Final Results

Montanaro UK Smaller Companies Investment Trust PLC Annual Report and Accounts 2008 The Montanaro UK Smaller Companies Investment Trust PLC ("MUSCIT") was launched in March 1995 and is listed on the London Stock Exchange. Investment Objective MUSCIT's investment objective is capital appreciation (rather than income) achieved by investing in small quoted companies listed on the London Stock Exchange or traded on the Alternative Investment Market ("AIM") and to achieve relative outperformance of its benchmark, the FTSE SmallCap (excluding investment companies) Index. No unquoted investments are permitted. Investment Policy The Company looks to achieve its objective and to diversify risk by investing in a portfolio of UK Smaller Companies. At the time of initial investment, a potential investee company must be profitable and smaller than the largest constituent of the HGSC Index, which represents the smallest 10% of the UK Stock Market by value. At the start of 2008, this was any company below Â£1.1 billion in size. The Manager looks to focus on the smaller end of this Index. In order to manage risk the Manager will limit any one holding to a maximum of 5% of the Company's investments. The weightings for every stock are closely monitored to ensure they reflect the underlying liquidity of the particular company. The Company's AIM exposure is also closely monitored by the Board and is limited to 30% of total investments with Board approval required for exposure to be above 25%. The Manager is focused on identifying high quality niche companies operating in growth markets. This typically leads the Manager to invest in companies that enjoy high barriers to entry, a sustainable competitive advantage and strong management teams. The portfolio is therefore constructed on a "bottom up" basis and there are no sectoral constraints placed on the Manager. However, "top down" relative risk is regularly assessed by reference to the benchmark's position. The Board, in consultation with the Manager, is responsible for determining the gearing strategy for the Company. Gearing is used to enhance returns when the timing is considered appropriate. The Company currently has a credit facility of Â£25 million through ING Bank. The Board has agreed to limit borrowings to 25% of shareholders' funds. The Board believes in the opportunities that UK Smaller Companies present for long-term superior total returns. As a consequence of this any material changes to the Company's existing investment objective and policy will be subject to shareholder approval. Highlights 2008 Results Net Asset Value ("NAV") -16.9% (Â£102 million) Gross assets -17.5% (Â£118 million)* FTSE SmallCap (excluding investment companies) Index -30.9% Share price -21.2% As at 31 As at 31 March March 2008 2007 Revenue return on ordinary activities (Â£000) 1,358 1,041 Movement in capital reserve (Â£000) (23,586) 21,457 Revenue return per ordinary share 3.82p 2.92p Dividend per ordinary share 3.65p 2.65p Total return per ordinary share (62.48)p 63.18p As at As at 31 March 31 March 2008 2007 Ordinary share price 245.00p 311.00p NAV per ordinary share 304.52p 366.31p *Over the year the Company bought stock into Treasury and for cancellation, which accounted for a reduction of Â£4.89m in gross assets. Chairman's Statement "With a well defined and proven investment process that has delivered consistent outperformance across both strong and weak markets, MUSCIT gives scope for confidence going forward." Highlights 2008 - In the year to 31 March 2008, the NAV of MUSCIT decreased by 16.9% to 304.5p in comparison with a 30.9% loss by the SmallCap. - Since launch, the NAV of MUSCIT has increased by 205% in comparison with a gain of 60% by the Small Cap outperforming by 145%, - The Board is responsible for the share buy back programme. During the year 1,828,000 shares were bought into Treasury and 160,000 shares were bought for cancellation. Background I am pleased to present the thirteenth annual report of the Montanaro UK Smaller Companies Investment Trust (MUSCIT), which was launched in 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£102 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 2008, the NAV of MUSCIT decreased by 16.9% to 304.5p in comparison with a 30.9% fall by the FTSE SmallCap (excluding investment companies) Index ("SmallCap"). Since launch, the NAV of MUSCIT has increased by 205% in comparison with a gain of 60% by the SmallCap, outperforming by 145%. Discount The discount of MUSCIT's share price to NAV stood at 19.5% on 31 March 2008 in comparison with a weighted sector average of 17.2% (source: Wins Investment Trusts). Share Buy Backs The Board is responsible for the share buy back programme. During the year 1,828,000 shares were bought back for Treasury and 160,000 shares were bought back for cancellation at a cost of Â£4,501,000 and Â£384,000 respectively. 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 sector'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 Association of Investment Companies 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 relative and absolute returns for investors. On 10 December 2007 the Company bought 1,828,000 ordinary 10p shares into Treasury, representing 5.44% of the issued capital, at a price of Â£2.445 per share. The total cost of the purchase, including expenses, was Â£4,501,000. As at 31 March 2008, 1,828,000 shares were held in Treasury. During the year the Company repurchased 160,000 ordinary 10p shares for cancellation, representing 0.48% of the issued capital. The breakdown of these purchases is detailed in Note 15. The total cost of the purchases, including expenses was Â£384,000. As at 31 March 2008 the Company had authority to repurchase a further 3,349,857 ordinary 10p shares. The above repurchases were undertaken in accordance with the policies and risk management strategies outlined in the Business Review. Gearing The Board actively reviews the level of gearing considered appropriate for the Company 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. During the course of the year a new increased facility was arranged with ING Bank, which now provides a revolving credit facility of up to Â£25 million. At 31 March 2008, Â£15 million was drawn down at a weighted average interest rate of 6.1203%. During the year, net gearing ranged from 3.8% to 11.3%. At 31 March 2008, net gearing was 3.8% Dividend MUSCIT's primary focus is on capital growth rather than income. The Board's policy is to pay out by way of dividend a minimum of 90% of net earnings. Accordingly, the Board proposes a final dividend of 3.65p per ordinary share payable on 18 August 2008 to shareholders on the register at the close of business on 13 June 2008. Value Added Tax (VAT) In 2004 the Association of Investment Companies (AIC) and J.P.Morgan Claverhouse (Claverhouse) brought a case against HM Revenue & Customs to challenge the VAT charge on management fees paid by investment companies. The case was referred to the European Court of Justice and in a ruling in June 2007 it upheld the AIC/Claverhouse claim. The immediate effect is that invoices from the investment manager will no longer include VAT. The MUSCIT Board is awaiting further clarification from HM Revenue & Customs on the timetable and procedure for reclaiming VAT paid on investment management fees since 1 January 2001. There may also be scope for recovering certain VAT paid in relation to earlier periods. At the current time the Board is not recognising the potential back claim in its results nor its published NAV. Corporate Governance The Directors have thoroughly reviewed the recommendations of the 2006 Combined Code on Corporate Governance (the "Code") and have maintained procedures where appropriate, such as an annual evaluation of the Board's 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. Chairman's Comment The past financial year will live long in the memory. A US sub-prime problem rapidly escalated into a full-scale credit crisis with international ramifications. Over the summer of 2007, the US housing market deteriorated dramatically, placing considerable strain on the global banking sector. The full consequences are as yet unknown but we have seen over $100 billion in worldwide losses related to the collapse of sub-prime mortgages, the fire-sale of Bear Stearns and emergency rights issues at UBS and Lehman Brothers. Closer to home, inter-bank lending dried up as confidence evaporated in the banking system. Ultimately this contributed to the first run on a UK commercial bank since 1866 and the eventual nationalisation of Northern Rock. In the wake of such fundamental banking problems the appetite for risk has been reappraised. Essentially the era of cheap, easily accessible credit is over. This will have serious implications for the outlook for UK housing and heightens the likelihood that the problems that have beset the financial sector will spill over into the real economy. Given these tumultuous events, it can be of no surprise that the bull market in equities came to a grinding halt during the summer of 2007. Markets feed off confidence, be it consumer or macro-economic. Looking back over the past 12 months, the prevailing economic climate has been one of heightened uncertainty. Investors have become increasingly risk averse. This change in investor sentiment has been particularly visible at the smaller end of the equity markets. Over the course of the year the FTSE SmallCap fell 30.9% in contrast to a fall of 10.8% in the FTSE All-Share. When the problems that have beset the global economy in the last year are put into a historic context, the extreme variance in annual returns that were seen in 2007/08 become more understandable. Research based on the FTSE All-Share and the Hoare Govett Smaller Companies Index (HGSC), which represents the bottom 10% of the market by value, shows that Smaller Companies have underperformed their larger peers by more than 4% just 10 times in the last 52 years. The worst year was 1975 when they underperformed by 35%. This, of course, was the year of the oil crisis. Interestingly, if you look at the other years of significant underperformance, the theme of crisis is prevalent. With the credit crisis taking such a firm hold on the British economy in the second half of the year, it should be of little surprise that Smaller Companies have disappointed on such a significant relative basis. In such a challenging year there must be even greater emphasis placed on stock picking skills. It is pleasing to see that MUSCIT's stock selection has driven a year of strong relative outperformance. The Manager's focus on profitable businesses, those that are ultimately in control of their own destiny thanks to pricing power and a core competitive advantage, has helped deliver impressive relative performance over the past year. While it is impossible to forecast the scale and severity of the current downturn, history illustrates that Smaller Companies do outperform over the longer term. Indeed, the HGSC has outperformed the FTSE All-Share in 35 years out of the last 52 years. For this reason Smaller Companies should not be neglected. Indeed, UK Smaller Companies do especially well in periods of recovery. One of the keys to successful equity investing is identifying a company able to make a meaningful difference to investor returns. With a well defined and proven investment process that has delivered consistent outperformance across both strong and weak markets, MUSCIT gives scope for confidence going forward. DAVID GAMBLE Chairman 30 May 2008 Manager's Report We have taken the opportunity to add to existing positions whose business models are familiar to us. Our experience shows that these long-term holdings, where our knowledge and understanding is strongest, have tended to deliver the best returns for us. Highlights 2008 Heightened concentration within the portfolio has been a strategic decision in a more challenging market. The portfolio continued to see M&A with seven constituents taken over, including MTL Instruments and Coda. Portfolio Management At 31 March 2008, the portfolio consisted of 66 companies, compared with 71 companies a year earlier. The top ten holdings represent 26.0% of the total compared with 23.6% one year ago. This heightened concentration within the portfolio has been a strategic decision. In a more challenging market where profit warnings are increasingly common, we believe that it is a case of "better the devil you know". We have taken the opportunity to add to existing positions whose business models are familiar to us and with management teams we believe are capable of managing market expectations in more challenging periods, rather than rush to add new holdings. Our experience shows that these long-term holdings, where our knowledge and understanding is strongest, have tended to deliver the best returns for us. The past financial year has proved no exception and two of the strongest performers have been held for many years. Chloride, which specialises in power protection systems, has benefited from global investment in infrastructure that has helped it deliver a succession of earnings upgrades. We first invested in 1997. Similarly Dechra Pharmaceuticals, a provider of veterinary products and pharmaceuticals, delivered good growth as it expanded into Europe. We have owned it since the company was listed in September 2000. We consider both to be core holdings that can deliver further value to shareholders over coming years. On reflection, the past year has been just as much about what we have not owned as what we have. Our underweight positions in General Financials and Real Estate, two of the worst performing sectors, have been rewarded. Equally, the focus we place on cash generation and healthy balance sheets has also proved beneficial. In an environment where credit is becoming both increasingly scarce and expensive, the market has taken a negative view of highly geared companies that might have to renegotiate banking facilities. In a year when absolute returns have been hard to achieve, takeovers have proved a valuable source of performance. The portfolio has historically seen more than its fair share of mergers and acquisitions and this trend continued in 2007/08. The traits that attract us to our investments make them enticing to predators. During the year we saw seven holdings taken over. The most significant were the long-term holdings in MTL Instruments (manufacturer of industrial safety devices), Coda (accounting software), Foseco (supplier of consumable products for foundries) and Sondex (oil services). All went out at healthy premiums. Unsurprisingly, given the recent travails of the private equity sector, we saw a greater number of stocks fall to trade buyers than in recent years. As old holdings get taken over the team at Montanaro is continually looking to identify the next generation of investments. This has proved a particularly interesting exercise in volatile markets that present pricing anomalies. At a time when there are question marks over the resilience of the British economy, we have sought to identify companies with a global focus operating in robust growth markets. While retail may not seem immediately obvious, we believe the recent acquisition of Early Learning Centre can help revitalise the Mothercare brand. The company has a strong international franchise business which accounts for almost half the company's profits and is delivering double-digit like for like growth. In a similar vein Senior is also benefiting from strong international growth, this time in the global aerospace industry. It manufactures valuable parts for Boeing and Airbus, companies with order books at record levels. Annual Returns The period under review has been one of the toughest for the Smaller Companies sector in recent years. The Smaller Company market has been particularly hard hit as investors moved to the perceived security and liquidity of larger stocks. The past 12 months to 31 March 2008 have been the worst in relative terms for the FTSE SmallCap Index against the FTSE All-Share Index since the Company's inception. We should not forget that Smaller Companies have enjoyed a spectacular run in recent times. From its nadir in March 2003 the FTSE SmallCap Index rose 150% through to early June 2007. This represents outperformance of 33% against the FTSE All-Share. However, there is a degree of inevitability that the Index has since responded in the way that it has. The domestic focus of Smaller Companies and their exposure to the more cyclical sectors such as Real Estate and General Financials leaves them more vulnerable in times of economic uncertainty. There is little doubt that during this period these sectors have entered bear markets. The Real Estate sector, for example, has experienced a perfect storm. It underperformed the wider market as