Annual Financial Report

RNS Number : 4575Y

Standard Life UK Small.Co's Tst PLC

03 September 2009

 



STANDARD LIFE UK SMALLER COMPANIES TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2009

1.    CHAIRMAN'S STATEMENT

Review of the year ended 30 June 2009

The Company's statutory net asset value fell by 22.0% during the year ended 30 June 2009 compared with a fall of 15.5% in the Extended Hoare Govett Smaller Companies Index (excluding Investment Companies). The Company's Ordinary share price decreased by 15.9% from 119.50p to 100.5p over the same period.

The Company benefited from the Manager's robust investment process, with its focus on more defensive growth companies, over the first nine months of the year, but performance of the quality growth smaller companies sector lagged that of the wider market during the bounce in share prices later in the year.

The Manager's consistent investment record has been recognised with the Company winning a number of awards during the last year. Against its peer group the Company remains number one out of 18 trusts over five years, and number two out of 19 trusts over three years. 

Gartmore Smaller Companies Trust ('Gartmore') Merger

The Board was delighted to announce the merger with Gartmore in November 2008 and I am very pleased to report to shareholders that this transaction has progressed very smoothly and that the portfolio re-alignment has been completed ahead of schedule. The combined assets now represent total assets of approximately £80m and the merger has helped to achieve the Board's objective of increasing the size of the Company as well as reducing the total expense ratio. 

In February 2009, 31,189,825 Continuation shares were issued to former shareholders in Gartmore Smaller Companies Trust p.l.c. ('Gartmore') who elected, or were deemed to have elected, to continue their investment in UK smaller companies. The Continuation shares converted into a total of 29,961,251 new Ordinary shares issued on 14 April 2009 and 11 June 2009, respectively. This resulted in a total of 63,163,381 Ordinary shares in issue, with voting rights as at 30 June 2009 (compared to 32,037,585 at 30 June 2008), in addition to a further 559,175 Ordinary shares in treasury. The Manager was particularly successful in efficiently realigning the portfolio of assets transferred from Gartmore in a period of four months which compared to the twelve months initially envisaged at the time of the merger.

Earnings and Dividend

Although the investment objective of the Company is to achieve capital growth, the Board is pleased to recommend to shareholders an increase in total dividends for the year from 1.0p last year to 1.6p this year (excluding Special dividends) reflecting strong growth in dividends from the underlying portfolio of investments. The revenue return per share for the year ended 30 June 2009 was 2.56p (2008 - 1.94p) and the Board is recommending a final Ordinary dividend of 1.10p per share which, together with the interim dividend of 0.5p, paid prior to the Gartmore merger, provides total dividends for the year of 1.6p per Ordinary share. This compares with the final Ordinary dividend of 1.0p per share in respect of the year ended 30 June 2008. Last year, a Special dividend of 0.60p per share was also paid to reflect the VAT refund received from HM Revenue & Customs ('HMRC'). Subject to shareholder approval at the Annual General Meeting, the final Ordinary dividend will be paid on 16 October 2009 to shareholders on the register as at 18 September 2009 with an associated ex-dividend date of 16 September 2009.

VAT on management fees

As reported last year VAT is no longer applied to management fees following the successful case brought against HMRC. No further VAT refunds have been received during the last financial year in respect of claims via the Company's former manager Edinburgh Fund Managers PLC (now owned by Aberdeen Asset Management PLC). The Board is assured that the Company's former manager is actively pursuing this matter with HMRC and negotiations continue. Until further progress is made the Company is unable to recognise any potential amounts due.

Performance

As mentioned above, the Company's statutory net asset value fell by 22.0% over the year ended 30 June 2009, compared with a reduction of 15.5% in the Extended Hoare Govett Smaller Companies Index (excluding Investment Companies).

With its focus on investing in companies with proven business models and some exposure to international markets, the Company's investment portfolio matched or out-performed the wider smaller companies market until March 2009, when the performance of the Manager's preferred quality and growth companies was overtaken by the performance of more risky stocks with greater perceived exposure to the rapid recovery in markets.

Despite under-performing the benchmark index over the last year, the Company retains a record of long-term investment performance, since the appointment of Standard Life Investments as Manager in September 2003, as the table below illustrates:

Per Ordinary share	1 year	3 years	5 years
Net asset value 1	-22.0%	-6.1%	+56.2%
Share price	-15.9%	-1.0%	+96.1%
Peer group ranking	6/19	2/19	1/18

Source: Fundamental Data/Standard Life Investments

1 Statutory Net Asset Value

Major contributors to performance during the year included the portfolio's technology-related and internet-orientated stocks, as well as two holdings which fell to takeover bids on attractive terms.

Further details on portfolio activity and performance during the year, as well as the Manager's outlook for smaller companies, are included in the Manager's Report.

Warrants

In October 2008, 1.1m Ordinary share warrants (40% of the outstanding warrants in issue at 30 June 2008) were exercised on the final subscription date and an equivalent number of Ordinary shares issued on 14 October 2008. The remaining warrants in issue have now expired.

Manager

The Board believes that its appointment of Standard Life Investments continues to be in the long-term interests of shareholders. Harry Nimmo, Head of Smaller Companies at Standard Life Investments, continues to be the lead manager of the Company's investment portfolio and was confirmed recently as Citywire's Top One Hundred Manager of the Year for 2009.

The Company was also recognised as Investment Week's best UK Smaller Companies investment trust for 2008 and was recently awarded both the Moneywise UK Smaller Companies Trust award for the third consecutive year and the Best Performing Smaller Companies Fund at the PLC Awards. Accordingly, the Board continues to remain confident in the ability of the Manager to deliver excellent long-term returns for shareholders.

Gearing

The Manager has discretion to vary the gearing level between -5% and 20% depending on its view of the prospects for smaller companies. The Company actively managed its gearing level during the year ended 30 June 2009. At the end of the first quarter the Company had a net cash position of 2% having started the year with gearing of 6%. This change reflected the Manager's cautious outlook for stock markets at that time albeit the near collapse of the banking system was not anticipated. Gearing was increased during March and April 2009 as the Manager became more confident on the outlook for UK smaller companies triggered by very low interest rates, attractive valuations and significant director buying. The Company had drawn down £6.0m of its £10.0m bank loan facility as at 30 June 2009, which was unchanged at the time of writing.

Discount 

The discount at which the Company's shares trade relative to their underlying net asset value narrowed over the year ended 30 June 2009 from 16.2% to 9.6% which compares to a sector weighted-average for the UK smaller companies peer group of 14.2% (2008 - 16.0%). At the time of writing, the share price is 110.5p per Ordinary share which represents a discount of 8.5% to the prevailing net asset value.

Share buy backs

During the last financial year the Company did not buy back any of its shares. The Board will aim to use its annual 14.99% share buy back authority to seek to maintain a discount level of less than 10% on the Company's Ordinary shares, in normal market conditions.

Regular tender offers

As part of the Company's discount control policy, and as set out in the prospectus published by the Company and sent to shareholders on 23 December 2008, the Board intends, on a six-monthly basis commencing in June 2010, to offer shareholders the opportunity to exit some or all of their investment in the Company.

