BANK OF SCOTLAND. The Governor and Company of the

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1 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 91/4per 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 91/4 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, 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 91/4 per cent. Non-Cumulative Irredeemable Preference Stock at 102.5p per 1 nominal of Preference Stock

2 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

3 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

4 DEFINITIONS The following definitions apply throughout this document unless the context requires otherwise: "Bank of Scotland" or "the Bank" "Bank of Scotland Group" or "the Group" "Board" or "the Directors" "British Linen Bank" "the Executive Scheme" The Governor and Company of the Bank of Scotland. Bank of Scotland and its subsidiary companies. the Board of Directors of Bank of Scotland. The British Linen Bank Limited. 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 Placing" "the Placing Agreement" "Preference Stock" "the Regulations" "the Resolutions" "the Savings Scheme" "the Stock Ownership Scheme" "The Stock Exchange" 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 by Cazenove & Co. of Preference Stock as described in Part II of this document. the agreement described in Part II of this document. the 9 1 /4per 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 for the Management and Administration of Bank of Scotland. the Resolutions to be proposed at the Extraordinary General Meeting of the Proprietors of Bank of Scotland to be held on Friday, 9th December, the Bank of Scotland Savings-Related Stock Option Scheme. the Bank of Scotland Profit Sharing Stock Ownership Scheme. The International Stock Exchange of the United Kingdom and the Republic of Ireland Limited. 4

5 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, months ended 31st August, (unaudited) million million million million million million Profit before taxation Profit after taxation and minority interests but before extraordinary items Dividends , Retained Profit , pence per 1 Ordinary Stock Earnings (Note) Dividends (Note) million million million million million Stock in Issue Proprietors* Funds Total Assets Total Deposits 6,189 5,451 7,277 6,367 8,126 6,946 9,343 8,104 11,005 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, 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

6 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 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 million and the total of Proprietors' Funds amounted to 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, 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, The existing certificates for the Ordinary Stock will cease to be valid with effect from Monday, 12th December, 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

7 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 aliato (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, 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, It is estimated that the cash proceeds (net of expenses) accruing to the Bank from the Placing will amount to approximately 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, It is expected that dealings in the Preference Stock will commence on Monday, 12th December,

8 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, "Consolidated Profit and Loss Account 6 months ended 31st August, 1988 (unaudited) 6 months ended 31st August, 1987 Year ended 29th February, 1988 million million million Operating Profit after interest on subordinated loans Exceptional specific provision for sovereign debts (21.5) (25.3) Associated companies Provision for profit sharing (3.6) (2.3) (5.4) Profit before taxation Taxation (32.0) (21.0) (49.4) Profit after taxation Minority interests (0.3) (0.5) (0.7) Extraordinary items 0.9 Profit attributable to Proprietors Dividend (9.4) (8.2) (23.5) Retained Profit 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 ended 31st August, months ended 31st August, 1987 Year ended 29th February, 1988 million million million 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 on31st August, 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 The increase in the share of profit from associated companies reflects the first contribution from Countrywide Banking Corporation Limited in New Zealand, 8

9 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 ( 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, 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, 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, Notes million million million million million Operating Profit Exceptional specific provision for sovereign debt (25.3) Share of profits of associated companies Allocation to Staff Profit Sharing Schemes (2.5) (3.3) (3.9) (4.8) (5.4) Profit before taxation and extraordinary items Taxation 5.3 (9.0) (39.9) (41.1) (46.6) (49.4) Profit after taxation Attributable to minority interests (0.6) (0.3) 0.4 (0.4) (0.7) Profit before extraordinary items Extraordinary items Transfer from reserves 5.4 (56.3) 56.3 (0.5) (5.2) 0.9 Profit attributable to Proprietors Dividends 5.6 (9.2) (12.8) (17.3) (20.5) (23.5) Retained Profit 5.7, Earnings per 1 Ordinary Stock (Note) p 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 therightsissues in 1984 and

10 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: Notes million million million million million Capital Stock Reserves Proprietors' Funds Minority Interests Dated loan capital Undated loan capital Capital Resources ,036.4 Deferred Taxation Other Liabilities Current, deposit and other accounts , , , , ,623.4 Notes in circulation , Proposed dividend , , , , ,005.5 Cash and short-term funds , , , ,079.3 Cheques in course of collection Investments Advances to customers and other accounts , , , , ,240.9 Trade investments Property and equipment , , , , ,

11 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: million million million FREE CAPITAL Source of funds Depreciation Profit attributable to Proprietors after extraordinary items Adjustment for items not involving movement of funds: 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) Amortisation of investments Funds generated by operations Funds from other sources Disposals of property and equipment Disposals of subsidiary, associated company and trade investments (0.1) 10.2 Proceeds of loan capita) issues Stock issued under profit sharing scheme Net proceeds of rights issue Application of funds Purchases of property and equipment Purchases of associated companies and trade investments Reduction in loan capital Dividends Goodwill arising on acquisition of subsidiaries Other items Increase in Free Capital BANKING FUNDS Source of funds Increase in free capital (above) Deposits and other accounts Investments , , Increase in deferred tax , ,640.4 Application of funds Liquid assets Reduction in deferred tax Advances and other accounts , ,312.1 Details of acquisition of subsidiaries are stated in note , ,

