5th Sep 2006 07:00
Dechra Pharmaceuticals PLC05 September 2006 Issued by Citigate Dewe Rogerson Ltd, BirminghamDate: Tuesday 5th September 2006 Embargoed: 7.00am Dechra Pharmaceuticals PLC Preliminary Results for the year ended 30 June 2006 Year Ended Year Ended June 2006 June 2005 Revenue £232.5m £210.3m +10.6% Operating profit £12.3m £11.3m +9.4% Profit before taxation £11.0m £9.7m +13.8% Cash generated from operations £14.0m £13.5m +3.3% Earnings per share Basic 14.71p 13.77p +6.8% Diluted 14.36p 13.54p +6.1% Dividend Final 4.33p 3.50p +23.7% Total 6.24p 5.20p +20.0% Clinical trial work required to obtain regulatory approval for VetorylR)Capsules and Felimazole(R) Tablets in the USA is progressing in linewith expectations and is expected to be completed prior to the end of 2007 14% pre-tax profit growth after product development expenditure increaseof 30.9% Cash conversion rate at 114% of operating profit Total dividend for the year increased by 20% "Current trading remains in line with management expectations and we continue tomaintain confidence in the future. We have an increasing number of opportunitiesto market and exploit our own-developed branded veterinary products on a globalbasis, and also to further extend our strong position within our Servicesbusinesses." Michael Redmond, Chairman FULL STATEMENT ATTACHED Enquiries:Ian Page, Chief Executive Fiona Tooley, DirectorSimon Evans, Group Finance Director Katie Dale, Senior Account ManagerDechra(R) Pharmaceuticals PLC Citigate Dewe RogersonToday: 0207 638 9571 Today: 0207 638 9571Mobile: 07775 642222 (IP) or 07775 642220 (SE) Mobile: 07785 703523 (FMT) or 07770 788 624Thereafter: 01782 771100 Thereafter: 0121 455 8370www.dechra.com -2- Dechra Pharmaceuticals PLC Preliminary Results for the year ended 30 June 2006 STATEMENT BY THE CHAIRMAN, MICHAEL REDMOND Introduction I am pleased to report that we continue to make solid progress across the Group.This is reflected in the positive performance by our Pharmaceuticals andServices Divisions, both of which achieved strong revenue growth andimprovements in profitability. Overall, our strategic focus firmly remains the on-going development of theGroup's own branded veterinary pharmaceutical portfolio for the world'scompanion animal markets. Financial Highlights These are the first set of full year results to be presented using InternationalFinancial Reporting Standards ("IFRS"). The comparative figures for the yearended 30 June 2005 have been restated accordingly. Group revenue increased 10.6% from £210.3 million to £232.5 million. Operating profit increased by 9.4% to £12.3 million (2005: £11.3 million) andprofit before taxation rose 13.8% to £11.0 million (2005: £9.7 million). Basic earnings per share was 14.71 pence, up 6.8% from the 13.77 pence achievedin 2005. Cash flow continued to be strong with cash flow from operations being 114% ofoperating profit. As at 30 June 2006, the Group had net funds of £1.1 millioncompared to net debt of £4.9 million at 30 June 2005. Interest cover was 9.7 times. Capital expenditure during the year totalled £2.2 million which principallycomprised IT upgrades at our distribution and manufacturing businesses and anexpansion of capacity at our distribution business. Dividend In line with our progressive dividend policy and our confidence in the business,the Directors are recommending a 23.7% increase in the final dividend to 4.33pence per share (2005: 3.50 pence per share). This, together with the interimdividend of 1.91 pence per share (2005: 1.70 pence per share), makes a totaldividend for the year of 6.24 pence per share (2005: 5.20 pence per share), a20% increase. Total dividend cover is 2.3 times profit after taxation. The final dividend, which is subject to Shareholder approval at our AnnualGeneral Meeting to be held on Wednesday 18 October 2006, will be paid on 24November 2006 to Shareholders on the Register at 27 October 2006. People On behalf of the Board and all our Shareholders, I warmly welcome all staff whojoined us during the year and I would like to take this opportunity to thank allof our people for the tireless hard work, focus and commitment to the business. continued... -3- Prospects Current trading remains in line with management expectations and we continue tomaintain confidence in the future. We have an increasing number of opportunitiesto market and exploit our own-developed branded veterinary products on a globalbasis, and also to further extend our strong position within our Servicesbusinesses. Following the launch of Vetoryl(R) Capsules by our European Marketing Partner inFrance, Germany and the Benelux countries, we expect to see a reasonablecontribution in 2007 towards revenues. The clinical trial work required to obtain regulatory approval for Vetoryl(R)Capsules and Felimazole(R) Tablets in the USA is progressing in line with ourexpectations and these trials are expected to be completed prior to the end of2007. -4- Dechra Pharmaceuticals PLC Preliminary Results for the year ended 30 June 2006 Please note the following Business and Financial Reviews are excerpts taken fromthe complete Directors Review which can be found at www.dechra.com and will becontained in the Report & Accounts due to be published shortly. BUSINESS REVIEW The Business Dechra Pharmaceuticals PLC ("Dechra") comprises six businesses operating undertwo divisions, Pharmaceuticals and Services. Both divisions are focused on theveterinary market with a key area of specialisation being on companion animalproducts. The Group's main focus is delivering organic growth from its two divisions;however, the key strategy to deliver medium to long-term growth is thedevelopment of our own branded veterinary pharmaceutical products for licensinginternationally. Dechra employs 698 people who operate out of 16 locations. Product Development Achievements During the last five years we have licensed four specialist products of whichVetoryl(R) Capsules and Felimazole(R) Tablets currently represent our biggestopportunities for international growth. Vetoryl(R) is a novel and patented product for the treatment of Cushing'sDisease (excess cortisol or hyperadrenocorticism) in dogs. It is the onlylicensed product within the EU and is the only recognised safe and efficaciousproduct for the treatment of Cushing's Disease around the world. Launched in theUK on a provisional marketing authorisation in September 2001, Vetoryl(R) hasbeen well received by veterinarians, with revenue now in excess of £2.9 millionper year. It achieved mutual recognition for approval within Europe in 2005 andwas recently launched within the key European territories. Felimazole(R) is the first veterinary licensed product for the treatment offeline hyperthyroidism. Felimazole(R) received marketing approval in 2002 andhas achieved revenues in excess of £2.4 million in the financial year.Felimazole(R) was launched into most major EU territories during the 2005financial year. Both Vetoryl(R) and Felimazole(R) have been granted an expedited review statusby the FDA in the USA. The principal advantage to an expedited review is thatthere is a target 90-day response from submission of