Annual Financial Report

Montanaro UK Smaller Companies Investment Trust PLC Annual Report and Accounts 2010 The full Annual Report and Accounts 2010 can be found on the Company's website www.montanarouksmaller.co.uk 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 through 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 ("SmallCap"). No unquoted investments are permitted. Highlights for the year ended 31 March 2010 Results ● NAV + 54% (£101m) ● Gross assets + 59% (£113m) ● Share price + 53% (market capitalisation £78m) ● FTSE SmallCap (excluding investment companies) Index + 63% Year to Year to 31 March 31 March 2010 2009 Revenue return on ordinary 2,296 2,465 activities (£000) Movement in capital reserve 36,704 (37,721) (£000) Revenue return per Ordinary 6.86p 7.36p share Dividend per Ordinary share 6.20p* 6.85p** Total return per Ordinary 116.50p (105.18)p share As at As at 31 March 31 March 2010 2009 Ordinary share price 234.00p 153.00p NAV per Ordinary share 302.59p 195.94p * Includes 3p interim dividend paid December 2009. ** Includes 1.99p in respect of VAT refund. Chairman's Statement "Over the longer term, investors will continue to prefer the greater predictability and security of well-managed high quality businesses with good prospects at times of economic uncertainty." Highlights 2010 ● In the year to 31 March 2010, the NAV of MUSCIT increased by 54% to 302.6p in comparison with a 63% rise by the SmallCap. ● Since launch, the NAV of MUSCIT has increased by 203% in comparison with a gain of 39% by the SmallCap outperforming by 164%. ● Dividend income rose 23% in the year allowing the Company to pay an interim dividend of 3 pence and recommend a final dividend of 3.20 pence per share. Compared to a total dividend in 2009 of 6.85p including 1.99p in respect of the VAT refund. Background I am pleased to present the 15th annual report of MUSCIT, which was launched in March 1995. In 1996, the initial investment of £25 million was increased in size through a £30 million "C" share issue. Net assets now stand at £101 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 2010, the NAV of MUSCIT increased by 54% to 302.6p in comparison with a 63% rise in the SmallCap. Since launch, the NAV of MUSCIT has increased by 203% in comparison with a gain of 39% by the SmallCap, outperforming by 164%. Discount The discount of MUSCIT's share price to NAV stood at 23% on 31 March 2010 in comparison with a weighted sector average of 15% (Source: Close Wins Investment Trusts). Share Buy Backs The Board is responsible for share buy backs which are undertaken at arm's length from the Manager. No shares were bought back during the year. Holding Shares in Treasury Since December 2003, investment trusts have had the right 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 NAV. The Board has actively and carefully considered the use of Treasury Shares and has been among the industry's pioneers. Our policy is to ensure that shareholders receive a tangible benefit above and beyond an enhanced ability to manage the liquidity of the shares of MUSCIT. Shares held in Treasury will only be re-issued at a lower discount than when they were originally purchased and to produce a positive absolute return. Shares not re-issued will be cancelled within one year from purchase. As at 31 March 2010 no shares were held in Treasury. Gearing The Board 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. The Board has agreed to limit borrowings to 25% of shareholders' funds. Throughout the year the Company had a £15 million facility with ING Bank. At 31 March 2010, £10 million was drawn down at an interest rate of 1.84%. The remaining £5 million was drawn down on 13 April 2010 at a rate of 1.50%. During the year, net gearing ranged from a net cash position of 1.8% to gearing of 10.5%. At 31 March 2010, net gearing was 7.7%. Dividends MUSCIT's primary focus is on capital growth rather than income however, dividend income has risen by 23% over last year and the Board took the opportunity to pay a 3p per share interim dividend on 18 December 2009. The Board proposes a final dividend of 3.20p per Ordinary share payable on 13 August 2010 to shareholders on the register at the close of business on 2 July 2010 making a total dividend in respect to the year ended 31 March 2010 of 6.20p per share. Corporate Governance The Directors have thoroughly reviewed the recommendations of the 2008 Combined Code on Corporate Governance (the "Code") and have implemented procedures where appropriate, such as an annual evaluation of the Board's performance. 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. The use of an internal audit function is not considered necessary given the inherent segregation of duties and internal controls. Chairman's Comment The 12 months to 31 March 2009 had been a historic period in terms of the economic environment. This culminated in the SmallCap reaching a low on 12 March 2009, a level not seen previously since 1993. The subsequent 74% recovery (to the end of March 2010) is almost as remarkable. Much of this recovery came from an increased appetite for risk which, at the extreme margins, was a "dash for trash". Companies that once were priced for receivership saw a sharp upturn as confidence returned and rescue equity rights issues were seen. The world's major economic powers have acted unilaterally to shore up the banking system through a variety of measures including most notably "quantitative easing". UK interest rates dropped to record lows and government debt reached record highs. Credit spreads narrowed and availability of credit improved. The UK economy, which is more service based than our counterparts in Europe, went into the recession earlier and appears to be coming out later. The General Election has resulted in a coalition government which, although seemingly relatively market friendly, is new. Therefore investors remain uncertain about its performance in the light of very challenging circumstances. Furthermore, at the time of writing, the Euro crisis has created further uncertainty and volatility. This, together with cessation of quantitative easing in the future and likely fiscal tightening in 2011, leaves a somewhat uncertain backdrop to the UK economy. It has led to a further bout of sterling weakness and increased concerns about an economic "double