Final Results

16th Mar 2006 07:01

Gyrus Group PLC16 March 2006 16 March 2006 Gyrus Group PLC Gyrus completes transforming year with 73% increase in revenue Gyrus Group PLC ("Gyrus" or "the Group"), a leading supplier of medical deviceswhich reduce trauma and complications in surgery, today announces itspreliminary results for the year ended 31 December 2005. Financial Highlights • Group revenues up 73% to £150.4 million (2004: £86.9 million) including 23 weeks' revenues from the acquisition of ACMI amounting to £50.4 million • Gyrus businesses show organic growth of 15% to £99.9 million (2004: £86.9 million), 14% on constant currency • Operating profit before restructuring costs, amortisation of acquired intangible assets and one-off IFRS acquisition accounting items up 111% to £21.3 million (2004: £10.1 million) • Basic EPS of 5.6p (2004: 10.2p) ahead of expectations • Adjusted EPS* rises 27% to 14.2p (2004: 11.2p); 0.7p of which derived from lower than anticipated current tax charge * Before acquired intangible asset amortisation, deferred tax, restructuringcosts and material non-recurring IFRS acquisition accounting items Operating Highlights • Surgical Division sales up 29% driven by growth in laparascopic gynaecology and strong international performance • Strong second half growth in Partnered Technologies to finish the year up 15% • Good start for PlasmaCision products and development of laparascopic surgery and visualisation products for introduction in 2006 • Integration of ACMI on track for annualised $22 million savings by mid 2008 • ACMI acquisition performs well with annualised revenue growth up to 6.5% (2004: 4.3%) Brian Steer, Executive Chairman, said: "2005 was an outstanding year for Gyrus; our business performed extremely well,we successfully acquired ACMI, which more than doubled our size, and we endedthe year in the FTSE-250 index having enjoyed a significant increase in equityvalue since the mid year. 2006 is the foundation year for our long term goal ofbecoming a leader in minimally invasive surgery and we have embarked on it withdue care and a high degree of confidence." Enquiries: Gyrus Group PLC On 16 March 2006:Brian Steer, Executive Chairman Tel: 0207 831 3113Simon Shaw, Chief Financial Officer Tel: 0207 831 3113 Financial DynamicsBen Atwell Tel: 0207 831 3113 Introduction 2005 was an outstanding year for Gyrus; our business performed extremely well,we successfully acquired American Cystoscope Makers Inc ("ACMI"), which morethan doubled our size, and we ended the year in the FTSE-250 index havingenjoyed a significant increase in equity value since the mid year. Our businessdivisions made substantial progress and we successfully organised the structureof the enlarged business in time to capitalise on a strong finish to the yearand position ourselves for some important new product launches in 2006. The Group's reported sales revenue increased by 73% to £150.4 million (2004:£86.9 million). £50.4 million derived from the acquisition of ACMI in July,however the existing Gyrus business posted revenue of £99.9 million, whichrepresented sterling growth of 15% (14% on a constant currency basis). Our revenue performance together with continued management of operating costsresulted in growth in adjusted earnings per share of 27% to 14.2p (2004: 11.2p)which included 0.7p from a lower than anticipated current tax charge. Acquisition of ACMI During the year the Group announced the acquisition of ACMI, a market leader inurology and a leading developer and manufacturer of endoscopy systems. Therationale for the acquisition centred around the combined Group's leading marketpositions in Urology and Gynaecology. The combination of Gyrus and ACMI's coretechnologies in PK tissue management and digital visualisation respectivelyenables the Group to provide class leading "see" and "treat" products tosurgeons focused on minimally invasive, or "keyhole", surgery. Business Review Our business segments are presented on the same basis as 2004 with the additionof ACMI, renamed the "Urology & Gynaecology" Division. 2005 saw revenue growthacross the Gyrus business. Since the acquisition of ACMI in July, we haverestructured our business so that it now comprises three principal divisionswhich form our proprietary business. In addition we retain the PartneredTechnologies Division as a non-proprietary business. The divisions are asfollows: Gyrus ACMI Urology & Gynaecology Division This division focuses primarily on endoscopic surgery including cysto-resection,lithotripsy, endometrial ablation and associated procedures. It represents theacquired ACMI business, which is based in Boston and enjoys market leadership inthe Urology field. Revenue from this division comprised approximately £50.4million during the period (2004: £Nil). ACMI had historically grown revenues atan average of approximately 4.5% per annum for the last few years. In 2005 thisdivision increased year-on-year sales growth to approximately 6.5%. At the sametime the foundations were set for the Urology & Gynaecology Division to sell theGyrus PK SuperPulse product range for Urology from the beginning of 2006. Gyrus ACMI Surgical Division The Surgical Division is focused on the growing market for laparascopic surgery.It has built on the strong position Gyrus had in the laparascopic bipolarinstruments market, particularly the hysterectomy procedure, and now has aportfolio of products available and in development to address the much largergeneral surgery market. Based in Minneapolis, the division posted global revenuegrowth of 29% to £37.2 million (2004: £28.8 million). The continued increase inthe laparascopic hysterectomy market resulted in gynaecology revenues growing byover 20% year-on-year, and the division successfully proved the benefit of thefirst PlasmaCision-derived product, the PlasmaSpatula, with over $1 million inrevenues by the year-end. This was a good start for a peripheral instrument inthe gynaecology field and supported the Group's view of PlasmaCision as a keytechnology for the future. Gyrus ACMI ENT Division This division focuses on providing a broad portfolio of surgical devices to Ear,Nose and Throat specialists in otology, sinus and rhinology and head and necksurgery. Based in Memphis, the division grew its global revenues by 4.5% to£40.1 million (2004: £38.4 million) and ended the year with good market andtechnique positions established for its new PK Technology products. The Diegomicrodebrider range continued its strong performance with 16% growth, althoughthis was masked by a decline in sales of the Sepra nasal packing product. TheOtology and Head and Neck businesses grew by 2% and 4% respectively. After the acquisition of ACMI, the division was restructured and a team, underthe new President Bob Hoxie, was put in place in November. Gyrus ACMI Partnered Technologies Division This division exploits the Group's technology in markets where the Group has noproprietary presence, by out-licensing and manufacturing products for thirdparties including Johnson & Johnson, Guidant and Conmed. The division, which isrun out of Minneapolis but with significant operations in Cardiff, showed a verystrong turnaround between the first half revenue decline of 0.5% to finish theyear showing global revenue growth of 15% to £22.7 million (2004: £19.7million). This performance compares very favourably with the strong performancethe previous year. Adoption of International Accounting Standards This is the first set of annual results to be produced under InternationalFinancial Reporting Standards as adopted by the EU (IFRS). In themselves IFRShave a considerable impact upon reported earnings when compared to previousperiods under UK Generally Accepted Accounting Practice (UK GAAP). In addition,the impact of IFRS on accounting for the ACMI acquisition is significant. Inorder to help shareholders assess the effect of IFRS and the acquisition on theGroup's results, the Income Statement is presented to show the effect of theacquisition of ACMI, associated restructuring costs and other materialnon-recurring items separately. There are a number of material effects of theseitems and associated deferred taxation adjustments on reported earnings pershare under IFRS so, in order to give a measure of the underlying performance ofthe Group, we have presented adjusted earnings per share to eliminate theirdistorting effect. Gross Margin The Group's reported gross margin under IFRS declined to 55.6% in 2005 (2004:59.1%) but this substantially masks the underlying picture. The legacy Gyrusbusiness continued to increase its gross margin from 59.1% in 2004 to 61.8% in2005 through volume increases and continued focus on the operating efficiencyimprovement programme. The ACMI business produced a post-acquisition grossmargin of 52.8% compared with a 2004 margin of 49.8%. Finally the effect of IFRS3, which requires the write up of inventory to market selling value onacquisition and associated write down through cost of sales over the period ofinventory turn, resulted in a one-off non-cash charge against the margin of £4.7million; this represented a reduction of 3.1% on the Group gross margin. Operating Expenses The Group's operating expenses increased as a percentage of sales revenue to49.7% (2004: 48.2%); approximately 1.6% of the difference is a result of therestructuring charges incurred in the first six months of the three-yearprogramme to integrate ACMI. In addition the amortisation of intangible assets,recognised as a result of the acquisition, represented 2.6% of sales. In theabsence of these factors the like-for-like operating expense ratio improved to45.5% (2004: 48.2%). Sales and Marketing Since the acquisition of ACMI the Group has re-branded its trading name toreflect the combination of two strong businesses in the respective areas of "See" (ACMI 's leading position in visualisation for surgery) and "Treat" (Gyrus'sleading position in minimally invasive tissue management). We now market underthe name "Gyrus ACMI". We have strengthened the marketing resource