Final Results

ABERFORTH GEARED CAPITAL & INCOME TRUST plc Audited final results for the year to 31 December 2008 The following is an extract from the Company's Annual Report and Accounts for the year to 31 December 2008. The Annual Report is expected to be posted to shareholders on 30 January 2009. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website at www.aberforth.co.uk. The Annual Report and Accounts will shortly be available for inspection at the FSA's document viewing facility at 25 The North Colonnade, Canary Wharf, London E14 5HS. FEATURES Total Returns Total Assets - 38.4% Net Asset Value of Capital Shares(1) - 84.1% Second Interim Dividend per Income Share 6.7p (unchanged) Total Dividend per Income Share 12.6p (+20%) (1) Capital Shares asset performance assumes Income Shares have a capital entitlement of 100p each. The investment objective of Aberforth Geared Capital & Income Trust plc is to provide Income Shareholders with a high level of income payable half yearly with the potential for income growth and to provide Capital Shareholders with geared capital growth. All data throughout this Annual Report is to, or as at, 31 December 2008 as applicable, unless otherwise stated. CHAIRMAN'S STATEMENT TO SHAREHOLDERS INTRODUCTION I reflected last year that 2007 had been a difficult year for the stockmarket performance of AGCiT's chosen asset class of small UK quoted companies. 2008 proved to be even more challenging with the severe stresses in the financial system generating a sharp slowdown in the global economy and equity markets throughout the world experiencing significant declines. The UK has been no exception. The FTSE All-Share Index, representative of larger UK companies, produced a negative total return of 29.9%, while the Hoare Govett Smaller Companies Index (Excluding Investment Companies), the index which represents AGCiT's chosen asset class, produced a negative total return of 40.8%. The Total Asset Total Return of AGCiT's portfolio was minus 38.4%. AGCiT is a geared investment company and has consistently employed debt close to the available limit of its facilities for the majority of the time. The effect of gearing for Capital Shareholders is to magnify the underlying portfolio returns. Consequently, in a period of such significant negative returns, the effect on the Net Asset Value of the Capital Shares has been material, reflected in a decline from 579.5p at 31 December 2007 to 91.9p at 31 December 2008, a fall of 84.1%. AGCiT's debt facilities are provided by Bank of Scotland and were agreed at the time of listing in 2001. I am pleased to inform Shareholders that AGCiT was fully compliant with its bank covenants at the most recent annual testing date of 31 December 2008. DIVIDENDS Your Board has declared a second interim dividend of 6.70p per Income Share, which is the same level declared for the equivalent dividend in 2007. When taken together with the first interim dividend of 5.90p, the total dividends for the year of 12.60p represent an increase over the payments in respect of 2007 of 20.0%. The second interim dividend will be paid on 27 February 2009 to Income Shareholders on the register at the close of business on 6 February 2009. The ex-dividend date will be 4 February 2009. The Company's earnings have been strong this year reflecting good underlying growth in dividends from portfolio investments, a particular feature of the first half of the year. Revenue has also been enhanced by the receipt of non recurring interest relating to VAT. Consequently, following the payment of the second interim dividend total revenue reserves will be approximately 6p per Income Share. It is unlikely that the level of income earned by the portfolio in 2009 will be as high as 2008. The near term outlook for corporate dividends in the UK is challenging and many financial commentators are of the view that, in aggregate, UK dividends will fall in 2009. In this context, the existence of revenue reserves gives your Board a degree of flexibility. VALUE ADDED TAX (VAT) Shareholders will recall from previous reports that VAT is no longer imposed on management fees and that your Board and Managers reached agreement for recovery of all VAT on management fees paid by the Company since 2001. As stated in the Half Yearly Report, a total of £743,000 has been received from the Managers, comprising £672,000 (accounted for in 2007) of VAT plus associated interest of £71,000 (accounted for in 2008). I believe that this represents a most satisfactory outcome for Shareholders. SUMMARY AND OUTLOOK 2008 has been a difficult year for UK smaller companies with a steep decline in the level of their share prices. If ever a reminder was needed that equity investment requires a long term perspective it has been given to us in this past year. Whilst it would be folly to suggest that there is no more pain to come, your Managers are of the view that, despite the current uncertainties, UK small company equities represent attractive value. Consequently, it is intended that, barring unforeseen circumstances, the structure and philosophy of the Company will be unaltered. The level of debt employed will continue to be close to its available limit for