Annual Financial Report

RNS Number : 2292S

Standard Life UK Small.Co's Tst PLC

07 September 2010

 



STANDARD LIFE UK SMALLER COMPANIES TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2010

1.    CHAIRMAN'S STATEMENT

Review of the year ended 30 June 2010

The Company's net asset value per share rose by 38.5% to 154.04p during the year ended 30

June 2010 compared to a rise of 24.4% in the Hoare Govett Smaller Companies Index (excluding

Investment Companies) (all figures in capital return terms). The Company's Ordinary share price increased by 35.8% to 136.50p, from 100.50p, over the same period. Total dividends increased by 56.3%.

The Company has won a number of awards during the last year and has consistently remained a top performer in its peer group since Standard Life Investments' appointment as Manager.

Earnings and Dividend

The Company's primary objective is capital growth and it is very pleasing that the net asset value has increased by 38.5% over the last financial year. The Company pays a dividend based on the receipts from underlying investments during the year, which may be higher or lower than in previous years. The revenue return per share for the year ended 30 June 2010 was 2.86p (2009 - 2.56p). The Board is recommending to shareholders a final Ordinary dividend of 1.50p per share which would result in total dividends for the year of 2.50p following the payment, on 19 March 2010, of an interim dividend of 1.0p. This compares with the final Ordinary dividend of 1.10p per share in respect of the year ended 30 June 2009 and total dividends of 1.60p per share for that year. If approved, this will represent an increase in the final dividend of 36.4% and an increase in total dividends for the year of 56.3%.

Subject to shareholder approval at the Annual General Meeting on 12 October 2010, the final Ordinary dividend will be paid on 15 October 2010 to shareholders on the register as at 17 September 2010; the ex-dividend date is 15 September 2010.

VAT on management fees

Further to negotiations with the Company's former manager, the Board is pleased to report the receipt of £374,000 during the year representing repayment of VAT charged to the Company between January 2001 and the transfer of the investment management contract in September 2003. This equates to a contribution to revenue return per share of 0.3p during the year.

Performance

As mentioned above, the Company's capital net asset value increased by 38.5% over the year ended 30 June 2010, compared with an increase of 24.4% in the Hoare Govett Smaller Companies Index (excluding Investment Companies), all figures in capital return terms.

During the period under review, the Manager continued to focus on investing in companies with proven business models and exposure to international markets. This led the Company's investment portfolio to outperform the wider smaller companies market over the year. For example, a preference for companies that display resilience, low risk and growth led to strong outperformance in the final quarter of the financial year.

The Company retains a record of successful 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  (A)	+39.7%	-2.3%	+78.8%
Share price	+35.8%	+4.2%	+97.1%
Peer group ranking	6/18	2/18	1/18

Source: Morningstar/Standard Life Investments

(A) Statutory Net Asset Value

Robust trading spurred the Company's major holdings, including online retailer ASOS, online antibodies distributor Abcam, retail Independent Financial Adviser Hargreaves Lansdown and Domino's Pizza. As a result, these companies were key contributors towards performance over the period. Power systems firm Chloride Group also boosted performance as it received an improved bid offer from US industrial technology company Emerson, while fashion retailer SuperGroup added to returns after listing on the FTSE 250 Index. On the downside, online security firm Datacash underperformed following lacklustre results, while BATM Advanced Communications was also weak following disappointing results.

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.

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. The Manager's clear approach to small company stock selection and very good long term performance record give the Board confidence in the ability of the Manager to deliver excellent long-term returns for shareholders.

Awards

The Company won the Small Capitalisation ("Small Cap") fund of the year award at the Growth Company Awards 2009, Best UK Small Cap category at the Money Observer Investment Trust awards 2009 (second year in a row) and the UK Smaller companies category at the Moneywise Investment Trust awards 2010 (fourth year in a row).

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 2010. Gearing was increased during the last quarter of 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 as well as a more confident outlook for the prospects of the Company's portfolio.

The Company had drawn down £2.0m of its £10.0m bank loan facility as at 30 June 2010 (2009 - £6.0m). The Company currently has no borrowings and its bank loan facility expired on 23 August 2010. The Board is in the process of negotiating an increased £15m bank loan facility.

Discount

The discount to net asset value (on a capital only basis) at which the Company's shares trade relative to their underlying net asset value widened over the year ended 30 June 2010 from 9.6% to 11.4% which compares to an arithmetic sector average for the UK smaller companies peer group of 16.5% (2009 - 16.6%). The average discount for the Company was 9.6% over the last financial year. As at 1 September 2010, the latest practicable date prior to publication, the share price was 152.75p per Ordinary share which represented a discount of 9.0% to the latest published capital net asset value per share (including income) of 167.87p.