in eachDivision, which now supports a US sales force providing the highest qualitypackage of products to surgeons in its core area of surgery. In total we nowhave approximately 290 sales representatives in the US market and an additional56 international sales staff looking after our direct and distributor-basedmarkets outside the United States. Selling and distribution expenses of £39.0million, excluding restructuring costs and amortisation of acquired intangibleassets, reduced to 25.9% of sales revenue (2004: £23.2 million; 26.7%). Internationally, we have been slower to consolidate our distributor base andhave focused primarily on integration in territories where we have a directpresence. These now comprise: The UK, Holland, Belgium, Germany, Australia andNew Zealand. The latter two territories were added in 2005 through theacquisition of Urology Solutions Pty Limited in Australia, since renamed GyrusAustralasia Pty Limited, and a sister company in New Zealand. In addition wehave embarked upon the process of opening a direct representative office inChina, which we aim to build upon during 2006. Research & Development Research and development remains an important driver of our business and wecontinue to invest substantially in creating future growth opportunities for theGroup. Excluding amortisation of acquired intangible assets, in 2005 the Groupincreased its R&D spend by over 84% to £13.1 million (2004: £7.1 million). Thisrepresented 8.7% of sales (2004: 8.2%). This increase was partly associated withthe acquisition of ACMI, however research and development expenditure in thelegacy Gyrus business increased by 49% to £10.6 million (2004: £7.1 million).Approximately £1.9 million (2004: £0.4 million) was expensed in the continuingpreparation and prosecution of the Group's legal defence against the previouslydisclosed intellectual property infringement action brought against the ENTdivision by Medtronic. The case is due to be heard in the third quarter of 2006and there is robust Counsel's opinion in favour of Gyrus's intellectual propertyposition, which the Group will continue to defend vigorously. We regardlitigation costs of this type as a regrettable but necessary expense ofoperating in the global medical devices industry, where our policy is to defendour position strongly. Excluding these costs the underlying growth in Gyrus R&Dexpenditure was 22% and reflected the significant expenditure on the Group's PKPlasmaCision products for launch in 2006, including the new General SurgeryGenerator and several instruments. Our investment in R&D has produced some potentially significant new productsderived from our PK PlasmaCision and digital visualisation technologies whichwill be introduced to the market during the course of 2006. Profitability The Group's reported operating profit for 2005 was £10.4 million representing a6.9% operating margin (2004: £10.1 million representing a 11.6% margin). Howeverthe post acquisition period in 2005 contained a number of significantacquisition accounting and restructuring items as well as amortisation ofacquired intangible assets. Excluding these, the Group's underlying operatingprofit rose 111% to £21.3 million, representing an operating margin of 14.2% ofsales revenue. Although restructuring charges will continue to have an impactupon 2006 and 2007 the Group is on track to meet its goal of substantiallyimproving underlying operating performance. Integration of ACMI and restructuring costs Our first integration goal was to create the new divisions and align theenlarged Group's product range and sales forces appropriately. Certain productshave been exchanged between the Urology & Gynaecology Division (former ACMI) andthe Surgical Division. These exchanges were completed by the year-end and didnot materially affect divisional performance in 2005. In January 2006 we announced to employees that our plant in Racine, Wisconsinwould close over the next 18 months with products being transferred toMinneapolis and Norwalk during that period. We are also at the final stage ofselecting the Group's new Global ERP system, a project whose implementation willspan the three-year integration period to mid 2008. During the 23 weeks after the acquisition the Group recorded restructuring costsof £2.4 million (2004: £nil). These costs represented a number of integrationexpenses incurred during the first months of the Group's three-year integrationplan. At the time of the acquisition it was disclosed that integration wasexpected by the directors of Gyrus to enhance annualised pre-tax earnings by $22million (approximately £12.2 million) by the end of the three-year periodfollowing the acquisition, at a total cost of approximately $33 million(approximately £18.3 million) over the same period. The directors continue tobelieve that these estimates are appropriate. The restructuring costs chargedduring 2005 represented the cost of severance, short-term sales commissionalignment for the combined sales force, the write down of certain assets andcosts associated with the alignment of global IT systems and sundry integrationexpenses. In overall terms we have embarked successfully on the integration process, whichsupports the potential value of the benefits that will accrue over the period.However we recognise that these initiatives are significant and, carrying anassociated level of risk, require strong management focus to ensure a successfuloutcome. Earnings per share The unusual integration costs, IFRS acquisition adjustments (including deferredtax) and material non-recurring items associated with the acquisition serve tomask the underlying performance of the Group. This can be seen in the IFRS basicearnings per share of 5.6p in 2005 compared with 10.2p in 2004. For these reasons, in addition to the prescribed measures of earnings per share,the Group discloses adjusted earnings per share, which excludes the amortisationof acquired intangible assets, integration costs (including the cost of theone-off special LTIP award, but not "normal" annual awards), materialnon-recurring items and deferred taxation. In 2005, adjusted EPS increased 27%to 14.2p (2004: 11.2p) of which approximately 0.7p related to a lower currenttaxation charge than was originally anticipated. It is this measure which mostclosely matches the adjusted earnings per share figures disclosed under UK GAAPin previous years, and so most readily enables longer term earnings comparisonsto be made. The installed base of PK generators in the US In 2005 the installed base of PK generators in the Surgical and ENT markets inthe US grew by 12% to 5248 units (2004: 4681 units). The value of the associatedrevenues from the sale of disposable instruments increased by 22% to $46.3million (2004: $37.9 million). During 2005 the Group continued to sellapproximately 50% of its generators which entered the US market. This continuedthe trend established in 2004 and was associated with the broader utility of theGroup's newer generators for use as workstations in our areas of surgicalspeciality. Management and staff Since the acquisition of ACMI we have restructured our management team in orderto deliver the integration plan and the future growth prospects of the combinedbusiness. A new Executive Committee (comprising the three Executive Directors,Tom Murphy the US-based Executive Vice President and Frank D'Amelio the ChiefTechnology Officer) was formed to oversee integration and the development andimplementation of the enlarged Group's strategy. Group activity is primarily directed by the eleven strong Operating Board, whichcomprises Executive Committee members, the division Presidents, the US-basedVice President of Finance and the Vice President of Legal Affairs. The Group's performance in 2005 is a testament to the quality and skill of GyrusACMI staff around the world; the Board thanks them for their enthusiasm andcommitment, particularly during this crucial post-acquisition period. Board Mark Goble has resigned as a non-executive director of Gyrus in order to devotehis energies to the development of Rhytec Limited, in which the Group continuesto hold an investment. Mark founded Gyrus in 1989 and the Board has valued histechnological drive and enthusiasm to change surgical practice throughout histime with the Group. We wish him and the Rhytec team well in 2006. As a result of the acquisition and the timing of the associated integrationprocess, the Nomination Committee of the Board has invited Brian Steer to extendhis tenure as Chairman by approximately 6 months to the end of 2007. This isdesigned to ensure management stability and continued accountability during thisimportant period for the Group. A resolution to approve the proposed contract extension will be considered atthe forthcoming Annual General Meeting in May. Summary and Outlook In 2005, Gyrus delivered very strong revenue and profit growth whilstundertaking, and commencing integration of, a transforming acquisition. 2006presents exciting opportunities for the Group through the continued integrationof Gyrus and ACMI, and the introduction of significant new products derived fromour PlasmaCision and digital visualisation technologies. These products willexpand our "See" and "Treat" surgical platform and support our entry into thestrategically important general surgery market. 