information. To date, we have submitted the safety and UK based efficacy parts of thedossiers; in both instances clear guidance has been provided by the FDA onrequirements for further USA-based clinical trial work. In the USA, the varioussections of the dossier can be submitted independently, i.e. when one section iscomplete it can be sent for review as opposed to the whole application beingmade concurrently. We anticipate filing our manufacturing sections by the end ofthis 2006 calendar year and the efficacy sections, containing data from theUSA-based clinical trials, during the 2007 calendar year. continued... -5- Development Update There have been a number of achievements within our development programmethroughout the financial year: - - Vetoryl(R) Capsules have received approval for marketing in 19 major European territories. This is a major achievement for our Regulatory team and is now the third product we have successfully licensed throughout key European markets following the approval of Felimazole(R) last year and Hypercard in 2003; - Our protocols for Vetoryl(R) clinical trials within the USA have been approved by the FDA and trials have commenced in several dogs with new cases being identified daily. We anticipate completing the trials on schedule prior to the end of the 2007 calendar year; - Clinical trials for Felimazole(R) are also progressing well within the USA. A significant number of cats have now commenced the trial and, as with Vetoryl(R), we anticipate the trials to be completed prior to the end of the 2007 calendar year; - After twelve months' negotiations of both a technical and commercial nature, we have signed a marketing agreement for Vetoryl(R) in Japan with Kyoritsu Seiyaku ("KS"). KS are Japan's leading companion animal pharmaceutical supplier and have over sixty representatives marketing to veterinary practices. The Japanese Regulators will require clinical trials to be conducted in Japan. These will be the responsibility of KS and it is anticipated that it will be at least three years to gain approval in this significant territory; - Complete dossiers have been submitted for Vetoryl(R) to the Canadian and Australian authorities. The complete Felimazole(R) dossier has been submitted in Canada. We estimate that the review process in these territories will take two to three years prior to marketing authorisations being approved; - A new 10mg small dog Vetoryl(R) Capsule is at an advanced stage of development for all markets, with approval anticipated for Europe within the next twelve months. The USA approval is expected to be concurrent with the full application; - Further investment has also been made into our pharmaceutical development laboratory in terms of equipment and people, as we continually strengthen our in-house product development formulation capabilities. We currently have a number of other products under development; due tocommercial sensitivity we believe it to be appropriate to treat the nature ofthese projects as confidential. Pharmaceuticals Division Our Pharmaceuticals Division comprises Dechra Veterinary Products ("DVP UK"),Dechra Veterinary Products USA ("DVP USA"), Arnolds Veterinary Products("Arnolds(R)") and Dales Pharmaceuticals ("Dales"). DVP UK As outlined in the Financial Review in this release, DVP had a very successfulyear. Felimazole(R) revenue increased by 34%, predominantly as a result of theintroduction of the new 2.5mg product presentation which was launched last year.It is estimated that over 50,000 cats are now being treated with Felimazole(R)daily. Vetoryl(R)'s market penetration has also increased with over 2,100 of theUK's 3,500 veterinary practices now prescribing Vetoryl(R). The reduction in thepack size from a pot of 100 capsules to blister packs of 30 had a temporarydepressive effect on UK revenue in the year as the number of capsules in thesupply chain was reduced. This has now reversed out and solid growth is beingdelivered. The marketing department has been strengthened and restructuredduring the year with greater accountability being given to the marketingmanagers, with individual product categories being assigned to specific teams.Our business in Eire has been restructured and we have taken on direct salesresponsibility with the appointment of a Business Development Manager for theterritory. We have also strengthened our management team with the appointment ofa European account manager to develop our relationship with our marketingpartners and drive sales of our products within Europe. continued... -6- DVP US As outlined under Product Development, both Vetoryl(R) and Felimazole(R) are atan advanced stage of the licensing process, with full submissions being targetedto be completed by the end of 2007. The Directors consider that the US marketrepresents the biggest single opportunity for our own international expansion.We believe that to gain full value from our products, the best route to marketwill be to create a Dechra brand within the USA. In order to achieve this, wecurrently market one minor product with the intention of establishing the Dechrabrand, developing distributor relationships, creating a customer database andestablishing accounting and logistics systems prior to the approval of our ownkey products. It is our intention to distribute our products through theexisting network of veterinary suppliers within the USA, who also provide firstline sales support. Our American function will be structured predominantlyaround marketing and technical support, with a team of up to 12 people beingemployed to coincide with the launch of our first major product. Due to theunique nature of Vetoryl(R) and Felimazole(R) the products will be sold on atechnical basis, i.e. education of veterinary surgeons and opinion leaders whichis achieved through technical marketing, sponsoring congress lectures, andthrough conducting regional educational roadshows. Pre-marketing has alreadycommenced; the majority of world opinion leaders now understand and support thebenefits of our products. Arnolds(R) Arnolds is a well-established brand within the UK veterinary market and sellslicensed critical care fluids, instruments, consumables and equipment toveterinary practices. Critical care products, branded Vetivex, drive the growthwithin Arnolds(R). The revenue from instruments and surgery equipment isdifficult to maintain given the low barriers to entry, cheap unregulated importsand the increasing number of small business entrants. The majority of productsare branded "Arnolds", however, we do have a number of important long-termmarketing agreements which include 3M, B Braun and Portex (Smiths Medical). Throughout the year we have continued to build on the Vetivex range of criticalcare fluids which were purchased from Gambro BCT in April 2005. We haveincreased market share by 4% to 37.5% on a moving annual total basis and saleshave now exceeded £1.2 million per annum. Many of our disposable products, whichare associated with critical care, have also been branded Vetivex to leveragebrand strength. Dales Throughout the year, we have continued to strengthen our technical departmentwith further appointments being made