Final Results

Dechra Pharmaceuticals PLC 05 September 2006 Issued by Citigate Dewe Rogerson Ltd, Birmingham Date: Tuesday 5th September 2006 Embargoed: 7.00am Dechra Pharmaceuticals PLC Preliminary Results for the year ended 30 June 2006 Year Ended Year Ended June 2006 June 2005 Revenue Â£232.5m Â£210.3m +10.6% Operating profit Â£12.3m Â£11.3m +9.4% Profit before taxation Â£11.0m Â£9.7m +13.8% Cash generated from operations Â£14.0m Â£13.5m +3.3% Earnings per share Basic 14.71p 13.77p +6.8% Diluted 14.36p 13.54p +6.1% Dividend Final 4.33p 3.50p +23.7% Total 6.24p 5.20p +20.0% Clinical trial work required to obtain regulatory approval for VetorylR) Capsules and Felimazole(R) Tablets in the USA is progressing in line with expectations and is expected to be completed prior to the end of 2007 14% pre-tax profit growth after product development expenditure increase of 30.9% Cash conversion rate at 114% of operating profit Total dividend for the year increased by 20% 'Current trading remains in line with management expectations and we continue to maintain confidence in the future. We have an increasing number of opportunities to market and exploit our own-developed branded veterinary products on a global basis, and also to further extend our strong position within our Services businesses.' Michael Redmond, Chairman FULL STATEMENT ATTACHED Enquiries: Ian Page, Chief Executive Fiona Tooley, Director Simon Evans, Group Finance Director Katie Dale, Senior Account Manager Dechra(R) Pharmaceuticals PLC Citigate Dewe Rogerson Today: 0207 638 9571 Today: 0207 638 9571 Mobile: 07775 642222 (IP) or 07775 642220 (SE) Mobile: 07785 703523 (FMT) or 07770 788 624 Thereafter: 01782 771100 Thereafter: 0121 455 8370 www.dechra.com -2- Dechra Pharmaceuticals PLC Preliminary Results for the year ended 30 June 2006 STATEMENT BY THE CHAIRMAN, MICHAEL REDMOND Introduction I am pleased to report that we continue to make solid progress across the Group. This is reflected in the positive performance by our Pharmaceuticals and Services Divisions, both of which achieved strong revenue growth and improvements in profitability. Overall, our strategic focus firmly remains the on-going development of the Group's own branded veterinary pharmaceutical portfolio for the world's companion animal markets. Financial Highlights These are the first set of full year results to be presented using International Financial Reporting Standards ('IFRS'). The comparative figures for the year ended 30 June 2005 have been restated accordingly. Group revenue increased 10.6% from Â£210.3 million to Â£232.5 million. Operating profit increased by 9.4% to Â£12.3 million (2005: Â£11.3 million) and profit before taxation rose 13.8% to Â£11.0 million (2005: Â£9.7 million). Basic earnings per share was 14.71 pence, up 6.8% from the 13.77 pence achieved in 2005. Cash flow continued to be strong with cash flow from operations being 114% of operating profit. As at 30 June 2006, the Group had net funds of Â£1.1 million compared to net debt of Â£4.9 million at 30 June 2005. Interest cover was 9.7 times. Capital expenditure during the year totalled Â£2.2 million which principally comprised IT upgrades at our distribution and manufacturing businesses and an expansion of capacity at our distribution business. Dividend In line with our progressive dividend policy and our confidence in the business, the Directors are recommending a 23.7% increase in the final dividend to 4.33 pence per share (2005: 3.50 pence per share). This, together with the interim dividend of 1.91 pence per share (2005: 1.70 pence per share), makes a total dividend for the year of 6.24 pence per share (2005: 5.20 pence per share), a 20% increase. Total dividend cover is 2.3 times profit after taxation. The final dividend, which is subject to Shareholder approval at our Annual General Meeting to be held on Wednesday 18 October 2006, will be paid on 24 November 2006 to Shareholders on the Register at 27 October 2006. People On behalf of the Board and all our Shareholders, I warmly welcome all staff who joined us during the year and I would like to take this opportunity to thank all of our people for the tireless hard work, focus and commitment to the business. continued... -3- Prospects Current trading remains in line with management expectations and we continue to maintain confidence in the future. We have an increasing number of opportunities to market and exploit our own-developed branded veterinary products on a global basis, and also to further extend our strong position within our Services businesses. Following the launch of Vetoryl(R) Capsules by our European Marketing Partner in France, Germany and the Benelux countries, we expect to see a reasonable contribution in 2007 towards revenues. The clinical trial work required to obtain regulatory approval for Vetoryl(R) Capsules and Felimazole(R) Tablets in the USA is progressing in line with our expectations and these trials are expected to be completed prior to the end of 2007. -4- Dechra Pharmaceuticals PLC Preliminary Results for the year ended 30 June 2006 Please note the following Business and Financial Reviews are excerpts taken from the complete Directors Review which can be found at www.dechra.com and will be contained in the Report & Accounts due to be published shortly. BUSINESS REVIEW The Business Dechra Pharmaceuticals PLC ('Dechra') comprises six businesses operating under two divisions, Pharmaceuticals and Services. Both divisions are focused on the veterinary market with a key area of specialisation being on companion animal products. The Group's main focus is delivering organic growth from its two divisions; however, the key strategy to deliver medium to long-term growth is the development of our own branded veterinary pharmaceutical products for licensing internationally. Dechra employs 698 people who operate out of 16 locations. Product Development Achievements During the last five years we have licensed four specialist products of which Vetoryl(R) Capsules and Felimazole(R) Tablets currently represent our biggest opportunities for international growth. Vetoryl(R) is a novel and patented product for the treatment of Cushing's Disease (excess cortisol or hyperadrenocorticism) in dogs. It is the only licensed product within the EU and is the only recognised safe and efficacious product for the treatment of Cushing's Disease around the world. Launched in the UK on a provisional marketing authorisation in September 2001, Vetoryl(R) has been well received by veterinarians, with revenue now in excess of Â£2.9 million per year. It achieved mutual recognition for approval within Europe in 2005 and was recently launched within the key European territories. Felimazole(R) is the first veterinary licensed product for the treatment of feline hyperthyroidism. Felimazole(R) received marketing approval in 2002 and has achieved revenues in excess of Â£2.4 million in the financial year. Felimazole(R) was launched into most major EU territories during the 2005 financial year. Both Vetoryl(R) and Felimazole(R) have been granted an expedited review status by the FDA in the USA. The principal advantage to an expedited review is that there is a target 90-day response from submission of