Annual Financial Report

RNS Number : 6651N

Standard Life UK Small.Co's Tst PLC

06 September 2011

 



STANDARD LIFE UK SMALLER COMPANIES TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2011

1.    CHAIRMAN'S STATEMENT

Review of the year

The Company's net asset value total return was 57.2% for the year ended 30 June 2011, representing an excellent result when compared to a total return of 34.2% on the Company's benchmark, the RBS Hoare Govett Smaller Companies Index (excluding investment companies).  The Company's Ordinary share price total return for the year was 76.0%, reflecting the strong underlying asset performance and a substantial narrowing of the discount.

The Company was named 'Best UK Investment Trust for 2011' at the What Investment Trust Awards and, for the fifth year in a row, won the UK Smaller Companies category at Moneywise Investment Trust Awards 2011.

Earnings and Dividend

The Company has seen strong dividend growth this year from the underlying portfolio, with income from investments increasing by 15.6%.

The revenue return per share for the year ended 30 June 2011 was 4.35p (2010 - 2.86p). The current year revenue return includes 1.38p (2010 - 0.30p) in respect of VAT refunds and related interest received from HM Revenue & Customs (HMRC). Removing the effect of this, the underlying earnings per share increased by 16.0%.

The Board is recommending a final dividend of 1.75p per share, an increase of 16.7% on last year's final dividend of 1.50p. In addition, the Board is recommending a special dividend of 1.0p per share in respect of the non-recurring VAT refunds received this year.

If approved, the final dividend of 1.75p, together with the interim dividend of 1.0p paid in March, will give a total dividend for the year (excluding the special dividend) of 2.75p per share and will represent an increase of 10.0% on last year.

Subject to shareholder approval at the Annual General Meeting on 11 October 2011, the final dividend and special dividend will both be paid on 14 October 2011 to shareholders on the register as at 16 September 2011 with an associated ex-dividend date of 14 September 2011.

VAT on Management Fees

Following continued negotiations with the Company's former manager, a further VAT refund of £561,000 was received during the year. In addition the Company has, this year, received £395,000 of interest from HMRC in relation to the VAT refunds.

Performance

As mentioned above, the Board is pleased to report a net asset value total return for the year ended 30 June 2011 of 57.2%, compared to a rise of 34.2% on a total return basis in the Company's benchmark, the RBS Hoare Govett Smaller Companies Index (excluding investment companies). Over the year, the total return for the FTSE All-Share Index was 25.6%.

Since the appointment of Standard Life Investments as investment manager, the Company has built up a strong, long term track record, compared to its peer group, as illustrated in the table below:

Per Ordinary share	1 year	3 years	5 years
Net asset value total return	+57.2%	+79.4%	+114.6%
Share price total return	+76.0%	+108.9%	+149.5%
Peer group ranking	2/16	1/16	1/15

The outperformance of the Company's investment portfolio is a reflection of the Manager's focus on high quality, growth orientated stocks that are not dependent on the strength of the economy to sustain their profit and dividend growth. Strong performance has come from investments in companies that have successfully harnessed the power of the internet and have embraced opportunities in emerging markets, in particular China.

Stock specific highlights were Mulberry, the handbag designer and retailer, and ASOS, the on-line clothes retailer. Both benefited from their international exposure and were key contributors to performance over the period. On the downside, there was some weakness in stocks heavily exposed to the UK consumer.

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

Manager

The Board believes that the 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. The excellent performance record of the Company gives the Board confidence in the ability of the Manager to deliver strong long-term returns for shareholders.

Gearing

On 28 March 2011, the Company issued £25million 3.5% Convertible Unsecured Loan Stock 2018 ("CULS") to replace the bank loan facility and introduce structural gearing, aligning the Company's gearing policy with the Manager's long term investment philosophy. The £15m bank loan facility was repaid on 28 March 2011.

Shareholders were given the opportunity to invest in the CULS, which pay a coupon of 3.5% per annum and can be converted into Ordinary shares on 30 September and 31 March each year up to March 2018 at a fixed price per Ordinary share of 237.2542p.

At 30 June 2011, £16.4m of the CULS issue had been invested and the Company had net gearing at the year end of 8.8%.

Investment Policy

Further to shareholder approval of the change to the Company's Investment Policy at the General

Meeting held on 28 March 2011, the Board gave the Manager discretion to vary the level of net gearing between -5% and 25% of net assets depending on the Manager's view of the outlook for smaller companies.

Discount

The discount at which the Company's shares trade relative to the underlying net asset value narrowed over the year ended 30 June 2011 from 11.4% to 1.5%. Although the shares ended the year on a discount, they were trading, on average, at a small premium for much of second half. The year end discount of 1.5% compares to an arithmetic sector average discount for the UK smaller companies peer group of 14.1% (2010 - 16.5%).

Share Issues

At each Annual General Meeting, the Board seeks authority from shareholders to allot up to 10% of the

Company's issued Ordinary share capital for cash over the coming year, without application of pre-emption rights.

The Board has taken the opportunity to issue new Ordinary shares, at a slight premium to net asset value, where there has been demand in the market. It has been pleasing to see an increase in demand for the Company's shares, particularly from private client wealth managers.

During the year ended 30 June 2011, the Company issued 825,000 new Ordinary shares at prices per share ranging from 232.00p to 234.00p. Between 1 July 2011 and the time of writing, the Company issued a further 350,000 new Ordinary shares at prices per share ranging from 204.0p to 213.8p.

Issue of Shares from Treasury

In September 2010, the Company issued 3,717,342 shares out of treasury at prices per share ranging from 166.5p to 170.8p. These shares had been bought into treasury previously at prices per share ranging from 99.5p to 144.8p. In January 2011, the Company issued 512,076 shares out of treasury at a price per share of 209.00p compared to a purchase price of 193.4p. During the year ended 30 June 2011, a total of 3,670,243 of the shares issued out of treasury were originally purchased as part of the Company's regular tenders.