the period of yield compression came to an end and the investment market stalled. Many of these companies run highly leveraged balance sheets, leaving a deteriorating gearing position as asset values decline. While it is disappointing to report that the NAV fell over the last year, we are pleased to have outperformed the benchmark by 14%. In addition, the prevailing investment style has continued to deliver impressive relative performance. We are convinced that high quality growth companies will deliver long-term outperformance. Market Outlook While uncertainty remains over the full scale and location of the sub-prime losses across the global financial system, it is hard to see a near-term improvement in investor sentiment and stock market performance. Last year's nervousness led to redemptions from UK SmallCap retail unit trusts and OEICs totalling Â£366 million according to the Investment Management Association. This only served to exacerbate last year's poor performance. In tight, illiquid markets the presence of forced sellers often led to dramatic and indiscriminate markdowns. Clearly there are no quick fix solutions and we need a period of consolidation to help restore confidence. The financial system may require greater assistance from the UK regulatory authorities as banks need to recapitalise. After all, banks with weak balance sheets will struggle to finance the lending required to drive economic growth. Any reduction in lending activity will only make the current situation worse. Our experience tells us that just as valuations and market sentiment get too high in periods of economic strength they are likely to fall too far on the downside in the present environment. We are alert to opportunities and will be prepared to utilise our borrowing facility accordingly. However, while attractively valued stocks are now to be found in abundance we firmly subscribe to the theory that "you get what you pay for." We will continue to be happy to pay a little more for businesses where the quality of the operation gives greater comfort in the earnings outlook. This philosophy goes a long way to explaining why the Company's portfolio trades at a small premium to its benchmark. At present the forward P/E on the portfolio is 12x in contrast to the market on 10x. These valuations are towards the low end of historic trading ranges and represent a ratings compression of almost 40% over the last year. For the first time in four years, Small and Large companies are trading at broadly the same level. With a more realistic level of earnings growth forecasts in the market and valuations at four year lows, we believe it is unlikely that Smaller Companies will see the degree of underperformance witnessed in 2007. Ultimately this will be another year for astute stock picking. With economic growth set to slow over the course of the next 12 months and with further uncertainty surrounding the British housing market, we will be proceeding with care. However, there remain strong pockets of global growth and we aim to capitalise on them where we can. Additionally, some sectors are experiencing beneficial tailwinds from Sterling's weakness against the Euro which will support earnings. We also believe that if equity markets fail to value companies fairly, predators in the form of trade buyers will be prepared to do it for them. I would like to record my thanks to the Chairman and the Board of Directors for their help and support during the year and look forward to the future with confidence. I am also very grateful for the extremely valuable input I have received from our shareholders over the past 12 months. Dan Harlow Montanaro Investment Managers Limited 30 May 2008 Description of Thirty Largest Holdings as at 31 March 2008 Fisher (James) & Sons PLC Provider of specialist marine support services and operator of tankships around UK coastal waters. Dignity PLC The UK's largest provider of funeral related services. Genus PLC A world leader in the application of genetics to animal breeding. Dechra Pharmaceuticals PLC Manufacturer and distributor of veterinary products and pharmaceuticals. BPP Holdings PLC The leading provider of training services to the legal, accountancy and financial markets. Scott Wilson Group PLC An international consultancy offering integrated professional services in the transportation, property, environmental and natural resources sectors. Chloride Group PLC International electronics group, manufacturing products to protect sensitive electrical equipment against power loss and power surges. Ricardo PLC The leading UK independent automotive consultancy. Fenner PLC A world leader in the field of reinforced polymer engineering whose products are primarily sold into the mining, hydraulics and energy industries. Latchways PLC World leader in the design, manufacture and sale of safety systems for individuals working at height. Wilmington Group PLC Leading provider of information and training to business and professional markets, with particular strength in the legal and regulatory sectors. WSP Group PLC International consulting engineers with activities in the UK, Scandinavia and United States. Detica Group PLC A business and technology consultancy strongly focused on the National Security, Financial Services and Telecoms sectors. Phoenix IT Group PLC A provider of a range of IT support services, including Business Continuity, hosting, service desks, and network and systems management. M.P. Evans Group PLC A producer of Indonesian palm oil and Australian beef cattle. Hargreaves Services PLC A leading provider of transport and support services to the energy and waste sectors. Hill & Smith Holdings PLC One of the largest suppliers of galvanised steel to the UK infrastructure, building and construction industries. White Young Green PLC Multi-disciplinary consultant providing engineering, environmental, planning and management services to clients in the public and private sector. NCC Group PLC A provider of Escrow Solutions, Assurance Testing and Consultancy. Domino Printing Sciences PLC An international group providing total coding and printing solutions to a wide portfolio of market sectors. eaga PLC The UK's leading provider of residential energy efficiency solutions. VP Group PLC A specialist in the provision of rental equipment and associated services to a range of market sectors. RPS Group PLC An international consultancy providing advice on the development of natural resources, land and property, the management of the environment, and health and safety. Care UK PLC An independent provider of health and social care service solutions. Croda International PLC A manufacturer of speciality chemicals for the consumer care and industrial markets. The Stanley Gibbons Group PLC The market leader in rare stamp and autograph investment. Victrex PLC The world's largest manufacturer of PEEK, a high performance thermoplastic. Hornby PLC An international models and collectibles group. Brammer PLC A pan-European technical distributor of power transmission components. Domino's Pizza UK & IRL PLC The UK and Ireland's leading pizza delivery company. Fifty Largest Holdings as at 31 March 2008 Market Value % of Cap Holding Sector Â£000 portfolio Â£m Fisher (James) & Sons PLC Industrial Transportation 3,325 3.1 304 Dignity PLC General Retailers 3,074 2.9 487 Genus PLC Pharmeceuticals & Biotechnology 3,030 2.9 433 Dechra Pharmaceuticals PLC Pharmeceuticals & Biotechnology 2,900 2.7 237 BPP Holdings PLC Support Services 2,889 2.7 263 Scott Wilson Group PLC Support Services 2,613 2.5 182 Chloride Group PLC Electronic and Electrical Equipment 2,598 2.5 492 Ricardo PLC Support Services 2,468 2.3 179 Fenner PLC Industrial Engineering 2,350 2.2 411 Latchways PLC Support Services 2,321 2.2 93 Ten Largest Holdings 27,568 26.0 Wilmington Group PLC Media 2,265 2.1 146 WSP Group PLC Support Services 2,239 2.1 382 Detica Group PLC Software & Computer Services 2,121 2.0 289 Phoenix IT Group PLC Software & Computer Services 2,081 2.0 217 M.P. Evans Group PLC Food Producers 1,991 1.9 230 Hargreaves Services PLC Support Services 1,983 1.9 132 Hill & Smith Holdings PLC Industrial Engineering 1,982 1.8 251 White Young Green PLC Support Services 1,879 1.8 144 NCC Group PLC Software & Computer Services 1,875 1.7 113 Domino Printing Sciences PLC Electronic & Electrical Equipment 1,808 1.7 338 eaga PLC Support Services 1,800 1.7 465 VP Group PLC Support Services 1,765 1.7 142 RPS Group PLC Support Services 1,725 1.6 682 Care UK PLC Health Care Equipment & Services 1,719 1.6 227 Croda International PLC Chemicals 1,691 1.6 903 The Stanley Gibbons Group PLC General Retailers 1,662 1.6 47 Victrex PLC Chemicals 1,633 1.5 620 Hornby PLC Leisure Goods 1,604 1.5 72 Brammer PLC Support Services 1,602 1.5 149 Domino's Pizza UK & IRL PLC Travel & Leisure 1,572 1.5 325 Thirty Largest Holdings 64,565 60.8 Consort Medical PLC Health Care Equipment & Services 1,571 1.5 159 Holidaybreak PLC Travel & Leisure 1,564 1.5 268 BSS Group PLC Support Services 1,542 1.4 479 Superglass Holdings PLC Construction & Materials 1,479 1.4 80 Chemring Group PLC Aerospace & Defence 1,474 1.4 799 Foseco PLC Industrial Engineering 1,473 1.4 490 Primary Health Properties PLC Real Estate 1,471 1.4 105 Ultra Electronics Holdings PLC Aerospace & Defence 1,461 1.4 879 Brewin Dolphin PLC General Financials 1,451 1.4 290 Senior PLC Industrial Engineering 1,450 1.4 395 UTV Media PLC Media 1,398 1.3 136 Albemarle and Bond Holdings PLC General Financials 1,394 1.3 105 Lok'n Store Limited Support Services 1,380 1.3 47 Gooch & Housego PLC Industrial Engineering 1,331 1.2 54 Mothercare PLC General Retailers 1,309 1.2 357 Carclo PLC Chemicals 1,286 1.2 46 Synergy Energy Healthcare PLC Health Care Equipment & Services 1,269 1.2 345 IBS Open Systems PLC Software & Computer Services 1,244 1.2 44 London Capital Group Holdings PLC General Financials 1,222 1.2 129 Barr (AG) PLC Beverages 1,215 1.1 225 Fifty Largest Holdings 92,549 87.2 Analysis of Investment Portfolio by Industrial or Commercial Sector as at 31 March 2008 % of % of Sector portfolio SmallCap Oil and Gas Producers 2.1 2.1 Oil Equipment Services and Distribution 0.0 0.0 Oil and Gas Total 2.1 2.1 Chemicals 4.3 1.3 Mining 0.0 0.5 Basic Materials Total 4.3 1.8 Aerospace and Defence 2.8 1.1 Construction and Materials 2.3 3.8 Electronic and Electrical Equipment 6.4 2.7 General Industrials 0.0 0.8 Industrial Engineering 9.0 3.5 Industrial Transportation 3.1 4.3 Support Services 25.9 10.5 Industrials Total 49.5 26.7 Automobiles and Parts 0.0 0.0 Beverages 1.1 0.7 Food Producers 1.9 4.2 Household Goods 0.0 0.6 Leisure Goods 1.5 1.0 Personal Goods 0.0 0.0 Consumer Goods Total 4.5 6.5 Health-care Equipment and Services 4.3 3.1 Pharmaceuticals and Biotechnology 5.6 5.6 Health-care Total 9.9 8.7 Food and Drug Retailers 0.0 0.3 General Retailers 5.7 7.9 Media 3.4 5.0 Travel and Leisure 3.0 5.2 Consumer Services Total 12.1 18.4 Fixed Line Telecommunications 0.0 2.0 Telecommunications Total 0.0 2.0 General Financials 4.8 8.2 Life Insurance 0.0 1.2 Non-life Insurance 0.0 2.5 Real Estate 5.0 12.0 Financials Total 9.8 23.9 Software and Computer Services 7.8 7.8 Technology, Hardware and Equipment 0.0 2.1 Technology Total 7.8 9.9 The investment portfolio comprises 66 listed UK equity holdings including 14 holdings totalling Â£18,259,000 (representing 17.2% of the portfolio) traded on the Alternative Investment Market ("AIM"). Board of Directors MUSCIT has a highly experienced Board of Directors with extensive knowledge of investment management and investment trusts David Gamble - Chairman (Aged 64) David Gamble was appointed a Director on 19 November 2004 and became Chairman of MUSCIT on 28 January 2005. David is also chairman of Hermes Property Unit Trust, a director of IBM Pension Trustees Limited, Barrie & Hibbert PLC, Vencap International PLC, New Star Asset Management Limited, Polar Capital Technology Trust PLC and Dunedin Enterprise Investment Trust PLC. He retired as chief executive of British Airways Pension Investment Management in 2004. Antony Hardy (Aged 68) Antony Hardy was appointed a Director on 17 July 2000. He is a director of Perpetual Income and Growth Investment Trust plc, Sableknight Limited and Lockfold Communications Limited and a director of several pension fund trustee bodies. He is also an independent investment adviser to several local authority pension schemes and endowed charities, YMCA England and a number of private companies. He was previously investment manager for Church Commissioners for England. Christopher Jones (Aged 67) Christopher Jones has over thirty years' investment experience and was appointed a Director on 9 July 1999. From 1985 until 2004 he was head of investments at Merchant Investors Assurance Company Limited. He is also a director of Schroder UK Mid and Smaller Cap Fund plc, Atlantis Japan Growth Fund Limited, Ecofin Water & Power Opportunities PLC, Montanaro European Smaller Companies PLC, Jupiter Second Enhanced Income Trust plc, Cayenne Trust plc and Japan Accelerated Performance Fund PLC. Michael Moule (Aged 62) Michael Moule formerly specialised in managing investment trusts for Henderson and Touche Remnant. Appointed a Director on 28 January 2005, he has extensive experience of UK and overseas equity markets having worked with investment trusts since 1967. He is also a director of Foreign & Colonial Eurotrust PLC, Lowland Investment Company plc and Polar Capital Technology Trust PLC. Laurence Petar (Aged 58) Laurence Petar has been involved in the investment trust sector for the past 30 years and was appointed a Director on 23 May 2003. He was a partner at the stockbroking firm of Gilbert Elliott & Co until 1986. He then spent 10 years as an executive director in charge of the investment trust department at UBS Limited and most recently he was a consultant to HSBC Securities. He is currently a director of Jupiter Asset Management Limited. Advisers Manager Montanaro Investment Managers Limited 53 Threadneedle Street London EC2R 8AR Tel: 020 7448 8600 Fax: 020 7448 8601 www.montanaro.co.uk info@montanaro.co.uk Company Secretary, Administrator and Registered Office CAPITA Sinclair Henderson Limited Beaufort House 51 New North Road Exeter EX4 4EP Tel: 01392 412 122 Fax: 01392 253 282 Registrars Capita Registrars Shareholder Services Department The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Tel: 0871 664 0300 (calls will cost 10p per minute plus network charges) Fax: 020 639 2342 ssd@capitaregistrars.com www.capitaregistrars.com Bankers HSBC International PO Box 181 27-32 Poultry London EC2P 2BX ING Bank N.V. London Branch 60 London Wall London EC2M 5TQ Auditor KPMG Audit Plc 100 Temple Street Bristol BS1 6AG Solicitors Norton Rose LLP 3 More London Riverside London SE1 2AQ Corporate Broker Winterflood Securities Limited The Atrium Building Cannon Bridge 25 Dowgate Hill London EC4R 2GA Montanaro UK Smaller Companies Investment Trust PLC Registered in England and Wales No. 3004101 An investment company as defined under Section 833 of the Companies Act 2006. Directors' Report The Directors present their Annual Report and financial statements for the year ended 31 March 2008. Business Review Introduction Preparation of a Business Review is a recent development in financial reporting and a mandatory requirement arising from Section 234ZZB of the Companies Act 1985. A Business Review must contain a review of a company's business, the principal risks and uncertainties it faces and an analysis of its performance during the financial year and position at the year-end. To aid understanding of these areas, your Board is required to include analysis using appropriate Key Performance Indicators. DEVELOPMENT, PERFORMANCE AND POSITION OF MUSCIT Review of the Business of MUSCIT A description of MUSCIT's activities during the year is given in the Chairman's Statement and in the portfolio management section of the Manager's Report. MUSCIT is a closed-end investment trust listed on the London Stock Exchange. Its affairs are managed so that it receives approval from HM Revenue & Customs as an investment trust under s842 of the Income & Corporation Taxes Act 1988 ("s842"). One of the criteria for compliance is that at least 85% of MUSCIT's eligible investment income arising in an accounting period is distributed to shareholders. The Board considers that MUSCIT will continue to qualify as an investment trust, which confers certain benefits such as exemption from the payment of capital gains taxes arising on the sale of investments. MUSCIT has most recently received approval under s842 for the year ended 31 March 2007 and an application will be made to HM Revenue & Customs for MUSCIT's status as an investment trust in financial year 2007/08 to be confirmed. Further details on the operation of investment trusts can be obtained from the Association of Investment Companies on their website