Annual Financial Report

RNS Number : 7779H

Shires Smaller Companies PLC

01 March 2010

SHIRES SMALLER COMPANIES PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2009

1. CHAIRMAN'S STATEMENT

Financial Results

During 2009, investment conditions changed dramatically from depression to recovery. Consequently, in the twelve months to 31 December 2009, the FTSE All Share Index made a total return of 30.1%. Smaller companies enjoyed an even stronger rally than larger companies as riskier assets returned to favour. Over the same period, the FTSE Small Cap Index (ex investment companies) rebounded by 57.7%.

The turning point came in March 2009, when the UK, US and European governments embarked on programmes of quantitative easing to improve liquidity and restore confidence to the banking system. These important measures, along with signs of some stabilisation and improvement in economic trends, encouraged investors to return to the stock market. Corporate bonds also staged a recovery in 2009 as measured by the iBoxx Sterling Non Gilts 1-15 year Index which made a total return of 10.1%. With interest rates held at very low levels, cash returned a modest 0.6%.

I am pleased to report that your Company's annual results reflected the improved investment environment. In the year to 31 December 2009, the Company's total return on net assets was 46.8%. Over the same period, the Company successfully reduced its gearing from 52.1% to 38%. The share price responded well to both the de-gearing and recovery in smaller cap equities and over the same period, increased by 69.6% from 56p to 95p to produce a total return of 96.6% for the year.

Investment Returns

In the twelve months to 31 December 2009, the total return on net assets was 46.8% compared to the FTSE Small Cap (ex investment companies) Index return of 57.7%. The Company's performance was not as strong as the index because it holds some of its assets in corporate bonds and preference shares which, although positive, did not appreciate as much as equities. The Company had also started the year with a higher than normal allocation to cash in order to pay down gearing but, once this was achieved, the equity portfolio took the lead again and outperformed in the second half of the year. The corporate bond portfolio made a total return of 15.3% exceeding the index return of 10.1%.Over the same twelve month period, the total return on the share price was 96.6% reflecting a significant narrowing in the discount to net assets from 32.3% to 15.8%.

Zero Coupon Finance

The Company first introduced Zero Coupon Finance (ZCF) as part of its gearing strategy in August 2000, primarily to enhance the yield to shareholders. The financing proved successful for almost eight years.

However, the extraordinary events of the global banking crisis in 2008 resulted in major and unexpected increases in the costs and collateral required to support this type of finance. The Manager responded rapidly to these new conditions by raising cash to meet these additional requirements but the changes undermined the benefits of this form of gearing. The Board decided, on the grounds of both higher cost and risk profile, to reduce the overall gearing of the Company. In December 2008, £11m of ZCF was repaid when it matured. A further reduction in gearing followed in February 2009 with the early repayment of £5.36m ZCF and £3m of the bank facility.

The final £5.3m tranche of the ZCF will mature in July 2010. It is the Board's intention to run the remaining ZCF to its expiry when it will be repaid rather than rolled over. The Company intends to use a combination of cash and bank facilities to meet this liability and no further financing will be undertaken using ZCF.

Portfolio Profile and Gearing

In the year under review, a total of £8.36m out of debt of £20.5m was repaid split between £5.36m of ZCF and £3m of bank debt. As a consequence, the overall gearing ratio declined from 52.1% to 38%.

At the beginning of 2010, total net debt was £12.3m comprising £7m of bank loans and the final £5.3m tranche of the ZCF due to mature in July 2010. The Board deemed that it was no longer in shareholders best interests to continue to gear using ZCF and it will be repaid on maturity.

The remaining debt of £7m is a bank loan due to be re-financed in December 2010. Negotiations have already been initiated with our bank and the Board foresee no difficulties in securing an offer of bank facilities up to £10m on commercial terms which together with existing cash resources will provide for that re-financing and support the closure of the ZCF.

Earnings and Dividends

In the past, the Company's high dividend yield was enhanced by the Company's geared structure. As explained above, the banking crisis caused our counterparties to impose conditions which rendered this type of financing uneconomic. At the same time, the recession forced many UK companies to reduce or pass dividends making it a very difficult environment for high yielding investment trusts such as your Company.

Last year, after careful consideration of the Company's revenue projections and the impact of lower gearing, the Board anticipated that the dividend would have to be rebased from 15.1p to 7p per share (inclusive of 1p per share relating to the VAT rebate). The forecast proved to be accurate and in the year to 31 December 2009, the revenue return per share was 7.27p. The total dividend paid in the period covered by this annual report was 7p per share, paid in four interim distributions of 1.75p each. As announced in December 2009, the fourth and final interim was paid to shareholders on 29 January 2010.

During this period, the Manager has successfully de-geared the Company, without recourse to shareholders and improved the liquidity and quality of the equity portfolio. Going forward, the Board intend using only bank debt to gear the balance sheet up to a maximum of £10m or 40% of net assets. On the basis of £10m bank debt, the Board anticipates that it should be possible to pay a dividend of 6p per share in the year to end December 2010. Over the years, the Company has prudently built up substantial revenue reserves of £1.65m, equivalent to 7.48p per share. The Board are aware of how important income is to shareholders and would use these revenue reserves to underpin distributions.

Continuation Vote

The Company's Articles of Association require the Board to put a resolution to shareholders, at this year's AGM and each fifth thereafter, to resolve that the Company should continue as an investment trust. In the event that the resolution is not passed, the Board must convene an EGM, to be held within four months after the AGM, at which a special resolution would be proposed requiring the Company to be wound up voluntarily or to approve a unitisation of the vehicle.

The Board is of the view that, since the recent restructuring of the portfolio and debt reduction programme, the Company is in a strong position to move forward and benefit from the improving economic and company profits outlook. The shares also continue to offer an above average yield which is fully supported by revenue reserves. The Board therefore consider that it is in the best interests of shareholders to vote in favour of continuation at this year's AGM.

Outlook

The UK economy emerged from recession in the fourth quarter of 2009 but only by 0.1%. The outcome was lower than expectations and reminds investors of the fragile nature of the upturn. Although the Bank of England do not plan to extend quantitative easing beyond the £200bn committed so far, it is likely given the economic trends, that they will keep interest rates at low levels for the rest of this year.

Income investors are now very dependent on a small number of large companies to pay their income. It is estimated that the top 15 largest UK companies account for 70% of the income generated by FTSE 100 Index companies. By contrast, our smaller company portfolio avoids such concentration and offers a broadly diversified pool of dividends with longer term growth prospects. We expect the current year should see the focus switch from recovery to fundamental values and our Company is well placed to benefit from that environment and deliver improved results to shareholders.

H. S. Cathcart

Chairman

26 February 2010

2. MANAGER'S REVIEW

Background

After the turmoil of the previous year, 2009 was a historic year for equity returns, however, this has to be viewed in the context of the sharp declines witnessed in the previous two years. Smaller companies worldwide were also back in vogue, after a tough couple of years, with global indices rebounding sharply and exceptional returns recorded in the emerging regions.

Markets entered the first quarter of 2009 facing the real prospect of a prolonged recession exacerbated by the collapse of Lehmans and the credit crunch. Banks were in turmoil despite the authorities putting together multi billion dollar rescue packages, and the proposed removal of toxic assets from their balance sheets. This created huge uncertainty which was most evident in the first quarter. Volatility, recorded by the VIX index, spiked sharply and 10% plus price moves were a daily occurrence. The Royal Bank of Scotland share price fell 67% in January after reporting the biggest loss in British corporate history, HSBC fell 19% after cutting its dividend and announcing a £12.5bn rights issue, and towards the end of the quarter Lloyds Banking Group surged 50% as fears of a full nationalisation subsided. The crisis weighed most on the FTSE 100 with the heavyweight banking and mining sectors with smaller companies out performing.

The second quarter saw a reversal of fortunes halting seven consecutive quarters of decline. Markets reacted positively to a slew of stimulus measures from Governments and Central Banks. Base rates hit record lows, and an unprecedented £200bn of Quantitative Easing was to be injected into the system to improve liquidity.

