Final Results

MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC PRELIMINARY ANNOUNCEMENT OF AUDITED ANNUAL RESULTS The Directors announce the audited statement of results for the year ended 31 March 2002 as follows:- SUMMARISED STATEMENT OF TOTAL RETURN (incorporating the revenue account* of the Company) 1 April 2001 to 31 March 1 April 2000 to 31 March 2002 2001 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Capital losses on investments - (10,702) (10,702) - (4,932) (4,932) Dividends and interest 2,256 - 2,256 2,113 - 2,113 receivable Other income 13 - 13 2 - 2 Investment management (510) (510) (1,020) (1,174) - (1,174) fee Other expenses (422) - (422) (232) - (232) Net return before financing costs and taxation 1,337 (11,212) (9,875) 709 (4,932) (4,223) Interest payable and similar charges (311) (311) (622) (684) - (684) Return on ordinary activities before taxation 1,026 (11,523) (10,497) 25 (4,932) (4,907) Taxation on ordinary - - - - - - activities Return on ordinary 1,026 (11,523) (10,497) 25 (4,932) (4,907) activities after taxation Dividends proposed (690) - (690) (120) - (120) Transfer to/(from) reserves after dividends proposed 336 (11,523) (11,187) (95) (4,932) (5,027) Pence Pence Pence Pence Pence Pence Return per ordinary 2.66 (29.84) (27.18) 0.06 (12.30) (12.24) share * The revenue column of this statement is the revenue account of the Company. The accounts have been prepared using accounting standards and policies adopted at the previous year end. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year. SUMMARISED BALANCE SHEET As at As at 31 March 31 March 2002 2001 £'000 £'000 Investments 78,543 89,979 Net current (liabilities)/assets (4,774) 6,514 Total assets less current liabilities 73,769 96,493 Creditors - amounts falling due after more than one year - (7,500) Net assets 73,769 88,993 Net asset value per ordinary share 197.84p 221.92p STATEMENT OF CASHFLOWS As at 31 As at 31 March March 2002 2001 £000 £000 Operating activities - Investment income received 2,044 1,859 - Deposit interest received 262 281 - Underwriting commission received 13 2 - Investment Management fee (1,327) (1,068) - Company Secretarial fees paid (50) (49) - Other expenses (606) (397) Net cash inflow from operating Activities 336 628 Servicing of finance - Interest and similar charges paid (614) (748) Net cash outflow from servicing of finance (614) (748) Taxation - Taxation recovered 105 - Net inflow from taxation 105 - Capital expenditure and financial investment - Purchases of investments (21,365) (31,397) - Sales of investments 22,740 38,571 Net cash inflow from capital expenditure and financial investment 1,375 7,174 Equity dividends paid (120) (120) Financing - Repayment of credit facility - (7,500) - Ordinary shares repurchased and cancelled (4,037) - - Warrants repurchased and cancelled - (7) Net cash outflow from financing (4,037) (7,507) Decrease in cash (2,955) (573) The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2002 or 2001. Statutory accounts for 2001 have been delivered to the Registrar of Companies, whereas those for 2002 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. Chairman's Statement Background The Company was launched on 16 March 1995 as an asset allocation vehicle for institutional shareholders to invest in quoted UK 'smaller' companies. In 1996, the initial £25 million Company was increased in size through a £30 million 'C' share issue. Net assets now stand at £74 million. At the time of the launch, 'smaller' companies were defined as those with a market capitalisation of £100 million or less. Currently, the Company invests in companies falling within the SmallCap, although the investment policy remains to research and invest in the 'smaller' end of the quoted UK small companies market to maximise returns for both institutional and individual shareholders. At 31 March 2002, over 70% of the portfolio was held in companies with a market capitalisation of less than £150 million. The structure of the fund is important. Due to the investment focus on illiquid companies, and the preference of investors for a listed structure, the fund was launched as an investment trust. It avoids the situation where the fund manager is forced to realise the most liquid portfolio holdings at an inappropriate time as a result of redemptions that typically arise in periods of weak stock-market performance. Investment trusts have the benefit of providing a market in which shareholders can sell their shares. Furthermore, specialist investment trusts offer both institutional and individual investors the benefits of diversification. At the Annual General Meeting held in July 2001, shareholders voted overwhelmingly in favour of the Company continuing as an investment trust. Performance In the year to 31 March 2002, the NAV of the Company declined by 11% to 197.84p (2001: 221.92p), in comparison with a 12% fall by the SmallCap. Once again, the Company performed better than the UK small company market, outperforming by 1%. It was one of only nine UK small company investment trusts to outperform the SmallCap. Since launch, the NAV of the Company has increased by more than 100%, whilst the SmallCap has only risen by 49%. There are a number of requirements for successful investment in quoted UK small companies. Since this market is 'inefficient', it requires the skills and resources of specialist fund managers with proven track records. Within such a broad and diverse market, there are many attractive quoted UK small companies from which to choose. Consistently successful smallcap managers are those who not only have the skills to identify sound investments but also the ability to avoid the pitfalls. The Company has outperformed for seven consecutive years, which is a unique achievement. This consistent outperformance has been due to the investment approach and sound stock selection of the Investment Manager, which is one of the few independent fund managers in the UK to specialise in quoted UK 'smaller' companies. In the past year, it has recruited several analysts to create one of the largest quoted UK small company teams in the City. Dividend The Company's primary focus is on capital appreciation, rather than income. As a result of the change to the allocation of costs announced last year, the minimum dividend payable has increased and thus the Board proposes a final dividend of 1.85p (2001: 0.3p) per ordinary share. The final dividend will be payable on 31 July 2002 to shareholders on the register at the close of business on 7 June 