Annual Financial Report

RNS Number : 2739L

Standard Life UK Small.Co's Tst PLC

03 September 2012

 

STANDARD LIFE UK SMALLER COMPANIES TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2012

1.      CHAIRMAN'S STATEMENT

Since Standard Life Investments took over as Manager on 1 September 2003, the Company has delivered a net asset value total return of 253%, representing an annualised return of 15.3% per annum and outperforming the Company's benchmark, the Numis Smaller Companies Index (excluding Investment Companies), by 4.6% per annum.

Since 2003, the Board and the Manager have taken several significant steps to strengthen the framework of the Company, most notably the successful merger with Gartmore Smaller Companies Trust in 2009 which increased the size of the Company and put in place active discount control measures to enhance shareholder value. The Company's debt has been restructured by the issuance of Convertible Unsecured Loan Stock, with an interest cost of 3.5% per annum, and dividend growth for the past five years has been 31.1% per annum (excluding specials).

In recognition of the excellent long term performance and the positive impact of the structural enhancements mentioned above, the Company won the 'Best Shareholder Value' award, across the whole investment company sector, at the Investment Week Investment Trust of the Year Awards 2011. The Company also won the 'UK Smaller Companies' category for the third year out of the past four, as well as a number of other awards including Moneywise UK Smaller Companies Trust of the year for the sixth year in a row.

Performance

Notwithstanding the good long term performance, continued market volatility has created a challenging environment over the past year. Following the sharp sell off last August, markets recovered some ground at the start of 2012, responding to the European Central Bank's support of the banking system. The rally was led by recovery and cyclical stocks. The Company's focus on risk aversion combined with its strong preference for high quality, growth orientated stocks caused it to underperform during this period.

For the year ended 30 June 2012, the Company's net asset value total return was -7.6%, compared with a total return of -4.1% for the Company's benchmark, the Numis Smaller Companies Index (excluding Investment Companies).

The Manager's Report provides further information on the Company's performance over the year, as well as portfolio activity and the Manager's outlook for smaller companies.

Despite losing some ground this year, the Company's long term performance remains strong and it continues to compare well against its peer group, as illustrated in the table below:

                                                          3 years               5 years

Net asset value total return        + 100.4%      +49.7%

Share price total return                 +112.3%      +67.4%

Benchmark total return                 +  64.8%        +8.6%

Peer group ranking                               6/16            1/15

Earnings and Dividend

The revenue return per share for the year ended 30 June 2012 was 3.50p (2011 - 4.35p). Last year's figure included 1.38p in respect of VAT refunds and related interest received from HM Revenue & Customs. Removing the effect of this, the underlying earnings per share has increased by 17.8% this year as dividend growth from the underlying portfolio remained strong.  Income from investments increased by 21.5% in the period.

The Board is recommending a final dividend of 2.10p per share, an increase on last year's final dividend of 20.0%. If approved, the final dividend, together with the interim dividend of 1.0p paid in March, will give a total dividend for the year of 3.10p and will represent an increase of 12.7% on last year (excluding the special dividend paid last year in relation to the VAT refunds).

Subject to shareholder approval at the Annual General Meeting on 11 October 2012, the final dividend will be paid on 18 October 2012 to shareholders on the register as at 21 September 2012 with an associated ex-dividend date of 19 September 2012

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, has been the lead manager of the Company's investment portfolio since 2003 and his excellent performance record gives the Board confidence in the ability of the Manager to continue to deliver strong long term returns for shareholders.

Management Fee Arrangements

One of the key aims of the FSA's Retail Distribution Review (RDR) is that investment products offer transparent charging structures. The Board recognises the importance of the Company having a clear and easily understood fee basis to ensure that it remains competitive and fair to shareholders in the post RDR environment.

With this in mind, the Board and the Manager have agreed to simplify the management fee structure by removing the performance fee element and reverting to a basic management fee arrangement. The Manager was previously able to earn up to 1.25% of total assets less current liabilities in any one year. This was made up of a basic management fee of 0.65% (reduced to 0.2% on any uninvested cash) plus a performance fee of up to 0.6%.

With effect from 1 July 2012, the Manager will receive a basic management fee of 0.85% per annum of the Company's total assets less current liabilities. The Manager will no longer receive a performance fee.

Gearing

The Board has given 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.

The Company currently has £24.9 million 3.5% Convertible Unsecured Loan Stock 2018 (CULS) in issue and the Manager is able to vary net gearing by adjusting the level of cash held by the Company.

At 30 June 2012, the net gearing level was 5.8%, with approximately £10 million of the £24.9 million CULS invested. Net gearing has been maintained around this level throughout the year, reflecting the short term uncertainties in the market but optimism over the longer term. As a reminder to holders of the CULS, these can be converted into Ordinary shares on 30 September and 31 March of each year up to

March 2018, at a fixed price per Ordinary share of 237.2542p.