at www.theaic.co.uk. MUSCIT is also an investment company as defined in s833 of the Companies Act 2006. The current portfolio of MUSCIT is such that its shares are eligible for inclusion in an ISA and PEPs up to the maximum annual subscription limit and the Directors expect this eligibility to be maintained. MUSCIT's investment objective is capital appreciation (rather than income) achieved by investing in quoted companies listed on the London Stock Exchange or traded on the Alternative Investment Market ("AIM"). No unquoted investments are permitted. The benchmark is the FTSE SmallCap (excluding investment companies) Index. At the time of initial investment, a potential investee company must be profitable and smaller than the largest constituent of the HGSC Index which represents the smallest 10% of the UK Stock Market by size. At the start of 2008, this was any company below Â£1.1 billion in size. The Manager of MUSCIT is Montanaro Investment Managers Limited ("Montanaro"), a highly experienced specialist in UK and European quoted small companies established in 1991. Montanaro has one of the largest teams in the UK researching and investing exclusively in quoted small companies. They closely monitor all investments within the portfolio and identify potential new investments. Although sector weightings of the benchmark are monitored, the portfolio is a result of bottom-up stock picking and may differ markedly from the index. Tracking error may be relatively high reflecting a focus on research driven stock selection. Montanaro currently manage over Â£700 million, mainly on behalf of leading financial institutions. There are currently 35,449,458 ordinary 10p shares in issue (2007: 35,609,458) of which 1,828,000 are held in Treasury (2007: nil). Ordinary shareholders have unrestricted voting rights at all general meetings of the Company. Details of the shares bought back during the year are contained in the Chairman's Statement and Note 15. Description of Principal Risks Associated with MUSCIT The Board carefully considers the principal risks for MUSCIT and seeks to mitigate these risks through continual and regular review, policy setting, compliance with and enforcement of contractual obligations and active communication with the Manager, the Administrator and shareholders. The Board applies the principles detailed in the recommendations of the AIC Code as described elsewhere in the Directors' Report. Details of MUSCIT's internal controls may be found under Corporate Governance below. Mitigation of the principal risks is sought and achieved in many ways as shown below: Investment Manager: Montanaro has been the Manager of MUSCIT since its launch in 1995. The success of MUSCIT and its strong performance is largely attributable to Montanaro. Should the current Manager not be in a position to continue its management of the Company, performance may be impacted. The Board holds board meetings which are attended by the Manager. Montanaro have one of the largest specialist teams in the UK. Succession planning within Montanaro and recruitment of personnel are closely monitored. Investment & Strategy: MUSCIT may underperform its benchmark as a result of poor stock selection or sector allocation or as a result of being geared in a falling market or ungeared in a rising market. The Manager meets regularly with the Board to discuss portfolio performance and strategy, and provides the Board and shareholders with monthly reports. The portfolio is well diversified thereby reducing stock specific risk. The Board receives and reviews monthly a report of all transactions and, through the forum of its Management Engagement Committee, formally reviews the performance of the Manager annually. Gearing: one of the benefits of closed ended investment trusts is the ability to use borrowings which can enhance returns in a rising stock market. However, gearing exacerbates movements in the net asset value both positively and negatively and will exaggerate declines in net asset value when prices of quoted UK small companies are falling. The Board monitors and discusses with the Manager the appropriate level of gearing of MUSCIT at each Board meeting. Portfolio Liquidity: as with all small company investment trusts, there are times when the liquidity of the underlying portfolio is poor, such as when small company trusts are out of favour or during periods of adverse economic conditions. The Manager focuses on Smaller Companies where the opportunities may be more attractive but this can increase overall underlying illiquidity. This may result in the Manager being unable to buy or sell individual holdings within the portfolio. In addition, this may impact the discount of MUSCIT to the net asset value of the portfolio. One of the benefits of a closed end trust is that the Manager is not forced to buy or sell individual holdings at inopportune times. The Manager constantly reviews the underlying liquidity of the portfolio, which is well-diversified. Particular attention is paid to the AIM holdings, with the Manager providing the Board with liquidity reports at every meeting. Montanaro deal with a wide range of brokers to enhance their ability to execute and minimise liquidity risk. Liquidity of MUSCIT Shares: as with many small company investment trusts, there are times when the liquidity of the shares of MUSCIT is low. In the case of MUSCIT, many of the shareholders are large financial institutions with a long-term investment horizon. Unlike other trusts where private individuals form a larger part of the share register, this may result in less shares being traded in MUSCIT on a daily basis and make it difficult at times for investors to buy or sell shares of MUSCIT. The Manager is encouraged by the Board to market the strong investment story of MUSCIT to private client wealth managers and other potential new investors. The goal is to widen the shareholder base to enhance liquidity. In addition, the ability to buy back shares to be held in Treasury for subsequent re-issue enhances the liquidity of MUSCIT shares. Discount Volatility: as with all small company investment trusts, discounts can fluctuate significantly both in absolute terms and relative to their peer group. The Board actively monitors and seeks to manage the discount of MUSCIT and is responsible for share buy backs for cancellation or issuance from Treasury. Share buy backs may help to reduce the discount. During the year and up to the date of this report, MUSCIT has made use of the authority granted at the Annual General Meeting held in 2007 to make market purchases of up to 5,337,857 ordinary shares. As at the date of this report, 1,828,000 ordinary shares are held in Treasury. A further 160,000 Ordinary shares were bought back for cancellation. The Board encourages the Manager to market MUSCIT to new investors to increase demand for shares of MUSCIT, which may help to reduce the discount. Regulatory: a breach of s842 might lead to MUSCIT being subject to capital gains tax; a breach of rules of the London Stock Exchange might result in censure by the FSA and/or suspension of MUSCIT's listing on the London Stock Exchange. The Board has agreed a service level agreement with the Administrator which includes active and regular review of compliance with s842, and FSA and London Stock Exchange Rules. This is reviewed at each Board meeting. Operational: if the Administrator's operational procedures proved deficient and its core accounting systems failed, accounting errors might occur resulting in inaccurate net asset valuations and performance data and possibly a qualified audit report and/or loss of s842 status. The Board monitors operational issues monthly and reviews them in detail at each Board meeting. Financial: inappropriate accounting policies or failure to comply with current or new Accounting Standards might lead to a breach of regulations and/or loss of s842 status. The Board monitors financial issues monthly and reviews them in detail at each Board meeting. Banking: a breach of MUSCIT's loan covenants might lead to funding being summarily withdrawn. The Board monitors compliance with banking covenants monthly and reviews them with the Administrator and Manager. Reputational: inadequate or deficient controls of the Administrator or Manager or other third-party providers might result in breaches of regulations and damage the trust and confidence of shareholders in MUSCIT, leading to a widening of the discount. The Board continually monitors and reviews issues that may impact the standing of MUSCIT. Reputational: Failure to keep current and potential investors informed of the Trust's performance and development could result in less shares being traded in MUSCIT on a daily basis and also lower investor confidence. The Board and Manager maintain clear and frequent communication with shareholders and potential investors. The Board and Manager are happy to meet with shareholders. A description of MUSCIT's system for reviewing its risk-environment is shown in the Directors' Report. Analysis of Performance using Key Performance Indicators Results and Dividends: the results for the year are as set out in the Income Statement. The Directors recommend that a first and final dividend of 3.65p (2007: 2.65p) per ordinary share (excluding any shares held in Treasury), amounting to Â£1,227,000 (2007: Â£944,000), be paid on 18 August 2008 to shareholders on the share register at the close of business on 13 June 2008. Net Asset Value: the NAV per ordinary share, including revenue reserves, at 31 March 2008 was 304.52p (2007: 366.31p). The Board and the Manager monitor the following Key Performance Indicators: - the NAV over one, three and five years and since launch relative to the benchmark and peer group; - the high, low and closing level of discount; and - the Total Expense Ratio, which was 1.7% in 2007/08. Future Developments and Events Subsequent to the Year End At the Annual General Meeting held in 2005, shareholders voted overwhelmingly for the continuation of MUSCIT. The next continuation vote is due in 2010. Section 992 Companies Act 2006 The following information is disclosed in accordance with Section 992 of the Companies Act 2006. The Company's capital structure and voting rights. Details of the substantial shareholders in the Company. The rules concerning the appointment and replacement of Directors are contained in the Company's Articles of Association. Amendment of the Company's Articles of Association and the giving of powers to issue or buy back the Company's share require a special resolution to be passed by shareholders and the Board's current powers to buy back shares and proposals for their renewal. There are: no restrictions concerning the transfer of securities in the Company; no special rights with regard to control attached to securities; no agreements between holders of securities regarding their transfer known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid. There are no agreements between the Company and its Directors concerning compensation for loss of office. Management Agreement The Company's investments are managed by Montanaro Investment Managers Limited under a management agreement dated 30 June 1998, amended on 10 June 1999 and 31 July 2001. The management fee comprises two components: a fixed fee of 1/12 of 1% of the gross assets of MUSCIT, payable monthly in arrears, and a performance fee of 0.1% of the gross assets of MUSCIT for each 1% outperformance (or part thereof) of MUSCIT's NAV against the SmallCap over the financial year, subject to a maximum of 0.5% of the gross assets calculated at the end of the financial year. A performance fee is only payable in respect of any financial year of MUSCIT in the event that the NAV of MUSCIT as at the end of that financial year (as derived from the audited financial statements of MUSCIT): (i) is not less than the NAV of MUSCIT as at the end of the immediately preceding financial year in which the Manager was entitled to a performance fee; and (ii) has outperformed MUSCIT's benchmark during the year by at least 2%. (In such event, the performance fee would be payable in respect of each 1% (or part thereof) outperformance of the benchmark). In the year to 31 March 2007 the Company achieved a new "high on high" NAV of 366.31p. No performance fee is payable in respect of the year ended 31 March 2008 (2007: Â£710,000+VAT). On termination of the management agreement by MUSCIT, the Manager is entitled to a termination fee of 1% of gross assets of MUSCIT as at close of business on the last day of the calendar month immediately preceding the effective date of termination of the agreement. The Board keeps under review the performance of the Manager. In the opinion of the Directors the continuing appointment of the Manager on the terms agreed is in the interests of shareholders as a whole. Among the reasons for this view are the satisfactory investment performance of MUSCIT relative to that of the markets in which MUSCIT invests and because the remuneration of the Manager is reasonable compared to that of the managers of comparable investment companies. Directors The Directors in office at the year end, along with their biographies, are shown above. Directors' Beneficial and Family Interests The interests of the Directors and their families in the ordinary shares of MUSCIT are set out below: As at As at 31 March 31 March 2008 2007 No. of shares No. of shares David Gamble - Chairman 10,000 10,000 Antony Hardy 10,000 10,000 Christopher Jones 10,000 10,000 Michael Moule 7,000 7,000 Laurence Petar 10,000 10,000 There have been no changes to the above holdings between 31 March 2008 and the date of this Annual Report. None of the Directors nor any persons connected with them had a material interest in any of MUSCIT's transactions, arrangements or agreements during the year. Corporate Governance Compliance with the Provisions of the AIC Code of Corporate Governance The Board of MUSCIT has considered the principles and recommendations of the AIC Code of Corporate Governance ("AIC Code") by reference to the AIC Corporate Governance Guide for Investment Companies ("AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in Section 1 of the Combined Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to MUSCIT. The Board considers that reporting under the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the Combined Code), will provide better information to shareholders. The Company has complied with the recommendations of the AIC Code and the relevant provisions of Section 1 of the Combined Code, except as set out below. The Combined Code includes provisions relating to: the role of the chief executive; executive directors' remuneration; and the need for an internal audit function. For the reasons set out in the AIC Guide, and in the Preamble to the Combined Code, the Board considers that these provisions are not relevant to the position of MUSCIT, being an externally managed investment company. The Company has therefore not reported further in respect of these provisions. The AIC Code recommends that a full portfolio listing is made available to shareholders at least once a year, and where it is not contained in the Annual Report, a reference should be given explaining where it can be found. The Company was not compliant as such disclosures were not contained in the Annual Report for the year to 31 March 2007. The Company discloses the top 50 holdings within its portfolio, currently representing 87.2% of the portfolio. It is considered that the remaining stocks are largely holdings in transition and not therefore strictly representative of the portfolio. Board Responsibilities The Board comprises five non-executive Directors. The Board has considered the independent status of each Director under the AIC Guide and has determined that all are independent other than Christopher Jones for the reasons set out on the following page. Mr Gamble and Mr Moule have a common directorship of another investment trust but this is not considered to affect their ability to act independently and each Director is deemed independent in outlook and judgement. The Chairman is free from any conflicts of interest and does not have any other significant commitments than those disclosed in his biography above. The Board has formalised the arrangements under which Directors, in the furtherance of their duties, may take independent professional advice. The Company also maintains Directors' and Officers' liability insurance. The Company holds at least four Board meetings each year at which the Directors review MUSCIT's investments and all other important issues to ensure control is maintained over MUSCIT's affairs. During the year ended 31 March 2008, six Board meetings were held, one of which was a full-day session devoted entirely to reviewing strategic matters. None of the Directors has a contract of