6th Mar 2007 07:01
Zotefoams PLC06 March 2007 Tuesday 6 March 2007 Preliminary Results for the Year Ended 31 December 2006 Strong underlying performance Zotefoams plc, which manufactures and sells high-performance foams, announcesits preliminary results for the 12 months ended 31 December 2006. The Company's foams are made by a unique process and are used in a wide varietyof applications worldwide. In 2006, Zotefoams continued investment in highperformance products under the ZOTEK(R) brand name complementing our strengthsin polyolefin foams. ZOTEK(R) foams can be used in a wider range ofapplications due to their flammability and temperature performance, light weightand good chemical resistance. As such, ZOTEK(R) foams are targeted at highlytechnical and demanding applications in markets such as aerospace,pharmaceutical, semi-conductor and chemical processing thereby broadening thesales base outside of the traditional applications in such areas as sport andleisure, premium packaging, building, automotive and industrial goods. Financial Highlights • Revenue of £30.1 million (2005: £28.0 million), up 7% • Operating profit* of £2.8 million (2005: £2.0 million), up 40% • Profit before tax* of £2.7 million (2005: £1.8 million), up 45% • Gross margin of 26% (2005: 23%) • Cash generated from operations of £4.7 million (2005: £4.1 million), up 16% • EPS excluding exceptional items was 5.4p (2005: 3.5p), up 54% • EPS including exceptional items was 3.4p (2005: 6.7p) • Proposed final dividend of 3.0p per share making a total for 2006 of 4.5p (2005: 4.5p) *Excludes an exceptional charge of £1.1 million in 2006 for costs incurred in terminating commercial relationships with the Sekisui Group and an exceptional gain of £1.4 million in 2005 Operational Highlights • Strong overall sales growth, particularly in continental Europe; • Direct sales team in place after termination of a major distribution and agency agreement; • A number of new higher-margin, high-performance ZOTEK(R) products launched, with orders for these products in 2007 already exceeding total sales for 2006. Commenting on the results, Nigel Howard, Chairman, said: "Zotefoams' strategy is to create sustained profit growth by expanding its salesinternationally and by broadening its potential market with unique new products. Trading in the first two months of 2007 is in line with our expectations.Compared with 2006 foreign exchange rates have moved adversely for our businessand these will impact our profitability in 2007. However, our expectation isfor continued profit growth as the combination of a solid foundation inpolyolefin foams combined with the very encouraging signs from ourhigh-performance polymers offer exciting prospects for the future." Enquiries: Zotefoams plc Tel Today: 020 7831 3113 David Stirling, Managing Director Thereafter: 020 8664 1600Clifford Hurst, Finance Director Financial Dynamics Tel: 020 7831 3113 Ben Brewerton INTRODUCTION During 2006 we grew profit before tax and exceptional items by 45% to £2.67m(2005: £1.84m) and sales increased 7% to £30.05m (2005: £27.98m). Werestructured the worldwide sales and marketing of polyolefin foams terminating amajor agency and distribution agreement and investing in additional dedicatedsales staff in Europe and Asia. In high-performance polymers we have made goodprogress in product and business development providing exciting prospects forthe future. We intend to grow sales in our core polyolefin business in excess of the rate ofinflation in Europe and achieve double digit percentage growth in North Americaand Asia. Our sales growth in America is supported by our factory in Kentuckywhich opened in mid-2001 while in Asia we will consider a similar operation,either under a license or as a joint venture, as sales increase to a level wheresuch an investment is sensible. We are also committed to developing a portfolioof unique foam products from high-performance materials which will enjoysignificant advantages over competitive materials. This will allow highermargins for Zotefoams and confirm our position as the pre-eminent foamtechnology company. We intend to achieve this growth while continuing to improveour operating margins and our return on capital employed. Outlook Trading in the first two months of 2007 is in line with our expectations.Compared with 2006 foreign exchange rates have moved adversely for our businessand these will impact our profitability in 2007. However, our expectation isfor continued profit growth as the combination of a solid foundation inpolyolefin foams combined with the very encouraging signs from ourhigh-performance polymers offer exciting prospects for the future. BUSINESS REVIEW Zotefoams plc is the world's leading manufacturer of cross-linked block foams.Its products are used in a wide range of markets including sports and leisure,packaging, transport, healthcare, building, marine and the military. Through a unique production process, the Company produces foams which havecontrolled properties and are of a