Final Results

Capital Gearing Trust PLC 02 July 2007 CAPITAL GEARING TRUST plc (the 'Company') PRELIMINARY ANNOUNCEMENT OF ANNUAL RESULTS FOR THE YEAR ENDED 5 APRIL 2007 •Net asset value ('NAV') per share increased by 4.5% •For the 23rd consecutive year, our stated objective of achieving capital growth in absolute terms has been met •Dividend recommended of 14p per share, 12p plus a special dividend of 2p Chairman's Statement Overview In the year ended 5 April 2007, I can report that Capital Gearing Trust's net asset value per share increased from 1,937.0p to 2,024.2p or by 4.5%. This follows a 14.5% increase in 2006 and a 13.6% increase in 2005. For the 23rd consecutive year, our stated objective of achieving capital growth in absolute terms has been met, albeit this year by a relatively modest amount. This has been achieved during a period when the FTSE Equity Investment Instruments Index rose by 6.8%, the FTSE All Share Index by 8.0% and the FTSE Government All Stock Index fell by 4.8%. During the year, we have continued to adopt a risk averse investment strategy and there has been little change in the overall asset mix. At the year end, fixed interest, index linked securities and cash accounted for 40.8% of total assets with a further 17.6% held in zero dividend preference shares and 6.5% in endowment funds. Equity exposure was virtually unchanged at 35.1%. Earnings per share for the period amounted to 18.7p compared to 17.9p in 2006. Dividend Last year, a total distribution of 13.5p was paid, made up of 11.5p plus a special dividend of 2p. Subject to shareholder approval at the Annual General Meeting ('AGM'), this year the Board recommends a total distribution of 14p made up of 12p plus a special dividend of 2p. The special dividend continues to reflect the income generated from the high bond content of the portfolio that might at some stage be switched into lower yielding capital growth securities. The dividend will be paid on 17 August 2007 to shareholders on the register as at 20 July 2007. Continuation of the Trust It is the Board's intention to offer shareholders the opportunity to realise their investment in the Company, at a price that fairly reflects the underlying net asset value in the Autumn of 2008. Closer to this time, shareholders will receive a letter detailing the mechanisms through which this will be effected. However, I can assure investors that providing that there is sufficient support, the Company will continue in its present form thereafter. Board Matters In the course of the year, the company providing us with corporate secretarial and accounting services was sold to new owners. The Board are satisfied that this change of ownership will not impact upon the quality of service it currently receives. Also, Smith & Williamson Investment Management Limited was appointed to provide certain portfolio administration services supplied previously by Gerrard Limited. Your Board acknowledges its responsibility to ensure that there are proper systems in place to safeguard your investment. There is an ongoing process for identifying, evaluating and reviewing these systems and the performance of our service providers, and we consider that there are effective controls in place. The Board has for some time operated an informal discount/premium control mechanism whereby market supply and demand imbalances have been satisfied by either the issuance of shares at a premium to net asset value or buying back shares at a discount. At the last AGM shareholders approved the necessary resolutions to enable these policies to be renewed and although no change in the issued capital took place during our last financial year, similar resolutions will again be put forward at this year's AGM. This year, the AGM will be held in Belfast in August. The Notice convening the forty-fourth AGM of the Company will be circulated to shareholders in due course. Mr Spiller, Mr Morton and I will all retire at the AGM, and being eligible, will each offer himself for re-election. Your Board would like to invite you to attend the AGM and I look forward to welcoming you to the meeting. Outlook Turning to the outlook, I commented in last year's report that it is always impossible to predict with any accuracy when market bubbles might burst. Many of the concerns that we identified then as major risks to the stability of world financial markets remain. These include the weakness in the US housing market, high levels of consumer debt, the excessive leverage of many financial institutions, rising energy and commodity prices and the prospect of further tightening in monetary policy by the central banks. I also alluded to some of the short-term drivers of equity prices including the withdrawal of equity through debt financed