The Board is therefore proposing to seek shareholder approval at the forthcoming Annual General Meeting of the Company to operate the first tender offer in June 2010. In order to fund the tender offer (and any share buy backs), the Board proposes to cancel the Company's share premium account and capital redemption reserve and apply to the Court in order to create a new special reserve which may be treated as distributable profits.

A separate circular and tender form, which will be sent to shareholders prior to the expected first tender offer date on 30 June 2010, will set out the full terms and conditions of the tender offer and the procedure for tendering shares. 

Marketing activities

The Manager continues to broaden the shareholder base and, as part of the merger with Gartmore, was pleased to welcome a further 450 planholders who transferred into the ISA and Share Plan ('the Plans') operated by Standard Life Savings Limited.

Board

Following the effective date of the merger with Gartmore, the Board was pleased to announce the appointment of Carol Ferguson and Lynn Ruddick as Directors of the Company on 4 February 2009. Carol is a chartered accountant who brings to the Board more than 30 years' experience in the investment and financial services industry and is currently Chairman of The Association of Investment Companies. Lynn is a fellow of the Chartered Association of Certified Accountants and a Member of the Securities Institute who retired as a Managing Director of Merrill Lynch Investment Managers in 2004 after more than 30 years' experience in the investment management industry.

As part of the ongoing succession plan for the Board, Neil Dunn stepped down as a Director on 4 February 2009; the other Directors would like to thank Neil for his significant contribution to the development of the Company over the last 15 years.

In early March, the Board announced, with great regret, the sudden death of Micky Ingall. Mr Ingall had served as a non-executive Director of the Company since its formation in 1993 during which time the other Directors and the Company benefited greatly from his industry experience and sound advice.

Prospects

The Board shares the Manager's optimistic view of the longer-term outlook for smaller companies noting that caution remains as to the timing and extent of the wider economic recovery. For those companies which have survived the trough of the recession with an intact balance sheet and experienced management team, there exists the opportunity to benefit from the recovery via organic growth, due to the distress of competitors, or by acquiring other business assets at historically low prices. The Manager's focus on robust business models, with its emphasis on quality companies, means that the Company may miss out on the initial riskier opportunities available and which are set to benefit at the forefront of the recovery, but the Board believes the longer-term performance of the Company is better served by the Manager's risk-averse approach.

Donald MacDonald

Chairman

2 September 2009

  2.    MANAGER'S REPORT

The UK smaller companies sector, as represented by the Extended Hoare Govett Smaller Companies Index (excluding Investment Companies), fell by 15.5% (capital only) over the year. This compares with a 22.0% fall in net asset value of the Company, while the share price fell by 15.9%. The underperformance of the Company relative to the benchmark occurred principally during a rapidly recovering market towards the end of the financial year. The Company has a risk-averse approach and it is not unusual for the early months of recovery to produce poor periods of relative performance for quality and growth companies and good periods for the most risky recovery stocks. This risk-averse approach and our robust, stable investment process should deliver strong returns in more stable rising markets and provide resilience when conditions are tough.

UK economy and equity market

The bulk of the period under review was characterised by extreme stress in the global financial system. The third and fourth quarters of 2008 brought very real concerns as to the stability of the global banking system. The collapse of Lehman Brothers in the US and the rescue of American International Group brought major dislocation to global financial markets. The UK was hit hard, with UK banks requiring massive financial support from the government. 

The last three months of 2008 saw the financial turmoil feed through to the real economy as consumer spending slowed, housing markets faltered, stocks were run down and capital investment withered. Many companies found themselves with stretched balance sheets that were wholly unable to cope with the dire market conditions. Private equity-owned companies and real estate companies, that had previously benefited from the compounding effect of high gearing, struggled. Stock markets sold off aggressively with the Extended Hoare Govett Smaller Companies Index (excluding Investment Companies) falling by 32% in the two months from the end of August 2008. The crude oil price also retreated from highs of over $140 per barrel to a low of around $25 by Christmas; a fall not seen since 1986. Other industrial minerals showed similar collapses.

Markets experienced a modest recovery in the first quarter of 2009. By the end of 2008, directors of listed UK companies had started buying shares in their own companies in a major way. In addition, the Bank of England slashed UK base rates to record low levels and 'quantitative easing' was introduced in an internationally coordinated way in order to stabilise economies. The first stage of balance sheet repair took place in the first quarter of 2009 as an unprecedented level of placings and rights issues hit the market. There was, however, an appetite for these offerings as investors, generally holding high cash levels, saw the opportunity to invest at very low share prices. From March 2009, economic data, while remaining very mixed, started to show the first faltering signs of improvement, particularly related to consumer spending patterns. A sharp market rally subsequently took place, with investors looking to buy into companies that had sunk to historically low valuations. The rally was far more marked among smaller companies that have historically been more exposed to cyclical recovery than their large company equivalents. 

Performance review

The Company generally matched or outperformed its benchmark up until the beginning of March 2009. Our ongoing focus on companies with resilient, proven business models and exposure to international markets helped performance. In periods of risk aversion our process typically does well. There were periods however, particularly in July and December 2008, when 'false dawns' caused the Company to underperform. 

The beginning of March 2009 marked a turn in sentiment in global markets from pessimism to optimism regarding stock markets and the potential for recovery. As noted earlier, the early months of recovery typically produce bad periods of relative performance for quality and growth companies, and good periods for the more recovery stocks. Therefore, the Company underperformed in March and April 2009 while still achieving strong absolute returns.

Although bids were not a strong feature of the period, the Company benefited from the contested takeover of oil services firm Expro International by private equity specialist Candover. Meanwhile, Abcam, the online vendor of antibodies, rose by 52% over the year. Other technology-related companies performed strongly, including software providers Autonomy, Craneware, Fidessa, Micro Focus and SDL. Internet-orientated companies, such as Telecity, Datacash and Asos, also outperformed. Food (Robert Wiseman), household goods (PZ Cussins) and retailers (Dunelm and JD Sports) were additional areas of comparative strength.

Underperformance over the year came from industrial specialists such as Victrex, Aveva and Chloride. Oil & gas stocks also underperformed, to the detriment of the Company, especially during the first half of the period in question. The exception was Emerald Energy, which continued to perform well, with a succession of new oil discoveries in Syria and Colombia.

Merger with the Gartmore Smaller Companies Trust

The decision was taken on 3 February 2009 by Gartmore Smaller Companies Trust ('Gartmore') shareholders to roll their assets over into the Company. Following distribution of cash or shares in specie to those shareholders who had expressed a preference, the ongoing Gartmore assets were placed in a 'C' share asset class. The aim of this structure was two-fold. Firstly, to protect existing shareholders from the costs involved in restructuring the Gartmore portfolio. Secondly, the 'C' share class was to have a 12-month life. This was to avoid any 'fire-sale' approach to selling comparatively illiquid assets, therefore protecting value for Gartmore shareholders who had elected to rollover into the Company. 