strength, consistency, quality and puritysuperior to foams produced by other methods. Business Overview Zotefoams considers its business falls into two distinct categories: polyolefinfoams and high-performance polymers. Both businesses rely on our unique production process which uses nitrogen gas athigh temperature and pressure to foam solid plastics. Polyolefin foams are mainly made from polyethylene which, when foamed, producesa versatile material used in a wide variety of applications. Typically ourproducts are sold to foam converters who process the foam by a variety oftechniques such as cutting, welding, moulding and routing into finished orsemi-finished parts based on end-user requirements. The benefits of Zotefoams'products are evident at both foam processors and end-users and include purity,consistency of processing, good performance to weight ratio and aesthetics. Keyto growing this business successfully is close relationships with the converterscombined with business development activities at end-users to highlight thebenefits of our materials and track industry trends for future development. High-performance polymers use the processing technology developed for polyolefinfoams applied to other materials. This is an emerging business which offers animproved return on capital in new business segments. We have developed, patentedand launched world leading products made from fluoropolymer and nylon which arebranded ZOTEK(R) our high-performance foams trademark. These foams are targetedat highly technical and demanding applications in markets such as aerospace,pharmaceutical, semi-conductor and chemical processing and market developmentlead times are long. Timing of revenue generation is therefore difficult topredict. Strategy and Objectives Zotefoams' strategy is to grow our existing business in polyolefin foams whiledeveloping a portfolio of high-performance polymers. We will seek to profitablygrow the business through a combination of organic growth in both polyolefin andhigh-performance polymers and acquisitions or partnership deals in relatedtechnologies, products or markets. Our stated objectives are: 1. Grow sales in our polyolefin business in excess of the rate of inflation in Europe and achieve double digit percentage growth in North America and Asia.2. Develop a high-performance polymers portfolio to deliver enhanced margins.3. Improve our operating margins.4. Improve our return on capital employed. Performance in 2006 against these objectives was: 1. Sales performance was as follows: a. Sales in the UK and Europe grew by 10% which was significantly above the average inflation rate; b. Sales in North America grew 4% in constant currency which was below our expectations due to a slow-down in the US economy in the second half of 2006; and c. Sales in Asia declined slightly. We view 2006 as a year of transition, exiting a regional distribution agreement and forming more direct relationships with foam converters and end-users. While we believe that Asia offers significant potential for growth, we anticipate that currently the best opportunities lie in more niche, higher added-value products and we are focusing our resources here. 2. Sales of high-performance polymers in 2006 were similar to 2005 withsubstantial progress made in three areas: a. We developed and launched three promising variants of our ZOTEK(R) F fluoropolymer foams in response to market feedback; b. We developed and launched a world first nylon foam, ZOTEK(R) N, designed for areas where higher temperature performance is critical; and c. Our business development activities should result in a significant uplift in demand during 2007, with confirmed orders received already in excess of 2006 sales. 3. Group operating margins, pre-exceptional items, improved from 7% to 9% of sales revenue. 4. Pre-tax return on capital employed, pre-exceptional items, increased from 7% to 11%. Financial Results Group turnover increased by 7% to £30.05m (2005: £27.98m) and profit before taxand exceptional items increased by 45% to £2.67m (2005: £1.84m). Our sales growth resulted from a 5% increase in volumes shipped along with thepositive impact of price rises in all our major markets offset, particularly inthe second six months of the year, by somewhat adverse foreign exchange rates. On 21 March 2006 we announced the termination of the Group's commercialrelationships with the Sekisui Chemical Company Ltd and subsidiaries ("Sekisui")which sold Zotefoams' polyolefin products as an agent in Continental Europe andNorth America and as a distributor in Asia. The costs of this termination areshown as an exceptional charge of £1.10 million. Group gross profit margin increased to 26% of sales revenue (2005: 23%), despitean 11% rise in basic polymer prices and a 26% increase in energy costs comparedwith last year, with benefits from commission savings following the terminationof the Sekisui relationship and better operational efficiency. Distribution costs increased by 11% as we increased our own sales resourcesfollowing the