23rd Mar 2005 07:01
Medical Solutions PLC23 March 2005 For further information, please contact: Medical Solutions plc Charles Green Chief Executive Officer Neil Johnston Chief Financial Officer Tel: 0115 973 9010 www.medical-solutions.co.uk Bell Pottinger Ann-Marie Wilkinson/Geoff Callow Tel: 0207 861 3232 Medical Solutions plc Preliminary results for the year ended 31 December 2004 Medical Solutions plc (LSE: MLS) announces its preliminary results for the yearended 31 December 2004. Financial Highlights 2004 • Turnover of £6.6 million (2003: £7.3 million) • Operating loss before exceptional costs and amortisation of goodwill and development costs of £4.8 million (2003: £1.8 million), see Note 2 • Operating loss after exceptional costs and amortisation of goodwill and development costs of £9.5 million (2003: £2.2 million) Operational and Financial Highlights - early 2005 • Successful Placing and Open Offer raising £5.6 million (net of expenses) • Initial cost reduction measures introduced, expected to generate annualised savings of approximately £0.6 million per annum; further initiatives planned • Signing of further Liquid Based Cytology contract with Lancashire and Cumbria Strategic Health Authority • Agreement reached in principle with Tripath Imaging Inc for renewal of LBC UK Distribution Agreement until 31 December 2008 • Acquisitions of Dubai Medical Laboratories and Specialised Clinical Laboratories formally completed • Agreement reached in principle with Hamamatsu Photonics KK for sale of certain intellectual property rights for initial consideration of £450,000 • Strengthened Board through appointments of Neil Johnston and Robin Slinger Charles Green, Chief Executive Officer, said: "As we have highlighted previously, 2004 was a disappointing year for MedicalSolutions. In early 2005, we have completed the Placing and Open Offer, signed afurther LBC contract and reached agreement in principle to renew our LBCdistribution agreement with Tripath which had been due to expire in December2005. We completed two acquisitions in Dubai and have reached agreement inprinciple, for the sale of certain intellectual property rights to HamamatsuPhotonics KK. We have made two important appointments to the Board and havebegun the process of reducing our cost base to an appropriate size for ourbusiness." Chairman's Statement Recent developments 2004 was a challenging year for Medical Solutions. Having made significantinvestment into our operational capabilities in 2003, the level of revenuegrowth we anticipated did not materialise as quickly as we had hoped. This ledto a drain on the Group's cash resources. It is pleasing to report that, despitethese challenges, the Group has delivered a number of important successes duringthe year and was able to complete an extremely important Placing and Open Offer,raising approximately £5.6 million (after expenses) in early 2005. In our Services Division, our profitable operations in Dubai were expandedthrough the acquisitions in early 2005 of Dubai Medical Laboratories andSpecialised Clinical Laboratories. We demonstrated our ability to capitalise onthe market opportunity for liquid based cervical smear testing having beenawarded five-year contracts to supply the whole of Wales, Birmingham Women'sHospital & Good Hope Hospital and the Cheshire & Merseyside Region. Our UKDiagnostic Pathology and Drug Development Services businesses made slowerprogress than we expected. In our Technology Division, we sold the trade and assets of both Kinetic ImagingInc and Kinetic Imaging Limited to Andor Technology plc. We also completed thesale and leaseback of our Nottingham facility. Board changes In early 2005, the Board was delighted to welcome Neil Johnston as ChiefFinancial Officer and Company Secretary. Neil was previously Chief FinancialOfficer at Pharmagene plc and spent nine years at PricewaterhouseCoopers. Wealso welcomed Robin Slinger to the Board as a non-executive director. Mr Slingerspent 34 years as a director of Corporate Banking at The Royal Bank of Scotlandplc. In December, Professor Ian Ellis resigned from the Board as a result of hiscommitments to the University of Nottingham, but remains with the Group asMedical Director on a part-time basis. Andrew Longstaffe, previous ChiefFinancial Officer and Company Secretary left the Board and the Group to pursueother activities. We wish him well in his future career. Corporate Governance The Board is committed to improving its corporate governance policies andpractices. Our policy and planned developments in this area will be describedmore fully in the Corporate Governance statement within our Annual Report andAccounts. Prospects Whilst 2004 was undoubtedly a difficult year, the Board remains focused onbecoming a profitable business through the achievement of its three strategicgoals: • expanding the Group's research services business with pharmaceutical companies through both clinical trials support and biomarker contracts; • growing the UK-based pathology services business, including through the SurePath liquid based cytology system; and • maximising returns from the Group's activities in the Middle East, both through its existing pathology services operations and through pursuing acquisition opportunities as they arise. LBC sales during the early part of 2005 have been encouraging although saleswithin the UK Diagnostic Pathology business have remained sluggish. Overall, wehave retained our expectations for the rate of revenue growth in 2005, albeitfrom a lower