Discount

The discount at which the Company's shares trade relative to the underlying net asset value was 5.8% at 30 June 2012.  The Company's shares traded at a small premium for much of the first half of the reporting period but risk aversion in the market at the end of 2011 caused a widening of discounts across the UK Smaller Companies sector.  The Company's discount does, however, compare very favourably with the peer group average, which was 17.4% at 30 June 2012.

Since the year end, the Company's discount has narrowed and, at the time of writing, its shares were trading at a small premium.

Regular Tender Offers

The Board exercised its discretion and did not conduct a tender offer at either of the 31 December 2011 or 30 June 2012 tender dates.  This reflected the fact that the Company's shares had traded, on average, at a discount of less than 2% during the previous twelve month period.  The costs of the first two tenders, held in 2010, ranged from 6.0% to 6.5% of the net asset value of shares tendered.

The Board believes that the regular tender offer is an important mechanism for controlling the Company's discount and protecting shareholder value and will continue to consider a 5% tender offer at six monthly intervals, offering shareholders the opportunity to tender their shares where it is in their best interests to do so. The Board does not intend to carry forward any unused tender amounts.  The next review by the Board will be in November 2012, prior to the 31 December 2012 tender date.

Outlook

The macroeconomic backdrop remains challenging, particularly in relation to the on-going difficulties in the Euro-zone.  Despite the economic uncertainties, many UK smaller companies are proving resilient, with strong balance sheets and the ability to grow through internally generated cash flows.

Although remaining cautious on the near term outlook, your Board and Manager are confident that investing in high quality UK smaller companies, particularly those able to harness new technologies, will continue to provide shareholders with attractive long term returns.

Donald MacDonald

Chairman

31 August 2012

2.      MANAGER'S REPORT

Over the year, the Company's net asset value total return was -7.6%. This compares with the UK smaller companies sector as represented by the Numis Smaller Companies Index (excluding Investment Companies) which returned -4.1%, in total return terms. Over the same period the total return on the FTSE 100 Index of the largest UK listed companies was -2.7%.

The Company's share price at 30 June 2012 was 203p which is 16.7% below the high of 243.75p on 7 May 2011. Standard Life Investments has managed the Company since 1 September 2003, at which time the share price stood at 47.75p.  The share price has risen by 325% from then to the current year end, compared with our benchmark which was up 84.2%.

Equity markets

The major factor driving markets during the year in question has been the "Euro Crisis" and policy responses to that crisis. Markets fell sharply in the summer of last year as investors grew ever more concerned about a possible Greek exit from the Euro and potential economic collapse in that country. A further concern was contagion sweeping the whole southern part of Europe stretching from Cyprus to Portugal. By November 2011 some clarity started to appear with wholesale support for the Euro and the banking system from European monetary authorities. This in turn set off a market rally led by the more risky, recovery orientated stocks. This rally petered out by March 2012 when the Spanish economy in particular gave cause for concern, engendering some market weakness and a rotation into the better quality more stable names. By June markets again preferred riskier assets as further central support came in to help Spain shore up its banking sector.

Outside the Euro area economic growth has been sluggish at best. The UK at one point slipped back into technical recession and China has continued to slow all year ending up with interest rates being cut to head off slowdown. In the US modest headway has been made. Germany's manufacturing sector has been the bright feature, benefitting from the weak Euro.

Oil prices stayed high for most of the year peaking at over $125, but cracking to below $100 as worries over economic growth took hold in March 2012, only to recover on fears of growing political tensions in the Middle East. Sanctions against Iran have added to these fears. Metal prices have tended to trend down throughout the year as economic growth has remained sluggish.

Bid activity has been subdued in larger companies but there has been significant activity in smaller companies. Private equity activity has been absent. It is mainly about industry consolidation and trade buyers. The on/off Glencore/Xstrata situation is the only significant megacap bid situation.

Base rates have remained unchanged at rock bottom levels for yet another year in the US, Europe and the UK punctuated by periods of quantitative easing in what appear to be vain attempts to stimulate growth. This situation seems likely to continue for some time to come.

Performance

The first three quarters of the year were difficult for the Company. There were two reasons for this. The sharp selloff in August caused investors to sell stocks where they could book a profit. This caused some of our more highly rated growth stocks, such as Asos that had done very well, to trade off sharply. Following European Central Bank support for the European banking system in November, markets responded strongly into 2012 with a sharp return to risky recovery shares. The Company tends to de-emphasise that type of risky investment and, as a result, the net asset value was left behind as markets rallied strongly. The final quarter of the year saw stronger relative performance for the Company as gloom set in over the Spanish Banking system. This encouraged a return to form for our high quality, generally predictable growth stocks.

