Interim Results

Zotefoams PLC 18 August 2005 Thursday 18th August 2005 Zotefoams plc Zotefoams plc, the world's leading manufacturer of cross-linked polyolefin block foam, today announces its interim results for the six months ended 30 June 2005. Summary • Turnover increased by 6% to £13.7m (2004: £13.0 million) • Sales growth in all major markets • First meaningful sales of ZOTEK(R) fluoropolymers, initiating a range of new high-performance products • Underlying* pre-tax profit up by 9% to £1.0 million (2004: £0.9 million) despite significant increases in polymer and energy costs • Continued development focus on unique high-performance products • Strong balance sheet with net debt of £1.8 million and 8% gearing • EPS* of 2.4p, increased by 41% (2004: 1.7p) • Interim dividend unchanged at 1.5p per share (2004: 1.5p) * Excluding legal, advisory and other costs of £206,000 in respect of a preliminary approach for the share capital of the Company that was announced on 14 January 2005, which are included in administrative expenses for the period. Commenting on the results, Bill Fairservice, Chairman, said: 'With strong cash flow from operating activities, a low level of gearing, continuing sales growth and a promising development portfolio we are well positioned for the future despite the challenges posed by price rises on our cost base.' Enquiries: Zotefoams plc 020 8664 1600 David Stirling, Managing Director Clifford Hurst, Finance Director Financial Dynamics 020 7831 3113 Deborah Scott/Sarah Macleod About us Zotefoams plc is the world's leading manufacturer of cross-linked polyolefin block foams. Its products are used in a wide range of markets, including sports and leisure, packaging, transport, healthcare, toys, building, marine and the military. Through a unique production process, Zotefoams produces foams which have controllable properties and are of a strength, consistency, quality and purity superior to foams produced by other methods. Zotefoams' strategy is to create sustained profit growth by expanding its sales internationally and by broadening its potential market with new unique products. Chairman's statement Overview On 14 January 2005 the Board announced that it had received a very preliminary approach that may or may not lead to an offer being made for the entire issued share capital of Zotefoams. On 8 March and 28 April 2005 the Board confirmed that it remained in discussion with a number of parties. These discussions are continuing. Shareholders should however note that all the indicative offer terms that have been received are at levels below the closing mid market share price of 87.5 pence on 17 August 2005. There can be no certainty that an offer will be made, nor as to the terms on which any offer might be made. This announcement has not been made with the agreement or approval of the potential offerors. In the first six months of 2005, Zotefoams incurred legal, advisory and other costs of £206,000 in respect of this approach which are included in administrative expenses for the period and described below as 'bid costs'. Results These Interim 2005 results represent the first time adoption of International Financial Reporting Standards ('IFRS'). 2004 comparatives have been restated accordingly. Full details of the transition to IFRS can be found in the Appendix. Profit before tax for the six months ended 30 June 2005 was £0.75 million. However, excluding bid costs profit before tax was £0.95 million, a 9% increase compared to the first half of 2004 (2004: £0.87 million). This increase was achieved on sales growth of 6% in an environment of significantly increased input costs. Operational improvements and price rises in all markets, along with a surcharge linked to raw material prices, helped to maintain gross margins at 22.4% (2004:23.0%) despite significant rises in material and energy costs. The effective tax charge for the period was 4% (2004: 31%) with a £0.12 million tax credit due to the partial recognition of US tax losses as a deferred tax asset. Markets Sales grew 6% to £13.69 million (2004: £12.95 million) despite a 2% reduction in volumes, reflecting better product mix and price increases. The first meaningful sales of ZOTEK (R) fluoropolymer foams were made in the period, initiating what we believe will grow to become a significant range of new high performance products. Sales for these products were £0.16 million (2004:Nil) all of which were into the aviation market in North America. In our major product line, polyolefin foams, sales grew 8% in local currency in North America which, in line with our expectations, was the strongest performance of any of our major markets. In the more mature markets of the UK and continental Europe, growth was 2% and 4% respectively. In Asia and the Middle East we grew at a more rapid rate with sales of £0.38 million (2004:£0.26 million) as we continue to penetrate these markets from a low base level. Product Development We continue to exploit our unique manufacturing technology for high performance foams. Our short term focus is to extend the range of fluoropolymer foams offered, with tailored offerings to meet specific market needs. We will continue developments at pilot plant scale with polyamide (nylon) and silicone foams with a view to launch commercially during the first half of 2006. We have therefore increased the sales and marketing resource for fluoropolymer foams and expect this additional investment to continue as further opportunities are sought. In the longer term we believe there are further opportunities with other materials and technology variants which are currently at laboratory scale. Operations Improvements in operational performance, particularly in North America, were necessary to offset increases in the purchase price of raw