Annual Financial Report

MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC ("MUSCIT") ANNUAL FINANCIAL REPORT 2013 The full Annual Report and Accounts for the year ended 31 March 2013 can be found on the Company's website: www.montanarouksmaller.co.uk. CURRENT 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 Numis Smaller Companies Index (excluding Investment Companies)("NSCI")*. No unquoted investments are permitted. * The benchmark to 31 March 2013 was the FTSE SmallCap (excluding Investment Companies) Index ("SmallCap"). HIGHLIGHTS FOR THE YEAR ENDED 31 MARCH 2013 Results NAV +21% Â£177m NAV (excluding +22%* Â£175m current period revenue) Gross assets +18% Â£193m Share price +26% Â£146m** FTSE SmallCap Index +24%*** * Calculated using AIC guidelines. ** Market capitalisation. *** Excluding Investment Companies. Year to Year to 31 March 31 March 2013 2012 Revenue return on ordinary 2,350 2,480 activities (Â£000) Movement in capital reserve 30,916 4,778 (Â£000) Revenue return per Ordinary 7.02p 7.41p share Dividend per Ordinary share 6.76p 6.76p Total return per Ordinary 99.37p 21.68p share As at As at 31 March 31 March 2013 2012 Ordinary share price 437.00p 348.00p NAV per Ordinary share 529.19p 436.57p NAV (excluding current period 522.17p 429.17p revenue) per Ordinary share CHAIRMAN'S STATEMENT Montanaro's investment focus on companies of the highest quality - "Blue Chip" SmallCap - should reassure investors in these uncertain times. Highlights 2013 - In the year to 31 March 2013, the NAV of MUSCIT increased by 21% to 529.19p in comparison with a 24% rise in the SmallCap. - Since launch, the NAV of MUSCIT has increased by 430% in comparison with a gain of 87% in the SmallCap, outperforming by 343%. Background I am pleased to present the 18th annual report of 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£177 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 The NAV (excluding current period revenue) of MUSCIT at 31 March 2013 increased in the year by 21.7% to 522.2p, by 345.1% over ten years and by 429.6% since launch. In comparison, the FTSE SmallCap (excluding Investment Companies ("SmallCap") rose by 24.3% in the year, by 92.9% over ten years and has gained 86.8% since launch. Since launch, the NAV (excluding current period revenue) of MUSCIT has outperformed the SmallCap by 342.8%. Discount The discount of MUSCIT's share price to NAV (including current period revenue) stood at 17.4% on 31 March 2013 in comparison with a weighted sector average of 12.8%. Share Buy Backs The Board is responsible for share buy backs which are undertaken at arm's length by 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 had 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. As at 31 March 2013 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. On 19 December 2011 the Company entered into a Â£15 million revolving credit facility with ING Bank. The facility is available until 19 December 2016. At the same time the Company entered into an interest rate swap effectively fixing the interest rate at 4.29% for the life of the facility. At 31 March 2013, Â£15 million was drawn down. During the year, net gearing ranged from 0.3% to 8.3%. At 31 March 2013, net gearing was 1.1% (debt as a % of gross assets) and 1.2% (debt as a % of net assets). Dividends MUSCIT's primary focus is on capital growth rather than income. The Board proposes a final dividend of 6.76p per Ordinary share payable on 9 August 2013 to shareholders on the register at the close of business on 28 June 2013. Given the magnitude of the special dividends received last year, the Board has decided to maintain the dividend at the same level. Directors There have been no changes to the structure of the Board in the year to 31 March 2013. Following our internal Board evaluation process and as part of our long-term succession planning we have decided to search for an additional Director with complementary skills to the existing Board members. Corporate Governance The Directors have reviewed the recommendations of the AIC Code of Corporate Governance (the "AIC Code") and have implemented procedures where appropriate, such as an annual evaluation of the Board's performance. MUSCIT has complied with the AIC Code throughout the year except where compliance would be inappropriate given the size and nature of the Company. Full disclosure of MUSCIT's compliance with the AIC Code is included in the Directors' Report. The Manager has signed up to the Stewardship Code and has published its voting records on its website. The use of an internal audit function is not considered necessary given the inherent segregation of duties and internal controls. Alternative Investment Fund Managers' Directive The Board has been monitoring the progression of the AIFM Directive and has been actively discussing options with providers. This will ensure that the Company will be able to comply with its requirements when the Directive is fully implemented in July 2014. Continuation Vote Under the Articles the Directors will propose a Resolution at this year's Annual General Meeting to remove the obligation that they put a Resolution to Shareholders at the Annual General Meeting in 2014 to wind up the Company. If passed, this will allow the Company to continue as an investment trust for a further five years. This Resolution is similar to the one passed by Shareholders in 2009 and one which the Board recommends all Shareholders vote in favour. Chairman's Comment The past year has been particularly good for investors in UK Small and Mid Cap companies, with rises of 24.3% and 20.7% in the SmallCap and FTSE 250 indices. This compares to an increase in the FTSE 100 Index of 11.2%. The second half of the Company's financial year witnessed a marked recovery in lower quality, "value" companies - the opposite of where MUSCIT invests - which largely explains the modest underperformance of MUSCIT against its benchmark (for only the fourth occasion in 18 years). Nonetheless, investors enjoyed NAV returns of 21.2% and saw the MUSCIT share price increase by 25.6%. In recent years, Montanaro has found fewer stocks meeting their exacting criteria within the SmallCap and Fledgling markets, which represent an ever shrinking proportion of UK stocks. After consulting several of the Company's larger shareholders, the Board considered that the benchmark should be changed from the SmallCap Index to the Numis Smaller Companies Index (excluding Investment Companies) ("NSCI") from 1 April 2013. The goal was to introduce a benchmark that more closely reflected the actual structure of the portfolio, 82% of which falls within the NSCI. This decision was conveyed to shareholders in the half-yearly report. MUSCIT would have outperformed this broader new benchmark last year, which rose by 19.9%. Despite the change in benchmark, the investment strategy and focus on high quality, growing UK smaller companies remains unchanged. Montanaro firmly believes that thorough research at an individual company level can provide opportunities for long-term outperformance. However, the appetite for