12 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, 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

13 (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 million million Operating profit is stated after crediting: Income from investments: Profits on realisation of investments and after charging: listed unlisted Interest to depositors Interest on loan notes Bad and doubtful debts Contribution to Pension Schemes (Note 5.2) Depreciation Property rentals Directors' emoluments Auditors' remuneration 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, The actuary to the principal scheme is a partner in the firm of R. Watson & Sons, Consulting Actuaries. 5.3 Taxation U.K. Corporation Tax, at 35 percent. ( percent.) million 44.6 million 53.8 Deferred tax (6.1) Relief for overseas taxation (1.3) (1.4) Overseas taxation Share of associated companies' taxation The charge for taxation includes 7.5 million ( million) in respect of the notional tax on the release from regional development grants and leasing earnings equalisation provisions. 13

14 5.4 Extraordinary Items million million Gain on disposal of investments in associated companies 1.9 Other (0.5) 1.4 Corporation Tax (0.5) Profit Attributable to Proprietors Of the profit attributable to Proprietors, 65.2 million ( million) has been dealt with in the accounts of the Bank. 5.6 Dividends million million Interim dividend of 6.6p per 1 Ordinary Stock (1987 6p) Proposed final dividend of 12.3p per 1 Ordinary Stock ( p) Retained Profit million million The profit of the Group has been retained by: The Bank Subsidiary companies Associated companies 0.3 (0.5) Earnings per 1 Ordinary Stock Earnings per 1 Ordinary Stock are based upon Group profit, before extraordinary items, of 81.2 million ( million) and the weighted average Ordinary Stock of million ( million). 5.9 Emoluments of Directors and Employees Fees as Directors of the Bank Other emoluments of Directors, including additional remuneration and pension contributions in respect of Governor and Deputy Governor Pensions paid to former Directors Emoluments of. Governor excluding pension contribution Emoluments of highest paid Director excluding pension contribution Ex gratia payment to former Directors 60 Number of Directors whose emoluments, excluding pension contributions, were within the undernoted limits: Not more than 5, ,001 35, ,001 10, ,001 40, ,001 15, ,001 55, ,001 20, ,001 60, ,001 25, , , ,001 30, , ,000 1 The number of employees of the Group, other than Directors, whose emoluments, excluding pension contributions, exceeded 30,000 were: ,001 35, ,001 65, ,001 40, ,001 70, ,001 45, ,001 75, ,001 50, ,001 80, ,001 55, ,001 85, ,001 60, ,001 90, ,001 95,

15 5.10 Current, Deposit and other Accounts million million Sterling Retail Customers non-interest bearing interest bearing , ,5 3,319.4 Wholesale Customers corporate inter-bank 2, , , , ,865.6 Currency Customers interest bearing Inter-bank , ,243.7 Deposits 7, ,109.3 Other accounts , , Deferred Tax Provided for Potential Provided for Potential in Accounts Liability in Accounts Liability million million million million Capital allowances: on assets leased to customers on other assets Other timing differences (0.8) (0.1) (2.0) (1.2) A.C.T. recoverable (4.9) (4.9) (5.1) (5.1) 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 Dated Loan Capital million million million million The Bank Due to a subsidiary:* 91/2per cent. Unsecured Loan Notes 1989/2010 Variable Rate Loan Notes /4 per cent. Notes redeemable not later than 1990 (US $50 million) Floating Rate Notes redeemable not later than 1992 (US $100 million) 1414 percent. Fixed/Floating Rate Notes redeemable not later than 1996 (US $50 million) Floating Rate Notes redeemable not later than 1997 (US $200 million) Subsidiaries 131/2per cent. Subordinated Unsecured Loan Stock 1995/ * 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

16 5.13 Undated Loan Capital million million The Bank Floating Rate Primary Capital Notes (US $250 million) 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 Capital Stock million million Ordinary Stock: authorised issued: At 1st March, Issued under the Stock Ownership and Savings Schemes At 29th February, 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, 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 p on 357,750 of Ordinary Stock exercisable between 1989 and 1996 at p on 400,875 of Ordinary Stock exercisable between 1990 and 1997 at p on 430,875 of Ordinary Stock Note: These figures have been adjusted for the 1 for 2 capitalisation issue in May Reserves The Bank and its Associated Subsidiaries Companies Total million million million At 1st March, 1987 Reclassifications (0.6) Surplus on revaluation of properties Exchange movements 29.5 (0.4) Premium arising on issue of stock Net negative goodwill, being the excess of net tangible assets acquired over the purchase price paid for subsidiary and associated companies Part-disposal of interests in associated and subsidiary companies 0.6 (0.7) (0.1) Other movements Retained profit (0.2) 59.1 (0.5) (0.2) The reserves of the Group include share premium of the Bank 68.6 million ( million), and surplus on revaluation of fixed assets 60.7 million ( million) Cash and Short Term Funds million million Cash and balances with the Bank of England Money at call and short notice 1, ,234.2 U.K. Treasury Bills Bills discounted 119, Certificates of deposit 139, , ,079.3

