10th Mar 2006 07:40
Ceramic Fuel Cells Limited10 March 2006 Ceramic Fuel Cells Limited Statutory Accounts For the half-year ended 31 December 2005 Directors' Report For the half-year ended 31 December 2005 DIRECTORS' REPORT Your directors present their report on the consolidated entity consisting ofCeramic Fuel Cells Limited and its 100% owned entity, Ceramic Fuel Cells(Europe) Limited, for the half-year ended 31 December 2005. DIRECTORS The directors of Ceramic Fuel Cells Limited in office at the date of this reportare: Mr Julian Westley DinsdaleMr David CarruthersMr John Patrick DempseyProfessor Michael Dureau (appointed 8 December 2005) Dr C M Adam was a Director from 6 July 1992 to the date of his resignation of 22August 2005. Mr J G Pullar was a Director from 23 November 2004 to the date of hisresignation of 19 August 2005. PRINCIPAL ACTIVITIES The principal activity of the Company during the year was the commercialdevelopment and demonstration of ceramic (solid oxide) fuel cell technology. There were no significant changes in the nature of the activities of theconsolidated entity during the year. DIVIDENDS No dividends were recommended, declared or paid during the year and to the dateof this report. REVIEW OF OPERATIONS A summary of the financial performance of the consolidated group for the sixmonths ended 31 December 2005 is set out below: Half-year 2005 2004 $000 $000 Revenue from continuing operations 530 393 Other income Expenses 12 -----------Research & Development (5,320) (5,612)General & Administration (2,786) (2,896)Sales & Marketing (617) (388)Finance Costs (506) (4) ------------------Profit/(loss) before income tax (8,687) (8,507)Income tax expense - - ------------------Profit/(loss) for the half-year attributable to members ofCeramic Fuel Cells Limited (8,687) (8,507) ===================== During the six month period ended 31 December 2005 the company has continued todevelop and commercialise its fuel cell technology. The net loss for the periodof $8.7m was up by $0.2m from the equivalent period in 2004 due to an increasein its business development activities and to the financing costs associatedwith the issue of $8.2m of convertible notes in August 2005. The result for theperiod was better than the company's internal budgets. Commercialisation and Market Development Activities--------------------------------------------------- During the period the company contracted to undertake three further field trialsof its Combined Heat & Power (CHP) demonstration unit. The German utility EWEwill undertake field trials of two units and the company has entered into aLetter of Intent with EWE to collaborate on determining the specifications,technical standards and opportunities for commercial market development for fuelcell systems. These field trial units were delivered in December 2005 andcommissioned in January 2006. The company also entered into a field trialagreement with the Australian property development company, szencorp, toundertake a field trial in their high energy efficiency commercial officeredevelopment in Melbourne. This unit has also been delivered and commissioned. In November 2005 the company signed an agreement with Precision FlowTechnologies Inc., a US manufacturer of fuel cell testing systems, to licenseCFCL's test station designs and other know-how relating to the manufacture andoperation of solid-oxide fuel cell test stations. During the half-year a major focus of activity was on the development of thecompany's NetGenTM micro fuel cell system for domestic applications. The firstdemonstration unit was launched in October 2005 at the Ninth Grove Fuel CellSymposium in London, UK. The company believes that this represents a significantadvancement on the previous demonstration model and expects field trials ofthese units to be undertaken in 2006. Research and Development Activities----------------------------------- The company's expenditure on R&D activities was down by $0.2m compared to theprior half-year. As stated above, a major focus of activity was on thedevelopment of the NetGenTM micro fuel cell system. In addition to this, workhas continued on improving fuel cell and fuel cell stack performance. The company continues to carefully manage its intellectual property portfolioand at 31 December 2005 it has 28 patent families in various stages ofregistration. Financing Activities-------------------- In August 2005 the company issued A$8.2m of convertible notes. The notes have amaturity date of 2 August 2008 and bear interest at a fixed rate of 10% perannum, payable quarterly in arrears. The Noteholders may elect to convert theirnotes into fully paid ordinary shares in the company at any time prior to thematurity date at A$0.50 per share. The company may redeem the notes prior to the maturity date after having giventhe Noteholders 90 days notice of the intention to redeem. The Noteholders mayelect to convert their notes during this period. Notes to a value of A$1.750mhave been converted as at the date of this report, resulting in the issuance of3.500m ordinary shares. MATTERS SUBSEQUENT TO THE END OF THE HALF-YEAR Subsequent to the end of the half-year period the company has undertaken aplacement of shares to investors identified by the company's UK brokers and hashad its shares admitted to trading on the Alternative Investment Market (AIM) ofthe London Stock Exchange plc. The placement involved the issue of 175,000,000ordinary shares at a price of 21.25 pence (approximately A$0.50) and raised theequivalent of A$87.4m (before costs) (the 'UK Placement'). The company's shareswere admitted to trading on the AIM on 2 March 2006. In addition to this, the Company has lodged a prospectus with the AustralianSecurities & Investments Commission on 24 February 2006 to offer shares tocertain existing shareholders, who have previously expressed an interest inparticipating (the 'Australian Placement'). The company is seeking to raise afurther A$2,750,000 at a share issue price of A$0.50 per share. The AustralianPlacement is scheduled for completion by 23 March 2006. On 6 March 2006 the company gave notice to the convertible noteholders that itwould redeem all notes that were still outstanding as at 9 June 2006. The facevalue of the notes outstanding as at the date of this report is A$6.450m. AUDITOR'S INDEPENDENCE DECLARATION A copy of the auditors' independence declaration as required under section 307Cof the Corporations Act 2001 is set out on page 5. This report is made in accordance with a resolution of