Given the divergence in the investment processes between the two trusts, the restructuring was extensive and involved the sale of around 90% of Gartmore's equity assets and the redeployment of cash in existing holdings of the Standard Life UK Smaller Companies Trust. We are pleased to report that the restructuring took place more quickly than had been anticipated, helped by improving market conditions from March 2009 onwards. It was therefore decided to complete the conversion process on 11 June 2009. 

Dealing and activity

We made several significant new investments to the portfolio during the period, including Telecity, a major provider of secure network and data centres. Its customers include major telecoms, media and internet-led businesses across Europe. We added Hargreaves Lansdown, the national financial adviser and administration group, to the portfolio. It has successfully harnessed internet-led technologies to deepen and widen the relationship with its clients. This has enabled the company to build brand and scale to a far greater extent than was previously possible in a fragmented industry characterised by close individual relationships between advisers and clients. Hargreaves Lansdown has also shown considerable resilience in recent periods of market turmoil. Another major new holding was Computacenter, the IT hardware distributor and service provider. Again, this company has proved resilient in difficult market conditions and should benefit from any upturn.

Sectors that have not featured significantly in the portfolio returned after an absence of several years. These included speciality financials and real estate. We added two new retail names to the portfolio. Soft furnishings firm Dunelm has grown steadily from a market stall in Leicester 25 years ago to the current network of over 90 stores. It is well-capitalised, has plenty of scope for geographic growth and can benefit from competitor problems. JD Sports is also well-capitalised and, unlike other major players in its sector, has continued to trade strongly and take market share. We also initiated a holding in Evolution, the midmarket investment banking specialist. Evolution remains financially strong and is picking up assets and business in the recovery. In the real estate sector, we invested in Shaftesbury, the London west end real estate specialist, and Derwent London, the London commercial office specialist.

The largest area of selling was in the oil & gas and mining sectors. For example, Expro International was subject to a cash bid. Other sales in these sectors included Imperial Energy, Wellstream, Aquarius Platinum and Bateman Engineering. 

Meanwhile, we realised some profits in our software holdings, notably Craneware, Aveva, Axon and Autonomy. The latter made it into the FTSE 100 Index, while Axon was subject to a cash bid from HCL of India. We made partial sales of Abcam and online clothing retailer Asos after these holdings had performed so well and become too large a part of the overall portfolio. Other significant sales included PV Crystalox in photovoltaic cells, insurance underwriter Chaucer and outsourcing specialist Xchanging.

Gearing

Gearing remained low during most of the last year. From 4.7% on 30 June 2008, it was reduced to a net cash position, which remained in place from September 2008 through to April 2009 when debt was again introduced. By 30 June 2009, gearing was around 3.7%.

Outlook

Historically, the largest profits can be made when, or soon after, the economic and market outlook is at its worst. The possible wholesale collapse of the global banking system is comparable with 1974 and, to some extent, with the great depression of the early 1930s. The rate at which recovery occurs depends on the speed and extent of corrective measures taken by global economic authorities and particularly whether these are carried out in a co-ordinated fashion. 

While economists and other commentators continue to hold divergent views on the outlook, we take an optimistic viewpoint. By the end of 2008, two solid leading indicators of the future direction of economies had turned positive. Firstly, base rates had been slashed to 0.5%. While this is a blunt instrument of policy, it normally leads to recovery in 12 to 18 months' time. Secondly, directors were buying shares in their own companies in very large amounts. Backing this up, company valuations were at low levels not seen since the recessions of the early 1980s and 1990s. The flurry of placings and rights issues seen in the first half of 2009 went some way to solving the serious balance sheet issues facing many companies. Savings are again starting to flow back into equities, where some high, secure dividends, as well as capital growth, are available. Our policy is generally to invest in companies where management has successfully come through recessions with balance sheets intact, and are ready to take advantage of recovery with the potential to buy bargain assets as they become available. It is not our policy to become involved in distressed fund raisings where incumbent managers are effectively being rewarded for destroying shareholder value.

In 2009 and 2010, there is likely to be a period of continued recovery, albeit punctuated by short-term setbacks. The Company is therefore likely to see a period of strong absolute returns over the next year. Our investment process remains consistent, looking for companies with robust business models and a bias towards organic growth. While absolute returns are likely to be robust, the Company's performance may lag behind our competitors who prefer investing in high risk, recovery orientated, low quality companies. This period of underperformance normally dissipates after a number of months as recovery becomes more obvious. 

After a period of extreme turmoil, the outlook is for a period of sustained recovery and good returns from smaller companies. However, the turmoil of the last year and the scale of interest rate cuts may lead to far shorter economic cycles than was prevalent over the last 15 years, with a return to boom and bust economics. Therefore, the Company's risk-averse approach is most suitable for tackling and gaining strong rewards from an uncertain world. In the meantime, the constituent companies within the Company are generally trading well and are mainly in a position to increase dividend payments over both the short and longer term.

Harry Nimmo

Standard Life Investments Limited

Manager

2 September 2009

  3.    RESULTS & DIVIDENDS

Financial Highlights

	30 June
	2009	2008	% change
Total Return
Net asset value per Ordinary share			(18.9%)
Extended Hoare Govett Smaller Companies Index (excluding Investment Companies)			(12.4%)
Capital return
Net asset value (statutory) per Ordinary share	111.23p	142.68p	(22.0%)
Ordinary share price (mid-market)	100.50p	119.50p	(15.9%)
Discount of Ordinary share price to Net asset value	9.6%	16.2%
Warrant price (mid market)	n/a	19.50p	n/a
Extended Hoare Govett Smaller Companies Index (excluding Investment Companies)	2,729.10	3,230.10	(15.5%)
Total assets (£m) 1 *	76.26	49.21	55.0%
Equity shareholders funds (£m) *	70.26	45.71	53.7%
Total expenses ratio (TER) 2	1.2%	1.3%
Revenue return per Ordinary share	2.56p	1.94p	32.0%
Dividend yield	1.1%	0.8%
Interim dividend paid during year	0.5p	n/a
Proposed Final Ordinary dividend for the year	1.10p	1.00p	10.0%
Special dividend paid during year ended 30 June 2008	n/a	0.60p	-
Ordinary shares in issue (excluding shares held in treasury) *	63,163,381	32,037,585	97.2%
Ordinary shares held in treasury	559,175	559,175	-
Gearing (ratio of Borrowings to Equity Shareholders' funds)
Actual gearing ratio 3	3.7%	4.7%
Maximum potential gearing ratio 4	14.2%	21.9%
Year's Highs/Lows	High	Low
Net asset value per Ordinary share	137.51p	90.54p
Ordinary share price	117.25p	74.75p
Discount of Ordinary share price to Net asset value	19.7%	6.5%

Note 1: Total assets less current liabilities, after excluding short-term debt of £6.0m (2008 - £3.5m).

Note 2: Total expense ratio is calculated as the total of the investment management fee (2008 - excluding VAT refund) and administrative expenses divided by the average of equity shareholders' funds at the start and end of the financial year.

Note 3: Actual gearing ratio is calculated as the total of the bank loan, less the cash invested in AAA money market funds, cash and short-term deposits, divided by total assets less current liabilities.