within the Quality Assurance and QualityControl departments. We have successfully introduced a new Quality ManagementSystem, which provides the framework for anticipated future worldwide compliancerequirements and is the basis for continual improvement. The improvement in thebusiness has already been witnessed within the year as, despite theseappointments, the overall headcount has reduced due to increased efficiency andinvestment in new equipment. The Dales management are at an advanced stage ofimplementing a new integrated IT system, which is expected to go live prior tothe end of 2006. Services Division Our Services Division comprises National Veterinary Services ("NVS(R)"),NationWide Laboratories ("NWL") and Cambridge Specialist Laboratory Services("CSLS"). NVS(R) NVS services companion animal practices, livestock practices and agriculturalmerchants, with approximately 60% of sales being in favour of companion animalrelated products. continued... -7- The wholesale market in which NVS trades saw a major consolidation within theyear with the acquisition of GenusXpress by Dunlops. There are now only twomajor full-line competitors to NVS within the mainland UK, the other businessbeing Centaur Services. NVS saw good growth within the year and market share gains, which now stands at44%. NVS launched a new IT solution, Vpod, in February 2006, a hand-held,stand-alone, electronic, on-line ordering device. To date, 100 have beeninstalled as veterinary practices recognise the benefits of this system tomaintain optimum stock levels and the flexibility to place orders at any time ofday. Over the last five years, NVS have been investing in automation within thewarehouse. This has continued during this financial year with an investment inexcess of £700,000. This investment increases our capacity and provides improvedoperational efficiencies. The warehouse has been extended with a new 16,000 sq.ft. mezzanine floor and significant improvements and extensions have been madeto the semi-automated picking circuit. There have been two major management changes at NVS within the year. MartinRiley was appointed as Managing Director and Caitrina Harrison as Sales andMarketing Director. Laboratories The laboratories management team, established over the last two years, has begunto realise benefits from the changes they have implemented. New account gainshave been good and new services have been introduced. Allervet, a pet allergytesting programme introduced last year, has exceeded expectations. We are alsostarting to build on the microbiology laboratory at NWL by providing servicesfor food quality testing. This is a potentially large market and offers goodgrowth opportunities. -8- Dechra Pharmaceuticals PLC Preliminary Results for the year ended 30 June 2006 FINANCIAL REVIEW Review of Operating Performance Group Performance The Group achieved revenue growth of 10.6% for the year whilst operating profitgrew by 9.4%. This was despite the start up losses incurred by our US operationand a 30.9% increase in product development expenditure. Operating profit beforethese costs increased by 11.7% compared to last year. The Group achieved a pre-tax profit of £11.0 million, an improvement of 13.8%compared to last year. Pre-tax profit before product development and USA costsincreased by 15.9%. The results are reviewed in more detail on a divisional basis below: Pharmaceuticals Division 2006 2005 £'000 £'000Revenue Own branded pharmaceuticals 12,316 10,915 Instruments, consumables, critical care and equipment 5,127 4,436 Third party contract manufacturing 5,809 6,030 ---------- ---------- 23,252 21,381 ========== ==========Operating profit 4,868 4,292 ========== ========== Revenue from own branded pharmaceuticals continued to show strong growth,achieving a 12.8% increase over the previous year. As already emphasised, thedevelopment of this area of the business is the key strategic driver to longterm growth. Most of the increase this year came from our key products Vetoryl(R) Capsulesand Felimazole(R) Tablets. Vetoryl(R) achieved global revenue of £2.90 million,a 35.9% increase on the £2.13 million achieved last year. Felimazole(R)generated global revenue of £2.41 million, a 34.1% increase over last year.During the year, Vetoryl(R) became our largest product measured by globalrevenue with increasing amounts being sold overseas. In May 2006, we made thefirst shipment to our European marketing partner following the approval ofVetoryl(R) within the European Union. We are also selling substantial amountsinto the USA under the FDA waiver scheme for named patients. Our USA operation commenced marketing one small product during the financialyear. Although the revenue generated of £326,000 (US$589,000) was modest, wehave managed to establish the Dechra brand within the USA and establishrelationships with the key distributors that we will work with following thelaunch of Vetoryl(R) and Felimazole(R) into this market. Revenue from instruments, consumables, critical care and equipment increased by15.6% to £5.13 million. This was entirely due to the excellent performance ofthe Vetivex(R) range of critical care fluids that we acquired in April 2005. Therevenue achieved was £1.25 million which, as already noted, was derived from asignificant gain in market share. Revenue from other instruments and consumablescontinued to struggle in the face of low cost competitors and "grey market"imports. continued... -9- Revenue from third party contract manufacturing fell slightly due to the timingof customer delivery requirements. However, continued efficiency improvementsenabled our manufacturing operation to increase operating profit by 14.6%despite the lower revenue. The order book at 30 June 2006 was strong at £2.0million and, subsequent to the year end, a significant new contract has beenagreed. Operating profit for the pharmaceuticals division increased by 13.4% to £4.9million. This was even after a 30.9% increase in product development expense andthe start-up losses incurred by our USA operation. Operating profits beforethese costs improved by 17.6% and reflects the higher margins achieved by ourown branded pharmaceuticals and increased efficiency at our Dales manufacturingoperation. Services Division 2006 2005 £'000 £'000Revenue Veterinary wholesaling 210,940 190,634 Vetcom 819 785 Laboratories 3,797 3,192 ---------- ---------- 215,556 194,611 ========== ==========Operating profit 8,681 7,973 ========== ========== Revenue from veterinary wholesaling increased by 10.7% to £210.9 million. Thiscompared to market growth as measured by GfK, an independent market analyst, of5.3% for the same period. Revenue was boosted by NVS gaining, towards the end ofthe 2005 financial year, a number of veterinary practice accounts who had joinedtogether as a buying and marketing group. Other account gains were also madeduring the year. Following the Competition Commission review of the veterinary market in 2003,the agricultural market was opened up to us. Revenue from sales to agriculturalmerchants reached nearly £2.6 million for the year, an increase of 17.1% over2005. Revenue from our various IT products, branded Vetcom, increased