information. To date, we have submitted the safety and UK based efficacy parts of the dossiers; in both instances clear guidance has been provided by the FDA on requirements for further USA-based clinical trial work. In the USA, the various sections of the dossier can be submitted independently, i.e. when one section is complete it can be sent for review as opposed to the whole application being made concurrently. We anticipate filing our manufacturing sections by the end of this 2006 calendar year and the efficacy sections, containing data from the USA-based clinical trials, during the 2007 calendar year. continued... -5- Development Update There have been a number of achievements within our development programme throughout the financial year: - - Vetoryl(R) Capsules have received approval for marketing in 19 major European territories. This is a major achievement for our Regulatory team and is now the third product we have successfully licensed throughout key European markets following the approval of Felimazole(R) last year and Hypercard in 2003; - Our protocols for Vetoryl(R) clinical trials within the USA have been approved by the FDA and trials have commenced in several dogs with new cases being identified daily. We anticipate completing the trials on schedule prior to the end of the 2007 calendar year; - Clinical trials for Felimazole(R) are also progressing well within the USA. A significant number of cats have now commenced the trial and, as with Vetoryl(R), we anticipate the trials to be completed prior to the end of the 2007 calendar year; - After twelve months' negotiations of both a technical and commercial nature, we have signed a marketing agreement for Vetoryl(R) in Japan with Kyoritsu Seiyaku ('KS'). KS are Japan's leading companion animal pharmaceutical supplier and have over sixty representatives marketing to veterinary practices. The Japanese Regulators will require clinical trials to be conducted in Japan. These will be the responsibility of KS and it is anticipated that it will be at least three years to gain approval in this significant territory; - Complete dossiers have been submitted for Vetoryl(R) to the Canadian and Australian authorities. The complete Felimazole(R) dossier has been submitted in Canada. We estimate that the review process in these territories will take two to three years prior to marketing authorisations being approved; - A new 10mg small dog Vetoryl(R) Capsule is at an advanced stage of development for all markets, with approval anticipated for Europe within the next twelve months. The USA approval is expected to be concurrent with the full application; - Further investment has also been made into our pharmaceutical development laboratory in terms of equipment and people, as we continually strengthen our in-house product development formulation capabilities. We currently have a number of other products under development; due to commercial sensitivity we believe it to be appropriate to treat the nature of these projects as confidential. Pharmaceuticals Division Our Pharmaceuticals Division comprises Dechra Veterinary Products ('DVP UK'), Dechra Veterinary Products USA ('DVP USA'), Arnolds Veterinary Products ('Arnolds(R)') and Dales Pharmaceuticals ('Dales'). DVP UK As outlined in the Financial Review in this release, DVP had a very successful year. Felimazole(R) revenue increased by 34%, predominantly as a result of the introduction of the new 2.5mg product presentation which was launched last year. It is estimated that over 50,000 cats are now being treated with Felimazole(R) daily. Vetoryl(R)'s market penetration has also increased with over 2,100 of the UK's 3,500 veterinary practices now prescribing Vetoryl(R). The reduction in the pack size from a pot of 100 capsules to blister packs of 30 had a temporary depressive effect on UK revenue in the year as the number of capsules in the supply chain was reduced. This has now reversed out and solid growth is being delivered. The marketing department has been strengthened and restructured during the year with greater accountability being given to the marketing managers, with individual product categories being assigned to specific teams. Our business in Eire has been restructured and we have taken on direct sales responsibility with the appointment of a Business Development Manager for the territory. We have also strengthened our management team with the appointment of a European account manager to develop our relationship with our marketing partners and drive sales of our products within Europe. continued... -6- DVP US As outlined under Product Development, both Vetoryl(R) and Felimazole(R) are at an advanced stage of the licensing process, with full submissions being targeted to be completed by the end of 2007. The Directors consider that the US market represents the biggest single opportunity for our own international expansion. We believe that to gain full value from our products, the best route to market will be to create a Dechra brand within the USA. In order to achieve this, we currently market one minor product with the intention of establishing the Dechra brand, developing distributor relationships, creating a customer database and establishing accounting and logistics systems prior to the approval of our own key products. It is our intention to distribute our products through the existing network of veterinary suppliers within the USA, who also provide first line sales support. Our American function will be structured predominantly around marketing and technical support, with a team of up to 12 people being employed to coincide with the launch of our first major product. Due to the unique nature of Vetoryl(R) and Felimazole(R) the products will be sold on a technical basis, i.e. education of veterinary surgeons and opinion leaders which is achieved through technical marketing, sponsoring congress lectures, and through conducting regional educational roadshows. Pre-marketing has already commenced; the majority of world opinion leaders now understand and support the benefits of our products. Arnolds(R) Arnolds is a well-established brand within the UK veterinary market and sells licensed critical care fluids, instruments, consumables and equipment to veterinary practices. Critical care products, branded Vetivex, drive the growth within Arnolds(R). The revenue from instruments and surgery equipment is difficult to maintain given the low barriers to entry, cheap unregulated imports and the increasing number of small business entrants. The majority of products are branded 'Arnolds', however, we do have a number of important long-term marketing agreements which include 3M, B Braun and Portex (Smiths Medical). Throughout the year we have continued to build on the Vetivex range of critical care fluids which were purchased from Gambro BCT in April 2005. We have increased market share by 4% to 37.5% on a moving annual total basis and sales have now exceeded Â£1.2 million per annum. Many of our disposable products, which are associated with critical care, have also been branded Vetivex to leverage brand strength. Dales Throughout the year, we have continued to strengthen our technical department with further appointments being made within the Quality