Note 4: Potential gearing ratio is calculated as the value of the maximum bank loan facility (£10.0m) divided by net assets.

* During the year, total assets, shareholders' funds and issued shares increased partly as a result of the merger with Gartmore Smaller Companies Trust p.l.c. as described in the Chairman's Statement.

Proposed final Ordinary dividend

The Board is recommending a final Ordinary dividend of 1.10p per share. The dividend will be payable on 16 October 2009. The ex-dividend date is 16 September 2009 and the record date is 18 September 2009.

  4.     BUSINESS REVIEW

With the rest of the Annual Report and Financial Statements, this Review is intended to provide shareholders with the information and measures which the Directors use to assess, direct and oversee Standard Life Investments ('the Manager') in the management of the Company's activities.

A review of the Company's activities is given in the Chairman's Statement and in the Manager's Report while the financial highlights may be found in Results and Dividends.

Principal Activity and Status

The Company was incorporated as a public limited company on 9 July 1993 and its Ordinary shares were listed on the London Stock Exchange on 19 August 1993. The Company is an investment company within the meaning of Section 833 of the Companies Act 2006 and carries on business as an investment trust and is a member of The Association of Investment Companies.

The Company has been approved by HM Revenue & Customs as an investment trust for the purposes of Section 842 of the Income and Corporation Taxes Act 1988 ('Section 842') for the year ended 30 June 2008. The Directors are of the opinion, under advice, that the Company has conducted its affairs for the year ended 30 June 2009 so as to be able to continue to obtain approval as an investment trust under Section 842 that year. The Company intends to manage its affairs so that its Ordinary shares continue to be a qualifying investment for inclusion in the stocks and shares component of an Individual Savings Account.

Investment objective

To achieve long-term capital growth by investment in UK quoted smaller companies.

Investment policy

The Directors intend to achieve the investment objective by investing in a diversified portfolio consisting mainly of UK quoted smaller companies. The portfolio will normally comprise around 50 individual holdings representing the Manager's highest conviction investment ideas. In order to reduce risk in the Company without compromising flexibility, no holding within the portfolio should exceed 5% of total assets. 

The Directors expect that, in normal market conditions, gearing will be between -5% and 20% of net assets. The Directors have delegated responsibility to the Manager for the operation of the gearing level within the above range. The maximum level of gearing is 100%. 

The Manager's investment process combines asset allocation, stock selection, portfolio construction, risk management and dealing. The investment process is research-intensive and is driven by the Manager's distinctive 'focus on change', which recognises that different factors drive individual stocks and markets at different times in the cycle. This flexible, but disciplined process ensures that the Manager has the opportunity to perform in different market conditions.

Oversight and Review of Performance

An outline of the Company's performance, market background, investment activity and portfolio strategy during the period under review, as well as the Manager's investment outlook, is provided in the Manager's Report which may be found above.

For the year ended 30 June 2009, the Company's net asset value fell 22.0% which was greater than the fall of 15.5% in the Company's benchmark, the Extended Hoare Govett Smaller Companies Index (excluding Investment Companies).

The Board considers performance with the Manager at every meeting. The Board receives a detailed portfolio report for each meeting, sets the overall strategy for the Company and establishes the extent to which the Company is successful in achieving its objectives, as measured by three key performance indicators ('KPIs') which are as follows: 

·             net asset value relative to the Company's benchmark with particular attention to long-term performance, which is considered by the Board to be over a period of five years

·             Ordinary share price (total return); and

·             discount or premium of the Ordinary share price to net asset value.

A record of these KPIs, for the year under review, is included in the financial highlights within Results and Dividends

Management of Risk

Principal Risks and Uncertainties

The Board regularly reviews the principal risks facing the Company which the Board and the Manager have identified and the Board sets out delegated controls designed to manage those risks. Key risks within investment and strategy, including inappropriate stock selection and gearing, are managed by the Board through a defined investment policy, guidelines and restrictions and by the process of oversight at each Board meeting. Operational disruption, accounting and legal risks are also covered at least annually and regulatory compliance is reviewed at each Board meeting.

The major risks associated with the Company are:

 

·         Investment and market risk: The Company is exposed to the effect of variations in share prices due to the nature of its business. A fall in the value of its investment portfolio will have an adverse effect on the value of shareholders' funds. Uncertainty over market prices and the Manager's ability to outperform the Company's benchmark with due attention given to the preservation of shareholders' funds are prerequisites to the continued existence of the Company over the long term.

 

·         Capital structure and gearing risk: The Company's capital structure consisted of equity share capital comprising Ordinary 25p shares at 30 June 2009. There is a three-year revolving credit facility with Lloyds for up to £10m at an interest rate fixed at 0.35% above LIBOR, which has been in place since August 2007. In rising markets, the effect of the bank borrowings would be beneficial, but in falling markets the gearing effect would adversely affect returns to shareholders. The Manager is able to increase or decrease the gearing level by repaying or drawing down periodically from the bank facility subject to Board restrictions which require gearing to remain between -5% and 20% of net assets, under normal market conditions.

 

·         Revenue and dividend risk: In view of the Company's investment objective, which is to generate long-term capital growth by investment in UK quoted smaller companies, the Manager is required to strike a balance more in favour of capital growth than revenue return. In normal circumstances, the Board intends to pay a dividend commensurate with the year's income. The Board receives regular updates as to the progress made by the Manager in generating a revenue return and the consequent level of the Company's anticipated dividend.

 

·         Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. A breach of Section 842 of ICTA would result in the Company being subject to capital gains tax on portfolio investments. Breaches of other regulations, including the Companies Act 2006, the UKLA Listing Rules or the UKLA Disclosure and Transparency Rules, could lead to a number of detrimental outcomes and reputational damage. Breaches of controls by service providers, such as the Manager and the Administrators, could also lead to reputational damage or loss.

 

·         Supplier risk: in common with most investment trusts, the Company has no employees. The Company therefore relies upon services provided by third parties, including the Manager in particular, to whom responsibility for the management of the Company has been delegated under an Investment Management Agreement, further details of which may be found in Note 3 to the financial statements.

 

The Directors have adopted a robust framework of internal controls, which is designed to monitor the principal risks and uncertainties facing the Company, and to provide a monitoring system to enable the Directors to mitigate these risks as far as possible.

5.    STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

 

·          select suitable accounting policies and then apply them consistently;  

·          make judgments and estimates that are reasonable and prudent; and 

·          state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements.