Four of the most resilient stocks led performance during the year. Telecom Plus, the multi-utility vendor continued to beat expectations. Rightmove steadily gained market share in their business of advertising domestic property. Likewise, Paddy Power rapidly out-distanced the more traditional sports betting companies, a result of their leading internet and mobile betting operation. Telecity, the internet infrastructure company, performed strongly through the year. Indeed it is noteworthy that three out of these four winners are either on-line or internet businesses. The massive growth of 3G internet-enabled mobile phones was instrumental in driving this progress.

Bid activity was also a significant positive for the fund. Cove Energy was a spectacular success following a competitive bidding battle between Shell and PTT of Thailand. Bids also came in for Globe Op Financial Services, Goals Soccer Centres and Group NBT.

The negatives in the portfolio included Kofax, the document management software company, Homeserve, the domestic boiler insurance company, Immunodiagnostic Systems Holdings, the diagnostic testing company and Lamprell in oil services. All of these holdings have been sold. Andor Technologies, the Belfast based specialist camera manufacturer, was weak following setbacks at a couple of its largest customers. We have retained this holding.

Dealing and Activity

The most significant additions to the portfolio were as follows:

·      The Company bought back into Paypoint, operators of the yellow payment terminals in convenience stores. This is a means of paying for a range of utility services with cash at the counter. Further growth is coming through as the ranks of the "unbanked" expand.

·      Diploma, the specialist industrial and healthcare distributor was added to the portfolio. This high quality operator has good business visibility and very predictable revenue streams.

·      Oxford Instruments was another significant purchase. This company has recently moved from turnaround to growth mode and has significant intellectual property. 

·      Waterlogic, the water purification company, was purchased when it listed on the stock market in July 2011. Waterlogic is a world leader in the provision of purified tap water.

·      Finally NCC Group, the leader in what is sometimes called "ethical hacking" was added. They assist companies in maintaining the integrity of their IT systems against external attack.

On the sell side, the above mentioned Cove Energy was sold for a substantial profit following the bids. Other major sales not mentioned so far include Intermediate Capital Group, which is likely to continue to flounder as it depends on healthy deal flow in the Private Equity Industry, and Cineworld Group, the multiplex cinema operator where trading has continued to be challenging.

Outlook

The outlook remains distinctly subdued in the short and medium term. Although Euro crisis part one was averted last November, it is as yet unclear whether there will be a happy outcome to this seemingly intractable problem. Our thinking is that certain weaker peripheral South European countries may ultimately leave the Euro. That outcome, we feel, will not be quite the Armageddon that many commentators are predicting.

On the positive side, the US may surprise on the upside, helped on by the windfall of shale oil and gas. It is likely that the rate of growth in China will slow as that country expands but will still be at a rate that leaves developed markets well behind.

Three themes are likely to influence the corporate environment in the UK in coming years. First, the level of regulatory scrutiny into the banking industry and their business practices is likely to continue at a high level and ultimately lead to significant re-regulation as to how that industry conducts itself and indeed its very structure. Second, the mining super-cycle of remorselessly rising raw material prices looks to be drawing to a close. China's growth in the future is more about changing consumer patterns and greater disposable income and less about building infrastructure. This is occurring just as huge newly developed mines are coming into production. Third, 3G,iPads and the mobile internet are likely to continue the current period of mass corporate extinction for businesses that have been slow to adapt to the on-line world, be it in retailing, sports betting, media, tourism, leisure, airlines or financial services.

These themes are bad for large companies and generally good for smaller companies. Banking and the extractive industries are to be found in the FTSE100 to a much greater extent than further down the market capitalisation range. Furthermore, on the issue of the internet, it is newer smaller companies that can build their businesses with new technologies and methodologies in mind. Older established businesses find it very difficult to adapt to the new environment. This all suggests that smaller and medium sized companies are likely to out-perform larger companies for another ten years. Our strong view is that investors should rebalance their portfolios to reflect this likelihood.

Although the business outlook looks rather tenuous, valuations are not stretched. Profitability, margins and cash-flows for many companies remain very strong. Furthermore balance sheets are in great shape. Indeed if one looks at the underlying corporate debt to equity ratio of the holdings in the Company one will find that there is on average a net cash position. The vast majority of our companies have net cash positions and can grow from internally generated cash-flows. Far from being at the mercy of the banks, they don't need banks. Another encouraging trend is the good rate of dividend growth and the use of special dividends without compromising growth prospects. This all gives us great confidence in the long term outlook for the Company.

Given however that growth remains very hard to find and that uncertainty surrounds the key pillars of our financial system, our emphasis on risk aversion, resilience, growth and momentum still feels right for the future.