2006 is the foundation year for our long-term goal of becoming a leader inminimally invasive surgery and we have embarked on it with due care and a highdegree of confidence. Gyrus Group PLC Consolidated Income Statement Year ended 31 December 2005 Note Year ended 31 Acquisition of Restructuring (Note December 2005 American 4) pre-acquisition of Cystoscope Makers American Cystoscope Inc (Note 3) Makers Inc and restructuring costs £000 £000 £000Revenue 99,945 50,431 - Cost of sales (38,201) (23,805) (57) _____ _____ _____ Gross profit 61,744 26,626 (57) Other operating income 1,501 - - Selling and distribution expenses - Selling and distribution (26,448) (12,507) (1,206) - Amortisation of intangible assets - (2,524) - Research and development expenses - Research and development (10,618) (2,473) - - Amortisation of intangible assets (57) (1,349) - General and administrative (13,365) (3,057) (1,106)expenses _____ _____ _____ Operating profit 12,757 4,716 (2,369) Financial income 151 104 -Financial expenses (3,149) (2,569) - _____ _____ _____ Profit before taxation 9,759 2,251 (2,369) Taxation (3,783) 443 900 _____ _____ _____ Profit for the year 5,976 2,694 (1,469) _____ _____ _____ Earnings per ordinary shareBasic 6Diluted 6 Note Impact of fair value Year ended 31 Year ended 31 adjustments on December 2005 December 2004 acquired inventory and option accounting (Notes (a) and (b) below) £000 £000 £000Revenue - 150,376 86,930 Cost of sales (4,686) (66,749) (35,570) _____ _____ _____ Gross profit (4,686) 83,627 51,360 Other operating income - 1,501 641 Selling and distribution expenses - Selling and distribution - (40,161) (23,158) - Amortisation of intangible assets - (2,524) - Research and development expenses - Research and development - (13,091) (7,139) - Amortisation of intangible assets - (1,406) - General and administrative - (17,528) (11,629)expenses _____ _____ _____ Operating profit (4,686) 10,418 10,075 Financial income 2,972 3,227 932Financial expenses (992) (6,710) (1,020) _____ _____ _____ Profit before taxation (2,706) 6,935 9,987 Taxation 1,781 (659) (1,504) _____ _____ _____ Profit for the year (925) 6,276 8,483 _____ _____ _____ Earnings per ordinary shareBasic 6 5.6p 10.2p _____ _____Diluted 6 5.4p 10.1p _____ _____ All activities were in respect of continuing operations. (a) Fair value adjustment on acquired inventory As required by IFRS 3 "Business Combinations", at the date of acquisition ofAmerican Cystoscope Makers Inc finished goods were valued at the selling priceless the costs of disposal and a reasonable profit allowance for the sellingeffort. Work in progress was valued at the selling price of the finished goodsless costs to complete, costs of disposal and a reasonable profit allowance forcompleting and selling the goods. Raw materials were valued at currentreplacement cost. The fair value adjustment arising as a result of thisvaluation exercise amounted to an increase in the value of inventories of£4,686,000. This inventory uplift reversed through the income statement over theinventory turn and the charge arising in the year ended 31 December 2005 was£4,686,000. (b) Option accounting On 16 June 2005 Gyrus announced the proposed acquisition of ACMI for a totalconsideration of $497 million. On the same date it entered a placing agreementto raise £116 million (net). In order to ensure that £116 million proceeds ofthe sterling capital raised would buy at least USD$ 206 million required forsettlement, regardless of movements in the USD$:GBP£ exchange rate, Gyrusentered into an option agreement. The cost of the option was £992,000 and theterms of the option allowed for exercise up to the 15 August 2005. On completion, the sale of option generated proceeds of £2,972,000 (a net gainof £1,980,000). This has been deemed an ineffective hedge under the provisionsof IAS 39, and therefore the cost of the option and the sale proceeds thereofhave been taken to financial expense and financial income respectively. Gyrus Group PLC Statement of recognised income and expense Year ended 31 December 2005 2005 2004 £000 £000Exchange differences arising on translation of 18,807 (8,326)operations Deferred tax recognised on income and expenses 663 (187)directly in equity Cash flow hedgesChanges in accounting policy relating to the 115 -first-time adoption of IAS 39Effective portion of changes in fair value of cash 579 -flow hedges net of recycling Actuarial loss on defined benefit pension plan (35) - _____ _____ 20,129 (8,513) Profit for the year 6,276 8,483 _____ _____ Total recognised income and expense for the year 26,405 (30) _____ _____ Gyrus Group PLC Consolidated Balance Sheet As at 31 December 2005 2005 2004 £000 £000 Assets Property, plant and equipment 20,057 10,396Goodwill 288,027 90,709Other intangible assets 110,288 265Deferred tax asset - 4,403 _____ _____Total non-current assets 418,372 105,773 _____ _____ Inventories 33,140 13,434Trade receivables 35,509 13,834Other current assets 8,849 2,480Cash and cash equivalents 20,194 7,263 _____Total current assets 97,692 37,011 _____ _____ Total assets 516,064 142,784 _____ _____ Equity Share capital (2,785) (2,160)Share premium (303,699) (152,447)Merger reserve (3,860) (3,860)Other reserves (10,467) 9,034Retained earnings 19,306 27,780 _____ _____Total equity (301,505) (121,653) _____ _____ Liabilities Bank loan (136,731) -Obligations under finance leases and hire purchase (146) (126)contractsDeferred tax liabilities (22,801) - Provisions (3,219) -Other creditors - (8) _____ _____Total non-current liabilities (162,897) (134) _____ _____ Bank overdrafts and loans due within one year (13,123) (8,928)Trade and other payables (37,476) (11,685)Current tax payable (929) (326)Obligations under finance leases and hire purchase (134) (58)contracts _____ _____Total current liabilities (51,662) (20,997) _____ _____Total liabilities (214,559) (21,131) _____ _____Total equity and liabilities (516,064) (142,784) _____ _____ Gyrus Group PLC Consolidated Cash Flow Statement For the year ended 31 December 2005 2005 2004 £000 £000Cash flows from operating activities Profit for the year 6,276 8,483 Adjustments for:Depreciation of property, plant and equipment 4,316 3,562Amortisation of intangible assets 4,327 346Loss/(profit) on disposal of property, plant and 85 (263)equipmentFinancial income and expenses 5,463 88Exchange loss/(gain) included in financial income and (1,062) 762expensesFair value adjustment on acquired inventory and option 2,705 -accountingEquity settled share based payment expense 1,570 324Taxation 659 1,504 _____ _____Operating cash flows before movement in working capital 24,339 14,806 (Increase)/decrease in inventories (1,263) 856Increase in trade and other receivables (10,268) (1,578)Increase in trade and other payables 948 1,963 _____ _____Cash generated from operations 13,756 16,047 Interest paid (3,227) (787)Tax paid (573) (185) _____ _____Net cash from operating activities 9,956 15,075 _____ _____ Cash flows from investing activities Interest received 192 171Proceeds on disposal of property, plant and equipment - 417Acquisition of property, plant and equipment (4,238) (2,657)Acquisition of patents, trademarks and other (56) -intangiblesExpenditure on product development (253) (141)Acquisition of subsidiaries (net of cash acquired) (289,775) 400 _____ _____Net cash from investment activities (294,130) (1,810) _____ _____ Cash flows from financing activities Proceeds from issue of share capital 155,660 480Proceeds from increase/(decrease) in borrowings 141,259 (10,380)Repayment of obligations under finance leases (133) (113) _____ _____Net cash from financing activities 296,786 (10,013) _____ _____ Net increase in cash and cash equivalents 12,612 3,252 Cash and cash equivalents at beginning of year 7,263 4,145 Effect of foreign exchange rate fluctuations on cash 319 (134)held _____ _____ Cash and cash equivalents at end of year 20,194 7,263 _____ _____ Bank balances and cash 20,194 7,263 _____ _____ Gyrus Group PLC Notes to the Preliminary Announcement Year ended 31 December 2005 1. Basis of preparation and accounting policies The preliminary announcement for the full year ended 31 December 2005 has beenprepared in accordance with International Accounting Standards and InternationalFinancial Reporting Standards (collectively "IFRS") as adopted by the EuropeanUnion (EU) at 31 December 2005. Details of the accounting policies applied areset out below. The Group is preparing its financial statements in accordance with IFRS for thefirst time and consequently has applied certain transitional provisions of IFRS1. An explanation of how the transition to adopted IFRS has affected thereported financial position and financial performance of the Group is providedin note 8. The annual financial information presented in this preliminary announcement forthe year ended 31 December 2005 is extracted from, and is consistent with, theGroup's audited financial statements for the year ended 31 December 2005, andthose financial statements will be delivered to the Registrar of Companiesfollowing the Company's Annual General Meeting. The auditors' report on thoseaccounts is unqualified and does not contain any statement under section 237 ofthe Companies Act 1985. Information in this preliminary announcement does not constitute statutoryaccounts of the Group within the meaning of section 240 of the Companies Act1985. Statutory accounts for the year ended 31 December 2004, which wereprepared under accounting practices generally accepted in the UK, have beenfiled with the Registrar of Companies. The auditors' report on those accountswas unqualified and did not contain any statement under section 237 of theCompanies Act 1985. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Grouphas the power, directly or indirectly, to govern the financial and operatingpolicies of an entity so as to obtain benefits from its activities. In assessingcontrol, potential voting rights that are presently exercisable or convertibleare taken into account. The financial statements of subsidiaries are included inthe consolidated financial statements from the date that control commences untilthe date that control ceases. On acquisition, the identifiable assets, liabilities and contingent liabilitiesof a subsidiary are measured at their fair values at the date of acquisition.The results of subsidiaries acquired or disposed of during the year are includedin the consolidated income statement from the effective date of acquisition orup to the effective date of disposal, as appropriate. (ii) Transactions eliminated on consolidation Intragroup balances, and any unrealised gains and losses or income and expensesarising from intragroup transactions, are eliminated in preparing theconsolidated financial statements. (b) Foreign currency (i) Foreign currency transactions Transactions denominated in foreign currencies are recorded at the exchange rateruling on the date of the transaction. Foreign currencies received aretranslated at the exchange rate ruling on the date of conversion. Monetaryassets and liabilities denominated in foreign currencies, are translated intosterling at rates of exchange ruling at the balance sheet date. The resultingexchange differences are charged to the income statement for the year. (ii) Foreign statements of foreign operations On consolidation, the results of overseas operations are translated at theaverage rates of exchange during the period and their balance sheets at therates ruling at the balance sheet date. Exchange differences arising ontranslation of the opening net assets and on the difference between the resultsof overseas operations translated at average monthly exchange rates and year-endrates are dealt with through the Group's translation reserve. (c) Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreignexchange risks and interest rate risks arising from operational and financingactivities. In accordance with its treasury policy, the Group does not hold orissue derivative financial instruments for trading purposes. Derivatives are recorded at fair value and any gains or losses on remeasurementof fair values are taken to the income statement. However, where derivativesqualify for hedge accounting, recognition of any resulting gain or loss dependson the nature of the item being hedged. The fair value of forward foreignexchange contracts is their quoted market price at the balance sheet date. The fair value of interest rate swaps is the estimated amount that the Groupwould receive or pay to terminate the swap at the balance sheet date, takinginto account current interest rates and the current creditworthiness of the swapcounterparties. (d) Cash flow hedging When a derivative financial instrument is designated as a hedge of thevariability in cash flows of a recognised asset or liability or highly probableforecast transaction, the effective part of any gain or loss on the derivativefinancial instruments is recognised directly in the hedging reserve. If a hedgeof a forecasted transaction subsequently results in the recognition of afinancial asset or a financial liability, then the associated gains or lossesthat were recognised directly in equity are reclassified into the incomestatement in the same period or periods during which the asset acquired orliability assumed affects the income statement (i.e. when interest income orexpense is recognised). The ineffective part of any gain or loss is recognised immediately in the incomestatement. When a hedging instrument expires or is sold, terminated or exercised, or theGroup revokes designation of the hedge relationship but the hedged forecasttransaction is still expected to occur, the cumulative gain or loss at thatpoint remains in equity and is recognised in accordance with the above policywhen the transaction occurs. If the hedged transaction is no longer expected totake place, then the cumulative unrealised gain or loss recognised in equity isrecognised immediately in the income statement. Comparative information for derivative financial instruments and hedging The Group has taken advantage of the transitional arrangements of IFRS 1 not torestate corresponding amounts in accordance with the above policies. Instead thefollowing policies were applied: In the comparative period all financial assets and liabilities were carried atcost. Gains and losses on forward exchange contracts treated as hedginginstruments were not recognised in the income statement. On recognition of thehedged transaction the unrecognised gains and losses arising on the instrumentwere recognised, either in the income statement or in the carrying value of theassociated asset or liability. The following adjustments necessary to implement the revised policy have beenmade as at 1 January 2005 with the net adjustment, to net assets, taken throughthe 2005 statement of recognised income and expense. Corresponding amounts for2004 are presented and disclosed in accordance with the requirements of theCompanies Act 1985 and FRS 4 in 2004. The main differences between the 2004 and2005 bases of accounting are shown and described below. Effect on the balance sheet at 1 January 2005 £000Other financial assets - Cash flow hedges 115 Hedging reserve - Cash flow hedges (115) Effect on the income statement of the new policies Recognition in the income statement of a net gain of £1,980,000 as a materialnon-recurring item in relation to what is recognised under IAS 39 as anineffective hedge in respect of the sterling denominated equity portion of theconsideration paid for ACMI. Effect on the current year statement of recognised income and expense of the newpolicies Gains and losses arising on cash flow hedges (to the extent effective), net ofamounts recycled to the income statement for the period in respect of hedgedtransactions, resulted in a net gain of £579,000 being taken directly to thehedging reserve. The effect of implementing the new policies on 1 January 2005 has resulted in anet credit taken directly to equity of £115,000. The cash flow statement is unaffected by the change in accounting policy. (e) Property, plant and equipment (i) Owned assets Items of property, plant and equipment are stated at cost less accumulateddepreciation and impairment losses. (ii) Leased assets Where the group enters into a lease which entails taking substantially all therisks and rewards of ownership of an asset, the lease is treated as a financelease. The lease is recorded in the balance sheet as a tangible fixed asset andis depreciated over its estimated useful life or the term of the lease,whichever is the shorter. Future instalments under such leases, net of financecharges, are included in creditors. (iii) Depreciation Depreciation is provided to write off the cost less the estimated residual valueof tangible fixed assets by equal instalments over their estimated usefuleconomic lives. Land is not depreciated. The estimated useful lives are asfollows: Fixtures, fittings and office equipment 3 - 10 yearsBuildings 20 yearsLeasehold improvements Term of leasePlant and machinery 3 - 10 yearsPlaced equipment 3 years Placed equipment relates to equipment placed in clinical settings to generate astream of "disposables" revenue. Utilisation of such equipment is measured andprovision made where appropriate for impairment. (f) Intangible assets (i) Goodwill Goodwill arising on consolidation represents the excess of the cost ofacquisition over the Group's interest in the fair value of the identifiableassets, liabilities and contingent liabilities of a subsidiary at the date ofacquisition. Goodwill is recognised as an asset and is tested for impairmentannually, or on such other occasions that events or changes in circumstancesindicate that it might be impaired. In respect of acquisitions prior to 1 January 2004, goodwill is included on thebasis of its deemed cost, which represents the amount recorded under UK GAAP.The classification and accounting treatment of business combinations thatoccurred prior to 2004 has not been reconsidered in preparing the Group'sopening IFRS balance sheet at 1 January 2004. On disposal of a subsidiary, the attributable amount of unamortised goodwillwhich has not been subject to impairment is included in the determination of theprofit or loss on disposal. (ii) Research and development Expenditure on research activities is recognised as an expense in the period inwhich it is incurred. Development expenditure arising from the Group's development activities iscapitalised and amortised over the life of the product only if the Group candemonstrate the following: - The technical feasibility of completing the intangible asset so it will be available for use or sale; - The intention to complete the intangible asset and use or sell it; - The ability to use or sell the intangible asset; - That it is probable that the asset created will generate future economic benefits; - There is the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and - The development cost of the asset can be measured reliably. Where no intangible asset is recognised, development expenditure is recognisedas an expense in the period in which it is incurred. Capitalised developmentcosts are amortised over the life of the product, which is usually no more than10 years. (iii) Licensing agreements Licensing agreements are included at cost and depreciated over their usefuleconomic life. Provision is made for any impairment. (iv) Intellectual property rights Patents and trademarks are measured initially at purchase cost and amortised ona straight-line basis over their estimated useful lives. (v) Subsequent expenditure and amortisation Subsequent expenditure on a capitalised intangible asset is capitalised onlywhen it increases the future economic benefits embodied in the specific asset towhich it relates. All other expenditure is expensed as incurred. On acquisition, intangible assets are identified and valued in accordance withIFRS 3. Amortisation is charged to the income statement on a straight-line basis overthe estimated useful lives of the relevant intangible assets unless such life isindefinite. Intangible assets with an indefinite useful life are systematicallytested for impairment at each balance sheet date. Other intangible assets areamortised from the date they are available for use. The estimated useful livesare as follows:- Capitalised development costs 5 - 10 yearsAcquired research and development As identified at acquisition dateLicensing agreements Life of the agreement or underlying patentIntellectual property rights Life of the underlying right (e.g. patent)Customer relationships As identified at acquisition dateTrademarks As identified at acquisition date (g) Trade and other receivables Trade and other receivables are stated at their fair value less impairmentlosses. (h) Inventories