termination of the commercial agreement with Sekisui.Administrative expenses include a foreign exchange loss of £147,000 (2005: gainof £111,000). The overall effective tax rate is 23% (2005: 26%) as shown in note 6. Earnings per share and Dividend Group earnings per share after exceptional items were 3.4p (2005: 6.7p). TheDirectors are recommending the final dividend is maintained at 3.0p per sharepayable on 24 May 2007 to shareholders on the Company register at 27 April 2007.This would bring the total dividend to 4.5p per ordinary share for the year(2005: 4.5p). Cash flow Cash generated from operations was £4.72m (2005: £4.06m). Capital expenditure of£2.64m was higher than in recent years with the refurbishment of one of ourlarge high-pressure vessels and the purchase of a nylon extruder. After thedividend payment of £1.63m this left us with a cash outflow of £0.36m,increasing net debt to £1.43m (2005: £1.07m). Gearing remains low at 6% (2005:4%). Markets and Operations In 2006 overall sales grew 7% to £30.05m (2005: £27.98m). Our high-performance polymers are unique foams for technically demandingrequirements. They offer properties such as improved chemical, flammability ortemperature performance compared to other foam materials. The applications forthese products are often much larger in value than a typical polyolefin foamapplication, however the performance requirements and test conditions are verydemanding and evaluation can take many months or sometimes years. Therefore theinherent uncertainty of such projects, particularly their timing and the uniquerequirements of specific applications which will vary from project to project,makes projecting revenues and success rates extremely difficult, especially atthis early stage of their development. In 2006 high-performance polymersaccounted for 2% of Group sales. We continued to increase both technical andmarketing resource, the additional investment appropriate to the potential sizeand profitability of this segment, and during the year good progress was made onthe launch of new grades and development of applications, particularly in theaerospace and high-performance insulation markets. The polyolefin foams business grew to £29.56m (2005: £27.42m). The UK, which wegenerally regard as our most mature market, performed well with a 3% salesincrease. Continental Europe, which required the most significant sales teamrestructuring after the termination of the Sekisui relationship, grew 14% withparticularly pleasing growth in Germany, Italy and the Benelux markets. NorthAmerica, which was affected by a weak economy in the second six months, grew by4% The termination of the Sekisui relationship in polyolefin foams marked asignificant change in Zotefoams' approach to our customers in Europe and, on asmaller scale, in Asia. We have now completed the recruitment and training of adirect sales organisation across all product lines worldwide which is giving usbetter visibility and influence over business development activities in manymarkets. We expect the termination cost of £1.10 million, which is shown as anexceptional charge, and the ongoing costs of establishing and operating our ownsales team will be more than offset by the end of 2007 through a reduction incommissions payable to the Sekisui Group. At our Croydon site we continue to invest to enhance both production capacityand capability. During 2006 we spent £2.64m on capital expenditure. Majorprojects included installing a new extrusion line to support the launch of ourZOTEK(R) N nylon foams and completing the refurbishment and upgrade of one ofour large high-pressure vessels where we had discovered corrosion. This reducesto approximately 26% the proportion of our high-pressure capacity which operateson a water-cooling mechanism where corrosion may be present and as part of anongoing programme to address this we are currently refurbishing a further vesselwhich is due to be re-instated during the second half of 2007. Consolidated income statementfor the year ended 31 December 2006 2006 Pre- Exceptional Post- exceptional items exceptional items (see note 4) items Note £000 £000 £000 ______ ______ ______Revenue 2 30,052 - 30,052Cost of sales (22,257) - (22,257) ______ ______ ______Gross profit 7,795 - 7,795Distribution costs (2,117) - (2,117)Administrative expenses (2,842) (1,074) (3,916) ______ ______ ______Operating profit 2,836 (1,074) 1,762Financial income 5 884 - 884Finance costs 5 (1,047) - (1,047) ______ ______ ______Profit before tax 2,673 (1,074) 1,599Taxation 6 (682) 322 (360) ______ ______ ______Profit for the year 3 1,991 (752) 1,239 ______ ______ ______Attributable to:Equity holders of the parent 1,991 (752) 1,239 ______ ______ ______Earnings per shareBasic (p) 7 3.4 ______Diluted (p) 7 3.4 ______ Consolidated income statementfor the year ended 31 December 2006 (continued from table above) 2005 Pre- Exceptional Post- exceptional items exceptional items (see note 4) items Note £000 £000 £000 ______ ______ ______Revenue 2 27,975 - 27,975Cost of sales (21,640) - (21,640) ______ ______ ______Gross profit 6,335 - 6,335Distribution costs (1,905) - (1,905)Administrative expenses (2,407) 1,449 (958) ______ ______ ______Operating profit 2,023 1,449 3,472Financial income 5 813 - 813Finance costs 5 (997) - (997) ______ ______ ______Profit before tax 1,839 1,449 3,288Taxation 6 (569) (292) (861) ______ ______ ______Profit for the year 3 1,270 1,157 2,427 ______ ______ ______Attributable to:Equity holders of the parent 1,270 1,157 2,427 ______ ______ ______Earnings per shareBasic (p) 7 6.7 ______Diluted (p) 7 6.7 ______ Consolidated statement of recognised income and expensefor the year ended 31 December 2006 2006 2005 £000 £000 ______ ______Foreign exchange translation differences on investment in foreign subsidiary (905) 846Effective portion of changes in fair value of cash flow hedges net of recycling 163 (79)Actuarial gains/(losses) on defined benefit schemes 426 (42)Tax on items taken directly to equity (159) 13 ______ ______Net (expense)/income recognised directly in equity (475) 738Profit for the year 1,239 2,427 ______ ______Total recognised income and expense for the year 764 3,165 ______ ______Attributable to equity holders of the parent 764 3,165 ______ ______ Consolidated balance sheetas at 31 December 2006 2006 2005 Note £000 £000 ______ ______Non-current assetsProperty, plant and equipment 27,018 28,364Deferred tax assets 99 132 ______ ______Total non-current assets 27,117 28,496Current assetsInventories 3,785 3,933Trade and other receivables 6,163 6,182Cash and cash equivalents 82 432 ______ ______Total current assets 10,030 10,547 ______ ______Total assets 37,147 39,043 ______ ______EquityIssued share capital (1,816) (1,816)Share premium (13,753) (13,753)Capital redemption reserve (5) (5)Translation reserve 635 (270)Hedging reserve (84) 79Retained earnings (9,815) (9,857) ______ ______Total equity attributable to the equity holders of the Company (24,838) (25,622) ______ ______Non-current liabilitiesInterest-bearing loans and borrowings (700) (1,100)Employee benefits 9 (4,240) (5,220)Deferred tax liabilities (2,764) (2,730) ______ ______Total non-current liabilities (7,704) (9,050)Current liabilitiesInterest-bearing loans and borrowings (400) (400)Bank overdraft (411) -Tax payable (307) (698)Trade and other payables (3,487) (3,273) ______ ______Total current liabilities (4,605) (4,371) ______ ______Total liabilities (12,309) (13,421) ______ ______Total equity and liabilities (37,147) (39,043) ______ ______ Consolidated cash flow statementfor the year ended 31 December 2006 2006 2005 £000 £000 ______ ______Cash flows from operating activitiesProfit for the year 1,239 2,427Adjustments for:Depreciation, amortisation and impairment 3,251 3,322Financial income (884) (813)Financial expense 1,047 997Equity-settled share-based payments 64 (14)Taxation 360 861 ______ ______Operating profit before changes in working capital and provisions 5,077 6,780Increase in trade and other receivables (107) (346)Decrease/(increase) in inventories 51 (704)Increase in trade and other payables 314 334Decrease in provisions and employee benefits (619) (2,003) ______ ______Cash generated from the operations 4,716 4,061Interest paid (126) (151)Tax paid (823) (713) ______ ______Net cash from operating activities 3,767 3,197Proceeds on disposal of property, plant and equipment 3 -Interest received 8 26Acquisition of property, plant and equipment (2,641) (1,070) ______ ______Net cash used in investing activities (2,630) (1,044) ______ ______Proceeds from the issue of share capital - 49Repayment of borrowings (400) (400)Payment of finance lease liabilities - (57)Dividends paid (1,634) (1,631) ______ ______Net cash used in financing activities (2,034) (2,039) ______ ______Net (decrease)/increase in cash and cash equivalents (897) 114Cash and cash equivalents at 1 January 432 298Effect of exchange rate fluctuations on cash held 136 20 ______ ______Cash and cash equivalents at 31 December (329) 432 ______ ______ Cash and cash equivalents comprise cash at bank and short-term highly liquidinvestments with a maturity date of less than three months. Notes to the financial statement 1. Accounting policies Zotefoams plc (the 'Company') is a Company incorporated in Great Britain. The Group financial statements consolidate those of the Company and itssubsidiaries (together referred to as the 'Group'). The Group financial statements have been prepared and approved by the Directorsin accordance with International Financial Reporting Standards as adopted by theEU ("Adopted IFRS"). The financial information does not constitute the Company's statutory accountsfor the year ended 31 December 2006 or 2005 but is derived from those accounts.Statutory accounts for 2005 have been delivered to the Registrar of Companies,and those for 2006 will be delivered following the Company's Annual GeneralMeeting. The auditors have reported on those accounts; their reports wereunqualified and did not contain statements under Section 237 (2) or (3) of theCompanies Act. 