Against this backdrop Equities reacted positively with accompanying return in appetite for risk. The perception was that the worst of the banking crisis had passed, and with valuations at multi decade lows the FTSE Small Cap (ex IT) Index bounced 31.9% in April. The rally was most pronounced amongst cyclical companies especially those with stretched balance sheets, many of which had been priced to go bankrupt. Over the quarter nine such companies in the small cap index returned in excess of 100%.

Markets paused for breath in June but continued their ascent in the third quarter recording a second consecutive return of over 30%. The themes driving markets were very similar to those seen previously coupled with company earnings which, whilst not positive, were less negative. Cost cutting measures were also starting to take effect and management teams were in the main delivering in line with market expectations. This renewed optimism sent the FTSE Small Cap (ex IT) index back to levels not seen since the collapse of Lehmans.

Equities retreated from their highs towards the end of 2009 as attention turned to the economic implications of the vast stimulus packages. Central banks had waved the magic wand, freely printing money, but there wasn't going to be such an easy solution to reducing the huge fiscal deficit. We saw the implications of this towards the back end of the year with ratings agencies placing a renewed emphasis on sovereign debt and the path to recovery. The U.K. has been one of the harder hit nations through the crisis and the government is now walking an economic and political tightrope. There is no doubt that austerity is the only way forward, but what form this will take is as yet unknown.

Equity Portfolio

Across the market equity returns were correlated with size. Large companies generated an admirable absolute return but this was some way short of the Fledgling market which returned nearly 80%.

The FTSE Small Cap (ex IT) Index returned 57.7% over the year while the Trust recorded a NAV total return of 46.8%. The equity portfolio on a stand alone basis performed better than the NAV, returning 51.6%. We underperformed in the first half of the year against the headwind of the ongoing de-gearing, and the underweight equity position. This trend reversed in the second half as these headwinds ameliorated with the equity portfolio generating a total return of 31.7% (contributing to a NAV total return of 41%) versus 24.9% for the index. This was a creditable performance on an absolute and relative basis.

The restructuring of the portfolio that took place through 2008 reduced some of the smaller, illiquid companies which had low or negative earnings and were often heavily indebted. Whilst we are aware that we were defensively positioned coming into the year, this is reflective of the Aberdeen process and the more conservative view we take on company gearing. It was, however, these distressed names that bounced the strongest, which left the Trust trailing the index by almost 10% through April. There was a rotation back to quality as the valuation differential unwound and the trust regained a large portion of this lag over the remainder of the year.

The sheer speed of the slowdown came as a surprise to most management teams with very little clarity on where the bottom lay or the quantum of inventory in the system. Management turned their focus to what they could control: costs. There was a concerted effort to align these with lower demand to mitigate the worst of the downside. The savage nature of the recession forced them to cut costs much more aggressively than they have historically. This favoured those companies with strong balance sheets who were able to take the necessary action without being dictated to by the banks.

With an increasing focus on the need to strengthen balance sheets and clear evidence that banks would no longer provide the level of facilities they had historically, many management teams were forced to re-evaluate their dividend policies. This debate dominated discussion in many of our company meetings. For those with weak balance sheets, debt refinancing dominated their thinking and those companies took the easy decision to cut the dividend and maintain liquidity. The Trust had a number of dividend cuts, but on a positive note there were very few companies that passed their dividend altogether.

Despite the quantum of support given to banks it was clear that this wasn't reaching the real economy. Across the market we witnessed an ever increasing number of fundraisings. It was noteworthy that these were priced at a materially wider discount to the historical average, and not all fundraisings were for distressed companies. For instance, Holidaybreak raised £33m with only a portion used to reduce debt, with the remainder to fund growth in their core education business. Building materials group Marshalls also raised cash to pay down debt post a higher than average period of capital investment. This investment allowed them to maintain their position as the lowest cost manufacturer placing them in a strong position when markets recover.

The portfolio benefited from two takeovers during the year. Venture Production the North Sea operator of gas assets was acquired by Centrica. The second takeover was education provider BPP who had built an enviable position in the training and higher education market, evidenced by them becoming the first for profit organisation to be granted degree awarding powers. This didn't go unnoticed by private equity with the Board finally recommending a takeover by Apollo.

Over the year we have taken the opportunity presented by share price weakness to initiate a number of new positions. These included Chloride, Bloomsbury, Hornby, AG Barr and Dignity, all companies we have known for several years. There were also a number of strong performers across the portfolio; Mothercare, McBride, Victrex and Fenner. Mothercare has a strong UK business, and following the acquisition and integration of the Early Learning Centre they have further improved the depth of the portfolio. Cost savings coupled with underlying organic growth allowed them to deliver another good set of results in one of the most severe retail downturns. They also have a growing overseas franchise leveraging economies of scale on purchasing and distribution. The conclusion to this good year was a 21% increase in the dividend. Fenner, a provider of industrial belting to the coal industry, also had a good year after being sold off in the latter part of 2008. Management had made a number of acquisitions to strengthen the business which left them with higher than average debt levels, but they reacted early to take out costs. They also had the benefit of over half of group earnings not being impacted by the recession and with the long term demand for coal still in place this provided support to the earnings.

Fixed Interest

In sharp contrast to 2008, corporate bonds returned a stellar performance in 2009. With the base rate in the UK falling to 0.5%, a more stable banking environment, repairs made to companies' balance sheets and investors continued search for yield, corporate bond spreads tightened dramatically from the wide levels reached in March 2009.

In the twelve months to 31 December 2009, the FTA Government All Stocks Index made a total return of -1.16% in contrast, the iBoxx Sterling Non-Gilt 1-15 years Index, which measures investment grade corporate bond performance, delivered a return of +10.1%. The Company's fixed interest securities returned +15.32% with, in particular, good returns on holdings in Financial and Insurance institutions. The Manager has also increased the quality of the portfolio with purchases of telecom and secured property bonds and sales of subordinated financial debt which had outperformed.

Outlook

After two years of volatile economic and financial events, the UK economy is slowly emerging from recession and investment conditions are stabilising. The recovery is likely to be sluggish as the Government deals with the massive deficits caused by the banking crisis but the most threatening events are behind us. Over this period, the Manager has worked to reduce the gearing, especially the dependence on Zero Coupon Finance and raise the quality of the Company's portfolio. This focus delivered good performance in 2009, especially in the second half of the year and should continue to deliver better performance from a stronger base. Although valuations for smaller companies have recovered considerably from their lows we still see opportunities to continue to build our preferred holdings.

Aberdeen Asset Managers Limited

26 February 2010

3. RESULTS & DIVIDENDS

Financial Highlights

	31 December 2009	31 December 2008	% change
Total investments	£34,947,000	£29,469,000	+18.6
Shareholders' funds	£25,327,000	£19,375,000	+30.7
Market capitalisation	£21,004,000	£12,381,000	+69.6
Net asset value per share	114.55p	87.63p	+30.7
Share price (mid market)	95.00p	56.00p	+69.6
Discount to adjusted NAV{A}	15.8%	32.3%
Gearing	38.0%	52.1%
Total expense ratio	2.2%	2.1%

Dividends and earnings
Revenue return per share{B}	7.27p	15.58p	-53.3
Dividends per share{C}	7.00p	15.10p	-53.6
Dividend cover	1.04	1.03
Revenue reserves{D}	£2,041,000	£2,677,000
{A} Based on IFRS NAV above reduced by dividend adjustment of 1.75p (2008 - 4.90p).
{B} Measures the revenue earnings for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income).
{C} The figures for dividends per share reflect the years in which they were earned (see note 8).
{D} The revenue reserve figure does not take account of the fourth interim dividend amounting to £387,000 (2008 - £1,083,000).