Inventories are stated at the lower of cost and net realisable value. Cost isdetermined on a first in first out basis and includes transport and handlingcosts. In the case of manufactured products, cost includes all directexpenditure and production overheads based on the normal level of activity. Netrealisable value is the price at which the stocks can be sold in the normalcourse of business after allowing for the costs of realisation and, whereappropriate, the cost of conversion from their existing state to a finishedcondition. Provision is made where necessary for obsolete, slow-moving anddefective stocks in determining net realisable value. Finished goods acquired as a result of business combinations are valued at theselling price less the costs of disposal and a reasonable profit allowance forthe selling effort. Work in progress acquired as a result of businesscombinations is valued at the selling price of the finished goods less costs tocomplete, costs of disposal and a reasonable profit allowance for completing andselling the goods. Raw materials acquired as a result of business combinationsare valued at current replacement cost. The fair value adjustment arising as aresult of the valuation exercise is reduced over the period of the stock turn ofthe acquired company. The resulting charge is taken to the income statement. (i) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bankoverdrafts that are repayable on demand and form an integral part of theGroup's cash management are included as a component of cash and cash equivalentsfor the purposes only of the statement of cash flows. (j) Impairment At each balance sheet date, the Group reviews the carrying amounts of itstangible, intangible assets and financial assets to determine whether there isany indication that those assets have suffered an impairment loss. If any suchindication exists, the recoverable amount of the asset is estimated in order todetermine the extent of the impairment loss (if any). Where it is not possibleto estimate the recoverable amount of an individual asset, the Group estimatesthe recoverable amount of the cash-generating unit to which the asset belongs. Goodwill arising on acquisition is allocated to cash-generating units. Therecoverable amount of the cash-generating unit to which goodwill has beenallocated is tested for impairment annually, or on such other occasions thatevents or changes in circumstances indicate that it might be impaired. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. Impairment lossesare recognised as an expense immediately, unless the relevant asset is land orbuildings at a revalued amount, in which case the impairment loss is treated asa revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset(cash-generating unit) is increased to the revised estimate of its recoverableamount, but such that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of an impairmentloss is recognised as income immediately, unless the relevant asset is carriedat a revalued amount, in which case the reversal of the impairment loss istreated as a revaluation increase. However, impairment losses relating togoodwill may not be reversed. (k) Interest-bearing borrowings Interest-bearing bank loans and overdrafts are recognised initially at fairvalue less attributable costs. Subsequent to initial recognition,interest-bearing borrowings are stated at amortised cost with any differencebetween cost and redemption value being recognised in the income statement overthe period of the borrowings on an effective interest basis. (l) Employee benefits (i) Defined contribution plans Obligations for contributions to defined contribution pension plans arerecognised as an expense in the income statement as incurred. (ii) Defined benefit plans The Group has obligations to two defined benefit plans which were assumed on 21July 2005 as part of the acquisition of American Cystoscope Makers Inc. The Group's net obligation in respect of defined benefit pensions plans iscalculated separately for each plan by estimating the amount of future benefitthat employees have earned in return for their services in current and priorperiods; that benefit is discounted to determine the present value, and the fairvalue of any plan assets is deducted. The discount rate is an actuariallydefined rate, based upon long term interest rates, used to determine the presentvalue of gross future obligations of the scheme. The calculation is performed bya qualified actuary using the projected unit credit method. Where the calculation results in a benefit to the Group, the recognised asset islimited to the present value of any future refunds from the plan or reductionsin future contributions to the plan. Actuarial gains and losses arising subsequent to the acquisition of AmericanCytoscope Makers Inc are recognised directly in equity in the period that theyoccur through the statement of recognised income and expense. (iii) Share based payment transactions In accordance with the transition provisions, IFRS 2 has been applied to allgrants of shares or share options made after 7 November 2002 that were unvestedas of 1 January 2005. The Group issues equity settled share based payments to certain employees.Equity settled share based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date of the equity settled sharebased payments is expensed on a straight-line basis over the vesting period,based on the Group's estimate of shares that will eventually vest. The fair value of services received in return for share options granted toemployees is measured by reference to the fair value of share options granted.The estimate of the fair value of the services received is measured based on astochastic option pricing model. This model takes into account the followingvariables: exercise price, share price at grant, expected term, expectedvolatility of share price, risk-free interest rate and expected dividend yield. The Group also gives employees the opportunity to purchase shares in the Groupby participating in a share purchase plan. The option price for the UK Save AsYou Earn scheme is the market price on the day preceding the invitation datediscounted by a maximum of 80%. The share options under this plan are alsotreated as equity settled share based payments and the fair value calculatedusing a stochastic model. In May 2005, the Group issued the first grant under the Gyrus 2005 Long TermIncentive Plan. This is a discretionary plan which provides for the grant ofconditional awards or nil cost options over 1p ordinary shares in the company.Awards normally vest following the third anniversary of grant once certainperformance conditions have been satisfied and provided that the participantremains employed by the Group. The performance conditions are based on earningsper share growth. The fair value of grants under this scheme are determined asbeing the mid market quote on the day preceding grant which is charged to theincome statement evenly over the 3 year vesting period based on the Group'sestimate of shares that will eventually vest. (m) Provisions Provisions are recognised when the Group has a present legal or constructiveobligation as a result of a past event and it is probable that an outflow ofeconomic benefits will be required to meet that obligation. (i) Restructuring Provisions for restructuring costs are recognised when the Group has a detailedformal plan for the restructuring and it has been notified to affected partiesby the balance sheet date. Future operating costs are not provided for. (n) Trade and other payables Trade payables are stated at their fair value. (o) Revenue Product sales are recognised upon shipment of product. Royalty revenue relating to licensed technology is recognised upon shipment ofproduct or when advised by the other party to the royalty contract that theroyalty is earned. Revenue excludes VAT and similar taxes. (p) Other income Other income represents revenues derived from collaborative developmentagreements and is recognised in accordance with the applicable contract terms. (q) Cost of sales Cost of sales represents the material, labour and production overheads incurredin manufacturing the products sold or the purchase cost and directlyattributable handling costs of products bought for re-sale. (r) Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on astraight-line basis over the life of the lease. (ii) Finance lease payments Minimum lease payments are apportioned on an effective interest basis, betweenthe finance element, which is charged to the income statement account, and thecapital element, which reduces the outstanding obligations for futureinstalments. (iii) Financial expenses Financial expenses comprise interest payable on borrowings, foreign exchangelosses and losses on hedging instruments that are recognised in the incomestatement. (iv) Financial income Financial income comprises interest income recognised in the income statement asit accrues, interest receivable on funds invested and foreign exchange gains onhedging instruments that are recognised in the income statement. (s) Income tax The charge for current tax is based on the results for the period as adjustedfor items which are non-assessable or disallowed. It is calculated using ratesthat have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method inrespect of temporary differences between the carrying amount of assets andliabilities in the financial statements and the corresponding tax basis used inthe computation of taxable profit. Deferred tax liabilities are recognised forall taxable temporary differences and deferred tax assets are recognised to theextent that it is probable that taxable profits will be available against whichdeductible temporary differences can be utilised. Such assets and liabilitiesare not recognised if the temporary difference arises from goodwill (or negativegoodwill) or from the initial recognition (other than in a business combination)of other assets and liabilities in a transaction which affects neither thetaxable profit nor the accounting profit. Where the Group is able to control the distribution of reserves fromsubsidiaries, and there is no intention to distribute the reserves, deferred taxis not recognised for these temporary differences. Deferred tax is calculated at the rates that are expected to apply when theasset or liability is settled. Deferred tax is charged or credited in the incomestatement, except when it relates to items credited or charged directly toequity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxeslevied by the same taxation authority, and the Group intends to settle itscurrent tax assets and liabilities on a net basis. Information as to the calculation of the income tax expense is included in note5. 