by 4.3%. Our laboratories had an excellent year, achieving revenue growth of 19.0%. Thisreflected new veterinary practice account gains following a concerted sales andmarketing effort and the introduction of new services such as Allervet, our petand equine allergy testing programme. The overall veterinary wholesaling market continues to be competitive withupward pressure on discounts allowed to our customers. We largely negated thisby further operational efficiencies and improvement of our gross margin. Thedivision did, however, see a small reduction in operating margin from 4.10% to4.03%. The Services Division has always been a strong cash generator and this providesthe Group with the financial resources to invest in the development of our ownbranded pharmaceuticals. Unallocated Central Costs These costs comprise the charge in respect of share-based payments under IFRS2,Non-Executive Director fees and corporate legal, taxation and advisory fees. Central costs for the year increased from £1.0 million to £1.24 million. Theprincipal reason for the increase was a rise in the charge for share-basedpayments (including national insurance) from £398,000 to £515,000. continued... -10- Net Finance Expense The net finance expense reduced by 18.4% to £1.27 million. This was due to thestrong cash flow achieved during the year. The net finance expense was covered ahealthy 9.7 times by operating profit (2005: 7.2 times). Taxation The effective tax rate this year was 31.6% compared to 27.6% last year. The ratethis year was higher than the standard rate of 30% because of the losses of ourUSA subsidiary for which no tax asset has been recognised and expense items notdeductible for tax purposes. A full reconciliation to the standard rate is shownin note 5 to the financial statements. During the year, additional tax credits totalling £429,000 relating toshare-based payments were recognised. However, under IFRS rules, these had to betaken directly to equity rather than credited to the income statement. The 2005 tax rate was less than 30% due to tax relief on goodwill payments thathad not been previously recognised. Earnings Per Share and Dividend Earnings per share increased by 6.8% over last year. The lower rate of growthwhen compared to pre-tax profit was due to the higher tax charge. The Board is proposing a final dividend of 4.33p per share (2005: 3.50p) which,when added to the interim dividend of 1.91p (2005: 1.70p) already paid, gives atotal dividend for the year of 6.24p (2005: 5.20p). The 20% increase over last year reflects the strong cash flow performance of theGroup and the Board's confidence in the future. Cash Flow The Group aims to achieve a cash conversion rate of at least 100% (defined ascash generated from operations as a percentage of operating profit). This year,a cash conversion rate of 114% (2005: 120%) was achieved. Total capital investment during the year was £2.16 million (2005: £2.43million). The major items were upgrades to our IT systems at NVS and Dales andan expansion of our central warehouse capacity at NVS. This figure also includes£195,000 (2005: £321,000) of development costs that met the criteria forcapitalisation. Financial Position at the End of the Year 2006 2005 £'000 £'000Non-current assets Intangible assets 7,527 7,039 Property, plant & equipment 5,595 4,946 Deferred tax assets 445 406 ---------- ---------- 13,567 12,391 Working capital 11,774 12,127 Current tax liability (2,505) (2,057) Net cash/(borrowings) 1,079 (4,859) ---------- ----------Net assets 23,915 17,602 ========== ========== continued... -11- The financial position at the end of the year was strong with equityshareholders funds standing at £23.9 million. This compares with just £1 millionat 30 June 2001, our first year end following the listing of our shares on theLondon Stock Exchange. The increase in non-current assets is due to the investments detailed abovewhilst the reduction in working capital reflects further improvements inreceivables days. During the year there was a drive to convert customers of ourlargest business, NVS, to pay by direct debit. It is pleasing to report that1,250 accounts are now paying by this means. The strong cash flow during the year converted net borrowings of £4.9 million at30 June 2005 to net funds of £1.1 million at 30 June 2006. Shareholders will beaware that the working capital requirements of the Group vary both intra-monthand during the course of the year, reaching their peak in the period December -February. The Group will therefore return to a net borrowings situation at thenext reporting date of 31 December 2006. Group Funding The Group is funded by £28.2 million of called up share capital, a £17.2 millionterm loan from Bank of Scotland repayable in instalments ending in 2010 andvarious finance lease and hire purchase contracts. The Group also has available a £5 million revolving credit facility committeduntil 2010 and a £4 million overdraft facility renewable annually to fund theGroup's working capital requirements. These are only partially utilised at peakworking capital points during the year. -12- Consolidated Income Statement for the year ended 30 June 2006 Year ended 30 June Note 2006 2005 £'000 £'000 Revenue 2 232,471 210,267Cost of sales (199,205) (180,550) ------------ ------------Gross profit 33,266 29,717 Distribution costs (10,309) (9,073) Administrative expenses (10,645) (9,389) ------------ ------------ Operating profit 2 12,312 11,255 Finance income 3 725 355 Finance expense 4 (1,993) (1,909) ------------ ------------ Profit before taxation 11,044 9,701 Income tax expense 5 (3,487) (2,674) ------------ ------------Profit for the year attributable to equityholders 7,557 7,027of the parent ============ ============ Earnings per share (pence) Basic 7 14.71p 13.77p ============ ============ Diluted 7 14.36p 13.54p ============ ============Dividend per share (interim paid and finalproposed 6 6.24p 5.20pfor the year) ============ ============ -13- Consolidated Balance Sheet At 30 June 2006 As at 30 June Note 2006 2005 £'000 £'000ASSETS Non-Current AssetsIntangible assets 8 7,527 7,039Property, plant & equipment 9 5,595 4,946Deferred tax assets 10 445 406 ------------ ------------Total non-current assets 13,567 12,391 ============ ============Current AssetsInventories 11 21,957 20,390Trade and other receivables 12 35,347 33,708Cash and cash equivalents 13 19,738 13,924 ------------ ------------Total current assets 77,042 68,022 ============ ============Total assets 90,609 80,413 ============ ============ LIABILITIESCurrent LiabilitiesBorrowings 16 (3,417) (1,502)Trade and other payables 14 (45,530) (41,971)Current tax liabilities 15 (2,505) (2,057) ------------ ------------Total current liabilities (51,452) (45,530) ============ ============ Non-Current LiabilitiesBorrowings 16 (15,242) (17,281) ------------ ------------Total non-current liabilities (15,242) (17,281) ============ ============Total liabilities (66,694) (62,811) ============ ============Net assets 23,915 17,602 ============ ============EQUITYIssued share capital 17 519 511Share premium account 27,693 26,953Hedging reserve (71) -Merger reserve 1,720 1,720Retained