Harry Nimmo

Standard Life Investments Limited, Manager

31 August 2012

3.      FINANCIAL HIGHLIGHTS

	30 June
	2012	2011	% change
Performance
Total Return
Net asset value per Ordinary share			-7.6%
Numis Smaller Companies Index (excluding Investment Companies)			-4.1%
Capital return
Net asset value (statutory) per Ordinary share	215.61p	240.65p	-10.4%
Ordinary share price (mid market)	203.00p	237.00p	-14.3%
Discount of Ordinary share price to net asset value	5.8%	1.5%
Numis Smaller Companies Index Capital Return (2011-RBS Hoare Govett Smaller Companies Index Capital Return)
(excluding Investment Companies)	4,318.73	4,637.03	-6.9%
Convertible Unsecured Loan Stock price	103.50p	109.00p	-5.0%
Total assets (£m)1	163.47	178.37	-8.4%
Equity shareholders' funds (£m)	140.15	155.33	-9.8%
Ongoing charges ratio2	0.96%	1.00%
Revenue return per Ordinary share	3.50p	4.35p3
Dividend yield	1.5%	1.6%
Interim dividend paid for year	1.00p	1.00p	-
Proposed final Ordinary dividend for the year	2.10p	1.75p	20.0%
Proposed Special dividend for the year	-	1.00p
Ordinary shares in issue (excluding shares held in treasury)	64,999,905	64,547,556	0.7%
Ordinary shares held in treasury	-	-	-
Gearing (ratio of Borrowings to Shareholders' funds)
Net gearing ratio4	5.8%	8.8%
Maximum potential gearing ratio5	16.6%	14.8%
Year's Highs/Lows
Net asset value per Ordinary share	245.33p	187.62p
Ordinary share price	245.00p	179.38p
Premium/(discount) of Ordinary share price to net asset value	7.2%	-9.5%
Convertible Unsecured Loan Stock price	115.00p	100.00p
Gearing	8.8%	1.1%
1        Total assets less current liabilities, after excluding short-term debt of nil (2011-nil).
2     Ongoing charges ratio calculated in accordance with guidance issued by the AIC as the total of the investment management fee and administrative expenses divided by the average cum income net asset value throughout the year. The figures for 2011 have been restated.
3     Revenue return per ordinary share in 2011 includes 1.38p of non-recurring VAT refunds and related interest.
4        Net gearing ratio calculated as the total of the liability component of £23.3m of the Convertible Unsecured Loan Stock less the cash invested in AAA money market funds and cash and short term deposits, divided by net assets.
5     Potential gearing ratio is calculated as the total of the liability component of £23.3m of the Convertible Unsecured Loan Stock divided by net assets.

4.            BUSINESS REVIEW

Together 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 2011. 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 2012. 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 2012, the Company's net asset value total return was -7.6%, compared to a total return of -4.1% for the Company's benchmark, the Numis Smaller Companies Index (excluding Investment Companies). For the five years ended 30 June 2012 the Company's net asset value total return was 49.7% compared to a total return of 8.6% for the benchmark.

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 2012, consisted of equity share capital comprising 64,999,905 Ordinary shares and £24,935,071 nominal amount of CULS.

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 further regulatory risk in the form of the Alternative Investment Fund Managers Directive ("AIFMD") which came into force in July 2011 and is due to be enacted in the national laws of member states of the European Union by July 2013.  The AIFMD will introduce a new authorisation and supervisory regime for all investment trust fund managers and investment companies 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 auditor does not involve consideration of these matters and, accordingly, the auditor accepts 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

31 August 2012

INCOME STATEMENT

for the year ended 30 June 2012

		2012			2011
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Net (losses)/gains on investments held at fair value	9	-	(14,397)	(14,397)	-	53,665	53,665
Currency gains/(losses)		-	-	-	-	1	1
Income	2	3,192	-	3,192	2,942	-	2,942
Investment management fee	3	(238)	(713)	(951)	(237)	(711)	(948)
Performance fee	3	-	-	-	-	(1,064)	(1,064)
VAT recovered on investment management fees	3	-	-	-	480	81	561
Other administrative expenses	4	(367)	-	(367)	(329)	-	(329)
		________	________	________	________	________	________
NET RETURN BEFORE FINANCE COSTS AND TAXATION		2,587	(15,110)	(12,523)	2,856	51,972	54,828
Finance costs	5	(289)	(866)	(1,155)	(105)	(313)	(418)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES BEFORE TAXATION		2,298	(15,976)	(13,678)	2,751	51,659	54,410
Taxation	6	(25)	-	(25)	(7)	-	(7)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES AFTER TAXATION		2,273	(15,976)	(13,703)	2,744	51,659	54,403
		________	________	________	________	________	________
RETURN PER ORDINARY SHARE:	8	3.50p	(24.61p)	(21.11p)	4.35p	81.96p	86.31p
		________	________	________	________	________	________
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 2012