base in 2004 than originally expected. We look forward to updating shareholders on our progress during 2005. Sir Gareth Roberts FRS, FREngNon-executive Chairman Chief Executive Officer's review Overview Medical Solutions is a UK-based healthcare company specialising in pathologyproducts and services. Our business continues to be divided into two divisions: The Services Division provides specialist pathology-based services, biomaterialsresources and expertise to the pharmaceutical and biotechnology industry as wellas public and private healthcare providers based in the UK and Dubai. TheService Division has access to an established tissue bank and a network of over60 specialist pathologists to provide reporting services to both the NHS and theprivate sector. We believe Medical Solutions remains well placed to fullyexploit the increasing international demand for outsourced support services,particularly in cancer diagnostics and drug development. The Technology Division has a range of products including specialist software invirtual microscopy, telepathology, image analysis and tissue quantification.Medical Solutions also distributes and supports the SurePath liquid basedcytology ("LBC") system for the preparation and analysis of cervical smearsamples. SurePath is one of only two systems approved by the National Instituteof Clinical Excellence ("NICE") for use in England and Wales. The Board continued to implement its strategy of moving towards being a servicefocused business. During the early part of the year, we continued to invest inadditional staff and facilities to provide the operating capacity to fulfil thelevel of revenue we had anticipated. Unfortunately, this revenue did notmaterialise as quickly as we had hoped. This placed a significant strain on ourcash resources resulting in the need to raise additional finance. In December, we announced a Placing and Open Offer to raise approximately £5.6million (after expenses). The fundraising was closed successfully in January2005. Turnover for the year was £6.6 million (2003: £7.3 million). For the year ended31 December 2004, operating losses before exceptional items and amortisation ofgoodwill and development costs were £4.8 million (2003: £1.8 million; see Note2). Operating losses including exceptional items and amortisation of goodwilland development costs were £9.5 million for the year ended 31 December 2004(2003: £2.2 million). Services Division Our Services Division generated revenue of £5.5 million in 2004 compared to £5.1million in 2003, an increase of 8%. Operating losses before common costs,exceptional costs and amortisation of goodwill and development costs were £0.8million in 2004 compared to an operating profit of £0.9 million in 2003. UK Diagnostic Pathology Revenue from our UK Diagnostic Pathology operation grew in 2004 compared with2003. The UK operation is solely histopathology-based and generates revenue fromour operations in London and Nottingham. In London, our specialist laboratory inHarley Street provides histopathology services to both private and publichealthcare providers. In Nottingham, we provide outsourced histopathologyconsulting services to NHS Trusts and carry out as well as a number ofspecialised laboratory tests. Our reference laboratory is the only privatelaboratory in the UK used by Roche to carry out its HER-2 test on tissue toestablish whether a patient will respond to its drug Herceptin for breastcancer. We have put in place a level of capacity based on our expectations of revenueduring 2004. It was disappointing that our expectations were not met. The market drivers for this business remain sound. The UK continues toexperience a shortfall in the number of pathologists and the Government's focuson modernising UK pathology services is expected to generate significant longterm benefits. We have a strong network of associated pathologists and are wellsituated to access the strong private market based in London. In December, ourLondon laboratory had its Clinical Pathology Accreditation status renewed. InSeptember, we appointed Carol Knott as divisional manager. Carol comes with astrong operational management background in both public and private healthcare,primarily in the UK and has already made a strong contribution. Dubai Diagnostic Pathology The Dubai Diagnostic Pathology business generated revenue of £2.8 million in2004 compared with £3.1 million in 2003, a reduction of 10% which was due tolower LBC sales and adverse exchange rate movements. The diagnostic pathologybusiness in Dubai comprises the pathology laboratory of the Welcare Hospitaltogether with a small, histopathology based business known as Histopathology &Speciality Laboratories (HSL). We put in place a new management team andadditional resources to grow and integrate our businesses in Dubai. These costshave reduced the profitability of our Dubai business in the short term, but havebeen planned as part of our long term objectives in this region. Following the completion of the Placing & Open Offer in January 2005, the Groupalso formally completed the acquisitions of majority shareholdings in DubaiMedical Laboratories and Specialised Clinical Laboratories, for a totalconsideration of £2.8 million. Although the timing of the completion of theseacquisitions meant that they did not contribute to the results we are reportingtoday for 2004, they have helped to consolidate Medical Solutions' position asthe leading provider of pathology services in this geographic area and both areexpected to generate