Final Results

MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC PRELIMINARY ANNOUNCEMENT OF UNAUDITED ANNUAL RESULTS The Directors announce the unaudited statement of results for the year ended 31 March 2006 as follows:- HIGHLIGHTS * NAV +40% (Â£109 million) * Gross assets + 41% (Â£120 million) * FTSE SmallCap +21% * Share price +42% INCOME STATEMENT for the year to 31 March 2006 Year to 31 March 2006 Year to 31 March 2005 (restated *) Revenue Capital Total Revenue Capital Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Gains on investments at fair value - 33,354 33,354 - 14,714 14,714 Dividends and interest 1,986 - 1,986 1,729 - 1,729 Management fee (592) (1,296) (1,888) (440) (440) (880) Other expenses (336) - (336) (248) - (248) Net return before finance costs and taxation 1,058 32,058 33,116 1,041 14,274 15,315 Interest payable and similar charges (258) (258) (516) (221) (221) (442) Net return before taxation 800 31,800 32,600 820 14,053 14,873 Taxation - - - - - - Net return after taxation 800 31,800 32,600 820 14,053 14,873 Return per ordinary 2.30p 91.57p 93.87p 2.36p 40.42p 42.78p share** The total column of this statement is the profit and loss account of the Company. * For details of the restatement of the Company's comparative figures please refer to note 1. ** The calculation of returns per ordinary share excludes shares held in Treasury; the weighted average number of shares in issue during the year has been adjusted to reflect this. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES for the year to 31 March 2006 Year to 31 March Year to 31 March 2006 2005 Â£000 Â£000 Net return after taxation 32,600 14,911 Total recognised gains during the year 32,600 14,911 Prior period adjustment (see note 1) (658) - Total recognised gains and losses since last annual report 31,942 14,911 Total recognised gain per share 91.97p 42.89p RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS for the year to 31 March 2006 Capital Own Called-up Share Capital reserve Capital shares Total equity share premium redemption Special - reserve - Revenue held in shareholders' capital account reserve reserve realised unrealised reserve Treasury funds Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Year to 31 March 2006 As at 31 March 2005* 3,652 18,937 1,058 11,075 29,378 12,120 1,818 (2,588) 75,450 Net gains on realisation of investments - - - - 12,854 - - - 12,854 Unrealised appreciation on investments before transfer on disposal - - - - 12,854 20,500 - - 20,500 Transfer on disposal of investments - - - - 1,344 (1,344) - - - Costs allocated to capital - - - - (1,554) - - - (1,554) Cancellation of - ordinary shares from Treasury (91) - 91 (1,240) - - - 1,240 - Resale of ordinary shares from Treasury - - - - - - - 1,348 1,348 Premium on sale of ordinary shares from Treasury - 370 - - - - - - 370 Dividends paid in the year - - - - - - (1,007) - (1,007) Net revenue for the year - - - - - - 800 - 800 As at 31 March 2006 3,561 19,307 1,149 9,835 42,022 31,276 1,611 - 108,761 Capital Own Called-up Share Capital reserve Capital shares Total equity share premium redemption Special - reserve - Revenue held in shareholders' capital account reserve reserve realised unrealised reserve Treasury funds Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Year to 31 March 2005 As at 1 April 2004* 3,684 18,680 1,026 11,518 26,983 462 2,039 - 64,392 Net gains on realisation of investments - - - - 2,163 - - - 2,163 Unrealised appreciation on investments before transfer on disposal - - - - - 12,551 - - 12,551 Transfer on disposal of investments - - - - 893 (893) - - - Costs allocated to capital - - - - (661) - - - (661) Repurchase and cancellation of ordinary shares (32) - 32 (443) - - - - (443) Purchase of ordinary shares into Treasury - - - - - - - (3,752) (3,752) Resale of ordinary shares from Treasury - - - - - - - 1,164 1,164 Premium on sale of ordinary shares from Treasury - 257 - - - - - - 257 Dividends paid in the year - - - - - - (1,041) - (1,041) Net revenue for the year - - - - - - 820 - 820 As at 31 March 2005* 3,652 18,937 1,058 11,075 29,378 12,120 1,818 (2,588) 75,450 * Restated - For details of the restatement of the Company's comparative figures please refer to note 1. BALANCE SHEET as at 31 March 2006 31 March 31 March 2006 2005 (restated*) Â£000 Â£000 Â£000 Â£000 Fixed assets Investments at fair value 115,939 83,224 Current assets Debtors 231 1,486 Cash at bank 3,905 716 4,136 2,202 Creditors: amounts falling due within one year Other creditors (1,314) (2,476) Revolving credit facility (2,500) - (3,814) (2,476) Net current assets/(liabilities) 322 (274) Total assets less current liabilities 116,261 82,950 Creditors: amounts falling due after more than one year Revolving credit facility (7,500) (7,500) Net assets 108,761 75,450 Share capital and reserves Called-up share capital 3,561 3,652 Share premium account 19,307 18,937 Capital redemption reserve 1,149 1,058 Special reserve 9,835 11,075 Capital reserve - realised 42,022 29,378 - unrealised 31,276 12,120 Revenue reserve 1,611 1,818 Own shares held in Treasury - (2,588) Total equity shareholders' funds 108,761 75,450 Net asset value per ordinary share ** 305.43p 217.93p * For details of the restatement of the Company's comparative figures please refer to note 1. ** See note 2 STATEMENT OF CASH FLOWS for the year to 31 March 2006 Year to 31 March 2006 Year to 31 March 2005 Â£000 Â£000 Â£000 Â£000 Operating activities Investment income received 1,897 1,628 Deposit interest received 110 190 Management fees paid (978) (758) Company secretarial fees paid (60) (49) Other cash expenses (429) (316) Net