Assurance and Quality Control departments. We have successfully introduced a new Quality Management System, which provides the framework for anticipated future worldwide compliance requirements and is the basis for continual improvement. The improvement in the business has already been witnessed within the year as, despite these appointments, the overall headcount has reduced due to increased efficiency and investment in new equipment. The Dales management are at an advanced stage of implementing a new integrated IT system, which is expected to go live prior to the end of 2006. Services Division Our Services Division comprises National Veterinary Services ('NVS(R)'), NationWide Laboratories ('NWL') and Cambridge Specialist Laboratory Services ('CSLS'). NVS(R) NVS services companion animal practices, livestock practices and agricultural merchants, with approximately 60% of sales being in favour of companion animal related products. continued... -7- The wholesale market in which NVS trades saw a major consolidation within the year with the acquisition of GenusXpress by Dunlops. There are now only two major full-line competitors to NVS within the mainland UK, the other business being Centaur Services. NVS saw good growth within the year and market share gains, which now stands at 44%. NVS launched a new IT solution, Vpod, in February 2006, a hand-held, stand-alone, electronic, on-line ordering device. To date, 100 have been installed as veterinary practices recognise the benefits of this system to maintain optimum stock levels and the flexibility to place orders at any time of day. Over the last five years, NVS have been investing in automation within the warehouse. This has continued during this financial year with an investment in excess of Â£700,000. This investment increases our capacity and provides improved operational efficiencies. The warehouse has been extended with a new 16,000 sq. ft. mezzanine floor and significant improvements and extensions have been made to the semi-automated picking circuit. There have been two major management changes at NVS within the year. Martin Riley was appointed as Managing Director and Caitrina Harrison as Sales and Marketing Director. Laboratories The laboratories management team, established over the last two years, has begun to realise benefits from the changes they have implemented. New account gains have been good and new services have been introduced. Allervet, a pet allergy testing programme introduced last year, has exceeded expectations. We are also starting to build on the microbiology laboratory at NWL by providing services for food quality testing. This is a potentially large market and offers good growth opportunities. -8- Dechra Pharmaceuticals PLC Preliminary Results for the year ended 30 June 2006 FINANCIAL REVIEW Review of Operating Performance Group Performance The Group achieved revenue growth of 10.6% for the year whilst operating profit grew by 9.4%. This was despite the start up losses incurred by our US operation and a 30.9% increase in product development expenditure. Operating profit before these costs increased by 11.7% compared to last year. The Group achieved a pre-tax profit of Â£11.0 million, an improvement of 13.8% compared to last year. Pre-tax profit before product development and USA costs increased by 15.9%. The results are reviewed in more detail on a divisional basis below: Pharmaceuticals Division 2006 2005 Â£'000 Â£'000 Revenue Own branded pharmaceuticals 12,316 10,915 Instruments, consumables, critical care and equipment 5,127 4,436 Third party contract manufacturing 5,809 6,030 ---------- ---------- 23,252 21,381 ========== ========== Operating profit 4,868 4,292 ========== ========== Revenue from own branded pharmaceuticals continued to show strong growth, achieving a 12.8% increase over the previous year. As already emphasised, the development of this area of the business is the key strategic driver to long term growth. Most of the increase this year came from our key products Vetoryl(R) Capsules and Felimazole(R) Tablets. Vetoryl(R) achieved global revenue of Â£2.90 million, a 35.9% increase on the Â£2.13 million achieved last year. Felimazole(R) generated global revenue of Â£2.41 million, a 34.1% increase over last year. During the year, Vetoryl(R) became our largest product measured by global revenue with increasing amounts being sold overseas. In May 2006, we made the first shipment to our European marketing partner following the approval of Vetoryl(R) within the European Union. We are also selling substantial amounts into the USA under the FDA waiver scheme for named patients. Our USA operation commenced marketing one small product during the financial year. Although the revenue generated of Â£326,000 (US$589,000) was modest, we have managed to establish the Dechra brand within the USA and establish relationships with the key distributors that we will work with following the launch of Vetoryl(R) and Felimazole(R) into this market. Revenue from instruments, consumables, critical care and equipment increased by 15.6% to Â£5.13 million. This was entirely due to the excellent performance of the Vetivex(R) range of critical care fluids that we acquired in April 2005. The revenue achieved was Â£1.25 million which, as already noted, was derived from a significant gain in market share. Revenue from other instruments and consumables continued to struggle in the face of low cost competitors and 'grey market' imports. continued... -9- Revenue from third party contract manufacturing fell slightly due to the timing of customer delivery requirements. However, continued efficiency improvements enabled our manufacturing operation to increase operating profit by 14.6% despite the lower revenue. The order book at 30 June 2006 was strong at Â£2.0 million and, subsequent to the year end, a significant new contract has been agreed. Operating profit for the pharmaceuticals division increased by 13.4% to Â£4.9 million. This was even after a 30.9% increase in product development expense and the start-up losses incurred by our USA operation. Operating profits before these costs improved by 17.6% and reflects the higher margins achieved by our own branded pharmaceuticals and increased efficiency at our Dales manufacturing operation. Services Division 2006 2005 Â£'000 Â£'000 Revenue Veterinary wholesaling 210,940 190,634 Vetcom 819 785 Laboratories 3,797 3,192 ---------- ---------- 215,556 194,611 ========== ========== Operating profit 8,681 7,973 ========== ========== Revenue from veterinary wholesaling increased by 10.7% to Â£210.9 million. This compared to market growth as measured by GfK, an independent market analyst, of 5.3% for the same period. Revenue was boosted by NVS gaining, towards the end of the 2005 financial year, a number of veterinary practice accounts who had joined together as a buying and marketing group. Other account gains were also made during the year. Following the Competition Commission review of the veterinary market in 2003, the agricultural market was opened up to us. Revenue from sales to agricultural merchants reached nearly Â£2.6 million for the year, an increase of 17.1% over 2005. Revenue from our various IT products, branded Vetcom, increased by 