dip" recession. On the other hand, emerging market economies are in good shape and many smaller companies are benefiting from the growth in demand there. Sterling's weakness will be helpful to exporters. Investor sentiment is still cautious and many investors hold significant amounts of cash, having missed the rally in 2009. In addition, takeover activity should pick up this year as better capitalised companies take advantage of attractive valuations. Over the longer term, investors will continue to prefer the greater predictability and security of well-managed high quality businesses with good prospects at times of economic uncertainty. Not all companies have survived the difficult times of the recent recession. Those that have done so are now leaner and more efficient, in a better position to increase market share and gradually raise margins and profits. Montanaro's focus on these high quality growth companies should fare well at such times as these. Laurie Petar resigned from the Board on 16 June 2010 for personal reasons. Laurie has made an outstanding contribution to the Board over many years. His knowledge, humour and good common sense have been a really positive contribution to the Trust's success, we will miss him. As we announced in the half yearly report, Christopher Jones has decided to retire at the end of the AGM on 30 July 2010, Christopher has been an outstanding Senior Independent Director for many years and I thank him for his contribution. We are delighted to welcome Kathryn Matthews to the Board of Directors. As a consequence of Christopher Jones's intention to retire at the AGM, the Board will appoint Roger Cuming to the post of Senior Independent Director. He will also chair the Nominations, Management Engagement and Remuneration Committees. Finally, I am pleased to report that Charles Montanaro, assisted by Adam Rackley, has resumed the role of portfolio manager (at Montanaro Asset Management) responsible for managing MUSCIT. David Gamble Chairman 21 June 2010 Manager's Report "We expect mergers and acquisitions to be a notable feature over coming months, dominated by trade buyers. The weakness in sterling leaves many UK companies looking cheap as far as overseas investors are concerned." Highlights 2010 ● 62% of our holdings are in companies with a market capitalisation of under £ 300 million. Portfolio Review In most market and economic cycles, Montanaro outperform as a result of our focus on the highest quality companies and a fundamental long-term investment approach based on detailed in-house research. The exceptions are typically periods of recovery from deep Bear Markets, occasions that (fortunately) occur infrequently. Since the launch of the Company 15 years ago, two such periods were between March and September in 2003 and six years later in 2009. As investor confidence and appetite for risk recovers, so high risk, high beta stocks often do well at these times. Nonetheless, we do not change our investment style but rather always "stick to our knitting". 50 of the 61 companies in the portfolio a year ago remain in the portfolio, reflecting our belief in long-term investment. Of the 11 that are no longer in the portfolio, three were taken over (BPP, Venture Production and Care UK) and eight were sold as we found higher quality investments to replace them. The sharp rise in share prices has been driven by the refinancing of the banking system. Quantitative easing implemented throughout the world finally led to an improvement in demand and economic recovery. Management teams who had taken an overly cautious view on 2009, led to many upgrades in earnings forecasts and a significant recovery in share prices. 18 portfolio holdings saw their share prices double during the year under review. Many companies raised new financing last year and concerns over balance sheets are largely a thing of the past. Those with strong market positions have emerged from the recession in good shape with higher levels of cash than expected by still cautious analysts. We expect mergers and acquisitions to be a notable feature over coming months, dominated by trade buyers as private equity continues to face challenges. The weakness in sterling leaves many UK companies looking cheap as far as overseas investors are concerned. This is particularly the case for US companies looking to increase their exposure to Europe. As we enter the new financial year, one of our long-term holdings, Rensburg Sheppards, has received a take-over offer at a premium of almost 50% which indicates the considerable value within the portfolio. Whilst in the previous financial year we commented on the fact that many defensive counter cyclical companies contributed to the Company's outperformance, in the year under review it has been somewhat different. The strongest contributors have been companies which might best be described as either special or recovery situations and - in the case of BPP - a take-over. Senior and Domino Printing Sciences have recovered strongly as component and capital equipment (printers) purchasing patterns improved. Carclo saw investors place considerable value on new products from its CIT development business. Similarly Dialight (LED lighting) and Immunodiagnostic Systems (Vitamin D testing) have risen strongly as investors appreciated the prospects for these products. On the downside, in marked contrast to last year, some of the more defensive companies (e.g. Dechra Pharmaceuticals and Consort Medical) lagged the sharp recovery in the stock market. Some late cyclical companies such as Marshalls and James Fisher performed similarly. However, not a single investment in the portfolio at the end of the year recorded a fall in its share price over the previous 12 months. A benefit of having one of the largest specialist research teams in the UK is having the resources that can help to avoid profit warnings and companies that disappoint. Annual Returns The year under review saw a return to the outperformance of SmallCap companies. The SmallCap rose by 63% compared to the 47% rise in the FTSE All Share Index. The Company recovered as the NAV rose by over 54%. However, as in 2003/4, the Company underperformed its benchmark, but by far less than six years previously. The Company has outperformed its benchmark in 12 out of the last 15 years. The portfolio now has a 