Regular Tender Offers

The Company conducted its second periodic tender offer on 31 December 2010. In light of the Ordinary shares trading, on average, at a small premium between December 2010 and June 2011, the Board exercised its discretion not to conduct a tender offer at the 30 June 2011 tender date.

It remains the Board's intention to maintain the regular tender at six monthly intervals, and to offer shareholders the opportunity to tender their shares where it is in their interests to do so.

Marketing activities

The Manager continues to broaden the Company's shareholder base by engaging with existing and potential shareholders. Further information on how to invest in the Company through the Standard Life

Investment Trust Savings Scheme and ISA may be found on the Manager's website at www.standardlifeinvestments.com.its.

Prospects

Since the Company's year end, markets have become concerned about sovereign debt issues and the sustainability of world economic growth. The consumer is facing challenges in the form of inflation and government spending cut-backs. Despite this, there are opportunities to be found in growth orientated smaller companies, in particular those with international exposure and a focus on new, innovative ways of doing business.

The Board shares the Manager's belief that investing in high quality UK smaller companies with strong management and robust business models will continue to provide shareholders with attractive long term returns.

Donald MacDonald

Chairman

5 September 2011

2.    MANAGER'S REPORT

For the year ended 30 June 2011, the Company's net asset value total return was 57.2% and the share price total return was 76.0%. This compares with the UK smaller companies sector as represented by the RBS Hoare Govett Smaller Companies Index (excluding Investment Companies) which rose by 34.2%, in total return terms, over the year. The total return of the FTSE 100 Index of the largest UK listed companies was 24.9%.

When Standard Life took on the management of the Company on the 1 September 2003 the share price was 47.75p. At 30 June 2011 the share price reached 237p. The percentage rise in the share price over that time has been 396.3%.

Equity Markets

The period from June 2010 through to January 2011 was one of continued strength for UK markets and in many ways was a continuation of the previous year. Steady economic recovery continued in the UK, Europe and the US while Emerging Markets, in particular China, continued to be the engines of world economic growth. Corporate profits across a wide range of sectors continued apace. Interest rates in Europe and the US remained near rock bottom levels, supported by another round of monetary easing.

From time to time sovereign debt caused concern, notably Greece but also Portugal and Ireland.

By September 2010 markets had become particularly euphoric. The Alternative Investment Market (AIM) led the way in this period. AIM has a significant proportion of "blue sky" companies and market conditions need to be particularly strong for investors to favour such concepts.

The oil price per barrel rose from $70 to $128 by April 2011 before settling down somewhat. Commodity prices have generally been strong too, both metals and a range of agricultural products, although there was a bout of weakness towards the end of the year in question. Emerging Markets, in particular Chinese, demand was responsible for this strength.

Share markets were much more subdued in the first half of 2011. Various natural and man-made calamities caused near panic conditions, although ultimately this negativity was overcome. Firstly there was the Japanese earthquake and tsunami. Then the market fixated on sovereign debt, particularly that of Greece. Furthermore UK economic conditions started to falter. The weakest aspect was the consumer.

The delayed impact of tax rises started to hit home in a big way on consumer spending. The US and parts of the European economy were also weak, with the exception of Germany.

Bid activity was also depressed as trade buyers became cautious on the economic outlook and private equity buyers remained on the sidelines.

Performance

In contrast, the Company performed steadily throughout the year in question, despite some underperformance during the period from September 2010 to January 2011 when AIM was strong. It is the policy of the Company not to invest significantly in "concept" stocks which have yet to generate revenues and profits. The Company's strong performance came from high quality growth stocks, internet related shares and export orientated electrical and engineering shares mainly exposed to vibrant emerging markets such as China. A number of other stock specific winners helped substantially. They were characterised by their exposure to growth markets and the strength of their cash-flows, balance sheets and the visibility of their earnings.

The most spectacular winner was Mulberry, the handbag designer and retailer, whose share price rose by 578% over the year to 30 June 2011. Mulberry has delivered a profit result that is over 4 times higher than predicted a year ago as they have repositioned and internationalised their business. ASOS, the on-line clothing retailer, rose by 179% over the year also, proving that their market reach is international as a UK retailer that derives 57% of its sales from outside the UK. First Quantum, the copper and gold producer with assets in Zambia, Australia, Mauritania and Finland overcame the loss of a quarter of their assets that were seized by the Government of the Democratic Republic of Congo, to rise 159% in the year in question. Andor Technology, the Belfast-based high performance camera specialist, saw its shares rise by 153% in the twelve months to 30 June 2011. Other internet winners included Rightmove in property advertising, PaddyPower in on-line sports betting and Blinkx in video streaming. In export-orientated electricals, very strong performances came through from Gooch & Housego, Dialight, XP Power and Renishaw.

Weakness was also stock-specific, including a couple of stocks exposed to the UK consumer (Goals Soccer Centres, Cineworld and Domino's Pizza), together with Cranswick and Robert Wiseman in Food & Drink. The weakest two stocks were the heavily indebted care home provider Caretech and CPP (Card Protection Plan), which was subject to a Financial Services Authority enquiry. Software stock Kewill and set top box manufacturer Pace also disappointed.

Dealing and Activity

The most significant new additions to the portfolio were: Kofax, a world leader in document management software, Lamprell, the Dubai-based fabricator of jackup drilling rigs, Spirax Sarco, the leading provider of steam in industrial processes, GlobeOp, the provider of back office services to the hedge fund industry and IG Group, the world's leading spread betting company.

On the sell side, by far the largest was the sale of Chloride which was subject to a contested bid from Emerson and ABB. It is of note that the Company received proceeds of £3.54million on a book cost of £0.79million. Likewise, profits were taken in ASOS to keep the holding to a manageable size. In this case proceeds were £2.35million on a book cost of £0.28 million. ASOS remains the Company's largest holding. Very significant profits were taken on Supergroup, the clothing retailer that was purchased as a new issue in March 2010, and Mulberry. The long standing holding in Chemring, the diversified defence company was sold for a profit.