materials and energy. The average price of LDPE, our major raw material, increased by 42% compared with the first six months of 2004 and there were significant price rises in most other polymer costs. Polymer and energy price rises increased our input costs in the period under review by £0.98 million over 2004 levels. Cash Flow and Balance Sheet I am pleased to report that, after bid costs, £1.76 million cash was generated from operations (2004:£1.99 million). Zotefoams incurred £17.4 million of capital expenditure from 2000 until 2002, primarily on our facility in Kentucky, USA, and rebuilding parts of the Croydon, UK site after a fire in 2000. Largely due to this expenditure depreciation of £1.69 million was significantly in excess of capital expenditure of £0.42 million. After payment of dividends of £1.09 million (2004: £0.73 million) our balance sheet remains strong with net debt of £1.83 million (2004 year end: £1.66 million) and gearing of 8% (2004 year end: 7%). Pensions In common with many UK businesses Zotefoams offers a defined benefit final salary pension scheme. This scheme was closed to new entrants in 2001. The tri-annual actuarial valuation of this scheme as at 5 April 2005 has now been prepared. This showed a deficit on an ongoing valuation basis of £3.84 million. In view of the size of the deficit and the ongoing risk of offering a defined benefit scheme the Board's intention is to discuss with the scheme trustees and employee members structural changes to the scheme such as closing it to future accrual of benefits. Assuming closure of the scheme to future accrual of benefits the deficit in this scheme is approximately £2.5 million. Following this course of action could involve a significant one-off payment into the scheme by Zotefoams to reduce this deficit. Under IAS19 there is an estimated deficit of £7.57 million, gross of deferred tax, in respect of this scheme as at 30 June 2005. This is shown as a liability in the balance sheet. Earnings and Dividend Earnings per share for the six months ended 30 June 2005, were 2.0p. However, excluding bid costs, earnings per share were 2.4p compared to 1.7p for the six months ended 30 June 2004. The Directors have declared an unchanged interim dividend of 1.5p net per share (2004: 1.5p). The dividend will be paid on 30 September 2005 to shareholders who are on the Company's register at the close of business on 2 September 2005. Outlook In order to provide certainty on the price of energy, which is a significant part of our cost base, Zotefoams placed a 12 months fixed price contract for UK energy in November 2004. While we have successfully managed the impact of higher energy prices through efficiency measures and selling price increases, we anticipate that when these contracts expire higher energy prices will adversely impact our cost base in 2006. Additionally, although polymer prices have declined from the very high levels experienced during early 2005 there are now signs that prices are likely to rise from current levels. However, on average we expect the prices in the second half of the year to be lower than that for the first six months. Sales of our unique ZOTEK (R) fluoropolymer foams are growing strongly, albeit from a low base, and orders received for shipment in the second half of 2005 are already more than 150% of the sales achieved in the first six months. As mentioned earlier we believe other developments in our technical portfolio are very promising, however, these are not expected to start generating revenues until 2006. Overall we anticipate continuing sales growth in the second half with good cash generation from operating activities. Capital expenditure is planned to increase in the second half as we begin our rolling programme of upgrading some of the high-pressure vessels in our Croydon facility. The expenditure associated with this programme is anticipated to be well within our current level of depreciation for the next few years. With strong cash flow from operating activities, a low level of gearing, continuing sales growth and a promising development portfolio we are well positioned for the future despite the challenges posed by price rises on our cost base. W H Fairservice Chairman 17 August 2005 Consolidated income statement Six months ended 30 June 2005 Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 Note £000 £000 £000 ______ ______ ______ Revenue 3 13,691 12,950 25,176 Cost of sales (10,620) (9,966) (19,652) ______ ______ ______ Gross profit 3,071 2,984 5,524 Distribution costs (936) (939) (1,869) Administrative expenses (including bid costs of (1,323) (1,065) (2,121) £206,000) ______ ______ ______ Operating profit before finance costs 812 980 1,534 Financial income - interest 13 - - Finance costs (79) (107) (225) ______ ______ ______ Profit before tax 746 873 1,309 Income tax expense 4 (29) (271) (139) ______ ______ ______ Profit for the period 717 602 1,170 ______ ______ ______ Attributable to: Equity holders of the parent 717 602 1,170 ______ ______ ______ Earnings per share Basic (p) 6 2.0 1.7 3.2 ______ ______ ______ Diluted (p) 6 2.0 1.7 3.2 ______ ______ ______ Consolidated statement of recognised income and expense Six months ended 30 June 2005 Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 £000 £000 £000 ______ ______ ______ Gain/(losses) on investment in foreign subsidiary 487 (108) (576) Actuarial (losses)/gains on defined benefit schemes (368) 132 264 Tax on items taken directly to equity 110 (40) (79) ______ ______ ______ Net income/(expense) recognised directly in equity 229 (16) (391) Profit for the period 717 602 1,170 ______ ______ ______ Total recognised income and expense for the period 946 586 779 ______ ______ ______ Attributable to equity holders of the parent 946 586 779 ______ ______ ______ Consolidated balance sheet 30 June 2005 30 June 30 June 31 December 2005 2004 2004 Note £000 £000 £000 ______ ______ ______ Assets Property, plant and equipment 28,883 31,170 29,795 Deferred tax assets 149 - - ______ ______ ______ Total non-current assets 29,032 31,170 29,795 Current assets Inventories 3,698 3,177 3,126 Trade and other receivables 6,581 6,378 5,675 Cash and cash equivalents 137 240 298 ______ ______ ______ Total current assets 10,416 9,795 9,099 ______ ______ ______ Total assets 39,448 40,965 38,894 ______ ______ ______ Equity Issued share capital 7 (1,814) (1,813) (1,813) Share premium 7 (13,727) (13,707) (13,707) Capital redemption reserve (5) (5) (5) Share option reserve (83) (22) (54) Other reserves 89 108 576 Retained earnings (8,418) (8,933) (9,050) ______ ______ ______ Total equity (23,958) (24,372) (24,053) ______ ______ ______ Liabilities Interest-bearing loans and borrowings (1,300) - (1,500) Employee benefits (7,570) (7,336) (7,192) Deferred tax liabilities (2,194) (2,612) (2,585) ______ ______ ______ Total non-current liabilities (11,064) (9,948) (11,277) Bank overdraft (265) (3,006) - Interest-bearing loans and borrowings (397) (503) (457) Income tax payable (611) (919) (577) Trade and other payables (3,153) (2,217) (2,530) ______ ______ ______ Total current liabilities (4,426) (6,645) (3,564) ______ ______ ______ Total liabilities (15,490) (16,593) (14,841) ______ ______ ______ Total equity and liabilities (39,448) (40,965) (38,894) ______ ______ ______ Consolidated cash flow statement Six months ended 30 June 2005 Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 Note £000 £000 £000 ______ ______ ______ Net cash from operating activities 8 1,234 1,615 4,487 ______ ______ ______ Cash flow from investing activities Proceeds on disposal of property, plant and - - 1 equipment Interest received 13 - - Acquisition of property, plant and equipment (415) (603) (1,331) ______ ______ ______ Net cash used in investing activities (402) (603) (1,330) ______ ______ ______ Cash flow from financing activities Repayment of borrowings (200) (381) (851) New borrowings - - 2,000 Payment of finance lease liabilities (60) (60) (119) Dividends paid (1,088) (725) (1,269) ______ ______ ______ Net cash used in financing activities (1,348) (1,166) (239) ______ ______ ______ Net (decrease)/increase in cash and cash (516) (154) 2,918 equivalents Cash and cash equivalents at beginning of period 298 (2,616) (2,616) Effect of exchange rate fluctuations on cash 90 4 (4) held Cash and cash equivalents at the end of period (128) (2,766) 298 ______ ______ ______ Cash and cash equivalents comprise cash at bank and short-term highly liquid investments with a maturity date of less than three months. Notes to the interim financial statements Six months ended 30 June 2005 1 General information The comparative figures for the year ended 31 December 2004 are not the Company's statutory accounts for that financial year. Those accounts, which were prepared under UK Generally Accepted Accounting Practices, have been reported on by the Company's auditor and delivered to the Registrar of Companies. The auditor's report was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. 2 Accounting policies The consolidated interim financial statements of the Group comprise the Company and its subsidiaries. European Union (EU) law (IAS regulation DC1606/2002) requires that the next annual consolidated financial statements of the Group, for the year ending 31 December 2005, be prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the EU. This interim financial information has been prepared on the basis of the recognition and measurement requirements of IFRS in issue that either are endorsed by the EU and effective at 30 June 2005 or are expected to be endorsed and effective at 31 December 2005, the Group's first annual reporting date at which it is required to use adopted IFRS. Based on these adopted and unadopted IFRS the Directors have made assumptions about the accounting policies expected to be applied, which are as set out below, when the first annual IFRS financial statements are prepared for the year ending 31 December 2005. In particular, the Directors have assumed that the following IFRS issued by the International Accounting Standards Board will be adopted by the EU in sufficient time that it will be available for use in the annual IFRS financial statements for the year ending 31 December 2005: Amendment to International Accounting Standard IAS 19 Employee Benefits: Actuarial Gains and Losses, Group Plans and Disclosures. In addition, the adopted IFRS that will be effective in the annual financial statements for the year ending 31 December 2005 are still subject to change and to additional interpretations and therefore cannot be determined with complete certainty. Accordingly, the accounting policies for that annual period will be determined finally only when the annual financial statements are prepared for the year ending 31 December 2005. a) Statement of compliance An explanation of how the transition to IFRS has affected the reported financial position, financial performance, and cash flows of the Group is provided in the appendix. This note includes reconciliations of equity and the income statement for comparative periods reported under UK GAAP (previous GAAP) to those reported for those periods under IFRS. b) Basis of preparation The financial statements are presented in sterling, rounded to the nearest thousand unless otherwise stated. They are prepared on the historical cost basis except that derivative financial instruments are stated at their fair value. The preparation of the condensed consolidated interim statements in accordance with IFRS resulted in changes to the accounting policies as compared to the most