4.3%. Our laboratories had an excellent year, achieving revenue growth of 19.0%. This reflected new veterinary practice account gains following a concerted sales and marketing effort and the introduction of new services such as Allervet, our pet and equine allergy testing programme. The overall veterinary wholesaling market continues to be competitive with upward pressure on discounts allowed to our customers. We largely negated this by further operational efficiencies and improvement of our gross margin. The division did, however, see a small reduction in operating margin from 4.10% to 4.03%. The Services Division has always been a strong cash generator and this provides the Group with the financial resources to invest in the development of our own branded pharmaceuticals. Unallocated Central Costs These costs comprise the charge in respect of share-based payments under IFRS2, Non-Executive Director fees and corporate legal, taxation and advisory fees. Central costs for the year increased from Â£1.0 million to Â£1.24 million. The principal reason for the increase was a rise in the charge for share-based payments (including national insurance) from Â£398,000 to Â£515,000. continued... -10- Net Finance Expense The net finance expense reduced by 18.4% to Â£1.27 million. This was due to the strong cash flow achieved during the year. The net finance expense was covered a healthy 9.7 times by operating profit (2005: 7.2 times). Taxation The effective tax rate this year was 31.6% compared to 27.6% last year. The rate this year was higher than the standard rate of 30% because of the losses of our USA subsidiary for which no tax asset has been recognised and expense items not deductible for tax purposes. A full reconciliation to the standard rate is shown in note 5 to the financial statements. During the year, additional tax credits totalling Â£429,000 relating to share-based payments were recognised. However, under IFRS rules, these had to be taken directly to equity rather than credited to the income statement. The 2005 tax rate was less than 30% due to tax relief on goodwill payments that had not been previously recognised. Earnings Per Share and Dividend Earnings per share increased by 6.8% over last year. The lower rate of growth when compared to pre-tax profit was due to the higher tax charge. The Board is proposing a final dividend of 4.33p per share (2005: 3.50p) which, when added to the interim dividend of 1.91p (2005: 1.70p) already paid, gives a total dividend for the year of 6.24p (2005: 5.20p). The 20% increase over last year reflects the strong cash flow performance of the Group and the Board's confidence in the future. Cash Flow The Group aims to achieve a cash conversion rate of at least 100% (defined as cash generated from operations as a percentage of operating profit). This year, a cash conversion rate of 114% (2005: 120%) was achieved. Total capital investment during the year was Â£2.16 million (2005: Â£2.43 million). The major items were upgrades to our IT systems at NVS and Dales and an expansion of our central warehouse capacity at NVS. This figure also includes Â£195,000 (2005: Â£321,000) of development costs that met the criteria for capitalisation. Financial Position at the End of the Year 2006 2005 Â£'000 Â£'000 Non-current assets Intangible assets 7,527 7,039 Property, plant & equipment 5,595 4,946 Deferred tax assets 445 406 ---------- ---------- 13,567 12,391 Working capital 11,774 12,127 Current tax liability (2,505) (2,057) Net cash/(borrowings) 1,079 (4,859) ---------- ---------- Net assets 23,915 17,602 ========== ========== continued... -11- The financial position at the end of the year was strong with equity shareholders funds standing at Â£23.9 million. This compares with just Â£1 million at 30 June 2001, our first year end following the listing of our shares on the London Stock Exchange. The increase in non-current assets is due to the investments detailed above whilst the reduction in working capital reflects further improvements in receivables days. During the year there was a drive to convert customers of our largest business, NVS, to pay by direct debit. It is pleasing to report that 1,250 accounts are now paying by this means. The strong cash flow during the year converted net borrowings of Â£4.9 million at 30 June 2005 to net funds of Â£1.1 million at 30 June 2006. Shareholders will be aware that the working capital requirements of the Group vary both intra-month and during the course of the year, reaching their peak in the period December - February. The Group will therefore return to a net borrowings situation at the next reporting date of 31 December 2006. Group Funding The Group is funded by Â£28.2 million of called up share capital, a Â£17.2 million term loan from Bank of Scotland repayable in instalments ending in 2010 and various finance lease and hire purchase contracts. The Group also has available a Â£5 million revolving credit facility committed until 2010 and a Â£4 million overdraft facility renewable annually to fund the Group's working capital requirements. These are only partially utilised at peak working capital points during the year. -12- Consolidated Income Statement for the year ended 30 June 2006 Year ended 30 June Note 2006 2005 Â£'000 Â£'000 Revenue 2 232,471 210,267 Cost of sales (199,205) (180,550) ------------ ------------ Gross profit 33,266 29,717 Distribution costs (10,309) (9,073) Administrative expenses (10,645) (9,389) ------------ ------------ Operating profit 2 12,312 11,255 Finance income 3 725 355 Finance expense 4 (1,993) (1,909) ------------ ------------ Profit before taxation 11,044 9,701 Income tax expense 5 (3,487) (2,674) ------------ ------------ Profit for the year attributable to equity holders 7,557 7,027 of the parent ============ ============ Earnings per share (pence) Basic 7 14.71p 13.77p ============ ============ Diluted 7 14.36p 13.54p ============ ============ Dividend per share (interim paid and final proposed 6 6.24p 5.20p for the year) ============ ============ -13- Consolidated Balance Sheet At 30 June 2006 As at 30 June Note 2006 2005 Â£'000 Â£'000 ASSETS Non-Current Assets Intangible assets 8 7,527 7,039 Property, plant & equipment 9 5,595 4,946 Deferred tax assets 10 445 406 ------------ ------------ Total non-current assets 13,567 12,391 ============ ============ Current Assets Inventories 11 21,957 20,390 Trade and other receivables 12 35,347 33,708 Cash and cash equivalents 13 19,738 13,924 ------------ ------------ Total current assets 77,042 68,022 ============ ============ Total assets 90,609 80,413 ============ ============ LIABILITIES Current Liabilities Borrowings 16 (3,417) (1,502) Trade and other payables 14 (45,530) (41,971) Current tax liabilities 15 (2,505) (2,057) ------------ ------------ Total current liabilities (51,452) (45,530) ============ ============ Non-Current Liabilities Borrowings 16 (15,242) (17,281) ------------ ------------ Total non-current liabilities (15,242) (17,281) ============ ============ Total liabilities (66,694) (62,811) ============ ============ Net assets 23,915 17,602 ============ ============ EQUITY Issued share capital 17 519 511 Share premium account 27,693 26,953 Hedging reserve (71) - Merger reserve 