cash inflow from operating activities 540 695 Servicing of finance Interest and similar charges paid (500) (442) Net cash outflow from servicing of finance (500) (442) Investing activities Purchases of investments (53,721) (30,149) Sales of investments 53,659 24,931 Net cash outflow from investing activities (62) (5,218) Equity dividends paid (1,007) (1,041) Net cash outflow before financing (1,029) (6,006) Financing Ordinary shares purchased for cancellation - (443) Ordinary shares purchased and held in Treasury - (3,752) Ordinary shares sold from Treasury 1,718 1,421 Proceeds of short-term credit facility 2,500 - Net cash inflow/(outflow) from financing 4,218 (2,774) Increase/(decrease) in cash 3,189 (8,780) Notes: 1. CHANGES IN ACCOUNTING POLICIES AND RESTATEMENT OF PRIOR YEAR FIGURES The financial information set out above has been prepared using new accounting standards which have been issued to begin the process of converging UK Financial Reporting Standards (FRSs) with International Financial Reporting Standards. With effect from 1 April 2005, the Company has adopted the new Financial Reporting Standards (`revised UK GAAP'), and the comparative figures have been restated accordingly for the following: FRS 21: EVENTS AFTER THE BALANCE SHEET DATE a. Dividends paid by the Company are accounted for in the period in which the dividend has been paid. Previously, the Company recognised dividends in the period in which net revenue, to which those dividends related, was accounted for. FRS 25: FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION; AND FRS 26: FINANCIAL INSTRUMENTS: MEASUREMENT b. All investments held by the Company are designated as at `fair value through profit or loss'. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices at the close of business on the balance sheet date. Previously all listed investments were valued using closing mid market prices at the balance sheet date. The financial effects of these changes to the Company's accounting policies as at 31 March 2004 and 31 March 2005 are set out in the tables below: as at 31 March Previously Adjustment Restated 2004 reported Â£000 Â£000 Â£000 Investments at fair value (b) 63,430 (620) 62,810 Other creditors (a) (1,802) 1,050 (752) Capital reserve - unrealised (b) 1,082 (620) 462 Revenue reserve (a) 989 1,050 2,039 as at 31 March Previously Adjustment Restated 2005 reported Â£000 Â£000 Â£000 Investments at fair value (b) 83,882 (658) 83,224 Other creditors (a) (3,463) 987 (2,476) Capital reserve - unrealised (b) 12,778 (658) 12,120 Revenue reserve (a) 831 987 1,818 The resulting effect of these changes on the net asset value as at 31 March 2005 is laid out in the table in note 2. The financial effects of these changes to the Company's results for the year ended 31 March 2006 are not material. 2. NET ASSET VALUE PER SHARE Net asset values per share are calculated based on the number of ordinary shares in issue at the period end excluding shares held in Treasury at that date. In accordance with AITC guidance the net asset value per share published in respect of 31 March 2005 was calculated on the basis of accounting policies in use prior to the introduction of the new accounting standards referred to in note 1. A reconciliation from net asset values as published to net asset values as presented in the 31 March 2006 report under the new accounting standards is shown below: 31 March 31 March 2005 2005 Â£000 Pence Net assets (as originally stated) 75,121 216.98 Increase due to dividend accounting change 987 2.85 Reduction due using bid prices (658) (1.90) Net assets per revised UK GAAP 75,450 217.93 3. DIVIDEND The Directors propose a dividend for the year ended 31 March 2006 of 2.30p per ordinary share to be paid on 25 July 2006 to shareholders on the register on 9 June 2006. 4. FINANCIAL INFORMATION The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2005 or 2006, and has been based on the accounting policies used in the statutory accounts for the year ended March 2005, except as noted above. Statutory accounts for 2005 have been delivered to the Registrar of Companies, whereas those for 2006 will be delivered following the Company's Annual General Meeting. The auditors have reported on the 2005 accounts; their report was unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. CHAIRMAN'S STATEMENT Chairman's Statement Background I am pleased to present the eleventh annual report of Montanaro Smaller Companies Investment Trust ("MUSCIT") which was launched on 16 March 1995. In 1996, the initial investment of Â£25 million was increased in size through a Â£30 million "C" share issue. Net assets now stand at Â£109 million. An investment trust is an attractive vehicle for shareholders to invest in quoted UK "smaller" companies, which are less well researched and more illiquid than larger, blue chip companies. Performance In the year to 31 March 2006, the NAV of MUSCIT increased by 40% to 305.43p in comparison with a 21% gain by the SmallCap, outperforming by 19%. Since launch, the NAV of MUSCIT has increased by 210% in comparison with a gain of 106% by the SmallCap, outperforming by 104%. Discount The discount of MUSCIT's share price to NAV narrowed to 13.2% on 31 March 2006 (2005: 14.2%) in comparison with the sector average of 12.3% (Source: Close Wins Investment Trusts). Share Buy Backs The Board is responsible for the implementation of the share buy back programme, which is undertaken at arms length from the Manager. The Board continues to consider share buy backs as and when appropriate. Since launch, 13,333,470 shares of MUSCIT have been bought back. Full details of shares