2. Segment reporting Segment information is presented in respect of the Group's business divisions,which are the primary basis of segment reporting. The business segment reportingformat reflects the Group's management and internal reporting structures for2005 including the effects of the acquisition of American Cystoscope Makers Inc. Inter-segment pricing is determined on an arm's length basis. Segment results include items directly attributable to a segment as well asthose that can be allocated on a reasonable basis. Business segments The Group is comprised of the following main business segments: ENT Design, development, manufacture, marketing and sales of otology, sinus and rhinology and head and neck productsSurgical Design, development, manufacture, marketing and sales of laparascopic surgery productsUrology & Design, development, marketing and sales of urology and gynaecology and visualisationGynaecology products. It represents the acquired American Cystoscope Makers Inc ("ACMI") business.Partnered Out-licensing of the Group's proprietary technology in conjunction with a manufacturingTechnologies contract for markets outside the Group's core sales and marketing competence From 1 January 2006 certain products have been swapped between the Surgical andthe Urology & Gynaecology divisions. In future years segment reporting will beconducted on this divisional basis. For the year ended 31 December 2005 ENT Surgical Partnered Urology & Total Technologies Gynaecology £000 £000 £000 £000 £000RevenueExternal sales 40,119 37,174 22,652 50,431 150,376Inter-segment sales 1,715 1,750 1,501 622 5,588 _____ _____ _____ _____ _____ 41,834 38,924 24,153 51,053 155,964 _____ _____ _____ _____ _____Segment result before 1,946 7,967 4,172 3,863 17,948restructuring chargesRestructuring charges (846) (876) (34) (613) (2,369)Material non-recurring item - - - (4,686) (4,686) _____ _____ _____ _____ _____Segment result after 1,100 7,091 4,138 (1,436) 10,893restructuring charges andmaterial non-recurring item _____ _____ _____ _____ _____Unallocated corporate expenses (475) _____Profit from operations 10,418Net finance costs (5,463)Material non-recurring items 1,980 _____Profit before tax 6,935Income tax expense (659) _____Profit for the year 6,276 _____ As at 31 December 2005 ENT Surgical Partnered Urology & Unallocated Total Technologies Gynaecology £000 £000 £000 £000 £000 £000 Capital additions 1,197 1,409 653 921 114 4,294 _____ _____ _____ _____ _____ _____ Depreciation 2,221 939 546 555 55 4,316 _____ _____ _____ _____ _____ _____ Amortisation 128 63 32 4,104 - 4,327 _____ _____ _____ _____ _____ _____ Assets 130,402 45,901 25,835 319,695 (5,769) 516,064 _____ _____ _____ _____ _____ _____ Liabilities (59,907) (3,910) (3,497) (145,427) (1,818) (214,559) _____ _____ _____ _____ _____ _____ For the year ended 31 December 2004 ENT Surgical Partnered Urology & Total Technologies Gynaecology £000 £000 £000 £000 £000RevenueExternal sales 38,369 28,822 19,739 - 86,930Inter-segment sales 1,179 1,346 - - 2,525 _____ _____ _____ _____ _____ 39,548 30,168 19,739 - 89,455 _____ _____ _____ _____ _____Segment result 1,764 5,892 3,983 - 11,639 _____ _____ _____ _____ _____Unallocated corporate expenses (1,564) _____Profit from operations 10,075Net finance costs (88) _____Profit before tax 9,987Income tax expense (1,504) _____Profit for the year 8,483 _____ As at 31 December 2004 ENT Surgical Partnered Urology & Unallocated Total Technologies Gynaecology £000 £000 £000 £000 £000 £000 Capital additions 1,145 927 570 - 15 2,657 _____ _____ _____ _____ _____ _____ Depreciation 2,106 792 585 - 79 3,562 _____ _____ _____ _____ _____ _____ Amortisation 85 - - - 261 346 _____ _____ _____ _____ _____ _____ Assets 98,409 38,432 17,943 - (12,000) 142,784 _____ _____ _____ _____ _____ _____ Liabilities (60,981) (2,686) (2,683) - 45,219 (21,131) _____ _____ _____ _____ _____ _____ The average number of employees for the year for each of the Group's principaldivisions was as follows: Year ended 31 December Year ended 31 2005 December 2004ENT 235 223Surgical 273 250Partnered Technologies 139 133Urology & Gynaecology 819 -Head office & administration 32 26 _____ _____ 1,498 632 _____ _____ Geographical Segments Turnover by destination Year ended 31 December Year ended 31 2005 December 2004 £000 £000North America 111,361 58,427United Kingdom and rest of Europe 28,196 21,747Rest of world 10,819 6,756 _____ _____ 150,376 86,930 _____ _____ Assets 2005 2004 £000 £000North America 467,545 116,525United Kingdom and rest of Europe 47,234 25,882Rest of world 1,285 377 _____ _____ 516,064 142,784 _____ _____ Capital additions 2005 2004 £000 £000North America 3,107 2,005United Kingdom and rest of Europe 1,093 652Rest of world 94 - _____ _____ 4,294 2,657 _____ _____ 3. Acquisition of American Cystoscope Makers Inc On 21 July 2005, Gyrus Group PLC acquired 100% of the share capital of AmericanCystoscope Makers Inc ("ACMI"). ACMI designs, manufactures, markets and servicessurgical visualisation and treatment systems used by surgeons and physiciansprimarily for diagnosis and minimally invasive surgery in the field of Urologyand Gynaecology. ACMI was acquired for a consideration of US$332 million plusthe assumption of debt and other obligations subsequently repaid by the companyof US$168 million less the assumption of cash balances on the date ofacquisition. The consideration was satisfied by the issue of 61,560,025 placingshares at 250p per placing share and new banking facilities. The entire proceedsof the allotment of the placing shares (which were issued in consideration forthe outstanding common stock of ACMI) were paid to the Sellers. New bankingfacilities of US$280 million include a five year fixed term loan of US$250million and a US$30 million revolving credit facility secured by a fixed andfloating charge over the assets of the Group. Acquiree's book values Fair value adjustments Acquisition amounts £000 £000 £000Property, plant and equipment 10,440 (1,991) 8,449Intangible assets 612 108,812 109,424Inventories 15,938 4,686 20,624Trade and other receivables 16,442 - 16,442Deferred tax asset/(liability) 216 (27,009) (26,793)Cash and cash equivalents 2,642 - 2,642Trade and other payables (30,243) - (30,243)Provisions (2,245) - (2,245)Bank loan (83,365) - (83,365) _____ _____ _____Net identifiable assets and (69,563) 84,498 14,935liabilities _____ _____ _____Goodwill on acquisition 180,351 _____Total consideration including 195,286costs _____ Purchase price of US$332,460,951 186,368Acquisition costs taken to cost of 6,938investmentFunds from exercise of option* 1,980 _____Total consideration 195,286 _____ *In order to ensure that £116 million of placing proceeds raised translated intothe minimum US$ amount required for the completion of the acquisition, GyrusGroup PLC entered into an option agreement on the announcement date. The netfunds received from the sale of this option approximately one month later were£1,980,000. Satisfied by US$000 £000Share placing 153,901Cash 32,467Purchase price 332,461 186,368 _____ _____ Cash acquired (4,712) (2,642)ACMI debt paid on acquisition 167,763 94,052Acquisition costs** 10,721 _____ _____Net cash outflow as a result of the acquisition 495,521 288,499 _____ _____ ** Includes £6,938,000 of acquisition costs taken to cost of investment and£3,783,000 of acquisition costs relating to the share placing that were taken toshare premium account. Fair value adjustments A valuation study was commissioned to identify and value intangible assets. As aresult of the valuation, £108,812,000 of intangible assets were recognised whichcan be analysed as follows:- £000Developed product technology - Urology 12,557Developed product technology - Gynaecology 4,148In process R&D - Urology 9,362In process R&D - Gynaecology 2,915Trademark/tradename portfolio - Urology 28,141Trademark/tradename portfolio - Gynaecology 5,662Customer relationships 46,471Less: amounts included in opening balance sheet in (444)connection with the above _____Total 108,812 _____ A valuation study was commissioned on the land and buildings owned by ACMI. As aresult of the valuation the value attributed to property, plant and equipmentwas reduced by £1,991,000. As required by IFRS 3, the fair value adjustment to stock for finished goodsrepresents the selling price of the goods less costs to dispose and a reasonableprofit allowance for the selling effort. Work in progress has been similarlyvalued and includes an allowance for the costs to complete. The resulting fairvalue adjustment of £4,686,000 has been recognised. The acquisition of ACMI has provided Gyrus with the opportunity to combineACMI's urology, gynaecology and endoscopic expertise with Gyrus's tissuemanagement technology in these fields. This enables the enlarged Group to meettwo key requirements of surgeons - the ability to visualise the operative siteand the ability effectively to manipulate tissue with minimum collateral damage.Goodwill of £180 million has arisen as a result of the synergistic andintegration benefits of combining the two organisations. Since the date of acquisition, ACMI has contributed the following to theoperating profit of the Group:- £000Revenue 50,431Cost of sales (23,805) _____Gross profit 26,626 _____ Selling and distribution expenses - Selling and distribution (12,507) - Amortisation of intangibles assets (2,524)Research and development expenses - Research and development (2,473) - Amortisation of intangible assets (1,349)General and administrative expenses (3,057) _____ Operating profit 4,716 _____ Had the acquisition taken place on 1 January 2005, ACMI would have contributedthe following to the operating profit of the Group:- £000Revenue 111,920Cost of sales (49,570) _____Gross profit 62,350 _____ Selling and distribution expenses - Selling and distribution (27,805) - Amortisation of intangibles assets* (5,706)Research and development expenses - Research and development (6,277) - Amortisation of intangible assets* (3,050)General and administrative expenses (8,511) _____ Operating profit 11,001 _____ *Amortisation on intangible assets included from date of acquisition 4. Restructuring As a result of the acquisition of American Cystoscope Makers Inc, a number ofrestructuring costs have been incurred across the Group. The total charge forthe year ended 31 December 2005 amounted to £2,369,000 (2004: £nil). An analysisof these costs is shown below. 