Final Results

Scottish American Investment Co PLC 15 February 2008 THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C. Results for the year to 31 December 2007 SAINTS income grew strongly over 2007. The proposed total dividend for the year is up 11.5%. • The recommended final dividend of 2.15p brings the total dividend for 2007 to 8.25p (up 11.5% on 2006), with earnings per share at 8.56p (up 13.4%). The dividend is fully covered for the sixth successive year. • The NAV total return for the year (capital and income) was 3.0% compared to a 6.6% total return on the benchmark (70% FTSE All-Share Index and 30% FTSE World Ex UK Index). Capital performance lagged the benchmark, mainly due to stock selection in the financial sector over the period. Share price total return was 2.8%. • Over 4 years NAV total return has been 67%, benchmark total return 65% and share price total return 84%. • 2007 was a strong year for global economic growth but from summer onwards banking and financial markets suffered significant blows to confidence. Some attractive opportunities beyond equity markets were identified, for example, in listed forestry funds. During the year exposure to UK property was reduced. Exposure to UK listed equities was also reduced and may be reduced further in the current year. • Global growth is likely to be slower in 2008 but market turbulence is likely to give rise to interesting opportunities. The Managers are also keen to exploit opportunities in higher yielding overseas equities. Past performance is no guarantee of future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. This is because the share price is determined by the changing conditions in the relevant stockmarkets in which the Company invests and by the supply and demand for the Company's shares. The Company invests in overseas securities. Changes in the rates of exchange may also cause the value of an investment, and any income it may pay, to go down or up. The Company has borrowed money to make further investments. This is commonly referred to as gearing. The risk is that, when this money is repaid by the Company, the value of these investments may not be enough to cover the borrowing and interest costs, and the Company makes a loss. If the Company's investments fall in value, gearing will increase the amount of this loss. The more highly geared the Company, the greater this effect will be. The Company has some direct investments in property which may be difficult to sell. Valuations of property are only estimates based on the valuer's opinion rather than of fact. These estimates may not be achieved when the property is sold and this would have the effect of reducing the value of the Company. Property values are affected by such factors as the level of interest rates, economic growth, fluctuations in property yields and tenant default. Therefore on the realisation of any property, the Company may receive less than the original amount invested. Investment in investment trusts should be regarded as medium to long term. The staff of Baillie Gifford & Co and the Company's Directors may hold shares in the Company and may buy or sell such shares. You can find up to date performance information about SAINTS on the SAINTS page on the Managers' website www.bailliegifford.com. SAINTS objective is to increase capital and grow income in order to deliver real dividend growth. Its policy is to invest flexibly and actively across a broad range of assets and markets. Listed equities, both UK and overseas, form the largest part of the portfolio. Investments are also made in bonds, property and other asset classes. Baillie Gifford & Co, the Edinburgh based fund management group with over £50 billion under management and advice, is appointed as investment managers and secretaries to SAINTS. 15 February 2008 - ends - For further information please contact: Patrick Edwardson, Manager The Scottish American Investment Company P.L.C. 0131 275 2133 07812 537316 Robert O'Riordan Baillie Gifford & Co 07730 412007 Roland Cross, Director Broadgate 020 7726 6111 THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C. Chairman's Statement Results SAINTS' objective is to increase capital and grow income in order to provide shareholders with real dividend growth. Capital returns in 2007 were poorer than in recent years with the net asset value per share rising just 0.1p to 272.7p. However, the income produced by the investment portfolio continued to grow strongly with total portfolio income rising 15.8% and earnings per share rising 13.4%. The robust health of SAINTS' revenue account allows another significant increase in the dividend. Including a recommended final dividend of 2.15p, the proposed total distribution for 2007 is 8.25p, an increase of 11.5% on the previous year. This compares to an increase in the retail price index of 4.0% and continues a period of consistent dividend growth since the appointment of our Managers, Baillie Gifford and Co: the compound growth rate in the dividend since 2003 has been 9.9% per annum, well ahead of inflation over the same period at 3.5% per annum. The disappointing capital performance this year is partly a reflection of developments in world markets and partly an outcome of our investment positioning during 2007. A full review of the portfolio and investment activity in 2007 is set out in the Managers' Overview and the Managers' Portfolio Review below but the outcome was a