service with MUSCIT nor has there been any contract or arrangement between MUSCIT and any Director at any time during the year. The Company has neither executive directors nor employees. However, the Board has engaged external companies to undertake the investment management, administrative and custodial activities of MUSCIT. Clear, documented contractual arrangements are in place between MUSCIT and these firms that define the areas where the Board has delegated functions to them. Further details of the investment management agreement are given above. A schedule of matters specifically reserved to the Board for its decision has been adopted. These reserved matters include the approval of annual and interim accounts, the approval of dividends, the approval of press releases and circulars, Board appointments and removals and the membership of Committees. Decisions regarding gearing and the capital structure of MUSCIT (including share buy backs and Treasury share transactions) are also taken by the Board, while the day-to-day investment of the portfolio is delegated to the Manager. Christopher Jones is the Senior Director of MUSCIT. While Mr Jones is not deemed to be independent under the AIC Code or Listing Rules, due to his being a director of more than one investment trust managed by the Manager, the Board believes that his extensive knowledge of the interests of shareholders of investment trusts enables him to effectively perform this role. Elections and Re-elections at the Annual General Meeting In accordance with the Company's current Articles, one-third of the Directors subject to retirement by rotation retire at each AGM. In so far as the number of Directors retiring is less than one-third, those Directors who have been longest in office shall retire. In accordance with the Combined Code and AIC Code Directors will be subject to re-election by shareholders at intervals of no more than three years. In divergence from the AIC Code, Directors will not be subject to annual re-election once they have served nine years on the Board since the date of first election. The Board will consider the continuing independence of any Director who has served on the Board for nine years or more, giving consideration to: (i) Employee relationships. (ii) Material business relationships. (iii) Family ties. (iv) Cross-directorships. (v) Shareholdings. The tenure of the Chairman will be subject to the same restrictions. A Chairman stepping down from that role will be capable of continuing to serve as a Director. In accordance with the Articles of Association, Antony Hardy will retire by rotation at the Annual General Meeting and, being eligible, will offer himself for re-election. His fellow Directors strongly recommend the re-election of Antony Hardy who is Chairman of the Audit Committee and has extensive experience as an independent investment adviser. In accordance with the Combined Code and AIC Code, Michael Moule and David Gamble will retire at the Annual General Meeting as a result of it having been 3 years since their last election and, being eligible, will offer themselves for re-election. David Gamble is Chairman of the Company and has over 35 years experience within the asset management industry and currently performs a number of non-executive and advisory roles. Michael Moule has extensive experience of both UK and overseas equity markets and the investment trust sector. Their fellow Directors strongly recommend the re-election of David Gamble and Michael Moule as they make a valuable contribution to the knowledge and experience of the Board. In accordance with Listing Rule 15.2.13A, Christopher Jones will offer himself for re-election as a result of being a director of another investment company managed by the Investment Manager. His fellow Directors strongly recommend the re-election of Christopher Jones who has significant experience both as a non-executive Director and through a 30 year career in investment management. Performance Evaluation The Directors conduct an annual review of Board performance and effectiveness. This process is comprised of three elements: 1. a factual report of Board Committee procedures from MUSCIT's Secretary; 2. an assessment of the Board and a self-evaluation by each Director against specific agreed criteria; and 3. an assessment of the Chairman by each Director against specific agreed criteria. Voting Policy and Socially Responsible Investment The Company has given discretionary voting powers to the Manager, Montanaro. AIC Code Principal 16 recommends that the Board should agree a policy regarding voting rights exercised by Montanaro. However, the Board has agreed that there is no need to set a written down policy with Montanaro concerning key operational issues as the Board and Montanaro already have a clear understanding of their respective responsibilities. The Board encourages the Manager to give due consideration to environmental, social and governance matters whilst recognising the overall investment policy and objectives of the Company. Montanaro regularly reports to the Board on how the Company's voting powers have been exercised. Montanaro votes against resolutions it considers may damage shareholders' rights or economic interests. Montanaro gives due weight to what they consider to be socially responsible investment when making investment decisions, but its overriding objective is to produce good investment returns for shareholders. Board Committees The Audit Committee comprises all members of the Board, with Antony Hardy acting as Chairman, which the Board considers to be appropriate in order to maximise the collective knowledge of the Committee. The Committee meets at least twice a year in conjunction with the annual and interim results of MUSCIT. It provides a forum through which MUSCIT's Auditor reports to the Board; reviews the terms of appointment, remuneration, independence, objectivity and effectiveness of the Auditor; reviews the annual and interim reports of MUSCIT and monitors the internal controls of MUSCIT and its service providers. The Committee has adopted formal written terms of reference. The Remuneration Committee comprises all members of the Board, with the Chairman of MUSCIT acting as its Chairman, which the Board considers to be appropriate in order to maximise the collective knowledge of the Committee. The Remuneration Committee meets as required for the purpose of considering levels of remuneration paid to the Board. The Committee has adopted written terms of reference. The Board also uses a number of other committees, detailed as follows, on which all Board members sit. Written terms of reference, which may be obtained from the secretary on request, have been adopted in respect of each committee, all of which are chaired by the Chairman of MUSCIT. A Management Engagement Committee meets at least once a year for the purpose of reviewing the terms of appointment and performance of the Manager and other service providers. During the year this Committee held one meeting. The Nomination Committee meets as required for the purpose of considering appointments to, and removals from, the Board. Appointments to the Board are made according to a person's existing knowledge and expertise. The Board is committed to a policy of succession planning. This Committee also held one meeting. Attendance Management Audit Remuneration Engagement Nomination Board Committee Committee Committee Committee Number Number of Number of Number of Number of Number of Number of Number of Number of Number of of meetings Meetings meetings Meetings meetings Meetings meetings Meetings meetings Meetings held attended held attended held attended held attended held attended David Gamble 6 6 2 2 1 1 1 1 1 1 Antony Hardy 6 6 2 2 1 1 1 1 1 1 Christopher Jones 6 6 2 2 1 1 1 1 1 1 Michael Moule 6 6 2 2 1 1 1 1 1 1 Laurence Petar 6 6 2 2 1 1 1 1 1 1 Internal Control and Financial Reporting The Board is responsible for establishing and maintaining MUSCIT's system of internal control and for maintaining its effectiveness. Internal control systems are designed to meet the particular needs of MUSCIT and the risks to which it is exposed and by their very nature provide reasonable but not absolute assurance against misstatement or loss. The Directors have reviewed the effectiveness of the system of internal controls, including financial, operational and compliance controls, and risk management. The key procedures, which have been established to provide effective internal control, are as follows: Throughout the year under review and up to the date of this Annual Report, there has been an ongoing process for identifying, evaluating and managing the significant risks faced by MUSCIT, which accords with guidance in the document entitled "Internal Control: Revised Guidance for Directors on the Combined Code" and is reviewed on a regular basis by the Board. The process involves reports from MUSCIT's Secretary and Manager as described below. In addition, the Board receives internal control statements from all the third parties to which it delegates functions. In accordance with guidance issued to directors of listed companies in October 2005 the Board has carried out a review of the system of internal controls as it has operated since 1 April 2007. Investment management is provided by the Manager, which is regulated by the Financial Services Authority. The Board is responsible for setting the overall investment policy and monitors the activity of the Manager at regular Board meetings. The Manager provides reports at these meetings, which cover investment performance and compliance issues. Capita Sinclair Henderson Limited is responsible for the provision of administration and company secretarial duties. It also reports to the Board on risk control issues for MUSCIT as a whole. Custody of assets is undertaken by independent third parties. The duties of investment management, accounting and the custody of assets are segregated. The procedures of the individual parties are designed to complement one another. The Board of MUSCIT clearly define the duties and responsibilities of their agents and advisers in the terms of their contracts. The appointment of agents and advisers is conducted by the Board after consideration of the quality of the parties involved, and the Board monitors their ongoing performance and contractual arrangements. Mandates for authorisation of investment transactions and expense payments are set by the Board. The Board reviews financial information produced by MUSCIT's Secretary in detail on a monthly basis. Dialogue with Shareholders The Directors are always available to enter into dialogue with shareholders and have a policy of regularly inviting major shareholders to meet with the Board. All shareholders have the opportunity to attend and vote at the Annual General Meeting during which the Board and Manager are available to discuss issues affecting MUSCIT. Substantial Shareholdings As at the date of this report, MUSCIT has been informed of the following notifiable interests in MUSCIT's voting rights: % of Beneficial owner Ordinary Shares shares in issue Derbyshire County Council 2,925,000 8.70 East Riding of Yorkshire Council 2,675,000 7.96 Co-operative Insurance Society 2,500,000 7.44 Royal London Asset Management Limited 2,350,000 6.99 Reliance Mutual Insurance Society Limited 2,310,000 6.87 Newton Investment Management Limited 2,054,890 6.11 Jupiter Asset Management 1,875,000 5.58 Legal & General Group PLC 1,454,321 4.33 J O Hambro Investment Management Limited 1,359,600 4.04 Going Concern The Directors, after due consideration, are of the opinion that it is appropriate to presume that the Company will continue in business for the foreseeable future and accordingly have adopted the going concern basis in preparing the accounts. Payment of Suppliers It is MUSCIT's payment policy to obtain the best possible terms for all business and therefore there is no consistent policy as to the terms used. The Company agrees with its suppliers the terms on which business will take place and it is MUSCIT's policy to abide by those terms. The Company endeavours to pay suppliers' invoices by the end of the month in which they are received. No invoices received by MUSCIT prior to the Balance Sheet date (or 31 March 2007) were unpaid and, therefore, there were no trade creditors at either year end. Auditor KPMG Audit Plc is willing to remain in office and Resolution 8 for its re-appointment will be proposed at the Annual General Meeting. The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditors are unaware; and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company's Auditors are aware of that information. Special Business at the Annual General Meeting A resolution to renew MUSCIT's authority to purchase (either for cancellation or for placing into Treasury) up to 14.99% of MUSCIT's ordinary shares in circulation for a further year will be put to shareholders as Resolution 9 at the Annual General Meeting. Any shares held in Treasury for a period in excess of 12 months will be cancelled. Resolution number 10, if passed, will give the Directors the general authority to allot ordinary shares (including issues out of Treasury) up to an aggregate nominal amount of one-third of MUSCIT's issued ordinary shares, in accordance with statutory pre-emption rights. Resolution number 11, subject to the passing of Resolution 10, if passed, will give the Directors the general authority to allot ordinary shares (including issues out of Treasury) for cash, up to an aggregate nominal amount of 10% of the issued ordinary shares and at a price not less than the net asset value per share, without having to offer such shares to existing shareholders in proportion to their existing holdings. Resolution number 12, subject to the passing of Resolution number 10, if passed, will give the Directors the general authority to allot shares held in Treasury at a discount to net asset value, up to the same aggregate nominal amount of 10% of the issued ordinary shares. Any shares placed into Treasury under this authority will only be re-issued at an absolute profit and at a lower discount than when they were originally purchased. Any decisions regarding placing shares into Treasury, or issuing shares from Treasury, will be taken by the Directors. Resolution number 13, if passed, will amend the Company's Articles of Association, primarily to reflect the provisions of the Companies Act 2006 that came into force on or before 6 April 2008, and to reflect the provisions of the Companies Act 2006 which are coming into force in October 2008. An explanation of the main changes between the proposed and existing Articles of Association is set out in the note at the end of this report. In addition, it is also proposed to increase the maximum amount of the Directors' authorised aggregate annual remuneration from Â£100,000 to Â£140,000 to allow for adequate succession planning which could require the possible appointment of an additional Director if deemed to be appropriate. Full details of these resolutions are provided in the Notice of Annual General Meeting. By order of the Board CAPITA SINCLAIR HENDERSON LIMITED Company Secretary 30 May 2008 Directors' Remuneration Report The Board has prepared this report, in accordance with the requirements of the Directors' Remuneration Report Regulations 2002, in respect of the year ended 31 March 2008. An Ordinary Resolution to receive this report will be put to shareholders at the forthcoming Annual General Meeting. The law requires your Company's Auditor to audit certain disclosures provided. Where disclosures have been audited, they are indicated as such. The Auditor's opinion is included in its report. Remuneration Committee The Company currently has five non-executive Directors, all of whom sit on the Remuneration Committee. Policy on Directors' Fees The Board's policy is that the remuneration of Directors should reflect the experience of the Board as a whole, be fair and comparable to that of other companies of a similar size and capital structure (ordinary shares and bank borrowings) and that have a similar investment objective (capital growth). It is intended that this policy will continue for the year ending 31 March 2009. The fees of the Directors are determined within the limits set out in the Company's Articles of Association. Directors are not eligible for bonuses, pension benefits, share options, long-term incentive schemes or other benefits. Directors' Service Contracts It is the Board's policy that none of the Directors has a service contract. The terms of their appointment provide that a Director shall retire and be subject to election at the first Annual General Meeting after his appointment, and at least every three years thereafter. The terms also provide that a Director may be removed without notice and that compensation will not be due on leaving office. Your Company's Performance The following graph compares the total return (assuming all dividends are reinvested) over the past five years to ordinary shareholders to the total shareholder return on a notional investment made up of shares of the same kinds and number as those by reference to which the FTSE SmallCap (ex.I.Cs) is calculated. The index was chosen for comparison purposes as it is the benchmark used for investment performance measurement purposes. Directors' Emoluments for the Year (Audited) The Directors who served in the year received the following emoluments in the form of fees: Year to Year to 31 March 2008 31 March 2007 Â£ Â£ David Gamble 23,000 23,000 Antony Hardy 16,000 16,000 Christopher Jones 16,000 16,000 Michael Moule 15,000 15,000 Laurence Petar 15,000 15,000 Approval The Directors' Remuneration Report was approved by the Board of Directors on 30 May 2008. DAVID GAMBLE Chairman Statement of Directors' Responsibilities in Respect of the Annual Report and the Financial Statements The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website, www.montanarouksmaller.co.uk. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement of the Directors in respect of the annual financial report We confirm that to the best of our knowledge: the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and the Directors' Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face. DAVID GAMBLE Chairman 30 May 2008 Independent Auditor's Report to the Members of Montanaro UK Smaller Companies Investment Trust PLC We have audited the financial statements of Montanaro UK Smaller Companies Investment Trust PLC for the year ended 31 March 2008 which comprise of the Income Statement, the Reconciliation of Movements in Shareholders' Funds, the Balance Sheet, the Statement of Cash Flows and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors' Remuneration Report that is described as having been audited. This report is made solely to the Company's members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an Auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The Directors' responsibilities for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the Statement of Directors' Responsibilities above. Our responsibility is to audit the financial statements and the part of the Directors' Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors' Report is consistent with the financial statements. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the company's compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Company's corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors' Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors' Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors' Remuneration Report to be audited. Opinion In our opinion: the financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the Company's affairs as at 31 March 2008 and of its loss for the year then ended; the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors' Report is consistent with the financial statements. KPMG Audit Plc CHARTERED ACCOUNTANTS REGISTERED AUDITOR 30 May 2008 Income Statement for the year to 31 March 2008 Year to 31 Year to 31 March 2008 March 2007 Revenue Capital Total Revenue Capital Total Notes Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 (Losses)/gains on investments designated as fair value through profit or loss 10 - (22,427) (22,427) - 23,331 23,331 Dividends and interest 2 2,823 - 2,823 2,423 - 2,423 Management fee 3 (716) (717) (1,433) (736) (736) (1,472) Management performance fee 3 - - - - (834) (834) Other income 2 5 - 5 3 - 3 Other expenses 4 (312) - (312) (342) - (342) Net return before finance costs and taxation 1,800 (23,144) (21,344) 1,348 21,761 23,109 Interest payable and similar charges 6 (442) (442) (884) (304) (304) (608) Net return before taxation 1,358 (23,586) (22,228) 1,044 21,457 22,501 Taxation 7 - - - (3) - (3) Net return after taxation 1,358 (23,586) (22,228) 1,041 21,457 22,498 Return per ordinary share 9 3.82p (66.30p) (62.48p) 2.92p 60.26p 63.18p The total column of this statement is the profit and loss account of the Company. All revenue and capital items in the above statement derive from continuing operations. No Statement of Total Recognised Gains and Losses has been prepared as all such gains and losses are shown in the Income Statement. No operations were acquired or discontinued in the year. The notes below form part of these financial statements. Reconciliation of Movements in Shareholders' Funds for the year to 31 March 2008 Called- Own Total up Share Capital Capital Capital shares equity Share- share premium redemption Special reserve reserve Revenue held in holders' capital account reserve reserve - realised - unrealised reserve Treasury funds Year to 31 March 2008 Notes Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 As at 31 March 2007 3,561 19,307 1,149 9,835 46,505 48,250 1,833 - 130,440 Transfer between reserves - - - - 46,384 (46,384) - - - Fair value movement of investments 10 - - - - (16,362) (6,065) - - (22,427) Costs allocated to capital - - - - (1,159) - - - (1,159) Dividends paid in the year 8 - - - - - - (944) - (944) Shares purchased for cancellation (16) - 16 (384) - - - - (384) Shares purchased for Treasury - - - - - - - (4,501) (4,501) Net revenue for the year - - - - - - 1,358 - 1,358 As at 31 March 2008 3,545 19,307 1,165 9,451 75,368 (4,199) 2,247 (4,501) 102,383 Own Total Called-up Share Capital Capital Capital shares equity Share- share premium redemption Special Reserve reserve Revenue held in holders' capital account reserve reserve - realised - unrealised reserve Treasury funds Year to 31 March 2007 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 As at 31 March 2006 3,561 19,307 1,149 9,835 42,022 31,276 1,611 - 108,761 Net gains on realisation of i nvestments 10 - - - - 6,357 - - 6,357 Unrealised appreciation on investments before transfer on disposal 10 - - - - - 16,974 - - 16,974 Costs allocated to capital - - - - (1,874) - - - (1,874) Dividends paid in the year 8 - - - - - - (819) - (819) Net revenue for the year - - - - - - 1,041 - 1,041 As at 31 March 2007 3,561 19,307 1,149 9,835 46,505 48,250 1,833 - 130,440 The notes below form part of these financial statements. With effect from 1 April 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 April 2007 have been amended by a reserve transfer to reflect this change. In accordance with TECH 01/08, gains and losses arising from changes in the fair value of investments are considered to be realised to the extent that they are readily convertible to cash, without accepting adverse terms, at the balance sheet date. Fair value gains on unlisted investments are not considered to be readily convertible to cash and therefore treated as unrealised. The treatment of listed investments is dependent upon the individual circumstances of each holding. Balance Sheet as at 31 March 2008 31 March 31 March 2008 2007 Notes Â£000 Â£000 Â£000 Â£000 Fixed assets Investments designated at fair value through profit or loss 10 106,154 137,442 Current assets Debtors 12 460 969 Cash at bank 20 11,243 4,360 11,703 5,329 Creditors: amounts falling due within one year Other creditors 13 (474) (1,831) Revolving credit facility 14 (15,000) (10,500) (15,474) (12,331) Net current liabilities (3,771) (7,002) Total assets less current liabilities 102,383 130,440 Net assets 102,383 130,440 Share capital and reserves Called-up share capital 15 3,545 3,561 Share premium account 19,307 19,307 Capital redemption reserve 1,165 1,149 Special reserve 9,451 9,835 Capital reserve - realisedÃ¢â‚¬Æ’ 75,368 46,505 - unrealised (4,199) 48,250 Revenue reserve 2,247 1,833 Own shares held in Treasury (4,501) - Total equity shareholders' funds 102,383 130,440 Net asset value per ordinary share 18 304.52p 366.31p These financial statements were approved by the Board of Directors on 30 May 2008. DAVID GAMBLE, ANTONY HARDY The notes below form part of these financial statements. Statement of Cash Flows for the year to 31 March 2008 31 March 31 March 2008 2007 Notes Â£000 Â£000 Â£000 Â£000 Operating activities Investment income received 2,604 2,147 Deposit interest received 177 125 Management fees paid (2,059) (1,832) Company secretarial fees paid (63) (54) Other cash expenses (529) (598) Net cash inflow/(outflow) from operating activities 19 130 (212) Servicing of finance Interest and similar charges paid (802) (612) Net cash outflow from servicing of finance (802) (612) Taxation Taxation paid - (3) Net cash outflow from taxation - (3) Capital expenditure and financial investment Purchases of investments (28,763) (34,074) Sales of investments 37,647 35,675 Net cash inflow from investing activities 8,884 1,601 Equity dividends paid (944) (819) Net cash inflow/(outflow) before financing 7,268 (45) Financing Proceeds of short-term credit facility 4,500 10,500 Repayment of short-term credit facility - (10,000) Ordinary shares purchased for cancellation (384) - Ordinary shares purchased for Treasury (4,501) - Net cash (outflow)/inflow from financing (385) 500 Increase in cash 20 6,883 455 The notes below form part of these financial statements. Notes to the Financial Statements at 31 March 2008 1 Accounting Policies Accounting Convention The financial statements are prepared under the historical cost convention as modified by the revaluation of fixed asset investments and in accordance with applicable accounting standards and the Statement of Recommended Practice regarding the Financial Statements of Investment Trust Companies ("SORP") issued in January 2003 (revised December 2005). All the Company's activities are continuing. A resolution regarding the continuation of the Company as an investment trust beyond 2011 will be put to shareholders at the 2010 Annual General Meeting, as required by the Articles of Association. Therefore, the Directors believe that it is appropriate for the financial statements to be prepared on a going concern basis. Income Recognition UK dividend income is included in the financial statements when the investments concerned are quoted ex-dividend and shown net of any associated tax credit. Deposit interest and underwriting commissions receivable are included on an accruals basis. Management Expenses and Finance Costs Management fees and finance costs are allocated 50% to the capital reserve - realised and 50% to the revenue account. This is in line with the Board's expectations of long-term returns from the investment portfolio of the Company. Performance fees are charged 100% to capital. Costs arising on early settlement of debt are allocated 100% to capital, in accordance with the requirements of the SORP. All other expenses are allocated in full to the revenue account. Investments Investments are recognised and derecognised on the trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at fair value. All investments held by the Company are classified as at "fair value through profit or loss". Investments are initially recognised at cost, being the fair value of the consideration given. After initial recognition investments are measured at fair value, with unrealised gains and losses on investments and impairment of investments recognised in the Income Statement and allocated to capital. 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, without adjustment for transaction costs necessary to realise the asset. In accordance with TECH 01/08, gains and losses arising from changes in the fair value of investments are considered to be realised to the extent that they are readily convertible to cash, without accepting adverse terms, at the balance sheet date. Fair value gains on unlisted investments are not considered to be readily convertible to cash and therefore treated as unrealised. The treatment of listed investments is dependent upon the individual circumstances of each holding. Treasury Shares The consideration paid for shares held in Treasury is presented as a deduction from equity shareholders' funds, in accordance with FRS 25: "Financial Instruments: Disclosure and Presentation". Any profit on the sale of shares out of Treasury is credited to the share premium account in full. Taxation The charge for taxation is based on the net revenue for the year. Deferred taxation is provided in accordance with FRS 19: Deferred Taxation, on all timing differences that have originated but not reversed by the balance sheet date. Deferred taxation assets are only being recognised to the extent that they are regarded as recoverable. Dividends Payable to Shareholders In accordance with FRS 21: "Events after the Balance Sheet date", dividends to shareholders are recognised as a liability in the period in which they have been declared. Therefore, any interim dividends are not accounted for until paid, and final dividends are accounted for when approved by shareholders at an annual general meeting. Bank loans and borrowings All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest bearing loans and borrowings are subsequently measured at amortised cost. Any differences between cost and redemption value is recognised in the Income Statement over the period of the borrowings on an effective interest basis. CAPITAL RESERVES i) Capital Reserve - Realised: Gains and losses on realisation of investments and changes in fair value of instruments which are readily convertible to cash, without accepting adverse terms, are dealt with in this reserve. This reserve is also used for the purchases of the Company's own shares for cancellation. 50% of the management fees, including any related VAT, and 50% of finance costs in accordance with the Company's objectives are allocated to this reserve. (ii) Capital Reserve - Unrealised: Changes in fair value of investments which are not readily convertible to cash, without accepting adverse terms, are dealt with in this reserve. 2 Income Year to Year to March 2008 March 2008 Â£000 Â£000 Income from investments 2,628 2,248 UK dividend income 2,628 2,248 Other income Bank interest 195 175 Underwriting commission 5 3 Total income 2,828 2,426 Total income comprises Dividends from financial assets designated at fair value through profit or loss 2,628 2,248 Interest from financial assets designated at fair value through profit or loss 195 175 Other income not from financial assets 5 3 2,828 2,426 All investment income has been obtained from investments listed in the UK. 3 Management Fee Year to 31 Year to 31 March 2008 March 2007 Revenue Capital Total Revenue Capital Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Management fee 664 664 1,328 626 626 1,252 Irrecoverable VAT thereon 52 53 105 110 110 220 Performance fee - - - - 710 710 Irrecoverable VAT thereon - - - - 124 124 716 717 1,433 736 1,570 2,306 The Manager receives a monthly fee equivalent to 1/12 of 1.0% of the gross assets of the Company valued at the close of business on the last business day of each month and is entitled to a performance fee calculated as described in the Directors' Report above. At 31 March 2008, Â£98,000 (2007: Â£829,000) excluding VAT was due for payment to the Manager. The Company ceased to pay VAT on its Manager's fees from 10 October 2007 as a result of the AIC/Claverhouse ruling. 4 Other Expenses Year to Year to 31 March 31 March 2008 2007 Â£000 Â£000 Administration and company secretarial fees 63 59 Auditor's remuneration (also see * below) for: - audit 20 22 - other services to the Company 3 3 Other expenses (including Directors' remuneration and VAT) 226 258 312 342 * Total fees paid to the Auditor for the year, all of which were charged to revenue, comprised: Audit services - statutory audit 20 22 Tax services - compliance services 3 3 23 25 The Directors do not consider that the provision of non-audit work to the Company affects the independence of the Auditor. 5 Directors' Remuneration Year to Year to 31 March 2008 31 March 2007 Â£000 Â£000 Total fees 85 85 A breakdown of the Directors' remuneration is set out in the Directors' Remuneration Report above. The Company has no employees. 6 Interest Payable and Similar Charges Year to 31 Year to 31 March 2008 March 2007 Revenue Capital Total Revenue Capital Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Financial liabilities not at fair value through profit or loss Interest payable on loan 442 442 884 304 304 608 442 442 884 304 304 608 7 Taxation The current taxation for the year is lower than the standard rate of corporation tax in the UK of 30% (2007: 30%). A reconciliation is provided below: Year to Year to 31 March 2008 31 March 2007 Â£000 Â£000 Return on ordinary activities before taxation - revenue 1,358 1,044 Theoretical corporation tax at 30% 407 313 Effects of: - UK dividend income not liable to corporation tax (788) (669) - expenses disallowed for taxation purposes 6 16 - excess management expenses 375 340 - irrecoverable overseas tax - 3 Current taxation charge - 3 Capital returns are not included in the above analysis since, as an investment trust, the Company's capital gains are not taxable. At 31 March 2008, the Company had surplus management expenses and non-trade losses of Â£20,383,984 (2007: Â£17,970,720), which have not been recognised as a deferred taxation asset. This is because the Company is not expected to generate taxable income in future periods in excess of the deductible expenses of those future periods and, accordingly, it is unlikely that the Company will be able to reduce future taxation through the use of existing surplus expenses. Due to the Company's status as an Investment Trust and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments. 