further growth in this part of our business. We are now focused on the efficient integration of our four businesses in Dubai,an emerging world centre for business and high quality healthcare provision. Drug Development Services Medical Solutions' Drug Development Services business unit offers diagnostic andtherapeutic testing services to support drug discovery and development andassists pharmaceutical and biotechnology companies in identifying the markersmost closely linked with response to therapy during clinical trials. We aremainly focused on cancer research particularly in the development of newsurrogate markers. In addition, the Group offers its clients rapid and flexible access to a rangeof ethically sourced human biomaterials with full donor consent and demographicand medical history. The Drug Development Services business made encouraging progress in 2004. Ourrelationship with AstraZeneca continued to grow stronger as we successfullycompleted a number of cancer focused biomarker assessment contracts. During thesecond half of the year, we completed a significant agreement with Synexus Ltdto provide histopathology services for a Phase III study into the reduction ofprostate cancer risk. We also completed a number of smaller studies with otherpharmaceutical and biotechnology companies. Sales of human tissue and humantissue based products were disappointing and we continue to keep this aspect ofour business under review. We recruited Cliff Murray to the position of Senior Scientist, Drug DevelopmentServices in December. Cliff is a highly respected research scientist who waspreviously Reader in Oncology at Nottingham University and Head of the CancerResearch UK Tumour Cytokine Biology Group. Technology Division Within the Technology Division, turnover fell from £2.2 million in 2003 to £1.1million in 2004, largely as a result of the disposal of Kinetic Inc and KineticLimited in June, which contributed turnover of £0.6 million in 2004 (2003:£1.1million). Operating losses before common costs, exceptional items andamortisation of goodwill and development costs for the year ended 31 December2004 were £2.1 million (2003: £1.4 million). Operating losses after exceptionalitems and amortisation of goodwill and development costs for the year ended 31December 2004 were £5.4 million (2003: £1.6 million). SurePath Liquid Based Cytology There are currently more than 4 million smear tests performed each year inEngland and Wales. We believe that this new marketplace is worth in excess of£10 million annually. During 2004, Medical Solutions has demonstrated itsability to capitalise on this market opportunity by being awarded 5 yearcontracts to supply the whole of Wales, Birmingham Women's & Good HopeHospitals, and the Merseyside & Cheshire region. This was supplemented in early2005 by the announcement of a further agreement to supply Lancashire andCumbria. As previously announced during the year, we observed a fundamental shift in thebuying pattern of our customers in this area. Where previously, we had expectedto make outright sales of LBC machines and associated consumables, our customersultimately chose a purchasing model in which the cost of machines was absorbedinto a higher consumable unit price over the 5 year period. This led tosignificantly lower level of revenue than we had expected during the year. Inaddition, this meant the Group has had to finance the cost of its investment inLBC machines (£1.3 million). As contracts were awarded, we were able tosuccessfully finance around £0.6 million of this investment. Virtual Microscopy Whilst we have enjoyed significant past successes in this area of our business,we have recognised that Medical Solutions does not have sufficient resources tocontinue to research and develop new products in the area of virtual microscopy.For this reason, we have been collaborating with companies such as HamamatsuPhotonics KK to develop new product lines such as the NanoZoomer, a fastscanning device used to scan and store microscope slide images. Our strongrelationship with Hamamatsu has led to an agreement in principle, in which weexpect to sell certain intellectual property rights for initial consideration of£450,000. We are looking to exit this area of our business over the medium term,but expect to retain a core software development team to assist other parts ofour business. Other key transactions We sold the trade and assets of Kinetic Imaging Limited and Kinetic Imaging Incin June for a total consideration of £0.6 million. In February, we completed thesale and leaseback of our headquarters generating consideration of £4.6 million.The Group entered into a 25 year lease for the premises at an annual rent of£400,000. Intellectual Property Our intellectual property portfolio continued to be strengthened and we weregranted a key patent in the areas of microscopy imaging systems. We also filed afurther two patent applications to support our operational activities in thedrug development services area. Summary 2004 was a difficult year for Medical Solutions and its shareholders. We remainfocused on the key challenge of creating a profitable and cash generativepathology-based services group. Charles GreenChief Executive Officer Financial review Results of operations Turnover for the year ended 31 December 2004 was £6.6 million, compared to £7.3million in 2003, a reduction of 10%. Costs of sales (excluding exceptional costsof sales of £0.4 million, see Note 3) rose from £3.9 million in 2003 to £4.7million in 2004 as the