the majority of the time. As a result, Capital Shareholders will be best placed fully to participate in any stockmarket recovery while Income Shareholders will have the opportunity to earn a sufficient level of income to attempt to meet the objective of sustaining their level of dividends over the remaining three years of the Company's life. Alastair C Dempster Chairman 26 January 2009 MANAGERS' REPORT PERFORMANCE The total return of the HGSC (XIC) was negative 40.8% in 2008. This was the second worst result in nominal terms over the index's 54 year history. The FTSE All-Share performed less poorly but nevertheless experienced a negative total return of 29.9%. Against this background of extremely weak equity markets, AGCiT's total return at the total asset level was negative 38.4%. Recent declines have been so severe that through AGCiT's lifetime, just over seven years, the FTSE All-Share has registered a total return of just 12.6% cumulatively, a negative outcome in real terms. Small companies have performed more strongly, with a return of 18.6% over the same period, while AGCiT's total return at the total asset level has been 46.8%. INVESTMENT BACKGROUND Last year's horrible performance from equities was not confined to the UK. Stockmarkets around the world declined precipitously, with 50% drops not uncommon in both established and emerging markets. Nor was the weakness of these returns confined to equities: any asset class perceived as risky suffered in 2008 as the credit markets moved from crunch to crisis. By default, as it were, government debt has been the beneficiary of such extreme risk aversion: in the US, treasury bill yields have at times dropped below zero and ten year government bonds ended the year yielding close to 2%. And, of course, bank deposits were caught up in the maelstrom: at certain points through the year, equities certainly looked a less risky proposition. After the relative calm of the first half of the year, the credit crisis intensified in the third quarter. The process of de-leveraging, which started over a year ago when US subprime problems were exposed, gathered pace and was punctuated by large downward lurches. Of these, the most spectacular and deep- reaching was the failure of Lehman, which brought home the reality of counterparty risk. The reluctance or inability of the banks to make new loans was obvious in extended spreads between LIBOR and base rates. The consequent dearth of funding compromised what has become known as the `shadow-banking system', which is the complex of hedge funds, prime brokers, money market funds and securitisation markets that facilitated the build-up of debt in Western economies over recent years. The forced unwinding of leveraged investment positions has intensified the cycle of de-leveraging that is at the heart of the credit crisis. Meanwhile, real economic conditions deteriorated through the year, to the extent that recession is with us, whether officially as in the US and Germany or de facto as in the UK. Housing has been the principal transmission mechanism of credit market problems to the real economy. On both sides of the Atlantic, falling house prices, together with the difficulty in securing new mortgage financing, have tempered consumers' willingness to spend, while rampant commodity prices earlier in the year eroded disposable income. Additional pressure is coming from rising unemployment, with many large redundancy programmes making the headlines towards the end of the year as businesses, particularly those close to the troubled automotive industry, adjusted to the environment of weaker demand. Importantly, however, some relief was forthcoming later in the year from the remarkable reversal in fortune for commodities. Built on hopes that the emerging world could decouple from Western economies and continue to grow through internally generated demand, the prices of commodities, together with the share prices of the companies exploiting them, reached extravagant levels earlier in the year. These hopes were undermined as it became clear that the ructions in credit markets would feed back to affect real economic activity and that the `China phenomenon' depended substantially on Western, predominantly American, spending. The extraordinary journey of the oil price, which rose by almost 51% in the first half before plummeting to end 54% down for the year, is illustrative of the wider commodity arena. With the bursting of this latest bubble, the concern about stagflation that was so prevalent less than six months ago has vanished. Expectations for inflation have hurtled downwards: at the end of June, the difference between ten year conventional and index linked gilt yields - a proxy for anticipated inflation - was over 4%; by the end of the year, this had dropped to almost 1.5%. Similar movements are observable in the US and European bond markets. With the stagflationary chimaera exposed, financial markets are again confronted by deflation, with which they last flirted six years ago. The Bank of England's November inflation report introduced the prospect of CPI inflation dropping into negative territory at some time in 2009, having been running at over 5% in the third