passive strategies and Exchange Traded Funds ("ETF") has continued to grow and by the end of 2011, 12% of professionally managed assets around the world were run passively, compared to 7% two years earlier (source: Boston Consulting Group). Two clear effects of increased indexation have been a fall in average holding periods for equities and a declining interest for individual company fundamentals. The reduction in holding periods is perhaps best exemplified by "SPY", the world's largest ETF, which mirrors the S&P 500 Index and has an average holding period of less than a week. Meanwhile, the decline in interest for company fundamentals is implicit in the rise of passive investments - no-one buys an index tracker because they have analysed every constituent company and found them all to be undervalued. Both of these offer opportunities for active, long-term and bottom up investors. Montanaro, on the other hand, does analyse every company it holds. In the knowledge that earnings drive the valuations of companies on the stock market, it has assembled a large, multi-national, specialist team based in the United Kingdom to ensure that it understands a company's fundamentals better than others. This is the vital information edge that differentiates bottom-up investment managers. That it can buy or sell stocks to those who have far more transient reasons for investing is an added benefit. If the trend toward passive investing continues, the opportunity to add value by performing the work that others cannot or do not carry out will increase. Montanaro's focus on companies of the highest quality - "Blue Chip" SmallCap - should reassure investors in these uncertain times. I believe that investors can look forward to the future of MUSCIT with confidence. David Gamble Chairman 19 June 2013 MANAGER'S REPORT Highlights 2013 MUSCIT is well-positioned to benefit from a return of investor appetite for the highest quality quoted small companies. We look forward to the coming year with confidence although we do not expect to see a repeat of the excellent returns of last year. Breakdown by Market Cap (Ex Cash) Market Cap Percentage Â£50-Â£100m 0% Â£100-Â£200m 5% Â£200-Â£300m 17% Â£300-Â£600m 23% Over Â£600m 55% Breakdown by Index(Ex Cash) Index Percentage FTSE 100 2% UK AIM 5% FTSE 250* 11% Numis Smaller Companies 82% * represents those holdings that are in the FTSE 250 and are above the threshold for Numis Smaller Companies holdings. Manager's Review The change at the helm of the European Central Bank ("ECB") in November 2011 had a salutary effect on Europe's stock markets. Mario Draghi may one day be remembered for changing the course of history with his statement in July 2012: "Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro, and believe me, it will be enough". This, combined with toned down rhetoric from Germany and the creation of the European Stability Mechansim, reduced the tail risk for the UK's largest export partner, whilst economic recovery in the US provided the impetus required for positive equity markets. However, the domestic UK economy remained sluggish with little to suggest a resumption of sustainable GDP growth. A lack of fiscal stimulus left the heavy lifting to the Bank of England, which duly kept monetary policy exceptionally loose. The resulting weakness in sterling provided some comfort to exporters. Fiscal 2012/13 proved to be an excellent year for UK SmallCap: the SmallCap Index rose by 24.3% whereas the FTSE All-Share Index rose by just 12.6%. In comparison, the NAV of MUSCIT rose by 21.2%. Outlook As the financial year to 31 March 2013 drew to an end, UK equities had enjoyed ten consecutive months of positive returns. In less than a year, extreme pessimism had been replaced by broad based optimism. All the ingredients are now in place for a recovery in M&A activity. Companies continue to sit on large cash balances which yield negative real returns, capital is cheap for sound borrowers and confidence is improving. We expect there to be increasing pressure to either invest or return some of this cash to investors. We entered 2013 expecting yet another strong January, reflected in gearing of 8.3% at 31 December 2012. However, in a pattern similar to the previous year, as the quarter has progressed we have adopted an increasingly cautious stance - stock markets simply do not go up in a straight line forever. We would therefore not be surprised to see some profit-taking in the first half of 2013 and would welcome a correction. However, the foundations of the long-term equity bull market are still intact. There are signs that the reign of Value over Growth that began during the summer of 2012 may also be drawing to an end. In a world of low and scarce growth and macro-economic uncertainties, investors are likely to continue to pay a premium for visible and secure growth. MUSCIT is well positioned to benefit from a return of investor appetite for the highest quality UK quoted small companies. We look forward to the coming year with confidence, although we do not expect to see a repeat of the exceptional returns of last year. Montanaro Asset Management Limited 19 June 2013 TEN LARGEST HOLDINGS as at 31 March 2013 (35% of the portfolio) Dignity PLC - General Retailers The UK's largest provider of funeral-related services. Â£7.10m 4.0% Â£814m Value Portfolio Market cap Dechra Pharmaceuticals PLC - Pharmaceuticals and Biotechnology An international veterinary pharmaceutical business. Â£6.75m 3.8% Â£653m Value Portfolio Market cap Brammer PLC - Support Services A pan-European distributor of maintenance, repair and overhaul components. Â£6.50m 3.6% Â£435m Value Portfolio Market cap Genus PLC - Pharmaceuticals and Biotechnology A world leader in bovine and porcine genetics. Â£6.31m 3.5% Â£957m Value Portfolio Market cap Domino Printing Sciences PLC - Electronic and Electrical Equipment A provider of total coding and printing solutions. Â£6.20m 3.5% Â£715m Value Portfolio Market cap Devro PLC - Food Producers Producer of manufactured casings for the food industry. Â£6.14m 3.4% Â£582m Value Portfolio Market cap Domino's Pizza PLC - Travel and Leisure The UK's leading franchise pizza delivery company. Â£6.03m 3.4% Â£987m Value Portfolio Market cap EnQuest PLC - Oil and Gas Producers An independent oil and gas development and production company. Â£5.96m 3.3% Â£1,153m Value Portfolio Market cap Fidessa Group PLC - Software and Computer Services Provider of trading, investment and information solutions for the world's financial community. Â£5.84m 3.2% Â£725m Value Portfolio Market cap James Fisher PLC - Industrial Transportation A provider of specialist services to the marine, oil and gas industries worldwide. Â£5.43m 3.0% Â£518m Value Portfolio Market cap INVESTMENT PORTFOLIO as at 31 March 2013 % of % of Market portfolio portfolio Holding Sector Value cap 31 March 31 March Â£000 Â£m 2013 2012 Dignity General Retailers 7,094 814 4.0 2.7 Dechra Pharmaceuticals and 6,746 653 3.8 2.2 Pharmaceuticals Biotechnology Brammer Support Services 6,497 435 3.6 3.3 Genus Pharmaceuticals and 6,312 957 3.5 