2. Segment reporting The Group manufactures and sells high-performance foams for specialist marketsworldwide. These fall into two main business segments best categorised by theirconstituent raw materials. • Polyolefins: these foams are made from olefinic homopolymer and copolymer resin. The most common resin used is polyethylene. • High-performance polymers (HPP): 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 mainly derived from our ZOTEK(R) F foams made from PVDF fluoropolymer. Other polymers either commercially launched or being assessed in development include polyamide (nylon) and silicone. Due to our unique manufacturing technology Zotefoams can produce polyolefinfoams with superior performance to other manufacturers. However, our strategy isto use the capabilities of our technology to produce foams from other materialsas well as polyolefins. The development of foams from high-performance polymersbusiness is currently in its early stages with costs (including the technicaland marketing costs to develop these materials) exceeding revenues. Polyolefins HPP 2006 2005 2006 2005 Note £000 £000 £000 £000 ______ ______ ______ ______Revenue 29,558 27,420 494 555Pre-exceptional profit/(loss) 3,369 2,219 (533) (196)Exceptional items 4 (1,074) - - - ______ ______ ______ ______Post-exceptional profit/(loss) 2,295 2,219 (533) (196)Net financing costsTaxationProfit for the periodSegment assets 35,716 38,026 1,332 885Unallocated assets - - - - ______ ______ ______ ______Total assetsSegment liabilities (9,123) (9,752) (115) (241)Unallocated liabilities - - - - ______ ______ ______ ______Total liabilitiesDepreciation 3,188 3,272 63 50Capital expenditure 2,287 1,053 354 17 ______ ______ ______ ______ (continued from table above) Consolidated 2006 2005 Note £000 £000 ______ ______Revenue 30,052 27,975Pre-exceptional profit/(loss) 2,836 2,023Exceptional items 4 (1,074) 1,449 ______ ______Post-exceptional profit/(loss) 1,762 3,472Net financing costs (163) (184)Taxation (360) (861) ______ ______Profit for the period 1,239 2,427Segment assets 37,048 38,911Unallocated assets 99 132 ______ ______Total assets 37,147 39,043Segment liabilities (9,238) (9,993)Unallocated liabilities (3,071) (3,428) ______ ______Total liabilities (12,309) (13,421)Depreciation 3,251 3,322Capital expenditure 2,641 1,070 ______ ______ Geographical segments UK and Eire Europe North America £000 £000 £000For the year ended 31 December 2006Revenue from external customers 7,543 14,391 7,504Segment assets 29,746 - 7,401Capital expenditure 2,574 - 67For the year ended 31 December 2005Revenue from external customers 7,332 12,604 7,336Segment assets 29,876 - 9,167Capital expenditure 1,046 - 24 (continued from table above) Rest of the World £000 Total ______ ______For the year ended 31 December 2006Revenue from external customers 614 30,052Segment assets - 37,147Capital expenditure - 2,641 ______ ______For the year ended 31 December 2005Revenue from external customers 703 27,975Segment assets - 39,043Capital expenditure - 1,070 ______ ______ 3. Expenses and auditor's remuneration 2006 2005 £000 £000 ______ ______Included in profit for the year are:Research and development costs expensed 924 776Net exchange losses/(gains) 147 (111) ______ ______Auditor's remuneration:Group - audit of these financial statements 80 84 - fees receivable by the auditor and their associates in respect of other services: - other services pursuant with legislation 18 39 - other services relating to taxation 5 11 - services relating to corporate finance transactions - 8 ______ ______ 103 142 ______ ______ 4. Exceptional items The Company has classified the following items as exceptional: Commercial agreement termination costs Relating to the termination payment, legal, advisory and other costs to end thecommercial relationship with the Sekisui Group which was announced in March2006. Bid costs Relating to legal, advisory and other costs incurred in respect of a preliminaryapproach for the share capital of the Company which was announced in January2005 and terminated in November 2005. Pension curtailment costs On 31 December 2005, the Zotefoams Defined Benefit Pension Scheme for UKemployees was closed to future accrual of benefits. The actuarial gain onclosing the scheme to future accrual of benefits and the associated costs havebeen classified as an exceptional item. Tax adjustment to exceptional items in prior year In 2001 and 2002, the Group recorded an exceptional profit on insurance proceedsfollowing a fire in 2000 at the Group's Croydon site. The tax computationsrelating to 2001 and 2002 have been agreed with the Revenue resulting in a£267,000 release on the deferred tax provided in relation to these proceeds.This was released as an exceptional item in 2005 because it relates to aprevious exceptional item. 2006 2005 £000 £000 ______ ______Bid costs 30 (413)Commercial agreement termination (1,104) -Pension curtailment:Actuarial gain - 1,972Associated costs borne by the Company - (110) ______ ______Exceptional items before