8 Dividends Year to Year to 31 March 2008 31 March 2007 Â£000 Â£000 Paid 2007 Final dividend of 2.65p (2006: 2.30p) per ordinary share 944 819 Proposed 2008 Final dividend of 3.65p (2007: 2.65p) per ordinary share 1,227 944 9 Return per Share Year to 31 Year to 31 March 2008 March 2007 Revenue Capital Total Revenue Capital Total Ordinary share 3.82p (66.30p) (62.48p) 2.92p 60.26p 63.18p Revenue return per ordinary share is based on the net revenue after taxation of Â£1,358,000 (2007: Â£1,041,000) and 35,576,425 (2007: 35,609,458) ordinary shares, being the weighted average number of ordinary shares, excluding shares held in Treasury. Capital return per ordinary share is based on net capital losses for the year of Â£23,586,000 (2007: gains Â£21,457,000), and on 35,576,425 (2007: 35,609,458) ordinary shares, being the weighted average number of ordinary shares, excluding shares held in Treasury. 10 Investments Year to 31 Year to 31 March 2008 March 2007 Â£000 Â£000 Total investments at fair value 106,154 137,442 The investment portfolio comprises 66 listed UK equity holdings including 14 holdings totalling Â£18,259,000 (representing 17.2% of the portfolio) traded on the Alternative Investment Market ("AIM"). Year Year to to 31 March 2008 31 March 2007 Â£000 Â£000 Opening book cost 89,192 84,662 Opening fair value adjustment 48,250 31,276 Opening valuation 137,442 115,938 Movements in the year Purchases at cost 28,234 34,432 Sales - proceeds (37,095) (36,259) Sales - gains on sales 10,072 6,357 Changes in fair value (32,499) 16,974 Closing valuation 106,154 137,442 Closing book cost 90,403 89,192 Closing fair value adjustment 15,751 48,250 106,154 137,442 TRANSACTION COSTS During the year, the Company incurred transaction costs of Â£183,000 (2007: Â£261,000) and Â£59,000 (2007: Â£65,000) on purchases and sales of investments, respectively. These amounts are deducted in determining gains on investments at fair value as disclosed in the Income Statement. With effect from 1 April 2007, changes in fair value of investments which are readily convertible to cash, without accepting adverse terms, at the balance sheet date are considered to be realised. Fair value gains on unlisted investments are not treated as readily convertible to cash, whereas the treatment of gains on listed investments depends on the individual circumstances of each investment. 31 March 2008 31 March 2007 Realised Unrealised Total Realised Unrealised Total `000 `000 `000 `000 `000 `000 Net gains on investments at fair value though profit or loss Gains on sales 10,072 - 10,072 6,357 - 6,357 Changes in fair (26,434) (6,065) (32,499) - 16,974 16,974 value (16,362) (6,065) (22,427) 6,357 16,974 23,331 A list of the top 50 investments by market value and an analysis of the investment portfolio by industrial or commercial sector are set out above. 11 Significant Holdings The Company has a holding of 3% or more of the voting rights attached to shares that is material in the context of the accounts in the following investments: % of Voting Security rights Zytronic 3.9 The Stanley Gibbons Group PLC 3.6 12 Debtors 31 March 2008 31 March 2007 Â£000 Â£000 Prepayments and accrued income 114 647 Dividends receivable 346 322 460 969 The carrying amount for prepayments, accrued income and dividends receivable disclosed above reasonably approximates to its fair value at the year end and is expected to be realised within a year from the balance sheet date. 13 Other Creditors 31 March 2008 31 March 2007 Â£000 Â£000 Accruals and deferred income 474 1,831 474 1,831 The carrying amount for accruals and deferred income disclosed above reasonably approximates to its fair value at the year end and is expected to be realised within a year from the balance sheet date. 14 Revolving Credit Facility 31 March 2008 31 March 2007 Â£000 Â£000 Falling due within one year 15,000 10,500 Falling due after more than one year - - 15,000 10,500 The Company has a Â£25,000,000 Revolving Credit Facility with ING Bank N.V. As at 31 March 2008, Â£15,000,000 was drawn down (31 March 2007: Â£10,500,000), all of which has a fixed interest rate of 6.1203%* and is repayable on 1 August 2008. The remaining Â£10,000,000 remains undrawn. * Including margin and mandatory costs. 15 Share Capital 31 March 2008 31 March 2007 Â£000 Â£000 Authorised: 82,101,048 (2007: 82,101,048) ordinary shares of 10p each 8,210 8,210 Allotted, called-up and fully paid: 35,449,458 (2007: 35,609,458) ordinary shares of 10p each 3,545 3,561 Voting rights Ordinary shareholders have unrestricted voting rights at all general meetings of the Company. At the Annual General Meeting on 27 July 2007 the Company was granted the authority to repurchase 5,337,857 ordinary shares. As at 31 March 2008 the Company had the authority to repurchase 3,349,857 ordinary shares. This authority is due to expire at the conclusion of the next Annual General Meeting to be held on 18 July 2008. During the year the following shares were purchased for cancellation: Number of Total cost of purchase Ordinary shares purchased including expenses Date Â£000 17/12/2007 25,000 58 18/12/2007 10,000 23 09/01/2008 50,000 121 16/01/2008 20,000 48 21/01/2008 30,000 71 07/03/2008 20,000 50 14/03/2008 5,000 13 160,000 384 During the year the following shares were purchased for Treasury: Number of Ordinary shares purchased Total cost of purchase including expenses Date Â£000 10/12/2007 1,828,000 4,501 The Company does not have any externally imposed capital requirements. The Capital of the Company is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed above. 16 Duration of the Company The Articles of Association prescribe that shareholders should have the opportunity to consider the future of the Company at regular intervals. At the Annual General Meeting to be held in 2010 an Ordinary Resolution will be proposed to release the Directors from the obligation to convene an EGM during 2011 for the purpose of voluntarily winding up the Company, as provided for in the Company's Articles of Association. If the Company is not wound up, such resolution will be proposed at an EGM every five years thereafter unless, at any AGM held within, and not more than, 18 months prior to the expiry of the relevant period of five years, an ordinary resolution is passed releasing the Directors from the obligation to convene such an EGM. 17 Own Shares Held in Treasury The Company has taken advantage of the regulations which came into force on 1 December 2003 to allow companies, including investment trusts, to buy shares and hold them in Treasury for re-issue at a later date. In accordance with FRS 25: "Financial Instruments: Presentation and Disclosure", the consideration paid for shares held in Treasury is presented as a deduction from shareholders' funds. Year to 31 March 2008 Year to 31 March 2007 Own shares Premium on Own shares Premium on held in Treasury disposal held in Treasury disposal SUMMARY Number Â£000 Â£000 Number Â£000 Â£000 At 1 April - - - - - - Additions 1,828,000 4,501 - - - - Cancellation - book cost - - - - - - Disposals - book cost - - - - - - At 31 March 1,828,000 4,501 - - - - 18 Net Asset Value per Ordinary Share Net asset value per ordinary share is based on net assets of Â£102,383,000 (2007: Â£130,440,000) and on 33,621,458 (2007: 35,609,458) ordinary shares being the number of ordinary shares in issue at the year end. 19 Reconciliation of Net Revenue Before Finance Costs and Taxation to Net Cash Inflow/(Outflow) from Operating Activities Year to Year to 31 March 2008 31 March 2007 Â£000 Â£000 Net revenue before finance costs and taxation 1,800 1,348 Management fee charged to capital (717) (1,570) (Decrease)/increase in creditors (910) 163 Decrease in prepayments and accrued income (43) (153) Net cash inflow/(outflow) from operating activities 130 (212) 20 Reconciliation of Net Cash Flows to Movements in Net Debt Year to Year to 31 March 2008 31 March 2007 Â£000 Â£000 Increase in cash in year 6,883 455 Proceeds of credit facility (4,500) (10,500) Repayment of credit facility - 10,000 Movement in net funds 2,383 (45) Net debt at beginning of year (6,140) (6,095) Net debt at end of year (3,757) (6,140) ANALYSIS OF NET DEBT 1 April 2007 Cash flows 31 March 2008 Â£000 Â£000 Â£000 Cash at bank 4,360 6,883 11,243 Debt due in less than one year (10,500) (4,500) (15,000) Debt due after one year - - - (6,140) 2,383 (3,757) 21 Analysis of Financial Assets and Liabilities As required by FRS 29: "Financial Instruments: Disclosures", an analysis of financial assets and liabilities, which identifies the risk to the Company of holding such items, is given below. BACKGROUND The Company's financial instruments comprise securities, cash balances and debtors and creditors that arise from its operations, for example, in respect of sales and purchases awaiting settlement and debtors for accrued income. The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period. The Company has little or no exposure to cash flow or foreign currency risk. The principal risks the Company faces in its portfolio management activities are: credit risk; market price risks, i.e. movements in the value of investment holdings caused by factors other than interest rate or currency movement; interest rate risk; liquidity risk i.e. the risk that the Company has difficulty in realising assets or otherwise raising funds to meet commitments associated with financial instruments; and gearing. The Manager monitors the financial risks affecting the Company on a daily basis. The Directors receive financial information on a monthly basis which is used to identify and monitor risk. (i) Credit Risk Credit risk is the risk of financial loss to the Company if the contractual party to a financial instrument fails to meet its contractual obligations. The carrying amounts of financial assets best represent the maximum credit risk exposure at the balance sheet date. The Company's listed investments are held on its behalf by HSBC acting as agent, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Board monitors the Company's risk by reviewing the custodian's internal controls reports. Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered in its obligations before any transfer of cash or securities away from the Company is completed. Cash is only held at banks that have been identified by the Board as reputable and of high credit quality. The maximum exposure to credit risk at 31 March 2008 was: 31 March 2008 31 March 2007 Â£000 Â£000 Cash at bank 11,243 4,360 Debtors and prepayments 460 969 11,703 5,329 None of the Company's assets are past due or impaired. (ii) Market Price Risk Market price risk arises mainly from uncertainty about future prices of financial instruments. The value of shares and the income from them may fall as well as rise and shareholders may not get back the full amount invested. The Manager continues to monitor the prices of financial instruments held by the Company on a real time basis. Adherence to the Company's investment objectives shown on the inside front cover mitigates the risk of excessive exposure to one issuer or sector. The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Manager. The Board meets regularly and each meeting reviews the investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore the portfolio may well diverge from the short term fluctuations of the benchmark. Fixed asset investments are valued at their bid price which equates to their fair value. A list of the Company's 50 largest equity investments is given above. In addition, an analysis of the investment portfolio by broad industrial and commercial sector, an analysis of the portfolio by market capitalisation of holdings and a list of the 30 largest equity investments are contained in the Managers' Review section. The maximum exposure to market price risk is the fair value of investments of Â£106,154,000 (2007: Â£137,442,000). If the investment portfolio valuation fell by 1% from the amount detailed in the financial statements as at 31 March 2008 it would have the effect, with all other variables held constant, of reducing the net capital return before taxation by Â£1,062,000 (2007: Â£1,374,000). An increase of 1% in the investment portfolio valuation would have an equal and opposite effect on the net capital return before taxation. (iii) Interest Rate Risk Changes in interest rates may cause fluctuations in the income and expenses of the Company. The revolving credit facility with ING Bank.NV is a fixed rate facility (see note 14). The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board. The Company mitigates the risk by fixing the interest rates of the facility for six months at a time. The Company receives interest on the cash deposits at a rate of 0.5% below the bank base rate. The interest received in the year amounted to Â£195,000 (2007:Â£175,000). The interest risk profile of the Company is given below. If interest rates had reduced by 1% from those paid as at 31 March 2008 it would have the effect, with all other variables held constant, of increasing the net revenue return before taxation on an annualised basis by Â£150,000 (2007: Â£105,000). If there was an increase in interest rates of 1% there would have been an equal and opposite effect in the net revenue return before taxation. The calculations are based on cash at bank and short-term deposits as at 31 March 2008 and these may not be representative of the year as a whole. Due to the short-term nature of the loan facility, changes in interest rates would not have an effect on the fair value of the loan. (iv) Liquidity Risk Liquidity is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Manager does not invest in unlisted securities on behalf of the Company. However, the investments held by the Company consist of UK quoted small companies which are inherently less liquid than quoted large companies. Short-term flexibility is achieved through the use of bank borrowings. Liquidity risk is mitigated by the fact that the Company has Â£11.2 million cash at bank which can satisfy its creditors and that as a closed end fund assets do not need to be liquidated to meet redemptions. The Board has deemed that the funds listed investments with a market capitalisation of over Â£100 million are readily realisable to cash. Exposure to listed investments with a market capitalisation of less than Â£100 million is Â£17,198,000. (v) Gearing Gearing can have amplified effects on the net asset value of the Company. It can be positive for a company's performance, although it can have negative effects on performance in falling markets. It is the Company's policy to determine the adequate level of gearing appropriate to its own risk profile. (vi) Use of Derivatives It is not the Company's policy to enter into derivative contracts. FINANCIAL ASSETS The majority of the Company's financial assets are listed equity shares which neither pay interest nor have a maturity date. No fixed interest assets were held at 31 March 2008 nor during the year. All financial assets are in sterling and disclosed at fair value through profit or loss. FINANCIAL LIABILITIES The Company finances its operations through equity, retained profits and bank borrowings (see note 14). The change in the fair value of financial liabilities during the year was not related to the credit risk profile. The interest rate risk profile of the financial liabilities of the Company as at 31 March 2008 is as follows: Weighted average Period until Total interest rate maturity Â£000 % Years Amounts drawn down under fixed revolving credit facility Â£15.0m 15,000 6.1203 0.33 Financial liabilities upon which no interest is paid 474 - - The interest rate risk profile of the financial liabilities of the Company as at 31 March 2007 was as follows: Weighted average Period until Total interest rate maturity Â£000 % Years Amounts drawn down under fixed revolving credit facility Â£7.5m 7, 500 5.7349 0.33 Â£3.0m 3,000 6.1453 0.25 Financial liabilities upon which no interest is paid 1,831 - - The maturity profile of the Company's financial liabilities is as follows: As at As at 31 March 2008 31 March 2007 Â£000 Â£000 In one year or less 15,474 12,331 In more than one but not more than two years - - In more than two years but not more than five years - - 15,474 12,331 The Company had Â£10,000,000 undrawn under the fixed Revolving Credit Facility at 31 March 2008 (2007: Â£4,500,000). The Company's fixed revolving credit facility is measured at cost and denominated in sterling. All other financial liabilities are in sterling and disclosed at fair value. It is considered that, because of the short term nature of the facility, cost approximates to fair value. 