3.4 Biotechnology Domino Printing Electronic and 6,198 715 3.5 3.0 Sciences Electrical Equipment Devro Food Producers 6,143 582 3.4 3.5 Domino's Pizza Travel and Leisure 6,025 987 3.4 2.5 EnQuest Oil and Gas Producers 5,959 1,153 3.3 3.0 Fidessa Group Software and Computer 5,835 725 3.2 2.8 Services James Fisher Industrial 5,434 518 3.0 2.8 Transportation RPS Group Support Services 5,346 588 3.0 2.8 Shaftesbury Real Estate/Real Estate 5,233 1,464 2.9 2.6 Investment Trusts Consort Medical Health Care Equipment 5,171 227 2.9 2.6 and Services Senior Aerospace and Defence 5,078 991 2.8 - Fenner Industrial Engineering 5,057 754 2.8 2.9 Victrex Chemicals 4,980 1,406 2.8 3.6 Dialight Electronic and 4,843 416 2.7 3.4 Electrical Equipment NCC Group Software and Computer 4,738 293 2.6 3.0 Services Aveva Group Software and Computer 4,641 1,541 2.6 2.0 Services Renishaw Electronic and 4,607 1,338 2.6 2.2 Electrical Equipment Twenty largest 111,937 62.4 holdings Mears Group Support Services 4,272 336 2.4 2.2 Brewin Dolphin General Financials 4,130 523 2.3 2.4 Oxford Instruments Electronic and 3,972 942 2.2 2.9 Electrical Equipment Ricardo Support Services 3,964 218 2.2 2.3 Latchways Support Services 3,789 121 2.1 2.5 Carclo Chemicals 3,383 259 1.9 1.9 M.P. Evans Group Food Producers 3,366 280 1.9 1.9 Croda International Chemicals 3,292 3,724 1.8 2.5 Rotork Industrial Engineering 3,194 2,521 1.8 - James Halstead Construction and 3,121 614 1.7 1.5 Materials Ocean Wilson Industrial 3,120 368 1.7 2.4 Holdings Transportation Premier Oil Oil and Gas Producers 3,110 2,057 1.7 1.9 Helical Bar Real Estate/Real Estate 2,959 280 1.7 1.6 Investment Trusts Rathbone Brothers General Financials 2,918 672 1.6 - AG Barr Beverages 2,861 636 1.6 2.7 Clarkson Industrial 2,721 295 1.5 1.5 Transportation Brooks Macdonald General Financials 2,476 188 1.4 1.5 Group Wilmington Group Media 1,988 137 1.1 0.8 Primary Health Real Estate/Real Estate 1,986 252 1.1 1.3 Properties Investment Trusts Telecity Group Software and Computer 1,626 1,825 0.9 - Services Marshalls Construction and 1,625 246 0.9 0.9 Materials Halma Electronic and 1,552 1,956 0.9 - Electrical Equipment Cranswick Food Producers 1,282 478 0.7 - Albemarle & Bond General Financials 802 119 0.5 0.9 Holdings Total portfolio 179,446 100.0 ANALYSIS OF INVESTMENT PORTFOLIO BY INDUSTRIAL OR COMMERCIAL SECTOR as at 31 March 2013 Sector % of portfolio % of FTSE SmallCap Oil and Gas Producers 5.0 1.6 Oil Equipment, Services and Distribution - 2.7 Oil and Gas 5.0 4.3 Chemicals 6.5 1.2 Industrial Metals - 1.3 Mining - 2.7 Basic Materials 6.5 5.2 Construction and Materials 2.6 4.7 Aerospace and Defence 2.8 0.5 General Industrials - 0.6 Electronic and Electrical Equipment 11.9 4.9 Industrial Engineering 4.6 3.7 Industrial Transportation 6.2 2.9 Support Services 13.3 20.2 Industrials 41.4 37.5 Automobiles and Parts - 0.2 Beverages 1.6 Food Producers 6.0 4.3 Household Goods - 2.6 Leisure Goods - 0.8 Consumer Goods 7.6 7.9 Health Care Equipment and Services 2.9 1.5 Pharmaceuticals and Biotechnology 7.3 1.4 Health Care 10.2 2.9 General Retailers 4.0 6.5 Media 1.1 6.4 Travel and Leisure 3.4 5.6 Consumer Services 8.5 18.5 Life and Non-life Insurance - 2.5 Real Estate/Real Estate Investment Trusts 5.7 14.0 General Financials 5.8 1.3 Financials 11.5 17.8 Software and Computer Services 9.3 4.4 Technology Hardware and Equipment - 1.5 Technology 9.3 5.9 Total 100.0 100.0 The investment portfolio comprises 44 listed UK equity holdings including 4 holdings totalling Â£9,766,000 (representing 5.4% of the portfolio) traded on the Alternative Investment Market ("AIM"). BOARD OF DIRECTORS David Gamble - Chairman Roger Cuming Kathryn Matthews Michael Moule BUSINESS REVIEW The Business Review has been prepared in accordance with the Companies Act 2006 and should be read in conjunction with the Chairman's Statement and Manager's Report above. Introduction The purpose of the Business Review is to provide an overview of the business of the Company by: â€¢ Analysing development and performance using appropriate key performance indicators ("KPIs"). â€¢ Outlining the principal risks and uncertainties affecting the Company. â€¢ Describing how the Company manages these risks. â€¢ Explaining the future business plans of the Company. â€¢ Setting out the Company's environmental, social and ethical policy. â€¢ Providing information about persons with whom the Company has contractual or other arrangements which are essential to the business of the Company. â€¢ Outlining the main trends and factors likely to affect the future development, performance and position of the Company's business. REVIEW OF THE DEVELOPMENT AND PERFORMANCE OF THE BUSINESS AND POSITION 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 Manager's Report. MUSCIT is a closed-ended investment trust listed on the London Stock Exchange with registration number 3004101. It has applied for, and been granted, approval from HM Revenue & Customs as an investment trust under s1158/1159 of the Corporation Tax Act 2010 ("1158/1159") for the year ended 31 March 2013. One of the criteria for continued compliance is that MUSCIT is required to distribute a minimum of 85% of all its income as dividend payments. The Company could lose its investment trust company status if it became a close company at any time during the accounting period. MUSCIT will be treated as an investment trust company for each subsequent accounting period, subject to there being no subsequent serious breaches of the conditions for approval. Failure by MUSCIT to satisfy the new requirements could result in it being subject to capital gains tax arising on the sale of investments. 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. New rules introduced by HM Revenue and Customs removed the maximum holding in any one investment of 15% and replaced this with a risk diversification approach. The Board has considered this and agreed that the Company's Investment Policy offers suitable risk diversification. MUSCIT is also an investment company as defined in Section 833 of the Companies Act 2006. The current portfolio of MUSCIT is such that its shares are eligible for inclusion in an ISA 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 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"). From 1 April 2013 the Company adopted the Numis Smaller Companies Index (excluding Investment Companies)("NSCI") as its benchmark. No unquoted investments are permitted. The Company seeks to achieve its investment objective and diversify risk by investing in a portfolio of quoted UK small companies. At the time of initial investment, a potential investee company must be profitable and smaller than the largest constituent of the NSCI which represents the smallest 10% of the UK Stock Market by value. At the start of January 2013, the largest company in the NSCI had a market capitalisation of over Â£2.3 billion. The Manager focuses on the smaller end of this Index. The Manager will normally limit any one holding to a maximum of 4% of the Company's investments. The portfolio weighting of each investment is closely monitored to reflect the underlying liquidity of the particular company; smaller investments are made in less liquid companies. AIM exposure is also closely monitored by the Board and is limited to 30% of total investments, with Board approval required for exposure above 25%. At 31 March 2013 this was 5.4% (2012: 7.9%). The Manager is focused on identifying high quality niche companies operating in growth markets. This typically leads to investment in companies that enjoy high barriers to entry, pricing power, a sustainable competitive advantage and strong management teams. The portfolio is constructed on a "bottom up" basis and there are no sector constraints. 