taxation (1,074) 1,449Tax on above 322 (559)Adjustment to tax on prior year exceptional item - 267 ______ ______Exceptional items after taxation (752) 1,157 ______ ______ 5. Finance income and costs Financial income 2006 2005 £000 £000 ______ ______Interest on bank deposits 8 26Expected return on assets of defined benefit pension fund 876 787 ______ ______ 884 813 ______ ______ Finance costs 2006 2005 £000 £000 ______ ______On bank loans and overdrafts 125 120On finance leases - 16Interest on defined benefit pension obligation 922 861 ______ ______ 1,047 997 ______ ______ 6. Taxation 2006 2005 £000 £000 ______ ______UK corporation tax 484 917Overseas taxation 6 2Adjustment to prior year UK tax charge (60) (84) ______ ______Current taxation 430 835Deferred taxation (70) 26 ______ ______Total tax charge 360 861 ______ ______ Factors affecting the tax charge The tax charge for the period is lower (2005: lower) than the standard rate ofcorporation tax in the UK of 30% (2005: 30%). The differences are explainedbelow: 2006 2005 £000 £000 ______ ______Tax reconciliationProfit on ordinary activities before tax 1,599 3,288 ______ ______Tax at 30% (2005: 30%) 480 986Effects of:Research and development tax credits less expenses not deductable for tax (53) 115purposesPartial recognition of US tax losses (1) (54)(Lower)/higher tax rates on overseas earnings (6) 15Adjustments to tax charge in respect of previous periods (60) 66Adjustment to tax charge on prior year exceptional items - (267) ______ ______Total tax charge 360 861 ______ ______ 7. Dividends and earnings per share 2006 2005 £000 £000 ______ ______Final dividend prior year of 3.0p (2004: 3.0p) net per 5.0p ordinary share 1,087 1,087Interim dividend of 1.5p (2005: 1.5p) net per 5.0p ordinary share 547 544 ______ ______Dividends paid during the year 1,634 1,631 ______ ______ The proposed final dividend for the year ended 31 December 2006 of 3.0p pershare (2005: 3.0p) is subject to approval by shareholders at the AGM and has notbeen included as a liability in these financial statements. Earnings per ordinary share Earnings per ordinary share is calculated by dividing profit after tax of£1,239,000 (2005: £2,427,000) by the weighted average number of shares in issueduring the year. Diluted earnings per ordinary share adjusts for the potentialdilutive effect of share option schemes in accordance with IAS 33. 2006 2005 ______ ______Average number of ordinary shares issued 36,319,924 36,276,976Deemed issued for no consideration 339,875 - ______ ______Diluted 36,659,799 36,276,976 ______ ______ Shares deemed issued for no consideration have been calculated based on thepotential dilutive effect of the Executive Share Option Scheme and optionsgranted under the HMRC Approved Share Option Scheme: Number of shares under optionDate from which exercisable Exercise price 2006 2005 ______ ______18 March 2006 80.0p - 872,8657 April 2007 72.5p 1,130,034 1,130,03422 December 2008 77.0p 1,026,320 1,026,32027 March 2009 80.5p 111,801 - ______ ______ 2,268,155 3,029,219 ______ ______ The average fair value of one ordinary share during the year was considered tobe 88.3p (2005: 72.0p). 8. Financial instruments Policy The Group does not enter into significant derivative transactions. The Group'sprincipal financial instruments comprise bank loans, cash and short-termdeposits. The main purpose of these financial instruments is to raise financefor the Group's operations. It is and has been throughout the period underreview, the Group's policy that no trading in financial instruments shall beundertaken. The main risks arising from the Group's financial instruments are credit risk,interest rate risk, liquidity risk and foreign exchange risk. The Board reviewsand agrees policies for managing each of these risks and they are summarisedbelow. These policies have remained fundamentally unchanged throughout the year. Credit risk Management has a credit policy in place and the exposure to credit risk ismonitored on an ongoing basis. Credit evaluations are performed on all customersrequiring credit over a certain amount. The Group does not require collateral inrespect of financial assets. In 2006 and 2005, the Group had credit insurance to mitigate this risk. However,not all the exposure is covered so elements of risk remain. At the balance sheet date there were no significant concentrations of creditrisk. The maximum exposure to credit risk is represented by the carrying amountof each financial asset, including derivative financial instruments, in theBalance Sheet. Interest rate risk The Group finances its operations through a mixture of retained profits and bankborrowings. The Group borrows in the desired currency generally at a variablerate of interest. The interest rate profile of the Group's borrowings at 31 December was: Effective Fixed Variable 2006 interest rates rates Total rate £000 £000 £000 ______ ______ ______Sterling 6% - 1,511 1,511 ______ ______ ______ - 1,511 1,511 ______ ______ ______ (continued from table above) Effective Fixed