Regular tender offers and Share capital

Following shareholder approval at the last AGM for the Company to embark on regular tender offers, the

Company published a circular to Shareholders on 23 April 2010 setting out details of a tender offer for up to 5% of the Company's issued share capital at 30 June 2010. On 7 July 2010, the Company announced that a total of 4,731,822 Ordinary shares, representing approximately 7.5% of the Company's issued share capital at 30 June 2010, were validly tendered. Following scaling back, 3,158,167 Ordinary shares were repurchased into treasury by the Company at a price of 144.84p per share. Following the implementation of the tender offer, and as at the date of this Report, the Company had 60,005,214 Ordinary shares in issue with voting rights. Payments were made to tendering shareholders on 14 July 2010. The next proposed tender offer would take effect on 31 December 2010 prior to which a circular and tender form would be sent to shareholders and holders of shares via the Company's savings scheme. To participate in the 31 December 2010 tender offer shareholders would require to be on the share register at the record date of 10 September 2010. In light of the experience and costs of the 30 June 2010 tender offer, the tender price for future tender offers should be realisable value less a 2% exit charge.

During the year ended 30 June 2010, the Company did not buy back any of its Ordinary shares.

On 31 March 2010, the Scottish Court of Session granted the Company's application to approve the cancellation of the entire share premium account and capital redemption reserve and the creation of a capital reserve ('the reserve'), in the amount of approximately £25,620,000. The reserve is available to be used in any manner in which the Company's profits available for distribution may be applied, including the funding of tender offers and share buy backs.

Marketing activities

The Manager continues to broaden the shareholder base via the Company's ISA and Share Plan.

Prospects

With the new Government setting tough goals for cutting public expenditure in order to seek to stabilise the country's finances, growth in many areas of the economy will be hard to achieve while the overall performance of the economy is likely to be fairly weak. In addition, markets are likely to be volatile with regular changes in sentiment.

Despite this background, however, the Board shares the Manager's belief in the good prospects for the Company. This reflects the Manager's proven and consistent success in selecting and investing in high quality companies with strong, sustainable and well-managed businesses with good growth prospects even in tough markets.

Donald MacDonald

Chairman

6 September 2010

2.    MANAGER'S REPORT

The UK smaller companies sector, as represented by the Hoare Govett Smaller Companies Index (excluding Investment Trusts), rose by 24.4%, in capital return terms, over the year. This compares with a rise in net asset value for the Company of 38.5%, while the share price rose by 35.8% (all figures in capital return terms). Meanwhile, the FTSE 100 Index of the largest UK listed companies rose by 15.7%, (in capital return terms). At year end, the Company's share price had surpassed the previous high of 134p on 6 April 2007 since our appointment as Manager. This is in sharp contrast to our benchmark and the blue chip FTSE 100 Index, both of which remain approximately 28% below their high points at the Company year end.

UK economy and equity market

There were three distinct market phases over the year in question. Between July and October there was a rapid recovery in markets. Early indicators of improvement around the world translated into significantly better trading across a wide range of corporate sectors. Equity markets continued to respond rapidly to the reversal of sentiment. This upswing was led by risky recovery stocks and was accompanied by a slew of fund raisings as companies repaired their balance sheets.

From October, investors became more discerning about stock selection after the initial bounce.

Markets moved up more slowly while businesses with greater visibility and growth characteristics started to lead the way. By the end of the first quarter of 2010 markets took fright at the implications of the sovereign debt crisis when Greece required a bail out as it became increasingly difficult for it to refinance its government debt. In the UK, the election was an issue as the potential for a hung parliament scared investors. In the event, the coalition has looked solid and the emergency budget has done enough for the UK to retain its AAA credit rating. The final quarter of the year was one of extremely strong relative Company performance. The Company benefited from a further bout of risk aversion as investors searched for reliable and predictable growth stocks that could buck the trend of what looked likely to be a period of sluggish growth for the remainder of 2010. It became clear that the scale of government cutbacks and tax increases required to stabilise the national balance sheet would restrain economic and corporate recovery.

Performance

The Company underperformed during the first phase of the year as high-quality growth companies remained out of favour. From October onwards, however, performance gradually improved and finished the year on a very high note indeed, as companies with resilient, proven business models and international market exposure started to outperform significantly.