earnings (5,946) (11,582) ------------ ------------Total equity attributable to equity holders ofthe 23,915 17,602parent ============ ============ -14- Consolidated Statement of Changes in Shareholders' Equity for the year ended 30 June 2006 Issued Share Hedging Merger Retained Total Share Premium Reserve Reserve Earnings Capital Account £'000 £'000 £'000 £'000 £'000 £'000 Year ended 30 June 2005 At 1 July 2004 510 26,784 - 1,720 (17,012) 12,002 Profit for theperiodbeing total - - - - 7,027 7,027recognised incomeandexpense for theperiod Dividends paid - - - - (2,473) (2,473) Share-based paymentsincluding deferredtax - - - - 876 876 Shares issued 1 169 - - - 170 ------- ------- ------- ------- ------- ------- At 30 June 2005 511 26,953 - 1,720 (11,582) 17,602 ======= ======= ======= ======= ======= ======= Year ended 30 June 2006 At 1 July 2005 aspreviously stated 511 26,953 - 1,720 (11,582) 17,602 Impact of adoptionofIAS32 and IAS39 on 1 - - (71) - - (71)July 2005 ------- ------- ------- ------- ------- ------- At 1 July 2005 -re-stated 511 26,953 (71) 1,720 (11,582) 17,531 Profit for theperiodbeing total - - - - 7,557 7,557recognised incomeandexpense for theperiod Dividends paid - - - - (2,777) (2,777) Share-based paymentsincluding currentand - - - - 856 856deferredtax Shares issued 8 740 - - - 748 ------- ------- ------- ------- ------- -------At 30 June 2006 519 27,693 (71) 1,720 (5,946) 23,915 ======= ======= ======= ======= ======= ======= -15- Consolidated Statement of Cash Flows for the year ended 30 June 2006 Year ended 30 June Note 2006 2005 £'000 £'000 Cash flows from operating activitiesProfit for the period 7,557 7,027 Adjustments for:Depreciation 886 902Amortisation 136 74Gain on sale of property, plant and equipment (23) (42)Finance income (725) (355)Finance expense 1,993 1,909Equity-settled share-based payment expenses 427 488Income tax expense 3,487 2,674 ------------ ------------ Operating cash flow before changes in working 13,738 12,677capitalIncrease in inventories (1,567) (3,411)Increase in trade and other receivables (1,736) (787)Increase in trade and other payables 3,562 5,070 ------------ ------------Cash generated from operations 13,997 13,549Interest paid (1,890) (2,022)Income taxes paid (2,618) (1,996) ------------ ------------ Net cash from operating activities 9,489 9,531 Cash flows from investing activitiesProceeds from sale of property, plant and equipment 23 140Interest received 672 355Purchase of property, plant and equipment (1,320) (644)Capitalised development expenditure (195) (321)Purchase of other intangible fixed assets - (1,100) ------------ ------------Net cash from investing activities (820) (1,570) Cash flows from financing activitiesProceeds from the issue of share capital 780 138New borrowings 705 13,160Repayment of borrowings (1,582) (1,538)Dividends paid (2,777) (2,473) ----------- -------------Net cash from financing activities (2,874) 9,287 Net increase in cash and cash equivalents 5,795 17,248 Cash and cash equivalents at start of period 13,924 (3,324) ------------ ------------Cash and cash equivalents at end of period 19,719 13,924 ============ ============Shown as:Cash and cash equivalents 19,738 13,924Bank overdraft (19) - ------------ ------------ 19,719 13,924 ============ ============ Reconciliation of net cash to movement in netborrowingsNet increase in cash and cash equivalents 5,795 17,248Repayment of borrowings 1,582 1,538New borrowings (705) (13,160)New finance leases (649) (438)Other non-cash changes (85) 63 ------------ ------------Movement in net borrowings in the period 5,938 5,251Net borrowings at start of period (4,859) (10,110) ------------ ------------Net cash/(borrowings) at end of period 19 1,079 (4,859) ============ ============ -16- Notes to the Financial Statements For the year ended 30 June 2006 1. Status of AccountsThe financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) as adopted by the European Union ("adoptedIFRS") for the first time. These financial statements have also been prepared inaccordance with the Companies Act 1985. The Group previously prepared its annual and interim consolidated financialstatements under UK Generally Accepted Accounting Principles (UK GAAP). As partof the transition to IFRS, announced on 19 October 2005, Dechra published therestatement of comparative financial information under IFRS for the year ended30 June 2005. This is available from the Company's website at www.dechra.com. The Board of Directors approved the preliminary announcement on 5 September2006. 2. Segmental AnalysisThe Group's primary reporting segment is business divisions which correspondwith the way the operating businesses are organised and managed within the Groupand its secondary segment is geographical origin. Segment results, assets and liabilities comprise those items directlyattributable to particular segments as well as items which can reasonably beallocated to those segments. Inter-segment transactions are entered intoapplying normal commercial terms that would be available to third parties. Unallocated items comprise mainly corporate assets, expenses, loans andborrowings together with the elimination of inter-segment transactions. The composition of the segments is detailed in the Business Review section ofthis announcement. BUSINESS Pharmaceuticals Services Unallocated TotalSEGMENT 2006 2005 2006 2005 2006 2005 2006 2005 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 RevenueExternalcustomers 17,001 15,783 215,470 194,484 - - 232,471 210,267Inter-segment 6,251 5,598 86 127 (6,337) (5,725) - - ------- ------- ------- ------- ------ ------- ------ -------Total revenue 23,252 21,381 215,556 194,611 (6,337) (5,725) 232,471 210,267 ======= ======= ======= ======= ====== ======= ====== =======Operatingprofit 4,868 4,292 8,681 7,973 (1,237) (1,010) 12,312 11,255 ======= ======= ======= ======= ====== =======Finance income 725 355Financeexpense (1,993) (1,909) ------ -------Profit beforetaxation 11,044 9,701 Income taxexpense (3,487) (2,674) ------ ------- Profit for theyear 7,557 7,027 ====== =======AssetsIntangibleassets 5,104 4,630 2,423 2,409 - - 7,527 7,039 Property,plant andequipment 3,571 3,590 2,024 1,356 - - 5,595 4,946 Other assets 11,071 9,460 64,235 57,058 2,181 1,910 77,487 68,428 ------- ------- ------- ------- ------ ------- ------ -------Total assets 19,746 17,680 68,682 60,823 2,181 1,910 90,609 80,413 ======= ======= ======= ======= ====== ======= ====== ======= LiabilitiesBorrowings (508) (33) (1,056) (340) (17,095) (18,410) (18,659) (18,783)Otherliabilities (3,026) (3,842) (41,965) (37,964) (3,044) (2,222) (48,035) (44,028) ------- ------- ------- ------- ------ ------- ------ -------Totalliabilities (3,534) (3,875) (43,021) (38,304) (20,139) (20,632) (66,694) (62,811) ======= ======= ======= ======= ====== ======= ====== =======Netassets/(liabilities) 16,212 13,805 25,661 22,519 (17,958) (18,722) 23,915 17,602 ======= ======= ======= ======= ====== ======= ====== ======= Other Segment ItemsCapitalexpenditure- intangibleassets 552 1,421 72 288 - - 624 1,709 - property,plant andequipment 469 341 1,066 381 - - 1,535 722 ------- ------- ------- ------- ------ ------- ------ -------Total capitalexpenditure 1,021 1,762 1,138 669 - - 2,159 2,431 ======= ======= ======= ======= ====== ======= ====== =======Share-basedpaymentscharge - - - - 515 398 515 398 ======= ======= ======= ======= ====== ======= ====== =======Depreciationandamortisation 566 490 456 486 - - 1,022 976 ======= ======= ======= ======= ====== ======= ====== ======= continued... -17- GEOGRAPHICAL SEGMENTIn presenting information on the basis of geographical segments, IAS14 'SegmentReporting' requires segment revenues to be based on the geographical location ofcustomers. In this respect, £228,191,000 arises from customers in the UK (2005:£207,173,000) and £4,280,000 from customers in the rest of the world (2005:£3,094,000). The table below gives additional information in respect of segmentrevenue and segment operating profit based on the geographical location of thebusiness unit supplying the goods or services. Segment assets and capitalexpenditure are based on the geographical location of the assets andexpenditure. Activities in the UK comprise all operating segments. Overseasoperations comprise pharmaceuticals only. UK USA Unallocated Total 2006 2005 2006 2005 2006 2005 2006 2005 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000Revenue bygeographicorigin 232,145 210,267 326 - - - 232,471 210,267 ======= ======= ======= ======= ====== ======= ====== =======Operatingprofit 13,809 12,450 (260) (185) (1,237) (1,010) 12,312 11,255 ======= ======= ======= ======= ====== ======= ====== =======Total 88,190 78,453 238 50 2,181 1,910 90,609 80,413assets ======= ======= ======= ======= ====== ======= ====== ======= Capitalexpenditure- intangibleassets 624 1,709 - - - - 624 1,709 - property,plant andequipment 1,532 709 3 13 - - 1,535 722 ------- ------- ------- ------- ------ ------- ------ -------Total capitalexpenditure 2,156 2,418 3 13 - - 2,159 2,431 ======= ======= ======= ======= ====== ======= ====== ======= 3. Finance Income 2006 2005 £'000 £'000 Bank interest receivable 627 355Other interest receivable 52 -Fair value gains on derivative financial instruments 46 - --------- ---------Total finance income 725 355 ========= ========= 4. Finance Expense 2006 2005 £'000 £'000 Bank loans and overdrafts 1,913 1,877Finance charges payable on finance leases and hire purchasecontracts 64 32Fair value losses on derivative financial instruments 16 - --------- ---------Total finance expense 1,993 1,909 ========= ========= 5. Income Tax Expense 2006 2005 £'000 £'000 Current - charge for current year 3,491 3,001tax - adjustment in respect of prior years (58) (233) --------- ----------Total currenttax expense 3,433 2,768 --------- ---------- Deferred - origination and reversal of temporary 4 (37)tax differences - adjustment in respect of prior years 50 (57) --------- ----------Total deferredtax expense 54 (94) --------- ---------- --------- ----------Total incometax expense inthe incomestatement 3,487 2,674 ========= ========== All taxation is in the United Kingdom. continued... -18- The tax on the Group's profit before tax differs from the standard rate of UKcorporation tax of 30% (2005: 30%). The differences are explained below: 2006 2005 £'000 £'000 Profit before taxation 11,044 9,701 ========= ==========Tax at 30% 3,313 2,910Effect of:- depreciation on assets not eligible for tax allowances 27 22- disallowable expenses 33 2- overseas trading losses 78 30- under-recovery of deferred tax on share-based payments 44 -- adjustments in respect of prior years (8) (290) --------- ----------Total income tax expense 3,487 2,674 ========= ========== Additional current tax credits of £367,000 (2005: £nil) and deferred tax creditsof £62,000 (2005: £388,000) have been recognised directly in equity. 6. Dividends 2006 2005 £'000 £'000Final dividend paid in respect of prior year but notrecognised as a liability in 1,794 1,606that year 3.50p per share (2005: 3.15p) Interim dividend paid 1.91p per share (2005: 1.70p) 983 867 --------- ----------Total dividend 5.41p per share (2005: 4.85p) recognised asdistributions to 2,777 2,473equity holders in the period ========= ==========Proposed final dividend for the year ended 30 June 20064.33p 2,248 1,789per share(2005: 3.50p) ========= ==========Total dividend paid and proposed for the year ended 30 June2006 6.24p 3,231 2,656per share (2005: 5.20p) ========= ========== In accordance with IAS10 'Events After the Balance Sheet Date', the proposedfinal dividend for the year ended 30 June 2006 has not been accrued for in thesefinancial statements. It will be shown as a deduction from equity in thefinancial statements for the year ending 30 June 2007. The proposed final dividend for the year ended 30 June 2005 is shown as adeduction from equity in the year ended 30 June 2006. continued... -19- 7. Earnings per ShareEarnings per ordinary share have been calculated by dividing the profitattributable to equity holders of the parent after taxation for each financialperiod by the weighted average number of ordinary shares in issue during theperiod. 2006 2005 Pence Pence Basic earnings per share 14.71 13.77 ========= ==========Diluted earnings per share 14.36 13.54 ========= ========== The calculation of basic and diluted earnings pershare is based upon: £'000 £'000Earnings for basic and diluted earnings per sharecalculations 7,557 7,027 ========= ========== No. No.Weighted average number of ordinary shares for basicearnings per share 51,385,648 51,022,645 Impact of share options 1,227,342 879,018 --------- ----------Weighted average number of ordinary shares fordiluted earnings per share 52,612,990 51,901,663 ========= ========== 8. Intangible Assets Goodwill Software Development Patent Product Marketing Total Costs Rights Rights Authorisations £'000 £'000 £'000 £'000 £'000 £'000 £'000 COSTAt 1 July 2004 4,385 - 310 789 - - 5,484 Additions - 288 321 - 278 822 1,709 -------- -------- ---------- ------- ------- ----------- ------ At 30 June2005 and 1July 2005 4,385 288 631 789 278 822 7,193 Additions - 429 195 - - - 624 -------- -------- ---------- ------- ------- ----------- ------At 30 June2006 4,385 717 826 789 278 822 7,817 ======== ======== ========== ======= ======= =========== ====== AMORTISATIONAt 1 July 2004 - - 80 - - - 80Charge for theyear - 33 41 - - - 74 -------- -------- ---------- -------- -------- ----------- -------At 30 June2005 and 1July 2005 - 33 121 - - - 154 Charge for theyear - 58 60 - 18 - 136 -------- -------- ---------- -------- -------- ----------- ------- At 30 June2006 - 91 181 - 18 - 290 ======== ======== ========== ======== ======== =========== ======= NET BOOKVALUEAt 30 June2006 4,385 626 645 789 260 822 7,527 ======== ======== ========== ======== ======== =========== ========At 30 June2005 and 1July 2005 4,385 255 510 789 278 822 7,039 ======== ======== ========== ======== ======== =========== ======== At 1 July 2004 4,385 - 230 789 - - 5,404 ======== ======== ========== ======== ======== =========== ======== Development costs are internally generated. All other additions to intangibleassets were acquired outside the Group and have been measured at cost at thetime of acquisition. The amortisation