Group geared up its internal resources, particularlyheadcount, in anticipation of further revenue growth. Average direct headcountrose from 52 in 2003 to 77 in 2004. Revenue growth did not materialise asanticipated during 2004 and as a result gross profit, excluding exceptional costof sales, fell to £1.9 million (see Note 3) compared to £3.4 million in 2003.Including exceptional cost of sales, gross profit in 2004 was £1.5 million(2003:£3.4 million). The exceptional cost of sales of £0.4 million relates to achange in accounting methodology for human tissue stock together with a writedown of certain Technology stocks in recognition of the Group's plans to exitthis area of its business over the medium term. Operating losses before exceptional costs and amortisation of goodwill anddevelopment costs were £4.8 million (2003: £1.8 million, see Note 2). Operatinglosses after exceptional costs and amortisation of goodwill and developmentcosts were £9.5 million (2003: £2.2 million). Other operating expenses,excluding exceptional items and amortisation of goodwill and development costs,were £6.7 million in 2004 compared with £5.2 million in 2003 (see Note 3). Totalother operating expenses in 2004 were £11 million compared to £5.7 million in2003. Selling and distribution costs of £0.9 million were broadly in line with 2003(£0.8 million). Research and development costs were reduced to £0.2 million in2004 from £1.1 million in 2003 as a result of a shift in business focus.Administrative expenses, excluding exceptional items and amortisation ofgoodwill and development costs, were £5.6 million compared with £3.3 million in2003 (see Note 3). Increased administrative expenditure in the year wasprimarily due to the cost of the Group's Nottingham facility following the saleand leaseback in February 2004, increased depreciation charges following theinvestment in LBC and laboratory equipment and IT systems during 2003 and 2004and full year costs in relation to MSL Dubai and MSL London, both acquiredduring 2003. As part of the continuing consolidation of the Group's facilities,the Group agreed to surrender a property lease in Nottingham at a cost of £0.1million. We have conducted a thorough review of the carrying value of the Group'sgoodwill and development costs in the consolidated balance sheet. The net impactof this review, has resulted in a total charge to the profit and loss account of£2.9 million for the year ended 31 December 2004 (2003: £Nil). This has beenshown as an exceptional administrative cost (see Note 3). Other exceptionaladministrative costs for the year ended 31 December 2004 include redundancycosts of £0.2 million and costs related to an aborted acquisition of £0.2million. The Group generated a net profit of £0.6 million from the sale and leaseback ofits main Nottingham facility and the cost of exiting alternative premises inNottingham. During the year, the activities of Kinetic Limited and Kinetic Incwere sold, generating a loss of £0.5 million after taking account of transactioncosts and goodwill written off. After taking account of tax and interest charges, the loss for the financialyear was £9.5 million compared to a loss of £0.1 million in 2003. Group net assets fell from £18.1 million at 31 December 2003 to £11.6 million at31 December 2004. As at 31 December 2004, the Group had a total of 116 employees(31 December 2003:132). Segmental performance Internally, the Group reports the performance of two primary business segments,Services and Technology. A significant proportion of the Group's costs in 2004relate to shared activities and are shown as Common costs. Services division Turnover within the Group's Services division grew to £5.5 million in 2004 from£5.1 million in 2003, an increase of 8% mainly as a result of a full year'srevenue from MSL Dubai and MSL London. As already noted, significant investmentswere made in human resources to meet anticipated demand which did notmaterialise at the level expected. Consequently, operating losses beforeexceptional costs, common costs and amortisation of goodwill and developmentcosts were £0.8 million in 2004 (2003: operating profit of £0.9 million, seeNote 2). After taking account of exceptional costs and amortisation of goodwilland development costs, but before common costs, the division generated anoperating loss of £2.3 million compared to an operating profit of £0.6 millionin 2003 (see Note 2). Technology division Turnover fell from £2.2 million in 2003 to £1.1 million in 2004, a reduction of52%. This was partly due to the sale, in May 2004 of the trade and assets ofKinetic Imaging Limited and Kinetic Imaging Inc, but also to disappointing salesfrom other parts of this business. The Technology business generated anoperating loss before exceptional costs, common costs and amortisation ofgoodwill and development costs of £2.1 million in 2004 compared to an operatingloss of £1.4 million in 2003. Before common costs, but after exceptional costs,amortisation of goodwill and development costs, operating losses were £5.4million in 2004 compared to £1.6 million in 2003 (see Note 2). Liquidity and capital resources Net cash outflow from operating activities during the year ended 31 December2004 was £2.8 million (2003: £2.1 million, see Note 8). The Group generated netproceeds of £4.6 million from the sale and leaseback of the Nottingham facility.Medical Solutions plc concluded an equity fundraising in July 2004, raising £3million, of which £2.2 million was used to satisfy part of the