		2012	2011
	Notes	£'000	£'000
NON-CURRENT ASSETS
Investments at fair value through profit or loss	9	147,937	170,172
		___________	___________
CURRENT ASSETS
Debtors	10	966	635
Investments in AAA Money Market funds	15	15,208	9,296
Cash and short term deposits	15	18	3
		___________	___________
		16,192	9,934
		___________	___________
CURRENT LIABILITIES
Creditors: amounts falling due within one year	11	(661)	(1,734)
		___________	___________
NET CURRENT ASSETS/(LIABILITIES)		15,531	8,200
		___________	___________
TOTAL ASSETS LESS CURRENT LIABILITIES		163,468	178,372
NON-CURRENT LIABILITIES
3.5% Convertible Unsecured Loan Stock 2018	12	(23,321)	(23,040)
		___________	___________
NET ASSETS		140,147	155,332
		___________	___________
CAPITAL AND RESERVES
Called-up share capital	13	16,250	16,137
Share premium account		3,722	2,881
Equity component of Convertible Unsecured Loan Stock 2018	12	1,470	1,470
Special reserve		46,871	46,871
Capital reserve		69,038	85,014
Revenue reserve		2,796	2,959
		___________	___________
EQUITY SHAREHOLDERS' FUNDS		140,147	155,332
		___________	___________
NET ASSET VALUE PER ORDINARY SHARE	16	215.61p	240.65p
		___________	___________

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 30 June 2012
		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 2011	16,137	2,881	1,470	46,871	85,014	2,959	155,332
Return on ordinary activities after taxation	-	-	-	-	(15,976)	2,273	(13,703)
Issue of  Ordinary Shares	106	790	-	-	-	-	896
Issue of new Ordinary Shares from conversion of  3.5% Convertible Unsecured Loan Stock 2018	7	51	-	-	-	-	58
Dividends paid (see note 7)	-	-	-	-	-	(2,436)	(2,436)
	________	________	________	________	________	________	________
BALANCE AT 30 JUNE 2012	16,250	3,722	1,470	46,871	69,038	2,796	140,147
	________	________	________	________	________	________	________
For the year ended 30 June 2011
		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 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 Ordinary 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
	________	________	________	________	________	________	________
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 2012

		2012		2011
	Notes	£'000	£'000	£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	14		878		1,539
SERVICING OF FINANCE
Interest paid			(874)		(91)
TAXATION			(53)		6
FINANCIAL INVESTMENT
Purchase of investments		(30,093)		(49,917)
Sale of investments		37,609		32,229
		_________		_________
NET CASH INFLOW/(OUTFLOW)FROM FINANCIAL INVESTMENT			7,516		(17,688)
EQUITY DIVIDENDS PAID			(2,436)		(1,544)
			_________		_________
NET CASH INFLOW/(OUTFLOW) FROM MANAGEMENT OF LIQUID RESOURCES AND FINANCING			5,031		(17,778)
FINANCING
Shares issued		896		9,331
Buyback of shares		-		(5,565)
Tender offer expenses		-		(153)
3.5% Convertible Unsecured Loan Stock 2018		-		24,460
Repayment of bank loan		-		(2,000)
		_________		_________
NET CASH INFLOW FROM FINANCING			896		26,073
			_________		_________
NET CASH INFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES			5,927		8,295
MANAGEMENT OF LIQUID RESOURCES
Purchase of AAA Money Market funds		(34,184)		(57,430)
Sale of AAA Money Market funds		28,272		49,135
		_________		_________
NET CASH  OUTFLOW FROM MANAGEMENT OF LIQUID RESOURCES			(5,912)		(8,295)
			_________		_________
INCREASE IN CASH	15		15		-
			_________		_________

RECONCILIATION OF NET CASHFLOW TO MOVEMENT IN NET DEBT
Increase in cash		15		-
Net change in liquid resources		5,912		8,295
Net change in debt due within one year		-		2,000
Net change in debt due in more than one year		-		(24,460)
Other non-cash movements		(281)		1,421
		_________		_________
MOVEMENT IN NET DEBT IN YEAR			5,646		(12,744)
OPENING NET DEBT			(13,741)		(997)
			_________		_________
CLOSING NET DEBT			(8,095)		(13,741)
			_________		_________

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

NOTES TO FINANCIAL STATEMENTS:

For the year ended 30 June 2012

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 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).
		Any 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.
	(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 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 and 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 using the effective interest rate.
		The interest expense on the CULS is calculated according to the effective interest rate method by applying the assumed rate of 4.83% 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 on redemption that is recognised through profit or loss. The amount of consideration allocated to equity is recognised in equity with no gain or loss being recognised.