	Performance (Total return)
		1 year	3 year	5 year
		% return	% return	% return
Net asset value		+46.8	-48.5	-23.7
Share price (based on mid price)		+96.6	-51.8	-35.6
FTSE SmallCap Index (excluding Investment Companies)		+57.7	-33.1	-2.2
FTSE All-Share Index		+30.1	-4.0	+36.8
All figures are for total return and assume re-investment of net dividends excluding transaction costs.

Dividends

	Rate per share	xd date	Record date	Payment date
First interim dividend	1.75p	15 April 2009	17 April 2009	30 April 2009
Second interim dividend	1.75p	8 July 2009	10 July 2009	31 July 2009
Third interim dividend	1.75p	7 October 2009	9 October 2009	30 October 2009
Fourth interim dividend	1.75p	6 January 2010	8 January 2010	29 January 2010
2009	7.00p

First interim dividend	3.40p	9 April 2008	11 April 2008	30 April 2008
Second interim dividend	3.40p	9 July 2008	11 July 2008	31 July 2008
Third interim dividend	3.40p	8 October 2008	10 October 2008	31 October 2008
Fourth interim dividend	4.90p	7 January 2009	9 January 2009	30 January 2009
2008	15.10p

	Distribution of Assets and Liabilities

		Valuation at		Movement during the year				Valuation at
		31 December					Gains/	31 December
		2008		Purchases	Sales	Other{A}	(losses)	2009
		£'000	%	£'000	£'000	£'000	£'000	£'000	%
Listed investments
Ordinary shares		13,590	70.1	9,219	(6,539)	-	6,814	23,084	91.1
Convertibles		1,180	6.1	-	(148)	-	174	1,206	4.8
Corporate bonds		7,791	40.2	1,805	(3,487)	(33)	423	6,499	25.7
Other fixed interest		6,908	35.7	-	(2,496)	-	(254)	4,158	16.4
		______	_____	_______	______	_______	_______	_______	______
		29,469	152.1	11,024	(12,670)	(33)	7,157	34,947	138.0
		______	_____	_______	______	_______	_______	_______	______
Other non current assets		3,048	15.7					-	-
Current assets		11,747	60.6					3,418	13.5
Current liabilities		(6,763)	(34.9)					(13,038)	(51.5)
Non current liabilities		(18,126)	(93.5)					-	-
		______	_____					______	_____
Net assets		19,375	100.0					25,327	100.0
		______	_____					______	_____
Net asset value per Ordinary share		87.6p						114.6p
		______						______

{A} Amortisation adjustment of £33,000 (see note 2).

4. BUSINESS REVIEW

Objective

The objective of the Company is to provide a high and growing dividend and capital growth from a portfolio invested principally in ordinary shares of smaller UK companies and UK fixed income securities.

Continuation Vote

As required by the Company's Articles of Association, a continuation vote is due at this year's AGM. The Directors believe the Company's objective remains relevant and accordingly an ordinary resolution that the Company continue as an investment trust for a further five years will be put to the AGM. If the continuation vote is not passed, the Directors will convene a general meeting to be held within four months after the date of the continuation vote at which a special resolution will be proposed to require the Company to be wound up voluntarily or to approve proposals which provide shareholders with an opportunity to realise their investment. The Directors believe the proposal to be in the best interests of shareholders and unanimously recommend that shareholders vote in favour of the resolution. In the opinion of the Company's advisers, the continuation vote has a reasonable prospect of succeeding.

Activities

The Company is an investment trust. Its subsidiary undertaking, Shirescot Securities Limited, is an investment dealing company. There was no investment dealing activity in the year.

Results and Dividends

The financial statements are for the year ended 31 December 2009. Dividends declared for the year amounted to 7.00p per share (2008 - 15.10p).

A fourth interim dividend of 1.75p per share was announced by the Board on 30 December 2009 and paid on 29 January 2010. Under International Financial Reporting Standards (IFRS) this dividend will be accounted for in the financial year ended 31 December 2010.

Going Concern

The validity of the going concern basis depends on the continuation vote at the AGM being passed by shareholders. The primary purpose of the continuation vote is to determine whether shareholders are satisfied to continue the operations of the Company. There is no guarantee that shareholders will pass the continuation vote at the AGM. The Board believes that the Company will be able to secure an offer of an appropriate level of facilities on commercial terms to replace the zero coupon finance which matures on 31 July 2010 and the term loan which falls due for repayment on 23 December 2010. The Board considers that the Group has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly the Directors believe that it is appropriate to prepare the financial statements on a going concern basis.

SHIRES SMALLER COMPANIES PLC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

		Year ended			Year ended
		31 December 2009			31 December 2008
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Gains and losses on investments
Gains/(losses) on investments at fair value	10	-	7,157	7,157	-	(29,659)	(29,659)
Fair value movement in zero coupon finance derivatives	13	-	(274)	(274)	-	(1,504)	(1,504)

Revenue	2
Dividend income		1,258	-	1,258	2,828	-	2,828
Interest income from investments		667	(33)	634	1,123	(69)	1,054
Deposit interest		23	-	23	88	-	88
Other income		134	-	134	105	-	105
Net loss of dealing subsidiary		-	-	-	(109)	-	(109)
		_______	_______	_______	_______	_______	_______
		2,082	6,850	8,932	4,035	(31,232)	(27,197)
		_______	_______	_______	_______	_______	_______
Expenses
Investment management fee	3	(127)	(127)	(254)	(239)	(239)	(478)
VAT recoverable on investment management fees	19	144	144	288	220	220	440
Other administrative expenses	4	(212)	-	(212)	(260)	-	(260)
Finance costs of borrowings	5	(279)	(279)	(558)	(312)	(312)	(624)
		_______	_______	_______	_______	_______	_______
Profit/(loss) before tax		1,608	6,588	8,196	3,444	(31,563)	(28,119)
Tax expense	6	-	-	-	-	-	-
		_______	_______	_______	_______	_______	_______
Profit/(loss) attributable to equity holders of the Group	7	1,608	6,588	8,196	3,444	(31,563)	(28,119)
		_______	_______	_______	_______	_______	_______

Earnings/(loss) per Ordinary share (pence)	9	7.27	29.80	37.07	15.58	(142.76)	(127.18)
		_______	_______	_______	_______	_______	_______

The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS. The supplementary revenue return and capital columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations.
The Company does not have any income or expense that is not included in profit/(loss) for the year, and therefore the "Profit/(loss) attributable to equity holders of the Group" is also the "Total comprehensive income attributable to equity holders of the Group" as defined in IAS 1 (revised).
All of the profit/(loss) and comprehensive income are attributable to the equity holders of the parent Company. There are no minority interests.
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.

SHIRES SMALLER COMPANIES PLC

Balance Sheets

		Group		Company
		As at	As at	As at	As at
		31 December	31 December	31 December	31 December
		2009	2008	2009	2008
	Notes	£'000	£'000	£'000	£'000
Non-current assets
Ordinary shares		23,084	13,590	23,084	13,590
Convertibles		1,206	1,180	1,206	1,180
Corporate bonds		6,499	7,791	6,499	7,791
Other fixed interest		4,158	6,908	4,158	6,908
		________	________	________	________
Securities at fair value	10	34,947	29,469	34,947	29,469
Zero coupon finance derivatives at fair value	13	-	3,048	-	3,048
		________	________	________	________
		34,947	32,517	34,947	32,517
		________	________	________	________
Current assets
Cash and cash equivalents		2,381	9,573	2,381	9,573
Zero coupon finance derivatives at fair value	13	637	1,154	637	1,154
Investments in dealing subsidiary		-	-	-	-
Other receivables	12	400	1,020	542	1,162
		________	________	________	________
		3,418	11,747	3,560	11,889
		________	________	________	________
Total assets		38,365	44,264	38,507	44,406

