14th Mar 2006 07:05
Medical Solutions PLC14 March 2006 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 Geoff Callow/Chris Hamilton Tel: 0207 861 3232 Medical Solutions plc Preliminary annual results for the year ended 31 December 2005 Medical Solutions plc (LSE: MLS) announces its preliminary annual results forthe year ended 31 December 2005 prepared under International Financial ReportingStandards ("IFRS"). Financial Highlights •Revenue from continuing operations up 77% to £10.7 million (2004: £6.0 million) •Gross profit improved to £4.1 million (2004: £1.3 million); gross profit margin up to 39% (2004: 22%) •Operating expenses (excluding restructuring costs) reduced to £5.9 million (2004: £10.2 million) •Operating loss from continuing operations (excluding restructuring costs of £0.3 million) of £1.3 million (2004: loss of £8.3 million) •Loss for the year of £1.8 million (2004: £9.4 million) •Net cash of £2.3 million (30 June 2005: £2.7 million; 31 December 2004: £0.7 million overdraft) Operational Highlights •Awarded eight Liquid Based Cytology ("LBC") agreements worth £15.7 million over five years; England & Wales LBC target market share raised from 35% to over 40% •LBC UK Distribution Agreement with Tripath Imaging, Inc. renewed until 31 December 2008 •Acquisitions of Dubai Medical Laboratory ("DML") and Specialised Clinical Laboratory ("SCL") formally completed, both earnings enhancing during the year •Certain intellectual property rights sold to Hamamatsu Photonics KK for initial consideration of £450,000 •Further steps taken to reduce costs including consolidation of UK diagnostic pathology in Nottingham, closure of Harley Street facility and significant reduction in UK headcount Post year-end events •Agreement reached with Welcare Parties to settle outstanding deferred consideration of £2.5 million relating to the acquisition of the Welcare Laboratory in 2003, in exchange for a 16.7% stake in Group's Dubai business, Medical Solutions FZ LLC. Welcare Hospital to repay £0.9 million owed to Medical Solutions plc (see separate press release) •First step in planned, phased exit from the Group's operations in Dubai Charles Green, Chief Executive Officer, said: "We have made excellent progress during 2005 towards our target of becoming aprofitable, cash generative business. This is evidenced by the further narrowingin losses during the second half of the year when compared with the first halfof 2005 and the ongoing reduction in our cash burn during the year. In parallel,we have been negotiating a settlement of the outstanding deferred considerationconnected with the acquisition of our Welcare Laboratory and exploringopportunities to realise value from our operations in Dubai. During 2006, we aimto achieve a structured exit from our operations in Dubai in order to focus onthe growth of our UK business." Chairman's Statement Introduction The Board of Medical Solutions remains committed to becoming a profitable, cashgenerative business. From such a platform, the Board has the ambition ofbecoming a significant player in the UK and international diagnostic pathologyand cytology markets. During 2005, our main focus has been on achieving thefirst of these objectives and I am pleased to report that substantial progresshas been made over the last twelve months. Business overview The Group overall and each of the core parts within our business has madesignificant progress during the year and these achievements are set out indetail later in this document. Board and management At the time of our Interim Report in September, we announced that Mr CharlesGreen, Chief Executive Officer, intended to concentrate his efforts on theGroup's Dubai business with a view to maximising shareholder value. The Boardbelieves that this will continue for the foreseeable future and, in the interim,Dr Neil Johnston has assumed Mr Green's responsibilities in the UK, as well ascontinuing to act as Chief Financial Officer for the Group. Financial reporting For the first time, our annual results have been prepared in accordance with therequirements of International Financial Reporting Standards ("IFRS"). During theyear PricewaterhouseCoopers LLP have been appointed auditors to the Company. In our 2005 annual report and accounts, we intend to include an Operating andFinancial Review ("OFR"). This new reporting format provides our shareholderswith a substantial amount of additional information about the business andoperations of the Group and our strategy for the future. For the first time, wewill identify certain Key Performance Indicators, which represent the principalmeasures used by the Board to report the development, performance and positionof the business. We will also identify the key risks faced by individual partsof the business and by the Group overall together with information as to howthese risks are being managed. Corporate Governance During the year, we have reviewed and tightened up our corporate governancepolicies and practices in many areas. The details of progress in this area willbe set out fully within the 2005 Annual Report and Accounts to be sent toshareholders in the near future. However, it is pleasing to note that all of theexceptions that were noted within the 2004 Annual Report and Accounts have beenaddressed during the year. Staff 2005 has been a year of significant change for Medical Solutions. As the Groupnow looks forward to the achievement of its short and long term objectives, Iwould particularly like to acknowledge the contributions of our staff whosecommitment and dedication has been instrumental to the positive steps the Grouphas taken during the last twelve months. Prospects The Group is now focusing its resources on the development of the pathology andcytology based activities, areas that we believe are capable of scalable,long-term growth. Our key objectives for 2006 are aimed at growing the business through theintroduction of new products and services whilst expanding the market share ofour existing offerings. At the same time, we will continue to focus