quarter, as the commodities boom works its way out of the system. So, the Chancellor may be receiving more letters in 2009, albeit rather different in tone. Relenting inflationary pressures have afforded monetary authorities, even the ECB, the excuse to cut interest rates, though, given the disinflationary nature of the de-leveraging process and of recession itself, such an excuse was hardly required. In December, the Fed took US rates to zero. Meanwhile, UK base rates ended the year at 2% and early in 2009 were cut again to 1.5%, their lowest level since the foundation of the Bank of England. It is worth remembering that at the half year futures markets were anticipating a rise by the year end from the then prevailing level of 5%. As interest rates approach zero, other remedial measures have been deployed by monetary and fiscal authorities. Echoing Ben Bernanke's speeches back in 2002, these unconventional steps include public ownership of swathes of the financial system and the extension of the range of collateral accepted by the central banks. Most significantly, as the year drew to a close the Fed confirmed that it had embraced `quantitative easing', which is the expansion of the central bank's balance sheet and thus of money supply. The newly printed money is to be used to purchase government debt together with mortgage and other consumer loans. These various actions have had some success in bringing interbank rates to levels more consistent with prevailing base rates, though they have yet to filter through the extended credit market. Such measures nevertheless risk encountering the phenomenon of `pushing on a string': deluged by cheap money, banks may opt to repair balance sheets rather than lend; similarly, consumers may prefer saving over spending. In order to deal with this conflict of individual rationality and the collective `good', governments are stepping up to play their part, with half an eye to the political capital apparently available from playing `my TARP's bigger than yours'. In the UK, a combination of partial or full nationalisations, tax cuts and a commitment to government spending programmes has seen projections for public sector borrowing rise to around 8% of GDP over the next year or so. The consequent probability of rising gilt issuance must exert an upwards drag on gilt yields, though this has so far been overwhelmed by the flight to safety. So far, the more tangible effects of the UK's difficult economic circumstances have been sterling's falls of 26% and 23% against the dollar and euro respectively over the course of 2008. INVESTMENT PERFORMANCE Against this background of stress in the real economy, dysfunctional credit markets and general risk aversion, the share prices of small companies struggled. As already noted, the HGSC (XIC)'s total return of negative 40.8% was the second worst since its inception in 1955. With the FTSE All-Share's 29.9% decline, large companies fared relatively well: a much greater exposure than their smaller peers to the high-profile casualties in banks and commodities was offset by the benefit of higher weightings in resilient parts of the market such as utilities and pharmaceutical companies. The subsequent paragraphs, together with the table, provide an analysis of AGCiT's relative performance. · The weakness within the small company universe was widespread: the HGSC (XIC) entered 2008 with 509 constituents; of those, only 68 managed a positive total return in 2008. In order to achieve this feat, it helped to be on the receiving end of M&A activity: 34 of these companies received bids, mostly in the first half of the year before credit markets seized up in the third quarter. AGCiT, which entered the year with 78 companies in its portfolio, had holdings in 12 of the 68 companies noted above. Benefiting from active management, it had holdings in another eight companies that achieved a positive total return. As described in greater detail below, AGCiT did well from M&A activity. PERFORMANCE ATTRIBUTION ANALYSIS 12 Months to 31 December 2008 Basis Points Stock Selection 17 Sector Selection 478 ----- Attributable to the portfolio of investments 495 Impact of mid price to bid price (29) Gearing/cash (4,084) Management fee (106) Interest cost (256) Movement in swap valuation (289) Other expenses (61) ----- Total Attribution based on bid prices (4,330) ----- Note: 100 basis points = 1%. Total Attribution is the difference between the capital only performance of the Capital Share net asset value and the HGSC (XIC) (i.e. Capital Share net asset value = -84.13%; HGSC (XIC) = - 40.83%; difference is -43.30% being -4,330 basis points). · Stock selection made a small positive contribution, though this was overshadowed by a strong showing from sector selection to produce AGCiT's overall out-performance at the portfolio level. Your Managers have not given up on their fundamentally driven, bottom-up approach to investment! Behind the contribution from sector selection was a large under-weight position in the commodities sectors (Industrial Metals, Mining and Oil & Gas), which performed extremely poorly. Within the small company universe, the constituents of these sectors are typically