Current liabilities
Trade and other payables		(126)	(303)	(126)	(303)
Short-term loan	13	(7,000)	-	(7,000)	-
Zero coupon finance derivatives at fair value	13	(5,912)	(6,460)	(5,912)	(6,460)
		________	________	________	________
		(13,038)	(6,763)	(13,038)	(6,763)
		________	________	________	________
Non-current liabilities
Long-term loan		-	(10,000)	-	(10,000)
Zero coupon finance derivatives at fair value		-	(8,126)	-	(8,126)
		________	________	________	________
		-	(18,126)	-	(18,126)
		________	________	________	________
Net assets		25,327	19,375	25,469	19,517
		________	________	________	________

Issued capital and reserves attributable to equity holders of the parent
Called up share capital	14	11,055	11,055	11,055	11,055
Share premium account		11,892	11,892	11,892	11,892
Capital redemption reserve		2,032	2,032	2,032	2,032
Retained earnings:
Capital reserve	15	(1,693)	(8,281)	(1,693)	(8,281)
Revenue reserve	15	2,041	2,677	2,183	2,819
		________	________	________	________
		25,327	19,375	25,469	19,517
		________	________	________	________

Net asset value per Ordinary share (pence):	9	114.55	87.63
		________	________	________	________

SHIRES SMALLER COMPANIES PLC

Consolidated Statement of Changes in Equity

Year ended 31 December 2009

			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2008		11,055	11,892	2,032	(8,281)	2,677	19,375
Revenue profit for the year		-	-	-	-	1,608	1,608
Capital profits for the year		-	-	-	6,588	-	6,588
Equity dividends	8	-	-	-	-	(2,244)	(2,244)
		_______	_______	_______	_______	_______	_______
As at 31 December 2009		11,055	11,892	2,032	(1,693)	2,041	25,327
		_______	_______	_______	_______	_______	_______

Year ended 31 December 2008
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2007		11,055	11,892	2,032	23,282	2,571	50,832
Revenue profit for the year		-	-	-	-	3,444	3,444
Capital losses for the year		-	-	-	(31,563)	-	(31,563)
Equity dividends	8	-	-	-	-	(3,338)	(3,338)
		_______	_______	_______	_______	_______	_______
As at 31 December 2008		11,055	11,892	2,032	(8,281)	2,677	19,375
		_______	_______	_______	_______	_______	_______

The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.

SHIRES SMALLER COMPANIES PLC

Group and Company Cash Flow Statement

	Year ended		Year ended
	31 December 2009		31 December 2008
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Investment income received		2,083		4,542
Deposit interest received		165		77
Money market interest received		-		105
Investment management fee paid		(386)		(442)
VAT recovered		728		-
Net sales of dealing subsidiary		-		346
Other cash expenses		(255)		(264)
		________		________
Cash generated from operations		2,335		4,364
Interest paid		(560)		(624)
		________		________
Net cash inflows from operating activities		1,775		3,740

Cash flows from investing activities
Purchases of investments	(11,024)		(13,016)
Sales of investments	12,678		38,740
	________		________
Net cash inflow from investing activities		1,654		25,724
Cash flows from financing activities
Equity dividends paid	(2,244)		(3,338)
Repayment of September 2009 ZCF position	(5,377)		-
Repayment of December 2008 ZCF position	-		(16,098)
Proceeds from September 2009 ZCF tranche	-		4,984
Loan repaid	(3,000)		-
	________		________
Net cash outflow from financing activities		(10,621)		(14,452)
		________		________
Net (decrease)/increase in cash and cash equivalents		(7,192)		15,012
Cash and cash equivalents at start of year		9,573		(5,439)
		________		________
Cash and cash equivalents at end of year		2,381		9,573
		________		________

SHIRES SMALLER COMPANIES PLC

YEAR ENDED 31 DECEMBER 2008

NOTES TO THE FINANCIAL STATEMENTS

1.	Accounting policies
	(a)	Basis of accounting
		The financial statements of the Group and Company have been prepared in accordance with International Financial Reporting Standards (IFRSs) which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and International Accounting Standards and International Financial Reporting Interpretations Committee interpretations approved by the International Accounting Standards Committee ("IASC") that remain in effect, and to the extent that they have been adopted by the European Union.

		The financial statements have been prepared under the historical cost convention as modified to include the revaluation of securities held at fair value and on the assumption that approval as an investment trust will continue to be granted. The principal accounting policies adopted are set out below. These policies have been applied consistently throughout the year. Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the Association of Investment Companies in January 2009 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP except as referred to in paragraph (f) and (j) below. The effects on capital and revenue of the items involving departures from the SORP are set out under risk management - Income Enhancement in note 17.
		In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. In accordance with the Company's status as a UK investment company under Section 833 of the Companies Act 2006, net capital returns may not be distributed by way of dividend. Additionally, the net revenue of the Company is the measure the Directors believe appropriate in assessing the Group's compliance with certain requirements set out in Section 842 of the Income and Corporation Taxes Act 1988.

		The Company adopted the extended disclosure requirements within IFRS 7 for accounting periods beginning on or after 1 January 2009. The extended disclosure requirements introduced a fair value hierarchy and this is disclosed in note 18.

		At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective:
		-	IFRS 9 - Financial Instruments: Classification and Measurement (effective for annual periods beginning on or after 1 January 2013). This standard has not yet been adopted by the EU.
		-	Amendments to IFRS 1 - First-time Adoption of IFRSs and Additional Exemptions for First-time Adopters (effective for annual periods beginning on or after 1 July 2009 and 1 January 2010 respectively)
		-	Amendments to IFRS 2 - Group Cash-settled Share-based Payments (effective for annual periods beginning on or after 1 January 2010)
		-	Amendments to IFRS 3 & IAS 27 - Business Combinations (effective for annual periods beginning on or after 1 July 2009)
		-	Amendments to IAS 24 - Related Party Disclosures (effective for annual periods beginning on or after 1 January 2011)
		-	Amendments to IAS 32 - Classification of Rights Issues (effective for annual periods beginning on or after 1 February 2010)
		-	Amendments to IAS 39 - Eligible Hedged Items (effective for annual periods beginning on or after 1 July 2010
		-	IFRIC 17 - Distributions of Non-cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009)
		-	IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2009)
		-	Amendments to IFRIC 14 - Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after 1 January 2011)

		The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the financial statements of the Group. The Group concludes however that certain additional disclosures may be necessary on their application.

	(b)	Consolidation
		The consolidated financial statements incorporate the financial statements of the Company and entity controlled by the Company (its subsidiary) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. All intra-group transactions, balances, income and expenses are eliminated on consolidation. The Company has availed itself of the relief from showing a Statement of Comprehensive Income for the parent company, granted under Section 408 of the Companies Act 2006.

	(c)	Investments
		Investments are recognised or derecognised on the trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned, and are initially measured at fair value.

		All investments are designated upon initial recognition as held at fair value and are measured at subsequent reporting dates at their fair value, which is the bid price as at close of business on the Balance Sheet date.

		Gains and losses arising from the changes in fair value are included in net profit or loss for the period as a capital item. Transaction costs are treated as a capital cost.

	(d)	Investments in dealing subsidiary undertaking
		Investments held are shown as current assets at fair value. Gains and losses arising on these investments are dealt with in the revenue column of the Consolidated Statement of Comprehensive Income.

	(e)	Zero coupon finance
		The Company has in place medium-term funding in the form of zero coupon finance through a series of option transactions on the FTSE 100 Index. The option contracts are accounted for as separate derivative contracts and therefore are shown on the Balance Sheet at their fair value i.e. market value adjusted for the amortisation of transaction expenses. Changes in the fair value of the option contracts are charged or credited to capital and presented as a capital item in the Consolidated Statement of Comprehensive Income.

	(f)	Income
		Dividend income from equity investments including preference shares which have a discretionary dividend is recognised when the shareholders' rights to receive payment have been established, normally the ex-dividend date.

		Interest from debt securities which include preference shares which do not have a discretionary dividend are accounted for on an effective yield basis. Any write off of the premium or discount on acquisition as a result of using this basis is allocated against capital reserve. The SORP recommends that such a write off should be allocated against revenue. The Directors believe this treatment is not appropriate for a high yielding investment trust which frequently trades in debt securities and believe any premium or discount paid for such an investment is a capital item.