acquisitionconsideration for DML and SCL and deferred consideration for the acquisition ofthe laboratory business of the Welcare hospital. The sale of Kinetic Imaging andKinetc Inc raised £0.6 million. The Group invested £0.8 million in tangiblefixed assets (see Note 9). Post balance sheet events The Group's operational performance during 2004 placed a significant strain onits cash position during the latter part of the year. Through a successfulPlacing and Open Offer, completed in January 2005, the Group raised £5.6 millionnet of expenses. These proceeds have been and are being used to repay certainborrowings, pay outstanding creditors and fund ongoing losses within the Group. In January 2005, the Group also completed the acquisition of an 80% shareholdingin Dubai Medical Laboratories and a 100% shareholding in Specialised ClinicalLaboratories for a total combined consideration of £2.8 million. Recent progress Having raised the funds necessary to secure the immediate future of the Group,we have set about the task of reversing the Group's fortunes. Initially, ourefforts have focused on reducing the Group's cost base, particularly in the UK.The Board of Directors has taken a 10% reduction in salary/fees, we have madeheadcount reductions in our UK business and have consolidated our operations inNottingham onto a single site. We continue to develop our strategy and arereviewing the number of businesses the Group operates in with a view to focusingon those parts of our business capable of achieving scalable growth. Neil JohnstonChief Financial Officer Consolidated Profit and Loss AccountFor the year ended 31 December 2004 2004 2003 Notes £'000 £'000 TurnoverContinuing operations 2 6,026 6,197Discontinued operations 2 560 1,103 -------- -------- 2 6,586 7,300Cost of Sales- Normal 3 (4,721) (3,870)- Exceptional 3 (412) - -------- -------- (5,133) (3.870)Gross Profit 1,453 3,430Other operating expensesSelling and Distribution costs 3 (923) (832)Research and Development costs 3 (148) (1,070)Administrative expenses- Normal (including amortisation of goodwill anddevelopment costs of £940,000, 2003 £435,000) 3 (6,526) (3,761)- Exceptional (including impairment of goodwill anddevelopment costs of £2,938,000, 2003 £nil) 3 (3,359) - -------- --------Total Administrative expenses 3 (9,885) (3,761) -------- --------Total Other operating expenses 3 (10,956) (5,663) -------- --------Operating lossContinuing operations 2 (9,336) (1,803)Discontinued operations 2 (167) (430) -------- -------- (9,503) (2,233)Profit/(loss) on disposal of fixed assets -continuing operations 4 607 - Loss on disposal of discontinued operations 5 (469) (91) -------- --------Loss on ordinary activities before finance charges (9,365) (2,324)Finance charges (net) (20) 63 -------- --------Loss on ordinary activities before taxation (9,385) (2,261)Tax on loss on ordinary activities (90) 2,126 -------- --------Loss for the financial year (9,475) (135) -------- -------- Loss per ordinary share - basic and diluted 6 (0.10)p (0.16)p -------- -------- Consolidated Statement of Total Recognised Gains and LossesFor the year ended 31 December 2004 2004 2003 £'000 £'000 Loss for the financial year (9,475) (135)Currency translation difference on foreign currency netinvestments (54) (136) -------- --------Total losses recognised since the last report and financialstatements (9,529) (271) -------- -------- Consolidated Balance SheetAs at 31 December 2004 2004 2003 Notes £'000 £'000 Fixed assetsDevelopment costs and know-how 339 1,698Goodwill 11,005 13,934 ------- --------Intangible assets 11,344 15,632Tangible assets 2,679 6,594Investments - 2 ------- -------- 14,023 22,228 ------- --------Current assetsStocks 878 1,461Debtors 4,348 2,783Cash at bank and in hand 1,990 3,250 ------- -------- 7,216 7,494 ------- --------Creditors: Amounts falling due within one year (8,086) (5,565) ------- --------Net current assets/(liabilities) (870) 1,929 ------- --------Total assets less current liabilities 13,153 24,157Creditors: Amounts falling due after more thanone year (1,540) (6,045) ------- --------Net assets 11,613 18,112 ------- -------- Capital and reservesCalled-up share capital 7 1,960 1,788Share premium account 7 27,912 25,059Shares in Employee Benefit Trust 7 - (45)Merger Reserve 7 3,467 3,467Capital redemption reserve 7 5 -Other reserve 7 1,136 1,136Translation reserve 7 (190) (136)Profit and loss account 7 (22,677) (13,157) ------- --------Equity shareholders' funds 7 11,613 18,112 ------- -------- Consolidated Cash Flow StatementFor the year ended 31 December 2004 2004 2003 Notes £'000 £'000 Net outflow from operating activities 8 (2,836) (2,057)Returns on investments and servicing of finance (20) 63Taxation (61) -Capital expenditure and financial investment 9 3,563 (6,074)Acquisitions and disposals 9 (1,675) (7,263) -------- --------Cash (outflow) before management of liquid resourcesand financing (1,029) (15,331)Financing 832 2,068 -------- --------(Decrease) in cash in the year (197) (13,263) -------- -------- Notes to the Preliminary Financial StatementsFor the year ended 31 December 2004 1 Basis of reporting The preliminary results have been prepared in accordance with UK AccountingStandards and the Companies Act 1985 on the basis of the accounting policies setout in the Group's 2003 Annual Report and Accounts. The financial information contained in this announcement of preliminary resultsdoes not constitute financial statements within the meaning of Section 240 ofthe Companies Act 1985. Statutory consolidated financial statements for the yearended 31 December 2003 have been delivered to the Registrar of Companies uponwhich the auditors report was unqualified and did not contain any statementunder Section 237(2) or section 237(3) of the Companies Act 1985. The statutoryaccounts for the financial year ended 31 December 2004 have not yet been signedby the directors and the auditors of the Company. 