More normal market conditions have resumed during 2010 with the return of bid activity and the new issues market. Following Kraft's bid for Cadbury, an increasing bid momentum almost entirely from trade buyers helped markets make progress. The Company's holdings in Emerald Energy and Chloride received bids during the year, with the latter being contested which led to a very significant premium being paid.

A number of new issues, the lifeblood of the smaller companies sector, were well received by the market.

The Company particularly benefited from a very strong performance from SuperGroup, the owner of the "Superdry" clothing brand. The other new issue of note, CPP (Card Protection Plan), performed well following its listing in March 2010.

Our high exposure to successful online business models was strongly beneficial to performance.

ASOS, the online clothing retailer, was easily the best performer of the year, up 153%. ASOS has consistently beaten expectations and is now developing a very strong international presence. Abcam, the world's leading online antibody distributor and the Company's second largest position, also continued to deliver on expectations. Our third online business, online property company Rightmove, forged ahead as advertising moved from the printed page to the internet.

Other areas of strength included our electronic and electrical holdings. These included Andor Technologies, the Ulster-based specialist digital camera company, electronic measurement probes firm Renishaw and LED lighting company Dialight. Growth retailers such as JD Group and Dunelm performed well while there were a number of stand out branded goods companies, albeit at different ends of the spectrum. These were healthcare products manufacturer PZ Cussons, soft drinks firm AG Barr and handbag company Mulberry. All of these companies retained strong balance sheets during the recession and were able to pick up cheap assets and grow through that difficult period.

On the other hand, some of our more recent investments proved disappointing, notably Axis Shield, the Dundee-based medical test kit company, set-top box company Pace and mid-sized investment bank

Evolution Group. Goals Soccer Centres also proved a disappointment, even though it has successfully opened its first centre in the US.

Dealing and activity

The Company bought back into First Quantum, a copper miner with assets in Zambia, Australia, Mauritania and Finland. Another key purchase was Mulberry Group, the handbag brand, which has performed strongly and has the potential to become an international brand. We also bought Hikma Pharmaceuticals, the Jordanian generic pharmaceuticals company listed in London. Hikma is the leading pharmaceutical company across the Middle East, where spending on healthcare is rising rapidly. A further new issue, electronic patient records software firm EMIS, was added to the portfolio. Immunodiagnostics Systems Holdings based in Gateshead, a world leader in Vitamin D test kits was another purchase. The product is receiving a lot of attention at the moment as a marker for a range

of bone-related diseases as well as hypertension, resulting from a shortage of Vitamin D.

On the sell side, Emerald Energy, which was subject to a bid, was sold to Sinopec. Profits were taken in

ASOS for risk reduction reasons as it became too large a position in the portfolio. We also took profits in Ultra Electronics which had become too large for the Company. Other sales included Paypoint, the electronic payments system, property company Hansteen, gaming software firm Playtech and social housing maintenance provider Connaught.

In terms of sector exposure, the Company remains heavy in software companies with earnings visibility, healthcare, leading engineers and capital goods specialists, growth retailers and personal branded goods companies. We are light in support services, insurance, financial, real estate and building and construction companies. The Company has only minimal exposure to government spending which is likely to be under pressure for years to come. As usual, our focus is on high-quality growth stocks with a surplus of earning visibility and the potential to become large companies.

It is also notable that founders are often still running the companies that we hold. Indeed, 15 out of the top 30 holdings have a founder as chief executive. In 23 out of 30 the chief executive has been in place for more than 10 years. This brings an entrepreneurial spirit, strong focus and the ability to take companies from start up to having hundreds of employees and substantial profits.

Gearing

Gearing was 3.7% at the start of the year under review. It was increased to near the maximum level by November 2009. In May, the gearing was reduced rapidly to 1.0% where it remained at the end of the period.

Tender Offer

In June, 7.49% of the outstanding shares were tendered, therefore requiring 5% of the Company's assets to be sold. A price of 144.84p was achieved for exiting shareholders. This transition was achieved in an orderly fashion albeit that market conditions were difficult at the beginning of July 2010 as investors turned risk averse and dealing spreads widened.

Outlook

Whereas 2009 was a year of rapid recovery from the turmoil of the previous year, the first half of 2010 saw the realisation sink in that an extended period of belt tightening would be required to make good the losses stemming from the banking crisis and excess of the previous decade.

Our view is that the disaster of depression has been averted and enough has been done to ensure that recovery is sustainable. The emerging markets of China, India, Brazil and Russia are on a continuing growth path and are driving the world economy forward. However, this recovery is likely to be slow and somewhat anaemic in its character. In addition, the sovereign debt crisis and issues around the stability of the euro may return periodically to haunt the greater European economy. There looks to be a structural mismatch in the ability of a number of weaker European economies to solve their budgetary excesses within the euro.