22 Previous Commitments and Contingent Liabilities At 31 March 2008, there were no capital commitments (2007: nil). 23 Related Party Transactions Under the Listing Rules the Manager is regarded as a related party of the Company. The amounts paid to the Manager are disclosed in note 3. However, the existence of an independent Board of Directors demonstrates that the Company is free to pursue its own financial and operating policies, and therefore, in terms of FRS 8: "Related Party Transactions", the Manager is not considered a related party. The relationship between the Company, its Directors and the Manager is disclosed in the Directors' Report. Company Summary Investment Objective MUSCIT's investment objective is capital appreciation (rather than income) achieved by investing in small quoted companies listed on the London Stock Exchange or traded on the Alternative Investment Market ("AIM") and to achieve relative outperformance of its benchmark, the FTSE SmallCap (excluding investment companies) Index. No unquoted investments are permitted. Investment Policy The Company looks to achieve its objective and to diversify risk by investing in a portfolio of UK Smaller Companies. At the time of initial investment, a potential investee company must be profitable and smaller than the largest constituent of the HGSC Index, which represents the smallest 10% of the UK Stock Market by value. At the start of 2008, this was any company below Â£1.1 billion in size. The Manager looks to focus on the smaller end of this Index. In order to manage risk the Manager will limit any one holding to a maximum of 5% of the Company's investments. The weightings for every stock are closely monitored to ensure they reflect the underlying liquidity of the particular company. The Company's AIM exposure is also closely monitored by the Board and is limited to 30% of total investments with Board approval required for exposure to be above 25%. The Manager is focused on identifying high quality niche companies operating in growth markets. This typically leads the Manager to invest in companies that enjoy high barriers to entry, a sustainable competitive advantage and strong management teams. The portfolio is therefore constructed on a "bottom up" basis and there are no sectoral constraints placed on the Manager. However, "top down" relative risk is regularly assessed by reference to the benchmark's position. The Board, in consultation with the Manager, is responsible for determining the gearing strategy for the Company. Gearing is used to enhance returns when the timing is considered appropriate. The Company currently has a credit facility of Â£25 million through ING Bank. The Board has agreed to limit borrowings to 25% of Shareholders' funds. The Board believes in the opportunities that UK Smaller Companies present for long-term superior total returns. As a consequence of this any material changes to the Company's existing investment objective and policy will be subject to Shareholder approval. Benchmark FTSE SmallCap (excluding investment companies) Index ("SmallCap"). Gross Assets Â£117,857,000 as at 31 March 2008. Shareholders' Funds Â£102,383,000 as at 31 March 2008. Market Capitalisation Â£82,373,000 as at 31 March 2008. Capital Structure As at 31 March 2008 and at the date of this report, the Company had 35,449,458 ordinary shares of 10p each in issue (of which 1,828,000 were held in Treasury). Wind up Date In accordance with the Articles of Association, a resolution will to be put to shareholders at the Annual General Meeting to be held in 2010 to release the Directors from the obligation to convene an EGM in 2011 for the purpose of winding up the Company. Management Fee The management fee comprises two components: a fixed fee of 1/12 of 1% of the gross assets of the Company, payable monthly in arrears, and a performance fee of 0.1% of the gross assets of the Company for each 1% outperformance (or part thereof) of the Company's NAV against the SmallCap over the financial year, subject to a maximum of 0.5% of the gross assets calculated at the end of the financial year. For further details above. Administration and Company Secretarial Fees The Company Secretary receives an annual fee of Â£63,000 plus VAT, which is subject to an annual RPI uplift. Sources of Information All information contained within the Chairman's Statement and the Manager's Report has been provided by Montanaro Investment Managers Limited unless otherwise noted. Glossary of Terms Nav NAV stands for Net Asset Value and represents shareholders' funds expressed as an amount per individual share. Shareholders' funds are the total value of a company's assets at current market value less its liabilities. Discount If the share price of an investment trust is lower than the NAV per share, the shares are said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, the shares are said to be trading at a premium. Gearing Gearing is the process whereby growth or decline in the total assets of a company has an exaggerated effect on the NAV of that company's ordinary shares due to the presence of borrowings or share classes with a prior ranking entitlement to capital. Net Gearing Net gearing is the total debt, net of cash and equivalents as a percentage of the total shareholders' funds. Gross Assets Gross assets are the sum of both fixed and current assets with no deductions. Shareholder Information Sources of Further Information The Company's share price is listed in the Financial Times under "Investment Companies". Information on the Company is available on the Company's website, www.montanarouksmaller.co.uk, and the Manager's website: www.montanaro.co.uk. Key Dates 31 March 2008 Company year end 30 May 2008 Annual results 11 June 2008 Ex-dividend 18 July 2008 Annual General Meeting 18 August 2008 Dividend payable November 2008 Interim results Frequency of Nav Publication The Company's NAV is released to the London Stock Exchange on a daily basis. PEP/ISA Status The Company is fully eligible for inclusion in ISAs and transfers into existing PEPs. AIC The Company is a member of the Association of Investment Companies. Explanatory Notes of Principal Changes to the Company's Articles of Association We are asking shareholders to approve a number of amendments to our Articles of Association, primarily to reflect the provisions of the Companies Act 2006 that came into force on or before 6 April 2008, and to reflect the provisions of the Companies Act 2006 which are coming into force in October 2008. An explanation of the main changes between the proposed and existing articles of association is set out below. In addition, it is also proposed to increase the maximum amount of the Directors' authorised aggregate annual remuneration from Â£100,000 to Â£140,000. The remaining provisions of the Companies Act 2006 are expected to come into force in October 2009. In addition, various regulations that relate to certain of these provisions have yet to be finalised. Consequently, it will be necessary for the Company to undertake a further review of its Articles of Association in due course in order to reflect these other provisions. As these further changes to the Articles of Association will be reasonably substantial in number, it is anticipated that the Company will adopt new Articles of Association at its next Annual General Meeting. It is proposed to adopt new Articles of Association (the "New Articles") in order to update the Company's current Articles of Association (the "Current Articles") primarily to take account of changes in English company law brought about by the Companies Act 2006 that came into force on or before 6 April 2008, and are coming into force in October 2008. The principal changes introduced in the New Articles are summarised below. Other changes, which are of a minor, technical or clarifying nature and also some more minor changes which merely reflect changes made by the Companies Act 2006 have not been noted in this Appendix. The New Articles showing all the changes to the Current Articles are available for inspection at the offices of Montanaro Investment Managers Limited, 53 Threadneedle Street, London EC2R 8AR from 10am on 16 July 2008 until the close of the Annual General Meeting on 18 July 2008. 1 Uncertificated shares The Current Articles currently grant the Company power to refuse to register a transfer of shares if a restriction notice served in relation to those shares has not been complied with. This empowers a public company to investigate interests in its share capital. The Company may serve a restriction notice on any person whom it reasonably believes is or has been (at any time during the three years immediately preceding the issue of the notice) interested in the Company's shares. However, under the Uncertificated Securities Regulations 2001 (the "Regulations"), Euroclear UK & Ireland Limited ("Euroclear") maintains the register in relation to those members who hold uncertificated shares in the Company and automatically registers transfers of title of uncertificated shares on settlement of transactions. Accordingly, if the shares in respect of which a restriction notice has been served are in uncertificated form, it would not be possible for the Company to exercise its power to refuse to register a transfer of those shares. Therefore, the Regulations permit the Company to give Euroclear notice requiring the shares to be converted into certificated form, provided that the conversion is in accordance with provisions in the Company's Articles of Association. It is therefore proposed that the Company includes in its New Articles a provision enabling it to force the conversion of the relevant shares to certificated form on a failure to respond to a restriction notice, it will then be able to serve a notice on Euroclear to that effect and subsequently impose the restrictions on transfer that are available in respect of certificated shares. 2 Treasury shares Under the Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003, the Company is allowed to hold up to 10% of its own shares in treasury following a buy back, instead of cancelling them as previously required. This gives the Company the ability to re-issue treasury shares quickly and cost-effectively and provides the Company with additional flexibility in the management of its capital base. Such shares may be resold for cash but all rights attaching to them, including voting rights and any right to receive dividends are suspended whilst they are held in treasury. If the Board exercises the authority to purchase the Company's own shares, the Company will have the option of either holding in treasury or of cancelling any of its own shares purchased pursuant to this authority and will decide at the time of purchase which option to pursue. 3 Form of resolution The Current Articles of the Company contain a provision that, where for any purpose an ordinary resolution is required, a special or extraordinary resolution is also effective. This provision is being amended as the concept of extraordinary resolutions has not been retained under the Companies Act 2006. The Current Articles enable members to act by written resolution. Under the Companies Act 2006 public companies can no longer pass written resolutions. These provisions have therefore been removed in the New Articles. 4 Convening extraordinary and annual general meetings The provisions in the Current Articles dealing with the convening of general meetings and the length of notice required to convene general meetings are being amended to conform to new provisions in the Companies Act 2006. In particular an extraordinary general meeting to consider a special resolution can be convened on 14 days' notice whereas previously 21 days' notice was required. 5 Variation of class rights The Current Articles contain provisions regarding the variation of class rights. The proceedings and specific quorum requirements for a meeting convened to vary class rights are contained in the Companies Act 2006. The relevant provisions have therefore been amended in the New Articles. 6 Votes of members Under the Companies Act 2006 proxies are entitled to vote on a show of hands whereas under the Current Articles proxies are only entitled to vote on a poll. The time limits for the appointment or termination of a proxy appointment have been altered by the Companies Act 2006 so that the articles cannot provide that they should be received more than 48 hours before the meeting or in the case of a poll taken more than 48 hours after the meeting, more than 24 hours before the time for the taking of a poll, with weekends and bank holidays being permitted to be excluded for this purpose. Multiple proxies may be appointed provided that each proxy is appointed to exercise the rights attached to a different share held by the shareholder. The New Articles reflect all of these new provisions. 7 Age of directors on appointment The Current Articles contain a provision stating that a person is not incapable of being appointed a Director by reason of his having attained the age of 70. Such provision is now unnecessary due to the Employment Equality (Age) Regulations 2006 and so has been removed from the New Articles. 8 Provision for employees on cessation of business The Companies Act 2006 provides that the powers of the directors to make provision for a person employed or formerly employed by the Company in connection with the cessation or transfer to any person of the whole or part of the undertaking of the Company, may be exercised by the directors or by the Company in general meeting. However, if the power is to be exercised by the directors, the articles of association must include a provision to this effect. The New Articles provide that the directors may exercise this power. 9 Conflicts of interest The Companies Act 2006 sets out directors general duties which largely codify the existing law but with some changes. Under the Companies Act 2006, from 1 October 2008 a director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict with the Company's interests. The requirement is very broad and could apply, for example, if a director becomes a director of another company or a trustee of another organisation. The Companies Act 2006 allows directors of public companies to authorise conflicts and potential conflicts, where appropriate, where the articles of association contain a provision to this effect. The Companies Act 2006 also allows the articles of association to contain other provisions for dealing with directors' conflicts of interest to avoid a breach of duty. The New Articles give the directors authority to approve such situations and to include other provisions to allow conflicts of interest to be dealt with in a similar way to the current position. There are safeguards which will apply when directors decide whether to authorise a conflict or potential conflict. First, only directors who have no interest in the matter being considered will be able to take the relevant decision, and secondly, in taking the decision the directors must act in a way they consider, in good faith, will be most likely to promote the Company's success. The directors will be able to impose limits or conditions when giving authorisation if they think this is appropriate. The New Articles also contain provisions relating to confidential information, attendance at board meetings and availability of board papers to protect a director being in breach of duty if a conflict of interest or potential conflict of interest arises. These provisions will only apply where the position giving rise to the potential conflict has previously been authorised by the directors. It is the Board's intention to report annually on the Company's procedures for ensuring that the Board's powers to authorise conflicts are operated effectively. The New Articles will also apply to alternate directors. 10 Notice of board meetings Under the Current Articles, when a director is abroad he can request that notice of directors' meetings are sent to him at a specified address and if he does not do so he is not entitled to receive notice while he is away. This provision has been removed, as modern communications mean that there may be no particular obstacle to giving notice to a director who is abroad. It has been replaced with a more general provision that a director is treated as having waived his entitlement to notice, unless he supplies the Company with the information necessary to ensure that he receives notice of a meeting before it takes place. 