involved in exploration and development of resources and, consequently, seldom generate cash. This positioning was motivated less by an insight into the commodities prices themselves, which would have been a top-down consideration, than by the lofty valuations of the individual stocks on offer within these sectors. These stocks were frequently priced for an improbable rate of exploration success, on top of some potentially heroic assumptions about the underlying commodity price. So, this positioning is essentially driven by bottom-up considerations, although the attribution calculation drags most of the benefit into sector selection. · At the interim stage, the portfolio's bias to businesses with overseas profit streams was noted. This proved advantageous, but the benefit was substantially confined to the first half. Through the third quarter, the logic was undermined as it became clear that the implications of the credit crisis were not confined to the US and UK: the global economy, if not entering recession, is at least undergoing a meaningful deceleration. The problems facing the capital goods arena were highlighted by a spate of trading statements from companies around the world that warned of an extremely sharp contraction in demand in the fourth quarter. From the portfolio's point of view, the valuations of its capital goods holdings in many cases appear already to be discounting a sharp decline in profits. However, at the margin, your Managers have been tilting the portfolio back towards the domestic economy, adding to holdings in the Media, Household Goods, Construction & Materials and General Retailers sectors. Behind this shift, which has been undertaken tentatively, are the low valuations of businesses within these sectors together with a contention that these businesses will be among the first to see a pick-up in profitability, when the recovery comes. · In a diversified collection of small companies, it is inevitable that during recession some will see their profitability decline to a level that will challenge banking covenants. Reflecting this risk, the portfolio retains the bias to companies with strong balance sheets that was noted in the interim report. This defensive positioning, which is influenced by the parlous state of the credit markets, has been beneficial to AGCiT's performance and remains very much in place: 37% of the portfolio is invested in companies with net cash on their balance sheets; at the other extreme, 5% of the portfolio sits in companies whose net debt to EBITDA ratios exceed three times. Where net debt is a feature, the current emphasis is on the tenure of funding from the banks, rather than the interest rate margin payable over LIBOR. Margins have been rising extravagantly as banks seek to restore their own profitability: 100 basis points a year ago might now be 300 basis points. The alternative to accepting these new terms would be worse for shareholders. · As already noted, M&A activity was prevalent in the first half of the year but tailed off substantially in the second. The credit markets in effect closed during the third quarter and those companies with sufficiently strong balance sheets to contemplate acquisitions are often being discouraged from doing so for the time being by investors, your Managers included. Therefore, with rescue rights issues becoming common, de-equitisation, which describes the replacement of equity financing with debt financing and which has provided an underpinning to UK equity valuations in recent years, has run out of steam. AGCiT benefited from the completion of seven bids for its holdings over the year, though all those were completed before October's turmoil. Exit valuations were on the whole high, typically over 15x EV/EBIT, though trended downwards as the year wore on. Two holdings received bids in the second half; these had yet to complete at the year end. As an indication of the change in attitudes, eight companies within the portfolio received approaches through the year but subsequently saw the talks ended. · As described in the `Investment Outlook' section of this report, your Managers believe that dividend yield will make a crucial contribution to forthcoming equity returns. Despite last year's deteriorating trading environment and rising uncertainty, the dividend payments from AGCiT's investments were robust. Of AGCiT's 67 holdings at the year end, one had started paying a dividend only in 2008, rendering year on year comparisons meaningless. Of the remaining 66, eight cut their dividends, a further five held them unchanged and 53 reported increases. The median company within the 66 raised its dividend payment by 10%. This rate of growth is considerably ahead of that achieved by UK equities over the longer term and given present economic challenges is very unlikely to be sustained in 2009. It should be noted that the median figure does not necessarily reflect AGCiT's actual receipts, since the portfolio is actively managed and a specific rate of dividend growth is not targeted. INVESTMENT OUTLOOK Coming out of a year of wrenching declines in equity prices, it is difficult but necessary to take a step back in order to survey the opportunity base with a