2 Turnover and Segmental Analysis Continuing Discontinued Operations Operations Total 2004 2003 2004 2003 2004 2003 £'000 £'000 £'000 £'000 £'000 £'000Turnover 6,026 6,197 560 1,103 6,586 7,300Cost of sales -------- -------- -------- -------- -------- --------- normal (4,298) (3,358) (423) (512) (4,721) (3,870) -------- -------- -------- -------- -------- --------- exceptional (412) - - - (412) - -------- -------- -------- -------- -------- -------- (4,710) (3,358) (423) (512) (5,133) (3,870) -------- -------- -------- -------- -------- --------Gross profit 1,316 2,839 137 591 1,453 3,430 -------- -------- -------- -------- -------- --------Other operatingexpensesSelling anddistribution costs (866) (593) (57) (239) (923) (832)Research anddevelopment costs (103) (830) (45) (240) (148) (1,070)Administrativeexpenses- normal (6,324) (3,219) (202) (542) (6,526) (3,761)- exceptional (3,359) - - - (3,359) - -------- -------- -------- -------- -------- --------TotalAdministrativeexpenses (9,683) (3,219) (202) (542) (9,885) (3,761) -------- -------- -------- -------- -------- --------Total Otheroperating expenses (10,652) (4,642) (304) (1,021) (10,956) (5,663) -------- -------- -------- -------- -------- --------Operating loss (9,336) (1,803) (167) (430) (9,503) (2,233)Profit on sale offixed assets 607 - - - 607 -Loss on sale ofdiscontinuedoperations - (91) (469) - (469) (91) -------- -------- -------- -------- -------- --------Loss on ordinaryactivities beforefinance chargesand taxation (8,729) (1,894) (636) (430) (9,365) (2,324) -------- -------- -------- -------- -------- --------Finance charges(net) (20) 63 - - (20) 63 -------- -------- -------- -------- -------- --------Loss on ordinaryactivities beforetaxation (8,749) (1,831) (636) (430) (9,385) (2,261) -------- -------- -------- -------- -------- -------- An analysis of exceptional costs is shown in Note 3. Technology Services Total 2004 2003 2004 2003 2004 2003 £'000 £'000 £'000 £'000 £'000 £'000Turnover 1,056 2,199 5,530 5,101 6,586 7,300Operating (loss)/profitbefore exceptionalcosts, amortisationof goodwill anddevelopmentcosts and commoncosts (2,110) (1,448) (834) 949 (2,944) (499)Exceptional cost ofsales (202) - (210) - (412) -Exceptionaladministrativeexpenses(includingimpairment of goodwill anddevelopmentcosts) (2,784) - (575) - (3,359) -Amortisation ofgoodwill and development costs (255) (133) (685) (302) (940) (435) -------- -------- -------- -------- -------- --------Operating (loss)/profit before common costs (5,351) (1,581) (2,304) 647 (7,655) (934)Common costs (1,848) (1,299) -------- --------Operating loss (9,503) (2,233)Profit on sale offixed assets 607 -Loss on sale ofdiscontinued operations (469) - (469) (91) -------- -------- -------- -------- -------- --------Loss on ordinaryactivities beforefinance charges andtaxation (9,365) (2,324) -------- -------- -------- -------- -------- --------Net assets,excluding unallocated netassets 955 4,263 13,023 13,418 13,978 17,681 Unallocated net assets (2,365) 431 -------- --------Net assets 11,613 18,112 -------- -------- Within the Preliminary Financial Statements, reference is made to the Operatingloss before exceptional costs and amortisation of goodwill and development costs(£4.8 million; 2003: £1.8 million). This figure represents the sum of theoperating loss before exceptional costs, amortisation of goodwill anddevelopment costs and common costs of £2.9 million (2003: £0.5 million) as shownabove together with common costs of £1.8 million (2003: £1.3 million) also shownabove. A reconciliation to the statutory operating loss of £9.5 million (2003:£2.2 million) is shown above. An analysis of exceptional costs is given in Note3. Total 2004 2003 £'000 £'000Turnover by destinationUnited Kingdom and Republic of Ireland 3,193 3,536Other European Union 241 122Rest of Europe 17 44The Americas 247 315Africa - -Asia 2,887 3,281Other 1 2 -------- -------- 6,586 7,300 -------- -------- Geographical Analysis by Origin United Dubai USA Kingdom Operations operations operations Total 2004 2003 2004 2003 2004 2003 2004 2003 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000Turnover 3,509 3,896 2,832 3,149 245 255 6,586 7,300 ------ ------ ------ ------ ------ ------ ------ ------Operatingprofit/(loss)beforeexceptionalcosts andamortisationof goodwillanddevelopmentcosts (5,717) (3,019) 527 1,223 (14) (2) (5,204) (1,798) ------ ------ ------ ------ ------ ------ ------ ------Exceptionalcosts(includingimpairment ofgoodwill anddevelopmentcosts) (3,359) - - - - - (3,359) -Amortisationof goodwillanddevelopmentcosts (370) (144) (570) (291) - - (940) (435) ------ ------ ------ ------ ------ ------ ------ ------Operating(loss)/profit (9,446) (3,163) (43) 932 (14) (2) (9,503) (2,233)Profit on saleof fixedassets 607 - - - - 607 -Loss on saleofdiscontinuedoperations (420) (91) - - (49) - (469) (91) ------ ------ ------ ------ ------ ------ ------ ------Loss onordinaryactivitiesbefore financecharges andtaxation (9,259) (3,254) (43) 932 (63) (2) (9,365) (2,324) ------ ------ ------ ------ ------ ------ ------ ------Net assets 10,045 16,953 1,644 1,172 (76) (13) 11,613 18,112 ------ ------ ------ ------ ------ ------ ------ ------ An analysis of exceptional costs is shown in Note 3. 