the directors. Julian W DinsdaleChairman Melbourne9 March 2006 Auditors' Independence Declaration As lead auditor for the review of Ceramic Fuel Cells Limited for the half yearended 31 December 2005, l declare that to the best of my knowledge and belief,there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the review; and b) no contraventions of any applicable code of professional conduct in relation to the review. This declaration is in respect of Ceramic Fuel Cells Limited and the entity itcontrolled during the period. Charles Christie MelbournePartner 9 March 2006 Interim Financial Report For the half-year ended 31 December 2005 This interim financial report does not include all the notes of the typenormally included in an annual financial report. Accordingly, this report is tobe read in conjunction with the annual report for the year ended 30 June 2005and any public announcements made by Ceramic Fuel Cells Limited during theinterim reporting period in accordance with the continuous disclosurerequirements of the Corporations Act 2001. A copy of this interim financial report may be obtained from the company'swebsite: www.cfcl.com.au Consolidated Income StatementsFor the half-year ended 31 December 2005 Half-year 2005 2004 Note $ $Revenue from continuing operations 529,585 393,508 Other Income 12,656 -Research & Development (5,319,443) (5,611,885)General & Administration (2,786,243) (2,896,355)Sales & Marketing (617,273) (388,156)Finance Costs (506,313) (4,473) ----------- -------- Profit/(loss) before income tax (8,687,031) (8,507,361) Income tax expense - - ------------ --------- Profit/(loss) for the half-year attributable to members of Ceramic Fuel Cells Limited (8,687,031) (8,507,361) =========== ============ Cents Cents Earnings per share for profit/(loss)attributable to the ordinary equity holders of the companyBasic earnings per share 8 (7.76) (7.73) The above consolidated income statements should be read in conjunction with theaccompanying notes. Consolidated Balance SheetsAs at 31 December 2005 31 December 30 June 2005 2005 Note $ $ASSETSCurrent AssetsCash and cash equivalents 4,752,670 5,470,018Receivables 500,295 214,764Other 4 2,151,858 900,831 ---------- ---------Total Current Assets 7,404,823 6,585,613 ---------- ----------Non-Current AssetsPlant and equipment 2,241,038 3,020,020Leasehold improvements - 118,464Intangibles 1,000 1,000 ---------- --------Total Non-Current Assets 2,242,038 3,139,484 ----------- ----------Total Assets 9,646,861 9,725,097 ----------- ---------- LIABILITIESCurrent LiabilitiesPayables 1,134,550 1,038,932Interest bearing liabilities 220,764 -Provisions 4 796,381 547,915Deferred (unearned) revenue 335,821 157,000 ---------- ---------Total Current Liabilities 2,487,516 1,743,847 ----------- ----------Non-Current Liabilities Interest bearing liabilities (10% convertiblenotes) 6 5,148,656 -Provisions 4 133,144 151,898 ----------- ----------Total Non-Current Liabilities 5,281,800 151,898 ----------- ----------Total Liabilities 7,769,316 1,895,745 ---------- ---------- Net Assets 1,877,545 7,829,352 ============ ========== Consolidated Balance SheetsAs at 31 December 2005 31 December 30 June 2005 2005 $ $EQUITYContributed equity 97,135,494 94,407,155Reserves 6,885 -Retained profits (95,264,834) (86,577,803) -------------- ------------- Total Equity 1,877,545 7,829,352 ================ ============ The above consolidated balance sheets should be read in conjunction with theaccompanying notes. Consolidated Statements of Changes in EquityFor the half-year ended 31 December 2005 Half-year 2005 2004 Note $ $Total equity at the beginning of the half-year 7,829,352 24,779,604 ----------- ----------- Exchange differences on translation of foreignoperations (3,465) -Employee share options 10,350 - ----------- -----------Net income (expense) recognised directly inequity 6,885 -Profit/(loss) for the half-year (8,687,031) (8,507,361) ----------- ------------Total recognised income and expense for thehalf-year (8,680,146) (8,507,361) ----------- ------------ Transactions with equity holders in theircapacity asequity holders: Contributions of equity (net of transactioncosts) 1,330,000 289,579Dividends provided for or paid - -Value of conversion rights on issue of 10%convertible notes 1,398,339 - ------------- ------------ 2,728,339 289,579 ------------ ------------Total equity at the end of the half-year 1,877,545 16,561,822 ------------ ------------ Total recognised income and expense for the half-year is entirelyattributable to members of Ceramic Fuel Cells Limited. The above consolidated statements of changes in equity should be read inconjunction with the accompanying notes. Consolidated Cash Flow StatementsFor the half-year ended 31 December 2005 Half-year 2005 2004 $ $Cash Flows from Operating Activities Receipts from customers (inclusive of goods andservices tax) 557,869 584,460Payments to suppliers and employees (inclusive ofgoods and services tax) (7,927,613) (8,550,505) ----------- ----------- (7,369,744) (7,966,045)Interest received 228,437 388,588Interest paid (522) (4,473) ----------- -----------Net cash outflow from operating activities (7,141,829) (7,581,930) ----------- ------------ Cash Flows from Investing Activities Proceeds from sale of plant and equipment 64,440 -Payments for plant and equipment (90,619) (345,292) ----------- -----------Net cash (outflow) from investing activities (26,179) (345,292) ----------- ----------- Cash Flows from Financing ActivitiesRepayment of borrowings (63,117) -Interest paid on borrowings (2,649) -Deferred share issue costs (857,427) -Proceeds from issuing convertible notes 8,200,000 -Convertible note issue costs (531,815) -Interest paid on convertible notes (294,332) - ----------- ---------Net cash inflow from financing activities 6,450,660 - ----------- --------- Net Increase/(Decrease) in Cash and Cash Equivalents (717,348) (7,927,222)Cash and cash equivalents at the beginning of thehalf-year 5,470,018 21,410,396 ----------- -----------Cash and Cash Equivalents at the End of the 4,752,670 13,483,174Half-Year =========== =========== The above consolidated cash flow statements should be read in conjunction withthe accompanying notes. Notes to the Consolidated Financial StatementsFor the half-year ended 31 December 2005 Note 1. Summary of Significant Accounting Policies This general purpose financial report for the interim half-year reporting periodended 31 December 2005 has been prepared in accordance with Accounting StandardAASB 134 Interim