 

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's webpage hosted by the Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

For and on behalf of the Board of Standard Life UK Smaller Companies Trust PLC

Donald MacDonald

Chairman

2 September 2009

  INCOME STATEMENT 

for the year ended 30 June 2009 (audited)

		2009			2008
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Net losses on investments at fair value	9	-	(8,063)	(8,063)	-	(2,697)	(2,697)
Currency losses		-	(10)	(10)	-	-	-
Income	2	1,433	-	1,433	868	-	868
Investment management fee	3	(41)	(143)	(184)	80	(89)	(9)
Other administrative expenses	4	(385)	-	(385)	(303)	-	(303)
		________	________	________	________	________	________
NET RETURN BEFORE FINANCE COSTS AND TAXATION		1,007	(8,216)	(7,209)	645	(2,786)	(2,141)
Finance costs	5	(13)	(40)	(53)	(14)	(2,833)	(2,847)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES BEFORE TAXATION		994	(8,256)	(7,262)	631	(5,619)	(4,988)
Taxation	6	(4)	-	(4)	(3)	-	(3)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES AFTER TAXATION		990	(8,256)	(7,266)	628	(5,619)	(4,991)
		________	________	________	________	________	________
RETURN PER ORDINARY SHARE:
BASIC	8	2.56p	(21.39p)	(18.83p)	1.94p	(17.36p)	(15.42p)
		________	________	________	________	________	________
DILUTED	8	n/a	n/a	n/a	1.92p	(17.14p)	(15.22p)
		________	________	________	________	________	________
The total column of this statement represents the profit and loss account of the Company. A Statement of Total Recognised Gains and Losses has not been prepared as all gains or losses are recognised in the Income Statement. All revenue and capital items in the above statement derive from continuing operations. The accompanying notes are an integral part of the financial statements.

  BALANCE SHEET

as at 30 June 2009 (audited)

		2009	2008
	Notes	£'000	£'000
NON-CURRENT ASSETS
Investments at fair value through profit or loss	9	72,576	47,846
		___________	___________
CURRENT ASSETS
Loans and receivables	10	770	357
AAA Money Market funds	14	3,118	1,208
Cash and short-term deposits	14	77	6
		___________	___________
		3,965	1,571
		___________	___________
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR	11	(6,285)	(3,706)
		___________	___________
Net current liabilities		(2,320)	(2,135)
		___________	___________
NET ASSETS		70,256	45,711
		___________	___________
CAPITAL AND RESERVES
Called-up share capital	12	15,931	8,149
Share premium account		25,073	68
Capital redemption reserve		549	549
Warrant reserve		-	743
Special reserve		21,364	21,364
Capital reserve		6,063	13,875
Revenue reserve		1,276	963
		___________	___________
EQUITY SHAREHOLDERS' FUNDS		70,256	45,711
		___________	___________
NET ASSET VALUE PER ORDINARY SHARE
BASIC	15	111.23p	142.68p
		___________	___________
DILUTED	15	n/a	139.14p
		___________	___________

  RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 30 June 2009  (audited)		Share	Capital
	Share	premium	redemption	Warrant	Special	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 June 2008	8,149	68	549	743	21,364	13,875	963	45,711
Return on ordinary activities after taxation	-	-	-	-	-	(8,256)	990	(7,266)
C shares issued	7,491	23,832	-	-	-	-	-	31,323
Exercise of warrants	291	1,173	-	(299)	-	-	-	1,165
Cancellation of warrants	-	-	-	(444)	-	444	-	-
Dividends paid (see note 7)	-	-	-	-	-	-	(677)	(677)
	________	________	________	________	________	________	________	________
Balance at 30 June 2009	15,931	25,073	549	-	21,364	6,063	1,276	70,256
	________	________	________	________	________	________	________	________
For the year ended 30 June 2008 (audited)		Share	Capital
	Share	premium	redemption	Warrant	Special	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 June 2007	8,146	58	549	746	21,364	20,109	596	51,568
Return on ordinary activities after taxation	-	-	-	-	-	(5,619)	628	(4,991)
Buy back of ordinary shares	-	-	-	-	-	(618)	-	(618)
Exercise of warrants	3	10	-	(3)	-	3	-	13
Dividends paid (see note 7)	-	-	-	-	-	-	(261)	(261)
	________	________	________	________	________	________	________	________
Balance at 30 June 2008	8,149	68	549	743	21,364	13,875	963	45,711
	________	________	________	________	________	________	________	________

The accompanying notes are an integral part of the financial statements.

  CASHFLOW STATEMENT

Year ended 30 June 2009 (audited)

		2009		2008
	Notes	£'000	£'000	£'000	£'000
Net cash inflow from operating activities	13		739		538
Servicing of finance
Interest paid			(45)		(491)
Taxation			(12)		(9)
Financial investment
Purchase of investments		(45,627)		(17,647)
Sale of investments		42,468		23,867
		_________		_________
Net cash (outflow)/inflow from financial investment			(3,159)		6,220
Equity dividends paid			(677)		(261)
			_________		_________
Net cash (outflow)/inflow before management of liquid resources and financing			(3,154)		5,997
Financing
Share buy back		-		(615)
Share buy back expenses		-		(3)
Share capital issued - C shares		1,480		-
Exercise of warrants		1,165		13
Drawdown of bank loan		2,500		3,500
Repayment of debenture		-		(9,648)
Premium on repayment of debentures		-		(2,791)
		_________		_________
			_________		_________
			5,145		(9,544)
			_________		_________
Net cash inflow/(outflow) before management of liquid resources			1,991		(3,547)
Management of liquid resources
Purchase of AAA Money Market funds		(37,296)		(15,265)
Sale of AAA Money Market funds		35,386		15,679
		_________		_________
Net cash (outflow)/inflow from management of liquid resources			(1,910)		414
			_________		_________
Increase/(decrease) in cash	14		81		(3,133)
			_________		_________
Reconciliation of net cashflow to movement in net debt
Increase/(decrease) in cash	14	81		(3,133)
Net change in liquid resources	14	1,910		(414)
Net change in debt due within one year	14	(2,500)		6,148
Other non-cash movements	14	(10)		244
		_________		_________
Movement in net debt in year			(519)		2,845
Opening debt	14		(2,286)		(5,131)
			_________		_________
Closing debt	14		(2,805)		(2,286)
			_________		_________

  NOTES TO FINANCIAL STATEMENTS:

For the year ended 30 June 2009

1	Accounting policies
	(a)	Basis of accounting
		The financial statements have been prepared in accordance with the applicable UK Accounting Standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (issued in January 2009 and adopted early). The early adoption of the January 2009 SORP had no effect on the financial statements of the Company, other than:   ·                     the requirement to separately disclose capital reserves that relate to the revaluation of investments held at the reporting date. This new requirement replaces the previous requirement to disclose the value of the capital reserve that was unrealised.   ·                     the requirement to present tax reconciliations based on the total column of the Income Statement rather than the revenue column as was previously recommended. The reconciliation is disclosed in note 6.    They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis.   All values are rounded to the nearest thousand pounds (£000) except where indicated otherwise.
	(b)	Valuation of investments
		Investments have been designated upon initial recognition as fair value through profit or loss. Investments are recognised and de-recognised at 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 measured initially at fair value. Subsequent to initial recognition, investments are valued at fair value. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE 100 constituents and most liquid FTSE 250 along with some other securities. Gains and losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Income Statement and are ultimately recognised in the capital reserve. The AAA money market funds are used by the Company to provide additional short-term liquidity and are recognised at fair value. Unlisted investments are valued by Directors at fair value having regard to the International Private Equity and Venture Capital Valuations Guidelines.
	(c)	Income
		Income from equity investments (other than special dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to revenue or capital in the Income Statement, according to the circumstances. Fixed returns on non-equity shares are recognised on a time-apportioned basis so as to reflect the effective yield on shares. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short-term deposits is accounted for on an accruals basis.
	(d)	Expenses and interest payable
		Expenses are accounted for on an accruals basis. Expenses are charged to the capital column of the Income Statement when they are incurred in connection with the maintenance or enhancement of the value of investments. In this respect, the investment management fee and relevant finance costs are allocated 25% to revenue and 75% to the capital columns of the Income Statement in line with the Board's expectation of returns from the Company's investments over the long-term in the form of revenue and capital respectively (see note 3).
		Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Income Statement.
	(e)	Dividends payable
		Dividends are recognised in the period in which they are paid.
	(f)	Capital reserve
		Gains and losses on realisation of investments and changes in fair values which are readily convertible to cash, without accepting adverse terms, are transferred to the capital reserve.
	(g)	Taxation
		Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the Balance Sheet date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Balance Sheet date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the Financial Statements which are capable of reversal in one or more subsequent periods. Owing to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
	(h)	Other reserves
		On the issue of shares, the premium is credited to the share premium reserve together with the premium arising on the exercise of warrants as described in the paragraph below.  The warrant reserve recognises that a proportion of the proceeds from the issue of ordinary shares and warrants attached can be attributed to the warrants. When warrants are exercised, the amount previously recognised as warrant premium is transferred to share premium. This reserve, along with the remaining warrants, was cancelled on 14 October 2008.  The special reserve arose following court approval for the cancellation of the then share premium account on 24 June 1999.
	(i)	Foreign currency
		Overseas monetary assets and liabilities are converted into Sterling at the rate of exchange ruling at the Balance Sheet date. Transactions during the year involving foreign currencies are converted at the rate of exchange ruling at the transaction date. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the Income Statement.

		2009	2008
		£000	£000
2	Income
	UK dividend income	1,102	685
	Unfranked investment income	171	76
		_____________	_____________
		1,273	761
		_____________	_____________
	Other income
	Interest from AAA Money Market funds	53	61
	Interest from UK Treasury Bills	73	-
	Deposit interest	1	46
	Interest from HMRC	33	-
		_____________	_____________
		160	107
		_____________	_____________
	Total income	1,433	868
		_____________	_____________

		2009	2008
		£000	£000
3	Investment management fee
	Investment management fee	184	339
	VAT thereon *	-	(330)
	Charged to capital reserve	(143)	(89)
		_____________	_____________
		41	(80)
		_____________	_____________
	The Company has an agreement with Standard Life Investments ('SLI') for the provision of management services. The contract is terminable by either party on twelve months' notice. The management fee paid to SLI is 0.65% per annum (0.8% per annum prior to the final C share conversion on 11 June 2009) of the invested assets of the Company after deducting current liabilities but including any bank loans and 0.2% per annum for cash or non equity securities. The fee is chargeable 25% to revenue and 75% to capital. The Company agreed to make a contribution to the costs of the scheme of reconstruction and winding up of Gartmore Smaller Companies Trust plc for the benefit of the holders of C shares equal to 0.6% of the value of the continuation fund immediately following the implementation of the scheme. This contribution is broadly equivalent to the management fee on the continuation fund for a period of 9 months and was paid by means of a management fee waiver. Consequently, the balance due at the year end was £nil (2008 - £85,000), with a refund of £12,000 being due to the Company.
	* On 5 November 2007, the European Court of Justice ruled that management fees on investment trusts should be exempt from VAT. HMRC has announced its intention not to appeal against this ruling to the UK VAT Tribunal and therefore protective claims which have been made in relation to the Company will be processed in due course. The balance of these claims has not been finalised and the Company has made no further provision in these financial statements for further repayment.  In the meantime a refund of £330,000 of VAT has been made to the Company by Standard Life Investments Limited which was recognised in the year ended 30 June 2008. Interest of £33,000 on the refund of VAT was recognised in the year ended 30 June 2009.

		2009	2008
		£000	£000
4	Administrative expenses (inclusive of VAT)
	Secretarial fees	100	97
	Directors' fees	56	58
	Auditor's remuneration
	- statutory audit	19	22
	- expenses	1	2
	- other fees associated with issue of C shares	1	-
	Registrar's fees	58	32
	Professional fees	76	41
	Other expenses	74	51
		_____________	_____________
		385	303
		_____________	_____________
	The secretarial fee is paid to Standard Life Investments plc and adjusted annually in line with the Retail Price Index.
	Irrecoverable VAT has been included under the relevant expense line above.

		2009	2008
		£000	£000
5	Finance costs
	7.75% debenture stock interest	-	108
	Premium on repayment of debenture	-	2,791
	Amortised premium and expenses of issue	-	(244)
	Bank loan interest	53	192
		_____________	_____________
		53	2,847
	Charged to capital reserve	(40)	(2,833)
		_____________	_____________
		13	14
		_____________	_____________

		2009			2008
		Revenue	Capital	Total	Revenue	Capital	Total
6	Taxation	£000	£000	£000	£000	£000	£000
	(a) Analysis of charge for year
	Tax on ordinary activities	4	-	4	3	-	3
		_______	_______	______	_______	______	_______
	(b) Provision for deferred taxation
	At 30 June 2009, the company had unutilised management expenses and loan relationship losses of £29,979,000 (2008 - £29,687,000). No deferred tax asset has been recognised on the unutilised management expenses and loan relationship losses as it is unlikely there will be suitable taxable profits from which the future reversal of the deferred tax asset could be deducted.
	(c) Factors affecting current tax charge for year
	A reconciliation of the company's current tax charge is set out below:
						2009	2008
						£000	£000
	Total return on ordinary activities before taxation					(7,262)	(4,988)
						______	_______
	Return on ordinary activities at the UK standard rate of corporation tax (28%) (2008 - 29.5%)					(2,033)	(1,471)
	Effects of:
	Losses on investments not taxable					2,258	795
	Exchange losses not taxable					3	-
	Non-taxable income					(309)	(202)
	Excess management expenses and loan relationship losses					81	878
	Irrecoverable overseas tax					4	3
						______	_______
	Current tax charge for the year					4	3
						______	_______
	Due to the Company's status as an investment trust, and the intention to continue meeting the conditions required to obtain approval in the forseeable future, the Company has not provided for deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.