So, what does this all mean for the UK stock market and particularly smaller companies? It is likely that risk aversion will be the dominant theme and the market may generally find it hard to make substantial progress. The good news is that this is a particularly positive environment for our investment style. We expect a continuation of the strong performance that has been seen in the closing months of the year under review. If we are correct in our view on the economy then the Company is likely to generate significant returns.

It is notable that our holdings generally performed well through the downturn of 2008 and early

2009. There were no dividend cuts; indeed dividend increases were significant which, in turn, allowed the Company's dividend payment to move ahead substantially. Our expectation is for more to follow in future years.

Furthermore, the top 20 largest listed companies in the UK face major structural problems. Led by BP and the banks, dividends have been slashed at the top end of the market. Many of these companies are in decline or ex-growth, following many years of merger and excess. Investment attention is quite rightly moving down to the smaller companies, which are the larger companies of tomorrow. It is likely that this will mean an increase in bid activity as these large companies look to add more dynamic mid and smaller companies to their portfolios in an effort to restart growth.

This underscores our opinion that our process is right for this market and that the outlook for Standard Life UK Smaller Companies Trust is bright in the short, medium and long term. Our focus on growth, quality and sustainable business models is right for a period when underlying economic growth is hard to come by.

Harry Nimmo

Standard Life Investments Limited, Manager

6 September 2010

3.    RESULTS & DIVIDENDS

Financial Highlights

			30 June
			2010	2009	% change
	Performance
	Total Return
	Net asset value per Ordinary share	-		-	41.4%
	Hoare Govett Smaller Companies Index	-		-	28.0%
	(excluding Investment Companies)
	Capital return
	Net asset value (statutory) per Ordinary share	154.04p		111.23p	38.5%
	Ordinary share price (mid market)	136.50p		100.50p	35.8%
	Discount of Ordinary share price to net asset value	11.4%		9.6%	-
	Hoare Govett Smaller Companies Index Capital Return	3,544.30		2,846.96	24.5%
	(excluding Investment Companies)
	Total assets (£m)1	99.30		76.26	30.2%
	Equity shareholders' funds (£m)	97.30		70.26	38.5%
	Total expenses ratio2	1.2%		1.2%
	Revenue return per ordinary share	2.86p		2.56p
	Dividend yield	1.8%		1.6%
	Interim Ordinary dividend paid for year	1.00p		0.50p	100.0%
	Proposed final Ordinary dividend for the year	1.50p		1.10p	36.4%
	Ordinary shares in issue (excluding shares held in treasury)	63,163,381		63,163,381	-
	Ordinary shares shares held in treasury	559,175		559,175	-
	Gearing (ratio of Borrowings to Shareholders' funds)
	Actual gearing ratio3	1.0%		3.7%
	Maximum potential gearing ratio4	10.3%		14.2%
	Year's Highs/Lows	High		Low
	Net asset value per Ordinary share	157.02p		108.61p
	Ordinary share price	142.50p		100.00p
	Discount of Ordinary share price to net asset value	14.0%		5.6%

1            Gross assets less current liabilities, after excluding short-term debt of £2.0m (2009 - £6.0m).

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

4        Potential gearing ratio is calculated as the value of the maximum bank loan facility (£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 ("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 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 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 2009. The Directors are of the opinion, under advice, that the Company has conducted its affairs for the year ended 30 June 2010 so as to be able to continue to obtain approval as an investment trust under Section 1158 of Corporation Tax Act 2010 (formerly 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

For the year ended 30 June 2010, the Company's net asset value rose 38.5%, in capital terms, which was greater than the rise of 24.4% in the Company's benchmark, the Hoare Govett Smaller Companies Index (excluding Investment Companies), in capital 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 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.

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 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 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 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.

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 consisted of equity share capital comprising Ordinary 25p shares as at 30 June 2010. There was a three-year revolving credit facility with Lloyds Banking Group plc for up to £10m at an interest rate fixed at 0.35% above LIBOR, which expired on 23 August 2010. 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 Sections 1158 - 1159 of Corporation Tax Act 2010 (formerly Section 842 of Income and Corporation Taxes Act 1988) 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.

There is also a regulatory risk in the form of the Alternative Investment Fund Managers Directive ("AIFMD") published by the European Commission. The AIFMD would, if implemented into UK legislation as proposed, introduce a new authorisation and supervisory regime for all investment trust fund managers in the European Union creating additional regulatory costs and other potentially adverse consequences 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 has been delegated under an Investment Management Agreement.