3 Cost of Sales and Other Operating Expenses (Net) Continuing Discontinued operations Operations Total 2004 2003 2004 2003 2004 2003 £'000 £'000 £'000 £'000 £'000 £'000Cost of Sales - Normal 4,298 3,358 423 512 4,721 3,870Cost of Sales -Exceptional- Write down oftechnology stocks 202 - - - 202 -- Write down of tissue stocks 210 - - - 210 - -------- -------- -------- -------- -------- -------- 412 - - - 412 - -------- -------- -------- -------- -------- --------Total Cost of Sales 4,710 3,358 423 512 5,133 3,870 -------- -------- -------- -------- -------- -------- Selling and distribution costs 866 593 57 239 923 832Research and development costs 103 830 45 240 148 1,070Administrativeexpenses Amortisation ofgoodwill and development costs 940 416 - 19 940 435Other Normaladministrative expenses 5,384 2,784 202 542 5,586 3,326 -------- -------- -------- -------- -------- --------Normal Administrativeexpenses 6,324 3,200 202 561 6,526 3,761Exceptional items- Redundancy 181 - - - 181 -- Costs of abortedacquisition 240 - - - 240 -- Impairment of goodwill 1,712 - - - 1,712 -Impairment ofdevelopment costs 1,226 - - - 1,226 - -------- -------- -------- -------- -------- --------ExceptionalAdministrative expenses 3,359 - - - 3,359 - -------- -------- -------- -------- -------- --------Total Administrative expenses 9,683 3,200 202 561 9,885 3,761 -------- -------- -------- -------- -------- --------Total Other 10,652 4,623 304 1,040 10,956 5,663Operating Expenses -------- -------- -------- -------- -------- -------- Exceptional Costs of Sales of £412,000 (2003:£Nil) includes the write down ofTechnology stock (£202,000; 2003:£Nil) and Tissue stock (£210,000; 2003:£Nil).The Group expects to exit part of its Technology business over the short tomedium term and as such has recognised a one-off charge to the carrying value ofrelated stock items. During the year the Group changed the methodology on whichit has accounted for tissue stock and no longer includes certain overheads inthe valuation of such items. Accordingly, the Group's results for the year ended31 December 2004 reflect a charge of £210,000 (2003:£Nil). Gross profit beforeexceptional items of £1,865,000 represents the sum of exceptional cost of salesas described above (£412,000) and the statutory gross profit figure of£1,453,000 for the year ended 31 December 2004. Exceptional Administrative expenses for the year ended 31 December 2004 were£3,359,000 (2003:£Nil). This includes the redundancy costs (2004: £181,000;2003: £Nil), costs associated with an aborted acquisition (2004: £240,000; 2003:£Nil) and costs associated with the impairment of the carrying values ofdevelopment costs (2004: £1,226,000; 2003:£Nil) and goodwill (2004:£1,712,000;2003:£Nil), based on a review carried out by the directors, which included thepotential commercial prospects of each identified project or business stream. Other operating expenses, excluding exceptional expenses and amortisation ofgoodwill and development costs of £6,657,000 (2003: £5,228,000) comprisesselling and distribution costs (£923,000; 2003:£832,000), research anddevelopment costs (£148,000; 2003: £1,070,000) and other normal administrativeexpenses (£5,586,000; 2003: £3,326,000) as shown above. 4 Profit on sale of fixed assets On 28 February 2004, the Group completed the sale and leaseback of itsheadquarters in Nottingham for a consideration of £4.6 million generating aprofit on disposal of fixed assets of £986,000. During 2004, the Group alsoagreed to surrender its lease at Malville Works, Nottingham and completed itsmove to new premises in Harley Street, London, recognising a charge of £379,000relating to fixed asset disposals. Overall, the Group recognised a net profit ondisposal of fixed assets of £607,000 (2003:£Nil). 5 Loss on disposal of discontinued operations The trade and assets of Kinetic Imaging Inc and Kinetic Imaging Limited weresold in June 2004, generating a loss on disposal of £469,000 after accountingfor unamortised goodwill and certain transaction related legal and professionalcosts. 6 Loss per Ordinary ShareThe calculations of loss per share are based on the following results andweighted average number of shares: Basic and diluted 2004 2003 £'000 £'000Loss for the financial year (9,475) (135) -------- -------- 2004 2003 Number of Number of shares SharesWeighted average number of shares:For basic earnings per share and diluted earningsper share 92,597,733 84,303,925 -------- -------- FRS 14 requires presentation of diluted earnings per share (EPS) when a Companycould be called upon to issue shares that would decrease net profit or increasenet loss per share. For a loss making Company with outstanding share options,net loss per share would only be increased by the exercise of out-of-the-moneyoptions. Since it seems inappropriate to assume that option holders would actirrationally and there are no other diluting future share issues, diluted EPSequals basic EPS. 7 Reconciliation of movements in shareholders funds Share Share Shares Merger Capital Other Translation Profit Total premium in redemption and shareholders' loss capital account EBT reserve reserve reserve reserve account FundsGroup £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000At 1January 2004 1,788 25,059 (45) 3,467 - 1,136 (136) (13,157) 18,112Shares issued 177 2,853 - - - - - - 3,030Loss forthe year - - - - - - - (9,475) (9,479)Shares in EBT (5) - 45 - 5 - - (45) -Translationadjustment - - - - - - (54) - (54) ------ ------ ------ ------ ------ ------ ------ ------ ------At 31December 1,960 27,912 - 3,467 5 1,136 (190) (22,677) 11,6132004 ------ ------ ------ ------ ------ ------ ------ ------ ------ In July 2004, 3,100,000 Ordinary shares were issued as fully paid at a price of35.5 pence per share to raise additional working capital for the Group. On 2August 2004, 5,740,868 Ordinary shares were issued as fully paid at a price of35.5 pence per share to raise cash to part fund the acquisitions of DML and SCL(see Note 10). Costs relating to the issue of shares were charged to the Sharepremium account. 