private equity take-overs which have in 2007 continued apace. For the moment, and apart from some short lived setbacks in world markets between April and June 2006 and at the end of February 2007, investors appear willing to ignore the prevailing risks in the pursuit of higher investment yields. At some stage, this enthusiasm for risk taking will no doubt abate leading to increased market volatility. We are well placed to take advantage of the opportunities that might present themselves if this should happen. Our investment policy is, as always, geared as much to the preservation of shareholders' wealth as it is to achieving long-term capital growth. We believe that two decades of producing uninterrupted asset growth is testament to its effectiveness and is a policy that will continue to serve investors well in the future. Finally, I am pleased to note the recent judgement of the European Court of Justice ('ECJ') with regard to VAT on management expenses. The ECJ's ruling that listed investment companies should have the same tax rules on their management fees as unit trusts and open-ended investment companies, which have been VAT exempt since 1990, is welcomed. Your Board will continue to monitor closely developments in this case and the practical implications this will have on the Company. Mr T R Pattison Chairman 2 July 2007 Investment Manager's Report and Portfolio Analysis Review During the year, the net asset value per share rose by 4.5%. The FTSE All Share Index did better, with a rise of 8.0%, but the strength of Sterling meant that the FTSE World Index rose only by 1.2%. The equity portfolio did better than the All-Share, but our other investments, notably in overseas conventional and index-linked bonds did less well, showing modest capital losses in Sterling terms. In general, the zero dividend preference shares performed as expected, though yields rose a little; the endowment funds actually outperformed the equity market and with far less risk. The property returns, largely through TR Property, were excellent. The only major change in allocation was to reduce the weighting to private equity/venture capital. Although the environment remains favourable for realising investments made in prior years, new investments are being made at high prices with extraordinary leverage and the return made on current acquisitions may turn out to be modest at best. Small additions were made to the two currencies that suffered from the 'carry trade', the Swiss Franc and the Japanese Yen. The portfolio benefited from corporate reconstructions/liquidations in Acorn Income Fund, Advance UK, Falcon, Hedgefirst, F & C Private Equity 'A', Invesco English & International, Man Alternative Investments, Platinum and Resources Investment Trust. Eurovestech was noteworthy in the venture capital sector; the holding was reduced as the price rose by over 30%. Overall, this was a year when our fears for the consequences of global imbalances were not realised; indeed, the 'dash to trash' continued unabated as appetite for risk increased. At least, the hopes underlying the construction of the portfolio appeared to be justified when the equity markets wobbled on fears for sub-prime mortgages in the early spring of 2007. With good appreciation from the bonds, both conventional and index-linked, and from currencies, the overall value of the portfolio barely moved during the equity setback. Outlook Financial markets in general are at a most interesting stage. After a long period of low inflation under the influence of globalisation on wages and ever cheaper imports from China in particular, the threat of accelerating increases in prices has emerged. Wages, of course, seem under reasonable control in the major economies, but with the cost of goods leaving China now rising instead of falling, the output gap closing and food prices rising as agricultural production switches to energy, the upward pressure on labour incomes is growing. In the UK, the Bank of England has continuously had to raise the level of interest rates that it forecasts are required to keep inflation on target; there must be a fear that its current projection of 53/4% as a peak will once again prove optimistic. These rises in interest rates have pushed Sterling to levels that look rich relative to all currencies with respect to purchasing power parity. However, so long as rates keep rising and the financial services industry, the UK's major sector, remains buoyant, there is no reason to expect a reversal any time soon. Certainly the expanding current account deficit seems to be ignored in foreign exchange markets. However, once interest rates rise enough to slow the economy or cause a significant set back in the housing market or indeed a correction in