net asset value total return of 3.0% which compares to the 6.6% total return on our benchmark. Capital performance is always likely to be more volatile than income growth over the short term but over the medium to long term the two should progress at a broadly similar rate. Since 2003, SAINTS' net asset value has risen 50% and portfolio income has grown 56%. The net asset value total return since 2003 is 66.7% which is ahead of the benchmark total return of 65.5%. Share Price and Discount SAINTS' share price fell slightly during 2007 from 241.3p at the start of the year to 240.0p by the end of December. The effect of this move in the share price and the small rise in the net asset value per share to 272.7p was a slight widening in the discount from 11.5% to 12.0% Buy-backs and Treasury Shares The power to buy back shares was renewed at last year's Annual General Meeting. The Board is mindful of the enhancement to net asset value that can accrue to shareholders through the use of buy-backs. It is also aware that undue volatility in the level of discount is not welcomed by shareholders. However, the Board feels that the longer term trend is still for the discount to narrow, subject to continued strong dividend growth and good long term total returns. Consequently, no shares were bought back during 2007. The Board does however intend asking for the authority to be renewed at this year's AGM so that it is available should future circumstance make a buy-back more appropriate. Borrowings SAINTS' borrowings at the end of the year were in the form of a single debenture due for repayment in April 2022, on which date £80m will be repaid to the debenture holders. The market value of this debenture will vary according to conditions in bond markets. During 2007, the market value fell from £101.6m to £98.8m reflecting prevailing conditions in investment grade bond markets. SAINTS will also use shorter term borrowing facilities from time to time and did so during 2007. The ability to borrow money for investment can, potentially, lead to better returns for shareholders than would otherwise be possible. However, the Board recognises that borrowing levels should not be excessive. At the end of 2007, the book value of the debenture was equivalent to 24% of shareholders' funds. VAT The European Court of Justice ruled in June 2007 that investment trust management fees should be exempt from VAT and this decision has now been accepted by HM Revenue and Customs. The result of this decision is that future management fees paid by the Company will not be subject to VAT and the Company will be able to recover some of the VAT suffered on management fees in the past. The terms of, and procedure for, reclaim are still to be clarified so the amount of the refund is still uncertain, but it will not be material. Consequently no provision has been made for any refund in this set of financial statements. The Board and the AGM As indicated last year, Dr Morgan will retire from the Board after the AGM. Dr Morgan has served on the Board for 16 years. I am very grateful for her valued support, full commitment and considerable contribution over that period. I am also pleased to welcome Sir Menzies Campbell as a Director. I am sure that Sir Menzies' experience and perspective will prove to be of great value to the Company. Lord Kerr, Mr Price and Mr Moon retire and are offering themselves for re-election. Their contribution is prized and the other Directors and I fully support their re-election. All shareholders are invited to the AGM which will be held at Baillie Gifford's offices at Calton Square, 1 Greenside Row, Edinburgh on Thursday 10 April at 11.00am. Mr Edwardson will make a short presentation on the investment position and the Directors look forward to meeting you. Outlook We suggested last year that 2007 would be a strong year for global economic growth and this was indeed the case. However, economic prospects are now decidedly weaker. From last summer onwards, financial and banking markets have suffered significant blows to confidence because of various issues encompassing rising default rates and falling market liquidity. In turn, this has caused banks to become less willing lenders to consumers and to the corporate sector. The net effect is that global growth is likely to be slower in 2008. We may well see a recession in the United States, and growth in other developed economies, including the United Kingdom, will probably slow sharply. Emerging economies, such as China and India, are likely to continue growing strongly although perhaps not at quite the heady levels of recent years. In many respects this slowdown in growth is necessary; inflationary pressures were rising and slower growth will now see them diminish. A greater level of savings in the US and other western economies is also beneficial. Slower growth will, however, mean lower corporate profits and this prospect, together with the fear of a more severe downturn, has caused global equity markets to fall, with particularly sharp declines in the opening weeks of 2008. Market turbulence of this sort usually gives rise to interesting investment opportunities. Our Managers believe the global economy will slow rather than contract and are happy to buy those equities where the opposite appears to be assumed in valuations. Having generally avoided investment in credit markets in recent years, they are now seeking to allocate money to