In terms of sector exposure, the Company remains heavy in stocks that are internet-led or have successfully harnessed on-line methodologies to their advantage. There is also major exposure to emerging market-orientated electrical and engineering companies that are benefiting from the upgrading of the Chinese manufacturing base in particular. Likewise food companies that benefit from the increased demand for meat and processed foods in emerging markets were significant in the portfolio. The Company remains light in real estate, construction, the UK "built environment" and exposure to UK Government spending.

Again it is worth pointing out that a significant number of holdings in the portfolio are still run by their founders or Chief Executives who have been in place for many years. These are proven moneymakers who tend to grow their businesses organically using internally generated cashflows. Corporate cultures are usually strong and private equity involvement in their development is noticeable by its absence.

Outlook

Since 30 June 2011 markets have experienced severeweakness; buffeted by strong head-winds of sluggish UK and US economic growth and sovereign debt issues of alarming proportions in a world awash with debt. The bright spot is the continuing powerful economic development in emerging markets, in particular China. These markets together account for over 20% of the world total.

Our reading of the economic and market cycle is that we are now in the second or downward part of the cycle. The recovery phase is now a distant memory and the next stage is for continuing sluggish growth and maybe something worse in 2012 or beyond. That in itself sounds somewhat depressing. However, a market that is risk-averse will favour our kind of high quality, predictable and growth orientated stocks which exhibit momentum. These companies are not dependent on the strength of the economy to sustain their profit and dividend growth but can grow from internally generated cash-flow. They do not need debt or to borrow. Indeed debt is likely to remain a dirty word for many years to come.

Two major themes play to the strengths of today's smaller company. Firstly, the internet has changed the way business is transacted, how companies communicate with clients and transformed the cost base. Many of the larger companies have been caught napping in response to these new challenges. In many cases it has been the smaller, newer companies that have been able to focus exclusively on these new trends. The second theme is that of emerging markets. Here again smaller companies with global pretensions have quickly been able to orientate themselves towards these burgeoning new markets while the largest companies are hamstrung by their historical market positions.

While market conditions may be challenging over the next year, our approach to smaller company investing is likely to prove rewarding if unspectacular in the near term but in the medium to long term is likely to continue to provide very attractive returns.

Harry Nimmo

Standard Life Investments Limited, Manager

5 September 2011

3.    FINANCIAL HIGHLIGHTS

	30 June
	2011	2010	% change
Performance
Total Return
Net asset value per Ordinary share			57.2%
RBS Hoare Govett Smaller Companies Index
(excluding Investment Companies)			34.2%
Capital return
Net asset value (statutory) per Ordinary share	240.65p	154.04p	56.2%
Ordinary share price (mid market)	237.00p	136.50p	73.6%
Discount of Ordinary share price to net asset value	1.5%	11.4%	-
RBS Hoare Govett Smaller Companies Index Capital Return	4,637.03	3,544.30	30.8%
(excluding Investment Companies)
Convertible Unsecured Loan Stock price	109.00p	-	-
Total assets (£m)1	178.37	99.30	79.6%
Equity shareholders' funds (£m)	155.33	97.30	59.6%
Total expense ratio2	0.99%	1.17%
Revenue return per Ordinary share	4.35p	2.86p
Dividend yield	1.6%	1.8%
Interim Ordinary dividend paid for year	1.00p	1.00p	-
Proposed final Ordinary dividend for the year	1.75p	1.50p
Proposed Special dividend for the year	1.00p	-
Ordinary shares in issue (excluding shares held in treasury)	64,547,556	63,163,381
Ordinary shares held in treasury	-	559,175
Gearing (ratio of Borrowings to Equity Shareholders' funds)
Net gearing ratio3	8.8%	1.0%
Potential gearing ratio4	14.8%	10.3%
Year's Highs/Lows	High	Low
Net asset value (statutory) per Ordinary share (diluted, including income)	240.65p	152.46p
Ordinary share price	237.00p	140.75p
Discount/(premium) of Ordinary share price to net asset value	4.4%	(12.5%)
Convertible Unsecured Loan Stock price	109.50p	108.50p
1         Total assets less current liabilities; (2011 - nil; 2010 - £2.0m short-term bank debt).
2      Total expense ratio calculated as the total of the investment management fee and administrative expenses divided by the average of shareholders' funds throughout the year.
3      Net gearing ratio calculated as the total of the liability component of £23.0m of the Convertible Unsecured Loan Stock (2010 - bank loan) less the cash invested in AAA money market funds and cash and short term deposits, divided by net assets.
4      Potential gearing ratio is calculated as the total of the liability component of £23.0m of the Convertible Unsecured Loan Stock (2010 - maximum bank loan facility of £10.0m) divided by net assets.

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 (Corporate Funds) Limited ("the Manager") in the management of the Company's activities.

A review of the Company's activities may be found in the Chairman's Statement, Manager's Report and the Financial Highlights.

Principal Activity and Status

The Company was incorporated on 9 July 1993 and its Ordinary shares were listed on the London

Stock Exchange on 19 August 1993. The Company is registered as a public limited company in Scotland under company number SC145455. 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. The Company 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 1158 of the Corporation Tax Act 2010 ("Section 1158") for the year ended 30 June 2010. The Directors are of the opinion that the Company has conducted its affairs so as to be able to continue to obtain approval as an investment trust under Section 1158 for the year ended 30 June 2011. 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 Company intends to achieve its 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 Investment 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 per cent. of total assets at the time of acquisition.

The Company may use derivatives for portfolio hedging purposes (i.e. only for the purpose of reducing, transferring or eliminating the investment risks in its investments in order to protect the Company's portfolio). Within the Company's Articles of Association, the maximum level of gearing is 100 per cent. of net assets. The Directors' policy is that gearing will be between -5 per cent. and 25 per cent. of net assets (at the time of drawdown) in normal market conditions. The Directors have delegated responsibility to the Investment Manager for the operation of the gearing level within the above parameters.