		Interest receivable on AAA rated money market funds and short term deposits are accounted for on an accruals basis.

		Underwriting commission is taken to revenue, unless any shares underwritten are required to be taken up, in which case the proportionate commission received is deducted from the cost of the investment.

	(g)	Expenses
		All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Statement of Comprehensive Income, all expenses have been presented as revenue items except those where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. Accordingly the investment management fee and finance costs have been allocated 50% to revenue and 50% to capital, in order to reflect the Directors expected long-term view of the nature of the investment returns of the Company.

	(h)	Bank borrowings
		Interest-bearing bank loans and overdrafts are recorded at the proceeds received. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the Statement of Comprehensive Income using the effective interest rate method.

	(i)	Finance costs and long-term borrowings
		Long-term borrowings are stated at the amount of the proceeds of issue net of expenses. The finance costs, being the difference between the net proceeds of borrowing and the total amount of payments that require to be made in respect of that borrowing, accrue evenly over the life of the borrowing and are allocated between capital and revenue.

		Finance costs have been allocated 50% to revenue and 50% to capital in the Consolidated Statement of Comprehensive Income, in order to reflect the Directors expected long-term view of the nature of the investment returns of the Company.

	(j)	Taxation
		The tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible (see note 6 for a more detailed explanation). The Group has no liability for current tax.

		Deferred tax is provided in full on timing differences which result in an obligation at the Balance Sheet date to pay more tax, or a right to pay less tax, at a future date at rates expected to apply when they crystallise, based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.

		The SORP requires that a transfer should be made from income to capital equivalent to the tax value of any management expenses that arise in capital but are utilised against revenue. The Directors consider that this requirement is not appropriate for an investment trust with an objective to provide a high and growing dividend that does not generate a corporation tax liability. Given there is only one class of shareholder and hence overall the net effect of such a transfer to the net asset value of the shares is nil no such transfer has been made.

	(k)	Foreign currencies
		Transactions involving foreign currencies are converted at the rate ruling at the time of the transaction. Assets and liabilities in foreign currencies are translated at the closing rates of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in capital reserve or the revenue account as appropriate.

		2009	2008
2.	Income	£'000	£'000
	Income from investments
	Dividend income from UK equity securities	1,167	2,704
	Dividend income from overseas equity securities	91	124
	Interest income from investments	667	1,123
		__________	__________
		1,925	3,951
		__________	__________

		2009	2008
		£'000	£'000
	Other income
	Interest on VAT recoverable on investment management fees	132	-
	Deposit interest	23	88
	Interest from AAA rated money market funds	-	105
	Decrease in fair value of investments in subsidiary	-	(109)
	Underwriting commission	2	-
		__________	__________
		157	84
		__________	__________
	Total revenue income	2,082	4,035
		__________	__________

	As per note 1 (f), the Company amortises the premium or discount on acquisition on debt securities against unrealised capital reserve. For 2009 this represented £33,000 (2008 - £69,000) which has been reflected in the capital column of the Statement of Comprehensive Income.

		2009			2008
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Investment management fees	£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	127	127	254	239	239	478
		_______	______	______	______	______	______

	For the year ended 31 December 2009 management and secretarial services were provided by Aberdeen Asset Managers Limited. The fee is at an annual rate of 0.75%, calculated monthly and paid quarterly. The fee is allocated 50% to capital and 50% to revenue.

	Note 19 provides further information on the recoverability of VAT previously charged on management fees.

		2009	2008
4.	Other administrative expenses	£'000	£'000
	Directors' remuneration - fees as Directors	71	71
	Fees payable to auditors and associates:
	- fees payable to the Company's auditors for the audit of the annual accounts	18	18
	Other management expenses	123	171
		______	______
		212	260
		______	______

	The Company had no employees during the year (2008 - nil). No pension contributions were paid for Directors (2008 - £nil).

		2009			2008
		Revenue	Capital	Total	Revenue	Capital	Total
5.	Finance costs and borrowings	£'000	£'000	£'000	£'000	£'000	£'000
	Loan repayable in less than one year	280	280	560	276	276	552
	Bank loans and overdrafts	(1)	(1)	(2)	36	36	72
		______	______	______	______	______	______
		279	279	558	312	312	624
		______	______	______	______	______	______

6.	Taxation
	Management expenses arising on revenue items this year were relieved against taxable revenue. By relieving £302,000 (2008 - £882,000) of surplus management expenses arising on capital items against the remaining taxable revenue, the Company eliminated its corporation tax charge. In accordance with accounting policy 1(j) no amount (2008 - £nil) has been credited to capital and charged to revenue as a notional corporation tax item.

	At 31 December 2009, the Company had net surplus management expenses and loan relationship deficits of £7,851,000 (2008 - £7,890,000) in respect of which a deferred tax asset has not been recognised. This is because the Company is not expected to generate taxable income in a future period in excess of the deductible expenses and deficits of that future period and, accordingly, it is unlikely that the Company will be able to reduce future tax liabilities through the use of existing surplus expenses and loan relationship deficits.

	The UK Corporation tax rate applicable at the year end was 28% (2008 - effective rate of 28.5%).

	2009			2008
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Profit/(loss) before tax	1,608	6,588	8,196	3,444	(31,563)	(28,119)

Taxation of return on ordinary activities at the standard rate of corporation tax	450	1,845	2,295	982	(8,995)	(8,013)
Effects of:
UK dividend income not liable to further tax	(353)	-	(353)	(762)	-	(762)
Capital (gains)/losses disallowed for the purposes of corporation tax	-	(1,995)	(1,995)	-	8,472	8,472
Zero coupon finance costs not an allowable tax deduction	-	77	77	-	429	429
Income not subject to tax	(12)	-	(12)	-	-	-
Unrecognised deferred tax asset in respect of taxable loss	-	-	-	31	-	31
Utilisation of surplus management expenses	(85)	73	(12)	(251)	94	(157)
	______	_____	_____	______	______	______
Taxation charge for the year	-	-	-	-	-	-
	______	_____	_____	______	______	______

7.	Revenue and capital profit attributable to equity holders of the Company
	The revenue and capital profits attributable to equity holders of the Group for the financial year includes £8,196,000 (2008 - losses of £28,119,000) which has been dealt with in the Company's financial statements.

		2009	2008
8.	Dividends	£'000	£'000
	Amounts recognised as distributions to equity holders in the period:
	Fourth interim dividend for the year ended 31 December 2008 of 4.90p (2007 - 4.90p) per share	1,083	1,083
	Three interim dividends for the year ended 31 December 2009 totalling 5.25p (2008 - 10.20p) per share	1,161	2,255
		_______	_______
		2,244	3,338
		_______	_______

	The fourth interim dividend of 1.75p per share, declared on 30 December 2009 and paid on 29 January 2010 has not been included as a liability in these financial statements.

	We also set out below the total dividends payable in respect of the financial year, which is the basis on which the requirements of Section 842 of the Income and Corporation Taxes Act 1988 are considered:

		2009	2008
		£'000	£'000
	Three interim dividends for the year ended 31 December 2009 totalling 5.25p (2008 - 10.20p) per share	1,161	2,255
	Fourth interim dividend for the year ended 31 December 2009 of 1.75p (2008 - 4.90p) per share	387	1,083
		_______	_______
		1,548	3,338
		_______	_______

		2009	2008
9.	Return/(loss) and net asset value per share	£'000	£'000
	The returns/(losses) per share are based on the following figures:
	Revenue return	1,608	3,444
	Capital return/(loss)	6,588	(31,563)
		_______	_______
	Net return	8,196	(28,119)
		_______	_______
	Weighted average number of shares in issue	22,109,765	22,109,765
		_________	_________

	The net asset value per share is based on net assets attributable to shareholders of £25,327,000 (2008 - £19,375,000) and on the 22,109,765 (2008 - 22,109,765) shares in issue at 31 December 2009.