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£15 million through ING Bank. The Board has agreed to limit borrowings to 25% of shareholders' funds. SHARE CAPITAL There are currently 33,475,958 Ordinary 10p shares in issue (2012: 33,475,958) none of which are held in Treasury (2012: nil). Holders of Ordinary shares have unrestricted voting rights of one vote per share 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 in the Chairman's Statement. Details of MUSCIT's internal controls may be found in the Corporate Governance section of the Company's full Annual Report and Accounts. 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 meetings are attended by the Manager. Montanaro has a large, multi-national specialist team based in the UK. Succession planning within Montanaro and recruitment of personnel are closely monitored by the Board. Investment & Strategy: MUSCIT may underperform its benchmark as a result of poor stock selection, 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 on an annual basis. Gearing: one of the benefits of closed-end 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. The Board agreed with the Manager to take out a five year borrowing commitment to December 2016. The Board monitors and discusses with the Manager the appropriate level of gearing for the portfolio and whether the cash balances held are appropriate. 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 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 deals with a wide range of brokers to enhance itsability 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 investment trusts where private individuals form a larger part of the share register, this may result in fewer 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 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's shares. Discount Volatility: as with all small company investment trusts, the discount can fluctuate significantly both in absolute terms and relative to its peer group. The Board actively monitors and seeks to manage the discount of MUSCIT and is responsible for share buy backs 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 not used the authority granted at the Annual General Meeting held in 2012 to make market purchases of up to 5,018,046 Ordinary shares. No Ordinary shares are currently held in Treasury. The Board encourages the Manager to market MUSCIT to new investors to increase demand for its shares, which may help to increase liquidity and reduce the discount. Regulatory: a breach of s1158/1159 might lead to MUSCIT being subject to capital gains tax. A breach of the rules of the London Stock Exchange might result in censure by the FCA and/or suspension of MUSCIT's listing on the London Stock Exchange. The Board has agreed a service level agreement with the Manager which includes active and regular review of compliance with s1158/1159 and compliance with the Company's published Investment Policy. The Board regularly reviews the share register to ensure it does not become a close company. During the year under review the Administrator reviewed compliance with FCA and London Stock Exchange Rules. This is reviewed at each Board meeting. The Board has been monitoring the progression of the AIFM Directive and has been actively discussing options with providers. This will ensure that the Company will be able to comply with its requirements when the Directive is fully implemented in July 2014. 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, performance data and possibly a qualified audit report and/or loss of s1158/1159 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 investment trust company 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 Bank N.V. revolving credit facility require it to ensure that total borrowings will not exceed 30% of the adjusted NAV at any time and that the adjusted NAV does not fall below Â£39,000,000 at any time. The Board monitors compliance with banking covenants monthly and reviews them with the Administrator and Manager at each Board meeting. The Company has entered into an interest rate swap agreement, the fair value of this is disclosed in note 15 of the financial statements. 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. Failure to keep current and potential investors informed of the Company's performance and development could result in fewer 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 and are both 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 its continuing existence 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 in the full Annual 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 final dividend of 6.76p (2012: final 6.76p) per Ordinary share, amounting to Â£2,263,000 (2012: final Â£2,263,000) be paid on 9 August 2013 to shareholders on the share register at the close of business on 28 June 2013. Net Asset Value: the NAV per Ordinary share, including revenue reserves, at 31 March 2013 was 529.19p (2012: 436.57p). The Board reviews performance by reference to a number of KPIs and considers that the most relevant KPIs are those that communicate the financial performance and strength of the Company as a whole. The Board and the Manager monitor the following KPIs: â€¢ the NAV over the previous ten years and since launch relative to the benchmark as disclosed in the Chairman's Statement; â€¢ the level of discount; and â€¢ the Ongoing Charges which were: 2013 2012 Ongoing Charges 1.3% 1.3% Performance fees - 0.6% Finance costs 0.4% 0.2% Total Ongoing Charges plus 1.7% 2.1% performance fees and finance costs Further KPIs are those which show the Company's position in relation to the investment trust tests which it is required to meet and maintain its investment trust status. SOCIALLY RESPONSIBLE INVESTMENT The Company has no employees and the Board is comprised entirely of non-executive Directors. Day-to-day management of the Company's business is undertaken by Montanaro as the Investment Manager. Montanaro receives independent third party corporate governance research and will usually vote in line with International Corporate Governance Network policies. Where possible, it engages with management teams before an AGM or EGM prior to any decision to abstain or vote against a board's recommendation. In carrying out business with its suppliers, the Company aims to conduct itself responsibly, ethically and fairly. GOING CONCERN The Company's Articles