on reducingcosts where appropriate, improving our operational efficiency and investing inkey R&D projects. Over the last six months, we have also been exploring potential opportunities torealise value from our operations in Dubai. The agreement announced todayrelating to the settlement of the deferred consideration represents the firststeps along this path. The Board is currently considering various strategicoptions in this respect and has received approaches from a number of privateequity groups interested in acquiring further stakes in Medical Solutions FZLLC. During 2006, we will retain focus on achieving our stated target whilstremaining fully alert to strategic opportunities to maximise shareholder value. Sir Gareth RobertsNon-Executive Chairman14 March 2006 Operating and Financial Review (abbreviated) Cautionary statement This Operating and Financial Review contains certain forward-looking statementswith respect to the financial condition, results, operations and businesses ofMedical Solutions plc. These statements and forecasts involve risk anduncertainty because they relate to events and depend upon circumstances thatwill occur in the future. There are a number of factors that could cause actualresults or developments to differ materially from those expressed or implied bythese forward-looking statements. Nothing in this Operating and Financial reviewshould be construed as a profit forecast. Overview Medical Solutions plc is a healthcare company with operations based in the UKand Middle East. During the year, our core activities have been re-focused andwe have concentrated upon becoming a leading provider of services and productswithin the pathology and cytology sectors. We believe that these markets providestrong growth opportunities for our business and thus for our shareholders. The Pathology Services division comprises our diagnostic pathology operations inNottingham (UK) and Dubai (United Arab Emirates ("UAE")). This division providespathology services to public and private healthcare providers based in the UKand Dubai as well as the pharmaceutical and biotechnology industry. ThePathology Services division also has access to an established bank of normal anddiseased processed human tissue and a UK network of over 60 specialistconsultant pathologists. In each of its UK business segments in this area,Medical Solutions operates in a highly competitive market and competes forbusiness against other service-based organisations, often against teams fromwithin the customer itself. Regulatory accreditation from relevant authoritiesis considered to be critical in ensuring the Group can offer its products andservices to customers in a trusted manner. In Dubai, DML, SCL and Histopathology and Speciality Laboratory ("HSL") operatein a similarly competitive business environment. The Group's Welcare business inDubai is a tied provider of pathology services to the Welcare Hospital. Each ofthe Group's pathology businesses in Dubai has a current trading licence from therelevant authorities in the UAE. Our Cytology division distributes and supports the SurePathTM liquid basedcytology ("LBC") system and consumables for the preparation and analysis ofcervical smear samples. SurePathTM is one of only two systems approved by theNational Institute of Clinical Excellence ("NICE") for use in England and Wales. Following the successful Placing and Open Offer to raise approximately £5.7million (after expenses) in January 2005, the new Board set about reversing thedecline seen in 2004 and implemented the business plan which had been outlinedto investors at the time of the fundraising, a plan which had made the financialstability of the Group its top priority. The principal components of this planincluded refocusing the Group's business, reducing the cost base significantly,selling or closing non-core activities, improving efficiency and strengtheningfinancial controls. The Group's results for the year ended 31 December 2005 demonstrate thatsignificant progress has been made although more remains to be done if MedicalSolutions is to realise its long-term potential. The Board remains committed tothe achievement of profitability and cash generation for the Group whilst beingmindful of opportunities to realise value for shareholders as and whenattractive opportunities arise. Business Segment Performance Review Pathology Services Our Pathology Services division generated revenue of £8.2 million in 2005compared with £5.8 million in 2004, an increase of 42%. This growth, togetherwith the significant cost reduction measures taken during the year led to asignificantly improved operating performance in 2005. The division generated anoperating profit of £1.0 million (2004: operating loss of £2.5 million). UK Diagnostic Pathology Revenue from our UK Diagnostic Pathology operation grew by 10% to £2.4 million(2004: £2.2 million). This area became profitable in 2005 generating anoperating profit of £0.1 million compared to an operating loss of £2.2 millionin 2004. The growth in Her-2 testing volumes, the consolidation of operations onto asingle site in Nottingham and strong cost control in other areas has led to asignificantly improved operating performance for this part of the business. During the first half of 2005, it became clear to the Board that operations inLondon and Nottingham could not both be sustained given the current and likelyshort term future levels of revenue. A decision was taken to consolidateoperations in Nottingham and to close our site in Harley Street, London. Ourfull operational capability went live in Nottingham in July and in addition, wesurrendered the lease on the Harley Street premises in November 2005 at no cost. Our operation in Nottingham also offers a number of specialised laboratorytests, including the Her-2 test. This test is designed to establish whether ornot a patient suffering with breast cancer will respond to the drug Herceptin(manufactured and sold by Roche). During the second half of 2005, research waspublished which indicated that Herceptin could