35% weighting in the FTSE 250 as at 31 March 2010 which compares to 41% at 31 March 2009. The Company's AIM exposure is closely monitored by the Board and is limited to 30% of total investments with Board approval required for exposure to be above 25%. AIM represented 20% of the portfolio at the year end compared to a high point of 25% in November 2009. This is likely to decrease from here as a number of companies are expected to move to a full listing. As the table below illustrates, we remain invested in "smaller" companies with almost two thirds invested in companies with a market capitalisation of under £ 300 million. Market Cap by Value of Holding Value of Holding Percentage £0-50m 5% £50-£100m 19% £100-£200m 25% £200-£300m 13% £300-£600m 27% >£600m 11% 100% Market Outlook The last decade was the first in over a century in which UK equities underperformed both in cash and bonds as the long equity bull market of the 90s came to an end. There then followed a number of crises including 9/11 and the collapse of Lehman Brothers. When there is panic, small companies underperform as investors seek the safety of more liquid larger companies or cash. Confidence measures such as the German IFO indicator are currently positive. Deflation fears have eased, credit spreads have narrowed and GDP forecasts are being revised upwards, all positive signs indicating that the recovery in share prices seen already was both justified and may be sustainable based on the economic recovery currently underway. So what of market valuations? The price to book is now 1.4x compared to a peak of 2.5x and the forward price/earnings ratio stands at around 12x compared to a longer term median of nearer 14x. SmallCap Index earnings fell both in 2008 and 2009 but are now forecast to be back on an upward trend in 2010. At 31 March 2010, the SmallCap remains 43% below the peak seen in mid 2007. Although it has risen by some 75% from its low, it would need to rise by this same amount again to reach its previous peak. History shows that after two years of negative returns, such as we saw in 2007 and 2008, equity markets usually have a strong recovery over the subsequent two years. Over the past 50 years, the SmallCap Index has outperformed by over 7% each year during Bull markets. This current Bull market is now just one year old - compared with an average duration of 54 months - and should have a long way still to go. We remain positive about the outlook. CHARLES MONTANARO Montanaro Asset Management Limited 21 June 2010 Description of Thirty Largest Holdings as at 31 March 2010 Domino Printing Sciences PLC An international group providing total coding and printing solutions to a wide portfolio of market sectors. Chloride Group PLC International electronics group, manufacturing products to protect sensitive electrical equipment against power loss and power surges. Dignity PLC The UK's largest provider of funeral related services. Ricardo PLC The leading UK independent automotive consultancy. Senior PLC Designs, manufactures and markets components and systems for the civil aerospace, defence, diesel engine, exhaust system and energy markets. Fisher (James) & Sons PLC Provider of specialist marine support services and operator of tankships around UK coastal waters. Hill & Smith Holdings PLC One of the largest suppliers of galvanised steel to the UK infrastructure, building and construction industries. Latchways PLC World leader in the design, manufacture and sale of safety systems for individuals working at height. Domino's Pizza UK & IRL PLC The UK and Ireland's leading pizza delivery company. Immunodiagnostic Systems Holdings PLC A producer of diagnostic testing kits for the clinical and research markets, focusing on immunoassays used in the area of bone disease particularly Vitamin D. Dialight PLC Applied LED technology (energy saving, improved safety and easy disposal) for industrial and commercial uses including obstruction lighting, traffic and rail signalling. Brewin Dolphin PLC The UK's largest independent private client Investment Manager. Dana Petroleum PLC Independent oil and gas exploration and production company. Victrex PLC The world's largest manufacturer of PEEK, a high performance thermoplastic. Rensburg Sheppards PLC UK based investment management company. NCC Group PLC A provider of Escrow Solutions, Assurance Testing and Consultancy. Barr (AG) PLC The soft drink group, best known for producing Irn Bru. Chemring Group PLC A specialist manufacturer of decoy countermeasures and energetic materials for the global defence, security and safety markets. Hargreaves Services PLC A leading provider of transport and support services to the energy and waste sectors. WSP Group PLC International consulting engineers with activities in the UK, Scandinavia and United States. Dechra Pharmaceuticals PLC Manufacturer and distributor of veterinary products and pharmaceuticals. Albemarle & Bond Holdings PLC The UK's market leading pawnbroking business. Premier Oil PLC Independent oil and gas exploration and production company. Devro PLC Producers of manufactured casings for the food industry, supplying a wide range of products and technical support to manufacturers of sausages, salami, hams and other cooked meats. Microgen PLC Business Process Management software, principally for the financial services sector. Brammer PLC A pan-European technical distributor of power transmission components. Brooks Macdonald Group PLC Integrated private client asset management and financial services company. Kewill PLC Provider of solutions (software) that simplify global trade and logistics. M.P. Evans Group PLC A producer of Indonesian palm oil and Australian beef cattle. Mears Group PLC A leading social housing repairs and maintenance provider with a growing presence in the domiciliary care market. Fifty Largest Holdings as at 31 March 2010 Value % of Market Cap Holding Sector £000 portfolio £m Domino Printing Sciences Electronic and 2,968 2.7 425 PLC Electrical Equipment Chloride Group PLC Electronic and 2,941 2.7 553 Electrical Equipment Dignity PLC General Retailers 2,654 2.4 395 Ricardo PLC Support Services 2,565 2.3 154 Senior PLC Aerospace and Defence 2,557 2.3 442 Fisher (James) & Sons PLC Industrial 2,496 2.3 215 Transportation Hill & Smith Holdings PLC Industrial Engineering 2,480 2.2 265 Latchways PLC