financial markets, Sterling can be expected to fall significantly. Interest rises have already been sufficient to bring to an end the compression in capitalisation rates that has driven commercial property values. Indeed, it would be no surprise to see some reversal. Rents are increasing for offices in London and the South East, but prospects elsewhere look poor. However, the discounts to NAV mean that the sector remains interesting and the possibility of further consolidation or private equity acquisition remains. Furthermore, property returns in Europe, especially in Germany, are improving. Only in Spain is there the danger of a large correction. The portfolio's reduced exposure to private equity reflects a belief that the higher gearing and lower quality of current deals may lead to problems in the event of a downturn in the economy. Such a downturn is not currently evident outside the US. Even there, the slowdown can be attributed directly to reduced rates of residential investment. Surprisingly, consumption has not yet been affected and the savings ratio remained negative in the first quarter, financed in part by credit card borrowing rather than mortgage equity withdrawal. Markets had until recently been assuming that the next change in Federal Funds rate would be a cut, but with inflation looking likely to be above the Fed's 'comfort zone' for the rest of 2007 this now looks unlikely. Moreover, the lagged effect of past rate increases suggests that the economy may not recover in 2008 in the way that the consensus expects. If that is so, the rapid increase in credit that has supported the economy throughout this expansion could go into reverse; that is, the savings ratio could rise quite rapidly and thus turn a minor downturn into a recession. Against that background, the portfolio maintains its exposure to both conventional and index-linked high quality bonds. They may indeed suffer a little in the short-term if growth continues, but should produce excellent returns in a downturn. Meanwhile, valuations look fair, with real returns between 2% and 2.5% in different markets. Returns on these instruments are likely to be enhanced if the wildly over leveraged financial sector struggles to deal with a recession and central banks feel forced to be very accommodative to preserve the integrity of the financial system. For equities, the classic signs of a bear market are already in place; rising short and long term interest rates; decelerating though still positive growth in corporate profits; valuations that are rich on cyclically adjusted earnings; and even on current earnings, an environment where experienced fund managers have difficulty in finding attractive investments. However, liquidity is still powerfully supportive and the availability of high risk debt finance on generous terms both in interest rates and covenants is still enabling private equity funds to acquire companies at even higher valuations. With all companies looking over their shoulder, capital expenditure has disappointed, but companies are re-leveraging their balance sheets to buy in their shares or distribute cash to shareholders. So long, therefore, as the 'bubble' in the availability of cheap finance continues, equity markets could make further progress. We have confidence that our equities can continue to outperform the market and therefore continue to maintain over exposure at about 25% (excluding property and private equity), which seems about right for an absolute return fund, bearing in mind the potential extent of a downdraft. Meanwhile, prospective returns on the zero dividend preference shares have risen to attractive levels and prospective returns on the endowment funds still look satisfactory. Mr R P A Spiller 2 July 2007 Income Statement for the year ended 5 April 2007 2007 2006 Revenue Capital Total Revenue Capital Total £000 £000 £000 £000 £000 £000 ------- ------ ------- ------- ------ ------ Gains on - 3,417 3,417 - 6,471 6,471 investments Exchange (losses)/ - (717) (717) - 455 455 gains Investment 990 - 990 948 - 948 Income ------- ------ ------- ------- ------ ------ Gross Return 990 2,700 3,690 948 6,926 7,874 Investment (164) (383) (547) (152) (354) (506) Management Fee Transaction - (76) (76) - (74) (74) costs Other expenses (250) - (250) (240) - (240) ------- ------ ------- ------- ------ ------ Net return on 576 2,241 2,817 556 6,498 7,054 ordinary activities before tax Tax on ordinary (54) 54 - (59) 59 - activities ------- ------ ------- ------- ------ ------ Net return 522 2,295 2,817 497 6,557 7,054 attributable to ------- ------ ------- ------- ------ ------ equity shareholders Return per 18.68p 82.11p 100.79p 17.89p 236.03p 253.92p ordinary share ------- ------ ------- ------- ------ ------ The total