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. 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 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.

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, give a

true and fair view of the assets, liabilities, financial position and profit; 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

6 September 2010

INCOME STATEMENT

for the year ended 30 June 2010

		2010			2009
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Net gains/(losses) on investments held at fair value	9	-	27,633	27,633	-	(8,063)	(8,063)
Currency losses		-	(3)	(3)	-	(10)	(10)
Income	2	2,202	-	2,202	1,433	-	1,433
Investment management fee	3	(157)	(470)	(627)	(41)	(143)	(184)
Performance fee	3	-	(619)	(619)	-	-	-
VAT recovered on investment management fees	3	187	187	374	-	-	-
Other administrative expenses	4	(398)	-	(398)	(385)	-	(385)
		________	________	________	________	________	________
NET RETURN BEFORE FINANCE COSTS AND TAXATION		1,834	26,674	28,562	1,007	(8,216)	(7,209)
Finance costs	5	(18)	(54)	(72)	(13)	(40)	(53)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES BEFORE TAXATION		1,809	26,674	28,490	994	(8,256)	(7,262)
Taxation	6	(7)	-	(7)	(4)	-	(4)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES AFTER TAXATION		1,818	26,665	28,483	990	(8,256)	(7,266)
		________	________	________	________	________	________
RETURN PER ORDINARY SHARE:	8	2.86p	42.23p	45.09p	2.56p	(21.39p)	(18.83p)
		________	________	________	________	________	________
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 2010

		2010	2009
	Notes	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	9	98,057	72,576
		___________	___________
Current assets
Loans and receivables	10	1,255	770
AAA Money Market funds	14	1,001	3,118
Cash and short term deposits	14	2	77
		___________	___________
		2,258	3,965
		___________	___________
Creditors: amounts falling due within one year	11	(3,017)	(6,285)
		___________	___________
Net current liabilities		(759)	(2,320)
		___________	___________
Net assets		97,298	70,256
		___________	___________
Capital and reserves
Called-up share capital	12	15,931	15,931
Share premium account		-	25,073
Capital redemption reserve		-	549
Special reserve		46,871	21,364
Capital reserve		32,737	6,063
Revenue reserve		1,759	1,276
		___________	___________
Equity Shareholders' funds		97,298	70,256
		___________	___________
Net asset value per Ordinary share	15	154.04p	111.23p

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 30 June 2010		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 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 (see note 18)	-	-	-	-	(115)	-	-	(115)
Cancellation of reserves (see note12)	-	(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
	________	________	________	________	________	________	________	________
For the year ended 30 June 2009		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
	________	________	________	________	________	________	________	________
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 2010

		2010		2009
	Notes	£'000	£'000	£'000	£'000
Net cash inflow from operating activities	13		1,619		739
Servicing of finance
Interest paid			(74)		(45)
Taxation			(15)		(12)
Financial investment
Purchase of investments		(32,411)		(45,627)
Sale of investments		34,041		42,468
		_________		_________
Net cash inflow/(outflow) from financial investment			1,630		(3,159)
Equity dividends paid			(1,326)		(677)
			_________		_________
Net cash inflow/(outflow) before management of liquid resources and financing			1,834		(3,154)
Financing
Share capital issued - C shares		-		1,480
Exercise of warrants		-		1,165
Tender offer expenses		(23)		-
(Repayments)/drawdown of bank loan		(4,000)		2,500
			(4,023)		5,145
			_________		_________
Net cash (outflow)/inflow before management of liquid resources			(2,189)		1,991
Management of liquid resources
Purchase of AAA Money Market funds		(32,000)		(37,296)
Sale of AAA Money Market funds		34,117		35,386
		_________		_________
Net cash inflow/(outflow) from management of liquid resources			2,117		(1,910)
			_________		_________
(Decrease)/increase in cash	14		(72)		81
			_________		_________
Reconciliation of net cashflow to movement in net debt
(Decrease)/increase in cash	14	(72)		81
Net change in liquid resources	14	(2,117)		1,910
Net change in debt due within one year	14	4,000		(2,500)
Other non-cash movements	14	(3)		(10)
		_________		_________
Movement in net debt in year			1,808		(519)
Opening debt	14		(2,805)		(2,286)
			_________		_________
Closing debt	14		(997)		(2,805)
			======		======
The accompanying notes are an integral part of the financial statements.