The Investment 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 Investment 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 Investment Manager has the opportunity to perform in different market conditions.

Oversight and Review of Performance

For the year ended 30 June 2011, the Company's net asset value total return was 57.2%, which was greater than the rise of 34.2% in the RBS Hoare Govett Smaller Companies Index (excluding Investment Companies), in total return terms.

The Board considers performance with the Manager at every meeting. As well as carrying out the matters reserved to the Board, the Board receives a detailed portfolio report for each meeting, sets the overall strategy for the Company and assesses 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 total return 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 underlying net asset value.

A record of these KPIs, for the year under review, is included in the Financial Highlights.

A review of the Company's performance, market background, investment activity and portfolio strategy during the year under review, as well as the Manager's investment outlook, is provided in the Manager's Report.

Future Trends

The Company's smaller company portfolio features high quality growth stocks with visible, recurring revenue, which exhibit both earnings and price momentum. Given the availability of high quality companies at sustainable valuations, the Company continues to be positive about the long-term outlook for smaller companies.

Principal Risks and Uncertainties

The Board regularly reviews the principal risks and uncertainties facing the Company which the Board and the Manager have identified and the Board sets out delegated controls designed to manage those risks and uncertainties. Key risks within investment strategy, including inappropriate stock selection and gearing, are managed by the Board through a defined investment policy, with 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 Directors have adopted a robust framework of internal control and risk management systems 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.

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.

• Capital structure and gearing risk: The Company's capital structure, as at 30 June 2011, consisted of equity share capital comprising 64,547,556 Ordinary shares and £25,000,000 nominal amount of CULS.

The Company's revolving credit facility for £10m with Lloyds Banking Group plc expired on 23 August 2010. In October 2010, the Company entered into a one-year multicurrency revolving credit facility with BNP Paribas for up to £15m. The credit facility was repaid in full on 28 March 2011 following the receipt of proceeds from the issue of the CULS.

The effect of gearing should be beneficial in rising markets but could adversely affect returns to shareholders in falling markets. The Manager is able to increase or decrease the Company's level of net gearing by holding a lower or higher cash balance subject to the Company's investment policy, amended on 28 March 2011, which requires that gearing should remain between -5% and 25% of net assets at the time of drawdown.

• 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 1158 would result in the Company being subject to capital gains tax on its 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 to the Company could also lead to reputational damage or loss.

There is also a new regulatory risk in the form of the Alternative Investment Fund Managers Directive ("AIFMD") which was ratified in November 2010 by the European Commission.

The AIFMD will introduce a new authorisation and supervisory regime for all investment companies and investment trust fund managers in the European Union. This is expected to create some additional regulatory costs for the Company.

• 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's investments has been delegated under an Investment Management Agreement.

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. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

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

•      select suitable accounting policies and then apply them consistently;

•      make 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 are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that 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 Statement of Corporate Governance that comply with that law and those regulations.

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

The work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

Directors' Responsibilities statement

Each Director confirms, to the best of their knowledge,

that:

•      the financial statements have been prepared in accordance with UK Accounting Standards and applicable law, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and that

•      the Directors' Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces.

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

Donald MacDonald

Chairman

5 September 2011

INCOME STATEMENT

for the year ended 30 June 2011

		2011			2010
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Net gains on investments held at fair value	9	-	53,665	53,665	-	27,633	27,633
Currency gains/(losses)		-	1	1	-	(3)	(3)
Income	2	2,942	-	2,942	2,202	-	2,202
Investment management fee	3	(237)	(711)	(948)	(157)	(470)	(627)
Performance fee	3	-	(1,064)	(1,064)	-	(619)	(619)
VAT recovered on investment management fees	3	480	81	561	187	187	374
Other administrative expenses	4	(329)	-	(329)	(398)	-	(398)
		________	________	________	________	________	________
NET RETURN BEFORE FINANCE COSTS AND TAXATION		2,856	51,972	54,828	1,834	26,728	28,562
Finance costs	5	(105)	(313)	(418)	(18)	(54)	(72)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES BEFORE TAXATION		2,751	51,659	54,410	1,816	26,674	28,490
Taxation	6	(7)	-	(7)	(7)	-	(7)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES AFTER TAXATION		2,744	51,659	54,403	1,809	26,674	28,483
		________	________	________	________	________	________
RETURN PER ORDINARY SHARE:	8	4.35p	81.96p	86.31p	2.86p	42.23p	45.09p
		________	________	________	________	________	________
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.
No operations were acquired or discontinued in the year.
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 2011

		2011	2010
	Notes	£'000	£'000
NON-CURRENT ASSETS
Investments at fair value through profit or loss	9	170,172	98,057
		___________	___________
CURRENT ASSETS
Loans and receivables	10	635	1,255
AAA Money Market funds	15	9,296	1,001
Cash and short term deposits	15	3	2
		___________	___________
		9,934	2,258
		___________	___________
CURRENT LIABILITIES
Creditors: amounts falling due within one year	11	(1,734)	(3,017)
		___________	___________
NET CURRENT ASSETS/(LIABILITIES)		8,200	(759)
		___________	___________
TOTAL ASSETS LESS CURRENT LIABILITIES		178,372	97,298
NON-CURRENT LIABILITIES
3.5% Convertible Unsecured Loan Stock 2018	12	(23,040)	-
		___________	___________
NET ASSETS		155,332	97,298
		___________	___________
CAPITAL AND RESERVES
Called-up share capital	13	16,137	15,931
Share premium account		2,881	-
Equity component of Convertible Unsecured Loan Stock 2018	12	1,470	-
Special reserve		46,871	46,871
Capital reserve		85,014	32,737
Revenue reserve		2,959	1,759
		___________	___________
EQUITY SHAREHOLDERS' FUNDS		155,332	97,298
		___________	___________
NET ASSET VALUE PER ORDINARY SHARE	16	240.65p	154.04p
		___________	___________