8 Reconciliation of Operating Loss to Operating Cash Outflow 2004 2003 £'000 £'000Operating loss (9,503) (2,233)Goodwill amortisation 715 435Impairment of goodwill 1,712 -Depreciation charges 895 372Amortisation of development costs and know-how 225 316Impairment of development costs 1,226 -(Increase)/decrease in stocks 272 (441)(Increase)/decrease in debtors 467 (1,551)Increase/(decrease) in creditors 1,155 1,045 -------- --------Net cash outflow from operating activities (2,836) (2,057) -------- -------- 9 Analysis of Cash Flows 2004 2003 £'000 £'000Returns on investments and servicing of financeInterest received - 134Interest paid (4) (23)Interest element of finance leases and hire purchase rentalpayments (16) (48) -------- --------Net cash inflow/(outflow) (20) 63 -------- -------- -------- --------Taxation (61) - -------- -------- Capital expenditure and financial investmentPurchase of tangible fixed assets (789) (5,623)Development costs (248) (451)Sale of tangible fixed assets 4,600 - -------- --------Net cash outflow 3,563 (6,074) -------- --------Acquisitions and disposalsDeferred consideration for acquisitions paid (200) (650)Sale of businesses 555 (78)Deposit on Acquisition of SCL and DML (2,030) -Purchase of subsidiary undertakings - (6,535) -------- --------Net cash outflow (1,675) (7,263) -------- --------FinancingIssue of Ordinary Share Capital 3,030 - -------- --------Capital element of finance leases and hire purchase rentalpayments (26) 31Increase/(decrease) in short-term borrowings 1,384 364Increase/(decrease) in long-term borrowings (3,556) 1,673 -------- -------- (2,198) 2,068 -------- --------Net cash inflow 832 2,068 -------- -------- 10 Post Balance Sheet Events Placing and Open Offer On 22 December 2004, the Group announced that it intended to raise approximately£6.4 million before expenses through a Placing and Open Offer. The net proceedsof the Placing and Open Offer (approximately £5.6 million) were to be used toinvest in specialist laboratory equipment required to drive future revenuegrowth within the Group's drug discovery/development and liquid based cytologyoperations, reduce the Group's debt position, pay deferred consideration inrespect of historic acquisitions of HSL and SCL in Dubai and to fund the Group'santicipated future operating losses and general working capital requirements. At an Extraordinary General Meeting of the Company held on 14 January 2005, allresolutions necessary to approve the Placing and Open Offer together withcertain other matters were duly passed and dealings in the new shares issuedcommenced on 19 January 2005. As a result of the Placing and Open Offer, theGroup raised net proceeds of approximately £5.6 million. Acquisition of Subsidiary UndertakingsOn 14 January 2005, the Group completed the acquisition of Dubai MedicalLaboratories ("DML") and Specialised Clinical Laboratories ("SCL"). Theacquisitions were made by two newly established 100% subsidiaries DML FZ LLC andSCL FZ LLC respectively. These subsidiaries entered into civil partnershipagreements with the existing laboratory owners to effectively acquire 80% (DML)and 100% (SCL) of the existing laboratory businesses. Each of the acquisitionswas deemed as having gone unconditional on 14 January 2005. Cash considerationtotaling £2.0 million was paid to the owners of DML and SCL at that time and,together with related legal and professional costs (£292,000) has been shownwithin Prepayments (part of Debtors) in the consolidated Group balance sheet at31 December 2004. Dubai Medical Laboratories ("DML") DML FZ LLC acquired an 80% shareholding in DML, a clinical analytical anddiagnostic services laboratory which operates as a civil partnership in theEmirate of Dubai. DML FZ LLC acquired the 80% holding in DML for totalconsideration of approximately £1.7 million. The total purchase considerationcan be broken down as cash of £1.2 million and 3,887,853 new ordinary shares inMedical Solutions plc, with an aggregate value of £267,000. The Group incurredlegal and professional costs of £250,000 in connection with the acquisition ofDML. At the date of acquisition, DML had net assets of £72,000. Specialised Clinical Laboratories ("SCL")SCL FZ LLC acquired 100% of SCL, a provider of specialised investigations,routine tests and other clinical laboratory services. SCL operates as a civilpartnership registered in the Emirate of Dubai. SCL FZ LLC acquired a 100%holding in SCL for total consideration of approximately £1.1 million. The totalpurchase consideration can be broken down as cash of £0.8 million and 3,575,730new ordinary shares with an aggregate value of £246,000. The Group incurredlegal and professional costs of £42,000 in connection with the acquisition ofSCL. At the date of acquisition, SCL had net assets of £18,000. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
SBS.L