recent annual financial statements prepared under the previous GAAP. The accounting policies set out below have been applied consistently to all periods presented in these condensed consolidated financial statements. They also have been applied in preparing an opening IFRS balance sheet as at 1 January 2004 for the purpose of the transition to IFRS, as required by IFRS1 except, in respect of foreign currency financial hedging where the Company has taken advantage of the exemption in IFRS1 not to restate comparative information for 2004. The impact of the transition from previous GAAP to IFRS is explained in the appendix. c) Basis of consolidation i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. ii) Transactions eliminated on consolidation Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions are eliminated in preparing the condensed interim financial statements. Unrealised gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group's interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. d) Foreign currency i) Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate prevailing at the time of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in profit and loss. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. ii) Financial statements of foreign operations The assets and liabilities of foreign operations, including fair value adjustments arising on consolidation, generally are translated to sterling at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations generally are translated to sterling at the average rate of exchange ruling during the year. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity. e) Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative finance instruments are stated at fair value. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged (see accounting policy f). The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. f) Cash flow hedging When a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. If a hedge of a forecasted transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains or losses that were recognised directly in equity are reclassified into the income statement in the same period or periods during which the asset acquired or liability assumed affects the income statement (i.e., when interest income or expense is recognised). The ineffective part of any gain or loss is recognised immediately in the income statement. When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, then the cumulative unrealised gain or loss recognised in equity is recognised immediately in the income statement. g) Property, plant and equipment i) Owned assets Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation and impairment losses (see accounting policy l). When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate items of property, plant and equipment. ii) Leased assets Leases in terms of which the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. Lease payments are accounted for as described in accounting policy r. iii) Depreciation Depreciation is charged to the income statement on a straight line basis over the estimated useful lives of each part of the item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows: Buildings 20 years Plant and equipment 5-15 years Computer equipment and vehicles 3-5 years h) Intangible assets i) Research and development Expenditure on research and development activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically and commercially feasible and the Group has sufficient resources to complete development. i) Trade and other receivables Trade and other receivables are stated at their cost less impairment losses (see accounting policy l) j) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completing and selling expenses. In determining the cost of raw materials, consumables and goods purchased for resale, the weighted average purchase price is used. For work in progress and finished goods manufactured by the group, cost is taken as production cost, which includes an appropriate proportion of attributable overheads. k) Cash and cash equivalents Cash and cash equivalents comprises cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purposes of the statement of cash flows. l) Impairment The carrying amounts of the Group's assets, other than inventories (see accounting policy j), employee benefits (see accounting policy o) and deferred tax assets (see accounting policy s), are reviewed at each balance sheet date where there is an indication that the asset may be impaired. If any such indication exists, the asset's recoverable amount is estimated (see below). An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. i) Calculation of recoverable amount The recoverable amount of assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. ii) Reversals of impairment An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. m) Share capital i) Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a change in equity. Repurchased shares that are not subsequently cancelled are classified as treasury shares and presented as a deduction from total equity. ii) Dividends Dividends are recognised as a liability in the period in which they are declared. n) Interest bearing borrowings Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any differences between cost and redemption values being recognised in the income statement over the period of the borrowings on an effective interest basis where material. o) Employee benefits i) Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. ii) Defined benefits plans The Group's net obligation in respect of defined benefit post employment plans, including pension plans, is calculated separately for each plan by estimating the amount of future benefit that the employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value of any plan assets is deducted. The discount rate is the yield at the balance sheet date on AA credit rated bonds that have maturity dates approximating the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit credit method. All actuarial gains and losses at 1 January 2004, the date of transition to IFRS, were recognised. The Group recognises the actuarial gains and losses that arise subsequent to 1 January 2004 through the Statement of Recognised Income and Expenditure. iii) Share based payment transactions The share option programme allows Group employees to acquire shares of the Company. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employee becomes unconditionally entitled to the options. The fair value of the options granted is measured using a Monte Carlo simulation method taking into account the terms and conditions upon which the options were granted. p) Trade and other payables Trade and other payables are stated at cost. q) Revenue Revenue from the sale of goods is recognised in the income statement at the point of despatch when significant risks and rewards of ownership is deemed to have been transferred to the buyer. r) Expenses i) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expenses. ii) Finance lease payments The finance charge, where material, is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. s) Income tax Income tax on the income statement for the periods presented comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustments to the tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. Information as to the calculation of income tax on the income statement for the interim periods presented is included in note 4. t) Segmental reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. 3 Business segments The Group manufactures and sells high-performance foams for specialist markets worldwide. These fall into two main business segments best categorised by their constituent raw materials. - Polyolefins: these foams are made from olefinic homopolymer and copolymer resin. The most common resin used is polyethylene. - High performance polymers: these foams exhibit high performance on certain key properties, such as improved chemical, flammability or temperature performance, due to the resins on which they are based. Turnover in the segment is currently derived from our ZOTEK (R) F foams made from PVDF fluoropolymer. Other polymers being assessed in development include polyamide (nylon) and silicone. Due to our unique manufacturing technology Zotefoams can produce polyolefin foams with superior performance to other manufacturers. However, our strategy is to use the capabilities of our technology to produce foams from other materials as well as polyolefins. The development of foams from high-performance polymers is currently in its early stages with development and marketing costs exceeding revenues. High performance Polyolefins polymers Consolidated Six months ended 30 June 2005 £000 £000 £000 ______ ______ ______ Revenue 13,528 163 13,691 Result 1,215 (197) 1,018 ______ ______ ______ Unallocated corporate expenses - bid costs* (206) Financial income - interest 13 Finance costs (79) ______ Profit before tax 746 ______ Income tax expense (29) ______ Profit for the period 717 ______ * Bid costs relate to legal, advisory and other costs incurred in respect of a preliminary approach for the share capital of the Company which was announced in January 2005. High performance Polyolefins polymers Consolidated Six months ended 30 June 2004 £000 £000 £000 ______ ______ ______ Revenue 12,950 - 12,950 Profit from operations 1,169 (189) 980 ______ ______ ______ Finance costs (107) ______ Profit before tax 873 ______ Income tax expense (271) ______ Profit for the period 602 ______ 4 Tax Six months Six months ended ended 30 June 30 June 2005 2004 £000 £000 ______ ______ Current tax: UK corporation tax 465 771 Foreign tax (6) 13 ______ ______ 459 784 Deferred tax (430) (513) ______ ______ 29 271 ______ ______ Income tax for the interim period is charged at 62% (2004: 90%), representing the best estimate of the weighted average annual income tax rate expected for the full financial year. The high income tax rate is primarily because taxable profits are higher than accounting profits due to the excess of depreciation over capital allowances. This is compensated for by a release of deferred tax. The Group has $6.2 million tax losses carried forward in the USA. These tax losses at a 35% tax rate and current exchange rates have a value of £1.2 million. The Group has recognised £120,000 of those tax losses as a deferred tax asset representing what the Board believe is a prudent estimate of the expected US tax loss utilisation in the near future. The effect of the release of deferred tax due to the excess of depreciation over capital allowances, the partial recognition of US tax losses, R & D tax allowances and adjustments in respect of prior periods is to reduce the effective tax rate to 4% (2004: 31%). 5 Dividends Six months Six months ended ended 30 June 30 June 2005 2004 £000 £000 ______ ______ Final dividend for the year ended 31 December 2004 of 3.0p (2003: 2.0p) per 1,087 725 share ______ ______ The final dividend for the year ended 31 December 2004 was paid on 24 May 2005. A proposed interim dividend for the year ended 31 December 2005 of 1.5p per share (2004: 1.5p) was approved by the Board on 17 August 2005 and has not been included as a liability as at 30 June 2005. 