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 30 June 2011
		Share	Equity
	Share	premium	component	Special	Capital	Revenue
	capital	account	CULS 2018	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 June 2010	15,931	-	-	46,871	32,737	1,759	97,298
Return on ordinary activities after taxation	-	-	-	-	51,659	2,744	54,403
Issue of Shares	206	2,881	-	-	6,244	-	9,331
Issue of 3.5% Convertible Unsecured Loan Stock 2018	-	-	1,470	-	-	-	1,470
Tender Offer buybacks	-	-	-	-	(5,565)	-	(5,565)
Tender Offer costs	-	-	-	-	(61)	-	(61)
Dividends paid (see note 7)	-	-	-	-	-	(1,544)	(1,544)
	________	________	________	________	________	________	________
BALANCE AT 30 JUNE 2011	16,137	2,881	1,470	46,871	85,014	2,959	155,332
	________	________	________	________	________	________	________
For the year ended 30 June 2010
		Share	Capital
	Share	premium	redemption	Special	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 June 2009	15,931	25,073	549	21,364	6,063	1,276	70,256
Return on ordinary activities after taxation	-	-	-	-	26,674	1,809	28,483
Tender Offer costs	-	-	-	(115)	-	-	(115)
Cancellation of reserves	-	(25,073)	(549)	25,622	-	-	-
Dividends paid (see note 7)	-	-	-	-	-	(1,326)	(1,326)
	________	________	________	________	________	________	________
BALANCE AT 30 JUNE 2010	15,931	-	-	46,871	32,737	1,759	97,298
	________	________	________	________	________	________	________
The revenue reserve represents the amount of the Company's retained reserves distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.

CASHFLOW STATEMENT

Year ended 30 June 2011

		2011		2010
	Notes	£'000	£'000	£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	14		1,539		1,619
SERVICING OF FINANCE
Interest paid			(91)		(74)
TAXATION			6		(15)
FINANCIAL INVESTMENT
Purchase of investments		(49,917)		(32,411)
Sale of investments		32,229		34,041
		_________		_________
NET CASH (OUTFLOW)/INFLOW FROM FINANCIAL INVESTMENT			(17,688)		1,630
EQUITY DIVIDENDS PAID			(1,544)		(1,326)
			_________		_________
NET CASH (OUTFLOW)/INFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES AND FINANCING			(17,778)		1,834
FINANCING
Shares issued		9,331		-
Buyback of shares		(5,565)		-
Tender offer expenses		(153)		(23)
Issue of 3.5% Convertible Unsecured Loan Stock 2018		24,460		-
Repayment of bank loan		(2,000)		(4,000)
		_________		_________
NET CASH INFLOW/(OUTFLOW) FROM FINANCING			26,073		(4,023)
			_________		_________
NET CASH INFLOW/(OUTFLOW) BEFORE MANAGEMENT OF LIQUID RESOURCES			8,295		(2,189)
MANAGEMENT OF LIQUID RESOURCES
Purchase of AAA Money Market funds		(57,430)		(32,000)
Sale of AAA Money Market funds		49,135		34,117
		_________		_________
NET CASH (OUTFLOW)/INFLOW FROM MANAGEMENT OF LIQUID RESOURCES			(8,295)		2,117
			_________		_________
DECREASE IN CASH	15		-		(72)
			_________		_________
RECONCILIATION OF NET CASHFLOW TO MOVEMENT IN NET DEBT
Decrease in cash as above		-		(72)
Net change in liquid resources		8,295		(2,117)
Net change in debt due within one year		2,000		4,000
Net change in debt due in more than one year		(24,460)		-
Other non-cash movements		1,421		(3)
		_________		_________
MOVEMENT IN NET DEBT IN YEAR			(12,744)		1,808
OPENING NET DEBT			(997)		(2,805)
			_________		_________
CLOSING NET DEBT			(13,741)		(997)
			_________		_________

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

NOTES TO FINANCIAL STATEMENTS:

For the year ended 30 June 2011

1	Accounting policies
	(a)	Basis of accounting
		The financial statements have been prepared on a going concern basis and in accordance with applicable UK Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. They have also been prepared on the assumption that approval as an investment trust will continue to be granted.
	(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.
	(c)	AAA money market funds
		The AAA money market funds are used by the Company to provide additional short term liquidity. As they are not listed on a recognised exchange and due to their short term nature, they are recognised in the financial statements at cost which is deemed to be the fair value and as a current asset.
	(d)	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 depending on the commercial circumstances behind the payment. 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.
	(e)	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).
		The performance fee is recognised 100% as a capital item in the Income Statement as it related entirely to the capital performance of the Company.
		Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Income Statement within net gains/ (losses) on investments.
	(f)	Dividends payable
		Dividends are recognised in the period in which they are paid.
	(g)	Capital reserve
		Gains and losses on realisation of investments and changes in fair values are transferred to the capital reserve.
	(h)	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 temporary differences can be deducted. Temporary 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.
	(i)	Other reserves
		The special reserve arose following court approval for the cancellation of the share premium account balance at 24 June 1999. On 13 October 2009, Court of Session approval was granted for the cancellation of the Company's entire share premium account and capital redemption reserve and subsequent creation of a special distributable capital reserve.
	(j)	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.
	(k)	3.5% Convertible Unsecured Loan Stock 2018
		Convertible Unsecured Loan Stock ("CULS") issued by the Company is regarded as a compound instrument, comprising of a liability component and an equity component.  At the date of issue, the fair value of the liability component was estimated by assuming that an equivalent non-convertible obligation of the Company would have a coupon rate of 4.83%.  The fair value of the equity component, representing the option to convert liability into equity, is derived from the difference between the issue proceeds of the CULS and the fair value of assigned to the liability.  The liability component is subsequently measured at amortised cost using the effective interest rate method and the equity component remains unchanged.
		Direct expenses associated with the CULS issue are allocated to the liability and equity components in proportion to the split of the proceeds of the issue.  Expenses allocated to the liability component are amortised over the life of the instrument with the equity component being written off through the revenue column of the Income Statement.
		The interest expense on the CULS is calculated according to the effective interest rate method by applying the actual rate of 4.86%, after allocation of direct expenses associated with the CULS issue, at initial recognition, to the liability component of the instrument.
		On conversion of CULS, equity is issued and the liability component is derecognised.  The original equity component recognised at inception remains in equity.  No gain or loss is recognised on conversion.
		When CULS is repurchased for cancellation, the fair value of the liability at the redemption date is compared to its carrying amount, giving rise to a gain or loss redemption that is recognised through profit or loss on redemption.  The amount of consideration allocated to equity is recognised in equity with no gain or loss being recognised.