be applicable to a much widerpopulation of breast cancer sufferers than had originally been believed. Thishas led to a significant increase in the number of Her-2 tests performed byMedical Solutions during the second half of the year. Looking forward, the market drivers for this business remain sound. The UKcontinues to experience a shortfall in the number of pathologists and theGovernment's focus on modernising UK pathology services is expected to generatelong term benefits for our business. We are targeting further organic growthfrom this area of our business during 2006 and we aim to introduce a number ofnew products during the course of the year. These targets, if achieved, togetherwith the reduced cost base for this part of our business should provide a soundbasis for a further improvement in the profitability of this area of ourbusiness in the short to medium term. Dubai Diagnostic Pathology Medical Solutions is a leading provider of pathology services in Dubai and thispart of our business also grew strongly generating revenues of £5.0 million in2005 compared with £2.8 million in 2004, an increase of 77%. Growth was partlydriven by the existing Welcare Laboratory/HSL business and partly driven by theacquisitions of DML and SCL both of which were completed in January 2005. DubaiDiagnostic Pathology generated an operating profit of £1.6 million in 2005compared with £0.6 million in 2004. The DML and SCL acquisitions have bedded down well into our existing business.During the year, SCL commenced a significant programme, in conjunction with theUAE government, to provide medical services to individuals entering Dubai priorto being granted a work permit. During the second half of the year, negotiations have continued to find amutually satisfactory resolution to the payment of the outstanding deferredconsideration due from the time of the acquisition of the Welcare Laboratoryfrom Welcare Hospital during 2003. We have announced today that we have agreedto settle the outstanding liability owed by Medical Solutions, of approximately£2.5 million, in exchange for a 16.7% stake in Medical Solutions FZ LLC. WelcareHospital has also agreed to repay sums owing to Medical Solutions plc ofapproximately £0.9 million. The Board of Medical Solutions has decided to focus on its UK business goingforward and we plan to exit from our business in Dubai in a phased andstructured manner in order to maximise shareholder value. 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 haveparticular strengths in high throughput quantitative protein expression servicesand in sophisticated image analysis capabilities. The Drug Development Services continued to make good underlying progress in 2005although revenues of £0.8 million showed only a modest improvement on 2004 (£0.7million). We completed a significant biomarker study for AstraZeneca during thefirst half of the year. We have also begun to build a strong relationship withGlaxoSmithKline and completed a number of smaller studies with otherpharmaceutical and biotechnology companies. During the year we restructured our relationships with tissue providers in theUK in order to bring the cost base for this part of our business more into linewith its revenue generation. As a result, we have generated annualised cashsavings of approximately £0.5 million per annum. Overall, Drug DevelopmentServices generated an operating loss of £0.7 million in 2005 compared with anoperating loss of £0.9 million in 2004. Going forward, we are aiming for growth from this area of our business based onthe increased number of ongoing projects and the general improvement in salesleads and market awareness resulting from our activities over the last twelvemonths. In the short term, we have focused on reducing our cost base and believethat the level of incremental revenue needed to achieve profitability remainschallenging but achievable. Cytology The current market in England & Wales for LBC products is estimated to be worthin excess of £10 million annually, comprising approximately four millioncervical smear tests each year. Medical Solutions has continued to demonstrateits ability to capitalise on this market opportunity having been awarded a totalof eight five-year contracts since 2004 worth a total of £15.7 million. Duringthe year, we have consistently raised our market share target and now aim toachieve over 40% of the LBC market in England & Wales. Revenue improved significantly as a consequence of these contract wins, risingto £2.5 million in 2005 from £0.4 million (including inter-segment sales of £0.2million) in 2004, a 490% increase. In addition, we have improved the utilisationof our installed machine stock (ie the proportion of machines which are revenuegenerating) from 50% at the start of 2005 to 95% by the end of the year. TheCytology division also generated an operating profit for the first time of £0.2million in 2005 compared with an operating loss of £0.7 million in 2004. During the second half of the year, Medical Solutions co-sponsored a HealthTechnology Assessment Trial designed to test the potential for automatedcytology screening in the UK. It is likely that this trial will run for two tothree years and other trials are likely to follow. The UK distribution agreement for the supply of LBC equipment and consumableswith Tripath Imaging, Inc. was renewed and extended until 31 December 2008. The Board is aiming for further growth in 2006 from the Cytology division as aconsequence of additional contract wins and the achievement of full run rate forthe supply of consumables on existing contracts. Typically there isapproximately a six month period between the contract being signed and full runrate during which time training is being conducted, logistics are beingorganised and the conversion to LBC is achieved by the customer. Central resources Central resources include the plc Board together with certain other key supportpersonnel and related costs. Other costs shown centrally include facilities andinvestor relations. Having taken significant actions