NOTES TO FINANCIAL STATEMENTS:

For the year ended 30 June 2009

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 equates to 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, according to the circumstances. 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 recognized 100% as a capital item in the Income Statement as it related entirely to the capital performance of the trust. Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Income Statement.
	(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 which are readily convertible to cash, without accepting adverse terms, are transferred to the capital reserve.
	(h)	Taxation
		Deferred taxation is recognised in respect of all temporary 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 and on 31 March 2010, 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.

		2010	2009
		£000	£000
2	Income
	UK dividend income	1,963	1,102
	Unfranked investment income	-	137
	REIT income	57	34
	Overseas dividend income	161	-
		__________	__________
		2,181	1,273
		__________	__________
	Other income
	Interest from AAA Money Market funds	13	53
	Interest from UK Treasury Bills	-	73
	Deposit interest	-	1
	Interest from HMRC	-	33
	Underwriting commission	7	-
	Other income	1	-
		__________	__________
		21	160
		__________	__________
	Total income	2,202	1,433
		__________	__________

		2010	2009
		£000	£000
3	Investment management fee
	Investment management fee	627	184
	Charged to capital reserve	(470)	(143)
		__________	__________
		157	41
		__________	__________
	Performance fee
	Performance fee	619	-
	Charged to capital reserve	(619)	-
		__________	__________
		-	-
		__________	__________

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. 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 movement plus 1%.  This is capped at 0.6% of the Gross Asset Value at the period end. During the year ended 30 June 2009, SLI 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. The balance due to SLI at the year end was £779,000 (2009 - debtor of £12,000). 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 approximately £330,000 of VAT has been made to the Company by Standard Life Investments plc, which was accounted fro in the 2008 financial statements.  In addition a further £374,000 has been received from Aberdeen Asset Management plc which has been accounted for in the current year.  Both 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.

		2010	2009
		£000	£000
4	Administrative expenses (inclusive of VAT)
	Secretarial fees	100	100
	Directors' fees	64	56
	Auditor's remuneration
	- statutory audit	20	20
	- other fees associated with issue of C shares	-	1
	Registrar's fees	25	58
	Professional fees	86	76
	Other expenses	103	74
		__________	__________
		398	385
		__________	__________
	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.

		2010	2009
		£000	£000
5	Finance costs
	Bank loan arrangement fee	6	-
	Bank loan interest	66	53
		__________	__________
		72	53
	Charged to capital reserve	(54)	(40)
		__________	__________
		18	13
		__________	__________

			2010					2009
			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	4	-	4
			________		_______		______	________	_______	_______
	(b)  Provision for deferred taxation
	At 30 June 2010, the company had unutilised management expenses and loan relationship losses of £31,253,000 (2009 - £29,979,000).  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 28% (2009: 28%)
	The differences are explained below.
		2010						2009
		Revenue		Capital		Total		Revenue	Capital	Total
		£'000		£'000		£'000		£'000	£'000	£'000
	Net profit on ordinary activities before taxation	1,816		26,674		28,490		994	(8,256)	(7,262)
	Corporation tax at 28% (2009: 28%)	508		7,469		7,977		279	(2,312)	(2,033)
	Effects of:
	Non-taxable UK dividend income	(550)		-		(550)		(309)	-	(309)
	Non-taxable overseas dividends	(40)		-		(40)		-	-	-
	Exchange losses not taxable	-		1		1		-	3	3
	Income taxable in different years	(5)		-		(5)		-	-	-
	Overseas taxes	7		-		7		4	-	4
	Excess management expenses and loan relationship losses	58		267		316		30	51	81
	Expenses not deductible for tax purposes	29		-		29		-	-	-
	Other capital returns (e.g. gains/(losses) on investments)	-		(7,737)		(7,737)		-	2,258	2,258
		________		_______		______		________	_______	_______
	Current tax charge	7		-		7		4	-	4
		________		_______		______		________	_______	_______

		2010	2009
7	Dividends	£000	£000
	Amounts recognised as distributions to equity holders in the period:
	2009 final dividend of 1.10p per share (2008 - 1.00p) paid on 16 October 2009	695	320
	2008 special dividend of 0.60 per share	-	192
	2010 interim dividend of 1.00p per share (2009 - 0.50p) paid on 19 March 2010	631	166
	Return of unclaimed dividends	-	(1)
		_______	_______
		1,326	677
		_______	_______
	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 Sections 1158 - 1159 of the Corporation Taxes Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £1,809,000 (2009 - £990,000).
		2010	2009
		£000	£000
	2010 interim dividend of 1.00p per share (2009 - 0.50p) paid on 19 March 2010	631	166
	2010 final dividend of 1.50p per share (2009 - 1.10p) payable on 15 October 2010	900	695
		_______	_______
		1,531	861
		_______	_______

		2010		2009
		p	£000	p		£000
8	Return per ordinary share
	Basic
	Revenue return	2.86	1,809	2.56		990
	Capital return	42.23	26,674	(21.39)		(8,256)
		_______	_______	_______		_______
	Total return	45.09	28,483	(18.83)		(7,266)
		_______	_______	_______		_______
	Weighted average number of Ordinary shares in issue		63,163,381		38,598,545
	The remaining warrants were cancelled on 14 October 2008 and so no calculation of diluted return per ordinary share is possible for either year.