Variable 2005 interest rates rates Total rate £000 £000 £000 ______ ______ ______Sterling 6% - 1,500 1,500 ______ ______ ______ - 1,500 1,500 ______ ______ ______ The interest rate payable on the sterling overdraft is determined by LIBOR (orsimilar) plus a bank margin. Liquidity risk The Group's objective is to maintain a balance of continuity of funding andflexibility through the use of overdrafts, loans and finance leases asapplicable. The Group has a short-term facility of £5.0 million which is freely transferableand convertible into sterling. This facility expires in April 2007 and is utilised by Zotefoams plc and itssubsidiary undertakings under a cross-guarantee structure. On 25 August 2004 Zotefoams plc borrowed £2.0 million under a five yearmortgage, repayable in equal quarterly instalments. This facility is securedover specific plant assets. Foreign currency risk The Group is exposed to foreign currency risk on sales, purchases, assets andliabilities which are denominated in a currency other than sterling. Thecurrencies giving rise to this risk are primarily the euro and the US dollar. The Group hedges a proportion of its estimated cash exposure in respect of tradeand other receivables, trade and other payables and forecast sales receipts andpurchase payments for the next nine months. The Group uses forward exchangecontracts to hedge its foreign currency risk. As at 31 December 2006 theseforward currency contracts covered approximately two-thirds of the estimated netcash foreign exchange exposure for the next nine months. In respect of other monetary assets and liabilities held in currencies otherthan the euro and the US dollar, the Group ensures that the net exposure is keptto a manageable level, by buying or selling foreign currencies at spot rateswhere necessary to address short-term imbalances. Forecasted transactions The Group classifies its forward exchange contracts hedging forecastedtransactions as cash flow hedges and states them at fair value. The net fairvalue of forward exchange contracts used as hedges of forecasted transactions at31 December 2006 was a net asset of £84,000 (2005: net liability of £79,000)comprising assets of £85,000 (2005: £17,000) and liabilities of £1,000 (2005:£96,000) that were recognised in fair value derivatives in 2006. Recognised assets and liabilities Changes in the fair value of forward exchange contracts that economically hedgemonetary assets and liabilities in foreign currencies and for which no hedgeaccounting is applied are recognised in the Income Statement. Both the changesin fair value of the forward contracts and the foreign exchange gains and lossesrelating to the monetary items are recognised as part of administrative expenses(see note 3). Sensitivity analysis In managing currency risks the Group aims to reduce impact of short-termfluctuations on the Group's earnings. Over the longer-term, however, permanentchanges in foreign exchange and interest rates would have an impact onconsolidated earnings. Short-term fluctuations in interest rates are not hedged as the Group, atpresent, does not consider them material. At 31 December 2006 it is estimatedthat a general increase of one percentage point in interest rates would decreasethe Group's profit before tax by approximately £15,000 (2005: £15,000). At 31 December 2006 it is estimated that an increase of one percentage point inthe value of sterling against the euro and the dollar and would decrease theGroup's profit before tax by approximately £30,000 (2005: £43,000) and £44,000(2005: £45,000) respectively. The forward exchange contracts have been includedin this calculation. The Group has significant undertakings in the USA whose revenue and expenses aredenominated in US dollars. Zotefoams plc makes a significant proportion of itssales to European customers and these revenues are predominantly in euros. Itwas the Group's policy in 2006 to hedge a proportion of the foreign currencycash flows of invoiced sales net of expected foreign expenditure. Hedging isachieved by the use of foreign currency contracts expiring in the month ofexpected cash flow. Fair values The fair values together with the carrying amounts shown in the Balance Sheetare as follows: 2006 2005 Carrying Carrying amount Fair value amount Fair value £000 £000 £000 £000 ______ ______ ______ ______Trade and other receivables 6,078 6,078 6,165 6,165 ______ ______ ______ ______Cash and cash equivalents (329) (329) 432 432Forward exchange contracts - assets 85 85 17 17 - liabilities (1) (1) (96) (96) ______ ______ ______ ______Secured bank loans (1,100) (1,100) (1,500) (1,500) ______ ______ ______ ______Trade and other payables (3,486) (3,486) (3,177) (3,177) ______ ______ ______ ______ Estimation of fair values The following summarises the major methods and assumptions used in estimatingfair values of financial instruments reflected in the table. Derivatives Forward exchange contracts are marked to market using listed market prices.Interest-bearing loans and borrowings and trade and other receivables/payablesCarrying amounts equals the fair value. 