to reduce such costs in2005, it is pleasing to note that central costs fell from £5.3 million in 2004to £3.0 million in 2005, a 44% reduction. We will continue to control such coststightly. Geographic performance Both the UK and Dubai regions showed revenue growth in 2005. The UK grew from£3.3 million in 2004 to £5.7 million, an increase of 69%. Revenue in Dubai grewby 77% from £2.8 million to £5.0 million in 2005. The reasons for this growthare described above. Financial review Financial performance Turnover has increased by 77% to £10.7 million (2004: £6.0 million) primarilydriven by growth in both the Cytology business and from the Group's operationsin Dubai. As a consequence of the significant growth in sales, costs of sales rose from£4.7 million in 2004 to £6.5 million in 2005. Gross margins have increased to39% in 2005 from 22% in 2004. The efficiency of the Group's operations hasimproved significantly during the year following the consolidation of diagnosticpathology operations in Nottingham and the general reduction in UK headcount. Our laboratory infrastructure in both the UK and Dubai is capable of handlingincreased sample volumes. Further staff and capital investment may be requiredbeyond a certain level. Laboratory staff are highly qualified, experienced andflexible thus providing good operational gearing as revenue grows and assistingin dealing with fluctuations in workload. In May, we completed the sale of certain intellectual property assets in thearea of virtual microscopy to Hamamatsu Photonics KK for initial considerationof £0.45 million, generating a profit on disposal of £0.4 million. We haveretained a non-exclusive licence, at no cost, to continue to utilise theintellectual property concerned within the Pathology Services division. Selling and distribution costs of £0.8 million were in line with 2004 (£0.9million). Research and development costs increased to £0.2 million in 2005 from£0.1 million in 2004, primarily due to lower capitalisation of developmentcosts. Administrative expenses, excluding restructuring costs, share based compensationcosts and impairment of goodwill and development costs, were £4.5 million in2005 compared with £5.6 million in 2004. This reduction is primarily due tosavings realised in the area of personnel and property costs. Totaladministrative expenses for the year includes the charge of £0.3 million (2004:£0.3 million) relating to a share option based compensation charge as requiredby IFRS 2 Share based payment. Operating losses for the year ended 31 December 2005, excluding restructuringcosts were £1.3 million compared with £8.3 million during 2004. This includes aprofit on sale of fixed assets of £0.4 million during 2005 (2004: £0.6 million).It is especially pleasing to note that operating losses have continued to narrowduring the second half of 2005 compared with the first half. Operating lossesfor the six months ended 30 June 2005, excluding restructuring costs and theprofit on sale of fixed assets were £1.1 million compared with £0.6 millionduring the second half of 2005. Exceptional restructuring costs for the year ended 31 December 2005 of £0.3million (2004: £0.2 million) relate mainly to the closure of the Harley Streetfacility and certain other redundancy costs incurred during 2005. Restructuringcosts in 2004 related mainly to redundancies. After taking account of tax and interest charges, the loss for the 2005financial year was £1.8 million compared with a loss of £9.4 million in 2004. Financial position As at 31 December 2005, the Group had net assets of £17.2 million compared with£12.0 million as at 31 December 2004. Of this, approximately £14.8 millionrepresents goodwill (2004: £11.1 million). As at 31 December 2005, the Group hadnet cash of £2.3 million (31 December 2004: £0.7 million overdrawn afterexcluding £2 million restricted cash deposit). The improvement in the Group's underlying financial position during 2005 isdemonstrated by an examination of the movement in net current assets/(liabilities), including the full Welcare deferred consideration during theperiod. At 31 December 2004, the Group had a net current liability position of£0.8 million compared with a net current asset position of £0.5 million as at 31December 2005. Excluding the Welcare deferred consideration (included withinProvisions), this equates to a net current asset position of £2.9 million at 31December 2005 compared with £0.3 million at 31 December 2004. This positive change has been effected through the net proceeds of thefundraising, strong working capital management and the reduction in short-termborrowings during the year. During the year, the Group also reached agreementswith a number of major creditors who were outstanding as at 31 December 2004.Assuming a successful resolution of the outstanding deferred consideration issueand continued improvements in the trading profile of the business, the Boardexpects this position to improve further during 2006. The Group has historically been funded primarily through equity although debthas been raised as and when appropriate for the needs of the business. As at 31December 2005, the Group's balance sheet included bank and finance leaseobligations of approximately £0.6 million, £0.3 million of which is repayablewithin one year and £0.3 million after more than one year but less than twoyears. As at 31 December 2005, the Welcare deferred consideration amounted to£2.4 million (net of discounting of £0.1 million), all of which is repayablewithin one year. Cash flows and Liquidity A total of £5.7 million (net of expenses) was raised through an equityfundraising completed in January 2005. Net cash used in operations during theyear ended 31 December 2005 was £2.1 million (2004: £2.8 million). Capital expenditure of £0.3 million was incurred during the year (2004: £0.8million) primarily in relation to additional LBC equipment. During 2004, theGroup invested cash of £2.2 million in the acquisitions of subsidiaries,including majority shareholdings in DML and SCL, although these acquisitionswere