6 Earnings per share The calculation of the basic and diluted earnings per share is based on the following data: Six months Six months ended ended 30 June 30 June 2005 2004 £000 £000 ______ ______ Earnings Earnings for the purpose of basic earnings per share being net profit 717 602 attributable to equity holders of the parent Earnings for the purposes of diluted earnings per share 717 602 ______ ______ Number of shares Number Number Weighted average number of ordinary shares for the purposes of basic 36,260,296 36,255,772 earnings per share ______ ______ Effect of dilutive potential ordinary shares: Share options 81,600 31,288 Weighted average number of ordinary shares for the purposes of diluted 36,341,896 36,287,060 earnings per share ______ ______ 7 Share capital Six months Six months ended ended 30 June 30 June 2005 2004 £000 £000 ______ ______ Opening issued share capital 1,813 1,813 Shares issued in period 1 - ______ ______ Closing issued share capital 1,814 1,813 Opening share premium 13,707 13,707 Premium on shares issued in period 20 - ______ ______ Closing share premium 13,727 13,707 ______ ______ 8 Notes to the cash flow statement Six months Six months Year ended ended ended 31 December 30 June 2005 30 June 2004 2004 £000 £000 £000 ______ ______ ______ Profit for the period 717 602 1,170 Adjustments for: Depreciation 1,693 1,658 3,371 Loss on sale of property, plant and equipment 5 - 23 Financial income - interest (13) - - Interest expense 79 107 225 Equity-settled share-based payment expenses 29 13 46 Income tax expense 29 271 139 ______ ______ ______ Operating cash flow before changes in working capital and 2,539 2,651 4,974 provisions (Increase)/decrease in trade and other receivables (797) (523) 136 (Increase)/decrease in inventories (554) 4 (13) Increase/(decrease) in trade and other payables 559 (126) 188 Increase/(decrease) in provisions and employee benefits 10 (12) (24) ______ ______ ______ Cash generated from operations 1,757 1,994 5,261 Interest paid (94) (136) (254) Income taxes paid (429) (243) (520) ______ ______ ______ Net cash from operating activities 1,234 1,615 4,487 ______ ______ ______ 9 Retirement benefit schemes The Company has adopted IAS 19 as at 1 January 2004. An estimated valuation for the interim in 2005 has been performed in conjunction with the Company's actuaries based on the IAS 19 valuation at 31 December 2004. Appendix: Explanation of transition to IFRS The reconciliations of equity at 30 June 2004 and the reconciliation of profit for the six months ended 30 June 2004 have been included below to enable a comparison of the 2005 interim figures with those published in the corresponding period of the previous financial year. Reconciliation of equity at 30 June 2004 Reclassify Provide translation Previous Remove deferred tax differences GAAP proposed on rolled to other 30 June 04 dividend over gains reserves £000 £000 £000 £000 ______ ______ ______ ______ Assets Property, plant and equipment 31,170 - - - ______ ______ ______ ______ Total non-current assets 31,170 - - - Current assets Inventories 3,177 - - - Trade and other receivables 6,378 - - - Cash and cash equivalents 240 - - - ______ ______ ______ ______ Total current assets 9,795 - - - ______ ______ ______ ______ Total assets 40,965 - - - ______ ______ ______ ______ Equity Issued capital (1,813) - - - Share premium (13,707) - - - Capital redemption reserve (5) - - - Share option reserve - - - - Other reserves - - - 108 Retained earnings (14,268) (544) 830 (108) ______ ______ ______ ______ Total equity (29,793) (544) 830 - ______ ______ ______ ______ Liabilities Employee benefits - - - - Deferred tax (liabilities)/assets (3,983) - (830) - ______ ______ ______ ______ Total non-current Liabilities (3,983) - (830) - Bank overdraft (3,006) - - - Interest-bearing loans and borrowings (503) - - - Income tax payable (919) - - - Trade and other payables (2,761) 544 - - ______ ______ ______ ______ Total current liabilities (7,189) 544 - - ______ ______ ______ ______ Total liabilities (11,172) 544 (830) - ______ ______ ______ ______ Total equity and liabilities (40,965) - - - ______ ______ ______ ______ Reconciliation of equity at 30 June 2004 (continued from table above) Recognise Recognise pension share IFRS deficit options 30 June 04 £000 £000 £000 ______ ______ ______ Assets Property, plant and equipment - - 31,170 ______ ______ ______ Total non-current assets - - 31,170 Current assets Inventories - - 3,177 Trade and other receivables - - 6,378 Cash and cash equivalents - - 240 ______ ______ ______ Total current assets - - 9,795 ______ ______ ______ Total assets - - 40,965 ______ ______ ______ Equity Issued capital - - (1,813) Share premium - - (13,707) Capital redemption reserve - - (5) Share option reserve - (22) (22) Other reserves - - 108 Retained earnings 5,135 22 (8,933) ______ ______ ______ Total equity 5,135 - (24,372) ______ ______ ______ Liabilities Employee benefits (7,336) - (7,336) Deferred tax (liabilities)/assets 2,201 - (2,612) ______ ______ ______ Total non-current Liabilities (5,135) - (9,948) Bank overdraft - - (3,006) Interest-bearing loans and borrowings - - (503) Income tax payable - - (919) Trade and other payables - - (2,217) ______ ______ ______ Total current liabilities - - (6,645) ______ ______ ______ Total liabilities (5,135) - (16,593) ______ ______ ______ Total equity and liabilities - - (40,965) ______ ______ ______ Reconciliation of profit for the six months ended 30 June 2004 Recognise Previous share GAAP Pensions options IFRS £000 £000 £000 £000 ______ ______ ______ ______ Revenue 12,950 - - 12,950 Cost of sales (9,974) 8 - (9,966) ______ ______ ______ ______ Gross profit 2,976 8 - 2,984 Distribution costs (940) 1 - (939) Administrative expenses (1,055) 3 (13) (1,065) ______ ______ ______ ______ Operating profits before finance costs 981 12 (13) 980 ______ ______ ______ ______ Finance costs (107) - - (107) ______ ______ ______ ______ Profit before tax 874 12 (13) 873 Income tax expense (265) (4) (2) (271) ______ ______ ______ ______ Profit for the period 609 8 (15) 602 ______ ______ ______ ______ The reconciliations of equity as at 1 January 2004 (date of transition to IFRS) and at 31 December 2004 (date of last UK GAAP financial statements) and the reconciliation of profit for 2004, as required by IFRS 1, have been included below. Reconciliation of equity at 1 January 2004 Provide Previous Remove deferred tax GAAP proposed on rolled 1 January04 dividend over gains £000 £000 £000 ______ ______ ______ Assets Property, plant and equipment 32,375 - - ______ ______ ______ Total non-current assets 32,375 - - Current assets Inventories 3,178 - - Trade and other receivables 5,893 - - Cash and cash equivalents 212 - - ______ ______ ______ Total current assets 9,283 - - ______ ______ ______ Total assets 41,658 - - ______ ______ ______ Equity Issued capital (1,813) - - Share premium (13,707) - - Capital redemption reserve (5) - - Share option reserve - - - Retained earnings (14,311) (725) 830 ______ ______ ______ Total equity (29,836) (725) 830 ______ ______ ______ Liabilities Interest-bearing loans and borrowings (57) - - Employee benefits - - - Deferred tax (liabilities)/assets (4,502) - (830) ______ ______ ______ Total non-current liabilities (4,559) - (830) Bank overdraft (2,828) - - Interest-bearing loans and borrowings (905) - - Income tax payable (385) - - Trade and other payables (3,145) 725 - ______ ______ ______ Total current liabilities (7,263) 725 - ______ ______ ______ Total liabilities (11,822) 725 (830) ______ ______ ______ Total equity and liabilities (41,658) - - ______ ______ ______ Reconciliation of equity at 1 January 2004 (continued from table above) Recognise Recognise pension share IFRS deficit options 1 January 04 £000 £000 £000 ______ ______ ______ Assets Property, plant and equipment - - 32,375 ______ ______ ______ Total non-current assets - - 32,375 Current assets Inventories - - 3,178 Trade and other receivables - - 5,893 Cash and cash equivalents - - 212 ______ ______ ______ Total current assets - - 9,283 ______ ______ ______ Total assets - - 41,658 ______ ______ ______ Equity Issued capital - - (1,813) Share premium - - (13,707) Capital redemption reserve - - (5) Share option reserve - (8) (8) Retained earnings 5,236 6 (8,964) ______ ______ ______ Total equity 5,236 (2) (24,497) ______ ______ ______ Liabilities Interest-bearing loans and borrowings - - (57) Employee benefits (7,480) - (7,480) Deferred tax (liabilities)/assets 2,244 2 (3,086) ______ ______ ______ Total non-current liabilities (5,236) 2 (10,623) Bank overdraft - - (2,828) Interest-bearing loans and borrowings - - (905) Income tax payable - - (385) Trade and other payables - - (2,420) ______ ______ ______ Total current liabilities - - (6,538) ______ ______ ______ Total liabilities (5,236) 2 (17,161) ______ ______ ______ Total equity and liabilities - - (41,658) ______ ______ ______ Reconciliation of equity as at 31 December 2004 Provide Reclassify Previous deferred translation GAAP Remove tax on differences 31 December proposed rolled to other 2004 dividend over gains reserves £000 £000 £000 £000 ______ ______ ______ ______ Assets Property, plant and equipment 29,795 - - - ______ ______ ______ ______ Total non-current assets 29,795 - - - Current assets Inventories 3,126 - - - Trade and other receivables 5,675 - - - Cash and cash equivalents 298 - - - ______ ______ ______ ______ Total current assets 9,099 - - - ______ ______ ______ ______ Total assets 38,894 - - - ______ ______ ______ ______ Equity Issued capital (1,813) - - - Share premium (13,707) - - - Capital redemption reserve (5) - - - Share option reserve - - - - Other reserves - - - 576 Retained earnings (13,305) (1,087) 830 (576) ______ ______ ______ ______ Total equity (28,830) (1,087) 830 - ______ ______ ______ ______ Liabilities Interest-bearing loans and borrowings (1,500) - - - Employee benefits - - - - Deferred tax (liabilities)/assets (3,913) - (830) - ______ ______ ______ ______ Total non-current liabilities (5,413) - (830) - Interest-bearing loans and borrowings (457) - - - Income tax payable (577) - - - Trade and other payables (3,617) 1,087 - - ______ ______ ______ ______ Total current liabilities (4,651) 1,087 - - ______ ______ ______ ______ Total liabilities (10,064) 1,087 (830) - ______ ______ ______ ______ Total equity and liabilities (38,894) - - - ______ ______ ______ ______ Reconciliation of equity as at 31 December 2004 (continued from table above) Recognise Recognise IFRS pension share 31 December deficit options 2004 £000 £000 £000 ______ ______ ______ Assets Property, plant and equipment - - 29,795 ______ ______ ______ Total non-current assets - - 29,795 Current assets Inventories - - 3,126 Trade and other receivables - - 5,675 Cash and cash equivalents - - 298 ______ ______ ______ Total current assets - - 9,099 ______ ______ ______ Total assets - - 38,894 ______ ______ ______ Equity Issued capital - - (1,813) Share premium - - (13,707) Capital redemption reserve - - (5) Share option reserve - (54) (54) Other reserves - - 576 Retained earnings 5,034 54 (9,050) ______ ______ ______ Total equity 5,034 - (24,053) ______ ______ ______ Liabilities Interest-bearing loans and borrowings - - (1,500) Employee benefits (7,192) - (7,192) Deferred tax (liabilities)/assets 2,158 - (2,585) ______ ______ ______ Total non-current liabilities (5,034) - (11,277) Interest-bearing loans and borrowings - - (457) Income tax payable - - (577) Trade and other payables - - (2,530) ______ ______ ______ Total current liabilities - - (3,564) ______ ______ ______ Total liabilities (5,034) - (14,841) ______ ______ ______ Total equity and liabilities - - (38,894) ______ ______ ______ Reconciliation of profit for the year ended 31 December 2004 Recognise Previous share GAAP Pensions options IFRS £000 £000 £000 £000 ______ ______ ______ ______ Revenue 25,176 - - 25,176 