require that the Directors convene a General Meeting in 2014 to be held on or within seven days prior to the accounting reference date of the Company falling in that year, at which a Special Resolution will be proposed providing for the Company to be wound up on a voluntary basis, unless an Ordinary Resolution is passed at the 2013 Annual General Meeting releasing the Directors from this obligation. As set out in the Chairman's Statement, such an Ordinary Resolution will be proposed at the forthcoming Annual General Meeting. The Directors strongly recommend that shareholders vote in favour of continuation of the Company beyond 2014. The Directors after due consideration of the Company's cash balances, the liquidity of the Company's investment portfolio and the cost base of the Company, are of the opinion that it is appropriate to presume that the Company will continue in business for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis, consistent with previous years. No provision has been made for the costs of winding up the Company or liquidating its investments in the event that the resolution to release the Directors from the obligation to convene a General Meeting for the purpose of proposing a winding-up resolution is not passed. Such costs are likely to include professional fees (accounting and legal advisers) and, depending on the timing, the costs of terminating existing operational contracts such as management, administration, registrar and custody agreements. At the present time it is not possible to quantify the wind-up costs involved with any reasonable degree of accuracy. With regard to the investments, the value would be determined by investment markets and bid prices at that time. The full Annual Report and Accounts contain the following statements regarding responsibility for the financial statements. 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: â— select suitable accounting policies and then apply them consistently; â— make judgements and estimates that are reasonable and prudent; â— state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and â— 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 and enable 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 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. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors confirm to the best of their knowledge: â— the financial statements, prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and return of the Company; and â— the Chairman's Statement, the Manager's Report and the Directors' Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces. On behalf of the Board DAVID GAMBLE Chairman 19 June 2013 NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 March 2013 or 31 March 2012 but is derived from those accounts. Statutory accounts for the year ended 31 March 2012 have been delivered to the Registrar of Companies and statutory accounts for the year ended 31 March 2013 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498(2) or (3) of the Companies Act 2006. The text of the Auditor's reports can be found in the Company's full Annual Report and Accounts at www.montanarouksmaller.co.uk. INCOME STATEMENT for the year to 31 March 2013 Year to 31 March 2013 Year to 31 March 2012 Revenue Capital Total Revenue Capital Total Notes Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Gains on investments 10 - 32,574 32,574 - 6,607 6,607 designated as fair value through profit or loss Dividends and interest 2 3,844 - 3,844 3,667 - 3,667 Management fee 3 (857) (857) (1,714) (781) (782) (1,563) Management performance 3 - - - - (812) (812) fee Other expenses 4 (315) - (315) (246) - (246) Movement in fair value 15 - (479) (479) - (75) (75) of derivative financial instruments Net return before 2,672 31,238 33,910 2,640 4,938 7,578 finance costs and taxation Interest payable and 6 (322) (322) (644) (160) (160) (320) similar charges Net return before 2,350 30,916 33,266 2,480 4,778 7,258 taxation Taxation 7 - - - - - - Net return after 2,350 30,916 33,266 2,480 4,778 7,258 taxation Return per Ordinary 9 7.02p 92.35p 99.37p 7.41p 14.27p 21.68p share 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 2013 Called-up Share Capital Distributable Total equity share premium redemption Special Capital revenue shareholders' capital account reserve reserve reserve reserve funds Year to 31 Notes Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 March 2013 As at 31 3,348 19,307 1,362 4,642 113,343 4,146 146,148 March 2012 Fair value 10 - - - - 32,574 - 32,574 movement of investments Costs - - - - (1,179) - (1,179) allocated to capital Dividends 8 - - - - - (2,263) (2,263) paid in the year Movement in 15 - - - - (479) - (479) fair value of derivative financial instruments Net revenue - - - - - 2,350 2,350 for the year As at 31 3,348 19,307 1,362 4,642 144,259 4,233 177,151 March 2013 Called-up Share Capital Distributable Total equity share premium redemption Special Capital revenue shareholders' capital account reserve reserve reserve reserve funds Year to 31 Notes Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 March 2012 As at 31 3,348 19,307 1,362 4,642 108,565 3,929 141,153 March 2011 Fair value 10 - - - - 6,607 - 6,607 movement of investments Costs - - - - (1,754) - (1,754) allocated to capital Dividends 8 - - - - - (2,263) (2,263) paid in the year Movement in 15 - - - - (75) - (75) fair value of derivative financial instruments Net revenue - - - - - 2,480 2,480 for the year As at 31 3,348 19,307 1,362 4,642 113,343 4,146 146,148 March 2012 The notes below form part of these financial statements. BALANCE SHEET as at 31 March 2013 31 March 2013 31 March 2012 Notes Â£000 Â£000 Â£000 Â£000 Fixed assets Investments designated at 10 179,446 148,373 fair value through profit or loss Current assets Debtors 12 711 566 Cash at bank 21 12,961 13,966 13,672 14,532 Creditors: amounts falling due within one year Other creditors 13 (413) (1,682) Revolving credit facility 14 (15,000) (15,000) (15,413) (16,682) Net current liabilities (1,741) (2,150) Total assets less current 177,705 146,223 liabilities Creditors: amounts falling 15 (554) (75) due after more than one year Interest rate swap Net assets 177,151 146,148 Share capital and reserves Called-up share capital 16 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 144,259 113,343 Distributable revenue reserve 4,233 4,146 Total equity shareholders' 177,151 146,148 funds Net asset value per Ordinary 19 529.19p 436.57p share These financial statements were approved by the Board of Directors on 19 June 2013. DAVID GAMBLE Company Registered Number: 3004101 The notes below form part of these financial statements. STATEMENT OF CASH FLOWS for the year to 31 March 2013 Year to Year to 31 March 2013 31 March 2012 Notes Â£000 Â£000 Â£000 Â£000 Operating activities Investment income received 3,681 3,600 Deposit interest received 2 1 Interest received on VAT - 7 reclaimed on administration and company secretarial fees Management fees paid (1,688) (1,558) Performance fees paid (812) (786) Company secretarial fees paid (82) (86) Other cash