		2012	2011
		£000	£000
2	Income
	UK dividend income	2,504	2,178
	REIT income	58	53
	Overseas dividend income	501	272
	UK stock dividend income	-	4
	Overseas stock dividend income	-	14
		__________	__________
		3,063	2,521
		__________	__________
	Other income
	Interest from AAA Money Market funds	129	26
	Interest from HMRC	-	395
		__________	__________
		129	421
		__________	__________
	Total income	3,192	2,942
		__________	__________

		2012	2011
3	Investment management fee	£000	£000
	Investment management fee	951	948
	Charged to capital reserve	(713)	(711)
		__________	__________
		238	237
		__________	__________
	Performance fee
	Performance fee	-	1,064
	Charged to capital reserve	-	(1,064)
		__________	__________
		-	-
		__________	__________
	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.
	Up to 30 June 2012 the management fee was calculated at an annual rate of 0.65% of the gross assets after deducting current liabilities and reduced to an annual rate of 0.20% on uninvested cash and cash equivalents. The fee is chargeable 25% to revenue and 75% to capital.
	In addition, SLI was 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), exceeded the Benchmark Index movement plus 1%.  This was capped at 0.6% of the Gross Asset Value at the period end. From 1 July 2012, the management fee payable to SLI will be 0.85% of the gross assets of the Company after deducting current liabilities but including any bank loans.  There will be no performance fee.
	The balance due to SLI at the year end was £245,000 (2011 - £1,343,000).
	In 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 have now been processed.
	A refund of £561,000 was received from AAM which as accounted for in 2011.  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, in 2011 an amount of £395,000 was received in respect of interest on the AAM settled claim and was credited wholly to revenue (see note 2).

		2012	2011
		£,000	£,000
4	Administrative expenses (inclusive of VAT)
	Secretarial fees Directors' fees	113	106
		79	71
	Auditor's remuneration
	- statutory audit	22	21
	Registrar's fees	30	31
	Professional fees	17	71
	Other expenses*	106	29
		__________	_________
		367	329
		__________	_________
	*Other expenses for 2011 include £54,000 of over accruals for previous years written back in 2011.
	The secretarial fee is paid to SLI and adjusted annually in line with the Retail Price Index.

		2012		2011
		£,000		£,000
5	Finance costs
	Bank loan arrangement fee	-		9
	Bank loan interest	-		80
	Interest on 3.5% Convertible Unsecured Loan Stock 2018	870		225
	Notional Interest on 3.5% Convertible Unsecured Loan Stock 2018		213	54
	Issue expenses on 3.5% Convertible Unsecured Loan Stock 2018	-		32
	Amortisation of 3.5% Convertible Unsecured Loan Stock 2018 issue expenses	72		18
		__________		_________
		1,155		418
	Charged to capital reserve	(866)		(313)
		__________		_________
	Charged to revenue reserve	289		105
		__________		_________

			2012				2011
			Revenue		Capital	Total	Revenue		Capital	Total
6	Taxation		£000		£000	£000	£000		£000	£000
	(a)  Analysis of charge for year
	Tax on ordinary activities		25		-	25	7		-	7
			_______		_____	_______	_______		_____	_______
	(b)  Provision for deferred taxation
	At 30 June 2012, the Company had unutilised management expenses and loan relationship losses of £35,273, 000 (2010 - £33,012,000).  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 25.5% (2011: 27.5%). The differences are explained below.
		2012					2011
		Revenue		Capital		Total	Revenue		Capital	Total
		£'000		£'000		£'000	£'000		£'000	£'000
	Net profit on ordinary activities before taxation	2,298		(15,976)		(13,678)	2,752		51,657	54,409
		_______		_______		_______	_______		______	_______
	Corporation tax at an effective rate of 25.5% (2011: 27.5%)	586		(4,074)		(3,488)	757		14,206	14,963
	Effects of:
	Non-taxable UK dividend income	(639)		-		(639)	(599)		-	(599)
	Non-taxable overseas dividends	(128)		-		(128)	(75)		-	(75)
	Non-taxable stock dividends	-		-		-	(5)		-	(5)
	Exchange losses not taxable	-		-		-	-		-	-
	Income taxable in different years	(1)		-		(1)	(2)		-	(2)
	Overseas taxes	25		-		25	7		-	7
	Excess management expenses and loan relationship losses	182		403		585	(79)		407	328
	Expenses not deductible for tax purposes	-		-		-	3		145	148
	Other capital returns (e.g. gains on investments )	-		3,671		3,671	-		(14,758)	(14,758)
		_______		_______		_______	_______		_______	_______
	Current tax charge	25		-		25	7		-	7
		_______		_______		_______	_______		_______	_______
								2012		2011
7	Dividends							£000		£000
	Amounts recognised as distributions to equity holders in the year:
	2011 final dividend of 1.75p per share (2010 - 1.50p) paid on 14 October 2011							1,137		907
	2011 special dividend of 1.00p per share (2010-nil) paid on 14 October 2011							649		-
	2012 interim dividend of 1.00p per share (2011 - 1.00p) paid on 30 March 2012							650		637
								__________		__________
								2,436		1,544
								__________		__________
	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.
	The actual 2011 final dividend paid differs from the proposed 2011 final dividend due to additional Ordinary Shares issued in October 2011 - see note 13.
	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 £2,273,000 (2011 - £2,744,000).
								2012		2011
								£000		£000
	2012 interim dividend of 1.00p per share (2011 - 1.00p) paid on 30 March 2012							650		637
	2012 final dividend of 2.10p per share (2011 - 1.75p) payable on 18 October 2012							1,365		1,136
	2012 special dividend of nil (2011 -1.00p )							-		649
								__________		__________
								2,015		2,422
								__________		__________
	The amount payable for the proposed final dividend is based on the Ordinary shares in issue as at 31 August 2012 which satisfies the requirement of Section 1159 of the Corporation Tax Act 2010.