high yield markets. We continue to encourage our Managers to seek out interesting and attractive opportunities beyond traditional equity markets and the investments this year in listed forestry funds are a good example of this. Our Managers are also keen to exploit the increasing number of higher yielding equity opportunities available in overseas markets. The portfolio's weighting to UK companies has reduced slightly in the last year and is likely to come down further this year. The combination of high levels of volatility in market prices and our desire to take advantage of the wide array of opportunities available may give rise to higher levels of turnover in the portfolio than is usual, but our basic stance is to be fully invested at current market levels. Managers' Overview The global economy grew very strongly again in 2007, but the disruption in Western banking and credit markets that emerged during the second half of the year made conditions for investing more difficult and volatile. For much of this decade interest rates around the world were set at very low levels, as a series of events and developments from 2000 onwards encouraged many central banks, and particularly the US Federal Reserve to loosen monetary policy and stimulate demand and confidence. This was done against a backdrop of low inflation and downward pressure on the prices of many goods as their manufacture shifted to lower cost locations in emerging economies. Low interest rates encouraged western consumers to take on increasingly large levels of debt and fed liquidity into financial markets, causing asset prices and investors' appetite for credit risk to rise. Global economic growth also improved and was strong from 2003 onwards, fuelling an expansion in the profitability of the corporate sector. Strong growth in turn led to the emergence of inflationary pressures and interest rates began to rise again. For some time, this change in the economic backdrop had little impact on the behaviour of western consumers and financial markets but this changed during 2007. Rising default rates in the US sub-prime mortgage market raised question marks over the credit worthiness of related debt securities and this uncertainty spread quickly. From August onwards, liquidity began to withdraw from credit markets. There was general distrust of any debt issue where the underlying exposure was to residential mortgages, the prices of complex, structured debt securities fell and inter-bank lending rates rose. This was not just a matter for financial markets. Banks began to write down the value of the debt securities held on their balance sheets and take back on to their books large volumes of debt that previously had been sold to off-balance sheet vehicles. With capital under threat from write offs but the requirement for capital growing in order to fund this unexpected expansion in their balance sheets, banks began to restrict credit to corporate and householder borrowers. As a consequence, optimism on the economic outlook fell and the outlook for corporate sector profitability deteriorated. Unsurprisingly, share prices in most stock markets began to come under pressure. This weakness was concentrated in the western economies with developing countries continuing to perform well for a time, but even there cracks were beginning to emerge by the end of the year. In the opening weeks of 2008, these fears about the economic outlook caused stock markets worldwide to fall further. Manager's Portfolio Review The Investment Portfolio The total return on net assets in 2007 was 3.0%. This compares to the total return on the benchmark of 6.6%. The net asset value per share was barely changed on the year, rising just 0.1p, which means that the return for the year came almost wholly from income. The total amount of income generated by the investment portfolio rose 15.8% to £17.8m. This level of income equates to a 3.9% historic yield on the portfolio (based on the year end value of gross assets). The yield on SAINTS' shares, using the proposed full year payment of 8.25p and the year end share price of 240.0p, was 3.4%. A breakdown of performance across different investment categories and other information on the portfolio is shown below. This year we have tried to show more detail on the performance and composition of the portfolio by identifying separately our investments in listed funds which give exposure to a particular asset class. Consequently, the performance table and portfolio information pages have entries for listed property and listed forestry funds. Separate commentary is provided on each of these later in this review. Stock selection within the mainstream equity portfolio detracted from performance but asset allocation was helpful. Reflecting our view at the start of the year that equity returns would be lower than in recent years and subject to greater uncertainty, we had an allocation to equities (excluding the listed property and forestry funds) that was moderately cautious. Our neutral position for equity exposure is full investment of shareholders' funds in mainstream equity markets but during 2007 the allocation (as a percentage of shareholders' funds) was usually between 90 and 95%. We also held a variety of investments in bonds, direct property, listed property and listed forestry. These were largely funded by borrowed funds. SAINTS' borrowings are primarily in the form of a single debenture bond issue