expenses (227) (216) Net cash inflow from 20 874 962 operating activities Servicing of finance Interest and similar charges (646) (148) paid Net cash outflow from (646) (148) servicing of finance Capital expenditure and financial investment Purchases of investments (28,187) (26,508) Sales of investments 29,217 41,517 Net cash inflow from 1,030 15,009 investing activities Equity dividends paid (2,263) (2,263) (Decrease)/increase in cash 21 (1,005) 13,560 The notes below form part of these financial statements. NOTES TO THE FINANCIAL STATEMENTS at 31 March 2013 1 ACCOUNTING POLICIES Accounting Convention The financial statements are prepared on a going concern basis, 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. The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied throughout the year and the preceding year. Income Recognition Dividend income is included in the financial statements when the investments concerned are quoted ex-dividend and shown net of any associated tax credit where applicable. Deposit interest and underwriting commissions receivable are included on an accruals basis. Management Expenses and Finance Costs All expenses are accounted for on an accruals basis. 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 quoted market bid prices or closing prices for SETS (London Stock Exchange's electronic trading service) stocks sourced from the London Stock Exchange 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. Derivative Financial Instruments It is the Company's policy not to trade in derivative financial instruments. However, the Company has utilised an interest rate swap to mitigate its exposure to interest rate changes on its bank loan which is subject to a variable rate of interest. Details can be found in note 15. Derivatives are recognised at fair value. Movement in the fair value of the derivative is recognised in the Income Statement and allocated to capital. Reserves Capital reserve The following are accounted for in this reserve: â€¢ gains and losses on the realisation of investments; â€¢ net movement arising from changes in the fair value of investments that can be readily converted to cash without accepting adverse terms; â€¢ net movement from changes in the fair value of derivative financial instruments; and â€¢ expenses, together with related taxation effect, charged to this account in accordance with the above policies. Special reserve The special reserve was created by a reduction in the share premium account by order of the High Court in August 1998. It can be used for the repurchase of the Company's Ordinary shares. In accordance with the SORP, the consideration paid for shares bought into and held in Treasury is shown as a deduction from the special reserve. Capital redemption reserve The capital redemption reserve accounts for amounts by which the issued capital is diminished through the repurchase of the Company's own shares. 2 INCOME Year to Year to 31 March 31 March 2013 2012 Â£000 Â£000 Income from investments 3,842 3,659 UK dividend income 3,781 3,550 Overseas dividend income 61 109 Other income Bank interest 2 1 Interest received on VAT reclaimed on - 7 administration and company secretarial fees Total income 3,844 3,667 Total income comprises Dividends from financial assets designated at 3,842 3,659 fair value through profit or loss Interest from financial assets designated at 2 1 fair value through profit or loss Dividends and interest 3,844 3,660 Other income not from financial assets - 7 3,844 3,667 3 MANAGEMENT FEE Year to 31 March 2013 Year to 31 March 2012 Revenue Capital Total Revenue Capital Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Management fee 857 857 1,714 781 782 1,563 Performance fee - - - - 812 812 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 in the full Annual Report and Accounts. At 31 March 2013, Â£161,000 (2012: Â£947,000) was due for payment to the Manager. 4 OTHER EXPENSES Year to Year to 31 March 31 March 2013 2012 Â£000 Â£000 Administration and company 89 86 secretarial fees VAT reclaimed on administration and - (53) company secretarial fees Auditor's remuneration for: - audit 20 20 Other expenses (including Directors' 206 193 remuneration and VAT) 315 246 5 DIRECTORS' REMUNERATION Year to Year to 31 March 2013 31 March 2012 Â£000 Â£000 Total fees 85 85 A breakdown of the Directors' remuneration is set out in the Directors' Remuneration Report in the full Annual Report and Accounts. The Company has no employees. 6 INTEREST PAYABLE AND SIMILAR CHARGES Year to 31 March 2013 Year to 31 March 2012 Revenue Capital Total Revenue Capital Total Financial Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 liabilities not at fair value through profit or loss Interest payable on 322 322 644 160 160 320 loan 322 322 644 160 160 320 7 TAXATION Year to 31 March 2013 Year to 31 March 2012 Revenue Capital Total Revenue Capital Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Return on 2,350 30,916 33,266 2,480 4,778 7,258 ordinary activities before taxation Theoretical 564 7,420 7,984 645 1,242 1,887 corporation tax at 24% (2012: 26%) Effects of: - capital gains - (7,703) (7,703) - (1,698) (1,698) that are not taxable - overseas (15) - (15) (28) - (28) dividend income not liable to corporation tax - UK dividend (883) - (883) (901) - (901) income not liable to corporation tax - expenses - - - 1 - 1 disallowed for taxation purposes - excess 334 283 617 283 456 739 management expenses - - - - - - At 31 March 2013, the Company had surplus management expenses and non-trade losses of Â£30,175,753 (2012: Â£27,605,536) 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 to meet the conditions required to maintain its investment trust status, 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 2013 2012 Â£000 Â£000 Paid 2012 Final dividend of 6.76p (2011: 2,263 2,263 6.76p) per Ordinary share Proposed 2013 Final dividend of 6.76p (2012: 2,263 2,263 6.76p) per Ordinary share 9 RETURN PER ORDINARY SHARE Year to 31 March 2013 Year to 31 March 2012 Revenue Capital Total Revenue Capital Total Ordinary 7.02p 92.35p 99.37p 7.41p 14.27p 21.68p share Revenue return per Ordinary share is based on the net revenue after taxation of Â£2,350,000 (2012: Â£2,480,000) and 33,475,958 (2012: 33,475,958) 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 Â£30,916,000 (2012: Â£4,778,000), and on 33,475,958 (2012: 33,475,958) 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 2013 2012 Â£000 Â£000 Total investments at 179,446 148,373 fair value The investment portfolio comprises 44 listed UK equity holdings including 4 holdings totalling Â£9,766,000 (representing 5.4% of the portfolio) traded on the Alternative Investment Market ("AIM"). Year to Year to 31 March 31 March 2013 2012 Â£000 Â£000 Opening book cost 103,944 105,747 Opening investment 44,429 47,428 holding gains Opening valuation 148,373 153,175 Movements in the year Purchases at cost 27,716 26,702 Sales - proceeds (29,217) (38,111) Sales - realised 8,019 9,606 gains on sales Increase/ 24,555 (2,999) (decrease) in investment holding gains Closing valuation 179,446 