		2009	2008
7	Dividends	£000	£000
	Amounts recognised as distributions to equity holders in the period:
	2008 final dividend of 1.00p per share (2007 - 0.80p) paid on 24 October 2008	320	261
	2008 special dividend of 0.60p per share (2007 - nil) paid on 24 October 2008	192	-
	2009 interim dividend of 0.50p per share (2008 - nil) paid on 23 January 2009	166	-
	Return of unclaimed dividends	(1)	-
		________	________
		677	261
		________	________
	The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. We set out below the total dividends paid and proposed 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. The revenue available for distribution by way of dividend for the year is £990,000 (2008 - £628,000).
		2009	2008
		£000	£000
	2009 interim dividend of 0.50p per share (2008 - nil) paid on 23 January 2009	166	-
	2009 final dividend of 1.10p per share (2008 - 1.00p) payable on 16 October 2009	695	320
		______	_______
		861	320
		______	_______

		2009		2008
		p	£000	p	£000
8	Return per ordinary share
	Basic
	Revenue return	2.56	990	1.94	628
	Capital return	(21.39)	(8,256)	(17.36)	(5,619)
		_________	__________	_________	__________
	Total return	(18.83)	(7,266)	(15.42)	(4,991)
		_________	__________	_________	__________
	Weighted average number of shares		38,598,545		32,375,153
	Diluted
	Revenue return	n/a	n/a	1.92	628
	Capital return	n/a	n/a	(17.14)	(5,619)
		_________	__________	_________	__________
	Total return	n/a	n/a	(15.22)	(4,991)
		_________	__________	_________	__________
	Weighted average number of shares		n/a		32,786,549
	The calculation of the diluted total, revenue and capital returns per ordinary share are carried out in accordance with Financial Reporting Standard 22, 'Earnings per Share'. For the purposes of calculating diluted total, revenue and capital returns per ordinary share, the number of ordinary shares used is the weighted average number used in basic calculation plus the number of ordinary shares deemed to be issued for no consideration exercise of all warrants by reference to the average price of the ordinary shares during the year. The remaining warrants were cancelled on 14 October 2008 and so no calculation of diluted return per ordinary share is necessary for the year ended 30 June 2009.

			2009	2008
			£000	£000
9	Investments
	Fair value through profit or loss
	Opening fair value		47,846	57,600
	Opening fair value gains on investments held		(13,322)	(22,124)
			__________	__________
	Opening book cost		34,524	35,476
	Additions at cost		75,606	16,981
	Disposals	- proceeds	(42,813)	(24,038)
		- (losses)/gains on sales	(5,095)	6,105
			__________	__________
	Closing book cost		62,222	34,524
	Current year fair value gains on investments held		10,354	13,322
			__________	__________
	Closing fair value		72,576	47,846
			__________	__________
	Losses on investments
	(Losses)/gains on sales		(5,095)	6,105
	Decrease in fair value losses on investments held		(2,968)	(8,802)
			__________	__________
			(8,063)	(2,697)
			__________	__________
	With the exception of DCD Media, an unlisted loan stock, all investments are equity shares which are mainly listed on the London Stock Exchange.
	Transaction costs
	During the year, expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within losses on investments in the Income Statement. The total costs were as follows:
			2009	2008
			£000	£000
	Purchases		232	109
	Sales		34	30
			__________	__________
			266	139
			__________	__________

		2009	2008
		£000	£000
10	Loans and receivables
	Amounts due from brokers	577	232
	Net dividends and interest receivable	156	102
	Investment management fee receivable	12	-
	Other debtors	25	23
		__________	__________
		770	357
		__________	__________

		2009	2008
		£000	£000
11	Creditors: amounts falling due within one year
	Bank loans	6,000	3,500
	Amounts due to brokers	136	-
	Interest payable	4	-
	Investment management fee payable	-	85
	Sundry creditors	145	121
		__________	__________
		6,285	3,706
		__________	__________
	The Company currently has a revolving credit facility with Lloyds. At the year end there was a balance of £6,000,000 (2008 - £3,500,000), drawn down at a rate of 1.0234% (2008 - 5.8909%) with a maturity date of 8th July 2009. Subsequent to the year end, the loan rolled over from 8 July 2009 to 10 August 2009 at an all-in rate of 0.9734% and rolled over from 10 August 2009 to 10 September 2009 at an all-in rate of 0.9233%.

		2009	2008
12	Called up share capital	£000	£000
	Authorised:
	149,998,996 (2008 - 149,998,996) ordinary shares of 25p each - equity	37,500	37,500
		__________	__________
	Issued and fully paid:
	63,163,381 (2008 - 32,037,585) ordinary shares of 25p each - equity	15,791	8,009
	Held in treasury:
	559,175 (2008 - 559,175) ordinary shares of 25p each - equity	140	140
		__________	__________
		15,931	8,149
		__________	__________
	On 4 February 2009 the Company issued 31,189,825 C shares in exchange for investments valued at £31,323,000 under the scheme of reconstruction and winding up of Gartmore Smaller Companies Trust plc. The consideration for the issue of the C shares was £29,637,000 for investments, £206,000 for debtors and £1,480,000 for cash, being the fair value of assets transferred. On 14 April 2009, 27,545,948 C shares were converted into 26,273,612 new Ordinary shares of 25p each at a conversion ratio of 1 C share to 0.953810 Ordinary shares. On 11 June 2009, the final conversion of C shares took place resulting in the remaining 3,643,877 C shares being converted into 3,687,639 new Ordinary shares of 25p each at a conversion ratio of 1 C share to 1.012010 Ordinary shares.
	On 14 October 2008 1,164,545 warrants were exercised with proceeds of £1,164,545, with the remaining 1,732,965 warrants being cancelled at that time.
	The investment objective of the Company is to achieve long-term capital growth by investment in UK quoted smaller companies.
	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;
	- 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.

		2009	2008
		£000	£000
13	Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
	Net return before finance costs and taxation	(7,209)	(2,141)
	Adjusted for:
	Losses on investments	8,063	2,697
	Currency losses	10	-
	(Increase)/decrease in accrued income	(54)	44
	Increase in other debtors including investment management fee	(14)	(3)
	Decrease in sundry creditors including investment management fee	(57)	(59)
		__________	__________
	Net cash inflow from operating activities	739	538
		__________	__________

		At 30 June 2008	Cashflow	Currency and other movements	At 30 June 2009
		£000	£000	£000	£000
14	Analysis of changes in net debt
	Cash and short-term deposits	6	81	(10)	77
	AAA money market funds	1,208	1,910	-	3,118
	Debt due within one year	(3,500)	(2,500)	-	(6,000)
		__________	__________	__________	__________
	Net debt	(2,286)	(509)	(10)	(2,805)
		__________	__________	__________	__________

15	Net asset value per share
	Total shareholders' funds have been calculated in accordance with the provisions of applicable accounting standards. The analysis of total shareholders' funds on the face of the Balance Sheet reflects the rights, under the Articles of Association, of the ordinary shareholders on a return of assets.
	For the year ended 30 June 2009, these rights are reflected in the net asset value and the net asset value per share attributable to Ordinary shareholders at the year end, adjusted to reflect the deduction of the debenture stock at par. A reconciliation between the two sets of figures is given below:
		2009	2008
	Basic net asset value per share
	Total shareholders' funds	£70,256,000	£45,711,000
	Number of ordinary shares in issue at year end	63,163,381	32,037,585
	(excluding shares held in treasury)
	Total shareholders' funds per share	111.23p	142.68p
		____________	____________
	Diluted net asset value per share
	Total shareholders' funds	n/a	£48,609,000
	Potential number of ordinary shares in issue at year end	n/a	34,935,095
	Total shareholders' funds per share	n/a	139.14p
		____________	____________
	The remaining warrants were cancelled on 14 October 2008 and so no calculation of diluted net asset value per share is possible for the year ended 30 June 2009. The diluted net asset value per ordinary share as at 30 June 2008 was calculated by reference to the total number of ordinary shares in issue at the year end and on the assumption that those warrants which are not exercised at the year end, amounting to 2,897,510 warrants were fully exercised on the first day of the financial year at 100p per share, giving a total of 34,935,095 ordinary shares.