which will be redeemed in 2022 but on occasion we also used short term bank loans. The effective borrowing cost of the debenture is low and we see no advantage in redeeming it early. Equities Equity markets generally performed well in the first half of the year but struggled in the second half following the emergence in August of problems in credit markets and subsequent fears about economic growth and profits. The stockmarkets of countries experiencing rapid growth and industrialisation delivered far better performance than those of developed economies. Companies listed in developed markets and whose businesses were exposed to the strength of demand in developing economies prospered both in terms of share price and operational performance. Companies listed in developed markets but with domestically oriented businesses had mixed operational results but generally struggled in share price terms. The return on SAINTS' equity investments was 4.4%, behind the benchmark return of 6.6%. There was also a marked difference between the relative performance of the UK and overseas portfolios which deserves explanation. Although identified separately in the performance table, we manage the UK and overseas equity positions in an increasingly unified way. We believe this approach is a sensible one. The domicile of a company's stock market listing often has little bearing on where it conducts its business or generates profits. Also, most stock markets around the world move up and down in sympathy with one another and there is little diversification to be had from splitting the portfolio into distinct geographic components and managing each separately. However, managing the equity investments as a single portfolio will lead, as on this occasion, to wide differences when the overall performance result is split out between regions. This is best illustrated by looking at our investments in the banking and energy sectors. Our overall position in banks was a little below their weighting in the benchmark index. However, on grounds of valuation and yield, almost all of the banks exposure was achieved through owning UK domiciled banks. Banking stocks performed poorly in most markets, particularly in the second half of the year, but our weighting towards UK names meant our UK equity performance was particularly badly hit while the absence of banks boosted our relative performance in overseas equities. The reverse held true for oil stocks. These feature heavily in the UK stockmarket but we are generally more enthusiastic about the prospects for oil companies listed elsewhere. Our investments in Petrobras, a Brazilian oil company, and Russian energy companies Gazprom and Lukoil proved very profitable for the portfolio as a whole. As mentioned earlier, the excellent performance of emerging market stocks was a notable feature. We had 12% of the equity portfolio invested in these stocks, a significantly greater weighting than in the benchmark. Arguably though, the absolute size of this allocation was far too low given the long term attractions of these markets. The ongoing development and economic growth in countries such as Brazil, China and India is changing the structure of the global economy in the most profound way and investments in these and similar countries are likely to have increasing importance in the portfolio over time. Stocks which are felt by the market to be vulnerable to the deterioration in economic and credit market conditions tended to perform badly. We have mentioned our bank positions already but investments in companies such as US housebuilder Pulte Homes, the builders' merchant Wolseley and recruitment consultant Hays were also weak. In some cases we have sold the holding, for example Pulte is no longer in the portfolio. In other cases we have either held our nerve (Wolseley) or added (Hays). Companies whose earnings are felt to be relatively immune to the economic cycle performed well. Good examples of such defensive companies include British American Tobacco and US tobacco company Altria. Both these stocks did well. The investment in on-line retailer Amazon was also very profitable. Whilst not a typical defensive stock, it is a good example of how companies with strong competitive positions and long-term growth prospects can ride out periodic economic storms. The current economic storm will, we believe, have a noticeable impact on the level and growth rate of corporate profits. We expect the US stock market to see a drop in aggregate earnings and the same might happen in other markets. However, market levels have fallen from their peaks and individual share prices have in some instances experienced severe falls. Some decline in markets is warranted and some of the movements in individual share prices will also be justified. However, a common feature of market panics is that individual shares get badly mis-priced as investors rush to exit their positions. We intend turning this to our advantage and are trying to buy those shares which we feel have fallen too far and sell those whose defensive qualities are fully appreciated. Quoted Equity Forestry Investments The investments in listed forestry funds comprise holdings in two companies, Cambium Global Timberland and Phaunos. These represented, on average, 4% of SAINTS' portfolio during 2007. They were bought in the first half of the year and, although they produced modest returns between then and the year end, this