Financial Reporting and the Corporations Act 2001. This interim financial report does not include all the notes of the typenormally included in an annual financial report. Accordingly, this report is to be read in conjunction with the annual report forthe year ended 30 June 2005 and any public announcements made by Ceramic FuelCells Limited during the interim reporting period in accordance with thecontinuous disclosure requirements of the Corporations Act 2001. (a) Basis of preparation of half-year financial report The principal accounting policies adopted in the preparation of the financialreport are set out below. These policies have been consistently applied to allthe periods presented, unless otherwise stated. Application of AASB 1 First-time Adoption of Australian Equivalents toInternational Financial Reporting Standards (AIFRS) This interim financial report is the first Ceramic Fuel Cells Limited interimfinancial report to be prepared in accordance with AIFRS. AASB 1 First-timeAdoption of Australian Equivalents to International Financial ReportingStandards has been applied in preparing these financial statements. Financial statements of Ceramic Fuel Cells Limited up to, and including, 30 June2005 had been prepared in accordance with previous Australian Generally AcceptedAccounting Principles (AGAAP). Whilst AGAAP differs in certain respects fromAIFRS, as previously reported the adoption of AIFRS has not had a materialeffect upon the retained earnings of the Group as of 1 July 2004 or on thereported profit of the Group for the year ended 30 June 2005. The Group hastaken the exemptions available under AASB1 to only apply AASB 132 FinancialInstruments: Disclosure and Presentation and AASB 139 Financial Instruments:Recognition and Measurement from 1 July 2005, and to not apply AASB 2Share-based Payment to options that were granted on or before 7 November 2002 orgranted after 7 November 2002 but vested before 1 January 2005. Historical cost convention These financial statements have been prepared in accordance with the historicalcost convention and do not take into account changing money values or, exceptwhere stated, current valuations of assets. (b) Principles of consolidation The consolidated financial statements incorporate the assets and liabilities ofall subsidiaries of Ceramic Fuel Cells Limited ("company" or "parent entity") asat 31 December 2005 and the results of all subsidiaries for the half-year thenended. Ceramic Fuel Cells Limited and its subsidiaries together are referred toin this financial report as the Group or the consolidated entity. Subsidiaries are all those entities (including special purpose entities) overwhich the Group has the power to govern the financial and operating policies,generally accompanying a shareholding of more than one-half of the votingrights. The existence and effect of potential voting rights that are currentlyexercisable or convertible is considered when assessing whether the Groupcontrols another entity. Subsidiaries are fully consolidated from the date on which control istransferred to, or acquired by, the Group. They are de-consolidated from thedate that control ceases. The purchase accounting method is used to account for the acquisition ofsubsidiaries by the Group (refer Note 1(k)). Intercompany transactions, balances and unrealised gains on transactions betweenGroup companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidenceof the impairment of the asset transferred. Accounting policies of subsidiarieshave been changed, where necessary, to ensure consistency with the policiesadopted by the Group. Minority interests in the results and equity of subsidiaries, where applicable,are shown separately in the consolidated income statement and balance sheetrespectively. (c) Going concern As the company progresses its commercialisation plans for its fuel celltechnology, it will be required to raise additional capital to continue as agoing concern. Subsequent to the end of the financial period the company has undertaken aplacement of shares to investors (refer Note 9(a) UK Placement). In addition to this, the Company intends to undertake a further placement tocertain existing shareholders (refer Note 9(b) Australian Placement). With the successful completion of the UK Placement, the directors believe thatthe company has sufficient cash to enable its obligations to be met for at leastthe next 12 months and accordingly the finance report has been prepared on agoing concern basis. (d) Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are different tothose of other business segments. A geographical segment is engaged in providingproducts or services within a particular economic environment and is subject torisks and returns that are different to those of segments operating in othereconomic environments. (e) Expenses classification The income statement continues to be reported on the basis of the function ofexpenses incurred, rather than by their nature. The main reasons for theclassification of expenses into the functional sub-categories of Research &Development (R&D), General & Administration (G&A) and Sales & Marketing (S&M)are as follows: • readers of the consolidated entity's income statements will gain a better understanding of progress towards achievement of its business plans than they would otherwise have gained if reporting was based upon the nature of costs, and • these classifications are widely recognised within the Australian and international financial community. Research & Development expense, as denoted in the consolidated incomestatements, includes the cost of all research and development projects,incorporating direct labour and direct material costs, as well as parent entitydepreciation and amortisation charges, but excludes indirect project supportcosts and otherwise apportionable overheads, which are borne within the General& Administration expense classification. Sales & Marketing expense includesdepreciation costs attributable to Ceramic Fuel Cells (Europe) Limited. (f) Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates ("the functional currency"). The consolidated financialstatements are presented in Australian dollars, which is Ceramic Fuel CellsLimited's functional and presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreign exchangegains and losses resulting from the settlement of such transactions and from thetranslation at reporting period-end exchange rates of monetary assets andliabilities denominated in foreign currencies are recognised