1,720 1,720 Retained earnings (5,946) (11,582) ------------ ------------ Total equity attributable to equity holders of the 23,915 17,602 parent ============ ============ -14- Consolidated Statement of Changes in Shareholders' Equity for the year ended 30 June 2006 Issued Share Hedging Merger Retained Total Share Premium Reserve Reserve Earnings Capital Account Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Year ended 30 June 2005 At 1 July 2004 510 26,784 - 1,720 (17,012) 12,002 Profit for the period being total - - - - 7,027 7,027 recognised income and expense for the period Dividends paid - - - - (2,473) (2,473) Share-based payments including deferred tax - - - - 876 876 Shares issued 1 169 - - - 170 ------- ------- ------- ------- ------- ------- At 30 June 2005 511 26,953 - 1,720 (11,582) 17,602 ======= ======= ======= ======= ======= ======= Year ended 30 June 2006 At 1 July 2005 as previously stated 511 26,953 - 1,720 (11,582) 17,602 Impact of adoption of IAS32 and IAS39 on 1 - - (71) - - (71) July 2005 ------- ------- ------- ------- ------- ------- At 1 July 2005 - re-stated 511 26,953 (71) 1,720 (11,582) 17,531 Profit for the period being total - - - - 7,557 7,557 recognised income and expense for the period Dividends paid - - - - (2,777) (2,777) Share-based payments including current and - - - - 856 856 deferred tax Shares issued 8 740 - - - 748 ------- ------- ------- ------- ------- ------- At 30 June 2006 519 27,693 (71) 1,720 (5,946) 23,915 ======= ======= ======= ======= ======= ======= -15- Consolidated Statement of Cash Flows for the year ended 30 June 2006 Year ended 30 June Note 2006 2005 Â£'000 Â£'000 Cash flows from operating activities Profit for the period 7,557 7,027 Adjustments for: Depreciation 886 902 Amortisation 136 74 Gain on sale of property, plant and equipment (23) (42) Finance income (725) (355) Finance expense 1,993 1,909 Equity-settled share-based payment expenses 427 488 Income tax expense 3,487 2,674 ------------ ------------ Operating cash flow before changes in working 13,738 12,677 capital Increase in inventories (1,567) (3,411) Increase in trade and other receivables (1,736) (787) Increase in trade and other payables 3,562 5,070 ------------ ------------ Cash generated from operations 13,997 13,549 Interest paid (1,890) (2,022) Income taxes paid (2,618) (1,996) ------------ ------------ Net cash from operating activities 9,489 9,531 Cash flows from investing activities Proceeds from sale of property, plant and equipment 23 140 Interest received 672 355 Purchase of property, plant and equipment (1,320) (644) Capitalised development expenditure (195) (321) Purchase of other intangible fixed assets - (1,100) ------------ ------------ Net cash from investing activities (820) (1,570) Cash flows from financing activities Proceeds from the issue of share capital 780 138 New borrowings 705 13,160 Repayment of borrowings (1,582) (1,538) Dividends paid (2,777) (2,473) ----------- ------------- Net cash from financing activities (2,874) 9,287 Net increase in cash and cash equivalents 5,795 17,248 Cash and cash equivalents at start of period 13,924 (3,324) ------------ ------------ Cash and cash equivalents at end of period 19,719 13,924 ============ ============ Shown as: Cash and cash equivalents 19,738 13,924 Bank overdraft (19) - ------------ ------------ 19,719 13,924 ============ ============ Reconciliation of net cash to movement in net borrowings Net increase in cash and cash equivalents 5,795 17,248 Repayment of borrowings 1,582 1,538 New borrowings (705) (13,160) New finance leases (649) (438) Other non-cash changes (85) 63 ------------ ------------ Movement in net borrowings in the period 5,938 5,251 Net borrowings at start of period (4,859) (10,110) ------------ ------------ Net cash/(borrowings) at end of period 19 1,079 (4,859) ============ ============ -16- Notes to the Financial Statements For the year ended 30 June 2006 1. Status of Accounts The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union ('adopted IFRS') for the first time. These financial statements have also been prepared in accordance with the Companies Act 1985. The Group previously prepared its annual and interim consolidated financial statements under UK Generally Accepted Accounting Principles (UK GAAP). As part of the transition to IFRS, announced on 19 October 2005, Dechra published the restatement of comparative financial information under IFRS for the year ended 30 June 2005. This is available from the Company's website at www.dechra.com. The Board of Directors approved the preliminary announcement on 5 September 2006. 2. Segmental Analysis The Group's primary reporting segment is business divisions which correspond with the way the operating businesses are organised and managed within the Group and its secondary segment is geographical origin. Segment results, assets and liabilities comprise those items directly attributable to particular segments as well as items which can reasonably be allocated to those segments. Inter-segment transactions are entered into applying normal commercial terms that would be available to third parties. Unallocated items comprise mainly corporate assets, expenses, loans and borrowings together with the elimination of inter-segment transactions. The composition of the segments is detailed in the Business Review section of this announcement. BUSINESS Pharmaceuticals Services Unallocated Total SEGMENT 2006 2005 2006 2005 2006 2005 2006 2005 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Revenue External customers 17,001 15,783 215,470 194,484 - - 232,471 210,267 Inter-segment 6,251 5,598 86 127 (6,337) (5,725) - - ------- ------- ------- ------- ------ ------- ------ ------- Total revenue 23,252 21,381 215,556 194,611 (6,337) (5,725) 232,471 210,267 ======= ======= ======= ======= ====== ======= ====== ======= Operating profit 4,868 4,292 8,681 7,973 (1,237) (1,010) 12,312 11,255 ======= ======= ======= ======= ====== ======= Finance income 725 355 Finance expense (1,993) (1,909) ------ ------- Profit before taxation 11,044 9,701 Income tax expense (3,487) (2,674) ------ ------- Profit for the year 7,557 7,027 ====== ======= Assets Intangible assets 5,104 4,630 2,423 2,409 - - 7,527 7,039 Property, plant and equipment 3,571 3,590 2,024 1,356 - - 5,595 4,946 Other assets 11,071 9,460 64,235 57,058 2,181 1,910 77,487 68,428 ------- ------- ------- ------- ------ ------- ------ ------- Total assets 19,746 17,680 68,682 60,823 2,181 1,910 90,609 80,413 ======= ======= ======= ======= ====== ======= ====== ======= Liabilities Borrowings (508) (33) (1,056) (340) (17,095) (18,410) (18,659) (18,783) Other liabilities (3,026) (3,842) (41,965) (37,964) (3,044) (2,222) (48,035) (44,028) ------- ------- ------- ------- ------ ------- ------ ------- Total liabilities (3,534) (3,875) (43,021) (38,304) (20,139) (20,632) (66,694) (62,811) ======= ======= ======= ======= ====== ======= ====== ======= Net assets/(liabil ities) 16,212 13,805 25,661 22,519 (17,958) (18,722) 23,915 17,602 ======= ======= ======= ======= ====== ======= ====== ======= Other Segment Items Capital expenditure - intangible assets 552 1,421 72 288 - - 624 1,709 - property, plant and equipment 469 341 1,066 381 - - 1,535 722 ------- ------- ------- ------- ------ ------- ------ ------- Total capital expenditure 1,021 1,762 1,138 669 - - 2,159 2,431 ======= ======= ======= ======= ====== ======= ====== ======= Share-based payments charge - - - - 515 398 515 398 ======= ======= ======= ======= ====== ======= ====== ======= Depreciation and amortisation 566 490 456 486 - - 1,022 976 ======= ======= ======= ======= ====== ======= ====== ======= continued... -17- GEOGRAPHICAL SEGMENT In presenting information on the basis of geographical segments, IAS14 'Segment Reporting' requires segment revenues to be based on the geographical location of customers. In this respect, Â£228,191,000 arises from customers in the UK (2005: Â£207,173,000) and Â£4,280,000 from customers in the rest of the world (2005: Â£3,094,000). The table below gives additional information in respect of segment revenue and segment operating profit based on the geographical location of the business unit supplying the goods or services. Segment assets and capital expenditure are based on the geographical location of the assets and expenditure. Activities in the UK comprise all operating segments. Overseas operations comprise pharmaceuticals only. UK USA Unallocated Total 2006 2005 2006 2005 2006 2005 2006 2005 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Revenue by geographic origin 232,145 210,267 326 - - - 232,471 210,267 ======= ======= ======= ======= ====== ======= ====== ======= Operating profit 13,809 12,450 (260) (185) (1,237) (1,010) 12,312 11,255 ======= ======= ======= ======= ====== ======= ====== ======= Total 88,190 78,453 238 50 2,181 1,910 90,609 80,413 assets ======= ======= ======= ======= ====== ======= ====== ======= Capital expenditure - intangible assets 624 1,709 - - - - 624 1,709 - property, plant and equipment 1,532 709 3 13 - - 1,535 722 ------- ------- ------- ------- ------ ------- ------ ------- Total capital expenditure 2,156 2,418 3 13 - - 2,159 2,431 ======= ======= ======= ======= ====== ======= ====== ======= 3. Finance Income 2006 2005 Â£'000 Â£'000 Bank interest receivable 627 355 Other interest receivable 52 - Fair value gains on derivative financial instruments 46 - --------- --------- Total finance income 725 355 ========= ========= 4. Finance Expense 2006 2005 Â£'000 Â£'000 Bank loans and overdrafts 1,913 1,877 Finance charges payable on finance leases and hire purchase contracts 64 32 Fair value losses on derivative financial instruments 16 - --------- --------- Total finance expense 1,993 1,909 ========= ========= 5. Income Tax Expense 2006 2005 Â£'000 Â£'000 Current - charge for current year 3,491 3,001 tax - adjustment in respect of prior years (58) (233) --------- ---------- Total current tax expense 3,433 2,768 --------- ---------- Deferred - origination and reversal of temporary 4 (37) tax differences - adjustment in respect of prior years 50 (57) --------- ---------- Total deferred tax expense 54 (94) --------- ---------- --------- ---------- Total income tax expense in the income statement 3,487 2,674 ========= ========== All taxation is in the United Kingdom. continued... -18- The tax on the Group's profit before tax differs from the standard rate of UK corporation tax of 30% (2005: 30%). The differences are explained below: 2006 2005 Â£'000 Â£'000 Profit before taxation 11,044 9,701 ========= ========== Tax at 30% 3,313 2,910 Effect of: - depreciation on assets not eligible for tax allowances 27 22 - disallowable expenses 33 2 - overseas trading losses 78 30 - under-recovery of deferred tax on share-based payments 44 - - adjustments in respect of prior years (8) (290) --------- ---------- Total income tax expense 3,487 2,674 ========= ========== Additional current tax credits of Â£367,000 (2005: Â£nil) and deferred tax credits of Â£62,000 (2005: Â£388,000) have been recognised directly in equity. 6. Dividends 2006 2005 Â£'000 Â£'000 Final dividend paid in respect of prior year but not recognised as a liability in 1,794 1,606 that year 3.50p per share (2005: 3.15p) Interim dividend paid 1.91p per share (2005: 1.70p) 983 867 --------- ---------- Total dividend 5.41p per share (2005: 4.85p) recognised as distributions to 2,777 2,473 equity holders in the period ========= ========== Proposed final dividend for the year ended 30 June 2006 4.33p 2,248 1,789 per share (2005: 3.50p) ========= ========== Total dividend paid and proposed for the year ended 30 June 2006 6.24p 3,231 2,656 per share (2005: 5.20p) ========= ========== In accordance with IAS10 'Events After the Balance Sheet Date', the proposed final dividend for the year ended 30 June 2006 has not been accrued for in these financial statements. It will be shown as a deduction from equity in the financial statements for the year ending 30 June 2007. The proposed final dividend for the year ended 30 June 2005 is shown as a deduction from equity in the year ended 30 June 2006. continued... -19- 7. Earnings per Share Earnings per ordinary share have been calculated by dividing the profit attributable to equity holders of the parent after taxation for each financial period by the weighted average number of ordinary shares in issue during the period. 2006 2005 Pence Pence Basic earnings per share 14.71 13.77 ========= ========== Diluted earnings per share 14.36 13.54 ========= ========== The calculation of basic and diluted earnings per share is based upon: Â£'000 Â£'000 Earnings for basic and diluted earnings per share calculations 7,557 7,027 ========= ========== No. No. Weighted average number of ordinary shares for basic earnings per share 51,385,648 51,022,645 Impact of share options 1,227,342 879,018 --------- ---------- Weighted average number of ordinary shares for diluted earnings per share 52,612,990 51,901,663 ========= ========== 8. Intangible Assets Goodwill Software Development Patent Product Marketing Total Costs Rights Rights Authorisations Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 COST At 1 July 2004 4,385 - 310 789 - - 5,484 Additions - 288 321 - 278 822 1,709 -------- -------- ---------- ------- ------- ----------- ------ At 30 June 2005 and 1 July 2005 4,385 288 631 789 278 822 7,193 Additions - 429 195 - - - 624 -------- -------- ---------- ------- ------- ----------- ------ At 30 June 2006 4,385 717 826 789 278 822 7,817 ======== ======== ========== ======= ======= =========== ====== AMORTISATION At 1 July 2004 - - 80 - - - 80 Charge for the year - 33 41 - - - 74 -------- -------- ---------- -------- -------- ----------- ------- At 30 June 2005 and 1 July 2005 - 33 121 - - - 154 Charge for the year - 58 60 - 18 - 136 -------- -------- ---------- -------- -------- ----------- ------- At 30 June 2006 - 91 181 - 18 - 290 ======== ======== ========== ======== ======== =========== ======= NET BOOK VALUE At 30 June 2006 4,385 626 645 789 260 822 7,527 ======== ======== ========== ======== ======== =========== ======== At 30 June 2005 and 1 July 2005 4,385 255 510 789 278 822 7,039 ======== ======== ========== ======== ======== =========== ======== At 1 July 2004 4,385 - 230 789 - - 5,404 ======== ======== ========== ======== ======== =========== ======== Development costs are internally generated. All other additions to intangible assets were acquired outside the Group