column of this statement is the Income Statement of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance issued by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. Reconciliation of Movements in Shareholders' Funds for the year ended 5 April 2007 Called up Share Capital Capital Capital Revenue Total share premium redemption reserve- reserve- reserve capital reserve reserve unrealised realised £000 £000 £000 £000 £000 £000 £000 ------ ------ ------ ------ ------ ------ ------ Balance at 6 689 7,296 16 7,643 30,078 890 46,612 April 2005 Issue of 10 - - - - - 10 shares Premium on - 818 - - - - 818 issue of shares Exchange gains - - - 444 11 - 455 on investments Net gains on - - - - 1,139 - 1,139 realisation of investments Net increase - - - 5,332 - - 5,332 in unrealised appreciation Transfer on - - - (2,649) 2,649 - - disposal of investments Transaction - - - (63) (11) - (74) costs Costs charged - - - - (354) - (354) to capital Tax on costs - - - - 59 - 59 charged to capital Net revenue - - - - - 497 497 for the year ------ ------- -------- -------- ------- ------- ------ Total 699 8,114 16 10,707 33,571 1,387 54,494 ------ ------- -------- -------- ------- ------- ------ Dividends - - - - - (358) (358) ------ ------- -------- -------- ------- ------- ------ Balance at 5 699 8,114 16 10,707 33,571 1,029 54,136 April 2006 ------ ------- -------- -------- ------- ------- ------ Balance at 6 699 8,114 16 10,707 33,571 1,029 54,136 April 2006 Issue of - - - - - - - shares Premium on - - - - - - - issue of shares Exchange - - - (717) - - (717) losses on investments Net gains on - - - - 1,087 - 1,087 realisation of investments Net increase - - - 2,330 - - 2,330 in unrealised appreciation Transfer on - - - (3,564) 3,564 - - disposal of investments Transaction - - - (64) (12) - (76) costs Costs charged - - - - (383) - (383) to capital Tax on costs - - - - 54 - 54 charged to capital Net revenue - - - - - 522 522 for the year ------ ------- -------- -------- ------- ------- ------ Total 699 8,114 16 8,692 37,881 1,551 56,953 ------ ------- -------- -------- ------- ------- ------ Dividends - - - - - (377) (377) ------ ------- -------- -------- ------- ------- ------ Balance at 5 699 8,114 16 8,692 37,881 1,174 56,576 April 2007 ------ ------- -------- -------- ------- ------- ------ Balance Sheet at 5 April 2007 2007 2006 £000 £000 -------- -------- Fixed Assets Investments: Listed investments 52,721 53,008 -------- -------- Current Assets Debtors 3,857 1,193 Cash at bank 228 145 -------- -------- 4,085 1,338 Creditors: amounts falling due within one year 230 210 -------- -------- Net current assets 3,855 1,128 -------- -------- Net assets 56,576 54,136 -------- -------- Capital and Reserves Called up share capital 699 699 Share premium account 8,114 8,114 Capital redemption reserve 16 16 Capital reserve - unrealised 8,692 10,707 Capital reserve - realised 37,881 33,571 Revenue reserve 1,174 1,029 -------- -------- Total shareholders' funds - equity 56,576 54,136 -------- -------- Net asset value per ordinary share 2,024.2p 1,937.0p -------- -------- Cash Flow Statement for the year ended 5 April 2007 2007 2006 £000 £000 -------- -------- Net cash inflow from operating activities 334 103 -------- -------- Capital expenditure and financial investment Payments to acquire investments (14,037) (16,595) Receipts from sale of investments 16,948 15,697 -------- -------- 2,911 (898) -------- -------- Equity dividends paid (377) (358) -------- -------- Management of liquid resources Cash paid to brokers awaiting investment (2,785) 319 -------- -------- Financing Issue of new shares - 828 -------- -------- Increase /(Decrease) in cash 83 (6) ======== ======== The financial information set out above does not constitute the Company's statutory accounts for the years ended 5 April 2007 or 2006. The financial information for the year ended 5 April 2006 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The Auditors reported on those accounts and their report was unqualified and did not contain a statement either under Article 245(2) or Article 245(3) of the Companies (Northern Ireland) Order 1986. The financial information for the year ended 5 April 2007 has been prepared using the same accounting policies as adopted in the company's statutory accounts for the year ended 5 April 2006. The statutory accounts for the year ended 5 April 2007 will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. For queries, please contact Campbell Morton, Senior Independent Director 02890 763 631 Alice Parker, TMF Corporate Secretarial Services Limited alice.parker@tmf-group.com This information is provided by RNS The company news service from the London Stock Exchange

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