in the incomestatement, except when deferred in equity as qualifying cash flow hedges andqualifying net investment hedges. Group companies The results and financial position of all the Group entities (none of which hasthe currency of a hyperinflationary economy) that have a functional currencydifferent from the presentation currency are translated into the presentationcurrency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each income statement presented are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and • all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of any netinvestment in foreign entities, and of borrowings and other currency instrumentsdesignated as hedges of such investments, are taken to shareholders' equity.When a foreign operation is sold or borrowings repaid, a proportionate share ofsuch exchange differences is recognised in the income statement as part of thegain or loss on sale. (g) Revenue recognition Revenue is disclosed net of duties and taxes paid or received. Revenue fromfield trial contracts is recognised progressively throughout the period of thefield trial. The amount of contract revenue recognised at reporting date isproportional to the amount of costs incurred at reporting date and the totalestimated cost of the completed field trial. (h) Government grants Grants from the government are recognised at their fair value where there is areasonable assurance that the grant will be received and the Group will complywith the attached conditions. Government grants relating to costs are deferred, if received in advance, andrecognised in the income statement over the period necessary to match them withthe costs that they are intended to compensate. Government grants relating to the purchase of property, plant and equipment areincluded in non-current liabilities as deferred income and are credited to theincome statement on a straight-line basis over the expected lives of the relatedassets. (i) Income tax The income tax expense or revenue for the period is the tax payable on thecurrent period's taxable income based on the national income tax rate for eachjurisdiction adjusted by changes in deferred tax assets and liabilitiesattributable to temporary differences between the tax bases of assets andliabilities and their carrying amounts in the financial statements, and tounused tax losses. Deferred tax assets and liabilities are recognised for temporary differences atthe tax rates expected to apply when the assets are recovered or liabilities aresettled, based on those tax rates which are enacted or substantively enacted foreach jurisdiction. The relevant tax rates are applied to the cumulative amountsof deductible and taxable temporary differences to measure the deferred taxasset or liability. An exception is made for certain temporary differencesarising from the initial recognition of an asset or a liability. No deferred taxasset or liability is recognised in relation to these temporary differences ifthey arose in a transaction, other than a business combination, that at the timeof the transaction did not affect either accounting profit or taxable profit orloss. Deferred tax assets are recognised for deductible temporary differences, whilstunused tax losses are recognised only if it is probable that future taxableamounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differencesbetween the carrying amount and tax bases of investments in controlled entitieswhere the parent entity is able to control the timing of the reversal of thetemporary differences and it is probable that the differences will not reversein the foreseeable future. Current and deferred tax balances attributable to amounts recognised directly inequity are also recognised directly in equity. Ceramic Fuel Cells Limited does not have any wholly-owned, Australian resident,controlled entities and so has not implemented the Australian tax consolidationlegislation. (j) Leases Leases of property, plant and equipment where the Group has substantially allthe risks and rewards of ownership are classified as finance leases. Financeleases are capitalised at the lease's inception at the lower of the fair valueof the leased property and the present value of the minimum lease payments. Thecorresponding rental obligations, net of finance charges, are included in otherlong-term payables. Each lease payment is allocated between the liability andfinance charge so as to achieve a constant rate on the finance balanceoutstanding. The interest element of the finance cost is charged to the incomestatement over the lease period so as to produce a constant periodic rate ofinterest on the remaining balance of the liability for each period. Theproperty, plant and equipment acquired under finance leases are depreciated overthe shorter of the asset's useful life and the lease term. Leases in which a significant portion of the risks and rewards of ownership areretained by the lessor are classified as operating leases. Payments made underoperating leases (net of any incentives received from the lessor) are charged tothe income statement on a straight-line basis over the period of the lease. Lease income from operating leases is recognised in income on a straight-linebasis over the lease term. (k) Acquisitions of assets The purchase method of accounting is used to account for all acquisitions ofassets (including business combinations) regardless of whether equityinstruments or other assets are acquired. Cost is measured as the fair value ofthe assets given, shares issued or liabilities incurred or assumed at the dateof exchange plus costs directly attributable to the acquisition. Where equityinstruments are issued in an acquisition, the value of the instruments is theirpublished market price as at the date of the exchange unless, in rarecircumstances, it can be demonstrated that the published price at the date ofexchange is an unreliable indicator of fair value and that other evidence andvaluation methods provide a more reliable measure of fair value. Transactioncosts arising on the issue of equity instruments are recognised directly inequity. Identifiable assets acquired and liabilities and contingent liabilities assumedin a business combination are measured initially at their fair values at theacquisition date, irrespective of the extent of any minority interest. Theexcess of the cost of acquisition over the fair value of the Group's share ofthe identifiable net assets acquired is recorded as goodwill. If the cost ofacquisition is less than the fair