Support Services 2,384 2.2 76 Domino's Pizza UK & IRL Travel and Leisure 2,372 2.2 542 PLC Immunodiagnostic Systems Health Care Equipment & 2,251 2.0 213 Holdings PLC Services Ten Largest Holdings 25,668 23.3 Dialight PLC Electronic and 2,250 2.0 76 Electrical Equipment Brewin Dolphin PLC General Financials 2,178 2.0 334 Dana Petroleum PLC Oil & Gas Producers 2,104 1.9 1,112 Victrex PLC Chemicals 2,090 1.9 735 Rensburg Sheppards PLC General Financials 2,090 1.9 378 NCC Group PLC Software and Computer 2,046 1.9 125 Services Barr (AG) PLC Beverages 2,037 1.8 371 Chemring Group PLC Aerospace and Defence 1,987 1.8 1,170 Hargreaves Services PLC Support Services 1,971 1.8 175 WSP Group PLC Support Services 1,957 1.8 185 Dechra Pharmaceuticals Pharmaceuticals and 1,953 1.8 274 PLC Biotechnology Albemarle & Bond Holdings General Financials 1,946 1.8 136 PLC Premier Oil PLC Oil & Gas Producers 1,914 1.7 1,437 Devro PLC Food Producers 1,871 1.7 263 Microgen PLC Software and Computer 1,862 1.7 71 Services Brammer PLC Support Services 1,822 1.7 140 Brooks Macdonald Group General Financials 1,776 1.6 71 PLC Kewill PLC Software and Computer 1,736 1.6 79 Services M.P. Evans Group PLC Food Producers 1,713 1.5 200 Mears Group PLC Support Services 1,684 1.5 235 Thirty Largest Holdings 64,655 58.7 Zytronic PLC Electronic and 1,677 1.5 33 Electrical Equipment Booker Group PLC Food and Drug Retailers 1,644 1.5 655 Wilmington Group PLC Media 1,610 1.5 108 Croda International PLC Chemicals 1,593 1.4 1,287 UK Mail Group PLC Industrial 1,585 1.4 176 Transportation Mothercare PLC General Retailers 1,507 1.4 529 Primary Health Properties Real Estate Investment 1,502 1.4 186 PLC Trusts Education Development PLC Support Services 1,462 1.3 78 Carclo PLC Chemicals 1,450 1.3 89 Group NBT PLC Software and Computer 1,437 1.3 79 Services SDL PLC Software and Computer 1,427 1.3 377 Services VP Group PLC Support Services 1,415 1.3 82 TR Property Investment Real Estate 1,410 1.3 88 Trust PLC Sigma Holidaybreak PLC Travel and Leisure 1,403 1.3 193 Fenner PLC Industrial Engineering 1,384 1.2 372 Cineworld Group PLC Travel and Leisure 1,348 1.2 265 Shaftesbury PLC Real Estate Investment 1,346 1.2 873 Trusts Consort Medical PLC Health Care Equipment 1,291 1.2 103 and Services Goals Soccer Centres PLC Travel and Leisure 1,274 1.2 80 Salamander Energy PLC Oil and Gas Producers 1,235 1.1 407 Fifty Largest Holdings 93,655 85.0 Analysis of Investment Portfolio by Industrial or Commercial Sector as at 31 March 2010 Sector % of % of portfolio SmallCap Oil and Gas Producers 4.8 1.4 Oil Equipment Services and Distribution 0.0 0.0 Alternative Energy 0.0 0.8 Oil and Gas Total 4.8 2.2 Chemicals 4.7 2.1 Mining 0.0 1.7 Basic Materials Total 4.7 3.8 Construction and Materials 3.1 4.6 Aerospace and Defence 4.1 1.4 General Industrials 0.0 1.3 Electronic and Electrical Equipment 8.9 1.5 Industrial Engineering 5.4 3.7 Industrial Transportation 5.4 4.0 Support Services 14.9 14.8 Industrials Total 41.8 31.3 Automobiles and Parts 0.0 0.0 Beverages 1.8 0.0 Food Producers 3.2 3.2 Household Goods 0.0 1.3 Leisure Goods 0.0 1.5 Personal Goods 0.0 0.0 Consumer Goods Total 5.0 6.0 Health Care Equipment and Services 3.2 3.2 Pharmaceuticals and Biotechnology 2.6 4.0 Health-care Total 5.8 7.2 Food and Drug Retailers 1.5 0.3 General Retailers 5.8 6.3 Media 1.5 4.3 Travel and Leisure 5.8 4.9 Consumer Services Total 14.6 15.8 Fixed Line Telecommunications 0.0 1.9 Telecommunications Total 0.0 1.9 Gas, Water and Multiutilities 0.0 0.0 Utilities 0.0 0.0 Non-life Insurance 1.0 2.6 Life Insurance 0.0 2.0 Real Estate and Investment Services 3.4 10.9 Real Estate Investment Trusts 2.6 3.4 General Financials 7.3 7.0 Equity Investment Instruments 1.3 0.0 Financials Total 15.6 25.9 Software and Computer Services 7.7 4.5 Technology, Hardware and Equipment 0.0 1.4 Technology Total 7.7 5.9 Total 100.0 100.0 The investment portfolio comprises 67 listed UK equity holdings including 15 holdings totalling £22,311,000 (representing 20% of the portfolio) traded on the Alternative Investment Market ("AIM"). Directors' Report The Directors present their Annual Report and financial statements for the year ended 31 March 2010. Business Review Introduction The purpose of the Business Review is to provide an overview of the business of the Company by: • Analysing development and performance using appropriate key performance indicators ("KPIs"). • Outlining the principal risks and uncertainties affecting the Company. • Describing how the Company manages these risks. • Explaining the future business plans of the Company. • Setting out the Company's environmental, social and ethical policy. • Providing information about persons with whom the Company has contractual or other arrangements which are essential to the business of the Company. • Outlining the main trends and factors likely to affect the future development, performance and position of the Company's business. DEVELOPMENT, PERFORMANCE AND POSITION OF MUSCIT Review of the Business of MUSCIT A description of MUSCIT's activities and a review of the development and performance of the business 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 with registration number 3004101. 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 2009 and an application will be made to HM Revenue & Customs for MUSCIT's status as an investment trust in financial year 2009/10 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 value. At the start of 2010, this was any company below £1.2 billion in size. The Manager of MUSCIT is Montanaro Asset Management Limited ("Montanaro"), a highly experienced specialist in UK and European quoted small companies established in 1991. Montanaro have 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 £500 million, mainly on behalf of leading financial institutions. There are currently 33,475,958 Ordinary 10p shares in issue (2009: 33,475,958) of which none are held in Treasury (2009: nil). Holders of Ordinary shares have unrestricted voting rights at all general meetings of the Company. Description of Principal Risks Associated with MUSCIT The Board carefully considers the principal risks for MUSCIT and seeks to manage 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. Mitigation of the principal risks is sought and achieved in many ways as shown in italics 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. 