11 Electronic and web communications Provisions of the Companies Act 2006 which came into force in January 2007 enable companies to communicate with members by electronic and/or website communications. The New Articles continue to allow communications to members in electronic form and, in addition, they also permit the Company to take advantage of the new provisions relating to website communications. Before the Company can communicate with a member by means of website communication, the relevant member must be asked individually by the Company to agree that the Company may send or supply documents or information to him by means of a website, and the Company must either have received a positive response or have received no response within the period of 28 days beginning with the date on which the request was sent. The Company will notify the member (either in writing, or by other permitted means) when a relevant document or information is placed on the website and a member can always request a hard copy version of the document or information. 12 Directors' indemnities and loans to fund expenditure The Companies Act 2006 has in some areas widened the scope of the powers of a company to indemnify directors and to fund expenditure incurred in connection with certain actions against directors. In particular, a company that is a trustee of an occupational pension scheme can now indemnify a director against liability incurred in connection with the company's activities as trustee of the scheme. In addition, the existing exemption allowing a company to provide money for the purpose of funding a director's defence in court proceedings now expressly covers regulatory proceedings and applies to associated companies. 13 Duration of the Company At the Annual General Meeting of the Company held on 15 July 2005 the Company's shareholders resolved to release the directors from convening a General Meeting in 2006 to propose a Special Resolution for the winding up of the Company. As a consequence of that resolution, the directors are next obliged to convene a General Meeting to propose a Special Resolution for the winding up of the Company in 2010, unless at the Company's 2009 Annual General Meeting an Ordinary Resolution is passed releasing the directors from the obligation to convene such General Meeting. 14 Directors' fees It is proposed to increase the maximum amount of the Directors' authorised aggregate annual remuneration from Â£100,000 to Â£140,000. 15 Entitlement to Attend and Speak It is proposed to include a provision entitling directors to attend and speak at any meeting of the Company, and to allow the Chairman to invite any person to attend and speak at any meeting where this will assist in the deliberations of the meeting. 16 Execution of Deeds It is now possible for a witness to attest a Director's signature when executing a deed. This applies both when affixing the Company seal and when executing a deed without the seal. 17 General The New Articles include some other more minor changes. The opportunity has also been taken to bring clearer language into the New Articles and in some areas to conform the language of the New Articles. Notice of Annual General Meeting Notice is hereby given that the Thirteenth Annual General Meeting of the Company will be held at the offices of Montanaro Investment Managers Limited, 53 Threadneedle Street, London EC2R 8AR on Friday, 18 July 2008 at 12 noon for the following purposes: Ordinary Business RESOLUTION 1 - ORDINARY RESOLUTION To receive and, if thought fit, to accept the Reports of the Directors and the Auditor and the audited financial statements for the year ended 31 March 2008. RESOLUTION 2 - ORDINARY RESOLUTION To receive and, if thought fit, to accept the Directors' Remuneration Report for the year ended 31 March 2008. RESOLUTION 3 - ORDINARY RESOLUTION To declare a first and final dividend of 3.65p per ordinary 10p share for the year ended 31 March 2008. RESOLUTION 4 - ORDINARY RESOLUTION To re-elect Christopher Jones a Director of the Company. RESOLUTION 5 - ORDINARY RESOLUTION To re-elect David Gamble a Director of the Company. RESOLUTION 6 - ORDINARY RESOLUTION To re-elect Michael Moule a Director of the Company. RESOLUTION 7 - ORDINARY RESOLUTION To re-elect Antony Hardy a Director of the Company. RESOLUTION 8 - ORDINARY RESOLUTION To re-appoint KPMG Audit Plc as Auditor to the Company to hold office from the conclusion of this meeting until the conclusion of the next general meeting at which financial statements are laid and to authorise the Directors to determine their remuneration. Special Business RESOLUTION 9 - SPECIAL RESOLUTION That the Company be and is hereby generally and unconditionally authorised in accordance with Section 166 of the Companies Act 1985 ("the Act") to make market purchases (within the meaning of Section 163 of the Act) of ordinary shares of 10p each in the capital of the Company ("ordinary shares"), provided that: (i) the maximum number of ordinary shares hereby authorised to be purchased shall be 5,313,874, or if less, 14.99% of the number of shares in issue immediately following the passing of this resolution; (ii) the minimum price which may be paid for each ordinary share is 10p; (iii) the maximum price payable by the Company for each Ordinary 10p share is the higher of (i) 105 per cent. of the average of the mid-market value of the Ordinary 10p shares in the Company for the 5 business days prior to the date of the market purchase and (ii) the higher of the price of the last independent trade and the highest current bid as stipulated by Article 5(1) of Commission Regulation (EC) 22 December 2003 implementing the Market Abuse Directive as regards exemptions for buyback programmes and stabilisation of financial instruments (No.2233/2003); (iv) the authority hereby conferred shall expire at the conclusion of the next Annual General Meeting of the Company in 2009 or, if earlier, on the expiry of 15 months from the passing of this Resolution, unless such authority is renewed prior to such time; (v) the Company may make a contract to purchase ordinary shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiration of such authority and may make a purchase of ordinary shares pursuant to any such contract; and (vi) any shares purchased under the authority hereby conferred and held in Treasury by the Company shall, if not issued out of Treasury within 12 months following such purchase, be cancelled. RESOLUTION 10 - ORDINARY RESOLUTION That the Directors of the Company be and they are hereby generally and unconditionally authorised (in substitution for any authorities previously granted to the Directors), pursuant to Section 80 of the Companies Act 1985 ("the Act"), to exercise all the powers of the Company to allot relevant securities, including any issue of shares out of Treasury (within the meaning of Section 80(2) of the Act) up to an aggregate nominal amount of Â£1,181,648, being one third of the total issued ordinary share capital as at 31 March 2008, provided that this authority shall expire on the earlier of the date of the next Annual General Meeting of the Company to be held in 2009, or 15 months after the date of passing this resolution, save that the Company may before such expiry make offers, agreements or arrangements which would or might require relevant securities to be allotted after such expiry and so that the Directors of the Company may allot relevant securities in pursuance of such offers, agreements or arrangements as if the authority conferred hereby had not expired. RESOLUTION 11 - SPECIAL RESOLUTION That, subject to the passing of Resolution 10 set out above, the Directors of the Company be and they are hereby empowered pursuant to Section 95(1) of the Act to allot equity securities, including any issue of shares out of Treasury (within the meaning of Section 94 of the Act) pursuant to the authority conferred by Resolution 7 as if Section 89(1) of the Act did not apply to any such allotment, provided that this power shall be limited to the allotment of equity securities for cash up to an aggregate nominal amount of Â£354,495 being 10% of the issued share capital as at 31 March 2008, at a price of not less than the Net Asset Value per share and shall expire on the earlier of the date of the next Annual General Meeting of the Company to be held in 2009, or 15 months after the date of passing this resolution, save that the Company may before such expiry make offers, agreements or arrangements which would or might require equity securities to be allotted after such expiry and so that the Directors of the Company may allot equity securities in pursuance of such offers, agreements or arrangements as if the power conferred hereby had not expired. RESOLUTION 12 - SPECIAL RESOLUTION That, subject to the passing of Resolution 10 set out above, the Directors of the Company be and are hereby authorised, for the purposes of paragraph 15.4.23 of the Listing Rules of the United Kingdom Listing Authority, to issue ordinary shares of 10p each in the capital of the Company at a price below the net asset value per share of the existing ordinary shares in issue, provided always that such issue will be limited to: (i) up to an aggregate nominal amount of Â£354,495, being 10% of the ordinary shares in issue as at the date of this report; (ii) the sale of shares which, immediately before such sale, were held by the Company as Treasury shares; and (iii) in the event of a sale of shares which, immediately before such sale, were held by the Company as Treasury shares, such shares shall be issued at a higher price and at a lower discount to net asset value than when purchased by the Company in accordance with Resolution 9 set out above. RESOLUTION 13 - SPECIAL RESOLUTION THAT the new Articles of Association, a copy of which was produced to the meeting and initialled by the Chairman of the meeting for the purpose of identification, be hereby approved and adopted as the new Articles of Association of the Company in substitution for, and to the exclusion of, the existing Articles of Association. By Order of the Board CAPITA SINCLAIR HENDERSON LIMITED Company Secretary 30 May 2008 Note 1: A member entitled to attend and vote at this meeting may appoint one or more persons as his/her proxy to attend, speak and vote on his/her behalf at the meeting. A proxy need not be a member of the Company. If multiple proxies are appointed they must not be appointed in respect of the same shares. To be effective, the enclosed form of proxy, together with any power of attorney or other authority under which it is signed or a certified copy thereof, should be lodged at the office of the Company's Registrar, Capita Registrars, Proxy Department, 34 Beckenham Road, Beckenham, Kent, BR3 4TU not later than 48 hours before the time of the meeting. The appointment of a proxy will not prevent a member from attending the meeting and voting in person if he/she so wishes. A member present in person or by proxy shall have one vote on a show of hands and on a poll every member present in person or by proxy shall have one vote for every ordinary share of which he is the holder. Note 2: A person to whom this notice is sent who is a person nominated under Section 146 of the Companies Act 2006 to enjoy information rights (a "Nominated Person") may, under an agreement between him/her and the Shareholder by whom he/she was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the Annual General Meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may, under any such agreement, have a right to give instructions to the Shareholder as to the exercise of voting rights. The statements of the rights of members in relation to the appointment of proxies in Note 1 above does not apply to a Nominated Person. The rights described in those Notes can only be exercised by registered members of the Company. Note 3: As at 29 May 2008 (being the last business day prior to the publication of this notice) the Company's issued share capital and total voting rights amounted to 35,449,458 ordinary shares carrying one vote each. Note 4: Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, the Company specifies that only those Shareholders registered on the Register of Members of the Company as at 12pm on 16 July 2008 (or in the event that the meeting is adjourned, only those Shareholders registered on the Register of Members of the Company as at 12pm on the day which is two days prior to the adjourned meeting) shall be entitled to attend in person or by proxy and vote at the Annual General Meeting in respect of the number of shares registered in their name at that time. Changes to entries on the Register of Members after that time shall be disregarded in determining the rights of any person to attend or vote at the meeting. Note 5: In order to facilitate voting by corporate representatives at the Annual General Meeting, arrangements will be put in place at the meeting so that: (i) if a corporate Shareholder has appointed the Chairman of the meeting as its corporate representative with instructions to vote on a poll in accordance with the directions of all of the other corporate representatives for that corporate Shareholder present at the meeting then, on a poll, those corporate representatives will give voting directions to the Chairman of the meeting and the Chairman will vote (or withhold a vote) as corporate representative in accordance with those directions; and (ii) if more than one corporate representative for the same corporate Shareholder attends the meeting but the corporate Shareholder has not appointed the Chairman of the meeting as its corporate representative, a designated corporate representative will be nominated from those corporate representatives in attendance on behalf of the corporate Shareholder who will vote on a poll and the other corporate representatives will give voting directions to that designated corporate representative. Corporate Shareholders are referred to the guidance issued by the Institute of Chartered Secretaries and Administrators on proxies and corporate representatives - www.icsa.org.uk - for further details of this procedure. The guidance includes a sample form of representation letter if the Chairman is being appointed as described in paragraph (i) of this Note 5. Note 6: Shareholders should note that it is possible that, pursuant to requests made by shareholders of the Company under section 527 of the Companies Act 2006, the Company may be required to publish on a website a statement setting out any matter relating to: (i) the audit of the Company's accounts (including the auditor's report and the conduct of the audit) that are to be laid before the Annual General Meeting; or (ii) any circumstances connected with an auditor of the Company ceasing to hold office since the previous meeting at which annual accounts and reports were laid in accordance with section 437 of the Companies Act 2006. The Company may not require the shareholders requesting any such website publication to pay its expenses in complying with sections 527 or 528 of the Companies Act 2006. Where the Company is required to place a statement on a website under section 527 of the Companies Act 2006, it must forward the statement to the Company's auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the Annual General Meeting includes any statement that the Company has been required under section 527 of the Companies Act 2006 to publish on a website. Note 7: The following documents will be available for inspection at the registered office of the Company during normal business hours on any weekday (Saturdays, Sundays and public holidays excepted) from the date of this notice until the conclusion of the Annual General Meeting and on the date of the Annual General Meeting at the offices of Montanaro Investment Managers Limited, 53 Threadneedle Street, London EC2R 8AR from 11:45am until the conclusion of the meeting: a) Copies of the letters of appointment of the Chairman and the Non-executive Directors of the Company. b) A copy of the Articles of Association of the Company. Registered in England and Wales No. 3004101. A copy of MUSCIT's Annual Report for the year ended 31 March 2008 can be found on the Company's website, www.montanarouksmaller.co.uk END

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Montanaro UK Smaller Companies Inv Trust (MTU)

Thursday, 21st November 2024

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HLMA JD. ITH

JD Sports tanks after management tighten profit guidance towards the lower end of expectations, Halma finds support from strong earnings and capital return commitment cheers shareholders in Ithica Energy.

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