not formally completed until January 2005. International Financial Reporting Standards The Group has adopted IFRS for the first time in producing consolidatedfinancial statement for the year ended 31 December 2005. The reconciliations ofthe Group's balance sheet and equity at 1 January 2004 and 31 December 2004together with reconciled income statements and cash flows for the year ended 31December 2004 were presented with the Group's Interim Report for the six monthsended 30 June 2005. The Group's key accounting policies under IFRS were also set out in the InterimReport (available on our website www.medical-solutions.co.uk) together with adescription of the impact of adopting IFRS on its balance sheets, incomestatements and cash flows during the period covered. The Board does not believethat there are any material changes to the information presented within theInterim Report. Prospects During 2005, the Board was focused on dealing with the turnaround of thebusiness and implementing the plan outlined to shareholders at the time of thefundraising in January 2005. Whilst there remains much to do, the Group is nowin a much more stable position than one year ago. The settlement of theoutstanding deferred consideration relating to the Welcare Laboratory representsa further step forward. We expect to exit from our operations in Dubai during2006. The Board remains focused on becoming a profitable and cash generative businessand believes the key target for 2006 to be the continued organic growth of boththe Pathology Services and Cytology divisions. We are aiming for revenue growthrates of 20-25% overall in 2006 (including Dubai). Such growth, coupled withclose cost control, prudent investment, and the introduction of new productswill be the basis upon which the Board aims to achieve its short-termobjectives. Over the medium to long term, the Board believes the opportunities for growth inour business to be strong. We expect the markets for our products and servicesto grow significantly. As a consequence of greater demand for therapeutics whichtarget segmented patient populations and the need for companion diagnostics, theanticipated increased demand for pathology testing from the primary care arenaand various UK national screening initiatives we believe the prospects forgrowth in Pathology Services to be positive. We have an establishedinfrastructure and strong relationships with our customers, which we can utiliseto benefit from this market expansion. We also intend to capture greater market share through the introduction of newproducts and services. Through partnerships, we are also investing in the nextgeneration of automated cytology and image analysis. Consolidated Income StatementFor the year ended 31 December 2005 Unaudited Unaudited Year Year ended ended 31 December 31 December 2005 2004 Continuing operations Note £'000 £'000Revenue from continuing operations 10,672 6,026Cost of sales (6,536) (4,710) -------- ---------Gross profit 4,136 1,316Selling and distribution expenses (833) (866) Administrative expenses:- normal (4,460) (5,609)- share based compensation (304) (320)- restructuring costs 3 (347) (181)- impairment of goodwill and development costs (64) (3,049)- aborted acquisition - (240) Administrative expenses (5,175) (9,399)Research and development (207) (103)Gain on sale of fixed assets 4 383 607 -------- ---------Operating loss from continuing operations (1,696) (8,445)Interest receivable 108 -Interest payable and similar charges (251) (264) -------- ---------Loss before tax from continuing operations (1,839) (8,709)Taxation - (90) -------- ---------Loss after tax but before loss fromdiscontinued operations (1,839) (8,799) Discontinued operationsLoss from discontinued operations - (636) -------- ---------Loss for the year (1,839) (9,435) -------- --------- Attributable to:Equity holders of the parent company (1,890) (9,435)Minority interest 51 - -------- ---------Loss for the year (1,839) (9,435) -------- --------- Basic and diluted loss per ordinary share fromcontinuing operations 5 (0.96)p (9.50)pBasic and diluted total loss per ordinary share 5 (0.96)p (10.19)p -------- --------- Consolidated Statement of Changes in Shareholders' Equity Attributable to equity holders of the Company Merger and Profit Share Share other Translation and loss Minority Total capital premium reserves reserve reserve interest equity £'000 £'000 £'000 £'000 £'000 £'000 £'000Balance at 1January 2005 1,960 27,912 4,608 (190) (22,317) - 11,973Currencytranslationadjustments - - - 307 - 1 308 ----- ------ ------- ------- ------- ------ ------Net incomerecogniseddirectly toequity - - - 307 - 1 308(Loss)/profitfor the year - - - - (1,890) 51 (1,839) ----- ------ ------- ------- ------- ------ ------Totalrecognisedincome/(expense)for theyear - - - 307 (1,890) 52 (1,531)Shares issued 2,115 4,372 - - - - 6,487Employee share optionscheme:- value ofservicesprovided - - - - 304 - 304 ----- ------ ------- ------- ------- ------ ------Balance at 31December 2005 4,075 32,284 4,608 117 (23,903) 52 17,233 ----- ------ ------- ------- ------- ------ ------ Consolidated Balance SheetAs at 31 December 2005 Unaudited Unaudited As at As at 31 December 31 December 2005 2004 Note £'000 £'000Non-current assetsGoodwill 14,808 11,131Other intangible assets 181 339Property, plant and equipment 2,041 2,679 --------- -------- 17,030 14,149 --------- --------Current assetsInventories 773 878Trade and other receivables 3,212 4,348Financial assets- cash and cash equivalents 2,313 1,990 --------- -------- 6,298 7,216 --------- --------Current liabilitiesTrade and other payables 3,058 3,790Financial liabilities- borrowings 301 3,039Provisions 2,443 1,197 --------- -------- 5,802 8,026 --------- --------Net current assets/(liabilities) 496 (810) --------- --------Total assets less current liabilities 17,526 13,339 --------- --------Non-current liabilitiesFinancial liabilities- borrowings 293 540Provisions - 826 --------- -------- 293 1,366 --------- --------Net assets 17,233 11,973 --------- -------- EquityIssued