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 spreading investment risk and 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 companies are out of favour or during periods of adverse economic conditions. The Manager focuses on smaller companies at the lower end 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's share price to the net asset value of the portfolio. One of the benefits of investment trusts is that generally 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 notusedthe authoritygranted at the Annual General Meeting held in 2009 to make market purchases of up to 5,018,046 Ordinary shares and as at the date of this report has the authority to purchase 5,018,046 Ordinary shares. No Ordinary shares are currently held in Treasury. No shares were purchased during the year. The Board encourages the Manager to market MUSCIT to new investors to increase demand for shares of MUSCIT, which may help to increase liquidity and 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 and investment holdings potentially being sold at a time of poor liquidity. The main financial covenants to which the Company is subject in respect of the ING N.V. revolving credit facility require it to ensure that total borrowings will not exceed 30% of the adjusted Net Asset Value at any time and that the adjusted Net Asset Value does not fall below £39,000,000 at any time. 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. Company Viability: Through falling NAV, or a reduction in the size of the Company through purchases of its own shares, the size of the Company could make the continuing existence of the Company unviable in the opinion of investors. The Board actively monitors and seeks to manage the discount of MUSCIT and is responsible for share buy backs for cancellation or holding in Treasury. The resultant size of the Company is an important consideration of the decision to undertake buy backs. A description of MUSCIT's system for reviewing its risk-environment is shown in the Directors' Report. 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). Under company law the directors must not approve the financial statements unless they are satisfied that they 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 judgements 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 adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company andenable them to ensure that the financial statements comply with the Companies Act 2006. 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 complies 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. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. DAVID GAMBLE Chairman 21 June 2010 Independent Auditor's Report to the Members of Montanaro UK Smaller Companies Investment Trust PLC The Company's financial statements for the year ended 31 March 2010 have been audited by KPMG Audit Plc. The text of the Auditor's report can be found in the Company's Annual Report and Accounts which is available from the Company Secretary and on the Company's website www.montanaro.co.uk. Income Statement for the year to 31 March 2010 Year to 31 March 2010 Year to 31 March 2009 Revenue Capital Total Revenue Capital Total Notes £000 £000 £000 £000 £000 £000 Gains/(losses) on 10 - 37,277 37,277 - (37,641) (37,641) investments designated as fair value through profit or loss Dividends and interest 2 3,206 - 3,206 2,855 - 2,855 Management fee* 3 (486) (487) (973) 26 (61) (35) Management performance fee* 3 - - - - 247 247 Other income 2 3 - 3 184 - 184 Other expenses 4 (341) - (341) (334) - (334) Net return before finance 2,382 36,790 39,172 2,731 (37,455) (34,724) costs and taxation Interest payable and 6 (86) (86) (172) (266) (266) (532) similar charges Net return before taxation 2,296 36,704 39,000 2,465 (37,721) (35,256) Taxation 7 - - - - - - Net return after taxation 2,296 36,704 39,000 2,465 (37,721) (35,256) Return per Ordinary share 9 6.86p 109.64p 116.50p 7.36p (112.54p) (105.18p) * Year to 31 March 2009 net of VAT refund. 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 2010 Called-up Share Capital Own Total equity shares share premium redemption Special Capital Revenue held in shareholders' capital account reserve reserve reserve reserve Treasury funds Year to 31 Notes £000 £000 £000 £000 £000 £000 £000 £000 March 2010 As at 31 3,348 19,307 1,362 4,642 33,448 3,485 - 65,592 March 2009 Fair value 10 - - - - 37,277 - - 37,277 movement of investments Costs - - - - (573) - - (573) allocated to capital Dividends 8 - - - - - (3,297) - (3,297) paid in the year Net revenue - - - - - 2,296 - 2,296 for the year As at 31 3,348 19,307 1,362 4,642 70,152 2,484 - 101,295 March 2010 Called-up Share Capital Own Total equity shares share premium redemption Special Capital Revenue held in shareholders' capital account reserve reserve Reserve reserve Treasury funds Year to 31 £000 £000 £000 £000 £000 £000 £000 £000 March 2009 As at 31 3,545 19,307 1,165 9,451 71,169 2,247 (4,501) 102,383 March 2008 Fair value 10 - - - - (37,641) - - (37,641) movement of investments Costs - - - - (80) - - (80) allocated to capital Dividends 8 - - - - - (1,227) - (1,227) paid in the year Shares (14) - 14 (308) - - - (308) purchased for cancellation Treasury (183) - 183 (4,501) - - 4,501 - shares cancelled Net revenue - - - - - 2,465 - 2,465 for the year As at 31 3,348 19,307 1,362 4,642 33,448 3,485 - 65,592 March 2009 The notes below form part of these financial statements. Balance Sheet as at 31 March 2010 31 March 2010 31 March 2009 Notes £000 £000 £000 £000 Fixed assets Investments designated at fair 10 110,160 64,207 value through profit or loss Current assets Debtors 12 341 344 Cash at bank 20 2,196 6,167 2,537 6,511 Creditors: amounts falling due within one year Other creditors 13 (1,402) (126) Revolving credit facility 14 (10,000) (5,000) (11,402) (5,126) Net current (liabilities)/ (8,865) 1,385 assets Total assets less current 101,295 65,592 liabilities Net assets 101,295 65,592 Share capital and reserves Called-up share capital 15 3,348 3,348 Share premium account 19,307 19,307 Capital redemption reserve 1,362 1,362 Special reserve 4,642 4,642 Capital reserve 70,152 33,448 Revenue reserve 2,484 3,485 Own shares held in Treasury - - Total equity shareholders' 101,295 65,592 funds Net asset value per Ordinary 18 302.59p 