2005 £000Severance costs 1,320Short term sales commission alignment 352Demonstration equipment write-off 148Alignment of global enterprise resource planning systems 456Other costs 93 _____ 2,369 _____ 5. Income tax expense Current tax expense 2005 2004 £000 £000 UK corporation tax charge on profits for the (379) (286) year Adjustments in respect of previous periods (54) - _____ _____ (433) (286) Foreign tax on profits for the year (487) (356) Adjustments in respect of previous periods - - _____ _____Total current tax charge (920) (642) _____ _____ Deferred tax credit/(expense) Origination and reversal of temporary 6,175 (930) differences Benefit of tax losses recognised (5,914) 68 _____ _____ 261 (862) _____ _____ Total income tax expense in income statement (659) (1,504) _____ _____ Reconciliation of effective tax rate The total tax charge for the year is lower (2004: lower) than the standard rateof corporation tax in the UK. The differences are explained below. 2005 2004 £000 £000Profit before taxation 6,935 9,987 Profit before taxation multiplied by standard rate of 2,081 2,996corporation tax in the UK 30% (2004:30%)Effect of tax rates in foreign jurisdictions (rates higher than 319 67UK taxation)Expenses not deductible for tax purposes 216 885Items not deductible until paid 12 (394)Depreciation in excess of capital allowances 15 37Other short term timing differences (1,909) 418Adjustments arising on consolidation (111) (1,587)Effect of tax losses utilised (239) (1,048)US State taxes 221 130Prior year adjustments 54 - _____ _____Total tax charge for the year 659 1,504 _____ _____ Deferred tax recognised directly in equity Relating to foreign exchange (gain)/loss (220) 187Relating to share option schemes (443) - _____ _____ (663) 187 _____ _____ 6. Earnings per share Basic earnings per share The calculation of basic earnings per share for the year ended 31 December 2005was based on the profit attributable to ordinary shareholders of £6,276,000(year ended 31 December 2004:£8,483,000) and a weighted average number ofordinary shares outstanding as at 31 December 2005 of 111,601,948 (year ended 31December 2004:83,426,097). Diluted earnings per share The calculation of diluted earnings per share for the year ended 31 December2005 was based on the profit attributable to ordinary shareholders of £6,276,000(year ended 31 December 2004:£8,483,000) and a weighted average number ofordinary shares as at 31 December 2005 of 115,368,521 (year ended 31 December2004:83,809,138). Earnings 2005 2004 £000 £000Earnings for the purposes of basic and diluted earnings per share 6,276 8,483 _____ _____ Weighted average number of ordinary shares 2005 2004 Number NumberIssued ordinary shares at 1 January 83,652,980 83,306,049Effect of share options exercised 289,121 120,048Effect of shares issued to acquire ACMI 27,659,847 - _____ _____Weighted average number of ordinary shares as at 31 December 111,601,948 83,426,097Dilutive effect of share options in issue 3,766,573 383,041 _____ _____Weighted average number of ordinary shares as at 31 December 115,368,521 83,809,138(diluted) _____ _____ Basic earnings per share 5.6p 10.2p _____ _____ Diluted earnings per share 5.4p 10.1p _____ _____ Adjusted earnings per share In order to provide a clearer measure of the Group's underlying performance,profit attributable to ordinary shareholders is adjusted to exclude items whichmanagement consider will distort comparability. Adjusted basic earnings pershare has been calculated by dividing adjusted profit attributable to ordinaryshareholders (see table below for adjustments made) of £15,835,000 (year ended31 December 2004:£9,345,000) by the weighted average number of ordinary sharesoutstanding as at 31 December 2005 of 111,601,948 (year ended 31 December 2004:83,426,097). Adjusted diluted earnings per share has been calculated bydividing adjusted profit attributable to ordinary shareholders of £15,835,000(year ended 31 December 2004:£9,345,000) by the weighted average number ofordinary shares outstanding as at 31 December 2005 of 115,368,521 (year ended 31December 2004: 83,809,138). Earnings on which adjusted earnings per share is based: 2005 2004 £000 £000Earnings for the purpose of basic and diluted earnings per share 6,276 8,483Net impact of fair value adjustments on acquired inventory and 2,706 -option accountingRestructuring charges 2,369 -Amortisation of acquired intangible assets 3,873 -Charge relating to "special" LTIP award* 872 -Deferred taxation (261) 862 _____ _____Earnings for the purposes of adjusted earnings per share 15,835 9,345 _____ _____ Adjusted basic earnings per share 14.2p 11.2p _____ _____ Adjusted diluted earnings per share 13.7p 11.2p _____ _____ *As part of the acquisition of American Cystoscope Makers Inc, a "special" awardof conditional shares under the Group's LTIP scheme was approved by shareholdersand was made to retain and incentivise approximately 25 key executives tointegrate the business effectively. The award will create a charge overapproximately three years until the potential vesting date of July 2008. Thecharges relating to this are considered to be another form of integration/restructuring cost. 7. Dividend The Directors do not recommend the payment of a dividend. 8. Explanation of transition to IFRS As stated in note 1 "Basis of preparation and accounting policies", these arethe Group's first annual financial statements prepared in accordance withInternational Financial Reporting Standards as adopted by the EU ("IFRS"). The accounting policies disclosed have been applied in preparing theconsolidated financial information for the year ended 31 December 2005, thecomparative information for the year ended 31 December 2004 and the preparationof an opening IFRS balance sheet at 1 January 2004 (the Group's date oftransition). In preparing its opening IFRS balance sheet and comparative information for theyear ended 31 December 2004, the Group has adjusted amounts reported previouslyin financial statements prepared in accordance with UK GAAP. An explanation of how the transition from UK GAAP to IFRS has affected theGroup's financial position and financial performance is set out in the followingtables and the notes that accompany the tables. Consolidated Balance Sheets UK GAAP Effect of transition to IFRS IFRS 1 January 2004 £000 £000 £000Non-current assetsProperty, plant and equipment 12,097 - 12,097Goodwill 96,680 (37) 96,643Other intangible assets 870 - 870Deferred tax asset - 5,452 5,452 _____ _____ _____ 109,647 5,415 115,062 _____ _____ _____ Current assetsInventories 16,814 - 16,814Trade receivables 12,061 - 12,061Deferred tax asset 6,160 (6,160) -Other current assets 2,182 - 2,182Cash and cash equivalents 5,392 - 5,392 _____ _____ _____ 42,609 (6,160) 36,449 _____ _____ _____Total assets 152,256 (745) 151,511 _____ _____ _____ EquityShare capital (2,156) - (2,156)Share premium (151,971) - (151,971)Merger reserve (3,860) - (3,860)Other reserves - 708 708Retained earnings 36,400 - 36,400 _____ _____ _____Total equity (121,587) 708 (120,879) _____ _____ _____ LiabilitiesBank loan (18,888) - (18,888)Obligations under finance leases and hire (201) - (201)purchase contractsDeferred tax liabilities - - -Provisions - - -Other creditors (359) 17 (342) _____ _____ _____Total non-current liabilities (19,448) 17 (19,431) _____ _____ _____ Trade payables (3,175) - (3,175)Current tax payable (850) - (850)Obligations under finance leases and hire (107) - (107)purchase contractsBank overdrafts and loans due within one (1,667) - (1,667)yearOther creditors (264) 20 (244)Accruals and deferred income (5,158) - (5,158) _____ _____ _____Total current liabilities (11,221) 20 (11,201) _____ _____ _____Total liabilities (30,669) 37 (30,632) _____ _____ _____Total equity and liabilities (152,256) 745 (151,511) _____ _____ _____ Consolidated Balance Sheets UK GAAP Effect of transition to IFRS (restated) IFRS 31 December 2004 £000 £000 £000Non-current assetsProperty, plant and equipment 10,396 - 10,396Goodwill 85,241 5,468 90,709Other intangible assets 124 141 265Deferred tax asset - 4,403 4,403 _____ _____ _____ 95,761 10,012 105,773 _____ _____ _____ Current assetsInventories 13,434 - 13,434Trade receivables 13,834 - 13,834Deferred tax asset 6,082 (6,082) -Other current assets 2,480 - 2,480Cash and cash equivalents 7,263 - 7,263 _____ _____ _____ 43,093 (6,082) 37,011 _____ _____ _____Total assets 138,854 3,930 142,784 _____ _____ _____ EquityShare capital (2,160) - (2,160)Share premium (152,447) - (152,447)Merger reserve (3,860) - (3,860)Other reserves - 9,034 9,034Retained earnings 40,749 (12,969) 27,780 _____ _____ _____Total equity (117,718) (3,935) (121,653) _____ _____ _____ LiabilitiesBank loan - - -Obligations under finance leases and hire (126) - (126)purchase contractsDeferred tax liabilities - - -Provisions - - -Other creditors (8) - (8) _____ _____ _____Total non-current liabilities (134) - (134) _____ _____ _____ Trade payables (2,285) - (2,285)Current