charge is recognised within administrative expenses in theincome statement. continued... -20- 9. Property, Plant and Equipment Freehold Short Motor Plant and Total land leasehold vehicles fixtures buildings £'000 £'000 £'000 £'000 £'000 COSTAt 1 July 2004 13 2,627 596 5,960 9,196Additions - 60 - 662 722Disposals - (243) (58) (315) (616) -------- ---------- --------- --------- ---------At 30 June 2005 and 1July 13 2,444 538 6,307 9,3022005 Additions - 157 - 1,378 1,535Disposals - - (105) (185) (290) -------- ---------- --------- --------- ---------At 30 June 2006 13 2,601 433 7,500 10,547 ======== ========== ========= ========= ========= DEPRECIATIONAt 1 July 2004 - 511 541 2,920 3,972Charge for the year - 147 54 701 902Disposals - (243) (58) (217) (518) -------- ---------- --------- --------- ---------At 30 June 2005 and 1July - 415 537 3,404 4,3562005 Charge for the year - 135 1 750 886Disposals - - (105) (185) (290) -------- ---------- --------- --------- ---------At 30 June 2006 - 550 433 3,969 4,952 ======== ========== ========= ========= ========= NET BOOK VALUEAt 30 June 2006 13 2,051 - 3,531 5,595 ======== ========== ========= ========= =========At 30 June 2005 and 1July 13 2,029 1 2,903 4,9462005 ======== ========== ========= ========= ========= At 1 July 2004 13 2,116 55 3,040 5,224 ======== ========== ========= ========= ========= 10. Deferred TaxesRecognised deferred tax assets and liabilities are attributable to thefollowing: Assets Liabilities Net 2006 2005 2006 2005 2006 2005 £'000 £'000 £'000 £'000 £'000 £'000 Intangible assets - - (193) (153) (193) (153)Property, plant and equipment - - (311) (272) (311) (272)Inventories - - - - - -Receivables 98 45 - - 98 45Cash and cash equivalents - - - - - -Borrowings - - - - - -Payables 38 103 - - 38 103Current tax liabilities - - - - - -Share-based payments 813 683 - - 813 683 ------- ------- ------- ------- ------- ------- 949 831 (504) (425) 445 406 ======= ======= ======= ======= ======= ======= On the basis that all deferred income taxes relate to the UK and that there is alegally enforceable right to offset current tax liabilities against current taxassets, deferred income tax assets and liabilities have been offset. 11. Inventories 2006 2005 £'000 £'000Raw materials and consumables 1,443 1,021Work in progress 117 694Finished goods and goods for resale 20,397 18,675 ---------- ----------- 21,957 20,390 ========== =========== continued... -21- 12. Trade and Other Receivables 2006 2005 £'000 £'000 Trade receivables 33,476 31,778Other receivables 1,073 1,112Prepayments and accrued income 798 818 ---------- ----------- 35,347 33,708 ========== =========== Trade receivables are stated after an impairment provision of £2,035,000 (2005:£1,761,000). 13. Cash and Cash Equivalents 2006 2005 £'000 £'000 Cash at bank and in hand 4,552 3,857Short term deposits 15,186 10,067 ---------- ----------- 19,738 13,924 ========== =========== The short term deposits are repayable on demand 14. Trade and Other Payables 2006 2005 £'000 £'000 Trade payables 41,988 38,175Other payables 491 313Other taxation and social security 1,373 1,650Accruals and deferred income 1,678 1,833 ---------- ----------- 45,530 41,971 ========== =========== 15. Current Tax Liabilities 2006 2005 £'000 £'000Corporation tax payable 2,505 2,057 ========== =========== 16. Borrowings 2006 2005 £'000 £'000Current liabilitiesBank loans and overdrafts 3,019 1,400Finance lease obligations 398 102 ---------- ----------- 3,417 1,502Non-current liabilitiesBank loans 14,200 17,200Finance lease obligations 1,147 271Arrangement fees netted off (105) (190) ---------- ----------- 15,242 17,281 ---------- -----------Total borrowings 18,659 18,783 ========== =========== continued... -22- At the year end, the Group had the following unutilised borrowing facilities: 2006 2005 £'000 £'000 Revolving credit facility 5,000 5,000Bank overdraft facility 4,000 4,000 ---------- ----------- 9,000 9,000 ========== =========== The overdraft facility is renewable annually whilst the revolving creditfacility is committed until 30 June 2010. 17. Share Capital Ordinary shares of 1p each 2006 2005 £'000 No. £'000 No.Authorised 750 75,000,000 750 75,000,000 ========== ============ ========== ==========Issued at start of year 511 51,120,964 510 50,977,857New shares issued 8 794,038 1 143,107 ---------- ------------ ---------- ----------At end of year 519 51,915,002 511 51,120,964 ========== ============ ========== ========== During the year, 794,038 new ordinary shares of 1p (2005: 143,107 new ordinaryshares of 1p) were issued following the exercise of options under the Unapprovedand SAYE Share Options Schemes. The consideration received was £748,000 (2005:£170,000). 18. Share-based Payments 2006 2005 £'000 £'000Equity-settled share-based transactionsCash-settled share-based transactions 427 273 88 125 ---------- ----------- 515 398 ========== =========== The above charge to the Income Statement was included within administrativeexpenses. 19. Analysis of Net Cash/(Borrowings) As at As at 30.06.06 30.06.05 £'000 £'000 Bank loans and overdraft (17,114) (18,410)Finance leases and hire purchase contracts (1,545) (373)Cash and cash equivalents 19,738 13,924 ---------- -----------Net cash/(borrowings) 1,079 (4,859) ========== =========== 20. Explanation of Transition to IFRSAs stated in note 1, these are the Group's first consolidated financialstatements prepared in accordance with adopted IFRSs. Consistent accountingpolicies have been applied in preparing comparative information for the yearended 30 June 2005 and the preparation of the opening IFRS balance sheet at 1July 2004 (the Group's date of transition). In preparing its opening balance sheet and comparative information for the yearended 30 June 2005 the Group has adjusted amounts reported previously infinancial statements prepared in accordance with UK GAAP. continued... -23- The adjustments from the conversion to IFRS had no impact upon the cash flows ofthe Group although there are a number of presentational differences under IFRS. An explanation of the principal changes in accounting policies and how thetransition from UK GAAP to IFRS has affected the Group's income statement,balance sheet and net equity is summarised below. (a) IFRS Reconciliation of Income Statement Comparatives Year ended 30 June 2005 Notes Published IFRS Restated UK GAAP adjustments under £'000 £'000 IFRS £'000Revenue a 208,197 2,070 210,267Cost of sales a (178,480) (2,070) (180,550) ---------- -------- -------Gross profit 29,717 - 29,717 Operating expenses b, c, d,e (19,305) 843 (18,462) ---------- -------- ------- Operating profit 10,412 843 11,255 Finance income 355 - 355 Finance expense (1,909) - (1,909) ---------- -------- -------Profit before taxation 8,858 843 9,701 Income tax expense f (2,590) (84) (2,674) ---------- -------- -------Profit attributable to equityholders 6,268 759 7,027of the parent ========== ======== ======= Earnings per share (pence) Basic 12.28p 1.49p 13.77p ========== ======== ======= Diluted 12.08p 1.46p 13.54p ========== ======== ======= continued... -24- (b) IFRS Reconciliation of Balance Sheet Comparatives 1 July 2004 30 June 2005 