9. Employee benefits The Group and Company operate one defined benefit scheme in the UK which offersboth pensions in retirement and death benefits to members. Pension benefits arerelated to the members' final salary at retirement and their length of service.Since 1 October 2001 the scheme has been closed to new members. From 31 December 2005 future accrual of benefits for existing members of thescheme ceased. Contributions to the plan for the year from the Company have been agreed withthe Trustees at £50,000 per month from January 2006 to December 2010. The Company has opted to recognise all actuarial gains and losses immediatelyvia the Statement of Recognised Income and Expenditure (SORIE). An actuarialvaluation of the scheme was carried out as at 5 April 2005 and the results havebeen updated to 31 December 2006 by a qualified independent actuary. The majorassumptions used by the actuary were (in nominal terms) as follows: As at As at 31 December 31 December 2006 2005 ______ ______Discount rate 5.10% 4.80%Expected return on plan assets 6.58% 6.13%Rate of salary increase n/a 4.40%Rate of increase to pensions in payment 3.00% 2.80%Rate of inflation 3.10% 2.90%Mortality assumption 90% of PA92 90% of PA92 ______ ______ The assumptions used in determining the overall expected return of the schemehave been set with reference to yields available on government bonds andappropriate risk margins. The assets in the scheme and the expected rates of return were: Long-term Long-term rate of return Value at rate of return Value at expected at 31 December expected at 31 December 31 December 2006 31 December 2005 2006 £000 2005 £000 ______ ______ ______ ______Equities 7.1 12,402 6.6 11,387Bonds 4.6 2,437 4.1 1,915Other 5.0 1,022 4.5 957 ______ ______ ______ ______ 15,861 14,259 Present value of defined obligation: Funded plans (20,101) (19,479) ______ ______Total (20,101) (19,479) ______ ______Deficit in the scheme (4,240) (5,220) ______ ______Related deferred tax asset 1,272 1,566 ______ ______Net pension liability (2,968) (3,654) ______ ______ Reconciliation of opening and closing balances of the present value of thedefined benefit obligation: Benefit obligation at beginning of year 19,479 18,721Service cost - 440Interest cost 922 861Contributions by plan participants - 209Actuarial loss 233 1,621Benefits paid (552) (401)Past service costs 19 -Curtailments and settlements - (1,972) ______ ______Benefit obligation at end of year 20,101 19,479 ______ ______ Reconciliation of opening and closing balances of the fair value of plan assets: Value at Value at 31 December 31 December 2006 2005 £000 £000 ______ ______Fair value of plan assets at beginning of year 14,259 11,529Expected return on plan assets 876 787Actuarial gain 659 1,579Contributions by employers 619 556Contributions by plan participants - 209Benefits paid (552) (401) ______ ______Fair value of plan assets at end of year 15,861 14,259 ______ ______ The amounts recognised in the Income Statement are: Current service cost - 440Interest on obligation 922 861Expected return on plan assets (876) (787)Gains on settlements and curtailment - (1,972)Past service cost 19 - ______ ______Total expense/(gain) 65 (1,458) ______ ______ The expense/(gain) is recognised in the following line items in the IncomeStatement: 2006 2005 £000 £000 ______ ______Cost of sales 19 242Distribution costs - 38Administrative expenses - 160Financial income (876) (787)Finance costs 922 861Exceptional gain in administrative expenses - (1,972) ______ ______ 65 (1,458) ______ ______ Actuarial gains/(losses) shown in SORIE since 1 January 2004: 2006 2005 £000 £000 ______ ______Balance as at 1 January 222 264Actuarial gains/(losses) 426 (42) ______ ______Balance as at 31 December 648 222 ______ ______ History of scheme assets, obligations and experience adjustments As at As at As at 31 December 2006 31 December 2005 31 December 2004 ______ ______ ______ Present value of defined benefit obligation 20,101 19,479 18,721Fair value of scheme assets 15,861 14,259 11,529Deficit in the scheme (4,240) (5,220) (7,192)Experience adjustments arising on scheme liabilities 233 1,621 93Experience item as a percentage of scheme liabilities 1% 8% 0%Experience adjustments arising on scheme assets 659 1,579 299Experience item as a percentage of scheme assets 4% 11% 3% ______ ______ ______ Other pension schemes On 1 January 2006 a separate stakeholder scheme was set up for those employeeswho were originally in the closed defined benefit scheme. The contributions paidby the Company in 2006 were £534,000 (2005: nil). In addition to this scheme, Zotefoams plc operates a stakeholder scheme which isopen to employees who joined after 1 October 2001. The contributions paid by theCompany in 2006 were £20,000 (2005: £12,000). For US based employees Zotefoams Inc. operates a 401(k) plan. The contributionspaid by Zotefoams Inc in 2006 were £85,842 (2005: £106,000). This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Zotefoams