value of the net assets of the subsidiaryacquired, the difference is recognised directly in the income statement, butonly after a reassessment of the identification and measurement of the netassets acquired. Where settlement of any part of cash consideration is deferred, the amountspayable in the future are discounted to their present value at the date ofexchange. The discount rate used is the entity's incremental borrowing rate,being the rate at which a similar borrowing could be obtained from anindependent financier under comparable terms and conditions. (l) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation andare tested annually for impairment. Assets that are subject to amortisation arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. An impairment loss isrecognised for the amount by which the asset's carrying amount exceeds itsrecoverable amount. The recoverable amount is the higher of an asset's fairvalue less costs to sell and value in use. For the purposes of assessingimpairment, assets are grouped at the lowest levels for which there areseparately identifiable cash flows (cash generating units). (m) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call withfinancial institutions, other short-term, highly liquid investments withoriginal maturities of three months or less that are readily convertible toknown amounts of cash and which are subject to an insignificant risk of changesin value, and bank overdrafts. Bank overdrafts would be shown within borrowingsin current liabilities on the balance sheet. (n) Trade receivables Trade receivables are recognised initially at fair value and subsequentlymeasured at amortised cost, less provision for doubtful debts. Trade receivablesare due for settlement no more than 30 days from the date of recognition. Collectibility of trade receivables is reviewed on an ongoing basis. Debts whichare known to be uncollectible are written off. A provision for doubtfulreceivables is established when there is objective evidence that the Group willnot be able to collect all amounts due according to the original terms ofreceivables. The amount of the provision would be the difference between theasset's carrying amount and the present value of estimated future cash flows,discounted at the effective interest rate. The amount of the provision isrecognised in the income statement. (o) Fair value estimation The fair value of financial assets and financial liabilities must be estimatedfor recognition and measurement or for disclosure purposes. The nominal values, less estimated credit or debit adjustments, of tradereceivables and payables are assumed to approximate their fair values. The fairvalue of financial liabilities for disclosure purposes is estimated bydiscounting the future contractual cash flows at the current market interestrate that is available to the Group for similar financial instruments. (p) Plant and equipment All plant and equipment is stated at historical cost less depreciation.Historical cost includes expenditure that is directly attributable to theacquisition of the asset. Subsequent costs are included in the asset's carrying amount or recognised as aseparate asset, as appropriate, only when it is probable that future economicbenefits associated with the asset will flow to the Group and the cost of theasset can be measured reliably. All other repairs and maintenance are charged tothe income statement during the financial period in which they are incurred. Depreciation of plant and equipment is calculated using the straight line methodto allocate their cost or revalued amounts, net of their residual values, overtheir estimated useful lives, as follows: Plant and equipment 5 to 10 yearsVehicles 6.7 yearsFurniture and fittings 5 yearsComputer equipment 3 yearsComputer software 2.5 years The assets' residual values and useful lives are reviewed, and adjusted ifappropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amountif the asset's carrying amount is greater than its estimated recoverable amount(Note 1(l)) Gains and losses on disposals are determined by comparing proceeds with carryingamount. Gains are included in income, whilst losses are included in expenses,within the income statement. (q) Leasehold improvements The cost of improvements to or on leasehold properties is amortised over theunexpired period of the lease, or the estimated useful life of the improvementto the company, whichever is the shorter. All leasehold improvements have beencompletely written down as at reporting date. (r) Intangible assets and expenditure carried forward (i) Intellectual property Intellectual property consists of the actual cost incurred in purchasing (for anominal sum) the beneficial interest in the company's intellectual property,which previously resided in the company's founding members. This asset has an indefinite life, hence it is reviewed for impairment at eachreporting date. (ii) Research and development Expenditure on research and development activities, being the application ofresearch findings or other knowledge to a plan or design for the production ofnew or substantially improved products or services before the start ofcommercial production or use, is capitalised only if the product or service istechnically and commercially feasible and adequate resources are available tocomplete development. Any expenditure so capitalised would comprise all directlyattributable costs, including costs of materials, services, direct labour and anappropriate proportion of overheads. Such capitalised expenditure would bestated at cost less accumulated amortisation, the latter being calculated on astraight-line basis over the period of the expected benefit. All research anddevelopment expenditures not meeting the criteria for capitalisation arerecognised in the income statement as expenses when incurred. (iii) Patents Patent costs are written off to the income statement in the periods in whichincurred. (iv) Deferred share issue costs Costs incurred in relation to planned equity raisings are capitalised as adeferred expenditure asset in the balance sheet pending the finalisation of theintended equity raising. (s) Trade and other payables These amounts represent liabilities for goods and services provided to the Groupprior to the end of the reporting period and which are unpaid at that date. Theamounts are unsecured and are usually paid within 30 days of recognition. (t) Borrowings Borrowings are initially recognised at fair value, net of transaction costsincurred. Borrowings are