result compared favourably to equity markets which generally fell. We believe forestry offers an appealing mix of good returns, split evenly between capital growth and income, and a low degree of correlation with most other investments within SAINTS. The two funds in which SAINTS has invested were established relatively recently and are still investing the monies raised in their equity raisings. Consequently, no dividends were paid by either fund during 2007. We expect both to become fully invested within the next twelve months at which point they are expected to be paying dividends. Quoted Equity Property Investments The listed property funds held by SAINTS in 2007 performed poorly and produced a total return of minus 21%. This result owed more to falls in their share prices relative to fund asset values than to actual valuation declines in the underlying portfolios and, as such, we do not believe our investments have suffered a permanent loss of value. Nonetheless, the return was very disappointing. The poor returns were concentrated in the second half of the year. The difficulties seen in credit markets from August onwards caused banks to rein in property related lending and many investors to question whether prevailing property valuations were sustainable. The prices of listed property funds were also hit by selling as some shareholders reduced their positions. We owned nine property funds in total during the year. Of these, only one was invested solely in UK commercial property and this was sold profitably in the early part of the year. One other, which we still own, is invested partly in UK property and partly in European property. Of the remaining seven funds, four give exposure to European property markets, two to Japanese markets and one to Chinese markets. Aside from one of the Japanese funds, these funds invest in commercial rather than residential property. Most are listed on UK stock exchanges but one is listed on the Tokyo Stock Exchange. We have added to our positions since the fall in share prices. In the near term European property values may come back a little in the absence of debt-funded property investors but the funds in which we are invested trade on large discounts to net asset value which discount larger valuation declines than we expect to occur. We believe prospects for the Chinese and Japanese property funds continue to be good. Direct Property The direct investments in UK commercial property are managed by OLIM Ltd, a specialist in property investment. The experience with OLIM has been very rewarding with an annualised total return of 13.5% since the portfolio was established in 1996. Returns have been particularly strong in recent years as low interest rates and strong investor interest pushed up commercial property prices. By the end of 2006, valuation yields on commercial property had fallen to record lows. Although each of SAINTS' individual properties was fully occupied and generating a good level of rent, the market valuations had reached a point where it would have been unwise not to make some sales. Consequently, four properties were sold in the first half of 2007 with each achieving a sales price above its 2006 fair value. The commercial property market peaked around the middle of 2007 with the main market indices recording significant declines by the end of the year. SAINTS' remaining properties outperformed this difficult market environment being subject to only a slight downwards revaluation. Fixed Interest Fixed interest markets have had little to commend them in recent years. Government bond markets have tended to be valued fairly at best and the rewards on offer in credit markets have fallen well short of what one ought to require for taking credit risk. Despite this general assessment, 7% or thereabouts of SAINTS' portfolio during 2007 was in bonds. These investments are better described as special opportunities and, with one exception, they performed very strongly. The largest investment was in bonds issued by the Brazilian government and index-linked to inflation in that country. Brazil is a large and increasingly developed economy that is seeing its credit-worthiness improve, its currency appreciate, and its short and long term interest rates fall. For owners of Brazil's index-linked debt, these are very profitable developments and the holding delivered a total return in excess of 50% during the year. We continued to hold bonds (issued by a special purpose vehicle known as 'Bay Haven') where our return will effectively depend on the frequency and size of insurance industry losses arising from a number of weather related and seismic events during their three year life. We also added to our holdings of this type of investment when a similarly structured but separate set of bonds (issued by a vehicle called 'Fremantle') became available. Both the Bay Haven and Fremantle bonds are floating rate notes with their quarterly coupons set at a fixed spread over 3m LIBOR rates. We think that this spread over LIBOR is well above the level required to compensate for the likelihood of these natural events occurring. The holding in a short-dated bond issued by the Ford Motor Company was sold. This had been purchased on the basis that the repayment of this bond had been guaranteed by a financial institution with a higher credit rating than Ford. This view gained wider currency during the period we held the bond, its market price