148,373 Closing book cost 110,462 103,944 Closing investment 68,984 44,429 holding gains 179,446 148,373 Fair Value Hierarchy In accordance with FRS 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: â— level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities; â— 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 â— 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: â— the level in the fair value hierarchy into which the fair value measurements are categorised in their entirety; â— any significant transfers between level 1 and level 2 of the fair value hierarchy and the reasons for those transfers; and â— for fair value measurements in level 3 of the hierarchy, a reconciliation from the opening balances to the closing 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. The table below sets out fair value measurements of financial assets in accordance with the FRS 29 fair value hierarchy system: 31 March 2013 31 March 2012 Level 1 Level 2 Total Level 1 Level 2 Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Equity investments 179,446 - 179,446 148,373 - 148,373 179,446 - 179,446 148,373 - 148,373 The table below sets out fair value measurements of financial liabilities in accordance with the FRS 29 fair value hierarchy system: 31 March 2013 31 March 2012 Level 1 Level 2 Total Level 1 Level 2 Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Revolving credit loan - 15,000 15,000 - 15,000 15,000 facility Derivative financial - 554 554 - 75 75 instruments - 15,554 15,554 - 15,075 15,075 Transaction Costs During the year, the Company incurred transaction costs of Â£172,000 (2012: Â£177,000) and Â£33,000 (2012: Â£51,000) 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. 31 March 31 March 2013 2012 Â£000 Â£000 Net gains on investments at fair value though profit or loss Gains on sales 8,019 9,606 Changes in fair value 24,555 (2,999) 32,574 6,607 A list of the 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 financial statements in the following investments: Security % of voting rights Latchways PLC 3.1 12 DEBTORS 31 March 31 March 2013 2012 Â£000 Â£000 Prepayments and accrued 68 84 income Dividends receivable 643 482 711 566 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 31 March 2013 2012 Â£000 Â£000 Due to brokers - 471 Accruals and deferred 413 1,211 income 413 1,682 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 LOAN FACILITY 31 March 31 March 2013 2012 Â£000 Â£000 Falling due within one year 15,000 15,000 15,000 15,000 On 19 December 2011 the Company agreed a Â£15,000,000 Floating Rate Revolving Credit Loan Facility with ING Bank N.V. At the same time the Company entered into a Â£15,000,000 Interest Rate Swap with ING Bank N.V. The Floating Rate Revolving Credit Loan Facility is available for a five year term from 19 December 2011 to 19 December 2016. The loan is currently drawn down until 19 June 2013 and will be rolled over on a six monthly basis. Interest is payable at six month LIBOR plus a margin and MLA costs. The Interest Rate Swap is for five years and enables the Company to fix the effective interest rate of the Â£15,000,000 loan over its term at 4.2921%* per annum. * Including margin and mandatory costs. 15 DERIVATIVE FINANCIAL INSTRUMENTS An interest rate swap is an agreement between two parties to exchange fixed and floating rate interest payments based upon interest rates defined in the contract without the exchange of the underlying principal amounts. The Company entered into an agreement on 19 December 2011 which swapped its obligation to pay variable rates of interest for a fixed rate of 4.2921% per annum until 19 December 2016. The fair value of the derivative financial instrument is shown below: 31 March 31 March 2013 2012 Â£000 Â£000 Opening valuation (75) - Movement in fair value (479) (75) Closing valuation (554) (75) 16 SHARE CAPITAL 31 March 31 March 2013 2012 Â£000 Â£000 Allotted, called-up and fully paid: 33,475,958 (2012: 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 27 July 2012 the Company was granted the authority to purchase 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 objective, both of which are detailed above. 17 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 on 26 July 2013 an Ordinary Resolution will be proposed to release the Directors from the obligation to convene a General Meeting during 2014 for the purpose of voluntarily winding up the Company, as provided for in the Company's Articles of Association. If the Ordinary Resolution is passed, the Directors will be required to convene a General Meeting to propose the winding up of the Company in 2018, and every five years thereafter, unless at any Annual General Meeting 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. 18 OWN SHARES HELD IN TREASURY The Company has previously taken advantage of the regulations which came into force on 1 December 2003 to allow companies, including investment trusts, to buy their 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. 19 NET ASSET VALUE PER ORDINARY SHARE Net asset value per Ordinary share is based on net assets of Â£177,151,000 (2012: Â£146,148,000) and on 33,475,958 (2012: 33,475,958) Ordinary shares, being the number of Ordinary shares in issue at the year end. 20 RECONCILIATION OF NET REVENUE BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES Year to Year to 31 March 31 March 2013 2012 Â£000 Â£000 Net revenue before finance 2,672 2,640 costs and taxation Management fee (857) (1,594) charged to capital (Decrease)/increase (796) 49 in creditors Increase in prepayments and (145) (133) accrued income Net cash inflow from operating 874 962 activities 21 RECONCILIATION OF NET CASH FLOWS TO MOVEMENTS IN NET DEBT Year to Year to 31 March 2013 31 March 2012 Â£000 Â£000 (Decrease)/increase in (1,005) 13,560 cash in year Movement in net funds (1,005) 13,560 Net debt at beginning (1,034) (14,594) of year Net debt at end of year (2,039) (1,034) ANALYSIS OF NET DEBT 1 April Cash 31 March 2012 flows 2013 Â£000 Â£000 Â£000 Cash at bank 13,966 (1,005) 12,961 Debt due in less than (15,000) - (15,000) one year (1,034) (1,005) (2,039) 22 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: â— credit risk; â— market price risk, i.e. movements in the value of investment holdings caused by factors other than interest rate or currency movement; â— interest rate risk; â— 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 â— 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 2013 was: 31 March 2013 31 March 2012 Â£000 Â£000 Cash at bank 12,961 13,966 Debtors and 711 566 prepayments 13,672 14,532 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 policy 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 Manager. The Board meets regularly and at 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 policy. 