Cost of sales (19,669) 17 - (19,652) ______ ______ ______ ______ Gross profit 5,507 17 - 5,524 Distribution costs (1,871) 2 - (1,869) Administrative expenses (2,080) 5 (46) (2,121) ______ ______ ______ ______ Operating profits before finance costs 1,556 24 (46) 1,534 ______ ______ ______ ______ Finance costs (225) - - (225) ______ ______ ______ ______ Profit before tax 1,331 24 (46) 1,309 Income tax expense (130) (7) (2) (139) ______ ______ ______ ______ Profit for the period 1,201 17 (48) 1,170 ______ ______ ______ ______ Explanation of transition to IFRS Principal differences 1 Dividend recognition Under current UK GAAP, proposed dividends are recognised in the financial results for the period to which they relate. However, under IFRS, a dividend can only be recognised if it has been formally declared during the accounting period being reported. The Zotefoams' Board declares interim and final dividends after the end of each accounting period at the same time as approving the interim and annual reports. Hence, we will no longer accrue proposed dividends in the financial period to which they relate. Consequently the final dividend for 2003 and 2004 are not recognised as a liability in the opening balance sheet and the proposed interim dividend is not recognised in the balance sheet for 30 June 2004 and 30 June 2005. 2 Deferred tax Under IAS 12 deferred tax is recognised on deferred capital gains. Under FRS 19 deferred tax was only recognised on deferred capital gains when the assets into which the gain has been rolled over were sold. 3 Accounting for foreign currency transactions and financial instruments Zotefoams has a policy of taking out forward foreign currency contracts to cover forecast foreign currency income streams to provide an element of short-term predictability in its results. Under IAS 39 the fair value of forward foreign currency contracts have to be recognised in the balance sheet when effective. Ineffective hedges are immediately recognised in the income statement. Zotefoams has adopted cash flow hedge accounting with effect from 1 January 2005 and therefore the movement in fair value can be deferred in a hedging reserve until the associated transaction occurs at which point the cumulative movement is released to the income statement. The Company has taken the exemption in IFRS 1 not to restate comparative information for 2004. Translation differences on the exchange conversion of a foreign subsidiary are now posted to a translation reserve rather than the profit and loss account reserve. 4 Pensions Under UK GAAP, Zotefoams has accounted for pensions in accordance with SSAP 24, which spreads the costs of the defined benefit scheme over the employee's working lives within the Group. Zotefoams has also made additional disclosures giving details of the pension fund deficit, liabilities and operating charges on the valuation methodologies in accordance with FRS 17. IAS 19 - employee benefits requires the actuarial deficit arising under the defined benefit scheme to be recognised in the balance sheet based on fair valuations of the assets and liabilities at the balance sheet date. The movement in the deficit as a result of the current service cost, and other finance income has to be recognised in the income statement and Zotefoams has taken the option under IAS 19 to recognise actuarial gains and losses through the statement of recognised income and expense as opposed to the income statement. Note that similar adjustments would have been required under UK GAAP once FRS 17 with effect from 2005. 5 Share-based payments The Company has adopted IFRS 2 'Share-based payments' only in respect of awards granted after 7 November 2002 which had not vested at 1 January 2005. A charge is made to operating profit representing the fair value of share options granted to employees with the opposing entry taken to equity. The fair value has been calculated using a Monte Carlo simulation model and is charged to the income statement over the relevant vesting period. The charge is adjusted to reflect actual and expected levels of vesting, and for the expected achievement of any non-market performance conditions attached to each option. 6 Segmental reporting Both UK GAAP and IFRS require statutory segmental reporting to match the internal reporting structure. Under UK GAAP there is an exemption if the disclosure of a particular segment is considered by the Directors to be prejudicial to the interests of the Company. Under IFRS there is no exemption and Zotefoams will disclose its high performance foams business separately from its polyolefin business. For information purposes, some segmental information has been included in these interim statements although Zotefoams has not adopted IAS 34. 7 Intangible assets Under IAS 38 Zotefoams is required to capitalise intangible assets subject to certain specified criteria. Zotefoams' policy under UK GAAP in respect of research and development expenditure was to expense such costs. Under IAS 38, research expenditure is expensed whereas development costs must be capitalised when specified criteria have been met. Following a review of the Company's research and development expenditure, no material development costs met the IAS 38 criteria required for capitalisation and therefore no adjustment has been made under IFRS. Circulation and enquiries This interim report will be sent to shareholders and will be available from the company's registrars, Computershare Investor Services PLC, PO Box 82, The Pavilions, Bridgewater Road, Bristol, BS99 7NH. KPMG Audit Plc Chartered Accountants 1 Forest Gate Brighton Road Crawley RH11 9PT 17 August 2005 This information is provided by RNS The company news service from the London Stock Exchange

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