rose and we sold at a profit. The one disappointing bond investment stemmed from the purchase of a security where the principal and interest payments are exposed to the performance of a pool of mortgage loans made to East German housing associations. Between our first purchase and the year end, the market price of this security fell reflecting the great turbulence in credit markets seen in the second half of the year. We have since added to the holding believing it to be under-valued. Outlook A global economic slowdown is widely expected with many commentators believing recession likely in the United States and a meaningful risk in other developed countries, notably the UK. Emerging economies are expected to continue growing quickly in absolute terms but they will still be affected by events in the developed world and their growth rates are likely to be lower than in recent years. Despite this economic outlook, we are not unduly pessimistic on equity markets, at least at current levels. Central banks are responding to developments by lowering interest rates with significant reductions occurring in the US. The prices of most financial assets are also well down on their peak levels which may mean that some of the likely downturn is already priced in. Finally, the uncertainty is causing high levels of volatility in individual share prices which we think will give rise to some exciting investment opportunities. We go into 2008 keen to take advantage of these as they occur. At the current moment, approximately 95% of shareholders' funds is invested in equity markets. We will continue to set this figure at a level which reflects our enthusiasm for stockmarkets generally and the competing attractions of other asset classes. The weighting to overseas listed companies is likely to move up further from current levels. We still see little value in most government bonds markets. The deterioration in the economic outlook has already been reflected in interest rate expectations and long-dated bond yields have also fallen. The regular corporate bond market now looks more attractively priced than it has done for several years but prices may come under further pressure if corporate default rates rise as economic growth slows. However, we think there are exciting prospects emerging in other parts of the credit markets including securitised and structured bonds. As for property markets, it seems likely that the UK commercial market will see further valuation falls. After considering the rental income received on SAINTS' direct investments and the significant costs of re-entering the direct market if it chose to sell, the Board believes shareholders will be better served by continuing with the current investments. We believe that the prospects are good in the medium term for European and other commercial property markets. Finally, we will continue to assess interesting opportunities beyond traditional assets classes. The investments made this year in forestry are a good example of what can be done within a diversified but actively managed portfolio such as SAINTS. THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C. The following is the unaudited preliminary statement for the year to 31 December 2007 which was approved by the Board on 14 February 2008. The Board of The Scottish American Investment Company P.L.C. is recommending to the Annual General Meeting of the Company to be held on 10 April 2008 the payment of a final dividend of 2.15p (2.00p last year) per ordinary share making a total of 8.25p (7.40p last year) paid and proposed for the year ended 31 December 2007. INCOME STATEMENT (unaudited*) For the year ended For the year ended 31 December 2007 31 December 2006 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Net gains on investments - - 460 460 - 35,285 35,285 securities Currency gains - 53 53 - 44 44 Income (note 1) 17,751 - 17,751 15,326 - 15,326 Management fees (1,053) (1,053) (2,106) (991) (991) (1,982) Other administrative expenses (885) - (885) (800) - (800) Net return before finance costs and taxation 15,813 (540) 15,273 13,535 34,338 47,873 Finance costs of borrowings (3,089) (3,089) (6,178) (3,027) (3,025) (6,052) Net return on ordinary activities before taxation 12,724 (3,629) 9,095 10,508 31,313 41,821 Tax on ordinary activities (1,379) 1,116 (263) (506) 412 (94) Net return on ordinary activities after taxation 11,345 (2,513) 8,832 10,002 31,725 41,727 Net return per ordinary share (note 2) 8.56p (1.89p) 6.67p 7.55p 23.95p 31.50p STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES (unaudited) For the year ended For the year ended 31 December 2007 31 December 2006 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Return on ordinary activities after taxation 11,345 (2,513) 8,832 10,002 31,725 41,727 Net (losses)/gains on investments - property - (309) (309) - 4,682 4,682 Total recognised gains and losses for the year 8,523 10,002 36,407 46,409 11,345 (2,822) Total recognised gains and losses per ordinary share (note 2) 8.56p (2.13p) 6.43p 7.55p 27.48p 35.03p The total column of the Income Statement is the profit and loss account of the Company. All revenue and capital items in these statement derive from continuing operations. THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C. BALANCE SHEET (unaudited) At 31 December 2007 At 31 December 2006 £'000 £'000 Fixed Assets Investments - securities 428,429 418,026 Investments - property 29,825 