degree of objectivity. The easiest observation to make is that the de- leveraging process has to continue and that the present recession is, regrettably, an essential part of it. Trading conditions are therefore set to worsen in 2009, and it will take time for banks to repair their balance sheets and pass on the benefit of lower interest rates to the private sector. Despite the fillip of a weak sterling, profits will therefore fall. A decline of at least 40% is not out of the question, which would put the present downturn roughly on a par with that of the early 1990s. Gloomier scenarios are being painted by some commentators, with a replay of the 1930s depression sometimes cited. Given the extraordinary breadth and depth of remedial actions taken by monetary and fiscal authorities, your Managers suspect that a re-run of the deflationary 1930s is unlikely. However, this is not to say that policy errors have not been made: for example, a different sleuth of bears reckons that the extreme monetary easing is foisting a substantial inflation problem in the future, which would conveniently erode the present burden of debt and ask serious questions of currently very low government bond yields. At the very least, it would seem sensible to expect lower returns on equity in the future in an environment of scarcer debt funding, greater regulation and, eventually, higher taxes. Profits probably commenced their decline in the second half of 2008. It will in all likelihood not fit conveniently into one calendar year, so it makes sense to plan for a trough in profitability some time in 2010. Meetings with company management teams can throw little light on the timing of the inevitable recovery. Instead, the focus has to be on attempting to assess whether the businesses will be around to benefit from the upturn. Scope to cut costs and balance sheet resilience, preferably to the extent of having net cash, are therefore crucial. Also important is the concept of being `paid to wait'. Given the uncertain duration of the downturn, investors can be rewarded for their faith in a company through the consistent payment of a dividend. Dividend yields have accounted for the majority of the real return from UK equities of around 5.1% over the long term. High yields presently abound in the small company universe, with the average from the HGSC (XIC) being 5.9%, the first time that it has exceeded the yield on ten year gilts since 1974. Some of these yields will prove illusory as cuts to underlying dividends are made. It is a focus for your Managers at the current time to minimise the effects of such reductions, and to persuade company boards that cuts motivated by fashion, or by the argument that the market expects double-digit yields to be cut, are unacceptable. The historic yield from AGCiT's portfolio at the year end was 6.1%. In planning for 2009, your Managers have anticipated a number of dividend cuts. Importantly, the portfolio is not reliant on a small number of particularly high yielding companies to generate its income: double-digit yielders on a forecast basis account for 4% of the portfolio, while 42% is invested in companies with forecast yields between 2.5% and 5%. With the top ten income contributors accounting for less than 32% of total forecast income for 2009, your Managers are hopeful that AGCiT's dividend experience may prove relatively resilient in what will be a very difficult year for dividends. Equity market valuations are presently very low against government bonds and against their own history. The FTSE All-Share ended 2008 valued on a yield of 4.5% and a PE of 7.3x. Valuations in the small company world are more extreme. At 6.4x, the historic PE ratio is back to the levels of the early 1980s. The average PE over the last 30 years, a period covering two other recessions, has been almost 13x. So, profits could halve and equities would still look reasonably valued against their history. The other dimension to take into account is recovery: the stockmarket will anticipate a pick-up before profits themselves start to grow. Thus it can take stocks to high multiples of depressed historic earnings. A relevant example is 1993, when the HGSC (XIC) rose by almost 42%, moving the historic PE up to over 18x, despite earnings continuing to fall in that year. 31 December 31 December 2008 2007 Characteristics AGCiT HGSC AGCiT HGSC (XIC) (XIC) Number of Companies 67 495 78 509 Weighted Average Market £249m £442m £423m £577m Capitalisation Price Earnings Ratio 6.4x 6.4x 13.2x 11.7x (Historic) Net Dividend Yield 6.1% 5.9% 3.0% 2.9% (Historic) Dividend Cover (Historic) 2.6x 2.6x 2.5x 2.9x As the table above demonstrates, the portfolio offers similar value to the HGSC (XIC) on a PE and dividend yield basis. Perhaps the most notable aspect of its valuation is that it could quite easily have been brought down further had your Managers not chosen to eschew a grouping of often sizeable companies within the HGSC (XIC) that trade on exceptionally low multiples, driven by high levels of debt and substantial defined benefit pension schemes. At some point it will be appropriate to embrace these highly geared businesses, but with the trading environment still under