			Group & Company
			2009	2008
10.	Non current assets - securities at fair value		£'000	£'000
	Listed on recognised stock exchanges:
	United Kingdom		32,845	25,954
	Overseas		2,102	3,515
			_______	_______
			34,947	29,469
			_______	_______

			Group & Company
			2009	2008
			£'000	£'000
	Cost at 31 December 2008		45,244	84,503
	Investment holdings (losses)/gains at 31 December 2008		(15,775)	432
			_______	_______
	Fair value at 31 December 2008		29,469	84,935
	Purchases		11,024	13,016
	Amortised cost adjustments to fixed interest securities		(33)	(69)
	Sales	- proceeds	(12,670)	(38,754)
		- net losses on sales	(5,210)	(13,452)
	Movement in investment holdings losses during the year		12,367	(16,207)
			_______	_______
	Valuation at 31 December 2009		34,947	29,469
			_______	_______
	Cost at 31 December 2009		38,355	45,244
	Investment holdings losses at 31 December 2009		(3,408)	(15,775)
			_______	_______
	Fair value at 31 December 2009		34,947	29,469
			_______	_______


			Group & Company
			2009	2008
	Gains/(losses) on investments		£'000	£'000
	Net realised losses on sales		(5,210)	(13,452)
	Movement in fair value		12,367	(16,207)
			_______	_______
	Gains/(losses) on investments		7,157	(29,659)
			_______	_______

	The total transaction costs on the purchases and sales in the year were £52,000 (2008 - £76,000) and £6,000 (2008 - £57,000) respectively.

	All investments are categorised as held at fair value through profit and loss.

		Company
		2009	2008
11.	Subsidiary undertaking	£'000	£'000
	Shares at cost	-	-
		_______	_______

	The Company owns the whole of the issued ordinary share capital of its sole subsidiary undertaking, Shirescot Securities Limited, an investment dealing company registered in Scotland.

	As at the 31 December 2009 Shirescot Securities Limited had negative net assets of £142,000 (2008 - negative net assets of £142,000). Shires Smaller Companies plc confirms that it will provide financial support for Shirescot Securities Limited to continue to trade.

		Group		Company
		2009	2008	2009	2008
12.	Other receivables	£'000	£'000	£'000	£'000
	Amounts due from brokers	6	14	6	14
	Accrued income & prepayments	391	560	391	560
	Due by subsidiary undertaking	-	-	142	142
	VAT recoverable (see note 19)	-	440	-	440
	Other debtors	3	6	3	6
		_______	_______	_______	_______
		400	1,020	542	1,162
		_______	_______	_______	_______
	None of the above amounts is overdue.

		2009	2008
13.	Loans and zero coupon finance derivatives at fair value	£'000	£'000
	Short-term loan included at amortised cost	7,000	-
	Long-term loan included at amortised cost	-	10,000
	Zero coupon finance derivatives at fair value - current liabilities	5,912	6,460
	Zero coupon finance derivatives at fair value - non-current liabilities	-	8,126
		_______	_______
		12,912	24,586
		_______	_______
	Short-term loan
	The short-term loan of £10 million was taken out on 22 December 2005 and £3,000,000 was repaid in March 2009. The interest on this loan is fixed at 5.49% per annum on the principal amount and is payable quarterly in arrears. The loan is repayable at par on 23 December 2010 and is unsecured.

	The Directors' opinion of the fair value of the short-term loan at 31 December 2009, determined by discounting the future cash flows of the loan with reference to the current interest profile of an equivalent gilt, was £7,398,000 (2008 - £10,724,000).

	Zero coupon finance
	The zero coupon finance arrangement comprises a set of separately traded financial instruments (FTSE 100 Index options) each with its own market value, which equates to their fair values. The options run until July 2010. Set out below is a breakdown of the different options split between put and call options and assets and liabilities as disclosed in the Balance Sheet. The change in the net total market value of the options in each accounting period is treated as an unrealised loss and charged to the capital column of the Consolidated Statement of Comprehensive Income.

	A September 2009 tranche of zero coupon finance, which was taken out in July 2008, was repaid in February 2009 at a cost of £5.4 million. The July 2010 tranche has a maturity value of £5.3 million.

	The amount charged to capital will fluctuate over accounting periods due to market volatility over the life of the options but is approximately 5.5% per annum for the options which expire in July 2010.

	As at 31 December 2009, the Company had pledged collateral equal to at least 160% of the market value of this finance in accordance with standard commercial practice. The actual carrying amount of financial assets pledged equated to £8,463,000 (2008 - £16,747,000, including £252,000 in cash) in the form of securities. The collateral position is monitored on a daily basis, which then determines if further assets are required to be pledged over and above those already pledged.

		2009	2008
	Fair value at 31 December 2009	£'000	£'000
	Current assets
	Call option expiring on 29 July 2010	4	-
	Put option expiring on 29 July 2010	633	-
	Call option expiring on 18 September 2009	-	112
	Put option expiring on 18 September 2009	-	1,042
		_______	_______
		637	1,154
		_______	_______
	Non-current assets
	Call option expiring on 29 July 2010	-	138
	Put option expiring on 29 July 2010	-	2,910
		_______	_______
		-	3,048
		_______	_______
	Current liabilities
	Call option expiring on 18 September 2009	-	(1,906)
	Put option expiring on 18 September 2009	-	(4,554)
	Call option expiring on 29 July 2010	(1,414)	-
	Put option expiring on 29 July 2010	(4,498)	-
		_______	_______
		(5,912)	(6,460)
		_______	_______
		2009	2008
		£'000	£'000
	Non-current liabilities
	Call option expiring on 29 July 2010	-	(1,052)
	Put option expiring on 29 July 2010	-	(7,074)
		_______	_______
		-	(8,126)
		_______	_______
	Net zero coupon finance liability - fair value	(5,275)	(10,384)
		_______	_______
	The movements in the fair value of this finance were as follows:
		Group and Company
		2009	2008
		£'000	£'000
	At 31 December 2008	10,384	19,994
	Proceeds from new zero coupon finance arrangement	-	4,984
		_______	_______
		10,384	24,978
	Cost of closure of existing zero coupon finance arrangement	(5,383)	(16,098)
		_______	_______
		5,001	8,880
	Finance costs charged to capital	274	1,504
		_______	_______
	At 31 December 2009	5,275	10,384
		_______	_______

		Ordinary shares
		of 50 pence each
14.	Called up share capital	Number	£'000
	Authorised
	At 31 December 2009 and 31 December 2008	35,000,000	17,500
		__________	_______

		Ordinary shares
		of 50 pence each
	Allotted, called up and fully paid	Number		£'000
	At 31 December 2009 and 31 December 2008	22,109,765		11,055
		__________		_______
	The objective of the Company is to provide a high and growing dividend and capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities.

	The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.

	The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:
	- the planned level of gearing, which takes account of the Investment Manager's views on the market;
	- the level of equity shares in issue; and
	- the extent to which revenue in excess of that which is required to be distributed should be retained.

	The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.

	The Company does not have any externally imposed capital requirements.

				Group & Company
				2009	2008
15.	Retained earnings			£'000	£'000
	Capital reserve
	At 31 December 2008			(8,281)	23,282
	Net losses on sales of investments during the year			(5,210)	(13,452)
	Movement in investment holdings losses during the year			12,367	(16,207)
	Amortised cost adjustment relating to capital			(33)	(69)
	Zero coupon finance costs (note 13)			(274)	(1,504)
	Finance costs of borrowings (note 5)			(279)	(312)
	Investment management fee			(127)	(239)
	VAT recoverable on management fees			144	220
				_______	_______
	At 31 December 2009			(1,693)	(8,281)
				_______	_______

	The capital reserve includes investment holding losses amounting to £3,408,000 (2008 - £15,775,000), as disclosed in note 10.