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 fair value as detailed in note 1. A list of the Company's equity investments, 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 10 largest equity investments is set out above. The maximum exposure to market price risk is the fair value of investments of Â£179,446,000 (2012: Â£148,373,000). If the investment portfolio valuation fell by 1% from the amount detailed in the financial statements as at 31 March 2013 it would have the effect, with all other variables held constant, of reducing the net capital return before taxation by Â£1,794,000 (2012: Â£1,484,000). 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 Loan Facility with ING Bank N.V. is a floating 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 the use of an interest rate swap to fix the interest rates on borrowings. The Company received interest on cash deposits over Â£25,000 at a rate of 0.03%. The interest received in the year amounted to Â£2,000 (2011: Â£1,000). The interest risk profile of the Company is given below. If interest rates had reduced by 1% from those paid as at 31 March 2013 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 (2011: Â£150,000). If there was an increase in interest rates of 1% the net revenue return before taxation on an annualised basis would have decreased by Â£20,000 (2012: Â£10,000). The calculations are based on cash at bank, short-term deposits and the Revolving Credit Loan Facility as at 31 March 2013 and these may not be representative of the year as a whole. Due to the structure of the loan facility, changes in interest rates would not have an effect on the fair value of the loan. (iv)Liquidity Risk Liquidity risk 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. The Manager reviews the portfolio liquidity on a regular basis. Short-term flexibility is achieved through the use of bank borrowings. Liquidity risk is mitigated by the fact that the Company has Â£13.7 million cash at bank and short-term debtors 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 the Company's policy not to trade in derivative financial instruments. However, the Company has utilised an interest rate swap to mitigate its exposure to interest rate changes on its Revolving Credit Loan Facility. FINANCIAL ASSETS The Company's financial assets consist of listed equity shares, which neither pay interest nor have a maturity date, cash at bank and short-term debtors. No fixed interest assets were held at 31 March 2013 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 2013 is as follows: Weighted average Period interest until Total rate maturity Â£000 % Years Amounts drawn down under 15,000 3.69 0.22 revolving credit loan facility Derivative financial instruments 554 0.60 3.72 Financial liabilities upon which 413 - - no interest is paid The interest rate risk profile of the financial liabilities of the Company as at 31 March 2012 was as follows: Weighted average Period interest until Total rate maturity Â£000 % Years Amounts drawn down under 15,000 3.96 0.22 revolving credit loan facility Derivative financial instruments 75 0.33 4.22 Financial liabilities upon which 1,682 - - no interest is paid The maturity profile of the Company's financial liabilities is as follows: 31 March 31 March 2013 2012 Â£000 Â£000 In one year or less 15,413 16,682 In more than one year but not more than two - - years In more than two years but not more than 554 75 five years 15,967 16,757 The Company had nil undrawn under the fixed Revolving Credit Facility at 31 March 2013 (2012: Â£nil). The Company's Revolving Credit Loan 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. 23 CAPITAL MANAGEMENT POLICIES The objective of the Company is to achieve capital appreciation through investing in small quoted companies listed on the London Stock Exchange or traded on AIM and to achieve relative outperformance of its benchmark, the FTSE SmallCap (excluding Investment Companies) Index. No unquoted investments are permitted. In pursuing this long-term objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern. It must therefore maintain an optimal capital structure through varying market conditions. This involves the ability to: issue and buy back share capital within limits set by the shareholders in general meeting; borrow monies in accordance with the Articles of Association; and pay dividends to shareholders out of distributable revenue reserves. Details of Ordinary share capital are set out in note 16. Dividend payments are set out in note 8. 31 March 2013 31 March 2012 Â£000 Â£000 Called-up share capital 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 144,259 113,343 Distributable revenue reserve 4,233 4,146 Total equity shareholders' funds 177,151 146,148 The Company's objectives for managing capital are the same as the previous year and have been complied with throughout the year. 24 PREVIOUS COMMITMENTS AND CONTINGENT LIABILITIES At 31 March 2013, there were nil capital commitments (2012: nil). 25 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 in the full Annual Report and Accounts. COMPANY SUMMARY Current 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 Numis Smaller Companies Index (excluding Investment Companies) ("NSCI"). No unquoted investments are permitted. The benchmark to 31 March 2013 was the FTSE SmallCap (excluding Investment Companies) Index ("SmallCap"). Current 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 NSCI, which represents the smallest 10% of the UK Stock Market by value. At the start of 2013, this was any company below Â£2.3 billion in size. The Manager focuses on the smaller end of this Index. In order to manage risk the Manager will normally limit any one holding to a maximum of 4% of the Company's investments. The portfolio weighting of each investment is closely monitored to 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, pricing power, 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 Â£15 million through ING Bank of which Â£15 million was drawn as at 31 March 2013. The Board has agreed to limit borrowings to 25% of shareholders' funds. Benchmark (capital return) For the year under review the benchmark was the SmallCap. From 1 April 2013 the Company adopted the NSCI. Gross Assets Â£193,118,000 as at 31 March 2013. Shareholders' Funds Â£177,151,000 as at 31 March 2013. Market Capitalisation Â£146,290,000 as at 31 March 2013. Capital Structure As at 31 March 2013 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 be put to shareholders at the Annual General Meeting to be held on 26 July 2013 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 Secretarial and administrative services are provided by Capita Sinclair Henderson Limited, under an agreement dated 3 November 2011. Fees for these services of Â£89,000 were paid in the year to 31 March 2013, and are 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 Asset Management Limited unless otherwise noted. Annual General Meeting The Company's Eighteenth Annual General Meeting will be held at the offices of Montanaro Asset Management Limited, 53 Threadneedle Street, London EC2R 8AR on Friday, 26 July 2013 at 12 noon. National Storage Mechanism A copy of the 2013 Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/NSM . ENDS Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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