				2010	2009
				£000	£000
9	Investments
	Fair value through profit or loss
	Opening fair value			72,576	47,846
	Opening fair value gains on investments held			(10,354)	(13,322)
				________	________
	Opening book cost			62,222	34,524
	Additions at cost			32,275	75,606
	Disposals	- proceeds		(34,427)	(42,813)
		- realised gains/(losses) on sales		5,314	(5,095)
				________	________
	Closing book cost			65,384	62,222
	Current year fair value gains on investments held			32,673	10,354
				________	________
	Closing fair value			98,057	72,576
				________	________
	Losses on investments
	Realised gains/(losses) on sales			5,314	(5,095)
	Increase/(decrease) in fair value gains on investments held			22,319	(2,968)
				________	________
				27,633	(8,063)
				________	________
	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/(losses) on investments in the Income Statement. The total costs were as follows:
			2010		2009
			£000		£000
	Purchases		162		232
	Sales		37		34
			________		________
			199		266
			________		________

		2010	2009
		£000	£000
10	Loans and receivables
	Amounts due from brokers	963	577
	Net dividends and interest receivable	256	156
	Investment management fee receivable	-	12
	Other debtors	36	25
		________	________
		1,255	770
		________	________

		2010	2009
		£000	£000
11	Creditors: amounts falling due within one year
	Bank loans	2,000	6,000
	Amounts due to brokers	-	136
	Interest payable	2	4
	Investment management fee payable	160	-
	Performance fee payable	619	-
	Sundry creditors	144	145
	Tender offer costs payable	92	-
		________	________
		3,017	6,285
		________	________
	The Company had a revolving credit facility with Lloyds TSB until 23 August 2010. At the year end there was a balance of £2,000,000 (2009 - £6,000,000), drawn down at a rate of 0.93330% (2009 - 1.0234%) with a maturity date of 19 July 2010.  Subsequent to the year end on 19 July 2010 the loan was fully paid off and the facility expired on 23 August 2010.

		2010	2009
12	Called up share capital	£000	£000
	Authorised:
		37,500	37,500
		________	________
	Issued and fully paid:
	63,163,381 (2009 - 63,163,381) ordinary shares of 25p each - equity	15,791	15,791
	Held in treasury:
	559,175 (2009 - 559,175) ordinary shares of 25p each - equity	140	140
		________	________
		15,931	15,931
		________	________
	Following shareholder approval for the Company to embark on tender offers, the Company published a circular on 23 April 2010 for a tender offer of up to 5% of the Company's issued share capital at a discount of up to 2% of net asset value, as at 30 June 2010.  On 7 July 2010, the Company announced that a total of 3,158,167 Ordinary shares were repurchased into treasury.  Following the implementation of the tender offer, the Company had 60,005,214 Ordinary shares in issue and 3,717,342 Ordinary shares in treasury. During the year the Company received Court approval to cancel its entire share premium account and capital redemption reserve and create a special reserve of £25,622,000.
	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.

		2010	2009
		£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	28,562	(7,209)
	Adjusted for:
	(Gains)/losses on investments	(27,633)	8,063
	Currency losses	3	10
	Increase in accrued income	(100)	(54)
	Decrease/(increase) in other debtors including investment management fee	9	(14)
	Increase/(decrease) in sundry creditors including investment management fee	778	(57)
		________	________
	Net cash inflow from operating activities	1,619	739
		________	________

		At 30 June 2009	Cashflow	Currency and other movements	At 30 June 2010
		£000	£000	£000	£000
14	Analysis of changes in net debt
	Cash and short term deposits	77	(72)	(3)	2
	AAA money market funds	3,118	(2,117)	-	1,001
	Debt due within one year	(6,000)	4,000	-	(2,000)
		________	________	________	________
	Net debt	(2,805)	1,811	(3)	(997)
		________	________	________	________