		Group	Company	Group	Company
		2009	2009	2008	2008
	Revenue reserve	£'000	£'000	£'000	£'000
	At 31 December 2008	2,677	2,819	2,571	2,607
	Revenue return	1,608	1,608	3,444	3,550
	Dividends paid	(2,244)	(2,244)	(3,338)	(3,338)
		_______	_______	_______	_______
	At 31 December 2009	2,041	2,183	2,677	2,819
		_______	_______	_______	_______

16.

Risk management, financial assets and liabilities

Risk management

The Company's objective of providing a high and growing dividend with capital growth is addressed by investing in smaller UK market capitalisation equities to provide growth in capital and income and in fixed income securities to provide a high level of income.

The impact of security price volatility is reduced by diversification. Diversification is by type of security - ordinary shares, preference shares, convertibles and corporate fixed interest - and by investment in the stocks and shares of companies in a range of industrial, commercial and financial sectors. The management of the portfolio is conducted according to investment guidelines, established by the Board after discussion with the Managers, which specify the limits within which the Manager is authorised to act.

The Manager has a dedicated investment management process which ensures that the investment objective is achieved. Stock selection procedures are in place based on the active portfolio management and identification of stocks. The portfolio is reviewed on a periodic basis by a Senior Investment Manager and also by the Manager's Investment Committee.

The Company's Manager has an independent Investment Risk department for reviewing the investment risk parameters of all core equity, balanced, fixed income and alternative asset classes on a regular basis. The department reports to the Manager's Performance Review Committee which is chaired by the Manager's Chief Investment Officer. The department's responsibility is to review and monitor ex-ante (predicted) portfolio risk and style characteristics using best practice, industry standard multi-factor models.

Additionally, the Manager's Compliance department continually monitor the Company's investment and borrowing powers and report to the Manager's Risk Management Committee.

The Manager has a Business Risk department to consolidate risk management functions. The department is responsible for supporting management in the efficient identification of risk and resolution of control issues. The department incorporates Operational Risk, Breaches and Errors Risk Control Management, Counterparty Risk, and the Procedures and Business Control teams. The Head of Front Office risk reports directly to the Manager's Group Head of Risk.

Financial assets and liabilities

The Company's financial assets include investments, cash at bank and short-term debtors. Financial liabilities consist of bank loans and overdrafts, other short-term creditors and long-term creditors arising from option contracts and a fixed rate term loan.

The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk and other price risk), (ii) liquidity risk and (iii) credit risk. The Company has no exposure to foreign currency risk as it does not hold any foreign currency assets or have exposure to any foreign currency liabilities.

The Company is subject to interest rate risk because bond yields are linked to underlying bank rates or equivalents, and its short-term borrowings and cash resources carry interest at floating rates. The interest rate profile is managed as part of the overall investment strategy of the Company.

(i)

Market risk

The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk.

Interest rate risk

Interest rate movements may affect:

the fair value of the investments in fixed interest rate securities;

the level of income receivable on cash deposits;

interest payable on the Company's variable rate borrowings.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.

The Board reviews on a regular basis the values of the fixed interest rate securities.

Interest rate profile

The interest rate risk profile of the portfolio of financial assets and liabilities (excluding ordinary shares and convertibles) at the Balance Sheet date was as follows:

Weighted average

Weighted

period for which

average
interest

Fixed

Floating

Non-
interest

rate is fixed

rate

Bearing

As at 31 December 2009

Years

£'000

Assets

UK corporate bonds

8.30

7.19

6,499

UK preference shares

7.47

4,158

Zero coupon finance

637

Cash

2,381

________

Total assets

10,657

2,381

637

________

Weighted average

Weighted

period for which

average
interest

Fixed

Floating

Non-
Interest

rate is fixed

rate

Bearing

Years

£'000

Liabilities

Short-term bank loan

0.98

5.49

(7,000)

Zero coupon finance

(5,912)

________

Total liabilities

(7,000)

(5,912)

________

Total

3,657

2,381

(5,275)

________

Weighted average

Weighted

period for which

average
interest

Fixed

Floating

Non-
interest

rate is fixed

rate

bearing

As at 31 December 2008

Years

£'000

Assets

UK corporate bonds

8.89

6.94

7,791

UK preference shares

8.19

6,908

Zero coupon finance

4,202

Cash

9,573

________

Total assets

14,699

9,573

4,202

________

Liabilities

Long-term bank loan

1.98

5.49

(10,000)

Zero coupon finance

(14,586)

________

Total liabilities

(10,000)

(14,586)

________

Total

4,699

9,573

(10,384)

________

The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. The maturity dates of the Company's loans are shown in note 13 to the financial statements.

The cash assets consist of cash deposits on call earning interest at prevailing market rates.

Short-term debtors and creditors (with the exception of loans and zero coupon finance) have been excluded from the above tables.

All financial liabilities are measured at amortised cost.

Maturity profile

The maturity profile of the Company's financial assets and liabilities at the Balance Sheet date was as follows:

Within

More than

1 year

1-2 years

2-3 years

3-4 years

4-5 years

5 years

At 31 December 2009

£'000

Fixed rate

UK corporate bonds

672

771

507

306

4,243

UK redeemable preference shares

221

Bank loan

(7,000)

_______

(6,107)

771

507

306

4,243

_______

Within

More than

1 year

1-2 years

2-3 years

3-4 years

4-5 years

5 years

£'000

Floating rate

Zero coupon finance

(5,275)

Cash

2,381

_______

(2,894)

_______

Total

(9,001)

771

507

306

4,243

_______

Within

More than

1 year

1-2 years

2-3 years

3-4 years

4-5 years

5 years

At 31 December 2008

£'000

Fixed rate

UK corporate bonds

2,677

2,373

2,741

UK redeemable preference shares

474

Bank loans

(10,000)

_______

474

(7,323)

2,373

2,741

_______

Floating rate

Zero coupon finance

(5,306)

(5,078)

Cash

9,573

_______

4,267

(5,078)

_______

Total

4,741

(12,401)

2,373

2,741

_______

The maturity table above excludes the value of holdings in UK irredeemable preference shares held at the year end, which equated to £3,937,000 (2008 - £6,434,000).

Interest rate sensitivity

The sensitivity analysis below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the Balance Sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.

If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's:

profit before tax for the year ended 31 December 2009 would increase/decrease by £24,000 (2008 - £96,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances. These figures have been calculated based on cash positions at each year end.

profit before tax for the year ended 31 December 2009 would increase/decrease by £458,000 (2008 - £146,000). This is also mainly attributable to the Company's exposure to interest rates on its fixed interest securities. This is based on a Value at Risk ('VaR') calculated at a 99% confidence level.

In the opinion of the Directors, the above sensitivity analyses would not necessarily reflect the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives. The risk parameters used will also fluctuate depending on the current market perception.

Other price risk

Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.

It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets to specific sectors and the stock selection process both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on the London Stock Exchange.

Other price sensitivity

If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the profit before tax attributable to ordinary shareholders for the year ended 31 December 2009 would have increased/decreased by £2,429,000 (2008 - increase/decrease of £1,477,000). This is based on the Company's equity portfolio and convertibles held at each year end.

(ii)

Liquidity risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.

Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities (note 13).

(iii)

Credit risk

This is failure of the counter party to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.

The Company considers credit risk not to be significant as it is actively managed as follows:

where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default;

investments in quoted bonds are made across a variety of industry sectors so as to avoid concentrations of credit risk;

transactions involving derivatives are entered into only with investment banks, the credit rating of which is taken into account so as to minimise the risk to the Company of default;

investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker;

the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a monthly basis. In addition, the Custodian carries out a stock reconciliation to third party administrators' records on a monthly basis to ensure discrepancies are picked up on a timely basis. The Manager's Compliance department carries out periodic reviews of the Custodian's operations and reports its finding to the Manager's Risk Management Committee.

transactions involving derivatives, structured notes and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest are subject to rigorous assessment by the Manager of the credit worthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board;

a proportion of the Company's gearing relates to the zero coupon finance raised in the derivatives market. The final liability of the zero coupon finance is pre-determined at the outset of each tranche of zero coupon finance. The zero coupon finance is subject to counterparty risk. The Company places trades through a broker and pledges collateral in support of the net market value of this finance in accordance with commercial practice. Collateral requirements can vary at the option of the broker and the broker's Euronext.LIFFE market clearer. The overall intended effect of the related put and call options which constitute each trance of zero coupon finance is dependent upon any liability of the Company under each constituent option contract being honoured. The option contracts are traded on Euronext.LIFFE. On-exchange trades go through LCH.Clearnet S.A. such that the Company is not exposed to the credit risk of the exchange member. The Company manages its collateral obligations on a daily basis; and

cash is held only with reputable banks with high quality external credit enhancements.