43,700 458,254 461,726 Current Assets Debtors 1,645 1,621 Cash and deposits 7,628 1,414 9,273 3,035 Creditors Amounts falling due within one year (7,433) (2,088) Net Current Assets 1,840 947 Total Assets Less Current Liabilities 460,094 462,673 Creditors Amounts falling due after more than one year (note 4) (88,708) (89,079) Net Assets 371,386 373,594 Share Capital And Reserves Called-up share capital 33,121 33,121 Capital redemption reserve 22,781 22,781 Capital reserve - realised 286,437 200,533 Capital reserve - unrealised 14,324 103,050 Revenue reserve 14,723 14,109 Shareholders' funds 371,386 373,594 Net Asset Value Per Ordinary Share: (Debenture at fair value) 272.7p 272.6p Net Asset Value Per Ordinary Share: (Debenture at book value) 280.3p 282.0p Ordinary Shares In Issue (note 5) 132,485,943 132,485,943 THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS (unaudited) For the year ended 31 December 2007 Capital Capital Capital Total redemption reserve - reserve - shareholders' Share reserve realised unrealised Revenue funds capital reserve £'000 £'000 £'000 £'000 £'000 £'000 Shareholders' funds at 1 January 2007 33,121 22,781 200,533 103,050 14,109 373,594 Transfer between reserves* - - 83,164 (83,164) - - Total recognised gains and losses for the year - - 2,740 (5,562) 11,345 8,523 Dividends appropriated in the year - - - - (10,731) (10,731) Shareholders' funds at 31 December 2007 33,121 22,781 286,437 14,324 14,723 371,386 *With effect from 1 January 2007, changes in fair value of investments which are readily convertible to cash, without accepting adverse terms, at the balance sheet date are included in realised, rather than unrealised, capital reserves. The balances on both reserves at 1 January 2007 have been amended by a reserve transfer to reflect this change. For the year ended 31 December 2006 Capital Capital Capital Total redemption reserve - reserve - shareholders' Share reserve realised unrealised Revenue funds capital reserve £'000 £'000 £'000 £'000 £'000 £'000 Shareholders' funds at 1 January 2006 33,121 22,781 172,099 95,077 13,513 336,591 Total recognised gains and losses for the year - - 28,434 7,973 10,002 46,409 Dividends appropriated in the - - - - (9,406) (9,406) year Shareholders' funds at 31 December 2006 33,121 22,781 200,533 103,050 14,109 373,594 THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C. CASH FLOW STATEMENT (unaudited) For the year ended For the year ended 31 December 2007 31 December 2006 £'000 £'000 £'000 £'000 NET CASH INFLOW FROM OPERATING ACTIVITIES 14,195 12,629 SERVICING OF FINANCE Interest Paid (6,549) (6,402) NET CASH OUTFLOW FROM SERVICING OF FINANCE (6,549) (6,402) TAXATION Overseas tax (253) (94) TOTAL TAX PAID (253) (94) FINANCIAL INVESTMENT Acquisitions of investments (150,312) (136,202) Disposals of investments 158,966 139,993 Forward currency contracts 805 - Currency gains/(losses) 93 (199) NET CASH INFLOW FROM FINANCIAL INVESTMENT 9,552 3,592 EQUITY DIVIDENDS PAID (10,731) (9,406) INCREASE IN CASH 6,214 319 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT Increase in cash 6,214 319 Other non-cash changes 371 351 MOVEMENT IN NET DEBT IN THE YEAR 6,585 670 NET DEBT AT 1 JANUARY (87,665) (88,335) NET DEBT AT 31 DECEMBER (81,080) (87,665) ASSET ALLOCATION (unaudited) At 31 December At 31 December 2007 2006 % % UK Quoted Equities* 45.6 52.0 Overseas Quoted Equities* 30.2 27.6 Total Quoted Equities* 75.8 79.6 Direct property 6.5 9.3 Quoted Equity Property Investments 6.3 5.0 Quoted Equity Forestry Investments 3.8 - Quoted Fixed Interest 6.9 5.3 Unquoted 0.3 0.6 Net Liquid Assets 0.4 0.2 100.0 100.0 * Excludes quoted equity property and forestry investments. THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C. PERFORMANCE ATTRIBUTION for the year ended 31 December 2007 (unaudited) Average allocation Total return* Contribution to relative Stock Asset SAINTS Benchmark SAINTS Benchmark return Selection % Allocation % % % % % % UK Quoted Equities* 59.9 70.0 (6.0) 6.3 (6.3) (6.4) 0.1 Overseas Quoted Equities* 34.3 30.0 23.3 9.7 4.5 4.4 0.1 Total Quoted Equities* 94.2 4.4 6.6 (1.8) (2.0) 0.2 Direct Property 9.3 5.0 (0.3) - (0.3) Quoted Equity Property Investments 6.9 (21.4) (2.1) - (2.1) Quoted Equity Forestry Investments 3.8 5.4 (0.1) - (0.1) Quoted Fixed Interest 6.6 35.0 1.4 - 1.4 Unquoted 0.7 (0.2) - - - Debenture at Book Value (23.7) 6.9 - - - Deposits and Other Items 2.2 - - - - Portfolio Total Return (debenture at book value) 3.4 6.6 (3.0) (2.0) (1.0) Adjustment for change in 0.8 fair value of debenture Portfolio Total Return 4.2 6.6 (2.2) (debenture at fair value) Expenses and other items (1.2) Fund Total Return (debenture at fair value) 3.0 * Excludes listed forestry and property investments Source: Baillie Gifford & Co The above returns are calculated on a total return basis with net income reinvested. Past performance is no guarantee of future performance. THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C. THIRTY LARGEST HOLDINGS at 31 December 2007 (unaudited) 2007 2006 Name Classification Business % of total Value Value assets £'000 £'000 Petrobras Overseas Integrated oil 24,581 5.3 12,297 Brazil CPI Linked Fixed Interest Brazilian government bond 16,699 3.6 12,268 15/05/2045 Royal Bank of Scotland United Kingdom Banking 16,243 3.5 19,335 Cambium Global Quoted Equity Forestry investment fund 15,750 3.4 - Forestry Inv. Timberland GlaxoSmithKline United Kingdom Pharmaceuticals 