share capital 7 4,075 1,960Share premium 7 32,284 27,912Other reserves 4,725 4,418Profit and loss reserve (23,903) (22,317) --------- --------Total equity attributable to equity holders ofthe parent company 17,181 11,973Minority interest 52 - --------- --------Total equity 17,233 11,973 --------- -------- Consolidated Cash Flow StatementFor the year ended 31 December 2005 Unaudited Unaudited Year Year ended ended 31 December 31 December 2005 2004 Note £'000 £'000Cash flows from operating activitiesCash used in operations 6 (2,064) (2,836)Interest paid (78) (20)Tax paid - (61) -------- ---------Net cash used in operating activities (2,142) (2,917) -------- --------- Cash flows from investing activitiesAcquisition of subsidiaries, net of cashacquired 8 (491) (2,230)Purchases of property, plant and equipment (262) (789)Purchases of intangible assets (30) (248)Proceeds from sale of property, plant andequipment 29 4,600Proceeds from sale of intangible assets 405 -Proceeds from sale of discontinued operations - 555Interest received 108 - -------- ---------Net cash (used in)/generated from investingactivities (241) 1,888 -------- --------- Cash flows from financing activitiesProceeds from the issue of share capital 7 6,365 3,030Repayment of borrowings (2,259) (2,172)Payment of transaction costs (695) -Finance lease principal repayments (48) (26) -------- ---------Net cash generated from financing activities 3,363 832 -------- --------- Net increase/(decrease) in cash and cashequivalents 980 (197)Cash and cash equivalents at beginning of year 1,312 1,509Exchange gains on cash and cash equivalents 21 - -------- ---------Cash and cash equivalents at end of year 2,313 1,312* -------- --------- * including a £2 million restricted cash deposit Notes to the Consolidated Preliminary Financial StatementsFor the year ended 31 December 2005 1. Basis of preparation For all periods, up to and including the year ended 31 December 2004, MedicalSolutions plc prepared its financial statements in accordance with UK generallyaccepted accounting practice (UK GAAP). From 1 January 2005, Medical Solutionsplc is required to prepare consolidated financial statements, includingcomparative data, in accordance with IFRS as adopted by the European Union.Accordingly, financial information for the year 2005, and comparativeinformation, has been prepared on this basis. The financial information contained in this announcement of preliminaryfinancial statements does not constitute statutory financial statements withinthe meaning of section 240 of the Companies Act 1985. Our previous auditors,Deloitte and Touche LLP, have issued unqualified opinions on the Group's UK GAAPfinancial statements for the years ended 31 December 2003 and 31 December 2004and did not include a statement under section 237(2) or (3) of the Companies Act1985. Neither the Directors of the Company nor the present auditors,PricewaterhouseCoopers LLP, have as yet approved the statutory financialstatements for the financial year ended 31 December 2005. These financialstatements and the comparative information for 31 December 2004 are thereforeunaudited. 2. Segmental reporting Primary reporting format - operating divisions At 31 December 2005, the Group is organised on a worldwide basis into two mainoperating divisions: •Pathology Services •Cytology Pathology Services comprises the business units of UK Diagnostic Pathology,Dubai Diagnostic Pathology and Drug Development Services. During 2005 there were immaterial sales between business segments (2004: £0.2million), and where these do occur, are at arm's length pricing. Unallocated costs represent corporate expenses and common operating costs.Segment assets include plant and equipment, stocks and debtors. Unallocatedassets include property, central debtors and prepayments and operating cash. Segment liabilities comprise operating liabilities and exclude borrowings. Capital expenditure comprises additions to plant and equipment. Year ended 31 December 2005 Pathology Services Cytology Unallocated Group UK Dubai Drug Diagnostic Diagnostic Development Pathology Pathology Services £'000 £'000 £'000 £'000 £'000 £'000Continuing operationsRevenue 2,415 5,017 773 2,467 - 10,672 ------ ------ ------- ------ ------- ------Segment result 121 1,617 (740) 183 (2,877) (1,696) ------ ------ ------- ------ ------- ------Interest expense (251) (251)Interest income 108 108Loss before tax (3,020) (1,839)Taxation - -Loss for the year fromcontinuing operations (3,020) (1,839)Profit attributable tominority interests (51) - (51) ------ ------ ------- ------ ------- ------Net loss attributable toequity shareholders (3,020) (1,890) ------ ------ ------- ------ ------- ------ Segment assets 1,392 16,399 719 1,678 - 20,188Unallocated assets - property, plant and equipment 737 737 - debtors and prepayments 322 322 - cash and cash equivalents 2,563 2,563 ------ ------ ------- ------ ------- ------Total assets 1,392 16,399 719 1,678 3,622 23,810 ------ ------ ------- ------ ------- ------ Segment liabilities 240 2,839 420 603 - 4,102Unallocated liabilities - corporate borrowings 594 594 - creditors and accruals 1,881 1,881 ------ ------ ------- ------ ------- ------Total liabilities 240 2,839 420 603 2,475 6,577 ------ ------ ------- ------ ------- ------ Other segment itemsCapital expenditure 2 3 2 169 83 259Acquisition ofsubsidiaries - 3,761 - - - 3,761Depreciation 115 54 80 254 191 694Amortisation ofintangible assets 58 - 3 - - 61Impairment ofdevelopment costs 64 - - - - 64Other non-cash expenses - share option scheme - - - - 304 304 ------ ------ ------- ------ ------- ------ Year ended 31 December 2004 Pathology Services Cytology Unallocated Group UK Dubai Drug Diagnostic Diagnostic Development Pathology Pathology Services £'000 £'000 £'000 £'000 £'000 £'000Continuing operationsSales to external customers 2,244 2,832 692 258 - 6,026Sales to other segments - - - 160 (160) - ------ ------ ------- ------ ------- ------Revenue 2,244 2,832 692 418 (160) 6,026 ------ ------ ------- ------ ------- ------Segment result (2,178) 602 (888) (672) (5,309) (8,445) ------ ------ ------- ------ ------- ------Interest expense (264) (264)Loss before tax (5,573) (8,709)Taxation (90) (90) ------ ------ ------- ------ ------- ------Loss for the year fromcontinuing operations (5,663) (8,799) Discontinued operationsRevenue 560 560Segment result (167) (167)Loss on disposal ofoperation (469) (469)Loss before tax (636) (636)Taxation - - ------ ------ ------- ------ ------- ------Loss for the year fromdiscontinued operations (636) (636) ------ ------ ------- ------ ------- ------Net loss attributable toequity shareholders (5,663) (9,435) ------ ------ ------- ------ ------- ------ Segment assets 1,968 13,608 1,535 1,229 - 18,340Unallocated assets - property, plant and equipment 931 931 - debtors and prepayments 146 146 - cash and cash equivalents 1,948 1,948 ------ ------ ------- ------ ------- ------Total assets 1,968 13,608 1,535 1,229 3,025 21,365 ------ ------ ------- ------ ------- ------ Segment liabilities 408 2,404 258 459 - 3,529Unallocated liabilities - corporate borrowings 3,579 3,579 - creditors and accruals 2,284 2,284 ------ ------ ------- ------ ------- ------Total liabilities 408 2,404 258 459 5,863 9,392 ------ ------ ------- ------ ------- ------ Other segment itemsCapital expenditure 264 163 6 344 185 962Depreciation 87 40 116 217 435 895Amortisation of intangibleassets 145 - 80 - - 225Impairment of intangibleassets 1,120 - 106 - - 1,226Impairment of goodwill - - - - 1,823 1,823Other non-cash expenses - share option scheme - - - - 320 320 ------ ------ ------- ------ ------- ------ Secondary format - geographical segments The group manages its business segments on a global basis. The operations arebased in two main geographical regions. The UK is the home country of the parentcompany. The main operations in the principal territories are as follows: •UK diagnostic pathology, cytology and drug development services •Middle East diagnostic pathology The Middle East segment operations are mainly based in Dubai, United ArabEmirates. The sales analysis in the table below is based on the location of the customer,which is not materially different from the location where the order is receivedand where the assets are located. Revenue Segment assets Capital expenditure 2005 2004 2005 2004 2005 2004 £'000 £'000 £'000 £'000 £'000 £'000Continuing operationsUK 5,607 3,094 7,411 7,757 256 799Middle East 5,017 2,832 16,399 13,608 3,764 163European (non-UK) 40 258 - - - -North America 8 2 - - - - ------ ------ ------- ------ ------- ------ 10,672 6,186 23,810 21,365 4,020 962DiscontinuedoperationsUK - 315 - - - -Middle East - - - - - -European (non-UK) - - - - - -North America - 245 - - - - ------ ------ ------- ------ ------- ------ - 560 - - - - ------ ------ ------- ------ ------- ------Intragroup trading - (160) - - - - ------ ------ ------- ------ ------- ------Total 10,672 6,586 23,810 21,365 4,020 962 ------ ------ ------- ------ ------- ------ 3. Consolidation of the group's UK diagnostic pathology operations and otherrestructuring costs As set out in the Chairman's Statement, the Board took the decision during theyear to consolidate its UK diagnostic pathology operations in Nottingham andclose its facility in Harley Street, London. The decision to transfer operationsand make a number of staff redundant was implemented during July 2005 and theGroup has incurred costs of £255,000 during the year in connection with theclosure. In addition, the Group has incurred costs of a further £92,000 inrespect of redundancies made at its Nottingham operations during the year. 4. Profit on sale of fixed assets In line with the Group's previously stated intention to exit the virtualmicroscopy activity of the business, the sale of certain intellectual propertyassets, along with microscopy equipment, to Hamamatsu Photonics KK was completedin May 2005. Consideration for the assets was £450,000, which generated a profiton disposal of £387,000. Of the consideration, £405,000 was received in cashwith the balance subject to withholding tax. The Group also disposed of tangiblefixed assets in the year, generating a loss on disposal of £4,000. 5. Loss per share The calculation of basic and diluted earnings per share for the year was basedon the loss attributable to ordinary shareholders of £1,890,000 (2004: loss of£9,435,000) on 196,780,731 ordinary shares (2004: 92,597,733 ordinary shares)being the weighted average number of ordinary shares in issue. IAS 33 Earnings per share requires presentation of diluted earnings per sharewhen a company could be called upon to issue shares that would decrease netprofit or increase net loss per share. Net loss per share in a loss-makingcompany would only be increased by the exercise of share options, which were outof the money. Assuming that option holders will not exercise out-of-moneyoptions, no adjustment has been made to the diluted loss per share forout-of-money share options. 6. Reconciliation of cash flows Year Year ended ended 31 December 31 December 2005 2004 £'000 £'000 Loss for the year from operations (1,839) (9,435)Taxation - 90Depreciation of tangible fixed assets 700 895Recognition of grant income (67) -Impairment of goodwill - 1,823Amortisation of capitalised development costs 61 225Impairment of capitalised development costs 64 1,226Impairment of tangible fixed assets 140 -Profit on sale of property, plant and equipment (383) (607)Loss on sale of discontinued operations - 469Interest payable 251 264Interest receivable (108) -Share based payments - value of employee service 304 320Decrease in inventories 175 272(Increase)/decrease in trade and otherreceivables (684) 467(Decrease)/increase in creditors (678) 1,155 ------------- ----------Cash used in operations (2,064) (2,836) ------------- ---------- All of the cash used in the year was used in continuing operations. Cash used incontinuing operations in the year ended 31 December 2004 was £2,603,000(discontinued operations £233,000). 