195.94p share These financial statements were approved by the Board of Directors on 21 June 2010. DAVID GAMBLE MICHAEL MOULE Company Registered Number: 3004101 The notes below form part of these financial statements. Statement of Cash Flows for the year to 31 March 2010 31 March 2010 31 March 2009 Notes £000 £000 £000 £000 Operating activities Investment income received 3,136 2,652 Deposit interest received 7 313 Management fees paid (939) (960) Company secretarial fees (80) (79) paid VAT and interest reclaimed 2/3 - 1,313 on investment management fees Other cash expenses (213) (257) Net cash inflow from 19 1,911 2,982 operating activities Servicing of finance Interest and similar charges (125) (686) paid Net cash outflow from (125) (686) servicing of finance Capital expenditure and financial investment Purchases of investments (47,066) (14,400) Sales of investments 39,606 18,563 Net cash (outflow)/inflow (7,460) 4,163 from investing activities Equity dividends paid (3,297) (1,227) Net cash (outflow)/inflow (8,971) 5,232 before financing Financing Proceeds/(repayment) of 5,000 (10,000) short-term credit facility Ordinary shares purchased - (308) for cancellation Ordinary shares purchased - - for Treasury Net cashinflow/(outflow)from 5,000 (10,308) financing Decreasein cash 20 (3,971) (5,076) The notes below form part of these financial statements. Notes to the Financial Statements at 31 March 2010 1Accounting 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 UK applicable accounting standards and the Statement of Recommended Practice regarding the Financial Statements of Investment Trust Companies and Venture Capital Trusts ("SORP") issued in January 2009. 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 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. 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 In accordance with the guidance given in the AIC SORP issued January 2009 the capital reserve is not separated into realised and unrealised. Therefore gains and losses on realisation of investments and changes in fair value of investments are shown in one reserve. 2 Income Year to Year to 31March 31 March 2010 2009 £000 £000 Income from investments 3,205 2,608 UK dividend income 3,167 2,608 Overseas dividend income 38 - Other income Interest received on Investment Management - 181 fees reclaimed VAT Bank interest 1 247 Underwriting commission 3 3 Total income 3,209 3,039 Total income comprises Dividends from financial assets designated at 3,205 2,608 fair value through profit or loss Interest from financial assets designated at 1 247 fair value through profit or loss Dividends and interest 3,206 2,855 Interest received on Investment Management - 181 fees reclaimed VAT Other income not from financial assets 3 3 Other income 3 184 3,209 3,039 All investment income has been obtained from investments listed in the UK. 3Management Fee Year to 31 March 2010 Year to 31 March 2009 Revenue Capital Total Revenue Capital Total £000 £000 £000 £000 £000 £000 Management fee 486 487 973 460 460 920 Irrecoverable VAT - - - - - - thereon VAT reclaimed on - - - (486) (399) (885) Investment Management fees 486 487 973 (26) 61 35 Performance fee - - - - - - Irrecoverable VAT - - - - - - thereon VAT reclaimed on - - - - (247) (247) Performance fees - - - - (247) (247) 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 Company Summary. At 31 March 2010, £93,000 (2009: £58,000) 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. The refund of VAT in the year to 31 March 2009 was in respect of performance fees relating to fees paid in 2007, 2006 and 2001. 4 Other Expenses Year to Year to 31 March 20 31 March 10 2009 £000 £000 Administration and company 80 79 secretarial fees Auditor's remuneration (also see * below) for: - audit 24 20 - other services to the 5 5 Company Other expenses (including Directors' 232 230 remuneration and VAT) 341 334 * Total fees paid to the Auditor for the year, all of which were charged to revenue, comprised: Audit services - statutory audit 24 20 Tax services - compliance services 5 5 29 25 The Directors do not consider that the provision of non-audit work to the Company affects the independence of the Auditor. 5Directors' Remuneration Year to Year to 31 March 2010 31 March 2009 £000 £000 Total 87 85 fees A breakdown of the Directors' remuneration is set out in the Directors' Remuneration Report in the Annual Report. The Company has no employees. 6Interest Payable and Similar Charges Year to 31 March 2010 Year to 31 March 2009 Revenue Capital Total Revenue Capital Total Financial £000 £000 £000 £000 £000 £000 liabilities not at fair value through profit or loss Interest payable on 86 86 172 266 266 532 loan 86 86 172 266 266 532 7 Taxation The current taxation for the year is lower than the standard rate of corporation tax in the UK of 28% (2009: 28%). A reconciliation is provided below: Year to Year to 31 March 31 March 2010 2009 £000 £000 Return on ordinary activities before 39,000 (35,256) taxation Theoretical corporation tax at 28% 10,920 (9,872) (2009: 28%) Effects of: - Capital (gains)/losses (10,438) 10,539 that are not taxable - Overseas dividend income not (11) - liable to corporation tax - UK dividend income not liable (887) (730) to corporation tax - expenses disallowed for 8 9 taxation purposes - excess management expenses 408 54 Total current taxation charge - - At 31 March 2010, the Company had surplus management expenses and non-trade losses of £22,025,508 (2009: £20,575,810), 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 31 March 2010 2009 £000 £000 Paid 2009 Final dividend of 6.85p* (2008: 2,293 1,227 3.65p) per Ordinary share Proposed and part-paid Interim dividend paid of 3.00p per 1,004 - Ordinary share (2009: nil) 2010 Final dividend of 3.20p (2009: 1,071 2,293 6.85p) per Ordinary share * Including a non-recurring element of 1.99p 9 Return per Share Year to 31 March 2010 Year to 31 March 2009 Revenue Capital Total Revenue Capital Total Ordinary 6.86p 109.64p 116.50p 7.36p (112.54p) (105.18p) share Revenue return per Ordinary share is based on the net revenue after taxation of £2,296,000 (2009: £2,465,000) and 33,475,958 (2009: 35,518,244) Ordinary shares, being the weighted average number of Ordinary shares, excluding any shares held in Treasury. Capital return per Ordinary share is based on net capital gains for the year of £36,704,000 (2009: losses of £37,721,000), and on 33,475,958 (2009: 33,518,244) Ordinary shares, being the weighted average number of Ordinary shares, excluding any shares held in Treasury. Normal and diluted return per share are the same as there are no dilutive elements on share capital. 