subsequently measured at amortised cost. Any differencebetween the proceeds (net of transaction costs) and the redemption amount isrecognised in the income statement over the period of the borrowings using theeffective interest method. The fair value of the liability portion of a convertible note is determinedusing a market interest rate for an equivalent non-convertible note or anappropriate market-based valuation technique. This amount is recorded as aliability on an amortised cost basis until extinguished on conversion ormaturity of the notes. The remainder of the proceeds is allocated to theconversion option. This is recognised and included in shareholders' equity. Borrowings are classified as current liabilities unless the Group has anunconditional right to defer settlement of the liability for at least 12 monthsafter the balance sheet date. (u) Borrowing costs Borrowing costs are recognised as expenses in the period in which they areincurred. Borrowing costs include interest payable on convertible notes up toand including the date of repayment of the principal sum outstanding. (v) Provisions Where there are a number of similar obligations, the likelihood that an outflowwill be required in settlement is determined by considering the class ofobligations as a whole. A provision is recognised even if the likelihood of anoutflow with respect to any one item included in the same class of obligationsmay be small. Provisions are not recognised for any anticipated future operating losses. (w) Employee benefits (i) Wages, salaries and annual leave Liabilities for wages and salaries, including non-monetary benefits, and annualleave expected to be settled within 12 months of the reporting date arerecognised in other payables in respect of employees' services up to thereporting date and are measured at the amounts expected to be paid when theliabilities are settled. Liabilities for non-accumulating sick leave arerecognised when the leave is taken and measured at the rates paid or payable. (ii) Long service leave The liability for long service leave expected to be settled within 12 months ofthe reporting date is recognised in the provision for employee benefits and ismeasured in accordance with (i) above. The liability for long service leaveexpected to be settled more than 12 months from the reporting date is recognisedin the provision for employee benefits and measured as the present value ofexpected future payments to be made in respect of services provided by employeesup to the reporting date. Consideration is given to expected future wage andsalary levels, experience of employee departures and periods of service and anyknown impending changes to relevant legislation. Expected future payments arediscounted using market yields at the reporting date on national governmentbonds with terms to maturity that match, as closely as possible, the estimatedfuture cash outflows. (iii) Employee benefit on-costs Employee benefit on-costs, namely payroll tax and workers' compensationinsurance, are recognised and included in employee benefit liabilities and costswhen the employee benefits to which they relate are recognised as liabilities. (iv) Short-term incentive The Group recognises an expense for short-term cash incentives based on aformula that takes into consideration, as at each reporting date, progresstowards the expected achievement of company and/or employee key performanceindicators. The Group recognises a provision where contractually obliged orwhere there is a past practice that has created a constructive obligation. (v) Share-based payments Share-based compensation benefits are provided to employees, and have beenprovided to former directors, via the Ceramic Fuel Cells Limited Share OptionPlan. Share options granted before 7 November 2002 and/or vested before 1 January 2005 No expense is recognised in respect of these options. The shares will berecognised if the options are exercised, in which case the proceeds receivedwill be allocated to share capital. Share options granted after 7 November 2002 and/or vested after 1 January 2005 The fair value of options granted under the Ceramic Fuel Cells Limited ShareOption Plan is recognised as an employee benefit expense with a correspondingincrease in equity. The fair value is measured at grant date and recognised overthe period during which the employees become unconditionally entitled to theoptions. The fair value at grant date is independently determined using an option pricingmodel which takes into account the exercise price, the term of the option, thevesting and performance criteria, the non-tradeable nature of the option, theshare price at grant date, the expected price volatility of the underlyingshare, the expected dividend yield and the risk-free interest rate for the termof the option. The fair value of the options granted excludes the impact of any non-marketvesting conditions (for example, profitability and sales growth targets).Non-market vesting conditions are included in assumptions about the number ofoptions that are expected to become exercisable. At each balance sheet date theentity revises its estimate of the number of options that are expected to becomeexercisable. The employee benefit expense recognised each period takes intoaccount the most recent estimate. Upon the exercise of options the balance of the share-based payments reserverelating to those options is transferred to share capital. (x) Contributed equity Ordinary shares are classified as equity. Incremental costs directlyattributable to the issue of new shares or options are shown in equity as adeduction, net of tax, from the proceeds. (y) Earnings per share Basic earnings per share for the half-year is determined by dividing the profit/(loss) attributable to equity holders of the company (excluding any costs ofservicing equity other than ordinary shares) by the weighted average number ofordinary shares outstanding, adjusted for any bonus elements in ordinary sharesissued. Diluted earnings per share is not applicable when the Group is in a losssituation because the potential conversion of outstanding options to shareswould decrease the loss per share, which would be a non-dilutive outcome. (z) Financial instrument transaction costs The Group has taken the exemption available under AASB 1 First-time Adoption ofAustralian Equivalents to International Financial Reporting Standards to applyAASB 132 Financial Instruments: Disclosure and Presentation and AASB 139Financial Instruments: Recognition and Measurement