, £15 for each share registry entry, £10 for each dividend payment, £15 for each statement issued and £7 for each payment by telegraphic transfer. The Administrator is also reimbursed by the Company, as appropriate, for all reasonable costs, expenses and disbursements incurred by it in the performance of its duties for the Company. Custodian Deutsche International Custodial Services (Ireland) Limited has been appointed Custodian to the Company pursuant to the Custodian Agreement. For this service, the Company pays to the Custodian a fee of 0.025% per annum of the average weekly NAV of the Company. The Custodian's fee will be paid monthly in arrears and shall be accrued daily based on the average weekly NAV of the Company. In addition, the Custodian is entitled to a transaction charge of £20 per transaction. The Custodian is also reimbursed by the Company for all reasonable out-of-pocket expenses, including sub-custody fees and expenses which are charged at normal commerical rates. 8. Distributions Substantially all of the net income of the Company will be distributed as dividends. Dividends will be declared and paid quarterly in January, April, July and October of each year. The following dividends were paid during the period: Ex Date Paid Date Amount £ £ Per Share 14-01-00 24-01-00 371,617 0.007454 24-03-00 03-04-00 1,121,732 0.022500 14-07-00 24-07-00 1,121,732 0.022500 13-10-00 23-10-00 1,121,732 0.022500 9. Debtors 2000 £ Accrued income 1,553,712 Unrealised gain on forward contracts 76,138 1,629,850 10. Analysis of cash on the Balance Sheet 2000 £ Cash and bank balances 2,097,712 Bank overdraft (322,644) 1,775,068 All cash and bank balances are held with Deutsche Bank A.G., London. 11. Creditors All settlements are scheduled for less than one year. The loan of EUR15,750,000 is repayable to Deutsche Bank AG Frankfurt at a rate of 5.47%, with the repayment date being 1 March 2001. The facility will be open for a period of five years renewable on such terms as may be mutually agreed between the Company and such banks and financial institutions as may be parties to the Facility Agreement at such time, although the Facility is repayable earlier under certain circumstances. 2000 £ Accrued expenses (160,261) Loan (9,898,812) (10,059,073) 12. Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities 2000 £ Net income 4,475,042 Interest on loan 524,652 4,999,694 Foreign exchanges gains/(losses) (873,024) Increase in debtors (1,629,850) Increase in creditors 160,261 Net cash inflow from operating activities 2,657,081 13. Exchange rate The following sterling exchange rates as at 31 December 2000 have been used in this report: EUR 1.5911 DEM 3.1119 USD 1.4938 14. Soft commission arrangements There were no soft commission arrangements during the period under review. 15. Efficient Portfolio Management The Company enters into forward exchange currency contracts to hedge its exposure to changes in non-Euro currency exchange rates on its non-Euro portfolio holdings and to hedge certain firm purchase and sale commitments denominated in non-Euro currencies. A forward exchange currency contract is a commitment to purchase or sell a non-Euro currency at a future date at a negotiated forward rate. The gain or loss arising from the difference between the original contract and the closing of such contract is included in net gains or losses on investments. Fluctuations in the value of open forward exchange currency contracts are reflected for financial reporting purposes as a component of debtors. Risks may arise from the potential inability of a counter-party to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the Euro. At 31 December 2000, the Company had outstanding forward exchange currency contracts as follows: Contract £ Value on £ Current Unrealized Amount GBP Origination Value Appreciation Date GBP Forward Exchange Currency Buy Contract Euro, 5,678,525 3,493,991 3,570,128 76,138 settling 11/01/01 16. Financial Instruments The main risks and policies relating to financial instruments are set out below. The financial instruments held by the Company are set out in the portfolio of investments. The Company has no financial liabilities other than short term creditors. Market Risk Potential investors should note that the investments of the Company are subject to market fluctuations and other risks inherent in investing in securities in Europe and there can be no assurances that any appreciation in value will occur. The value of investments can go down as well as up and an investor may not get back the amount invested. Foreign Exchange Risk Changes in exchange rates between currencies may also cause the value of the investments to diminish. A substantial portion of the portfolio of investments and other net assets of the Company are denominated in currencies other than in sterling and are included below: Currency Exposure as at 31 December 2000 Investments Other Net Total Assets/liabilities Currency £ £ £ Euro 42,542,423 (6,245,292) 36,297,131 German Mark 2,400,967 30,989 2,431,956 Sterling 2,832,333 (439,902) 2,392,431 United States -0- 50 50 Dollars 47,775,723 (6,654,155) 41,121,568 Interest Rate Exposure The interest rate profile of the Company's financial assets (excluding short term debtors and creditors) at 31 December 2000 was: Total Fixed rate Floating rate Financial financial financial assets on assets assets which no interest is paid Currency £ £ £ £ Euro 42,542,423 41,911,727 628,496 2,200 German Mark 2,400,967 2,400,967 -0- -0- Sterling 2,832,333 2,832,333 -0- -0- 47,775,723 47,145,027 628,496 2,200 Fixed rate financial assets Fixed rate financial assets Currency Weighted average interest Weighted average period for rate which rate is fixed % Years Euro 8.94 9.72 German Mark 10.91 6.11 Sterling 10.05 8.47 17. Approval of annual report The annual audited report was approved by the Board of Directors on 2 April 2001.

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