		2011	2010
		£000	£000
2	Income
	Income from investments
	UK dividend income	2,178	1,963
	REIT income	53	57
	Overseas dividend income	272	161
	UK stock dividend income	4	-
	Overseas stock dividend income	14	-
		__________	__________
		2,521	2,181
		__________	__________
	Other income
	Interest from AAA Money Market funds	26	13
	Interest from HMRC	395	-
	Underwriting commission	-	7
	Other income	-	1
		__________	__________
		421	21
		__________	__________
	Total income	2,942	2,202
		__________	__________

		2011	2010
3	Investment management and performance fees	£000	£000
	Investment management fee
	Investment management fee	948	627
	Charged to capital reserve	(711)	(470)
		__________	__________
	Charged to revenue reserve	237	157
		__________	__________
	Performance fee
	Performance fee	1,064	619
	Charged to capital reserve	(1,064)	(619)
		__________	__________
		-	-
		__________	__________
	The Company has an agreement with Standard Life Investments (Corporate Funds) Limited ('SLI') for the provision of investment management services. The contract is terminable by either party on twelve months notice.
	The management fee paid to SLI is 0.65% per annum of the gross 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.
	In addition, SLI is entitled to a performance-related fee calculated annually at a rate of 20% of the amount by which the NAV's performance over the year (excluding current year income), exceeds the Benchmark Index Capital Return movement plus 1%.  This is capped at 0.6% of the Gross Asset Value at the period end.
	The balance due to SLI at the year end was £1,343,000 (2010 - £749,000).
	In 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 which have been made in relation to the Company have now been processed.
	A refund of £330,000 of VAT has been made to the Company by Standard Life Investments plc, which was accounted for in the 2008 financial statements, and a further £374,000 was received from Aberdeen Asset Management plc ('AAM') which has been accounted for in 2010.  In addition a further £561,000 has been received from AAM which has been accounted for in the current year. The Company has now received all principal VAT due in respect of the claim against HMRC. All amounts have been allocated to revenue and capital respectively, in accordance with the accounting policy of the Company for the periods in which the VAT was charged. In addition, an amount of £395,000 (2010 - nil) in respect of interest on the AAM settled claim has been included in the current year's financial statements are credited wholly to revenue (see note 2).

		2011	2010
		£000	£000
4	Administrative expenses (inclusive of VAT)
	Secretarial fees Directors' fees	106	100
		71	64
	Auditor's remuneration
	- statutory audit	21	20
	Registrar's fees	31	25
	Professional fees	71	86
	Other expenses	29	103
		__________	__________
		329	398
		__________	__________
	The secretarial fee is paid to Standard Life Investments plc and adjusted annually in line with the Retail Price Index.

		2011	2010
		£000	£000
5	Finance costs
	Bank loan arrangement fee	9	6
	Bank loan interest	80	66
	Interest on 3.5% Convertible Unsecured Loan Stock 2018	279	-
	Issue expenses on 3.5% Convertible Unsecured Loan Stock 2018	32	-
	Amortisation of 3.5% Convertible Unsecured Loan Stock 2018 issue expenses	18	-
		__________	__________
		418	72
	Charged to capital reserve	(313)	(54)
		__________	__________
	Charged to revenue reserve	105	18
		__________	__________

			2011				2010
			Revenue		Capital	Total	Revenue	Capital	Total
6	Taxation		£000		£000	£000	£000	£000	£000
	(a)  Analysis of charge for year
	Tax on ordinary activities		7		-	7	7	-	7
			_______		_______	_______	_______	_______	_______
	(b)  Provision for deferred taxation
	At 30 June 2011, the Company had unutilised management expenses and non-trade loan relationship losses of £33,012,000 (2010 - £31,253,000).  No deferred 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 asset could be deducted.
	(c)  Factors affecting current tax charge for year
	UK corporation tax at an effective rate of 27.5% (2010: 28%). The differences are explained below.
		2011					2010
		Revenue		Capital		Total	Revenue	Capital	Total
		£'000		£'000		£'000	£'000	£'000	£'000
	Net profit on ordinary activities before taxation	2,752		51,657		54,409	1,816	26,674	28,490
		_______		_______		_______	_______	_______	_______
	Corporation tax at an effective rate of 27.5% (2010: 28%)	757		14,206		14,963	508	7,469	7,977
	Effects of:
	Non-taxable UK dividend income	(599)		-		(599)	(550)	-	(550)
	Non-taxable overseas dividends	(75)		-		(75)	(40)	-	(40)
	Non-taxable stock dividends	(5)		-		(5)	-	-	-
	Exchange losses not taxable	-		-		-	-	1	1
	Income taxable in different years	(2)		-		(2)	(5)	-	(5)
	Irrecoverable overseas taxes	7		-		7	7	-	7
	Excess management expenses and loan relationship losses	(79)		407		328	58	267	325
	Expenses not deductible for tax purposes	3		145		148	29	-	29
	Capital gains on investments not taxable	-		(14,758)		(14,758)	-	(7,737)	(7,737)
		_______		_______		_______	_______	_______	_______
	Current tax charge	7		-		7	7	-	7
		_______		_______		_______	_______	_______	_______