pressure it seems appropriate not to pursue both operational and financial gearing. Another indication of value within the portfolio comes from its average EV/EBIT multiple, a measure used in the context of corporate activity. At 5.4x, it is at a significant discount to the multiples of around 15x at which deals were being done earlier in the year. To be fair such levels of valuation may be considered an aberration, born of an M&A culture that had become too reliant on cheap and freely available debt. Nevertheless, the portfolio stands at a significant discount to the longer run average of around 10x that has been more typical over AGCiT's lifetime. So, when the M&A market opens again, your Managers are confident that AGCiT can benefit. To state the obvious, to a value investor at least, the probability of securing a good return from equities over the medium term is increased when starting from depressed valuations. Your Managers are thus optimistic on the basis of prevailing valuations but acknowledge that stockmarkets can overshoot in either direction. Therefore, the duration of the present bear market is tough to call. That said, sentiment can turn remarkably swiftly once there is the whiff of recovery in the air. Timing that change in sentiment to the month or even the quarter requires a large dose of luck. Accordingly, given the characteristics of the small company universe, it is necessary to start positioning the portfolio early. This pragmatism was an important motivation in the recent cautious reorientation of the portfolio to domestic cyclical sectors. There is, however, a balance to be struck. Strong balance sheets and a conservatively structured income profile afford AGCiT resilience, which allows it to look beyond the short term and be in a position to benefit from the upturn when it comes. Aberforth Partners LLP Managers 26 January 2009 DIRECTORS' RESPONSIBILITY STATEMENT Each of the Directors confirm to the best of their knowledge that: (a) the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and (b) the Annual Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces. On behalf of the Board Alastair C Dempster Chairman 26 January 2009 INVESTMENT PORTFOLIO Thirty Largest Investments as at 31 December 2008 Valua % of tion No Company £'000 Total Business Activity 1 Greggs 4,272 6.0 Retailer of sandwiches, savouries and other bakery products 2 Spirax-Sarco 3,193 4.5 Engineering Engineering 3 Hampson 2,989 4.2 Aerospace and automotive Industries 4 BSS Group 2,649 3.7 Distribution of plumbing supplies & tools 5 Brown (N.) 2,373 3.3 Home shopping catalogue retailer Group 6 Robert Wiseman 2,325 3.3 Processing and distribution of Dairies milk 7 e2v 2,127 3.0 Manufacture of electronic technologies components and sub-systems 8 RPC Group 2,022 2.9 Manufacture of rigid plastic packaging 9 Beazley Group 2,014 2.8 Insurance 10 Halfords Group 1,895 2.7 Retailer of auto, leisure and cycling products Top Ten 25,859 36.4 Investments 11 Domino 1,772 2.5 Manufacture of industrial Printing printing equipment Sciences 12 Delta 1,735 2.4 Galvanising, manganese products and industrial supplies 13 Spectris 1,614 2.3 Manufacture of precision instrumentation and controls 14 Headlam Group 1,482 2.1 Distribution of floorcoverings 15 Interserve 1,477 2.1 Facilities, project & equipment services 16 Wilmington 1,439 2.0 B2B publishing and training Group 17 Phoenix IT 1,335 1.9 IT services Group 18 Brewin Dolphin 1,320 1.9 Stockbroker and private client Group fund manager 19 RM 1,272 1.8 IT services for schools 20 Keller Group 1,216 1.7 Ground and foundation engineer Top Twenty 40,521 57.1 Investments 21 Bellway 1,191 1.7 Housebuilder 22 Evolution 1,187 1.7 Stockbroker and private client Group fund manager 23 UMECO 1,163 1.6 Advance composite materials and supply chain management 24 Dunelm Group 1,160 1.6 Homewares retailer 25 Holidaybreak 1,138 1.6 Holiday, travel and educational services 26 Shanks Group 1,095 1.5 Waste management 27 Collins 1,056 1.5 Stockbroker and private client Stewart fund manager 28 Communisis 1,028 1.5 Marketing communication services 29 Wincanton 999 1.4 Logistics 30 Hansard Global 987 1.4 Life assurance Top Thirty 51,525 72.6 Investments Other 19,405 27.4 Investments (37) Total 70,930 100.0 Investments Net (58,174) Liabilities Total Net 12,756 Assets The Income Statement, Balance Sheet, Reconciliation of Movements in Shareholders' Funds, and Summary Cash Flow Statement are set out below: - INCOME STATEMENT (Audited) For the year ended 31 December 2008 2008 2007 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Realised (losses)/gains on - (2,378) (2,378) - 19,654 19,654 sales Unrealised losses - (45,324) (45,324) - (32,197)(32,197) ------ ------- ------- ------ ------- ------- Losses on investments - (47,702) (47,702) - (12,543) (12,543) Dividend income 4,482 848 5,330 3,925 176 4,101 Interest income 89 - 89 3 - 3 Other income 12 - 12 - - - Investment management fee (276) (645) (921) (163) (382) (545) Other expenses (268) (373) (641) (235) (636) (871) ------ ------- ------- ------ ------- ------- Net return before finance 4,039 (47,872) (43,833) 3,530 (13,385) (9,855) costs and taxation Finance costs: interest (668) (3,317) (3,985) (695) (1,848) (2,543) ------ ------- ------- ------ ------- ------- 3,371 (51,189) (47,818) 2,835 (15,233) (12,398) Finance costs on Income (3,087) - (3,087) (2,377) - (2,377) Shares ------ ------- ------- ------ ------- ------- Return on ordinary 284 (51,189) (50,905) 458 (15,233) (14,775) activities before tax Tax on ordinary activities (2) - (2) - - - ------ ------- ------- ------ ------- ------- Return attributable to 282 (51,189) (50,907) 458 (15,233) (14,775) shareholders ===== ===== ===== ===== ====== ====== Returns per share Income Share 13.75p - 13.75p 11.57p - 11.57p ------ ------- ------- ------ ------- ------- Capital Share - (487.51p)(487.51p) - (145.08p) (145.08p) ------ ------- ------- ------ ------- ------- NOTES 1.The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period. A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement. 2.The calculations of revenue return per Income Share are based on net revenue on ordinary activities before distributions of £3.369 million (2007: £2.835 million) and on 24.5 million Income Shares (2007: 24.5 million). The calculations of capital return per Capital Share are based on net capital losses of £51.189 million (2007: losses of £15.233 million) and on 10.5 million Capital Shares (2007: 10.5 million). 3.The 2007 investment management fee expense incorporates the expected repayment of all VAT paid on investment management fees since the firm's inception, as set out in the Chairman's Statement. This repayment amounted to £672,000 of which £202,000 was credited to revenue and £470,000 was credited to capital. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS (Audited) For the year ended 31 December 2008 Share Capital Special Capital Revenue capital redemption reserve reserve revenue Total reserve £'000 £'000 £'000 £'000 £'000 £'000 Equity 105 50 9,674 51,014 2,820 63,663 shareholders' funds as at 31 December 2007 Return - - - (51,189) 282 (50,907) attributable to equity shareholders ----- ----- ------ ------ ----- ------ Equity shareholders' 105 50 9,674 (175) 3,102 12,756 funds as at 31 December 2008 ====== ====== ====== ====== ===== ====== For the year ended 31 December 2007 Share Capital Special Capital Revenue capital redemption reserve reserve revenue Total reserve £'000 £'000 £'000 £'000 £'000 £'000 Equity shareholders' 105 50 9,674 66,247 2,362 78,438 funds as at 31 December 2006 Return attributable to - - - (15,233) 458 (14,775) equity shareholders ----- ----- ------ ------ ----- ------ Equity shareholders' 105 50 9,674 51,014 2,820 63,663 funds as at 31 December 2007 ====== ====== ====== ====== ===== ====== BALANCE SHEET (Audited) As at 31 December 2008 31 31 December December 2008 2007 £'000 £'000 Fixed Assets: Investments Investments at fair value through 70,930 119,420 profit or loss ------- ------- Current assets Other debtors 448 1,029 ------- ------- 448 1,029 ------- ------- Creditors (amounts falling due within one year) Bank overdraft (136) - Amounts due to brokers (16) (61) Other creditors (87) (63) ------- ------- (239) (124) ------- ------- Net current assets 209 905 ------- ------- Total assets less current 71,139 120,325 liabilities Creditors (amounts falling due (58,383) (56,662) after more than one year) ------- ------- Total net assets 12,756 63,663 ====== ====== Capital and reserves: Equity interests Called up share capital: Capital shares 105 105 Reserves: Capital redemption reserve 50 50 Special reserve 9,674 9,674 Capital reserve (175) 51,014 Revenue reserve 3,102 2,820 ------- ------- Total equity 12,756 63,663 ====== ====== Net Asset Values: - per Capital Share 120.16p 620.27p - per Income Share (Income 100.57p 94.02p Shares are classified as financial liabilities) NOTE The Company had 24.5 million Income Shares and 10.5 million Capital Shares in issue as at 31 December 2008 and 31 December 2007. SUMMARY CASH FLOW STATEMENT (Audited) For the year ended 31 December 2008 2008 2007 £'000 £'000 CASH FLOW STATEMENT Net cash inflow from operating 4,850 2,603 activities ------- ------- Taxation paid Overseas tax suffered (2) - Returns on investment and servicing of finance Dividends paid (3,087) (2,377) Interest and other finance costs (2,222) (2,324) paid ------- ------- Net cash outflow from returns on investment and servicing of (5,309) (4,701) finance ------- ------- Capital expenditure and financial investments Payments to acquire investments (31,381) (48,417) Receipts from sales of 31,751 48,966 investments ------- ------- Net cash inflow from capital 370 549 expenditure and financial investments ------- ------- Net cash outflow before (91) (1,549) financing activities ------- ------- Financing activities Loans (repaid)/drawn down (45) 1,548 ------- ------- Net cash (outflow)/ inflow from (45) 1,548 financing activities ------- ------- Change in cash during the period (136) (1) ====== ====== Reconciliation of change in cash to movement in net debt Change in cash during the period (136) (1) Loans repaid/(drawn down) 45 (1,548) Change in fair valuation of (1,757) (225) interest rate swap Amortisation of issue costs (9) (9) during the period ------- ------- Change in net debt (1,857) (1,783) Opening net debt (56,662) (54,879) ------- ------- Closing net debt (58,519) (56,662) ====== ====== NOTES TO THE FINANCIAL STATEMENTS 1. ACCOUNTING STANDARDS The financial statements have been prepared in accordance with UK generally accepted accounting practice (UK GAAP) and the AIC's Statement of Recommended Practice ``Financial Statements of Investment Trust Companies and Venture Capital Trusts'' issued in January 2009. The total column of the Income Statement is the profit and loss account of the Company. All revenue and capital items in the Income Statement are derived from continuing operations. No operations were acquired or discontinued in the period. The same accounting policies used for the year to 31 December 2007 have been applied for the year to 31 December 2008. 