		2012		2011
		p	£000	p	£000
8	Return per ordinary share
	Basic
	Revenue return	3.50	2,273	4.35	2,744
	Capital return	(24.61)	(15,976)	81.96	51,659
		________	________	________	________
	Total return	(21.11)	(13,703)	86.31	54,403
		________	________	________	________
	Weighted average number of Ordinary shares in issue		64,926,950		63,029,147
			__________		__________

		2012	2011
		£000	£000
9	Investments
	Fair value through profit or loss
	Opening fair value	170,172	98,057
	Opening fair value gains on investments held	(78,376)	(32,673)
		__________	_________
	Opening book cost	91,796	65,384
	Additions at cost	30,180	49,917
	Disposals - proceeds	(38,018)	(31,467)
	- realised gains on sales	2,875	7,962
		__________	_________
	Closing book cost	86,833	91,796
	Current year fair value gains on investments held	61,104	78,376
		__________	_________
	Closing fair value	147,937	170,172
		__________	_________
	Gains on investments
	Realised gains on sales	2,875	7,962
	(Decrease)/Increase in fair value gains on investments held	(17,272)	45,703
		__________	_________
		(14,397)	53,665
		__________	_________
	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:
		2012	2011
		£000	£000
	Purchases	166	264
	Sales	49	27
		__________	_________
		215	291
		__________	_________

		2012	2011
		£000	£000
10	Debtors
	Amounts due from brokers	610	201
	Net dividends and interest receivable	303	401
	Tax recoverable	42	14
	Other debtors	11	19
		__________	__________
		966	635
		__________	__________

		2012	2011
		£000	£000
11	Creditors: amounts falling due within one year
	Bank loans	-	-
	Interest payable	221	279
	Investment management fee payable	245	279
	Performance fee payable	-	1,064
	Sundry creditors	108	112
	Amounts due to brokers	87	-
		__________	__________
		661	1,734
		__________	__________

12	Non-current liabilities
		Nominal	Liability	Equity
	3.5% Convertible Unsecured Loan Stock 2018	Amount £000	Component £000	Component £000
	Opening balance	25,000	23,040	1,470
	Conversion of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary Shares	(65)	(58)	-
	Notional Interest on 3.5% Convertible Unsecured Loan Stock 2018	-	267	-
	Amortisation	-	72	-
		__________	__________	__________
	Closing balance	24,935	23,321	1,470
		__________	__________	__________
	On 3 October 2011 the Company converted £52,234 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 22,003 Ordinary Shares. Also on 3 April 2012 the Company converted £12,695 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 5,346 Ordinary Shares. As at 30 June 2012, there was £24,935,071 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 in issue. 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 up until 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. 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.

		2012	2011
13	Called up share capital	£000	£000
	Authorised:
		37,500	37,500
		__________	_________
	Issued and fully paid:
	64,999,905 (2011 - 64,547,556) Ordinary shares of 25p each - equity	16,250	16,137
	Held in treasury:
	Nil (2011 - nil) Ordinary shares of 25p each - equity	-	-
		__________	_________
		16,250	16,137
		__________	_________
	During the year the Company issued 425,000 Ordinary shares to satisfy shareholder demand for a total consideration received of £896,000.  Also, the Company issued 27,349 Ordinary shares following the receipt of elections to convert by holders of the Company's 3.5% Convertible Unsecured Loan Stock 2018.
	Capital Management
	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.