bought back during the year are included in the Directors' report, in the Annual Report. Approval to renew the Directors' authority to buy back shares, either for cancellation or for placing into Treasury, is included as Resolution 6 in the notice of the forthcoming Annual General Meeting. Holding Shares in Treasury As an alternative to cancellation, new regulations came into force on 1 December 2003 that allow companies, including investment trusts, to buy back shares and hold them in Treasury for re-issue at a later date. This has the benefit of improving liquidity as well as retaining the opportunity to enhance the net asset value. The Board has actively and carefully considered the use of Treasury Shares and has been among the industry's pioneers. Our policy is to ensure that shareholders receive a tangible benefit above and beyond an enhanced ability to manage the liquidity of the shares of MUSCIT. Shares held in Treasury will only be re-issued at a lower discount than when they were originally purchased and to produce a positive absolute return. Shares not re-issued will be cancelled within one year from purchase. This policy is in accordance with the recommendations of the AITC in their paper "Treasury Shares - A Guide to The Commercial and Technical Issues" dated 28 August 2003. Indeed, it goes further than their recommendations in seeking both absolute and relative returns for investors. During the year, 988,280 shares were re-issued from Treasury and 908,120 were cancelled. No further shares were bought back during the year and currently there are no shares held in Treasury. The Directors will seek the authority to issue shares, including those from Treasury, up to an aggregate amount of 10% of MUSCIT's issued shares as Resolution 8 at the forthcoming Annual General Meeting. The Directors will also seek the authority to issue shares from Treasury at a discount to net asset value as Resolution 9. Gearing The Board reviews the level of gearing considered appropriate for MUSCIT in discussion with the Manager. One of the benefits of investment trusts is the ability to hold prudent levels of gearing, which can enhance investment returns. ING Bank provides a borrowing facility of up to Â£10 million at a weighted average rate of 5.60% as at 31 March 2006. The facility will mature on 1 August 2007. At 31 March 2006, net gearing was 9.2%. Dividend The Company's primary focus is on capital growth rather than income. Accordingly, the Board proposes a final dividend of 2.30p per ordinary share payable on 25 July 2006 to shareholders on the register at the close of business on 9 June 2006. Corporate Governance The Directors have reviewed the recommendations of the 2003 Combined Code on Corporate Governance ("Code") and have implemented new Board procedures where appropriate, such as an annual evaluation of the Board performance. Consequently, MUSCIT has complied with the Code throughout the year except where compliance would be inappropriate given the size and nature of MUSCIT. Full disclosure of MUSCIT's compliance with the Code is included in the Directors' Report, in the Annual Report. Continuation Vote More than 97% of shareholders voting at the Annual General Meeting held on 15 July 2005 elected for MUSCIT to continue. Chairman's Comment Strategists have been recommending a switch out of small stocks into large for two years now on the basis that small companies are now trading at a premium. They continue to be wrong, mistakenly thinking that relative valuation is a guide to relative performance - it is not. Small companies commanded a premium for much of the 1980s, a period when generally they enjoyed good out performance supported by higher earnings growth, much as today. The great thing about the small company market is that it allows good stock selectors to add value. MUSCIT has outperformed in nine out of eleven years and produced an annualised NAV return of 11%, a return 4% p.a. more than the SmallCap market and 5% p.a. more than the FTSE-100. Put another way, Â£100 invested in the portfolio at launch (excluding dividends) would be worth Â£310 today compared with Â£206 if invested in the FTSE SmallCap and Â£190 in the FTSE-100. In recent times, there has been an increasing awareness of non-correlated, alternative assets as a means of risk reduction and diversification. Consultants are talking about different management approaches such as Portable Alpha, liability driven mandates or unconstrained equity mandates. Yet it is ironic, in light of the well documented historic returns over the past fifty years, that few are recommending UK and European small companies. Surely it is high time for quoted SmallCap to be recognised as a separate asset class in its own right. As Myners pointed out in 2003: "There is no obvious relationship between size and performanceâ€¦[there are] opportunities for trustees to select managers that are non-consensual and add value, but to do this successfully, trustees will have to be more rigorous in their conduct of duties". I believe that both quoted small companies and small company boutiques should feature more prominently in asset allocation decisions by pension funds and consultants alongside the currently more fashionable choices of private equity and hedge funds. Montanaro have delivered impressive consistency in steering MUSCIT to outperformance in nine out of eleven years with returns almost double those of the SmallCap. On behalf of the Board and shareholders, I extend my congratulations to them for these achievements. DAVID GAMBLE Chairman 30 May 2006

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