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.
		2010	2009
	Basic net asset value per share
	Net assets attributable (£000)	97,298	70,256
	Number of Ordinary shares in issue at year end	63,163,381	63,163,381
	(excluding shares held in treasury)
	Net asset value per share	154.04p	111.23p
		________	________

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 (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 on the basis that their impact is considered immaterial.
	(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. During the year ended 30 June 2010, the Company's borrowings comprise a £2m 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.
	Details of borrowings as at 30 June 2010 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 2010			Years			%		£000
	Assets
	AAA Money Market funds			-			0.66		1,001
	Cash deposits			-			-		2
				________			________		________
	Total assets			-			-		1,003
				________			________		________
	Liabilities
	Bank loans			-			0.93		2,000
				________			________		________
	Total liabilities			-			-		2,000
				________			________		________
				Weighted average			Weighted
				period for which			average		Floating
				rate is fixed			interest rate		rate
	At 30 June 2009			Years			%		£000
	Assets
	AAA Money Market funds			-			0.64		3,118
	Cash deposits			-			-		77
				________			________		________
	Total assets			-			0.64		3,195
				________			________		________
				Weighted average			Weighted
				period for which			average		Floating
				rate is fixed			interest rate		rate
				Years			%		£000
	Liabilities
	Bank loans			0.1			1.02		6,000
				________			________		________
	Total liabilities			0.1			1.02		6,000
				________			________		________
	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 maturity date of the Company's loan is 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 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 2010 would increase / decrease by £10,000 (2009 : increase / decrease by £32,000). 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 2010			30 June 2009
			Net		Total			Net	Total
		Overseas	monetary		currency	Overseas		monetary	currency
		investments	assets		exposure	investments		assets	exposure
		£'000	£'000		£'000	£'000		£'000	£'000
	Euro	2,982	-		2,982	1,803		-	1,803
		________	________		________	________		________	________
	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 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 2010 would have increased / decreased by £9,806,000 (2009 - increase / decrease of £7,258,000).  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. Short-term flexibility is achieved through the use of loan and overdraft facilities (note 11).
	(iii) Credit risk
	This is failure of the counter party to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.
	The Company considers credit risk not to be significant as it is actively managed as follows:
	-       where the 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 rating 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; -       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.
	Fair values of financial assets and financial liabilities
	The fair value of borrowings has been calculated at £2,000,000 as at 30 June 2010 (2009 - £6,000,000) compared to an accounts value in the financial statements of £2,000,000 (2009 - £6,000,000) (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.

17.     Fair Value hierarchy
The Company adopted the amendments to FRS 29 'Financial Instruments: Disclosures' effective from 1 January 2009. These amendments require an entity to classify fair value measurements using a fair value hierarchy that reflects the significance.
-        Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
-        Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (ie as prices) or indirectly (ie derived from prices); and
-        Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The financial assets and liabilities measured at fair value in the Balance Sheet are grouped into the fair value hierarchy at 30 June 2010 as follows:
		Level 1	Level 2	Level 3	Total
	Note	£'000	£'000	£'000	£'000
Financial assets at fair value through profit or loss
Quoted Equities	a)	98,057	-	-	98,057
		________	________	________	________
Net fair value		98,057	-	-	98,057
		________	________	________	________
a) Quoted Equities
The fair value of the Company's investments in Quoted Equities have been determined by reference to their quoted bid prices at the reporting date. Quoted Equities included in Fair Value Level 1 are actively traded on recognised stock exchanges.
18.     Post Balance Sheet events The Company released a Tender Offer document to shareholders in April 2010.  The Company announced on 7 July 2010 that the Tender Offer resulted in 4,731,822 Ordinary shares (representing approximately 7.49 per cent. of the Company's issued share capital) being tendered and, in accordance with the terms of the Tender Offer, the total number of shares to be bought back under the Tender Offer was 3,158,167 Ordinary shares, representing 5 per cent. of the Ordinary shares in issue on the Record Date. The cost of the shares bought back was £4,574,000, excluding tender offer costs of £115,000, which has been charged against this reserve during the year. Following the implementation of the Tender Offer, the Company had 60,005,214 Ordinary shares in issue with a total number of voting rights of 60,005,214.

Additional notes

This Annual Financial Report announcement is not the Company's statutory accounts.  The statutory accounts for the year ended 30 June 2009 have been delivered to the Registrar of Companies. 

The statutory accounts for the years ended 30 June 2009 and 30 June 2010 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 2010 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 12 October 2010 at the offices of Standard Life Investments, 1 George Street, Edinburgh EH2 2LL.

The Annual Report will be posted to shareholders in September 2010 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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