10 Investments Year to Year to 31 March 31 March 2010 2009 £000 £000 Total investments at 110,160 64,207 fair value The investment portfolio comprises 67 listed UK equity holdings including 15 holdings totalling £22,311,000 (representing 20% of the portfolio) traded on the Alternative Investment Market ("AIM"). Yearto Year to 31 March 31 March 2010 2009 £000 £000 Opening book cost 80,990 90,403 Opening fair value (16,783) 15,751 adjustment Opening valuation 64,207 106,154 Movements in the year Purchases at cost 41,644 14,251 Sales - proceeds (32,968) (18,557) Sales - gains/ 4,606 (5,107) (losses) on sales Changes in fair 32,671 (32,534) value Closing valuation 110,160 64,207 Closing book cost 94,272 80,990 Closing fair value 15,888 (16,783) adjustment 110,160 64,207 FAIR VALUE HIERARCHY In accordance with Financial Reporting Standard No. 29: "Financial Instruments: Disclosures", the Company must disclose the fair value hierarchy of financial instruments. The fair value hierarchy consists of the following three levels: ● level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities; ● level 2 - inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and ● level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs). For financial instruments (within the scope of FRS 29), which are measured at fair value in the balance sheet an entity shall disclose the following for each class of financial instruments: ● the level in the fair value hierarchy into which the fair value measurements are categorised in their entirety; ● any significant transfers between level 1 and level 2 of the fair value hierarchy and the reasons for those transfers; ● for fair value measurements in level 3 of the hierarchy, a reconciliation from the beginning balances to the ending balances. As well as highlighting purchases, sales, and gains and losses, this reconciliation will identify transfers into or out of level 3 and the reasons for those transfers. All of the Company's financial instruments fall into level 1, being valued at quoted prices in active markets. TRANSACTION COSTS During the year, the Company incurred transaction costs of £246,000 (2009: £ 95,000) and £62,000 (2009: £27,000) on purchases and sales of investments, respectively. These amounts are deducted in determining gains/(losses) on investments at fair value as disclosed in the Income Statement. 31 March 20 31 March 10 2009 Total Total `000 `000 Net gains/(losses) on investments at fair value though profit or loss Gains/(losses) on sales 4,606 (5,107) Changes in fair value 32,671 (32,534) 37,277 (37,641) 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. 11Significant 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: Security % of Voting rights Lok'n Store Group PLC 5.6 Zytronic PLC 5.1 Superglass Holdings PLC 3.9 The Stanley Gibbons Group PLC 3.6 Latchways PLC 3.1 12Debtors 31 March 20 31 March 10 2009 £000 £000 Prepayments and accrued 8 42 income Dividends receivable 333 302 341 344 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. 13Other Creditors 31 March 20 31 March 10 2009 £000 £000 Accruals and deferred 1,402 126 income 1,402 126 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. The carrying amount includes £ 1,190,000 due to brokers (2009: £nil). 14Revolving Credit Facility 31 March 31 March 2010 2009 £000 £000 Falling due within one year 10,000 5,000 Falling due after more than - - one year 10,000 5,000 The Company has a £15,000,000 Revolving Credit Facility with ING Bank N.V. As at 31 March 2010, £10,000,000 was drawn down (31 March 2009: £5,000,000), all of which has a fixed interest rate of 1.84%* and is repayable on 13 December 2010. The remaining £5,000,000 was drawn down on 13 April 2010, at a rate of 1.50%, and is repayable on 13 October 2010. * Including margin and mandatory costs. 15Share Capital 31 March 20 31 March 10 2009 £000 £000 Authorised: 82,101,048 (2009: 82,101,048) Ordinary 8,210 8,210 shares of 10p each Allotted, called-up and fully paid: 33,475,958 (2009: 33,475,958) Ordinary 3,348 3,348 shares of 10p each Voting rights Ordinary shareholders have unrestricted voting rights at all general meetings of the Company. At the Annual General Meeting on 31 July 2009 the Company was granted the authority to purchase 5,018,046 Ordinary shares. As at 31 March 2010 the Company had remaining authority to repurchase 5,018,046 Ordinary shares. This authority is due to expire at the conclusion of the next Annual General Meeting. During the year no shares were purchased for cancellation. 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 objectives, both of which are detailed above. 16Duration of the Company At the Company's AGM held on 31 July 2009 Shareholders voted to remove the obligation under the Articles of Association to convene a General Meeting during 2010 for the purpose of voluntarily winding up the Company, as provided for in the Company's Articles of Association. The Company will be required to propose a resolution at a General Meeting 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 a General Meeting. 17Own 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 its own shares and hold them in Treasury for re-issue at a later date. There were no shares held in Treasury at any time during the year. Year to 31 March 2010 Year to 31 March 2009 Own shares Premium Own shares Premium on on held in held in Treasury disposal Treasury disposal SUMMARY Number £000 £000 Number £000 £000 At 1 April - - - 1,828,000 4,501 - Additions - - - - - - Cancellation - book - - - (1,828,000) (4,501) - cost Disposals - book - - - - - - cost At 31 March - - - - - - 18Net Asset Value per Ordinary Share Net asset value per Ordinary share is based on net assets of £101,295,000 (2009: £65,592,000) and on 33,475,958 (2009: 33,475,958) Ordinary shares being the number of Ordinary shares in issue at the year end. 19Reconciliation of Net Revenue Before Finance Costs and Taxation to Net Cash Inflow from Operating Activities Year to Year to 31 March 31 March 2010 2009 £000 £000 Net revenue before