2. INVESTMENT MANAGEMENT FEE 2008 2007 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Investment management 276 645 921 323 754 1,077 fee VAT paid thereon - - - 42 98 140 VAT recovered - - - (202) (470) (672) ------ ------ ------ ------- ------ ------ 276 645 921 163 382 545 ====== ====== ====== ======= ====== ====== The VAT recoverable recognised during the year to 31 December 2007 represents the repayment of all VAT paid on investment management fees since the company's inception (including all VAT previously offset by the managers). 3. FINANCE COSTS 2008 2007 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Interest on base rate 84 197 281 101 237 338 loans/overdraft Interest on LIBOR loans 584 1,363 1,947 594 1,386 1,980 Change in fair - 1,757 1,757 - 225 225 valuation of interest rate swap ------ ------ ------ ------- ------ ------ Total interest costs 668 3,317 3,985 695 1,848 2,543 ====== ====== ====== ======= ====== ====== 2008 2007 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Second interim dividend 1,642 - 1,642 1,446 - 1,446 for the year ended 31 December 2007 at 6.7p (2007: 5.9p) First interim dividend 1,445 - 1,445 931 - 931 for the year ended 31 December 2008 at 5.9p (2007: 3.8p) ------ ------ ------ ------- ------ ------ Total distribution 3,087 - 3,087 2,377 - 2,377 costs ====== ====== ====== ======= ====== ====== A second interim dividend for the year to 31 December 2008 of 6.7p will be paid on 27 February 2009 to Income Shareholders on the register on 6 February 2009. 4. RETURNS PER SHARE 2008 2007 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Return on ordinary 282 (51,189) (50,907) 458 (15,235) (14,775) activities Add back dividends on 3,087 - 3,087 2,377 - 2,377 Income Shares ------ ------ ------ ------- ------ ------ Earnings attributable 3,369 (51,189) (47,820) 2,835 (15,233) (12,398) to shareholders ====== ====== ====== ======= ====== ====== Number of Income Shares 24.5m - 24.5m - Number of Capital - 10.5m - 10.5m Shares Returns per share 13.75p (487.51p) 11.57p (145.08p) 5. NET ASSET VALUE Total net assets have been calculated in accordance with the provisions of Financial Reporting Standard 4. Income Shares are classified as financial liabilities and are carried on the balance sheet at their fair value of 100p each which results in a total fair valuation of the Income Shares of £24,500,000. This valuation does not reflect the rights of the Income Shares under the Articles of Association on a return of assets. Set out below is a reconciliation of Capital and Income share net asset values in accordance with the Articles. 2008 2007 Capital Income Total Capital Income Total Shares Shares Shares Shares £'000 £'000 £'000 £'000 £'000 £'000 Net assets per Balance 12,756 - 12,756 63,663 - 63,663 Sheet Revenue reserve (3,102) 3,102 - (2,820) 2,820 - Capital entitlement of - 24,500 24,500 - 24,500 24,500 Income Shares as at 31 March 2011 Capital entitlement not 2,963 (2,963) - 4,286 (4,286) - yet transferred to Income Shareholders ------ ------ ------ ------- ------ ------ Net assets per Articles 12,617 24,639 37,256 65,129 23,034 88,163 ====== ====== ====== ======= ====== ====== Number of Income Shares - 24.5m - 24.5m Number of Capital 10.5m - 10.5m - Shares NAV per share 120.16p 100.57p 620.27p 94.02p 6. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 2008 2007 £'000 £'000 Loan facility 1,800 1,845 LIBOR loan facility 30,000 30,000 Less: unamortised issue costs (28) (37) Income shares 24,500 24,500 Interest rate swap 2,111 354 --------- --------- Total 58,383 56,662 ======== ======== 7. FURTHER INFORMATION The foregoing do not comprise Statutory Accounts (as defined in section 434(3) of the Companies Act 2006) of the Company. The statutory accounts for the year to 31 December 2007, which contained an unqualified Report of the Auditors , have been lodged with the Registrar of Companies and did not contain a statement required under section 237(2) or (3) of the Companies Act 1985(as amended). Certain statements in this announcement are forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by those statements. Forward looking statements regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future. Accordingly, undue reliance should not be placed on forward looking statements. Contact: John Evans - Aberforth Partners LLP - 0131 220 0733 Aberforth Partners LLP, Secretaries - 26 January 2009 ANNOUNCEMENT ENDS

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