Notes Published IFRS IFRS Published IFRS Restated UK GAAP Adjustments UK GAAP adjustments under IFRS £'000 £'000 £'000 £'000 £'000 £'000 Non-current assetsIntangible assets- goodwill a 4,385 - 4,385 3,821 564 4,385- software b - - - - 255 255- otherintangibles c 789 230 1,019 1,889 510 2,399 Propertyplant b 5,224 - 5,224 5,201 (255) 4,946and equipment Deferred d - - - - 406 406taxes ------- -------- ------ ------- ------- ------- Totalnon-currentassets 10,398 230 10,628 10,911 1,480 12,391 Current assetsInventories 16,979 - 16,979 20,390 - 20,390 Trade andotherreceivables 32,889 - 32,889 33,708 - 33,708 Deferred d - - - 4 (4) -taxes Cash and cashequivalents - - - 13,924 - 13,924 ------- -------- ------ ------- ------- -------Total currentassets 49,868 - 49,868 68,026 (4) 68,022 ------- -------- ------ ------- ------- -------Total 60,266 230 60,496 78,937 1,476 80,413assets ------- -------- ------ ------- ------- ------- Current liabilitiesBorrowings (5,347) - (5,347) (1,502) - (1,502) Trade andother e (36,944) (89) (37,033) (41,826) (145) (41,971)payables Current taxliabilities (1,275) - (1,275) (2,057) - (2,057) Proposeddividend f (1,606) 1,606 - (1,789) 1,789 - ------- -------- ------ ------- ------- -------Total currentliabilities (45,172) 1,517 (43,655) (47,174) 1,644 (45,530) Non-currentliabilitiesBorrowings (4,763) - (4,763) (17,281) - (17,281) Provisions - - - - - - Deferred d (174) 98 (76) - - -taxes ------- -------- ------ ------- ------- ------- Totalnon-currentliabilities (4,937) 98 (4,839) (17,281) - (17,281) ------- -------- ------ ------- ------- -------Totalliabilities (50,109) 1,615 (48,494) (64,455) 1,644 (62,811) ------- -------- ------ ------- ------- -------Net assets 10,157 1,845 12,002 14,482 3,120 17,602 ======= ======== ====== ======= ======= =======EquityCalled upshare capital 510 - 510 511 - 511 Share premiumaccount 26,784 - 26,784 26,953 - 26,953 Merger 1,720 - 1,720 1,720 - 1,720reserve Retainedearnings g (18,857) 1,845 (17,012) (14,702) 3,120 (11,582) ------- -------- ------ ------- ------- -------Total equityattributableto equityholders ofthe 10,157 1,845 12,002 14,482 3,120 17,602parent ======= ======== ====== ======= ======= ======= c) Reconciliation of Equity 1 July 2004 30 June 2005 £'000 £'000 Equity under UK GAAP 10,157 14,482Write-back of proposed dividend 1,606 1,789Deferred tax 98 402Lease incentive (89) (145)Capitalisation of development costs 230 510Write-back of goodwill amortisation - 564 ------------ ------------Equity under IFRS 12,002 17,602 ============ ============ continued... -25 - Explanatory notes to the UK GAAP to IFRS Reconciliations Income Statement a. Under IAS18 'Revenue' certain items, such as the sale of trading data tosuppliers, have been reclassified to revenue from cost of sales. There is noimpact on profit, earnings per share or net assets. b. Under UK GAAP, goodwill was amortised over its estimated useful life. UnderIFRS3 'Business Combinations', goodwill is not amortised but is subject toannual impairment review. This has resulted in a credit to the income statementof £564,000 for the year ended 30 June 2005. c. Under UK GAAP the accounting policy of the Group was, in general, to writeoff all development expenditure to the income statement as incurred. Under IAS38'Intangible Assets' development expenditure meeting the required criteria mustbe capitalised. This has resulted in a credit to the income statement of£280,000 for the year ended 30 June 2005. d. Under IFRS2 'Share-based Payments', the cost of employee share optionsrecognised in the income statement is based upon the excess of the fair value ofthe option over the exercise price at the date of grant. Under UK GAAP, the costrecognised was generally the intrinsic value being the difference in exerciseprice and market price at the date of grant of the option. The change in method of calculation has resulted in a net credit of £55,000 inrespect of the year ended 30 June 2005. e. Under UK GAAP, the benefit of lease incentives received (in the form of rentfree periods) was spread over the period until the rent reverts to market rates.Under IAS17 'Leases', the benefit must be spread over the entire lease period.This change has resulted in an additional charge to the income statement of£56,000 for the year ended 30 June 2005. f. The income tax expense has been adjusted to reflect the tax effect of theabove adjustments. Balance Sheet a. The increase in goodwill reflects the write-back of amortisation previouslycharged under UK GAAP. b. Under IAS38 'Intangible Assets', software costs that are not an integral partof the related hardware are classed as intangible assets. They have thereforebeen reclassified from property, plant and equipment. There is no impact on theincome statement or net assets. c. The increase in other intangible assets represents capitalised developmentcosts under IAS38 'Intangible Assets'. d. The calculation of deferred tax under IAS12 'Income Taxes' can be differentfrom UK GAAP, under which deferred tax is calculated based upon income statementtiming differences. The principal reason for the increase in the deferred taxasset is that deferred tax in respect of share-based payments is calculated byreference to a figure which differs from the charge for such payments in theincome statement. Deferred tax in respect of share-based payments chargeddirectly to the income statement is also taken to the income statement but anyexcess tax relief over this amount is taken directly to equity. e. The increase in trade and other payables represents the balance of leaseincentives received that are being spread over the remaining lease periods. continued... -26 - f. Under IAS10 'Events After the Balance Sheet Date' dividends are recognisedwhen they are paid or approved by the shareholders. This generally results in alater recognition in the financial statements than under UK GAAP. g. The increase in retained earnings at 30 June 2005 is made up as follows: - net adjustments to the income statement of £759,000- reduction to credit to equity in respect of share-based payments of (£55,000)- capitalised development costs at 1 July 2004 of £230,000- increase in lease incentives carried forward at 1 July 2004 of (£89,000)- de-recognition of the final dividend of £1,789,000- credit to deferred tax recognised directly in equity of £486,000 21. Other InformationThe financial information set out above does not constitute the company'sstatutory accounts for the years ended 30 June 2006 or 2005 but is derived fromthe 2006 accounts. Statutory accounts for 2005, which were prepared under UKGAAP, have been delivered to the registrar of companies, and those for 2006,prepared under accounting standards adopted by the EU, will be delivered in duecourse. The auditors have reported on those accounts; their reports were (i)unqualified, (ii) did not include references to any matters to which theauditors drew attention by way of emphasis without qualifying their reports and(iii) did not contain statements under section 237(2) or (3) of the CompaniesAct 1985. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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