		2011	2010
7	Dividends	£000	£000
	Amounts recognised as distributions to equity holders in the year:
	2010 final dividend of 1.50p per share (2009 - 1.10p) paid on 15 October 2010	907	695
	2011 interim dividend of 1.00p per share (2010 - 1.00p) paid on 18 March 2011	637	631
		__________	__________
		1,544	1,326
		__________	__________
	The proposed final and special dividends are subject to approval by shareholders at the Annual General Meeting and have 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 1158 - 1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £2,744,000 (2010 - £1,809,000).
		2011	2010
		£000	£000
	2011 interim dividend of 1.00p per share (2010 - 1.00p) paid on 18 March 2011	637	631
	2011 final dividend of 1.75p per share (2010 - 1.50p) payable on 14 October 2011	1,136	900
	2011 special dividend of 1.00p per share (2010 - nil ) payable on 14 October 2011	649	-
		__________	__________
		2,422	1,531
		__________	__________
	The amount payable for the proposed final dividend and special dividend is based on 64,897,556 Ordinary shares in issue as 5 September 2011 which satisfies the requirement of ss. 1158 - 1159 Corporation Tax Act 2010.

		2011		2010
		p	£000	p	£000
8	Return per Ordinary share
	Basic
	Revenue return	4.35	2,744	2.86	1,809
	Capital return	81.96	51,659	42.23	26,674
		________	________	________	________
	Total return	86.31	54,403	45.09	28,483
		________	________	________	________
	Weighted average number of Ordinary shares in issue		63,029,147		63,163,381
			__________		__________

		2011	2010
		£000	£000
9	Investments
	Fair value through profit or loss
	Opening fair value	98,057	72,576
	Opening fair value gains on investments held	(32,673)	(10,354)
		__________	__________
	Opening book cost	65,384	62,222
	Additions at cost	49,917	32,275
	Disposals - proceeds	(31,467)	(34,427)
	- realised gains on sales	7,962	5,314
		__________	__________
	Closing book cost	91,796	65,384
	Closing fair value gains on investments held	78,376	32,673
		__________	__________
	Closing fair value	170,172	98,057
		__________	__________
	Gains on investments
	Realised gains on sales	7,962	5,314
	Increase in fair value gains on investments held	45,703	22,319
		__________	__________
		53,665	27,633
		__________	__________
	All investments are equity shares 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 gains on investments in the Income Statement. The total costs were as follows:
		2011	2010
		£000	£000
	Purchases	264	162
	Sales	27	37
		__________	__________
		291	199
		__________	__________

		2011	2010
		£000	£000
10	Loans and receivables
	Amounts due from brokers	201	963
	Net dividends and interest receivable	401	256
	Other debtors	33	36
		__________	__________
		635	1,255
		__________	__________

		2011	2010
		£000	£000
11	Creditors: amounts falling due within one year
	Bank loans	-	2,000
	Interest payable	279	2
	Investment management fee payable	279	160
	Performance fee payable	1,064	619
	Sundry creditors	112	144
	Tender offer costs payable	-	92
		__________	__________
		1,734	3,017
		__________	__________
	At the year end the Company no longer had a revolving credit facility in place and therefore had no balance drawn down (2010 - £10,000,000 facility with Lloyds Banking Group with £2,000,000 drawn down).

12	Non-current liabilities
		Nominal	Liability	Equity
	3.5% Convertible Unsecured Loan Stock 2018	Amount £000	Component £000	Component £000
	Opening balance at 30 June 2010	-	-	-
	Issue of 3.5% Convertible Unsecured Loan Stock 2018	25,000	23,530	1,470
	Issue costs	-	(508)	(32)
	Issue costs expensed through revenue	-	-	32
	Amortisation	-	18	-
		__________	__________	__________
	Closing balance at 30 June 2011	25,000	23,040	1,470
		__________	__________	__________
	On 28 March 2011, the Company issued £25,000,000 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018.  The loan stock can be converted at the election of holders into Ordinary Shares during the months of March and September each year throughout their life, commencing 30 September 2011 to 31 March 2018 at a fixed price per Ordinary share of 237.2542p.  Interest is paid on the 3.5% Convertible Unsecured Loan Stock 2018 on 30 September and 31 March each year, commencing 30 September 2011. In the event of a winding-up of the Company the rights and claims of the Trustee and CULS holders would be subordinate to the claims of all creditors in respect of the Company's secured and unsecured borrowing, under the terms of the Trust Deed.

		2011	2010
13	Called up share capital	£000	£000
	Authorised:
	149,998,996 (2010 - 149,998,996) Ordinary shares of 25p each - equity	37,500	37,500
		__________	_________
	Issued and fully paid:
	64,547,556 (2010 - 63,163,381) Ordinary shares of 25p each - equity	16,137	15,791
	Held in treasury:
	Nil (2010 - 559,175) Ordinary shares of 25p each - equity	-	140
		__________	_________
		16,137	15,931
		__________	_________
	As a result of a tender offer on 7 July 2010, 3,158,167 Ordinary shares were repurchased into treasury at a cost of £4,574,000 excluding tender offer costs of £115,000 which were charged against the capital reserve during the previous year.  On 12 January 2011 a further tender offer resulted in 512,076 shares being repurchased into treasury at a cost of £991,000, excluding tender offer costs of £61,000 which have been charged against the capital reserve during the current year.
	During the year the Company issued 4,229,418 Ordinary shares from treasury for a total consideration received of £7,405,000.  Also, the Company issued a further 825,000 new Ordinary shares for a total consideration received of £1,926,000.
	Capital Management
	The investment objective of the Company is to achieve long term capital growth by investment in UK quoted smaller companies.
	The capital of the Company consists of equity, comprising issued share capital and the equity component of the 3.5% Convertible Unsecured Loan Stock 2018, reserves and retained earnings. 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.