2002. Discount The Company focuses on quoted UK 'smaller' companies, which are less widely researched and more illiquid than quoted UK small companies, thereby creating an inefficient market that offers the potential for higher returns. The closed-end structure enhances the Investment Manager's ability to achieve high returns through strong NAV performance. However, the illiquidity of the underlying investments tends to be reflected in the level of discount of the Company. The discount of the Company's share price to NAV on 31 March 2002 was 17.9%, having narrowed from 19% a year earlier, and is in line with the sector average of 17%. The discount of the Company over the past seven years has averaged around 15.5% (Source: Bloomberg). Share Buy Backs The Board is responsible for the implementation of the share buy back programme, which is undertaken at arm's length from the Investment Manager. In the year to 31 March 2002, a total of 2,813,470 shares were repurchased for cancellation. The Board will continue to consider share buy backs as and when appropriate. Approval to renew this authority will be included as a Resolution at the forthcoming Annual General Meeting. Share Save Scheme As previously announced, the Board is introducing a Share Save Scheme to attract investment in the Company by individual shareholders, who wish to invest in quoted UK 'smaller' companies for the long-term. Details of the Scheme will accompany the Annual Report. Outlook for Equities It has been a difficult two years for investors in UK equities, whether in large or small companies. The FTSE-100 Index and the SmallCap have fallen by 19% and 23% respectively, the worst performance since 1973-1974. Investor confidence is understandably fragile following losses in technology shares in 2000, the aftermath of the terrorist attacks in the US in September 2001 and, more recently, the collapse of the split capital investment trust market. Such developments have prompted debate about the wisdom of investing in equities for the long-term, which had been taken for granted over the past forty years. The recent Equity-Gilt Study by Barclays Capital shows that, over the past decade, the average annual return from UK equities was 8.6%, compared with 9.6% from corporate bonds. Outperformance by corporate bonds has led people to question the cult of the equity. The much-publicised decision last year by Boots Company plc to move its £2.3 billion pension fund out of equities altogether and into corporate bonds has added weight to such debate. Most UK pension funds on average hold around 70% of their investments in global equities and the balance in fixed interest securities (mainly gilts) and property. Currently, we are witnessing a secular asset allocation shift away from equities into bonds. Suggestions that the asset allocation could shift further away from equities, reducing the weighting closer to 50% in favour of corporate bonds, would have significant implications. HSBC has estimated that this shift would result in the sale of £107 billion of UK equities, which is equivalent to 7% of the total UK stock-market. Even if this shift could be achieved in practice, there are simply not enough corporate bonds in issue to meet such demand. Furthermore, such a development might well increase risks both in terms of the quality of new corporate bond issuance and also the level of increased gearing assumed by the companies themselves. The decision on the equity/bond allocation must depend on the individual pension scheme, its requirements and the risk profile deemed appropriate. Any debate amongst actuaries about optimum asset allocation revolves broadly around life expectancy and investment returns. One of the benefits of the recent poor performance of equities has been a healthy lowering of investor return expectations. From the heady days of the 1980s when real returns of over 12% were achieved, investors have come to accept that nominal returns of 7-8% are more realistic in the current low inflationary environment. To achieve such returns, there has been an increasing move towards indexation. This is unsurprising after two years of poor performance by equity fund managers. The argument runs that, since most active fund managers are unable to consistently outperform global equity markets, it makes sense to be passive. A refinement is to adopt a core-satellite approach whereby the bulk of equities are invested in 'efficient' markets such as the FTSE-100 Index via indexation and incremental performance is achieved at the margin from active management within 'inefficient' markets such as private equity and small companies. The trend towards indexation/tracking is potentially unhelpful to quoted UK small companies, since it tends to marginalise their importance. Currently, the SmallCap is less than 4% of the FTSE AllShare Index, making it easy for large institutions to ignore small companies particularly as the proportion of funds invested (passively) in large companies becomes ever greater. Inevitably, the arguments in favour of indexation are more forceful after a period of poor investment returns. Ironically, this is precisely the time when quoted UK small companies should be more attractive. The inefficiency of this asset class offers the potential for far higher investment returns through selective stock picking - precisely the opposite approach to index tracking. Whereas increasing indexation is unhelpful to quoted UK small companies, the adoption of a core-satellite approach to asset allocation by large fund management groups might be positive. Specialist mandates for inefficient asset classes such as quoted UK small companies offer both the potential for attractive investment returns and support for often overlooked small companies, which are an important element of dynamism to a growing economy. The Company has now reached its seventh anniversary. Since launch, the NAV has more than doubled in value. The Company has outperformed its benchmark every year and cumulatively by over 50% after deduction of all costs. It has also outperformed the FTSE AllShare Index by 34%. The Company demonstrates that sound stock selection from a specialist fund manager with a proven track record operating within an appropriate fund structure can deliver attractive returns even when prevailing markets are subdued. It remains the only UK small company investment trust to have outperformed for seven consecutive years. SIR BRANDON GOUGH Chairman 27 May 2002

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