None of the Company's financial assets are secured by collateral or other credit enhancements.

Credit risk exposure

In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 December was as follows:

2009

2008

Balance

Maximum

Balance

Maximum

Sheet

exposure

Sheet

exposure

£'000

Non-current assets

Securities at fair value through profit or loss

34,947

29,469

Zero coupon finance derivatives at fair value

3,048

Current assets

Trade and other receivables

460

Accrued income

391

552

Cash and cash equivalents

2,381

9,573

Zero coupon finance derivatives at fair value

637

1,154

_________

________

_________

38,365

44,256

_________

________

_________

None of the Company's financial assets is past due or impaired.

Fair value of financial assets and liabilities

The fair values of the short term loan and zero coupon finance are shown in note 13. Traded options contracts are valued at fair value which have been determined with reference to quoted market values of the contracts. The contracts are tradeable on a recognised exchange The book value of cash at bank and bank loans and overdrafts included in these financial statements approximate to fair value because of their short-term maturity. Investments held as dealing investments are valued at fair value. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. For all other short-term debtors and creditors, their book values approximate to fair values because of their short-term maturity.

Gearing

The Company has in place a £7 million unsecured loan. The Company augments this from time to time with short-term borrowings so that greater returns to shareholders may be generated from the capital stock thus enlarged. Although this gearing increases the opportunity for gain, it also increases the risk of loss in falling markets. The risk of increased gearing is managed by retaining the flexibility to reduce short term borrowings as appropriate.

A further component of the Company's gearing relates to the zero coupon finance raised in the derivatives market. The final liability of the zero coupon finance is pre-determined at the outset of each tranche of zero coupon finance. However the amount charged to capital will fluctuate over accounting periods due to interest rate movements giving rise to interest rate risk. This is managed by investing the proceeds of the zero coupon finance in predominantly investment grade corporate bonds, the value of which are also affected by interest rates but in an inverse manner to the zero coupon finance.

Gearing is also restricted by the various covenants applicable to the different borrowings. The unsecured loan contains a clause which stipulates that total borrowings cannot exceed 75% of adjusted total gross assets. As at 31 December 2009 the reported ratio was 32.5% (2008 - 51%). A second clause relates to the ratio of bank indebtedness to the value of the Company's investments. This ratio should not exceed 50%. As at 31 December 2009 the reported ratio was 23.9% (2008 - 43.7%).

There is a second short term borrowing facility with another major bank for £1 million. In respect of this lender, the Company's net asset value must not fall below £10 million. As at 31 December 2009 the net asset value stood at £25.3 million.

17.	Income enhancement
	Zero coupon finance (note 13) raised in the derivatives market is invested in corporate fixed interest securities to augment the income available for distribution to shareholders. The cost of these funds is fixed when they are raised, and is charged wholly to capital.

	In addition the SORP recommends that debt securities are accounted for on an effective yield basis with the associated adjustment being allocated to revenue. The Company has decided to allocate this adjustment to capital as explained in note 1(f). The effect of this treatment on revenue and capital is set out below.

	Finally, as explained in note 1(j) revenue utilises surplus management expenses that have arisen in capital but does not compensate capital as recommended by the SORP.

	The effect of these income enhancement strategies on capital and income is summarised in the table below. There is a risk with these strategies that capital will be eroded unless the charges to capital are covered by gains elsewhere in the portfolio, and this is managed by investing in a portfolio of shares which in the long run is expected to provide adequate capital growth to absorb both the zero coupon finance cost and the effective yield adjustment while paying growing dividends which contribute to the pursuit of the Company's objectives.

	In following this strategy, the Directors recognise that there is only one class of shareholder.

		2009		2008
		Income	Capital	Income	Capital
		£'000	£'000	£'000	£'000
	Zero coupon finance:
	Finance costs charged to capital	-	(274)	-	(1,504)
	Return on corresponding investments	286	212	577	(1,602)
	Purchase of preference shares with discretionary dividends cum-dividend and sales ex-dividend	19	-	-	-
	Debt securities:
	Amortised cost adjustment charged to capital	33	(33)	69	(69)
	Tax value of management expenses arising in capital but utilised against income	85	(85)	251	(251)
		_______	_______	______	_______
		423	(180)	897	(3,426)
		_______	_______	______	_______

18.	Fair value hierarchy
	The Group adopted the amendments to IFRS 7 'Financial Instruments: Disclosures' effective from 1 January 2009. These amendments require an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:
	- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
	- Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (ie as prices) or indirectly (ie derived from prices); and
	- Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

	The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy at 31 December 2009 as follows:

			Level 1	Level 2	Level 3	Total
		Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities	a)	27,242	-	-	27,242
	Quoted bonds	b)	7,705	-	-	7,705
	Derivatives	c)	-	637	-	637
			_______	_______	_______	_______
	Total		34,947	637	-	35,584
			_______	_______	_______	_______
	Financial liabilities at fair value through profit or loss
	Derivatives	c)	-	(5,912)	-	(5,912)
			_______	_______	_______	_______
	Net fair value		34,947	(5,275)	-	29,672
			_______	_______	_______	_______
	a) Quoted equities
	The fair value of the Group's investments in quoted equities have been determined by reference to their quoted bid prices at the reporting date. Quoted equities included in Fair Value Level 1 are actively traded on recognised stock exchanges.
	b) Quoted bonds
	The fair value of the Group's investments in Corporate quoted bonds have been determined by reference to their quoted bid prices at the reporting date.
	c) Derivatives
	The fair value of the Group's investments in Derivatives have been determined using observable market inputs other than quoted prices included within Level 1.

19.	Commitments, contingencies and post Balance Sheet events
	On 5 November 2007, the European Court of Justice ruled that management fees on investment trusts should be exempt from VAT. HMRC announced its intention not to appeal against this ruling to the UK VAT Tribunal and therefore protective claims were made in relation to the Company with HMRC. The Company has not been charged VAT on its investment management fees from 1 October 2007.

	The Manager has refunded £440,000 (excluding interest) to the Company for VAT charged on investment management fees for the period 1 January 2004 to 30 September 2007. This sum was included in the financial statements for the year ended 31 December 2008. In addition, a further £288,000 (excluding interest) has been refunded by the Manager in the current year. The repayment relates to VAT charged on investment management fees for the periods 28 August 1992 (commencement of trading) to 3 December 1996 and 1 January 2001 to 31 December 2003. This repayment has been allocated to revenue and capital in line with the accounting policy of the Company for the periods in which the VAT was charged.

Additional Notes to the Annual Financial Report

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2009. The statutory accounts for the year ended 31 December 2009 received an audit report which was unqualified.

The statutory accounts for the financial year ended 31 December 2009 were approved by the Directors on 26 February 2010 but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which is to be held at 12 noon on 27 April 2010 at Bow Bells House, One Bread Street, London EC4M 9HH.

The Annual Report will be posted to shareholders in March 2010 and additional copies will be available from the Manager (Investor Helpline - Tel. 0845 60 24 247) or by download for the Company's webpage (www.shiressmallercompanies.co.uk)

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

For Shires Smaller Companies plc

Aberdeen Asset Management PLC, Secretaries

This information is provided by RNS

The company news service from the London Stock Exchange

END

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