from 1 July 2005. The Grouphas applied Australian Generally Accepted Accounting Principles (AGAAP) in thecomparative information on financial instruments within the scope of AASB 132and AASB 139. Under previous AGAAP transaction costs were excluded from theamounts disclosed in the financial statements. Under AIFRS such costs areincluded in the carrying amounts. Note 2. Segment Information Primary reporting format - geographical segments Australia Europe Consolidated $ $ $Half-year 2005 Total segment revenue 134,856 137,617 272,527 ---------- ----------- -----------Unallocated revenue 257,058 -----------Total revenue and other income 529,585 -----------Segment result (7,786,779) (378,469) (8,165,248) ------------ ---------- ------------Unallocated revenue less unallocatedexpenses (521,783)Profit/(loss) before income taxexpense (8,687,031) Half-year2004 Total segment revenue - - - -------------- ----------- Unallocated revenue 393,508 ------------Total revenue and other income 393,508 ------------ Segment result (8,719,327) (177,069) (8,896,396) ------------- -----------Unallocated revenue less unallocatedexpenses 389,035 ------------Profit/(loss) before income taxexpense (8,507,361) ------------- Half-year 2005 2004Note 3. Profit/(loss) Before Income TaxThe profit/(loss) for the half-year before income taxincludes the following: Specific expensesEmployee benefits expense 4,408,682 4,360,770DepreciationPlant and equipment 831,279 1,064,695AmortisationLeasehold improvements 121,089 13,386 Item which is unusual because of its nature, size orincidence 220,073 -Expense on recognition of provision for onerousproperty lease 31 December 30 June 2005 2005Note 4. Balance Sheet $ $The balance sheet as at reporting date includes thefollowing items whichare unusual because of their nature, size orincidence: Current Assets - Other 1,857,138 719,130Deferred share issue costsCurrent Liabilities - Provisions 164,462 -Provision for onerous leasesNon-Current Liabilities - Provisions 55,611 -Provision for onerous leases Note 5. Equity Securities Issued (a) Securities Issued on Conversion of Notes During the half-year 2,660,000 ordinary shares in the capital of Ceramic FuelCells Limited were issued to holders of the company's 10% convertible notes who,in exercising their right, converted $1,330,000 of the entity's interest bearingliabilities into share capital. (b) Share Options Issued to Employees On 12 October 2005 the company issued options over 430,200 ordinary shares toemployees under the Ceramic Fuel Cells Limited Share Option Plan. The optionswere issued for no consideration and have an exercise price of $0.58 per share.The options have a 3 year vesting period and a 10 year life. Exercise is subjectto escalating performance hurdles based on compound share price growth per annumduring the exercise period, measured by reference to the exercise price and theissue date, as follows: Compound share price growth p.a. % of options that vest Less than 15% 0 15% 50 20% 75 25% 100 Note 6. Non-Current Interest Bearing Liabilities On 2 August 2005 Ceramic Fuel Cells Limited (the company) issued A$8,200,000 ofsecured convertible notes. The notes have a maturity date of 2 August 2008 andbear fixed interest at a fixed rate of 10% per annum payable quarterly inarrears. The noteholders may elect to convert their notes into fully paidordinary shares in the company at any time prior to the maturity date at A$0.50per share. The company may redeem the notes at any time prior to the maturity date afterhaving given the noteholders 90 days notice of the intention to redeem. Thenoteholders may elect to convert their notes during this notice period. The notes are secured by a fixed and floating charge over the assets of thecompany. The face value of the notes is reconciled to the amount included in non-currentinterest bearing liabilities as at 31 December 2005 as follows: $ Face value of convertible notes issued 8,200,000Less: Transaction costs (531,815)Value of conversion rights (1,398,339) -------------Fair value of liability portion on issue (2 August 2005) 6,269,846 Add: Charge to income statement 503,142Less: Interest paid (294,332)Face value of notes converted during period (1,330,000) -------------Interest bearing liability as at 31 December 2005 5,148,656 -------------- Note 7. Contingent Liability The consolidated entity has the following contingent liability: R&D Start Grant Under an agreement with the Industry Research and Development Board (IR&D Board)acting on behalf of the federal government, the company received a $15 milliongrant under the R&D Start Grant programme. The company has received the fullamount of the grant. The agreement runs until 2009 and imposes certainobligations upon the company. If the company was to breach the agreement orbecome insolvent, the IR&D Board may elect to terminate the agreement. In theevent of such a termination, or in other specific circumstances, the agreementprovides that the IR&D Board may choose to require the repayment of any or allof the grant with or without interest. At the end of the half-year the maximum amount of this liability would have been$20.785 million. Note 8. Earnings Per Share Half-year 2005 2004 Cents CentsBasic earnings per share (7.76) (7.73) Number NumberWeighted average number of sharesWeighted average number of shares used as thedenominator 111,916,231 109,996,231in calculating basic earnings per share $ $Earnings used in calculating basic earnings pershare (8,687,031) (8,507,361)Profit/(loss) attributable to the ordinary equityholders of the company There was no net loss attributable to outside equity interest to be taken intoaccount in determining earnings used in calculating basic earnings per share. Information concerning the classification of securities With regards to the: • options issued under the CFCL Share Option Plan; • options issued to subscribers under the private placement completed 6 May 2004; and • convertible notes issued to subscribers on 2 August 2005 whilst all of these instruments are considered to be potential ordinary shares,because their conversion to ordinary shares would decrease the net loss pershare attributable to the ordinary equity holders of the company, they are notconsidered to be dilutive and no calculation of diluted earnings is required.Neither the options nor the convertible notes have been included in thedetermination of basic earnings per share. Note 9. Events Occurring After Reporting Date (a) UK Placement Subsequent to the end of the financial period