and have been measured at cost at the time of acquisition. The amortisation charge is recognised within administrative expenses in the income statement. continued... -20- 9. Property, Plant and Equipment Freehold Short Motor Plant and Total land leasehold vehicles fixtures buildings Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 COST At 1 July 2004 13 2,627 596 5,960 9,196 Additions - 60 - 662 722 Disposals - (243) (58) (315) (616) -------- ---------- --------- --------- --------- At 30 June 2005 and 1 July 13 2,444 538 6,307 9,302 2005 Additions - 157 - 1,378 1,535 Disposals - - (105) (185) (290) -------- ---------- --------- --------- --------- At 30 June 2006 13 2,601 433 7,500 10,547 ======== ========== ========= ========= ========= DEPRECIATION At 1 July 2004 - 511 541 2,920 3,972 Charge for the year - 147 54 701 902 Disposals - (243) (58) (217) (518) -------- ---------- --------- --------- --------- At 30 June 2005 and 1 July - 415 537 3,404 4,356 2005 Charge for the year - 135 1 750 886 Disposals - - (105) (185) (290) -------- ---------- --------- --------- --------- At 30 June 2006 - 550 433 3,969 4,952 ======== ========== ========= ========= ========= NET BOOK VALUE At 30 June 2006 13 2,051 - 3,531 5,595 ======== ========== ========= ========= ========= At 30 June 2005 and 1 July 13 2,029 1 2,903 4,946 2005 ======== ========== ========= ========= ========= At 1 July 2004 13 2,116 55 3,040 5,224 ======== ========== ========= ========= ========= 10. Deferred Taxes Recognised deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net 2006 2005 2006 2005 2006 2005 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Intangible assets - - (193) (153) (193) (153) Property, plant and equipment - - (311) (272) (311) (272) Inventories - - - - - - Receivables 98 45 - - 98 45 Cash and cash equivalents - - - - - - Borrowings - - - - - - Payables 38 103 - - 38 103 Current tax liabilities - - - - - - Share-based payments 813 683 - - 813 683 ------- ------- ------- ------- ------- ------- 949 831 (504) (425) 445 406 ======= ======= ======= ======= ======= ======= On the basis that all deferred income taxes relate to the UK and that there is a legally enforceable right to offset current tax liabilities against current tax assets, deferred income tax assets and liabilities have been offset. 11. Inventories 2006 2005 Â£'000 Â£'000 Raw materials and consumables 1,443 1,021 Work in progress 117 694 Finished goods and goods for resale 20,397 18,675 ---------- ----------- 21,957 20,390 ========== =========== continued... -21- 12. Trade and Other Receivables 2006 2005 Â£'000 Â£'000 Trade receivables 33,476 31,778 Other receivables 1,073 1,112 Prepayments and accrued income 798 818 ---------- ----------- 35,347 33,708 ========== =========== Trade receivables are stated after an impairment provision of Â£2,035,000 (2005: Â£1,761,000). 13. Cash and Cash Equivalents 2006 2005 Â£'000 Â£'000 Cash at bank and in hand 4,552 3,857 Short term deposits 15,186 10,067 ---------- ----------- 19,738 13,924 ========== =========== The short term deposits are repayable on demand 14. Trade and Other Payables 2006 2005 Â£'000 Â£'000 Trade payables 41,988 38,175 Other payables 491 313 Other taxation and social security 1,373 1,650 Accruals and deferred income 1,678 1,833 ---------- ----------- 45,530 41,971 ========== =========== 15. Current Tax Liabilities 2006 2005 Â£'000 Â£'000 Corporation tax payable 2,505 2,057 ========== =========== 16. Borrowings 2006 2005 Â£'000 Â£'000 Current liabilities Bank loans and overdrafts 3,019 1,400 Finance lease obligations 398 102 ---------- ----------- 3,417 1,502 Non-current liabilities Bank loans 14,200 17,200 Finance lease obligations 1,147 271 Arrangement fees netted off (105) (190) ---------- ----------- 15,242 17,281 ---------- ----------- Total borrowings 18,659 18,783 ========== =========== continued... -22- At the year end, the Group had the following unutilised borrowing facilities: 2006 2005 Â£'000 Â£'000 Revolving credit facility 5,000 5,000 Bank overdraft facility 4,000 4,000 ---------- ----------- 9,000 9,000 ========== =========== The overdraft facility is renewable annually whilst the revolving credit facility is committed until 30 June 2010. 17. Share Capital Ordinary shares of 1p each 2006 2005 Â£'000 No. Â£'000 No. Authorised 750 75,000,000 750 75,000,000 ========== ============ ========== ========== Issued at start of year 511 51,120,964 510 50,977,857 New shares issued 8 794,038 1 143,107 ---------- ------------ ---------- ---------- At end of year 519 51,915,002 511 51,120,964 ========== ============ ========== ========== During the year, 794,038 new ordinary shares of 1p (2005: 143,107 new ordinary shares of 1p) were issued following the exercise of options under the Unapproved and SAYE Share Options Schemes. The consideration received was Â£748,000 (2005: Â£170,000). 18. Share-based Payments 2006 2005 Â£'000 Â£'000 Equity-settled share-based transactions Cash-settled share-based transactions 427 273 88 125 ---------- ----------- 515 398 ========== =========== The above charge to the Income Statement was included within administrative expenses. 19. Analysis of Net Cash/(Borrowings) As at As at 30.06.06 30.06.05 Â£'000 Â£'000 Bank loans and overdraft (17,114) (18,410) Finance leases and hire purchase contracts (1,545) (373) Cash and cash equivalents 19,738 13,924 ---------- ----------- Net cash/(borrowings) 1,079 (4,859) ========== =========== 20. Explanation of Transition to IFRS As stated in note 1, these are the Group's first consolidated financial statements prepared in accordance with adopted IFRSs. Consistent accounting policies have been applied in preparing comparative information for the year ended 30 June 2005 and the preparation of the opening IFRS balance sheet at 1 July 2004 (the Group's date of transition). In preparing its opening balance sheet and comparative information for the year ended 30 June 2005 the Group has adjusted amounts reported previously in financial statements prepared in accordance with UK GAAP. continued... -23- The adjustments from the conversion to IFRS had no impact upon the cash flows of the Group although there are a number of presentational differences under IFRS. An explanation of the principal changes in accounting policies and how the transition from UK GAAP to IFRS has affected the Group's income statement, balance sheet and net equity is summarised below. (a) IFRS Reconciliation of Income Statement Comparatives Year ended 30 June 2005 Notes Published IFRS Restated UK GAAP adjustments under Â£'000 Â£'000 IFRS Â£'000 Revenue a 208,197 2,070 210,267 Cost of sales a (178,480) (2,070) (180,550) ---------- -------- ------- Gross profit 29,717 - 29,717 Operating expenses b, c, d,e (19,305) 843 (18,462) ---------- -------- ------- Operating profit 10,412 843 11,255 Finance income 355 - 355 Finance expense (1,909) - (1,909) ---------- -------- ------- Profit before taxation 8,858 843 9,701 Income tax expense f (2,590) (84) (2,674) ---------- -------- ------- Profit attributable to equity holders 6,268 759 7,027 of the parent ========== ======== ======= Earnings per share (pence) Basic 12.28p 1.49p 13.77p ========== ======== ======= Diluted 12.08p 1.46p 13.54p ========== ======== ======= continued... -24- (b) IFRS Reconciliation of Balance Sheet Comparatives 1 July 2004 30 June 2005 Notes Published IFRS IFRS Published IFRS Restated UK GAAP Adjustments UK GAAP adjustments under IFRS Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Non-current assets Intangible assets - goodwill a 4,385 - 4,385 3,821 564 4,385 - software b - - - - 255 255 - other intangibles c 789 230 1,019 1,889 510 2,399 Property plant b 5,224 - 5,224 5,201 (255) 4,946 and equipment Deferred d - - - - 406 406 taxes ------- -------- ------ ------- ------- ------- Total non-current assets 10,398 230 10,628 10,911 1,480 12,391 Current assets Inventories 16,979 - 16,979 20,390 - 20,390 Trade and other receivables 32,889 - 32,889 33,708 - 33,708 Deferred d - - - 4 (4) - taxes Cash and cash equivalents - - - 13,924 - 13,924 ------- -------- ------ ------- ------- ------- Total current assets 49,868 - 49,868 68,026 (4) 68,022 ------- -------- ------ ------- ------- ------- Total 60,266 230 60,496 78,937 1,476 80,413 assets ------- -------- ------ ------- ------- ------- Current liabilities Borrowings (5,347) - (5,347) (1,502) - (1,502) Trade and other e (36,944) (89) (37,033) (41,826) (145) (41,971) payables Current tax liabilities (1,275) - (1,275) (2,057) - (2,057) Proposed dividend f (1,606) 1,606 - (1,789) 1,789 - ------- -------- ------ ------- ------- ------- Total current liabilities (45,172) 1,517 (43,655) (47,174) 1,644 (45,530) Non-current liabilities Borrowings (4,763) - (4,763) (17,281) - (17,281) Provisions - - - - - - Deferred d (174) 98 (76) - - - taxes ------- -------- ------ ------- ------- ------- Total non-current liabilities (4,937) 98 (4,839) (17,281) - (17,281) ------- -------- ------ ------- ------- ------- Total liabilities (50,109) 1,615 (48,494) (64,455) 1,644 (62,811) ------- -------- ------ ------- ------- ------- Net assets 10,157 1,845 12,002 14,482 3,120 17,602 ======= ======== ====== ======= ======= ======= Equity Called up share capital 510 - 510 511 - 511 Share premium account 26,784 - 26,784 26,953 - 26,953 Merger 1,720 - 1,720 1,720 - 1,720 reserve Retained earnings g (18,857) 1,845 (17,012) (14,702) 3,120 (11,582) ------- -------- ------ ------- ------- ------- Total equity attributable to equity holders of the 10,157 1,845 12,002 14,482 3,120 17,602 parent ======= ======== ====== ======= ======= ======= c) Reconciliation of Equity 1 July 2004 30 June 2005 Â£'000 Â£'000 Equity under UK GAAP 10,157 14,482 Write-back of proposed dividend 1,606 1,789 Deferred tax 98 402 Lease incentive (89) (145) Capitalisation of development costs 230 510 Write-back of goodwill amortisation - 564 ------------ ------------ Equity under IFRS 12,002 17,602 ============ ============ continued... -25 - Explanatory notes to the UK GAAP to IFRS Reconciliations Income Statement a. Under IAS18 'Revenue' certain items, such as the sale of trading data to suppliers, have been reclassified to revenue from cost of sales. There is no impact on profit, earnings per share or net assets. b. Under UK GAAP, goodwill was amortised over its estimated useful life. Under IFRS3 'Business Combinations', goodwill is not amortised but is subject to annual impairment review. This has resulted in a credit to the income statement of Â£564,000 for the year ended 30 June 2005. c. Under UK GAAP the accounting policy of the Group was, in general, to write off all development expenditure to the income statement as incurred. Under IAS38 'Intangible Assets' development expenditure meeting the required criteria must be capitalised. This has resulted in a credit to the income statement of Â£280,000 for the year ended 30 June 2005. d. Under IFRS2 'Share-based Payments', the cost of employee share options recognised in the income statement is based upon the excess of the fair value of the option over the exercise price at the date of grant. Under UK GAAP, the cost recognised was generally the intrinsic value being the difference in exercise price and market price at the date of grant of the option. The change in method of calculation has resulted in a net credit of Â£55,000 in respect of the year ended 30 June 2005. e. Under UK GAAP, the benefit of lease incentives received (in the form of rent free periods) was spread over the period until the rent reverts to market rates. Under IAS17 'Leases', the benefit must be spread over the entire lease period. This change has resulted in an additional charge to the income statement of Â£56,000 for the year ended 30 June 2005. f. The income tax expense has been adjusted to reflect the tax effect of the above adjustments. Balance Sheet a. The increase in goodwill reflects the write-back of amortisation previously charged under UK GAAP. b. Under IAS38 'Intangible Assets', software costs that are not an integral part of the related hardware are classed as intangible assets. They have therefore been reclassified from property, plant and equipment. There is no impact on the income statement or net assets. c. The increase in other intangible assets represents capitalised development costs under IAS38 'Intangible Assets'. d. The calculation of deferred tax under IAS12 'Income Taxes' can be different from UK GAAP, under which deferred tax is calculated based upon income statement timing differences. The principal reason for the increase in the deferred tax asset is that deferred tax in respect of share-based payments is calculated by reference to a figure which differs from the charge for such payments in the income statement. Deferred tax in respect of share-based payments charged directly to the income statement is also taken to the income statement but any excess tax relief over this amount is taken directly to equity. e. The increase in trade and other payables represents the balance of lease incentives received that are being spread over the remaining lease periods. continued... -26 - f. Under IAS10 'Events After the Balance Sheet Date' dividends are recognised when they are paid or approved by the shareholders. This generally results in a later recognition in the financial statements than under UK GAAP. g. The increase in retained earnings at 30 June 2005 is made up as follows: - net adjustments to the income statement of Â£759,000 - reduction to credit to equity in respect of share-based payments of (Â£55,000) - capitalised development costs at 1 July 2004 of Â£230,000 - increase in lease incentives carried forward at 1 July 2004 of (Â£89,000) - de-recognition of the final dividend of Â£1,789,000 - credit to deferred tax recognised directly in equity of Â£486,000 21. Other Information The financial information set out above does not constitute the company's statutory accounts for the years ended 30 June 2006 or 2005 but is derived from the 2006 accounts. Statutory accounts for 2005, which were prepared under UK GAAP, have been delivered to the registrar of companies, and those for 2006, prepared under accounting standards adopted by the EU, will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and (iii) did not contain statements under section 237(2) or (3) of the Companies Act 1985. This information is provided by RNS The company news service from the London Stock Exchange

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