7. Fund raising On 22 December 2004, the Group announced that it intended to raise £6.4 millionbefore expenses through a Placing and Open Offer. The net proceeds of thePlacing and Open Offer would be used to invest in specialist equipment requiredto drive future revenue growth within the Group's Drug Development Services andLiquid Based Cytology operations, reduce the Group's debt position, pay deferredconsideration in respect of historic acquisitions and to fund the Group'sgeneral working capital requirements. At an Extraordinary General Meeting of theCompany held on 14 January 2005, all resolutions necessary to approve thePlacing and Open Offer together with certain other matters were duly passed anddealings in the new shares issued commenced on 19 January 2005. As a result ofthe Placing and Open Offer, the Group raised net proceeds of £5.7 million. 8. Acquisitions of subsidiaries On 14 January 2005, the Group completed the acquisitions of Dubai MedicalLaboratory (''DML'') and Specialised Clinical Laboratory (''SCL''). Theacquisitions were made by two newly established 100% subsidiaries of MedicalSolutions FZ LLC, DML FZ LLC and SCL FZ LLC respectively. These subsidiariesentered into civil partnership agreements with the existing laboratory owners toeffectively acquire 80% (DML) and 100% (SCL) of the existing laboratorybusinesses. Medical Solutions FZ LLC is a 100% owned subsidiary of the Company.Each of the acquisitions was deemed unconditional on 14 January 2005. Dubai Medical Laboratory DML FZ LLC acquired an 80% shareholding in DML, a clinical analytical anddiagnostic services laboratory which operates as a civil partnership registeredin the Emirate of Dubai. DML FZ LLC acquired the 80% holding in DML for totalconsideration of approximately £1.8 million. The total purchase considerationcan be broken down into cash of £1.2 million and 3,887,853 new ordinary sharesin Medical Solutions plc, with a fair value of £267,000 (based on the Company'sshare price at the date of acquisition). The Group incurred legal andprofessional costs of £261,000 in connection with the acquisition of DML. At thedate of acquisition, DML had net assets of £77,000. In the period between 14 January 2005 and 31 December 2005, DML contributed netprofits of £244,000 to the consolidated net loss for the year. Specialised Clinical Laboratory SCL FZ LLC acquired 100% of SCL, a provider of clinical laboratory services. SCLoperates as a civil partnership registered in the Emirate of Dubai. SCL FZ LLCacquired the 100% holding in SCL for total consideration of approximately £1.2million. The total purchase consideration can be broken down into cash of £0.9million and 3,575,730 new ordinary shares in Medical Solutions plc, with a fairvalue of £246,000 (based on the Company's share price at the date ofacquisition). The Group incurred legal and professional costs of £52,000 inconnection with the acquisition of SCL. At the date of acquisition SCL had netassets of £18,000. In the period between 14 January 2005 and 31 December 2005, SCL contributed netprofits of £265,000 to the consolidated net loss for the year. Had the acquisitions of DML and SCL occurred on 1 January 2005, Group revenueswould have been increased by £29,000 and the net loss reduced by £9,000. The acquisition had the following effect on the Group's assets and liabilities. Acquiree's net assets at date of acquisition DML SCL Recognised Recognised value and value and carrying carrying amount amount £'000 £'000Property, plant and equipment 22 12Inventories 55 6 --------- --------Net identifiable assets and liabilities 77 18Goodwill on acquisition 1,693 1,161 --------- -------- Satisfied in cash* 1,503 933Satisfied in shares 267 246 --------- --------Consideration paid 1,770 1,179 --------- -------- * Includes legal fees and costs amounting to £261,000 and £52,000 in respect ofDML and SCL respectively. Of the consideration satisfied in cash, £2,030,000 was prepaid during 2004 andthe balance of £406,000 was settled during 2005, along with £85,000 of deferredconsideration and associated legal costs relating to the acquisition of HSL. In accordance with IFRS 3 Business combinations and IAS 38 Intangible assets,the acquiring party is required to recognise separately an intangible asset ofthe acquiree if it meets the definition of an intangible asset and its fairvalue can be measured reliably. The Board has not identified any exchangetransactions in respect of the same or similar non-contractual customerrelationships that might otherwise have provided evidence of fair value orseparability. As such, the Board does not believe it would be appropriate torecognise any intangible assets separately from goodwill at the date ofacquisition. 9. Prior year comparatives Deferred consideration The Group notes that under UK GAAP, deferred contingent consideration of £2.2million as at 31 December 2004 payable in cash or shares at the Company'soption, should have been reflected within Equity shareholders' funds rather thanas a liability. However, under IFRS the appropriate treatment is to reflect suchamounts within Liabilities and thus no net adjustment has been made to thefinancial statements concerned. 10. Events after the balance sheet date Deferred consideration in respect of the acquisition of the Welcare Laboratory On 13 March 2006, the Company entered into an agreement with the WelcareHospital and Welcare World Health Systems Limited in respect of the deferredconsideration outstanding following the acquisition of the Welcare Laboratoryfrom the Varkey Group in 2003. Under this agreement, the Company will exchange ashareholding of 16.7% in its subsidiary Medical Solutions FZ LLC in satisfactionof the outstanding deferred consideration recognised at 13 March 2006 of £2.5million. On conclusion of this transaction, Welcare Hospital will release cash to theCompany amounting to £0.9 million, which has been withheld pending settlement ofthe deferred consideration. This transfer of shares in Medical Solutions FZ LLC requires ratification by theDubai Healthcare City authorities. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
SBS.L