17 5.17 Investments Book Value Valuation Book Value Valuation million million million million Listed Securities of, or guaranteed by, the British Government Others 7, Unlisted 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 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 million million Banking advances and other accounts 5, ,816.3 instalment credit and other financial agreements Assets leased to customers Advances to associated companies , ,240.9 The cost of assets acquired during the year for the purpose of letting under finance leases amounted to million ( million) 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 Specific General Total Specific General Total million million million million million million At 1st March, 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 (0.2) (0.2) New provisions less releases Augmentation Reallocation (0.2) 0.2 At 29th February, Revenue charge Recoveries of amounts previously written off (1.7) (1.7) (2.6) (2.6) Net charge to revenue 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 Advances to Directors and Connected Persons The number and the total amounts outstanding of loans to Directors and connected persons were 18 ( ) and 1.6 million ( million) respectively. 17

18 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 Book Value Valuation Book Value Valuation million million million million Associated companies listed unlisted Others unlisted Dividends received from unlisted associated companies amounted to 3.4 million ( million) Property and Equipment Property Equipment million million Cost or valuation at 1 st March, Exchange movements and reclassifications (0.3) (0.2) Acquisitions 1.1 Additions Surplus on revaluation 23.6 Disposals (2.2) (6.6) At 29th February, Consisting of: At valuation 31 st December, At cost Accumulated depreciation Net book value 29th February, Net book value 28th February, Cost or valuation of property comprises: Freehold Leaseholds fifty years and over unexpired 0.7 Leaseholds less than fifty years unexpired 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

19 5.23 Commitments 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 for which contracts have not been entered into 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 over five years Included in current, deposit and other accounts are net obligations under finance leases, payable as follows: within one year between two and five years Contingencies There are contingent liabilities in respect of: million million Acceptances Guarantees and other obligations 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) 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 Acquisition of Subsidiaries The statement of Source and Application of Funds incorporates the undernoted amounts relating to the acquisition of subsidiary companies: million million Property and equipment Goodwill Dated loan capital (3.0) Free capital 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 Consideration: Issue of loan notes Liquid assets

20 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 ( million) 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,

21 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 91/4per 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, 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

22 (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

23 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

24 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, (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

25 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

26 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, ,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, ,632,090 Preference Stock (in units of 1 nominal) 125,000, ,000, ,325, ,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 Date of issue Amount of Price per 1 Ordinary Stock Ordinary Stock 3rd June, , p 15th July, , p 2nd June, , p 31st May, , p (ii) Ordinary Stock issued in respect of exercised options (under the Savings Scheme unless otherwise stated) Date of issue Amount of Ordinary Stock Price per 7 Ordinary Stock 17th February, p 17th March, p 14th April, p 21 st July, p 15th September, , p 22nd September, p 15th December, p 16th February, p 15th March, p 15th March, p 12th April, p 21st June, , p 19th July, p 16th August, p 16th August, p 26

27 Amount of Price per 1 Date of issue Ordinary Stock Ordinary Stock 16th August, th August, , p p (under the Executive Scheme) 16th August, , p (under the Executive Scheme) 13th September, , p (iii) Ordinary Stock issued as a result of a 1 for 2 capitalisation issue to Proprietors on the register on 12th May, Amount of Date of Issue Ordinary Stock 31st May, ,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, ,561 1,223, and p 21st October, , , and p 20th October, , , and p 18th October, , , and p 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, , and p 21st October, , and p 20th October, , and p 18th October, , and p 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 131/2per cent. Subordinated Unsecured Loan Stock 1995/ /2per cent. Unsecured Loan Notes 1989/ Variable Rate Loan Notes ,5 US$ 50 million 10 3 /4 per cent. Guaranteed Notes 1990* 28.3 US$ 100 million Guaranteed Floating Rate Notes 1992* 56.6 US$ 50 million 141/4per cent. Guaranteed Fixed/Floating Rate Notes 1996* 28.3 US$ 200 million Guaranteed Floating Rate Notes 1997* Undated Loan Capital US$ 250 million Floating Rate Primary Capital Notes Total Loan Capital 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, By means of interest swap arrangements with third parties, the fixed rates of interest due on the US$50 million 103/4per cent. Guaranteed Notes and the US$ 50 million 141/4per 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 *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

28 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 It is operated in conjunction with the Bank of Scotland Profit Sharing Cash Scheme ("the Cash Scheme"), which was established in April 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 l21/2per cent /2 per cent. or over but less than 13 per cent per cent. or over but less than 131/2per cent /2per cent. or over but less than 14 per cent per cent. or over but less than141/2per cent /2per cent. or over but less than 15 percent per cent. or over but less than 151/2per cent /2per cent. or over but less than 16 per cent per cent. or over but less than161/2per cent. 3.6 I61/2per cent. or over but less than 17 per cent 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

29 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 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, 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

30 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, 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

31 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, 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, 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

32 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, 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

33 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, 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