tax payable (593) - (593)Obligations under finance leases and hire (58) - (58)purchase contractsBank overdrafts and loans due within one (8,928) - (8,928)yearOther creditors (1,624) 5 (1,619)Accruals and deferred income (7,514) - (7,514) _____ _____ _____Total current liabilities (21,002) 5 (20,997) _____ _____ _____Total liabilities (21,136) 5 (21,131) _____ _____ _____Total equity and liabilities (138,854) (3,930) (142,784) _____ _____ _____ Consolidated Balance Sheets UK GAAP Effect of transition to IFRS IFRS 31 December 2005 £000 £000 £000Non-current assetsProperty, plant and equipment 20,057 - 20,057Goodwill 343,664 (55,637) 288,027Other intangible assets 4,499 105,789 110,288Deferred tax asset 22,037 (22,037) - _____ _____ _____ 390,257 28,115 418,372 _____ _____ _____ Current assetsInventories 33,140 - 33,140Trade receivables 35,509 - 35,509Deferred tax asset - - -Other current assets 8,020 829 8,849Cash and cash equivalents 20,194 - 20,194 _____ _____ _____ 96,863 829 97,692 _____ _____ _____Total assets 487,120 28,944 516,064 _____ _____ _____ EquityShare capital (2,785) - (2,785)Share premium (303,699) - (303,699)Merger reserve (3,860) - (3,860)Other reserves (5,543) (4,924) (10,467)Retained earnings 20,056 (750) 19,306 _____ _____ _____Total equity (295,831) (5,674) (301,505) _____ _____ _____ LiabilitiesBank loan (136,731) - (136,731)Obligations under finance leases and hire (146) - (146)purchase contractsDeferred tax liabilities - (22,801) (22,801)Provisions (3,219) - (3,219)Other creditors - - - _____ _____ _____Total non-current liabilities (140,096) (22,801) (162,897) _____ _____ _____ Trade payables (9,546) - (9,546)Current tax payable (929) - (929)Obligations under finance leases and hire (134) - (134)purchase contractsBank overdrafts and loans due within one (13,123) - (13,123)yearOther creditors (6,890) (296) (7,186)Accruals and deferred income (20,571) (173) (20,744) _____ _____ _____Total current liabilities (51,193) (469) (51,662) _____ _____ _____Total liabilities (191,289) (23,270) (214,559) _____ _____ _____Total equity and liabilities (487,120) (28,944) (516,064) _____ _____ _____ Consolidated income statement UK GAAP Effect of transition to IFRS (restated) IFRS 31 December 2004 £000 £000 £000Revenue 86,930 - 86,930 Cost of sales (35,570) - (35,570)Restructuring - - - _____ _____ _____ Gross profit 51,360 - 51,360 Other operating income 641 - 641 Selling and distribution expenses (23,158) - (23,158)Restructuring - - -Research and development expenses (7,280) 141 (7,139)Restructuring - - -General and administrative expenses (10,840) (789) (11,629)Restructuring - - -Goodwill amortisation (5,505) 5,505 - _____ _____ _____ Net operating profit 5,218 4,857 10,075 Profit on sale of land 373 (373) -Loss for period from terminated operations (400) 400 - _____ _____ _____ 5,191 4,884 10,075 Financial income 170 762 932Financial expense (988) (32) (1,020) _____ _____ _____ Profit before taxation 4,373 5,614 9,987 Income tax expense (485) (1,019) (1,504) _____ _____ _____ Profit after taxation 3,888 4,595 8,483 _____ _____ _____ Earnings per ordinary share Basic 4.7p 5.5p 10.2pDiluted 4.6p 5.5p 10.1pAdjusted basic 11.1p 0.1p 11.2p _____ _____ _____ Consolidated income statement UK GAAP Effect of transition to IFRS IFRS 31 December 2005 £000 £000 £000Revenue 150,376 - 150,376 Cost of sales (62,006) (4,686) (66,692)Restructuring (57) - (57) _____ _____ _____ Gross profit 88,313 (4,686) 83,627 Other operating income 1,501 - 1,501 Selling and distribution expenses (38,955) (2,524) (41,479)Restructuring (1,206) - (1,206)Research and development expenses (13,344) (1,153) (14,497)Restructuring - - -General and administrative expenses (17,310) 888 (16,422) Restructuring (1,106) - (1,106)Goodwill amortisation (11,334) 11,334 - _____ _____ _____ Net operating profit 6,559 3,859 10,418 Profit on sale of land - - -Loss for period from terminated operations - - - _____ _____ _____ 6,559 3,859 10,418 Financial income 3,227 - 3,227Financial expense (5,648) (1,062) (6,710) _____ _____ _____Profit before taxation 4,138 2,797 6,935 Income tax expense (659) - (659) _____ _____ _____ Profit after taxation 3,479 2,797 6,276 _____ _____ _____ Earnings per ordinary share Basic 3.1p 2.5p 5.6pDiluted 3.0p 2.4p 5.4pAdjusted basic 16.1p (1.9)p 14.2p _____ _____ _____ (i) Charge for share based payments Under IFRS 2 a charge must be recognised for any share based payments includingawards under the Group's share option plans, under the Save As You Earn Scheme,the US Employee Stock Purchase Plan and the Group's Long Term Incentive Plan.The cost of the option is based on the fair value of the option at the date ofgrant and is charged to the income statement over the vesting period. A chargehas been recognised for all awards granted since 7 November 2002 and not vestedby 31 December 2005. It is charged to the same income statement expensecategory as the costs of the employee to whom the share award has been made. Anequivalent amount is credited to the profit and loss reserve in the balancesheet. Under FRS 20 "Share based payments" a charge must also be recognised forany share based payments. FRS 20 was effective for accounting periods beginningon or after 1 January 2005. As a result the UK GAAP comparatives for the yearended 31 December 2005 include a charge for share based payments and, inaccordance with FRS 20, prior year comparatives have been restated. (ii) Goodwill The Group's policy under UK GAAP regarding the amortisation of goodwill was toamortise the goodwill over 20 years. Under IFRS 3, there is no amortisation ofgoodwill so this adjustment removes the goodwill amortisation charged under UKGAAP. An annual impairment review is performed under IFRS and any reduction inthe carrying value is to be written down through the income statement. Theimpairment review at 31 December 2005 confirmed that there had been noimpairment of goodwill. (iii) Capitalised development expenditure Under UK GAAP all research and development expenditure was charged to the profitand loss account as incurred. Under IAS 38 development expenditure which meetscertain specified criteria is required to be capitalised and amortised over itsuseful life. For the period to 31 December 2005 capitalised developmentexpenditure amounted to £253,000 (2004:£141,000). Development expenditurecapitalised since 1 January 2004 has been amortised over a period of 5 years.This policy has not been applied retrospectively. (iv) Recognition of deferred tax liability where goodwill amortisation iseligible for a tax deduction A deferred tax liability is recognised on goodwill which is eligible for a taxdeduction in the US but for which, under IFRS, there is no amortisation chargein the income statement. (v) Deferred consideration An adjustment for interest on deferred consideration required under IFRS 3. (vi) Reclassification of deferred tax asset as a non current-asset Deferred tax is shown in the balance sheet as a non-current asset or liabilityunder IFRS, rather than a current asset or liabillity under UK GAAP. (vii) Treatment of exceptional items The audited profit and loss account for the year ended 31 December 2004 includesan exceptional item of £27,000. Under IFRS, there is no concept of "exceptional" items. Material non-recurring items, for example, those of a type that underUK GAAP would be exceptional items, may not be aggregated but may be disclosedseparately on the face of the income statement. The net exceptional item of£27,000 has been included within the General and Administration heading of theincome statement under IFRS. The IFRS adjustment of £4,686,000 for materialnon-recurring items represents the write down of the IFRS 3-derived uplift inacquired inventory as a result of the American Cystoscope Makers Incacquisition. (viii) Tax effect Many of the above adjustments require an adjustment to the tax charge. Theaggregate adjustment represents a net additional non-cash deferred taxprovision. (ix) Reserve movements As a result of the adoption of IFRS, a hedging reserve and a translation reservehave been created. The hedging reserve comprises the effective portion of thecumulative net change in the fair value of cash flow hedging instruments relatedto hedged transactions that have not yet occurred. The translation reservecomprises all foreign exchange differences arising from the translation of thefinancial statements of foreign operations. These reserves are shown as "Otherreserves" for the purpose of the transition balance sheets. (x) Gain/(loss) on foreign exchange Gains and losses arising on foreign exchange through the profit and loss accountwere reported within General and Administration expenses under UK GAAP. UnderIFRS, gains and losses have been reclassified to financial income and financialexpenses within the income statement. Gyrus Group PLC has taken advantage of the following exemptions: 1. Under IFRS 3, Business Combinations, no restatement of businesscombinations prior to adopting IFRS. 2. Under IAS 21, The effects of changes in foreign exchange rates, noprior adjustment for cumulative translation differences that existed at the dateof transition to IFRS. 3. Under IAS 32, Financial Instruments: Disclosure and Presentation,and IAS 39, Financial Instruments: Recognition and Measurement, no restatementof comparatives for 2004 so such information is disclosed in line with UK GAAP. 9. Approval This statement was approved by the Board of Directors on 15 March 2006. 10. Copies of the Preliminary Announcement and Annual Report and Accounts This Preliminary Announcement will be sent to all shareholders and copies areavailable at the company's registered office, Fortran Road, St. Mellons,Cardiff, CF3 0LT. Copies of the Annual Report and Accounts will be sent to all shareholders andfurther copies will be available at the company's registered office, FortranRoad, St. Mellons, Cardiff, CF3 0LT. This information is provided by RNS The company news service from the London Stock Exchange

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