the company has undertaken aplacement of shares to investors identified by the company's UK brokers and hashad its shares admitted to trading on the AIM Market of the London StockExchange plc. The placement involved the issue of 175,000,000 ordinary shares ata price of 21.25 pence (approximately A$0.50) and raised the equivalent ofA$87.4m (before costs). The company's shares were admitted to trading on the AIMMarket on 2 March 2006. (b) Australian Placement The company lodged a prospectus with the Australian Securities & InvestmentCommission on 24 February 2006 to permit it to make a further placement tocertain existing shareholders, who have previously expressed an interest inparticipating (the 'Australian Placement'). The company is seeking to raise afurther A$2,750,000 at a share issue price of A$0.50 per share. The AustralianPlacement is expected to be completed by 23 March 2006. (c) Redemption of Convertible Notes The company issued a redemption notice to all noteholders on 6 March 2006,giving 90 days notice of its intention to redeem all outstanding notes. Thenoteholders may elect to convert their notes during this notice period. Anynotes so converted will be transferred from interest bearing liabilities toequity (issued capital) within the balance sheet. The consideration paid to redeem all notes still outstanding after expiration ofthe notice period will be allocated between the equity and liability componentsinitially recognised on issue of the notes, and in the same proportion. Anydifference between the amount of the consideration apportionable to theliability component and the balance of the liability at the date of redemptionwill be taken to the income statement. The consideration apportionable to equitywill reduce this balance sheet component, thereby reflecting the reduction invalue of the conversion component of the original instrument brought about byearly repayment. Note 10. Explanation of Transition to AIFRS The changes in significant accounting policies, as outlined in Note 1, have nothad any material effect upon the retained earnings of the group as of 1 July2004 or on the reported profit of the group for the year ended 30 June 2005. DIRECTORS' DECLARATION In the directors' opinion: (a) the financial statements and notes set out on pages 7 to 21 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the company's and consolidated entity's financial position as at 31 December 2005 and of their performance, as represented by the results of their operations and their cash flows, for the half-year ended on that date; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the directors. Julian W DinsdaleChairman Melbourne9 March 2006 Independent review report to the members of Ceramic Fuel Cells Limited Statement Based on our review, which is not an audit, we have not become aware of anymatter that makes us believe that the financial report of Ceramic Fuel CellsLimited: • does not give a true and fair view, as required by the Corporations Act 2001 in Australia, of the financial position of the Ceramic Fuel Cells Group (defined below) as at 31 December 2005 and of its performance for the half-year ended on that date, and • is not presented in accordance with the Corporations Act 2001, Accounting Standard AASB 134: Interim Financial Reporting and other mandatory financial reporting requirements in Australia, and the Corporations Regulations 2001. This statement must be read in conjunction with the rest of our review report. Scope The financial report and directors' responsibility The financial report comprises the balance sheet, income statement, statement ofchanges in equity, cash flow statement, accompanying notes to the financialstatements, and the directors' declaration for the Ceramic Fuel Cells Group (theconsolidated entity), for the half-year ended 31 December 2005. The consolidatedentity comprises both Ceramic Fuel Cells Limited (the company) and the entitiesit controlled during that half-year. The directors of the company are responsible for the preparation and true andfair presentation of the financial report in accordance with the CorporationsAct 2001. This includes responsibility for the maintenance of adequateaccounting records and internal controls that are designed to prevent and detectfraud and error, and for the accounting policies and accounting estimatesinherent in the financial report. Review approach We conducted an independent review in order for the company to lodge thefinancial report with the Australian Securities and Investments Commission. Ourreview was conducted in accordance with Australian Auditing Standards applicableto review engagements. For further explanation of a review, visit our websitehttp://www.pwc.com/au/financialstatementaudit. We performed procedures in order to state whether, on the basis of theprocedures described, anything has come to our attention that would indicatethat the financial report does not present fairly, in accordance with theCorporations Act 2001, Accounting Standard AASB 134: Interim Financial Reportingand other mandatory financial reporting requirements in Australia, a view whichis consistent with our understanding of the consolidated entity's financialposition, and its performance as represented by the results of its operationsand cash flows. We formed our statement on the basis of the review procedures performed, whichincluded: • inquiries of company personnel, and • analytical procedures applied to financial data. Our procedures include reading the other information included with the financialreport to determine whether it contains any material inconsistencies with thefinancial report. These procedures do not provide all the evidence that would be required in anaudit, thus the level of assurance provided is less than that given in an audit.We have not performed an audit, and accordingly, we do not express an auditopinion. While we considered the effectiveness of management's internal controls overfinancial reporting when determining the nature and extent of our procedures,our review was not designed to provide assurance on internal controls. Our review did not involve an analysis of the prudence of business decisionsmade by directors or management. Independence In conducting our review, we followed applicable independence requirements ofAustralian professional ethical pronouncements and the Corporations Act 2001. PricewaterhouseCoopers Charles Christie MelbournePartner 9 March 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Ceramic Fuel Cells