14,676 3.2 15,411 Barclays United Kingdom Banking 13,704 3.0 15,854 British Gas 2008 United Kingdom Oil and gas producer 11,536 2.5 - structured notes British American Tobacco United Kingdom Cigarette manufacturer 11,299 2.5 3,719 HBOS United Kingdom Banking 9,890 2.2 12,175 Vodafone United Kingdom Mobile telecommunication services 9,511 2.1 7,157 Aviva United Kingdom Life assurance 7,734 1.7 8,010 Man Group United Kingdom Hedge fund manager 7,656 1.7 6,195 Amazon.com Overseas Online retailer 7,539 1.6 3,266 CVRD Overseas Iron ore mining 7,233 1.6 3,346 Rutley European Property Quoted Equity European commercial property fund 6,677 1.5 5,125 Property Inv. Bay Haven FRNs 2009/10 Fixed Interest Re-insurance bonds 6,625 1.4 6,770 Hays United Kingdom Recruitment agency 6,210 1.3 - China Real Estate Quoted Equity Commercial property fund 6,177 1.3 - Opportunities Property Inv. Standard Chartered United Kingdom Banking 6,139 1.3 3,890 Atlas Copco Overseas Engineering 6,052 1.3 6,947 Holiday Village in New Direct Property Holiday village 5,800 1.3 5,500 Romney Altria Overseas Cigarette manufacturer and food 5,657 1.2 6,528 producer Penn West Energy Trust Overseas Oil and natural gas producing 5,649 1.2 - income trust Schlumberger 6% 2008 Overseas Energy equipment and services 5,426 1.2 - Lonmin 6.15% 2008 United Kingdom Platinum mining 5,389 1.2 - Ecofin Waterpower United Kingdom Utilities investment fund 5,335 1.2 - Opportunities Tesco United Kingdom Food retailer 5,239 1.1 4,449 Gazprom Overseas Integrated gas 5,128 1.1 4,239 Quorum Oil & Gas United Kingdom Oil and gas services 5,024 1.1 - Nursing Home in Direct Property Nursing home 4,950 1.1 5,250 Kenilworth 265,528 57.7 167,731 THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C. NOTES 1. Income 2007 2006 £'000 £'000 Franked investment income 8,129 8,597 UK unfranked investment income 770 789 Overseas dividends 3,847 2,230 Overseas interest 2,447 954 Total income from security investments 15,193 12,570 Deposit income 447 230 Rental income 2,072 2,511 Other income 39 15 17,751 15,326 2. Return per ordinary share Return per ordinary share is based on the return on ordinary activities after taxation figures in the Income Statement and on 132,485,943 ordinary shares of 25p, being the weighted average number of ordinary shares in issue during each year. Total recognised gains per ordinary share is based on the total recognised gains for the year in the Statement of Total Recognised Gains and Losses, and on 132,485,943 ordinary shares of 25p, being the weighted average number of ordinary shares in issue during each year. There are no dilutive or potentially dilutive shares in issue. 3. Ordinary dividends 2007 2006 2007 2006 £'000 £'000 Amounts recognised as distributions in the year: Previous year's final (paid 10 April 2007) 2.00p 1.70p 2,650 2,252 First interim (paid 29 June 2007) 2.00p 1.70p 2,649 2,252 Second interim (paid 28 September 2007) 2.05p 1.85p 2,716 2,451 Third interim (paid 31 December 2007) 2.05p 1.85p 2,716 2,451 8.10p 7.10p 10,731 9,406 We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 842 of the Income and Corporation Taxes Act 1988 are considered. The revenue available for distribution out of current year profits by way of dividend for the year is £11,345,000 (2006 - £10,002,000). 2007 2006 2007 2006 £'000 £'000 Dividends paid and proposed in the year: First interim (paid 29 June 2007) 2.00p 1.70p 2,649 2,252 Second interim (paid 28 September 2007) 2.05p 1.85p 2,716 2,451 Third interim (paid 31 December 2007) 2.05p 1.85p 2,716 2,451 Current year's proposed final dividend (payable 14 April 2008) 2.15p 2.00p 2,848 2,650 8.25p 7.40p 10,929 9,804 If approved the final dividend of 2.15p will be paid on 14 April 2008 to all shareholders on the register at the close of business on 14 March 2008. 4. The market value of the 8% Debenture Stock 2022 at 31 December 2007 was £98.8m (2006 - £101.6m) 5. At 31 December 2007, the Company had the authority to buy back 19,859,642 of its own shares. No shares were bought back during the year under review. THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C. NOTES (cont'd) 6. Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities 2007 2006 £'000 £'000 Net return before finance costs and taxation 15,273 47,873 Gains on investments - securities (460) (35,285) Currency gains (53) (44) Changes in debtors and creditors (558) 187 Other non-cash changes (7) (102) Net cash inflow from operating activities 14,195 12,629 7. The Report and Accounts will be available on the Managers' website www.bailliegifford.com on or around 6 March 2008. 8. The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2007. The financial information for 2006 has been extracted from the statutory accounts for 2006. The statutory accounts for 2006 have been delivered to the Registrar of Companies. The Auditors have reported on the 2006 accounts, their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2007 are unaudited and will be finalised on the basis of the financial information presented in this preliminary announcement. They will be delivered to the Registrar of Companies following the Company's Annual General Meeting. None of the views expressed in this document should be construed as advice to buy or sell a particular investment. This information is provided by RNS The company news service from the London Stock Exchange

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