		2012	2011
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	(12,523)	54,828
	Adjusted for:
	Losses/(gains) on investments	14,397	(53,665)
	Currency gains	-	(1)
	Decrease/(increase) in accrued income	98	(145)
	Decrease/(increase) in other debtors	8	(10)
	Decrease/(increase) in sundry creditors including investment management fee and performance fee	(1,102)	532
		__________	_________
	Net cash inflow from operating activities	878	1,539
		__________	_________

		At 30 June 2011	Cashflow	Currency and other movements	At 30 June 2012
		£000	£000	£000	£000
15	Analysis of changes in net debt
	Cash and short term deposits	3	15	-	18
	AAA Money Market funds	9,296	5,912	-	15,208
	Debt due in more than one year	(23,040)	-	(281)	(23,321)
		__________	_________	__________	_________
	Net (debt)/cash	(13,741)	5,927	(281)	(8,095)
		__________	_________	__________	_________

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.
		2012	2011
	Basic net asset value per share
	Net assets attributable (£000)	140,147	155,332
	Number of Ordinary shares in issue at year end	64,999,905	64,547,556
	(excluding shares held in treasury)
	Net asset value per share	215.61p	240.65p

17	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.
	(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 and money market funds;
	- 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 2012, 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 and is also able, if the circumstances warrant, to use derivatives or to purchase fixed interest securities in order to offset the effect of gearing.
	The 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 2012	Years	%	£000
	Assets
	AAA Money Market funds	-	0.69	15,208
	Cash deposits	-	-	18
		_________	________	________
	Total assets	-	-	15,226
		_________	________	________
	Liabilities
	3.5% Convertible Unsecured Loan Stock 2018	6.25	3.50	23,321
		_________	________	________
	Total liabilities	-	-	23,321
		_________	________	________
		Weighted
		average period for	Weighted average
		which rate is fixed	interest rate	Floating rate
	At 30 June 2011	Years	%	£000
	Assets
	AAA Money Market funds	-	0.84	9,296
	Cash deposits	-	-	3
		_________	________	_________
	Total assets	-	-	9,299
		_________	________	________
		Weighted
		average period for	Weighted average
		which rate is fixed	interest rate	Floating rate
		Years	%	£000
	Liabilities
	3.5% Convertible Unsecured Loan Stock 2018	7.25	3.50	23,040
		_________	________	________
	Total liabilities	-	-	23,040
		_________	________	________
	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 higher or lower and all other variables were held constant, the Company's :
	- profit for the year ended 30 June 2012 and net assets would increase / decrease by £152,000 (2010 - increase / decrease by £93,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances and money market funds.
	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 2012			30 June 2011
			Net	Total		Net	Total
		Overseas	monetary	currency	Overseas	monetary	currency
		investments	assets	exposure	investments	assets	exposure
		£'000	£'000	£'000	£'000	£'000	£'000
	Euro	7,218	-	7,218	5,876	-	5,876
		_________	_________	________	_________	_________	________
	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 (i.e. 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% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 30 June 2012 and net assets would have increased / decreased by £14,794,000 (2011 - increase / decrease of £17,017,000).  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;
	-     the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a monthly basis. In addition, both stock and cash reconciliations to the Custodians' records are performed on a daily basis to ensure discrepancies are investigated on a timely basis.
	-     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:
				2012		2011
				Balance	Maximum	Balance	Maximum
				Sheet	exposure	Sheet	exposure
	Current assets			£'000	£'000	£'000	£'000
	Loans and receivables			966	966	635	635
	AAA Money Markets funds			15,208	15,208	9,296	9,296
	Cash and short term deposits			18	18	3	3
				_________	_________	_________	_________
				16,192	16,192	9,934	9,934
				_________	_________	_________	_________
	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:
		2012	2011
		£'000	£'000
	In more than one year	23,321	23,040
		_________	_________
		23,321	23,040
		_________	_________
	The full contractual liability for the CULS assuming no further conversions is £29,953,000 (2011 -  £30,906,000)
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 (i.e. as prices) or indirectly (i.e. 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 (20101- 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 (2012 - £147,937,000; 2011 - £170,172,000) have therefore been deemed as Level 1. The Company's CULS are actively traded on a recognised stock exchange.  The fair value of the CULS (2012 - £25,808,000; 2011 - £27,250,000) has therefore been deemed Level 1.
19.	Related party transactions
Standard Life Investments (Corporate Funds) Limited received fees for its services as investment manager and company secretary.  Further details are provided in notes 3 and 4.  The Directors of the Company received fees for their services.

Additional notes

This Annual Financial Report is not the Company's statutory accounts.  The statutory accounts for the year ended 30 June 2011 have been delivered to the Registrar of Companies.   The statutory accounts for the years ended 30 June 2011 and 30 June 2012 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 2012 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 2012 at the offices of Standard Life Investments, 1 George Street, Edinburgh EH2 2LL.

The Annual Report will be posted to shareholders in September 2012 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

Maven Capital Partners UK LLP, Secretaries

For Further Information please contact:

Standard Life Investments - Gordon Humphries, Head of Investment Companies - Tel. [phone]

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