16	Financial instruments
	The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company also has the ability to enter into derivative transactions for the purpose of managing currency and market risks arising from the Company's activities.
	The main risks the Company faces from its financial instruments are Market price risk (comprising Other price risk, Interest rate risk and Foreign currency risk), Liquidity risk and Credit risk.
	The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures.
	A. Market price 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 price risk comprises three elements - other price risk, interest rate risk and foreign currency risk.
	(i) Other price risk
	Other price risks (ie changes in market prices other than those arising from interest rate or foreign 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 or company. The allocation of assets 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 mainly listed on the London Stock Exchange.
	Other price risk sensitivity
	If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 30 June 2009 would have increased / decreased by £7,258,000 (2008 - increase / decrease of £4,785,000). This is based on the Company's equity portfolio held at each year end.
	(ii) 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 and money market funds; and
	- 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.
	It is the Company's policy to increase its exposure to equity market price risk through the judicious use of borrowings. When borrowed funds are invested in equities, the effect is to magnify the impact on Shareholders' funds of changes - both positive and negative - in the value of the portfolio. During the year ended 30 June 2009, the Company's borrowing facility comprised a £10m revolving credit facility. The Board regulates the overall level of gearing by raising or lowering the level of the credit facility and is also able, if the circumstances warrant, to use derivatives or to purchase fixed interest securities in order to offset the effect of gearing. The Board gives the Manager discretion to increase or decrease the gearing within pre-agree limits. Details of borrowings as at 30 June 2009 are shown in note 11.
	Interest risk profile
	The interest rate risk profile of the portfolio of financial assets and liabilities at the Balance Sheet date was as follows:
				Weighted average		Weighted
				period for which		average		Floating
				rate is fixed		interest rate		rate
	As at 30 June 2009			Years		%		£000
	Assets
	AAA Money Market funds			-		0.64		3,118
	Cash deposits			-		-		77
				______________		______________		_____________
	Total assets			-		0.64		3,195
				______________		______________		_____________
	Liabilities
	Bank loans			0.1		1.02		6,000
				______________		______________		_____________
	Total liabilities			0.1		1.02		6,000
				______________		______________		_____________
				Weighted average		Weighted
				period for which		average		Floating
				rate is fixed		interest rate		rate
	At 30 June 2008			Years		%		£000
	Assets
	AAA Money Market funds			-		5.72		1,208
	Cash deposits			-		4.53		6
				______________		______________		_____________
	Total assets			-		5.71		1,214
				______________		______________		_____________
				Weighted average		Weighted
				period for which		average		Floating
				rate is fixed		interest rate		rate
				Years		%		£000
	Liabilities
	Bank loans			0.1		5.89		3,500
				______________		______________		_____________
	Total liabilities			0.1		5.89		3,500
				______________		______________		_____________
	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 11 to the financial statements.
	The floating rate assets consist of AAA Money Market funds and cash deposits on call earning interest at prevailing market rates.
	All financial liabilities are measured at amortised cost.
	Interest rate risk sensitivity
	The sensitivity analyses below have been determined based on the exposure to interest rates at the balance sheet date and with 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 for the year ended 30 June 2009 would increase / decrease by £32,000 (2008 : increase / decrease by £12,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances.
	Bank loans are excluded from the sensitivity analysis on the basis that their interest rate is fixed at the point of roll-over.
	(iii) Foreign currency risk
	A small proportion of the Company's investment portfolio is invested in overseas securities and the Balance Sheet can be affected by movements in foreign exchange rates. It is not the Company's policy to hedge this risk on a continuing basis. The Company only has borrowings denominated in sterling.
	The revenue account is subject to currency fluctuation arising on overseas income. The Company does not hedge this currency risk.
	Foreign currency risk exposure by currency of denomination:
		30 June 2009			30 June 2008
			Net	Total			Net	Total
		Overseas	monetary	currency	Overseas		monetary	currency
		investments	assets	exposure	investments		assets	exposure
		£'000	£'000	£'000	£'000		£'000	£'000
	Euro	1,803	-	1,803	1,231		-	1,231
		_________	_________	________	_________		_________	_________
	The asset allocation between specific markets can vary from time to time based on the Investment Manager's opinion of the attractiveness of the individual markets.
	Foreign Currency sensitivity
	There is no sensitivity analysis included as the Company has no outstanding foreign currency denominated monetary items. Where the Company's equity investments (which are non-monetary items) are priced in a foreign currency, they have been included within the other price risk sensitivity analysis so as to show the overall level of exposure.
	B. 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. In addition, to mitigate the risk associated with potential illiquidity in smaller companies, there are limits on the amount which may be invested in any one company (5% of total assets, under normal market conditions) to ensure risk diversification. Short-term flexibility is achieved through the use of loan and overdraft facilities (note 11).
	C. 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 risk is not significant, and is managed as follows:
	- where the investment 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;
	- investment transactions are carried out with a large number of brokers, the credit-standing of each of which is reviewed periodically by the investment manager, and limits are set on the amount that may be due from any one broker so as to minimise the risk to the Company of default;
	- cash and money market funds are 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.
Fair values of financial assets and financial liabilities
The fair value of borrowings has been calculated as £6,000,000 as at 30 June 2009 (2008 - £3,500,000), the same amount as the accounts value in the financial statements of £6,000,000 (2008 - £3,500,000) (note 11). The fair value of each loan is determined by aggregating the expected future cash flows for that loan discounted at a rate comprising the borrower's margin plus an average of market rates applicable to loans of a similar period of time and currency. All other assets and liabilities of the Company are included in the Balance Sheet at fair value.

Additional notes 

This Annual Financial Report announcement is not the Company's statutory accounts. The statutory accounts for the year ended 30 June 2008 have been delivered to the Registrar of Companies. The statutory accounts for the years ended 30 June 2008 and 30 June 2009 received an audit report which was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not include a statement under either section 498(2) or 498(3) of the Companies Act 2006.  The statutory accounts for the financial year ended 30 June 2009 have been approved and audited but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which will be held at 12.30pm on Tuesday 13 October 2009 at the offices of Standard Life Investments, 1 George Street, Edinburgh EH2 2LL.

The Annual Report will be posted to shareholders in September 2009 and copies will be available from the Manager or by download from the Company's webpage hosted by the Manager (www.standardlifeinvestments.com/its).

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 and may be affected by exchange rate movements. Investors may not get back the amount they originally invested.

For Standard Life UK Smaller Companies Trust PLC

Aberdeen Asset Management PLC, Secretaries

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