		2011	2010
14	Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities	£000	£000
	Net return before finance costs and taxation	54,828	28,562
	Adjusted for:
	Gains on investments	(53,665)	(27,633)
	Currency (gains)/losses	(1)	3
	Increase in accrued income	(145)	(100)
	(Increase)/decrease in other debtors including investment management fee and performance fees	(10)	9
	Increase in sundry creditors including investment management fee and performance fees	532	778
		__________	_________
	Net cash inflow from operating activities	1,539	1,619
		__________	_________

		At 30 June 2010	Cashflow	Currency and other movements	At 30 June 2011
		£000	£000	£000	£000
15	Analysis of changes in net debt
	Cash and short term deposits	2	-	1	3
	AAA Money Market funds	1,001	8,295	-	9,296
	Debt due within one year	(2,000)	2,000	-	-
	Debt due in more than one year	-	(24,460)	1,420	(23,040)
		__________	_________	__________	_________
	Net debt	(997)	(14,165)	1,421	(13,741)
		__________	_________	__________	_________

16	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.
		2011	2010
	Basic net asset value per share
	Net assets attributable (£000)	155,332	97,298
	Number of Ordinary shares in issue at year end	64,547,556	63,163,381
	(excluding shares held in treasury)
	Net asset value per share	240.65p	154.04p

17	Financial instruments
	The Company's financial instruments comprise securities and other investments, cash balances, Convertible Unsecured Loan Stock 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 (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) 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.
	(i) 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 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.
	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.
	At the year end, the Company had no revolving credit facility in place.  The Board regulates the overall level of gearing by raising or lowering the level of the credit facility it may have in place from time to time and is also able, if the circumstances warrant, to use derivatives or purchase fixed interest securities in order to offset the effect of gearing.
	The 3.5% Convertible Unsecured Loan Stock 2018 was issued by the Company at a fixed cost until its conversion.  It is carried in the Company's balance sheet at amortised cost rather than at fair value.
	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 period for			Weighted average
					which rate is fixed			interest rate		Floating rate
	As at 30 June 2011				Years			%		£000
	Assets
	AAA Money Market funds				-			0.84		9,296
	Cash deposits				-			-		3
					_________			_________		_________
	Total assets				-			-		9,299
					_________			_________		_________
	Liabilities
	3.5% Convertible Unsecured Loan Stock 2018				7.25			3.50		23,040
					_________			_________		_________
	Total liabilities				-			-		23,040
					_________			_________		_________
					Weighted
					average period for			Weighted average
					which rate is fixed			interest rate		Floating rate
	At 30 June 2010				Years			%		£000
	Assets
	AAA Money Market funds				-			0.66		1,001
	Cash deposits				-			-		2
					_________			_________		_________
	Total assets				-			-		1,003
					_________			_________		_________
					Weighted
					average period for			Weighted average
					which rate is fixed			interest rate		Floating rate
					Years			%		£000
	Liabilities
	Bank loans				0.05			0.93		2,000
					_________			_________		_________
	Total liabilities				-			-		2,000
					_________			_________		_________
	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 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 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 (2010 - 100 basis points) higher or lower and all other variables were held constant, the Company's :
	- profit for the year ended 30 June 2011 and net assets would increase / decrease by £93,000 (2010 - increase / decrease by £10,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances.
	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 2011			30 June 2010
			Net	Total			Net			Total
		Overseas	monetary	currency	Overseas		monetary			currency
		investments	assets	exposure	investments		assets			exposure
		£'000	£'000	£'000	£'000		£'000			£'000
	Euro	5,876	-	5,876	2,982		-			2,982
		_________	_________	_________	_________		_________			_________
	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.
	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 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 all listed on the London Stock Exchange.
	Other price risk sensitivity
	If market prices at the Balance Sheet date had been 10% (2010 - 10%) higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 30 June 2011 and net assets would have increased / decreased by £17,017,000 (2010 - increase / decrease of £9,806,000).  This is based on the Company's equity portfolio 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.
	(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 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, whose credit-standing is reviewed periodically by the investment manager, and limits are set on the amount that may be due from any one broker; 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 30 June was as follows:
				2011		2010
				Balance	Maximum	Balance			Maximum
				Sheet	exposure	Sheet			exposure
	Current assets			£'000	£'000	£'000			£'000
	Loans and receivables			635	635	1,255			1,255
	AAA Money Market funds			9,296	9,296	1,001			1,001
	Cash and short term deposits			3	3	2			2
				_________	_________	_________			_________
				9,934	9,934	2,258			2,258
				_________	_________	_________			_________
	None of the Company's financial assets is past due or impaired.
	Maturity of financial liabilities
	The maturity profile of the Company's financial liabilities at 30 June was as follows:
							2011		2010
							£'000		£'000
	In less than one year						-		2,000
	In more than one year						23,040		-
							_________		_________
							23,040		2,000
							_________		_________

18.	Fair Value hierarchy
FRS 29 'Financial Instruments: Disclosures' requires 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 asset 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).
All of the Company's investments are in quoted equities (2010 - same) actively traded on recognised stock exchanges, with their fair value being determined by a reference to their quoted bid prices at the reporting date.  The total value of the investments (2011 - £170,172,000; 2010 - £98,057,000) have therefore been deemed as Level 1.

Additional notes

This Annual Financial Report is not the Company's statutory accounts.  The statutory accounts for the year ended 30 June 2010 have been delivered to the Registrar of Companies.   The statutory accounts for the years ended 30 June 2010 and 30 June 2011 received an audit report which was unqualified, did not include a reference to any matters to which the auditor 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 2011 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 11 October 2011 at the offices of Standard Life Investments, 1 George Street, Edinburgh EH2 2LL.

The Annual Report will be posted to shareholders in September 2011 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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