finance costs and 2,382 2,731 taxation Management fee charged to capital (487) (460) VAT reclaim on Investment - 646 Management Fees charged to capital Increase/(decrease) in creditors 40 (45) (Increase)/decrease in prepayments and (24) 110 accrued income Net cash inflow from operating activities 1,911 2,982 20Reconciliation of Net Cash Flows to Movements in Net Cash/(Debt) Year to Year to 31 March 2010 31 March 2009 £000 £000 Decrease in cash in (3,971) (5,076) year Proceeds of credit (5,000) - facility Repayment of credit - 10,000 facility Movement in net funds (8,971) 4,924 Net cash/(debt) at 1,167 (3,757) beginning of year Net (debt)/cash at end (7,804) 1,167 of year ANALYSIS OF NET CASH/(DEBT) 1 April Cash 31 March 2009 flows 2010 £000 £000 £000 Cash at bank 6,167 (3,971) 2,196 Debt due in less than (5,000) (5,000) (10,000) one year Debt due after one - - - year 1,167 (8,971) (7,804) 21Analysis 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 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. The banks at which cash is held are under constant review. The maximum exposure to credit risk at 31 March 2010 was: 31 March 20 31 March 10 2009 £000 £000 Cash at bank 2,196 6,167 Debtors and prepayments 341 344 2,537 6,511 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 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 shown 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 description of the 30 largest equity investments are contained in the Manager's Review section. The maximum exposure to market price risk is the fair value of investments of £ 110,160,000 (2009: £64,207,000). If the investment portfolio valuation fell by 1% from the amount detailed in the financial statements as at 31 March 2010 it would have the effect, with all other variables held constant, of reducing the net capital return before taxation by £1,102,000 (2009: £642,000). 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 N.V. 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 received interest on cash deposits over £25,000 at a rate of 0.03%. The interest received in the year amounted to £1,000 (2009: £247,000). The interest risk profile of the Company is given below. If interest rates had reduced by 1% from those paid as at 31 March 2010 it would have the effect, with all other variables held constant, of increasing the net revenue return before taxation on an annualised basis by £100,000 (2009: £50,000). 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 2010 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 £2.2 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. (v)Gearing Gearing can have amplified effects on the net asset value of the Company. It can have a positive or negative effect depending on market conditions. 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 All 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 2010 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 2010 is as follows: Total Weighted Period average until maturity interest rate £000 % Years Amounts drawn down under fixed 10,000 2.0381 0.70 revolving credit facility Financial liabilities upon which 1,402 - - no interest is paid The interest rate risk profile of the financial liabilities of the Company as at 31 March 2009 was as follows: Total Weighted Period average until interest maturity rate £000 % Years Amounts drawn down under fixed 5,000 5.5338 0.45 revolving credit facility Financial liabilities upon which no interest 126 - - is paid The maturity profile of the Company's financial liabilities is as follows: As at As at 31 March 20 31 March 10 2009 £000 £000 In one year or 11,402 5,126 less In more than one but not more than two years - - In more than two years but not more than - - five years 11,402 5,126 The Company had £5,000,000 undrawn under the fixed Revolving Credit Facility at 31 March 2010 (2009: £10,000,000). 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. 22Previous Commitments and Contingent Liabilities At 31 March 2010, there were no capital commitments (2009: nil). 23Related 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 through 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 ("SmallCap"). No unquoted investments are permitted. Investment Policy The Company seeks to achieve its objective and to diversify risk by investing in a portfolio of quoted 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 2010, this was any company below £1.2 billion in size. The Manager focuses to on the smaller end of this Index. In order to manage risk the Manager will normally 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. The Board, in consultation with the Manager, is responsible for determining the gearing strategy of the Company. Gearing is used to enhance returns when the timing is considered appropriate. The Company currently has a credit facility of £15 million through ING Bank of which £10 million was drawn as at 31 March 2010 the remaining £5 million was drawn down on 13 April 2010. The Board has agreed to limit borrowings to 25% of shareholders' funds. Benchmark FTSE SmallCap (excluding investment companies) Index ("SmallCap"). Gross Assets £112,697,000 as at 31 March 2010. Shareholders' Funds £101,295,000 as at 31 March 2010. Market Capitalisation £78,334,000 as at 31 March 2010. Capital Structure As at 31 March 2010 and at the date of this report, the Company had 33,475,958 Ordinary shares of 10p each in issue (of which none were held in Treasury). Wind up Date In accordance with the Articles of Association, an Ordinary resolution will to be put to shareholders at the Annual General Meeting to be held after 30 November 2012 to release the Directors from the obligation to convene a General Meeting in 2014 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. Administration and Company Secretarial Fees The Company Secretary receives an annual fee of £80,000, which is subject to an annual RPI uplift. The Company ceased to pay VAT on its administration and company secretarial fees in October 2008. Sources of Information All information contained within the Chairman's Statement and the Manager's Report has been provided by Montanaro Asset Management Limited unless otherwise noted.

Companies

Montanaro UK Smaller Companies Inv Trust (MTU)
UK 100
FTSE quotes by TradingView

Latest directors dealings

All directors dealings today